Reston Spring

Reston Spring
Reston Spring

Friday, January 27, 2012

RCA Study Shows Wilbur Smith Toll Revenue Forecast Errors Put Dulles Toll Road at Risk

PRESS RELEASE                                                                                                 Point of Contact:
January 27, 2012                                                                                                Terry Maynard


“Our analysis of a number of Wilbur Smith Associate’s forecasts for toll facilities indicates they frequently overestimate the toll revenues,” Colin Mills, President of the Reston Citizens Associations (RCA) Board of Directors said.   He continued, “These overestimates have led to major financial restructurings and even toll road bankruptcies in the cases we looked at, resulting in major losses to investors and bondholders as well as often requiring new public funding and higher tolls.”  RCA completed the study as Wilbur Smith Associates (WSA) is about to complete its third traffic and revenue forecast for the Dulles Toll Road and the “funding partners” for the Silver Line are preparing to approve a decision to move forward with Phase 2 of the line’s construction.

The 81-page analysis, entitled Wilbur Smith Associates’ Traffic and Revenue Forecasts:  Plenty of Room for Error, examines the widely recognized phenomenon of “optimism bias”—overestimating traffic and revenues—in toll road forecasts and how Wilbur Smith Associates’ (WSA) work fits into that context.  Data from a national study of toll road overestimates indicates WSA’s forecasts averaged a 127% overestimate of revenues—more than double—for the first five years for twelve projects it supported.  Other forecasting groups performed nearly as poorly, but WSA’s forecasts did not improve over that time span while the others improved markedly.  RCA made no broad judgments that WSA’s studies were better or worse than any of its competitors since it didn’t study its competitors’ work in depth. 

RCA looked at four cases where WSA seriously overestimated near-term future revenues, sometimes by more than half, with adverse results.  In two cases, the toll roads filed for bankruptcy; the others required major financial restructuring.  All ended up with major losses to owners and bond holders as well as larger, longer debt servicing arrangements that saw local taxes and/or tolls climb further. 

In looking at these toll road cases and two cases involving pending toll bridge construction decisions, RCA discovered several disturbing trends in WSA’s forecasts. 
  •  The initial forecast by WSA in a series of reports for a project tended to underestimate the revenue maximizing toll.  Subsequent reports forecast that much higher tolls were needed.
  • It routinely used the most optimistic population and employment forecasts available to drive its forecasts upwards, resulting in significant errors when compared with 2010 Census data.
  • The four toll roads that used WSA’s forecasts usually saw the shortfall in revenues within one or two years.  Nonetheless, they tended to continue to use new WSA forecasts for some time with few improvements in results.

The RCA assessment notes that WSA’s work in its two studies of the Dulles Toll Road so far (2005 and 2009) show the same disturbing trends.  Its 2005 forecast put the revenue maximizing toll at $2.00; its 2009 study called for tolls to reach $11.25.  It used the highest available population and employment forecasts in both forecasts, overestimating 2010 Fairfax employment by 25% in 2005 and 52% in 2009.

The pattern of overestimates in WSA’s forecasts suggests a substantial risk in proceeding with the Metrorail line’s current financial plan.  The report notes risks that:
  • Lenders will not fund the three billion dollars needed to finance Metrorail construction, or will require state guarantees or funding for an investment grade rating.
  • Tolls may double those forecast by WSA to meet debt servicing requirements, compensate for the revenue overestimate, pay higher interest rates, and offset reduced traffic demand.
  • Much higher toll rates on the Dulles Toll Road will discourage economic growth along the Dulles Corridor and force a substantial flow of traffic to already congested nearby highways and roads. 
  • MWAA may have to use airport revenues to pay Dulles Toll Road debt servicing obligations.  
  • MWAA may face default or restructuring of its Dulles Toll Road debt at a greater debt servicing—and greater toll— expense over a long period of time. 
In its recommendations and a cover letter to Virginia Governor McDonnell, FHWA Administrator Mendez, and the Silver Line funding partners—MWAA, and Fairfax and Loudoun counties—RCA calls for an immediate independent traffic and revenue forecast overseen by Virginia’s Department of Transportation.  It further calls on the funding partners to defer any decision on proceeding with Phase 2 Metrorail construction and FHWA to withhold approval of any financing until the independent forecast is prepared and differences between it and the WSA forecast are resolved.  It also calls for MWAA to release the upcoming traffic and revenue study as soon as possible, and for all the funding partners to engage the public in a dialogue on whether and how to proceed with Phase 2 under the current financial plan.  Longer term, it calls on FHWA to oversee a process that would lead to a substantial improvement in traffic and revenue forecasts.

RCA Board member  Tammi Petrine added, “We are particularly concerned that the upcoming Wilbur Smith forecast will not consider recent GMU’s authoritative research  indicating regional growth over the next two decades will be much more slower than they had previously forecast.  Both the continuing hard climb out of the recession and coming cutbacks in federal spending will slow Fairfax County growth significantly for a number of years.   The new WSA report should be carefully read to see how it treats these variables.  Given the WSA record of ‘optimism bias,’ particularly its past use of excessive Fairfax County employment projections, this may become a major problem.”

“RCA has long been enthusiastic about Metrorail to Dulles via Reston,” said Terry Maynard, the report’s principal drafter, “but we do not want a rail line at any price, especially one that forces Dulles Toll Road users to absorb most of the financial burden and area communities to absorb added traffic on already crowded local roads.  The prospects are even worse if the WSA forecasts overestimate revenues as much as our research suggests.  We hope that an independent forecast, combined with ‘value engineering’ for Phase 2 and restructuring the financial arrangements will lead to a better outcome for everyone.”

 RCA Study--Wilbur Smith Traffic & Revenue Forecasts--012712

No comments:

Post a Comment

Your comments are welcome and encouraged as long as they are relevant, constructive, and decent.