Mass transit systems in the United States are collectively losing money hand over fist. Yet many individual routes (including bus routes) earn enough to pay their own operating (and even capital costs). But like bad mortgages contaminating the good, money-losing transit routes are bogging down the system.
We can divide individual systems into three sets of routes:
1. Those routes break-even or profit financially (at a given fare). This is the "core".
2. Those lines which are necessary for the core routes to break-even, and collectively help the set of routes break-even. These are the "feeders".
3. Those lines which lose money, and whose absence would not eliminate profitability on other routes. These money-losers are a welfare program. We might politely call them "equity" routes.
Mass (or public) transit agencies are transportation organizations first, not welfare organizations. They should be considered public utilities rather than departments of government, which provide a useful service for a price to their users.
My thesis is that the local transit systems should identify and propose to retrench to the financially sustainable system, and present local politicians with a choice.
If local politicians want additional "equity" services, they should be presented with a cost of subsidy per line, and then can collectively choose which lines to finance out of general revenue, as this is primarily a welfare rather than an transportation function. In other words, public transit organizations would present the public with a bill for these money-losing services (the subsidy required in order to at least break even on operating them (i.e. the difference between their revenue and their cost), and not be expected to pay for them out of operating revenue.
If the cost of those lines is deemed too expensive (i.e. the politicians are unwilling to pay for them with general revenue tax dollars), they should be canceled. Transit agencies would no longer be losing money, they would now be break-even or slightly profitable. They might even pay a dividend to their owners (the general public).
General revenue (the treasury) would of course now be losing money, we didn't pull money from thin air, but since this is a social welfare/redistribution function, that is perfectly appropriate. This would entirely change public and political perception of transit services. It might also result in fewer bad routes being funded, since it would be crystal clear where the subsidies lay.
The which routes to fund decision should be revisited periodically (e.g. biannually).
Transit fares should be set at a sufficient level to at least break-even on the above system (plus a small positive rate of return).
If these fares are too high, politicians should give poor people money directly. It makes more sense to do that than to subsidize people who are perfectly capable of paying so that some group doesn't face a full cost they cannot pay. If they don't want to give poor people money (e.g. because they don't true poor people with cash, or fear they would use the money for something other than transit (like, say food, or housing, or heat)), they should top-up their transit smartcard (e.g. by adding funds weekly). These funds would come from a separate government agency (let's call it the "Transportation Opportunities Office") which is completely separate from the transit organization. The poor people would use the same smartcard as everyone else, so no public stigma is attached to using the card. Moving towards smartcard systems is efficient all around, saving boarding times and reducing transit run times.
Finally, these public transit utilities should have the freedom to contract with other organizations to provide services, much as London contracts out its routes.