Nevada Business & Economic Report

A Critical Analysis of the City of Reno’s Proposed $192 Million Downtown Railroad Trenching Scheme
by Nevada Research Associates

Considering that Comstock Bank's quarterly Survey of Nevada Business & Economics and its annual
companion product the Nevada Casino Gaming Report have both now ceased their publication with
the bank's acquisition by First Security Bank of Utah, we thought it fitting to attempt to replace those
reports, in our own modest way, with a periodic analysis of economic, financial, political and casino
gaming trends in Nevada.

The authors of these reports were two economists with extensive analytical training and experience
in the areas of economics, finance, banking and gaming. Certainly the loss of these reports will
create a considerable void in publicly available information, analysis and forecasts. Unquestionably,
their publications represented the most detailed and inclusive analyses of the Nevada economy and
its crucially-important casino gaming industry.

From the outset of publication some nine years ago, the primary intent of these reports was to
provide the most comprehensive, extensive, single source of information, analysis and forecasts that
would help to guide Nevada's business leaders, policy makers, the media and the general public in
their deliberations and assessments of local business and economic conditions.

Out of respect for these authors’ persistent efforts, and due to the crucial need for a continuation of
such analysis, we thought that we would attempt to continue that tradition, admittedly on a
considerably less frequent and regular basis, with some thoughts about those reports' underlying
themes and the oftentimes controversial and provocative discussions which ensued.

Admittedly, the reactions to the findings and conclusions of those reports were not always favorable,
particularly when the authors went beyond merely an analysis of historical trends. But that never
deterred them from venturing into unchartered waters, openly discussing sensitive and controversial
issues, analyzing related trends and impacts, drawing thought-provoking conclusions, and
confronting opposition and criticism with considerable research, documentation and supporting
detailed analysis.

For the most part, the conclusions arrived at were not so novel as many may have thought. In fact,
many others had already made similar assessments, only by perhaps a less rigorous analytical path
and without such widespread publication. If nothing else, the authors tended to confirm a number
of widely-held suspicions about the workings of the State and local economies and the effects of
government public policies.

From only a cursory analysis of Nevada's economy, and particularly its political underpinnings, it
became quite clear that public policy tends to drive economic and fiscal conditions. What the
authors of these reports found to be most disturbing, however, was that all too often, especially in
northern Nevada, pressing economic and fiscal conditions do not necessarily drive public policy.
There seems to be some apparent purpose to public policy, but judging from governmental actions
and reactions it is not driven by fundamental concepts of economics and finance. Perhaps it was just
naive on their part to assume that economic and fiscal conditions should weigh heavily in political
decisions and policy formulation.

It had therefore become an underlying theme of these publications to persuasively demonstrate the
integral linkages between a government's public policy decisions and the inevitable effects on local
and regional business and economic conditions. Towards that end, the authors attempted to show
the fundamental economic nature of gaming and tourism in Nevada, noting its extensive and
pervasive "spill-over" effects on both economic conditions and public finance.

These publications critically analyzed the linkages of the State's gaming and tourism industry
through sophisticated economic impact (Input-Output) models specifically designed for Nevada's
tourism-based economy. In their reports the authors noted that through its direct and indirect effects,
gaming and tourism presently account for nearly 35 percent of Washoe County's total economic
output (Gross County Product), up to 45 percent of Clark County's economic output, and nearly 40
percent of the total economic activity (Gross State Product) in the State of Nevada.

The authors also applied these same economic impact analysis techniques to the State's tax revenues
to more realistically estimate that gaming and related tax revenue sources do not comprise a mere
34 percent of Nevada's general fund revenues (37 percent with the casino entertainment tax) as has
been commonly held, but over 60 percent, conservatively, when accounting for all the direct and
indirect effects of this crucially-important industry sector. Based on these realities, the authors
justifiably questioned the State's concerted efforts towards economic diversification, particularly its
generous tax rebates, tax deferrals, reductions in its Business Activity Tax (BAT), and property tax
reductions, without any meaningful efforts towards an analysis of the economic and fiscal
consequences of such pursuits.

As a result of this type of in-depth analysis, and in order to foster gaming and tourism and bolster
the economy and underlying tax bases, the authors unrelentingly called for more enlightened public
policies on issues dealing with gaming and tourism, economic diversification, redevelopment, and
the use of condemnation and eminent domain, most notably in downtown Reno's economic and
entertainment core. Along these same lines, the authors also called for a recognition of how more
liberal and enlightened policies towards the use of airwalks and skyways, and downtown
"connectivity" in general, could foster gaming and tourism activity in downtown Reno, expand the
"reach" and features of individual casino properties, unite the casinos' business interests, and
promote economic activity in general and private investment in particular.

The conclusions of their analysis also clearly demonstrated the critically urgent need for a centralized
downtown Reno convention, entertainment, retail and sports complex and how such an
interconnected facility could bring significant revival to the downtown area and provide substantive
benefits to the entire northern Nevada gaming and entertainment industry, not to mention the
northern Nevada regional economy.

