Credible commitment and congestion pricing - Springer Link

Transportation (2013) 40:229–249 DOI 10.1007/s11116-012-9430-9

Credible commitment and congestion pricing Michael Manville • David King

Published online: 1 July 2012 Springer Science+Business Media, LLC. 2012

Abstract Transportation analysts frequently assert that congestion pricing’s political obstacles can be overcome through astute use of the toll revenue pricing generates. Such ‘‘revenue recycling,’’ however, implies that the collectors of the toll revenue will not be its final recipients, meaning that any revenue recipient must believe that the revenue collector will honor promises to deliver the money. This raises the potential for credible commitment problems. Promises to spend revenue can solve one political problem, because revenue is an easy benefit to understand, but create another one, because revenue is easy to divert. Revenue recycling may therefore not be a promising way to build political support for congestion pricing. We highlight the role commitment problems have played efforts to implement congestion pricing, using examples from around the world and then focusing on California. Because congestion reduction is a more certain benefit than any particular use of the toll revenue, demonstration projects, rather than revenue promises, will be key to pricing’s political success. Keywords Congestion pricing Revenue recycling Credible commitment Stockholm Political acceptability

‘‘The promise given was a necessity of the past; the word broken is a necessity of the present.’’ –Machiavelli, The Prince Suppose a highway agency wants to implement congestion pricing. Because pricing will be—at least at the outset—politically unpopular, the agency promises to spend the resulting toll revenue in some politically acceptable and (hopefully) socially efficient M. Manville (&) Department of City and Regional Planning, Cornell University, Ithaca, NY, USA e-mail: [email protected] D. King Graduate School of Architecture, Planning and Preservation, Columbia University, New York, NY, USA

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manner. Perhaps the agency pledges to rebate money to drivers through reduced fuel taxes, to dedicate revenue to public transportation, or some combination of both. Whatever the promised distribution, the agency cannot distribute the revenue until the tolls have been collected, because an agreement to begin tolling must precede any allocation of its proceeds. As a result, the individuals or institutions promised the revenue must believe the highway agency will actually give it to them. If the recipients don’t believe the collectors, the political exchange necessary to usher pricing into existence won’t take place. This is the credible commitment problem. A credible commitment is one where ‘‘clear agreement is followed by clear performance’’1—one party to a transaction promises to do something, the other party has little reason to doubt it, and the first party makes good on its promise. Commitment problems arise when the second party doubts the first, often because the first party (or a similar party) has reneged on agreements in the past. If this disbelief cannot be ameliorated, the agreement won’t be reached, and any gains from agreement will be lost. Credible commitment is not a new idea—it is a core concept of the New Institutional Economics (Williamson 1983)—but it has rarely been applied explicitly to transportation policy, and never (at least to our knowledge) to congestion pricing. Yet its relevance to both transportation policy in general and congestion pricing in particular is strong. It is commonplace for transportation analysts to acknowledge congestion pricing’s many practical and political obstacles—that people rarely understand how pricing works; that it might be regressive and unfair; that it lacks a concentrated beneficiary with sufficient incentive to shepherd it to political approval; and that the gains from reduced congestion might be a small fraction of the total revenue collected. But it is equally commonplace to then suggest that some or all of these problems can be solved through astute use of the toll revenue. Vouchers can mitigate impacts on the poor. Unpopular tolls can finance popular forms of public transportation. Elected officials can rebate gas taxes and other fees to compensate drivers, or can use toll revenue to create strong, motivated claimants who will lobby for pricing’s implementation. And so forth (Guiliano 1992; Small 1992; Goodwin 1989; Kockelman and Kumanje 2004; King et al. 2007). These assertions contain an implicitly benevolent vision of government. The toll collector—usually though not always a government—is treated as almost a black box, through which revenue flows in and out, without diversion or impediment. Kockelman and Kumanje (2004, 2005), for example, propose a tolling system where one month’s net toll revenues are promptly rolled over and distributed to all licensed drivers, while Levinson and Rafferty propose a tolling plan where the government returns tolls revenue ‘‘directly to those whose were delayed almost instantly’’ (2008, p. 4). The government, however, is not a black box: it has an internal organization and an external reputation, both of which matter. In American transportation policy the ‘‘government’’ is actually a multitude of governments, many of which compete as much they cooperate. Transportation authority in U.S. metropolitan areas is shared vertically by local, state and federal governments, and horizontally across a wide range of local and regional governments and agencies. Thus if revenue redistribution is necessary to win pricing’s political approval, the final recipients of the toll revenue will probably not be its collectors. This will be true if the toll revenue is rebated to drivers (Small 1992), if it is given to public transportation agencies (Goodwin 1989) or if it is redistributed to local governments (King et al. 2007). The viability of any redistribution plan, in other words, pivots on the 1

This is a paraphrase of MacNeill (1974) who described a credible commitment as ‘‘sharp in by clear agreement, sharp out by clear performance.’’

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credibility of the institution doing the collecting. And in both the United States and elsewhere, promises to earmark transportation-related revenue are rarely considered credible, because similar promises have been so frequently broken in the past. Poisoned political environments have policy consequences (Hetherington 1998). Trust is essential for policy innovation, because innovation involves risk (Dasgupta 1990; Slovic 1993; Rothbart and Park 1986). Elected officials who support congestion pricing must assure their constituents that pricing will in some way make them better off. But trust is easier to destroy than create, so officials who have lost credibility—for instance by breaking promises in the past—will be hard-pressed to convince voters of their sincerity, and thus hard-pressed to introduce and advance new ideas. ‘‘Distrust begets disapproval,’’ as Hetherington (1998, p. 792) writes, ‘‘and disapproval makes it more difficult to marshal resources and solve problems.’’ Congestion pricing is a new approach to fighting congestion; forcing motorists to pay rent for the roads is a radical departure from conventional transportation policy. New policy, however, is not the same as new politics. Congestion pricing may be something new under the sun, but it will be introduced and debated it in the same old political environments, which are often polluted by old grudges, territorial feuds, and long memories (real or imagined) of promises broken. To be clear: we are not arguing that credible commitment is the only or even the most important obstacle to congestion pricing. Our point is that revenue redistribution, often promoted as a solution to pricing’s other problems, might just as easily compound these problems. The temptation to sell congestion pricing with revenue promises is understandable, but it also shifts the emphasis of the debate away from a certain benefit— reduced congestion—to a highly uncertain one: money delivered after-the-fact by politicians. The next section of this article describes the credible commitment problem, and from there shows the role it has played in various attempts to implement congestion pricing. Throughout, we emphasize that voters’ unfamiliarity with, and suspicion of, congestion pricing leads policymakers to emphasize its revenue potential rather than its potential to reduce congestion. This emphasis on revenue creates commitment problems, because revenue promises are so often unreliable. We illustrate our points with attempts to implement pricing both in the US and internationally, and then focus on Los Angeles County, which has both the worst traffic congestion in the United States and is located in a state that is notorious for intergovernmental mistrust. We show, using data from over 50 interviews with LA County officials, that pervasive mistrust—between governments and the electorate, and between governments themselves—poses a serious obstacle to the implementation of congestion pricing. Fully one-third of our interview respondents told us that distrust of state or county agencies would prevent them from supporting congestion pricing—a share equal to those who worried that congestion pricing might be regressive or unfair. We conclude that policymakers should demonstrate the benefits of collecting tolls, rather than make promises about distributing revenue.

