Could Maryland's Mass Transit Administration leave depreciation and interest out of 'operating costs' when calculating its required 50% fare box recovery ratio?

Plain-English summary

A state senator asked the Attorney General whether the Mass Transit Administration (MTA) could exclude capital costs, such as depreciation and interest, from its calculation of "total operating costs" when determining whether it met the statutory requirement to recover at least 50% of those costs through bus fares and other operating revenues. A Legislative Auditor's report had flagged MTA's exclusion of such expenses and recommended seeking an Attorney General's opinion, since the underlying statute did not define "operating costs." Relying on and expanding an earlier Assistant Attorney General memorandum, the opinion concluded that excluding depreciation and interest was a reasonable interpretation of the statute, pointing to a technical report issued around the time the statute was enacted that likewise excluded those items, companion legislation from the same legislative session that required the Department of Transportation to distinguish capital from operating expenditures, and the risk that including depreciation would sharply raise fares and undermine the purpose of the transit program. The opinion also found support in a 1979 legislative task force report that first recommended the 50% recovery ratio and in fiscal notes for a similar 1981 commuter rail statute that computed "operating costs" the same way.

Currency note

This opinion was issued in 1984. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Could Maryland's Mass Transit Administration leave depreciation and interest out of "operating costs" when calculating its required 50% fare box recovery ratio?
According to this 1984 opinion, yes. The Attorney General agreed with an earlier Assistant Attorney General memorandum that excluding depreciation and interest from operating costs was consistent with the design and intent of TR §7-208(a)(2)(i).

Why did the Legislative Auditor think depreciation should have been included?
The opinion noted that the Legislative Auditor's audit report treated depreciation as a valid cost of operating the bus transit system that should count toward the recovery calculation, and recommended that MTA seek an Attorney General's opinion since the statute did not define "operating costs."

What legislative history supported excluding capital costs from the calculation?
The opinion pointed to a February 1983 technical report issued shortly after the statute's enactment that did not include depreciation or interest in its accounting of MTA operating expenditures, companion transportation legislation from the same session requiring a capital-versus-operating distinction in departmental budgeting and reporting, a 1979 task force report that first recommended the 50% recovery ratio and separately tracked operating and capital subsidies, and fiscal notes for a similar 1981 commuter rail statute that computed "operating costs" without including depreciation or interest.

Background and statutory framework

TR §7-208(a)(2)(i) of the Transportation Article required MTA to set Baltimore-region bus fares projected to recover at least 50% of "total operating costs" for bus services under its jurisdiction, starting in fiscal year 1983, but the statute did not define "operating costs." The opinion built on an Assistant Attorney General's Memorandum of Advice to the Department of Transportation, examining a companion statutory scheme, TR §§2-103.1 and 2-103.2, that required the Department to distinguish capital from operating expenditures in its budgeting and reporting, and a similarly worded 1981 commuter rail cost-recovery statute, TR §3-217(b), whose legislative fiscal notes also excluded depreciation and interest from "operating costs." The opinion's editor's note records that the General Assembly later amended TR §7-208(a)(2)(i) by Chapter 397, Laws of Maryland 1986, to extend the fare recovery requirement to both bus and rail services.

Citations

Statutes:

• TR §7-208(a)(2)(i) (Transportation Article requirement that MTA recover at least 50% of total operating costs through Baltimore-region bus fares)
• TR §§2-103.1 and 2-103.2 (Department of Transportation requirement to distinguish capital and operating expenditures)
• TR §3-217(b) (similar 50% fare recovery requirement for commuter rail operations)
• Chapter 397, Laws of Maryland 1986 (later amendment extending the recovery ratio to bus and rail services)

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1984/Volume69_1984.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

TRANSPORTATION

Mass Transit Administration-50% Fare Box Recovery Ratio-"Operating Costs"-MTA Exclusion Of Depreciation And Interest From Computation Of Operating Costs Is Reasonable Interpretation Of Governing Statute.

October 8, 1984

The Honorable Julian L. Lapides
Senate of Maryland

You have requested our opinion on whether the Mass Transit Administration ("MTA") may exclude capital costs such as depreciation and interest from its calculation of the "50% fare box recovery ratio" required by §7-208(a)(2)(i) of the Transportation Article.

For the reasons given below, it is our opinion that the exclusion of such costs is consistent with the design and intent of that section.

I
Discussion

Section 7-208(a)(2)(i) of the Transportation Article ("TR" Article) provides, in relevant part, as follows:

"For fiscal year 1983 and each fiscal year thereafter, the [Mass Transit] Administration shall establish in the Baltimore region bus transit fares at rates projected to recover from such fares and other operating revenues at least 50 percent of the total operating costs for mass transit bus services under its jurisdiction."

