SMART board laying groundwork for sales-tax renewal amid looming financial crisis

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Key SMART figures and dates

Measure Q, quarter-cent sales tax, passed by voters in 2008

Passenger service launched in August 2017

Passengers to date: 1.4 million

Current annual operating expenses: $58 million

Projected annual operating expenses, 2021: $63 million

Projected annual debt costs, 2022: $18 million

Projected start of Larkspur service: End of this year

Projected start of Windsor service: End of 2021

Projected cost to reach Cloverdale from Windsor: $364 million

The daunting financial challenges disclosed last week by the North Bay’s commuter rail system have only increased the urgency within SMART to convince voters to renew a sales tax that funds the 2-year-old train line and underpins its future.

SMART officials are beginning to craft the talking points for a campaign to persuade voters that, despite past rail agency missteps, they should extend the agency’s tax funding another two or three decades, allowing it to more readily refinance its mounting debt costs.

To be successful, members of the Sonoma-Marin Area Rail Transit board say, the campaign must show voters how the system has improved the quality of life across the region, beyond its 1.4 million riders to date, and enhanced the economies of the two counties it serves.

“I think it’s a reasonable ask,” said Sonoma County Supervisor Shirlee Zane, a nine-year board member. “We’re asking to extend a sales tax in order to assure that we’re here and healthy for the next 30 years, and can continue to expand and be convenient for riders. That’s the message.”

To renew the tax, however, SMART also must overcome its faults and earn the trust of two-thirds of the voters in Sonoma and Marin counties. Revenues have fallen far short of initial projections, construction costs have doubled, and buildout of the rail line and parallel bike path is far behind the original schedule.

SMART is unable to state outright when it will extend service north to Healdsburg and Cloverdale, finishing off the last 22 miles of its planned 70-mile line. Forty-three miles of track are laid, connecting San Rafael in the south to the northernmost station near Charles M. Schulz-Sonoma County Airport. Another 2 miles of track south to Larkspur is set to be ready by the end of the year, and service 3 miles north to Windsor is scheduled to be added by the end of 2021.

Measure Q, the quarter-cent sales tax that voters passed in 2008, also promised an accompanying bicycle and pedestrian path. Only 20 miles have been completed — less than a third of what had been envisioned.

But SMART hopes to frame the conversation by focusing on its accomplishments and the long-term advantages of maintaining and expanding rail service. While the official decision to seek renewal of the sales tax will not be made until fall, a majority of SMART’s 12-member board already supports the idea and has started putting together the campaign to build its case before the March 2020 primary election.

The tax is scheduled to expire in 2029. Renewing it almost a decade early, SMART officials say, will give the agency its best chance to complete construction of the rail line and avoid deep cuts they fear could threaten its very survival.

SMART directors blame the economic downturn in the late 2000s as the main reason construction is taking longer than expected, the result of tax revenues that fell short of expectations. Yet they are proud they have delivered a more than $500 million public works project after receiving only $289 million from the sales tax through the summer of 2018. That required securing $323 million in federal, state and regional grant funding to date — a model SMART believes sets the agency up for future success.

“We have a great track record,” said Deb Fudge, vice mayor of Windsor and one of SMART’s longest-tenured board members. “What we can’t tell people is exactly when, but we need to get the money with the extension of tax, and that makes extensions (of rail service) north much more certain.”

Key SMART figures and dates

Measure Q, quarter-cent sales tax, passed by voters in 2008

Passenger service launched in August 2017

Passengers to date: 1.4 million

Current annual operating expenses: $58 million

Projected annual operating expenses, 2021: $63 million

Projected annual debt costs, 2022: $18 million

Projected start of Larkspur service: End of this year

Projected start of Windsor service: End of 2021

Projected cost to reach Cloverdale from Windsor: $364 million

It is expected to cost $364 million to construct the final segment of the rail line from Windsor to Cloverdale, according to Erin McGrath, SMART’s chief financial officer. That would bring the total cost of the 70-mile line and bike path to $944 million — nearly double the rail agency’s initial estimate a decade ago of $541 million.

