The Toll Road User Is Still the Frog in the Pot, Terry Maynard

As probably everyone in northern Virginia and well beyond knows by now, earlier this week the MWAA Board of Directors folded to political pressure to abandon its planned preference for bidders on Phase 2 of the Silver Line offering Project Labor Agreements (PLAs).  In fact, this vote may be the most over-reported near-non-event in the decades-long history of the rail to Dulles. 

What it truly came down to was a largely meaningless partisan Republican-oriented victory for “right to work” over a Democratic-oriented pro-union stance.  It may (or may not) save 5%-10% on the total cost of Phase 2—about $150-$300 million out of $3 billion—at the same time creating a roughly equally small risk that there may (or may not) be labor-related issues that offset any savings from not having a PLA in place.  In fact, it is quite reasonable to think that the construction companies bidding for Phase 2 will actually reach voluntary PLAs without any preference in the bidding process, just to reduce the risk of delays and cost escalations during construction.  In short, the result of the MWAA decision is swapping slightly greater cost risk at a lower price for near certainty at a higher price.  This is not always a good investment strategy, but it gives the Governor and others chest thumping honors for the week.

There may be some good news in the MWAA Board decision, however.  It should clear the last partisan stumbling block in seeing the Republican-controlled Loudoun County Board of Supervisors approve its participation in the Silver Line project.  Still, as the Loudoun Board has come to recognize, there are a number of other real issues that need to be addressed before making an informed decision.  Whatever their decision ultimately is, they deserve credit—unlike their Fairfax counterparts—for looking at the numerous issues involved in making such a massive investment.  The good news is that Loudoun's participation would enable the smooth transition from the completion of Phase 1 completion to Phase 2 construction rather than further delays in figuring out how to finance the project.

There may also be good news if, as promised, Governor McDonnell allows state funds to be used in financing Metrorail construction.  Unfortunately, the total amount is small at present--$150 million--and will be dribbled out in $50 million annual increments to help cover the financing costs of the line.  Even in the unlikely “best case” event that the state contributed $50 million per year through mid-century, its contribution to the total financing costs over that timeframe would be about 11%--far short of the 25% it committed to in the 2004 FEIS. 

What is foolish about this arrangement, moreover, is that the state's money is going to pay the interest on bonds at MWAA's junk bond interest rate levels (somewhere north of 7%).  If the state instead put its money into the capital end of the investment, the debt could be paid at the state's much lower AAA-rating interest rate (south of 4%).  The state’s planned course of action is sort of like preferring a mortgage at sub-prime rates with no down payment when you could be borrowing at prime rates with a mere 5% down payment.  It’s a very cost inefficient use of Virginia taxpayer funds.  Nonetheless, the state’s investment would allow toll rates to edge up to $4.50 full toll over the three-year period rather than merely double to that level next year as now forecast.  It would not significantly lessen the long term impact on tolls.

On the other hand, the cost projections for Phase 2 are still in at the “100% preliminary engineering” stage and, if the tale of the projections for Phase 1 are any lesson, they are likely to climb substantially.  In Phase 1, two separate “100% preliminary engineering” cost assessments were conducted, and the final contract agreement exceeded those assessments by 11% and 35%.  And, yes, there has been a nearly 10% cost overrun in building Phase 1 alone—which, while not bad for a project of this scope—more than offsets all the financial gains from cutting PLAs and using incremental toll increases.  All of which shows how meaningless the recent partisan posturing on PLAs and bureaucratic posturing incremental toll increases have been.  

The real issue remains that the Dulles Toll Road user will be stuck paying for some three-quarters of the cost of Phase 2 and over half the total $6 billion cost of the Silver Line. 

The myth of boiling frogs is that they do not feel the pain if they are put in a pot of cold water that is slowly brought to a boil, while throwing a frog in boiling water causes great pain.  Both lead to death, however.  Toll road users face the same fate financially.  The likely incremental changes in toll rates are rather like warming the water up with the frog in the pot rather than throwing the frog in the boiling pot of toll doubling and tripling in the next six years—and climbing thereafter. 

So, despite all the recent political, bureaucratic, and media hullabaloo, toll road users will face toll increases of at least $2 every five years to $18.75 by mid-century per MWAA’s official forecast.  Total toll road revenue collections are forecast to exceed $17 billion through mid-century, all paid for by a declining number of sufficiently wealthy, willing toll road users.    In the end, neither technique is in the long term interests of the frog--nor the toll road user.  And the absence (or presence) of PLAs will likely be totally meaningless to future tolls.  For the toll road user, nothing much has changed—his or her wallet will be boiled dry for much higher tolls.