Recession, questionable decision-making bring state to crossroads on Tacoma Narrows Bridge

Drivers feeling the pinch from this month’s toll hike on the Tacoma Narrows Bridge can take some solace in this: It’s the first increase in four years, and you should be paying more by now.

But the state’s history of shifting bridge costs and keeping tolls low has led to a crossroads, and it raises a scenario that offers no solace: You eventually may have to pay more than anyone anticipated.

In the end, some of the state’s decisions could “come back to bite people,” one transportation leader says.

As the completed eastbound bridge turns five years old Monday, questions mount about whether the state can collect enough toll revenue to pay what it owes under the financing plan drawn up a decade ago.

The flat cost for the bridge project historically has been pegged at $792 million. But the state will pay a total of nearly $1.5 billion in principal and interest by the time the debt is retired 18 years from now.

Tollpayers and taxpayers alike could be on the hook unless there’s a sizeable increase in bridge traffic.

For the second consecutive year, the number of crossings has declined, and it’s expected to fall again this year. Toll revenue has stayed flat, though a bump is expected this year due to the rate increase.

“Clearly, keeping the rates down didn’t keep the traffic up,” said Richard Ford, chairman of the the Washington Transportation Commission, which sets toll rates.

There’s no question the housing bubble that crashed the economy also smashed the traffic and revenue projections that state officials relied on to pay for the bridge.

But an extensive review by The News Tribune shows that the financial decisions made before and after the bridge opened – most of them made to ease the pain of paying tolls – cost the state significant revenue.

The newspaper found:

• The state backloaded the debt and saddled itself with bonds that largely couldn’t be refinanced, even as lower interest rates became available.

• The political decision not to toll the old 1950 span before completion of the new bridge eliminated a potential revenue stream that could have leveled out debt payments and toll rates.

• The state relied on optimistic traffic and revenue projections from a private consultant who didn’t see a weak economy on the horizon.

• The Good to Go! electronic toll discount was never considered in the financing plan, and the runaway popularity of the program has put the state farther behind.

In recent years, the state has reduced costs to operate and maintain the bridge, but its biggest expense is something it can do nothing about: debt payments. Those bills increase progressively in the coming years.

If revenue falls short of expenses, there are two possibilities: Tollpayers could be asked to pay more than the $6 maximum toll originally promised, or general state taxpayers could be asked to subsidize the bridge. The debt is backed by the state’s highway fund, and if that’s insufficient, the state’s credit and taxing powers.

Experts say tolls can’t be raised indefinitely. At a certain level, which the state hasn’t determined, the bridge will give up more money in lost traffic than could be gained through higher tolls.

Officials with the Washington State Department of Transportation say the state is making its debt payments and there’s no evidence at this point to suggest a bridge bailout will be necessary.

Others outside WSDOT aren’t so sure.

Noah Crocker, senior financial analyst for the state transportation commission, sees a higher-than-anticipated toll or state subsidy as a possibility. He shared his concerns with lawmakers during the last legislative session.

“We need to find a different solution because (the financing plan) is not going to work,” he said.

Rep. Jan Angel, R-Port Orchard, is alarmed by the increasing debt and lagging traffic. She proposes selling naming rights for the bridge and says it’s urgent that officials take up the matter of bridge financing soon.

“I don’t think we can wait,” she said. “I don’t want to get us down to a crisis mode.”

Ford said raising all tolls to $6, anticipated to occur in 2016, may generate enough money, but “you just don’t know until you get right up looking at the facts.”

“To say it’s an unreasonable plan, I don’t think that’s fair,” he said. “We are faced with the reality that, for a variety of reasons, traffic may drop. That does worry me.”

The picture will become more clear in the next six months as the effects of the toll increase shake out, Ford said.

The looming challenges have prompted state officials to abandon the model used to pay for the Narrows Bridge. For future projects around Washington, they favor approaches built on more level tolls and debt payments.

State Treasurer Jim McIntire said he wants to build public confidence in “a conservative financing mechanism, and one that’s not going to be an excuse for ever-increasing tolls.”

Randy Boss, a Peninsula resident and longtime critic of Narrows Bridge tolling, put it this way: “We were really the guinea pig.”

‘TRAFFIC NIGHTMARE’ ENDS

Nobody questions that the July 2007 opening of a second suspension bridge across the Tacoma Narrows has relieved traffic and improved safety.

Collisions on State Route 16 between 24th Street Northwest in Gig Harbor and North Jackson Avenue in Tacoma have declined 75 percent, according to data from WSDOT.

