Colorado Toll Roads – Trying to follow the money

In 1995 and 1996, the Colorado E-470 Public Highway Authority entered into noncompete agreements with several cities and counties. The purpose of the noncompete agreements was to make free public roads so unattractive that drivers would feel that paying a toll was preferable.

The Hidden Costs of Toll Roads described some parts of those noncompete agreements. This piece continues the story.

FYI. Excerpts from the key documents relied on by this post are at the end. They are not otherwise available on-line.

You may well ask: Why would cities and counties agree to install unnecessary stop lights (and assume the cost of putting up those stop lights), lower the speed limit, and cease doing work to improve “competing” roads? Taking these steps would only annoy the citizens and voters in those counties and cities. Even if the local governments failed to foresee that people would be annoyed, surely there would be complaints later that would make them want to renege on the deal.

In fact, locals did notice that Tower Road became slower when E-470 opened and complained about it, but apparently no one – until now – thought to check whether there was a noncompete agreement.

But in 1995-1996, few would have heard of noncompete agreements in road building. It was not until 1999 that the use of such an agreement became a public scandal.

The poster child for noncompete agreements is California SR 91. That agreement provided that public highways near SR 91 would not be maintained or improved until the year 2030. But when the State of California began work on nearby roads, the private toll road owner sued for breach of contract, and the public learned the true cost of the private road.

The public was furious and turned against the project and the government that had agreed to it. SR 91 made noncompete agreements anathema. California Attorney General Bill Lockyer described the Hwy. 91 as a “polite form of highway robbery.

News of S.R. 91 doesn’t seem to have prompted Coloradans to ask whether building E-470 involved noncompete agreements. Perhaps there was no coverage. Perhaps the subject seemed too arcane – something that would happen in California but nowhere else. Or perhaps by about 2002 when Tower Road’s speed limit was lowered and the traffic signals put in, events of 1999 one thousand miles away were forgotten.

Had anyone asked, Coloradans would have learned that E-470′s viablility depended, at least in part, on noncompete agreements with terms far more onerous than those of CA S.R. 91.

So why did certain Denver area cities and counties enter into these noncompetes, and what kept them from reneging when there were complaints or at least dissatisfaction.

Why agree to a covenant not to compete?

The reality is that when there is no “noncompete” provision, the private sector is not interested in funding toll roads, because they cannot be guaranteed a return on their investment. The GAO found that 4 of the 5 tollways examined included noncompete clauses in their contracts “under which the public sector agrees to varying degrees not to build any new roads or improve any of the existing roads that may result in additional capacity within a predetermined distance of the newly constructed road for a certain period of time.” Where these did not exist, there were “understandings” the state would not build a competing road.

The United States Department of Transportation Report to Congress on Public-Private Partnerships (December 2004) strongly supports noncompete agreements. It says that states should enact legislation that, among other things, creates the power to establish a geographic non-compete zone. It adds that, without some of these powers, it would be difficult for a State to undertake public-private investment initiatives.

Another reality, whose meaning is to be explored in a later post, is that E-470 is not truly and completely a public road. It depends on a high degree of involvement by the private sector. And the private sector wants the protections that a noncompete agreement gives. Therefore, if E-470 was to be financed and built, there had to be noncompete agreements or the private sector would refuse to become involved.

But given all this, why would the cities and counties have cared enough about building E-470 to have traded away the welfare of its citizens?

I do not know the answer to that question, but I can make some reasonable guesses. I have included excerpts from the documents at the end of this posting, so you can add your own conclusions in comments. They include key terms of two agreements:

1. The first is between the City of Commerce City and the E-470 Public Highway Authority.

2. The second is between the E-470 Public Highway Authority and the Colorado cities of Aurora, Brighton, Parker, Thornton, Adams County, and Douglas County.

The basic reason that the cities and counties agreed to the covenant not to compete seems to have been because they were worried that, if they did not, E-470 would literally pass them by. In other words, this was about where interchanges – entrances and exits – would be built.

Each of the two agreements has details about what interchanges will be built – their locations and even diagrams of their off and on ramps. Had any city not entered into this agreement, it would have risked losing business and even population to another city. People in a hurry want convenience. This means they do not want to have a difficult time getting on and off E-470 so they could reach the places E-470 would go.

Put another way, the quid quo pro for an interchange is lowering speed limits, installing traffic signals, and not making improvements.

Why did the cities and counties not renege once the interchanges were built?

A clever city or county would have agreed to lower the speed limit, install unnecessary traffic lights, and fail to improve the roads, but once the interchanges were built and open, it would have reneged. That way it could have both the interchanges and keep faith with its citizens.

Why did this not happen? One reason is that there are penalties for breaching the agreements.

