City Blames Metro for Cash Crunch

A financial dispute may make Schechter's job of selling a transit plan tougher.
Deron Neblett

Just as Metropolitan Transit Authority officials are preparing a comprehensive transportation plan to submit to voters next fall, a fracas has broken out between the City of Houston and the regional agency over millions of dollars in reimbursement funds earmarked for city projects.

Internal city documents indicate that Metro's delays in paying out more than $60 million are causing budget problems for the city, primarily in its Capital Improvement Plan. Several city sources believe the delays are caused by two transit agency problems: unpublicized cost overruns in the Main Street rail project and lower than expected sales tax revenues.

A top Metro official counters that Metro is simply following the letter of a transportation agreement with the city that phased out annual payments to the city and replaced them with project-by-project reimbursements. He denies that the agency has any cash flow problems.

The conflict comes at a touchy time for Metro, which will need all the municipal goodwill it can get to win voter approval for whatever mixture of rail, roadway improvements and bus service it presents for a vote in the near future. Rail opponents are sure to jump on any perceived financial problems as evidence the rail is a boondoggle that will only worsen with expansion.

Metro chairman Arthur Schechter, who is set to spearhead the Metro campaign effort, says he is unaware of any city problems with the agency and thought the reimbursement issue had been resolved to the satisfaction of both sides.

The Transportation Improvement Agreement between Metro and the city seemed to be a good one when it was inked in 1999, pledging Metro to provide more than $750 million over a 10-year period for city transportation projects. But it also specified that Metro would not have to reimburse the city until certificates of completion were issued on the projects. As it turns out, that's a very big sticking point.

City officials would like to bill Metro at the completion of each phase of a project, lessening the up-front financing burden. Metro takes the view that no certificate of completion can be issued and invoices paid until the entire project is finished. Hanging in the balance is years' worth of reimbursements.

According to an internal city communication sent to the city controller and Mayor Lee Brown's legal and financial administrators in late October, the stipulation will allow Metro to hold onto $80 million or more that the city badly needs to pay project contractors.

"We have not received any of the approximately $29 million due in the past fiscal year and will not be able to use the approximate $50 to $60 million due in the current year," the city memo complains. "This is causing problems with both our general fund and CIP budgets that were dependent on getting this money."

According to the memo, Metro officials have been working with municipal counterparts "to set up a plan in which the City would issue revenue anticipation notes to fund our projects (including our $10 million general fund overlay program) and that as we complete the projects, [Metro] would pay us both our capital and all interest incurred by selling the notes."

Dr. Phillip Scheps, the city finance and administration director who was among those who received the memo, says Chief Administrative Officer Al Haines is the one leading the discussion with Metro officials. But Scheps agreed with the memo's general conclusions and suspects that the root problem is transit agency cost overruns.

"I think that's probably the case from what I've heard, but I don't have any firsthand knowledge," says Scheps. "But certainly, we're all dealing with a big sales tax drop. They get their money like we do and that's got to be part of it."

Haines says he agrees with Scheps's assessment. "My guess is pretty strong that they're seeing a falling off of their sales tax forecast and I think there's a cash flow issue."

Scheps says the proposal to issue revenue anticipation notes is a device to push back transit costs into the future.

"It is certainly true that any sort of financing would be a way of spreading out payments on a long-lived asset," says Scheps. He notes that most of the city's long-range construction projects are financed that way. "Most people think that is a good thing, by distributing the cost across generations who use the asset."

The problem with Metro is that the agency would likely have to pledge sales tax revenues to pay off the bonds in order for them to be saleable. If Metro also agreed to pay the interest on the notes, then the notes begin to look like a backdoor method of incurring debt without the required approval of voters -- which runs counter to the mandate of the state legislation that created Metro.

A little history explains how the city got into its current predicament. When Bob Lanier became mayor in 1992, he engineered a massive fund transfer from Metro that, by the end of the decade, delivered more than $371 million to the city and helped sustain a spending splurge on infrastructure and law enforcement. Brown came into office in 1998 promising to phase out the transfer, and the 1999 transportation agreement did just that last June, at the end of the city's budget year.

In its place Metro agreed to provide funds on a project-by-project basis for a variety of transportation-related projects. Francis Britton, Metro's vice president and chief financial officer, says the agency is simply abiding by the terms of the deal.

"The master agreement signed by the city and signed by Metro does not call for advance payments by Metro," says Britton. "The city has to certify they have completed the work before they are paid." He says that, in the first year of the pact in 2000, Metro voluntarily made a $10 million cash advance to the city and followed the next year with a $4.5 million advance.

"If somebody in the city is complaining about that," says Britton, "then it's the city's problem, because the agreement says they will pay us upon [submission of] certificates of completion."

Britton says that transit officials suggested the city issue bonds to cover up-front costs, but denies that would constitute a backdoor plan to let Metro accumulate debt.

"It is not Metro's problem to decide how the city is going to manage its cash flow," he comments. As for the claims that the agency has not paid money due last year, he replies that Metro does not owe money because the projects have not been finished.

"There is no $29 million due in the past fiscal year," Britton testily insists, disputing the claims of that city memo. "I don't know who wrote that, or the basis they had for writing that document. That's not a Metro document and I can't be responsible for what somebody at the city is saying in some memo they wrote."

Former Metro chairman Robert Miller attributes the situation to a continuation of the behind-the-scenes rivalry between the transit agency and its dominant member.

"Metro plays things very close to the vest," explains the attorney. "But in my experience both the city and Metro can be equally adept at trying to screw the other side."

In this case, with a crucial election approaching, the warring parties may just wind up screwing themselves.

She Got the Halfway House; He's in the Penthouse

While Hotel Six convict Betti Maldonado spends the last few months of her four-year conspiracy and bribery sentence in a Los Angeles halfway house, an unindicted player in the events surrounding the 1996 FBI sting at City Hall has done considerably better.

A previously unreported arbitration judgment awards developer Wayne Duddlesten $8.8 million from Crescent Entertainment for that company's failure to honor commitments to a partnership to build the downtown convention center hotel that was at the heart of the federal investigation.

Maldonado and former councilman Ben Reyes were indicted with three other City Hall officials and a lobbyist on charges of bribing or accepting bribes in exchange for votes for Duddlesten's hotel proposal. Only Reyes and Maldonado were convicted, and Duddlesten was never implicated in the illegal activities. Reyes is serving a nine-year federal sentence in Georgia.

Duddlesten later teamed up with Crescent to build the hotel, but Crescent never obtained the necessary financing to begin construction. The city eventually issued bonds to finance the hotel, and Duddlesten went to court against Crescent to reclaim an $8.5 million "put price" mandated by their agreement plus assorted expenses. The partnership contract required that the matter be submitted to binding arbitration.

A three-member panel of the American Arbitration Association sided with Duddlesten in late October, ruling that Crescent did not make a credible effort to find financing for the deal. The panel concluded that "Crescent failed to bring 'certainty,' 'cash', and speed to the development project."

A City Hall insider marvels at Duddlesten's ability to tap dance through the Hotel Six minefield unscathed.

"What kills me about the hotel scandal is Duddlesten is the only one that made out with anything. That guy always has a way of coming out on top."

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