As the stimulus money dries up, the ridership levels remain the same, and the pressure to "green" the fleets intensifies, the public transit systems throughout the country are forced to look for immediate ways to meet their operational and infrastructure challenges. We will examine:
- Prospect of the financial cliff and balancing needs
- The worth of big projects
- Alternative financings: tax increment financing
- TIFIA grants
- The green component: electrifying the fleets
- Looking at green infrastructure at other transit agencies as an example
Ira Smelkinson (00:08):
Great, thanks. Good afternoon and welcome to the first afternoon panel for what I think will be a very interesting set of discussions throughout the remainder of the day. I know the morning was certainly interesting and yesterday's was a lot of topics and some lively discussions of some senior market participants and Hall of Fame, incoming Hall of Fame members. My name is Ira Smelkinson. I'm a Manager Director with Loop Capital Markets. I'm based in New York. I head up loops Transportation Finance team, provide investment banking services to a broad array of transportation, issuers, airports, seaports, maritime and Transit. And we are very fortunate this afternoon to have I think a top tier panel who are going to be able to share their perspectives on our topic, the transit conundrum. And I think we'll start off just by having them introduce themselves and then we'll come back and start on the discussion. So Ali, why don't you start Please.
Ali Chaudhry (01:08):
Thank you Ira. Can you hear me? Yeah. Great. Well thanks so much for having me here. Thanks Ira. Thanks to the organizers. My name is Ali Chaudhry. I'm Chief of Development and Government Relations for AECOM for what we call America's East, which is the east coast of the us, the Caribbean, and South America. I am for many of those folks here and attorney by trade as sort of the black sheep in the infrastructure engineering world. Don't hold that against me for me. Exactly. There's a few of us here, we hide and shame together. And at AECOM, for those of you that aren't familiar with the company, it's a global premier infrastructure firm. We do engineering architecture planning as well as construction program management, construction management, as well as financing around the globe based out of New York. Myself, been a public service official in the past, working as counsel for transportation, economic development and housing for the New York governor, as well as Deputy Secretary for Economic Development and transportation. Happy to be here. Thank you.
David Narefsky (02:13):
Assume this works. Hi, I'm David Narefsky. I'm a Partner in the Chicago office of Mayor Brown, focused on Infrastructure and Municipal Finance. And our practice is now really national in scope as well as local in context. And so my own brain is sort of wired in part for traditional municipal financing of infrastructure and also a healthy amount of P three projects for infrastructure including in particular transit. And I would just note as someone who grew up in New York City, in a family that didn't have a car, I've been a transit junkie I think since the time I could get around. So I care very much and delighted to be on a panel with both current and former clients.
Nora Wittstruck (03:00):
Hi, I am Nora Wittstruck. I'm a Senior Director at S&P Global Ratings. I know a little bit about most of the sectors in our practice, including transit, just enough to be dangerous. I'm here on behalf of our more our Sector Leader, Kurt Forsgren, who most of you know, I have less gray hair than he does, but I am very happy to be here. I cover local governments, I cover state governments, I cover transportation entities and also municipal pools for those of you who are in the infrastructure world like we all are and thanks for having me.
Leanne Redden (03:39):
I'm Leanne Redden. I'm the Executive Director of the Regional Transportation Authority here in Chicago. So Jeremy and I get to work closely over a lot of different things. The RTA, if you don't understand our transit governance structure here, exciting, we are kind of the umbrella with the three operators that are CTA, Metro and Pace the budget people and some of the funding finance side of things as well in the capital delivery space also.
Patrick Landers (04:10):
Hi, I'm Pat Landers. I'm the Treasurer of the MBTA. The MBTA is the oldest continuously operating transit system in the country rather. And we're also one of, we have the most types of modes. So we have communal rail, we have trolleys, we have subway, we have buses, we have ferry. So I was looking at Jeremy's statistics and thinking that maybe CTA was bigger than us, but actually we're a smaller city. But the MBTA moves 1.3 million people a day and we have a budget of $2 billion and we employ about 6,000 people. So prior to that I was an Investment Banker. Prior to that I was assistant state treasurer. And actually my first job out of college was I was elected to the Massachusetts legislature. So I've been involved in transit policy and governance and finance really since the mid eighties. Thank you.
Jeremy Fine (05:18):
Thank you. I'm Jeremy fine, the Chief Financial Officer at CTA Chicago Transit Authority. I think most of you are familiar, but for those that aren't, we're the second largest transit agency in the country. We operate in Chicago in 35 suburbs. We have eight rail lines, 127 bus routes, even post pandemic. We're still carrying about a million people a day and that equates out to about 80 to 85% of the regional riders. While we're still receiving only about 50% of the operating dollars regionally, we have a 1.8 billion operating budget. And I think that some of the topics later on in the discussion we'll talk about closing that gap of $400 million that we're projecting. We have a $4 billion plus five-year CIP, about 5 billion of outstanding debt and we have a myriad of different operating revenue streams as well as capital revenue streams. But again, here in Illinois we have unfortunately been historically underfunded. So I think that now is the time and we'll talk more about this, but now is the time to really kind of write some of the funding concerns that we've had for quite a while and get us on a track for success as we move forward.
Ira Smelkinson (06:36):
Great. Well again, thank you all and welcome. We appreciate your participation this afternoon. I think we're fortunate to have operator slash finance executives to have planners to have legal, to have credit all on this panel. And I think their perspectives on this conundrum will all be worthwhile hearing. Again, when I see the word conundrum, I think of red wine. So when you look on their website, they say that their label of conundrum wine is bold and exciting. So that's what we're trying to get to this afternoon. But Leanne, I think maybe we'll start with you. When you see the term transit conundrum, what does that mean to you?
