ELKHART — Sure, the state of Indiana got $3.8 billion by leasing management of the Indiana Toll Road to a private concessionaire.
That isn’t pocket change, and the funds have been put toward improvement of Indiana’s infrastructure per the state’s 10-year Major Moves road plan.
A public policy expert’s new review of the 2006 deal, though, casts doubt on whether the transaction is all it’s cracked up to be. Indeed, John Gilmour, a government professor at the College of William and Mary in Williamsburg, Va., says future generations of Hoosiers will be short-changed.
As he sees it, Indiana has essentially taken a lump sum payment here and now on the value of the toll road — akin to a home-equity loan — for short- and medium-term benefit. Down the road, in decades to come, he argues, Hoosiers of the future will pay the price for the 75-year deal in the form of lost toll road revenue that otherwise would have made its way into government coffers.
“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 says in his report.
His analysis, more fodder for the debate over the 2006 deal, appears in the November/December issue of Public Administration Review, a journal put out by Indiana University’s School of Public and Environmental Affairs.
Indiana authorities came back, calling Gilmour’s article “flawed.” The response — prepared by Troy Woodruff, the Indiana Department of Transportation chief of staff — also appeared, in shortened version, in Public Administration Review.
Among other things, Woodruff writes, Gilmour doesn’t consider the value of some $4.4 billion in future maintenance and improvements to the toll road that will be the responsibility of the new toll road manager, the ITR Concession Co.
‘REALLY BAD DEAL’
The 2006 lease deal, pushed by Gov. Mitch Daniels, generated plenty of controversy. Proponents touted the $3.8 billion up-front payment Indiana received from the concessionaire while critics saw the transaction as selling out vital public infrastructure. Indiana maintains ownership of the roadway, per the deal, while the ITR Concession Co. takes on management over the 75 years of the accord, responsible for toll road upkeep and also pocketing toll road revenue.
Even now, the issue comes up from time to time. Most recently, Democrat Brendan Mullen cited Republican Jackie Walorski’s vote when a state lawmaker in favor of privatization in their battle for the 2nd District U.S. House seat, which the GOPer won in balloting last month.
Gilmour acknowledges that terms of the toll road deal were more favorable to the Indiana government than other leases of public assets, such as the Skyway and parking meters in Chicago. Even so, the Indiana transaction was a “really bad deal,” he said in a phone interview. Though there’s a short-term benefit, that fades as time passes.
In his analysis, Gilmour factors the $3.8 billion payment Indiana received as well as the value of planned and coming Major Moves road improvements around the state financed by the funds. Those are the benefits.
He counters that, noting the limited life span of the upgrades: 30 years for roads and 50 years for bridges, less than the 75-year term of the toll road lease. Moreover, he maintains that Indiana loses out on what he contends will be increasing toll road revenue streams as traffic increases on the road and toll rates go up.
All told, in his analysis, the greatest benefit for Indiana is derived in the first 25 years of the 75-year toll road lease, while the cost is greatest in the last 25 years. Put another way, Hoosiers early on benefit from the new roads paid for out of lease proceeds and the fact that other revenue that might otherwise be used on roads is freed for other things. Later though, they lose out as that new infrastructure ages and as forgone toll road revenue, going into the pocket of the ITR Concession Co. instead of government coffers, climbs and climbs.
He crunches numbers under several different scenarios and in the mid-range one, 50 percent of benefits of the deal for Indiana are reaped in the first 25 years of the deal, 37 percent in the second 25 years and 13 percent in the final 25 years. Just 13 percent of the cost of the deal is felt in the first 25 years, with 30 percent in the second 25 years and 57 percent in the last 25 years.
“It is easy to see why current politicians view asset leases with up-front payments as wonderful, allowing them to spend today without raising taxes or appearing to incur debt,” Gilmour writes. “In short, the ITR lease is a great deal for current residents of Indiana, but it offers little to those who will live in Indiana in future decades.”
A FAULTY UNDERLYING ASSUMPTION?
A state-commissioned study in 2006, as the lease deal was being considered, determined that the net value of tolls over 75 years to the state, if the toll road were to remain under public control, would be $1.92 billion. That’s nearly $2 billion less than the final $3.8 billion the state actually got from the ITR Concession Co., suggesting the transaction was a good deal.
One of the underlying assumptions of that 2006 study, though, was that toll road rates would rise at about the same relatively slow rate as they had in previous decades if the state were to maintain control. Gilmour faults that assumption, calling it self-serving for those deciding on the lease.
“In the current fiscal climate, states are demanding more from their toll roads, and it is likely that Indiana would have, too,” he writes. He goes on to note that Daniels had 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.”
Per terms of the deal with ITR Concession Co., the new operator has been able to increase tolls each year since 2010, within certain guidelines, which will be loosened in 2016. After that, Gilmour surmises, tolls will “keep rising at a brisk pace” to allow the company to make a profit on the lease deal.
DEFENDING THE DEAL
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.”
Woodruff goes on to note parallel benefits at least partially due to road improvements financed with proceeds of the toll road deal. There’s a new Honda manufacturing plant near a new I-74 interchange in Greensburg that employs 2,000 and another Amazon.com complex near a planned new bridge in southern Indiana employing more than 1,000.
Then there’s the “sorry history” of 50-plus years when the toll road “was under political management,” Woodruff adds. Under state control, the toll road never became debt free and it lost money in three of the last five years it was publicly operated, including a $16 million loss in 2005.
“Prior to the lease, the road had generated a total of only $254 million for other purposes over its entire history,” notes Woodruff.
Still, Gilmour remains convinced there are better alternatives to the method Indiana chose.
Lease deals could be structured to provide payments to the government over their entire term, not just at the beginning. Indiana could have foregone leasing and maintained control of the toll road, aggressively raising tolls on its own.
Beyond that, he pitches the idea of states adopting constitutional amendments prohibiting lease deals of more than, say, 30 years. Moreover, he says government entities should conduct studies ahead of any deals to address “intergenerational fairness” and determine how costs and benefits are shifted over their terms.