November 15 Transcript

Texas Department of Transportation Commission Meeting

Commission Room
Dewitt Greer Building
125 East 11th Street
Austin, Texas 78701-2483

Thursday, November 15, 2007

COMMISSIONERS PRESENT:

Ric Williamson, Chairman
Ted Houghton, Jr.
Ned S. Holmes
Fred A. Underwood

STAFF MEMBERS:

STEVE SIMMONS, Deputy Executive Director
BOB JACKSON, General Counsel
ROGER POLSON, Executive Assistant to the Deputy Executive Director
DEE HERNANDEZ, Chief Minute Clerk

PROCEEDINGS

MR. WILLIAMSON: Good morning.

AUDIENCE: Good morning.

MR. WILLIAMSON: It is 9:08 a.m., and I would like to call the November 2007 meeting of the Texas Transportation Commission to order. It's a pleasure to have each of you here this morning.

Please note for the record that public notice of this meeting, containing all items on the agenda, was filed with the Office of Secretary of State at 1:08 p.m. on November 8, 2007, and an addendum to the agenda, to add an additional item, was filed publicly at 5:05 p.m. that same day.

Before we begin today's meeting, I would appreciate you if you would join with the commission in taking out your pager, cell phone, BlackBerry or other electronic device and putting it on the silent or vibrate mode. And in particular, those who will be participating in the roundtable today or who might be testifying are asked to leave their BlackBerry in their seat because the signal from the BlackBerry destroys the videotape, and we're very intent at this agency on recording all of our actions for the public record. Thank you very much.

It's our custom to open with comments from each member of the commission. We begin with Mr. Underwood on your far left, then Mr. Holmes, Mr. Houghton. Ms. Andrade is not with us today. She is executing transportation business with the president of the Republic of Mexico, and we wish her good luck in her negotiations on behalf of the citizens of the State of Texas.

Fred.

MR. UNDERWOOD: Good morning, everybody. It looks like we have a full house. Does everybody have a seat? I see somebody standing in the back. There's some chairs up front if you need a seat or whatnot.

Also, good morning, John. Good to see you, John Wilson, good to see somebody from home.

That's all I have to say, Mr. Chairman.

MR. HOLMES: Good morning. Welcome. I saw Lawrence Olsen earlier today. Lawrence, congratulations. You did a great job on Prop 12. Thank you.

MR. HOUGHTON: Good morning, everyone, and welcome. We've got a full agenda. We're going to adjourn about 11:00 today, I've got a feeling in my bones.

I also want to take this moment in time to wish you a very happy holidays and Thanksgiving next week with your families and travel safely. And be it noted, Commissioner Holmes, that El Paso County carried, percentage-wise, all commissioners' home towns.

MR. HOLMES: Well done.

MR. HOUGHTON: Thank you. Welcome again.

MR. WILLIAMSON: Thank you, members. And I associate myself with my fellow commission members' remarks. We appreciate your attendance, we welcome you here. And those that are participating with us today or delivering comments for the record, we particularly appreciate your willingness to share in the important business of addressing the state's transportation challenge.

I need to remind everyone that if you wish to address the commission, we ask that you complete a speaker's card which you can find on the registration table on the lobby to most of your immediate right. If you're going to comment on an agenda item, we ask that you complete the yellow card, similar to the card that's in my right hand. If you're going to wait and comment in the open comment period at the end of the meeting, we ask that you complete the blue card, again similar to the card that's in my right hand.

No matter which area you wish to comment upon, we ask that you try to limit your remarks to three minutes, in the interest of giving everybody the opportunity to speak, unless you're a sitting member of the Texas Legislature, in which case we invite you to speak for as long as you wish.

The first item on today's agenda is the approval of the minutes of the October 25 meeting. Members, you have a copy of those minutes in your briefing materials, you've had the opportunity to review them. Is there a motion?

MR. HOUGHTON: So moved.

MR. UNDERWOOD: Second.

MR. WILLIAMSON: There's a motion and a second. All those in favor of the motion will signify by saying aye.

(A chorus of ayes.)

MR. WILLIAMSON: All opposed, no.

(No response.)

MR. WILLIAMSON: Motion carries. Thank you.

I'm now going to turn the meeting over to Steve Simmons, our chief operating officer, who is pinch-hitting for Amadeo Saenz today. Amadeo found the first month of dealing with diminishing cash flow too rough and he had to go to the hospital and get all kinds of operations in order to prepare himself for the tough job ahead.

So Steve, I turn the meeting over to you.

MR. SIMMONS: Thank you, Mr. Chairman. And I think people are characterizing that Amadeo would rather have his knee operated on than be here, but kind of like I'd rather have a root canal.

(General laughter.)

MR. SIMMONS: But anyway, this is an opportunity today to celebrate and recognize one of our employees for outstanding service to the department. This individual has been critical to making this department run on a day-to-day basis and helping out everybody at the administration level. And I'd ask Nancy Handrick to come up.

Nancy has served in numerous capacities at the administration level for many, many years. She is currently the executive assistant to Amadeo Saenz, our executive director, and I know he would have liked to have been here, but we've already missed giving it to her in October because she became a grandmother again, and we were not able to do it at the Transportation Conference and we weren't able to do it at Eagle Pass.

So Nancy, I can't tell you how much we thank you for what you've done. You've been with the department 35 years and it seems like just yesterday that I got to come up here and work with you. But I want to thank you for everything you do and would like to recognize you with your service award, and I'll just read it real quick.

"In recognition and appreciation of 35 years of meritorious service for the Texas Department of Transportation, the Commission presents this certificate to Nancy Handrick and extends its congratulations and best wishes for a long and happy continuance of service."

And of course, we have your gift and your pin. So Nancy, any words after 35 years?

MS. HANDRICK: Well, after 35 years, I guess I've enjoyed TxDOT and if anybody knows, I worked here for 11-1/2 years first and then I quit and went away for 2-1/2 years, and fought to come back to the administration where I've been since 1984. So I've worked with a great group of people; I thank you all. And all my friends back there in the back, thank you. And everybody I've worked for　-- I've worked for a lot of directors, went through a lot of change. I'm ready to face another one. Thank you.

MR. SIMMONS: Nancy, don't run off. We have photographs.

(Pause for photographs.)

MR. WILLIAMSON: Congratulations, Nancy.

(Applause.)

MR. WILLIAMSON: Before Steve resumes the meeting, for our friends from the NTTA, are there any NTTA board members with us today? None.

That being the case, as I had had a request if any of your board members had come, to put you at the front and expedite, but without board members, if you don't particularly object, we would like to go ahead and get the Grand Parkway done because David's presentation, I think, is fairly non-controversial and won't take much time, and to lay the groundwork for our roundtable　-- which I hope we'll all enjoy　-- we kind of need to hear the presentation on our cash flow, particularly in light of the bond election. So that's the way I'd like to proceed.

MR. SIMMONS: Thank you, Mr. Chairman. Our first item is item 2 which is a report from the Grand Parkway Association. This is their annual report, and I ask David Gornet to come forward and make his presentation.

MR. GORNET: Good morning, members of the commission. My name is David Gornet. I'm executive director of the Grand Parkway Association, coming from Houston, Texas today.

The presentation that I have to present today is slightly different from that that is in your books. It is more brief, and that is in recognition of your agenda today having a lot of items on there.

The Grand Parkway continues its development. It's still 184 miles long, although someone noted that last year I had 185 miles on there. Segments H and I-1, as we continue to study that, there are little shifts that are occurring there, and so 184 miles is approximate, as 185 miles was. There are 20 miles of Segment D and part of Segment E that are still open; 10 miles of Segment I-2 over in Chambers County are under construction; 146 miles of Segments B, C, E, F-1, G, and H, and I-1 are under study; and the balance of six miles of Segment A will have studies started in fiscal year 2008.

If you add all those miles up of what's constructed and what's under study, you'll find you're missing a few miles. That's over in Segment I-2, because Segment I-2 is 14 miles long but only the first 10 miles from I-10 down to FM 1405 are under construction.

We continue to work towards meeting TxDOT's goals. As we discussed last year, the Grand Parkway is an integral element of achieving these goals for the Houston region. It will work to reduce congestion in the Houston metropolitan area, it will enhance safety of the traveling public in the Houston metropolitan area, as well as providing a significant part of the future hurricane evacuation needs for the area.

The portion on the south side, Segments A, B, C, D, E, will bring traffic out of Galveston and Brazoria counties and allow them to avoid traversing the metropolitan area during needed evacuations, like last Segment I-2, I-1, H and G will move traffic around to the north side of town to facilitate evacuation in Harris County and Chambers County and in Liberty County to get people out of harm's way.

We continue to have significant growth in these outlying counties and adding additional opportunities for them to escape incoming hurricanes, a storm surge and that, is very important for our region.

Grand Parkway will expand economic opportunity in the Houston metropolitan area and the state of Texas. It provides enhanced access to our ports. There are a number of areas that are eagerly awaiting the development of the highway because they see that it would be integral to their continued development and sustained growth in those communities in the outlying areas of Houston.

The Grand Parkway, in fact, in reducing congestion, we also work to improve air quality in Houston. As part of the Air Quality Conformity Plan for the Houston metropolitan area by reducing congestion, we've reduced the amount of idling that's done, and we improved the air quality of the metropolitan area.

And it increases the value of the transportation assets by spreading traffic around, allowing our existing infrastructure to work more efficiently and with less need for either rehabilitation or expansion costs.

In 2007, our activities. We continued construction of Segment I-2. That's occurring over in Chambers County. Toll studies for Segment D and Segment I-2 were completed by TxDOT and submitted to Federal Highways for their review and approval. The draft environmental impact statement for Segment G was approved and a public hearing was held in March of 2007. Workshops were held for Segments H and I-1. TxDOT engaged a general engineering consultant to work with the association and work with their staff in the Houston District to facilitate expedited reviews of the environmental documents.

The draft environmental impact statement for Segment B, however, continues to be under review by the Environmental Division in Federal Highways. It's more where we're in a queue with a number of projects for Federal Highways and we're working with them to expedite the review of that project.

The final environmental impact statements for Segments C, E, F-1, F-2 have been submitted for review and comment. Public meetings were held on Segment C to discuss it being a toll facility. We've received a number of comments. I'm sure members of the commission were contacted by our elected officials down there in Fort Bend County to discuss how they see Segment C might impact the local residents. And the Grand Parkway Association continued to support TxDOT in their discussions with HCTRA and other issues related to Senate Bill 792.

In fiscal year 2008, what we have on schedule, we have already submitted the final environmental impact statement for Segment G for review and comment. We have submitted the draft environmental impact statement for Segments H and I-1. We do expect to release the draft environmental impact statement for Segment B, hopefully in December, and hold public hearings in January. The final environmental impact statements for Segment E will be released very shortly. It's our understanding Federal Highways has been given clearance to sign that FEIS. So we will have C, E, F-1, F-2 and G environmental impact statements all reviewed and approved during fiscal year 2008.

