New Starts,Growing Inequities: Federal and Local Public Transit Funding

Introduction

How we pay for transportation—the sources of funds and rules about their distribution—matter for equity. Equity questions about local revenue sources are increasingly important, because local and regional sales taxes have increased amid perceived federal funding shortfalls. Sales tax fares poorly along two common equity concepts—ability to pay and beneficiary to pay. Yet, already by 2005, sales taxes accounted for 35.5% of mass transit capital funds in metropolitan areas of more than 1 million (Cambridge Systematic Inc., KFH Group Inc., McCollum Management Consulting Inc., 2009). ¹ Other more innovative tools for financing, such as land value capture and public–private partnerships (P3s), may have implications for how goals are prioritized in transportation planning given their link to increased property values and private profit. Funding equity matters across all modes, but public transit is of particular importance for low-income populations and people of color, as they constitute the largest shares of transit users (Taylor & Morris, 2015).

In the United States, public transit infrastructure investment typically draws on a mix of funding sources. After the public takeover of transit systems in the 20th century and the advent of federal grants for transit (see Hess & Lombardi, 2005), the federal level has often been a critical source of funding for public transit and especially capital expenses. In 2014, the U.S. federal level accounted for the largest share of capital funds—42.6%. The state level provided only 13.6%, and the local level and directly generated revenue accounted for 21.0% and 22.7%, respectively (American Public Transportation Association [APTA], 2017).

This study considers shifts in the federal role and the evolving role of sales tax, land value capture, and P3s in the federal New Starts program. We examine the equity implications of the rise of and types of local funding sources. Despite extensive discussion of new revenue sources, there is little empirical knowledge of shifts in funding nationally. There is intense competition for a limited pool of public transit infrastructure expansion funds distributed through this program. This study is informed by an equity lens derived from Martens (2017) and others, as detailed below. We find growth in federal-level spending that has become distributed across more costly projects, coupled with increased sales tax use at the local level. The increase in local spending on transit should be met with concern rather than congratulations at local self-help, given the equity problems with the revenue mechanism. Furthermore, the emergence of tools linked to the private sector and land value capture should inspire caution, as these mechanisms could shift the purpose and beneficiaries of transit. The next section discusses concepts of funding system equity, a section introducing the New Starts program follows, and then the article turns to methods and findings.

Equity in Transportation Funding

Taylor and Tassiello Norton (2009) describe several philosophical notions of equity, which they translate into three more applied concepts: outcome, opportunity, and market equity. Outcome equity for transportation finance is the most radical and rarely employed (in policy) concept. Outcome equity is when spending is such that it results in equal service levels regardless of revenue contribution patterns. For opportunity equity, all spending is equal, but not necessarily transportation system outcomes. Market equity is when benefits received are proportional to revenue contributions. In addition to the equity concept utilized, stakeholders adopt a reference unit for evaluating equity. Stakeholders may examine equity by geographies (e.g., municipality, state), groups (e.g., transit users, low-income households, people of color), or individuals (e.g., users, voters, residents) (Taylor and Tassiello Norton, 2009). This results in a limitless number of measures for equity when considering the different possible reference units by the three main concepts they describe. Thus, a funding and spending scheme can easily be inequitable by some standards and equitable by others. For instance, Iseki (2016) finds that funding for the metropolitan transit system of Toledo, Ohio, is progressive or equitable from the standpoint of serving the needs of lower income groups, but inequitable by geographic jurisdiction when using the market equity concept of beneficiary to pay.

Alternately, some transportation scholars (Litman, 2014; Mathur, 2015) define equity more simply by vertical and horizontal equity. Horizontal equity considers whether members of a group are treated the same by the financing mechanism and is often equated with the market equity idea of beneficiary to pay (Mathur, 2015). Vertical equity considers equity across different groups, often “operationalized through the ability-to-pay principle” (Mathur, 2015, p. 31). Rosenbloom (2010) employs the user or beneficiary to pay and ability to pay notions of equity, while adding a third—geographic equity—based on the idea of a fair funding allocation by spatial units.

Researchers have evaluated a range of funding mechanisms along such various equity principles. Although politically unpopular, congestion pricing is relatively equitable along the notion of beneficiary to pay and fares better than sales tax along the ability to pay concept (Schweitzer & Taylor, 2008; Taylor & Tassiello Norton, 2009). For instance, in an Orange County, California, case study, Schweitzer and Taylor (2008) find that sales taxes redistribute funds from low- and high-income groups to middle income groups. As a regressive tax, the poor pay the highest proportion even though the highest income groups pay the most in absolute terms. They suggest the regressive aspect—of those with least ability to pay contributing the largest share of their incomes—is even more problematic as middle and upper income drivers disproportionately travel during peak periods and thus disproportionately benefit from capacity increases funded through sales taxes.

