Expressway bond deal: Will it cost too much?

Feb 24, 2010 — The Orlando Sentinel

Dan Tracy

Feb. 24, 2010 (McClatchy-Tribune Regional News delivered by Newstex) -- Buoyed by a toll increase, metro Orlando's main road-building agency is set to borrow $360 million to improve its system, but a government auditor is objecting to the way the deal is being handled.

"It's a shame," said Orange County Comptroller Martha Haynie, who independently audits county finances but has no power over the Orlando-Orange County Expressway Authority. The authority's board plans to vote today on selling bonds for the road work.

Haynie objects to the authority's plan to allow major financial houses such as JP Morgan and Citi (NYSE:C) to negotiate the fixed rate of interest that will be paid on the bonds. That could lead to higher costs, she said, during a time when interest rates are especially low.

Instead, Haynie said, the agency should force JP Morgan and Citi and eight others involved in the deal to guarantee the rate before the bonds are sold. That's called a competitive bid.

Nita Crowder, the road agency's chief financial officer, said authority officials considered competitive bids but think they can get a lower interest rate by going the negotiated route.

"The current market conditions and the nature of our business would at this point lend us to a negotiated sale," she said.

She maintains it is more difficult to get investors to buy bonds backed by tolls, rather than taxes. The authority, she said, has to tell investors a "story" about the authority to get them interested in buying.

Haynie called that logic "a bogus argument" because the agency has sold more than $2.1 billion worth of bonds in recent decades to finance its 105-mile system, meaning buyers are well aware of the agency and that it has never missed a payment.

"This is not a new issue," said Haynie, who has twice been called in to review the authority's books. "Toll roads aren't complicated."

Like many government and quasi-government agencies, the authority has been burned by bonds, most prominently when it got caught up in the financial meltdown that swept the nation in 2008. The problem for the Orlando agency was that it had sold nearly $1 billion in variable-rate bonds.

Rates on those bonds rose as the economy worsened, causing debt payments to increase. But rather than cash them out, the agency held onto them, figuring the rates would drop again. The rates did stabilize. It would have cost $100 million to go to fixed-rate bonds.

Similar performances of $125 million worth of variable-rate bonds sold by the Greater Orlando Aviation Authority caused that agency to sell and replace them with fixed-rate bonds. The cost was about $11.2 million.

The new bonds the Orlando road agency intends to sell late next month could have an effective interest rate of between 5.25 percent and 5.5 percent, once all financing costs are included and depending on how well the financiers sell them.

Authority Chairman Walter Ketcham said the key to the pending deal for him is that interest rates are fixed: "Let's be sure we do something conservative that we're not going to get surprised on."

The bonds will pay for four major projects:

-- Purchasing land and completing the interchange of the John Land Apopka Expressway, or State Road 414, with State Road 429. That $145 million job will serve as the western entrance to the planned Wekiva Parkway, or the final 26-mile segment that would complete the metro Orlando beltway.

--Continuation of the widening of State Road 408, formerly known as the East-West Expressway. That includes rebuilding and widening the interchange with the 408 and State Road 417. That work combined will cost more than $145 million.

--Widening S.R. 417 from State Road 528, or the BeachLine Expressway, to Curry Ford Road for almost $32 million.

--Building a new toll plaza about 15 miles east of Orlando International Airport on the S.R. 528 at a cost of more than $38 million.

The bonds likely would not have been sold if the authority did not raise most tolls by 25 cents in April. Traffic dropped as a result, but the extra fares raised revenues enough for the agency to be able to take on more debt.

The authority also has approved a series of rate hikes in the future tied to the cost of living. That additional revenue -- over time -- should allow the agency to borrow as much as $1.8 billion to pay for the Wekiva Parkway, with construction possibly starting in 2014 and completion in 2018.

Dan Tracy can be reached at dtracy@orlandosentinel.com or 407-420-5444.

Newstex ID: KRTB-0151-42317416