Las Vegas Monorail bond insurer loses key ruling

By Steve Green

Published Monday, April 26, 2010 | 5:16 p.m.

Updated Monday, April 26, 2010 | 6:16 p.m.

The insurer for the Las Vegas monorail’s bonds suffered a setback on Monday when a bankruptcy judge declined to convert the case to a Chapter 9 reserved for government agencies.

Ambac Assurance Corp. of Wisconsin -- which insured the bulk of the $649 million in tax-exempt bonds issued by the state to construct the monorail -- and Wells Fargo Bank had argued that the monorail should not be allowed to proceed under Chapter 11.

Ambac and the bank, which has also done business with the monorail, have argued instead that it acts like a municipality under bankruptcy law and therefore should have filed under Chapter 9.

But, as noted by Judge Bruce Markell in his ruling, the bond documents clearly say the state is not liable for any bond indebtedness. Markell’s ruling would seem to bolster the belief that taxpayers can’t be held liable for January’s monorail bankruptcy and the default on the bonds that were marketed in 2000.

"A key component of the transaction, known to all, was that the state of Nevada would not be liable on the bonds. Indeed, the director (of the state Department of Business and Industry) and other public officials assured the public that no tax revenues would be used to acquire or operate the monorail. Structurally, this promise was honored by making the bonds nonrecourse as to the state of Nevada," Markell wrote in his ruling.

The monorail has said that because of disappointing rider counts it has never been able to make enough money to cover its debt obligations. The system, which started operations in 2004 east of the Las Vegas Strip and on Paradise Road, has said that without financial relief it won’t be able to pay for hundreds of millions of dollars in necessary train and equipment repair and replacement costs.

The recession has deepened problems at the monorail. Ridership fell to 6 million in 2009 from 7.9 million in 2007. The system, which charges $5 for a one-way ride, collected $27 million in fare revenue in 2009, down from $30.3 million in 2007. Advertising revenue has also declined.

Last year, the system generated less than $5 million in net cash flow, far short of the $34 million needed to service its debt.

In looking at whether the monorail was a public agency, Markell noted there has been substantial state involvement in its creation and operations -- but ruled that was not enough to make it a municipality. Besides receiving the bond money raised by the state, the system received state sales tax and county property tax exemptions and its board was appointed by the governor.

"Chapter 9 is a bankruptcy remedy restricted to municipalities. As used in the Bankruptcy Code, this term includes instrumentalities of the state," Markell wrote in his ruling. "Ambac contends that (the monorail) is such an instrumentality, contending that the level of control held and exercised by the state is sufficient for that categorization under recent bankruptcy case law and tax law."

But Markell found the monorail does not exhibit any of the characteristics of public instrumentalities eligible to file for Chapter 9 under the Bankruptcy Code or bankruptcy case law.

"No one seriously contends that Las Vegas Monorail Co. is a political subdivision or agency of the state of Nevada. It has no power to tax, no power of eminent domain and no sovereign immunity," Markell wrote in his ruling.

"While the governor has the power to approve Las Vegas Monorail Co.’s fares, approve its budget and appoint its directors, Las Vegas Monorial Co. operates its day-to-day business in significant isolation from the state. It has more than minimal competition from other government agencies, such as the RTC (Regional Transportation Commission)," Markell wrote.

"It must apply for permission to operate from other public agencies. Its creditors are not, and do not expect to be, creditors of the state. It was created with the express and repeated promise that no taxes would be used to fund its operation. This low level of state control over matters going to essential state sovereignty and essential state functions indicates that Las Vegas Monorail Co. is not a municipality as contemplated by the Bankruptcy Code," the judge wrote.

Separately, a hearing is set for May 19 before Markell to consider a motion by the monorail to extend the amount of time it will have to file a bankruptcy reorganization plan.

The monorail initially had until May 19 to file its plan. The monorail seeks to extend that deadline to Aug. 17.