The Efficacy of Subsidizing of Public Transit

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transportation funding at the local and state level has long been dependant on the revenue stream provided by the outdated taxes, which have lost buying power due to neglect.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), 591-604. Retrieved from JSTOR (http://www.jstor.org/stable/1806101).

Measure M2 M2020: the Next Ten Years. (2010, October). In octa.net. Retrieved November 9, 2016, from http://www.octa.net/pdf/TOC%20Next%2010101116.pdf

Office of Budget and Policy. (2016). 2015 National Transit Summary and Trends. In . (Ed.). N.p.: Federal Transit Administration U.S. Department of Transportation. Retrieved from https://www.transit.dot.gov/sites/fta.dot.gov/files/docs/2015%20NTST.pdf

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 Transport and the Mohring Effect. Journal of Transport Economics and Policy, 42(2), 349-359. Retrieved from JSTOR (http://www.jstor.org/stable/20054051).

Savage, I., & Small, K. A. (2010, September). A Comment on 'Subsidisation of Urban Public Transport and the Mohring Effect'. Journal of Transport Economics and Policy, 44(3), 373-380. Retrieved from JSTOR ( http://www.jstor.org/stable/25801406).

Transportation Needs Rise While Funding Declines. (2010). In www.selfhelpcounties.org. Retrieved November 11, 2016, from http://www.selfhelpcounties.org/Declining_Transportation_Funds_FactSheet_021113.pdf

Measure M: Envisioning the Future (2014)

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http://www.selfhelpcounties.org/focus/counties/Orange.pdf

Warren, T. (n.d.). In J. D. Eurell (Ed.), Email Interview Questions About Measure M1 & M2.