Sunday, September 27th, 2009
This is the fourth installment of my series on taking transit to the next level in Chicago. Other installments are:
- Part One: Building the Vision
- Part Two: Raising the Bar on Design
- Part Three: Cost Containment and Governance
- Part Five: Getting It Done
This piece focuses on the $35 billion question – how to pay for it. Next up: getting it done, followed by a wrap-up.
If transit today is underfunded, how can we expect major improvements out of our agencies? The answer is, we can’t. That’s not to say that the CTA can’t and shouldn’t improve. It should, and I’d argue it has been in the recent past. But we’re not going to change the game, to go from good to great, without a lot more money. So, where can we get it?
First, let’s start with the fact that the CTA does not control any material funding lever except fares, which are already high. The remainder of the CTA’s money, save for some minor advertising income and the like, comes from a mixture of federal capital aid, and taxes whose rate is set by state law. So any change in the funding situation will require legislative action.
Second, the CTA, Metra, and Pace are required by law to achieve 50% farebox recovery. This might not sound like much, but is much higher than most transit systems. Portland, for example, only has about 20% farebox recovery. While the CTA, as a big city system, might be expected to be higher, 50% is probably still too high. Incidentally, there are only two transit systems in the world that break even or turn a profit: Singapore and Hong Kong, two island city-states, and I don’t even have the latest data on them.
Third, the CTA is burdened with innumerable unfunded mandates from the state and federal government, including free rides for seniors and other discounts.
Fourth, the CTA is caught in a big pension vice. Its pension system was vastly underfunded, until it borrowed money to top it off – with repayments that comes right off the top out of the operating budget. The Illinois constitution prohibits the impairment of any pension benefit already earned.
A Fixed Cost System vs. Variable Revenues
A transit system is more or less a fixed cost system to operate once you decide on services levels. That is, the CTA decides how much seat capacity to put on the street and rail lines, and the cost to operate it is more or less fixed regardless of how many people actually ride.
However, the CTA’s tax revenues come from two principle sources: sales taxes and real estate transfer taxes. Both of these are highly cyclical. And where we are in the cycle, those revenue streams have declined massively, putting huge holes in transit budgets across America. The fact that the CTA is so dependent on fares is actually a plus right now, since fare revenue is fairly short term stable, at least in contrast to other revenue streams.
If you are going to fund a fixed cost system with variable revenues, you had better have a healthy reserve account for a rainy day. Chicago’s regional transit systems do not, which is why there are repeated “Doomsdays” as revenues decline.
You Have to Pay For It Yourself
So where is the money going to come from to improve and operate Chicago’s transit system? At the end of the day, Chicagoans are going to have to use their own money to do so.
I find it interesting that most local transit advocacy focuses on getting more money from Washington and Springfield. While a Chicago-heavy White House with Democratic control of Congress might enable something to happen there, I’m not holding my breath.
Consider that there are only a handful of cities with older systems like the CTA that need upgrading. That right there creates a numbers game problem, particularly in the Senate. Likewise, historically Springfield has done little to help. Even the recent $25 billion state capital plan included a comparatively small amount for transit.
Most importantly, other cities around the country are paying for their own transit. In city after see we see transit levies placed on the ballot to raise funds to construct and operate new light rail lines and other systems. Last November, for example, the Seattle area voted to raise its own taxes in order to collect $30 billion over the life of the tax for transit improvements. This is in an area only about a third the size of Chicago.
This also creates problems in Congress. If every other city is voting to raise taxes to invest major local dollars into transit capital, why should Chicago get a pass? Also, this goes right along with the heritage of the Burnham Plan. Chicagoans voted dozens of times to allow bond issues to finance the major public works programs coming out of that plan.
The answer to me is pretty clear. To really change the transit game in Chicago means putting a tax on the ballot for the people to put up or shut up on whether they actually want a first class transit system.
Parameters of the Financing
Before getting to the specific measures, I’d like to propose some basic things to use the money for.
