Toll Lane Financials

Some elected officials justify toll lanes as a means to generate revenues for roads.  They note gas tax receipts are expected to decline while road construction needs will increase.  These trend lines are headed in the wrong direction and to reverse that, these advocates point to toll lanes (and roads) as an important revenue-raising tool.

This implies that toll lanes must not only cover their operating costs, but also bring in enough revenue to pay for the lane itself. Ideally they would generate a surplus that can be used as a source of funding for other transportation needs.  For I-77, the current plan is a $550M project consisting of toll lanes for 27.5 miles from downtown Charlotte to the middle of Iredell County.  The project is proposed as a public-private partnership, where the NCDOT would lease the lanes to a private company under a 50 year contract.  The $550M includes $170M in public funds, and the rest would be financed through a combination of private debt and equity.

Before we begin our analysis, a word about sources.  Population data comes from the U.S. Census Bureau.  The financial data was taken from the 2012 Managed Price Lane Guide published by the Federal Highway Administration.  This document is basically a how-to manual for getting toll lanes built.  It was written by Parsons-Brinkerhoff, an engineering consulting firmly deeply involved in the toll lane business.  Among its authors is David Ungemah, the featured speaker at a local toll lane information session.  He is nationally recognized as a “managed lanes expert.”  Thus, any bias in the information presented is in favor of toll lanes.

With that in mind, we’ve undertaken a study of existing toll road financials.

Revenues

The chart below plots annual toll revenues vs metropolitan served area (MSA) population for 11 toll lanes currently in operation. In addition, we plotted the required Revenuesrevenues ($20M) for the proposed I-77 toll lanes.  Toll lane experts have placed this number as high as $30M; we erred to the low side.

A couple of observations.  First, toll revenues are roughly correlated to the MSA.  On the low end are the I-15 lanes through Salt Lake City with a metropolitan area of approx one million and revenues of $500K.  On the high side- indeed an outlier- is SR 91 connecting North Orange County to Riverside.  Combined, over 7 million people live along this route, and toll revenues were $41M.  We’ll discuss SR 91 in more detail in a moment.

This correlation is not surprising as urban sprawl is necessary for the toll lane model to work.  As we have stated elsewhere, toll lanes rely on congestion in the general purpose lanes to entice people to pay the toll.  Robert Poole of the Reason Foundation affirms this in a recent article he wrote examining toll revenues in Miami.  (Poole invented the term “HOT lanes” and is widely viewed as the father of the concept.)  Poole states:

I could imagine that a managed lane project in Minneapolis or Salt Lake City, say, might not relieve enough congestion to cover its costs out of toll revenues. But congestion on I-95 in Miami was nearly as bad as on the Los Angeles freeways, and the prices charged during peak periods are considerably higher than on many other managed lanes around the country.

In order to cover its costs, Poole implies, toll lanes must be in a large metropolitan area.

The second observation is that the required revenues for I-77 are out of proportion with the region’s population.  I-77 toll revenues will need to surpass those in Seattle, San Diego, Houston, Atlanta, and Miami, among others.  In fact, the I-77 project would need to be the second-highest grossing toll lane in the country.  It would require revenues greater than the eight lowest-grossing toll lanes combined.  This should be especially concerning in light of the fact that the project’s northern terminus (Iredell) has the smallest population (160K) of any of the existing toll lanes.

Operating Income

Operating Income is defined as revenues minus operating costs and does not include debt repayment.  Whatever is left over from operating expenses is what is available to pay for the capital cost of the project.  Toll lanes incur several operating costs that are unique to toll lane operation.  Among these are advertising, toll billing, toll collection, credit card fees, toll enforcement, occupancy enforcement, administration of the tolling authority, insurance claims and premiums, and ROI to private equity and debt investors.  General purpose lanes incur none of these.

The chart below shows annual operating income vs population, with projects sorted in order of increasing population.  Of the 11 projects, 7 have negative operating income.  IncomeThree generate significant positive income and one generates a modest income.

With one exception, no toll lane serving a population of less than 5.5 million currently covers its operating cost.  The exception (Denver) is an HOV-HOT lane conversion with a modest capital cost of $9M.  It was built with public funds and is run publicly, thereby avoiding some of the expenses previously mentioned.  The other HOT lanes with positive income are in Houston, Miami and Riverside/NOC.  SR 91 (Riverside/NOC) generates a significant income of nearly $20M.  This stretch of road is ten miles long and serves the relatively affluent North Orange County and more working-class Riverside.  The total served population is over 7 million and traffic on this road is over 300K vehicles per day, about twice what the busiest freeway in North Carolina carries.

However, even this “success” story is not without a cautionary tale.  The project originally opened in 1995 as a private, for-profit investment at a cost of $135M.  When the state tried to make improvements to ancillary roads, the operator sued, citing a clause in the contract that would prevent the state from making improvements that would ease congestion and impact toll revenues.  In 2003 the Orange County Transportation Authority bought the project back for $207M, 50% more than its original cost.

