The MBTA: A Case Study in the (Mis)Alignment of Operating Models for Public Services

Overview of the MBTA's current fiscal and operational challenges, to serve as a case study that illustrates the challenges in aligning operational and business models for public services

Problems at the MBTA in 2015

The MBTA, one of the oldest transit agencies in North America, is facing severe financial and operational issues:

Financial Unsustainability

  • 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]

Operational Challenges

  • 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”.
http://blog.mass.gov/transportation/wp-content/uploads/sites/2/2015/02/MBTA-Green-Line-Snow-February-2015.jpg
http://blog.mass.gov/transportation/wp-content/uploads/sites/2/2015/02/MBTA-Green-Line-Snow-February-2015.jpg

Potential Solutions

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

orange line

[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.

Previous:

Lululemon: From Niche Market Pioneer to Apparel Ubiquity

Next:

Amazon: ‘The Everything Store’ – Driving Long-Tale Strategy with Superior Supply-Chain Management

13 thoughts on “The MBTA: A Case Study in the (Mis)Alignment of Operating Models for Public Services

  1. I don’t think public transportation should run at a profit, since the cost to society is much higher. I wonder if adopting some of the European success stories would work. What are the European cities such as Vienna, Zurich, Berlin etc. doing so much better that they manage to maintain a modern public transportation system? Is it just public funding? Or did the authority manage to achieve efficiencies that are not yet achieved by the MBTA. The fact is that not repairing the system is unsustainable and can endanger the citizens who use it.

    1. I would say that the greater success of European transit systems is based on a few factors:
      -Less auto ownership and urban form more conducive to transit use -> this results in not only higher usage, but also greater recognition among citizens of the need for transit
      -Better management than the MBTA – I do feel the MBTA has been managed poorly
      -More funding from the government

  2. I wonder if pricing can play a role in improving its financial sustainability. Currently the system operates on a fixed price that is independent of the length of the journey. Several massive rapid systems across the world use a variable pricing model where the price varies with the length of the journey. I’d love to know your thoughts on this.

    1. Very perceptive comment – most North American systems use flat pricing within the system (although DC is the “gold standard” in terms of pricing that varies both by distance and by time of day to encourage people to commute outside the peaks).

      Resistance to variable pricing is based on politics (people are used to paying one fare and will perceive it as “unfair” if the system changes) and also technology – you need people to both “tap in” and then “tap out” of the system, which requires introduction of new technology

      Also – the MBTA has surprisingly low fare-box recovery (proportion of costs covered by fare revenue), and also has lower fares than most other North American cities. There is probably room for them to increase their fares – transit demand is generally inelastic

  3. This is mind-boggling! I knew that public transport in the US tended to the inefficient, but these numbers are massive. I’d be interested to know the split of deficits as it relates to subway and commuter rail versus bus. It seems like systems with heavy capital investments (i.e., rails) would be more susceptible to deficits. So in a city like Boston where most of the subway T runs above ground (or easily could if it wanted to) whether switching to lower cost public transport would help alleviate some of the cost pressures. Also, as a total aside, does the refrain we often hear to “take the T more” hold water here? How much would volume have to increase to plug the gap?

    1. Interesting comments! In terms of the “subsidy-per-rider” by mode type, subway requires the least subsidy (because it accommodates a very high ridership for relatively short distances) and is the most cost-effective mode (at least from an operational perspective). Commuter rail commands a higher subsidy, because passengers travel far longer distances.

      In terms of the state-of-good repair backlog, it is 44% subway, 43% commuter rail and 9% bus (vehicles and maintenance facilities).

      To your second point, I don’t see their problems as a demand issue (i.e. if only we had more demand, the T would run better). At present, there is congestion during the peak periods (which could be improved through better operations), so I would suggest that the T focus on that first. I think the bigger issue is that they are not able to serve riders cost-effectively, and I would focus on reducing their cost-per-rider before any aggressive attempts to increase ridership.

  4. Great article, Andrew!

    Tackling a public organization for this assignment seemed daunting to me. From the outside, the majority of transit organizations seem so misguided and operationally inefficient, but you bring up a lot of reasons why it’s actually quite difficult to reverse this. Attracting the right talent and changing the mindset from “funded by the state” to “funded by ourselves” is incredibly difficult to encourage, especially when the organization has notoriously avoided innovation and budget consciousness.

