Papers Show State Officials Had Fought Toll Road Sale

As early as 1998, high-ranking state transportation officials feared a proposed sale of private toll lanes in the median of the 91 Freeway would appear to be a “sweetheart deal” and allow the sellers to “reap a windfall” from state bonds proceeds.

Yet in late 1999, Caltrans Director Jose Medina approved the transaction, which was later abandoned after newspaper revelations and an outcry from key public officials raised the same questions.

Caltrans’ private misgivings about the deal--as well as Medina’s actions to approve it at the behest of the private roadway’s operators--will be the subject of a Feb. 1 hearing of the joint Senate and Assembly Transportation Committee. Medina agreed to the sale as part of a settlement of a costly lawsuit brought by the California Private Transportation Co., which operates the lanes.

Details about the internal back-and-forth over the proposed sale of the 91 Express Lanes are outlined in documents released in advance of the hearing to lawmakers and, through a separate request, The Times.

The documents don’t make it clear whether Medina was aware of the internal debate over the transaction. Medina has refused repeated requests for interviews.

But internal memos, deposition transcripts and other correspondence show that transportation officials, who are now Medina’s top aides, were well aware of the public sensitivity to the transaction. At one point, they even expressed concern that the political fallout would hurt the presidential aspirations of then-Gov. Pete Wilson.

“The Year 2000 is still on the governor’s mind,” one official wrote.

Despite the misgivings, James van Loben Sels, Medina’s predecessor, recommended approving the deal, which allowed the state’s only private road to be sold to a nonprofit corporation created expressly to buy the 10-mile stretch of roadway.

But Van Loben Sels’ boss, then-Transportation Secretary Dean Dunphy, nixed the idea in the summer of 1998, the documents show. He suggested to the private company that operates the toll lanes to try again under a different administration.

They did. Within weeks of Gov. Gray Davis’ January 1999 inauguration, the toll group traveled to Sacramento to gain Medina’s support.

The deal called for the private company to sell the lanes to NewTrac, a nonprofit group of Orange County and Riverside County businesspeople. The private operator stood to clear about $90 million on the 10 miles of money-losing toll lanes that opened in late 1995. The lanes are the only private road in the state and run along the median of the Riverside Freeway near the Orange County/Riverside County border.

The deal made some Caltrans officials and their superiors at the Department of Business, Transportation and Housing under the Wilson administration skittish, the documents show.

For nearly a year, from the fall of 1997 to mid-1998, they debated the merits of the proposed sale. Some were worried about their promise to keep the sale negotiations secret. Others were troubled by the private company cashing out just three years into their 35-year contract, potentially reaping a huge profit, Caltrans memos show.

Other concerns raised by some state officials included, according to the documents:

* Whether the public benefited from the sale. Motorists, for example, were not guaranteed lower tolls. In fact, the new nonprofit owner anticipated hiking the tolls by about 3% a year, memos show.

* Public outrage over a potential windfall of $74 million to $90 million for the private company. “The ‘smell test’ on the rate of return is key,” wrote Van Loben Sels. “Whatever rate structure is selected must be capable of being explained as nothing unusual in the industry. . . . “

* Whether tax-exempt financing for the sale violated the intent of the 1989 law that set up the private toll lanes. If such financing was to be used, some officials argued, the state should share in the profits from the sale.

“To do otherwise is allowing a private corporation to reap a windfall profit from minimal risk and capital investment and provides fuel to the fires that argue against public-private partnerships,” wrote Craig House, then Caltrans’ top financial officer.

* Whether the deal was too cozy because it called for the private company to be hired back under an exclusive, no-bid operating contract for at least 15 years.

“To avoid this becoming or being perceived as a ‘sweetheart deal,’ I still believe . . . [the new owner needs to seek] competitive bids,” House wrote.

* The private company’s request to keep the deal secret from Riverside and Orange County officials until the sale was a “fait accompli.”

Dunphy rejected the request, House said Sunday.

“Dean Dunphy objected, saying ‘We’re not going to ram it down the throats of our local partners,’ ” House said. “We thought that was unreal.”

Many of the same questions debated within Caltrans were raised by State Treasurer Phil Angelides in December when he stopped the proposed sale, which was to be financed by $274 million in tax-exempt bonds issued by the California Infrastructure and Development Bank. The bank was created to offer alternative funding for public-benefit projects.

The private company abandoned its bid to sell the roadway after The Times disclosed its relationship to the new buyers and the potential windfall profit.

The aborted sale has focused intense scrutiny on the state’s experimentation with private road-building. In addition to the upcoming legislative hearing, the scrapped deal is being investigated by state Atty. Gen. Bill Lockyer and reviewed by the governor’s office.

The backlash stunned Medina, according to Caltrans sources, but his aides have maintained that the Caltrans director’s role was not to endorse the deal, but to find a buyer capable of running the lanes.