Riders and Taxpayers Held Hostage: Boston and Beyond By: Wendell Cox

In Missing the Bus, Robert M. Melia provides a comprehensive description of how the Massachusetts “Pacheco” law requires the Boston public transit system to spend more than necessary to provide its services.  The Pacheco law establishes a wage and benefit “floor” for employees of private contractors who would produce competitively contracted1 bus service for the Massachusetts Bay Transportation Authority (MBTA).  This wage floor is mandated despite the fact that such workers would be covered by minimum wage laws.2Further, the Pacheco law establishes evaluation procedures that prejudice public service provisions against the use of private contractors, despite their lower costs.  As a result, MBTA has been restricted in its ability to improve its cost effectiveness.  The Pacheco law violates the public interest:  riders pay more for less service; taxpayers are shortchanged by the production of less service than their funding should produce; and the community suffers from greater traffic congestion and air pollution than would occur if transit subsidies and fares were used to produce a concomitant amount of service.  

The policy absurdity established by the Pacheco law is not unique.  In most U.S. metropolitan areas, the interests of transit employees and unions is served before the interests of riders, the community and taxpayers. 
 

THE PUBLIC PURPOSE OF PUBLIC TRANSIT

Public transit is subsidized throughout the United States and the developed western world for two primary public policy purposes: (1) to provide mobility to those who have no access to automobiles; and (2) to provide an alternative to travel by automobile, thereby reducing traffic congestion and air pollution.  The direct beneficiaries of public transit subsidies should thus be the riders, for whom mobility should be provided; the community, which should experience reduced traffic congestion and air pollution; and the taxpayers, whose tax funds should purchase as much service as possible within the constraints of the tax resources provided.  Moreover, because it takes people to provide public transit service, transit employees should also be incidental beneficiaries of public transit subsidies.  Transit policy should not primarily serve transit employees, but should benefit them in the process of serving the riders, community and taxpayers.   
 

THE PUBLIC PURPOSE FAILURE OF TRANSIT

Reality falls far short of theory in the United States.  More than $340 billion (in 1997 dollars) has been provided to transit agencies in federal, state and local subsidies over the last 35 years—more than the cost of the 40,000 mile interstate highway system (which carries 25 times as many passenger miles annually).3Yet public transit’s market share has dropped significantly.  Annual ridership per capita is down more than 40 percent, and the decline has accelerated since 1980.4The significance of the role of public transit in providing transportation to work has fallen even faster—a 60 percent market share decline since 1960.5Two primary factors are responsible for transit’s decline:

?  Suburbanization of jobs and residences has created an urban environment that cannot be effectively served by mass transit.  Public transit is simply not a viable option for most trips within the modern urban area.6  

?  Transit unit costs (costs per hour or mile) have doubled relative to costs in the market.  As a result, transit agencies are charging higher fares and providing less service than would have been possible if costs rose within market rates.  Higher fares and lower service levels mean fewer passengers.  Transit might have retained its market share if the expanding subsidy revenues had been used to produce more service at lower fares.7The escalating cost of transit is directly traceable to its monopoly over the provision of services.  Without competition, which gives strong incentives to control costs, compensation of transit labor and management has risen to well above market levels, and staff sizes have burgeoned.

As a result, the transit employees who were to have been incidental beneficiaries of transit policy have instead emerged as the primary beneficiaries.  Meanwhile, the intended beneficiaries—the riders, community and taxpayers—lost by receiving fewer benefits than they ought to have received.  Moreover, virtually thousands of potential employees were not hired because less transit service was produced; they have been incidental losers as a result of transit policy. 
 

BOSTON

Boston has experienced the same dynamics.  Costs escalated while ridership per capita, and transit share of the work trip market, declined.  But, as Melia notes, Boston faced a serious financial crisis in the early 1980s and spent much of the next decade improving its cost performance.  In response, ridership began to rise, though market share losses continued, because automobile use was rising at a considerably greater rate.  Yet Boston’s 1980s progress, largely under the leadership of Governor Michael Dukakis and Transportation Secretary Fred Salvucci was notable.  For example, while MBTA was reversing its ridership decline, most of the largest transit agencies in the nation were experiencing ridership losses.

In the early 1990s, under the leadership of Governor William Weld and Transportation Secretary James Keaisiotes, MBTA became the first and only U.S. transit agency to recognize that, to achieve its public policy potential, a radically different approach was needed.8MBTA undertook to become a facilitator of transportation, which would competitively contract for all of its services, rather than provide them directly.  The result would be that costs would decline to market rates—at least 20 percent below MBTA rates.  This would allow MBTA to maintain and expand service, while keeping fares affordable.  MBTA adopted what has become the emerging model for delivery of public transit service in Europe, Australia and New Zealand—separation of policy from operations.  The role of the transit agency would become that of designer and purchaser of service, while all operations would be provided by companies selected through periodic competitive procurements.