In an extensive two-part series, the authors drew comparisons between the financial objectives of
private investment decisions and public policy decisions to promote and foster public investment in
projects that will specifically provide real financial returns to the economy and promote follow-on
private investment. The authors also analyzed the ongoing evolution of the gaming and tourism
industry in Nevada into a broader entertainment and recreation industry and noted that such a
transformation will necessitate large-scale capital investments, accommodative public policies, and
public-private partnerships. In this regard, the authors took particular exception with Legislative
proposals to raise the maximum gaming revenue tax rate noting the need for this industry to retain
its revenues for retained earnings so as to better face growing competition through increased
investment. (As a public policy, it also seems rather frightening to us to raise tax rates just because
they had not been raised in a while.)

The bank's economic and gaming reports also extensively analyzed threats to Nevada's basic and
most important "export" industry, reviewed the conditions in northern Nevada's primary "feeder"
tourism markets and assessed the linkages between the lack of capital investment, notably in
downtown Reno, waning business conditions, declining property values and tax bases, and the
resultant adverse effects on local government tax receipts. The authors were the first to note that
Reno's real (inflation-adjusted) gaming win still remains below its 1984 level of real gaming win and
that private investment will only be attracted to this market when anticipated returns exceed the
effects of inflation (i.e., real returns are positive).

The authors justifiably criticized projects like the Reno Redevelopment Agency's Truckee River
corridor movie theater complex as another example of an ill-planned, ill-suited and ill-situated public
investment project coming from an unimaginative redevelopment strategy and an arrogant political
process that has persistently ignored public and expert opinion, economic and financial
fundamentals, and continually failed to undertake even the most basic cost-benefit or economic
impact analysis for alternative projects for the Reno downtown area.

Now, as part of our own modest effort to continue that tradition of insightful, timely and oftentimes
necessarily controversial analysis and reporting, we would like to provide a summarization of our
own conclusions with respect to statewide business and economic conditions and trends. The
economies of Nevada's two major growth and population centers -- Las Vegas and Reno -- are
decidedly embarking on two distinctly separate courses which provide some stark contrasts and
interesting comparisons in terms of their public policy pursuits and ultimate economic and fiscal
consequences. Both pursuits have their positive and negative aspects. Las Vegas' public officials
have seemed to demonstrate significantly greater awareness of the economic and tax consequences
of that economy's far greater emphasis on gaming and tourism and have tended to pursue policies
to promote, or at least accommodate, that basic industry sector as a means to attain alternative
business strategies and meet public service needs.

Either by design or happenstance, this rapidly growing southern Nevada urban area has promoted
its gaming and tourism industry as a cornerstone of its economic and fiscal viability. As a result of
far more favorable and enlightened public policies towards casino expansion and private investment,
the Las Vegas economy has successfully promoted the evolution of this industry and fostered
gaming's development of new features, attractions and entertainment values afforded nowhere else
in the world. These "value-added" features have clearly differentiated the Las Vegas gaming
industry from all others and thereby assured this market's unrivaled competitive position.
These singularly successful efforts have provided the Las Vegas economy extensive and pervasive
spill-over economic and fiscal benefits to its citizens and local governmental entities. In fact, the
Las Vegas (Clark County) government recently announced a budget surplus, not great, but
nonetheless surprising given a population growth rate in southern Nevada which is currently over
five times (5.3 percent versus 0.9 percent for 1998) that of Reno (Washoe County). Las Vegas'
ability to stay abreast of its growing needs for public services and infrastructure requirements is most
encouraging and provides a lesson that should not be lost on the State's northern economies. On the
downside, however, this area's remarkable rates of growth have also forced it to endure the trappings
of a major metropolitan area in terms of crime, traffic, congestion, resource limitations (especially
water) and pollution.

Washoe County and the City of Reno, on the other hand, have taken a much different approach
towards economic development and related public policies. Political leaders in northern Nevada,
and especially the Reno City Council, have appeared to show a fundamental lack of insight and
understanding about the workings of their economy and the underpinnings of their tax bases. By
contrast, local governments have been far more enthusiastic at embracing the presumed virtues of
economic diversification. Towards that end, the City of Reno has tended to ignore the needs of
gaming and tourism and has instead pursued public policies towards reducing the region's
dependency on that industry.

In this regard, it might prove instructive to note that the theory of financial portfolio analysis and the
benefits of "financial" diversification (i.e., asset allocation) do not necessarily provide the best guide
for assessing the benefits of "economic" diversification. In an economy where gaming and tourism
are peerless in their substantive effects on local economic activity, as well as their effects on State
and local government tax bases, this benign neglect towards the needs of the gaming industry and
a myopic pursuit of economic diversification are destined to produce less than desired economic and
fiscal results.

