Monday, May 21, 2007

What is so bad about the “apply market valuation” clause in SB 792?

Q. Does this clause give landowners a better price for land confiscated by eminent domain?
A. No, in this bill, they are referring to market valuation for the ENTIRE INFRASTRUCTURE PROJECT rather than for getting an appraisal on the real estate before they pay the land owner. There are rules that apply to acquisition of land by eminent domain which will not be changed by this phrase in this bill.

Q. What is Market Valuation as used in HB 792?
A. What they are referring to is HOW THEY VALUE the land years after it is acquired, how they VALUE the entire infrastructure throughout the life of the contract.

Q. Is it a common practice?
A. Applying Market Valuation to state highway projects is a new concept. Market Valuation is a private sector practice where an owner of an asset values that asset over time as the value of the real estate escalates. As demand for adjacent property rises, rental and usage fees rise to reflect what the private company would have to pay for that house or business or real estate on the day they lease it to a user. For example, a friend of mine rents a house she purchased for $20,000.00 but which appraises on today’s market for $45,000.00. Years ago she charged $150.00 a month for rent but today she charges $750.00 a month for a tenant to rent the house.
This is a common practice in the public sector because she used her personal funds or credit to acquire the property. She is not a public housing authority which uses public funds.

Q. Why is it a such "big deal" in this particular bill?
A. Until a few years ago, only public toll authorities were legally allowed to build toll roads in Texas. With changes in the law, we now allow private companies to partner with the state to build toll roads. We also have public toll authorities which build toll roads in Texas. Public and private toll companies are in competition for bids on lucrative projects. Public toll companies (like NTTA) have an advantage in the bidding process because they operate on different rules than private companies like Cintra. A private company is supposed to invest private investor capital into the project and the private investors, wherever they live in the world, get a return on their investment and they can spend or invest that money anywhere in the world in any kind of project they choose. A public authority uses taxpayers money as an agent of the people and the return or user fees goes back into the public coffers, not to private investors. The return must remain in the region for use on public works projects for the public good.

Q. What about use of right of way?
A. If a private company use right of way owned by the state, frequently they must pay a today’s value for that right of way when they acquire the right to use it because they are a company of private investors making a profit off of the taxpayer’s assets. A public authority should not have to pay today's value for acquisition of the right of way because they are agents of the people, whose money was used to acquire the asset and who will be the customers who use the finished transportation project. Profit (or return on stockholders investment) should not apply to public works (public toll authorities) projects.

A. Are there any exceptions?Q. In some versions of legislation that have been passed by various houses of the Texas Legislature (but which have not to date been signed by the Governor), there was language to allow private or public toll authorities to utilize the right of way at the same cost or no cost and not include the difference between what it actually cost the state to acquire the right of way and what the right of way costs today (market valuation) into the project cost. The idea is to try to keep project cost down so lower costs would allow lower usage fees to the public. But that language was an EXCEPTION to normal practices in the private market place.

Q. When Market Valuation is applied to a project, does it apply to anything other than the real estate cost?
A, Yes. By applying market valuation to a project means each year value would would be base on what it would have cost to build that project that year, instead of what it actually cost to build it when it was built. That means calculating what supplies would have cost at current rates of inflation, what real estate would cost if acquired during the year when they are computing the current year's market valuation, what labor would cost now vs. during the year it was actually built. Applying market valuation means that building supplies, labor, land cost, engineering fees, studies, actually every project cost is calculated based on the current rate of inflation and cost for those design/build/acquire elements for the project based on the cost in each year of the contract. It is suspected that projects will cost much more 50 years from now than they do today. Applying market valuation to a project means that what it would cost to build that project 50 years from now is the cost that will be used to calcuate the rates in the formula used to calculate user fees and potential buy-back costs.

Michael Morris of the NCTCOG RTC says that every project they have escalates in cost about a billion dollars a year. Applying Market Valuation to a public toll project would mean that instead of the project costs remaining what was ACTUALLY SPENT by the government on behalf of the people to build that project, they will be artificially applying a bookkeeping model to the project cost each year which will include what it would cost should they build that project at different years in the contract.

Q. Why did Gov. Perry insist that this language be inserted in SB 792?
A. That is a good question and the only way to answer it is to speculate. Pushing application of Market Valuation to public toll projects levels the playing field between Cintra and the NTTA. It removes the advantage of using a public toll authority to build the project. Rick Perry received substantial campaign contributions from Zachry and Zachry family members and associates during each election cycle he has been in office. Zachry is Cintra's partner and TxDOT favors Zachry-Cintra as contractor for the lucrative TTC project and for SH121. TxDOT was not pleased when legislation was passed which required allowing public toll authorities have the "right of first refusal" in bidding on projects in their region.

I think that requiring application of Market Valuation to public toll authorities bids is a tool that Perry’s administration is trying to use so that Cintra and private investors will have a better chance to win state highway toll contracts. (Private investors charge the taxpayer twice what most public toll authorities charge the public to use the infrastructure).

Q. Why shouldn't they apply Market Valuation to a public project?
A public toll authority is supposed to build the project at as low a cost as possible and any return on investment is actually taxpayer’s money and must be invested in other public infrastructure in the region for the benefit of the people or returned to the taxpayer through payments to the government.
The funding for a public toll project is taxpayer funding – either gas money, public bonds, etc.

