323

Transportation, 11 (1983) 323-345 Elsevier Science Publishers B.V., Amsterdam - Printed in The Netherlands

CONSEQUENCES OF PUBLIC OWNERSHIP A N D SUBSIDIES FOR MASS TRANSIT: EVIDENCE FROM CASE STUDIES A N D REGRESSION ANALYSIS

JOHN PUCHER and A N D E R S MARKSTEDT

Department of Urban Planning, Rutgers University, New Brunswick, NJ 08903, U.S.A.

ABSTRACT

The trend toward public ownership, public regulation, and public subsidization of the U.S. transit industry has recently come under attack. Many argue that the result has been reduced productivity, increased costs, and very little real benefit. This article examines the impacts of subsidies and public ownership in four large transit systems that cover a range of transit system types and financing arrangements. Evidence fromthe case studies is compared to the results of both time-series and cross-section regression analysis of operating and financial statistics for large samples of bus systems. Although the case studies and the regressions rely on different datasets and different techniques, they support the same conclusions. Increased subsidies and public ownership have kept down fares and permitted service expansion, but have also encouraged wasteful cost escalation. Thus, transit riders unquestionably have benefited from public takeovers of transit systems and burgeoning subsidies, hut not nearly as much as they would have benefited if costs had not skyrocketed at the same time.

Introduction

Since 1970, the term "public transportatfon" has become increasingly descriptive of the transit industry in the United States. Public subsidies to transit have burgeoned, public regulation of transit has proliferated, and public ownership of transit has become almost complete (Pucher, 1982). These trends toward increased government support and control of transit have resulted both from the worsening finances of the industry and from the expectation that transit would play a key role in revitalizing cities, conserving energy, abating pollution, relieving traffic congestion, and in achieving a range of other social and environmental goals (Altshuler.et al., 1981, pp. 31-49). Recently, however, the overwhelming government involvement in Ameri0049-4488/ 83/ $03.00 1983 ElsevierScience Publishers B.V.

324 can transit has been called into question. The Reagan Administration, for example, maintains that subsidization, regulation, and public ownership have drastically reduced the efficiency of the transit industry, and that the transit program has achieved almost none of the objectives that formed the basis of its support (Executive Office of the President, 1981). Moreover, much of the testimony presented at extensive Congressional hearings supported the view that the transit industry suffers from serious productivity and cost problems, and that these problems have been exacerbated by rapid subsidy growth and increased government regulation (U.S. House of Representatives, 1981; Bonnell, 1981). Even a cursory examination of transit operating and financial statistics reveals alarming cost escalation during the recent decade. Operating expense per vehicle mile increased from an average of $1.02 in 1970 to $3.11 in 1980 (American Public Transit Association, 1981a, pp. 47, 58). Capital costs per transit vehicle and per mile of rail system construction increased by almost four-fold (Pucher, 1982). These cost increases substantially exceeded the general rate of inflation in the economy. In inflation-adjusted constant dollars, the per-unit operating costs grew by 62%, and per-unit capital costs by about 100%. This rapid cost escalation dissipated much of the 15-fold increase in transit subsidies in the U.S. over this period. Although total operating and capital subsidies from all government levels rose from $518 million in 1970 to $7812 million in 1980 (Pucher, 1982), vehicle miles of transit service increased by only 11%, and ridership increased by only 7% (American Public Transit Association (APTA), 1981a, pp. 55, 58). These general impressions are reinforced by the findings of various researchers. Tye (1974) and Hilton (1974), for example, concluded that Federal capital subsidies had encouraged inefficiencies in the transit industry by distorting investment decisions and by discouraging maintenance of existing infrastructure and vehicles. They also estimated that capital subsidies had had negligible impacts on-transit ridership, central city vitality, roadway congestion, pollution levels, and mobility of the poor. More recent studies generally confirm this critical evaluation, and indicate that operating subsidies have probably been ineffective also (Altshuler et al., 1981, pp. 431-441; Meyer and Gomez-Ibanez, 1981, pp. 37-55). Clearly, the Reagan Administration's concern over the ineffectiveness of the current subsidy program is warranted. There is reason to suspect that the very design of the Federal subsidy program, for example, has encouraged cost escalation, unjustified service expansion, and excessively low fares. Other aspects of the nation's transit program - including state and local policies - may also have hampered its effectiveness. The purpose of this article is to examine the impacts of subsidies and public ownership in four large transit systems that cover a range of transit system types and financing arrangemems. By comparing differences among the four systems

325 in costs, productivity, service levels, and fares, the study seeks to isolate the effects of public ownership and subsidies. This disaggregate case study analysis is related to the results of five econometric studies, which involved time-series and cross-section regression analysis of operating and financial statistics for large samples of bus systems. Together, these two sources of information permit a number of useful generalizations to be made about impacts of the current subsidy program and changes that would increase its effectiveness.

Case Study Analysis

In order to examine the impacts of public ownership and subsidies, four large transit systems were chosen for detailed analysis: the Chicago Transit Authority (CTA); the Tri-Met system in Portland, Oregon; Transport of New Jersey (TNJ); and New Orleans Public Service. In addition to information provided directly by these systems, data were also obtained from APTA's detailed financial and operating reports for each system (American Public Transit Association, 1971, 1977, 1981b, c). For comparability, only the bus portions of multi-modal operations were considered. Together, the four systems differ along a number of dimensions of interest for this analysis. Chicago and Portland, for example, had publicly-owned systems for the entire decade of the 1970s, whereas TNJ only recently turned public (taken over by NJ Transit in 1980), and New Orleans Public Service is still private. Indeed, New Jersey and New Orleans had by far the largest private urban bus systems in the U.S. in the 1970s. Subsidy arrangements vary significantly among the four systems. New Jersey's transit system, for example, receives virtually no local government subsidies; in contrast, all of Portland's non-Federal subsidy is financed by local taxes. New Orleans is noteworthy because, until 1976, operating deficits were financed almost entirely by cross-subsidies from the profitable utility operations of the transit system's parent company. Similarly, TNJ, which was a subsidiary of Public Service Electric and Gas Company (of New Jersey), also received substantial cross-subsidies during this period, although they were supplemented by increasingly large state government subsidies. Currently, almost all of the non-Federal subsidy in Chicago and Portland is derived from dedicated transit taxes - a regionwide sales tax in Chicago and a regionwide employer payroll tax in Portland. The state and local subsidies in New Jersey and New Orleans, by comparison, are appropriated on a year-to-year basis from general tax revenues. The degree of Federal subsidy also differs. In New Jersey, Federal operating subsidies in 1980 covered about twice as high a proportion of the deficit as in the other three systems. There is variation along other dimensions also. Portland's system provides

