Study: Toll Road Lease Bad for the Kids

The Associated Press has an article on a study on the Toll Road deal by a government studies professor out of William & Mary.

“These transactions have important consequences for intergenerational justice because they enrich current citizens and governments at the expense of future citizens and governments by transferring future revenue to current budgets,” Gilmour states in his report.
. . .
“It is easy to see why current politicians view asset leases with up-front payments as wonderful, allowing them to spend today without raising taxes or appearing to incur debt,” Gilmour said. “In short, the ITR lease is a great deal for current residents of Indiana, but it offers little to those who will live in Indiana in future decades.”

Presumably this means that people who are now criticizing the national debt because “won’t somebody please think of the children,” were also against selling off the toll road, but that’s not quite how I remember it going down.

Whether the toll road sale was a good deal or not pretty much hinges on whether there would have been political will to raise tolls. Historically there had not been. My sense at the time was that the sale was a solution in lieu of developing that will. Aaron Renn has said that the numbers on the deal were favorable to Indiana. I trust his judgment on such things better than my own or Professor Gilmour’s.

Still, I’m philosophically against selling off public infrastructure. The way I saw it at the time:

I’m against selling off Indiana’s infrastructure. It’s just not a good idea to eat your seed corn. Mitch Daniels reminds me of one of those kids who gets set up with an annuity through a lawsuit from when they were a minor. They see an ad on daytime television from a company that will pay a lump sum purchase on the annuity. The kid is being ripped off, the company’s only paying 50% of what the annuity is worth, but he doesn’t care, he just wants a pocket full of money right now so he can buy that bitchin’ Camaro he’s had his eye on.

Another thing that caught my eye was that the AP story quotes Troy “I’ll never vote for DST” Woodruff as the INDOT chief of staff. As you might recall, Indiana owes the implementation of Daylight Saving Time to him. It passed by one vote – that vote was his; after he said he wouldn’t vote for it. It would be uncharitable of me to suspect he got taken care of after he got his arm twisted and lost his seat.


  1. Carlito Brigante says

    They see an ad on daytime television from a company that will pay a lump sum purchase on the annuity. The kid is being ripped off, the company’s only paying 50% of what the annuity is worth, but he doesn’t care, he just wants a pocket full of money right now so he can buy that bitchin’ Camaro he’s had his eye on.

    But those companies have such cool songs and that ad with the neat little doggie.

    Your insights are accurate. Instant money with no tax increases are political crack. Like gambling revenue or tobacco settlement money. Or campaign loans that will never be presented for payment.

    • Gene says

      Carlito took most of my comment ! Three facts about the toll road deal:

      1) Besides being an intergenerational wealth transfer, the whole thing is just a tax dodge. The consortium that put together the lease gets to depreciate the road, creating a tax break for the consortium’s investors that would not otherwise exist. That’s how they make money off it.

      2) Almost all the money has been spent already – Mitch got his invisible tax increase.

      3) At the time many people saw this as a ripoff and tried to challenge the deal in court; the Indiana court demanded the complaining plaintiffs put up a bond in the billions of dollars before the lawsuit could proceed. There’s justice fer ya !

      • Brian says


        Your ignorance of reality is appalling. There are no such things as tax dodges. Anyone who buys an asset for business gets to deduct the cost over its life. The deduction is worthless by itself- you must have income to offset it. Are you suggesting that if you were to make ice cream for sale the deduction for cream and sugar would be a “tax dodge.” If so, please sell me a cone for a nickel (assuming it’s any good).

        The money was planned to be spent. Why is this now a surprise to you? Given that many roads are built or improved using bonds, why would a long-term lease be viewed less favorably? Bonds “mortgage the future” as well.

        The people upset about it lived in the area and feared the deal would move traffic off the toll road and onto local streets- their streets. They also feared DST. I suspect many have yet to buy a microwave.

        If it were a rip-off, wouldn’t other states used it as a bad example? Rip-off in what sense? We could have gotten more? Based on what? It’s clear we were never going to get enough in tolls to cover the operating costs. The real rip-off was the long-standing political patronage that ran it for decades.

  2. Anon says

    With all due respect, Aaron Renn does not know of what he speaks on this issue. He simply parrots the Mitch Daniels line.

    His first argument for stating the lease was a good deal is: “The Toll Road was actually losing money when it was leased.” That is simply incorrect. And even if it were true, it was making more than any other road in the state – it was the only one generating ANY revenue.

    If we’re going to accept that an “operating costs : revenue” ratio is the best way to determine an appropriate asset to lease or sell, then the Toll Road should have been the LAST highway in the state to go on the block.

    But, I-465 is used by good Republicans in the Indy suburbs, while I-80/90 is used by dirty Democrats up north…

    • Brian says


      Your comparison to 465 is fair, but misses the point. The state is prohibited from making it a toll road. At the time it was built, perhaps it should have been, but we are well past that. Given that the toll road is a toll road, it’s the only highway asset with a market value.

      You can rightly question why the toll road still existed after the bonds were paid off, but that’s an issue in many states.

  3. says

    I like the point made in the journal article: there should be a constitutional amendment that prohibits politicians from entering leases for long durations. That author suggested 30 years. I’d say make it shorter than that. The politicians make the deal for money up-front—and btw it would have been a Firebird the kid bought, if Pontiac still were around—get the money, brag about how good they are w/budgets—Mitch Daniels? One of the Budget Wizards of the “W” White House?—and dump the expenses for taxpayers a couple of generations out. I take the Interstate up there. That, soon, probably will be sold or leased. Just like the interurban was sold a few decades ago.

