Deficits by Design Plague Metro

June 21, 2004

Metro’s board on Thursday adopted a new budget balanced in part by fare increases that helped close a $23.4 million operating deficit. The increases mark the second year in a row that fares and fees have gone up.

But don’t think that’s the end of the fare raises.

Fares may go up again next year and the year after that if the region’s leaders fail to address a fundamental long-term flaw in Metro’s financial structure.

Yes, Metro’s short-term fiscal problems owe in part to a series of short-term budgetary challenges. Rapidly increasing costs for its paratransit service, security-related expenses in a post-September 11 world, insurance and benefits for employees all play a part.

Yet at their core these issues do not dramatically differ from what other large metropolitan transit agencies face.

No, what sets Metro apart is that the agency’s budget problems stem for the most part from the agency’s unusual and problematic revenue base.

Metro, as I found while researching a new Brookings Institution report, stands out as virtually the only major transit system in the nation that receives no dedicated stream of revenue each year for capital or operational costs.

Instead, Metro—unlike all other major systems—remains uniquely dependent on annual operating subsidies from its member jurisdictions as well as revenue it generates internally from passenger fares, advertising and parking.

Other agencies can rely heavily on steady income from a variety of sources dedicated to them to support their services. Portland, Ore., receives cigarette- and payroll-tax revenues; Boston garners a portion of the state’s sales tax; Atlanta, Dallas and Chicago obtain revenue from a regional sales tax. In Alabama, Birmingham’s system can even count on proceeds from the local beer tax.

And indeed, about one-third of the revenues for operating expenses nationally, and half on the capital side, come from dedicated sources.

In sharp contrast, the only dedicated revenues to which Metro lays claim come from a small gas tax in Northern Virginia that constitutes less than 2 percent of the agency’s total operating budget. As a result, nearly one-third of Metro’s funding comes from state and local governments’ general fund revenues—the same volatile and highly contested pool of money that subsidizes public safety, education, parks and other needs. This over-reliance ensures that the agency remains vulnerable to all the lurches and bumps of local budgeting and so to perennial financial crises such as the present one.

What, then, should be done to stabilize Metro? Opponents of a dedicated source of revenue for the transit agency invariably argue that higher fares will solve the agency’s budget woes. But fares here are already some of the highest in the nation. Increasing them again and again will only impose yet another regressive burden on lower-income commuters even as it pushes riders off trains and buses onto the region’s already-congested roadways.

In light of that, this region needs to reaffirm its commitment to a world-class transit system by establishing a dedicated source of revenue to take the burden off state and local general fund revenues and shore up an important regional asset. Reserving for Metro proceeds from regional sales and/or gas taxes are a possibility. So are congestion charges, parking fees or strategies that capture increases in land value near Metro stations.

Yet the exact source of stability for Metro is not as important as the need to act soon on whatever is possible.

Without action, the agency will constantly be scrambling to fill revenue gaps, rather than focusing on its core mission of ensuring that Metro remains one of the great transit systems in the country. Beyond that, it will struggle to address a $1.5 billion gap in essential and urgent capital priorities needed simply to maintain and upgrade the existing system.

Clearly, a crisis is looming. Let’s head it off.