First of a Series: The Feds Giveth, The Feds Taketh Away

All is not well in the world of transit in the United States today. The COVID-19 virus has changed the way many Americans work, among other large-scale social and economic changes, and they include the way riders use rail transit. Carrying commuters into the city core in the morning and back home at the end of the workday was the primary job of the nation’s regional railroads since the middle of the 19^th Century. Today, fewer workers are commuting to their offices five days every week. Some are only going there on certain weekdays, while others are working “remotely” from home all the time. These changes appear to be permanent, and it also appears that many of the legacy commuter rail agencies are facing huge challenges as they attempt to serve their riders under a new and developing paradigm.

The cause of these challenges is that Congress authorized billions of dollars’ worth of operating support for transit in 2021, in the wake of the dramatic and sudden loss of riders on all modes of transit everywhere, a phenomenon that hit the industry hard all over the country. Now, the providers who kept going through the pandemic emergency will soon face the loss of those funds, which will run out soon.

In this series, we will look at the history of federal operating support for transit, the issue of farebox recovery as a component of a rail transit provider’s overall budget, and what the major transit providers are doing to prepare for a challenging future, if they are indeed preparing. We will concentrate on the agencies that run large rail systems, particularly those in the few cities that operate legacy rail transit and regional rail (historically known as “commuter rail”) components. In addition, we will examine the situation in other cities that have developed major rail systems more recently. We will conclude with some thoughts about what the providers and the elected officials who determine their fate, can do.

Operating Support, the Disappearing Gift

A comprehensive report detailing the history of federal operating support for transit recently appeared. It was published by the Congressional Research Service on Jan. 18, 2024 and authored by transportation consultant William J. Mallett. Its title is Federal Support of Public Transportation Operating Expenses, and it was prepared for members of Congress.

Mallett began the summary of his report by saying: “The costs of providing public transportation service fall into two main categories: operating expenses and capital expenses. Operating expenses (e.g., labor and fuel) are about two-thirds of all transit service expenses, and capital expenses (e.g., bus purchases) are about one-third. For much of the federal public transportation program’s history, most federal funding has gone to support capital expenses with a maximum federal share of 80% of project costs. When permitted, federal support of operating expenses has a maximum federal share of 50%. In the late 1990s, Congress eliminated federal operating support for transit in urbanized areas of 200,000 people or more but broadened the definition of capital expenses in federal law to include items considered by the industry to be operating expenses, such as preventive maintenance. Consequently, federal funding of operating expenses based on the industry definition was almost five times greater in 2019 than in 1997 (in inflation-adjusted terms)” (parenthetical in original).

Mallett continued: “Federal support for operating expenses has reemerged as an issue because of the disruptions to public transportation ridership caused by the Coronavirus Disease 2019 (COVID-19) pandemic. Public transportation agencies kept many buses and trains running during the height of the pandemic, especially to support the travel of ‘essential workers,’ but ridership and fare revenues plummeted. Public transportation agency budgets, particularly operating expenses, were supported by federal supplemental appropriations in FY2020 and FY2021 totaling $69.5 billion. This amount was about five times the annual federal public transportation support of $12 billion in 2019, the final full year before the pandemic, and more than three times the $19 billion coming from fares and other operating revenue.” He also mentioned that all the supplemental appropriations in the COVID-19 relief legislation had been obligated by summer 2023, but that ridership is still at about 70% of pre-COVID level. That means the deficits facing some providers are starting in FY2024, which is happening now. Mallett noted: “Thus, transit agencies are likely to need additional governmental support to avoid reducing services and employee layoffs. Some states and local governments have announced greater funding for transit, and some agencies are implementing changes such as fare increases and operating efficiencies.”

New Jersey Transit is an example of this. The agency is now in the process of implementing a 15% fare increase and has announced that other revenue-enhancing and cost-cutting and measures have not been enough to fill the $106 million shortfall that it expects to face in the fiscal year beginning July 1. We will report in more detail on that situation later in this series.

Regarding other possible solutions, Mallett said: “Another possible way to address expected budget deficits is to increase federal operating support for public transportation agencies. Federal assistance for operating expenditures could affect three main aspects of public transportation: (1) transit service, including the amount provided and fares, (2) transit productivity, and (3) transit capacity and condition. Research on the rapid expansion of operating support in the 1970s generally concludes that it allowed transit agencies to maintain a higher level of transit service and lower fares than would have prevailed without it, but such support also caused supply-side productivity (e.g., the operating cost per vehicle mile) to worsen. With growth in vehicle miles of about 50% since the late 1990s, the operating cost per vehicle mile has remained relatively constant over the same period. In contrast, demand, measured by ridership, grew by about 14% over the same period, resulting in substantial growth in the operating cost per trip. Another potential effect of federal operating support is that it may reduce geographic service inequalities that arise from the ability of different state and local governments to support transit service.” He proposed several ideas, ranging from reducing support to raising user fees on automobiles and congestion pricing. We have been reporting extensively on New York’s experience with that policy.

