[Orange County] Grand jury says TCA should focus on paying off debt

The Transportation Corridor Agencies should pay off their debt obligations by 2040—more than a decade sooner than currently planned—the Orange County Grand Jury recommended in a new report that casts doubt on the prospect that their toll roads eventually will become free thoroughfares.

The latest Grand Jury report on the TCA, the second in as many years, found that the agencies’ remaining principal debt and interest of about $10 billion could be paid by 2037 if the TCA employed “extreme measures and focused entirely on debt elimination.”

Recommending that the TCA’s top priority should be the elimination of the debt, the 79-page report suggested that the agencies draft a plan to pay off their debt by 2040, which could save an estimated $1 billion in debt services.

The Grand Jury noted, however, that the TCA’s “huge debt obligation” to pay off the bonds that funded the construction of the 73, 133, 241 and 261 Toll Roads is what will keep the agencies in existence for at least the next 30 years.

“The debt level is an important element of the TCA’s business plan,” the report stated, before referencing state law that allows the collection of tolls and development impact fees (DIFs) to fund construction or defray financing costs for construction.

“If the TCA had no construction work or outstanding construction debt, its continued existence would rest on shaky legal ground,” the report added.

Released on Monday, June 21, the report comes a year after the OC Grand Jury published the initial findings of its investigation into the TCA, reporting, among other things, that the toll road operators had placed themselves in road planning projects that are likely outside of their legislative purview.

That investigation, however, was cut short because of the pandemic.

In this month’s report, the Grand Jury largely focused on the TCA’s revenue from tolls and DIFs, as well as how that money is spent. It also covered the ongoing controversy over the 241 extension proposals, the purpose of the two agencies and whether they’ll ever go out of business.

Highlighting aspects of the report that praised the toll roads, the TCA on Monday emphasized its construction of “excellent roads with minimal tax dollars,” and running of a “state-of-the-art toll collection operation.”

“In the report, the 2021 Grand Jury—like the Grand Jury before it—found no evidence of fiscal mismanagement by TCA,” the agencies also said in its press release.

“TCA respects the work of the volunteers who serve as the Grand Jury and appreciates the positive highlights in their report as an indication that we are on the right path as we move forward into the future,” TCA CEO Samuel Johnson added in the release.

According to the report, titled “$28 Billion for a $2.8 Billion Road,” the toll roads, between their inception and 2053, are tracking to collect $28 billion in total revenue—10 times more than the cost to construct them.

“By 2053, when the debt is scheduled to be retired, the roads will have consumed $28 billion—an amount that burdens the drivers, limits the TCA’s pricing options, and exceeds any reasonable cost per mile of road,” the new report states.

Based on a review of the TCA’s financial reports and capital improvement plans, the Grand Jury calculated the total cost to construct the toll roads at just shy of $2.8 billion. The Foothill/Eastern TCA’s toll road projects—the 133, 241 and 261—cost about $1.64 billion, while the San Joaquin Hills TCA required nearly $1.13 billion to construct the 73 toll road.

“Major construction was completed more than 20 years ago,” according to the report. “Since then, the TCA has invested in miscellaneous improvements, but none that significantly alter the ‘base price’ of the roads.”

Looking at revenues since the construction of the roads, the TCA has made more than $6 billion as of Fiscal Year 2020, from its collection of tolls, fines, DIFs and investments, the report showed. The TCA is expected to collect another $22.13 billion between the current fiscal year and 2053.

The TCA, however, said the report’s title ignores aspects of the public-private funding mechanism to build the roads, while references to the $28 billion didn’t consider that the figure “is based on 60 years of operations and assumptions as to how future Boards may operate over the next 30 years—decisions that clearly haven’t been made.”

“The report also fails to acknowledge the billions of dollars the roads provide as an economic driver for Orange County,” TCA’s press release stated. “Our region’s transportation system is core to the quality of life we enjoy, making this one of the best places in the world to live.”

The Grand Jury in the report noted that the TCA was likely to disagree with the $28 billion assessment, surmising that the agencies “hope to build additional roads with some of that money before 2053.”

As for the TCA’s obligations to pay off the bonds, the report explained that nearly $5.4 billion has already been paid as of FY 2020. The TCA currently owes another $4.8 billion in principal debt, as well as more than $5.5 billion in interest.

With the debt scheduled to be paid off by 2053, the expectation is for the TCA to dissolve and cease collecting tolls from motorists using the roads. The Grand Jury, however, reported that those would be “radical” steps and are “unlikely to happen.”

According to the report, a debt-free TCA wouldn’t be required to go out of business based on state law. It went on to note that in interviews with TCA management, some were “surprised” at the notion of eventually shutting down—”a complete reversal of the TCA’s public statements over the past three decades.”

“Currently, no TCA employees are assigned to implement a debt payoff followed by an agency sunset,” the report stated. “The professional staff are predominantly consistent in defending the TCA’s financial status and looking for ways to expand the scope and extend the life of the organization.”

As part of its response to the report, the TCA stated that governing boards have held strategic planning discussions and adopted capital improvement programs (CIPs) to help plan for the agencies’ financial futures.

The Foothill/Eastern TCA Board, the agencies said in the press release, “is also considering using reserves to retire $125 million in bonds in 2022 when they become callable.”

According to the report, the TCA currently only has one major capital project on its plate: the connection between the 241 and Express Lane on the SR-91 in Riverside. The project, expected to get underway in the coming years, is meant to resolve bottleneck issues on the interchange, as well as generate revenue.

As to the question of whether the roads will become part the state’s freeway system under the California Department of Transportation (Caltrans), making them free to use, the Grand Jury stated it doesn’t believe such a thing will happen.

