SD11 - Performance-Based Funding Distribution for Public Transportation (SJR 297, 2011)
In February 2011, the General Assembly passed Senate Joint Resolution 297 (SJR 297), which directed the Virginia Department of Rail and Public Transportation (DRPT) to study key issues relating to the distribution of funding to transit agencies within the Commonwealth of Virginia. This report is in response to the legislative directive. A copy of SJR 297 can be found in Appendix A of this document.
Virginia’s current funding model has been in place for more than 25 years (1986 Acts of Assembly). During its 1986 session, the General Assembly passed a set of statewide taxes and fees to provide dedicated funding for highway construction, transit, ports, and aviation. From this effort, 14.7 percent of the annual Transportation Trust Fund revenues were dedicated to mass transit.
Since 1986, the importance of transportation to the nation’s economy has been amplified, and the demand for multimodal transportation investments has stressed the available limited resources both at the state and local level. SJR 297 called for the examination of current transit funding practices with respect to performance, prioritization, stability, and allocation. Specifically:
"In conducting its study, the Department of Rail and Public Transportation (DRPT) shall study, but not be limited to, the following issues:
1. Performance – The study should determine if there should be a system in place to reward operator performance based upon specific performance criteria (e.g., farebox recovery, cost per passenger trip, passenger trips per vehicle revenue hour, etc.);
2. Prioritization – Currently, all capital requests are matched equally. The study should examine different funding categories;
3. Stability – Match ratios change every year based upon demand and available revenues. The study should examine holding systems harmless at existing levels and creating a reserve to stabilize funding for both capital and operating expenses; and
4. Allocation – Current funding formulas were established in the Code of Virginia about 25 years ago at a time when transit was not as important as today in the overall transportation network. The study should evaluate the allocation of the 14.7 percent of Transportation Trust Fund revenues among capital and operating expenses and special programs. The study also should address the current Code language that allows transit funding up to 95 percent of eligible capital and operating expenses. The study should determine an appropriate percentage.
(2011 Acts of Assembly, SJR 297)
The new federal transportation bill, Moving Ahead for Progress in the 21st Century Act (MAP-21), became effective October 1, 2012, and calls for the development and use of a performance-based approach as a tool for guiding transportation investments. Recipients of federal funds will fall under the new federal performance-based provisions.
In response to the legislative mandate, DRPT employed professional planning consultants with expertise in the field of transit operations and funding to assist in the research and analysis required by SJR 297 and to assist in the development of a hybrid funding model. This second report to the General Assembly builds upon the SJR 297 Interim Report that was delivered to the 2012 General Assembly. It includes information presented in a Technical Report prepared by Cambridge Systematics (CS) as well as subsequent work completed by TransPro, a consultancy with expertise in building and implementing state aid performance models.
In conjunction with this study, DRPT engaged in dialogue and solicited input from the transit community and key stakeholders. A SJR 297 Funding Study Advisory Committee was formed to represent transit stakeholders. Members included transit systems, local governments, and metropolitan planning organizations (MPOs), as well as other interested parties. A complete list of the Committee members is included in Appendix B. The advisory committee met five times over the duration of the study period to discuss the current state funding system and gather feedback on proposed formula options. DRPT provided a study briefing to the Commonwealth Transportation Board (CTB) and held a statewide transit meeting in early September 2012 to present the findings and recommendations to the transit community at-large.
The study process also explored best practices, conducted a peer review, included data discussion, and developed of a variety of formula options for consideration by the SJR 297 Funding Study Advisory Committee.
While the SJR 297 effort specifically examines transit related issues, an interrelated component of transportation systems involves Transportation Demand Management (TDM). DRPT partially funds 17 TDM agencies around the state which market local transit systems and provide other transportation services to residents and businesses. Research shows that TDM efforts contribute to a substantial shift of people from driving alone into transit, ridesharing, and other modes. In this way, TDM can provide significant support for transit operations and it also helps with roadway system performance by reducing vehicle trips. For this reason, DRPT and the working group concurrently discussed the Commonwealth’s TDM programs and services. TDM funding needs and its potential to generate additional transit revenue will be further examined outside of this document in the Statewide Transit and Transportation Demand Management Plan and other studies.
