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TxDOT's Challenge

DALLAS - The Texas Department of Transportation begins its fiscal year this week with new leadership, a record $8.3 billion budget, and $1.5 billion of newly mandated bonds amid a challenging political environment.

With another tough legislative session coming in four months, the department must justify its existence in the Sunset review process after taking sharp criticism in a special audit for a $1.1 billion accounting error.

The Sunset Review Commission, a 12-member legislative body that reviews the policies and programs of more than 150 government agencies every 12 years, may have already set up a power struggle between Gov. Rick Perry and the Legislature over TxDOT's direction.

Under its current structure, TxDOT is supervised by the Texas Transportation Commission, a five-member board appointed by the governor. The current TTC chairwoman, Deirdre Delisi, is Perry's former chief of staff, replacing the late Ric Williamson who shared Perry's enthusiasm for privately financed toll roads and the mammoth Trans Texas Corridor.

If the Sunset Review Commission's report is adopted, the TTC board would be replaced by a single commissioner appointed for two years instead of the current six-year terms for board members. The Sunset report also recommends another review in four years instead of the standard 12 years to reconsider whether TxDOT should continue to exist.

"The Sunset review of the Texas Department of Transportation occurred against a backdrop of distrust and frustration with the department and the demand for more transparency, accountability, and responsiveness," the report stated. "Many expressed concerns that TxDOT was 'out of control,' advancing its own agenda against objections of both the Legislature and the public."

Last month, TxDOT took another blow to its image as the state auditor's office issued a report that "ineffective internal communication, a complex reporting structure, and misunderstanding of reported data led the Department of Transportation to erroneously schedule $1.1 billion in planned contract awards for fiscal year 2008."

The accounting error, for which TxDOT executive director Amadeo Saenz had already apologized before legislative committees, came in 2007 when TxDOT counted $581 million in Proposition 14 bond proceeds twice when developing the fiscal 2008 contract award schedule.

The department also included $488 million in Texas Mobility Funds in the future award amount, even though those funds were required for existing projects, according to the audit.

In a prepared response last week, Saenz said the report "recognizes many of the same concerns we had identified and confirms many of our prior plans on addressing them. Implementation is already well underway for several of the recommendations. I am committed to increasing the department's transparency, and the recommendations identified in this audit put us another step closer to realizing that goal."

With the Proposition 14 fiasco behind it, TxDOT and the TTC last week laid the groundwork for the fiscal 2009 financing plan, authorizing $1.5 billion of Proposition 14 bonds that had already been authorized by the Legislature in the 2007 session.

Reluctant to issue the debt because of uncertainty over revenues to fund the debt service, the TTC agreed to proceed after receiving a strongly worded letter from Perry, Lieut. Gov. David Dewhurst, and House Speaker Tom Craddick on Aug. 22. The letter demanded that the TTC and TxDOT immediately take steps to issue the bonds, with the assurance that the next session of the Legislature would provide debt service by ending the use of fuel tax and state fees for non-transit purposes.

"The immediate sale of up to $1.5 billion of voter and statutorily authorized Proposition 14 bonds will ensure that greater road funding levels are maintained through the fall and spring until we can work with other elected officials to provide additional solutions," the letter advised.

"We had concerns about where the debt service would come from," said James Bass, chief financial officer of TxDOT. "The letter addressed the long-range concerns."

Texas voters approved $3 billion of Proposition 14 highway bonding authority in 2003, an amount the Legislature doubled in the last session. Under the new formula, the TTC can issue $1.5 billion per fiscal year instead of the previous $1 billion.

Since 2003, TxDOT has issued $3.1 billion of Proposition 14 bonds. The Proposition 14 bond program allows TxDOT to borrow money on a short-term basis to improve cash flow and cash management and to issue general obligation bonds secured by the State Highway Fund to accelerate transportation projects. The bonds are repaid with money from the State Highway Fund, including motor fuels taxes and vehicle registration fees.

"The funds generated by the sale of these bonds will enable TxDOT to get needed transportation projects back on track," Delisi said. "I have instructed TxDOT staff to begin identifying projects across the state that are ready to immediately move forward and make use of these additional funds. I expect the staff to present these projects to the commission in September."

Bass said the bonds are not likely to be issued at one time, but in two or more issues over the fiscal year. TTC ordered Bass to begin the process of seeking underwriters and other key players for the upcoming issue.

Meanwhile, TTC took another bond proposal before the state Bond Review Board Friday, a $150 million refunding of 2002B variable-rate Central Texas Turnpike System bonds that carried Ambac Assurance Corp. backing. Ambac lost its triple-A rating as the credit crunch escalated. Since early July, interest on the weekly variable-rate debt has been around 9.5%, a costly escalation from the expected 2.7%.

Those revenue bonds went before the Bond Review Board for approval on Friday. TxDOT has not set a date for the issue, Bass said.

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