The miscalculation, fueled in part by rising construction costs, has compelled longtime board members to defend their numbers, then and now.

“We were estimating what it costs. It was theoretical in 2008; it’s not theoretical now,” said Fudge. “We were being honest at all times. Now we’re being sort of brutally honest.”

The alarm sounded by SMART staff members last week was not the first, but it was the loudest yet. They warned that without early renewal of the sales tax, SMART would need to slash passenger service and significantly downsize its workforce starting in 2022 to cover rising debt costs.

“It was a little bit of a shock,” Zane said. “I think the staff definitely wanted us to realize what’s at stake in getting a measure passed for the next 30 years.”

A crush of multimillion-dollar debt payments is consuming a larger and larger share of SMART’s revenue stream, primarily coming from sales tax payments. The tax is expected to generate about $38 million this fiscal year, of which $16 million — 42% — will go to pay down its annual debt service. The agency also receives $4 million annually in fares, plus a small amount of state money toward operations.

Debt payments will rise to $18 million in 2022 and require refinancing over a longer period of time, McGrath said. Either that, or the expenses will quickly eat through most of the agency’s $17 million reserve cushion, risking serious financial strain by summer 2023.

Board members said they don’t want to again have to delay SMART’s path forward by cutting service in half. Such cuts, McGrath warned, could be necessary if the board doesn’t pursue the quarter-cent sales-tax renewal as soon as March. Options include a 20-year measure or a 30-year tax.

But the two-thirds majority required to pass the tax is considered a sizable challenge under any economic circumstances.

“I don’t care what it is, it’s difficult,” said San Rafael Mayor Gary Phillips, the SMART board chairman. “It’s doable, but it’s going to take substantial outreach to the public so they understand what the pros and cons are. So am I comfortable? No.”

SMART’s newly stark financial predicament will complicate its campaign, said Brian Sobel, a political analyst and former Petaluma councilman. But the political challenge is not impossible, he said.

“It comes down to the story that SMART tells,” he said. “They’re smart getting out and saying, ‘Here’s where we had successes and where we’ve missed the mark.’ And I like the fact that the current board and administration is saying where they undershot and are just being honest and transparent about it. That is a very good thing to do when you’re going to the public.”

A majority of the board, made up of elected officials from Sonoma and Marin counties, has voiced support for the tax extension in public or in private. A formal vote isn’t expected until November, only three months before most voters in the region receive their ballots, leaving little time to waste for SMART’s campaign.

“I wish I could communicate that all things are rosy and all things are great, but I’m not going to do that if I’m not convinced in my own brain that’s the case,” said Sonoma County Supervisor David Rabbitt, a SMART board member. “Things were never rosy. But I think people have to stand back and look at the big picture, in terms of where we are, what we have as an asset and what our future use of that asset will be.”

The campaign is likely to highlight the train system’s contribution to the North Bay’s economic vitality, transporting workers and visitors between the two counties. The agency hopes that role will increase when it completes its southern terminus later this year, allowing tourists from San Francisco to reach trains via the Larkspur ferry.

Board members also spotlight SMART’s part in reducing traffic on Highway 101 and greenhouse gas emissions from vehicles while increasing the viability of high-density housing projects that have begun to spring up along the rail corridor.

“If we’re going to move forward, we’ve got to remind voters why SMART is exciting,” said Healdsburg Councilman Joe Naujokas, who joined the SMART board earlier this year. “I think SMART will help us to change the way we think about transportation in Sonoma County and development and housing. Before it was pie in the sky, and here’s this vision, and we think we know what it’s going to take. Now we know, painfully well, what’s involved.”

You can reach Staff Writer Kevin Fixler at 707-521-5336 or kevin.fixler@pressdemocrat.com. On Twitter @kfixler.

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