The Martin Luther King Jr.

East Busway
A Cost-Benefit Analysis

Overview
Pre-1978 History Port Authoritys CBA (1978) Revising Port Authoritys CBA Actual Results

History of the East Busway

The busway was part of the Early Action Plan (EAP) EAP consisted of 3 other projects

EAP was largest transit project in Pennsylvania ever Construction was to begin in 1971

Delay of the East Busway

Lawsuit delayed the project 6 years until 1978 Factors that increased project costs:

Oil

crises Spiraling inflation Right of way dispute with railroads

Construction was completed in 1983

Port Authoritys 78 CBA

Capital Costs Operating Costs Benefits Benefit Cost Ratio

Capital cost estimates grew during the delay

120 110 100 80 60 40 20 0 70 71 72 73 74 Year 1978 Dollars Nominal Dollars 75 76 77 78 40 33

Cost (Millions)

78 68

34 21 15 9

Port Authoritys Capital Costs

Project Costs
Original Project Cost of Delay (from inflation) Additional Cost of Property Over Estimate $20,000,000 $20,000,000 $6,800,000

Costs for Adjustments to Conrail

Cost to Accommodate Conrail Vertical Separation $36,900,000 $6,000,000

Improvement Costs
Neville Ramp Addition
East Liberty Station Improvements Additional Changes

$10,600,000
$3,200,000 $6,500,000

Capital Costs Total

$110,000,000

Port Authoritys Operating Costs

Per Year Maintenance Costs Total Operating Costs $700,000 $700,000

Port Authoritys Financing Costs

Per Year Busway cost: $110M at 5.6% for 30 years $6,160,000

Total Costs

$6,160,000

Benefits promised during the delay

Quantified Benefits:

$82.4M time savings for current passengers $29.4M savings for new passengers (time and auto costs) $21.8M in time savings for drivers from reduced congestion $11M in additional property tax revenue At the peak construction level, 670 workers will be employed on the PATways. Their earnings will total $13 million.

Non-quantified benefits:

provide benefits to job opportunities, urban renewal and economic development have been calculated in the hundredes of millions of dollars unquantifiable quality of life benefits" "intangible benefits of new mobility will not be measurable in dollars and cents" improve mobility in decaying neighborhoods, raising property values and inspiring renewal. inspire new construction of all kinds --- commercial, residential, and industrial. provide "new suburban employment, medical, and recreational opportunities to ghetto residents. enhance environmental quality, pollution reduced due to fewer cars on the road

Port Authoritys Benefits

Project Benefits
Operating Time Savings (97 hours per day @ $28 per hour) (=29,100 hours/year) Riders Time Savings $7,770,000 $ 819,000

(10 minutes per round trip for 54,000 daily riders)

(8633 hours per day @ $3 per hour) (=300 days/year)

Sub-Total
Less Annual Maintenance Cost

$8,589,000 $ 700,000

Total Net Benefits

$7,889,000

The Rise and Fall of 82 Ridership Projections

Projected Ridership

Thousands

100 80 60 40 20 0 46 60 74

90

80 Projected Ridership

1973 1975 1976 1978 1982

Port Authoritys CBA

Whats missing from Port Authoritys analysis?

Missing benefits No loan principal No NPV No discount rate The benefit-cost ratio may be inflated

Port Authoritys Benefit Problems

78 analysis indicates many potential benefits without any attempt at measurement:

Vehicle Safety

Emissions

78 analysis points to future benefits ($10 million/yr) for future riders without analyzing associated costs:
Service

Expansion Unidentified Improvements

Previously mentioned benefits gone!