Market valuation is not something they push so that land owners get more when their land is claimed by eminent domain. It is a technique they are trying to misapply to public toll authorities to make them act like private companies like Cintra. A public company's assets belong to the state/taxpayer and they are supposed to operate at the lowest cost to the taxpayer to use those assets. That is why states and public toll authorities buy right of way years in advance at lower costs than what the market would value that real estate in the year they actually break ground or later in the contract, in the year in which the driver is actually driving on that real estate. After all, it is taxpayer money that pays for the real estate and for the bonds that build the infrastructure.

Q. What is the difference between a private and a public toll authority?
A. In a private company, private investor money is investedto acquire the asset. Their stockowners want as great a return as possible on their investment. They apply market valuation to the project each year they own the asset, modeling what the land and construction costs would be if acquired and built each year instead of what it actually cost them to acquire and build the asset when the land was actually bought and the project was actually built. Each year, market valuation is used to set rental rates and prices charged to "customers" or tenants. This allows the investors, private people, to get the greatest return on their initial investment. The investors are different from the customers.

A governmental (public) entity building an infrastructure project is acting as an agent of the people. Their customer or renter is the taxpayer, and the government as an agent of the taxpayer, invests the taxpayers money as capital to build the project. Market Valuation is not applied to public projects because the taxpayer, (who is also the investor who puts up the capital), is not seeking PROFIT like a private shareholder. The public, or taxpayer, is seeking to have access to the infrastructure at the lowest possible cost.
It is of no benefit to the investor (taxpayer) in a public project to apply MARKET VALUATION BOOKKEEPING MODELING TECHNIQUES to the project each year the road is used. The investor is the user and the user wants the cost to remain as low as possible for him (the taxpayer) to use their public infrastructure asset.

Q. What harm does it do if they track what it would cost to build the project each year if it were built in that year?
A. Knowing what it would cost to build it each year is somewhat different from "Applying Market Valuation" to a project as used in SB 792. Applying market valuation to SH 161 could allow use of inflated building costs and land values to influence the rate of the tolls. It could mean that more public money would be required should the state decided to terminate the contract before the 50th year. Applying Market Valuation means using each year's market valuation in the modeling for toll rates rather than "just knowing" the value of the infrastructure.

A. Why is it so important that we call all the North Texas Delegation and object to their voting to allow Market Valuation to remain in this bill?
B. The cost to the taxpayer to use a public assess constructed by a public toll authority using taxpayers resources should not escalate over time as adjacent real estate escalates n price. Appling MARKET VALUATION to public toll authorities projects as used in SB 792 will force public toll authorities to pretend like they are private entities and they will be raising the cost to the user over time as the real estate costs rises in the market place for adjacent land. Even though the state acquired the land years ago with taxpayer money so that the cost to the taxpayer to use the infrastructure would be low, the rules will be turned upside down and the taxpayer will see their user fees rise as adjacent real estate costs rise.

Q. What is so bad about the “apply market valuation” clause in SB 792?
A. Gov. Perry and TxDOT wants MARKET VALUATION APPLIED because this will generate “more revenue out of the ground” for right of way already owned by the state and paid for by taxpayer dollars without giving any additional benefit to the taxpayer.
TxDOT and Perry and probably the NCTCOG RTC favors applying MARKET VALUATION to public toll projects because it will “justify” higher tolls and enable greater amounts of surplus toll revenue to travel from the project into the TxDOT/RTC coffers for use on other projects. (We’ll see how much of it trickles down and actually gets spent on infrastructure and how much evaporates in transit). TxDOT favors it because it insures lots of transportation engineers will continue getting paychecks should federal funds dry up because we miss air quality attainment standards.

Q. Who loses if SB 762 is passed with language requring application of Market Valuation to public toll projects in it?
A. The taxpayer. Taxpayers pay for the right of way then it is acquired with gas tax money. Applying market valuation to the project gives private investment companies like Cintra an advantage in bidding. It costs the taxpayer about twice more to use a project constructed by a private toll authority than it should cost if constructed by a public toll authority. Then by applying market valuation to the project, the project cost escalates on paper each year with inflation removing the advantage of having used tax money years ago to acquire right of way. The people get charged on paper artificially high prices for the right of way that was already paid for with the people's money when it is incorporated into a toll project. Then each year, as inflation increases and what it would have cost to build that project in each successive year of the contract rises, they get to apply this MARKET VALUATION TOOL to the project, and can use it to possibly charge greater cost to the public when citizen-taxpayers drive on the highway.
On every front, the taxpayer gets gouged. Double taxation. Escalated values instead of real cost. Inflated user fees “justified” by market valuation in different years of the project.

What they are attempting to do is to jack up the COST of the project on paper so that they can "justify" higher toll rates and higher project costs so that they'll be able to justify artificially jacking up the project pay off cost should the state decide to reacquire the project at some time in the future. The higher the project cost, the easier it is to justify billions more of surplus toll revenue.

We purchase right of way years in advance so that it will require less of the taxpayers money when it is time for us to build new highway infrastructure and it will cost less to the taxpayers to use that infrastructure. Because public taxpayer money was used, the public should be able to use that infrastructure at as low a cost as is absolutely possible during every year of the contract or life of that infrastructure. The entire CDA to generate surplus toll revenue to give to the RTC concept turns the entire concept on its head. Instead of doing it so the citizens can use it as inexpensively as possible, it is build it and now APPLY MARKET VALUATION TO IT in such a way that the citizen will be fleeced as much as possible every time they put their tires on the highway.

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