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Cincinnati’s Highway Revolt on the Verge of Victory

Ohio State Rep. Tom Brinkman, a Republican who believes in lower taxes, is taking a principled stance against a wasteful highway project. Photo: Wikipedia

Ohio State Rep. Tom Brinkman, a Republican who believes in lower taxes, is taking a principled stance against a wasteful highway project. Photo: Wikipedia

Could the end be near for the $1.4 billion Eastern Corridor highway project proposed for eastern Cincinnati? Language added to Ohio’s transportation budget, which is being debated right now, would specifically “prohibit [Ohio DOT] from funding the Eastern Corridor Project in Hamilton County.”

The amendment was introduced by Republican state lawmaker Tom Brinkman, who represents an eastern portion of Cincinnati. Brinkman told the Cincinnati Enquirer, ”I am representing constituents who say, ‘We don’t want to tear down our communities.’” The boondoggle highway project is opposed by residents in Newton, Mariemont, Madisonville, and other towns east of Cincinnati.

The highway does have its defenders in the legislature. At a House Finance Committee meeting Monday, Democrat Denise Driehaus, who represents Cincinnati, signaled her concerns about Brinkman’s amendment.

“It’s been going on for about a decade and so there has been significant investment at both the state and local level,” she said. “It seems to me this sets a precedent that the legislature prohibits ODOT from spending on a local project that has been vetted locally.”

Ryan Smith, a Republican from southeastern Ohio, countered: “This project has gone on for a decade but I think everyone can agree that heading down the wrong path and continuing down the wrong path may be problematic.” As to whether it would represent some kind of dangerous precedent for elected leaders to direct state transportation officials not to fund specific projects, he said, “This is the first time I can remember somebody asking not to be funded on a project.” (For what it’s worth, Governor Kasich added legislation to a previous budget that forbid state money from being spent on the Cincinnati Streetcar.)

You can watch the exchange between Driehaus and Smith here at about the 8:30 mark.

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Americans Are Driving Less, But Road Expansion Is Accelerating

Notice how the new lane miles and miles driven depart in the upper right hand corner of this chart, via FHWA.

Starting around 2005, driving leveled off, but transportation agencies continued to expand roads. Click to enlarge. Chart: FHWA

Americans drive fewer miles today than in 2005, but since that time the nation has built 317,000 lane-miles of new roads — or about 40,000 miles per year. Maybe that helps explain why America’s infrastructure is falling apart.

The new data on road construction comes from the Federal Highway Administration and reached our attention via Tony Dutzik at the Frontier Group, which studies trends in driving. In 2005, Americans drove just above a combined 3 trillion miles. Almost a decade later, in 2013, the last year for which data was available, they were driving about 45 billion less annually — so total driving behavior had declined slightly. Meanwhile, road construction continued as if demand was never higher.

Between 2005 and 2013, states and the federal government poured about $27 billion a year into road expansion. According to FHWA data, road expansion was spread across highways and surface streets fairly uniformly.

That’s actually a faster pace than in previous decades, Dutzik points out. For the whole of the 1990s — when gas was cheap and sprawl development was booming — the country added, on average, about 17,000 lane-miles a year, less than half the current rate.

This is further evidence that America’s “infrastructure crisis” is due in large part to spending choices that favor new construction over maintenance.

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More Money Won’t Fix U.S. Infrastructure If We Don’t Change How It’s Spent

Milwaukee's Marquette Interchange, which cost $810 million to construct, sits practically empty during daylight hours.

Milwaukee’s Marquette Interchange is a beast that cost $810 million to build. If this is how state DOTs spend their money, existing infrastructure will continue to crumble. Photo: HNTB

“America’s infrastructure is slowly falling apart” went the headline of a recent Vice Magazine story that epitomizes a certain line of thinking about how to fix the nation’s “infrastructure crisis.” The post showed a series of structurally deficient bridges and traffic-clogged interchanges intended to jolt readers into thinking we need to spend more on infrastructure.

The idea that decrepit roads are caused by a lack of money is widespread. Vox‘s Matt Yglesias recently argued that the nation should borrow a bunch of money at low interest rates now and invest in an “infrastructure surge” that would help put idled construction workers back to work. Liberal crusader Bernie Sanders has introduced a bill in the Senate to spend $1 trillion on infrastructure over the next five years.

States have been shirking their maintenance responsibilities in favor of building expensive new projects. Image: Smart Growth America

States have been shirking their maintenance responsibilities in favor of building expensive new projects. Graphic: Smart Growth America

It’s true that a surge of investment could be very helpful in building modern, high-capacity transit systems in American cities, or in constructing high-speed rail links between major metros. It’s also true that the federal gas tax has been eroded by inflation for more than 20 years, so tens of billions of dollars in general fund revenue has been diverted to transportation spending since 2008.

