Home MTA Economics Against the use of capital funds to cover the gap

Against the use of capital funds to cover the gap

by Benjamin Kabak

At yesterday’s MTA Board meeting, two sides to an important policy battled emerged. On the one hand were those who supported the so-called Gene Russianoff plan, a call to shift 10 percent of the MTA’s available federal stimulus funds from its capital budget to cover its operating gap. On the other side were those who lived through New York City in the 1970s and experienced first-hand what capital neglect meant to the city’s subway system and what it led to.

Doreen Frasca, a 2008 Paterson appointee, spoke out in favor of shifting the funds. She urged the agency to shift its pay-as-you-go funds to cover its operating gap and wanted to make the move to transfer nearly $90 million in stimulus funds, the maximum allowed by the feds, to the MTA’s operating balance sheet as well. “I will vociferously support transferring 10 percent of that money” to cover the gap,” she said.

Others spoke out against the idea. “I have great difficulty in moving capital money to operating,” Mitchell Pally, the Suffolk County representative, said. “That’s the problem we had in the 70s when we did that and it took us a very very long time to change the negative consequences of that.”

Norman Brown, one of the labor reps from the Metro-North Railroad Coalition, agreed. “The fear is that if capital is flexed to operating, that if federal funds are flexed to operating then the state and the city government will not be forthcoming with the funds they were previously forthcoming with,” he said. In fact, he continued, the state’s shifting of capital debts to the operating ledger is exactly why the MTA is saddled with excruciatingly large debts due to come due in a few years. To do the same in reverse would accomplish nothing.

Despite this burgeoning ideological policy debate, these comments only scratch the surface of the why of it all. On Tuesday, the Regional Plan Association released a statement that explained the policies behind its opposition to the funding shift.

First, the RPA says, there are two specific problems with “bleeding particular sources of capital dollars.” The pay-as-you-go fund allows the MTA to both keep the capital plan moving into the new year before the agency’s next five-year plan gets approved, and the capital budget faces a budget gap of 9.9 billion. To take money from capital today would drastically harm transit’s tomorrow.

The release continues:

2. Capital spending is good for long term economic recovery, which the MTA desperately needs given tax revenues are tied to the economic health of the region. Also, we’re in this operating mess because of past lack of investment. Moving these dollars to operating would undercut the system’s reliability and safety and jeopardize the progress that has been made since 1980 in restoring the system to a state of good repair. And by deferring required maintenance, it would actually increase future costs to sustain the system, requiring even larger investments – and putting more pressure on the fare – in the future. Similarly, halting or deferring projects like East Side Access or the Second Avenue Subway would undercut future economic growth and require returning federal funds that have already been committed.

3. The MTA’s riders and taxpayers are already paying a heavy price for past financing practices brought on by underinvestment (lack of capital spending). As a result of the disastrous system of “borrow now, pay-during-the-next-person’s-term-of-office” used to finance capital programs in the late 1990s and the first half of the current decade, starting in 2012, almost one in five dollars of the MTA’s operating budget is expected to be devoted to paying debt service. Cutting capital expenditures is the same as cutting service, just in the future rather than the present.

It’s important to underscore the interconnectedness of the future with the capital budget. It’s vital to recognize that the capital budget is a separate beast so that the MTA can continue to modernize and grow its capacity through a fund more secure than the operating budget. It’s also important to highlight how the MTA would actually have to return federal funds and how thousands of workers in New York’s fragile construction economy would lose jobs if the capital budget were to dry up. That is an immediate future scary to contemplate.

In the end, the MTA will have to escape from this capital mess by the best means on hand. It could raise fares; it could cut services; it could shift funds; it could ask Albany to institute real, permanent, reliable gap-closing measures such as congestion pricing or East River Bridge tolls. Robbing from the capital future — or even from the capital present — is no way to cover an operating debt. The two budgets are separate for good reasons gleaned from recent history and should stay that way, financial crisis or not.

