How to Cut Fares to the New Airport (IP-16-1993)

October 20, 1993

Issue Paper

By Jack McCroskey

Sixteen dollars for a one-way trip to Denver's new International Airport?

That's what RTD says it needs to cover costs. But $16 seems much too much.
It's more than many travelers can afford, and more than others will tolerate.
Virtually everyone, including RTD, agrees the proposed fares ought to be
reduced. The tough question is how to go about actually delivering the lower
fares everybody wants. By increasing subsidies? Restructuring service?
Cutting costs?

In this Issue Paper, we consider each possibility, and conclude that the cost-
cutting approach is by far the best approach to take. It is doable; it is
inexpensive; and it will work out better than the other approaches with regard
to travel time and customer convenience.

1) Higher subsidies might be a way to go, but where on earth would the
money come from? Trying to raise taxes in today's political climate is like
trying to raise bananas on the top of Pike's Peak. Ridiculous.

Equally futile is the idea of stealing RTD resources away from other people in
other places. What such attempts will surely do is stir up a lot of territorial
battles, and should the resource shifts actually take place the results could
prove even worse: A weakened transit system, with customarily well-
patronized routes diminished and covered with dust.

2) Restructuring airport service seems another possibility. The idea here

would be for RTD to back away from its current plan--which includes proposals
for new direct routes to the airport from six different locations around the
metropolis. The substitute plan, as proposed by Rocky Mountain News
columnist Gene Amole, calls for all (or almost all) airport service to begin and
end at old Stapleton.

Not an altogether bad idea, certainly a money saver, but one carrying a
heavy burden of off-putting side effects. For one, a great many potential
riders are going to rebel at the notion of having to transfer at old Stapleton
before they can get to the new airport. Some are going to wind up deciding
that buses cause more trouble than they're worth. Patronage will almost
certainly shrink--and it could sink to a level where the cost per individual
passenger climbs above the original estimates.
So as sensibly conservative as the idea may seem at first, severely restricted
airport service will over the long run self-destruct. What's more, such
deplorably second-rate service really isn't necessary if RTD handles the
problem in the right sort of way. And that's the way it can be handled, thanks
in part to Douglas Bruce and the Taxpayers Bill Of Rights.

3) Lower costs, lower by 40 to 50 percent, are not only possible, but can be
achieved without down-grading service in either quantity or quality, or in
geographical scope. Another plus: RTD won't have to lay anybody off.

The task won't be easy, but neither should it prove overwhelmingly difficult.
What RTD officials will need most of all is a touch of determination. Oh yes,
and a willingness to take a second look at Amendment 1. While at this writing
the politically correct view of the amendment remains one of fear and
loathing, the economically correct view is yet to be recorded. Until it is,
government officials would be wise to keep an open mind. And wiser still,
perhaps, to try enlarging upon some of the themes and apparatus contained
therein.

Here is how the "lower-cost" proposal, using some of these materials, would
work:

First, RTD should separate its airport routes from its regular service, creating
what the Colorado State Constitution (after Amendment 1) calls a
"Government Enterprise," and what this Issue Paper will henceforth refer to as
"Skyride." Such spin-offs are legally permissible when: a) They are owned by
governments with bond raising capability; and b) They raise 90 percent or
more of their own dollar spending.

Yielding a variety of benefits, this strategy will guarantee that "Skyride"

retains its self-supporting status, and avoids dipping into the funds RTD needs
for multitudes of other purposes. This strategy can also play a key role in
overcoming some potentially disruptive disputes between RTD and its labor
union (more on this later). And overall "Skyride" is likely to produce superior
transit service. Partly because it will be smaller and easier to manage, and
partly because it can constructively delegate broader responsibilities to
employees with on-line duties.

After establishing "Skyride" as an independent unit, RTD should contract out

all airport driving to private businesses. The word for this, of course, is
"privatization"--an awkward and somewhat misleading term, but one that is
rapidly gaining respect within state and local governments.

To avoid confusion in this Issue Paper, here are four brief notes on how the
author understands the concept:

In America, as distinct from Europe, where it conveys something far grander,

"privatization" signifies very simply the hiring of business firms to produce and
deliver public goods and services. It has nothing to do with closing the public
schools, or selling the public parks, or with fobbing off the young and old onto
the streets.

