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SMART AT A CROSSROADS - Marin Grand Jury ( June 2023)

SMART’s Threats and Challenges

The primary “threat” to SMART is its dependency on the locally imposed sales tax. As recognized in its own SWOT analysis, a well-funded and organized opposition to the sales tax could very likely cause the service to end.

Lack of ridership not only contributes to public questioning of the system’s value, but it also means less revenue. SMART cannot survive on ridership revenue alone. Rather, it requires a public subsidy to continue operating. This is not atypical; all the largest public transit systems in the San Francisco Bay Area are financed by public subsidies. The question is how much of a subsidy will voters accept.

An operation such as SMART has significant fixed costs to operate. This means that regardless of the number of riders or the fares that it charges its riders, SMART’s operating expenses do not vary significantly over time. As demonstrated in Table 1 below, SMART’s annual operating expenses (which exclude capital expenditures and debt service) have remained about $27 million since 2019. But in the past four years revenue from riders approached $4 million just once.

The data speaks for itself and the lesson is clear: SMART cannot survive just from its farebox. It requires some form of public subsidy. SMART’s primary source of operating revenue is and has always been the local sales tax. In FY 2022, sales tax receipts were $49 million compared to $1.2 million obtained from the farebox. The current FY 23 budget forecasts $51.6 million in sales tax collections.

As demonstrated in Table 1, SMART’s ridership, and therefore its farebox revenues, declined precipitously during the pandemic and have yet to recover.³⁸
SMART’s farebox recovery ratio, i.e., the amount received by paying customers relative to operating costs,
dropped from 15 percent in 2019 to as low as 3 percent in 2021, and 5 percent in 2022. WRONG
The end result is that the sales tax has subsidized SMART ridership, ranging from $32 to $75 per ride, with a high of $196 in 2021. WRONG

dropped from 9 percent in 2019 to as low as 2 percent in 2021, and 3 percent in 2022.
The end result is that the sales tax has subsidized SMART ridership, $128 in 2019, $168 in 2020, $518 in 2021, $240 in 2022  per ROUNDTRIP.

SOURCE page 79

FINDINGS

1. F1. SMART is heavily dependent on revenue from voter approved Marin and Sonoma County sales taxes for funding its operations.
2. F2. SMART has never attained the ridership levels that it promised in 2008.
3. F3. SMART’s past inability to be open and transparent about decision making and operations contributed to the erosion of public confidence leading to the defeat of the Measure I sales tax extension in 2020.
4. F4. SMART will likely be forced to discontinue services if Marin and Sonoma County voters do not approve a sales tax extension by the required supermajority in an election before 2029.
5. F5. SMART’s new leadership, especially its General Manager and Chief Financial Officer, appear qualified, energetic and motivated to take on the many challenges that SMART is facing.
6. F6. SMART does not have a comprehensive marketing and communications strategy.

RECOMMENDATIONS

1. R1. By December 1, 2023, the Board of Directors should initiate a fully transparent, public process to be completed by April 1, 2024 that examines how SMART might continue funding its operations beyond April 2029, including an evaluation of when the voters would decide whether to continue levying a sales tax for SMART’s operations.
2. R2. By December 1, 2023, SMART’s Board of Directors should direct staff to develop a written strategic marketing communications and public outreach plan and budget focused on educating voters in Marin County about the community benefits derived from the continued operation of the SMART rail system.
3. R3. SMART’s Board of Directors should consider hiring consultants to help evaluate the feasibility and timing of future tax measures.

On  April 2029 the ¼ percent sales tax expires.

Since Marin and Sonoma county voters in 2008 authorized the sales tax  the public have invested more than $600 million.

Since trains first began operating in 2017, the weekday average ridership has rarely exceeded 2,500. ( 1,250 ROUNDTRIPS)

Even though SMART’s ridership has rebounded after the Covid-19 pandemic, current ridership remains short of expectations.
Without more riders the public may not be convinced of SMART’s value.

Even though SMART’s new leadership, especially its General Manager and Chief Financial Officer, appear qualified, energetic and motivated, SMART’s Board of Directors (Board) has yet to engage in a comprehensive marketing and outreach strategy to increase the number of riders.

