Transit Deep Dive: How Nashville Expects To Pay For Its Plan, And Why Some Worry | Nashville Public Radio

Transit Deep Dive: How Nashville Expects To Pay For Its Plan, And Why Some Worry

Apr 18, 2018

One of the most important — and complex — pieces of Nashville’s mass transit proposal is its funding strategy. There’s been significant focus on proposed increases to four local taxes, which would partly fund the projects. Yet those taxes are only a portion of the plan.

So how, in total, would the transit overhaul be funded? And if the financing projections are off target, how would Metro adjust?

‘Dedicated’ Funding For Transit

Before going into the nuts and bolts of the financing, it’s important to unpack one of the plan’s key concepts. The buzzword used by officials is “dedicated funding” for transit.

What this means is raising taxes and securing financing to go solely into expanded transit, in essence creating a new pot of money to fund the Metro Transit Authority, separate from other Metro departments.

This would be a big change, and it’s an arrangement newly made possible in Tennessee following action last year by the state legislature. As part of the IMPROVE Act, Nashville and other city and county leaders offered support for a statewide increase to the gas tax — which funds billions of dollars in road projects — and in exchange, successfully fought for authorization to raise six types of taxes for transit. (Nashville’s proposal then selected four of those six types: sales tax, business tax, hotel occupancy tax and rental car tax, as detailed on plan page 39).

Metro officials argue it’s past time for Nashville to create a funding stream for transit, especially with the regional population growth that’s expected.

“In many ways, we’re becoming a grown-up city,” said Erin Hafkenschiel, director of transportation in the mayor’s office. “The vast majority of the cities that are bigger than us … have dedicated funding for mass transit, and most of them have rail-based transit systems.”

In contrast, some referendum opponents take issue with this setup, referring to it as the creation of a “forever tax.”

Whatever the perspective, the referendum does ask permission to make a fundamental shift for Nashville: Should the city collect more taxes specifically for a much larger transit system?

The Money Metro Wants

The plan calls for a combination of funding sources through 2032.

The largest would be revenue from the four local tax increases (38%). The most robust money-generator, by far, is the sales tax, which is projected to eventually bring in more than $300 million per year, solely for transit.

The next-largest share would come from borrowing, as Metro would issue $3 billion in bonds, to be paid back by 2060. Much more on those below.

Other sources include:

  • Two types of federal grants, routine federal allotments and a federal loan
  • Money kicked in by the Convention Center Authority and the Nashville International Airport
  • Farebox collections

The federal portions have drawn questions, especially as to whether they would be guaranteed.

“We used a number that’s conservative compared to what other systems have obtained,” said Metro Chief Operating Officer Rich Riebeling. “There’s no guarantee of that money — but it’s a reasonable assumption.”

In terms of the federal TIFIA loan that Metro wants, a city memo shows that Nashville could qualify for a loan of $1.8 billion, but intends to seek just $500 million (this is slightly above the average TIFIA loan of $394 million).

For the federal grants — the New Start and Small Start programs — Metro’s plan seeks less than the maximum obtained by other cities. A city memo reports that 68 transit agencies have received these grants since 2009, that the available federal funding has increased in the past decade and that Metro's transit ridership projections would likely score well when applying.

“These programs are pretty popular among the congressman in the country,” Riebeling said. “I don’t think there’s any great fear that the federal government is going to get out of the business of helping to support transit systems.”

This chart from Nashville's plan shows the proposed revenue sources for transit, and how the money would be spent.

To fund the entire plan — the bus improvements, new light rail lines, sidewalks, new fleet, changes to the roadways and bridges, and operating the system for 15 years — comes with a price tag of $8.9 billion.

The largest cost would be light rail ($5.4 billion). After that, the next two largest categories are bus system enhancements ($1.15 billion) and, to the surprise of some, the financing costs ($1.19 billion). Exact figures have not been calculated beyond the first 15 years, when operations and debt repayments would be ongoing. 

Doubts About The Debt Load

The long-term financing plan, especially the amount of borrowing, has drawn concerns.

One of the most vocal critics is at-large Metro Councilman John Cooper, who argues that $3 billion is too much to borrow, and that it’s risky to chart out a repayment schedule that takes decades.

