70 Hermosa Avenue
Oakland, CA 94618
Phone: (415) 861-8336
fax: (510) 652-9310
May 10, 2000
Mr. Wesley Hough, Co-President Mr. Steve Peyser, Co-President
Public Resources Advisory Group Public Resources Advisory Group
3550 Wilshire Boulevard, Suite 1630 40 Rector Street, Suite 1600
Los Angeles, CA 90010 New York, NY 10006
Dear Mr. Hough & Mr. Peyser:
We have reviewed the set of April 2000, documents submitted to the State of Nevada by the monorail proponents. Unfortunately, these documents did not include the Wilbur Smith Associates (WSA) or PRAG reports, nor did they indicate any change in the monorail's unsupportable claims that their 3.8-mile system could be completely self-supporting.
The April 2000 documents consist most notably of a recent budget indicating startup fares have been increased to $2.50 one-way, a fourth draft of the URS Greiner "forecasts" understating, as before, the elasticity implications of an even higher fare, and another draft of the bond underwriter's efforts. We note that Salomon Smith Barney has now doubled its fees to over $12 million. We also note that the purchase price of the existing monorail has risen from $20 million to $25 million and the reimbursement for predevelopment expenses from $9 million to $12 million. There is no explanation for these increases, and there continues to be no breakdown of these costs. In addition, there has been a 226 percent increase in the LLC management and oversight fee, from $88.3 million to $287.9 million, over the life of the project (to 2035).
We are aware of the political pressures being applied to approve this project, no matter the consequences, and also of the many millions in profits the various monorail participants anticipate. The purpose of this letter is to review the six questions you asked of Wilbur Smith Associates in December 1999 and to contribute our comments, based on this recent document submittal. The Wilbur Smith Associates letter of May 8, 2000 does not directly address these six questions.
It remains evident that the proposed monorail, if ever constructed, will become insolvent as soon as it is opened and its reserve funds quickly depleted. Wendell Cox now projects that the higher initial fares will worsen financial results by at least $4 million annually, beginning in 2004. Based on this new data, he predicts reserves will be consumed in 2007.
When looking at issues of substance in relation to this proposed project, it also remains clear that the proponents are presenting projections, assumptions, forecasts, models, unsubstantiated claims, and chatter about the "unique nature of Las Vegas." There is absolutely no evidence, based on fact, which would convince a reasonable person that the proposed monorail has the capability to return the billion dollar plus revenues essential to pay for itself. The Wilbur Smith letter, while proffering phrases such as " appears to be reasonable, " and "appears logical," is careful to point out on page 4, that "WSA is unable to comment on the reasonableness of the resulting forecasts in the absence of control counts to validate the global demand."
There is no track record of income for the current monorail, which is proposed to be extended. This is a free, no-fare service. All short-haul monorails in Las Vegas are free; parking for both patrons and employees at Las Vegas casinos is free; connector bus service at convention facilities is free. A survey in November 1999, of over 5, 000 patrons of the free Mandalay Bay monorail indicated that 84 percent were unwilling to pay for any monorail trip in Las Vegas.
Self-promotion to sell privately funded transportation projects has not had a successful track record. The billion dollar San Jaoquin toll road in California, promoted by many of the participants of the proposed monorail project, has experienced usage 56 percent below projections. Short tourist trips on the proposed monorail may be even more price sensitive and the monorail is apt to experience even lower actual usage.
Furthermore, despite the extravagant monorail claims of $6 million to $8 million in initial advertising revenues on their system, the fact is that there are zero advertising revenues on the current monorail system. A visit to the MGM monorail station, for instance, indicates no advertising whatsoever, unless you include a lone TV set promoting future events at the MGM Grand.
Second, there are no case studies supporting the supposedly lucrative returns for monorail as public transit. A Bombardier-constructed monorail system in Jacksonville, Florida is an embarrassing financial failure, costing hundreds of millions of dollars and capturing only one-tenth of its projected ridership. A 40-year old short-haul tourist monorail in Settle covers its operating costs, but only attracts 8,500 riders a day. The lack of monorail use nationally is indicative of its shortcomings as a public transit technology.
Finally, the history of public transit finance in the United States over the past 50+ years clearly indicates that the proposed monorail will never realize the revenues they are claiming. Public transit economics is clear-cut. The national average for farebox return is about 42 percent of operating and maintenance costs, with advertising and other income contributing another 4 percent. The remaining 54 percent of operating costs and 100 percent of capital purchase and debt service costs, are covered by public tax monies. Las Vegas is no different; the CAT transit system had a 42.5 percent rate of return in 1998, and their advertising revenues were 4 percent of total revenues and a bit under 2 percent of total operating expenses.
