Reversing Roles: Should Washington Cover Operations Costs?

» Are public transportation operations too much of a redistributive function to be funded by local governments?

Since 1998, Congress has banned the use of federal funds to pay for public transportation operations in communities of more than 200,000 people, effectively requiring transit agencies to pay for all of their salary, electricity, and fuel costs using local or state revenues. Meanwhile, the U.S. government has continued to sponsor a majority of costs for capital expenses, including the construction of expensive new fixed-guideway bus and rail lines.

This split in funding has resulted in a number of particularities in the American transportation system — during the recent recession, transit agencies actually received more money to pay for new construction programs from the federal government’s stimulus and steady transportation allocations, but less to sponsor services from fluctuating state and local revenue sources. This has produced a situation in which many cities are actively building new rail lines even as they’re cutting offerings on their bus operations.

Should Washington be asked to help find a way out?

Since last year, when the full effects of the recession were making themselves clear, some agencies have been clamoring for the federal government to take a bigger role in operations funding; they’ve argued that the stimulus would have little effect if they’re forced to fire drivers and technicians. Recently, several Democratic Senators have suggested promoting a two billion dollar emergency operations aid plan and several agencies have been asking for the flexibility to use capital funds for operations, though the American Public Transportation Association and several other agencies argue that this would limit their ability to adapt to changing fiscal conditions; they prefer their operations and capital budgets separate.

In the past, I’ve argued against federal aid for operations, suggesting that such policy would reduce local funding responsibility and ultimately diminish the ability of the U.S. government to fund investments in new corridor construction programs. Federal Transit Administrator Peter Rogoff suggested last month that local agencies must find more local funding before the federal government will commit to sponsoring their expansion schemes.

Nonetheless, it may be worthwhile to consider the possibility of entirely reversing the current equation — what if the federal government paid for operations costs while local governments invested in new capacity?

Paul E. Peterson — the urban political theorist whose views on most issues I hardly share — nevertheless provides an interesting approach to considering this question. In his seminal 1981 book City Limits, Peterson addresses the issue of what role urban governments should have within the U.S. federal system. He argues relatively persuasively that cities and their leaders should have only a minor interest in promoting policies that are designed to move wealth from that city’s wealthiest residents to its poorest; “The local interest in economic growth all but precludes a commitment to redistribution,” he suggests (93). “Broad-scale redistributive policy proposals are inappropriately addressed to local governments. For example, if a city-wide minimum wage is passed, it will drive business outside the city’s boundaries. If good quality, subsidized housing is built with local funds, not only must it be paid for out of local tax dollars, but it might very well attract low-income families from other places” (173).

The suggestion is that cities cannot in their own budgets commit to politics that aid the poor; these policies generally have the tendency to encourage the wealthy to leave cities and the poor to stay, ultimately resulting in a declining tax base. Rather, Peterson argues, cities will produce more benefit by investing in developmental projects that increase attractiveness and expand the tax base. Obviously, all of these arguments must be understood with a grain of salt — they’re not all-encompassing, and cities are affected by trends outside of their own making. We also must assume that it is in a city’s primary political interest to want to increase its tax base.

Also, Peterson does not argue against redistribution entirely — City Limits does leave room for higher levels of government to be involved in funding services designed specifically for the poor — he simply points out that it is not in a city‘s long-term interest to use locally raised funds on the lower class. After all, the net migration in and out of a city can be quite significant (the city of Baltimore, just to take an example, has lost a third of its population since 1950), while the country as a whole, and its tax base, will mostly remain constant.

If we take these assumptions as more or less true, what implications do they have for public transportation? The answer comes down to both whether we define transit operations as a redistributive resource or as a developmental one and whether the tax base of a transit district is sufficiently broad as to be able to ensure long-term revenue sources from middle and high-income populations.

The first question — whether transit operations are redistributive or developmental — is not easy to answer. If a bus or rail system serves almost entirely as mobility of last resort, used only by people in the lower class to get around, it is almost assuredly redistributive. Cities that provide such services are, according to Peterson, investing in something that will ultimately lower the local tax base (I’m not sure if I would go that far, but the argument still makes some since). In these situations, it would make complete sense for the federal government to pay for operations, because it is unfair to burden already poor cities with the need to raise local funds to cover social services.

