Empty Denver Toll Road Called O.C. Tollway Omen : Transportation: The Colorado project was once a model for the $1-billion San Joaquin Hills artery.

A five-mile stretch of E-470 toll road lies eerily silent on the rolling Colorado plain just outside Denver. A car traveling along this road in midday is as rare as a UFO sighting--unusual, but not unheard of.

It was not supposed to be this way on a project that once was called a model for Orange County’s 17.5-mile, $1-billion San Joaquin Hills tollway, scheduled for construction next year.

Both the Orange County and Denver projects began about five years ago when municipalities along the planned routes formed joint-powers authorities to build toll roads that would serve new housing subdivisions.

In Denver, they also wanted eventually to serve a proposed international airport.

In Orange County, the San Joaquin Hills tollway would extend the Corona del Mar Freeway (State Route 73) from MacArthur Boulevard in Newport Beach to Interstate 5 near San Juan Capistrano, through the new community of Aliso Viejo.

Proponents of Orange County’s project steadfastly maintain that all is well financially, and that construction bonds will be sold during the first half of 1993.

But some observers fear that the Orange County project is following a treacherous path similar to Denver’s--especially environmentalists who strongly oppose the tollway.

“It’s a road doomed to failure because nobody will use it,” Laguna Beach activist Beth Leeds recently argued. “Taxpayers will be left with a white elephant.”

The Denver and Orange County projects were considered similar enough for Orange County’s San Joaquin Hills Transportation Corridor Agency to hire away Greg Henk, E-470’s chief engineer, and even loan him money for a house.

But inaccurate traffic and financial forecasts, as well as a serious cash shortage, have forced E-470 officials to drastically cut their project from 48 miles to 30 miles. Moreover, the remaining project mileage is being rerouted over existing highways in order to eliminate toll-free competition--thus wasting the $15 million in previous design work.

“There’s that western sense of independence that says, ‘By God, I’m not going to pay a toll,’ ” Steve Hogan, the E-470 project’s executive director, said recently.

What’s more, the E-470 authority is knee-deep in litigation with the consulting firm that selected the automated toll collection and computer systems, which did not perform as well as expected.

A key bank recently declined to renew the Denver project’s line of credit, and state officials declined to provide $150 million in other financing.

Now, Orange County’s tollway officials reject most comparisons with the Denver project. They argue that E-470 is geared to development that hasn’t occurred, while the Orange County project would relieve traffic on heavily congested Interstate 5.

But in five years construction cost estimates have more than doubled, construction has been postponed annually, and litigation remains a roadblock.

A dejected Orange County Supervisor Thomas F. Riley, whose district is bisected by the route, said last week that he’s so disappointed by the lack of progress that “I’ll do anything to get the road built.”

The tollway agency has spent more than $77 million since its inception, without an inch of concrete poured--more than it cost to install 30 miles of car-pool lanes on the San Diego Freeway, or about what Caltrans estimates it takes to build three miles of eight-lane freeway.

Moreover, documents obtained by The Times show that:

* Tollway officials recently sought to borrow upward of $74 million from the Orange County Transportation Authority’s rail funds. As part of the deal, OCTA would get $40 million in state highway funds destined for the tollway but which can’t be used by the state’s deadline due to construction delays.

OCTA would turn around and loan the $40 million back to the tollway agency later, when it’s needed. If OCTA loaned the $74 million to the tollway agency it would probably be used for a portion of another cash-strapped toll road project--the Foothill, a three-mile segment of which is scheduled to open next summer near Mission Viejo.

* Richard Swanson, a financial consultant hired by OCTA, advised OCTA Executive Director Stan Oftelie not to loan any more money to the tollway agency without guarantees and a lien on future toll revenue because such a loan would be “high risk.”

“We believe that the (tollway agency) will not be able to secure a rating on tax-exempt bonds given . . . (the) concern rating agencies and investors have about the pace of economic recovery in the county,” Swanson wrote to Oftelie in a draft memo dated Sept. 18. Without a favorable rating from one of the major bond-rating companies, the tollway authority might have to offer interest rates that would risk making the project economically unfeasible.

Despite plans to sell construction bonds in the next few months, some financial experts doubt tollway officials’ ability to gain anything but a junk-bond rating, raising the financing costs.

