Texas seeks to end P3 for toll lane project

Bonds

Texas, where the use of public-private partnerships (P3s) by the state transportation department has been stymied, is now looking to end a 52-year agreement for a toll lane project that was partially financed with private-activity bonds. 

The Texas Transportation Commission voted March 28 to terminate a 2016 comprehensive development agreement (CDA) with Blueridge Transportation Group, LLC, for the project on the 61-mile State Highway 288, which runs from Houston to the Gulf of Mexico. The termination would cost TxDOT $1.7 billion.

Transportation Commission Chairman J. Bruce Bugg, Jr. said the board’s unanimous vote marks the beginning of the process and does not reflect “any deficiency” in Blueridge’s management of the project or any changes to the project, which included four toll lanes over a 10.3-mile stretch of the highway in Harris County.  

“We anticipate many conversations with (Blueridge) to occur over the next few months,” he said at the meeting. “I want to emphasize that these conversations by TxDOT will continue to be squarely within the four corners of the contract.”

A statement from Blueridge said: We are grateful to the chairman of the transportation commission and TxDOT for their continued partnership and look forward to working with them over the coming months to best serve the people of Texas. We are a highly credible, long-term operator of toll roads with a proven track record of delivering for the local community.”

Robert Poole, director of transportation policy at the Reason Foundation, said the termination of the State Highway 288 comprehensive development agreement for Harris County toll lanes raises the specter that Texas could terminate other deals early, which could have long-term consequences for transportation infrastructure in the state.

Reason Foundation

Robert Poole, director of transportation policy at the Reason Foundation, said TxDOT has never done this before, adding it raises the specter that Texas could terminate other deals early, which could have long-term consequences for transportation infrastructure in the state.  

Companies might say “never mind” should TxDOT in the future opt for private financing and toll revenue to largely pay for projects, according to Poole. 

“They don’t want to take that risk,” he said. 

TxDOT had eight active public-private and public-public partnerships as of Aug. 31 with construction completed on all of them, according to the department’s fiscal 2023 annual comprehensive financial report. The duration of the P3s ranged from fiscal 2049 to 2068.

Termination for cause or convenience provisions were included in the CDA for the development, design, construction, finance, operation, and maintenance of the State Highway 288 project.

TxDOT did not provide answers to questions on why the CDA termination was being pursued at this time and if other terminations were being explored.

“If the agreement is terminated, toll revenue collected after the date of termination and future decisions regarding tolling policies, pricing, and operations, will be at the authority of the Texas Transportation Commission,” it said in a statement.

The commission created a non-profit corporation with the power to acquire, develop, finance, refinance, construct, reconstruct, expand, operate, and maintain “any toll project within the state as determined by the commission.” Three TxDOT officials, including Chief Financial Officer Stephen Stewart, were appointed as the corporation’s initial directors

In 2016, the Texas Private Activity Bond Surface Transportation Corporation issued $272.6 million of tax-exempt senior lien bonds for the project. The debt is structured with term maturities in 2040, 2025, 2050, and 2055 and has a Dec. 31, 2025, first par call date. If the CDA is terminated, the bonds are subject to mandatory redemption in whole, according to the official statement.

In addition to bond proceeds, the financing plan included a $357 million federal Transportation Infrastructure Finance and Innovation Act (TIFIA) loan to be repaid with toll revenue, $375.3 million in private equity, and $17.1 million of TxDOT funds, according to the Federal Highway Administration.

The bonds, originally rated BBB-minus by Fitch Ratings and Baa3 by Moody’s Ratings, were subsequently upgraded to BBB and Baa2 respectively with stable outlooks.

In its June 2022 upgrade, Fitch pointed to “the asset’s strong traffic and revenue outperformance, in comparison to the initial sponsor forecast since opening to tolling in November 2020, leading to a financial profile commensurate with the higher rating.”

According to an October Moody’s report, all of the bonds and the TIFIA loan plus $24 million of capitalized interest were outstanding as of the end of 2022. 

“Principal payments are delayed until 2030 for TIFIA and 2036 for the PABs, providing flexibility during the first half of the debt term,” the report said.

Poole said P3s got a boost in Texas under Gov. Rick Perry, who held office between 2000 and 2015, but fell out of favor with current Gov. Greg Abbott, whose first term began Jan. 20, 2015.

In a presentation to the transportation commission ahead of its March 28 vote, State Sen. Robert Nichols, who chairs the legislative chamber’s Transportation Committee, said P3s came about around 2003 when TxDOT was short on money to maintain, preserve, and build roads.

TxDOT subsequently “tapped the brakes” on P3s amid concerns over non-compete clauses and the cost of buybacks, with the latter addressed in a bill he sponsored that became law in 2013, he added. The measure requires CDA’s to include a purchase price breakdown starting from the date a toll project opens and for intervals of at least two years over the term of the agreement.

Nichols warned of price escalations if the commission does not move quickly to terminate the State Highway 288 CDA.

“That’s one of the high-volume growth areas of the state and those volumes of revenue are shooting through the roof,” he said. “Every year you delay doing it, the price goes up more than $100 million a year.”

Texas voters approved constitutional amendments in 2014 and 2015 that specifically excluded toll roads from new sources of funding for public roadways.

Proposition 1, passed in 2014, gives TxDOT a portion of oil and gas production tax revenue with $3.1 billion flowing into its coffers in fiscal 2023 for constructing, maintaining, and acquiring right-of-way for roads.

In 2015, voters passed Proposition 7, which dedicates a portion of revenue from certain state taxes, including the sales tax, to the State Highway Fund. TxDOT received $3.1 billion in the prior fiscal year. 

The message from their passage was “there is no need to do P3s because we have all this extra money to spend on transportation,” Poole said. 

TxDOT ended fiscal 2023 with a combined fund balance for its governmental funds of $8.5 billion, which was up 23.4% from fiscal 2022, according to the latest annual financial report. Its fiscal 2024-25 biennial budget totals $37.2 billion.

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