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Out of Control Policy Blog Archives: 6.17.12–6.23.12

Depreciation Policy For Those Congress Likes

An article in The Hill this morning reports that House Democrats are pushing their GOP colleagues to support “bonus depreciation” to promote economic growth. Under the proposal, businesses could deduct 100% of the cost of capital equipment in the year in which they make the investment. Since the proposal would only apply through the end of this year, it’s unlikely to have a large impact, especially for large capital investments. Given the economic doldrums our economy has been stuck in for the past four years, a far longer time frame—perhaps even a permanent change of this sort—would make better sense.

But I’m struck by the contrast between this proposal and two previous proposals on the subject of depreciation from leading Democrats. Last year President Obama proposed eliminating accelerated depreciation for those who purchase business jets. Even though these planes can be very productive business tools, our President has several times gone out of his way to demonize this depressed segment of the aviation industry. And just last month, Sen. Jeff Bingaman (D, NM) slipped into the Senate surface transportation bill several amendments aimed at discouraging highway public-private partnerships, such as the long-term lease of the Indiana Toll Road, the proceeds of which have fully funded a 10-year highway investment program in Indiana.

One of the anti-PPP measures would forbid accelerated depreciation of such assets, dramatically changing the economics of such PPPs. A companion measure would penalize states that lease toll roads by cutting off a portion of their federal highway funds. According to today’s Democrats in Washington, fast depreciation is good for the economy—except when it’s not. And it’s not if you are a company seeking to increase the productivity of top executives’ travel or if you are a pension fund seeking to invest in transportation infrastructure because it’s a good fit with your long-term obligations to retirees.

Why can’t politicians stick with simple rules that apply across the board to everyone?

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New GAO Report Takes Aim at Federal Property Management

On Wednesday, the U.S. Government Accountability Office (GAO) issued a new report on federal real property management that finds major deficiencies in management and decision making related to divesting excess and underutilized property. Here's a brief summary of the highlights:

The Federal Real Property Council (FRPC) has not followed sound data collection practices in designing and maintaining the Federal Real Property Profile (FRPP) database, raising concern that the database is not a useful tool for describing the nature, use, and extent of excess and underutilized federal real property. For example, FRPC has not ensured that key data elements—including buildings' utilization, condition, annual operating costs, mission dependency, and value—are defined and reported consistently and accurately. GAO identified inconsistencies and inaccuracies at 23 of the 26 locations visited related to these data elements (see the fig. for an example). As a result, FRPC cannot ensure that FRPP data are sufficiently reliable to support sound management and decision making about excess and underutilized property.

The federal government has undertaken efforts to achieve cost savings associated with better management of excess and underutilized properties. However, some of these efforts have been discontinued and potential savings for others are unclear. For example, in response to requirements set forth in a June 2010 presidential memorandum for agencies to achieve $3 billion in savings by the end of fiscal year 2012, the General Services Administration (GSA) reported approximately $118 million in lease cost savings resulting from four new construction projects. However, GSA has yet to occupy any of these buildings and the agency’s cost savings analysis projected these savings would occur over a 30-year period—far beyond the time frame of the memorandum. The five federal agencies that GAO reviewed have taken some actions to dispose of and better manage excess and underutilized property, including using these properties to meet space needs by consolidating offices and reducing employee work space to use space more efficiently. However, they still face long-standing challenges to managing these properties, including the high cost of property disposal, legal requirements prior to disposal, stakeholder resistance, and remote property locations. A comprehensive, long-term national strategy would support better management of excess and underutilized property by, among other things, defining the scope of the problem; clearly addressing achievement goals; addressing costs, resources, and investments needed; and clearly outlining roles and coordination mechanisms across agencies.

The full report, highlights and more are available from GAO here. And there's more here from the Washington Post, which notes:

The federal government is the country’s largest holder of real estate, with nearly 400,000 properties that it owns or leases, and President Obama views the properties as presenting opportunities for cutting costs. In 2010, Obama issued a memorandum requiring agencies to achieve $3 billion in real estate savings by the end of fiscal 2012.

GAO researchers found that despite warnings that property information and management were flawed, the government knows very little about the condition and use of properties it owns. The problems also persist despite efforts to create a central database that would facilitate the sale or lease of properties that the government does not need or use.

Real property management—essentially the smart stewardship of government buildings, land and other real property assets—remains an ongoing challenge in the federal government, and Reason Foundation has long advocated smarter government asset management through the development of comprehensive, actively-managed real property inventories.

Last month I had the opportunity to testify before the House Subcommittee on Energy and Mineral Resources on the need for a robust, functional real property inventory at the federal level to lower operations and maintenance costs, identify divestiture opportunities and improve the public stewardship of taxpayer assets. From my testimony:

Managing real property can often be considered a mundane chore in the public sector. Each government agency often has its own monitoring and tracking methods, which are often not compatible or interoperable with other agencies, leading to a lack of standardized reporting methods at agencies and departments. Without the ability to know what government agencies own, it becomes very difficult to manage those assets in the most cost-effective and efficient ways. […]

Unfortunately, when it comes to knowing what it owns, the federal government is lacking. The absence of a robust real property inventory presents a major challenge for right-sizing the federal property portfolio and causes higher than necessary operating costs and maintenance responsibilities.

Read the full testimony here. And in June 2010, Reason Foundation published a report by Anthony Randazzo and John Palatiello outlining the case for a federal real property inventory to serve as a central record of government-owned land and assets and an important component of efficient property management. [A version of this report tailored to state and local governments is available here.]

With the ongoing fiscal challenges at all levels of government, it's critically important for policymakers to see real property management for what it should be: a central component of smart fiscal management and right-sizing strategies. Tools like real property inventories offer a powerful means by which to lower costs, generate revenue and prioritize the use of taxpayer dollars.

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We Must Take UNís Internet Grab Seriously

Thanks to our friends Jerry Brito and Eli Dourado at George Mason University's Mercatus Center, and the anonymous individual who leaked a key planning document for the International Telecommunication Union's World Conference on International Telecommunications (WCIT) on Jerry and Eli's inspired WCITLeaks.org site, we now have a clearer view of what a handful of regimes hope to accomplish at WCIT, scheduled for December in Dubai, U.A.E.

Although there is some danger of oversimplification, essentially a number of member states in the ITU, an arm of the United Nations, are pushing for an international treaty that will give their governments a much more powerful role in the architecture of the Internet and economics of the cross-border interconnection. Dispensing with the fancy words, it represents a desperate, last ditch effort by several authoritarian nations to regain control of their national telecommunications infrastructure and operations

A little history may help. Until the 1990s, the U.S. was the only country where telephone companies were owned by private investors. Even then, from AT&T and GTE on down, they were government-sanctioned monopolies. Just about everywhere else, including western democracies such as the U.K, France and Germany, the phone company was a state-owned monopoly. Its president generally reported to the Minster of Telecommunications.

