Paying for a great transit system

Excerpt from City Lab, Jan 2019

NYC MTA’s capital costs are pegged at $60 billion to cover a maintenance backlog.

That sounds like a lot, and it is. But this city had a gross metropolitan product of roughly $1.7 trillion dollars last year. Surely the most robust urban economy in the world could scrounge up the cash to fix the engine of that economy—its transit network—if it wanted to. Right?
The answer is yes. There are all kinds of ways New York could better harness its massive wealth to pay for critical infrastructure. Here are five possibilities, some more politically feasible than others—plus some reasons why the city has so far refused to implement them on a wide scale.

Congestion pricing

In 2017, New York’s Regional Plan Association, a nearly century-old planning group, released its Fourth Regional Plan, a massive document that lays out a plethora of recommendations for improving the tri-state region’s infrastructure. Among them are several methods by which New York City could better pay to maintain its transit network. Those fixes fall into three categories, said Christopher Jones, RPA’s senior vice president and chief planner.

“The first is just from the transportation system itself,” he said. “Predictably, that’s charging auto users for the true cost of what they really add onto the system.”

That’s where congestion pricing comes in. By charging motorists a fee (the RPA proposes $11.52 for cars and more for trucks) to enter the most congested parts of Manhattan during rush hour, the city could use this policy to raise cash to shore up the subway.

This is probably the most viable revenue source in the shorter term. In recent days, a task force responsible for coming up with solutions to sustain the MTA unanimously endorsed the idea of congestion pricing (and not much else), as did Governor Andrew Cuomo, who enters his third term in January with full party control of the state legislature. But lawmakers from suburban and rural regions, as well as outer boroughs in New York City, have stymied previous efforts to pursue congestion pricing, which was first proposed by then-Mayor Michael Bloomberg in 2008.

It’s been estimated that the policy would generate $810 million annually—that’s a lot, but it’s only a fraction of the $60 billion needed by the MTA in the coming years. Where will the rest come from?

Land value capture

A second funnel to flow a lot more cash to the subways would be to capture more of the city’s land and economic value. According to the New York Building Congress, New York is in “the midst of its second and most robust building boom of the 21st century,” on track to break records this year with $61.8 billion in construction activity.

It would work like this: If the MTA can demonstrate to New York’s commercial and business interests that upgrading the subway system—through renovated stations, upgraded signals, or other enhancements—would drive up property values or generate new development, then a portion of those gains can taxed through various land value capture (or LVC) mechanisms to benefit the public good (in this case: a better subway system). In other words: the city could reap some of the profits from real estate development spurred by better transit to—voilá!—pay for better transit. After all, below 60th Street in Manhattan, just being near a subway station adds $3.85 per square foot to overall value, according to one estimate. Land value capture means making the best of that fact for the public.

Consider Penn Station, the Western Hemisphere’s busiest transit hub. If the MTA were to renovate it in accordance with RPA’s plan—moving Madison Square Garden to a different location, routing Metro North through this hub, adding the new Gateway Tunnel for New Jersey Transit, and building a much larger terminal to better serve this massive daily ridership—then the city should expect a sea of new restaurants, retail, office space, and apartment buildings, Jones said. Capturing some of that windfall could be a source of revenue for the project.

The tricky thing with using land value capture to fund transit is that the majority of New York’s subway system has been here for over 100 years. So the wealth generated by the stations’ existence has long been scavenged—in essence, that’s what built New York City. It’s not like Taiwan, Beijing, or Hong Kong, where new transit systems have been sculpted in the last quarter-century, since that value only recently just amassed.
Commuters use a staircase to transfer from the L train platform to the Union Square subway station. (Mark Lennihan/AP)

Still, it could work by building out New York’s system, which hasn’t seen a major expansion away from its hub-spoke model in decades, said George “Mac” McCarthy, the president of the Lincoln Institute of Land Policy, who has studied this issue in depth. “Adding a transit line like the Second Avenue Subway would definitely have an impact on land value, in line with the corridor,” he said. Since Phase I of that line opened on New Year’s Day in 2017, dozens of rentals, condos, and retail space—with just one development alone going for around $300 million—have opened or are planned along Second Avenue. “What was the overwhelming encumbrance of that area? It was the lack of mass transportation,” one broker told The New York Times six months after the three new stations opened.

Hudson Yards is another example of how much LVC could raise for New York City. In order to develop Hudson Yards on Manhattan’s Far West Side, which is now home to New York’s newest skyscrapers, the Bloomberg administration went all in on the $2.4 billion price tag of the 7 train line extension, which brought subway service there for the first time. After a 60-block rezoning of the area and a city-issued bond to pay for the project, the city was able to scrounge the funds through a fee on developers to build past a certain height, paid compensation to be tax exempt, and the selling of the MTA’s air rights to a major developer. According to an NYU Wagner study, the developer bonus is expected to collect well over $500 million by the end of 2018, and the payments in lieu of taxes (PILOTs) are expected to rake in $112 million annually once most major projects at Hudson Yards are done in the next few years. (The 7 train extension opened in 2015, and other parks and amenities are now planned for the area.)

As it is, a bill put forward by Cuomo that first made headlines last January seeks to create “special transit improvement districts” around new transit projects valued above $100 million, like the $6 billion Phase II of the Second Avenue Subway, which will stretch into Harlem. In this case, an assessment of the properties within a specified boundary would be done before and after the project, and the difference would be taxed, with 75 percent going to the MTA and 25 percent to New York City. The money raised, it is said, would go to subway repairs, and projects.