The Grand Jury has found that SMART is highly dependent on sales tax revenues for its operations.
 Without those funds SMART will not be able to continue even if it substantially increases the number of riders or obtains additional federal, state, or regional funds from existing programs.
 In fact, SMART will likely be forced to discontinue services if Marin and Sonoma county voters do not approve a sales tax extension by the required supermajority in an election before 2029.

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DISCUSSION

As the March 2020 election results made clear, voters did not believe SMART’s Board and existing management had accomplished what they promised, nor did voters have confidence and trust in the Board’s performance.

¹¹ The Board and management team have difficult tasks ahead of them.
They must continue to construct and improve the system and regain public support in the organization’s mission.
 In 2021, a newly hired General Manager and his new management team recognized their principal mission was to review ongoing operations and identify and plan for future challenges and opportunities.

To help them accomplish these goals, last year they crafted a SWOT (Strengths, Weakness, Opportunities, and Threats) Analysis (a widely used model or technique designed to help organizations focus their projects more clearly and effectively).

The Grand Jury applauds the General Manager for undertaking this effort. Since SMART is using this model to assess its own operations and future plans, the Grand Jury believes it can be the criteria against which SMART can be measured and also provide the general public an assessment of where SMART stands today.

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They have been successful in obtaining funding. Most recently, their continuing efforts have resulted in obtaining a substantial share of the funding from the Regional Measure 3 toll program required to finish constructing the route to Windsor and Healdsburg.¹²

Last October, SMART announced it obtained $10 million from the State of California’s Transportation Agency and $2 million from both the city of Petaluma and Sonoma County’s Transportation Authority to build the 13th station, North Petaluma.¹³

SMART has operated its trains as planned with 30 minute headways. When the system expanded from Larkspur north, the number of daily weekday trips increased to 36. As a result of the Covid-19 pandemic the number of scheduled trains declined substantially. In October 2022, SMART finally reached its goal of 38 weekday daily round-trips.¹⁴

SMART reported in 2020 that “nearly 20 percent of its riders brought bicycles onboard” and “nearly 65,000 bike/walk trips monthly across nine locations in Marin and Sonoma counties.”15The Grand Jury calculated from the monthly ridership reports that in 2022 approximately 15 percent of the boarders brought along bicycles.16 Evidently, SMART’s connection with bicycle riders appears to be working.

SMART’s Weaknesses

While a traditional “SWOT” analysis considers an organization’s “weakness” to be reflective of an organization’s internal deficiencies, the Grand Jury has focused on SMART’s major weakness which is low ridership. Without more riders, public perception of the system’s value will continue to decline.

Low ridership

SMART has failed to meet its own projections or goals for ridership.
SMART’s 2006 Final Environmental Impact Report projected that by 2025 it would carry approximately 5,050 riders per weekday.¹⁷

When the trains began operating, SMART temporarily reduced its ridership goal to 3,000 riders each weekday. Yet, as of March 2023, SMART’s General Manager, Eddy Cumins, promoted the goal of 5,000 riders per weekday.¹⁸

Actual ridership on the SMART system since it commenced operations has been considerably less. Graph 1 illustrates the average number of weekday riders since the start of operations.
The data illustrates a slight increase in the number of riders when service to Larkspur was initiated.

Graph 1 also illustrates that prior to the impact of COVID-19 in March 2020 SMART ridership fluctuated between 2,000-3,000 riders per weekday, rarely approaching or exceeding 3,000 riders per weekday.
In April 2023, SMART’s weekday average ridership was 2,340 passengers.¹⁹

Source: SMART Ridership Reports, https://www.sonomamarintrain.org/sites/default/files/Ridership%20Reports/SMART%20Ridership%20Web%20Posting_Apr.23.xlsx   , Accessed on 4/28/23.

