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The President George Bush Turnpike is a 30-mile outer beltway under construction north and east of Dallas, Texas. The $700 million facility will have four to eight toll lanes (the Turnpike) in addition to four to six toll-free frontage road lanes (designated State Route 190) linking seven cities in three counties. The Turnpike is being built and operated by the North Texas Tollway Authority, which became responsible for the construction and operation of toll facilities in the Dallas-Fort Worth "Metroplex" region after the state-level Texas Turnpike Authority was dissolved by the Texas Legislature.
The Metroplex grew by more than one million residents between 1990 and 2000 and continues to grow at a rapid pace-more than 2.6 million people and 1.7 million new jobs are projected to move to the Metroplex by 2025. 1 The communities north of Dallas are absorbing the largest share of this growth, leading to severe peak-period congestion on existing freeways. Interstate 635, which lies south of the Bush Turnpike corridor, is currently the only major east-west highway north of Dallas, and needs to be expanded by three lanes in each direction at a cost of over $1 billion.2 According to the Texas Department of Transportation (TXDOT), the I-635 expansion will reduce the duration of the peak period, but will not eliminate congestion altogether.
The George Bush Turnpike will provide a second east-west limited access highway through the center of the rapidly growing "Telecom Corridor," which contains corporate headquarters for several large firms. A Turnpike extension to Interstate 30 east of Dallas and a connection with I-635 and State Highway 161 northwest of Dallas will increase mobility throughout the Metroplex by linking Dallas-Fort Worth International Airport with employment centers and residential areas in northern and eastern suburbs.
The George Bush Turnpike faced many of the financial obstacles common to large construction projects. Specifically, the high cost of construction would have easily overwhelmed available financial resources. Traditional financing mechanisms were ill-equipped to advance a project of this magnitude without consuming most available funds and delaying other transportation projects. Further complicating the financial outlook for the project was the fact that TXDOT did not have statutory authority to issue bonds. Consequently, the primary means available for funding the George Bush Turnpike was traditional pay-as-you-go expenditures from motor fuel taxes and vehicle registration fee receipts.
TXDOT has reported that only one-third of the funds needed to maintain current levels of mobility in Texas will be available in the next 25 years. Local governments are required by TXDOT to purchase right-of-way for major facilities and raise matching funds for state and Federal grants. Since many local governments do not have the resources to raise the large amounts of cash necessary for transportation projects, TXDOT is advancing the concept of using toll revenues to finance new highway construction in order to avoid the constraints of traditional funding approaches. Toll roads and high-occupancy/toll (HOT) lanes have become a major component of transportation plans in every region of the state due to their ability to accelerate construction schedules of major projects.
The Texas Turnpike Authority (now the North Texas Tollway Authority) was given responsibility for constructing the George Bush Turnpike as a toll facility so that scarce state and Federal funds could be directed to other projects in the Metroplex. In order to maintain high bond ratings, the Authority requires a toll facility to generate revenues at least 1.20 times the amount of bonds outstanding. The $700 million cost of the George Bush Turnpike precluded financing the project exclusively with revenue bonds, since tolls were not projected to generate sufficient revenue to obtain a satisfactory credit rating in bond markets.
To address the obstacles confronting implementation of the project, TXDOT and the Texas Turnpike Authority (TTA) formed a unique alliance to finance and construct the project as a turnpike. The partnership was supported by a change in Texas legislation in 1991 that allowed greater flexibility in turnpike project financing and the lending of highway funds for turnpike projects. The new legislation allowed the project to take advantage of Federal-aid funds available to TXDOT as well as TTA's bonding authority. The project partnership expanded to include three counties and seven cities, resulting in the donation of several locally owned rights-of-way to the project.
Leveraging this partnership was a proposal to use innovative financing tools available under ISTEA and FHWA's TE-045 program. TXDOT provided a $135 million Section 129 loan - using Surface Transportation Program (STP) funds - to TTA as part of the project's plan of finance. This funding gave TTA the ability to reduce the coverage (net revenues divided by net debt service) on its combined debt, and greatly enhance the creditworthiness of TTA's $446 million in revenue bonds issued for the first four segments of the project. Furthermore, the loan enabled TTA to contribute $20 million to the project from funds that might otherwise have been required as reserves for the debt.
TTA's repayment obligation on the Section 129 loan will be subordinate to the repayment of its toll revenue bond debt service. Repayment of the Section 129 loan is spread over 25 years and does not begin until 2004. Interest for the revenue bonds is capitalized through 2004, with the first annual debt service payment scheduled for 2005. Both repayment schedules protect investors from the risk associated with the project's construction and startup period.
The Section 129 loan was disbursed in five payments of $20 million, $35 million, $20 million, $40 million, and $20 million over a four-year period. TXDOT employed partial conversion of advance construction to spread the designation of Federal obligation authority over four years rather than incurring the upfront $135 million impact to its Federal obligation authority.
The use of creative partnerships and innovative finance tools enabled Texas to overcome significant financial barriers to construction of the George Bush Turnpike with the result that the project will be accomplished over a decade sooner than would have been possible under traditional pay-as-you-go financing.
The financial benefits of the Section 129 loan's inclusion in the mix of financing are highlighted below:
The loan's subordinated status improved the credit quality of the senior bonds;
TTA obtained below-market interest rates on their revenue bonds, reducing the debt burden on the project; and
The loan repayments will provide the foundation for a self-sustaining revolving fund.
Through a combination of a Section 129 loan and partial conversion of advance construction, TXDOT structured a finance plan for the project that responded to the state's debt and cash flow constraints, allowing this and other important projects throughout the state to proceed more quickly than would otherwise be possible.
