City Journal.
City Journal Special Issue 2009.
City Journal Special Issue 2009.
Table of Contents
A quarterly magazine of urban affairs, published by the Manhattan Institute, edited by Brian C. Anderson.

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After The Fall: Saving Capitalism From Wall Street--and Washington

After The Fall: Saving Capitalism From Wall Street—and Washington

by Nicole Gelinas

Transit for Tomorrow
The MTA’s labor costs are crowding out money for a twenty-first-century system.
The MTA's labor costs are crowding out money for a twenty-first-century system.
Ira Block/Aurora Photos

In early May, New York’s Metropolitan Transportation Authority (MTA), facing a whopping 18 percent budget deficit, got a $2 billion bailout from the state, averting service cuts and 30 percent fare hikes. In approving the bailout, the politicians dealt with the immediate political problem of constituents’ screaming about higher fares and service cuts. Fares will still go up, but by just 10 percent.

Still, the fact that the authority needed a bailout—and not just a one-shot infusion of new funds in a crisis, but a permanent new source of money to supplement its existing billions—highlights everything that’s wrong with New York. Both city and state spend way too much on education and health care, crowding out funds for mass transit. Worse, what does get spent on transit goes disproportionately to outsized and outdated labor costs and not nearly enough to upgrading the transportation infrastructure that keeps New York’s private sector moving—and thus the region’s economy alive and growing. Without the booming Wall Street that has defined it for the past quarter-century, New York must reorder its priorities so that it can afford the transit system it needs to ensure a robust future.

State politicians pushed a convenient narrative to explain the MTA’s $2 billion budget gap when it began to materialize last year: when the global economy imploded, the state-run authority’s finances collapsed along with it. There was some truth to the argument. Rider fares, plus tolls on bridges and tunnels, cover just 56 percent of the MTA’s costs. So the authority depends on downstate taxes to cover the gap, including one that gives it a small piece of every real-estate transaction in and around the city—adding up to $1.6 billion in tax revenue yearly at the peak of the Wall Street boom. As real-estate sales in Manhattan have all but ceased and prices on the few completed deals have plummeted, the MTA will be lucky to get $500 million this year. Similarly, the portion of the downstate sales tax that the MTA gets is down, though less dramatically. Fewer city jobs mean fewer riders paying subway, bus, and commuter-rail fares, too, though these falling fare revenues are dwarfed by the lost tax revenues.

But the MTA’s day of reckoning was inevitable. More than four years ago, long before the financial crisis provided an excuse for the authority’s woes, City Journal wrote about this eventuality, noting that because labor costs and inconsistent state and city support had “squeezed” the MTA “from both the cost and the revenue sides,” it was running “chronic operating deficits that are about to become unsustainable” (see “How to Save the Subways—Before It’s Too Late,” Spring 2005). Well, here we are. Since 2004, the MTA’s labor costs have risen to nearly $7 billion a year, up more than 40 percent. The biggest drivers: pension and health-care costs, which now total $2.5 billion annually. Almost as expensive are interest payments on the debt that the MTA has used to finance past capital investments and maintenance: they have increased by nearly half, to $1.5 billion a year.

These expenses are still rising, meaning that the new annual bailout solves nothing in the long term. The debt costs will swell to $2.3 billion annually by 2012. Labor costs will also keep heading skyward—to $7.6 billion a year by 2012, the MTA anticipates. And that’s likely a low estimate, since it includes annual-raise projections for the MTA’s biggest labor union, the Transport Workers Union (TWU), well below the pay hikes that Mayor Michael Bloomberg recently gave the city’s own workforce, setting the pattern for other public-sector unions downstate. The forecast may also underestimate the higher pension expenditures needed to make up for stock-market losses (New York, like other states, invests its pension funds in the market, but workers’ pensions are guaranteed no matter how the market does). In short, for the nearly $2 billion in extra tax money that they are now sending the state every year, New Yorkers will get, at best, short-term maintenance of an untenable transit status quo.

