Nickel and Dimed

NYC Has Always Struggled to Pay for Subways

by James Murdock

Financing mass transit has always seemed impossible. The price tag of the system 100 years ago seems but a drop in the bucket compared to today's estimates for new mass transit projects.

The contract for constructing New York City's first subway totaled $33 million. This sum amounts to roughly $703 million in today's currency, but it's a drop in the bucket compared to what the Metropolitan Transportation Authority estimates the system's overall price tag is now.

Were it to be built again from scratch, the subway's 1,960 track mi. and 468 passenger stations - along with power substations, signaling systems and maintenance facilities - would cost as much as $400 billion. "It would be almost impossible to finance," said Mysore Nagaraja, president of MTA Capital Construction Co.

Financing mass transit has always seemed impossible. Officials at the MTA and all of its predecessors have faced the constant challenge of covering routine operating and maintenance expenses while also investing in system expansions, all without raising fares too high.

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"The ongoing question is how do we pay for our subways," said transit historian and author Peter Derrick

Five-Cent Fare Folly
The Steinway Commission, the first agency created to oversee New York's subway, failed to attract a single serious bid when it advertised for construction in 1892. Private investors weren't interested in building and operating a subway unless they >> were also able to control the fare box.

City leaders, though, wanted the fare to remain at a nickel to allow poorer New Yorkers to commute to new housing in the Bronx and Brooklyn.

The Rapid Transit Commission, Steinway's successor, formulated a compromise: The city would pay to build the subway itself and then lease it to a private operating company. John McDonald won the first subway construction contract. He promptly sought financial assistance from August Belmont, who represented the interests of the wealthy Rothschild family.

Belmont founded the Interborough Rapid Transit Co., which backed McDonald and operated the subway after it opened in 1904.

Ridership immediately exceeded expectations. The subway attracted 75 million passengers in its first year and the number kept growing. But Derrick said that on closer analysis, Belmont discovered the IRT was making money only on short-haul trips within Manhattan and opposed the city's desire to expand the system.

The stalemate between Belmont and city leaders lasted until 1913, when a new transit commission worked out what became known as the dual contract. Under this agreement, the IRT would pay $75.8 million for constructing new lines, and a second private operating company, the Brooklyn Rapid Transit Co., would pay $50.4 million; and the city would pay $123 million.

The dual contracts more than doubled the subway's size and likewise expanded the revenue base. Currency inflation set in after World War I, though, and cut the value of a nickel by more than half. The operating companies were pushed to the brink of bankruptcy. The BRT eventually succumbed and was reborn in 1923 as the Brooklyn-Manhattan Transit Corp.

Throughout the 1920s, customer revenue was insufficient to cover operating costs, let alone system expansion. The IRT and BMT sought the city's permission to increase fares, but the dual contracts had specified they could only charge a nickel.

John Hylan, New York's mayor from 1918 to 1926, led the fight against a fare increase. As it happened, he had once been a motorman for the BRT. He was fired after nearly running over his supervisor and had borne a grudge against the firm ever since. Regardless of his reasons for hating the private companies, the public supported Hylan.

"The public perception was that the private companies were somehow making vast amounts of money and that if the fare was raised it would only benefit the rich capitalists," Derrick said. "But the city was really the one holding the bag because it had to pay off its bonds with tax dollars."

The matter eventually went before U.S. District Court, which ruled in favor of the private companies' request to increase fares, but the decision was then reversed by the U.S. Supreme Court. The 5-cent fare remained until 1948 and led to disastrous fiscal consequences.

"One huge mistake that New York made was to get tied to the nickel fare," said Kenneth Jackson, a professor of history and social sciences at Columbia University. "The subway was a profit-making affair in the 1910s, but not in the 1930s, and that's why we didn't have enough money for capital improvements, maintenance and operating expenses."

The Subway's Nadir
Although the subway was already losing money and required municipal subsidies, Hylan decided that the best way to run the private operating companies out of business was to build a city-operated subway to compete against them.

His subway, the Independent System, cost $674 million and was financed through municipal bonds. In 1940, the same year that the IND opened, the >> city finally bought out the ailing IRT and BMT.

Subway ridership hit an all-time peak in 1947, exceeding 2 billion passengers, but soon entered a steady decline. The fall was precipitated by the adoption of a five-day workweek, which hurt Saturday ridership, but several factors other factors contributed.

