Myth vs Reality: Information Sorts out the Issues

February 23rd, 2012

On February 15th, KABATA Board Chairman Michael Foster, P.E. sent an e-mail to Anchorage Community Council officers, the Mayor of Anchorage, Municipality of Anchorage Public Works, and other municipal departments. The email is an apparent response to multiple presentations by concerned citizens regarding the financial impacts of the Knik Arm Crossing. Mr. Foster’s email outlines what he characterized as myths vs. realities about the Knik Arm Bridge. The terse email text is as follows:

It’s time for a more factual discussion about the Knik Arm Bridge.  If you would like a presentation, please contact KABATA at 269-6698.

The meat of the email was contained in two attachments: The first attachment is a “call and response” by Mr. Foster apparently in response to issues raised in presentations questioning the Knik Arm Crossing Finances. The second attachment is a questionable view of Government Hill neighborhood before and after the bridge construction.

Below are nine assertions, labeled “Myths” in Mr. Foster’s documents, each followed by an explanation by Mr. Foster and then a point by point response by Bob French and Jamie Kenworthy. Kenworthy and French’s remarks include links to supporting documents, in many cases KABATA’s own documents – that underlie their assertion that the Knik Bridge will end up costing the state of Alaska $5.5 Billion. An analysis of before and after images of Government Hill neighborhood follows the “Myth” discussion.

1. Assertion: Proposed legislation creates an “open-ended” guarantee for the Knik Arm Crossing

Mr. Foster: Proposed legislation will limit state obligations. Existing statutes and contract provisions protect the state’s interest.

French and Kenworthy: The bills KABATA is now seeking to have the legislature pass, HB 158 and SB80 would make any contract or obligation of KABATA, “obligations of the state”.

HB 159 and SB 79 seeks to give $150 Million to KABATA for a “Reserve Fund” to make up for toll shortfalls. KABATA estimates that they will sign a contract with the contractor for $2.98 billion in availability payments over 35 years. (See column 1 p.4 in KABATA’s 12/16/2011 Financial Plan ) plus the contractor will receive the net cash flow of $920 million (column 8, p. 5). In effect, the contract is a state commitment of nearly $4 billion plus KABATA administrative costs and minus toll revenue collected.

A recent independent study of the national track record of Wilbur Smith, the consultant KABATA used for the traffic and toll estimates shows that Wilbur Smith consistently overestimates the first five years of toll revenue on projects by 2.2 times. In the case of the Knik Arm Crossing, KABATA’s P3 contractor takes the risks of whether or not the construction cost estimates are accurate. But the State of Alaska the state will have the full downside risk of the toll shortfall if Wilbur Smith’s toll revenue estimates are wrong.

KABATA’s own Financial Plan that was submitted to the federal government 12/30/11 for a $308 M TIFIA loan says on pages 8 and 24.2 that “If ending balance falls below $50 M, the state will replenish the amount back to $50 million.” A continually replenished “reserve fund” is by definition, unlimited.

2. Assertion: The Knik Arm Crossing will use up all of the money that would normally go toward building roads in Anchorage.

Mr. Foster: Conversely, the revenue generated by tolls will help fund future transportation in Anchorage and statewide. Limited upfront public funds frees up capital for projects statewide.

French and Kenworthy: We estimate that the Bridge deficits will total $1.1 Billion between 2016 and 2035 or half the $2.2 Billion in road improvements identified in the MTP. View the Real Cost Paper and then note the following from page 6-30 of Chapter 6 of the 2035 MTP Update.

Any state appropriation associated with SB 79 or SB 80 to cover the required availability payments are assumed to be in excess of what is identified in the MTP and will not adversely affect the amount of state funds anticipated to be committed within the AMATS area.

Page 6-34 of the 2035 MTP Update Public Review Draft warns:

lf the actual financial plan for the Knik Arm Crossing requires more state investment or is required to draw from sources such as federal NHS funds, that affect the implementation of other MTP projects, this MTP will have to be amended to reassess the Knik Arm Crossing, remove roadway projects from the network, resulting in worsening congestion, or new revenues sources and assumptions will need to be brought forward.

Given that the toll shortfall could be well over $1 Billion, is it reasonable to assume that Legislators from other parts of the state will not reduce state transportation funding for Anchorage, given that AMATS decided to move the bridge forward, despite being warned that toll revenue was likely to be half of KABATA’s predictions?

