Auditor's Report Calls for Legislative Reforms of Trans-Texas Corridor
Sun February 25, 2007 9:54 am

The state auditor's report on TTC-35, the first project in the massive Trans-Texas Corridor program, includes legislative recommendations that will provide the accountability, oversight, and transparency that have been notably lacking until now. While it is always true of legislation that "the devil is in the details," there is no legitimate reason for TxDOT or Governor Perry to oppose these recommendations in principal. Indeed, the auditor's report notes, "The Department [TxDOT] generally agrees with our recommendations...."

The words "state auditor" conjure up the image of an anonymous wizened figure wearing thick eyeglasses and a green eyeshade. In fact, as many readers will know, the current auditor is well known around the Capitol and has been a respected figure in state government for many years. John Keel served as director of the Legislative Budget Board from 1994 to 2004 before becoming state auditor. His reputation and his independence are impeccable.

Here are Keel's recommendations (all "comments" are mine, not the auditor's):

* Transfer toll road revenue projections from TxDOT to the Comptroller.
--COMMENT: The Comptroller will have to rely on TxDOT for information, but her participation as a statewide elected official assures accountability.

* Require the state auditor's office to audit the financial statement for each segment of a toll road BEFORE TxDOT enters into a contract with a developer.
--COMMENT: This is extremely important. It means that provisions such as agreements by TxDOT not to compete toll roads will become part of the debate before the contract goes into effect.

* Mandate that surplus toll revenue and other revenues paid to TxDOT should be placed in the Highway Fund and be subject to legislative appropriation.
--COMMENT: Another essential provision. In dealing with the private sector developers of toll roads, such as Cintra Zachary LP, TxDOT envisions receiving large concession payments amounting to, potentially, billions of dollars ($3 billion for TTC-35). Any revenue, whether from up-front payments or from tolls, that is in excess of the amount of money required for maintenance and operation of roads and payment of principal and interest of bonds should be subject to appropriation. The Legislature needs to be able to assure that adequate funds are available to build and expand free roads, as well as more toll roads.

* Provide the governor, the Legislature, and the Comptroller with a forecast of projected toll revenue, costs, operating expenses, and developer income before any contract is signed.
--COMMENT: This information is necessary for proper oversight.

* Submit draft Comprehensive Development Agreements--including any non-compete agreements restricting TxDOT from improving existing free highways within designated zones--to the attorney general for review and approval before signing.
--COMMENT: The incentive for TxDOT is to build more toll roads, which will provide the agency with mammoth concession payments, but the priority for the Legislature must be to provide for the continued well being of the free road system.

* Account for project costs in a manner that allows the public to know how much the State will pay and whether the costs were appropriate. (For example, why should TxDOT, rather than the developer, be responsible for eating the cost of motorists who don't pay the tolls, as is contemplated in future contracts for the Texas 130 bypass of Austin?)
--COMMENT: There may be a logical reason for this, but the public ought to know it.

The auditor's report deals with governance issues. It does not address questions that incite the anti-toll road groups, such as eminent domain, access to private land that is isolated by the highway right-of-way, and foreign ownership of Texas roads. The fundamental issue in the Trans-Texas Corridor project is over who will control the money stipulated in the process, TxDOT or the Legislature. The auditor's report sets up another clash between the executive and legislative branches that has been a characteristic of the Perry governorship. TxDOT envisioned having total control over concession payments for toll roads and using them to finance other toll roads. As controversial as the Corridor project has been, it is unquestionably a visionary program designed to meet a real need for mobility in the future. In time, it will be Perry's biggest legacy. Legislative oversight ought to be regarded as an asset for that legacy, not a hindrance.

The report raises a number of issues that require public discussion and debate:

* Non-compete clauses. In its reponse to the audit, which is included in the auditor's report, TxDOT avers, "We will never agree to a contract where we are precluded from building a project that is in the best interests of the state." In its draft agreements for the remaining segments of the Texas 130 bypass, TxDOT does agree to compensate the builder if it improves roadways within a designated zone of the toll roads. Improvements to Interstate 35 and other roads that TxDOT plans to build or expand are exempted from claims for compensation. Whether TxDOT can contemplate exemptions for roads that may be necessary 30 or 40 years in the future is dubious. In such cases, TxDOT would build the road but would also have to compensate the developer. Are these compensation clauses in the public interest, and will they tie the hands of the department in assuring mobility over the fifty-year life of the contract?