Despite criticisms of sales taxes along the ability to pay and user pays equity principles (Rosenbloom, 2010), sales taxes for transportation have proliferated. Sales taxes pose the greatest relative burden on lower income populations. As early as the 1990s, Goldman and Wachs (2003) identify a notable increase in the passage of local option taxes for transportation, especially sales taxes. In 2005, sales taxes were the most common source of dedicated transit funds (Cambridge Systematic Inc., KFH Group Inc., McCollum Management Consulting Inc., & Hemily, 2009). And by 2017, for example, 24 of California’s 58 counties had local option sales taxes for transportation (Albrecht, Brown, Lederman, Taylor, & Wachs, 2017).

While more limited in use, innovative sources of mass transit funding also have been subjects for equity analysis. The U.S. Department of Transportation (2015) has identified the private sector as a potential source of transportation funding. Private partners may seek to develop in concert with public transit investments in a whole range of P3s, including joint developments. One set of strategies—called land or property value capture—aim to leverage the increases in land value that can come from public transit investment, based on the idea that the beneficiaries of transit investment include not only transit users but also property owners. Indeed, the modern streetcar trend, for example, emphasizes economic development, not transportation, benefits of streetcars which primarily accrue as increased property value for nearby land holders (King & Fischer, 2016).

Land value capture funding for transit is based on the idea that increased value comes from improved accessibility, and mechanisms to capture the increased value include impact fees, special assessment districts, and tax increment financing districts (Mathur, 2014). Such strategies thus could align with a beneficiary to pay principle of equity if the charges levied are proportional to property value increases. Some strategies exist to align land value increase with contributions, as well as to mitigate costs for those less able to pay (Mathur, 2015). However, the benefits of the improved land value accrue along different time frames. Commercial property owners may quickly earn additional income from improved access to transit, but the majority of homeowners will see a monetary benefit from a transit improvement—offsetting the costs of a special assessment district, for example—only when they sell their property (Zhao & Larson, 2011). This makes deferral programs important for homeowners whose incomes are not proportional to the value of their homes (e.g., seniors on fixed incomes or persons with disabilities; Zhao & Larson, 2011).

Funding mechanisms do have implications for the transportation system. For example, linking usage to fees through congestion pricing disincentives travel behavior (low-occupancy, peak-hour vehicle travel) that negatively impacts the transportation system’s efficacy and social costs, like pollution (Taylor & Tassiello Norton, 2009) and thereby improves transportation system outcomes. Certainly, the equity of funding mechanisms cannot be completely separated from the overall equity aim of a transportation system. Although traditional transportation planning focused on ensuring equal speed across the roadway network, many urban planning efforts now emphasize equity or fairness in accessibility.

Drawing on philosophers Walzer, Rawls, and Dworkin, Martens (2017) argues that “a transportation system is fair if, and only if, it provides a sufficient level of accessibility to all under most circumstances” (p. 215). He argues a system of progressive taxation (based on ability to pay) should fund the basic system that achieves sufficient accessibility for all—a framework that most closely aligns with Taylor and Tassiello Norton’s notion of outcome equity. Recent other works draw on Sen and Nussbaum (Hananel & Berechman, 2016; Nahmias-Biran, Marten, & Shiftan, 2017) and Rawls (Pereira, Schwanen, & Banister, 2017) for a capabilities or hybrid approach. These related approaches argue for a sufficient level of accessibility for all as a defining feature of a just or equitable transportation system. Emphasizing adequate accessibility for all leads Martens to argue for transportation planning that prioritizes benefits for those whose accessibility is insufficient. These related approaches, however, are not the driving force in policy and practice that have been oriented around travel time savings and economic rationale, more than transportation justice and the needs of those experiencing inadequate accessibility. This article’s scope is not exploring the underlying philosophical approaches or delineating an equitable transportation system. Nonetheless, informed by these approaches to transportation equity, the following analysis adopts an ability to pay principle of equity. We also consider the more conventionally employed notion of beneficiary to pay principle, given the political traction this notion of equity has. The study examines projects funded through a major U.S.-based program for funding transit capital investments, New Starts.

