Saturday, February 17th, 2007
One thing I’ve not seen mentioned in all the extensive coverage of the Indiana Toll Road lease and the associated Major Moves program is how Indiana Gov. Mitch Daniels took advantage of a structural advantage to get a great deal for Indiana.
The Indiana Toll Road is part of a series of state toll highways linking Chicago with the east coast. The Toll Road connects with the Ohio Turnpike on the east and the Chicago Skyway on the west. The Skyway, incidentially, is one of the few municipally owned expressways in the United States. Technically it is a toll bridge, not a toll road, because when it was built Illinois State law didn’t give cities the power to built toll roads, but it did allow them to build toll bridges.
Unlike the state toll roads, the Skyway was a financial disaster from day one. When the interstate highway system created a free route into Chicago, traffic declined even further. The city went into default on its bonds, with the result that tolls were set by the courts, leading to the highest tolls in the region, upwards of $1.50 to $2. But the Skyway still didn’t break even.
The city under current Mayor Richard M. Daley then decided to get aggressive on this. They cut a deal with the bondholders on the Skyway which saw the debts settled for pennies on the dollar. This got the Skway out from under receivership – but, the city didn’t drop the tolls. Instead, after wiping out the bondholders, the city invested in improvements to the condition of the long-neglected road, to increase traffic. Then when the Northwest Indiana casinos opened, traffic boomed. Daley had outfoxed the bondholders and now had a cash cow on his hands.
Now that it looked like the Skyway would be solidly profitable, Mayor Daley started looking for ways to get his hands on that money. He intended to divert a significant portion of the toll revenue stream to pay for street improvements in the city. Motorists cried foul and various people filed lawsuits to stop this diversion, and the mayor quietly dropped this idea.
Meanwhile, over in Indiana, tolls had been stagnant for quite some time. The disparity in tolls is obvious to anyone who ever drove that route. While the Skyway toll at the border crossing was $2, Indiana’s was only $0.50. Chicago was getting four times as much revenue from the border crossing as Indiana. While this might have been something to ignore when the Skyway was in receivership, now that it was a cash cow for Daley, the inescapable conclusion is that Da Mare was playing Indiana as chumps. I actually pointed this out to INDOT any anyone else who would listen, but nothing was ever done.
With his plans to directly divert toll revenue dead, Daley switched tactics. Rather than diverting tolls himself, he leased the Skyway to a consortium for $1.8 billion cash. He was then free to spend this on anything he wanted. The consortium also got the right to raise tolls to $4 over a ten-year period to recoup their investment.
This is where Indiana Gov. Mitch Daniels came in. A savvy financial man, having run the Office of Management and Budget under President Bush, Daniels came into office having pledged to the voters he would shake thing up. One of the first things he did was come clean on the fact that INDOT had promised local communities billions more in road projects than there was money to fund them. He started a prioritization process then set about looking for ways to bridge the gap.
Leasing the Toll Road was the perfect solution. Various people have complained that the state could have just raised the tolls itself and used that money for other state road projects, but the experience of Chicago should show that would have been politically unworkable. Rather, the Daley lease plan was the way to go.
Here’s where Daniels’ shrewdness came in. He knew about the huge disparity in toll rates at the border. He also knew that the consortium that leased the Skyway was dependent on maintaining traffic and doubling tolls. But what’s more, he knew that basically the only way to get onto the Skyway is via the Indiana Toll Road. Indiana could raise its border crossing toll to $4 to match the Skyway increases or even jack it up higher to completely choke off the flow of traffic on the Skyway. The consortium that leased the Skyway was completely at Daniels’ mercy. Indiana could afford to drive border traffic to zero because the Toll Road traveled the length of Indiana and could remain solvent even if all the traffic diverted to the Borman Expressway approaching Chicago.
It shouldn’t come as any surprise that when Indiana put the Toll Road up for bid, the same consortium had to buy it, that they bid twice what any other bidder offered, and gave far more than initial estimates. Their backs were against the wall. Gov. Daniels exploited Indiana’s leverage masterfully to drive a hard bargain.
That’s one reason I think the time is ripe for Ohio to put the Turnpike up for bid. The same group would no doubt pay the most, just to retain control of the entire road. Now, Ohio doesn’t have quite the leverage Indiana did because the Ohio Turnpike doesn’t have a single chokepoint problem. But given that the Turnpike is probably worth more than the Indiana Toll Road in its own right, I’d expect them to get a very good deal. The favorable financial, sentiment, political, and legal environment for these types of deals may not last forever, so Ohio should strike while the iron is hot.
Indiana leased the Toll Road for $3.9 billion. Now that’s only about 2x the Skyway for a much longer route, so I’m not actually convinced Indiana squeezed the maximum value out of its asset. But regardless, this is great for the state and shows the real leadership of Gov. Daniels who, unlike Daley, had to stare down intense public opposition to the deal. Thanks to his real leadership, Indiana is now positioned to actually build much of the backlog of its critically needed transportation projects.
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