The draft environmental impact statement for Segments H and I-1 we anticipate being approved and will hold a public hearing. Segment I-2, construction will be completed, it will be open to traffic. We anticipate a test marketing period in advance of tolls being placed on that so that the commuters in that area can get used to using the new facility and how they can adjust their routes in the area there.

We also anticipate after the release of those final environmental impact statements, receiving records of decision signed by Federal Highways on Segments E, F-1, F-2, G and C. And we will continue to work with TxDOT in their negotiations with HCTRA or any other concessionaires that might be interested.

Where do we go from here? Of course, as I mentioned, we have all those records of decision that we anticipate to be approved. That will allow TxDOT or someone to move forward, so as TxDOT is looking at this, they could work with a concessionaire or they can work with HCTRA, however those negotiations continue. We expect in later fiscal years to receive the records of decision for B and H and I-1 that will essentially complete the environmental approval process for the entire loop.

We stand ready to work with TxDOT to initiate the design, right of way mapping, right of way acquisition for all segments of the Grand Parkway, particularly important in some areas is the right of way mapping and acquisition so that as development is occurring, we know exactly where the road is going to go and we can work with those landowners to avoid any further impacts that could come up as development occurs.

Construction in some areas could start as early as 2009. That is dependent, of course, on TxDOT's negotiations with HCTRA or with other concessionaires, or if they decided to build it themselves. And if construction starts in 2009, it could be open to toll traffic by 2012.

And that completes my brief presentation. Are there any questions, comments?

MR. WILLIAMSON: I'm sure there's going to be some questions, I know I have some, but I'll yield to the members first.

MR. HOLMES: David, would you put the last slide up? I think it's important to emphasize a point that David made about the evacuation component. It's obvious that the transportation element and the improvement in air quality and congestion, enhancing the assets are quite clear, but in the areas of A, B, C, I-2 and I-1, there are a million people living in those areas that are in storm surge risk in the event of a hurricane. What we learned in Rita was that we could not evacuate Houston in any sensible amount of time when about a million one or two left, and without this infrastructure that million people are going to have to go basically through the middle of Houston to get out of the way of a storm.

And so I think it's important to emphasize that because it relates to how it is ultimately built, and I feel very strongly that all segments are built and that it is done in one major agreement, as opposed to yielding to the temptation of cherry-picking the high value portions of it. Otherwise, if we make the mistake of cherry-picking, that west side, the D and E, F-1, F-2, G portions and neglecting the other side, then we jeopardize completing in a couple of lifetimes.

MR. GORNET: I would agree with you, sir. That million people are there in harm's way today and as Houston continues to grow, we will continue to have additional residents that are coming into those areas.

MR. HOLMES: I think that's a good point. That whole area in A and B is booming.

MR. HOUGHTON: David, welcome back for your annual pilgrimage to Austin.

MR. GORNET: Thank you, sir.

MR. HOUGHTON: You said 184?

MR. GORNET: Yes, sir.

MR. HOUGHTON: Your handout says 185 still. We still can't get away from that 185.

Let me ask you a question on the environmental impact and the routing. I have some children that live up in a couple of those areas. The slower we go on this project, are we at risk of having people build right on top of the desired right of way?

MR. GORNET: Yes, sir, we are. There are some homes that are being built within the proposed right of way today, and we have talked to the developers, the builders have alerted them to that.

MR. HOUGHTON: They're willing to take that risk?

MR. GORNET: They're willing to take that risk. As long as we do not have a record of decision, we do not have a final route selected, and the City of Houston cannot stop development from occurring in those areas until we get the record of decision. Most, 90 percent plus of the developers have been very cooperative and understanding because they seen the need for this project. There are those that have continued forward with their plans and we have not been able to successfully get them to set aside rights of way.

MR. HOUGHTON: So what Commissioner Holmes is talking about building this in one procurement, seems to me it would be the desirable way to go instead of the cherry-picking method because some of these areas would take how many years to build out? I think the last time you were here, you said it would take 20 to 25 years before we got to some of these areas?

MR. GORNET: If we were to wait until a specific segment, say H and I-1, is fully sustainable as a stand-alone element, it would be a significant number of years before that happened. By being able to develop this as a comprehensive project, the entire project supports itself, we can accelerate that.

MR. HOUGHTON: And the sooner you can get to the right-of-way acquisition, the routing, after the environmental is taken care of.

Tell me how important the asset is, Grand Parkway, especially on the south and southeast side, to port traffic, to the enhancement of the Port of Houston.

MR. GORNET: Well, the proposed route tying into 45 and the ultimate connection over to 146 will give port traffic additional alternatives. Now, of course, I'm not an expert on port traffic, as Commissioner Holmes is, but it will afford an opportunity for traffic that needs to go out US 59 southward toward South Texas and Mexico. It will give them an alternate to today they have to go up to the Beltway or into the 610 Loop. They will be able to stay off 45, off portions of 146 or 225 to accommodate that movement. We're very close to the Texas City Port. We can accommodate traffic coming in and out of the Port of Galveston, and now as a subset of the Port of Houston there.

MR. HOUGHTON: Has the Grand Parkway Association taken a position on whether to cherry-pick or build this all at once?

MR. GORNET: No, sir. Our board is more administrative. This is a TxDOT project and we report to TxDOT and it's the decision of this commission and the administration.

MR. HOUGHTON: Do you have a preference?

MR. GORNET: I would prefer to see it all developed. When we say develop at once, it's not reasonable to expect that all 185 miles would be under construction at one time, but you would see them all being done sequentially so that as one is finishing　-- obviously the more important segments, E, F-1, F-2 and G, would come on line sooner, but you would more quickly then get into Segments H and I-1.

MR. HOUGHTON: David, thank you again for coming.

MR. GORNET: Thank you, sir.

MR. WILLIAMSON: David, good job.

MR. HOLMES: May I make one other comment, Mr. Chairman?

MR. WILLIAMSON: Of course.

MR. HOLMES: I've noticed that the mileage changes a little bit but there is, David, as I understand it, a significant fluctuation in the number of miles in H and I-1 depending on which one of the three routes is ultimately selected.

MR. GORNET: That's correct, sir.

MR. HOLMES: Do you have a sense of that?

MR. GORNET: The difference significant in a 36-mile segment, it might be 38 or 39 if you go with a route that stays further to the east and the north. If it swings out and makes more of a right angle turn versus one that cuts it off, it could get as low as 32 or 33. So there's a five-mile swing in a 36-mile area.

MR. HOLMES: So it may be 180-190.

MR. GORNET: Yes, sir.

MR. WILLIAMSON: David, thank you for being here and thanks, again, for a succinct and forward-thinking report.

I just really have one question. As parts of the Parkway have been built and as the rest of it will be built, has it been necessary for the state to spend money on the connections, the on and off ramps and the interchanges as the route crosses over existing thoroughfares?

MR. GORNET: To date, particularly at I-10 and US 59 where the two major interchanges are on Segment D, there have not been monies spent on direct connect ramps there, nor has the state spent any money beyond what was spent initially back in the early '90s on Segment D for overpasses or additional ramps. But people want those, and certainly, I'm sure Mr. Trietsch is getting pressure to have direct ramps built up at I-10. There's significant delays that occur there with the two major left-turn movements that direct ramps might be warranted relatively soon.

MR. WILLIAMSON: So even if the department or HCTRA pushes forward with constructing the entire facility, unless a concessionaire or HCTRA provides the financing for those connections, they'll either not be made　-- which would be silly　-- or the state will have to contribute to make that happen.

MR. GORNET: I would presume so, yes, sir.

MR. WILLIAMSON: Okay, thank you. We need to build this road, we all agree with you.

MR. GORNET: Thank you.

MR. WILLIAMSON: As soon as possible.

MR. HOUGHTON: Thanks, David.

MR. SIMMONS: Mr. Chairman, our next item is a discussion on our cash flow projections on the system operations, and this will be a tag team between James Bass and myself. And I might want to, just for the record, point out that James has been elevated up to the administration level and is now officially titled　-- while he's held the title, it's official now　-- our chief financial officer. So you can blame him for everything from this point on.

I look at our dialogue today as not just a one-time shot. I think that this is something we'll give you an overview today, and then next month we'll drill a little deeper, and then we'll need to continue to keep you updated each month on our cash flow situation. So with that, James, I'll turn it over to you for your portion.

MR. BASS: Thank you, Steve. As Steve said, I am James Bass, CFO at TxDOT. And I believe, all of the members, you have a hard copy of the presentation that will be up on the screen in front of you as well.

I'm going to start off and talk about our cash balance in the State Highway Fund but I want to provide some background to that because there seems to be disagreement as to actually how much cash does TxDOT have and how is it that reasonable people can agree to disagree, and I think I'll put it in some context and hopefully it will make more sense how people can disagree on it.

MR. WILLIAMSON: And I'm not trying to trap you, James, but for those who are watching our proceedings, in a general sense, where might the disagreement lie? Between Mr. Houghton and myself, between you and I?

MR. BASS: No, sir. I think with members and leadership in the legislature and leadership of TxDOT as to what exactly is the funding situation at TxDOT.

The first chart is an end-of-month balance and it's titled "All In" and this is an example, if I were sitting in the Capitol somewhere across the street and I logged into the Comptroller's statewide accounting system and wondered what is the balance of the State Highway Fund today, if I ran that report, this is what I would get.

It includes proceeds from the sale of State Highway Fund revenue bonds, or Prop 14 bonds; it includes our short-term borrowing dollars; and it also includes money from the State Infrastructure Bank. The key to all of those three categories is those dollars are only available for very limited purposes. They are not available each and every day to pay the salary of TxDOT employees; they're not available to pay the salary of DPS employees. When the Education Agency needs to pull $50 million out of the State Highway Fund to distribute to school districts across the state for school bus transportation, they cannot pull bond proceeds, they cannot pull short-term borrowing, they cannot pull money that's in the State Infrastructure Bank.

So we don't consider that money to be available to us for our day-to-day operations of the department, but if you run a report off the Comptroller's system, this is what you'll get.

I will point out, in the far right you'll see a sharp spike, a little sliver on the far right there, and that's actually in October of this month we issued and received $1.3 billion of proceeds from Proposition 14. Just wait till you see this chart next month when two weeks from today we receive a $3.3 billion deposit into the State Highway Fund. Again, it will only be available for projects within the Dallas-Fort Worth region and not available to TxDOT on a day-to-day basis for our pay-as-you-go or salaries.

MR. WILLIAMSON: And I want to be sure and help you clarify because you used salaries as your examples, but you also mean contractor payments for our tax road system.

MR. BASS: Yes, sir.

MR. WILLIAMSON: Not just the salaries of TxDOT employees.

MR. BASS: Correct.

MR. WILLIAMSON: But all of our ongoing tax road management.

MR. BASS: The traditional pay-as-you-go tax supported construction program in Texas.

So if we back those items out and look at the end-of-month balance　-- so in effect, this is getting our bank statement at the end of the month and saying this is your balance on October 31, November 30　-- this is what those balances would be if I excluded the money that's not available for our day-to-day operations and our tax supported contractor payments.

