Friday, January 30, 2009

False Dichotomies: Capital or Operating?

It's one of the central concepts of transit wonks: every transit agency (in fact, pretty much every government agency, and most corporations as well) has two sections to its budget. Operating budgets pay for short-term expenses like salaries, fuel, electricity and the printing of schedules. Generally, once they're consumed, there's nothing left of any value. Capital budgets pay for large durable items that can sometimes be resold, like train cars, buses, station platforms, signals and railroad ties. On this division depends a significant amount of politicking, such as the neverending bickering about profitability and farebox recovery. A company or agency can sometimes be called "profitable" if its revenues cover all its operating expenses, even while it gets capital subsidies.

On many a blog I've seen transit wonks shake their sympathetic heads at passengers who don't understand why the agency is laying off drivers and building a new rail line at the same time. These poor people don't know that driver salaries and rail construction come from two different budgets, they say. Of course, that's a non-explanation on a par with "the computer won't let me do it."

The fact is that these two neat categories mask a continuum of expenses, from the very durable and valuable (concrete roadbeds) to the completely ephemeral (lobbyist fees, perhaps). There are lots of things in the middle that don't quite fit. One of the biggest is debt service - the interest and principal on the loans that were taken out to pay for the capital budget. And don't get me started on these shady lease-back deals where transit agencies "sold" their assets to financial firms (for capital money) and "rented" them from the same firms (using operating money).

The other big area in the middle is capital maintenance, which covers things like replacement parts for vehicles and new signals. It's in the capital budget, but it affects operations. If agencies "defer maintenance" to cut capital costs, they wind up with more breakdowns and "accidents," and thus an overall lower quality of service.

The current dichotomy between capital and operating costs obscures the issue for many people. You could be forgiven for thinking that the capital budget only covered things like system expansion and service upgrades and concluding, "why not cut it this year, when we're short on cash?" The capital/operating dichotomy doesn't make it clear that cutting a million dollars from capital maintenance can be as disastrous for transit service as cutting a million dollars from the operating budget. It'd be a lot easier if there were a different set of two buckets: one for the budget where cuts would disrupt service, and another where cuts would just defer system expansion.

Maybe I'm cynical, but I think that some people out there like it this way. They can cry "You can't defund the capital budget or else we won't be able to fix the seats on the buses!" and then use the money to dig new tunnels. Well, that's a bait-and-switch, and we don't like it when our friends do it any more than when our enemies do it.

This bait-and-switch is aided by another intermediate category: "modernization." It's true that old parts tend to be harder to maintain and to find parts for, so in the long run it can save money and cut down on service disruptions to replace them with newer models. And these newer models, coincidentally, sometimes come with new features that the agency didn't mention when asking for money to modernize. Are they capital, maintenance or operations?

My apologies to the bait-and-switchers, but I think we should be clearer about these things, and separate system expansion, upgrades, modernization and maintenance in the capital budget, so people know where their money is going.


BruceMcF said...

The frame is also used in the other direction ... a big framing of the debate over rail and transit funding in the stimulus bill is "shovel ready", with the idea that all "capital" spending is new projects used to pretend that there is a shortage of projects that can be completed in a year and a half ... when in reality the major maintenance capital backlog across the country is so bad it could easily soak up as much as is being thrown at highways.

However, of course the distribution of the capital works backlog might not be the most politically appealing, with much of it in "safe" Democratic House districts.

Gary said...

Cap'n, I believe your cynicism is well founded.