The Federal Transit Administration should revise its cost-effectiveness rule as follows:
1. Require transit agencies to consider a full range of alternatives.
Consideration of a full range of alternatives is vital to an honest cost-effectiveness analysis. At the very least, alternatives to New Starts light- and heavy-rail projects should include a variety of bus-rapid transit lines and a system-wide reduction in fares. Alternatives to commuter-rail projects should include long-haul commuter bus services. Alternatives to streetcar and Small Starts projects should include local circulator buses. Alternatives to any projects should also include no build, baseline, and significant alternatives submitted by members of the public.
2. Allow transit agencies to consider the cost-effectiveness of transit projects in meeting any of several key non-monetary benefits.
The FTA may continue to require that agencies calculate the cost-effectiveness of projects per hour of transportation system user benefit. But transit agencies should be allowed to consider other cost-effectiveness measures as well, such as the cost-effectiveness of reducing air pollution. However, only true outputs, not means to ends, should be considered. For example, reducing vehicle miles traveled is a means to an end, not an output, and so should not be rated as a cost-effectiveness measure.
3. Require transit agencies to accurately project the costs, monetary benefits, and non-monetary benefits of proposed transit projects and their alternatives.
Cost estimates should use reference-class forecasting to account for historic forecasting errors for similar projects. Costs should also look ahead at least 50 years to account for long-term capital renewal and replacement costs. Finally, the FTA should require transit agencies to do a “stress-test” to insure that the costs of new projects do not force agencies to reduce existing service in the event of economic downturns.
4. Require transit agencies to rank alternatives according to the net dollar cost per unit of each non-monetary benefit.
|Net cost per: Alternative||Hour of Transportation User Benefit||Ton of Ozone Abated||Ton of Greenhouse Gases Abated||BTU of Energy Saved|
Calculating the cost per unit of benefit for several alternatives and non-monetary benefits should produce a table something like the one above. In the table, “net cost” is the annualized capital cost plus annual operating cost minus annual fares. In this table, no alternative is most cost effective by all non-monetary benefits, but two alternatives - D and E - are clearly not cost effective by any measure.
5. Require that alternatives that rank low be eliminated from consideration.
The FTA should require that alternatives that are clearly not cost effective - such as alternatives D and E in the above table - be rejected. This process gives transit agencies the flexibility they desire to consider a broader range of benefits while imposing rigor on the cost-effectiveness analysis to insure that federal resources are not spent on cost ineffective projects.
On June 3, 2010, the Federal Transit Administration (FTA) asked for “public input on how to improve its calculation of ‘cost effectiveness,’ including whether FTA should measure quantifiable benefits other than reduced travel time. In addition, FTA seeks comment on how it should evaluate environmental benefits and economic development effects.”
Cost effectiveness is an essential criterion for allocating resources at any time. Even during economic boom periods, government funds and resources are limited. Almost everyone loses if those funds are spent on costly projects that provide few benefits. The current recession combined with record federal debt makes cost effectiveness in federal spending more important than ever.
Cost effectiveness is often confused with benefit-cost, but the two differ significantly. A benefit-cost analysis attempts to calculate all benefits and costs in dollars (or some other common denomination). When properly calculated, any project whose benefits exceed the costs can be considered worthwhile. If resources are limited, projects can be ranked by their benefit-cost ratios and those with the highest ratios should be undertaken first, but such ranking is not absolutely essential so long as the benefits of each selected project exceed the costs.
When it is not possible to express all of the potential benefits of investments in dollar terms, however, a cost-effectiveness analysis is called for. For such an analysis, benefits that cannot be expressed in dollars must still be quantified using some other measure or measures such as hours of time saved, tons of abated air emissions, or accident fatalities avoided. Then the costs in dollars are divided by the benefits to calculate the cost per hour, ton, fatality, or whatever is the benefit.
Note that a benefit-cost analysis produces a clear threshold that allows decision makers to reject projects: any project whose benefit-cost ratio is less than one should not be funded. A cost-effectiveness analysis has no such clear threshold. Instead, for a cost-effectiveness analysis to work, it is vital that any proposed project be compared with a full range of alternative projects that can potentially produce similar benefits. Projects should be selected only when their dollar cost per unit of benefit is clearly lower than that of any of the alternatives.
