Public Transit Program Funding Issues in Surface Transportation Reauthorization

Public Transit Program Funding Issues in
Surface Transportation Reauthorization
Updated April 16, 2008
William J. Mallett
Specialist in Transportation Policy
Resources, Science, and Industry Division



Public Transit Program Funding Issues in
Surface Transportation Reauthorization
Summary
As enacted in the Safe, Accountable, Flexible, Efficient Transportation Equity
Act — A Legacy for Users (SAFETEA), federal public transit programs are currently
authorized through September 2009. Decisions about reauthorization will likely
hinge on the amount of funds available from the Mass Transit Account of the
Highway Trust Fund, the source of about 80% of federal transit funding. Without an
increase in the federal fuels tax, the use of other dedicated revenue mechanisms, or
more money from the general fund, federal funding available to support both
highways and transit will slow in the short term, and may decline in the medium
term. Because of the growth in authorized spending in SAFETEA and the spending
down of unexpended balances over the last few years, however, the transit account
is expected to go into deficit in FY2011 or FY2012.
At the spending level provided for in SAFETEA in FY2009, the fuels tax
dedicated to the transit account would need to be raised by approximately 1 cent per
gallon to remedy the current deficit in transit funding. This would allow for no
growth in the program to deal with growing needs or inflation. The U.S. Department
of Transportation (DOT), however, estimates that the country needs to spend 25%
more annually over the next 20 years than is currently being spent to maintain the
current conditions and performance of transit systems, and 73% more to make
substantial improvements. At the current federal share of overall transit finances, this
translates to an additional 0.6 cents per gallon in the federal fuels tax for transit to
maintain the system and 1.8 cents per gallon to improve the system.
Without new revenue, Congress may have to modify transit program priorities
or, alternatively, may want to reexamine the federal role in the financing of transit
systems. Some of the options that may be considered include reducing the federal
matching share, encouraging more private-sector involvement, including the use of
public-private partnerships and innovative financing, encouraging improvements in
transit system productivity, and the broad restructuring of current federal transit
programs.
The report outlines several ways of restructuring federal public transit programs,
each an alternative to the possibility of leaving the existing system unchanged. First,
Congress might decide to focus more resources on major capital expenses for the
rehabilitation and expansion of transit service in places that are best served by this
mode, primarily the densely populated parts of large cities that are often severely
congested. Second, Congress might focus on supporting and rehabilitating existing
services rather than major capital expansion. Third, Congress might eliminate the
capital improvement programs altogether, to be replaced with a simple “block grant”
that could be distributed based on transit ridership or population. This would allow
state and local governments to decide how best to allocate transit funding support
among existing and new services.



Contents
In troduction ......................................................1
Public Transit Finance..............................................2
Issues for Congress................................................6
Transit Funding Level..........................................6
Highway Trust Fund Issues.....................................11
Rate of Return...........................................13
Federal and State/Local Funding Shares...........................14
Transit and Highway Matching Shares........................15
Private-Sector Involvement.....................................16
Innovative Financing......................................18
Transit System Productivity.....................................19
Federal Public Transit Program Priorities..........................23
List of Figures
Figure 1. Public Transit Revenue From All Sources, 2004.................2
Figure 2. Public Transit Revenue From Government Sources, 2004..........3
List of Tables
Table 1. Public Transit Revenue Sources for Operating Expenditures,

1975-2004 ..................................................19



Public Transit Program Funding Issues in
Surface Transportation Reauthorization
Introduction
As enacted in the Safe, Accountable, Flexible, Efficient Transportation Equity
Act — A Legacy for Users (SAFETEA), P.L. 109-59, federal public transit programs
are currently authorized through September 2009. Decisions about reauthorization
will likely hinge on the amount of funds available for surface transportation,1
particularly revenues from the federal fuels tax and related taxes. Currently,
approximately 80% of federal transit funding is derived from the Mass Transit
Account of the Highway Trust Fund, and the other roughly 20% is taken from the
General Fund of the U.S. Treasury. Without an increase in the fuels tax, the use of
other dedicated revenue mechanisms, or more money from the general fund, federal
funding available to support both highways and transit will slow in the short term,
and may decline in the medium term. Because of the growth in spending provided
for in SAFETEA and the spending down of unexpended balances over the last few2
years, however, the highway account of the trust fund is likely go into deficit in
FY2009 and the transit account is expected to follow in FY2012.3
Fiscal austerity may require a reassessment of federal transportation priorities.
A significant increase in the fuels tax, the identification of other revenues, or a
combination of the two, on the other hand, may allow the programs to grow as they
have in the recent past. In terms of transit programs, SAFETEA authorized
approximately $53 billion from FY2004 through FY2009. In nominal terms, this wasst
a 46% increase in transit spending over the Transportation Equity Act for the 21
Century (TEA-21), as amended, P.L. 105-178 and P.L. 105-206, and double the
amount authorized in the Intermodal Surface Transportation Efficiency Act of 1991
(ISTEA), P.L. 102-240.
In this context, this report examines the financing of the federal public transit
program, and transit financing in general. The report begins with an overview of
public transit finance and the role of the federal government. This is followed by a
discussion of the funding issues that Congress is likely to face in the reauthorization


1 Revenues deposited in the Highway Trust Fund come from taxes on several fuels (gasoline,
diesel, gasohol, and special fuels) as well as taxes on tires, sales of trucks and trailers, and
heavy vehicle use.
2 Although not named in law, the part of the Highway Trust Fund outside of the Mass
Transit Account is typically called the highway account, a convention followed in this
report.
3 Estimates provided to CRS by the Congressional Budget Office, February 29, 2008.

of the transit programs. These include the overall level of funding, issues with the
Mass Transit Account of the Highway Trust Fund, state and local matching shares,
the role of the private sector and innovative financing, and transit industry
productivity. The report concludes with a discussion of broad options for
restructuring federal transit program finances.
Public Transit Finance
In 2004, a total of $39.5 billion from all sources was spent on providing transit
service in the United States, with $28.4 billion of this amount derived from public
funds and $11.1 billion from system-generated revenues such as passenger fares and
advertising. The federal contribution amounted to about $7 billion, representing 18%
of all transit revenue sources if system-generated revenue is included (Figure 1). If
system-generated revenue is excluded, local government contributed almost half of
the funding spent on transit provision, with state government contributing slightly
more than one-quarter and the federal government slightly less than one-quarter
(Figure 2).
Figure 1. Public Transit Revenue From All Sources, 2004


(in Billions)
System-
Generated
Local$11.1
$13.7 28%

34%


Federal
$7.0 State
18%$7.8

20%


Source: U.S. Department of Transportation, Federal Highway Administration and Federal Transit
Administration, 2006 Status of the Nation’s Highways, Bridges, and Transit: Conditions and
Performance (Washington, DC, 2007).

Figure 2. Public Transit Revenue From Government Sources, 2004


(in Billions)
State
$7.8

27%


Local
$13.7

48%


Federal
$7.0

24%


Source: U.S. Department of Transportation, Federal Highway Administration and Federal Transit
Administration, 2006 Status of the Nation’s Highways, Bridges, and Transit: Conditions and
Performance (Washington, DC, 2007).
Note: Percentages do not add to 100 due to rounding.
There was very little public funding of transit until the mid-1960s, when, with
falling ridership and mounting debts, many private transit companies were
reestablished as public agencies. The federal government supported this process with
capital grants beginning in a substantial way with the Urban Mass Transportation Act
of 1964 (P.L. 88-365). Public funding for transit at all levels of government
expanded rapidly toward the end of the 1960s and through the 1970s. In the 1980s,
overall public funding remained relatively constant, at about $15 billion a year (in
constant 2004 dollars), followed by a period of growth in the 1990s that has been
particularly rapid since the late 1990s. The federal share of public funding for transit
grew rapidly in the 1970s, peaking in the early 1980s at around 40% before4
stabilizing at around 25% during the past decade.
Although the federal government provides only 18% of transit revenues,
including system-generated revenues, this support is particularly important for capital
expenditures. Almost three-quarters of federal funds go for capital, representing 39%
of transit capital expenditures.5 As rail modes are generally more capital-intensive
4 U.S. Department of Transportation, Federal Highway Administration and Federal Transit
Administration, 2006 Status of the Nation’s Highways, Bridges, and Transit: Conditions and
Performance (Washington, DC, 2007), chapter 6. [http://www.fhwa.dot.gov/policy/2006cpr/
index.htm].
5 It is assumed in this calculation that operating revenues are applied exclusively to
(continued...)

