Monorail Q&A: Trying to keep track of cost

Confused about all the numbers flying around the Seattle Monorail Project's proposed Green Line? Let's try to shed some light.

Q: $11 billion? I thought the monorail was supposed to cost $1.75 billion.

A: That smaller number was the price cited when voters approved the 14-mile line. The cost estimate has since risen to $2.1 billion. Of that, $1.62 billion would be spent erecting the line, building stations and buying trains; the remaining money would go for buying land, relocating utilities, administration and other expenses.

Q: That still doesn't get us to $11 billion.

A: The Seattle Monorail Project (SMP) is planning to borrow the entire cost of the Green Line ($2.26 billion, which includes some planned refinancing) by selling a mix of short-term debt (called "commercial paper") and long-term bonds — including high-interest debt also known as "junk" bonds. The payments on all that debt will extend out to at least 2050; add up all the interest and principal, and you get about $11.4 billion.

Q: How can borrowing $2.26 billion generate so much more in interest? It sounds like loan-sharking.

A: Paying off any long-term loan will cost a lot more than the amount you originally borrowed. Just how much more depends on two key factors: the interest rate and the repayment period.

For example, let's say you take out a standard 30-year mortgage, borrowing $300,000 at an annual rate of 6 percent. If you keep the house for the full term of the mortgage and make equal monthly payments, you'll pay $1,798 each month, or a total of $647,515.

Shortening the term of the loan will reduce the overall amount you pay, but increase the monthly payment. With a 25-year mortgage, given the same terms as above, you'd pay $1,933 a month but cut the total cost of the loan to $579,871.

Conversely, lengthening the term of the loan can free up cash in the short run but cost more overall: A 40-year mortgage would carry a $1,651 monthly payment but cost $792,308 over its entire term.

Essentially, that last option is what the SMP has decided to do.

The car-tab tax on which the monorail project relies isn't bringing in as much money as originally predicted, mainly because the agency overestimated how many taxable cars there are in Seattle. With less money coming in each month to service its bonds, the SMP decided to stretch out the term of its borrowing.

Q: What about the interest the SMP will be paying?

A: The agency will be issuing several different types of bonds. About $1.5 billion will be borrowed though investment-grade bonds; the projected interest rates on those bonds range from 4.71 percent to 6.43 percent. But SMP, in an uncommon move, also plans to issue $429.4 million in junk bonds, which carry rates from 7 percent to 8 percent.

An extra few percentage points may not sound like much, but due to compounding they can make a big difference in what you'll ultimately pay on a loan.

Go back to our mortgage example above: If rates rise and you have to take out a 9 percent mortgage, over 30 years you'd pay nearly $870,000 in principal and interest.

The same principle applies in SMP's case. For instance, the agency said it plans to issue $47.9 million in 8 percent bonds in 2014 — part of a larger $313.7 million issue intended to pay off the short-term commercial paper. For that $47.9 million, SMP will pay more than $768 million in interest by the time the bonds are retired in 2051.