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InTransition Magazine : Transportation Planning, Practice & Progress

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Mass Transit's Reversal of Fortune

Even As Ridership Surges, Economic Crisis Ravages Agencies' Budgets

By Josh Stephens

RTD

Public transportation ridership reached its highest level

in 52 years in 2008, according to APTA.

At some point in the past year, nurses in St. Louis discovered that they couldn’t get to their nursing home, where they cared for Alzheimer’s patients. Hipsters studying at Pratt had to fish out an extra quarter to get to the loft party in Williamsburg. And suburbanites in Aurora resigned themselves to waiting a few more years before they could take the train to work in downtown Denver.

Between volatile fuel prices, a sea change in public attitudes towards the environment, and the enormity of the world’s financial collapse, the nation’s transit agencies have appeared more like amusement parks in the past year, riding a roller coaster of increased demand, increased cost and uncertain financial futures. But as the sobriety of 2009 has set in, this wild ride eased into a new reality: deficits, fare increases and cost-cutting strategies that are ushering in a new age of austerity that rivals any crisis that American public transit has ever experienced.

“The issue at hand is challenging because it’s so widespread,” said Robert Padgett, director of policy and research at the American Public Transit Association (APTA). “It is not an issue that is facing a single agency.”

Were the nation’s transit agencies true businesses, many would have by now gone bankrupt. Eighty percent of the nation’s transit agencies have reported declining operating budgets. Estimated annual operating deficits projected for 2009 treat millions like pocket change: $230 million for Los Angeles Metro, $160 million for Boston’s Massachusetts Bay Transportation Authority, $200 million in Chicago, $100 million in San Francisco and $57 million in Atlanta. St. Louis Metro’s $46 million deficit represents 21 percent of its operating budget.

Roughly $2 billion short for 2010, New York City’s Metropolitan Transportation Authority (MTA) is trying to close the sort of budget gap that would daunt most countries, much less a single public agency.

States are raiding transit funds, and the federal government’s $787 billion American Recovery and Reinvestment Act (ARRA) sets aside only $8.4 billion for transit, just 10 percent of which can be used to relieve operating deficits. Unfortunately for America’s commuters, those deficits have reached unprecedented proportions.

Billions and Billions

The economic downturn has put unprecedented pressure on America’s transit operators. In some cases, every imaginable form of revenue is down, from sales tax to farebox collections to bus advertising. Amid its spectacular financial collapse, California has announced that it will revoke all of its promised funding for local transit in 2010—for Los Angeles Metro, for instance, that marks a loss of $200 million—and the state’s bond rating ranks dead last among the 50 states.

“That’s really pathetic,” said Metro Chief Financial Officer Terry Matsumoto, who said his agency is contending with a 19 percent drop in county sales tax revenue for the first quarter of 2009.

Boston carries a $5.2 billion debt load and debt service consumes roughly one-third of its operating expenses, according to Jonathan Davis, deputy general manager and CFO of Boston’s Massachusetts Bay Transportation Authority (MBTA).


Valley Metro

To make ends meet, many transit providers

have cut services, particularly on off-peak

schedules.

And yet, America’s rolling stock and related services are no less a part of cities’ infrastructure than its roads and bridges. Calling it quits and putting the trains out to pasture is not an option, but the morass of funding options, coupled with agencies’ obligations to serve the public and play a role in cities’ economic recovery, makes anything resembling a marketbased solution impossible.

“It’s very complex, but it’s the nature of transportation finance to be complex because it plays such a complex role in our society,” said Martin Wachs, director of the Space, Transportation, and Technology Program at the RAND Corporation. “It has a facilitating effect on almost everything we do, so it’s inherently complex. That’s not different from any other country or any other period of time.”

Though every city has its unique vascular system of roads, routes and ridership patterns, the fiscal situation across the country is remarkably similar. With farebox revenues accounting for hardly more than 30 percent of operating expenses, transit agencies receive the vast majority of their funding from the public coffers, usually from one of the most uncontrollable sources of funding: local sales taxes.

“Given the way we fund transit, with sales tax, it’s directly related to
the slowdown in the economy,” said Deputy General Manager Jim acobson, whose King County (Seattle) Metro Transit is facing a $100 million deficit that represents over 15 percent of its operating budget. “The staggering loss of sales tax revenue overcomes the ability to deal with it on the cost side.”

While other public facilities such as schools are funded by income or real estate taxes, every cutback in household spending sends ripples through a city’s transit system. Transit agencies have therefore suffered through no fault of their own, but blame is hardly at issue.

