Article by Erik Smith. Published on Wednesday, August 10, 2011 EST.

Borrowing Costs Would Go Through the Roof, Says McIntire – State Office of Financial Management to Release Reports on Initiatives

The Highway 520 bridge on Lake Washington.

See also: Toll initiative could force state to return $127 million in federal grant money for 520 bridge, says OFM.

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, Aug. 10.—State Treasurer Jim McIntire says Initiative 1125 would blow a half-billion dollar hole in the state’s plans to replace the Highway 520 bridge on Lake Washington – a deficit so big that it would throw the entire project in doubt.

            Not just that, but it would also jeopardize other big transportation projects now contemplated by the state – among them, the Seattle downtown tunnel project and the I-5 bridge across the Columbia between Vancouver and Portland. The cost of issuing toll-backed bonds would be driven up so dramatically that the state might as well forget it, the treasurer says.

            “By removing toll-only bonds from consideration, passage of Initiative 1125 would blow a huge hole in the financing plan for 520,” McIntire says.

            That’s a sneak peek at the report on the measure the governor’s Office on Financial Management will release today. By law, the state office is required to prepare a “fiscal impact statement” on each of the initiatives that will appear on the November ballot. The reports will be posted on OFM’s website later today.

            Washington State Wire obtained a copy of the comments submitted by the treasurer to the governor’s budget office on Initiative 1125, the Tim Eyman-sponsored measure that would restrict the way highway tolls are raised and spent. The treasurer’s comments aren’t the only element that will be incorporated in the report – the Department of Transportation will weigh in as well, and presumably OFM itself.

            But it demonstrates that state agencies see a devastating impact from the measure for some of the state’s highest-profile transportation projects.

            Astronomical Borrowing Costs

            Initiative 1125 throws a big monkey wrench into the state’s plans to use tolls to pay for multi-billion-dollar projects in urban areas. The central element is that it would block “system tolling” – the use of tolls collected in one place to be used for a project somewhere else. That means, among other things, that tolls couldn’t be placed on the I-90 bridge across Lake Washington in order to help pay for a new Highway 520 bridge a few miles north.

            It also would prohibit variable toll rates, such as are charged on Highway 167 in the Green River Valley depending on the hour traveled. And it would block the use of state-funded highway projects for transit, preventing Sound Transit tracks from being laid on the I-90 bridge. That’s a reason Bellevue developer and light-rail opponent Kemper Freeman weighed in with more than $1 million to collect signatures to place the measure on the ballot.

            But another key element is this. Tolling decisions couldn’t be made by the the state Transportation Commission. Instead, the measure would require the decisions to be made by the Legislature. So the pitch is that it takes tolling decisions out of the hands of unelected bureaucrats and puts them in the hands of lawmakers, who are accountable to voters.
            That’s a good thing, right? 
            Not so fast, McIntire says. No other state requires tolls to go through its legislature. McIntire’s office predicts that the bond market will turn up its nose at bonds whose revenue is dependent on fickle politicians. The result will be enormous borrowing costs that will make toll-backed bonds infeasible for major transportation projects.

            Unprecedented Nationally

            McIntire’s formal comments state:
            “Requiring tolls to be set and adjusted by the Legislature rather than by an independent toll-setting body makes the cost of bonds secured solely by toll revenue prohibitively expensive and would be unprecedented nationally. Because investors in toll revenue bonds see the independence of toll-setting bodies as a critical credit characteristic, no other toll revenue bond issuer in the nation sets tolls subject to legislative approval.

            “Passage of I-1125 would remove over $500 million in fiscal year 2014 toll revenue bond proceeds from the baseline financing plan for the 520 bridge replacement project now under way. Similarly, I-1125 would eliminate tolls revenue bond financing as a way to help pay for other major highway projects such as the I-5 Columbia River crossing, the Alaskan Way Viaduct tunnel replacement, and projects to extend SR 167 in Puyallup and the SR 509 in South King County.

            “By eliminating toll revenue bonds as a way to pay for these projects, I-1125 increases the need to rely on bonds secured by already oversubscribed motor vehicle fuel tax revenues. I-1125 also removes tolling as a potential source of funds to pay for completion of the 520 project.”

            Additional 18 Percent Swallowed by Debt Service

            How much more would Washington state have to pay for financing? The question has been wrinkling brows in state offices for months, ever since the passage of last year’s Initiative 1053. That’s another measure sponsored by conservative initiative promoter Eyman, noted mainly for the fact that it imposes a two-thirds voting requirement on the state Legislature for tax increases. But a less-noticed provision of the measure also requires fee increases to be approved by the Legislature, rather than by state agencies. And most significantly for transportation projects, the state attorney general’s office has held that fee increases include tolls. Transportation interests in this state have been quaking ever since. The implications for future projects could be immense, they say. Though lawmakers can always repeal or modify an initiative, it’s not politically easy, and as long as the provision remains on the books, they say borrowing costs would shoot to the moon.

            Earlier this year, the treasurer’s office asked the Los Angeles-based Public Resources Advisory Group to look at the question. Its report notes that no other state requires legislative approval for tolls, and predicts that Washington state bonds would be downgraded significantly.

            It points out that the national agencies that rate bonds put a high value on the independence of toll-setting authorities. If tolls are set by a political body influenced by public opposition, the reasoning goes that hard-nosed business decisions are more difficult to make.

            One bond-rating service, Standard and Poors, describes its criteria this way: “A history of being able to increase toll rates when needed to the maximum level allowed is considered a positive. It is also considered a strength if ratemaking decisions are shielded from normal political processes or influences. Failure to increase toll rates when needed because of intervening political influence is a frequent situation with existing facilities that Standard & Poors has evaluated.”

            The upshot is this. Right now the state could probably issue bonds and get an “A” rating, the PRAG report says. But if tolls have to go through the Legislature, it’s likely that the rating on new bonds would fall dramatically, perhaps to the triple-B level.

            And what that means is $18 million in additional interest costs over 30 years for every $100 million that is borrowed.

            More Taxpayer Money for Wall Street

            The state would face such dramatic costs that toll-backed bonds really wouldn’t be an option, said former state transportation secretary Doug MacDonald, a member of the coalition opposing I-1125. Or else it would mean that a big wad of taxpayer money would wind up in the hands of Wall Street instead of paying for new highway construction.

            “The state treasurer’s conclusion reinforces how terribly I-1125 would affect our practical ability to finance and build some of the projects in Washington state we need the most,” he said. “This is not an arena in which Tim Eyman’s views are going to prove helpful to anyone.”

            For his part, Eyman says the Legislature is precisely the body that ought to be making decisions on big things like tolls – not a bureaucracy. The whole idea of tolling existing highways to pay for projects elsewhere ought to be considered a huge tax increase on anyone who drives. No wonder state officials want to make it easy, he says.

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