Here’s the idea in a nutshell. Revise the valuation schedule for the MVET, per HB 2201, so that the ST3 MVET (0.8%) is levied on the more accurate 2006 schedule. Pay for it by extending the Sound Move MVET (0.3%) that is otherwise scheduled to expire in 2028. The extended 0.3% MVET can use the 2006 vehicle schedule too, and can be set to expire once the funding gap is made whole. Sound Transit’s ability to deliver voter-approved projects on time will not be impaired. Car owners will see an immediate tax cut, offset only by a delay in the expiration of the Sound Move MVET after 2028.
Let’s recall some MVET history and ST3 financing.
Background
Regional voters authorized a 0.3% MVET in Sound Move in 1996. That levy used a schedule that overvalues newer cars relative to resale values. Because of I-776, that levy will expire in 2028 when bonds based on the tax are paid off. In 2006, the Legislature approved a new valuation schedule that aligns to resale prices.
When the Legislature authorized the ST3 taxes, it required Sound Transit to continue using the old schedule as long as the 0.3% levy was in place, and to switch to the new schedule for the 0.8% in 2029.
Few noticed the valuation issue until bills began to arrive in mailboxes in January 2017. Now that the valuation schedule was linked to a higher levy rate, the impact was suddenly magnified, and lawmakers got an earful from car owners.
Effects of HB 2201
The Legislature is considering EHB 2201 that would credit car owners for the difference in valuations. Effectively, they’d pay the ST3 MVET on whichever schedule shows the lower value. This reduces revenues by $780 million between 2017 and 2028.
That doesn’t seem very large, just 1.4% of a $54 billion 25-year program. But it is multiplied as the missing funds are replaced by debt. There are no spare tax revenues in the plan to cover an MVET revenue shortfall. Unless projects are delayed, the principal and interest payments on the foregone MVET revenues would be financed with more borrowing. The Financial Plan anticipates bonding at 5.3% with principal repayments beginning five years after the bonds are issued. At those rates, the MVET reduction accumulates to $2.2 billion in outstanding bonds and $1.53 billion in cumulative debt servicing costs by 2041.
Of course, those are nominal dollars. $2.2 billion in 2041 is about $1.28 billion in 2018 dollars. But it increases risk to project timelines by pushing Sound Transit closer to debt limits as other projects are also financed partly by debt.
There is some cushion in the Financial Plan for Sound Transit to take on more debt, apparently enough to absorb the MVET revenue hit if everything else goes well. But the plan is vulnerable to adverse events, particularly if they happen early. Just as the MVET impact is multiplied by debt, so are federal funding shortfalls or cost increases on early projects. As in 2008, an early recession would set back the program. Sound Transit expects to get closest to the statutory debt limitations about 2035 as most major capital projects are completed. If federal grants also came up short, the accumulation of debt would strain the plan so investments have to be delayed or cancelled.
The best solution must reset the MVET schedule to values that car owners perceive as fair today, while not financing the tax cut with debt that accumulates through the end of the ST3 program. So, how to make up the missing revenues?
Pay for HB 2201 by Extending the Sound Move MVET
Our understanding is that the constraint on how long Sound Transit can collect the Sound Move 0.3% taxes is only in the statewide vote on I-776. By repealing or amending I-776, the Legislature can allow Sound Transit to collect the 0.3% MVET beyond 2028, as already approved by voters in 1996. The extension can use the 2006 schedule, so the taxes are viewed as fairer. Lawmakers could limit the extension of the 0.3% MVET so it ends once the cost of the schedule adjustment is covered.
An extension of the Sound Move MVET beyond 2028 does not ask the rest of the state to contribute anything. It yields lower car tab bills today, while paying down the associated debt before it threatens Sound Transit investments. It overturns a signature Eyman initiative, but has there ever been a better time for legislators to challenge Tim Eyman? It would respect the will of voters in the Sound Transit area who rejected I-776 by a 56.6% margin in 2002.
How the Financing Works
A very rough financial model, rather simpler than Sound Transit’s model, suggests the impacts. Without mitigation, Sound Transit will have accumulated nearly $1.1 billion in additional debt by 2028 (the $780 million in reduced revenues and the cost of servicing the corresponding debt). That accumulates steadily to add $1.6 billion to Sound Transit’s debt burden by 2035, the year when Sound Transit’s margin for error is least, and reaches $2.2 billion by 2041.
