"Utilizing local tax revenues and related debt for projects and services which benefit the subareas generally in proportion to the level of revenues each subarea generates." (Definition of Equity, Sound Move, page B-3)
Subarea equity was a concept created by the Central Puget Sound
Regional Transit Authority (aka Sound Transit) in early 1996, to reassure voters outside
Seattle — particularly voters on the Eastside — that their tax
resources would not be used to subsidize a costly, risky Seattle rail project. It
promised that tax revenues and debt for each of five subareas — Snohomish County,
Pierce County, and North (including Seattle), South, and East King County — would be
used to benefit transit programs in their respective jurisdictions. It was a key
political understanding aimed at crafting a winning campaign in November 1996, with an
explicit set of promises and supporting policy.
In the very first sentence of its adopted Financial Policies, Sound Transit promised
"minimal debt financing" (Sound Move, Appendix B), which, in the budget, it
estimated at $1.052 billion (Appendix A). Sound Transit said it had in place
policies "ensuring that the ten-year construction program is completed on time and
within budget," so that level of financing would be sufficient.
Now, according to Sound Transit's 2003 Financial Plan, debt financing is estimated at
$2.553 billion, through 2009 — which does not include the most costly portions of its
most costly project, Central Link light rail, from Tukwila to SeaTac, and from downtown
Seattle to the north end. The once-described
"minimal debt financing" will exceed $5 billion.*
With cost overruns for Central Link light rail more massive than anyone could have
anticipated, and further behind schedule than foreseen, Sound Transit is assaulting its
pledge of subarea equity on three broad fronts: The allocation of debt through bond
obligations, the practice of "subarea borrowing," and use of the Regional Fund.
Allocating Debt
Sound Transit pledges the tax proceeds of the entire region to secure its bonds. According to Sound Move, a policy repeated in Sound Transit's grant submission to the federal government, bondholders "have a legal priority to the RTA's local tax revenues, above and beyond any commitment the RTA may wish to make with its subareas that no subarea will pay another subareas' debt." If Sound Transit's cost and revenue assumptions were reliable, and its bond ratio prudent, that would present a risk, but a modest risk, to the subareas not benefited by the bonds.
But Sound Transit has proven reckless in its cost and revenue assumptions, and FTA
facilitates its excesses. When Sound Transit and FTA signed the $500 million full
funding grant agreement in mid-January 2001, Sound Transit legally obligated the region to
complete 7.2-mile University Link light rail (Central Link from Northeast 45th Avenue to
South Lander Street). It accepted that obligation even though it could not afford
it, and FTA offered and co-signed the grant, knowing that it couldn't. Fortunately,
the region was saved by the intervention of the USDOT Inspector General, who recommended
that the grant be withheld, negating the legal obligation Sound Transit had assumed.
Had that not occurred, other subareas — especially East King County, because it has
no rail project, so has not been subjected to such severe cost overruns — would have
been legally obliged to make substantial contributions to the project, because Sound
Transit pledged the entire region's full faith and credit to back-up the
transaction. Even with East King County's resources added, the project would have
been halted mid-stream, and would have languished for a number of years, while tax
revenues were generated sufficient to complete it.
Dick Paylor, a Bothell city council member, active in East King County transportation
planning, observes that East King County is in the position of the responsible family
member who's pressured to co-sign for loans taken out by his irresponsible
brother-in-law. He receives no recompense, just exposure to serious risk.
Two facets of protection Sound Transit promised voters in 1996 were restrained borrowing
("minimal debt financing"), and a prudent bond debt ratio (2x1). That is,
Sound Transit would borrow scarcely more than $1 billion, have resources adequate to
underwrite bonds at no less than twice that level. In a given year, the margin of
safety could be narrowed to 1.3x1 — that is, thirty percent greater estimated
available revenue than bond liabilities. Policies of minimal debt financing, and 2x1
bond debt ratio, were promised not only during the Ten-Year Regional Transit System Plan
put before voters in 1996, but for subsequent phases of Sound Transit's expansion.
("These Financial Policies will apply to future capital programs," Sound
Move, B-7.) But now the agency intends to maximize rather than minimize borrowing,
and proposes to narrow the margin of safety from 2:1, to 1.15:1, subjecting the region to
a vastly higher level of risk.
In short, it is near-certain that East King County will be called upon to bail out other
subareas — especially North King County, since it is responsible for most of the cost
of Central Link light rail, and lacks the resources to complete it. Furthermore,
East King County's future debt capacity for its own needs will be curtailed, for an entire
generation, because its tax resources will be heavily pledged to support 30-year bonds
required by other subareas.
