Public transportation infrastructure is a
vital part of any local economy. While many may agree on the importance of
freeways, streets, and roads, there is strong disagreement about the efficiency
of public transit. This result in public transit funding faces continually
bifurcated sources as it fights other transportation needs. According to the National Transit
Summaries and Trends 2015, “On average passenger fares fund 33 percent of
public transit operations in the United States, with another 12 percent
generated directly by the transit operator. Local and State sources fund 24
percent and 23 percent, respectively; Federal Government sources fund the
remaining 8 percent.” (Department of Transportation, 2015) However,
transportation funding at the local and state level has long been dependant on
the revenue stream provided by the outdated taxes, which have lost buying power
due to neglect. This, coupled with lower allocation levels in the mid 2000’s
put transit funding on a steady path to a financial cliff. The solution was a
Self Help sales tax measure, as embraced by the majority of California, which
will serve as a test case, but also nation wide. While public transit does not
always cover it’s operating expenses, consistent subsidizing of public transit
is vital for two main reasons. First, there are economic losses associates with
allowing public transit to fail and great returns on investment with public
transit. Second, climate change will necessitate less reliance on vehicles and
greater dependence on mass transit to solve the crisis. These benefits from
public transit subsidies are consistent with the urban transit economic
literature discussed towards the end of this paper
Why Self-Help
While most public transportation funding had come from the
revenues generated by the gas tax, according to selfhelpcounties.org, there has
been a thirty seven percent decrease in the buying power of the gas tax since
1993 when California stopped adjusting it. This was around the time self help
strategies had been adopted in California. In this time period, technology made the gas tax strategy
obsolete with fuel-efficient cars and an effort to reduce carbon
emissions. The Self Help method is
not just a sales tax strategy, but a
two-thirds majority voter approved half a cent sales tax to fund transportation
infrastructure. This provides a guaranteed funding source to the local transit
authority that it can then allocate accordingly to various projects. This
strategy has been the bulk of actual and estimated transportation expenditures
since 2000. Once a county agency or transit authority gets the revenue, then
pays the collections and administrative costs, they can then determine how the
revenue is allocated to what projects. This strategy provides top to bottom
accountability to the voters and adapts to under-performing projected revenues.
In Orange County, OCTA M2 project manager Tamara Warren explained, “It is a 1/2 cent sales tax that goes to
transportation improvements based on an Ordinance that was created and approved
when passed. Currently the sales tax revenue forecast is estimated to raise
$14.2 billion over the 30-year plan period (2011-2041). The Ordinance
specifies how the funding is allocated and there are a number of projects and
programs within the plan that have varying ways of being allocated.
Generally speaking, the plan is broken into four main areas. Freeways
(42%) - set projects and scopes, Streets and Roads (32%) - funding allocated by
formula with some funds going directly to the local jurisdictions by formula
and some available to local jurisdictions on a competitive basis; Transit (25%)
- several programs with most allocated to local jurisdictions through a
competitive basis (agencies submit applications and they are rated based on set
criteria); and an Environmental
(2%) program designed to protect our waterways by preventing transportation
related contaminants and debris from entering the waterway…Prior to the allocation of net M2 revenues to the Freeways,
Streets and Roads, and Transit categories, M2 funds are first directed to the
following “accounts”, as outlined in the Renewed Measure M Ordinance No. 3.
Funds are disbursed out. ” (Warren,
2016) This adaptability is how OCTA has averted budget crisis and other
ongoing challenges.
Efficiency in Action
Orange County’s Measure M1 and M2 are
examples of the Self Help strategy’s efficacy to fund public transit. The
phrase conveyed by OCTA’s project manager and Self Help website is, “promises
made promises kept”. M1
(1991-2011) provided 4 billion in transportation improvements in 20 years.
Including the widening of SR22, and numerous other projects between freeways,
roads and streets that enhanced traffic mobility in Orange County. This could
be why in 2006, Measure M2 was approved with 70% of the vote 5 years before
implementation and extended for 30 years. Presently, M2 is operating under the
M2020 Plan, which is an adaptable guide to M2 funded projects until 2020. This
was bolstered by the early action plan approved by the OCTA board to accelerate
implementation of M2 funds prior to their 2011 collection. This is not to say
that the Self Help strategy has been perfect for OCTA. As figure 1 indicates,
M2 came up about ten billion dollars short in August of 2016 from its 2005
development forecast. However, realistic estimates of external funding, updated
costs estimates, programs scale to available revenues are leading OCTA to plan
their spending for projects differently by letting revenues accrue and spending
when cash flow is high, and saving when revenue is not, as shown in figure 2
(octa.net, 2010). This kind of
economic rationality would imply that transit authorities are just as efficient
as any other firm.
