Toll Road Transfer Deal Bothers State Treasurer

State Treasurer Phil Angelides said Monday that he could not support a proposed $274-million bond issue to finance the purchase of the 91 Express Lanes by an Irvine-based nonprofit group because of concerns over potentially unrealistic projections on the toll lanes.

“I could not satisfy myself as to the public benefits to this transaction,” said Angelides, the state’s top fiscal officer. “I had questions as to whether the revenue projections, growth projections and cost projections could ever be realized.”

Angelides, the only elected official on the board of a state bank that approves loans and issues bonds on behalf of cities, counties and nonprofit groups, abstained from a Nov. 23 vote on the project.

But California Trade and Commerce Secretary Lon S. Hatamiya and state Finance Secretary B. Timothy Gage, appointees of Gov. Gray Davis, voted in favor of the project, which will be funded through the state bank.

Despite his reservations, Angelides said he would not block the project’s bond sale, scheduled for Thursday. Such a move would come only if the treasurer believed the deal was illegal or not favorable in current market conditions, his chief deputy said.

However, Orange County Treasurer John M.W. Moorlach said he called Angelides on Monday and asked him why he wasn’t doing anything more to question the sale. Moorlach said he told Angelides, “If you didn’t feel comfortable, you should have tabled it or voted no.”

The 91 Express Lanes deal, announced last month, calls for a private operator, California Private Transportation Co., to sell the lanes to NewTrac, a nonprofit group of businessmen from Orange and Riverside counties. The private operator had been losing money on the road since it opened in December 1995. Although the operators had begun turning a modest profit last year, the toll lanes were back in the red earlier in the summer.

Some Riverside County officials have been the most critical of the proposed sale. County Supervisor Bob Buster plans to ask his fellow supervisors today to help him block the sale.

“I’m trying to raise the biggest ruckus I can to see if we can’t hold up this bond sale and get a fair, open look at whether they are paying too much for the value of the toll lane franchise,” Buster said, adding that drivers taking the Riverside Freeway are already facing one of the most harrowing commutes in the region.

“I was always concerned that we’d lost control over this key arterial link,” he said. “Now it appears that not only are we continuing to not have any control, but the private owners could be making away with unfair profits again at the community’s expense.”

NewTrac Chairman Gary Hausdorfer did not return calls seeking comment Monday. His public relations manager, Laer Pearce, issued this statement: “We don’t participate in witch hunts. Especially when there are no witches.”

Documents show that officials with California Private Transportation Co. came up with the concept of selling the road to a nonprofit company, and then approached Hausdorfer to form the nonprofit. The company then loaned NewTrac $1 million to hire consultants and others to prepare for the sale. The buyer and seller are sharing legal services on the transaction.

Buster, Moorlach and others have questioned the sales price, developed without an independent appraisal. The sellers, Moorlach said, “found a loophole to get out of the deal they made and found a way to make a nice profit too.”

“Their own official statement gives the impression that this is a contrived transaction,” Moorlach said. “It may not be illegal, but it certainly is unethical.”

Angelides, one of three top officials who sit as directors of the California Infrastructure and Economic Development Bank, which issued the bonds, said he started questioning the deal when NewTrac’s application was being reviewed last month.

“I had some concerns about whether profit at the front end would be matched by public benefit at the back end,” Angelides said. “The only reason to do this was if there was some benefit to the public.”

Angelides was particularly concerned about the traffic projections. If traffic falls short, NewTrac will have difficulty raising enough money to make payments on its bonds. Toll revenue must rise nearly 6% annually for NewTrac to meet its obligations, according to bond documents and ratings reports.

Yet ridership on the toll lanes has been slipping steadily since reaching an all-time high of 27,553 cars in July 1998. About 8,634 fewer cars used the toll lanes this past July.

While a company can create and do business with a nonprofit group, tax laws prohibit the business from receiving “an excessive benefit,” said two attorneys who specialize in nonprofit tax laws and an Internal Revenue Service manager.

“If this group pays [$274 million] and the lanes are worth only $130 million or $150 million, then they’ve got big problems,” said Paul J. Dostart, a La Jolla attorney who specializes in nonprofits. “That would not be acting in the best interest of the public. You can’t be beholden at all to the people who put you there. They are required to be thinking of the people of the state of California.”

During an interview last week, Hausdorfer said he has not looked at California Private Transportation’s financial ledgers but knows the group has invested more than $150 million in the project.

“He hasn’t seen the books and he’s going to pay [$274 million] for it?” asked Robert A. Wolf, transportation undersecretary during the Wilson administration, which refused to approve the deal. “Would somebody please tell me what the sales price is based on? Who was representing the people of California when they were in that room negotiating the purchase price?”

Marc Owens, IRS director of the exempt organizations division in Washington, said it is “standard procedure” for the IRS to audit nonprofits to make certain that expenditures are appropriate.

If the IRS determines that an “excess benefit” has been derived from dealings with a nonprofit, then it can revoke the organization’s nonprofit status or assess a tax penalty of 25% of the excess benefit, or both. In addition, the entire amount determined to be “the excess benefit” must be returned to the nonprofit, he said.

NewTrac officials have said the project’s uniqueness means an appraisal would have been hard to get.

“That’s not an answer,” said Dostart. “I could find you 10 appraisers in a couple of hours. They might say they haven’t done one, but they’re competent to do it.”