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Agenda Item # 6

BOARD MEMORANDUM

BACKGROUND: 

Both the 2002 Business Review Team and the 2003 VTA Board of Directors Ad Hoc Financial Stability Committee recommended a combination of cost efficiencies and fare increases to improve VTAs farebox recovery ratio.  Both committees believed an improved farebox recovery ratio to be an essential element of restoring VTA to a sound fiscal position.  Specifically, these committees recommended a farebox recovery target of  20% to 25%, to be pursued over the next two to three years.   

In June 2003, the VTA Board of Directors endorsed the 20% to 25% farebox recovery target and approved a comprehensive transit and paratransit fare increase effective August 1, 2003.  At the same time, the Board approved a Biennial Budget covering FY 2003-2004 and FY 2004-2005.  In addition to the fare increase approved for FY 2004, this Budget also assumed a fare increase for FY 2005.  As part of the discussion of these actions, the Board requested staff to return to the Board with a multi-year fare policy to guide future fare changes as part of an overall financial strategy to improve farebox recovery.  

The VTA Fare Policy was presented to the Advisory Committees and Board Standing Committees in October 2003 and again in November.  With some changes to reflect recommendations from the Standing Committees, the Fare Policy was adopted by Resolution 03.12.21 on December 4, 2003.  The Fare Policy establishes a process for fare reviews to be performed in conjunction with development of the Biennial Budget with fare increases to be implemented in January of each year until the farebox recovery target is achieved. 

The Fare Policy highlights the significance of addressing three key factors affecting farebox recovery, as follows:

• Fares (average fare revenue per boarding);
• Productivity (boardings per hour of service) and;
• Cost Efficiency (operating cost per hour of service).

The Fare Policy establishes $0.25 increments as a standard for changes to the Adult cash fare (base fare) and defines specific pricing relationships between the base fare and other elements of the fare structure so that future fare changes can be implemented simply through modification of the base fare. 

Pursuant to the process established in the Fare Policy, we plan on presenting proposed fare changes for January 2005 to the VTA Board Advisory Committees in February of this year.  In February and March, we will hold community meetings throughout the County as part of the public involvement process, to discuss the proposal and receive public comment.  Following these meetings, and considering input received, we will present final recommendations to the Administration & Finance, Transit Planning & Operations, and Congestion Management & Planning committees in April.  Final action on a fare change would then occur at the May 2004 Board of Directors meeting. 

DISCUSSION: 

As discussed in the Fare Policy, the farebox recovery ratio is influenced not only by fare levels and discounts but also by ridership, service levels and operating costs.  For analysis purposes, we have identified average fare per boarding, boardings per hour of service, and operating costs per hour of service as the three legs of the stool supporting farebox recovery.  Attachment A compares VTAs performance on these factors with other local transit operators in FY 2002, and also shows preliminary VTA (only) results for FY 2003.

As shown in Attachment A, four of the six peer operators achieved 20% or greater farebox recovery in FY 2002.  Of these four, Sacramento achieved the highest recovery rate through above average revenue per boarding and boardings per hour, and the second lowest operating cost per hour.  San Francisco MUNI achieved the next highest recovery due almost entirely to outstanding boardings per hour productivity, this outweighing below average revenue per boarding and above average operating costs per hour.    AC Transit achieved the third highest rate with better than average rankings for boardings per hour and operating costs per hour outweighing lower than average revenue per boarding.  Santa Cruz Metro was fourth, with a high revenue per boarding and below average operating costs countered by relatively low boardings per hour. 

SamTrans achieved 17.8% with relatively strong revenue per boarding, low boardings per hour and average operating costs.  Central Contra Costa Transit Authority (CCCTA) achieved 16.8% recovery despite having the lowest operating costs, primarily because of very low average boardings per hour.  VTAs FY 2002 recovery ratio was 11.6%.  The VTA result appears to be largely a result of having the highest operating costs per hour in the group with a lower than average fare revenue per boarding.