Methods

This study analyzes federal and local funds to understand whether New Starts projects rely on local sources that are problematic along the ability to pay and beneficiary pays equity principles. As noted above, New Starts is a major program to support key infrastructure investments across U.S. metropolitan areas and provides critical insight into national trends. We examine projects for which the FTA issued grant agreements during two time periods. The first period is 2001-2005, prior to the GAO’s above analysis and before 2005 legislation created Small Starts. The second period (2012-2016) corresponds to passage of Moving Ahead for Progress in the 21st Century in 2012. The first period was selected to reflect decisions prior to Small Starts implementation, and the last period was selected to show a recent period and change. Much of the intervening period is explored in the GAO study described above.

For the two periods, we identified 46 projects for which the FTA issued grant agreements, based on annual reports that the FTA makes to the U.S. Congress. Fifteen New Starts projects were identified for the 2000-2005 period, and for the 2012-2016 period, 13 New Starts projects and 18 Small Starts projects were identified. We collected funding information from the most recent annual report for which a project’s funding scheme was listed and consulted supplemental information from agencies when needed. Project funding sources were entered into a spreadsheet with separate categories for different levels of government and at the local level for sales tax, value capture, and P3s; additional local sources were categorized as other. The share of each project funded by each stream was calculated. When local sponsors reported sales tax with other sources, those dollars were classified as sales tax because we expected sales taxes made up the major share of such funds, a study limitation. Dollar values were indexed to 2016 dollars to understand aggregate funding across projects and time. Indexing costs for projects with grant agreements in 2003 or after relied on the Federal Highway Administration’s National Highway Construction Cost Index for June of the grant agreement year. To index projects with grant agreements from 2001 and 2002, we used the discontinued bid price index, with data provided by the Federal Highway Administration. The t tests were conducted on selected share amounts between the two periods, but findings of statistical significance were limited in part due to small sample size.

Findings

The Federal Role

The data show an evolving federal role, with a shift away from a slight majority of project funding coming from the federal level. Table 1 shows that there was reduction in the average federal funding share (including but not limited to the New Starts program) from 63.7% to 50.0%. The difference was statistically significant at the 95% confidence interval. Small Starts had a 69.7 average federal share. The average share coming specifically from the New Starts program shrank as well from 51.5% to 47.2%, although this change did not demonstrate statistical significance. Similarly, when aggregating federal contributions across projects for each time period, there was also a reduced federal share, from 51.0% to 46.7%. When aggregating funds, the federal level accounted for the majority of total funds for Small Starts, at 62.8%.

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Table 1.

Shares New Starts and Total Federal Funding.

	Average federal share (percent)	Aggregated federal share (percent)	Average New Starts share (percent)
New Starts 2001-2005	63.7 a	51.0	51.5
New Starts 2012-2016	50.0 a	46.7	47.2
Small Starts 2012-2016	69.7	62.8	59.4

a

Statistically significant at the 95% confidence level.

At first glance, this appears to indicate a shrinking federal role, but an examination of total project awards shows a different pattern. The total amounts that the FTA pledged through New Starts grant agreements substantially increased, as shown in Table 2. Certainly the average is pulled by several tremendously costly projects in the second period. For example, the largest federal amounts (indexed to 2016 dollars) were US$1.7 billion for a Honolulu project and US$1.3 billion for the Westside Extension in Los Angeles. But, the median New Starts amounts also increased—from US$136.0 million to US$871.9 million. Likewise, the aggregated amount indexed to 2016 dollars shows a tremendous expansion of federal contributions due, in part, to costly projects. These funding totals for the period will not align with the total amounts expended (even when indexed) as these totals reflect the year of pledge (grant agreement), not the year of expenditure. Certainly, one limitation is that New Starts average amounts for 2001 to 2005 reflect that smaller projects were combined in the analysis, instead of funded through the later Small Starts program. Nonetheless, the aggregated total amounts are dramatically larger in the later period, disrupting the narrative of a shrinking federal role.

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Table 2.

New Starts and Federal Funding Contributions.

	Average New Starts, amount 2016US$	Average New Starts amount, variable year US$	Aggregated federal, amount 2016US$
New Starts (2001-2005)	149.3	232.9	2,757.7
New Starts (2012-2016)	799.4	810.6	11,068.0
Small Starts (2012-2016)	51.1	51.4	1,146.2

Note. Aggregated amounts reflect each project contribution indexed to 2016 and then summed across projects.

