Stalking the Public Purse
July / August, 2000
From the start, the Las Vegas Monorail
ackers of the Las Vegas monorail have long promised that Southern Nevada's taxpayers will not find themselves on the financial hook for the project.
Similarly, in the press, for years the monorail project has been called "privately funded" and celebrated as innovative and creative. Nevada Journal itself, in a cover story last year ("Switching Tracks," March 1999), took such pledges at face value, as recently did Reason Public Policy Institute President Robert Poole, in a Sunday Focus section opinion piece published by the Las Vegas Review-Journal ("On the Right Track," June 25).
Well, innovative the project may well be. Unfortunately, mounting evidence suggests that much of the creativity here has been devoted to an effort to get into the pockets of Nevada taxpayers through a more circuitous route than usual.
Spreading the Operating Costs
From the beginning, it turns out, Las Vegas's monorail promoters have had the goal of an extended monorail system in the resort corridor for which Clark County taxpayers would bear the cost.
Nevada Journal has obtained from a Las Vegas source a copy of minutes from an October 1995 meeting of the board of directors of the MGM Grand-Bally's Monorail Limited Liability Company (LLC). Jointly owned by the two largest hotel-casino firms in the worldnow known as MGM Mirage and Park Placethe LLC has spearheaded the push for an expanded monorail from the beginning.
In June 1995, just four months prior to that meeting, the short monorail route between the MGM Grand and Bally's had opened. Now, on Oct. 3, the LLC's board of directors was already focusing on ways to shift its costs onto Clark County taxpayers.
According to the minutes, then-LLC chairman Scott Langsner presented a financial and operational report in which he noted that the used Disney trains which the LLC had purchased incurred high maintenance costs. That had been expected, he said, and anticipated in the company's budget.
Continuing in the same vein was Andrew Jakes, the monorail consultant retained by the LLC:
Though the minutes of the meeting are unusually candid about the company's goals, anyone who has closely followed the public record of the monorail project will not be surprised. For years the LLC and its supporters in elected office have been clear about their intent: As soon as politically feasible, they want to transfer the monorail's financial burdens to Clark County taxpayers.
Let's Use County Staffers
Indeed, they have already tried to make this switch more than once. For example, about a year after the LLC board meeting, Bally's, the MGM Grand and the Hilton went to the Clark County commission and asked it to assign taxpayer-paid county employees to run the monorail construction project.
The main staffer the Strip magnates wanted was Robert Broadbent, then county aviation director. They would eventually hire Broadbent directly, but their first effort was to get his services on the taxpayers' dime. And it wasn't just one staff member the hotels wanted. Other taxpayer-supported county employees to be assigned to the project, according to county commissioner Bruce Woodbury, were Assistant County Manager Jim Ley and several county public works officials and airport planners.
"The County Commission Tuesday unanimously agreed to authorize County Manager Pat Shalmy to put Broadbent in charge of a special-projects group that will do the legwork needed to get a monorail built around the Strip," wrote Las Vegas Sun reporter Jeff Schweers in a November 1996 story.
The article noted that the hotels had already been seeking to achieve the same end through the county's Regional Transportation Commission (RTC), but had found trying to work with that agency too slow and frustrating.
The hotels' proposal was approved by county commissioners, but eventually foundered on fears that using airport personnel and money on a Strip monorail project could endanger federal airport funding. So the next year Broadbent resigned from his McCarran Airport post and went to work directly for the monorail project. The retainer for his new consultancy company, he told Nevada Journal, was $250,000 annually.
In April of 1997, the monorail promoters again telegraphed their intent. Attorney Greg Jensen, who also works for MGM and Hilton interests on monorail matters, revealed that his clients had hired Los Angeles-based lawyer Geoffrey S. Yarema of Nossaman, Guthner, Knox & Elliott, LLP. Yarema's expertise, noted Jensen, is "in devising privately funded transit systems which can later be turned over to the public."
