Financing Expansion of Tucson's Streetcar: Strategies and Revenue Options

Costs

Remember the first assignment memo to Fletcher McCusker of Tucson ‘s Rio Nuevo downtown redevelopment agency? He wants your firm to find a way in which to finance an expansion of the street car. Details follow:

Costs

1. Expand the street car using only private funds. Federally funded rail projects cost $50 million per mile or more (sometimes a lot more) while local/private costs are only $20 million per mile. 

 

2. Total costs for expansion are $90 million. A 20-year bond will cost $5 million per year.

 

3. Total new operating costs are $5 million per year.

 

4. Total costs are $10 million per year. We need to raise this revenue to make the expansion feasible.

Benefits

1. Real estate investment increases by $1 billion directly along the route.

 

2. Real estate investment increases by another $500 million away from the route but in the corridor.

 

3. Real estate investment increases by $500 million elsewhere throughout the city as the street car will attract new development from outside the City just because City has it.

 

4. Retail sales increase by $500 million per year directly along the route only.

Ridership

1. Ridership is projected at 1 million per year along the expansion. (Assume these are new riders.)

 

2. About half the riders are lower income who are income inelastic meaning they will pay whatever fare is charged because they have no substitutes.

 

3. The other half are middle to upper income and are price (though also income) elastic meaning that if the fare goes up by 10% ridership among them will fall by 10% because they have substitutes (such as cars).

Current Revenues

1. Farebox revenues are currently $2.50 per one-way trip (1 million riders = $2.5 million).

 

2. Citywide sales tax of 0.25% ($0.0025 or 25 cents per $100 sales) generates $2.5 million but that goes for supporting the current system. This tax would need to be increased to pay for expansion costs.

 

3. Farebox and sales tax revenues are 50% of operating costs but none of the capital costs.

 

4. County, State and Federal subsidies provide the other 50% but only because federal funds were used to build the current system. These subsidies would not be available if the system were financed from local/private and other local (non-federal) sources.

Revenue Options

1. Continue with fares or increase them or reduce them or make ridership free.

 

2. Create a three-tiered special property tax assessment district such that properties along the route are charged one property tax rate, those in the second tier pays a lower rate, and the rest of the city pays the smallest amount.

3. One-tiered special sales tax assessment district for retail properties along the route which will pay an amount in addition to the current rate used to subsidize existing and expanded street car operations.

4. Increase the sales tax citywide regardless of who benefits from the street car directly.

 

5. Add a new property tax citywide to also help pay for the costs.

Objective

Create a revenue structure that generates $10 million/year from local sources to pay for the expansion.

Strategies

1. Achieve at least two purposes of public engagement in the economy (see Module 1).

 

2. Create agglomeration economies by attracting economic development to the street car (see Module 2).

 

3. Achieve correspondence between those who benefit and those who pay to reduce free riders and associated externalities (see Module 3)

 

4. Reduce externalities associated by reducing auto use and associated pollution, accidents, etc.

 

5. Prevent regressivity in who pays (see Module 3).

 

6. Maximize value capture (see Module 4).

This is a memo not to exceed 1,500 words exclusive of tables, charts, graphs, etc.