Ten years ago, the toll roads were seen as a way out of Orange County’s gridlock and the private sector was touted as the solution.
Orange County’s grand experiment at building California’s only toll roads didn’t work out exactly as planned.
Nowadays, revenue from the toll roads is less than expected. Lockheed Martin IMS recently pulled out of its contract to manage the San Joaquin Hills and Foothill/Eastern toll roads, claiming it lost $50 million in three years. The owners of the 91 Express Lanes, The California Private Transportation Co., are still trying to unload them.
The public perception is that the toll roads haven’t worked very well. Even Todd Spitzer, chairman of the San Joaquin Hills Transportation Corridor toll road and a county supervisor, declared, “There should be no toll roads in California.” He said the state should buy OC’s toll roads.
“It’s not a bailout,” Spitzer insisted. “It’s an argument that the state should pay for infrastructure. That’s why we pay our taxes. The state has been negligent in its duty. Sacramento laughs the whole time because they know Orange County taxes itself to build infrastructure.”
Many would agree with Spitzer’s complaint that the state government short-changes Orange County in funding. But even so, Spitzer’s comments are hardly a ringing endorsement for the building and operation of toll roads as an alternative.
The situation doesn’t mean the toll roads will shut down or are in danger of going bankrupt or that Orange County taxpayers will have to bail them out. But it does mean that the private sector is not anxious to jump into new toll-road ventures, and there appears to be little political will on the part of officeholders to support toll roads.
“It seems that Caltrans and the business community don’t see the toll roads as a viable approach at this time,” said Robert Poole, president of the Reason Foundation, one of the most prominent and instrumental supporters of the toll roads. “Given the high costs and the risks involved, particularly with time-consuming environmental regulations, it’s a high-risk proposition for the private sector.”
Any future toll roads in Orange County will have even tougher obstacles to surmount. American Transportation Development is trying to build a $1 billion toll road along the Santa Ana River to link the Orange (57) and San Diego (405) freeways. It recently sought an extension of its franchise to attempt to re-invigorate its so-far non-starting proposal. The Transportation Corridor Agencies is trying to complete a 16-mile extension of the Foothill (241) Toll Road to San Clemente, but has run into fierce opposition from environmentalists and has had to beat back a legislative assault led by state Sen. Tom Hayden, D-Santa Monica.
And the perception of what has happened in Orange County could signal whether Los Angeles follows through on proposals to build toll lanes on freeways such as the Long Beach (710).
Underlying all of this is the fact that the county’s two main toll roads did issue about $3.4 billion in bonds and 51 miles of roads are in existence. Toll road officials bristle at the idea that some consider the roads a failure.
“I can assure you that if we shut them down for two or three days, there would be very few people county-wide saying the toll roads aren’t working,” said Susan Withrow, chairwoman of the Foothill/Eastern Corridor toll road. “If you dump 200,000 vehicles a day on our freeways, it’ll be noticeable, big time.”
So what happened to make the perception that the toll roads aren’t working?
Both critics and toll road officials agree that the initial ridership projections were overly optimistic. They said the projections didn’t take into account how quickly the Santa Ana (5) Freeway would be improved, and some of the surveys of consumer interest in toll roads were done of drivers sitting in traffic, hardly a scientific sampling.
As a result, traffic projections have twice been revised downward. After the latest revision, Fitch IBCA in February downgraded the $1.7 billion in San Joaquin Hills Bonds to BBB- from BBB. Fitch IBCA warned that the San Joaquin Hills (73) toll road could face the loss of investment-grade status.
“The lower projected revenue base suggests a barely sufficient coverage of escalating debt service requirements without remedial measures,” said the Fitch report. “Until 2007, the federal line of credit provides credit enhancement to this revenue stream. Afterwards, however, projected debt service coverage levels appear weak for an investment grade credit.”
But after this report was issued, the reserves of the Transportation Corridor Agencies improved greatly when it received $37 million as part of a settlement from the 1994 Orange County bankruptcy.
“It gives us quite a bit of breathing room,” said Walter Kreutzen, chief executive of the Transportation Corridor Agencies.
Ramp-Up Stage
And other analysts aren’t as worried as Fitch. Moody’s Investor Service analyst Chee Mee Hu said that while the San Joaquin toll road isn’t meeting its projections, both toll roads are considered to be in a ramp-up stage and will be for the next three to five years. Moody’s has rated at an investment level, Baaa3, both the Foothill/Eastern Transportation Corridor’s $1.8 billion in bonds and the San Joaquin Hills Transportation Corridor’s $1.7 billion in bonds. Interest on the bonds are in the 5%-plus to just over 6% range.
