How to Fix Transit Financing

» Moving transit funding towards a sustainable source – in and out of economic downturns

The budget crisis affecting American public transportation agencies – a result, principally, of a decline in tax revenue – confirms the need for both a more stable source of income and tighter control over expenses. In this post, I’ll take New York’s Metropolitan Transportation Authority as an example, and compare it to a significant foreign peer – Paris’ RATP, which runs the city’s métro and buses. In the process, I hope to give some explanations for the crisis in which many U.S. transit agencies find themselves, and provide some structural remedies for the problem.

The MTA is facing a $1.2 billion shortfall, which depending on the outcome of the deal I discussed yesterday, may or may not be reduced to a $750 million shortfall. This deficit comes at a time of record subway ridership and is therefore not the result of declining fare receipts but rather the result of fewer tax revenues than the agency had expected when preparing its budget in previous years. About 3/10 of the agency’s total revenue for its operating budget comes from dedicated taxes or fees, with the other 7/10 the product of fares, tolls on MTA bridges, and local and state subsidies.

Half of the taxes that fund the MTA come from New York State’s Metropolitan Mass Transportation Operating Assistance Program (MMTOA). In this year’s budget (PDF), the agency expects revenue from MMTOA to decline from $1.7 billion in 2008 to $1.4 billion in 2009, though both numbers are way up from the $982 million recorded in 2005. MMTOA funds come from a 1/4¢ sales tax, a corporate tax surcharge levied in the New York metro region, and a petroleum and transportation industries tax.

MMTOA represents the bulk of MTA revenue and the biggest explanation for why its balance sheets are so far in the red, but the MTA will also lose revenue this year from the Urban Tax (from $557 million in 2005 to $500 million in 2009) – a fee on real estate transactions – and the Mortgage Recording Tax (from $745 million to $380 million), a fee recorded on mortgages made in the city.

Other components of MTA revenue have remained relatively flat over the same time period. State and local operating assistance, which provides a total of about $400 million each year to the agency, remains the same; meanwhile, receipts from the Petroleum Business Tax, a part of MMTOA, have inched up from $561 million in 2005 to $626 million in 2009. Revenues from tickets have increased from $3.6 billion to $4.2 billion with a fare increase; toll revenue from bridges and tunnels, transferred to mass transit as a subsidy, has increased from $1.1 billion to $1.3 billion in the same period.

Thus, MTA’s overall budget has been able to rely on stable funds from fares, toll collection, and the tax levied on gas-based businesses. On the other hand, revenue from sales taxes, corporations, real estate transaction taxes, and mortgage fees have fluctuated wildly in recent years with the rise of the real estate boom and now its quick fall. Relying on tax revenue that changes with the state of the economy makes managing the transit system difficult. Transit agencies need to provide similar services every year, no matter whether the economy is up or down. If the MTA is to establish a stable funding program, it must be able to rely on a stable source of revenue.

Let’s compare the MTA’s revenues and expenses with those of a foreign peer that does not face similar fiscal difficulties – Paris’ RATP, which remains in the black, even during this economic crisis. RATP runs the city’s métro, tramways, and buses, as well as some of its RER regional express trains. It is funded by a regional organization run by elected leaders throughout the Paris region called Stif that collects tax revenue and government subsides for the entire region; in 2008, its total budget was 7.5 billion euros, making it equivalent in size to the $10 billion MTA. Most of Stif’s funds are distributed to RATP, though some are given to SNCF, the national train company, as well as to a few private bus operators in the city’s suburbs. The chart below compares the RATP’s expenses with those of the MTA, and Stif’s revenue with that of the MTA.

The chart demonstrates that both Paris and New York get about 2/5 of total revenue for running transit services from fares. But while New York’s system relies on income generated from tolling the city’s bridges and tunnels for a large percentage of total revenue, Paris relies much more on local taxes and government subsidies, which contribute about 3/5 of total funds, versus only about 4/9 of the MTA’s.

