The Economics of Passenger Trains - They Don't Go, Go, Go, They Cost, Cost, Cost

Publish Date: 
Wednesday, October 8, 2014 - 4:45pm

All Aboard Florida is seeking $1.75 billion in tax exempt bonds to pay for its express passenger rail service, an abrupt departure from the federal loan the private company had sought and a jolt to people working to derail the project.

The private company, which plans to run 32 trains per day between Miami and Orlando on the Florida East Coast Railway tracks, confirmed Tuesday that it applied to the U.S. Department of Transportation in August to issue the private activity bonds. The notes have a low interest rate, but are attractive to investors because they don’t pay taxes on the interest they are paid.

All Aboard Florida President and Chief Development Officer Michael Reininger said Tuesday the bonds will allow the railroad to begin construction on the second phase of the line between West Palm Beach and Orlando more quickly than if it waited for the approval of a $1.6 billion Federal Railroad Administration loan.

Construction will begin this fall on All Aboard Florida’s route between Miami and West Palm Beach. That leg is being paid for with $405 million in private high-risk bonds that All Aboard Florida sold in June.

Reininger said he hopes using the bonds, which will be marketed to private investors, will alleviate concerns that the project was seeking public money in the form of a taxpayer-subsidized federal loan.

“The entirety of the risk is born by the entities that buy the bond,” Reininger said. “The parties that buy these notes will evaluate our creditworthiness and bear all risk associated with our business.”

Approval by the U.S. Department of Transportation could come by the end of this month, Reininger said. Depending on the amount granted, All Aboard Florida will rescind or substantially reduce its loan request.

If approved, it would likely be the first passenger rail project to be paid for with private activity bonds.

Rail experts said they could only speculate on All Aboard Florida’s motives to scrap the loan request, but said bonds may offer a more sure-fire route to financing.

“It could be political pressure driving them to test the market or they may have thought they couldn’t get the full loan amount,” said Robert Poole, the South Florida-based director of transportation for the libertarian-leaning Reason Foundation. “It’s probably a prudent move because the loan is not a guarantee.”

All Aboard Florida opponents were targeting the loan, and the environmental impact statement process, in their fight against the project.

The statement was released Sept. 19 with eight public comment meetings scheduled for later this month and early November.

Some residents in northern Palm Beach County and the Treasure Coast fear the additional trains will increase traffic congestion, cause boat backups when drawbridges have to be lowered more often, and delay first responders.

U.S. Rep. Patrick Murphy, D-Jupiter, who is fighting All Aboard Florida, said the company’s financing shift “changes the dynamic.”

Murphy spoke at a Citizens Against Rail Expansion, or CARE, event at the Jupiter Medical Center on Tuesday. He and other opponents at the event said they had just heard about the bond plan that morning.

“When they were asking for a federal loan, there was more involvement federally, and if they withdraw that, it changes the dynamic,” Murphy said. “Regardless of how they do their financing, it doesn’t change the safety concerns we have.”

It’s unclear how the bond could be affected by the environmental impact statement, if at all.

“Theoretically, All Aboard Florida may not have to address the environmental impact statement,” said Steve Ryan, a Washington, D.C.-based attorney representing CARE. “Interesting legal questions come up.”

Private activity bonds are designed to encourage companies to invest in projects that are beneficial to the public and local economies.

Emil Frankel, a visiting scholar at the Washington-based Bipartisan Policy Center and former assistant secretary for transportation at the U.S. Department of Transportation, said the bonds are popular and have increasingly been used to pay for transportation projects.

But they are not without critics. Because they are tax exempt, some groups have complained they amount to a government subsidy because they eliminate money that would have gone into federal coffers.

“Treasury doesn’t generally like tax-free bonds,” Frankel said. “But these are not guaranteed so the taxpayers are not at risk.”

If the U.S. Department of Transportation approves the bonds, the Florida Development Finance Corporation will act as an conduit of the bonds but assumes no liability for the project.

All Aboard Florida’s success at securing private financing through the $405 million bond this year may have hastened its pursuit of the private activity bonds. The first bond sale offered a notable 12 percent interest payout.

Randall O’Toole, a rail expert with the Cato Institute, has questioned All Aboard Florida’s ability to be profitable and said Tuesday a 12 percent interest rate verges on junk bond status.

“I love passenger trains and it would be real easy for me to say go, go, go, but I also know the economics of passenger trains and they don’t go, go, go, they cost, cost, cost,” O’Toole said.