Indiana Toll Road lease was bad deal for taxpayers
Last week, Leslie Widenbener wrote in the Louisville Courier Journal that Indiana officials are looking at options, including increasing the gasoline tax, to cushion a 25% drop in highway funding for the 2014-2015 budget cycle.
Those revenue streams will total about $3.1 billion during the two-year cycle, including revenue from state and federal gasoline taxes. In the current budget cycle — which ends June 30 — the state has had more than $4 billion to spend on road and bridge projects.
Other states – and the federal government – are facing highway funding problems, too, as increasing fuel economy means people are driving more miles but using less gas, and thus paying less in gasoline taxes. But Indiana’s situation is worse, since we’re crashing from the sugar high we got from Mitch Daniels’ toll road lease:
Indiana’s highway funding issues are exacerbated by the drop off in toll road funds — the same revenue that helped the state build hundreds of miles of roads while other states were struggling to maintain their existing highways.
And a new study argues that the 75-year lease of the Indiana Toll Road was a very bad deal for Hoosier taxpayers. (PDF) John B. Gilmour of the College of William and Mary crunched the numbers on the lease, focusing on the intergenerational aspect of the deal. He compares it to a revenue bond issue by a government: the government gets cash upfront, while pledging future revenue to pay off the bond. But revenue bond issues are typically limited to 30 years by state laws and constitutions; there are no comparable limitations on leasing off public assets.
Gilmour gives an overview of other studies of the ITR lease, starting with the state-commissioned Crowe-Chizek study that concluded that the state got a pretty good deal.
Enright (2006) conducted an alternative evaluation of the value of the lease. He contended that the Crowe-Chizek study had relied on low estimates of future traffic growth and high estimates of future maintenance costs and employed too high a discount rate. Using estimates that he contended were more appropriate, he found that the present value of the 75-year stream of revenue from the ITR exceeded the up-front cash payment by more than $1 billion. […] Taking a different approach, Johnson, Luby and Kurbanov (2007) contended that because the Indiana Toll Road lease provides a 75-year monopoly, the operator might not keep up with traffic loads, consequently pushing traffic onto parallel routes and overwhelming them (the state is partially prohibited by the contract from expanding competing routes).
Whether or not the up-front payments are adequate compensation is an important question, but it does not bear directly on the fairness of the lease across time. Even if the state gets a good price, it could distribute the benefits disproportionately in the first few years, leaving little or nothing to citizens in decades to come.
Under the scenarios Gilmour uses to make his calculations, the majority of the benefit happens in the first 25 years. (Remember, once we hit that milestone, there’s still 50 years left on the lease.) But most of the costs of the lease – “the value of the revenue that the state sacrifices by giving the ITR operator the power to collect and retain all future tolls” – happen in the last 25 years.
The political logic of exchanging an up-front payment today for future revenue makes a great deal of sense from the standpoint of elected officials. Asset leases with up-front payments offer officials the possibility of providing benefits to constituents without raising taxes or taking on new debt. Rational voters might be concerned about the future cost of leasing deals, but there is ample evidence that people tend to discount future costs and benefits excessively.
The Daniels administration is in full legacy-protection mode, though, and sent Troy Woodruff, the Indiana Department of Transportation chief of staff, to attack the messenger. As Tim Vandenack wrote in the Elkhart Truth:
In defending the deal, INDOT’s Woodruff zeroes in on the estimated $4.4 billion in toll road maintenance and improvements costs that will fall to the ITR Concession Co. instead of the state. Gilmour, he maintains, didn’t factor that savings to the state.
The concessionaire, to date, has “invested more than $330 million in electronic tolling, a new state police post, added lanes to Chicago and other capital improvements,” Woodruff writes. “Clearly, this huge omission alone discredits (Gilmour’s) analysis.”
In fact, Gilmour himself notes this limitation: “It is conceivable that an additional benefit might be better maintenance and operation of the ITR, but there is no way of knowing whether the road will be better or worse maintained under private operation, so that potential benefit (or loss) will not be considered here.” So, yes, there are some limits to Gilmour’s report and calculations. But as Gilmour himself notes, part of that is the fact that we’re dealing with a 75-year lease. “Changes in transportation technology could fundamentally change the importance of cars, trucks, and interstate highways over the next 75 years,” he writes, “rendering all projections wrong.”
So when my Back to the Future flying cars render highways obsolete, there won’t be much demand for the toll road. But Mitch and his cronies in the General Assembly will have long since spent the money, leaving future generations holding the bag.