326
TABLE I Trends in Operating Subsidies, 1970-1980 Statistic/bus system Year 1970 Total operating subsidy ($millions) Chicago Portland New Jersey New Orleans Subsidy per bus hour ($) Chicago Portland New Jersey New Orleans Subsidy per passenger ($) Chicago Portland New Jersey New Orleans Subsidy as percent of total operating expenses Chicago Portland New Jersey New Orleans Subsidy split by government level (% Federal/% state/% local) Chicago Portland New Jersey New Orleans Percent of state and local subsidy that is dedicated Chicago Portland New Jersey New Orleans 1975 1980

0.0 1.2 0.4 3.3

40.7 10.2 24.6 9.7 ~

194.7 30. I 41.6 16.7

0.00 1.89 0.06 2.40

4.80 9.11 5.60 7.40~

23.32 19.49 11.68 12.95

0.00 0.07 0.00 0.03

0.08 0.36 0.21 0.101

0.36 0.59 0.36 0.22

0.0 18.3 0. l 24. l

22.2 52. l 27.2 48.41

55.5 57.5 35.2 44.5

0/0/0 0/0/100 0/1002/0 0/0/03

0/97/3 16/0/84 11/892/0 0/0/03

27/17/56 16/0/84 49/51/0 29/36/35

0 100 0 0

77 100 0 0

98 100 0 0

I The 1975 figures for New Orleans were adjusted to compensate for the effect of a strike. 2 Part of the subsidy used to cover the operating deficit of TNJ in 1970 and 1975 was derived from cross-subsidies from the profits of a state-wide utility company, Public Service Inc. 3 In 1970 and 1975, virtually no government subsidies were received by the New Orleans transit system. Instead, operating deficits were covered by cross-subsidies from utility operations of the parent company. However, there were no cross-subsidies in 1980.

327 only bus service, whereas T N J and Public Service of New Orleans also run a small amount of light rail service, and the CTA has an extensive heavy rail network. Even though the comparisons here are limited to bus service, the multi-modal nature of a system may affect the operations and finances of its bus division. The four systems also vary in size and type of service area. The bus routes of the CTA and New Orleans systems are limited primarily to central city areas. Portland's routes, however, cover an extensive three-county area, and T N J provides service both within and between urbanized areas throughout New Jersey. The CTA's service area is the densest and most transit-oriented, while the service areas of Tri-Met and T N J are least dense and least transit-oriented; New Orleans is somewhere between these extremes. TRENDS IN SUBSIDIES As shown in Table Ii operating subsidies increased rapidly from 1970 to 1980 for all f o u r of the case study systems. From only $4.9 million for all systems combined in 1970, the subsidy had grown to $283.1 million by 1980; a 58-fold increase. Even in constant, inflation-adjusted dollars, the subsidy increase was a dramatic 29-fold. The growth in subsidies accelerated over the decade for Chicago and Portland, the two public systems. The subsidy increase in Chicago between 1975 and 1980 was four times as large as the increase between 1970 and 1975 ($154 million vs. $41 million), and in Portland, the increase during the last half of the decade was twice as large as during the first half ($20 million vs. $9 million). In contrast, subsidy increases over the two periods were roughly the same for the two private systems. Subsidy per bus hour in 1980 was almost twice as large in Chicago and Portland as in New Jersey and New Orleans (see Table I). Moreover, subsidies covered a much higher percentage of costs in the two public systems. Although Portland had the largest subsidy per passenger (59), and New Orleans the smallest (22), Chicago and New Jersey were the same (36) - in spite of Chicago's high per-hour costs - presumably due to relatively high'toad-factors on the CTA and long trip distances in New Jersey. Overall, then, most of these four indices of subsidy indicate that the two public systems are much more subsidized than the private systems, and that their subsidy growth over the decade has also been greatest, with Chicago being particularly notable in this respect. The other two statistics in Table I are the subsidy split by level of government and the percentage of state and local funding that is derived from earmarked transit taxes. Probably the most striking trend is the increase in Federal funding, although the timing of its growth varied among the systems, and the percentage of Federal funding in 1980 ranges widely. In 1980, Chicago and Portland relied more on local tax financing than New Jersey and New Orleans, where state

