Coronavirus

Coronavirus Is Devastating State Budgets. Is Leasing Toll Roads to Private Operators the Answer?

Leasing state toll roads could provide the revenue states need to improve their balance sheets.

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The economic toll of COVID-19 has left state governments short on revenue, prompting policymakers to mull tax increases and hope like hell for another federal bailout. At the same time, the pandemic has done nothing to reduce states' longer-term needs for funding their pension systems, servicing their debts, and maintaining infrastructure.

One possible way to strengthen states' balance sheets would be to lease state-owned toll roads to investors, who could offer a near-term infusion of cash in exchange for the right to collect the tolls currently being paid to state tolling agencies.

"Despite the pandemic and recession, car usage is nearly back to normal levels in many areas," says Robert Poole, director of transportation at the Reason Foundation (which publishes this website). "There continues to be great interest in long-term investing in U.S. toll roads. With today's low interest rates, these types of acquisitions are still attractive to global toll road companies, infrastructure investment funds, and pension funds."

A new Reason Foundation study authored by Poole looks at nine major state-owned and -operated toll road systems. It finds that long-term leases of these roads could bring in anywhere from $1.1 billion (in Kansas) to $19.4 billion (in Illinois).

The pandemic has created both dangers and opportunities for toll road investors. Early in the crisis, declining traffic volumes saw Moody's downgrade the expected bond ratings of several European toll roads from stable to negative. In other words, they anticipate that those bond ratings will fall in the future.

The easing of lockdown orders, and the rebound in vehicular travel, have seen Moody's rate the outlook for other toll roads' bond ratings as stable. Pension funds and private toll road operators have also either increased their investment in toll road leases or expressed a willingness to do so in the near future. Low interest rates and the financial distress of current toll road operators make this a good time to invest, according to the Reason study.

States are facing a collective $500 billion budget shortfall over the next two fiscal years, according to an analysis from Moody's Analytics. The Coronavirus Aid, Relief, and Economic Security Act, passed in March, created a $150 billion relief fund that states, territories, and localities could tap to pay for increased expenses related to the pandemic.

Democrats have proposed an additional $1 trillion in bailout funds for states and localities. Republicans say they'd like to keep the additional aid to $150 billion.

Often investors will make an upfront lump-sum payment to governments for a toll road lease. Using that one-time windfall to plug short-term budget gaps would be unwise, the Reason study argues. It could avert some of the short-term cuts to programs and staff, but it would do nothing to alleviate states' longer-term obligations while leaving them without the toll revenues they could normally expect.

Instead, Poole recommends that states use that money to pay down longer-term liabilities, particularly unfunded pension obligations.

Most state pension systems were already underfunded before the crisis. The pandemic hasn't helped matters. "With some investment returns likely declining by as much as 15 percent this year, thanks to the COVID-19 pandemic, states are going to face a cumulative pension debt of between $1.5 trillion and $2 trillion by the end of the year," wrote Reason's Eric Boehm in April.

Leasing state-owned toll roads could cover anywhere from a paltry 5 percent of unfunded pension liabilities, in the case of Ohio, to around half of Florida and Oklahoma's unfunded pension obligations.

Pensions aren't the only way states could use the proceeds from leasing toll roads to improve their balance sheets. Chicago used the money it earned from leasing out its Skyway toll road to pay down debt. When Indiana leased its toll road system, it used the proceeds to pay for infrastructure improvements.

In addition to putting states' balance sheets in better shape, leasing toll roads to private operators could ensure these roads are managed more professionally. Leasing contracts can include specific performance targets and a state of repair that toll road operators have to meet. Private management would also guard against the politicization that often befalls state tolling agencies.

Leasing of toll roads to private operators is a common practice in Europe, Asia, Latin America, and Australia. But so far, the U.S. has been pretty resistant to this trend.

The coronavirus pandemic has upended all manner of senseless regulations and ways of doing business. Perhaps it offers an opportunity to improve how we manage our roadways too.

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  1. Or, and this is just way out there conjecture, they could just rescind all the silly ass executive orders, and let us live. Oh, yes, and by the way, repeal the existing laws AGAINST wearing a mask.

    1. State executive orders bad! Federal executive orders good!

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  2. This would be a dangerous precedent. If you lease out the roads to private companies, the next thing you know is that people may want to privatize other public transportation, school, and Healthcare, and who knows what will happen?

