Roger Baker :
METRO | Risky business in Central Texas: The toll road bond gamble

Wall Street won’t insure the new CTRMA toll road debt at an affordable cost because of its high risk.

Graphic from Investopedia.

By Roger Baker | The Rag Blog | September 14, 2015

AUSTIN — The Central Texas Regional Mobility Authority, or CTRMA, is a toll road agency that solicits and bundles money from various sources and uses it to build and operate toll roads in the Austin, Texas, area. The main purpose of this essay is to take a closer look at an under-reported aspect of the CTRMA’s toll road policy, their toll road debt and its potential local risk.

Is the CTRMA road bond debt arrangement likely to work out as a good investment, benefiting both those who hold the bonds as well as Austin area taxpayers? I believe the risk of bond default is unacceptable.

However I’ll present some of the known facts with documentation and let the readers decide. Full disclosure: The author is on the board of the Save Our Springs Alliance which opposes roads and road expansions that threaten to degrade Edwards Aquifer water quality.

Worst of all to environmentalists is the proposed $100 million toll road over the Edwards Aquifer.

Worst of all from many environmentalist’s point of view is the CTRMA’s proposed new $100 million toll road over a particularly sensitive part of the Edwards Aquifer: SH 45 SW.

Funding for the project’s estimated $100 million cost would come from several sources:

• The Mobility Authority would borrow $48 million from the State Infrastructure Bank;
• CAMPO would produce a $32 million grant;
• Travis County would issue$15 million in bonds;
• and Hays County would contribute $5 million.

The Mobility Authority’s loan would be paid back using toll revenue over the course of the next 20 to 30 years, Manager of Communications Rick L’Amie said.

Another CTRMA toll road that has recently drawn major public opposition is the MoPac South Project, proposing to add four new toll lanes to the already very congested MoPac highway, starting from north of the river and on south across the river down to Slaughter Lane.

The MoPac South project is anticipated to cost between $350 and $400 million. We anticipate adjustments to this figure as additional design activities are conducted.

This project is distinctly unpopular among a sizable urban alliance of Austin environmentalists and political activists who mostly prefer to keep MoPac a local traffic facility, rather than an unattractive way to deal with traffic from afar.

CTRMA and TxDOT continue to rush ahead to convert Mopac from a local commuter highway to a second, partially tolled Interstate 35 through Austin, in their less-than-honest, piecemeal way. At the same time, resistance to this piecemeal scheme continues to grow.

The Texas Department of Transportation (TxDOT) and the CTRMA seek to construct MoPac South and SH 45 SW to function as a highway looping around southwest Austin as a string of isolated segments without considering their overall social, economic, and environmental impact as federal law appears to require.

The MoPac project was unpopular with the Austin City Council.

The MoPac project was unpopular enough with the Austin City Council that they passed a resolution calling for less grandiose MoPac designs from the CTRMA. This was defeated when it got to Austin’s top transportation planning agency, CAMPO (Capital Area Metropolitan Planning Organization), which usually is in tune with Texas road lobby politics. In terms of its political power, CAMPO has become the most powerful planning body in the Austin region through its ability to control a shrinking but substantial portion of Austin area transportation funds.

Texas Toll Roads 101

Some of the CTRMA money and outside help for things like federally required environmental studies come from its close working relationship with TxDOT. The main thing that the CTRMA can do that TxDOT can’t do is to set up public-private partnerships, such as selling long term toll road bond debt to Wall Street. These are efforts that it pursues vigorously.

Gov. Rick Perry, ever attentive to his various business and political opportunities, began by working with his close political friend and Texas Transportation Commission appointee Ric Williamson to set up RMAs in 2001. Williamson said that in the future Texas drivers would have a choice between “slow roads, toll roads or no roads.” By the end of his first term on office, according to Texans for Public Justice, Perry had received more than a million dollars in campaign contributions from the state’s biggest road contractors.

A long time ago, in the Ric Williamson management era, TxDOT used a sort of a sister Agency, the Texas Turnpike Authority,  to build toll roads. In the era of rapidly expanding travel demand, before about 2007, it was possible to imagine that toll roads could make a reliable profit if they were well-managed. However TxDOT-initiated roads, like SH 130 to the east of Austin, have begun to look like low-profit headaches. Now TxDOT would like to get out of the toll road business if it can, but the line of prospective buyers for TxDOT’s toll roads does not exist.

The private bond debt for toll roads in the Austin area has been largely issued by the CTRMA in recent years. The original goal of RMAs was to create a new kind of state agency that could wheel and deal and tap private money in ways that TxDOT could not, with the object of getting roads built a lot faster than the old finance deals used by TxDOT.

The RMAs were designed to facilitate fast road building through public-private partnerships.

The RMAs were designed to facilitate fast road building through every kind of public-private partnership, with the aim of building new roads, in large part to facilitate the prevailing Texas trend toward sprawling rings of unregulated car-dependent growth that sprouts up outside the tax authority of every major city in Texas.