What the word connotes is greater productivity, with the gains seen as
stemming from the skills and incentives belonging to private enterprises. The
programs themselves, whatever their social or economic significance,
continue to belong to government. There exists no implied suggestion of
abandonment, either right away or later.

Under privatization, RTD's elected board of directors retains control over the
total amount and all operating features of public transportation in the
metropolitan region. The board calls all final shots on the frequency, the
location and scope of service. Also on the level of passenger fees and
charges.

If you don't like the contraptions that look like school buses now coursing
through the district, you are by no means alone. But you shouldn't blame
these awful looking vehicles on privatization. Blame RTD's board of directors
for letting themselves be euchred into signing a poorly conceived contract
cooked-up by a blinkered RTD purchasing department. An embarrassing lapse
but one that should not and need not be repeated.

After four years of working with more than 20 percent of its service
contracted out to private providers, RTD has accumulated an invaluable store
of evidence relating to comparative safety, on-time performance, driver
courtesy and customer acceptance. The conclusion? Private companies usually
deliver the goods as well as RTD itself, and sometimes a little better.

Then why all the sound and fury? If the everyday product stays about the
same, why not just drop what has become such a hot potato? Because
privatized service is cheaper than the product provided by RTD. Much, much
cheaper.

Mounting evidence on this score comes from around the nation. One can count
better than 100 studies reaching this important point: Private firms provide
services at lower costs than government agencies. This conclusion holds true
for street cleaning, trash collection, housing construction, rail-road track
repairs, school-bus operations--and the list runs on and on. Governments
everywhere are consequently opening their doors to privatization, both the
concept and the practice.

Turning from the general to the particular here at RTD in Denver, what
bottom-line savings can be expected through privatization? The answer is
about 45 percent. An astonishing result--a number so extraordinary large it
would surely fail all plausibility testing were it not for the fact that RTD has
carefully documented its experience.
Beginning with the passage of Senate Bill 164 in 1988, the Colorado General
Assembly has asked RTD on several occasions to undertake an objective
analysis of how privatization is working. In response, and using tight
competitive-bidding procedures, RTD hired KPMG-Peat Marwick to conduct the
inquiry. Peat Marwick is a national consulting and accounting firm of high
reputation.

The first study, completed in December 1990, vividly portrayed the possibility
of huge savings in the making. But because the study covered less than 12
months of actual operations, several board members (including the author)
believed it was too short to allow full evaluation.

Completed in November 1991, the second study dealt with a longer time
period, and vigorously reinforced what the first study had only intimated.
Owing to privatization, RTD has chalked up very substantial savings.(1)
Observations since then indicate that the savings have continued, and maybe
even grown a bit.

The fundamental comparisons made here are between a) What RTD would
have had to spend in order to run the approximately 20 percent of its service
that if contracted out, and b) What RTD paid its contractors (Mayflower,
Laidlaw and ATC) to run the same service over the same routes. The
difference between the two--in-house versus outside contractors--constitutes
the savings or loss.

As in most inquiries of this type, these studies generated a bucketful of

statistical information--statistics that sprout and spread in sometimes
bewildering ways. Two of the major discrepancies in the numbers here arise
from the differing concepts of 1) Incremental costs, and 2) Fully allocated
costs.

1) Incremental costs, also called cash-basis costs, are attuned to the short
run. They ignore changes in overhead and depreciation and other items that
cannot be quickly adjusted when output changes. Because governments find it
so difficult to react promptly to developing events, incremental costs provide
the most meaningful measurements when existing service undergoes
privatization.

2) Fully allocated costs. But when ascertaining the savings for new service--
such as that to Denver International Airport (DIA)--fully allocated costs clearly
make the best yardsticks. Oriented toward the long run, these costs include
such things as administration and fixed assets. These can be terribly difficult
to cut back once in effect, but it is relatively easy not to create them in the
first place.

Using fully allocated costs, as seems appropriate for new service, privately
operated service ran about 45 percent less in dollar terms than RTD operated
service.(2)

What all this adds up to is that the $16 proposed fare for a single one-way trip
to DIA can drop to a more reasonable $8. Fares for seniors and disabled can
fall from $8 to about $4. The Table below gives other comparisons.