The agreement with Commerce City says that the Authority will construct a portion of E-470, “at no cost” to Commerce City according to a map that is attached. It also says that the Authority will construct “at no cost” to Commerce City interchanges at 96th and 104th Avenues. The Authority also agreed to reimburse up to $1.3 million of Commerce City’s costs for constructing ramps and the fair market value of obtaining rights of way. However, if Commerce City breached any provision of the agreement, then there will be no obligation to reimburse these costs. In addition, Commerce City will owe “liquidated damages” of 200% of any amounts already paid by the Authority.

However, I think the real reason the cities and counties have not reneged is because the agreements require that they have money riding on the success of E-470. This money comes into the picture in several ways. Each of the entities was required to lend set amounts as part of the financing of E-470. The second agreement states that each of the parties has been told that they must make “an appropriate level of financial participation” if E-470 is to be successfully completed.

The counties and cities are asked to “consider making separate and discrete loans to the Authority . . . to assist the Authority in the successful implementation of the Approved Plan of Finance.” The minimum total of the loan commitments and financial contributions are to be $20 million. The loans are to be deemed to be revenue, rather than loans.

The amounts to be paid by each city in each year are:

Aurora – $584,845 a year for 20 years to a maximum of $11,696,900;

Brighton – $395,737 total over 20 years;

Parker – $210,000 by December 31, 1994;

Thornton – $144,000 a year for 20 years, not to exceed a total of $2,880,000;

Adams County – $2,8000,000 total over 20 years; and

Douglas County – either $383,250 a year for 4 years or $144,601 a year for 20 years.

The cities and counties can get credit against their loan commitments for donating rights of way to E-470.

The agreements also provide that repayment of the loans will not begin until the Authority receives revenues that exceed the amounts needed to pay other debts and authorized expenditures. In addition, no repayments will be made until the Authority has the financing needed to complete Segment IV of E-470. In other words, the cities and counties are at the end of the line for repayment.

The effect of this is to make the cities deeply committed to getting cars onto E-470, even if it means making other roads slow and unpleasant drives. In other words, the cities and counties are in a bind in terms of their obligations to their citizens. On the one hand, they think E-470 will benefit their citizens, but it will also be a detriment to those who do not want to pay tolls or who can’t afford to pay. However, once the loans are made, the cities are deeply committed to the success of E-470 as being in the best interest of their citizens. If E-470 fails to make money, the citizens of those cities and counties will have lost a great deal of money. This may be why at E-470 Authority meetings city and county representatives spend time working on marketing using E-470.

All this makes the cities and counties so motivated that E-470 succeed that they are not likely to breach the agreements. Put another way, the quid quo pro for an interchange is loaning the Authority money or lowering speed limits, installing traffic signals, and not making improvements.

At the time these agreements were entered into, there was great enthusiasm for private toll roads. However, in 1997, the Congressional Budget Congressional Budget Office, report Toll Roads: A Review of Recent Experience, February 1997, painted a less sanguine picture of toll roads:

A study by J. P. Morgan Securities of 14 urban toll roads financed over the past 12 years compared actual revenues with the original forecast. In only two of the projects did revenues exceed projections during the first four years of operation. For 10 projects, revenues fell short by 20 percent to 75 percent. For the remaining two projects, revenues for completed segments appeared close to projections but the results were not in for the entire projects. The findings of that study may prompt potential lenders and equity investors to take greater care in scrutinizing projections of traffic and revenues and to require government funding or financial guarantees to reduce the risk of investing, especially at the earliest and riskiest stages of the project.

Despite the overly optimistic revenue projections, none of the toll roads in the J. P. Morgan study has defaulted on its debt. That is not the case, however, for the Dulles Greenway in Virginia, where the traffic has fallen short of projections, and toll revenues have not been sufficient to meet interest payments.

In fact, the financial reports posted by the E-470 Authority suggest that the cities and counties will have a long wait for repayment. Actual revenues lagged projected revenues by nearly 27% in 2003, and continue to fall below projections in 2005 by 9-10%.

But some things don’t add up

So far this all holds together, but the agreements actually do not require that the cities and counties actually appropriate any funds for making loans, and failure to appropriate funds is not a default. If the cities and counties have no obligation to make the loans, then this removes an important carrot or stick to making them comply with the noncompete agreement. What is the point of a making the obligation to make loans into a good will charitable gesture on the part of the cities and counties?

I do not know the answer to this question. Finding out the answer would be important, because E-470 has been held up as the model for other Colorado roads.

Colorado Governor Bill Owens called the E-470 highway “the father of the new tolling authority,” and noted that, “[w]e learned a lot from the E-470, and its contributions aren’t finished.” The completed road contains many innovations, such as technology built into the highway system that allows commuters to pay tolls electronically. This has allowed about 60 percent of all tolls to be paid electronically, saving time and costs to both drivers and local governments. The Transportation Finance Task Force has cited the project as a “model” which should be “replicated to the extent practicable.”

