Wednesday, February 18, 2009

"The use of a defacto puppet agency like the CTRMA allows TxDOT to use the CTRMA as a financial firewall, to avoid bond default blowback"

Texas Toll Road 183-A: The Economics and the Special Interests

Texas Tollroad U.S 183A northbound in outskirts of Austin, approaching toll plaza.

Shrinking traffic increases could mean bond default problems for US 183-A
The road lobby operates as a sort of well-funded shadow government, organized to overcome citizen opposition to unpopular toll roads intended to serve hypothetical sprawl development.

By Roger Baker
The Rag Blog
Copyright 2009

In August 2007, the Central Texas Regional Mobility Authority’s (CTRMA's) first toll road, US 183-A, was newly opened and was acclaimed as a star performer. And yet it could still be in trouble due to outside factors beyond the control of the CTRMA. Let us drill down and examine the background and details.

The success of 183-A is important because the CTRMA, which manages 183A, intends to use the current extra revenue being generated by 183-A as a financial "backstop.” The 183-A toll revenue will essentially serve as collateral for leveraging funding for another toll road, US 290 E, that the CTRMA is actively promoting. Such speculative use of deficit spending to leverage rapid growth in road infrastructure was part of a leveraged debt trend encouraged under Bush, called public-private partnerships (PPPs).

The plan that the Capital Area Metropolitan Planning Organization (CAMPO) recently approved, urged by CTRMA bond consultant JP Morgan Chase Securities, is to combine these two toll roads using the 183-A surplus toll revenues as a substitute for bond default insurance on 290E. 183A does have bond default insurance, but it has now become unaffordable for 290 E due to the credit crisis. (TxDOT partly wants to get 290 E built to help bail out SH 130, a relatively underused toll road which suffers from slow access into Austin).

Not long after the Texas Department of Transportation (TxDOT) famously mismanaged their finances about a year ago, by double counting $1 billion in revenue, TxDOT cut back its construction spending drastically. TxDOT then decided to turn over its plans for six planned Austin area planned toll roads to the Central Texas Regional Mobility Authority. Under strong organized pressure from the road lobby, CAMPO, which approves federal funds for roads, accepted this shift in funding and construction responsibility.

The Texas road lobby, similar to the situation in many parts of the USA, is basically a coalition of special interests, both local and statewide. Statewide, these revolve around Texas road consulting and road construction in coalition with local regional banking, development and land speculation interests. The Texas road lobby and its allies (like the Texas Good Roads Assn., and Associated General Contractors or AGC) has been around as a significant force in Texas politics since about 1950. Now they are recognized as one of the most powerful lobby groups in Texas. Molly Ivins used to call TxDOT "the Pentagon of Texas.”

Locally, the road lobby is closely linked to the Greater Austin Chamber of Commerce, Opportunity Austin, and the Capital Area Transportation Coalition .

In the last year or so, the same interests that were previously focused solely on roads have developed a much stronger interest in regional and commuter rail to San Antonio, Cedar Park, Elgin, etc. At the same time federal funds for rail starts have become scarce. There is no easy money for rail or roads anymore.

Bankers, developers, and land speculators all share a strong interest in the outcome of most decisions on public infrastructure funding. Special interests fund "astroturf" media campaigns meant to mimic grass roots input. For example, this link is a good example of such an effort to promote 45 SW, a planned but mostly unfunded toll road over the sensitive recharge zone of the Edwards Aquifer.

The road lobby operates as a sort of well-funded shadow government, organized to overcome citizen opposition to unpopular toll roads intended to serve hypothetical sprawl development. It aims to persuade politicians to issue public debt to subsidize what up until recently was highly profitable sprawl growth in the suburban fringes that were predicted to grow rapidly forever. The money incentive is strong in Texas, with its many property rights laws imbedded in the state constitution. However, Texas has a heavily urbanized population distribution. As with other sunbelt cities that grew rapidly in an affluent era of cheap oil, Texas has large rings of car-addictive sprawl development surrounding its major cities.

Although the two are legally distinct, TxDOT maintains tight control over the CTRMA toll road projects through close collaboration on planning, long-standing ties involving ex-TxDOT engineers, common contractors, etc.

