Writing the intent of the law out of the contract
Let’s say you make $91K per year. You’ve just ticked over into the 28% income tax bracket and you’ve got to mail the IRS a hefty check. But all of a sudden the IRS does you a huge favor: they raise the tax bracket. In fact, they raise it by a factor of a thousand. So instead of paying taxes on $91 thousand, the 28% tax bracket doesn’t kick in until you make $91 million.
Not only that, but they raise all of the tax brackets in the same way. You won’t start paying taxes until you make over $9 million. Unless you’re in line for a hefty raise, the IRS just eliminated your tax liability. A huge favor indeed.
Of course, that scenario is impossible in the real world, but the I-77 toll project is a different story. Under North Carolina law, public-private partnerships (P3’s) are required to contain a revenue sharing provision. If the private company collects revenues above a certain amount, a portion must be shared with North Carolina. NCDOT touts this revenue sharing provision as a key benefit of the private toll lane project.
The contract between NCDOT and Cintra dutifully complied, as they developed a tiered revenue sharing scheme of 0% / 12.5% / 25% / 50% / 75%. (It strikes us that an unelected bureaucracy negotiating revenue sharing rates with a private company is taxation without representation, but that’s another matter.) Like income tax brackets, revenues falling within certain bands would be shared at the above percentages.
The revenue bands increase every year, but taking 2019 as an example, the 12.5% bracket kicks in at revenues above $43,000. The highest bracket (75%) starts at revenues above $61,000. So three-quarters of all revenues above $61,000 would be paid to NCDOT. (All of this was laid out in a couple of tables buried in the contract.)
That struck us as a very low ceiling, especially considering annual toll revenues are projected to be upwards of $30 million. (We don’t believe that number, either.) We wondered if the bond underwriters knew only about a quarter of the revenues were available for debt service. So we wrote them a letter (Revenue Payment Amounts).
Of course, we weren’t privy to the internal conversations, but we do know the day after we emailed our letter the feds cancelled a meeting where they were set to approve the loan. So the project’s financial close was delayed. And delayed again. And again.
Then on May 1, 2015, NCDOT & Cintra issued an amendment to the contract. That amendment contained a seemingly innocuous change. Referring to the revenue sharing table, it stated:
“The amounts in the above table are in thousands of dollars (000)”
The implications are huge. Like our IRS example, instead of the lowest bracket kicking in at $43 thousand, now there is no revenue sharing until revenues top $43 million. And every year the revenue bands increase. In 2035 annual toll revenues would have to exceed about $1.5 billion before North Carolina receives a dime.
In essence, NCDOT wrote revenue sharing out of the contract so they could achieve financial close. The bond ratings agencies admitted as much, telling us in an email that “the traffic forecast did not eclipse the threshold at which revenue sharing would begin.”
So the bond rating and subsequent loan underwriting are based on zero revenue sharing to North Carolina, despite a statutory requirement to do so.
Of course, the parties can always amend the table, but that should trigger a re-analysis by the bond ratings agencies and neither party probably wants to go there.
Yet another example of the public-private “partnership” doing whatever it takes to get this deal done.
Here is the Amendment: Executed Comprehensive Agreement Amendment No. 3