Since most phone companies were large state agencies, the ITU, as a UN organization, could wield a lot of clout in terms of telecom standards, policy and governance--and indeed that was the case for much of the last half of the 20th century. That changed, for nations as much as the ITU, with the advent of privatization and the introduction of wireless technology. In a policy change that directly connects to these very issues here, just about every country in the world embarked on full or partial telecom privatization and, moreover, allowed at least one private company to build wireless telecom infrastructure. As ITU membership was reserved for governments, not enterprises, the ITU's political influence as a global standards and policy agency has since diminished greatly. Add to that concurrent emergence of the Internet, which changed the fundamental architecture and cost of public communications from a capital-intensive hierarchical mechanism to inexpensive peer-to-peer connections and the stage was set for today's environment where every smartphone owner is a reporter and videographer. Telecommunications, once part of the commanding heights of government control, was decentralized down to street level.

There's no going back. Even authoritarian regimes understand this. Fifty years ago, when a third-world dictatorship faced civil strife, it could control real-time information by shutting off its international telephone gateway switch. Not so today. So much commerce, banking, transportation and logistics depends on up-to-the-second cross-border data flow that no country, save for truly isolated regimes such as North Korea, can afford to cut themselves off the global Internet, even for one day.

That's why it's no surprise that the authoritarian regimes of China and Russia, supported by even more despotic states such as Iran, are spearheading the UN/ITU effort. Their politically repressive regimes can't function with the Internet, but their economic regimes, tied as they are to world trade, can't function without it. That's why attempts at Internet control have to be more nuanced and cloaked in diplomacy. 

As we see in the leaked documents, their agenda is masked as concerns about computer security and virus and malware detection, or in arguments about how nation-states have a historically justifiable regulatory responsibility for setting technical standards for IP-to-IP connections. But dig deeper and you find their proposed solutions would give them the power to read emails, record browser habits and extort fees from web sites and services such as Google, Facebook and Twitter (if they aren't going to block them completely).

In the long run, it is doomed to fail. As an organism, the Internet defies top-down control. Every time a country attempts to impede certain types of Internet communications, via firewalls, filters, or outright domain name blocks, individuals create workarounds. It's not that difficult.

That simple fact might engender complacency among netizens here in the U.S. And besides, speaking out against ominous plots by UN agencies makes us sound too much like the nutty neighbor with the backyard bunker.

But there are serious risks to what the ITU and the UN are attempting. Even if only gets part of what it wants, the ITU's Internet grab stands to seriously damage the global free and open Internet.

First, as a multi-lateral "international" agreement, the ITU plan will give repressive regimes cover for Internet clampdowns. Even if the U.S. does not sign on, all it will take is buy-in a few other Western governments, who might just see the treaty as convenient (see the U.K.'s recent Home Office ideas), to allow the more egregious dictatorships in the world to take repressive action.  

The U.S. should be leading all democratic governments in speaking out against the ITU plan. A weak-willed "I'm-OK-you're-OK" approach, or worse, a non-judgmental relativism that suggests American ideas of Internet freedom should defer to a more repressive country's "national culture," are simply not acceptable.  

It seeks to displace multi-stakeholder development. The collaborative culture of the Internet, driven by consensus and undergirded with a commitment to open standards and platforms, is the ITU's primary target. When a nation-states make rules for phone networks, they can specify equipment, favor their domestic manufacturers, create cumbersome compliance rules, and ban possession of non-compliant devices all with the force of heavy-handed law. This is hardly far-fetched. Ethiopia has made Internet phone calls (i.e. Skype) illegal.

It seeks to normalize government regulation of the Internet. For more than 30 years, deregulation has been the predominant policy toward the Internet. This trend has managed to hold on despite numerous attempts at censorship, "neutrality" regulation and price controls. The most common proposition we hear runs to the effect of the Internet has become so important that it needs regulation. Frankly, the Internet has survived and thrived since its beginning without top-down state regulation. Worldwide access continues to grow. By and large, international data networks operate reliably and inexpensively. If anything, the burden of proof for regulation of the 'Net should be ever higher. Why, exactly, do we need an international regulatory regime for the Internet? So far those who would impose one haven't said so. And sorry to say, because citizens are taking to the streets with their iPhones and demanding basic freedoms is not an acceptable reason.

 

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Exciting Investment Opportunities Await InÖ Public Parking

Today my colleague Leonard Gilroy and I published a piece on Real Clear Markets entitled, “Exciting Investment Opportunities Await In… Public Parking.”

The piece begins:

U.S. policymakers in Chicago, Indianapolis and elsewhere have recently begun to unlock value trapped in a neglected treasure: municipal parking assets. This might not seem like a hot topic, but for investors seeking new places to park capital, creative partnerships to invest in and manage city parking garages, meters and lots are increasingly attractive.

Next, we explain that parking is a historically commercial enterprise that’s being crowded out, or captured, by the public sector. But investors drawn by steady returns in the 10-14 percent range are being lured into the market amid the post-recession flight to quality.

The piece continues:

American automobile ownership slowly proliferated in the early 20th century, and by the 1930s, cities began to face traffic congestion. In 1935, a private company installed the first Park-o-Meter, charging motorists five cents an hour to park in Oklahoma City's downtown business district. New private meters successfully promoted higher turnover of parking spaces, satisfying the needs of retailers and customers who wanted access to them.

Over the next decade over 140,000 meters were installed across the nation. Unfortunately, innovation was subsequently stymied as the public sector assumed increased ownership and operation of parking assets, including meters, street-level lots and garages. The private parking market didn't disappear; it simply calcified under public sector capture. But now it's being reborn.

Today, the private sector is partnering with governments to deploy disruptive technology, from real-time parking meter sensors accessible via smart phones to variable pricing that more accurately values spaces. Meanwhile, investors are starting to pour capital into government-owned parking infrastructure.

We go on to walk through Chicago’s groundbreaking public-private partnership for most of publicly owned parking meter system. Chicago signed a 75-year concession (lease) agreement that netted the city an up-front $1.1 billion payment from a Morgan Stanley-led consortium in 2009. We also highlight the adapted approach taken in Indianapolis, who inked a 50-year lease of 3,700 of the city’s parking meters, opting for a $20 million up-front payment and revenue sharing agreement that will net between $300-600 million.

Next, we detail Ohio State University’s pending partnership, which is expected to yield $483 million for almost 36,000 spaces over a 50-year contract. Finally, we explore New York City’s new plan, which is in its embryonic stages, but at this point is likely to resemble a contract for management with guaranteed revenue to the city, alongside capital reinvestment for new technology.