The more progressively oriented Washington’s political climate is, in other words, the more local transit operations would be subsidized. The question of how many services to provide comes down to how much we want to help the lower class.

On the other hand, if transit proponents are to suggest that bus and rail operations in themselves produce economic benefit — i.e., if you have more buses on the same line, you get an increase in economic activity — than there is an argument for local funding based on Peterson’s assumptions. If the transit system is used by a whole spectrum of the population and increases overall efficiency of the local economy, it isn’t really redistribution. In these cases, it seems highly advantageous for cities to invest local money in their day-to-day transit, even if it means taking out loans to do so.

But the other problem posed by Peterson’s arguments is where the money is coming from; the basis of the city “limits” relies on the idea that the wealthy can leave (presumably into the suburbs) if they feel overburdened by taxes to support the local poor. Yet if a transit district is large enough, this poses less of a problem. For example, if a district covers everyone in a metropolitan region and taxes them all, there is no problem with paying for redistributive transit services — assuming the taxes aren’t so high as to encourage people to leave the region entirely.

On the other hand, if that district fails to grow with an expanding population, it may lose its ability to perform these redistributive functions. Take Dallas as an example: Though the local DART agency includes a number of suburban jurisdictions within its tax base, it hasn’t expanded to encompass the region’s far exurbs, ultimately reducing its ability to maintain necessary budgetary growth. This means that it has less of a capacity to invest in essential transit services that don’t necessarily ensure long-term economic benefit.

Is a potential answer to ask Washington to pay for operations as cities and their metropolitan regions invest in new rail and bus capacity as a developmental tool? Perhaps: If cities investing in new public transportation projects can prove that that spending will increase their tax base over time, there may be advantages to taking out loans to pay for new projects and then paying them back using the corresponding increase in local tax revenues. On the other hand, because cities have a whole variety of circumstances, some places may be more capable of doing do than others; whereas a fast-growing metropolis like Phoenix may have no problem seeing immediate return in its capital investments, cities with falling populations like Detroit may not. In those situations, it should be the federal government’s role to step in, even on construction spending.

It may be in the federal government’s interest to provide adequate operations funds to ensure (or even require) a minimal level of transit services in every community of a certain size. That idea, however, requires federal intrusion into policy that is overwhelming affected by state and local decision-making; this could pose insurmountable obstacles to this concept. That said, it may be time for cities to take more responsibility for the funding of new transit capacity through capital construction. If these investments do produce a measurable return on investment — and that’s an argument made frequently by proponents of new light rail lines, for instance — then municipalities should have an economic interest in using local funds to pay for them.

Image above: New York City’s George Washington Bridge Bus Terminal, by Yonah Freemark

24 Comments | Leave a Reply »
  • One could make the argument that maintenance is a capital expense, and as such should be eligible for Federal funding. That would take some of the pressure off local/state funding sources, while still maintaining that “local/state funding responsibility” and local commitment that you had argued previously.

  • 電車男

    I think Peterson’s point regarding buses reducing local tax base makes sense, so long as it’s only applied to cases in which a city deliberately builds the cheapest, most bare-bones network it can get away with. Unfortunately, this is often the case, particularly outside of large cities. For transit to be an economic benefit, as it often is in other countries, it must be comprehensive and frequent. Maintaining a modern image and a positive advertising campaign are pretty important as well. For public transit to have a positive impact on a city, instead of reducing its tax base, it must not be viewed or treated as a last-resort method of transportation. If public transit is built to be convenient and attractive to potential riders, then it usually will be.

