Surface Transportation Newsletter #118
Photo 88437997 © Caymia -

Surface Transportation Innovations Newsletter

Surface Transportation Newsletter #118

Populist attack on tolling in Virginia, TIFIA and project bankruptcy, Express lane projects gaining traffic, and More...

In this issue:

Populist Attack on Tolling in Virginia

Virginia’s Midtown Tunnel P3 project, being delivered as a $1.7 billion toll concession, has been challenged in court as an unconstitutional delegation of tolling authority to Virginia DOT (and hence to the concession company, a joint venture of Macquarie and Skanska). To the surprise of many observers, earlier this year a state Circuit Court agreed with the plaintiff’s case, so it is now on appeal to the Virginia Supreme Court.

Virginia has been one of the pioneers in long-term P3s for transportation infrastructure. After its very first such project, the Dulles Greenway, endured a difficult birth as (legally) a public utility under the jurisdiction of the same regulatory agency that regulates electric utilities, the legislature enacted the Public-Private Partnership Act (PPTA) of 1995. A number of tolled and non-tolled projects have been carried out under the PPTA, including the tolled express lanes on the Capital Beltway (I-495) and the under-construction tolled express lanes on I-95, with more such projects in the pipeline. None of those projects faced constitutional challenge.

What aroused the ire of local activists and legislators about the Midtown Tunnel concession was the financing deal worked out to minimize the toll rates for the new tunnel. With the addition of the new tunnel via this project, there will be three parallel tunnels under the Elizabeth River linking Norfolk and Portsmouth. The original tunnels were financed with toll revenue, but when their original bonds were paid off, the tolls were (foolishly) rescinded. Given that the three tunnels will be close substitutes for each other, charging only to use the new one would (a) mean large numbers of motorists would opt for the non-tolled alternatives, and (b) require sky-high toll rates on the new tunnel, which would exacerbate problem (a). So the concession agreement calls for the company to be responsible for operating and maintaining all three tunnels, with comparable low tolls on each.

I recently read over VDOT’s opening brief to the Supreme Court. I am not an attorney, so I can give you only a transportation policy perspective on its arguments-but I find them highly persuasive. The first main point is that, contrary to the plaintiffs’ allegations, the tolls are not “taxes,” either in the legal meaning under Virginia law or in any common-usage sense of the two terms. The tolls are user fees that do not raise revenues for unrelated purposes. There’s a huge legal literature on this subject, not only in Virginia but in many other states. And VDOT argues that there is ample legal precedent, in utility law and elsewhere, that user fees to support a bond financing may support a “project” that consists of multiple facilities operating as a network.

VDOT also argues that the tolls are not taxes because they are voluntary, since there will remain alternative ways to cross the river without paying a toll; hence there is no delegation of taxing power to VDOT. The brief also notes that the “plaintiffs have not cited even a single case holding that tolls are taxes, in Virginia or elsewhere.” And finally, arguing that the PPTA does not unlawfully delegate legislative authority to VDOT, the brief says that “Compared to the generally stated policy objectives upheld in other cases, the PPTA easily passes muster.”

This case poses a direct challenge both to toll finance and to one of the nation’s first, and most-used, transportation P3 enabling laws. It would be a travesty for the Virginia Supreme Court to uphold the horribly flawed Circuit Court decision.

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TIFIA and Project Bankruptcy

One concern raised by skeptics of the US DOT’s TIFIA loan program is that federal taxpayers may get stuck with loans that cannot be repaid, if some of the projects turn out to be more risky than estimated when the loan was granted. So far, only one TIFIA-supported project has gone through bankruptcy-and the outcome sets a good precedent for taxpayer protection.

The project was a brand new (“greenfield”) toll road in San Diego, the South Bay Expressway (SBX). Due in part to large litigation costs over construction cost overruns and to a steep decline in traffic thanks to the Southern California housing markets collapse in 2008-09, SBX filed for bankruptcy at the end of 2010. The private-sector equity investors were wiped out, and the creditors consisted of 10 banks ($340 million in loans) and TIFIA ($172 million subordinated debt). This was the first test of the “springing lien” provision in TIFIA-in the event of a bankruptcy, TIFIA’s subordinated loan springs into equal status with the senior debt (in this case the bank loans).

