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The Moolah Rail

How a scheme to shift costs of the Las Vegas monorail away from sponsoring hotels and onto taxpayers led to a hugely inflated project price tag and fishy ridership numbers

by Steven Miller

pponents of the Las Vegas resort-corridor monorail have repeatedly charged over the last two years that the $650 million project has been set up to masquerade as public transit, though it is actually intended to primarily serve private interests—specifically, those of the sponsoring hotel-casinos.

That was the gist of the accusation Venetian Hotel General Counsel David Friedman made before the Clark County Commission in January 1998.

"This is a point-to-point system that serves the Hilton properties," said Friedman, according to a Las Vegas Sun report. "But it's well-disguised as a public system."

On the other hand, champions of the project—conditionally approved by the state Department of Business & Industry in July and the Clark County Commission in August—maintain that the completed monorail will bring significant benefits to Southern Nevada by reducing both air pollution and traffic congestion. Furthermore, maintains project point man Robert Broadbent, former director of McCarran International Airport, a monorail in the resort corridor will help Southern Nevada's economy by augmenting tourism. For all these reasons, says Broadbent, the monorail fully qualifies as a public transportation project. And as such, he says, it is entitled to the tax-exempt bonds the state can issue under its statutory authority to assist nonprofit companies.

The Make or Break Question

Tax-free bonds can cut financing costs for a big, multi-year project by as much as 30 percent. That is why, one state official told Nevada Journal, tax-exempt status for the monorail bonds is critical to the viability of the project. Otherwise, he said, the project simply will not "pencil out."

Ultimately, the U.S. Internal Revenue Service seems certain to decide whether or not the bonds—if issued by the state—meet the standards set in IRS regulations. Although monorail promoters have resisted suggestions that they request a letter ruling from the IRS, such requests can originate from virtually any taxpayer. Because opposition to the monorail project is active in certain quarters of the state, it seems clear that any decision by the state Board of Finance to issue the bonds will be followed by demands that the IRS officially decide the matter.

But any such IRS ruling appears likely to emerge well down the road—long after the state's Board of Finance, relying on advice of the state bond co-counsels, will have had to make its own determination.

So what is the essential nature of the monorail project? Is it public or is it private—or if it is both, which aspect predominates? That question, in one form or another, has haunted the effort from its very beginning. That's because, while the project has always been clearly tied to the business plans of the sponsoring hotels, it also has always envisioned using public resources—e.g., county right-of-way, the county's powers of eminent domain—and then turning the system over to Clark County (see accompanying article).

The Dawn of Creation

Bob Maxey—who oversaw the MGM Grand during its construction and then for two years after its December 1993 opening—says it was while the hotel was still being built that the idea for a Las Vegas monorail first occurred to him. Looking out the window of a landing airplane, he says, he noticed that it was a "straight shot" from the airport to his new hotel. And being aware of growing traffic congestion around the Strip, he says, the idea of a monorail along the county right-of-way between the MGM and the airport immediately attracted him.

Although connecting with the airport was not immediately possible, Maxey found that Bally's Las Vegas, up the Strip, was a ready and willing partner, and by the time his new hotel opened, the two firms had formed MGM Grand-Bally's Monorail Limited Liability Company.

Andrew S. Jakes was the nationally recognized transit consultant and monorail admirer brought in by MGM to advise on the developing project and then to oversee competitive bids for the monorail trains. Nevada Journal reached him in Indianapolis, where his company is partnering with the city and a university medical complex on a 1.5-mile mid-town monorail project. In the interview, Jakes told Nevada Journal that "after the system opened [in June 1995], we started to promote the expansion." The 1.1-mile monorail between the two Strip hotels had been "kind of an instant success, with a lot of ridership and fairly low costs," he says, so the momentum for other wholly private monorail systems—and their possible later integration—was initially quite strong.

Right after the opening of the MGM-Bally's system, says Jakes, his company was hired by several other casino firms, including Circus Circus, Harrah's, the Stratosphere, the Boyd Group and "a couple of other casinos" on Fremont Street.

The first job was an extension study for Harrah's Las Vegas, located about half a mile north of Bally's.

Only If to Our Interest

"Harrah's was willing to spend $20 million to extend [the existing monorail] from Bally's to their location," says Jakes. "However, at that time, the chairman of Bally's decided that it [was] not in the interest of Bally's unless we [went] all the way to the convention center. And he basically killed the deal."

The condition demanded—that the monorail had to go to the convention center—was a killer, says the consultant. The reason was that, while all the hotels liked the idea of a connection to the convention hall, none of them wanted to pay for it.