With the extension of the Sound Move MVET, the debt caused by HB 2201 would peak in 2028, decline to $700 million in 2035 and near payoff 2041.
That largely eliminates the risk from HB 2201 to Sound Transit’s projects by paying down the debt before it becomes material to the delivery of the system voters asked for.
The problem with the HB 2201 rebate model is that it would violate the 2016 “green” bond covenants that pledged collection of the car tax at the full rates through 2056 as security for bondholders. Only collecting 80% (net) of that amount would violate the contracts clause of the constitution.
How much tax revenue does Sound Transit need? It’s going to be taking in $1.7B this year, and that amount will grow by 5% annually for decades. Is there any agency document that shows how much tax revenue it will have taken in by, say, 2050 which is when the tax rates are supposed to be lowered? I can’t find anything showing how much tax it expects to take in!
Source? My understanding is that the HB 2201 credit/rebate model was constructed that way precisely so that it wouldn’t violate the bond covenants.
The bond covenants state the taxes rates will stay the same while debt is outstanding. The bondholders’ (very reasonable) expectations are that those revenues will be taken in by the agency and will strengthen it financially. Those contracts do not contemplate that only (net) 80% of the car tax revenues would be kept by the agency, due to a rebate program of the type HB 2201 proposes. The bondholders would sue, on the grounds that 80% of the revenue is materially different than the 100% of the car tax revenue they expected the agency would take in each year to secure their interests. The bondholders would win.
“The bond covenants state the taxes rates will stay the same while debt is outstanding.”
ST could easily get around this by employing a defeasance strategy.
Sound Transit has issued $6 billion of debt — and secured TIFIA loans — using pledges to collect the cat tax at the current rates through the mid-2050’s. It can not “easily” (or quickly, or inexpensively) defease it. If the reason for such a defeasance is because it wants to rebate some taxes the market would hammer it when it tried to sell more long term debt.
It’s not ST wanting to change the schedule or wanting to defease; it’s the state ordering it to do so. So the bondholders would sue the state, and if defeasance is not possible under the contract, then the bonds would remain on the old schedule as in ST1. From ST’s perspective, it would be a change that failed and a temporary distraction. But future bonds which haven’t been issued yet (which are most of them) may still be switched to the new schedule, so that would remain a revenue hit to ST.
Regarding the 2016S-1 green bonds, p. 24…..
Defeasance
Sound Transit has reserved the right, within the requirements of the best long-term financial interests of Sound Transit, to defease the 2016 Parity Bonds by depositing irrevocably with an escrow agent money and/or noncallable Defeasance Obligations which, together with the earnings thereon and without any reinvestment thereof, are sufficient to pay the principal of any particular 2016 Parity Bonds or portions thereof (the “Defeased Bonds”) as the same become due, together with all interest accruing thereon to the maturity date or date fixed for redemption, and in the case of Defeased Bonds to be redeemed prior to maturity, irrevocably calling the Defeased Bonds for redemption or delivering to the escrow agent irrevocable instructions to call such Defeased Bonds for redemption on the date fixed for redemption, and paying or making provision for payment of all fees, costs and expenses of that escrow agent due or to become due with respect to the Defeased Bonds, at which time all liability of Sound Transit with respect to the Defeased Bonds will cease, the Defeased Bonds will be deemed not to be Outstanding and the Owners of the Defeased Bonds will be restricted exclusively to the money or Defeasance Obligations so deposited, together with any earnings thereon, for any claim of whatsoever nature with respect to the Defeased Bonds.
“Defeasance Obligations” means non-callable direct and general obligations of the United States of America or non-callable obligations that are unconditionally guaranteed as to payment of principal and interest by the United States of America, or any agency or instrumentality thereof when such obligations are backed by the full faith and credit of the United States of America, including any stripped interest or principal portions of non-callable United States of America obligations or of Resolution Trust Corporation securities.
