Washblog

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.

No?

Okay.

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.

Yeah, um,...okay.

Moving on...third, Sound Transit says this:

Sound Transit's enabling legislation defines Sound Transit's capacity for issuing general
obligation debt at one and one-half percent of the value of the taxable property within the
boundaries of the Sound Transit District (and with approval of three-fifths of voters voting within
the Sound Transit District, up to five percent of the value of the taxable property within the
district's boundaries). There is no dollar limit for revenue indebtedness.

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.

Why?

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.

The Monorail [was] forced into some unconventional financing arrangements because the project is about 20 percent more expensive than expected and because its motor-vehicle excise tax revenue is 30 percent less than expected.

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.

(Monorail)

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.

The $2.66 trillion municipal debt market is reeling from a series of jolts springing from a decline in the creditworthiness of insurers that once backed half of all securities sold at the same time the economy teeters on the edge of a recession, eroding tax revenue.

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):


Allocation of Sound Transit Debt

1. For reporting purposes, the amount of long-term debt financing used to benefit each of the
subareas will be based on each subarea's ability to repay debt after covering operating
costs. The Board may determine appropriate debt service limits by subarea.

2. While the above policy prescribes the use of debt financing for subarea reporting, the
Board will manage the agency's debt capacity on a consolidated basis so as to maximize
resources between subareas.

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.

< Stopping Voter Suppression: The Press Gets It Right in Virginia | all your vote >

Poll

Will ST2's Light Rail Get Built?
No.
Not Likely.
Are you kidding?
Sure, $30 billion, $40 billion, who cares what it costs?
Yes, Bill Gates and Paul Allen will build it in Bill Gates's garage.
Emotionally, I have to say yes somehow/I am still in Monorail Denial.

Votes: 10
Results | Other Polls
Display: Sort:
You do realize that, right?

I mean, none of you is actually suggesting that an $11 billion light rail system (of dubious merit, in my view) is worth thirty billion dollars, right?. You do remember that the annual budget for the entire state of Washington is about 30 billion dollars.

Where do you think we're going to get the money from, outer space?

by dlaw on Sat Aug 09, 2008 at 12:58:38 AM PST

* 1 none 0 *


From 5.5 years ago!

Boston Globe Article

When I get some of the 'REAL' ha ha ha numbers for the Big Dig, I'll do some math voodoo ...

My born & raised in Boston wife kind of remembers about 2 or 3 billion in the late 80's ...

and it finished at ... 15 billion ...

ha ha ha.

In Boston, they've got all these REALLY smart and REALLY crooked people who've been ripping off the public for centuries.

In Seattle, we've got all these people who think they're really smart - they've got the sheepskins to show !!

BUT

(thankfully they ain't crooked)

BUT

they're also clueless!  

add clueless to seattle's piddle around fart around decisive-less don't-rock-the-boat let's-worry-about-everything-that-doesn't-matter culture

we're gonna get our pockets CLEANED !

rmm

http://www.liemail.com/BambooGrassroots.html

by rmdSeaBos on Sat Aug 09, 2008 at 10:45:49 AM PST

* 2 none 0 *



Are folks not getting that even if you want to spend the money, the money can't be had at a rational cost?

You could try and finance the project through fees alone, but let's look at those numbers:

There are about 700K households in King County. For convenience, let's call that 1.1 million taxpayers.

Thus to build the light rail we're talking about at least ten thousand dollars per King County taxpayer over...well, you name the term of the construction.

I think that's an insane amount of money in construction alone, but leaving that aside it's an absolutely impossible tax burden as planned - and that's before cost overruns.

As we saw with the Monorail, the enormous (in this financial environment, insuperable) problem with rail is the up-front cost. A rail system is only useful to the extent that it is a complete system. It is useless in parts.

And because the up-front cost is so high, rail has to be financed with borrowing and that is just not possible in the present environment.

There are other options that can be financed more slowly, but in a world where up-front money cannot be had at reasonable rates, rail is a non-starter.  

by dlaw on Sat Aug 09, 2008 at 08:34:59 PM PST

* 6 none 0 *


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