Next Stop: Solvency

The New York subways don't really need government subsidies-so says a little-noticed MTA study. And that means they really could be sold off.


Last year, New York City's transit system soaked up nearly a billion dollars in subsidies. About 90 percent of it went to the city's crumbling subways, covering almost half of the system's operating costs.

Why should city, state, and federal taxpayers be paying half the cost of transporting some 2.7 million passengers a day on New York City's subways? Why, indeed. Last year, New York University economist James Ramsey proposed that the subways be sold off to private investors, removing them from the hands of the quasi-governmental Metropolitan Transit Authority (MTA), which has found it politically impossible either to raise fares or to institute union-opposed cost-cutting measures. Advocates of the status quo counter that private firms couldn't possibly be interested in buying subway lines, because fares couldn't be raised enough to cover costs—ridership would decline so drastically that revenues would still fall short of costs.

This supposed inherent unprofitability of transit is the major impediment to serious discussion of selling the subways to commercial investors. In a previous article in REASON ("Unload the Subways," May 1982), in which I investigated the MTA's finances and reported on the proposal to sell the subways to private operators, I addressed this problem. Subway demand, I suggested, would in fact support sizable fare hikes. That was an educated guess.

The results of a new study, then, are quite interesting. In fact, concludes the study, the demand for subway service in New York City is such that fare increases would reduce ridership only very slightly. Moreover, even if fares were raised substantially, total fare-box revenues would still rise. The bottom line is that the city's subways could be supported by their users instead of by a multitude of taxpayers.

I ferreted this information from a study commissioned by the MTA itself. In preparation for two bond issues last fall worth $385 million—a first step in a five-year, multibillion-dollar capital-improvement plan—the MTA was looking to provide potential bond buyers an answer to this question: In the event of severe subsidy cutbacks, could fare-box revenues keep the system solvent? The MTA commissioned Charles River Associates, a Boston-based transportation-consulting firm, to find out just how many riders would stop using the system as fares increased to cover costs.

The firm delivered its conclusions to the MTA on October 1, 1982, in a report entitled "New York City Transit Authority Revenue Feasibility Study: Economic Analyses and Projections." Although copies of the report are obtainable from the MTA's Public Affairs Department, the MTA has not publicized the results outside the bond community, nor have New York media picked up on and reported to taxpayers the interesting implications of those results.

To do the study, Charles River Associates (CRA) formulated an economic model of the New York City system's ridership. CRA used what seem to be cautious forecasts of population, employment, and travel patterns in the New York area. They then estimated subway riders' responsiveness to changes in fares and in the frequency of train failures. (The study assumes that the planned $5.5-billion capital-improvement program is implemented, increasing the subways' reliability.)

The consulting firm also developed a model of the system's finances and then considered four different scenarios for covering operating expenses (including interest on the planned bond issue) over the next 10 years. In Case I, some subsidies are held to their present dollar level, so that total subsidies rise from just under $1 billion in 1983 to $1.4 billion in 1992. Case II has subsidies rising with inflation, to a projected $1.6 billion in 1992. Case III maintains the present ratio of subsidy to overall operating costs (currently nearly 50–50); in this scenario, total subsidies rise to $2.2 billion in 1992. Case IV—the interesting case—hypothesizes the phasing out of "general operating subsidies," so that total subsidies stand at $0.7 billion in 1992.

The various subsidy scenarios in the study project different fare levels to cover remaining costs and, of course, come up with differing levels of ridership. Case III, in which subsidies grow to $2.2 billion, has the system serving 1.4 billion passengers a year at a fare of 82 cents in 1982 dollars. (The fare is now 75 cents.) That might be termed the Big Spender approach to transit. Case IV, which we might call the Stockmanite Scheme, requires cutbacks in subsidies and ends up with 1.3 billion passengers and a $1.41 fare. The other two cases are quite predictable in-between positions with lesser losses of ridership and more-moderate fare increases than in the Stockmanite Scheme.

What is most striking in the study is the relatively small passenger loss involved in even the most radical, Stockmanite scheme. Only 7.5 percent of passengers would choose not to use the subways when fares are raised in this scheme to take the place of the subsidies of the Big Spender scenario. It is this relatively small reaction of ridership to fare hikes that enables the MTA's consultants to say with such confidence that, if need be, the system can pay for itself from the fare-box. Typically, however, defenders of the status quo and apologists for the entrenched bureaucracies say that ridership losses will be so large in response to fare increases that there is no way deficits can be overcome.

Consumers' response to a price change is a technical economic concept called, in the jargon, "price elasticity of demand." For the New York subways, CRA found that the long-run fare elasticity of demand is ?0.101. This means that for every percentage increase in the fare, there will be a 0.101 percent decrease in ridership. So a 20 percent increase, for example, in the fare can be expected to produce an ultimate 2.02 percent decrease in ridership.

