How to Avoid Fiscal Derailment

New York City mass transit has enjoyed a golden age for the past 30 years. During the 1980s, the state-run Metropolitan Transportation Authority (MTA), which operates subways, buses, and many of the city’s bridges and tunnels, finally began repairing and improving assets that had been neglected for decades. In the 1990s, thanks to an economic boom, New York started preparing to build the Second Avenue subway—its first new line since 1932. In the 2000s, the MTA broke ground on that subway and on three more major projects: the lengthening of the Number 7 subway line west from Times Square; the construction of the Fulton Center transit hub downtown; and the extension of the Long Island Rail Road from Penn Station to Grand Central Terminal. Even as the city and the nation slid into recession in 2008, New York saw more blasting, tunneling, and concrete-pouring than in the previous eight decades.

You might suppose that the city’s next mayor would reap the political benefits. During the mayor’s first year in office, he or she will ride the first Number 7 train and smile for the Fulton Center ribbon cutting. Two years later will come the first trip on the Second Avenue subway. If the mayor scores a second term, a ride on the Long Island Rail Road across midtown in 2019 might be in the cards.

But well before then, the mayor could confront a fiscal derailment. The system that New York has used to fund transit investments during this golden age—debt backed by ever-increasing tax and toll revenues—is about to break. True, nominal responsibility for this slow-motion disaster belongs to Albany, not city hall. But unless the mayoral candidates start thinking seriously about how to pay for the infrastructure that moves New York’s private economy, the winner of November’s election may end up watching as it crumbles again.

New York’s modern transit system was born of successive crises and bailouts. In 1904, with city money, the private Interborough Rapid Transit Company built New York’s first subway line, from City Hall to 145th Street. The agreement that the IRT and another firm, the Brooklyn–Manhattan Transit Company, had inked with the city government specified that they would run the trains and collect nickel fares. But the companies made a big mistake: they neglected to index the fare to inflation. As prices rose, the private lines could no longer pay their expenses while charging five cents a ride. After World War I, they gradually went bankrupt.

Trying to fix things, the city first tried to unify the two companies’ management and then tried to assume control of that management. By 1940, it had acquired the companies outright. (The city already owned a third subway line that it had built itself.) But straphangers did no better under city control. The problem was the same: though the fare had risen to ten cents, revenues failed to cover expenses. Payroll costs, driven by the powerful Transport Workers Union, were a particular problem, more than doubling during the decade after acquisition. But city pols feared further fare hikes, and the system’s only other revenue came from sporadic contributions from the city government. By 1952, the subways’ $235.5 million operating budget was facing a $28.5 million deficit.

Mayor Vincent Impellitteri then had a bright idea: a “self-sustaining,” independent transit agency whose revenue would come directly from real-estate and business taxes. The city’s Board of Estimate favored the plan, noting that a transit authority funded with its own “dedicated” taxes wouldn’t have to compete with “schools, hospitals, and other vital services” for money from the city budget. The New York Times agreed, noting that independence could “lift fare and decisions on labor problems out of the political realm.” In 1953, Governor Thomas Dewey accepted part of Impellitteri’s plan and created the New York City Transit Authority. But he refused to fund it with dedicated taxes, contending that “the continued imposition of onerous taxes without limit must be self-defeating.” The transit system kept running deficits; by 1965, it was “in serious trouble,” the Times reported, with a $62 million budget gap.

In 1968, to solve that problem, Governor Nelson Rockefeller created the modern MTA by merging the transit authority, as well as some bankrupt commuter lines, with the Triborough Bridge and Tunnel Authority, which operated a number of tolled thoroughfares in the city. The thinking was that perennial bridge and tunnel surpluses would subsidize chronic mass-transit deficits. That fall, state voters also approved a $2.5 billion state bond issue, some of which was meant for the MTA. William Ronin, the former New York University prof who had agreed to run the authority, enthused that he was awaiting “various intensive studies . . . of where new subways might go.”

For the third time, a change in control introduced no new budget discipline. The subway system was starting to age, requiring a major infusion of capital spending just to remain in good shape. But politicians used both the Triborough surpluses and the proceeds from the bond issue to keep fares at 30 cents. In 1971 and again in 1973, statewide voters—perhaps wondering where those promised new subways were—rejected further borrowing for transportation.