You can see there on the far right there are a couple of times where we dip into the negative. In reality, obviously the balance can't be negative. What happened in those cases is we went out and we issued some of the short-term borrowing program in order to cover those payments on a short-term basis.

MR. WILLIAMSON: And once again, just for clarity purpose for those who are watching today's proceedings, when you say if you remove the bond proceeds, short-term borrowing and SIB, one might infer, well, but you still have the bond proceeds to go build with so you're actually presenting sort of a misleading picture here. The bond proceeds that we remove, are those proceeds to be used on contracts to be let in the future, or are the proceeds from those bond sales to be used to make contractor payments for projects already in process?

MR. BASS: The majority for contracts that are already in process, and actually there's a subsequent slide that will go over that and break it down into exactly those pieces. But again, the reason they're not on here is because those are already assigned, the dollars that are in the balance are assigned to specific projects and they're not available for tax supported projects, salaries, Texas Education Agency.

MR. WILLIAMSON: Or debt service.

MR. BASS: Or debt service, correct.

MR. WILLIAMSON: So what we're looking at is cash on hand　-- we're looking at free cash available for use in our tax system, our debt service and our operations.

MR. BASS: Correct. And the key here, this is the balance at the end of the month. When we manage our cash flow in the operations of the department, it's on a day-to-day basis. Contractor payments on the tax-supported system happen the 10th of the month. So if I'm going to get money on the 28th and it will show up in my end-of-month balance, it doesn't help me make payments on the 10th. When payroll processes on the 22nd, a deposit that's going to come in on the 28th or 29th doesn't help me on the 22nd.

If this is the bank statement that you get at the end of the month, we manage and we look at the check register and manage the day-to-day operations, and when you look at that balance, this is what you come up with.

You can see back in September of 2001 on the left part of the chart　-- I'm not sure if this will work　-- that low point was before the department had any short-term borrowing authority.

MR. WILLIAMSON: Over here to the left.

MR. BASS: Yes, right there. That was $4.1 million. For some reason, I will remember that amount forever because there was no borrowing authority whatsoever.

As you can see, the State Highway Fund balances began to recover as we took some drastic measures. One of the key things, though, we did is the State Highway Fund had loaned money for a project before the SIB was in existence. We ran into this cash flow issue and we had a State Highway Fund who had a receivable out there with no money, we had the SIB whose only purpose was to loan money for projects in the state that had a balance of over $200 million, so the State Infrastructure Bank, in effect, bought the note from the State Highway Fund and provided an infusion of cash.

MR. WILLIAMSON: And we want to take this opportunity because we think that people who are watching right now might be watching in a few minutes and they might infer from the discussion that there's some friction between us and NTTA. We would want to take the opportunity to point out that it was NTTA that owed us the money and they didn't have to do what we asked them to do, and they did it to help us for which we're very grateful. We don't forget things like that.

MR. BASS: Correct. And in addition, not just that loan, on another one they prepaid a payment on another project agreement that they were under no obligation to do whatsoever and prepaid to the tune of $10- to $12 million. When your balance is only $4.1-, $10- to $12 million is a large amount of money.

You see this kind of cash bubble there in the middle of the screen, and if you recall from some of our earlier conversations, the implementation of a tapered match approach with Federal Highway Administration, in its simplest form, it just allowed us to get the federal money on a project on the front-end of the project and not have it equally spread out over the entire project.

MR. WILLIAMSON: And again, it's important for those who are, again, watching the proceedings who have some perhaps doubts about the situation with regard to cash flow in this department, it's important to explain that in normal person's language. You just explained it in a language most of us can understand but 99 percent of the people watching us have absolutely no idea what you just said. So let's take a moment and try to put it in normal person's language.

MR. BASS: If you and I were business partners and you agreed that we were going to build a $100 million project and you agreed that you were going to put in 80 percent of the cash and I was going to put in 20 percent but I was going to manage it to equal out. Traditionally, with our partners at Federal Highway, every payment we would make, they would do 80 percent and we would pay 20 percent over the life of that project.

MR. WILLIAMSON: More to the point, the bill would come in from Mr. Pitcock; we would pay him $100; we would turn around and give the bill to the Federal Government and they would reimburse us $80.

MR. BASS: Eighty, exactly. Now, under tapered match, that same $100 bill comes in, we pay $100, and at the front-end of the project we are able to bill and get $100 back from Federal Highway, not $80. Now, for that whole project, once we hit the $80 million threshold, they're no longer going to continue to reimburse us but we get that total of $80 million much faster than we typically would. So that brought an infusion of cash in and allowed us to deliver and develop projects sooner than otherwise.

MR. WILLIAMSON: But what it really let us do was take Interstate 10, the big expansion projects on the west side of Houston　-- and that would be the one, Mr. Holmes, where the state built tolled lanes on the interstate managed right of way in Houston, as much as we propose to do in Dallas and San Antonio and Austin if the legislation pending before Congress doesn't prevent us from doing that　-- it permitted us to expedite the construction of that project by having more cash available on the contract permitting the contractor　-- in this case, Mr. Pitcock; that's the reason we use his name　-- to deploy more resources to get it done faster, saving us money and saving the drivers of Harris County a little bit of grief　-- not a lot but a little bit.

So tapered match means instead of the Federal Government reimbursing us 80 through the early years, they reimburse us 100 but then they don't reimburse us anything at the tail-end.

MR. BASS: Correct.

MR. WILLIAMSON: Which, along with NTTA redoing the debt structure between us, permitted our cash balance to move up which permitted us to expedite that contract.

MR. BASS: Yes, sir.

You'll notice on the right side of the screen we'll see the red appear and remain, starting in September of '05 and for the majority of the last two years. If not for the short-term borrowing program, we would have been at a negative balance. And to specify again, this is the lowest daily balance, so at the end of the month, at the 31st, we might have been positive but for at least one day during that month, we would not have been able to make payments that were due on that day if we did not have the short-term borrowing program.

And you can see it has not been a one-time situation, it has been pretty somewhat stable that we had something outstanding for the past two years.

And so back to my earlier point of how can people look at the balance of the State Highway Fund and come up with different conclusions, and to somewhat explain the pained expression on my face when somebody asks me what's the balance of the State Highway Fund, it could be any one of those three options right there, and each of the three would be an accurate response.

But the key for us is that lower one, again, the check register that we're managing and operating the day-to-day operations of the State Highway Fund and making sure that money is available when the payments become due.

MR. WILLIAMSON: I want to be clear about this. If the question directed at you was how much cash do you have available to expand a tax road in Bexar County, a tax road, your pointer would go to where?

MR. BASS: I would go to that chart.

MR. WILLIAMSON: Yet we hear every day how much money we have.

MR. BASS: That would be someone looking at that chart.

MR. WILLIAMSON: Could we use that money to pay for that tax road in San Antonio?

MR. BASS: No, sir.

MR. MORRIS: Better not spend the Dallas money in San Antonio.

(General laughter.)

MR. WILLIAMSON: Okay, thank you. Go ahead, James.

MR. BASS: So again, to give some background as to why or how could there be confusion and disagreement, I think that hopefully provides some flavor to that.

I just painted a pretty dire picture for the tax supported system of construction in the state, however, during this time we've been utilizing　-- to your earlier question, Mr. Chairman　-- two valuable tools that we've received in the past several years from the legislature.

The first one we'll talk about is the Blue Whale, the Texas Mobility Fund. And what this shows is the life-to-date aggregate expenditures and planned expenditures from proceeds of the Texas Mobility Fund. Based upon revenue estimates that we get from the Comptroller's Office on what will be available for debt service, we feel like the capacity of the Mobility Fund is $6.4 billion. As we sit here this morning, we have $6.4 billion of work active and ongoing today that's tapped into the Mobility Fund.

MR. WILLIAMSON: Wait. There's been some conversation recently about all the debt capacity we have. I want to be sure that you're very clear about this, so say that one more time and maybe in a different way.

MR. BASS: And there's a couple of different things that, again, adds to the confusion. We have $6.4 billion in work currently under contract. That may actually be the actual construction, right of way acquisition, or environmental and design for those projects. If you add all those up that we have plugged into and counting on money from the Mobility Fund, it is $6.4 billion.

However, we have not issued $6.4 billion in debt. Why haven't we done that? Well, because it's going to take another 2-1/2 years for the payout on those projects to occur.

MR. WILLIAMSON: Payout being defined as bills sent to us by Mr. Abrams, Mr. Parsons, Mr. Goldman, all the people that we pay to build our projects. That's what payout means.

MR. BASS: Correct.

MR. WILLIAMSON: So if we stopped right now and said we don't want to build any more roads funded by the Mobility Fund, other than the roads we are under contract and committed to build now, would we have any money available to us from the Mobility Fund for the next three, four, five years?

MR. BASS: No, sir.

MR. WILLIAMSON: So the proceeds from that debt are already committed to projects in process, many of which are already under construction.

MR. BASS: Yes.

MR. WILLIAMSON: This is a trick question, Mr. Simmons. Can you name for the audience one of those projects they would recognize? They hate it when I do this to them.

MR. SIMMONS: There's a project in　-- since Dallas is here　-- in Dallas that's on Loop 12 to eliminate some flooding issues.

MR. WILLIAMSON: That's an example of the kinds of projects across the state that are already in process that will be paid from the proceeds of the Mobility Fund. So just in the event there's someone in the listening audience that believes we have construction capacity left in the Mobility Fund, you're telling the commission that that is not the case.

MR. BASS: Correct. The active obligations, commitments out of the Mobility Fund are $6.4 billion. We've issued $4 billion in debt and we have paid to date about $3-1/2 billion of that.

MR. WILLIAMSON: Out, paid out to contractors.

MR. BASS: Out. So when you look on the Blue Whale, the tail of it that's in the solid dark blue, that is actual expenditures we've paid to date. The lighter blue and the crosshatch going forward is how we expect the remainder of that $6.4 billion to pay out over the next two to two and a half years. And you can see it levels off there, in around November of '09, it levels off right at the $6.4 billion such that there would be no additional payments.

And so Mobility Fund has accelerated and will deliver $6.4 billion of projects years ahead of what we would have been able to otherwise. Very valuable tool; it's been fully utilized, it's fully committed.

Similar, and I kept the scale the same here on the next slide to compare it to Prop 14 bonds or State Highway Fund bonds, and it's a slightly different picture but not hugely. As we sit here today, the actual commitments, actual obligations, counting on money coming from the State Highway Fund bonds, is about $2.85 billion. Our plan, and I believe the commission has instructed us they're comfortable with us issuing and obligating up to $3.1 billion. So again, today we have $2.85 billion that's fully committed, however, we've spent to date about $1.5- of that. Again, that's the solid blue on the left side.

The remainder of the $2.85- will pay out over the next, again, two and a half years until it reaches that $2.85-, and here in the next two to three months there will be another $200- to $250- of projects that will be committed and tapped into that remainder of the State Highway Fund bond program, and we expect that to pay out as you see it in the upper part of that, the candy cane going across the top there.