than non-rail modes, about 70% of this federal capital support goes to rail, with most
of the remaining 30% used for bus and bus-related capital expenses.
As noted in the introduction, about 80% of federal transit funding comes from
the Mass Transit Account of the Highway Trust Fund, with the remaining roughly
20% from the General Fund of the U.S. Treasury. Of the 18.4 cents federal tax on
a gallon of gasoline, 2.86 cents is deposited in the transit account. Of the rest, 15.44
cents is deposited in the highway account, and 0.1 cent is deposited in the Leaking
and Underground Storage Tank (LUST) Trust Fund. Revenues credited to the trust
fund also come from taxes on diesel, gasohol, and special fuels.6 Since the Surface
Transportation Assistance Act of 1982 (P.L. 97-424), it has been customary for 20%
of federal fuels tax increases to be dedicated to the transit account. In 1983, the
transit account was established with a dedicated 1.0 cent of a 5.0-cent-per-gallon
increase in the federal fuels tax.7 Increases in the fuels tax since then have seen the
amount per gallon dedicated to transit increase to 1.5 cents in 1990, 2.0 cents in

1995, 2.85 cents in 1997, and to 2.86 cents in 1998 (retroactive to October 1, 1997).8


SAFETEA authorized approximately $53 billion for transit programs from
FY2004 through FY2009. In nominal terms, this was a 46% increase in transit
spending over the TEA-21, as amended, and more than double the amount authorized
in the ISTEA.9 In addition to federal funding for transit from the transit programs
themselves, federal funding is also available from several surface transportation
programs that allow highway money to be spent on transit projects and vice versa.
Most funds “flexed” to the transit programs come from the Surface Transportation
Program (STP) and the Congestion Mitigation and Air Quality Improvement Program
(CMAQ). Flexing funds is largely the decision of state decision-makers; hence, the
amount transferred can vary widely from year to year. In 15 years, from FY1992
through FY2006, a total of $13.1 billion has been flexed from highways to transit,


5 (...continued)
operating expenses, and that capital expenses are funded entirely with government funding.
6 U.S. Department of Transportation, Federal Highway Administration, Office of Policy
Development, Highway Trust Fund: A Primer (Washington, DC: 1998). [http://www.fhwa.
dot.gov/aap/primer98.pdf].
7 The Surface Transportation Assistance Act of 1982 actually dedicated one-ninth of the
fuels tax to the transit account, reflecting the fact that the tax on gasoline, diesel, and some
other fuels was being raised to 9 cents per gallon. This was contentious, hence, in the
Deficit Reduction Act of 1984 (P.L. 98-369) the law was revised to specify that the transit
account would receive 1.0 cent per gallon.
8 U.S. Department of Transportation, Federal Highway Administration, Financing Federal
-aid Highways (Washington, DC, 2007), Appendix L. [http://www.fhwa.dot.gov/reports/
financingf ederalaid/financing_highways .pdf].
9 American Public Transportation Association (APTA), Safe, Accountable, Flexible,
Efficient Transportation Equity Act — A Legacy for Users: A Guide to Transit Related
Provisions (Washington, DC: 2005), p. 1. [http://www.apta.com/government_affairs/
safetea_lu/documents/brochure.pdf].

ranging from $0.3 billion in FY1992 to $1.6 billion in FY2000.10 Very little transit
program funding has been flexed to highways.
Paratransit is another area in which funding is available from the federal
government outside the transit program. Paratransit, also known as demand response
or dial-a-ride, is non-fixed route service for people with disabilities and the elderly,
and typically involves the use of small buses, vans, or passenger cars. In a 2003
report, the General Accounting Office (now the Government Accountability Office),
or GAO, found that 56 federal programs in seven federal agencies other than U.S.
Department of Transportation (DOT) fund transportation services to transportation-
disadvantaged populations.11 The same report could not estimate the transportation
spending in these programs because the money often was not tracked separately from
other types of spending.
Because of the complexity of federal programs and overlapping responsibilities
in paratransit, the President issued Executive Order (EO) 13330 on Human Service
Transportation Coordination on February 24, 2004, directing federal agencies to
examine and improve the coordination of federal programs supporting paratransit,
and, to implement the effort, created the Federal Interagency Coordinating Council
on Access and Mobility (CCAM).12 The CCAM launched a national initiative,
United We Ride, and prepared a report to the President on the issue of coordinating
federal paratransit programs with five recommendations that focused on 1)
coordinated planning, 2) vehicle sharing, 3) cost sharing, 4) performance measures,
and 5) demonstration grants.13 According to CCAM’s latest progress report, 40 states
have United We Ride-coordinated transportation plans, and a number of grants have
been distributed to help demonstrate the various strategies.14


10 American Public Transportation Association, Public Transportation Fact Book 2007
(Washington, DC, 2007), table 44; and American Public Transportation Association, Public
Transportation Fact Book 2006 (Washington, DC 2006), table 44.
11 U.S. General Accounting Office (now the Government Accountability Office),
Transportation-Disadvantaged Populations: Some Coordination Efforts Among Programs
Providing Transportation Services, but Obstacles Persist, GAO-03-697 (Washington, DC,

2003). [http://www.gao.gov/new.items/d03697.pdf].


12 Federal Register, Vol. 69, No. 38, Executive Order 13330, of February 24, 2004: Human
Services Transportation Coordination, pp 9185-9187. [http://a257.g.akamaitech.net/7/257/

2422/14mar20010800/edocke t.access.gpo.gov/2004/pdf/04-4451.pdf].


13 Coordinating Council on Access and Mobility, Report to the President: Human Service
Transportation Coordination, Executive Order 13330 (Washington, DC, 2005).
[ h t t p : / / www.uni t e dwer i d e.go v/ 0216_LAYOUT _1.3F_v6.pdf ] .
14 Coordinating Council on Access and Mobility, Progress Report: Implementation of
Executive Order 13330, Human Services Transportation Coordination, 2005-2007
(Washington, DC, 2007). [http://www.unitedweride.gov/UWRProgress_report2005-20072_

2_07.doc].



Issues for Congress
With looming fiscal difficulties and growing demand on the transportation
system, there is likely to be vigorous debate over the level of funding for surface
transportation programs in the reauthorization of SAFETEA. The overall level of
transit funding, therefore, is likely to be a major issue for Congress. Without new
revenue, Congress may have to reexamine the federal role in the financing of transit
systems. Some of the options discussed below include reducing the federal matching
share, encouraging more private-sector involvement, including the use of public-
private partnerships and innovative financing, encouraging improvements in transit
system productivity, and the broad restructuring of current federal transit programs.
Transit Funding Level
The overall level of federal transit funding is likely to be a major issue in the
reauthorization of SAFETEA, particularly as it relates to the relative balance between
highway and transit funding. A number of groups, including the American
Association of State Highway and Transportation Officials (AASHTO), the U.S.
Chamber of Commerce, and the American Society of Civil Engineers, argue that
America is underinvesting in transportation infrastructure, including public transit
infrastructure.15 These groups contend that the physical condition and operational
performance of public transit is suffering and will continue to suffer unless there is
an increase in funding levels. In their view, federal infrastructure investment should
be significantly increased to deal with an existing backlog of projects and other future
needs.
This view is bolstered, to some degree, by the most recent highway and transit
“needs assessment” by DOT, which suggests that the capital cost to maintain the
current condition and operational performance of transit systems in the United States
from 2005 through 2024 is 25% more annually than is being currently spent by all
levels of government. In 2004, transit capital spending by all levels of government
in 2004 was $12.6 billion, $3.2 less than the $15.8 billion that DOT estimates will
be needed annually over the next 20 years.16 Of this $15.8 billion, $10.4 billion is for
replacement and rehabilitation of current infrastructure, and $5.4 billion is for new
vehicles and infrastructure to accommodate new riders. Capital spending to improve


15 See, for instance, American Society of Civil Engineers, “Report Card for America’s
Infrastructure 2005,” [http://www.asce.org/reportcard/2005/page.cfm?id=34]; American
Association of State Highway and Transportation Officials (AASHTO), Surface
Transportation Policy Recommendation (Washington, DC, March 2007) [http://www.
transportation1.org/tif2report/]; National Chamber Foundation, Future Highway and Public
Transportation Financing, Executive Summary (Washington, DC, 2005), [http://www.
uschamber.com/ ncf/publications/default.htm] .
16 U.S. Department of Transportation, Federal Highway Administration and Federal Transit
Administration, 2007, p. 8-8.

