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[UPDATE 2: Dominic Holden strongly objects to my assertion that he is “implicitly comparing” the cost to other projects. I take him at his word and apologize for the error. In any case, my issue is with the frame of the PSN campaign, not Dominic.]

[UPDATE: This post is being taken as a broader attack than it is. A shaky financing plan, which might be the subject of a coverup, is a big story and an important issue. I have a very narrow objection, to the rhetoric that adding in interest cost reveals the project’s true cost, and then implicitly comparing that to other projects that don’t include the same interest payments.]

In the midst of a bunch of really damning facts about the DBT’s financing plan, Dominic Holden cites a new, inflated cost estimate for the tunnel: it’s $6.1 billion!

This is another one of those things that all project-oriented no campaigns do, and it sucks. The common way to price these projects is with year-of-expenditure or (my preference) current dollars — excluding interest. True, in some sense we’re paying the entire amount. But all of these numbers are so large that they mean anything only in the context of other projects — projects that are not priced to include interest.

I’m generally wary of household similes, but it’s like a house. No one includes the total cost of the mortgage when saying how much they paid for it, even though there are good mortgages and there are shaky ones. A shaky financing plan that leads to high interest costs is a problem, but we can only see they’re high if it’s compared to other projects.

The subtext here is that proponents have been hiding the true costs up until now. It was done to the monorail*, it was done to Sound Transit 2, and now it’s being done to the DBT. One of these projects is worse than the others, but the rhetoric is just as bad. The reject campaign is dealing with remarkably dishonest opponents, and this anti-tunnel point is not a lie per se, but it is misleading, and a misleading point used against good projects as well as bad.

* and that was a terrible financing plan, number games aside.

56 Replies to “Interest Payments”

  1. In this case, I disagree, and I have a very good reason.

    The other, cheaper options on the table would incur less bonding. The difference in economic impact of a tolled tunnel isn’t $400 million – it’s $800 million, because those tolls are paying off a bond. For the most part, that’s more out of the local economy.

    The I-5/surface/transit option would not just cost less – a larger proportion of its cost would not be bonded.

    The real story, though, is that the state won’t admit to the amount that’s bonded, because they know it makes the actual gap between the projects significantly higher.

    1. I agree, but then take the ST5 plan’s costs, with interest, and compare it to the tunnel’s costs.

      The people who tried to say that ST2 would cost $150 billion used similar arguments. That’s just not how we report these numbers.

      1. We can’t compare the ST5 plan’s costs with interest, because the state won’t disclose it. We just know it’s at *least* $700 million less in capital costs, but also ~$400 million further less (because it doesn’t include the bonded tolls).

    2. But I agree that the coverup is pretty shady. And I agree that’s the real story, which is why it’s a shame there’s all the $6 billion stuff.

    3. as Seatowner already pointed out to you in a different post, your figures are disingenuous and you don’t, actually, have a good reason to disagree. Furthermore, whatever remedy is chosen to replace the AMV will cost money. For some reason, though, that money and however it is financed, is only considered if it relates to the DBT…Anyway, here is the response you have chosen to ignore:

      SeaTowner 1 day ago in reply to benschiendelman
      Your post is rife with errors.

      The AWV program (not tunnel) has a total cost of $4.2 billion. The tunnel has a total cost of $1.9 billion (of which the design-builder would get $1.3 billion).

      The AWV Program” includes the tunnel, but in addition to that includes many major projects (Spokane Street Viaduct widening, SR 519 Phase 2, Holgate to King, Mercer West, plus demolition of the exiting viaduct, rebuilding the surface Alaskan Way and utility relocation).

      So even if there was no tunnel, the funds committed to those projects can’t be used for transit (unles transit is already included in those individual projects).

      Also comprising the $4.2 billion program budget is $300 million that has been committed by the Port of Seattle (whose committment is related to the deep-bore tunnel, not ST5). If ST5 happens, don’t count on that $300 million to be used for transit.

      Another $400 million (again of the total $4.2 billion) is to be from tolling. Is tolling a part of ST5 as well? If not, there’s another $400 million that can’t be used for transit.

      So saying that “the rest is usable for transit” is false. The “rest” is either accounted for, or would not be available for ST5.