Mallett’s report is short, covering only 18 pages after the summary and table of contents, but he took a deep dive into several issues concerning transit and how the industry could fare under different scenarios. He looked at a few parameters concerning transit, as well as different modes. Those include fixed-route buses and community transportation, in addition to rail. Some of the issues he covered are asset condition and employee productivity. While his report is packed with information, we will concentrate on service issues that will affect riders on rail transit and the regional railroads that depended heavily on commuters before the virus hit, and where there is less commuting today.

Federal Operating Support Came and Went

Federal support for transit began with the Urban Mass Transportation Act of 1964 (P.L. 88-365). The Act established the Urban Mass Transit Administration (UMTA), the predecessor of today’s Federal Transit Administration (FTA). It also authorized assistance to transit, but for capital projects only. According to Mallett, that decision was based on a 1962 study that “had recommended against federal support for operating expenses on the basis that such support would reduce transit operators’ incentives to control costs” (at 5, study cited at n.16).

Spurred by the “oil crisis” of 1973, when an export embargo by the Organization of Petroleum Exporting Countries (OPEC) restricted the supply of oil coming into the United States, Congress introduced operating assistance for transit in the Federal-Aid Highway Act of 1973 (P.L. 93-87) and the National Mass Transit Act of 1974 (P.L. 93-503). The matching federal matching share for operating support was set at 50%, with 80% for capital projects, beginning in FY1975. Mallett reported: “federal funds applied to operations more than doubled from FY1975 through FY1980. As total assistance rose, federal operating grants as a share of operating and capital grants grew to nearly 30% by 1980. Assistance increased so rapidly that the General Accounting Office concluded that at all levels of government, ‘demand for transit operating subsides is approaching crisis proportions.’ In response, and as a part of a desire to reduce federal expenditures, the Reagan Administration proposed phasing out operating assistance by FY1984 and cutting back on capital assistance” (Id., footnotes omitted). Congress imposed a cap on operating grants, and the share going toward operations dropped to about 25% through the early 1990s (Id. at 6).

The Transportation Equity Act for the 21^st Century (TEA-21, P.L. 105-178) made two significant changes, beginning in FY1998. It eliminated federal operating support for transit in unbanized areas with a population of 200,000 or more. That requirement eliminates essentially all U.S. cities that have rail transit today. The other change was that maintenance of capital assets became eligible for capital funds, when it had previously been considered an operating expense. Paratransit, which is service for persons with disabilities required by the Americans with Disabilities Act (ADA) also became eligible for treatment as a capital program, but that service is provided by special vans, and never runs on rails. According to Mallett (at 6), the share of funds going toward operations increased from 13% to 32% between 1997 and 2011, but that increase included paratransit as well as maintenance purposes. Mallett reported an increase in grants, mostly for capital expenses, in the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5) and assistance for small bus-service providers in urban areas in the Moving Ahead for Progress in the 21^st Century Act (MAP-21, P.L. 121-141). Still, there was no change in the picture regarding operating support for providers of rail transit until the virus hit.

The COVID-19 pandemic was a disaster for all modes of transportation, all phases of rail service, and transit everywhere. As the downturn unfolded four years ago, reporters from Railway Age and its sibling publications joined forces to report on the developing crisis. We continued to report on the slow return of service on Amtrak and rail transit for the next three years, and transit providers are still reeling from the reductions in ridership, which also caused reductions in revenue, resulting from the pandemic.

Regarding the effects of the virus, Mallett noted: “With fewer riders due to COVID-19, fare revenue has fallen dramatically at most public transportation agencies. According to FTA, fares and other operating revenue fell from $22 billion in 2019 to a low of $10 billion in 2021 (in 2022 dollars). Public transportation agencies also have faced higher costs as a result of the health emergency, such as extra cleaning costs. To maintain public transportation services and jobs, public transportation agency budgets were supported by federal supplemental appropriations in FY2020 and FY2021 totaling $69.5 billion, about five times the pre-pandemic level of annual federal public transportation support and more than three times the amount coming from fares and other operating revenue annually. While the pandemic challenged the public transportation industry nationwide, its financial effects fell most heavily on agencies operating subways and commuter rail systems, the largest of which are located in the New York metropolitan area. Not only did subways and commuter rail lose a greater share of ridership than bus systems due to the pandemic, but they are typically more reliant on fares to cover operating costs. Prior to the pandemic, fares and other operating revenues covered about one-quarter of the total cost of providing public transportation nationally. The five-year average (2015-2019) of fare revenue as a share of total costs for buses was 20%, and the shares of total costs for subway and commuter rail coming from fares were 34% and 32%, respectively” (at 7-8, citations omitted).