MR. WILLIAMSON: Now, the Mobility Fund debt is retired from user fees the legislature and the governor agreed to implement a raise in, I guess, '03 and '05. So the debt payments related to projects financed by the Mobility Fund don't diminish the state gas tax revenue. Yes or no?

MR. BASS: Correct.

MR. WILLIAMSON: How is debt associated with Proposition 14 paid?

MR. BASS: Out of gas tax revenues. And that leads to a question some may be asking: Well, in the last legislative session the statutory cap on issuance from this program was increased to $6 billion so why on your chart are you stopping at $3.1 billion? And the reason is to your question because the debt on this program gets paid from this chart, and so calling your attention back to this chart, this chart has been running negative for the past two years, if not for the short-term borrowing and the cash management borrowing that we've been doing.

So this chart right here has plugged into it and going forward an anticipated debt service on $3.1 billion. If we were to increase that debt burden on it, you would obviously drive the balance more negative, if that were possible.

MR. WILLIAMSON: Well, it's not possible. What we would do in the real world is we would do what we're doing now: we would reduce our tax supported construction projects and then we would begin to reduce our rehabilitation projects, would we not?

MR. BASS: Yes. In the next two slides, my last two slides, I take this slide you see before you right now and kind of focus on the last two years of it, and then forecast it out for the next few years.

MR. WILLIAMSON: Maybe you're going to slide this in a moment　-- I don't know, I haven't seen this presentation　-- but just while we're on this point, what are the projected debt payments now on the debt we've issued?

MR. BASS: Once we have the $3.1- out, it will be about $240 million a year.

MR. WILLIAMSON: So if we issued another $3 billion, it would be an additional $230 million a year, about?

MR. BASS: $240-, assuming we could get the same historically low interest rates we've gotten over the last two years, yes.

MR. WILLIAMSON: Out of the gasoline tax receipts.

MR. BASS: Yes, out of, in effect, this chart that's up on the screen right now.

And so as we focus on the last two years and then look going out to the future, there's a couple of not real options, but I struggled with how to portray the look-forward, and so I ended up showing two different scenarios.

One of them is well, what if we just continue to award $3 billion, roughly, worth of tax supported projects　-- that's both added capacity and maintenance together　-- if we just continue, keep on doing what we've been doing　-- Mobility Fund has gone away, Prop 14 is about to go away in the next couple of months as far as awarding projects, you're still going to see work going on for the next two years and barricades up　-- but what if we just continued to hope and pray the Road Fairy is going to show up　-- if Commissioner Houghton hasn't shot him　-- and continue to award $3 billion in both preservation and added capacity projects.

Well, obviously the balance and the picture would get worse and worse and nearing the end of 2010, we'd be almost $1 billion negative. Well, obviously that's not an option.

So the other option　-- and I think Mr. Simmons is getting ready to talk about some of those　-- is what if we continue to award maintenance contracts, preservation contracts, and we continue to make payments on the added capacity projects we've already awarded out of the tax-funded system, but we award no additional added capacity projects out of the tax supported system. That would get you to this picture, and you can see until we get positive, it's again, roughly two to two and a half years before that cash flow becomes positive.

Again, that's keeping fully online with all of the projects that have already been awarded to date, continuing to award additional maintenance or preservation projects, but awarding no additional added capacity projects funded through the tax system.

MR. WILLIAMSON: Okay, stop.

Michael, would you object too much if I asked you to answer just one question? I know you're watching this presentation. Are we in Texas, in your opinion, reducing congestion at the rate at which we're currently building projects with tax resources?

MR. MORRIS: Michael Morris, director of transportation at the North Central Texas COG.

The rate in which we're building capacity right now isn't keeping up with the growth of the state's population. That's why some regions ten years ago started building toll roads to create their own revenue picture. We obviously couldn't have foreseen the details of this, but we foresaw this direction of state revenues, and why, you'll hear in a moment, Dallas-Fort Worth region is doing more innovative ways to get capacity funds.

And at some point, if you want to be in the capacity business　-- which I think we're hearing today　-- it's going to come out of sweat equity and innovation within each of our particular regions until either the legislature or Congress does something. And our region knew that and that's why they're doing their own toll road push and managed lanes and toll roads within the region. And even at that, we still haven't caught up yet but we hope to catch up and change the direction of those congestion indexes.

Remember, under state law, each of our regions has a due diligence to present to you the performance of our systems, and that's why some regions are aggressively looking at alternative revenues. The maintenance of the system needs to be our highest priority. Hopefully, the event this summer in Minneapolis has taught us that particular lesson, and if you want to be in the capacity business　-- we said in probably 1996, if you want to be in the capacity business in this state, you're going to have to develop local innovative strategies to be in that, and I think we've been in this direction for some time.

MR. WILLIAMSON: Thank you very much.

The reason I interrupted you, James, is because I didn't want, again, those who might be watching our proceedings to be led down the path of all we have to do is find a way to get through the next two or three years and we'll be okay because the green is starting to pop up. The reality is all of this has to be talked about against the backdrop of congestion getting worse, even at the rate we're spending money, and thus, air quality getting worse at the rate we're spending money, and thus, our roads getting less safe, our economic opportunity being eliminated, and our roads deteriorating under our feet. That's the backdrop that we have to always remind people.

Right now, you're telling us about what we have to do to be good stewards of the state's resources and not overdraw our checking account. I want to be sure it's in the context of and we're not reducing congestion by doing this.

Okay, go ahead.

MR. BASS: A few things before I turn it over to Mr. Simmons. If we're not going to be building additional capacity projects, then why would you continue to spend and acquire right of way at the same clip that we have in the past few years, why would you continue to develop plans at the same clip you have? The reductions or options that Steve is going to lay out for you and discuss have not been built into the model that you see up here.

The other thing that's interesting　-- and it gets back to your federal reimbursement discussion earlier　-- by not awarding those added capacity projects in the future, we may save $100 million of expenditures but we also lose $80 million of revenue. So in the balance, we only gain $20 million, because if we're not spending the money on an eligible project, we can't send the bill to Federal Highways and expect them to reimburse us. And so this chart shows on there it's not just the savings from the expenditures, it nets out that we would also lose revenue by not spending and doing those projects.

In addition to the cost savings measures I think Steve is going to discuss, to mention some other things that are out there and being discussed, it also does not include $300 million that the Comptroller's Office recently certified being available out of the General Revenue Fund for TxDOT, the commission to use to pay debt service. That has not been accounted for in here. If you choose to use it in that way, if we use that to pay debt service that's coming out of this line, it would free up $300 million for that purpose.

The other thing that's been in the news lately　-- and hopefully most of the people in this room voted for it just a couple of weeks ago　-- was Proposition 12 and $5 billion of state GO debt. Again, this chart and most of our discussion has really just focused on the tax supported system and operations of the department, including construction, maintenance, day-to-day operations. So the $5 billion wouldn't show up on this chart if we were able to use it. As we sit and discuss it today, we are not able to use that. The voters approved it, it's in the constitution, and the language in the constitution says the legislature may authorize the commission to issue up to $5 billion in debt. There's no enabling legislation, therefore, although the legislature may, they have not yet done so.

So the difficult thing for the department, and I would assume for the commission: Do you start planning for the $5 billion and what if it doesn't come? Because the legislature may not give the $5 billion all on day one, they may say here's a billion and a half for the next two years and then we'll come back, and we don't know if the legislature may choose to direct that for certain type of projects, or prohibit the proceeds from being used on certain type of projects.

So the good news is the voters approved it. I think the voters spoke loudly, they want and agree there needs to be more transportation infrastructure. We'll have to wait for the next session before we're provided that enabling legislation to then move forward on it, and there might be some delay because, as you're all familiar with, just when you get money, you can't automatically go award a contract. You have to spend years acquiring right of way, going through the environmental process and designing the plans in order to utilize those dollars.

If you have no additional questions, I'm going to tag Mr. Simmons at this point and let him take over.

MR. HOLMES: James, I think it's important to note that while $5 billion sounds like a lot of money, it's about a year and a half worth of lettings.

MR. BASS: Correct.

MR. WILLIAMSON: Thanks for pointing that out. It does sound like a lot of money.

MR. BASS: And part of the confusion, it may be a year and a half of letting but it would likely take us four years to actually spend it. And again, why is there confusion over the same situation? Different people tend to focus on different numbers or different definitions.

MR. WILLIAMSON: You have to think a little bit about how the cash comes in and out to understand it. Since government accounting is different from private sector accounting, it's not quite as clear.

Questions of James at this time?

(No response.)

MR. WILLIAMSON: Okay, Steve, proceed.

MR. SIMMONS: Thank you. For the record, my name is Steve Simmons. I'm the deputy executive director of the Texas Department of Transportation. And if it's okay, I'll talk from up here.

MR. WILLIAMSON: Please.

MR. SIMMONS: Today I'm going to summarize some of the steep financial challenges that we've been discussing with you over the last five months, and I'm going to discuss the options, both internal to the department and external, that we will be enacting to help deliver the transportation system and optimize our funds.

Of course, you have given us clear guidance. We've got to evaluate our options in the context of our goals. You know, how can we address our financial shortfall while maximizing our ability to reduce congestion, enhance safety, expand economic opportunity, improve air quality, and increase the value of our transportation assets? And as you will see, given our situation, some of our goals are going to have to take a backseat to the goals of enhancing safety and maintaining the asset value of our system.

The commission and most of the people here are very familiar with the circumstances that we're in, but there still is a lot of misinformation regarding our funding projections and our innovative project delivery program. A couple of recent examples are the articles that imply that we're going to reduce the speed limit on I-35 in order to increase revenue on State Highway 130. And a well-read blogger recently wrote that we are inappropriately promoting the lemon law because we're trying to improve our image. As long as these people feel comfortable taking shots at the solutions that we've identified, I think it's important that we continue our message regarding the reality of what the situation is.

For several months now, Mr. Saenz and Mr. Bass and Mr. Chase have been discussing with you the deteriorating state of our system. We have been having to spend future maintenance and mobility funds to just slow the decline of pavement conditions, and at the same time we have seen skyrocketed inflation erode our ability to maintain it. We've discussed at length the need to refocus our attention on maintaining these critical assets and that will come at the cost of new construction. For this reason, we will simply not have enough money to build new capacity.

We are preparing a minute order that will make the necessary adjustments to our funding distributions, and you should see that starting next month.

However, there are many circumstances, some good and some bad, that are impacting how we manage this shift. Federal rescissions continue to take a toll on our planning efforts, and we've mentioned before, over the last two years, Congress has rescinded $666 million that was apportioned to Texas, another $249 million is included in the FY 2008 Transportation Appropriation Bill which was passed by the House yesterday and is expected to be heard by the Senate before the Thanksgiving break.

And of course, Congress included an approximately $700 million rescission in the SAFETEA-LU that will hit in 2009, and that rescission was included in the bill that was enacted in 2005 but Congress recognized even then the precarious nature of the Federal Highway Trust Fund.