Leanne Redden (07:12):
Well, lemme just start. I think conundrums also, they have a nice white as well, not too bad, but I mean it is a good word I think to describe the challenges that we are facing. I think the pandemic changed so much of everything. It changed not just the way people travel and work in our regions. It also fundamentally changed for us in the transit space, the way we fund both the capital and the operating systems that we have. So there's, Jeremy just sort of touched on it a little bit. We've got some very real challenges looming in our region. I don't know if this is safety in numbers, but we are not alone in this challenge of this sort of funding shortfall. And the most looming challenge I think many of us are facing is on the operating side right now, as Jeremy talked about, the numbers that they have at the CTA level for our region as a whole across our three operators, it's a $730 million gap that we are going to face beginning in 26.
(08:12)
We're kind of lucky we're a little bit behind the California and the New York areas where they've kind of expended through the large share of their operating their federal stimulus relief monies. So we've got a little bit more time to tackle the challenge, but it is the same challenge that we're all facing. One of the biggest issues the big large legacy systems have had is we have been very dependent on fair revenue in our funding, specifically on the operations side. And with the changing travel patterns, ridership is continuing to come back and as Jeremy said, we're carrying over a million people on a daily basis. It's still below where we were pre pandemic, but I think the thing that we're seeing is we've got more than 90% of the people back riding the transit system, but they're not riding five days a week and they're not riding in that traditional commuter style that they were in the past.
(09:05)
So that presents, and for example, our state legislature is woefully behind, shall we say, in how much it funds on the operating side of our transit system compared to our peers across the country. So this is an ongoing conversation we're having with them. So both the funding paradigm is completely upside down and really presents us some challenges on the capital side of things as well. There's a lot of demand. I think in the pandemic. We spent a lot of time talking about how the role, the value, the benefits of the transit system is to our regions from both an economic standpoint, I think from addressing climate change and then from an equity and a broader mobility standpoint. And I think the fact that ridership is not there, we now have to find that who's going to fill that gap for us. And it's a conversation with our state legislature.
(09:54)
They have really underfunded us chronically for decades and it was an issue really happening before the pandemic. It has been exacerbated since then. On the capital side, I think the conundrum is we've been, well I should say overall too, we've been bolstered by the strong level of sales tax that is continuing to come into our region. So we have a large portion of our revenues come for sales tax, a lot for operating, but it also pledges against a lot of the debt that we issue. So I think there's a lot of stability there, but again, it shouldn't, once we run out of that federal relief money, there is that gap that we have to address With that. I'll just stop. I'm sure we're going to get into more conversation about some of the challenges or some of the things that we are doing to address that, but I'll stop there for now.
Ira Smelkinson (10:39):
That's great. Maybe Jeremy, you'll go next to give your perspective also being in the same region as Leanne.
Jeremy Fine (10:44):
Yeah, and I think Leanne really kind of outlined the conundrum. And again, just to extrapolate a little bit more off of what she highlighted, it's really an opportunity in any kind of paradigm shift. There's a lot of uncertainty and a lot of risk, but there's also a lot of opportunity. And I think that what we have found traction with when we have conversations with community groups, with other stakeholders, with the state legislature is that people understand probably better than ever how an essential service transit truly is. And I think that they're hearing this on multiple different avenues coming into them. Again, because of the work that RTA has done that CMAP has done through the part report, it really kind of has been a bit of a grassroots effort of getting these community groups together and really kind of casting a vision of what transit not only can get back to, but what it really should be.
(11:40)
And one of the things that President Dorval Carter talks about a lot is what should we really be comparing ourselves to? Should we be comparing ourselves to Philly and San Francisco and others, or should we really be looking at the Hongkong's and the Singapore's and the London's of the world and really seeing what transit could really become in North America and here in Chicago in particular. So while there's a lot of risks out there, I think that ultimately there's some fantastic opportunities. And I think that the transit is the answer plan, the part plan really kind of build off of each other in a very productive way. But we have to continue to make this effort of showing what transit can be and what problems it solves. And as Leanne highlighted, and we're working with our partners at MIT on is really trying to drill down on what the economic impact is. But beyond that, what are the environmental offsets that transit brings to the table? What are the equity benefits that transit brings to the table for the community? So I think that all of those things are resonating very loudly, particularly among the state legislature. And again, we remain very hopeful that we'll be able to get something here finished in the near term to help solve this funding gap that we have.
Ira Smelkinson (13:00):
Great. Thanks. Pat, you want to give your perspectives from Boston?
Patrick Landers (13:01):
Sure. My perspective is a long perspective. As I mentioned, I started as a Legislator back in the eighties. And in that period of time, Governor Dukakis and his Secretary of Transportation, Salvucci were huge proponents of transit. In fact, the governor used to ride the green line from Brookline into Boston and back, of course he had two state cops on either side of him to protect him, but he was a strong proponent and they expanded the system and they did it in such a way that the state would pay for expansion and the state would also pay for net cost of service. And then we got into this period of time when state economies, if you recall there was after Governor Cox ran for President Massachusetts fell in a hard times because we relied on capital gains tax that went away. Legislature had to increase taxes, but they were still getting this bill from the MBTA and at the time they got very, very reticent of that.
(14:02)
And what they said was, listen, we don't want to be just signing blank checks to the MBTA. So what they did is they did what they call as forward funding. So they took the sales tax and they said that, listen, we're going to give the T now 1% of the statewide sales tax. Now, when they did that, if you were to look at the empirical performance of that sales tax, if you took a 20 year look, it had a constant annual growth rate of 8%. If you took a 10 year look, it had a constant annual growth rate of 6%. What actually happened, and if you think about this, this happened in 2000, what happened in 2000 internet sales, right? It took states a long time to figure out how to capture that. Remember Sears was doing it, Amazon got it, wealth, other people would voluntarily do that.
(14:55)
Now it's being captured and it's happening. So the long shot of it is that the actual performance of that revenue source was not 6% or 8%, it was 2.01% all the way up to 22 from 2000. So that's an under performance of between 13 and $9 billion. And at the same time, we're operating one of the oldest transit systems in the country. And one of the reactions to previous administrations was to say, listen, the T is always coming and asking for a handout. So they brought in these people that were, they're not government people, they were actually workout people. They'd come from the corporate world, they were turnaround guys and they cut cost, they cut cost as you can do. They made the books look good, but there was an underinvestment in the system and we're now realizing just exactly what that means. Last week we had press about the amount of slowdowns that's occurring on our system.