    1. I do.

    2. Here’s the thing about that. You’ll end up paying per use for these things, or at least maybe a subscription fee or something like that. And taxes will be reduced to compensate, right? Of course not. So you’re just paying more for the same thing. Maybe the quality will go up over time, but I personally don’t need deluxe roads that cost extra when adequate roads will do just fine.

    3. Great idea. If we lease out public transportation, we’ll find out how much it’s worth.

  3. “The economic toll of COVID-19 has left state governments short on revenue, prompting policymakers to mull tax increases and hope like hell for another federal bailout.”

    This is such good news.

    All we have to do to make the government smaller is oppose tax increases at the state level during a recession (easy peasy) and elect a president who refuses to bail out the states?

    Has the more libertarian choice for president ever been clearer?

    1. Man I love this post. Great answer!

    2. I guess you have never heard of deficit spending. That would explain why you erroneously use economic arguments to justify your psychological worship of Trump.

      1. He’s talking about how Trump put the kibosh on a $1 Trillion with a T bailout of fiscally irresponsible states like CA.

        This is a great move by Trump and has nothing to do with the Federal deficits that h ave been run up under him, because that is a separate issue just like building the wall is a separate issue.

        But you wouldn’t understand that.

        1. He understands very little.

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      2. “I guess you have never heard of deficit spending. That would explain why you erroneously use economic arguments to justify your psychological worship of Trump.”

        I know…
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    3. If we’re talking about the story-behind-the-story, this is also interesting:
      “Despite the pandemic and recession, car usage is nearly back to normal levels in many areas,” says Robert Poole, director of transportation at the Reason Foundation

      Meaning that we’re headed back to normal economically, and fast.

      1. And judging by the state of the Dow and NASDAQ, investors agree with that assessment.

        1. I seriously doubt the stock market would be back to all time highs like they are right now without all that Fed pumping.

    4. Has the more libertarian choice for president ever been clearer?

      How about the actual Libertarian running for President?

      1. Well, that’s debatable I suppose given who’s running.

    5. It’s easy to oppose them, yes.

  4. No.

    More taxation is not the answer.

    Liberty and justice (less taxation) is the answer.

    End the lockdowns and whatever government can’t be paid for with current funds. The more, the better.

  5. God forbid they cut spending.

    1. God, I’m not so sure; but the democrats definitely forbid any spending cuts.

      1. They even oppose reducing the rate of growth.

      2. Republicans are no better.

        1. They actually are. They’re just not good enough.

    2. I know, right?! In the People’s Republic of NJ, Phailing Phil Murphy is raising taxes and borrowing like a drunken sailor with a limitless credit card. Even worse, the NJ People’s Commissars (what others call the NJ supreme court) basically gave the governor almost unlimited authority to borrow and spend without the Legislature’s assent.

      NJ is a total fucking basket case. Incompetent and corrupt leaders.

  6. Sure, privatization is always the answer. It’s not like that hasn’t ever worked out.

    1. Get bent.

    2. Get up off of your damn knees.

    3. Works better than government running things.

  7. “The economic toll of COVID-19 has left state governments short on revenue…

    No, the economic toll of state governments’ overreactions to COVID-19 has left state governments short on revenue. And the answer to those overreactions is… wait for it… more overreactions.

    Lather, rinse, repeat.

    1. Kuckland first law of sociatal physics
      “for every action there is an equal and opposite overreaction”

      1. Government: If you think the problems we create are bad, just wait until you see our solutions.

  8. But I thought the whole point of government was because private roads were impossible, and consequently libertarians hated roads and wanted to get rid of them all.

    But seriously, This doesn’t make much sense to me. It’s the same problem as putting a government agency between producers and consumers: how does filtering money through a middleman result in more money at the end (in this case for the state)?

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    2. It’s not to provide more money, it’s to provide money up front, right now when the government needs it. The private operator would collect more in tolls in the long run, but they’d have to wait until people are actually traveling a commuting again

      Think of it like buying a government savings bond. The government gets some cash up front, and in 20 years or so you get more money back than you initially invested

      The real problem is that it will just go to a low-ball offer from someone with good government connections, and rather than helping the government or the people, it just puts money into crony’s pockets

      1. I was thinking that they could just issue a bond like they usually do, but I just remembered interest rates are thing. I still can’t imagine that for a state in good fiscal condition the interest would be more expensive than the revenue lost from giving up a toll road concession, which is why private corporations run public roads almost exclusively as part of a build-operate-transfer scheme.

