May 20, 2002

Proposal for a Statewide Policy for Funding Public Transportation

A 5-Point Program for an Adequate, Stable and Secure Source of Future Funding

The New Jersey Association of Railroad Passengers (NJ-ARP) recommends that a statewide policy to ensure an adequate, stable, and secure source of future funding for public transportation operations and expansion projects be adopted by the state legislature.

The approval of a New Jersey Transit (NJT) rail and bus fare increase, effective April 1, 2002, highlighted the absence of any adequate and consistent transport policy within the State of New Jersey. Consequently, NJT has been forced to withdraw critically needed funds from its capital budget in order to eliminate the annual operating budgetary shortfall. This practice, especially during recessionary times, could have dire consequences for transit needs and users in the state.

NJ-ARP, the statewide rail advocacy group formed in 1980, suggests that the following 5-point proposal be enacted into law to guarantee that all modes of transportation finally begin to receive equal modal support from the state.

1. NJ Transit Fare Policy Must Be A Statewide Policy

State government must acknowledge NJT as its principal authority for transit service decision-making. In turn, the Legislature and Governor need to delegate a degree of freedom of action to NJT so that the agency can conduct its affairs in a businesslike fashion, responding to the market-driven demands of its customers. Importantly, NJ-ARP believes the agency must be insulated from political intrusion in both its day-to-day operations as well as in its planning, designing and construction activities. All transit users, whether inner city or suburban, regional or commuter rail, or local bus, deserve to be addressed equally with services and benefits tailored to each individual community's needs. Without insulation from political intrusion, existing services will be balkanized and new service initiations delayed. This the state can ill afford, given increasing roadway congestion and future energy constraints already being experienced from the conflict in the Middle East.

2. NJT's Base Cost-Recovery Ratio Should Be Established Within a Band of 45% to 55%

To begin the introduction of societal justice and equal modal support with the heavily subsidized automobile, NJ-ARP recommends a sliding scale of state operating assistance to NJT ranging from a low of 45% to a high of 55%, depending upon NJT's ridership and its ability to contain costs indexed to the median of the 5 largest public transportation agencies in the eastern U.S. Nationally, most transit systems recover about half their costs from customer fares, therefore NJ-ARP extended the band of recovery 5% on each side of the median. We are convinced that additional technological innovation and other operating efficiencies can keep NJT's costs contained at a level that the agency would achieve the upper limit of the proposed assistance level (55%). Where these other operators' services consist of rail, bus and LRT divisions, NJT's specific operations will be indexed to them individually as well as to their systemwide average cost-recovery ratio. If necessary, outside auditors could be periodically retained by the state to authenticate NJT's financial reporting.

Even during the best of times, governmental policies regarding public transit have forced NJT, and others, "to do more with less." This is especially true during the current prolonged economic contraction, which has disproportionately affected state government. But a sound, easily explained and understood cost-recovery ratio, with clear goals and objectives established by the legislature, offers NJT and other transit operators within the state heightened financial and political stability. New Jersey can establish a sound funding mechanism by beginning to collect taxes based on the carbon emissions of fuels, much as is done in Europe. A good first start would be to increase the state motor fuels tax by 10 cents. This tax, which in 2002 was the fourth-lowest in the nation, would raise $45 million for each additional penny paid at the pump.

When NJ-ARP was first founded in 1980, we argued that lower fares, and a lower cost-recovery ratio, were justified because public transit and particularly rail could not compete against the low-cost, highly subsidized automobile. The auto subsidy is in the form of public infrastructure upkeep supplied by Federal, State and Local Governments. It does not even take into consideration tax ratables denied municipalities or the environmental effect of road infrastructure. Today's expanding highway congestion, coupled with the resultant non-conformance with environmental standards, has only served to reinforce that argument. Increasingly, New Jersey residents now must access transit since roadway gridlock has become the norm rather than the exception. Clearly, the terrorist attack of September 11, 2001 and the ongoing political instability in the Middle East has demonstrated our vulnerability to a cessation of oil supplies. Unfortunately, it has also highlighted New Jersey's dependence on the highly subsidized automobile.

The base farebox ratio split should include all internal New Jersey transit funding sources: passenger revenues, real estate, rentals, advertising space and others. It should not include payments from Amtrak, the MTA, the Port Authority of New York & New Jersey, the Delaware River Port Authority, or other similar agencies.