In April 2011 the federal bankruptcy court approved a reorganization under which the banking group and TIFIA became the owners of SBX, in a 68%/32% ratio. TIFIA’s secured debt was $99 million, with another $73 million as an unsecured claim. But four months later the local transportation/planning agency, SANDAG, negotiated a deal to buy SBX from its new owners, for $344.5 million. That deal gave TIFIA $15.4 million in cash and a restated loan of $94.1 million. But that note is now senior debt, in three tranches with much higher interest rates than the original TIFIA loan at 4.6%, plus a subordinated loan at 14%. According to the TIFIA Report to Congress 2012, “the TIFIA program is positioned to fully recover the principal balance of the original loan.” The report also notes that Fitch Ratings has given the new TIFIA debt an investment-grade rating.

To be sure, one successful workout of a bankrupt project is no guarantee of similar success on future bankruptcies. But the good news about failed greenfield toll projects is that they are typically bought out of bankruptcy for a fraction of the initial cost. With a lower cost basis, the new owner/operator can generally reduce the toll rates and increase traffic significantly, which makes various refinancings feasible. This has occurred with at least three greenfield toll projects in Australia in the past decade or so, most recently with the refinancing of the bankrupt Lane Cove Tunnel in Sydney.

My assessment is that TIFIA has emerged from its first bankrupt project in good shape, illustrating the value of the springing lien provision. I also think the original TIFIA (pre-MAP-21) provision limiting TIFIA to financing no more than 33% of the project cost is another wise, risk-reducing principle, consistent with the intent that the program exists to provide gap financing, not to be a project’s primary debt provider. I’d prefer to see Congress restore that limit (as opposed to MAP-21’s 49% maximum) as part of the next reauthorization bill.

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Express Lane Projects Gaining Traffic, as Recovery Proceeds

Recently opened express toll lane projects that were panned as failures in their initial months of operation are doing far better as the economy recovers from the Great Recession. That’s true in Atlanta, in the Washington, DC metro area, and in Southern California.

Atlanta’s converted HOV lanes on I-85 got off to a rough start in late 2011, thanks in part to initial pricing mistakes and one-sidedly negative media coverage. A new report by Georgia Tech transportation engineering professor Randy Guensler finds that the tolled express lanes are handling more hourly throughput than the HOV lanes they replaced, but the vehicle mix has changed. In addition to attracting numerous paying vehicles from the general-purpose (GP) lanes, the faster and more reliable express lanes are seeing 20% more buses and 20% more vanpools, offsetting a decline in carpools. Better traffic flow overall means that the express lanes now operate at 51 mph (up from 30 mph when they were HOV lanes) and the GP lanes are also faster, at 44 mph compared with 36 mph formerly. Guensler also borrowed an idea from Washington State DOT by identifying the most frequent vehicle models using the toll lanes: in order these are Honda Civic, Toyota Camry, Ford F-150, and Nissan Altima.

In the DC area, traffic on the Capital Beltway (I-495) express toll lanes, increased 38% in the quarter ending in June, compared with the previous quarter, and a yielded a 65% increase in toll revenue. The increase is probably due to a combination of the improving economy and increasing driver familiarity with the toll lanes. And an increase in the express lanes’ speed limit to 65 mph (from 55 mph) as of late June may boost the next quarter’s numbers even further. The June quarter’s average daily traffic of just under 29,000 is still far below the 2007 (pre-recession) forecast of 66,000 for the first year, but the growth rate is encouraging, as congestion returns to the Beltway’s GP lanes.

Across the Potomac River in Maryland, the new Inter County Connector (ICC) is also showing good traffic growth-up 34% this spring over the previous spring, in its first year of operation. Growth may have been helped by an increase last fall from the original 55 mph speed limit to a still-low 60 mph. While the ICC is not technically an express toll lanes project (it is a new suburban toll road), all its lanes are managed with variable pricing, so the entire facility can be thought of as a component of a future regional express toll lanes network.

