Don’t Count On Toll Revenue Forecasts

Southern California toll road debacle raises questions for the Northwest.
This post is 38 in the series: Dude, Where Are My Cars?

From sunny Southern California, some gloomy news on highway tolls. Here’s the Orange County Register

Orange County’s toll roads have slid farther and farther behind the confident projections of ridership and revenue on which they were built, prompting an unusual state review of their finances.

The roads were the first of their kind in California, a bet that drivers would be willing to pay to escape the grind of Southern California freeway traffic…but the bet has not paid off as well as operators expected.


The bonds backing both projects have sunk to junk status—a sign that investors are worried about whether they’ll actually be paid back.

To be fair, one of the two toll projects was performing as expected up until 2006—when traffic started falling below projections. Revenue stayed up with projections for another couple of years, before it started to trail off as well.

But traffic on the other route lagged behind forecasts from the get-go. The toll route is generally free-flowing, but drivers prefer parallel, toll-free alternatives, even if they’re clogged with traffic.

Toll road failures are nothing new; in fact, they’re surprisingly common. But I thought that this case deserved a special mention, for two reasons.

San Joaquin

First, it took about a decade for the forecasting flaws in the Foothills/Eastern projections to appear—but those flaws quickly turned high-grade bonds into junk. The lesson here: in highway bonding, short-term success doesn’t matter that much. To be safe from serious fiscal consequences, you have to be right over the long haul.

And second, there are very relevant connections between the Southern California roads and what’s happening here to the Pacific Northwest. The traffic forecasts for the Southern California roads were made by the same consulting firm—CDM Smith, formerly Wilbur Smith—that performed the investment-grade bond study for Washington’s SR-520. And that firm was recently contracted for similar study on the Columbia River Crossing connecting Portland, OR with Vancouver, WA. CDM Smith has a good reputation—but that didn’t protect them from producing projections that went badly awry. For SR-520 or the Columbia River Crossing to avoid the same fate as the California toll roads, they’ll have to meet CDM’s traffic growth forecasts not just for a few years, but for many years to come.

What’s more, the troubles facing Southern California’s toll roads may have ripple effects in the municipal markets here as well. Bond investors are notoriously risk-averse. The savvy ones may look at the California toll road failures, along with many others, and decide that there’s a lot more risk in road-tolling bonds than they thought. If that happens, the Northwest might be faced with higher interest payments for transportation bonds, and lower revenues from the bond markets—neither of which is good news for boosters of highway megaprojects.

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  1. Don says:

    Another conclusion is if people perceive new freeway projects (e.g. the CRC) as free (paid by “the feds” or “the state”) then folks support the project. However, if asked to pay out of pocket their support dwindles. People vote with their money. As you have reported rather than pay a toll (in Seattle) many people change their trip; in California they buy a coffee and sit in traffic.

    If the CRC was dependent on voter approved tolling and/or bonds, the project as we know it would be toast.

    • Clark Williams-Derry says:

      Great point. Nearly anyone will take a bridge if it’s free. But it’s clear that, even if WSDOT and ODOT tolled both I-5 and I-205 across the Columbia, it could never pay for the CRC.

      • Morgan says:

        Isn’t it funny how boosters of roads & bridges deploy economic arguments, yet there’s insufficient demand to pay for them?

  2. Morgan says:

    Thanks Clark for another trenchant piece of reporting/analysis that pertains directly to us here in Washington.

    Behavioral economics only recently arrived in academia and has done wonders for aligning economic theory more closely w/ reality. I’m guessing that travel planners have much yet to learn about human behavior. After all, it took many decades to figure out that building more roads doesn’t solve traffic problems.

    On a different note, it occurs to me that bond issuers (counties & state govs) would be motivated to advocate policies that sustain traffic levels through tolled corridors. Whether that manifests as more tolling (eg tolling I-90 here in Wash) or failing to support in-corridor transpo alternatives or supporting development along the corridor, I have no idea.

    • Clark Williams-Derry says:

      That’s a great point about state & municipal governments trying to encourage traffic to pay off binds. I know of several instances in which toll road agencies used tolling revenue to advertise toll roads…trying to drum up business for underperforming roads.

      • Morgan says:

        Since the issue is that people (myself probably included), undervalue the value of our time, tools that highlight the value of the tolled route might be a good thing. For example, on I-5 there are digital signs that tell drivers how long it will take them to go one route or the other, such as 405 v 5 or express v mainline.
        What if there was an app where you plugged in your personal value of time, and the app told you which way to go when approaching a junction, because it knows the toll rate, the time differential, and was gps aware?

  3. Brian Higgins says:

    So, this speaks to the danger of proposing tolls upfront as a way of paying for the construction of a new roadway/freeway/bridge/parkway, but what about the placement of tolls on existing roads – particularly the interstate system. This, is of course, being looked at for the I-95 corridor in the east. Would the same behavioral economics argument suggest that avoidance of tolls could increase traffic on local arterials? I argue that it will, but I haven’t researched it.

    • Tyler Milligan says:

      @Brian – Some diversion is inevitable. A tollroad is built because of demand (or assumed demand) and lack of existing funding. SR 520 in Seattle/Bellevue landed a toll because a) it was way over its design capacity and preferred level of service, and b) there is a significant funding shortfall to rebuild it. The original tolls were pulled back in the 70’s (I think) and go figure, the state doesn’t have money now to rebuild it.

      I-95 is getting a good look by the planners because these major corridors that were built in the 50’s and 60’s are getting near the end of life . There are some reasonable free alternatives that parallel that I-95 corridor. Regretful part is that these corridors that get new tolls over the next 5 years will have some degree of economic impact, positive or negative, as travel patterns and development change. Un/fortunate consequence of US expansion and poor governance.

  4. Dick Burkhart says:

    Tolling is not just about behavior, or narrow perceptions of costs / benefits, but also about both short term and long term economics.

    Financial bubbles and business cycles can drive short term growth, then decline in toll revenues. You can’t predict their timing but you can take into account their likelihood – just plan on using excess tolls to pay off the bonds up front as much as possible, knowing that there will be leaner times ahead.

    But the US is very poorly prepared for adverse long term trends. Private and public agencies never do more than superficial econometric forecasting (extrapolations of various growth statistics). Whereas the real risk comes from the end of global economic growth (already slowed dramatically, major contraction likely in the 2020s) due to the imminent bursting of the centuries long fossil fuel bubble. Bond buyers are right to be worried, in fact, very worried. Bond issuing authorities may have to pledge other revenues to insure against future declines in tolls.

    • Clark Williams-Derry says:

      Great points! AS I understand, the SR-520 bonds aren’t backed just by toll revenue, but ultimately by the state itself. That’s how they get such low rates: the bonds have the state’s credit rating, not the rating for the project itself.

      So in this case, it’s the people of Washington who are pledging other revenues to insure against a shortfall in toll revenues.

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