Nationwide, city planners believed that the future of transportation belonged to the automobile, and the public agreed. Urban populations began falling, as did municipal tax revenue, as people moved out to the suburbs.

The federal government failed to help. The G.I. Bill allowed returning military veterans to secure cheap, single-family housing, and the government further encouraged suburban growth by funding highway projects with 90-10 financing. (Uncle Sam paid 90 percent of highway construction costs while local authorities contributed just 10 percent.)

Although the same trends were present in New York City, voters approved a $500 million bond issue in 1951 to build a Second Avenue subway line. The money was soon diverted, though, to fund routine maintenance and a massive campaign to lengthen station platforms for new 10-car trains. In 1968, the newly created MTA revived plans for the Second Avenue Subway. Construction began on the first $90 million phase in 1972; it ground to a halt just a few years later.

It is widely believed that New York City's legendary fiscal crisis was the sole reason for stalling Second Avenue construction. But according to Robert Olmsted, a transportation consultant and retired MTA planner, 80 percent of the funding came from the federal government and 15 percent came from the state.

"I'm not convinced the fiscal crisis had to stop construction," Olmsted said.

He added that what really killed the Second Avenue Subway was New York City Mayor Abe Beame's decision to shuffle capital funds into the MTA's operating budget. Whatever the case, the MTA had bigger problems. By 1975, it was running a deficit of nearly $500 million. Years of deferred maintenance caught up with the subway. Trains were covered in graffiti and broke down every 7,000 mi. Ridership fell to its lowest level in six decades.

Back from the Brink
Bringing the subway back from the brink of collapse seemed like an impossibility, but the MTA did it. Since 1982, the agency has spent $48 billion on upgrades and station rehabilitation. Funding has come from everything from the sale of real estate assets to gas tax revenue.

During the last funding cycle, though, the MTA relied heavily on bond issues. The result has been spiraling debt payments and the looming prospect of deficits. Debt service accounts for 12 percent of the agency's overall budget in 2004, a share that will jump to 15 percent in 2005 and is largely responsible for projected budget deficits of $539 million in 2005 and $1.18 billion in 2006.

To close these gaps, the MTA is proposing a combination of measures, from layoffs and reduced pensions to limited fare hikes and service cutbacks. It is even considering reduced maintenance. Board members won't vote on the measures until December, but MTA watchdog groups are already voicing concern.

"Our top priority has been and will always be fixing the system and keeping it in good repair," said Gene Russianoff, staff attorney for the Straphangers Campaign. "There's been a lot of progress since 1982, but that progress will be at risk if there isn't continued investment."

Observers are particularly concerned that New York City might go the way of London, which underfunded subway maintenance to instead pay for a massive system expansion during the 1990s. "We can't do what London did," Russianoff said. "It built Jubilee line and now the existing Underground is a mess and it has to be brought back from near collapse."

Nagaraja said maintaining state of good repair is his No. 1 priority. For this reason, the MTA will look to the state and federal government for assistance with its capital projects such as the Second Avenue line. But observers remain skeptical.

"The MTA may be engaging in wishful thinking," said Jeffrey Zupan, senior fellow for transportation at the Regional Plan Association Inc. "To say that you'll rely increasingly on the feds runs contrary to what recent history shows is possible."

New York has been receiving a smaller and smaller portion of federal mass transit funds in recent years because the state's population is shrinking relative to other states, he added. Funding for the South Ferry and Fulton Street Transit Center projects was an anomaly.

But there is a more inherent problem with federal money, said Clifton Hood, associate professor of history at Hobart and William Smith Colleges. Capital projects typically stretch over several years and therefore require a steady funding stream, something that the political appropriations process cannot guarantee.

The danger is that if New York City fails to expand its subway system, much less maintain a state of good repair, it risks losing jobs to other regions in the United States and worldwide.

Cities including Paris, Hong Kong, Seoul and Tokyo have recently invested heavily in mass transit. In Paris, subways are funded through a dedicated payroll tax.

Russianoff said New York City should create its own dedicated funding stream for subway construction, possibly by adding tolls on the East River bridges or by reintroducing the commuter tax.

But raising taxes is never easy. "It takes real leadership to do it," Russianoff added.