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Older and Wiser December 17, 2009 - 2:53 am

“…almost one in five dollars of the MTA’s operating budget is expected to be devoted to paying debt service…”.

Lets see if I’ve got this straight. It is somehow acceptable that permanently encumbering the operating budget with capital debt service, once started, must forever remain a done deal. Never mind that this encumberace continues to permanently reduce the baseline amount of the OPERATING operating budget available for actually OPERATING the system.

Does it never occur to anyone up top that perhaps it might at some point be reasonable to make the operating budget whole again by means of a modest return favor on the part of the construction budget?

Alon Levy December 17, 2009 - 2:56 am

If you want to be snarky, then you can say that canceling SAS and restarting it with contractors who don’t cost 4 times the normal amount would be a good thing. If somehow the MTA can raid 7 extension funds, it will be even better.

Older and Wiser December 17, 2009 - 3:15 am

The only sensible thing to do about the SAS would be to immediately mothball every other project, and then pour the resultant freed-up capital into the public works equivalent of a military surge. Let’s get the T line up and running at warp speed, like was done with the Liberty ships of WWII.

The SAS is the only capital project whose practical utility and potential value have consistently grown with each passing decade. Later for ESA. Later for a Taj Mahal at Fulton St. Later even for the highly touted $500 million Business Services Center, which may take 50 years to return the money now being invested at a time when dollars are in such short supply.

Alon Levy December 17, 2009 - 3:34 am

The reason the state funded ESA is that Sheldon made a quid pro quo with Pataki – if Sheldon got SAS, he would let Pataki have his ESA.

Marc Shepherd December 17, 2009 - 12:23 pm

Ironically, Sheldon isn’t even getting the SAS he wanted. His downtown district benefits only when Phase IV is built, and at this point the MTA hasn’t even buttoned up full funding for Phase I.

Alon Levy December 17, 2009 - 6:11 pm

This is true. Sheldon said that as long as the full project would be built, he didn’t mind if the Upper East Side got to be Phase I.

In a way, he was rational – at the per-km cost of Paris or Tokyo, the full line would cost $5.5 billion, little more than the current budgeted cost of Phase I.

Scott E December 17, 2009 - 8:50 am

I understand the point of not deferring capital projects at the expense of operating costs, but if it results in increased debt, is it worth it? If we can’t sustain operations now, I can only imagine how much more these operations/maintenance will cost with five brand new subway stations and two new “mega-stations”. I support replacing old rolling stock (which actually DECREASES maintenance costs), and don’t want to abandon the new projects altogether. However, I wouldn’t object to shifting tenth of the Economic Stimulus Funds (and none of the MTA-earned funds) to keep the agency on life support.

Instead of the so-called “Russianoff plan”, is it too late to bring back the Ravitch Plan?

Marc Shepherd December 17, 2009 - 12:25 pm

If you want to bring back the Ravitch plan (i.e., East River bridge tolls), you have to figure out how to persuade a few more Senators to vote for it.

Scott E December 17, 2009 - 4:26 pm

Dear Senator: If you don’t approve bridge tolls, your families will each need to pay about $700 per year, per child, to educate the youth. (might that work? Hate to use the kids as a negotiating pawn, but fair is fair)

Eric F. December 17, 2009 - 9:28 am

Or you could have the SAS run by a private company. You are just adding capacity, so anyone who doesn’t want pay to use the private train would be free to use the existing public system. It’s unlikely that you could cover the entire SAS cost through private investment but you could likely greatly reduce the cost to the MTA, and actually get the project done. My sense is, however, that people in New York would rather have no subway than a private one, and that’s ultimately what they are likely to wind up with.

Scott E December 17, 2009 - 10:33 am

Not really. SAS has some federal and government funding, so it couldn’t go private without losing that funding. Also, it overlaps with the “Q”, so unless the connection from 63rd to 72nd were severed, it wouldn’t work.