Figure 1: Measure M2 projected sales tax
revenue
Figure 2: OCTA’s Measure M2 cash flow
When
evaluating the efficiency of subsidizing public transit it is important to recognize
the uncomfortable truth that public transit is a monopoly. However, to call
public transit an inefficient monopoly isn’t exactly correct. First, transit
naturally forms into a monopoly, due to its spatial impacts and high start up
costs. While conventional monopolies often result in dead weight loss because
of their supplier singularity, public transit only appears inefficient when one
only considers the price equilibrium to be where the marginal private benefit
and the marginal social cost intersect, rather than the intersection of the
marginal social cost and marginal social benefit curve created by positive
externality. What is the positive externality that shifts the MSB curve outward? Research suggests that there are
economic gains to be made in public transit investment. According to a 2008 report
by the American Public Transportation Association, “The study finds that the
economically and socially optimal investment program outlined above would
generate significant economic and social benefits relative to the costs of
achieving them. The present-day value of the program’s total life-cycle
benefits between 2008 and 2038 would total an estimated $2,359 billion. Total
life cycle cost over the same period (capital and operating expenses) would be
$539 billion for a net benefit of just under $1830 billion- and economic rate
of return of 23 percent” (APTA, 2008)
Also,
the negative impact of recent service cuts in response to declining ridership
in Orange County’s public transit highlighted the equity aspect of subsidizing
transit, because even though OC’s rider population is small, the service is
vital to them. To adapt to underperforming venues, OCTA opted to eliminate
certain routes, create new ones that cover the combined eliminated routes while
keeping routes that have a more regular ridership, which depends on these
routes for their transportation needs (Kwong, 2016). With a program as large as
Measure M, it is necessary to do a P.E.S.T. and S.W.O.T. analysis for Self
Help.
Political
|
Economic
|
Social
|
Technological
|
Tax climate:
General public reluctance towards new
taxes. Openness to this
particular tax strategy because cost appears small (half cent).
|
Figures on tax revenue from these kinds
of taxes found in Figure 1. Gains
from capturing positive externality of public transit.
|
Allows for local control of transit
funding for transportation infrastructure.
|
Each city will have to pass a
respective tax meaning there is no technological barrier to
implementation.
|
Strengths
|
Weaknesses
|
Opportunities
|
Threats
|
-Voter approval by 70% across the
country.
-Allows a modicum of local self
sufficiency
-Can also allow funding to tangential
projects
|
-Money can be siphoned or
misappropriated
-Tax can lead to loss of efficiency and
creation of a deadweight loss monopoly, however, not likely, as the nature of
public transportation infrastructure is such in size and scale that any
provider public or private would be a natural monopoly.
|
-Future tax measures to be supported
-Transportation expanded
|
-Ride sharing
-Austerity
-Economic recession
|
Pros and Cons
Self Help is not impervious though,
despite its ability to facilitate a consistent revenue source for subsiding
public transit. One positive aspect of Measure M as well as similar measures is
that they are demonstratively popular with the voters both in California and
nation wide. Eighty percent of California’s populations between 19 counties
have approved similar measures, with dozens of other counties nation wide
opting for this strategy. With any
sales tax supported subsidy, there is a vulnerability to economic recession,
such as 2008’s, that can affect the revenues needed to support public transit.
Another positive part of Self Help is that public transit investments have
benefits to freeways and roads by alleviating congestion and vehicle usage,
adding an environmental gain. Finally, another drawback of the discretionary
nature of Self Help is that arterial freeways and roads may receive
disproportional allocation in relation to transit, which could distort the
cyclical benefits of investing in public transit.
To Subsidize or Not to
Subsidize
One
of the main objections to public transit subsidies is that they are monopolies
incapable of efficiently determining the price equilibrium of supply and demand.
