BILL ANALYSIS �
SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: sb 693
SENATOR MARK DESAULNIER, CHAIRMAN AUTHOR: dutton
VERSION: 4/13/11
Analysis by: Jennifer Gress FISCAL: no
Hearing date: May 3, 2011
SUBJECT:
Public-private partnerships: city and counties
DESCRIPTION:
This bill authorizes the California Department of Transportation
(Caltrans) to delegate to a city or county its authority to
enter into public-private partnership (PPP) agreements for
transportation projects on the state highway system.
ANALYSIS:
Caltrans is responsible for building, maintaining, and operating
the state highway system. In February 2009, the Legislature
passed and the Governor signed SB 4 (Cogdill), Chapter 2, Second
Extraordinary Session to allow Caltrans and regional
transportation agencies to enter into lease agreements with
private entities (arrangements known as public-private
partnerships or PPPs) to design, build, finance, operate, and
maintain transportation facilities within their jurisdiction.
The authority to enter into these contracts expires January 1,
2017.
Since 1996, local agencies have had authority to utilize PPPs to
develop and finance local, fee-producing infrastructure,
including transportation projects. Local agencies are
prohibited, however, from entering into PPPs to design,
construct, finance, or operate a state project, including toll
roads on state highways, state water projects, state park and
recreation projects, and state-financed projects.
PPPs aside, a city or county may, in some instances, become
responsible for some portion of, or for work performed on, a
state highway within its jurisdiction. For example, Caltrans
periodically relinquishes some segments of the state highway
system to a city or county when expressly required to do so by
law. In addition, Caltrans may, under current law, delegate to
SB 693 (DUTTON) Page 2
a city or a county any part of its powers and jurisdiction with
respect to any portion of a state highway within that city or
county, except the power of approval. Examples of work that is
sometimes delegated include design, funding, and preparing
environmental documents and permit applications.
This bill allows Caltrans to delegate its authority to enter
into PPPs to a city or a county for transportation projects on
the state highway system.
COMMENTS:
1.Purpose . According to the author, local governments believe
that their authority to enter into a PPP on state projects is
unclear. Removing the ambiguity in current law will provide
local governments and Caltrans with the necessary assurances
that local governments may do so. The sponsor of the measure,
the Southern California Association of Governments (SCAG),
explains that it is responsible for developing the regional
transportation plan (RTP) to organize and prioritize the most
important transportation projects in the region to improve
mobility, reduce congestion, move goods, improve air quality,
and enhance overall quality of life. The current RTP
identifies a shortfall in funding of over $120 billion. SCAG
contends that there are a number of regional highway capacity
toll projects that could collectively cost over $25 billion
through 2035 to implement fully, which could be designed and
constructed more quickly and efficiently through the
leveraging of public and private investment.
2.Show me the projects . This bill applies to city and county
departments of transportation, not regional transportation
agencies such as the Los Angeles County Metropolitan
Transportation Authority who already have authority to utilize
PPPs for state highway projects. While the sponsor argues
that many local governments would like to have this "tool in
the toolbox," it is unclear the extent to which cities and
counties are genuinely interested in entering into, and have
the financial resources and technical expertise to carry out,
a PPP for a state highway project. Furthermore, while there
are a small number of projects that have been discussed as
possible candidates for PPPs, namely the State Highway Route
(SR) 710 tunnel and the High Desert Corridor in Los Angeles
County, the sponsor identified only one city - the City of
Industry - who may be interested in doing a PPP on the state
highway. That project involves upgrading the SR 57/60
SB 693 (DUTTON) Page 3
interchange in Los Angeles County, but it is unclear how a PPP
would be structured to upgrade an interchange or what
advantages a PPP would confer over traditional financing for
that particular project.
3.Questions . This bill raises several questions that cast doubt
on any benefits that may be achieved by granting cities and
counties authority to enter into PPPs for state highway
projects.