I won’t be discussing expenses much in this post, but the chart demonstrates that MTA is overloaded with payroll expenses as compared to RATP, suggesting either that MTA pays its employees too much (especially in overtime), or that it has too many workers. RATP’s spending is more evenly distributed, and lower in cost per passenger mile provided. I’ll let others come to conclusions about how MTA can reduce operating expenses.

The real question for us, then, is how Paris’ Stif is able to maintain fiscal balance: how is it funded, and why does its system work more efficiently than that of the MTA?

About 2/5 of Paris’ transport funding comes from the versement transport, a tax collected on salaries in the Paris region. The fees are highest – at 2.6% – in Paris and the neighboring rich département (similar to a county) Hauts-de-Seine; they’re lower, at 1.7%, in two poorer neighboring départements, Seine-Saint-Denis and Val-de-Marne. In the four départements on the edge of the region, the rate is 1.4%. Having the tax rate vary by location, with people who are more likely to be able to take advantage of public transportation paying more, makes a lot of sense. The region’s decision to tax the poorer départements bordering Paris at a lower rate also serves as a social equalizer, attempting to encourage investment in less-well-off areas.

The versement transport was first instituted in the full Paris region in 1991, and the amount charged on salaries has risen four times sense. The tax only applies to people working for companies with more than nine employees; it is designed to give a break to small shops and enterprises.

One-seventh of total Stif funds in 2008 came from government subsidies, far higher than the 1/12 of funds the MTA is likely to receive for its 2009 budget. 51% of Stif’s funds come from the regional body, 30% from the city of Paris, 7.7% from the Hauts-de-Seine département, and less than 3% from each of the other départements. The national government also contributes some funding, especially for subsidies for transportation for the poor and the young.

So, on the surface level, Stif appears to be funded much like the MTA, with funds coming from dedicated taxes and from government subsidies. There are two important differences, however: one, revenue from the taxes that pay for transportation in Paris are less likely to vary significantly during economic downturns; two, the government subsidies are designed to compensate when tax revenue falls short.

MTA’s reliance on sales and real estate transfer taxes puts it at a great risk of loosing expected funds, because consumption of consumer products (sales tax) and of property (urban tax) decreases dramatically during recessions; so do the balance sheets of corporations, which the MTA also taxes. On the other hand, taxes on income do not see changes that are nearly as significant, especially in France, where firing people is incredibly difficult. As a result, Stif can be confident that it will continue to receive funding from taxes, even during bad economic periods.

Just in case, however, government contributions are designed to make up for tax shortfalls. As the chart below demonstrates, the government subsidy to Stif remained at around $1 billion Euros between 1990 and 2004, while funding from the versement transports increased from a little above $1 billion Euros in 1990 to $2.5 billion in 2004 (data from Stif). This increase was due to inflation and also because of the increase in charges on income over the years – the government has made a priority to focus revenues for transportation on salaries, rather than from general revenues. The stable increase in income generated from this tax, even during the early 1990s recession, is demonstrated below.

Though salaries in the Paris region have not hit a serious downfall since the versement transports was instituted, local governments are mandated to increase subsidies if needed. If the transit agencies in the Paris region, such as RATP, need to increase service to provide for demand but tax revenue can’t keep up, the regional body and the governments of the city of Paris and the départements are required by national law to make up the deficit.

Paris’ system for transit financing provides an instructive look into how American public transportation systems could go about finding more efficient and stable sources of revenue. As we have seen in recent months, the sales tax revenues most agencies rely upon have collapsed in the past year, and the result, all over the nation, are service cuts and increased fares. Those aren’t solutions when more than ever we need transit service to provide the alternative mobility the American people need.

Therefore, a funding system with a stable tax base that is not as likely to fluctuate with economic problems is a necessity. In addition, government entities at the local and state levels must make a financial commitment to ensure the continued funding of transit agencies, even when recessions hit. Making an effort to incorporate the fiscal advantages of the French system detailed above will bolster the health of our own transportation networks.