MMPA 6451 Week 7 Farebox Revenue Memo Example

Memorandum

To: Finance Director, Corliss Area Transit Authority

From: Policy Analyst, Planning Department

Date: Week 7

Re: Estimated effect of fare capping on fare revenue, and who would absorb it

Summary

A thirty-day fare cap at the price of the current pass would reduce fare revenue by an estimated $2.7 million a year, about 11 percent of the authority's composite annual fare revenue of $24 million. The loss would fall almost entirely on revenue from frequent single-fare riders, who would stop paying once they reach the cap, plus a smaller amount from pass holders who ride less than the pass is worth and would switch to paying as they go. New trips by riders who move closer to the cap would offset about a tenth of the loss. Every figure here is composite, drawn from the authority's fare records for a typical month, annualized. Capping's cost would never appear as a budget line, since it takes the form of revenue not collected; Salamon (2002) describes such tools as low in visibility, and this memo is meant to make the cost visible before the board decides.

Method

The estimate uses a simple formula for each group of riders:

Revenue lost = riders in the frequency band × average trips above the cap threshold × average fare per trip.

The cap threshold is 30 trips at the $2.00 single fare, since 30 trips cost $60, the price of a thirty-day pass. Riders are grouped by how many single-fare trips their card account recorded in the month.

Table 1

Revenue Lost From Existing Trips, by Frequency Band, Typical Month

Account counts and trip averages come from the authority's card records; the fare is the current single fare.

Annualized, revenue lost from existing trips is about $2.76 million. The higher band, with a quarter of the accounts, accounts for more than half of the loss, because each account rides so far past the threshold.

Two Effects Often Blurred

Revenue lost from existing trips and revenue gained from new trips are different effects with different certainty, and this memo keeps them apart.

Lost revenue from existing trips is the more certain of the two. It assumes that frequent riders keep riding as they do now and simply stop paying after the threshold. The card records measure this directly.

Revenue gained from new trips is less certain. Riders who now take 20 to 29 trips a month may ride a few more times when they know they are approaching a cap, paying for those trips until they reach it. The memo assumes 4,000 such accounts add an average of three paid trips a month, which adds about $288,000 a year. Trips taken after a rider reaches the cap add riders but no revenue, so they are excluded from the revenue estimate, though they matter for ridership.

A third, smaller effect is a loss: about 1,500 current pass holders ride fewer than 30 trips a month, averaging 24. Under capping, they could stop buying passes and pay as they go, spending $48 instead of $60. If all of them switched, the authority would lose about $216,000 a year.

Net effect: $2.76 million lost from existing trips, plus $0.22 million from pass migration, minus $0.29 million from new paid trips, gives a net loss of about $2.7 million a year.

Who Absorbs the Loss

Three sources could absorb the net loss, and the board must choose among them. The choice is partly a test of operational capacity, since a proposal that cannot be sustained financially fails even if it creates public value (Moore, 1995). For context, the authority's fare revenue per trip and its share of operating costs covered by fares can be compared with peer agencies in the National Transit Database (Federal Transit Administration, 2024).

Operating budget: the authority could absorb the loss through reduced spending elsewhere, which in a transit agency usually means service. At the authority's composite cost per revenue hour, $2.7 million is roughly the cost of operating two frequent bus routes for a year.

State operating assistance: the state's transit operating grant program allows grant funds to support fare programs that serve low-income riders. A request would need to be submitted in the next grant cycle, with no assurance of approval.

Fare level: the board could offset part of the loss by raising the single fare. A fare increase would reduce the cap's benefit to the riders it is meant to help and would require public hearings and an equity analysis, so it is the least attractive option.

The finance director's recommendation on these sources would shape the board decision expected in Week 11.

Assumptions

Table 2

Numbered Assumptions Behind the Estimate

A3 changes the result most: if the higher band averages 15 trips above the threshold rather than 22, the annual loss falls by about $490,000.

Assumption A6 deserves emphasis. If the authority succeeds in moving cash riders to cards, as the Week 5 readiness assessment recommends, more riders would reach the cap and the revenue loss would grow. That growth would be a measure of success, but the budget should anticipate it.

References

Federal Transit Administration. (2024). National Transit Database. U.S. Department of Transportation.

Moore, M. H. (1995). Creating public value: Strategic management in government. Harvard University Press.

Salamon, L. M. (2002). The tools of government: A guide to the new governance. Oxford University Press.