If E-470 is the model, then these or similar provisions are likely to be used to build other roads.

Here are some possible explanations for the loan provisions. First, the amounts the cities and counties were to loan – roughly $20 million – are trivial when it comes to building a road, even though not trivial in the budgets of those cities and counties. This was not enough money to build even one mile of E-470.

The cost of E-470′s segments were:

Segment 1 of E-470, consisting of 5.13 miles, was completed for $115 million ($22.4 million/mile), Segment 2 and 3, totaling 29.3 miles, was completed for $663 million ($22.6 million/mile), and segment 4, 12.24 miles long, was completed for $453 million ($37 million/mile). The total cost for the 46-mile long highway was $1.2 billion.

So it seems that, financially speaking, if these loans had not been made, E-470 would still be built. But if that is the case, why ask for the money at all?

When E-470 was being planned and constructed, financial markets, including “international borrowing market in the early 1990s,” were uncertain. In short, E-470 was in deep financial trouble.

Therefore, “the E-470 Authority partnered with the contractor Morrison Knudsen (now Washington Group International) — one of the first agreements of its kind. Under this agreement, Morrison Knudsen designed and built segments 2 and 3 of E-470. “[T]he E-470 Authority in Colorado entered into a $321 million design-build contract in 1995 with Morrison Knudsen and Fluor Daniel.”

Morrison Knudsen also agreed to secure millions of dollars to keep the project moving forward and worked with the E-470 authority through difficult political, legal, and environmental issues. cite
See also this cite

Based on the facts I know now, here are a few possibilities for the nonobligation loan obligations.

First, committing money signals the private sector that the public sector is committed to the project’s success. This commitment can then be taken to the private sector to calm their nerves and entice them to invest.

A darker spin on this hinges on the fact that the loans are “to be deemed to be revenue, rather than loans.” As any of us who has ever applied for a loan or a mortgage knows, lenders look at money in your account quite differently if it is your own earnings versus coming from a loan. One effect of listing the loans as revenue is to suggest to lenders that the project was in better financial shape than it was. On the other hand, given the uncertain they would ever be paid back and the very long payback period that hinged on solvency, perhaps they could be said to be revenue.

Second, it may be that there were legal or other provisions at the time that constrained local governments from making long term financial commitments that would bind future city councils. Therefore, this noncommitment commitment was the best that could be done within those legal constraints.

Third, federal highway laws increasingly demand local investment and guarantees before federal money will be committed. Indeed, a 1998 report by the Congressional Budget Office, Innovative Financing of Highways: An Analysis of Proposals January 1998, gives some support to this explanation. It states:

A fourth segment, which would fill the 12- mile gap between 120th Avenue and I-25 on the north side of Denver, is not part of the project as currently defined. However, in 1997, the authority obtained additional financing to begin the initial design work on Segment 4 and acquire the necessary rights-of-way. . . .

The Colorado Department of Transportation has agreed to lend up to $20 million (subject to annual appropriations) to match contributions from local governments.

A later part of the same document supports this conclusion:

Appendix B The Matching-Share Requirement
. . .

Rationale for the Requirement

Several federal grant programs- including the highway program – require state or local governments to match the federal funds provided. The usual rationale for a match requirement is to ensure that states have an incentive to provide an economically efficient level of services in the area that the program covers. A state comparing the costs of a project with the benefits to its own citizens might underinvest, ignoring the benefits to people living in other states. To overcome that problem, the federal government may want to subsidize state spending on highways with tax dollars collected at the national level. Theoretically, the federal share should reflect the extent to which benefits of the program spill over to citizens of other states. (That is, the relative shares paid by the federal and state governments should reflect the relative benefits to out-of-state and in-state users.) Another part of the argument for requiring that states put some of their own money at stake through a match is that it may give them incentives to pick their projects more carefully than they would if the money were completely “free.”

We do not know whether any loans have been made so far. If they have been made, it seems unlikely that any have been repaid. As discussed above, so far the revenues have fallen short of projections.

Your role in this enterprise

I have included portions of two documents below. I invite you to examine them and to provide your observations and ideas in the comments section below.

Excerpts from The Agreements [note: italics are not in the originals.

We are looking at the terms of two agreements. The first is between the City of Commerce City and the E-470 Public Highway Authority. The second is between the E-470 Public Highway Authority and the Colorado cities of Aurora, Brighton, Parker, Thornton, Adams County, and Douglas County. Pay attention to anything dealing with money. Notice what the documents say are the benefits to each party and each party’s obligations. Observe anything that refers to Tower Road. Examine each detail to try to figure out what their purpose is beyond building a road.

