Short-Term Thinking

There’s been a lot of spilled ink recently about the deals a few transit agencies made with American International Group (AIG). It appears that operators in Atlanta, Los Angeles, Washington, San Francisco, and Chicago, as well as 30 others, sold their fleets to the insurance group in order to make a quick buck. The systems then proceeded to make deals to lease back their own equipment – trainsets and buses – from the company. These deals are indicative of the kinds of decisions being made today by transit systems – all short-term thinking, no considerations of long-term investment.

The deal made sense for Washington’s Metro, which sold 600 rail cars – that’s right, 80-100 trainsets – in 16 different deals, worth $1.6 billion. San Francisco made several hundred millions of dollars worth of deals, and Los Angeles benefited from its own $1 billion investment. At the time, these deals made sense. The transit agencies – chronically in need of cash – could basically “get back” the money they had spent on the vehicles and then spend just a small part of their budget each year on vehicle leasing. Many automobile consumers basically make the same choice in choosing to lease rather than buy their cars.

But there was a fundamental problem with these deals: they relied on AIG to stay afloat. Unfortunately, along with the rest of the U.S. economy, AIG went broke last month. Even with the influx of cash provided by the Treasury’s bailout plan, there is less investor confidence in AIG’s assets. Now, under an original signing clause  based on AIG’s credit ratings (which dropped from AAA to A-), banks that had invested in AIG can now demand money from the agencies in the tune of $400 million from Metro, for instance. It is likely that Congress, which was all too willing to help the dying banks, will find a way to ensure that transit agencies won’t be stuck in this unfair situation – they’ve asked Henry Paulson and Ben Bernanke to intervene on behalf of the systems.

And that’s good. We shouldn’t ask transit agencies to shoulder the blame for the poor management and insane excesses of a private corporation. In these heady days of transit ridership – the highest levels since World War II – systems have other things to worry about. High fuel costs have encouraged drivers to get off the road in vast numbers. And even as the price of petrol has declined, people are still taking transit. Meanwhile, other expenses, such as health care costs, continue to rise. And local and federal funding, already dropping, is completely falling through with the decrease in tax revenues expected during this upcoming recession.

But – and I hate to say it – the fact that transit agencies got into these deals in the first place bothers me. Yes, it’s true, there’s always a need for money on hand, and AIG certainly came through on that side of the bargain, propping up the budgets of these agencies in the years when they committed to the deals. But these deals were like crack – providing immediate benefit but soon after loosing all value and requiring their users to invest more to get the same benefits.

The thing is, transit agencies aren’t car buyers. Whereas people have an incentive to lease cars, because they may keep the vehicles for only a couple of years before moving on to the next one, transit agencies will keep their trains for 30-50 years before they move on. Leasing doesn’t make sense when you’re talking about such long time periods. The consequences is that while budgets may look better today (an amusing notion, considering the delicate nature of transit agency budgets), they will have to continue leasing these vehicles for many more years, eventually paying much more than the single purchase price of the vehicles would have meant. This is poor thinking, based only on short-term goals and with no true consideration of long-term consequences.

And in fact, transit agencies have been taking more and more advantage of deals that produce these terrifying consequences. Like the U.S. budget, ever-increasing expenses are being covered by loans and bonds – and those bonds are eventually going to have to be paid off – with sizable interest. For these public agencies, relying on taxpayer funds, this isn’t a good thing, because it means a future of huge debt payments for services provided years before.

Maybe that future has already arrived. In this year’s budget, Chicago’s CTA will devote more than $100 million to paying off its “pension obligation” debt service. The transit agency couldn’t afford to pay its employees pensions from its regular budget because of its limited revenues, so it released private-market bonds to make up the difference. In the fiscal year 2007 budget, LA’s Metro spent 11.5% ($312 million) of its total budget on similar back-payments, and this percentage doesn’t even include debt service on the agency’s building projects, which require far more debt. New York’s MTA, by far the nation’s biggest transit agency, spent an astounding $1.7 billion on similar expenses in 2007 – this is equivalent to almost half of the agency’s total $4 billion revenue from fare boxes.

Transit agencies, then, are like crack addicts, addicted to the quick benefits of loans, leases, and other poorly considered deals. Much of this reliance is due of course to the underfunded nature of the agencies, but the situation is only going to get worse as all these debts have to be paid back.

In order to solve this problem, we should have a moratorium on taking out loans to pay for operating expenses. Transit agencies should stop this ridiculous process of selling off their vehicles, simply to lease them back. Finally, we – the taxpayer public – need to agree to give more money to the agencies so that these loans don’t seem so appealing in the future.

3 Comments | Leave a Reply »
  • Peggy

    Yes! We need to fund public transportation. We also need to use it. When I travel in Europe and Japan I am always disgusted to come back to the US and not be able to get between major cities in the west in a timely fashion. Americans have been short sighted about most of the things we do but public transportation has been a major mistake over the years from Ford and cohorts dismantling good urban and suburban systems in the thirties and forties to the focus on building super highways for gas guzzling vehicles that resemble war machines more than passenger cars.

    I fear that good public transit will not come soon enough and from your post here, it is now on the verge of financial collapse. When will Americans stop being narcissistic and begin to realize that we are just part of a whole?

  • One of two things needs to happen:

    Charge the customers the cost of the service or make the service free.

    The first would make service unaffordable. The second unappealing.

    Either one would be a recognition of the true nature of the problem. And that problem is: cities are not viable when run by crooks.

  • OctaviusIII

    Um, wrong number?

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