The FTA’s existing cost-effectiveness process for New Starts is inadequate because it fails to recognize the need to consider a full range of alternatives. Instead, it sets an arbitrary threshold of approximately $24.49 dollars per hour of “transportation system user benefit,” (the exact dollar amount varies with inflation), above which projects are deemed to not be cost effective.
There are two major problems with this process. First, this arbitrary threshold would potentially allow many cost-ineffective projects to be approved for two reasons:
- Projects that cost $5 per hour of benefit were ranked equally with projects that cost $24.49 per hour of benefit, when in fact the former were far more cost effective.
- Projects that cost less than $24.50 per hour were considered cost effective even if alternative projects in that corridor or metropolitan area could produce the same benefits at a far lower cost.
As noted in the advance notice of proposed rulemaking, some “members of the transit community” objected to the FTA’s cost-effectiveness process for an additional reason: The arbitrary threshold required the FTA to reject any projects that cost more than about $24.50 per hour of user benefit even if they produced other benefits that were not measured in terms of “hours of transportation system user benefits.”
The Cato Institute proposes a new cost-effectiveness process that will remedy all of the defects of the FTA’s current process, including the transit community’s complaint that other benefits are not considered in the process. This process includes the following steps:
- Identification of a full range of alternative projects.
- Identification of key non-monetizable benefits of those alternative projects.
- Estimates of the costs and monetary benefits of each alternative project.
- Estimates of the non-monetary benefits of each alternative project.
- Ranking the alternative projects in terms of dollars of net cost per unit of each key non-monetary benefit.
- Eliminating low ranking projects from consideration.
1. Develop a Full Range of Alternatives
The goal of a cost-effectiveness analysis is to find the least-cost way of attaining designated outputs or goals, and identification of a full range of alternatives is a crucial step in any such analysis. Leaving out any alternatives that could be more cost effective than the proposed action effectively biases the analysis towards the proposal.
For New Start projects, the FTA should specify that alternatives include, at the very least:
- No build;
- A baseline alternative as defined in the existing rule and including, at the very least, improvements in existing services that the transit agency would be likely to make over the lifetime of the proposed New Start project if that project is not built;
- A significant reduction in system-wide fares;
- In the case of light- and heavy-rail projects, alternatives should include a range of bus-rapid transit and/or express buses alternatives operating on existing roads, new general purpose highway lanes, exclusive busways, and “virtual” busways (high-occupancy toll or HOT lanes with priority for buses and vanpools and dynamically priced to keep lanes fully utilized but free-flowing);
- In the case of commuter-rail projects (defined as passenger service that operates only, or mainly, during rush hours), alternatives should include long-haul commuter bus service on existing roads and (if not now available) on new HOV or HOT lanes.
In addition to no-build and baseline alternatives, the FTA should specify that alternatives to streetcar and other Small Start projects include:
- Increased frequencies of local bus service;
- A local circulator bus or a network of circulator buses or other special bus routes, recognizable by distinctive liveries; and
- Designation or construction of exclusive bus lanes or lanes dedicated to buses and selected other vehicles such as taxis, share taxis, and bicycles.
Other alternatives should be included depending on which key non-monetary benefits are included in a cost-effectiveness analysis. For example, if a transit agency counts abated greenhouse gas emissions as a benefit, it should consider alternative fueled buses, trolley buses, and other ways of achieving that benefit. In addition, transit agencies should give serious consideration to alternatives submitted by members of the public.
2. Identify Key Non-Monetizable Benefits
While hours of transportation system user benefit are an important potential benefit of transit projects, transit agencies should be allowed to consider other benefits as well. However, any benefit considered in a cost-effectiveness analysis must be a true output, not merely a means to an end. For example, reducing air pollution is an output; persuading auto drivers to take transit instead is merely a means to an end.
The FTA should continue to require transit agencies to calculate the cost per hour of transportation system user benefits. In addition, agencies should be allowed (and in some cases the FTA may want to require) to consider cost effectiveness in terms of cost per:
- Passenger mile of mobility within the metropolitan area;
- Hour of reduced delay due to congestion;
- Ton of abated air pollution;
- Ton of abated greenhouse gas emissions;
- BTU of energy saved;
- Life saved from avoided accidents;
- Other true outputs that cannot be measured in dollar terms.