The taxes are steep, moreover. The biggest new levy is a one-third of 1 percent tax on all downstate payrolls. A medium-size employer with a $10 million payroll will owe an extra $33,000 in taxes each year—at a time when New York City is already hemorrhaging jobs. And a hidden tax will be higher still: Albany has agreed to refund school districts the new payroll tax, forcing New Yorkers to pay tens of millions more in other taxes to pay for the refund. Legislative leaders added this provision to win sufficient support from suburban lawmakers, who would have nixed any new tax on schools.

But the long-term cost to New York’s economy will be even greater than the new taxes. Even with the new annual bailout, the MTA’s labor expenditures and the state’s disordered priorities may leave the authority with almost no money for its long-term physical investments over the five years starting in 2010.

Keep in mind that the authority must spend $5 billion on its infrastructure every year. Two-thirds of this money simply keeps the existing system running—replacing subway cars, refurbishing tracks, and the like. (The MTA must spend $1 billion annually on signals alone, modernizing a system that still relies on parts that date from the Great Depression.) The remaining third pays for expansion projects, including the Second Avenue subway along Manhattan’s East Side and the extension of the Number 7 train westward from Times Square to the Hudson River. Such expansion projects are vital to the city’s long-term health. The decades-overdue Second Avenue project, for instance, will alleviate miserable and even dangerous crowding conditions on the East Side at rush hour.

Since New York started formal capital plans for the MTA in 1982, after decades of deterioration had crippled the system, the results have proved that transit investment matters. According to MTA data, subways are 40 times more reliable in avoiding breakdowns than in the dark days of the seventies and early eighties, when, as Governor David Paterson reminisced recently, every trip to work was an “adventure.” The system experiences breakdowns half as often today as it did even a decade ago. As ridership has soared, the MTA has proven itself at least somewhat up to the task of helping passengers make nearly a billion more trips annually than they did ten years ago. The system is safer, too: no passenger has died in a train derailment in nearly two decades.

Despite the recession, New York should be increasing capital investment now, to take advantage of the lower labor and materials costs that are accompanying the global construction slump. In its early planning, the MTA has found that bids on some projects for the next few years have come in 15 to 25 percent below expectations—the reverse of the situation three years ago or so, when the MTA was competing with the world’s developers for parts and labor.

Consider in this light the recent history of Brazil and Venezuela. Brazil spent billions of dollars over the last decade diligently investing in the physical infrastructure that its oil industry needed to be competitive. Venezuela, by contrast, stripped its state oil company of resources in order to fund extra social spending. Today, Brazil is much better off—and has more resources to achieve social goals. In Venezuela, the neglected oil assets can no longer prop up the vast social spending to which the nation has grown accustomed. The lesson for New York: a deteriorating transit system will make it harder to attract the new private-sector jobs needed to fund the billions of dollars in education and health spending that Albany dispenses every year.

Here is the dangerous gamble that New York legislators are making. If the economy suddenly bounces back, and if personal income grows healthily, the corresponding payroll tax will yield the MTA enough money for capital spending in 2010 and 2011. But if the economy stagnates through 2010 (a real possibility) or if personal income grows more slowly than it did when Wall Street was booming (a grave likelihood), the MTA, even with the bailout, may barely have enough to cover its operating spending, let alone its long-term capital investments.

Don’t expect a rescue from Washington. The feds are sending the MTA only $1.1 billion in stimulus money for capital projects, not even enough for one year’s spending. True, Congress typically provides about a third of the money for long-term state transit capital programs—but with trillions of dollars in federal deficits as far as the eye can see, New York would be prudent not to count on it, no matter what Congress says.

New Yorkers won’t get a twenty-first-century transportation system, then, until the MTA gets its own house in order. The good news is that the MTA offers endless opportunities for creative labor savings. While the authority’s white-collar workforce surely could use some trims, far more of the potential savings are in the blue-collar force, as the numbers show. At the MTA, the 2.8 percent of the workforce that earns more than $100,000 a year—a rough proxy for white-collar workers—consumes just 5.8 percent of the payroll. So the MTA isn’t that top-heavy, compared with, say, the New York City workforce, where the 7 percent of workers earning $100,000 or more a year consume 22 percent of the payroll. Finding savings in unionized labor doesn’t mean paying skilled employees substandard wages. It just means treating the MTA’s labor force as a means to an end—paying what you need to attract good people who do their jobs competently.

