Move to Ensure Tollway Merger Fails

A controversial proposal to combine the operations of two Orange County toll roads and refinance their debt with a $4-billion bond issue faces possible defeat today after a last-minute political move to build support for the merger failed.

If Transportation Corridor Agencies board members do not approve the consolidation or an alternative solution, the county’s turnpike authority will remain without a plan to bail out the struggling San Joaquin Hills tollway in coastal Orange County.

Though traffic has increased recently, the 16-mile highway suffers from lower-than-projected revenue and is expected to default on $1.5 billion in bonds by 2014. In that event, the road would remain open, but a trustee would probably be appointed to oversee operations.

“It is time to vote,” said Lake Forest Mayor Peter Herzog, a board member who supports the merger and refinance plan. “There is no doubt we need to have a solution. This thing has been thoroughly analyzed, and there’s a clear plan to rectify the situation.”

After more than 20 months of study, the corridor agency staff has recommended that operations of the successful Foothill-Eastern tollway be merged with the San Joaquin Hills and their combined debt refinanced with a $4-billion bond issue.

The plan, which will be considered by a special 21-member board of directors, requires 16 votes to pass, something backers of the merger have failed to muster for several months.

At least six board members have been opposed to the proposal, including Anaheim Councilman Bob Hernandez and Santa Ana Councilman Brett E. Franklin.

Since February, the opponents have forced delays in the merger vote to give them time to propose and evaluate alternatives, including one by Orange County Supervisor Bill Campbell.

“It is a matter of promoting the best plan to save the system,” said Supervisor Chris Norby, a critic of the refinancing. “We all want to save the San Joaquin Hills from default, but I’m opposed to the Wall Street interests who have been pushing this merger for months and months.”

Trying to weaken the opponents, the Santa Ana and Anaheim city councils on Tuesday considered passing resolutions in support of the merger. Also on Anaheim’s council agenda was a measure to remove Hernandez as the city’s representative to the tollway agency.

Anaheim Mayor Curt Pringle and Santa Ana Mayor Miguel A. Pulido pushed the measures in hopes of neutralizing Hernandez and Franklin and breaking the opposition. But the Santa Ana resolution failed to pass. Though Anaheim approved a measure to support consolidation, the council took no action on whether to oust Hernandez.

Pringle, who supports the merger, decided not to vote amid a debate over whether he had a conflict of interest involving a former consulting contract. From 1999 to Aug. 1, 2003, Pringle was a lobbyist for J.P. Morgan Securities Inc., a giant Wall Street brokerage that would serve as an underwriter for bonds sold by the toll agency if the merger is approved.

Hernandez says he remains opposed to the merger, although he is “trying to keep an open mind.” He contends the merger plan does not have to be resolved immediately because interest rates for bonds are not going to jump dramatically soon.

As recommended, the $4-billion bond issue would involve $3 billion in fixed rate bonds and $1 billion in bonds that involve so-called interest rate swaps with financial institutions.

Supporters contend the plan is the only way to prevent the San Joaquin Hills from defaulting on its bonds without jeopardizing $1 billion in planned improvements to the 51-mile tollway system and construction of the proposed Foothill South tollway through southern Orange County.

Herzog, who chairs the Foothill Eastern board, warned that continued delay of the merger could threaten a potential bond deal because, unlike Hernandez, he fears interest rates could rise in the months ahead.

Critics say the merger will cost the toll agency almost $200 million in financial fees and bond insurance. They also say that the interest rate swaps are riskier than fixed-rate bonds and that tolls would be extended to 2044 -- four years longer than planned.

Competing with the merger at today’s board meeting is Supervisor Campbell’s proposal. It calls for the Foothill-Eastern tollway to make an initial payment of $120 million to the San Joaquin Hills and loans at 3% interest to the faltering highway as needed. The San Joaquin Hills needs an infusion of about $1 billion to stay solvent.

An analysis by the toll agency indicates the Campbell plan would delay improvements by three to 10 years and keep tolls in place until 2050 at a cost of about $3.9 billion to motorists.

Campbell disagrees with the initial findings of the agency, which is continuing to review the plan. He says his analysis shows that only widening projects would be delayed but completed four years before the tollways are turned into free highways.

Among other things, the plan would avoid $200 million in financial fees and the risks of entering into the interest rate swaps. Meanwhile, Campbell says, the proposal would allow the Foothill South to be built and would allow the on-time completion of many other improvements.