It is Time to Admit the Purple Line Was a Mistake

The Path the Purple Line Will Take – Before and The View At Rock Creek Now

A.  Introduction

The proposed Purple Line, a 16-mile light-rail line passing in an arc across parts of suburban Maryland around Washington, DC, has become a fiasco.  The State of Maryland, under Republican Governor Larry Hogan, is preparing to sign a new contract with the private concessionaire that will pay that concessionaire $3.7 billion more than had been agreed to under the existing contract.  The total cost of that contract alone (there are significant other costs on top) will now be $9.3 billion (66% more than the $5.6 billion set in the earlier contract), and the opening will be delayed by at least a further 4 1/2 years (thus doubling the originally contracted construction period – now to a total of 9 years).  And the governor is doing this with no legislative approval being sought.

The Purple Line has long been controversial – due to its high cost, the disruption it is causing to a number of suburban neighborhoods, the destruction of parkland it has been routed through, and its use of scarce resources for public transit to benefit a privileged few rather than the broader community.  There are alternatives that would not only be far more cost-efficient but also less environmentally destructive.  The project illustrates well why the US has such poor public transit and poor public infrastructure more generally, as scarce resources are channeled into politically-driven white elephant projects such as this.

In response to the announcement of the terms of the revised contract with the concessionaire, I submitted to the Washington Post a short column for its “Local Opinions” section.  They have, however, declined to publish it.  This is not terribly surprising, as the Washington Post Editorial Board has long been a strong proponent of the Purple Line, with numerous editorials pushing strongly for it to go forward.  And while the Post claims that it supports an active debate on such issues, the guest opinion columns it has published, as well as letters-to-the-editor, have been very heavily weighted in number to those with a similar view as that of its Editorial Board.

I am therefore posting that column here.  It has been slightly edited to reflect developments since it was first drafted, but has been kept in style to that of an opinion column.

Opinion columns must also be short, with the Post setting a tight word limit.  That means important related issues can not be addressed due to the limited space.  But with room here, I can address several of them below.  Finally, I will discuss the calculations behind two of the statements made in the column, as a “fact check” backing up the assertions made.  These should themselves be of interest to those interested in the Purple Line project (and in public transit more broadly), as they illustrate factors that should be taken into account when assessing a project such as this.

B.  The Column Submitted to the Washington Post

This is the column submitted to the Post, with some minor changes to reflect developments since it was first drafted:

               It is Time to Admit the Purple Line was a Mistake

Governor Hogan has re-negotiated the contract with the private concessionaire that will build and operate the 16-mile long Purple Line through suburban Maryland.  The Board of Public Works has approved it, and despite an extra $3.7 billion that will be spent the Maryland legislature will have no vote.  The private concessionaire will now be paid $9.3 billion, a 66% increase over the $5.6 billion cost in the original contract.  And this is just for the contract with the concessionaire.  The total cost, including contracts with others (such as for design and engineering work) as well as direct costs at the Maryland Department of Transportation (MDOT), is likely well over $10 billion.

The amount to be paid to the concessionaire for the construction alone will rise to $3.4 billion from the earlier $2.0 billion, an increase of 70%.  And even though the construction is purportedly halfway complete (with $1.1 billion already spent), the remaining amount ($2.3 billion) is larger than the original total was supposed to be.  And the amount being paid to the private contractors for the construction will in fact be even higher, at $3.9 billion, once one includes the $219 million MDOT has paid directly to the subcontractors in the period since the primary construction contractor withdrew, and the $250 million paid to that primary contractor in settlement for the additional construction expenses it incurred.  That $3.9 billion is close to double the $2.0 billion provided for in the original contract.  In addition, the project under the new contract will require an extra 4 1/2 years (at least) before it is operational, doubling the time set in the original contract to 9 years.  Even though the project is purportedly halfway built, the remaining time required will equal the time that was supposed to have been required under the original plan for the entire project.

The critics were right.  They said it would cost more and take longer than what Maryland asserted (and with supposedly no risk to the state due to the “innovative” contract).  It also shows that it is silly to blame the opponents of the project.  The lawsuit delayed the start of construction by less than 9 months.  That cannot account for a delay of 4 1/2 years.  Furthermore, the state had the opportunity during those 9 months to better prepare the project, acquire the land required, and finalize the engineering and design work.  Construction should then have been able to proceed more smoothly.  It did not.  It also shows that Judge Leon was right when he ruled that the project had not met the legal requirements for being adequately prepared.

Even the state’s own assessment recognized that such a rail line was marginal at best at the costs originally forecast.  With the now far higher costs, no unbiased observer can deny that the project is a bad use of funds.  The only possible question is whether, with what has already been spent, the state should push on.  But so far only $1.1 billion has been spent on the construction, plus the state agreed to pay the former construction company the extra $250 million when it quit the project.  Thus close to $8 billion (plus what the state is spending outside of the contract with the concessionaire) would be saved by stopping now.

There are far better uses for those funds.  A top priority should be to support public transit in Montgomery and Prince George’s countries.  Even at the originally contracted cost for the Purple Line there would have been sufficient funds not only to double capacity on the county-run bus systems (doubling the routes or doubling the frequency on the routes or some combination), but also to end charging any fares on those buses.  Those bus systems also cover the entire counties, not simply a narrow 16-mile long corridor serving some of the richest zip codes in the nation.  In particular, better service could be provided to the southern half of Prince George’s, the location of some of the poorer communities in the DC area and where an end to bus fares would be of particular benefit.