“People don’t realize that the reasons surpluses go up and down are not because they’re putting the money under a pillow,” said Gene Russianoff, staff attorney for the New York City transit advocacy group the Straphangers Campaign. “It’s because the economy changes and so their inflation-sensitive taxes produce more or less.”

“In the past when we’ve dealt with these things we’ve generally been able to manage by deferring service additions,” said Jacobson. “Almost always without having to reduce the services on the street.”

According to APTA, among those public transit systems reducing service, 65 percent have eliminated or reduced off-peak service and 48 percent have reduced the geographic coverage of public transit service.

In the short term, many agencies’ version of a balanced budget has drawn on emergency state funds. Boston’s MBTA received over $150 million from the state legislature in order to balance its books for 2009. But there is little indication that this funding is sustainable.

Behind the scenes, agencies have been trimming down to the bone. Hundreds of positions have been eliminated, and agencies such as New York’s MTA are even proposing cutting back on the cleaning of subway cars and the manning of subway booths. Though these moves have enabled many agencies to balance their budgets through 2010, it remains to be seen whether they can survive on skeleton crews—with even more passengers.

The Paradox

Transit is what economists call an “inferior good.” This is not to say that it is below par or that nine-figure budgets are diminutive in any way. Rather, it means that demand increases as you move down the income scale. With so many people out of work and making less money, more of them are turning to public transit and leaving their cars at home. The combination of individual belt-tightening, environmental consciousness, and astronomical gas prices in the summer of 2008 led to the greatest number of transit riders in 52 years, according to APTA. But financing operations is under great stress.

“All of this is happening despite this incredible demand for transit service,” said APTA’s Padgett. “We’ve got this incredible paradox.”


RTD

It's coutnerintuitive, but experts say under some

circumstances, ridership increases can actually cause

transit providers to lose money.

Unlike Wal-Mart or McDonald’s, transit agencies do not make a profit off new customers. If the increase in ridership is distributed in such a way that it overwhelms a bus or train line’s capacity, and more vehicles must be added to alleviate the overcrowding, the benefit of more riders disappears. In other words, it’s great if you can pack more people on to the same number of vehicles, but once you need to add vehicles, the extra people start costing you money. Therefore, many agencies are facing a situation in which more people are epending on them, but they are ill-equipped to serve new riders.

Gratification, therefore, has turned into consternation as sustained ridership has compounded the funding challenges.

“It’s counter-cyclical,” said Wachs, of RAND. “When the economy is bad, transit ridership goes up.”

“It’s the same good news/bad news challenge everywhere,” said Rick Simonetta, CEO of Phoenix’s Valley Metro. “There’s a frustration level out there.”

A venerable rule regarding the elasticity of public transit contends that a 10 percent increase in fares leads to a 3 percent decrease in ridership, thereby making fare increases marginally useful. Likewise, because every passenger is, in the aggregate, subsidized by amounts in the neighborhood of $6 or $8, the elimination of service and sometimes entire lines can save a considerable amount of money even if revenue drops because riders opt for their cars.

“Our farebox recovery is about 20 percent,” said Phil Washington, interim general manager of the Denver Regional Transportation District (RTD). “But it’s not nearly enough to offset the additional service we have to put out on the street. It’s been a strain for us.”

The challenge is to ferret out the least efficient lines—those that require the most subsidy—and keep the ones that generate revenue without straining operations while, at the same time, ensuring that key constituencies—such as suburban members of metro transit agencies—are still served. It’s a delicate balance.

“People are turning to public transportation to get to work in a way that is more cost-effective. In the past three years we’ve seen a real surge in ridership,” said Padgett. “That’s due to a real environmental consciousness as well. Transit agencies are trying to respond to the continued demand for service, and they’ve not been able to do so at the same level.”

In New Jersey, NJ Transit has so far been able to use attrition, furloughs, wage freezes and labor-saving contracts to minimize the impacts on riders in the face of a decline in state funding and a fall in farebox revenues. “We have cut administrative costs to the lowest proportional level in NJ Transit history, enabling us to create a budget with no fare increase and no major service cuts,” said Executive Director Richard Sarles.

Though most transit economists agree that the value of riding transit extends far beyond the individual rider—and into benefits like reduced pollution and reduced congestion—these are benefits that transit agencies essentially give away for free.

Likewise, transit service has been credited with helping revive urban America. Now the future of American transit and of cities themselves is in doubt.