  4. Joe says

    Anon: those “dirty Democrats” did themselves no favor in the debate. It would have been very easy, I would think, to come up with an alternative that would have gotten the state more money in the long run by simply agreeing to a schedule of Toll Road rate increases that would have meant more money for Indiana. IIRC, if they did come up with that idea, it was far too late in the game, and they spent most of their energy talking about selling the road to foreigners. Which, not surprisingly, got no traction.

    Failing that, what was going to be an easier deal to pass – higher taxes on Hoosiers to pay for infrastructure projects or the Toll Road deal? Then again, I don’t understand how we have surpluses to worry about when we have billions in unfunded pension obligations.

  5. says

    I read that study. I actually had a little trouble interpreting it because the raw data and equations weren’t present, however, their “findings” are entirely the result of an absurdly low discount rate. They used three scenarios, one of which, and I kid you not, was 0%. That’s saying a dollar today and a dollar 75 years from now are worth exactly the same. If that professor believes that, I’d love to make a deal with him in which he gives me his entire savings right now, and I’ll give him back the exact same amount in 75 years. I’ll even promise to keep his money in risk free treasuries over that time frame.

    I believe the other discount rates were 2% and 4%, both of which are absurd.

    There’s certain a debate to be had on discount rates. For long streams of money like 75 years, it make a massive difference in the net present value. Pro-privatization groups like to use high discount rates. William Blair (a Chicago investment bank that consulted on the parking meter transaction) suggests a range with a median of 12%. The Inspector General’s report from the City of Chicago (critical of the parking deal), IIRC used 7%, based on government formulas based on the risk of an asset class from Australia and overseas type gov’ts with a lot of privatization experience.

    In no way shape or form are discount rates like 0% or 2% appropriate. And 4% is nearly a risk free rate.

  6. Anon says

    Joe – In fact, the Democrats at the time did propose an alternative plan that would have scheduled toll increases and essentially bond off that future revenue. It didn’t raise as much money, but was still a substantial amount. Every response, though, would have been “late in the game” because Daniels cut the deal without letting anyone know about it until the terms were all set. He came to the Legislature to give authorization after it had been negotiated.

    Aaron Renn – I don’t know why the author of the paper chose 0%, 2%, and 4% specifically. But the OMB does recommend using both a 7% and 3% discount rate for a base-case in regulatory analysis. (e.g., the yield on 10-year Treasury notes has averaged 8.1 percent since 1973 while the average annual rate of change in the CPI over this period has been 5.0 percent, implying a real 10-year rate of 3.1 percent.)

    Specifically for situations with inter-generational costs and benefits it recommends a further sensitivity analysis with a positive rate “lower than” three. See:

    Proper discount rates for long-term government projects are – for good reason – figured differently than in short-term private investment analyses.

  7. Joe says


    My recollection is that an alternative toll plan was the second or third response of the Democrats. The primary response I seem to recall was nonsense. Looking back at the archives of this blog ( since so many of the news stories at the time are behind paywalls, I see nuggets of wisdom from Pat Bauer like:

    “Bauer said there is a possible terrorism threat in Indiana from the leasing arrangement because the toll road is part of the interstate highway system.”

    I mean, seriously? I complained about it in 2006, I still am.

    That an alternative plan to Major Moves was never discussed on this blog tells me it came far too late, if at all.

    And if a complaint is that Daniels moved too fast, well, maybe the flip side is that Pat Bauer moved way too slow. He has led the opposition party into the ground. I hope it can be rectified soon, because we are better off as Hoosiers with two parties that are effective.

    • says

      An alternative to leasing the toll road? I think mine was “don’t.”

      But the foreigner bashing approach by Bauer was awful.

      Still, the Daniels administration used boiler room tactics to get the thing passed. Deliberation wasn’t exactly encouraged and alternatives weren’t solicited. So, if it was a good idea or if it was a bad idea, it’s on the Daniels’ administration. The Democrats were more or less irrelevant to the discussion.

      • Joe says

        That’s part of the problem – they shouldn’t be irrelevant.

        Bauer’s initial response should have been “don’t because we could make more money ourselves if that’s how we want to raise it. Here’s the proof.” Then he can move on to other questions, like why a road in part of the state should be used as the funding source for the entire state’s infrastructure projects. Where’s the shared sacrifice, etc.

        But when his initial response is foreigner bashing and other nonsense, it’s easy to tune out anything further the man says.

        IMO Pat Bauer’s job while leading the Indiana Democrats was to offer an alternative to what Mitch Daniels had to offer. Something other than “don’t do what Mitch says”. Even if you don’t have the votes, offer something to prove there is intelligence on your side of the aisle.

  8. Joe says

    OK, you spent far more time in the House, and actually have written legislation in a past life IIRC, so if you regard amendments as alternatives, I would defer to you.

    But my perspective is that a true alternative would need to be a different bill with different language. No?

    And it does remind me – they’ve got to get that “no I-69 in Perry Township in Marion County” provision out of the law.

  9. Anon says

    The problem is, there was no possibility for any alternative, in reality. Daniels negotiated a multi-billion dollar deal in secret, then sought legislative authorization for his ability to sign the contract – after it had been put together. The legislature was not at the table until they only had the ability to say yes or no (the perry twp. provision is the exception)

    I agree with Doug that the best option was “just don’t do it.” Cest la vie.

  10. Paul C. says

    Doug… there is one error in your logic when you compare leasing the toll road and the national debt. Your and my children, as citizens of the United States, are almost certain to be obligated to pay down (or at least service) the debt. However, the likelihood that my children and your childrenwill have to pay the costs of leasing the Indiana toll is much lesser. I am not crazy about this argument, but it does have some validity.

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