port authority audit part 1

v!PORrAUTlIORRY OF NY& NJ

January 31,2012

The Honorable Chris Christie The Honorable Andrew M. Cuomo Governor Governor State of New Jersey State of New York State House State Capitol Trenton, NJ 08625 Albany, NY 12224

Dear Governors:

In response to last year' s toll and fare increase, on August 18, 2011, you charged the Board of Commissioners of the Port Authority of New York and New Jersey to undertake a comprehensive review and audit of the entire agency, covering its finances, operations, and ten-year Capital Plan. On September 19, 2011, a Special Committee of the Board was organized to oversee that directive, and thereafter it retained the international firms of Navigant Consulting, Inc. and Rothschild Inc. to assist in this effort.

We present herewith the Phase I Interim Report. It is the Special Committee's intent that this Report together with our subsequent final report will present a thorough assessment of the Port Authority's current business model, finances, and operations, as well as provide corrective recommendations and measures. The findings and recommendations of the Report will be presented to the Port Authority's Board for consideration and appropriate action .

We note that the Report finds an "organization at a crossroads" and indicates that the Port Authority needs a top-to-bottom overhaul of its management structure. Navigant's preliminary review revealed, in their assessment, "a challenged and dysfunctional organization suffering from a lack of consistent leadership, a siloed underlying bureaucracy, poorly coordinated capital planning processes, insufficient cost controls, and a lack of transparent and effective oversight of the World Trade Center program that has obscured full awareness of billions of dollars in exposure to the Port Authority."

As can be seen in the Report, the World Trade Center redevelopment costs grew from an estimate of approximately $11 billion in 2008 to a current estimate of approximately $14.8 billion, with the estimated net cost to the Port Authority after third-party reimbursements growing from approximately $6 billion to approximately $7.7 billion.

Given that enormous burden, we are committed to taking the steps necessary to mitigate the Port Authority' s exposure at the World Trade Center site by:

• Establishing new financial and management controls, and value engineering all possible aspects of the World Trade Center project. This crucial step should help

225 Park Avenue South New York NY 70003 T: 272 435 7000

THE PORTAUlHORnY OF NY &NJ Hon. Chris Christie Hon. Andrew M. Cuomo - 2 - January 31, 2012

limit or mitigate the approximately $1 billion of potential incremental cost exposure identified in the Report;

• Maximizing the recovery of costs spent on behalf of third-party stakeholders and strictly limiting any new financial commitments related to increased scope and third-party work. As noted in the Report, the Port Authority already needs to recover approximately $1.6 billion from public agencies and private entities, such as the National September 11 Memorial & Museum;

• Leveraging private sector expertise. The Port Authority has made advances in this direction by forming a joint venture with the Durst Organization on Tower 1 and actively negotiating a joint venture with Westfield on the retail components of the World Trade Center site. As suggested by the Report, the Port Authority underestimated approximately $1 billion of costs that were subsequently identified by the involvement of experienced, private partners. There may have been an opportunity to mitigate some of these costs had they been identified earlier; and

• Pursuing the feasibility of third-party capital sources to fund the commercial aspects of the site. Alternative methods of funding the infrastructure needs of the Port Authority may come from monetizing certain assets at the World Trade Center site.

The amount of debt at the end of 2001 ($9.1 billion) grew to $19.5 billion at year-end 2011, and is expected to increase further to approximately $20.8 billion by the end of 2012. This significant increase in the agency's debt load will remain a burden for years to come.

Gross compensation at the Port Authority has grown in the last five years by approximately 19%, from $629 million to $749 million, primarily as the result of "add-on" compensation such as overtime, unused vacation exchange and "longevity" programs. During this same timeframe, the cost of benefits for employees increased by approximately 35%, from $341 million to more than $458 million.

These findings underscore the Special Committee's objective of finding ways of lowering operating costs and increasing operational efficiencies across the agency. The Special Committee is strongly committed to bringing employee compensation and benefits in line with appropriate public employee benchmarks and has already asked our executive management team to examine the following measures:

• Requiring contributions to healthcare. If implemented for all employees, these contributions would result in expected savings of approximately $103.8 million over the course of the next four years;

THE PORTAUTHORITY OF NY &NJ Hon. Chris Christie Hon. Andrew M. Cuomo - 3 - January 31, 2012

• Eliminating "add-on" compensation programs, such as unused vacation exchange and "longevity." The estimated annual savings for eliminating these programs for non-represented employees is approximately $9.1 million;

• Implementing a merit driven compensation program; • Imposing sh·onger controls on overtime; and • Revising vacation and other compensated time policies.

