Tag Archives: finance

Lessons for transit agency funding, finance, and governance – MBTA

It’s been a rough winter for transit in Boston. The agency’s general manager resigned; they’re buried in 90 inches of snow – it’s a natural disaster in slow-motion. All of those problems are piled on top of the MBTA’s structural deficiencies, outlined in this 2009 review of the agency’s finances. The review, led by former John Hancock CEO David D’Alessandro, paints a bleak picture.

Prior to 2000, the MBTA was backward-funding – sending a bill to the state to cover the organization’s annual operating deficit. A reform program sought to make the MBTA fiscally self-sufficient by dedicating a portion of the state’s sales tax revenue to the agency in exchange for a requirement that the MBTA balance their budget every year. This requirement to balance the budget every year would serve as an incentive for the MBTA to control costs and grow revenues.

Often, similar conversations emerge around WMATA, noting Metro’s lack of a dedicated funding source. However, the MBTA case study shows that dedicated funding alone isn’t a silver bullet. There are other elements to the MBTA’s structural deficit beyond funding.

The MBTA blueprint for self-sufficiency was based on several bad assumptions: The plan called for the MBTA to decrease operations costs by 2% a year. In actuality, they increased by an average of 5% per year. Fuel and energy costs account for a large portion of the shortfall as oil prices rose dramatically (and unexpectedly). Sales tax revenues were expected to grow at 3% per year, the actual growth averaged to 1% per year. The net impact, even with rising fare revenue, is a sea of red ink:

Cumulative impacts from the MBTA funding plan, showing large net negative impacts from the baseline.

Cumulative impacts from the MBTA funding plan, showing large net negative impacts from the baseline.

There are two different kinds of error here: one is a failure to account for uncertainty in the forecast. Sales tax revenue is strongly influenced by the larger economy; fuel and energy prices are similarly based on much larger and unpredictable energy markets. The size of the error also increases with time from the original plan. Error in the MBTA’s fuel cost assumptions gets larger with each successive year from FY01 to FY08 – beware the cone of uncertainty.

The second type of error stems from wishful thinking. While it’s nice to plan on reducing operations costs, and there’s value in budgeting accordingly in order to set a goal to do so, it’s not clear that the legislation had a clear idea for how the MBTA would reduce those costs. Another analysis from the MBTA shows binding arbitration between the MBTA and labor unions imposed substantial wage increases with no regard for the MBTA’s operating deficit. In that light, assuming the MBTA’s operating costs would decrease seems like wishful thinking at best.

The D’Alessandro review notes that the MBTA’s headcount is actually down, yet wages are up. The agency showed progress in reducing costs, but they “could not pare staff below the number needed to move hundreds of thousands of riders across hundreds of routes each workday.” Baumol’s Cost Disease in action – increasing costs without a corresponding increase in productivity.

To meet the requirement to balance their annual budget, the MBTA sought to lower their annual debt service payments by refinancing their debt to push the principal into the out years and lower near term payments. Much of this refinancing simply ‘papered over’ the agency’s structural deficit. Again, the faulty assumptions of the financing plan exacerbated that structural deficit.

The MBTA’s debt load is also a major issue, one that dates back well before the Forward Funding plan. As a part of a 1991 consent decree to get approval for Boston’s Big Dig, the courts required a broad array of transit expansion projects as “environmental mitigation.” The decree did not identify any funding for those projects. Now, the MBTA has a massive amount of debt, of which approximately 2/3rds is dedicated to prior obligations before the Forward Funding agreement or towards state-mandated expansion projects.

(It’s worth noting the decision-making priorities involved in the Big Dig – the massive tunnelling project was only approved because the transit mitigation projects, backed by transit advocates as a way to hitch their wagon to omnipresent highway funding – yet those projects were never fully funded and now play a large role in exacerbating the agency’s stability. Imagine a project that simply removed the Central Artery and ‘replaced’ it with the long-imagined North/South rail link instead; or where the response to the Big Dig proposal was focused on re-defining the project itself rather than just tacking on ‘mitigation’ transit expansion.)

D’Alessandro’s conclusion is stark: “A private sector firm faced with this mountain of red ink would likely fold or seek bankruptcy.”

Yet, at the same time, the MBTA is “too big to fail.” Transit provides a critical service for any large city’s economy. Given the subsidized nature of public transit in the US, any reform must involve the public sector.

