Reston Spring

Reston Spring
Reston Spring

Tuesday, October 18, 2011

Will the Silver Line be MWAA's and Fairfax County's Trash Incinerator?

In a post on the self-evident blog, "bond girl"--a former public finance analyst and investment manager--writes about the recent bankruptcy of Harrisburg, PA, the capital of Pennsylvania.  Her post, "The Money Pit," describes the four-decade debacle of local politicians pouring money into the city's trash incinerator as the key driver in the city's bankruptcy.  She says,
. . . the incinerator plant has been a major source of financial trouble for the city since it opened in the early 1970s, yet city officials have demonstrated an inexplicable devotion to throwing money at the project.  (This story is, in fact, one long lesson in not allowing sunk costs to influence decision-making.  Not everyone pays attention in economics, apparently.)
In the course of her analysis of the incinerator snowball rolling down the hill to city bankruptcy, she addresses the issues of construction risk.  
One of the largest sources of risk in project finance is construction risk.  Construction risk refers to the risk that unforeseen problems would occur in the process of constructing a project that would throw the project off schedule or radically alter the project’s scope.  When bonds are primarily backed by the revenues generated by a facility, it is important that the project actually be producing revenues by the time the first payment is due. . . . I mention construction risk because the Harrisburg project was several times larger than any project Barlow (the general contractor) had previously undertaken.  When asked whether his technology could be applied to a much larger project, Barlow did what most entrepreneurs about to land a major contract would do: he said he would make it work.  Barlow also stipulated that his company be the project manager, giving him complete control over the project’s execution.
She continues later in her treatise:
. . . I would submit to you that city officials – and by extension, the people who elected them – have also been true speculators in this project all along.  City officials bet that they could get some nobody to construct a large project for less than far more sophisticated corporations, demanded no insurance in the event of his failure, and put their taxing authority behind that bet.  Were they born yesterday?  Was this the first project the city had ever undertaken?  No, they were greedy and reckless, plain and simple.  If the city had chosen a more honest and traditional arrangement, the project would not have been feasible on paper, and the bonds could never have been sold.
Does any of this sound familiar?

MWAA, Fairfax County, and Loudoun County are pretty much making the same kind of speculative bet with your tax and toll money.  It's called "doubling down"--and it's a very bad poker and business strategy.

MWAA is somehow expecting Dulles Toll Road users to pay well over half--56% and climbing--of the $6-7 billion cost of the Silver Line's construction.  Recent unofficial estimates indicate that will raise the full toll to between $15-20 within 20 years--as much as an order of magnitude increase in current fares--and higher beyond that period.  

In Fairfax County, we have elected officials betting about one billion in our tax dollars in construction costs (the county's 16.1% share) that the Silver Line will generate enough jobs and new residents in the future to pay back that bet and cover the interest--which could be another two billion dollars over 40 years.  Loudoun has a similar problem, but much smaller problem; it's share of the bet is less than five percent. 

The officials representing the parties to the current financial arrangement continue to meet in secret to re-allocate, but probably not cut the ultimate costs of Silver Line construction.  MWAA--the project manager--is trying to blame Washington and Richmond for not paying their fair share.  While they were expected to contribute three-quarters of the total construction cost (half from Washington, a quarter from Richmond), both governments saw the outrageous price increases long ago and bailed out after an initial commitment in 2007.  

But did the local governments and MWAA do the same???

MWAA got together with Fairfax and Loudoun in secret soon after to pound out the agreement that sticks toll road users with 56% of the cost--then projected at about $5.2 billion, up from $2.7 billion at the time the Final Environmental Impact Statement (FEIS) was published in 2004.  Now the price of the Silver Line has mushroomed to well over $6 billion and it will likely go to $7 billion before the first train moves down the track.  

So far, despite public posturing to the contrary, the vast majority of the Board of Supervisors have shown no reluctance to throw additional money at this project.  Despite the more than doubling and possibly tripling of construction costs since 2004, the County Board Board has made a huge bet of our future taxes.  The failure to generate the anticipated employment and residential growth will almost certainly not bankrupt the county if the politicians are wrong, but it could see taxes--residential, special tax district, and others--balloon in future decades.  

And what if MWAA can't make up the difference in toll road fares??  The projections of future toll road fares and revenues are all over the place, even from MWAA's favorite consultant Wilbur Smith Associates.  In 2005, WSA said toll revenues would maximize at tolls around $2.00-$2.50.  In 2009--well before the latest construction cost estimate increase--they said that tolls would have to be $10 in 2038 and continue upward for another decade (the fare end of their estimate range).  Now, MWAA has given them a third chance to make an estimate, one that is expected to be completed by the end of the year.  It is almost certain that the toll forecasts go up unless they find sources for large new infusions of money or make extremely unrealistic assumptions about other financial factors.

So, if potential toll road users use other means (maybe even Metrorail) or other driving routes (on Rt. 7 or our local streets, for example) rather than pay extortionate tolls, how is MWAA going to pay off the more than $3.5 billion in bonds it will have to issue to get the Silver Line built??  Will they add to passenger and freight fees, which they have so far stubbornly refused to do (in part because of a meddling Congressional role in setting these fees)?

More importantly, will there be blow back on Fairfax (& Loudoun) County taxpayers as well??

Unfortunately, like Harrisburg, it may take four decades for this debacle to unwind totally . . . and who will remember who made those terrible decisions over the last decade???  How much more should we speculate that the Silver Line will be a gold mine for the county???

Terry Maynard

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