Port Authority inflated BC ratio using annualized costs

Year 1978 1979 1980 1981 1982 1983 1984 1985 Total Time 0 1 2 3 4 5 6 7 -202,300,000 Total Cost -6,160,000 -6,160,000 -6,160,000 -6,160,000 -6,160,000 -6,860,000 -6,860,000 -6,860,000 214,725,000 Total Benefit 0 0 0 0 0 8,589,000 8,589,000 8,589,000 1.25 Ratios

Their BC ratio = 1.28

Used annualized values based on a representative year

This hides the fact that benefits do not start until five years after costs.
Total: BC Ratio = 1.06 Result: BC Ratio = 1.25

1.06

Their Way
Time Savings Operating Savings Maintenance Cost Annualized Benefits Finance Cost Annualized Costs Annualized BC Ratio 7,770,000 819,000 -700,000 7,889,000 -6,160,000 -6,160,000 1.28

Our Way
Time Savings Operating Savings Annualized Benefits Finance Cost Maintenance Cost Annualized Costs Annualized BC Ratio 7,770,000 819,000 8,589,000 -6,160,000 -700,000 -6,860,000 1.25

Adding the loan principal makes a difference

No principal payments: NPV = 12,425,000

With principal payments: NPV = -32,346,343

Assumes 0% discount rate over 30 years. Thus NPV = net benefits

Estimating a discount rate for 1978

Nominal yields on corporate AAA bonds 8% Nominal T-bill rates 7.57% Inflation 7.6% Corporate tax est.40% Individual tax est. 20%

Reasonable social or institutional nominal discount rates range from 7.5% to 13%
rz = Marginal Rate of Return on Private Investment AAA Corporate Bond Yields 8.00% Average corporate investment taxes 40% After tax nominal rate (bond yield/1-tax rate) 13.33% pz = Marginal Social Rate of Time Preference T-bill Rate of Return Average personal investment taxes After tax nominal rate (T-bill rate/1-tax rate)

7.57% 20% 9.46%

Discounting actually improves NPV

Rate Undiscounted Untaxed Rz Aftertax Rz Untaxed Pz Aftertax Pz 0% 7.57% 8.00% 9.46% 13.33% NPV -32,346,344 -31,284,651 -31,141,424 -30,635,167 -29,230,007

Discounting improves NPV because it reduces the present value of heavy loan payments during first few years

Net Discounted at T Benefits 1/(1+r)^t 13.33% -7,652,378 -7,652,378 0 1.00 -7,652,378 -6,752,297 1 0.88 2 3 4 5 6 7 8 -7,652,378 -7,652,378 -7,652,378 236,622 236,622 236,622 236,622 0.78 0.69 0.61 0.53 0.47 0.42 0.37 -5,958,084 -5,257,288 -4,638,920 126,570 111,683 98,546 86,955

Textbook problems usually assume costs occur at T=0, but if costs happen later, they get discounted too.

Additional problems with Port Authoritys analysis

Funding too aggregated Economic impact of taxes ignored Time savings understated Option value ignored Accounting for future inflation ignored No recognition of uncertainty

Funding was more complicated than a single bond issue

10%
$88M $11M

federal grants

10%

in state contributions local funding

80%

$11M

Federal State Local

How were funds raised?

Locally, Port Authority intended sell bonds

(30

years, @5.6% payment=$765K) Likely serviced debt with county property taxes

State funding: 50% income and 50% sales taxes Federal funding: income taxes

When were the funds raised?

State and federal funding to be appropriated each year over the construction project (4-5yrs)
Local funding serviced over 30 years

Distribution of Funding
25% 20% 15% 10% 5% 18% 21% 22% 21% 18%

0% Y1 Y2 Y3
Construction Year

Y4

Y5

How much did they cost to raise?

Amount Local property taxes State income taxes State sales taxes Federal income taxes 22,957,134 5,500,000 5,500,000 88,000,000 Rate 17.0% 25.0% 43.5% 43.5% Total METB 3,902,713 1,375,000 2,392,500 38,280,000 45,950,213

With METB and more realistic funding assumptions NPV gets worse, except for undiscounted case

Rate Undiscounted Untaxed Rz Aftertax Rz Untaxed Pz Aftertax Pz 0% 7.57% 8.00% 9.46% 13.33%

NPV -32,346,344 -31,284,651 -31,141,424 -30,635,167 -29,230,007 Undiscounted Untaxed Rz Aftertax Rz Untaxed Pz Aftertax Pz