Airlines provide an interesting point of comparison: While US airlines operate for-profit businesses, the nature of air transport is deeply intertwined with the public sector. However, US Airlines are private, for profit corporations. Unlike the MBTA, they can seek legal protections to restructure their business through bankruptcy – and every major airline has done precisely that over the last decade. Airlines used bankruptcy to reduce operations costs from long-term labor agreements. German transit agencies have achieved fiscal stability using similar tools.

Unfortunately, the simplified narrative in the wake of the T’s failure to function normally in the face of Boston’s record snowfall has been to set up a false dichotomy between transit system expansion and system maintenance. In spite of the Big Dig deal, the challenge isn’t between expansion vs. maintenance, but between the political governance and funding mechanisms and the technical requirements to operate and maintain the system.

This political challenge isn’t limited to transit. Highway spending is overwhelmingly focused on expanding the system, at the expense of maintaining the system we already have. Angie Schmidt at Streetsblog put it bluntly: More money for transportation won’t matter if we don’t change how that money is spent.

Development costs and housing affordability

Vancouver towers along False Creek. Photo by author.

Two competing narratives often emerge when talking about policy responses to housing costs. One asserts that lowering the costs of construction and development will allow those savings to be passed on to eventual users of the real estate; the other asserts that markets set prices, and lowering the cost of development would yield pure profit to developers who will charge what the market will bear. So, which is it? The Vancouver Sun has a series of articles on housing affordability in Vancouver, BC. One of these articles focuses on development impact fees(among other causes) and their role in affordability. The two basic narratives are on display:

“The significant cost premiums of building new homes in Vancouver, compared to Surrey, leads to two observable results,” said Anne McMullin, president and CEO of the Urban Development Institute. “Either the increased costs will inevitably be passed on to homebuyers or the viability of building new market housing will be suppressed. Regardless, the end game is a more unaffordable and less socially sustainable city.”

She says the most obvious way to address affordability is to look at the costs and supply of housing.

“Costs affect supply — if it’s too expensive to build, you’re going to limit the supply. But we still have the demand. There’s always going to be a demand — there are buyers who can afford it.”

But Brian Jackson, the City of Vancouver’s general manager of planning, says market demand drives the price of housing much more than the costs of development.

“If we took $1,000 off the cost of the CACs or we took $1,000 off the cost of the DCLs,” Jackson said, referring to two types of city development fees, “is the developer going to take $1,000 off the cost of selling the house? I don’t think they would – they’re going to get the highest price that they could.”

These two narratives aren’t necessarily at odds with one another. In the short run, a small decrease in development fees (thereby lowering the cost of development) wouldn’t likely lower costs. However, the total fee amounts per unit in Vancouver are substantial – on the order of $76,000 per unit, according to the Sun’s figures. That’s roughly equivalent to the cost of an underground parking space. If you were to remove the fees, would developers merely pocket the difference as extra profit? Recall research on the liberalization of parking space requirements in Los Angeles: removal of these requirements lowered the cost of development in Downtown LA, but the results were not merely additional profit for developers. Instead, the lower development costs allowed developers the flexibility to build for a wider variety of sub-markets and price points.

Instead of the high-cost regulations forcing them to build Cadillacs, lower costs allow them to build a wider variety of products to meet a wider range of price points. If the costs are too high, developers have little choice but to aim for the luxury submarkets.

Markets do indeed set prices; and in the short term, developers won’t necessarily lower their prices. However, the markets are deeper and more complex in the longer run and allowing flexibility to build to those submarkets will produce a wider range of products, not just catering to the luxury set. As that housing ages, it can filter to lower-priced submarkets. Filtering isn’t a set policy so much as it is a description of  how housing markets work.

Note that some of these Vancouver fees might only apply to units in re-zoned developments. However, that raises the question of if there is enough by-right development capacity not just within a city or political jurisdiction, but in areas with demand for market-rate development. Also note that in many places, by-right development is increasingly rare, subject to negotiation and incentives as a part of the approvals process. A profile of New York’s Amanda Burden in last year’s New York Times noted that “there really doesn’t seem to be any true as-of-right development anymore.”