Currently, 14.7 percent, or $134.2 million in fiscal year 2013, of the Transportation Trust Fund (TTF) is allocated to the Mass Transit Trust Fund (MTTF). Additionally, beginning in fiscal year 2009, $0.02 of the recordation tax, approximately $25 million, is dedicated to transit operations each year. The vast majority of the MTTF funds, at least 73.5 percent, is distributed to transportation providers for operating assistance. Twenty-five percent of the MTTF is used for capital assistance. The Mass Transit Capital Fund (MTCF) funds is derived primarily from bond proceeds supported by a tax on insurance premiums and is expected to be exhausted by 2018. The revenue generated from the MTCF is allocated to specific capital projects approved by the CTB. This report introduces new funding allocation methods for both operating and capital fund distribution.
DRPT also conducted a needs assessment as part of a separate, but parallel, process of updating the Statewide Transit and TDM Plan. The needs assessment identifies three investment strategies ranging from a low investment strategy that could ultimately result in a reduction in the transit mode share of all transportation trips to a high investment strategy that could increase transit service level per capita and result in an increase in transit ridership of 92 percent by 2040. The examination of generating new revenues via various funding mechanisms has been part of other DRPT study efforts and provides the General Assembly with a basis for discussion and decision making to determine how best to offset the anticipated funding gap for public transportation into the future.
This study focused on current DRPT operating and capital funding methods and the potential need for additional resources. In particular, testing of the policy implications of various allocation tools provided insight into the SJR 297 legislatively mandated target areas of performance, prioritization, stability, and allocation:
The current funding allocation model allocates state transit funds based on statewide transit system operating expenses, regardless of system type and performance. Based on the 1986 model, a peak performing transit system with a high system user recovery receives the same funding as a low performing transit system with the same total operating cost. In essence, the more a transit agency spends, the more they receive in future years. Based on the legislative mandate and study effort, DRPT has developed a hybrid performance-based funding model that establishes peer benching of like systems. Utilizing study inputs, it was determined that:
• Use of transit agency performance measures to directly support the CTB’s policy goals will be challenging but can be accomplished by rewarding transit providers for improved performance outcomes.
• Utilizing nationally recognized and system-collected inputs, performance data that speak to cost effectiveness and system cost efficiency can demonstrate outcomes and reward providers accordingly. Local transit decisions can still be made to continue or develop transit services that do not perform well.
• The use of data that is received from transit providers in a funding allocation methodology is the most transparent and direct link between transit agency performance and the Commonwealth’s financial support.
• MAP-21 calls for the development and use of a performance-based approach as a tool for guiding transportation investments.
Prioritization of state capital funding investments is critical as aging systems struggle to maintain a state of good repair while new systems or services come on line. Threshold levels of state capital funding participation could vary, such as having greater emphasis on state of good repair for bus replacements than bus stop benches or computer software.
• Prioritization of capital investments should be more directly linked to and supportive of the CTB’s policy goals.
State funding for mass transportation continues to fluctuate over time. The current system utilizes data that is two years old and does not necessarily reflect current or anticipated changes in system operations, service cuts resulting from economic downturn, or increased operational expenses because of normal cost escalation. Fluctuations in federal, state, and local funding levels also contribute to the instability of funding. Over the past 15 years, state participation in funding for transit operations has remained stable at around 20 percent, while the largest fluctuations have occurred in capital funding.
• The SJR 297 Funding Study Advisory Committee’s input showed that it is important to transit providers to know with confidence and sufficient lead time how much financial support a transit provider will receive and that consistency of support is helpful for their budget development and planning purposes.
• Tier threshold levels of state funding could be established that will facilitate better long-term capital budgeting for transit systems and provide the Commonwealth with greater confidence in its capital cost forecasting to guide the allocation of funds.
Analysis of the current funding model and a review of Virginia’s transit systems show that transit operations provide services for an array of purposes, such as the movement of people to work; reducing traffic congestion and the number of single occupant vehicles; providing mobility options; and economic development. In the allocation of limited state transit resources, the following should be considered:
• Numerous improvements could be considered to improve the correlation between allocation of funds and progress towards achieving the CTB policy goals.