conditions and operational performance is estimated to require $21.8 billion annually,

73% more than is currently being spent.17


It should be pointed out, however, that, as with any attempt to estimate current
and future system conditions and performance, there are a host of simplifying
assumptions, omissions, and data problems that influence the results. Nevertheless,
this analysis suggests that if total government spending is not increased above current
levels, the physical condition and operational performance of system elements may
decline.
DOT makes no recommendation about the shares of capital spending made by
different levels of government in its estimates of capital needs. However, in the
current ratio of capital spending, according to DOT’s estimates of total need, this
would translate to $6.2 billion of federal spending annually to maintain the system
and $8.5 billion annually to improve the system. In 2004, the federal government
provided $4.9 billion for capital expenses (the remaining $2 billion in federal
spending went for non-capital expenses).
The congressionally created National Surface Transportation Policy and
Revenue Study Commission (NSTPRSC), created under Section 1909 of SAFETEA,
estimated significantly greater needs than DOT in its December 2007 report to
Congress.18 In comparison with currently sustainable transit capital spending by all
levels of government of about $13 billion (in 2006 dollars), the NSTPRSC estimated
middle- and high-range capital spending needs over 15-year, 30-year, and 50-year
periods. The middle-range capital spending for transit by all levels of government
over the next 30 years (2006 through 2035) was estimated to be in the range of $17
billion to $25 billion per year (in constant 2006 dollars) (an increase of between 31%
and 92%), and the high range was estimated to be $23 billion to $34 billion (in
constant 2006 dollars) (an increase of 77% to 162%).19
In its most recent policy statement on national transportation infrastructure,
AASHTO contends that it will be very difficult for the country to build enough
highway infrastructure to keep up with the current forecasted growth in highway
travel. Consequently, it argues that a national policy goal should be to double transit
ridership over the next 20 years to reduce highway demand and to meet the needs of
the transit-dependent. AASHTO believes this would require increasing federal
transit assistance from $10.3 billion in FY2009, the amount authorized in the final


17 Ibid., p. 7-18. Based on data supplied by Metropolitan Planning Organizations (MPOs),
DOT estimates that passenger miles traveled (pmt) on transit will increase at an annual rate
of 1.57%. Over the 20 years of the forecast, therefore, pmt will increase by a total of 37%.
This is about twice the growth in the U.S. population forecast by the Census Bureau. MPOs
are local government entities responsible for carrying out the metropolitan transportation
planning process, and are required by federal law in urbanized areas with a population of

50,000 or more.


18 National Surface Transportation Policy and Revenue Study Commission, Transportation
for Tomorrow (Washington, DC, 2007). [http://www.transportationfortomorrow.org/final_
report/]
19 Ibid., Volume II, p. 4-12.

year of SAFETEA, to $17.3 billion by FY2015, possibly the last year of the next
authorizing legislation.20 One way to boost ridership, according to AASHTO, is to
provide more funding for the New Starts program (49 U.S.C. §5309), which provides
up to 80% of federal matching funds for the creation or extension of fixed-guideway
transit systems (including bus rapid transit). New Starts funding is in great demand.
By AASHTO’s estimate, $35 billion is needed to fund the 36 projects that have
moved beyond the initial planning stages,21 and, in a survey of transit project
sponsors, GAO found that there are another 141 projects planned, of which three-
quarters are likely to request federal New Starts funding.22 In SAFETEA, the New
Starts program is authorized at $1.8 billion in FY2009.
An alternative view of the overall level of government transportation spending
in general, and of transit spending in particular, is that it has not been dramatically
deficient. In terms of the nation’s transit systems, the DOT needs analysis shows that
total government spending on capital and operations (excluding farebox and other
revenue) grew by approximately 80% between 1980 and 2004 (in real terms), much
faster than passenger trips and passenger miles, which grew by 12% and 23%,
respectively.23 However, it is true that federal spending grew relatively slowly over
this period, particularly when compared with state and local spending, 4% and 129%,
respectively (in real terms). Consequently, the federal share of total spending over
the period declined from 42% to 25%. The federal share of capital spending has also
declined, from approximately 50% in the mid-1990s to 39% in 2004. Since 1995,
federal spending has slightly outpaced state and local spending, growing by 43% and

39%, respectively.24


As a result of this increase in overall government spending, transit service has
grown and the condition and performance of transit systems have generally improved
over the past decade. Transit system capacity, measured in capacity-equivalent
revenue miles, increased by 30% between 1995 and 2004. With the opening of
several new systems and extensions, light rail capacity more than doubled over the


20 AASHTO, March 2007, p. 35.
21 AASHTO, Future Needs of the U.S. Transportation System (Washington, DC, February

2007), p. 45. [http://www.transportation1.org/tif1report/TIF1-1.pdf].


22 U.S. Government Accountability Office, Public Transportation: Future Demand is Likely
for New Starts and Small Starts Programs, but Improvements Needed to the Small Starts
Application Process, GAO-07-917 (Washington, DC, 2007). [http://www.gao.gov/new.
items /d07917.pdf].
23 U.S. Department of Transportation, Federal Highway Administration and Federal Transit
Administration, 2007, exhibit 6-22; American Public Transportation Association, “Unlinked
Passenger Trips by Mode, 1890-2004.” [http://www.apta.com/research/stats/ridership/trips.
cfm]; U.S. Department of Transportation, Research and Innovative Technology
Administration, Bureau of Transportation Statistics, National Transportation Statistics 2007
(Washington, DC, 2007), table 1-3. [http://www.bts.gov/publications/national_
transportation_statistics/html/table_01_37.html ].
24 CRS calculation using GDP implicit price-deflator based on U.S. Department of
Transportation, Federal Highway Administration and Federal Transit Administration, 2007,
exhibits 6-20, 6-23.

period. Bus capacity grew by a more modest 18%.25 The growth in ridership, on
average, has generally lagged behind the growth in capacity; hence, capacity
utilization has slipped. Between 1995 and 2004, utilization, as measured in terms of
passenger miles per capacity-equivalent vehicle, increased for heavy rail, decreased
for commuter rail and light rail, and remained about the same for motorbus.26
The overall physical condition of transit systems is a more complex picture.
Nonetheless, conditions have generally improved, particularly in the bus fleet. The
condition of the urban bus fleet weighted for bus size has improved from 2.88 in
1995 to 3.08 in 2004 on a 5-point scale (1 = poor; 5 = excellent). Rail vehicle
condition has remained about the same over the period, at around 3.5. Rail
maintenance facilities are in reasonable condition. Of the 152 facilities in 2004, only
7% were considered substandard and 1% poor. Additionally, 48% were rated
adequate and 43% were rated good or excellent. Rail systems — communication,
train control, traction power, and revenue collection — all improved, except for train
control systems. About one-quarter of train control systems were rated substandard
or worse in 2004. Other structures such as elevated structures and tunnels and track
have improved, and are rated good overall. Rail yards have deteriorated slightly over
the past few years, and had an overall rating of 3.8 in 2004. One area of concern,
according to the DOT study, is transit rail stations, as about half are rated
substandard. 27
A third view on the overall level of transit funding is that governments,
including the federal government, spend too much on public transit relative to the
benefits it provides.28 It is often pointed out that while transit spending amounts to
about 16% of all government highway and transit spending and about 14% of federal
highway and transit capital expenditure (in 2004),29 only about 2% of all trips are
made by this mode.30 Even for commuting trips, for which transit is better-suited,
transit only accounts for 5% nationwide, a share that has changed little over the past
two decades. Only in two cities, New York and Chicago, does the transit share rise
above 10%.31 The effect, according to transit critics, is to short-change highway
spending, thereby causing highway conditions and performance, including highway


25 Ibid., exhibit 2-25.
26 Ibid., exhibit 4-17.
27 Ibid., chapter 3.
28 Cox, Wendell, “Transit’s Limited Capability and Promise,” in Wendell Cox, Alan
Pisarski, and Ronald D. Utt (eds), 21st Century Highways: Innovative Solutions to America’s
Transportation Needs (Washington, DC, Heritage Foundation, 2005).
29 U.S. Department of Transportation, Federal Highway Administration and Federal Transit
Administration, 2007, exhibits 6-8, 6-20, 6-23.
30 U.S. Department of Transportation, Bureau of Transportation Statistics, NHTS 2001
Highlights Report, BTS03-05 (Washington, DC, 2003), figure 6.
31 U.S. Census Bureau, “Most of Us Still Drive to Work Alone: Public Transportation
Commuters Concentrated in a Handful of Large Cities,” U.S. Census Bureau News, June 13,