Another important issue that we've discussed many times before is that the Federal Highway Trust Fund is expected to become insolvent in 2009 to the tune of $4 billion, and that equates to about $480 million to Texas. That's money in, and if you go back to what James was talking about, you pay out over three years, that's about $1.5 billion for the projects we stop.

For the next Federal Re-authorization Bill, we're proposing a top-to-bottom restructuring of the federal program rather than re-authorizing the current unfocused patchwork of programs. There should be an emphasis on flexibility in transportation finance and procurement, and in addition, states should be focused on specific goals　-- like you have focused us on　-- like reducing congestion, and you hold the states accountable for these goals.

Mr. Chase and Mr. Bass have previously done a very good job of explaining our appropriations bill and analyzing the financial impacts of the legislation. We're in the process of refining those projections right now and we believe next month we'll be able to come to you with more information. But our current projections are that if the existing authorized letting and expenditure plans are carried out, the department will sustain a deficit of at least $1.8 billion by 2012, and at least $3.6 billion by 2015. We can't wait until then to address the problem.

So different people have different ideas about how long it takes to build a highway from the time that a need is identified, as James was talking about, to the point at which the last contractor is paid and the facility is open to traffic. Most of the driving public looks at the process as beginning when they see us starting to clear right of way. Appropriators tend to think in two-year cycles. They see that they have appropriated $3 billion for transportation construction, that's how much they think will be built that year.

The truth is that it can take many years to plan, design, clear the environment, acquire the right of way, relocate the utilities, and begin construction. So in effect, much of that $3 billion appropriation has already been obligated by the decisions of past MPOs and past commissions. Furthermore, our planning process does not reflect the cash flow that dictates our ability to build projects. This sets unrealistic expectations for the public and the elected leadership of our communities.

I mention all this for an important reason: Given the circumstances I've just described, we need to identify the optimal distribution of our limited resources. For example, it makes no sense to keep our consulting engineer budget at half a billion dollars if we know we will not have the money to build the projects they are designing. At the same time, we need to keep planning projects. Whether the state and federal legislatures decide to make short-term improvements to transportation finance, or they allow us to access the private capital in order to solve our long-term needs, we need to be prepared. And with that said, I'd like to make the following recommendations.

We will reduce our 2008 consultant engineering budget by 57 percent, or roughly $250 million. In a moment I'll discuss developments that have occurred recently that allow such a limited reduction. In the meantime, we need to mobilize our in-house sources to meet project development goals. However, I suspect that the engineering community will react negatively, so we need to be prepared to have a discussion with them, solicit their input, and ensure a smooth transition. And I am meeting with the Council of Engineering Consultants at the end of this month to start the dialogue.

Right of way acquisition, similar to contract engineering, we'll have little need to acquire right of way if we can't build anything on it, and I recommend that our 2008 right of way budget be reduced from $500 million to $275 million.

When it comes to our department purchases, our districts and divisions will shortly be notified that the administration in Austin will have to approve all purchases, from dump trucks to asphalt to paper clips. And there's nothing wrong with the district engineer fighting for every penny he or she gets for their district, but under the circumstances, we need to keep an eye on statewide expenditures and priorities to ensure that those areas with the greatest need are getting the resources.

We will also want to examine our research budget and look for opportunities to trim up to 50 percent of our expenditures in 2009.

In regards to our staffing, we will impose a hiring freeze in which only the executive director can make an exception. In fact, we will also look for opportunities to consolidate functions, both in our district offices and Austin divisions, in order to generate greater efficiencies and effect cost savings.

Let me clarify that I'm not saying we are currently operating inefficiently. After the 2003 legislative session, we successfully took the tools we were given and accelerated projects using these tools. After the 2007 session, it is clear that we need to pull back. We ramped up for an increased program and now we need to take the opposite course as our focus shifts and our capabilities diminish.

And as James mentioned, we do have a few positive news that we do need to enter into the equation. He mentioned the Proposition 12, the recent passage of it. Voters approved an amendment to the constitution that allows the legislature to issue up to $5 billion in debt for improvements to the state highway system. The legislature will have to come back next session to write enabling legislation to authorize the money for bond issuance.

At that time, we will know how much they will allow you to issue and specifically how the money can be spent. And if you remember, the Texas Mobility Fund, they required us to spend 20 percent on safety projects, there was bills passed that said 20 percent of the Mobility Fund had to be spent on the border, so we're not sure where they're going to require us to spend the money.

Appropriators must also decide how much General Revenue they can allocate in order to pay the debt service. This is one of those uncertainties that makes it a bit more challenging to identify that optimal distribution of resources that I mentioned earlier. Because the bonds are payable from General Revenue, there is no guarantee that the legislature will authorize the bonds, much less the full $5 billion. However, if they do allow it, we need to have projects on the shelf ready to go should those proceeds be made available.

James also mentioned $300 million. The comptroller certified this and the appropriation will free up $300 million of state highway funds that would have been used for debt service on previous issuances.

Now, there are several ways we can use this money. James mentioned short-term debt, and I don't think he mentioned in his presentation how much we have outstanding right now. James, how much? We have $340 million of short-term debt that we're out there paying interest rate on right now. So you could use that $300 million to pay off this debt. This course of action would generate an even bigger bang when you consider the interest charges that would be avoided.

Mr. Morris mentioned the Minneapolis bridge collapse, and we could use $300 million to repair bridges that are structurally deficient. And there's a misnomer out there that when we say structurally deficient that it's unsafe to drive across. I want to make sure everybody understands that our state bridges are safe. Those that are deemed unsafe are closed immediately. However, due to the critical nature of this type of infrastructure and the growing uncertainty of our financial future, it may be a good idea to repair our bridges now rather than waiting for them to deteriorate further.

A third option would be to run the $300 million through our normal distribution formulas to give an allocation to each district, and I think you can imagine $300 million wouldn't really go too far in view of our districts.

You could pick a large project. For example, there's a project in the Dallas District that we're going to talk about today that has been delayed because of provisions of Senate Bill 792. It's critical for the Super Bowl, so you could find $300 million to put on the project.

Debt on the general obligation bonds. Last, and perhaps most difficult to achieve, would be to hold the $300 million back for debt service on this $5 billion bond program. If you could reserve this money for use in the next biennium, it would be an incentive for the appropriators to allow us to issue the full $5 billion since they wouldn't have to come up with a debt service in 2010-2011. I would not recommend such a course unless we're allowed to leverage the $5 billion by using it to develop toll projects by TxDOT.

Or we could use some of the proceeds to participate in an RMA or with HCTRA where the State could be an equity partner and receive a cut of the tolls. Even though, while the rewards would be substantial, there would be risks we'd have to endure in the legislative process. And there may be technical problems with this option. $300 million could possibly lapse after the current biennium.

So before I conclude, let me reiterate that there are many moving parts that we have to account for as we work toward identifying the optimal distribution of resources. We've discussed the major variables that we have to take into account. For instance, there is a little known requirement that we are to expend about one-fourth of the state gasoline taxes on farm-to-market and ranch-to-market roads. If this requirement continues, it could affect our ability to ensure that our resources are applied where they are most needed, and we will bring this matter up during the Sunset process.

Commissioners, that concludes my remarks, and I'd be happy to field any questions.

MR. WILLIAMSON: And I know each of you have questions. I do want to lay out on the record legislative leadership, and principally Lieutenant Governor Dewhurst, have been quite active in communicating with the department in two matters: one, how to prepare for the $5 billion. Governor Dewhurst has been quite aggressive in making it clear to me that the legislature, or at least the Senate, will provide for those General Revenue debt payments, in an attempt to give us assurance to move forward if we choose to use the $300 million in reserve for the debt payment for that $5 billion.

Chairman Ogden and Chairman Carona and Governor Dewhurst have been equally aggressive and positive in encouraging us to take the $300 million and perhaps consider issuing the balance of the Proposition 14 bonds, holding the $300 million to pay for that, and then negotiating in the next legislative session how that debt might be transferred to the general account. So we would want the record to reflect that the governor and Chairman Carona and Chairman Ogden are aware of the dilemma we face.

I have sat down with the Governor's Office and explained to them the approach the Senate would like to take. I've not communicated that approach yet to Chairman Krusee, Chairman Chisum or Speaker Craddick, primarily because I believe that would be the responsibility of the lieutenant governor and the governor to work through that process. We're all happy and comfortable communicating with leadership, but there's a point beyond which I think we can go. We have to let them decide how they want to solve the problem.

So while I appreciate, Steve, your warning of the fiscal dangers that any state agency faces going through a legislative session, we would also want the record to be clear that Governor Dewhurst, Chairman Ogden and Chairman Carona have long been aware that this cash flow problem was on the horizon and have been kicking around the different tactics that they wish to execute to assist us in whatever it is we come up with for the next few years.

With that said, please, members, ask Mr. Simmons questions.

MR. UNDERWOOD: But you don't know how much. Did they convey to you the full $5 billion, use of that?

MR. WILLIAMSON: I can say clearly, Fred, Governor Dewhurst was very direct with me. He said, It is my intention to provide for the full debt service on the $5 billion.

MR. UNDERWOOD: But not how it would be, just to provide it. Is that correct, sir?

MR. WILLIAMSON: Out of the General Revenue account. I mean, Governor Dewhurst understands, he's a business guy, he understands cash flow, he's not unfamiliar with these charts. We've shared them with him, he understands them, he understands cash flow, and he's been quite direct that he would stand for full payment of that debt out of General Revenue in the next legislative session.

MR. UNDERWOOD: Thank you.

MR. HOLMES: Steve, I was trying to jot down the numbers that you were running through, and I didn't keep up with you, I'm afraid. You said consulting engineering reduction of $257 million?

MR. SIMMONS: It's a 57 percent reduction which equates to $250 million.

MR. HOLMES: And the right of way acquisition would be a reduction of $225-, is that the way I understood that, $500- to $275-?

MR. SIMMONS: Yes, sir. It's a reduction of $225-.

MR. HOLMES: And I didn't get any numbers on the rest of them.

MR. SIMMONS: We don't have the actual numbers yet.

MR. HOLMES: Do you have any idea?

MR. SIMMONS: No, sir. We believe probably 10 percent of our expenditures could be reduced, and I'd have to ask James what that is　-- about $500 million.

MR. HOLMES: On top of these, in addition to these?

MR. WILLIAMSON: No.

MR. HOLMES: Including these?

MR. WILLIAMSON: So if you back that billion out, it would be about $380 million more on top of the　--

MR. HOLMES: I'm sorry, did you say a billion or did you say $500 million? Because I'm already at $475-.

MR. BASS: Again for the record, James Bass. Total expenditures coming from the state highway fund, the tax supported system, are in the neighborhood of $5.5- to $6 billion a year. So if you take 10 percent of that total, you're going to be in the neighborhood of $550- to $600-, and it's going to include the two $250-, the $225-, the $475- that's already been itemized, so you're looking at another $100- to $125- is my quick guess for 10 percent.