Please note that for consistency among the operators, all boardings per hour and operating costs per hour ratios on this chart are calculated on the basis of revenue service hours, not total service hours.  This does not impact the calculation of farebox recovery but does result in different productivity and cost efficiency ratios than if total service hours were used.  Preliminary VTA results for FY 2003 show a significant improvement in average revenue per boarding but this is countered by a decline in boardings per hour and an increase in costs per hour, so the final farebox recovery ratio is only slightly improved from FY 2002 (to 12.0%).  

For FY 2004, VTA has increased fares in August 2003.  We have implemented a 3% reduction of unproductive service this month, and have taken many other steps to reduce operating costs.  Further changes to improve productivity and reduce costs are on-going for this year and next.  As discussed below, even VTAs most determined efforts to increase ridership productivity and reduce operating costs are limited in what can be achieved in the near term.  A   FY 2005 fare increase remains essential for VTA to improve farebox recovery and maintain financial viability. 

Ridership Productivity

Through November, VTAs FY 2004 year-to-date ridership is down 18% from FY 2003, with November being the 32^nd straight month of year-over-year ridership declines.  Although demand for transit is influenced at some level by service changes, fares, population, promotions, traffic congestion, and other factors, VTAs experience shows clearly that employment is the dominant factor in determining how many riders board our services. 

As compared to total ridership, ridership productivity per service hour is more controllable by VTA.  We improve productivity by targeting low ridership routes, route segments, or time periods when implementing service modifications.  However, when area employment (and therefore ridership) falls as fast as it has over the last three years; the net effect is declining productivity despite service reductions totaling 14%. 

As shown in Attachment A, in FY 2002 VTA was exactly in the middle of the local peer group with regard to boardings per hour, bested only by SF Muni, AC Transit, and Sacramento RTD.  While we will continue to actively review, reallocate, and reduce unproductive services on an on-going basis, improvement of ridership productivity will have limited results until there is a rebound in the economy and basic transit demand picks up. 

The Board adopted a Service Management Plan on December 4, 2003.  It sets the policy for service changes to improve system productivity, and is another element of longer term (rather than near-term) improved results. The performance standard for acceptable service had previously been established at 60% of the average for all routes within each route classification and service period.  The standard was increased to 75%.  Any route where passenger boardings per revenue vehicle hour do not equal or exceed this number is classified as substandard.  Additionally, where previously VTA had a minimum standard of 10 passenger boardings per revenue hour, this was increased to a minimum of 15 boardings per revenue hour.

Standards established in the new Service Management Plan were used as the basis for the 3% reduction of substandard service implemented on January 3, 2004.

Cost Efficiency

• The Transportation and Maintenance Division has developed a strategic departmental restructuring and staffing reduction plan with the goal of improving cost efficiency while simultaneously improving the services provided by VTA. The plan is the result of a thorough evaluation process whereby reporting relationships and position counts were reviewed on the basis of business necessity, productivity and quality of service.
• The Technology Department has been reorganized to enhance efficiencies and effectiveness while reducing cost. The plan is to consolidate VTAs technology projects within one department and staff it appropriately.   The reorganization eliminated both employee and consultant positions.
• In order to tighten budgetary control and ensure accurate forecast of resources needed, we have been performing more stringent variance analyses comparing actual data to budget. Three times per year, Cost Center Managers are asked to offer budget reductions when appropriate. The variance adjustments for the first five months of FY 04 totaled $6.6 million.
• We deferred merit pay increases for non-represented employees for FY 2003.

Three of our four labor agreements were negotiated during calendar year 2003.  The SEIU, Local 715 and TAEA contracts expired in 2003; the ATU contract was opened a year earlier than its expiration in January 2005.  In all cases, the labor leaders and their members have been well aware of the financial situation within VTA.  They worked diligently with VTA management to identify and develop contract provisions that demonstrate their concern for financial stability for VTA.  As an example, they all agreed to changes in the medical plan co-pays and contributions to the monthly premiums. 

Fares

VTAs current fare structure was implemented August 1, 2003.  A summary of VTAs current fare structure is shown below.  Fares for ADA Paratransit service are linked to the Adult single ride fare and are discussed in a later section of this report.  Attachment B provides a history of VTA fares over the past decade.