In connection with a defeasance, Sound Transit is required to cause to be delivered (i) a verification report of a firm of nationally recognized independent certified public accountants or other qualified firm, (ii) an opinion of nationally recognized bond counsel to the effect that the defeasance is permitted under the laws of the State and the Parity Bond Master Resolution and (iii) in the case of Defeased Bonds that are Tax-Exempt Parity Bonds, an opinion of nationally recognized tax counsel that such defeasance will not, in and of itself, adversely affect the exclusion of interest on the Defeased Bonds from gross income for federal income tax purposes. See APPENDIX B – “FORM OF THE PARITY BOND MASTER RESOLUTION – Defeasance.”
Any competent treasury management team could handle such a strategy.
https://m.soundtransit.org/About-Sound-Transit/Accountability/Information-for-investors/Investors/2016
Mr Canary, the tax rates WILL stay the same over the life of the bonds. The district will rebate the difference between the 1996 and 2006 schedules to those for whom the 1996 schedule is higher.
If the Republicans were genuinely concerned about the equity of the valuation tables, they would enthusiastically embrace this solution.
But no, the point is to strangle the transit system and force the area to build more freeways out of frustration with transit stuck in traffic.
It occurred to me today that the 2015 amendment to the ST3 enabling legislation, made by a Republican Senator whose name I can’t find right now, may have been made as a Red Herring.
It doesn’t stretch credulity to ask if what we’re seeing today is the “backup plan” in case, as happened, the public did not recoil in horror at the system cost and passed ST3.
Was that “WTF? Why is the GOP proposing a higher tax?” moment a cunning trap?
We report. You decide.
They are only talking about changing the 0.8% which has yet to be bonded against. So there wont be a legal challenge or a Defeasance.
Ian Scott. That is incorrect. The 2016 S-1 parity bonds (“green bonds”) issued in Dec 2016 for $478M in proceeds state:
“In the 2016 Parity Bond Resolutions, Sound Transit has added the 1996 Motor Vehicle Tax to Pledged
Taxes and designated the ST3 Sales Tax and the ST3 Motor Vehicle Tax as “Adopted Parity Rate Adjustments,”
also included as Pledged Taxes. The Pledged Taxes currently consist of the following components:
• The Sales Tax, imposed at the rate of 1.4%;
• The 1996 Motor Vehicle Tax, imposed at the rate of 0.3%;
• The ST3 Motor Vehicle Tax, imposed at the rate of 0.8%; and
• The Rental Car Tax, imposed at the rate of 0.8%.
The Pledged Taxes are pledged to the payment of the Parity Bonds, including the 2016 Parity Bonds. The
pledge of the existing Pledged Taxes to the payment of the Parity Bonds is subordinate to the pledge thereof (as
Local Option Taxes) to the payment of the Prior Bonds. Under the Parity Bond Master Resolution, Sound Transit may: (i) pledge to the payment of the Parity Bonds and Second Tier Junior Obligations (and, if Sound Transit so determines, to the payment of First Tier Junior Obligations) any taxes other than Local Option Taxes (“Additional Taxes”), which upon such pledge become a component of Pledged Taxes; and (ii) at its discretion, pledge amounts attributable to any increase of the Sales Tax rate above 1.4%, any increase in the Motor Vehicle Tax rate above 0.8% (or, during any time the 1996 Motor Vehicle Tax is being imposed, above 1.1%) and any increase in the Rental Car Tax rate above 0.8% to any other obligations or to other purposes of Sound Transit.
Sound Transit has reserved the right to reduce the rate of the Sales Tax to 1.3% upon satisfaction of the
conditions set forth in the Parity Bond Resolutions. See “SECURITY FOR THE PARITY BONDS – Security for the Parity Bonds – Covenant to Impose Pledged Taxes” and APPENDIX B – “FORM OF THE PARITY BOND
MASTER RESOLUTION – Covenants – Pledged Taxes.”
Before issuance of the 2016 Parity Bonds, the 1996 Motor Vehicle Tax was not a component of Pledged
Taxes pledged to the payment of the Parity Bonds. Under current law, Sound Transit does not have authority to impose the 1996 Motor Vehicle Tax after the 1999 Prior Bonds are retired or provision is made for their payment. The last scheduled maturity of the 1999 Prior Bonds is February 1, 2028.” (Pgs 3-4)
Also:
“Covenant to Impose Pledged Taxes.
