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Tollway authority approves State Highway 161 project
Friday, February 26, 2010
The North Texas Tollway Authority voted today to borrow nearly $1.2 billion and formally accept State Highway 161 into its growing network of toll roads.
The decision means construction on the final leg of the 11.5 mile road between Irving and Grand Prairie can begin as soon as next month, and be open to full traffic by late 2012.
The decision adds to NTTA’s already staggering $7 billion debt, and puts future drivers in the role of guarantors for the new loans, since toll rates will go up if traffic on highway is significantly below expectations.
Texas taxpayers could be on the hook, too. That’s because the Texas Department of Transportation guaranteed the debt for SH 161, promising to make annual debt payments for decades, in the unlikely event that traffic is so low the road can’t support itself even after rates are increased.
The NTTA board’s vote to proceed with the project was 8 to 1, with Bill Moore, an appointee from Collin County, opposed.
Under NTTA’s rules, it would have taken only two “no” votes to scuttle the project.
Even some of those voting for the deal expressed concerns.
Board Chairman Paul Wageman of Plano said the North Texas region has too many toll roads as it is. Vice Chairman Victor Vandergriff of Arlington said taking on the project means the agency could be “sidelined for a number of years,” unable to proceed with other major new ventures.
The decision was closely watched across the region and in Austin, as well as by scores of local and state officials packed into NTTA’s Plano headquarters.
The road is expected to generate big profits for NTTA after 2040. But Wageman — who peppered advisers and staff alike with questions as if he were a lawyer cross-examining witnesses — asked how reliable the revenue estimates could possibly be that many decades out.
“Are they not just estimates? Guesses?” he asked. “We don’t know what the world will look like in 30, 40 years.”
Dan Heimowitz of RBC Capital Markets, NTTA’s chief financial adviser, agreed. He noted, however, that NTTA’s current roads have, over time, exceeded projections, not fallen short.
Sensible people in the Metroplex may have given up long ago on Southwest Parkway and State Highway 161, two huge road projects that were first proposed back in the 1960s. Now they’re toll roads — one incomplete, one not yet started — and the money to build them may finally be available.
There is, of course, a catch.
On Wednesday, Texas Department of Transportation commissioners approved a “credit wrap” that will help the North Texas Tollway Authority afford the loans it needs to complete SH 161 and to build Southwest Parkway. That was expected, but they also added a provision that forces NTTA to pay interest if it can’t meet their revenue commitments. As part of the deal, NTTA gets to use TxDOT‘s credit rating to lower its own borrowing costs. Since the state isn’t allowed to guarantee loans from its highway fund — known as Fund 6 — and isn’t allowed to lend money that will be used directly to pay off someone else’s loans, the agency is exploiting a loophole.
The local authority will vote on whether to accept TxDOT’s conditions on Friday, and that late addition could prove contentious. NTTA building toll roads while drawing on TxDOT’s credit rating to incur enormous debts is a far cry from Texas’ traditional pay-as-you-go approach to highway construction. With traditional sources of funding falling short, the story of Southwest Parkway and SH 161 illustrates the lengths the state must go to meet its transportation needs.
The ramp-up period
Almost everyone in North Texas seems to agree on the necessity of the two projects. SH 161, first initiated in 1969, runs north-south from SH 183 to I-20 on the Dallas-Tarrant county line, forming a link in Dallas’ growing “loop.” Southwest Parkway (also known as Chisholm Trail Parkway), which first appeared on the drawing board in 1962, connects southwest Fort Worth to downtown. Three of SH 161’s four phases are complete; construction has yet to begin on Southwest Parkway.
The funding imbalances for the projects were projected to be in the billions, and given the state’s lack of available funds for transportation, both would clearly require using tolls to offset debt. As SH 161 began to garner support and funding, those concerned about the parkway proposed a new idea: Combine the projects so that excess revenues from one could support the other.
“[Southwest Parkway] was getting pushed aside in favor of what might be a more reliable revenue sources,” says state Sen. Wendy Davis, D-Fort Worth. That has changed: Southwest Parkway is now projected to be more profitable than its sister road, but the revenue-sharing mechanism is still in place and should lower risks for lenders and make construction loans easier to come by.
“We expect that both roads have potential to be very lucrative projects once they get through the ramp-up period,” says NTTA spokeswoman Sherita Coffelt. “We don’t anticipate either road underperforming, but in the case that one did, the other one would be able to support it.”
NTTA has taken out a variety of loans to complete its various projects, a burden that makes it less appealing to lenders and pushes up the costs associated with its debt. Thanks to the recent TxDOT vote, NTTA can now use TxDOT’s credit rating. While the state Constitution prevents Fund 6 from being used as collateral for this type of loan, the state can make construction and maintenance loans to NTTA that happen to mirror the amounts of the authority’s bond payments.