The notion that a 3.8 mile, seven station, off-strip monorail will magically generate enough revenue to cover operating costs, maintenance expenses, bond principal reduction and massive debt payments is just not credible.
We next address, point by point, the questions posed to WSA in December 1999.
"Is the methodology employed by URS Greiner appropriate?
No. The URS Greiner forecasts appear to be constructed as means to justify an end, rather than an unbiased examination of the ridership issue. While draft #4 removes some of the more extreme of their assertions, such as positing a direct positive relationship between hotel rooms and the present monorail… despite stagnant ridership on the current system…their forecasts still rest on projections based on the perception of free fares, rather than the currently-proposed $2.50 fare.
The URS Greiner forecasts rest on the assumption that most monorail riders will perceive their fares to be zero and thus understate the sensitivity of monorail ridership to fare. There is a long history at APTA and elsewhere of clear-cut elasticities that can be applied to transit fares. Yet, a key flaw in the URS work is their refusal to apply fare elasticity and willingness to pay factors to all riders who will actually pay... since such application would render the monorail infeasible.
Bernard Malamud, Professor of Economics at the University of Nevada Las Vegas and an independent consultant, properly applied the willingness to pay coefficients developed in the Stated Preference Survey to the proposed monorail, and arrived at a most likely daily ridership of 25,810. Professor Malamud has carefully assessed recent changes and alternative fare assumptions. He now predicts daily ridership of 26,000 to 29,000 and annual ridership of 8.7 million to10.6 million at a $2.50 fare based on an alternative fare structure (figure enclosed). The Wendell Cox Consultancy reviewed the RTC model, and came to the conclusion that 26,600 daily passengers was a high ridership projection. Jon Twichell/Associates contrasted the practical example of the San Francisco Cable Car, and concluded that 25,000 was an optimistic estimate of proposed monorail daily ridership.
Jon Twichell/Associates has pointed out another substantial fault in the URS Greiner forecasts. When it became obvious costs were rising and fare revenues could not be further inflated, URS Greiner accepted uncritically the LLC's claims of $6 to $8 million in advertising revenues annually. These claims, initially based on one unsubstantiated letter, are now based on three unsubstantiated letters. The proposed monorail will be very fortunate to obtain one million dollars in advertising revenues annually, which is an amount equal to the annual advertising revenues for the entire RTC Greater Las Vegas transit system.
Representations are being made that McCarrran Airport has high advertising revenues, therefore the monorail will as well. This ignores the fact that the proposed monorail is not a new airport, but an expanded public transit system which currently has zero advertising revenues. Transit advertising is based on impressions, the number of times at eye level that motorists and pedestrians see bus advertising. The monorail is out of just about everyone's sight lines.
Another assertion is that the "naming rights" of the monorail have some monetary value, ala sports stadiums. This ignores the fact that whenever an event occurs at the Staples Center, Enron Field or Pacific Bell Park these facilities are named and seen by millions of television viewers regionally and nationally. No one will see the monorail on the news, except when it declares bankruptcy or another calamity occurs. Thomas A. Rubin thoroughly discussed the weaknesses of the advertising revenue assertions in his and Jon Twichell/Associates' report of February 23, 2000.
"Are each of the assumptions of the report valid and appropriate?"
No. Another one of the more obvious errors in the URS Greiner forecasts is the "adjustment" of the RTC model based on the Stated Preference Survey. It is clear, we believe that the SPS is applicable only to those hotels which would be directly served by the monorail (more on this under the next section) and cannot be extrapolated to the entire Strip.
The experience of the currently free monorail confirms this. As pointed out in the URS Greiner report on page 23, initial daily ridership on the existing system plateaued at 14,200 for several years, then fell off 10 percent, to 12,800 a day in 1998. In 1999, it rose slightly to 13,400 and only since the Paris casino opened has ridership picked up.
The reason for stagnant ridership, despite no fares, is obvious; the vast majority of patrons are those at the two hotels served by the monorail, Bally's and MGM Grand. Despite the recent additions of the Bellagio, the Venetian and Mandalay Bay to the Strip, there were no additional stops on the monorail, hence no significant pickup in ridership. Only now that Paris has opened has a new, adjacent attraction stimulated ridership.
Those hotels immediately adjacent to the proposed monorail stops contain about 24,000 rooms. This portion, about one-fifth of the rooms in the resort corridor, will contribute patrons to the system; the other four-fifths will not. Again, it is obvious the ridership of the proposed system will in actuality be significantly lower than proponent's inflated claims. It should also be noted that currently a couple and their two children can stay at Bally's and visit the MGM Grand at no cost. If the proposed monorail extension were to be implemented, it would cost $20 for the same short roundtrip for this group. Common sense dictates that fare will impact monorail ridership.
