Taxpayers, You Are About to Get Fleeced

SMART proposes to issue risky bonds before the repeal process is resolved without disclosing how much this could cost the taxpayers.

If we have learned anything from the financial crisis, it is this: Those buying or selling complex financial securities need to understand what they’re doing. As many learned the hard way, a lot of money could be lost when events don’t unfold as “assumed” (e.g., the assumption that housing prices will always rise). 

Financial contracts such as subprime loans, option ARMs, CDOs, CMOs, credit default swaps, once thought to be “safe” are now recognized as risky. Many of those who bought them lost fortunes, including those who invested in institutions that bought them.  And some of those institutions were local governments with Boards that didn’t bother to understand the risks before authorizing the investments.

At Wednesday’s SMART meeting in Santa Rosa, the board will consider issuing “up to” $200 million in complex, risky securities, known as VRDOs, otherwise known as multi-mode variable rate demand bonds. The public is being told that they are “safe.” Public Financial Management, SMART’s financial adviser, claims, “The recommended financing structure accomplishes SMART’s goals, offers strong security to investors and insulates SMART from any adverse impact on revenues.”

Hmmm. Are these bonds free? Has SMART discovered a financial free lunch? 

These bonds are anything but free and they are so risky that the Fulbright and Jaworski, SMART’s “disclosure counsel,” is asking for additional fees.

Taxpayers of Marin and Sonoma County, wake up! You are about to be fleeced.  Here’s why.

The bond issuance is unnecessary and it is certainly not free. It could cost SMART millions of dollars in interest payments.

In the very documents that most board members won’t read because they’re too long and filled with legal disclosure language, Public Financial Management states that proceeds raised by the bonds won’t be spent and that, instead, the proceeds will be escrowed until the repeal process is resolved. Fulbright and Jaworksi then disclose that resolution of the repeal process may not occur until December 2012, 13 months from now, after voters have a chance to vote on a repeal measure for local sales tax revenues.

And while the repeal process continues and voters await the outcome of a repeal measure, SMART will have to pay a much higher interest rate on the bonds than it earns on the invested proceeds. How much more? PFM doesn’t know, which means the board doesn’t know, which means the public doesn’t know. But it could be millions of dollars if the board issues $200 million next month and the RepealSMART organization turns in 15,000 valid signatures in January.

In other words, SMART is proposing to knowingly pay interest on potentially $200 million for up to 13 months, risking even higher interest costs over that time because they will be paying a variable rate. 

And since they can’t use the funds during this period, why are they taking on this cost? Why are they willing to incur the risk of even higher interest rates some time in 2012? The documents don’t say. The public is in the dark as to why the board would propose such a costly and risky financial transaction.

Whether one is for or against the rail proposal, whether one is for or against efforts to repeal the sales tax, voters and taxpayers ought to be clear: The SMART board is proposing to gamble with our money by issuing a very complex security that it doesn’t understand. It doesn’t know what it will cost. It doesn’t even know what it could cost.

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Clay Mitchell November 18, 2011 at 09:14 PM
Scott- There was a knowledgeable financial person connected to this project- his name is David Heath, and he has been fired. Makes you wonder, doesn't it?
Cathy November 19, 2011 at 01:47 AM
Clay: Why did you consider David Heath a "knowledgeable financial person"? The central complaint about SMART from Repeal SMART seems to be the lack of clarity, accuracy, etc. about their finances.
Cathy November 19, 2011 at 02:05 AM
Clay: FACT: There was a 2/3rds majority vote to pass the SMART tax between Sonoma and Marin County's. Yes, Marin's total was not quite 2/3rds but Sonoma was in the exceeded 70% and they have a larger population....so the total between the 2 hit the 2/3rds majority. IF you had/have issues with SMART you could have used all of your well demonstrated skills at rabble rousing to resolve them instead you want to kill SMART. What is Repeal SMART offering in it's stead? Why aren't you involved with Friends of SMART or petitioning the SMART Board to activate their Citizen Advisory Panels? You seem more skilled at organizing than the other, more positive groups. I was responsible for marketing the Hudson-Bergen Light Rail Project/Newark City Subway and the Seacus Transfer station --- all rail projects during the year that I worked for NJTRANSIT. IMHO and professional opinion the communication to the public on SMART has been abysmal. However the changes to the plan and problems encountered by SMART are not fundamentally different from those that occur with all large transit construction projects. The other issue is the plethora of transit agencies involved in public transportation in the Bay Area. Aside from the obvious waste of funds and times, it makes connecting and coordinating fares, fare collection equipment, schedules, and routes a nightmare.
Cathy November 19, 2011 at 02:35 AM
Clay: To clarify: The NCRA, as is indicated in the information at the NCRA site that I linked to in my earlier post, is a government entity created by the CA legislature. SMART may or may not "own the tracks" but it does not own the land the tracks are on. The NCRA leases the right of way to various entities like SMART and NWP for rail operations. Those leases or operating agreements have terms that limit what they can and can not do. One of those terms mandated that freight trains have access to the same tracks that the passenger trains will use. Another made SMART responsible for the improvements to the tracks, bridges, etc. Hope this helps!
Rick Fraites November 21, 2011 at 07:07 PM
Once (if?) SMART is up and operating how many rail commuters will be crossing the Marin/Sonoma border during the peak commute hours? What will be the total cost to provide this transportation 'alternative?' Why are the tax payers forking over an approximate ONE BILLION DOLLARS to add an extra lane to 101, between Novato and Petaluma? What is the estimate of the number of housing units that will be required to be located near the SMART rail stops currently planned throughout the rail corridor? Just askin'.....


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