DART Doing Fuzzy Math
Dallas Area Rapid Transit was conceived in sin. Dallas wanted to father a light rail system, but in order to get the money to pay for it, Dallas married its first cousin, Suburbia. Now DART, the progeny of this cynical union, is sadly, uh...not quite right.
DART announced in early December it was suddenly about a billion dollars short on its rail construction budget. An editorial in the January 24 edition of Dallas' only daily said the deficiency has all been taken care of already.
"Dallas Area Rapid Transit officials are moving swiftly to shore up plans to deliver rail projects on time and perform damage control on the agency's credibility," The Dallas Morning News editorial page announced.
The problem is, that's bullshit. A $1 billion shortfall just went away? Give me a break.
The shortfall is very serious, and it has not gone away. It's money. Money doesn't go away. It just waits around the corner for you. What the DART staff proposed to the DART board last week was a concoction of screwball borrowing schemes—"off-shoring debt," as one DART watcher described it to me—inspired entirely by politics, public relations and a keen desire to avoid talking about DART's real problem: It can't go in two directions at the same time forever.
At some point DART has to decide if the primary purpose of light rail is to promote density in the city or development in the 'burbs. The billion dollar shortfall is a big, painful symptom of the fact that DART can't continue to do both forever as co-equal priorities.
Nobody wants to talk about that, because it's a conversation that can lead to divorce. But there you have it. If things like this didn't happen, we would never have invented divorce.
But first let's talk about the money.
DART staff conceded in early December that "new estimates" showed the agency was suddenly about $900 million short of the amount needed to complete promised rail lines to suburban Irving and Rowlett by 2011 and 2012, respectively, the promised completion dates. Under grilling by Dallas City Council member Angela Hunt, DART director Gary Thomas conceded he had known for sure about the shortfall for at least eight months and had been seeing the signs coming for about three years before telling his board.
Hey, maybe he's shy. But let's move on.
Here's the squeeze. DART doesn't just owe the suburbs some rail lines. It owes the city some rail lines too. That's why there's not enough money. It has enough money to do the suburban lines. Or it has enough for the city lines. It doesn't have enough money for both.
Here's the bottom line. DART has to get more money. Close to a billion bucks. Or somebody gets shorted. Mom. Or Dad. City or 'burbs. They can't both get what they want, because there isn't enough money.
We voters told DART in an election in 2000 that it could borrow $2.9 billion for future rail projects. That's what's called a "hard cap." DART cannot legally borrow more money by selling long-range bonds, unless it comes back to us voters for permission or gets the law changed so it doesn't have to come to us any more.
Guess what the big idea is. You got it. Repeatedly at last week's DART board meeting, board members and their financial advisors talked about how they need to get the Legislature to change the law so we voters won't have the right to vote on their borrowing in the future.
Robert Estrada, the outside bond lawyer who advises the DART board on how to borrow more money, told the board it could borrow up to $5 billion, instead of a meager $2.9 billion, if the Legislature would agree to cut us voters out of the picture.
Estrada said he knows tons of institutions that would love to sign up DART for big credit deals right away. He said they are "beating our doors down here. They're salivating at the thought of $5 billion in capacity...They'd love to get their hands on a payment for the next 40 or 50 or 100 years."
I'm sitting in the peanut gallery thinking, "And this is a good thing?"
But wait, Estrada and DART chief financial officer Sharon Leary told the board there were plenty of other ways they could borrow lots of money without going to the voters—even without getting the law changed.
For example, they said DART could raise $300 million by mortgaging the fare-box revenues (ticket receipts). We voters wouldn't have a right to vote on that, they said. DART, like Nike, could just do it.
According to their most recent published financial statement, DART brings in about $41 million a year in fares. So Estrada and Leary were telling them they could borrow against that.
Here's the issue. DART uses the fare-box money for part of its operating expenses. Estrada told them if they borrowed against it, they would have to take about a third of the fare-box money in the future and use it to pay off the loan.
The main way DART gets money for operations is from the $370-plus million it gets every year in local sales tax revenues. Raymond Noah, the board member from the Park Cities, pointed out that if DART takes fare-box money out of the operating budget to pay off debt, then it just has to use more money from the sales tax to operate on.
"That means that the sale tax subsidy then would have to increase because the money from the fare box would have to go directly to the bonds. All we're doing is just moving one set of funds to get another set of funds," he said.
I think there's another big point in here that Noah didn't quite get to, although I'm sure he's aware of it because he's a sharp guy. I tried to call him last week, and he didn't call back.
What DART also would be doing with this and other borrowing schemes proposed to the board last week is taking money from the operating budget and using it for capital expenditures. That's a big policy shift.
Another scheme suggested by Estrada and Leary, for example, was borrowing money against the federal grant money that DART gets. The problem with both of those ideas, of course, is that the capital plan for a railroad needs to be very long-range. You have to be able to commit to and plan for projects decades ahead.
But fare-box revenues can go up or down with short-range economic cycles. And federal grant money can go up or down depending on which congressional committee chairman got caught with an intern at a bed and breakfast in Vermont over the weekend.
Using these financial reach-arounds to finance the long-range building of regional rail is flaky. Don't take it from me. Listen to what DART board members had to say to Estrada and Leary at last week's meeting:
Noah characterized the ideas being presented to the board as "funny financing activities." He said, "The reason I'm asking the questions this way is because this funky stuff kind of cuts you off when you get on down the line and you really want to get serious about financial alternatives."
Dallas board member Pamela Dunlop Gates said the ideas were being offered as a "panacea" that she described as "exotic."
Funny financing funky exotic panacea. You feeling better about this yet? I am not.
Another idea presented to the board was to finance future debt on longer notes—40 years instead of 25 to 30—as a way of getting smaller payments. Angie Chen Button, a member from Garland, was one of several who questioned why DART would start basing its future on paper-thin borrowing deals now, at a time when almost everyone expects a tough economic downturn ahead. She described the ideas as "too optimistic."
Even after Estrada and Leary tried to tell her more borrowing would have no effect on the agency's credit rating, Chen Button said, "I'm sorry, but it's very hard for me to believe that's not going to affect our credit rating."
So now we have a funny financing funky exotic too optimistic panacea with a bad effect on our credit rating.
DART staff floated another idea: getting private companies to build the rail lines themselves and then paying those companies for the use of the lines. A DART observer, who asked not to be identified because he does business with the agency, described this to me as "off-shoring debt."
He pointed out that the private companies have to borrow money to build the rail lines. And DART is going to have to pay them back for that, every penny and then some, some day. The money waits around the corner for you.
Of course, even to proceed with any of this funky funny off-shore business, DART will have to hope it won't be distracted by the problems of its board chairman, Lynn Flint Shaw, who is dealing with accusations of forgery, non-payment, campaign ethics, etc. There is also the odd little side deal with Deloitte Touche, the agency's auditors, who revealed last week they had been paying Shaw $20,000 a year to promote accounting as a profession among minority high school students.
Does this sound to you like a situation that is under control, a problem that has been solved?
Yes, the board said last week that it will build everybody's rail lines on time, and it doesn't have any real financial problems any more. Leary, the CFO, told the board, "We are not financially constrained, nor are we running a deficit. I am going to repeat that. We are not financially constrained, nor are we running a deficit. We actually have a debt constraint issue."
Translation: "Don't worry. We have tons of money. All we have to do is borrow it."
What do I think? If you are counting on a rail line anytime soon for your community, you should stop counting.
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