MR. HOUGHTON: Where does that get you, James, as far as cash flow when you look at it?

MR. BASS: Well, one of the questions would be do we do that one year, what happens the next year, how do we go. And that last slide that showed us regaining a positive position at the end of 2010　--

MR. HOUGHTON: That's because you're not building anything.

MR. BASS: Right. The most negative we were at that point was probably $375-, so it would get us back up but, as we've talked before, there's a strong correlation between right of way, engineering, environmental and construction and they all need to go together. So you cut $500- one year and you're plus $100- so you start going again, you're just going to zigzag positive/negative over time.

And so do this immediate reduction and then work and find that balance amongst those three that will have the sufficient number of plans and projects being ready when there's funding available to move forward with construction.

MR. HOLMES: And did I understand correctly that this is for fiscal year '08? Is that what you said, Steve?

MR. SIMMONS: Yes, sir, that's the remaining of fiscal year '08, and then we'll be looking at fiscal year '09, what we do then.

MR. HOLMES: Which means that we're three months into '08, this is over the next nine months, and is the proportion greater by virtue of twelve months into FY '09, or is this $500-, $600 million?

MR. SIMMONS: We're finalizing our cash flow projection models right now and putting these numbers into it, and we'll have a better idea what 2009 looks like with these cuts. So that's when we'll come back and make a recommendation for what 2009 should look at.

MR. HOUGHTON: What's the carry on the $300 million of short-term?

MR. BASS: It varies depending upon the term and everything. We're roughly paying 3.2 percent, I'd say, on average, so $9-, $10 million a year.

MR. HOUGHTON: And then the research reduction of 50 percent, that's included in these numbers of $500- plus?

MR. SIMMONS: That's roughly about $9 million.

MR. WILLIAMSON: I mean, I've been working with the administration pretty steadily on this. I think that's the contracts they can reach into and change the fastest. It's a little harder to start winding down construction contracts because, as Mr. Morris will no doubt tell us in a little bit, we're in the process or have been in the process for years of distributing the authority to act to our regional partners. So winding down our construction projects is not just our decision, it's a function of a negotiation process, principally with the nine metros, on which projects get wound down.

MR. HOUGHTON: What you're basically doing is shrinking your program.

MR. WILLIAMSON: Oh, there's no question about that.

MR. HOUGHTON: Significantly shrinking the program.

MR. WILLIAMSON: Yes. That's what you have to do when you run out of cash.

MR. HOUGHTON: Well, I understand that.

MR. WILLIAMSON: Or at least it was the last time I ran out　-- which was last month. Now, Fred has never run out of cash so he wouldn't know about this.

(General laughter.)

MR. HOUGHTON: What are other states doing?

MR. SIMMONS: Commissioner, we're working on re-authorization right now with a lot of states and I've been talking to their executive directors　-- particularly Florida, Colorado, Pennsylvania, they're all in the same boat. With gas prices going up, they're not seeing the increase that they projected in fuel revenues or motor fuel tax revenue. The rescissions are hitting them the same, the projected shortfall of the Federal Highway Trust Fund, it's affecting all states.

MR. WILLIAMSON: One of the things that's hurt us the most is inflation on our product. I mean, a preponderance of what we spend our money on, steel, asphalt, concrete is petroleum-driven. And I don't know that we've done a particular study on that, but my guess is our inflation rate for the entire construction budget has averaged 10 percent the last ten years, but my guess is within that cement, asphalt and steel, it's probably 30, 40, 50 percent higher than that.

MR. SIMMONS: Is Thomas here?

MR. HOUGHTON: Well, my point was on shrinking the program, we're shrinking our program in a time of phenomenal growth, so we've got this delta that's going to open up as far as mobility issues are concerned, congestion.

MR. SIMMONS: Basically losing ground.

MR. HOUGHTON: As Michael was talking about earlier.

MR. WILLIAMSON: Anything more, members?

(No response.)

MR. WILLIAMSON: Well, Steve, none of us like what we're doing but we understand cash flow, so proceed. Keep us advised. If you detect any land mines, let us know.

MR. SIMMONS: Our goal is to come back to you next month with another discussion item. We'll have a little bit more time to spend with our cash flow forecast and I think we will show you some options, how different variables play into what our cash flow is, and we can show you through this model that we've developed.

MR. WILLIAMSON: So that the audience and those who might be witnessing our proceedings can be advised, one of the principal projects on the immediate horizon for the State of Texas is State Highway 161 in the Dallas-Fort Worth area. There's a lot of attention being paid to this now because it is the first market evaluation project under Senate Bill 792 that has advanced to the point of discussing business terms and selecting a market evaluator, so it's the template that the commission will use for the other 87 projects it's identified as qualifying for the market evaluation process.

Because of different events that have occurred in the last few months, we asked the administration and the board of NTTA to spend some time with us this morning and kind of kick around some different ideas and to discuss why the market evaluation process isn't moving as quickly as the commission thinks it should.

The chairman of the NTTA, Paul Wageman, pointed out to me that perhaps the board shouldn't be involved in these things, it's a staff matter. After reflection, I completely agreed with him and notified him of that last night.

The commission will sit in primarily for one piece of this, the commission will not engage in interfering in the negotiations process that should occur between NTTA and TxDOT under the watchful eye of RTC. We've used the roundtable approach in our commission meetings several times in the past few years. We find it generally a good tool to bring resolution to some difficulties.

We're going to take a precisely five-minute recess to let everybody kind of gather themselves over here at the table, and then we will resume with the commission members, part of legal staff, District Engineer Bill Hale, and whomever the North Texas delegation has brought, and we'll start our discussions at that point. So five minutes from now.

(Whereupon, a brief recess was taken.)

ROUNDTABLE DISCUSSION - STATE HIGHWAY 161

MR. WILLIAMSON: We have a couple of things to accomplish in this roundtable. One is to hear from our partners in North Texas and what really the department views as the transportation leaders in North Texas, that being the Regional Transportation Council, speaking through their director, Mr. Morris. And the second is to talk about the market evaluation process and what needs to be done to expedite that.

And I would say for the record, as I'm sure NTTA will also, the department and its employees are committed to negotiating the market evaluation process 24 hours a day, seven days a week, starting Monday morning, with all the resources that are necessary, to get the job done within a reasonable time frame　-- which I think the commission has some thoughts about that we'll express in a moment.

With that said, Mr. Morris, I would almost prefer for you to make your presentation first before we start our dialogue.

MR. MORRIS: Mr. Chairman, thank you very much. Michael Morris, director of transportation at the North Central Texas Council of Governments. Thank you very much.

There's basically two parts to, I think, what we want to do. We have an innovative way we think we can proceed with 161. The second part is to work on the mechanics of TxDOT and NTTA, working on the market valuation for 161. The point we want to bring across today in this presentation is we think we can work in parallel to get that accomplished. What we can't do　-- and I think, Mr. Chairman, with your remarks　-- we can't hold up the ability of this project being built in a timely fashion, and that's what I hope to bring to your attention.

Amadeo Saenz, I wanted to congratulate him on his new appointment. I want to thank Steve Simmons for going with us to Omaha, Nebraska to expedite issues with the Union-Pacific Railroad. I think those already paying dividends, and I want to thank Steve for going up there with Maribel, Bill and I to get that accomplished.

The title of this presentation is Regional Transportation Council Fiscal Year '07-08 Theme Project Delivery.

Our whole focus in Dallas-Fort Worth this year is to get projects across the goal line and get construction and implementation begun. We think we've talked about projects for now, some of these projects three or four years. We hope those days are over; we hope to get actual innovative ideas into place and get actual projects constructed.

And of course, I do that because we have a federal responsibility to get these projects done, but now under the state law, through the Texas Metropolitan Mobility Plan, I have a state responsibility to get these projects across the goal line.

A few weeks ago, two things occurred. It appeared that the market valuation was not going to be completed by Christmastime which is the time frame we had given to be able to proceed　-- and I'll explain that in a moment　with how projects would be implemented. NTTA said just because we can't reach agreement, we've got to be able to get 161 expedited. They have a proposal that I believe they sent to Amadeo. We agree with them 100 percent, the project has to be expedited.

We have a different proposal, but I believe the proposal that you'll hear today has unanimous support from the two district engineers, the North Texas Tollway Authority and us to proceed with 161 in an innovative way while we give the State and NTTA more time to work out what the market valuation is on this particular project. If you turn over to the next, as you can see, 161 is slowly being developed, and through communication, it has now been expedited.

You will hear　-- if you have questions　-- great progress made on 121. I think we're down to literally days or hours with regard to the money being wired to TxDOT on the 121 project. Your office and our office expedited $160 million to get the PGBT extension across the goal line and implemented. We had discussion with citizens of Dallas on the Trinity Parkway and successfully were able to maintain the balanced vision plan for the Trinity Parkway project which was a major focus for us this fall.

Both TxDOT and our office requested NTTA to pass a board item that indicated their roles and interest on the managed lane policies which was to be the collector of tolls and not to be the implementer which we think will help the private sector respond to the next three projects: LBJ, the North Tarrant Express, and the DFW Connector.

In that particular case, those roles and responsibilities, I think, are more clearly defined which would help us get improved proposals from the private sector in those three managed lane corridors. We think that we have that behind us; TxDOT has the lead in getting that completed.

That brings us down to the 161 project. We hope to get 161 to bed and we will soon have the Southwest Parkway on our radar screen to get that across to goal line as quickly as possible.

Let me review for a minute the value of the 121 project. There's an up-front concession payment we talk about of approximately $2.5 billion. We are capped on that at $40 million with regard to the same private sector interest payment, so most of that interest cost will be charged to the North Texas Tollway Authority. That will come in a hair under $2.5 billion.

As part of the partnership initiative, the Regional Transportation Council has taken the float on the $833-. If that closed today　-- which it will be pretty close to closing in the next few days　-- that's about a $64 million item which is a lot better than where we were a few months ago, so something around $780- or so will be the $833- payment. So my focus of my presentation is on this $780 million.

The Regional Transportation Council right now, working with TxDOT, is identifying projects for the $2.5 billion. We should be completed with that task this winter. We anticipate closure on 121, we had a deadline for projects on August 3 and we're evaluating those projects. So you'll see in your TIP in the next few months $2.5 billion worth of projects coming forward.

Now, the $833- was a rainy day fund that the RTC established because they're not going to have too many more State Highway 121s, so they wanted to be able to use those funds for other needs, and that's the innovation, I think, in our presentation regarding 161.

I won't go through the rest of the numbers on this table, just for everyone to remember, yes, it's $3.3 billion, but you've got to remember plus the remaining construction on 161, plus any other maintenance and construction on this project over time, and that's a strong commitment that NTTA has made to the region as part of this particular initiative and wire transfers that will be occurring in the next few weeks　-- at least by the end of the month　-- to this home office of TxDOT.

I wanted to highlight　-- and this follows up some testimony I gave to the legislature in the spring, and I think we need to continue to talk about this　-- why has Dallas-Fort Worth pushed innovative finance with regard to managed lanes and toll roads. And I think we have to first focus on the gas tax.

