July 18 Transcript

Texas Department of Transportation Commission

Special Commission Meeting

STAFF:

MR. WILLIAMSON: Good morning. It is 9:06 a.m., and I would like to call the special meeting of the Texas Transportation Commission to order. It is a pleasure to have each of you here this morning with us.

Please note for the record that public notice of this special meeting, containing all items on the agenda, was filed with the Office of Secretary of State at 10:16 a.m. on July 10, 2007.

Before we begin today's meeting, I would appreciate it if you would join with me in taking out of your pocket and removing from your pocket your telephone, your pager, your PDA, your Dewberry and all other electronic devices you might carry, and put them on the silent or vibrate or page mode so that we will not interrupt our guests while they're testifying. Thank you very much.

We called this special meeting to receive briefings related to five external audits that are near completion on several areas of the department's operations. It's the commission's intention to have an executive session, following hearing from our auditors, to further discuss the process of whether or not we will accept the retirement letter from Mr. Behrens, and if we do, how we will go about replacing him　-- which is a remote possibility.

Let me remind you that if you wish to address the commission's meeting today, we ask that you complete a yellow speaker's card, such as the one in my right hand, which you can find out in the lobby to your right, if you intend to speak on a matter that's on the commission's agenda.

Do we have general comments today?

MR. BEHRENS: No.

MR. WILLIAMSON: In a special meeting, we do not entertain general comments.

If you haven't signed up for the Texas Transportation Forum which starts in a few minutes, you will find in your chair a card, and I think we've got one or two spots left, if you'd fill out this card which you can find in the lobby to your right, we'd love to have you at our forum.

We'll also be taking up and considering today the awarding of 27 private sector concession　-- oh, no, that's next time. I forgot.

(General laughter.)

We will limit each speaker to three minutes, unless you're a sitting member of the legislature, in which case you may take all the time you wish.

Before we proceed with today's posted agenda, it's our custom to invite each commissioner to make opening comments. We will begin with Mr. Underwood, then Mr. Holmes, then Mr. Houghton, and then Ms. Andrade, and then we'll start our official meeting. Again, thank you for being here.

MR. UNDERWOOD: I want to thank everyone for being here. This is an important meeting. Also, on a sidebar, I want to thank the men and women of the Childress District for treating me like king for a day, except it lasted for three days, and I really appreciate the hospitality in Childress at the district there. Thank you.

MR. HOLMES: Welcome. This will be an interesting meeting and we appreciate all of your attention and attendance, and I look forward to seeing you at the Transportation Forum.

MR. HOUGHTON: I welcome you to Austin and to the commission meeting and the kick-off of the Transportation Forum.

MS. ANDRADE: Well, I echo my fellow commissioners, welcome to our special called meeting, and it's great to see so many of our district engineers in the audience also, so special welcome to you all. And I look forward to our forum that starts this afternoon. I think it's just absolutely wonderful when over a thousand people get together to discuss transportation for Texas. So thank you very much.

MR. WILLIAMSON: Thank you, members. I associate myself with the remarks. I also welcome you to Austin and to our special meeting. I look forward to an interesting morning as we talk about the external audits that are ongoing. And I guess with that, Michael, we'll call Steve Simmons, our deputy executive director, to the podium, who will set the stage for today's meeting. Steve.

MR. SIMMONS: Good morning, commissioners, Mr. Behrens. For the record, my name is Steve Simmons; I'm the deputy executive director of the Texas Department of Transportation.

And Commissioner Andrade, the district engineers are here because they were told to be here.

(General laughter.)

MR. SIMMONS: And a lot of our division directors are here also because this is something that's very important to the department as we move into our Sunset Review, that they need to hear what these independent auditors have said and be able to react, as the department always has, to changes that are necessary.

A little background. Transportation Code 201.109(b)(5) requires the department to contract for an independent audit　-- and I stress independent audit　-- of the agency's management and business operations in 2007. In order to comply with this requirement, at the commission's direction, the department was divided into five separate auditable units. They were: transportation funding, contracting/project delivery, consumer services, management and support operations, and field operations.

When we originally went out for these, we had several proposers for each one except for, I believe, the field operations which we did not get any the first go-round, but we went out for a second round and we selected Deloitte Consulting to do that.

The contracts were awarded to: Dye Management Group, they performed the transportation funding and consumer services audit; and then Deloitte performed the contracting and project delivery, the field operations, and the management and support operations.

The individual teams determined the objectives of each audit by conducting a risk analysis and developing an audit work plan. Mr. Behrens established an audit oversight committee to provide guidance through the audits and approve all audit deliverables. The committee members consisted of myself as the chairman of the audit oversight committee, Owen Whitworth from the Audit Office, Coby Chase from the Government and Public Affairs Office　-- and he's supposed to be sitting over there but we didn't tell him　-- Bill Hale, our Dallas District engineer, and Mario Jorge, our Pharr District engineer, to try to get a broad expertise to help review these audits.

And I'd be remiss if I did not recognize Donna Roberts from the Audit Office. Donna, where are you? Please stand up. Donna is the one that worked tirelessly to get these auditors onboard and also kept the audit oversight committee in line and worked with the districts and divisions to get responses to these audits. So thank you, Donna.

In carrying out their duties, the committee drew upon subject matter experts throughout the department as needed. Each of the five audits are now in draft reporting stage and have results ready to present to the commission.

Please note that the timing of the audits is such that recent legislative changes are still being analyzed by our staff and may not be incorporated into the final results or conclusions of these audits at this time.

If, after hearing the audit results, the commissioners would like the auditors to provide any additional information, that request can be made under the current contract terms, and currently the contracts expire the end of August.

So unless you have any other questions, I'm ready to bring forward the first team of auditors to make their presentation.

MR. WILLIAMSON: Members, do you have any questions of either Mr. Simmons or other staff? I'll have a few but I yield to you first.

Steve, when we first set out to define our expectations for our external auditors, I know we had a series of extensive　-- I guess the word would be frank and straightforward meetings with not only staff but with the auditors themselves, and part of that straightforwardness and frankness circled around the importance of the agency's staff totally cooperating with the effort, even when it was painful to do so. In your estimation, did agency staff totally cooperate with the auditors, and more to the point, do commissioners need to worry about whether or not whatever these people have to say to us is based upon frankness from the staff?

MR. SIMMONS: Mr. Chairman, that was a question I posed to each of the independent auditors when we went through a walk-through of these to make sure that they got full cooperation, not only from the department but also that they were able to interact with our transportation partners outside the department because there are several of these audits that did require going outside the department to get information and how we do things, and the response they gave me　-- and I hope that you'll ask each one individually to make sure that that is a true statement　-- they said unequivocally that they got 100 percent cooperation from the department.

MR. WILLIAMSON: Well, I am going to ask almost the same question of each of them, and I wanted to give you the opportunity to say first, in your view, that they received the total cooperation of the department.

MR. SIMMONS: Yes, sir.

MR. WILLIAMSON: Well, if that's the case, I'm ready to proceed, if you are.

MR. SIMMONS: Our first auditable unit to make a presentation is our transportation funding which I think all of you know is very important to the department. And Dye Management Group did that, and I'm going to ask Bill Dye and Peter Mills to make the presentation.

MR. DYE: Good morning, Chairman Williamson and members of the commission. My name is Bill Dye, for the record, and I'm president of Dye Management Group. With me this morning is Peter Mills, a senior associate with Dye Management Group. Together, we will provide you with an overview of the findings and recommendations from the transportation funding audit.

I'd like to preface my comments by thanking the members of the audit oversight committee, TxDOT staff, and business partners from MPOs, RMAs, and toll authorities across the state for responding to our requests for data and information, and for reviewing our work in progress in a timely manner. And with regard to Chairman Williamson's question, we had very good cooperation from everyone in the department and felt that we could do our job very professionally in that regard.

MR. WILLIAMSON: Well, let me stop you and ask you about that.

MR. DYE: You bet.

MR. WILLIAMSON: The reason I'm focused on this is because we just went through almost six months of I think the proper word would be skepticism about how we arrived at certain conclusions we've arrived at upon which to base some decisions we've made. It is extremely important that you can defend your work product with Chairman Carona, Chairman Krusee, Chairman Ogden, Chairman Chisum, the lieutenant governor and the speaker, and any other interested House or Senate member. You have to be able to say, Look, this is our view, our professional view, and we can defend it. Because one of the things we've learned in the last six months is no matter what story we tell, someone is going to try to find a way to describe it as an alternate reality, perhaps.

MR. DYE: Yes, sir.

MR. WILLIAMSON: You have to be able to go into that room by yourself without us around and say, This is the facts, Jack.

MR. DYE: Yes, sir. I know of no finding that we changed　-- other than findings of facts that changed any recommendation that we made in the report because of comments. Again, we were unfettered.

MR. WILLIAMSON: Okay, thank you.

MR. DYE: You bet.

You have in your packets the draft executive summary to our draft final report. As you see, it covers a lot of ground. Our presentation is organized by major audit area, and in each area our presentation focuses on the findings and recommendations that we believe address important policy questions for TxDOT as it goes into the Sunset process.

Please also note that the audit does not address implications of House Bill 792 or the legislation enacted by the 80th Texas Legislature.

This slide addresses the four audit areas that were covered: fiscal capacity; programming project selection, including the use of debt in project finance; management capacity for the new finance mechanisms; controls and oversight. For each area there was a series of general and specific audit questions. The audit report takes each question in turn, provides an answer, supporting findings, and where applicable, recommendations.

MR. WILLIAMSON: Hang on a second. The print is a little small, I'm having to focus on it. Old man eyes　-- you know how that is. Okay.

MR. DYE: Now I'm going to turn the floor over to Peter Mills, who is going to talk about our first audit area.

MR. MILLS: Commissioners, ladies and gentlemen, good morning. For the record, I am Peter Mills, an engineer and economist with the good fortune to be affiliated with Dye Management Group, and also to be assigned to this project.

I thank you for your attention to the table in front of you. We're going to use this to present our findings with respect to the first question, and that is: What revenues can Texas reasonably expect from the funding tools that are defined in House Bill 3588 and House Bill 2702?

In the left-hand column we present the estimates that were compiled by the MPOs and the department in 2004. The funds from existing sources, $102 billion, will be familiar to you. It was weighed against $188 billion of unmet needs to estimate a shortfall of some $86 billion over the period 2005 to 2025 to 2030. As old as these estimates are, they are still very much in the public eye, so we have compared our forecast to them.

And to keep that forecast and that comparison consistent, we　-- as the department did in 2004　-- have forecasted in constant 2005 dollars, and there is an important implication to that: it does not include inflation; it does not include any possibility or any expectation of increases in tax rates; and it does not, on the needs side, allow for any inflation in the costs of completing projects. So in terms of purchasing power, what we're showing here are only nominal dollars and not accounting for the erosion of purchasing power as the costs of constructing projects on the needs side increases over this period.

MR. WILLIAMSON: Stop a second, if you would.

MR. MILLS: Yes.

MR. WILLIAMSON: Now, I, for one, have not seen this until this morning. Do I assume that we're all in that position?

