Road to Ruin
Joseph Roth was late. To make matters worse, he was late for an appointment in South County. To make matters much, much worse, Roth was in his car and heading south toward the El Toro Y--the place where the 5 and 405 freeways collide, where (locals will tell you) traffic is invariably miserable.
"I drove through the Y without even touching my brakes once," Roth said. "It was weird; it was kind of like The Twilight Zone."
Roth's story was the lead in an April 28 Times Orange County article declaring an end to "life in the slow lanes." Crediting an array of road improvements--including the multibillion-dollar San Joaquin Hills Transportation Corridor--Times reporter Frank Messina took on the role of public-relations manager for the county. "Rush hour hasn't disappeared," he wrote, but (citing a California Highway Patrol officer) "there is definite, definite improvement."
The true cost of that improvement only began to emerge two days later when The Orange County Register reported that revenues to the Transportation Corridor Agencies (TCA)--the county agency charged with building and managing the toll road--are off by half. The toll road, in other words, is losing money. Big money. But not to worry, sources told Register reporter Ricky Young. Young cited toll-road officials and bond analysts suggesting the bad news was no cause for alarm.
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Racing to catch up, the Times ran a similar don't-worry-be-happy story three days later. But it was too late. And, worse, the story was now rolling over both papers.
In conversations with the Weekly, four directors of the TCA now reveal the county agency is so far behind in revenue--losing nearly $100,000 every day--that it has entered emergency refinancing negotiations with the toll road's chief investors. Worse than that, the agency's staff members have demanded that its board of directors--made up of elected officials appointed by various O.C. cities--sign a non-disclosure form and talk to no one about the emergency finance effort--not the press or public, not even the cities the directors are supposed to represent.
TCA spokesperson Lisa Telles said she has "been told to call [the emergency refinance effort] 'refunding,'" and said the move is "part of good business practices." Telles said the poor ridership numbers have "nothing to do with the refunding," but she couldn't explain why members of the board say there is an unequivocal link between poor revenues and the agency's refinancing talks. She claimed she is "personally" unaware of any non-disclosure demands made by staff to the board.
The effort to shut up normally powerful local politicians--there are 12 of them on the board of directors--has a dj-vu quality; it's only been a little more than two years since officials tried to keep a lid on the tumbling fortunes of the county's investment pool. But the cover-up has also created a climate of fear and mistrust on the board. When I asked one director if the agency was trying to mask impending financial ruin at the TCA, I was met with silence, and then: "Does anyone know that you are calling me?"
"Because they have threatened us--forcefully--to keep our mouths shut. They don't want the public to know the truth, that the toll road is a financial disaster. They are desperate for people to believe everything is rosy," the board member said. "And they have promised to get any member of the board who talks."
"Who is behind this?" I asked.
"Basically, it's members of the TCA's senior staff. They act as if the agency belongs to them personally and is not accountable to the public," said the board member. "A few weeks ago, [members of the board] were approached privately. [The staff was] hoping that no one on the outside would find out about this. But there is a document. Under the guise that it was simply routine, the staff told us to sign a three-page non-disclosure form guaranteeing that none of us would tell what is happening at the toll road. [Last week], the staff called a private, closed-door meeting and lied--claiming the session was to discuss litigation. But it was really to find out who leaked that there is a non-disclosure form circulating. It's just unbelievably arrogant that the bureaucrats think they can get away with this, but it shows the crooked mentality running the TCA."
All four directors said the staff asserted that the non-disclosure form was necessary to the refinance effort--and business as usual.
Sources told the Weekly that the financial picture is so gloomy that the agency is planning to refinance its debt of $5 billion in principal and interest. Refinancing would be a significant move that brings with it even more debt accumulation at near-junk-bond rates, and it prolongs the life of the TCA, which was supposed to convert the road to a freeway after it had been paid off in 40 years. Chucking aside the most basic elements of supply-and-demand economics, there has also been talk of raising the tolls--a move sure to drive away users. According to board members who spoke with the Weekly, no one has seriously considered lowering the toll rates. One of the TCA's privately commissioned studies from last summer suggested that removing the toll entirely is likely the only way to meet traffic projections.
The TCA staff has at least a year or two of breathing room. TCA Chief Operating Officer Wally Kreutzen told the Register, "I have money in the bank today to pay through March of 1999." That prompted the Register to headline a related story on the collapse, "Road bonds in no danger before 1999." What Kreutzen didn't tell the Reg was that much of the money in the bank was borrowed. Thanks to Republicans in Washington, D.C., the agency has a $120 million "ridership risk" line of credit. But to tap that cash now would add to the TCA's mounting debt, which ultimately means even more cars will have to pay to use the road if it's going to be financially viable.
A high-ranking county official familiar with the TCA called the non-disclosure agreement "ominous" and the toll road's ridership numbers "miserable." The source added, "On the heels of the county's bankruptcy and the costly lessons we were supposed to have learned about the need for open, informed decisions, I'd have to conclude unfortunately that the lessons didn't sink in with everyone."
Tom Rogers, a South County rancher and longtime Republican critic of the toll road, said he complained to the agency last week when he learned of the non-disclosure agreement. "Based on their reaction, I think I caught the staff with their hands in the cookie jar, and they don't like it," he said. "But we want full disclosure of all the facts about the project. It's just crazy that the TCA thinks it's okay to hide the truth from the public."