(16:04)
We've got a number of lines we're speed restricted to 25 miles per hour. And they happen to be, if you think about our system, it's like a funnel where all of these lines come in and then they come into Park Station or they come into North Station or South Station. It's those last legs where the point of the funnel where the tracks are just worn out, very, very hard to change all those and to get the diversion resources necessary to fix those. So I would agree with Leanne. I would agree with Jeremy that we're at an inflection point. We've had 2 billion worth of federal money that's kept us propped up and without that and we're running out of that. The question has to be what do we do now? What is the right thing? And Bill Bradley who was, if you remember, he played for the Knicks.
(16:57)
He was a US senator. He has this quote I like that said, there's, there's really nothing as dangerous than the wrong solution to a real problem. And he also said this, he also said that it's as easy to have a grand solution as to have an incremental solution. So I think what we need is a grand solution to this transit problem here in Massachusetts, and that's what we're going about doing. We have a brand new governor, we've just gone from a Republican administration to a democratic administration. There's the opportunity with a new governor to take a fresh look and to be frank about it, Democrats are sometimes less constrained on the revenue front, then Republican governors put themselves in. So there's the ability to think about broader ways to generate revenue and broader ways to fix the problem.
Ira Smelkinson (17:51):
Great. Thanks Pat.
Nora Wittstruck (17:52):
If I could interject, I think Leanne, Jeremy and Pat have demonstrated sort of the transit conundrum, which also is the credit conundrum for transit systems. And I think more than ever during Covid, we understood as Jeremy said, that transit systems were the lifeblood of cities during shutdown. They were there to transport essential service workers, healthcare workers, other people that had to get to their jobs. That unlike me, I could sit in my apartment I'll be at 500 square feet and work. The transit systems were there. And I think what's happening is those that are going to sort of go on and shine like the CTA, which we upgraded in February of this year, are the ones where the states recognize that or the local governments recognize that importance and give funding, give them alternative ways to issue debt like the state of New York has through the PMT credit and as well as the New York City sales tax credit that MTA has now or local measures to support them through alternate operating revenues, whether it be a sales tax, which some leverage for debt, but also that could be there for operations as well.
(19:12)
The fairbox credit is sort of history I would say. I don't think that Pat's never leveraged a fairbox credit. So I think that aspect of this being sort of a business operation or an enterprise is kind of in the rear view mirror. And I think from a credit perspective, our view is that there's really going to be this divergence going forward and we're starting already to see it with some transit systems, but definitely I think it's being more pronounced post pandemic.
Ira Smelkinson (19:45):
Now, how about from the planning side? The comment was made about the value proposition as you're talking to your governmental clients, your transit clients from kind of a planning development. How does this new way of looking at the value of transit enter into any of those discussions? How do you quantify that?
Ali Chaudhry (20:03):
Sure, thank you. So there's a lot there to unpack and I appreciate all the comments from the speakers here. So let me phrase what I think briefly of the conundrum here, including the planning of the development sign into three buckets, coming from a policy background, myself, legislation as well as government. First off, let's just all be bold enough, brave enough, and maybe ambitious enough to take on the system as a whole and sort of think outside the box. Some of the systems are obsolete from a planning perspective for what they were built, what they were built to execute and deliver is not the world we live in now. And I freely use New York as an example, since I'm a New Yorker, all New York subway system lines were built to go into Manhattan travel, carry people into Manhattan. That was the lifeblood. That's where the jobs were.
(20:53)
That's where people wanted to move to. Most working class jobs are outside in the boroughs, not in Manhattan. That is no longer the case today. So all of the lines now get congested, partly because if you live in Queens or the Bronx and your job is actually in Brooklyn, you have to transit through Manhattan first. So for the first time, cities like New York are looking at the system as a whole and saying more than 500 miles of track, more than 400 stations are we doing right by people who live here, who commute here, who work here, who need to get to where they need to be in the most efficient, quickest way, also the greenest way possible, right? Transportation is the biggest polluting sector in the economy today. So we all have to think about sort of rethinking the system as a whole. Proud to say, make the plug ACOMs working on a study for an Interborough transit line, the very first one in the New York City subway system that will basically connect Queens, Bronx and Brooklyn and not Manhattan be the first time that ever touches Manhattan.
(21:43)
Partly to alleviate some of that ridership that's going to Manhattan Congestion Alliance. So one, we have to sort of think outside the box as to where ridership is now, where are people living? Where are the jobs? What are the jobs we're trying to attract? Where are the big campuses going? Where are the big employees going? If the employees are coming in and creating those jobs, should they be paying for transit service because they're creating that burden, they're bringing it in and there's some elasticity to it, right? You can't overburden the employees coming in so much that they don't want to come to your city, but you also want them to have some stake. I think New York City did a good job with midtown zoning a few decades ago. Now feel over saying it under Mayor Bloomberg where new employees, especially if they're increasing their towers in Midtown, actually have to pay towards the MTA to actually build out the system so they can carry the increased ridership that employer is bringing into Midtown.
(22:33)
I think there's avenues like that that we should think about systemically. I will say this also, every system is different because it serves as a big urban city, big urban center in DC. You go take the metro, you pay for the miles that you travel, you swipe in and you swipe out. That's a pretty equitable way of charging people. But that's also because the wealthiest people in the DC metro area live the furthest they live in the suburb. Whereas the New York City, that won't work because the people that afford the least live the furthest. So that's why it's a flat fare. It's fair and equitable. So partly think about the system as a whole. What are we trying to achieve? Second, I would say on the construction sequencing planning side, this is a huge public conference issue. We all like our new station. We all like them to be wonderful in grand, but it takes time, it takes construction, it disrupts people's commutes.
