DALLAS — The Texas Transportation Commission is again considering a controversial solution to congestion on Interstate 35 in Austin: Tolling the interstate and removing tolls on a financially struggling private tollway on the fringe of town.

The idea of "flipping" the status of the I-35 freeway and State Highway 130 tollway resurfaced in an Oct. 31 meeting of the Texas Transportation Commission chaired by Ted Houghton, an appointee of Gov. Rick Perry.

"There has been talk over the years of flipping Interstate 35 to State Highway 130, exchanging the tolled lanes to I-35 and free lanes to 130," Houghton told Marc Williams, head of planning for the Texas Department of Transportation.  "I think that's something that needs to be looked at — whether it's legal.  If it's not what you'd have to do get it across that goal line."

 Williams, who had just completed a presentation on a $1.9 billion plan to redevelop the existing I-35 corridor through downtown Austin, assured Houghton that the swap would be considered in the ongoing study of proposals for the congested freeway.

The idea was first floated two years ago at the Interstate 35 Corridor Advisory Committee created by the Texas Transportation Commission. The report suggested converting two lanes to tolls on I-35, between Austin's southern suburb of Buda and Georgetown to the north, while leaving four lanes non-toll. Tolls on SH 130, several miles east of I-35, would then be removed.

In the 2011 Texas Legislature the idea garnered little support.

Houghton's decision to resurrect the proposal comes less than a month after warnings from Moody's Investors Service that the privately financed portion of State Highway 130 is heading toward default by June 2014.

Moody's on Oct. 15 downgraded the concessionaire that built the southern half of SH 130 to Caa3 from B1, affecting $1.1 billion of outstanding debt.

That five-notch downgrade came six months after Moody's lowered the rating four notches to B1 junk-bond status from investment-grade Baa3. The outlook remains negative.

The downgrade affected ratings for the senior bank facility with $686 million outstanding and the subordinate Transportation Infrastructure Finance and Innovation Act (TIFIA) loan with $493 million outstanding.

The majority investor in the toll road is a unit of Grupo Ferrovial SA of Madrid, Spain, which provided financing for the Spanish toll road developer Cintra Concesiones de Infraestructuras de Transporte S.A. in partnership with Zachry Construction of San Antonio.

The partners created the SH 130 Concession Co. to collect tolls on the highway for 50 years in a revenue-sharing arrangement with the state. SH 130 Concession Co. is responsible for operation and maintenance while the state owns the road.

Gov. Perry's original plan to build SH 130 as part of the proposed Trans-Texas Corridor brought vocal opposition in 2009.  The corridor was envisioned as a 1,200-foot-wide project that would have combined rail, truck and car traffic along with utility lines from the Mexican border to the Oklahoma state line. In the 2011 legislature, the corridor was officially declared dead.

Cintra-Zachry was paid $3.5 million to plan the Trans-Texas Corridor under a contract that was terminated.

All five members of the Texas Transportation Commission that supervises TxDOT are Perry appointees. Despite Perry's advocacy for tolling and private concession agreements, the Texas Legislature has appeared wary, imposing a moratorium on the deals.

TxDOT spokesman Veronica Beyer said Houghton has not issued any further explanation of why he raised the issue at the meeting.

 "Our team is constantly looking for ways to safely address congestion and this idea was yet another one of those," Beyer said in a prepared statement. "There are many challenges both on the state and federal level that need evaluation before action further could take place."

Terri Hall, founder of the citizens' watchdog group Texans United for Reform and Freedom (TURF) called the latest Houghton proposal a potential "bailout" of the investors on SH 130.

"It's not clear how this would work on retiring the debt on SH 130," she said. "Would it involve bailing out segments 5 and 6 which are privately operated?"

Segments 5 and 6 are the privately financed sections of the 91-mile tollway. Segments 1-4 of the highway were financed by TxDOT.

Cintra-Zachry signed a $1.3 billion agreement with the state in 2006 to build the combined 41 miles of Segments 5 and 6 connecting U.S. 183 on the north end of Austin to Interstate 10 in Seguin to the south.

The developers created the SH 130 Concession Co., which was to collect tolls on the highway for 50 years in a revenue-sharing arrangement with the state. The Cintra-Zachry financial plan showed the expected toll revenue to be collected for Segment 5 and 6 at $14.9 billion over 50 years.

