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Mayor Emanuel shaking hands at the 95th Street station, the current terminal on the Red Line Dan Ryan branch. Photo by slow911.

Rahm Emanuel said he would help the Chicago Transit Authority (CTA) find whatever money possible to fund an extension of the Red Line’s Dan Ryan branch to 130th Street. That project will have four new stations (view map); the construction will most likely be majority paid for by the federal government (the capital costs). But the federal government won’t pay for the CTA’s new costs from operating the extension. Or any operating costs (note 1). The CTA and Mayor Emanuel are also pursuing bus rapid transit (BRT), a faster moving bus route.

How will we continue funding transit?

Currently, transit agencies in northeastern Illinois receive revenue through sales tax, advertising and concessions, fares, interest on investments and leasebacks (note 2), and transfers from the Regional Transportation Authority (RTA). Additionally, the CTA receives contributions from the City of Chicago and Cook County at annual fixed rates of $3 million and $2 million, respectively (making up just 0.37% of CTA revenues).

The RTA, which oversees the CTA, Metra, and Pace, gets 74% of its revenue through sales tax, 24% from the state’s Public Transportation Fund (note 3), and 2% from the Chicago real estate transfer tax (RETT). Much of this is shared back to CTA, Metra, and Pace. Read the 2011 Budget Recommendations for full details. See note (3) below for more information on how the state subsidizes transit.

All of these funding formulas are defined by the state legislature. When the transit agencies cannot balance their budgets, these are their options:

The seventh option is to increase sales taxes or change the subsidy formula (note 3). But this requires the legislature to spend several years fighting each other for the best way to collect, subsidize, and distribute revenues to the various transit agencies. Arguments in the Illinois General Assembly are “settled” on three topics:

How much each transit agency should get from sales tax revenues (CTA vs. Metra vs. Pace)

How much each county’s residents should contribute (this becomes a Chicago vs. Suburban Cook County vs. Collar counties discussion)

How much Chicagoland benefits and how much downstate Illinois benefits

There may be an eighth option: local referendum.

A referendum appears on a voting ballot on an election day and gives voters the opportunity to approve or deny either raise or institute a tax, or issue bonds (to be sold to investors and used mostly for capital expenses). This referendum would only be needed to support the transit agencies’ day-to-day operating expenses as the federal and state capital grants pay the majority of the costs for new equipment and rail lines (80% of these “capital” costs is paid for by the federal government).

The CTA receives 39% of its operating costs from passengers (data from the 2011 Budget Recommendations). For comparison, TriMet, a transit agency serving the Portland, Oregon, area, receives only 22% of its operating costs from passengers and the remainder from payroll taxes in the TriMet service district (data from TriMet’s website). In New York City, the most comparable transit system the CTA, the Metropolitan Transportation Authority (MTA) receives 45% of its operating costs from passengers and tolls (the MTA also operates seven toll bridges and two toll tunnels; data from the MTA 2008-2009 financial statement).

In Maricopa County, Arizona (containing Phoenix, Tempe, and Mesa), voters approved Proposition 400 (58 to 42 percent), which continued a half-cent sales tax increase, set to expire in 2005, until 2025 to fund transit. A larger portion of this fund goes to pay for highways than for transit, but nonetheless, voters stepped up for transit.

Voters in Mecklenburg County (home of Charlotte, North Carolina) have twice voted to impose on themselves a half-cent sales tax (first in 1998, with a 58 to 42 margin, and then in 2007, with a 70 to 30 margin). This sales tax pays for 49% of Charlotte Area Transit System’s operating costs, with passenger revenues comprising 22%.

The Transport Politic recently described efforts in Atlanta and Seattle to pass referendums that support local transit, recognizing the cost cutting of Congress and decreased revenues from state operating assistance (all transit agencies are experience lower revenues as a result of the recession; the recession means lower sales or payroll tax revenue).

Would residents of Chicago and the six collar counties vote to approve a new sales tax, to be controlled by them, instead of the state legislature?

