The Hazards of Federal Subsidies for Operations

There’s an interesting discussion on Twitter, courtesy of Adam Batlan, about federal subsidies for capital funding versus operations. It’s become a popular reform proposal among American public transport advocates, who are frustrated with the status quo of federal funding for capital but not for operations. Unfortunately, the proposed change to the status quo – federal funding of operations and maintenance – is even worse than the status quo. The hazards of outside funding sources for operations are considerable and unavoidable, whereas those of outside funding for capital expansion can be mitigated by defining expansion appropriately, to the exclusion of ongoing maintenance.

Why federal funding should only go to expansion

Public transportation has ongoing operating expenses, and capital funding. Ongoing expenses can only change gradually – rail service in particular is dominated by fixed costs, like maintenance, and service changes have little effect on operating costs. This argues in favor of steady funding for operations.

Can federal funding be this steady? The answer is no. The federal government is where politics is. People with serious differences in opinion over issues including the overall size of federal spending, spending priorities, and how sensitive spending should be to economic conditions contest elections, and if one side has a majority, that side will get its legislative way. Nor is this some artifact of two-party majoritarianism. In consensus democracies the salience of a majority is if anything higher – there are big differences in policy, including transportation policy, between the various parties of Switzerland or the Netherlands, as the parties have to deliver results to attract voters rather than relying on polarization and partisan identity.

This kind of politics is very good when it comes to debating one-time capital projects. A center-right government committed to austerity with little attention to climate change, for example Germany since 2005, will not spend much money on rail expansion, and railroads will formulate their plans accordingly. The key here is that planning around maintaining current operations without expansion is not difficult, whereas planning around sudden cuts in operating funding is.

The issue of ongoing capital expenses

Current US policy is for the federal government to fund capital expenses, but not necessarily expansion. Normal replacement of equipment and long-term maintenance both receive federal funding. This is bad policy, because the way agencies respond to changes in funding levels is to defer maintenance when the federal government is stingy and then cry poverty when the federal government is generous.

The most extreme case of this is the state of good repair (SOGR) scam. The origins of SOGR are honest: New York City Transit deferred maintenance for decades, until the system collapsed in the 1970s, leading to a shift in priorities away from expansion and toward SOGR in the 1980s and 90s. There were tangible improvements in the last era, raising the mean distance between failures on the subway from about 10,000 km in 1980 to 250,000 in the 2000s. But this process led to a trend in which agencies would deliberately defer maintenance, knowing they could ask for SOGR funding letting them spend money without having anything to show for it.

By the 21st century, New York’s SOGR program turned into such a scam. The MTA capital plans keep having line items for achieving SOGR, but there are no improvements, nor does the backlog appear to shrink. If anything, throughout the 2010s service deteriorated due to slowdowns, until Andy Byford began the Saving Precious Seconds campaign. The same scam appears elsewhere, too: Amtrak deferred maintenance in the 2000s under political pressure to look profitable for privatization, a Bush administration priority, and when Obama was elected and announced the stimulus, Bush-installed CEO Joe Boardman began to talk about SOGR on the Northeast Corridor as a way of hogging billions of dollars without having to show increases in speed.

The forward solution to this problem is to credibly commit not to fund maintenance, ever. The fix-it-first maxim is for local governments only. The maxim for outside funding should be that any request for funding for maintenance or replacement is a tacit admission the agency cannot govern itself and requires an outside takeover as well.

The issue of frequency

The problem the thread linked to at the beginning of this post sets to solve is that some cities get money to build a light rail line but then only run it every 20 minutes. This, however, is a problem of incompetence rather than one inherent to the incentives.

A long-term revenue-maximizing agency, confronted with an urban rail line that runs every 20 minutes, will increase its frequency to at worst every 10 minutes, secure in the knowledge that the long run elasticity of ridership with respect to frequency in this range is high enough that it will make more money this way. This remains true even for a dishonest agency, which has no trouble maximizing long-term revenue by deferring maintenance and then asking for SOGR money when funding is available.

This fact regarding frequency is doubly true if the trains already run frequently at rush hour and only drop to 20-minute frequency off-peak. Fleet costs are determined by the peak, and large peak-to-base service ratios require expensive split shifts for crews. Therefore, a bump in off-peak frequency, especially from such a low base as 20 minutes, will increase ridership for very little increase in operating cost.

The thread does not mention the issue of connecting bus service much – I got yelled at for proposing half-hourly local buses timed with commuter trains – but there, too, the rule of only subsidizing expansion rather than maintenance or operation leads to good enough incentives. In Seattle, light rail expansion has led to bus service changes designed to feed the trains, increasing bus ridership even as rail service replaces the most crowded corridors.

The bus cuts of (for example) San Mateo County in response to rail expansion should then be put in the same basket of pure incompetence with the light rail line that runs every 20 minutes off-peak. The incentives line up in one direction, but due to such factors as unfamiliarity with best practices and managers who do not ride the trains they run, management goes in the other direction.

