Financing the Gov Mario M. Cuomo Bridge To Replace the Tappan Zee Bridge (“TZB”)
Table of Contents
Through a competitive process, Jeffrey Parker & Associates, Inc. (“JPA”) was selected in December 2011 as special financial advisor to the New York State Thruway Authority (“NYSTA”) to develop and execute a plan of finance and assist in implementing a procurement strategy for replacement of the TZB (“the Project”), a 3.1-mile megaproject.
The engagement began 48 hours after selection with a kick-off meeting in Albany, NY. A Draft Request for Qualifications (“RFQ”) had already been issued for a design and construction team by NYSTA, so the procurement was formally underway at the time of selection. In July 2012, JPA was acquired by EY and the JPA team completed the TZB engagement as EY Infrastructure Advisors (“EYIA”). Background on the TZB and the Gov Mario M. Cuomo Bridge is available at https://mariomcuomobridge.ny.
Goals for JPA’s Engagement
- Complete the TZB construction project within the budgeted resources. Working with JPA, NYSTA was able to complete the Project at a cost of $4 billion, almost $1 billion below the $5 billion estimate prepared by NYSTA and approved by the Federal Highway Administration (“FHWA”).
- Complete the TZB construction project within the targeted time frame. The initial span of the Project opened to traffic in August 2017 and the second span opened in September 2018, consistent with the target date set by the project schedule. The Project was the first design / build project undertaken by New York State. Pursuant to special State authorizing legislation. JPA worked closely with NYSTA to monitor and execute each milestone of the construction plan.
- Develop a toll plan that minimizes the burden on toll payers, while fully funding the Project. Initially, senior policymakers were publicly quoting passenger tolls in the range of $12-14 to meet funding needs for the TZB Project. However, JPA identified a series of financial levers that were used to reduce the final passenger toll to $5.75, an increase of about $1 over the existing toll.
For JPA to meet these objectives, a broad work scope was created that focused on:
Design of a novel approach to forecasting and leveraging toll revenue debt
NYSTA and its advisors focused on traditional toll revenue financing techniques – developing a traffic and revenue forecast and then calculating the volume of debt the resulting revenue stream could support. But holes remained at the time of JPA’s selection because of static traffic trends, ongoing revenue needs to keep the balance of the 570-mile NYSTA system in good repair and sustain the credit ratings for NYSTA’s roughly $3 billion in outstanding debt, adhering to a clear policy directive to avoid becoming locked into a schedule of tolls prematurely, accurately calculating the benefits of a TIFIA loan, and minimizing the impacts of TIFIA on NYSTA’s existing debt. Essentially, a public agency with $3 billion in outstanding bonds and extensive state-of-good repair needs sought to finance a one-time, $5 billion project.
Application of Best Practices for Mega-Project Delivery
NYSDOT and NYSTA had only limited experience with accelerated design / build construction, most of which involved small projects to repair damage from natural disasters. JPA / EYIA supported internal efforts to modify traditional approaches to allocating risk, setting financial security requirements, determining bid prices and managing inter-disciplinary, one-on-one negotiations with the competing proposers. JPA was able to draw upon its experiences advising public agencies on Public-Private Partnership (“PPP”) projects such as, the Port of Miami Tunnel, the I-595 Reconstruction and the Goethals Bridge Replacement to offer precedents that gave confidence to NYSTA and NYSDOT leadership and professional staff while reassuring the bidders throughout the procurement process that “market standard” best practices would be followed.
Maintaining competitive tension among the bidders and incorporating their ideas for cost efficiency through Alternative Technical Concepts (“ATC”) proved to be a key factor in the resulting financial success of the Project, even though the winning bid price of $4 billion included roughly $300 million in underwater foundations to support a future rail crossing of the Hudson River that was required by the Project’s environmental approvals.
Federal Agency Coordination
JPA provided technical support to senior officials in the Governor’s Office on fulfillment of federal requirements. Project delivery required extensive federal agency coordination because the TZB was part of the interstate highway system, numerous federal environmental permits were necessary, and a federal loan made under the Transportation Infrastructure Finance Act (“TIFIA”) was a critical element of the finance plan. At the time of financial close in December 2013, the TZB TIFIA Loan was the largest ever made – a principal amount of $1.6 billion.
Breakthroughs
Creating a New Debt Structure for the Project
A First in the U.S. – PPP Risk Allocation Combined with Tax-Exempt Finance
Revised Estimate for TIFIA Benefits
New Budgeting Approaches and Business Models
New Bid Price Calculation Methodology
New Methods of Interaction with Proposers
Fast-Track Project Delivery
- Creating a New Debt Structure for the Project
- A new, junior lien covenant was created for the Project to avoid the TIFIA loan impacting NYSTA’s Outstanding bonds (i.e., mitigating the springing lien feature) and provided for NYSTA’s first-ever 40-year toll revenue debt in recognition of the Project’s design life of 100 years.