Aside from these findings and recommendations, the Report includes preliminary observations on the Port Authority's current $25.1 billion Capital Plan and underlying capital planning process. The majority of that capital, more than $18 billion, is planned for assets excluding the World Trade Center site, reflecting significant state-of-good-repair and other needs of our core transportation assets. Yet the Report observes that the capital planning process does not necessarily align with the agency's overall priorities . Line functions promote projects to maintain their own asset base, while management roles and responsibility for oversight of the planning and project execution process are not clearly defined. Furthermore, senior management lacks key performance metrics to drive accountability for the execution of the Capital Plan.

The next phase of the Special Committee's work will further the detailed review of the hundreds of projects in the Capital Plan. However, it is clear that the Port Authority must refocus its organization and processes to increase the speed of project delivery and reduce project costs. Already, our executive management team is focusing on various steps to achieve these goals, including:

• Streamlining pre-construction approval processes; • Reducing "soft costs" associated with project development; • Requiring financial department review of all transactions before they are brought

to the Board; and . • Improving communications internally to foster better collaboration and decision-

making for critical projects.

These important steps, together with other improvements such as greater use of electronic systems to improve management of our real estate and leaSing contracts, and improving the timely collection of revenues owed to us, will improve the value to the agency, and to the public, of the capital dollars we spend.

The above findings, along with the others in the Report, make abundantly clear something that we already knew: we must now move to a new era for the Port Authority. In 2011, the Board had already begun this process by implementing significant changes to

THE PORTAUTHORITY OF NY & NJ Hon. Chris Christie Hon. Andrew M. Cuomo - 4 - January 31,2012

reinvigorate the agency. For example, in the past months it has moved forward in a proactive way with positive changes in governance and transparency by:

• Posting online the compensation of all employees of the Port Authority and committing the agency to quarterly updates;

• Implementing the elimination of the non-revenue component of the Port Authority's E-ZPass program for certain employees and retirees;

• Hiring the first new independent auditor for the agency in 31 years; • Strengthening the Port Authority's internal Enterprise Risk Management System

to allow the Board to better anticipate and mitigate potential problems; • Establishing an Insurance Working Group to examine the Port Authority's

insurance practices and costs; and • Approving Preliminary Operating and Capital Budgets for 2012 expressly subject

to any measures adopted by the Board as a result of the Special Committee's reVIew.

Beyond these recent steps and the aforementioned commitments, much more needs to be done. The Special Committee's continued review will serve as the vehicle for this change, and as we move into Phase II with the guidance of Navigant and Rothschild, the principal objectives will remain the same: to reduce costs, improve efficiencies, and fulfill the Port Authority's mission as the engine for economic growth and job creation in the New York/New Jersey region . We look forward to your continued support.

Respectfully,

THE SPECIAL COMMITTEE OF THE BOARD OF COMMISSIONERS OF THE PORT AUTHORITY OF NEW YORK AND NEW JERSEY

David Samson Scott Rechler Chairman Vice-Chairman

William "Pat" Schuber Jeffrey Lynford Commissioner Commissioner

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PhaseȱIȱInterimȱReportȱȱ

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Presentedȱto:ȱ

TheȱSpecialȱCommitteeȱofȱtheȱBoardȱofȱCommissionersȱofȱȱ

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Januaryȱ31,ȱ2012ȱȱȱȱȱȱȱ

Presentedȱby:ȱȱ

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PhaseȱIȱInterimȱReportȱtoȱtheȱSpecialȱCommitteeȱofȱtheȱPortȱAuthorityȱofȱNewȱYorkȱandȱNewȱJersey�ȱ

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TableȱofȱContentsȱI.� EXECUTIVEȱSUMMARYȱ..............................................................................................ȱ5�

PRELIMINARYȱORGANIZATIONALȱDESIGNȱ&ȱOPERATIONALȱASSESSMENTȱ..................................................ȱ5�INITIALȱCOSTȱREVIEWȱOFȱWTCȱPROGRAMȱ....................................................................................................ȱ6�PRELIMINARYȱCAPITALȱPLANNINGȱASSESSMENTȱ.........................................................................................ȱ7�

II.� NATUREȱOFȱENGAGEMENTȱ&ȱSCOPEȱ..................................................................ȱ7�III.� GENERALȱAPPROACHȱ................................................................................................ȱ9�

COMPENSATIONȱ&ȱBENEFITSȱREVIEWȱ............................................................................................................ȱ9�INITIALȱCOSTȱREVIEWȱOFȱTHEȱWTCȱPROGRAMȱ............................................................................................ȱ9�PRELIMINARYȱCAPITALȱPLANNINGȱASSESSMENTȱ.........................................................................................ȱ9�

IV.� BACKGROUND..............................................................................................................ȱ9�V.� PORTȱAUTHORITYȱOVERVIEWȱ.............................................................................ȱ11�

Observationsȱ&ȱFindingsȱ.......................................................................................................................ȱ13�PreliminaryȱRecommendationsȱ&ȱNextȱStepsȱ.......................................................................................ȱ15�

VI.� PRELIMINARYȱGENERALȱORGANIZATIONALȱOBSERVATIONSȱ.............ȱ15�VII.� PRELIMINARYȱCOMPENSATIONȱANDȱBENEFITSȱASSESSMENTȱ.............ȱ18�

SCOPEȱ............................................................................................................................................................ȱ18�METHODOLOGYȱ............................................................................................................................................ȱ18�PRELIMINARYȱGENERALȱOBSERVATIONSȱ.....................................................................................................ȱ18�EMPLOYEEȱHEADCOUNTȱ..............................................................................................................................ȱ20�


COMPENSATIONȱ............................................................................................................................................ȱ22�Observationsȱ&ȱFindingsȱ.......................................................................................................................ȱ23�PreliminaryȱRecommendationsȱ&ȱNextȱStepsȱ.......................................................................................ȱ28�

BENEFITSȱ.......................................................................................................................................................ȱ29�Observationsȱ&ȱFindingsȱ.......................................................................................................................ȱ30�PreliminaryȱRecommendationsȱ&ȱNextȱStepsȱ.......................................................................................ȱ34�

REPRESENTEDȱEMPLOYEESȱCONTRACTȱCONSIDERATIONS..........................................................................ȱ35�Observationsȱ&ȱFindingsȱ.......................................................................................................................ȱ35�PreliminaryȱRecommendationsȱ&ȱNextȱStepsȱ.......................................................................................ȱ36�

VIII.� INITIALȱCOSTȱREVIEWȱOFȱWTCȱPROGRAMȱ.....................................................ȱ36�BACKGROUNDȱ...............................................................................................................................................ȱ36�SCOPEȱ&ȱMETHODOLOGYȱ.............................................................................................................................ȱ37�


IX.� PRELIMINARYȱCAPITALȱPLANNINGȱASSESSMENT......................................ȱ44�BACKGROUNDȱ...............................................................................................................................................ȱ44�SCOPEȱ&ȱMETHODOLOGYȱ.............................................................................................................................ȱ44�


X.� OVERVIEWȱOFȱPHASEȱIIȱ..........................................................................................ȱ46�PHASEȱIIȱ–ȱORIGINALȱMANDATEȱ.................................................................................................................ȱ46�



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PHASEȱIIȱ–ȱADDITIONALȱRECOMMENDATIONSȱ............................................................................................ȱ46�

XI.� APPENDIXȱ–ȱAȱ..............................................................................................................ȱ48�XII.� APPENDIXȱȬȱBȱ...............................................................................................................ȱ50�XIII.� APPENDIXȱ–ȱCȱ..............................................................................................................ȱ51�

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Tablesȱ

Tableȱ1ȱ–ȱPortȱAuthorityȱCoreȱFunctionsȱ...............................................................................................................ȱ12�

Tableȱ2ȱȬȱCumulativeȱNetȱIncomeȱbyȱLineȱDepartmentȱ(Inceptionȱ–ȱ2010)ȱ......................................................ȱ13�

Tableȱ3ȱ–ȱSummaryȱFinancialȱTrendsȱbyȱYearȱ(2001ȱ–ȱ2011)ȱ...............................................................................ȱ14�

Tableȱ4ȱ–ȱExecutiveȱDirectorȱTenureȱ......................................................................................................................ȱ16�

Tableȱ5ȱ–ȱ“Actual”ȱvs.ȱ“Authorized”ȱStaffingȱTrendsȱ(2006ȱȬȱYTDȱNovȱ2011)ȱ.................................................ȱ21�

Tableȱ6ȱ–ȱTotalȱCompensationȱTrendȱ(2006ȱ–ȱ2010)ȱ..............................................................................................ȱ22�

Tableȱ7ȱ–ȱTotalȱCompensationȱ&ȱBenefitsȱTrendȱperȱActiveȱEmployeeȱ(2006ȱ–ȱ2010)ȱ.....................................ȱ23�

Tableȱ8ȱȬȱPortȱAuthorityȱBenchmarkingȱAmongȱPeers,ȱAviationȱ......................................................................ȱ25�

Tableȱ9ȱȬȱPortȱAuthorityȱBenchmarkingȱAmongȱPeers,ȱTB&Tȱ...........................................................................ȱ25�

Tableȱ10ȱȬȱPortȱAuthorityȱBenchmarkingȱAmongȱPeers,ȱPortȱCommerceȱ........................................................ȱ26�

Tableȱ11ȱȬȱPortȱAuthorityȱBenchmarkingȱAmongȱPeers,ȱPATHȱ.........................................................................ȱ26�

Tableȱ12ȱ–ȱ“AddȬon”ȱCompensationȱforȱNonȬRepresentedȱ&ȱRepresentedȱEmployeesȱ(2010)ȱ.....................ȱ27�

Tableȱ13ȱ–ȱExistingȱ“AddȬon”ȱCompensationȱProgramsȱforȱNonȬRepresentedȱEmployeesȱ..........................ȱ27�

Tableȱ14ȱ–ȱTrendsȱinȱEmployeeȱBenefitȱExpensesȱ(2006ȱ–ȱ2010)ȱ.........................................................................ȱ29�

Tableȱ15ȱȬȱBreakoutȱofȱHealthȱBenefitȱExpensesȱbyȱEmployeeȱTypeȱ(2010)......................................................ȱ30�

Tableȱ16ȱ–ȱPortȱAuthorityȱHealthȱBenefitȱContributionȱvs.ȱStatesȱofȱNYȱandȱNJȱ.............................................ȱ31�

Tableȱ17ȱȬȱExpectedȱSavingsȱfromȱHealthȱCareȱInitiativesȱ..................................................................................ȱ31�

Tableȱ18ȱȬȱPaidȱTimeȱOffȱandȱCashȬOutȱPoliciesȱofȱPortȱAuthorityȱvs.ȱStatesȱofȱNYȱ&ȱNJȱ.............................ȱ33�

Tableȱ19ȱȬȱTopȱ10ȱOvertimeȱRecipients,ȱPublicȱSafetyȱ(2010)ȱ..............................................................................ȱ36�

Tableȱ20ȱȬȱPublicȱSafetyȱOvertimeȱ(2006ȱ–ȱYTDȱNovȱ2011)ȱ.................................................................................ȱ36�

Tableȱ21ȱ–ȱPeriodicȱWTCȱEACȱComparisonȱ(Decȱ2006ȱ–ȱCurrentȱEstimate)ȱ....................................................ȱ37�

Tableȱ22ȱȬȱPeriodicȱWTCȱEACȱComparisonȱ(Decȱ2006ȱ–ȱNovȱ2008)ȱ..................................................................ȱ39�

Tableȱ23ȱȬȱPeriodicȱWTCȱEACȱComparisonȱ(Novȱ2008ȱ–ȱCurrentȱEstimate)ȱ....................................................ȱ40�

Tableȱ24ȱ–ȱWTCȱCurrentȱEstimateȱandȱPotentialȱExposureȱ................................................................................ȱ42�

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Figuresȱ

Figureȱ1ȱ–ȱPortȱAuthorityȱKeyȱHistoricalȱMilestones...........................................................................................ȱ13�

Figureȱ2ȱ–ȱOperatingȱCashȱFlowȱAvailableȱforȱInvestmentȱinȱFacilitiesȱ(2001ȱ–ȱ2010)ȱ....................................ȱ14�

Figureȱ3ȱ–ȱStaffingȱAllocationȱTrendȱ(2001ȱ–ȱYTDȱNovȱ2011)ȱ.............................................................................ȱ21�

Figureȱ4ȱȬȱAverageȱEmployeeȱBaseȱSalaryȱbyȱPublicȱAgencyȱ&ȱAuthorityȱ(2010)ȱ...........................................ȱ24�

Figureȱ5ȱȬȱTopȱ25ȱEmployeesȱAverageȱBaseȱSalaryȱbyȱPublicȱAuthorityȱ(2010)ȱ...............................................ȱ24�

Figureȱ6ȱ–ȱNumberȱofȱNonȬRepresentedȱEmployeesȱbyȱEmployeeȱGroupȱ......................................................ȱ28�

Figureȱ7ȱ–ȱAverageȱCostȱofȱVacationȱDayȱExchangeȱ&ȱBankingȱofȱDays,ȱperȱEmployeeȱ(2006ȱ–ȱ2010)ȱ........ȱ32�

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I. EXECUTIVEȱSUMMARYȱ

Theȱ Portȱ Authorityȱ ofȱ Newȱ Yorkȱ andȱ Newȱ Jerseyȱ (theȱ “Portȱ Authority”)ȱ isȱ aȱ complexȱorganization,ȱ comprisedȱ ofȱ billionsȱ ofȱ dollarsȱ ofȱ vitalȱ infrastructureȱ andȱ transportationȱoperationsȱasȱwellȱasȱsignificantȱrealȱestateȱholdings.ȱȱNavigantȱConsulting,ȱInc.’sȱ(“Navigant”)ȱpreliminaryȱreviewȱrevealedȱaȱchallengedȱandȱdysfunctionalȱorganizationȱsufferingȱfromȱaȱlackȱofȱconsistentȱleadership,ȱaȱsiloedȱunderlyingȱbureaucracy,ȱpoorlyȱcoordinatedȱcapitalȱplanningȱprocesses,ȱ insufficientȱ costȱ controls,ȱ andȱ aȱ lackȱ ofȱ transparentȱ andȱ effectiveȱ oversightȱ ofȱ theȱWorldȱ Tradeȱ Centerȱ (theȱ “WTC”)ȱ programȱ thatȱ hasȱ obscuredȱ fullȱ awarenessȱ ofȱ billionsȱ ofȱdollarsȱinȱexposureȱtoȱtheȱPortȱAuthority.ȱ

Theȱorganizationȱisȱatȱaȱcrucialȱcrossroads.ȱȱTheȱPortȱAuthorityȱmustȱreȬaffirmȱitsȱcoreȱmission,ȱandȱ supportȱ itȱwithȱ aȱ viableȱ longȱ rangeȱ strategicȱ andȱ capitalȱplanȱ andȱ anȱ organizationȱwithȱrenewedȱ focusȱonȱoperatingȱefficiencyȱandȱeffectiveness,ȱ inȱorderȱ toȱsustainȱ itsȱrelevanceȱasȱaȱprimaryȱ contributorȱ toȱ theȱeconomicȱgrowthȱofȱ theȱ regionȱ inȱ theȱ21stȱCentury.ȱ ȱAȱ significantȱundertakingȱ willȱ beȱ requiredȱ includingȱ bothȱ organizationalȱ andȱ financialȱ realignmentsȱ toȱproperlyȱ positionȱ theȱ agencyȱ toȱ addressȱ theȱ challengesȱ inheritedȱ byȱ theȱ recentlyȱ appointedȱleadership.ȱ ȱTheȱ followingȱrepresentsȱcertainȱpreliminaryȱ findingsȱassociatedȱwithȱ theȱPhaseȱ Iȱreportȱ commissionedȱ byȱ theȱ Specialȱ Committeeȱ ofȱ theȱ Boardȱ ofȱ Commissionersȱ ofȱ theȱ PortȱAuthorityȱatȱtheȱrequestȱofȱtheȱGovernorsȱofȱNewȱYorkȱandȱNewȱJersey.ȱ

