Gone and Quartered

Illustration by Jason Stout

East Seventh Street from I-35 to Pleasant Valley Road is a corridor the city of Austin has planned to improve for at least a decade. At long last, construction began in March on improvements: new and repaired sidewalks, street trees and landscaping, new lighting, better accessibility for wheelchairs, new pavers, and directional signage created by artists. And over on part of the Drag (Guadalupe from 21st to 24th), a Great Streets revitalization planned since 1995 was finally approaching construction. But both projects relied on "Quarter Cent Program" funding from Capital Metropolitan Transportation Authority – money that Cap Metro now is too cash-poor to pay. As a result, their timely completion has been put at risk.

In recent weeks, the city of Austin and Capital Metro have been engaged in a politically sticky negotiation. The transit authority owes the city more than $50 million, but the agency is too cash-strapped to pay its bills. Most reports have focused on how Cap Metro got itself into this unfortunate financial situation. But the other side of the story is what this stop-payment does to the city. It has more than $15.5 million in transportation projects under contract – in all, more than $20.5 million committed – that depend on Quarter Cent cash flow. Another $12.8 million in projects are in design. The transit agency has asked for an extended payment period on its debt; under its proposal, the money wouldn't start flowing again until 2011 and wouldn't be paid in full until 2019.

Meanwhile, the city has bills to pay. Now what happens? Which projects will be pushed off to an uncertain future? "We may not be able to sustain the pace of construction we've embarked on," said Howard Lazarus, acting Assistant City Manager (while Assistant City Manager Robert Goode serves as interim general manager of Austin Energy). The Public Works department and the city budget office have been scrambling to fill the funding gap – to beg, borrow, swap, or find new funds – until Cap Metro pays up.

On March 26, Goode and Austin's Chief Financial Officer Leslie Browder sent a memo to the mayor and council members laying out a gap-financing plan. One option: If voters approve $100 million in transportation bonds this November, some of that money potentially could be swapped for the missing Cap Metro funds until those are reimbursed.

The day before, City Council had authorized staff to begin preparing for the bond election, including a process for prioritizing and selecting a final list of "road, sidewalk, bicycle infrastructure, trail and other transportation-related investments." That makes it timely to reflect on what regional mobility benefits Austin received for its quarter-cent transportation funds. What relief did taxpayers get for their $110 million in sales taxes initially paid from 2001 to 2004 to Cap Metro for transit but reimbursable to the city to be spent on other transit-related projects?

Quarter Cent History

Back in the 1980s and 1990s, one-quarter of the penny in sales tax collected by Capital Metropolitan Transit Authority was originally earmarked to fund an extensive light-rail transit system. But after light rail was narrowly defeated at the polls in 2000, the quarter-cent funds going forward were returned to the cities whence they came (see "Cap Metro: The Quarter Cent Shuffle"). The city of Austin entered into an interlocal agreement with transit authority specifying that Austin would receive funds – eventually accumulating to more than $110 million – for transit-supportive projects for "regional mobility, roadway improvements, regional safety and traditional neighborhood corridor[s]."

No official comprehensive plan drove the $110 million in spending – Austin got a few miles of improvements over here and a few miles of fixes over there. Some projects funded by the Quarter Cent Program affect the whole region – such as $5.6 million for consultants to help create the Strategic Mobility Plan and the Austin Urban Rail program, and $1.34 million to get the Compre­hen­sive Plan under way – and others have been as mundane as fixing potholes. Meanwhile, from 1997 to 2007, Texas Transportation Institute data for Austin shows that "congested travel" (as a percentage of peak vehicle miles traveled) increased from 54% to 70%.

Under the terms of the interlocal agreement, Cap Metro collected and banked the quarter-cent funds as sales taxes came in, from 2001 to 2004. The transit agency knew it owed that money to the city of Austin, yet it didn't set it aside to meet the obligation. Reserving encumbered funds is common financial practice, according to city Deputy Chief Financial Officer Greg Canally. "For us," he said, "it would be a required financial practice." But somehow, the city never made sure that's how they kept the books over at the transit agency. Goode said that, in hindsight, "the original ILA should have said 'bank it!'" Even better, the city could have required the transit agency to transfer the funds as they were collected – not as the city billed for projects. Because the city was "staff-limited" for many years, said Lazarus, it was slow to get Quarter Cent Program projects under contract. So only now is it billing for funds collected through 2004.

