Problems at the MBTA in 2015
The MBTA, one of the oldest transit agencies in North America, is facing severe financial and operational issues:
- The agency has a state-of-good repair backlog of $7.3B, caused by ongoing under-investment in maintenance and repair. This figure represents the investment required to bring all of the MBTA’s assets (i.e. stations, tunnels, tracks, vehicles) into good repair[i]
- The operating budget runs a deficit, with expenses increasing nearly three times as fast as revenue growth; the structural operating deficit is forecast to reach $427 M by FY2020 if unaddressed, as illustrated on page 17 of the MBTA Fiscal and Management Control Board’s Report #1[ii]
- Subway and commuter rail services were crippled during the winter of 2014/2015, in part due to ineffective winter maintenance practices
- Fare evasion is a major problem – full collection of fares would help reduce the operating deficit
- The Green Line Extension to Somerville is over-budget – in August 2015, the MBTA announced that the project cost up to $1 B more than its budgeted cost of $1.99 B[iii], an increase of approximately 50%. Consultants hired by the state to investigate found that “MBTA employees were ill-equipped to oversee the massive Green Line extension into Somerville and Medford, should have foreseen its ballooning costs, and still don’t have an accurate cost estimate for the project”.
In 2015 Governor Charlie Baker created both the Fiscal and Management Control Board and appointed Brian Shortsleeve (HBS 2001) to the new position of Chief Administrative Officer. This new organizational structure, which is much more deliberately attuned to fiscal imperatives, has been implemented to transform the MBTA into a more financially sustainable and operationally efficient organization. To address the problems faced by the MBTA, multiple strategies are under consideration at present[iv]:
- Fare increases (5% or more)
- Elimination of late-night service and some weekend commuter rail trips
- Outright cancellation of the Green Line Extension, or substantial scope reduction and redesign to be followed by re-tendering[v]
- Fewer trips and increased fares on the MBTA’s service for disabled riders
- Hiring freeze, early retirement packages, deferred wages and modifications to overtime policies
- Privatization of some bus routes[vi]
While steps must be taken to strengthen the MBTA’s financial sustainability, care must be taken; many of these strategies concentrate impact on those with the greatest need.
How did it come to this?
Prior to 2000, the MBTA was a “backward-funding” organization: regardless of what it spent, the State would cover its costs at the end of the year. After years of ever-increasing budget over-runs, a program called “Forward Funding” was introduced by the State in 2000 with the stated purpose of “transforming the MBTA from an agency that bills the State for its operating deficits to a system that sustains itself from an identifiable revenue stream”; this program was supported by the dedication of 20% of the State sales tax to the MBTA. Budget deficits have continued, however, as costs increased instead of decreasing and the sales tax revenue stream yielded less capital than expected[vii].
As a result of this funding structure, the MBTA’s business model does not support its operating model; because the MBTA has historically been able to have the State cover all of its costs, there has been little incentive for innovation. Further, the MBTA’s effective monopoly smothered any drive to develop competitive advantage. For as long as the State has been willing to underwrite all costs, the urgency to achieve cost efficiencies and develop and implement a cogent business strategy has been muted.
What could work better?
So what business model would work better? Should the MBTA be run as a for-profit organization, to incentive strategic decision making and drive efficiency? While this model is effective for private organizations, it would not be feasible for the MBTA. Across North America and Europe, there is no transit agency that can cover all of its operational costs through the revenue it generates[viii]. If the MBTA were mandated to run at a profit, much of the system would have to shut down as most routes are not profitable. The MBTA needs some degree of funding from taxpayers to supplement generated revenue because transit addresses broader societal needs by providing:
- Mobility into high-density urban centres
- Low-cost accessibility to employment, healthcare, education and recreation
- A sustainable transportation alternative to automobile use
- Support for economic development and urban regeneration
This illustrates the challenge in developing a business model that can be aligned with the operational model of a public service such as education, healthcare, the military or public transportation. Public services are generally striving to fulfill multiple diverse objectives that do not relate to financial return. In comparison, a for-profit organization has a much narrower band of objectives it is striving to fulfill – generally, to maximize the return on shareholder equity, which can be achieved in the long-run by focusing on interrelated short-term objectives (i.e. maximizing market share, minimizing costs, etc.)
So how can the business model be improved to better support the complex operating models for social services? These three options prove wanting:
- Guaranteed funding has led to ever-ballooning costs
- Setting annual budget targets has proven unsuccessful
- Privatization neglects broader social objectives
However, I believe that improved outcomes can be achieved by:
- Attracting highly qualified leaders to run agencies and organizations “like a business” in terms of linking service delivery to financial performance, while optimizing social objectives
- Providing sufficient tax subsidy to fund operations
[i] MBTA Fiscal and Management Control Board Report #1 – Baseline Analysis and Progress to Date, September 22, 2015, page 2
[ii] MBTA Fiscal and Management Control Board Report #1 – Baseline Analysis and Progress to Date, September 22, 2015, page 17
[iii] https://www.bostonglobe.com/metro/2015/11/30/green-line-project-plagued-with-problems-consultants-say/VjSlACBEmPQn6JLwVodTJO/story.html, accessed December 4, 2015.
[iv] https://www.bostonglobe.com/metro/2015/12/06/mbta-looks-fare-hikes-reopening-union-contracts-balance-budget/PnRwU9uHhzu0C3MfxO60qO/story.html, accessed December 4, 2015.
[v]https://twitter.com/search?q=mbta+green+line+extension&ref_src=twsrc%5Egoogle%7Ctwcamp%5Eserp%7Ctwgr%5Esearch, accessed December 9, 2015.
[vi] http://www.wbur.org/2015/08/21/mbta-privatize-bus-routes, accessed December 4, 2015.
[vii] MBTA Review, David d`Alessandro et al, November 1, 2009, accessed December 4, 2015.
[viii] https://en.wikipedia.org/wiki/Farebox_recovery_ratio, accessed December 4, 2015.