Those development fees aren’t just collected for fun, however. They’re paying for something. However, as is the case with parking, is collecting these fees the best way to accomplish the goals? Over at Human Transit, Jarrett Walker notes some of the perverse incentives baked into development fees, and the unintended consequences therein. Jarrett cites this post from the Pembina Institute, looking at the often-perverse incentives packaged into these fees:

Developers continue to build in sprawling greenfields because it is often cheaper and easier than building developments in walkable, transit-oriented neighbourhoods. Lack of supply means homebuyers are priced out of these locations and are literally “driven” to the urban and suburban fringes, where long and stressful auto commutes are required — and this only leads to more congestion.

Building transit is only one half of the solution. Toronto also needs to make sure we get the right mix of development in the right places to support and use transit infrastructure. Perhaps this current process of examining revenue tools will create an opportunity to do so.

As noted previously, a great deal of development will follow the path of least resistance. These kinds of fees might provide an easy way to fund new infrastructure, but they also add to the overall cost of development. Other tools for capturing that value and channeling it to the needed projects might offer fewer unintended consequences. One such unintended consequence is to push development into outlying areas, or force development to only serve the luxury submarket.

Hacking the city

Times Square

Mammoth’s excellent series of posts covering any and all topics on The Infrastructural City recently touched on chapter 5 – Blocking All Lanes, the first of the book’s section on the fabric of this city of networked infrastructure.  Mammoth notes a couple of big themes from the chapter, each with profound implications for how cities are built and how they evolve.

The interesting fact that arises from the complexity of these co-evolved systems (and, as noted in Varnelis’s introduction to The Infrastructural City, from the primacy of individual property rights in L.A.’s political culture) is that, “as the possibilities for adding new highways — or even lanes — dwindle in many cities, most new progress is made at the level of code”.  This shift which the authors identify is a part of a systemic shift in the methodology of urbanism, from plan to hack, that we’ve been fascinated with for some time now.  In a mature infrastructural ecology, like Los Angeles, the city has developed such a persistent and ossified physical form that, barring a radical shift in the city’s political culture, designing infrastructure becomes more a task of re-configuration and re-use than a task of construction.

The idea is simple – big moves, such as new highways, new subways, and other massive infrastructure investments are much harder in a developed city than in a greenfield site.  I’d also argue that such challenges are not solely physical or political, but also financial (see previous discussions of the limitations of nostalgia for private-sector transit funding).

Mammoth continues:

Initially, this may seem an extraordinarily frustrating condition for urbanists, who have of late been so interested in the possibility that the design of infrastructures might offer an alternative instrument for shaping cities, combining the intentionality and vision of the plan with the vibrancy and resilience characteristic of emergent growth.  Infrastructures, we’ve noticed, can be a stable element which mold and manipulate the various flowing processes of urbanization which produce cities: economic exchange, human migration, traffic patterns, informational flows, property values, hydrologies, waste streams, commutes, even wildlife ecologies.  Historically, governments and private developers have sought to harness this potential, whether by profiting from the sale of land along a new infrastructure or by supplementing existing infrastructure to reinforce growth and density in a locale (the initial growth of Los Angeles along privately-owned streetcar lines being one of the classic examples of the former sort of infrastructural generation).  But if, as the authors of “Blocking All Lanes” suggest (and, I think it is fair to say, The Infrastructural City suggests as a whole), opportunities to plan and design new infrastructural frameworks are likely to be extremely rare in mature infrastructural ecologies, should urbanists abandon their interest in infrastructure as an instrument for shaping the city?

There’s no doubt about urbanists and their interests in large scale infrastructural investments (see the various transit fantasy maps at Greater Greater Washington –  spilling out to reader submissions, for example – and even my own contribution here).  Many of these ideas are financial non-starters, but the overall ideal is not something to be completely dropped.  Instead, the focus should be on encouraging those infrastructures to evolve within this urban context, while also continuing to use the useful parts of the old infrastructure plans and ideas of capturing increased land value, etc.  Mammoth seems to agree:

I don’t think so […]

First, the rarity and scarcity of those opportunities does not mean that they should not be seized when they are realistically presented.  And when opportunities for the construction of new infrastructures within a mature city do occur, they are likely to appear in hack-like guises: concretely, like Atlanta’s Beltline, which utilizes a defunct rail right-of-way as the foundation for a new commuter rail line1, or Orange County’s Groundwater Replenishment System, which redirects the flow of cleaned wastewater in Orange County from ocean to aquifer; speculatively, like Velo-City’s Toronto bicycle metro (which, as it happens, has a less-speculative southern Californian counterpart, the Backbone Bikeway Network).  Go over, go under, re-deploy, tag along, piggyback.

