Stop the COPs

One of the issues in the Twin Cities is whether to build the Southwest light-rail line from Minneapolis to the wealthy suburb of Eden Prairie. As is typical of successive light-rail projects, the Southwest line is expected to cost twice as much as the region’s previous line, which cost twice as much as the one before that. In the case of the Southwest line, that means a current projected cost of $1.858 billion, which is up from the previous estimate of $1.25 billion for what was going to be a longer line (15.8 miles vs. 14.5 miles) just five years ago.

When the projected cost had reached $1.77 billion, the plan called for the state of Minnesota to contribute $160 million. But, fed up with cost overruns, the state legislature backed out, leaving a large hole in the project’s budget. The feds had promised to pay for half provided the state and local governments secured the other half. To keep the feds from also backing out, the transit agency had to find a spare $160 million.

In the Twin Cities, the transit agency is also the metropolitan planning organization whose purpose is to distribute transportation funds to various transit projects and local road agencies, which creates a suspicious conflict of interest. The Metropolitan Council has unsurprisingly decided that transit is the best way to relieve congestion even though light rail actually makes congestion worse. However, most of the federal and state gas taxes it receives can’t be spent on transit, so it can’t simply use them to fill in the $160 million gap in the Southwest route’s budget.

To fill that gap, the Met Council decided to call the COPs, that is, certificates of participation. This is a tricky way for transit agencies and other local governments to borrow money without it counting against their legal or financial debt limits. In effect, the COP involves the agency buying equipment, selling it to investors, who then lease it back to the agency. This is completely different from borrowing money from investors and repaying them–except it’s not different at all in that the agency still has to pay the investors roughly the same amount of money to cover the cost (actually more because COP interest rates are usually more than for municipal bonds).

In other words, COPs are just another way of getting around legal debt limits. The Antiplanner has previously noted that public-private partnerships (PPPs) of the “availability-payments” model (as opposed to the “demand-risk” model) are also a way of getting around debt limits. In the demand-risk model, the private partner puts up the money and only earns it back out of user fees if the project succeeds. Under the availability-payment model, the public partner contracts to repay the money borrowed by private partner whether the project succeeds or not.

As the Antiplanner noted in the link above, Denver used a PPP to get around a debt limit to build its airport rail line. Now Maryland is proposing to use a PPP to build the Purple Line light rail with the explicit purpose of avoiding a debt limit. A study of Canadian PPPs concluded that the main motivation for such PPPs is to keep debt off the agency’s books.

In effect, both COPs and availability-payment PPPs allow state and local governments to borrow money without adding to their public debt, and thus stay below any debt limits imposed on them by law or the banks. It’s the same as being obligated to pay most of your income to an ex-spouse and then not telling the bank about that obligation when borrowing money to buy a house. It’s both deceptive and highly risky.

One solution is to enact state legislation redefining public debt to include contractural obligations to pay private partners, whether partners in PPPs or COPs. The Antiplanner isn’t the first to suggest this; Paulo Medas of the International Monetary Fund made a similar suggestion regarding PPPs (see p. 12). However, I haven’t heard of similar proposals in the United States.

This redefinition of debt would limit the ability of agencies to both impose future costs on taxpayers and to undertake boondoggles like $130 million per mile light-rail lines. Now that fiscal conservatives dominate the legislatures of many states, this is a good time for citizens to propose this idea to their state senators and representatives.

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