In Los Angeles, the new express toll lane conversions of former HOV lanes on the Harbor (I-110) and El Monte (I-10) freeways are both showing steady growth after an initial six months or so. On the I-110 lanes, average daily trips are running at 57,256 compared with around 50,000 prior to the conversion last fall. And speeds in the express lanes are 65 mph during the morning peak, compared with 48 mph in the GP lanes. On the I-10 lanes, a preliminary report from LA Metro puts the morning peak period speed at 64 mph. The I-10 lanes opened in February, so comparable six-month figures are not yet available. These are still very early days for the first two express toll lane projects in Los Angeles County.

Just to the south, in Orange County, the 91 Express Lanes (the nation’s first such project) are experiencing slow growth in recovering from Southern California’s housing market collapse and the ensuing Great Recession. Average daily traffic in the lanes had peaked at over 40,000 in 2007 but declined to 32,635 in 2012. But despite the addition of a fifth GP lane each way in the corridor in February of this year, average daily traffic so far is above 33,000. Traffic will likely increase once the extension of the Express Lanes eastward to I-15 in Riverside County is completed in 2017. That $1.3 billion widening and extension will replace a single HOV lane each way with two express toll lanes in each direction, as exist now in Orange County. The new toll lanes will continue for about five miles south on I-15 as feeders to the SR 91 lanes.

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Some States Making Headway on Deficient Bridges

The collapse of one span of the I-5 bridge in Washington State several months ago has led to considerable discussion of U.S. bridge problems. After the 2008 bridge collapse on I-35 in Minneapolis, the Government Accountability Office recommended a major overhaul of the federal bridge program. Not all states were using their federal bridge money to reduce their backlog of deficient bridges (and the law allowed them to shift half of it to general highway purposes). Some disagreed with the federal deficiency measures, and some told GAO that linking the amount of funding to the extent of deficient bridges might create a perverse incentive toward retaining a large number of them.

And while MAP-21 did make a few changes, it’s not clear to me that deficient bridges-while a serious problem-are an inherently federal responsibility. Any review of tables of deficient bridges by state makes it pretty clear that this is a very state-specific problem, with a handful of states that have let the problem get out of hand (Rhode Island 53.4% deficient as of 2008; Pennsylvania 38.7%; Hawaii 38.0%; New York 37.1%; Massachusetts 36.4%) while at the other end of the spectrum are relatively responsible states with much smaller fractions (Nevada 11.0%; Arizona 11.5%; Minnesota 13.4%; Wyoming 13.5%; Colorado 13.8%).

Some states are dramatically reducing the time it takes to replace deficient bridges by adopting accelerated bridge construction (ABC) techniques. This typically involves constructing most of the superstructure off-site and moving it into place when the piers and abutments are ready. Utah was a pioneer of this approach, and made it standard for bridge replacement in 2010. Nevada, Texas, and Massachusetts have also begun using ABC in recent years.

Another innovation is packaging a large number of bridge refurbishments and replacements into a single design-build contract. Missouri pioneered this approach with its Safe & Sound Bridge Improvement Program, replacing 554 obsolete bridges. Awarded in 2009 to a team of companies, the program was completed 14 months ahead of schedule. North Carolina DOT’s state-funded Bridge Improvement Program aims to replace 705 structurally deficient bridges and refurbish another 475, via “express design-build.” And Oklahoma DOT is under way on a program to eliminate all structurally deficient bridges by 2019.

Pennsylvania DOT is planning to make use of its new PPP law to bundle about 1,000 state, county, and local deficient bridges into an availability-pay concession, which of course will require increased state funding which the governor is seeking but has not yet obtained. Last month the DOT secretary said that weight limits will have to be imposed on over 1,000 such bridges if the repair-and-replace program is not funded.

In a piece offering useful perspective on the bridge situation nationwide, Eric Jaffee (The Atlantic Cities) noted that in the 2008 GAO report, state officials said that repair or replacement of deficient bridges in urban corridors is typically a mega-project, and that “funding just one of these mega-projects could mean ignoring all other state bridges for years.” Which suggests the rather obvious solution of toll-financing such mega-projects. And that is what several states are doing.

One example is the $2.6 billion Ohio River Bridges project, which is building two tolled crossings of the river at Louisville, KY. Another is the proposed replacement for the functionally obsolete Scudder Falls Bridge on I-95 near Trenton, NJ, using toll finance. It has been legal since 1991, under federal law, to replace a non-tolled bridge or tunnel on the Interstate with a tolled one, and today’s all-electronic tolling makes that far more user-friendly than in the 20th century when introducing tolls would have meant creating toll plazas. On a smaller scale, two entirely private-sector bridge replacements are the $100 million Jordan Bridge in Portsmouth, VA (which opened last year) and the $200 million Cline Avenue Bridge in East Chicago, IN.