        1. Yeah, I’m pretty sure the states that would consider this, and states that are in fiscal condition, are two mutually exclusive groups. For example IL was mentioned in the article as one that could bring the most revenue in by leasing out toll roads, but they are also in the worst fiscal condition in the country, barely above “junk” status for a bond issue

        2. I live within walking distance of the Morris and Sussex Turnpike, one of many such roads built by such a scheme 200 years ago — except that after the transfer it would be (and was) untolled.

      2. They could just call J. G. Wentworth at 877-Cash-Now.

        1. I don’t know who the heck I was responding to there…

          1. thanks for the song in my head

    3. The idea being you charge the operator a fixed fee – the operator makes more money by making the operation more efficient so there’s a greater gap between what they’re paying the government and what they’re raking in.

      The FUCKING PROBLEM THAT SEEMS TO HAVE BEEN IGNORED is who is going to sign on to a toll-road operator franchise if the toll road incomes have massively dropped.

      The value of that license is significantly less valuable right now than it was a year ago. Any government is going to have to con potential franchisees with the idea that everything will be back to normal soon – despite them doing everything possible to prevent that from happening.

      1. If the article is believable, then the traffic is almost at pre-WuFlu levels. But the efficiency thing is something I also considered, but then why can’t the government spin off the road maintenance agency as a publicly owned/privately run corporation and pocket the extra revenue for itself?

        It may be an idea for states that are so indebted that they can’t issue bonds at reasonable interest rates. Or maybe the math works out if you do a proper cost analysis and it just sounds strange at first.

    4. “It’s the same problem as putting a government agency between producers and consumers: how does filtering money through a middleman result in more money at the end (in this case for the state)?”

      Coyote Blog’s Warren Meyer has just such a business- privately managing public parks- and he makes more money for the government than they are able to do themselves. He explains how that happens on his website, long story short- the government sucks at running just about anything that doesn’t involve taking money at gunpoint.

  9. Fuck you, cut spending.

    1. Increasing taxes is cutting spending.

      /NJ Governor Goldman Sachs executive Phil Murphy.

  10. Leasing state toll roads could provide the revenue states need to improve their balance sheets.

    In the words of a wise man: Fuck you, cut spending. The idea that states don’t have the revenues they “need” is ludicrous, all the money in the world isn’t enough for what they “need”. It’s long past time to start knocking these goddamn leeches in the head and explaining to them the difference between “wants” and “needs”. Human beings got along just fine for thousands of years without the things they claim they “need” and huge chunks of the modern world still exist just fine without them.

    1. We need to clean house. No more progressives.

  11. Sell the roads, lease them, who cares. It won’t matter anyway.

    I am happy to see the state governments floundering though. I wish we could shut the assholes down permanently. But nope they will just keep raising taxes on ever lower incomes and profits.

    I’d say I told you so, but there’s no joy in watching socialists fuck it up other than some bitter schadenfreude.

    1. Eventually California will be starved out. Then we can take it back.

  12. What a thoroughly awful idea. There are worse privatization ideas out there (private prisons for one) but not too many.

    1. A what specifically makes privatizing toll roads a bad idea? There are private toll roads in this country.

      1. Why is tolling roads a bad idea? Numerous reasons. First, Private companies are not incentivized to take care of the roads. Like w/prisons, they will want to maximize profits, which means neglecting the roads. This is especially true when government gives them a long contract of say 30 years, which is common. Second, Toll roads cause people to change their driving behavior. People will drive onto residential streets to avoid tolls, causing congestion and safety problems. Third, tolls are incredibly unpopular. Americans already pay a user fee to drive on highways, i.e. a federal and state gas tax. You going to repeal that? Fourth, unlike the aforementioned gas tax, toll roads hit drivers unequally. Even though two drivers might drive the same amount of miles, the one who has to use the toll road will pay the toll tax…and it is a tax, make no doubt about it.

        I have had to drive in the northeast part of the country and constantly pay tolls if I wanted to (some of) the highways. Why anyone would want to replicate that in other parts of the country is odd.

