MNTRC Newsletter Vol. 21, Issue 1: Summer 2014

New York MTA’s early years reveal politics of finance

Nicholas Tulach, PhD Candidate, Rutgers University

Grafitti-tagged MTI car

Heavily tagged metro vehicles can use significant maintenance funds.
Photo Credit: Erik Calonius, US National Archives

Rutgers News – Public transit finance is often examined from an economic perspective. Instead, research conducted by doctoral candidate Nicholas Tulach examines the politics of finance through a case study of the New York Metropolitan Transportation Authority (MTA). This ongoing historical study situates the narrative within a context of crisis management. It also further examines the intersection of actor-based history and structural forces to draw out the complexity of transit finance in America’s largest metropolitan region.

Financial trouble from the start

The study begins by examining the roots of financial trouble, which were present even at the agency’s founding. Originally created by Governor Nelson Rockefeller in 1965 as a way to save the region’s struggling commuter railroads, the MTA was expanded in 1968 to include the New York City Transit Authority, which operated the subway and bus systems, and the Triborough Bridge and Tunnel Authority, the last piece of Robert Moses’s New York infrastructure empire. Though Rockefeller’s vision was to use bridge and tunnel tolls to fund public transit and embark on a major expansion program, political battles over the transfer of suburban driver tolls to city transit users threatened to undo the delicate fiscal arrangement the governor had concocted.

Debt graph

Long-term debt growth, 1972-2008
Data Source: MTA Annual Reports, 1972-2008

By the end of the 1960s, all the MTA’s various component agencies struggled to maintain and operate their existing systems. Rockefeller and William Ronan, chairman of the MTA, continued their ambitious vision of system expansion despite the agency’s significant needs for additional operating and maintenance funds. One such project was the Second Avenue Subway, which would take nearly 50 years to revive.

Flagging support from city and state

The 1970s were a decade of total economic transformation for older American cities. Deindustrialization and suburbanization accelerated, with the former primarily responsible for the decline in many high paying, low skilled jobs in the city center. Industry began to relocate outside the city or to move out of the United States completely. Not only did the role of public transit in the daily lives of New Yorkers begin to change, but the system itself struggled to maintain sufficient ridership. Subway ridership declined from a post-war peak of more than 2 billion passenger trips to fewer than 1 billion by 1976.

At the same time that ridership declined, state and city subsidies also declined. This was the era of New York history forever immortalized by the New York Post headline, “Ford to City: Drop Dead.” While the MTA struggled to operate and maintain the vital regional transportation infrastructure, the City and State of New York teetered at the edge of bankruptcy. Retrenchment was seen as the only option for agencies and public authorities. So while the leadership of the MTA knew it needed increased funds to repair a crumbling system, they were asked to make further cuts as part of a broad public spending reduction.

Revenue graph

Fares and other revenues, 1972-1990
Data Source: MTA Annual Reports, 1972-2008

Retrenchment is poor policy for failing public infrastructure, which by its nature as a public good cannot be supported by the private marketplace and, therefore, must be subsidized. Where those subsidies come from—paid for by users or commonly shared among a broader population—is a legitimate political question. However, cutting infrastructure funding during periods of austerity leads to further crisis and decline. This was the outcome of mid-1970s public finance in New York, and the MTA’s infrastructure—already in deplorable condition—quickly degraded. In turn, this led to a spiral of ridership loss and further fiscal trouble. The long-managed fiscal crisis had finally become too much to handle by simple last-minute budget fixes alone.

“State of Good Repair” political and financial fix

By 1979, the MTA’s problems had become such a public spectacle that they could no longer be ignored by Governor Hugh Carey. He reached out to an unusual choice to help turn around the troubled agency, but it was one he knew was likely to succeed. Richard Ravitch, a friend of the governor and long-time public servant with a background in real estate, was asked to take over the chairmanship position and correct the agency’s many problems. The troubles had gone 1970s version of viral, with derailments, fires, graffiti, and robberies on the subways appearing almost daily in newspapers and on television.

Ravitch immediately identified that the troubles of the agency were tied, first, to a lack of sufficient revenues to cover operations and maintenance and, second, to a misguided allocation of resources to capital expansion projects instead of to maintenance. He created a new policy to address these misallocations and called it “State of Good Repair.” Resources no longer would be squandered on expansion projects. Instead, they would be directed at a prioritized list of maintenance projects. To finance his ambitious goals, the MTA would need new revenues. Without state and city support for increased subsidies, Ravitch knew his only option was to increase fares. Fares, however, had been a long-standing political fiasco for city and state politicians, who often staked their political careers on maintaining the existing subway fares. Ravitch, however, was enabled by the governor to explore fare increases, and he used his background in real estate finance to open a new avenue to address this issue.

Financial independence at last

Ravitch and his advisors thought if they could borrow against farebox revenue, they could raise enough capital to tackle the massive repairs that were necessary to restore the system. The state could not provide the subsidies directly, but the agency could raise short-term capital if there were a way to convince the banks that MTA gross revenue bonds were a reasonable investment. Ravitch commissioned a study from Charles Rivers Associates to provide justification for these new debt instruments—that the agency would be able to support itself with fare increases and service cuts alone if subsidies were to disappear.

Creating the gross revenue bonds also operated on the assumption that fare increases would become a consistent, predictable component of long-term transit finance. This was a major departure from fare politics of the previous 50 years, in which fare increases were politically unfeasible and fares were held as low as possible. Ravitch was the first chairman to achieve the kind of independence that was envisioned at the creation of the MTA.

Gross revenue bonding had not been done before, and if it were to be successful, the MTA would need support from outside the agency. Ultimately, the agency found that support from private investors and was able to raise enough revenue to begin its program of repairing the transit system.

New era of debt finance

Gross revenue bonds ushered in a new era of debt financing that allowed the MTA to solve its short-term capital deficiency and constitute a new program aimed at righting long-standing shortfalls in system maintenance. By most accounts, the agency was successful. They were able to clean their subway cars, repair their public image, and decrease crime and the perception of crime in the system. Ultimately, the MTA would see ridership gains and other technological improvements such as the MetroCard fare payment system that would lead to even greater gains.

Yet the cost of this repair continues to haunt the agency. In 2008, the MTA saw losses totaling at least $5 million related to derivatives it had created similar to the real estate financial crisis. The agency’s finances are vastly more complicated and difficult to forecast than before, leading to a continuous reliance on debt financing to cover shortfalls over the years. The MTA still has not solved its financing issue, but instead it has managed to push off the problems associated with underfunding to future generations through ever more complex financing arrangements. Until the political will to fully fund public transit is found in New York, the MTA will continue to struggle with these issues.