A transit tax wish list, revisited

An April 2019 blog analyzed a report that advocated for expanded tax and fee options for local governments to support mass transit agencies.  The issue at the time was the change on the horizon (in 2022) when the payment from the Pennsylvania Turnpike Commission to the Public Transportation Trust Fund was to drop to $50 million.  That funding change has occurred, and the state now transfers sales and use tax revenue to the fund.


With the coming expiration of federal COVID dollars for mass transit agencies, there should be no surprise that agencies are starting to look for new money.  To be sure, ridership has yet to return to pre-pandemic levels for many agencies.  This includes Pittsburgh Regional Transit (PRT), where the latest data show bus and light-rail ridership are still down significantly.


A news article notes that leadership at the Southeastern Pennsylvania Transportation Authority (SEPTA) is raising the possibility of fare hikes and service cuts once the federal money is gone.  The article describes a legislative proposal introduced into the House of Representatives that would expand county options for subsidizing mass transit.  Many of the options would be along the lines of proposals in the 2019 report.


Allegheny County would be the only county able to continue to levy taxes on alcoholic beverages and car rentals as permitted by Act 44 of 2007.  Those taxes are budgeted at a combined $49.5 million for this year.


The bulk of the collections are for the tax on alcoholic beverages; collections have fluctuated through the pandemic and after.  Inflation has also had an impact.  The change in the Northeast Consumer Price Index from 2021 to 2022 was 6.9 percent, well above the previous three years.  If county drink tax collections came in at the 2022 budget level ($42.2 million), the 14 percent growth likely would have been impacted by inflation’s effect on the price of alcoholic beverages.


If approved, taxes, surtaxes and fees on deed transfers, motor vehicles and motor vehicle registrations, personal income, local services and rides originating in the specific county from transportation network companies (arranged through an app) could become real.  Some of these items are already taxed by the state, municipalities and/or school districts.


But where is the insistence on cost reductions? PRT has done very little in the way of layoffs, service reductions or utilizing smaller vehicles as a way to adjust to low ridership. Hopefully the General Assembly takes the need to reduce costs into consideration before providing counties with a menu of new levies which would exacerbate issues with mass transit spending.



Another Year, Another Hike in Turnpike Tolls

Another year and another toll increase for users of Pennsylvania’s Turnpike system.  For the sixth consecutive year, tolls will rise for travelers paying with cash (E-Z Pass fares were not raised in 2012).  Turnpike tolls have been boosted to cover the cost of rising bond obligations incurred to satisfy 2007’s Act 44 requirement that the Turnpike contribute $450 million to PennDOT annually.


As we had written in past Briefs (Volume 12, Number 5 and Volume 13, Number 3) the Turnpike will need some legislative help to lighten this debt burden as the cycle of issuing debt and raising tolls cannot continue for the fifty years outlined in Act 44.  In late 2013 that help arrived with the passing of Act 89 of 2013 which reduces the amount owed by the Turnpike from $450 million to $50 million—in the fiscal year (FY) ending in 2022.  While any help is welcome, the damage may already have been done.


For FY 2004 the amount of mainline bonds outstanding (those issued against toll revenue) was just over $1.13 billion[1]. In May 2007, before Act 44 was passed, that debt total climbed by 46 percent to reach $1.7 billion.  By May 2013 the amount had jumped above $7.5 billion—an increase of more than 560 percent over 2004 levels and 350 percent higher than in 2007.  With a strategy of borrowing to satisfy Act 44 requirements and using toll revenues to pay them off, the amount of mainline debt will continue to rise dramatically for the foreseeable future.  An official from the Turnpike Commission was quoted in news reports that their bond ratings have been solid, so there appears to be little outward worry.


