This is how you fix Metro’s funding problems

This is the second in a three-part series by GGWash board member Dan Tangherlini on the Metro governance crisis and our need as a region to address it.

Last week I asked the question: “What do we want WMATA to do?” I argued that we should want WMATA to be what it was originally conceived as: a regional platform for planning, developing, and sponsoring public transportation. That platform could support both public and private service provision leveraging the massive investment in infrastructure and operations that have been built over the last fifty years. It should also include reducing the redundancy in our region’s public transportation network.

In order to make that proposal work, we need to be able to pay for it. And while the conversation is underway about renegotiating the organizing structure, or compact, for WMATA, we should also talk about updating the regional funding formula. The formula is based on a series of assumptions made fifty years ago, and the idea that those assumptions no longer apply is reflected in the need for this conversation today. In fact, a lack of dedicated funding for WMATA has been a long standing piece of unfinished business for its entire history.

Rebuilding the funding formula around dedicated revenue source(s) for public transportation in the region (WMATA) would separate public transportation investment decisions from other parts of our region’s state and local government’s budgets. CFOs hate this idea because it reduces flexibility and shields a single category from shocks in broader revenue collection — but that’s why it is a good idea for public transportation in general and Metro specifically.

Given that our current funding discussion focuses primarily on Metro, let’s talk about how to pay for Metro, but with an eye toward potentially extending the mechanism to a regional public transportation system.

Not just dedicated revenue. The right type of dedicated revenue.

Luckily, consensus has begun to coalesce around the idea of dedicated funding. While a positive step — and maybe the only politically palatable one — it has begun to coalesce around a source that is neither adequate nor directly relevant: a sales tax. This particular type of tax is also known to be regressive and is prone to economic shocks that slow or shrink consumption.

Instead, Metro’s dedicated funding should primarily come from the recipients of the vast majority of Metro’s benefits and value appreciation: real estate. In his excellent article on the subject, the Post’s Jonathan O’Connell makes the case better than I could. In the article he links to a report by Metro from 2014 that explores various cost recovery and funding mechanisms. The most logical, defensible and rational is a system-wide station area incremental assessment on all property within a half mile of a Metro station.

According to the Metro report, the value of property within a half mile of a Metro station is $235 billion. An assessment based on value (which I think is less attractive) or realized square footage could be designed to generate more than half of the funds that Metro needs in the form of operating and capital subsidies from the jurisdictions each year. These funds could then be matched on a new formula basis by the participating jurisdictions to provide Metro with a stable, predictable, annual subsidy that would be supplemented by federal grants and fare collections.

An approach of this sort would eliminate the annual budget dance of threatened service cuts, fare increases or jurisdictional subsidy shocks. While it would reduce the ability of jurisdictions to influence annual budgets at a pure operational level, that ability has contributed to the scandalous underfunding of maintenance and repair.

This funding strategy would also reward Metro for successfully developing its station areas, both current and new. It would also encourage jurisdictions to reduce limitations on station-area development as it would support revenue generation, service improvements and fare stability. Having a direct economic counter-incentive to NIMBYism would allow the region to reap the benefit of the initial and ongoing investment in Metro.

What does this mean for me?

If you have read this far, you probably want to know how the numbers work. And you likely want to know how they work for you. (My corollary to Tip O’Neill’s rule that “All politics are local” is that “All local politics are personal.”)

Regrettably, the numbers necessary to develop an estimate of the relative size of a square-footage based assessment are hard to find. More research is necessary to nail down the actual amount. However, a rough guess based only on rentable commercial office buildings of 25,000 or more square feet suggests a roughly 25-cent per foot annual assessment on all property within a half mile of Metro stations, matched by an equivalent state/local subsidy would provide Metro with sufficient operating and capital funding to operate, repair and invest in its system. A stable, real-property based funding source would dramatically improve Metro’s borrowing capacity and options. The impact of this stability alone could be measured in the tens of millions of dollars of additional buying power and interest cost reductions.

But a 25-cent per foot Metro assessment could be onerous to some landowners, such as residential property owners or non-profits. Therefore, while universities, hospitals or the federal government should not be exempted from this assessment (there is precedent for this in our business improvement district fees and through GSA’s “Good Neighbor Policy”), we could allow jurisdictions to buy down the assessment. In other words, a jurisdiction that was concerned that an additional property-related assessment burden would be punitive or unpopular could pay the difference between the per-square foot assessment rate and a level that the jurisdiction determines is more acceptable, up to the full assessment amount. This could be done directly, as a payment to WMATA, or indirectly as a credit to individual property tax bills.

