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Upfront: Will economy derail SMART?
Backers say train system still on track for 2014

by Peter Seidman

Building a railroad isn't easy. It's even harder in the middle of a massive recession and an unprecedented credit meltdown.

The reality of that situation is defined in the recently released strategic plan for the Sonoma Marin Area Rail Transit (SMART) system, which will run on 70 miles of track between Cloverdale and Larkspur. Contained in the plan is an update of financial projections compiled prior to putting Measure Q on the ballot in November 2008. The news: SMART faces a "funding gap of 154.7 million in current dollars ($175.9 million in escalated year-of-expenditure dollars)." In addition to that funding gap (more later about that "escalated year of expenditure dollars"), SMART has revised upward its cost estimates for the rail project, reflecting a wider scope of work and costs associated with meeting new safety standards.

SMART critics pounced. Mike Arnold, a Novato resident who was co-chairman of North Bay Citizens for Effective Transportation, wrote an opinion piece that appeared in papers in Marin and Sonoma counties. "SMART is in deep financial trouble." That's how Arnold starts his critique. One of his main targets is the difference between the current-dollar funding shortfall and the escalated-dollar shortfall. That's an example of a smoke and mirrors strategy that SMART used in its financial projections during the campaign for Measure Q and continues to use, according to Arnold, who has opposed SMART with religious fervor in fights that stretched over multiple ballot measures. Arnold also calls into question SMART's current fiscal projections and says, "SMART has to face up to this" and revise its financial plan and look at downsizing the project for the rail line. There's just not enough money to go around, according to Arnold.

Chris Coursey, community outreach and education manager at SMART, says the strategic plan includes the two funding-shortfall numbers in the name of full disclosure. "If we had to get this money today, it would be $154.7 million. If you take into account inflation [by the time] we're going to need the money, it's $175.9 million." The financial projection posits there will be a 13 percent inflation rate over the next five years, which will bump up the original $154.7 long-term shortfall.

But SMART doesn't need that money immediately to continue building the system. SMART officials say they're staying on track for a 2014 start date. Sales tax revenue, even though it's less than originally projected, will cover costs in the short term. "We've got two years of doing final engineering work," says Lillian Hames, SMART project director. She says SMART also will "do value engineering" to look at the entire project with an eye toward cost savings. "We're going to do final engineering on the entire 70-mile project."

That last comment came after Cloverdale Councilwoman Carol Russell, who serves on the SMART board, took strong exception to a contingency plan in a draft version of the strategic plan that suggested postponing train service to Cloverdale while SMART gathers additional funds. Russell said voters in the northern part of the SMART district voted heavily in favor of Measure Q and they deserve their rail service.

"Certainly in North County here, in Cloverdale, they've been very supportive of this project," says Sonoma County Supervisor Mike Kearns, who also serves on the SMART board. "I would hate to leave them hanging out there for another few years."

The board agreed to take the phased-in approach out of the strategic plan. "That is a political move, not an economic move," says Arnold, who adds that SMART consultants should have made more astute financial projections and that the current financial projections contained in the strategic plan show what he has said for years: SMART can't deliver on its promise to voters to build the 70-mile system and stay within budget, at least without substantial government aid.

There's a huge irony in that statement, say Hames, Kearns and other SMART proponents.

Measure Q was the last in a line of proposals to raise the sales tax in the two counties to fund rail transportation. In 2006, Measure R failed to garner the combined required two-thirds majority in the two counties needed for passage. It received a combined 65.3 percent of the vote, just 1.3 percent shy of the necessary total. Arnold was a major player in the anti-SMART contingent in Marin in 2006.

If Measure R had passed in 2006, says Hames, "we would be in the catbird's seat. Let me say what would have happened in 2006: We would have come off of a year of 5 to 6 percent growth in sales tax. We would have [sought bonding funds] in 2007, before the collapse of the municipal bond market. We would have had a bonding capacity of an additional $200 million. We have $155 million right now. We would have had our final engineering completed by now. We would be bidding construction now, when everyone is getting 25 percent and 30 percent reductions in their engineering estimates. We would be eligible for stimulus funds." But Measure R did fail to pass. And a loss by 1.3 percent is as good as a mile.