(23:19)
It disrupts their daily life. There has to be transparency in the communication with the public, with outages, with track work and keeping to that schedule. So I think that as a whole, we have to think about. And number three, I'll touch on financing here. I think in big urban centers, transit is a lifeblood and creates jobs and housing opportunity for people to be mobile, especially regionally, right? You look at Amtrak even for example, it's a different system, but I know folks that live in Philadelphia and commute to New York City for work, it makes the distances smaller. Every developer who is benefiting from that should have a stake in supporting transit. I think transit oriented development is the future. I think the systems need to do a better job of working with the series taxing jurisdictions as well as developers to provide that opportunity of the back of which developers make a lot of money and a lot of revenue, but the system never see a dollar back. There is no Hudson Yards in New York City without the extension of the seven line. There is no development in the Bronx without Second Avenue, subway, phase one and so on and so forth. But it's time that folks that benefit from that should be paying into the system. I'll stop there.
Ira Smelkinson (24:33):
Great. Thanks David. I mean from the legal standpoint or any particular thorny issues with your transit clients that you're dealing with now that you want to add?
David Narefsky (24:41):
Well, not so much legal considerations are, but two considerations both in my mind as to how to capitalize on perception, reality, and optics. So one is, and I'm going to talk about Chicago, but I don't think it's unique to Chicago. I suspect it's other urban centers as well. Congestion, traffic congestion in Chicago, just as a resident and as a regular consumer, so speak is terrible. It just seems to be, and people complain about it even more than they ever, there could be various reasons for it. I don't know if the statistics really bear it out. It feels like it's worse. And so there's the challenge of how to capture that unhappiness and build support because the solution to some part of that is get better transit, don't just complain about it, get better transit separately. This started a little bit in the pandemic and it continues to bit, and I'm sure Jeremy deals with on a regular basis.
(25:42)
There have been some issues with respect to crime and mass transit and cleanliness of stations, people feeling a little unease. And I think it may be more a question of optics and perception than actual increase in the numbers. But again, I think the solution is how to capture that concern, deal with it, and develop more supporters, more stakeholders. Because what we've got now is, as people said, there's been a lot of return CTAs at a high level, lots of urban transit systems are, but to be able to get the money that's going to be needed to really get to the next level, we've got to like all hands in and there are other stakeholders that need to be addressed, I think.
Ira Smelkinson (26:30):
Right. Jeremy, just since David mentioned you, can you comment on this, whether it's perception or reality about lack of security in the system, how do you go about trying to change people's perceptions?
Jeremy Fine (26:43):
Yeah, so this is a critical issue for us. The perception issue is a real concern for folks out there. We have seen the actual crime statistics continue to drop, but we have invested substantial amounts of additional funding for safety and security measures. Our budget for security back as late as 2019 was about 14 million a year From the 23 budget we're up to 41 million a year. So we're putting substantial resources behind it, but it's not just a matter of security, it's also social services. So we're also funding social service missions out on the system as well to address issues out there because a lot of them don't necessarily fall within policing activity or needs there. We've also invested in just making the system cleaner and friendlier looking better, lighting, more cameras out there. And again, these are all things that are resonating with our customers and are being well received with the customers.
(27:48)
And you're starting to see that manifest itself in the fact that already we're achieving more than what we expected to in terms of ridership for the year even before we start going into the heavy fall ridership season. So again, I think that you're seeing that people coming back is frankly probably the best antidote to some of these security and safety issues out there because the more people you have on the system, again, a lot of it's perception and getting more people on the system out there, it makes people feel a lot more comfortable, particularly in the off peak type hours.
Ira Smelkinson (28:27):
Leanne, I see you nodding to Jeremy's comments. Anything you want to add on this perception issue?
Leanne Redden (28:32):
No, I mean I think Jeremy's spot on, and I think it's actually a broader issue than just a transit issue. It's really a reflection of our broader society. And one of the things we're collectively talking about doing is sort of this much broader safety summit conversation. So recognizing that transit can own the piece of the puzzle that belongs to them, but it's a mental health issue. It's a social services issue, it's a homelessness issue, it's a medical issue and drug intervention issue. So it's this complexity that none of us in the transit space are even equipped. And I think so owning and recognizing both the things we can control and the things we can't, but having an open conversation about that I think is a big step in the right direction. But the people back on the system is a huge perk. And I think one of the things that the three operators in our region are doing too is recognizing, it ties in a little bit to what you were saying about delivering different kinds of services and amenities to, it's not different fair products, different hours of service on the three operators here we're working on actually a completely universal one day pass so people can just pay one fair regardless of how many rides you take, no transfers, all those kinds of things.
(29:45)
Simplifying the fair system, so people who don't have some of those traditional barriers to riding, but also say on a commuter rail to the point our system in Chicago is very hub and spoke to get kind of nerdy, but it's central hub in the core, at least Manhattan's come along and everything. Like our commuter rail guys will say, we don't have the luxury of picking up the rails and just plunking them somewhere else, but we know people are traveling differently, so how do they reinvent themselves within the physical infrastructure that we have to better maximize different travel patterns? And so there are some of the real complexities in some of the challenges that we have to continue to tackle. And I think we're working on them, but some of them take time, as you would say.
Ali Chaudhry (30:30):
Yeah, please. I love the idea of perception in this because just been a former government person myself, I think government's perception of what is transit is evolving and changing and I think justifiably so, I would hate for us to not mention buses just in the context of what is public transportation, what is transit? Usually the Volvo has been seen as mutually exclusive with a bus system and as a transit system or a subway system, a light rail system, and they manage separately. Busing is an integral part of fixing the issue of transit deserts where subways and commuter railroads can't get to. And some of the people that live there are the ones that afford the least when it comes to actually commuting. And that social equity, the reason why, I mean this is maybe my opinion, so take it for what it's worth. You go to other parts of the world like you are where busing is very popular.
