Sunday, September 27th, 2009

Chicago Transit: From Good to Great, Part 4 – Paying For It

This is the fourth installment of my series on taking transit to the next level in Chicago. Other installments are:

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?

Financial Facts

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:

  1. 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.
  2. 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.
  3. Automobile surcharges. This could include items such as additional registration fees or parking taxes.
  4. 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.

More Chicago

Chicago Transit: From Good to Great
Part 1: Building the Vision
Part 2: Raising the Bar on Design
Part 3: Cost Control and Governance
Part 4: Paying For It (this article)
Part 5: Getting It Done

Other Transportation Related Articles
The Urbanophile Wins Chicagoland Chamber of Commerce Transit Competition
Transportation and the Burnham Plan
Metropolitan Linkages (high speed rail benefits case)
High Speed Rail (implementation)

10 Comments
Topics: Transportation
Cities: Chicago

10 Responses to “Chicago Transit: From Good to Great, Part 4 – Paying For It”

  1. Alon Levy says:

    Profitable rail transit isn't limited to Singapore and Hong Kong. In Tokyo, almost all rail operators are in the black, and the few that aren't have farebox recovery ratios in the 90s. In Calgary I don't have hard numbers, but the average operating cost of a light rail ride is C$0.27 and the base fare is C$2.50; the total construction cost was too low to pull the recovery ratio under 100% (or for that matter 300%).

    Some of the common strategies used in the above cities are,

    - Having the transit agencies develop surrounding real estate on their own. In both Tokyo and Hong Kong the transit operators make money by leasing development rights. In American cities, people think that to not hand those rights to developers for free is socialism.

    - Not building freeways to compete with transit. Calgary's freeway network is disjointed, as the city made a choice to make light rail rather than freeway its primary form of transportation.

    - Minimizing subway construction. Singapore's first two MRT lines are elevated outside downtown. Calgary's C-Train is almost entirely at-grade, separated from other traffic by fences and gates rather than viaducts and tunnels. Tokyo's rapid transit is mostly elevated or at grade commuter lines rather than subways.

    - Citywide planning. None of those cities has Chicago's insanity of running commuter rail into four different terminals with no connections between them. If Tokyo, with its 11 different companies running rail, 10 of which are private, can get this right, so can Chicago.

  2. The Urbanophile says:

    Developing property adjacent to stations isn't entirely dissimilar to a land value tax. However, the US, all of the land is already privately owned, and it isn't clear exactly how in this country transit agencies would get the rights to development without controversial condemnation that in some states at least would be illegal.

  3. Ahow says:

    I've actually mentioned on a regular basis to my wife that in large cities with good transit, tollways should be the primary method for payment of transit costs.

    Drop fare charges (or even make riding free) and charge that equivalent or more for tolls. People in many cities feel that driving is a first option. Make them pay for it. Of course there HAS to be a strong transit system in place for this to work.

  4. VivaLFuego says:

    Speaking to several issues Urbanophile and Alon have raised, Chicago is somewhat 'cursed' by geography here relative to some peer cities (and I'll consider the peers to be US cities only for reasons of government structure).

    Namely, NYC, San Fran, and Boston all have land-constrained peninsula core districts. This results in two things that aid transit: firstly, extrinsic pressure to develop densely, with density inherently being less friendly to auto use due to the resulting traffic congestion and high parking prices. Perhaps more importantly though, the geography of these cities mean that people driving to the core pay tolls by virtue of being funneled to one of a limited number of bridges and tunnels. I'm not sure about SF, but in NYC and Boston this toll revenue provides a vital local source of capital construction dollars for the transit system.

    There was that short-lived downtown congestion-pricing scheme in Chicago, but after the meter parking uproar we haven't heard much about that. Without geography forcing the issue, Chicago faces an uphill battle in establishing structural conditions to fund transit and incentivize people to use it.

  5. Alon Levy says:

    Aaron, there are many areas where the transit operator does own property, for example railyards. In New York, the MTA owns railyards above Penn Station and Atlantic Terminal; however, instead of developing and leasing air rights, it's been forced to sell at below-market prices to politically favored developers, and is now giving those developers further discounts because of the recession. Chicago could avoid this mistake at least in principle, developing air rights above the various Metra terminals (in practice, Chicago makes New York look clean, so this will never happen).

    This is no different from how things work in Tokyo and Hong Kong. In Tokyo land is privately owned, just like in any US city; in Hong Kong, it's publicly owned, but the government gives 99-year leases. However, the local transit agencies manage to reserve ownership of key station complexes.

    A land value tax won't work so well – it's an incentive to build near highways, which have no similar tax, and away from transit.

    In Paris, where transit doesn't come close to breaking even, they fund rail using a payroll tax, ranging from 1% in the exurbs to 1.7% in Paris proper and its richest suburbs.

  6. The Urbanophile says:

    Thanks for the additional comments and interesting info.

  7. emathias says:

    I'd advocate a combination of payroll and land value taxes. There is already an unused property tax district that was set up to help fund the old downtown circulator. Shows up on my tax statement every year, even though it's all zeros.

    Anyway, if we followed Paris' lead on the income tax, if there are 3 million households in the Metro area, and the average housedhold earns $40,000/yr in payroll (that doesn't include investment income, etc), then averaging 1% across the area would bring in $1.2 billion/year in revenue for capital projects. Add in a little more from land value taxes, and you could have between $1.5 and $2 billion year for infrastructure. If, to get buy-in, we had to use half of that for roads or some other non-transit use, we'd still have about a billion/year for transit. What could we build in the next ten years if we had $10 billion, plus perhaps another $10 billion in state and federal matches. We'd achieve the state of good repair. We'd get the North Main rebuilt. We'd get the Circle Line done. Plus we could do some serious work on either a cross-town transitway or proper downtown rail additions. The ten years after that, we could finish up the new downtown subways AND the crosstown transitway AND enhanced south lakefront transit.

    With the share not going to transit, we could build out the Crosstown Expressway, fund the extra lanes for the Ike going through Oak Park, and fix at-grade freight rail crossings for dozens of roads in the suburbs and City.

  8. Nick Helmholdt says:

    I'm no authority on transit (no pun intended), but I think you neglected one potential revenue source that the CTA could take advantage of: a tax on parking services. Owners of arking lots within the CTA area could be subject to imposing a tax on their customers. While this might discourage some drivers, it might get some to switch to regular transit use, thereby adding to fare revenue.

    Thanks for the insightful post!

  9. John says:

    One quibble, although the law requires a 50% farebox recovery ratio, in actuality the amounts are much lower. There's a good description of why here

    You can see the NTD data at the following links:
    CTA – 41%
    Pace – 24%
    Metra – 41%

  10. Anonymous says:

    Yes Illinois has a law about not rescinding pensions once earned however if one could argue the the last 40 years of bloated public employee unions at the CTA was more akin to extortion than work would it still be considered "earned"? I jave an uncle who worked a transit security detail for many years on top of a day job and was able to because he rarely actualy went to his CTA job at night. Im glad we still pay his pension at a rate higher than I earn at my full time job. It is true, the working man is a sucker.

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