Track workers are one obvious opportunity for smart cost-cutting. The MTA employs 1,865 of them on the city’s subways. According to seethroughny.net, a project of the Empire Center for New York State Policy, each gets paid an average of nearly $59,000 (not including benefits or health care), for a total of $109 million in 2008. But as graduate students at Milano, the New School’s urban-policy program, found recently in research for the Manhattan Institute, New York doesn’t spend its resources efficiently here. Following union rules, the MTA schedules “nine hours of a track worker’s 40-hour week” during peak rush-hour times for trains. But MTA safety rules keep workers off the tracks during rush hours. In other words, the MTA schedules workers “when no work can take place.” Riders and taxpayers are paying people to do nothing. Worse, because union rules mandate eight-hour shifts and a normal eight-hour shift will almost always overlap with a rush hour, workers often wind up completing their tasks during overtime, for which they’re paid lots more. Overtime accounted for about 12 percent of the total spent on track workers last year, the Empire Center data show.

The MTA has experimented recently with how to reduce these costs, conducting a pilot program with the union to schedule workers on a four-day week—including two 12-hour days on the weekend, when scheduled trains are fewer, bringing up the number of hours in which workers can actually do work. The MTA could achieve savings, too, by going to two 12-hour days and three four- and five-hour days, since this kind of “off-peak week” wouldn’t overlap with rush hours and would completely eliminate unproductive paid work hours. But it would require “the abolishment of the eight-hour shift, an important bargaining agreement for the TWU,” the Milano students noted. Because the MTA spends so much on these labor costs and because the costs are so inefficient, such improvements could eventually save riders and taxpayers tens of millions of dollars a year.

Another obvious area of savings is customer service. The MTA spends $191 million annually on clerks in subway stations. The average clerk earns $24 an hour, plus overtime, which comes to $54,000 a year, not including health and pension benefits. These jobs are retail positions, however, and the MTA could get qualified people to do them at retail-level wages—half of what they pay now. And there’s no reason that clerking has to be a full-time career: at many locations, higher staffing might be limited to high-traffic hours and done by college students and other people seeking part-time work. The MTA could conceivably cut its expenditures in half in this area. Yet current labor contracts are so firm that of the MTA’s entire 70,000-strong workforce, only 300 workers are part-time.

Above all, the MTA needs savings in pensions and health care. Raising the retirement age from 55 to 62 for new employees—a modest start to pension reforms, not the end of them—would save hundreds of millions of dollars over the long term. And freezing wages for just two years during the fiscal crisis, increasing workers’ pension contributions from 2 percent of their wages to 4 percent, and tripling their health-care contributions from 1.5 percent of wages to 4.5 percent would soon save $200 million annually—more than the MTA would have saved from the draconian service cuts it had planned before the bailout. Some of this money, of course, could go toward capital spending.

It’s possible that if state lawmakers, Governor Paterson, and Mayor Bloomberg proposed the necessary reforms with one voice, the union, in a weakened state since its 2005 strike, might not risk a brawl. Paterson showed that the government can make progress on pensions in early June, when he got civilian state unions—not including the MTA’s—to support legislation that will enact a higher retirement age of 62, up from 55, for future employees. The expected legislation will also require workers to contribute 3 percent of their salaries toward pension costs over their working lives, rather than just for the first decade. These changes cost New York too much in considerations that Paterson offered in return—after all, politicians don’t need union support to reform pensions for future workers, only a new law. But the moves at least show that pension changes don’t have to be taboo.

If confrontation is the price to jump-start real changes at the MTA, though, it’s worth it. Mathematically, New York cannot make good on the promises that it keeps making to its public workforce, the MTA included. If the state and the city don’t make changes now, they will have to make them later—when their fiscal positions may be even more desperate and when deteriorated physical assets may be actively hurting the economy.