• Current and new funding distribution should be guided by a hybrid allocation model that includes 50 percent funding by system size and 50 percent funding by system performance. The model should allow for the peer evaluation of systems instead of the one-size-fits-all allocation system. This proposed hybrid performance-based funding model is illustrated in Figure 1. Transit systems should be evaluated in peer groups of similar systems, and not be compared with all of the transit systems combined. Utilizing a new system of this type will eliminate the winner and loser approach of the current process and establish an allocation model of high, middle, and low peer performers as a tool for guiding the allocation of limited state transit resources.
• Key issues to be addressed before using performance data in an allocation system are consistency of data reporting and data definitions, testing of data, development of an understanding as to how data variation causes shifts in the allocation of funds, and identification of additional funds to support transitional assistance.
• The new allocation model should be implemented over a transition period with a diminishing hold harmless phase-in over several years. The model should be re-evaluated by the CTB, with public input, every three years, followed by a one year notice prior to implementation of any changes.
Of the funding models explored, a hybrid performance-based funding model provides the best elements of the current formula program that transit service providers understand and enables some level of stability while concurrently rewarding increased performance. MAP-21 calls for the development and use of a performance-based approach as a tool for guiding transportation investments.
DRPT conducted a statewide transit needs assessment as part of the Statewide Transit and TDM Plan, which was developed as a separate but parallel study process. The needs assessment provides input to the SJR 297 Study and Report to demonstrate the anticipated funding needs for public transportation between 2013 and 2040. The Statewide Transit and TDM Plan should be finalized by the end of 2012. The needs assessment quantifies the needs according to three investment categories: state of good repair, transit and TDM capacity enhancements, and major transit capital projects. The identified needs include both physical capital improvements and the ongoing cost to operate and maintain the increased services that are recommended to enhance mobility and increase transit and TDM modal share.
• State of Good Repair (SGR) needs consist of the backlog of existing equipment and facilities beyond their useful lifecycles; preventive maintenance and rehabilitation of existing equipment and facilities; and state of good repair on new assets added to the inventory (e.g., new service expansion buses).
• Capacity Enhancement needs address expanding transit and TDM services through both capital investment and operating and maintenance expenses to meet increasing demand and economic opportunity. Service capacity enhancements include extension of transit and TDM services into regions of the Commonwealth that do not currently have service but have an identified need for it; improvement of existing services in areas that currently receive service but not at a level that meets community needs; and expansion of service to reflect anticipate population growth or evolution of some regions to area types that would benefit from more intensive levels of transit service.
• Major Transit Capital Project needs include capital costs of construction, right of way acquisition, and equipment purchase (both rolling stock and supporting systems), plus continued operating and maintenance costs, to address high-capacity needs in heavily developed areas of the Commonwealth.
The transit and TDM needs that have been identified were used to develop capital and operating costs according to three investment scenarios:
• Low Investment: This scenario assumes minimal investment in transit and TDM services. Transit capacity expansion consists of improvements identified in each transit operator’s 6-year Transit Development Plan (TDP) through 2018. No additional transit expansion is assumed beyond 2018. This scenario addresses State of Good Repair (SGR) needs for existing facilities and vehicles and any new facilities and vehicles associated with new service that is identified in TDPs. It also includes Major Capital Projects currently under development. For TDM, it continues existing programs, and growing existing TDM agency budgets to reflect expected inflation rates.
• Moderate Investment: This scenario includes expansion of transit capacity to meet service needs associated with population growth and increasing urbanization through 2040. It addresses SGR for all existing and future vehicles and facilities. It also includes Major Capital Investment Projects, assuming lower cost solutions where applicable. For TDM, it includes extension of services into geographic areas not currently receiving TDM service, at levels consistent with average services of existing programs.
• High Investment: This last scenario includes all investments in the Moderate Scenario, plus additional capacity enhancements that are designed to increase transit modal share. Major Capital Investment Projects assume higher cost alternative solutions where applicable. For TDM, the high investment scenario closes geographic gaps as in the Moderate Scenario and funds new or improved strategies consistent with recommended area-type programs.