How solid is that estimate? I asked Daniel Brand, a senior associate at CRA and primary author of the study. Brand is a well-known authority in the transportation industry and from 1973 to 1979 was chairman of the Passenger Travel Demand Forecasting Committee of the Transportation Research Board, based in Washington. "It's bulletproof," Brand claimed. No one has questioned it.

Besides, it is not an unexpected result. The CRA report cites "a small literature" on subway elasticity and notes that their ?0.101 figure is well within the range of previous estimates. The studies go back as far as 1968 and find elasticities ranging from ?0.09 to ?0.132. (In a paper delivered at the 62nd Annual Meeting of the Transportation Research Board in January, researchers Robert Cervero and Gary Black cite a more extensive literature and note that ridership response to fare increases in large urban areas is slight because of the density of the population—traffic congestion and parking constraints make it difficult for transit riders to switch to automobiles.)

Furthermore, there was a recent real-life experiment in the effect of a substantial subway fare hike when the Chicago Transit Authority raised its fare from 60 cents in 1980 to 90 cents in July 1981. The result was a 3.2 percent ridership slippage, on a real fare increase—adjusted for inflation—of 29.4 percent. The fare elasticity in this case was ?0.109 or ?0.126, depending on what statistical formula is used.

These elasticities establish that the New York subways could move a long way toward self-support. Revenues could be raised relatively easily by increasing fares toward cost, thus making it possible to reduce substantially the present massive subsidization of subway users by city, state, and federal taxpayers. The MTA, however, shows no intention of moving in this direction. It commissioned a study, used it to assuage the bond community, and then filed it.

This is striking evidence of the need to replace the MTA management of New York City's subways with commercial management. It's not that particularly incompetent people staff the MTA. But the MTA, being a government entity, is subject to a whole constellation of political pressures, constraints, temptations, and limitations, such that even geniuses and the wisest of men will end up in a mess.

Is private—completely unsubsidized—operation of the subways really feasible? After all, even the Stockmanite Scheme in the study by Charles River Associates falls short of fully testing the unsubsidized financial viability of the subway system.

For instance, Case IV provides for the city's continuation of some $300 million—nearly $600 million by 1992—of rather mysteriously termed "service reimbursements" to the MTA. Around half of these reflect the costs of the Transit Police. Cops are indeed needed to keep the peace on the subways—but shouldn't they be paid by the operator of the subway system and ultimately by the users? The CRA study, however, assumes these personnel will be paid by the city. The remainder are described as services of "a capital nature" provided by MTA personnel. Since the city owns the tracks, tunnels, and stations, the city reimburses the MTA for work performed on these facilities by MTA employees.

CRA's Case IV also assumes the city's continuation of about $96 million a year in "fare reimbursements" to the MTA. This is a welfare program by which the city subsidizes the MTA's discounted fares for the elderly and schoolchildren. The study also provides for transfer to the MTA of "operating surplus" from tolls collected on certain city bridges and tunnels (though these subsidies are projected to decline sharply, from $109.5 million in 1983 to $1.2 million in 1982).

Finally, in assuming that the capital-improvement plan will be implemented as proposed by the MTA, the "unsubsidized" scenario set out in the study builds in yet more subsidies. The MTA's capital plan is for a full 57 percent of the funds for the project to come from federal, state, and city grants—subsidies, that is.

Consider, however, the fact that the CRA study assumes no major reforms of the system whatsoever. Cost-saving measures would certainly be expected from private operators, although history shows that they are extremely unlikely under government operators.

The study does not assume, for instance, any increase in labor productivity. Yet as I found last year when I first investigated the New York subway story, private transit operators can get workers at half the wages government pays its employees. Moreover, a wide array of labor-saving measures that the politically pressured MTA won't touch with a 10-foot pole could be implemented by private operators. Given that labor is by far the largest component of transit operating costs, the savings in this category alone, under private operation, would be considerable.

Also not assumed in the Charles River study are any service cutbacks. Figured into the costs of maintaining, upgrading, and operating the subways are costs incurred by operating lightly traveled routes and little-patronized stations—precisely those unprofitable elements that commercial management would eliminate. And again, the savings would be great.

Automated fare equipment—such as stored-value cards, which record place of entry and exit—would enable an operator to set more-rational pricing policies on the subways and, in some cases, integrate subway service with commuter rail service. Distance-related fares could replace the flat fare. This would bring charges closer to costs and would attract some short-distance travelers, who at present are deterred by the relatively high fare. Moreover, a rational fare system would allow off-peak discounts, selective rates on little-traveled routes, and higher rates for express service—mechanisms by which an operator both reflects costs in prices and improves service.

Early this year, the MTA in fact acknowledged the case for doing away with tokens on the subways. Chairman Richard Ravitch suggested that an automated system would eventually have to replace tokens, and he alluded to Washington's stored-value magnetic-strip cards. At present, around 20 percent of subway revenues goes for the costs of token sales, an absurdly high sales expense. (And it is not as if the token sales staff do anything about fare-evaders, who, right in front of the salespeople's eyes, go in through exit slamgates or jump turnstiles. The MTA currently estimates losses from evasion at $50 million a year, but casual observation suggests it may be more.) Any actual move to replace personnel with automated equipment, however, is sure to meet with transit-union resistance. And history suggests that such resistance is not likely to be for naught.

