Familiar Threads Woven in Harrisburg Recovery Plan

Over three years ago, in February 2010, we asked if the debt related to a trash incinerator was pervasive enough to cause a municipal bankruptcy filing-colloquially, that the City of Harrisburg’s finances could possibly end “up in ashes”. 


After the City was placed into Act 47 status, saw the General Assembly make changes to the statute as it applied to Harrisburg, and operating under the direction of an appointed receiver, a plan, somewhat pretentiously titled “Harrisburg Strong”, has come together for placing the City on the path to a solid financial future.


Readers of our reports, especially as they pertain to Pittsburgh, will notice some familiar themes and one very different situation; namely, the presence of the aforementioned dollar devouring trash incinerator. That facility is slated to be sold-to another public authority-and some of the proceeds will go to satisfy creditors (but only partially satisfy since negotiations have produced settlements for less than owed) and reimburse Dauphin County.  That won’t pay all the bills, so a 40 year lease of parking garages, lots, and street spaces to a public-private partnership is expected to yield enough money to pay off parking debt, the rest of the incinerator debt, for the City itself, and for funds related to economic development, infrastructure development, and a trust fund for retiree health care obligations.


That last point is a good starting place to assess how the City and its employees are partnering up at this critical juncture.  As the February 2012 recovery plan pointed out, Harrisburg is similar to many municipal governments in that it is a very labor intensive undertaking and the lion’s share of costs are attributable to employee compensation.  Three bargaining units represent the majority of the workforce covering police, fire, and non-uniformed staff (461 employees total including non-represented staff) and all negotiated early-bird contract extensions that limited the City’s and the receiver’s ability to make changes.  Compared to other cities of the third class in Pennsylvania (Reading, York, Allentown, etc.) the plan found that Harrisburg public safety minimum salary ran about $10,000 higher. The recovery plan projected workforce costs to rise from $45 million to $52 million from 2012 through 2016. 


As described in the “Harrisburg Strong” plan, two of the three bargaining units (police and non-uniformed) have agreed to concessions during the lives of the existing contracts to move the City toward its goal of getting $4 to $4.8 million in savings.  There are tradeoffs for both the City and the bargaining units: for police, what were to be 3 percent annual wage increases through 2016 are now 0 rising to 1 percent in the final year.  Payments toward health care coverage for current employees will be made with variations based on the number of people covered on an employee’s plan with the percentage of income paid for insurance rising throughout the duration of the agreement.  Current employees who retire after the ratification of contract changes are treated the same as active employees and, as is almost always the case when it comes to legacy cost changes, new hires will not be eligible for post-retirement health care benefits. The police contract opens up the possibility that certain positions might be offered to civilian employees and that booking could be transferred to Dauphin County. Most of those same terms will apply to the adjustment for non-uniformed employees.  


So what sweeteners do the employees get in return for these concessions? For one thing they are asking for elimination of the residency requirement. This issue has been bandied about in Pittsburgh over the summer and will no doubt intensify closer to Election Day. In Harrisburg, the proposed amendments for both police and non-uniformed contracts contain language stating “…the residency requirement contained in prior collective bargaining agreements between the parties is eliminated, and employees, regardless of hiring date, shall not be required to establish or maintain a residence within the corporate limits of Harrisburg”.  Could that be a deal breaker for City officials who must pass some of the necessary ordinances to make “Harrisburg Strong”? 


Overall approval for the plan falls to the Commonwealth Court, which plans to review the proposal in mid-September. 

Should We Be Concerned About County Debt?

The County Controller released the 2012 Comprehensive Annual Financial Report last week and foremost among the Controller’s concerns is the debt, which, when examined by the "net bonded debt" marker was $825 million, up from $747 million in 2011. The County administration stated that 2012 was a bit of an outlier, "the result of the county squeezing two years’ worth of new loans into one". If that is the case, it is worth looking at data prior to then to see if there is a trend.