But throwing more money at the problem overlooks the fatal flaw in American transportation infrastructure policy: The system is set up to funnel the vast majority of spending through state departments of transportation, and those agencies have an absolutely terrible track record when it comes to making smart long-term decisions. As long as state DOTs retain unfettered control of the money, potholed roads and decrepit bridges will remain the norm.

That’s because the sorry state of American transportation infrastructure is mainly the result of wasteful spending choices, not a lack of funding.

State DOTs’ lack of fiscal discipline is nothing short of criminal. The chart on the right, courtesy of Smart Growth America, shows how states divided spending between new construction and maintenance from 2004 to 2008. States used most of their money — 57 percent — on new construction (projects like that massive but oddly empty interchange in Milwaukee, above, don’t come cheap). Meanwhile, states used the 43 percent left over to maintain the remaining 98.7 percent of road infrastructure. This is a recipe for ruin.

If you think that states have felt chastised in the last few years, think again. Here’s a chart from the Minneapolis Star Tribune showing how Minnesota DOT divides its money between maintenance and new construction:

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Washington Republicans: Put Seattle’s Highway-Borer Out of Its Misery

If nothing else, the politics of Seattle’s deep-bore highway tunnel fiasco keep getting more interesting. With Bertha the tunnel-boring machine stuck underground and “rescue” efforts literally destabilizing city neighborhoods, a pair of Republicans in the Washington State Senate introduced a bill to scrap the project before any more money is wasted.

After Seattle has spent billions and more than a year and all it has to show for it is a hole in the ground. Photo: Washington Department of Transportation

Washington Democrats won’t back off their support for a risky deep-bore highway tunnel in Seattle. Photo: Washington Department of Transportation

While putting a halt to the underground highway would limit Seattle’s exposure to enormous cost overruns and open the door to more city-friendly transportation options, this effort to bury Bertha comes from outside the city. The Democratic establishment in the Seattle region isn’t rallying around the idea.

Republicans Doug Ericksen of Ferndale and Michael Baumgartner of Spokane co-sponsored legislation to cease spending on the stalled tunnel project and use the remaining money to study alternatives. The text of their bill [PDF] is probably the most sensible thing any politician has said about this project in quite some time:

The legislature finds that the state route number 99 Alaskan Way viaduct replacement project has failed. The legislature also finds that the project as it is currently designed cannot be justified financially and is not in the best interest of the public.

The knock against the bill is that it’s pure theater — a political maneuver to place the blame for Bertha squarely at the feet of Democrats.

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Can Seattle Stop Its Highway Tunnel Boondoggle Before It’s Too Late?

Is it too late for Bertha? Photo: WsDOT

Seattle and the state of Washington have a window of opportunity to stop throwing good money after bad. Photo: WsDOT

It’s been one year since the world’s largest tunnel boring machine, “Bertha,” got stuck 120 feet beneath Seattle. Before it broke down, the colossal machine had excavated just 1,000 feet of the two-mile tube that’s supposed to house a new, $3.1 billion underground highway to replace an aging elevated road called the Alaskan Way Viaduct.

Bertha hasn’t budged an inch in the 12 months since. Meanwhile, the bad news keeps on piling up.

Right now, the state’s contractor is busy building a second tunnel down to the machine, so that parts can be removed, repaired, and replaced. In order to keep the second tunnel dry, construction crews have been draining the water table. This work has dangerously destabilized the very elevated highway the tunnel is supposed to replace, and one of the city’s historic neighborhoods — Pioneer Square — is actually sinking as well.

As David Roberts detailed in a recent Grist story, the project could impose billions of dollars in cost overruns on the public. Nobody is certain the machine can be fixed, or if it does get fixed, whether the same problem won’t occur again, farther down its path. In December, the deep-bore tunnel ran away with the voting for Streetsblog’s “Highway Boondoggle of the Year” award.

If there’s anything positive to emerge from the current mess, it’s that local advocates like Cary Moon, who warned against building the tunnel in the first place, are commanding attention again. Moon recently took to the pages of the local alt-weekly, the Stranger, to argue that in light of the tunnel project’s spectacular, slow-motion meltdown, the city should explore other options.

We reached out to her to learn more.

This is a pretty big disaster, it sounds like.

This project identified a lot of risks at the beginning of the process, but the political commitment to it was already high enough at that point that no one really paid that much attention, except for several of us.