* As part of the loan negotiations, OCTA proposed a merger of the two agencies, similar to OCTA’s attempted hostile takeover of the Orange County Transit District little more than a year ago. That proposal has been derailed at least temporarily.

* Deloitte & Touche, one of the nation’s biggest accounting firms, recently stopped its review of the tollway agency’s projections of future income from developer fees because tollway officials paid Deloitte & Touche for a less-rigorous evaluation than national accounting standards allow, according to Greg Clark, a former Deloitte & Touche official who worked on the analysis. The problem, he said, was that the tollway agency wanted to make the compilations available to investors or the general public, when they were only fit for limited, in-house distribution.

Meanwhile, the loan negotiations have stalled, probably as much a result of inter-agency squabbling as anything having to do with the merit of the proposals. The two agencies have been at odds over priority-setting for years.

Construction of Orange County’s much-delayed San Joaquin Hills tollway, designed to carry 150,000 vehicles a day, is supposed to be financed 48.5% with developer fees, with the rest coming from a combination of bonds to be repaid from toll revenues, property taxes paid by homeowners along the route through special property tax districts, and small state and federal grants.

But the recession has virtually halted new development, sharply reducing revenues from developer fees. Developer fee revenues slid from $2.6 million in the second quarter of 1990 to only $586,700 in the same quarter this year, the last period for which data is available.

The slowdown in development also has changed some of the population projections used to forecast future toll income.

In addition, environmental litigation and financing problems have thwarted planned ground-breaking ceremonies on at least three occasions. Originally due to be built in the late 1980s, the latest construction start date to be abandoned was the end of this year.

The Swanson memo, one of the documents obtained by The Times, urged OCTA not to loan tollway officials any more money for the time being. “OCTA should seek a guarantor for repayment,” Swanson wrote. “In addition we suggest that the OCTA should, at a minimum, seek a very significant equity position in the (tollway), in consideration of the high-risk nature of the loan.”

“I’m optimistic,” tollway executive director William C. Woollett, Irvine’s former city manager, said last week. “Otherwise I wouldn’t have taken this job.”

“We will do it,” promised Wally Kreutzen, the agency’s chief financial officer. “We have enough money now . . . to build a segment that will provide relief to some residents of Orange County.”

But OCTA Chairman Gary L. Hausdorfer, a San Juan Capistrano councilman and also a former tollway agency board member, finds himself championing the road while seriously questioning the amounts of money spent so far. In a recent interview he was also pessimistic about the tollway agency’s ability to obtain $1 billion in construction financing during the next few months.

“I don’t blame anyone because I was there myself,” Hausdorfer said of the costs borne so far. “But it’s natural for people to wonder where all the money has gone. . . . And I think that doing financing of any kind in today’s market is a challenge. To the extent that the (tollway agency) is a new, unrated agency, they will have a challenge securing the amount of money they’ve indicated they need.”

According to monthly reports given to tollway board members, this is how the agency has spent $77.7 million since 1987:

* $43.5 million went to engineering, most of it by a private consortium called the Corridor Design and Management Group. With a team of Caltrans engineers looking over its shoulders at taxpayers’ expense to ensure that CDMG is complying with state design standards, CDMG is also designing two other South County toll roads--the Foothill and the Eastern.

* $20.3 million was spent on rights of way, even though most of the land has been donated by developers.

* $6.9 million has been spent on lawyers, lobbyists and special consultants, mostly in connection with legislation and environmental permits needed to proceed, and lawsuits filed both by and against the tollway agency. With two lawsuits still unresolved, these costs are expected to rise.

* $2.2 million went for staff salaries.

* $2.2 million was paid in as interest to creditors.

* The remaining $2.6 million went for office rent, employee health care and other benefits, postage, insurance, travel and other administrative expenses.

The costs are much higher than those experienced by Colorado’s E-470 authority.

However, Caltrans officials declined to comment on such expenditures because they have had no recent, similar experience, except the Century Freeway in Los Angeles. That project is so abnormally expensive due to right-of-way and housing-relocation costs that--at $100 million per mile--it defies comparisons.

The real issue, according to county transportation officials who requested anonymity, is that the tollway agency has spent large sums on design work and other matters before gaining title to all of the necessary rights of way and required environmental permits.

“To spend all that money without getting your ducks in order is ridiculous,” said one disgruntled, former tollway agency board member.