Promises made and broken Trust is the essence of politics, because politics is built on exchange. Only rarely does a political goal command majority support from both elected officials and the public. More often a policy’s success will require a coalition, and the coalition will be held together by

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an explicit or implicit understanding that support from one member will be returned in kind. The credible commitment problem arises because political exchanges are rarely simultaneous. If two groups don’t swap favors at the same time, then their exchange becomes, for one, an investment, and therefore a risk. The size of the risk will depend on what the group is agreeing to do, and with whom the group is agreeing. A new or unfamiliar policy can be risky simply because it is new (Slovic 1993). The old adage in politics is that ‘‘when you are explaining, you are losing,’’ and the logic of some policies is more self-evident than others. Pricing roads, for example, may be less intuitive than building them, in part because building roads is much more common. The prevalence of an idea both increases awareness of it and reduces the risk associated with it. This is true whether the idea is good or bad. For elected officials, there is safety in adopting a widespread strategy, even a flawed one. It is better to make the same mistake as everyone else than to make a new mistake all your own.2 Commitment problems also increase as the ability to enforce agreement falls. A group that has broken promises in the past, or that is powerful enough to escape punishment if it breaks promises in the future, poses a particular peril. For this reason commitment dilemmas are prevalent in contracts with elected officials or governments (Williamson 1993). Political promises are frequently informal and, to quote Will Rogers, ‘‘not worth the paper they aren’t written on.’’ Private contracts can be enforced by governments, but a government strong enough to enforce contracts may also be strong enough to break them (Weingast 1995). The price governments pay for defecting is often low, and they can as a result ignore past promises, violate agreements, or pass new laws that supersede old ones (Cowen et al. 2000; Williamson 1993). The idea that governments or elected officials can violate agreements might at first seem implausible. No one is above the law, and in some ways elected officials are highly constrained, hemmed in by (and overly responsive to) small changes in public opinion (Stimson et al. 1995). Ideally perhaps, the courts will punish a governor who acts illegally; voters will punish elected leaders who break promises; and the politician who betrays a colleague will feel that colleague’s wrath later on. But voters have short memories and short attention spans, and while government officials are subject to voter attitudes, they can also shape voter attitudes (Jacobs and Shapiro 2000; Page and Shapiro 1983). Politicians make many promises to many people; keeping some frequently involves breaking others. ‘‘A prince,’’ as Machiavelli observed, ‘‘never lacks legitimate reasons to break his promise.’’ The defection might be deliberate and premeditated—politicians might give their word knowing they will break it—but this needn’t be the case and in many instances probably is not (Senser 1991). A fiscal or political emergency might lead officials to reverse course. Or an elected official might make a promise but then retire or be thrown from office, prompting her successor to rethink the original commitment. (Entering into agreements with politicians requires trusting not only the politicians but also their likely successors). Or the initial commitment might yield disastrous short-term results, leading officials to change course, even it means leaving some promises unkept (Cowen et al. 2000; Falaschetti and Miller 2001).

2

The theory of ‘‘yardstick competition’’ (Kenyon 1997) between jurisdictions and policymakers underlies this idea. If one jurisdiction adopts light rail transit, or subsidizes a sports stadium or convention center, other jurisdictions feel pressure to do the same. The adopted policy’s efficacy may be a secondary consideration.

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Courts cannot punish broken political promises (Senser 1991; Ayres and Klass 2004) and the vote is a crude instrument of sanction. In theory, voters punish those who rob Peter to pay Paul, but in practice this only happens if Peter is highly visible and popular, and if he gets mugged in broad daylight shortly before an election. Elections occur infrequently, and voters use them to discipline politicians only if the perceived costs of the politician’s broken promise outweigh the other benefits of having him in office, and if there is a viable and superior challenger. The courts can punish governments for contract violation, but in practice this remedy is slow and its success far from certain.3 How then are credible commitment problems overcome? When possible, the best approach is to minimize the importance of the benefit that is at risk. So if political actors worry that congestion pricing’s revenue won’t materialize, one solution is to downplay the revenue’s significance, and emphasize pricing’s ability to reduce congestion instead. If downplaying the benefits at risk is difficult, an alternative approach is to minimize the probability of defection. This approach, in turn, usually involves some combination of two strategies: vertical integration and economic hostages (Williamson 1993). Vertical integration makes monitoring performance, and punishing nonperformance, easier. If one group breaks a promise to another, the second group may have little recourse. But if the first group works for the second, or if both work for some larger institution and therefore have aligned goals and incentives, then the chance of the second group defecting is lower. The motivation to defect falls as the cost rises. Private companies often vertically integrate to eliminate the hassle of negotiating and monitoring many small agreements (Coase 1937; Weingast and Marshall 1988; Williamson 1999). In the political arena, however, it is difficult for one group to subsume another. A firm can purchase its supplier, but elected representatives can acquire neither their colleagues nor their successors.4 Commitment problems in government and politics may thus be more likely to involve hostages—or, more precisely, the economic equivalent of hostages. Hostages were first described by the economist Thomas Schelling (1956) and explicitly linked to commitment problems by Williamson (1983). The hostage idea is simple: one person binds another to a promise by identifying a future goal important to the second person, and maneuvering into a position with decisive control over its fate. The second person therefore cannot defect without jeopardizing an important goal of his own. Note that hostages can be given as well as taken. If the second person wants to demonstrate his trustworthiness, he might actually place the first person in a position to torpedo his future goal. He might give a hostage to signal credibility, or the first person might take the hostage to ensure credibility. When hostages are taken rather than given, however, the commitment problem might be escalated rather than resolved. If the second person is determined to defect from the initial agreement, he might simply take another hostage in turn (assuming one is available).

