Roger Baker : Can TxDOT avoid financial disaster? / 2

Agency in denial: TxDOT and financial reality.

By Roger Baker | The Rag Blog | February 1, 2013

“Denial isn’t just a river in Egypt.” — Mark Twain

Second of a two-part series.

A glaring example of the Texas Department of Transportation’s (TxDOT) denial of financial reality is that they view their roads in a way that confuses their assets with their financial position. This is made clear from TxDOT’s 2012 Annual Financial Report (AFR), p 15, where we see this key statement.

Over time, increases and decreases in net assets measures whether TxDOT’s financial position is improving or deteriorating. Overall, the net assets of governmental activities increased by $710.7 million or 1.1 percent from fiscal 2011, primarily due to TxDOT’s continued efforts to maintain, improve and expand the state’s infrastructure network.

This characterizes TxDOT’s financial viewpoint of highways as being financially beneficial assets, rather than as maintenance-demanding liabilities. By using construction costs to evaluate TxDOT’s financial condition, the more it costs to build a road, the sounder TxDOT’s finances are said to be. As we can see elsewhere in the AFR, TxDOT is claiming that the value of all its roads as assets is now about $64 billion, based on construction costs. They are public assets only so long as the public can afford to keep driving; otherwise they become a growing public maintenance burden.

TxDOT’s roads are not marketable goods; few if any of its roads are marketable assets. This means that TxDOT appears to have nothing much to offer as collateral, to backstop its growing debt burden, to shield TxDOT against default on their $14 billion accumulation of road bond debt.

Is it possible to regard TxDOT’s most traveled roads as collateral; as assets that TxDOT could plausibly sell to someone or some group willing to take them over and to manage them as private toll roads? We know that this is probably not the case because of TxDOT’s inability to find a buyer for its CTTP group of Austin area toll roads, which are big money losers.

It is true that a few years back, TxDOT managed to sell the future tolling rights for the southern extension of their SH 130 toll road to a Spanish toll road operator named CINTRA, but those days are past. Freeways have become “costways.”

TxDOT’s toll roads are big money losers

Under Gov. Rick Perry’s first appointee and close political ally, TxDOT Chairman Ric Williamson, TxDOT’s philosophy was to try to attract money to build state roads supplemented with private funding as toll roads whenever possible. Williamson’s slogan was that henceforth it was to be “toll roads, slow roads, or no roads.”

This reflected an early approach to dealing with TxDOT’s financial problems, stemming from the refusal of an anti-tax Texas Legislature to raise gas taxes. A decade ago, it was relatively easy to get private bond investors to supplement TxDOT’s limited revenues by tolling and collecting fees; it was then anticipated that state toll roads could be profitable when operated as toll roads partially funded with gas taxes.

TxDOT first got into the toll road business with an initial group of toll roads, called the Central Texas Turnpike Project or CTTP. This was subsidized not only with direct TxDOT contributions, but also with a lot of Austin city money for ROW. The latter was demanded by the road lobby as the price to pay for the failure of Austin’s 2000 light rail election.

Later on, after TxDOT became aware that its own toll roads were becoming management headaches, TxDOT and the Texas road lobby started actively promoting the establishment of newly authorized outside agencies termed “regional mobility authorities,” such as the Austin area’s CTRMA. These governmental bodies are able to wheel and deal and promote “public-private partnerships,” partially supplemented with TxDOT contributions, but operating with fewer legal restrictions than TxDOT itself. They offer the additional benefit that TxDOT can’t be held responsible whenever a RMA’s toll road bonds default.

A July 2011 article by Austin American Statesman transportation reporter Ben Wear, reveals that TxDOT’s own CTTP toll roads are big money losers, ones that TxDOT would like to sell if they could find a buyer. TxDOT’s rather far-fetched selling point is to maintain that better marketing might somehow turn around their toll roads’ current losses. TxDOT’s “assets,” if converted into toll roads, will probably always be money-losing liabilities.

