Leverage Federal Funds for Tollway Projects and Merge the Turnpike Authority with TxDOT

Texas should leverage federal funds for tollway projects with private investment; also, the planning and management function of the Texas Turnpike Authority (TTA) should be merged into the Texas Department of Transportation (TxDOT).

Three new measures the federal Intermodal Surface Transportation Act (ISTEA), a presidential executive order and a Texas Constitutional amendment provide Texas with the opportunity to expand the resources available for transportation. Texas must study how to best incorporate and leverage these new options into a comprehensive transportation program that places a greater emphasis on tollroads for both freight and passenger travel.

New Federal and State Initiatives for Tollroad Development
Recent changes in both state and federal laws provide more flexibility in policy development and financing options for the construction and operation of tollways. ISTEA, signed in December 1991, allows states much more authority and flexibility to use fede ral funds for tollways, public/private partnerships and user-charge options. A presidential executive order issued April 1992 authorized the removal of federal regulations preventing state and local governments from promoting private inv estment in infrastructure. Finally, a 1991 amendment to the Texas Constitution allows TxDOT to provide money from any source to use in TTA projects.

ISTEA relaxes restrictions on the use of toll financing in the federal aid program, provides for leveraging federal funds with private investment and makes cost-sharing possible in the context of public/private partnerships. States, for the first time, can use federal dollars for initial construction of toll facilities; reconstruction, resurfacing, restoratio n and rehabilitation of a toll facility; reconstruction of free bridges or tunnels and conversion to toll facilities; and preliminary project feasibility studies. Furthermore, the act allows states to continue the federal-aid tollway after the debt is reti red. The proceeds must then be used for eligible transportation purposes and may even be used as the state s portion of expenditures eligible for federal matching funds. Various forms of federal loans and grants can also be administered by states and co-mingled with toll-backed debt and private equity.

ISTEA s removal of barriers to the widespread use of tollways allows states to consider a supplement to conventional federal and state fuel and vehicle taxes. Recent developments, such as Automated Vehicle Identification (AVI), are gradually eliminating ex pensive and space-consuming manual toll collection and associated congestion. AVI allows for cashless billing when a vehicle passes an electronic toll and traffic management device (ETTM). Pricing schemes c an be used during congestion, or peak hour traffic, to reduce travel time, achieve cleaner air and generate revenue. Another form of toll technology that is used in some areas is weight-distance tolls. Cars and trucks are weighed as they pass by an ETTM de vice and are billed according to the distance traveled and the weight of the vehicle.

In accordance with the push for privatization, the April 1992 presidential executive order relaxes federal regulations that hinder state and local governments from prom oting private investment in infrastructure. The order defines an infrastructure asset as any asset financed in whole or in part by the federal government and needed for the functioning of the economy. 1 This includes airports, housing, schools, roads, bridges, toll roads, water supply facilities and solid waste disposal and wastewater treatment facilities.

The order allows state and local governments to sell or lease infrastructure projects. Proceeds are received first by the state or local governments (full investment in the original project cost plus any other repair costs). The federal government is then entitled to its grants less calculated depreciation. State and local governments keep any remaining proceeds. The proceeds may then be used for additional investments in infrastructure assets or used for debt or tax reduction.

Texas Turnpike Authority
Since 1953, TTA has had statewide authority to plan, finance, build and operate toll facilities in Texas. TTA does not receive state funds for the constr uction of its projects. Revenue bonds are issued for TTA projects, and the funds are held outside the State Treasury. Until recently, the constitution prohibited the appropriation of state funds to any agency that builds and operates toll facilities. The c onstitution also prohibited the Legislature from lending the credit of the state or assuming any indebtedness for the construction, maintenance or operation of tollways within the state.

On November 5, 1991, voters approved an amendment allowing TxDOT to provide money from any source to TTA projects. 2 Money from the Highway Fund must be repaid over the lifetime of the project.

Also in 1991, TTA underwent sunset review which resulted in new legislation, allowing TTA to enter into agreements with political subdivisions of the state and states of Mexico as well as private organizations. 3 TTA can negotiate with private entities for the construction, maintenance, repair and operation of tollway projects.

Currently, there are three tollway projects in Texas operating under TTA s authority: the Dallas North Tollway and Mountain Creek Lake Bridge in Dallas County and the Houston Ship Channel Bridge in Harris County. There are also two local toll roads, separate from the TTA, that have been built by the Harris Co unty Toll Road Corporation: the Sam Houston Tollway and the Hardy Street Tollway.

