To what extent is the Intercity Marketplace skewed in the US

Trains Magazine Passenger
1

There have been some recent comment on the extent, or subsidy per unit of activity, on the board recently. I have uploaded a working draft that the group might be interested in
reviewing at

http://freepdfhosting.com/d68ae064e1.pdf

It speaks to the degree of cross subsidy that has been set as policy for intercity roadway travel in this country. By my calculation around $0.11/automobile vehicle mile, inclusive of capital and government borne accident costs. Newer build toll roads are now showing $0.12 in TxDOT country and this does not cover accidents.

For certain it is not complete but it is at 40+ pages now.

I am rethinking my target audience in the light of political reality.
The paper demonstrates the feasibility and financial economy of the
long-distance train outside of the “congested areas” using the Crescent as an
example. Volpe of course had originally postulated that intercity rail was best suited to
congested short corridors and justified some of his decisions within the DOT methods
of the day.

However, he proceeded from two errors, probably due to politics of the time,
which has misdirected policy since then. In the past the financing of the
capital to build the interstates has been considered a “sunk cost” such that
only costs going forward should be considered. Winston worked off this premise,
bringing much clarity to the assignment of costs between trucks and automobiles,
but disregarded the initial system capital costs for what is a high cost system.
The other error was the assumption that a positive highway trust fund balance
was a proxy for user self financing. In fact the HTF more closely resembles a
general tax on land as several road classes under city, county, and state
ownership are taxed to support almost entirely Federally financed road projects
under state ownership. It is equivalent to taxing all the

2

I typed the URL you referred to into my browser, and my ISP said that there is no such address. Is this a paper you are writing or is it a paper that someone else has put together? If you are writing it, what are your qualifications, i.e. accountant, economist, engineer, etc.?

Whatever the country has spent on highways is, at least from an accounting sense, sunk costs. They cannot be taken back. The decision rolling forward is how should the U.S. allocate public transport dollars? Where do passenger trains make sense in the public transport panoply?

If you want some insight into how highways in the U.S. are financed, The Highway Trust Fund and Paying for Highways, CBO report dated May 17, 2011, is an excellent overview.

In FY11 Amtrak’s long distance trains lost $615.4 million of real money. The Crescent lost $46.1 million. And that is before considering depreciation, interest, and ancillary charges. It also does not include the cost of most the stations used by the Crescent, which are paid for by the communities where the train calls, sometimes offset by nominal rents, or that Amtrak pays no taxes whatsoever.

Even if funding for highways is opaque, as it is to a certain extent, and even if it is skewed in favor of rubber tire vehicles, which may have been or is the case, many folks in these forums miss a key point. Americans want cars and trucks because in most instances they are the optimum option. They are not going to give them up even if it costs them more than riding public transit or an intercity train, bus, or airplane. People will use public transit where the congestion associated with driving is so great the frustration level becomes overwhelming or the cost prohibitive, but at least in Texas they are not going to give up driving willingly.

Nations, states, people, etc. make decisions beyond pure economics. Psychology plays a big role in their decision making, as the behavioral economists are lifting up. Key

3

Working link to the Payne paper:

http://freepdfhosting.com/89a6ff1326.pdf

4

Good points, with the working link to the paper, I had a “t” in front of the address previously, perhaps most questions are answered. I don’t think intercity rail could ever be more than about 6-8% of all intercity travel, but that is quite a bit more than it is now. It would be about 6 trains a day for most of the main 40,000 miles of intercity routes realistically possible.

I am an engineer with more than a tangential relationship to highways, and parts of the paper are written to actually financially protect the highway/ transportation departments out there much as what Winston tried to achieve in the 1980’s. But is is a private effort paper. There is a massive amount of politcal desire to overbuild that needs to be framed in light of finances.

