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.