The lack of public support towards gaming and tourism, and most especially the inattention paid to
fundamental economic and financial issues, has significantly weakened northern Nevada's economic
growth prospects and has severely jeopardized the fiscal positions of local governmental entities.
As a direct result of stagnant real gaming revenues, weakened trends in tourism, shuttered
downtown casino properties and growing urban blight, declines in airline traffic, reduced gaming
employment, a lack of new investment in the critical downtown economic and entertainment core,
falling property valuations and property taxes, particularly on casino properties in the City of Reno,
and an inability to confront competitive threats in its major "feeder" markets, both the economic and
fiscal environments in northern Nevada face far greater threats from external economic and
competitive forces than ever before.

Precipitating from these conditions and their resultant effects, government officials in Washoe
County recently announced growing fiscal stress, noting that accumulated prior-year general fund
surpluses (analogous to a private corporation's retained earnings) would be exhausted within only
a couple of years at current projected county growth rates and continued rates of delivery of public
services. Proposals to meet this looming county government deficit have centered on reduced
spending on public services and increased taxes and fees. Again, we attempt to address the effects
of the problem and not the cause itself.

Although not as candid as Washoe County, the City of Reno has also been desperately attempting
to shore up its financial situation through the expedited efforts to annex some 34 "islands" of
unincorporated land and through various other measures to enhance fees and charges for city
services. The city also continues its efforts for State approval to revoke the 1.5 percent per year
depreciation allowance on real property, thereby attempting to increase the tax burden on local
property owners.

Budget reports for the City of Reno show that for the last two fiscal years the city has run a deficit
in its general fund amounting to approximately $6 million in each year. [The City of Reno's
anticipated budget deficit for fiscal year 1999 has been estimated at being significantly larger.]
While these deficits have been apparently "covered" by increased net debt issued (new debt minus
retired debt) and transfers from prior-period surpluses (similar to a corporation's net loss diminution
of retained earnings), a fundamental problem apparently exists with a growing shortfall in city
revenues relative to expenses. Surplus (capital) fund accounts have been bolstered by net debt
additions, in effect, "covering" the city's budget shortfalls through additional debt issuance.

More specifically, for the fiscal year (FY) ended June 30, 1997, the City of Reno reported
consolidated revenues of the general fund, special revenue funds, debt service funds, and capital
project funds of $124,027,311 and consolidated expenditures for these same fund categories of
$130,597,694, resulting in an operating deficit for FY1997 of $6,570,383. Similarly, for the fiscal
year ended June 30, 1998, the city reported consolidated revenues of $130,414,546 and consolidated
expenditures of $136,108,572, resulting in an operating deficit for FY1998 of $5,694,026. These
two fiscal years combined produced a City of Reno cumulative operating deficit of $12,264,409.

But there also exists another potential source of revenue that the City of Reno appears to be now
tenaciously pursuing. The city's recent flurry of activity to "construct" a railroad trench in the heart
of downtown Reno, we feel, represents another effort by city officials to help resolve Reno's growing
financial stress. One may reasonably ask how the proposed construction of a 2.1-mile long, 33-foot
deep, 54-foot wide railroad trench running through the heart of Reno's economic and entertainment
core is destined to help solve growing financial problems in the City of Reno's government? At first,
we also wondered the same thing.

It was the shear determination and tenacity on the part of city officials to overcome all obstacles,
dismiss all critics, promote enabling and supporting legislation with the Nevada State Legislature,
work out a sales tax deal with Washoe County, conclude underwriter arrangements for a massive
$104 million debt issue, arrange for a $85 million federal transportation loan, secure $18 million in
state and federal grants, transfer another $1 million from Reno street bonds, move quickly to increase
downtown Reno's room taxes, establish a new Special Assessment District (SAD) in downtown
Reno, hastily conclude a Memorandum of Understanding (MOU) which is highly favorable to the
Union Pacific Railroad, and effect the funding for this highly complex project that provoked our
interest and curiosity and warranted a more in-depth analysis.

Our curiosity was particularly aroused when we considered the principal players involved in these
efforts. We must remember that these are the same city fathers and city officials who, like all too
many of their predecessors, have vacillated on critical public policy decisions affecting downtown
Reno's economic redevelopment. These are the same officials who continued a tradition to leave the
Mapes Hotel vacant and standing for over 16 years, and the Riverside Hotel empty and useless for
over 12 years. These two structures perhaps afford the most striking and visible testaments to the
success of the City of Reno's redevelopment strategies. These are also the same officials who have
vacillated on the enactment of an aggressive policy on condemnation and eminent domain in
downtown Reno, a public policy that is desperately needed if redevelopment in the downtown Reno
Redevelopment District is to ever prove effective.

