Light is Dawning on Turnpike Debt Growth

Member Group : Allegheny Institute

(August 30, 2012)–In January of this year, the Pennsylvania’s
Auditor General proclaimed that the Pennsylvania Turnpike was
"drowning in debt" to which the Turnpike CEO responded that it was
"simply not true". He elaborated by saying that the Turnpike "has
developed a sound, fiscally responsible approach to meet all of its
financial obligations…". Seven months later, in another news
article, the CEO’s attitude seems to have changed a bit as he admits
that the Turnpike cannot continue its policy of raising fares and
issuing more and more debt for the long term. But given the
circumstances he claims this is the best the Commission can do and
the strategy does not pose an immediate threat. In other words, we
are okay in the very short run, but this is going to get very messy
in a couple of years.

As we noted in a Policy Brief (Volume 12, Number 5) from January, the
situation is getting worse every year with no end in sight. And of
course the culprit is Act 44 of 2007 which mandated that the
Commission use funds from expected toll revenues to supply $900
million a year to PennDOT to fund mass transit and road and bridge
repairs through 2057. The linchpin of Act 44 was the imposition of
tolls on Interstate 80. When the Federal government denied
permission to impose the tolls, the Legislature lowered the annual
payment to PennDOT to $450 million, but the burden fell on existing
Turnpike toll revenues.

So the Commission began to borrow in order to comply with the Act 44
requirement and began a policy of increasing toll rates to cover the
debt service. According to the Commission’s fiscal 2011
Comprehensive Annual Financial Report (CAFR) they had $2.5 billion in
bonds outstanding in 2007, the year Act 44 was passed. By fiscal
2011 the total debt had more than tripled to $7.7 billion fueled in
large part by the $2.95 billion in payments already made to PennDOT.
By 2011debt service payments had climbed to $352 million, almost
double the level of just four years earlier.

According to the CAFR, revenues from mainline fares in 2011 reached
$739.7 million. Adding revenues from other sources puts the
Commission’s total at $901.4 million. Meanwhile their operating
expenses were $641.5 million along with and the interest and bond
expenses of $333.3 million and a $450 million payment to PennDOT.
Thus, the Turnpike incurred a net asset loss of $523.4 million in
2011 and had an operating loss over $75 million. And as the debt
level continues to rise, so will debt services costs driving added
pressure to find more revenue.

How long will the Turnpike be able to borrow on the extraordinarily
favorable terms it has enjoyed in recent years? In just three years
debt will swell by almost $1.5 billion, not counting what the
Turnpike will need to borrow for its capital developments. Its debt
now stands at 8.5 times earnings and will soon be ten times earnings.
This is what credit rating agencies will have to consider as they
determine credit worthiness of the Turnpike. Lower credit ratings
will raise borrowing costs for future bond issues creating ever
increasing financial difficulties for the Turnpike that will impair
its ability to deliver quality services.

Funding ongoing operations as well as meeting the rapidly rising debt
service expenses will require continually rising Turnpike fees.
Economically, permanent large annual hikes in toll rates will
eventually cause traffic to fall sufficiently to flatten or decrease
revenue from the fare hikes. Credit rating agencies will have no
choice but to look at the situation that will exist in a few years
and start lowering the Turnpike’s bond rating. Tolls have already
risen 104 percent since 2004 while traffic has been relatively flat
over the period. With the price of fuel sharply higher since 2004,
the continued raising of fees will likely cut significantly into
Turnpike usage. That will put more traffic on other roads less able
to handle the volume and could cut into the state’s overall
productivity by causing travel times to increase while boosting the
expenditures on maintenance of roads unexpectedly forced to carry
more load.

In short, this pattern of issuing more debt and increasing tolls to
pay for it is very perilous and perhaps the Commission CEO finally
sees the writing on the wall. This is a dangerous pattern that will
likely result in serious harm to the Turnpike’s long term fiscal

Jake Haulk, Ph.D., President
Frank Gamrat, Ph.D. Sr. Research Assoc.

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