From 2003 to 2011, net bonded debt grew 14.7% (from $651 million to $747 million) while population fell 2.9% and, as a result, the per capita debt level increased nearly $100 from $517 to $611. Compared to the City of Pittsburgh’s per capita debt, the County is in great standing. The ratio of debt to assessed valuation has remained around 1% or fractions above 1% for most of those years and, if we treat things in terms of legal debt limit, the County was in 2011 and has been since 2003 using 80% or more of that limit. Debt service as a percentage of non-capital expenditures is a tad over 4% and has been about that percentage over the time frame.

The previous Controller in 2010 called for a long-term debt policy that would act as "…a strategic tool for determining affordability and setting priority for financing capital projects".

Pittsburgh Taxpayers’ Debt Load Getting Lighter

In 2011, the debt per capita in Pittsburgh was $1,901, based on the Census count of 306,000 and $581.8 million in general obligation debt of the City.  A decade earlier the average resident carried a much heavier debt load of $2,651.  Both the debt and the City’s population were higher in 2001 but debt has fallen faster than population in the intervening years resulting in the per capita debt drop. 



It is no small feat what the City has accomplished with regards to its debt.  Over that time frame it resisted issuing new obligations and set a target for bringing down the ratio of debt outlays to general spending (which has been running around 20 percent) over the coming decade.  When the Act 47 team examined debt service as a percentage of operating expense in 2009, Pittsburgh’s 21 percent was well above Newark (4.6%), Buffalo (7.6%), St. Louis (7.9%), and Cleveland (11%). The City wants to get the level down close to 12 percent.


Beyond the obligations of the City government, Pittsburgh taxpayers are liable for various other debts issued by related governments that perform functions such as owning sports stadiums, land, parking facilities, and schools.  City financial data shows that City taxpayers are responsible for all the debt or a portion of debt for some of the other borrowers. A look at the decade from 2001 to 2011 shows that some shares have increased, some debts have disappeared, and some have increased.









(Direct and Overlapping)


Obligation of City Taxpayers

$ Amount (millions)


(Direct and Overlapping)


Obligation of

City Taxpayers


$ Amount (millions)

Pittsburgh General Obligation



Pittsburgh General Obligation



Stadium Authority



Stadium Authority



Auditorium Authority



Auditorium Authority



Urban Redevelopment Authority



Urban Redevelopment Authority



Parking Authority



Parking Authority



Pittsburgh Schools



Pittsburgh Schools



Allegheny County



Allegheny County










While the City government’s debt was falling, so too was the debt of the authorities related to stadia and the URA.  The percentage of URA debt attributable to the City rose while the amount of URA debt fell. It is reasonable to assume the City has agreed to back more of that agency’s debt and, should it incur more obligations, the City would be on the hook for a larger share than in the past. By way of explanation, note that if the City were still responsible for only 29 percent of URA debt in 2011, the dollar amount of the obligation would have been $19 million rather than the actual $40 million it now actually has.


Going in the opposite direction by taking on more debt from 2001-2011 was the Parking Authority ($9.5 million), Allegheny County ($16.6 million), and perhaps most surprisingly, the Pittsburgh Public Schools ($52 million).  The School District has been losing enrollment and is currently being advised on what to do with twenty school buildings no longer in use. Some are in the process of being sold.  The District is expected to be “insolvent” by 2015 by some observers, so it’s puzzling as to why the debt was issued and why the District has not put itself on a self-imposed “debt diet”. 


In total, all the debt obligations City taxpayers are responsible for amounted to $4,926 per capita in 2001, falling by about 10 percent to $4,449 in 2011.  Note that much of the property tax in the City is paid by commercial and industrial properties, many of which are owned by non-residents who pay a large share of taxes collected in and by the City.