The state’s data also show much faster travel times during morning and evening commutes.

Peninsula-area residents knew two decades ago that something had to be done. Traffic congestion was bad on the aging 1950 bridge and was projected to get worse, a chokepoint that threatened economic growth, said Pat Lantz, a state representative from Gig Harbor at the time.

Collisions would cause hours-long backups on the bridge.

“We had a transportation nightmare here, there’s no question about it,” Lantz said.

The conversation reached a milestone in 1998, when voters in seven counties went to the polls to voice their opinions on whether the state should build a new span parallel to the existing bridge.

It was one of six demonstration projects proposed around Washington after state lawmakers in 1993 invited private investors to help the state unclog public roads. The other five projects were dropped for various reasons.

The advisory ballot measure stated: “An initial round trip not to exceed $3.00 will be charged when the new bridge is open to traffic.”

It’s not as if tolls were an unprecedented idea on the peninsula. They were imposed to pay for the 1950 span; the state removed them in 1965 after the project was paid off.

But voters living on the west side of the bridge soundly rejected the 1998 ballot measure, even as the rest of the region supported it.

The state signed a contract with United Infrastructure Washington in 1999 to develop the project. A neighborhood group opposed to tolls filed a lawsuit, and the state Supreme Court threw out the contract. Among other things, the justices ruled that only the state transportation commission could set tolls, not a private entity.

With the project in limbo following the high court ruling, then-State Treasurer Mike Murphy had some time. He thought the private financing proposed to build the new bridge cost too much. He tried to make his argument to state lawmakers, but recalled in a recent interview being told: “The train had already left the station.”

But someone shared his concerns and had the clout to do something about it: State House Speaker Frank Chopp.

The Seattle Democrat said public financing would save money and prevent a for-profit company from controlling the bridge for years. State lawmakers generally agreed on the need for a new bridge, he said, but there was a “major battle” during the 2002 legislative session over how to pay for it.

Public financing prevailed.

“It took citizen action to give us the ability and time to present the better case for public financing,” Chopp said.

Murphy maintains to this day that private financing would have cost hundreds of million dollars more, resulting in higher tolls today.

BUY NOW, PAY LATER

The legislative victory for Murphy led to a second problem: The state needed to take out debt to pay for workers and materials to build the bridge, but there would be no way to repay it until toll revenue started rolling in.

“How do you finance something without a revenue stream?” Murphy asked.

The answer: Pay the bare minimum at the beginning and ratchet up the payments in future years, cashing in on expected population and traffic growth.

To keep up with those payments, tolls were scheduled to be raised over time. Under the financing plan, they would start at $3 when the bridge opened, then increase $1 every three years before a final jump to $6 in 2016.

Lantz had reservations about the estimates but said she and other lawmakers put their trust in the experts.

“They had the projections, but you had to ask the question, ‘How do you bank on this?’” she said.

From 2002 to 2007, the state issued $680 million in debt out of the $800 million state lawmakers authorized for the project. Construction started in October 2002.

It didn’t make any payments until the bridge opened, and owed $590 million just in principal as of last summer, according to the treasurer’s office.

The total payment for the fiscal year that ended June 30 was $43 million; it will grow to a maximum of $87 million before the bonds mature in 2030, when tolls are set to be removed.

Every extra dollar the state manages to save –  such as through the shutdown of tollbooths now under consideration – could help pay down the debt more quickly.

‘STUCK WITH WHAT WE GOT’

Lack of revenue during construction also drove another decision that would have future ramifications: The state opted to sell zero-coupon bonds, which don’t carry the same annual interest payments as traditional bonds. The full amount of principal and interest is paid when each bond in a series matures.

The advantage of so-called “zeroes” is that the state could push out the start of debt payments until toll revenue started flowing.

The disadvantage is that zeroes typically aren’t callable, meaning there’s no ability to reduce costs by refinancing if interest rates drop before bonds mature.

The state sold 10 series of bonds to build the new Narrows Bridge, and eight of them were zeroes. The other bonds, which were callable, amount to less than 10 percent of the total debt.

Thus, the state can’t take advantage of the current low interest rates to reduce payments and relieve pressure to increase tolls.

“Would I love to be able to refinance the Tacoma Narrows Bridge? Absolutely,” McIntire said.

There are ways to refinance these bonds, Ellen Evans, a state treasury official, wrote in a response to a state lawmaker’s inquiry. But they are either barred by state law or are so costly they wouldn’t save the state money in the long run.