A great variety of potential improvements in the operation of the New York subway system were discussed recently in an excellent "Transit Issue" of the journal New York Affairs (Vol. 7, No. 3, 1982). David Schoenbrod of New York University's Urban Research Center points out the complete lack of responsiveness and flexibility of the system under present institutional arrangements: "The (New York) region lacks the institutional means to deal intelligently with the question of how and where the system should shrink and grow. No official document lays out the choices and recommends a course of action.…the political process has shown itself prompt to obstruct the MTA's taking unpopular actions but loath to tell the MTA what to do instead." The consequence, he notes, is that the subway system "is overlarge and rundown."

Boris Pushkarev, head of research at the New York Regional Plan Association and another contributor to the issue, criticizes most effectively the MTA's now-exclusive preoccupation with renovation and management of the existing system (witness the current capital-improvement program). This preoccupation is precluding it from adapting the system to radically changing population patterns, employment distribution, and travel demands.

The past few years' revival of Manhattan as an employment center—employment grew right through the recent recession, during which Manhattan experienced a boom in office and hotel construction—offers a splendid opportunity for the subway system to gain new customers. The Second Avenue subway rotting half-built under the east side of Manhattan could be completed and run profitably. Certainly the overloading of the east side's only subway, the Lexington Avenue IRT, suggests there is room for a Second Avenue line.

The 63rd Street tunnel complex under the East River could be profitably connected to lines in Queens, which is by far the largest generator of subway commuters. Improvements in service where demand is presently not catered to could be accompanied by reductions in service where population has declined (the Bronx and Brooklyn).

Pushkarev, a long-time follower of the subway situation, estimates that there is demand for 17 miles of new subway—a Second Avenue line being the obvious portion of that—and 20 miles of new routes on existing or unused railroad rights of way. He also suggests the closure and demolition of 26 miles of elevated tracks. Also on Pushkarev's hit list are some 30 or so stations throughout the system that are used by fewer than 1,000 passengers a day, creating quite unwarranted costs in token sales and security staff and imposing delays on other travelers.

Indeed, the subways' speed is an item of much dissatisfaction among users. Though the trains can—and sometimes do—run at 60 mph, the overall system speed is only 18 mph. Pushkarev suggests that closing every second station on some portions of the system—some stations are spaced less than a half-mile apart even in residential areas, though spacing of nine-tenths of a mile is quite acceptable to users—could both improve service for riders and reduce costs. Faster service enables the same train and crew to perform more trips per day, thus increasing productivity. Pushkarev estimates a 10 percent speed increase reduces costs by 2.2 percent.

There are other opportunities, too, suggests Pushkarev, by which costs could be cut, some requiring capital investment. One example: Presently, most subway trains are driven by an engineer stationed in a cab on the right side of the lead car. But station platforms may be on either side of the train. So when a train draws up to a left-side platform, the engineer cannot see the platform. Therefore, a second crewman is needed solely to view the platform and signal the engineer that all is clear for departure. Car-width engineer's cabs would enable the driver to view both platforms, thus eliminating the necessity of the second crewman.

The system employs far too many people in other ways, as well. The MTA's bloated staff stands out among North American subways for "its unusually high ratio of maintenance-of-way employees per mile of track," Pushkarev reports. It has, for example, four times Toronto's staff per track-mile. Pushkarev claims that "with relatively modest changes in technology and manning requirements" as already reported, the New York subways could be run with 65 percent of their present employees.

It is clear, in other words, that the New York subways need not be a dying industry. Yet, such is the immobilism of the MTA bureaucracy that none of these opportunities for growth and streamlining is being seriously addressed. Private operators of the subways, however, could be counted on to search out and make the most of every plausible revenue-enhancing and cost-cutting opportunity.

Thus, it seems more than reasonable to suggest that the New York City subways could indeed be entirely self-supporting. The MTA's little-noticed study of responsiveness to fare increases meets the perennial objection of those who view transit as inherently unprofitable. Granted, a few subsidies remained even in the study's most austere scenario. Yet every expert who has looked at the system has noted the wide-ranging possibilities for cost and service improvements—while lamenting the utter inability of the MTA to exploit them. This is strong support for the contention that under private operation all subsidies could be removed and the system would survive—and prosper. It's time to let the taxpayers get off!

By the way, I asked Daniel Brand, the transportation expert who directed the MTA's study by Charles River Associates, whether in his opinion the study supports the case for selling the subways to private investors. It is noteworthy, and no doubt politic on his part, that Brand declined to make a comment for the record.

Peter Samuel is a Washington-based feature writer for the Murdoch newspaper chain. His frequent contributions to REASON include "Unload the Subways" in May 1982.