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Rules of the Road

A much-heralded law may be letting private interests drive public highways.


On 1,185 acres, in a high-end, sidewalked community along the James River, developers plan to build 3,029 homes, town houses and apartments, along with shopping centers, offices and even a marina. The subdivision will sit squarely on one of Henrico's most historic properties, Wilton Farm, in the county's most rural district, Varina. It's estimated that residents of the community will make 35,744 "vehicle trips" in and out of the subdivision every day.

For better or worse, the Wilton Farm development is a historic turning point for the county. But it most likely would never have happened without a decision by Virginia's General Assembly 10 years ago. That's when politicians passed the state's much-heralded Public-Private Transportation Act of 1995.

The act privatized the road-building process, a move seen by almost everyone as a win-win. It allows the state to get new roads built with less of a burden on taxpayers. It also streamlines the process by skirting the old bureaucracy. It used to take years to get road projects through the approval process. Under the act, it takes months. Roads get built faster, for less money — a true victory of capitalism. And investors love the bonds used to pay for the roads because they are a relatively safe, tax-free investment.

But some people are starting to worry about the pitfalls of the act.

They argue that the act is giving too much control and power to the private sector. That it's letting road construction firms and development groups ultimately decide which roads are built based on the potential for financial gain — not public need. And a new study by the Southern Environmental Law Center in Charlottesville finds that the act is not only shifting the balance, but also failing to generate any substantial private investment.

In short, critics say, the act makes road-building riskier to taxpayers and investors and creates a situation where private interests drive priorities. The results: classic development problems like traffic and sprawl.

Wilton Farm, they contend, is a prime example.

In a nutshell, the Public-Private Transportation Act allows the state to enter into agreements with private developers to build major roadways. The process starts with road builders and developers, who submit unsolicited proposals to construct roads the state can't afford to build.

Take Pocahontas Parkway, for example — Route 895. The 8.8-mile-long roller coaster of a toll road had long been in Henrico and Chesterfield counties' long-range plans. But there was no money for it. Then in the mid-1990s, Fluor Daniel/Morrison Knudsen LLC submitted a proposal to build the highway.

By floating $354 million in tax-free bonds, and $27 million in state-backed loans and funds, the developers completed the road sooner than anyone had dreamed possible. Construction started in 1998. The road opened in September 2002. Now it stretches 150 feet above Interstate 95. It starts in Chesterfield, cuts through eastern Henrico and dumps drivers at the Richmond International Airport.

It also dissects the northern end of the Wilton Farm property. Without it, Wilton Farm could not be built. The staggering amount of traffic generated by more than 3,000 households will need somewhere to go. Roads are the spark plugs of development. And in this case, Pocahontas Parkway was the answer.

Dan Schmitt, president of HHHunt Communities, says he wouldn't have been interested in Wilton Farm if it weren't for two things: Pochahontas and a key concession from the Virginia Department of Transportation (VDOT) allowing an interchange to the parkway. Local roads aren't big enough to handle the traffic. Without the interchange, the development would have been restricted to 520 homes — a number that would have effectively squashed the developer's plan.

Without the interchange, Wilton Farm would remain trees and wetlands.

During the board of supervisors meeting, Baker Davenport, a 51-year-old Varina resident, jokes that he'll miss riding his horses down Osborne Turnpike. "We do have a little pocket of heaven that we're not going to have much longer," he says of the Wilton Farm plan. Of course, he doesn't mind seeing his property values spike.

Wilton Farm is one of several developments at the heart of a growing debate over the state's push to privatize road construction. With no real money to pay for major roadways and an aversion to raising gas taxes, politicians on Capitol Square are singing the praises of public-private partnerships. Without them, there would be no Route 288 and no Pocahontas Parkway. And many of the proposals now under consideration in Northern Virginia — such as adding High Occupancy Toll (HOT) lanes to Interstate 495 — would never have been proposed. This session alone, there are half a dozen bills before the General Assembly designed to allocate more tax dollars to encourage private road investment, to speed up the approval process, and to tweak the law to make it even more developer-friendly.

"I think without that law, there would be transportation projects that would not be here today," says James W. Atwell, co-author of the act and now president of the Pocahontas Parkway board of directors, the nonprofit entity that runs the road.

