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Farebox recovery: The economics of public transit

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Great cities have great transit and their users pay more for it.
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As noted in earlier posts, public transport in the US is heavily subsidized. Regardless of whether this is a good thing, is 100% transit farebox recovery even possible, or will a death spiral result in no users? This post engages in a thought experiment to test what kinds of fares (and subsidies for users (not the system)) would be needed to achieve 100% farebox recovery.

A thought experiment

If 3 million people in the Twin Cities metro each purchased a Metropass at $76/month, that would be $228 million/month or $2.736 billion per year (about 9 times the current annual budget). (Metro Transit General Manager Brian Lamb would be very happy.) This is highly unlikely on a voluntary basis, the evidence for which is that we have not yet seen it.

According to MnDOT (2013 p. 121), total budgets are $301 million per year on Metropolitan Council systems for bus and LRT (excluding other services), so really ($301M)/($76*12) = 330,000 pass-holders would be required to cover existing costs. This is just an order of magnitude estimate, and certainly high since while a large (but unknown) fraction of existing riders are essentially daily riders, others are more infrequent riders and would still pay fares rather than get a pass. The problem is that there are not 330,000 daily or near daily users of the system, instead there are 267,700 daily trips for Metro Transit, and a few more for the opt-outs. Presumably about half that many persons ride daily, assuming mostly round trips, and one-trip per day. This is further complicated by transfers, but this is a blog post not a journal article.

Working this problem in reverse to cover $301 million dollars in expenditures from 267,700 rides (assuming round trips and no transfers) requires $2,250 per person per year, or $187 per person who rides per month. But if fares increased to the equivalent of ~$3.10 per trip (at 60 trips per month), there would be fewer users.

How many fewer users?

Scenario 1

If users were now paying $2.25 per trip in fares (two-way peak) and it increased to $3.10, that is a 39% increase in effective user prices (though this is complicated by switching from an out-of-pocket fare payment to a monthly pass). At an average fare elasticity of -0.4 (as per this report), we would expect a decrease in ridership from 133,750 travelers per day to 114,000.

Total revenue from 133,750*(1-0.15) persons at $187/month would be ~$255 million per year.

Nevertheless, if Metro Transit could reduce costs by $46 million = ($301M – $255M) without reducing service, yay! That is however unlikely, and we see aspects of the transit death spiral in place: Fewer riders -> Less revenue -> Reduced Service -> Fewer Riders. This might be self-limiting, as the weakest services affect the fewest number of riders.

Alternatively, we could just keep raising prices until we reached equilibrium. This reduces revenue and thus requires a rate increase, which further reduces riders. This is also self-limiting, and in this scenario the system ridership drops to just over 100,000 persons per day (200,000 trips per day) at an annual Metropass rate of $2988.

Scenario 2

Maybe riders are not paying on average $4.50 per day. A current farebox recovery ratio of 0.31 suggests riders are not in fact paying an average of $2.25 per trip. Instead, I estimate it is about $1.91 per day or $0.95 per trip equivalent. Certainly some riders pay “full freight”. Other have passes (and use more than the average number of trips that a pass is equivalent to), ride in the off-peak, or otherwise have discounts. Thus increasing to $3.10 for everyone would be more than a 40% increase for some. In this case, we would need to increase fares from $1.91 per day to $6.17 day, a 223% increase. If riders actually were expected to pay this, ridership would drop about 90%. Then to continue full service (though why would we?), we would need to increase daily rates to $56.22. This would reduce ridership to about 0. This is the full transit death spiral in action.

(There is a middle ground, retrenching service to that which is profitable, which would lose riders and service, but hopefully lose more costs than revenues).

Clearly we cannot uniformly more than triple real transit fares as paid by patrons and expect the current set of riders to pay that.

A plausible policy would argue for “equity subsidies” to cover the difference for groups that society wants to provide aid to rather than discounting fares for everyone alike.

Give them money

The greatest consequence of an effective fare increase to cover 100% of operating costs would be on the poor. One strategy (which appeals to my libertarian and rationalist sensibilities) for dealing with this problem is the negative income tax (endorsed by both Milton Friedman and the US Green Party), i.e. give the poor money to spend as they choose. There are some public policies which do this (Earned Income Tax Credit), but nothing so blatant as systematic cash handouts. One of the concerns is with incentives. If we just gave people money for being poor, wouldn’t we get more poor people? The other concern often raised is one of financial responsibility. Some people are poor temporarily due to bad luck or circumstance. Others have trouble with financial management and just giving money would not help.