The increase in pledged federal funds from New Starts and other federal sources aligns with the tremendous increase in planned project expenditures. When indexed to 2016 dollars, total planned funds (all sources, all levels of government) for the first period amounted to US$5.4 billion versus US$23.7 billion for the second period’s New Starts projects, along with US$1.8 billion of Small Starts projects. Certainly, when unindexed, total pledged funds for the first period are greater than when indexed (US$8.5 billion), but still much smaller than the second period.

State Funding

The data do show an increase in state funds for New Starts projects, although state funding is not the focus of this research. As Table 3 shows, the average state share increased from 9.6% to 17.0% for New Starts projects. When amounts were aggregated across projects, the state share also increased from 6.3% to 13.5%. On the contrary, Small Starts projects depended less on state-level funding with an average of 6.7% of funds from the state level or a 5.3% share when aggregated across projects.

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Table 3.

Local and State Project Funding.

	Average state share (unweighted percent)	Aggregated state share (percent)	Average local share (unweighted percent)	Aggregated local share (percent)
New Starts (2001-2005)	9.6	6.3	26.7	42.8
New Starts (2012-2016)	17.0	13.5	33.1	39.8
Small Starts (2012-2016)	6.7	5.3	23.6	32.0

Note. All in percentages, aggregated share reflects the funds indexed to 2016, and then summed across projects.

Local Funding

Trends in local funding differ depending on the metric used. As an average share of project funds, the local share increased from 26.7% to 33.1%, as shown in Table 3. This metric does not account for the different sizes of local pledges. Among indexed and aggregated funding sources, the local share actually decreased from 42.8% to 39.8%. Small Starts projects had an average share of 23.6% and an aggregated share of 32.0% from the local level.

Findings show increased use of the sales tax and limited use of value capture and P3s. As Table 4 displays, the number of New Starts projects utilizing sales tax more than doubled from four to nine, even though the number of New Starts projects slightly decreased. As a result, more than half of New Starts projects used sales tax in the second period. This brought the New Starts projects funding sources more in line with Small Starts projects, 11 of which used sales tax funds (out of a total of 18).

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Table 4.

Local Revenue Sources.

	Count projects using			Total projects
	Sales tax	Value capture	Public–private partnerships
New Starts 2001-2005	4	0	2 (both donations)	15
New Starts 2012-2016	9	1	3	13
Small Starts 2012-2016	11	1	2	18

The share of sales tax funds increased, along with the total count of its utilization. Based on our document analysis and tabulations, the average share of funds from sales tax increased from 7.7% to 20.6% (statistically significant at the 90% confidence level). The aggregated and indexed share increased from US$690.3 million and 12.8%, to US$5.3 billion and 22.5%. The average sales tax share among Small Starts projects was 13.4%, with an aggregated share of 18.4% at US$336.7 million.

Innovative funding sources account for small shares of costs, by project or when aggregated. Specific sources of innovative funds are listed by project in Table 5. During the 2001 to 2005 period, the only P3s were in the form of donations. The monetized value of one project’s donations was not available from the agency or FTA’s reports, while the other donation was valued 0.6% of that project’s costs. There was more diversity in funding mechanisms in the second period, with lease revenue, donations, and a district fee, but these sources typically accounted for very little of a project’s costs. In fact, among the New Starts projects, the maximum share from a P3 or land value capture mechanism was 4.6% for Los Angeles’s Regional Connector. Among the Small Starts projects, only three used innovative sources, and one P3 was a development authority categorized by the local project sponsor as a private source. Two of the projects had an innovate source share of less than 5%. On the other hand, the Southeast Rail Extension in Denver, Colorado, received cash and right-of-way donations from businesses valued at 15.3% of project costs.

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Table 5.

Projects Using Value Capture and P3s.

Project	Location	Source
2001-2005 New Starts
Medical Center Extension	Salt Lake, UT	Bridge donations from foundation Church parking space donation
Canal Streetcar Line	New Orleans, LA	Materials donation (poles) from private individual
2012-2016 New Starts
Regional Connector Transit Corridor	Los Angeles, CA	Development property lease revenue
Westside Purple Line Extension	Los Angeles, CA	Development property lease revenue
South Sacramento Corridor Phase 2	Sacramento, CA	District fee
Portland–Milwaukie LRT	Portland, OR	Private property donation
2012-2016 Small Starts
Van Ness Bus Rapid Transit Project	San Francisco, CA	Impact fees
Mason Street BRT	Fort Collins, CO	Development authority donation listed as private
Southeast Rail Extension Project	Denver, CO	Cash and right-of-way donations from local businesses

Note. P3 = public–private partnership; LRT = light rail transit; BRT = bus rapid transit.

