Mass Pike "bailout" attacked by state treasurer

Massachusetts Governor Deval Patrick has quietly sponsored legislation to allow the Massachusetts Turnpike Authority to refinance on the state's security, making the state liable for the Turnpike's debt if it defaults. Normally the Turnpike Authority's borrowing is secured only by the net toll revenues of the Turnpike. They are called "non-recourse" loans because the bondholders have no recourse to the state if revenues are insufficient.

The Patrick administration sought authority to pledge "the full faith and credit" of the state to Turnpike borrowing in a late amendment to a bridge repair bill in the lower house of the legislature where it has passed. However it has to go to the state senate before it can become law.

The move has drawn strong criticism from the State Treasurer Timothy Cahill. He said the Treasury department had not been consulted and didn't even know about it until reporters asked about it.

Cahill calls the move "fiscal recklessness," and a "bailout" of the Turnpike Authority which puts the state's taxpayers at serious risk. He said today that the Turnpike Authority's debt is "near junk bond status" whereas the state itself has so far avoided similar financial trouble and has a strong bond rating.

The Treasurer says the Turnpike Authority needs to "clean up its own mess" caused by taking tens of millions in cash to solve pressing financial problems in return for commitment to risky swap options and auction rate bonds. Those swap options or 'swaptions" have recently gone bad and the Turnpike faces an additional $25m in annual interest charges unless it can refinance.

The Massachusetts Turnpike has the lowest operating surplus ratio of any toll authority in the US and the highest debt/revenue ratio. The disastrous resort to swap options was made necessary by the failure of the Turnpike to develop adequate revenues while taking on the burden of financing the untolled Big Dig project.

Patrick administration officials say the Turnpike now faces a financial crisis and the only way to avoid this is to use the financial strength of the state to contain the costs of refinancing Turnpike debt.

Cahill says the same kind of argument can be used on behalf of a bunch of other state authorities in financial trouble: "Today it's the Turnpike, tomorrow it could be the MBTA (transit agency), where do you stop?"

In Massachusetts the Treasurer is not an appointee of the Governor but is an elected official in his own right. Both he and the Governor are Democrats so this is no partisan dispute.

Alan Le Bovidge, Turnpike CEO has been concentrating on cutting costs, reducing staff, consultants and less essential programs. He recently called off procurement of a new toll collection system as simply unaffordable in the Turnpike's present conditions. He says that even with cuts in costs the Turnpike Authority faces a funding gap of $70m to $100m next year.

Mary Connaughton, a corporate finance consultant and Turnpike Authority board member told us today she supports the move to provide state backing to Turnpike debt. As she sees it the state legislature and administration both forced the Turnpike to take on the huge Big Dig debt without allowing it to generate the revenues to service the debt. Even without the 'swaptions crisis' the Turnpike would be in financial trouble, she says, because of the huge costs incurred by the Turnpike for untolled portions of the Big Dig.

Connaughton says it never made sense to put the burden of financing the expensive north-south elements of the Big Dig project (I-93) onto the east-west travelers (I-90 and the harbor tunnels). The Turnpike's debt of $2.2b to provide state money to build untolled I-93 is so out of proportion, she says, there is no way out of the financial trouble without major new sources of cash.

Either the state needs to raise the gas tax or it will have to institute new toll points.

The obvious solution she thinks is to do cashless all-electronic toll collection on the north-south elements of Big Dig facilities that required the troublesome Turnpike debt to be incurred in the first place - the Zakim Bridge to the north and a point on I-93 to the south of Boston.

Meanwhile Connaughton says the Patrick administration plan to help alleviate the cost of refinancing the Turnpike's unfortunate swaptions is a sensible measure to avoid having to raise tolls just to pay higher interest charges.

BACKGROUND: Rounding, Turnpike revenues are now about $300m/year and operating expenses are over $200m, for an operting surplus of less than $100m. Interest on debt alone is about $130m and depreciation $80m. The exact size of the overall deficit depends much on rather arbitrary depreciation charges.

TOLLROADSnews 2008-07-17 (EDITS 2008-07-16 10:15)