The Well-Greased Baton
The following January, Broadbent spoke to Las Vegas Review-Journal reporter Mike Zapler and indicated that the owners of the LLC were still pursuing the same goal.
Wrote Zapler, "Broadbent said Bally's, Hilton and MGM Grand likely will try to sell or give the monorail to the county because the hotels 'have no interest in operating a monorail' over a long period of time.
"'That is troubling,' Regional Transportation Commission Director Kurt Weinrich soon wrote in a letter to the county commission. 'Turning over the monorail system to the county, could, in fact, turn into a taxpayer-subsidized windfall to the private owners.'"
Weinrich's frank admission was one more refusal by the RTC director to sing from the monorail sponsors' choir book. He would end up paying for his candor in mid-1999. That was when a friend and former lieutenant of Broadbent was brought in and installed above Weinrich in the RTC administrative hierarchy.
Weinrich, who leaned toward streetcar-like "light rail" as the collective solution to Clark County's traffic questions, had always remained dubious about the monorail alternative. But former airport planner Jacob Snow, the new RTC general manager, "loves the monorail," according to one knowledgeable source, and sees extending the system throughout the Las Vegas metropolitan area as a "seamless solution" to supposed mass transit needs.
Snow's attitude toward Broadbent had been suggested three years before and about a month after monorail owners had sought to get Broadbent appointed to head their project. A December 1996 Las Vegas Sun interview reported that, "As Snow sees it, Broadbent is the conductor of a big orchestra made up of many disparate players.
"'With one hand he leads the orchestra with his baton,' Snow said. 'And with the other hand he's cutting through red tape. My job is to help sharpen the scissors and keep the baton clean and well-greased.'"
The Scaffold Is Already Up
Amid the public denials that Clark County taxpayers will end up paying for the monorail, one important fact is nearly always overlooked: The process of arranging the eventual transfer to the county is already well down the road. Extensive legal language to facilitate the transfer has already been written into Clark County law.
This legal scaffoldingthough never publicly referred to as suchhas been erected in several places: in the terms of a new county ordinance, in a franchise agreement between the county and the monorail promoters and in transit planning documents. It is even located in one state law and in the legal structure of the nonprofit monorail company.
In each case, ground rules have been specified for different scenarios under which the monorail can be passed over to Clark County. All that remains is finding the politically opportune moment.
Under the ordinance negotiated between monorail promoters and the county commission, the company and the county can simply agree for the county to take over the system. This is probably the most likely scenario, and the script for it has been much discussed between the two sides. More about that script presently.
The company can also simply abandon the monorail. Under the ordinance, abandonment is explicitly considered a donation of the system to the county. But the monorail has to first lie inactive for six months before the county can begin its takeover.
Finally, the county can take the system through the use of its eminent domain powers. Should it do so, however, it must continue to provide the sponsoring hotel casinos with the same services from the monorail that they received before.
This is specified in two key paragraphs that attorney Jensen, on behalf of the MGM Grand and Bally's, had demanded be added to Assembly Bill 333, passed into law by the 1997 Nevada Legislature. The provisions ensure that if or when Clark County should ever take the monorail through eminent domain, the county must continue the routes, rates and service frequency precisely as before, unless the displaced company gives permission for the changes. Similar provisions were also inserted in the franchise agreement between the county and the monorail LLC, and in the county's franchise-enabling ordinance.
While Clark County's ordinance sets forth ways in which the system can become the responsibility of taxpayers, the master plan of the RTC now enshrines the monorail as the very heart of its regional transit system. This was one of the decisions effectively ratified as part of the RTC's three-year, multi-million-dollar investment study.
One main source of the RTC's eagerness to take on the monorail has been the idea that the system could then be categorized as a "private contribution" to a larger, regional taxpayer-funded mass transit system, giving Clark County a leg up in the competition for federal transit subsidies.
"Washington ... is very well aware that we have a role for the private sector in transportation," RTC official Lee Gibson said last year. He added, "The Republican Congress loves us for that."