Assessments of air pollution and greenhouse gas emissions should include the emissions from power plants providing electricity for electrically powered transit. They should also consider the effects of cold starts, i.e., that emissions of some pollutants, such as volatile organic compounds, are greatest when motor vehicle engines are cold, so a short trip can produce almost as much pollution as a long trip.
Some measures that should not be considered because they are means to an end, not outputs themselves, would include:
- Changes in local population densities or other measures of urban form;
- Vehicle miles traveled;
- Vehicle trips;
- Vehicle ownership rates.
Some transit agencies want to consider the economic development resulting from a transit project as one of the non-monetary benefits. The FTA should discourage this, however, for at least two reasons.
- The effects of new transit projects on economic development are often highly exaggerated. Most, if not all, of the transit-oriented developments that have been built along light-rail and streetcar lines in Portland, Oregon, for example, received millions of dollars in tax-increment financed (TIF) subsidies. These subsidies, not the rail transit, are what led to the developments.
- Local economic development is often a zero-sum game. As Robert Cervero and Samuel Seskin concluded in “An Evaluation of the Relationships Between Transit and Urban Form” (TCRP Research Results Digest, June, 2005), “Urban rail transit investments rarely ‘create’ new growth, but more typically redistribute growth that would have taken place without the investment.”
At the very least, transit agencies that wish to consider economic development as a benefit of transit projects should include TIF and other subsidies on the cost side of the project and should estimate the effects of those subsidies on development with both the proposed transit project and alternatives to it. To account for possible zero-sum games, they should also consider the effects on economic development on a metro-wide basis.
3. Estimate the Costs and Monetary Benefits
The direct costs of New Starts and Small Starts transit projects include the forecast annualized capital and annual operating costs of the entire transit system. The FTA should continue to require that capital costs be amortized over their useful lifespan at a 7 percent discount rate. While this seems straightforward, most transit agency analyses fail to disclose three important costs: overruns; capital renewal and replacement of worn-out infrastructure; and the threat to existing transit services when new projects have financial problems.
Cost overruns: In 1989, Department of Transportation researcher Don Pickrell found that then-recent rail transit projects had gone over their original projected costs by an average of 46 percent. He noted that, “The systematic tendency to overestimate ridership and to underestimate capital and operating costs introduces a distinct bias toward the selection of capital-intensive transit improvements.” Since then, transit agencies have somewhat improved their forecasts of future ridership, but recent rail transit projects are still costing an average of 40 to 50 percent more than the projections made at the time of the original cost-effectiveness/alternatives analysis.
Danish planner Bent Flyvbjerg argues that planners of public works should use “reference-class forecasting” to account for such overruns. For example, if similar projects have gone 50 percent over projections made at the time of the original alternatives analysis, then planners doing an alternatives analysis should add 50 percent to the projected cost of a proposed new project. The FTA should require this as a part of its cost-effectiveness analysis. The FTA should also require transit agencies that have not done reference-class forecasting to redo their cost-effectiveness analysis under the new rules if their projected costs escalate by more than 10 percent since their original analysis.
Capital renewal and replacement: America’s legacy rail transit systems - systems more than 30 to 40 years old - today suffer from deferred maintenance. A recent FTA report revealed that the nation’s seven largest transit systems required about $50 billion to bring them to a state of good repair, some 90 percent of which was due to deferred maintenance on rail lines. Moreover, most of those systems were not even spending enough money to maintain their existing state of poor repair, much less return then to a state of good repair.
Despite this, most of the dozens of cities that are building or planning new rail lines have no financial plans for renewing those lines when they start wearing out in 25 to 30 years. They are relying heavily on federal funding for construction, and in some cases have promised voters that they will end local taxes needed for local matching funds when construction has been paid for. This means they will have little or no money for capital renewal and replacement. The FTA should require agency cost-effectiveness analyses to include capital renewal costs, including replacement of vehicles and other worn-out infrastructure for at least 50 years after the project opens.
Threat to existing transit services: Monetary benefits include fares and transit advertising. Since fares are, in effect, a measure of transit ridership, transit agencies need not consider transit ridership as one of the key non-monetary benefits of transit projects. However, one serious problem with a large number of capital-intensive transit projects is that they have forced transit agencies to cannibalize their bus systems to pay for the fixed-guideway systems.
