Kasich Siphons Ohio Turnpike Cash at Lowest Yields: Muni Credit
Ohio needs $1 billion to cover transportation projects and doesn’t plan to raise fuel taxes to pay for the work. Governor John Kasich’s solution: have the Ohio Turnpike, whose bonds are trading at record-low yields, supply the funds.
Kasich, a first-term Republican who had considered leasing the 241-mile (388-kilometer) highway to raise as much as $4 billion over 50 years, instead wants the toll road to borrow $1 billion in 2013 and $500 million in about five years to pay for the work. Lawmakers are considering allowing the proposed bond sales as U.S. states seek ways to pay for needed infrastructure.
Officials in the Kasich administration call the plan “conservative” and Fitch Ratings said in a Jan. 4 report it probably wouldn’t affect grades on existing toll-road debt. Opponents, including the former Republican executive director of the Ohio Turnpike Commission, counter that it’s a bad idea to triple the agency’s debt to pay for work beyond the turnpike.
“This is highway robbery,” Gary Suhadolnik, who ran the commission from 2003 to 2008, said by telephone. “It makes no sense to me why people who are paying their own way through a toll should now have to pay, in effect, a surcharge -- higher toll rates -- to pay to improve someone else’s road.”
Yet now would be an opportune time to borrow. Transportation securities returned 5.8 percent over the 12 months through Feb. 19, including interest and price appreciation, according to Barclays Capital data compiled by Bloomberg. That compares with about 4.9 percent for the $3.7 trillion municipal market.
“Let’s try to move it as quickly as we can,” Kasich told lawmakers in urging support for the proposal during a Feb. 19 speech. “We have a window out there of cheap money.”
The highway’s revenue and bonds are also gaining.
Ohio toll receipts reached a record $252.5 million in 2012, up from $231 million in 2011, according to the commission. Total liabilities as of Dec. 31 were $623.3 million, including $566.3 million of revenue bonds payable, the agency said.
A tax-exempt turnpike revenue bond maturing in February 2019 traded Feb. 7 at an average yield of 1.11 percent, the lowest ever for the insured debt, data compiled by Bloomberg show. That was about 0.2 percentage point more than benchmark AAA municipals with a similar maturity. The bond, which traded at an average yield of about 1.79 percent Dec. 14, is rated AA by Standard & Poor’s and Fitch Ratings, both third-highest.
It is contemplated that investors in some of the new debt would have lower priority for repayment than current bondholders, and those additional securities would be structured to provide for a rating level of A, according a Dec. 12 study for the state by KPMG Corporate Finance LLC.
The main investor concerns will be how much debt is issued, flexibility to raise tolls as needed and whether traffic and revenue projections are sufficient, said Paul Brennan of Nuveen Asset Management in Chicago. The firm oversees more than $90 billion in municipals, including turnpike bonds.
Kasich has proposed limiting toll increases at the rate of inflation for 10 years, or about 2.7 percent a year, and at 10 percent every decade after that. Under the current version of the bill, the commission would retain the ability to set toll rates as needed to make debt payments. Democrats are seeking a guarantee that a specific portion of the proposed bond proceeds would be spent on projects in northern Ohio, near the toll road.
Some toll roads in the U.S. allow revenue transfers to local or state governments, including the New Jersey Turnpike Authority, which makes annual payments to the state’s Transportation Trust Fund Authority to finance Transportation Department and New Jersey Transit projects, according to a February 2012 report by Moody’s Investors Service called “Milking the Cash Cow.”
Toll roads that allow similar transfers have “materially weaker financial profiles” with higher debt ratios than turnpikes that don’t allow such payments, the report concluded.
The Ohio commission can handle the additional debt proposed, and about $70 million of the proceeds would be used to replace the 58-year-old toll road’s original concrete base, allowing the work to be done in 25 years instead of 40, Executive Director Richard Hodges said.
“We’re very confident that the governor’s proposal is creative but conservative,” Hodges said by telephone.
Even so, there are concerns that using toll revenue to back debt for non-turnpike projects may be dilutive for current bonds and diminish surpluses, said Howard Cure, director of municipal research for Evercore Wealth Management LLC in New York.
“When you start diluting the revenue stream and using it for capital programs away from its core mission, I think then you start questioning the soundness of the security,” Cure said by telephone. “It puts pressure on the security.”
A prominent example of a toll road borrowing to pay for state transportation projects is in Pennsylvania, where a law passed by the legislature and signed by former Democratic Governor Ed Rendell in 2007 requires annual payments from the Pennsylvania Turnpike Commission to the state Transportation Department in lieu of a long-term lease.
The Pennsylvania commission has transferred $3.6 billion to the state since then, borrowing about $4.2 billion to make the payments, Carl DeFebo, a spokesman, said by e-mail.
The commission is “drowning in debt” and “its very existence is at risk” because of the required payments, Jack Wagner, a former Pennsylvania auditor general, said in a January 2012 statement. The agency’s long-term debt has more than doubled to $7.3 billion under the law, Wagner said.
While the Pennsylvania agency regards Wagner’s assertion as “a gross exaggeration,” it supports a proposal by Republican Governor Tom Corbett to end the payments in 10 years instead of 2057 as called for in the law, DeFebo said by telephone.
If Ohio or any other state wants to pay to improve a road or bridge, it should charge the users of that transportation asset instead of using proceeds from turnpike debt, said Robert Poole, director of transportation policy at the Los Angeles- based Reason Foundation, which promotes libertarian views. Other states will be tempted to follow Kasich’s lead, Poole said.
“It’s like a pot of gold sitting there, so politically speaking, I wouldn’t be surprised to see other proposals like this,” Poole said by telephone. “I think it’s a wrong path to go down, but that doesn’t mean politicians won’t do it.”
Kasich, who also backed a plan to sell $1.5 billion in bonds backed by state liquor profits last month to fund a private economic-development entity, said the issue is solving problems and not the additional borrowing.
“We don’t like debt, but there are times in which you can appropriately move your value forward to give you significant advantages in the short term,” Kasich said at a Dec. 14 news briefing in Columbus to unveil his turnpike proposal.
In municipal trading yesterday, the average yield on top- rated securities maturing in 10 years rose to 1.88 percent, the highest since Aug. 23, from 1.85 percent the day before, Bloomberg valuation data show.
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