Posted by Alan Treffeisen, January 11, 2010

The uproar over the Metropolitan Transportation Authority’s plan to discontinue free MetroCards for students boils down to a couple of key questions: How much do the free rides really cost the MTA, and if they are to be provided, how to cover that cost? As is often the case, the answers are more complicated than the questions.

Around 450,000 school children in New York City use MetroCards that allow them to make three bus or subway trips, each with a free transfer, every school day. Roughly 58,000 students use MetroCards that permit three half-fare bus trips, each with a free transfer. The fare cards are distributed according to a student’s grade and distance of school from their home.

From 1995 up until this year, the city and state each contributed $45 million toward the cost of student MetroCards, with the MTA absorbing any costs above $90 million. Inflation has eroded the value of that $90 million by about 40 percent.

This three-way financing arrangement began when then-Mayor Rudy Giuliani suspended a $128 million per year city subsidy for the transit passes in October 1994. (The state had been reimbursing the city for $69 million of that amount, so the actual cost to the city had been $59 million.) While New York City has continued to contribute $45 million a year, New York State has now cut its contribution from $45 million to just $6 million, leaving the MTA to shoulder the rest of the student fare cost. Citing its own financial difficulties, the MTA says it can no longer afford to do so and wants students to pay half fare on subways and buses next school year and full fare in the school year that begins in September 2011.

But how much do those free MetroCards really cost the MTA? Back when Mayor Giuliani derailed the old subsidy arrangement, the MTA estimated the annual cost to be $135 million—with the city, state, and transportation authority splitting the bill evenly.

If the city and state payments had kept up with inflation they would now be around $72 million each. If the payments had increased in line with the MTA’s estimate of how much it costs to provide the students with MetroCards, they would have risen even more. The MTA currently pegs the cost of student MetroCards at over $250 million, meaning that a one-third share would be more than $83 million.

There are different ways one could calculate the school fare program. One way would be to compare the reimbursement that the MTA currently receives for the program with the revenue that it would receive if students (or the city and state on their behalf) paid the regular transit fare. This foregone revenue can be thought of as the cost to the MTA under the current arrangement, and appears to be how the transportation authority derives its estimate. Of course, if students or their families were responsible for paying the full fare, some would switch to schools within walking distance, or look for alternate modes of transportation.

Many economists would take a different approach, one that looks at the marginal cost of providing transit service to school children. In other words, what additional cost does the MTA incur by providing the service? Mayor Giuliani said in 1994 that there was no additional cost for transporting school children, since the trains would be running anyway. Untrue, responded the MTA, saying that it runs extra buses and trains, particularly during the morning commute, specifically to accommodate the additional passengers.

Regardless of how the cost is calculated, there’s also the question of who’s going to pay for it. Though the state and MTA have shared the cost of free- and reduced-cost student fares with the city in the past, some sections of state law appear to legally exempt the state and MTA from much of the responsibility.

Under state education law cities such as Buffalo and Rochester can be reimbursed by the state for up to 90 percent of the cost for the transit passes they provide to students. But this same law excludes cities with a population of more than 1 million—and there’s only one—from eligibility for the reimbursement. State law also makes it clear that education funds cannot be used to reimburse New York City for payments to the MTA for transportation costs.

State public authorities law, which covers the MTA, appears to put the legal onus for covering the cost of free or reduced fare passes on the city. The law says that if a Mayor requests a lower fare for some riders, it’s up to the city to pay for it. Of course, that wouldn’t prohibit the state and MTA from continuing to help out for the good of the city’s students.