The use of a defacto puppet agency like the CTRMA allows TxDOT to use the CTRMA as a financial firewall, to avoid bond default blowback. It also allows TxDOT to preserve control in a new and less regulated part of state law, recently crafted to give expanded toll road deal-making power to the RMAs; the regional mobility authorities, RMAs, like the CTRMA. TxDOT and the late Transportation Commissioner Ric Williamson had strongly encouraged establishing RMAs around Texas, although they have had limited success.

In other words, 183-A is being promoted as an example of the CTRMA's bonding prowess, demonstrating that 183-A can be used as a financial engine to pull along 290 E. Let us take a closer look at the engine.

Here is a glowing August, 2007, account in Toll Road News , a national pro-toll newsletter. The article shows that despite heavy public opposition to the toll road package passed by CAMPO in October of 2007, the early 183-A numbers toll numbers looked excellent. It seems that this road jumped ahead to match its future numbers:
...Central Texas may be a hotbed of anti-toll activism but motorists there love the tollroads. Traffic and revenue on the four pikes that have opened this year is way above expectations. In six months on the 183-A toll road they are meeting third year traffic and revenue forecasts.

Tollers in Austin seem to have found a way to bypass the dread "ramp up" that has afflicted many new tollroads in their first several years - from the Dulles Greenway VA to the Suncoast Parkway FL and the 91 Express Lanes CA. At five to ten years old these tollroads tend to be closer to forecast but they had horrible startup numbers for three or four years.

Take the Central Texas RMA and its 183-A tollroad. Since full toll rates have been in effect 183A has been pulling in $1.2m to $1.3m/month. On that basis it should gross $15m in its first year. The Vollmer Stantec forecast for the first full calender year (2008) was $10.3m. 2009 was forecast at $13.9m...

CTRMA don't think the traffic forecasts they got from Vollmer Stantec are flawed on the low side. They think that the marketing model they and TxDOT adopted in Austin has allowed them to bypass "ramp-up" and jump straight to a trend traffic level...
This was the situation a year and a half ago, but now we have about a year and a half of data that allow us to see how well things are actually doing on US 183-A. Since the bond brokers expect that toll roads will not do very well at first, until they are marketed to the public as a convenience, there is a bond debt reserve fund set aside. This is to cover the bond shortfalls through the ramp-up phase until a predicted ridership saturation point is reached. Financial training wheels of a sort.

In some ways things still look very good, including the fact that there is still more than enough revenue to pay the bond creditors. Whereas the 183-A toll road was only projected to collect $10.3 million in 2008, it actually brought in a bit more than $17 million. So 183-A is more than financially solvent for now. And 183-A would be likely to prosper if the transportation trends of the past were to continue.

In essence, 183-A jumped way up to a sort of plateau near its post-ramp-up projections, attributed to good marketing, but now the rate of revenue growth has slowed down considerably. The year over year toll transaction increase from the last quarter of 2007 to the last quarter of 2008 rose about 12.8%, whereas the revenue increase over the same period is about 10.8%.

Here were the bond projections for 183-A revenue:
  • 2008 -- $10,336,000 (2008 was the first full year of revenue, which counts weekends)
  • 2009 -- $13,937,000 (a 35% yearly increase projected)
  • 2010 -- $19,595,000 (a 40% increase)
  • 2011 -- $23,446,000 (a 20% increase)
  • 2012 -- $26,306,000 (a 12% increase)
(These 183-A revenue forecasts are from the official bond statement on the CTRMA website, showing projected increases during the initial ramp-up period; Table ES-1, page ES 3.)

But what if the 183-A revenues, off to a fast start, were only to grow at the current year over year rate of 10.8%, continuing over the next few years? Comparing with the numbers above, such increases would then fall behind the bond revenue projections after 2010, as follows:
  • 2008 -- $17 million
  • 2009 -- $18.9 million
  • 2010 -- $19.8 million
  • 2011 -- $21.4 million
  • 2012 -- $23.1 million
The truth is that when you inspect monthly 183A revenues, which jump around a lot from month to month, most of the last year looks fairly stagnant, about flat since May, 2008, when 183-A took in about $1,446,000. In December, 2008, the 183A toll revenue was down to $1,364,000.