I-77 is not included here because the financials are not yet public.  At 27.5 miles the I-77 toll project would be the second longest in the country, so operating costs can be expected to be on a par or greater than those currently in existence.

Capital Cost

The chart below shows the total project capital costs.  I-15 in San Diego is the highest, Capitalat $1.3B.  The project was financed through general bonds issued by the state of California.  This differs from the proposed financing in North Carolina, where bonds will be issued using anticipated toll revenues as surety (“toll revenue bonds”).  Implicit in the San Diego project is the consideration that toll revenues will never be sufficient to retire capital cost.  Conversely, as we reported here, North Carolina plans to issue hundreds of millions in toll revenue bonds.  In fact, by the end of FY 2015, North Carolina will have issued over $2B of these types of bonds.  These will be used for toll road construction (not toll lanes), but proponents of this method should take heed that even in Southern California, tolls are not viewed as a source of additional revenue.

The variation in capital costs are largely due to whether the project is a conversion of an existing lane or an entirely new project.  Houston, Riverside/NOC and Miami are new construction while the remainder are conversions of existing HOV lanes.

Of course, new construction is significantly more expensive than conversions.  I-77 is primarily new construction (10 lane-miles out of 90+ will be HOV conversion), and this is reflected in the project’s capital cost of $550M. The I-77 project would be among the most expensive currently proposed, and more expensive than any toll lane financed through toll revenue bonds except the Capital Beltway in DC.  (The recently opened Capital Beltway cost over $2B.  Operating financials are not yet available.)

As far as the implications for the rest of North Carolina, I-77 has the only HOV lanes in the state.  Therefore, building toll lanes will require either new construction- and the associated expense- or conversion of existing general purpose lanes.

Superlatives

Compared to projects in the rest of the U.S, I-77 toll lanes would be:

  • the second-highest grossing to make the project financially viable
  • the second most expensive project financed through toll revenue bonds
  • the second longest project in terms of miles
  • the first to have four toll lanes beside four general purpose lanes
  • located in the second smallest metropolitan area

In addition, I-77 toll lanes would be North Carolina’s first:

  • privately operated toll lane
  • toll lane or road to be operated on a for-profit basis
  • road under a 50 year contract

Historically, no toll lane:

  • serving a population the size of Mecklenburg-Iredell has ever had a positive operating income
  • has ever repaid a debt obligation as large as the proposed I-77 project, regardless of metropolitan population

Conclusions

The proposed I-77 project therefore requires revenues and income that have been historically unattainable.  This raises an obvious question:  shouldn’t the bond underwriters- the people who do this for a living- walk away from this?  When we were in Raleigh we asked this question.  The answer was if they do not think the project is viable, they will simply not fund the project.

Not so fast.  As we have pointed out previously, under the terms of the existing contract the taxpayer will be responsible for all but the equity portion of the total project cost.  (Equity is typically about 20% of the total project.) If the project fails, advocates tout that taxpayers could buy the project for “pennies on the dollar.”  To most people, eighty cents on the dollar is a lot of pennies.

Even if that were the case, the toll lane project requires several improvements that are otherwise unnecessary.  Foremost among these are the replacement and/or construction of 9 bridges.  According to the NCDOT none of the existing bridges require replacement.  So taxpayer money that could be spent elsewhere would instead pay for replacing structurally sound bridges.

The above analysis shows that North Carolina lacks both the population centers and existing infrastructure of readily-convertible lanes to make toll lanes financially viable. If we pursue this route the scenario for North Carolina is one of high capital costs, low revenues, and negative operating income. Indeed, rather than generating additional income for roads, toll lanes pose a substantial risk of making our funding problem worse.

Toll lanes may work elsewhere, but they should be removed from consideration in North Carolina.

15 Responses to Toll Lane Financials

  1. mjm77713 says:

    Kurt, Thanks for packaging all that information in a format that the average Joe can comprehend. As always, well done.

    If we can motivate our State elected officials to read and comprehend the “other side of the equation” as presented on the websites, “common sense” would dictate there should be enough believers to stop any vote from gaining momentum. (I guess, that is, aside from the value of the political currency that those heavily invested politicians will spend to try and see it through.)

    Am diggin the “No NC Tolls” movement. Seems like a great way to get the complete Congress engaged.

    Any meetings coming up? Any reason for one?

    Peace

  2. Pattie Marshall says:

    How an we get a dialogue with this information with our state elected officials? Those that make the final decision. Can we invite them to a local meeting of their constituents when they are out on recess and in town? I understand that is why they have so much time off…so they can spend time listening to their constituents…

  3. Paula Schmidt says:

    Thank you for sharing your insights on this project. Clearly, the only party that stands to benefit from the toll proposal is the company to which this boondoggle will be outsourced. We, the people, will suffer.