A conventional commodity would find its price at the intersection of its cost
and return. However, passenger fares only cover a small portion of public
transit funding overall resulting in the majority of public transit to be
subsidized. Public transit is not like other commodities though. As the
renowned transportation economist Herbert Mohring pointed out in his landmark Optimization and Scale Economies in Urban
Bus Transportation, “Transportation differs from the typical commodity of
price theory texts in that travelers and shippers play a producing, not just a
consuming role. In using common carrier services, they must supply scarce
inputs, their own time or that of the goods they ship, that are essential to
the production process.”(Mohring, 1972) This is what later becomes known as the
“Mohring effect” justifying transit subsidies, suggesting that “the magnitude
of mass transit scale economies and hence the lower bound for an optimal
transit subsidy policy” as Mohring points out is higher than what is often
supplied. Kenneth Small also concludes, “That today’s substantial operating
subsidies for transit systems are warranted on efficiency grounds, at least for
the three major metropolitan areas studied. The main caveat is that some of the
subsidy may be lost to inefficiency or captured by labor unions, given the
evidence cited earlier of increases in wages and other costs following transit
subsidies.”
This
is why OCTA opted to rearrange routes rather than broad service cuts. Small
also points out Moring’s assertion that “ …users’ waiting or access costs
declined as service frequency or route density is increased. A related point is
that the higher passenger density allows vehicles to be operated with higher
occupancy, thereby saving on the transit provider’s costs.” (Parry and Small,
2009)
However,
not everyone is convinced, Peran van Reeven contends, “If travel behavior is
such that consumers do not use the timetable, then the profit-maximizing
frequency is identical to the welfare maximizing frequency, and can be operated
profitably. This result applies to high-frequency public transport systems in
particular. The practical implication is that private operation of these
systems in is efficient, even without any subsidy.” (van Reeven, 2008) Small
countered this, though, by writing “The empirical literature has not directly
addressed the issues raised by van Reeven (monopolist’s profit-maximizing
choice versus social optimality), but rather, has analyzed whether profiting
additional subsidies to encourage operator to lower their existing fare and/or expand their existing frequencies is socially desirable.” (Savage and Small,
2009) Anecdotally speaking, private transit providers often only produced it as
a supplementary good to profit maximize other capital investments, such as the
Pacific Electric Railway or the Red Car service supported the real estate
developments in southern California of the Huntington family between 1901 and
1964, only to be replaced by the current transit authorities Los Angeles, San Bernardino,
Orange County, and Riverside County.
Conclusion
The
aim of this paper has been to examine the mechanics and the efficiency of
funding public transit. While public transit appears to be inefficient as a
monopoly, a closer look reveals that the inefficiency of transit stems more
from underinvestment in service overall.
Also, it is flawed to overlook the cyclical economic and social benefits
of subsidizing public transit in favor of the loss of private profit maximizing
strategies because of the unique nature of transit as a commodity. This line of
thinking appears to be akin to the grass always being greener on the other
side. The adaptability and transparency of Self Help strategies such as Measure
M1 & M2 allow for rational allocation based on their jurisdiction’s
individual needs, even in the face of lower than expected revenues. This is a
funding strategy that individual cities could confidently pursue within Orange
County, in places of expected population growth such as Irvine, to ease the
congestion associated with a denser population. Finally, it is important to
recognize the exceptional political popularity in conservative Orange County of
Self Help, given it is after all, a tax.
Works
Cited
HDR|HLB Decision Economics. (2016, February 8). The Optimal
Supply and Demand for Urban Transit in the United States. In American Public
Transportation Association. Retrieved November 29, 2016, from
http://www.apta.com/gap/policyresearch/Documents/TCRP%20Transit%20Investment%20Final.pdf
Kwong, J. (2016, February 11). Some bus routes saved after
OCTA modifies plans. OC Register. Retrieved from
http://www.ocregister.com/articles/service-703842-route-octa.html
Mohring, H. (1972, September). Optimization and Scale
Economies in Urban Bus Transportation. The American Economic Review, 62(4),
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Measure M2 M2020: the Next Ten Years. (2010, October). In octa.net.
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Office of Budget and Policy. (2016). 2015 National
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Parry, I. H., & Small, K. A. (2009, June). Should Urban
Transit Subsidies Be Reduced? The American Economic Review, 99(3),
700-724. Retrieved from JSTOR (http://www.jstor.org/stable/25592479).
van Reeven, P. (2008, May). Subsidisation of Urban Public
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