Cap Metro stopped paying its Quarter Cent Program bills on time in December 2008. The agency's position is that it's legally protected by an ILA clause stating it must reimburse the city for Quarter Cent Program project expenses "as funds become available." But the city's position, said Goode, is: "You collected those funds. Therefore, they were available."

As of the end of 2009, the city had spent about $66 million of the $110 million in the Quarter Cent Program. (All of the program funds had been assigned to specific projects.) It had billed Cap Metro for the full $66 million. But Cap Metro has reimbursed the city for only about $59.3 million, so the transit agency owes about $7 million for unpaid bills. It also has a remaining obligation of about $51 million, according to Browder. Of that amount, about $44.4 million is thus far unspent, but roughly half of it is committed to projects under contract or to reimbursable expenses under developer agreements in the Seaholm District (site of the Seaholm, Gables, Project Green, and new library projects), said Lazarus.

Thus the city's scramble to devise a gap financing plan. "The angst for many months now has been to find out what it looks like," said Goode. "We can't find enough stop-gap financing." That remains cause for concern, for both the city and for firms contracted to complete affected projects. Yet Lazarus insists that, one way or another, "we will always meet our contractual obligations."

How Multimodal?

One lens through which to view the city's projects: How well did they expand transportation choices, support transit, and advance the city toward a multimodal system?

Lazarus provided a partial list of major projects (the three dozen or so that cost more than $1 million), which altogether added up to more than $91 million as of Jan. 31 (see "Major Projects Funded by the Cap Metro Quarter Cent Program," below). From the start, the Quarter Cent Program dedicated 15% of its funds for pedestrian and bicycle projects. Of the $91 million, bicycle infrastructure got the least of the multimodal projects, budgeted at about $4 million for three projects: Pleasant Valley Bike Route (nearly $1.2 million), Shoal Creek Trail improvements ($1 million), and Upper Boggy Creek Trail ($1.8 million). (Another project, not included in Lazarus' list because it doesn't fit the "million and up" standard, is the Lance Armstrong Bikeway, at $967,000.)

Sidewalk projects appear as one line item on the spreadsheet Lazarus provided, budgeted at $10,691,890. Nearly all have been built and paid for. About half were done to meet Americans With Disabilities Act requirements, close sidewalk gaps, make repairs, or respond to specific needs in neighborhoods and on arterial roads, said Lazarus; another 18 projects fell under the Safe Routes to School initiative, to provide sidewalks where children need to walk to school.

An even larger Quarter Cent Program investment in pedestrian infrastructure has been the Great Streets Program: Seven major projects received a total budget of $17,836,857. Those implement the Great Streets Master Plan for Downtown, begun in 2000 to "improve the quality of downtown streets and sidewalks, aiming ultimately to make these great public spaces, where residents and tourists alike can thrive in the heart of a vital, humane and memorable place," according to the city's website. The projects support goals for sustainability, livability, and economic health, in addition to mobility, and they include the Second Street District, the Cesar Chavez conversion, and 23rd Street. The Drag Project, budgeted at $1,697,980 and now on hold, is the only one not yet under contract. (Questions about whether Austin Urban Rail might run down Guadalupe and routing issues related to bus rapid transit are among the reasons construction never began.) Also categorized under Great Streets are the Pfluger Bridge extension, which adds to bicycle/pedestrian infrastructure; the extension of West Avenue in the Seaholm District; and acquisition of Union Pacific right-of-way for the district.

Big Plans, Insufficient Dollars

The Quarter Cent Program has been a funding godsend for regional mobility planning. The city's budget office is reluctant to use bond money on planning consultants, unless it's for a specific construction project, said Lazarus and Browder; more flexible quarter-cent monies have come to the rescue. But because they were late to the party, major planning projects initiated by the new executive team are now among the projects most in need of gap financing. Yet Goode called them "a crucial priority." Caught short are the Downtown Austin Plan, the Comprehensive Plan, the Strategic Mobility Plan, and the Austin Urban Rail program.

"Obviously, we're going to have to identify other funding sources," said Goode. The March 26 memo issued by Goode and Browder identifies some potential sources. For example, 2011 interest earnings on unspent Capital Improvements Program bond proceeds can help fund the transportation elements of the Comprehensive Plan and the Downtown Plan. Build Central Texas program funds of about $3.6 million can be transferred over to help cover the costs of the Strategic Mobility Plan – although that means other Build Central Texas projects, including the dual-funded Drag redo, must be deferred. But as of last week, Browder and Goode still hadn't identified an alternative funding source for about $2 million of the cost of planning Austin Urban Rail.

