NTTA Bailout in the Works?

In the continuing saga of the North Texas Tollway Authority, things are worse than I had previously thought:

Right now, the North Texas Tollway Authority, which operates and builds the area’s toll roads, is having trouble finding financing for all of their new projects. Now, area transportation planners say they have a solution that would keep the building of all planned toll roads on time. [. . .] [T]he credit crunch is causing problems for the NTTA and their financing of toll road construction. “It appears those initiatives are going to be slowed down tremendously,” says Transportation Planner Michael Morris. Investors still haven’t bought all of the bonds to pay off Highway 121 and that must happen by November. The credit crisis is also making it more difficult for the NTTA to finance the fourth phase of the 161 Toll Road connecting Interstate-30 to Interstate-20, in Grand Prairie. Now, the lead transportation planner in North Texas, Michael Morris, says he’s developed a plan to keep the toll roads on schedule and avoid the troubled bond markets. Under his plan, the Regional Transportation Council would loan the NTTA the $225 million needed to buy outstanding bonds for the 121 toll. As for the 161 Toll Road, Morris says under his plan, NTTA would give up its right of first refusal to build the toll. Instead, a private firm would pay at least $500 million to the RTC to build the 161 toll, and then the RTC would split the profits with the NTTA. The plan would also have the RTC and the NTTA split the cost of building the proposed Trinity Parkway Toll Road, which would connect Highway 183, near Interstate-35 in Dallas, and Central Expressway just south of downtown.

A few observations here: 1) The Metroplex is getting a clinic in risk. And having sat in numerous RTC and Texas Transportation Commission meetings on the SH-121 project last summer, I can tell you that the risks were well described in advance, and policymakers knew what they were getting into. They were just blinded by the all of the promises NTTA made, and they were swept up in this “buy local” nonsense. For those on the RTC that voted for NTTA to take that project, I wonder how many would now look back and realize the key mistake: buying local bought the region a ton of risk. And it didn’t take long for chickens to start coming home to roost. 2) In principle, I think a bailout of a public toll authority sets a very bad precedent. Taxpayers are not on the hook if a public toll authority implodes— these entities generally rely on non-recourse toll revenue bond financing, meaning that their bonds are backed by project/system toll revenues. The legal documents executed in financing state emphatically that there’s no recourse against the state and taxpayers if things go south. In the case of default, the bondholders may gripe and complain and beg for a state or local bailout, but to date, there’s been a long track record of governments refusing to bail out failed toll projects. Should we really reward NTTA for willingly and consciously overextending itself and dumping a ton of risk on Metroplex taxpayers/drivers in its quest to preserve its regional monopoly? 3) The pragmatic side of me knows that Michael Morris is a fine and extremely capable public steward, and I sense that he’s not content to simply let NTTA sink, in the interest of the larger mobility needs in the region. 4) There are some interesting aspects to this. If I’m reading this correctly, it sounds like Morris’s plan would be to bail out the NTTA SH-121 bonds unsold by November in exchange for NTTA giving up right of first refusal on SH-161 and letting TXDOT advance that project as a PPP toll concession. Then RTC would later get back any upfront payment proceeds for SH-161, which presumably would repay some or all of the cost of acquiring the bonds. [Still unknown is why would you share the upfront payment and/or annual payments with NTTA? Presumably to hedge again future cash flow problems, but again, is this warranted? Seems to me that that’s giving up too much right up front to NTTA.] 5) Regardless, at its core, this plan would ultimately use PPPs to backfill the bailout of NTTA and get projects moving again. Another illustration of how policymakers can turn to PPPs to rescue failing public sector projects/entities. Morris would basically give the most lucrative remaining Metroplex toll project to the private sector, while they get NTTA back focused on projects that they (with RTC assistance, apparently) can realistically finance over the next few decades (which won’t be a whole lot, I predict). And Morris’s plan would shut down the terrible market valuation process on SH-161 for good. So there are indeed some appealing aspects of this as well, despite the terrible stench of the bailout component. 6) It’s not an understatement to say that, with events in the capital markets and Capitol Hill this week, Metroplex taxpayers are probably not going to be too keen to see yet another bailout of an entity making big-ticket, risky gambles. Even if repaid from non-tax sources, I can’t imagine that locals would take too kindly to news of a bailout in their backyard, especially for a business enterprise (or government business enterprise, more accurately) that made such lavish promises to the region just one year ago. And local leaders were clearly complicit–they knew the risks associated with NTTA, and they still let it happen. Worse, they had a golden opportunity to offload many of those risks in a PPP, and they still said no. The RTC’s poor judgment is now coming back to haunt them, and their constituents should be asking some tough questions about how they got into this mess in the first place. In sum, Morris’ plan to me seems partially like banishing the bad puppy to the doghouse in the backyard, and partially like still feeding it gourmet dog food in the backyard at mealtime. At the same time, they don’t have a whole lot of options to work with, thanks to the state legislature and SB 792 last session. This one will be interesting to watch develop. Reason’s Annual Privatization Report 2008 Reason’s Transportation Research and Commentary