HD33 - Review of the RMA and Powhite Parkway Extension Toll Facility Operations


Executive Summary:
The Richmond Metropolitan Authority (RMA) was created by the General Assembly in 1966 for the purpose of constructing and operating a limited access expressway system to serve the Richmond metropolitan area. To accomplish this, the RMA issued more than $125 million in revenue bonds in the early 1970s to construct two major highway systems in the City of Richmond. The RMA expressway system includes two toll roads - the Powhite Parkway and the Downtown Expressway - as well as the Boulevard Bridge which was purchased by the RMA in1969 (see figure, on page II). The RMA toll roads and the Boulevard Bridge carried more than 52.8 million vehicles and collected more than $23.3 million in toll revenues in fiscal year 2000.

Linked to the RMA's Powhite Parkway expressway is the Virginia Department of Transportation's (VDOT) Powhite Parkway Extension toll road, which opened in 1988 at a total cost of $123 million. In FY 2000, the Powhite Parkway Extension carried more than 20.8 million vehicles and collected more than $9.7 million in toll revenues. Together the RMA and VDOT toll roads provide a limited access highway system connecting Chesterfield and Henrico counties to downtown Richmond, and to 1-64 and 1-95.

House Joint Resolution 64 of the 2000 General Assembly Session directed the Joint Legislative Audit and Review Commission (JLARC) to "...study the operation of the toll facility operated by the Richmond Metropolitan Authority and the retirement of debt to allow the toll free operation of the Downtown Expressway, the Powhite Parkway, and the Powhite Extension." The mandate further specified that this review focus on a number of issues including but not limited to: the amount of debt issued by the facilities, the use of toll revenues, and resources and schedule for the retirement of debt. Several factors apparently provided the impetus for this study, including concerns regarding the outstanding indebtedness of the facilities and the ability of the facilities to become toll-free in the future. Significant findings of this report include:

• Users of the RMA's expressway facilities have paid more than $300 million in tolls since opening in 1973. Yet, at the close of FY 2000, outstanding indebtedness attributed to the expressway system totaled more than $200 million (consisting of $154.6 million in revenue bonds and $22.7 million in principal and $24.9 million in accrued interest on subordinate debt held by the City of Richmond), which is about $75 million more than the initial cost of construction. In the case of the Powhite Parkway Extension, users have paid more than $83 million in tolls in the 12 years the facility has been open, while outstanding debt totaled more than $114 million at the end of FY 2000. By contrast, construction of the Powhite Parkway Extension cost about $123 million.

• While the RMA has been able to operate without financial support from the City of Richmond since 1990, a major financial restructuring in 1992 was completed that enabled the RMA to fund capital construction projects, avoid a toll increase, and establish an unrestricted reserve fund. However, the restructuring also extended the final maturity of its bond debt from 2013 to 2022. The Powhite Parkway Extension, however, has required almost annual financial support from the State since it opened to cover operating expenses. As a result, both facilities will have substantial amounts of subordinate debt to repay after the senior bond debt is retired.

• Due to the level of outstanding debt on both toll road facilities, removal of tolls in the short-term would require substantial amounts of additional revenue. In addition, to ensure the removal of tolls on the RMA expressway system, RMA ownership and other legal issues will need to be systematically addressed.

• Controlling bond indentures require that toll revenues be applied entirely to the RMA expressway system and prohibit the co-mingling of funds with other enterprises and RMA's internal controls are designed to ensure compliance with the bond requirements. However, existing RMA or VDOT administrative processes should be formalized to ensure that the facilities' revenues continue to be allocated entirely to expressway debt payment and operating and maintenance expenses. For example, the RMA should formally approve existing practices for internal financial management processes, RMA and VDOT should monitor administrative expenses charged to the expressway systems, and the RMA Board of Directors should approve policies regarding use of the expressway's excess balances fund.

• Opportunities for increasing the amount of revenue available for debt retirement were also identified. These include limiting the future growth of RMA's operating and administrative costs and the use of Powhite Parkway Extension toll revenue for funding State Police services. In addition, opportunities for using available federal funding and for increasing the use of electronic toll collection technology should be pursued.

• Although the RMA and Powhite Parkway Extension plan to retire senior bond debt by 2022 and 2011 respectively, there will not be sufficient revenue available to repay the outstanding subordinate debt by those dates. Therefore, if it is a goal to have the facilities entirely debt free by the anticipated senior debt maturity date, additional sources of revenue will be required.

• Finally, retirement of all debt on the RMA's expressway system and the Powhite Parkway Extension does not ensure the removal of tolls. Upon retirement of senior debt, the Code of Virginia states that ownership of the RMA's expressway will transfer to the City of Richmond and that tolls can remain on the facility. However, a number of options are available to ensure that the facility is operated on a toll-free basis after the outstanding debt is retired.

Financing of the RMA and Powhite Parkway Extension Toll Roads

Both the RMA and VDOT toll roads were constructed with the intent that they would both operate as toll roads to repay the cost of construction, operation, and maintenance. Using the toll concept enabled both roads to be built sooner than would have otherwise been possible under traditional road construction financing mechanisms. However, both facilities have had only marginal success in progressing towards a debt-free operating status.

