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The Martin Luther King Jr. East Busway

The Martin Luther King Jr. East Busway. A Cost-Benefit Analysis. Overview. Pre-1978 History Port Authority’s CBA (1978) Revising Port Authority’s CBA Actual Results. The busway was part of the Early Action Plan (EAP) EAP consisted of 3 other projects.

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The Martin Luther King Jr. East Busway

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  1. The Martin Luther King Jr. East Busway A Cost-Benefit Analysis

  2. Overview • Pre-1978 History • Port Authority’s CBA (1978) • Revising Port Authority’s CBA • Actual Results

  3. The busway was part of the Early Action Plan (EAP) EAP consisted of 3 other projects EAP was largest transit project in Pennsylvania ever Construction was to begin in 1971 History of the East Busway

  4. Delay of the East Busway • Lawsuit delayed the project 6 years until 1978 • Factors that increased project costs: • Oil crises • Spiraling inflation • Right of way dispute with railroads • Construction was completed in 1983

  5. Port Authority’s ’78 CBA • Capital Costs • Operating Costs • Benefits • Benefit Cost Ratio

  6. Port Authority’s Capital Costs

  7. Port Authority’s Operating Costs

  8. Port Authority’s Financing Costs

  9. Benefits promised during the delay • Quantified Benefits: • $82.4M time savings for current passengers • $29.4M savings for new passengers (time and auto costs) • $21.8M in time savings for drivers from reduced congestion • $11M in additional property tax revenue • “At the peak construction level, 670 workers will be employed on the PATways. Their earnings will total $13 million.” • Non-quantified benefits: • provide “benefits to job opportunities, urban renewal and economic development have been calculated in the hundredes of millions of dollars“ • …“unquantifiable quality of life benefits" • "…intangible benefits of new mobility will not be measurable in dollars and cents…" • “improve mobility in decaying neighborhoods, raising property values and inspiring renewal.” • “inspire new construction of all kinds --- commercial, residential, and industrial.” • provide "new suburban employment, medical, and recreational opportunities to ghetto residents.“ • “enhance” environmental quality, pollution reduced due to “fewer cars on the road”

  10. Port Authority’s Benefits

  11. The Rise and Fall of ’82 Ridership Projections

  12. Port Authority’s “CBA”

  13. What’s missing from Port Authority’s analysis? • Missing benefits • No loan principal • No NPV • No discount rate • The benefit-cost ratio may be inflated

  14. Port Authority’s Benefit Problems • ’78 analysis indicates many potential benefits without any attempt at measurement: • Vehicle Emissions • Safety • ’78 analysis points to future benefits ($10 million/yr) for future riders without analyzing associated costs: • Service Expansion • Unidentified Improvements • Previously mentioned benefits gone!

  15. Port Authority inflated BC ratio using annualized costs • Their BC ratio = 1.28 • Used annualized values based on a “representative” year • This hides the fact that benefits do not start until five years after costs. • Total: BC Ratio = 1.06 • Result: BC Ratio = 1.25

  16. Their Way

  17. Our Way

  18. No principal payments: NPV = 12,425,000 With principal payments: NPV = -32,346,343 Adding the loan principal makes a difference Assumes 0% discount rate over 30 years. Thus NPV = net benefits

  19. Estimating a discount rate for 1978 • Nominal yields on corporate AAA bonds 8% • Nominal T-bill rates 7.57% • Inflation 7.6% • Corporate tax est.40% • Individual tax est. 20%

  20. Reasonable social or institutional nominal discount rates range from 7.5% to 13%

  21. Discounting actually improves NPV

  22. Discounting improves NPV because it reduces the present value of heavy loan payments during first few years Textbook problems usually assume costs occur at T=0, but if costs happen later, they get discounted too.

  23. Additional problems with Port Authority’s analysis • Funding too aggregated • Economic impact of taxes ignored • Time savings understated • Option value ignored • Accounting for future inflation ignored • No recognition of uncertainty

  24. Funding was more complicated than a single bond issue • $88M federal grants • $11M in state contributions • $11M local funding

  25. How were funds raised? • Locally, Port Authority intended sell bonds • (30 years, @5.6% payment=$765K) • Likely serviced debt with county property taxes • State funding: 50% income and 50% sales taxes • Federal funding: income taxes

  26. When were the funds raised? • State and federal funding to be appropriated each year over the construction project (4-5yrs) • Local funding serviced over 30 years

  27. How much did they cost to raise?

  28. With METB and more realistic funding assumptions NPV gets worse, except for undiscounted case Previous Assumptions With realistic funding and METB

  29. Cost frontloaded Reduces interest expense and total costs Thus undiscounted NPV is higher Discounting reduces benefits significantly

  30. Port Authority’s benefits could have been higher

  31. Port Authority’s Benefits

  32. New benefits improve NPV, but not much

  33. Inflation/Uncertainty • -64 -82M NPV? • Why bother!

  34. Busway Opened in ‘83

  35. Actual results: the good news • Capital costs were less than 110M • 75 to 101M in ’78 dollars • Maintenance cost 200K rather than 700K • People reported saving time by riding the busway

  36. Performance Bad news: ridership projections were way off Projections 100000 90000 80000 70000 60000 Ridership/ Weekday 50000 40000 30000 20000 10000 0 1973 1976 1982 1985 1988 1991 1994 1997 2000 1979

  37. Thus ridership benefits were overstated by about 3.6M a year • Assuming Port Authority’s assumptions about time savings were true except for ridership, having 30,000/week rather than 54,000 per week cuts time savings in half!

  38. Adding Insult to Injury… • In 1978 Moody’s downgraded the county’s rating from A-1 to BAA-1. • Standard & Poor’s did not follow suit, but bankers (unsurprisingly) insisted on the higher coupon rate. • Pitt. Press reported a sale of $31M in county bonds at the rate of 6.47% (not 5.6%). A portion was to go to the East Busway.

  39. Conclusions • Promises change when you ask for money • Port Authority CBA wholly inadequate • Even w/ other benefits, hard to say the busway was worth it • In ’78 inertia won again • Still going however

  40. Look out! Here comes the East Busway Extension…

  41. “The extension will attract new customers to the system” 13,000 riders (4,000 new) “Environmental benefits” “Decreases travel times” “Eases traffic congestion” “Adds a decorative green space along most of the Busway corridor” “Construction… is rehabilitating desolate and deserted areas.” “Provides, at no cost to community residents, various neighborhood enhancements, such as the rehabilitation of the historic Edgewood Train Station…among many other improvements.” Cost: $62M Look at these great benefits!

  42. Thank You!

  43. The busway did save time for those who rode it: • Routes diverted to the busway routes saved 8 minutes travel time during the morning, 3.5 minutes during the evening. • EBA Passengers (main new route) reduced travel time by 21-24 minutes. • On board survey showed that both new and diverted route passengers perceive large travel times savings since they started using the busway. • Transferring perceived to be easier, bus service deemed more reliable

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