By Aniko Laszlo
 

The Massachusetts Bay Transportation Authority (MBTA) is a government agency in need of reform. The MBTA has become a model of inefficiency and dependency on government largess.

Recent proposals are aimed at remedying this situation by tying the MBTA’s budget to a fraction of the sales tax. The essence of this solution is to substitute one budget-busting practice for another. It would end “backward funding,” whereby the state reimburses the MBTA, after the fact, for expenses incurred up to 18 months earlier. But it would also provide the MBTA with a subsidy that would grow with the state economy without regard to ridership, inflation or any factor related to actual funding requirements.

The problems go so deep that they cannot be solved without putting the MBTA on a fixed budget. Under this budget, the MBTA would receive only the subsidy that it needs in order to maintain existing levels of service, given reasonable expectations about inflation and the growth of ridership.

Put on this budget, the MBTA would increase operating efficiency, pay a
reasonable share of its debt service and roughly double fares. Though more far-reaching than any proposal currently before the legislature, the one offered here merely requires the MBTA to achieve levels of efficiency and self-sufficiency that are already achieved by comparable transit authorities in Massachusetts and other states.

The Massachusetts Bay Transportation Authority (MBTA) is a government agency in need of far-reaching reform. A few facts:

1. The MBTA could save $58.87 million in FY 2000 operating costs by increasing efficiency to levels achieved by comparable transit authorities and without sacrificing service.

2. The MBTA is subject to no budgetary discipline: Under a practice known as
“backward funding,” the MBTA receives what amounts to a blank check from the
state to incur expenses with assurance of reimbursement up to 18 months later. It
routinely transfers funds from line items with surplus funds to those in deficit and
routinely receives supplemental appropriations.

3. Massachusetts taxpayers pay on average $203 per year each to subsidize the MBTA, whether they use the system or not. The total state subsidy is $608 million. That comes to about 8% of the average taxpayer’s income tax bill.

4. In 1997, the MBTA paid 3,600 of its 6,000 workers on average 65% more than other Massachusetts employers for workers in certain comparable occupations.

5. The MBTA pays, on average, as much as 52% more than other transit authorities pay the same workers. It pays a “Delivery Person” $21.85/hr, compared to $14.38/hr by the Maryland Transit Authority (Baltimore) and $15.69/hr by the New Jersey Transit Corporation. It pays a “General Helper” $19.83/hr, compared to $16.23/hr by the New York Transit Authority under its contract with the Transit Workers Union, Local 1056.

6. The MBTA devotes a comparatively large share of its budget to administrative costs (20%) and to fringe benefits (31%).

7. The MBTA charges one of the lowest fares in the nation. Subway fares are, on
average, 38% below those charged by comparable authorities, and bus fares are 55% lower.

8. The state effectively subsidizes 100% of MBTA debt service, which, since 1980, has increased from 11% to 35% of the MBTA’s total budget. Since the mid-1980s, the MBTA’s reliance on state funds has risen from 40% to 65% of its capital expenditures.

9. Adjusted for inflation, the MBTA’s deficit increased 1060% from 1964 to 1999 or at an annual rate of 7.25%.

10. In 1997, the MBTA made 3.8 times as many bus trips as all of the state’s regional transit authorities combined. Yet, the state subsidy was 6.19 times higher for MBTA bus operations than for RTA bus operations. The MBTA subsidy per trip was $1.54; the RTA subsidy was $.94.

11. MBTA reform would free up public funds for other projects. The MBTA could, by increasing efficiency and making reasonable fare increases, save the state $217.24 million in subsidies, permitting it to fund an additional $2.66 billion in capital projects.

House bill H-4400, under consideration by the Massachusetts legislature, is
intended to address some of these problems. The bill does not, however, put the MBTA on a budget. Rather, it permits state funds going to the MBTA to reach $800 million per year by 2004, a level that would far exceed what is needed to maintain existing levels of service. 

We propose an alternative solution under which the state would reduce the FY
2000 subsidy by $217.24 million, from a projected $623.50 million to $406.26 million. By freeing up $217.24 million in revenues now going to the MBTA, the state could fund $2.66 billion in new infrastructure spending.

Under this plan, the share of MBTA operating expenses subsidized out of state funds would be brought in line with that for a “peer group” of eight comparable transit authorities.

The share of MBTA debt service paid by state funds would be reduced by 25%.
The MBTA would maintain existing service levels by raising fares and by increasing cost efficiency to a level comparable to that of the peer group of eight and of the RTAs. Fares would rise by 124%, bus fares rising from $.60 to $1.35 and subway fares from $.85 to $1.90.

