Bi-State Transit (St. Louis):
Cost Crisis Not Funding Crisis

August 2001
The hand-wringing by local public officials is underway, as the Bi-State Development Agency's transit budget crisis returns according to its predictably annual schedule. To read local press accounts, it would be easy to assume that the answer is simply more money. But such a perspective misses the point completely. What Bi-State faces is not a funding problem, it is rather a cost problem.
Bi-State's cost performance had been among the best in the nation until the 1993 sales tax increase was enacted in the city and the county. Costs per hour of bus service had been steadily declining since 1980 (inflation adjusted). During that period, repeated attempts to enact a dedicated transit tax failed. With no prospect for large new cash infusions, Bi-State rose to the challenge by controlling its operating costs. This contrasted with the performance of transit agencies that obtained new dedicated taxes and saw their costs per hour of operation escalate significantly as the new money rolled in. In Los Angeles, costs per hour of service escalated more than 20 percent in the 10 years following creation of the L. A. County Transportation Commision sales tax in 1982. Other systems did worse.
With the passage of the 1993 Bi-State sales tax, things changed radically. Since that time, bus costs per hour have escalated more than 10 percent, reversing much of the progress that had been made in previous years. Why did this occur? It is not because Bi-State is poorly managed, or that its labor unions have been too greedy. It is rather that, without structural financial controls, the availability of new transit funding takes the pressure off management and labor. The result is that some of the money that was intended to expand transit service or to fund light rail extensions is instead simply consumed by inordinately higher costs for operating existing services. The excess cost escalation above inflation at Bi-State has been more than enough, in annual terms, to fund the current budget shortfall.
The problem of transit cost escalation is not limited to the United States. Public officials around the world have been faced with virtually the same situation, and have taken resolute action to solve the problem through the application of competition. London Transport, for example, which operates the world's largest public transit bus system, contracted out virtually all of its services from 1985 to 2000. The result is cost reductions per mile on the order of 50 percent, substantial service increases and the best ridership performance in 20 years. Copenhagen, Stockholm and Helsinki have also competitively contracted all of their services, with cost reductions over a decade of approximately 20 percent. Each of these systems operates as a comprehensive and coordinated system, with a unified fare structure. In short, riders are largely unaware of the fact that services are operated by private operators that have had to compete for the right to offer services for a limited term (usually five years).
The success has been so great that the European Union is considering application of mandatory competitive tendering. Transit systems in Australia, and New Zealand have also been converted, while transit systems in South Africa are beginning to implement competitive contracting. In the United States, more modest programs have been implemented in San Diego, Denver, Los Angeles, San Francisco, Las Vegas, Washington, Seattle and other areas. Over 20 years, San Diego has converted more than 40 percent of its bus service and seen its costs per hour drop by more than 30 percent. At the same time, not a single union job has been lost, because the conversion has been limited to the annual employee attrition rate.
In the late 1980s, I assisted Bi-State in developing a competitive contracting program that was intended to make it possible to implement the light rail program without raising taxes. Regrettably, despite early successes, this program was not fully implemented and was sacrificed to obtain transit union support for the Bi-State tax increase in Jefferson City.
But it is not too late. Bi-State can address future budget crises by beginning to implement a program of competitive contracting at a rate sufficiently gradual to guarantee the jobs and rights of existing employees. It is really a matter of priorities. Where public officials have determined that the interests of riders and taxpayers are paramount --- from Europe to Australia --- competitive contracting has been adopted and served the community well. A similar commitment is overdue here.