That might not be a bad thing, according to a recent study of the act commissioned by the Southern Environmental Law Center. Projects built under the act, the study concludes, have been funded not with private money but "almost entirely with either traditional transportation funds or municipal bond debt backed by tolls or other public tax sources."

For example, the second major road completed under the act, Route 288, was paid for with taxpayer dollars. Although Route 288 is often cited as a public-private success story, the state paid for the entire road, and the last segment financed under the act — the $236 million link from Chesterfield to Goochland County — is being paid off with federally backed debt and state taxes. In essence, the cost of the road borrows against future federal subsidies, leaving the Richmond area with no significant road construction capital for the next 10 years. While there are some encouraging new projects in the pipeline, the law center's report contends that the act is going well beyond its original intent of being just another tool to build state roads.

In fact, says James J. Regimbal Jr., the Richmond-based financial and government policy analyst who conducted the study, the act allows private developers and road construction firms too much power to manage and control how and where the state's freeways, and ultimately Virginia's communities, develop. But in the meantime, the state still pays.

"This has been sold as a panacea," Regimbal says. "We need to make sure that everyone sees the forest for the trees." To make toll roads such as Pocahontas viable, he explains, new development is necessary to create traffic. By asking the private sector to ante up for them, the act effectively puts road construction firms and investors in the driver's seat.

"By losing control of where this main road is built," Regimbal says, "you are losing control of all this ancillary development that is taking place."

Pocahontas Parkway is a case in point.

The Wilton Farm developers knew their project wouldn't fly without an interchange connecting its residents to the parkway. So they submitted plans for one last spring to VDOT before filing any paperwork with the county. The state's transportation department staff reviewed the proposal, drafted a resolution to approve the interchange and was prepared to send the matter to the 16-member Commonwealth Transportation Board. It was scheduled to vote on the interchange at its May meeting.

It seemed to be a no-brainer. The developer would foot the bill for the $3.5 million interchange. And besides, Pocahontas had been struggling to meet toll revenue forecasts. In its first full year, 2003, the parkway brought in $6 million in tolls instead of the $15 million it expected. Wilton Farm could help produce the traffic to boost toll revenue. A traffic report paid for by the developer estimated that 52 percent of its residents would use the parkway each day.

This was good news. The parkway association needed to see its business improve. In the world of private roads, bondholders take on the risk of the road with the hope of making the money back, with interest.

The state had something at stake as well. While taxpayers aren't legally on the hook if the bonds default, some people worry that the parkway may not be able to pay its $9.5 million interest payment that comes due in August. That would force Pocahontas to dip into its $40 million reserve fund, Regimbal says — just three years after the parkway opened. It's not an immediate problem, but if the toll collections continue to lag and deplete the reserve fund, it could cast a long shadow. With the state's budget shortfall forcing more and more road construction to be financed by the private sector, VDOT can ill afford to see its first major public-private roadway go belly up.

Some argue that isn't likely to happen. The worst-case scenario is that the bonds would get refinanced. But even that could imperil the state's pristine AAA bond rating.

VDOT Commissioner Philip Shucet doesn't lie awake at night worrying about the parkway defaulting on $354 million in bonds. But he is concerned that such failures could pockmark the state's financial record. He recalls a recent conversation in his office with a developer who didn't understand why the state cared if investors lost their shirts. Investors took that risk.

"They just happened to ask the question, 'Why do you care? The bondholders would be stuck with that deal, and you know the bonds always get refinanced,'" Shucet recalls of the conversation.

"Here's why the state cares," he continues. "We are a triple-A-rated state. Even though these bonds aren't debt against the commonwealth, Wall Street looks at Virginia and says, 'What kinds of deals do these people make?' We can't have an excellent set of criteria for deals that affect the bonding capacity of the commonwealth and a crappy set of criteria for deals that don't, because the rating agencies are going to sit back and look at the way we conduct business. … They're going to say, 'Why would you go out and make this kind of deal and take these kinds of risks?'"

The state is feeling pressure to approve the Wilton Farm interchange to Pocahontas Parkway for that very reason. While Shucet vows that his office will not allow slow toll collecting on the parkway to determine whether it grants the interchange — thus making or breaking the Wilton Farm development — he admits to feeling the heat.

