The Mission of the Manhattan Institute is
to develop and disseminate new ideas that
foster greater economic choice and
individual responsibility.

New York Post.

Disaster ahead unless MTA makes major changes

April 24, 2005

New Yorkers learned in January that their subways are in trouble, when a fire knocked out service for the half-million people who ride the A and C trains each day. New York City Transit chief Larry Reuter sent riders and politicians in fits of rage when he announced that the C line would be out for three to five years. NYCT got service up within two weeks, in response to the outcry. But the fiasco followed by more fires and floods that cut subway service on more lines in February and March confirmed a mounting suspicion: Subway service is backslidirig after two decades of improvements.

Gotham's subways run on fragile technology that predates the Great Depression. The system requires constant maintenance, plus steady asset replacement, just to keep the trains running costing some $3 billion a year. But the state run Metropolitan Transportation Authority, which runs NYCT, never has the money to invest in modem infrastructure, or to maintain the infrastructure it has. Worse: The MTA will have even less money for vital investments over the coming decade.

The MTA will rake in $3.5 billion in mass transit fares this year, plus $1.1 billion from its bridge and tunnel tolls. But all that money covers less than half of the agency's $9.4 billion in expenses. So taxpayers must funnel an extra $2.6 billion into the MTA's coffers each year. But it's never enough. So the MTA has turned to debt and looming interest costs will soon break deficits wide open. The MTA now spends 12 percent of its revenues (including those billions in tax subsidies) on interest costs. Within a decade, that figure will double: Interest on debt will eat up nearly one fourth of the MTA's budget. This is a blueprint for asset deterioration and for a safety breach.

All that debt is a symptom of the real problem. The MTA can't rationally budget its capital investments without first paring back operational costs. Money for worker salaries and benefits never mind for capital investment will exceed fare and toll income by $1.7 billion this year.

The MTA can't manage its workers. Three years ago, the MTA failed at getting the unions to accept flexibility provisions to pay for the cost of workers' raises.

The MTA can't manage its payouts to workers. Its health care costs are skyrocketing - ballooning from $873 million this year to $1.15 billion by 2008. "Local 100 may be the only union in the U.S. that can claim health benefit improvements this year," union leadership exulted in 2002, when the brass secured a new benefit for retirees too young for Medicare. And there are plenty of young retirees, since NYCT employees can quit after 25 years with an excellent pension.

And the MTA can't manage itself. It pays hundreds of people to answer customer questions by telephone but cuts token-booth clerks in a crunch. While billion dollar operating budget deficits loom indefinitely, the MTA has propose to cut only a handful of office jobs: The authority would rather cut corners by deferring maintenance at Grand Central Station.

This isn't just political mismanagment that costs money but doesn't harm anyone: Transit woes affect real lives, constrict Gotham's tax base and retard economic growth. The outer boroughs have a harder time competing with Westchester and New Jersey for affluent residents when straphangers must endure brutal commutes.

The MTA needs two things: A consistent source of revenue, and rational management insulated from politics. The obvious solution to the first problem is to raise the fare so that fares cover costs.

Subways that pay for their own operations aren't unprecedented: Gotham's subways were built and operated by private-sector companies, and turned a profit during the first decades of their existence. They were profitable from their debut in 1904 until after World War I when politicians refused to allow a hike of the original, regulated nickel fare to cover costs, and unionizing workers drove up the cost of labor.

But today, even the most unabashed free marketeer can't propose that the public pay the full cost of a subway ride because the MTA and the Transit Workers, Union have so enshrined the inefficiencies of a public monopoly into the authority's operations that the full cost is outrageous. New York must first get that cost down by gently easing managed competition into the MTA's stifling monopoly. Impossible? Look to London.

A decade ago, London's Underground needed billions to stave off deterioration. But Prime Minister Tony Blair wasn't about to write a blank check not when the system's public sector managers had already spent billions to extend the Jubilee Line 20 miles, a project that came in two years late and 50 percent over budget. (This should sound familiar to MTA riders the authority's major projects, like the rehabilitation of its Broadway headquarters, are consistently years late and hundreds of millions over budget.)

So Blair applied a dose of the profit motive. The government determined what it expected from a successful system over the next 30 years: modern signals, decent racks, new trains, clean, modern stations. Then, officials turned to the private sector to find companies willing to take the risk of getting the work done right, on time, and on budget. Four for profit teams bid on three construction and maintenance packages in 2001; London chose the winners based on the fixed price payment that each would require from the government to do the work required.

Blair's initiative carved into two problems that plague New York City Transit:

The risk of cost overruns and shoddy work: The private sector in London assumes the risk if its cost estimates are wrong; it gets rewarded for timeliness and penalized for lateness; and, since it has assumed a 30 year responsibility, the prospect of having to redo poor work a few years later should keep it from cutting corners.

The power of a monopoly labor force. When London's Tube transferred maintenance responsibility to the private sector companies, 7,500 workers were transferred as well. The formerly public sector workers keep their jobs but must negotiate future contracts with their new management.

Cutting artificially high costs is one goal - but politicians must also allow the MTA to hike the artificially low price of a ride. Right now, city and state pols treat the subway as a social service when the fare is raised, they complain of a regressive tax. The MTA should ensure that fares cover the actual cost of a ride. Fares should cover operating costs (after federal and state capital grants), just as they did 100 years ago, and should be indexed yearly to inflation.

Will some low wage workers be unable to pay? Sure but the city and state governments can offer them vouchers based on need. Gov. Pataki could never stiff the city of that subsidy or the poverty police would come knocking.

Treating the subway as a market service paid for by customers, not as a social service subsidized by politicians, would improve the prospects of long stalled projects. Take the Second Avenue subway. The line hasn't been built in 70 years because there's no public justification for the $16 billion investment. The public sector builds subways for one reason; To encourage development and increase tax revenues. That's why Mayor Bloomberg is happy to pay for the No. 7 train extension to the Far West Side.

But a new Far East Side subway won't encourage development, because the Far East Side is already packed with people. East Siders won't get their subway unless it is built in response to market demand.

Gotham could invite companies to assess the East Side market and determine if enough riders would pay a premium over the MTA fare for a ride downtown. The city could then take bids from the private sector to determine which company would carry out the construction work for a fixed price and then operate the system for a regulated, premium fare. The Second Avenue subway is expected to serve 500,000 customers a day. A conservative $4 fare would bring in $600 million in annual revenues a tempting prospect for a for profit company that can hold down costs.

This won't be easy the MTA, and its politician patrons and bondholders, will try to protect the authority's monopoly at all costs. But customers who demand a market service and who are willing to pay for it - are the only force that can rescue the sinking MTA from its political abyss.

Adapted from the Spring issue of City Journal (

©2005 New York Post



Home | About MI | Scholars | Publications | Books | Links | Contact MI
City Journal | CAU | CCI | CEPE | CLP | CMP | CRD | ECNY
Thank you for visiting us.
To receive a General Information Packet, please email
and include your name and address in your e-mail message.
Copyright © 2009 Manhattan Institute for Policy Research, Inc. All rights reserved.
52 Vanderbilt Avenue, New York, N.Y. 10017
phone (212) 599-7000 / fax (212) 599-3494