How does Pittsburgh compare to other cities?  As we noted in our recent Benchmark City report, the per capita debt in Pittsburgh was 64 percent higher than the Benchmark City just on general obligation debt, and that the gap between Pittsburgh and the Benchmark shrank since we did our first Benchmark report in 2004 (it was 233% higher then).  But how about Pittsburgh compared on the total direct and overlapping debt to another city that is very similar on population and square mileage?  The City is Stockton, located in the San Joaquin Valley of central California.


The City has a lot of debt applicable to it in varying shares: school district, community facilities, and its own general fund and pension obligations, and the total comes in at $1.065 billion, just about $300 million less than Pittsburgh’s direct and overlapping total, and with a population of 296,000, the typical Stockton resident’s share of the debt is about $850 less than Pittsburgh’s ($3,601 to $4,449).


It is worth noting that Stockton’s pensions are in better shape than Pittsburgh’s (88% funded combined for police, fire, and non-uniformed employees compared to 62% combined for Pittsburgh) and it has slightly less accumulated in unfunded liabilities for other post-employment benefits like life insurance and retiree health care ($416 million in Stockton vs. $488 million in Pittsburgh).  Despite all the foregoing, the City of Stockton has been walloped by the effects of the recession and the housing bubble and it was successful in its Chapter 9 bankruptcy filing with a favorable ruling from a Federal judge in March. 


But the Stockton case does point to the absolute necessity of restraining municipal spending and being very prudent in agreeing to overly generous compensation and pension packages.  A lesson that Pittsburgh must keep in mind as it works its way out of distressed status and seeks to have the state appointed financial oversight board removed. 


A True Debt Picture

Hidden debt, understated pension and health care liabilities, and debt accumulated for special purposes but never approved by voters is the subject of an op-ed and estimated to be $7.3 trillion. Special authorities, corporations, etc. serve as a vehicle to accomplish such tasks.

Does this happen locally? In plain view taxpayers and inquisitive folks can peruse financial statements to see the clear picture. Let’s start with the city of Pittsburgh: its 2010 CAFR features several tables on debt and debt service: its net general bonded debt that year totaled $629.7 million. On a per resident basis (using a population of 306k), the result is $2,058. Our newest Benchmark City report uses the 2011 CAFR and the per capita amount fell to $1,900. When the related tentacles of City government are examined, the debt level changes: the City is responsible for 63% of URA debt, or $48.4 million; 50% of Auditorium Authority debt, or $1.6 million; and 100% of Parking Authority debt, or $97.4 million. Overlapping debt that would affect a City of Pittsburgh resident would include 100% of School District debt (though Mt. Oliver Borough would account for a small share) or $487.4 million, and 25% of the County debt (the CAFR estimated by population share) or $163 million. Together the total rises to $1.4 billion, $4,500 per capita.

How about Allegheny County? It has direct debt of $771 million, or $630 per capita. The County’s CAFR attributes 100% of the Community College debt to the County, adding $46 million. If the debt of local governments within the County’s ‘orders (but not part of the County) are added in, that adds on $2.8 billion from public schools, $677 from cities (Pittsburgh, McKeesport, Clairton, and Duquesne), and $601 million from boroughs and townships. No authority debt is applicable to the County from the CAFR table, and someone living in Aspinwall would be liable for debt incurred by Pitcarin or Sewickley, but when the Controller’s office puts the whole tab together the total almost touches $5 billion, bringing per capita amounts to $4,000.

Benchmarking Pittsburgh

City of Pittsburgh, know thyself. So goes the Socratic admonition.  Here’s some information to help in the self-knowledge. 



In order to see how the City performs on various measures of local government functions; how much it spends, taxes, how many people it employs, its legacy costs, and its authorities and schools, the Allegheny Institute in 2004 created the concept of the Benchmark City. The Benchmark City allows for an approximation of national norms of city governing by taking four regional hub cities from across the U.S. (Salt Lake, Omaha, Columbus, and Charlotte) and amalgamating them together to form a construct with which to gauge Pittsburgh’s performance.  After undertaking the initial analysis in 2004, we have updated the data in three year intervals and just recently released our 2013 report.