"Someone called me up and said, 'If you don't approve this development, you could be the reason for the Pocahontas Parkway failing,'" Shucet says, his face breaking into a wide smile. "Well, that's absurd to say that. If this development — if any development — is important to a locality, then it should be the people who are responsible for government in that locality to come and say 'this is important to us.'"

In the case of the Wilton Farm interchange, things didn't happen that way.

Henrico County indicated support for the interchange in a letter from County Manager Virgil Hazelett. But then-Planning Director John Marlles had yet to receive any development plans for Wilton Farm. When asked about the development by StyleWeekly in late April, he said, "I don't know enough to be able to react."

At the eleventh hour, the interchange proposal was pulled off the May agenda of the Commonwealth Transportation Board, Shucet says. Under the act, VDOT holds the power to advance a proposal. So if VDOT staff members don't approve of the plans, state code says they don't get a hearing in front of the transportation board.

"We kind of called timeout on that," Shucet says. "The locality should be coming to us and saying, as part of our comprehensive land-use planning, we believe a development at this location is good for our area. … as opposed to, you know, big VDOT sort of getting in the middle before the plans gel at the local level."

The seemingly innocuous formality underscores one of the key problems with the act, detractors say. While VDOT made the right choice in the case of the Wilton Farm interchange, says Trip Pollard, a project manager for the Southern Environmental Law Center, there is no guarantee that will continue. Under the act, the commissioner has the ultimate authority to approve or disapprove road construction projects. If state money is involved, the transportation board must approve it. But that board's role is largely defensive, Pollard says. Instead of setting policy, it's responding to it.

"I do think it's a flawed statute," he says. While Shucet has a track record of soliciting public input, state law doesn't require the affected localities to give their blessing. "You are still taking state and federal dollars, but it doesn't go through that normal process of competing against other projects," Pollard says.

"These developers are driving policy," Regimbal adds. "Instead of bubbling from the bottom up, it's now coming from these guys who think they can make money from this, this and this."

Maybe that's the way it should be, some argue. Investors would place a high priority on projects in highly congested areas such as Northern Virginia, where there is a greater likelihood for a return on investment, and a lower priority on projects in less populous areas. If the roads are truly private — without any state or federal money — bondholders take more of a risk. Limit the role of the state, and investors will demand more scrutiny of the developers proposing the work.

In theory, the state's involvement gets bondholders off the hook. Critics say that's a problem. The act doesn't require road builders to have a "vested interest" in the project — for example, purchasing 10 or 20 percent of the bonds floated on Wall Street.

Regimbal's report recommends such a requirement, and VDOT's Shucet concurs. "It's dangerous when they are not vested," Shucet says.

In the case of Pocahontas Parkway, the road construction firm didn't buy any of the bonds. While that project may eventually prove a success, it's an example of how the process can fall short, Regimbal says. Critics argue that Pocahontas Parkway wasn't a top priority, at least not in the wake of VDOT's shrinking budget. If there had been a public referendum, perhaps the road would never have been built. Yet the state allocated $9.8 million of the taxpayers' dollars for preliminary design and engineering work and loaned another $18 million to developers. The state also agreed to maintain the roads until the toll revenues increased to forecasted levels.

While it's impossible to know whether it would have made a difference, critics say that Pocahontas Parkway's toll forecasters, hired by a firm that wanted to build the road, had incentive to paint a rosy picture.

Hogwash, says James Atwell, the president of the parkway's board of directors. Atwell is a 39-year veteran of VDOT and president of Commonwealth Service Company, which was hired as a financial consultant on the parkway project. The firm hired to conduct the toll forecast, Wilbur Smith Associates, was promised no additional work, he says. Under the law, the firm doing the forecasting can have no other involvement in the project.

The missed toll projections? Blame the economy, Atwell says. Pocahontas Parkway's key selling point was a quicker commute to Richmond International Airport from Interstate 95, where it connects in Chesterfield. The lack of air travel in the wake of the Sept. 11, 2001, terrorist attacks and the ensuing recession have more to do with the missed forecasts than any flaws in the state code, Atwell says.

