CHICAGO — Ohio would issue $1.5 billion of 35-year bonds backed by future toll revenue from the Ohio Turnpike to finance infrastructure projects in a long-awaited plan announced Thursday by Gov. John Kasich.
The announcement means the state will not privatize or lease the AA-rated turnpike, one of the highest-rated toll roads in the country.
Kasich had publicly supported a long-term lease of the toll road to private investors, but said Thursday that keeping it in public hands while expanding borrowing authority best meets the state's needs. The decision comes after a year-long study by the state's advisor on the project, KPMG LLP.
KPMG analyzed three alternatives: maintaining a public turnpike under the control of the Ohio Turnpike Commission; maintaining a public turnpike but under Ohio Department of Transportation control; and entering into a public-private partnership for a 50-year lease of the road.
The state ultimately opted for the first alternative, while broadening the commission's authority to issue bonds based on future toll revenues and use toll revenue to finance projects not related to the toll road. Increased toll revenue and bond proceeds would be allow the state to obtain another $1.5 billion in local and federal grants, creating a $3 billion highway road construction fund, according to the state.
The study estimated that a private partner would have paid up to $2.6 billion upfront in cash to the state to lease the turnpike, with 15% of annual revenue still going to the state.
But Ohio would have had to pay nearly $800 million under that scenario, reducing its cash windfall to $1.8 billion. The $800 million payment would come from the costs of defeasing $556 million of existing tax-exempt bonds and paying an estimated $234 of "defeasance escrow inefficiencies" and related IRS penalties, according to the KPMG study.
"Some of this is based not just on hard numbers but also the perception that we're going to spend $160 million for an IRS escrow account and then $60-plus in penalties," said Jim Riley, director of a newly created ODOT department called the Division of Innovative Delivery, charged with exploring alternative financing methods for the cash-strapped transportation fund. "The perception of that is tough."
The lease would also have locked the state into a 50-year contract and would have likely led to higher toll rates over the long term, Riley added.
"Weighing the pros and cons over months of discussion and input from locals and other stakeholders, the administration decided the best course was the status quo with the leveraging option," he said.
The state hopes to enter the market with the debt by the third quarter, Riley said. It has not yet decided how it will assemble the bond team on the deal. KPMG remains the state's advisor on the project.
The KPMG report recommends that the bonds be issued in two series, including $1 billion in 2013 and $451 million in five years. The timing and size of the issues remain tentative, Riley said.
"The administration knows we can bond for $1.477 billion, whether it's done in years one and five or with some different combinations," he said. "But the volume wouldn't change, and this gives the ODOT program $200 to $250 million a year to add into our major new construction program."
The state would create a new master bond indenture that will allow the commission to issue bonds against future toll revenue projections. Currently it is restricted to issuing bonds with coverage levels tied to historic revenues.
The new bonds would be subordinate to the commission's $556 million of existing bonds. The new indenture will create second senior lien bonds and subordinate bonds.
Under the plan, the Ohio Turnpike Commission would be renamed the Ohio Turnpike and Infrastructure Commission. The commission would be allowed to tap toll revenue to finance infrastructure projects outside of the one-mile turnpike radius that it is currently restricted to. Kasich's plan calls for 90% of the $1.5 billion of bond proceeds to be used for projects across northern Ohio, where the toll road is located.
The Legislature still needs to approve the plan. Bills approving the plan will be included in the new ODOT budget, which will be introduced in March and is typically passed by late March or April.
Kasich and ODOT Director Jerry Wray announced the plan Thursday morning during a two-day tour across the state.
Wray said that raising tolls and bonding against future revenue will allow the state to issue $1.5 billion and raise local matching funds for federal grants that will all together create a $3 billion highway infrastructure program.