Unlike other public utilities like telephone, gas, electricity, garbage collection, and cable television. Public Transportation in the United States in most part is directly operated and/or subsidized by the government. Like most government services, funding for public transportation is not always assured and often compete with other transportation demands such as local streets and highways. Furthermore, pots of money for transportation are usually restricted in the kinds of expenditures they can be used for. It is rather not unusual to see a transit agency purchasing new buses and trains while proposing to cut service.

Understanding Transit Expenditures

Transit expenditures are classified into two general categories: capital and operating. Capital costs generally include long-term sunk costs such as system expansion, station upgrades, and fleet replacement. Operating costs typically refer to labor, fuel, and other costs of regular service and maintenance.

An analogy might be, if you buy a house, the cost of purchasing the house, including list price and interest on the mortgage, is considered a capital cost, whereas your monthly electric, gas, and water payments, which vary depending on your usage and stewardship of resources, are part of your operating cost.

Then there are fuzzy expenses that could potentially be either, and are sometimes called “capital[ized] maintenance” cost, and which are generally classified as a capital cost. In 2009/2010, most transit agencies suffered funding crises due to declining local tax revenues. To loosen the impacts on service, many transit agencies began to categorize the cost of maintenance from operation to capital, which they could take advantage of the new stimulus funds coming from the federal government. The federal government generally do not allow its funding to use on operation, but do allow some of its funding to use for capitalized maintenance.

Transit Funding and Expenditure Type

Most state and federal funds are restricted to capital expenditures. Politics being what it is, they want the money to produce shiny new equipment or facilities for a nice ribbon-cutting, rather than something less visible and tangible. They also feel that paying for operations is a local government responsibility and don’t want to encourage inefficiency (going back to our analogy, it’s like free money from your uncle results in you leaving certain lights on all the time, instead of using the money to operate more light bulbs in rooms that really need it).

This commonly creates a problem when local agencies pursue these capital funds but lack sufficient operating funds to actually operate the new service. The federal government has in some cases recognized this as a problem and have implemented criteria, such as in the federal New Starts program, to prevent fiascos that have occurred, such as the BART-Millbrae extension shutting down a leg of the service entirely (the branch of the wye that links San Bruno to Millbrae directly (bypassing SFO) was shuttered for many years after opening). It really doesn’t look good when they spend hundreds of millions to build something that isn’t used.

Transit funding

Transit funding comes from a variety of sources, from passenger fares, local tax revenue, as well as state and federal grants. Most state and federal grants require local entities to provide some matching funds.

Passenger fares

While passenger fares don’t cover the operating cost of the transit service, they’re an important source of revenue. Providing free rides on public transit for six of the region’s most polluted “Spare-The-Air” commute days in the summer of 2006, cost the Metropolitan Transportation Commission $13.3 million ($2.2 million/day) to compensate Bay Area transit agencies for lost fare revenue.

The ratio between the passenger fares paid and the operating cost is called the “farebox recovery” ratio. Local bus transit agencies typically have a farebox recovery ratio of about 20%, which means that 20% of the operating cost comes from passenger fares, and 80% is subsidized by various taxes and grants. Some of our regional rail operators have a farebox recovery rate closer to 50% or even higher. High fare-box recovery ratio, however, does not necessarily mean a lower public subsidy per ride — a $5.00 rail fare for a line with a 50% farebox recovery, for example, requires a public subsidy of $5.00 per ride, but a $1.25 bus fare at 20% farebox recovery ratio also means a subsidy of $5.00 per ride.

Local tax revenue

Almost all Bay Area counties have specific local sales taxes that support public transportation. In San Mateo and Santa Clara counties, a permanent half-cent local sales tax provides operating funds to each of the local transit operators, SamTrans and VTA, respectively. A permanent half-cent local sales tax is also levied in Alameda, Contra Costa, and San Francisco counties to support BART, AC Transit and Muni operations.

Besides sales taxes, AC Transit is additionally supported by property taxes within its special district, and Muni is supported through general city funding and various parking and impact fees.