The MTA was audited by the Legislative Auditor for the period from July 1, 1981, to June 30, 1983. In his Audit Report of February 27, 1984, the Legislative Auditor referred to this statute and noted:

"The Administration excluded certain expenses (e.g., depreciation) from total operating costs in determining the percentage of the recovery of such costs from fares and operating revenues. In our opinion, such expenses are valid costs of operating the bus transit system and should be included in computations to determine compliance with the law." Audit Report at 2.1

Responding to the Legislative Auditor's concerns, the Department of Transportation requested advice from its counsel. In a Memorandum of Advice, Assistant Attorney General Janis Ashman concluded that MTA's construction of the term "operating costs" as excluding depreciation and interest was not inconsistent with the law. Memorandum from Janis Ashman, Assistant Attorney General, to Frederick L. Dewberry, Acting Secretary of Transportation (May 23, 1984). Specifically, she found that:

1. Although the term "operating costs" usually encompasses depreciation in a business accounting context, the statute in question here applies to a governmental regulatory situation. Thus, the meaning of the term hinges on the particular intent of the General Assembly in this particular, regulatory context.

2. The February 1983 Report of the Special Committee on Transit Operating Costs (Technical Supplement), issued shortly after the enactment of TR §7-208(a)(2)(i), did not include depreciation or interest in its report of "MTA Operating Expenditures". See Technical Supplement at 41 and 42.

3. Legislation enacted during the same Session as TR §7-208(a)(2)(i) requires the Department of Transportation to distinguish between capital and operating expenditures for purposes of annual reporting and budget preparation. TR §§2-103.1 and 2-103.2. Thus, "[g]iven the fact that the Legislature has mandated a dichotomy of capital and operating expenditures and costs in areas which have a pervasive effect upon the workings of the Department, it follows logically that the Legislature intended this dichotomy to apply as well to the calculation of operating expenses in the fare cost recovery statute[] in question".

4. TR §7-208(a)(2)(i) should not be construed to reach an unreasonable or unintended result: "If depreciation expenses for high-priced capital assets such as ... buses were factored into the calculation of the operating costs of the MTA ... the operating costs would rise significantly, in turn producing a marked increase in fares with a sizable decline in ridership. As a result, the whole purpose of mass transit services would be thwarted. It is doubtful that the General Assembly would intend such a consequence."2

We have carefully reviewed Ms. Ashman's advice and the authorities and principles upon which it relies. For the reasons stated in her memorandum, we agree that TR §7-208(a)(2)(i) does not require the MTA to include depreciation and interest as "operating costs" for purposes of calculating the 50% fare box recovery ratio. Indeed, during the course of our own independent review of this matter, we found yet additional support for this conclusion:

5. The 1979 Report of the Subcommittee on Transportation of the Task Force to Study State-Local Fiscal Relationships, which apparently first recommended the 50% fare box recovery ratio, clearly differentiated operating subsidies from capital subsidies and operating deficits from capital deficits. See A Study of Maryland's Transportation Needs and Financing (December 12, 1979) at 38-39.

6. The 50% fare box recovery ratio appears to have been patterned after 1981 legislation that required the Department of Transportation to recover from fares and operating revenues at least 50% of "total operating costs" for all commuter rail operations under its control. See TR §3-217(b). The fiscal notes for the identical bills that enacted TR §3-217 compute projected "operating costs" without the inclusion of depreciation or interest. See Exhibit A to Revised Fiscal Notes for House Bill 201 and Senate Bill 1048 (1981).

II
Conclusion

For all of these reasons, it is our opinion that the exclusion of depreciation and interest from the calculation of the 50% fare box recovery ratio is consistent with a reasonable and proper construction of TR §7-208(a)(2)(i).

Stephen H. Sachs, Attorney General

Robert A. Zarnoch
Assistant Attorney General

Avery Aisenstark
Chief Counsel,
Opinions and Advice

Editor's Note: Since the issuance of this Opinion, the General Assembly amended TR §7-208(a)(2)(i) to require a fare recovery ratio of "at least 50 percent of the total operating costs for the mass transit bus and rail services under [the MTA's] jurisdiction." Chapter 397, Laws of Maryland 1986.

1 Recognizing, however, that "the law does not define operating costs," the Legislative Auditor recommended that an Attorney General's Opinion be sought on the question. Audit Report at 2.

2 We have since been advised by MTA of its current estimate that, in order to comply with the Legislative Auditor's recommendation, the base fare would have to be increased by more than 26%, from 75 cents to almost 95 cents.