Lisa Schweitzer Part 4: Capital Cost Recovery

Lisa Schweitzer continues her hermeneutic investigation of my CityLab post: How to Make Public Transit Sustainable Once and For All, this time focusing on capital cost recovery and land use issues.

What Levinson is trying to get at here simply concerns the “eyes bigger than market” problem that plenty of cities get into over things like stadium deals. If you actually live in a world where land taxes aren’t distorted (which I don’t, so there’s that), letting utilities buy and develop around train stations makes abundant sense. Here’s the part of the equation that I think really matters: if you require local jurisdictions to provide a portion of the capital and operating subsidies for service, they then have every incentive (instead of the incentive they have now), to alter their local zoning and approvals process ahead of timeso that development around station areas can actually occur.

She thinks she has spotted an inconsistency (or mic drop), but I am not clear what it is. (I think she means my moving from voters have the right to subsidize stuff they want vs. jurisdictions should only do something that pencils out).

There is a qualitative difference between capital and operating, between rail and bus (though that’s not the important one), between stocks and flows, and between new and old.

Capital investments are new stocks while operating expenditures are continuing flows. From a public policy perspective, continuing with existing commitments (which may be an implied social contract) may be more important than making investments that bring about new commitments. Thus new commitments (such as new rail lines which have irreversibly embedded immobile capital) should only be undertaken if we believe at the outset (admittedly a forecast, which have problems) that they have cost recovery.

It is one thing to run a bus with some small subsidy for some indeterminate period of time.  That decision is reversible if it doesn’t work out. It is another to build a large capital investment with no prospect of cost recovery for a long period of time. The bus, being mobile capital, can always be rerouted, or reallocated to another service.

The large right-of-way (usually rail, but also a BRT right-of-way) cannot – and in a world with bond financing rather than pay-as-you-go infrastructure, imposes involuntary costs (capital repayment) obligations on future generations. This appeals to rail fans as a sign of “commitment” (ignoring the streetcars went away), but it is an inflexibility and unadaptability that means the “burden of proof” for making such a decision is higher.

I agree that requiring locals pay for their infrastructure might induce them to have socially better land use controls, since they may need the revenue that the higher accessibility may have created with more intense development to support the infrastructure that created the higher accessibility in the first place.

3 thoughts on “Lisa Schweitzer Part 4: Capital Cost Recovery

  1. Mic drops and inconsistencies are two different things. A mic drop is a slang term for when a performer does something awesome at the end of a performance, drops the mic, and leaves the stage. BOOM! Because there’s nothing else that tops it. I think this is one of the most important things you wrote in your city lab piece. It’s a boom! moment.

    The inconsistently appears in the writing, not in the thinking, and it’s because you don’t have time to differentiate the difference between modes in dealing with capital cost recovery.When you look at the original piece, the idea that lines that don’t cover their capital shouldn’t be built and paying transit companies to run negative revenue lines do not sound like the two points are consistent. They are perfectly consistent if, as you and I have pointed out in our conversation, you are dealing with relatively small capital investment. However, I also think that a utility could successfully swing a rail project with negative expected revenue if they managed their risk well enough. For example, neither of us has discussed contract time limits. Your point about future generations is a reasonable one, so 50-year contracts are out under your rubrics, but not necessarily in practice. I’ve never really seen a long contract like that really work, but that doesn’t mean it never could. More realistically, it’s possible that, combined with development rights and a sufficiently long enough contract (20 years) a utility could make money on a negative revenue rail line.

    http://www.urbandictionary.com/define.php?term=mic+drop

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  2. BTW, one of the reasons why I want to retain your ideas about capital cost recovery for rail even with negative revenue is that a) people seem to have a strong preference for rail service so it’s something I strongly suspect voters and lobbyists will demand be built despite the capital recovery principle you suggest and thus, given that inevitability, b) constructions costs there are a place where a private utility might really make a difference.

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