IAN SAVAGE
DEPARTMENT OF ECONOMICS
Department of Economics > Ian Savage > Chicago Transit Authority
1. Miller, Caroline & Ian Savage (2017). Does the demand response to transit fare increases vary by income? Transport Policy 55:79-86.
[Journal Website] [Manuscript Version]
Changes in ridership at individual stations on Chicago's mass-transit rail system following fare increases in 2004, 2006, 2009 and 2013 are analyzed to determine whether the ridership response varies with the per capita income in the neighborhood surrounding each station. We find mixed results. For one of the four fare changes the decline in ridership is greater in lower-income neighborhoods than it is in higher-income neighborhoods. However, the reverse is found for another fare increase. For two of the increases there is no relationship between income and ridership response. These mixed findings are in line with the prior literature that also found an inconsistent relationship. We hypothesize that there are two competing forces at work. On one hand lower-income groups are more constrained in their budget, but on the other hand they have fewer options for switching to other modes.
2. Ian Savage (2013). The cross elasticity between gasoline prices and transit use: evidence from Chicago. Transport Policy 29:38-45.
[Journal Website] [Manuscript Version]
This paper calculates the cross elasticity between the price of gasoline and transit ridership in Chicago using monthly data for the period between January 1999 and December 2010. Separate estimations are conducted for city heavy rail, city bus, commuter rail and suburban bus services. A 12-month difference model is used to overcome seasonality. The paper finds that the cross elasticities when gas prices were less than $3 a gallon were small, with a magnitude of less than 0.05. When prices exceeded $3 a gallon, the elasticity was larger, in the range of 0.12-0.14, for the rail modes. In the summer of 2008 when prices exceeded $4 a gallon, there was considerable responsiveness with elasticities of 0.28-0.30 for city and suburban bus, and 0.37 for commuter rail. These values are similar to, or even larger than, those found during the oil crises of the 1970s and early 1980s.
3. Ian Savage (2010). The Dynamics of Fare and Frequency Choice in Urban Transit. Transportation Research A 44(10):815-829 [15 pages, 550 kb PDF].
This paper investigates the choice of fare and service frequency by urban mass transit agencies. A more frequent service is costly to provide but is valued by riders due to shorter waiting times at stops, and faster operating speeds on less crowding vehicles. Empirical analyses in the 1980s found that service frequencies were too high in most of the cities studied. For a given budget constraint, social welfare could be improved by reducing service frequencies and using the money saved to lower fares. The cross-sectional nature of these analyses meant that researchers were unable to address the question of when the oversupply occurred. This paper seeks to answer that question by conducting a time series analysis of the bus operations of the Chicago Transit Authority from 1953 to 2005. The paper finds that it has always been the case that too much service frequency was provided at too high a fare. The imbalance between fares and service frequency became larger in the 1970s when the introduction of operating subsidies coincided with an increase in the unit cost of service provision.
4. Ian Savage (2004). Management Objectives and the Causes of Mass Transit Deficits. Transportation Research A 38(3):181-199 [19 pages, 346 kb PDF].
This paper traces the finances of the Chicago Transit Authority (CTA) for fifty years from its first full year of operation in 1948 to 1997. At current prices, the CTA earned an $84 million operating surplus in 1948, but suffered a $458 million operating deficit in 1997. The paper decomposes the financial decline into its constituent causes, highlights those that were under the control of the CTA ("endogenous" causes) and those caused by outside factors ("exogenous" causes) over which the CTA has no control.
The paper concludes that factors outside the control of the CTA reduced annual profitability by almost $1 billion a year:
- about $400 million a year was caused by exogenous demand factors that have worked against transit in cities, and were outside the control of the CTA; and,
- babout $575 million a year was due to exogenous cost increases such as increased fuel prices and a doubling of real wages for all workers in the economy over the past fifty years.
- reducing the amount of bus service, saving $180 million a year (the level of rail service has remained relatively constant); and,
- increasing real fares, generating an additional $190 million a year in revenue.
In the 1950s the CTA increased productivity and saved an additional $250 million a year. Unfortunately between 1965 and 1980, nearly all of these productivity gains were given away. The run-up in costs occurred during a period when the available subsidies increased rapidly from year to year. Costs were only brought back under control when the size of the total annual subsidy was placed outside the influence of the CTA in the early 1980s. The subsidy was then tied to the amount of sales tax collected within the boundaries of the City of Chicago. Had the CTA been able to maintain unit costs at their mid 1960s level, it would be $158 million to the better, after allowing for exogenous effects. Consequently, the citizens of Chicago would either be paying lower sales taxes and/or receiving more and better service at lower fares. Alternatively, some of the funds would be available to deal with the backlog of capital expenditures in the century-old system.
A postscript is also available that updates the analysis through to 2004 [12 pages, 206 kb PDF].
5. Ian Savage (1999). Can Privatization Solve all of Chicago's Public Transportation Problems? In John G. Allen and Ian Savage (eds), Reinventing Mass Transit: Moving into the Millennium. Chicago, Ill.: Regional Transportation Authority [13 pages, 77 kb PDF].
In the past twenty years, private operation of urban transit services has been transformed from being a radical experiment to almost the norm. This is especially the case in Europe, Australasia and parts of South America. However, in Chicago - like many cities in the United States - there has been a reluctance to consider privatization due to memories of the poor financial performance of the predecessors of the CTA. Indeed it is possible to argue that the most successful period for transit service in Chicago was the first seventeen years of the CTA's existence. However, after 1964 things went horribly wrong. In many ways the objectives of privatization are to reverse some of the bad things that happened.