Transit operating and capital needs are supported through a variety of financial resources, including farebox and other operating revenues, as well as local, state, and federal funding. Overall, farebox collections and local subsidy are the predominant sources of revenue for the operations of public transportation services. The state operating and capital assistance programs contributes a minority portion of funding, which historically has comprised approximately 20 percent of total operating costs; however, the state's participation in capital costs has been slightly higher at 50 to 55 percent of the non-federal share. Without a significant increase in state funding for public transportation, the legislative maximum of 95 percent creates an expectation that the state can participate at a much higher level. Further, unlike the roadway system that is predominantly owned and maintained by the Commonwealth, the delivery and ownership of public transportation service is primarily a decision made at the local level. If the state participated at 95 percent, combined with a reasonable farebox recovery rate, service would be over funded and there would be no local financial responsibility to maintain accountability.
Results of the transit capital and operating needs assessment by investment theme (i.e., state of good repair, transit capacity enhancements, and major capital projects) and investment scenario (i.e., low, medium, and high) are shown in Table 1 below. The needs analysis and estimated total funding gap are based on anticipated revenues. The state funding gap identified in Table 1 illustrates the state funding needed to achieve and maintain the historic state share for capital assistance at 16 percent total cost (80 percent of the non-federal costs), operating assistance at 20 percent total operating costs, and TDM operating assistance at 80 percent of eligible, nonfederal costs.
Without an increase in state funding for capital and operating assistance, the state's participation in operating assistance is projected to decline to 10 percent under the low-investment scenario and 5.4 percent under the high-investment scenario by 2040. Likewise, the capital assistance is anticipated to decline to 13 percent under the low investment scenario and 4 percent under the high investment scenario by 2040.
The projected state funding gap for operating assistance to achieve and maintain the historic 20 percent state share ranges from $3.96 billion (YOE$) under the low investment scenario to $8.75 billion (YOE$) under the high investment scenario. The state funding gap for capital assistance to achieve and maintain the historic state share of 16 percent of total eligible costs ranges from $1.21 billion (YOE$) under the low investment scenario to $10.82 billion (YOE$) under the high investment scenario. The state funding gap between for TDM to achieve and maintain an 80 percent historic state share is $177 million (YOE$) under the low investment scenario and $896 million (YOE$) under the high investment scenario.
Recommended Action Plan
In response to the legislative mandate, DRPT has developed a series of recommendations for the General Assembly’s consideration regarding state public transportation funding decisions. DRPT recommends a system that establishes benchmarks and funding allocations based on performance and the delivery of efficient and effective public transportation service to its customers. Transit systems under a hybrid performance-based funding approach will be funded with a level of formula assistance and performance-based assistance. Taxpayers will benefit from the increased value provided by the transit providers, and transit users will benefit from improved service. With respect to the four major study areas of the SJR 297 legislation, DRPT recommends the following:
The Code of Virginia should be revised to call for the implementation of a hybrid allocation system that incorporates both a formula and a peer performance-based component.
An allocation process should be developed that links capital investment decisions to CTB priorities.
A reserve fund should be created to stabilize match ratios for capital expenses. There should be flexibility to allow capital funds to be flexed into operating assistance. Additionally, a funding source should be identified to provide transitional assistance to transit providers as the new state funding model is implemented.
The codified 95 percent cap on eligible capital and operating expenses should be eliminated as it creates an unrealistic expectation. The new funding model shifts allocations to those based on total operating costs, not categorical eligibility. Funds allocated must require a local match from the transit provider recipient. Any new funds should be allocated based on a declaration of maintenance of effort by the transit recipient.
Capital and Operating Needs
In considering potential options to provide additional funds to support public transportation in Virginia, the General Assembly may wish to examine the feasibility of generating additional revenue from the following mechanisms:
• Appropriating available revenues to support transitional assistance for two years through an annual allocation from the General Fund
• Increased allocation from the Transportation Trust Fund (TTF)
• Creation of a statewide index sales tax on gasoline
• General sales and use tax increase
• Direct the CTB to reserve a percentage of Congestion Mitigation and Air Quality (CMAQ) funds to support major transit capital improvements and the ongoing State of Good Repair in eligible areas of the state
• Creating a dedicated revenue source that is sustainable and will provide for the maintenance and expansion of the WMATA Metro service into Virginia. This would shift WMATA service costs to other revenue sources, allowing for the residual funds to be used for mass transit operating and capital assistance throughout the Commonwealth.
