Wednesday, September 17, 2014

SMART train is on Shaky Financial Footing

Sonoma-Marin Area Rail Transit staff has issued a draft "financial plan" that specifies the transit agency's financial outlook through 2028.
Is it any good?
No one who has followed SMART's long history of overstating the train's financial prospects should be surprised that the answer is no. Once again, staff has decided to gloss over the likely financial challenges facing the agency and, instead, has drafted a rosy scenario, employing cherry-picked assumptions adopted to favorably portray SMART's financial outlook.
The most important revenue in SMART's financial future is sales tax. While no one knows exactly what sales tax revenues will be, SMART's track record for forecasting this revenue stream is dreadful.
The financial plan draft states that it "uses a fairly conservative estimate of 3 percent annual growth in sales tax revenues."
In fact, the plan's assumption is anything but conservative, when compared with historical experience.
SMART has assumed sales tax revenues will rise faster than the historical average.
On the expense side, SMART staff assumes total operating expenses grow at precisely the inflation rate. In other words, SMART staff has just posited that there will be no real increases in the price of diesel and in its own compensation between now and 2028.
This assumption is totally out of line with the experience of other Bay Area transit operators. It's hardly conservative to assume that diesel prices will grow no faster than the general price level or that SMART staff won't get a real wage increase between now and 2028.
One component of its financial plan is not an assumption. SMART is committed to paying back the bonds it issued in 2012 with a payment schedule that increases over time.
In 2015, SMART's annual debt service (principal and interest payments) will be $8.5 million. By 2028, SMART is obligated to pay over $20 million, or almost half of every sales tax dollar.
Sales taxes are highly sensitive to economic growth. The longest expansion on record is just under 10 years. The Great Recession ended in June 2009. This means a conservative assumption would incorporate two recessions into the planning horizon.
The financial plan has included none.
The plan claims that "the model's conservative estimates and building of prudent reserves means the agency will be on sound footing regardless of those uncertainties." There is nothing in the plan to document this claim.
Unfortunately for Marin and Sonoma taxpayers, SMART is a highly levered entity because of its debt burden.
When over 40 percent of forecast sales tax revenues are pledged to debt service, revenue declines have almost twice the effect on funding for operations. The plan does not provide any guidance as to how the agency will respond to declining sales tax revenues when the next recession occurs.
While ridership figures are not provided, the increases in ridership can be calculated from the assumed increase in fare revenues. The draft states ticket prices will remain constant in real dollars, but fare revenues will more than triple.
Staff is assuming that by 2028 ridership will be 2.4 times higher than the number of riders in the first year of operation. This also assumes from 2019 to 2028, ridership will grow 3.5 times the projected employment growth rate for Marin and Sonoma in the adopted Plan Bay Area.
The financial plan is still a draft document. As a result, there is ample opportunity for the board to perform its fiduciary duties, as called for by the grand juries of Marin and Sonoma counties.
The plan's assumptions need to be revised to reflect reality, not pipe dreams. The time for wishful thinking and marketing is over.
The public deserves to be told the truth: revenues from the quarter-cent sales tax are unlikely to consistently fund promised rail services, particularly when the next recession occurs and those revenues decline.
Mike Arnold of Novato is an economist, consultant and longtime critic of the SMART train.

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