At various stages in the lifespan of rail transit systems, cost overruns, revenue shortfalls, and long-term maintenance costs have led at least half the nation’s metropolitan areas that have both rail and bus transit to severely cut bus services. The FTA requires transit agencies to show that building a fixed-guideway system will not take funding away from the existing transit system, but this requirement should be made more rigorous. For example, the FTA should require a stress test asking what would happen to transit agency operations if, at any time when the agency is building or repaying bonds sold to finance fixed-guideway projects, the tax revenues needed to support the agency decline for several years due to a recession.
4. Estimate the Non-Monetary Benefits
Transit agencies should quantify the annual outputs (or savings) of each of the key non-monetary benefits under each of the alternatives. The FTA should continue to require that estimates of benefits be made for the entire urban area served by the transit agency, not just the corridor to be served by the proposed project. This will ensure that the benefits in the corridor, such as transit ridership gains or economic development, are not offset by zero-sum-game losses (or slower rates of growth) elsewhere in the urban area.
In estimating benefits, transit agencies should be required to use the current travel demand forecasting model of the local metropolitan planning organization (MPO) for all estimates of ridership, revenue and costs that relate to ridership. The FTA should discourage modification of the MPO model for transit studies unless those changes (including modification of land use densities, socioeconomic assumptions and demographic forecasts) are clearly documented and reviewed in the public record and certified by the MPO. Under no circumstances should any transit agency develop its own travel demand-forecasting model for estimating patronage for any proposed new transit project or line.
5. Rank the Alternative Projects
Compiling the data would result in a table resembling the one below. “Net cost” is the annualized capital and capital renewal cost plus annual operating cost minus fares. In this table, none of the alternatives ranks best for all of the key non-monetary benefits, but alternative C ranks either first or second for all of the criteria. That would probably be the most cost-effective alternative, though a case could be made for alternatives A or B. Alternatives D and E are clearly not cost effective.
|Net cost per: Alternative||Hour of Transportation User Benefit||Ton of Ozone Abated||Ton of Greenhouse Gases Abated||BTU of Energy Saved|
In practice, it is more than likely that the ranking will be roughly similar for all of the non-monetary criteria. This is because projects that have a significant effect on such outputs as congestion delay should also have parallel effects on air emissions, energy consumption, and other environmental measures.
6. Eliminate Low-Ranking Projects from Consideration
A project should be considered cost effective only if it ranks at or near the top of the list (in terms of least net cost per unit of benefit) for all of the key non-monetary benefits. Projects that are not cost-effective, such as alternatives D and E in the above table, should not be considered for federal funding.
The current cost-effectiveness rule applies a nationally set arbitrary number to rule out federal funding for local transit projects. The Cato Institute’s proposed cost-effectiveness process compares local transit proposals with alternatives in the same corridor or metropolitan area, and only rules out projects that are less cost effective than local alternatives.
At the national level, the FTA should still classify projects as “high” through “low” depending on whether they cost, say, less than $12 through more than $30.50 per hour of transportation system user benefit. But no project would be completely ruled out for simply being “low” as long as it is still the most cost-effective project in its metropolitan area (though any transit agency unable to find a project costing less than $30.50 per hour of user benefit probably isn’t trying hard enough).
Local variations in calculation procedures will probably result in a significant range of results for projects that are, in fact, similarly cost effective. Thus, a project in one metropolitan area that is ranked “high” should not have clear priority over a project in another metropolitan area that is ranked “medium-high.” However, calculation procedures should be consistent enough from one metropolitan area to another than a project that is ranked “high” should have clear priority over one that is ranked, say, “medium” or lower.
In sum, the Cato Institute proposes that the FTA adopt a cost-effectiveness rule that requires transit agencies submitting New Starts and Small Starts proposals to:
- Consider a full range of alternatives, including, as appropriate, various forms of bus-rapid transit and other improvements in bus service;
- Calculate the costs of alternatives including long-term maintenance costs and the use of reference-class forecasting to estimate cost overruns;
- Estimate the cost per hour of transportation system user benefit as well as the cost per unit of other key non-monetary benefits that are true outputs, not means to an end;
- Continue to base calculations on urban-area effects, not corridor effects, so as to eliminate the possibility of zero-sum-games.
Taken together, these proposals should significantly improve the effectiveness of federal transit grants while they give transit agencies the flexibility they need to solve local transportation problems.