“We cannot loan them money for debt service,” explains TxDOT deputy director James Bass. “We’re looking at what eligible expenses we are able to make a loan available to them for.”
He estimates the funding gap now, if the deal is approved by NTTA on Friday, at about $30 or $40 million. That’s pennies in the world of road building. The maneuver could save the authority hundreds of millions in interest and essentially makes it possible to build two roads that might not otherwise get built. “So it’s real, it’s big,” says TxDOT Commissioner Bill Meadows, who represents the Fort Worth area on the board.
Will the safety net be needed?
It also creates a new way to pay for roads that may not be as fiscally conservative as people might like. “Given the amount of debt the [Transportation] Department has already incurred and the uncertainty of future revenue to replenish Fund 6, what protections, if any, are there for Fund 6?” wrote House Transportation Chair Joe Pickett, D-El Paso, in a letter to the agency. (Pickett did not return several requests for an interview.)
To answer his question, the agency included a number of protections. Before anyone could touch Fund 6, NTTA would have to raise tolls on both projects, and even if anyone dipped into the fund, it could not take out more than the difference between expected and actual toll earnings. “We’re not making a pledge that we’re going to make sure [that] in any and all circumstances bondholders get paid,“ Bass explains.
It also includes a stabilization fund with enough money to match the next year’s projected revenues. That way, should the highways underperform one year, the fiscal trouble is at least 12 months away. “The intent is that it will always provide one year’s cushion … before there’s a call placed upon Fund 6,” Bass told the board.
Staffers at both agencies assured the commissioners the safety net won’t be needed. Coffelt says the revenue estimates are very conservative, and that the roads would have to be 20 percent below these low expectations in order to even consider going into Fund 6. “We think there’s a very slim to none chance of that happening,” she says. Bass echoed those sentiments to the TxDOT commissioners.
Such reassurances ease Davis’ concerns, as her constituents would benefit from the roads. “If I felt like Fund 6 were ever going to be drawn upon by virtue of these projects it would concern me, but I think enough analysis has been done,” she says. “I don’t foresee any circumstance that Fund 6 will ever spend a dime towards these projects.”
Coffelt says the credit wrap isn’t just good — it offers innovative methods to overcome funding challenges. “That’s never been done before,” she says. “Taking advantage of TxDOT’s good credit rating and our cash flow abilities is what’s allowing us to get these projects across the goal line. “
The idea of using state credit to finance local projects isn’t entirely new, says Bill Allaway of the Texas Taxpayers and Research Association. When school districts use bonds, the state often backs the bonds with the Permanent School Fund to secure a lower rate. “The difference is the Permanent School Fund’s actually got a pile of cash in it. It’s an endowment,” he says. “Whereas the highway fund is not an endowment but an operating fund.”
The Highway Fund, a.k.a. Fund 6, generally struggles to meet its own obligations — particularly as the Legislature has dipped into it for health and human services programs, education programs and other spending that has little to do with highways. With the fund already struggling, Meadows sympathizes with concerns that the credit wrap maneuver will become a regular tool in transportation.
Not everyone is worried. “I think this will be a model for projects all over our great state,” state Rep. Rob Orr, R-Burleson, told the TxDOT board as he exhorted them to approve the agreement to build in his district. Yet TxDOT Commissioner Ned Holmes of Houston insisted that the board amend the agreement to charge interest should NTTA not meet its revenue-sharing agreements after year 10 of the project. “We’re in the business of setting precedents,” he said. “I think it’s a very dangerous precedent to set, not to have cost to a deferral.”
Meadows argued against the amendment, which ultimately passed, but he acknowledged the significance of the effort. “This whole thing about the precedent-establishing nature of this action — I think that’s a good public policy question,” he says. But nonetheless, he’s “ready to build the roads” and isn’t interested in waiting longer.
No one’s saying the situation is perfect, but impatience and desperation are setting in. “I’m supporting it because at this point, it’s the only solution that we have,” Davis says.
But while legislators hold out for better leadership on transportation, some see this effort as a sign of things to come. “Projects in the future are going to be more and more complicated to fund,” says Michael Moore, director of transportation for the North Central Texas Council of Governments. “Is this a systemic problem? … The answer is yes.”
NTTA’s board gets its say on Friday. Coffelt says the board may be hesitant, given Holmes’ amendment. The various partners who have negotiated the effort — the Regional Transportation Council, the counties, not the mention TxDOT — are holding their collective breath.