These are also the same city officials who have failed to assess the advantages of physically linking
downtown properties with airwalks and skyways, even though the benefits of this concept have been
conclusively proven with the triplex properties of Circus Circus, Silver Legacy and the Eldorado.
And these are the same officials who conceived of the Truckee River corridor movie theater project
which, even before construction has begun, is already over budget, behind schedule, and has no
tenants for its proposed retail space. But when it comes to organizing the political, financial,
environmental and engineering forces for funding and designing a very large, very expensive, and
very economically unproductive trench, this city council has no equals.

To understand the surprising persistence behind these efforts, we must recognize that this represents
a public works "gravy train" project the likes of which Reno has not seen in many years and will not
likely see for many more years. Simply put, in the absence of private investment, public investment
is the next best thing. It is therefore understandable why there are so many lining up at the public
trough who are more than willing to overlook this project's potential adverse, and possibly disastrous
economic and fiscal effects on the City of Reno. It seems incomprehensible to us that, given the
magnitude of this project and its potential long-term effects on the community, so few possess a
fundamental awareness of the project's specifics and possible consequences, and that even fewer still
have shown the courage to ask the embarrassing questions the city appears reluctant to answer.

As an aside to this issue, one interesting technical complication to be overcome with respect to the
railroad trenching project may finally provide the Reno Redevelopment District with its
much-needed and long-sought powers of condemnation and eminent domain. The railroad's current
right-of-way through the downtown for two parallel tracks is 54 feet wide. However, in order to
provide for 5-7 foot thick retaining walls for the lowered tracks, and supporting tiebacks to hold
those walls in place, the project will require an easement on either side for retaining walls and
tiebacks of up to 35 feet, thereby resulting in a total width requirement for the trench and its
supporting structures of up to 124 feet (54 feet + 35 feet + 35 feet). It now appears obvious to city
officials that the only way this additional property can be obtained is, you guessed it, through the
city's use of condemnation and eminent domain in the heart of downtown Reno. Only recently has
the city recognized this new space requirement and belatedly begun an assessment of the financial
implications of having to acquire the necessary additional land for a wider right-of-way.

How ironic that the very public policy (i.e., condemnation and eminent domain) that has been denied
to the Reno Redevelopment District for so long despite its potential economic and fiscal benefits will
now very likely come to pass for political expediency in order to accommodate the digging of a
non-economically beneficial trench, a trench which is destined to seriously jeopardize the city's fiscal
condition for many years to come. It all boggles the mind. More ominous still is that the city's cost
estimates nowhere explicitly account for the additional millions of dollars that will be needed to
condemn and acquire this extra land on either side of the trench's right-of-way. The potential for
litigation on this matter alone is immense and reminds us of the recent debacle with the city's $1.2
million underestimation on its condemnation of the Riverside Hotel.

In addition to the city's failure to explicitly account for the additional funds that will be needed to
acquire land along a much wider railroad right-of-way, the city has also failed to fully account for
the disruption of public utilities along and across the railroad trench's path and the costs involved
in literally having to relocate much of downtown Reno's utility service infrastructure. Across and
under the current railroad right-of-way there exists a network of critically-important electrical power
lines, transformers and distribution stations, sewer lines, grease traps, storm drains, water mains, gas
lines, telephone and fiber optic cables, television cables, a major fuel line for the Sparks Tank Farm
facility, and the intricate feeder networks for distributing these utilities to residences and businesses
throughout the downtown area. Those removed from the tracks that believed they would not be
significantly affected by this trenching project are destined to be greatly surprised by the pervasive
effects that this construction will have on virtually all downtown residents and businesses. Estimates
by local utility industry experts have conservatively put the cost of relocating these facilities in the
neighborhood of $50-100 million. To date, however, the city has not even requested more detailed
cost estimates for such relocations from local utility service providers.

Perhaps never before in the City of Reno's history have so many city, county, state and even federal
governmental agencies and private entities come together in such a relatively short period of time
to assemble most preliminary, incomplete and highly questionable design studies, engineering plans,
environmental assessments and an intricate funding program for a project of such magnitude.
Perhaps even more amazing has been how much has been accomplished in this process without the
public's full knowledge, understanding and approval. But the most troubling aspect of all is that the
myriad of funding sources have effectively been put in place before the project has even been proven
economically viable and financially feasible through reasonable and comprehensive cost estimates.
This ramrod approach of doing "something" before the facts are known appears remarkably similar
to the City of Reno's hasty approach used for the approval of the downtown riverfront movie theater
project.