3

Alexander Hamilton famously called courts the ‘‘least dangerous branch’’ of government, because of their relative impotence. The courts ‘‘have neither force nor will, but merely judgment, and must depend upon the aid of the executive arm even for the efficacy of its judgments’’ (Hamilton, Federalist 78; Paulsen 1994).

4

In theory, one bureaucracy can absorb another (a highway agency could take over a transit agency) but in practice this rarely happens, and federalism often makes such annexations unconstitutional.

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Credible commitment and congestion pricing For much of the public, the most certain benefit of congestion pricing—reduced congestion—is also the hardest to understand. The least certain—the revenue—is easiest to understand. Pricing, if properly implemented, will almost certainly reduce congestion. But the projected revenue may not materialize, either because someone breaks their word or because, as a result of errors or lies, the revenue stream is smaller than anticipated (i.e., Flyvberg et al. 2002). The London Congestion Charge, for example, reduced more congestion than expected, but raised less net revenue, because forecasts overestimated the number of drivers who would pay and underestimated both operating costs and evasion (Santos 2008). A government that builds support for congestion pricing on the prospect of revenue therefore does so on pricing’s most salient but least reliable aspect. Further, the credibility of any revenue promise will depend on how governments have treated similar promises in the past. As a result ample reason exists for the public to view such promises with suspicion. The most common form of transportation-related revenue in the United States comes from fuel taxes. States frequently dedicate fuel tax revenue to transportation spending—21 states have Constitutional amendments mandating so, another nine have statutory requirements (Puentes and Price 2001)—but lawmakers often divert this revenue into the general fund. Such diversions have a long history. Oregon implemented the first fuel tax in 1919; Oregon’s legislature attempted the first fuel tax diversion in 1922 (Brown 2001). Space doesn’t permit a complete account of fuel tax diversions and the protests they have triggered, but a few recent examples should suffice: between fiscal year (FY) 2002 and 2006 Illinois legislators diverted $1.3 billion from the fuel tax into the state’s general fund (Transportation for Illinois 2006). In FY2010 and 2011 Texas legislators diverted $2.7 billion, prompting substantial public outcry (Brendel 2011).5 In Tennessee legislators diverted over $2 billion between FY2004 and 2007. In Maryland the figure was closer to $100 million (Goble 2011), and in New Hampshire in 2006 the legislature diverted over 60% of fuel tax revenue (Arlinghaus 2007). Voters in Missouri approved a law in the 1930s to prevent fuel tax diversions, but legislators violated the law so frequently that in 2003 voters amended the state Constitution to stop the practice. In New Jersey, years of fuel tax diversions depleted the state’s road repair fund, leading the governor, in 2011, to propose taking revenue from the state’s toll roads to make up the shortfall (Reitmeyer 2011). Can such diversions impede road pricing proposals? In Connecticut, a proposal to toll highways foundered because the legislature had diverted over 60% of the state’s fuel tax— nominally earmarked for transportation—into the general fund. Legislators and activists opposed both tolls and fuel tax increases not because of their transportation impacts, but on grounds that the government would misuse the revenue. ‘‘Tolls shouldn’t even be considered until we have the fortitude to use those monies directly to pay for transportation,’’ the Mayor of Stamford told a newspaper (Phanuef 2010). ‘‘No one likes to pay taxes,’’ said Representative Lawrence Cafo, ‘‘but we convinced the world that your taxes will go into public transportation projects…. People like to believe that. The problem is, that’s not the case’’ (Phaneuf 2008). A transportation activist added, ‘‘Before [anyone] can talk about tolls, they have to restore the public’s confidence’’ (Phanuef 2010). Similarly, when officials in Manchester, England, proposed congestion pricing they emphasized its revenue, which they pledged to spend on road and transit improvements, including some projects that had been long delayed (Salter 2007; Transport for Greater 5

This is over and above a constitutionally sanctioned contribution from the fuel tax toward education.