“You have gas prices pushing $4 per gallon and new riders are coming into the system, and you’re really making an impact and helping people in their lives,” said Jacobson. “And then the bottom drops out of the funding. It’s disappointing. I think we were really poised to create a whole new set of travel patterns among the next generation of transit riders."

Some agencies are already seeing the tide of 2008 ebb. Though systems have gained riders who want to economize, those that carry a high number of commuters have seen drop-offs as work has disappeared. Davis said that because 60 percent of workers commuting to Boston’s financial center do so on public transit, any fluctuation in employment will have a direct impact on ridership.

Creative Solutions

In an industry that often relies on rational calculation—ridership projections, bond ratings, vehicle-miles traveled and the wisdom of crowds—many agencies have been exploring more creative ways to generate revenue from their fleets of rolling billboards and patches of real estate. Abiding by a “transit first” policy, the San Francisco Municipal Transportation Agency (SFMTA) controls street and public garage parking in the city and has recently rolled out a new plan to wring as many dollars as possible from what it considers a competing, and not necessarily beneficial, mode of transportation. SFMTA spokesperson Judson True said that the agency, which has already eliminated $90 million in personnel, stands to gain $90 million from parking citations and another $30 million from meter collections.


Valley Metro

A Valley Metro bus picks up passengers at night in the

Pheonix area.

Meanwhile, Phoenix has considered selling naming rights to its new light rail line, as if it was a gridiron and not a railroad. Cleveland has already sold the rights for a bus line’s name to a hospital.

And rather than simply raise fares across the board, many agencies that have implemented technologically sophisticated fare-collection systems are considering variable pricing schemes that would adjust fares according to not only distance, as some agencies already do, but also time of day.

Then again, some schemes are not quite so palatable. The New York MTA’s decision to cut back on cleaning of its subway platforms has led to some understandable squeamishness. On the other hand, New York has thus far been able to push through an unusually comprehensive suite of taxes and tolls intended to generate over $1 billion. Referred to as a “mobility tax” it falls on all 12 counties that MTA serves and addresses both driving and public transit.

Public Reaction

The elimination of some riders’ livelihoods has been met with relatively mild reaction in many cities. Riders who might otherwise be up in arms or filing lawsuits have expressed sympathy for agencies’ predicaments and, in many cases, accepted fare increases and service cuts as a matter of course, along with all the other challenges of the current economy. New efforts have emerged to collect stakeholders’ inputs and, in some cases, create new
civic-minded partnerships to keep some services running.

“I think [riders] are sympathetic,” said Dianne Williams, communications director for St. Louis Metro. “Until it happened people didn’t talk as much about what the impact was going to be on human beings. It was more conversation about a big, bad public entity that just wants more money. We figured out how much money we have and how much service we can give.”

In one St. Louis neighborhood, local businesses worked with the transit agency to preserve a bus line that brought in badly needed customers and employees. And in New York, whose $2 billion deficit led to some of the most protracted political wrangling in the city’s history, a compromise has emerged that spreads the pain among a wide range of stakeholders who have, through their representatives, each agreed to bear a share of the burden.

“They understand, especially last year when fuel costs went up, that we needed a fare increase to offset the budget challenges,” said Washington, of Denver’s RTD. “They’re looking at their own households and they know that their own households are tightening up and so are government agencies.”

Likewise, rather than try to draw rosy pictures for the public, transit officials are speaking with remarkable frankness about their situation.

“It’s one of the most daunting financial challenges in our history,” said Davis, of Boston’s MBTA. “We’re dipping into our savings to put food on the table,” said Matsumoto, whose Los Angeles Metro is on the verge of tapping out its emergency cash reserves.

Part of this frankness stems from what agencies consider the need to involve stakeholders in future planning efforts. They are eager to consult stakeholders to identify which cuts are the least painful and, perhaps, to spread some of the responsibility.

“We invite our customers to have a discussion to determine—assuming we have to do one of [these] two things—would they rather see a fare increase or a service reduction or a combination of both,” said Davis.

These efforts have already led to a surprising consensus in New York City, where stakeholders and policymakers endured difficult negotiations at the state and local level to close the MTA’s budget gap. The result is that a proposed fare increase, which would push the base fare up a quarter to $2.25, has been met with reluctant but firm support.

“It was not easy for us as a transit riders group to support a fare increase. We took our criticism,” said Russianoff, of the Straphangers Campaign. “But we felt if it leveraged a substantial amount from businesses and motorists that it was a fair deal.”