Without question, the orchestration of this trenching project has been admirable. From (1) State
Legislature enabling legislation in 1997 (Assembly Bill 291), to (2) the Washoe County
Commission's hasty, but certainly timely administrative approval (in lame duck session, no less) of
a one-eighth percent sales tax increase specifically for railroad trenching (Bill No. 1223), to (3) the
Reno City Council's enactment of a 1 percent downtown hotel room tax, to (4) the formation of the
third downtown Reno Special Assessment District (SAD) comprising some 450 downtown
properties, to (5) the City of Reno's $60 million (largely soft dollars and arguably wildly overstated
by up to $33 million in terms of its property value component) Memorandum of Understanding
(MOU) with the Union Pacific Railroad (which, by the way, virtually absolves the railroad of all
environmental responsibility and shifts full liability to the City of Reno), to (6) the City of Reno's
request to secure an $85 million federal transportation loan (City of Reno Resolution 5557), to (7)
another $18 million in state and federal grants, and (8) another $1 million from the proceeds of 1992
city street bonds, to (9) further tax support in the 1999 Legislative session through passage of Senate
Bill 255, and to (10) a Senate Bill introduced in the 1999 Legislature (SB 437) to permit
design-build methods to be allowed for certain public projects to be constructed virtually without
regard to their ultimate costs, this project has been admirably orchestrated by a host of influential
organizations and individuals. Our score card — City of Reno officials: 10; Reno citizens: 0.

We are not necessarily arguing against railroad safety considerations or the potential for long-term
benefits of such a project. We do, however, categorically reject those baseless assertions by certain
political analysts, and others, that political "lame ducks" (meaning the Washoe County
Commissioners who were voted out of office) know more than Reno's ("lame-brain") citizens
(meaning the rest of us). Nor will we attempt to argue the point that downtown Reno, without such
a trench, needlessly exposes itself to the worst possible horrors of rail accidents imaginable that
would create far greater economic damage to our community than the money anticipated to "fix" this
problem now.

The argument that the population is basically ignorant, or is needlessly exposing itself to a disaster
of high probability, represent the superiority and fear cards all too often played by smug and arrogant
proponents of projects which possess little substantive merit on the facts alone. Just based on
financial constraints, many communities simply cannot afford to completely insulate themselves
from the dangerous and irresponsible behavior or others. But this digresses from the fundamental
issue at hand.

Our concern is not so much with the trenching project itself, which may very possibly have
long-term community benefits and improve safety. Our basic concern is with its timing in the order
of economic and fiscal needs of the city and the utter lack of openness, candor and credibility in this
project's conceptualization, cost estimates, probable benefits, feasibility, potential impacts and
funding. The public had previously rejected increased taxation for this project, but the local political
process (i.e., the better informed "lame-ducks") found innovative, if not devious ways to circumvent
the public's wishes. Irrespective of its conformity to Nevada law, as has been pointed out by the
lame-duck supporters, a fundamental public-approval process has been circumvented by the Washoe
County Commission and, as a result, Washoe County residents have been taxed by a purely
administrative decision and without due process and certainly without effective representation.

Importantly, the decision to undertake this monumental project does not represent a response to the
city's fundamental economic needs. In simple truth, what the Reno downtown area desperately
needs now is a source of economic vitality to shore up a declining business climate and a
much-weakened tax base. Without question, this should be the number one priority the city pursues
before it digs a long, deep trench, uncovers untold hazardous wastes and possibly creates the State's
second "Superfund" site, extensively disrupts the downtown's economy, requires the relocation of
virtually the city's entire downtown underground infrastructure of public utilities (sewer lines, water
mains, storm drains, telephone, electricity, gas, fiber optics, fuel lines, etc.), creates economic and
environmental mayhem, and taps all possible revenue sources for an "un-costed" project which is
destined to produce a horrendous debt burden, obligate Reno's citizens to a horrific interest expense
in near perpetuity, and provide few, if any, economic benefits.

There is also considerable questions as to the valuation of the Union Pacific Railroad’s real property
contribution towards this railroad trenching project and the rationale behind the City of Reno
wanting to acquire this land at all. Both the railroad and the City of Reno have valued the property
to be transferred at some $42 million. However, Washoe County’s property assessment records
reflect a market value of this property at only approximately $9 million. If, indeed, this higher
assessment is correct, as both the railroad and the city have claimed, then it would reflect an on-
going, annual underpayment of Washoe County total property taxes by the Union Pacific Railroad
of approximately $393,400 (calculated at a property tax obligation of $500,700 on $42 million of
real property market value less a current tax payment of approximately $107,300 on the $9 million
current appraisal).

But the real question is why the City of Reno would want to acquire this land at all and thereby
remove it entirely from the tax rolls, consequently reducing total property taxes in Washoe County
by the full $500,700 annually. It is estimated that the effect of this action by the city would result
in an annual reduction in property taxes of $133,400 to the City of Reno, a reduction of $161,500
to the Washoe County School District, a reduction of $183,700 to Washoe County, a reduction of
$22,000 to the State of Nevada and a reduction of $88 in annual special tax district property tax
revenues. As a more responsible fiscal policy, why could not the city have negotiated for the Union
Pacific Railroad to retain ownership of their “lowered” real property (after trenching and at their own
“appraised” $42 million), increase their property taxes to reflect the property’s new higher value, but
obligate the railroad to no increased property tax responsibility for the city’s “leasehold
improvements”? The reason, of course, is that the city needed the stated value of the transferred
property (at $42 million) in order to satisfy the project’s total funding requirements before Washoe
County would pass the one-eighth percent sales tax increase. More boggles to the mind.

