Indiana’s plan to bank $1 billion for infrastructure spending from a rate hike on the privately operated Indiana Toll Road is a credit positive for the Aaa-rated state because it avoids raising state taxes or issuing new state debt, according to Moody’s Investors Service.
The agreement between the state and ITR Concession Company, LLC, the private concessionaire that operates the toll road,
“The deal enables the state to keep its bonded debt burden extraordinarily low,” Moody’s said in a report on Wednesday.
Approximately $1.5 billion of the state's total of $2.0 billion in outstanding net tax supported debt is for transportation related projects. This debt constituted just 0.6% of state GDP in fiscal 2017, according to Moody's.
Moody’s said in the report that borrowing to finance $1 billion worth of projects would have increased the state's ratio to 0.9% of GDP. On a relative basis, the state’s debt burden is currently lower than all but five states but the additional borrowing would have moved Indiana to 41st.
The state has been able to maintain a lower debt burden by financing capital expenditures through tax increases. Last year this approach led to a 10-cent-per-gallon gas tax increase to 28 cents, which the state used to fund bridge and road repairs. Moody’s said that the agreement between the state and ITR may prevent further gas tax hikes.
However the rating agency warned that the increase in tolls has the potential to divert some of the commercial traffic away from the toll road onto free publicly managed roads. “This could raise the long-term capital costs for these roads if they are used more frequently by heavy vehicles looking to avoid the increased toll rates,” Moody’s said.
The plan calls for the IFA to amend its agreement with the ITR to increase the toll rates for heavy vehicles by 35% beginning in October.
The state will receive a $1 billion payment from the concessionaire distributed over three years. The first payment of $400 million is expected in early October; $300 million in October 2019, and $300 million in October 2020.
The bulk of the resources will go toward highways, including accelerating work on Interstate 69 and bridge improvements, resurfacing and new interchanges on U.S. routes 20, 30 and 31. The remaining funds – approximately one-fifth of the total – will be spent on rural broadband, recreational trails and subsidies for international flights.
ITR may opt to finance the equity payments with bond proceeds but a restriction on issuing additional debt means the concessionaire will first have to reduce its roughly $3 billion in debt outstanding and grow revenues, according to Fitch Ratings report. The toll rate increase is expected to generate additional cashflows on an annual basis and contribute to additional revenue.
ITR anticipates that any borrowing for the purpose of partial reimbursement of the $1 billion payment will not be issued before fiscal 2020 or 2021. Fitch affirmed its BBB rating with stable outlook on ITR’s debt outstanding on May 21.
Indiana holds triple-A ratings from the three largest rating agencies.