A final element of the legal scaffolding for a taxpayer takeover of the monorail is the structure of the Las Vegas Monorail Company (LVMC ) itself. A nonprofit shell corporation formed by the LLC's owners to receive both the monorail franchise and the expected $650 million in tax-exempt bonds, the LVMC has been slated from the beginning to hire a for-profit management company formed and owned by MGM Mirage and Park Place. Legally, such nonprofit corporations, on dissolution, must pass on any assets they own to a state or county government.
The Big Double Bind
One might grant that all the pieces are in place for Clark County to take over the monorail, but still question whether that reality necessarily means that countyor even statetaxpayers are at serious risk. Perhaps RTC Director Weinrich, when he spoke in 1998 of a "taxpayer-subsidized windfall" to the monorail's private owners, was simply wrong. Or maybe, despite all odds, the monorail will actually surprise all its critics and turn out to not only cover operating and maintenance costs, but also repay its debt to bondholders.
Anything is conceivable, but by agreeing to the bloating of project costs (see "The Moolahrail" cover story), monorail promoters have painted themselves into an extremely tight corner. Their "nut"the budgeted costs that revenues must coveris now huge, and thus the risk it will not be met has also grown quite large.
Indeed, that risk appears to be larger than even key officials in the state Department of Business & Industry have grasped. New Director Sydney Wickliffe has repeatedly arguedfollowing her official, yet conditional, approval of the projectthat hotels sponsoring the monorail can institute prepaid fares for conventioneers traveling to the publicly supported Las Vegas Convention Center. This step, she indicated, would dispel fears that ridership revenues will not reach needed levels.
The reality, however, is that monorail promoters have refused to officially make such a commitment. The reason appears to be because they are now caught in a deadly double bind. On the one hand, they have made tax-exempt status for the huge load of bonds they need to sell absolutely critical to the viability of their project. Yet, on the other hand, for sponsoring hotel-casinos to now support the monorail with large, expensive block purchases of tickets carries a significant risk. It reinforces the general knowledge that the monorail is an important element in corporate business plans, lending credence to the argument that the monorail itself is really a system built for the benefit of the sponsoring hotel-casinos. That argument, if (or when) accepted by the Internal Revenue Service, will deprive the bonds of their tax-exempt status and thus kick out a huge financial prop for the project.
Furthermore, the Internal Revenue Service will not be approaching this particular question in a vacuum. Agency auditors will also note that under the monorail business plan, stations will exist on the line only when, where and if the rights to erect a station have been purchased by participating casino-hotels; members of the Clark County public will have no say about where stations are to be. And the IRS will also notice that, according to the monorail company's own consultants, 93 percent of people riding the trains will be clientele of the sponsoring hotels.
In each case, the inescapable conclusion is that the monorail is serving the business ends of the sponsoring hotel-casinos. Yet the IRS code requires the agency to reject tax-exempt status for bonds where more than 10 percent of the funds raised by the bond issue benefit private businesses in a way that people in general do not.
So beneath the surfaceand despite Director Wickliffe's conditional approval of their bond applicationthe promoters of the monorail project are on the horns of a serious dilemma: Without block-fare purchases, the project has no chance at financial viability. But with those purchases, the project's tax-exempt status, already in danger, is seriously at risk.
Whichever horn of the dilemma its promoters choose, the project appears to be in real financial jeopardy.
An Opaque Red Herring
You wouldn't know this, however, from reading the risk-factors section of a recent draft of the monorail bond offering's preliminary prospectusthe so-called "red herring" to be provided to prospective investors to allow them to make informed decisions.
"Because fare collection technology is changing rapidly, the fare collection system for the Monorail will not be finalized until 200_," says the draft, leaving blank the exact year when the fare-collection approach will be "finalized."
The section is also largely opaque in respect to any block-fare purchases by sponsoring hotel-casinos. This is significant because monorail promoters used the prospect of such block purchases very skillfully with the Department of Business & Industry, giving the project, after some early PR stumbles, the appearance of genuine financial solidity. Yet now this highly effective sales point seems to have virtually evaporated from the project, at least as discussed in the draft preliminary prospectus.