"The bottom line was that MGM wasn't willing to spend an additional dime on that," says Jakes. "MGM management's position was, 'Well, we were able to build the first system, and make our investment, and now if anybody wants to extend it, that's fine; we won't object as long as there's no serious conflict of interest.'"

The attitude coming from the Hilton Hotels was similar, he says. "Hilton liked the idea of extending it to the Hilton, but wasn't really willing to spend a $100, $150 or $200 million to make this happen."

One big reason why the wholly private monorail effort was running out of steam, says Jakes, was that county government had started waving public money at the casino companies. Already officials had starting talking up the monorail as the first segment of a $2.2 billion metro mass transit system for which they hoped to someday get federal funds. At the same time Clark County's Regional Transportation Commission (RTC) placed representatives of the major Strip casinos and local politicians on a "Resort Corridor Major Investment Study" panel and contracted to pay over a million dollars to the engineering consulting firm of Parsons, Brinckerhoff, Quade & Douglas.

"They hired Parsons Brinckerhoff," says Jakes, "and basically killed the entire momentum of extending the MGM monorail. Because the casino decision-makers said, 'Well, let the county do it.' And it hasn't happened yet, of course."

Hey—It Can Be Free!

During the period of RTC-stalled momentum, says Jakes, representatives from some of the prospective contractors—including Granite Construction, and later, Bombardier Transportation—came up with a new approach to the financing problem. The new idea, he says, was: "Why don't we do it at no cost to anybody?" Now that was an approach the existing monorail's owners liked.

"So when those agents came," says Jakes, "and said, 'Well, we have this great idea to do it at no cost to both of you,' both companies, Hilton and MGM said, 'Well, go ahead and do it, if it won't cost us anything and you're going to give us new trains and you will connect us to the convention center. So—good for us. Go ahead and do it.'"

What exactly was the new idea? Tax-exempt financing through a nonprofit corporation—which in turn can hire for-profit construction, management and operating companies. Such "63-20" nonprofits—named after the 1963 IRS ruling that permitted them—had recently been revived in some state transportation projects elsewhere in the country.

The Las Vegas hotel-casinos were assured that all the business-plan benefits they had been pursuing would still be theirs, but at virtually no charge. The public would be allowed to continue believing that the project was simply a snazzy resort-corridor monorail that private investors were financing at no charge to taxpayers. But the State of Nevada would be approached for tax-exempt status for the hundreds of millions dollars-worth of bonds required to finance the project. The pitch to the state would be that the casino's monorail was a public transportation project worthy of tax-exempt financing of the sort normally received by hospitals and medical centers.

For the contractors the sweetener was to be that they would be part of the "team," and their design/build contracts would not have to face competitive bids. The contractors, in Jakes' words, would essentially "get to charge whatever they wanted."

It Explains A Lot

These origins of the Las Vegas monorail project explain much about it—especially the exceptionally high anticipated costs. In 1997 a monorail company attorney had said the project, as envisioned at the time, was going to cost $65 million. Today the $650 million tax-free bond issue is slated to be the largest ever done by the State of Nevada. Indeed, it is almost triple the total amount of bonds the state Department of Business & Industry has ever issued.

"You cannot have a free ride," says Jakes. "By the time the team was put together and those scenarios started to be explored, [the project] started to become more and more expensive because more and more people were involved. Everybody had invested a lot of money in this, until today, everybody needs to get a very high return on their investment. That's why the costs have been going up and up. There has to be a reward at the end of the stick."

Publicly, proponents have blamed the massive inflation of costs on the decision to meet federal standards for "transit grade" transportation—which theoretically would permit an eventual integration of the resort corridor's custom-built Bombardier trains into a federally funded metro system that the RTC hopes it someday can finagle.

But monorail consultant Jakes says that his company determined costs for a transit-grade line fully extended from the MGM to the Las Vegas convention center, and it did not cost anything like what the consortium says.

"We estimated that exactly the same system could be built for about $190 million," he says, "and I still stand behind that number.

"Everything above $200 million is buried in various fees and interest and insurance and the financial deal, which, percentage-wise, is quite substantial."

Jakes is only one of several national monorail experts who find the price of the Las Vegas system exceptionally high. Boston-based Larry Fabian, a high-profile authority on automated people-mover systems, recently noted that the Vegas system is coming in at more than three times the price of a larger monorail system just completed in Singapore. Las Vegas Sun reporter Adrienne Packer quotes Fabian as saying the 4.6-mile Singapore route serves about 3,300 riders per hour and cost $205 million to build.

"There is no average cost per mile," Fabian said. "But $150 million a mile, that's very high based on any number of projects."

