Toll Road Tales: Good News for Taxpayers, Motorists

TReactions were varied recently when the company operating the Indiana Toll Road filed for bankruptcy. A researcher at the Harvard Kennedy School emphasizes the positive aspects of how that deal was structured and focuses on the continually evolving role of each party in such an agreement. Governing reports:

n 2005, two companies came together to form the Indiana Toll Road Concession Co. (ITRCC), which won the right to operate the toll road in exchange for a $3.8 billion up-front payment. The deal limited how much tolls could rise and included a trigger requiring the consortium to expand the roadway if certain congestion benchmarks were reached. The $3.8 billion threw off about $250 million that was used to fund other state transportation priorities.

Like so many other enterprises, ITRCC was done in by the Great Recession. Its financing structure called for large debt payments at the end of the first decade, which proved overwhelming in the face of revenues that didn’t meet projections when the downturn hit and traffic volume fell.

But what’s reassuring is that motorists will see no interruption in service or toll increases as a result of the bankruptcy. The roadway is still subject to the same performance metrics, and there will be no taxpayer bailout. State officials will first try to find a new operator to take on the remainder of the concession deal. If that doesn’t work out, the ITRCC will likely be recapitalized with an altered debt schedule.

In either case, customers will retain the benefits from the $458 million ITRCC has invested since 2006 in road, bridge and pavement improvements and a new electronic tolling system.

While it appears that the Indiana Toll Road deal has succeeded at protecting taxpayers and motorists, that doesn’t mean there aren’t lessons to be learned from the bankruptcy. To maintain a true public-private partnership, governments might want to avoid taking the entire concession payment up front.

Chicago completed a similar deal just before the Indiana Toll Road agreement and couldn’t resist the temptation to use the upfront windfall to plug other holes in the city budget instead of using interest from the concession payment to maintain transportation infrastructure. More recently, public-private partnerships for Virginia’s Pocahontas 895 parkway and Colorado’s Northwest Parkway featured smaller upfront payments but give taxpayers a cut of the ongoing toll revenue.

Creative Budgeting Government Style; A Statehouse Up for Sale?

A few years ago, some Hoosiers raised an eyebrow when Gov. Daniels successfully proposed the lease of the toll road in northern Indiana to boost the state coffers. Yet, it pales today to the bold (or desperate) actions some states are attempting and taking due to dire financial straits – the likes of which they have never seen.

Hands down, the “winner,” if you will, with the most outlandish gimmick to come up with quick cash is Arizona. The state is seriously considering SELLING its Capitol building and other state properties for $735 million and then leasing them back for $60 million a year.

It doesn’t take a genius to figure out the problems with this. Sure, it’s a major short-term windfall, but the state is only adding to its debt with the building lease. And what if Arizona can’t come up with its rent money? Will the governor and Legislature have to relocate to less fancy digs – say, a Phoenix strip mall?

The motive is sheer desperation. While California has the title of most beleaguered state budget in terms of actual dollars in debt, no state tops Arizona for percentage of budget shortfall (30% of a more than $10 billion budget). Arizona has also started borrowing from Bank of America to help pay the state’s bills and staggering $3 billion shortfall.

(Learning all this almost makes me want to hear Jim Nabors’ sing “Back Home Again in Indiana” and commit to eating a unique fried food at our state fair next year!)

While Arizona’s possible money “solution” comes from left field, there are plenty more commonplace practices – some legitimate, some a bit sketchy – that states take that can bite them and taxpayers in the end. 

California has tried myriad creative accounting maneuvers to try to make a dent in its nearly $60 billion black hole:  from borrowing from special accounts and local government property taxes to adding to payroll withholdings.  The state also pushed the last month of payroll (June) into the first month (July) of the next fiscal year.  This trick is akin to what used to be a regular occurrence in Indiana: the delaying of local government payments month after month (which ceased with the Daniels administration).

Meanwhile, Illinois legislators recently decided the state should simply not pay its $3.8 billion in bills until the next fiscal year.  Just like when a personal credit card is paid late, there is a price to pay.  For Illinois, that means its vendors may charge up to a 5% penalty.  Now, that’s a late fee that will hurt!

Bottom line: States’ budget quick fixes often come with consequences – steep ones.  Indiana, fortunately, is in better fiscal shape than nearly all others. I guess that’s another thing to be thankful for this Thanksgiving.