Sunk cost goes completely underwater


Featured Image By Nicholas La Joie

The Milwaukee streetcar has always been a huge mess, but as Dan O’Donnell writes, his problems are now worse than ever.

June 11, 2021

Perspective by Dan O’Donnell

We’ve all been there: we know the movie we’re watching is terrible. It’s barely watchable, in fact. But we’re an hour away and paid $ 28.50 for two tickets and an extra $ 25 for popcorn and soda. At this point, we might as well hang in there, right?

Wrong. It’s sunny outside and if we go now we can watch the sunset from the bar terrace down the street. Besides, why would we want to keep watching a movie we hate?

The answer lies in what is called the “sunk cost fallacy” – our tendency to invest more time and money in things where we have already invested our time and money. The price of movie tickets and the hour we spent in the theater are sunk costs, that is, they cannot be recovered. To justify this investment, we invest even more in a futile attempt to save it.

This is, on a much larger scale, what the city of Milwaukee has been doing with its streetcar system for years, and the terrible movie it has decided to keep watching is a horror movie.

The Hop, a $ 128 million boondoggle paid for with a combination of federal funds and additional tax funding, opened in late 2018. However, the word “business” shouldn’t be taken literally. Thanks to a sponsorship agreement with the Potawatomi Hotel and Casino, the rides were free for the first year.

Even then, ridership declined once the novelty wore off. After the first year, Milwaukee Mayor Tom Barrett and other Hop supporters knew the original plan to charge $ 1 per ride would be a failure, as the Milwaukeeans likely wouldn’t be pouring even such a minimal cost into a tram that only travels in two. mile loop.

Now, the public isn’t even willing to spend $ 0 on a ride on the Hop, as the number of riders has dropped to just 450 rides per day.

“We wanted to see what it looked like for ourselves,” reported Bryan Polcyn of FOX 6 Milwaukee, “so on April 27 – a partly cloudy Tuesday with a high of 70 degrees, we looked at a single streetcar platform. for eight hours, from 9 a.m. to 5 p.m. Meanwhile, 48 trains passed on the platform of the Cathedral Square, but only 22 people boarded. Thirty-seven of these trains stopped and left without win a single new passenger. “

While the COVID-19 pandemic has certainly played a role in the sharp drop in ridership over the past year, the Hop averaged 495 passengers per day in December, but that number fell to 450 in April, when the weather was obviously much nicer. and COVID vaccines were widely available, making people who might otherwise have been reluctant more likely to venture into society.

There was, in other words, no reason for a drop in ridership other than the public simply not wanting to ride the Hop. Consider this: Polcyn reports that while bus ridership fell 50% during the pandemic, streetcar ridership fell 85%.

“While streetcars in other cities, like Kansas City, Tuscon, Cincinnati and Oklahoma City have already started to see a rebound in ridership this spring, the Milwaukee streetcar has not,” added Polcyn.

The state of Wisconsin and its communities are expected to receive $ 20 billion, of which $ 400 million is earmarked for transit projects alone. Milwaukee itself will receive $ 405 million. Wouldn’t it make sense to use at least some of that to reimburse the federal government and end a streetcar that doesn’t have the prayer to pay for itself?

To make matters worse, Milwaukee is paying around $ 4.5 million to operate the Hop this year. $ 1.3 million is covered by sponsorship and advertising deals, but without ticket sales to offset operating costs, the city faces a shortfall of $ 3.1 million.

This prompted calls to suspend service or abandon the streetcar altogether, but it would prove costly.

“When we decided to make this improvement, we did it largely with federal money and as part of that we entered into some sort of contractual or project agreement with the government. federal government, ”Jeff Polenske, commissioner of the Milwaukee Department of Public Works, told Urban Milwaukee. last fall. “We have an obligation to use it for the life of the improvement. “

Since Milwaukee has accepted $ 69.1 million in federal funds, it is forced to run the Hop for its “useful life” – about 25 years – or it will have to pay the federal government back in full.

While this is a massive payout, it is actually paltry compared to the cost of running Hop for the next 25 years. Using the funding gap of $ 3.1 million as a benchmark and taking into account an inflation rate of 2.5% per annum, the City of Milwaukee is expected to spend a minimum of $ 111.5 million for continue to operate the tram system throughout its useful life.

In the very likely event that Milwaukee is unable to sell advertising and sponsorship on something that no one is riding, it would have to pay the full operational costs once the Potawatomi money runs out in 2028. Once the Potawatomi money runs out in 2028. plus, assuming an annual inflation rate of 2.5%, this translates to almost $ 150 million in total operating costs, an average of about $ 6 million per year each year for the next 25 years.

Would it be wiser to just pay less than half that amount up front to end this mess? Of course it would, especially now that municipalities like Milwaukee are teeming with COVID-19 relief money.

The state of Wisconsin and its communities are expected to receive $ 20 billion, of which $ 400 million is earmarked for transit projects alone. Milwaukee itself will receive $ 405 million. Wouldn’t it make sense to use at least some of that to reimburse the federal government and end a streetcar that doesn’t have the prayer to pay for itself?

It does, but when it comes to his favorite project, Mayor Barrett never made much sense. He wants to use that federal money to expand the streetcar, saying people won’t start using it until it expands to other neighborhoods.

While this may be true, the question is whether they will pay for their rides. If no one does the Hop when it’s free, why would anyone do it when they have to pay? And even if they pay, a $ 1 fee will only cover a tiny fraction of annual operational costs.

Using Hop’s original (and too sunny) forecast of 1,800 rides per day, $ 1 per ride would only earn the city $ 657,000 in annual revenue to cover $ 4.5 million in costs. Milwaukee will have no choice but to dip into its parking revenue or find some other way to pay to keep the Hop running.

The logical thing to do would be to stop managing the Hop, try to strike a deal with the federal government to minimize the amount that needs to be paid back, and use as much COVID relief money as possible to pay it back.

The sunk cost fallacy will almost certainly prevent that, as Milwaukee will invariably continue to pour money into the streetcar in a futile attempt to finally make Mayor Barrett’s vanity scheme work.

Rather than cut losses, Milwaukee will stay on this train until it crashes; while taking taxpayers for a ride.

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