3. Future Operating Costs Should Be Split between NJT and the State on a Sliding Scale

The NJ-ARP proposed sliding scale has an incentive to keep costs within reasonable levels, increase modernization (especially in the area of fare collection) and afford NJT the opportunity to turn facilities (such as the Meadows Maintenance Complex - MMC) into revenue generators and profit centers. The reward to NJT would be state support on the high side of the sliding scale which could even allow for an operating budget surplus to be used in lean years or transferred to the capital budget.

Under this structure, NJT would be shielded from a significant decline in passengers and revenues as long as it contains its costs. This has been a historic weakness encountered by heavily leveraged fixed-cost rail systems consisting of equipment, shops, infrastructure, and stations. Excess expenses cannot be shed expeditiously to match declines in revenues. Even if NJT's cost-recovery ratio slipped as its revenues declined (assuming for this example that costs were stabilized), the minimum percentage state support would ensure a commitment from NJT and the state on almost an equal basis. It might even result in a fare hike. But, the state couldn't "duck out" during a political firestorm or election year; thus, adequate, secure and stable funding would be assured.

The sliding scale of state support also:

• Addresses state legislature concerns about what input and control it may have to ensure NJT controls costs while at the same time promoting the use of transit facilities statewide;
• Guarantees state participation in a growing enterprise on a consistent, year-by-year basis;
• Allows NJT to survive as increased ridership and revenue from operations allow its cost recovery ratio to rise gradually and steadily.

While NJ-ARP suggests a sliding scale, it is not "married" to the 45% to 55% range as a target percentage for the cost recovery ratio. With the political will to address the issue of equal modal support building, NJ-ARP is willing to see how high operating assistance might go. If the highly subsidized automobile finally is recognized for its disproportionate consumption of scarce petroleum and geographic resources, then societal justice may just begin to shift in public transit's favor.

4. Fare Policies Should Be Set by NJT

NJT has been charged with providing public transit for the state; thus, it must have the power to continue to determine how and where public transit should be provided. NJ-ARP believes NJT should review farebox needs annually, as at present. We believe consumer input is a necessity and recommend the continuation of the current practice of mandatory fare hearings.

NJT must have the freedom to be flexible. That includes the freedom to "cross-subsidize" some operations, such as inner city Newark bus ridership or rural, sparsely settled areas. This cross-subsidy should not be an explicit or permanent policy. But NJT can, and must, have the flexibility to experiment with optimum market pricing in those areas where competition or regional demographics so mandate.

5. Service Expansions Should Also Be Funded by a Sliding Scale

NJ-ARP recognizes that service expansions are often a combination of the need for mobility and political motivation; thus, NJ-ARP recommends a sliding scale three-year expansion program, which splits the reward and risk between NJT and the state. Under our suggested plan, the state legislature could mandate additional service to specific locations within NJT's existing bus and rail systems. However, such a mandate would be funded as follows:

1. The state would assume 80 percent of the costs for the first year. NJT would provide 20 percent.
2. Second-year costs would be 70%/30%, respectively.
3. Third-year costs would be 60%/40%, respectively.
4. Finally, NJT would be required to provide an evaluation of the service expansion, and recommend its continuation or deletion. Criteria would be based on ridership, revenue counts, and future potential.
5. If NJT declined to permanently add the new service, the state legislature could override the decision, but only if additional funding were added to NJT's operating budget for that particular system. This funding would be equal to the state's obligated percentage for the overall system our proposed operating sliding scale subsidy of 45% to 55%.

Especially with rail projects, in-service dates occur on an incremental basis. That is, the entire project does not come on line all at once; rather, it happens on a segmented basis with each addition advancing the completion of the entire project. Because of this reality, NJ-ARP recommends that NJT's assessment of the viability of a project can only occur after 50% of the project is operational.

Under this procedure, NJT could be forced to expand against its will but will do so only if it were given approximately half the required funds to do so. This caveat prevents rampant political gestures for "pork-barrel" expansions that are not justified by market needs. This procedure also eliminates unfunded mandates and also allows for adjustments to occur over a multi-year trial period, in order to maximize success.

NJ-ARP stands ready to assist both the state legislature and NJT in addressing the important funding issue that has now reached critical mass.