O.C. Tollway Merger Hits a Dead End

Plans to merge the operations of two Orange County toll roads and refinance them with a $4-billion bond issue died Thursday, leaving in doubt the future of one of California’s first turnpikes -- a financially ailing route from Newport Beach to San Juan Capistrano.

Board members for the Transportation Corridor Agencies, however, backed a new -- but not fully analyzed -- proposal to save the San Joaquin Hills tollway by giving it money and loans from the successful Foothill-Eastern corridor, a sister highway that cuts along the hills of east Orange County.

The plan by Orange County Supervisor Bill Campbell would provide $120 million in cash to the San Joaquin Hills over several years and loans of up to $1 billion at 3% interest to keep the coastal highway from sliding into default on its bonds.

Opened with fanfare in 1995, the 16-mile San Joaquin Hills tollway has been plagued by lower-than-projected traffic and revenue. It is expected to default on $1.5 billion in bonds by 2014.

Tollway officials say the road will be in technical default as early as 2007, when it will breach an agreement with bondholders to take in $1.30 in revenue for every $1 of expenses.

“The work has just begun,” said Campbell, who managed to gain support for his proposal from board colleagues who had favored the merger and bond issue.

The vote to adopt the Campbell plan stunned many supporters of the merger, who contended that their board colleagues were recklessly proceeding with a proposal that has not been studied nearly as much as the merger -- which was crafted over a 20-month period.

The downside, they said, includes the loss of a $240-million federal line of credit that was part of the merger deal, increased financial uncertainty and the potential delay of tollway projects to relieve increasing congestion on the San Diego Freeway and south Orange County streets.

“This is an exercise in poor policy making,” said Bert Hack, a Laguna Woods councilman and TCA board member. The Campbell plan “is indefinite, unstructured and unknown. Now the process is in limbo.”

The San Joaquin Hills and Foothill-Eastern form a 51-mile network of tollways managed by the Transportation Corridor Agencies, a joint powers authority based in Irvine. The highways are governed by separate boards of directors.

The toll roads were financed by selling bonds that would be paid off with tolls and developer fees -- a novel approach designed to build highways in the 1990s at a time Caltrans could not afford to. Other states are considering similar approaches.

Today, TCA officials are planning to build the 16-mile Foothill South tollway from the Mission Viejo area to San Clemente or into San Diego County -- a final link in the tollway system. The agency also wants to make more than $1 billion worth of improvements, including widenings and new connectors to the Riverside Freeway.

The failed consolidation plan would have merged the two boards and refinanced the operation’s debt with a $4-billion bond issue, one of the largest municipal financing deals in Wall Street history.

After months of study, TCA staff members and a team of financial advisors recommended the merger as the only way to rescue the San Joaquin Hills without jeopardizing construction of the Foothill South and the planned improvements.

The deal called for $3 billion in fixed-rate bonds and $1 billion in bonds that involve so-called interest rates swaps with financial institutions.

TCA analysts said the competing Campbell plan would provide inadequate financing for Foothill South, delay improvement projects three to 10 years, and extend the debt of the agency at least five years longer than planned.

The consolidation plan was knocked out when the board of directors for the Foothill-Eastern toll road voted 10 to 5 to adopt the Campbell proposal -- negating its earlier approval of the merger plan.

With the merger plan gone, the issue never made it to a special 21-member board -- an amalgam of the agency’s two other boards created to decide whether to merge.

But even if the merger had gone before the special board, there was not enough support to muster the needed 16 votes for approval. At least six board members were opposed to consolidation.

To comply with the Internal Revenue Service, the TCA adopted the supermajority requirement so they could issue tax-exempt bonds if the merger was approved.

Most members of the Foothill Eastern board said they opposed the merger because they considered the interest rate swap too risky and the bond issue too expensive because it would require the payment of $188 million in fees.

Keeping the two operations separate, they said, will limit the financial risk to just one road -- the San Joaquin Hills -- should traffic and revenue decline in the future.

Campbell and his supporters also said the merged operations would require supermajorities on the board of directors to pass toll increases, construction projects and other important financial matters.

Though merger opponents used the supermajority to their advantage, they said, a simple majority would avoid the paralysis in policymaking that can occur with minority control.

Campbell answered his critics, saying his plan would cost less overall than the merger, and that only the planned widenings would be delayed. But Campbell predicted that they would be finished four years before the tollways are turned into free highways in 2040.

The Campbell plan still faces several hurdles. More financial analysis needs to be done to make sure it will work, and the San Joaquin Hills board of directors must agree to it.

Also under state law, the loans and payments to the San Joaquin Hills must benefit the Foothill-Eastern corridor as well and not impair its operations or financial condition.

“There are significant legal challenges,” said Rob Thornton, the TCA’s general counsel. “The state must make findings” that the plan is consistent with the law.