The piece concludes:

Municipal parking assets haven't been fully released into a free and competitive market, but innovative policymakers are finally unlocking value they've been sitting on for years. Meanwhile governments retain legal ownership of core assets, and important controls on things like meter rates and operating hours, for the duration of these agreements.

The increasingly relevant question in parking - and in public policy more broadly - is this: what other public infrastructure assets hidden in plain sight offer similar privatization opportunities?

Read the full piece available online here. For more of Reason’s work on parking, see Leonard’s recent post on New York City entitled, "Don't Believe the Hype About NYC Parking Privatization." For related infrastructure research, see our previous Real Clear Markets piece entitled, “States and Cities Going Private With Infrastructure Investment.”

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Former Governor Murkowski Suggests Replacing Bridge to Nowhere with Tunnel to Nowhere

The all-time king of transportation earmarks was the SAFETEA-LU bill that passed in 2005. The bill approved by both Republican houses of Congress included more than $20 billion in special projects. While some of these 5,092 high priority projects met legitimate needs, most were tools for getting re-elected. The research title was so earmarked that the amount of money for legitimate research activities was severely constrained. (The predecessor bill, TEA 21 had 1,849 such high priority projects.) These projects were in every section of SAFETEA-LU.

The most egregious project is the “bridge to nowhere” which intends to connect the Alaska mainland to a lightly used airport. Currently service is by ferry. Projects sponsors have shown no evidence that they need a new bridge. The “bridge to nowhere” project has drawn so much scorn that the state of Alaska will have trouble building it. Most Alaskan leaders, realizing that fiscal attitudes have changed in Washington D.C., would be happy with the $4.99 they receive in funds from Washington for every dollar that they pay. This is a better return than any other state in the nation receives. 

But former Governor Frank Murkoswski with his feet firmly planted in yesterday is not one of those leaders. Murkowski recently proposed a more expensive proposition—a tunnel.

From the Anchorage Daily News:

[Murkowski is] suggesting an alternative -- an underwater tunnel.

The technology already is in use in North America, Europe and Japan, he said.

The Ketchikan Shipyard could help build prefabricated tunnel sections that would be lowered into a trench on the floor of Tongass Narrows, Murkowski said. He offered his assistance to encourage evaluating a tunnel's chances, "because I think the community really needs to focus on the viable alternative, and then let the chips fall where they may."

The Ketchikan Daily News reports Murkowski spoke as the Alaska Department of Transportation is nearly done with an environmental review that will determine the most fiscally responsible alternative for access between the islands.

The review does not include the original state preferred alternative that drew national attention. That project included a bridge from Revillagigedo Island to Pennock Island and a second bridge from Pennock to Gravina Island, home to the state-owned airport and acreage where the city could expand. A small ferry now shuttles airline passengers to the island.

Murkowski is correct about one thing—prefabricated underwater tunnels are a cost-effective option compared to other tunnels for needed projects.  And prefabricated tunnels such as the Holland Tunnel under the Hudson River should be encouraged where they are legitimately needed. 

However, this area needs a tunnel as much as the U.S. needs to increase its budget deficit. Alaska has used some of the original earmarked funds to pay for projects north of Anchorage. The remaining $68.2 million in federal funds that Alaska intends to use to built this bridge/tunnel would be better returned to the federal government to either pay down the deficit or fund a more deserving transportation project. Compared to this project, building a new expressway though Wyoming would be more deserving.

I predict Alaska officials will scream murder and resist giving back the money. The Alaska congressional delegation did not slip an earmark into the bill at the last second to later give that money back to federal taxpayers. A second option would be to use the rest of the funds to improve additional infrastructure around Anchorage. I do not think Anchorage has the needs of Atlanta, Los Angeles, Washington D.C., or Houston; but it has needs that $68.2 million would fix.

The worst option would be for Alaska to build this unneeded crossing. If the crossing is built, USDOT should insist on the cheapest option possible. I would recommend a one-lane bridge with no decoration. Inbound and outbound traffic could alternate over the bridge. A signal could indicate when traffic is crossing in the opposite direction. I doubt that the signal will be needed for a bridge that connects 50 residents and a tiny airfield to the rest of the state. 

The transportation world was outraged with the Bridge to Nowhere. While earmarks have been a part of transportation bills since 1982, never had they been used for such completely useless projects. Unfortunately some politicians in our 49th state either do not care or have frozen brains. Regardless, transportation leaders should ensure that this crossing either by bridge, tunnel or zip line does not get built. 

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Don't Believe the Hype About NYC Parking Privatization

Last week, the New York City Department of Transportation formally launched a procurement for a potential long-term lease of the city's nearly 90,000 parking spaces via a request for qualifications (RFQ) from interested bidders (see here and here for more, as well as my recent post here).

One of the aspects of NYC's initiative that seems abundantly clear is that the Bloomberg administration is clearly trying to differentiate their efforts from Chicago's controversial parking meter lease. One key point of differentiation lies in the administration's statements that they are not looking for a large, upfront payment in a long-term lease arrangement (a la Chicago). Like many observers, I initially thought that this implied that the city was looking instead for a long-term lease that primarily involves a small (or no) upfront cash payment and shared revenues over time split between the city and the parking concessionaire. That's the model that Indianapolis pursued, where the city received a small upfront payment of approximately $20 million and will get an annual slice of revenues over the life of the 50-year deal estimated to tally in the hundreds of millions.

However, after looking at the city's RFQ more, I've come to the conclusion that the city isn't necessarily even looking at a lease/concession structure that would transfer a parking revenue stream to a concessionaire over a multi-decade period. Rather, NYC appears to be seeking a private management agreement in which a private parking manager would essentially take over day-to-day operations while guaranteeing certain minimum levels of annual parking revenue to the city (in addition to deploying cutting edge parking technology, innovation, operational efficiencies, etc.). In other words, rather than leasing a parking revenue stream to the private sector, the city would be asking a private partner to help the city increase its own parking revenue, with the private sector presumably being compensated on a performance basis depending on its ability to hit its targets.

Hence, to my eyes the NYC parking concept seems to draw as much or more inspiration from Illinois' private lottery management agreement and NYC's own recently-announced water/wastewater management agreement as it does from Chicago or Indy's long-term parking leases.

Important nuances like this appear to be getting lost in the public discourse, as if all parking deals were the same. A case in point is last week's blog post by Matt Taibbi over at Rolling Stone. The post presumes that NYC wants to replicate Chicago's parking meter transaction, suggesting that "[the Bloomberg administration is] expecting to get over $11 billion in upfront money from the deal," which the administration "gets to use […] to patch current budget holes instead of making tough cuts or raising taxes."

However, the administration has been clear from the outset that they are not looking to structure a Chicago-style deal with a massive upfront payment. In fact, this Bond Buyer article notes that even the RFQ itself issued by the city clearly states, "In contrast to certain precedent U.S. parking transactions, the city's objective is not to structure an upfront payment […]."