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Manchester 2008). But opponents sowed skepticism about whether the government would follow through on these assurances. ‘‘Despite the spin and promises,’’ one opposition circular read, ‘‘no one knows definitely what schemes will actually go ahead.’’6 Moreover, the government’s strategy of offering toll revenue to fund long-promised-but-neverdelivered transportation benefits backfired, as it reminded voters of the government’s failure to deliver on previous revenue pledges. ‘‘We were promised these [train routes] 3 years ago,’’ another circular read. ‘‘Now they make it seem as if they are doing us a favour by introducing these ‘new’ proposals—to be paid for by tolls!’’7 Voters defeated Manchester’s pricing proposal at the ballot box. Evidence from academic studies also suggests that commitment issues play a role in pricing’s political fortunes (Table 1). Congestion pricing in Hong Kong failed in part because voters didn’t believe government promises to rebate toll revenue to drivers (Hau 1990; Borins 1988). As Hau (1990, p. 211) wrote, ‘‘People were simply not convinced that the government would follow through with its promise to lower annual license fees and…registration taxes.’’ Citizens also feared that the Chinese government, which was slated to annex Hong Kong in 1998, would not honor promises made by British authorities (Vickrey 1993). Postmortems on the failed pricing referendum in Edinburgh suggest that voters were skeptical about government pledges to dedicate toll revenue to public transportation (McQuaid and Grieco 2005), while drivers were skeptical that the project would reduce congestion (Gaunt et al. 2007). Congestion pricing in New York City was toppled in part by similar doubts (Orski 2009; Schaller 2010). Proponents of the New York plan made much of the $200 million the federal government would give New York if the city implemented tolling. Opponents, however, said this money was illusory. Congressman Anthony Weiner, a prominent opponent of the pricing plan, dismissed the idea of New York getting more money as ‘‘political naivete´,’’ arguing that the federal government would give with one hand but take with the other, and reduce other aid to the city. ‘‘The moment we have $200 million in revenue,’’ he said ‘‘…I’m going to be hearing from my colleagues in Washington, DC, [saying] ‘you need $200 million less.’’ Weiner also predicted that state legislators, as a condition of approving the pricing plan, would divert toll revenue from the city to their own districts. ‘‘You honestly believe [State Senate Majority Leader] Joe Bruno is going to pass [congestion pricing] without getting a piece of the action for Rensselaer County?’’, he asked (Danis 2008).8 A subsequent plan to toll bridges on the East and Harlem Rivers, and return some of the toll revenue to drivers, was stymied by local officials’ disbelief that the rebates would be permanent. ‘‘They’re going to do a rebate?’’ Bronx State Senator Ruben Diaz Sr. asked. ‘‘After two years they’re gonna say no rebate. It’s a gimmick’’ (Neuman 2009). Conversely, places that have successfully implemented pricing have institutional structures that allow them to overcome commitment problems. Singapore, which began road pricing in 1975, is a vertically-integrated autocratic state with extreme continuity of government. The Ministry of Transport controls all land, sea and air transportation. Most power rests with the Prime Minister; the Prime Minister has changed only twice since 6

http://www.notolls.org.uk/manchester.htm.

7

Campaign circular from Manchester Against Road Tolls (MART). http://www.notolls.org.uk/ ourfutureleaflet.pdf.

8

Rensselaer county is 150 miles north of New york City. This fear wasn’t groundless: from 2009 to 2011, the NY legislature diverted over $260 million in transit funds, prompting some legislators to propose a ‘‘transit lockbox’’ to protect the funds from raids.

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Table 1 Credible commitment issues in selected congestion pricing proposals Area

Proposed pricing plan

Years

Outcome

Commitment issue

Hong Kong

Cordon Toll

1983–1985

Defeated

Voters didn’t believe toll revenue would be used to rebate other vehicle taxes; concern that Chinese government would not honor promises of British government after 1998 takeover

Edinburgh

Cordon Toll

2005

Defeated

Disbelief that toll revenue would be used for public transport rather than the general fund

New York

Manhattan Cordon Toll

2007

Defeated

Disbelief that revenue would be used for public transit; fear that state and federal governments would divert revenue

New York

Bridge Tolls

2008

Defeated

Tolling proponents suggested a rebate to some commuters; opponents dismissed rebate as a ‘‘gimmick’’

Manchester

Road Tolls

2008

Defeated

Disbelief that promised improvements would materialize; opponents citied failure to make such improvements in the past

Connecticutt

Highway Toll

2011

Defeated

Disbelief that revenue would be dedicated to transportation; opponents cited gas tax diversions as evidence of weak credibility

Los Angeles

HOT Lanes

2008

Approved

Local officials didn’t believe pricing would reduce congestion, and cited past broken promises by county transportation officials

London

Cordon Toll

2003

Approved

Vertically integrated transportation system reduced commitment problems

Singapore

Cordon Toll

1973

Approved

Strong central government and extreme continuity of government reduced risk and uncertainty

Stockholm

Cordon Toll

2006

Approved

Demonstration Project showed that pricing has benefits regardless of how revenue is used

Notes Text describes each case in more detail. Some proposals were defeated or approved at the ballot box, others within government agencies

independence in 1959, and the same party has won every election for over 50 years (Richmond 2008). London, which implemented congestion charging in 2003, has little in common with Singapore except vertically integrated transportation policy. Transport for London (TfL) has extensive control over transportation policy in Greater London—a situation unheard of in the United States, where authority over transportation is shared among multiple agencies and jurisdictions. New York Mayor Michael Bloomberg, in his effort to introduce tolls, was hampered by negotiations with state officials and city council members. London’s Mayor Ken Livingstone, by contrast, could and did begin congestion charging without legislative approval (Schaller 2010). Livingstone later wrote that the structure of London’s government was ‘‘critical to the introduction of congestion charging’’ (2004, p. 491). Stockholm, where voters approved congestion charging via referendum in 2006, is an apparent exception. Stockholm’s government has neither inordinate continuity nor vertical integration. To the contrary, congestion charging in Stockholm emerged from the tumult of political change, a result of negotiations between local and national political parties after the elections of 2002 (Harsman and Quigley 2010). But Stockholm implemented pricing

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with a seven-month demonstration project explicitly designed to show that tolls would reduce congestion (Isakson and Richardson 2008), thereby making the revenue less politically relevant. Public opinion was against congestion charging before Stockholm’s demonstration, but in favor of it by the time of the referendum. As it had promised, the Stockholm government closed down the demonstration at the end of July 2006 and the election was held in September 2006, while the roads were free. Yet voters nevertheless supported pricing, 52–48%. A number of scholars have analyzed Stockholm’s election returns, and their findings generally suggest that pricing’s demonstrated ability to reduce congestion, rather than any promised use of toll revenue, explains tolling political success. Winslott-Hiselius et al. (2009) found that personal experience with congestion tolls was the largest determinant of support for them; people who had used or seen the tolling cordon were more likely to vote for it. Eliasson and Jonsson (2011) showed that the two strongest factors affecting pricing’s support were expectations of effectiveness and environmental attitudes. These factors, which are directly related to reduced congestion, were more important than vehicle ownership, transit access, or equity concerns. Schuitema et al. (2010) show that the public came to favor tolls came when motorists realized pricing would benefit them. And Harsman and Quigley (2010) analyzed voting returns by city traffic zone and found the strongest determinant of support for congestion charging to be the average amount of travel time saved during the demonstration period. In zones where vehicle speeds increased most, more voters supported pricing. The demonstrated benefits, not the manner in which the revenue was spent, were decisive. The Stockholm evidence also casts new light on the idea that a strong public transportation system is necessary for pricing’s success. Certainly a strong transit system could enhance the acceptability, efficiency and fairness of a tolling regime. Existing transit riders might be more likely to support tolls, the presence of quality transit service might make some drivers less antagonistic toward pricing, and if many low-income commuters are already transit riders, pricing’s effects might be less regressive. Stockholm at the time of demonstration, had a well-developed transit system. Yet Harsman and Quigley found that the share of a zone’s commuters using transit had no statistically significant influence on that zone’s overall support for tolling. One possible explanation for this result is that middle income voters—who probably include drivers with the lowest incomes—were the decisive voting bloc. For members of this group who wished to continue driving, the ability of tolls to reduce congestion (i.e., to give them something for their money) might be most salient politically. Ison and Rye (2005) note that Hong Kong’s proposed pricing program also featured a demonstration project. But this demonstration was designed to show that tolling technology worked, not that tolling could reduce congestion. During the demonstration the Hong Kong government sent motorists a bill each month that detailed how frequently they crossed the proposed toll boundaries. The government did not, however, levy any actual tolls. The demonstration thus gave voters an idea of tolling’s costs, yet no suggestion of its likely benefits. At the ballot, pricing in Hong Kong lost. The case of California California is America’s largest state, home to two of its most congested urbanized areas (Los Angeles and the San Francisco Bay Area), and also one of its most high-profile examples of budgetary diversions. Neither promises, laws, nor lawsuits appear capable of preventing California’s officials from diverting dedicated local revenue into the state’s