2007. [http://www.census.gov/Press-Release/www/releases/archives/american_community_


survey_acs/010230.html ].

congestion, to be worse than they would be otherwise.32 A corollary to this view is
that a significant proportion of federal transit funding, roughly 80%, comes from
taxes paid by highway users.
A number of critics of federal transit policy argue that it focuses too much on
financial support for building new rail systems. These critics contend that such
systems are expensive to build and maintain, less flexible compared with regular bus
transit, and ill-suited to today’s low-density, dispersed metropolitan areas. These
critics contend that rail transit may only be worth the cost in high-density corridors,
and that few of these corridors remain without rail service.33 Moreover, critics
contend that construction of new rail systems in search of discretionary riders,
primarily suburban commuters, have worked to the detriment of bus-dependent
populations in the central city. Overall, these critics argue, the effect has been to
switch those riding buses to riding rail, with little net gain in transit patronage.34
Even the environmental benefits of new rail lines have been called into question
because many new rail riders must drive to a station to access the system.
Consequently, the reduction in emissions from building new rail lines has been found
in many cases to be negligible.35
In the view of some, federal support for new transit capacity would be better
spent on BRT, in which express buses run over roads with some sort of priority
system ranging from signal preemption to an exclusive busway. Others argue that
BRT projects, while cheaper than rail systems, are still more expensive and less
effective than conventional bus service. For instance, one analyst contends that
“modest improvements to basic bus services combined with an attractive fares policy
have shown they can secure substantially greater ridership increases than capital-
intensive projects involving either light rail or busway construction.”36 Others note
that BRT projects favor suburban commuters over more centrally located transit such
as streetcars, a lighter, cheaper, but slower type of light rail.37
A counter argument to these critics, and one in favor of increased transit
spending, is that transit’s worth must be analyzed in terms of economic value, not


32 Cox, W. And R. O’Toole, “The Contribution of Highways and Transit to Congestion
Relief: A Realistic View,” Heritage Foundation Backgrounder, No. 1721, January 24, 2004.
[http://www.heritage .org/ Resear ch/UrbanIssues/bg1721.cfm].
33 Wachs, M., “U.S. Transit Subsidy Policy: In Need of Reform,” Science, Vol. 244, pp.

1545-1549.


34 Richmond, J., “A Whole-System Approach to Evaluating Urban Transit Investments,”
Transport Reviews, 2001, Vol. 21, No. 2, pp. 141-179.
35 Ibid.
36 Ibid., p. 161.
37 Siggerud, K. Director of Physical Infrastructure, “U.S. Government Accountability Office,
Preliminary Analysis of Changes To and Trends in FTA’s New Starts and Small Starts
Programs,” Statement Before House Subcommittee on Highways and Transit, May 10, 2007,
GAO-07-812T, [http://www.gao.gov/new.items/d07812t.pdf]; Herrick, T., “A Streetcar
Named Aspire: Lines Aim to Revive Cities, Wall Street Journal, June 20, 2007, B1.

just transportation value.38 The economic value argument includes economic
development as well as mobility, such as mobility for non-drivers and congestion
management. By this measure, according to proponents, transit investment is highly
productive, often more productive than an alternative highway investment. The
implication for transit’s detractors is that “the reality that transit cannot as a rule
make it financially seems to have created a belief in some quarters that it cannot
make it economically either.”39 This has been an issue in the New Starts program,
as some have argued that federal funds should be used to support projects that
provide the most transportation mobility benefits, such as bus rapid transit, and others
have contended that funding ought to be available for projects that have fewer
mobility benefits but may provide greater economic development benefits, such as
light rail and streetcars.40
Highway Trust Fund Issues
The amount of funding available for transit programs, at least in the short to
medium term, is likely to depend on decisions surrounding the Highway Trust Fund.
At the moment, about 80% of federal transit funding comes from the Mass Transit
Account of the Highway Trust Fund, with the rest coming from general funds. In
early 2008, the Congressional Budget Office (CBO) estimated that with current
revenues and outlays at the level provided for in SAFETEA (with adjustments made
for inflation after FY2009), the transit account would go into deficit in FY2012.41
Problems with the highway account are more immediate, however, as CBO estimates
that this will go into deficit in FY2009. At funding levels provided for in SAFETEA,
CBO estimates that expenditures from the Highway Trust Fund will exceed revenues
by $6.6 billion in FY2009, with a $4.7 billion difference in the highway account and
$1.9 billion difference in the transit account. Expenditures from the transit account
do not become a problem until FY2012, however, because of previously accrued
unexpended balances. The unexpended balance in the highway account is being
exhausted more quickly; hence, the more immediate problem this presents.
Funding shortfalls in the highway and transit programs are related to a few key
underlying factors. To begin with, the fuels tax has not been increased since 1993,
when 4.3 cents per gallon were added as a general budget deficit reduction measure.
This tax increment was redirected to the Highway Trust Fund beginning October 1,
1997. In addition, the fuels tax is not indexed to inflation. Consequently, since

1993, inflation has eroded about one-third of the purchasing power of the fuels tax.42


38 Lewis, D. and F.L. Williams, Policy and Planning as Public Choice: Mass Transit in the
United States (Brookfield, VT, Ashgate, 1999).
39 Testimony of David Lewis, Consultant, in U.S. Congress, House Subcommittee on
Highways and Transit, Implementation of New Starts and Small Starts Program, May 10,

2007.


40 See CRS Report RL34171, Public Transit Program Issues in Surface Transportation
Reauthorization, by William J. Mallett.
41 Estimates provided to CRS by the Congressional Budget Office, February 29, 2008.
42 Transportation Research Board, National Cooperative Highway Research Program, Future
(continued...)

One current estimate suggests that the fuels tax would need to be increased by about
10 cents per gallon to restore its 1993 purchasing power.43 Despite no increase in the
federal fuels tax and the problem of inflation, which has been especially severe in
construction materials and fuel over the past few years, SAFETEA authorized
funding increases based primarily on spending down the unexpended balances that
had accrued in the Highway Trust Fund accounts. These balances have been
eliminated more quickly than estimated when SAFETEA was enacted.
Although receipts from the fuels tax are subject to a good deal of uncertainty,
as they depend on projections of travel demand and fuel usage, the current rule of
thumb is that a 1.0-cent-per-gallon tax increase generates approximately $1.6 billion
to $2 billion in revenue for the Highway Trust Fund as a whole and $0.3 billion to
$0.4 billion for the transit account, assuming 20% of the increase goes to the transit
account. At the funding level currently provided for in FY2009, with expenditures
exceeding revenues by $6.6 billion in total and by $1.9 billion in the transit account,
and assuming revenue at the higher end of the range, the fuels tax would need to be
raised by approximately 5 cents per gallon to close the gap (with 1 cent per gallon
dedicated to the transit account). This allows for no growth in the program to deal
with growing needs or inflation. Indexing the fuels tax to inflation would allow the
programs to remain at the FY2009 level in real terms. One estimate of indexing the
fuels tax (beginning in FY2010) predicts that this alone would raise the current 18.3-
cent-per-gallon tax, excluding the 0.1 cents dedicated to the Leaking and
Underground Storage Tank Trust Fund, to 21.8 cents per gallon by FY2017.44
CBO estimates that expenditures from the transit account will exceed revenues
by about $1.9 billion in FY2009, but, under the current assumptions, this gap is
expected to continue widening over time. CBO estimates that the difference will be
$4.0 billion by FY2012, $4.5 billion by FY2015, and $5.0 billion by FY2018.45
Another way to look at fuel taxes and future funding needs is to assess the fuels
tax in relation to the DOT needs assessment discussed above. There is no
requirement that the federal government provide extra funding to alleviate
deficiencies in highway and transit infrastructure identified in the DOT report. But
at the level of its current share, the federal government would have to raise an extra
$1.3 billion per year, from 2005 though 2024, for capital expenditures to maintain the
current condition and performance of the system. To improve the current condition
and performance would require an extra $3.6 billion annually. Assuming revenue at
the higher end of the range again, these estimates suggest a 0.6- to 1.8-cent-per-
gallon increase in the fuels tax for the transit account. At the current ratio, this would
require a 3.0-cent to 9.0-cent-per-gallon increase in the fuels tax overall. This does