“We’re stuck with what we got,” Ford said.

Angel, the legislator from Kitsap County, said Murphy did a disservice by not giving the state the option to refinance the bonds.

Murphy said he and his team did the best they could with the hand they were dealt.

TOLL THE NEW, NOT THE OLD

One step state lawmakers could have taken to help level out debt payments: Put a toll on the existing bridge while the new one was under construction.

Murphy said he supported doing so, but the idea was a non-starter in Olympia.

“If you started the toll process earlier, then you would have cash in the bank and a revenue stream that we didn’t have on the Narrows,” he said. The problem, he said, was that elected lawmakers didn’t want to put a toll on a bridge that was already paid off.

Boss, the longtime critic of tolls on the Narrows Bridge, said tolling the old span was political dynamite.

“It was shot down as quickly as it came out of anybody’s mouth,’ he said.

Lantz said tolling of the aging bridge was “not politically tolerable” and went against the message that people “could have everything you wanted and not feel the pain.”

Chopp said early tolling makes sense for megaprojects like one now under way in Seattle. He agrees with tolling the State Route 520 floating bridge to help pay for its replacement, but was unable to recall why it wasn’t done for the Narrows Bridge, saying he was focused at the time on the public-vs.-private financing question.

HARD TIMES NOT IN FORECAST

Of course, no one would likely bat an eye about the bridge’s financing method if toll revenue was growing with traffic, as the state’s consultant projected it would.

Years before construction started, the state hired consultant Wilbur Smith Associates, now CDM Smith, to determine how much traffic and toll revenue the bridge would bring in. The treasurer’s office used those estimates to finance the project.

The consultant, based in Cambridge, Mass., looked in-depth at traffic patterns around the bridge, how different tolls rate would affect those patterns and how the area’s economy would grow.

The 2002 and 2005 updates made the same assumption, which it considered “reasonable” at the time: “No major recession or significant economic restructuring will occur which would substantially reduce traffic in the region.” (It did include a disclaimer that forecasting carries “inherent uncertainty.” The consultant relies heavily on economic data provided by the state to do its forecasts.)

A year after the bridge opened, the bottom fell out of the economy.

The bridge was expected to see consistent traffic growth. Instead, traffic has declined for two consecutive years.

For the 2012 fiscal year that ended last month, the consultant had projected back in 2005 that the bridge would generate $63.3 million in toll revenue. The unaudited actual figure: $44.3 million.

A News Tribune review of the quarterly updates CDM Smith provides WSDOT showed its initial optimism eventually gave way to the reality of a protracted economic lull.

“The recent recession was deeper and lasted longer than most economists predicted early into the recession, and its negative effects continue to linger,” CDM Smith spokeswoman Marlene Hobel wrote in an e-mail last month.

In its most recent forecast for the fiscal year that ends in June 2013, the consultant expects traffic to dip to 13.6 million vehicles as a result of the toll increase.

But the bridge is forecast to raise nearly $61 million in toll revenue – better than the roughly $44 million in revenue each year since the last toll hike in 2008.

In subsequent years, CDM Smith expects, as it has before, for an economic recovery to take hold and drive more traffic to the bridge.

Asked if the consultant’s forecasts have been too optimistic, state tolling director Craig Stone responded its work has been professional and credible. But he noted there’s discussion about whether to update the forecasting model.

THE UNACCOUNTED DISCOUNT

Lower-than-projected traffic isn’t the only thing that has cost the bridge. So has something CDM Smith never considered in those initial forecasts: the discount for Good to Go!, the state’s electronic tolling system.

State officials wanted to give drivers an incentive to sign up for Good to Go! passes because officials worried about long backups at the tollbooths after the bridge opened.

Thus, the rate to cross the bridge using an electronic transponder was $1.75 for the first year and $2.75 for the next four. The consultant had based its revenue forecast on tolls starting at a baseline of $3 for all bridge users.

The popularity of the program surprised state officials. Today, Good to Go! collects about three-quarters of the tolls each year.

Before approving the discount, Ford, the transportation commission chairman, said there never was analysis of revenue loss over time.

”There was not anything done like that,” he said.

Hobel, the CDM Smith spokeswoman, said the discount had a “significant impact on revenues,” although an estimate of the loss is unknown.

With the toll hikes that took effect this month, the transportation commission narrowed the gap between cash and electronic tolls. But a $1 discount continues, even though the financing plan called for a straight-across $5 toll during the current fiscal year.