They treated us like we were gadflies instead of pointing out honestly and clearly what was probably going to happen. It’s frustrating because all this was known then but no one was listening.

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The Great Traffic Projection Swindle

This is the final piece in a three-part series about privately-financed roads. In the first two parts of this series, we looked at the Indiana Toll Road as an example of the growth in privately financed highways, and how financial firms can turn these assets into profits, even if the road itself is a big money loser. In this piece, we examine the shaky assumptions that toll road investments are based on, and how that is putting the public at risk.

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A consultant predicted traffic on the Indiana Toll Road would rise 22 percent in seven years. Instead, traffic fell 11 percent in eight years. Photo: Jimmy Emerson/Flickr

For privately financed toll road deals, traffic projections are critical. These forecasts tell investors how much revenue a road will generate, and thus whether they should buy a stake in it, and what price to pay. While traffic projections have underpinned the rapid growth in privately financed highways, the forecasts have a dismal track record, consistently overstating the number of drivers who will pay to use a road.

Private toll roads have been sold to the public as a surefire something-for-nothing bargain — new infrastructure with no taxes — but it turns out that the risk for taxpayers is actually substantial. The firms performing traffic projections have strong incentives to inflate the numbers. And the new breed of private finance deals are structured so that when the forecasts turn out wrong, the public incurs huge losses.

Given the huge sums of money involved, even small errors in traffic projections can result in huge problems down the line — and, as Streetsblog has reported, traffic projections everywhere have tended to be wildly off-target. A whole financing scheme, meant to last for generations, can easily be sunk in just a few years by exaggerated traffic projections. The Indiana Toll Road, purchased in 2006 for $3.8 billion, is a great example. The firm that owned it, ITR Concession Co. LLC, declared bankruptcy in September.

Wilbur Smith Associates had predicted that traffic volumes on the Indiana Toll Road would increase at a rate of 22 percent over the first seven years. Instead, traffic volumes shrank 11 percent in the first eight. The result was financial disaster for the concession company, owned jointly by Australian firm Macquarie and Spanish firm Ferrovial. By the time they filed for Chapter 11, debt on the road had ballooned to $5.8 billion.

The company blamed the recession for putting a damper on truck traffic. The same story was offered on another bankrupt Macquarie-owned project, San Diego’s South Bay Expressway. But is that explanation sufficient?

UK-based consultant Robert Bain literally wrote the book on traffic projections, warning in 2009 against forecasters who blamed faulty predictions on the economy [PDF]. Commenting on the flurry of global toll highway bankruptcies that was just starting then, Bain said they had “less to do with the present economic climate, and more to do with a market readiness to be seduced by hopelessly optimistic traffic and revenue projections.”

Bain went on to list 21 ways in which forecasters systematically overestimate future traffic. Each one may tilt the forecast by a tiny amount, but cumulatively they result in huge errors. Some of the errors indicate that forecasters have not yet acknowledged the broader decline in driving and sprawl underway, while others “underestimate the reluctance of some to paying tolls.” Bain argued for a paradigm shift in the use of traffic projections, recognizing that many of them “resemble statements of advocacy rather than unbiased predictions.”

Phineas Baxandall, a senior researcher with the U.S. Public Interest Research Group who’s written extensively for Streetsblog on trends in driving, says the engineering firms that provide the figures know how things work. “Companies seeking investment for privatized toll roads shop for the forecasting they want,” he said. “[There's] no incentive to tell bad news. And if the deal appears promising, then the forecasting company gets other opportunities to sell further analysis, legal advice, raising debt, selling equity, etc.”

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How Macquarie Makes Money By Losing Money on Toll Roads

This is the second post in a three-part series about the Indiana Toll Road and privately financed highways. Read part one.

When you invest in Macquarie Atlas Roads, now-worthless shares in the Indiana Toll Road (and four “Other Toll Roads”) are an almost-free bonus with your purchase of shares in APRR, which runs profitable toll roads in France. Image: Macquarie Atlas’ September 2014 Investor Presentation

Macquarie Group, the gigantic Australian financial services firm with some $400 billion in assets under management, has made a lot of money in the infrastructure privatization game.

The publicly traded company owns the Brussels Airport, the Dulles Greenway, telecommunications towers in Mexico, a wind farm in Kenya, and much more. One of those assets was the Indiana Toll Road, which Macquarie purchased in 2006 with Spanish firm Ferrovial — whose most profitable assets include Heathrow Airport and the 407 toll road ringing Toronto. The Indiana Toll Road was housed in a spinoff company called ITR Concession Co. LLC., which filed for chapter 11 bankruptcy in September after a disastrous eight-year run.

