The NYC Subway and MTA Commuter Rail Lines Need to Cover Their Costs on an “Auto Equivalent” Basis

There are two points of view with regard to how much of the cost of subway and commuter rail mass transit, ideally, would be covered by the fare.  One viewpoint is that the fare should be as subsidized as possible, or even eliminated, and that the transit system should be as dependent as possible on funds allocated by politicians (whose backers tend to be other, more powerful interests.)  That is the point of view held by politicians themselves, who like to cast themselves as “fighting for the people” to “save the fare” while never actually coming up with the money, forcing the MTA to borrow instead.  And the Straphangers Campaign, the very effective lobbyist for past transit riders in competition with the interests of current and future transit riders.  And some of those affiliated with organizations like Streetsblog, who believe that transit is so morally superior, in an environmental sense, to driving that mass transit should be paid for entirely by drivers.  And, contradictorily, that driving should be drastically reduced.

I, on the other hand, believe that the higher the share of subway and commuter rail transit costs that is covered by the fare, the better off transit riders will be, now and in the future.  Covering costs frees the transit system from having to beg a political class that drives everywhere and believes mass transit if for the serfs.  It frees the transit system from attack from those living in places with less mass transit.  And it ensures the viability of the transit system, and the city’s economy, in a future characterized by shrinking public resources and lower incomes.

One of the problems with politics by advocacy group is that no one pays attention to the big picture.  Transportation wonks concern themselves only with transportation, and thus believe the only barrier to more and more funds for their concerns is “political will.”  Rather than other interests, other needs, and past thefts of future resources.  And the big picture is bleak.

We’ve just replaced a Mayor who was greatly concerned with people’s health with a Mayor who is greatly concerned with the financial interests of health care providers, the largest interest group that backed his re-election.  In addition to demanding that all private hospitals remain open, despite a surplus of workers and beds as health care shifts to more efficient venues, he is facing a huge money sinkhole in the public hospital system.

“HHC President Alan Aviles, citing federal and state operating-aid cuts and ‘astronomical increases’ in employee fringe-benefit costs, predicted an HHC operating deficit of some $1.4 billion a year by 2018. That’s a big hole in Mayor de Blasio’s budget.  HHC owns and operates 11 hospitals; it treated 1.4 million patients last year, 500,000 of whom had no health insurance.”

Then there is the public housing system.  Presidents Reagan and Bush II talked like fiscal conservatives, but increased spending on just about everything except public housing, which is concentrated in a few places like New York. The city has been left with an obligation to house the nation’s poorest and no money to repair or replace the buildings, which have money components reaching the end of their useful life.  “According to NYCHA, its five year capital plan (2013-2017) is $3.9 billion, but $13 billion more is needed.”  Housing advocates are pushing for the city to put housing first.

Then there are the schools.  In exchange for an enormous increase in funding, paid for by an 18 percent property tax increase, city residents were promised better schools, smaller class sizes, and universal pre-kindergarten.  Instead, the NYC teacher’s union got one more huge retroactive pension increase than all the other public unions in the state, and all the additional money paid for the schools went instead to the retired.  Now the DeBlasio Administration is pushing yet another tax increase to provide the education New Yorkers had been promised to begin with, as the unions seek to ensure that the money will once again go to those cashing in and moving out.

Speaking of pensions, New York City is underfunding its pensions by $1 billion per year.  According to the optimistic estimate of the City Actuary who for 20 years sat by and blessed all those retroactive pension deals that got the city pension funds in the hole to begin with.  Like a reformed sinner, he is now trying to get people to admit how deep the hole is – and how much everything will have to be cut to increase pension funding.

“For New York City’s biggest fund, known as Nycers, the conventional numbers show assets of about $45 billion and liabilities of $67 billion, or a less-than-stellar funded ratio of 66 percent. But Mr. North’s fair-value numbers, deep in Nycers’s annual report, show assets of $43 billion and liabilities of $106 billion, or a funded ratio of just 40 percent — a sure sign of trouble ahead as the city’s work force ages and retires.  The difference, $63 billion, is Nycers’s shortfall. That money has to be made up before today’s city workers retire — within 14 years, on average. As a result, New York’s contributions to Nycers are rising every year, squeezing the city budget and making it harder for the city to provide public services.”

That is the same pension fund that covers New York City Transit workers.  The New York State pension funds, though well funded until recently, are now allowing local governments in the rest of the state to make their required pension contributions by borrowing the money from the pension funds.  To be paid back at an inflated cost in the future.

To top it all off, the people who will have to pay taxes and forego services to cover these rising burdens from the past are much poorer than the older generations that preceded them.  On average, the generations starting with the second half of the baby boom have been paid 20 percent or more less than the richer generations that preceded them, adjusting for their education level and their age.  As shown most recently in this detailed report from the Federal Reserve.

The Fed’s main question for this analysis is the economic status of older Americans, and indeed since the young have other advantages the diminished status of younger generations will really hit home when they become old themselves.  The diminished income and wealth of younger cohorts (based on birth year) at each point in the lifecycle is summarized starting on the bottom of page 26 and shown graphically in figures 29 and 30 on pages 73 and 74.  It puts the start of income disadvantage by generation with those born after 1950, but other studies put it a few years later.  Moreover, falling incomes have gradually worked their way up the education and income scale.  Now, finally, pay is even falling for the one percent.