First, I’m assuming there is that compelling vision from part one to get people to buy into the system. This probably has a mix of near term and long term items, tangible and conceptual items. That means there is probably a phasing that needs to be figured out. I would suggest that it would be a limited number of phases, with a pretty beefy first phase. If asking citizens to vote on a tax increase, they should get something pretty big and visible out of it. Also, you don’t want to go back to the well too many times. On the other hand, you can’t expect people to buy a pig in a poke either, so it probably can’t be everything in one vote.
With that backdrop, I would suggest the a ballot to raise taxes with the proceeds to be used for:
- Establishing a CTA operating reserve of $500 million, with parameters to make sure it isn’t rapidly drained and never replenished. Metra and Pace need reserves as well, though potentially we’ve reorganized our governance at this point, remember?
- Rolling back CTA fares to $2 and eliminating transfer surcharges.
- Providing additional operating assistance and reducing the required farebox recovery percentage.
- Funding debt service on a bond for a fairly healthy first phase of work. I would suggest something in the neighborhood of $15-20 billion. Potentially the actual program could be bigger when combined with federal assistance or other revenue sources such as existing TIF’s.
Sources of Funds
Typically, transit bonds are backed by increases in the sales tax. However, given the sale tax dependency of Chicago transit today, and the high Chicago sales tax rate and associated political drama, this may not be realistic. Where then could the city look? Here are some ideas:
- Land Value Tax. A land value tax is a tax not on dirt, but on a physical site. This does not include any improvements made to the site, such as buildings. This is an attractive form of taxation for a few reasons. Firstly, it doesn’t distort production. If you tax something, you get less of it, but since the surface of the earth is already fixed in extent, this isn’t a problem here. The marginal supply of new sites is zero no matter what. Also, it encourages people to put land to good use. Today, if someone builds a skyscraper downtown, their “reward” is a huge tax bill. But if someone tears down a historic building and puts in a surface lot, his taxes go down. That makes no sense. A LVT discourages land banking and speculation, and encourages people to invest in their property. And, the value of a site is really not a function of what any individual person does. Rather, it is a result of overall community growth and investment. This is in contrast to the value of a building, which is principally a result of what the owner does. Consider the value of the Chicago Loop. Now consider the value of the Chicago Loop without transit. The enormous site values in the Loop were created by transit, so why not capture for transit the value created by it? I can’t do this topic full justice here, but suffice to say there are many reasons why, if you have to have a tax, a land value tax is the best way to go. Its principal downsides are a lack of familiarity and a lack of experience in implementation, which would doubtless result in some bumps.
- Congestion Charges/Tolling. This would involve something along the lines of converting the freeways in the city into tollways, using the proceeds to fund road maintenance and operations, and also transit. It could also be used for congestion management purposes. This would require federal rule changes and no doubt much political difficulty. I do not believe a London style congestion charge around the Greater Loop area is feasible.
- Automobile surcharges. This could include items such as additional registration fees or parking taxes.
- Income taxes. Illinois income tax rate at 3% is not that high on a comparative basis. It remains to be seen where it will be after the legislature finishes addressing budget deficits, but this is one possible source of funding as well.
I would suggest that a land value tax is the best approach, but that the income tax based approach is probably the most straightforward and easiest to implement. I don’t have the time right now to do the math, but it should be fairly straightforward to calculate the supplemental rate needed to raise the types of funds outlined above.
Chicagoans may not go for this, but I do not see any other realistic alternative to raising major funds other than local dollars. Possibly the Olympics combined with a major push from the Obama administration could pry some serious federal money loose, but it strikes me that the President is, rightly so, focused on national policy, not one particular city’s transit system.
Fundamentally, if Portland, Seattle, San Francisco, Dallas, Denver, Charlotte and many more places can do it, I don’t see why a truly world class city like Chicago can’t step up to the plate and do what needs to be done, particularly when the need is evident and when you have that vision in place and the other elements needed to convince the public.
Next up, Getting It Done.
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