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Pacific Research Institute Study Questions the Financial Viability of the Toll Roads

The poor toll road!  It is being whip-sawed back and forth this week.  First, on Tuesday it received good news in the form of $8.3M in funding from the Orange County Board of Supervisors and OCTA for construction of Cow Camp Road to an interchange with the proposed 241 Tesoro Extension.  Today, however, a research study questions the financial viability of the toll roads and suggests that the Tesoro Extension should be shelved.  The Pacific Research Institute for Public Policy released a study on the Orange County toll roads titled: “Orange County Toll Roads: Serious Concerns Should Lead to Significant Review by State and Local Officials”, authored by Donna Arduin, a former budget director under Governor Schwarzenegger and Pacific Research Institute senior fellow Wayne Winegarden, Ph.D.

“Orange County Toll Roads: Serious Concerns Should Lead to Significant Review by State and Local Officials” (cover credit: Pacific Research Institute)

The Patch reports on the study in this article.  The Los Angeles Times reports on the study in this article.  From the Times:

In December, SNR Denton, a Los Angeles law firm that helped stop the TCA from building a route through San Onofre State Park, disclosed documents that revealed a host of issues plaguing the agency. They included sagging ridership and revenue as well as mounting debts and declining ratings for bonds sold to investors.  … The new study agrees with many of Denton’s findings, but it goes one step further in recommending that the TCA halt the refinancing and shelve a proposed tollway project in southern Orange County until the agency’s finances are vetted.

Spokespersons for the Toll Roads agency claim the study is the latest efforts by opponents to stop further construction of the toll roads.

Among the findings of the study (excerpted from this summary page at the Pacific Research Institute’s web site):

  • Unlike virtually every other toll road in the United States, the Orange County toll roads receive annual subsidies from taxpayers for road maintenance.  These subsidies — which include payments by homeowners via “developer fees” — total an estimated $1.7 billion to date.
  • A substantial portion of the current debt is in the form of controversial “capital appreciation bonds,” which defer both principal and interest payments for an extended period of time.  This structure permitted TCA to have much smaller debt service payment in the early years but will result in huge increases in annual debt service payments each year through maturity. For both FETCA and SJHTCA, capital appreciation bonds constitute 23 percent of total outstanding debt.
  • In order to meet the toll roads’ debt obligations, toll rates have risen dramatically; the debt per mile for the 241 toll road (managed by FETCA) is $64 million and for the 73 toll road (SJHTCA) is $136 million, compared to $17.1 million for the average U.S. toll road.
  • Toll rates for the 241 and 73 roads are among the highest in the country.  This has compelled price-sensitive commuters to avoid them and instead to drive on free public roads.

The study also includes some recommendations:

  • TCA’s proposed refinancing plan is extremely risky and relies heavily on capital appreciation bonds.  The proposed refinancing plan should not proceed without further review by state officials.
  • TCA’s plan to spend funds to extend  the 241 under these conditions is not justifiable and should cease immediately.
  • The board and management of FETCA and SJHTCA should address these serious shortcomings and evaluate additional options before continuing plans to extend the 241 or refinance existing debt.
  • Caltrans should review its subsidy of toll road maintenance, should suspend any agreement that prevents improvements to Interstate 5, and should undertake a comprehensive review to coordinate traffic for the county in a rational, efficient manner.

Who is the Pacific Research Institute?  It has been described as a libertarian leaning think tank.   Founded in 1979, the Pacific Research Institute for Public Policy’s stated mission is to promote “the principles of individual freedom and personal responsibility” by advocating free markets and limited government.  The Pacific Research Institute travels in the same ideological circles as prominent conservative and libertarian think tanks and policy shops such as the American Enterprise Institute, Heritage Foundation and Cato Institute.  Pacific Research Institute is primarily known for its work on market-based healthcare solutions, although it also publishes a broadly distributed index of environmental indicators and a ranking of the 50 states by economic freedom.  Pacific Research President and CEO Sally Pipes is a prominent conservative leader and a vocal opponent of President Obama’s health care system.  She has been named one of the most influential women in the conservative movement in America.

From the study’s executive summary:

An old business adage holds that a business will never catch up if it must continually make decisions based on cash flow requirements that are detrimental to its long-run viability. Instead the problems with shortterm and near-term cash flow considerations must be identified and addressed. This adage appears to be applicable to the 241 and 73 toll roads in Southern California and the two public joint-powers agencies that manage these roads, the Foothill/Eastern Transportation Corridor Agency (FETCA) and the San Joaquin Hills Transportation Corridor Agency (SJHTCA)—known jointly, as the Transportation Corridor Agencies (TCA).

Based on our review, the operations of these toll roads presently appear to be unsustainable and likely have been unworkable from their inception. The original financial plans for the 241 and 73 toll roads were based on overly optimistic growth assumptions and did not leave a financial cushion for TCA to operate under reduced utilization or economic downturns. Subsequent decisions by TCA board members and managers have made matters worse.

Ouch.  We are going to read the entire study and comment on it to the extent we have anything to add.  If you would like to do the same, the Pacific Research Institute study is available for download here (PDF).

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