However there are two main reasons to worry. First; interest rates for the past few years have been very low, making borrowing cheap and offering extraordinarily favorable refinancing opportunities.   Through its quantitative easing policy, the Federal Reserve has kept interest rates historically quite low purportedly to promote the national economic recovery. This has kept the growth in debt service on these bonds from rising as rapidly as the debt growth itself. In 2004 the debt service on the mainline bonds stood at $81.1 million before rising to $111.5 million in 2007 (38 percent).  In 2013 that amount swelled by 185 percent to $318.9 million.  Thus, the increase to the debt service of these bonds grew by a slower rate than the amount of debt issued.  Even though debt service is currently manageable, debt service will inevitably rise as more borrowing is incurred, even with low interest rates, and to make matters worse it is a virtual certainty that interest rates will eventually move higher.


The second reason to worry is that Turnpike traffic levels have been flat over the past decade or so.  The mainline Turnpike offers the best route to traverse the southern part of the state, connecting west to east from border to border.  Customer demand is highly inelastic in the short run and usage levels do not drop appreciably in the face of price hikes.  This is borne out by the data.  Since FY 2008 (before the first hike) to FY 2013 there were the six consecutive cash toll increases and yet gross toll revenue increased nearly 33 percent with the total number of vehicles using the Turnpike virtually unchanged (down less than one percent) over the period.  To be sure, there must have been some effect on traffic over the period in light of the improvement in the state’s economy and the very modest upturn in national economic activity. One would have expected some significant pickup in traffic absent the toll increases.  Indeed, the traffic did rise to recover to the 2008 level in 2011 and 2012 but dropped back to 2004 readings in 2013.


But within the years we can see that the growth in gross toll revenue was rising at a decreasing rate.  From FY 2009 to FY 2010 gross revenues increased 12.5 percent.  Then from FY 2010 to FY 2011 growth was less than 6.5 percent and the increases got smaller from 2011 to 2012 (4.4 percent) and again from 2012 to 2013 (3 percent) despite the constant toll hikes.


Are motorists starting to react negatively to the toll hikes by finding alternative routes to travel?  While the number of vehicles has not changed much since FY 2009, within the last three fiscal years the change to the number of passenger vehicles on the Turnpike’s roads have been decreasing (up one percent, down 0.16 percent and down 0.77 percent).  The number of commercial vehicles using the toll roads over the last three fiscal years has been increasing, albeit at a decreasing rate (3.8 percent, 1.3 percent, and 0.33 percent respectively).


However, a more telling indicator kept by the Turnpike is revenue miles.  From FY 2008 to FY 2013, this measure had fallen by 4.5 percent.  FY 2009 had the largest fall of nearly 3.75 percent, but FYs 2010 (-0.69), 2012 (-1.19), and 2013 (-0.03) all had setbacks as well.  Only 2011 had a modest one percent uptick.


But revenue miles per vehicle points to a possible reduction in usage.  FY 2007 represents the high-water mark for both revenue miles per passenger vehicle (27.69) and per commercial vehicle (51.84) for the last ten years.  In FY 2013 the average passenger vehicle using the Turnpike traveled 26.81 revenue miles—about three percent lower than in 2007.  However, commercial vehicles on average traveled 46.17 revenue miles—nearly eleven percent fewer miles than they did in 2007.  In fact, commercial revenue miles per vehicle had been steadily declining since that peak.  This measure shows that commercial customers may be more sensitive to the fare increases than originally thought as they have shaved more than 5.5 miles off an average trip.  This could eventually be problematic for the Turnpike as commercial vehicles pay more per mile than passenger vehicles.  It could also cause problems for municipal and state roads as this measure suggests that commercial vehicles are substituting state or local roads for the Turnpike.  Of course commercial vehicles do far more damage to roadways and bridges and that may translate into higher costs for those entities.


All told, the continual borrowing by the Turnpike and the raising of tolls has not produced a crisis as yet but there is every reason to be concerned as the debt piles up and tolls reach levels that begin to drive significant traffic off the Turnpike.  Once the toll reaches a level that leads to stagnation or decline in revenue, the financial situation will become extremely problematic. As it stands, the annual $450 million contribution to PennDOT is scheduled under the recent transportation bill to continue through FY 2020-21.  The reliance on permanent historically low interest rates is not a prudent strategy.

