Monday, December 10, 2012

Study Claims Toll Road Lease Bad For Indiana

The 75-year, $3.8 billion sale/lease of the Indiana Toll Road has been hailed as one of the crowning achievements of Gov. Mitch Daniels. The state used the upfront payment to finance an ambitious highway construction plan, including the upgrading of US 31 from Indianapolis to South Bend to an interstate highway, the partial extension of I-69 from Evansville to Indianapolis and the construction of the Hoosier Heartland Highway connecting Lafayette to Fort Wayne. Six years into the lease, the money is about to run out and now a new study questions whether the state got a good deal. The answer according to John Gilmour, a government professor at the College of William and Mary, is no.
"These transactions have important consequences for intergenerational justice because they enrich current citizens and governments at the expense of future citizens and governments by transferring future revenue to current budgets," Gilmour states in his report.
A state-commissioned study in 2006 determined that if the toll road remained under public control, the net value of tolls over 75 years would be $1.92 billion. The state got $2 billion more than that from the lease.
But Gilmour said that study assumed toll road rates would increase at about the same rate as they had in previous decades, The Elkhart Truth reports. That's not a valid assumption, he claims in his report which appears in the November/December issue of Public Administration Review, a journal put out by Indiana University's School of Public and Environmental Affairs.
"In the current fiscal climate, states are demanding more from their toll roads, and it is likely that Indiana would have, too," he wrote. He goes on to note Daniels increased tolls on the toll road prior to the lease offering to make the lease more valuable, "showing that raising tolls is not impossible or politically suicidal."
An Indiana Department of Transportation official, Troy Woodruff, claims Gilmour's study is flawed because he didn't take into account $4 billion in highway maintenance costs that will have to be paid over the life of the lease by the private operator rather than the state. He also points out that the state lost money operating the toll road in three of the last five years it operated it, and it only made about $254 million the state could use for other transportation-related purposes during the entire time the state operated it.

It's certainly true that the state did a horrible job managing the toll road and failed to raise the toll fees to reflect its actual cost of operation. If the state continued operating the toll road as badly as it had prior to entering into the privatization deal, then it goes without saying that the state was better off leasing the road and, instead, using the upfront payment to meet other transportation needs. The state could have chosen to use the higher tolls Daniels imposed right before the lease was entered into to up its value and implemented a better strategy for managing it so that it would have been a revenue-generating source for the state. I'm not convinced the state got a bad deal. I think it would have been an even better deal, though, if the state had found a way to monetize the $3.8 billion payment in a way that it would have provided benefits to the state's highway transportation needs for less than ten years. We're now going to have a lot of new highway miles to maintain with the money spent from the deal without a source of funding for those ongoing expenses. As a consequence, the state will either have to toll more roads in the future or raise taxes to meet those expenses.

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