The MBTA’s plans to better serve the people of the Boston area were, however, frustrated.  The principal beneficiaries of transit public policy—the transit unions—used their considerable political influence to obtain enactment of the Pacheco law, over the veto of Governor Weld.  Now Boston, which alone among the nation’s transit agencies had embarked upon a program to quickly restore public transit to its public policy purposes, had again experienced a public policy hijacking by the special interests that have largely precluded transit from achieving its potential around the nation. 
 

POLITICAL DYNAMICS 

Some of the strongest political support for transit funding is to be found among people concerned about the effects of the automobile on the environment and the dense central cities.  Some of these interests exhibit an anti-automobile sentiment that is the virtual equivalent of religious zealotry.  For these, it is important to discourage automobile use and encourage higher densities in employment and population.  Transit is a crucial element to their vision of the city restored.  

There is much restoring to do.  Virtually all U.S. central cities that have not annexed additional land area have lower populations than in 1950.  In a number of cases, population has dropped by more than 40 percent.  The city Boston has fared a bit better, with a loss of more than 25 percent.  From 1950 to 1990, the Boston urbanized land area (developed area, including the city and suburbs) has expanded by 150 percent, while the population has increased only 25 percent, as people and businesses moved from the city to the suburbs.  At regular intervals over the past half-century there have been initiatives to restore central cities.  But aside from their growing roles as regional entertainment centers (often publicly financed), the central cities have not been restored and their downtown areas are more often than not surrounded by square miles of decay and vacancy.  

The pro-city interests have been strongly in favor of additional transit subsidies, but have been virtually absent with respect to demanding financial accountability.  More often than not, central city proponents see transit subsidies as something of which there is too little, especially as regards contributions from suburban jurisdictions, state governments and the federal government.  But more subsidies are not the answer.  Additional subsidies are almost invariably consumed by higher unit costs, leaving little for lower fares and service expansion.  Since 1970, less than $0.20 of each new $1.00 in funding (inflation adjusted) has been used to expand service or reduce fares.9

So long as city proponents fail to address financial accountability, their theories about transit’s potential to assist in urban revitalization will remain unproven.  The additional funding will not be approved and the required expansion of transit service will not be produced.

The problem goes beyond transit.  In most U.S. central cities, policy is driven by the interests of public employee unions and bureaucracies.  The result is higher taxes and often poorer quality services.  In the long run those who favor cities must determine whether their cities are to primarily serve a privileged class of public employees or the public.  They can’t do both.  Up to this point, in transit and in other public services, the pro-city lobby has been either unwilling or unable to face this issue.  In the vacuum, public employee unions and bureaucracies have supplanted the former political machines.  It has been estimated that average city employee compensation is at least 30 percent higher than market.10

Consequently, the public may be worse off.  In 1904, Lincoln Steffens reported that: 

... there was a limit to the “rake-off,” and some insiders have told me that it has been laid down as a principle with the ring (city political machine) that the people should have in value ... ninety-five cents out of every dollar.  In some deals I have investigated, the “rake-off” ... was as high as twenty-five percent.11

To use Steffen’s characterization, a considerably larger “rake-off” is occurring in transit. More than 80 percent of the new transit money has served private purposes (the internal interests of transit agencies and their unions), while less than 20 percent has been used to serve the public. 
 

COMPETITIVE CONTRACTING  

The MBTA’s plan for separating policy from operations and competitively contracting service is, as noted above, the wave of the future in other developed nations. As governments in other nations observed cost escalations under the public monopoly model, they opted for a future in which cost effective, vibrant transit systems can serve, preserve and even revitalize cities.  They don’t want the systems to become instruments of neglect, as they have become in the United States.  Moreover, the trend toward competitive contracting is not limited to buses.  Subway and light rail (streetcar) systems are being competitively contracted as well.12

?  London is in the process of competitively contracting all of its bus service.  So far service levels have been expanded by 30 percent, subsidies have nearly been eliminated and ridership is up.

?  Stockholm, Melbourne, Perth, Adelaide and Helsinki are in the process of converting all of their bus and rail services to competitive contracting.

?  South Africa and New Zealand have or are in the process of converting all public transit services to competitive contracting.

?  European Union Transport Minister Neil Kinnock, the former British Labour Party leader, is encouraging conversions to competitive contracting throughout.

Competitive contracting is expanding in Europe and elsewhere for the same reason that MBTA adopted its policy:  transit costs have escalated under the public monopoly model.  If transit’s public purpose of service to riders and taxpayers is to be achieved, reform is necessary.