The forward solution here is to stick to funding by expected ridership. If the service plan involves low frequency, this should show up in the ridership screen and penalize the project in question, while urban rail lines that run every 5 minutes get funded.

25 comments

  1. Henry Miller

    Federal funding should be contingent on maintenance being up to date for everything in your region. Want a new road lane – show the water pumps have been oiled. Part of this is funds set aside to replace the pipes when they reach end of life (and some reason to believe the fund won’t be raided).The water system and road system are not related, but if you are not to keeping up your current systems why should I believe that will keep the new system we give up working.

    Of course in some cases the region can respond that the public water system shouldn’t have been built and they are deferring maintenance because there is no point in maintaining something that will be scrapped soon anyway. While this is a rare situation I will accept it – but I expect the old system to be abandoned in that case, and won’t help replace it.

    • trapsforfools

      This is already the case for new transit projects. The grant applicant has to show that they can operate + maintain the new project for 20 years – without sacrificing the operation/maintenance of their existing system.

      As always, the policy is imbalanced, because federally-funded highway projects have no such requirement.

  2. DL

    What if instead of a dollars fixed subsidy, you just made the government pay for the shortfall between operating expenses and revenue? Then the government incentives are in place to plan around reduction in subsidy, no matter the political party.

      • DL

        I would think in that situation it would be in the government’s best interest to do oversight, and some of the planning?

        The more the government oversees the more they have the possibility to accurately measure all the societal costs/benefits of things.

  3. Hugh B

    What about projects that could be considered SOGR, but the replacement is far better than what it is replacing? i.e. insert any 100 year old piece of infrastructure on the NEC?

  4. Gok (@Gok)

    By expansions do you strictly mean the addition of new routes? Is electrification expansion? What about replacing grade crossings with overpasses, or double-tracking?

    > If the service plan involves low frequency, this should show up in the ridership screen and penalize the project in question, while urban rail lines that run every 5 minutes get funded

    Has there ever been a successful clawing back of funding from a project that reneges on a service plan?

  5. Henry

    I don’t think it would be unreasonable to attach minimum performance criteria to transit projects seeking funding, e.g. must run every half hour during the midday.

  6. adirondacker12800

    nor does the backlog appear to shrink.

    Because stuff that wasn’t ancient ten years ago wears out over those ten years. There’s going to be something wearing out somewhere forever. It’s why the private railroads spend a bazillion dollars every year on maintenance. It’s never ends. Or airlines buy new planes to fly to airports with new terminals or bus companies or the obscure ferry or funiculars… Stuff, unless you build it out of durable stone or Roman concrete, doesn’t last forever.

    • michaelrjames

      Stuff, unless you build it out of durable stone or Roman concrete, doesn’t last forever.

      … except maglev. Well, the important–and most expensive–bits don’t wear much at all. A US engineer who did a technical visit to the Shanghai Transrapid (at about 12 years age) said they had performed about the equivalent of 2 weeks maintenance over the whole period. Must represent a massive cost saving over the lifetime of a passenger railway. Not to mention the reliability bonus.
      At the risk of being a bore (ok, no risk, already achieved):

      https://pedestrianobservations.com/2017/07/24/faster-than-conventional-rail-where-could-it-work/#comment-66804

      • adirondacker12800

        The Panteon hasn’t been around as long as the pyramids but they’ve been around a long time. Maglev is going to last as long as you can expect conventional concrete to last. If the Chinese think it’s so cheap why haven’t they built more?

        • Alon Levy

          The PRC was uncertain about maglev vs. conventional HSR, and then the NIMBYism in Shanghai swung the pendulum toward conventional HSR. People in Shanghai complained that the PRC had changed the standards for separation between tracks and residences from the German original, IIRC from 100 to 30 meters, and said that there was unsafe radiation emanating from the system. The radiation concerns were bunk, but nobody believes a word the PRC says about environmental matters, it turns out that having unsafe food to eat on the streets because CCP officials get private sources of food is not conducive to social trust.

          Westerners perceive China as a place where NIMBYs get steamrolled, and it’s roughly as true as in postwar America, where demolishing black neighborhoods for freeways and urban renewal was easy but doing the same to gentrifying white neighborhoods like Greenwich Village was not. Turns out that when you don’t have rule of law, and don’t bother developing rule of law because putting Uighurs in concentration camps is a higher priority, middle-class herrenvolk don’t trust the state to be honest about anything.