RMA Expressway Debt Structure Extends Beyond Repayment of Bond Debt. The RMA expressway system was constructed with $125 million in revenue bonds that were issued in 1973 with a 2013 maturity. In addition, the City of Richmond provided the funding for the RMA's bond reserve fund and had to provide subsidies to the RMA to cover revenue shortfalls on almost an annual basis. In 1992, the RMA refinanced its outstanding debt to accomplish four objectives which were to: (1) establish a true operating capital reserve (the excess balances fund), (2) level out existing debt service to avoid an immediate toll increase, (3) to provide revenue for capital construction projects and (4) repay the City of Richmond the funding it had provided for the expressway's debt service reserve fund. Most important among these from the RMA staff's perspective was the establishment of the excess balances fund, which improved the overall financial integrity of the expressway system. However, the restructuring also extended the final maturity on the bonds by nine years from 2013 to 2022.

In addition, the RMA issued 50-year subordinate notes to the City of Richmond to reflect the subsidies provided by the city through FY 1990. Interest accrues annually on the notes owed to the city, and if no payments are made by the RMA, the outstanding notes could total more than $76 million when senior bond debt is retired. As a result, when the RMA makes the final payment on senior bond debt in 2022, a substantial amount of debt will still remain on the expressway system (see figure on page IV).

Powhite Parkway Extension Debt Also Extends Beyond Repayment of Bond Debt. As with the RMA expressway system, $78 million in revenue bonds were issued in 1986 to construct the Powhite Parkway Extension. Unlike the RMA expressway, the original maturity date of 2011 has been maintained despite one refinancing in 1993. However, like the RMA expressway system, other construction loans combined with annual operating subsidies provided through the Toll Facilities Revolving Account mean that debt will still be outstanding on the Powhite Parkway Extension after the senior bond debt is repaid in 2011 (see figure on page V).

Selected Toll Road Administrative Processes Should Be Developed or Enhanced

A primary element in the retirement of all expressway system debt is the appropriate collection, handling, and application of toll revenue. To ensure that this consistently occurs, the RMA should formalize written policies and procedures for the internal financial management processes that it has developed. Moreover, the RMA board of directors should approve the annual workplan developed by the RMA's internal auditor. Finally, RMA staff should seek board of directors' approval of policies for the administration of the relatively new excess balances fund. Establishment of this fund was a significant accomplishment for the RMA and could provide substantial flexibility in the future for the administration of the expressway system, including early retirement of debt. Therefore, the RMA board should strictly govern its use.

Allocation of administration expenses across the various RMA enterprises, as well as between the Powhite Parkway Extension and the soon-to-be opened I-895, should be monitored. Administrative charges to the RMA expressway system have consistently increased year after year, and steps should be taken to actively monitor the charges for appropriateness. In addition, staff at the Powhite Parkway Extension will soon be dividing time between the extension and I-895. As work at both facilities commences, the allocation of administrative charges between the two facilities should be monitored for accuracy. Appropriate application of expenses will help ensure that the maximum amount of revenue will be available for debt retirement at both facilities.

Opportunities for Cost Savings or Avoidance Exist at the RMA and the Powhite Parkway Extension

While enhanced administrative processes can ensure the appropriate application of toll revenue, this review also identified areas in which potential savings or cost avoidance might be available. For example, RMA should focus efforts on curtailing growth in the toll facilities' operating costs as well as the administrative charges allocated to the expressway. The rate of growth of the operating expenses, as well as the administrative charges allocated to the expressway, has increased at a faster rate than toll revenue (see figure on page VI). To increase the amount of revenue available for debt service on the Powhite Parkway Extension, State Police charges - totaling more than $3.6 million since FY 1993 - could be financed from revenue sources other than toll revenue. Finally, both facilities should identify opportunities to obtain federal funding in order to free other funds for debt retirement. Moreover, use of the new electronic toll collection system, Smart Tag, should be maximized by both the RMA and VDOT in order to increase the potential long-term benefits available through the use of this technology. As a result, expediting payment of outstanding debt is unlikely on that facility.

Accelerated Retirement of Debt Through Toll Revenues Will Be Difficult

The RMA expects to retire senior revenue bond debt according to the current 2022 maturity date. The Powhite Parkway Extension bond retirement is projected to occur in 2011. Yet, those dates do not reflect repayment of other subordinate debt that must be addressed after the senior revenue bond debt is retired. However, the vast majority of toll revenue collected by the RMA has been and is projected to be used to pay operating expenses, maintenance, and senior debt service requirements with only marginal amounts left to apply to subordinate debt (see figure on page VII). The Powhite Parkway Extension consistently has lacked sufficient toll revenue to address both annual senior debt service requirements and operating expenses. As a result, expediting payment of outstanding debt is unlikely on that facility.

