Monday, 17 September 2012

Pennsylvania Turnpike's burgeoning debt

The Trucker.com published a report from Associated Press claiming that the Pennsylvania Turnpike looks like it is on a path towards financial difficulties, not because of a lack of traffic, but because it is being expected to cross-subsidise a lot of transportation spending across the state.

Background

The Pennsylvania Turnpike is 856km (532 miles) long connecting Ohio to New Jersey, and is one of the states most strategically vital corridors, with its various segments comprising parts of six Interstate Highways.  It is managed by a state quango called the Pennsylvania Turnpike Commission and the prevailing tolling technology is a combination of closed road tolling (ticket based) manual tolls with EZ Pass tags as optional.

Pennsylvania Turnpike network map
Story

Prices on the Turnpike have doubled in the last ten years, but it is now generating less revenue than what it spends.  Its current debt is US$7 billion.  

The article states:


Highway and bridge projects around Pennsylvania have grown dependent on the money from turnpike toll-payers, and so have transit agencies such as the Southeastern Pennsylvania Transportation Authority.

If the turnpike stopped making its $450 million-a-year payment to PennDOT, the already strapped state transportation budget would lose about 12 percent of its financing.


Its liabilities exceed assets by US$1.3 billion, because it keeps being required to fund activities outside its core, so that it is, in effect, a borrowing instrument of the state.

The problem comes from an ill thought out law which was originally envisaged to raise revenue by expanding tolls.  


The root of the turnpike's financial woes is Act 44, the 2007 state law that required the turnpike to contribute $900 million a year for statewide roads, bridges and transit.

To come up with the money, state lawmakers authorized the Turnpike Commission to convert Interstate 80, which parallels the turnpike across northern Pennsylvania, to a toll road. But the federal Department of Transportation in 2010 denied the state's application to require tolls for I-80 travel.

So the turnpike's obligation to fund other roads and transit dropped in half in 2011, to $450 million a year, under terms of Act 44.


In other words, with the Federal Government opposing an application for tolls on an existing highway, the legislation didn't remove the obligation, just halved it.

Revenue at the turnpike is currently US$800 million a year, and US$300 million is spent on operating and maintaining the road (yes, there should be an issue with this and this is allegedly being addressed).  US$300 million is also spent on servicing existing debt, yet instead of US$200 million being spent on other projects, the Turnpike Commission is expected to spend US$450 million.

Prospects

Moodys is bullish in the short term, but forecasts of continued traffic growth look over-optimistic.


Moody's, like other ratings agencies, continues to rate the turnpike's financial health fairly high: Aa3 on its debt for turnpike operations, and three notches lower, A3, on the debt for Act 44 payments.

Moody's has assigned a "negative" outlook for the future of the turnpike's debt because of "dependence on regular toll increases and modest traffic growth to support projected debt-service coverage ratios."

Turnpike officials are assuming that traffic will increase by 3 percent to 5 percent every year, according to their most recent traffic study.


So the path is laid out for the state to either cut spending, raise other taxes or expand the tolling remit of the Turnpike Authority.

The article concludes with a useful review of other states which use tolling authorities to cross-subsidise other activities:

Pennsylvania is one of several state and local governments that require toll-payers to pay for projects not directly related to the road or bridge that is tolled.

The New Jersey Turnpike Authority, the Triborough Bridge and Tunnel Authority in New York City, and the Harris County Toll Road Authority in the Houston area are among those that tap tolls for other projects.

In New Jersey, about 30 percent of toll revenue is transferred to the state Transportation Trust Fund Authority for use on statewide highway projects and transit operations.

Locally, the Delaware River Port Authority spent nearly $500 million over the last 15 years for "economic development" projects — such as stadiums and museums — to be repaid by revenue from its four toll bridges linking Philadelphia and South Jersey.

It warns that Moodys considers toll authorities with wider funding remits to be "riskier" than those without, which is logical, given that without such commitments, tolling authorities (especially for large high volume networks) should be quite profitable.  For now, it appears that some states are using there toll networks to offset declining real revenues in fuel taxation.  The problem they have, and Pennsylvania certainly will have, is that this is only sustainable if the proportion of the tolled network increases as well.

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Penn Live has also published an editorial expressing concern about the sustainability of the existing cross-subsidies from the Turnpike.  It supports ideas from the Transportation Funding Advisory Commission such as increasing vehicle ownership fees, driver licensing fees and a tax on oil company franchises.  Of course, none of these ideas have anything to do with usage of the network, and most seem likely to exacerbate existing deadweight costs of taxation and so will impose an economic burden likely to be worse than raising turnpike tolls.  The choices need to be around getting better value for money for what is spent, treating asset management on a cost accounting basis, not some Soviet style public good, and then once some reasonable costs have been estimated for the long term lifecycle renewal of these assets, determining how to allocate those costs among users and charge them appropriately.   

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