    With the continued decline of American car-ownership, I am curious how transit agencies can continue to run safely and sustainably, while also upgrading their infrastructure. I guess we just need people like you to join the fight!

    Annie

  5. Such an interesting problem! Beijing’s RED alert this week is a reminder of how important public transportation is in the efforts to curb climate change and pollution. However for me, the benefits of UberX often win against the inconveniences of the T (a 15 min. walk away, the potential of delays, plus $2.10). How can we make public transportation more appealing, especially to younger generations?

  6. Nice work, interesting read. It’s sad that the MBTA has gotten to this point. I wish the MBTA would just do whatever they do to operate the subway in Singapore and/or Tokyo. Those systems run like clockwork, are in an excellent state of repair, and are never late for riders. If only we could go over there, study what they do, and then bring the operating model back to the US.

    1. As a matter of fact, the Transit Lab at MIT has students working on projects with Transport for London, MTR in Hong Kong and the MBTA … so we do have a sense of what’s happening in cities with better transit than Boston. Often in transit, the ideas / innovations are not that complicated or technical – the hurdle is rather one of funding and execution

  7. Great case study Andrew! This is a tough one as the services that public transport provides are essential but people are not used to paying a lot to actually make it profitable. Raising prices would be met with a huge backlash. I agree with you that there needs to be some innovation and improvements in public transport and that they could benefit from some business thinking and strategy. I wonder what would need to happen in the system to make this possible, you give a few examples but I wonder how people could really be incentivized around this opportunity. Transport can obviously be a money maker by looking at uber, lyft etc. so I wonder if the govt could leverage this opportunity in some way. Thanks for getting the conversation started!

  8. killer article! I think they’d be well served to raise the gasoline tax and drop the toll booths around Boston. Perhaps it could relieve some of the traffic congestion and improve the efficiency of bus routes in the city? I’d also be keen to see how the MBTA pension liability compares to comparable US cities. Thanks for sharing your insight.

  9. This post is increasingly relevant, especially given how terrible this past year’s winter was (for all forms of commuting, especially the green line – some 1/3rd of the engines were damaged and out-of-commission from the snow). You bring up some interesting points, ones that Bostonians have been talking about for years. The T is unprofitable, but profitability perhaps is not the goal – there are enormous positive externalities in having effective public transit systems. The T is very heavily utilized, with approximately 1.1M commutes serviced on a typical weekday (keeping in mind that the permanent population of the City of Boston is about 650K). The goal, ideally, would be to have the T bear a larger percentage of its operating costs and minimize cost increases while maintaining an efficient, well-maintained set of rails, engines, and buses. This is made even more difficult by the fact that Boston has terrible, variable weather and on top of that is the oldest subway system in North America (second oldest in the world behind the London Underground).

    Part of the problem the T has had historically with costs is, as you mentioned, the lack of incentives to control costs and innovate. You discussed some of the changes the new administration is considering – as much as it pains me to say, fare increases and decreased late night rides is probably a good idea in the here and now. I hope the T can one day become efficient enough to reinstate late night rides and continue the green line expansion – Boston is an expensive city (rental prices have increased over 30% in the past five years) and it is attracting more and more people; a wide-reaching subway is vital to a modern city’s growth. However, some of the changes mentioned, such as increased fares and fewer trips for disabled riders, strike me as cost-saving today but run counter to the goals of what is ultimately a company providing a public good. How do you think the T will be able to do this sociopolitcally, and are there better ways of saving costs?

    I see one of the greatest barriers to progress in the T is the heavily unionized labor. For example – the T has just under 1000 buses in its fleet. On its payroll, it has over 140 bus inspectors, almost all of whom earn over $70K per year – when you think how often a vehicle requires inspection and how long an inspection actually takes, it’s clear that the T has a massive surplus of inspectors whom are being grossly overpaid on an hourly basis. Beyond better management and strategy, which as you discussed is clearly required, how do operating expenses in personnel factor in with your thoughts on how the T can be improved? The T has a municipal history – should it still be unionized? What other parts of the T cost much more than they could?

    T statistics cited:
    http://www.mbta.com/uploadedfiles/Smart_Forms/News,_Events_and_Press_Releases/MBTA%20payroll%2062013.pdf
    http://www.mbta.com/uploadedfiles/documents/2014%20BLUEBOOK%2014th%20Edition.pdf

Leave a comment