By the early eighties, New York’s subways were in shambles. Every day, 140 subway trains had to be abandoned mid-route because of problems ranging from stuck doors to cracked windows. When a train broke down, it might stay broken for weeks because the inventory cupboards were bare. New York said it best when describing “a frigid winter morning” in 1982: “Stalled subway trains are plugging up tunnels from the Bronx to the Battery, and antique buses are coughing, wheezing, and refusing to roll out of their garages. All over the city, frosted commuters are stomping around packed platforms in anger and despair at what was once the greatest mass-transit system in the world,” now “a raw symbol of the city’s decay.”

But then the MTA’s new head, Richard Ravitch, proposed something radical: planning ahead. First, instead of relying on those sporadic contributions from the city, state, and federal governments, the MTA would get its own annual tax revenues from Albany, much as Impellitteri had proposed three decades earlier. The state agreed, dedicating certain downstate business taxes to the MTA and transforming it, in effect, into a little government with its own regular access to tax dollars.

Second, the MTA would use this money not to keep fares low but to finance a long-term capital-investment plan. The system had an enormous backlog of repairs and improvements: Ravitch estimated that the MTA would need more than $8 billion over five years to restore its assets to an “acceptable state” by purchasing subway cars and buses and fixing stations, escalators, signals, and rails. The new tax money wouldn’t suffice to cover this backlog; instead, it was used to pay for borrowing. In 1982, Ravitch issued the first bonds backed by subway-fare revenues ever sold in the United States. Since the authority, not the state, had issued the bonds, the move circumvented New York’s requirement that voters approve state debt. For better or for worse, the MTA no longer needed state voters’ approval to borrow.

New York has benefited from this system for more than three decades. These days, the MTA gets 35 percent of its annual income from dedicated taxes and fees, almost as much as the 41 percent it receives in fares. (Of its remaining income, half comes from tolls and the other half from state and local assistance.) The MTA gets a tiny slice of many downstate taxes: gas taxes, vehicle-registration taxes, sales taxes, a tax on “petroleum businesses,” and a tax on mortgage transfers.

These reliable streams of revenue have allowed the MTA to borrow and spend freely on repairs and improvements. Since the Ravitch years, the authority has spent $51.8 billion on capital investments, after depreciation, and won the public’s grudging confidence for doing what it said it would do. Ravitch’s futuristic plans for air-conditioned subway cars and environmentally efficient buses came true. Trains now fail every 166,000 miles, rather than every 6,700. As the city has gained 200,000 residents over the past decade, the subway system has managed to accommodate its biggest ridership since World War II, thanks to capital improvements. For example, modernizing the signal system along the L subway line enabled the MTA to add 98 round-trips each week, starting last June, serving the workers who commute from trendy Williamsburg, Brooklyn, to start-ups in Union Square.

But there can be too much of a good thing. All those dedicated revenues have encouraged the MTA to borrow too heavily. Since Mayor Michael Bloomberg took office nearly 12 years ago, the debt that the MTA owes for capital projects has nearly doubled, from $16.7 billion to $32 billion. That includes $8.5 billion borrowed against bridge and tunnel toll revenues—more than five times the amount that those tolls bring in annually. Debt costs, now $2.2 billion a year, eat up 16.7 percent of the MTA’s annual budget—up from 10.6 percent 12 years ago.

Why has the MTA relied so much on debt to fund its capital spending? Part of the reason is that it can’t draw money from the operating budget, which has more than doubled over the past decade, driven by skyrocketing labor costs. Pension costs for workers have quadrupled, from $318 million to $1.4 billion annually; and health-care costs have doubled, from $1.1 billion to $2.2 billion. By contrast, inflation has risen 27 percent.

