Highway to HellFixing Highway Finances in Pennsylvania

Miles Mutilator IngramTorrey Bloodthirsty Babson

Public Expenditure AnalysisMay 2007

Outline• Pennsylvania Highway Background

– Stakeholders– Background– Infrastructure State of Affairs– Financial State of Affairs

• PennDOT/Governor’s Proposal

• Pennsylvania Turnpike Commission’s “Modest Proposal”– Revenue Bond Program– Congestion Fees: Regional Mobility Funds– Tolling of I-80– Other Revenue Sources

• A Closer Look at Some Assumptions– Discounting– Traffic Diversion– Secondary Markets– Passage of Regional Mobility Fund

• Recommendations and Conclusion

Stakeholders• Pennsylvania Department of Transportation (PennDOT)

• Pennsylvania Turnpike Commission (PTC)

• Commonwealth of Pennsylvania

• Citizens of Pennsylvania

BackgroundPennDOT and PTC are separate, independent agencies, both reporting

to and receiving funds from the Secretary of Transportation.

Pennsylvania Department of Transportation• Has jurisdiction over all PA roads other than the turnpike and its spurs

• Is responsible for 40,500 miles of state roads and highways & about 25,000 bridges

• Created from the former Department of Highways by the legislature on May 6, 1970

• Employs 11,000 people

Background

• The PTC was created in 1937, and has jurisdiction over I-76 and its various tolled spurs. It officially entered service on October 1, 1940

• The turnpike was financed by a loan from the New Deal's Reconstruction Finance Corporation for almost $41 million at 3.75 percent. The New Deal’s Works Progress Administration also provided another $29 million in grants

• PTC employs around 2,250 people, or 4 people for every mile of road it oversees, including 480 managers

Pennsylvania Turnpike Commission

• Pennsylvania’s “highway and bridge systems are in crisis…”

• “Pennsylvania has more than twice the percentage of structurallydeficient bridges than the national average, and more than a third of the 21,000 miles of state-owned secondary roads are rated “poor.” Pennsylvania’s state owned bridges are on average 50 years old.”

Infrastructure State of Affairs

Their November, 2006 report found:

In February 28, 2005, Governor Rendell convened the nine-member Transportation Funding Reform Commission to study and make recommendations concerning the financing and operations of transportation systems in Pennsylvania.

Infrastructure State of Affairs

WORST ROADS1. Louisiana

2. Pennsylvania3. California

4. Illinois5. Michigan

WORST ROAD1. I-10 Louisiana

2. I-80 Pennsylvania3. I-40 Arkansas4. I-5 California

5. I-40 Oklahoma

• PA is “the state most frequently at the head of the Worst Roads list in its 16-year history” Overdrive, December 2006

• Overdrive, an online trucking magazine, issued its rankings for our country’s “Worst Roads” in December 2006:

• The American Society of Civil Engineers gives Pennsylvania Roads a grade of “D” in it’s Infrastructure Report Card for the state, entitled “The Keystone is Crumbling”

“the Commission believes an annual increased investment of $1.013 billion is needed with a heavy focus on system preservation and targeted capital investments.”

“Since the last increase in highway and bridge funding in 1997, PennDOT has lost approximately $350 million of its purchasing power due to inflation.”

Financial State of Affairs“The key to a successful infrastructure program is to have funds to support roadway construction, rehabilitation and

emergency situations” ASCE Infrastructure Report Card for Pennsylvania

The Governor’s Transportation Funding Reform Commission report also found:

PennDOT Current Finances

Motor License Fund

Other,

PA General Fund,Federal Funds,

PennDOT 2006 Annual Report

Motor License Fund Revenues

PTC Current Finances

Direct Transport Supply

Direct Transport Demand

Indirect Microeconomic

Indirect Macroeconomic

• Income from transport operations (fares and wages)

• Access to wider distribution markets and niches

• Improved accessibility

• Time and cost savings

• Productivity gains

• Division of labor • Access to a

wider range of suppliers and consumers

• Economies of scale

• Rent income • Lower price of

commodities • Higher supply

of commodities

• Formation of distribution networks

• Attraction and accumulation of economic activities

• Increased competitiveness

• Growth of consumption

• Fulfilling mobility needs

Benefits of Transportation

Source: European Conference of Ministers of Transport

Competing Propositions

Governor’s Plan• Lease or concession of Pennsylvania Turnpike system - $965 million/yr for

road and bridge repair• Excise tax on oil company gross profits - $760 million/yr for transit projects• Total is greater than $1.7 billion

Other Revenue Source Possibilities• New revenue by creating a $1 “congestion fee” in certain urban areas as a

way to raise the necessary funds for infrastructure repair• A highly leveraged debt recapitalization of the Turnpike by the Pennsylvania

Turnpike Commission or another public entity owned by the commonwealth

• Part A: Revenue Bonds

• Part B: “Regional Mobility Fund” Congestion Fee

• Part C: Tolling of I-80

• Part D: Other Revenue Sources

PTC’s “Modest Proposal”

