Are you ready for some football? As of last week, the answer would have been maybe not.

The new stadium in Arlington for the Dallas Cowboys is scheduled to open for the 2009 football season. And State Highway 161 — a proposed north-south tollway — would run right by the stadium. So there is a lot of interest in the Metroplex in having that road open by the fall of 2009.

But construction got delayed while the Texas Department of Transportation (TxDOT) and the North Texas Tollway Authority (NTTA) were feuding over how much money the toll proposal should bring in.  The two sides, along with the North Texas Regional Transportation Council, cut a deal April 20 that allows the road to be built — in time for football season.

The SH 161 fight has statewide significance, as the highway is subject to the “market valuation” process created in 2007 by SB 792 — the compromise transportation bill agreed to by the governor and lawmakers in the closing days of the legislative session.

 SH 161 is also explicitly exempted from the moratorium, declared in SB 792, on comprehensive development agreements — contracts whereby the state leases right-of-way to a private company for construction and operation of a toll road.

In the end, NTTA and TxDOT agreed that the toll agency would provide $458 million upfront to be used for other projects in the region.

After the 53^rd year, NTTA would evenly split remaining revenues with TxDOT.  NTTA now has six months to decide whether it wishes to build the project.

If it declines, TxDOT can issue a comprehensive development agreement for the highway.

So what is market valuation? A philosophical debate in the Legislature centers on  whether tolls should be set higher than the cost to build and maintain a road, with the excess going toward other non-tolled road building projects.

Some lawmakers, believing toll roads should pay only for themselves, see the setting of higher tolls to pay for other projects as “Robin Hood”-style redistribution or a back-door tax increase.

However, Gov. Rick Perry is a firm believer in that approach. He also strongly believes in “public-private partnerships” — the use of  lease agreements to secure private-sector financing for roads.

The market valuation process is a compromise between lawmakers and the Governor. It must either be completed or waived (by both TxDOT and local transportation authorities) before a new toll road may be built.

Under the procedure, TxDOT and the local tolling authority have to agree on terms and conditions — including toll rates — for a project. Then the two entities agree on a third-party to conduct the market valuation.  Next,  both entities have to agree on the final value. After that, the tolling authority has six months to exercise right-of-first-refusal — to build the project and make the up-front payment determined by the market valuation. If the  tolling authority doesn’t exercise its right-of-first-refusal, then TxDOT can issue a comprehensive development agreement.

If both TxDOT and the local tolling authority agree, market valuation can be waived.

The up-front payment TxDOT receives from the local tolling entity must be used to build other roads in that region.

What happened in the SH 161 case? TxDOT and NTTA could not agree on business terms for the market valuation. (Business terms are not specificly defined in the bill, other than that they have to include the toll rate and toll escalation methodology).

They have been negotiating since the summer of 2007. During these negotiations, literally hundreds of business terms have been negotiated, not the handful envisioned as a part of SB 792. At the Senate Transportation and Homeland Secruity Committee’s April 23 meeting, NTTA officials accused TxDOT of trying to impose on the local toll authority the same rules that are imposed on a private company under a comprehensive development agreement.

TxDOT had warned that it may try to construct SH 161 as a free road if an agreement on a market valuation wasn’t reached by April 15, 2008. This would mean that no new money would be generated by SH 161 for other projects in the region.

In the final days of the negotiations, Lt. Gov. David Dewhurst and several members of the Texas Senate helped negotiate a final deal between TxDOT and the NTTA.

In the final deal, TxDOT and NTTA agreed to waive the formal market valuation process. NTTA then agrees to pay $458 million if it wishes to build the road. NTTA and TxDOT also agreed to split revenue from the road 50/50, starting 53 years after execution of the project agreement.

Construction on the road begins immediately. Funding paid by NTTA to build the State Highway 121 project in the Northern part of the Metroplex is being used to build SH 161. Once it opens as a toll road, the up-front funds paid to start construction will be repaid.

What are the state policy implications? The most obvious state policy question is whether the state should continue to allow public-private partnerships and setting toll rates above what it costs to build and maintain that specific highway. Sen. Tommy Williams (R-The Woodlands) distanced himself from the market valuation language at the April 23 Senate Transportation and Infrastructure Committee and wondered whether it should remain in the code.

Perry, on the other hand, argues the state is growing and needs roads. He noted in a speech to the Texas Transportation Forum that highway contract lettings are almost half what they were in 2005. He wants to see more roads built, not less.

The authority to issue comprehensive development agreements will expire in 2009 for most roads and 2011 for all roads, unless the legislature renews it. Therefore, this issue will likely get fought out in the 2009 legislative session, and possibly as a part of the Texas Department of Transportation sunset bill.

Another key question is what business terms should be negotiated in advance of the market valuations. Toll rates and toll escalation are expressly mentioned in law. But Phillip Russell, assistant executive director for innovative project development for TxDOT, told attendees of the Texas Transportation Forum that he had envisioned a few key terms, while the SH 161 negotiations included hundreds of terms.

The other state policy implication is whether Houston got treated the same way as the Dallas-Fort Worth Metroplex. During the committee’s hearing, representatives of both Harris County and TxDOT agreed that the market valuation on the Grand Parkway would likely be around zero, because the North and West sections (which are lucrative) are off-set by the Eastern sections, which would likely lose money. In other words, Houstonians won’t likely have to make a big up-front payment to develop the Grand Parkway.

But TxDOT has sometimes valued projects in segments. And the Dallas area had to make big up-front payments to develop both SH 121 and SH 161. Sens. Florence Shapiro (R-Plano) and John Carona (R-Dallas) both questioned why NTTA had to make these payments, while folks in Houston may not have to.

Another key policy choice is whether state policy favors private comprehensive development agreements or the use of public authorities to build toll roads. In some ways, this is a question of debt versus equity financing. Public entities usually issue bonds to finance highways. Bond lawyers like to see traffic and revenue studies produced by one of a handful of firms respected by Wall Street. Even TxDOT officials argue these traffic and revenue studies are notoriously conservative and limit the amount of bonds that can be issued with good ratings.

So TxDOT officials frequently argue that public-private partnerships provide access to capital beyond what may be available in the public sector.

In the end, the real policy choice the legislature will have to make is what exactly is meant by local control. In 2003 — when the legislature first authorized privatized highways and using tolls from one project to pay for another — it was sold to legislators as “local control.” “More tools in the toolbox” was a common TxDOT refrain.

But many of the local tolling authorities and local leaders see TxDOT as an obstacle, rather than a help in meeting mobility needs.

Should TxDOT have the right — as it has under SB 792 — to demand above-cost tolls, where reveneus can be transferred to other projects? Or should that be a decision solely of local officials and metropolitan planning organizations?

Another related question is how much the state wants to spend on roads. For Perry, it’s “the more the merrier.” But when government (or quasi-government activities carried out by private companies) expands, someone has to pay.

The gasoline tax per capita is declining. So if the state wants to dramatically expand revenue, risky moves become necessary, such as raising that tax in the face of  soaring gasoline prices.

In short, the issues surrounding SH 161 reflect most of the key issues surrounding Texas transportation financing.

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