Investors seduced by rakish rail debt security…
by Peter Seidman- Pacific Sun
While critics of Sonoma-Marin Area Rail Transit continue their push to collect enough signatures by the end of January to qualify a tax repeal measure that essentially would stop the nascent rail line in its tracks, SMART has racked up a string of victories.
SMART officials say the spate of recent good news belies the critics’ charges that the proposed rail line is being constructed on shaky financial ground and will wind up as an economic and transit fiasco.
On Dec. 21 at a SMART board meeting, Farhad Mansourian, SMART general manager, introduced a portion of the meeting devoted to describing the details of a successful bond sale to raise money for the first segment of the rail line, from downtown Santa Rosa to downtown San Rafael. The bond sale raised $191 million. The SMART transit district will put $20 million of that total in reserve to “take off bond holders if anything goes wrong,” according to Mansourian. That leaves a net of $171 million from the bond sale, almost half of the $360 million SMART estimates it needs to complete the first segment, which includes 37 miles of track, stations and infrastructure.
The remainder of the money will come from federal, state and local sources, a pot that includes the one-quarter-cent sales tax in the SMART district, which covers the two counties and which critics are targeting in their tax-measure repeal effort. Voters in the SMART district approved the 20-year tax measure by a majority of almost 70 percent. Critics, who have coalesced around a group called RepealSMART, say the truncated first segment is substantively different that the Cloverdale to Larkspur rail line that appeared on the ballot in 2008.
In describing the successful completion of the bond, Mansourian said, “I think this patient was in pretty bad shape back in September, and we delivered a very, very healthy child yesterday.” Sarah Hollenbeck, a financial advisor to SMART said at the meeting, “The plan was to go out and issue bonds, escrow the funds and hold them until the repeal effort is resolved. We had confidence we would be able to do so, and indeed that is exactly what happened.” Hollenbeck said SMART went to market to sell the bonds on Dec. 14. The sale concluded Dec. 20. The repeal effort drove up the price for SMART, which settled for selling the first batches of short-term bonds at variable interest rate of 0.2 to .08 percent, which SMART can later convert to fixed rates. Hollenbeck said the first batch of bonds is pegged at .2 percent, “a pretty nice cost of funds.”
The bond sale went better than Mansourian expected. Marin County Supervisor Judy Arnold, who serves as vice chairwomen of the SMART board, says the results of the sale are “more than we could have hoped for. Clearly the financial firms would not have bought bonds if they thought an investment in SMART was ‘financially risky.’”
SMART critics say it’s foolish for SMART to sell the bonds before the repeal effort gets resolved. But SMART says the economic climate is advantageous for seeking bond funding and signing construction contracts. “It’s disingenuous to say this is the right time to do bonds because they don’t get to use the funds until this thing has run its course,” says Clay Mitchell, co-founder of RepealSMART. “And the projections are that interest rates will not go up for the next year. In essence, there is very minimal risk of higher bond costs at a later point. Unfortunately they spent more on an exotic [financial] product,” says Mitchell, referring to the variable-interest strategy.
Last week, shortly after SMART announced the bond sale, Mitchell told the Sun he was skeptical of the sale details. “I’d like to see who bought those bonds because SMART has shown they are not above using political influence to get their way. I’m curious what favors were called in to make sure they all got sold.”
That kind of accusation sends steam to the boilers of SMART supporters and SMART officials. Mansourian has stated and restated his belief in transparency. He says that shortly after he came on board, he sent a full package of financial information, everything he had, to SMART critics and local papers. Still, critics continued to voice their charge that SMART was withholding or hiding critical information. Those kinds of accusations continued right up to the time when SMART went out to seek bond funding. “They tried very hard to poison the well,” says Mansourian, who adds that the SMART financial team received “threatening” letters, saying that if the team continued to serve SMART, the professional reputation of team members would be at risk.
Even in that kind atmosphere, SMART still managed to complete its bond sales, says Jack Swearengen of Friends of SMART. “Clearly the critics were much too negative when they said no one would buy bonds.” And as for Mitchell’s question about who bought the bonds, there were no secrets at the Dec. 21 meeting. Hollenbeck told board members that SMART achieved “the highest short-term rating from Standard and Poor’s, based on basically escrowing U.S. Treasury securities.” She said SMART “received about eight times as many orders as we had bonds to sell.” A nice vote of confidence, she added. And the interest in the bonds, she continued, came from big-name financial firms, “Household names: Morgan Stanley, Goldman Sachs, Bank of America, Franklin Funds, Schwab, a long list of investors.”
