While opposed by many — and even considered “politically toxic” — New York City and New York State have moved to finance public transit infrastructure projects via a state-of-the-art revenue generator: congestion pricing on vehicles operating within the city’s core.
The catalyst for New York’s action was the obvious poor performance and safety issues at the Metropolitan Transportation Authority (MTA), declared recently, by Gov. Andrew Cuomo, to be in a state of emergency. Persistent reluctance by state legislative leaders to provide additional funding for mass transit modernization also contributed.
While New York is the first city in the U.S. to make this move, it has been enacted in cities around the globe such as London, Singapore and Stockholm. Other domestic metropolitan regions — and investors in their bonds — are watching closely. Philadelphia, Los Angeles, San Francisco, Seattle and Portland are “studying” congestion pricing.
We do not expect congestion pricing to impact MTA’s transportation revenue bonds in the short term. Further ahead, from a fixed income investor’s standpoint, these initiatives could provide exciting new investment opportunities with relatively high income and moderate risk.
Congestion pricing will likely become a popular method for political figures to offset fare increases in regions with antiquated mass transit systems, crumbling roadways and other infrastructure projects in need of funding. In fact, there are those who believe that congestion pricing must grow bigger, broader and, yes, greedier. Ideas to embrace funding transportation, renewable energy and water projects. Social infrastructure is ripe with opportunities, such as healthcare, education, and multifamily and senior housing.
It is difficult to cast congestion pricing initiatives as taxes that reduce jobs and impose undue social burdens. It is a Pigovian tax, as its intention is to cause motorists to adjust how, when, and where they travel. This not only can result in more rational uses of our streets, but can also generate revenue by charging those least inclined, or most capable, of seeking alternatives.
Technology to make the experience seamless is largely in place: existing EZ Pass systems in New York — and others around the country, such as SunPass in Florida — can be readily adapted. Vehicles also can be tracked and charged by cameras or using smart technology applications.
New York MTA’s Phase 1 revenue streams will fund subway projects, outer borough transit improvements and other overdue needs through surcharges on trips by for-hire vehicle (FHV) — i.e., medallion yellow cabs and “black car” limousines, as well as Uber and Lyft cars. Trucks are likely to pay more, their costs expected to be passed directly to delivery recipients. The FHV surcharge began Jan. 1, 2019. It is expected to annually generate around $300 million.
Phase 2 of the MTA’s congestion pricing initiative (to take effect in 2021) includes the Central Business District (CBD) Tolling Program, which hopes to generate $15 billion during the next 15 years. Full details may change, but the toll zone is expected to be defined as below 61st street in Manhattan, excluding the West Side Highway and FDR Drive.
These largely well thought out programs seek to reduce traffic congestion and improve average speeds in Manhattan’s CBD; provide new reliable funding for public transit infrastructure; and improve air quality by reducing vehicle exhaust. However, do not confuse potential positive externalities with the primary goal of sourcing new revenue to modernize and maintain local infrastructure.
Congestion pricing can succeed for two major reasons: its premise is clear and convincing; and it is but a single element in a larger plan to enhance every form of transit.
How much additional demand can our mass transit systems handle following modernization? New York is leading the charge to find out.