[T]he key realization is that successful shifts in urban form will only happen when they are paired with successful alterations of the infrastructures, systems, and flows that generate those forms.  Attempts to construct a new vision for the city that fail to grapple with the underlying systems that, like traffic, constitute and produce the city will ultimately either be ineffective or collapse catastrophically.

Instead of using the hack to replace the era of infrastructure, hacking instead is the method to implement these infrastructural changes.  In the comments, faslanyc likens the hack (as opposed to the plan) to the tactic (as opposed to the strategy) – tactical urbanism:

by the way, i like your reading of this chapter and think that it is basically what the nyc dot is doing with a lot of their bike lane/pedestrian plaza initiatives. A while ago I likened it to tactics and strategies, certainly they are not mutually exclusive, though in practice they aren’t usually working in concert.

Reconfiguring extant street space for new and re-prioritized uses is a good example, with bike lanes and NYC’s ‘temporary’ pedestrian plazas representing the lower end of the spectrum in terms of investment.  I’d argue that streetcars in DC (when compared against the costs for new Metro lines) represent another level of investment.  Even large scale investments, such as the Federal stimulus money for High Speed Rail involves a hack approach – key investments in grade separation, signaling, and other small moves to offer incremental improvements rather than wholesale development of TGV-style trains from the onset.  Federal grant programs such as TIGER tend to focus on these kinds of investments, as well.

Large scale investments are still crucial to our urban systems, but as Mammoth notes, opportunities to capitalize on them will be both rare and scarce.

Value capture & private transit financing

NoMA Development. CC image from bankbryan.

NoMA Development. CC image from bankbryan.

Jarrett Walker’s weekend links post directed me to this article in The Atlantic by Chris Leinberger, asking if we might return to the days when private interests invested in transit as a means to facilitate real estate development.  Our own urban history is one of linked transportation and land use planning, accomplished through the market and real estate development:

How did the country afford that extensive rail system? Real-estate developers, sometimes aided by electric utilities, not only built the systems but paid rent to the cities for the rights-of-way.

These developers included Henry Huntington, who built the Pacific Electric in Los Angeles; Minnesota’s Thomas Lowry, who built Twin City Rapid Transit; and Senator Francis Newlands from Nevada, who built Washington, D.C.’s Rock Creek Railway up Connecticut Avenue from Dupont Circle in the 1890s. When Newlands got into the rail-transit business, he wasn’t drawn by the profit potential of streetcars. He was a real-estate developer, and he owned 1,700 acres between Dupont Circle and suburban Chevy Chase in Maryland, land served by his streetcar line. The Rock Creek Railway did not make any money, but it was essential to attracting buyers to Newlands’s housing developments. In essence, Newlands subsidized the railway with the profits from his land development. He and other developers of the time understood that transportation drives development—and that development has to subsidize transportation.

The result of these transportation and real estate investments were the now ubiquitous streetcar suburbs.  Leinberger proposes to return to that model, where the value added to a given area of land from transit can be re-captured through some means and invested in the transportation network.

When the streetcar/real estate barons controlled the entire system, such value capture was merely an exercise in accounting.  Additionally, the ease of developing greenfield sites on the rapidly expanding fringe of the city (Leinberger’s DC example of growth along Newlands’ Connecticut Ave rail line represents the first real urbanization of that space) makes things much simpler than dealing with already established urban environments.

With those key differences in mind, Jarrett throws a wet blanket over Leinberger’s nostalgia for the way things used to be. Rightly, Jarrett notes that we won’t be able to re-create the environment of those private real estate and transportation investments.

Nevertheless, Leinberger is talking about a broader concept – one of leveraging the value transit has and capturing that value as a means to finance the infrastructure itself.  Jarrett’s follow-up on the subject concurs – the same basic concept of capturing that value is the core of the issue.