Three-Year Transition Period
DRPT is recommending a three-year transition period to provide transit operators an opportunity to improve their performance and data integrity leading up to full implementation of the recommended hybrid operating assistance allocation model. In order to provide each transit agency with a three-year transition period, a new one-time source of funding will be required in the amount of $18 million. The first year of implementation (FY2015) all transit systems would be made 100 percent whole by receiving transition assistance; the second year (FY2016) all transit systems would be made 50 percent whole by receiving transition assistance; and the third year (FY2017) the recommended hybrid operating assistance allocation methodology would be in place.
In response to the legislative directive, DRPT conducted a study and developed recommendations that address the performance, prioritization, stability, and allocation of state funds for mass transit. Deliberate actions of the General Assembly will be necessary to implement the recommended hybrid operating assistance allocation methodology, secure reserve funds to promote stability, require local match from all transit providers, allow for a tiered approach to funding capital investments, and identify transitional assistance funding. Based on research and input from transit stakeholders, key findings of this report include the following:
• The study recognizes the need for stability with regard to funding and makes several recommendations to provide stability and reliability.
* The recommended approach to capital assistance introduces a tiered approach to state match ratios based on CTB priorities to replace the current approach, which defines state match ratios based on the requests that are received each year.
* The recommended approach to operating assistance includes a performance-based approach to provide an incentive for efficient service as well as a formula-based component to ensure year-to-year stability in operating assistance to support the important role public transportation plays in providing access to job, supporting economic development, providing mobility options, and reducing congestion.
* The study recommends establishment of a reserve fund to stabilize match ratios for capital and operating expenses and flexibility to allow capital funds to be flexed into operating assistance to stabilize fluctuations that may occur from time to time.
* The study recommends a three-year transition period to provide transit operators an opportunity to improve their performance and data integrity leading up to full implementation of the recommended hybrid operating assistance allocation model. A new one-time source of funding will be required in the amount of $18 million to complete a three-year transition to the new allocation model by Fiscal Year 2017.
• DRPT is taking a two-pronged approach to addressing the Commonwealth’s critical public transportation needs.
* First, this report addresses the SJR 297 mandate to evaluate Virginia’s current transit funding practices with respect to performance, prioritization, stability, and allocation. The intent is to implement a funding methodology that builds accountability and confidence in the delivery of public transportation and encourages peak performance and efficiency.
* Second, the Department is completing an update to the State Transit and TDM Plan that includes a comprehensive evaluation of public transportation capital and operating needs, an assessment of the impact of various investment levels, and the anticipated funding shortfall. Quantification of public transportation funding needs is meaningless without establishment of a sound allocation methodology that supports statewide priorities and encourages peak performance.
• With implementation of the recommended changes to current funding formulas and methods, local governments and local transit operators will continue to make their own decisions with respect to their operations.
* The delivery and ownership of public transportation service is primarily a decision made at the local level. State operating and capital assistance programs contribute a minority portion of funding for public transportation.
* The key criterion for evaluating the success of a new funding model is not the degree to which agencies receive different amounts of funding, but whether the source of that differentiation is consistent with the goals and principles of the funding entity.
* The recommended hybrid operating assistance allocation model has a relatively low impact on the funding that public transportation providers will receive - the average change in total operating funding is 5 percent of total budget.
* Public transit agencies that operate efficient service will now be rewarded under the proposed allocation methodology, ultimately resulting in greater benefits to the Commonwealth.
* The recommended approach is consistent with the policy goals of the CTB.
• The current funding model creates winners and losers because it bases funding variations between agencies solely on size.
* Currently the only way for a transit provider to receive a greater amount of state operating assistance is to significantly increase their operating costs.
* The recommended allocation methodology levels the playing field by evaluating the performance of agencies of similar size.
• Six standard industry performance metrics were identified for use in the funding allocation model.
* The use of six metrics reduces the sensitivity of the funding model to any one measure and recognizes the variability of the transit operators serving Virginia while still providing meaningful, objective criteria for use in allocating funds to each state-funded public transportation agency.
* The six metrics are standard industry metrics that are readily available and auditable, as acknowledged by the SJR 297 Funding Study Advisory Committee.