Transportation consultant Glenn Gadbois, after reviewing the city's spreadsheet, commented: "The planning items have regional significance. Other projects, like Great Streets, are very important to diversify the system and promote a more inviting urban experience." He added, "The city may be better served to move some of the projects, like Great Streets and bicycle trails, from quarter-cent funds to capital improvement bond funding. It would be a more transparent approach to financing this type of project, and probably get them done quicker."

Lazarus conceded that road maintenance work done through the Quarter Cent Pro­gram doesn't light any fires under regional mobility. "But you can't just build new stuff," he said. "You have to maintain what you have." By using quarter-cent funds on repairs, the city has preserved its transportation bond capacity for other uses.

Gadbois added, "It would also be good stewardship to keep the one cent voters approved for transit going directly and clearly to transit expenses." Todd Hemingson, vice president of strategic planning and development at the Capital Metropolitan Transit Authority, said that he has pushed to have more of the money dedicated to strongly transit-supportive projects. An example would be sidewalk work to provide ADA and pedestrian accessibility to bus stops and MetroRail stations. "We would love to see the $51 million remaining balance spent in a manner that supports public transportation services, to directly benefit transit riders," said Hemingson. Responded Browder, "So would we."

We Also Build Roads

The remaining quarter-cent funds, spent and unspent, were directed by the city into streets. Since buses create wear and tear on roads, Cap Metro has historically contributed to road improvement and maintenance, as well as some sidewalk and curb improvements. Its funding programs include Build Greater Austin (a 10-year, $60 million interlocal agreement that ended in 2003) and Build Central Texas (the continuation in place since 2005). The major Quarter Cent Program expenditures on roads are divided into several categories: roadway improvements, intersections, maintenance and reconstruction, and traffic signalization.

By dollar amount, the single largest budget item on the city's Quarter Cent Program spreadsheet is roadway improvements. More than $20.76 million was devoted to eight major projects around Austin. Because they were started earliest and prioritized, most are now completed – but not East Seventh. That was budgeted at $4.3 million in quarter-cent funds, of which more than $1.7 million is encumbered. But Lazarus said the city plans to keep that project on schedule; it will pay the bills with general obligation bonds left from 2000. Once the physical streetscape improvements are completed, an economic redevelopment business plan could help achieve the desired rebirth of the area and help local businesses thrive along the corridor.

Almost $3 million for two big roadway improvement projects – Downtown roadway improvements (in the area of the Gables project nearing completion) and Seaholm District roadway – are in a special kind of limbo on the city's spreadsheet. Lazarus said that both complete roadways and associated water quality improvements are needed for the Seaholm Dis­trict. While those amounts aren't encumbered, Lazarus said they're reimbursable expenses under the terms of the developer agreement, so "we have to pay them."

Opportunity Costs

Lazarus said the city continues to look at the opportunity costs and trade-offs of delaying various projects; staff is working "to figure out what that does to our schedules and to issues like the sequencing of the Downtown projects." Goode said the city hoped to get the ILA negotiations concluded in April so that the terms of repayment are known: "We need to know how to cash-flow our projects." Once negotiated by staff, the amended ILA proposal is expected go to City Council for review or action on April 22 or later. Cap Metro has its own reasons to want a speedy resolution, he said, due to its audit schedule.

But whatever the final negotiated agreement, a delayed payment schedule translates to less work completed, said Lazarus. "You lose value on the dollar the longer it's delayed," he said. "The thing that hurts is, if the dollars could be available now, we could put the projects out to bid now – so the dollars would go a lot further. Plus they're repaying us with future, cheaper dollars; if inflation kicks up, that could be really significant. It's kind of a double hit." Of course, if the city had fast-tracked these projects back in 2001 – billing Cap Metro more or less as sales tax revenues came in – it wouldn't be in this position now.