These stagnant 183-A numbers probably tend to reflect the background situation that national road travel has been decreasing sharply for the last few years due to fuel prices and the recession. This chart makes this unprecedented travel decrease quite obvious:

Clearly there are unpredicted economic and growth risk factors at work, which are certain to affect 183-A traffic as well as the CTRMA's other planned toll roads. What are these risk factors?

These factors were outlined in the official bond statement to be found on the CTRMA website. Here are some of the risk factors spotlighted in the 183-A bond statement by the bond consultant, Vollmer and Assoc. prior to the 2005 bond sale, This is taken from page 66 of the US 183-A Official Bond Statement posted on the CTRMA's website:
10. "2005 Project traffic during the early years of operation will ramp up as formulated in the Traffic and Revenue Report." (Reality: Much faster early increases than projected, but looks like there may be a plateau and relative stagnation now.)

12. "Motor fuel will remain in adequate supply during the forecast period, and motor fuel prices (i.e., the average price for regular gasoline) in the foreseeable future will not increase above the 1980 peak, which, if adjusted for inflation, in current dollars would not be more than $3 per gallon." (Reality: These figures were greatly exceeded, peaking in July 2008, but now fuel prices have collapsed with the general economy.)

14. "No radical change in travel modes, which would drastically curtail motor vehicle use, is expected during the forecast period." (Reality: The FHWA travel chart above shows that this risk factor is in place and rapidly growing.)

"15. In the long term, generally normal economic conditions will prevail in the State and the United States, and there will not occur a major depression, national emergency or prolonged fuel shortage." (Reality: The IMF says that all the world's major economies are in a world-wide depression now, and long range fuel supply problems are apparent.)
Are there any further problems likely to crop up? Frankly yes. Not only are there about $66 million in federal TIFIA loans at stake in 183A, which have to be paid back starting in 2012, in addition to about another $166 million in private bond debt, but it is entirely unclear that the private bond insurance would still pay out in case of default. In case of 183A bond default, the insurance policy might amount to toxic waste requiring a federal bailout.

The feds are already distinctly pissed off at the way that TxDOT manages its federal toll road loans, and have threatened to cut off TIFIA funds, without which projects like 290 E seem impossible: Go here and here.

In the next year, the world economy could make a miraculous recovery and the 183A revenue trends could turn around, but it is very hard to find municipal bond investors willing to risk money on that possibility.

Such bonds tend to be favored by high income individuals who find tax-free municipal revenue bonds attractive as a tax shelter, partly because most such bonds were insured at a low cost. The current inability to get affordable bond default insurance today on toll road bonds is a problem. We don't know if the feds will bail out insured toll bonds, while uninsured toll bonds are like naked bets putting capital at risk for 40 years. US 183A is largely a commuter road designed to serve future residential development of a kind that is now reported to be in sharp decline in the Austin area (reporting in the Statesman on growth in Manor). Detroit, which makes the cars needed for expanding the future toll traffic, is broke and other car companies are in big trouble. CAMPO is now considering sharp cutbacks in its other road projects incorporated in its new long range 2035 plan.

This link explains how and why most toll road authorities tend to overestimate long range future demand.

Next is a link that explains how rapidly and unexpectedly once-assumed travel behavior can turn around in Texas, given our changing economic environment.

A willingness to invest private bond money on the theory that the weak 183A toll user trends might turn around fairly dramatically, even enough to help finance other projects like 290 E on its coat tails, is thus beginning to look like a heroic investment gamble.

In fact, the official travel numbers on the road 183A is designed to help -- 290E -- show approximately level traffic demand. [I hope to post the documentation later on The Rag Blog.] The TxDOT vehicle count numbers for 290 E have been stagnant for the last several years, and the accident statistics are trending downwards. Plus new home starts in fringe cities on 290 E, like Manor and Elgin, are in sharp decline. These trends undermine the major justifications commonly used for promoting new roads.

Sen. Kirk Watson, who chairs CAMPO, (and owns an interest in a bank in Elgin, on 290 E) is a skilled, energetic and powerful politician. He is also the vice chair of the Senate Committee on Transportation and Homeland Security and usually gets what he wants from CAMPO, the body that controls Austin's shrinking federal funds.

In more normal times, and if politics could still leverage money the way it used to do a few years ago, 290 E would probably be a done deal by now. But now we are living in times when the available public infrastructure funds are shrinking a whole lot faster than the old style of special interest politics can accommodate.

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