Wednesday, February 4, 2009

Unpacking the transit funding dilemma

It's been in the news a lot lately: public transit systems are being forced to cut service, even as they hit record ridership levels. This has come as a bit of a surprise to your Cap'n, since I know that transit can be profitable under some circumstances.

I had assumed that the subsidies were necessitated by unfair competition from subsidized private car travel, and that if ridership were high enough they could at least break even. In other words, that it was the inefficiency of operating almost-empty buses, trains and vans that necessitated such high operating subsidies.

It turns out that I was wrong, and that even at full capacity it is impossible to make a profit on many of these routes. This is why people are asking for operating subsidies to be part of the stimulus package being debated in congress.

It still rubs me the wrong way. Impossible to make a profit? You mean that if a private company set up on that route they wouldn't be able to break even, even with full buses? Then why do many buses in New Jersey make a profit even though they're not always full?

What's that I remember from Econ 101? Oh yeah, it's impossible to make a profit at that price. Those private buses in New Jersey are allowed to raise their fares, and to set them at a point where they can make a profit. So if the bus isn't breaking even with 50 people paying $1 each, maybe it would with 25 people paying $3 each. If the economy is really driving people towards transit, why not make some money off of that?

I can just hear the squawking now. You can't raise fares! Poor people have to feed their children! You'll hit them in the pocketbook! How else are they going to get to work?

So this is what's actually going on with the transit operating subsidies. They're not for keeping transit systems going - the demand is probably great enough for them to do that - but for keeping the transit fares within reach of the poor. In other words, a welfare system.

Let me say that I am sympathetic to that point of view. To me, "welfare" is not a bad word. I was once a college student without much income, and later worked at low-paying jobs with lots of student loans. I don't want to price basic transportation out of the reach of poor people.

My beef is that somebody is being less than honest here, and I think we can ill afford to do that. Transit is critical for lots of reasons, and getting large numbers of people to shift from cars to transit would bring tremendous benefits to society at large. But we can't do that if we can't afford to run the buses and trains where and when people want to go. What are we actually trying to do, and how can we accomplish that?


city said...

I'd love for transit agencies to be able to find the right fare to cover operating costs. But so long as they are publicly funded for expansion, the "straphanging" public is able throw fare fits and mess up their operations. So, then we have the general underfunded disgustingness of the NYC subway.

I think we could solve the problem by detaching infrastructure that requires public investment from operating businesses that run on it. That's basically how it works with your bus companies, using our heavily subsidized roads. If a separate public authority owned and expanded all light and heavy railroads (and potential BRT-ways) in the metro area, MTA and NJ Transit could opt out of public investment and set fares where they need to. In some future they could compete with each other or face new operating competition. Even without that the split arrangement seems to work better. The SNCF spun off it track building and maintaining operations in the 90s and now "turns a profit" on running trains. The tracks themselves still require public investment, but at a declining rate. It would be cool to be the first (?) to do this at the city and regional level.

CityLights said...

It's possible to not turn a profit at any fare level, simply because the economies of scale are so large that no company can meet them, at a particular location. And I think this is true to a large extent in America because transit is generally limited to shuttling workers. The buses and trains are full only at rush hour, and the schedules' long ends run at a loss.

If ridership can be increased by making it convenient enough for people to run errands, visit relatives, go shopping, etc using public transit, the economies of scale will materialize. But that will require increasing destinations, speed, and frequency of service (especially nights and weekends), impossible goals even in a good economy, much less now.

Regarding detaching infrastructure from operations, this worked well with the telecom industry in the 90's- the phone companies actually still had to take care of their networks, but had to allow other companies to use them, at near-market rates, of course.

Ben K. said...

The other issue to consider in the transit system vs. private company/profitability debate is that these transit systems — such as the MTA — are public benefit corporations. Since the MTA is performing a public service, the idea is to keep fares low artificially so that everyone has access to them at a price point that doesn't deter people who can't afford entry.

The problem in New York right now is that the legislature has failed to recognize and keep their end of the public benefit corporation funding deal.

Bob said...

I think there is something missing from your analysis here. Transit competes with automobiles, on the basis of both travel time and user cost. If you raise the cost, you make transit less competitive and fewer people ride. So there are diminishing returns to raising fares... it's unlikely profitability can be achieved that way.

But it's not welfare to subsidize transit, it's fair payment for positive externalities. Because there are benefits to diverting people to transit. Benefits to non-transit users like cars that have less delay, and companies that can get more employees to their downtown offices.

Subsidies keep transit user costs low enough to compete with automobiles, so enough people ride transit to achieve those benefits

There are still open questions: how much to subsidize? Where should the funding for the subsidy come from? I think these are still arguable. But subsidy does still need to happen.

By the way, I've heard of two heavy rail systems that claim to be in the black: Hong Kong and Tokyo. Both do it with significant real estate development businesses that are designed to complement their systems.

Bob said...

And now I see you already have a follow-up post I neglected to read before posting that comment... apologies!

fpteditors said...

Here is the piece you are missing. Transport is a system, not a collection of shops. Public transit cannot compete with the auto system because the auto system is subsidized past the critical mass needed to make a system work.

theglassrat said...

The main problem with your argument is it misses why driving is as affordable as it is for many people: it is highly subsidized, much more so than most fixed (aka rail, BRT..) transit. Almost all the roads are paid for by tax dollars. NYC Subway tracks? Maybe 40% paid for by public tax dollars.

Cap'n Transit said...

Glass Rat, please read paragraphs 2 and 3 of the post.