328 subsidies were more significant. Moreover, as noted previously, dedicated transit taxes now provide almost all of the non-Federal subsidy funds in the two public systems, whereas in New Jersey and New Orleans, none of the tax financing is earmarked for transit. Finally, it is noteworthy that the use of cross-subsidies has declined sharply. In New Orleans, utility cross-subsidies financed all of the deficit in 1970 and 1975, but none in 1980. Likewise, crosssubsidies covered 89% of TNJ's deficit in 1970, 45% in 1975, and 0% in 1980. TRENDS IN COSTS AND PRODUCTIVITY Differences in subsidy levels and financing arrangements are accompanied by differences in cost and productivity indices for the four systems. As shown in Table II, Chicago had the highest per-hour operating costs during the entire period, whereas New Orleans had the lowest. Partly due to increasingly rapid inflation, all the systems experienced greater growth in operating costs from 1975 to 1980 than from 1970 to 1975, but it is noteworthy that increases in per-hour costs during the latter half of the decade were much larger for Chicago and Portland than for New Jersey and New Orleans. This is more clearly shown in Table III, which displays average annual rates of change in per-unit operating costs adjusted for inflation. F r o m 1975 to 1980, the rate of per-hour cost growth in the two highly-subsidized public systems was twice that in the two private systems. Moreover, the rate of growth in inflation-adjusted operating costs actually fell significantly over the decade for the private systems, whereas it rose dramatically for the two public systems. Although roughly the same pattern of differences applies to cost changes on a per-mile basis, Chicago and New Orleans fare worse because the average bus speeds in those cities are much lower than in New Jersey or Portland. Indeed, average speed actually declined over the decade in Chicago (see Tables II and III). Changes in operating cost per passenger differ from changes in operating cost per bus hour, primarily due to varying load factors and trip distances. For example, high load factors in Chicago offset high per-hour costs, so that increases in per-passenger costs were only slightly larger in Chicago than in New Orleans (see Table II). Moreover, the r a t e of growth in per-passenger cost was much higher in New Orleans (see Table III). The relatively large increases in per-passenger costs in Portland and New Jersey are probably attributable to the increasing proportion of service provided to the low-density, suburban portions of their service areas. The higher level of cost per passenger in Portland and New Jersey throughout the decade also reflects the larger proportion of suburban service and the longer trip lengths and lower load factors that result. To some extent, differences in overall costs can be explained by differences in wage rates and labor productivity. For example, the hourly wage rate for bus drivers in Chicago in 1980 was almost $5 higher than in New Orleans ($11.87 vs.

329 TABLE II Trends in Per-Unit Operating Costs and Productivity, 1970-1980 Statistic/bus system Absolute level 1970 Cost per bus hour ($) Chicago Portland New Jersey New Orleans Cost per bus mile ($) Chicago Portland New Jersey New Orleans Cost per passenger ($) Chicago Portland New Jersey New Orleans Bus hours per employee Chicago Portland New Jersey New Orleans 14.66 10.35 11.83 9.93 1975 21.62 17.43 20.56 17.321 1980 42.00 33.88 33.22 29.08 Change 1 9 7 0 - 1 9 7 5 1975-1980 1970-1980 +6.96 +7.08 +8.73 +7.39 +20.38 +16.45 +12.66 +11.76 +27.34 +23.53 +21.39 +19.15

1.25 0.76 0.91 1.00

2.07 1.18 1.44 1.701

4.19 2.44 2.17 2.82

+0.82 +0.42 +0.53 +0.70

+2.12 +1.26 +0.73 +1.12

+2.94 +1.68 +1.26 +1.82

0.24 0.36 0.39 0.11

0.36 0.69 0.77 0.241

0.65 1.03 1.01 0.49

+0.12 +0.33 +0.38 +0.13

+0.29 +0.34 +0.24 +0.25

+0.41 +0.67 +0.62 +0.38

930 1350 1200 1190

930 1030 1100 1150J

880 1040 980 1120

0 -320 -100 -40

-50 +10 -120 -30

-50 -310 -220 -70

Average speed (bus miles/bus hour) Chicago 11.7 Portland 13.5 New Jersey 13.0 New Orleans 9.9

10.4 14.8 14.2 10.2~

10.0 13.9 15.3 10.3

1.3 +1.3 +1.2 +0.3

-0.4 -0.9 +1.1 +0.1

-1.7 +0.4 +2.3 +0.4

I The New Orleans figures for 1975 were adjusted to compensate for the effect of a strike.

$7.08), while bus hours per employee (a measure of productivity) were 21% lower in C h i c a g o than in New Orleans (880 vs. 1120) (see Tables II and IV). W a g e differences were m u c h smaller in 1970, with only a $1.28 gap between the two cities. The extent of h o u r l y wage increases is highlighted by the inflation-adjusted statistics at the b o t t o m o f Table IV. T h e y indicate that the h o u r l y wage of bus drivers increased faster than inflation in all f o u r case study systems during b o t h halves of the decade. In New Orleans, however, the increases were just barely faster t h a n inflation, whereas in Chicago, they considerably exceeded inflation.

330 TABLE III Average Annual Growth Rates of Per-Unit Operating Costs, in Inflation-Adjusted, Constant Dollars, 1970-1980 Statistic/bus system Percent annual growth rate during each period 1970-1975 Cost per bus hour Chicago Portland New Jersey New Orleans Cost per bus mile Chicago Portland New Jersey New Orleans Cost per passenger Chicago Portland New Jersey New Orleans 1.45 4.17 4.83 4.91 1975-1980 6.58 6.59 2.73 3.52 1970-1980 3.98 5.38 3.77 4.21

3.82 2.49 2.88 4.37

7.46 7.92 1.30 3.27

5.63 5.17 2.09 3.82

1.79 6.90 7.54 9.71

5.03 1.11 -1.47 7.65

3.40 3.97 2.94 8.67

Note: The GNP Deflator was used to calculate each year's cost indices in constant, 1970 dollars. These inflation-adjusted figures were then used to compute the growth rates shown in the table. Indeed, the real h o u r l y wage increase (in constant 1970 dollars) in Chicago was nine times greater t h a n in New Orleans. Real wage increases in P o r t l a n d and New Jersey were a b o u t half those in Chicago but r o u g h l y four times larger t h a n in New Orleans. It is n o t e w o r t h y that transit h o u r l y wages have generally increased faster t h a n m a n u f a c t u r i n g wages in private industry in the same areas (see T a b l e IV). Only in New Orleans did bus driver wages fall short of private m a n u f a c t u r i n g wages - a l t h o u g h only slightly - b o t h in terms of their level in 1980 and in the a m o u n t of increase over the decade. I n Chicago, by contrast, transit wage increases were twice as large as t h o s e for m a n u f a c t u r i n g workers, and in 1980, bus drivers earned m o r e than $4 per h o u r m o r e ($11.87 vs. $7.50). Driver wages and wage increases were also higher t h a n those for m a n u f a c t u r i n g workers in P o r t l a n d and New Jersey, but not by as m u c h as in Chicago. T h e same pattern of differences emerges if c o m p a r i s o n s are m a d e between transit and m a n u f a c t u r i n g workers in terms of inflation-adjusted wages (see b o t t o m of Table IV). R a p i d increases in transit wages came about, despite declining labor pro-

