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Private money, not taxpayers, should fund the V&T

Dave Campbell and Dan Mooney

The Carson City mayor and supervisors, with the enlightened exception of Supervisor Williamson, are considering voting to grant $10 million to the V&T Railway by raising the sales tax on Carson City residents by 1/8 percent, a 1.78 percent increase over the present sales tax. We are told that the money will be a good investment because the railroad will give 5 percent of its revenues to Carson City for 99 years. Of course, if the railroad doesn’t succeed, 5 percent of nothing is nothing.

In college psychology 101 we learned about “approach–avoidance” conflicts and a little about how to resolve them. The “approach” is something we want, but it comes with an unfavorable attachment, something we want to “avoid. ” The V&T sales tax issue is a classic example. The taxpayer is presented with the forced-choice alternative: You can have the railroad, but you must pay extra taxes to get it. This forced choice includes a colossal risk of tax money.

However, there is a win-win here. We can have the best of both worlds and not put the taxpayers money at serious risk.

Our solution to prevent risking tax money is to finance V&T construction by inviting private investors to invest $10 million by bonding 5 percent of the railroad’s revenue stream.

The V&T Commission can offer revenue bonds to the private investing market to be secured by 5 percent of the rail operator’s future revenues. That is a key point ” the source of the money to repay the investors is revenue from the operation of the V&T; ticket sales, for example. Investors will buy the bonds if they are satisfied they can get their money back as well as a reasonable return, with “reasonable” to be determined by the market.

This alternative sidesteps the argument that federal money already granted prevents private for-profit ownership or private-public shared ownership in the project. Private investors, the bondholders, would have no ownership except the bonds and, therefore, no equity position.

Each bond investor certainly would perform “due diligence” before sinking money into the project. Due diligence examines the operator’s business plan, engineering support, financial position and projections, assumptions, likely problems, and whatever else each individual investor considers important. Each investor, armed with a due diligence study, will analyze the project’s risk and determine the interest rate needed as compensation for that risk. A solid project can expect a number of prospective buyers to appear. In effect, the prospective bond buyer who demands the least interest will get the bonds and put $10 million into the V&T.

Voilà! Investors buy the bonds; the V&T gets the needed funds; the city has no risk, none, and construction goes forward. If revenues are insufficient to pay the bonds, it becomes the bondholders’ problem. Thus, should the V&T default it would not be the taxpayer’s concern. Interest compensates for risk; failure is one of the risks.

If the project is seen as risky, prospective bondholders will demand a high interest rate on the bonds or they will not buy them if their due diligence studies show that the risk is too high. In such a case, they will conclude that the V&T will not succeed or that 5 percent of revenues cannot compensate them for their risk.

Negative due diligence studies would be the clearest possible indication that the city (taxpayers) should not invest.

Therefore, Carson City would be foolish to invest in this project, which has a high probability of being rejected by professional investors who are thoughtful, professional evaluators of risk. They actively want to put their money to work. Would the V&T construction project attract private investors?

And here’s a real kicker. Not including steeply rising costs, even though no one can give a sensible estimate, some say that roughly $30 million will be needed to complete the project. Yet the proposed sales tax would bond only $10 million! The city unabashedly and rashly claims that the extra $20 million will come from “somewhere.” Somewhere?

Our psychology professor taught us that one dynamic of resolution is to review and select alternatives that will avoid conflict and find a win for both parties.

We want the V&T to be completed and, at the same time, prevent taxpayer risk. Both can be had by bonding 5 percent of the railroad’s revenue stream while also saving the all important legacy of our faithful public servants.

Dr. Dave Campbell, a Carson City resident, is Emeritus professor of marketing at Valdosea State University with a PhD in Business Administration and Director of Research for the Citizens for Private V&T Finance. Dan Mooney is Chairman of the citizens group and an occasional contributor to the Nevada Appeal opinion page.