123

123

295

Public transit accounts

100

704

2001–2002

75

760

2002–2003

135

181

807

2003–2004

1,693

250

354

1,214

2004–2005

1,778

250

380

1,303

2005–2006

1,867

325

1,058

2006–2007

1,052

2007–2008

350

1,395

2008–2009

1,700

910

1,900

2009–2010

5,338

2,760

4,992

8,398

Total

Sources: Coleman Financial Services, California Public Transit Association, California Redevelopment Authority

The state gave cities additional property tax revenue in order to compensate for losses in Vehicle License Fee revenue

The Vehicle License Fee Diversions do not include the ‘‘backfill’’ of these fees, wherein the state took approximately $500 million from the cities in 2003–2004 and paid it back in 2005–2006

b

a The redevelopment funds only include city redevelopment agencies. County redevelopment agencies lost approximately $8 million. The 2008–2009 diversion was successfully blocked in court, the 2009–2010 diversion was litigated, and in 2012 California abolished redevelopment agencies

Notes All dollars nominal. ‘‘Property taxes’’ refer to Educational Revenue Augmentation Fund (ERAF). In 2004/2005 and 2005/2006 the property tax total represents two different ERAF shifts (phase II and III)

Vehicle license feesb

Redevelopment fundsa

652

Property taxes

2000–2001

Table 2 Revenue diversions from local to state government in California, 2000–2009 (millions of dollars)

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general fund (Table 2). Between 1991 and 2003, state legislators appropriated over $40 billion earmarked for local governments and redevelopment agencies and used it to balance the state budget. In 2004, voters approved (with 84% support) a ballot initiative to curb this ‘‘forced lending’’ from localities to the state, but legislators exploited an exception in the law and continued the practice. Particularly galling to many local officials was the state’s diversion of voter-approved transportation bonds (which many local officials had lobbied voters to support), and the diversion of other voter-approved revenues from the Public Transit Account (even after voters had approved, by a margin of more than three to one, a measure protecting transit funds from diversion). From 2000 to 2008, the legislature diverted at least $8 billion in dedicated transportation funding to the state’s general fund. In 2008, a California Superior Court blocked a diversion of $350 million in redevelopment funds; the state didn’t appeal this decision, and instead three months later approved a slightly different bill that diverted $2 billion into the general fund. In both 2009 and 2010, state officials balanced the budget by withholding billions originally earmarked for localities. In 2011 it attempted to abolish redevelopment agencies altogether, and in 2012 succeeded in doing so.9 It was in this context, in 2008, that we surveyed 87 local officials in Los Angeles County about traffic congestion. The sample was one of convenience, and the survey was short: one-page, three-questions. Thirty-four of the respondents took the survey online after we emailed an invitation to do so; the remaining 53 took the survey prior to an in-person interview (we discuss our interviews more below). We attempted to reach elected officials, appointed officials who dealt with traffic congestion (such as planning directors or transportation directors, although in some smaller localities this was the city manager), and regional planners. We sent out 396 survey invitations, so our response rate was 22%. Responses came from 53 elected officials and 32 appointed officials, representing 58 of the county’s 88 cities. These 58 cities account for 71% of the county’s population. The survey included neither the county’s unincorporated municipalities nor the city of Avalon, which is located on an island 30 miles off California’s coast. We oversampled larger municipalities, such as Los Angeles and Long Beach. We presented the survey as part of a study about traffic congestion, and did not make specific mention of our interest in pricing. More details about the survey can be found in the Appendix. Although the survey’s response rate was respectable, the overall size of the sample is small, so we draw inferences from it with caution. Nevertheless, an initial look at the results (Table 3) suggests that support for congestion pricing was rather high: 47% of respondents either ‘‘strongly supported’’ or ‘‘somewhat supported’’ pricing on freeways, while only 15% opposed it. Support for cordon tolls was lower: 20% of respondents supported cordon tolls while 26% opposed them. (Every respondent left at least one option blank, so the sample size on each question is usually just under 80, rather than 87). However, while more people supported pricing than opposed it, pricing had low levels of support relative to other potentially competing policies. Forty-seven percent of respondents expressed some support for freeway congestion pricing, but 65% supported expanding the freeway system, 90% supported more carpool lanes, 96% supported improvements to the bus system, and 96% supported increased investment in light rail. If asked to choose between policies, many respondents rank congestion pricing rather low. This is perhaps not surprising: roads and rails are common, and their costs tend to be 9 See Waldie (2009) and Barbour (2007). Also Los Angeles Times, ‘‘Groups File Measure to Block State Raids of Local Funds’’ October 20, 2009. On the Public Transit Account, see Shaw v. Chiang, Cal. App. 4th, 577 (3d. Dist., 2009), and on the CRA diversions, see CRA v. Genest.