SMART’s ridership has not fully recovered to its pre-pandemic level. On the plus side, over the past year SMART’s average weekday ridership ranged between 68 and 97 percent of its prepandemic number. Its post-pandemic experience is better than both BART and San Francisco’s Muni operations, which have been less than 40 percent. ²⁰

Nevertheless, the system continues to experience lower than anticipated ridership. There are several factors which have contributed to this phenomenon. In the first place, the system was limited by the use of only a single track, minimizing the number of trains operating at one time and reducing the probability of more riders. A second cause is an underfunded marketing program. Most critically, however, less than anticipated riders occurs because of what is known in transit parlance as the “first/last mile” conundrum.

The “first/last mile challenge”

A major hurdle for all public transit operators, including SMART, is getting riders out of their automobiles and onto public transit. This is the “first/last mile challenge.” The problem is the result of several factors, some in SMART’s control and some not. Issues involving parking availability, bus and ferry system transfers, the bicycle pathway, and links with employers are all within SMART’s control. SMART is a system that, in contrast to other Bay Area transit agencies, has fewer potential riders, operates on a route with stops that are not close to many residences or large employment centers, and its route is such that it does not serve as many commuters as do other public transit agencies.

 SMART’s Opportunities

 “Opportunities,” in the language of a SWOT analysis, tells the Board and management to look outside the organization for new customers. Increasing ridership should be SMART’s number one operational goal. Increasing the number of riders is highly correlated to an attractive fare structure, reliability of service, improvement of first/last mile connections, and building public confidence in the Board and management.

A marketing plan

SMART’s “shortage” of riders has been known and discussed since the system’s inception and certainly once the trains began operating. At the time, numerous commentators noted it would be difficult for SMART to attract riders.²¹

SMART’s 2022-2023 budget proposed spending only $250,000 for communication and marketing purposes.²²

Given SMART’s ridership goals, the Grand Jury finds the lack of a comprehensive, multi-level communication and promotion effort to attract additional riders to be perplexing.

The “first/last mile” challenge—getting to work, home, jobs, and the airport

SMART has considerable “opportunities” to increase its ridership by focusing on improving its “first/last mile” connections. The 2009-2010 Marin Civil Grand Jury recognized this need and recommended that SMART create programs designed to encourage both employers and employees to use its trains.²³

The opportunity to help Marin’s workforce was clear. In 2018, the Transportation Authority of Marin (TAM) found that twenty eight percent of Marin’s commuters arrived each morning from Sonoma County locales.²⁴

Recently, SMART has made improvements in station parking, and two months ago established a three-year, $1.1 million trial program to connect Sonoma County Airport with the Airport Station.²⁵

The “first/last mile” challenge—building residences, retail, and jobs near SMART’s stations

Public transit systems have cooperated with local governments and developers to increase housing adjacent to transit stops with the dual objectives of increasing ridership and building more housing.²⁶

For example, Novato is considering linking the San Marin station to a mixed housing/retail project, the former headquarters of Fireman’s Fund Insurance Company, less than ½ mile away.²⁷

Conversely, Petaluma’s City Council recently turned aside a housing plan adjacent to the new North Petaluma (Corona Road Station) that would have provided 500 residences, parking, and revenue for both the city and SMART.²⁸

SMART has begun making contacts with major retailers and employers.²⁹

The bicycle-pathway is another way SMART has chosen to deal with the first/last mile challenge.³⁰

Regaining the public’s trust and confidence

Another “opportunity” arises because the general public, as the Grand Jury has heard in interviews, via direct observation, and in published reports, lost confidence and trust in SMART’s Board and prior management team.
The failed passage of the sales tax extension in March 2020 was attributed partially to the public’s questioning whether the Board and management were being fully transparent.³¹

When SMART was created and voters were asked in 2008 to approve a tax measure, advocates promoted the idea that it would be open to public input and scrutiny. Voters were promised the creation of a “Citizens Oversight Committee (COC)…to provide input and review on (SMART’s) Strategic Plan” and to conduct an ongoing review of the System’s finances.³²

The value of this independent citizens oversight body was highlighted by both the 2013-14 Marin Grand Jury and the 2021-22 Sonoma County Grand Jury.³³

After the 2020 defeat of Measure I, the Sonoma County Grand Jury reiterated a concern that SMART’s Board and prior management team neglected or chose not to solicit input from the Citizens Oversight Committee.³⁴