MR. MILLS: Uh-huh.

MR. WILLIAMSON: So this could either be real embarrassing or real uplifting, depending on what the next page says. But before we turn the next page, I need to be sure that I understand what you just said, and if Amadeo is not here, Steve, perhaps you can help me. Steve, where are you?

MR. SIMMONS: Right here.

MR. WILLIAMSON: When we projected what we called our revenue challenge, did we infer an increase in revenues over the next 25 years?

MR. SIMMONS: We used the MPOs projections for their plans. They based theirs on what they project they will get in from the revenue, whether it's from the state, from the federal, or whether it's local dollars. So that's the numbers that we used.

MR. WILLIAMSON: So his numbers are going to be not inflated.

MR. SIMMONS: That's correct.

MR. WILLIAMSON: And our projections were inflated on the revenue side.

MR. SIMMONS: Yes, sir, to some extent.

MR. WILLIAMSON: Now, on the cost side　-- which is more significant to us　-- your cost projections will not be inflated?

MR. MILLS: We have made no cost projections. We have dealt only with funding and with revenue, and our growth of revenues is the same as that as was projected by the MPOs. If you look at the table, you'll see that, in fact, the MPOs projected two sets of revenues. The first, the $102 billion, were the revenues to be expected from existing taxes, both federal and state, projected forward for growth in traffic, for economic growth, but not for price increases, so not for an assumption that the federal government would increase its federal excise tax rate or that the state would increase its motor fuel tax rate. So those sorts of price assumptions are not in there. The assumption is those tax rates will stay the same, both in the MPOs work at the $102 billion number which is the upper number, and also in the numbers we're going to show you.

MR. WILLIAMSON: Okay. So does that also mean that you didn't inflate the revenue for what we inflated the revenue, projecting our private sector investment activity and concession collections that we would use to bridge the gap?

MR. MILLS: We did not include price inflation or any progressive increase of toll prices over time in those either.

MR. WILLIAMSON: Can I stop you a second?

MR. MILLS: Yes.

MR. WILLIAMSON: Amadeo, can you come up, please? If you don't mind.

MR. MILLS: No, absolutely.

MR. WILLIAMSON: This is really important.

MR. MILLS: We want to make sure we're all on the same page.

MR. WILLIAMSON: Now, what I understand he's fixing to lay out for us is the external independent audit viewpoint of whatever the revenue facts may be. When we were projecting our shortfall and how we would bridge the gap, did we infer in our revenue what we thought we would collect from public-private partnerships, and specifically concession payments such as 121?

MR. SAENZ: The MPOs, when they put together their Metropolitan Mobility Plan, first took into account how much money they were going to get from traditional sources, and then they identified some potential toll projects, and in the first iteration they just identified the projects and they said we can build these projects, they did not take into account the concessions to carry it forward. That's being done as part of the second iteration of the Texas Metropolitan Mobility Plan.

MR. WILLIAMSON: So to the extent the revenues differ between what we stood on and got soundly kicked around about and what he's going to tell us is there shouldn't be any difference, the difference should be reality.

MR. SAENZ: Right now I think the numbers will be the same. In the next iteration when the MPOs update their Texas Metropolitan Mobility Plan, they'll be able to take into account and address how much more revenue could come from the concessions and concession payments.

MR. WILLIAMSON: Okay, thank you.

I'm sorry to interrupt you, but like I said, this is very important stuff for us.

MR. MILLS: So for the record, I'm Peter Mills, returning to the podium.

The estimates that the MPOs made that Amadeo just referred to of what new toll revenues might be available or what other reasonably expected new revenue sources might be available to them, those are included in the $12 billion which you see labeled as New Tools Business Plan 2005.

So Commissioner, to try to make sure I'm putting this in the right terms, what the MPOs estimated was $102 billion from state motor fuel taxes, federal aid, those traditional sources, plus approximately $12 billion　-- and this was just within the eight TMAs that did this work in the major urban areas　-- from what they believed they could do from tolls, from local option taxes, whatever, they made a few other small assumptions, but principally new toll projects. So their numbers in 2004 including traditional sources, new projects, but no assumptions about increases federal or state tax rates, that was $114 billion, and that's the number which is at the bottom left-hand column of this slide before you.

MR. WILLIAMSON: Well, the reason I took Amadeo through that discussion, we're playing the game right now on three levels: there is the MPO projection of revenues which came under some criticism from elected officials and primarily the State Auditor; then there is our projection of how we would fill in that gap with public-private partnerships, and that came into just a little bit of criticism from almost everyone; and then the third level at which we're playing is our projection of the cost that we think is necessary to be met if we're going to actually meet our goals as opposed to just continuing to operate as we do now.

In other words, the whole basis of our Strategic Plan is that we will reduce congestion in Austin, Texas, not that we will live with what we have. The whole basis of this Strategic Plan is that air quality will improve in Houston, Texas, not continue as it is now, and so forth. So if I have to stop you a lot to get you to elaborate, it's because this is pretty serious for us in terms of responding to certain elected officials, to the State Auditor.

MR. MILLS: Absolutely. I'm happy to stop, and also, as any technical forecaster is, happy to go into stultifyingly boring levels of detail for those who are interested in it -- in another forum, probably not today　-- but we're happy to show our forecasts and how we arrived to them and to defend them to all and sundry.

MR. WILLIAMSON: Of course, I'm afraid to turn the page, your forecasts might prove that we were out in left field.

MR. SIMMONS: Mr. Chairman, if I could. I was remiss in my opening comments. We did invite the State Auditor's Office here and they are here in the back of the room, so Dorothy, raise your hand. And we did also invite the Sunset staff to come and sit in on these meetings also, and I don't know if they are here yet or not. Apparently not.

MR. WILLIAMSON: They're no doubt watching us across the miracle of the internet.

MR. SIMMONS: Correct.

MR. HOUGHTON: A point of clarification. Did you say, Amadeo, that concessions are in this forecast?

MR. SAENZ: No.

MR. HOUGHTON: They're not in this forecast.

MR. WILLIAMSON: But as we advanced our Strategic Plan and argued our case, we argued that we would fill the gap with that.

MR. HOUGHTON: I understand.

MR. WILLIAMSON: And what I'm hearing them all saying is that that amount of money is not in here.

MR. HOUGHTON: Not in this forecast. When you talk about toll projects?

MR. MILLS: That's right, when we talk about toll projects, the $12 billion, we're talking about what the MPOs forecast as at the toll booth receipts from a toll facility.

MR. HOUGHTON: Above and beyond debt service and operation?

MR. MILLS: Just gross revenues.

MR. HOUGHTON: Just gross revenues.

MR. MILLS: That's correct. So this is point of sale at the toll booth.

MR. HOUGHTON: And you're going to get into expenses at the same time?

MR. MILLS: No. We are just forecasting revenue.

MR. HOUGHTON: Some of these toll projects do not make money for　--

MR. MILLS: We are going to address exactly that problem as we get into our remarks about the setting of toll prices relative to cost.

MR. HOUGHTON: Okay.

MR. MILLS: Shall I carry on?

MR. WILLIAMSON: Please.

MR. MILLS: Okay. So I'm going to lay out our forecast by starting from the same $102 billion and doing it comparatively, starting with our forecast of state revenues, principally from the state motor fuel tax. Now, we have made a forecast of that with, as I said, an assumption of no increase in the tax rate, despite the fact that it hasn't been increased in over 15 years, again to remain consistent with keeping inflation out of the forecast.

We have also made an assumption with respect to the increasing efficiency of engines in motor vehicles. We have used a forecast put out by the U.S. Energy Information Administration for nationwide improvements in fuel efficiency, and we have adjusted that for the different mix of vehicles in Texas, as in Texas there are a higher number of heavy vehicles and a higher number of pickups in the light vehicle fleet than one tends to find nationwide.

We have used the population forecast that was produced by the Texas State Data Center. We have also assumed that as the population of the state ages, as a higher proportion of the state reaches the Golden Years, that the existing patterns of driving amongst old people and new people do not change, so as we get older, we tend to drive less, and therefore, the Texas population　-- as the population will throughout the United States　-- tends to drive a little less as it ages.

So our forecast is about $8 billion lower than the departmental and MPO forecast that was done in 2004, and that seems like a fair bit from a financial perspective, but from a forecasting perspective, it's about a 15 percent variation, so our forecast is about 15 percent lower than that which was done in 2004, and when forecasting statistically over 25 years, 15 percent is actually not a significant variation.

Our next forecast is with respect to the funds that would be available for obligation through the Federal Aid Highway Program, and on this we've made a number of assumptions. We've made several assumptions, bold assumptions, as one has to do when one is predicting the behavior of the United States Congress. First we have forecasted what the fuel excise tax receipts would be nationwide into the Federal Trust Fund. We used the same sorts of assumptions on federal nationwide receipts as we did for the state receipts in Texas. We have also made some assumptions with respect to what the U.S. Congress may have to do over the next 25 years to deal with the current federal government deficit.

So we have assumed, for example, that the approximately $9 billion rescission that is called for in SAFETEA-LU in 2009, that that will happen. We have also assumed that the Congress will further reduce outlays from the Federal Highway Trust Fund to keep that fund from going into a negative cash balance in the year 2009, as it currently forecast to do. And we also assumed that starting in the year 2013 that Congress will, by reducing the fire walls through all the discretionary programs, take about $3 billion a year nationwide from the Federal Highway Trust Fund in order to make a contribution to reducing the federal deficit.

So bold assumptions and somewhat pessimistic ones.

MR. HOUGHTON: How did you come up with that assumption that they're going to do that?

MR. MILLS: We come up with that assumption by, first of all, predicting that the devaluation of your currency　-- which has happened by about 30 percent over the last five years　-- will not be tolerated, and therefore, they will have to take some action to reduce the federal deficit. So that's the first step.

The second step is we observe that the federal government's Budget Enforcement Act requires those reductions to be made in their discretionary programs, of which there are only five: Defense, FBI, Internal Revenue Service, Transportation　-- there's another one.

MR. HOUGHTON: They have sent a signal to that effect?

MR. MILLS: I'm sorry?

MR. HOUGHTON: They have sent that signal?

MR. MILLS: They are sending that signal, as I infer　--

MR. HOUGHTON: When you say $3 billion.

MR. MILLS: They have not signaled $3 billion, that is our assumption.

MR. WILLIAMSON: They're sending a signal by their actions and inactions; that's how they're ending a signal.

MR. HOUGHTON: Well, I understand that, but the $3 billion number.

MR. MILLS: The $3 billion is our assumption, and it is our assumption arrived at by what is required to reduce proportionately across all five of those discretionary areas in the federal budget to stop the federal deficit from getting worse.

MR. HOLMES: The $3 billion is an annual number?

MR. MILLS: Annual nationwide.

MR. HOLMES: And how does that relate to the rescissions that have taken place over the last couple of years?

MR. MILLS: It relates in that the rescissions are the means by which the federal government reduces its funds available when there's already an apportionment in place.

MR. HOUGHTON: And real dollars.