331 TABLE IV Comparison of Transit Wages with Wages in Private Industry, 1970-1980 Statistic/bus system Absolute level 1970
Wages in current dollars

Change 1980 1970-1975 1975-1980 1970-1980

1975

Hourly wage rate for bus drivers ($) Chicago Portland New Jersey New Orleans Average hourly wage in manufacturing ($) Chicago Portland New Jersey New Orleans

4.78 4.00 4.00 3.50

7.50 5.90 5.85 4.85

11.87 9.10 9.00 7.08

+2.72 +1.90 +1.85 +1,35

+4.37 +3.20 +3.15 +2.23

+7.09 +5.10 +5.00 +3.58

3.93 4.00 3.69 3.52

5.38 5.49 4.96 4.67

7.50 8.38 7.40 7.59

+1.45 + 1.49 +1.27 +1.15

+2.12 +2.89 +2.44 +2.92

+3.57 +4.38 +3.71 +4.07

Wages in inflation-adjusted, constant 1970 dollars

Hourly wage rate for bus drivers ($) Chicago Portland New Jersey New Orleans Average hourly wage in manufacturing ($) Chicago Portland New Jersey New Orleans

4.78 4.00 4.00 3.50

5.46 4.30 4.26 3.53

6.12 4.69 4.64 3.65

+0.68 +0.30 +0.26 +0.03

+0.66 +0.39 +0.38 +0.12

+1.34 +0.69 +0.64 +0.15

3.93 4.00 3.69 3.52

3.92 4.00 3.61 3.40

3.87 4.32 3.82 3.91

0.01 0.00 0.08 -0.12

-0.05 +0.32 +0.21 +0.51

-0.06 +0.32 +0.13 +0.39

Source: Transit data collected directly from transit systems; hourly manufacturing wages in each area collected from U.S. Department of Labor,:Bureau of Labor Statistics (1971, 1976, 1981). Note: The GN P Deflator was used to convert current dollars to constant 1970 dollars. It was derived from U.S. Department of Commerce, Bureau of the Census (1981, p. 460).

d u c t i v i t y , o n all f o u r t r a n s i t s y s t e m s . F r o m 1970 t o 1980, b u s h o u r s p e r e m p l o y e e fell b y 5 % in C h i c a g o , 6 % in N e w O r l e a n s , 18% i n N e w J e r s e y , a n d 2 3 % in P o r t l a n d . I t is n o t c l e a r w h y l a b o r p r o d u c t i v i t y d e c l i n e d m o r e f o r t h e t r a n s i t s y s t e m s w i t h l o w e r - d e n s i t y s e r v i c e a r e a s . T h e d i f f e r e n c e is p a r t i c u l a r l y p u z z l i n g b e c a u s e b u s h o u r s p e r : e m p l o y e e - u n l i k e b u s miles p e r e m p l o y e e - s h o u l d n o t b e

332
TABLE V Trends in Operating Labor Costs, 1975-1980 Statistic/bus system 1975 1980 Change, 1975-1980 In current dollars In constant dollars 2

(%)
Average annual salary per employee ($) Chicago Portland New Jersey New Orleans Average annual fringe benefits per employee ($) Chicago Portland New Jersey New Orleans Total annual labor cost per employee ($) Chicago Portland New Jersey New Orleans 14 228 13 120 15 893 11 125 j 21 825 18 898 20 505 13 900 +53 +44 +29 +25

(%)
+9 +2 -9 -12

3 505 1 082 2 464 2 4921

10 707 7 116 7 936 5 550

+205 +558 +222 +123

+116 +366 + 128 +58

17 734 14 202 !8 357 13 6171

32 532 26 014 28 441 19 450

+83 +83 +55 +43

+30 +30 +10 +1

Fringe benefits as percent of total labor cost Chicago 19.8 Portland 7.6 New Jersey 13.4 New Orleans 22.41 Top hourly wage of transit operators ($) Chicago Portland New Jersey New Orleans

32.9 27.4 27.9 28.5

+66 +261 +108 +6

+66 +261 +108 +6

7.50 5.90 5.85 4.85

11.87 9.10 9.00 7.08

+58 +54 +54 +46

+12 +9 +9 +3

I The 1975 figures for New Orleans were adjusted to compensate for the effect of a strike. 2 Calculated by deflating the 1980 totals with the GNP Deflator and computing the percentage change between the 1975 and 1980 figures, with both expressed in constant 1975 dollars.

affected by differences in congestion and travel speed. The combination of rising wages and falling productivity has unquestionably exacerbated transit's financial crisis. Moreover, increases in the top hourly wage almost certainly understate the full extent of labor cost growth. As shown