Rate 0% 7.57% 8.00% 9.46% 13.33%

NPV 29,317,653 -68,520,605 -70,579,163 -76,261,658 -84,552,731

Previous Assumptions

With realistic funding and METB

Millions Net Benefits (Bens - Costs)

15

5
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

-5

-15

Cost frontloaded

-25

Reduces interest expense and total costs

Thus undiscounted NPV is higher Discounting reduces benefits significantly
Year
Simple funding no METB Realistic funding w/METB

-35

-45

Port Authoritys benefits could have been higher

Project Benefits
Operating Time Savings (97 hours per day @ $28.00 / hour) (29,100 hours/year) Riders Time Savings 18.5 minutes per round trip for 34,300 daily riders 10,617 hours per day @ $3 per hour, 256 days/year $8,100,000 $ 819,000

Sub-Total
Option Value
(Assumes Bus Commuters to Car Commuters 1:1) (6 trips per driver a year @ $0.57/trip)

$8,919,000

$ 184,700

Total Measurable Benefits

$9,103,700

Port Authoritys Benefits

Project Benefits
Operating Time Savings (97 hours per day @ $28 per hour) (29,100 hours/year) Riders Time Savings $7,770,000 $ 819,000

10 minutes per round trip for 54,000 daily riders

8633 hours per day @ $3 per hour 300 days/year

Sub-Total
Less Annual Maintenance Cost

$8,589,000 $ 700,000

Total Net Benefits

$7,889,000

New benefits improve NPV, but not much

Rate Undiscounted Untaxed Rz Aftertax Rz Untaxed Pz Aftertax Pz 0% 7.57% 8.00% 9.46% 13.33% NPV 29,317,653 -68,520,605 -70,579,163 -76,261,658 -84,552,731 Undiscounted Untaxed Rz Aftertax Rz Untaxed Pz Aftertax Pz Rate 0% 7.57% 8.00% 9.46% 13.33% NPV 42,185,153 -64,261,841 -66,540,683 -72,867,239 -82,314,537

Inflation/Uncertainty
-64 -82M NPV? Why bother!

Busway Opened in 83

Actual results: the good news

Capital costs were less than 110M

75

to 101M in 78 dollars

Maintenance cost 200K rather than 700K People reported saving time by riding the busway

Bad news: ridership projections were way off

Projections
100000 90000 Ridership/ Weekday 80000 70000

Performance

60000
50000 40000 30000 20000 10000

Thus ridership benefits were overstated by about 3.6M a year

Assuming Port Authoritys assumptions about time savings were true except for ridership, having 30,000/week rather than 54,000 per week cuts time savings in half!

Adding Insult to Injury

In 1978 Moodys downgraded the countys rating from A-1 to BAA-1.

Standard & Poors did not follow suit, but bankers (unsurprisingly) insisted on the higher coupon rate. Pitt. Press reported a sale of $31M in county bonds at the rate of 6.47% (not 5.6%). A portion was to go to the East Busway.

Conclusions
Promises change when you ask for money Port Authority CBA wholly inadequate Even w/ other benefits, hard to say the busway was worth it In 78 inertia won again Still going however

Look out! Here comes the East Busway Extension

Look at these great benefits!

The extension will attract new customers to the system 13,000 riders (4,000 new) Environmental benefits Decreases travel times Eases traffic congestion

Cost: $62M

Adds a decorative green space along most of the Busway corridor Construction is rehabilitating desolate and deserted areas. Provides, at no cost to community residents, various neighborhood enhancements, such as the rehabilitation of the historic Edgewood Train Stationamong many other improvements.

Thank You!

The busway did save time for those who rode it:

Routes diverted to the busway routes saved 8 minutes travel time during the morning, 3.5 minutes during the evening.
EBA Passengers (main new route) reduced travel time by 21-24 minutes. On board survey showed that both new and diverted route passengers perceive large travel times savings since they started using the busway. Transferring perceived to be easier, bus service deemed more reliable

Capital cost results: looks to be under '78 budget, but nobody ever bragged about it
180 160 140 156

Cost (Millions)

120 110 100 80 60 40 20 0 15 9 34 21 40 33 78 68

115 101 75

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 Year Nominal Dollars 1978 Dollars