San Joaquin Tollway Gets $40-Million Transfusion

In a move described as “absolutely critical” for the financial stability of the San Joaquin Hills tollway, officials on Thursday took the unprecedented step of setting aside nearly $40 million in savings to guarantee debt payments and appease concerned bond rating agencies.

From the start, traffic on the 3 1/2-year-old road has lagged far behind projections, as much as 40% off original forecasts. The road has failed to meet even current, scaled-back projections, now falling 16% short of estimates. Traffic consultants relied on flawed economic forecasts, officials said.

The consistently low ridership figures were enough to alarm Wall Street bond analysts who warned toll road officials late last year that they were concerned about the road’s performance.

“We are constantly doing surveillance on any project we rate,” said William Streeter, a New York-based analyst with Fitch IBCA, one of the country’s three major ratings agencies.

“They had really downsized traffic projections when they refinanced and they were not meeting even those projections,” Streeter said. “We had sufficient grounds to be concerned and we let them know.”

Top officials of the Transportation Corridor Agencies, the government group that oversees Orange County’s three toll roads, met with bond analysts last month in New York and assured them that they were due $35 million in bankruptcy settlement proceeds that could be used to guarantee debt payment on the road until 2007. Another $5 million in savings had been set aside for the same purpose.

But the situation is far from resolved. Toll road officials say they still must find ways to generate more revenue, and did not rule out raising tolls sooner than expected.

Streeter said the action taken Thursday was “an important step” in taking care of long-term questions about the road’s financing. He said his agency is still assessing the status of the road’s investment-grade bond rating.

While toll road officials and bond analysts both emphasize the road is not in danger of defaulting, its financial picture is muddied by the lower-than-expected traffic. When the road was refinanced with $1.4 billion in bonds two years ago, investors were promised that $1.30 would be taken in for every $1 the agency had to repay. The cushion--known as debt coverage--was built in to assure a comfort margin for bond buyers.

Supervisor Todd Spitzer, who chairs the San Joaquin Hills tollway board, said Thursday it was “absolutely critical” that the agency take action in order to keep that promise.

“I have concluded, as our staff has concluded, that traffic on the San Joaquin Hills corridor is not likely to reach the projections that our financing was based on,” Spitzer said at Thursday’s board meeting where the action was unanimously approved. “So that’s the reality. And while it’s not the desired reality, it is a manageable reality.”

The agency--which has had problems with traffic forecasts for all 51 miles of toll road in operation--never before has gone to such lengths to reassure investors. Toll road officials, who have always tried to underplay the gap between actual traffic and forecasts, now acknowledge predictions made for the San Joaquin Hills tollway were too optimistic.

“This is the first time we have said we are not going to meet our projections,” said Wally Kreutzen, chief executive officer of the Transportation Corridor Agencies.

The nearly $40 million that will be set aside is sufficient to meet the debt coverage for the near term and give the agencies some breathing room until they have the chance to refinance again in 2007.

“What’s important is that by taking these steps we now have seven years to manage it,” Kreutzen said.

Toll road officials, however, said that Thursday’s vote does not resolve long-term concerns about revenue on the road. To that end, the agency plans to step up consideration of “variable pricing,” which some officials hope could generate more in tolls. Already in place in the 91 Express Lanes, variable pricing allows the toll road to charge more at peak commute times and less in the off-hours.

That option will be among those considered by a toll road committee that will meet publicly to discuss ways to increase revenue on the road, officials said. Spitzer said the agency will exhaust all options for increasing revenue without raising tolls before the next scheduled increase, July 1, 2001.

Critics of Orange County’s toll roads said the measures taken Thursday bolster their arguments against completing the planned 67-mile toll road system in Orange County with the controversial Foothill South. The proposed 16-mile toll road would connect Oso Parkway with Interstate 5 in San Clemente, cutting through some of the last pristine open space in South County--a proposition fiercely opposed by environmentalists.

“Reality has reared its ugly head in the smoke and mirror world of TCA financing,” said Bill Corcoran, who works for the Sierra Club in its efforts to block construction of the Foothill South. “It looks to me like you have transportation leaders in Orange County struggling to pay off one miscalculation at the same time it is setting up another potential sinkhole . . . “

Toll road officials, however, said the performance on the existing Foothill/Eastern corridor has been good, meeting or exceeding revised traffic projections issued last year when that road was refinanced.

Kreutzen said important lessons have been learned from the San Joaquin Hills tollway. Traffic forecasters relied too heavily on the wrong indicators--population and economic growth, for example--rather than employment trends and commuting patterns, he said.

At least one prognosticator was nearly on the mark, though. In 1996, a JP Morgan analyst warned traffic on the toll road would continue to fall 15% short of forecasts through 2000, said Spitzer, who made copies of the report available to fellow members of the board at the meeting.