        Again, we already have a user tax for highways, i.e. the gas tax, which is much more equitable in the revenue collected. Why would libertarians want yet another tax, especially this one not equitable. I was a big privatization fan, but there are places where experience has proven privatization does not work and that includes operation of highways and prisons.

    2. The government should get out of the roads business entirely. Privatize every inch of asphalt in the country please.

      1. So you going to repeal the gas tax, a user tax we already pay to drive on those roads? If you spent some time driving in country where there is a plethora of toll roads, I think you’d change your mind pretty quickly.

  13. Coronavirus is Devastating State Budgets. Is Leasing Toll Roads to Private Operators the Answer?

    Leasing state toll roads could provide the revenue states need to improve their balance sheets.

    Fuck you, cut spending.

    1. Often investors will make an upfront lump-sum payment to governments for a toll road lease. Using that one-time windfall to plug short-term budget gaps would be unwise, the Reason study argues. It could avert some of the short-term cuts to programs and staff, but it would do nothing to alleviate states’ longer-term obligations while leaving them without the toll revenues they could normally expect.

      Instead, Poole recommends that states use that money to pay down longer-term liabilities, particularly unfunded pension obligations.

      In addition to putting states’ balance sheets in better shape,

      On what planet do you think this would ever be done? What politician has the balls to pay down a quiet long-term obligation that no one outside of budget wonks knows about when he knows there will be a massive outcry if the Cowboy Poetry Festival doesn’t get its grant this year?

      This is, like, college level comparisons of how communism works on paper with how the free market works in real life.

      1. if the Cowboy Poetry Festival doesn’t get its grant this year?

        Yeah, I remember that…

  14. This pandemic hysteria and ensuing destruction of the economy was completely unnecessary and my fear is that rewarding private industry will only create an incentive for more of these fake crises.

    The solution for the cash crunch is for billionaires to create resort colonies so people can retire and leave jobs for others to work and support themselves and thereby obviate both big government and charity, which can then be abolished. In return the residents follow strict rules of conduct (e.g. no ‘mental illness’ or ‘addiction’) and vote for small government libertarians who will pare back pension obligations. This is actually the path to paradise as the good lord intended for us.

    1. Your skill in copying/pasting is truly exemplary.

      1. If you’re not interested in the retirement colonies they can add you to the ‘do not contact’ list.

        1. Were you born full of shit, or did it take you years of practice to become such an asshole?

          1. WTF is that idiot talking about?

    2. “…This pandemic hysteria and ensuing destruction of the economy was completely unnecessary and my fear is that rewarding private industry will only create an incentive for more of these fake crises…”

      Were you born full of shit, or did it take you years of practice to become such an asshole?

  15. What’s the rule on headlines that ask a question?

  16. Oh, they shut their states and now need money. They didn’t even see this coming. I guess the political class suffers for a lack of fore sight. Dumb asses.

    1. They saw this coming. They are hoping to blackmail voters into voting for them.

  17. Quick question.
    Since we have all been under house arrest without trial for about six months, WHAT have they been spending money on?

    1. Has the government laid off a single employee, anywhere?

      1. I would venture to say that not a single government employee at any level federal, state, county and municipal has been let go during the virus pandemic lockdown which slashed their revenues. Nope. Everyone still on the fucking payroll sitting at home cowering in fear.

  18. this is all for the pensions. pension problem solved easily where you cant collect until you are 64 years old

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  20. Because nothing says “freedom” like more toll roads? Nah.

    The answer to struggling state budgets is to end the lockdowns and get everyone back to normal, paying income and sales taxes as usual. And then taking a meat cleaver to state budgets, laying off all the inessential workers, and ending the bloated dinosaur era pension plans (at least for new hires from this day forward.)

    1. What color is the sky in your world?

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  23. The lease obviously had to bring in less money than the revenue, so it won’t help.

    Selling the roads and other property might help budgets.

  24. Without government, who would private equity funds and land developers buy the roads from?

  25. Yeah, toll road fees will save the universe, just like taxing billionaires will…. The only thing that will restore state income is for all the moron governors who have confused rigged statistics with science to rescind their emergency orders as of right now. But even then, near-fatal damage has been done to small businesses. But maybe that was the point, eh Christian — so your Silicon Valley overlords can move in?

    This comment not approved by Silicon Valley brain slugs.

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