Boss, the tolling critic, said holding down rates was probably “not a good plan” but it was the lesser of two evils. The state would have spent all the money brought in if officials kept to the tolling schedule, he contends, and then would have increased tolls further to pay higher expenses.

U-TURN ON FUTURE PROJECTS

Murphy, the former state treasurer, said the financing of the Narrows Bridge was intended as a prototype for the state’s other transportation megaprojects. Those include the new State Route 520 floating bridge; the Columbia River Crossing, the new I-5 span connecting Oregon and Washington; and the new Highway 99 tunnel in Seattle.

But McIntire, his successor, has taken the state on a different path as a result of the Narrows Bridge. He’s lobbied for level payments on megaprojects by tolling them before opening and not relying on toll increases to repay debt.

“I wish we hadn’t had such a difficult learning experience,” the treasurer said.

In 2010, on the advice of McIntire, the transportation commission  required that 12.5 percent of the bridge’s annual costs be set aside in reserve to cover shortfalls and legitimate cost increases, equaling $7.1 million in the current fiscal year. The state carries insurance on the bridge, but it only covers the loss of toll revenue if it is damaged and closed down for more than 10 days.

The reserve is unpopular with tollpayers, but McIntire argues that it makes financial sense.

The state began tolling the state Route 520 floating bridge in December to help pay for a portion of the replacement span scheduled for completion in 2014.

As with the Narrows Bridge, tolls increase over time. Five annual increases are planned, taking the peak hour toll to $4.35 in 2016 from the initial $3.50. But unlike the local bridge, the payments on the debt are far more consistent. The state has begun repaying the $518 million it borrowed in October, started at $15.2 million in the prior fiscal year and increasing to $36 million, where it will remain from 2017 to 2041.

The state plans to borrow additional money as the project swings into full gear. Unlike the Narrows span, tolls on Route 520 change depending on the time of day and are charged in both directions.

“Seattle has got a different situation,” said Alan Weaver, chairman of the citizen panel that recommends toll rates to the transportation commission. “I think we have to live up to our escalating payments. I haven’t worried about which is better and which is worse.”

The evolving financing plan to construct the Columbia River Crossing  at first mirrored the Tacoma Narrows Bridge: relying on toll increases over time to make debt payments that also rise over time. Like the 520, tolls would pay a portion of the project cost.

But an analysis by the Oregon Treasury last year concluded that the original traffic and revenue projections were outdated and the debt schedule too risky.

“Based on that analysis, there were certainly grounds for concerns over those early projections,” said James Sinks, an agency spokesman.

He added: “A lot of the lessons that were learned were from Tacoma Narrows.”

The Columbia River project has changed course to include more conservative traffic estimates and no assumption that tolls will have to increase to repay debt, a spokeswoman said.

PRESSURE TO POSTPONE

In hindsight, many observers point to the bad economy as a main factor in knocking the bridge financing plan off course.

Early in the recession, the decision to spare hurting families and businesses from toll increases came easy – perhaps too easy.

The bridge was relatively flush with cash following the 2008 toll hike as officials projected its savings account would have nearly $17 million two years later.

Ford, the commission chairman, said the panel got a “lot of pressure” to spend down the reserve to avoid another toll increase until now.

Lawmakers have also punted on expenses long known to be coming due.

The state had borrowed money to pay the bridge’s operating expenses after its opening was delayed three months. The $5.3 million loan was due in June 2011, but state Sen. Derek Kilmer, D-Gig Harbor, prodded lawmakers to delay the payment and changed it so the money would come from penalties for not paying photo tolls rather than from tolls themselves. (Stone said tolls could still pay the bills if the penalties are insufficient.)

Another postponement was approved for sales tax payments on bridge construction that were scheduled to begin in December. Kilmer persuaded lawmakers to defer those payments – more than $5 million over 10 years – for another six years. The annual payment is equivalent to a 40-cent increase in tolls.

Kilmer said the deferral was intended to buy time to lobby lawmakers to get rid of the payments in a future legislative session.

“I think it’s stupid that we would pay a toll to pay a tax,” he said.

Rep. Larry Seaquist, D-Gig Harbor, said the intent over the last five years has been to keep tolls as low as possible for as long as possible.

“We’ve been deliberately dragging our feet,” he said.

Ford said those decisions could “really come back to bite people.”

“I have no regrets,” he said. “I want the public that uses the bridge to know we do listen to them, but sometimes maybe we listen too closely.”

christian.hill@thenewstribune.com
253-274-7390
@TNTchill