Sound Transit has covenanted in the Parity Bond Resolutions that so
long as any Parity Bonds remain Outstanding, Sound Transit will fix, levy and impose the Sales Tax at a rate of not less than 1.4% and the Rental Car Tax at a rate of not less than 0.8%, except that Sound Transit may impose the Sales Tax at a rate of not less than 1.3% in the manner described below in “– Permitted Reduction of Sales Tax Rate.” Sound Transit has covenanted in the Parity Bond Resolutions to fix, levy and impose the 1996 Motor Vehicle Tax, to the extent permitted by law, at a rate of not less than 0.3% and to fix, levy and impose the ST3 Motor Vehicle Tax at a rate of not less than 0.8%. Under current law, Sound Transit does not have authority to impose the
1996 Motor Vehicle Tax after the 1999 Prior Bonds are retired or provision is made for their payment. The last
scheduled maturity of the 1999 Prior Bonds is February 1, 2028.” (P. 19)
As stated in the offer and the convenants contained in the master resolution, this issue is subordinate to the Prior Bonds.
Yes sadly the much delayed 2017 Annual Financial Plan only projects out to 2041 I believe. In the past, this critical part of the planning process used to project out for a longer time period (until 2060 I believe). Frankly, the 2017 report looks like it was hastily thrown together, having noticed multiple errors in the report.
How much tax revenue does it show Sound Transit will have taken in by 2041? Could you post a link? T.I.A.
Bill C. The report shows total tax revenues of $60.6 billion for the period 2017 – 2041.
The general fund balance was stated as $1.7 billion at 2016 EOY.
https://m.soundtransit.org/About-Sound-Transit/Accountability/Financial-documents
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To be clear are you suggesting that only the post-2029 0.3% use the 2006 schedule, or all of it using 2006 starting now, but for longer? I really don’t think you can change the depreciation schedule for the 0.3% MVET without impacting bondholders.
AFAICT, even under EHB 2201, ST would still technically levy the full 1996 amount, but have to create a separate instant rebate program from other revenues, but bondholders could still expect the full 1996 scheduled amount in repayment. I presume that people would see a triple line item on their car tabs receipt, the 1996 MVET, the 2006 MVET, and any rebate applied?
I think your idea is a great one if it passes legal muster. Clean and simple, pays for it with an extension of the status quo, doesn’t threaten projects, provides immediate relief (even if only at the margins…people won’t save as much as they think), and doesn’t compete with or damage things like education funding.
The other discussed pay-fors should happen anyway, like cheaper WSDOT ROW, not paying sales tax, etc.
Sound Transit is tied to the original 1996 schedule for the 0.3% MVET until 2028 because the associated bonds are what postpones the I-776 implementation. So the proposal is:
(a) Fix the schedule now for the 0.8% MVET (per HB 2201)
(b) leave the old schedule in place for the 0.3% MVET until 2028 (per HB 2201 and current law), and;
(c) extend the 0.3% MVET with the 2006 schedule from 2029 through 2040.
(c) is the only part that differs from a HB 2201 without mitigation. Sound Transit takes the same revenue hit in the early years, but it gets paid for in the critical 2030s when the debt limit would otherwise be a problem. Over 25 years, it balances out.
The HB 2201 rebate works as you describe. There’s an RTA tax line (it wouldn’t break out ST1 vs ST3, though), and a rebate line below, so the full tax is levied and then a portion credited off.
For additional simplification, could the Legislature immediately enact the new schedule for both the 0.3% and 0.8% MVETs, then cover the 2018-2028 0.3% gap by exempting ST from sales tax? That sales tax was originally earmarked for Pierce/King/Snohomish county education, but raiding a transportation budget for education is so clunky that the Legislature could make the counties whole with a better funding scheme.
I know there’s bonds and such that are tied to those 0.3% MVETs, so I don’t know how this pans out legally, but this seems like an elegant solution that actually improves the taxation system.
This proposal makes more sense than any of the others. The ideal scenario is to do nothing, though — people knew what they were voting for, and the only people pretending to be super upset about mvet valuation (with some exceptions that prove the rule, I’m sure) are those that smell bloody opportunity to wound Sound Transit, and are in reality giddy about THAT prospect rather than actually shocked about MVET rates. I support this extension of the 0.3% tax if doing nothing is not an option, but the reason it is not ideal is that this 3% tax would be an opportunity in the future for actually increasing funding via an ST4 (or a King County-specific measure).