333 in Table V, fringe benefits for transit workers increased at least four times as fast as direct wages in the four systems studied. Data on fringe benefits were not available for 1970, but between 1975 and 1980, fringe benefits per employee more than tripled in Chicago and New Jersey and increased 7-fold in Portland. The smallest increase was in New Orleans, where benefits doubled. Even in constant dollars, these increases were large, exceeding inflation by 116% in Chicago, 128% in New Jersey, 366% in Portland, and 58% in New Orleans. By 1980, annual fringe benefits per employee ranged from $10 707 in Chicago to $5550 in New Orleans. As a consequence of rapid fringe-benefit growth, the percentage of labor costs consumed by fringe benefits rose substantially in each of the four systems - to almost a third. Including fringe-benefit costs, the total annual labor cost per employee in 1980 ranged from $32 532 in Chicago to $19 450 in New Orleans. In current dollars, total labor cost per employee increased from 1970 to 1980 by 83% in Chicago and Portland, by 55% in New Jersey, and by 43% in New Orleans. In constant dollars, the increases were still larger in the two public systems- 30% compared to only 10% in New Jersey and 1% in New Orleans. Thus, direct salaries as well as fringe benefits have increased much faster in the two public systems than in the two private systems. At least one explanation for these differences is in degree of union power. For example, the transit union in New Orleans is much weaker than in Chicago. Not only is there less union influence in general in the South, but because New Orleans is a less transit-oriented city, the political and economic costs of a strike are less than in Chicago. In addition, the privately-run New Orleans system is probably in a better position to bargain firmly with labor and is less likely to succumb to the concerns of local politicians with the untoward consequences of strikes. The labor cost and productivity problems identified for the four case study systems are by no means unique. At the nationwide, aggregate level, transit worker productivity fell by 19% from 1965 to 1980 - from an average of 13 800 vehicle miles per employee to 11 200 vehicle miles per employee (American Public Transit Association, 1981a, pp. 58, 66). Because average bus speeds increased, the fall in productivity would have been even greater if it had been calculated in terms of vehicle hours per employee (Sale and Green, 1979). In contrast, the value (in constant dollars) of output per employee hour in the private, non-farm sector of the U.S. economy increased by 23% during the same period. Despite their absolute as well as relative decline in productivity, transit workers benefited from wage increases that were larger than those for private sector workers (U.S. Department of Commerce, Bureau of the Census, 1981, p. 400; U.S. Department of Commerce, Bureau of Economic Analysis, 1971, 1981). Transit hourly wages also increased faster than inflation during most of the period. Only since 1978 have they lagged behind inflation - but only slightly, and not by as much as private sector wages (U.S. Department of Commerce,

334 Bureau of the Census, 1981, p. 459; U.S. House of Representatives, 1982). As in Chicago, New Jersey, Portland, and New Orleans, moreover, transit wage increases understate the extent of labor cost escalation in other systems also. In a study of four large transit systems, Ortner and Wachs (1979), for example, found that fringe benefits for workers constituted the fastest-growing component of transit operating costs. Even when calculated on the basis o f inflation-adjusted, constant dollars, the increases in fringe benefit costs from 1960 to 1975 ranged from 400 to 1000%. Consequently, whereas fringe benefits accounted for only 3-4% of operating budgets in 1960, they accounted for 10-15% in 1975. Nationwide, aggregate data indicate that fringe benefit costs have continued to increase since 1975. In constant dollars, transit fringe benefits increased by 49% between 1975 and 1980, andtheir proportion of total operating costs grew from 16 to 20% (American Public Transit Association, 1981 a, pp. 47, 66). Fringe benefits are an especially significant cost problem in large systems. In 1980, fringes accounted for 29%. of operating costs in systems with a thousand or more vehicles, compared to an average of 16% for systems with fewer than a hundred vehicles (U.S. House of Representatives, 1982). Furthermore, a study by Peat et al. (1980) indicated that rising fringe benefit levels may have encouraged lower worker productivity. For example, they found that from 1974 to 1978, as sick-pay benefits per employee rose by 54%, the rate of absenteeism due to alleged illness rose by 24%. Even more striking, as workers' compensation benefits per employee increased by 238%, the rate of absenteeism due to alleged injury increased by 149%.-By 1978, unscheduled absenteeism among transit employees averaged 29 days per employee per year, costing U.S. transit systems $187 million (Peat et al., 1980). This rate of absenteeism was 50-200% higher than in private industrial sectors of the economy (U.S. House of Representatives, 1982). More generous fringe benefits, therefore, 'not only increase transit operating costs directly, but they may also increase costs indirectly by encouraging more frequent absenteeism and lower productivity. If subsidies provoke increases in fringe benefits, this would be yet another source of their adverse impact on costs. TRENDS IN RIDERSHIP, SERVICE LEVELS AND FARES The preceding discussion suggests that the rapid increases in subsidy in Chicago and Portland - togethe r with transit tax earmarking and public ownership - may have been responsible for the much faster cost-escalation in these two systems. Differences in subsidy levels and ownership have probably affected service levels, fares and ridership also. As shown in Table VI, Portland expanded hours of service by 143% over the decade, whereas there was virtually no change in Chicago, and service hours fell by 7% in New Orleans and by 39% in New Jersey. Not only were service cutbacks greatest on the private systems, but

335 TABLE VI Trends in Ridership, Service Level and Fares, 1970-1980 Statistic/bus system Absolute level 1970 Total ridership (millions) Chicago Portland New Jersey New Orleans Total bus hours (millions) Chicago Portland New Jersey New Orleans Total bus miles (millions) Chicago Portland New Jersey New Orleans Average fare (S/passenger) Chicago Portland New Jersey New Orleans Service area population (thousands) Chicago Portland New Jersey New Orleans 503 18.2 193 115 1975 503 28.4 119 94.71 1980 538 50.7 114 76.6 Change (%) 1970-1975 1975-1980 +0.0 +56.0 -38.3 -17.7 +7.0 +78..5 -4.2 -19.1 1970-1980 +7.0 +178.6 -40.9 -33.4

8.39 0.63 6.43 1.39

8.48 1.12 4.43 1.311

8.35 1.54 3.93 1.29

+1.1 +76.7 -31.1 -5.8

-1,5 +37.5 -11.3 -1~5

-0.4 +142.9 -38.9 -7.2

98.3 8.58 85.5 13.8

88.5 16.6 63.1 13.31

83.7 21.4 60.0 13.3

-I0.0 +93.5 -26.2 -3.6

-5.4 +28.9 -4.9 0

-14.9 +149.4 -29.8 -3.6

0.27 0.30 0.39 0.09

0.28 0.26 0.57 0.161

0.29 +3.7 0.32 -13.3 0.74 +46.2 0.27 +77.8

+3.6 +23.1 +29.8 +68.8

+7.4 +6.7 +89.7 +200.0

3367 879 4476 593

3099 965 4449 560

3005 1051 4377 557

-8.0 +9.8 =0.6 -5.6

-3.0 +8.9 -1.6 -0.5

-10.8 +19.6 -2.2 -6.1

J The New Orleans figures for 1975 were adjusted to compensate for the effect of a strike.

