June 12, 2007

by Paul Burka, Texas Monthly

What follows is the result of a discussion I had with a knowledgeable person who was involved in the debate over transportation and toll roads and who prefers not to be further identified. After the discussion, I received two written communications on the subject. I'm going to present the entire discussion as an interview. Hopefully, it will shed light on these two questions: (1) What is to be made of SB 372, the transportation bill that Governor Perry has pledged to sign? (2) Who were the winners and losers?

Q. What constituencies drove the fashioning of SB 372 and how effective were they?

A. One was a loose collection of grassroots, anti-Trans Texas Corridor, anti-toll advocates who have criticized the Corridor since it was first proposed. Some of these individuals, however, often border on a "black helicopter" message and have little legislative impact other than to keep the issue stirred up. To the extent that their message is anti-toll rather than anti-concession, it flies in the face of general legislative acceptance that toll strategies will have to be part of solving the mobility crisis in Texas. The second important group of players were legislators, led by senators John Carona and Robert Nichols and representative Lois Kolkhorst. They questioned the long-term policy implications of concessions, especially those that impinged on long-term public control, such as covenants-not-to-compete (or "developer rights" as these provisions came to be called), buyback provisions, control of toll rates, and similar issues. A third factor, which became more and more important as the legislative session went on, was strong criticism from independent business leaders and groups in Houston and Dallas who criticized the financial terms of concession agreements, which Carona referred to as "like buying a TV on a rent-to-own basis." A final factor was the set of interests united behind the local toll road authorities, especially the Harris County Toll Road Authority (HCTRA), who were working to preserve the ability of these entities to develop toll projects independent of TxDOT's push for concessions. Advocates for the local entities see them as best positioned to build political support for toll strategies in the metropolitan areas. HCTRA enjoys strong political support from business leaders and from engineering and construction interests in Harris County.

Q. How did all this get started?

A. It was triggered primarily by the TxDOT?s insistence during 2006 that HCTRA pay the TxDOT $1.3 billion upfront and some unspecified share of future revenues before it could proceed with three pending toll projects. HCTRA and its backers chose to take this issue to the Legislature instead, championed by in the Senate by Tommy Williams and in the House by Wayne Smith. Originally, the primary intent of both HB 1892 (Smith's bill that was vetoed by the governor) and Williams' SB 792 was to provide local toll authorities "primacy" in the development of toll projects within their jurisdiction. Through parliamentary maneuvering, these bills became the vehicles for a thorough review of state transportation policy.

Q. Governor Perry's office has said that the effort to limit concessions failed--that the main initiative, to impose a two-year moratorium on concession agreements, does not achieve its goal, and that TxDOT's concessions policy "dodged a bullet.? Do you agree?

A. This argument is mostly political spin. While some projects under development will go forward as concessions, it is almost certain that, in the absence of a moratorium, TxDOT would have solicited proposals for additional concessions or would have received unsolicited proposals for new projects. Most observers saw the demands TxDOT made of HCTRA in 2006 as a prelude to a solicitation for concession agreements in Harris County. The moratorium in SB 792 stops this possibility, as well as other potential solicitations in other parts of the state. Also, some of the potential projects that are technically exempted from the moratorium almost certainly have no chance of proceeding as a concession agreement, even though they are exempt from the moratorium--for example, the proposed TTC-69 south of Corpus Christi. In Bexar County, the moratorium derails a pending concession agreement on US 281 and Loop 1604. And finally, the legislation takes two projects that would have been developed as concessions under previous law--SH 121 and SH 161 in the DFW area--and grants the North Texas Tollway Authority a right of first refusal on the projects. In sum, it cannot be reasonably argued, as the governor's office attempted to do, that the CDA moratorium in SB 792 is without effect.

Q. How was the issue of primacy between the state and the local toll authorities resolved?

A. The locals won. They have the right of first refusal for any project in their region. Although this might appear to be a state versus local issue, it is more accurately seen as an issue that pits the concession model for toll roads against a more traditional public toll road authority model. The leadership of TxDOT has been totally committed to the concession model. While SB 792 gives the local toll authorities the ability to do concession agreements, they have, to date, shown little interest (especially in Harris County) in considering concessions.

Q. What did the governor's office get from the compromises in SB 372?

A. Two things. (1) The bill limits the primacy of local toll authorities initially to a specified list of projects. (2) Future projects must go through a "market valuation" process. The notion of a market valuation of a toll project is that an effort will be made to estimate the amount of surplus revenues that can be extracted from a toll project at the front end. Under the pilot project set out in SB 792, the toll authority and TxDOT would agree on a third party to conduct a market valuation. After the valuation, the authority, if it chose to exercise its right to develop the project, would be required to commit to construct additional projects equal to the surplus revenue or to deposit an equal amount into an account to be used by TxDOT to construct additional projects in the region. TxDOT believes that the market valuation study will show that more revenue will be available from the concession model than from the traditional model of collecting tolls over the life of the project.

Q. Isn't this the central issue in the transportation debate?

A. Let's restate it this way: Is it better to extract surplus revenue over the life of a project or to estimate this and (if feasible) extract it at the front end?

TxDOT's policy has assumed that it is better to extract the revenue at the front end: Identify the 20-25 most gold-plated toll projects in the state; be as aggressive as possible in maximizing the toll rates; lock up the revenue stream from these projects for as long a period as possible; leverage this revenue stream to the maximum extent practical; and use that super-long term borrowing to fund current transportation needs in the absence of a fuel tax increase. Those who disagree with this approach have argued that it surrenders public control over toll rates and ties the state's hands by providing disincentives to building free roads that might reduce revenue on toll projects. Opponents also argued that the transactional costs associated with this approach divert an excessive amount of the long-term revenue stream associated with a toll project, money that could otherwise be spent on transportation improvements. Advocates of traditional public approaches characterized the concession approach as the "high cost" way of building projects, as opposed to the traditional ?low cost? way.

Q. So, who were the winners and losers?

A. It is hard to see SB 792 as anything other than a setback for the concession model.

One closing comment. In the next to last Q and A, it is clear that the assumption underlying TxDOT's policy is that the Legislature will not raise the gasoline tax. Mike Krusee offered an amendment this session to index the tax to inflation, and it was soundly voted down by the House. Lawmakers, craven as ever, want to complain about concession agreements, but they refuse to take actions that would make them unnecessary. A popular governor could provide the leadership for indexing the gasoline tax and issuing bonds based on the increased revenue stream, selling it to the public as a way to avoid expensive toll roads. Dream on.