Further, I've been reading about this initiative for weeks and have not seen anything suggesting an $11 billion valuation for NYC's parking (taking aside the point that the city is not seeking a monetization). I must assume that Taibbi misread one of the articles he links to, confusing what investors hope to recoup over time from Chicago's lease, not NYC. And if that's the case, it's my understanding that the $11 billion in hoped-for revenue from Chicago is in nominal dollars, not inflation adjusted and converted to a net present value covering the span of the 75 year lease. Further, it is derived from a Morgan Stanley prospectus, so it's an aspirational number that they want to attract investors with but in real life may very well never reach. In all honesty, I'm skeptical that they'll come even close to earning their desired return, if there's even much of a return at all.

That's mostly neither here nor there with regard to NYC, except for the fact that Taibbi talks about Chicago getting pennies for the dollar and "selling off" at a "steep discount." For an alternative take, check out this interview I did with former Chicago CFO Gene Saffold and his Reason.org article, both from back when the bogus "Chicago got ripped off" meme started to propagate in the media. Sure, one might counter, "well he was the city's CFO, of course he's going to say they didn't get ripped off." But I have asked a wide range of subject matter (financial and industry) experts about claims that Chicago "got ripped off" over the years, and this notion is widely regarded as laughable and generally ignores basic finance principles and the way long-term leases actually work.

The blog post also confuses sales and leases. The post starts by assuming that NYC is pursuing a lease—again, something I do not believe to be the case at all. But even if it was a lease, then the city would take back full control of its parking assets, including revenue, at the end of the agreement. Yet, the tone then shifts to "selling off a valuable piece of city property," "spending the proceeds of your sale," and "selling off a critically valuable public revenue stream." And then there's perhaps the most far-reaching assertion in the post, namely that Chicago's in a bind "because there's no parking meter revenue anymore, ever."

This is wrong on several fronts. First, and most obviously, a lease does not last forever. By definition, a commercial lease is for a set duration at which point the owner gets back full operational control of the asset. In a sale, something is literally sold from one party to another in perpetuity.

Beyond that, it's still false to say that Chicago is no longer getting parking meter revenue anymore. First, the city set aside a pool of reserve meters outside of the concession that it still collects revenue from today. Second, the concessionaire does not get a penny of the city's parking ticket/violation enforcement revenue today—this still goes to the city and tallies to tens of millions per year. That holds true for meters in the concession and outside of it. Last, revenues from any new meters installed by the city would flow to the city, not the concessionaire. (The city also still collects parking-related revenue from residential permit fees and parking permits as well.)

Finally, Taibbi makes this statement: "Meanwhile, whoever gets to own all of those meters will now be sitting on the ultimate investment. You get all the certainty of tax revenue, but you don’t have any of the accountability attached to public governance. It’s profit without risk, customers without responsibility."

But it's inaccurate to suggest there's no risk in parking. How is parking revenue "certain"? What happens to parking revenues when fuel prices skyrocket in a few decades due to some international event? When gas goes up, people tend to drive less, and if they drive less they use less paid parking. Or, what happens if a city were to put in place a London-style congestion pricing system that creates a disincentive to driving downtown? Or, what happens if consumer preferences in that area turn more towards public transit usage and less driving? What happens when telecommuting and technology reduce the need to face-to-face downtown meetings? What happens in 30 years when flying cars perhaps become a reality? What happens if new private parking garages open up to draw users away from metered street parking? Or, what happens to parking revenues in a global financial meltdown and economic recession?

Some of these risks may sound overblown at first blush, but recent data on both public transit usage and urban congestion, while by no means indicative of massive long-term shifts, at least suggest that cities face very real financial risks and volatility related to long-term parking revenues. Chicago's former CFO Gene Saffold touched on the subject of parking-related risk in my December 2009 interview with him:

There have been a few contrarian valuations offered to date, but they've generally failed to fully factor annual operating expenses and recurring costs, like capital expenditures, or failed to allocate the appropriate level of risk. Risk discounts future cash flow. Let's be honest, there are some very real risks associated with the metered parking system, like labor costs, fuel costs, expanded use of public transportation, and changes in driver behavior. The City has shifted those risks, however, from the taxpayers to the concessionaire.

The bottom line is that the concessionaire holds those risks today in Chicago. And if those risks materialize in parking, then the concessionaire faces a very real risk that their hoped for profit at the end of the deal may not materialize whatsoever. For the private sector, here are no guaranteed profits in municipal parking leases, just guaranteed risks.

But Taibbi's dismissal of risk was also paired with a statement that in a lease one would lose "accountability attached to public governance." Again, this misunderstands the nature of these deals. Parking leases are governed by contracts written with governments sitting at the table across from the concessionaire. Controls on rates, hours of operation, etc.—key elements of public accountability—are addressed in the Chicago and Indy concessions as they would be in a future NYC contract. And if, for example, you want to make sure you can remove a block's worth of parking meters on a whim as part of a new government streetscape project without triggering a lawsuit by the parking vendor over potential lost revenues, then policymakers could carve out that ability up front in the contract. The notion that for the private sector it's all profit and no accountability is a major misstatement.

Suffice to say, I'd advise New Yorkers to take such prognostications with a big grain of salt. NYC seems much more interested in pursuing a management contract, not a Chicago-style long-term concession, for starters.

Deals like this should certainly be examined in their entirety. And I encourage taking a closer look at deals in Chicago—which fair-minded people can criticize, but which also offers a lot to learn from— as well as Indy, which pursued a different approach. For more on those examples and more, see Reason Foundation's Annual Privatization Report 2011.

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Five Reasons the DoJís Investigation of Data Caps is Misguided

Count me among those who are rolling their eyes as the Department of Justice initiates an investigation into whether cable companies are using data caps to strong-arm so-called "over-the-top" on-demand video providers like Netflix, Walmart's Vudu and Amazon.com and YouTube.

The Wall Street Journal reported last week that DoJ investigators "are taking a particularly close look at the data caps that pay-TV providers like Comcast and AT&T Inc. have used to deal with surging video traffic on the Internet. The companies say the limits are needed to stop heavy users from overwhelming their networks."

Internet video providers like Netflix have expressed concern that the limits are aimed at stopping consumers from dropping cable television and switching to online video providers. They also worry that cable companies will give priority to their own online video offerings on their networks to stop subscribers from leaving.

Here are five reasons why the current anticompetitive sturm und drang is an absurd waste of time and might end up leading to more harm than good.

Cable companies set data caps high, really high. Comcast, for example, currently sets its residential data limit at 250 gigabytes (GB). Searching around the 'Net, I've found that a rule of thumb is 1 GB equals 1 hour of video, although quality, frame rate and resolution may affect this measure.  However, this 1 hour = 1 GB tracks with my own household downloading, which varies between YouTube and iTunes downloads, and Netflix HD.