Similarly, the director of Seattle's Elevated Transportation Company—working to develop a new monorail system approved by voters there three years ago—finds the Las Vegas system pricey. Its total project per-mile price, assuming 3.8 miles in length and $650 million, comes to a bit over $170 million per mile.

Paul Elliott noted that Seattle's consultants—a team that included Bombardier, one of the same design-build consortium members involved in the Las Vegas proposal—priced the Seattle system at between $25 million and $50 million per mile to construct.

"I would certainly say [the] Las Vegas numbers are high," Elliott said.

Finally, a company CEO who two years ago offered to build a completely private monorail system throughout the RTC area, including the resort corridor, told Packer he thinks Clark County residents are being taken for a ride.

Ron Watson, of Transco Holdings, a Hawaii company that reports several monorail contracts in mainland China and private financial backing from Merrill Lynch, had offered to build the system at a cost of between $25 and $30 million a mile.

"It's the biggest joke I have ever seen," Watson told Packer. "We get a kick out of this. When you have the only deal in town and nobody wants to pursue any other deal—something stinks in the desert," said Watson.

Andrew Jakes is a long-time partisan of monorails for public mass transit, and does want to see the resort corridor monorail succeed. But he worries that ridership and revenue will not be sufficient to keep the monorail from defaulting on the $650 million debt now being sought.

"They are really stretching it at this cost level," he says. "I think that at a $3 or a $4 hundred-million-dollar cost level it wouldn't be a problem, but at that kind of cost level, it may be a problem. And I think it's an unnecessary problem."

The question, he says, is why the system is being built "for $200 million per mile when it was demonstrated in '96 that it only cost $25 million per mile."

"We know how much this costs," says Jakes, noting that the existing monorail paid "$1,400 per linear foot of dual guideway designed for 65 miles per hour." However, "recently [the consortium's] numbers are $6-8 thousand per linear foot, for the same type of guideway."

The consultant notes with satisfaction that his 1.5-mile project in Indianapolis will cost only $30 million in total. "And that includes the stations," he boasts.

In Las Vegas the price has been quadrupled, he says, and no technical construction reason required it.

In some respects, the inflated costs appear to have grown out of its status as a government-linked project. As soon as the monorail company began seeking state approvals needed for the tax exempt bonds, the project began to increasingly approximate stereotypically expensive government undertakings. While its promoters, in public, continued to describe the project as a "private monorail," in actuality they were hip-deep in efforts to massage state and county law into congenial patterns, while shepherding city, county and state politicians down the paths necessary for the tax-subsidized financing. Project promoters also now had to devote massive resources to getting approvals from the state Department of Business & Industry.

That, says Jakes, entailed "complicated financial mechanisms and multiple reviews by various agencies and hundreds and hundreds of pages of various reports, which do not really contribute much." Doing business is Las Vegas is normally free from much bureaucracy, he says, but this project soon became an exception.

Does It Also Explain
the Ridership Estimates?

Given the exceptionally high costs of the project—costs necessary, according to Jakes, to keep the monorail virtually "free" for the sponsoring hotel casinos, and richly rewarding for firms in the project "team"—ridership estimates also had to come in at extremely high levels. Candidly forecasting huge operating deficits far into the future is not a way to woo state and county officials. Or bond investors.

Sure enough, when the monorail consortium's selected ridership consulting firm, URS Greiner Woodward Clyde, came out with its ridership forecast in August 1999, the predicted daily ridership numbers and revenues far exceeded anything achieved anywhere in America during the last half-century. Not only would the monorail achieve wondrously high ridership numbers, said the firm, but it would do so while charging an exceptionally high average fare of $2.50 per trip. Moreover, said URS Greiner, revenues from ridership would cover not only system operations and maintenance, but also construction and financing costs.

On average, American public transit systems recover less than half (42 percent) of their operating and maintenance (O&M) costs through farebox revenues. All the rest of expenses, including all capital costs, routinely end up being borne by taxpayers. Jon Twichell and Thomas Rubin, two California-based mass transit consultants, argue that the monorail has no chance at ridership revenues that would cover operating costs, much less construction and financing. Retained by Desert Inn Estates homeowners who believe the monorail would lower their property values, Twichell and Rubin first made this argument that revenues would be too low in the spring of 1999. At that time promoters of the project were pricing it at some $250-$350 million lower than they are today.

Robert Broadbent, current chairman of the monorail company, acknowledges the 42 percent average figure for entire transit systems. But, he argues, certain transit system segments have ridership revenues high enough to support not only O&M but capital costs. He cites as an example midtown-Manhattan sections of the New York City subway system.