Leinberger cites a of local example, the New York Avenue Metro station and the subsequent development of the NoMA area:

How would the private funding of public transit work? Most states already have laws in place that allow local groups of voters to create “special-assessment districts,” in which neighborhood property owners can vote to fund an upgrade to infrastructure by charging themselves, say, a onetime assessment, or a higher property-tax rate for some number of years. If a majority of the property owners believe they would benefit from the improvement, all property owners in that district are obligated to help pay for it. These districts can vote to fund new transit as well (potentially, the transportation-financing agency could even receive a minority-ownership stake in the district’s private property in return for building new transit). In the late 1990s, property owners paid for a quarter of the cost of a new Metrorail station in D.C. using this approach; after the station opened, an office developer told me he believed his investment was being returned manyfold.

The idea of a transit or government agency owning a stake in real estate development is another interesting idea – Hong Kong’s MTR Corporation both operates the rail system and develops/manages real estate around stations.   However, vesting this kind of authority in the government can be problematic, as mixing of eminent domain capabilities and the desire for private, transit-oriented real estate development can be a touchy subject, as some experience from Colorado shows.

Existing mechanisms for value capture, such as tax-increment financing (again, as Jarret notes) do work, but are limited.  As one of the commenters at The Atlantic notes, Leinberger’s example of an infill Metro station only works because the value of such a station is that it provides a link to an existing, robust transit network.  Such a mechanism wouldn’t work for starting a system from scratch.

The current battle over how to re-shape Tysons Corner is illustrative of many of the issues.  In Tysons, many land owners have agreed to tax themselves in order to add transit.  This works because they’ll be adding a linkage to Metro’s already robust and successful network.  At the same time, the initial plans aimed to maximize the return on the transit investment by substantially upzoning the area and increasing density – but now some parties are getting cold feet.

The other piece that Leinberger raises (as well as several commenters on Jarrett’s post) is reforming the federal piece of transit financing to be more responsive and agile in partnership with private capital:

We could hasten the process by making a much-needed change in federal transportation law. The federal government typically provides 20 to 80 percent of the money for local transportation projects (with local and state governments paying the rest). Yet federal funding of projects that involve private partners is extremely rare—in large part because federally funded projects typically take years to approve, and private developers usually can’t tie up their capital waiting for the government wheels to turn. Over the past few years, private corporations and foundations in Detroit raised $125 million to help build a light-rail line, and have been working for some time to secure federal funds to complete the project. Fixing federal transportation law to expedite transit projects would allow faster development at lower public cost.

None of these mechanisms is perfect, but each will likely be a part of future transit financing discussions – value capture, tax-increment financing, public-private partnerships, upzoning, etc.

Infrastructure + Networks + Security

A series of (somewhat) tangentially related post/items/articles I’ve been meaning to mention here:

1. Security Theater – mammoth

There are always tensions between openness and security, and cities like DC have plenty of examples of this – everything from bollards anchored in 6 feet of subterranean concrete to jersey barriers strewn in front of building entrances.  Given these tensions, there are questions about how much is necessary, and how that which is necessary can be better designed:

Though Perlin’s project explores the former possibility, the latter fascinates me, as it reminds me of the concept of “security theater”, coined by Bruce Schneier to describe the ways in which the public apparatus of security (at airports, government buildings, schools, transit stations, etc.) exists primarily not to provide security, as those measures are demonstrably ineffective, but to provide a fearful public with the illusion of security.

This tension has serious consequences for how we use space…

2. Death of a LieDCist

The Capitol Visitors Center was built, amongst many reasons, to help enhance security for visitors to the halls of Congress.  It’s also meant the death of traditions:

Before the advent of the CVC, a visit to the Capitol meant a tour for taxpaying citizens guided by hapless interns who would straight up lie to them. Just bald-faced, outrageous, entirely untrue claims about the nation’s history and its legislative process.

Is nothing sacred? Security kills even the most benign and stupid traditions.

3. Regional Security – CSG + COG

At the Coalition for Smarter Growth’s 11/12 forum to discuss the Greater Washington 2050 plan, one attendee asked about the inherent contradiction between the agglomerations and concentrations inherent to urbanism and the desire for various federal agencies to have uber-secure campuses – or at least ones that put on that particular show in the theater.

DC’s Planning Director, Harriet Tregoning, mentioned the inherent tension between the openness of urbanism and the desired security, but also noted there were some design considerations that need to be taken into account.