Albany’s responsibility here is to start asserting the taxpayers’ needs over the vote-rich union’s needs—something it hasn’t done for more than a decade. During the Pataki administration, the MTA avoided addressing labor costs by borrowing for its capital plan. Though it accumulated so much debt that it can’t practically borrow any longer, there’s no indication that any state politician has the fortitude to change this calculus now. During the six-month-long debate over the bailout that started last December, not one official—including Richard Ravitch, the former MTA head who put together the initial bailout package—mentioned the MTA’s unsustainable labor costs as a major reason why capital spending is falling behind.

Privatization isn’t the answer here. Yes, the state should experiment with competitively contracting out some of the MTA’s services and tasks, as other places do. Buses are a good place to start (see sidebar, page 62). Lenders don’t mind financing the purchase of buses by start-up companies, since if those companies lose their contracts, the buses can easily be repossessed and sold to the new operator. But New York would never find a reputable private-sector operator to take the open-ended risk posed by its vast and ancient subway system; London’s unsuccessful effort to transfer such risk has ended up costing taxpayers hundreds of millions of dollars. Moreover, introducing even limited private-sector competition to the MTA would still require the governor and state lawmakers to be assertive with the union. It would also require competent, honest state management. When New York State’s pension fund “contracted” with private-sector fund managers, it shot the process through with favors, kickbacks, and opacity, as recent indictments by Attorney General Andrew Cuomo show.

New York City, too, has a role to play in reforming transit, so important to its future prosperity. The city doesn’t control the MTA—but Mayor Bloomberg didn’t control the public school system either, until he decided that somebody accountable to city residents needed to be in charge. The city needs the mayor to treat transit as an asset, not a liability—explaining to New Yorkers, for example, that a massive investment in new technology on subway lines could slash commuting times to the outer boroughs by allowing trains to run faster and more often, bringing huge swaths of inexpensive housing closer to Manhattan.

During the boom, the city could have used its own money to improve transit. Instead, the mayor spent Wall Street–generated tax revenues on health care and schools. Downstate Medicaid spending increased by 44 percent, costing the city nearly $6 billion annually. Education spending rose by 70 percent, to nearly $21 billion, even though school enrollment had fallen—with the portion coming from city taxes, rather than state or federal subsidies, nearly doubling to $11 billion. Devoting just 10 percent of that education spending—$1.1 billion a year—to smart investments in transit would make a major difference in New Yorkers’ lives. Now that the bust has happened, let’s hope that the subway system doesn’t have to fall apart, as it did three decades ago, before elected officials remember how important it is.

Nicole Gelinas, a City Journal contributing editor and the Searle Freedom Trust Fellow at the Manhattan Institute, is a Chartered Financial Analyst.

Competition Can Make Bus Service Better

Podcast available PODCAST: E. S. Savas reads this story

Our nation has gone to great lengths to protect people from monopolies: the Sherman and Clayton Antitrust Acts, the Justice Department’s antitrust unit, and a public service commission in every state that regulates utilities. All this effort is directed against private monopolies, the assumption apparently being that the public kind will unfailingly act in the public interest. But public monopolies favor their own interests, just as private ones do.

The antidote to monopolies, including the public-sector ones that rule New York, is competition. Not all public services lend themselves to it, but we should opt for competitive contracting wherever possible. One viable area is bus services, where competition would help break up inefficient transit monopolies. Major cities in the United States and Europe—Los Angeles, San Diego, London, and Copenhagen, for example—introduced bus competition several decades ago and saw spectacular success in reducing costs. In a Manhattan Institute study a few years ago, E. J. McMahon and I found savings ranging from 20 percent to 51 percent in cities that used competitive bidding to select bus contractors.

Even a 20 percent cost reduction would save New York’s bus system an estimated $425 million annually. Gotham squandered a valuable opportunity in 2005 and 2006, however, when it took private companies that enjoyed exclusive, noncompetitive deals with the city to provide bus service and merged them with the state-run MTA, instead of bidding out their routes in a true competition. To this day, competitive contracting is practically verboten among public officials, who cower before the transit unions’ political might. The recent MTA financing debate ignored the idea entirely.

