Why Light Rail Ain't Gonna Happen - Vote or No Vote.
First, I'll admit that I think it shouldn't, but forget the fact that it's bad transportation policy that needs to be re-thought at least twice more.
Forget the fact that nobody on Earth has ever explained nor can ever explain to me why people think this is still the 19th century and thus we have to run mass transit stock with steel wheels on steel rails rather than rubber wheels on cement.
The fight is over before it has begun, arguments are moot and policy debate is pointless. Remember the Monorail? Well, the financial antics of the Washington Mutuals of the world have, in essence, turned Sound Transit's light rail into the Monorail. So you can vote for all the "Sound Transit 2" you want - that light rail just ain't gonna happen.
And by the way, Washington Mutual, you are going to go broke if you don't raise more capital. There, I said it. Now would you please sue me the way BankAtlantic sued Dick Bove? Please? Just a little? I think Washblog would really appreciate the traffic.
Then to get to the point, Sound Transit 2 says three things in its big plan.
First, they plan to issue about six and a half billion bucks worth of bonds, mainly 30-year (you'll remember the Monorail was derided for issuing 25-year bonds), but also shorter maturity to bridge the gap between costs and - ehem - revenues.
Second, Sound Transit "estimates" debt service will cost about - ehem again - $1.8 billion.
Moving on...third, Sound Transit says this:
Sound Transit's enabling legislation defines Sound Transit's capacity for issuing general
I don't know what the first part means, but I know the second part means that cost overruns will be moved to the bonds.
Except they won't, because it won't even get that far.
Look at how the Monorail cost plan went from here in 2002 to here in 2005. Any cost ballooning of even half or a third that size would be fatal to Sound Transit 2 - and indeed in this financial climate Sound Transit 2 and its light rail will die.
Same thing that caused the Monorail fatality, just a different scenario.
...the Monorail expect[ed] to pay higher interest rates than Sound Transit -- up to 7 or 8 percent for junk bonds, which will pay for part of the project Seattle voters narrowly approved in 2002.
Is my effort to liken Sound Transit 2 to the Monorail by bolding the word "Monorail" whenever I write it becoming at all clear by now?
Good, then I will not have bolded in vain.
But this is Sound Transit, right? They are not going to be paying any junk bond rates, right? Ron Sims says it will only be a measly $1.8 billion in debt service, right?
Yeah, um, no.
When Junk Is Everywhere, Everything Becomes Junk
As Bloomberg tells us:
Almost a year after the Federal Reserve began to cut its target rate for overnight loans between banks to 2 percent from 5.25 percent, borrowing costs for states, cities, hospitals and municipal authorities are going in the opposite direction.
Okay, I can hear you starting to doze off, so what does it mean? It means as I said before, that Sound Transit 2 and light rail are dead. Dead.
If the Monorail died because it was going to have to pay 7 or 8 percent, what will an interest rate of 10% do to light rail? How does 15% grab you? That's what Washington D.C. is paying on some of its debt these days. Read the article, dammit.
It's simply out of the question for King County to pay the kind of ruinous interest the market will charge them for 30 years. Sound Transit clearly knew the interest rates would be high. They didn't even dare to include them in the Sound Transit 2 plan, so far as I can see - and that was before the credit crisis. No matter, the situation has gone from bad to worse and now the money for light rail simply cannot be had at a price King County can afford to pay. It's over.
Look, I understand you're in denial still, but I'm the guy who has to tell you. It's over. No light rail. Will not happen. Too expensive. No money.
Move on to anger.
"But why should it be so, dammit? Why?" you ask, having now read the article. This is healthy, let's talk about it.
It's a tale of greed and indolence, followed by stupidity.
There are - or maybe, more correctly "were" - companies that insured municipal bonds - the kind of bonds that fund light rail - to make them nice and super-duper-duper safe. Why was this necessary? Well, lazy, rich people buying municipal bonds were apparently not satisfied with low default rate and huge tax advantages. They required an extra measure of protection to slake their innate greed and indolence.
Municipalities very rarely default, but bond buyers (and raters) cannot, it seems, be bothered to properly value municipal bonds - again because of greed and indolence. Instead, they have chosen for many years to blindly insist that municipalities get insurance for their bonds.
This system worked well, but then again how hard can it be to insure bonds that almost never default? Well, to greed and indolence we can add stupidity, because it turns out that the bond insurance companies couldn't be bothered to value anything properly. These companies took the nice fat profits they made from many years of the boring, profitable business of ripping off municipalities and put the money into the sexy, exciting business of "insuring" pools of mortgage-backed securities and derivatives.
But because these people are greedy, indolent morons, they apparently thought the word "insure" meant something much more like "take the bank's word for it and get a fee."
The present time finds these companies - like MBIA and Ambac - having lost their money, lost their credit ratings and now worthless for insuring anyone (which they apparently were in the first place, but I digress). Nobody has stepped into their place.
The bond buyers (and raters) are just as greedy, indolent and stupid as ever. There is no bond insurance to be had. So, as Bloomberg relates, municipalities are paying interest through the nose to keep these greedy, indolent fools feeling safe - even to coax them into buying just small issuances of bonds.
Our Sound Tranit is not talking about a small issuance, but is talking about a minimum of six and a half billion dollars' worth. That is going to make the rich morons very nervous and when they get nervous, things get expensive. To make matters worse, Sound Transit has a fancy accounting system (from Appendix B of Sound Transit 2):
What was originally intended to create flexibility, fairness and more than a little CYA for Ron Sims is now sure to create confusion and engender outrageous cost. The complexity of the revenue model will be used as an excuse by the greedy, indolent, stupid, municipal bond market to hammer Sound Transit's new bonds with murderous interest rates.
Launching into the turbulent and shark-infested financial waters created by the credit crisis, Sound Transit will enter King County taxpayers into the financial food chain - and not at the top. Unless they can get very creative indeed - like creating a new financial system - like by magic - Sound Transit 2 will be looking at an absolutely unsupportable cost of debt.
Bottom line: Like the Monorail, Sound Transit 2 and its $11-billion-to-build, goodness-knows-how much-to-finance light rail simply will not happen because it will cost far, far too much.
The good news is that the plan needed a LOT of work anyway. The bad news is that this municipal debt crisis is a quiet, $2.66 trillion disaster that will start to undermine all public policy in America if it doesn't get fixed.
So please don't yell at me about light rail. Light rail is the least of our worries.
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