St. Louis Metro Dealing With Court Loss

CHICAGO — St. Louis Metro transit officials were scrambling to address disclosure issues on their $20 million revenue bond issue tomorrow following a St. Louis County Circuit Court jury’s verdict against the agency in a lawsuit that sought to recoup a portion of cost overruns on a rail expansion from the project’s managers. On Friday, the jury in Metro’s lawsuit against the Cross County Collaborative rejected the agency’s arguments that the CCC was liable for about $81 million of the $126 million of cost overruns on the Metrolink extension project. The jury found in favor of the defendants and ordered Metro to pay the CCC $2.5 million on its claim that the agency violated its contract. The CCC also intends to seek reimbursement for its legal fees. In a statement, Metro attorneys said the agency stood behind its decision to pursue the companies that made up the CCC through litigation, and officials are weighing their legal options. The trial began in August before Judge Carolyn Whittington and was completed early last week with the jury returning its verdict on Friday.Metro, formally called the Bi-State Development Agency of the Missouri-Illinois Metropolitan District, sold $400 million of sales tax appropriation-backed revenue bonds in 2002 to finance construction of the then $550 million project. However, $126 million of cost overruns forced officials to return to market in 2005 with an additional $150 million issue. The bonds carry ratings in the single-A category.As the cost overruns mounted and the project’s expected completion was delayed, the agency fired the CCC — which was formed by Parsons Brinckerhoff, Jacobs Engineering, STV Inc., and Kwame Building Group — in 2004 blaming in part the companies’ incomplete design.Richard Hardcastle, attorney for the CCC, said in a statement: “For more than three years we have maintained that Metro wrongfully terminated the CCC and that its claims were baseless.”The verdict is not expected to have any immediate impact on the agency’s finances, chief financial officer John Noce said yesterday. Metro has various self-insurance funds and reserves to cover the award and legal fees it might be forced to cover. “It won’t have an immediate impact on either our operational budget or our coverage levels,” Noce said.The verdict does, however, pose questions for the agency as it seeks to manage its debt portfolio in the mid-to-long term and on its operations and capital planning. The decision could damage Metro’s public image and in turn could hurt its efforts to win a sales tax increase on the February ballot.The agency had been banking on some financial award from the trial and had structured the 2005 issue with that in mind. About $100 million of the deal carries a fixed rate with a maturity in 2009. The remainder is floating rate. The overall structure gave Metro flexibility in using any award funds to retire debt. As part of any defeasence, it planned to refund its 2002 issue. In the meantime, the agency faced a $26 million deficit in its $214 million fiscal 2008 budget. Officials decided to issue the $20 million of refunding bonds that would cover a $9 million principal payment owed this year and another $8 million owed next year to provide immediate fiscal relief. The Metro board is expected to sign off on the deal tomorrow and Merrill Lynch & Co. is expected to price it the same day. Officials yesterday were scrambling to update the deal’s offering statements to include news of the verdict and its potential fiscal impact on the agency. Columbia Capital Management is the agency’s financial adviser. Gilmore & Bell PC is bond counsel. “We are still planning at this time on pricing Wednesday,” Noce said.The trial’s outcome also stands to affect voter sentiment ahead of the agency’s measure on the February ballot seeking an additional one-half percent sales tax increase in St. Louis County to fund operations and future expansion projects. “The verdict makes it even clearer that the sales tax increase for Metro will have no chance of passing,” said Tom Sullivan, spokesman for the Public Transit Accountability Project, who blames internal mismanagement and Metro chief Larry Salci for the rail project’s problems.Between fiscal 2003 and 2007, the agency’s current one-fourth sales tax grew 1.9% annually to $50.3 million. Fiscal 2007 collections provided 1.3 times coverage on all of Metro’s debt. In a recent report, Fitch Ratings wrote: “In the absence of additional funding support, Fitch expects Bi-State to maintain financial balance through a combination of service and non-service-related expense reductions and fare adjustments.”