Sound Transit expects better revenue recovery, but still lengthy project delays

The latest financial plan anticipates a moderate recession scenario requiring a four year average delay to future projects (image: Sound Transit).

Sound Transit's latest financial plan is much more optimistic about a recovery in tax revenues than forecasts of a few months ago. But predictions of project delays have not improved so much. The more favorable revenue outlook is offset by operating cost pressures. Ahead of the ST3 realignment decisions next summer, staff are still talking in terms of a four to six year delay in projects depending on how revenue forecasts evolve.

As economic activity declined sharply in the early months of the COVID pandemic, Sound Transit hypothesized it might be in for an $8 billion to $12 billion reduction in tax revenues through 2041. That would translate to an average five-year delay in all projects not already in construction.

The most recent projection is for a $6.1 billion shortfall in tax revenues vs the year-ago forecast. Some $800 million of that is likely offset by extra federal grants (both CARES support received in 2020 and expected greater grant support in future). A $5.3 billion net reduction in revenues would seem to put Sound Transit on a path for much reduced delays to projects, but the latest financial plan analysis draws attention to several risks on the cost side.

Capital cost inflation has been a challenge for Sound Transit since 2016. It should slow as the economy cools, and then increase more gradually from this lower level. The lower macro forecast of capital investment inflation rates are reflected in a $1.2 billion decrease in projected capital expenditures in the plan. Sound Transit staff are expressing hesitation about this number however. There is, as yet, no evidence that bid costs are slowing locally, either in Sound Transit projects or in large private projects. Land acquisition costs are still growing quickly. CEO Peter Rogoff highlighted a related threat to property acquisition costs. Redevelopment of potential station sites can increase future costs if rather than purchasing a green field, we might have to be purchasing multi story condos and businesses."

Operating and State of Good Repair costs are adjusted upwards by $800 million. On the positive side, the inflation index for operations costs is adjusted lower. But Sound Transit faces more immediate cost pressures in two areas.

The expenses of repairing DSTT elevators has caused the forecast of vertical conveyance SOGR costs to increase by $555 million through 2041.

Sound Transit is also wrestling with steep increases in the cost of purchased transportation. Assuming 5% increases through 2025 adds $562 million to the plan. But there's a real risk of much higher outlays. The actual increase in price for service bought from partner agencies has been 5.7% since 2016, and an extrapolation of those increases into the future risks another billion dollars in added cost, enough as CEO Peter Rogoff pointed out that purchased transportation costs pose a real risk to capital programs.

Sound Transit's debt capacity is limited to 1.5% of assessed values within the RTA. The latest projection of property values indicates a $2.4 billion decrease in the debt limit in 2041. If that plays out, it takes away much of Sound Transit's leeway to make up any revenue gaps with borrowing.

Fare revenue forecasts are reduced just $150 million through 2041 (for context, Sound Transit collected $97 million in fares in 2019). But that forecast assumes most of the decline in passenger counts can be offset through fare increases. Fare recovery targets, if maintained, will require higher fares.

Finally, there's another $1 billion in debt service costs. This isn't a change to interest rates. Rather, it's simply the result of taking on more debt, within the assessed value debt cap. Sound Transit expects to operate near the debt cap for a prolonged period.

This recession is unusual, initially very deep, but with a rapid partial recovery so far, making it hard to forecast when conditions will normalize (image: Sound Transit)

Sound Transit's financial plans, because they require projections over more than 20 years, are very sensitive to minor changes in assumptions. Nobody should view these as a precise measure of the future. However, Sound Transit has committed to a realignment of projects in mid-2021, and is cautiously assessing their exposure to cost risks. Within the forecasts presented in recent weeks, a modest recession scenario puts delays at about four years. A prolonged recession could extend those delays out to six or more years.