Yesterday, the Washington State Supreme Court agreed to hear a challenge by King County and others to I-976, the initiative approved by statewide voters last November to remove car tabs. Yesterday’s decision fast-forwards the case so it moves directly from King County Superior Court to the Supreme Court without a transfer to the Court of Appeals. The accelerated review means a decision is likely sometime this summer.
For Sound Transit, the outcome may take longer to play out. Sound Transit asserts it may continue collecting the MVET whatever the outcome of this case. If the initiative is upheld in this case, it probably means another round of litigation to sort out the unique Sound Transit issues.
To date, the initiative has not taken effect. An injunction granted in November remains in force and is now extended until the Supreme Court decides the case. Collections of the motor vehicle excise tax have continued although those may have to be refunded if the initiative is upheld.
In a February decision, King County Superior Court mostly upheld the initiative. While the Supreme Court may see the issues differently, it suggests I-976 is more likely than not to be found constitutional. Immediate impacts would include a reduction of funding for the state’s multimodal fund by 85%. The Seattle Transportation Benefit District would see about half of its revenues disappear, though those taxes were scheduled to expire at the end of this year anyway and a replacement with a higher sales tax levy seems likely. The STBD’s reserves could cover most of the cost of refunding vehicle license fees for 2020 if required, but it would start 2021 in a cash-poor position even if local voters approve new STBD taxes later this year.
Sound Transit’s expansion plans are obviously threatened by I-976, particularly now that the effects are magnified by an impending recession. A deep recession and I-976 together would exceed any margin of error in the ST3 financial plan several times over. Projects not already in construction would be cancelled or suspended into the far future.
Beyond hoping for a favorable outcome at the State Supreme Court, Sound Transit has several further defenses not available to other parties.
Several sections of I-976 are specific to regional transit authorities (Sound Transit is the only one). The current authority to collect an MVET or rental car tax is removed. That, however, takes effect only when bonds secured by the tax revenues are retired. Sound Transit is required to retire bonds to make this effective, but the initiative has no deadline to do so.
The initiative has an incentive to retire the bonds early by reducing Sound Transit’s future MVET authority to just 0.2% if taxes are not repealed by April 1 2020. That date has, of course, passed. Because current taxes are pledged to bonds, Sound Transit states the reduction in MVET authority effectively only applies to future expansion plans.
The bonds tied to the MVET are not callable, at least at this time. So they must be paid off on the original schedule, though they may be defeased. Defeasement is a mechanism to set aside cash or Treasury bonds in an escrow account to meet the full future repayment schedule. Effectively, defeasement removes the bonds from the balance sheet while paying the bondholders on the original schedule. But it requires a hefty immediate cash outlay to meet all the future scheduled bond commitments.
Is defeasement possible? Sound Transit says no, pointing to other commitments including the long list of current contracts for capital expansion. $2.3 billion of bonds are tied to MVET revenues. The cost of fully defeasing these bonds is an inverse function of treasury rates which are low, and recently trending even lower. The lower those rates go, the more expensive defeasement becomes. At recent interest rates, it would require about $2.9 billion in cash to defease the bonds.
Current cash on hand is just $1.6 billion, and there are ongoing operations and debt service. It is therefore, in Sound Transit’s view, not feasible to defease the bonds. It will shortly become more difficult. Available cash was projected to shrink more than $500 million by the end of year even before the recent crisis reduced forecast revenue.
Will these arguments withstand judicial scrutiny? It all becomes moot if King County prevails at the Supreme Court and the initiative is thrown out as unconstitutional. Sound Transit is not a party to that litigation. If the initiative is upheld at the Supreme Court, expect another round of litigation to sort out what Sound Transit is required to do, perhaps in 2021.