GUEST OPINION: SMART's money problem is no surprise
By MIKE ARNOLD


Published: Wednesday, June 3, 2009 at 7:57 p.m.
Last Modified: Wednesday, June 3, 2009 at 7:57 p.m.

SMART is in deep financial trouble. Exactly how much is subject to debate, because once again SMART has misrepresented its future costs and revenues and tried to gloss over its troubles.

The simple truth is this: Under current credit market conditions, unless a white knight in the form of hundreds of millions of dollars of federal funding becomes available in the next few years, SMART does not and will not have the funds to build the rail and bike trail system that it promised voters just a few months ago. Deferring or phasing in construction without federal funds will not address their financial shortfall.

SMART’s own numbers show that the funding gap is $175 million, not the $155 million reported in The Press Democrat. However, this number is based on SMART’s calculations, which have proven to be completely unreliable. Given how quickly and how much SMART’s financial position deteriorated after being promoted as affordable, voters should ask how this came about.

For starters, it is apparent that the SMART board does not understand how dependent the financials are on economic variables that it does not control.

For example, the board continues to demonstrate that it is fooled by what is called “money illusion,” a term coined by economist John Maynard Keynes in the 1930s to describe the tendency to think in “nominal” rather than “real” terms. While the board claims its sales tax revenue forecast has been revised downward to reflect the deteriorating economy, its consultant raised, not lowered, the sales tax revenue forecast in real terms. When SMART’s financial forecast is adjusted for this error, the funding gap is even larger than reported.

SMART’s staff and consultants failed to alert the board regarding financial risks to completing the full project. While they may not have known how deep this recession would become, they knew that credit market conditions had deteriorated before the 2008 expenditure plan was adopted. They downplayed what this meant.

For example, the 2008 plan states that SMART may not obtain bond insurance, but that “there is sufficient bonding capacity to complete all of the rail project as currently planned if bond insurance is not available.”

SMART’s bond counsel and staff are paid to know that without bond insurance the interest rate paid on the bond would be higher than forecast and reduce the agency’s bonding capacity. Yet, no analysis was provided to the public to substantiate the above quote, and the board never questioned its validity.

After the Lehman Brothers bankruptcy in mid-September, the economy was sinking fast. Retail sales and sales tax revenues had dropped precipitously by October, further reducing SMART’s bonding capacity. While SMART Chair Charles McGlashan and Vice Chairwoman Debora Fudge were busy suing rail opponents for “misleading” ballot statements, calling them “lies,” they failed to notify voters that, in fact, the rail plan that they had mailed to every registered voter in Marin and Sonoma was a house of cards.

It is up to the voters to determine whether and how to hold board members accountable for these misdeeds. The real question is what the board should do now.

First, the board needs to accept the financial realities. Without hundreds of millions of dollars in federal funding, the rail and trail system that can now be built with local tax dollars will have to be significantly downsized. Delaying construction will buy time but provides no guarantee that the financials will look substantially better after the delay.

Second, the board owes it to the voters to explain its complicity in this public scam. Rail opponents have argued for years that SMART’s financial plan did not pencil out. Instead of carefully examining these arguments, they approved a financial plan that was DOA, built on false hopes rather than financial realities. Cloverdale voters and bikers now understand what this means — taxation without transportation.