Wanted: Economic Analysis of Urban Rail Transportation

Lynne Kiesling

One of the big stories in Chicago at the moment is the Chicago Transit Authority (CTA), its expenditures, and its management decisions. Last week I mentioned the ongoing construction and expansion of the Brown Line stations, as well as Time Out Chicago’s set of feature articles.

But there’s more frustration and discontent simmering than I indicated. This article from Crain’s Chicago Business summarizes the problems facing the CTA, many of which they have created for themselves: complaints of being underfunded, but willing to splash out for “ostentatious expansion projects” instead of spending on routine track maintenance, a concomitant increase in “slow zones” because of deteriorating track, and so on. Our train ride to the airport last Friday took more than 50% longer than usual (35 minutes instead of 20 from the Irving Park stop) because much of that distance is now covered by slow zones). Shockingly, one of the largest urban rail systems in the world also still has manual and mechanical signals. Yes, you read that right: at junctions like the one I go through to ride to work, Belmont, a person sitting up in a little white tower does the switching that coordinates three different train lines where two sets of tracks meet. And the switching is mechanical, not electronic, which boggles the mind. Electronic switching would actually increase the capacity utilization, or load factor, on the rails, because it would enable more trains to travel more frequently. That would improve service.

For frustrated commuters, the CTA’s most pressing need might be the $727 million it would take to finish replacing mechanical signals, built as far back as the 1950s, with electronic gear. Modern devices are more reliable and can handle more trains, Mr. Fish says. Mr. Paaswell calls such spending “probably the best investment you can make” on a train system. “It’s better than expansion.”

And yet expansion is what the CTA often has opted for under Mr. Kruesi.

Mr. Kreusi is Frank Kreusi, CTA President. In my view, Kreusi is a very poor manager who lays blame for the CTA’s failings entirely on funding. And he may have a point; this article from the Time Out series compares the CTA with urban rail in other large cities, including Paris, London, and Tokyo. Chicago has approximately the same number of miles of track as London, but less than one-third of the funding. The CTA makes do with a substantially smaller budget per mile of track than the other major urban rail systems. But also note in the same table that the average frequency of trains is every 10 minutes, in comparison to every 90 seconds in New York or every 5 minutes in London. So yes, the CTA makes do, but by at least one measure they do not provide as much service.

And yet, the past decade has seen a 25% increase in ridership, which means lots more fare revenue. And then there’s the federal and state funding. As Crain’s reports,

Remarkably, the CTA is coming off a relatively flush period, having funded major work on four lines (Brown, Red, Blue and Green) in recent years with federal cash and the proceeds of Illinois First bond issues. But the Illinois First money has about run out. If the General Assembly doesn’t come up with a new funding source this spring, the CTA may not have the local dollars needed to qualify for matching federal funds.

Even when it was flowing, Illinois First money wasn’t enough to tackle many of the CTA’s thorniest problems, especially along North Side routes, where some of the oldest transit lines run through many of the city’s fastest-growing neighborhoods. For instance, among the CTA’s $5.8 billion in unfunded capital needs are large, crumbling sections of concrete walls supporting the 1920s-era Red Line from Wilson Avenue to Howard Street that are held together by steel braces and plates. Estimated cost of replacement: $406 million. At least five seedy, forbidding subway stations on that same line need to be rebuilt at $50 million-plus each.

Instead, what is the CTA doing with some of that federal/state money? They are building a mega-stop in the Loop, under Block 37, to anchor an express line to O’Hare that doesn’t even have any public or private funding in the near future.

The CTA is spending $130 million building a super-station under the Block 37 development on State Street that would anchor express service to O’Hare. The idea behind the station, which is also getting $42 million in city subsidies, is to let air travelers check their luggage downtown before being whisked to the airport. To help pay for it, the CTA shifted money from equipment purchases and viaduct work in Evanston, transit sources say. But that service will never begin unless a private operator can be found to bring up to $1.5 billion of its own capital to the project.