MR. HOLMES: Yes, my question was how does the $3 billion relate to the total dollars of rescissions on an annual basis.

MR. MILLS: Okay, $3 billion a year. You receive in Texas roughly 8-1/2 to 9 percent of national apportionments. So in other words, 8-1/2 to 9 percent of all the highway funds apportioned in the United States are apportioned in Texas. So we assume that you would have to absorb approximately 8-1/2 to 9 percent of that $3 billion reduction.

MR. HOLMES: There have been rescissions for the last couple of years.

MR. MILLS: That is correct.

MR. HOLMES: And what is the amount of that annual rescission over the last couple of years?

MR. MILLS: In Texas?

MR. HOLMES: No, in total, and how does that relate to the $3 billion. The rescissions have actually been a little more than $3 billion the last couple of years. Right?

MR. MILLS: The rescissions have been, I think, more in the order of $6- or $7- over the last couple of years, and we're assuming that they will not continue at that level. In other words, the federal government will not have to pull back $6- to $7- or more billion dollars a year out of the Federal Highway Program because we are assuming　-- and this is, again, where we get into bold assumptions about political responses　-- we're assuming that defense expenditures in Iran will go down after 2009.

MR. HOLMES: And so you're actually optimistic, the $3 billion is an optimistic number relative to the last couple of years.

MR. MILLS: I'm putting it in the context of the rescissions with which you have been hit, and of course, the rescissions are merely the most disruptive means by which the federal government calls back the money which they said they were going to apportion or said they were going to authorize. Yes, we're assuming that, in fact, it will be less than it has been, over the long run it will be less than it has been of late.

So in other words, this forecast is a combination of many assumptions about political behavior and economic conditions. Some of them can be viewed as optimistic, some of them can be viewed as pessimistic, absolutely.

MR. HOUGHTON: Does that statement apply to state revenue forecasts too?

MR. MILLS: Absolutely. We have assumptions there about how people in Texas will adapt to higher fuel prices and how they will change the types of cars they drive, as they do across the nation, as they start to substitute different vehicles in the vehicle fleet.

MR. HOUGHTON: In the equation is political forecast in that?

MR. MILLS: The only political assumption in the state revenue forecast is that the state government will not raise the state tax rate.

MR. HOUGHTON: Revenues.

MR. MILLS: Yes.

MR. SIMMONS: Peter, I know this just came out last week, but the federal budget forecast for the Highway Trust Fund, previously they were forecasting about a $700 million shortfall and now they came out with $3.6-, $3.8-?

MR. MILLS: Close to $4 billion, yes.

MR. SIMMONS: And then if you put the Raba into it, it's $4 billion short in 2009, and I think it's $16 billion short in 2010, but that's the next federal bill. How does that play into your forecast, does that number go up?

MR. MILLS: If I was doing this forecast again today, yes, it would probably go up as a result of that because I would have to make a stiffer assumption as to how much outlays will have to be reduced to keep the fund from going negative, the cash balance in the Highway Trust Fund from going negative.

Now, I might, if I may, at this moment just generalize about forecasts. We are presenting this forecast　-- and this is a relevant point to do it　-- we're not presenting this forecast as one being superior to one that's been done by TxDOT two years ago or last year or last week, nor are we trying to suggest that our assumptions or our methodologies are better. The recommendation we're making here to you, with respect to forecasts, is do it often. In our opinion, the best forecast is always the next one, and therefore, my advice or our advice is always absolutely question these assumptions if you don't like them　-- and no reason why people should　-- run another forecast with different assumptions.

MR. WILLIAMSON: Well, we appreciate you saying that, but we wouldn't want you to think that because we're on point that we have reason to doubt.

MR. MILLS: No, absolutely not.

MR. WILLIAMSON: We just enjoy being on this side of the table for once; we've spent the last six months being on the other side.

(General laughter.)

MR. MILLS: And commissioners, we would give you the same advice regardless of whether you liked our assumptions or disliked them. Our recommendation to you is that as an agency, as a commission and as TxDOT, you should be having these sorts of discussions all the time, and they should happen at a high level and they should happen inclusively of your partners so that when rescissions happen, they are not a surprise. They shouldn't be a surprise to anybody when they happen because yes, the means might be a surprise that yes, they've had to rescind existing, but the fact that the federal government is running out of money and the Federal Highway Program is one place where they can go and get it, that should not be a surprise.

MR. WILLIAMSON: In fact, that highlights probably a mistake that I made by letting the rescissions and our obnoxious focus on private sector partnerships become the focal point of the discussion. We haven't highlighted enough, from our perspective, I think, whether it's the war in Iraq or the war you won in Iran　-- which I support　-- or additional Social Security distributions, or whatever it is, the truth is the transportation pot in D.C. is a lot like the transportation pot in Texas: it is legal and easy to reach into and reapportion to some other function of government, and for us to make our 25-year plan based upon an increasing amount of federal government aid, as opposed to decreasing, would be irresponsible because it's not going to happen. It's going to decrease for some reason, whatever that reason is.

MR. MILLS: So let me move on, if I may, into our forecast of revenues that we believe the new tools will bring. We have forecasted revenues from toll operations, and because we are forecasting gross revenues from a toll operation, this forecast would be the same regardless of whether that toll operation was run by a public toll authority or whether it was operated under a concession agreement by the private sector. So what we're forecasting here is toll revenue point of sale at the toll booth and as the car drives under that TxTag reader.

Our forecast for that is about $25 billion over the period from new toll facilities, so this is above and beyond existing toll facilities in the state which collect roughly $500 million a year at the present moment. The forecast takes into account growth in traffic. It also makes an assumption with respect to pricing, and this takes us back, Commissioner Holmes, to a question you raised. We assume that the prices that are set on these tolls on these new tollways are not set just to cover their costs, that they are set based on the value of time they save for their customers.

So for example, if a facility costs an equivalent of 10 cents a mile to build over time, and the value of time saved to the people who drive on it is 16 cents a mile, our price assumption here is that the toll charged will be 16 cents a mile, of which 10 cents is going to go into maintaining that tollway and 6 cents is going to be available for other projects and other transportation priorities within the region　-- surplus revenue, if you will.

MR. WILLIAMSON: So let me ask you something. Would that logic apply to a gas tax rate. If tolls weren't an option and you were doing a capacity analysis and what was on the table was an increase in the motor fuels tax rate as opposed to generating tolls, would you be able to reach the same conclusion? I'm not leading you someplace, I really need to know. Would you instead be saying right now that assumes that if your gasoline tax rate needs to be 49 cents to recover your costs, you'll actually charge 88 cents to reflect the value of time per gallon, or is that analysis only relevant in a toll environment?

MR. MILLS: The value of time analysis is only relevant in a toll environment because people face a choice: they face a choice of traveling on another roadway or another system, and if they choose the tollway, they will save 20 minutes, 30 minutes, 40 minutes, and therefore, we can assign a very specific value of time and we can survey people and find out what that's worth to them and we can assign a time to that.

When people respond to higher fuel taxes, they respond in different ways. They don't just respond by making another choice as to where they travel, they may choose not to travel, they may choose to travel less, in the long run they may choose to buy another vehicle which gives them better fuel efficiency.

So when we forecast revenues from fuel taxes, yes, we can factor in adjustments for as you raise the tax, some people will drive less, some people will buy a hybrid, some people will just be mad and drive as much as they used to and pay more, but it's not a value of time argument, it's a cost of travel argument.

MR. HOLMES: Just a point of clarification, the $25 billion you have up here, if you use the 16 cents/10 cents analogy, is that the 16 cents?

MR. MILLS: That's the 16 cents, not the 10 cents.

MR. WILLIAMSON: And it's not inflated.

MR. MILLS: It is not inflated.

MR. WILLIAMSON: Just like the $102 billion in 2004 dollars which is going to get reduced perhaps to $87 billion because of other variables.

MR. MILLS: To use the analogy we're using, it starts with a toll of 16 cents a mile and stays with a toll of 16 cents a mile through the 25-year period.

MR. WILLIAMSON: I'm not trying to jump ahead of you, but it appears to me　-- oh, you've got one more revenue thing. I'm sorry. I want to ask that question when you're discussing all revenue.

MR. HOUGHTON: Where did the averages come from, 10 cents?

MR. WILLIAMSON: He just pulled that out.

MR. MILLS: Actually, I'm just pulling that out of the air as an example. It's not unrealistic.

MR. HOUGHTON: I mean, you had to come up with that $25 billion somewhere.

MR. MILLS: That's right. Well, the $25 billion, the way we came up with the 16 cents is we used the value of time estimates that underlay three of your most recent and most advanced traffic and revenue studies. So for SH 121 in Denton County, SH 121 in Johnson and Tarrant counties, and I think Copperas Cove and the Tyler Bypass, Wilbur Smith, who did all of those　traffic and revenue studies, they gave us the values of time which were implicit in all the survey work they did to support those T&R studies, and we used those values of time which are expressed in dollars an hour, basically what people think their time is worth when they're traveling. So that's how we came up with the 16 cents.

How we came up with the 10 to 12 cents was that is the established tolling policy of, in that same North Central Texas area, the NTTA. So their policy is to charge as low a toll as possible and still cover their system costs, and their target toll rate is a uniform 10 cents a mile. So while we pulled them out of the air, we pulled them from more or less the right places in the air.

MR. WILLIAMSON: So Michael can go back to Dallas and report to the consumers of North Texas that toll rates really need to go up to 16 cents a mile.

MR. HOUGHTON: They're being subsidized is what you're saying, toll rates are being subsidized.

MR. MILLS: No, I wouldn't say they're being subsidized.

MR. HOUGHTON: At 10 cents versus 16 cents?

MR. MILLS: I wouldn't say they're being subsidized because that implies that they're not covering the costs of the facilities, and they are covering the costs of the facilities. What they're doing is they are foregoing a revenue opportunity. Basically, they're taking the product which is worth 16 cents to a customer and they're selling it for 10 cents, 11 cents, when they could be charging 15, so they're giving the customer a pretty good deal.

MR. HOUGHTON: Yes, and they're being subsidized.

MR. WILLIAMSON: Well, not from his perspective, Ted. We don't want to put words in his mouth. But from our perspective, his 10 to 12 cents policy they set would not have been possible had the state not subsidized that toll system in the first place. The cost would have been more like 12 to 14 because they would have had an additional $500- to a billion dollars in debt cost.

MR. MILLS: A good example right now on the SH 121 Johnson-Tarrant county section which is just being looked at now, the costs are looking like they will drive the toll rate there up to about 15 cents. So TxDOT, City of Fort Worth, and NCTCOG are all working towards basically a special dispensation for NTTA to charge a 15 cent a mile toll because the costs of that project are going to be higher.

But the point I'm making here is that all of these tolls are based on recovering the cost of the toll system. Yes, you may subsidize it because you put toll equity in, you build connectors, you give them right of way, you do those things which artificially lower the cost of the tollway. I'm making a different point, I'm making whatever that cost is, the State of Texas and the toll authorities here have a tendency to charge a price that recovers the cost of the product, not what the product is worth to the customer.