Subarea Borrowing
Subarea borrowing — Sound Transit taking resources from one subarea
and lending them to another — was not anticipated in the 1996 plan. It is a
post-election creation of the agency. In moderation, it could work all right:
North King County is collecting years of taxes prior to the launch of its Link light rail
project, while other subareas are proceeding more quickly with other projects, like
Regional Express buses and Sounder commuter rail. Rather than pay market rates in
the bond market, why not loan some of North King County's money to subareas that can put
it to work, like South King County? A payment at the rate of the consumer price
index may be higher than conventional interest — so good for North King County —
and the CPI cost would be lower than market rates in the bond market, hence good for South
King County.
But Sound Transit has abandoned moderation as a principle. It is planning to subject
subareas to the bond market in profligate fashion, even when there is little if any need
for that jurisdiction to borrow money, as in the case of East King County. East King
County needed to borrow perhaps $15 million for its own purposes. But in the 2002
Financial Plan Sound Transit programmed it to borrow $326 million, and upped it to $530
million in the 2003 Financial Plan, 100 percent of its borrowing capacity through
2006. East King County has no need for that kind of borrowing — which will cost
it more than $30 million annually, interest-only. The burden on Eastside taxpayers
will total $399 million through 2016, $520 million through 2019, according to Sound
Transit's 2003 Financial Plan, assuming no additional bonds are let after 2006. The
reason for all that borrowing is not East King County's needs, but those of North King
County, which requires prodigious sums beyond its own capacity, if 21-mile Central Link
light rail is to be built. South King County has similar needs for its portion of
Central Link, to the Airport, as does Snohomish County, for Sounder.
The perverse outcome will be that East King County borrows at the market rate for
money, and is paid at the CPI rate — if it's paid. Hence it will massively
subsidize any subarea to which its resources are directed. Then the exposure of East
King County will be not merely the money borrowed against North King County's revenue
stream, or South King County's, for which East King County is the effective co-signer, but
the exposure extended by massive sums of money borrowed against East King County's own
revenue stream. Theoretically North and South King County subareas will repay the
money borrowed, so East King County will "only" lose the difference between
market bond rates and CPI — easily hundreds of millions of dollars. But the
theory of repaying the money is likely not to be borne out in practice, so the injury to
East King County will be much greater than that. If similar raids are made on East
King County's assets and bonding capacity after 2006, the cost to that subarea could total
billions of dollars.
All accounts between the subareas were to be reconciled in 2009. That was the
premise under which subarea borrowing was instigated. But making good on the money
by that time is impossible, or at least inconvenient, so now Sound Transit proposes to
extend subarea borrowing another decade, to 2019. That's 23 years after the public
vote to approve a purported Ten-Year development plan. It will be even easier to
extend subarea borrowing for another decade or two, or more, when 2019 proves similarly
inconvenient.
The only security inherent in subarea borrowing is the prospect that Sound Transit may
honor its commitment, and that equity, though long delayed, ultimately won't be
denied. Sound Transit's record of fidelity to the promises it's made does not
inspire confidence.
The Regional Fund
In the 1996 Sound Move budget presented to voters, the costs for Sound Transit's
central administration, plus some other regional tasks like fare integration, phase II
planning, and an innovation fund, were to be covered by the Regional Fund. The
Regional Fund was to receive the proceeds of a seven percent contribution from each
subarea's tax revenues, which could be raised as high as ten percent. During the
Ten-Year Plan, seven percent amounted to a projected $139 million. There was a
second, smaller source of money for the Regional Fund, interest on unused capital.
If, for example, North King County accumulated tax revenues as it prepared to launch its
Central Link light rail project, the interest on that money would flow into the agency's
Regional Fund. By rights it should belong to North King County, but, in moderation,
that arrangement did not seem unreasonable. The money thus accumulated during the
Ten-Year Plan, from interest on invested capital assets, was projected at $31
million. That would contribute 18 percent of the $170 million Regional Fund during
the completion of Ten-Year Plan's development projects, 1996-2006.
