Paying the Streetcar Fare: Key Financing Issues Still Need to Be Worked Out

Our goal over the past week has been to look at DC’s streetcar plans through a different lens, going beyond its transportation impact to understand that this project is really about economic development.

Today we want to focus on where the District will get the money to build the streetcar system, with estimated construction costs of $1.5 billion. Although the project is well underway, city leaders acknowledge that key financing details remain to be hammered out in a comprehensive financing plan that is still being put together. This morning, Councilmember Mary Cheh introduced the “Surface Transit Planning Task Force Establishment Act of 2012” that would create a 7-member taskforce to oversee financing for the streetcar system.

The financing of the streetcar system will be critical to determining whether the benefits outweigh the costs and whether the District will be able to help existing residents and businesses remain as property values inevitably skyrocket.

Here are some key streetcar financing issues to be considered:

Should DC Raise its Debt Limit for the Streetcars? We say “no.” Current law limits the District to spending no more than 12 percent of its budget paying off debt such as bonds. DC already is close to the limit, which means the city will need to be creative to manage the increased borrowing needed for streetcars. Mayor Gray recently signaled a willingness to explore increasing the debt cap. But given Wall Street’s word of caution regarding DC’s bond rating, it would be best to finance the streetcar within the existing debt limit.

How to Use Rising Property Values to Help Pay for the Streetcars: The Streetcar Land Use Study finds that the “increases in real estate values and development that the streetcar could spur over a ten-year period…would exceed the projected cost of creating the system by 600% to 1,000%.” The study suggests some form of “value capture,” tapping into that economic activity to finance the system. This is compelling because it would ensure that the businesses and residents who stand to gain the most from the streetcar system, directly contribute to its construction and maintenance.

Value capture methods could include a special tax or assessment on businesses and residents in the area or simply setting aside a portion of the increased property taxes within the streetcar corridors.

A special tax or assessment may make sense, but this could add pressure to small businesses currently in the streetcar corridors, which are already vulnerable to dislocation as rising property values make it more expensive and difficult for them to remain in their neighborhoods.

If the District’s “value capture” is tied to the increase in property taxes resulting from rising land values, only a portion of the new revenues should be diverted to the streetcar project, with the rest going to the general fund. This is important to ensuring that the streetcar project results in fiscal boost to the city as a whole.

Financing Needs to be Put in Place Soon: Along the H Street NE corridor, many new residents and business have arrived in anticipation of the streetcar, and  property values and rents have already risen in the area. If the District wants to capture rising property values to pay for the streetcar, it should do so sooner rather than later.

Currently, there are more questions than answers when it comes to the question of how to pay for the streetcar system. Hopefully DDOT’s financing plan will shed light on these various questions.