Tollway Boards Agree to Study Merging

Two boards that control Orange County’s largest turnpike system took steps Thursday toward merging their highways--a move some say might save the financially ailing San Joaquin Hills toll road as well as plans to build another tollway south of Mission Viejo.

The board of the successful Foothill-Eastern toll road through eastern Orange County agreed to study a consolidation with the San Joaquin Hills, which has failed to meet traffic and revenue projections since it opened in 1996.

Immediately after the decision, Foothill-Eastern directors met with the board of the San Joaquin Hills road and began the complicated task of determining whether a merger is politically and economically feasible.

They established a research committee and outlined issues to be resolved before a decision can be made to create a unified agency. The topics include how to meld both boards into a single governing body and whether $4 billion in bonds--the total debt of the toll roads--could be refinanced.

“This is the beginning of a yearlong process,” said Walter D. Kreutzen, chief executive of the Irvine-based Transportation Corridor Agencies, which manages both toll roads. “Although we don’t know yet whether a merger will work, I don’t think there is any other way to go right now.”

Though the Transportation Corridor Agencies administers both turnpikes, each is financed independently and has its own board of directors selected from county and municipal government.

TCA officials are in the middle of planning the Foothill South project, a toll road that would run 15 miles from Oso Parkway in Mission Viejo to Interstate 5 south of San Clemente. If built, it would complete the agency’s 67-mile toll road network and be under control of the Foothill-Eastern’s board.

Directors for both toll roads began considering a merger after an economic analysis indicated it might be the only way to keep the San Joaquin Hills tollway from eventually defaulting on about $1 billion in bonds sold to build the road. Financial ratings agencies have downgraded those bonds twice, lowering them to junk-bond status earlier this year.

The analysis further concluded that if nothing were done, Wall Street might further lower the ratings of TCA bonds and undermine the agency’s ability to refinance or borrow for future projects, such as the Foothill South.

A merger, TCA officials say, might let the more successful Foothill-Eastern subsidize the San Joaquin Hills and improve the prospects for refinancing all the debt of both toll roads. If the study shows a merger is feasible, a consolidation might occur by May 2003.

During discussions Thursday, some board members cautioned that it is not yet clear whether a merger would make it possible to refinance the toll roads or sell new bonds for Foothill South.

A consolidation might lower the TCA’s margin between revenue and expenses to a level that might adversely affect its credit ratings, officials said. If so, issuing new debt would be harder and more costly.

“We might not get market access to refinance,” said Orange County Supervisor Todd Spitzer, a member of both toll road boards. “If our numbers come up too conservative for traffic and revenue, then we are right where we are today.”

Any merger will be contingent on the results of new traffic and revenue studies for the Foothill-Eastern and San Joaquin Hills roads. The former is at 110% of projections for both revenue and vehicle trips. The latter has been running between 70% and 80% of forecasts.

The TCA is particularly concerned about a recent Irvine Co. decision to scale back commercial and residential development dramatically in eastern Orange County and how that might affect the Foothill-Eastern’s revenue growth.

Though that toll road is profitable, the Irvine Co.’s action is expected to reduce the number of daily vehicle trips in the area by 400,000 a day.

Spitzer and his board colleague, Supervisor Tom Wilson, said the merger committee should be willing to look at other options, though they did not say Thursday what those might be. But Wilson said both boards must study consolidation very carefully and be ready with another scenario if it is ruled out.

“The merger is not a slam dunk,” Wilson said. “It’s just another proposal as far as I’m concerned. I don’t care about all the financial people in the audience.” The supervisor was referring to the bond attorneys, underwriters and brokerage representatives at the meeting. Some of them have been financial advisors to the TCA.

At the joint board meeting, opponents of the Foothill South, such as the Sierra Club and Friends of the Foothills, criticized the merger as a misguided attempt to save plans for an unneeded tollway that would destroy open space and valuable wildlife habitat.

Bill Corcoran, a regional representative for the Sierra Club, told board members that the proposed refinancing of the toll road bonds would extend the debt for years, making “a mockery” of the promise that toll roads would eventually become free to the public.

“Wall Street just wants to protect its bond sales,” Corcoran said. “Orange County’s taxpayers should consider toll road finances with a skeptical eye and a hand on their pocketbooks.”