Table 1 - Texas Turnpike Authority Facts

Vehicle Trips Net Revenues
Highway 10/91-10/92 Construction Cost* October 1992+
Project Miles (millions) (millions) (millions)

Dallas North Tollway 9.8 73.4 $370.8 $1.03
Mountain Creek Lake Bridge 2.5 3.0 9.2 0.05
Houston Ship Channel Bridge 4.2 5.9 129.9 (0.52)

Total 16.5 82.3 $509.9 $0.56

* Bonds issued to date.
+ Based on accrual method of accounting.
Sources: Texas Turnpike Authority, 1991 Annual Report, and July 31, 1992 Financial Statements; and Comptroller of Public Accounts, Texas 1991 Comprehensive Annual Financial Report.

Tollroad Opportunities
TTA is exploring the possibility of selling or leasin g these projects to Dallas and Harris Counties. The Texas Attorney General issued a statement dated September 16, 1992, regarding the authorization of TTA to transfer the Houston Ship Channel Bridge project to a transportation corporation organized on beha lf of Harris County. The statement concluded that the Texas Turnpike Act neither explicitly authorizes nor explicitly prohibits the proposed transfer of the Houston Ship Channel Bridge, indicating that the decision will be left to the Legislature. 4

Selli ng or leasing the tollways will allow TTA to clear its balance sheet and begin planning and developing future projects that should include private equity. Clearing the balance sheet is important because investors are already concerned about purchasing toll -backed revenue bonds that depend on ridership for the next 40 years. Selling or leasing the tollways to other governmental subdivisions, however, will not take advantage of private investment. The idea behind flexibility of private equity in tollway finan ce is to increase the public good without using taxpayer money or by leveraging public funds.

Other states involved in private tollroad projects include California, Arizona, Virginia and Florida. In addition, legislation has been proposed or discussed for private projects in Colorado, Illinois, Missouri, Minnesota, Mississippi and Nevada. Arizona i s the first state to offer tollway users the opportunity to receive a refund of gasoline taxes paid for miles driven on the tollways. In Arizona and California, a cap on the rate of return for private firms operating such projects creates an excess which can be used to help fund additional free highways. This is potentially a good way to stretch the private investment dollar for not only the private tollway, but for other highway projects as well. Ceilings are the maximum returns that may be earned, not guaranteed returns.

The key to ceilings is to limit the private developers to a reasonable return on investment, without unreasonably interfering with the ability of the project to attract financing. 5 This balancing act can be difficult, however, if toll collections are lower than expected or costs are higher. Regulating toll rates under these circumstances could hinder a private entity from receiving a positive return on its investment.

Privately-developed tollway projects are common worldwide. Tollway facilities have been constructed with private investment in countries such as Argentina, Australia, Canada, China, England, France, Germany, Holland, Japan and Mexico.

The world s most aggressive and experienced player in private infrastructure is Mexico. The Mexicans are operating or developing 32 build-operate-transfer (BOT) projects for 2,835 kilometers of new toll roads, and two international bridges, with a total co st of $4 billion. 6 According to Mexico s Secretariat of Communications and Transport (SCT), the transportation sector in Mexico is expected to grow 42 percent between 1990 and 1994. If the North American Free Trade Agreement (NAFTA) is implemen ted, SCT predicts a doubling of demand for domestic transportation services and a tripling of international traffic by the year 2000. 7

A. The Legislature should mandate that Texas Department of Transportation (TxDOT) study the sale of existing toll facilities to private investors and/or interested governmental subdivisions; the study should be completed by June 1, 1994.

Considering the advantage of private leveraging of tollways provided in the ISTEA and the future impact of the North A merican Free Trade Agreement (NAFTA) on transportation needs, tollway planning, development and construction will play an important role in the development of the state s future transportation infrastructure. TxDOT should use expertise already existing in Texas institutions of higher education to assist in planning and conducting research.

The Legislature also should require TxDOT to study ways to attract private entities for tollway investment opportunities. Joint ventures between the public and private sectors should be explored, including ventures between sub-levels of government and the private sector as well as solely private investments. Another area that should be explored is the use of public pension funds. Pension funds to promote economic develo pment are used throughout the nation and may offer distinct possibilities for resolving the procurement of additional debt.

