Credit downgrade may effect toll projects

Credit downgrade may effect toll projects
By Terri Hall
August 9, 2011

Well, if it’s one thing we’ve learned in the bailout era, it’s that all things financial are interconnected. Following Standard and Poor’s credit downgrade of the U.S., it also downgraded Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are quasi-governmental entities set-up using controversial public private partnerships (or P3s), which have a reputation for lending money to people who don’t have the ability to pay them back.

The same is true of toll projects, especially those done using P3s. For a many years, politicians have been heavily lobbied to turn to P3s to solve their road funding shortfalls, under the auspices that government can fill the gap with some private money. In return, the private entity gets the right to collect tolls in long-term leases, in some cases for up to 99 years as was the case on the Chicago Skyway deal with Cintra-Macquarie.

The bond markets surely see the trend that toll roads are faltering and going bankrupt all over the globe. So the likelihood that they’ll ignore this trend and continue to loan money to either public or private toll entities given the downgrade in the credit-worthiness of the U.S., is slim to nil. Add to that, a recent report by the Office of Inspector General warns that P3s cannot fill the road funding gap, as Congressman John Mica proposes, and it spells trouble for advocates who plan to rely on more toll roads.

From whence will the debt come? Perhaps more importantly, from whence will the money come from to pay it all back, even if government does find a way to borrow more money it doesn’t have?

Clearly we’ve entered into new territory. The days of playing fast and loose with credit and borrowing, and traffic and revenue projections are over. Toll projects, if they’re ever to get off the ground in this climate, had better have traffic projections paved with gold (which is getting harder and harder to do).

In Texas, former Chairman of the House Transportation Committee, Rep. Joe Pickett, testified last year that there are no more toll viable roads in Texas. They’ve all been done. All the remaining toll projects cannot pay for themselves with the projected traffic alone and will involve massive public subsidies to make them solvent. Should taxpayers risk what the private bond investors won’t?

Road debt spirals out of control
At least one former State Representative in Texas is saying ‘no’ to more road debt.  In a recent editorial in the Houston Chronicle, Jim Dunnam notes that with all the talk of the debt ceiling and debt crisis on the federal level, many states, with Texas as a case in point, have a debt crisis of their own.

For the first time in Texas history, taxpayers will be spending more on debt service than it will for new roads. This is Texas Governor Rick Perry’s legacy -- borrowing and spending beyond its means. Texas used to be pay-as-you-go, but under Perry’s leadership, Texas started borrowing money for roads in 2001. The state has gone from zero debt for roads to now owing $31 billion. Most of that borrowing has gone to subsidize toll roads, making taxpayers pay twice to use the same stretch of road.

Dunnam states: “...nearly all of our future infrastructure needs are to be funded by borrowing from the future generation of Texans. In fact, bond rating agencies are already looking negatively upon toll road debt in the states, so even that favored option of (Rick) Perry's will be gone.”

As yet another indication that toll roads and the debt they incur are neither fiscally sound investments nor a means of generating revenue to make-up for road funding shortfalls, the Central Texas Turnpike System has had to subsidize that system to the tune of $100 million. These subsidies are paid with gas taxes, again, double-taxing taxpayers to bailout a toll system that isn’t covering its debt. When subsidies are necessary, tolls become a new hidden tax for roads.

Then there’s the federal borrowing to prop-up toll roads that can’t pay for themselves using a loan program known as Transportation Infrastructure Finance and Innovation Act (TIFIA).  The first federal TIFIA loan went to a P3 venture in San Diego known as the South Bay Expressway. Less than three years later, the road went bankrupt (traffic projections were off by 40,000 cars a day) -- resulting in a loss of nearly $80 million to taxpayers. Now, the local government is going buy back that failing toll road with yet more taxpayer money, which is, in effect, another bailout.

But the tax man still cometh
All of this comes at a time when Americans’ paychecks are shrinking and when energy and food costs are skyrocketing beyond their ability to keep up. Federal Highway Administration statistics consistently show, as the cost of transportation goes up, driving goes down. So add tolls on top of already rising gas prices, and it puts these toll roads on a collision course with economic reality. Of course, the tax man still cometh, too.  So it begs the question, what is the rationale to keep borrowing and spending money for roads beyond what this generation can pay?

Thomas Jefferson warned against such multi-generational debt when he said: “I say, the earth belongs to each of these generations during its course, fully and in its own right. The second generation receives it clear of the debts and incumbrances of the first, the third of the second, and so on. For if the first could charge it with a debt, then the earth would belong to the dead and not to the living generation. Then, no generation can contract debts greater than may be paid during the course of its own existence.”

Politicians aren’t known for reining themselves in, voters try, but usually end up in the same place only a few years later. So if Europe’s debt crisis is any indicator, the United States’ borrowing habit is likely to be tamed by the financial market itself, as the weight of this crushing debt sinks under its own weight and investors finally say ‘no’ to ill-conceived government borrowing that has no fiscally sound means of repayment.

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