(31:19)
One of the reasons is because they designed and plan the system with bus shelters much better. Let's be honest about this. Busing in the United States has all been seen a poor person system. It has been treated that way. It has been designed that way. And shelters are horrific. I mean, I live in New York, I also come to Chicago often, almost every week. You look at these cities where climate is pretty cold in the winter, there's the inclement weather cities, we obviously live in them. And you see shelters that are not shelter, that's a bus stop with a pole in the ground. You go to other parts of the world, there's some dignity to how the busing is done. There's a dignity to how the shelters are created, where people feel safe, where people feel like they can be warm, they can be stationed there, and the buses feel like a dignified way to commute.
(32:04)
So I think on the planning side, largely on a macro level when it comes to multimodal sort of planning around transit, it's busing, it's obviously rail, it's also last mile connectors such as the scooters and the e-bikes and everything else that we're seeing in the cities already. I think they're doing a good job with that on the West coast for example. I think we're all trying to learn from it. So I think the perception of what is transit needs to be multimodal for everybody, not just government, but the end user and how they all connect to make the city move a little better.
Nora Wittstruck (32:34):
I mean, multimodal systems did better during the pandemic, obviously when people weren't riding, they were on the buses. But I guess if I could switch to another topic, just my question is, and maybe this is my credit background, but with all of these extra demands now on operators, including some of the things that you guys mentioned around public safety and just being more coordinated in terms of public service response, how are you handling that against these other operational limitations or challenges? How are you evolving? I think what we view, what we think at S&P is that those transit systems that can evolve will, and that will be how they save their credit profile. But if it's okay if I, I'm just curious what types of evolution you're thinking about.
Patrick Landers (33:26):
Well actually bus transportation was our most resilient mode during this. And if you think about it, of course it is because you're going to household, you're going to direct care workers during the pandemic. Boston has got some of the oldest hospitals in the country. It's got some of the oldest universities in the country. Those direct care workers were going all through all three shifts in Longwood medical area. And so during the pandemic, what we were able to do is we did an entire bus system redesign, service redesign. And when cars weren't coming in, we grabbed a lane and made it a dedicated bus lane. And in some cases we put them in the middle because there's so much competition for the curb that if you put it right down the middle and you can, oh, maybe that's dangerous for being in the middle. It's actually not because if you have to go from one side to the other, you're ing all those lanes where if you're just going to the middle, you're crossing far less.
(34:28)
And they use this technology that I didn't know even existed is they used cell phone data on an aggregated basis and so they could tell where people were actually coming from, where they're going to. And we used the registry information to find out what households without cars, and we redesigned our bus system in order to adapt and to bring it to where it needs to be. Also, the city of Boston did a pilot program to do free bus. It turned out there are only two bus lines that were entirely in the city of Boston, but those have been the pilot and those have been tremendously successful.
Jeremy Fine (35:10):
And from a CTA perspective, I think we are following the data as well, I think in ways that we always did a little bit. But I think it's become a much bigger focus for us, particularly as we continue to add on workforce back into the system with ramped up hiring efforts, following that data which routes need more people on it, which routes need more frequency and really being much more demand driven than we probably ever were. And that's a good thing. That's a good part of the evolution. I think that we've also followed some of the technological improvements through the pandemic period of touchless access to the system and rolling out the Google and Apple Pay to be able to access the system. Again, looking for things that our customers want in trying to deliver on those. And I think that this whole process through the pandemic has been very beneficial in a lot of ways.
(36:09)
And I think further amplified through the RTAs transit is the answer. And the CMAP part plan is really what are the customers really looking for and what will get them back on transit and what will get them to ride more frequently? And that is what we're putting our resources behind to try to amplify and take advantage of those opportunities. And I think, again, you're seeing it resulting in higher ridership both on the weekends when people have more things to do, as well as just the weekdays you're seeing people get out and ride more frequently as well.
Leanne Redden (36:45):
If I can just add in terms of resiliency and thinking about what transit is, I think the operators across the country, I would argue I've actually gotten more creative in not just thinking about it in terms of buses and trains, and it's about that first and last mile. It's about integrating the bike shares, the scooter shares, the Uber, Lyft, those kinds of transportation, the private sector into operating, especially when we get in the region that I have to help support is our entire metro area here. And so you get out into some of the suburban areas where the commuter rail might work really well to get you to that certain point, but to get that last couple of miles to that office campus, and we don't have to think about as sort of the Ubers and the Lyft as the other, let's integrate them into the apps that we have.
(37:34)
Let's partner with them on actually funding. We've done some pilots that have funded with in some of our industrial areas around the O'Hare area for that third shift. So they might be able to get to that shift by CTA or Metro in the earlier evening. But then when they end that shift, the CTA isn't really operating necessarily on all the lines. So we are providing maybe a safer and much more affordable too because we're subsidizing it, but partnering with those providers that can use the tech that they already have and plug it into our system as a jigsaw puzzle piece to fill some of those gaps that we may not be traditionally as good at doing and thinking about it as a network as opposed to we just run buses and trains.
David Narefsky (38:18):
I was going to ask that transit professionals here are something that was triggered by Pat's comment about this pilot program as I'd read about to have a couple of the bus lines in Boston free, and I know they were trying to do that in District of Columbia with some challenges. I mean, to me it feels like it's an interesting idea, very complicated to really think you can run an urban transit system without having people pay something for it. But does it lead to the possibility of different fair pricing based on income, some kind of policies in which people who have less money pay less?
Patrick Landers (39:00):
There is work being done and being thought about that, the implementation of these concepts seems easy, but in their implementation, if you were to take a bus into Park Station and then you would take a transit, you'd take a subway somewhere else, you'd still end up paying the subway fare. So sorting all that out, what happened was that it wasn't without revenue to our system because the city of Boston budgeted $8 million to pay for those two bus lines. And so now the governor is thinking about how to join numerous suburban communities, not just Boston, but in what we call the hub and thinking about how the T would still get paid for that, but it would not be from fares.
David Narefsky (39:59):
Yeah, well another way of equity, another way of providing equity.
Jeremy Fine (40:03):
And David, just go ahead. Sorry, go ahead.
