On Saturday I speculated on my land use blog about what might happen to the deep bore tunnel if Congress failed to reach agreement on raising the debt ceiling. Well, now they have a deal. But even if they pass the deal (and they may not) trouble might still be ahead for the project because of problems at the federal level. Here is what I was thinking this weekend:
It seems very likely that if the federal government defaults, or even if it gets close and gets its credit score dinged, the tunnel project up for a vote could be in serious financial trouble. The fact is that the project is very dependent on federal money and borrowed money. Federal money might get cut off as the national government struggles to pay its bills without extra borrowed cash, and state and local government would face increased costs as interest rates go up when their credit ratings get downgraded because of the federal cash crunch. Anyway you slice it, the current troubles mean that even if the project comes in on budget, Seattle may get stuck with what the feds can’t pay, and the State, Port, and City share might ballon as their borrowing costs go up, pushing more risk and costs on city taxpayers. Let’s unpack this.
From the New York Times Q and A on what the pending debt crisis could mean for local governments:
Q. What could it mean for states and cities?
A. States, still recovering from the downturn, could be hurt in two ways. First, if the federal payments they rely on for everything from Medicaid to highway construction are interrupted, states that are still recovering from the recession could face serious cash-flow problems.
A default by the federal government on its obligations would profoundly affect a lot of people and organizations. But it could affect the tunnel by affecting highway funds allocated for the project. Now, at first, you might think that federal funds are coming, off in the future. But it’s likely that the Congress is going to play this game again later on. The pressure for a two step vote, one now and one next year, makes the possibility that funds both now and and in the future for tunnel construction might get choked off. That’s a de facto overrun even if the tunnel’s costs are as predicted since the revenues won’t be.
I haven’t seen anything that maps out priorities for who gets paid first as federal dollars get scarce with a default. But it’s hard to see the federal government continuing the flow of cash to a deep bore tunnel in Seattle instead of paying for grandma’s social security. Those entitlements are a significant outlay, but so is all the money that will be borrowed by the state, port and city to pay for the tunnel and seawall replacement. Who gets paid first?
State and local governments are already feeling the pressure of decreases in revenues. But could there be a ripple effect on the tunnel created by a default and subsequent downgrade of the federal government’s credit rating? Moody’s is already reviewing local governments and considering downgrading them if the crisis unfolds with a default.
A Moody’s spokesman said such factors as dependency on federal revenues, reliance on capital markets, exposure to overall economic cycles and cash reserves played into which entities are being reviewed. Nationally, the review list includes 162 local governments, 14 housing finance programs and one university.
The story from Minnesota’s Star Tribune goes on to say:
“If the U.S. isn’t AAA credit, that threatens everything,” Schowalter said. “If the U.S., which protects and guides the states’ credit, is decreased that is going to have a ripple effect on the economy that is really profound.”
And more from the New York Times Q and A:
Some states are already feeling the effects. Maryland postponed a bond sale after it was warned that its credit rating would probably be lowered in the event of a federal downgrade. California, which typically issues short-term bonds for cash-flow reasons at this time of year, is working to arrange bank loans instead, citing the market uncertainty. Some state pension funds are worried that a default could erode the value of their investments, which are still recovering from losses during the recession.
How could this affect the tunnel? Well there is a lot of federal and borrowed money in the funding stream for the tunnel. The Washington State Department of Transportation’s website shows that
The viaduct replacement projects have $2.4 billion in committed funding from the state gas tax and federal sources. The Port of Seattle has committed $300 million to the replacement program.
The City of Seattle needs to borrow as much at $235 million to fund the seawall replacement, and the Port of Seattle seems to be leaning towards borrowing for its $300 commitment. Taken together, and not including possible state borrowing, that’s about $535 million in borrowing. Borrowing for the project could reach a billion dollars.
Currently, borrowing for local governments with good credit can be pretty low. But even small increases in interest rates for the city or the port could increase the costs by millions of dollars. A couple of percentage points might not seem like much, but when considered along with choked federal cash, increases in state costs of borrowing and perhaps even higher increases in interest rates the costs could start to multiply.
And don’t for get that the state borrows billions for lots of things, not just highways. If the state’s other borrowing costs go up from the typical 4 to 5 percent up to 6 or 7 percent it could cost the state millions in revenue it doesn’t have.
So put it together: less federal money, and higher interest rates at the state, local, and port level means less cash and higher costs for borrowing money. That spells real trouble for the tunnel project. The federal government can’t pay it’s bills, the state doesn’t have much money, and the costs of borrowing start to climb as credit ratings get downgraded. All of this ought to heighten the worries of Seattle voters considering the tunnel. With problems with toll revenues, sketchy info on the Port’s commitment, trouble with federal money, and higher borrowing costs, all signs point to higher costs for the tax payers of the city of Seattle.
The tunnel project isn’t just unsustainable and bad for the environment, it’s a public finance Frankenstein, assembled from shaky and flaky funding sources. When the federal government defaults, credit ratings drop, toll revenues fail, there’s only one place to go for the extra cash: Seattle tax payers. This is one exit we shouldn’t take.