Taken for a Ride
The taxi medallion system in New York and other cities raises fares, impoverishes drivers, and hurts passengers. So why can’t we get rid of it?
Posted Wednesday, June 6, 2012, at 6:30 AM
Under a medallion lease, the medallion owner has a constant stream of income. Drivers are the ones who suffer when gas prices rise or a cab gets stuck in traffic—they’ve still got to make their daily lease payments. More importantly, New York’s tight limits on the number of medallions in circulation has suppressed the supply of cabs. There are 13,237 medallions now outstanding, a few hundred fewer than in 1937, but a huge supply of drivers competing to lease them.
In practice, a fixed number of medallions is just a fact of the system. In New York, Chicago, and Boston, the number of medallions has barely budged since they were issued in the 1930s. New York went 60 years without issuing new medallions, and it's only been a trickle since.
Restricted supply makes for high medallion prices, and that in turn leads to consolidation in the industry. Only around 18 percent of cabs are owner-operated, putting most medallions in the hands of big taxi fleets or brokers who simply rent them out. The limited number of shifts and oversupply of drivers looking to work means that the fleets only rent out cabs by the shift, the shortest term, most profitable way possible.
For proof that owning a medallion is an economic turkey shoot, just listen to Andrew Murstein. He’s the chief executive officer of Medallion Financial, a publicly traded company that owns hundreds of medallions and lends money for medallion purchases.
“Taxis are little cash cows,” he announced in an interview last summer touting medallion ownership. Even passive investors who farm out their medallions end up with a 5 percent return, he said.
Because Murstein's company owns a bank, it’s able to take advantage of the Fed’s low interest rates to borrow money for 0.35 percent and loan it out to striving young cabbies who want to own a medallion. The cabbie borrows at around 5.5 percent, with 25 percent down.
“If a borrower doesn’t pay, we send out somebody,” Murstein said. “Literally, they can pop the medallion off the hood of the car and bring it back to our office and, bingo, the guy is out of work.”
While owners and financiers thrive, drivers are having a harder and harder time. Though figures for driver earnings are hard to come by and vary widely, shortly after the most recent fare raise in 2006, a report [Page 36] from an independent consulting company found that drivers’ take-home pay for a 12-hour shift averaged $158. (Last year the NYTWA calculated it at $96.) By all accounts, it’s slipped since.
The principal reason for drivers’ diminished fortunes is that every time taxi drivers ask for a fare raise to cover increased operating costs, the medallion owners’ trade association tries to come along for the ride. Known as the Metropolitan Taxi Board of Trade, the organization has been remarkably successful at convincing the Taxi and Limousine Commission to give them a cut of any fare hikes.
In 2004, the last time the TLC increased fares across the board, drivers got a 26 percent fare increase and MTBT secured an 8 percent [Page 36] increase in the lease rate. In 1996, the commission signed off on a 20 percent fare increase and a 14 percent [Section3.8] boost for lease rates. This time around, taxi drivers have asked for a 20 percent hike in fares. How much would the MTBT like to increase lease rates? Why, it thinks 20 percent is only fair.
Jeff Horwitz is an editor for American Banker.
Chris Cumming is a financial reporter in New York.