Also, despite the use of the word "caps," residential Internet users are not cut off when they reach the 250 GB threshold. Comcast customers are just charged $10 for another 50 GBs, that is, another 50 hours of video.

The idea of a threshold is not unreasonable. Video delivery requires greater network management to address issues such as latency and error correction, adding costs to network operation. The alternative is for service providers to raise the base price of "unlimited downloads" for all users, essentially spreading the cost of a small percentage of high-volume users across the entire subscriber population. That in itself raises fairness questions. It's a simple trade-off, do we want higher prices across the board, or should the top tier users bear the costs they are responsible for imposing?    

The pay-per-view market is crowded, and cable has a right to compete. Consumers have a fair degree of choice among pay-per-view providers. Cable companies, along with Amazon, Vudu, Cinema Now and Apple's iTunes all have solid selections in terms of recent film releases and TV episodes. These virtual rentals generally cost $5 to $7 for a 24- to 48-hour period. Most also offer viewers an option to buy a digital copy. While Netflix's on-demand menu lacks the timeliness of the others, it compensates in terms of depth, and thousands of titles are available for a relatively low $8 per month subscription fee. Then there's Google's YouTube, the largest server of Internet video, which is trying to expand off the desktop PC and onto the living room big-screen by funding development of new "channels." Although the first fruits of this venture, channels such as The Nerdist seems a bit, come across as a bit, well nerdy, we should know by now not to discount anything Google attempts.

The point is that cable is not somehow shutting down "low-cost" access to video, as the DoJ claims. In truth, alternatives to cable pay-per-view can be less expensive and more varied. 

"Cutting the cable cord" involves a value proposition. Like telephone service before it, household video delivery no longer depends solely on a single hard-wired monopoly infrastructure. For someone not particularly interested in watching TV news, reality shows and real-time sports events, it is possible to do away with cable TV entirely and get one's video fix through DVDs, digital downloads via wireless service providers. Or one could even chose the lowest-priced cable tier, essentially local channels, with Internet access.

But the landline telephone analogy has limits. Wireless service is replacing wireline because it offers much more value than the old home phone. For starters, wireless makes communications truly personal: your phone is associated with you, not a geographic location like your home office. Today's wireless phones also are as much information appliances as they are communications tools.

True, cable companies don't get much love from consumers, but there's still something to be said for watching the NBA playoffs on a 50-inch HD big screen. And contrary to what the DoJ thinks, there is no consumer "right" or entitlement to this service at below-market rates. Saying so--and assigning the social cost on one segment of the value chain, namely the infrastructure owners, stands to create all sorts of problems. For example, why hold the cable company responsible for low-cost video and not the TV manufacturers? Why shouldn't all DVDs rentals be priced at $1 rather than $3 for "new releases?" Why should Apple's iTunes be permitted to charge extra for TV episodes delivered "free" the night before? 

The answer is that there are costs and trade-offs associated with each. An Amazon customer may be able to buy all of season one of Game of Thrones for the cost of one month's subscription to HBO, but she must wait almost a year for the opportunity to do so. In this model, the cable company leverages timeliness, HBO is protects its distribution partners, yet, in the the long run, the programming is available to those who don't want to pay the cable premium. It's difficult to see where consumer rights are being violated.

Wireless is the wild card.  As alluded to above, wireless service may yet be a substitute for cable connections. Spectrum scarcity, however, makes wireless connections more expensive, and therefore usage caps are much lower (unless you're piggybacking on a household WiFi supported to a cable modem). But this is just one more reason to speed ahead with spectrum re-allocation.  

Here's where current policy works at cross-purposes. Fostering greater consumer choice is a laudable goal. But that goal can be achieved faster and more cost-effectively if policy is aimed at increasing market mechanisms - which spectrum auctions, unencumbered by conditions, will do. It beats creating cumbersome regime of subsidized service and mandating prices, which, at the end of the day, is nothing but raiding the wallets of average users to pay the cost of heavy bandwidth consumers.

The TV game is changing. Looking at the current video landscape, I have trouble seeing the cable companies as having any sort of advantageous position right now. Their big competitive differentiator, wide scope of programming, is becoming commoditized. Television audiences are fragmenting, which means even the most popular shows draw lower ratings than in the past. oard. DVRs, DVDs and iTunes allow audiences to avoid advertising, which means the one-time stalwart business model that supported free content since the beginning of broadcasting is changing.  

Truth be told, no one really knows exactly how TV programming content and delivery will change over the next ten years--only that it will. As broadband data capacity and management becomes more germane to video delivery, bandwidth tiers may yet be an important to pay for it and keep content free. At the same time, there is enormous potential for unintended consequences if unwise policy courses are taken. The worse thing right now is for any government agency to start fumbling around with mandates, regulations and directives on broadband video entertainment, whether they address pricing, platforms or business models.    

 

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Why the GAO Study on Special Education in Charter Schools Gets It Wrong

As the New York Times reports a new GAO study finds that charter schools enroll 3 percent fewer students labeled as special education than traditional public schools: 

Across the country, disabled students represented 8.2 percent of all students enrolled during the 2009-10 year in charter schools, compared with 11.2 percent of students attending traditional public schools, according to a Government Accountability Office analysis of Department of Education data.

The basic premise of the GAO report is questionable. The assumption that schools with higher rates of special education are some how doing a better job of serving special needs children is suspect--just because you label students does not mean you are serving them.  This type of analysis implies that a higher rate of special education designation proves that certain schools are serving special needs children better.

In fact an alternative explanation might be that public schools are better at gaming the funding system by labeling a larger number of children as special education. There has been significant debate over the degree to which the largest special education category of specific learning disability (SLD) reflects a true disability or an instructional failure in reading in the early grades. As education researcher Jay P. Greene has long  pointed out in articles such as the "The Myth of the Special Education Burden," specific-learning disabilities has been the fastest growing category of disability and has grown at a rate much faster than other categories of special education.

A 2002 report from the President's Commission on Special Education estimated that 80 percent of students who receive an SLD diagnosis-two out of five special education students-are assigned to the program "simply because they haven't learned how to read." In a similar vein, an in-depth analysis in Rethinking Special Education for a New Century, a 2001 report published by the Fordham Foundation and the Progressive Policy Institute, estimates that nearly 2 million children would not have been classified as learning disabled if the public schools they attended had provided proper, rigorous, and early reading instruction. A plausible explanation for the 3 percent differential between charter schools and traditional schools is that many charter schools do a better job of teaching students to read, have agressive early-intervention programs, and simply do not label as many children as special education in the first place. 