"Was the size and composition of the Stated Preference Survey sufficient?"
No. The SPS is representative of those properties immediately served by the monorail, but not fully applicable to the overall Strip. Fifty percent of the respondents were patrons of Bally's, MGM or the Flamingo Hilton, while well over 80 percent of the respondents were directly related to projected monorail stops. Again, the results of this survey were biased towards properties immediately adjacent to proposed monorail stations. As such, the pool of 24,000 hotel rooms and those zones immediately adjacent to the monorail stops could be said to be adequately represented. However, extrapolating the results of the SPS to the overall Strip is inappropriate.
Comparing the SPS results with ongoing research contained in "Las Vegas Perspective" reinforces the bias we perceive in the SPS; percentages of respondents flying vs. driving, as well as other key information, varies significantly between the SPS and annual figures generated in "Perspectives."
"Are the fare elasticity coefficients provided by the Stated Preference Survey handled properly in the projections?"
Clearly Not. Professor Bernard Malamud completed his initial review of the URS Greiner methodology in November of 1999, and concluded that the most likely case at that time was for daily 25, 810. URS Greiner assumes most passengers on the proposed monorail will perceive their rides to be free, and therefore they do not apply the fare elasticity coefficients provided by the Stated Preference Study to those passengers. The assumption of zero perceived fare may be reasonable for the 26 percent of Las Vegas visitors who stay at hotels directly adjacent to the monorail, but it is not for the other 74 percent of visitors who will not stay at monorail hotels. When Professor Malamud applies the SPS willingness to pay coefficients to rides by the 74 percent of visitors who will not be staying at monorail hotels and to Las Vegas residents, his projections are for 29,000 daily rides at $2.50 fare, as opposed to the URS Greiner projections of over 50,000 paid passengers daily when the system opens in 2003.
"Is it appropriate for URS Greiner to make revenue projections without a fare collections or enforcement plan in effect?"
Clearly not. As has been previously discussed, the URS Greiner report avoids the implications of willingness to pay fares by discussing a convoluted system where riders would "perceive" that their trips were "free." They further propose an ill-thought-out scheme whereby hotels would pay up front for tickets, distribute them to patrons, then are left to their own devices to actually collect revenues. Further, the Wilbur Smith letter completely avoids this critical issue.
This has the makings of a financial disaster. There is a significant disconnect between the precisely proposed patronage estimates and the disorganized and poorly planned fare collection system. While the patronage and fare revenue forecasts are reassuringly specific, the actual fare collection system and actual advertising revenues, if any are discussed in a haphazard and ill-thought-out manner. We are not aware of commitments by major convention or hotels - not even hotels with stations on the proposed monorail - to buy tickets in bulk and distribute them to their guests. Nor are we aware of hotel plans to provide their guests with smart cards, with rides paid for in advance or upon check-out. Nor, do we believe, are hotels themselves aware of any scheme by which they would collect fares from their guests and transfer these revenues to the monorail operator. The inevitable conclusion is that the monorail proponents do not have a clear idea how they are going to actually collect the revenue essential to pay the costs of the proposed system.
"Are the ridership projections reasonable at the fares indicated?"
Absolutely not. It is abundantly clear that, especially with the proposed increase to $2.50 for a short, one-way trip in lieu of the current no-fare system, that the monorail ridership forecasts are self-promoting rather than impartial and accurate. There is a consensus amongst reviewers of this proposed project that 25,000 - 29,000 daily patrons is a generous estimate, not the 50,000-plus claimed by the proponents.
When all is said and done, we believe there is no solid evidence that this proposed monorail project is capable of overturning the past half-century of public transit finance experience. There is no solid evidence, as opposed to projections, assumptions and unsubstantiated forecasts, that the ridership forecasts and fare collection schemes are anything more than expensive daydreams. The recent Wilbur Smith letter is careful to point out, for instance, that no actual counts of existing travel underlie the URS trip tables used in the analysis. Their comment (page 4 of their letter) is "WSA is unable to comment of the reasonableness of the resulting forecasts."
We believe that there is no solid evidence sufficient to convince a prudent person, beyond a reasonable doubt, that the State of Nevada should risk its reputation on the $600 million bond issue - which the project sponsors refuse to guarantee - and which we believe, is clearly destined for insolvency. This is the largest State issued bond issue in Nevada's history. At the very least, the State should require project sponsors MGM Grand and Park Place Entertainment to guarantee the bonds, as is current policy for Stated-issued housing and other bonds.
Very truly yours,
Jon Twichell/Associates Wendell Cox Consultancy
Professor Bernard Malamud Thomas A. Rubin, CPA