One can only wonder why such a project, which is destined to so extensively and substantively
disrupt the City of Reno's downtown area for a number of years has received such determined and
tenacious attention by city officials. It is a public works project which, by itself, will provide
virtually no increase in tourism or promote no new downtown private investment. It is a project
which will also very likely jeopardize a number of already marginal downtown properties, and
encourage the further exodus of businesses and residents out of the downtown area in order to avoid
a growing tax and debt burden. It will very likely unleash untold environmental mayhem on the
downtown area from the excavation of over 125 years of undisclosed hazardous material leaks, spills
and discharges and, in the process, effectively shift all consequent environmental responsibility from
the offending Union Pacific Railroad to the City of Reno and its citizens. It is also a project which,
in all probability, could have been effectively and far more cheaply accomplished with road
overpasses and underpasses. We would suggest that the answer to these puzzling and largely
unanswered questions may well lie in the potential fiscal gains to the City of Reno itself.

In noting its "extensive" economic merits, the city has argued that up to 3,000 new jobs and some
$240 million in economic activity will be created from this project alone. But anyone remotely
familiar with the basic concepts of economic impact analysis knows that these are temporary impacts
and will provide only transitory economic benefits and will entirely go away upon project
completion. In effect, the City of Reno is incurring a long-term debt obligation and a horrendous
tax, interest and principal repayment burden for a project which will afford only short-term economic
gains and provide virtually no future revenue stream to offset the original capital outlay, related
interest costs, or unknown, on-going operations costs (most assuredly, the trench will have to be
continuously pumped and the water treated for hazardous substance content).

It is anticipated that operations and maintenance costs on the railroad trench, which will be fully
borne by the city, will total some $2 million each year. Without revenues from the project, taxes will
need to cover this annual financial obligation as well. Frankly, this is not a revenue-generating
project; it was never designed as a revenue project, and the leases that are supposed to come with
the Union Pacific Railroad's "contribution", for example, the Amtrack station, will largely go away
when the trench is dug. Reno's residents (and the city's remaining tourists who will have failed to
find a more hospitable gaming and entertainment environment elsewhere) must be made aware that
their increased tax burden alone will be paying for this downtown Reno "Grand Canyon" debacle
for many, many years to come.

To apparently ease some obvious public concerns as to the potential financial effects of this project,
City of Reno officials, and particularly the Reno City Manager, have been quick to point out that any
number of safeguards and fail-safe points exist in this lengthy development process. Consequently,
the city has made assurances that the project can be terminated at any time if, for example, during
the formal construction bidding process in 2001 the project's cost estimates come in well beyond the
current capital construction estimates of $192,850,000 (1998 dollars) for full build-out. (In truth,
in 2002 when construction is to begin, at just a 2 percent rate of inflation on construction costs, the
city's estimated cost of the project will have grown to nearly $210 million.)

The city's assurance of fail-safe points, however, does not begin to explain why the City of Reno has
already attempted to sell $104 million in bonds for this project before year-end 1998, to be backed
by new sales taxes, a new 1 percent room tax, and new SAD tax assessments. If this total debt issue
had been effected (it was stopped by an injunction), we estimate that the debt issue costs (prospectus,
printing, underwriting, etc.) would have totaled approximately $3-5 million. Contrary to the city's
assurance, how were these "sunk" debt issue costs to be recovered if, much later in the construction
bid process, more realistic cost estimates exceeded the city's initial estimate (as they will surely do)
and therefore make the project financially unfeasible? Also, how would the city have redeemed this
$104 million debt issue if the project had to be terminated?

Also unanswered in this process was why the City of Reno showed such a sense of urgency to issue
the full $104 million in debt before year-end 1998 when supposedly virtually no significant project
costs had yet been incurred and would not be incurred for at least a couple of years. Assurances by
city officials also do not adequately explain why the City of Reno, after it issued $104 million in new
debt (actually, only $6 million was issued before the court injunction prevented further debt issue)
and incurring some $3-5 million in issue costs, then intended to deposit only $87 million of that
$104 million into a special railroad construction fund account, thereby leaving approximately $12-14
million mysteriously unaccounted for. [From city sources we have learned that this $17 million
difference ($104 million minus $87 million) would be absorbed by debt issue costs ($3-5 million),
bolstering the city's capital reserves ($6 million) and adding to capitalized interest ($6-8 million).
In effect, with this new issued debt, the city had evidently planned on mixing special revenue
funding with its own capital reserves, inextricably linking the funding for this railroad trenching
project to general city financing.]