In a 2003  study, Special Education in Charter Schools and Conventional Public Schools, RAND researchers speculated that charter schools may have a philosophical difference and "choose not to give marginal students an IEP out of a belief that the stigma of special education may cause more harm than benefit to the child."  Congruently, my Reason Foundation study, Special Education Accountability: Structural Reform to Help Charter Schools Make the Grade, surveyed California charter schools and found that school directors reported using aggressive early intervention strategies and remediation strategies to help reduce the rate of special education.

One strategy used by charter schools is "neverstreaming" which is designed to avoid special education placements in the first place. Education researcher Robert Slavin defines neverstreaming as "implementing prevention and early intervention programs powerful enough to ensure that virtually every child is successful in the first place." The purpose of this approach is-as the name implies-to provide early intervention and services so the child never leaves the general education classroom.

Elk Grove Unified in California is a pioneer of the neverstreaming model. At Elk Grove the neverstreaming model was first implemented during the 1994-95 school year. The goal was to decreasethe number of students referred for special education assessment, improve schoolwide performance,improve staff collaboration, and improve school attendance. In 1999 a California Department of Education evaluation found that special education referrals dropped from about 1,300 during the 1996-97 school year to about 500 during the 1998-99 school year. Schoolwide performance on standardized tests and attendance also improved. Elk Grove has reduced its special education rate from about 17 percent in 1995 to approximately 6 percent of students. In the Reason study several California charter schools replicated this approach to special education.

Ironically, public schools and charter schools that offer services early on and actually reduce their special education population through approaches like "neverstreaming" or other early intervention strategies are often criticized as not properly serving special education students. Schools are often judged by their special education percentagesor rates as evidence of meeting special education obligations rather than their actual academic outcomes for students enrolled in their schools.

There is at least anecdotal evidence that charter schools are working to help students learn on the front end and avoid the special education designation altogether. The GAO report is wrong to suggest that if charter schools and traditional schools had identical special education rates, this would somehow say something about the quality of special education services in either charter schools or traditional schools. Low special education rates are not automatic evidence of a failure to serve students. In fact the opposite may be true. Schools with the highest rates of special education may be failing students early on.

 

 

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California Parking Bill Needs Revisions

Last week the California chapter of the American Planning Association (APA) upset several groups including the website Market Urbanism by writing a letter to its members asking for comment on California Assembly bill 904. One version of the bill is available here. The bill requires maximum parking standards for certain types of communities. APA’s letter to its California members includes the following:

APA California is not opposed to the concept of lower parking requirements near transit when a community decides it is right for them – the issue is that a one-sized-fits-all statewide standard is not appropriate.

AB 904, on and after January 1, 2014, would prohibit a city or county (including charter cities) from requiring minimum parking requirements in transit-intensive areas greater than the following:

[The bill authorizes] one parking space per 1000 square feet for nonresidential projects (including commercial, industrial, institutional, or any other nonresidential projects regardless of type of use); one parking space per unit for non-income-restricted residential projects; 75/100ths parking spaces per unit for projects that include both income restricted and non-income restricted units; 5/10ths parking spaces per unit for units that are deed restricted at least 55 years to rents or prices affordable to persons and families making less than 60% of area median income.

The definition of “transit-intensive area” means an area that is within 1/2 mile of a major transit stop or within 1/4 mile of the center line of a high-quality transit corridor included in a regional transportation plan, including a major transit stop such as a High Speed Rail transit stop) included in a regional transportation plan but not completed.

The proposed bill has both positives and negatives. The positives include introducing a market-based approach to parking, allowing local governments to set higher standards if it is appropriate for the community, granting certain exemptions to the law including rent control and deed-restricted housing and using substantially more quantitative standards than the old ITE approach. (Under the ITE standards, there were multiple categories for each business using insufficient data points and low r-squared values. For example, adult entertainment had multiple categories. The nude dancing category had separate subcategories for different types of nude dancing including fully nude, partially nude, etc.)

However, there are significant problems with the bill that outweigh its positives. First, the bill sets a statewide standard. California is one of the largest, most diverse states in the country. What is effective in San Francisco may not work in Truckee, CA. 

The bill applies one standard to all types of transit (i.e. heavy-rail, light-rail, BRT, local bus, express bus, etc.) and all times of day. Local bus service serves different areas than BRT or rail. The plan also applies to any planned transit service in a regional plan including HSR. It can take years before a planned system is actually built. In some cases, planned systems are never built. Waiting on a proposed but unfunded HSR system is crazy. Many systems operate only during rush-hours, others on weekdays but not on weekends. Some communities are served by multiple line both bus and rail. Others are served by only one bus per day. Applying one blanket solution is not the best approach.

Although there are exemptions the criteria for meeting these exemptions is uncertain. According to the original version of the bill an area must prove it has insufficient walkability, insufficient transit service, that the lower standards undermine Transit-Oriented Development (TOD) or affordable housing and that the standards conflict with reduced off-street parking. In other words, a local area is exempt if it already has existing standards similar or more restrictive than the proposed standards. But if the area wants higher standards for 3 of the four reasons or because it believes transit will not work as well in that community, it appears there is no wiggle room. The bill’s author has stated that she intended for communities to be exempted if any ONE of the FOUR reasons are true, not ALL FOUR of the reasons. She will try to add an amendment to the bill. However, I am currently basing my interpretation of the actual language in the bill not the intended language. 

The bill is sponsored by the California Infill Builders Association. The association is a trade group working to increase infill housing. As parking spaces cost money, for developers to be able to build these apartments/houses they need something in return. The something could be lower parking standards. Parking should be priced and I understand the desire for infill housing. However, the bill would be best originating from someone without a stake in the game. Such legislation can then be reviewed by a university researcher, the California Legislative Analyst’s Office, and another independent party. The only professional transportation group that has weighted in, APA, is not a strong supporter of the bill. 

This bill presents a big government solution to a government created problem. Free market solutions should operate outside of big government meddling. If the government is restricting free-market parking pricing (which it is) the bill should end subsidies to automobile drivers and developers. All transportation modes should operate on an equal plane. Creating a subsidy to counter another subsidy is both expensive and counterintuitive. 

Assemblyman Nancy Skinner deserves credit for trying to encourage market-based pricing. And APA California could be more open to the concept. However, this bill is a big government state-imposed solution that may or may not offer exemptions, does not consider the different geographies of the state and does not separate existing from current transit service. As written this bill needs substantial changes. If the author’s amendment passes, it still has some significant aspects that need fine tuning before it should be considered on a statewide basis.

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Milpitas Public Works Partnership Belies California Dysfunction

California: The ready and willing standard bearer of political dysfunction. When its lawmakers aren't busy pretending to balance a $92 billion budget (turns out they relied on gimmicks to close a $15.7 billion budget deficit), they're getting ban-happy by legislating everything from over-the-counter cold medicine to foie gras. But before you lose hope in the Golden State, turn your eyes to Milpitas in Santa Clara County.