These changes would bring MBTA operating costs and subsidies into line with
those exhibited by comparable transit authorities. They would also shift part of the responsibility for debt service to MBTA riders, reflecting the decline in federal funding of MBTA capital expenditures that has taken place since the mid-1980s.

The problems with the current system fall into four categories:

1. The existence of a state infrastructure crisis, to which the MBTA has become a leading contributor;

2. Budget practices under which Massachusetts absorbs all capital expenditures and offers the MBTA a blank check to cover its operating expenses;

3. High labor costs and overhead that reduce MBTA efficiency; and

4. An unwillingness to bring fares into line with those charged by comparable authorities in other states.

The Massachusetts Infrastructure Crisis

Massachusetts is in the throes of an infrastructure crisis. Educational and port
facilities require modernization, public housing and state office buildings need
rehabilitation and state information systems need upgrading. In recent years the greatest pressure for capital spending has come from the Central Artery/Tunnel (CA/T) project, whose current and future financing needs of $10.8 billion are crowding out other state capital projects.

Another element in this crisis is the state’s bond cap. Massachusetts operates
under a self-imposed limit on the issuance of general obligation bonds for capital
spending. Originally set at $825 million in 1992, but since raised to $1 billion, the bond cap is credited with helping the state recover from fiscal problems that bedeviled it ten years ago. Despite the state’s economic recovery, as manifested in recurrent state surpluses, there is reason to keep the bond cap in place. This is because Massachusetts still has a comparatively high level of indebtedness. In 1996, Massachusetts was third highest in the nation in terms of its debt service per capita.

The MBTA has itself become a major part of the infrastructure problem. The
MBTA’s capital budget will run about $500 million a year for the period 1995-2002. This represents a doubling of capital spending since 1986.

The problem is compounded by the fact that the share of MBTA capital spending
paid for by federal funds has deeply declined. In 1986, the federal government paid for 60% of MBTA capital spending, with the remaining 40% coming from the state. For the period 1995-1998 the federal share fell to 40% and is expected to fall to 35% for 1998-2002.

Budget Practices

The FY 1999 MBTA budget (including debt service as well as operating
expenditure) calls for $936 million in expenditures, of which $608 million or 65% will be defrayed through state subsidies. That’s about $203 per state taxpayer or 8% of the average taxpayer’s state income tax liability.

Backward funding has produced a state of affairs in which the MBTA operates, in
effect, without a budget. As the MBTA Advisory Board Finance Committee has noted in several reports and budget analyses, the authority routinely balances its books by covering overspending on particular line items with surplus funds from others. This practice masks the actual growth of various problem areas (particularly labor costs in 1994 and labor cost and debt service cost in 1997). Over the period 1994-1999, the MBTA has requested and received approval to transfer funds on ten occasions. It has received four supplemental appropriations since 1997. 

High Labor Costs and Other Inefficiencies

Using standard measures for comparing service efficiency and cost effectiveness,
we compared the MBTA to eight comparable transit authorities and to nine of the 15 regional transit authorities in Massachusetts.15 We found that these authorities generally outperformed the MBTA over the last 20 years. If the MBTA currently operated at least as efficiently as these other authorities, it could reduce operating costs by 10% or by $58.87 million in 2000.

We found that transit authority employees generally received substantially higher
wages than their counterparts in the same occupations employed elsewhere in the state. Public transit authorities generally paid a premium over other employers for workers in the same occupation. The difference is that the premium paid by the MBTA was higher than that for the other transit authorities.17 Specifically:

1. The NYCTA paid 38.25% more than other New York State employers for workers covered by two of its contracts and 26.179% more for workers covered by a third contract.
2. The New Jersey Transit Corporation and the Maryland Transit Authority paid
      premiums of 25.6% and 47.0%, respectively.
3. The MBTA’s current contract with the American Transit Union, Local 589 covers about 3,600 employees or 60% of the MBTA workforce. 

For almost all the occupations covered by this contract, the MBTA pays, on average, about 65% more than other Massachusetts employers pay workers in the same occupations. The MBTA not only pays a higher premium than other transit authorities for certain workers, it pays more than other transit authorities for similar kinds of labor. We examined 1999 data for workers in eight occupations employed by the MBTA, the NYCTA (three contracts), Baltimore and New Jersey. In every instance (except where certain data were not available), MBTA wages exceed those paid by the other transit authorities.

Unfare Subsidies

MBTA fares have been historically low. A policy of keeping fares low is one of
the causes of the expansion of deficits over the last 35 years. According to the latest survey conducted by the American Public Transit Association in 1997, the MBTA charges one of the lowest base fares for bus, subway and commuter rail in the country and has the lowest fares in comparison to those charged by the peer group of eight authorities.