As you can see, can-do states and localities are moving ahead with innovative approaches to deal with their deficient bridges. While I’m sure the federal bridge program has done some good, it’s far from clear that a bigger, better federal program is the answer to this very state-specific problem.

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When Will P3 Projects Run Out of Private Activity Bonds?

It took nearly two decades of lobbying and educational efforts before the P3 community finally persuaded Congress to extend to highway infrastructure a financing option that had long been available for P3 projects at airports and other forms of infrastructure: tax-exempt private activity bonds (PABs). The SAFETEA-LU reauthorization bill allowed up to $15 billion worth of such bonds to be issued by state agencies on behalf of P3 surface transportation projects. Since then, PABs have been used on eight of 12 major P3 projects, including SH-130 between Austin and San Antonio, the Capital Beltway express toll lanes, the I-595 project in Florida, the Port of Miami Tunnel, and the East End Crossing in Indiana.

The rationale for PABs is simple: to create a level financial playing field between P3 projects and those financed by state agencies themselves. States and their toll agencies routinely issue tax-exempt bonds for major projects, but the P3 approach is put at a significant disadvantage if its otherwise comparable bonds must be issued on a taxable basis, meaning higher interest rates and hence higher debt service costs.

A recent article in Public Works Financing (July-August 2013) drew on figures from US DOT and an analysis by Barclays Industry Research to assess the adequacy of the current $15 billion total issuance allowed under SAFETEA-LU. Some $3.8 billion worth of PABs have been issued for eight projects between Spring 2008 and Spring 2013. Another $5.5 billion has been allocated by DOT to 10 projects that are awaiting financial closings. Barclays’ estimate of subsequent deal flow suggests another $5.2 billion will be used for projects in the pipeline. That will leave only $500 million of the authorized $15 billion by the end of 2015.

This means increasing (or preferably eliminating) the $15 billion cap should be on Congress’s agenda when it deliberates on the next reauthorization, which should be debated next year, since MAP-21 expires Sept. 30, 2014. Staffers of the Joint Tax Committee-never friendly to any expansion of tax-exempt debt-have raised a trial balloon about reviewing the budget scoring impact of projects that combine TIFIA and PABs. That’s a bad sign, and an indication that state DOTs and the P3 industry need to ramp up their educational efforts over the next year.

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Upcoming Conferences

Note: I don’t have space to list all transportation conferences that might be of interest. Below are those that I or a Reason Foundation colleague are taking part in.

WTS/TRF/YPT Summer Reception and Conversation on Technology and Transportation Financing, August 14, 2013, Reason Foundation office, Washington, DC (Robert Poole speaking). Details from

Florida Transportation Commission MBUF Workshop, August 15, 2013, Burns Building, Tallahassee, FL (Adrian Moore speaking). Details from

Reducing Traffic Congestion and Increasing Mobility in Atlanta, 2013, August 28, 2013 Georgian Club, Atlanta, GA (Baruch Feigenbaum speaking). Details at:

IBTTA 81st Annual Meeting, Sept. 22-25, Vancouver Convention Center, Vancouver, BC (Robert Poole speaking). Details at:

AASHTO 2013 Annual Meeting, Oct. 17-21, Sheraton Denver Downtown, Denver, CO (Robert Poole speaking). Details at

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News Notes

Miami May Get Premium Toll Lanes on Toll Roads. The chairman and executive director of the Miami-Dade Expressway Authority (MDX) briefed the Miami Herald on July 31st on plans to add express toll lanes to its five Miami-area toll roads. The lanes would be part of a region-wide managed lanes network, including express toll lanes on FDOT’s I-95, I-595, I-75, SR 826, and the Homestead Extension of Florida’s Turnpike. If the plan receives approval from the MDX board, the agency would be the nation’s second toll agency (after Florida’s Turnpike) to offer premium toll lanes on existing toll roads.