Part A: Special Revenue Bonds• $4 billion bond issuance over 10 yrs• 25 yr Maturity• 5.5% interest rate

Part B: Congestion Fees

Metropolitan AreaNumber of Taxed

ExitsProjected Annual

Revenue

Pittsburgh 8 $50,000,000

Philadelphia 14 $83,500,000

Harrisburg 5 $13,000,000

Scranton/Wilkes-Barre 6 $12,000,000

  

Total   $158,500,000

$1 increase on turnpike exits around Pennsylvania’s major metropolitan areas

Part C: I-80 Tolling Financial Projections

• Initial toll of 8 cents per mile on passenger vehicles and 30 cents for commercial vehicles

• 3% annual increase in tolls

Road Tolling: Fixing Market Failure

Time and Money Costs

Road Trips

Excess Burden

Pcurrent

(includes personaltravel costs of

time and money)

Qcurrent

DMarginal Social Costs

Average Private Costs

Time and MoneyCosts

Road Trips

Ptoll

Qtoll

DMarginal Social Costs

Average Private Costs

Road Tolling: Fixing Market Failure

Toll Toll Revenue

Social Equilibrium

Part D: Other Revenue Sources• PTC projects revenue of over $12.5 billion between 2008 – 2038 from increase in tolls on I-76

• PTC assumes 25% turnpike toll increase 2010, and 3% annual increases thereafter

Project Increases in Turnpike Fees/mile

1.0 2.0 2.2 3.1 4.15.9 7.4 8.5 9.9 11.5

13.315.4

17.920.8

0.0

5.0

10.0

15.0

20.0

25.0

Year

Cen

ts/m

ile

Part D: Increases in Projected Turnpike Fees and I-80 Toll Fees

Turnpike vs. I-80: Fees/mile

0

10

20

30

40

50

60

70

80

2010

2015

2020

2025

2030

2035

2040

Year

Cen

ts/m

ile

I-80 Cost/mile (car)

Turnpike Cost/mile(car)

I-80Cost/mile(commercial)

Turnpike Cost/mile(commercial)

2008 $650.00 ($48.46) $158.00 $205.46 $9652009 $700.00 ($100.64) $161.16 $204.48 $9652010 $636.00 ($148.06) $164.38 $312.67 $9652011 $400.00 ($177.87) $167.67 $100.00 $269.02 ($29.59) $235.78 $9652012 $400.00 ($207.69) $171.02 $100.00 $283.87 ($29.59) $247.39 $9652013 $415.00 ($238.63) $174.44 $100.00 $299.52 ($29.59) $244.26 $9652014 $250.00 ($257.27) $177.93 $100.00 $316.02 ($29.59) $407.91 $9652015 $225.00 ($274.04) $181.49 $100.00 $333.41 ($29.59) $428.74 $9652016 $215.00 ($290.07) $185.12 $100.00 $351.73 ($57.19) $460.41 $9652017 $109.00 ($298.20) $188.82 $100.00 $371.03 ($58.79) $553.13 $9652018 ($298.20) $192.60 $100.00 $391.38 ($60.49) $593.71 $46.00 $9652019 ($298.20) $194.53 $100.00 $407.20 ($61.81) $623.28 $9652020 ($298.20) $196.47 $100.00 $423.65 ($63.18) $606.25 $9652021 ($298.20) $198.44 $100.00 $390.78 ($60.43) $634.42 $9652022 ($298.20) $200.42 $100.00 $406.59 ($61.76) $617.94 $9652023 ($298.20) $202.43 $100.00 $423.05 ($63.13) $600.86 $9652024 ($298.20) $204.45 $100.00 $440.17 ($64.56) $583.14 $9652025 ($298.20) $206.49 $100.00 $457.98 ($66.05) $564.77 $9652026 ($298.20) $208.56 $100.00 $476.52 ($67.60) $545.72 $9652027 ($298.20) $210.65 $100.00 $495.80 ($69.21) $525.96 $9652028 ($298.20) $212.75 $100.00 $515.87 ($70.89) $505.46 $9652029 ($298.20) $214.88 $100.00 $536.75 ($72.63) $484.20 $9652030 ($298.20) $217.03 $100.00 $558.47 ($79.17) $466.87 $9652031 ($298.20) $219.20 $100.00 $581.07 ($76.15) $439.08 $9652032 ($298.20) $221.39 $100.00 $604.59 ($78.12) $415.34 $9652033 ($249.74) $223.60 $100.00 $629.05 ($80.16) $342.24 $9652034 ($197.56) $225.84 $100.00 $654.51 ($82.28) $264.49 $9652035 ($150.14) $228.10 $100.00 $681.00 ($84.50) $190.54 $9652036 ($120.32) $230.38 $100.00 $708.56 ($86.80) $133.18 $9652037 ($90.50) $232.68 $100.00 $737.24 ($89.20) $74.78 $9652038 ($59.56) $235.01 $100.00 $767.07 ($91.69) $14.17 $9652039 ($40.93) $237.36 $100.00 $798.12 ($94.29) $1,0002040 ($24.15) $239.73 $100.00 $830.42 ($97.18) $1,0492041 ($8.13) $242.13 $100.00 $864.02 ($101.11) $1,0972042 $244.55 $100.00 $898.99 ($105.20) $1,1382043 $247.00 $100.00 $935.37 ($109.46) $1,1732044 $249.47 $100.00 $973.23 ($113.89) $1,2092045 $251.96 $100.00 $1,012.61 ($118.50) $1,246