“We are confident because of the structure of the financing,” said Mee Hu. “They have in place a number of reserve funds.”
Nowadays, The San Joaquin Hills Transportation Corridor, which runs from Aliso Viejo to Costa Mesa, is considered the laggard, running at only 84% of its projected revenue for the first nine months of this year. While officials aren’t sure why, some suspect competition from the Santa Ana Freeway, the high price for short trips or the traffic jams at peak hours at the toll road’s connector to the San Diego Freeway.
Meanwhile, the Foothill/Eastern Toll Road, which runs from the Riverside (91) Freeway to Foothill Ranch, Mission Viejo and the Santa Ana Freeway, is at 113% of its projected revenue for the first nine months of this year.
Mee Hu said that what makes the toll roads more attractive is the growing traffic in Orange County, which of course is bad for many commuters.
“Within the context of congestion and continually diminishing funding availability from state and federal governments, the fundamentals for these roads are positive,” she said.
If the toll roads are in danger of not meeting their future bond payments, the transportation corridor agency could simply refinance and extend the bond payments further into the future, as it did last year. Even if the toll roads go bankrupt, no one expects them to be shut down. Bondholders would simply find a new company to collect tolls.
Critics Skeptical
Some critics have charged that if the toll roads fail, Orange County taxpayers would be obliged to bail them out and the bankruptcy would be even bigger than the OC government’s in 1994. It’s a view disputed by toll road officials and independent analysts.
“It’s very clear if you read the documents,” said Moody’s Mee Hu. “The security pledged for the bonds is operating revenue for the toll road. Nowhere in the documents does it say there is a tax-backed support.”
A blow to the toll roads’ prestige came when Lockheed Martin IMS decided to pull out of managing the day-to-day functions. Lockheed Martin IMS’s annual contract meant it pulled in revenue of about $12 to $13 million this year, but the company claimed that over the past five years, it lost $50 million on Orange County’s toll roads. Toll road officials weren’t convinced.
“They have three different levels of management that were taking profits from that contract,” said Withrow. “It’s a typical Lockheed organization. They were taking revenue for accounting purposes and allocating them to divisions in Lockheed that had nothing to do with this contract.”
The Transportation Corridor Agencies decided to divide the Lockheed contract among two or three other companies. Chase Manhattan quickly agreed to a 2 1/2-year base contract worth $8.7 million. It will handle responsibilities such as service centers and bill collections. Other firms will handle other slices of the work, such as toll collections.
Foothill South Facing Hurdles
Perhaps the last phase of toll-road building in Orange County will be the 16-mile Foothill South route to San Clemente. It’s bogged down in a maze of regulatory permits. Some believe the stretch will have a more difficult time getting financing because of the problems with the other toll roads. Environmentalists such as The Sierra Club, which opposes the extension, claim that the road won’t meet its financial projections and thus won’t be acceptable to Wall Street. It could be that federal and state governments might have to fund portions of this extension, which will cost at least $600 million for road construction alone.
However, toll road officials point out that the Foothill/Eastern is the toll road that’s exceeding its projections.
“You cannot get through San Clemente on the 5 on the weekends,” said Withrow. “It’s ugly. Anyone who tells you it’s not needed doesn’t leave their homes. There are all kinds of homes coming on line at Talega , about 5,000. Anybody who tells you otherwise is not facing reality. We need another route.”
New Partnership
The Reason Foundation’s Poole believes that the experience of the past decade has shown that the private sector alone cannot build the roads, but it can be done with a new style of partnership between the private and public sectors. He said the state should obtain the necessary environmental approvals and then can turn it over to the private sector to build and operate the road.
“Other states that are fast growing and have pro-business climates are using a more advanced model of private franchising to get these kinds of projects delivered,” he said, pointing out a new road being built to link Austin and San Antonio in Texas.
The Southern California Association of Governments, an entity that directs where federal money should go in Southern California for infrastructure improvements, is studying whether to add toll lanes to freeways such as the 710. Poole added that study will examine whether the private sector or the public sector should build the toll lanes.
“Traffic is going to get much worse in the next 20 years,” said Poole. “Truckers may well find it in their interest to pay tolls rather than sit in traffic.” n
