BY ROHIT T. AGGARWALA
Eno Board of Advisors, Special Advisor, Bloomber Philanthropy

United States public transit faces a paradox: it is increasingly popular but constantly in fiscal crisis. Between 1995 and 2009, transit usage grew 34 percent, compared to a population increase of 15 percent. But this growth in ridership has not made transit more insulated from the vagaries of government funding; in fact, transit’s dependence on public subsidy expanded during this period from 56 cents of every dollar of operating costs to 63 cents. This explains why, despite growing ridership, transit agencies suffer dramatically with each recession and each budget shortfall.

Although advocates usually point to funding formulas and automobile-centric policies as transit’s main problems, they rarely address management and governance issues. It is time to ask: Is transit’s continued provision as a government service really in the best interests of its riders?

While many systems have outsourced operations to the private sector, this has not been accompanied by outsourcing management; therefore schedules, fares, advertising, and other managerial functions remain fully embedded in public agencies even when crew scheduling and labor negotiations have been contracted out to the private sector. It seems difficult to imagine that an industry so diverse that it contains the New York City subway and rural van services can only be managed through the uniform structure of the public transit agency.

This is particularly true for commuter rail, which serves a population that has, in most cases, access to automobiles. Unlike a social service (without which segments of the population would be disadvantaged), commuter rail is almost always a competitive service that must draw people out of their cars. Generally public agencies have chosen to do this by offering low fares, which are also politically popular, but it is not clear that low fares are the only basis on which riders make decisions. Similarly, public management generally prevents service innovations that might be attractive to the wealthy populations that characterize commuter rail riders in many regions. From first-class cars to onboard wi-fi to café service, profitable incremental opportunities go unexplored because catering to wealthy customers is politically difficult for a public agency. (The airlines continually demonstrate that small segments of the population will pay significant premiums for comfort and convenience, and these revenues can effectively cross-subsidize more affordable service in other sections of the plane.)

As a general rule the only available alternative to public management has been privatization, which has been tried in several other countries. But privatization has raised concerns – real or not – about public subsidies and infrastructure investment being used for private gain, and potential price gouging. Some of these fears are clearly overstated, but a legitimate question can be asked about whether the profit motive would really serve riders if the points of maximum profit are not the same as the points of maximum usage of the service.

Another approach has generally been ignored: turning transit over to a nonprofit that would manage and operate the service under contract to government. Precedents exist for this in several fields: a significant amount of public housing was turned over to nonprofit entities in the 1980s, and today nonprofits operate charter schools that compete with both public schools and traditional private schools. In hospitals and universities, nonprofits compete with both for-profit and government institutions and do so successfully. The fact that nonprofit organizations can operate massive hospitals demonstrates that the round-the-clock, safety-critical operations of a transit system are not beyond the capability of a nonprofit. Size is not a challenge: the annual operating budgets of nonprofits like Harvard University and the Mayo Clinic dwarf those of all transit agencies other than the New York MTA – and in fact come close to that.

The key benefit of nonprofit management would be that transit could maintain most of its current government support while obtaining the benefits of private management. In many situations – New York’s Metropolitan Museum of Art, for example, and the San Francisco Opera – public agencies own infrastructure that nonprofit organizations manage. Many nonprofits, from hospitals to universities to cultural organizations, receive large amounts of government operating subsidy.

But freedom from public-sector management also offers significant benefits. One of those benefits is donations. While everything from local libraries to hospitals to plazas are often funded through donations and corporate sponsorships, transit does not tap charitable giving. The reason is simple: Americans do not give money to entities run by the government, even if they would willingly donate to the same entity if it were run by a nonprofit. (To see how this works, compare the levels of donations from alumni to Stanford University and to the University of California at Berkeley.) In fact, transit stations, railcars, and other facilities would offer excellent fundraising objects (and naming opportunities) if transit were defined as a local nonprofit institution rather than a government function.

Second, nonprofits are given greater freedom by the public to operate like a business. Public universities – many of which receive minimal operating support from state governments – face major controversy when they raise tuition; private universities, however, rarely face objections. It is reasonable to think that a nonprofit Board managing a commuter railroad could raise fares, offer first-class cars, or impose peak pricing with much less public outcry than a public agency could. It would also be able to pay salaries that are more competitive with the private sector, and invest in internal operations without being accused of wasting public funds.

Finally, nonprofit management would bring a much clearer focus to the mission of transit. Different operations have different main purposes: Some are social services, used mainly by the disadvantaged; some are competitive, serving riders who would do just fine if it didn’t exist; and others are mainly for economic development or other purposes. A nonprofit, in order to raise money, would need to define its real objectives far more precisely than a public agency usually does. This clarity of focus would probably translate into better management – and thus better services.

Rohit T. Aggarwala is a lecturer in urban studies at Stanford University and leads the environment program at Bloomberg Philanthropies. This is a summary of his recent article, “Why Nonprofits Should Operate Commuter Trains,” Stanford Social Innovation Review, Summer 2013, 40-47.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of The Eno Center for Transportation.