Draft ST3 Financial Plan (May 26, 2016) Expert Review Panel June 6, 2016

5-26-16 Draft ST3 Plan Fully Affordable

• Draft ST3 Plan is: – Fully consistent with existing and proposed financial policies – Provides transparent accounting of all program costs – Meets the requirements of subarea equity that a subarea’s

revenues are spent on transit improvements that benefit the subarea

– Consistent with prudent financial planning assumptions and will allow continuation of high credit ratings enjoyed by ST

• 1.5x net coverage – Independently confirmed by: PB Consulting, Ben Porter &

Associates and investment banking team.

2

Plan Delivers $36 billion of Capital Improvements to Region

•

3

Taxes52%

Grants9%

Bonds20%

Fares & Other19%

SOURCES OF FUNDS $54 B.

Capital67%

O&M14%

Other19%

USES OF FUNDS $54 B.

$10b

$11b

$5b

$28b $8b

$10b

$36b

Billions of Year of Expenditure $

Financial Plan - Sources & Uses Summary 2017 through 2041

(YOE Dollars in Millions)

Sources of Funds Snohomish North King South King East King Pierce System-wide Total

1 ST3 Tax Revenues 3,689 7,912 3,933 6,973 5,203 - 27,7102 ST3 Grants - Federal 768 1,168 622 873 678 580 4,6903 Sound Move + ST2 Surplus 1,884 1,824 891 1,606 2,623 481 9,3084 Bond Proceeds 2,809 4,754 2,713 431 242 - 10,9485 Fares & Other Revenues 105 389 291 256 205 2 1,2476 Interest Earnings - - - - - 355 355

Total Sources 9,254 16,046 8,450 10,139 8,951 1,417 54,258

Uses of Funds

Capital Expenditures7 Sounder Commuter Rail - - 727 - 1,438 - 2,1658 Link Light Rail 5,867 8,764 3,234 6,004 3,200 4,022 31,0919 Regional Express Bus 23 5 25 76 60 - 189

10 Bus Rapid Transit 42 325 268 1,217 127 - 1,97811 System-wide Activities 122 109 72 29 69 341 742

Total Capital 6,053 9,203 4,327 7,327 4,893 4,363 36,166 O & M Expenditures

12 Sounder Commuter Rail - - 270 - 326 - 59613 Link Light Rail 409 679 563 305 312 702 2,97114 Regional Express Bus 67 - 59 160 278 - 56315 Bus Rapid Transit 132 238 170 668 90 - 1,298

System-wide Activities - - - - - 2,176 2,176 Total O&M 608 918 1,062 1,132 1,006 2,878 7,605

16 Debt Service 1,748 3,397 2,157 408 185 - 7,89517 State of Good Repair 9 81 171 440 81 - 78118 Contribution to Reserves 72 791 (92) (632) 1,705 (33) 1,81219 Contribution to System-wide 764 1,658 825 1,463 1,081 (5,791) -

Total Uses 9,254 16,046 8,450 10,139 8,951 1,417 54,258

4

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

ST3 Revenue & Spending ($B YOE)

CapitalRevenue

Debt Service

O&M

5

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

Bond Coverages

Net Gross

1.5x min net2.0x min gross

Debt Coverages Above Policy Targets

6

ST3 Sales Tax Forecast Up $42 million

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041

Sales Tax Growth Rates

Conway 2016 Current Forecast

ST/ Conway Adjusted Forecast Prior Year

Conway Forecast Prior Year

↓4.2% Average Growth 2020-2041

↑4.1% Average Growth 2020-2041

7

ST3 MVET Down $ 67 million

8

9

Key Financial Planning Assumptions for ST3Nominal Dollars

Sound Move 2007 ST2 PlanST3 Draft Plan

AprilST3 Draft Plan

May

Funding SourcesSales Tax and Use Tax 0.4% 0.9% 0.5% 0.5%Motor Vehicle Excise Tax ( MVET) 0.3% 0.3% 0.8% 0.8%Property Tax 0.25$ 0.25$

Annual Average Revenue GrowthSales Tax and Use Tax 4.8% 5.2% 4.1% 4.0%MVET 5.8% 5.3% 3.8% 3.5%

BondingLevel-Loaded Team 30 years 30 years 30 years 30 yearsAmortization Wrap Wrap Wrap WrapInterest-Only Team 5yrs/10yrs 5 years 5 years 5 yearsInterest-Only Premium - - - -Debt Issuance Costs 1.5% 1.5% 1.5% 1.5%Gross Debt Services Ratio Policy NA NA NA NANet Debt Services Coverage Ratio Policy 1.3x 1.5x 1.5x 1.5x

