We told you so

“ReTRAC was a success!”

After it opened, Reno city officials were not shy about declaring the controversial downtown railroad trench an unqualified success. Despite critics’ dire predictions of huge cost overruns and engineering failures, construction went smoothly, and the increased train traffic is hardly noticeable downtown.

However, the critics also warned that the city couldn’t afford the trench and several other projects begun around the same time. That prophecy is now turning out to be true. So true in fact that the city can’t afford to pay the interest on its debts and faces possible default.

All told, between borrowing and interest, Reno owes an astronomical $634 million. The news comes at a time when the city is struggling to balance its operating budget through layoffs and pay cuts.

During years of discussion and debate, critics of the project pointed out faulty or overly optimistic financial assumptions and warned of dire consequences should things not go as planned.

In an advisory public vote—the only time taxpayers were allowed to voice their opinion on the trench—65 percent said they were opposed to the project. Regardless of that, the trench was built, and now the community must live with the consequences.

Down in the trench

The train tracks that divide Reno have divided the public since as early as 1946 when it was proposed to move them elsewhere, but no action was taken for 50 years when a merger between Union Pacific and Southern Pacific railroads was announced.

That’s when the Reno City Council swung into action. Spearheaded by then-Mayor Jeff Griffin, council members and key staff started showing up at Washoe County Commission and other public meetings stressing the need to do something about the train tracks.

Griffin predicted that between 40 and 50 trains a day would barrel through town bringing gridlock and safety concerns with them. The city protested the proposed merger, as did many other cities and towns along the rail line.

One by one, Union Pacific settled with those communities until Reno was the only plaintiff left. The Town of Truckee got a $1 million underpass and roundabout in exchange for dropping its lawsuit. Similar agreements were made with the others, but Reno presented a special situation.

Mitigation for Reno would be a very expensive undertaking because the tracks run through the heart of the downtown casino district. Several alternatives were considered and discarded, including overpasses at each of the 11 downtown intersections where city streets cross the tracks.

Although the cheapest alternative, the overpasses would have to be very tall to allow trains to run underneath, which meant they would also have to be very long. In the congested downtown area, this would obscure many casino properties and that was unacceptable to the casinos.

An option to move the tracks to the Interstate 80 corridor was rejected as unfeasible and too expensive. Another option to make the train tunnels over Donner Summit taller was opposed by Union Pacific. The idea was to stack cargo two containers deep, which would cut train traffic in half. Eventually, that’s exactly what Union Pacific did, but for economic reasons.

At length, the city and the railroad cut a deal to dig the 2.25-mile long, 33-feet-deep, and 54-foot-wide trench that we have today. It was a deal that, some say, decidedly favored Union Pacific. The trench cost $265 million, of which the railroad contributed $17 million—mostly in the form of transfers to the city of parcels scattered along the rail route.

Money pit

The trench would be the largest public works project in the city’s history. Having made the deal with Union Pacific, it was now the city’s job to sell it to the community.

Taxpayers would be asked to fund the majority of the cost through a hotel room tax, a special downtown assessment district, a sales tax increase, a city bond, and federal grants. The critical part of all this was $119 million in bonds that would be guaranteed by the room and sales tax hikes.

To get the county on board, Reno proposed raising the sales tax by one-quarter of a percent for 30 years. Half of that would go to the trench, and the other half would go to the county for an ambitious flood control project.

It wasn’t an easy sell, however. Then County Commissioner Jim Galloway questioned the wisdom of spending so much money on a project that didn’t generate revenue. He also questioned the city’s financial assumption that sales and room taxes would continue to grow at an aggressive rate. Should the economy falter, Galloway warned, paying off the bonds would be problematic.

Ultimately, the majority of the county commissioners voted for the tax hike in a lame duck session, and the majority of City Council members voted for the trench.

“The change in Downtown Reno is astounding,” the city’s ReTRAC website trumpets. “No more train/car/pedestrian accidents in the ReTRAC area, traffic flow is greatly improved, emergency vehicle access is enhanced, property values of buildings adjacent to the trench have significantly increased and there are even various environmental benefits.”