Covid-19 has also now shown the foolishness of spending such sums on new fixed rail lines.  DC area Metro ridership is still 80% below where it was in 2019.   Rail lines are inflexible and cannot be moved, and in its contract the state will pay the concessionaire the same even if no riders show up.  Who knows what will happen to ridership in the 35 years of this contract?  In contrast, bus routes and frequency of service have the flexibility to be adjusted based on whatever develops.

It is time to cut our losses.  Acknowledge it was a mistake, don’t sign the revised contract, and use the funds saved to provide decent public transit services to all of our residents.

C.  Additional issues

a)  The Cost of Not Keeping the Original Construction Contractor

Media coverage of the proposed new contract has focussed on the overall $9.3 billion cost (understandably), as well as the cost of the construction portion alone.  The figure used for that construction cost has been $3.4 billion, a 70% increase over the originally contracted $2.0 billion cost.

But as noted in the column I drafted above, that $3.4 billion excludes what MDOT has paid directly to the subcontractors who have continued to work on the project since September 2020 (under the direct supervision of MDOT) after the original primary contractor (Fluor, a global corporation with projects on six continents) exited.  According to a report by MDOT in January 2022, $219 million was paid directly by MDOT for this work, and this will be in addition to the $3.4 billion to be paid to the concessionaire.  One should also add in the $250 million Maryland has agreed to pay the original primary contractor in the settlement for its claims that it incurred an additional $800 million in construction expenses on the project – expenses that were the fault of the state from an inadequately prepared project.  That $250 million was for construction costs incurred, and should be included as part of the overall construction costs that MDOT is paying the concessionaire.  The total to be paid for the construction (if there are no further cost increases, which based on the experience so far cannot be guaranteed) is thus in fact $3.9 billion.  This is close to double the original contracted cost of $2.0 billion.

This also raises another issue, which remarkably does not appear to have been discussed (from all that I have read).  The original contractor in 2020 had requested an additional $800 million in compensation for extra costs incurred in the project that it argued were the fault of the state.  One can debate whether this was warranted and whether it was the fault of the state or the contractor, but the amount claimed was $800 million.  Thus, had the state agreed, the total cost would then have been $2.8 billion, up from the originally contracted $2.0 billion.  The state rejected this, however, and then congratulated itself for bargaining the $800 million down to “only” $250 million.

But now we see that the overall amount to be paid the private firms building the rail line will be $3.9 billion.  Fluor was evidently right (even conservative) in its claim that building the project will cost more.  But the $3.9 billion it will now cost is $1.1 billion more than the $2.8 billion they would have paid had the state agreed to cover the $800 million (which probably could have been bargained down some as well).  This hardly looks like smart negotiating by Governor Hogan and his state officials.

Put another way, state officials refused to pay an extra $800 million for the project, insisting that that cost was too high.  They then negotiated a contract where instead of paying $800 million more they will pay $1.9 billion more – for the same work.  And then they sought praise for negotiating a new agreement where they will pay “only” an extra $1.9 billion.

Furthermore, the re-negotiated contract will not only pay $1.9 billion more for the construction, but also higher amounts for the subsequent 30 years when the concessionaire will operate and maintain the line.  Maryland had agreed to pay a total of $2.3 billion for this over the 30 years in the original 2016 contract, but in the re-negotiated contract will now pay $2.6 billion, an increase of $300 million.  Governor Hogan had earlier asserted that under its “innovative” PPP contract, the state would not have to cover any cost increases for the rail line operations over those 30 years – but now it does.  In addition, due to the now far higher construction costs and the proportionately much higher share of those costs that will be funded by borrowing (as the up-front grants to be provided will be largely the same – $1.36 billion will now be provided, vs. $1.25 billion before), the total financing costs over the life of the contract will now be $2.8 billion versus $1.3 billion before, an increase of $1.5 billion.  Thus the total contract will now cost $9.3 billion versus $5.6 billion before, an increase of $3.7 billion (which equals the $1.9 billion on construction + $0.3 billion on operations + $1.5 billion on financing).

It is difficult to see how there is any way this can be interpreted as smart negotiating.

b)  Don’t Blame the Lawsuit for the Problems

The politicians responsible for the Purple Line, starting with Governor Hogan, blame the lawsuit brought by opponents of the Purple Line for all the problems that followed.  This is simply wrong, and indeed silly.  The ruling by Judge Richard Leon delayed the start of construction by less than 9 months.  This cannot account for a delay that will now be at least 4 1/2 years (assuming no further delays).  Nor can it account for a project cost that is now $3.7 billion higher.

Judge Leon ruled in August 2016 that the State of Maryland had not fulfilled the legal conditions required for a properly prepared project.  The primary issue was whether a project such as this, with the unavoidable harm to the environment that a new rail line will have, is necessary to provide the transit services needed in the corridor.  Could there be other options that would provide the services desired with less harm to the environment?  If so, the law requires that they be considered.  The answer depends critically on the level of ridership that should be expected, and the State of Maryland argued that only a rail line would be able to handle the high ridership load they forecast.  Many of the Purple Line riders would be transferring from and to the DC Metrorail lines it would intersect, and the State of Maryland claimed that the DC Metrorail system (just Metro, for short) would see a steady rise in ridership over the years and thus serve as a primary draw for Purple Line riders.