Borrowing Range

Interest Rate 6.00% 5.75% 5.30% 5.30%

Federal Funds% of Capital 21% 7% 11% 13%

Inflation Cost IndexConsumer Price Index 2.90% 3.60% 3.30% 3.30%Building Cost Index 3.90% 3.60% 3.60% 3.60%Right of Way Index 3.90% 4.60% 4.60% 4.60%ST Inflation Contingency No No No No

OtherInterest earning rate 3.00% 3.00% 3.00% 3.00%Capital Replacement Yes Yes Yes Yes

Debt/Equity Ratio 30% 49% 22% 30%

State-of-Good-Repair Funded Funded Funded Funded

Risk Assessment

Initial Static Stress Tests

• Capital Costs: 10% increase in all capital ($3.6 billion)

• Sales Tax: 6% reduction in revenue 2017-2041

• Recession: -4% 2017, 0% 2018, return to forecast thereafter

• Interest rate increase of 25% (130 basis points, 6.6%)

• Inflation: increase of 60 basis points

Dynamic Risk Assessment

10

Risk Assessment Variables – Interest Rate

0%

2%

4%

6%

8%

10%

12%

14%

1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Aver

age

Inte

rest

Rat

e

Average Interest Rate

Historical Interest Rate

Fin Plan Assumption (5.3%)

11

Risk Assessment Variables – Sales Tax and MVET

-20%

-15%

-10%

-5%

0%

5%

10%

15%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Sale

s Tax

Bas

e Ra

te o

f Gro

wth

Sales and Use Tax Base Nominal Rate of Growth

Sales Tax Base Rate of Growth

Fin Plan Assumption (3.8%)

-15% -10%

-5% 0% 5%

10% 15% 20% 25% 30% 35%

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

MVE

T Re

venu

e Ra

te o

f Gro

wth

MVET Base Nominal Rate of Growth

MVET Base Nominal Rate of Growth

Fin Plan Assumption (2.8%)

12

Risk Assessment Variables – CPI and CCI

0%

5%

10%

15%

20%

1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

CPI R

ate

of G

row

th

Consumer Price Index (CPI) Rate of Growth

CPI Rate of Growth

Fin Plan Assumption (2.2%)

0% 1% 2% 3% 4% 5% 6% 7% 8%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

CCI R

ate

of G

row

th

Construction Cost Index (CCI) Rate of Growth

CCI Rate of Growth

Fin Plan Assumption (3.4%)

13

Risk Assessment Variables – ROW and Assessed Value

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

ROW

Inde

x Ra

te o

f Gro

wth

Right-of-Way (ROW) Index Rate of Growth

ROW Index Rate of Growth

Fin Plan Assumption (3.8%)

-15%

-10%

-5%

0%

5%

10%

15%

20%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Asse

ssed

Val

ue R

ate

of G

row

th

Assessed Nominal Value Rate of Growth

AV Rate of Growth

Fin Plan Assumption (5.9%)

14

Distribution Fitting – Risk Register

# Uncertain Variable

Variable Type

Historical Data Series

Distribution Curve Min 5th %ile 95th

%ile Max Mode (Most Likely) Mean Std Dev

1 General Inflation (CPI) Growth Rate Annual 1966-2015 LogLogistic -0.30% 0.99% 10.52% 10.52% 2.53% 4.37% 4.43%

2 Construction Cost Inflation (CCI) Growth Rate Annual 1997-2014 Normal -1.13% 1.48% 6.3% 7.58% 3.23% 3.23% 1.86%

3 Right of Way Cost Inflation (ROWI) Growth Rate Annual 1997-2014 Logistic -11.07% -4.96% 16.87% 22.99% 5.96% 5.96% 6.72%

4 Sales Tax Base Real Growth Rate 1 Annual 1979-2014 Logistic -11.36% -6.51% 10.78% 15.62% 2.13% 2.13% 5.33%

5 Motor Vehicle Excise Tax (MVET) Base Real Growth Rate Annual 1978-2014 ExtValue -7.17% -7.17% 17.67% 17.67% -0.47% 3.05% 7.83%

6 Property Assessed Valuation (AV) Nominal Growth Rate Annual 1992-2015 ExtValueMin -16.19% -7.22% 15.16% 17.53% 9.12% 5.95% 7.06%