Tolls and other revenue have fallen more than $100 million short of covering debt and operating costs of the state’s three-road Central Texas Turnpike System since the highways opened about four years ago. Texas Department of Transportation subsidies almost 70 percent more than originally predicted have made up the difference. Those subsidies, covered primarily by state gasoline taxes that otherwise would be available for other road spending, should average about $38 million a year over the next decade and total about $750 million by 2042, according to TxDOT documents…

“Any dollar that we support that system with is a dollar that is taken out of the state of Texas to build and support other roads,” said [TxDOT] Commissioner Ted Houghton of El Paso, who has served on the commission since 2003 and has long advocated such agreements with toll road companies. “We need to get out of that business. Find someone who knows how to market those roads, to operate them and collect the tolls. We do it as a sort of side business.”

More recently, TxDOT’s refusal to publicly reveal the revenue data on SH 130 , the most prominent of the CTTP toll roads, indicates that the lack of ridership is probably seen by TxDOT as a source of public embarrassment and an impediment to privatization. TURF, an active San Antonio-based anti-tolling group, has publicly announced a boycott of SH 130.

Total Texas and U.S. driving are both in decline, 
with little prospect for recovery

TxDOT doesn’t want to admit it, but another important aspect of their institutional denial is the assumption that driving on Texas roads will someday resume its past growth. The reality is that Texans are driving less than they did just a few years ago. The author has already documented this problem and the link to rising energy costs in considerable detail.

Global oil prices have recently been rising rapidly, with little relief in sight. Despite the recent spate of publicity about increasing U.S.energy independence, the reality is that rising oil prices continue to haunt both the U.S. and global economies.

Nationally, an important factor leading to less driving is that the lower income third of the population is struggling to afford to drive at all because of rising fuel prices. We see this from a recent Brooking Institute study showing a strong correlation between car ownership and income level. Likewise, the U.S. population is aging, and older drivers drive less. Meanwhile, the young have become less interested in owning and driving cars.

When driving declines, so do Texas state and federal fuel tax revenues. Fuel taxes are TxDOT’s major stable source of road funds, akin to TxDOT’s financial oxygen supply. In his introduction to the 2012 AFR, TxDOT Director Wilson, notes that fuel taxes are up: “Motor fuel taxes, TxDOT’s primary state funding source, shows a slight increase in fiscal year 2012 over 2011.”

However, even this 2.8% increase in TxDOT’s fuel tax revenue looks smaller when compared to TxDOT’s total budget.

We know that Texas driving is currently decreasing because the FHWA documents total driving on roads in every state. Here are the final revised travel numbers in millions of vehicle miles on all Texas roads for the past six Septembers (the latest month available in 2012).

• 2007…..19,422
• 2008…..18,838
• 2009…..19,730
• 2010…..20,023
• 2011…..19,386
• 2012…..19,377

It is true that driving in Texas has decreased somewhat less than in the rest of the country recently. This is quite likely due to the hydrofracturing (or fracking) boom to the southeast of San Antonio. While the fracking may increase fuel revenue slightly, it is tearing up Texas state and county roads, and these damages on its state roads are being greatly underfunded by TxDOT.

The truck traffic needed to deliver water to a single fracking well causes as much damage to local roads as nearly 3.5 million car trips. The state of Texas has approved $40 million in funding for road repairs in the Barnett Shale region, while Pennsylvania estimated in 2010 that $265 million would be needed to repair damaged roads in the Marcellus Shale region.

And this from an NPR State Impact statement:

“With all the traffic, it’s destroying our roads. Some are already completely destroyed,” says Frio County Judge Carlos Garcia in South Texas. It’s in the heart of the Eagle Ford Shale formation, where oil production from hydraulic fracturing, or “fracking,” in nearby Karnes County now leads the state.

