Looming ‘fiscal cliff’ shows deeper problems with transit funding, researchers say

Many big transit agencies are facing a “fiscal cliff” next year, the latest in a series of precarious financial situations transit agencies have found themselves in over the years because they rely too heavily on a single source of revenue, a new report argues.

Whether it’s the collapse of fare revenue after the COVID-19 pandemic or the drop off in sales tax receipts after the Great Recession, the main sources of income for local transit agencies can be especially unstable, wrote researchers from the Urban Institute.

“Virtually all U.S. transit agencies are reliant on external subsidies—meaning money they are unable to generate directly, such as through fares—to fund their services,” they wrote. “These subsidies … provide varying revenue over time and are sometimes so unstable as to put agencies in a bind, unable to fund their basic operations.”

The coming crisis for major transit agencies is a delayed reaction to the massive drop in passengers after the coronavirus outbreak. In the early days of the pandemic, Congress approved three rounds of subsidies to keep those local transportation options viable at a time when workplaces were closed and people avoided congregating together. But that money is running out, and Congress is not offering any more.

That puts many big systems in financial trouble. The transit agency that serves the Washington, D.C., metro region, for example, predicts an operating deficit of $750 million for the fiscal year that ends in 2025. That could lead to cutting bus and rail services by two-thirds, eliminating 98 of the region’s 135 bus routes and stopping all service by 9:30 p.m. In the Denver area, transit officials stockpiled cash during the pandemic and scaled back service; they have no plans to resume more than 85% of their pre-pandemic operations. And the Philadelphia area’s transit system is asking state lawmakers for more sales tax revenue to avoid “massive service cuts and drastic fare increases.”

The Urban Institute researchers said transit leaders are left with few good choices to keep their services in the black.

“These emergencies force agencies to cut service—leading, in turn, to steadily declining transit ridership. This cycle leads to more automobile traffic on the roads, higher greenhouse gas emissions in the air and less freedom of mobility for people with the fewest resources,” they wrote.

Instead, agencies and transit advocates should push for a diverse mix of funding streams that would help them better cope with volatile income sources. That could include sales taxes, property taxes, tolls and direct state aid. Most transit providers disproportionately depend on one or two of those funding streams, rather than a mix of them. And they tend to rely on volatile revenue sources, like sales taxes, much more than stable ones, such as property taxes. That sets them apart from other basic public services, such as fire departments, parks and libraries, which don’t face as many sudden crises as transit agencies do.

Take San Francisco’s Bay Area Rapid Transit, or BART, for example. At one point, it had the highest percentage of its operating costs covered by fare revenues in the whole country, topping off at 80% in 2015. But that plunged to 10% in 2021.

“The agency’s once-celebrated self-sufficiency in fare funding has been its Achilles heel during this time of crisis,” the Urban team wrote. “BART’s difficult circumstances have, however, offered an important lesson: There is value in establishing financial support from a diverse array of funding sources.”

That also means that an agency’s revenues need to at least keep up with inflation, they said. Often, fares themselves don’t keep up with the increased costs of operating buses and rail fleets. In fact, the share of operating expenses covered by fares at the top 100 transit agencies in the country was declining even before COVID-19 struck.

Agencies could raise fares to keep up with inflation—or even exceed it—but those moves are politically unpopular because they disproportionately impact lower-income riders and discourage people from using transit.

In the absence of raising fares, transit agencies often respond to increasing costs by underpaying their employees. Industries that are labor intensive like transit have a harder time cutting costs when inflation goes up, according to the report. They can't automate or outsource bus or rail drivers, so instead they cut costs by keeping wages low.

Keeping a lid on operating costs has become even harder in the wake of the pandemic because of factors such as difficulty retaining drivers and higher material costs.

“This is a major concern for transit agencies that are seeking to continue providing adequate levels of service quality in the face of unsteady transit budgets,” the report warned. “Transit agencies could identify best practices to increase operations efficiency while creating better working environments for their employees.”

Researchers pointed to several steps local agencies could take to shore up their bottom line.

They said agencies can demonstrate that the public still wants robust transit service by, for example, creating rapid bus routes using dedicated lanes or redesigning their bus networks. They can look for a chance to redirect revenues from existing taxes, rather than pushing for raising new taxes. They can encourage dense development around their stations to promote future ridership and, in some cases, agency revenue. They could create and fill rainy day funds to smooth out future jolts to their revenue sources. And they could be “transparent about doomsday scenarios” if they don’t receive more funding, with details about specific cuts that would result.

State and local leaders could also improve the financial standing of transit agencies by using flexibility in federal highway programs to pay for major capital expenses for the transit agencies, which could free up local money for operating expenses. Elected officials could also consider new revenue sources, including property taxes, income taxes on rich residents and charges on driving, the Urban Institute researchers said.

“Public officials have largely shirked their responsibility to maintain constant transit funding, rarely committing to ensuring the continuity that is more standard for services like libraries and fire departments,” they wrote.

The pandemic showed the federal government could play a role, too, they argued. Normally, the federal government only helps smaller transit agencies pay for day-to-day operations. Bigger transit agencies can get federal grants, but those are designated for new construction and upgrades. During the pandemic, Congress decided to let local agencies use federal aid to cover the cost of operating their system, which the Urban researchers described as a “lifesaver for large transit agencies.”