“We’ve been working for several years trying to create partnerships with private entities, local jurisdictions, to fund programs to put service on the street,” said Jacobson, whose King County Metro raised fares from $1.25 to $2 in under three years. “It’s been a good exercise to go through educating people on the options. There is no easy choice.”

No Federal Bailout

While federal bailouts and assistance money has flowed to finance houses and automakers, transit agencies have been getting short shrift as they struggle to convey a significant portion of America’s workers to those jobs that remain. By many accounts, transportation funding generally favors driving, with 80 percent of funding dedicated to roads and 20 percent to transit, and federal money is not generally allowed to be used for operations for any agency serving a population of over 200,000.


RTD

The economic stimulus has been an

opportunity for public transportation

providers to launch new capital projects,

but little help in maintaining existing

services.

Of the nearly $1 trillion in federal stimulus money that the Obama administration has or is planning to inject into the economy, a scant portion of it is of any immediate solace to transit agencies. Of the $8.4 billion in public transportation money set aside in the American Recovery and Reinvestment Act (ARRA), only 10 percent has been approved for operating expenses, under the philosophy that merely preserving existing jobs will not jump-start local economies. Therefore, agencies face the prospect of receiving stimulus money for new projects while they struggle to maintain existing services.

“When you look at the next transportation bill, we hope it’s sooner rather than later,” said Washington. “We hope to see more money going to transit. It’s historically been an 80/20 split between highway and transit. We obviously want that to be more equitable.”

A markup of that reauthorization bill was released in May but has been tentatively shelved. Therese McMillan, deputy administrator at the Federal Transit Administration (FTA), noted that President Obama and Transportation Secretary Ray LaHood are both eager to tailor that authorization towards policies that benefit cities and aid transit agencies.

“One of the key elements … is in the climate change initiatives and the livability focus,” said McMillan. “I think it’s widely recognized now that transit is a key to revitalized centers in both urbanized settings and for revitalizing neighborhoods at a smaller scale as well.”

Until then, many agencies have already factored ARRA money into their budgets and are waiting for funds to be disbursed and to be done so equitably, not only to big city agencies but also to rural transit providers.

“We’ve been very conscious of making sure that no one is left behind, so to speak,” said McMillan. “We want to work hard to make sure that the money is obligated and available for transit agencies to use as soon as possible.”

Long-Term Solutions

With the potential for disaster looming in fiscal years 2010 and 2011, transit agencies are not necessarily focused on long-term solutions. Many are standing by their capital projects, which will benefit from ARRA funds, but otherwise the discussion is just beginning about how public transit can alter its funding structure to avoid future crises.

“That [stimulus money] helps for the next couple of years, but given the situation we face, we have a longterm problem that we have to deal with,” Jacobson said.

Though the current crisis has inspired a great deal of introspection on the part of transit agencies, many say a truly sustainable urban transportation system has nothing to do with fares or lines but rather with the very form of the cities that they serve.

“I’m not sure that transit agencies can address the long-term alone,” said RAND’s Wachs. “But regional planning agencies—are trying to better link urban form and land use with transportation, and that is an important thing.”

That effort is, to an extent, exactly what many transit agencies are trying to achieve with new capital programs. Dozens of miles of light rail lines are planned, especially throughout the west, and these are intended to spur denser development and divert commuters from their cars. Whether excitement over capital projects will distract agencies from establishing long-term financial strategies remains to be seen.

“The sooner we can recover economically, the sooner we can maintain the schedule for those extensions,” said Simonetta, of Pheonix’s Valley Metro. “People [on the alignments for new rail extensions] are chomping at the bit and asking, when do I get mine?”

One alternative that wouldn’t require a single bucket of concrete but would wreak havoc on conventional accounting systems is to eliminate fares entirely and treat public transportation much the same way as public education. Vancouver-based transit consultant Dave Olsen has researched and lobbied for eliminating fares (see sidebar), contending not only that increased ridership would lead to greater aggregate mobility—because passengers could take transit as they pleased, without facing the barrier of the fare—but because, he claims, many agencies spend more on collecting fares than they actually generate.

Until radical change arrives, experts fear America’s transit situation may get worse before it gets better.

“The hard decisions will be coming in fiscal year 2011,” said Matsumoto, whose LA Metro is expected to implement a fare increase by then. “We haven’t seen anything yet.”

Josh Stephens is a freelance writer based in Los Angeles.

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