      1. Seriously, you’re honestly trying to repeat SeaTowner’s bullshit here?

        The $1.1 billion city contribution to the project is partially for projects that are gas tax fundable. In the DEIS, that funding would have gone to transit, and the DBT funding that came from gas tax would go to the surface boulevard instead.

        Quit with the strawman, it’s pointless. WSDOT’s DEIS for ST5 was clear.

  2. Although nobody talks about the true cost of their mortgage when talking to friends about how much we paid for our house, we are entitled to that information–in fact, the mortgage company is required to provide that information to you before you sign on the dotted line. Unlike the mortgage company, though, WSDOT has refused to release the preliminary finance plan, making everyone wonder what the real final cost will be.

    The problem that you’re hitting on results from selective use of these figures. The solution to this issue isn’t hiding financing costs, it’s revealing the financing costs for ALL projects. That way, we can truly compare apples to apples.

  3. Extending the house metaphor further, if you’re plugged into a mortgage you know you can’t afford in the terms specified, assuming the potential for more favorable refinancing or brighter revenue forecasts, the risks are far higher than they’d appear on their surface. For example, we optimistically assumed Sound Transit was on track to finish on-time and under-budget, but the recession caused a scaling-back and extension of construction time.

    In the case of the house, though, such subprime mortgages simply put people on the street.

    1. Central Link was under budget, and North Link is trending that way too. In recessions the cost of labor and materials goes down. East Link was delayed due to political bickering over B7 and potentially I-90. Anyway, if the time-scale slips because revenues drop (as in south King), well so what? That’s what you’d expect to happen if revenues drop. It’s not Sound Transit’s “fault” we had a recession and still have high unemployment. The issue is that we need the transit anyway to position the region for a successful future.

      1. The initial segment was not under budget. We all know that.

        One of the ways it went over was the DSST work was done under a separate project category – those were capital costs necessary for the initial segment (about $100 million above the initial segment’s budget).

        In addition, last month the board had to revise the initial segment budget up because of the cost overruns:

        Increasing the Initial segment budget above $2.070 B

        Resolution No. R2011-09 – (1) Amending the Link Initial Segment Project Capital Lifetime Budget to increase it by $32,200,000, from $2,070,000,000 to $2,102,200,000, (2) amending the Link Initial Segment North King County Subarea Project Reserve Lifetime Budget to reduce it by $32,200,000, from $90,695,270 to $58,495,270, and (3) amending the Initial Segment Project Adopted 2011 Annual Project Budget to increase it by $32,370,782, from $47,775,941 to $80,146,724

        http://www.soundtransit.org/documents/pdf/about/board/resolutions/2011/Reso2011-09sr.pdf

        Staff spent the money above budget, and the board had to revise the budget upward AFTER the project was done.

        “Anyway, if the time-scale slips because revenues drop (as in south King), well so what?”

        The tax costs go up, by a lot, because the bonding is delayed. Why are you ignoring Sound Transit’s financing costs?

      2. Nate, the Capital Lifetime Budget is the amount actually spent on capital, not the amount it was budgeted for in the first place.

        I think you should ask more about how this works before pointing fingers at line items, because I think it’s clear you don’t have a complete understanding of how Sound Transit spends money.

      3. “Nate, the Capital Lifetime Budget is the amount actually spent on capital, not the amount it was budgeted for in the first place.”

        You’re making no sense, Ben.

        The Capital Lifetime Budget is the project’s budget. The board sets it. The initial segment’s budget was set in 2001: $2.07 billion. Staff was going to spend more than that, so it had to be raised last month by $32 million.

        The initial segment went over budget by that $32 million, and it went over by all the DSST spending (which was part of the initial segment work, yet it was accounted for as a different project).

      4. “Despite the arbitration award, Sound Transit will wind up $117 million below its overall budget of $2.44 billion for the whole Seattle-Tukwila route — meaning $80 million can be applied to rail extensions in Seattle and $37 million in the south suburbs.”

        “Nonetheless, Link ended under budget because most other construction contracts were finished at or near official estimates, and because Sound Transit included a large financial cushion at the time construction was approved in 2003.”

        http://seattletimes.nwsource.com/html/localnews/2015410238_lightrail24m.html

      5. Zed:

        The ST board resolution whereby the board raised the initial segment’s budget above $2.07 Billion LAST MONTH (Res. 2011-09) proves that Times story was flat wrong when it reported the initial segment had a $2.44 Billion budget.

