With the sale of $2 billion in bonds in December, the financing for construction of the West Side extension to the No. 7 subway line is in place, and construction will begin later this year. The project will extend the No. 7 line from Times Square to a new subway station near the Javits Center at Eleventh Avenue and West 34th Street. An intermediate station, at Tenth Avenue and West 41st Street, has been discussed but is not currently funded.

The Number 7 extension was once merely one item on a laundry list of possible transit improvements. Now it has leapt past such long-discussed mega projects as the Second Avenue Subway in the journey from planners’ dream to reality. What happened to bring this about? What are the lessons for getting other big transportation projects done?

One key to the No. 7 extension’s fast progress involved the financing. Mayor Michael Bloomberg and Deputy Mayor Dan Doctoroff, champions of the project, recognized early on that the 7 extension would go nowhere if it had to compete for funding with the Second Avenue subway, connection of the Long Island Rail Road to Grand Central Terminal, airport rail access projects, a new tunnel from New Jersey, replacement of the Tappan Zee Bridge and other mega projects. Thus, they developed a novel funding method. The bonds issued last month, and another set of bonds to be issued in several years, will be paid off using payments made to City Hall in lieu of taxes by new residential, retail and office development on the West Side, payments for development rights in the eastern part of Hudson rail yards themselves, and from other taxes collected from the area. Having its own funding source was immensely important to bringing the 7 extension along.

Is this funding approach transferable to other projects? The city’s budget director, Mark Page, was skeptical when he addressed this question at a Bond Buyer’s conference in December. Page cited the unique circumstances of the far West Side development – the combination of the need for office space, proximity to Midtown and public investment in the area – as casting doubt that this financing plan could become a model to be replicated elsewhere in the city.

Part Of A Larger Goal

Other projects are indeed unlikely to replicate this funding structure. Yet there is a larger point that bears attention. The 7 extension was seen as critical to a bigger plan that involved development of the far West Side and Javits Center expansion. One lesson is thus that it is easier to get transportation projects to move forward when they are linked to broader goals.

A second lesson is that the benefits of accomplishing those goals – in this case, office, commercial and residential development of a declining industrial area – helping finance the transportation project itself. This is a critical point. Traditional sources of transportation funding are fuel-related taxes, motor vehicle fees, sales taxes, federal funds and voter-approved bonds. Using these sources, the beneficiary of the project pays, but so does everyone else.

What if the beneficiary were to pay? What if, for example, increased property taxes were used to finance a portion of the cost of the Second Avenue Subway? What if a similar arrangement were considered for downtown property that would benefit from direct rail access to JFK?

How would that work?

Funding Approaches

One approach is called tax increment financing (for more on TIFs, see this Independent Budget Office report). The problem with TIFs is defining the very generalized benefits from projects such as improved commuter rail access to the East Side. How do you identify and capture a portion of the flow of financial benefits?

Another approach to innovative financing involves various forms of public-private partnerships. One local example is the International Arrival Terminal at JFK Airport, where a private company invested $1.4 billion to construct a new passenger terminal in exchange for a 25-year concession. The private operator will collect user fees from the airlines using the terminal. Another rather spectacular example was a concession agreement for the Skyway Bridge in Chicago, which generated $1.83 billion for the City of Chicago. Officials in New Jersey are discussing such partnerships for the New Jersey Turnpike.

The State Transportation Department has pushed for “Transportation Development Partnerships,” which allow private investment in infrastructure projects although the public agency retains ownership. State Transportation Department staff have suggested that Transportation Development Partnerships could be used to build new highway lanes, replace the Tappan Zee Bridge or build new rail service. Such private-sector involvement is currently prohibited under state law, however.

Although the discussions do not explicitly make this point, under any private sector investment users of the facility will have to pay tolls or other charges in order for the private entity to recoup its investment.

Acting On Opportunities, Not Reacting To Problems

Another lesson from the 7 extension involves the merits of acting on opportunities. Local government tends to be reactive to problems. The far West Side development is an excellent example of government officials – in this case, fresh from the private sector – recognizing a huge opportunity for the city. This refreshing approach could be applied in other areas. Why, for example, ask whether traffic is bad enough to institute congestion pricing (discussed here last month)? Why not ask whether there isn’t a great opportunity to improve the quality of life in New York through less traffic, less noise, less pollution, greater safety, and greater funding for transportation improvements? Thinking in terms of opportunities frames the discussion around ways of making the city better and more attractive rather than bogging down in a debate over whether we can continue to tolerate long-standing problems.

The Need To Address Risk

A final lesson from the No. 7 extension is the need to address risk. City officials guaranteed payment on the bonds, using general fund revenues if necessary. One of the final decisions to be made was the Metropolitan Transportation Authority’s agreement to pay for any cost overruns that exceed $100 million, an amount that City Hall agreed to pick up. The MTA has expressed confidence that it can manage the project within budget, although the Independent Budget Office’s deputy director, George Sweeting, testified before the City Council in October that “the likelihood of costs overruns are high”, considering that construction costs are increasing at 1 percent per month.

Whether the MTA should have accepted this risk is now a moot point. The need to bear – and ultimately to manage – financial risks, however, are an inherent part of any large construction project.

So in fact, the No. 7 extension does have some lessons for other projects, particularly those in desperate need of funding, such as airport rail access, a freight tunnel under the harbor, putting the Gowanus expressway replacement underground, or the Tappan Zee Bridge.

In his State of the State address, Governor Eliot Spitzer mentioned reform of the Wicks Law, which mandates cumbersome contracting procedures and is viewed as driving up costs. It remains to be seen whether the new governor puts more far-reaching changes such as private-public partnerships on his already bulging legislative agenda.

Bruce Schaller, who has been in charge of the transportation topic page since its inception in 1999, is head of Schaller Consulting, which provides research and analysis about transportation. He is also a Visiting Scholar at the Rudin Center for Transportation Policy and Management at New York University.