HOUSTON—The Metropolitan Transit Authority could lose access to approximately $400 million if the Texas Attorney General does not change its current position after conducting a preliminary review of Metro’s latest plan to borrow money to expand the light rail system in Houston.
Under Texas law, any plan by a transit authority to sell bonds must be reviewed by the attorney general, who checks to make sure the authority will have the financial capacity to pay off the money they borrow.
A series of letters sent back and forth beginning last August between Metro and The Texas Attorney General’s Office reveals the state regulator had questioned the financial fitness of Metro’s current plan, which depends on using certain federal operating grants it receives today to never cease. The grants, called Section 5307 grants, are money Metro uses to currently operate, but grants that Congress could pull back on at any time.
The Texas Attorney General’s Office is tasked with looking decades into the future and made its comments at a time when the federal deficit continues to rise.
"Those grants could become unreliable in the mid-to long term," said Metro attorney Bob Collie in a letter to the state office, in attempting to describe the position the AGhad taken.
11 News asked Metro to provide a calculation of how much money it would be out if the AG did not change its position.
"I spoke with (Metro’s chief bond consultant, First Southwest) and the (amount) we came up with is about in the $400 million range," Metro Chief Financial Officer Louise Richman wrote. "This is only a very quick calculation, not a detailed run analysis."
The potentially large loss may explain why Metro attorney Bob Collie repeatedly wrote the AG earlier this year, urging it to reverse course, arguing that the Federal Section 5307 grants have been a reliable source of revenue in the past.
In a letter written in late February, Collie told the AG that Metro had come up with a plan that should address the state regulator’s concerns. The idea was to adopt an ironclad policy that some transit experts have said could force steep fare hikes for riders of rail and buses in Houston.
Metro’s lawyer explained to the AG that the policy could make up for any potential loss of federal money in the future by making an unbreakable promise to investors on Wall Street that, in the event Congress slowed down on giving out money, Metro would promise to raise fares on bus and rail service "as and to the extent necessary" to make up for the shortfall.
Collie told the AG the mandatory fare hikes would be a "firmly committed action." In explaining why the attorney general should not worry about how a "governing body will not have the will to increase fares in the future," Metro’s lawyer promised the attorney general the Metro Board would have no choice but to raise fares if they got into financial trouble, because Metro would adopt a "covenant" that would make the promise unbreakable, even by future-elected leaders or appointed board members. Collie concluded the fare hikes, therefore, would be a "certainty" in the event Metro might run into financial trouble.
"We’re talking about a process to protect the bondholders, not the citizens, not the riders, not the taxpayers," said Tom Rubin, the former chief financial officer of the transit authority in Los Angeles.
Rubin said Houston should learn a lesson from Los Angeles, which once forced higher fares on its citizens after it got into financial trouble in the early 1990s.
"We went through the same type of thing. Because the cost of constructing rail got so high, we kept cutting back and cutting back on bus service, and raising the fares, and we wound up losing over 25 percent of our ridership," Rubin said.
Dr. Marty Wachs, the director of transportation studies at the Rand Corporation, said unbreakable promises like the one Metro tried to get clearance to make should be debated publicly in a high-profile manner, due to their potentially widespread impact.
"I also would be concerned about tying fare hikes to paying off bonds," Wachs said.
The Rand Corporation is one of America’s leading think tanks and is affiliated with more than 30 winners of the Nobel Prize.
"There really is a risk the burden of paying for transit improvements will fall disproportionately upon the poor. Because it’s the poor who are dependent on transit," Wachs said after reviewing the letters Metro’s lawyer wrote to the attorney general. "What is specified is a commitment to pay the investors. And that will have to be met."
Lower-income transit riders like Elijah Wheeler pleaded with Metro to reverse course on the plan.
"Please, please don’t do it," Wheeler said. "It would seriously hurt me. Definitely."
Wheeler said he uses Metro buses to get to work every day and does not have enough spare cash to spend on potentially steep fare hikes.
"I do have an automobile, I give that to my wife. My wife uses it because she’s, she’s on disability. She goes back and forth to the doctors. So I use public transit," Wheeler said.
11 News brought what we found to the acting president of Metro, George Greanias.
KHOU: "Were you aware of this?"
Greanias: "I am not commenting on a letter that was written before I got here."
Greanias took over running Metro in May, following the resignation of Frank Wilson.
"I want you to be clear about this. I want the people who see this part of the interview to be clear about this. Those letters were written before I became the acting president and CEO," Greanias said in an interview on August 19. "The fact is that does not necessarily represent my policy."
KHOU followed up to ask what his policy would be, and if he would pull Metro back from what its lawyer was proposing.
"You’ve asked a policy question, which is a perfectly valid policy question. I do not want to speak to that right now," Greanias said two weeks ago.
Early Thursday evening, Greanias said he had formed a personal opinion on the matter, and called the requirements of the proposal Metro previously made to the attorney general "ill conceived," saying he would oppose anything that would take control for potential rate hikes out of the board’s hands.
Greanias was clear to say he was speaking as an individual only, and emphasized the Metro board would have the final say on the matter.
Board Chair Gilbert Garcia said he shares Greanias’s opinions on the matter, after reviewing the documents himself.
As for the attorney general’s position against Metro’s use of Section 5307 grants to pay off future bonds, Greanias said he hopes the attorney general changes its position on the matter. He emphasized that the AG gave a preliminary clearance to Metro in the apring to issue enough bonds to finance at least three lines of rail in Houston: the North, Southeast, and East End.
Metro would still have to pass a new financial test with the attorney general for those three lines at the time it formally proposes to borrow money, which has yet to be done.
Greanias said Metro does not plan to file a formal application to sell bonds until it gets final approval from the federal government for a separate $900 million federal grant it has applied for that would be used exclusively to fund light-rail expansion.
The federal grant, separate from the annual appropriation of Section 5307 operating grants, is currently on hold pending the results of a federal investigation of Metro’s compliance with federal procurement regulations.
Gilbert Garcia, George Greanias, and Louise Richman all agreed on a conference call early Thursday evening that the loss of $400 million in borrowing capacity could, however, impact the proposed University Line. They said Metro would plan to try and change the attorney general’s mind once again when they try to finance that line, as well as the Uptown Line, in order to be able to borrow more money to finance those projects.
Garcia noted the University Line, which is the major east-west corridor of Metro’s proposed rail expansion, is "the spine" and "backbone" of Metro’s five-line expansion plan that is currently being proposed.
Early this week at a special board meeting, Garcia and Greanias announced they are preparing for an unusually tough fiscal year coming up for Metro. While they blamed many of their expected troubles on the delay in acquiring a full funding grant from the Federal Transit Administration, which would allow them to be reimbursed for some construction they have paid for with local dollars, Metro also confirmed it projects revenues from bus and rail fares are going to come in several million dollars short in the current fiscal year.
Greanias said Metro officials are hoping to get the full funding grant approved, but are also busy drawing up contingency plans in the event the FTA investigation results in the denial of Metro’s application.