MR. HOUGHTON: I agree.

MR. MILLS: And that $25 billion is based on charging a price of what toll facilities are worth to the customer.

MR. HOUGHTON: What would you say they are today?

MR. MILLS: What are the prices today?

MR. HOUGHTON: $25 billion is at 16 cents.

MR. MILLS: Roughly 16 to 18 cents a mile in peak periods.

MR. HOUGHTON: And what are we at?

MR. MILLS: About 10 to 12.

MR. HOUGHTON: In gross dollars, $25 billion based on 16.

MR. MILLS: $25 billion based on pricing around 16 cents a mile.

MR. HOUGHTON: What does that equate to today, that $25 billion based on 10 cents, given the Wal-Mart price.

MR. MILLS: Given the Wal-Mart price. At 10 cents a mile, what's going to happen is the revenues will come down roughly 60 percent, so you would go from $25- down to $15-, however, there is what we call a price elasticity effect, at a lower price, more people will drive, so at that price you'll attract more customers which rule of thumb says it will go back up another 20. So you would probably be $18-, you'd be south of $20 billion; I'd say you'd be probably north of $15-, south of $20 billion.

MR. WILLIAMSON: Uninflated.

MR. MILLS: Again, uninflated. All based on the presumption that the toll that is set in 2005 remains in effect through the 25 years.

The last set of bold assumptions we made are around the funds that would be available from comprehensive development agreements. I just want to stop here and take a very careful definitional thing. When you sign a comprehensive development agreement that results in a concessionaire giving you a payment, there's five different places a concessionaire can get that payment when they look at sort of their funding and their ability to do the project.

One would be　-- and this happens in other jurisdictions that because they're in the private sector, they can charge a higher toll. That doesn't apply in Texas because in Texas a private sector concessionaire can't apply a higher toll, they're going to charge the same toll as a public sector provide would on the same facility. So that amounts to zero.

The other source on the revenue side from which a private sector concessionaire will draw that payment is they are able to make a more optimistic assumption of what the traffic will be. The traffic and revenue studies which are prepared for bond rating agencies are very conservative, and when a public sector toll authority issues bonds on those, they have to stay with those conservative forecasts, whereas, a private sector firm can take a risk and share some of the benefit of that risk-sharing with you and they can give you some portion of what increased traffic they think they will get.

That portion, and the way we've done this forecast, that's included in the $25 billion because you'll recall the way we forecasted the $25 billion is we said no matter who runs that toll facility, public or private, they're going to charge the same toll and they're going to collect the same amount at the toll booth from whatever traffic shows, never mind what the traffic and revenue study initially projected.

So for example, when you get $1.8- or $2 billion from somebody for a road, they will include in that their expectation of some revenues or some traffic higher than you initially projected in your public sector analysis. In this forecast, that is part of the $25 billion which is already on the board. So when we forecast a further $5 billion of payments from concessionaires, we're forecasting those to come from their cost savings, not from what they think they can do on the revenue side. That's already included in the $25 billion.

So that $5 billion is a product of what they can save by doing design-build and life cycle design and construction through the entire project, and it's what they can save on the financing side by combining private equity and private activity bonds. So when you look at that $5 billion and you think hey, hang on a minute, we've already been given a check for something close to $2 billion on one project, recognize that that $2 billion was part of what's in the $25- and part of what's in the $5-.

Have I thoroughly muddied that one up?

MR. WILLIAMSON: Well, I think as long as we keep remembering it's uninflated, I'm about ready to ask a couple of questions that are either going to make me feel good or make me feel bad, but as long as we recognize they're uninflated, I think we do understand that.

Can I ask you to rest a moment?

MR. MILLS: Absolutely.

MR. WILLIAMSON: Amadeo, where are you? Now, they've made a real good point of saying the $102 billion revenue is not inflated. When we got to $188-, we were arbitrarily increasing the revenue need by looking at the expense side and backing into it. In other words, we got to an $86 billion gap because we said, Here's the revenue side, here's what we think the expense side is, the difference between the two inflated is $86 billion.

MR. SAENZ: No. The $86 billion was in 2004 dollars. The needs were identified in 2004 dollars; the revenues, we brought them back to 2004 dollars and we just subtracted them.

MR. WILLIAMSON: So　-- again, correct me if I'm wrong　-- where we decided that we could only fill the $86 billion gap with basically toll projects, is that $86- comparable to what he says is $30-?

MR. SAENZ: Yes.

MR. WILLIAMSON: Because we're saying we can fill $86 billion in gap with tolls, he's saying no, you can't, you can only fill $30 billion with tolls.

MR. SAENZ: Yes, sir, that's right.

MR. WILLIAMSON: So does that challenge the $86 billion, or does that simply say boys, you haven't gone far enough? Which is it?

MR. SAENZ: I think we haven't gone far enough.

MR. WILLIAMSON: What would you say it was?

MR. MILLS: Well, I can't speak to the other half of the $86 billion because part of it is need and we didn't look at need, but if I start from the premise that all of those need are bona fide and pared to the bone and absolutely needed, then yes, you haven't gone far enough, absolutely.

MR. WILLIAMSON: I'm not sure that's what I wanted to hear　-- it might have been. In other words, we haven't been aggressive enough?

MR. MILLS: That's correct.

MR. WILLIAMSON: Oh, that's exactly what I wanted to hear.

(General laughter.)

MR. WILLIAMSON: Okay, please continue. We've been conservative? I thought I was obnoxious and aggressive, you were rude and abusive. I just don't think we've done enough of what we've been doing, Ted.

MR. MILLS: Well, and the news gets a little worse, because not only are we saying that everything you can do will get you halfway there　-- if I can put it roughly　-- or a third of the way there, you have this other problem, and that is that the traditional base, the field you're trying to run on, the traditional base is slipping sand. Because what we're identifying is that maybe $15 billion of the traditional state and revenue sources that you thought would be there behind you as you tried to get across that $86 billion, that's starting to erode away.

MR. HOUGHTON: For my simple mind, I've got to put this in a snapshot in time. Amadeo or somebody, what was our revenue increase from this biennium to the last biennium　-- I mean in traditional revenue, federal receipts, state receipts. Is Bass here?

MR. SIMMONS: I think that what we saw, Commissioner Houghton, was about a 3 percent increase over the last biennium.

MR. HOUGHTON: Three percent in traditional revenue sources.

MR. SIMMONS: Total.

MR. HOUGHTON: Right, total revenue. Now, my next question is with the state growing the way we are growing, supposed to go to 50 million, 40 million, whatever the demographers are talking about, do you factor that in as to receipts?

MR. MILLS: Absolutely.

MR. HOUGHTON: Flattening out?

MR. MILLS: Yes. So we include in that population growth in which you are very close to 3 percent over the time period, whereas the United States generally is about 1.7, less than 2 percent over the same period of time, so yes, your population is growing faster. However, we have also factored into that as it grows, the population of Texas will also get a little older and older people drive a little less, but more significantly, they will drive more fuel-efficient cars.

MR. HOUGHTON: That's a big shift, though, when you're talking about the amount of growth this state is going to experience. I can't remember all these things swimming up here. My point is that who has said to me the ratio of people to cars in the state of Texas is what? Who knows that? Brett, what's the ratio of cars to people in the state of Texas, registered vehicles?

MR. WILLIAMSON: Historically it's eight to ten, for every ten persons, eight vehicles are registered.

MR. SIMMONS: I think we have about 19 million registered vehicles, and that includes trailers and stuff.

MR. HOUGHTON: And I'm probably getting too specific with my calculation, but I'm just having a hard time understanding the revenue sources dropping off that much over time with the population and the shift to these types of vehicles.

MR. MILLS: If I can put it in those percentage terms, what our forecast is saying is that historically you've had a growth of roughly 3 percent year over year, that's a little better than you've usually done　-- historically, it's closer to 2 percent over many years　-- we're forecasting by the time you get to the end of this period, that year over year growth rate will be below 2 percent in the revenues, it will be 1.8 percent. And that will be because even though the population is growing at close to 3, they're going to be driving those 19 million vehicles will become 30 million vehicles, but as those new vehicles are added to the fleet, they will be more fuel-efficient vehicles.

MR. WILLIAMSON: If you'll remember, one of the big arguments we had　-- not arguments　-- one of the sticking points, rough spots with Michael Stevens's reporting to the commission a year ago was that it was predicated upon TTI's assumption that the vehicle fleet wouldn't become more fuel efficient which we found to be appallingly in error.

MR. HOUGHTON: But that's why I wanted to focus on that. That is a significant shift; I don't think people realize how big of a shift that is to those types of vehicles.

MR. MILLS: And because what we're doing here is taking that sort of risk approach to audit, what we're seeing is that it is a significant risk. Like there is a significant risk to your traditional revenue streams that come in the form of increasing fuel efficiency　-- which from a public policy point of view is probably a good thing　-- and from a huge federal deficit. Those are significant risks.

MR. HOLMES: Did you actually use specific numbers on the fuel efficiency increase?

MR. MILLS: Yes. We used the forecasts that are put out by the U.S. Energy Information Administration. They do a forecast nationwide of how new engines will be developed and introduced into the vehicle fleet and the rate at which old vehicles will be scrapped, and we adjusted that then for the difference between the Texas vehicle fleet and the national vehicle fleet.

MR. HOLMES: Can you give me just guidelines as to what you assume it is now and what you assume it becomes over this time period?

MR. MILLS: I don't want to try to drag the numbers out of my head because I'll invariably get them wrong, but the story of the numbers basically is that all through the 1980s there, of course, was a significant improvement in the fuel efficiency of engines, then what happened is that the fuel efficiency in engines was then counteracted by a desire for more horsepower, so there was, in fact, over the last 15 years a tradeoff in the vehicle fleet between increased horsepower and decreased fuel consumption per horsepower.

The U.S. Energy Administration's prediction says that's going to come to an end, that people will no longer continue to demand more and more horsepower, that people have pretty much peaked out in terms of the horsepower they need in their vehicles or want in their vehicles, and therefore, any future technological developments to increase fuel efficiency will start to drive miles per gallon back down again.

So that's without recalling the numbers which I'm sorry I just can't do out of my head.

MR. HOUGHTON: But consumption is down on miles per gallon.

MR. HOLMES: It won't drive miles per gallon down, it will drive the consumption down.

MR. MILLS: Yes. I'm sorry, I'm thinking of liters per 100 kilometers. But yes, miles per gallon would go up.

MR. HOUGHTON: You mean we're not going to drive Hummers anymore?

MR. WILLIAMSON: No, we are going to drive Hummers, what he's saying is　--

MR. MILLS: What General Motors will do is they'll try to put more fuel-efficient engines in the Hummers to develop the same horsepower a Hummer has now.

MR. WILLIAMSON: But he also is saying that right now their projections are the need for the Hummer times two, the market is not going to develop a demand for Hummer times two, that the demand for increased horsepower is peaking, and we actually already see that, I think.

MR. MILLS: Yes, so that basically the Hummer is as much horsepower as anyone is ever going to want.