On a statewide basis, a quarter-cent sales tax is collected through the Transportation Development Act (TDA) and is redistributed to the counties. The TDA funds support urban and rural transit operations, as well as pedestrian and bicycle projects throughout the state.

Unlike most transit agencies, Caltrain lacks a dedicated local transit tax. Caltrain’s operating subsidies are paid by the three county transit agencies (SamTrans, Muni, and VTA), which have their own dedicated taxes. This has always created a problem for Caltrain in that it’s had to limp along hoping for the good graces of these agencies every year. When SamTrans, Muni, and VTA suffer their own financial troubles, Caltrain suffers also.

“Temporary” local sales taxes for transit

To provide additional revenue for transportation, particularly highway and transit expansions, most urban counties in California collect a temporary countywide transportation sales tax (generally 1/2 cent). These temporary sales taxes have generally a life of 10 to 30 years and require voter approval to renew when the taxes approach expiration. These taxes, when placed to the voters for approval, typically have a list of transit and highway projects that would be funded. Because the funding is generally shared by different transportation entities (cities, county, transit agencies, etc), many counties have special boards to allocate these taxes. Only a few counties in California have a multi-function transportation agency that operates public transportation, funds and manages road projects, and oversee how temporary taxes are spent (VTA in Santa Clara County, OCTA in Orange County, LACMTA in Los Angeles County).

These taxes, due to their temporary nature and desire to promote very visible improvements to voters to assure passage, have historically specified that funding will go for capital projects and not operating costs. As new service is added and the demand for operating subsidies continues to grow, these taxes when up for renewal have frequently been adjusted to specify that a portion of the revenue will go to fund transit operations and maintenance.

Alameda County transportation revenue sources

Santa Clara County transportation revenue sources

State Assistance

Besides local funding, the State of California also financially support public transportation through Transportation Development Act (TDA). TDA provides two funding sources, Local Transportation Fund (LTF) and State Transit Assistance (STA).

LTF specifically is a 1/4 cent sales tax collected statewide. Unlike local sales taxes directly allocated to transit agencies in most Bay Area counties, there are state requirements such as minimum fare box recovery ratio, financial and performance audits, in order to maintain receiving funding from LTF. Because LTF is collected on a county basis, instead of a transit agency basis (especially where the transit area does not conform with county borders), LTF funds are allocated to all transit agencies in the county. In Contra County for example, BART receives a much larger shares of its own sales tax for rail operation, but a much smaller share of TDA funding, whereas local bus agencies like County Connection and Tri Delta Transit receive a much larger share of TDA funding and smaller share of BART’s sales tax funding. These local bus agencies do not have their own sales tax in their service areas.

In the Bay Area, the Metropolitan Transportation Commission also takes a cut of the TDA funds for regional programs such as the 511.

Another component, the STA, is funded by sales tax on diesel fuel sold in California. Unlike the LTF, STA is appropriated by the state legislature. Because of the funding is subject to Sacramento politics, the STA is not as a reliable of a funding source as LTF. Before 2010, the state legislature had the habit of reducing STA funds available to transit by borrowing to cover the state budget shortfall. In 2010, after losing a lawsuit, the state legislature and Governor Schwarzenegger eliminated gas sales tax (which guaranteed a portion to transit by Prop 42) and instead raised gas excise tax that could fund road programs but not transit. At the same time they approved raising diesel sales tax to provide some level of funding for STA, but not as much as before from gasoline.

TDA is an essential component for transit funding especially in ex-urban and rural areas where transit ridership is low but are depended strongly by those who have limited mobility. Rural counties can also use their share of TDA funds not used for transit for local streets and roads. TDA also requires rural counties to solicit community input on transit needs.

Federal Assistance

The Federal Government generally does not providing operating assistance aside from a few programs. Grant programs like JARC (Job Access Reverse Commute) and Section 5311(f) Intercity Bus Program can provide direct subsidies for operation. Some transit services in the Bay Area (including SamTrans 294 between Pacifica and San Mateo, and VTA 68 between San Jose and Gilroy) are partially supported by federal grants.