3. Assertion: KABATA’s population forecasts are much higher than other predictions.
Mr. Foster: KABATA’s population forecasts are in line with other forecasts, including the University of Alaska’s Institute of Social and Economic Research (ISER), the Alaska Department of Labor, and Woods and Poole. Our forecast differs from ISER’s by less than 1%.

French and Kenworthy: We would love to have Mr. Foster point out to us exactly where KABATA lists their actual current population forecasts. If they are listed in a public document, they are well hidden.
Below is an excerpt from a letter by Scott Goldsmith of ISER to Senate and House Finance Chairs regarding KABATA’s and ISER’s population forecasts.

The Wilbur Smith Associates (WSA) February 25, 2011 letter to Andrew Niemiec entitled Proposed Knik Arm Bridge Traffic and Toll Revenue Update Study purports to use the 2009 ISER population projection as well as those from other analysts, but inexplicably the Study does not present any population numbers. It is thus impossible to verify what numbers were actually used, and more importantly how they drive the prediction of tolls.

4. Assertion: KABATA is asking for public funds to pay the private partner a 12% rate of return.

Mr. Foster: KABATA is not guaranteeing any rate of return to the private sector. The private sector return is based on their performance. The private partner’s risk is in financing, designing, building, operating and maintaining the project. If they underestimate their costs in any of these areas, their profits will be reduced and they may even lose all or part of their equity.

French and Kenworthy: The KABATA Financial Plan estimates the contractor will receive the net cash flow of 12 % compounded annually for 35 years or $920 million for their equity investment of $78 million. (See page 1 for the $78 M equity investment in and 8th column (net cash flow) on p5. See the last column on p5 for equity investment out. While the P3 contractors may choose a different rate of return than 12%, annual compounded rate of return, that 12% is what KABATA’s financial plans are currently showing.)

Ironically, our independent realistic estimate of the Real Cost of the Knik Arm Bridge, states this was one item we believe KABATA overestimated since competition between the three teams is likely to reduce this to 10%. Unfortunately the $153 M saved by this overestimation is overwhelmed by the following 2 items:

  • Toll Revenue would be halved from $4.6 Billion to $2.3 Billion. KABATA estimated 36,000 trips a day in 2036. However, when CH2MHill modeled demographic projections from Scott Goldsmith of ISER for the Highway to Highway project, CH2MHill estimated less than half that traffic or 17,700 vehicles a day. This is consistent with Wilbur Smith Associates overestimating traffic by 2.2 times.
  • KABATA has been turned down at least 5 times for low cost TIFIA and TIGER loans but the Financial Plan listed above (p. 1) still includes $308 Million in federal TIFIA loans.

5. Assertion: KABATA promised that the bridge would not need any more public funds.

Mr. Foster: The project reserve fund is similar to a line of credit. The project reserve fund will be paid back with future toll revenue.

French and Kenworthy: Before 2011, KABATA testified at many forums (too numerous to list here), that the Knik Arm Bridge would not require any additional state or local funds. That all changed in 2011, when KABATA asked for SB 79 and 80, and HB 158 and 159. That is why AMATS in the 2035 MTP Update had to remove key “Firewall” provisions that had been inserted as conditions into Chapter 12 of the LRTP by the Assembly. Refer to the bottom of the center and upper right columns on page 6-30 of Chapter 6 of the 2035 MTP Update.

6. Assertion: The Knik Arm Crossing will cost $5 billion dollars.

Mr Foster:The bridge and associated 18 miles of road will cost approximately $1 billion dollars

French and Kenworthy: The first page of the the KABATA Financial Plan, does indeed show the cost of a billion dollar bridge but that includes none of the financing costs (If you borrow $200 K to buy a house, you certainly end up paying far more than $200 K when the mortgage is paid off 30 years later). KABATA’s financial document listed above shows a positive cash flow only 16 years after the 2016 estimated opening of the bridge (p7, right hand column). That leaves them in a situation similar to that of trying to make up for paying only partial mortgage payments for 16 years.

What is not included in the $1 billion cost of the bridge is the $3 billion in availability fees that KABATA estimates will be paid to the P3 Contractor (third column, p 7) and the $920 M in “net cash flow” (see item 4 above) that “public private partner” will be entitled to by the time the Phase 1 bonds will be paid off. KABATA estimates almost $4 billion in obligations the state is proposed to guarantee.