42 (...continued)
Financing Options to Meet Highway and Transit Needs, NCHRP Web-Only Document 102
(Washington, DC, 2006), pp. 2-16. [http://onlinepubs.trb.org/onlinepubs/nchrp/nchrp_
w102.pdf].
43 Ibid., p. 6-2.
44 Ibid., p. 6-1.
45 Estimates provided to CRS by the Congressional Budget Office, February 29, 2008.

not include any additional funding for non-capital expenses, currently about 30% of
federal transit support.
It should be emphasized that these are approximate calculations based on
estimates of travel, fuel use, and other factors that may change in the future.
Moreover, these calculations are based on assigning 20% of any fuels tax to the
transit account, as has been the case since 1983, and which transit supporters are very
keen to maintain in any future legislation.46 A number of highway advocates,
however, argue that highway user fees should be used to improve the condition and
performance of highways. These highway advocates note that the trust fund was
created in 1956 to provide money for the construction of the interstate highway
system and for other highway programs. They note that over time, however, an
increasing share of trust fund revenue has been diverted to other purposes,
particularly to public transit, but also to historic preservation, recreational trails, air
pollution mitigation, and, through earmarking, to projects that reward specific
constituencies to the detriment of transportation mobility. Continued large-scale
federal funding, they argue, has also come at the price of burdensome federal
regulation in a number of areas that raises costs and stifles innovation.47
Rate of Return. Aside from consideration of tax rates and receipts into the
Highway Trust Fund, reauthorization may also involve greater debate about each
state’s “rate of return” from the transit account, the so-called “donor-donee” issue.
This issue concerns the amount of funds each state receives from the trust fund
relative to the amount paid in by a state’s drivers. A state that pays in more than it
receives is known as a donor state. A state that pays in less than it receives is known
as a donee state. Highway legislation at least as far back as the Surface48
Transportation Assistance Act of 1982 has been marked by such concerns. Transit
funding, on the other hand, has generally been immune to this issue, mainly because
of the heavy concentration of transit service and ridership in just a few states, and
because such concerns have been assuaged with relatively large increases in highway
and transit spending. In an era of fiscal austerity, however, the debate surrounding
each state’s share of transit funding may appear as an issue.49


46 Millar, W., President, APTA, U.S. Congress, Senate Committee on Banking, Housing,
and Urban Affairs, Hearing on The Administration’s Proposal for Reauthorization of the
Federal Public Transportation Program, [http://frwebgate.access.gpo.gov/cgi-bin/getdoc.
cgi?dbname=108_senate_hearings&docid=f:96194.pdf], June 10, 2003.
47 Utt., R, “Reauthorization of TEA-21: A Primer on Reforming The Federal Highway and
Transit Programs,” Heritage Foundation Backgrounder, No. 1643, April 7, 2003,
[http://www.heritage.org/Research/SmartGrowth/upload/39789_1.pdf]; Utt, R., “Proposal
to Turn Federal Highway Program Back to the States Would Relieve Traffic Congestion,”
Heritage Foundation Backgrounder, No. 1709, November 21, 2003, [http://www.heritage.
org/ Research/Smart Growth/upload/52771_1.pdf].
48 See CRS Report RL31735, Federal-Aid Highway Program: “Donor-Donee” State Issues,
by Robert S. Kirk, Updated June 10, 2005.
49 Utt, R., “Time for Congress to End the Regional Inequities in the Federal Highway
Program,” Heritage Foundation WebMemo, #645, February 1, 2005. [http://www.heritage.
org/ Research/Sma rtGrowth/wm645.cfm].

Federal and State/Local Funding Shares
Federal funding for highways and transit, in most instances, is predicated on
sharing project costs with states and localities. From very early on, federal funding
for highway and, later, transit infrastructure was conceived as providing support to
programs run by state and local government. Consequently, most “federal aid” must
be matched with state or local money in a ratio determined by federal law. These
matching shares vary from program to program, and have occasionally been adjusted
according to the goals of federal policy.
Because of this, some suggest that one way to deal with the impending federal
transportation funding shortfall is to shrink the size of the federal role. This is
particularly true in the area of transit, which is often viewed as a local, not a national,
mode of transportation. Why, it is sometimes asked, should a driver in South
Carolina pay fuels taxes to subsidize a train rider in Philadelphia?50 Proponents of
turning back more responsibility to state and local governments sometimes argue that
withdrawal of federal support for transit programs, and with it federal regulations,
particularly the labor protection provisions enacted as Section 13(c) of the Urban
Mass Transportation Act of 1964, now Section 5333(b) of Title 49, might even spur
transit innovation and ridership, and lower costs. Under this labor protection
provision, some argue, it is difficult for transit agencies to reduce the number of staff
through the introduction of new technologies or by contracting out some or all agency
functions (see the discussion under “Transit System Productivity,” below).51
Supporters of a continued, and in some cases an even greater, federal role in
transit argue that transit is part of a national system, in that it provides a link at the
beginning and end of intercity trips. Moreover, they argue, transit can provide
congestion relief in major cities and in major travel corridors. Metropolitan areas
with large transit systems are viewed as drivers of the national economy. For
instance, the top 10 metropolitan areas in terms of transit ridership account for 25%
of the nation’s population and 30% of gross domestic product.52 Consequently,
transit supporters argue that improvements in transit systems may predominantly
improve local mobility, but will have national economic benefits. Other national
benefits cited include improving the response to national emergencies, a cleaner
environment, and energy conservation.53


50 Ibid.
51 Utt. R., Heritage Foundation Backgrounder, No. 1643, April 7, 2003.
52 U.S. Department of Transportation, Research and Innovative Technology Administration,
Bureau of Transportation Statistics, State Transportation Statistics 2006 (Washington, DC,

2007), table 4-3. [http://www.bts.gov/publications/state_transportation_statistics/state_


transportation_statistics_2006/index.html]; U.S. Department of Commerce, Bureau of
Economic Analysis, Gross Domestic Product by Metropolitan Area. [http://www.bea.gov].
53 American Public Transportation Association (APTA) “The Benefits of Public
Transportation — An Overview.” [http://www.apta.com/research/info/online/ben_overview.
cfm#ltn].

Transit and Highway Matching Shares. The federal matching share has
typically varied by program, and these shares have been changed in authorizing
legislation throughout the history of the federal-aid program. Before passage of
ISTEA, transit advocates often complained that the federal matching share for transit
projects was lower than that for highway projects, biasing state and local decision-
making toward highway projects so as to receive the extra federal money. ISTEA did
away with that supposed inequity by raising matching shares in various transit
programs, including the New Starts program, to 80%.
The great demand from transit agencies for federal funding from the New Starts
program has led some to argue for lowering the cap on the federal share for such
projects. Supporters of this view argue that lowering the cap would allow federal
funding to be shared among more worthwhile projects. Moreover, supporters argue
that a lower cap would encourage states and localities with more of their own money
at stake to advance only the strongest projects. GAO found that more economic
analysis of the costs and benefits of a project is typically done when more local54
funding is required. In addition, supporters point out that although the maximum
share is 80%, prior to SAFETEA it was FTA policy to rate a project as low if it
sought a federal share of more than 60%. This policy was a response to House
Appropriations Committee reports that a lower share was warranted because demand55
for funding help was outstripping the available resources. Provisions in SAFETEA
now prohibit the Secretary of Transportation from requiring more than 20% and
FTA’s policy, beginning in FY2007, no longer downgrades a project that seeks more
than 60%.56 Nevertheless, projects approved or with pending New Starts funding in57
FY2007 have a federal share ranging from 34% to 80%. In FY2008, the federal
share of New Starts projects ranges from 28% to 80%, and in FY2009 the share58
ranges from 30% to 80%.
Opponents of lowering the maximum federal share argue that lowering the cap
might bias state and local decision-makers to favor highways projects that have an


54 U.S. Government Accountability Office, Highway and Transit Investments: Options for
Improving Information on Projects’ Benefits and Costs for Increasing Accountability for
Results, GAO-05-172 (Washington, DC, January 2005). [http://www.gao.gov/new.items/
d05172.pdf].
55 See, for example, House Appropriations Report, Department of Transportation and
Treasury and Independent Agencies Appropriations Bill, 2004, 108-243.
56 U.S. Government Accountability Office, New Starts Program Is in a Period of Transition,
GAO-06-819 (Washington, DC, 2006). [http://www.gao.gov/new.items/d06819.pdf].
57 Ibid., p. 13.
58 U.S. Department of Transportation, Federal Transit Administration, Annual Report on
Funding Recommendations, Proposed Allocations of Funds for Fiscal Year 2008, New
Starts, Small Starts, Alternative Transportation in Parks and Public Lands (Washington,
DC, 2007). [http://www.fta.dot.gov/documents/FY2008_Entire_NS_Report.pdf]; U.S.
Department of Transportation, Federal Transit Administration, Annual Report on Funding
Recommendations: Proposed Allocations of Funds for Fiscal Year 2009, New Starts, Small
Starts, Alternative Transportation in Parks and Public Lands (Washington, DC, 2008).
[ h t t p : / / www.f t a.dot .gov/ publications/reports/reports_to_congress/publications_7753. h t ml ] .