        You get that, right?

  4. I’d also point out that the financial plan for the DBT is contingent upon people actually using it & paying the toll. If revenue is less than expected, we’ll be forced to pay it off over more years, and the interest we’ll be paying will go up. This makes it hard to compare apples-to-apples with untolled projects, which will be reliably paid for.

    Mind you, bonds-to-be-paid-for-with-sales-tax also have a similar problem, although that’s tied to people buying stuff in general, not people using one particular stretch of road.

    What actually happens if the tunnel sits mostly-empty, or they lower the tolls to attract more drivers? Do we just pay it off over longer time, do we issue more bonds, or does Seattle/WA have to make up the difference out of their budget?

    1. If revenues go down after the bonds are issued, then yes, we’ll have to pay them off slower and could potentially default. But if the bonds are issued as-needed rather than all up front — as ST is doing — then you just postpone construction projects and bond-issuing, and the cost doesn’t go up. Except in the sense that labor/materials might be more expensive. But we don’t know when inflation/deflation will hit in the future, or how much it will be, so we can’t definitively assume labor costs will be much higher.

      1. “But if the bonds are issued as-needed rather than all up front — as ST is doing — then you just postpone construction projects and bond-issuing, and the cost doesn’t go up.”

        The tax costs of ST2 are going way up because of ST’s delays in selling bonds. The taxes have to remain at or near the maximum levels while any bonds are outstanding. If the bonds are issued later, they’ll be outstanding longer, and that means the taxing stays at the high rates for longer periods. That’s a huge increase in public costs.

      2. ST hasn’t delayed selling any bonds. Tax recovery is down, so they don’t have the ‘down payments’ necessary to keep their bonding ratio down.

        Seriously, these attacks sound like things I heard ten years ago. Stop it.

      3. @Mike, I don’t see how you pay off bonds slower. They are issued at a set duration. A default means you close up shop and sell off assets (at pennies on the dollar). The only real choice is to curtail service hours. We could be paying interest on trains that never run. @Nate, the delay saves tax payers money. It’s a two ‘fer. First you aren’t paying out huge operational subsides so you quickly bank a nice pot of cash (and the later the opening you’d hope the higher the ridership from regional growth). You’re also not making payment on the debt so that’s more cash in the piggy bank. It’s just basic household economics that if you save up for something instead of putting in on the credit card it cost less… a lot less. And as far as the tax being in place longer, irrelevant because it’s never going to die. As soon as they’re paid off it will be time to replace the I-90 crossing and ST will have to pay full freight on the cost of portion of the new bridge they want to use. In fact they’ll likely get tapped for a lot of highway improvements as well.

      4. By “paying off the bonds slower”, I meant that you wouldn’t have extra money to pay them off early. But I guess that only applies to regular loans, not bonds.

      5. “ST hasn’t delayed selling any bonds.”

        The future bond sales – about $6 billion worth – will be delayed, due to the overly-optimistic revenue projections from 2007 used for the ST2 planning. You remember how McCartan said the bonds would be paid off in 2038, right before the vote? That’s been pushed WAY off, with huge negative tax impacts on the region.

        “@Nate, the delay saves tax payers money.”

        Bullshit. The delay causes the tax to remain at the maximum rate for years longer.

        “And as far as the tax being in place longer, irrelevant because it’s never going to die.”

        McCartan said before the vote the tax rollback could occur in 2038. That’s well before the bridge would need to be replaced. If that payoff date has been extended due to delays in issuing bonds then it causes massive additional tax costs. When’s the tax rate rollback date expected now?

      6. Bernie writes: “And as far as the tax being in place longer, irrelevant because it’s never going to die. As soon as they’re paid off it will be time to replace the I-90 crossing and ST will have to pay full freight on the cost of portion of the new bridge they want to use. In fact they’ll likely get tapped for a lot of highway improvements as well.”