MR. WILLIAMSON: The grade of the hill hasn't changed, and as congestion gets worse, the need for 500 horses under the hood becomes less and less because you can't go any faster, the guys in front of you won't get out of your way.

Other members may have other questions, but what strikes me in looking at this last slide is that I can conclude from your projection that we're going to have to look to toll regimes of some kind for approximately 35 percent of our revenue in the future.

MR. MILLS: Certainly more than the 25 percent that's indicated here.

MR. WILLIAMSON: And $86 billion in our gap is going to be filled by our toll program. We projected $188 billion toll revenue of which $86 billion would be filled by our toll program. Who's got a calculator? What's 86 over 188? I want to see how close we were. All of you engineers ought to have one of those slide rules hanging around your neck.

(General laughter.)

MR. WILLIAMSON: So we projected 46, our auditors are saying 35. I don't feel too bad about that. I feel real bad about people who spoke out of ignorance over the last six months.

Members, anything else for this man's presentation? Continue, please.

MR. MILLS: So faced with that sort of forecast, these are the recommendations which we put in front of you with respect to how the basic funding model　-- which we believe to be fundamentally sound　-- how that could be altered and somewhat improved. We think in the long run that you should be trying to replace, as many states are looking at now, the motor fuel tax with a vehicle miles traveled charge. Because the technology for that has to be installed onboard on vehicles, it's probably 20 years to get that done. Texas is part of the development effort and should continue to be so.

We've also recommended some measures you should be taking while that 20 years is going by. One thing we observe, of course, is that tolling is not an effective tool for raising revenues in rural areas, it's predicated on high volumes, it's predicated on congestion, it's also predicated on the economic benefit of the highway being captured by the many thousands of people that drive on it every day. In rural settings the principal economic beneficiary of a highway is not the people that are driving on it　-- which is a low number　-- but usually the owners of land that is developed around. So we're suggesting that TxDOT should be looking at tools which are able to raise revenues from rural facilities which are capturing the economic benefit which is accrued to landowners.

The other thing　-- which we've already discussed at some length　-- is toll authorities currently in the state tend to price on a cost recovery basis. The political incentives under which they're governed are such that basically their customers are happier and their voters are happier when those tolls are as low as possible, and their incentives are, of course, to cover their costs and keep their tolls down. So our recommendation is that they be encouraged to price on the basis of demand, and we've made some recommendations about tools with which you might be able to help encourage them.

And at this point, being very mindful of the time, I think I'd better turn things back to Bill, who will talk about the programming process.

MR. WILLIAMSON: Well, wait a second. Any more questions of this presenter at this time?

(No response.)

MR. WILLIAMSON: Thank you very much.

MR. DYE: Peter will be back so you can grill him more in a few minutes.

This audit area involved an assessment of the processes, methods and procedures used to program funds. We evaluated TxDOT against four broad industry standards for best practices for programming project selection:

First, is there an outcome or performance-based approach, that is, are resources allocated and projects programmed in alignment with TxDOT goals and objectives. And in this case we looked at the five Strategic Plan goals that you've established.

Secondly, do the methods and procedures used to select and prioritize a project reflect industry practices and technically sound approaches.

Third, is the process transparent and replicable and is it understandable.

And fourth, does the process provide metrics for the effective communication with the public and stakeholders regarding the outcomes, and does it chart Texas's progress in managing for results.

This slide highlights our findings. First of all, TxDOT has made changes in your UTP structure, your Unified Transportation Program structure, to better align your categories with goals. Funds are allocated to categories through a goal-based approach, so that's very positive.

Secondly, the procedures and methods for allocation are transparent. For example, they're published on the website and they're quite institutionalized. For example, statute makes reference to these mechanisms and distribution formula when specifying that districts and regions are to be held harmless in their UTP allocation for implementing toll projects. So it is a very understandable process.

Then thirdly, TxDOT is currently continuing to strengthen metrics so the project selection can better align with Strategic Plan goals. For example, work is underway so that if two projects have equally beneficial outcomes in terms of mobility and air quality improvements, then the project with the biggest safety benefits would be the one selected.

And then fourth, for many UTP categories, decision-making is decentralized now with new projects entering the UTP from the regional level. MPOs, as you know, have been empowered to select projects and work with TxDOT districts and local toll authorities in putting forth these projects.

So in brief, in this area the findings are very positive with respect to at least the first three criteria that I mentioned. Where we do see opportunity for improvement is that there is no reporting of the actual outcomes in terms of the proposed improved level of performance of the system and what we would expect to see from the implementation of the UTP or MPO plans, and we'd like to see greater measurement of that.

To that end, recommendations are for TxDOT to improve accountability and communicate the level of performance, that is, the outcome expected from the UTP which is, in essence, your capital plan for the next ten years.

Similarly, we recommend that the largest MPOs, that is, the Texas transportation management areas, TMAs, be required to report the level of performance from the implementation of their system plans against the TxDOT Strategic Plan goals. This could be similar to the accountability report that the North Central Texas COG now has posted on its website.

And then finally, as TxDOT updates the Strategic Plan, further work can be done to better align the UTP and the goals in the plan into an outcome-based framework.

Questions about that?

MR. UNDERWOOD: Quick question. If I understand correctly, to report the level of performance　-- I hope I'm saying this right　-- bottom line is do they have the computers to be able to do that? Are you talking about doing that through computers, are you talking about doing that through reports? How are you going to coordinate all of that?

MR. DYE: Well, the main issue is to define measurable goals and to quantify where they're trying to go. You've established some very clear goals in your Strategic Plan and we'd like to see some estimates of what measurable impact those goals will have.

MR. UNDERWOOD: How are you going to receive those estimates is the question I guess I'm trying to say.

MR. DYE: Well, there are a variety of ways of doing the estimates. Some of them require transportation modeling to come up with the estimates, in the case of your mobility estimates, your congestion estimates and so forth, so there are various tools available to do those. In the end, though, it does require defining what those measures are which is really where you're headed with the UTP itself for your own program, but we'd like to see the MPOs report in a likewise manner.

MR. HOUGHTON: So a political decision versus a business decision.

MR. DYE: Yes. In the end, no one will take the politics out, but we'd like for you to have better data on what you might accomplish.

MR. HOUGHTON: To build or not to build, to build a toll road, or to put rubber tire or commuter rail, that kind of analysis is what you're talking about.

MR. DYE: Exactly.

MR. WILLIAMSON: Whoa. I'm trying to form my questions correctly. So the Strategic Plan that we put in place at the top has very clear goals that it should be easy for the department and then the regions and then local government to report against, and your recommendation is we need to strengthen how that happens.

MR. DYE: Yes. In some cases it's not easy to report the measures, though. That does take work and where those measures have not been developed, Commissioner Williamson, they're going to have to be developed.

MR. WILLIAMSON: So if I could give an example, when we do our apportionment to the metro and urban areas of projected state aid　-- as opposed to toll aid, state tax aid, without telling CAMPO how to do something, we should say whatever decisions you make, we need some sort of measure. You've either got to reduce congestion or improve safety or improve air quality or attract jobs to the area or preserve the value of our state system, be sure and tell us how that happens with your decisions.

MR. DYE: That's correct.

MR. WILLIAMSON: And by inference, your decisions, if you have a dollar that you can spend on reducing congestion on 1 percent or 3 percent and you choose to do it on the 1 percent deal, why did you do that, why did you not choose the 3 percent deal.

MR. DYE: That's correct.

MR. HOUGHTON: That also ties into, Ric, the financing mechanism with it. I mean, it's just not a separate decision.

MR. DYE: Correct.

MR. WILLIAMSON: And by that do you mean there may be a toll project that will only reduce congestion 1 percent but the project that would reduce congestion 3 percent might not be tollable. Is that what you're getting at?

MR. HOUGHTON: And vice versa.

MR. WILLIAMSON: Maybe I shouldn't ask you this question, maybe I should ask it of Steve. Isn't that, in effect, what we did with the Mobility Plan, Steve, when we told the areas: Here's your mobility money but tell us how you'll use it, tell us how you'll leverage it?

MR. SIMMONS: Yes, and also if you'll remember, we also brought in the TCI, the Texas Congestion Index, as one measure that we would make sure that they're using the money since we've given them the authority to.

MR. HOUGHTON: That's the political decision versus the business decision. If I've got a project over here that's toll viable to 10 or 15 percent and I've got one over here that's 50 percent, where does the oversight come to wring out at this level the political decision? Those things do happen. I mean, we see the path of least resistance: Okay, I built this 10 or 15 percent viable project, I get access to the mobility funds, when in fact it did not hit the TCI, did not hit my measures, but because we say local control, you got it. That's the oversight as to the UTP plan. Where is the oversight when it comes to that, or do we have that kind of oversight?

MR. DYE: Well, this is to give you better tools to do oversight with, to tell you what you're actually accomplishing.

MR. HOUGHTON: Bang for the buck.

MR. DYE: In business it's the return on investment.

MR. HOUGHTON: Bang for the buck.

MR. DYE: Exactly.

MR. WILLIAMSON: But as our auditor　-- and maybe I don't understand the bullet points; like I said, I haven't read this until this morning　-- in slide 10 the first bullet point: UTP resource allocation dollars to categories is goal-based. The UTP is actually　-- I'm going to have about 29 engineers, that I know of, throw something at me when I say this　-- the UTP is really not a planning document, it is a project-scheduling document. Isn't that correct, Steve?

MR. SIMMONS: Yes, sir.

MR. WILLIAMSON: The planning document is the Strategic Plan and how it relates to the region's decisions to advance something to the UTP. The UTP itself is nothing more than a project process. Or is it not?

MR. SIMMONS: It is the project-scheduling based upon the MPOs planning.

MR. HOUGHTON: Where's the backup on that UTP? Where's the oversight to the UTP?

MR. SIMMONS: It's the MPO.

MR. HOUGHTON: Business versus political, where is the analysis piece of it that he's talking about?

MR. WILLIAMSON: I think maybe he's saying that's what we've got to strengthen.

MR. DYE: That's correct. And I think if you want to see a good example, it's the North Central Texas Council of Governments. They do a really kind of results report and talk about what they've accomplished, they try to put this in measurable terms, and that's really what we're talking about. And we're not trying to take away authorities of the regions, we're just trying to provide you better information.

MR. HOUGHTON: There has to be some oversight.

MR. DYE: That's correct, and you have to have good data to tell you what you're accomplishing, and that's really what we're talking about.

MR. WILLIAMSON: I didn't ask the previous presenter; I need to ask you and I'll ask him when he comes back up. Are you comfortable with the cooperation of the agency in doing your work? Did the employees of the agency work with you as they should have?

MR. DYE: Yes, absolutely. We've had excellent cooperation.

MR. WILLIAMSON: Anything else at this point, members?

(No response.)

MR. WILLIAMSON: Thank you.

MR. MILLS: For the record, I'm Peter Mills, returning to the podium, and I'm going to take you on to the next slide which discusses the application of debt to funding projects in Texas, highway projects in Texas.