So my question is this: from economics/management/free market perspectives, what is the most sensible policy approach at this point? I’d start by showing Frank Kreusi the door, to show that taxpayers do not reward his showy grandstanding priorities. But then what? I think one big conundrum in public transportation is the connection among management quality, funding, and incentives. Is the CTA doing the best it can with its limited budget, and will it thus spend wisely if its budget were increased? Clearly, as is true with any management situation, the Board of Directors is supposed to provide oversight and make sure that the incentive structure is set up properly. The 5-member CTA Board is appointed by Mayor Daley, and while Board Chairman Carole Brown has been critical of some of Kreusi’s decisions, it is not clear that the Board is providing the oversight that is in the best interest of the riders and the taxpayers. If they are, they certainly are doing a poor job of communicating that belief effectively to riders and taxpayers.

Simply put: what is the most efficient and fair way to fund and manage existing and future urban rail public transportation? Public ownership and management is not performing well in this case, but is privatization feasible? Or is there more going on than just a simple public/private ownership difference in incentives and performance?


21 thoughts on “Wanted: Economic Analysis of Urban Rail Transportation

  1. Do you think Federal Transit Administration funding priorities and guidelines have played a larger role in where CTA investments have been made than Frank Kreusi’s decisions?

    What is the ratio of federal funds for capital expansion projects available each year to those for maintenance and operations? There seems to be a dilemma between using local funds to do track and signal work vs. using them to match state and federal capital funding allocations.

    I’ve been told the CTA has tried to get the funding to do track and signal upgrades for years.

    Blaming Kreusi for being a poor manager without analyzing the role FTA, Congress, RTA, the State Assembly, and Mayor Daley in shaping CTA budgets is certainly a common pastime in Chicago–but may not lead to good conclusions.

    Your incentives for performance question is a good one, but the elephant in the room is the level of public funding for CTA. This conversion probably wouldn’t be happening if it was on par with other transit systems.

  2. I’d like to see some analysis of the public employee unions. Are we using manual switching because getting rid of them would sacrifice union jobs? What are the numbers on union membership, wage rates, etc?

    My solution to the CTAs problems is to privatize the system. Let the private entity re-negotiate all contracts, like United and the airlines did during their bankruptcy. Push automation as far as it will go (eliminate human fare taking altogether, perhaps get computers to drive the trains themselves).

  3. I’d like to see some analysis of the public employee unions. Are we using manual switching because getting rid of them would sacrifice union jobs? What are the numbers on union membership, wage rates, etc?

    My solution to the CTAs problems is to privatize the system. Let the private entity re-negotiate all contracts, like United and the airlines did during their bankruptcy. Push automation as far as it will go (eliminate human fare taking altogether, perhaps get computers to drive the trains themselves).

  4. tmac, thanks for the link.

    I think Derek’s right (as he usually is …), and that I’m focusing on Kreusi when the web of perverse incentives is much more complex and nuanced. The level of federal funding, and the state-level and city-level scramble to choose and scope its projects to acquire such funding is an enormous problem. That’s why I mentioned the privatization option.

    Which brings us to Buzzcut’s comment, one to which I am quite sympathetic. The local scuttlebutt is that the union jobs angle is definitely part of the story. I’ve even heard some people argue that Kreusi is following his strategy precisely to increase the probability of privatization, which would lead to contract renegotiation. I doubt that he has the capacity for such evil genius.

  5. Land value capture is used with some success in Japan, and I think Australia, to allow rail companies to raise capital to invest in their infrastructure. Essentially, the railco is given a % in the value uplift of commercial property along sections of new or existing stations. The Crossrail project in London to link Paddington in the West (access to LHR) with the City is proposing LVC as its funding mechanism. Have a read of this Policy Institute pamphlet: http://www.policyinstitute.info/AllPDFs/Bruce2Sep05.pdf

  6. Land value capture is used with some success in Japan, and I think Australia, to allow rail companies to raise capital to invest in their infrastructure. Essentially, the railco is given a % in the value uplift of commercial property along sections of new or existing stations. The Crossrail project in London to link Paddington in the West (access to LHR) with the City is proposing LVC as its funding mechanism. Have a read of this Policy Institute pamphlet: http://www.policyinstitute.info/AllPDFs/Bruce2Sep05.pdf

  7. >>Land value capture is used with some success in Japan, and I think Australia, to allow rail companies to raise capital to invest in their infrastructure.

    That makes a lot of sense. Clearly, in a city like Chicago, improved rail access must raise property values. Maybe it increases commercial property values.

    The problem is, the CTA (or the CTA, via the RTA) already gets a cut of all sales taxes. So if sales increased, sales taxes would increase, and the CTA would get their cut.