7 New Property Tax Revenue Growth Rate Annual - Triangular 0% - - 0.80% 0.50% - -

8 Federal New Starts Grant Revenues 2 Annual - Triangular - - - - - - -

9 Borrowing Interest Rate 3 Annual 1966-2016 LogNormal 2.63% 3.79% 9.68% 12.78% 4.80% 5.98% 1.96%

10 Construction Cost Adjustment Factor Uniform - Pert -10% - - 15% 0% 0.83% -

11 Right of Way Cost Adjustment Factor Uniform - Pert -10% - - 15% 0% 0.83% -

12 Other Capital Cost Adjustment Factor Uniform - Pert -10% - - 15% 0% 0.83% -

13 Ridership Forecast Adjustment Factor Uniform - Uniform -10% - - 10% 0% 0% -

1 To reflect the positively-skewed shape of the historic data histogram, the Logistic distribution (which is by definition symmetrical) is truncated at the 95th percentile value, equal to 10.81%. The maximum value observed in the data series considered is 10.43% in the year 1983. 2 Annual probability distributions for Federal New Starts Grant Receipts are defined by minimum, maximum, and most likely forecast values provided by Sound Transit for forecast years between 2019 and 2044. 3 The fitted distribution was re-adjusted to achieve a mode equal to the forecasted interest rate of 5.3%. This was to account for the fact that the historical data is not a perfect proxy for Sound Transit’s AAA-credit rating based interest rate.

15

Dynamic Risk Assessment (Monte Carlo)

Gross DSCR

Fare Revenue

Debt Service

Tax Revenue

Debt Service Period

Interest Rate

2014 Tax Base

CPI Growth Rate

Tax Base Real Growth Rate Gross

Proceeds

Tax Rate

Tax Base

Base Ridership Forecast

Ridership Adjustment Factor

Weighted Average Fare Ridership

16

Net Coverage Threshold Probabilities

0%

5%

10%

15%

20%

Prob

abilit

y

Year

Probability Net DSCR below 1.1x Probability Net DSCR below 1.5x

17

Gross Coverage Threshold Probabilities

0%

5%

10%

15%

20%

Prob

abilit

y

Year

Probability Gross DSCR below 1.6x Probability Gross DSCR below 2.0x

18

Legal Debt Capacity Threshold Probabilities

0%

5%

10%

15%

20%

25%

Prob

abilit

y

Year

Probability % of Debt Capacity above 95% Probability % of Debt Capacity above 80%

19

Risk Threshold Probabilities

• In all cases below 20% • Probability of exceeding borrowing capacity is higher than

probability of borrowing more than can be serviced with coverage

16.1%

7.5%

20.0%

Minimum Net DSCR < 1.5x

Minimum Gross DSCR < 2.0x

Maximum Share of Debt Capacity > 80%

Probability Across Forecast

14.5%

6.7%

18.4%

Net DSCR < 1.5x Gross DSCR < 2.0x Share of Debt Capacity > 80%

Probability in the Least Favorable Year

20

2033-2042 Critical Periods for Risk

• Minimal risk until approximately 2031 • 2033-2035: Higher risk of exceeding borrowing capacity • 2038-2043: Higher risk of borrowing more than can be serviced • After 2043: Low risk (no more debt issued and ST2 debt retires)

Least Favorable Year for Share of Debt

Capacity Utilized

Probability of Net DSCR < 1.5x < 5%

Probability of Gross DSCR < 2.0x < 5%

Probability of Share of Debt Capacity Utilized > 80% = 0

Least Favorable Year for Gross DSCR

Least Favorable Year for Net DSCR

Recovery Period

21

Risk Assessment Expected Values

• Risk Assessment shows: – MVET and AV expected to be higher (on average) than forecasted – Expected values for coverage are greater than the base case values – Expected values for share of debt capacity utilized are lower than the base case values

• More upside opportunity for sources than downside risk for uses – Expected values for revenues exceed the base case model values by more than the

expected values for capital and O&M costs changes – Construction cost variance (excluding inflation) has a comparatively small impact – Property assessed valuation risk has little effect on property tax revenues (due to statutory

growth limits) but creates upside opportunity for debt capacity • Compounded effects of early year variance in sales tax and MVET growth rates have

the most impact on meeting coverage in 2038 (year with highest risk)

22

Next Steps

Financial Policy: Review by board

Final ST3 Financial Plan: Mid-June

Board adoption of plan June 23

23