The bill was criticized by the Real Estate Board of New York, which represents some of New York’s wealthiest developers, and City Hall, whose officials said that having building owners pay was “not the way” to address the MTA’s issues. But it could see new life in a Democrat-controlled state legislature.

Rezonings

Another form of land value capture, but one that really deserves its own category when talking about New York City, is rezoning.

The de Blasio administration’s ambitious affordable housing goal to create or preserve 200,000 below-market-rate apartments by 2022 includes two forms of this LVC mechanism. The first is mandatory inclusionary housing or zoning, which is when the city permits developers to build high-density apartment buildings in once-low density areas, and leverages the additional profits raised from that to require (relatively) affordable housing units be built within them. And the second is more big picture: rezoning an entire neighborhood for more density, in exchange for badly needed community investments. The current administration has pursued 15 rezonings citywide, as part of the mayor’s $41 billion affordable housing plan.

How is this connected to transit? The rezoning of a particular neighborhood could include mechanisms to capture the profit that new development would bring, in order to renovate nearby nodes or fix service as a community benefit. For example, Brooklyn’s Gowanus neighborhood, where real estate speculation is rampant, is being considered for an upzoning, which would allow developers to build 22 stories up in some areas. Theoretically, that could be leveraged to improve signals on the F and G lines nearby, or rebuild stations.

Another example of what that could look like lies with Grand Central Terminal. When the de Blasio administration rezoned the 73-block radius of Midtown East, significant attention was paid to the old station, which is smack dab in the middle of the area and can expect to see a boost in visitors. To build One Vanderbilt Avenue, which will be the fourth-tallest skyscraper in the city, a developer paid $220 million to the MTA, two-thirds of which will go to improve the issue of overcrowding in and around the main terminal. It was the largest private investment in MTA infrastructure in the city’s history.

“This is something we would have not been able to do with public funds, given all of the demands on the MTA and all of the demands on the city,” de Blasio said at the time, “but something we could do through the right kind of development.”

Pied-à-terre tax

Another route: a possible pied-à-terre tax for New York City’s abundance of empty second homes.

As the New York Daily News reported in 2018, around 75,000 units in sleek high-rises are pied-à-terres, or second homes that lie vacant for much of the year, owned by wealthy investors who purchase properties and duck taxes by not living here full-time. A tax on second homes, such as the one implemented in Paris last year, could be another source of revenue for the subway. A study has showed that the tax would raise $665 million a year if implemented, and that is a conservative estimate.

Robert Cervero, a transit funding expert and retired professor of UC Berkeley who has studied metro systems all over the world, said that a pied-à-terre tax could help level the playing field between immensely wealthy property owners and subway riders, most of whom make salaries of less than $35,000. “There is so much concentrated wealth here,” Cervero said. “The fairest and most efficient way to radically and transform the transit offerings is to pass on charges to the beneficiaries—the landowners.”

Subway station sponsorships

Then there’s the idea of allowing corporations to essentially “adopt” subway stations in order to pay for increased maintenance. In June 2017, as part of the state’s ruminations about how to pay for the MTA’s ballooning capital and debt costs, Cuomo announced that up to 72 subway stations citywide could be eligible for subway station sponsorship.

According to his office, the way it would work is that a selected corporation would pay $400,000 per year for stations in Manhattan, or $200,000 a year for outer borough locations. Another method would be a $250,000 fee for a number of partners to pool their funds together to fix up a station. (According to Cervero, a version of this partnership has emerged before: Commercial and residential buildings have paid for subway station enhancements, in exchange for visibility. More recently, a high-rise in downtown Brooklyn paid for an adjacent entrance as a perk to residents.) Naming rights have also been floated as a possible fundraising scheme.

But adopting a subway station at a time when the system itself is the constant subject of negative headlines may be a tough sell. So far, only one developer has expressed interest in adopting a station as a result of Cuomo’s push, Politico reported in late October. One joint venture instead resulted in the “Transit Innovation Project,” a public-private partnership to devise innovative tech solutions to the subway’s woes that has raised $2 million. Earlier, a push to sell naming rights at stations only had one buyer, too—the Barclays Center at Atlantic Terminal.

What’s beginning to take shape

In some ways, New York City is in an uniquely difficult position to improve its mass transit.

In addition to being an older city that is largely built up already, New York’s transit agency is less autonomous than those in Paris or London; the state-run MTA answers to upstate, which has historically been resistant to many of the mechanisms discussed here (and altogether less hyped about funding the agency): Governor Cuomo and Albany have been criticized for “raiding” the MTA’s coffers of millions of dollars a number of times to pay off its ballooning debt, and other priorities. The last five-year capital plan of $32.5 billion was largely focused on expansion projects that the governor wanted, rather than the actual system itself.

What’s more, the city and state will have to convince the titans of Wall Street, tech giants like Google or Amazon, and wealthy real estate owners that it needs to help fund a system that is used by the rest of us, as it were. That will never be politically simple. But there is a good reason why Amazon cited transit as a major factor behind their decision to land HQ2 in Long Island City: The subway is a supremely necessary amenity for employers.

And things may be beginning to shift. It is telling that Kathryn Wylde, the head of the Partnership for New York City, an influential group of top CEOs, sat on the MTA Sustainability Advisory Working Group, and publicly recognizes the subway system’s collapse is the biggest threat to the city, and businesses here. (A recent New York Times headline: “Maybe It’s Not the Taxes That Scare off Businesses But Failing Subways.”)