        Well Bernie, that’s not what Brian McCartan says:

        “The proposed sales-tax increase would end in 2038, about 15 years after construction is finished, unless voters approve more projects, said Finance Director Brian McCartan.”

        http://seattletimes.nwsource.com/html/localnews/2008072045_soundtransit25m.html

        So, Bernie, what makes you think that tax is “never going to die”? You have any new information on this subject from a real source, or do you just like to make stuff up because you think it’s fun?

      7. “@Nate, the delay saves tax payers money.”

        “Bullshit. The delay causes the tax to remain at the maximum rate for years longer.”

        That’s just a technical point. It doesn’t mean that ST is raking in extra money during the intervening years, or that people are paying more money in taxes. If people were paying more money in taxes, the bonds wouldn’t be delayed in the first place. But people are buying less and thus paying less in taxes. At worst there’s a shifting of the burden from those who can’t afford to buy now to those who will be buying in the extra years (the years after the tax would originally have ended).

        But Ben is also right that when this tax ends, it will probably be replaced by a identical tax for ST3, ST4, and whatever other future transit improvements there might be. And because people are buying less and thus paying less taxes, those projects are postponed by some amount of time. That’s the real problem in a region that needs comprehensive transit yesterday. But in any case, either the series of taxes will continue for perpetuity, or they will eventually end. That doesn’t mean that people are paying more money because ST is postponing, or that ST is gaining more money because it’s postponing.

      8. “That doesn’t mean that people are paying more money because ST is postponing, or that ST is gaining more money because it’s postponing.”

        There’s plenty of reasons no “ST3” or “ST4” ever may make it to a ballot – the state legislature could see to that. Forget about that for the purposes of this discussion.

        Let’s see if your statement quoted there there holds water. Estimate how much tax Sound Transit will confiscate if the rollback occurs in 2038, as McCartan estimated. Now, let’s say that due to the incorrect tax revenue estimates the tax will need to be collected at or near the maximum rates through 2053. Estimate how much tax Sound Transit will have collected pursuant to the bond sale contract terms. We’ll compare those two numbers, and see whether or not Sound Transit “gains” more tax revenue by delaying the bond selling.

      9. “Confiscate”? Are you one of those who thinks light rail should not have been built at all? If not, how should it have been paid for?

  5. It’s been reported that the energy costs of operating the DBT will be astronomical. It is estimated that the DBT will consume TWENTY FIVE MILLION Kilowatt hours of power just to keep it ventilated and the various electronic systems running.

    1. That’s about $1.5M. Per year? Over 30 years? Ever? kW would be a more useful number than kWh.

    2. 25,000,000,000 Wh per year. That’s equivalent to 47,500 old fashioned 60W lightbulbs left on constantly throughout the year. Ouch. I bet it’s mostly fan energy.

    3. How much energy does it cost to keep other pieces of infrastructure running? Especially other tunnels, and other things that could have been alternatives to this one? You can’t just take a big number and say, “OMG, it’s a shocking waste, they should be able to do it for less money than that.” That’s like when a couple people said at the Metro hearings, “X million dollars should be plenty to run 240 bus routes.” Really? How much should 240 bus routes cost? I’d rather take somebody’s word who knows what the cost of each part is and how they add up to the whole, than somebody who just looks at the budget and outcome as two black boxes, especially if they say that just whacking the unions and privatizing the system would solve all the problems.

      1. I thought I was giving a pretty good comparison. 2.5 hours of every man woman and child leaving a 60W light bulb on every single day, forever (well, until we shut the thing down). Want a comparison with the surface option? It’ll use about: none. Maybe a few street lights (175W each, or less if we use LED’s) that we don’t use now.

      2. It certainly would cost something to do the alternative, energy-wise. But, surface streets don’t need fans, and they don’t need lights at night.

        So, regardless of whether this is reasonable or not for a tunnel, energy needs for alternatives would be dramatically less.

      3. (psst… they generally do need street lights at night, but fewer and only at night, not in the day)

      4. In the same SeattleP-I article it states the DSTT consumes 8 Million KWh per year which is also substantial but in my mind far more justified use of energy. Many tens of thousands of people use the tunnel everyday and have more interaction with it than most people will have with the DBT. This number is going to grow considerably in the coming decades.

        The DSTT at it’s inception used electrically powered hybrid buses inside the tunnel and now with the addition of Link trains, the amount of GHG’s from fossil fuels in the tunnel are small in comparison to the number of people being carried.