The next best is to give transportation vouchers to the poor to spend on transportation as they choose. The risk is that the poor with the transportation voucher might find buying a car or gasoline is a better decision than riding transit, especially if their jobs and homes don’t align with the network. While this is presumably better for the individual traveler (why would they allocate their resources that way if it weren’t), it doesn’t help the transit agency or other travelers, as it weakens transit service by removing the positive externality they would otherwise generate, and adds to congestion on roads in the short run.

The third best (and the best for the transit agency itself) is to give poor people pre-paid or discounted transit passes to spend on public transit.

The worst solution is to subsidize transit for all riders. This needlessly reduces the resources available to operate the transit system, and keeps transit agencies in the subservient position of having to beg for money on a regular basis rather than being fully funded by their users.

Presently, the “budget” for subsidies for the poor comes from the transit agency. I would argue that the budget for negative income tax, transportation vouchers, or transit vouchers should come from general revenue, as the primary objective is to help individual people, not transit systems.

Comparison of fares around the world

However, that said, I don’t think ~$8/day is an “unreasonable” or “immoral” fare for an unlimited use transit pass (or even $4 per trip for 2 round trips per day), though it is on the high side of rates for world cities (and certainly above average for US cities). If poor riders were subsidized some large fraction of the difference between current fares and the new fares, it could produce afarebox recovery rate of about 100% (depending on actual fare elasticities), compared to the 31% Metro Transit has now.

  • Toronto charges $3 each way for a single fare purchase, and $128.50 (1 Canadian dollar = 0.99 USD) for a monthly Metropass. Farebox recovery rate for TTC is 63%.
  • Vancouver charges $2.75 for adults one way, one zone, and $4.00 for two zones. Passes are $91 for one zone and $124 for two zones. The farebox recovery rate for Vancouver is 52%.
  • London charges a rail fare of £4.50 for adults one way (though only £2.10 for users of Oyster cards), for just zone 1 (the center of the region). The Annual travel card for zones 1-6 (excluding the exurbs) is £2,224. The current pound to dollar exchange rate is 1 USD = 0.64 British pound sterling, so the travel card equivalent is $3,458. Buses are cheaper. Farebox recovery rate for London is 50%.

A list of prices in various cities is at priceoftravel.com. Another list is at MSN.

A perhaps more important point is that Canada has a higher farebox recovery rate than the US, better transit, and higher transit mode shares. What are they doing more right than the United States?

Summary

The competitive environment for transit limits how high rates can go. In cities with a greater dependence on transit (and greater inconvenience for driving), transit agencies have more latitude to raise fares. The political environment also matters, and it may be simpler politically to subsidize rides for everyone, not just those who need it.

Lowering costs can also increase farebox recovery ratios, by lowering the denominator (expenses) instead of raising the numerator (revenue). As noted before, transportation costs too much, so there are probably a number of possibilities for reducing expenses.

There are a lot of policy alternatives for fares between $4.50 and $8.00 day, there is no magic number. Until transit is again privatized without subsidy there is no requirement for 100% fare recovery. It would almost certainly be a bad idea to do this kind of change overnight, large systems need transitions. Still, raising base fares should be on the table to give transit agencies more operational independence and to reframe their status from [whatever it is now] to what it once was and will eventually be again, a public utility providing a service in exchange forconsideration.

Great cities have great transit and their users pay more for it.

(Yes drivers should pay full cost too, I have written about this sufficiently, get off my lawn).

This post was written by David Levinson and originally published on streets.mn. Follow streets.mn on Twitter: @streetsmn.

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Comments (10)

Vanpooling Able to collect 100% operating costs

One mode that you should look at is vanpooling. Vanpoolers in Minnesota and accross the nation are provided a transit service in which they pay all of the operating costs, and in some cases part of the capital costs. Private providers of public transportation, like Vride, provide the vehicles on a turn-key basis. use of a private provider reduces overhead costs and is more efficient tha traditional services. The rider pays a moonthly fee on a pay-as-you-go basis.