In recent years it has been recognized that toll roads can be risky money losers, so TxDOT has been conspicuously keeping the toll business at arm’s length, preferring to operate by assisting governor appointment-led Regional Mobility Authorities like the CTRMA.

As one example of the risks of close involvement, the SH 130 toll road from south of Austin to Seguin, the result of a deal between Spanish CINTRA and TxDOT, has effectively defaulted on its toll road bonds due to sparse travel demand. It is said that TxDOT has been trying to avoid a formal declaration of default.

Gov. Rick Perry’s and TxDOT’s approach, which encouraged a big shift from historically free roads to toll roads whenever possible, has become distinctly unpopular. For one thing, paying an extra five or 10 dollars to get to work each day hurts the average person more than it used to. The RMAs haven’t caught on very broadly except for in a few major cities like Dallas and Austin.

The RMAs are now being more closely scrutinized by the Texas Legislature. Some Republicans have even been calling for toll road authority audits.

While Texas lawmakers appear intent this year on pumping billions of extra dollars into building and maintaining highways, another shift in the state’s approach to transportation is gaining traction. Anti-toll sentiment at the Capitol is at its highest level in at least a decade.

The Dallas Morning News recently had an excellent investigative report by James Drew, “Roads to nowhere,” on the Texas RMAs like Austin’s own CTRMA.

…But nearly 15 years after the Texas Legislature changed state law so the agencies could be created, most of the nine RMAs have struggled to live up to their ambitions while burning through at least $1 billion in tax dollars, an investigation by The Dallas Morning News has found…

The RMAs have spent at least $220 million on overhead costs, and not all RMAs have been audited, according to The News’ analysis. They’ve spent about $864 million in state and federal funds, despite the Texas Legislature originally hoping the projects would be financed almost exclusively by tolls… Several projects, including high-profile toll roads, moved forward because the Texas Department of Transportation bankrolled them, with the RMAs playing minor roles because some had challenges obtaining bond money to build them….

But critics assert that some of the local transportation agencies have become small fiefdoms, unaccountable to taxpayers… With only a few weeks left in the regular session, legislators so far haven’t advanced their bills through the House or Senate to require detailed audits of the local transportation agencies. They say that’s because the regional mobility authorities have gained power over the past 14 years, in large part because most of them use a politically connected law firm that doubles as their lobbyist. That firm, Dallas-based Locke Lord, has played a key role in enabling the agencies to tap vehicle registration fees and funds from higher property tax values for their projects…

Studies have shown most toll road revenue projections to be inflated.

Studies (including one from the Center for Transportation Research at UT) have shown most toll road revenue projections to be inflated. The issue is the soundness of the federal, state, and private toll road debt the RMAs have issued. The economic state of Texas, the USA, and even China, are all relevant factors when it comes to toll road bond debt risk, since tolls and fuel tax revenues rise and fall with driving, which depends on the state of the economy and regional growth patterns, which can shift unpredictably.

Establishing state agencies like the Texas Regional Mobility Authorities and telling them to go forth and build new roads without much regulatory oversight is asking for trouble.

How the high-yield bond debt market works

Let’s invent an investment scheme to take full advantage of the position that the CTRMA is in, as an agency under political pressure from the usual suspects: TxDOT, the hungry Texas road contractors, and the land developers who seek publicly funded roads to make their largely suburban real estate investments pay off.

In fact, most on the seven-member CTRMA board have a background in real estate development, including Chairman Ray Wilkerson, an Austin Chamber of Commerce director appointed by Gov. Rick Perry.

Let us tap the current easy near-zero interest credit available from the Federal Reserve by using our Wall Street bond house connections. The CTRMA’s financial officer Bill Chapman comes to the CTRMA from the banking industry. Then we use this money to invest in high-yield toll road bonds that pay out nearly five percent, with that high yield because of their high risk. Then the CTRMA can bond and sell the spread, the prospect of a nearly five percent guaranteed return, for decades to come. This way, old folks with pensions can get in on these exciting high interest returns too.

Everyone in need of a tax break likes high-yield municipal bond debt.

Everyone in need of a tax break likes high-yield municipal bond debt. Where else are you to find such big returns on long-term debt? Shale drilling in Texas was thriving on junk bond debt for a while, but not any more, see companion article. The CTRMA’s higher return and more risky junior debt is last in line for payment and is thus the thing to focus on when considering bond default risk.

To make this investment strategy work, we have to go somewhere where everyone expects booming growth for decades to come. We know, for example, that Texas will boom forever because of Gov. Rick Perry’s policy of job creation. Within Texas, we are attracted to a place like Austin, where all the economists the Chamber hires agree that Austin will always grow because of its permanently booming high-technology industry.