What did the 2013 analysis find?  An in-depth analysis can be found in the report, but here is a summary: on a per capita basis Pittsburgh spends more overall, collects more taxes and more non-tax revenue, and spends more on police and fire than the Benchmark City.  On the key measure of general fund spending, the gap between Pittsburgh and the Benchmark City was 46 percent ($1,539 to $1,051). When staffing levels are examined (on a per 1000 person basis), Pittsburgh is higher on total employees, total police, and total fire.  It has higher per capita debt obligations, a lower pension funded ratio, and pays out more in workers’ compensation.  City authorities employ many more people and have much more assets. Meanwhile, school spending and school taxes per person are considerably higher.  Overall, 2013 comparative results were not all that different from those found in the three previous Benchmark City reports as they took snapshots of budget and audited data at specific periods of time.


It is fair to say that positive change has occurred since 2004 when we first created the Benchmark City comparing Pittsburgh with cities of similar population size. Remember, that the City had just entered Act 47 recovery status and an oversight board like the one in Philadelphia was being discussed.  Gone are the business privilege and mercantile taxes, the $10 occupational privilege tax, and in their place are the payroll preparation tax and a $52 local services tax.  Act 47 status could be revoked based on the recommendations made by the recovery team in November of last year. 


With nearly ten years of benchmarking data on hand it is also possible to look back at 2004 and compare the relative standing of Pittsburgh to the Benchmark City now to see where the gap on certain variables has improved, stayed the same, or gotten worse.  There is good news. Pittsburgh has significantly improved its standing relative to the Benchmark City on pensions and debt.  In 2004, the funded ratio of Pittsburgh’s pensions was 43 percent lower than the Benchmark City.  By 2013, the gap had shrunk to 13 percent. Obviously the 2010 revenue plan crafted locally in response to the mandate by the state under Act 44 had a major impact. In 2004 the funded ratio in Pittsburgh was 51 percent and the Benchmark City 89 percent.  As Pittsburgh’s ratio climbed to 62 percent, the Benchmark City ratio fell to 72 percent, thus the combination of Pittsburgh’s improvement and the Benchmark’s poorer showing worked to close the gap. 


Then too, per capita debt, which was 233 percent higher than the Benchmark nearly ten years ago now stands at 64 percent higher.  Pittsburgh’s per capita debt fell by more than $800 while the Benchmark City debt rose by over $300 per person. If there is a strict adherence to reaching the debt to spending goal laid out by City Council (12% of spending taken up by debt by 2020) then improvement will continue in the future. 


Total staffing and fire staffing (per 1000 people) have also seen movement in a positive direction. Per capita school spending and per capita school taxes (which are not under the control of City officials in Pittsburgh or any of the cities that comprise the Benchmark, but are critically important) are still higher in Pittsburgh as of 2013, but again the relative standing between Pittsburgh and the Benchmark shrank since 2004.


That being said, the City’s per capita spending still remains close to 50 percent higher than the Benchmark,  now as it was did in 2004 and the gap between it and the Benchmark City on taxes is likewise the same (62% higher in 2004, 57% higher in 2013).  There is no noticeable difference in the staffing levels or asset holdings of related authorities which, again, are not directly part of any city’s government but perform services critical to taxpayers and have directors exclusively or partially appointed by city officials.


Did anything get worse since 2004?  The student population to city population (students per 1000 people) was 29 percent lower in 2013 compared to 20 percent lower in 2004.  Police staffing was 13 percent higher in Pittsburgh in 2004 and is now 24 percent higher. 


In sum, we conclude the Pittsburgh has made progress, but there is still much more work to do.  Whether there is one oversight group or two going forward, they will have to continue pressing the City for more restraint and downsizing of government.

