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Hey, It's Worth a Look
The good news: The McDonnell administration has discovered $5.4 billion in "surplus" bond proceeds to help pay for Dulles Rail. The bad news: Money dribbles in slowly and it's all there is to pay for Dulles Toll Road improvements over the next four decades.
by James A. Bacon
The General Assembly faces a major policy decision regarding the financing of Dulles Rail -- what to do with a projected $5.4 billion in surplus Dulles Toll Road revenues to be collected over nearly four decades to provide security for the project's bond holders, Virginia Highway Commissioner Gregory A. Whirley told members of the Joint Commission on Transportation Accountability Monday.
To obtain affordable interest rates on the bonds it issues, the Metropolitan Washington Airports Authority (MWAA) is required to maintain minimum debt service ratios set by the terms of its bond agreements. Toll revenues must cover two times the debt service for senior (AA-rated) debt, 1.35 times for intermediate debt, 1.2 times for lower-rated debt and 1.0 time for the most subordinated debt. The excess revenues will be set aside in a separate fund.
The state has three broad options on what to do with the money: Use it to pay for improvements to the toll road, one of Northern Virginia's critical transportation arteries; renegotiate bonds to lessen the burden on toll road users, who could wind up paying as much as $8.75 per trip in 2025 and $18.75 by 2048; or return the money to the state.
Initially, the surplus will be small, Whirley explained, but enough money could accumulate within a decade to help out toll road users by renegotiating some of the project's more expensive debt.
The escalation of Dulles Toll Road tariffs has become a heated issue in Northern Virginia, where tens of thousands of commuters rely upon the limited access highway to get to and from work. Under the final financing agreement, revenues from the toll roads will cover about half the $6 billion cost of building both phases of the heavy rail project. The state allocated $150 million this year to cover interest payments in the early years of bond payments, making it possible for MWAA to slow the rate of fare increases on the toll road. The surplus funds identified by Whirley would dwarf that sum, although they would have to cover far more years of interest payments. In April, Transportation Secretary Sean Connaughton said that tapping the surplus funds could reduce tolls by $.90 per rider in the early years.
MWAA has issued $1.3 billion in toll-backed bonds so far to finance Phase 1 of the project, which is nearing completion, and anticipates selling approximately $2 billion more over the next five to six years. The bonds will be sold in four tranches, each offering a different level of security for investors and paying a different interest rate. The top-rated, "flagship" bonds will bear low interest rates of 2.5% to 3%. Investors will regard them as having minimal risk because they will be first in line, after operating and maintenance costs, to receive toll road revenues and they will have a 2.0-to-one coverage ratio. Other tranches will stand behind the senior bonds in line and have less debt-service coverage. A key component of MWAA's financing strategy is to reduce the risk on the lowest-rated bonds by getting the federal government to back them under the Transportation Infrastructure Finance and Innovation Act (TIFIA).
MWAA's interest rate projects are conservative, said Andrew Rountree, MWAA's chief financial officer. Projections assume an average cost of capital of 6.5%, which is considerably higher than interest rates prevailing today. MWAA's AA bond rating for senior debt places it among the top 11% of all airport authorities in the country. MWAA runs Dulles International Airport and Reagan National Airport, and has been entrusted with managing construction of the Dulles Rail project, which will run along MWAA-owned right-of-way.
Under a new transportation bill agreed to by Congress, the federal government will expand its TIFIA loan program substantially, Rountree said. By converting the project's expensive, subordinated debt to TIFIA-backed debt, MWAA could bring down toll road fares considerably. "We'll be doing everything we can to access that program."
Otherwise, Whirley's idea of tapping the surplus debt-coverage funds offers the only realistic prospect of ameliorating the plight of toll road commuters. Rountree cautioned that it will take years before the funds could be accessed. "The opportunity to tap the surplus won't come about for quite a while," he said. A big chunk doesn't become available until the very last two years.
Moreover, there would be complications in renegotiating the debt. A significant share of MWAA obligations will consist of "capital appreciation bonds," which are used in the early phase of a project when it is not generating revenue. Instead of paying interest on the bonds, the interest is added to the principle. They do not have "call" features allowing the issuer to retire them early. Additionally, any future improvements to the Dulles Toll Road during the life of the bonds will have to come from the surplus funds. However, Rountree said, "Our finance plan is not cast in stone."
Rountree was grilled by Republican lawmakers from Northern Virginia whose constituents have fought the rail project. Del. James LeMunyon, R-Chantilly focused on the decline in tolled transactions between 2009 and 2012 as a sign that MWAA toll revenues forecasts are flawed. Although Rountree said that toll revenues have hit very close to forecasts -- 99.6% of forecast in 2009, 102.8% the next year and 97.5% the year after that -- LeMunyon was not reassured. "How accurate are the projections 10, 20, 30 years in advance? If we're wrong by 20% on these projections 20 years out, we're all sunk."
Del. Timothy D. Hugo, R-Centreville, reinforced the point, citing the risk of cost overruns and toll revenue shortfalls. Under the financing structure, any deficit would be made up by higher tolls. "Toll road riders will scream and yell. If we're not careful, MWAA and everyone who supports [the rail project] will come back and say, 'We need $300 million, $400 million or $500 million.'"
"The data already shows we're chasing cars off the toll road," LeMunyon said. Aggressive toll increases in the future will discourage even more drivers from using the toll road, pushing them onto side streets and making traffic congestion worse. "I'm concerned that the airport authority has a different priority. Our priority in Northern Virginia is to maximize mobility," he said, speaking to Rountree. "Yours is to maximize revenue."
"We're not in the toll maximization business," retorted Rountree. "We collect only what's needed" to fund the project.
In a side conversation with Bacon's Rebellion, Rountree and his bond council, Doreen Frasca, with Frasca and Associates, disputed the idea that the recent decline in toll road traffic should be blamed on toll rate increases. The economy has been weak and unemployed workers aren't using the road. As for future toll increases, the citizens of Loudoun and Fairfax counties have among the highest incomes in the country. Tolls are less than what residents of New Jersey and New York pay, Frasca said. The consultants who modeled the traffic and revenue forecasts considered the impact of higher tolls on Toll Road traffic and revenues, and she has confidence in them..
Commission chairman Del. Joe T. May, Leesburg, said the commission would continue its deliberations on the bond-financing issue in its next meeting.
This article was made possible by a Piedmont Environmental Council sponsorship.