Judge Leon observed that in fact Metro ridership had been declining in the years leading up this case (2016), and ruled that Maryland should look at this issue and determine whether, based on what was then known, a less environmentally destructive alternative to the Purple Line might in fact be possible.  If Maryland had complied with this ruling, they could have undertaken such a study and completed it within just a few months.  There would have been little surprise if such a study, under their own control, would have concluded that the Purple Line was still warranted.  The judge would have accepted this, and they could then have proceeded, with little to no delay.  Construction had only been scheduled to begin in October 2016.

Instead, the State filed numerous motions to reverse the ruling and to be allowed to proceed with no examination of their ridership assumptions.  They argued in those motions that there would be a steady rise in Metro ridership over time, and that by the year the Purple Line would open (then expected to be in 2022) Metro ridership would have been growing at a steady pace for years, which would then continue thereafter.  When Judge Leon declined to reverse his ruling, the State appealed and then won at the Appeals Court level.  The judges in the Appeals Court decided that the judicial branch should defer to the executive branch on this issue.  Construction then began in August 2017.  The Purple Line contractors said that they were delayed by 266 days ( = 8.7 months) as a result of Judge Leon’s ruling.

We now know that Judge Leon was in fact right in raising this concern with the prospects for Metro ridership.  Ridership on the system had in fact been falling for a number of years leading up to 2016, and it has continued to fall since then.  Metro ridership peaked in 2008, fell more or less steadily through 2016, and then continued to fall.  Ridership in 2016 was 14% below where it had reached in 2008 (despite the Silver Line opening with four new stations in 2015), and then was even less than 2016 levels in 2019.  And all this was pre-Covid.  Metrorail ridership then completely collapsed with the onset of Covid, with ridership in 2020 at 72% below where it was in 2019 and in 2021 at 79% below where it was in 2019.

Judge Leon was right.  Even setting aside the collapse in ridership with the onset of Covid, Metro ridership declined significantly and more or less steadily for more than a decade.  It was not safe to assume (as the state insisted in its court filings would be safe to assume) that Metro ridership would resume its pre-2008 upward climb.  And now we have seen not only the collapse in Metro ridership following from Covid, but also the near certainty that it will never fully recover due to the work-from-home arrangements that became common during the Covid crisis and are now expected to continue at some level.

In addition and importantly, while the Purple Line contractor noted that the judicial ruling delayed the start of construction by 266 days, this does not mean project completion should have been delayed by as much.  As Maryland state officials themselves noted, while the ruling meant construction could not start, the state could (and did) continue with necessary preparatory work, including final design work, acquisition of land parcels that would be needed along the right of way, and the securing of the necessary clearances and permits that are required for any construction project.  The state was responsible for each of these.  With the extra 9 months they should have been able to make good progress on each, and with this then ensure that the project could proceed smoothly and indeed at a faster pace once they began.

This turned out not to be the case.  Despite the extra 9 months to prepare, the Purple Line contractors cited each of these as major problems causing delays and higher costs.  Final designs were not ready on time or there had to be redesigns (as for a crash wall that has to be built for the portion of the Purple Line that will run parallel to CSX train tracks); state permits were delayed and/or required significant new expenditures (such as for the handling of water run-off); and the state was late in acquiring “nearly every” right of way land parcel required (there were more than 600) – and “by more than two years in some cases”.

An extra 9 months for preparation should have led to fewer such issues.  That they still were there, despite the extra 9 months, makes one wonder what the conditions would have been had they started construction 9 months earlier.  The extra time to prepare the project – where these were later revealed still to be major problems – likely saved the project money compared to what would have been the case had they started construction earlier.  It simply makes no sense now to blame that extra 9 months for the difficulties when they in fact had an extra 9 months to work on them.

c)  Diversion of MARC Revenues to Get Around Maryland’s Public Debt Limits

Under the Purple Line contract, the State of Maryland will be obliged to pay the concessionaire certain set amounts over 35 years, starting with a payment of $100 million when operations start (in a planned 4 1/2 years from now), but especially then for the following 30 years when the concessionaire will operate the line.  The state will be obliged to make those payments for those 30 years on the sole condition that the rail line is available to be operated (i.e. is in working order).  Hence those payments are called “availability payments”.  The payments will be the same regardless of ridership levels.  Indeed, they will have to be made (and in the same amount) even if no riders show up.  A major share of the availability payments will be made up of what will be required to cover the principal and interest on the loans that the concessionaire will be taking out to finance the construction of the project, with the repayment then by the state through the availability payments.  The concessionaire is in essence borrowing on behalf of the state, and the loans will then be repaid by the state via the concessionaire.

These long-term budget obligations are similar to the obligations incurred when the state borrows funds via a bond being issued.  Indeed, this can hardly be disputed for the borrowing being done by the concessionaire to finance the construction, with the state then repaying this through the availability payments.  it is also, at 35 years, a longer-term financial obligation than any bond Maryland has ever issued.  Governor Hogan will be tying the hands of future governors for a very long time, as failure to repay on the terms he negotiated would be an event of default.