The premises of the Regional Fund have been profoundly altered. In 1999, Sound
Transit borrowed $350 million in the bond market, money it didn't need. It allocated
the $17 million annual debt payment (interest-only) to various subareas, which will
step-up to $21 million in 2006, and $35 million in 2019, continuing at that level until
2028. While the subareas pay for the bonds, Sound Transit invests the money and
directs the proceeds into its Regional Fund. In such fashion, the $31 million interest
income flowing to the Regional Fund during the Ten-Year Plan (1996-2006), has ballooned to
a projected $325 million interest income (1996-2009), with the Regional Fund escalating
from $170 to $603 million. With its victory in King County superior court, entitling
Sound Transit to tax indefinitely in order to carry out its putative Ten-Year Plan,
projected interest income, 1996-2016, will be $430 million, plus seven percent of tax
revenues, $289 million, for a Regional Fund total of $718 million. By the time the
Ten-Year Plan has run 25 years,1996-2021, interest flowing into the Regional Fund is
projected at $718 million, and tax revenues for the Regional Fund will add about $700 million, total $1.4 billion.**
These staggering sums presume that Sound Transit will forego any borrowing after 2009, an
improbable assumption, since it would negate Sound Transit's claims that it will complete
Central Link to the Airport and to the North End. That said, it's unlikely the
agency could reach that goal even if it applied all its taxes, and mortgaged all its
assets, from all its subareas, through 2021. The cost overruns are simply so vast
they preclude that result.
This will impose heavy costs on subareas for bonds. The 2003 Financial Plan programs
each subarea to borrow 100 percent of its capacity by the end of phase I. Those
assets, plus any unutilized tax revenues, can be invested, with the resulting income
flowing into the Regional Fund. This has enabled Sound Transit's central
administration to expand enormously. Originally, it was supposed to cost merely $5.5
million per year (1995 dollars, or about $6.6 million in current dollars). Now it is
many times that, facilitating a bloated bureaucracy with generous salary scales, and
lavish PR, media, and lobbying costs that exceed what the entire administration was
supposed to cost. In the face of egregious misrepresentations, schedule delays,
over-budget projects, and less-than-predicted ridership, Sound Transit keeps itself afloat
in the public arena by manipulative propaganda, generous media buys, and lobbying,
underwritten by its lavish Regional Fund, with most of
the money flowing from its investments of assets that rightly belong to the subareas.***
With $1.4 billion projected for the Regional Fund, 1996-2021, there's considerably
more money than even a bloated central administration can spend on itself. So this
is another avenue to subvert the promises of subarea equity. It is proposed to
transfer hundreds of millions of dollars of costs for the Central Link light rail project
from North King County to the Regional Fun. The Regional Fund, in turn, largely will
be underwritten by East King County, the only subarea in fiscal health and, with North
King County, the largest tax base. Some of the liabilities proposed for transfer are
the costs of the Central Link maintenance base, the cost of converting the downtown
transit tunnel, and the cost of operating the joint bus/rail use of the tunnel, until
someday it is extended to north Seattle and converted to rail-only. There is,
furthermore, a general admonition to search for other costs to transfer from North King
County to the Regional Fund.
Conclusion
With or without I-776 in place, the pressure of light rail cost increases combined with
the financial tactics described here make future subversion of subarea equity a high
probability despite any Sound Transit commitments in the present day to maintain subarea
equity.
________________________________
* "Minimal debt
financing" was projected in 1996 at $1.052 billion. Currently it's
projected at $2.553 billion. That does not include most of the costs of Central
Link. If Central Link light rail is to be completed, SeaTac Airport to the
University District, bonded debt will exceed $5 billion. Even with favorable bond
costs, interest charges for thirty-year bonds exceed the sum borrowed. For instance,
Sound Transit's $350 million bond in 1999 was obtained at the favorable rate of five
percent. Over its 30 year life, it will cost $387 million in interest, plus the
repayment of the $350 million, $737 million total. If Sound Transit is able to
achieve such favorable terms on $5 billion debt, the cost of the bonds will exceed $5.5
billion. The agency will be required to pay $10.5 billion back over 30 years.
Considering that that's in addition to billions of dollars of sunk capital costs from huge
tax revenues, plus large annual operating subsidies, that's a lot of money for a Ten-Year
Plan represented to voters as a $3.9 billion set of transit investments.
**Sound Transit may return some of this
money to the subareas, if it does not need it for its own purposes. But the disposal
of the money is at the discretion of the agency, whereas the agency ought to be obliged to
conform to the principle of subarea equity, "utilizing local tax revenues and related
debt for projects and services which benefit the subareas generally in proportion to the
level of revenues each subarea generates." Sound Transit agreed to a fiduciary
obligation, which it used to help obtain a favorable vote in 1996--and the agency ought to
honor it.
*** State law requires the Washington State
Treasurer to fully compensate all jurisdictions for the investment proceeds of their
assets, managed by the Treasurer. There is no such statute to curb the appetite of
Sound Transit. If the State Treasury acted like Sound Transit does, it would keep
everyone's investment proceeds. Worse, it would use its arbitrary authority to
compel them to borrow money they didn't need, then keep the profits earned on those funds.
Emory Bundy
September 10, 2003
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