Illinois-based transport consultant Wendell Cox, originally retained to study the Vegas monorail by the Mandalay Resort Group, judges it very unlikely that the URS Greiner projections will pan out. In the area of high-passenger-volume predictions, he notes, consultants working for advocates of new transit systems have a horrendous prediction record:

  • Jacksonville's downtown monorail was to have carried 10,000 daily riders in its original alignment and 38,000 when completed. In 1996 the monorail was carrying under 1,000 daily riders—90 percent below the 10,000 projection. The system has since been nearly tripled in length, but ridership has risen to only 1,800.

  • Miami's Metromover was projected to carry 41,800 riders daily by 1988. It missed its projection by nearly 75 percent. In 1999 it was carrying 13,400 daily riders. That's 68 percent below projection, even though route length had more than doubled.

  • Detroit's downtown people mover was projected to carry 67,700 daily riders in the late 1980s. In 1996, the system carried fewer than 7,000 daily riders, approximately 90 percent below the projection.

"The most inaccurate ridership projections have occurred with respect to systems projected to carry more than one million annual passengers per route mile," writes Cox. "Virtually no such projection has been close to accurate."

The Las Vegas resort corridor monorail is projected to carry a yearly ridership of 5.1 million passengers per route mile. Though URS Greiner puts daily ridership at 54,200, the Illinois consultant says monorail promoters will be fortunate to get 26,600 riders per day.

Cox notes that the URS Greiner estimates rely on earlier projections put together for the RTC's Resort Corridor Major Investment Commission.

Those rail ridership projections, he wrote in his report, "may be the most aggressive ever produced in the U.S. transit industry and appear to be consistent with the particularly inaccurate experience with high volume system projections." Reached by telephone, he was decidedly more blunt in his appraisal of the numbers prepared for the RTC: "Beyond belief. It is Santa Claus stuff. It is so bad that in the long run, that if Vegas goes forward in building a fixed guideway system like RTC would like, it will be more of a laughingstock than Miami was, 15 years ago. Really, really awful stuff. I mean, I was trying to reach an audience that wasn't that familiar with transit, but anybody who believes that transit ridership in Vegas is going to be at European levels clearly doesn't understand."

Cox says there are two basic reasons why high-volume forecasts like these are so unreliable. One is that the "state of the ridership forecasting art has simply not advanced to the point that high volume projections are reliable." The second reason has to do with the often morally skewed nature of the mass transit business in America today:

Perhaps the most important reason that major transit facility ridership projections have not improved is that there is no compelling reason [to do so]. Transit projections have not been prepared for genuine investment purposes. Transit ridership projections have largely been used to justify allocation of federal funding or to promote transit projects to local officials or voters. In all these government projects, when the projected passengers fail to materialize, no individual investor loses money. Government agencies simply make up the deficit with subsidies. Moreover, transit projects rely only to a small degree on passenger fares. Virtually all transit facilities rely on government subsidies for 100 percent of their construction costs and a large percentage of their operating costs.

Gresham's Law II

As in so many other cases when special government-granted privileges operate, many of the incentives are wrong in the publicly subsidized mass transit industry, and hence destructive. Politicians, for example, do not risk their own money when they approve these projects and thus rarely suffer financially when their boondoggles turn out to burden the public. It is easy to posture as a visionary when it is someone else's money. And if it all turns into a problem for the lowly taxpayer, the problems can easily be blamed on someone else.

The consequence is that in public transit there is significantly less appetite for the kind of realistic, candid analysis that intelligent private investors always demand before risking their own capital. A kind of Gresham's Law often tends to operate instead—but rather than bad money driving out good, junk analysis tends to displace the accurate and rigorous. When it is clear that powerful patrons want government assistance for a "public" transit project, unrealistic (but expensive) reports soon appear. They dispense exaggerated accounts of the need for the project and its supposed benefits, then proceed to coolly offer just the ridership forecasts necessary to justify the project.

Eleven years ago Don Pickrell, an employee of what is now called the Federal Transit Administration, checked the National Transit Database and compared consultants' earlier projections of ridership against passenger numbers recorded after projects were fully operational. The discrepancy was startling. The average ridership overestimate by consultants for major urban mass transit rail projects turned out to be almost 240 percent. Pickrell's published findings rocked the industry, occasioning many publicly furrowed brows and introspective pontifications at transit association conventions—but brought about no real change.

In July the St. Petersburg Times reported a story relevant to the Las Vegas monorail ridership projections. It concerned the record, in Florida, of URS Greiner Woodward Clyde.

"Flawed figures leave toll roads running flat," read the headline. "A consulting firm has grossly overestimated traffic projections for five different projects in Florida, leaving the state to deal with the cost overruns."