Public roads, especially those a few decades old, are by nature money losers which require a rising level of maintenance over time to remain useful. Asphalt and diesel costs for road maintenance have risen sharply during the past decade, along with rising oil prices; the crude oil used for making gasoline and diesel has more than tripled in price over the last decade.

Nationwide, driving decreased by about 1.6% in the last year, according to the FHWA TVT data for September 2012, as compared to September 2011; see lower right of this chart. We see that total U.S. driving peaked in 2007, and has fallen roughly 3% over the last five years. This bumpy downward trend line is largely due to a combination of a poor economy and rising fuel costs. Rising fuel costs contributed to the poor economy.

Over the same last five years, U.S. population has been increasing by about .75 % per year, which means a 3.75% U.S. population increase over this time. If you add both trends, per capita U.S. driving decreased nearly 7% in the last five years. People are driving less, while using transit more, except that U.S. urban transit typically isn’t very efficiently matched to existing land uses and work trips.

Whither fuel prices? Globally, total liquid fuel supply has been flat since conventional (the old cheap stuff) oil production peaked worldwide about five years ago, and seems unlikely to rise much above 90 million barrels a day. Looking ahead, this implies a continuing recession and higher driving costs.

The rising long-term price of TxDOT’s denial

TxDOT’s current planning is in denial by being geared toward handling a most unlikely continuation of the rising car and road travel seen in past decades. Any shift away from road building is guaranteed to upset the Texas road lobby; a constellation of the big road contractors, land developers, and engineering firms. Together these comprise some of the most politically powerful interests in Texas, whereas TxDOT is one of the most politicized state agencies in terms of its policies and priorities.

Low density suburban sprawl growth encouraged and subsidized by publicly funded roads is beginning to be recognized as a type of Ponzi scheme. Whenever the rate of new growth slows down, the fact that this kind of growth doesn’t pay for itself is revealed by the sorts of funding shortfalls that TxDOT is experiencing now.

In America, we have a ticking time bomb of unfunded liability for infrastructure maintenance. The American Society of Civil Engineers (ASCE) estimates the cost at $5 trillion — but that’s just for major infrastructure, not the minor streets, curbs, walks, and pipes that serve our homes. The reason we have this gap is because the public yield from the suburban development pattern — the amount of tax revenue obtained per increment of liability assumed — is ridiculously low.

Over a life cycle, a city frequently receives just a dime or two of revenue for each dollar of liability. The engineering profession will argue, as ASCE does, that we’re simply not making the investments necessary to maintain this infrastructure. This is nonsense. We’ve simply built in a way that is not financially productive.

Arguably, the wisest mode of damage control to remedy its looming fundings shortfalls would be for TxDOT to shift its priorities toward preserving and maintaining at least the most important of its existing roads, including the interstates, non-interstate highways, and toll roads.

TxDOT needs to shift its focus away from planning roads it can no longer afford to maintain, and in the direction of public mobility by increasing the current minimal level of state funding for transit (the feds prefer to fund transit much more than TxDOT does).

Because of budget constraints, people increasingly need to live where TxDOT can still afford to fund and maintain transportation infrastructure and mobility and not a future overwhelmingly based on more cars and roads.

In the future, TxDOT’s planning should be geared toward discouraging private vehicle travel. In fact, TxDOT really doesn’t have much alternative to moving in that direction, either willingly or unwillingly. To try to continue their current denial of financial and travel demand trends can only make TxDOT’s future problems worse.

Bottom line: If you have trouble driving to work, you shouldn’t expect much help from TxDOT.

[Roger Baker is a long time transportation-oriented environmental activist, an amateur energy-oriented economist, an amateur scientist and science writer, and a founding member of and an advisor to the Association for the Study of Peak Oil-USA. He is active in the Green Party and the ACLU, and is a director of the Save Our Springs Association and the Save Barton Creek Association in Austin. Mostly he enjoys being an irreverent policy wonk and writing irreverent wonkish articles for The Rag Blog. Read more articles by Roger Baker on The Rag Blog.]

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