Dedicating Revenue to the Capital Needs of WMATA

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Madam Chairperson and members of the Committee, thank you for the opportunity to testify on the recommendations of the panel on WMATA funding.

I believe that the major conclusions of the panel are hard to dispute:

1. Our subway system is extremely popular. It is well designed, clean, relatively free of crime, and, with appropriate support, can remain reliable.
2. The popularity of the system is leading to increased demand, and ridership is expected to increase more than 2 percent per year over the next 10 years.
3. This creates a pressing need for increases in capacity at the same time that the system is aging. As equipment threatens to become less reliable, it is vitally important to finance additional capital maintenance for both the subway and the bus system.
4. The current system for locally subsidizing WMATA is dependent on annual appropriations. This creates serious problems for financing capital investment. It leads to uncertainty for planners and makes it more difficult to develop an efficient long-term investment strategy. Suppliers of materials and equipment are likely to charge more if future orders are subject to the availability of appropriations. Credit rating services give bonds a less desirable rating than they would if a more reliable source of revenues were provided.

Faced with these findings, the panel strongly endorsed having a dedicated funding source for the capital needs of our system. Our system is unusual when compared with most other mass transit systems in the country in that it does not have a significant source of dedicated funding.

There was some debate on the panel regarding the appropriate amount of dedicated funding. Some panel members would have used dedicated funding to cover a substantial portion, if not all, of the current operating subsidy as well. However, a solid majority felt that this would go too far, and I believe that there is considerable merit in having the oversight that goes along with having annual appropriations cover a substantial share of the operating subsidy.

In the end, we defined a funding "gap" that equaled the projected capital needs of the system plus a small portion of operating costs minus the funds already pledged for the Metro Matters program. It was assumed that the bulk of operating costs would be financed by fare revenue that would continue to grow sufficiently to continue to cover 57 percent of operating costs, and by annual appropriations that would grow with economic activity in the region. It must be emphasized that these assumptions imply a very substantial and growing financial contribution to WMATA by riders and local jurisdictions. This point is important in discussing an appropriate payment from the federal government.

The defined gap over the next 10 years is $2.4 billion. In discussing how that gap might be filled with a dedicated revenue source, the panel analyzed a wide array of options: sales taxes, gasoline taxes, payroll taxes, parking taxes, variations on property tax increases, and congestion fees.

A majority of the panel favored a sales tax. The base is broad, a collection mechanism is in place, and visitors will bear some of the burden. We thought this appropriate because visitors benefit directly by riding the system and indirectly from the reduction in traffic congestion that it provides.

If a sales tax is used, the gap can be covered by a rate of one-half of 1 percent if there is no additional contribution by the federal government, or by one-quarter of 1 percent if the federal government were to cover one-half of the gap that we identified. We believe that a substantial federal contribution is warranted because of the benefit that the federal government derives as its employees use the system. A well-functioning mass transit system will also be crucial if the region is again hit by a terrorist attack or is afflicted by some other emergency.

I would like to conclude with two crucially important points. First, the panel's main goal is to establish a dedicated revenue source. Although a majority of the panel favored dedicating a portion of the sales tax, it felt that the choice of a dedicated tax was very much a secondary issue. There would not be strong objections from the panel if some other funding source were chosen. Second, dedicating a portion of a tax is quite different from increasing that tax. For example, the District might choose to finance the dedication of a portion of the sales tax, not by increasing it, but by increasing some other tax, reducing the growth of some expenditure, or by applying a portion of a budget surplus to that purpose.

Thank you again for inviting me to testify.

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