All the more reason to push for the elimination of unnecessary security theater – as the built forms that result likely aren’t all that desirable.

4. Secure + Connected Infrastructure – mammoth

Mammoth again notes the challenges of updating our infrastructure, both to provide redundancy and security, as well as enhance development and feed the economy.

I do greatly appreciate the thrust of one of those student projects, ‘The Diversity Machine and Resilient Network’2, which argues that, though Beirut’s “urban fabric… lacks consolidation… optimization or efficiency”, this is not a weakness, but a strength: “it is precisely the ‘redundancy’ of the distributed social infrastructure and relative autonomy of the neighbourhoods that lends the city its resilience.” Though made more specifically in reference to urban form and less in reference to infrastructure, this point reminds me of two things.

First, as faslanyc noted in the comments on a previous post, the impact of an infrastructure on the territory in which it resides should be evaluated not just by its scale, but also for its degree of distribution and connectivity…

Second, and directly related to that first advantage, I’m also reminded of the article Fracture Critical, which ran recently in Places and draws an interesting parallel between two ways of designing specific infrastructures, fracture-critical and fracture-resistant, and ways of designing larger systems. […] Given that the consequences of a networked super-project being fractured would be enormous, I suspect that there’s a place for being cautious about the design of such projects, even while recognizing their value.

Lots to digest here – the notion of how we perceive ‘infrastructure’ is key.  I suspect the urbanist sees it as the backbone on which a city can grow – as we see vestiges of that growth in the urban forms and fabric from various generations of housing stock, transportation facilities, etc…

5. Parcel by Parcel

It also raises the issue I noted with some of the proposed Eco City Beautiful infrastructure – how does one visually convey the vision of urban development around a core infrastructure system without dictating architecture and urbanism?  How do you convey the kind of organic growth of a city – parcel by parcel, building by building?  Mammoth again:

I’d like to think that learning to work infrastructurally (to use Lahoud’s language1) means working more flexibly (despite rhetoric which differs sharply from modernist rhetoric, the two designs presented appear to be close kin of modernist residential housing collectives and contemporary superblocks, as both take a large piece of land and develop urban fabric wholesale upon it), less directly (designing the infrastructure upon which the city grows, with an awareness of how the shaping of the infrastructure will affect the growth of the city, but not presuming to design the city itself) and accepting a degree of loss of control over the aesthetics of the resulting city fabric (which presents a host of drawing problems — how do you draw something which you are not presuming to design and still manage to communicate the importance of the work you’ve done in designing the scaffolding? — but still seems to me to be a humility worth developing).

“Accepting a degree of loss of control” is a nice way to put it.  Kostoff described the key attribute of cities as “energized crowding,” a kind of social context that can’t fully be designed.

6. But, what about scale? – mammoth + NYT + Infrastructurist

Louis Uchitelle argues that we’ve got a superproject void in the US these days – Infrastructurist responds with an impressive list of projects, if only a little disjointed – and mammoth notes the missing connective tissue:

That said, Infrastructurist doesn’t really respond to Uchitelle’s points about the relationship between scale and economic effect, as Uchitelle is arguing not just that that contemporary infrastructure projects are smaller, but that there’s something fundamentally different about the economic effect of a very large project, like the ARC Tunnel, which, while physically impressive, operates in a relatively small geographic territory, and a superproject, which connects formerly disconnected territories (as the interstate highway system did), aggregating markets. The obvious contemporary corollary to the interstate is high speed rail, but Uchitelle also rightly notes that the Obama administration project which is closest to a superproject, defined not just by impressive physical impact, but also by economic effect and ability to facilitate new connections, is the proposed integrated health care computer network.

While the idea of high speed rail has the potential for that kind of connectivity and transformation of markets, what’s missing is the systemic planning.  Looking at DC as a analogous situation, the city and region have benefited immensely from a system planned as a system – and built out in full.  Piecemeal construction on a line by line basis has been less than successful in other cities, and that pattern could hold for intercity rail, too.

7. Paying for it – The Transport Politic + Streetsblog

One place that has taken a system-oriented approach is Denver, and TTP notes the pain they’re dealing with for their foresight.

Perhaps good long term decisions like those in Denver could be vindicated with a little help from a National Infrastructure Bank?