VTA Current Fare Structure

When VTA modified fares in July 2002, it had been three years since the previous increase.  As shown in Attachment A, VTAs average fare revenue per boarding was the second lowest of the local peer group in FY 2002.  The fare change was successful in increasing average revenue per boarding 15% from $0.59 in FY 2002 to $0.68 in FY 2003.   However even this improvement still left VTA behind the majority of local peers with regard to average fare revenue per rider, as shown on Attachment A. 

During FY 2003, it became clear that further fare increases would be necessary.  Not only VTA but almost all other transit operators are experiencing fiscal crises, and every Bay Area peer undertook fare modifications.  VTA adopted a fare increase for the second year in a row, with implementation August 1, 2003.  Based on revenue and ridership through November, it appears that this action has resulted in the average fare per boarding growing to $0.79.  In addition to the effect of the August fare change, VTA will also receive some benefit during FY 2004 from more aggressive fare enforcement on VTA bus and rail services, redesigned monthly passes that are more difficult to counterfeit, and from renegotiation of the BART Plus multi-operator fare program. 

Even without a further fare increase, we would expect slightly higher average fare per boarding in FY 2005 because of the August implementation of the FY 2004 increase plus the January 2004 effective date for new EcoPass rates on contract renewals.  However, the adoption of the Fare Policy leaves no doubt that a fare change must be proposed for FY 2005, and for succeeding years until the farebox recovery target is achieved. 

PROPOSAL:

The Fare Policy not only establishes the necessity for a fare change at this time but also to a large extent defines the scope for a fare change. 

In summary, the proposal is to increase the Adult Single Ride fare (Base Fare) from $1.50 to $1.75 (16.7%).  All other Adult and Adult Express fares will increase proportionally.  Youth and Senior/Disabled fares will be adjusted to achieve consistency with pricing relationships established in the Fare Policy.  Fares for ADA paratransit services will increase in proportion to the change in the fixed route Base Fare.  No change at this time is proposed for EcoPass fares (including rates for SJSU) based on the relationship established in the Fare Policy between EcoPass and the average Adult fare.  Potential adjustments to EcoPass pricing will be reviewed after the affects of the calendar year 2004 changes become clearer. 

Attachment C outlines the specific fare proposal and impact on all fare categories in accordance with the Board adopted Fare Policy. 

ANALYSIS:

The table below shows estimated revenue per boarding for the fare change proposal including both FY 2005 results (with the fare change in the middle of the fiscal year) and annualized results.  Average fares for Youth and Senior/Disabled riders after the proposed fare change fit well within the parameters of the Fare Policy.  Average Youth revenue per boarding is estimated at 87% of average Adult revenue per boarding, compared to a Fare Policy standard of 80% - 90%.  Average Senior/Disabled revenue per boarding is estimated at 41% of average Adult revenue per boarding, compared to a standard of 40%-45%. 

Note:  Average revenue per boarding for EcoPass (including SJSU) reflects calendar year 2004 rates.

Also note, shuttle revenues are not reflected in figures in this table.

Paratransit fares will increase by the same percentage as Adult fares.  The One-way trip fare will increase from $3.00 to $3.50 and the Same-day Trip charge will increase from $12.00 to $14.00.  Attachment D presents a complete listing of current paratransit fares and what these fares would be with a $1.75 fixed route Base Fare. 

FISCAL IMPACT: 

FY 2005 ridership and revenue has been modeled assuming the fare change proposal is effective January 1, 2005.  Consistent with other current financial plans, this modeling assumes a 2% increase in base ridership for FY 2005.  Also, the model reflects additional light rail ridership anticipated for FY 2005 following the July 2004 opening of the Tasman East/Capitol extension. 

The estimated impacts on passenger fare revenue and ridership for each fare category are shown on Attachment E.  The annualized revenue impact is estimated to be $34,600,000 which is 18.5% higher than the amount of fare revenue currently forecast for FY 2004.   Of this increase about 15.2% is the impact of the fare increase and about 3.3% is the impact of ridership growth assumptions.

In addition to the $34,600,000 in expected fare revenues for FY 2005 from passengers (and EcoPass), we anticipate about $1,200,000 in shuttle revenues that is reported as fares.    

CONTACT THE BOARD SECRETARY'S OFFICE FOR ATTACHMENTS.

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