fare increases were also m u c h larger. F r o m 1970 to 1980, average fares in N e w Orleans and N e w Jersey rose by 200% a n d 90%, respectively. In contrast, average fares rose by only 7% in C h i c a g o and P o r t l a n d . It seems clear, therefore, that subsidies d o not simply inflate costs. Rather, they also permit transit systems to expand, or at least maintain, service levels and to hold d o w n fares. Ridership trends for the f o u r systems reflect differences in fare and service policy. The n u m b e r of passengers in P o r t l a n d increased by 179%, and in Chicago

336 by 7%. By comparison, patronage fell by 33% in New Orleans, and by 41% in New Jersey. Population changes obviously have had some effect on ridership, but they do not appear to be nearly as important as transit policies. The 20% population growth in Portland's service area, for example, probably added to the impact of service improvements and low fares, whereas in Chicago, population decline probably offset some of the favorable impacts of stabilizing service levels and fares. Population losses in New Orleans and in New Jersey's urbanized areas probably exacerbated the impacts of retrenchment by the two private systems. POSSIBLE EXPLANATIONS FOR VARIATIONS Differences among the four case study systems invite a number of generalizations about the impacts of public ownership and subsidies. For example, public ownership, rapid subsidy growth, and earmarked, regionwide transit taxation appear to be associated with large cost increases, small fare increases, and service and ridership growth. Conversely, private ownership, slow subsidy growth, and the unavailability of dedicated transit taxes seem to produce the reverse effects. It may be that privately-owned systems are more sensitive than public systems to market signals, and that they therefore set fare and service levels more in accordance with supply and demand. Likewise, private systems may be more likely to focus on the balance sheet, and thus to cover a relatively large proportion of costs from fare revenues. In contrast, public systems probably have a greater interest in the social and environmental benefits of transit. Instead of minimizing deficits, public systems are more likely to adopt the goal of maximizing ridership. Moreover, public systems may have less flexibility in bargaining with labor unions, perhaps due to more political constraints. For example, the local political costs of a strike may be prohibitively high for a public system, which may therefore be willing to incur excessive wage and fringe benefit settlementS, generous overtime provisions, and inefficient work rules in order to avert a shutdown. Similarly, public systems are probably more sensitive to the political consequences of fare and service policies. Subsidies would also be expected to influence transit operations and finances. Rapid increases in Federal and state subsidies to transit have reduced the proportion of transit costs that are directly relevant to local decision-makers. This probably weakens the incentive for cost control and encourages low fares and service expansion. Federal subsidies may have had a particularly detrimental impact on Costs. Not only have Federal matching rates been high (80-85% for capital; up to 50% for operating), but Federal funds are stipulated on compliance with numerous regulations - including labor rules, accessibility requirements, environmental standards, social impact assessments, and requirements to pur-

337 chase American-built equipment - all of which directly contribute to cost escalation. The specific type of tax financing arrangement at the state and local level may also have an important effect. Over the decade of the 1970s, there has been a marked trend toward earmarking taxes for transit support (Pucher, 1982). By providing a d e p e n d a b l e - and usually growing - source of funding, such earmarking has probably reduced the incentive for cost control while encouraging service expansion and low fares. Likewise, the specific type of tax relied on may be significant. Taxes differ in degree of revenue elasticity (how revenues grow with the economy), degree of visibility (how aware taxpayers are of tax burden), and spatial distribution (how rates vary among regions). It seems likely that transit systems relying on revenue-elastic, hidden taxes (such as sales taxes) would be less pressured to control deficits and costs than would systems depending on revenue-inelastic, highly visible taxes (such as the property tax). Finally, some regional financing arrangements require that transit subsidies be distributed among areas of a transit district in proportion to tax contributions. Most of these arrangements produce surplus funds in the suburbs and insufficient funds in central city areas, where most transit service is concentrated. This imbalance between needs and resources invites the provision of extremely unprofitable services in the suburbs to use up the available funds. Indeed, even if there is no legal requirement to spend transit funds where they are collected (as in the Chicago metropolitan area), most regional transit districts are compelled to offer some minimum level of service to the suburbs - no matter how unprofitable or underutilized - as a quid pro quo for suburban tax support for transit. Thus, regionwide taxing arrangements may lead to greater cost escalation and deficit growth due to unwarranted service expansion. Like public ownership, subsidies probably affect transit through their impacts on labor costs also. For example, rapid subsidy growth, transit tax dedication, state and especially Federal subsidies (and regulations), and the consequent politicization of transit have surely increased the power of labor unions. Differences in union power probably explain much of the variation among transit systems in wage and fringe benefit levels, the use of part-time workers to handle peak-hour loads, the level of premium payments for split shifts, the link between wage settlements and improvements in labor productivity, and the extent to which workers can be penalized or fired for unacceptable performance. Because labor costs typically account for 70-80% of transit operating costs (American Public Transit Association, 1981 b), factors affecting labor costs can have great significance for the overall finances of the transit industry. Although the case studies were useful in exploring possible explanations for differences in transit finances and operations, the evidence from four systems is obviously not sufficient to draw firm conclusions about the impacts of public ownership and subsidies. The results of five multiple regression studies are examined below to aid in this assessment.

