August 2011

Steps to Help Transit Systems Get On the Road to Financial Viability

by Don Stevens

California-based Monterey-Salinas Transit was able to move forward on its fleet expansion plan and replace aging buses by entering into a municipal lease.

California-based Monterey-Salinas Transit was able to move forward on its fleet expansion plan and replace aging buses by entering into a municipal lease.
Governmental budget issues are a common story in the news. The cause of the problems are complex, and often, structural, including pension obligations, infrastructure allocations, tax policies, changing demographic patterns and much more. We did not get into these problems overnight and solutions will require days, months and even years of tough decisions.

In the world of public transportation, there are several key steps that agencies can make today to make a positive impact on fiscal budgets. These steps will not close fiscal budget gaps alone. Yet, these practical and concrete steps will contribute to incremental positive progress toward creating the fiscal stability that is vital to our economic future.

Bus Replacement
At first glance, replacing aging buses seems like an expensive proposition. When the decision is examined in greater detail, the potential for financial savings emerges. Often, transportation managers have a difficult choice concerning the operation of bus fleets. The options include refurbishing a large number of aging buses or maintaining and operating the older vehicles. We all know the expense and headaches involved in maintaining an automobile in the later stages of its useful life. Often, there is a third option that is optimal through public-private partnerships — accelerated vehicle acquisition.

To illustrate this partnership, let's take a look at California-based Monterey-Salinas Transit located on the Monterey Peninsula approximately 120 miles south of San Francisco. The 110-square-mile area with 29 fixed routes, over 1,200 bus stops and three transit centers serves a population of 300,000 residents. Monterey-Salinas Transit funds its operating and transit budget through a combination of Federal Transit Administration (FTA) grants, state transit assistance from California general funds, local sales tax investment, and advertising and farebox revenue. When faced with key decisions regarding the future of its bus fleet, the agency turned to an outside transit financing and consulting agency for ­input.

With 86 buses and 73 active vehicles in its fleet, the agency implemented a fleet replacement and expansion program. The first step was to replace 11 buses that were 25 years old. These older buses had maintenance costs that were five times the maintenance costs per mile as newer buses. Next, another 38 buses, ranging in age from 12 to 19 years and averaging more than 1,000,000 miles per vehicle, needed replacement.

Viable Financing
If Monterey-Salinas had solely used available federal funding, the agency could not have replaced all its aging buses. Through private partnerships, an innovative solution was put in place. By using municipal leases, a sales contract is developed where the municipality makes principal/interest payments over time. Upon final payment, the municipality obtains ownership. The financial cost savings can be significant. Municipalities do not have to rely upon traditional, publicly offered bond issues. Municipal leases are more efficient and less costly. With tight credit markets and limited access to capital markets, the municipal lease often is the most viable and effective option available.

With a municipal lease in place, Monterey-Salinas moved forward on its expansion plan. This expansion was crucial to meeting needs and an expanding commuter market. The agency ordered eight suburban transit coaches for commuter routes, 16 40-foot and eight 35-foot standard buses for use where hills and other topography prevents the operation of low-floor buses. Monterey-Salinas also ordered 10 low-floor 40-foot buses to alleviate delays and overcrowding on the busiest lines in East Salinas, Seaside and Monterey. Finally, six bus trolleys in Downtown Monterey completed the expansion.

This 46-bus acquisition was funded with private capital and the consulting company provided assistance with the FTA approval process. The agency entered an obligation to pay leases through a combination of farebox, local, state and federal grant monies over a 10-year term.

Results
Even with interest costs from the transaction, the agency will see a major financial savings from accelerating its fleet acquisition. This fuel savings is approximately 400,000 gallons of diesel fuel over five years. The total savings from annual equipment cost increases, maintenance and fuel costs are just under $6 million. In these days of billion or even trillion dollar transactions, a savings of this amount may not seem substantial. Yet, for the budget of Monterey Salinas Transit, this savings is a major amount, especially when directly related to delivering vital public services. When this type of savings is multiplied in city after city and state after state, eventually the savings adds up to real money — no matter how you define it.


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