There are three rules that come into play with regard to gas tax that very much dampers the ability of meeting the needs of a particular state. The first is the law of allocation. What we mean by the law of allocation is, okay, you increase the gasoline tax, the first step is you've got to strip away a portion of that for education, then you've got to strip away or decide by this commission how much goes to capacity and how much goes to maintenance. We heard that conversation earlier today, very germane to this discussion. You then have rural needs, you have urban needs and metropolitan needs, and then within the metropolitan regions you allocate money to Houston and Dallas-Fort Worth, and so on and so forth.

So A, gasoline tax increase suffers from the law of allocation because we're in a big state with lots of needs throughout the whole state.

The second item you have is the law of inflation. You have all portions of the state having projects that are ready to go to construction. Steve shared with us in Omaha　-- and Mr. Chairman, you mentioned it earlier　-- 100 percent increase in the cost of projects in ten years. At 10 percent a year, if you've got $5 billion worth of projects or $10 billion worth of projects that this state has ready to go to construction, you've got $500 million to a billion dollars a year in inflation just on the costs that are ready to go to construction. And we call that the drifting sailboat, that the sailboat is within reach but it's drifting at a speed faster than you get from the revenue sources that you have at hand.

More and more you're going to hear us talk about rule number 3, the law of silos. This is the non-flexibility you have with regard to these programs which is horribly damaging. Steve talked about that earlier, that maybe where this state is going to go is stop getting money by silos, get the revenue back to the state, and give to this commission the ability of flexing the money to the appropriate goals and objectives of that particular state.

Now, with regard to toll financing　-- where Dallas-Fort Worth has been for some time　-- on our plus side we have the law of competition. And we're all, unfortunately, very familiar with the 121 process. There were times during that process I wondered if it was all worth it, but that's behind us now and we saw the benefits of competition. Commissioner Houghton, you and I have talked about that several times.

What I want to talk about is the law of leveraging and the idea you have today is another example of leveraging, believe it or not, that we think we can construct a project and raise revenue at the same time and not deplete the revenues within the region. And we want to show you that example we have on 161.

And then we have the law of fungibility. The flexibility of these funds from NTTA are coming into the process as local, they won't have the same strings attached to them as you get through your state revenues or your federal revenues, and we're working out with the state right now how we can expedite projects through that flexibility and actually construct projects faster　-- which will help us on the inflation side　-- and have the flexibility of putting the right dollar to the maintenance or safety or transit operations or other already identified legal uses of that by the legislature.

Let's focus on 161 directly. And now we saw that the discussion with regard to 161, the market valuation, at least we were told　-- remember, we're not in the market valuation process, that's a process between the State of Texas and the North Texas Tollway Authority　-- we were told it probably would not be done by the December time frame. So we are now going to Plan B because we need to expedite 161 while that process is going on. And I believe that the agencies sitting at your table are all in agreement with the approach I have for you today.

Now, Senate Bill 792, Mr. Chairman, as you've already talked about, has the market valuation process. You've got discussions occurring within the state should use our private sector financial model, similar to what we used in 121, or a public sector model which was how the public sector sold bonds by discounting anticipated revenues to make sure you didn't have a failed bond sale. We're hopeful that this public-private sector discussion won't creep into Dallas-Fort Worth. I know it's creeping into other portions of the state.

I think TxDOT and NTTA need more time to work on the mechanics of how they want to proceed. And NTTA can speak for themselves, but I don't think they're necessarily saying to be successful they need a more conservative public sector model to accomplish this.

Now, the rub we get into　-- and I hate to show too much of our details here, but the details are important　-- the 121 project produced about $200 million for projects in Dallas County. We have already committed to you to be the backstop of about $200 million for the LBJ project that is going through your CDA process. The LBJ project is one of our top priorities within that particular county, and we've told everybody if we can get the market valuation process complete by the holiday time frame, then we can proceed with picking $200 million worth of projects within Dallas County. But I can't serve my due diligence by spending $200 million somewhere else and not have the backstop of $200 million that Bill will need to get the LBJ project done because that's a higher priority project.

So we have told Dallas County cities your project selection process is now on hold because the market valuation is not going to be done in a timely enough fashion because I was anticipating using revenues from the 161 project to pay for the backstop on the LBJ $200 million process. Because some of us think the revenue from 161 will be north of the $200 million needed for the LBJ backstop, so elected officials in Dallas County have now been told your selection process needs to be put on hold until we can get the market valuation process complete.

Now, I have to then compare that to where we are on the 161 project. Parallel to 161, in Maribel's district is State Highway 360, horribly congested project, parallel to 161. The regional plan had intended to have 360 and 161 opened at the same time, balancing this traffic. This 161 project is not in place so 360 is doing the work of two corridors.

We committed to Grand Prairie to get this project up and running as their commitment not to go ahead with a gas tax- supported roadway but to build this roadway as a toll road. I've authored the Super Bowl Plan. We have a Super Bowl about three miles from this particular corridor. This particular corridor will need 161 open by the Super Bowl date. 161 needs to be open 20 years ago; we're not pressing this just because there's a Super Bowl, but maybe the Super Bowl should be telling us to do the things we should be doing anyway and I'm trying to use that as an excuse.

We worked with the Attorney General's Office and the U.S. Attorneys and TxDOT to lift the federal injunction on this project in 1998. That required us to make commitments to the court that this project would be built in a timely fashion. I do not wish to go back to federal court on why we're not making timely improvements in this particular corridor. Our testimony as expert witnesses during that case for TxDOT and Attorney General's Office as that this project would be expedited.

I then move us to, okay, how would that occur absent a market valuation. Well, as I shared with you, on the 121 project we have $833 million, we took the risk on the float, we think it will be about $64 million. The Regional Transportation Council has been debating two funding strategies. One, even though we wanted to keep this money for a rainy day and to build projects slowly over time, we've got such a backlog of projects, we're just going to have to go ahead and spend it. That's option one.

Option number two is we have been working with your staff on the notion of an endowment, like a university would have an endowment. Put the $833- in the bank, create a revenue source that produces about $40- or $50 million a year in interest, and have that $40- or $50 million come to the region forever. Nice ability to build $50 million a year and not spend any of the endowment proceeds.

Well, the idea we have for you today is a cake-and-eat it-too strategy which is to go ahead and take a portion of the $833-, the rainy day fund, and go ahead and advance about $200- to $300 million of construction on 161 while the market valuation is going on. And then to sell that asset that is being constructed at somewhere between 4 percent which would be the monies that you would get by having $833 million sitting in the bank, and 10 percent which would be the cost of inflation. Anything below 10 would seem to be a good deal to a constructor who already has the asset in had and does not have to build the asset in out-year dollars two, three, four years from now.

We presented this idea to the Regional Transportation Council. Because of the short nature, it was not an action item; this is coming back to them next month as an action item. But if I had to guess, I think the Regional Transportation Council, who likes this idea, would be to go ahead and have TxDOT let portions of the 121 project.

At this particular point, this project is going through a re-evaluation　--

MR. HOUGHTON: 161?

MR. MORRIS: I'm sorry. 161. I apologize.

161 is going through an environmental evaluation to be a toll road. As I'll show you in a minute, 161 is already under construction with money from TxDOT and the RTC　-- we're using a lot of surface transportation, metropolitan mobility money on 161　-- and then retain this as an implemented asset that we would sell to NTTA if NTTA wishes, through the market valuation with TxDOT, to be the implementer, or we would sell that asset to the private sector.

The cake-and-eat-it-too is we build the asset in a timely fashion that needs to be open for the public to meet our federal responsibilities to the court, and we get the money back to be put back into the account because this is a toll road project that we then can use that money to go expedite probably something on the Southwest Parkway or another managed lane project we have within the region.

The yellow line on this map is the frontage roads on 161. This is a Bill Hale map from the district. You can see where 360 is on this map which is just west of there. That's already open to traffic, horribly congested from 30 to 183. The 183 interchange with 161 is almost open. If you've landed at our airport and headed east, the interchange at 20 is already under construction, the first phase of that is proceeding. The frontage roads will be open in the fall of 2008.

The critical nature of this project is the main lanes between just south of 30　-- which is Division Street　-- to 183. That's where the big push is. A lot of this particular project is designed. Mr. Hale thinks he can get the major bridges across the Trinity River to letting in the March time frame, and then follow it up with the other critical section over Bear Creek by the summer time frame. If you proceed with us to be able to do this, we think we will have the project open to traffic at the critical times in which the region needs it, and then permit TxDOT and NTTA to have more time to go through the market valuation.

So instead of these projects being sequential and use the market valuation revenues to build the project, we go in and use our public sector credit union bank, advance the money to keep 161 on schedule, and then backfill that credit union commitment in our public sector credit union bank from the resolution of the market valuation.

Now, we understand there's risk associated to what we're doing, but if we're going to follow your intention of your goals, our responsibilities and state law with performance measures, my long issue of accountability in leading a region on what should be done anyway and focusing on the customer, my federal obligation to the court to expedite the project, and then our responsibility as a metropolitan planning organization to build things and not talk about them, we think this is the best strategy.

I remind you hopefully wisdom will creep in somewhere in this town as we can build inner city transportation improvements desperately needed. The early phase of the 360 access as part of the Trans-Texas Corridor and the regional loop that you see there is that middle spine road, includes State Highway 360, this particular project on 161, the remaining portions of the George Bush and the Dallas North Toll Road. So if you remember earlier presentations, in the interim until the regional loop is done　-- and we have a whole bunch of people working on the regional loop in partnership with the two districts　-- this initiative will be fed from the middle. And I'm just reminding us, 161　-- to give you some location　-- is the critical piece as part of this particular process as well.

The thought is going to be well, gee, the project has not been constructed. I remind everybody this project is under construction now. Frontage roads are being funded, you've got interchanges that are being funded. What we're asking for today by three agencies is to move forward with a transportation improvement program commitment. We're not asking you to use any of your gas tax money from your previous discussion. These will be monies that are wire transferred to us; this is our rainy day, critical fund program. We think we're in a rainy day, critical situation. We take the money out of our credit union account, we wish to fund this particular project, value the asset, and sell it to the market valuation process, have it be NTTA or the private sector.

Mr. Chairman, I think I'll stop there. I believe NTTA and the districts are onboard with this initiative. We can focus on this part for a moment, if you wish, and then we can move into the item about market valuation and its timing as part of this. I think it's an out-of-the-box idea, I know you're getting it cold, but I think it's, frankly, the responsibilities you have as to the regional process to get projects delivered. I'm charged this year to get as many projects as I possibly can and I'm not embarrassed to bring forward an out-of-the-box notion to get 161 underway, even though the market valuation process is still being discussed. Be happy to take questions.

MR. WILLIAMSON: First of all, we always welcome out-of-the-box thinking around here. It frequently is the best way to get problems solved.

There are several dilemmas that we need to air at this table, and some of them it may seem to you that the commission is reacting negatively or not fully appreciative of your approach. I assure you that's not the case.

