Yesterday’s Globe detailed the downward spiral in the financial picture of the Turnpike Authority, with financial instruments used by the Turnpike Authority several years back now blowing up in their face. From the Globe:
Beginning in 1999, the Turnpike Authority entered into complex arrangements – known as credit swaps – with three investment banks as a means of raising cash to pay off rising Big Dig debt. Essentially, the banks paid the Turnpike Authority cash for the right to swap interest rates with the agency on future debt payments. The deals, while immediately raising $71.5 million in cash for the agency, left it vulnerable to fluctuations in interest rates. The deals also established termination fees that rise and fall based on market conditions.
Earlier this year, a declining market had raised the termination fees on the deals to about $200 million, which the Turnpike could be forced to pay immediately if certain triggers were tripped. By Friday, that liability had risen to about $447.7 million. Making things worse was a decline in the credit rating for the turnpike’s insurer last week; another step down could trigger an immediate request for payment from one of the banks of about $353 million.
The use of these credit swaps has been known for some time, but the Patrick Administration now fears that a legislative effort to freeze tolls pending further review could actually produce a scenario where these payments are “tripped” by a further deterioration of the Pike’s finances.
Patrick administration officials, several of whom spoke with the Globe on the condition they not be named, revealed the news in part because of worries that legislative attempts to put the proposed toll hikes on hold could trigger a demand that some of the investments be paid off in full, in one lump sum. But even if the toll increases are given final approval by the turnpike board, the threat still looms that the authority could soon be sent a bill for $353 million if the financial markets continue to deteriorate.
The Governor continued to take some lumps from the Legislature, with Senator Mark Montigny asking why the Administration has failed to act to void these agreements.
Montigny faulted the Patrick administration for failing to investigate fully the complicated investments that led to problems. He said other government agencies that have seen complex investments turn sour during the credit crisis have been able to renegotiate or terminate their agreements after proving they were entered into nefariously.
The existence and downward potential of these credit swaps will not deter legislative critics of a toll increase.
“The Legislature would never take any action that would impact in a negative way the credit rating of the turnpike authority, but we have an absolute obligation to discuss public policy on behalf of our constituents,” said Representative David Linsky, a Natick Democrat who opposes raising tolls and says he will continue to fight against them.
If the worst case scenario unfolds here tolls alone will not be able to pay the bill. The circumstances surrounding the purchase of these swaps needs to be looked at closely, and the Commonwealth needs to move to void these transactions if the purchases were not made in accordance with the law.
The House and Senate Chairs of Transportation have sent Governor Patrick a letter calling for the formation of a Transportation Reform Steering Group to look at ways to “reform” our transportation system. The letter is from the new blog of Senator Baddour.
Dear Governor Patrick,
We are writing to invite you and members of your administration to join members of the legislature to form a Transportation Reform Working Group to develop a comprehensive transportation reform plan.
Decades of neglect and indifference to the needs of the Commonwealth’s diverse transportation network has resulted in an unsustainable system. As the Transportation Finance Commission reported, virtually every transportation agency in the State is running structural deficits and resorting to short-term quick fixes that hide systemic financial problems; the condition of our roads, bridges, and transit systems are all in broad decline; revenue is being squeezed from all sides; and the Commonwealth has no money for transit or highway enhancements or expansions without further sacrificing our existing systems and exacerbating our problems.
Public dollars for transportation need to be spent more resourcefully because each dollar saved is a dollar we do not have to raise. The legislature has consistently applied this philosophy in its reform proposals for transportation. This philosophy seeks to ensure that tax- and toll-payer money is spent effectively and efficiently so we don’t pump new funding into a broken system.
Massachusetts tax-, toll- and fare-payers Massachusetts deserve assurance that their money is being well-spent right now. By working together, we can present viable solutions to make our transportation system sustainable for future generations.
Thank you for your attention to this matter. We look forward to your participation in this joint effort.
Rep. Joseph F. Wagner
Joint Committee on Transportation
Sen. Steven A. Baddour
Joint Committee on Transportation