Macquarie and Ferrovial paid the state of Indiana $3.8 billion for the Indiana Toll Road. At the time, it was the largest infrastructure privatization deal in U.S. history. Eight years later, the road was saddled with an astounding $5.8 billion in debt, far beyond the original, unexpectedly-high purchase price.

Traffic fell well short of the projections offered by the engineering firm Wilbur Smith (now CDM Smith), and the company blamed the bankruptcy on the fallout from the recession.

But some observers also pointed to the risky financing underlying the deal. Macquarie and Ferrovial each chipped in just $374 million of their own money to finance the deal. The other $3 billion was borrowed from seven European banks, six of whom have since been bailed out by their respective governments.

Granted, the deal happened in 2006, when debt was flowing freely. According to a 2007 profile by Fortune’s Bethany McLean, Macquarie borrowed its billions using loans resembling a balloon mortgage. It would purchase a type of derivative, called an “accreting swap,” to get a low teaser interest rate, all the while assuming that a refinance was just around the corner. But when credit markets froze entirely, Macquarie couldn’t extricate itself from punishing interest payments.

McLean cited the example of the Macquarie-owned Chicago Skyway: “In 2007 the Skyway will pay interest of just $129,000 on $961 million of debt. But the interest payment for 2018 is to be $480 million — that’s not a typo.”

That helps explain how Macquarie and Ferrovial ended up owing almost twice as much as they paid for the Indiana Toll Road, after collecting tolls for eight years.

Randy Salzman, associate editor of Thinking Highways North America, has reported extensively about P3s, saying that it’s common for privately financed roads to go bankrupt. He says that firms acquiring infrastructure typically provide very little of their own cash, and because of a complicated mix of fees and tax breaks, they may benefit financially even when the deals go sour.

“You’d think that they wouldn’t be investing in these things because so many of them go bankrupt,” he said. “You’d think that the money would be running away.”

But Salzman says he’s seen these kinds of bankruptcies happen over and over again. “The only question is when.”

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The Indiana Toll Road and the Dark Side of Privately Financed Highways

This is the first post in a three-part series on the Indiana Toll Road and the use of private finance to build and maintain highways. 

Who owns the Indiana Toll Road? Well, as of the bankruptcy filing in September, Macquarie Atlas Roads Limited (MQA Australia), which is joined at the hip to Macquarie Atlas Roads International Limited (MQA Bermuda) on the Australian stock exchange, has a 25 percent stake. Macquarie’s investment bank arm brokers the various transactions related to ownership of the road, collecting fees on each one. Welcome to the world of privately financed infrastructure. Graphic: Macquarie prospectus

In September, the operator of the Indiana Toll Road filed for bankruptcy, eight years after inking a $3.8 billion, 75-year concession for the road with the administration of Governor Mitch Daniels.

The implications of the bankruptcy for the financial industry were large enough that ratings agency Standard & Poor’s stepped in immediately to calm nerves. In a press release, the company attempted to distinguish the Indiana venture from similar projects, known as public-private partnerships, or P3s: “We do not believe this bankruptcy will slow the growth of current-generation transportation P3 projects, which have different risk characteristics.”

But the similarities between the Indiana Toll Road and other P3s involving private finance can’t be ignored. And as we’ll see, even the differences aren’t all good news for the American public. Once hailed as the model for a new age of U.S. infrastructure, today the Indiana deal looks more like a canary in a coal mine.

At a time when government and Wall Street are raring to team up on privately financed infrastructure, a look at the Indiana Toll Road reveals several of the red flags to beware in all such deals: an opaque agreement based on proprietary information the public cannot access; a profit-making strategy by the private financier that relies on securitization and fees, divorced from the actual infrastructure product or service; and faulty assumptions underpinning the initial investment, which can incur huge public expense down the line. Though made in the name of innovation and efficiency, private finance deals are often more expensive than conventional bonding, threatening to suck money from taxpayers while propping up infrastructure projects that should never get built.

For the parties who put these deals together, however, the marriage of private finance and public roads is incredibly convenient. Investors are increasingly impatient with record-low returns on conventional bonds, and are turning to infrastructure as an asset class that promises stable, inflation-protected returns over the long run.

Meanwhile, governments are eager to fix decaying infrastructure — but without raising taxes or increasing their capacity to borrow. On the occasion of yet another meeting intended to drum up investor interest, Transportation Secretary Anthony Foxx recently wrote on the U.S. Department of Transportation’s blog: “With public investments in our nation’s important transportation assets steadily declining, we need to find better ways to partner with private investors to help rebuild America.”