The closest one can find is the sentence: "The URS Greiner Report assumes a high level of integration of the Monorail fare collection system and resort ... billing procedures." But even that is almost immediately taken away: "There can be no assurance ... of the willingness or ability of ... resorts ... to agree to such a fare collection system." This sentence touches on one of the project's sorest points: that not one of the sponsoring hotel-casinos has legally obligated itself, as of the time Nevada Journal goes to press, to any form of an integrated fare-collection system.
Indeed, the quality and sparseness of the "letters of support" from hotels for the project make the risk warnings in the red herring look a bit puny. (The letters can be read at the Department of Business & Industry website: http://www.state.nv.us/b&i/monorail/)
Given the tax-exemption quandary discussed earlier, it may be that information about one horn of the promoters' dilemma is being only faintly referenced in the preliminary offering in order to not raise a red flag with the IRS. But the underlying realities cannot be edited out so easily. While the block-fare purchases may present tax-status problems, it remains the case that without the block fares there is no prospect of ridership revenues at the level needed to meet the project's debt obligations.
What this all comes down to is that even at this late date, the monorail project seems to have little prospect of the kind of farebox revenues that would allow it to pay back the huge debt the state is being asked to issue.
The Emerging Scenario
If the state Board of Finance approves issuance of the bonds and they are sold, the project's tax-exemption problems will soon begin oozing out into public view. It is certain that project opponents will find a way to force the IRS to decide the question. Based on a review of published IRS rules and prior rulings, the likelihood appears quite strong that the bonds will lose their tax-exempt status.
Should that happen, the effective cost of financing the project will go up, conceivably as much as 30 percent. This is the kind of difference that a couple of interest rate points can make over the life of a 30-year project.
Exactly how the bill comes due to Nevada taxpayers will depend on which route the IRS chooses to take. In such a situation, the tax agency has two options. According to bond lawyers consulted by Nevada Journal, in similar situations IRS officials usually come to the issuerin this case, it would be the State of Nevadaand ask for the lost taxes. The agency will say, "We think there is something wrong with this deal. These bonds really are taxable. But we're willing to enter into negotiations with you. And we'll do what's called a closing agreement, where you make up the difference and pay the IRS what is effectively a fine or a penalty. We will agree that if you pay this sum to the U.S. Treasury, we will not declare your bonds taxable. That way the investors won't be hurt, and you won't suffer the consequences of lawsuits from them. Also, your reputation in the market won't be ruined."
In such agreements, Nevada Journal was told, the lost taxes sought by the IRS roughly total the difference between what the project's bonds sold for in the tax-exempt markets and what they would have sold for in the taxable bond markets. Assuming the IRS comes on the scene relatively early in the life of such a mischaracterized project, the amount of taxable interest that the issuer will have to make up may still be relatively low. But the settlement agreement in such cases usually also requires that at the earliest opportunity, the issuer go into the bond market and buy back the balance of the tax-exempt bonds.
Normally in such circumstances, the issuerNevada, in this caseseeks reimbursement from the real party in interest. Legally, that will be the shell nonprofit that the mega-resorts have formed to receive the county monorail franchise and the bonds sold by the state. That nonprofit, however, will not have the resources to both buy back the bonds and continue building and/or operating the monorail. This makes it most likely that the state, as issuer, would have to eat the difference. Nevada taxpayers would end up holding the bag for the expanded monorail.
The other direction the IRS can go is simpler in concept, but much more lethal for Nevada. The tax agency can just declare the bonds taxable. That, in effect, would loose the houndstort lawyersagainst the state. Suddenly the interest paid to investors would no longer be tax-exempt. Bondholders now owing taxes on their interest income (perhaps retroactively to the date the bonds were issued) would most likely sue the state, charging it with misrepresenting the situation or failing to provide its statutorily required due diligence. In this case, Nevada's credit ratingalready not the highestwould almost certainly suffer additional damage in the markets.