Local attorney Glade Hall represented opponents of the trench in several lawsuits aimed at stopping the project. He says the financing package was flawed and that the city wouldn’t be able to afford it if things got tough.

“There was no room, no way they could pay for it if things turned down,” Hall recalls. “We couldn’t afford the project. Period.”

Although he appreciates having the trench, Hall says it’s a project no one wanted except for the political “powers that be” that wanted to be associated with the project and the construction companies who built it. Hall says the money spent on the trench would have been better spent to build three schools.

On Nov. 18, 2005, the first train rolled through the completed trench, just three years after construction began. After 10 years and hundreds of planning meetings, ReTRAC was completed on time and under budget, according to the city website.

“Today, vehicles flow through downtown without waiting while trains move almost silently underground,” the website continues. “ReTRAC will have an impact on the community for many years to come and in many different ways.”

One of those impacts that will be felt for many years will be to city finances. Simply put, the money isn’t there to pay the city’s debts.

Jill Olsen, Reno’s interim finance director, says hindsight is 20-20 and that then-finance director Andy Green didn’t see what was coming. Green’s team looked at 50 years of sales tax history in making their revenue projections.

“I’m not saying I agree with it, but this is my understanding,” Olsen says. “They felt that the projections on average were reasonable. Nobody foresaw a recession such as what we experienced.”

Olsen says it appears obvious now that the projections were too aggressive, and in the future, revenue projections should be more conservative.

Beyond the financial impacts, the trench played a large part in the closure of downtown businesses and smaller casinos and helped cost Mayor Jeff Griffin—deemed unelectable after forcing the trench on the public—his job.

Although the trench was not the engineering disaster naysayers predicted, train traffic never reached predicted levels, either, leaving some to wonder if it was ever really needed.

According to trench critic and former Reno mayoral candidate Mike Robinson, it wasn’t. He says the real driving force behind the trench was the downtown casino owners who didn’t like the train whistles disturbing their guests.

Money for nothing

Around the time discussion about the trench began, the Reno-Sparks Convention and Visitors Authority spent $105 million to renovate the Reno-Sparks Convention Center. Downtown casino owners were incensed. They argued that only the Atlantis and Peppermill casinos would benefit from the renovation and said they wanted their own convention center downtown.

As part of a compromise reached when the Legislature enabled a room tax increase to raise money for the Reno-Sparks Convention Center expansion in 1999, four major downtown Reno casinos were allowed to build their own $65 million events center.

The four casinos formed Newco, a limited liability company to construct and operate the $65 million center. Newco pledged to contribute $20 million of its own money to the project.

The plan drew fire from outlying casinos, including John Ascuaga’s Nugget, the Peppermill and the Atlantis. They said the center would be in direct competition with the Reno-Sparks Convention Center.

The city issued $120 million in 30-year bonds guaranteed by 15 percent of its consolidated tax revenues. Of that, $43 million was used to retire the bowling stadium debt, $7.6 million was used repay the city for the land the stadium sits on, and $65 million was used to pay for the project itself.

Critics of the project said they doubted its viability. They said the financial model was over-optimistic and warned that Reno taxpayers could end up paying for the mistake.

“There isn’t any demand for a facility of this size,” Robinson told the City Council at the time. “The project has been misrepresented to our state Legislature, and if you approve the plan as proposed, you are charting a course of conflict between duplicate facilities.”

Robinson pointed out that Newco’s $20 million offer disappeared in the final legislation. In addition, Robinson accused the city of abusing room taxes. He said that 25 percent of Las Vegas room taxes go to fund roads and schools. In Reno, no room taxes are used for roads or schools. At that time, Reno had a 13.5 percent room tax, while Las Vegas’ room tax was only 9 percent.

Declining sales (down 30 percent) and room taxes (down 8 percent) have cut deeply into the revenue that was supposed to pay off these downtown bonds. So much so that the city had to ask bondholders for the trench for a two-year holiday from making debt payments.

According to a city staff report, the sales and room taxes will bring in $6.3 million next year, far short of the $10 million due for servicing the debt. Originally, it was assumed that tourism would increase by up to 2 percent a year, but that didn’t happen.