In the first bullet there, debt is no substitute for revenue. We put that there for any of those of you who do not have teenage children and do not then know the futility of trying to meet demands with debt. And starting from that skeptical position that using debt as a substitute for revenue in meeting needs in the long run is ill-conceived, we have found that in Texas the application of debt is rather good, specifically even more so at the state level perhaps than the local level.

Again, these numbers are a little bit dated, but if you look at the red and pink bars at the top which represent the debt incurred by the state government and state toll authorities　-- that includes the NTTA for funny reporting reasons　-- a large proportion of state-level debt in Texas is applied to toll-generating projects which, by definition, generate a benefit in the form of tolls and revenues which exceeds the cost of the debt. So Texas, we find is well placed and relatively well placed to other states in their use of debt.

Our observations with respect to debt is that TxDOT is doing the right thing in pursuing private sector financing through comprehensive development agreements as an alternative to toll revenue debt issued by municipal or state level public toll authorities. It is less expensive when public activity bonds can be brought to bear, and our belief is TxDOT should continue to do that.

The third point we'd like to make with respect to debt is around the issuance of debt, toll-backed debt by RMAs. What we've said here　-- and I should be a little more careful than I've been in the slide in differentiating this　-- whenever a toll project is financed with a high degree of debt, with a high proportion of debt and a low proportion of equity　-- in other words, it's highly levered or highly geared　-- there is, of course, a higher level of risk to the bondholders that the project will fail and they will not be able to clip their coupons. As a result, projects that carry a relatively high proportion of debt carry a higher debt cost, both in terms of the rating that the bonds receive and in terms of the insurance that the agency issuing the bond may have to issue.

So our observation that a highly geared or highly levered toll project has relatively expensive debt would apply not just to an RMA but to any another state or local level of toll authority that's issuing such debt, but our concern here is that the RMAs, coming out of the gate as they are, have very little equity, they don't have the equity available to them to put alongside bond debt when they kick off their first toll project, and therefore, that makes their debt very expensive, and therefore, if they were able to attract an equity shareholder to invest along with them in that toll facility, they would lower the cost of debt and therefore the cost of that toll facility.

MR. HOUGHTON: Are you saying an equity shareholder like in the private sector, private equity?

MR. MILLS: Or could be public equity.

MR. HOUGHTON: Here's that decision again, political versus business.

MR. MILLS: No. In this particular instance it would be government making a business decision.

MR. HOUGHTON: A political decision not to bring in the private sector, run away from it, or a business decision to say how do we narrow that debt with equity.

MR. MILLS: What the RMAs are missing is the third way or the third option. Right now they're caught between we either have to do a CDA and bring in private sector financing, or we have to issue a bond that's going to cover 80 percent of this project's cost and scrabble together the other 20 percent, if that.

MR. HOUGHTON: Or cut the project back.

MR. MILLS: Or cut the project back. And what we're seeing is that if there was a state entity　-- and I use that term loosely　-- a public corporation or an investment authority that the state had　--

MR. HOUGHTON: Have you been talking to this guy, Ric?

MR. WILLIAMSON: No, I haven't, I swear I haven't, not at all.

MR. HOUGHTON: I know.

MR. MILLS: I've actually probably been speaking more to people in jurisdictions outside the United States which do this quite frequently and where they form basically call it a public corporation　-- that's probably the best way to describe it.

MR. HOUGHTON: Like equity from the Teachers Retirement System and Employee Retirement System?

MR. MILLS: Well, I don't know if you'd even have to tread into that. TxDOT itself, in the Texas Mobility Fund, has the ability to raise debt to capitalize these sorts of things. But the important issue here　-- and I don't want to get prescriptive as to where the money comes from or how such an entity is structured　-- it's public equity in the sense that the state is investing money into that project without a guaranteed return as a bondholder would have.

But what they are getting, of course, is they're getting, first of all, a vehicle by which if there are surplus revenues on that project, as a shareholder they will be earned and they will be earned according to well-defined rules that come out of the private sector. They will also, as a shareholder, have some voice in setting what the tolls will be on that facility which takes us back to our previous point about having the means to encourage local toll authorities to do some demand management and peak pricing.

This next slide, we covered some of this in our first discussion so I'll do this very briefly.

MR. WILLIAMSON: I don't want to leave that too fast because that sort of strikes to the heart of another of the donnybrooks we find ourselves in. It is assumptive in the world that a 100 percent financed government-owned asset surely can generate more cash flow than a 50 percent private sector financed asset for the citizens of the state.

We took the position, Ned and Fred, before you got here, and when Mr. Nichols was on this side of the table, that the latter was preferable to the former because ultimately the cost of debt to the public monopoly would be more than the public monopoly wishes to discuss because the debt source is still going to be, in the end, my 401(k) and I'm not going to invest my 401(k) and take a risk without being paid a premium for that risk. We have so far been unsuccessful, the five of us, in persuading a lot of the state that that's the case, but your observation is that is precisely the case.

MR. MILLS: Our observation is　-- and I'll just make sure that I'm getting this in terms that work for you　-- is that the two choices faced now of a private sector financing where you combine private sector equity with a private activity bond, that is a lesser cost, and therefore, a better cash flow than a publicly financed facility. So that's where we start.

We then turn to the publicly financed facility and say even though it would still cost more than the private sector alternative, it would cost a little less if you were able to combine in it public debt and public equity.

MR. WILLIAMSON: And public equity could occur as an apportionment of our gas tax revenue if we had excess gas tax revenue　-- which we don't.

MR. MILLS: We haven't addressed what the source of funds would be.

MR. HOUGHTON: It's just public equity.

MR. WILLIAMSON: Or it could be the Teacher Retirement System.

MR. HOUGHTON: Or the General Land Office.

MR. WILLIAMSON: As you have so aggressively advocated for.

MR. MILLS: It could be those funds, and I guess I point to the example of private pension funds which historically were the source of funds for private sector investments in highways. They find that kind of long-term investment in people like Cintra and McCreary very attractive. So it would make sense that a public pension fund would find those sorts of long-term equity investments in a public asset equally attractive. But again, we do not want to be too prescriptive.

MR. WILLIAMSON: And if I could look for an appropriate example of the third category you touched on which is the public monopoly with some public equity in it, it would be fair then to observe that NTTA, in its negotiation with the regional MPO, is sort of doing that when it says we will match and exceed the private sector proposal and the way we'll finance that is we'll use the equity we have built up in our existing system.

MR. MILLS: Exactly. They, in fact, are doing exactly that, they are using public equity to lower the proportion of debt applied to the project and lower its cost.

MR. WILLIAMSON: In order to make that particular project's costs fall into line.

MR. MILLS: That's right. And because they can't effectively do what the private sector can do with the private activity bond　-- which is capture tax credits for depreciation　-- they won't get all the way there but they'll get closer.

MR. WILLIAMSON: Because in the end, NTTA, unlike HCTRA, is an extension of the state, is it fair to say then that the probable risk to the state is that if the project　-- in this case, State Highway 121　-- doesn't meet its projected revenue goals as its own project, that equity will be fully realized by raising the tolls on the entire system to pay for the difference between the project's revenue projections and reality?

MR. MILLS: That would, I guess, depend on the shareholder interest that that public entity has in the rest of the system.

MR. WILLIAMSON: Well, I'm sorry, they would do one of two things: they would either markedly raise the project's tolls or less markedly raise the tolls on their entire system.

MR. MILLS: That's correct. Certainly, as a shareholder, you now have a voice in determining what those tolls will be.

And one thing before we leave that, you've used the term, Commissioner, public monopoly. It wouldn't have to be a monopoly, there's no reason why there couldn't be more than one or why they couldn't compete with each other. So no, it merely needs to be a public entity, basically, which is owned by the people of Texas and it has capital available to make equity investments in toll projects in Texas.

MR. WILLIAMSON: Well, I think most of this commission is four-square in the corner competition but we haven't convinced some of our regional monopolies that that's the best way, but we'll keep working on it.

MR. MILLS: This next slide which I'm putting in front of you speaks to the question of toll rates　-- and Commissioners Houghton and Holmes, this takes us back to our example of 10 cents, 16 cents, 18 cents　-- and what this slide shows you is some data which we collected out of toll systems in the North Central Texas area. And I will just stop here because I think we pretty much already described this and where this information came from, and in the interest of time, I'll just make it part of the record.

I'll move on to our recommendations with respect to debt and project funding. We see this sort of equity investment as the solution to a couple of different problems. One, of course, is providing some effective means by which the state can encourage local authorities to price on what their product is worth rather than what it costs, and practice some demand management as well. We also see it as a means by which projects can still be done as public projects rather than CDAs, and albeit more expensive than a CDA, the gap would be narrowed by being able to invest public equity into the project. So that's really the basis for these recommendations that we're putting before you in this area.

The other one I would mention　is -- and it's something of a paradox　-- as we make potential toll facilities more and more valuable, we create a bit of a problem for our cousins in transit. Transit authorities are funded very differently in terms of their capital. They receive big bond issues to undertake specific projects and then they receive grants to fund their operating expenses, so when they're invited to the table to become part of the deal-making process for funding　-- and I'll just pull an example out of the air　-- the Katy Freeway and the inclusion of transit facilities in the Katy Freeway, they're not very well equipped and their heads aren't quite in the game as yet, but they're not well equipped from their funding standpoint to fund contributions to those projects to own a piece of them, to integrate their projects into them and become sort of one of the players in the funding of one of those projects.

And it's just something we've asked, we've made a recommendation here that if that ever does become a problem, that's perhaps a direction in which some equity can be invested to make sure that they are properly integrated into those things.

MR. WILLIAMSON: Ned.

MR. HOLMES: I need you to expand on that thought a little bit and explain that a little bit.

MR. MILLS: Well, here's an example. At the planning stage　-- and this works well at the planning stage　-- a toll corridor will be planned and the MPO will determine that there should be a transit element in it, and that might be some right of way reserved for light rail or it might be a dedicated busway or it might be a HOT lane, a high occupancy toll lane.

So now as let's say an RMA, a local toll authority, TxDOT start trying to put together the funding for the project and now we're at the point where the city owns the right of way so how much are they going to get for the right of way, and who's going to build those connectors and who's going to build those enhancements, and where are they going to get funded. Now the question comes up: Well, how are we going to fund the transit components. So in other words, here's a lane which if we just made it tollway, if that was a lane in a tollway, it could raise a million dollars a year　-- that's a number I'm pulling out of the air.

So now I turn to the transit authority and say, Well, that lane which you want me to turn into a dedicated bus lane, it has a toll value of a million dollars a year, and therefore, you should pay me a million dollars a year to make that a dedicated bus lane. And the transit authority looks back at you blankly because they just aren't accustomed to dealing with that sort of pricing of access to right of way. So it puts transportation planning and funding in a bit of a conundrum because on the one hand good planning might dictate that the best use of that lane is as a transit facility, and yet, in terms of your revenue goals and toll generation, you're giving up a million dollars a year.