The MTA can’t keep borrowing this heavily, especially when interest rates are at historical lows and have nowhere to go but up. But the authority needs to keep making capital investments. More than two-thirds of its capital spending is devoted not to new projects but to maintaining a century-old system: replacing tracks and cables, buying buses, fixing escalators, and so forth. Despite decades’ worth of investment, the MTA is far from finished, at least according to a poll conducted by Zogby Analytics for the Manhattan Institute: only 20.7 percent of New Yorkers believe that the outer boroughs are “adequately served by public transportation,” while 61.6 percent want more investment “to expand existing services and create new ones.” Cutbacks could curtail the city’s growth. For instance, Mayor Bloomberg’s plan to allow taller office buildings in east midtown will run into problems if commuters can’t get there in the first place. Waiting platforms in the Lexington Avenue subway, which serves the area, are already overcrowded; a completed Second Avenue subway would help, as would simpler investments, such as bigger platforms.

But how to pay for these necessary improvements if borrowing is off the table? Fare hikes will do only so much. The MTA has finally reversed the doomed policy of raising fares more slowly than inflation: since 2002, the cost of a 30-day MetroCard has jumped from $63 to $112, and a round-trip toll for a passenger vehicle on a major crossing has risen from $6 to $10.66 (provided the driver uses an E-ZPass, as most do). But as round-trip tolls creep toward $15 and $20 over the next decade, there’s a danger that they’ll discourage traffic, which in turn would reduce the bridge-and-tunnel revenue that the MTA uses to pay for borrowing. “For 45 years now,” the bridges “have been a cash cow for the MTA,” says former city traffic commissioner Sam Schwartz. But “it isn’t going to work” any more “because the price is getting too high.”

The MTA also can’t count on still more dedicated tax money to fund its capital spending. Just three years ago, the authority got its latest dedicated tax, most of it in the form of a third-of-a-percentage-point Social Security–style levy on downstate payrolls, which brings in about $1.9 billion a year. At the time, the architect of that rescue, State Senator Malcolm Smith (now facing unrelated criminal corruption charges), promised that it would “finally stop this endless cycle of threats by the MTA to raise fares and cut services every time their business practices get them in trouble.” (It didn’t.) Nor can the MTA rely on the feds, the city, or the state to pay for its capital spending at a time when all levels of government are cutting back.

Though the MTA is operated by the state, not the city, no mayor wants to stand by as mass transit disintegrates. The next occupant of City Hall could help by promising financial aid from a source that transit advocates have long wanted to tap: the city’s East River bridges, which connect Manhattan to Brooklyn and indirectly to Long Island. At the moment, those bridges aren’t tolled, simply because they were constructed long before Robert Moses got the idea of building a permanent empire of vehicle tolls. But the arbitrary difference isn’t fair, Schwartz says. You pay more than $10 to cross the Verrazano-Narrows Bridge from Brooklyn to Staten Island; you can even pay $2 to travel from one remote part of Queens to another. But you cross the East River from Brooklyn to Manhattan without paying a dime.

This inequity isn’t merely unfair; it harms New Yorkers’ quality of life. The Verrazano charges tolls only on westbound lanes, Schwartz points out. The tunnels from New Jersey to Manhattan (controlled by the Port Authority of New York and New Jersey) do the opposite, charging for eastward travel only. So truckers who have driven from Jersey to Brooklyn via the Verrazano have a big incentive to make the return trip through Manhattan, across those free East River bridges and through the free tunnels, saving $50 to $80 per round-trip. Every day, about 100,000 drivers perform that maneuver and similar ones to save money. But the detours entail driving through narrow residential streets—causing wear and tear, congesting traffic, and endangering pedestrians—instead of on wider highways.

Schwartz has proposed an ambitious plan that would both fix the problem and raise funds for city infrastructure. It would levy a $5.33 toll each way on drivers using the East River bridges and also on drivers crossing 60th Street to enter or leave Manhattan’s congested central business district. Some of the proceeds would be used to lower tolls on bridges in the outer boroughs. Imposing tolls in Manhattan and reducing them elsewhere makes sense not only because Manhattan is congested but because people who want to get there have plenty of mass-transit alternatives—which isn’t the case in large swaths of the outer boroughs. To ease Manhattan congestion further, Schwartz would eliminate Manhattan residents’ current exemption from the parking tax, discouraging them from owning cars, and he’d slap a new surcharge on taxis and other hired cars below 96th Street.

Schwartz says that his plan would yield $1.5 billion a year. He’d devote $500 million of that to maintenance, keeping major city and MTA infrastructure in a “state of good repair.” Now that the city’s and the MTA’s assets are in better shape than they were three decades ago, it makes good sense to stop financing maintenance through borrowing.