    Last Nov. I had the pleasure of speaking briefly with Robert Brawley regarding the lack of funds for road improvements in this region. He commented that our road taxes were “redirected” for other purposes, and never repaid. How can we hold the responsible parties accountable for replacing these funds? We have paid our fair share of road taxes–why should we be made to pay again in the form of tolls?

    I am perplexed as to why there hasn’t been successful advocacy from our representatives in Raleigh and D.C. to alleviate our traffic congestion. I have not encountered another NC highway that matches the congestion of the south Iredell/north Mecklenburg stretch of I-77. What are the politics behind this?

    Trucking companies also bear the burden of our inadequate roads, in the form of greater fuel costs, delayed delivery times, higher insurance rates, and increased likelihood of traffic accidents (plus adverse environmental effects). Perhaps the Teamsters can help us push against the toll proposal and advocate for appropriate, overdue road improvements in this area.

    Please let me know how I can help block this toll road proposal. Many thanks.

    .

  4. valleebubak says:

    Further evidence to support this post: a blogger writes about the failing HOT lane projects in Virginia. http://www.baconsrebellion.com/2013/06/wherere-my-cars-dude.htm

  5. Any member of the NC Senate or House who got elected by promising lowering taxes yet wants to replace that with money direct billed to taxpayers by private companies to build and manage toll lanes in NC is definitely in the wrong direction of the voters who put them their. The taxpayers will not save a dime if roads that were previously being financed by government are now being paid for directly by taxpayers.

  6. […] With North Carolina’s toll lane scheme coming under increasing fire, some elected leaders have recently taken to demanding alternative funding options.  As we’ve pointed out previously, bloated toll lane projects like the proposed I-77 HOT lanes are not the solution, and no toll lane in a metropolitan area less than 2.5 million has even covered its operating costs. […]

  7. NoVaAbbe says:

    Virginia has same situation with the high occupancy toll lanes (HOT lanes) in the beltway and I-95, aka the expensive Lexus Lanes! Also the speed limit has been increased in hopes of upping the number of drivers in the HOT lanes since they are not well utilized due to costs.
    “The Express Lanes opened last November with a dynamic tolling system based on demand, time of day and other factors. Commuters can pay via EZ-Pass to use the express lanes to avoid the congestion of the mainline Beltway lanes. Carpools of three or more people may use the lanes free with an EZ-Pass Flex.

    In the first quarter of 2013, the Virginia Department of Transportation and Transurban, which run the lanes in a public-private partnership, reported nearly $2.5 million in revenue and more than 26,000 average daily trips on weekdays.

    That’s a big improvement from the project’s financial rocky start. In the first six weeks of its operation, the lanes reportedly lost $11 million.
    Not every locality is as fortunate. Houston’s I-45, Atlanta’s I-85, Seattle’s SR-167 and U.S. 59 express lanes are all suffering fiscally. ” Source: http://mclean.patch.com/groups/politics-and-elections/p/express-lanes-do-you-use-them

  8. Mark Neroni says:

    Kurt, I would argue that the public (we citizens) are donating more than $170 million to the project because we are also donating the right of way. That right of way has a very high value especially as you cross the lake. Once the right of way is in the hands of the P3, we can no longer use it for general purpose lanes. We, the people, are donating our land to this P3 for no compensation. Hmm.

  9. Randy Mintken says:

    When will the supporters of this toll scheme finally see the light? Before construction begins? PLEASE.

    Thank you for shedding light on the truth. Mecklenburg county needs a single lane in each direction for 7.5 miles (Exit 23 to Exit 31). Along with other transportation improvements, we would be in good shape for many years. That is a low cost proposition, probably well under 100 million. This improvement would afford us time to make sure future expansion is done in the best way possible instead of rushing into a P3 HOToll project. We don’t need what may now be over a 600 million dollar project with a 53 year contract, including 3 years for construction. Yes, it keeps getting worse.

    Even the inventor of HOToll lanes has reported that when these systems are designed with the main focus on profit, they do not optimize the ability to move people and shorten travel times for the majority of drivers over time.

    Our roads should be designed to maximize capacity, minimize travel times, and provide safe passage – NOT to maximize profit.

    We can’t afford the burden. The majority of the tolls will be paid by local residents. How do we ever get those millions back?

  10. […] the EA should be especially rigorous. ( If any of this sounds familiar, it might be because you read that here.)  It calls for a greatly expanded scope, including a time horizon out to 2035 and an assessment […]

  11. […] the current plan defies fiscal history.  As we’ve mentioned elsewhere, the I-77 toll lanes would have to collect more revenue than every toll lane in the country except […]

  12. […] said from the jump the financials make no sense. According to one commissioner’s estimates, toll revenues would have to exceed $30M/yr.  That […]

  13. […] we’ve reported here and during our public meetings, we’re skeptical the toll project can generate enough revenues to […]

  14. […] we’ve reported here and during our public meetings, we’re skeptical the toll project can generate enough revenues to […]

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