Turnpike Tolls Continue to Rise to Pay for Bond Debt


For the fifth consecutive year, the Turnpike Commission welcomed 2013 with an increase in tolls, ten percent for cash customers and two percent for electronic customers (E-Z Pass).  These toll increases are necessitated by the obligation of the Commission to pay $450 million annually to PennDOT as a result of Act 44 of 2007.  As we noted in a Policy Brief a year ago (Volume 12, Number 5) the Turnpike Commission’s strategy is to pledge toll revenues to cover the issuance of debt in order to satisfy the Act 44 obligation.  We warned that such a strategy is fraught with danger as the Commission is risking the Turnpike’s long-term fiscal health by continuing to take on larger and larger debt levels.


One very important consideration is whether or not the Commission can keep raising tolls every year without reaching a point at which revenues begin to decline. As mentioned above, tolls have increased every year beginning with the 2009 boost.  The last rate hike prior to 2009 occurred in 2004.  According to data in the Turnpike’s Comprehensive Annual Financial Report (CAFR) for fiscal 2012, overall traffic on the system, the Mainline and the smaller spurs such as the Mon-Fayette Expressway and Findlay Connector, has been flat for the last few years.  In 2008 overall traffic reached 189.5 million vehicles (all classes).  The following year, the first of the successive toll increases and the start of the recession, traffic decreased by just under two percent to 186.2 million before climbing back up to 189 million in 2011.  That number held in 2012. 


While traffic levels have been flat, the amount of gross fare revenue has been increasing due to the toll increases.  Gross fare revenue in 2007 was $617.6 million and $619 million in 2008.  For 2009 gross fare revenues increased to $638 million on the heels of a 25 percent increase in tolls despite the recession and decrease in overall traffic.  For fiscal 2012 gross fare revenues reached $797.8 million-an increase of 29 percent since 2007 thanks largely to the to the 56 percent rise in tolls since 2008.  


The rising tolls and subsequent increasing of revenues indicates that drivers using the Turnpike system are not very responsive (demand is inelastic) to the toll increases.  But how long will this last?  At what point do drivers become more responsive (demand becomes elastic) and decrease their usage of the system sufficiently to reduce toll revenue?  While the mainline Turnpike is still the best route for crossing the southern part of the state, traffic might be declining significantly on certain stretches of the road. Recently a newspaper story, using Turnpike data measuring traffic between interchanges, noted that commercial traffic between the Ohio state line and Westmoreland County’s Donegal exit has been declining since 2008.  On a sixteen mile stretch between New Stanton and Donegal, truck traffic declined fourteen percent from 2008 to 2011. 


Demand may be inelastic for longer runs but more elastic for shorter runs. A number of factors will contribute to the difference. Availability of a viable substitute route, extra travel time on the alternative compared to the Turnpike, and the dollar costs savings, if any, factoring fuel and driver expenses, etc. Some commercial drivers travelling relatively short distances apparently have made the calculation that there are other ways to transit those distances that lead to net savings for them.  As tolls rise further, it is likely that more will join them and some will seek alternatives for even longer stretches of Turnpike use.  Of course, this process will be limited by the additional congestion and slowing of traffic on the alternative routes.  Nonetheless, the decline in truck traffic over the shorter distances is a warning sign for the Turnpike as it plans to continuously raise tolls to pay for Act 44 debt issuance.


As mentioned above, the primary reason for the toll increases is to fund the Turnpike’s obligation to PennDOT under Act 44 which currently stands at $450M.  The Commission’s strategy to issue debt every year to make the annual outlay and then use revenue from toll increases to cover added debt service payments has worked so far, but it is not sustainable.


In 2007, the year Act 44 went into effect, the Commission had $1.7 billion in Mainline bonds outstanding issued against toll revenue. By fiscal 2012 that amount had quadrupled to $6.7 billion.  Keep in mind that the Commission also has bonds outstanding linked to their share of the Oil Franchise tax and the Motor License Registration fee (both for capital improvements on the Mon/Fayette Expressway and the Southern Beltway).  In all the total debt outstanding at the end of fiscal 2012 reached nearly $8 billion.  The debt issued to make the Act 44 payments are linked to the Mainline bonds, which are backed by toll revenues. 