* Enforcement of toll violations. The draft agreements make TxDOT responsible for reimbursing the developer for toll violations by scofflaws. The cost of enforcement will surely exceed the value of the lost tolls. The auditor recommends that TxDOT should "make no payment for uncollectable fees."

* Regulation of toll rates. The contracts stipulate that the developer must submit the methodology for setting toll rates to TxDOT for approval. However, no law exists giving TxDOT that power or establishing any guidelines for approval.

* Development rights. TxDOT retains the right to develop land along the highway right-of-way. This raises the question of whether, after the Legislature acted to preserve private property rights against government use of the power of eminent domain, TxDOT will be able to do exactly what property-rights advocates feared: allowing government to condemn private property for the purposes of making money. Allowing TxDOT to act as entreprenurial land developers also raises the spectre of kickbacks and corruption. One of my biggest concerns about the Corridor is that the amount of money in play is so immense as to invite corruption--just as was the case in the tobacco settlement, which ended with Attorney General Dan Morales going to prison.

* Revenue sharing. The draft contract allows TxDOT to share up to 50% of the toll revenue with the developer, as revenues increase and the allowable speed limit increases, to 85 miles per hour. The issue, as with concession payments and development rights, is whether the agency will have a free hand with the money, or whether it is subject to legislative appropriation and oversight, as it ought to be.

I believe that I have covered the major recommendations. I have omitted recommendations for a number of accounting deficiencies identified by the auditor that I'm sure are desirable but am not qualified to evaluate.

Two tables near the end of the report bear mentioning.

One (page 52) examines the estimated revenue over sixty years following the projected opening of TTC-35 in 2013. The total estimated revenue is $525 billion. The net, after federal and state taxes, is $286.5 billion. The report says that it will take the developer 22 years to pay $51 billion in costs associated with the construction, maintenance, and operation of the road and the cost of capital before the project begins to show a profit.

The other (page 53) compares the projected toll per mile for TTC-35 with the tolls charged by the six longest toll systems in the country:

New York Thruway: 4 cents per mile
Oklahoma Turnpike system: 4 cents per mile
Pennsylvania Turnpike: 7 cents per mile
Florida Turnpike: 6 cents per mile
Harris County (Tx) Toll Road Authority: 19 cents per mile
North Dallas Toll Authority: 12 cents per mile
TTC-35: 12.5 cents per mile
San Joaquin Hills Toll Road (Orange County, California): 22 cents per mile

While the toll for TTC-35 may seem to be in line with that of other Texas toll road systems and a bargain compared to California, the auditor's report observes that the Harris County and Dallas roads are located in urban areas, as is San Joaquin Hills, where costs (especially land) are much higher than for cross-country travel. The report warns that using urban toll rates may result in an overprojection of revenue for a cross-country route.

Summing up:

The auditor's report is a solid piece of work, as you would expect from John Keel. It is not a gut shot, as TxDOT's critics would have liked to see. It identifies a number of practices that TxDOT should have been doing from the beginning and that the Legislature should insist on now. It leaves unanswered some important questions of transportation policy, and properly so, because that is the province of the Legislature.

I have been a critic of the Corridor, more from instinct--too much loose cash lying about, with too little transparency, oversight, and accountability--than from a policy basis. I do not dispute the need for toll roads. My car has a Tex-Tag. But TxDOT has failed to make a persuasive case for the need to surrender control over toll roads to the private sector. Undoubtedly, the agency craves the up-front money for concessions payments, development rights, and revenue sharing. But our grandchildren will pay for those concessions in the form of much higher tolls in 2035 (when the initial costs of TTC-35 are paid off) and beyond, and development rights will take wealth out of the private sector and into the public sector.

Here is the fundamental question: Is this wheeling and dealing method of financing really necessary? The state has access to capital markets. Its cost of capital is lower than that of private companies. What is wrong with building toll roads the old-fashioned way, by having the state issue bonds secured by toll revenues and the mobility fund? That is a proven method with virtually no risk of graft and no loss of public control over toll rates.

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