Although we are early in the ST3 program, some observers are already looking forward to extending Link light rail lines into the suburbs and adding more lines in Seattle. The ST3 plan funds several studies of suburban extensions. Current taxes do not support further expansions at the pace of ST3, however. Unless Sound Transit secures another large tax increase, capital spending beyond ST3 will be mostly squeezed out by the costs of managing what has already been built and financing the bonds accumulated in ST3.
The budget for future projects is constrained by Sound Transit’s tax authority. Sound Transit levies nearly all the taxes currently permitted by the Legislature; the only unused authority is a small rental car tax. Any prospect of further authority is hard to forecast. Certainly, it is difficult to imagine today’s Legislature granting more tax authority. Many legislators were unhappy about how the ST3 program far outran the smaller 15-year program they anticipated in 2015, and high car tabs remain unpopular. On the other hand, fifteen years is a long time in politics, and a new generation of legislators in the 2030s may take a sunnier view.
But let’s suppose we are limited by current law, or equivalently that voters resist new taxes. In that scenario, Sound Transit might ask voters in the waning years of the ST3 program to authorize more projects with an extension of current taxes. How much could Sound Transit build with voter approval if they just roll the current law taxes forward indefinitely? Less than you might expect. It turns out that a capital program extended to 2060 would have a run rate perhaps only a third as large as the 2016-2041 program.
Why is this? ST4 will face several constraints that were not present in ST3.
- Sound Transit will have to operate rail and BRT systems as they are completed. The rail network will grow from 22 miles today to 116 in 2041, and bus hours will also grow. Operations and maintenance (O&M) are a significant expense for the mature system.
- Sound Transit prudently committed in ST3 to keep the system in a state of good repair (SOGR). SOGR are capital expenditures to repair and replace existing network elements as they wear out. The Board took to heart the cautionary experience of systems where the initial outlay of building the network was followed by a period of under-investment. That requires about $400 million per year in 2018 dollars by 2040 and an even larger commitment beyond.
- Sound Transit will be burdened by the debt overhang from ST3. By the 2030s, projected debt tops $17 billion and bumps up against statutory limits on debt that can be issued without 60% voter approval (1.5% of the property tax base in the RTA). Loading up on debt will super-charge the ST3 capital program, allowing more projects to be built more quickly than pay-as-you-go. It also means that debt servicing consumes 18% of tax revenues after the capital program peaks in the 2030s.
- Additionally, the stretched ST3 financial plan is vulnerable to shocks that reduce revenues or raise costs higher than projected. Sound Transit has modeled scenarios where even a “small recession” early in the plan would push agency debt over the limit by 2032 unless the pace of the capital program is dialed back.
The graph demonstrates the implications in constant 2018 dollars.* Because we’re interested in potential capital investments, I’ve adjusted using the Capital Cost Index from the Sound Transit Financial Plan. This is the cost escalator Sound Transit uses to convert estimated capital project costs to future Year-of-Expenditure (YOE) dollars.
The black line is revenues from all sources (about 80% from taxes during ST3 with the balance from fares and grants). The line dips in some years as car tabs are reduced in 2028 and as grant income reduces with the completion of the program.
The capital program (in blue) pushes outlays well above revenues for most of the ST3 program. Sound Transit manages that by issuing bonds. By the mid-2030s, the bond capacity is nearly exhausted and further outlays cannot exceed available revenues by much. Only with the substantial completion of the capital program are revenues in surplus. Without fresh voter approval, those surpluses are available for future debt repayment and tax reductions.
In 2041 as the first trains roll to Issaquah, 82% of revenues from all sources will be spent operating and maintaining the network, keeping it in a state of good repair, and servicing the bond debts associated with the ST2/ST3 capital program.
Here’s the challenging math of new capital programs. The 2018-2035 capital program averages about $1.7 billion per year in current dollars. The 2041-2060 revenue surplus averages only $550 million. There’s some scope to expand revenues beyond that with grant revenue and by replacing maturing debt, but those would be offset by even more operations expense and more debt servicing costs.
Historically, most agencies go through a period of rapid expansion after which they must pivot to operating the system they have with minor extensions. Unless the Legislature and voters approve a large expansion of Sound Transit taxes, that is the future of Puget Sound light rail.
* The graph mimics one, sometimes referred to as the ‘blob diagram’, that has been shared at Sound Transit Board meetings. I redrew that chart (always shown in YOE dollars) in inflation-adjusted dollars to more realistically capture the funds available for future capital projects. The Capital Cost Index (CCI) is a forecast inflation factor for products used in building major capital projects. Historically, it grows somewhat more quickly than the Consumer Price Index (CPI), but not as quickly as Right of Way costs. All data is from the 2018 Sound Transit Financial Model.