The main point is equivalency with a bit of skepticism that we are on the right path. I think the generation of engineers my age, mid-thirties, see the world a lot differently, here is a kindred spirit in the one of the national engineering magazines, though it is a little to the left sometimes:

http://www.pemagazine-digital.com/pemagazine/20120809?pg=10#pg10

I just took a look at the budget request for my DOT, it figures we only need to spend almost $3 Billion to get our bridges back into shape, and that we are spending about $0.35 Billion a year less than we should on pavements, and this is for a somewhat rural southern state. Look around at the I-95 and I-70 toll proposals on existing interstates just to fund maintenance.

I mentioned the TxDOT toll roads, think about this if the average state and federal fuel taxes are around $0.40, and cars are getting 30 MPG, then we are only paying $0.0133 on “free highways”. However, if the best a private company, with below market bond rates, could do on a bypass to heavily used I-35 around Austin, SH-130, is a $0.12/VM toll + the fuel tax, doesn’t that mean that the realistic subsidy for the type of road that competes for intercity travel is $0.12 if we were

5

New link to the paper reference above

http://freepdfhosting.com/d68ae064e1.pdf

Also, I finally found the link again to the 1969 ICC study of passenger train cost. It is really a great document, other than it is limited to establishing the costs of passenger train only.

http://catalog.hathitrust.org/Record/000022941

It does not go into the detail of the 1959 ICC report below, which looks briefly at funding levels from non-users for other modes.

http://catalog.hathitrust.org/Record/001351149

6

Actually, Sam, highway expenditures can be taken back if we wish to do so. Governor Jon Corzine proposed that we sell the New Jersey Turnpike. The legislature turned him down but it could have been done. Today with EZ pass it is possible to put a toll on every single road in the country. Once the roads are tolled they could be sold to private companies. I do not recommend that we do this but it is possible and would allow us to recoup the value of our roads.

7

The nation’s highway expenditures are a sunk cost. They cannot be reversed or wished away. How they are paid for, however, can be changed. That is what Corzine proposed.

If the state were to sell a highway(s), i.e. the New Jersey Turnpike, the price of the asset would be the book cost of the highway, a sunk cost, plus any goodwill, which would reflect the profits expected by the buyer. The book cost of the highway(s) would be transferred from the state’s books to the books of the buyer. They would still be there. I am not sure about the amount that would be transferred. The land that the highways sit on is not depreciated. I don’t know whether the roadway, i.e. rebar, concrete, etc. is depreciated.

Ultimately most of the users (taxpayers) pay directly and indirectly for the nation’s roadways. What they don’t pay directly as users, i.e. fuel taxes, excise taxes, vehicle and driver licensing fees, tolls, etc., they pay through income, sales, and property taxes. These generally flow into the general fund. To the extent that the direct user fees don’t cover the cost of the nation’s roadways, monies are transferred from the general fund(s) to the roadways fund(s). And herein lies a hidden subsidy.

In FY09, ac

8

I don’t know why you continue to insist that “highway expenditures are a sunk cost.” The statement is incorrect.

Early in our history the Philadelphia and Lancaster Turnpike was built by a private company and many other highways followed it. In 2006 the Indiana Tollway was leased to a private operator for 75 years and in the same year the Chicago Skyway was leased for 99 years to a private operator. If you google on “US private highways” you will find a list of examples.

Whether to give over operation of a highway to private interests is a complex issue/ I certainly would not advocate that as a general way to improve government finances. But clearly, it can be done and it is being done so the costs of building highways are not “sunk costs” unless it can be shown that the government takes a loss in leasing or selling the highway.

9

Are you an accountant? Do you understand activity based cost accounting? Would you know how to value the basis of an asset that is being bought by another and determine whether there is a gain or loss on the sale of the asset?

10

I have never studied accounting in my life, Sam. I do understand sunk costs refers to costs that cannot be recovered. However, if the costs can be recovered (as through the sale of of the think they were spent on) then the costs are not sunk. Am I mistaken?

11

Expenditures for capital assets go onto the Balance Sheet as an asset. The asset is depreciated over its expected useful life. The depreciation flows to the income statement as an expense. It also reduces the book value of the asset, i.e. the book value is usually the cost less depreciation and adjustments.