Under current law, Caltrans may not delegate its power
of approval. For this reason, it is unclear what it means
for a local agency to enter into a PPP for a state highway
project. First, PPPs require on-going negotiation; if
Caltrans must retain its approval authority, it will likely
have to be more deeply involved in the project than it
would be if it were simply delegating responsibility for
other tasks, such as completing permit applications.
Second, it is likely that Caltrans would bear the risk for
the project, not the local agency, if it is ultimately
responsible for approving a lease agreement. Finally, as
the "owner" of a state highway, any facility developed by
another entity would revert to Caltrans upon expiration of
a lease agreement. For this reason, Caltrans should, and
likely would, be heavily involved in developing the PPP
agreement to ensure that the facility is properly managed
and the state does not face undue risk. If Caltrans must
be so heavily involved and is unable to transfer its risk
from the state to the local agency, what is gained by
giving a city or county authority to enter into a PPP for a
project that Caltrans is ultimately responsible for?
PPPs are complex legal and financial arrangements that
require considerable resources and expertise to develop.
Do cities and counties have the capacity to undertake such
an endeavor? Furthermore, because Caltrans remains
relatively inexperienced in developing projects under a PPP
rubric, does it have the capacity to oversee another agency
with even less experience?
1.Status of SB 4xx (Cogdill) . Caltrans remains relatively
inexperienced in developing and executing PPP projects. Only
one PPP project, the reconstruction of Doyle Drive in San
Francisco, has been brought forward under SB 4xx since its
enactment in early 2009. Doyle Drive is a 1.5 mile segment of
SR 101 that connects the south end of the Golden Gate Bridge
SB 693 (DUTTON) Page 4
with city streets in San Francisco.
Caltrans entered into a PPP lease agreement with Golden Link
Concessionaire LLC on January 3, 2011 to reconstruct the
facility. The lease agreement provides that Caltrans pay
Golden Link Concessionaire LLC a lump sum "milestone" payment
of $173 million when the facility is opened to the public
followed by annual "availability" payments beginning at $28.5
million per year for 30 years. The total value of the
agreement is estimated to be about $1.1 billion over the
course of the 33-year contract (approximately 3 years to
design and construct the facility plus 30 years to operate and
maintain it).
Prior to signing the lease agreement, the Legislative
Analyst's Office (LAO) concluded, in a letter dated December
9, 2010, that the reconstruction of Doyle Drive will be more
costly to the state to finance as a PPP without the benefits
that Caltrans promised. Furthermore, the availability
payments will reduce the funds available in the State Highway
Account for other maintenance, rehabilitation, and
capacity-expanding projects across the state.
This project has not yet begun construction and is expected to
be completed in 2014.
2.California's previous experience with PPPs . Prior to SB 4xx,
California's experience with PPPs has been troubled. In 1989,
the Legislature approved AB 680 (Baker), Chapter 107, which
authorized Caltrans to enter into PPPs for the construction
and operation of toll roads. Four demonstration projects
were authorized in order to augment or supplement public
sources of revenue because "(p)ublic sources of revenue to
provide an efficient transportation system have not kept pace
with California's growing transportation needs."
Under that bill, a private entity could obtain an exclusive
development agreement for 35 years to construct a toll road
facility. These agreements required that toll revenues be
applied to "payment of the private entity's capital outlay
costs for the project, the costs associated with operations,
toll collection, and administration of the facility,
reimbursement to the state for the costs of maintenance and
policy services, and a reasonable rate of return."
SB 693 (DUTTON) Page 5
Two of the four projects authorized by AB 680 were built.
First, the SR 91 Express Lanes generated substantial
controversy. A clause in the lease agreement between Caltrans
and the private developer prohibited Caltrans from granting
similar franchise rights to third parties or developing any
public transportation facility within an "Absolute Protection
Zone." This zone was comprised of the area 1 miles on
either side of the centerline of the toll road facility. This
restriction, commonly referred to as the "non-compete clause,"
was deemed necessary to protect the toll road's profitability
and the developer's investment. Caltrans proposed to make a
number of "safety" improvements totaling $30.6 million, in
order to curb the growing number of congestion-related
accidents. Caltrans' accident statistics indicated that the
accident rate on this portion of the freeway was approximately
72 percent higher than on comparable freeways in the state.