Due to concerns of excessive government borrowing undermining finances, many states have set limits on the amount they can borrow.  In Maryland, the state has set two “capital debt affordability ratios”, which limit outstanding, tax-supported, state debt to less than 4% of Maryland personal income and the debt service that will be due on this debt to less than 8% of state tax and other revenues.

If the 35-year long Purple Line obligations were treated as state debt, then there could be a problem of Maryland running close to, and possibly exceeding, these debt affordability ratios.  This is discussed in further detail in an annex at the end of this blog post, with illustrative calculations.  Exceeding those limits would be a significant issue for the state, and might conceivably put it in violation of conditions written into the contracts for its outstanding state bonds.  To avoid this, or even if the Purple Line obligations would bring it closer to but not over those limits, Maryland would need to limit its public sector borrowing, postponing other projects and programs due to the limited borrowing space that the Purple Line has used up.

The issue is not new.  It already arose in the contract signed in 2016.  But it will be even more important now due to the higher cost of the concession  – $9.3 billion to be paid to the concessionaire vs. $5.6 billion before.

Lawyers can debate whether the payment obligations (or a portion of them, e.g. the portion directly tied to the debt incurred by the concessionaire on behalf of the state) should or should not be included in the state’s capital debt affordability ratios.  But to forestall such a debate, MDOT has chosen to create a special trust account from which all payments for the Purple Line would be made.  That trust would be funded by Purple Line fare revenues (whatever they are) and grant funds received for the project (primarily from federal sources).  But MDOT acknowledges that such funding would not suffice for the financial obligations being incurred for the Purple Line, at least for some time.  And if direct support to cover this was then provided from the Maryland state budget, where revenues come primarily from taxes, the Purple Line obligations would be seen as tax-supported debt and hence subject to the borrowing limits set by the capital debt affordability ratios.

So instead of openly providing funding directly from the state budget, they will channel fare revenues collected on MARC (the state-owned commuter rail system) in the amounts necessary to cover the payment obligations on the Purple Line.  But MARC does not run a surplus.  Like other commuter rail lines it runs a deficit.  Each dollar in MARC fares channeled to cover Purple Line payment obligations thus will increase that MARC deficit by a dollar.  But then, for reasons that make little sense to an economist but which a lawyer might appreciate, those higher MARC deficits can be covered by increased funding from the state budget without this impacting the state’s capital affordability limits.  The identical payments if sent directly to cover the Purple Line obligations, however, would be counted against those ratios.

But this is just a shell game.  The funding to cover the Purple Line payment obligations are ultimately coming from the state budget, and routing it via MARC transfers simply serves to allow the state to bypass the capital debt affordability limits.  It also reduces transparency on how the Purple Line costs are being covered.

Nor are the agencies that assign ratings to Maryland state bonds being fooled by this.  S&P, for example, noted specifically that it will take into account the payment obligations on the Purple Line when they compute for themselves what the capital debt affordability ratios in fact are.

d)  Role (or Lack of It) of the State Legislature

Under the new contract Governor Hogan and his administration have negotiated, a total of $9.3 billion will be paid to the concessionaire, or $3.7 billion more than the $5.6 billion that was to be paid under the original contract.  The state legislature will apparently have no say in this.  While it will bind future administrations to make specified payments over a 35 year period, with payments that must be made regardless of ridership or any factor the state has control over (the rail line needs merely to be “available”), the only recognized check on this is apparently a vote in the Board of Public Works.  But there are only three members on this Board, only two votes are required for approval, and the governor has one of those two votes.  The legislature has no role.

I find this astonishing.  The state legislature is supposed to set the budget, but no vote will be taken on whether the further $3.7 billion should be spent.  Indeed, it appears the legislature would have no role regardless of how much the current governor is binding his successors to pay (Governor Hogan will be long out of office when the payments are due), nor for how long.  Suppose it was twice as much, or ten times as much, or whatever.  And while this commitment will be for 35 years to 2056 (five years past what was in the original contract), it appears the same would apply if the revised contract were extended to 50 years, or 100 years, or whatever.  Under the current rules, it appears that the legislature has accepted that the governor can commit future administrations to pay whatever he decides and for as long as he decides, with just the approval of the Board of Public Works.

This is apparently a consequence of the state law passed in 2013 establishing the process to be followed for state projects that would be pursued via a Public-Private Partnership (PPP) approach.  The Purple Line is the first state project being pursued on the basis of that 2013 legislation, with the legislature approving also in 2013 the start of the process on the Purple Line.  This legislative approval was provided on the basis of cost estimates provided to it at the time.  MDOT then issued a Request for Qualifications in November 2013 to identify interested bidders, a Request for Proposals in July 2014, and received proposals from four bidders in November and December 2015.  Following review and final negotiations, MDOT announced the winning bidder on March 1, 2016.  Only then did they know what the cost (under that winning bid) would be, and the state legislature was given 30 days to review the draft contract (of close to 900 pages) during which time they could vote not to approve.  But no vote taken would be deemed approval.  Then, with just the approval of the Board of Public Works as well (received in early April 2016), MDOT could sign the contracts on behalf of Maryland.

