Tag Archives: Turnpike

Another Year, Another Hike in Turnpike Tolls

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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.

Turnpike Tolls Continue to Rise to Pay for Bond Debt

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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?

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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?

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"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.

Turnpike CEO: Changing His Attitude About Debt?

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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.

Turnpike Drowning in Debt?

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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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What is the Next Fix for PA’s Transportation Needs?

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"…tolling I-80 from border to border is a highly contentious issue and could face substantial difficulties in obtaining Federal approval"-

Allegheny Institute Policy Brief, August 28, 2007

As we pointed out for the better part of the last three years, the state’s plan to ask the Federal government to allow for tolls to be placed on Interstate 80 in order to generate revenues for the state’s roads, bridges, and public transit systems was going to be a long shot. At the time there were other states waiting for permission to levy tolls on previously un-tolled roads, but that was for upgrading and maintaining the roads themselves, not for other transportation needs. That goes without mentioning the negative economic impacts placing tolls on I-80 could have had in the northern corridor.

Near the close of 2007 we suggested that "a major overhaul of the [Act 44] or, better yet, a complete rescission seems to be the best option for Pennsylvania". Yet the state pressed on, ignoring a letter from the Federal Highway Administration (FHWA) in December of 2007 that the plan was not well thought out; the plan was rejected in September of 2008, yet the following May Turnpike officials still felt the application was "viable" and was hoping for a more favorable response from the Obama Administration. That hope was dashed by yesterday’s rejection.

So what follows this episode? The state House Transportation Chairman has said that Act 44 was "plan B" and now there is an indication a special session will be called by the Governor to address possible solutions. Shouldn’t that have been in the works in September of 2008? How did they not get the message?