Mr. Saenz received a letter from the executive director of NTTA that principally broke into two parts. We, being both of us, can't get the market valuation process done in the time frame that you wish, in part because you're not operating collaboratively with us　-- I think was the word. And then the second piece was we'd be willing to advance the money to get the critical parts done for the Super Bowl.

And the problem with that letter is, after I got to thinking about it and after I got our lawyer to take a look at it, is that it was, in effect, a circumvention of the negotiation clearly described in 792. That didn't occur to me for several days because, like you, what I'm really interested in is reducing congestion. If that means building 161 or extending the commuter rail system to Fort Worth, that's what I'm committed to.

And I sent a letter to Mr. Wageman offering to sit down and talk collectively at this table about the offer and the collaboration concerns that I have about my own staff　-- no offense to my own staff but they know how I feel about this　-- and other letters traded between Mr. Wageman and myself and between Mr. Saenz and the executive director of NTTA and some of our staff.

All of these letters are going on, and it hits me, Michael, that Senate Bill 792 is fairly straightforward, it's not really very confusing at all, and it's certainly not confusing to those of us who had staff sitting in on the negotiations for three months. And the not confusing part is that once the process starts, it's a process that has beginning and ending pieces not to be interfered with.

And to that point, Mr. Jackson, if you would, share with Mr. Morris our viewpoint of that process.

MR. JACKSON: Bob Jackson, general counsel.

Senate Bill 792 sets up a process that we must follow if anybody wants to build a toll road in this state. If either a local tolling entity　-- which includes NTTA　-- or TxDOT wants to build a toll road, then the two entities have to get together and the first thing they have to do is negotiate terms and conditions. If that is not successful, then you can't build a toll road. If it is successful, you move on to a market valuation. The two sides have to agree on who does it, either side or a third party. You can waive the market valuation.

So you complete a market valuation, you waive it, or if you're not successful in agreeing to a market valuation or waiver, then you can't build a toll road, and that's very clear. If you get past that second step, then you give the option to the local tolling entity to develop and operate the toll road in accordance with the market valuation.

Those three steps are mandatory with the exception that you can waive the market valuation. A waiver of the market valuation does not mean that you waive the first step or the third step. You must comply, you must follow all three steps.

MR. WILLIAMSON: Now, in saying that, Mr. Morris, the difficulty for us at this table is that someone at this table or someone in this room will go back and say, Oh, they got another bureaucratic fight going and we're suffering as a result of it. I know that's going to be said; I know that no matter what I say, that's going to be said. But I want to say to you, a good partner in transportation, that I've been reminded in the past few weeks of the intensity of the Senate Bill 792 negotiations, and the fact that it was constructed word by word after long hours of arguing that involved TxDOT, lawyers representing NTTA, lawyers representing HCTRA, House and Senate members, and it was constructed to precisely prevent the situation we find ourselves in　-- which is two institutions of the state unable to agree on business terms and a market evaluator.

The whole point of the process was to say to the Central Texas RMA and TxDOT: Boys, if you want to build a toll road, then you need to learn how to work together; if you can't work together, then it's not a toll road, it's a tax road or it's no road. So we find ourselves today, upon reflection, if our staff and their staff can't agree on these things, then it's a tax road, and so now we start looking for the tax money. It's simple.

MR. MORRIS: Let me add some things just to make sure we're all on the same page. First of all, NTTA made a particular proposal, I think, for them to go ahead and design it in the interim and maybe to construct it in the interim. That is not the proposal we're bringing forward today. Some of us think that from a procurement standpoint that that becomes a very slippery slope and how can you have a market valuation going on while someone is already designing the project and someone is constructing the project and is possession nine-tenths of the law. And then you've got a situation well, you're already doing A, B, C, D and E, why don't you just go ahead and do the project. And I think that would undermine the 792 process and I think it would undermine general procurement procedures.

What we're talking about is not the original NTTA proposal. NTTA brought it to our attention to say, Well, look, if we can't come up with an agreement, we've got to do something. We took the okay, we're going to do something and proceed with an MPO initiating something directly with TxDOT. Now, the same legal issues may respond, but I just want to be clear that we're not proceeding with NTTA's original proposal.

The second thing that's important is right now the project is not environmentally cleared as a toll road. That re-evaluation is going through. I don't know the nuances of 792, but I think we have a right to build it as a gas tax road, and we're prepared to do so because I have to look ahead to a situation where maybe both parties don't agree and the project can't proceed and I need to prepare a region that we're going to build transportation in the absence of that particular situation, why do I need to wait three or six or nine months, why can't I proceed in the interim and then we'll worry about if the environmental process permits it to be a toll road which then, in my opinion, would trigger a 792 issue.

The third is we're already under construction now. If this was such a integrated issue with 792, why wouldn't a hold order or a termination of contract situation come down and say, Well, you're under construction in a particular corridor, I see that it may be a toll road in the future for us to be so precise with Senate Bill 792 language, we need to terminate all contracts.

What we're asking for is permit us to go to the fifth phase of construction in an all ready set of contracts in which we're using gas tax revenue and we think I may have to prepare a region that this may be a gas tax facility in the future.

So I'm not here to argue the legal elements, and I certainly wasn't there in the room when 792 was debated, I certainly was being beaten during that time frame when 792 was being discussed but we're still striving for a win-win situation of trying to proceed with construction while the market valuation process　-- I would have liked the market valuation process to be done in November-December, I wouldn't have to go to Plan B, we resolve it, revenues come over under the market valuation process, I can proceed with my $200 million project selection in Dallas County, and then we'll transfer some portion of the 161 assets to the backstop on LBJ, and we get our LBJ, we proceed with $200 million worth of projects.

But as you know, we're not an agent to the market valuation process.

MR. WILLIAMSON: Yes, and I would not want my poor explanation of our position to mislead you. We don't disagree with the notion that Plan B needs to develop because this may well be a tax road. I think we're almost suggesting that the process set up by 792 contemplated this exact problem, that being the TxDOT view of market value might be different at any one time from the Montgomery County Toll Authority view, the HCTRA view, the North Texas Tollway Authority view, the Central Texas RMA view. And that difference should not stop a decision from being made about whether or not to build the road. It should only stop the decision about whether or not the road is to be a tolled asset.

We have 88 of these we have to go through. This is the first one. It is almost, by definition, incumbent upon us to adhere to the structure of the law in order to set the tone for the remaining 87.

Bob, you jumped a while ago. Is there something about the RTC proposal that you feel like you need to comment on?

MR. JACKSON: No. Just two things. One, on current construction, yes, part of 161 main lanes are being constructed but that contract was awarded prior to the effective date of 792, well before. Also, I'll make one clarification on what I said earlier. The market valuation does not have to be agreed to. We have to agree on who will do it, we don't have to agree to the results, we have to live with the results.

MR. WILLIAMSON: So as a practical matter, take us through the process. TxDOT and NTTA sit down and negotiate the business terms first.

MR. JACKSON: Yes.

MR. WILLIAMSON: Now, if they don't agree on business terms, what happens?

MR. JACKSON: You cannot build a toll road.

MR. WILLIAMSON: Let's assume they agree on business terms. What's the next step?

MR. JACKSON: Decide who will do the market valuation.

MR. WILLIAMSON: What if you can't decide on who will do the market valuation?

MR. JACKSON: You cannot build a toll road.

MR. WILLIAMSON: Let's assume you decide on who will do the market valuation and the market valuation is done and the person or company you contract with says here it is based on the business terms you agreed on. What happens then?

MR. JACKSON: You have to comply with those terms, or you do have I believe it is 90 days to negotiate revisions to the market valuation.

MR. WILLIAMSON: So there's a point at which the public knows what the market value of this is, the RTC knows generally how much equity would flow out of that asset into their toll roads, all the players have the opportunity to kind of check their hole card with their financial advisors and see if they want to do the deal, and if there's any adjustments to that, those adjustments could be agreed upon.

MR. JACKSON: Yes.

MR. WILLIAMSON: But once the market valuation　-- well, what happens if you can never agree on the market valuation, the number?

MR. JACKSON: Then you have to accept the market valuation as it was.

MR. WILLIAMSON: And then who has the first option to acquire the asset or construct the asset at the market valuation number?

MR. JACKSON: The local toll entity which would be NTTA.

MR. WILLIAMSON: And if they pass, then what happens?

MR. JACKSON: Then TxDOT has the option.

MR. WILLIAMSON: And if TxDOT passes a TxDOT road, then what happens?

MR. JACKSON: You don't build a toll road and you could always start the process all over again.

MR. WILLIAMSON: So it's a pretty logical well thought-out process with checks and balances in place that kind of force TxDOT staff and Central Texas RMA staff to either agree or move on with the tax road.

MR. JACKSON: Yes.

MR. WILLIAMSON: And what I hear you saying, Michael, is this road is so important for other reasons, you're willing to recommend to your members that it be built as a tax road and start.

MR. MORRIS: Yes. I think my claim would be it's environmentally cleared as a gas tax roadway, permit us to proceed with it as a gas tax roadway. If and when those four different scenarios, eight combinations of steps are successful, get back to us. Otherwise, we've got to go build a transportation system.

MR. WILLIAMSON: Okay. Well, before I take the discussion to what we need to do to work together to make the market valuation part work, I think that I would open it up to anyone at the table comments about this aspect of the matter, bearing in mind that, since your original letter to Amadeo, we've been kind of warned that we don't need to be a party to interfering with the 792 process, so the commission members may not be able to respond to some questions you ask.

MR. HOLMES: May I just ask a clarification question? In selecting the third party that will do the evaluation, what instructions can be given or not given? How do you instruct that third party to perform the evaluation?

MR. JACKSON: Per the terms and conditions.

MR. WILLIAMSON: Per the business terms.

MR. JACKSON: Yes. So you first negotiate business terms or terms and conditions is what 792 says, and that's what you give to the entity that develops the market valuation. So you can put whatever instructions both sides agree to within those terms and conditions.

MR. WILLIAMSON: So what's the maximum toll rate, what's the congestion pricing.

MR. JACKSON: The minimum would be scope of the project, toll rate, and toll rate escalation.

MR. HOLMES: Let me jump to another question, Michael. If the RTC effectively front-end financed for some time period and there was never an agreement on fair market value, what happens? Does the RTC own the project? What happens with that?

MR. MORRIS: That's a good question, Commissioner. The money is sitting in Fund 6. Remember, we have sort of a reverse RMA notion that you're our funder. We don't wish to do our own contracting, so we simply go through the TIP process and request you to go ahead and get Bill to finish the design of the project, and it's let, just like everything else here is let. We're not the constructors, it's a regular TxDOT process.

If and when you come back with a market valuation, and we have a re-evaluation of the environmental process that determines it's a toll road, then the hope is we have not lost six months, sixty days, six years　-- I don't know how long this process might take　-- to go ahead and sell that asset back as part of the toll road process.

That's why I call it our cake-and-eat-it-too. We've got to get this project to