The Times concluded that St. Petersburg's taxpayers will pay—big-time—for the rosy ridership scenario provided by URS Greiner Woodward Clyde: "At $1.25 per car, the Osceola Parkway was supposed to pay for itself. But five years after the Osceola opened it has attracted such meager traffic that taxpayers must subsidize it. County officials say that by the time all its debts are paid, the $150-million road could wind up costing more than $1 billion."

Furthermore, the paper found that the parkway was not the first place the company's numbers didn't add up: "The Osceola's woes are not the result of an isolated error. Over the past decade the same San Francisco-based consulting firm, URS Greiner Woodward Clyde, has produced erroneous traffic projections for three other toll roads and a toll bridge"

The Rubes in the Hustle

To this date, monorail promoters have adroitly used the "public-private" nature of their project. Whenever they seek special government-granted privileges— tax-exemption for the bonds, county right-of-way for their train, access to the county's powers of eminent domain—they posture as a collective, selfless, rosy-cheeked Santa Claus, showering alleged traffic and air-quality benefits upon the public. (In actuality, such improvements are quite minimal; see sidebar article.) But when observers point out that most benefits favor the sponsoring resorts—or when public representatives raise the prospect of genuine public oversight—then the promoters suddenly morph into righteous (if momentary) libertarians, fierce about their right to spend "their" (actually, primarily bondholders') money the way they want to.

For proponents of a clean separation of government and business, this is a dispiriting spectacle. In a genuine business, where value is given for value, a good return on investment indicates that large value has been given and that thousands of customers  have recognized this in free, voluntary transactions. In the world of statist pseudo-business, however, where investments, if legal, take the form of campaign contributions, "a good return on investment" is little other than a political payoff, and free-market rationalizations are completely out of place. Further, when the actual, documented intent is to stick taxpayers in perpetuity (see sidebar article) with the costs of what is essentially a big casino people-mover, mouthing such catchphrases only demonstrates a kind of moral vacuity.

The essentially private nature of the benefits provided by the resort-corridor monorail is today part of the public record. URS Greiner, for example, the monorail promoters' own traffic consultant, projects that less than 7 percent of the monorail system's riders will be residents of Clark County, while over 93 percent will be visiting clientele of the sponsoring hotels. Given such proportions, only lawyers-for-hire will argue that most of the monorail's benefits do not go to the sponsoring hotels.

Now, in addition, an account of the origin of the project's general financing approach has been placed on the record. That approach, we find, was consciously structured entirely for the short-term financial benefit of consortium members. Yet, as the accompanying article makes clear, it is taxpayers who have been chosen to bear the actual risks of the project.

If members of the monorail consortium want to provide sponsoring casino-hotels with a slick-looking train over to the convention center at virtually no charge, that is their right—but only so long as they, and not taxpayers, bear financial responsibility, in perpetuity, for the line's operating and maintenance, capital and debt costs.

And if members of the monorail consortium wants to exempt their participating design-build "team" from competitive bidding, that too is fine—but only so long as the consortium, and not the public, bears the future financial burden of that decision.

Promoters of the monorail project, as currently structured, seek to justify its balance of public and private benefits with the tired line about how the Strip hotel resorts are the goose that lays the golden egg. They conveniently forget that certain major members of the Strip fraternity have long considered this particular egg a bad one. For years, Mandalay Resort Group executive Mike Sloan has quietly argued that both the RTC and resort-corridor monorail schemes have the makings of huge government blunders—ineffective for actually resolving local traffic and pollution concerns, but all-too-likely to trigger higher local taxes on the gaming industry itself.

It is easy to see how that could come to pass, given the likely consequences of a monorail default: big front-page headlines, stories on the real beneficiaries of the project, and Southern Nevada taxpayers deducing they were supposed to be the "rubes" in the hustle. With each passing year voter deference to the casino industry's political muscle declines, and an angry electorate in Southern Nevada could easily turn and seek its own pound of flesh.

The jovial, winking commingling of public authority and private benefit is an old, old story in Las Vegas. Some would even call it the city's unique style or tradition. But in fact it's just a left-over from the dusty, early days when sad scams—bootlegging, turning tricks or fleecing the passing-through rubes—were the only ways people could think of to keep themselves alive under the broiling Mojave sun.

That is not today's emerging world-class Las Vegas. And with the city now in the eye of people throughout the world, this is not the kind of story it and the state should be working to generate.  NJ

See also:

Stalking the Public Purse

The Mass Transit Delusion

Steven Miller is the managing editor of Nevada Journal.


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