Toll Board Sees a Merger as Cure for Ills

Faced with a shortage of customers and dire financial warnings, directors for the San Joaquin Hills toll road on Thursday authorized a merger with a second county toll agency in an effort to deal with the turnpike’s growing debt.

The unanimous vote comes nearly three months after a major Wall Street ratings agency downgraded more than $1 billion in San Joaquin toll road bonds to junk status because traffic and revenue for the 15-mile highway continued to fall far short of projections.

Board members for the second toll agency, which oversees the other two Orange County tollways, the Eastern and Foothill, are scheduled to cast a deciding vote on a merger June 13.

The San Joaquin has struggled financially from the start, never quite recovering from its early years, when revenue dipped to only 50% of projections.

A panel of financial analysts, which examined the toll agency’s ledger books and recommended a merger, said that even with an infusion of as much as $400 million, the agency would fail to establish long-term financial stability.

Directors of the San Joaquin were warned Thursday that without quick action--such as a merger--the agency would miss crucial bond payments as early as 2005 and would probably default by 2012 unless revenue grew 11.5% annually.

The toll for drivers on the San Joaquin was recently raised to a maximum of $3 for a one-way trip, which could eventually generate needed revenue--or, as some suggest, discourage customers. A further rate hike is not anticipated right now.

A merger of the two toll agencies, creating a single board and combining all revenue and debt, would put the joint debt at roughly $4 billion.

Critics have previously worried that while a merger could prop up the San Joaquin’s sagging finances, it could drag down the more successful Eastern and Foothill tollways.

That second toll agency is operating at a much healthier 110% of projected revenue. At least one of its board members is eager to consider a merger.

“I believe the toll roads have been a success, and we want to continue along in that vein,” said Peter Herzog, a Lake Forest city councilman. “This is just some of the bumps and grinds.”

The San Joaquin, which stretches from Newport Beach to San Juan Capistrano, has had its share of bumps. In January, revenue was 82% of projections but has since slipped to 77%, said board Chairwoman Linda Lindholm, a Laguna Niguel city councilwoman.

“Each month it went down, and when it hit 77%, I told myself I don’t think we are going to make our debt [payments],” Lindholm said. “Now is the time to take these steps.”

If the board failed to act, it ran the risk of creating a domino effect that could further erode Wall Street’s ratings of the toll bonds, undermine the agency’s borrowing ability and affect other toll agencies, analyst Mark T. Young said.

Young said another ratings downgrade is likely without a merger.

Previous downgrades have already hurt toll road investors by lowering the value of $789 million in uninsured bonds issued in 1997 and $220 million in revenue bonds sold in 1993. An additional $795million in San Joaquin Hills bonds sold by the agency in 1997 still retain an AAA rating because they are insured.

Scott Diehl, chairman of the Foothill/Eastern toll board, said a decision whether to merge will come down to “what is the best for all of Orange County.”

The Foothill/Eastern agency still hopes to add a 16-mile southern extension that would eventually serve San Clemente and push into San Diego County.

“I can’t tell you what the vote will be in two months, but we would be foolish if we didn’t take a look at what is the best structure for us,” Diehl said. “We still have quite a bit of [research] for our board to do.”

A merger would allow the joint $4 billion in debt to be restructured under a new agency, analysts said. They added that consolidation would add efficiency and streamline operations.

The San Joaquin toll road opened in 1996. After its first year, revenue was 50% short of projections. Bonds had been sold in 1993 assuming that annual revenue would grow an average of 6.6%.

The agency refinanced a majority of its debt in 1997, reducing the interest rate from 7.6% to 5.7%, resulting in significant long-term savings.

Revenue and traffic have increased in recent years, but not enough.

The San Joaquin board also instructed its staff to work with a Foothill/Eastern agency committee to plan for a new board structure, select traffic and revenue consultants and prepare a joint-powers agreement.