Leanne Redden (40:06):
We're probably going to say similar things. I was going to add that in our region, we actually already provide significant amount of free and reduced fares to people with disabilities and the elderly. And so they're already administered. One of our challenges, as I talked at the front end about the funding gap we have, the more you add to those programs where, so depending on where we are looking at it just from a revenue and efficiency standpoint, or are we looking at it from a social equity and broader benefit standpoint. So weighing those two things because providing more free or reduced rides in many cases is actually further loss or further degradation of revenues into the system. I will say though, we are looking to expand, as I say that ourselves, we are looking to expand across our region, the reduced fare program to an income base. So using SNAP food stamps program as the criteria and administering that, especially starting maybe on our commuter rail side as sort of the first pilot, our legislature is asking us to look at all these things. So we figured try piloting things to get what real revenue and the data looks like so we can actually start to price what that might cost and then talk to the state about filling that gap or what is an alternative funding source. We still have to provide those.
David Narefsky (41:19):
We're getting the state to pay for it since it's really takeaway social.
Patrick Landers (41:22):
There was one thing I forgot to say, David, that is that commuter rail, actually the fair recovery ratio on commuter rail is much, much higher than it's on bus. So there is a cross subsidy there like two to one.
Jeremy Fine (41:38):
And David, it's not just getting the state to pay at the front end but continuing to pay and escalating those payments. So for instance, just to kind of highlight one data point that Leanne referenced is we provide at CTA about 140 million of free and reduced fair rides. We get reimbursed $14 million. So you have to be able to toggle those on and off or make the funding not be able to be diminished in the future.
Leanne Redden (42:06):
I think just sorry to add another thing, sorry, I've taken over conversation. Quite alright. You're no longer mine. The technology and a lot of the way we are paying for fares now gives the operators to a lot more options to the point about those who can could pay more, but also fair capping and getting creative time of day if people are managed lanes. Yeah, I mean the airline industry, but the airline industry has been doing this, you buy a seat, I have no idea what the complexity is of those algorithms are to price my ticket versus when my husband bought one five minutes later. But I mean there's a lot more data and technology that we can use to actually create more both balancing out sort of that equity and that revenue side of things in the fair space because of electronic and electronic payments.
Ali Chaudhry (42:55):
So on that note, that's fascinating. I think evolution that we've seen everywhere. For example, one of my pet peeves has been in New York, the MTA who I love has maybe some of the best data in the country on foot traffic because of the turnstiles that they've had for a long time. It's like every time you're swiping, it's another data point. And I think they're finding now at a place that they've been looking at this where based on that data they can actually map out foot traffic on a certain corridor or path and where are people coming in, what are the times of days? And they're anchoring the lease rates based on that data now. So you want to be in a station that's heavy traffic and you want to sell coffee, you should probably pay a little more and afford to pay more because you can make the money back.
(43:38)
So the MTA finally leveraging its real estate for that reason. One question I have for the transit officials here as well. Yeah. But I'm curious about this because I know this is something that New York is struggling with and trying to, this is a conundrum, right? I'll say the word congestion pricing, I'll leave it out here. But the goal of the transit push is to get more and more people to use public transportation and transit in particular. The question always comes to, at least in New York, is isn't there a breaking point though? If we are successful in doing everything to get the end users to embrace transit like we want them to, it's better for the environment, better for the city, better for the fair box, all of that. But is there a capacity issue in the system already that at certain point if people do migrate over, does it the system, I think the MTA is struggling with that. How do you get people in when you're already at capacity? So then at some point, does it have to expand first and transit deserts have to be overcome? How does that work from your perspective?
Patrick Landers (44:44):
I think we have to remember that transit is a subsidized system, and when you expand a subsidized system, you need more subsidy. That has not happened with the MBTA. What's happened since 2015 is there's a special blue ribbon commission and they said the T needs some help with capital. And so anytime there's an expansion project, it actually happens with state dollars, state bond money and bond proceeds are used. But as we've been saying, the current fair recovery ratio in our system is combined 19%. Where do you get the other 80%? And they look at you like you can squeeze a nickel, right? Everyone likes to show up to the ribbon cutting and have the brand shiny new thing. And you mentioned before, because we've done expansion in my era, let's say three times in a major way. We did green bush, we did south coast rail, and then we did GLX, which is green line extension.
(45:52)
And so the South coast rail, there was some talk about value capture because property value is going to come up. And the state senator, who also happened to be the chairman of the ways and means made the very good point that, listen, when you expanded green bush to Hingham, which is a very affluent neighborhood, everyone just thought, oh yeah, they deserve it. Right? When you brought transit to Fall River, new Bedford, which is depressed now, oh, those are low property values. Those property values are going to go through the roof. We've got to grab a piece of that. And he's like, wait a minute, where's the equity there? Why did you not have that feeling or inclination when we were providing enhanced service to an affluent zip code? And now you want to do it when we're trying to build and bring that up? And the other thing that I think relative to T transit oriented development is we have to think about what our goal is here. And our goal is really to be a car killer. And so to the extent that we do kind of operate in that mode, we're making it harder on a relative basis to I think solve that larger problem.
Nora Wittstruck (47:12):
I would actually argue that I don't think that it, well, maybe not the CTA, but the MTA I don't think congestion pricing, it's all about just bringing people back to transit. I would actually argue that the MTA was well over capacity before the pandemic, and they're probably operating, they're at about 83% ridership now. I just looked at the statistics and I would actually say that's probably about where they should be. And so I think congestion pricing is just another option to fund capital. And so I don't know what you guys feel about where the CTA, where the equilibrium is for your operations, but before the pandemic, you had so many delays on the subway with them being so far over capacity, people were angry, people are getting angry again on the MTA because they don't like the trains being full. But I don't know what you guys think about that.