338

Regression Analysis
Multivariate regression analysis is useful for examining the impacts of subsidies and public ownership because it can incorporate data from many systems and it can separate out the independent impacts of a variety of explanatory variables. Most initial econometric analysis of transit finances was aimed at assessing the extent of scale economies or diseconomies in bus operations (Lee and Steedman, 1970; Miller, 1970; Mohring, 1972; Nelson, 1972; Wabe and Coles, 1975). Recently, however, a number of studies have sought to determine the influence of public control and subsidies on mass transit. Five of these studies are reviewed below, with the intention of extracting evidence to compare with the case study analysis. In a time-series regression analysis of 40 U.S. transit systems from 1960 to 1970, Pashigian (1976) examined the impacts of both public ownership and public regulation. The main finding was that publicly-owned systems experienced larger cost increases over the decade than privately-owned systems. Because, in addition, passenger revenues rose less for public systems, they became increasingly unprofitable relative to privately-owned systems. Moreover, the longer the history of public ownership, the more unprofitable the operation. The impact of subsidies was not examined by Pashigian, probably because government aid only began to reach significant levels during the late 1960s. However, he did examine the impacts of regulation. As might be expected, less stringent regulation was associated with lower costs, higher revenues, and larger profits (or smaller losses). Finally, Pashigian estimated that publicly-owned transit systems were no more successful "than private systems at curtailing ridership declines or at stemming the rise in auto ownership and use during the 1960s. To investigate the impacts of subsidies on transit operations and finances, Bly et al. (1980) analyzed time-series data from 1965 to 1977 for 59 transit systems in seven countries and for national aggregate trends in 15 countries. They found that subsidies probably reduce productivity and increase wage levels and unit costs, but that they also enable fare reductions, service expansion, and ridership gains. In particular, it was estimated that for every additional 1% increase in the proportion of oPerating costs covered by subsidies, output per employee fell by 0.15-0.3%, employee wages increased by 0.2-0.3% (in excess of inflation), and per-unit operating costs increased by 0.4-0.6% (in excess of inflation). These adverse impacts of subsidies were offset by a 0.5-0.7% reduction in fares, a 0-0.3% increase in vehicle kilometers of service, and a 0.2-0.3% increase in ridership. Overall, therefore, slightly more than half of increased subsidy funding was translated into lower fares and better service, whereas slightly less than half was consumed by per-unit cost increases in excess of inflation.

339 Bly et al. (1980) experimented with a number of different time-lag structures in their regressions in order to examine directions of causation. In general, they found that changes in productivity, costs, fares, service levels, and ridership tended to f o l l o w changes in subsidy. Although this of course does not prove that subsidies cause the observed changes in the other operating and financial variables, it does suggest that subsidies are not simply the response to these other changes. Using'time-series data from 35 U.S: bus systems from 1970 to 1979, Pucher (1982) analyzed the impacts of public ownership, public management, and subsidies. The systems were chosen to include a cross-section of transit system types, subsidy financing arrangements, cost and service levels, fare policies, geographic locations, and types of urban area. A number of regression equations were estimated. Probably the most important finding was that public ownership, public management, transit tax dedication, and high subsidy ratios were all associated with substantially larger increases in per-hour operating costs from 1970 to 1979. When controlling for other factors affecting operating costs, it was found that costs grew by 68 per hour more for publicly-owned systems than for privately-owned systems. Operating costs for publicly-managed systems grew by 33 per hour more than for systems with private management contracts. Furthermore, for every 10% more of a system's state and local funding derived from earmarked taxes, operating cost per hour rose by an additional 30. Controlling for other factors, therefore, a system with 80% of its funds dedicated would be expected to have had a cost increase that was $2.40 more than for a system with no dedicated funding. Finally, for every additional 10% of operating costs that was covered through subsidy instead of fares, cost per hour increased by 33 more over the decade. Coefficients were, of course, estimated for the control variables also, but they are not central to the hypotheses being examined here. Equations for service levels, fares, and per-rider subsidies were also calibrated. Public ownership was estimated to have encouraged smaller fare increases over the decade (8 less) and larger increases in subsidy per rider (5 more). Public management was estimated to have encouraged larger subsidies per rider (8 more) as well as service expansion. Tax earmarking evidently had a tendency to reduce fares, or at least to keep fare increases small. For every additional 10% of funding from dedicated sources, fares increased a penny less, offset by a penny increase in subsidy per rider. Fare reductions and service expansion encouraged increased ridership. This beneficial impact of subsidies and public control offset somewhat their adverse impact on costs. The fourth in this group of regression studies was conducted by Barnum and Gleason (1979). Based on a sample of 26 U.S. bus systems in 1975 and 29 systems in 1976, their equations generally do not provide evidence of statistically significant impacts of subsidies, public management, and public ownership either on wage rates or on employee productivity. The insignificant coefficient

340 estimates may have resulted from the small sample size. Moreover, the largest increases in transit subsidies in the U.S. came after the period of the Barnum and Gleason data. Federal operating subsidies, in particular, are not adequately reflected by the data reported by systems in 1975 and 1976. Thus, the full impacts of these subsidies are probably not captured by the regression estimates. There is yet another reason to view the Barnum and Gleason results with caution. The estimated cost and productivity effects of some variables change dramatically with alternative specifications of other variables in the same equations. Moreover, some of the coefficient estimates seem inconsistent. For example, an additional dollar of Federal operating subsidY per bus hour is associated with a i2~ increase in the hourly wage of drivers, but with a 29~ decrease in the hourly pay of other transit employees. Similarly, Federal operating subsidies are associated with increased productivity of drivers, but with decreased productivity by other employees. Estimated effects of other subsidy variables - and of management and ownership variables - also fluctuate depending on the particular employee group, the form of compensation (base wage rate, premium payments, or fringe benefits), and the particular equation specification being used. No explanation is provided for these anomalous results. Due to the few significant impacts they estimate for subsidies, Barnum and Gleason conclude that only 11% of subsidy funds has been consumed by decreased productivity and increased per-unit costs. The remaining 89% is estimated to have gone toward lower fares and service improvements, leading to two additional transit trips for every dollar of additional subsidy. These results seem overly optimistic, but they certainly support the view that subsidies have generated real benefits for riders and not simply higher costs. The last of the regression studies to be examined here was recently completed by Pucher et al. (1983). They relied on a pooled cross-section database of 77 U.S. bus systems in 1979 and 135 U.S. bus systems in 1980. The key equation of the study - a regression for per-hour operating costs - is shown in Table VII. The coefficient estimates for the three subsidy variables are all statistically significant at the 0.0001 level, and the management coefficient is significant at the 0.0021 level. The coefficients indicate that, after controlling for other factors affecting costs, an additional dollar of Federal operating subsidy per hour was associated with operating costs that were 62~ per hour higher. In contrast, an add.itional dollar of state operating subsidy was associated with only a 34~ increase in operating costs, suggesting t h a t state subsidies may be less cost-inflationary than Federal subsidies. Earmarking taxes for transit also appears to have an adverse impact on costs. Bus systems with more than half of their state and local operating subsidies dedicated for transit had operating costs that were $2.38 per hour higher than for systems with little or no dedicated funds.