CAMPO’s growth projections have easily passed the FHWA’s road policy credibility test, (assuming there still is such a thing). If ever there were an investment without risk, is it not a place like Austin, certain to keep booming and expanding in area into the surrounding suburbs forever? Is this assumption not the appropriate foundation for a risk-free bond investment strategy?

This level of payback is possible assuming that the Fed never raises its interest rates. If it were to do that, it would shrink the nearly 5% interest spread and push these fixed rate investments down into junk bond territory, since they would be worth less in exchange for cash.

This is already a matter of concern. It seems the high yield bond market has been in a steep decline in recent months, because of a lack of economic recovery and because of the threat of Fed action to raise rates (sometimes termed “taking away the punchbowl”). Here are links to the High Yield Growth and Junk Bond charts. Click on the five year setting for a good perspective. We see a steep decline in the market since last summer, due to a broad high yield bond liquidity decline.

High yield on bond investments means high risk.

Periodically the big bond houses reevaluate muni bonds according to many changing factors. This process has been criticized as being neither accurate nor transparent in risk evaluation. High bond yield is interpreted to mean high risk.

When Bill Chapman goes to Wall Street to finance Texas toll debt he becomes a salesman. Are not CTRMA toll road bonds such a sure fire investment that the CTRMA doesn’t need to insure them any more, because it would cost too much? And is this debt not safe because the permanence of the Austin growth boom and its associated traffic demand means that these these bonds are safe even without being insured?

What do the bond houses say about the CTRMA’s toll road debt?

Here is what CTRMA Director Mike Heiligenstein wrote to CAMPO Director Ashby Johnson on May 2, regarding a question the author posed to CAMPO, questioning the lack of the insurance on the CTRMA’s new toll road debt.

The RMA did have insurance coverage on its first debt issuance, and while expensive, it made sense given it was our first venture into the capital markets and the Agency had no track record. After the debt/finance crisis of 2008/2009 the public insurance market virtually dried up and became very risk averse and expensive. We again showed our financial creditability by going into the market for debt on both Phase two of the 183A project, as well as the 290/Manor Expressway project without the market demanding the insurance overlay. This saves our customers money, and confirms the confidence the creditors/investors have with the RMA.

So there we have it. Wall Street won’t insure this new CTRMA toll road debt at an affordable cost because of its high risk.

Why buy insurance when we have the Travis County taxpayers to assume a share of the risk.

But why buy bond insurance when we will have the Travis County taxpayers to assume a share of the risk, since Travis is one party to the approval of the toll bond debt. Without any default protection, Travis will have a financial obligation to help keep the toll road revenues coming in. If the toll revenue doesn’t grow fast, the toll bonds default and the Travis County credit rating suffers.

Without bond insurance, the bond collateral is, in the final analysis, Travis County taxpayers and the assumption that these bonds are reliable revenue generators. The only collateral backing them up is the perpetually increasing travel demand largely coming from the sprawl growth trends in the regions surrounding Austin.

Ben Wear’s analysis in the September 8, 2015, Austin-American-Statesman was for US 290 E only, but the piece made it clear that the last year of toll revenues on this road are only covering somewhat more than half of current debt service, and revenues will need to rise a lot in the future. US 290 revenue in the last year is about $14.3 million minus $1.7 million operating expense, this to cover $22.6 million in debt costs, rising to $27 million in 2023 on this $376 million road. Some of the debt is to fill this gap in the early years. That means toll road demand needs to keep growing pretty fast during the next 10 years, more than 10% a year for years to come.

Just as students get report cards, bonds get bond risk ratings. The lords of finance who get to decide the risk of toll road debt are the big bond houses like Moody’s, Fitch, and Standard and Poor, which issue bond ratings on every kind of bond, including the private bond debt issued to build Austin area toll roads.

The CTRMA’s junior debt bonds scored a barely passing grade, just above the junk bond cutoff point as an investment risk. This rating means a lot in terms of their marketability as securities because the bonds do pay quite well at 4.77 percent per year, without quite slipping below investment grade into junk bond territory, based on the assumption that both the Austin economy and its travel demand will keep growing at the current booming rate of growth for many years to come.

As Moody’s reported, the CTRMA had $754 million in debt in December 2014, primarily for 183A and 290 E. Moody’s rating is Baa-3 for the CTRMA junior bond debt, junior meaning the last creditors to be paid. It was noted that the CTRMA has a “very high ratio debt to operating revenue.” In other words, CTRMA debt is high and very dependent on a continuation of the current growth boom.

Standard and Poor gave the CTRMA a BBB- bond rating, noting the risk of downgrade if Austin growth slows down:  “The authority’s current and planned debt is structured with escalating annual debt service. Therefore, strong growth in toll revenues will be necessary for the authority to provide adequate debt service coverage, particularly during the next 10 years.”

Also read “Is cheaper driving here to stay?“, Roger Baker’s Rag Blog companion piece written to accompany this article. 

[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 Alliance 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.]