  • eldondre

    It’s an interesting question and without a doubt, there’s a lot of truth in what Peterson is quoted as saying. It’s worth noting that those words don’t say anything about transit in particular. I’d also argue that the large the capital investment, the more likely the transit line is to be an economic driver (within reason). for example, a subway line that will cut travel time froma neighborhood to the city center from 40 minutes on a bus to 15 minutes on a subway (yes, in places like Philadelphia trip times on local streets are extremely slow) then it’s likely to make the area more desirable to live in and help the road system cope with more people (allowing high density). I think Philadelphia is an excellent example, as it’s basically a failed welfare state. I’d even argue that the bus system as redistributive is even hurting the poor, as it’s often poorly performing buses in semi-suburban districts that are allowed a pass from farebox requirements, reducing money for runs elsewhere. Anymore, more to the point, it’s not transit subsidies that has driven people from Philadelphia, but high taxes to support all kinds of redistributive programs from public housing, to summer camps, free gas for public housing tenants, etc, etc..and perhaps most importantly, the use of city government as an employment tool. (Of course, lot sof problems such as the school board stacked with incompetent cronies aren’t redistributive just ineffective, and people who can afford to leave do)Eventually, businesses and people just leave, leaving a declining tax base to support a worsening economy. Bringing this back to transit, one needs to look at the whole picture. Why can’t cities afford transit systems? where else is the money going? is it simply because transit is undervalued in terms of priorities? I’d argue that’s the case in Philadelphia at least. STandards for operating ratio are a good thing. I would argue that money for maintenance from the funds certainly would help, but paying for bus drivers? I’m not sure that’s a good idea since cities should be encouraged to improve transportation….the wonderful thing about subways is they have much more efficient use of labor, but if labor is subsidized, that begins to tilt the favor towards buses, which are often lower quality of life.

  • dejv

    Almost all transit happens to be in rich regions – with exception of school buses. This alone should question, if collecting taxes from here to DC only to paid back as federal subsidies is a good idea. Another reason is that local agencies lose appeal to make their service more effective – offer better/more service for the same costs or cut costs while maintaining the same level of service.

    That said, funding operations from local revenues is generally good idea. The problem is in two details IMO:

    1) transit operations are generally funded with revenues of highly volatile sales tax

    2) in many places, transit works as a welfare service for the poorest and in many more places, it is percieved so despite being important part of metropolitan area economy

    The ways to fix these two problems are obvious, but hard politically – the first requires tax reorganization and the second increasing of utility of transit for everyday use (that in most cases requires several times more operating subsidies to make frequent extensive service possible).

    • simple

      > Almost all transit happens to be in rich regions

      How do you measure that? Do you have data that compares regional GDP per capita with regional transit service hours per capita? If so, can you please share a link? Thanks!

      • dejv

        By simple fact that those areas generate most economic activity. I didn’t meant it as areas where rich people live – they like to live where they can evade taxes. ;)

  • Danny

    It would be worth considering if only local transit agencies were doing everything they could to control costs. They aren’t.

    We have some agencies who insist on having multiple operators on a single train so that they don’t have to lay off unnecessary workers. We have some agencies whose unions have effectively prevented adequate staffing levels, thereby ensuring that everyone from bus drivers to station agents can make six digit salaries if they want to work enough overtime. We have some agencies that are so hell bent on spending all their money on stupid things like branding and bus stop architecture, and are left twiddling their thumbs when they realize they haven’t created a drop of value for their riders with those expenditures.

    No, we don’t need a federal government bailout of transit unions and idiot planners. In fact, we need the opposite. We need all funding to come from local sources…because that is the ONLY way that you can ensure any degree of accountability.

    The only value-creating role I can see for the federal government in this is by creating transit districts and jurisdictions. They are the only government power that can override state and city boundaries to establish these districts for entire metropolitan areas.

    Once they are established, grant them independent authority to levy taxes, and make the leadership of these districts a directly elected position.

    Only then, when local transit leaders are held accountable by the exact same residents they are supposed to serve, can we really have some accountability for out of control costs. Any strategy that involves federal funding for local screwups is a bankrupt strategy.

    • simple

      But what if federal allocation of operating assistance was based on criteria that actually incentivized operating efficiency?

      Rather than allocating based strictly on population, it could be based on some combination of total ridership and off-peak service hours — those operators who can produce more ridership and off-peak service hours per federal $ would thereby be rewarded for their efforts in the next year’s appropriation. Those regions who decide to use their federal support to provide overly generous rewards to labor, and those who cannot manage to plan in ways that stimulate ridership or meet off-peak service needs would keep getting less.

      • Danny

        The problem with that idea is that the more efficient they run, the less assistance they need. NJ Transit, probably the most efficient public transit operator in the nation, wouldn’t need an operating subsidy because they are already operating at a surplus.

        If operating efficiency is the incentive for receiving federal funding, then the real underlying incentive is to maintain a certain level of inefficiency so as to continue to “need” funding.

