Dedicated Revenue Won't Support Louisiana's Road Debt

DALLAS - Louisiana will have to tap into its transportation trust fund for the next 35 years to support debt service on bonds financing the state's $5.2 billion, 20-year-old highway improvement program.

Bonds for the program are supported with revenue generated from four cents of a 20 cents-per-gallon increase in the gasoline tax approved by voters in 1989. Revenue from the remaining 16 cents goes into the trust fund to pay for other highway construction and maintenance efforts. The total state gasoline tax is 38.4 cents per gallon.

William D. Ankner, secretary of the Louisiana Department of Transportation and Development, said a four-cents-per-gallon gasoline tax that is constitutionally dedicated to the Transportation Infrastructure Model for Economic Development program will not support the financing needed to finish the projects remaining in the16-project effort.

Ankner told a special state senate committee that the revenue from the tax probably can support the TIMED program's current outstanding debt, but is not sufficient for the remaining $985 million in bonding capacity for the program. Even so, he said, the proceeds will not be enough to complete two expensive TIMED projects that now are not under construction or under contract.

Not only is inflation sapping the purchasing power of the tax revenues, Ankner said, gasoline tax revenues are not growing as much as anticipated due to more fuel-efficient vehicles.

If the state sells $485 million of the bonds as planned this year, debt support will require drawing on the transportation trust by 2018, with the assistance peaking at 1.4 cents in 2041. If the full $985 million were sold by 2010, the trust fund would be drawn upon immediately and would peak at two cents in 2045.

Total draw on the trust fund for TIMED debt support is estimated at between $750 million and $1 billion over the next 35 years.

All the bonds for the TIMED effort must be sold by Dec. 31, 2010. Scheduled sales include $485 million this year and $500 million in 2010. When all the authorized bonds are issued, Louisiana will have issued $3.3 billion of debt for the program.

Previous gasoline and fuel tax revenue bond sales for the TIMED effort include an initial $264 million in 1990, followed by a $275 million issue in 2002, $548 million in 2005, and $1.1 billion in 2006.

The bonds supported by the four-cent per gallon gas tax have underlying ratings of Aa3 from Moody's Investors Service, AA-minus from Standard & Poor's, and A-plus from Fitch Ratings.

Seven of the 16 TIMED projects have been completed, he said, with seven currently in design or under contract.

"To complete the projects, we're going to need to issue additional debt," Ankner said. "The four cents will not be sufficient, so we're going to have to use one-half to one cent from the other 16 cents over the next 35 years to complete what we've got out there today.

"The only solution is using some of the 16 cents," he said. "There is no other option for supporting the debt."

Taking money from the transportation fund will hamper the state's ability to maintain and expand existing roads and bridges, Ankner said. Each one cent of gas tax generates about $30 million in annual revenue.

The Transportation Department is considering other options, Ankner said, including suing the swap counterparties to the $485 million bond issue that is being held up.

"The first hurdle is the current financial crisis for the program and the additional debt that is needed to complete it," he said. "We're exploring ideas that might require the issuance of subordinated debt.

"But right now, there is no credit market out there," Ankner said. "At least, there is not a tax-exempt market. It's been a real roller coaster. So maybe the way to go forward would be to issue taxable debt."

Louisiana was scheduled to issue $485 million of TIMED bonds in late 2008 or early 2009, but had postponed the sale because of significant penalties associated with a swap termination agreement. Swap counterparties went along with a request by the State Bond Commission to extend the agreement until May 1 in anticipation that the market would improve so that the state can issue the bonds at an acceptable rate.

Counterparties include Morgan Keegan Financial Products with 50% of the swap, Merrill Lynch Capital Services with 25%, and Citibank NA and JPMorgan Chase Bank with 12.5% of the swap each.

Ankner said the department needs the bond proceeds to pay contractors, despite a swap termination fee that is currently $130 million but changes daily.

"We are going to run out of money by June, and it is unacceptable to terminate contracts," he said. "It is outrageous that in order to sell $485 million of bonds we may have to pay the banks a penalty of $130 million or more."

The Bond Commission in late 2006 authorized a forward purchase delivery contract for a $485 million issue with Morgan Keegan & Co. and Citigroup Global Markets Inc. as underwriters.

A forward floating-to-fixed interest rate swap agreement allowed the state to lock in a rate of 3.602% for the gasoline and fuels tax revenue bonds. The rate was 110 basis points lower than the 4.7569% true interest cost for the state's November 2006 TIMED bond sale.

The TIMED program was authorized by a constitutional amendment approved by voters in 1989. The project list became part of the constitution and cannot be altered without amending Louisiana's constitution.

The effort was envisioned as a pay-as-you-go program, but was later altered to include bond financing to accelerate the construction of vital roads and bridges.

Cost of the program was set at $1.4 billion in 1989, but is currently at $5.2 billion. One uncompleted bridge over the Mississippi River was originally estimated at $60 million. The current price tag is $1.2 billion.

The TIMED program originally included more than 550 miles of roadway widening and construction as well as three bridges and improvements to the Port of New Orleans and Louis Armstrong New Orleans International Airport.

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