Tollway officials argue that they don’t want to own all of the right of way until they actually need it because of legal liabilities that come with holding title. They also argue that all of the remaining design work will be done by the same consortium building the project and that the early designs were done to save time.

Anti-tollway activists such as Leeds of Laguna Beach point out that, to stay afloat thus far, the tollway agency borrowed $13 million from the Orange County Transportation Authority, obtained a $15-million line of credit from an East Coast bank and negotiated deferred billings from the construction contractor. Also, the agency arranged for $120 million in federal loan guarantees that will be triggered if toll revenues aren’t sufficient to pay off bond investors in the first few years of operation, which are the riskiest financially.

The tollway agency’s Kreutzen, however, said these transactions prove the viability of the project--or they couldn’t have been successfully negotiated.

Next month tollway officials will meet with bond rating agencies, including Standard & Poor’s. The meetings could be crucial to gaining a decent credit rating, which so far has eluded this and several other toll road projects around the U.S.

Standard & Poor’s Ernie Perez said the problem is the unreliability of construction schedules, which affect when bondholders will see a return on their investment.

“We can’t do the deal,” said Perez, “until the risk of delayed or incomplete construction is taken care of.”

Letters of credit from banks, insurance policies that protect bondholders, or financial guarantees from the firm building the road are about the only ways to protect investors from a default, Perez said.

The tollway agency is currently negotiating an insurance policy to cover up to $200 million of bond debt in the event the project is not completed on schedule. Also, the builder--a consortium headed by Kiewit Pacific Co.--is potentially financially liable for some future delays.

This would be added to the $120 million in federal loan guarantees recently approved by Congress and the Bush Administration.

But Perez said he will have to wait until his meetings with tollway officials in December to decide whether such measures are sufficient.

One factor: The tollway agency is re-evaluating all revenue estimates based on the county’s latest population estimates and is taking into account the accelerated schedule of improvements such as car-pool lanes due on the Santa Ana Freeway and other road projects that represent toll-free competition.

In the Denver area, says E-470 chief Steve Hogan, such improvements helped reduce traffic on the new toll road there from an expected 22,000 vehicles per day by this year’s end to only 4,100, with toll revenues of $750,000 running far below the $1.2 million cost of operating the toll plazas.

Some tollway board members in Orange County fear that their project could suffer a similar fate.

Two years ago, the Irvine Co. studied the possibility of having developers take over the project, since they are already paying for part of it. But the study showed that such a takeover wouldn’t be cost-effective. Unlike public agencies, developers have no direct access to tax-exempt bond financing, which means much higher interest costs on any money borrowed to complete the road.

And so talk of a possible merger of the tollway agency with OCTA has increased in recent months, fueled partly by the tollway agency’s desire for more cash in order to help persuade prospective bond purchasers that their investment is worthwhile.

Bond agencies agree that this would enhance the tollway agency’s ability to gain a favorable rating.

“I believe the only way that OCTA and (the tollway agency) can blend their interests is a straight up business deal that benefits both agencies and that’s capable of passing the most rigorous public scrutiny,” said Hugh Fitzpatrick, the Irvine Co.’s vice president for regional infrastructure.

Fitzpatrick said the recent proposal for a $74-million loan from an OCTA’s rail service endowment fund “fits into that category.”

But Woollett, the tollway agency’s executive director, said the deal simply hasn’t worked out so far, although discussions will continue.

Woollett said a proposed agency merger hasn’t even been discussed at board sessions. Clearly, he said, OCTA’s Oftelie would “like to have the ability to access toll revenues. . . . We’re not legally in a position to do that. When we were created, the law said we can use the money only to build toll roads.”

And given the tollway agency’s problems, OCTA’s Hausdorfer remains skeptical about the value a merger would have for OCTA.

“I’m very reluctant,” Hausdorfer said. “OCTA already has a full plate.”

OCTA’s Oftelie said his proposal for loans and a merger of the two agencies is based on a desire to make funds available from his rail endowment fund now.

“In exchange for setting aside those funds,” Oftelie said, “we want to be repaid in a way that helps us operate an urban rail system in the future.”

Oftelie was referring to the proposed, $2-billion, nine-city monorail system now undergoing feasibility studies.

Another goal, Oftelie said, is to bring all county transit agencies together “so there would be one policy voice for transportation policy issues countywide.”

Referring to tollway officials, Oftelie said: “We see the ball as essentially in their court.”