80% match.59 Others contend that lowering the match will result in a wider
distribution of federal transit new starts investment, which will have the effect of
diluting its effectiveness. Some also advocate reducing the federal share for both
highways and transit, say to 50%, to encourage states and localities to focus on the
most productive projects.60
Private-Sector Involvement
Another idea for dealing with the potential federal funding shortfall in the transit
program is to encourage more private participation in developing transit projects
through public-private partnerships (PPPs) or private development. Two types of
PPPs in the development of transit projects are joint development and turnkey
procurements, such as design-build-operate-maintain (DBOM). Joint development
involves the construction of private facilities on or over transit agency land in
exchange for some kind of benefit, such as a one-time payment, rent, or improvement
of transit facilities.61 The principal argument for these mechanisms is the increased
ridership that results from the new uses and the direct financial benefits. A prominent
example of joint development is the mixed-use facilities (offices, retail, and a hotel)
surrounding the Washington Metropolitan Area Transit Authority’s (WMATA)
Bethesda, MD, station, completed in 1985. The air-rights lease for this development
generates $1.6 million annually in rents for WMATA.62
Turnkey procurements, such as DBOM, involve public-private agreements that
turn over more control to private entities in exchange for a lower cost, faster project
delivery, or both. In these types of procurements, the public sector contracts with a
private contractor to deliver a construction project at a certain time for a certain price.
The rationale for this is that the contractor is better able to manage the risks involved,
whereby cost and time overruns reduce the contractor’s profit, but delivering early
and under budget increases profit. Projects can range from design-build-transfer,
where the contractor designs and builds the project and then transfers it to the owner,
to more complex agreements such as DBOM, where the contractor may be involved
for decades in the operation and maintenance of the facility.63 An example of DBOM


59 Beimborn, E. and R. Puentes, “Highways and Transit: Leveling the Playing Field in
Federal Transportation Policy,” in Bruce Katz and Robert Puentes, eds., Taking the High
Road: A Metropolitan Agenda for Transportation Reform. (Washington, DC. Brookings
Institution Press, 2005.)
60 Luberoff, D., “ The Triumph of Pork Over Purpose,” Blueprint Magazine, September 10,

2001. [http://www.ndol.org/ndol_ci.cfm?contentid=3765&kaid=141&subid=299].


61 U.S. Department of Transportation, Report to Congress on Public-Private Partnerships
(Washington, DC, 2004), p. 36. [http://www.fhwa.dot.gov/reports/pppdec2004/pppdec2004.
pdf].
62 Transportation Research Board, Transit Cooperative Research Program, Transit-Oriented
Development in the United States: Experiences, Challenges, and Prospects, TCRP Report

102 (Washington, DC, 2004). [http://onlinepubs.trb.org/onlinepubs/tcrp/tcrp_rpt_102.pdf].


63 U.S. Department of Transportation, Federal Transit Administration, Innovative Financing
Techniques for America’s Transit Systems (Washington, DC, 1998). [http://www.fta.dot.

is the construction and operation of the Hudson-Bergen Light Rail in New Jersey,
which opened in 2000. In addition to construction of the project, the agreement with
the contractor, 21st Century Rail Corporation, includes operation and maintenance
of the system for 15 years. According to DOT, using this procurement method to
build the project saved an estimated 30% ($345 million) over the more traditional
design-bid-build procurement method, and the line was open almost five years ahead
of projections.64
Private development and operation of facilities are another possibility for greater
private-sector involvement in transit. An example of predominantly private
development of transit is the Las Vegas monorail, a four-mile system that connects
hotels and other attractions on the Las Vegas Strip. The original segment operating
between two hotels, opened in 1995, was expanded in 2004 by a nonprofit
corporation financed by tax-exempt bonds and financial and in-kind contributions
from hotels and resorts.65 A proposal to extend the system to McCarren International
Airport was approved by Clarke County in November 2006. Despite this approval,
the project does not appear to have attracted the approximately $500 million needed
to finance construction.66 Financial problems with the existing system may be to
blame. Newspaper reports have stated that the system is failing to meet its operating
and debt expenses by about $30 million annually, and that the company may exhaust
its reserve funds by 2010.67 One estimate suggests that while the monorail carried
about 22,000 passengers a day in late 2007, it needs to carry about 35,000 a day to
break even.68
A number of legislative and regulatory initiatives have improved the
environment for private-sector involvement in transit. These include, among others,
the explicit authorization for DBOM in ISTEA, a new joint development policy
issued by FTA in 1997, and the Public-Private Partnership Pilot Program (known as
Penta-P) in SAFETEA. Although there are some remaining issues in federal and
state laws regarding the formation of PPPs, many believe that PPPs will be
increasingly important in the future.
Despite the potential for greater private-sector involvement and PPPs, the
overall difference they may make to the financing of transit system services is likely


63 (...continued)
gov/ planning/metro/planning_environment_3530.html ].
64 U.S. Department of Transportation, 2004, pp. 38-39.
65 General Accounting Office (now the Government Accountability Office), Highways and
Transit: Private Sector Sponsorship of Investment in Major Projects Has Been Limited,
GAO-04-419 (Washington, DC, 2004), pp. 52-53. [http://www.gao.gov/new.items/
d04419.pdf].
66 McCabe, Francis, “Monorail Extension Going Nowhere Fast,” Las Vegas Review-Journal,
January 13, 2008, p. B2.
67 McCabe, Francis, “Monorail Tax Break Renewed,” Las Vegas Review-Journal, March 4,

2008, p. B2.


68 McCabe, Francis, “Monorail Ridership Climbs in 2007,” Las Vegas Review-Journal,
January 19, 2008, p. B3.

to be relatively small. A study of joint development around transit stations contends
that WMATA is a national leader, yet this aggressiveness only yields about $6
million in annual revenues.69 While this is substantial, it is a relatively small amount
compared with an annual budget of more than $1.9 billion (in FY2007).70 Similarly,
a study by GAO of private involvement in major highway and transit projects
concluded that
[u]nder current conditions and circumstances, private sector sponsorship and
investment seems best able to finance a relatively small number of projects but
seems unlikely to stimulate significant increases in the funding available for71
highways and transit.
As noted earlier, however, financial accounting largely ignores the economic benefits
that transit can generate for local areas through land development, job creation, and72
an increase in the tax base, among other benefits. Others prefer, therefore, to focus
on the wider economic benefits that joint development, and transit-oriented
development more generally, can provide.
Innovative Financing. Related to the discussion of private-sector
involvement in infrastructure financing is the use of so-called “innovative financing.”
Several innovative financing mechanisms have been developed in the past two
decades to leverage existing federal resources or to develop new revenue-generating
assets. Federal laws have been modified to broaden the ways in which states can
match and obligate federal funds. This has enabled states and localities to use their
resources more efficiently, to use private funds for the non-federal share on a project,
and for projects to be completed more quickly. Moreover, several mechanisms have
been created to allow states to issue bonds against future federal aid, making it easier
to complete large projects more quickly and cost effectively than would be possible
on a pay-as-you-go basis. In transit, Grant Anticipation Notes (GANs) have been
used in this way. State Infrastructure Banks (SIBs) have also been set up to create
a mechanism to leverage other resources through lending instead of granting federal-
aid funds. In the case of generating new revenue-generating assets, state and local
governments and nonprofit corporations are allowed to issue tax-exempt bonds on
behalf of private project developers. For example, in the case of the Las Vegas
monorail, the State of Nevada issued $600 million of tax-exempt bonds on behalf of
the private developers. These bonds were secured by farebox and advertising
revenue. 73
Again, although there have been successes in innovative financing in
transportation, the ability of these mechanisms to generate extra resources is likely