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39 %

77

Don’t know/indifferent

N

75

51 %

5%

21 %

19 %

1%

Cordon tolls

77

6%

0%

4%

48 %

42 %

Carpool lanes

75

18 %

4%

17 %

39 %

19 %

Preferential carpool lanes

76

1%

0%

1%

43 %

53 %

Bus transit

77

3%

0%

1%

32 %

64 %

Light rail

77

8%

0%

0%

30 %

62 %

Facilities management

75

25 %

0%

6%

35 %

31 %

Parking management

Notes Facilities management includes traffic light synchronization, installing left-turn lanes and other changes to the physical design and usage of roadways

Source: Survey conducted by authors

12 %

3%

Strongly oppose

Somewhat support

Somewhat oppose

17 %

30 %

Strongly support

Congestion pricing on freeways

Table 3 Support for congestion management strategies

76

14 %

4%

16 %

26 %

39 %

Expanding freeways

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hidden in gas and sales taxes, and spread over many people, including non-drivers. Congestion tolls, by contrast, are unusual and their costs fall transparently on drivers, making them likely to be less popular. Second, and more important for our purposes, many respondents had no opinion about pricing. Almost 40% of the respondents marked ‘‘don’t know/indifferent’’ when asked about freeway congestion pricing, and over half marked ‘‘don’t know/indifferent’’ when asked about cordon tolls. By contrast, only 3% marked ‘‘don’t know/indifferent’’ when asked about light rail. The dominant response to congestion pricing was neither support nor opposition, but uncertainty. In addition to our surveys, we interviewed 53 local officials—36 elected and 17 appointed officials from 39 of the county’s cities. (Every interview respondent also took the survey, but not every survey respondent was interviewed). Interviews usually lasted 20 min, although some were over 40 min. As we did with the survey, we told interview respondents they would be participating in a study on traffic congestion. We did not explicitly mention congestion pricing and did not discuss pricing until halfway through the interview. We first asked respondents to describe the congestion problem in their city, and the various policies, if any, the city employed to combat it. From there we asked if the city employed a lobbyist at the state or federal level to work on transportation and congestionrelated issues, and whether the city worked with its neighbors on congestion-fighting initiatives. Only after these questions did we bring up pricing. If respondents were unfamiliar with congestion pricing, we supplied a neutral definition, emphasizing that it involved tolls that rose and fell with demand for the road. We did not provide a detailed rationale or defense of pricing to any respondents. We also did not say anything about tolling only a few lanes, creating HOT lanes, or building roads explicitly to toll them. We asked about the idea of placing tolls on existing unpriced freeways. We asked respondents if they supported pricing, and if their support for pricing would rise or fall if the toll revenue was spent on roads or public transportation, or if it was returned to cities on a per capita basis, as described in King et al. (2007). No respondent was asked about particular concerns associated with pricing. We did not ask about ‘‘double taxation,’’ equity, or distrust of state officials. If a respondent expressed reservations about pricing, we asked why, but we did not ‘‘lead’’ any respondents into particular objections. The interviews were transcribed by a professional transcription service. Each interview was coded by at least two researchers. Overall, interview respondents’ attitudes about congestion pricing ranged from openmindedness (‘‘we should be prepared to try anything’’) to political fear (‘‘Everyone would be recalled … the response would be overwhelmingly negative, I’m just convinced of it.’’) About 30% of respondents voiced some level of support for pricing, but this support was almost always qualified. One major concern was pricing’s equity. A third of respondents— both those who supported pricing and those who opposed it—worried it would harm poor drivers. Only a handful of respondents expressed ideological opposition to tolls. Our interviews suggest that congestion pricing has two of the key ingredients for credible commitment problems. First, (as the survey also suggested) there is little understanding of the proposed policy. Second, there is distrust of a potential counterparty (the state). Together, these factors create a large obstacle to building local support for pricing: local officials feel like they are being asked, by people they don’t trust, to support a policy they don’t understand. In our interviews, neither local elected officials nor local professional transportation planners appeared to understand how congestion pricing works. This absence of understanding might reflect a larger unfamiliarity with economics-based arguments about

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pricing and efficiency (e.g., Viegas 2001). Many people think of prices, particularly prices used by the public sector, as mechanisms to collect revenue, rather than to allocate resources. Uncertainty about congestion pricing might also reflect its failure to penetrate the knowledge base of local practitioners. Academics lionize congestion pricing, but local policymakers rarely discuss it. As one of our respondents put it: I don’t think there’s been a serious discussion of tolls. I’ve been in elected office for 12 years. It’s never been discussed at meetings that I’ve ever been to. We’ve discussed adding lanes on the freeway. We’ve discussed subway. There’s been discussion of light rail. There’s discussion of carpooling and expanding carpools, and certain vehicles. I’ve never had a discussion of tolls. Another respondent, the mayor of a city of 100,000, after admitting he knew nothing about pricing: Clearly we haven’t come to the point where people have accepted that concept [congestion pricing]. I mean, when you find the mayor of a, you know, small town saying ‘you better teach me about this’—you know, there’s a lot of education to be done … Maybe I’m behind the times on it, but I’m not sure I’m too far behind the curve. This unfamiliarity has consequences. Unsure of how pricing worked, respondents emphasized its risks and discounted its benefits. Ideally, agencies that propose congestion pricing would explain it to local officials and alleviate their concerns. But our interviews suggested that foreignness of pricing was exacerbated by local distrust of transportation agencies. For example, over one-fifth of respondents worried, quite reasonably, that freeway tolls would cause spillover traffic on local streets. But almost every respondent who voiced this concern framed it in part as an issue of intergovernmental suspicion. From the perspective of these respondents, if the California Transportation Authority (Caltrans) tolled freeways, it would be both collecting revenue and offloading drivers onto local streets. Congestion pricing would shift rather than reduce congestion levels, and the shift would increase rather than decrease local congestion: Caltrans seems to really only be worried about traffic on the freeway, and they don’t care a whole lot about traffic on our streets. In fact, they’re more than willing to keep traffic on our streets as long as it doesn’t affect the freeway. A planning director: [With congestion pricing] you’re not reducing the number of trips, you’re just diverting those numbers of trips from being on the freeways to possibly being on the public streets, so you’re taking that one burden from the freeway system and putting it on another network. A mayor from a mid-sized city made a similar point, adding that he would rather have freeway congestion than risk spillover traffic, even if his city received congestion toll revenue as compensation: If there is going to be congestion I’d rather have it on the freeway, because frankly, it’s not a city issue then from a public official point of view. And if you cause a problem that causes [congestion] now to get on the street and then you hand me a check, I’m not really sure what to do with that money because we don’t have any more streets to build.