So the logical argument is to say, Transit Authority, you should pay us a million dollars a year to get access to that authority. And that kind of pressure on deal-making is happening out there in the field, it's happening in Houston, starting to happen a bit in Fort Worth and Dallas, and the transit agencies aren't well equipped to deal with that. Their funding structure makes it a little hard for them to come up with well, okay, we'll pay you a million dollars a year for access rights to that lane of highway.

MR. WILLIAMSON: So are you suggesting　-- and maybe you're not　-- can I infer from your observation that the transit authorities should have an economic interest in the toll collections?

MR. MILLS: I'm inferring one of two things: I'm inferring either that we be open to the possibility that transit will come along and say, Okay, we'll give you the million dollars a year but we want that treated as an equity investment and we want to be a shareholder in this thing; or that if the transit authority is simply unable to do that, that you may have to come along, that TxDOT may have to come along and say, Okay, we will own that lane and we will decide to forego the tolls and put transit on it.

MS. ANDRADE: So are you encouraging it or discouraging it?

MR. MILLS: We are putting it forward as a last resort.

MS. ANDRADE: That sounds kind of sad for public transit.

MR. MILLS: It would be sad if public transit was excluded from a toll facility simply because they couldn't meet that offset price, and this is putting a means in place that as TxDOT if you find that the funding structure of a particular toll facility is going that way where transit simply is getting forced out of the game by the high revenue potential that that tollway has, then yes, this provides you with the means to step in and say, All right, we will own that lane, we will be the equity investor, we will own that lane, and we will decide to forego the revenue and put transit in it.

MR. WILLIAMSON: I don't think what he's saying is bad, I think what he's saying is current practice is transit is being pushed to the side.

MR. MILLS: There's a risk that transit might get pushed to the side.

MS. ANDRADE: So we just need to do a better job in encouraging them to be a partner but helping them understand what it's going to take to be a partner.

MR. MILLS: Yes. Certainly our discussions with transit people suggested that they haven't fully got their heads around all of this yet, and so for example, when TxDOT officials talk to them about well, okay, we think we're going to make some surplus revenue here and you have to be prepared to make some contribution towards that surplus revenue on a toll project, to transit people that's a whole new language.

MS. ANDRADE: I also think we haven't done as well of a job in bringing them as one of our partners.

MR. MILLS: And all we're proposing here is that there is a risk in the development of a toll project　-- I don't think we've seen it happen yet, but there is a risk in the mechanisms, the way they're set up right now, that a transit element which was identified at the planning level as a good thing might get forced out just because they can't participate in the funding of it. So we're just saying as a last resort, you may have to step in and solve that problem.

MS. ANDRADE: All right. Thank you.

MR. HOLMES: Doesn't the tension come from the fundamental economic differences between transit and toll roads?

MR. MILLS: Actually the economics are not far different in that the transit authority will collect a toll, if they run a light rail or a dedicated busway, they'll collect a toll, they will generate revenues, they will capture a benefit, so the economics of it works. What doesn't work quite so well is the financing because the way transit authorities are financed is they get an operating grant from the federal government to cover ongoing operating costs, so basically a subsidy of their fuel and labor which is a big bill. And then when they have to acquire capital, they go out and do a single big bond issue or a single big raising of capital, they don't have the sort of pools of capital funds available to participate in projects like this that say a highway agency does.

MR. HOLMES: I'm not sure I agree that the economics are the same. You know, there are obviously toll roads that are not fully toll-viable that require some toll equity, but there are also some toll roads that are very toll-viable and will produce additional value which is where the CDA process comes in. I have not yet seen a transit project that recovery through the fare box even covers its operating costs, much less capital costs, much less provides additional funding. So I don't agree that the economics are fundamentally the same.

MR. WILLIAMSON: But Ned, you're comparing transit to　-- this is great, we've been having this discussion for seven years now　-- you're comparing transit to a toll road, compare it to a tax road instead which is still 90 percent of the roads we operate in the state.

MR. HOLMES: And the tax road is paid by the users through the gas tax.

MR. WILLIAMSON: Well, right now it's not.

MR. HOLMES: And the transit is paid by sales tax on general sales, not on a specific use.

MR. WILLIAMSON: I agree that the source of revenue for transit is not good, there's not a direct relationship between the use of the funds and the source of the funds, but forgetting the source for a moment and just looking at dollars in and dollars out, the same subsidy is occurring on tax roads. You and I are being subsidized by our children's taxes on the tax roads we drive on today, and taxes we pay don't near cover the cost of original construction and maintenance and rehabilitation of those roads. We're just shoving it onto the next generation, and in actuality　-- I started to ask you about this and decided that I was being too aggressive or obnoxious, whichever applies　--

MR. MILLS: No such thing.

MR. WILLIAMSON: 　-- isn't it the fact that the subsidy that my father paid for me, that bill is now coming due from me? That is, in reality, the problem that transportation faces.

MR. MILLS: That's the fundamental tenet of a pay-as-you-go system.

MR. WILLIAMSON: It started in about 1976 when the age of the Federal Highway System started to matter, and my father paid one-third of the gas tax he should have been paying, and I am now beginning to subsidize his consumption of that road, and I am consuming the roads that I expect my children to pay for in just a few more years.

Now, the same thing that happens between tax highways happens between transit users, exact same thing happens: we're all being subsidized.

MR. HOLMES: Well, I think the general rule is correct, but I think it's across all levels of government that we are passing on the cost of all levels of government to our children and grandchildren, it's not just transit and highways. I think it's a more dramatic difference between transit and highways than it is in other areas.

MR. MILLS: And transit is deliberately subsidized for a specific public policy reason. The public policy objective is that we will underprice transit from the perspective of the user in the hopes that more people will use it, and that's the demand management thing. Right? We'll try to alter people's behavior. Which takes us back on the toll side we'd say, Well, we will charge more than it cost to build this toll road in the hopes that less people will use it　-- as a conundrum as that sounds, but basically that's demand management.

MR. WILLIAMSON: Well, it's not conundrum-sounding to us because we buy into that. I think all of us on this panel　-- forget for a moment that we're trying to make transit work from just a business perspective　-- all five of us are self-employed, we understand the notion that you ought to charge what something is worth, people ought to pay what it's worth to them. But it seems to me that we can never include transit into this discussion as long as they're getting the subsidy, as long as their source of revenue is not directly related to transportation to begin with, a sales tax as opposed to a gasoline tax or as opposed to a share of the toll collections or a share of the concession fees.

Because what's always struck me about urban transit in particular　-- and I assume your observations take this into account　-- no one ever asks the question: How much cleaner is the air because a thousand people take a subsidized electric train? It's got to be cleaner and there's got to be a value associated with it but no one ever seems to want to calculate that.

MR. MILLS: And to link this back to the outcome measures that my colleague, Bill, just spoke of, that takes us to the decision-making at the UTP or the project level where yes, you weigh different projects and you look and see what each alternative will provide you in terms of contributions towards your five goals: safety, mobility　--

MR. WILLIAMSON: How many accidents do you have as a result of 800 fewer cars being on the road?

MR. MILLS: Yes, exactly. And the politics of it works out such that in a small urban community or small rural community, they would logically put a lower relative weight on air quality, perhaps, than they would on safety. So yes, we'd expect them to be less likely to pursue a project, a transit project which had a big air quality component.

So with that, we should perhaps move on with our section with respect to management capacity, Section C, and I will turn it over once again to my colleague, Bill Dye.

MR. DYE: For the record, I'm Bill Dye again, Dye Management Group.

MR. WILLIAMSON: One other question about slide 14, Bill. I'm sorry.

MR. DYE: That's okay.

MR. WILLIAMSON: This is, again, my first time to look at it so I'm having to kind of think through. No, I want to wait for a moment, I want to form that question better. Thanks.

MR. DYE: I'm still Bill Dye.

This audit area addresses the organizational development required for TxDOT to manage and execute the work required to exercise its responsibilities for the new finance mechanisms. As you know, this represents a major new business line for TxDOT and requires development of the organization and tools to address it. The work required and the competencies are quite different to those required for the traditional funding mechanisms.

The audit finds that TxDOT has a workforce plan which has identified and correctly defined the challenges that TxDOT faces as an agency in recruiting, retaining employees and in succession planning, however, there is no department-wide action plan to address these issues. For the competencies required for these new finance mechanisms, the issues are even more acute, as TxDOT does not have established procedures and tools for recruiting and retaining the required particular competencies in this area.

To date, TxDOT has been able to cover the volume of work through reassignment of resources, however, they are stressed. The audit finds that the current organizational capacity is not scalable as you continue to add more work in this area. More staff with the required competencies will be needed. Corrective work also is needed to address compensation, recruiting, career development and retention issues for the competencies needed for the financing mechanisms. Again, if we're talking about at least 25 percent of your revenues being from these new sources, again, you can see the corresponding workload will be growing substantially.

Regarding the tools, we find that TxDOT's cash management tools address the use of debt and new revenue sources, and those are working quite well.

In terms of our recommendations, they really have to do with the management capacity side. We recommend that TxDOT, as a matter of priority, establish an action plan to address the changed management required from the new procedures for recruiting, retaining and career-pathing. The recommendations include requirements for increased staffing and compensation for the required competencies.

Any questions?

MR. WILLIAMSON: Members?

MR. HOUGHTON: Did you look at like industry as to when you talk about competencies and recruitment, a like industry in the private sector versus us versus compensation scale on the differential in that compensation scale?

MR. DYE: I know that we looked at like businesses, the compensation scales in other authorities that perform the same sort of functions.

MR. HOUGHTON: I think our competition is the private sector on retention and recruitment of those new competencies you're talking about.

MR. DYE: It is, and I know there were comparisons, I don't know whether they were strictly industry. I know that we did look at, for example, with engineering firms and other firms that have competencies like this, I know we did look at their scales.

MR. HOUGHTON: We have compensation-benefits are totally loaded, what is the differential between the public sector/private sector attracting those competencies?

MR. DYE: Well, again, I know we did some comparisons and I'd have to get back with you on more details about that.

MR. HOUGHTON: Because that, in my opinion, is where the issue lies.

MR. DYE: It's a tough market out there, as you probably know, for professionals at all levels, and this is a more specialized area. Obviously it's challenging even in the engineering areas where you're having a tough time just meeting the private sector competency levels, but these require the combination between engineering and finance and more what a master's in business administration candidate would have, so it's even a more specialized area.

But I'll get back to you specifically, Commissioner Houghton, with some more detail on that.

Other questions on that?

MR. WILLIAMSON: We may come back to it.

MR. MILLS: For the record, I'm Peter Mills, returned to the podium to deal with the last of our audit questions, and that is the controls and accountability around the regional mobility authorities, and I'll spend very little time on this for two reasons. First of all, so as not to exhaust you, but secondly, because in the order of magnitude of the problems and challenges we've been facing today, there really isn't much here. The RMAs are well conceived, they've been well founded, they're well run.

We have put some recommendations in front of you with respect to not so much trying to control them but to merely know what they're up to. So I would characterize the recommendations we've given here as more of you keeping a light touch and a finger on the pulse of what the RMAs are doing rather than trying to exert a heavy-handed control over telling them what to do.