Should Nonprofits Run Commuter Rail Lines?. In its June issue, Governing reported that 10 out of 28 commuter rail systems lost ridership in 2012 and most experience financial difficulties. To improve their finances, Stanford’s Rohit Aggarwala has proposed turning such agencies into nonprofit corporations, like museums and universities. That would enable them to fund-raise effectively, as well as encouraging them to operate like businesses (e.g., offering first-class cars at higher fares). “Why Nonprofits Should Operate Commuter Trains” appears in Stanford Social Innovation Review, Summer 2013.

Poole P3 Testimony Before Joint Economic Committee. On July 24th I presented invited testimony on the role that public-private partnerships could play in improving U.S. transportation infrastructure. My testimony is posted on the Reason Foundation website at: /wp-content/uploads/2013/08/robert_poole_testimony_federal_policy_infrastructure.pdf.

Public Works Financing Editor Wins Award. At the 25th anniversary public-private partnerships (P3s) conference of the American Road & Transportation Builders Association, Bill Reinhardt received the organization’s Legacy Award for more than 25 years of outstanding reporting and commentary via his Public Works Financing newsletter. The awards banquet was held in the new American History wing (which includes a great transportation section) of the Smithsonian Institution. Congratulations, Bill!

Doubled Exports Goal Won’t Be Achieved. The President’s goal of doubling U.S. exports by 2015 (from 2009 levels) will not be reached. An analysis by Drewry Maritime Research estimates that it will take 17 more years to achieve that goal, based on recent trends, reports the Journal of Commerce, July 22, 2013.

Climate Models of Little Use Says MIT Scholar. In a new working paper for the National Bureau of Economic Research, MIT energy economist Robert Pindyck (a former classmate of mine, Class of 1966) concludes that all current climate models have “crucial flaws that make them close to useless as tools for policy analysis.” These include arbitrary assumptions about discount rates and descriptions about climate-change impacts that are “completely ad-hoc, with no theoretical or empirical foundation.” His NBER paper is “Climate Change Policy: What Do the Models Tell Us?”, and you can read an excellent summary by Reason magazine science reporter Ron Bailey at:

California Bill Would Stigmatize Contract Bus Service. A bill recently passed the California Senate would require all contract bus service to wear a Scarlet Letter: each driver’s uniform would have to be labeled “This is not a government employee,” and each bus would require a large exterior sign stating, “The operator of this vehicle is not a government worker.” Agencies in Los Angeles and San Diego that have expanded transit service via competitive contracting are opposing the measure, which is now before the state Assembly.

Report Finds Motorcoach Service More Cost-Effective than Amtrak. A new report from the American Bus Association, cosponsored by the Reason Foundation and Taxpayers for Common Sense, finds that essentially unsubsidized bus lines serve nearly 2,800 cites compared with about 500 served by Amtrak using extensive government subsidies. Fully allocated costs per bus passenger are only 25% of the cost of comparable Amtrak service. And per-passenger emissions from motorcoach service are 45-65% less than from Amtrak. (

Two New Handbooks on Design-Build. The Transportation Research Board in July released its Legal Research Digest 61, providing an overview of performance-based specifications such as those used in design-build procurements. ( And ARTBA has released “Suggested Best Practices for Design-Build in Transportation Construction,”

Congressional P3 Caucus Launched. Rep. Mike Rogers (R, AL) and Rep. Gerry Connolly (D, VA) announced last month the formation of the Congressional Caucus on Public-Private Partnerships, aka the Congressional P3 Caucus. They aim to build a bipartisan membership to work toward more-friendly P3 policies at the national level.

Correction re RRIF Loans. Several readers emailed after last month’s article on reforming the Railroad Rehabilitation & Improvement Financing (RRIF) program. Contrary to what I wrote (about all previous grants having gone only to short-line freight railroad projects), one loan went to large railroad Kansas City Southern and several have gone to passenger rail projects, including for Amtrak locomotives, Denver Union Station reconstruction, and the commuter rail service Virginia Railway Express. One reader also noted that RRIF loans are reviewed by the same USDOT Credit Council that reviews TIFIA loans.