Competition for bus service should be introduced gradually. Beginning in one borough, existing bus routes would be divided into several logically related route clusters of similar size. The MTA would continue to operate most of the clusters, at least initially, with just two or three put out to competitive bid for staggered three- to five-year contracts. In the contract specifications, the MTA would set the daily bus schedule for each route in each cluster and also calculate its own current cost of operating that cluster. Bids from qualified private bus operators would be invited, and the bid prices would be compared with the current costs. If a bid price were lower, the state would award the cluster to the private bidder and pay it to operate the routes, but it would continue to set fares and to receive the income on the contracted routes—riders would pay using MetroCards, just as on the MTA routes. (This differs from a franchise arrangement, in which the operator collects and keeps the fares.)

Obviously, one can’t expect the MTA to evaluate bids or its rivals’ performance impartially. Therefore, as in London, an independent body would take over these tasks, armed with the power to award cluster contracts to private firms that performed well and underbid the MTA. Ideally, contracts for the clusters would be awarded to separate bidders, with a limit on the number of clusters any one firm could win. The idea is to create a competitive environment in which one can regularly compare the contractors’ performance with the MTA’s. In time, more clusters would be put out to bid.

The experience in other municipal services shows that after losing several rounds of competition, public agencies begin to adopt the better practices of the private sector. Even if the MTA’s bus operations prove consistently worse and more costly than the private contractors’, however, some bus routes should remain “in-house.” This would help prevent collusive high bidding by private firms. It would also allow an emergency MTA takeover if a contract with a private company had to be canceled, as the MTA could easily expand to assume route operation in such cases. Montreal follows this policy for snow removal, retaining 10 percent of the work for its municipal crews.

Competitive contracting is neither a heretical notion nor an untested scheme. Many cities do it, and they have much experience to draw upon. It’s about time New York caught up and started saving hundreds of millions of dollars.

—E. S. Savas



New Yorkers: Give a Hoot!

As the MTA raises fares and reduces spending, it will undoubtedly be tempted to economize further by cutting the subway cleaning budget. The agency must avoid doing so at all costs. Nothing signals a city out of control more decisively than a filthy public-transit system. If trash starts piling up again on subway platforms and in subway cars, New Yorkers will know that the time to despair has arrived.

But it need never come to that point. Subway litter is a problem that New Yorkers can solve for themselves simply by changing their ways. There is no possible excuse for leaving a half-drunk cup of coffee on a subway floor, dropping a candy wrapper on a platform, or abandoning a newspaper on your seat as you exit a train. The execrable habit of dropping trash in public areas does not belong in a world-class, civilized city. Public space in America has traditionally been a place of civic engagement and shared citizen responsibility—unlike public space in less developed countries, a no-man’s-land for which no one takes responsibility and from which everyone with the money to do so retreats into private, guarded enclaves.

Fortunately, it’s not too late to teach the slobs among us a minimum of respect for the public realm. The MTA and city leaders should start an ad campaign to shame people into cleaning up after themselves. The nation’s original beautification effort, Keep America Beautiful, began in New York City in 1953 when a group of concerned citizens, business leaders, and government officials decided to tackle the problem of litter on highways. A series of public-service campaigns followed; anyone who grew up in the 1960s remembers the slogan “Don’t Be a Litterbug” and Lady Bird Johnson’s involvement in the effort. Such public messages do play a role in shaping people’s values.

Plenty of up-and-coming advertising agencies hurting for business right now might jump at the opportunity to get their work into the public eye. They should be persuaded to contribute their talents for free or for minimal fees. In Dublin, Ireland, reports Chris Caldwell in The Weekly Standard, trash cans currently remind residents, litter is disgusting and so are the people responsible—a bracing bit of honesty from which New Yorkers could certainly benefit. Additionally, the city could ask school students to design catchy subway posters reminding people to take their trash with them. Though the police department faces budgetary pressures, commanders should tell officers to be on the lookout for litterers. Discarding personal refuse in public is not a harmless act; it erodes the health of a city as surely as higher-level crime does, if with less immediate danger. Subways are particularly critical areas: confined, threatening to many, they elicit from tourists and potential commuters acute sensitivity to visual signs of disorder.

In this time of belt-tightening and budget shortfalls, New Yorkers should increase the number of things they do without government assistance. Behaving responsibly in the subways is a good place to start.

—Heather Mac Donald

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