Jeremy Fine (48:10):
Yeah, I think you may bring a good point and it's a great question, and it's really kind of the impetus behind why did we continue our capital program so strategically and so quickly during the pandemic, RPM was a major project for us to alleviate capacity constraints that we were facing on the near north side of the city. So that's why we continue to move that project. And during the early days of the pandemic, people were asking questions like, well, should you slow down or mothball capital projects? And it's like you have to continue to move those projects, those capacity projects forward. And again, these projects that we're doing with RLE and with bus vision study, again looking kind of down the road of where these capacity pinch points are going to be so that we can start addressing those before we start hitting those again is a critical component and really kind of behind the larger strategic vision that we have in our capital program, which is again, why we need more capital funding along with operating.
David Narefsky (49:15):
I think there's another point to be made, Jeremy, about your most of these two, most significant of your current capital projects was particularly with respect to value capture. But just to set the framework here for everyone, so RLE is this acronym for the Red Line Extension. The red line is the north south spine of the system. It currently ends at 95th Street on the south side. The plan is to extend it to the very southern border of the city at a hundred 30th street. So that's basically like a two mile extension to what everyone would fairly call a transit desert. If you're looking for a transit desert, that part of the city would fit that description. So kudos to Jeremy and team for this week getting 2 billion of FDA grant money. But the very significant portion of the local share of the cost of this extension is coming from a transit tiff in tax income and financing sort of special legislation, which just to be simplified about it, the very significant portion of the value property tax value that's captured to support this transitive doesn't come from the area that is benefiting from the expansion service.
(50:27)
It's really coming from the area that's from where we are now, going down to where the Stevenson Expressway and McCormick place are. So a very significant portion of the value, local value to support this is coming from a much higher income, wealthier, higher income generating portion of the city. And that was always a fundamental part of this project. Not just the transit issue, but how to pay for it.
Patrick Landers (50:52):
I'd like to make the point, who was it Wayne Gretzky to say that don't skate to where the puck is, skate to where the puck's going to be. Right. So the thing about congestion pricing, what we realized is that there was a time when I think that was extremely relevant and to a degree it's less so now because we've changed our service delivery to be more clock face. My train is now 6 11, 7 11, 8 11, et cetera throughout the whole day. It didn't used to be that way. The service delivery used to be in the morning commute and the evening. And part of the hybrid thing is that we're coming in the office, but there's not such a pressure to be nine to five anymore. And I think we're adapting now. So I just think that it's still certainly a rush hour in Boston without a doubt. But I think if you're thinking about forward and res, it's getting to where the puck's going to be. I think it has somewhat less relevance than it did prior to the pandemic.
Ira Smelkinson (52:02):
I do want to ask the operators on the panel, we've talked a lot about revenues and expanding the pie, et cetera. Jeremy, you mentioned it, so maybe you'll go first. Talk about some of the expense actions you took during the pandemic on a go forward basis. How much additional steps or additional actions, tools you have in your toolbox on that side of the P&L?
Jeremy Fine (52:20):
Yeah, necessity being the mother of invention, frankly, because of the underfunding, the historic underfunding that we've received in Illinois, we've had to be very aggressive with regard to expenses over the years. And frankly, we've been able to attain about 820 million of cumulative savings over the last seven years that's allowed us to drive our overall operating expenses to the lowest in the industry. And we have an administrative expense ratio that's in the corporate type level of about eight and a half percent. So we continue to look for those opportunities and we will continue to look for more of those opportunities. But again, you start picking the low hanging fruit, so there's not as much of that available. So again, this is part of the larger mosaic of the conversation that we're having with the legislature and is a good lead in that if you invest more with us, it's going to be used wisely. And that's been very helpful in us getting traction right out of the gates with the legislature and with CMAP and RTA when they're asking these tough questions as well. But that has been very helpful for us to be able to close gaps over the last several years through the pandemic and then beyond. But again, we're at the point where we need more funding.
Ira Smelkinson (53:39):
Okay. Great. Well, I think we're coming up to the top of the hour. I want to just see if there's any questions from the audience for our panel. One right here.
Audience Member 1 (53:56):
I can say it, my example. So other non-trans municipalities of our last cost savings, because their inability to hire and fill all their roles, that likely isn't the case for transit given this need bus drivers. Hello. That likely isn't the case for transit operators as you typically need bus drivers and train operators. Guess what have your agencies done to try to recruit and fill those roles, which ultimately likely will help with system efficiencies.
Patrick Landers (54:27):
I can take that. I just heard the other day from the head of HR that we've gone from 200 hires a month to 400 hires a month. So in Boston you'll see big billboards, bus drivers 30 bucks an hour. Now what happened during the pandemic of course, and particularly at the MBTA, MBTA had a pension benefit that went back years and years and years where it's called 23 and out. So you can retire at 23 years regardless of age and get 75% of your three highest years. Right? Wow. Yeah. Wow. So I mean, there are people that retire at late forties go out and get another job. So you think back about the beginning of the pandemic and just how scary that was for bus drivers and particularly if they had some medical issue.
(55:20)
So there were people that opted out at that point. They had their 23 years and they said, this is, so we've lost a lot of seasoned bus drivers during that period. So we've gone now from 24 bucks an hour to 30 bucks an hour, and we also have a holding pen. So we will pay you before we can even slot you. We'll pay you to get your CDL and wait. And if you actually have your CDL, then you get the full 30 bucks an hour. So we pay you to get the license, we pay you to wait until we can slot you. And that's been enormously beneficial.
Nora Wittstruck (56:03):
I would say though, I mean labor generally is something that's been a strain on most asset classes regardless of where they sit. And some of the transportation agencies or transit agencies that have had a rough patch, they're paying a lot for overtime for these people. And it's really pressuring the operations side of the balance sheet or the income statement. So I mean, to your point, it's not an easy solution, but it's not one that I think the whole industry is wrestling with.
Ira Smelkinson (56:41):
Great. Any question up here in the front please?
Audience Member (Jillian) (56:48):
Hi, Jillian. Hello. Okay. Hi everyone. I'm Jillian with Assured Guarantee. You mentioned that at Hudson Yards where the seven is that there's a lot of economic development that has come from that, but that there also should be some sort of balance between who is paying for that benefit and then who that benefit is ultimately helping. So how do you think about how, in addition to having tips and things like that, how else do you think about capturing the value and making sure that the people or the economic development that is coming from transit is being paid for by the organizations and the companies that are really benefiting from it?