Last week the Milpitas City Council announced their first-ever public works public-private partnership to rightsize the department. The city's public works department came under fire over the past year due to deteriorating park conditions ranging from broken irrigation systems and dead shrubbery, to graffiti and vandalism marring benches. Rather than accept city staff promises to restore conditions over the course of three years, policymakers turned to the private sector.

The City Council voted to award two related contracts to Colorado-based Terracare Associates for park and street landscaping, and repair services. The Milpitas Post reports:

Under its parks maintenance contact, Terracare will be paid an annual base price of $1,326,155 for the first two years and $1,369,638 for years three through five. The contract for these services is for one year with four one-year options for renewal, city reports state.

Terracare will be charged with maintaining 24 city parks and sports fields with equipment and personnel to provide routine landscape maintenance services, pruning, trash pick-up, weed removal, turf care, plant replacements, irrigation system maintenance and fixture and equipment repair services.

Under its streetscape maintenance and repair contract, Terracare will receive an annual not-to-exceed amount of $125,218 for all aspects of landscape and irrigation system maintenance for the city's landscaped streetscapes, medians and rights of way.

The council's approval allows the city manager to grant yearly increases pursuant to the contract without further city council action. Terracare was chosen above three other similar firms and was determined to be the most advantageous to the city, reports state.

This is a small step towards solving the overwhelming political dysfunction at California's state and local level; but for parkgoers and motorists in Milpitas, partnerships like this make all the difference. For more on local government privatization, see Reason Foundation's Annual Privatization Report 2011: Local Government Privatization available online here.

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What Twists Will We See from the FOMC Tomorrow?

Rumors are flying everywhere that the Fed is going to ease policy again after its meetings today and tomorrow. The Financial Times declared yesterday that "the doves are ready to act." And a report in Forbes suggests that more Fed easing is likely to come sooner rather than later, in the form of an extension of the Feds Operation Twist program. JP Morgan Chase and Barclays are also both expecting the FOMC will extend the $400 billion dollar (to this point) bond swap program known as Operation Twist.

These rumors are not terribly unexpected. Nor would Fed action tomorrow be shocking. The economy has been deteriorating this year steadily and financial markets have been tightening up. Chairman Bernanke has reiterated time and again this year that the Fed was willing to act if it needed to, but that they wanted to wait to see if their previous QE efforts could help recovery take hold. No such luck so far though.

More than two months ago Reason's James Groth predicted that rising yields in long-dated treasury bonds would likely lead to a new bond purchasing program or an extension of Operation Twist. It is looking like this is going to put more QE very much back in the cards—if not tomorrow then in coming months, as the global economy and U.S. economy are not going to hit an upswing soon. 

To date, 30-year US Treasury Bond yields have only gone down 9 basis points since the bond swap program began in October of 2011, and at many points during the programs original run 30-year US Treasury Bond yields were actually higher than before the program started. With economic conditions slowing (Barclays forecasts Q2 GDP to grow only 1.8% and May saw only 69,000 new jobs added) it's not surprising that this Fed would seek more easing.

One possible wrinkle, mentioned in the Forbes piece, in the program were it to be extended is that the Fed could move to purchasing more mortgage-backed securities and fewer treasuries (in order to limit the impact on the treasury market). If this turns out to be the case, you can add "a slowing of housing prices declining to normal levels" to the laundry list of Operation Twists negative side-effects.

The rest of the list (as illustrated by Dallas Federal Reserve Bank President Richard Fisher), first blogged about here:

  1. "Embarking on an Operation Twist would provide an even greater incentive for the average citizen with savings to further hoard those savings for fear that the FOMC would be signaling the economy is in worse shape than they thought. They might view an Operation Twist as setting the stage for a new round of monetary accommodation-a QE3, if you will. Such a program was considered redundant by business operators given their surplus of undeployed cash holdings and bankers' already plentiful excess reserves. In addition, such a program might frighten consumers by further driving down the yields they earn on their savings and/or lead to long-term inflation that would erode the value of those savings;
  2. The earning power of banks, both large and small, would come under additional pressure by suppressing the spread between what they can earn by lending at longer-term tenors and what they pay on the shorter-term deposits they take in;
  3. Pension funds would have to reassess their potential returns, with the consequence that public and private direct-benefit plans would have to set aside greater reserves that might otherwise have gone to investments stimulating job creation;
  4. Expanding the holdings of the Fed's book of longer-term debt would likely compound the complexity of future policy decisions. Perversely, the stronger the economy, the greater the losses the Fed would incur as interest rates rise in response and the prices of those longer-term holdings depreciate. The political incentive to hold rates down might then become stronger precisely when we want to initiate tighter monetary policy. This concern, of course, would be a good news/bad news issue: The good news is that it would stem from a stronger economy; the bad is that might hurt our maneuverability and, in doing so, might undermine confidence in the Fed to conduct policy independently."

Something that had not escaped some analysts is that the above discussion didn't factor in where inflation is at. As the FT shows in a chart, a number of inflation indicators are heading downward or hovering around 2 percent. However CPI has been on steady march up and hasn't slowed down since the middle of the first quarter of 2012. Concerns about economic and financial conditions could overshadow inflation fears at the FOMC meetings this week, but most are expecting some kind of action tomorrow. 

We'll have to wait for news tomorrow, but in the mean time, please ponder why since the "twist" dance went out of style 60 years ago, why this approach to monetary policy can't go out of style as well? 

 

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Alnnor Ebrahim Want His 15 Minutes Like Rajan Gupta

With Europe falling apart but Obama v. Romney quiet at the moment, it is not clear whether the media is going to fill its air time with the story of Alnoor Ebrahim. If this story does take top headlines—or better, get featured as a punchline on The Daily Show—hopefully it can move beyond the old hat debates about insider trading as policy and focus more on the complex ways in which different people view insider trading.

Let's start with what we know of this story: Alnoor Ebrahim is a former AT&T executive and he admits that he was paid to give information about cell phone sales to particular hedge funds looking into whether or not to invest in the likes of Apple, RIM, and perhaps AT&T itself. According to BizJournal and AP: "federal authorities said Ebrahim was paid more than $180,000 to serve as a consultant for employees of Manhattan-based investment firms."

We've made it pretty clear on this blog before that we tend to stand with the "let insiders trade" side of this debate. Insider trading is about as illegal in a universal justice sense as getting called for a blocking foul (when you throw your body in front of another player's path) in basketball. It is an arbitrary law set up to try and create a greater sense of fairness. Here is a sterilized break down of what happened.