Privatization can take many forms, ranging from the transfer of a public monopoly to private ownership, to complete deregulation with no controls on entry, prices, and levels of service. For more than twenty years I have advocated a middle ground, an approach which has come to be known as competitive contracting. This is particularly applicable to bus services. Under this system, monopoly rights to operate individual routes for a period of three to five years are put out to bid. Depending on the type of contract used, firms bid on the basis of the cost or the amount of the subsidy required to provide service. Typically the public authority specifies the level of service to be provided, the fares to be charged, and arranges for the marketing of the network of services and the sale of system-wide passes. The best-known example of such a system is London.
I would also advocate that the existing CTA bus operating division be broken up into smaller units, and sold to the private sector, although I would be open to retaining some in-house capability to protect against the forming of private cartels that drive up contract prices. These ex-CTA companies would then compete against each other and against existing private sector firms to win the contracts. The new opportunities may attract well-known national and multinational transportation conglomerates to establish operating bases in the city. The CTA would continue to exist, but as a marketing and procurement organization. While these proposals may sound very radical to a Chicago audience, they would be regarded as rather conservative by worldwide standards.
The main advantage of competitive contracting would be to remove the cost inefficiencies that emerged in Chicago between 1965 and 1980. Elsewhere in the world, competitive contracting has shown itself to be an effective method to reduce inefficiencies and reduce unit cost by 20% to 30%. As a consequence there will be a more socially beneficial balance between fares and service levels (as analyzed in the paper "Evaluating Transit Subsidies in Chicago"). Furthermore, reductions in unit operating costs can be used to lower fares, increase service levels, fund capital rehabilitation, or be returned to taxpayers as a reduced sales tax levy.
However, privatization should not be considered as a complete panacea for all of transit's ills. There are open questions as to the appropriate methods of service provision in lower density parts of the city, whether all of the additional capacity provided in the peak is justified, and whether there should be differential fares between the bus and rail system and between different times of day. These are also pressing policy issues for transit, and ones that are not directly tied to the privatization debate.
6. Ian Savage and August Schupp (1997). Evaluating Transit Subsidies in Chicago. Journal of Public Transportation 1(2):93-117 [25 pages, 1,262 kb PDF].
This paper investigates whether the CTA is using the current level of subsidies wisely. A model is set up that estimates the social benefits of using additional subsidies to either reduce fares or improve service levels. The model differentiates between peak and off-peak periods, and between bus and rail services. The calculations are based on data on CTA operations in 1994.
The potential welfare benefits of transit improvements accrue to several different groups of people: (1) existing transit riders; (2) automobile users who decide to switch to public transit; (3) road users who benefit from reduced road congestion; and (4) people who undertake new trips. These benefits are compared with the welfare cost of the additional sales taxes that are used to fund transit subsidies in Chicago. Results of the analysis are that:
- it is socially beneficial to use additional subsidies to reduce bus fares, especially during off-peak and weekend periods;
- rail fares are currently "acceptable" in that the marginal benefit of using subsidy to reduce rail fares is close to the excess burden of raising the subsidy;
- bus service levels are broadly acceptable, except for the peak period where there is too much service; and,
- rail service levels are too high at all times of the week, but especially in the peaks and on Sundays.
In general, it is more advantageous to use subsidy monies to reduce fares than improve service levels. This is contrary to the historical behavior of the CTA. Analysis in the "Management Objectives and the Causes of Mass Transit Deficits" paper found that for most of its existence the CTA has preferred to raise fares rather than cut service. Although service has been reduced, particularly on the bus system, average load factors for both bus and rail are only half of what they were in 1948. It appears to have been, and still is, more politically palatable to share the misery among many anonymous people by means of a fare increase than to affect a smaller, identifiable, group by a service cut.
This seemingly worldwide phenomenon has made riders worse off. Even if overall subsidy levels were not increased, society would be better off if service levels were reduced, and the money saved channeled into reductions in fares. The size of this welfare loss in Chicago in the early 1990s is estimated by this paper to be $76 million a year, or about $15 for each resident of Cook County.
The paper then models the effect of changes in fares and service levels on social welfare. At the combination of fares and service levels that maximize welfare, the benefit of increasing the overall level of subsidies was found to be $1.16 per $1 of subsidy. The return on transit subsidies is slightly less than the $1.26 in social loses incurred in raising an additional $1 in sales taxes. The approximate nature of the model makes it difficult to conclude with certainty that subsidies are currently "too high." Certainly one could not argue that current subsidies are grossly wasteful.
Many commentators believe that the current costs of service provision are higher than they could be, or should be. In Chicago, costs escalated in the period between 1965 and 1980. Even though costs have stabilized since 1980, and have even slightly decreased, they are still about 70% higher in real terms than they were in 1965. The model was re-estimated to observe the effect of reducing unit costs by 10%, 20% and 30%. Such cost reductions will only affect the returns to increasing the level of service, as fare reductions only affect the revenue side of the equation. The paper finds that cost reduction brings a much better balance of fares and service levels. This is especially the case for off-peak bus service. In addition, the reduced costs mean that a given level of subsidy will produce more service, and hence more riders. As a result, the returns to subsidies increase, and this can justify providing even more subsidies. Therefore, rather paradoxically, reductions in cost justify additional subsidies not cost increases.
Media Comments on Chicago Transit Financing
A commentary published in the 
October 11, 2007 [1 page, 140 kb PDF]
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