Indeed, the fallout for Nevada from this scenario could be exorbitant. If history is any guide, tort lawyers from across the country would probably queue up 10 deep and then mud-wrestle for the chance to represent aggrieved investors against sinful Nevada and its mob-era mystique. Choosing the venue in which to sue, they might easily pick one of the tort-lawyer paradises in the Bible Belt. Then, defaming the Nevada tourism business at great and loving length, they could raise a huge stink in the world's media. And they would most probably be able to continue the onslaught until Nevada sued for peace. Bondholders no doubt would receive every cent due themplus damages.
Nevada Tourism Held Hostage
This tort-lawyer scenario is important for another reason. It sheds light on why much of the talk about the "non-recourse" nature of the monorail bonds ispractically speakingvacuous. In certain quarters the idea appears to have taken root that it doesn't matter if the monorail project fails to make its extraordinarily optimistic ridership revenue targets, because the investors who have purchased the bonds will simply be out of luck. They can be "stiffed" at no cost, or so goes the thinking.
This is not true. Nevada tourism, and thus the state, is hostage to the good feelings that prospective visitors around the world have of the state and its Strip resorts. Practically speaking, therefore, in this huge bond issue there are no non-recourse bonds. It is simply that the recourse that bondholders have lies slightly outside the customary expectations.
Nevada's principal business and political leaders know they cannot allow the perception to begin spreading across the country and around the globe that Strip moguls and state regulators collude to rip off trusting investors. Because Las Vegas is so interesting to so many people, such a juicy and visual storytying images of plundered and destitute widows to the Vegas monorailwould quickly saturate excited TV news coverage around the world. The negative impact would be palpable, not only on the reputation of Southern Nevada but also on prices of the hotel-casino conglomerates' securities in the financial markets.
So under this scenario, it almost certainly will never get to that. If the State of Nevada goes ahead and issues the bonds, there probably will never be even a hiccup in the debt service. Long before the Las Vegas Monorail Company has exhausted its financial reserves, the move will have been madeas Broadbent indicated two years agoto transfer the monorail system to Clark County.
Taking Taxpayers Off the Hook
It may seem counter-intuitive, or even absurd, that monorail promoters could produce a financially upside-down private transit system and yet look forward to a county takeover and bailout.
But the system has financial problems largely because the expectation developed, courtesy of Clark County commissioners, that the skids are greased for this "private" system to be passed over to taxpayers.
No one doubts that MGM Mirage, Park Place, Bombardier Transit, Granite Construction and the rest know how, when their own money is at stake, to keep costs to a minimum and numbers in the black.
And that points the way to the solution of this imbroglio.
Representatives of the sponsoring hotels and the other consortium members profess great confidence that the monorail will meet its ridership and farebox predictions. Indeed, the highly optimistic studies they have commissioned and then waved about suggest high profit potentials for the system.
So here is their opportunity to entirely remove the cloud that hovers above this project. All they need do to demonstrate their confidence and good faith is put their money where their mouth is and fully guarantee all monorail-linked obligations.
That would take Nevada taxpayers off the hook. It would also firmly dispose of all suggestions that the public has been targeted to bear the risks for the projectwhile sponsoring hotels and other members of the consortium reap its rewards. NJ
Editor's note: Following the publication of this article and under the pressure of other criticism, in August 2000 the Las Vegas Monorail Company secured bond insurance for the project, providing significant protection for Nevada taxpayers. Because the credit rating for the municipal reinsurance firm, American Municipal Bond Assurance Corporation, (AMBAC) at the time was AAA, the reinsurance contract raised ratings for the tax-free revenue bonds funding the monorail project out of the high-risk, high-yield or "junk" category. However, in 2004, continuing problems with the monorail, and with one of its key and original contractor-partners, Bombardier Inc., led a major credit-rating agency, Fitch Inc., to place the bonds that funded the monorail project on a credit watch. See the Las Vegas Sun, September 14, 2004, at http://www.lasvegassun.com/sunbin/stories/lv-other/2004/sep/14/517508090.html
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