However, there will be no such review by the legislature of any amendments to that contract.  Amendments apparently require nothing more than the approval of the Board of Public Works, and with that sole approval, the governor is apparently empowered to commit future administrations to pay whatever amount he deems appropriate, for as many years as he deems appropriate.  The increase in the future payment obligations in this case will be $3.7 billion, but apparently it could be any amount whatsoever, with just the approval of the Board of Public Works.

Based on this experience, one would think that the legislature would at a minimum hold public hearings to examine what went wrong with the Purple Line, and what needs to be done to ensure the legislature retains control of the state budget.  The current legislation apparently gives the governor close to a blank check (requiring only the approval of the Board of Public Works) to obligate future administrations to pay whatever amount he sees fit, for as many years as he sees fit.

Central also to any legislative review of a proposed expenditure is whether that expenditure is warranted as a good use of scarce public resources.  One can debate whether the Purple Line was warranted at the initial cost estimates.  As will be discussed below, at those initially forecast costs even the state’s own analysis indicated it was at best marginal (and inferior to alternatives).  But even if warranted at the then forecast costs, it does not mean the project makes sense at any cost.  Based on what we now know will be a far higher cost, no unbiased person can claim that the Purple Line is still (if it ever was ) a good use of public resources.

Yet remarkably, it does not appear that any assessment was done by any office in Maryland government of whether this project is justified at the now much higher costs.  The issue simply did not enter into the discussion – at least in any discussion that has been made public.  Rather, at the Board of Public Works meeting on the project, Governor Hogan praised MDOT staff for continuing to push the project forward despite the problems.  Indeed, the higher the increase in cost for the project, the more difficult it would be to proceed, and hence the more the staff should be commended (in that view) for nevertheless succeeding in pushing the project through.  This is perverse.

Legislative review is supposed to look at such issues and to set overall budget priorities.  Yet under the PPP law passed in 2013, the legislature apparently has no role to review and consider whether an amended expenditure on such a project is a good use of the budget resources available.

D.  Fact Checks

a)  The Lack of Economic Justification for the Purple Line

The column includes the statement:

Even the state’s own assessment recognized that such a rail line was marginal at best at the costs then envisaged.  With the now far higher costs, no unbiased observer can deny that the project is far from justified.

This statement is based on the results of the state’s analysis reported in the Alternatives Analysis / Draft Environmental Impact Statement, released in September 2008.  The Alternatives Analysis looked at seven options to provide improved public transit services in the Purple Line corridor – an upgrading of existing bus services (labeled TSM for Transportation System Management), three bus rapid transit options (low medium, and high), and three light rail options (low, medium, and high).  All would provide improved public transit services in the corridor.  The question is which one would be best.

The summary results from the analysis are provided in Chapter 6, and the primary measure of whether the investment would be worthwhile is the “FTA cost-effectiveness measure” – see tables 6-2 and 6-3.  The Federal Transit Administration (FTA) cost-effectiveness measure is calculated as the ratio of the extra costs of the given option (extra relative to what the costs would be under the TSM option, and with both annualized capital costs and annual operational and maintenance costs), to the extra annual hours of user benefits of that option relative to the TSM option.  That is, it is a ratio of two differences – the difference in costs (relative to TSM) as a ratio to the difference in benefits (again relative to TSM).  Thus it is a ratio of costs to benefits, and a higher number is worse.  Hours of user benefits are an estimate of the number of hours saved by riders if the given transit option is available, where they mark up those hours saved by a notional factor to account for what they say would be a more pleasant ride on a light rail line (which biases the results in favor of a rail line but, as we will see, not by enough even with this).

The FTA issues guidelines classifying projects by their cost-effectiveness ratios.  For FY2008 (the relevant year for the September 2008 Alternatives Analysis), the breakpoints for those costs were (see Table II-2 in Appendix B of the FTA’s FY2008 Annual Report on Funding Recommendations):

High (meaning best) $11.49 and under
Medium-High $11.50 – $14.99
Medium $15.00 – $22.99
Medium-Low $23.00 – $28.99
Low (meaning worst) $29.00 and over

The Alternatives Analysis estimated that the Medium Light Rail Line option would have a cost-effectiveness ratio of $22.82.  This would place it in the Medium category for the FTA cost-effectiveness measures, but just barely.  This was important, as the FTA will very rarely consider for federal grant funding a project in its Medium-Low category, and never in the Low category.

The other two light rail options examined had worse cost-effectiveness ratios ($26.51 and $23.71 for the Low and High options respectively) that would have placed them in FTA’s Medium-Low cost-effectiveness category, and thus highly unlikely to be accepted by the FTA for funding.  Not surprisingly, the Governor of Maryland (O’Malley at the time) selected the Medium Light Rail option as the state’s preferred option, as the other two light rail options would likely have been immediately rejected, while the Medium Light Rail choice would have been within the acceptable limits – although just barely so.  And while in principle they chose the Medium Light Rail option, they then added features (and costs) to it that brought it closer to what had been the High Light Rail Option, while not re-doing the cost-effectiveness analysis.

Maryland should also have considered any of the three Bus Rapid Transit options, as their cost-effectiveness measures were uniformly better than any of the light rail options (with cost-effectiveness ratios of $18.24, $14.01, and $19.34 for the Low, Medium, and High options respectively).  They were better even without the scaling-up of user benefits (by a notional factor for what was claimed would be a more pleasant ride) that biased the results in favor of the light rail options.  And most cost-effective of all would have been a simple upgrading of regular bus services, introducing express lines and other such services where there is a demand.