- JPA / EYIA’s financial solution called for TZB toll revenues to cover the Project’s debt service and ongoing maintenance needs at 1.0X coverage to avoid cross-subsidies from the “balance of the system”. If “Upstate” toll revenues were tapped in the Project financial plan, the Project’s environmental documents would have had to cover all 570 miles of the NYSTA network, triggering extensive delays, as well as pushback from many toll payers who would rarely, if ever cross the new bridge. Under the finance plan devised by JPA, NYSTA developed an indenture with bifurcated coverage tests for the junior and senior liens that allow NYSTA to maintain high investment-grade ratings and efficiently finance both the TZB and systemwide projects.
- Rather than a fixed toll schedule incorporated into a traditional traffic and revenue forecast, a range of scenarios was modeled showing how the 1.0X TZB coverage requirement could be met through a variety of tolling strategies (i.e., peak pricing, auto vs truck), discount programs (i.e., residents, EZ Pass, farm-to-market) and external factors (i.e., capital contributions from “other” sources) without exceeding the tolls charged on Port Authority of New York & New Jersey (“PANYNJ”) and New York State Metropolitan Transportation Authority’s (“NYSMTA”) Triborough Bridge & Tunnel Authority crossings in New York City. The $3.2 billion financial close in December 2013 occurred without publication of a future toll schedule for the Project or the balance of the NYSTA system. This provided additional time for NYSTA to further develop their tolling strategy and meet policy objectives.
- To implement these changes in NYSTA’s financial structure, an entirely new financial model was developed by JPA and finalized under EYIA. The new financial model reverse-calculated the amount of revenues needed to achieve the target coverage ratios and fulfill the debt covenants, leaving the decision on how to raise the necessary funds to the NYSTA Board.
2. A First in the U.S. – PPP Risk Allocation Combined with Tax-Exempt Finance
JPA / EYIA succeeded in introducing PPP-style risk allocation to the Project’s publicly financed design / build procurement. Combining PPP risk transfer with public finance resulted in hundreds of millions of dollars in benefits from lower interest costs and reduced NYSTA exposure to risks it normally accepted that were instead transferred to the design / build contractors.
For example, potentially over $100 million was saved by having the bidders take commodity price risk (concrete, steel, petroleum products) for a 5-year construction program when the practice at that time was for the State to absorb commodity price increases above a benchmark. JPA / EYIA was able to gain proposer acceptance of this risk by pointing to PPP transactions with similar provisions for which the various bidding team members had submitted proposals.
3. Revised Estimate for TIFIA Benefits
Based on its prior experiences with TIFIA loans at the Miami Intermodal Center, the I-595 Reconstruction, the Port of Miami Tunnel, and the Goethals Bridge, JPA’s initial review found NYSTA was using overly conservative assumptions for the impact of TIFIA on the Authority’s debt capacity. Once confirmed, the revised assumptions immediately created over a hundred million dollars of additional financing potential from the same revenue streams. JPA / EYIA then took the primary role in drafting NYSTA’s TIFIA application to the U.S. Department of Transportation (“USDOT”), negotiation and closing the TIFIA loan, providing financial modeling services for stress testing and advising closely on the loan structure, security provisions, and interactions with rating agencies.
JPA / EYIA also collaborated with NYSTA’s debt underwriters to delay the drawdown of the TIFIA loan by substituting funds from a lower-cost, short-term tax-exempt financing, saving additional tens of millions in interest costs.
4. New Budgeting Approaches and Business Models
The Project’s financial planning effort required coordination across all NYSTA’s near-term and long-term capital and operating budgets to fulfill rating agency due diligence and TIFIA requirements – the result was long term savings across the entire State highway system. JPA / EYIA supported NTSTA leadership in its interactions with the powerful NY State Budget Office to manage critical financial issues such as:
- Toll increases,
- Sizing additional State contributions to mitigate toll increases,
- Subsidizing the Erie Canal (which was then part of NYSTA) and consuming about $65 million of toll revenues annually,
- Funding Troop T (the State Police unit that patrols the Thruway),
- Electronic tolling for the Project, yielding savings of over $25 million in construction and facilitating adoption of systemwide electronic tolling on NYSTA, and
- Efficiencies to better align NYSTA and NYSDOT cost structures
With no New York precedents to draw upon for a design / build mega-project, JPA / EYIA led:
- The evolution of performance bond requirements for the project, including calculation of maximum loss exposure,
- Due diligence for NYSTA leadership to challenge cost estimates generated by the technical team, including a detailed evaluation of net present value tradeoffs between the initial capital costs of proposed designs and future heavy maintenance costs,
- Analysis of financial aspects of the Monte Carlo-style schedule and cost studies required by USDOT,
- Presentation of the contract structure and financial security guarantees (bonding, letters of credit, warranties, corporate guarantees above surety limits, etc.) to the rating agencies. For example, a key factor in the cost savings proposed by the winning bidder was deployment of a specialized, barge-mounted crane that had just been used to build the Oakland Bay Bridge replacement. With the largest lift capacity in the world and the ability to operate in shallow water, the crane opened the path to cost and time savings through modular construction of the new bridges and simplified demolition of the existing bridge. The rating agencies were concerned that the crane might sink while making its way through the Panama Canal and cause the Project’s price tag to increase by $1 billion. A painstaking analysis was required to walk rating analysts through how such an event would be covered under the contract terms.
