Four years ago, when the Metropolitan Transportation Authority faced a formidable budget shortfall, then-Governor David Paterson and the state Legislature agreed to provide the transportation authority with new sources of state revenues. The transportation authority also initiated a series of biennial fare and toll increases, a change from the sporadic fare and toll hikes of the past. Each of the two rounds of fare and toll increases to date has generated a combined 7.5 percent rise in revenues.

The second biennial increase was implemented in March and the authority’s current financial plan assumes another rise in fares and tolls to generate an additional 7.5 percent in revenue in 2015, even though the authority’s board of directors has not yet authorized any additional fare increases. Given that the continued fiscal challenges faced by the agency will likely result in future increases in fares, the NYPIRG Straphangers Campaign has asked IBO to estimate how much base and discount fares would grow over the next 10 years under the current pattern and to compare the increases that result with projections for fare increases that mirror the expected local rate of inflation over the same period.

Ridership typically declines, at least temporarily, following a fare increase, which means fares have to increase by more than 7.5 percent in order to yield a 7.5 percent increase in revenues. For the March increase, the MTA projected that an 8.4 percent fare increase would yield a 7.5 percent rise in revenue over two years. IBO has assumed that this relationship remains constant over the next decade and that the annual inflation rate will average 2.7 percent in the metropolitan area in 2013 through 2023. Among our findings:

The introduction of the MetroCard and free transfers and discount passes reduced the average fare paid by riders so much that after accounting for inflation, the typical amount paid per trip is 18 percent lower now than in 1996, when the average fare was at its peak. If inflation matches IBO’s projections and the recent pattern of 8.4 percent biennial increases continue, the inflation-adjusted average fare paid by subway and bus riders would return to the 1996 level in 2027.

The Metropolitan Transportation Authority (MTA) faces major fiscal challenges as it seeks to maintain a high level of public transportation service in the context of rising operating expenses and continuing capital needs. Fare revenues for New York City Transit (NYCT) and MTA Bus were around $3.8 billion in 2012, enough to cover around 55 percent of the almost $6.9 billion in operating expenses for the city’s subways and buses.¹

The MTA relies more heavily on fare revenue from riders than many other transit system operators. Using 2011 data from the Federal Transit Administration, IBO estimated that the overall farebox recovery ratio—passenger fare revenue divided by operating expenses—was 58 percent for New York City subway and buses, compared with ratios of 44 percent, 38 percent, and 36 percent for local transit in Chicago, Boston, and Philadelphia, respectively.² While the city’s transit system receives a significant amount of financial support from direct state and local subsidies and (more importantly) dedicated taxes, fares will continue to be a major source of revenue for the foreseeable future.

In recent years, budgetary pressures have led the MTA to seek more frequent fare increases. At the request of the NYPIRG Straphangers Campaign, IBO computed the likely trajectory of city subway and bus fares over the next 10 years, if the Metropolitan Transportation Authority were to continue the pattern of 7.5 percent increases in fare revenues every two years that it has followed since the end of 2010. IBO then compared those results with the projected rate of inflation over the same period.

In recent years, budgetary pressures have led the MTA to seek more frequent fare increases. As part of the 2009 agreement reached by Governor David Paterson and the state Legislature to provide new revenue sources for the MTA, there was an understanding that the MTA would implement biennial fare and toll hikes that each time would increase revenues by 7.5 percent. The arrangement covers all divisions of the MTA, including bridges and tunnels, commuter rail, New York City Transit, and MTA Bus. The MTA has generally raised fares and tolls within each division to generate 7.5 percent more revenue for that unit. The first of these increases took place at the end of 2010, followed by another round in March 2013. The July 2013 MTA Financial Plan assumes increases of 7.5 percent in 2015 and 2017.

IBO’s analysis looks at the impact of continuing these biennial increases at New York City Transit and MTA Bus through 2023.⁵ The MTA Board has not formally proposed or approved any future fare increases, and the level of fare hikes implemented will ultimately be determined by the authority’s financial condition in the coming years.

Commuter Incomes and the Fare. When determining fare increases, NYCT takes into account the interrelationships between different types of fares, as well as differences in the average income levels of customers who purchase each fare type. Not surprisingly, the authority has found that their lowest-income customers, those with a reported income under $25,000, are more likely than higher-income customers to pay fares that are not discounted because they require the smallest initial cash outlay.

In recent years, NYCT has gradually reduced both the amount of the volume bonus, and the minimum purchase required to take advantage of the bonus. For example, from February 2005 through March 2008, customers received a bonus of 20 percent on purchases of $10 or more, meaning that customers had to pay for at least five trips upfront. Following the most recent fare increase, the bonus has been reduced to just 5 percent, but the minimum purchase necessary to receive a bonus has been lowered to $5. The minimum purchase is now two trips at $2.50 each, with the bonus leaving a balance of $0.25 remaining on the card. In order to get one bonus ride, customers now have to put $50 on their pay-per-ride card, compared with just $10 during 2005-2008. The practical effect of this policy has been to blur the distinction between regular pay-per-ride and bonus pay-per-ride fares.

New York City Transit has found that the market share of the seven-day pass is greatest among customers with incomes of $50,000 or less, while the market share of the 30-day pass is greatest among customers with income over $50,000.⁶ Relative changes in the price between the two unlimited fare cards since 2003 have favored users of the seven-day pass.

While all fares have increased at a rate greater than the rate of inflation since 2002, there appears to have been some effort to lessen the impact on lower-income customers during recent rounds of fare increases, including the most recent one in March 2013. Prices for unlimited-ride passes generally grew faster than the base fare, and prices for a 30-day pass have risen faster than for the seven-day pass.

Using this new fare structure as the point of departure, IBO assumed that customer response would be similar in the future and applied biennial fare increases of 8.4 percent in 2015, 2017, 2019, 2021, and 2023 in order to generate a net increase of 7.5 percent in each case. As noted above, fares are rounded to the nearest increment of $0.25 for the base fare or $1 for the unlimited-ride passes. The resulting nominal fares are then compared with the projected rate of inflation, using IBO’s forecast of the consumer price index (CPI) for the New York metropolitan area.

The increases are significantly larger than the projected 30 percent rise in the cost of living as measured by the local CPI over the 10-year period—inflation is expected to average around 2.7 percent per year through 2023. If fares simply tracked projected inflation over the period, IBO estimates that customers in 2023 would pay $3.25 for the base fare, $3.10 for the discounted base fare, $38 for the seven-day pass, and $145 for the 30-day pass.

After adjusting for projected inflation, the 50 percent rise in fares implies a 15 percent increase in real (ie, constant 2013 dollar) terms. In constant 2013 dollars, which allows one to see the effect of the projected fare hikes after accounting for inflation, the projected 2023 base fare would be $2.87 in 2013 dollars, compared with the current level of $2.50. The discounted pay-per-ride fare would be $2.74 in 2023, while the seven-day pass would be $34.48, and the 30-day pass $128.71.

Fare Considerations. The fare innovations that New York City Transit introduced in 1997 (free transfers) and 1998 (volume discounts and unlimited ride passes) reduced the average fare so much that after accounting for inflation, the fare paid per trip is now 18 percent lower than in 1996. However, at the end of 2010, the MTA began a policy of biennial fare increases that are significantly above the projected rate of inflation. IBO was asked to model the effects on the fare of continuing this policy over the next 10 years. If inflation matches IBO’s projections (2.7 percent annually through 2023, and 2.6 percent thereafter), fare increases yielding 7.5 percent revenue gains every two years would return the inflation-adjusted average fare to its pre-MetroCard level by 2027.⁸