69 Transportation Research Board, 2004, p. 9.
70 Washington Metropolitan Area Transit Authority, Approved Fiscal 2007 Annual Budget
(Washington, DC). [http://www.wmata.com/about/board_gm/FY2007_Budget_Book_final.
pdf].
71 Government Accounting Office, 2004, p. 6.
72 Lewis and William, 1999.
73 Transportation Research Board, 2006.

to be modest. This is particularly true in transit, where the possibilities for generating
new revenue streams or profit from operations are limited. The tolling of roads,
bridges, and tunnels is a much more likely source of new revenue to make these types
of financing vehicles possible.74
Transit System Productivity
Despite rising patronage over the past decade, financial deficits in the transit
industry have continued to rise. A financial deficit exists when system costs exceed
system-generated revenue. In 2004, system-generated revenue, passenger fares and
other income, accounted for 28% of all revenue sources for both operating and
capital costs, down from 30% in 1995.75 In terms of operating costs alone, system-
generated revenue has declined, from 59% in 1975 to 41% in 2004 (Table 1).
Table 1. Public Transit Revenue Sources for
Operating Expenditures, 1975-2004
Type of Revenue1975198519952004
System-Generated 59% 44% 42% 41%
Passenger Fares54%38%NANA
Other Operating Income5%6%NANA
State/Local Government32%49%53%52%
Federal Government9%8%5%8%
Key: NA = Not Available.
Sources: American Public Transit Association, 1990 Transit Fact Book (Washington, DC, 1990); U.S.
Department of Transportation, Federal Highway Administration and Federal Transit Administration,
2006 Status of the Nation’s Highways, Bridges, and Transit: Conditions and Performance
(Washington, DC, 2007).
A number of reasons have been put forward for the continuing and worsening
problem of financial deficits. A major factor is the difficulty public transit has with
maintaining market share when traveling by car is relatively easy and cheap. DOT’s
periodic national survey of personal travel found that in 2001, about 1.6% of all trips
were made by transit, down from 3.4% in 1969.76 Data from the decennial census
shows a similar trend in the usual mode of commuting, with public transit declining


74 U.S. Department of Transportation, Federal Highway Administration, Innovative Finance
Primer (Washington, DC). [http://www.fhwa.dot.gov/innovativefinance/ifp/ifprimer.pdf].
75 U.S. Department of Transportation, Federal Highway Administration and Federal Transit
Administration, 2007, exhibits 6-23, 6-25.
76 Polzin, S. and X. Chu, Public Transit in America: Results from the 2001 National
Household Travel Survey (Tampa, FL, 2005), p. 61. [http://www.nctr.usf.edu/pdf/527-

09.pdf].



from 8.9% in 1970 to 4.7% in 2000.77 The struggle for market share has been
exacerbated, in particular, by the growth of low-density suburbs that are relatively
difficult to serve with transit. In 2000, about 50% of the nation’s population lived
in suburbs, up from 36% in 1970.78
Although total transit ridership has grown to a level not seen since the late
1950s, the supply of transit service has grown more quickly, and productivity, output
divided by input, has declined. Even if the costs of providing transit service had
remained constant, therefore, total outlays would probably have risen faster than
revenue. At the same time, the cost of producing transit service has not stayed
constant, but has risen over time. The biggest drop in productivity most likely
occurred between the mid-1960s and the mid-1980s. By one estimate, the cost of
running a transit bus per hour nearly doubled, in real terms, between 1964 and
1985.79 Over the past 15 years, according to FTA data, productivity improved until

1998, when productivity began to slowly decline again.80


Several reasons are typically given for the drop in transit productivity over the
past 40 years. First, there has been a lot of pressure to expand transit to areas that are
costly to serve, particularly low-density suburbs, and to support a variety of social
service needs and other community goals that often boost costs. Second, some argue
that transit service is overcapitalized, as cities have been encouraged to build rail
lines where buses would make more sense, and to use full-sized buses where small
buses or vans would be more appropriate. Third, according to some, work rules and
other labor protections have made it relatively costly to staff transit agencies. Fourth,
governments have pushed to keep transit fares low in an effort to boost ridership.
Additionally, transit agencies are increasingly using simple or flat fare structures,
despite great variations in the cost of providing service, depending on location,
direction of service, and time of day.81 Fifth, large infusions of government support,
including from the federal government, have tended to weaken the constraint on
transit management to aggressively manage costs and revenues.82
As noted earlier, some argue that transit should be evaluated in terms of all the
economic benefits it generates for an area as a whole, including all the non-


77 Ibid.
78 Pisarski, Alan. E, Commuting in America III (Washington, DC, Transportation Research
Board, 2006), p. 27.
79 Lave, C. “It Wasn’t Supposed to Turn Out Like This,” Access, No. 5, Fall 1994, pp. 21-25.
80 CRS calculation of operating costs per revenue hour using the implicit price deflator for
GDP and U.S. Department of Transportation, Federal Transit Administration, National
Transit Summaries and Trends (Washington, DC, various years). [http://www.ntdprogram.
gov/ ntdprogram] .
81 Transportation Research Board, Fare Policies, Structures, and Technologies: Update,
Transit Cooperative Research Program (TCHRP) Report 94 (Washington, DC, 2003), table

2-6. [http://onlinepubs.trb.org/onlinepubs/tcrp/tcrp_rpt_94.pdf].


82 Lave, 2004; Taylor, B.D. “The Geography of Urban Transportation Finance,” in Susan
Hanson and Genevieve Giuliano (eds), The Geography of Urban Transportation, Third
Edition (New York, Guilford Press, 2004).

transportation benefits, not just on the basis of simple financial cost and revenue
calculations. Nonetheless, the reasons proffered for the drop in transit productivity
suggest that less public funding, including less federal funding, would be necessary
if transit operations could be made more financially self-sustaining. Much of this
comes down to policies pursued at the state and local level and by the transit agencies
themselves. However, Congress may also want to consider several broad policy
options during reauthorization that address the issue of financial sustainability.
Some suggest that transit agencies should stop many of the expansions of fixed-
route transit service, particularly in difficult-to-serve areas, and that the federal
government should encourage them to do so.83 According to this view, transit
agencies may also need to consider cutting services that lose the most money, except
perhaps paratransit service. In cases where new transit services are appropriate, such
as along densely populated and congested corridors, agencies might look to invest in
less costly transit modes, particularly buses and bus rapid transit.84 Others have
suggested that public assistance, including federal funding, should go mainly to
support transit’s core mission of improving mobility, particularly for transit
dependent populations, instead of supporting a profusion of policy goals in energy
and the environment, economic development, and highway congestion.85 For
example, although about half of the funding in the Congestion Mitigation and Air
Quality (CMAQ) Improvement Program goes to fund transit projects, the available
evidence appears to show that such projects are not particularly effective in reducing
vehicle emissions.86
Another suggestion is for states and localities to inject more competition into
the provision of transit service or to find other ways to reduce costs. This usually
entails proposals to competitively bid transit service provision and to allow private
operators to provide new services to compete with public transit agencies.87 This
could be accomplished, according to some advocates, by making the elimination of
local barriers to privatization a condition of federal funding.88 In many places, these
local barriers take the form of state and local laws and regulations that “provide local


83 Utt, R. “Getting Urban Transit Systems Focused on Cost and Service,” Heritage
Foundation Web Memo, #717, April 11, 2005. [http://www.heritage.org/Research/
SmartGrowth/wm717.cfm].
84 O’Toole, R. “A Desire Named Streetcar: How Federal Subsidies Encourage Wasteful
Local Transit Systems,” Policy Analysis, No. 559, January 5, 2006. [http://www.cato.org/
pubs/pas/pa559.pdf].
85 Downs, 2006.
86 Transportation Research Board, The Congestion Mitigation and Air Quality Improvement
Program: Assessing 10 Years of Experience, Special Report 264 (Washington, DC, 2002).
[http://onlinepubs.trb.org/ onlinepubs/sr/sr264.pdf].
87 Winston, C. and C. Shirley, Alternate Route: Toward Efficient Urban Transportation
(Brookings Institution Press, Washington, DC, 1998).
88 Testimony of Jim Seal, Consultant, in U.S. Congress, Senate Committee on Banking,
Housing, and Urban Affairs, Hearing on The Administration’s Proposal for Reauthorization
of the Federal Public Transportation Program, [http://frwebgate.access.gpo.gov/cgi-
bin/getdoc.cgi?dbname=108_senate_hearings&docid=f:96194.pdf], June 10, 2003.