If the city of Austin were starting fresh with the $110 million, would it see a more strategic way to spend that money today? Goode and Lazarus said the current city executive team favors using all incremental transportation funding to gradually implement a big-picture solution for the future. "That's the whole idea of the Strategic Mobility Plan we're doing now, to identify a long-range plan," said Goode. Once a vision and set of specific needs for the next two decades or more are in place, the city can implement them methodically; as each chunk of transportation bonds or other funding becomes available, said Goode, "you take bites of the apple." Now Austin is finally doing a comprehensive plan. "The management and direction of the city has changed," Goode observed. "That really comes from Marc Ott – he is why we are doing the Strategic Mobility Plan now."

Lazarus added, in regard to winning federal dollars: "Taking a leadership position allows you to get more funds. If you're out in front, while there are challenges, there are a tremendous number of benefits, too." He pointed to coordinated investments in our trail system as an investment in our tourism and convention economy, for example. "We ought to build on our brand and good reputation. ... It's an issue you can easily get passionate about."

Meanwhile, a list of "losers" – projects the city hasn't started, for which no alternate funding sources have been found – also emerged in the March 26 memo. Among those deferred is the Upper Boggy Creek Trail (it needs matching grant funds). Others are intersection improvements being designed for Ben White Boulevard and South First Street, Ben White Boulevard and Congress Avenue, Slaughter Lane at Manchaca Road, Cameron Road, and Rundberg Lane, as well as Southeast and North Austin bike routes, expansion of the Strategic Mobility Plan, and an intermodal transfer station.

On Nov. 5, 2009, council approved a resolution allowing the city to reimburse itself up to $30 million for city construction projects eventually to be paid by quarter-cent and Build Central Texas funds. (Through the latter, Cap Metro has provided $7.7 million annually for regional mobility projects by cities.) "In order to continue moving forward on the projects funded through these Capital Metro programs," stated the recommendation for council action, the resolution "preserves the City's ability to issue tax-exempt obligations in the future (e.g., tax-exempt Certificates of Obligation) to reimburse itself for incurred and future project expenses."

Back to the Bonds

Asked if, given the city's current plan to construct an urban rail system, there might be a certain logic in moving funds around in order to use the remaining Capital Metropolitan Transit Authority quarter-cent funds to begin the rail transit project – sending them full circle, in a sense – Goode said, "I don't think you can commit to it," since the timing of actually receiving the funds would be an issue. "Plus, it's tied to a larger picture of getting federal funds," he added. Those require a local match; the Transportation Department has been treating the city's initial system investment as its match.

From the dais March 25, Council Member Sheryl Cole said that in selecting projects for a potential $100 million bond referendum this November, a key criterion should be each project's ability to qualify for matching federal funds. The Obama administration is shifting its federal transportation funding to projects that advance interagency "livability" and "regional catalyst" goals. In the federal fiscal year 2011 budget proposal, transportation funding would be channeled into a $4 billion National Infrastructure Innovation and Finance Fund, to provide both loans and grants (and support public-private partnerships) for "projects of regional or national significance."

With Quarter Cent Program funds now delayed for years, a bond referendum for Austin Urban Rail now delayed, and the city's bond capacity limited, said Lazarus, "We need to be better prepared to compete for those federal dollars." When the original quarter-cent project list was compiled, "maybe what was missing was a program approach tying them together – [back then] the city was looking at infrastructure separately from everything else." Now, he said, the city needs to look at transportation funding as "part of a larger plan, based on what you want the outcome to be."

To have true regional impact, he said, "we need to decide on some strategic projects, and move them forward." Federal funds could prove the juicy carrot that entices Austin to become strategic, comprehensive, regional, and sustainable in all of its programs and projects. "We're smart enough to do that, and we need to build toward that," said Lazarus. "We need to do better."

Major Projects Funded by the Cap Metro Quarter Cent Program

These 34 projects (those that cost more than $1 million) account for some 83% of the total $110.3 million in transportation spending budgeted by the city of Austin to be funded by Capital Metro's payments to the city under the Quarter Cent Program.

Many important projects have already been funded either in full or in part, but as Cap Metro's payments have dried up, the city is left with around $40 million-$44 million in potentially unfunded work – more than half of which the city is already contractually committed to.

Figures reflect city accounting as of Jan. 31 and include only Quarter Cent Program monies; some projects have other funding sources as well.

** While not under contract, the city is committed to these costs by development agreement or other commitment.

* Percent of budget spent does not necessarily correlate with the percent completion of each project; for instance, where projects came in under budget, some of the original budget will not be spent.