Sound Transit maps next steps after I-976

Link Light Rail (Image: Lizz Giordano)

The Sound Transit Board had its first opportunity to review the results of I-976 at Thursday's meeting. While expressing confidence they would not be forced to reduce the MVET, and also outlining the litigation strategy they intend to pursue, the Board also heard how an immediate stop to MVET revenues would result in a five year delay to future projects.

I-976 appears to have been rejected by about 53% of voters within the Sound Transit district. That's close to the 54% yes vote on ST3, although it conceals a widening gap in voter preferences within the district. That gap was on display yesterday too, with Pierce County Executive Bruce Dammeier arguing Sound Transit should accept the will of statewide voters including two-thirds of those in Pierce County. Nevertheless, it's enough for most Board members who are ready to recognize a mandate of voters in the Sound Transit area to push ahead with projects and continue collecting the MVET if possible.

If I-976 took effect in full, Sound Transit would be required to retire or defease all bonds secured by MVET revenues and then eliminate the MVET. If the bonds could not be defeased, MVET authority would be reduced from the current 0.8% to just 0.2%. (The Sound Move 0.3% was repealed by an earlier initiative and the taxes survive only as long as some earlier bonds are outstanding. Whatever the outcome of I-976 litigation, Sound Transit has no authorization to collect the Sound Move 0.3% MVET past 2028).

Sound Transit's interpretation, supported by the voter pamphlet language, is that the reduction in future authority applies only to future voter-approved MVETs. The current MVETs remain fully in place as long as bonds secured by those revenues are outstanding. If that view prevails, the only impact of I-976 to Sound Transit would be to curb the available revenue options for an ST4 or subsequent initiatives.

Sound Transit doesn't intend to sue for now pending the outcome of the coalition lawsuit filed by Seattle, King County and others. If they are successful, I-976 might be thrown out entirely. A preliminary injunction delaying I-976 from taking effect until that litigation is resolved seems likely.

If that litigation fails, Sound Transit says their bond contracts still allow them to continue collecting the MVET, unlike the Seattle TBD or state multimodal account which are without similar protection. Sound Transit sold bonds secured by the MVET in 2016 that are repayable through 2046, and also entered a credit agreement with the FTA tied to ST3 taxes the same year.

That position was amplified in a statement last night by Board Chair John Marchione:

The initiative and the Attorney General's voter pamphlet summary both make clear that state law requires the MVET to be collected until Sound Transit's bonds are repaid. We intend to continue fulfilling our obligation to advance critical voter-approved projects and services while we monitor litigation and closely review legal issues surrounding this initiative. No action by the Board is needed or prudent at this time.

Sound Transit believes they can not be forced to defease or retire existing debt. General Counsel Desmond Brown also observed that the initiative lacks a deadline for Sound Transit to defease existing bonds, arguably suggesting the Board has discretion about when to end MVET collections if other pathways fail.

Defeasance is a process roughly equivalent to repaying bonds for the debtor. Instead of paying off the bond debt, Sound Transit would set aside cash or assets in an escrow account sufficient to meet the future repayment schedule. Typically, that means purchasing bonds with a yield that covers repayments on the bonds they have sold. Bond holders would then receive payments from that account on their original schedule. Because the bond liability and escrow assets offset each other, the debt need not be recorded, and the bonds would effectively be wiped from Sound Transit's books and would no longer protect against I-976 MVET reductions. But defeasance is a more costly and complex financial engineering exercise than simply paying the debt down on schedule. Indeed, part of Sound Transit's position is that they cannot be required to enter into more expensive debt to defease existing debt.

The meeting also heard about the impact to Sound Transit's financial position if the MVET is repealed. I-976 would also eliminate the small rental car tax, but that's a small part of overall revenues at less than $4 million annually. Repeal of both would reduce revenues by up to $7.2 billion through 2041, depending on when MVET collections end. Defeasing the $2.3 billion of debt backed by the MVET would mean another $521 million of direct costs and new debt issuance of $2.6 billion.

After proceeding with current projects, the agency would run out of financial capacity as early as 2029. Without MVET and rental car revenues, the delay to future Link and Sounder extensions would be about five years. (That's about in line with our analysis after election day).

In nominal terms, the delays add about $6 billion in capital costs due to inflation. There would be $16 billion in additional interest through 2061, partly due to the increased capital costs, and partly because the agency's debt position would be paid down more slowly after completing projects because of lower revenues. The mix of real costs and nominal changes due to inflation wasn't clear, but a portion is real because capital costs increase faster than general inflation and because Sound Transit expects their cost of borrowing to exceed inflation also.

Lower taxes today also mean higher taxes later as the program is stretched out to meet all spending commitments. The planned rollback of some taxes in the mid-2040s would be delayed 12 years. Taxpayers would end up paying about $25 billion more in total, though again those are nominal dollars rather than real.