or regional monopoly powers over public transit service to RTAs [regional
transportation agencies] or taxi companies.”89 Moreover, contracts with transit
workers unions often do not allow transit agencies to employ part-time workers or
to require split-shifts to cover the peaking of demand in the morning and evening.90
In addition, some argue that federal labor protections in transit, commonly known as
Section 13(c), should be abolished or modified, a position rejected by unions
representing transit workers.91 A GAO report released in 2001 found that 13(c) labor
protections had minimal impact on labor costs and other factors in transit operations,
except in the ability of transit agencies to contract out for fixed-route transit
services.92 A TRB report on contracting in the provision of bus service found that few
transit managers mentioned federal or state laws or policies, including 13(c), as a
reason to contract out or not.93
Another potential way of reducing the need for public assistance is to increase
fares, where possible, to cover costs. Fares need not necessarily be increased across
the board, but could be adjusted to more accurately reflect the cost of providing a
particular service. The federal government might encourage transit systems to do
this, particularly with the use of electronic fare payment technology that makes it
relatively easy to collect variable fares.
It might also be possible to reduce the need for government assistance of public
transit by making automobile use more expensive. One way to do this is to institute
new highway tolls, particularly ones that vary based on traffic levels. Such road
pricing schemes usually make the most sense in severely congested regions where
good transit options exist. Congress, therefore, might encourage congested
metropolitan areas to design comprehensive congestion management schemes that
incorporate highway pricing and transit, as DOT is doing with its Urban Partnership
Agreements (UPAs). In the summer of 2007, DOT announced UPAs with five cities,
New York City (NYC), Minneapolis/St. Paul, Seattle, San Francisco, and Miami.
The Minneapolis/St. Paul proposal, for example, involves, among other things,
converting high-occupancy vehicle (HOV) lanes to high-occupancy toll (HOT)
lanes, and, in the same corridor, expanding existing express bus service and
instituting BRT. It is also proposed that new toll revenue will be used to provide


89 Downs, p. 150.
90 Wachs, M., “U.S. Transit Subsidy Policy: In Need of Reform,” Science, Vol. 244, pp.

1545-1549.


91 Testimony of R. Molofsky, General Counsel, Amalgamated Transit Union in U.S.
Congress, Senate Committee on Banking, Housing, and Urban Affairs, Hearing on The
Administration’s Proposal for Reauthorization of the Federal Public Transportation
Program, [http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=108_senate_hearings
&docid=f:96194.pdf], June 10, 2003.
92 U.S. General Accounting Office (now the Government Accountability Office), Transit
Labor Arrangements: Most Transit Agencies Report Impacts are Minimal, GAO-02-78
(Washington, DC, 2002). [http://www.gao.gov/new.items/d0278.pdf].
93 Transportation Research Board, Contracting for Bus and Demand-Responsive Transit
Services, Special Report 258 (Washington, DC, 2001). [http://onlinepubs.trb.org/
onlinepubs/sr/sr258.pdf].

reduced transit fares in the peak periods on the newly priced facilities. DOT has
pledged to provide $133.3 million of federal funding to Minneapolis/St. Paul
contingent on legislative and other actions at the state and local level.94
Finally, some have proposed that the federal transit program include a
performance incentive element that rewards transit agencies for providing more
service per dollar of public subsidy. During the reauthorization of TEA-21, the
Administration proposed a $1.3 billion incentive program with funding going to
agencies with the largest increases in transit ridership.95 Transit industry
representatives argued against this proposal, noting that it might unfairly penalize
agencies that cannot increase transit ridership because of factors beyond their control,
such as capacity limitations or a local economic downturn. Moreover, they noted that
several of the formula programs already include factors that reward systems with
levels of ridership that are high relative to operating costs.96 A new performance
incentive program was not enacted in SAFETEA, but some observers maintain that
it is an option worth considering again.
Federal Public Transit Program Priorities
If federal funding for transit remains flat or possibly even declines over the next
decade, Congress may opt to adjust the structure of the programs based on a
reexamination of its priorities. Under SAFETEA, 43% of funds are authorized for
the Capital Investment Program, 42% for the Urbanized Area Formula Grants
Program, and 15% for several other formula programs, such as the Other Than
Urbanized Area Formula Program (commonly referred to as the Rural Formula
Program), state and metropolitan planning, research, and FTA operations.97 Several
possible ways of restructuring federal public transit programs, among many others,


94 U.S. Department of Transportation, “Minneapolis Urban Partnership Agreement.”
[http://www.upa.dot.gov/agreements/minneapolis.htm]. For more information on the Urban
Partnership Agreements in general, see the DOT website: [http://www.upa.dot.gov/index.
htm].
95 Testimony of Norman Y. Mineta, Secretary of Transportation, in U.S. Congress, Senate
Committee on Banking, Housing, and Urban Affairs, Hearing on The Administration’s
Proposal for Reauthorization of the Federal Public Transportation Program,
[http://frwebgate.access.gpo.gov/cgi -bin/getdoc.cgi ?dbname =108_senate_hearings
&docid=f:96194.pdf], June 10, 2003.
96 Testimony of William Millar in U.S. Congress, Senate Committee on Banking, Housing,
and Urban Affairs, Hearing on The Administration’s Proposal for Reauthorization of the
Federal Public Transportation Program, [http://frwebgate.access.gpo.gov/cgi-
bin/getdoc.cgi?dbname=108_senate_hearings&docid=f:96194.pdf], June 10, 2003;
Molofsky, R., General Counsel, Amalgamated Transit Union, Response to Written
Questions of Senator Shelby, in U.S. Congress, Senate Committee on Banking, Housing, and
Urban Affairs, Hearing on The Administration’s Proposal for Reauthorization of the
Federal Public Transportation Program, [http://frwebgate.access.gpo.gov/cgi-bin/getdoc.
cgi?dbname=108_senate_hearings&docid=f:96194.pdf], June 10, 2003.
97 For more information on the current structure of the federal transit program see CRS
Report RL34171, Public Transit Program Issues in Surface Transportation Reauthorization
by William J. Mallett.

are outlined below, each an alternative to the possibility of leaving the existing
system unchanged.
One way to reorder federal priorities would be to focus more resources on major
capital expenses for the rehabilitation and expansion of transit service in places that
are best served by this mode, primarily the densely populated parts of large and often
heavily congested cities. This would require expanding the programs that make up
the Capital Investment Program (the New Starts Program, the Rail Modernization
Program, and the Bus Capital Program) and cutting back on the more broadly spread
grants under the Urbanized and Non-Urbanized Formula Programs that are going for
smaller and more routine types of expenses. This change would likely result in a
concentration of resources in a few large cities where transit usage is already
relatively high.
Alternatively, Congress may decide that the era of retrofitting large and
medium-sized cities with new transit rail systems is largely over, and that resources
should now go to supporting and rehabilitating existing services. This could entail
a reduction in spending on the New Starts program, currently about 18% of the
federal transit program, and more support for the other capital programs and the
formula grants programs. The effect of these changes on the distribution of funds is
likely to be more mixed, and would depend on the share of funds dedicated to the
Rail Modernization program, a program that includes relatively few cities, and the
share dedicated to buses and formula programs that include a much larger number of
places.
A third alternative would be to eliminate the capital programs altogether, to be
replaced with a simple “block grant” that could be distributed based on transit
ridership or population. This would allow state and local governments to decide how
best to allocate transit funding support among existing and new services. Funds
distributed according to transit ridership would reward areas that commit their own
resources successfully to providing transit service. The distribution of funding in this
way would again depend on how this program would be structured, but it might also
depend on how states and localities react to the changes in terms of how aggressively
they promote transit ridership.
Much of this presupposes that federal transit funding may cease to grow or even
decline in real terms in the next reauthorization, which might take surface
transportation programs through FY2015. This need not be the case if the federal
fuels tax is raised and some of this new revenue dedicated to transit, or if other types
of dedicated revenues are created, or if Congress decides to fund transit programs at
a higher level from the general fund. Revenue and spending growth may make
programmatic decisions a good deal easier to make, but that does not necessarily
preclude Congress from making changes in the way the federal government supports
public transit provision.