    The problem is that the CTA is drawing sales taxes from the entire region, even areas that don’t receive service. And they’re STILL underfunded.

    The CTA is a management issue, not a funding issue.

  8. The El was profitable and actually had periods of decreasing fares when it was owned by Samuel Insull. Privatize it…in fact give it back to the Insull estate.

  9. The El was profitable and actually had periods of decreasing fares when it was owned by Samuel Insull. Privatize it…in fact give it back to the Insull estate.

  10. The El was profitable and actually had periods of decreasing fares when it was owned by Samuel Insull. Privatize it…in fact give it back to the Insull estate.

  11. The flashy expansion projects, at the expense of basic maintenance of existing track, is all too familiar to me. Only my experience of it is in a private sector hospital. Unfortunately, this combination of behaviors is common to all large, hierarchical organizations. The hospital where I work has poured money down ratholes like an “ACE Unit” (the latest gimmick, er, excuse me, “industry trend” in hospitals) that never opened because it wasn’t properly designed, and a surgical robot that an OR nurse tells me can do nothing that wouldn’t be accomplished much cheaper by scrubbing in another nurse to hold a camera. Unfortunately, the MBA types decided that if the two big neighboring hospitals had one, we had to have too; apparently it’s not as sexy to run a touchy-feely commercial that says “…and we’ve got an extra nurse who can hold a camera!”

    At the same time money is poured down these ratholes, the administration is justifying repeated, catastropic downsizings of nursing staff with the alleged need for “cost cutting.” When it comes to actual productive assets, rather than glamorous boondoggles, their approach is symptomatic of MBA Disease: milk the organization in order to inflate short-term earnings, and hope their successor will take the blame when the bill comes due.

    The average large corporation is so far removed from a free market, internally, that the irrationality and uneven development resemble those of a state planned economy.

  12. Privatization would hardly be a panacea; one of two companies hired in a privatization of the London Underground recently entered receivership, and taxpayers could be held responsible for its tremendous cost overruns. Our local “traction kings” hardly fared better: Insull made his fortune from energy, not the “L”; Yerkes profited off subterfuge and subdivisions, not the streetcars. In fact, both used securities fraud to cover the steep losses they faced on transit operations, which is why both were run out of town on the rails.

    Those men faced no real competition, as their empires predated today’s heavily subsidized and regulated freeways, parking, sprawl, etc. By the end of Insull’s reign, the railway industry was the most regulated public utility in American history, wearing far heavier regulatory yokes than those which the cable, phone, and electric companies are desperately fighting these days.

    This little history lesson hardly disproves that contracting out operations might reduce costs — particularly when public bureaucracies have ossified and become unresponsive to change — but do use caution before bandying about “PPP” without understanding its ramifications. One could even look back at the same Yerkes/Insull history and draw the conclusion that urban transit is a natural monopoly (thus enabling free transfers, for instance) and inherently requires local government involvement, or one might draw the conclusion that Illinois politics vis-a-vis transit have forever been poisoned by collusion and power-broking at the public’s expense.

    In any case, I have it on good authority that a great many MBA-diseased minds are being put to work on the CTA’s problems now. This may not have quite the results that we bargained for.

  13. Privatization would hardly be a panacea; one of two companies hired in a privatization of the London Underground recently entered receivership, and taxpayers could be held responsible for its tremendous cost overruns. Our local “traction kings” hardly fared better: Insull made his fortune from energy, not the “L”; Yerkes profited off subterfuge and subdivisions, not the streetcars. In fact, both used securities fraud to cover the steep losses they faced on transit operations, which is why both were run out of town on the rails.

    Those men faced no real competition, as their empires predated today’s heavily subsidized and regulated freeways, parking, sprawl, etc. By the end of Insull’s reign, the railway industry was the most regulated public utility in American history, wearing far heavier regulatory yokes than those which the cable, phone, and electric companies are desperately fighting these days.

    This little history lesson hardly disproves that contracting out operations might reduce costs — particularly when public bureaucracies have ossified and become unresponsive to change — but do use caution before bandying about “PPP” without understanding its ramifications. One could even look back at the same Yerkes/Insull history and draw the conclusion that urban transit is a natural monopoly (thus enabling free transfers, for instance) and inherently requires local government involvement, or one might draw the conclusion that Illinois politics vis-a-vis transit have forever been poisoned by collusion and power-broking at the public’s expense.