These poorer generations will be inheriting the debts and unfunded pension liabilities from the richer generations that preceded them, thanks to the Generation Greed politicians who are still in control in Albany and Washington.  The younger pols on the City Council, thanks to term limits?  They don’t get it and won’t know what hit them.  And we didn’t even get to the soaring cost of custodial care for seniors as the richest and most entitled generations in U.S. history begin to pass age 80 and increasingly require it.

Now that you know the rest of the story, how big do you want the funding gap for your New York City subway to be?  And how much should service and maintenance be cut back, as at the New York City Housing Authority, when it fails to materialize?

Drivers do owe an obligation of subsidy to transit riders, because by not driving those transit riders cede a share of the scarce space on the road to which they have an equal right.  Fair-minded drivers, capable of enlightened self-interest, will be willing to pay some “rent” for that space.  But a minority of those in Generation Greed, and small minority of its elected officials, are either fair-minded or enlightened.  Most of those coming after are distracted, apathetic or ill informed.  And in any event, the financial obligation of drivers to transit riders is not unlimited.

Thus my formula for the share of its operating costs that the subway and commuter rail lines should cover – an “auto equivalent basis.”  While motor fuel taxes and tolls are often imposed to cover the cost of state and federal highways, the vast majority of road space is local streets that are paid for by drivers and non-drivers alike.  The rail and subway lines are the equivalent of streets, and the rail and subway stations are the equivalent of public buildings.  Assets to the broader city and region that support the economy, real estate and the quality of life of everyone, including those traveling by automobile.

What, then, would an “auto-equivalent” basis include?  The cost of buying, maintaining, insuring, and operating transit vehicles, and collecting fares.  This is the cost that drivers pay for their own motor vehicles – if one doesn’t include all the externalities such as traffic, pollution, deaths and injuries foisted on others.

According to the National Transit Database, in 2012 the New York City Subway had $2.74 billion in fare revenue.  Vehicle Operations cost $1.71 billion, Vehicle Maintenance cost $633 million, and General Administration cost $433 million, with much of that I presume going to the cost of collecting fares.  That is $2.8 billion.

The city’s subway car fleet included 6,282 cars, and newly ordered subway cars cost about $2.5 million each.  New York City Transit has traditionally replaced cars after 40 years, but it has also floated bonds on the assumption of a 50-year life in the future.  That means 126 cars have to be purchased per year to keep up the fleet, for an annual cost of $314 million (in $2012) for subway cars.

Which brings to total cost of the subway on an “auto-equivalent basis” to $3.1 billion. Which means that to break even on an “auto-equivalent basis” in 2012, the fare revenue per ride would have had to have been 12.8% higher.  And that’s probably about how much the fare would have to increase, over and above the increases in cost since 2012, to break even on an “auto-equivalent” basis today.

Even if the subway broke even on an “auto-oriented basis,” the MTA would still have to come up with money to maintain the infrastructure and stations.  That cost $965 million in 2012, according to the national transit database.  Given how much transit stations raise the value of property, however, it makes sense that the MTA’s real estate transfer taxes be used to pay to maintain subway and commuter rail stations.  And as for a source of funds to maintain the infrastructure, that has already been proposed.

Where would people get the money to pay higher fares?  As it happens, most riders on our subway and rail transit system are traveling to and from Manhattan.  Those traveling within the other boroughs have the option to take buses, which I proposed that the City of New York take over in my previous post, or bicycles if the subway or commuter rail fare is to high for them.  And Manhattan happens to be the county with the highest mean income in the country, both among those living there and those working there, as I showed here.

Of course not everyone working in Manhattan earns so much.  Some earn the minimum wage, or close to it.  As it happens, Mayor DeBlasio has recently proposed that New York’s cities be allowed to increase their minimum wages to higher than the New York or U.S. minimums, to reflect the higher cost of living.  But New York City is not uniformly affluent.  A higher minimum wage might be a significant burden to a small business in Brownsville or Melrose, and their customers.  It would not be a significant burden to those who live and work in Manhattan.  And given the sky high commercial rent levels there, any Manhattan business that went under because of higher wages would be soon replaced by another, perhaps at a lower rent.

Given the higher level of average income, wages and salaries there, it would be perfectly appropriate for the minimum wage in Manhattan to be 33 percent or even 50 percent higher than U.S. or New York minimum wage, whichever was highest.  That could be a victory the state could give Mayor DeBlasio and the City Council, in exchange for requiring the subway to break even on an auto-equivalent basis.

It would also be a policy consistent with new Democratic Party demands for a higher minimum wage nationally, in place of higher government subsidies for the working poor, after Mitt Romney criticized the beneficiaries of those formerly bi-partisan subsides as freeloaders.  A subway lower fare is just a subsidy for low-wage employers and high-income people in Manhattan.  The workers would be better off with higher pay and an adequately funded subway system.

So I have called for a 12.8% fare increase on the subway, over and above whatever is required by rising costs, to help fund the capital plan on a pay-as-you-go basis and stop the borrowing for ongoing normal replacement.  How much, at current cost levels, would the fares have to rise on MetroNorth and the Long Island Railroads for their cost recovery to be the same?  A lot.  Particularly for the latter.

But there is a solution for this too.  The upcoming Long Island Railroad strike.  Go ahead, make my day.