It found that the SMART Board’s lack of citizen input contributed to voters’ distrust or disbelief of the system’s financial need and thus led to the defeat of the 2020 Measure I.³⁵ SMART’s Board just recently acknowledged the problem and agreed to accept the Sonoma Grand Jury’s recommendations “ensuring that COC will have an opportunity to provide timely feedback to the SMART Board of Directors.”³⁶

The SMART Board and new General Manager have taken several steps, including “listening tours,” designed to solicit greater public input from those who have been critical of SMART’s decisions.They also promised to have the COC’s reports become public and available on the SMART’s website.³⁷

Other sources of available revenue

Even sales tax collections have been insufficient to both operate and build the complete system.
Nearly every public transit agency in the country uses federal funds, and often state programs as well, to build their systems.
Recently, the federal government and the State of California have expanded their programs to also help pay ongoing maintenance and operating costs.
The federal government’s program provides SMART approximately $4 million annually for preventive maintenance.
By 2025, SMART will be eligible to receive funds from another federal program, called “State of Good Repair,” that is expected to provide about $6 million annually.³⁹

 State of California public transit assistance programs have supplied SMART with additional funds for both capital and operational purposes. SB 1, the State Rail Assistance program, allocated more than $21 million for SMART’s operations.⁴⁰

Additional funds have been received from Metropolitan Transportation Commission programs designed to help construct the bicycle pathway.⁴¹

The Grand Jury has investigated possible alternative funding sources for SMART operations, besides the sales tax, that exist or might become available prior to 2029. One new source of funds San Francisco Bay Area voters approved in 2018 came from increasing bridge tolls (Regional Measure 3). The money, which is restricted to capital improvements, was not distributed until a court challenge was finally decided in January 2023. This measure allocated a large share of the funding necessary for completing the route to Windsor and Healdsburg ($81 million) and finishing the bike paths ($3 million).⁴²

A similar regional tax plan is currently being considered by the Governor and Legislature. The Bay Area’s regional planning and transit bodies, business community leaders, and legislators representing every county in the region are expressing alarm that the region’s major transportation operators are facing “a fiscal cliff.”⁴³

One possible legislative response being deliberated is another regional tax measure which could appear on either the November 2024 or 2026 ballot.⁴⁴

The Grand Jury recognizes that while such a regional tax or a similar plan may be developed and voter approval would be sought, its impact on SMART is uncertain. The timing of a regional tax measure could influence how voters might treat any Marin-Sonoma local sales tax measure. SMART’s Board of Directors should monitor the progress of this proposed alternative financing option.

The Grand Jury has not been able to identify any single or combination of federal, state, and regional funding programs sufficient to replace the projected $51 million sales tax annual operating revenue needed to keep the trains running. Moreover, because the State of California’s anticipated revenues are projected to decline significantly, the Governor and Legislature are considering substantial reductions in state transportation funds.
Other than locally generated sales tax revenues, no other funds are guaranteed to keep the trains operating.

SMART’s FUTURE

The General Manager’s SWOT analysis identifies SMART’s primary “threat” to be the future of the sales tax. The Grand Jury agrees that it should be the Board’s primary focus.
In addressing this question, the Grand Jury reminds SMART’s Board of Directors that, while on four separate occasions since 1998, a majority of Marin and Sonoma county voters supported an inter-county passenger train, the plan to pay for it did not receive the required super-majority voter approval.
Local taxpayers have funded a monumental capital infrastructure project and voters have directed SMART’s board as stewards of this investment to manage it wisely.
The table is now set for a critical decision.
SMART’s management and Board of Directors need to make the case to voters in Marin and Sonoma why they should continue to support a project that has fallen short of its original goals and promises.
SMART should address and acknowledge its performance to date and educate voters on why its continued operation is in the best interest of Marin and Sonoma counties.
The analysis should include a clear explanation of its financing options and the likelihood of future success.
SMART is at a crossroads – will it be here tomorrow?

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SOURCE https://www.marincounty.org/-/media/files/departments/gj/reports-responses/2022-23/smart-at-a-crossroads.pdf?la=en