Implications and Conclusion

The federal level has not—as of yet—retreated from a substantial role in public transit expansion. In total dollars, the FTA pledged an increased amount for New Starts and Small Starts projects in the more recent period. The average size of awards, too, grew. However, the average share of project funds from New Starts and the federal level decreased, but this is largely attributable to expanding project costs. The state share—for New Starts—appears to cover some of the gap, but smaller projects continue to especially rely on the federal level. While the total amounts authorized and appropriated for New Starts depend on Congress, the FTA under the Executive Branch makes grant agreements. Some of the differences in project scope could be due to different informal guidance and preferences under two presidential administrations. Regardless, we see an expanded size of New Starts projects and a wide geographic dispersion of projects under the combined New Starts and Small Starts awards in the later period.

The future role of the federal level is unclear. As noted above, the Fixing America’s Surface Transportation Act (2015) capped the New Starts program share at 60%. This limit will have little direct impact, as the average share of New Starts funds in the second period (47.2%) was already below the new threshold. However, if regulations or FTA operational preferences shift, there may be further expansion of the local or state funding role. The current administration’s messaging around infrastructure has emphasized a role for the private sector and diminished federal involvement in urban public transit. Under the new administration, the FTA has issued only two full funding grant agreements in 2017 (a Chicago core capacity agreement was issued early in January 2017 before the presidential transition). A new model may be emerging. One of these projects, the suburban-serving Maryland Purple light rail project, relies on more than one billion dollars through a P3 and a federal contribution of just less than 40%. The past may not be a useful guide for the future in this political climate, but again Congress determines total New Starts authorizations.

The growth in sales tax as a source of transit funding raises critical equity questions. As described above, this article draws from Martens’s (2017) equity concepts. He argues for progressive taxation to fund improvements for those with inadequate accessibility to ensure sufficient accessibility for all. Although transportation system service equity is not synonymous with funding mechanism equity, it is useful to consider the goals of transportation system equity when considering funding mechanisms. The funding equity concept that best supports Martens’s framework notion is the ability to pay principle. Sales tax fares poorly on this notion of equity as it is not progressive relative to ability to pay. Nor does sales tax for transportation align with the alternative market equity idea of beneficiary to pay. Yet, the academic analyses on the equity problems of sales tax seem to have little policy traction.

Innovative funding sources receive attention but have not yet dramatically transformed the landscape for New Starts projects. With the exception of the modest donation in New Orleans, all the innovative arrangements—land value capture and P3s—were located in the West. Certainly, substantial growth in transit investment has occurred in the West, but this geographic pattern is still an area for further research. Innovative funding sources risk shifting the priorities of transit investment toward for-profit interests through P3s. Land value capture mechanisms turn planning’s focus to increased land valuation which raises questions related to gentrification and project evaluation criteria. Thus, from Martens’s framework, these mechanisms may not fare well as they do not address the transportation needs of those with the least accessibility. However, these mechanisms do potentially align with the market equity concept of beneficiary to pay, as land holders reap benefits and help fund the investments. An area for further exploration is the growing amount and further potential of state-level sources of funding, as states often have more flexibility in revenue mechanisms than the often limited options available to localities.

Extensive transit rail expansions may be inequitable in their distribution of benefits as well as their sources of revenue. Rail supporters claim a wide variety of benefits: reduced carbon emissions, human-scale development, economic development, attraction of the creative class, mobility options, reduced travel time and congestion, and accessibility improvements. Those supporting a particular transit investment may prioritize some of transit’s presumed benefits over others. A particular rail investment, in fact, may do little or nothing for one of these goals. Recent literature on streetcar investment, for example, has shown that these infrastructure choices are pursued for the associated land value increases (King & Fischer, 2016), while often performing poorly as transportation (Brown, 2013). Considering transit agencies’ goals more broadly, Taylor and Morris (2015) suggest that the stated goals to attract choice riders—while perhaps driven by political necessity—do not align with the core constituencies of those who actually use transit. Rail expansions are often justified as tools to attract choice riders. The classic example of rail expansion failing along an equity criteria of serving those with limited accessibility is, of course, the case of the Los Angeles scheme to expand rail and raise bus fares (see Grengs, 2002). Thus, the growing U.S. public investment in transit infrastructure may rely on inequitable funding mechanisms, while also doing little for a more equitable system with adequate accessibility for all.