The Commonwealth’s subsidy to the MBTA had increased substantially since the
creation of the MBTA in 1964. After adjusting for inflation, the MBTA’s deficit (defined as net cost of service) has increased 1060% or at an annual rate of 7.25% over the intervening 35-year period.

In 1998, Massachusetts paid $528.7 million in subsidies or 78.4% of the MBTA’s net cost of service. In contrast, the 1965 subsidy was 12%.

Solutions

The state infrastructure crisis has prompted a variety of proposed solutions. There
are arguments for delaying tax cuts, and for raising road and bridge tolls. There are admonitions against Governor Cellucci’s proposal to cut the personal income tax from 5.95% to 5% on the theory that the state will need the budget surplus to alleviate the infrastructure crisis.

One proposal would include the restoration of passenger vehicle registration fees,
now in the process of being phased out. Another proposal would raise tolls from 50¢ to $2 on the Boston extension of the Massachusetts Turnpike and from $1 to $4 on the harbor tunnels.24 The state is also invited to consider new user fees and various alternative-financing methods that would make more capital spending possible.

All such proposals, however, give rise to questions of their own about fairness
and about economic impact. Rejecting the proposed income tax cut means denying relief to taxpayers and losing an opportunity to create jobs and new capital spending in the state.

Raising tolls seems to represent a particularly unfair option. As a result of bonds
issued by the Massachusetts Turnpike Authority for the purpose of defraying CA/T construction costs, Massachusetts Turnpike drivers already pay 1.88 times the amount required to operate the Turnpike.

In view of the MBTA’s own very substantial capital needs and of the
comparatively low fares and high subsidies and labor costs that characterize MBTA operations, it is not surprising that the Massachusetts legislature is considering a change in MBTA funding that would probably necessitate a fare increase. The argument for expecting the MBTA and its riders to share in the sacrifice being imposed on other constituencies seems indisputable.

The task, however, is to rise above the current crisis and to frame a solution that
will end permanently the dependence on ever-expanding public subsidies that has
become a way of life for the MBTA.

This leaves two options: (1) raising fares and (2) reducing costs through greater
efficiency. We compared MBTA operating efficiency and cost-effectiveness ratios to the peer group of eight transit authorities and to nine of the 15 regional transit authorities operating in Massachusetts. We next compared the MBTA to the peer group for dependence on state subsidies. We then determined how much money Massachusetts taxpayers could save on average in 2000, if

1. The MBTA operated at least as efficiently as peer authorities and the RTAs;

2. The share of MBTA operating funds obtained from state subsidies were comparable to that obtained from state subsidies by peer authorities; and

3. The share of MBTA debt service funds obtained from state subsidies were reduced to reflect declining federal contributions to MBTA capital expenditures.

Following these recommendations, the state can save $217.24 million a year in MBTA subsidies and, by doing so, fund an additional $2.66 billion in new infrastructure spending.

Recommendations

1) The state can repeal Chapter 296 of the Acts of 1993, popularly called the
“Pacheco bill.” The statute purports to impose reasonable limitations on the privatization of state services but actually prevents competition in public procurement.

In 1996, the MBTA attempted to contract bus services to private providers. In
1997, after receiving bids for 40% of its bus operation, the MBTA submitted the
proposed contract to the state auditor. Estimated savings from private procurement were $23.1 million over five years for the Charlestown and Quincy garages. On the basis of the Pacheco bill, the State Auditor twice denied the MBTA’s request for privatization. 

Repeal of the Pacheco bill would be a step toward increased efficiency in MBTA
operations. Opening MBTA procurement to competition would put a downward pressure on costs, making it possible to reduce state subsidies and to moderate fare increases.

2) Beyond raising fares the agency’s financing structure must be changed in order to constrain managers to cut costs. As has been widely recommended, the legislature should substitute “forward funding” for “backward funding” of MBTA expenses. That simply means requiring the MBTA to operate under the same budget constraint as other public and private entities and holding MBTA managers accountable for their ability to operate within that constraint.

3) Increase fares immediately by 124 % across the board to bring MBTA fares into line with those paid by other mass transit users around the country. MBTA bus fares would increase to about $1.35 and subway fares to $1.90. These increases would, at first, make MBTA fares among the highest in the country. If the MBTA were able to achieve further cost reductions the fare increases proposed here could be moderated.
 

Aniko Laszlo is a lecturer in Economics at Suffolk University. This report is part of her doctral dissertation for George Mason University. Permission to publish excerpts of this report was provided by the Beacon Hill Institute for Public Policy Research, Suffolk University, 8 Ashburton Place, Boston, Mass. 02108-2770.  Tel. (617) 573-8750. Website: www.beaconhill.org.
 

RETURN TO FRONT PAGE