Transit Funding: Who Pays & the True Value of a 'Local Match'

For public transit systems, think buses, light rail, and commuter rail. To function and grow, funding must cover two main buckets:

1. Operating Costs: These are daily expenses such as driver wages, fuel, electricity, maintenance, cleaning, service frequency, and scheduling, among others.

2. Capital Costs: This includes purchasing vehicles, constructing stops, stations, and maintenance facilities, as well as paying for infrastructure, technology upgrades, and expansion.

   
   

Operating costs are recurring. This makes it challenging to reduce them significantly without compromising service quality. Capital costs often involve substantial investments that require careful planning. However, they can sometimes be covered through large federal grants when paired with a local match or financing mechanisms, such as bonds.

Main Funding Sources

Transit funding in the U.S. generally comes from a mix of federal, state, local, and other sources (fares, fees, private). Here are the typical players:

Source	What they contribute / how they are used	Pros & Cons
Federal Government (via FTA, USDOT, flexed funds from FHWA, etc.)	Grants (both formula & competitive) are available for both capital and certain operational expenses; matching funds are often required. https://www.congress.gov/crs-product/R47002	Pros: can provide big injections for large projects; helps with modernizing fleets, expansion, etc. Cons: often has strings attached (matching funds, project requirements), uncertain timing; competitive grants are not guaranteed.
State Governments	State transit assistance could be grants, matching funds for federal grants, or regulatory or policy support.	Helpful in smoothing out gaps. However, states vary widely in the amount they provide, and many have multiple priorities, so transit often competes with roads, education, and other services. https://t4america.org/2023/02/22/transit-report-card-part-1/
Local Governments / Agencies	Local revenue sources (sales tax, property tax, income tax, vehicle registration, special fees), fares, local bonds or debt. Tennessee has the IMPROVE Act. It allows for the use of local option sales tax, wheel tax, rental car tax, hotel/motel, and business tax. chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://comptroller.tn.gov/content/dam/cot/orea/advanced-search/2017/2017_OREA_IMPROVEAct.pdf	This is critically important: local sources are more predictable and politically accountable. Strong local funding improves the ability to plan and match federal grants, but raising local dedicated revenue (e.g., via taxes or fees) often requires political will and voter approval.
Farebox / Rider Revenues	The income from tickets, passes, etc.	Helpful, but usually covers only a portion of operating costs (often less than half). Fare increases also risk reducing ridership or being regressive.
Private & Other Sources	Public‐private partnerships, advertising, naming rights, developer contributions, and sometimes philanthropic grants. Transportation For America+1	Good supplemental sources, especially for capital or amenities, but rarely enough to fund large-scale operations or service expansions by themselves.

Formula vs. Competitive Grants

Because of the mixed sources, transit agencies often rely on two kinds of federal/state grants:

• Formula Grants: These funds are allocated based on data (population, need, ridership metrics) that go to transit agencies regularly. Because they are formulaic, agencies can somewhat predict them and plan accordingly. Department of Transportation+2Data.Transportation.gov+2

  
  

• Competitive / Discretionary Grants: These are awarded based on specific project proposals, often with scoring criteria (innovation, environmental impact, matching funds, readiness). These are more uncertain but can be big windfalls. Department of Transportation

  
  

Why Local Dedicated Funding Matters Here: Having strong local funding, especially a dedicated source, helps in several ways:

• Match Funds: Many federal grants require applicants to provide matching funds. If your transit agency can demonstrate steady, local, committed funding, it makes competitive grant requests stronger.

• Project Readiness: Predictable local funds enable you to plan, design, acquire land, and take other necessary steps ahead of time. This allows you to respond quickly when a Notice of Funding Opportunity (NOFO) opens.

• Credibility & Leverage: Grant-makers like to see that local stakeholders are invested. Local funding signals commitment and can unlock more federal or state dollars.

• Service Sustainability: Grants often cover capital or expansion, but not long-term operations. Without solid local revenue, capital gains may not translate into sustained service.

  
  

Where Tennessee Ranks & What’s At Stake

Drawing from recent reports (e.g., Think Tennessee, Transportation for America, etc.), here is how things look in Tennessee compared to other states, and some implications:

• Tennessee is among the states with the lowest per capita spending on transit/multimodal transportation. Think Tennessee+1

• Only one of Tennessee’s major cities, Nashville, has adopted dedicated funding sources for transit. Think Tennessee+2Think Tennessee+2

• Compared to peer states, Tennessee contributes about 9% fewer dollars to its transit agencies. Think Tennessee

• Because of these gaps, Tennessee receives less federal transit funding (formula + discretionary) in proportion to need compared to other states. Think Tennessee

• The lack of local dedicated funds limits Tennessee cities’ competitiveness for federal grants and makes long-term planning more challenging.

  
  

Why Local Dedicated Funding Is Especially Critical in Competing for Grants

Putting together the previous parts, here’s why dedicated local sources are almost indispensable if a region wants to win big grants and build strong transit:

1. Matching & Leverage: Many federal grants require that local or state partners match a percentage of the cost. Without local dedicated funds, securing matching dollars is harder, weaker, or less credible.

2. Demonstration of Stability & Readiness: Grant committees want to fund projects that are likely to be completed on schedule, properly maintained, and financially stable. Evidence of local commitment, as demonstrated by dedicated funding, provides confidence.

3. Enabling Long-Term Planning: Projects for transit expansion or modernization (such as new buses, rail lines, vehicle charging, or electric vehicle transition) can take years. Agencies need predictable revenue to plan for land acquisition, operations, and to meet regulatory and environmental requirements, among other needs.

4. Filling the Operations Gap: Even when capital grants are received, operations still need to be funded. Without reliable local revenue, service cuts or deferred maintenance can erode the gains from capital investment, reducing ridership and making future grant applications less competitive.

5. Presidential Administrative Goals: Many grants explicitly require or favor projects that meet presidential administrative goals, such as improving equity, reducing emissions, and enhancing access. To meet those goals, expansions or service improvements in underserved areas often require higher costs. Local funding ensures that those commitments don’t fall apart due to a lack of funds.

   
   

Key Takeaways & Policy Implications for Tennessee (and Similar States)

• Establishing a dedicated revenue source for transit, as outlined in the IMPROVE Act, should be a priority. Without that, our regional cities remain uncompetitive.

• State policymakers could consider matching programs or boosting state transit funding to reduce disparity.

• Advocates in Tennessee should highlight the cost of underinvestment in mobility, traffic congestion, and access to economic opportunity.

• Regions in Tennessee that secure or propose dedicated funding will likely experience multiple benefits, including improved service, more stable operations, and better success rates in obtaining federal grants.

  
  

Conclusion

In conclusion, the importance of local dedicated funding for public transit cannot be overstated. It is the backbone of a thriving transit system that meets the needs of our communities. By prioritizing these funding sources, we can ensure that our public transit systems are not only sustainable but also capable of supporting the growth and development of Middle Tennessee. Together, we can pave the way for a brighter, more connected future!