Coalition for Effective Transportation Alternatives

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Why I-776 will cut Sound Transit's funding
(despite what Sound Transit says)

The following assessment is from technical advisors John Niles and Tom Heller on the the issue of I-776 and Sound Transit's outstanding Bond commitment. They conclude that, despite Sound Transit's claims that I-776 cannot legally repeal its MVET tax, Sound Transit has the money to repay the bonds now. The bigger question is, why did they sell bonds in the first place, incurring debt payments prematurely ($17 million payments this year alone)?

Sound Transit claims I-776 cannot repeal its MVET tax

As reported by Eric Pryne in the Seattle Times (http://seattletimes.nwsource.com/html/localnews/134556829_mvet17m0.html):

The state says Sound Transit would continue to get motor-vehicle excise-tax money — even if voters approve Initiative 776 next month — unless a court orders otherwise. Initiative 776 is intended to limit car tabs to $30 a year and repeal local taxes on vehicle registration, including the 0.3 percent tax that helps support Sound Transit's bus, commuter-rail and light-rail programs. Supporters have characterized the initiative as a way to stop light rail.

But in a letter last month to the state Department of Licensing, which collects and distributes the money, Sound Transit officials argued the tax can't legally be repealed because the regional-transit agency already has pledged the proceeds to help pay off outstanding bonds.

In a Sept. 20 response, licensing director Fred Stephens concurred.

"... We will continue to collect and remit the (tax) unless and until a court of competent jurisdiction adjudicates that (the department) may not do so," Stephens wrote.

But re-programming of resources is possible...

From Tom Heller:

What Sound Transit WILL have to do is re-program its financial resources after the loss of their MVET (one-fifth of their tax revenue). That re-programming would presumably --and should-- knock out the light rail project; it should NOT require eliminating regional bus, HOV/direct access ramps, nor even commuter rail. (Those aren't the big-ticket items that LINK is. Nor are they terribly controversial.) But ST says I-776 would affect those (current and hence visible) services. They are, however, TOTALLY SILENT as to the likelihood that I-776 will necessitate a rethinking of the light rail project. They want to frame the I-776 vote as taking away things we already have, not things we know we don't want.

...and existing bonds are easily paid from cash on hand

From John Niles (with material also provided by Tom Heller):

My understanding of the $350 million in bonds already sold by ST in autumn 1999 in anticipation of starting LRT construction in year 2000 is that they are a rather trivial amount compared to the big picture of Sound Transit finances. These are the only bonds sold so far by Sound Transit. They can be easily repaid out of cash on hand if Central Link were cancelled. The money would not then be needed.

It is my understanding that the bonds are backed by the collective tax revenues of all five subareas. As of the end of 2002 all subareas are projected to have significant cash balances with unused cash of all five totalling $664 million. If its MVET revenues were cancelled, it still would receive 80 percent of its tax revenues, from the sales tax. If I-776 passes, ST could just repay the bonds and move on to what it needs to do next. The bonds are not in jeopardy. What I-776 passing would mean is, ST could not afford to proceed with Seattle Central Link Initial Segment--at least not with without a new public vote.

Light rail in Tacoma is a red herring, consuming just a pittance of total capital outlay according to the ST financial plan. Consider these CAPITAL (not operating) costs invested from 1997 thru end of 2002:

Details of bonding language provide other recourse besides continuing MVET

Following from the "Official Statement" prepared for the sale of ST's 1999 bond issue (the "Series 1999 Bonds") Here's what it reads on the security for the bonds:

"Security and Sources of Payment for the Bonds (note the plural, "sources")

"The bonds are special limited obligations of Sound Transit payable from and secured solely by a pledge of the Local Option Taxes, which are required to be deposited into the Local Option Tax Accounts, and amounts, if any, in the following accounts: the Local Option Tax Accounts, the Sales Tax and Motor Vehicle Excise Tax Bond Account, the Sales Tax and Motor Vehicle Excise Tax Bond Reserve Accounts, the Project Account, 1999, and any other project account created for the deposit of Bond proceeds (collectively, the "Pledged Accounts"). The pledge for the payment of the Bonds of the Local Option Taxes and amounts in the Pledged Accounts is a prior lien and charge upon the Local Option Taxes and the Pledged Accounts superior to all other charges of any kind or nature. The Bonds are not obligations of the State or any political subdivision other than Sound Transit.

"So long as any Bonds remain Outstanding, Sound Transit has covenanted in the Resolutions to levy the Motor Vehicle Tax at a rate of not less than 0.3%. So long as any Bonds remain Outstanding, Sound Transit has covenanted in the Resolution to levy the Sales Tax at a rate of not less than 0.4%, provided that Sound Transit may levy the Sales Tax at a rate of not less than 0.3$ so long as the Sufficiency Test is met. See "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS -- Pledge Securing Bonds -- Sufficiency Test." To the extent permitted by law and approved by the District's voters if a vote is required), Sound Transit may, but is not required to, pledge to the repayment of the Bonds Motor Vehicle Tax in excess of 0.3% and Sales Tax in excess of 0.4%.

