More in the Building Collection of Famous Last Words?

More in the Building Collection of Famous Last Words?

"Turnpike Head Says There is No Immediate Crisis".

Responding to a rising chorus of concerns about the Turnpike Commission’s annual borrowing of $450 million to meet its Act 44 obligation to PennDOT, the Commission head and the PennDOT Secretary say in effect, "move along there is nothing to see here." They contend there is no immediate crisis looming for the Turnpike. Their story is the Turnpike is cutting expenditures and raising toll rates adequately to meet debt service requirements. That means every year it must squeeze at least enough out of Turnpike users to cover the latest borrowing and of course that is accomplished through continuous rate hikes.

Moreover, the $450 million per year new debt is not all the Turnpike’s borrowing needs. In order to upgrade and maintain the old system, it has an extensive capital program underway that also necessitates additional borrowing. According to Moody’s summary, the Turnpike is scheduled to borrow $5.3 billion over the next 10 years for the capital projects. This in addition to the Act 44 borrowing. Of course, unless the Turnpike is kept in fairly good condition user levels will fall, something that would be disastrous for the Commission’s finances.

The other claim by the Commission head and the PennDOT Secretary is the Turnpike’s bond ratings are still high. That is true but Moody’s rating of March 2012 contains a negative outlook and lays out a number of challenges facing the Turnpike’s finances. Then too, as it does with municipal bonds, Moody’s gives great weight to the ability of the Turnpike to raise revenue through increased tolls. Indeed, it compliments the Commission for its independence and willingness to raise tolls. But as Moody’s points out raising tolls is only useful as long as demand for the Turnpike remains very inelastic. That simply means cars and trucks do not have viable alternatives between many travel points in the southern portion of the state and will bear high toll rates, at least at levels seen so far.

But as first year economic students learn, unless a product has no substitutes and is an absolute necessity, there is a price beyond which further increases will reduce revenue. That is, demand becomes elastic. How far away we are from that is hard to say. With a strong growing economy, the inelasticity can extend to higher prices. With a deep recession, raising prices will become extremely problematic. The Turnpike is in effect betting on virtually non-stop growth.

Beyond these considerations, one must be alarmed at the willingness to pile up debt in massive quantitites so the government is not forced to find other sources of revenue for PennDOT. That is the essential point here. The Turnpike is being used as a substitute taxing body and its users are contributing to roads and bridges throughout the state. It is a great asset that is being milked; perhaps to the point of catastrophic damage.

No crisis yet. That is the assertion. But looking around the state and country we see so many other cities, authorities and even states who are staring into a financial abyss. California, Illinois, San Bernardino, Birmingham, the Port Authority of Allegheny County, Pittsburgh pensions, the city of Harrisburg. And the biggest of all, the US government, accompanied by gigantic problems in Europe. Greece and Spain kept believing the crisis was not here yet. Now look. Warning signs are everywhere and each threatened player keeps saying "we’re still ok". Just like 2007 and 2008 when anyone with eyes to see knew the housing bubble was about to collapse. But what soothing words officials kept repeating that we should not be alarmed, all is well. And the problem is as long as the rating agencies bury their heads in the sand and pretend not to see the dangerous buildup of debt, the larger the amassing of debt. When the correction comes, it is much worse than if the rating agencies had looked at macro forces and downgraded some borrowers to discourage reckless borrowing.