          • adirondacker12800

            My brain hurts. The Chinese can’t be trusted with environmental matters but were scrupulously attentive to the NIMBY’s. Who rose up in a spontaneous grassroots effort. Not something prodded by the state propaganda machine to cover up that their gadgetbahn was a lemon. And the same people who scrupulously report what it costs to maintain and operate their white elephant. Who haven’t built more, in places where the NIMBYs aren’t so vocal. Okay.
            The Lower Manhattan Expressway was going to connect the Holland Tunnel to the Williamsburg and Brooklyn Bridges. Also known as the Canal Street expressway, none of which are in Greenwich Village. Through Little Italy, Chinatown, what we now call SoHo and Tribeca. The Villagers were busy getting a historic district created which is far north of Canal. Far north of Houston too. Busy expanding it and gentrifying it. Pushing out the bohemians that made it destination. Some of them even filtered SOuth of HOuston. And when that got too expensive to the TRiangle BElow CAnal.

          • Alon Levy

            The PRC actually does care what Shanghai NIMBYs think. Same way the American state was forced to care about what NIMBYs in the Village thought even while destroying working-class neighborhoods elsewhere.

          • michaelrjames

            Now my brain hurts too.
            I don’t know what either of you guys are talking about.
            NIMBYs may have objected to the building of the maglev, and adopted typical NIMBY strategies, ie. on totally specious OHS grounds, but clearly they had no impact. Especially as the powers that matter were not going to listen to a bunch of rubes from the boondocks (ie. in the Pudong, not exactly the Xintiandi!).
            Today, those same powers, ie. the CCP, do care what happens in Shanghai but that’s because it’s where the trouble always starts, including of course the very founding of the CCP itself. Xi knows because he was mayor of Shanghai.

            Meanwhile they have obviously authorised serious spending on the maglev. What’s the bet they’ll have that 200km track up and running within a year, which is 5 times what the Japanese have for their (inferior) version of maglev. That’s already half the 362 km between New York and Washington, D.C.

        • michaelrjames

          So, tell me what the cost of maglev is? Hint, it’s not nearly as much as the Brits are paying per km for HS2 or the Californians for theirs. Especially if they have built those major lines (Beijing-Shanghai, etc) so they can add lightweight maglev on top.

          The real reason why in the mid-2000s they chose to go with standard HSR was that they didn’t have enough experience with maglev, construction and operation, and they wanted to roll fast train out very fast. I don’t think the issues Alon mentions would have stopped them but after almost 16 years of flawless operation the Shanghai TransRapid alleviated all fears, real and fake alike. It may still be some time away but clearly they have been working away. Could still build one as long as, and sooner than, HS2 or CAHSR. In fact this 200km maglev test-track is longer than HS2-phase 1 (192km, was due 2026 but might be cancelled by Xmas).
          ………………………
          Actually, perhaps sadly, most Han Chinese do trust their government, and more than most Americans or Brits trust their governments at the moment. It’s why they won’t allow Hong Kong to gain any more freedoms. They are intent on destroying rule of law there too, and a lot of Hong Kongers won’t care … until it’s too late.

  7. Jonathan Salmans

    When I visit parts of the United States other than my own city, I like having good public transit options. I do not have the ability to vote in other cities local elections, so the only way that I can influence that is by writing to my Federal representatives.

    Local transit decisions influence regional mass transit in another way, in that good intracity mass transit is necessary for good intercity mass transit. The reason is that there is not enough parking in downtowns for people to take intercity trains that run at a useful frequency, so you need to be able to get a significant number of people to the station by local transit for useful intercity frequency.

    The federal government in the United States also has more capacity to tax and raise revenue than local governments do.

    I also worry that if the federal government is not engaged in mass transit, there will be too much focus on transportation within states rather than across state borders. For example, in my state of Pennsylvania the state has studied possible improvements between Pittsburgh and Harrisburg, but there has been no consideration for improved train service between Pittsburgh and Cleveland.

    Finally, the relatively high spending on highways compared to transit is bad for transit in the United States.

    Perhaps if transit were given a dedicated funding source that does not need to be periodically re-authorized, that would be a better way to address the concerns in this blog post.

  8. Herbert

    A big problem is that cities are structurally broke. And unlike federal government they can’t create new funding sources. For example, German cities cannot charge congestion fees to fund public transit operations…

    The income cities are allocated is by far not enough to cover the stuff they have to do…

      • Herbert

        Berlin is a city-state, the municipal and the state level are the same. Also, the Greens want to explicitly allow congestion pricing at the federal level (Robert Habeck said that to me personally the two minutes I got to speak to him at a campaign event)

    • Matthew Hutton

      Local government could fix its management structures to be more efficient.

      • Herbert

        Even tho you might have heard it in some Randian screed, local government is not actually terribly inefficient. Some things it does more efficient than the private sector. Building metro lines for one. Amazingly in Madrid cheap metro buildout ad amazing levels of corruption coexisted in the mid 1990s to mid 2000s

        • Matthew Hutton

          Because managing staff by bullying them (which the public sector is notorious for) is how you get the best out of them? Because drowning staff in paperwork so that front-line staff spend half their time doing it is a good idea? Because refusing to do anything to make any kind of efficiency improvement is good?

          I get that the private sectors isn’t all roses – and these issues should be fixable – but still.

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