B. State statutes should be amended authorizing the consolidation of the Texas Turnpike Authority (TTA) into the Texas Department of Transportation (TxDOT).

This change, effective on December 1, 1994, would enhance the state s planning, development and construction of toll facilities. The consolidation, previously recommended by the Texas Performance Review, will improve coordination of toll facilities with other existing state, county and local roads. 8 Also, the consolidation fits with TxDOT s new mission to move away from being a highway agency to being a multi-modal transportation agency. However, the State of Texas will not ass ume any debt responsibilities from current TTA operations as it merges into TxDOT.

A revolving account should be created in the General Revenue Fund for financing future tollway projects. The fund should be designated the Turnpike Revolving Account. The account will assist in TxDOT s funding of future tollway projects, including loans to private sector entities developing or operating toll facilities. All interest and proceeds from tollway projects, including revenues from caps, should be deposited into t his general revenue account.

C. The Legislature should require TxDOT to examine where state statutes should be amended so that a certain minimum percent of a future tollway projects cost be provided by the private sector. Selling existing tollway facilities should also be studied. The studies should be completed by June 1, 1994.

Selling existing tollway facilities will allow TxDOT to begin planning the development of future tollway projects (especially in South Texas in preparation for increases in tr affic caused by NAFTA) in intermodal ground corridors or in other areas of Texas. More importantly, new tollway initiatives can attract private and foreign investors in new concessions. This new investment will greatly reduce the deferred construction and maintenance of the state s transportation infrastructure. TxDOT should use expertise already existing in Texas institutions of higher education to assist in planning and conducting research.

In addition, the study should investigate if state statutes should be amended to require a ceiling for all private owners of tollway projects. Private entities could be required to submit to the state any revenues above and beyond each project s designated ceiling level. The ceiling, or cap, should be low enough to raise additional revenue for planning and development for future tollways and for free highway construction and maintenance. At the same time, the cap should not be so high as to discourage private investment. D etermining caps on the rate of return for toll ways is difficult and may need periodic review and adjustment. Therefore, the Legislature should mandate that TxDOT set ceilings for each individual project and report recommendations for ceilings and ceiling changes on a case-by-case basis. A reasonable r ate of return should be preserved for private entities to encourage the leveraging of state and federal funds with private equity.

Fiscal Impact
The financing of the recommended studies would come, as much as possible, from federal ISTEA funds. ISTEA provides states with substantial funding to conduct research and planning. 9

All costs for operations of TTA projects must be kept separately from TxDOT appropriations. TTA bond funds and revenues must be used for the projects for which they are designated and will not be available for other highway purposes. TxDOT would receive re imbursement from these funds, however, for costs incurred, including operational and administrative costs related to turnpike activity. The State of Texas will not assume the debt responsibilities from current TTA projects.

In addition, further gains can be realized by allowing private investment for future tollways. Because of the various sizes and costs of different projects, an estimate cannot be determined. Also, revenues from ceiling caps, if realized, cannot be determin ed until each project has been thoroughly examined.

1 U.S. President, George Bush, Proclamation. Infrastructure Privatization. Federal Register, vol. 57, no. 86, May 4, 1992, p. 19063.
2 Lyndon B. Johnson School of Public Affairs, Guide to Texas State Agencies (Austin, Texas, 1992), p. 223.
3 Texas Turnpike Authority, Thirty-Eighth Annual Report, 1991 (Dallas, Texas, 1992), p. 6.
4 Memorandum from Will Pryor, First Assistant Attorney General, Texas Attorney General s Office, to Mr. James W. Griffin, Deputy Director, Texas Turnpike Authority, and Mr. Arnold W. Oliver, Executive Director, Texas Department of Transportation, September 16, 1992.
5 Price Waterhouse, Final Report on the Finance Provisions of the AB 680 Transportation Project Development Franchise Agreements (February 1991), p. 4.
6 Public Works Financing International, Privately Developed Infrastructure Projects Worldwide, October 1992, p. 14.
7 Public Works Financing International, Mexico-U.S. Road Privatization Parley Raises Hopes and Plenty of Questions, April 1992, p. 2.
8 Comptroller of Public Accounts, Breaking the Mold: New Ways to Govern Texas (Austin, Texas, July 1991), vol. 2, part 1, pp. TR 5-TR 11.
9 U.S. Department of Transportation, A Summary of the Intermodal Surface Transportation Efficiency Act of 1991 (Washington, D.C., 1992), pp. 31-33, 38-42.