Perhaps not coincidentally, this anticipated addition to the city's capital (surplus reserves) would just
"cover" the City of Reno's consolidated budget deficits of $12.26 million calculated previously
herein and more fully reported in the city's own Comprehensive Annual Financial Reports for fiscal
years 1997 and 1998. City officials have also failed to explain why the City of Reno would wish
to undertake this funding scheme and thereby incur a negative interest spread (cost of borrowed
funds greater that yield on earning assets) on the $104 million in debt it had intended to issue
(reported in a City of Reno Budget Director's Affidavit, dated January 12, 1999, at costing 5.20
percent in annual interest) versus the interest yield it anticipated on the $87 million to be deposited
in the railroad construction fund account (reported in the same Affidavit at 4.50 percent). Effecting
this issue would therefore have resulted in an unnecessary net interest deficit (cost) to the city of
nearly $1.5 million per year. [Calculated at a reported debt cost of 5.20 percent paid on $104 million
less 4.50 percent anticipated to be earned on $87,026,566.]

The city has also failed to explain why city officials would attempt to force those who secured an
injunction against this City of Reno debt issue to post a $9 million bond for what the city saw as an
unwarranted intrusion in their machinations and a potential for an unfavorable move in market
interest rates when, in fact, the injunction actually saved the city in unnecessary interest costs. The
City's Budget Director, in fact, incredulously filed an affidavit (noted above) in an effort to
demonstrate how much the city would "lose" by not issuing all the project-related debt now when
interest rates were deemed most favorable.

The more fundamental question that has been overlooked in this process is why issue debt at all if
the project has yet to be proven remotely financially feasible? The truth is actually quite simple:
Once all of the project's fund sources are in place, particularly outstanding debt issued and new tax
sources secured, there will be virtually no way to stop this construction process regardless of how
excessive are the future cost estimates. This was the same highly devious and deceptive tactic used
by the Washoe County Commission when it hurriedly issued debt against the recent sales tax
increase, thereby insuring that there would be no hope of a referendum to repeal it, even by the
newly-elected county commissioners who would have certainly voted against it.

Aside from these seemingly imponderable, if not disturbing financial questions surrounding this
railroad trenching project, there exists a more ominous lesson in history that apparently has yet to
be learned by the City of Reno. The railroad project has reminded us of a very recent City of Reno
construction "deal" that is rapidly going sour along the Truckee River -- the Oliver-McMillan
riverfront movie theater and retail store project. This project came to Reno as the first major
redevelopment project of the city's new administration. If nothing else, it was intended to represent
a decided debarkation from a long dry spell in Reno City Council redevelopment activity. All too
many Renoites may vividly recall the cost overruns and many millions of additional dollars spent
on the "river walk" project in front of the Riverside Hotel, a property that was supposed to reopen
but has yet to do so. Or we may recall the situation surrounding the Mapes, which has defied city
resolution even after standing dormant for over 16 years, or the Riverside, which itself has stood
abandoned for over 12 years. Hopefuls saw the Oliver-McMillan partnership and its movie theater
project as a change from the past and were just pleased that the city was doing "something."
Anything.

Presumably, these hopefuls believed that anything was better than nothing. Unfortunately, little
consideration was given to the effects of that "anything". The riverfront movie theater project, as
cursorily analyzed previously in reports on its economic, fiscal and geographic (location) drawbacks,
was found to be ill-suited for Reno's tourism-based economy, wanting in its tax revenue benefits,
an unnecessary duplication in its features, and particularly ill-placed along the Truckee River, which
has been "canyonized" enough. It will not promote tourism, it is misplaced for local residents and
tourists alike, it will not generate new spending or tax revenues, it does not have its own dedicated
nearby parking, and it is coming just as the market is experiencing a virtual glut in multi-screen
movie complexes in both Reno and Sparks. In fact, the Reno and Sparks Century complexes provide
more than sufficient capacity, more advantageous locations and more convenient parking.
Furthermore, the Century complexes are not publicly subsidized.

The Oliver-McMillan riverfront movie theater project represented bad economics and bad planning
from the beginning, and virtually excluded all public input and opinion. To the project's numerous
critics, the city merely replied that if Regal Theaters thought it was a good project, why shouldn't
we? Indeed. The truth is, Regal can walk away from this market; Reno cannot. Despite its obvious
economic drawbacks, it was actually the process of hasty approval, little substantive economic
analysis, and disdain for local input that concerned us the most and reflected "business as usual" in
Reno's city government. This same arrogant behavior and lack of sound financial analysis is now
being repeated with the downtown Reno railroad trenching project.

The riverfront movie theater project came without much public input or discussion, without rigorous
financial information, without discussion of probable costs and benefits, and without any meaningful
discussion and analysis of alternative projects which, in all probability, would have provided more
substantive economic and fiscal benefits and put that location to a more suitable use, for example,
a year-round, indoor-outdoor ice skating rink. The proposal also came from a California company
without any gaming experience and without consideration of the fundamental nature of Nevada's
economy and its dependency on gaming and tourism. Unfortunately, the city has failed to learn from
history and is therfore destined to repeat it.