In the United States, progress has been slower, largely because of special labor privileges in federal transit law (Section 13-c of the Federal Transit Act), which require that laid-off employees be provided up to six years severance pay.13This provision is unheard of in Europe and Australia, despite their far more restrictive labor markets.  In this sense, federal law has an impact similar to Massachusetts law:  it places the interests of transit employees before those of riders, taxpayers and the community.

Nonetheless, there has been progress in the United States, as agencies have converted at rates that do not require transit employee layoffs.  Overall savings have averaged 30 percent.14

?  San Diego competitively contracted nearly 40 percent of its service, driving unit costs down by 30 percent over the past 20 years (while national public transit unit costs rose by more than 20 percent).

?  In Las Vegas, all public transit services are competitively contracted.  Also, it is the only transit system in the United States that is experiencing significant growth.

?  Major competitive contracting programs have been established in Los Angeles, Seattle, Houston, Dallas, Austin, Denver, San Francisco and Washington.

Laws such as the Pacheco law and Section 13-c of the Federal Transit Act, and the considerable power that transit unions have over state legislatures and local transit politics, have combined to produce a national array of public transit systems that carry fewer riders than 20 years ago, while consuming at least $15 billion more (inflation adjusted) annually in tax revenue.  Moreover, until hostage transit policy is liberated from special interests, public transit will continue to fall far short of its potential.  The Massachusetts Bay Transportation Authority decided to liberate transit from special interests, and the Pacheco law was its reward.

Despite this reversal, it is hoped that the policy directions implemented in London, Copenhagen, and Stockholm will also be implemented in Boston and other metropolitan areas around the nation.  Then, and only then, will the promises of transit be given a fair chance of fulfillment.   
 

ENDNOTES

 .  In a number of places Melia uses the term “private contracting” as synonymous with competitive contracting.  Not all private contracting is competitive.  Where contracting is not competitive, production of service by private operators is likely to be more costly, as a result of the lack of competition.  For example, the non-competitive private contractors that produce local transit service within the city of New York have cost structures well above market rates.  Efforts on the part of Mayor Guiliani to convert these services to competitive contracting have been frustrated by effective political opposition. 
2.  From an economic perspective, minimum wage laws are problematic, given their tenancy to reduce employment.  But at least such laws treat all employees the same.  An above minimum wage law for certain employee classifications, such as required by the Pacheco law, provides special privileges for some employees, at the expense of all others.  This violates the principle of equal protection under the law. 
3.  “U.S. Public Transport Subsidies from 1960,” The Urban Transport Fact Book, Internet: http://www.publicpurpose.com/ut-ussby.htm. 
4.  “US Urban Public Transport Per Capita Ridership: 1920-1995,” The Urban Transport Fact Book, Internet: http://www.publicpurpose.com/utus1920.htm
5.  “US Employment & Public Transport Work Trips: 1960-1990,” The Urban Transport Fact Book, Internet:  http://www.publicpurpose.com/ut-jtw60.htm. 
6.  The difficulty of effectively serving most of the modern US metropolitan area with transit is outlined on pages 20 to 25 of Wendell Cox, Light Rail in Milwaukee (Thiensville, WI: Wisconsin Policy Research Institute), 1998. 
7.  If transit unit costs had risen within market rates, service levels would be more than 125 percent higher than present.  It is likely that ridership would be more than 75 percent higher—with per capita annual ridership approximately 20 percent above the 1965 level (assumes +0.65 service elasticity—0.65% increase in ridership per each 1% increase in service). 
8.  San Diego has also established a deliberate policy to achieve optimal cost effectiveness, but has thus far limited its conversion by a no lay-off requirement.  Alone among US major transit agencies, Las Vegas has achieved market rate cost effectiveness by competitively contracting all of its bus service (although it converted from private monopoly rather than public monopoly).   
9.   Author’s estimate, based upon U.S. Department of Transportation and American Public Transit Association data. 
 0.  Wendell Cox, America’s Protected Class: The Excess Value of Public Employment (Washington: American Legislative Exchange Council), 1994. 
 1.  Lincoln Steffens, The Shame of the Cities (New York: Hill and Wang), 1957. 
 2.  Wendell Cox, Jean Love and Nick Newton, Competition in Public Transport: International State of the Art, paper delivered to the Fifth International Conference on Competition and Ownership in Passenger Transport (Leeds, UK), 1997, Internet: http://www.publicpurpose.com/t-5.htm. 
 3.  A similar provision applicable to Amtrak Employees was repealed in the Amtrak Reform Act of 1997. 
 4.  “US Public Transport Costs by Metropolitan Area: Competitive Tendering (Competitive Contracting) and Non-Competitive,” The Urban Transport Fact Book, Internet:  http://www.publicpurpose.com/utuscc95.htm.