Those investors are lining up to get in the infrastructure game. According to the Congressional Budget Office, about 40 percent of new urban highways in America were built using the private finance model between 1996 and 2006. Since 2008, that figure has jumped to almost 70 percent.

In an attempt to get even more deals done, the current federal transportation bill ramped up funding for the TIFIA program — which offers subsidized federal loans and other credit assistance, often to projects that also receive private backing — by a factor of eight.

Major private investors have stepped up their lobbying efforts to close more of these lucrative deals. Meridiam North America recently hired Ray LaHood, Foxx’s predecessor as Transportation Secretary, and Macquarie Group — which orchestrated the Indiana fiasco — hired away a White House deputy assistant to “continue strengthening our relationships with key elected officials… while also exploring new investment opportunities.”

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Not Just a Phase: Young Americans Won’t Start Motoring Like Their Parents

Image: U.S. Public Interest Research Group

Young adults in 2009 were driving less and walking, biking, and riding transit more than young adults in 2001, according to the National Household Travel Survey. Chart: U.S. Public Interest Research Group

A raft of recent research indicates that young adults just aren’t as into driving as their parents were. Young people today are walking, biking, and riding transit more while driving less than previous generations did at the same age. But the vast majority of state DOTs have been loathe to respond by changing their highway-centric ways. 

A new report by the U.S. Public Interest Research Group points out the folly of their inaction: If transportation officials are waiting for Americans born after 1983 to start motoring like their parents did, they are likely to be sorely disappointed.

Though some factors underlying the shift in driving habits are likely temporary — caused by the recession, for instance — just as many appear to be permanent, the authors found. That means American transportation agencies should get busy preparing for a far different future than their traffic models predict.

“The Millennial generation is not only less car-focused than older Americans by virtue of being young, but they also drive less than previous generations of young people,” write authors Tony Dutzik, Jeff Inglis, and Phineas Baxandall.

There’s a good deal of evidence that the recession cannot fully explain the trend away from driving among young people. Notably, driving declined even among millennials who stayed employed, and “between the recession years of 2001 and 2009, per-capita driving declined by 16 percent among 16 to 34 year-olds with jobs,” the authors write.

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To Destabilize Detroit’s Fragile Renaissance, Go Ahead and Widen I-94

Several historic buildings, including Detroit's oldest recording studio, would be mowed down to widen I-94 for no reason. Photo: Mode Shift via U.S. PIRG and Frontier Group

Several historic buildings, including Detroit’s oldest recording studio, would be mowed down to widen I-94 for no reason. Photo: Mode Shift via U.S. PIRG and Frontier Group

A recent report by U.S. PIRG and the Frontier Group, “Highway Boondoggles: Wasted Money and America’s Transportation Future,” examines 11 of the most wasteful, least justifiable road projects underway in America right now. Here’s the latest installment in our series profiling the various bad decisions that funnel so much money to infrastructure that does no good. 

Michigan highway planners want to spend $2.7 billion to widen Interstate 94 through the heart of Detroit, saying that the existing road needs not just resurfacing and better bridges, but also more space for traffic. State officials continue to push forward with the project despite Detroit’s rapid population loss and other woes, and despite the fact that traffic volume on the stretch being considered for expansion is no higher than it was in 2005. Expanding the highway might even make Detroit’s economic recovery more difficult by further separating two neighborhoods that have been leading the city’s nascent revitalization.

The proposal would widen a seven-mile segment of I-94 called the Edsel Ford Expressway, which runs in a trench through the center of the city between the Midtown and New Center neighborhoods. Those areas are important for the city’s revitalization because of their central location. Efforts there to boost arts and culture, retail and commercial space, and downtown living have been gaining steam in recent years.

In fact, better connecting the neighborhoods is one reason for a $140 million streetcar project that broke ground this July. Officials have already begun calling for expansion of that project, but funds are currently lacking.

The proposed expansion of the highway would have the opposite effect, widening the physical trench between the neighborhoods and removing 11 bridges across the freeway that would not be replaced. As a result, walking and biking in the area would become much less convenient, forcing people to travel as much as six blocks out of their way to reach destinations.

Transportation officials say many buildings would have to be removed to make room for the wider road. The project requires displacing or demolishing 12 commercial buildings, 14 single-family homes, two duplexes and two apartment buildings with 14 units between them, as well as three buildings either on or eligible for inclusion in the National Register of Historic Places, including the city’s oldest recording studio.

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