These were all calculated at the costs as estimated in 2008.  We now know that the costs for the light rail line option chosen will be far higher than what was estimated in 2008.  That cost then was estimated to be $1.2 billion to build the line, and an annual $25.0 million then for operations and maintenance.  Adjusting these figures for general inflation from the prices of 2007 (the prices used for these estimates) to those of December 2021 would raise them by 34%, or to $1.6 billion for the capital cost and $33.5 million for the annual operational and maintenance costs.  But under the new contract, the capital cost will be $3.9 billion, or 2.4 times higher than estimated in 2008 (in end-2021 prices).  Also, the annual operational and maintenance costs (including insurance) in the new contract will be $2.6 billion over 30 years.  This payment will be adjusted for inflation, and the $2.6 billion reflects what it would be at an assumed inflation rate of 2% a year.  One can calculate that at such a 2% inflation rate, the annual payment over the 30 years in the prices of end-2021 would be $58.0 million, or 73% higher than the $33.5 million had been forecast earlier (also at end-2021 prices).

Putting the capital cost in annualized terms in the same way as was done in the Alternatives Analysis report, and adding in the annual operational and maintenance costs, the overall costs under the new contract (with all in end-2021 prices) is 2.3 times higher than what was forecast in 2008, when the Medium Light Rail option was chosen.  To be conservative, I will round this down to just double.  To calculate what the FTA cost-effectiveness measures would have been (had the forecast costs been closer to what the new contract calls for), one also needs ridership forecasts.  While we know that those forecasts are also highly problematic (as discussed in this earlier blog post, they have mathematical impossibilities), for the purposes here I will leave them as they were forecast in the Alternatives Analysis.

Based on this, one can calculate that the FTA cost-effectiveness measure would have jumped to $50.55 had the capital and operating costs been estimated closer to what they now are under the new contract.  This would have put the Purple Line far into the Low category for cost-effectiveness (far above the $29.00 limit), and the FTA would never have approved it for funding.  And at more plausible ridership estimates, the ratio would have been higher still.

b)  For the Cost of the Purple Line, One Could Double Bus Services in Suburban Maryland, and Stop Charging Fares

Resources available for public transit are scarce, and by spending them on the Purple Line they will not be available for other transit uses.  The Purple Line will serve a relatively narrow population – those living along a 16-mile corridor passing through some of the richest zip codes in the country, providing high-end services to a relatively few riders.  The question that should have been examined (but never was) was whether the resources being spent on the Purple Line could have been used in a way that would better serve the broader community.

A specific alternative that should have been considered would have been to use the funds that are being spent on the Purple Line instead to support public transit more broadly in Montgomery and Prince George’s Counties.  What could have been done?  The alternatives can then be compared, and a determination made of which would lead to a greater benefit for the community.  Only with such a comparison can one say whether a proposed project is worthwhile.

Specifically, what could be done if such resources were used instead to support the local, county-run bus services in Montgomery and Prince George’s Counties (Ride-On and The Bus respectively)?  They already carry twice as many riders as what the Purple Line would have carried in the base period examined (according to its optimistic forecasts), had it been in operation then.  As we will see below, with the funds that the State of Maryland will make in the availability payments on the Purple Line (and net of forecast Purple Line fare revenues), one could instead end the collection of all fares on those bus systems and at the same time double the size of those systems (doubling the routes or doubling the frequency on the current routes, or, and most likely, some combination of the two).  With unchanged average bus occupancy, they could thus serve four times the number of riders that the Purple Line is forecast (optimistically, but unrealistically) to carry.

The services would also be provided to the entire counties, not just to those living along the Purple Line’s 16-mile corridor.  Especially important would be service to the southern half of Prince George’s County, where much of its poorer population lives.  The Purple Line will not be anywhere close to this.  Ending the collection of fares would also be of particular value to these riders.

For the comparison to the cost of running the county-run bus systems, I used data on their operating costs, capital costs, and fare revenues from the National Transit Database, which is managed by the Federal Transit Administration of the US Department of Transportation.  The data was downloaded on February 1, 2022.  The data is available through 2020, but I used 2019 figures so as not to be affected by the special circumstances of the Covid-19 pandemic.

The bus system costs in 2019, along with what the Purple Line costs will be, are:

(in millions of $)

County-Run Bus Systems (for 2019):
Operating costs $157.6
10-year average K costs $17.1
  Total costs $174.7
Fares collected $22.0
  Total to double capacity and no fares $196.7
Purple Line:
Annual availability payments $240.0
Less fares collected (forecast) $45.3
  Net Costs $194.7

The two bottom-line figures basically match, at around $195 million.  The net payments that will be made on the Purple Line over its 30-year life would be $194.7 million, based on the announced availability payment averaging $240.0 million per year less forecast average annual fares to be collected.  That average fare forecast is undoubtedly optimistic (as the ridership forecasts are optimistic), and is based on what was provided in 2016 when the original contract was discussed with the legislature.  I have not seen an updated forecast, but MDOT staff stated (at the Board of Public Works meeting on January 26 to discuss and vote on the new contract) that fares would not be changed from what was planned before.