Death spiral

I've ridden on a transit system that was in the death spiral, and it was terrible. Limited service, high fares, and bus drivers with an attitude that seemed to say we should all be driving cars, yes San José, CA I'm talking about you. Monterey CA is even worse.
100% fare recovery is not possible until we make driving much more difficult. Maybe some sort of toll or congestion pricing for car commuters would "drive" more commuters onto trains and busses.

What's the point?

Mr. Levinson,

None of the transit systems you point to operate without subsidies, so do you expect ours to operate without a subsidy or are just trying to reduce the subsidy? If you're trying to reduce the subsidy, what's your target?

Since we're already subsidizing transit, why would want to give money to the poor? We're already giving money to the poor in the form of existing subsidies. We already offer discounted transit passes to students and disabled people. It looks to me like your just moving deck chairs around. You may change the way the subsidy is delivered, but your not necessarily reducing the subsidy, in fact, it may increase depending on the number of lower cost passes you hand out.

It looks like maybe your suggesting we could increase our recovery from 31% to around 50% but if you look at those systems they're clearly not getting that ratio out of higher fares alone. A $.75 increase in our fares would not get us to Toronto's 63% recovery rate, your own numbers demonstrate that.

What do they do better than the US? They have decent transit systems, ours suck. We designed our cities and transportation systems around moving cars instead of people and that's where we put our money. The problem isn't fares, the problem is the transit system. If and when we have comparable transit systems we will have comparable fare recovery rates. In the meantime messing around with fares isn't going to solve any problems. You can't expect our sub-par transit systems will generate the same revenue and fare recovery rates. In London you actually have to pay to drive your car in the city center for crying out loud. Try that in Boston and watch the recovery rate increase.

What's the point?

Mr. Levinson,

None of the transit systems you point to operate without subsidies, so do you expect ours to operate without a subsidy or are just trying to reduce the subsidy? If you're trying to reduce the subsidy, what's your target?

Since we're already subsidizing transit, why would want to give money to the poor? We're already giving money to the poor in the form of existing subsidies. We already offer discounted transit passes to students and disabled people. It looks to me like your just moving deck chairs around. You may change the way the subsidy is delivered, but your not necessarily reducing the subsidy, in fact, it may increase depending on the number of lower cost passes you hand out.

It looks like maybe your suggesting we could increase our recovery from 31% to around 50% but if you look at those systems they're clearly not getting that ratio out of higher fares alone. A $.75 increase in our fares would not get us to Toronto's 63% recovery rate, your own numbers demonstrate that.

What do they do better than the US? They have decent transit systems, ours suck. We designed our cities and transportation systems around moving cars instead of people and that's where we put our money. The problem isn't fares, the problem is the transit system. If and when we have comparable transit systems we will have comparable fare recovery rates. In the meantime messing around with fares isn't going to solve any problems. You can't expect our sub-par transit systems will generate the same revenue and fare recovery rates. In London you actually have to pay to drive your car in the city center for crying out loud. Try that in Boston and watch the recovery rate increase.

By the way, New York's Transit system reaches a 55% fare recovery rate, and they charge $2.25 for a unlimited daily subway pass. Their subway system is comparable to London's. They have a huge budget deficit however. San Fransisco, Chicago, and Washington DC have 60+% recovery rates and they charge LOWER fares. SF outperforms Toronto and charges lower fares. It's the system, not the fares. There's a nice little wiki that has a bunch of cites and FRR's listed: http://en.wikipedia.org/wiki/Farebox_recovery_ratio

I'm not on your lawn, this is the public sidewalk

If the presumed annual subsidy for a transit rider is $2,250, what is the same subsidy for commuters who drive? Your link regarding highway costs is from 1997. I have no idea if the data sets exist to calculate this:

First the cost of auto commuters not paid by tax on gas or parking revenues:

(state, county, and metro-city expenditures on highway and arterial road construction, maintenance plus parking costs (minus parking revenues) minus ((commuter miles per year/average mpg of metro vehicles) * (state gas tax p/gallon)) plus sales tax on gasoline in the metro area.

That would tell you the total subsidy in the metro area, divided by the number of commuters and you would have a number to compare to your $2,250 presumed subsidy for transit commuters. Admittedly this calculation is much more difficult than your calculation regarding commuters.