“The taxpayer has to tote that note,” Cooper said. “Long-term, this plan was designed to be a straitjacket — to commit us, irrevocably, to this most expensive of all choices.”

More: View the memo in which Metro officials and transit consultants answer Cooper’s toughest questions about the plan (PDF)

The bond repayment plan begins with 15 years of payments solely on interest — so the paying down of the principal amount is “backloaded” from 2032 to 2060. According to Councilman Bob Mendes, based on council briefings, Metro would end up paying down $226 million in principal per year for the final 20 years of the plan.

Metro defends this amount of backloading.

Riebeling — who agrees that it’s not ideal to begin with interest-only loan payments — said that’s necessary for this set of transit projects. He said Metro will need substantial funding to operate the expanding bus system while the rail lines are under construction, an arrangement that differs from building something like a stadium, which would not be in use during construction.

“It’s a balancing act,” he said. “I think the worst mistake we could have made would have been to have enough money to pay for the capital but then 20 years from now … go back and say, ‘Oh by the way, we have to get more money for operations.’ ”

This is another discussion in which dedicated funding surfaces. Metro is confident that the revenue will be robust from the four increased taxes, so would issue what are known as “revenue bonds,” which are specifically backed by those tax streams, and not the city's general fund. This setup is intended to separate transit from the city’s other debt obligations.

“The whole idea of dedicated funding is the city’s transit system is going to be self-sustainable,” Riebeling said.

Cooper still balks at the arrangement and said he also would have liked to see more state and federal grants involved, which wouldn't add to the debt load.

“We are borrowing it, where we do have to pay it back,” he said.

And the councilman doesn’t trust the tax revenue and cost projections that underpin the plan.

Conservative Or Risky?

“Frankly, this plan’s gonna fall out of bed almost immediately because of its tax and spending projections,” Cooper said. “We have maxed out an overly optimistic sales tax projection.”

To the councilman, either a misfire on tax revenues or construction cost overruns could jeopardize the plan.

On this front, he’s starkly at odds with Riebeling and the authors of the plan.

“We’ve been really conservative in our assumptions and have thought about a lot of these things,” Riebeling said.

He points to the tax revenue projections as coming from a trusted economist from the University of Tennessee, and points out that the all-important sales tax projection is based on many years’ worth of data, including the recession years (read the projections and methodology here).

“We didn’t pick out somebody that was going to give us the number we wanted to see. We picked out probably the best source of economic analysis in the state,” Riebeling said. “We’ve built leveling off into the analysis. They didn’t look at the last five years of growth.”

This table shows the UT tax forecast for Davidson County, completed in advance of Nashville's transit proposal. Ultimately, the sales tax and hotel tax included in this table were factored into the city's plan.
Credit UT Knoxville Boyd Center for Business & Economic Research

Metro also argues that other cautions are baked in, such as a contingency padding of almost 30 percent on construction costs, as well as other reserves (plan pages 29, 31 and 36).

And while many cities have gone over budget on transit projects, officials say Metro actually benefits by learning from others’ mistakes. In particular, the construction cost estimates in Nashville’s plan were based in part on what other cities ended up spending.

“With the reasonableness of this plan, the citizens should feel they have some protection,” Riebeling said.

Worst-Case Scenarios

Despite Metro’s confidence, there's always a chance that it could run into trouble. And if that happens, WPLN listeners have asked whether another tax increase could be proposed.

Riebeling and Hafkenschiel said that won’t be an option: that there wouldn’t be another tax increase, later, for transit.

However, if things are financially rocky, Metro could be forced to alter its plan. That’s not particularly easy, as any substantial revisions to the list of transit projects could trigger another referendum. Metro doesn’t anticipate such a drastic departure, but other adjustments would be possible to keep the plan moving.

First, Metro could look to adjust the mix of financing options, such as seeking more federal funds.

Another step, if money is coming in slower than expected, would be to extend the timeline for the projects.

But after walking through such scenarios, Riebeling couldn’t help but reiterate his confidence in the interlocking pieces of the plan — barring, he said, “Armaggeddon” scenarios such as “half the population moved out, or tourists quit coming.”

“That’s not real-world,” he said. “People are still going to buy refrigerators and stuff and you’re going to have sales tax money coming in.”