I-776 impact on Sound Transit's Motor Vehicle Excise Tax (MVET) is still being determined by the courts
by John Niles
If the MVET were zeroed out in accordance with the 2002 statewide vote, the Central Link Light Rail Initial Segment from Downtown Seattle to Tukwila would have insufficient funding to be constructed on schedule.
How much of Sound Transit's Motor Vehicle Excise Tax (MVET) established in 1996 will continue to be collected as a result of the passage of the Tim Eyman $30 license tab Initiative 776 is still undetermined as of September 2005. This initiative was designed to kill Sound Transit's MVET in a statewide vote.
I-776 became law on December 5, 2002 after passage by State voters, and in October 2003, the Supreme Court ruled that I-776 was constitutional.
Although some citizens complain that Initiative 776 failed to gain a majority in the Sound Transit taxing district, and thus should not be applied to Sound Transit, under the law a statewide vote is the only option for an initiative aimed at changing Sound Transit.
After another year passed, a lower court ruled in November 2004 that I-776 does not apply to Sound Transit's MVET collections because $350 million in bonds issued by this agency in 1999 created a contract to continue collecting this tax until the bonds are paid off several decades from now.
Lawyers opposed to this ruling provide this analysis:
Having found that I-776 “impairs” the contract rights of Sound Transit’s 1999 bond purchasers, the trial court ruled that the entire MVET — in addition to the additionally pledged sales tax revenues — must be levied and collected until the last of the Series 1999 bonds is retired in 2028, a span of 360 months. The trial court required this despite the fact that Sound Transit collects “pledged” local option tax revenues (in 2003 dollars) of $22.5 million monthly (i.e., $5 million MVET plus $17.5 million sales tax). At that rate, sufficient local option taxes are collected by Sound Transit in just 33 months to have fully funded the entire gross $738 million bond debt, both principal and interest owed over the entire 30 years."
As of March 2005, this lower court decision is being appealed with the following arguments, among many others, made in a brief filed with the State Supreme Court on February 22, 2005:
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No purchaser of municipal bonds could reasonably have contemplated that a relatively small bond issue of $350 million, with $738 million total debt service, would be irrevocably secured with a pledge of 100% of the issuer’s tax revenues totaling $8.1 billion over 30 years. |
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Important public policy interests justify any nominal contract impairment thought to be created by I-776. |
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Additional taxing authority to the repealed MVET already exists, where that security substantially exceeds the contractually required tax revenue-to-debt ratio of 2-to-1. |
March 2, 2005: In an interview transcript in The Olympian, State Attorney General Rob McKenna had this to say about the I-776 case:
"Sound Transit should not be allowed to spend MVET revenue until those [1999] bonds are retired. Once those are paid off, they are not allowed to continue collecting that tax."
AG McKenna in September 2005 made this opinion the legal position of the State of Washington in a filing with the State Supreme Court, posted here.
More detail on this legal case within the context of Federal funding for light rail is provided here.
An interesting sidelight on this case is that Sound Transit has never demonstrated that the Link Initial Segment of light rail could be completed if the MVET were zeroed out. In fact, to gain Federal funding, Sound Transit was required to certify that there was no pending legal action against their funding sources. The agency did so in a questionable manner with reference to a worst case analysis that is not the worst that can happen. The worst case contemplated in planning documents and reassurances to the FTA is that the MVET would be partially rolled back, not completely eliminated. Zeroing out the MVET is a reasonable potential.
Financial analyst Tom Heller provides a compelling case that defeasing the 1999 bonds -- in plain English, establishing a fund to repay these bonds -- and zeroing out the MVET is the only way that the court can enforce the I-776 law, and also protect the interests of bondholders.
The completion of the Initial Segment of light rail is at risk as long as the I-776 MVET case remains open. The Sound Transit Board has been warned in public testimony.
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Last modified: October 21, 2008