The downturn in ridership, especially on the major transit systems, continues today. The loss of the federal operating support that has been provided on a temporary basis to keep transit going through the pandemic, has the potential to cause catastrophic results. Mallett provided the breakdown: “For COVID-19 relief, $25 billion was provided in FY2020 in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), $14 billion was provided in FY2021 in the Consolidated Appropriations Act, 2021 (P.L. 116-260), and $30.5 billion was provided in FY2021 in the American Rescue Plan Act of 2021 (P.L. 117-2)” (n.29 at 8).

He went on to state: “The effects of these developments in ridership and fare revenue have been to upend the budgets of many public transportation agencies, especially the largest agencies that operate multimodal systems. According to the American Public Transportation Association (APTA), transit agencies had obligated more than 99% of federal COVID-19 emergency relief funds by the middle of 2023. In a survey of its members, APTA found that about half of transit agencies and more than two-thirds of large agencies said they would experience severe budget problems (a so-called ‘fiscal cliff’) in the next five fiscal years (FY2024-FY2028). Without new sources of federal, state, or local funding, or a combination of these, many operators would face large and sustained operating deficits. If new funding is not forthcoming, it is likely that agencies would have to institute some combination of fare increases, service cuts, and layoffs or search for efficiency improvements. Reduced and possibly more expensive service could lead to falling ridership, requiring further fare hikes and service cuts (at 8-9, footnotes omitted).” That is where transit stands today. The temporary federal COVID assistance is expected to run out soon, this fiscal year or next for many transit agencies.

Are Big Capital Projects the Problem?

In the early 1970s, when the federal government was giving capital grants to transit agencies, but not operating assistance, according to Mallett: “Some argued … that the federal policy of providing only capital assistance was causing operators to overbuild their systems, substitute capital for labor (even when it was uneconomic), and skimp on maintenance. These problems led to calls for federal operating support as a way of encouraging more efficient, less capital-intensive transit systems” (at 5, footnote omitted). Has that situation been repeating itself for the past half-century, and still appertains today?

At the November 2023 Light Rail Conference in Jersey City sponsored by Railway Age and its sibling publication Railway Track & Structures, this writer raised the issue of transit providers having capital grants that would enable them to build new infrastructure on which they could not afford to operate.

Some corporate employers are pushing harder to force most or all employees back into the pre-COVID pattern of going to the office five days every week. How well those efforts will achieve their stated objective, with the byproduct of providing additional revenue from commuters for the regional railroads and transit remains to be seen. Employees are pushing back against the change, and some can reasonably be expected to change jobs to avoid being forced back into a lifestyle and they have learned over the past four years that they did not like. It appears difficult to believe that most or all those employees are sufficiently fearful that they will give up the comfort of going into the office no more than two or three days per week. It seems easier to believe that more employees will go to the office some days and not others, while some employers have settled into allowing most to work remotely.

The existential question first raised a half-century ago has not been resolved, and this time the situation is more dire. The apparently permanent downturn in ridership, especially among former five-day-per-week commuters, coupled with the impending loss of federal operating support, could cripple transit providers in their efforts to continue providing service at the level that riders have come to expect, and that they need. But just how bad is the situation? The standard metric for changes in the overall revenue picture is farebox recovery, the percentage of operating costs covered by revenue paid by riders. We will look at this performance measure among major transit providers in the next article in this series.

David Peter Alan is one of North America’s most experienced transit users and advocates, having ridden every rail transit line in the U.S., and most Canadian systems. He has also ridden the entire Amtrak and VIA Rail network. His advocacy on the national scene focuses on the Rail Users’ Network (RUN), where he has been a Board member since 2005. Locally in New Jersey, he served as Chair of the Lackawanna Coalition for 21 years and remains a member. He is also a member of NJ Transit’s Senior Citizens and Disabled Residents Transportation Advisory Committee (SCDRTAC). When not writing or traveling, he practices law in the fields of Intellectual Property (Patents, Trademarks and Copyright) and business law. Opinions expressed here are his own.