If the state sells an asset, i.e. highway, building, university, etc., it probably will recover through the sale price some of the original cost. Theoretically it could recover the original cost, but it would be very rate. In most instances the taxpayers will have worn the depreciated portion of the asset. That is to say, they will have paid for the difference between the original cost and the book value of the asset. The portion of the asset that has not been depreciated is the book value.

If the buyer purchases the asset for the book value, the depreciated portion of the asset stays with the state taxpayers and is sunk. They don’t get it back; they have already paid for it. If the buyer purchases the asset for more than the book value, which is a major incentive for states to sell some of their assets, the state realizes a gain on the sale of the asset. It has not recaptured the original cost; it has gotten more for the asset than the book value says that it is worth.

If the buyer pays an amount that is equal to the original cost of the asset, plus the chained dollar accretion in the cost of the asset, the total cost of the asset has been recovered for the taxpayers. The buyer has assumed the original cost of the asset. It has it; It is still sunk, i.e. it does not change, but the buyer has decided for w

12

According to Wiki the city of Chicago got $1.8 billion for the Chicago Skyway and the state of Indiana got $3.8 billion for the Indiana tollway. You say:

So if Chicago goes forward with $1.8 billion and Indiana goes forward with $3.8 billion how is that a “moot point?”

13

Maybe there is a difference in terms out in different fields. It seems I was taught that a sunk cost was for something that had no salvage value, but that was in engineering economics. Now politically we will probably be using the ROW and embankments for the interstates as interstates at roughly the same low users fees in my lifetime, but financially, the charge to the users could change to recover the initial costs.

My point is that the past level of financial spending is a reasonable way of figuring out what has shaped the marketplace. Baring any changes people expect the same to go on forever. The only problem is most of the intercity network will need to be rebuilt shortly, so even future costs cannot be ignored, which the paper touches on by looking at new build toll road examples and some of the toll proposals to rebuild the interstates.

There are no “books” kept on highways in any of the agencies that I am aware of. After all, how would you define depreciation? Is a bridge from the 1937 that holds up to 100 vehicles a day on wood piling fully depreciated or not? How about one from 1973 that is now too narrow for 12,000 a day and has a spalled out deck. Yes, you can handle this situations in accounting but why would an agency do it? The promise of highways has always been “spend this massive amount of money just once and the forget about it” even though that is obviously not true. Pretty much you spend the money from the big pot and see how long it lasts in service, though you have an idea for planning purposes. This is the HERS program which has been saying we should be spending a lot more than we do now.

However, most people do not understand the pyramid effect of roadway financing and the degree to which it masks the costs on the intercity routes. That is the main point of the paper above. A lot of people think that an Economic Benefit to Cost ratio > 1.0 ,means the project pays for itself without realizing that only a financial analysis of what the u

14

I am a big fan of moving forward putting transportation capacity expansion projects on the same footing.

Whether we got to where we are in a “fair” manner or not is really all water under the bridge. I-79, I-89, I-94 and I-99 all exist whether there was a really good economic case for them when they were built, or not. I doubt there is any political or popular will to abandon any of these roads even if you can show the NPV of the ongoing costs exceed the NPV of the economic benefits. There really isn’t an option for a “do over” or a “make up call”.

The big issue is how to we accommodate growth? Queue up the alternatives, do the math (including sensitivity analysis) and rank’em. May the best bang of the buck win!

15

In accounting and finance parlance sunk cost refers to an expenditure that cannot be reversed. It is history. At the time the expenditure was made, in the case of most assets, the accountants determine whether the asset has any salvage value. If it does, the depreciation schedule is structured to reflect this fact. But the original expenditure cannot be clawed back.

The asset can be sold. As I noted above, the buyer may purchase part or all of the original cost, but doing so does not wipe it out.

What the country has spent on highways, airways, waterways, etc. (wisely or not) is irrelevant to solving today’s transport problems. You cannot reverse them. You can only solve problems going forward, although there may be some valuable lessons in the history, i.e. identification of decision points that could have gone the other way and why.