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Spillover is a legitimate concern about congestion pricing, and it is easy to believe, looking at a crowded roadway, that tolls could only reduce congestion by pushing a large share of vehicles off the road. Congestion is non-linear, however, so pricing relatively few cars off a crowded road can achieve sizeable reductions in congestion. And because a significant portion of peak hours trips are not commutes, pricing can re-allocate some trips to other times or modes, thereby reducing congestion without burdening other routes. Further, if an unpriced freeway is hypercongested, pricing might actually pull vehicles from surrounding routes onto the tolled road, with the net effect being less traffic on local streets (Small and Chue 2003). All this knowledge, however, is both technical and counterintuitive. Experts from state transportation agencies could explain that the costs of spillover will likely be low relative to pricing’s overall benefits, but if local voters and local elected officials don’t trust state agencies, they will be unlikely to believe such explanations. Revenue redistribution and distrust of state officials The problem of distrust was most evident when we asked about revenue recycling: redistributing toll revenue to help build political support. Fully 30% of our respondents, from cities large and small, explicitly told us they thought the state would keep any toll revenue, even if that revenue was promised for local uses. This is a sizable proportion, equal to the share of respondents worried about pricing’s equity. As evidence for this view, respondents cited past instances where the state had reneged on agreements to spend money in particular ways. Respondents were often at their most strident or agitated when discussing state legislators diverting dedicated funds. Many of the respondents mentioned the state’s diversion of the 2006 transportation bond money. For example, a city council member from Los Angeles, after mentioning other political difficulties associated with congestion pricing, said: I think also there is a skepticism, which I share, that the state legislature, who would be responsible for what those dollars would be used for, not us, will use it for their own purposes, like they did this last transportation bond. A mayor from a small city: I’ve been dragged into supporting too many things over the years where the promise was that the money was going to go for this and it turns out that it was for some other need. A transportation director: We have state legislators that sell you one thing and have people vote for bonds, and then take it to play budget games, where the bond funding is not going where the voters were told it would go. … The bonds were sold. They were supported by a very broad-based group of people with the promise to the people of the state of California that that this was going to provide new money for new projects that would help ease these issues. And you know, it’s not easy to get people to support bonds like that, yet overwhelmingly they did. What’s the very first thing—six months later—that the legislature does? Now I’m on my soapbox. Here I go. They take from one pile, backfill another pile, with monies that were supposed to be for new projects but that will now be for existing projects. We’re not making progress…

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A council member from a small city, when asked about toll revenue being spent on public transportation or to help local governments: That’s what we thought we were getting with the bond issue. Yeah, every city is guaranteed $400,000. And you know, we’re ready to go. We have projects. We have roads that need to be fixed. We’re ready to go. But you know, they’re still up there in Sacramento chewing on it and trying to decide … Another Los Angeles City Council Member: People are fed up with being in their cars, but they don’t trust politicians enough to give them their money … For our governor and our legislature to take $1.5 billion that was targeted for transportation and use it to balance the budget is irresponsible leadership in Sacramento. The Los Angeles HOT lanes In late 2008 Los Angeles County approved a federally-funded demonstration of two High Occupancy/Toll (HOT) lanes. On the surface, this project’s approval might indicate that commitment problems in Los Angeles were not as serious as our interviews suggest. Approving the HOT lanes, however, required a series of hostages, and the case demonstrates how the use of hostages, even when successful, can exacerbate rather than mitigate mistrust. The first hostage was taken by the federal government. Under its Congestion Pricing Pilot Program, the federal Department of Transportation tied supplemental transit funding to a region’s willingness to experiment with congestion pricing. Los Angeles received $200 million in bus improvements in exchange for conducting a pricing program.10 The HOT lanes were slated to run through the San Gabriel Valley, in the northeast portion of LA County. Here the second hostage situation arose. Valley residents and elected officials have long distrusted the county Metropolitan Transportation Authority (MTA), which they believe has broken promises about providing rail service to the region, and has neglected the Valley in favor of the City of LA (Taylor et al. 2009). When the MTA announced the HOT lane project, Valley officials were negotiating with the MTA to extend the Valley’s light rail route, the Gold Line. Although Valley officials had secured federal funding for the Gold Line extension, they needed $80 million in matching funds from the MTA in order to move forward. The MTA, however, considered the Gold Line Extension a low priority, and was instead focused on a sales-tax increase that would be used primarily for a new subway route in the City of Los Angeles. Valley officials were quick to use the congestion pricing program as a hostage in their negotiations for the Gold Line. They pledged to oppose both the pricing program and any sales tax increase unless the MTA funded their rail extension. For instance, Bill Bogaard, the Mayor of Pasadena, told the MTA board: We’re quite prepared to grapple with congestion pricing. Our city was the first to appoint its most qualified staff person to serve on the steering committee for congestion pricing. But I can say that if the Metro board doesn’t express support in the 10 Initially, Los Angeles filed an application for transit funding that didn’t include pricing, and the federal government denied the application. The funding became available again only after New York’s pricing program was defeated. LA’s successful bid for funding took place after we had completed our survey and interviews; neither we nor our respondents were aware the County was contemplating HOT lanes.