- Evaluation of design / build team proposer qualifications packages, setting qualification requirements for short listing, and certification of the pricing and commercial aspects of all bids received.
5. New Bid Price Calculation Methodology
The innovative approach to calculating the bid price was successfully utilized in prior JPA-advised procurements and allowed each proposer to optimize its schedule for delivery at the lowest possible construction cost. The resulting cost-loaded, monthly cash flow requirements were then discounted using a Net Present Value calculation to derive the bid price. The mechanism was transparent, accepted by the bidders, avoided gaming to front load cash flow requirements, and was commended by the New York State Comptroller’s Office.
6. New Methods of Interaction with Proposers
While standard in other mega-project procurements that JPA advised, multi-disciplinary, “one-on-one” discussions with the short-listed proposers was a novelty in New York. These discussions allowed the public procurement team to accept Alternate Technical Concepts (“ATC”) outside of the specifications package, resolve procurement and contract language issues, respond to literally hundreds of clarification questions from the proposers, and incorporate best practices for design / build and PPP procurements. These efforts resulted in significant cost savings for NYSTA. For example, one ATC involved modifying NYSTA’s Project design for a future structure to accommodate commuter rail service. The original design called for an expensive curve capable of handling a train operating at 60 mph when it was demonstrated by the proposers to be unlikely that any of the approach alignments would allow for speeds of even 25 mph at that location. The resulting changes reduced costs and yielded operational benefits.
7. Fast-Track Project Delivery
The Governor’s Office selected design / build rather than PPP based on an analysis prepared by JPA / EYIA that demonstrated design / build could be procured faster, while offering a lower cost of capital – both were key policy objectives for the Governor. JPA / EYIA was “agnostic” in performing this analysis as we were advising the Port Authority of New York & New Jersey on replacement of the Goethals Bridge at the same time using a PPP approach. Both the TZB design / build and the Goethals PPP closed in December 2013, together incorporating over $2 billion of TIFIA loans and over $5 billion in financing.
In addition, JPA / EYIA’s experience in successfully delivering mega-projects on behalf of other public sector clients gave confidence to agency staff in applying novel precedents and implementation methods in New York, as well as in questioning the relevance of historic documents and specifications to TZB. The “day jobs” of professional staff outside of the Project were ongoing and often involved following procedures the Project was in the process of transforming.
Impacts of The Project
Safety and Resilience – The original bridge had accident rates far in excess of the NYSTA system, lacked adequate shoulders to manage incidents and breakdowns, dumped contaminated stormwater directly into the Hudson River (in addition to odd pieces of steel and concrete), had zero seismic load capacity, zero capacity to survive a direct vessel impact, and was the source of significant regional emission liabilities at toll booths and for back-ups arising from accidents and break-downs.
Strategic – The Project opened the door to massive design / build programs at the Javits Center, NYSDOT (Kosciuszko Bridge replacement), NYSMTA (Long Island Railroad 3rd track and systemwide accessibility improvements) and PANYNJ airport construction, while introducing new finance approaches and internal business processes to NYSTA.
Economic and Social – Smoother traffic flows for commercial vehicles, commuters and tourists, along with ongoing State funding for additional bus routes to serve commuters and moderate potential traffic growth impacts on adjacent communities.
Operational – Initiated electronic tolling at NYSTA and triggered systemwide efficiencies to maintain credit ratings, as well as fulfill safety requirements.
Organizational – Demonstrated and proved the use of interdisciplinary teams, interagency coordination, make-or-buy decision trees, and hyper-responsiveness to policymakers.
Customer Experience – The Project offers a unique multi-use path, enhanced safety for passenger and commercial vehicles, greater travel time reliability, electronic tolling, and transformational aesthetics – all at toll rates comparable to the original TZB.
What didn’t go so well?
- Fairly common “teething” problems and construction claims – see histories of the Brooklyn Bridge (The Great Bridge, David McCullough) and the Panama Canal (built by George W. Goethals for whom the Goethals Bridge is named) https://history.state.gov/milestones/1899-1913/panama-canal for similar experiences involving monumental undertakings
- A relatively high TIFIA interest rate due to then-prevailing market conditions that was successfully mitigated through an ingenious re-financing subsequently undertaken by NYSTA
- Inability to secure attractive Revolving Fund debt through the Environmental Facilities Corporation – a bold strategy that was well worth the try
Bottom-Line
A huge win for New York, the traveling public, commercial vehicle operators and the adjacent communities from the successful replacement of one of the longest bridges in the U.S. with an iconic structure having a 100-year life and the capability to accommodate future rail, all in record time and at a cost well under the original estimates.
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