Understanding the Difference Between Capital and Operating Funding

Why we can't cancel the subway line and use the money to run more buses

Train passing subway platform


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What many members of the public (and some members of the planning profession) do not understand is that public transit is made up of two disparate funding categories: capital and operating.

Capital Funding

Capital funding is money earmarked to build things. Capital funding for transit is most often used to buy new buses, but it can also be used to build new garages, subway lines, and bus shelters. Politicians like capital funding because it allows them to get photographed in front of whatever shiny new building or rail line they secured funding for. Obama's stimulus plan consisted of capital funding of transit: many recipients used the stimulus funding to buy new buses or upgrade their facilities. Long Beach Transit in California, for example, used funding from the plan to renovate their twenty-year-old downtown transit mall.

Operating Funding

Operating funding is money used to actually run the bus and rail lines that you bought with capital funding. The vast majority of operating funding of public transit goes to pay employee salaries and benefits (as much as 70% of the total budget). Other operating funding goes to pay for such things as fuel, insurance, maintenance, and utilities.​

Why You Cannot Mix the Two

The majority of different government subsidies for transit are clearly designated to be used for either capital or operating purposes. For example, all federal money designated for public transit, with the exception of really small transit systems, is to be used for capital programs only. Many state and local government funding is likewise restricted to one or the other. Until relatively recently MARTA in Atlanta, GA was mandated by law to spend 50% of revenues it received from a sales tax on capital funding and 50% of operating funding. Such an arbitrary restriction is a sure way to have shiny buses and bus stops that due to a lack of funding cannot actually go anywhere. Of course, revenue raised by the system itself, such as fares, can be used for either capital or operating needs. Since in general capital funding is easier to come by, most fare revenue is spent on operations. Attempting to spend money earmarked for capital programs on operations and vice versa is a sure way to run afoul of the auditors.

The Prevalence of Capital Over Operating Funding

The "relative" ease of obtaining capital as opposed to operating funding (for the past couple of years it has not been easy for transit systems to gain ANY kind of funding due to the recession) can be attributed to three major causes:

  1. Politician Photo Ops: As mentioned above, politicians like building things because it gives them an opportunity to get favorable press at the ribbon cutting. Securing funding to keep a transit system operating without cutbacks does not easily lend itself to a similar type of situation.
  2. Worry About Salary Inflation: As mentioned above, as much as 70% of operating funding is spent on employee salary and benefits. If operating funding is increased, then the worry would be that the increase would be spent on raising salaries instead of providing more service. And, since most transit systems are heavily unionized, salary increases may pin the dreaded "in bed with the unions" tag on the politician.
  3. History of Federal Transit Spending: It has only been relatively recently that the federal government has spent money on public transit. Most federal transit spending comes out of the Highway Trust Fund, which was responsible for providing the financing for the interstate highway system. Since the Highway Trust Fund had a history of providing capital funding for highways, it was only natural that it would provide capital funding for transit. In addition, transit agencies needed help with capital funding before they needed help with operating funding. Government help with capital replacement and construction predates World War II, while many transit agencies were self-sufficient on the operating side until the 1970s.