Ali Chaudhry (57:37):
Thank you. So similar to what Dave was talking about with tax increment financing, that's how seven line extension was financed eventually that led to what is now Hudson Yards on the west side of Manhattan, probably maybe one of the most affluent new developments in Manhattan in decades. So what's crucial, in addition to what David already laid out as to how taxing and financing works, you need the taxing jurisdiction who otherwise recognized and realizes that new tax base of the district, right? So it's the property value was let's say an X amount, and then it's gone up because now there's transit accessibility. People want to live there, people want to open shop their business there. So your property value's gone up. New York City as a tax jurisdiction under mayor of Bloomberg decided that that whole development was worth it for them in the long run as far as the tax revenue base of the city of New York.
(58:35)
To give some of that tax, that delta, the additional tax value that they're recognizing, realizing for a certain number of years to give it back to the MTA to basically reimburse the MTA for the seven nine extension. Because without that extension, Hudson Yas would not be possible for the developers who are otherwise owning the land and underwriting the development. Now, side note to that, obviously controversial in its own way, right? The salmon line is the only line that services Queens, the borough of Queens in New York City, some of the most working class people in New York live in Queens, and that line has had a transit desert on the other side in Queens for decades and so controversial. Do we need a new development on the west side of Manhattan that's very affluent with the extension, or should we be extending it into the working class neighborhoods of Queens where people already live, where nobody lives in Hudson Yards?
(59:23)
The city's argument is, well, that money that Hudson Yards will raise, will go to all these other developments, right? So you've got to raise the money first and then you've got to deploy it. So that's like a lockbox. So let's dedicate that, raise revenue. That's our tax increment. Financing works. It bonded out obviously over a certain number of years. The city gets a lump sum upfront and then they deploy it. Another word is value capture. I'm a big fan of that. I just think it has to be done in a responsible way. It has to be done in a very transparent way, and I'm a big believer in dedicating that tax revenue upfront and not just a general fund, because then you're never going to get it for the communities that wanted some of that access and some of that benefits. So you have to have that conversation upfront, lockbox it so that when the money comes in, it goes to dedicated communities and that agreement has to be made first.
Ira Smelkinson (01:00:12):
Might have time for one last question. Anyone else? Okay.
Audience Member 2 (01:00:19):
Yeah, just a couple of questions perhaps maybe taken by different panelists here. One of them is demographics. So the changing makeup of a US society is going to take leaps and bounds changes from where it is today. I'm just wondering what the panelists might think about the changing demographic in this country and how that might affect the system and the makeup of the system going forward. And then secondly, we talked a little bit about labor earlier, but for those that are at the transit operators, I'm just very curious as to how your planning for future labor negotiations with the unions going forward and how that may impact your operations as well. Thank you.
Ira Smelkinson (01:01:01):
You want to take a second question.
Leanne Redden (01:01:03):
On the demographic side, I'll just say, I mean, there's two things. There's sort of the racial demographics and immigrant influence, I think on ridership patterns. I think that's very real, and I think we are seeing that and addressing that. I also, another key point is the aging population. The population is aging, and that's transit becomes a critical service for the aging population of our regions. And we're already seeing that in the growth and the costs in our a paratransit services that typically serve people, not just be disabilities, but the elderly as well. So they're very real issues that we have to address. I think they potentially bode well in terms of market share, if you will, for ridership. But it's not just going to happen without us being mindful and intentional about some of that.
Nora Wittstruck (01:01:52):
I mean, I'll add from the credit perspective, the demographics of not only the aging population, as Leanne said, but the changing demographics and the doom loop of urban communities and will they survive post pandemic as the primary for New York City without MTA, you don't have an urban center. And so I think that just emphasizes how important transit entities are to the economic lifeblood, not only for poorer people who use it as an essential in a cost effective way to get to their job or get to their doctor or wherever they might need to go to the older population who don't want to drive or can't drive or need to get to where they need to go. So I think that transit underscores all of that, those demographic shifts for a lot of different reasons, at least from a credit perspective and how governments raise revenue and make money to fund their own operations as well as pay their debt service transit has to continue to exist, or urban cores will just die away. I think that's my opinion, not S&P's.
Jeremy Fine (01:03:17):
And then just to hit quickly on your question about just generally about inflation and its impact on labor, I'll also couple in materials contracts at large. Some of the benefits of governmental entities entering into longer term contracts for those various categories is that it helps smooth out some of that impact at the height of the, so we were able to have a contract in place, hopefully for labor that will allow some time for some of the inflationary pressures to start to abate a little bit as well as for some of our materials and other contracts. And then we'll start seeing those higher costs cycling in. Obviously they'll be higher, but at least we won't be hitting kind of the peaks of some of those inflationary pressures on those different categories.
Ali Chaudhry (01:04:09):
Just do quick on the aging population because that was mentioned. I think we should all accept as a basic threshold requirement that escalators and elevators have to work at Subway stop and station. I mean, let's just accept that, right? It is an actual big issue and those fail all the time and we fail our commuters. Some who have no other choice, and that's a huge issue. So I think one as that population ages and there's a big retirement boom in this country, unprecedented, you're going to need those facilities and sub stations and the design and the actual operation to be available to folks. The only other thing on the other side is a younger population that's used to using technology in a way that's never been seen before. We all do this every single day. You want to go anywhere from point A to point B, you open up Google Maps and you see what mode of transportation gets you there fast. I do it in New York City all the time. Google will tell me how long by Subway, how long by foot, how long by bike, how long by car. I mean those platforms exist. People expect to be able to look at a plethora of options and say, what works for me in this time, in this day of the week, and I'm going to use that system. It's just they can't be severed anymore. They all have to be integrated somewhere for people to use.
Ira Smelkinson (01:05:21):
That's great. Well, let's cut it off here. Thanks to our panelists for a very live discussion.