Schwartz would devote the remaining $1 billion to long-term investments. One-third of it would improve roads and bridges. Untolled roads lack their own source of cash, so they must compete with other, louder special interests—including education and public safety—for money. Too often, the result is that they’re underfunded, since “infrastructure is low down on the totem pole,” says Schwartz. One of his ideas is raising the underpasses on the Belt Parkway so that truckers could take it to John F. Kennedy International Airport instead of using residential streets. He’d build elevated “busways” along various thoroughfares, including the Long Island and Bruckner Expressways, for better transportation to the airport and to outer-borough and suburban neighborhoods. He even wants to build three slender “ribbon bridges” to let bicycles and pedestrians get from Brooklyn, Queens, and New Jersey to Manhattan, relieving the congestion that newcomers to waterfront neighborhoods are creating.

The rest of the $1 billion would go to long-term improvements in transit. That would have the great merit of reducing the city’s dependence on federal funding. Local politicians’ never-ending quest for Washington money has encouraged them to focus on headline-grabbing expansion projects rather than boring but beneficial improvement projects. It’s not clear that the $8.8 billion East Side Access project connecting the Long Island Rail Road to Grand Central was more important than, say, building those elevated busways—but the busways wouldn’t have scored a multibillion-dollar federal grant. The perpetual focus on federal funding has also tempted state and local officials to treat the planning and pricing process sloppily: Why worry about how much a project will cost if the money paying for it comes from someone else? That sloppiness encourages initial cost underestimates—which mean that the state and local governments wind up spending billions of their own money anyway. A decade ago, East Side Access was supposed to cost less than half its current price tag. State and local governments have shouldered the balance via debt.

Potential mayors may view the Schwartz plan with caution. In 2006, Mayor Bloomberg proposed a similar plan to levy an $8 fee on cars entering Manhattan’s central business district and backed it up with a massive public-relations push. But outer-borough and suburban Democrats in the state assembly killed it, viewing it as an elitist tax imposed on non-Manhattanites visiting Manhattan.

The next mayor shouldn’t be too fearful of the politics, however. At some point, the political cost of ever-rising tolls on the Verrazano and other crossings will outweigh the political benefit of keeping the East River bridges free, as some drivers question more and more why they pay so much while others pay nothing. And there’s another reason that Albany might cooperate with the next mayor who wants to stick a price tag on free bridges: the alternatives are going broke and doing something that’s even more politically risky. In 2009, state lawmakers chose to fund the MTA with that new payroll tax because they thought that few would notice it. They weren’t expecting the blowback they received from small businesses and suburban counties, which screamed so loudly that the legislature had to cut the tax slightly two years later. It would be even more difficult to hide yet another tax; a new bridge toll might look appealing by comparison.

Harder than getting Schwartz’s plan through the state legislature would be making sure that the money it raises goes to capital, not fare subsidies or labor. State solons would surely try to steer the new funds into the MTA’s operating budget. The last time around, much of the money that lawmakers approved via the payroll tax found its way into a retroactive labor agreement for the Transport Workers Union months later. So the best approach for the next mayor would be to support a version of the Schwartz plan—but to address costs first. There will be no new revenue from tolled bridges, the mayor would say, until the MTA signs a contract with the Transport Workers Union in which workers agree to cut the growth of health-care costs and to pay for their raises by making adjustments that increase productivity. One goal of such a contract would be eventually phasing out the payroll tax. But another effect would be preventing the new money from East River bridges from getting sucked up by labor.

The next mayor may be tempted to tinker with transit and transportation on a smaller, safer scale. But it’s hard to do the small without tackling the big. It’s hard, for example, for the city to speed up bus service (as several mayoral candidates have suggested) when the roads are clogged with tens of thousands of vehicles that are there only because their drivers are trying to game a capricious system of tolls. As for ignoring the health-care and pension costs that are killing the transportation and transit budget: the same costs are overwhelming the city budget. By tackling them, the mayor would set a good example for the MTA (see “The Coming Budget Crunch,” page 4).

Finally, the new mayor will have to think about his legacy, starting on Day One. Does he or she want to be known as the person who watched as the hard-won gains achieved under the previous four mayors evaporated?