And we make that recommendation from the very simple premise that they are local authorities, they are locally governed and locally controlled, however, the commission has a legitimate and significant in their success. You want them to succeed and therefore, it's just prudent for you to have a finger on the pulse of what they're doing and how they're doing.

MR. WILLIAMSON: And perhaps more so in the early years and less so as time goes on.

MR. MILLS: Yes, as comfort levels build and such. We're just starting from the place that given that these are early days and this is a bold institutional change in Texas, yes, we want to discourage a failure, that's all. Our recommendations here are more on you just keeping a finger on the pulse of what they're doing.

MR. WILLIAMSON: I want to ask you a significant question because how you find on this may influence how the legislature reacts to changes that we're making internally. To what extent should the geographic boundary lines　-- and if you're not prepared to comment on this now, this is an add-on that I'm requesting　-- what extent should the geographic boundary lines of a multi-county toll authority, whether it's an NTTA type thing or an RMA, to what extent should those mirror the MPO boundaries, the planning boundaries?

MR. MILLS: We have not looked at that at all, we have not looked at geographic coincidence at all. We just simply took the law as it currently stands.

MR. WILLIAMSON: I think that might be one add I would like, I would like to see the relationship. Actually, it seems to me there's three relationships that need to be looked at in the audit process: the relationship between TxDOT's decision-making boundaries, a multi-county toll authorities decision-making boundaries, and the planners' decision-making boundaries, and to what extent that overlaps or gaps contribute to inefficiencies or efficiencies, and to what extent would matching up and there would be no gaps contribute to effectiveness or ineffectiveness.

MR. MILLS: It's a very valid question, yes, absolutely. And no, I couldn't give you a good answer on that today.

MR. WILLIAMSON: We'll follow that up with the formal process that you've established to look into that for us.

MR. MILLS: So with that, we conclude our presentation with this summary of our findings, and with our thanks to you, the commission and the department, for the cooperation we've had.

I may just add my own words with respect to the cooperation of the department, having spent considerable time out traveling around to field offices and district offices. I was pleasantly surprised, and I was pleasantly surprised not because they were very cooperative and helpful　-- I expected that　-- I was pleasantly surprised because in the midst of all of the other challenges they've been dealing with over the last six months, the legislative sitting not being the least of them, they still gave this audit a very high priority, higher than I expected.

So I watched them basically fight their way through other priorities so that they were able to meet with us, they were able to respond to our data requests, and as I say, they gave it not only their full cooperation but a higher priority than I had feared they would be able to, given the competing demands on their time. And we are very grateful for that. Thank you.

MR. WILLIAMSON: This would be your opportunity, members, to ask general questions, do as I just did. If there are things that popped into your head, since we started this a few months ago, that you want to add to the audit that we think might be either important to us or that we think the legislature Sunset Commission specifically might be interested in, this is the opportunity to voice that.

I have several I'm going to ask them about, so please have at it.

MR. HOLMES: Mr. Chairman, in their second bullet point when they talk about regional toll roads and CDAs being effective in urban areas, but the issues for outside the major metro areas, I think we need significant focus on that because it seems to me you've summarized it as one of the points that needs to be expanded, and I'd like further thought to be given to that. How do we develop revenue sources for the areas outside the major metropolitan areas, what are all the alternatives?

MR. WILLIAMSON: That would be very valid to add on.

MR. HOUGHTON: One of the add-ons we had talked about is the Texas corporation, Ric, that you worked on, but is now again raising it through your recommendations, I think has got to be a focus. There are public pension funds and there are public funds that could invest equity. As you demonstrated, debt financing and maximum debt financing has a tremendous amount of risk to those public agencies, like the RMAs, NTTAs, HCTRAs of the world, when, in fact, there ought to be a corporation there attracting these Teacher Retirement, Employee Retirement, as Ned and I were talking about at the state level, and there's loads of dollars there that we need to work on those people, the policy people to talk about infrastructure funds, dedicating those to infrastructure in the state of Texas, a percentage of their current assets under management.

But I think, Ric, that should be a huge initiative over the next 18 months during the next session.

MR. WILLIAMSON: Well, again, if we believe the Sunset Commission is going to look into that or if we believe we're going to advocate for that in '09 legislative session, then certainly that needs to be a part of their investigation.

MR. HOUGHTON: Well, with the lack of raising revenue through either gas tax, those means, and not wanting　-- as demonstrated in this last session　-- private sector investment, here's a way to mitigate some of that or a lot of it.

MR. WILLIAMSON: But I've been thinking about our last six months vacation, I don't think they said they didn't want private sector investment, I think what we've heard the legislature saying is we don't want private sector equity that permits an unusual amount of upside to preside in the private sector's hands.

MR. HOUGHTON: Well, I think we've demonstrated that on the analysis on 121 that that's a myth, the upside residing in the private sector's hands, through the analysis by an independent accounting agency that showed that it's fiction. So I think we have to demonstrate that more.

MR. WILLIAMSON: But you have to admit though, Ted, that since we announced 86 projects totaling $50 billion, that we intend to finance all of it through the private sector, have you heard a peep? I haven't had one House or Senate member call me with a concern, and doing my telephone calls as we all did in the last two weeks, did anyone? I mean, Senator Carona was very pointed with me: How are you going to finance this stuff? Here's how it works, make good business decisions, offer the locals the deal first. I mean, it wasn't like oh, don't go do that.

Although I understand clearly what the audit report is saying, it's saying you guys need more private equity in your deals, I just don't think that the legislature were saying no private money, they were saying no private equity that controls too much of the unanticipated profits. That's our challenge is to convince them that that's not going to happen. We know it won't happen, we've got to convince them of that.

I'm sorry, Ned.

MR. HOLMES: Well, I was going to associate myself with Ted's comments earlier in this part of the discussion about some of the public pension funds, whether it's the Teacher's Retirement Fund or the Texas Employees Retirement Fund, it seems to me that there is enormous pools of capital that are seeking returns and they should at least have the opportunity to invest in some of these toll road projects.

MR. WILLIAMSON: Without a doubt.

While you form some more questions, let me touch on a few that I scribbled down. Tell me a little bit about how far the audit went in terms of being able to give us some advice at some point on the impact of federal rescissions at a project level, not globally as we've talked about it today. But for example, we try to do a three-, five- and seven-year cash flow projection based upon certain assumptions.

MR. MILLS: Yes.

MR. WILLIAMSON: Where do we need to be in terms of planning? One of the questions that I'm frequently asked by House and Senate members is how are you going to deal with the rescission. Now, traditionally we just stand up and say, Well, we're going to plan to spend less on enhancements, we're going to plan to spend less on bridges, on safety. I'm thinking that we've got to get to a little bit greater level of detail in the very near future, if it's going to be the amounts of money you suggested.

MR. MILLS: The planning process, as I understand it, is based on what the apportionments will be, so when TxDOT programs, programs in the UTP, it is programming on the basis of what apportionments it expects. So because every rescission is a reduction in apportionments, it is, of course, a disruption of that plan.

MR. WILLIAMSON: So while it's not cash flow instant, it's cash flow in the future.

MR. MILLS: That is correct.

MR. WILLIAMSON: So we almost have to just actually reduce our if not three-year project plan, we're going to have to reduce what the project plan is going to look like seven years from now as a result of what happens today.

MR. MILLS: Well, seven years from now you're into a new piece of authorizing legislation, in which case the federal government will perhaps use other means to reduce the apportionments, they'll just be lower in the new authorizing legislation.

But yes, if you plan on the basis of being able to spend all of your apportionments, in other words, your obligation limits will, by the end of the legislation, equal your apportionments, that is unlikely to occur, and if you plan on the basis of the apportionments in succeeding pieces of authorizing legislation over the next 20 years will continue to grow at what they've grown historically, you will also find your program is under-funded, absolutely.

MR. WILLIAMSON: One of the things that the legislature asks us about on a regular basis　-- and I'm sure the Sunset Commission is going to bring up　-- is the extent to which the department looks for opportunities to outsource for its business. Right now two principal areas of outsourcing are our construction program　-- we don't build roads anymore, we contract that out　-- and increasingly, our engineering program, we don't design our roads like we used to, we contract a lot of that out.

But the Sunset Commission is no doubt going to say, Well, what about your IT services, what about your accounting services, what about your whatever, roadside park maintenance. To what extent would the audit have looked at that so far?

MR. MILLS: The funding audit did not look at that question at all. We were concerned solely with where the money is coming from, not with how programs are delivered. So no, I would not make any comment on that based on the work we've done in this audit. We've done lots of work on the question of outsourcing services. I worked on the outsourcing of our highway maintenance in British Columbia 15 years ago, so we have experience in that area, but it was outside the scope of this work.

MR. WILLIAMSON: So perhaps any of the questions that I might have concerning the ultimate use of that funds, maybe I'll wait and reserve that for the other presenter.

MR. MILLS: Yes.

MR. WILLIAMSON: I think I've asked all of my questions. Anything else of this group?

And you did confirm that the staff has fully cooperated with you?

MR. MILLS: Absolutely. No reservation in making that comment at all.

MR. WILLIAMSON: We thank both of you.

MR. MILLS: Thank you very much.

MR. DYE: Thank you.

MR. SIMMONS: Bill, Peter, thank you.

Commissioners, for the record, I forgot to tell you we set aside 30 minutes per presentation, so we're right on schedule after spending two hours on this one, but I think it was a good dialogue and I think it's something that's very needed.

Our next auditable area is consumer services, and I'm going to ask Rob Cooney to come up. This is probably the broadest area of the department because we have so many different areas of the department that are dealing with consumer services. And I'll let Rob make his presentation.

MR. COONEY: Thank you, Steve. For the record, my name is Robert Cooney. I'm a vice president with Dye Management Group and I am the project director on the consumer services audit.

First, I want to begin by just again thanking the commission, the management of the department and the staff of the department for their help and cooperating throughout the audit process. We also, in this area particularly, involved a number of stakeholders of the department. I'll highlight some of those as we go through here, but this represented both essentially all those folks who are consumers from the department's perspective. Those are other state agencies, as well as a number of industry groups that are in some way regulated or interact with the department, and we had representation from all of those industries on various work groups that we had throughout the audit. And again, I'll highlight some of that as we go through here.

So just to refresh your memory on what constitutes the consumer services auditable unit, it's motor carrier operations, motor vehicle dealer/distributor operations, the various grant programs that the department administers, that's public transportation, traffic safety, the automobile theft prevention program, as well as the enhancement program, vehicle title and registration operations, what we call the revenue-neutral operations which really has a focus on the outdoor advertising control program, and then the department's travel and tourism programs. And as Steve noted, these cover a quite broad area and so we'll go through a number of really detailed recommendations in each of these areas that, to some degree, stand on their own within the perspective of each of those as we go forward.

As Steve mentioned earlier this morning, there was a process where we went through a risk analysis process initially and really looked at a high level at all of these program areas and attempted to define what we thought were those areas of highest risk to the department based on the likelihood of a risk or opportunity occurring, and the impact to the department of that process. Duri