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Quotable Quotes

“TIFIA has done more than just provide additional capital for transportation infrastructure. TIFIA encourages prioritization of project selection, innovation in project finance, and considerable innovation in project delivery. In short, the TIFIA success story goes far beyond the $11 billion invested in $43 billion worth of projects. TIFIA creates a number of positive externalities that generate value for infrastructure investment beyond just the funds sent to projects. At its most basic, just the fact that borrowers have to repay funds, as opposed to traditional grant programs, encourages sponsors to select projects that will produce a return on investment. As a result governments are encouraged to advance projects that are of higher utility than a traditional transportation program. Federal financial support that has to be repaid, especially projects repaid with tolls, brings significant discipline to the project selection process, avoiding the challenge of ‘bridges to nowhere.'”
-D. J. Gribbin, testimony before the Senate Committee on Environment & Public Works, July 24, 2013

“States’ growing involvement in funding transportation is a trend of far-reaching consequences. In the short run, more state revenue dedicated to transportation will lessen the pressure on Congress to come up with increased resources to fund the next reauthorization. It has been estimated that to fund a six-year program at current spending levels would require roughly $320 billion ($53 billion/year). Trust Fund revenues and interest over the same period are expected to bring in only $240 billion according to CBO-leaving an unfunded shortfall of $80 billion. Additional state-generated revenue may significantly narrow this gap and make a one- or two-year reauthorization a distinct possibility. In the longer run, greater state fiscal autonomy could modify the federal-state relationship in transportation. There would be less need for direct financial aid to state highways, fewer federal requirements and mandates to comply with, and more emphasis on credit assistance and support of transportation investments of truly national scope and significance . . . . ‘This is not devolution,’ a thoughtful colleague listening to the Brookings forum presentation observed. ‘This is states acting responsibly to preserve their transportation assets and modernize their infrastructure-and taking charge, as they properly should, of their own transportation future.'”
-Ken Orski, “‘Can-Do’ States,” Innovation Briefs, Vol. 24, No. 9, July 22, 2013

“A spectre is haunting Russia: the spectre of shale gas. It is seeping into the salons of power, discomfiting Russia’s leaders and their bizniz cronies. Energy companies account for half of the value of the Russian stock market, and a single state-backed firm, Gazprom, produces 10% of the country’s exports. Russian politics are also built on conventional oil and gas: Vladimir Putin is in essence the CEO of Russian Energy Inc. The revolution in unconventional gas production from shale beds, which began in the United States and is now spreading around the world, is shaking Russian state capitalism to its foundations.”
-Schumpeter, “Spooked by Shale,” The Economist, June 29, 2013

“Nearly four decades ago, the state of Oregon adopted strong urban planning requirements, including the requirement of an urban growth boundary. Two principal purposes of the resulting policies (referred to as ‘smart growth,’ ‘urban containment,’ ‘compact cities,’ etc.) were densification and transferring travel demand from cars to transit. Portland’s progress toward these objectives has been modest. Most growth has continued to be in the suburbs. There has been only modest densification, and employment has continued to disperse from the core. At the metropolitan area level, travel by car remains virtually as dominant as before, and traffic congestion has intensified materially. Finally, house prices have been driven up relative to income.”
-Wendell Cox, “The Evolving Urban Form: Portland, NewGeography, Aug. 3, 2013 (

“[One] argument against subsuming state turnpikes into state DOTs is that they are very different entities. Turnpikes and other toll entities are basically businesses-and that’s regardless of their ownership and control. Whether state, local, private, or not-for-profit, they earn their revenue through highway service to willing customers who choose whether or not the service they get is worth the toll. If turnpikes don’t get the traffic and revenue they need to pay operating costs and service capital, they’re in trouble. They need to judge all their spending and especially new projects and other major capital spending like any other business does, asking ‘Will we get our money back?’ and ‘How quickly?’ and ‘What are the risks?’ And they need to price their services-set toll rates-somewhere near the profit-maximizing point. If the toll rates are lower, they’re leaving money on the table and encouraging excess traffic. If they set rates too high, they lose more traffic than they gain per transaction. They are answerable to the people who put up their capital-the investors in their bonds or stock. DOTs are fundamentally different organizations from turnpikes. They are dependent on legislators for their funds, and they are subject to the politically appointed secretary on personnel and priorities. Running a turnpike business inside a government department makes for a very odd fit.”
-Peter Samuel, “Different Animals,”, May 19, 2013 (

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