As to the point that people don’t understand how transport systems are financed in the United States, most people in the U.S. or the other countries where I have lived don’t understand finance period. Just yesterday I read an article in Bloomberg pointing out that more than 40 per cent of American high school graduates cannot compute simple interest or understand the terms of a credit card.

Cost is not the only driver in decision making. Cost accountants can determine with a reasonable degree of precision how much a product or service costs. But they don’t price it. It is priced by marketing specialists who understand that amongst other things people buy the intrinsic utility value of a product or service, which may be much greater than its cost. This is one of the reason that iPads and iPhones are priced way above what it costs to make and distribute them.

Most people I know are willing to pay for highway transport even if it costs two or three times what the alternatives cost. They want the convenience, comfort, flexibility, etc. of a car. They

16

Amen

17

OK, 11 cents/vehicle mile, are we talking about 8 cents per auto passenger mile? 4 trillion annual auto passenger miles? 320 billion dollars per year, in funding of the highway infrastructure and ancillary services?

OK, what you are talking about is cross subsidy to superhighways, mainly interstates, which are claimed to carry 25% of auto passenger miles. So you are saying there is an 80 billion dollar cross subsidy into Interstate highways? Out of a Federal highway budget in the 30-40 billion dollar range?

I suppose if you draw a broad enough “system boundary” around the Interstate highways, maybe you can come up with 80 billion in annual expenditure. But you are still talking about 8 cents/passenger mile vs, what is it, 20 cents/passenger mile overall Amtrak subsidy? And on the Amtrak side of the ledger, are you counting the perhaps below-market-fees for use of the tracks as a result of the “We can do this the hard way, or we can do this the easy way” arrangement with the freight railroads?

When this exercise is done, instead of the highway mode having a 10:1 advantage in cost-effectiveness of subsidy dollar, maybe you are talking about a 2-3:1 cost-effectiveness advantage.

So one continues to argue for fairness, of equal treatment of the different modes in manner of NARP’s agenda, one is advocating for a reduction in the Amtrak subsidy to, say 500 million per year, which was the George W Bush program?

The bottom line is whether railroad trains are a solution in search of a problem, driven by train enthusiasts who are enthusiastic about trains on first principle and are searching under the soffa cushions for financial support for the endeavor? Or is there a transportation problem for which trains are an effective solution?

I respect the effort to quantify where the money is going, but I stay with the opinion that “fairness”, that what the rail mode is getting in government support

18

As long as perception is that passenger trains = Amtrak, we have a problem. See Fred Frailey’s latest blog for just one more instance of Amtrak’s ineptness.

19

This is great feedback as it helps me to be sure the proper points come out. Remember that I am not looking for an average of expenditures but what is spent on the rural (intercity use) interstates, there are only about 140 billion passenger (auto) vehicle miles on rural Interstates, so the cross-subsidy is about 15 billion for cars and 20 billion for combination trucks. But some of this is a financial accounting of previous expenditures and government borne accident costs.

http://www.fhwa.dot.gov/policyinformation/statistics/2009/vm1.cfm

The other big point in the paper is if Amtrak long distance consists we’re expanded to about 8-12 revenue cars, those trains would be under the calculated intersate financial cross-subsidy, by several cents per mile. They would become the lowest financial cost. You still have the hundred some million in agency and commuter infrastructure costs for others that can be spread out over a larger base. Of course I didn’t account for highway administration or unfunded state pension tails either as those are also fixed costs.

20

This may be a problem. Is there market demand for LD train service on with the existing routes and schedules? How low would fares have to go to induce that many more riders?

I think it is somewhat of an urban legend that LD trains are “always full”. The fact is the load factor for these trains runs around 55%. That is not “always full” - it might mean that certain segments of certain routes run full during certain periods of time - but that is not “always full”, or even close.

Don’t discount the cost side of the equation. What happens if you get the train staff out of the revenue space? (rotate them off like T&E guys) Automate more of the food service? Stop cooking on the train? (serve meals like a dinner train)