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long-range plan for this [Gold Line] project, it will be extremely difficult to pull our city together in support (Abendschein 2008). Thus Valley officials held the $200 million congestion pricing program hostage in exchange for $80 million in local transit funds. The MTA, however, did not capitulate, and instead took a hostage of its own, by allowing the federal deadline for the Gold Line’s matching funds to pass. This placed the Valley officials in a difficult position. If they wanted to extend the Gold Line, they would have to rely upon the MTA not only winning the sales tax increase, but also deciding to use some of that new revenue to fund the Gold Line. And the MTA would base its decision to finance the Gold Line on the Valley’s support for congestion pricing. A veteran political journalist described the move as ‘‘a thinly veiled threat from the MTA: ratify the agreement financing the toll lanes or you won’t get your Gold Line extension’’ (Howard 2008). The hostage-taking, therefore, aligned the incentives of the Valley and the MTA: As a final negotiating tactic, the MTA agreed to move one of the proposed HOT lanes out of the Valley and into the City of Los Angeles; the City would share some of the political risk of tolling. With these agreements in place, the pricing program was approved; tolling is scheduled to begin in late 2012. In addition, voters approved the sales tax increase in the November 2008 election. Shortly after the election, however, the MTA revised the tax’s revenue projections downward by $250 million. In part this revision was a result of the recession, but in part it was a result of the state diverting $136 million of previously-promised public transit funds into the general fund. The diversion forced the MTA to use sales tax revenue to finance current obligations rather than new projects, and meant—once again—that voter-approved tax dollars would go to purposes different than those originally promised. Nevertheless, the first rail project financed by the sales tax was the Gold Line extension.

Conclusion The benefits of congestion pricing come both from collecting tolls and distributing toll revenue. Collecting tolls reduces congestion; distributing revenue can finance public services or compensate drivers. Politically, it is tempting to emphasize the benefits of distributing revenue, because revenue is easier for voters to understand and because revenue promises are common currency among political coalitions. Promises, however, are easier to make than keep, so a pledge to spend toll revenue in a particular way is a less certain benefit than congestion reduction. Further, the uncertainty surrounding revenue will rise as elected officials break more promises. While it is often individually rational for a politician to break a promise, it is collectively harmful; distrust and risk aversion are the legacy of broken promises, and as distrust accumulates it can impede the introduction of newer, better policies. We have shown, in this article, that voters and local officials often don’t understand congestion pricing, and often don’t trust revenue promises because such promises have been broken in the past. Overcoming such mistrust, while not impossible, often involves negotiation and brinksmanship that is both costly and wasteful, as the drama surrounding LA’s HOT lanes shows. Yet if revenue recycling is not a promising path toward congestion pricing, what is? Revenue promises are appealing because it is difficult to convince voters before-the-fact that pricing will benefit them. One lesson from Stockholm is that demonstration projects might be useful in circumventing this problem. Stockholm introduced congestion charging under a veil of impermanence: the demonstration period was short enough to make it

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politically acceptable, yet long enough for voters to evaluate pricing’s costs and benefits. Demonstrations allow voters to see if prices reduce congestion, if spillover is a serious problem, and if prices have other impacts (i.e., on noise, accidents, or transit commute times). Similarly, the great value of HOT lanes lies in their potential to educate people about congestion pricing. HOT lanes impose a cost on anyone who chooses to pay a toll, but provide a demonstration to anyone who chooses to pay attention. HOT lanes can therefore avoid placing large short-term losses on unwilling drivers, yet nevertheless illustrate the advantage of priced lanes (Fielding and Klein 1997). Nothing completely solves commitment problems, of course. If distrust is sufficiently pervasive voters might doubt any future action inherent in a proposed policy (i.e., what if the government breaks its word and doesn’t end the demonstration?). But pricing’s proponents may see more success if they re-emphasize congestion reduction, and downplay revenue redistribution. Using demonstration projects to focus on reducing congestion will not make promises about toll revenue more reliable, but it may make them less relevant. Acknowledgments Many people kindly let us interview them. Cameron Millard and Katie Matchett provided excellent research assistance. Donald Shoup, Brian Taylor, Ariel Strauss and Michael Smart provided helpful comments. The University of California Transportation Center provided funding. The usual disclaimers apply.

Appendix: Survey and interview questions Survey Instrument: 1. 2. 3. 4. 5.

Please give your position title. How long have you held this position? Please give your city name. Does your city have a City Manager? Please rank the following issues in the order of how much time you spend on each per month: a. b. c. d. e. f.

Public safety Education Business development Community services (Parks and recreation) Housing Transportation

6. Please rank the importance of these transportation issues to your office or department: a. b. c. d. e.

Transit service Jobs accessibility Traffic congestion Parking Other

7. The following question is about traffic congestion in Los Angeles County. Please rate your level of support for each of the nine strategies listed below. Stating you support a strategy means you would advocate for it to local citizens and/or other officials. a. Carpool lanes b. Light rail or subway transit

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c. d. e. f. g. h. i. j.

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Bus transit Expanding freeway capacity Facilities management (e.g. traffic signal synchronization) Congestion pricing on freeways Cordon tolls in business districts Parking management Preferential treatment in carpool lanes Other (please specify)

Interview Instrument: We conducted interviews in Winter and Spring 2007.The interview questions were (the exact wording varied from conversation to conversation): Most academics, and certainly most economists, believe that in a place as congested as Los Angeles County, the best way—and maybe the only way—to reduce congestion would be to put congestion tolls on the region’s freeways. So I want to ask: how familiar are you with this concept of congestion pricing, and what are your thoughts or reactions to it? The second question: One advantage of congestion pricing is its potential to raise revenue. Estimates vary, and we should always take them with a grain of salt, but academics who have attempted to forecast the revenue from congestion pricing on LA’s freeways think it would net over $5 billion per year. Do you think you, or the people in your city, would be more amenable to congestion pricing if this revenue were spent on transportation projects, such as roads or public transit? The final question: Suppose that instead of spending the toll revenue on transportation, the revenue was returned to individual cities on a per capita basis, and they could spend it in any way they saw fit. So a city with 50,000 people would receive $2.5 million per year. Would you be more or less likely to support congestion pricing if this revenue plan were in place?

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Author Biographies Michael Manville is Assistant Professor in the Department of City and Regional Planning at Cornell University. His research focuses on transportation and land use, local public finance, and the proper pricing of automobile travel. David King is an Assistant Professor of Urban Planning in the Graduate School of Architecture, Planning and Preservation at Columbia University. Through his research he explores local transportation planning, the built environment, public finance, and accessibility, with particular attention to social equity, institutional constraints and metropolitan spatial structure.

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