Leading up to the 2008 ballot, SMART compiled financial projections for Measure Q. Those projections had to be done in the spring of 2008 to make the deadline to qualify for the November ballot. Included in a set of conservative projections, says Hames, was an expectation that sales tax revenue would remain flat in the first years after a 2008 ballot measure passed. If sales tax had remained flat, SMART officials would now be ecstatic. They're not.

Marin Supervisor Charles McGlashan is chairman of the SMART board. He worked on the financial projections in April 2008 for Measure Q. "We wanted to be very, very conservative." McGlashan says he got clear indications from the feds that a SMART request for $25 million in funds would come through with relatively little pain. The feds viewed the passage of the quarter-cent sales tax for 20 years as a local commitment they could support. "The project still penciled out using a very conservative spending plan."

Then the economy collapsed—along with the credit market. In addition to sales-tax revenue, SMART will rely on bonds to raise money to get the train system running. Sales tax comes in yearly, but the large expenditures involved in building a railroad require large chunks of capital. Bonds are a big part of the SMART funding. "The thing that surprised everyone on Earth," says McGlashan, "is the utter meltdown of the credit market. While we did a pretty good job of predicting where sales taxes are over the next several years, no one saw the collapse of the credit market. That's a big reason why we have this hard work to do on the financial side."

McGlashan says SMART and its economic consultants "really worked hard" in the lead-up to Measure Q. "We all knew that an economic storm was on its way that would erode sales taxes. And even though we could all tell that the mortgage crisis was already in play in April of '08, no one knew that by September we would be having a full across-the-board credit market meltdown that would destroy some of the nation's leading investment banks and basically remove the credit market. For anyone to imply that the board didn't do right by the voters or didn't do its homework would be a pretty outrageous point of view."

Measure Q called for creating a seven-member citizen oversight committee to guard the public's interest. The SMART board appointed committee members in March 2009. When the committee met for the first time in April, members heard the financial bad news from financial consultants. (Hames says that she was talking in February about the problems the collapsed economy would visit on the rail project, but the release of the strategic plan brought the issues onto the front page.)

Total sales tax through March 31, 2029, the life of Measure Q, is now estimated at about $845 million. That's a 5.2 percent reduction from financial projections leading up to Measure Q. To add even more pain, the drop in sales tax has a deleterious effect on SMART's ability to get bond revenue. SMART planned to seek bond funding in the first year after Measure Q passed and then during the construction phase. "That's the way we delivered the project," says Hames. "If it had been 2006, we would be there." But if wishes were horses, then beggars would ride. "The way bonds work," says Hames, "is that they cue off of the last year of collection and off of the first year, our starting point. And our starting point just dropped significantly."

That means it will cost more for SMART to get its bond revenue. The rail agency has postponed its move to seek bond funding because of the dismal credit market. And that bond funding shortfall, so to speak, is most of the overall funding gap: $100 million of the $154.7 million shortfall comes not from reduced sales-tax projections but from the bond crisis. "That's the real problem," says McGlashan.

SMART has about two years of sales tax revenue to spend on a pay-as-it-goes basis until bond revenue is needed to keep the project's schedule on track for service in 2014. McGlashan says he's still confident SMART can get a funding infusion from the feds to help close the gap. Rep. Lynn Woolsey is seeking $50 million for SMART as part of a federal transportation finance package. And Hames says Sen. Barbara Boxer also is working to pry federal funds for SMART, which now is estimated to cost $590 million to complete.

According to the draft version of the strategic plan, "The funding gap does not cause any changes in the schedule or scope of the SMART project." In a best-case scenario, the economy would pick up, the credit markets would unclench and SMART could get back on the bond train. And some of those federal dollars would flow toward SMART. But what if that doesn't happen?

McGlashan says it's premature and counterproductive to consider contingency plans that might not even be needed in a few years. He says he met with congressional transportation leaders on both sides of the aisle "who were incredibly supportive. They basically said, 'If you need help, you come ask us.' [They said that] directly to my face." The amount of local participation through the sales tax played a big part in garnering that positive attention back East.

Arnold says that if SMART wants to deliver the project it sold voters, it's going to need those federal funds.

"We have our work cut out for us," says Marin Supervisor Judy Arnold, who sits on the SMART board. "The election is over and people need to put campaign mode behind them and work cooperatively for the best SMART outcome. We have to move forward, and make this the best it can be and provide an alternative to the automobile," says Arnold. "The way to go about it is to bring the public in and answer all questions and be transparent."

Contact the writer at peter@pseidman.com