Agreement No.1

We know that on January 12, 1995 the Board of Directors of the E-470 Public Highway Authority approved a resolution that made the city of Commerce City a member of the authority and approved a revised Intergovernmental Agreement between the E-470 Public Highway Authority and the city of Commerce City . The others listed as original Authority members were Adams County, Arapahoe County, and Douglas County. It also listed as members added later the cities and towns of Aurora, Parker, Thornton, and Brighton.

Attached to this document was an intergovernmental agreement between the E-470 Highway Authority and Commerce city “regarding Coordination of Road Improvements and Operations.” Its recitals include a statement that the parties are interested in coordinating matters not only with respect to E-470′s design, engineering, construction, and operation but also “with respect to E-470 and various other interchanges and roads in an area generally west of the new Denver International Airport (“DIA”) in order to more efficiently and effectively resolve alignment, access and operations issues of mutual interest and concern to the Parties . . ..”

The agreement also states that the parties are to coordinate “operations of certain aspects of E-470 and Tower Road, including certain interchanges or crossings associated therewith” and that this “would serve the public interest and promote the health, safety and welfare of the citizens of the region.”

The agreement says that the Authority will construct a portion of E-470, “at no cost” to Commerce City according to a map that is attached. The main feature of the attached map is an interchange. It also says that it will construct “at no cost” to Commerce City interchanges at 96th and 104th Avenues. The Authority also agreed to reimburse up to $1.3 million of Commerce City’s costs for constructing ramps and the fair market value of obtaining rights of way. However, if Commerce City breached any provision of the agreement, then there will be no obligation to reimburse these costs. In addition, Commerce City will owe “liquidated damages” of 200% of any amounts already paid by the Authority.

Paragraph 6 says that the Parties “agree to coordinate certain planning, design, engineering, construction and operations aspects of Tower Road. These include:

1. On the date E-470 opens north of Pena Boulevard, the maximum speed limit on Tower Road within Commerce City’s boundaries will be dropped to 40 m.p.h. from 55 m.p.h.. If the city imposes a toll of 25 cents, it may raise the maximum speed to 45 m.p.h.

2. Commerce City will install traffic signals at three intersections along Tower Road – at 96th Avenue, at 104th Avenue, and at 112th Avenue.

3. There may be no “improvements” to Tower Road unless they are “appropriate and consistent with the regional interests of the Parties.” Permitted improvements are limited to shoulder work, turning lanes, and widening only if necessary to meet demands of increased local development.

If Commerce City fails to do any of these things, it will not be reimbursed for its expenses, and it will have to reimburse the Authority 200% of any reimbursements it has received.

Agreement No.2

We also know that on February 20, 1996, an agreement was entered into related to building what is now known as E-470. The parties to that agreement were the E-470 Public Highway Authority and the Colorado cities of Aurora, Brighton, parker, Thornton, Adams County, and Douglas County. The purpose of that agreement was to provide “Cooperative Financial Assistance for the E-470 Public Highway.”

The agreement states that each of the parties has been told that they must make “an appropriate level of financial participation” if E-470 is to be successfully completed. The counties and cities are asked to “consider making separate and discrete loans to the Authority . . . to assist the Authority in the successful implementation of the Approved Plan of Finance.” The loans are to be deemed to be revenue. The minimum total of the loan commitments and financial contributions are to be $20 million.

The amounts to be paid by each city in each year are: Aurora – $584,845 a year for 20 years to a maximum of $11,696,900; Brighton – $395,737 total over 20 years; Parker – $210,000 by December 31, 1994; Thornton – $144,000 a year for 20 years, not to exceed a total of $2,880,000; Adams County – $2,8000,000 total over 20 years; and Douglas County – either $383,250 a year for 4 years or $144,601 a year for 20 years.

The cities and counties can get credit against their loan commitments for donating rights of way to E-470. The loans are to be repaid with interest of 7%. Repayment will not begin until the Authority receives revenues that exceed the amounts needed to pay other debts and authorized expenditures. No repayments will be made until the Authority has the financing needed to complete Segment IV of E-470. In other words, the cities and counties are at the end of the line for repayment.

The Authority has the sole right to decide how much to repay each year. The cities and counties will be given a “non-exclusive, subordinate lien” in vehicle registration fees and toll revenues as security for the loans. Again, the cities and counties have a low priority.

The cities and counties agree that for 15 years they will not take or permit any actions to construct or improve any road that could “compete with E-470 in a way that the amount of toll revenues projected by the Approved Plan of Finance to be collected form users of E-470 would be materially impaired or reduced”with certain listed exceptions. It continues: “Each of the Participating Governments acknowledges that the Authority is acting in material reliance upon each of the Participating Governments’ commitment in this regard to the Authority’s decision to implement the Approved Plan of Finance.”

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