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.

What Will Become of the Oversight Board?

Next year marks the end of the current life span of the Intergovernmental Cooperation Authority (ICA) for Cities of the Second Class, commonly known as the Oversight Board.  Created by Act 11 of 2004, which was signed into law on February 12 of that year, the statute’s language declares the Board “shall exist for a term of at least seven years”.  An act of the Legislature is required to extend the life of the Board beyond 2011.  

 

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