Monorail errors led to shortfall

When tax revenues for the Seattle monorail came in one-third below projections this summer, Seattle Monorail Project leaders blamed the problem on a lack of reliable data from other agencies — namely, the state Department of Licensing and Sound Transit.

But, despite the remarks by Executive Director Joel Horn and others, the monorail officials also contributed to their own predicament by not thoroughly investigating last year how much money could be raised by taxing cars in Seattle.

Working on a fast track to reach the November ballot, a monorail-planning agency called the "Elevated Transportation Co." overstated the potential revenue for the $1.75 billion plan.

"I would say we didn't spend much time on this at all. We were relying on experts," acknowledges Dick Falkenbury, who was on the monorail board at the time. "We had such an extremely short timeline and there was real pressure not to question things, and pressure to get things done 'on time and on budget.' That became a mantra."

What went on the ballot was a plan for the 14-mile Green Line from Crown Hill to West Seattle to be paid for by a tax on vehicles in the city. The tax rate would be $140 for every $10,000 of vehicle value. The plan passed by 877 votes.

The classic explanation for megaprojects that get in trouble is that proponents have overstated the benefits and understated the costs. The monorail saga adds a new twist.

"Normally, there are tax experts who can analyze the tax," said Harvard professor Alan Altshuler, one of several scholars who has written about the topic. "It sounds like a unique way of getting into fiscal trouble."

Errors in estimating the revenue account for most of the monorail shortfall, while unforeseen tax evasion — people registering their vehicles outside the city — also plays a role.

Once the crisis came to light, the agency began dissecting state vehicle data, recruited four of the state's top economists to review future predictions and approved a $52,000 independent investigation.

There should have been a more serious effort before the election, said project critic Geof Logan. The public "should demand that the hard questions be asked in the first place," he said. "The monorail had no detailed plan on the ballot before the voters. They still don't."

But Tom Weeks, monorail board chairman, defends the planning work. "I think we did a good and thorough job," he said, noting that two different consultants studied the tax last year.

At a meeting this morning, a monorail committee is expected to release the results of the independent inquiry, by Cambridge Systematics of Oakland. Monorail officials have been forthcoming about the details, said Christopher Wornum of Cambridge.

Those officials include Daniel Malarkey, now monorail finance director. Last year he estimated the value of Seattle's taxable vehicles — the so-called "tax base" — at $4.5 billion to $4.7 billion, but revenues are coming in as if the base were around $3.2 billion.

Here is a Seattle Times look at what contributed to the shortfall.

Limited study for big decision

On May 29, 2002, the all-volunteer monorail board voted for the annual tax rate of 1.4 percent. The agency based the decision on a three-page paper issued in April by Berk & Associates, a local consulting firm. It compared a flat $100 fee on car tabs with a 1 percent tax rate.

A Berk economist, Michael Hodgins, recalled that the paper was meant to be just one piece of planning with the understanding that more work would be needed.

Stuart Rolfe, a former monorail board member, recalls being focused on scrutinizing the cost to build the monorail, while assuming that the staff would produce solid tax information.

"I spent most of my time trying to be sure we were as conservative as possible in those (cost) estimates. On the revenue side, there was not the opportunity to do that. ... "

Would it be enough?

"There is some possibility that the 1.4 percent may not be enough to cover the full project implementation," Horn said in a June 28, 2002, message.

Ed Stone, monorail-outreach coordinator last year, recalls a meeting where Harold Robertson, then executive director of Elevated Transportation Co., wondered if the rate needed to be increased to 1.5 percent. Stone needed to know because he was about to publish a citywide mailing stating the 1.4 percent rate.

Horn reported that commercial vehicles weren't counted in earlier estimates but would be lucrative enough for the 1.4 percent rate to work, recalls Stone.

"Had we understood the tax base fully, we would have gone for a higher percentage rate to make sure the plan was fully funded," former board member Craig Norsen said yesterday.

A team from the financial firm of Goldman Sachs believed the car-tab tax was a strong revenue source, less subject to downturns than sales taxes. But the team cautioned in a July memo that no other huge bond issue relied entirely on a vehicle-excise tax.

To keep the financing more flexible, the Goldman team suggested in an e-mail to monorail officials that there be no sunset clause on the tax. The plan reached the ballot without a 25- or 30-year expiration date on the tax.

Would new cars be taxed?

The monorail board tried to tax new cars, but late in the 2002 legislative session an amendment supported by auto dealers said taxes would be collected "at relicensing." That meant no tax at the time of purchase.

Berk, the consulting firm, listed the potential tax base in April at $5.3 billion with new cars, $4.3 billion without. Monorail staff members cited $5.3 billion in spreadsheets produced in May and June.

Malarkey told the Licensing Department on June 27: "This issue is extremely important as it affects the tax rate needed to support the proposed project."

The state Department of Licensing determined new cars were exempt until they were a year old.

Rolfe said he and several board members weren't aware of the new-car exemption in May but knew about it by the time they passed a monorail plan for the public on Aug. 5. The plan did not say that new cars would not be taxed.

Malarkey published a tax-base estimate of $4.7 billion. He said he added 5 percent to Berk's number to include commercial vehicles, updated the numbers to account for recent growth, then subtracted 12 percent for the new-car exclusion. Mike Evans, a state economist with the Licensing Department, said recently that new cars are actually a bigger factor, because they are so much more valuable than used cars.

Malarkey and Berk both relied on historic Sound Transit revenue totals that wrongly counted some suburban cars as in the city of Seattle. The mistake was discovered by Sound Transit in late 2001 and fixed by the Licensing Department in June 2002, but nobody alerted Malarkey.

Weeks, the chairman, said the internal questioning shows monorail leaders took the tax-rate concerns seriously. He said that his belief by August was that the 1.4 percent rate would cover costs even without the new cars.

Potential bond marketers accepted the numbers — one firm assumed a $5 billion tax base as a starting point in its proposal to sell $1 billion in bonds by January 2003 — but might have found the flaws had they proceeded to a pre-sale investigation.

Raw vehicle data not studied

Malarkey received a database of vehicle values from the state, which was not examined in detail.

The Seattle Times, using July 2002 data obtained through a public-records request to the Licensing Department, found that a tally of nearly all vehicles in Seattle ZIP codes, including new cars, derived a tax base of $3.5 billion.

Berk's Hodgins and Malarkey both said that at the time it seemed more reliable to derive the projections from Sound Transit's published collections. "That's a real base, rather than making up something from scratch," Hodgins said.

But Sound Transit's tax calculation turned out to be wrong — for five years it mistakenly included some vehicles from the south-end suburbs as Seattle cars, causing a minor problem for that agency, which relies mainly on other taxes.

A look at the raw data would have displayed the ZIP codes of the car owners — and might have alerted the monorail agency to a problem that today looms as an obstacle to building the Green Line.

Mike Lindblom: 206-515-5631 or mlindblom@seattletimes.com