Robert Poole, director of transportation studies at the Los Angeles-based Reason Foundation, a nonprofit public policy think tank, says toll forecasts are hardly ever on target. In 2002, Standard & Poor's studied 32 toll roads and found that, on average, forecasters overestimated toll revenues in the first year by 25 percent. Pocahontas Parkway's forecasters overestimated first-year tolls by 58 percent. "On a brand-new toll road, the first five years, it's really hard to accurately predict what the toll revenue is going to be," he says. "The problem is nobody is very good at it."

The key, Poole says, is structuring the deals so that the public doesn't get stuck holding the bag. In other words, true private roads force the private sector to put together stronger deals. He cites Texas' privatization laws as the best in the country. Last year, state officials refused to bail out a $90 million public-private roadway. The road, eventually bought by John Hancock Insurance in bankruptcy court for 13 cents on the dollar, was eventually sold back to the state for 22 cents on the dollar. Even though the partnership failed, the state still got the road built for just $20 million, Poole says.

Late last year, Texas officials awarded the biggest construction contract in its history to build the Trans-Texas Corridor — a north-south route that stretches from the state's Mexico border to its Oklahoma border — for $7.2 billion. The catch? No state or federal funds are being used for the project; the deal is privately financed. Texas pulled off that deal by giving bondholders a safer bet. Instead of allowing investors the right to hold on to the property for the typical 25 to 35 years, usually the length of the debt service, it allowed what's known as a "franchise" of 50 years. Investors are interested in the last 10 years or so, Poole says, when there's the potential for nothing but profit. "The long-term agreement seems to work," he says.

Virginia isn't far off-course, argues Poole. The state's Public-Private Transportation Act, he says, is gathering steam. Some of the current proposals being considered in places like Northern Virginia and Hampton Roads seem to show the act has merit, he adds. The state is currently reviewing six projects and proposals worth about $10 billion, most of which will be privately financed with tolls.

"When I look around the country, I still see Virginia as one of the brighter spots on this landscape," Poole says.

Often, the debate over the privatization of roads is a philosophical one.

Many simply see road building as a tool to create sprawl and government control and solutions as the only way to manage growth, says Jonathan Gifford, professor of transportation studies at George Mason University.

"There are certainly people in the community who are concerned about suburban expansion, that it leads to an auto-dependent culture, and see highways as one element of that auto-dependent culture," he says. "…It's not for me to dictate those choices to people, but to make sure they have a range of choices. I want people to decide how they want to live."

From what Gifford has seen, the act seems to be working. The public gets roads that otherwise might not be built. And there are enough controls in place, he says. Besides, he says, "Congestion is a good thing. Congestion is a sign of vitality, it's an expression of activity." He continues, "People tend to travel because they want to do something at the other end of the trip."

Pollard, the lawyer with the Southern Environmental Law Center, says neither he nor his group is anti-road. He just thinks the state is setting itself up for future problems by allowing the private sector too much control over its road construction. With the state transportation budget falling short — only 29 percent of its $3.1 billion budget is allocated for construction; the rest goes toward road maintenance and debt service — Pollard worries that the state is poised to undertake too many public-private projects without carefully evaluating whether the act is working.

Commissioner Shucet agrees that the law needs to be looked at. And he's concerned about legislation before the General Assembly that would speed up the approval process too quickly. At the same time, however, Sen. Walter A. Stosch, R-Henrico, has introduced a bill that makes it even easier for road builders to sidestep the bureaucracy, among other things.

"The law needs some change," Shucet says. "I think the change is headed in the right direction. I'm concerned about setting time limits that are unreasonably short. I think that could backfire. The two things that could potentially happen are that you end up making a bad deal, or you end up making no deal at all because you can't do what you need to do within the time frame."

Is Pocahontas Parkway — and Wilton Farm — the case study?

It's too early to call, Shucet says. But one thing is clear from last week's board meeting in Henrico. VDOT's decision to postpone a decision on the interchange didn't nix the Wilton Farm development as some had worried it would do. Developer Schmitt of HHHunt expressed confidence that the interchange would get approved. The board of supervisors approved the subdivision before the state approved the interchange.

In the end, the developer concluded that the potential profits from Wilton Farm were worth the risk. S

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