Financial Engineering to Accelerate Link

Downtown Everett (Image: Emersb/Wikimedia)

Sound Transit CEO Peter Rogoff has suggested the agency is exploring creative financing options for Everett Link that shift some costs outside of agency debt limits. If successful, this would mitigate the risk of project delays as Sound Transit bumps up against statutory limits on debt in the 2030s, and may even accelerate the timetable.

The remarks came in a meeting of the Everett City Council. In response to questions about earlier service to Everett, Rogoff replied:

"Our goal in terms of being able to serve Everett sooner is two-fold. One, to work with the communities as cooperative partners to see if we can't focus on results and minimize bureaucracy to get a plan to get up here as soon as we can. That's A. B, if there is a way that we can work out a financial arrangement where we could start incurring costs for this that would be exempt from the debt cap imposed on us, that might provide some opportunities to get up here sooner. We're trying to be as creative as possible.

We've made that commitment to not only Paul Roberts, to Dave Somers, to Dave Earling, who've been on this for a long time. I don't want to say it's impossible. I'd like to continue with each passing year to see if we can't drive that schedule closer and closer."

Sound Transit, like any local government in Washington State, faces a constitutional limitation that non-voted debt not exceed 1.5% of the assessed value of property within its jurisdiction. This constrains the size and timing of capital investments as revenues must accumulate to cover most of the program. At its peak, the financial plan envisions $17.6 billion in debt by 2035, just as Everett Link is scheduled to open in 2036. The debt limit in 2035 is projected at $20.1 billion. There are many risks to that forecast, starting with the inescapable vagaries of a financial forecast two decades into the future. MVET reform alone could erode almost all of Sound Transit's cushion unless accompanied by offsets. Several billions of anticipated federal grants are uncertain. Community pressures may drive some project costs higher.

We asked Sound Transit to elaborate on the options to spend beyond the debt cap, and Sound Transit spokesperson Kimberly Reason explained:

Sound Transit is investigating opportunities to leverage public-private partnerships as we deliver our capital program and operate the system as it grows. Everett Link is one of several potential P3 applications, but we are still investigating this and no conclusions or decisions have been made yet. Our investigatory work will continue at least through the end of this year. The Executive Committee was last briefed on status of the work in February, and will be briefed again following completion of our exploration.

The February briefing to the Board described a wide range of P3 alternatives. Two illustrative options suggest the financial implications. In one simple scenario, a private partner could build the rail line and stations, then lease them back to Sound Transit, perhaps with the facilities reverting to Sound Transit ownership after a lengthy period. The transaction would be profitable for the private partner because the lease payments would cover the cost with interest of building the line, along with some margin for assuming the financial risks.

A more comprehensive partnership might encompass both construction and operations, with an operations contract designed to make the private partner whole over time for both capital and operations costs.

In either case, the debt would be owned by the private partner. For Sound Transit, the adjustments to net outlays would be roughly a wash. More lease payments or fees for operations, but correspondingly less debt repayment. P3s are often complex to administer because the contract must anticipate so many future contingencies. It may nevertheless be appealing to the Board because a debt re-engineering means more financial flexibility.

The debt cap also means that project delivery timelines in one subarea are sensitive to cost overruns or scope creep in others. In response to a question from Paul Roberts about escalating scope on the West Seattle and Ballard projects, CEO Rogoff explained:

You're right to identify that. You heard me make reference to the debt cap. The board must manage our finances to make sure they are continually affordable. That creates some peaks and valleys in terms on when we can take on debt. If we spend too much money in the early years, we could run into debt cap problems in the outer years. Importantly, it was not a coincidence that we put our Board Chair Dave Somers, the Snohomish County Executive, on the elected leadership group that is working on the alignments for the West Seattle/Ballard extension project.

In the elected leadership groups, there also needs to be a certain degree of fiscal discipline, because there is a budget for each one of these projects, and we have to make sure that they either stay within budget or, as we have for partnering agreements with certain of these cities, that there's going to be considerable betterments and considerable cost growth, there needs to be third party funding to make that happen. I think, from his public comments, on the Elected Leadership group for West Seattle and Ballard, that Executive Somers understands that's a very important role that he has in that group. We are doing this with every other elected leadership group, not just getting the elected leaders on the projects in the room, but making sure there is at least one Sound transit board member who doesn't have a dog in the fight to maintain some fiscal prudence in the conversation.