Plan would remove most tolls on Pike

By Brian McGrory, Globe Staff, 8/29/2003

Christy Mihos, the Massachusetts Turnpike Authority board member who has successfully tangled with some of the state's most powerful officials, is poised to launch his biggest battle yet: a plan to remove all tollbooths from Weston to Stockbridge, giving drivers a free ride along most of the Pike.

His proposal, which he outlined to the Globe yesterday, drew immediate fire from Mass. Pike officials. At the same time, former authority chairman Jim Kerasiotes called the plan "legitimate" and "honorable," and state Transportation Secretary Dan Grabauskas, briefed on the details by a reporter, said, "It would be tremendous."

At next month's board meeting, Mihos plans to propose that the Pike sell its lucrative leases on the 11 service plazas that were rebuilt along the highway last year. His plan calls for the proceeds from the sale to immediately pay off the road's $239 million bond debt. Under legislation from the 1950s, once that debt is retired, tollbooths come down and the road is given to the state Highway Department, to be considered no different than any other in Massachusetts.

Mihos estimated that the leases, negotiated by Mass. Pike during the white-hot real estate market in 2000, would be worth between $220 million and $240 million in upfront cash to an investment bank or a pension fund. He intends to pitch state Treasurer Timothy Cahill on the possibility of buying them for the state pension system.

"The governor wants to take control of that road, and people don't want to pay tolls," Mihos said yesterday. "This fulfills a promise to the state."

At the heart of the Mihos proposal is a question similar to what many lottery jackpot winners face: Would the state benefit most from an upfront cash payment, or by holding the leases and seeing a larger revenue stream spread over the next 25 years?

Mihos plans to argue that the upfront cash is the far better deal for a variety of reasons. First, it would allow the Pike to immediately pay off its bonds, saving upward of $100 million in debt interest over the life of the bonds.

Second, it would allow Mass. Pike to shut down operations from Weston to the Berkshires, saving millions more annually in toll collectors' wages and management costs. And third, it would fulfill the long-held mandate that once the debt is paid, Interstate 90 would become a toll-free road.

Mihos said he worked with financial analysts in determining the market value of the leases.

All this was embraced yesterday by Governor Mitt Romney's officials, who have been trying unsuccessfully to devise a way to eliminate the Turnpike Authority and consolidate it with the Masssachusetts Highway Department.

Grabauskas said Mass. Pike is engaged in a "ridiculous cycle," one in which tolls are collected to pay toll collectors and the bond debt is never paid off. "We can certainly run another 135 miles of road more efficiently than the Turnpike Authority," he said.

Late yesterday, authority officials disputed that assertion, as well as Mihos's complex calculations. Mass. Pike executives said they analyzed the value of the leases last year, and determined that they were worth between $129 million and $150 million, while the 25-year payoff to the state would be $314 million, not the $437 million Mihos is estimating.

"It appears to us that you would discount the numbers so much that it wouldn't be a prudent thing to do," said Stephen Hines, the chief development officer of the Pike, in a telephone interview.

Mihos, who owns Christy's Markets, countered, "If he's saying the leases are worth $129 million, I'll put up the money tomorrow. That's ludicrous."

State officials waged war over virtually all numbers yesterday, with Mass. Pike and Grabauskas sending the Globe sparring faxes over whether the state or the authority can operate roads for less money.

One discrepancy between the lease projections is the way the arrangements were analyzed.

Mihos, who was part of the Mass. Pike team that negotiated the two leases with McDonald's and Tosco Corp. (now ConocoPhillips), said the agreements could not be more valuable. McDonald's signed a 25-year lease to sell food, while Tosco signed a 10-year lease with two five-year options. Mass. Pike officials do not include the options in their calculations.

Mihos said the state negotiated a so-called "triple net" lease with each company that requires the tenant to pay for all renovations and maintenance on the property, making it far more valuable to the leaseholder. He said both companies are Fortune 500 entities that have a monopoly along that stretch of roadway, adding to the value of the leases.

"It's like a credit card," Mihos said. "Everything is provided by the tenant. We get a guaranteed minimum rent, then a rental override. If they do more than a certain amount of business, the leaseholder gets more money."

According to Kerasiotes, then-Governor William F. Weld considered selling the entire Pike to an investment bank in 1991 for $1 billion in cash. He decided against the plan because the state could use the road's value to borrow money to help pay for the Big Dig. The state went on to borrow $2.7 billion against the value of the Pike.

That decision partly explains why the bond payments continue. Initially, construction bonds on the western portion of the Pike were scheduled to be retired in 1994, resulting in the dismantling of the tollbooths. Instead, new bonds were floated, and Mass. Pike officials committed to paying them off by 2007. In 1997, however, the Legislature, with an eye toward the ballooning costs of the Big Dig, extended the bonds until 2017, where they stand today.

Mihos estimated that toll payers would save $1.4 billion between now and 2017 if the booths were pulled down this year. Automobile drivers now pay a toll of $3.60 from Weston to the New York State border. He said Mass. Pike could use tens of millions in existing cash reserves to tear down tollbooths and buy out contracts once the bonds are paid.

"Isn't it worth the time and effort to put this out to bid and see what they get?" Mihos asked last night.

Whether Mihos prevails is far from certain. He has often fought with the Mass. Pike chairman, Matthew Amorello. He successfully took former governor Jane Swift to court when she tried to fire him for delaying a toll increase on the eastern portion of the Pike.

For years, Mihos accused the administration of failing to properly oversee the private managers of the Big Dig. In February, a Globe report detailed extensive problems in design management and cost recovery in the Central Artery project.