  6. True, in some sense we’re paying the entire amount.

    “In some sense”?! So what are we paying? Precision, please. This goes beyond monetary inflation, construction cost inflation. As Ben noted, this is (cumulative) bond interest – something much more objective than the usual shenanigans about construction cost inflation.

    Secondly, regarding comparisons to other projects: the alternatives provide good comparisons. Less construction volume & risk leads to smaller financing volume & risk. You could derive further conclusions about comparative cost per mile (or per cubic feet of tunnel volume compared to other tunnels). Then the DBT doesn’t look good nationally and internationally (that goes for the whole US when it comes to large infrastructure builds).

    Third: demanding disclosure of the financing plan is a legitimate concern. Time and again those things have operated under the slogan “Tomorrow is another day!”

  7. Martin,

    The Slog is confusing two different concepts: interest and inflation. To address the inflation issue, the $4 billion cost estimate is, indeed, stated in year of expenditure (YOE) dollars and is thus inclusive of inflation (see http://www.wsdot.wa.gov/projects/viaduct).

    To address the interest issue, the added cost noted in the email ($1.9 billion) is likely the interest cost on the $2.4 billion state contribution, which is largely provided in the form of general obligation bonds that were already issued for projects across the state, and funded by the 2003 and 2005 gas taxes. Those bonds are repaid over several decades and–like any other form of debt–are subject to interest. It doesn’t matter what project ultimately benefits from those gas tax bonds, since interest will be incurred regardless of the project.

    I think you should quickly correct your posting (as should the Slog) to note that the “added” $1.9 billion cost is simply interest on state debt and that cost would apply to ANY project using gas tax bonds (yes, including the surface option).

    Thanks,
    Matt

    1. Ah, that’s a good point.

      If the bonds were already issued, then it simply isn’t honest to count the interest costs as part of the project cost. The interest costs are “baked in”.

      1. I’m not suggesting the interest costs shouldn’t be disclosed, I’m simply pointing out that the Slog is unfairly associating the interest costs with the DBT. I don’t think the project nor the state are trying to hide interest costs, I think it’s something that is just accepted as part of any debt.

      2. It’s not unfair. Some of the project isn’t bonded. This is really important to understand:

        Let’s say I have $1 billion in the bank, and two options for a project – one that’s $1.5 billion and one that’s $2 billion.

        I’m either going to bond $0.5 billion or I’m going to bond $1 billion. You can basically double that for total repayment cost (in constant dollars).

        This means my project totals are about $2 billion and about $3 billion.

        This is the same with the ST5 option versus the DBT. A lower cost option will also have much less bonded cost. The point here is that the cost difference is about double what it appears to be.

    2. Matt so you’re saying that if WSDOT built the ST5 then the interest costs would still be inured, they would just be “related” to other projects?

      1. Correct, if the Surface/Transit option were constructed using state funding (via gas tax bonds), interest costs would be incurred. It’s probably easier to think of it this way:

        (1) The state passed the 2003 and 2005 gas taxes to fund transportation projects across Washington.
        (2) The gas taxes provide a multi-year stream of revenue; unfortunately, we have immediate transportation needs and want the money sooner.
        (3) To advance the gas tax funding, bonds are issued against that revenue stream, and the proceeds are deposited into the motor vehicle fund.
        (4) Interest costs and debt service are paid out of the motor vehicle fund over several years, and the net bond proceeds are distributed to projects across the state.
        (5) Since interest and debt service are paid before funds are distributed to an individual project, the project really has no interaction with the gas tax financing — it’s something that occurs at a higher level.

        Obviously it’s possible to assign an interest cost to the state funding piece of the DBT, but it’s unfair to suggest that these “hidden” interest costs are only associated with the DBT. If the Slog wants to talk about interest costs, they better be prepared to show what the interest costs are for any other gas tax funded project across the state — including the surface/transit option.

      2. Capital costs might be lower but operational costs of increased transit seemed to be the deal killer. Those costs, instead of being spread State wide would lie almost entirely on King County tax payers. Kind of a hard sell to someone in North Bend facing service cuts that their taxes need to be increased to pay for more transit in Seattle. The only way Surface/Transit works is if Seattle gets serious about a congestion reduction charge. Really the problem isn’t a lack of capacity; it’s too many cars. Mostly from discretionary trips that don’t really need to happen at peak hours. Don’t believe it? Slam early tolling on SR-99 and see how many people adjust their priorities!