Speculating on the reasons why, the Grand Jury reported that if Caltrans takes over the roads, it could still decide to keep them as tolled routes “based on its own financial imperatives.” The report also noted that the transition to more electric vehicles is expected to reduce tax revenue from gas sales, so “some form of usage-based charge will have to replace it.”

The Grand Jury also pointed to the $400 million that local tolls provide annually and is applied to other local area projects—revenue that doesn’t fall under the purview of voters, legislators or drivers.

There also are benefits to toll roads or freeways with dedicated toll lanes, the report added, as they can be used to mitigate traffic or manage peak traffic, speed and air quality.

Most notably, the Grand Jury found, “knowledgeable officials, both elected and appointed, have expressed their opinion that the toll roads will never become freeways.”

“It’s possible that Caltrans will someday split the toll roads into toll lanes and free lanes,” the report concluded on the topic. “However, that will require very large projects to widen the roadways and construct the necessary safety features. As for the complete elimination of the tolls, that vision no longer applies.”

The tolls the TCA collects help fund the construction debt, additional improvements to the roads and cover costs to operate the agencies. The Grand Jury report expressed criticism over the agencies’ commitment to direct toll revenue toward the construction debt.

“The initial ($3 billion) debt was converted into more debt and then more debt, resulting in a $15 billion financial hole,” the report stated. “A toll dollar dropped into that hole has a one in five chance of landing on the original construction debt.”

The report further reiterated its previous statement that the TCA is looking to maintain its large debt obligation to perpetuate its own existence.

“Since the debt retirement date was moved to 2053, there have been actions taken to reduce payments, but no efforts to hasten the end date,” the Grand Jury said in the report.

The Grand Jury also said that over the years, the TCA has spent tens of millions of dollars on marketing and outreach campaigns, as well as legislative lobbying and advocacy—most recently an $850,000 allocation to oppose Sen. Patricia Bates’ legislation aimed at ending the 241 at Oso Parkway.

“The agency has a history of spending on activities that sustain its relationships with supportive entities,” according to the report. “The TCA’s large pool of unrestricted cash has been used to polish the agency’s image, perpetuate its life, bolster the positions of board members, and engender goodwill across a wide range of business and political leaders.”

Another source of revenue for the TCA since its inception has been DIFs—fees that developers have remitted to TCA member cities that are supposed to benefit from the toll roads.

The Orange County Grand Jury released another report on the TCA, finding that the toll road operators should draft a plan to pay off its debt by 2040 rather than the currently planned deadline of 2053. Photo: Shawn Raymundo

The TCA has explained that the amount of money a city has contributed is tied to the length of time a city has been a member, as well as the development that has and will occur.

San Clemente, in particular, has paid about $55 million over the life of the TCA, while San Juan Capistrano has paid $21 million and Dana Point $7 million. Irvine has paid the most ($308 million), while Rancho Santa Margarita has paid the least (about $1 million).

“For the past 10 years, DIFs have averaged $23.4 million per year, or 7% of the TCA’s total revenue,” according to the report, which questioned whether the agencies should continue to collect the fees.

“The toll roads have matured to the point that tolls can and should be the sole source of revenue,” the reported continued. “The roads cost less than $3 billion to build. Jurisdictions have already contributed over $750 million in DIFs and, at the current pace, their contribution will total $1 billion by 2030.”

In recent months, the topic of the DIFs has been closely tied to the ongoing dispute between San Clemente and the TCA over proposals to complete the southern extension of the 241, connecting it to the 5 Freeway.

The TCA’s Foothill/Eastern board voted unanimously in March 2020 to pursue an extension of Los Patrones Parkway as an untolled county thoroughfare, nixing the 241 extension proposals. However, recent action by the agencies, such as opposing Bates’ bills, have given San Clemente officials reasons to believe such plans aren’t actually off the table.

Citing some of the reasons the TCA gave to the Grand Jury regarding the extension, the report explained that new projects such as the 241 alignment would have to be justified by a traffic study, while it would be “short-sighted to preclude infrastructure that future generations might need.”

San Clemente on July 1 is set to walk away from the TCA as a member city—the first to do so. The city has also challenged its share of the DIFs, arguing that San Clemente has never benefited from the toll road because the southern alignment was never completed.

The Grand Jury report noted that the TCA is also motivated to keep the potential project alive, in part, because it may “eventually face a reckoning” on the issue of DIFs if it doesn’t deliver a road.

The report stated that “the repercussions of” San Clemente’s decision to withdraw from both TCA boards “are still evolving, with DIFs as a major point of consideration. Other cities are watching the situation.”

In a prepared statement from the city of San Clemente following the release of the report, Mayor Kathy Ward called it a “complete validation” of the city’s activities, and added that all Orange County cities owe San Clemente “a debt of gratitude for turning a bright light on the TCA’s nefarious activities.”

Mayor Pro Tem Gene James questioned why the TCA has not yet implemented “long-needed basic reforms” based on the Grand Jury’s findings in both reports.

“Our hard-earned taxpayer dollars aren’t some slush fund to be used by elected officials in other cities to enrich their friends and allies while undermining others, such as myself,” James said in the city’s press release.

The city, like the Grand Jury report, called on the TCA to draft a repayment plan so all debts are paid off by 2040, eliminate DIFs after the bonds have been paid while dedicating all fees for debt repayment until then, and look at the possibility of merging the two agencies.

Per state law, the TCA will have the coming weeks to issue a formal response to the Grand Jury report.

“While the Agencies respect the Grand Jury’s opinions and analysis, the Agencies do anticipate correcting substantive items in a formal response to the Grand Jury’s report,” the TCA said in its release.

San Clemente Times
By Shawn Raymundo
June 22, 2021