Hollenbeck and Mansourian both made a point of mentioning that the financial companies took long looks at the bond product SMART was offering and also at SMART itself. And that scrutiny included the effort to repeal the sales tax. “The financial people said they weren’t interested in the [political] garbage,” says Mansourian. “[They said they were] interested in buying secure investments. They scrutinized the project, the financing. They reviewed my resume and other resumes. They looked at the entire organization, not just the balance sheet.”
That affirmation from the financial companies came along with news that SMART is ready to award its first construction contract for the initial operating segment from Santa Rosa to San Rafael. Even though the bond money will go into escrow, SMART still has enough to start the first projects in the first segment. SMART estimates the first work will cost about $107 million. More good news could be coming down the line, however. As construction bids get narrowed down, SMART could find cost savings, and Mansourian says he thinks he’ll have good news for board members on Jan. 9 at 9am in the Sonoma County Board of Supervisors chambers, where he’ll lay out that first construction contract and the work it will entail. He wanted to announce the news at the Dec. 21 meeting, but details still were inchoate. Two companies had been whittled down in the bidding. One company gets the deal; the other company has a period during which it can appeal.
The news that SMART completes a successful bond sale and is close to nailing down its first construction contract magnifies an irony that comes with the RepealSMART effort to take the sales tax back to voters for another round—with a two-thirds hurdle for passage. SMART supporters say critics are being disingenuous, and their real intent is to sabotage SMART just as it gets rolling. Mitchell says that’s just not true. “We have a simple goal: to get enough signatures to let people vote [on a November ballot]. People say I’m out of step with public opinion. The way to figure that out is to let people vote.” SMART supporters and critics know it’s easier to collect signatures for a negative proposition than a positive one in the current political climate, especially when the issue focuses on a government agency.
If the RepealSMART folks can use the two-thirds hurdle, government spending and the delayed timetable for a full SMART route as bullets in their ammunition box, SMART can use the financial firms that have affirmed the stability of the rail system. It’s a major notch on the SMART gun belt.
But, as the pitchman says, “But wait, there’s more.” Along with the news about the successful bond sale and successful negotiations for a construction contract, SMART announced that the Atherton station in Novato is back on the construction calendar. SMART deleted the station in April as part of a cost-trimming measure. But cost savings in other areas of the first segment mean that SMART can put Atherton back on the calendar—without triggering a regional housing requirement for additional residential density. That’s because Rohnert Park is agreeing to move its station closer to downtown and increased housing density there. The move will satisfy a regional housing requirement that SMART stations along the line have a cumulative average of 2,200 housing units near stations to qualify for funds, money that can go a long way toward easing SMART funding pain. The Rohnert Park move means no additional housing is needed at the Atherton station. “It’s wonderful [cooperation] for Marin and Sonoma,” says Arnold. “This was our fist add-back that we wanted, and because of what Rohnert Park is doing, we can now have it.”
And, as the pitchman says, “There’s still more.” The construction deal that SMART is close to signing will mean about 900 jobs in the North Bay, according to SMART. “That’s a made-up number,” says Mitchell. “When we asked for calculations, we got no answer.” But that answer will come on Jan. 9, says Mansourian, when SMART will outline the first construction projects. Arnold says SMART critics have charged that the 900 number is faulty because it represents only temporary jobs. “There has been misinformation that I have cleared up in several e-mails. [Critics] have said these are not 900 permanent positions, but we have never said they were permanent.” Supporters of the first-segment construction project note that SMART will employ electricians, carpenters and other tradespeople hit hard by the economic downturn.
And still the SMART good news keeps coming. Arnold says that transportation agencies in Sonoma and Marin counties have been looking at a plan to run connector buses at both ends of the first segment. The buses will provide service to the original northern terminus in Cloverdale and to the southern terminus at the Larkspur Ferry Terminal station. “They all have looked at what they can do, and it looks like its feasible financially, which is a great thing.” A SMART connector working group has been studying the issue with an eye toward providing the connector bus service when the rail line begins operating in 2015 or 2016. SMART and its bus transit partners will work on the financial feasibility details and report back to the board in spring or summer.
According to a SMART staff report, a SMART connector bus, which would meet trains in Santa Rosa, would take 14 to 16 minutes to travel from Santa Rosa to Windsor, 26 to 29 minutes to Healdsburg and 49 to 53 minutes to Cloverdale. That’s substantially faster than the current bus service, which gets riders to Windsor in 27 to 38 minutes, Healdsburg in 46 to 58 minutes and Cloverdale in 75 to 91 minutes.
On the southern end of the line, connector buses would meet trains in San Rafael and take train riders from downtown to the Larkspur station in 8 to 11 minutes. Buses currently take 30 minutes to make that run.
Trains can run from either end of the first-segment train line much faster than even the express connector buses, but until the trains run on the entire line, the connector buses could offer a substantial advantage over current travel times—and attract more riders to the trains.
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