[1] All financial data from 2013 Turnpike Comprehensive Annual Financial Report:  http://www.paturnpike.com/geninfo/PTC_CAFR_13-12_final.pdf .  The Turnpike Commission’s fiscal year ends on May 31.

Who is Severely Distressed?

Act 44 of 2009 addressed public sector pensions at the local level in Pennsylvania and came up with a typology of distress based on the funding ratio (assets/liabilities) of the plan to determine if there was no distress (90% or above), minimal distress (70 to 89%), moderate distress (50 to 69%), and severe distress (49% or lower). Pittsburgh was at the severe distress level for some time until the 2010 "revenue infusion" plan moved it, by PERC’s measurement, to moderate distress.

The latest PERC status report looks at this typology. In 2010, with 1,439 municipalities scored, 27 (less than 2%) had a designation of severe distress. In 2012, with 1,449 municipalities scored, 26 (1.8%) had a designation of severe distress. One can see the impact of plans in Pittsburgh, as well as Philadelphia, moving out of this level of distress: in 2010, the class of "cities" reported 32,524 active members in the severe distress level, and by 2012 "cities" had 782 active members in the severe distress group.

PERC notes that many of the severely distressed plans are newer plans (less than ten years old) and gave past service credit to employees, raising the liability of the plan. Makes one wonder how many plans are severely distressed because of mismanagement or underfunding and if officials view the local pension system as one in need of inclusion in statewide reform (like the systems for state workers or school teachers) or if there are enough plans in good shape that should be left alone.

Turnpike CEO: Changing His Attitude About Debt?

In January of this year, 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 in 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 borrow funds against expected toll revenues to fund mass transit as well as for road and bridge repairs through 2057. The lynchpin of Act 44 was the imposition of tolls on Interstate 80. When the Federal government denied permission to impose the tolls, the burden fell on existing Turnpike toll revenues.

So the Commission began to borrow according to the Act and to cover this borrowing they began to increase the toll rates on the Turnpike. And of course the beat goes on as the Turnpike Commission is still responsible for $450 million in transportation funding every year until 2057-piling up the debt outstanding as well as continually increasing the annual debt service payments. According to the Commission’s financial report 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 for transportation funding. By 2011 debt service payments had climbed to $352 million–almost double the level from just four years earlier.

In financial terms, the real burden facing the Turnpike and its users is the present value of 45 more years of borrowing and servicing additional annual debt of $450 million a year. In ten years debt will swell by at least $4.5 billion, not counting what the turnpike needs to borrow for its own capital developments.

Funding ongoing operations as well as meeting the rapidly rising debt service expenses will require continually rising Turnpike fees. Economically, permanent large annual hikes 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, 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.

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 health.

Are Public Sector Pension Changes Coming?

It is not going to get any easier on the pension front in Pennsylvania.  Just this week, as the state put the final touches on the 2012-13 budget, the warning bells on the costs associated with the two statewide pension systems (one for state employees, the other for school employees) tolled  louder.  Doing nothing means the percentage of the state’s budget dedicated to pensions will grow to 10 percent according to one published newspaper report. 


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Pension Ratio Slips: What Does it Mean?

Under Act 44 of 2009, a law that dealt with municipal pensions in Pennsylvania, the two largest cities in the state were given special provisions regarding their pensions. Philadelphia got an extra point on its sales tax (taking it to 8%) and Pittsburgh was given the option of leasing its parking garages as a way to make a big cash infusion into the pension fund. The City could boost its parking tax as well if it did the lease. If the City’s funded ratio (assets/liabilities) was below 50% as of its 2011 valuation the fund would have been taken over by the state.

None of that happened: an alternative plan based on a thirty year funding stream came together and the Public Employee Retirement Commission valued the fund at 62% in September of 2011, making it "moderately distressed" under Act 44’s classifications. Just last week the City’s pension board was given a presentation by its fund manager that showed the fund now has a ratio of 55.8%: lower than PERC’s valuation but still "moderately distressed".