Am I right we’re talking about about 23 years? In that length of time past-tense, what did our economy go through in the early 1990’s, 9/11, 2008, and current Amazonian Dawn- whatever its results?
I’m not saying MVET calculations aren’t important. But I think it’s at least equally important to keep service steadily improving through the whole length of this project. Not, whatever their car-tabs are, making voters to wait years for significant results.
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My friend is an anti-tax socialist, he freaked out this last year when he renewed his tabs. He also lives on Capitol Hill. Think about people living in far flung areas on the outskirts of the ST service area. I think the above proposal is as good as you could get with the current car culture. But who knows?
Def agree about producing results, speed things along as construction and property costs are only going to increase.
Tuck, for the average person, the current car culture isn’t a conformist fad. It’s the only way they can get to work. As it has been their whole lives.
Vast majority in State of Washington- maybe in King County itself- have never experienced any kind of transit that suits their needs anywhere near as well.
From a lot of conversations these last several years, I think that any “Love Affair With the Automobile” is steadily becoming a forced marriage. But one that’ll cost more than many voters have got to get out of.
So I think that on the matter of revenue, we need to be able to talk with people region-wide and one-on-one about the relationship of these graphs to their own finances- which given price-directions in Seattle, many well-off people feel are tapped out.
Mark
Anyone willing to hazard a guess as to how much of the car-tab freakout is due to an inflated depreciation schedule and how much is due to being unaware that the MVET rate roughly tripled (0.3% –> 1.1%)? It sounds like a lot of people didn’t actually read the proposal or avail themselves of calculators published by ST and the Seattle Times.
All these people “shocked” that their tabs roughly tripled – wouldn’t that wind up being the case regardless of which depreciation schedule was used?
I agree with your assessment of the matter. I think the “sticker shock” experienced by many ST District car owners was due to the jump from .3% to 1.1% RTA tax on their registration renewals. While there is merit to the fairness discussion regarding the valuation schedules, I think you’ve hit the nail on the head.
Agree. This is why the bill to allow people to pay their MVET in installments throughout the year is way more useful than the bills that fiddle with the assessment schedule.
The fairness distinction is important. Obviously, people on the losing side of the election were unhappy the taxes passed.
But seeing one’s taxes go up after other voters approve a tax increase is just democracy. It sucks to be on the losing side, but we all deal with it some of the time.
Seeing that other people voted to raise your MVET to 1.1%, and then realizing it’s actually 1.5% of the value of your vehicle, that’s different. It offends a basic sense of fairness because it’s not even the same tax you thought you were voting against.
The proposal to allow MVET payments in installments is a good one because lots of people are cash-constrained. But most voters offended by the valuations won’t see paying in installments as being responsive to the question of fairness at all.
Right, the fairness argument is valid, but it seems like people are misunderstanding it and thinking, “Gee, my tabs tripled solely because dastardly Sound Transit is overvaluing my car!” instead of because, you know, the actual tax rate went up, and expecting the legislature’s car-tab “relief” bill to return their tabs to pre-ST3 levels. It’s like they thought ST3 was a free lunch.
It’s a good solution as proposed. The better one would be to rest on the wisdom of the voters and stay focused on delivering the program. The sources of taxes and amounts likely to be paid by taxpayers were, after all, extensively disclosed during the campaign, as well as required by the legislature that is now complaining about them.
The piece states the ST financial plan can absorb more debt. This is true, but it’s important to note why that is: to guard against swings in the economic cycle that could jeopardize service, schedules and budgets.
Let’s not forget the dot.com recession in 2000-2001 cost ST $1 billion, and the Great Recession cost ST almost $4 billion. And yet the agency has been able to keep to bulk of the ST2 program on track. That was because of prudent planning and judicious decision making about the use of public funds.
Frittering away debt capacity to humor anti-tax, anti-Transit politicians isn’t, shall we say, the most prudent use of the agency’s debt capacity. I suspect the Expert Review Panel would agree.