Opportunities Exist for Accelerating Retirement of Outstanding Toll Road Debt

Several options exist that would enable the RMA to expedite the retirement of its outstanding debt. The three options examined in this report include: (1) the provision of maintenance responsibilities by VDOT, (2) a toll increase, and (3) the provision of State or local grants. For each option, estimates were generated for dates at which all outstanding senior debt could be retired given the amount of additional funding provided. These estimates are based on revenue projections developed by the RMA, and are contingent upon the accuracy of the underlying revenue and expenditure assumptions and the assumption that all RMA fund balances could be used for debt retirement.

State Provision of Maintenance Services. If VDOT were to fund RMA's maintenance activities, the RMA would not have to make deposits into the repair and contingency fund for repairs that the independent consulting engineers have identified as necessary. If VDOT funded all maintenance, debt could potentially be retired as early as July 2015. This option would also have an impact on the outstanding subordinate debt as well. The projected total outstanding subordinate debt could be reduced from as much as $76 million to about $32 million in 2022. However, the impact of this proposal on VDOT's maintenance budget should be considered. If the Richmond District's maintenance allocations were not adjusted, the entire district would be required to subsidize the added expense of maintaining the RMA's expressway system.

Toll Increase Would Increase Revenue for Debt Retirement. A direct method of increasing revenue to use for repayment of debt is through a toll increase. Based on the toll sensitivity curves developed by the RMA's traffic and revenue consultants, a $0.05 increase would generate slightly more than $1 million additional revenue. Based on the revenue estimates, the effects of the alternative toll increases on early debt retirement were estimated. If the revenue and expense projections are accurate through 2022, senior debt could be retired by July 2015 if a $0.25 increase were implemented in July 2001. A $0.10 increase would enable the RMA to retire its senior debt by July 2016. A $0.05 increase would enable the RMA to retire its senior debt by July 2017. In addition, the projected balance for the outstanding subordinate debt would decrease as well.

State or Local Grants Could Be Used to Accelerate Retirement of Debt. In July 2001, a grant from the State or localities would have to equal $123 million in order to retire RMA senior debt at that time, assuming no penalties or additional fees were imposed and all RMA expressway fund balances could be utilized for debt retirement. Smaller grants deposited annually into an irrevocable escrow fund could help retire senior debt more quickly as well. An escrow type fund is used for illustrative purposes to ensure the grants will not enter the RMA's revenue stream and be subject to the flow of funds requirements. The amount needed to retire debt will decrease as the retirement date is extended. Finally, State or local grants could possibly be used to retire some of the RMA subordinate notes held by the City of Richmond, which would expedite the toll free status of the expressway system.

Removal of Tolls Not Linked to Retirement of Outstanding Debt

Payment of outstanding debt does not guarantee removal of tolls. The Code of Virginia provides that, if the RMA has received financial support from the City of Richmond, ownership of the facilities will be transferred to the city when all senior revenue bonds have been repaid. Although ownership of the RMA expressway system would revert to the City of Richmond, the city is not required to remove tolls when assuming ownership of the expressway system. Because the City of Richmond currently spends more on maintaining its city streets than it receives from the State for that purpose, it is likely that tolls would remain on the expressway. In the case of the Powhite Parkway Extension, VDOT has stated that tolls would be retained at least until enough revenues were generated to fully repay all outstanding debt. According to the VDOT Commissioner, after all of the debt is repaid, continued use of tolls on the Powhite Parkway Extension would be a policy decision for the Governor and the General Assembly.

Options Are Available for Ensuring Removal of Tolls on the RMA Expressway System

The removal of tolls on the RMA expressway will not be assured by the retirement of the senior bond debt on the facility. As currently structured, tolls will be required to repay the subordinate debt owed by the RMA to the City of Richmond. Even after the subordinate debt is fully repaid, the maintenance and operating costs of the facility will likely require tolls, as allowed by the Code of Virginia, even though ownership will have transferred to the City of Richmond.

However, there are a number of policy options available that would accomplish the objective of removing the tolls on the RMA expressway system. The options examined in this report include: (1) eliminating the city's authority to impose tolls and providing sufficient resources to the City of Richmond to recognize the road's extraordinary maintenance costs, (2) transferring ownership of expressway system to the State after all outstanding debt is retired, or (3) transferring ownership of the facility to the State prior to debt retirement.

If the General Assembly wishes to ensure that the facilities will operate toll free, it can address the current obstacles to toll-free operation by:

• amending the Code of Virginia to transfer ownership of the RMA expressways to VDOT upon retirement of all senior debt;

• amending the Code to prohibit the RMA and VDOT from issuing any additional debt which extends the date for retirement of senior debt;

• directing the Commonwealth Transportation Board to identify sources of funding to retire the subordinate debt to the City of Richmond and the Toll Facilities Revolving Account concurrent with retirement of all senior debt; and

• creating, by Appropriation Act language, a task force to examine and resolve the legal matters necessary to transfer ownership of the Downtown Expressway and the Powhite Parkway.

Finally, if the General Assembly wishes to ensure toll-free operation of the facilities prior to the current planned date for retirement of the RMA's senior debt, it could designate, by an appropriation from the Transportation Trust Fund or general funds, an amount needed to remove the tolls by the desired date.