341 TABLE Vll Multiple Regression Analysis of Operating Costs per Bus Hour Explanatory variable Labor productivity (bus hours per employee)1,2 Base hourly wage of bus drivers ($)2 Average age of bus fleet (years) Number of buses in fleet (natural logarithm) Federal operating subsidy per bus hour ($) State operating subsidy per bus hour ($) Dedicated state and local subsidy (0,1)s Private contract management (0,1)4 Sample year (0,1)5 Intercept Overall equation statistics R 2 ----0.77 F-statistic ----76.57 Source: Pucher et al., 1983, Table 9. Note: The sample used for this regression comprised 77 U.S. transit systems in 1979 and 135 U.S. transit systems in 1980. For details on sample characteristics and methodology, see Pucher et al., 1983. 1 Thousands of bus hours of service per full-time equivalent transit employee. 2 To avoid multicollinearity, the productivity and wage variables were adjusted to remove the effects of the other explanatory variables. 3 Dummy variable (=1 if earmarked taxes account for 50% or more of state and local operating subsidy; ---0 otherwise). 4 Dummy variable (=1 if private management; =0 if public management). 5 Dummy variable (=1 if sample year 1980; =0 if 1979). In contrast, private c o n t r a c t m a n a g e m e n t of transit systems was associated with significantly lower o p e r a t i n g costs - $1.72 per h o u r lower t h a n systems that were publicly managed. A variable for public ownership was not included in the m o d e l because, by 1980, almost the entire transit industry was publicly owned. Only 7% of the nation's service was provided by privatelyo w n e d systems ( A m e r i c a n Public Transit Association, 1981a, p. 43), a n d there were t o o few cases to enable reliable coefficients to be estimated for the effect of ownership. Separate equations were also estimated for h o u r l y w a g e rates and p r o d u c t i v i t y (not presented here). Subsidies were f o u n d to be associated with significantly higher wages and significantly lower productivity. Indeed, these equations were used to t r a n s f o r m the wage and productivity variables to r e m o v e f r o m t h e m the effects of subsidies before t h e y were e n t e r e d in the cost Coefficient 15.065 1.896 0.062 3.675 0.619 0.338 2.377 -1.722 3.068 0.553 t-statistic -11.29 5.78 0.74 17.06 5.16 4.55 4.08 -3.12 5.50 0.35 Significance level 0.0001 0.0001 0.4575 0.0001 0.0001 0.0001 0.0001 0.0021 0.0001 0.7270

Std. Dev. = 3.81

n = 212

342 equation reported in Table VII. Otherwise, obvious problems of multicollinearity would have resulted (for details of the procedure, see Pucher et al., 1983). Of course, neither the results of the five regression studies nor the trends observed in the four case studies are sufficient to prove beyond doubt the nature and extent of the impacts of subsidies and public control. In particular, empirical evidence of this sort is incapable of establishing by itself the direction of causation. Nevertheless, the case studies and regressions certainly support the theory that subsidies have had significant impacts on transit operations and finances. In the light of the available evidence, it would be difficult to argue the contrary.

Summary and Policy Implications

Although the findings of the case studies and the five regression studies rely on different datasets and different techniques, they support the same conclusions. Increased subsidies and public ownership have kept down fares and permitted service expansion, but have also encouraged wasteful cOSt escalation. Thus, transit riders unquestionably have benefited from public takeovers of transit systems and burgeoning subsidies, but not nearly as much as they would have benefited if costs had not skyrocketed at the same time. Conversely, private systems with less generous subsidy funding have been relatively successful at holding down costs and maintaining high operating ratios, but these accomplishments have come at the price of substantial fare hikes and service cutbacks for transit riders.Thus, the case for or against public ownership and subsidization is not unambiguous. Is there any way [o revise the transit program to control costs while still providing the subsidy funding and public input necessary for improving service and maintaining reasonable fares? Do subsidies inevitably inflate costs, or is it the design of the current subsidy program that is responsible for the lack of cost control? As suggested by the case study and regression results, subsidies funded by higher government levels (especially Federal) and by taxes dedicated exclusively for transit probably encourage cost escalation more than other forms of subsidy. A shift back to financing transit from the general revenues of local governments would almost certainly strengthen incentives for cost control. Such a decentralization of fiscal responsibility would force local decision-makers to weigh more carefully the costs and benefits of alternative levels of transit service. Because most local governments are already facing tight budgets, however, it would probably be necessary to facilitate a devolution of the transit subsidy burden through increased general revenue-sharing from the

343 Federal government. This would also help offset the increased local burden of financing other Federal programs that the Reagan Administration seeks to move to the state and local level. An alternative to returning the transit subsidy burden to the local level would be to tie Federal and state subsidy levels explicitly to performance indicators, output levels or ridership. By penalizing inefficient systems and rewarding efficient ones, such an arrangement would at least reduce the incentive for unwarranted cost escalation. This would be a sharp contrast to the current situation, in which the greater the cost generated, the greater the subsidy received. Yet another option might be to shift from supplier-side subsidies to userside subsidies, together with deregulation of the urban transportation industry to promote greater competition. This would require dramatic institutional changes, however, which would probably hinder implementation. Although it is virtually certain that any government subsidy program will engender some degree of inefficiency, the productivity losses and cost escalation observed in the transit industry during the 1970s h a v e been egregious. They have vitiated the transit program by dissipating increased funding, and could conceivably lead to its ultimate demise by undermining political support. Clearly, the transit subsidy program must be improved if it is to survive. As suggested in the preceding discussion, there are a number of ways to overcome the shortcomings of the program and thus to achieve more of the benefits transit has to offer.

Acknowledgement
The preparation of this paper was supported by the U r b a n Mass Transportation Administration, U.S. Department of Transportation, Research Grant No. UMTA-NJ-11-0011: "Redesigning Federal Transit Subsidies to Increase the Effectiveness of the Transit Program".

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