        This would be a sad perverse incentive. I haven’t done any in depth studies, but I have done some simple calculations on a few major cities. There are at least 12 intracity rail systems in the united states that could have operating surpluses at current ridership levels and service levels if they would do three things: 1) Keep wages in line with private market averages, 2) Keep staffing levels in line with necessities for operation (eliminate overtime and overstaffing), and 3) Keep procurement costs in check (off the shelf rail cars…not custom made).

        How sad would it be if we told them that in order to qualify for federal funding that they would have to be more efficient, but not as efficient as they could be?

        • New York City Transit and Toei have about the same per-employee compensation. The problem is not wages; it’s overstaffing – more specifically, administrative overstaffing. OPTO is a low-hanging fruit, and so is cutting on deadheading to increase train operator utilization, but beyond that you need to start laying off clerical workers.

          • simple

            Do you mean Toei or Tokyo Metro? I suspect that some of Toei’s administrative overhead gets buried in the overall budget of the Transportation Bureau of the Tokyo Metropolitan Government. As for Tokyo Metro, from what I can tell they also benefit from much looser restrictions on use of part-time employees — a lot of those staff that help shove you on the train are working part time without benefits. Also from what I understand, a number of maintenance functions (i.e. fare collection equipment) are performed by contract vendors which for me makes their labor accounting tough to compare with standard US practice. Happy to hear your take on it, though!

          • I mean Toei, which is the less efficient of the two systems. It has 6,400 employees, Tokyo Metro 8,500. I bring up Toei and not Tokyo Metro as a basis for comparison because Toei gives a more precise breakdown of its operating costs; Tokyo Metro just says what its operating costs are, without saying how much is labor expenses.

        • simple

          I see your point, but I don’t see how allocating federal operating assistance based on a combination of total ridership and off-peak service hours as I suggested would encourage inefficiency. Taking your NJT example, if they’re now maintaining an operating surplus and had the opportinity to receive federal ops funds based on total ridership and off-peak service hours, they would maximize future funding by adding service in ways that further increase ridership and/or provide more off-peak service. Anything they would do to reduce efficiency (i.e., increase costs in ways that don’t achieve higher ridership or more off-peak service) would mean less federal support during the next cycle, not more. It should be self-correcting, shouldn’t it?

          Since overall federal funds would be allocated based on share of total national ridership and off-peak service hours, broad economic effects would be normalized. Recession-induced peak ridership declines would suggest that less peak service is needed, so the transit operator should be cutting back there anyway. Off-peak service on the other hand is a social good, so that should not be jettisoned so quickly in lean times and the formula would respect that.

  • One of the main issues in transit capital investment is that transit operations almost never turn a profit. In building new rail lines, for example, transit agencies are in effect digging themselves a deeper operations deficit hole. Look at San Jose’s VTA. They are attempting to build a 6 billion (or more) dollar heavy rail project. Beyond the massive capital cost, VTA will have to subsidize the very expensive operation of the line. BART to San Jose could cause further cuts to VTA’s bus and light rail services and really only serve a tiny part of Santa Clara County. Therein lies the capital-operations split paradox. Spend money from the Feds to build new lines, but cut service when they open because operations funds don’t exist.

    • Tom West

      “One of the main issues in transit capital investment is that transit operations almost never turn a profit”
      That’s because most of the economic benefits of transit capital expenditure do nor accrue to the transit operator. They are generalyl apread across the economy as a whole – which is way it makes sense for the government (=the economy) to pay for it.

  • Tom West

    In effect, Peterson argues that policies done for social gain (e.g. minimum wage) (and implicity, economic disbenefit) have to be done at the top level of government. On ther other hand, while those doen for economic gain should be done at the lowest level.

    Transit is both… but the US style of transit-as-a-last resort pushes it towards the soical category, while the European style of transit-as-best-transport pusghes it towards the eocnomic category.
    Therefore, cities should invest in high quality, European style transit, so that it functions as an economic benefit.

    I would bet that there is a strong correlation between transit service provision and median income of users for transit systems… but which causes the other?