While all these price cuts will no doubt delight the great majority of citizens,
there are those who will complain. Among them: Some RTD middle managers,
a few of whom have built up monumental "we-they" attitudes toward outside
contractors.

But the biggest stink is sure to be raised by the Amalgamated Transit

Union(ATU), Local 1001. Union leaders will insist that all new service should be
run under their aegis; and, indeed, will probably argue that this is what their
contract calls for. Airport service, however, will operate under new auspices
(a government enterprise called "Skyride") and will not come under existing
contracts. But even if the courts were to rule otherwise--and courts have been
known to render curious opinions--the service can be contractually replaced
within three to six months.

Remember, service to DIA is brand new. So privatization will involve no

layoffs of present employees. Consider also this billfold-busting differential:
Operating buses with ATU members costs RTD, and hence taxpayers, $24.44
per hour; private contractors operate these same buses in the same manner
for $14.20 an hour. A whopping differential of $10.24 per hour for steady,
capable drivers doing exactly the same job and doing it equally well.(3)

When this enormous gap narrows, the public may want to reconsider.
Unfortunately the possibility of this happening is today almost nonexistent.
After decades of ruling the other way, the Colorado Department Of Labor And
Employment in collaboration with the Colorado Supreme Court decided in
1992 that RTD labor negotiations must go to mandatory arbitration. What this
means in practice: The RTD board of directors, together with the citizens who
put them in office, no longer have anything to say about the wages and fringe
benefits paid to union workers. Some unknown arbitrator, with zero
responsibilities to either taxpayers or riders, will be making these wage-
benefits decisions from here on.

So take another glance at the accompanying Table. You may even want to cut
it out and paste it in your hat. That way you can mull it over on some future
jaunt out to Denver International Airport.

Is the fare you're paying $16 or $8.80? The choice belongs to you, and to RTD
officials.

Proposed Bus Fares to Denver International Airport

Regular RTD Skyride Service(5)
Service(4)
Single one way $16 $8.80
Single round trip $24 $13.20
Proposed Bus Fares to Denver International Airport
Regular RTD Skyride Service(5)
Service(4)
Single one way $16 $8.80
Single round trip $24 $13.20
Senior, disabled, $8 $4.40
children 6-12, one
way
Senior, disabled, $12 $6.60
children 6-12, round
trip
Employee monthly $89 $48.95
pass
Eco pass holders, $12 $6.60
Round Trip

Endnotes

1. A report prepared by a Professor of Planning at Columbia

University, New York City, reaches diametrically opposite
conclusions. Commissioned by the Amalgamated Transit Union
(ATU), this report, in my opinion, is lacking in intellectual rigor. I
will not comment on it further. If you would like copies of either
this report or the Peat Marwick study, you might want to contact
either RTD or ATU.

2. Less retained fares which are not usefully included for this
analysis.

3. Denver RTD Privatization Performance Update, KPMG Peat

Marwick, November 1, 1991, p.12b.

4. Regional Transportation District data presented at public

forums.

5. Jack McCroskey computations, based on 45% cost savings for

RTD fares.

Copyright 1993 and 1997- Independence Institute

INDEPENDENCE INSTITUTE is a nonprofit, nonpartisan Colorado
think tank. It is governed by a statewide board of trustees and
holds a 501(c)(3) tax exemption from the IRS. Its public policy
focuses on economic growth, education reform, local government
effectiveness, equal opportunity, and the environment.

PERMISSION TO REPRINT this paper in whole or in part is hereby granted,

provided full credit is given to the Independence Institute.

TOM TANCREDO is President of the Independence Institute.

DAVID B. KOPEL is Research Director of the Independence Institute.

JACK MCCROSKEY was an RTD Director from 1983 through 1992 and also
Chairman of the RTD Board during 1991 and 1992. He is a Senior Fellow in
Tax Policy with the Independence Institute.

Nothing written here is to be construed as necessarily representing the views

of the Independence Institute or as an attempt to influence any election or
legislative action.
Please send comments to Independence Institute, 14142 Denver West Pkwy.,
suite 185, Golden, CO 80401 Phone 303-279-6536 (fax) 303-279-4176
(email)webmngr@i2i.org

Copyright 1997