Written by Administrator
Friday, 17 June 2011 17:19
By Leroy W. Demery, Jr.
Received wisdom in some circles holds that, prior to the era of public ownership, U.S. transit systems were “self-supporting” – that is, no subsidies required.
The historic record indicates this belief is incorrect.
Private investors incurred substantial losses because of operating deficits, debts not serviced or paid, and capital losses (on shares, or “stock”). If expressed in today’s dollars, the total would be a very large sum.
Research conducted more than 50 years ago by Werner W. Schroeder, Vice-Chairman of the Chicago Transit Board, established losses in the “debt” category (i.e. principal and interest not paid to bondholders) at more than $259 million. These were incurred over the 40-year period between enactment of Chicago’s traction ordinances in 1907 and the takeover of surface and elevated lines by the Chicago Transit Authority (CTA) in 1947. In addition, Schroeder estimated $11 million in losses to shareholders. The total cumulative loss was adjusted downward to account for more than $100 million in payments by CTA to security holders.
The total - $270 million - does not include an estimate of dividends not paid to shareholders. “Unpaid dividends” are not considered part of an investor’s “loss;” unlike interest on bonds, there is no contractual obligation to pay dividends.
Schroeder wrote, “It it not probable that the loss on each bond fell on the investor who originally put up the money. The bonds were sold and resold. Sometimes the prices would rise temporarily and then fall again. The loss in a large majority of the cases was distributed as to each bond over a series of investors, one taking part of the loss by selling below what he had paid, and another (or a succession of others) taking additional loss, and the ultimate holder taking the final loss. Over the whole period of time, the result to the investing community in the United States represents what might be called a private capital subsidy of Chicago transit exceeding one-quarter billion dollars.”
(From the Economics 101 perspective, ”the investing community in the United States” also provided ”subsidy” in the form of “foregone” returns on capital invested in shares (“stock”). Such returns were in sometimes provided under “service at cost” franchises or legislation - but not in the majority of cases, including Chicago.)
Adjusting for a half-century of inflation from the time of settlement, the private-sector “subsidy” to Chicago transit passengers between 1907 and 1947, estimated by Schroeder, approaches $2.5 billion in today’s dollars.
We believe this amount is the proverbial “tip of the iceberg,” because Chicago accounted for roughly 10 percent of U.S. transit patronage during that era. This suggests, in very rough terms, that the total amount of “private capital subsidy” of U.S. transit might have approached $25 billion in today’s dollars during the same period.
Schroeder’s report is not without its critics. Tennyson describes it as a political document, intended to cover up the failures of CTA under public ownership. During the era of private ownership, Chicago politicians obstructed fare increases needed to offset increases in operating expenses. Near the end of the era of private ownership in Chicago, the Chicago Surface Lines received a fare of $0.08 per passenger. By that time, however, most large U.S. transit operators received $0.10 per passenger. The new CTA management increased fares sharply, replaced streetcars with motor buses and trolleybuses - and experienced the fastest postwar ridership decline among the largest U.S. transit operators.
In spite of this, we believe that Schroeder’s assertion of large private capital subsidies to transit by investors throughout the U.S. is correct. Underlying reasons and historic alternatives are subject to debate, but we think that the finding itself is robust.
We gratefully acknowledge the comments provided by Edson L. Tennyson, P.E., former Deputy Secretary, Pennsylvania Department of Transportation and former Deputy Commissioner for Transit Engineering, City of Philadelphia.
Schroeder, Werner W. 1957. Metropolitan Transit Research Study. Chicago: Chicago Transit Authority.
Last Updated on Wednesday, 23 November 2011 19:27