Huge bill could soon come due for Turnpike

Liability at nearly half-billion dollars

Ten days after the Massachusetts Turnpike Authority board recommended sweeping toll increases, officials said yesterday that the authority's finances have grown even worse, with the agency's liability for a set of risky investments rising to nearly a half-billion dollars.

Patrick administration officials, several of whom spoke with the Globe on the condition they not be named, revealed the news in part because of worries that legislative attempts to put the proposed toll hikes on hold could trigger a demand that some of the investments be paid off in full, in one lump sum. But even if the toll increases are given final approval by the turnpike board, the threat still looms that the authority could soon be sent a bill for $353 million if the financial markets continue to deteriorate.

Several legislators have argued that the toll increases should be set aside while the Legislature debates alternatives, including a House proposal to raise the gas tax and a Senate proposal to raise cash through long-term leases on the roads with private businesses.

"The worst case, as far as I'm concerned, has come to pass," said Senator Mark Montigny, a New Bedford Democrat who leads the Senate bonding committee and was briefed on the problems yesterday. "We're looking at a sinking ship and the hole is getting bigger every day. And it's not just the ship at the Pike. It's the credit markets and the economy . . . This credit crisis is not over."

Beginning in 1999, the Turnpike Authority entered into complex arrangements - known as credit swaps - with three investment banks as a means of raising cash to pay off rising Big Dig debt. Essentially, the banks paid the Turnpike Authority cash for the right to swap interest rates with the agency on future debt payments. The deals, while immediately raising $71.5 million in cash for the agency, left it vulnerable to fluctuations in interest rates. The deals also established termination fees that rise and fall based on market conditions.

Earlier this year, a declining market had raised the termination fees on the deals to about $200 million, which the Turnpike could be forced to pay immediately if certain triggers were tripped. By Friday, that liability had risen to about $447.7 million. Making things worse was a decline in the credit rating for the turnpike's insurer last week; another step down could trigger an immediate request for payment from one of the banks of about $353 million.

All of the possible implications are subject to market changes and the decisions of bankers and credit agencies, which have not made their intentions known.

Montigny faulted the Patrick administration for failing to investigate fully the complicated investments that led to problems. He said other government agencies that have seen complex investments turn sour during the credit crisis have been able to renegotiate or terminate their agreements after proving they were entered into nefariously.

Patrick administration officials point out that they inherited the problems. In July, the administration tried to solve the credit swaps problem by asking the Legislature to back some of the Turnpike Authority's credit. It remains unclear whether that action will save the turnpike in the event it must make a sudden multimillion-dollar, lump-sum payment.

Each deal has different rules and triggers that could allow the banks to terminate them and force the Turnpike Authority to pay millions.

The smallest deal, from 1999, is with JP Morgan. The termination fee for the deal has grown from a few million to about $19 million in just a few months. As a result, the authority has been forced in the last few days to put about $7 million into an escrow account, leaving the agency with less cash.

The second deal, a 2001 agreement with UBS, will cost the authority about $2.2 million per month beginning in January because of the increased interest it will now have to pay on a certain amount of debt. And that's not even the worst-case scenario. UBS could demand that the turnpike pay off its termination fee - now about $353 million - if the turnpike's bond insurer, Ambac, loses another notch on its credit rating. The termination payment could also rise, depending on the unpredictable financial markets.

"Every day it's a different number," an official said. "We have no control."

A legislative freeze of the toll hikes could hasten UBS's ability to demand an immediate payment, according to Patrick officials. Under some interpretations of the agency's deal with the bank, it could be viewed as infringement on the authority's independence and set off the trigger. But even if the authority raises tolls, it has no control over the falling fortunes of its insurer and may still pay the price.

The final deal, with Lehman Brothers in 2002, is the most directly tied to the toll increase. Lehman Brothers has gone bankrupt, but the owner of its assets has the right to terminate the full value of the agreement for about $75.7 million if the Turnpike Authority's credit rating drops. The authority's rating is at the cusp of junk bond status, and credit rating agencies have warned that without a toll increase, it will be lowered soon.

"The Legislature would never take any action that would impact in a negative way the credit rating of the turnpike authority, but we have an absolute obligation to discuss public policy on behalf of our constituents," said Representative David Linsky, a Natick Democrat who opposes raising tolls and says he will continue to fight against them.

The increases, which will be the subject of a series of public hearings, would raise the cash toll at the Allston-Brighton and Weston booths by 75 cents to $2. Fast Lane users would see a 50-cent increase, to $1.50. The tolls at the Sumner and Ted Williams tunnels would double to $7 for those paying cash, and to $6 for Fast Lane users.

Noah Bierman can be reached at nbierman@globe.com.