  1. Potential investor in Apple seeks information about the success of Apple products
  2. Potential investor reads industry reports, looks at publicly available data, analyzes news reports, pays to attend conferences where Apple executives are presenting their products, pays to fly out and visit Apple production sites, pays assistants to gather intelligence from their friends on how much they like the product.
  3. Potential investor then pays an AT&T executive for data about the sales of Apple products. 
  4. Potential investor uses all of this information to make a decision.

So, what was the illegal activity here? The law says that investors should have a level playing field, they should have the same opportunities. It is obvious that not every potential investor in Apple has the same resources. They can all technically attend the conferences, and spend time reading the reports, and pay some recent graduates to survey their friends (even if in reality few people have those resources), but they can't all have the same AT&T friend and pay him for special information. 

Step three is what we've declared illegal. Now, I could get into semantic arguments about how there are logistical problems with items in step 2 that, by the same logic is making insider trading illegal should make them illegal, but that is the old debate. We probably should still make those points to keep the flag in the sand established. But what new could we consider?

How about thinking on reasons why we have the divide? Often times in this debate (as nearly every other) it seems as if people have made their decision whether they think this should be illegal and then justify it some how. Many justifications for keeping insider trading illegal are flimsy and disprovable concerns—like "its not fair to trade if you have special knowledge" even though that is basically what professional investors do for a living... trade on special knowledge. Some are based in very sound reasoning that are balanced on a single point of debate from which different opinions must necessarily diverge—like "insiders are part owners in a company who have a fiduciary responsibility to their fellow owners and should not seek to gain special financial privilege by selling the group's information" where the debate rests on whether owners should have equal financial outcomes from a business and whether all insiders have fiduciary responsibilities. 

The roots of people's justifications here rest on where their values and morals have evolved to place emphasis. As Jonathan Haidt wrote about in the May 2012 issue of Reason, there are six clusters of moral concern that all political cultures and movement base their moral appeals: "care/harm, fairness/cheating, liberty/oppression, loyalty/betrayal, authority/subversion, and sanctity/degradation." We would need to do a psych study (or if one has been done, please forward me the information) on exactly how individuals with particular value sets would fall in this matrix, but my hypothesis is that individuals who place a heavy value on fairness and care are those seeking to maintain insider trading rules. The more liberty focused would come up with justifications for making it legal. 

We'll have to wait for more details on Mr. Ebrahim's case to come forward. Perhaps he is owning up to this so he can get his name in the papers like Rajan Gupta. Perhaps he has come to see his own activities as illegal. Perhaps he's just trapped with no way out. In any case, this story really should be about Ebrahim. Rather we should take this as an opportunity to understand why there are differences on insider trading, identify the root source concerns, and then many figure out if there is a way we can reform the rule which is nearly impossible to defend and restricts the rights of individuals to pursue life, liberty, and happiness.

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DART Needs to Shift From Building New Rail Lines to Increasing Ridership

The Dallas Area Rapid Transit System (DART) is singing the blues. But it is not because ridership is down, debt is increasing, or the agency is laying off staff--although these are all true. The agency is upset because in the future it will no longer be building new rail lines.

The Dallas Morning News explains below:

Dallas Area Rapid Transit has a problem. As it approaches its 30th birthday, the agency is about to run out of rail lines to build.

DART light-rail ridership has grown significantly since the first cars began moving 16 years ago this month, but that growth has been dependent on a stream of groundbreakings. Largely obscured by all the ribbon-cuttings: The longer many stations are in service, the less people use them.

Of 34 stations that were open before the Green Line came on board beginning three years ago, 15 serve fewer people now than in their first year of service. Of the stations where use has grown since they opened, most serve no more people today than they did eight to 10 years ago.

The use of mass transit in Dallas appears to be falling, too. In 2005, 23,180 workers, or about 4.35 percent, commuted by bus or rail. By 2010, that had fallen below 20,000, though DART and other officials hope those numbers improve as unemployment in the area goes down.

There are several reasons for this drop in transit ridership. First, the agency has relied on building new train service to increase ridership. The agency has never had a long-range plan for increasing service on existing rail lines. It has taken advantage of FTA funding that supports new capital projects, but not maintenance in metro areas. More on how federal funding encourages new construction is available here and here. DART believed it could build its way to higher ridership. Unfortunately while total ridership increased slightly, ridership per station decreased substantially. For example, 16 out of 20 Green Line stations have seen ridership declines compared to a year ago. The costs of operating the new rail lines caused DART to eliminate some highly patronized bus routes. As a result, the system was one of two major transit systems to add new rail service and still lose total passengers. 

The Dallas Metroplex was never a good candidate for fixed-rail. For a metro area with more than 3,000,000 people it has one of the lowest population densities in the world. Its dispersed population is a better fit for Bus-Rapid-Transit (BRT). However, Dallas builds BRT systems as temporary solutions that are then replaced by new Light-Rail-Transit (LRT) systems. Most other cities combine their BRT and rail systems to build a transit network. Dallas needs to start aggressively building BRT systems if it wants to increase its transit ridership.

Since Dallas has several business clusters, its transit system should be structured as a grid network instead of a radial network. Currently there is no rail or BRT service along I-635 nor any east-west service north of the city. The only alternative is local bus service. At present to travel between suburban areas, travelers must ride into downtown Dallas. As a result, the 3- mile trip from the Burbank to the Park Lane station becomes an 18-mile excursion as commuters must travel through downtown. Good luck getting commuters to make that trip! 

The radial rail transit network serves the downtown business community well. Since downtown businesses were major boosters for LRT construction this is not surprising. Unfortunately, this rail transit fails to serve the rest of the metro area. While downtown business activity has been declining, business activity in other areas has been increasing. The downtown-oriented transit system was built for a 20th century commuting pattern not the 21st century reality. 

The management of DART has been focused on building new rail, not increasing ridership on existing rail. To its credit DART is hiring new leadership with experience improving ridership. However, due to land use patterns building ridership in Dallas will be more challenging than building ridership in Chicago.  

DART is not responsible for all of the transit system’s problems. For example, most downtown employers offer free parking. Unpriced parking offers a substantial subsidy for automobile users. Each parking space occupies land that has value, especially in a downtown area. This parking should be priced at market rates. While land values in Dallas are not equivalent to land values in New York City or San Francisco, market pricing would encourage some commuters to switch to transit.

Unfortunately, now that the system is built, DART needs to find a way to maintain it. Since Dallas has received grants from the FTA the city is obligated to continue operating transit or pay back 100% of the grant money. Good options include distance based pricing, where customers pay different fares depending on the length of their ride, charging for suburban parking and using value capture where applicable for Transit-Oriented-Developments (TODs). These options will not raise as much money in Dallas as they would in Washington D.C. where rail transit is more appropriate. Dallas is learning what many other regions that have accepted federal money for new rail construction already know; building a system is the easy part. Growing ridership, maintenance and operations are the challenge.

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