The economic picture for redevelopment is even worse than that for the bonds. Declining property values will drop from over $3 million this year to just over $800,000 next year. Reno’s redevelopment districts are carrying $31.5 million in debt, and the agency is tapping out its reserves just to meet this year’s debt service. Where the money will come from next year is anybody’s guess.

Bonds … Pay Bonds

Bonds are the mechanism through which municipalities fund expensive projects. These are sold to investors who profit from the interest charged on the bond. Just like a home mortgage, interest can be substantial over time. And just like any loan, the borrower needs to have some sort of collateral.

Bonds for the trench are revenue backed, meaning that investors can only collect whatever money comes in from that revenue stream. Bonds for the downtown events center, on the other hand, are backed by the city’s general fund which means the city has to tap its operating budget if revenues are too low to do the job.

In theory, the city could just tell trench bondholders to accept whatever revenue is on hand, but the events center bondholders have to be paid unless other arrangements are made. This year, the city will have to transfer $2.7 million from its general fund to help service the events center bond.

To make matters worse, some of the bonds have been refinanced several times, pushing back the date they will be paid off. Robinson says the original trench bond included $5 million in insurance, money that went away each time the bond refinanced. He also points out that both the trench and events center bonds are structured so that payments go up over time.

End of the line?

Like any homeowner unable to pay a mortgage, the city could declare bankruptcy, but state law prohibits that. Olsen says, in any case, that would be unthinkable because Reno’s already shaky credit rating would go down the tubes.

The city manager and finance director who presided over all those bond issues are gone, but the mess left behind will have to be dealt with by others. Among new Reno City Manager Andrew Clinger’s first tasks will be to go before the local government finance committee of the Nevada Department of Taxation on Aug. 4 to describe how he intends to address the city’s debt crisis.

With only a few weeks to come up with a plan and the situation as bad as it is, it looks to be a daunting task.

Olsen says she is working on plans to deal with the debts that Clinger can take to the finance committee. She won’t reveal specifics before Clinger’s appearance, but says she is monitoring the market to determine the best measures to proceed. These include refinancing bonds, asking for more debt holidays or hoping for an incredible upswing in the economy.

If the finance committee doesn’t like what it hears, it could declare a severe financial emergency and intervene in city finances to make them solvent. The committee could raise property taxes by $1 or more per $100 of assessed valuation. But Olsen doesn’t see that happening.

“We’ve put a crisis action plan together and addressed all the issues raised so I don’t see that happening,” Olsen said. “We need to formulate solutions that will stabilize our financial situation so that we can meet our obligations and still provide the services our customers expect.”

On July 25, a permanent finance director will take over. Robert Chisel comes to the job after nine years with the Nevada Department of Transportation. Clinger, who was the state budget director, says he worked with Chisel many times. Together, they might be able to pull Reno back from the brink.

Robinson says he doesn’t blame the politicians or city staff for their parts in creating the mess. He says poor choices by the city’s leaders, such as the casino owners and construction companies created this crises, and electing a new City Council won’t change that.

“That take’s people eyes off of the real problem,” Robinson says. “Selling all these bonds and doing all these foolish projects, that’s the issue: not to do this anymore.”

In the recent session of the Legislature, lawmakers approved a $2 room tax hike to refurbish the bowling stadium and livestock center. Councilwoman Jessica Sferrazza said $1 of that should go to debt service, but Olsen says the bill was specifically drafted in such a way that it can’t happen.

Now some City Council members are talking about issuing more bonds to pay for the bowling stadium upgrades even as a serious challenge to the city’s lock on bowling competitions is being brought by the city of Orlando, Fla., which wants a 20-year contract with the United States Bowling Congress.

Reno’s current contract with USBC ends in 2018. Officials say these tournaments bring in up to 95,000 people to the Reno area and generate up to $100 million in economic activity.

But like the local politicians’ premature declarations that “ReTRAC was a success!” predictions of the city government’s financial failure may be hasty. One thing is for sure, though: People like Andrew Clinger and Robert Chisel have a deep trench to dig Reno taxpayers out of.