At recently as 2012, Sound Transit had less than one billion dollars of debt. That increased to $4.6 billion by the end of 2017. The ST3 program will push it much higher, peaking at a projected $17.6 billion in 2035. That path puts Sound Transit close to legal limits as major ST3 projects are delivered. After 2035, as most major projects are completed, the outstanding debt could be reduced.
Sound Transit’s ability to take on more debt is constrained both by statute and by policy. Most immediately relevant is a statutory limit of non-voted debt at 1.5% of the assessed value of property within the RTA. This is the same limit all Washington State municipalities face. With 60% voter approval, the statutory limit would increase to 5%, though other policies and bond covenants would prevent the debt ever getting that high. The cushion between actual and allowed debt is most narrow in 2035, when the $17.6 billion in outstanding debt nudges against the $20.1 billion limit.
All financial projections over such an extended period are uncertain, combining assumptions about revenue growth, federal grants, project costs, and interest rates many years into the future. The legal debt limit may be lower than anticipated if the growth of assessed property values slows. Some risks correlate in unhelpful ways. Prolonged slower growth would mean lower tax revenues and less ability to borrow to fill the gap.
The long-term debt plan is very sensitive to small changes in the financial plan in the early years. Consider the bills to correct MVET valuations. The tax revenue loss from updating the valuation schedule is just $780 million between 2017 and 2028 if there is no other mitigation from the Legislature. The implications for Sound Transit debt are larger. Absent offsetting cost reductions, the lost revenues must be replaced by debt. The average interest rate is anticipated at 4% through 2021 (reflecting low recent bond rates), and 5.3% thereafter (a more typical pre-recession cost of debt). Sound Transit pays a 1% origination fee on bonds and typically begins repaying principal after five years. The principal and interest payments are themselves funded with more borrowing. At those rates, the MVET reduction accumulates to $1.6 billion in outstanding bonds by 2035, or $2.2 billion by 2041. That appears to just fit within future debt limits, but the margin of error is much too narrow for comfort in a decades-long financial forecast.
Could Sound Transit borrow to replace a loss of federal funding? Lynnwood Link and Federal Way Link alone were anticipated to receive $1.67 billion of federal grants, with several billions more in future New Starts loans on other projects. There is some short-term flexibility in the plan, as Sound Transit is still far from its maximum debt capacity. But extend out the cost of replacing those grants with accumulated interest, and the debt impact roughly doubles by 2035. More debt in the 2020s means exceeding debt limits in the 2030s. A significant shortfall in federal funding would almost surely mean delays or scope reductions somewhere in the capital program.
Not all risks are downside. Current growth is strong, though the upside to tax revenue is partly offset by construction cost inflation. State legislation enforcing sales tax on internet sales may yield tens of millions of dollars per year not in the current plan.
Transit advocates should watch closely for cost overruns and scope creep. If costs are higher than the representative projects assumed in the financial plan, the Board would restore financial health by cutting or delaying other projects.
In 2015 and 2016, the Sound Transit Board was challenged to meet a long list of desired projects. The response was to stretch the program, shoehorning in as many projects as possible, and then to deliver as quickly as finances allow. Just between March and June of 2016, the plan grew from a $50 billion draft plan to $54 billion without additional funding other than more borrowing. The high debt load leaves little margin for error in delivery. Keeping the program on schedule will require careful cost discipline as well as favorable outcomes in the other Washington.