Recent news reports show that the riverfront movie theater and retail store project, which now
consists mostly of trenches and mounds of dirt, is already over budget and behind schedule and
without leases for the retail stores which were planned to open in the fall of 1999. Should we be
surprised to find that the city has again built the wrong project, put the cart before the horse and
refused to concentrate its efforts on improving the economic foundations of the local economy?
Our concern now, however, is not only with the city's looming financial exposure on this movie
theater project, but with the fact that the City of Reno does not appear to have the wherewithal to
manage any redevelop project, especially one on the scale of the proposed downtown railroad trench
where costs appear to have been grossly underestimated. In fact, other engineering studies
undertaken privately have put the cost of this project at a more realistic $300-400 million. We now
face the reality of compounding the city's financial exposure on a poorly conceived and executed
development project by up to 30 times that of the growing debacle along the riverfront. It is perhaps
indicative of the city's credibility in this process to also note that key members of the City of Reno's
Financial Advisory Board remain essentially unaware of the particulars of this project and its
funding schemes and financial implications.

An examination of the issues surrounding the railroad trenching project constitutes the basis of our
concerns and shows us that this city council has changed little and learned virtually nothing from
its prior efforts to bring economic vitality to a lackluster downtown area, if indeed that is what it has
been trying to do. It is an issue of such profound importance to the future course of northern
Nevada's political and economic future that we find it highly disconcerting that the public has yet
to awaken to its full ramifications. It also tends to show that this city council, or the Reno City
Council sitting as the Reno Redevelopment Agency, not unlike those that have preceded it, has
neither the economic understanding nor the engineering, environmental and financial expertise to
undertake downtown redevelopment projects and should not be in the development and construction
business at all.

The function of government, particularly in instances of redevelopment, is to provide public policy
initiatives intended to promote and facilitate private investment. For example, the city needs to
effect aggressive implementation of eminent domain and condemnation to assist in the removal of
abandoned structures, undertake site preparation, and facilitate land assemblage for major private
investments. In essence, the city's function is to be the grease, not the hammer (unless, of course,
it is the hammer applied to reluctant, obstinate and obstructionist landowners refusing to sell their
property for worthwhile redevelopment projects at a fair, reasonable, and market-determined price).

In the case of the current riverfront development, the Reno City Council and its redevelopment
agency seem unnecessarily involved in a myriad of issues dealing with project design, bidding,
traffic flow, setbacks, cost overruns, time schedules, retail leasing contracts, costs of asbestos
removal, contaminated flood water removal (in the basement of the Mapes), obtaining tax credits
for historic building restoration, etc.

In addition to its support of redevelopment efforts through sound public policies, government should
also actively involve itself in infrastructure improvements which provide clear benefits to the
economy in terms of improving economic prospects, promoting private investment, increasing
property values and providing social benefits. The railroad project may partially qualify here, but
reasonable estimates of costs remain unknown and the possible economic and social benefits have
yet to be clearly demonstrated. However, the City of Reno's questionable track record in local
development matters, accurately estimating costs up front, and keeping to strict time schedules and
budgets should be of concern to us all.

If history is any guide, this railroad trenching project should be abandoned and the entire concept
drastically rethought. As a minimum, what is needed now is an independent estimation by a panel
of impartial experts in terms of detailed feasibility studies, a valuation analysis of the Union Pacific
Railroad's pledge of land to be transferred under its MOU with the city (whether it is worth $42
million as the railroad and the city have asserted, or $9 million as reported in county tax records, a
mere $33 million difference), an assessment of potential environmental hazardous materials buried
along the railroad right-of-way and the city's potential exposure for related mitigation, and
reasonable and realistic construction, condemnation, hazardous waste removal, relocation of affected
public utilities and trench pumping and operating cost estimates such that we can more definitively
determine if there is any point in proceeding further.

Unfortunately, and contrary to a normal capital budgeting process to estimate costs and then secure
financing, the City of Reno has done everything possible to obtain financing commitments, issue
debt, secure loans, raise and enact new taxes, and seek accommodating legislation before it even
remotely knows the true extent of its looming financial obligations. We are extremely concerned
over the lack of openness and candor concerning all facets of this project, particularly the accuracy
of cost estimates, the inadequacy of the project’s overall funding sources to cover assuredly higher
construction costs, the city's financial and environmental exposures, the adequacy of the project's
mitigation and contingency fund, and numerous other engineering, environmental and financial
factors only briefly touched on here. We see the greatest risk being that the full $200 million will
be used to start the project and then another $200 million will be required to finish it. We are also
highly suspicious of this project because we see the greatest benefits to the City of Reno not in the
railroad trench ever being dug, but in the debt being issued and the taxes being raised.

April 21, 1999
© 1999 Nevada Research Associates
Permission to quote granted with attribution

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