The San Joaquin Hills toll road has been steeped in bitter controversy almost from the day plans for the road were first announced in the mid-1970s. The $5 billion, 17-mile government project--which was completed last November--drew the praise of business leaders quick to point to growing traffic congestion. Citizens complained that the road would fuel South County development and that the toll road's finances were shaky. Much of the debate boiled down to whether the road was necessary to reduce traffic (as real-estate developers claimed at the time) or was a public-works project to increase the marketability of future private-housing developments (as community groups maintained).
In Orange County, the ultrawealthy developers who control local politics rarely lose in the end--and for good reason. Just as the county Board of Supervisors blatantly stacked the so-called "citizens" advisory committee on whether to convert El Toro Marine Corps Air Station into an international airport with ardently pro-airport panelists, the "citizens" committee that was formed to help decide the need for a toll road was monolithically pro-development. That panel consisted of six Republican politicians, a Building Industry Association lobbyist, and three real-estate developer executives from the Mission Viejo Co., the Santa Margarita Co. and the Irvine Co.
Dominating the decision-making process apparently wasn't enough. In the mid-1980s, the Irvine Co. was so eager to see the road built for its planned business ventures--particularly then then up-and-coming Newport Coast development--that it secretly wrote pro-toll road letters to the editor, had "average citizens" sign their names and then planted them in a local newspaper. Since it and other developers like the Mission Viejo Co. would benefit financially more than anyone else if the road were built, the Irvine Co. also briefly considered directly subsidizing a portion of the initial construction costs itself. That idea died an early death.
A number of grassroots citizen groups opposed the efforts. Over the years, skirmishes between the two forces--carried out in the courthouse and at the construction site--have become legendary. To publicize their opposition to the road, environmental activists chained themselves to bulldozers at the construction site in 1993 and were arrested for trespassing--a tactic repeated several times with great fanfare before large media crowds. There were also candlelight vigils and rallies off Laguna Canyon Road. Although the anti-toll-road groups succeeded in delaying the construction through court injunctions, the courts ultimately ruled against them, and the road was completed. Orange County public officials, including those at the TCA, promised the toll road would be a international model for future transportation projects.
Given the events of the past few years, it's clear they couldn't have been more wrong. Far from a financially conservative operation focused on the bottom line, the TCA has been plagued with questionable management. Last year, the agency paid $4.8 million for its Irvine headquarters--even though the property was valued at $3 million. For toll collection, installation and maintenance, the TCA is paying more than a whopping $600 million during the next 20 years to Lockheed Information Management Services of NY, a subsidiary of the defense-industry giant. And as Times Orange County reporter Mark Platte uncovered two years ago, the agency has lavished lofty salaries, huge bonuses and unusually generous perks on its senior staff. The three top TCA officials (CEO William Woollett Jr. and his two vice presidents, Kreutzen and Gregory G. Henk) were paid salaries of $148,749, $134,416 and $127,416 respectively in 1996, and they have been given combined cash awards of $66,228 and merit raises of $28,576--not to mention free cars worth more than $31,000. In one case, Kreutzen "sold back" his sick and vacation leave to the agency for $30,630, more than what most Orange County residents earn in one year. The revelations created an overnight public-relations nightmare for the agency.
Government of, by and for the rich is nothing new in Orange County. Nor is it limited to toll-road politics. According to the business community and the public officials in their pockets, for example, an international airport at El Toro with flights every 53 seconds, 24 hours a day, will reduce pollution, reduce traffic and bring in billions and billions and billions in profit--without a single significant drawback.
To get the toll road built, many of the same people made similar promises. When the project started, it was supposed to cost $350 million. Then the numbers shot up to $500 million, then to $750 million, and then to $1.5 billion. The current $5 billion price tag is more than 14 times greater than original estimates. Several thousand dollars in developer fees--tacked on to the price of each new home in the South County--was supposed to pay for almost 50 percent of the road.
But finance was never a primary concern among toll-road boosters. They just wanted their road. Irvine Co. executive Hugh Fitzpatrick admitted as much to the Times in 1987, when he said, "Just let me get the project ready to be built, and the money will appear."
Voodoo economics extended not only to costs but also to projections about how many people would be willing to pay more than $1,000 a year in tolls. (Most of the commuters who use the road are charged $2 each way.) Here was the official spin for the tollway in 1988: "The traffic demand is so high for the San Joaquin project that it is difficult to find an upper limit on the amount of people willing to pay to use it." John Cox, a Newport Beach councilman and then-chairperson of the TCA, said in 1990, "I think people have historically underestimated the sorts of tolls these roads could generate." Tossing caution to the wind, toll-road officials told the public that 100,000 cars would travel the road on opening day. They were wrong by some 60,000 cars.
Despite the ugly numbers and the pending financial free fall, the bureaucrats at the TCA refuse to be anything but chipper. "We will continue to enjoy a strong commitment to the corridor," TCA spokesperson Paul Glaab recently told the Times. "If all of a sudden you set projections aside, this road is performing very well."
But multiple sources on the TCA board of directors said the road is not performing well and is in jeopardy of eventually going bankrupt--essentially giving Orange County another black eye two years after the county lost $1.6 billion.
In June 1996, Rod Holtman, acting director of operations for the TCA, told the media not to worry if projected monthly toll-road usage was 6 or 12 percent off, but, "should the percentage drop a great deal lower--say to the vicinity of 30 percent--then we're in trouble."
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