Doubts Over Toll Lanes Sale Arose in ’98

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

Yet in late 1999, Caltrans Director Jose Medina approved the transaction--until newspaper revelations and an outcry from key public officials derailed the proposal for exactly those reasons.

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 joint hearing of the Senate and Assembly transportation committees. 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 to lawmakers in advance of the hearing and, through a separate request, to The Times.

The documents don’t make clear whether Medina was aware of his agency’s doubts about the transaction, 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. The sale would have allowed the private company to reap a potential $90-million windfall on the money-losing lanes just four years into a 35-year contract. Medina has refused repeated requests for interviews.

But internal memos, deposition transcripts and other correspondence show that other transportation officials were well aware of the public sensitivity of the transaction and, at one point, concerned 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, as long as the state could share in the profits. But Van Loben Sels’ boss, then-Transportation Secretary Dean Dunphy, rejected the idea in the summer of 1998, the documents show. He suggested the private company, which operates the toll lanes, try again under a different administration.

It did. Within weeks of Gov. Gray Davis’ January 1999 inauguration, the toll group went to Sacramento to lobby for 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 businessmen. The lanes run along the median of the Riverside Freeway near the border of Orange and Riverside counties.

A very similar deal worried some Caltrans officials and their superiors at the Business, Transportation & Housing Agency under the Wilson administration, the documents show.

For nearly a year, from the fall of 1997 to mid-1998, transportation officials 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 a 35-year contract, potentially reaping a huge profit, Caltrans memos show.

Among other concerns raised by some state officials, 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” for the private company of between $74 million and $90 million. “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,” according to one Caltrans memo.

Dunphy rejected the request, House said in an interview 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 state’s Infrastructure and Development Bank.

The private firm abandoned its bid to sell the roadway three weeks 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 the buyer capable of running the lanes.