TxDOT's unconstitutional loan guarantee raises ire

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Unconstitutional loan guarantee by highway department raises ire
By Terri Hall
July 21, 2013

With state and federal highway dollars pinched and toll road traffic taking a hit from a sustained economic downturn and high gas prices, states are looking for ways to get projects built with limited resources. Bond documents for the $2.6 billion Grand Parkway (State Highway 99) tollway reveal the bonds issued by the Texas Department of Transportation (TxDOT) will be backed by the state highway fund for all but $200 million of the debt if toll revenues are insufficient. Counting interest, that's an obligation of up to $9.6 billion for Texas taxpayers, without approval or oversight from either voters or the Texas legislature.

There’s a catch to TxDOT’s loan guarantee. The Texas Constitution prohibits the state highway fund from being used to guarantee loans:
"Nothing contained herein shall be construed as authorizing the pledging of the State's credit for any purpose."(Article 8, Sec 7-a)

The Comptroller’s revenue estimates for the state highway fund in for fiscal years 2014-2015 totals $17.3 billion (including federal funds), or approximately $8.5 billion/year. So the obligation for this single toll project consumes more than the total revenues available from the highway fund for an entire year.

Toll revenues often fall short
As recent data shows, collecting projected toll revenues are certainly no slam dunk. State Highway 130 around Austin has been in a sea of red ink since it opened. TxDOT operates the northern 45 miles (segments 1-4) and Spain-based Cintra operates the southern 41 miles (segments 5 & 6). Texas taxpayers had to bailout TxDOT’s segments to the tune of $100 million in 2010. Cintra’s segments are attracting only half the traffic forecasted and Moody’s downgraded the bonds on it predicting default by the end of next year. Despite taxpayers footing the bill for truck toll rates this year, the tollway still isn’t meeting projections. The same story has played out on a number of toll projects around the country like the South Bay Expressway, the Greenville Southern Connector, and the Pocohontas Parkway.

Precedent already set
TxDOT’s creative financing began in 2010 with the Highway 161 tollway, a direct connection to the Rangers Ballpark in Arlington, using the State Highway Fund to backstop a loan to the North Texas Tollway Authority (NTTA) for up to $6 billion in gas taxes over the next 52 years. Meanwhile, the NTTA brags on its web site that it doesn’t use tax money to support its toll roads.

A Texas Tribune article from February 2010 spells out the monkey business: "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…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."

Rep. Joe Pickett put up red flags about the precedent such loan guarantees would set in a letter to the Department: “Given the amount of debt the Department has already incurred and the uncertainty of future revenue to replenish Fund 6, what protections, if any, are there for Fund 6?”

Little else was done to stop the precedent. Emboldened by the free pass, TxDOT is doing it again for the Grand Parkway, unless the legislature and/or Texas Attorney General steps in. The Grand Parkway, an outer loop around the Houston metropolitan area, is primarily a greenfield project through the Katy prairie where there’s no current congestion problem. The project is not on the state’s 100 Most Congested Roads List. It’s been dubbed the road for ExxonMobil who re-located its headquarters to the suburbs of Harris County contingent upon the completion of these segments of the Grand Parkway.

The plot thickens
At its Commission hearing May 31, TxDOT proposed a rule change that grants the agency a blank check to enter into unlimited numbers of private toll contracts often called public private partnerships or P3s. The Minute Order brings a new type of P3 called ‘availability payments’ into the Department’s pass through financing rules. This authority expired in 2009 except on a very limited number of toll projects specifically authorized by the legislature, so the agency is trying to gain this authority by making an end run around state lawmakers.

Availability payments usually involve toll projects, where the state highway fund (meant to fund free roads), not toll revenues, guarantee repayment to the private concessionaire on the project.

TxDOT’s unconstitutional loan guarantee combined with its brazen proposed 'rule change’ puts the state of Texas at great financial risk. Essentially, the Department is writing checks the taxpayers do not have adequate funds to cash.

The Texas state highway fund has been chronically underfunded as well as raided for non-road purposes, leaving the highway department few options for financing new construction other than debt and tolling. So short of ending road tax diversions or draconian tax hikes, TxDOT is obligating not only budget writers but also Texas taxpayers to an uncertain future of red ink with no sustainable source of revenue to pay it all back.

But that certainly doesn’t give TxDOT permission to sidestep the Texas legislature and write its own rules, violate the Constitution, and obligate Texans to a virtually unlimited number of taxpayer bailouts of toll roads, whether public or private. It’s not only double taxation but also fiscally reckless. This arrogant move by TxDOT demonstrates why state agencies don’t get to appropriate themselves money from the state treasury. The Texas legislature appropriates tax money, and it’s directly accountable to the people who elected them. So bypassing lawmakers makes TxDOT its own defacto taxing entity -- like a king making laws in his own fiefdom.

State officials, especially those charged with oversight over the Texas state budget and enforcement of the Constitution, need to step-in to prevent this un-Constitutional loan guarantee by TxDOT that could be the final nail in the coffin sealing the state’s fiscal cliff on road funding.