  • Pantheon

    Transit systems that serve as a mobility of last resort are not redistributive. They are developmental. A certain percentage of workers – particularly in industries like fast food – do not have cars. Business owners and corporations that pay subsistence-level wages need transit so the slaves can get to work.

  • Two points jump out immediately.

    The first is that the question of the reaction to the recession is entirely obscured by the development versus redistribution framing. The primary point with respect to the recession is that it is the fiscal authority at the level of the sovereign issuer of currency that has the responsibility to increase deficit spending to provide the assets to permit excess saving to occur during recessionary conditions because it is the only level that CAN do that. Expecting California or New York or South Carolina or Ohio to fulfill that responsibility would be like expecting Greece to fulfill that responsibility within the Eurozone.

    But that is an economic stabilization function and could be done on an entirely functional basis – subsidize transit operations in proportion to the reduction in tax base as a stabilizing measure and subsidize transit operations in proportion to population served and decline in national economic activity as a stimulus measure.

    The second is that independence of oil-fired transport is a national security concern, so that federal operating subsidies for oil-free transport are justified on a national defense basis. That could well be on the basis of a per capita distribution to an account for each municipality, and counties and reservations for residents outside incorporated areas. Then projects would compete for funding from those accounts by being certified as qualifying projects, and then making their case to be allocated funding. If the funds were on a use-it-or-lose-it basis, we would see a wide range in experiments in a range of qualifying oil-free transport.

    • Good response, but I’d like to just comment on your “wide range in experiments” point. At this stage, doing experiments on transit is akin to doing experiments to check whether global warming is happening.

      In dense urban areas, we know what works because there are dozens of first-world cities with functional transit systems to learn from; in less dense urban areas, we have a reasonable number of examples as well, from Canada and Australia. To try to rediscover what the rest of the first world has been doing for decades is to reinvent the wheel.

      • Danny

        Well, I take exception to your exception as well as your example to prove your exception. We may not need to test to see if global warming has happened, but since all global warming projections are based on unproven forecasting models that rely on positive feedbacks that haven’t been observed with the accuracy of modern equipment…yes we have to continue to test. Most likely not to see that it is happening, but rather to see how fast it is happening and to know which of the many models are most accurate in its prediction capability. And since the climate is dominated by both positive and negative feedback effects, measuring that it is still happening is still useful even if it is not likely that global warming will stop any time soon.

        Likewise, we may know what works, but there is always a better to be achieved. Medellin transports more than 40,000 people per day on a gondola that was magnitudes cheaper than other forms of separated grade transit. All of Central America runs on a chartered route system with individually owned buses which are typically owned by the drivers…and in Tegucigalpa they have city wide ridership estimates of well over 1,000,000 per day…all running at operating profits and at zero net cost to the local governments.

        Sure, we may know what works in the developed world, but if you asked what worked in the developed world in 1920, you would have come up with an answer like “Completely private market subways and streetcars”. The world is different now, and while we may have an idea of current best practices, we need to be open to the fact that they will change with new technology, constraints, costs, and problems.

        • Fine. Tegucigalpa runs transit profitably. So does Tokyo. It’s not quite zero-cost to government in Tokyo, but the transit operators are profitable after depreciation, interest, and taxes.

          There’s a big difference between being open to change, and succumbing to not-invented-here syndrome. In a third-world country, which is what the US is when it comes to transit, the best thing to do is copy what the big boys are doing, learn, and only then innovate if the in-house experts find it prudent. There’s a difference between an established house of experts saying “We could try this” and a government giving grants to inexperienced people so they can reinvent the wheel.

  • One of the oddities of this issue that is usually overlooked is that although Federal subsidies for operations in large metro areas were discontinued, the Federal role in directing how service is provided has continued without considering that this affects operating costs. Mandates for a variety of services have worthy goals, but come out of local funding.

  • Joseph E

    I think this is an interesting debate.

    Perhaps there are a few places where a federal or national subsidy is clearly needed. In particular, I would point out that the federally-mandated discounts for seniors and the disabled are unfunded, and paratransit (taxi) services for the disabled are not fully funded by federal dollars.

    If the feds would pick up the whole tab for paratransit and the discounts given to seniors, the disabled and perhaps students, that would go a long way to improving operations. Add on an “emergency” operations fund, accessible during recessions, and transit would have a much more stable future.

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