In response to the proposal, the developer filed a lawsuit
against Caltrans for violating the non-compete clause of its
franchise agreement, arguing that the proposed project was not
safety related, but in fact designed to increase capacity.
Caltrans settled on October 12, 1999.
Meanwhile, congestion on SR 91 continued to worsen. In 2002,
AB 1010 (Correa), Chapter 688, was passed to allow the Orange
County Transportation Authority to purchase the franchise
rights to the Express Lanes from the developer, effectively
repealing the non-compete clause and facilitating improvements
along the corridor. OCTA acquired the SR 91 Express Lanes for
$207.5 million, making California's first operational private
toll project a public facility.
The second project was SR 125, also known as the South Bay
Expressway, in San Diego County. The SR 125 project consists
of a 3.2-mile public, non-tolled segment and a 9.3-mile
privately operated, tolled segment. Together, this highway
connects SR 905 near the international border to SR 54. Under
the lease agreement with the state, the developer, California
Transportation Ventures (CTV), a subsidiary of Macquarie
Infrastructure Group, will charge tolls for 35 years in order
to recoup its costs and earn a reasonable rate of return on
its investment.
This project has experienced significant cost overruns,
project delays, and litigation. Following the enactment of AB
680, plans were initiated for this facility in 1989. In 1991,
SB 693 (DUTTON) Page 6
a lease agreement was completed and initial project studies
and design were begun. Development and project approval
proved lengthy and final environmental clearance was not
granted until 2001. In 2003, the project received financing
from Macquarie Infrastructure Group and construction began.
The facility opened in late 2007.
Because the final costs of the project far exceeded what was
originally estimated for the project, the contractor
responsible for designing and building the facility under a
design-build contract with the developer filed several
lawsuits against the developer to recoup its costs. Despite
claims that the state is protected from such risk under PPP
arrangements, the developer in turn sued Caltrans in 2009 for
approximately $500 million, the largest lawsuit in Caltrans'
history. In 2010, the developer declared bankruptcy, although
it continued to operate normally. As the developer sought to
restructure its debt, Caltrans, the developer, and the
contractor settled the lawsuits. Just this month, the court
approved the developer's reorganization plan.
3.Clarifying amendments . If the committee were to pass this
bill, it may wish to consider the following clarifying
amendments: Amend Government Code Section 5956.10, which
prohibits local agencies from utilizing PPPs for state
projects, and Streets and Highways Code Section 143 specifying
which agencies may utilize PPPs, to specifically permit local
agencies to use PPPs on the state system in accordance with
the requirements of Section 143.
7.Reference to Rules Committee . This bill is keyed as
nonfiscal. Allowing local agencies to utilize PPPs on the
state highway system, however, has fiscal implications for
Caltrans who would be responsible for overseeing and approving
numerous aspects of the project. Because the Appropriations
Committee typically assesses the fiscal implications of a
bill, the motion in this committee should be to pass the bill
and re-refer it to the Rules Committee for consideration of
reference to the Appropriations Committee.
8.Related legislation . SB 475 (Wright) revises and clarifies the
statutes authorizing local agencies to enter into PPPs to
develop fee-producing infrastructure facilities. On April 27,
the Senate Government and Finance Committee passed this
measure 6 to 2.
SB 693 (DUTTON) Page 7
POSITIONS: (Communicated to the Committee before noon on
Wednesday,
April 27, 2011)
SUPPORT: Southern California Association of Governments
(sponsor)
CalChamber
Los Angeles Chamber of Commerce
OPPOSED: American Federation of State, County and
Municipal Employees
California School Employees Association
Professional Engineers in California Government