However, Moody's analysis shows that even the long-term debt scenario is not achievable. The SH 130 Concession is likely to deplete its $35 million liquidity provision in its second year and will fall short of next June's scheduled payment, analysts noted. The liquidity provision, designed to cover the start-up phase, was expected to last five years.

The toll road would not be able to afford termination payments on interest-rate swaps backing the loan, Moody's analysts said. The swaps are currently about $107 million out of the money, according to their report.

"An ongoing payment default could lead to events that eventually allow TxDOT to terminate the concession agreement, which could limit the lenders' ability to take possession of the collateral," Moody's warned.

If TxDOT terminates the concession agreement due to financial failure, it can buy SH 130 for the amount of the senior debt minus any balances in the concession funds, according to terms of the agreement. The TIFIA loan could be treated as a separate issue.

TxDOT operates Segments 1-4 of SH 130 under its subdivision known as the Central Texas Turnpike System.

Adding Segments 5 and 6 to the other four sections could affect the ratings on the CTTS' $1.3 billion of outstanding debt. The system's first-tier revenue bonds currently carry ratings of Baa1 from Moody's, A-minus from Standard & Poor's and BBB-plus from Fitch Ratings, all with stable outlooks.

For critics of tolling in Texas, the failure of the SH 130 concession would add fuel to the still smoldering fires that erupted in 2009. The phenomenon of tolling increased primarily because Texas lawmakers refused to raise the fuel tax that finances most of the state's highway system.

Hall, who lobbied hard against the Trans Texas Corridor and is currently fighting tollways in her hometown of San Antonio, said she has no objections to development of new turnpikes, even if they are privately financed. Her group is opposed to imposing tolls on existing highways built at taxpayer expense, a form of double taxation, she said.

Furthermore, the state constitution forbids the state to back a private loan, she said. The agreement on SH 130 and another TxDOT arrangement in Houston for the Grand Parkway loop violate that constitutional provision, she maintains.

That issue notwithstanding, Hall said the speculative nature of the SH 130 turnpike prompted concerns about a potential "bait-and-switch" if toll revenues fell short of projections.

"The question becomes: How are we going to bail out this toll road because they have this sea of red ink? And now we're going to have to make this really bad decision to cover up this other bad decision."

Flipping the toll status of the two highways would require new designations. Nationally, only one 184-mile section of I-35 known as the Kansas Turnpike is tolled. The 1,586-mile divided highway runs from Laredo, Texas, to Duluth, Minn., and is a major trade corridor between Mexico and Canada.

The scenario in Central Texas is somewhat similar to one in Southern Calif., where the San Diego Association of Governments bought a bankrupt toll road and lowered tolls to relieve pressure on Interstate 805 closer to the city's core.

The operator of the South Bay Expressway, a 10-mile stretch from Otay Mesa to Spring Valley, went bankrupt in 2010, less than three years after a public-private consortium spent $800 million to build the toll road.

SANDAG was considering adding capacity to I-805 but decided that acquiring the tollway and reducing tolls to draw traffic away from the interstate would be a less costly alternative. SANDAG was able to buy the toll road for about $340 million, less than 40% of the original investment. The lender on the original project was the Spanish bank BBVA.

For Austin, the conversion of its most heavily traveled corridor into a toll road could bring adjustments for the hundreds of businesses and major institutions such as the University of Texas and state offices. Planners are already considering proposals to eliminate elevated decks and take the freeway below street level to remove a barrier between downtown and East Austin.


The most costly plan under consideration would amount to $1.9 billion, according to Williams. The least costly would be $1.25 billion and would leave the elevated decks in place. Sources of funding have not been identified, he said.

Austin officials have committed bond money to I-35 connections in the past and are likely to do so again, said Robert Spillar, the city's director of transportation.

"Interstate 35 is an important state corridor; it's also Austin's main street," Spillar told the TTC. "We have from our last bond about $13 or $16 million to spend. We plan to continue investing in I35 as we go forward."

Neither Spillar nor the city has expressed any opinion about converting the freeway into a toll road. Cheyenne Krause, spokeswoman for the city of Austin transportation department, declined to say how Austinites have reacted to the proposal and deferred all questions to TxDOT.

But Hall said the idea, along with a similar plan to toll elevated sections of I-35 in San Antonio, are hot topics in the region.

"This has definitely been a topic wall-to-wall on talk radio," Hall said.  "I know that it's getting a lot of play. People are really, really mad about it."

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.