  8. “No one includes the total cost of the mortgage when saying how much they paid for it, ”

    Um, yeah, I do include that cost. But then I prefer to pay cash for a house.

    You have to discount by the time value of money. But right now, with deflation, money is staying about the same value.

    1. Um, inflation is positive, and bank interest rates are so low it doesn’t matter if you make a deposit today or in six months. All we can say is that inflation is lower than the norm, and thus the problem of a dollar eroding in value over a decade or two is less significant than usual (and in any case, it’s better than losing 30% of your savings in stocks the next time there’s a money-market run). But it’s still eroding. And there are real international supply-demand forces that could push commodity prices significantly higher in the next few years.

  9. At the risk of being accused of being naive about big project funding, or how Net Present Value works, or any number of financial theories, I’m going to go out on a limb here and make my own little case. I’ll use the typical American family.
    100 years ago, our grand parents were very frugal when it came to spending. If you didn’t have the money to buy something, you went without it. Government pretty much followed the same concept of balancing the budget. On the eve of the 2nd great crash, most everything was bought on credit, sometimes houses were interest only loans, with a huge balloon payment, knowing the price would rise, and all would be well. Governments did the same thing, knowing taxes would rise to save the day, or the debt ceiling could just keep growing.
    Now back to DBT or any UbberExpensive project that requires massive bonding for generations.
    Bond holders get paid first. If most of your revenue is being consumed by prior spending and debt runup, then you either have to forego new projects or up the debt/bonding ceiling. In other words, doubling down in Vegas on borrowed chips each time the dealer says pay me.
    That’s the fix our families are in, as well as our government, with no easy solutions out of it, except to pull a Germany or Brazil and default on our loans.
    That resets the financial clocks, and may be our only way out of this mess, but at what price. To wipe out the personal wealth of every American and most of our small.

    1. You also have to consider the value of the investment (i.e., what the borrowed money accomplished). If it’s genuine needed infrastructure, built frugally and sustainably, and will boost the economy in both the current and future generations, then borrowing the money may be a wise thing.

      People did live more on a cash basis a hundred years ago, but governments have raised debts for millenia, usually for wars. The US did the same, but paid off its war debts after the war. (Unlike historical societies that just kept raising war-debt until the king was overthrown.) Or at least we did until the 1960s when the deficit started going continuously upward (minus temporary dropdowns like Clinton’s deficit-cuttings).

      The comparison of families to countries is a false one because countries have a responsibility to keep their economies going, and in recessions that means borrowing to prevent demand from collapsing. In other words, countries have a responsibility to spend when their citizens/companies are sitting on cash because they’re afraid of a further downturn. I was particularly swayed by a Japanese economist a couple days ago who said the US and Europe are making the same mistakes Japan did a decade ago, and then as now, politicians were too confused and disunited to prime the economy.

      I suspect the US will have to monetize its debt eventually, and that’ll be less bad than the alternatives. But that doesn’t really have anything to do with local projects like the DBT. I do think the DBT is a bad idea, both because the state hasn’t obtained 100% of the base financing, and because Seattle could be saddled with humongous cost overruns that could bankrupt the city or displace transit investments for decades. It’s the city’s responsibility to make sure that 100% of the financing is in place before committing to the project.

  10. I think Martin’s point is valid, cost is the cash and carry price you use to compare any good or service. If you ask a contractor for the price to build a fence he doesn’t include costs you incur to finance it. [note: auto dealers don’t (in an upfront and honest manner) disclose the true cost of a car when what they are really selling is a loan]. However, if you’re in the store with a friend that want’s to “charge it” for a $200 pair of sneakers it would be appropriate to point out that the credit card bill is going to put him on a mac and cheese diet for years until the debt is paid off.

  11. Proponents always hide the costs; that’s how they get their projects approved, and the electeds are long gone or at least long forgotten when the you-know-what hits the fan. For those proponents of the surface option, of which this blog seems to have many, you’ll get a taste of what that option might be like come October, when the AWV will be closed for several days.

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