The cost of doubling the size of the county-run bus systems would have been $157.6 million for the operating cost (based on the actual cost in 2019) plus $17.1 million for the capital cost (based on the 10-year annual average between 2010 and 2019, as these expenditures fluctuate a good deal year to year), or a total of $174.7 million.  It is assumed that government will continue to spend what it is spending now to support these bus systems, so the extra funding needed for doubling the systems would be those costs again (for that second half), plus what is received in fare revenues in the system now (the $22.0 million) as fares would no longer be collected.  Thus the net cost would be $196.7 million, very close to the amount that could be covered by what will be provided on a net basis to the Purple Line (and assuming, optimistically, fares averaging $45.3 million a year).

In addition to this, a total of $1.36 billion will be provided in grants to the Purple Line.  At the lower cost of the earlier, 2016, contract, a portion of those grant funds ($1.25 billion before) would have been needed to cover a share of the costs of doubling the capacity of the bus systems and ending the collection of fares.  One could in principle have invested those grant funds and at a reasonable interest rate have generated sufficient funds to close the remaining gap.  But with the now far higher costs of the renegotiated contract, there would be no need for a share of those grant funds for this, and they could instead be used to provide funding for other high-priority transit needs in the region.

E.  Conclusion

The Purple Line has long been a problematic project, and with the now far higher costs in the renegotiated contract with the concessionaire, can only be described as a fiasco.  After rejecting a demand from the contractor to pay $800 million more to complete the construction of the rail line, they will instead now pay $1.9 billion more to a total of $3.9 billion for the construction alone, or close to double the originally negotiated cost of $2.0 billion.  They will also now pay more for the subsequent operation of the line.  It is all a terribly wasteful use of the scarce funds available for public transit, and comes with great environmental harm on top.  Funds that will be spent by the state under this concession contract could have been far better used, and far more equitably used, by supporting the public transit systems that serve the entire counties.

Despite the much higher costs, there does not appear to have been any serious assessment of whether the Purple Line can be justified at these higher costs.  At least there has not been any public discussion of this.  Rather, MDOT staff appear to have been directed to do whatever it takes, and at whatever the cost it turns out to be, to push through the project.  But that is in fundamental contradiction to basic public policy.  A project might be warranted at some low cost, but that does not then mean it is still warranted if it turns out the cost will be far higher.  That needs to be examined, but there is no evidence that there was any such examination here.

We should also now recognize as obvious that forecasts of ridership on fixed rail lines are uncertain.  Ridership on the DC Metro rail lines not only fell, more or less steadily, over the decade leading up to 2019, but then collapsed in 2020 and 2021 due to the Covid crisis.  Ridership in 2021 was almost 80% below what it was in 2019.  And it is highly unlikely that Metrorail ridership will ever recover to its earlier levels, as many of the former commuters on the system will now be working from home for at least part of the workweek.

Despite this, Governor Hogan has adamantly refused to look at alternatives to building a new fixed rail line, with this to be paid for via a 35-year long concession with private investors that will tie his successors to making regular availability payments regardless of whatever ridership turns out to be, and regardless of any other developments that might lead to more urgent priorities for the state’s budget resources.  The issue is not only that the ridership forecasts on the Purple Line are highly problematic, with mathematical impossibilities and other issues.  It is also, and more importantly, that any such ridership forecasts are uncertain.  Just look at what happened with Covid.  It was totally unanticipated but led ridership to collapse almost literally overnight.  And the effects are still with us, almost two years later.

The fundamental failure is the failure to acknowledge that any such forecasts are uncertain, and highly so.  There might be future Covids, and also other future events that we have no ability to foresee or predict.  For precisely this reason, it is important to design systems that are flexible.  A rail line is not.  Once it is built (at great cost), it cannot be moved.  Bus routes, in contrast can be shifted when this might be warranted, as can the frequency of services on the routes.

None of this seems to have mattered in the decisions now being taken.  As a consequence, and despite billions of dollars being spent, we do not have the transit systems that provide the services our residents need.

 

 

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Annex:  Details on the Diversion of MARC Revenues to Get Around Maryland’s Public Debt Limits

The State of Maryland follows a policy to limit its public borrowing so that state debt does not become excessive.  Specifically, it has set two “capital debt affordability ratios”:

1) Keep the stock of tax-supported state debt below 4% of personal income in the state;

and 2)  Keep debt service on tax-supported state debt below 8% of state revenues.

I am not sure whether these are limits have been set by statute, but as policy they will in any case be reflected in the state bond ratings.  It is also possible that representations, and perhaps even covenants, have been made in the Maryland state bond contracts stating the intention of the state to keep to them.  If so, then violation of those limits could have consequences for those bonds, possibly putting the state technically in default.

The commitments Governor Hogan will be making in signing the concession contracts for the Purple Line are in essence the same as commitments made when the state issues a bond and agrees to pay amortization and interest on that bond as those payments come due.  For the Purple Line, the private concessionaire will similarly be borrowing funds, but the State of Maryland will then have the obligation under the contract to repay that borrowing through the availability payments to be paid to the concessionaire for 30 years.  In addition to repaying (with interest) the borrowings made by the concessionaire, the availability payments will also cover the operational, maintenance, and similar costs over the 30-year life of the contract during which the concessionaire will operate the line.