    In any case, I have it on good authority that a great many MBA-diseased minds are being put to work on the CTA’s problems now. This may not have quite the results that we bargained for.

  14. Privatization would hardly be a panacea; one of two companies hired in a privatization of the London Underground recently entered receivership, and taxpayers could be held responsible for its tremendous cost overruns. Our local “traction kings” hardly fared better: Insull made his fortune from energy, not the “L”; Yerkes profited off subterfuge and subdivisions, not the streetcars. In fact, both used securities fraud to cover the steep losses they faced on transit operations, which is why both were run out of town on the rails.

    Those men faced no real competition, as their empires predated today’s heavily subsidized and regulated freeways, parking, sprawl, etc. By the end of Insull’s reign, the railway industry was the most regulated public utility in American history, wearing far heavier regulatory yokes than those which the cable, phone, and electric companies are desperately fighting these days.

    This little history lesson hardly disproves that contracting out operations might reduce costs — particularly when public bureaucracies have ossified and become unresponsive to change — but do use caution before bandying about “PPP” without understanding its ramifications. One could even look back at the same Yerkes/Insull history and draw the conclusion that urban transit is a natural monopoly (thus enabling free transfers, for instance) and inherently requires local government involvement, or one might draw the conclusion that Illinois politics vis-a-vis transit have forever been poisoned by collusion and power-broking at the public’s expense.

    In any case, I have it on good authority that a great many MBA-diseased minds are being put to work on the CTA’s problems now. This may not have quite the results that we bargained for.

  15. You sugggest replacing “mechanical signals” with “electronic gear.” [Electronic] cab signals cover most of the system now. They’re far less efficient than the older technology, because they’re poorly implemented and fail frequently. Failure means an operator must request and receive permission to proceed, and operate at restricted speed. Lots more trains were handled in the 1920s than can be accommodated today. At Clark Junction (Belmont) major improvements have been made in the past few years that seem to reduce delays.

    As for land value capture, there’s a fine annotated bibliography on the subject at http://www.vtpi.org/smith.pdf. At least two studies were done in Chicago in the ’90s, and both showed land values much higher where transit service exists. One was before-after and the other cross-sectional.

    Finally, concerning “privatization,” I agree with Payton that CTA wouldn’t be viable as a private company (Chicago Rapid Transit really wasn’t viable after 1929). There may be some opportunities for contracting out. One suggestion has been that RTA ought to put Pace in charge of one CTA bus garage, because Pace has shown much better ability to maintain buses.

    I don’t know how substantive reform can be accomplished as long as a large percentage of the electorate don’t see transit as an important service, and a large proportion of those who do use transit see themselves as dependent on government for their incomes.

    Whenever real reform is achieved, it will be accompanied by major changes in technology, probably substituting some kind of PRT or dualmode system for most of what we have now. Expensive though it would be, much can be done for less than we spend nowadays for inadequate rail service.

  16. You sugggest replacing “mechanical signals” with “electronic gear.” [Electronic] cab signals cover most of the system now. They’re far less efficient than the older technology, because they’re poorly implemented and fail frequently. Failure means an operator must request and receive permission to proceed, and operate at restricted speed. Lots more trains were handled in the 1920s than can be accommodated today. At Clark Junction (Belmont) major improvements have been made in the past few years that seem to reduce delays.

    As for land value capture, there’s a fine annotated bibliography on the subject at http://www.vtpi.org/smith.pdf. At least two studies were done in Chicago in the ’90s, and both showed land values much higher where transit service exists. One was before-after and the other cross-sectional.

    Finally, concerning “privatization,” I agree with Payton that CTA wouldn’t be viable as a private company (Chicago Rapid Transit really wasn’t viable after 1929). There may be some opportunities for contracting out. One suggestion has been that RTA ought to put Pace in charge of one CTA bus garage, because Pace has shown much better ability to maintain buses.

    I don’t know how substantive reform can be accomplished as long as a large percentage of the electorate don’t see transit as an important service, and a large proportion of those who do use transit see themselves as dependent on government for their incomes.

    Whenever real reform is achieved, it will be accompanied by major changes in technology, probably substituting some kind of PRT or dualmode system for most of what we have now. Expensive though it would be, much can be done for less than we spend nowadays for inadequate rail service.

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