PTC Bond Proceeds

Total Pennsylvania Transportation RevenuesYear

PTC and Other Revenue Sources Contributions

MLF Bond Proceeds

MLF Debt Service

Regional Mobility Funds

I-80 Cost Savings

I-80 Excess Revenues

I-80 Debt Service

PTC’s Projected Cashflows

• Cash flows are NOT discounted

• Traffic diversion due to tolls assumed at 20% for cars and 1% for trucks

• Secondary markets are not considered

• Will the Regional Mobility Fund pass the legislature?

A Closer Look at Some Assumptions

• Currently, future cash flows are not discounted! The sum of non-discounted cash flows to the PTC is $37.8 billion.

• The PTC report assumes an annual interest rate of 5.5% on issued bonds, and an annual inflation rate on costs of capital of 4%

• The following table shows the sum of cash flows at various discount rates:

Discount Rates

Rate PV of Cash Flows

Undiscounted $37,791.86

3.0% $22,105.21

3.5% $20,447.83

4.0% $18,972.80 4.5% $17,656.37

5.0% $16,478.20

5.5% $15,420.85

6.0% $14,469.32

Traffic Diversion RatesPassenger Vehicles:

• Passenger vehicles currently make up 87% of I-80 traffic. The average length of an I-80 trip is about 30 miles, therefore diversion to secondary roadways will be possible for most trips

• Passenger vehicle diversion (20%) will therefore have a significant effect on secondary roadways.

Commercial Trucks:

• I-80 is the one of the primary highways used for commercial trucks traveling west from New York and New Jersey ports, and is currently the only major east-west highway in the region that is not tolled

• Commercial truck diversion (1%) will therefore be significantly lower than passenger vehicle diversion

Diversion Rate Impact on Toll Revenues

Diversion Rate Impact on NPV

$0

$5

$10

$15

$20

$25

$30

$35

20% 25% 30% 35%

Passenger Diversion Rate

Cos

t (bi

llion

)

PTC Undiscounted Sum

PTC Discounted NPV

CBA StudyUndiscounted SumCBA Study DiscountedNPV

Social Costs in Excess of Private Costs – Dollars/Vehicle Mile

• Diversion = 20% car, 1% truck

• I-80 = 9,315,549 vehicle miles/day, 87% is passenger and 13% commercial • 2.36 billion passenger miles and 437 million commercial miles in year 1

Source: Transportation CBA – Roadway Costs, Victoria Transportation Policy Institute

Secondary Markets: Secondary Roadway Costs

Secondary Markets: Secondary Roadway Costs

• Traffic diversion to secondary roadways will result in increased maintenance and construction costs on these roadways

• At a discount rate of 4%, the present value of these costs will be $185 million

• This money represents a transfer of costs from PTC (I-80) to PennDOT (secondary roads), but not an overall increase in spending on road maintenance, therefore there are no price effects.

Secondary Markets: Secondary Roadway Costs

Secondary Markets: Gasoline Prices

The Mackinac Center for Public Policy (Michigan-based public policy research institute) found the long-run price elasticity of demand for gasoline to be .7

A meta-analysis of many studies in the Energy Journal found the elasticity to be .58

Regional Mobility Fund Passage

Present value of cash flows to the PTC with the Regional Mobility Fund:

$18,972 million at 4%

Present value of cash flows to the PTC without the Regional Mobility Fund:

$12,696 million at 4%

A difference of $6.3 billion!!!

What is the PTC analysis MOST SENSITIVE to??

• Discount Rate (very sensitive)

• Passage of the Regional Mobility Fund (very sensitive)

• Gas Prices (toll revenues are very sensitive, overall financing is less sensitive, and effects are hard to project)

• Traffic Diversion (not so sensitive for cars, more so for trucks)

Sensitivity Analysis Conclusions

Recommendations•NPV should be included in all PTC financial projection!!!

•Research the political feasibility of the Regional Mobility Fund, exploring options for incremental phase-in of fees.

•Research I-80 traffic flows:

Where are commercial vehicles coming from? Where are they going?

How much is in-state and out-of-state traffic? Who is using the road and who is paying for the road?

•Research the effects of gas prices on long-term financial outlook.

•Leasing of the Turnpike should be considered, but only with strict road maintenance stipulations.

Conclusions• At this time, PA has neither the money nor

the political will to fix its roads and bridges

• PTC’s report is seriously flawed

• For now, we’re on a Highway to Hell