Tuesday, June 05, 2007

TxDOT is 'buffeted in a rough legislative session, but emerges with more financial tools than ever.'

TxDOT To Sell $1.1B Tomorrow

Another $1 Billion Set for Early 2008


by Richard Williamson
The Bond Buyer
Copyright 2007

DALLAS — The Texas Department of Transportation — buffeted in a rough legislative session, but emerging with more financial tools than ever — will sell $1.1 billion of general obligation bonds tomorrow, with another $1 billion expected in nine months, officials said.

The negotiated deal led by Morgan Stanley and Southwest Securities Inc. comes the week after TxDOT executive director Michael Behrens announced plans to retire at the end of August. It also follows a swirl of legislation that would nearly triple the department’s bonding capacity and redrew the landscape for developing toll-road projects.

Working with financial adviser Ron Morrison of First Southwest Co., TxDOT expects a receptive market for the 30-year, fixed-rate debt among institutional investors looking for large blocks of high-quality credit.

“The demand has certainly been there in the past,” said James Bass, TxDOT’s chief financial officer. “We’ve been doing about $1 billion every eight to nine months. This deal is kind of typical.”

Indeed, Bass said, TxDOT will likely go to market with another $1 billion in eight or nine months. After tomorrow’s pricing, TxDOT will have issued $4 billion backed by the mobility fund that is made up of fees for drivers’ licenses, vehicle inspections, and titles.

Projects covered by the mobility fund are usually designed to relieve congestion in growing urban areas. Recent examples include an Interstate Loop 410 interchange at U.S. 281 in San Antonio and State Highway 45SE, a four-lane turnpike connecting Interstate 35 to State Highway 130 near Austin. While TxDOT has no cap on mobility fund debt, it must obtain the state comptroller’s certification that revenues will be 110% of debt service, Bass said.

Although that means revenues are more than adequate to cover debt service, the state applies its full faith and credit to the bonds under a state constitutional amendment passed in 2001.

Fitch Ratings rates the upcoming issue AA-plus, Standard & Poor’s rates it AA, and Moody’s Investors Service rates it A1.

Bass said the state would provide bond insurance for any large investors that require it.

Noting Texas’ relatively low debt ratios of $433 per capita and 1.3% of personal income, Fitch also pointed to financial pressures that rapid growth places on the state’s consumption-based tax system to meet property tax relief, transportation needs, and increased costs for health care, as well as corrections. The state has no personal income tax.

“The stable outlook reflects the state’s strong economic and revenue growth, and satisfactory balances,” Fitch analysts said.

Moody’s notes that revenue sources for the mobility fund are expected to grow about 2.6% annually, reaching about $578 million in 2036.

Analysts also commented on the fact the Legislature exempted the state from some reporting requirements under the Government Accounting Standards Board’s Statement 45. GASB 45 requires governments to report the future cost of retiree health plans — or other post-employment benefits — as liabilities.

A bill awaiting Gov. Rick Perry’s signature requires the state to estimate those costs but not to report them as “liabilities” that require advance funding.

“The state has not yet released a GASB 45-compliant valuation of its other post-employment benefits liability, although the Legislative Budget Board has estimated that the figure could be as high as $50 billion,” Moody’s analysts wrote. “In fiscal 2006, the state appropriated $626 million for OPEB costs in its four retirement systems.

In addition to the mobility fund, TxDOT issues debt from the State Highway Fund, which derives revenues from the state gasoline tax.

Sources of funding for transportation projects dominated the recently completed legislative session. Advocates of private financing of highways through public-private partnerships faced opposition from advocates of free highways supported by fuel taxes.

The authority of TxDOT to supervise toll-road development also faced a stiff challenge from the Harris County delegation that sought to transfer TxDOT’s powers to the Harris County Toll Road Authority.

TxDOT also saw years of work leading to a $5 billion private concession agreement with Spanish developer Cintra — Concessiones Infraestructuras de Transporte — for the State Highway 121 toll project near Dallas superseded at the suggestion of Sen. John Carona, R-Dallas. At Carona’s suggestion, bidding for the project was reopened to the North Texas Tollway Authority, a public entity that had previously agreed to sit out the project under a protocol agreement with TxDOT. Regional controversy over SH 121 reflected popular alarm over long-term lease agreements for toll projects. That led to calls for a two-year moratorium on private toll projects.

The NTTA’s competing bid for the project has been submitted to a coalition of regional governments operating as the Regional Transportation Council, and a decision is expected by the end of June.

Carona, chairman of the Senate Transportation and Homeland Security Committee, brokered deals in the final days of the session, seeking to protect existing toll projects in urban areas while addressing rural concerns about private highways. Carona’s SB 792 became an omnibus transportation bill after previous measures faced vetoes from the governor or political uncertainty in the Legislature.

Included in SB 792 were watered-down remnants of the moratorium on private concessions for toll road projects, a realignment of toll road development authority and, at the last minute, an amendment that doubled TxDOT’s authority to issue bonds backed by the State Highway Fund to $6 billion.

In its final form, SB 792 left TxDOT “whole,” while allowing public toll-road authorities first shot at toll projects, but leaving room for private concessions from foreign firms such as Cintra, Carona said.

“We did not do anything harmful to transportation,” Carona said. “The moratorium, in my opinion, does not have any effect in the urban areas.”

The bill does create a competition between TxDOT and authorities such as the NTTA to develop toll projects, Carona acknowledged.

“Each has a gun to the other’s head, and the result is that we’re going to get more roads built,” he said.

Carona also authored SJR 64, a proposed constitutional amendment that would create another $5 billion of general obligation bonding authority for TxDOT. The amendment will require voter approval Nov. 6.

Carona said the legislation is designed “to bring TxDOT into the 21st Century.”

Although he said he has “no qualms” about using foreign corporate investment to build roads in Texas, he also believes the state fuel tax should be raised to reduce an estimated $66 billion funding gap in transportation projects over the next 25 years.

Ric Williamson, chairman of the Texas Transportation Commission, the governing board of TxDOT, said he is assessing the impact of the legislation as he looks for a replacement for executive director Behrens.

“Our immediate focus is to thoroughly review all the new transportation legislation to make sure we understand the Legislature’s direction and intent,” Williamson said. “We will then move forward with a process to find the best person possible to lead TxDOT and implement the will of the Legislature.”

Behrens, who began his 37-year career as an engineering assistant, helped develop financing tools such as comprehensive development agreements, pass-through financing, and P3s. He became the department’s assistant executive director for engineering operations in 1998 and executive director in 2001.

“When I started, plans were still being drawn by hand, calculations made with mechanical calculators, and measurements done using tapes and surveying chains,” Behrens said. “What has not changed are the people who perform the work. They go about getting the task done, day in and day out, too often with little recognition from the public they serve.”

During Behrens’ tenure as executive director, TxDOT gained the right to issue bonds backed by the Mobility Fund and GO debt from the Highway Fund. The previous Legislature also authorized TxDOT to bid projects to private developers.

“The important thing to us was that we were getting a facility built that we could not afford to build ourselves,” he said.

Legislative efforts to devolve TxDOT’s authority to local and regional agencies and ongoing battles over public-private financing did not prompt Behrens’ retirement, he said. “There’s always something going on,” he said. “Sometimes you just get a gut feeling that it’s the right time.”

© 2007 The Bond Buyer: www.bondbuyer.com

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