So what happens if the City should slip below 50%, into the land of "severely distressed" and the area from which the state tried to keep them out? Apparently nothing since the takeover trigger under Act 44 was a one time measurement: beat the benchmark and management of the fund stayed with the City. Conversely, if the pension fund’s health gets better and eventually reaches a 70% level, it would be considered "minimally distressed" under the statute.

Turnpike Drowning in Debt?


Recently Pennsylvania’s Auditor General stated that the Pennsylvania Turnpike is “drowning in debt”.  This characterization was disputed by the Turnpike’s CEO as “simply not true” and that the Turnpike “has developed a sound, fiscally responsible approach to meet all of its financial obligations…”  So which is it?  Is the Turnpike’s financial condition sound or is the Auditor General correct in raising a red flag?  To get an unbiased picture of the situation it is important to examine the large rise in debt over the last few years and the major causes of the borrowing. A principal reason for the debt increase is a provision of Act 44 of 2007. 


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Dealing with City Pensions: What’s Next?

Following closely behind the oversight board’s approval of the City’s 2012 updated budget, which included putting an additional $10 million toward pensions and bringing next year’s total contribution from the City, state (including the state’s special allocation of $10 million), and employees to $65 million, a chorus of voices-including the City Controller, the City Finance Director, and the Act 47 coordinator-are saying that now is the time to put together a long-term fix for the City’s pension problem. 


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Distressed? Just Moderately

Following the determination of the PA Public Employee Retirement Commission (PERC) that its New Years’ Eve plan of diverting anticipated tax revenues for the next three decades satisfied the dictates of Act 44, Pittsburgh’s pension plans are now classified at "moderately distressed" under that statute.

Under Act 44, pensions that have a funded ratio (assets/liabilities) of 90% or greater are not distressed; those 89% to 70%, minimally distressed; 69% to 50%, moderately distressed; and 49% or lower, severely distressed. Pittsburgh has left the lowest class and has raised its funded ratio to 62%, placing it squarely in the moderate category.

So who does Pittsburgh join in this grouping? It is much larger than the class it was in, with 162 other municipalities/authorities/associations. Larger PA cities include Johnstown (50% funded), Allentown (68%), and York (58%). Several plans from Allegheny County likewise show up, including those belonging to the municipalities of Crafton (65%), Harmar (69%), and West Mifflin (67%).

Long term sustainability of Pittsburgh’s plan counts on present and future officials living under the terms of the December 31st plan, getting City employment levels to that of better performing cities, and further meaningful pension reform from Harrisburg and at the local bargaining table.

Pensions Stay in City’s Hands

Nine months following City Council’s December 31st pension bailout plan, which used a one time debt service transfer and pledged three decades of parking tax revenue ($13 million in the next few years, doubling in 2018) from the general fund to the pensions, the state Public Employee Relations Commission (PERC) has ruled that that plan constitutes an asset that satisfied the language of Act 44 of 2009. That language required the City to get its aggregate pension funded ratio (assets divided by liabilities) to a minimum of 50%. PERC’s assessment today puts the ratio at 62%.

Recall that Council vetoed the Mayor’s plan to have a long-term lease of parking assets to a private interest and opted instead for an "infusion of value" which relies on a long-term stream of payments instead of a lump-sum up front payment. If the plan had not worked and the pensions were below 50% funded, administration of the plans would have been transferred to the Pennsylvania Municipal Retirement System (PMRS).

Questions remain: many of these were pointed out in our first Policy Brief of 2011. For instance, since the promise of parking tax money, roughly $3 billion altogether, fell in the mid-range of the scenarios presented by PMRS, why was the City so afraid of a takeover? The state law clearly stated collective bargaining would remain at the City level. Also, where is the binding language that holds future City administrations and Councils to honor the promises of 2010? And, if we are to take the comments of the City Controller at face value when he said the bailout plan "is no long-term solution [but] a mechanism to avoid state takeover", then what is the long-term solution?