The federal government does have a role

The federal government will always have a role in Metro funding through capital grants and other Department of Transportation programs. Notably, a dedicated, real estate investment based approach to Metro funding would dramatically improve Metro’s competitiveness for loan guarantee programs such as TIFIA.

However, the federal government should not be exempted from its responsibility to support Metro’s operation and ongoing investment. This can be accomplished in two ways through this proposal and an additional change.

First, as stated above, this proposal contemplates that the federal government would also contribute to the per-square foot Metro access assessment. Property leased to the government would automatically be included, but property owned outright by the federal government is generally exempt from any level of local or state taxation. Although, there is some precedent to support federal payment. In fact, the General Services Administration voluntarily contributes to Business Improvement Districts and the General Accounting Office has ruled that federal agencies can make payments that tie directly to service delivery such as utility access - if there is a direct nexus between the collections and the service. In this way, this approach might allow the region to gain some small measure of recompense for the massive, untaxed Federal presence.

Second, the federal government provides an incentive to its employees to ride the region’s transit systems through the Transit Benefit Program. Regrettably, this program allows federal employees to access the regionally subsidized transit system at the price subsidized by those jurisdictions, not at the actual cost.

Normally an incentive program of this sort represents a fair trade-off with employers providing access to a system that they have helped fund through their taxes. However, with the subsidy-program-motivated federal employee riders, the region not only, as the saying goes, loses money on each passenger, but also makes it up in volume.

The fare that Metro charges Transit Subsidy riders should be set at an amount equivalent to the unsubsidized cost of providing that ride. While seemingly complex, this accounting is already done by Metro and the current all-electronic fare collection system would make collecting the higher full-cost rate a matter of changing some code. And because the subsidy is spread across so many agencies, it would represent “rounding error” in most agencies operating budgets and easily absorbed. However, the additional revenue to Metro would add up to tens of millions of dollars annually. (A similar fare structure for riders from non-participating jurisdictions and visitors should be considered as well.)

Free Metro to maximize its internally-generated revenue

Any dedicated revenue proposal should also recognize that Metro itself could be a more aggressive revenue generator on its own. Early private, for-profit transit systems were real estate developers, power generators, amusement park operators (Glenn Echo) and otherwise fully engaged in maximizing the value and return of their systems. However, Metro is held in check by its position as a public agency overseen by elected officials. Revenue maximization is tempered by strong private interests and constituency politics.

Metro land redevelopment is managed through a highly political process that has ended in more than a few instances in scandal and in nearly every case with limited direct benefit to Metro. Metro should have direct connection and participation in the development of its station areas and facilities. The systems in Hong Kong and Singapore have mastered the art of “value capture” and perhaps we could import some of this capitalism back to our country and its National Capital region?

Engage the new economy

We should recognize that the prior hierarchy of mobility options has been disrupted by the innovation of ridesharing and the potential for autonomous vehicles. These services provide a vital social benefit by expanding access to mobility geographically; utilizing existing, wasted capacity; and providing opportunity for part or full time work. However, some of this is at the cost of the existing, substantial public investment in mass transit service through rail, bus and streetcar.

In an earlier post I recommended that we recast regionwide transit management to include the regulation, oversight and support of these services. We should also leverage the existence of these services and their technology, innovation and creativity to dramatically improve access and coverage of public transportation.

This should include providing subsidies for services that link to traditional transit or provide access to unserved or underserved areas. We should also explore options for some sort of direct contribution from these services as well.

Metro is an allegory

There is more than enough value generated by Metro directly and indirectly to fund its operations, maintenance and expansion. This value, though, just isn’t arranged in such a way that allows Metro to benefit from it. Public revenue from massive private development is passed through several layers of local and state governments before some of it filters to Metro. Revenues are held in check and expenses are unconstrained by a political and parochial board.

In these ways, Metro is an allegory for the problems facing much of our economy-supporting infrastructure. Metro historically has served as a model for transportation policy - for good and for bad. Perhaps a meaningful effort to reform its role, governance and funding structure could be Metro’s next contribution to the National discussion?