"The System Plan specifies that certain transportation improvements will be operational within the ten-year period. Sound Transit is authorized to fund future operations, maintenance and debt service from the Local Option Taxes. Sound Transit expects that any significant future phase capital developments beyond those specified in the System Plan will require approval of the voters within the District. If voters decide not to proceed with future phases, Sound Transit may elect to repurchase, redeem or defease Bonds in accordance with their terms. Subject to meeting the Sufficiency Test for debt service coverage on the bonds, Sound Transit may also elect to reduce the rate of Sales Tax imposed to not less than 0.3%.

Analysis: Bond covenants don't bind anyone other than Sound Transit

The bond covenants are a binding pledge that ST will not take any action that fundamentally alters the terms on which they offer the bonds to investors.

But the covenants DO NOT BIND anyone other than Sound Transit. They DO NOT preclude the people from voting to reduce or repeal one or both of the revenue sources ST is pledging. ST can --and will-- argue that I-776 "impairs the 1999 bond contract" (this probably explains why they sold the bonds so early). But it will be hard for them to argue that the loss of 20% of its revenue impairs their bond contract when they're sitting on multiple hundreds of millions of dollars in unrestricted cash and short-term securities. (as of 12/31/01, it was $611million, composed of Cash and cash equivalents of $274 million and Investments, at fair value of $337 million, per the Deloitte Touche audit of 2001.)

The "Security and Sources of Payment for the Bonds" section of the Series 1999 Bond Issue's Official Statement states that "if voters decide not to proceed with future phases, Sound Transit may elect to repurchase, redeem or defease Bonds..."

Although it reads that ST may elect this action if voters decide not to proceed with FUTURE phases, Sound Transit ALREADY has the power to defease the bonds (thus rendering them not Outstanding, and thereby alleviating the bond covenant to keep the sales and MVET tax rates effective as long as Bonds are Outstanding.)

In case you are wondering what "defeasance" means, the Official Statement's "Security and Sources" section contains the following:

Defeasance

"Sound Transit has reserved the right to defease Bonds by setting aside with a trustee or excrow agent and pledging for that purpose cash and/or noncallable Government Obligations sufficient to redeem and retire such Bonds. Upon defeasance, Sound Transit need make no further payments into the Bond Account for the payment of those Bonds, and those Bonds will be deemed not to be Outstanding."

(And, although it doesn't pertain to defeasance, the Official Statement, in a later "Default and Remedies" section, sets forth what constitutes default and what remedies are available.)

So, if the MVET were to go "Poof!" because of I-776 there are ways provided in the Bond agreement to fully protect bondholders. And the presence of probably $800 million or so by now in liquid assets (cash and short-term investments) should guarantee this outcome. Hence, no impairment of contract results -- unless, of course, ST can prove (via an election!) that voters really want to move ahead with a Phase II which will require those MVET revenues. Absent such evidence, it's hard for them to prove impairment.

Also, note the representation above about the System Plan (Sound Move) that "certain transportation improvements will be operational within the ten-year period?" If ST Board members want to argue that the taxes must remain in place, then what about that performance pledge?

SIDEBAR: Current bond allocation

Here's how ST has been carrying the allocation of the $350 million (par amount) bonds obligated in 1999:
Snohomish - $23,803,000
North King - $191,479,000
South King - $61,529,000
East King - $15,547,000
Pierce - $53,124,000

I don't know how Ladenburg and Moss connect these bonds with present construction. I can find no relation to construction costs and no relation to the project modes. When additional bonding is needed, the amounts are calculated as amounts needed to keep end of year cash balances above zero after inter-subarea loans.

SIDEBAR: Interest being paid on unneeded bonds

Sound Transit district citizens have been paying $17 million annually on $350 million in bonds that we don't need. And, since they were sold in 1999, bond rates have gone down, so our timing wasn't good. The $17 million is for interest only; next year we have to start paying capital too, and it goes up to $23 million. Of course Sound Transit's spare change is invested, earning interest, but probably less, on the bond income, than the bonds cost.

SIDEBAR: Bonding strategy undermines subarea equity

It is the subareas that pay for the bonds, and it is Sound Transit that gets the interest on their money. It's one of the ways to get around subarea equity. Through 2021, Sound Transit is scheduled to reap $934 million interest on the subareas' money. From that standpoint, even though ST in the aggregate is likely "losing" money on the existing $350 million bonds,Sound Transit the bureaucracy is the big winner. By the end of 2009 it will have accumulated $273 million in interest--while the subareas shell out $586 million for debt service.

The primary victim in this exchange is East King County. Nearly 45 percent of the funds Sound Transit will invest come from EKC--so roughly $420 million that ST will collect in interest is effectively extracted at the expense of EKC. Then, on the other side of the ledger, EKC is scheduled to pay $354 million debt service through 2021, even though, during most of the 25 reported and projected years, this subarea has no need for debt--but it'll be paying on debt it doesn't need, so Sound Transit can reap the benefits.