What is a subsidy?

I have to ask what may sound like a stupid question, but I assure you I'm not being facetious or dim-witted. That is, what exactly is a subsidy?

Is it the amount of money that doesn't come out of a user's pocket? If so, it's easy to calculate the subsidy required to provide public transportation. The subsidy would be the total operating cost minus the fares. Easy. And incomplete.

The amount that doesn't come out of the users' pockets still, at least in part, comes out of users' pockets in the form of taxes and fees. Then the question becomes, is the subsidy the amount that comes out of non-users' pockets? If so, how exactly is that calculated? Do we take the average income, location, etc. of those most likely to ride the bus and calculate the amount that those people contribute to the taxes that specifically go to support public transit? Sounds fuzzy.

And how do we compare all of this to the subsidy provided for driving? The streets, the highways, the maintenance, the infrastructure related to all of it? And how do we divide out those items based on car usage vs. bus usage? They travel the same roads but they are almost certainly unequal contributors to the wear and tear and maintenance of the roads and other related infrastructure.

So, subsidy and cost are a superficial way to look at the issue. As a result, the solutions are somewhat superficial. While changing the manner in which public transit is subsidized isn't a horrible idea overall, it ignores the fact that simply maintaining our transit system isn't a long term solution to anything.

Our population is growing and our pocket books really aren't. So, as an overall volume of money, we will continue to have more (on average) than before. But on a per-person level, our spending/buying capacity is decreasing. That means we'll be less able to afford to be inefficient with our money. By simply maintaining our transit system by maintaining the current subsidy and/or looking for ways to reduce such a subsidy, we set ourselves up for increased inefficiencies and cost.

Now, I realize that the "cost" of driving has also been reviewed by the author of this article. However, it's not all about money. There is also a social and moral imperative to provide a sufficient public transit system, even if we must "subsidize" it. That is, on average, those most in need of public transit can least afford to pay for it. Even if we ignore that or send out transit passes to the poorest of them, it doesn't change the fact that a transit system can reduce the overall environmental cost (in dollars and quality). In addition, reducing the volume of traffic also increases quality of life in other ways, such as by reducing the time people spend away from their families. Finally, by reducing the volume of traffic and reducing the amount of time people spend in cars being completely unproductive, we can actually have a positive impact on the economy.

Cost/Benefit Analysis

Rachel, that's a hell of a good post. You eloquently spelled out that there are many more costs and more benefits to be calculated than just the "how much did you pay" mantra.

Remind me not to cross you in a dark debate alley--my intellect would come out the other side thoroughly roughed up.

Bus Rider

Taking an entirely different tact, let me jump into the story from the personal anecdote side.

I've been using a mix of driving and biking to work for several years and just this week made the switch to busing and biking. Bike on the nice days when it's not raining or there isn't white stuff on the ground and bus the rest of the time. I hit the bike for a lot of reasons, but primarily because, like a lot of Americans, I could stand to lose a few inches from the middle. Build exercise into the daily routine and I tend to stick with it.

The catalyst for the switch to buses though is our parking rates at work are getting jacked up, from $43/month to $75/month. That wouldn't be a big deal if I made a ton of money, but I work for a nonprofit and salaries are typically half what they are in the private sector. Factor in the recent jump in gas prices and I was primed for a change. I ran a few numbers and figure I'll save roughly $2000/year with the new routine, depending on how many days I need to bring the car to work anyway and have to pay full retail for parking. That's even after factoring in a couple of bus passes to get me through the winter.

The best part: with traffic the way it's been lately it's actually faster to bike in rather than drive, even though I just have to go from St. Louis Park to downtown. Given the congestion lately I'd say we're pretty darn near full employment.

Bike trip speed

A lot of auto drivers don't realize that many of their trips would be quicker if by bike - because they've never tried it !!

Your comment about commuting from St. Louis Park reminded me of a regular trip I used to take by both car and bike from near Oak and Washington SE to near Lake and Nicollet in south Mpls. It was virtually always quicker to bike, rush hour or not.

Sorry about that double post

I didn't mean to double post, I had thought the information about DC, San Fransisco etc. was in a second follow up post.