Eric F. December 17, 2009 - 10:49 am

I’m sure our powerful senators and congresspersons could manage to retain a public contribution to a public-private project. I agree that when you have an integrated system, managing aspects like transfers can be thorny. But I can take my car from the “free” I-80 to the tolled NJ Turnpike. Surely with a metro card fare system, fares that are line specific can be charged. The system can be used now to adjust pricing by time of day or even charge different fares at different stations, if there was ever the will and desire to do so. Note that the PA’s airtrain actually charges what amounts to an entrance/exit fee for it’s airport connection monorails tacked on to the standard mass transit fares that get you to the connection point. I’d love to see a private entity be charged with all of the operation and maintenance expenses on a particular line, relieving the MTA from those costs and adding capacity to boot. Maybe the ride would cost $5 instead of $2, or maybe pricing would vary at different times of day or by station, but when all you are doing is adding another travel option, and ensuring that the option actually gets built instead of waiting another 70 years, I’m not really seeing a huge downside. This would be one line that could actually manage to be self-supporting.

Aaron December 17, 2009 - 2:40 pm

Because it’s interlined with the Q, and because the Q has a bunch of same platform transfers at places, you would need to install fare gates at all 480+ stations capable of collecting an exit fare a la Washington. The investment is not worth the price, particularly when nobody at the MTA wants to go with an exit fare and cities like Boston are phasing theirs out due to the nuisance factor in collecting them.

Alon Levy December 17, 2009 - 6:12 pm

Why would any private company in its right mind build a subway at $1.7 billion per km? In Tokyo they’re balking at $500 million/km.

Ben December 17, 2009 - 11:21 am

Using money that’s been allocated to the capital budget is very bad idea for all of the reasons that have been discussed. It’s also very bad fiscal policy.

The people who are pushing this this idea did so because it is a relatively easy short-term fix (really it’s only a partial fix) to the current shortfall in the operating budget.

If you take the money now [from the capital budget] then what do you do next year – when most likely that there will be an even larger shortfall in the operating budget that has to be dealt with.

The only good news at this stage is that this discussion has only just begun. As they say, “the opera ain’t over ’till the fat lady sings.”

rhywun December 17, 2009 - 10:50 pm

The good news is that certain state politicians are making noise about how relying on capital funds to cover operations would put us back in the mess we had in the 70s. Which is very good news indeed, given the usual political game of relying on one-time gimmicks.

Jason A December 17, 2009 - 12:16 pm

You can bet dollars to doughnuts this is the “solution” that is going to win out.

Many answers, but no real soltuions, for MTA funding :: Second Ave. Sagas | A New York City Subway Blog December 18, 2009 - 1:48 am

[…] We know that some advocates are pushing a move to cover the operating gap with capital funds — a misguided idea at best — but other officials are searching for ways to provide for a steadier stream of transit […]

Art Nudell December 18, 2009 - 11:11 pm

The federal government (FTA) assumes the cost of financing “new Start” Projects like SAS and the LIRRs East Side Access (ESA) will be 22.8% of the total budget, which adds to the current $2 billion finance costs out of $12 billion in the operating budget. These costs are generated by service to relatively few riders- a few hundred thousand riders in the cae of the SAS and the ESA-but paid by fare increases and service cuts to millions of the rest of us!
The SAS could be completed without a 96th street station (and augmented by street level bus rapid transit (BRT)with dedicated lanes at a fraction of the cost), saving $2 billion plus finance costs. (The 86th street station will have the heaviest usage); the ESA could be brought directly into Grand Central’s lower level, rather than a $3 billion elaborate new terminal of dubious safety 17 stories below ground which could be turned into a 9/11 disaster by terrorists, a broken water main, or Con Edison!
Why does every one assume the MTA knows better??

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[…] week, I explained why I was not in favor of Gene Russianoff’s plan to use stimulus funds to cover the MTA operating gap. It’s not sound policy to move money […]

Fighting for and fighting against the MTA :: Second Ave. Sagas | A New York City Subway Blog January 26, 2010 - 10:22 am

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APTA speaks out against the use of stimulus funds for operating deficits :: Second Ave. Sagas March 23, 2010 - 4:08 pm

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