Debt service payments from the Mainline debt nearly tripled from $111.5 million to $313.3 million from 2007 to 2012, an increase of $201.8 million.  Meanwhile, gross toll revenue during the period rose only $180.2 million.  Thus, the rise in gross revenue, despite four toll hikes through fiscal 2012, did not keep pace with the jump in Mainline debt service.  Looking at the change from fiscal 2011 to 2012, debt service climbed $44.7 million while toll revenue was up by only $33.9 million.  To its credit, the Turnpike has focused on reducing expenses in order to make up for the revenue shortfall. However, the bottom line is that revenues from toll hikes are not keeping up with the increases in the Mainline debt service-and this does not bode well for the future.  For instance, a major recession or extended period of economic weakness would likely lead to serious problems for the Turnpike’s finances.


This is a very slippery slope for the Turnpike Commission.  They need to keep raising tolls to keep up with the rising debt service payments resulting from the annual bond issue needed to satisfy their Act 44 requirements.  While a substantial negative impact on overall traffic has yet to occur as a result of the annual toll increases, traffic has been flat, and there are warning signs that higher tolls could have significant negative impacts on short haul local commercial traffic. 


At some point, and probably quite soon, the Legislature will have to amend the Act 44 provision requiring the Turnpike to pay PennDOT $450 million per year.   Extracting more and more money from Turnpike users to subsidize other road and bridge maintenance has a limit of usefulness. There is a level of tolls at which there will be a reduction in the Turnpike’s positive contribution to and support of the state’s economy.

Pig in Turnpike Poke?

The Turnpike Commission says it is planning to build a 12.5 mile extension of the Southern Expressway at a "projected" cost of $633 million. Projected being the operative word. The final actual cost could end up if unexpected contingencies arise during construction. Of course, if there were no prevailing wage requirements, the project could cost a lot less.

Here’s the rub. Funding sources have not been fully identified although borrowing is likely to be a major component. Amazingly, the Turnpike spokesperson says no toll revenue will be used to repay any borrowing. What then is the revenue source to repay loans? Is the Turnpike expecting it will not have to pay its debts? Is the Turnpike counting on state or Federal grants to cover its debt costs?

When a toll road is built, it is built on the assumption that tolls will cover most of the cost. If tolls are not projected to be adequate to cover the cost of construction and maintenance, then the Turnpike will have to shift revenue from other parts of the Turnpike system to cover the costs. An extension costing $633 million would have to generate about $25 to $30 million at a minimum to repay debt and operate and maintain the road. At a toll of $5 per vehicle, the road would have to carry 6 million vehicles per year or 16,400 per day. The existing Southern Expressway is carrying about 5,000 per day. Can we reasonably expect to triple that number any time soon on the extension? And if a big share of the extension traffic is movement within the extension boundaries congestion might not be reduced appreciably on the Parkway or I-79.

The Turnpike is heavily burdened by existing and future debt as it is forced by legislation to borrow $450 million per year to turn over to PennDOT. The result is escalating main line Turnpike fees. Of course, the state desperately needs the Turnpike revenue to fund maintenance and operations on state highways now and even with those funds does not have enough to cover needed bridge and highway repairs and upgrades. How would the state possibly be able to divert hundreds of millions to a new road?

As someone wisely observed when looking at situation like this, "something about this does not feel right." Let’s hope the Turnpike planners come with better answers to key questions.

Building the extension by the Turnpike is on its face a good idea but only if the road will pay for itself. The Turnpike is no position to acquire a lot of additional debt beyond what is currently mandated to do. On the other hand, the extension might be built by PennDOT but only after a full and plausible explanation of how benefits will exceed costs with benefits heavily dependent on new tax revenue to the state and local governments arising from net expansion of economic activity in the area attributable to the road.

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.

Light is Finally Dawning on Turnpike Debt Growth

govt state

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.

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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.