Flying Blind: Why Public Leaders Need an Investment Grade Analysis

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Portland are a leaders are being asked to greenlight the so-called Interstate Bridge Replacement Project, which is projected by its proponents to cost as much as $5 billion. But they’re being asked to give a project a go-ahead with only the sketchiest financial information. The project’s cost estimates are slightly warmed-over versions of decade-old estimates prepared for the failed Columbia River Crossing. Ominously, the details of where the money will come from—who will pay and how much—are superficial and vague.

One thing project advocates grudgingly admit is that the I-5 bridge replacement can’t be financed without tolls. Program administrator Greg Johnson and Oregon Transportation Commission Chair Bob Van Brocklin have repeatedly said as much. But how much money tolls will produce and how high tolls will be are never clearly mentioned. Johnson has said tolls will provide “about a third of project costs.”

Knowing how much money tolls will produce, and how high tolls will have to be to produce that revenue is the central financial question.

Currently, the I-5 bridge carries about 130,000 vehicles per day. But that volume is predicated on the bridge being free. Charging people to use the bridge would dramatically reduce the number of crossings. As we’ve documented before, when tolls were added to a similar crossing, the I-65 bridges across the Ohio River in Louisville, traffic levels fell by half.

Because tolling depresses traffic, you can’t accurately estimate how much toll revenue a bridge will produce without a detailed model that accounts for this traffic-depressing effect.

The models routinely used by state highway departments don’t accurately account for the effect of tolling on traffic volumes. They tend to dramatically over-predict the amount of traffic on tolled roadways, which has led to over-built facilities that don’t generate enough toll-paying traffic to cover their costs.

Financial markets and the federal government, who are asked to loan money upfront (with a promise to be repaid by future tolls) simply refuse to believe state highway department traffic forecasts. Instead, they insist that states pay for an “investment grade” traffic and revenue forecast. You can’t sell toll-backed bonds on private financial markets, and you can’t even apply for federal TIFIA loans, without first getting an investment grade forecast. In January, Portland’s Metro Council adopted a statement of “Values, Outcomes and Actions” governing the I-5 project, directing the Oregon Department of Transportation (ODOT) to prepare an Investment Grade Analysis (IGA) of the project:

As the part of the finance plan, engage professionals with expertise in financing massive complex transportation infrastructure construction projects to conduct and deliver the results of an investment-grade traffic and revenue study of the design options.

That’s a critical step to making and informed decision.

What Is an Investment Grade Analysis?

Investment grade forecasts are generally prepared by one of a handful of financial consulting firms. These studies start with the traffic models used by state highway departments, but make much more realistic assumptions about future population and employment growth, the likelihood of economic cycles, and critically, the effect of tolling on levels of traffic. As a result, investment grade analyses invariably predict lower levels of traffic that the models used by state highway departments. Because traffic levels are lower, tolls have to be higher to produce any given amount of revenue.

And the differences between investment grade analysis and highway department forecasts are not trivial: They are huge. The Oregon and Washington highway departments prepared traffic and toll estimates for the Columbia River Crossing’s Final Environmental Impact Statement published in 2011. Those estimates were that the I-5 bridges would carry 178,000 vehicles per day in 2030, and that minimum tolls would be $1.34 to pay for about one-third of the cost of the project. The Investment Grade Analysis for this project, prepared by CDM Smith on behalf of the two agencies in 2013 estimated that in 2030, the I-5 bridges would carry just 95,000 vehicles per day in 2030, and that tolls would be a minimum of $2.60 each way in order to cover a third of project costs. In short, the initial highway department estimates overstated future traffic levels by double, and understated needed tolls by half.

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