Our conservative estimate for the final cost of the Bridge is $5.5 Billion:

  • $3 Billion in “availability fees”
  • Our estimate of a $2.5 billion deficit due to the toll shortfall and loss of over $300 million in federal TIFIA and TIGER loans that KABATA has applied for at least 5 times in 2007, 2010, and 2011 and never received. Nevertheless these low cost loans are included in KABATA’s financial plan as part of the $1 Billion “cost.”

7. Assertion: KABATA says they can fit 36,000 cars a day on a two lane bridge.

Mr. Foster: KABATA will expand the bridge deck and roadway to a four lane facility when traffic warrants.

French and Kenworthy: KABATA’s toll revenue forecast the revenue of 36,000 vehicles in 2036 but only the cost of a 2 lane Bridge and 2 lanes on the approach roads on the Mat Su side are included in what KABATA estimates as Phase 1.
At around 18,000 vehicles a day on restricted highways, most expressways have to go to 4 lanes to accommodate traffic. The 4 lanes of the Glenn Hwy at Eklutna Flats near the Mat-Su-Anchorage line now carries about 28,000 vehicles a day.

The problem is the KABATA toll revenue forecast and financial plan count on the revenue from over 18,000 vehicles in 2022 but does not include the cost of the 4 lanes of Phase 2 until 2030. How is this possible?

And the cost of Phase 2 by KABATA’s estimate is $617 M by KABATA’s number (p. 23.1 and over $800 M by an FHWA led process which in 2009 KABATA participated in 2009. There is discussion in the 2035 MTP Update stating that Phase 1A is a 2 lane bridge, and Phase 1B adds a 4 lane bridge and approach roads.BUT, KABATA is not showing those costs in their latest TIFIA Letter of Interest.

8. Assertion: KABATA is telling people they need to be out of their houses by July.

Mr Foster: KABATA is in active negotiations with property owners on Government Hill. Purchase and relocation agreements are still being developed with individual owners and tenants.

French and Kenworthy: A key difference here. We heard from a business owner, not a home owner that they were told by KABATA that they would need to vacate by the end of July 2012.

9. Assertion: The State is taking all the risks.

Mr. Foster: One of the primary reasons to enter into a Private Public Partnership is to transfer risks to the private sector. The private sector partner in this case will take on the risk of financing, designing, constructing, operating and maintaining the bridge.

French and Kenworthy: But the “private sector partner” takes no risks that the toll revenues will not be sufficient to make the “Availability Payments”. Under the “public-private partnership” structure that KABATA is now committed to, the contractor takes the construction cost risk (which any contractor doing a block of sidewalk would do) but really none of the finance risk since the contractor would have a 36 year contract promising “Availability Payments” guaranteed by the State of Alaska.

As mentioned above, two toll roads went bankrupt by relying on Wilbur Smith Associates Traffic and Revenue forecasts. This expose of WSA’s forecasting also states the following on page viii (pg 16 of the pdf file)

Four case studies of WSA toll road T&R forecasts indicate that WSA’s overestimates have had major adverse impacts on toll road owners and operators in the subsequent years of operation. In two of the studies, the toll roads went into bankruptcy within a decade. In all four cases, bondholders took substantial losses; equity investors lost most of their value if they were not wiped out in distress sales; and the necessary restructuring added tens, if not hundreds, of millions to debt servicing costs over extended payment periods for state and local jurisdictions. Toll road users were often forced to absorb those extra costs through higher tolls.

10. The Government Hill “Before & After” Attachment:

The second attachment in Mr. Foster’s email is a “photoshopped” aerial view of the Government Hill neighborhood. The apparent intent of the image is to show minimal impact on the Government Hill neighborhood. The “After” image is of Phase 1 and shows the connection to the A-C Couplet/Loop Road. That image does not show the taking of an additional portion of the neighborhood that would occur during Phase 2, which is the connection to the Ingra/Gambell couplet. Phase 2 also puts more than half of Sunset Park on the other side of a freeway from the rest of Government Hill. That is shown in this image, which, while not a fancy PhotoShop image, is derived from page S-31, Exhibit S-14 of the Summary of KABATA’s Final Environmental Impact Statement

What can not be seen in Mr. Foster’s “Before and After” depictions of Government Hill, is the effects of 3 to 4 years of construction, digging up the ONLY access road into the community, the loss of property values, the impacts to Government Hill Elementary School, which is a “magnet” Spanish Immersion School attracting students from all of Anchorage, and the many businesses that will go bankrupt because of lack of business due to construction.

If you have questions or comments, you can contact Bob French at or Jamie Kenworthy at