Under the original contract, signed in 2016, these payments were expected to average $154 million per year for 30 years.  Under the new contract, they are expected to average $240 million a year.  One can debate whether all of the availability payment (which includes payment for the operations and maintenance) or simply some share of these payments should be considered similar to debt, but the payment obligation is fundamentally the same.  Governor Hogan is committing future governors (up until 2056) to make these payments, with the sole condition that the concessionaire has ensured the rail line is available to be used (hence the label “availability payments”).  In particular, they will be obliged to make these payments regardless of what ridership turns out to be, or indeed whether any riders show up at all.  That risk is being taken on fully by the state and is not a concern of the concessionaire (who, indeed, will find things easier and hence preferable the fewer the number of riders who show up).

These availability payments have all the characteristics of a debt obligation.  But if it were treated as state debt, it would have to be included in the capital debt affordability limits, and this could affect the amount that the state could borrow for other purposes.  One can debate precisely what obligations to include and the timing of when they should be included, but purely for the sake of illustration, let’s use the 2016 contract amounts and assume that the obligation to be repaid would have had a capital value of $2.0 billion (equal to the then planned construction cost, minus grants received for it, but plus the present discounted value of non-debt operating and other costs that have been obligated).  Assume also this would have applied in 2017.  Based on figures in the November 2021 report of Maryland’s Capital Debt Affordability Committee (see Table 1 on page 26), the ratio of tax-supported state debt to Maryland personal income was 3.5% in 2017, or below the 4% limit.  However, if the full $2.0 billion from the Purple Line would have been added in 2017, following the contract signing in 2016, that ratio would have grown to 4.1%.

Similarly, the Capital Debt Affordability Committee report indicates (Table 2A on page 28) that debt service on tax-supported public debt in 2017 was 7.5% of state revenues.  If one were to add the full annual $154 million payment that would be due (under the original contract) for the Purple Line already in 2017 (too early, as it would not be due until construction is over, but this is just for illustration), the debt service ratio to state revenues would have risen from 7.5% without the Purple Line commitments to 8.2% with it – above the 8.0% limit.  Of the $154 million, about two-thirds would have been used to repay the funds borrowed to pay for the construction (plus for the equity, which was a small share of the total).  If one argued that only these payments on the debt incurred (and the similar equity cost) should be included, and not also the 30-year commitment to cover the operational and similar other costs, then the ratio would have risen to 7.98% if it applied in 2017 – basically at the 8.0% limit.

Again, these figures are simply for illustration, and the actual additions in 2017 would have been less and/or applied only in later years.  But as a rough indication, they indicate that the Purple Line debt and payments due would be materially significant and hence problematic.

it was thus important that MDOT structure these payment obligations in such a way that it could argue that they are not for “tax-supported public debt”.  This would be the case, for example, if the fare revenues from ridership on the Purple Line would suffice to cover the debt service and other payment obligations incurred.  But even MDOT had to concede the Purple Line revenues would not suffice for that in at least the early years, although it did assert (unconvincingly) that ultimately they would.

MDOT therefore established a separately managed trust for the Purple Line, which would be used to make the payments due and into which it would direct not simply Purple Line fare revenues and grants to be received for the project (primarily from federal sources), but also sufficient revenues from the MARC commuter rail line (operated by MDOT) to make the payments.  It argued also that only the debt service component of the availability payment would have to be included (about two-thirds of the total payment obligation in the 2016 contract), with the operations, maintenance, and other such costs not relevant to the capital debt affordability ratios (despite being a long-term, 30-year, commitment).  The State Treasurer, Nancy Kopp in 2016, ruled that this structure was acceptable and that Purple Line debt should thus not count against the state’s capital debt affordability limits.

But while deemed not applicable for the capital debt affordability limits, the immediate question that arises is what then happens to MARC?  Commuter rail lines in the US do not run a surplus, and require subsidies from a government budget to remain in operation.  MARC is no exception.  If a portion of MARC revenues are diverted to cover payments on Purple Line debt, then MARC’s deficit will rise by that amount and Maryland’s subsidies to MARC will have to rise by that same amount.  And those subsidies will come from state tax revenues.  Hence state tax revenues are in reality covering the Purple Line debt payments, and routing it via MARC does not change that reality.  At a minimum, transparency is being lost.

Furthermore, and as noted before, the state bond rating agencies have made it known that they are fully aware of what is going on, and will include these Purple Line obligations into their calculations.  S&P explained in May 2016 that upon the signing of the Purple Line contract, they will include the net present value of the payments to be made by the state during the construction period in their calculations of the state’s tax-supported debt ratios, and that once operations begin will include in the ratios the full availability payments net of fare revenues collected on the Purple Line only.

Maryland’s payment commitments under the revised Purple Line contract are now expected to average $240 million a year, far above the $154 million expected before.  MDOT has once again made its case with the new State Treasurer (Dereck Davis, who took office on December 17, 2021, replacing the long-time former Treasurer Kopp) that these long-term payment obligations should not count against the state’s Capital Debt Affordability Ratios.  While I have not seen a formal ruling on this from the State Treasurer’s office, presumably he agreed with the MDOT view as otherwise it would not have been presented to the Board of Public Works on January 26.