Getting to the bottom of the debate over $5.4B versus $8.9B

There has been some debate about whether the upcoming transit referendum language should include just the capital cost of the transit plan in 2017 dollars ($5,354,000,000) or also include additional information. In particular, one Council member has suggested adding language to the referendum stating that the “total cost for the transit system” is $8,951,062,000. The debate over this is slipping into a bit of name-calling. Here’s my take.

Before getting into the meat of this, there are three things to consider while you read this. First, debt is not inherently bad. Debt that can be reasonably managed to buy an asset you need is good. Debt incurred at exorbitant rates from a loan shark for a luxury item is bad. There are lots of shades of gray in between. Deciding on whether debt is good or bad requires balancing how badly you need the asset, the cost of paying the debt over time, and whether you can afford it once you consider all your other annual/monthly obligations. In nearly any situation, focusing on either the initial purchase price or the total amount of checks you will write over time to pay the debt is distracting. The question is about need, the cost to service the debt, and how that fits in with your budget.

Second, keep in mind that the 15 year length of the proposed transit plan is somewhat arbitrary. The State IMPROVE Act requires Metro to have the Comptroller and an independent CPA agree that the math in our transit plan adds up correctly. I understand that the Comptroller dictated to Metro that 15 years was the amount of information to present and get approved by the CPA firm. To be clear, the transit system will NOT be paid for in 15 years. The plan anticipates paying revenue bonds all the way through 2060.

Third, the State IMPROVE Act is also very clear that the referendum language has to be 250 words or less, and it must include the initial cost of the plan, as well as the recurring cost. This is pretty precise — it requires disclosing the initial capital investment and the expected annual operating losses. (Remember literally all transit systems lose money annually — that’s why it is important to disclose the expected recurring costs.)

Also, check out my post last night about transit. Especially the parts about financing provide context for thinking about this issue.

Okay — back to the $5.4B versus $8.9B argument…

To start, nobody has hid the ball on either number. Both numbers are in the Transit Improvement Program. You can read pages 46 to 55 of the Transit Improvement Program…you’ll see both discussed in detail. (I would concede to transit critics that the glossy pitch materials focus on the $5.4B number. But, the $8.9B number is clearly presented in the financial information in the Transit Improvement Program.)

Also, aside from not being part of what is required by the State IMPROVE Act, the proposed language saying that the total cost of the transit plan will be $8.9B is not accurate. It would be accurate to say that the total amount of checks that will be written by the end of 2032 will be $8.9B. But that’s not the same as the total cost of the transit plan. To get the total on the amount of checks that will be written to pay for the proposed transit plan, you’d have to include all of the principal and interest payments on the revenue bonds through 2060. And, then you’d have to decide whether you also wanted to keep including annual operating expenses for this additional 28 years. I’m not going to do the math, but that “total amount of checks we’ll write” number gets bigger over time through 2060.

So…the factually accurate statements would be:

  • “The capital cost of the program is estimated to have a present day value of $5,354,000,000” — this is what is in the referendum.
  • “The total amount of checks to write through 2032 for the transit system is $8,951,062,000” — this would make clear that we were only talking about the first 15 years.
  • “The total amount of checks to write through 2060 for the transit system is <<<I’m not going to do the math, but it’s bigger that $8.9B>>>” — again, this would make clear what timeline we were talking about.

I strongly feel that we should leave the referendum with its current language (option #1). Having the referendum say $5.4B for capital costs in today’s dollars is consistent with the IMPROVE Act. Also, when deciding whether debt is “good” or “bad”, it just isn’t helpful to add up the total amount of checks you’ll write over time. The focus should be on need and annual affordability (and as discussed in last night’s post, how to pay for a next phase of construction). And finally, looking at the total amount of checks to write over a 15 year period is certainly not helpful in deciding whether to take on debt for the proposed transit system.

There are legitimate questions that people are asking in trying to understand the proposed sales tax structure and about affordability. My suggestion though is that focusing on the total amount of checks to write over many years is not how people typically think about whether debt is a useful tool.

Bob Mendes

Bob Mendes represents all of Nashville as a Council-At-Large member of Nashville’s Metro Council. He is Chair of the Council’s Charter Revision Committee, a member of the Metropolitan Audit Committee, and a member of the Council’s Budget & Finance Committee, Rules & Confirmations Committee, and Ad Hoc Affordable Housing Committee. Bob also practices business law at Waypoint Law PLLC. Bob’s complete bio is here. You can follow Bob @mendesbob.