The Active Transportation Alliance and its myriad partners (like Chicago Metropolitan Agency for Planning, the creators of a comprehensive land use and transportation plan for our region), alongside the RTA and the three service boards, would need to spearhead this effort to get such a referendum on ballots in six counties.

The Transport Politic also noted a report on how referenda can be more easily passed:

By examining eight case studies, the study’s authors pointed to the importance of consensus among business, elected, and environmental interest groups and suggested that campaign leaders must be able to orchestrate a savvy, well-funded media message. What appears to be less important — especially as compared to the 2001 study that this report updates — is producing a multimodal plan that distributes gains evenly across the area whose population is asked to fund it. The reputation of the existing transit agency may or may not be important.

From the Mineta Transportation Institute at San Jose State University in California.

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At the end of the line. Photo by Jeff Zoline.

Notes

(1) Subsidizing operating costs

The federal government ceased funding transit agencies’ operating costs except for specific grant programs like Job Access Reverse Commute (JARC), wherein transit operators can receive a subsidy to provide new routes they typically have refrained from providing. For example, Pace might operate a special route once a day to the UPS Hodgkins facility for the night shift, a route different from the one that operates frequently through the morning, afternoon, and evening.

Another program that provides limited operating assistance is Congestion Mitigation and Air Quality (CMAQ). This program has a wide variety of purposes: it pays for many of Chicago’s new bike lanes, but also funds transit service expansion and operating costs of this new service (for up to three years).

(2) What is a leaseback?

A leaseback (also called SILO, for “sale in, lease out”) is an agreement between a private investor and a transit agency in which the transit agency sells equipment (often buses) to the private investor who leases is back to the transit agency. By owning the equipment, the private investor can deduct equipment depreciation from its tax bill. Given that transit agencies don’t pay taxes, these deductions are worthless to them. In the agreement, the private investor shares this benefit with the transit agency (often up front). Read the Tax Foundation’s Fiscal Facts for more details on leaseback agreements. The CTA recognizes these deals in its 2009-2010 Financial Statements (page 25). The CTA made its last leaseback in 2003 as the United States Treasury denied all future deductions starting in 2004.

(3) Funding the Public Transportation Fund

To subsidize transit operation in northeastern Illinois, the State transfers money from the General Revenue Fund to the Public Transportation Fund. The transfer amount is equal to a portion derived by summing:

20% of the revenues from sales taxes imposed by the RTA in Cook County

“one third” of the revenues from sales taxes imposed by the RTA in DuPage, Kane, Lake, McHenry, and Will counties (in exchange for their sales tax rate being raised by .25 percentage points, a third of the sales tax collected in these counties is transferred directly to the county boards to use for transportation or public safety projects)

The actual, complicated, formulas are described in 70 ILCS 3615/4.09 of the Illinois Compiled Statutes. The distribution formulas of RTA to its three service boards (CTA, Metra, Pace) is described in 70 ILCS 3615/4.03.

(4) The City of Chicago’s additional contributions

I note that the City of Chicago transfers just $3 million from its general revenue fund to the CTA. But that’s not all that the City provides to the CTA. It also provides, without reimbursement from anyone, about $22 million in dedicated services from the Public Transportation Section of the Chicago Police Department. I don’t think either should pay anymore than this – it’s not solely the responsibility of Chicago to provide transit; it should be shared amongst all municipalities and the state.

The City provides additional services by paying for the design and construction of new or rehabilitated stations, like Morgan Green/Pink, and Grand Red. The Chicago Department of Transportation actually owns all subway stations in the Loop, on both the Red and Blue Lines.

Note: This article does not attempt to compare taxpayer-funded subsidies to transit agencies with the taxpayer-subsidization of highways and local roads – this article only explores how transit is currently funded in northeastern Illinois and how it could be funded in the future. All transportation modes are subsidized in some way by taxpayers, and all American taxpayers are funding all transportation modes whether they use that mode or not.

Updated September 13, 2011, to add Note (4).