Financial Jam Mires O.C.’s Toll Highway
Traffic consultants for the San Joaquin Hills toll road, which runs through one of the wealthiest swaths of coastal California, were effusive back in 1992 when they prepared to sell $1.2 billion in bonds to finance the turnpike.
The tollway, they predicted, would average about 94,500 motorists a day within a year of its opening--more than enough to pay expenses and interest on the project’s enormous debt.
A decade later, the sky is not so blue.
The 15-mile tollway, which opened in late 1996, has failed to live up to its traffic and revenue projections. As of December, an average of 72,000 motorists traveled the road each day, well short of the 1992 forecast or even a revised, more conservative, estimate issued in 1997.
“It remains a hard sell,” said Michael McNally, an engineering professor at UC Irvine’s Institute for Transportation Studies. “It doesn’t surprise me that they are having problems. The road was premature.”
Now, with a Wall Street rating firm reducing the highway’s bond rating to “junk” status, the toll road authority has been going about the sobering business of revisiting its finances. The CEO for the toll agency said he fears the road could be in technical default within five years, a financial path that has put other toll roads across the nation in financial peril.
All this comes as tolls on the road are being raised to $3 a trip, a move that could generate new revenue or drive away customers.
The scenario for technical default is real, according to Walter D. Kreutzen, chief executive officer for the Transportation Corridor Agencies. He said bondholders were promised that the toll road would earn $1.30 for every dollar of debt. The ratio was offered as a margin of security for investors.
If the toll agency fails to maintain that ratio--which Kreutzen said is very possible--that financial covenant with investors will be broken. “It is not good,” Kreutzen said, “to be in any kind of default.”
Failing to meet the requirement does not mean that bondholders won’t receive their interest payments. The declining margin, however, is a substantial warning of increased risk and serious financial problems for the toll road.
The slower-than-expected traffic growth on the toll road had already prompted two of three Wall Street rating agencies to downgrade more than $1 billion in corridor bonds to the lowest investment grade. Last week, Fitch IBCA went a step further and kicked its rating down to speculative grade, or so-called junk bond status.
The San Joaquin Hills tollway, which runs from Newport Beach to north of San Juan Capistrano, is part of a 51-mile network of toll roads built and operated by the Transportation Corridor Agencies. Each of the network’s two corridors--the San Joaquin and the Foothill-Eastern--has its own board of directors and financial obligations.
The San Joaquin Hills tollway has long been the problem child of the family. Transportation analysts blame its low ridership on factors that have hampered similar toll-road projects across the country: lower-than-expected population growth, recessions and competing public highways.
The San Diego Freeway and Interstate 5, they say, remain viable options for drivers who might not want to spend as much as $3 to shave 10 to 15 minutes from a peak-hour trip.
Both freeways, which run through central Orange County, have been steadily improved over the years, including elimination of the notorious congestion at the El Toro Y. The dreaded interchange linking the two freeways has been completely rebuilt and widened.
From an economic standpoint, the San Joaquin Hills toll road has been battered by two recessions since it opened, slowing growth in Orange County and particularly in the area served by the tollway.
In a 1997 report, traffic consultants Wilbur Smith Associates concluded that traffic growth was hurt by a significant economic downturn in Orange County and the rest of Southern California during the early to mid-1990s.
Researchers said the recession delayed increases in employment in Orange County for at least six years and somewhat longer along the San Joaquin Hills corridor.
By the time the toll road opened, the Smith report stated, employment levels in the project area were still lower than they had been in 1990 and about 21% less than had been forecast for 1997.
“The 5 and 405 are very viable alternatives and the growth in housing and commercial development has not occurred as rapidly as thought,” said Kia Mortazavi, manager of planning for the Orange County Transportation Authority.
Professor Recommended a Smaller Highway
Peter Fielding, a professor at UC Irvine’s Institute of Transportation Studies, predicted in the mid-1990s that the San Joaquin Hills would encounter financial difficulties because of a lack of motorists for such a large highway. He said a smaller four-lane road would have accommodated growth for many years as long as tolls were raised and lowered based on demand.
“This advice was rejected,” Fielding said.
Whether the San Joaquin Hills will default on its bond is unclear. But if it does, it will not be the only tollway in the nation to have suffered severe financial setbacks.
The Chicago Skyway defaulted on its bonds for about 10 years before it finally recovered in the mid-1980s. During that time, the tollway stopped paying interest to bondholders. The Chesapeake Bay Tunnel went into default as well in the late 1970s.
Today, the Garcon Point Bridge, east of Pensacola, Fla., is on the brink of default on its bonds. The $100-million project includes a 31/2-mile long bridge and more than seven miles of connecting roads.
Peter Samuel, editor of Toll Roads Newsletter, based in Maryland, said some of these operations recovered and resumed paying interest to bondholders.
“Many of these roads depended on development for their success,” Samuel said. “But the expected development often takes a lot longer than the boosters say it will.”
Many Forecasts Fell Short
Forecasts by Wilbur Smith Associates had originally called for 94,500 riders a day on the San Joaquin Hills toll road during the first year of operations. But by spring, six months after its grand opening, the tollway was averaging only 48,250.
Toll officials predicted the shortfall would not hurt the corridor’s ability to meet expenses and pay the interest on its bonds. They also predicted the gap would disappear within a year.
It didn’t.
From July 1998 to June 1999, projections called for the road to earn almost $51 million in toll revenue from 28.5 million riders. But it actually collected $42.6 million from 24.8 million transactions.
The latest available figures indicate that the gap is widening. For the first six months of fiscal year 2001-02, projected revenue was about $37 million from 18.5 million riders. The actual revenue was $28 million from 13.2 million riders.
If trends continue, the toll revenue for the current fiscal year might be about $56 million from 26.5 million motorists. The projections call for almost $73 million in revenue from 37 million drivers.
The question facing corridor officials is whether revenue can keep pace with the road’s debt payments, which increase every year for the life of the bonds. The debt service is scheduled to go up from $46.7 million in January 2003 to $186 million in 2034.
Kreutzen said he is confident that the San Joaquin Hills can meet its financial obligations until 2007. There is a cash reserve of $140 million and a $12-million federal line of credit, which expires in five years. The toll agency also has been cutting its administrative costs to save money.
To help pay the debt service, the corridor agency already has used a $36-million infusion of cash from the settlements of lawsuits related to the Orange County bankruptcy.
Today, transportation officials are considering ways to refinance the tollway, including a merger of the two boards that govern the San Joaquin Hills, the Foothill and the Eastern turnpikes. Bond rating reports show that the transportation authority is considering refinancing the outstanding bonds of all three toll roads. Revenue would be combined to cover the annual debt service of the unified system.
The Foothill and the Eastern tollways are the healthiest of the three highways, with ridership running ahead of projections by about 8%. Bond rating agencies that evaluate the agencies’ debt have described the economic outlook of the two turnpikes as stable.