PRELIMINARYȱORGANIZATIONALȱDESIGNȱ&ȱOPERATIONALȱASSESSMENTȱ

� TheȱPortȱAuthorityȱmustȱconductȱaȱmeaningfulȱtopȬtoȬbottomȱorganizationalȱredesignȱfocusedȱonȱoperatingȱefficienciesȱandȱrootedȱinȱclearlyȱdefinedȱrolesȱandȱresponsibilities,ȱtransparency,ȱaccountability,ȱandȱalignedȱincentivesȱ

x TheȱPortȱAuthorityȱisȱaȱlongȱstandingȱbureaucracyȱthatȱisȱinherentlyȱresistantȱtoȱchange,ȱlacksȱeffectiveȱcollaborationȱbetweenȱitsȱstrategicȱbusinesses,ȱandȱwouldȱbenefitȱfromȱtheȱeffectiveȱdevelopmentȱofȱaȱsharedȱsupportȱservicesȱfunction.ȱ

x Promotionȱwithinȱtheȱorganizationȱisȱprimarilyȱbasedȱonȱseniority,ȱwithȱlittleȱevidenceȱofȱadvancementȱorȱcompensationȱbeingȱtiedȱtoȱperformance.ȱȱAsȱaȱresult,ȱtheȱorganizationȱhasȱaȱconcentrationȱofȱlongȱtenuredȱseniorȱandȱmiddleȱmanagementȱemployees.ȱ

x Theȱmagnitudeȱofȱgrowthȱinȱsizeȱandȱcostȱofȱtheȱsecurityȱapparatusȱwarrantsȱanȱinȱdepthȱreviewȱofȱitsȱefficiencyȱandȱrelativeȱeffectiveness,ȱasȱisȱcurrentlyȱbeingȱconducted.ȱ

x Overtimeȱandȱotherȱformsȱofȱ“addȬon”ȱcompensationȱresultedȱ inȱanȱadditionalȱ$20,559ȱperȱemployeeȱinȱ2010.ȱȱOvertimeȱexpensesȱaloneȱtoppedȱ$85ȱmillionȱinȱ2010.ȱ

x Totalȱ “addȬon”ȱ compensation,ȱ whenȱ combinedȱ withȱ allȱ otherȱ benefits,ȱ resultsȱ inȱincrementalȱaverageȱcostȱperȱemployeeȱequivalentȱtoȱapproximatelyȱ70%ȱofȱbaseȱsalary,ȱaȱrelativelyȱhighȱfringeȱbenefitȱrate.ȱ

x 93%ȱofȱemployeesȱmakeȱnoȱcontributionȱtoȱtheirȱhealthȱcare;ȱbyȱcontrast,ȱ100%ȱofȱNewȱYorkȱStateȱandȱNewȱJerseyȱStateȱemployeesȱcontributeȱtoȱhealthȱcare.ȱ

x TotalȱcostȱofȱcompensationȱandȱbenefitsȱforȱtheȱaverageȱactiveȱPortȱAuthorityȱemployeeȱisȱestimatedȱtoȱexceedȱ$143,000ȱannually.ȱ



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x Inȱadditionȱ toȱ theȱscrutinyȱandȱcurtailmentȱofȱrapidlyȱgrowingȱ ȈaddȬonȈȱcompensationȱandȱ benefitȱ costs,ȱ representedȱ laborȱ contractsȱ (andȱ theȱ currentȱ applicationȱ ofȱ relatedȱpractices)ȱmeritȱaȱdetailedȱreviewȱwithȱconsiderationȱofȱpotentialȱmodificationsȱtoȱworkȱrulesȱtoȱremoveȱimpedimentsȱtoȱproductivityȱandȱefficiencyȱgains.ȱ

INITIALȱCOSTȱREVIEWȱOFȱWTCȱPROGRAMȱ

� WTCȱcostsȱhaveȱgrownȱsignificantlyȱandȱgrossȱcostsȱwillȱ likelyȱexceedȱapproximatelyȱ$14.8ȱ billion,ȱ anȱ increaseȱ ofȱ $3.8ȱ billionȱ sinceȱ theȱ lastȱ forecastȱ inȱ 2008.ȱ ȱ Theȱ PortȱAuthority’sȱ netȱ fundingȱ obligationȱ hasȱ grownȱ fromȱ approximatelyȱ $6.0ȱ billionȱ toȱapproximatelyȱ $7.7ȱ billion,ȱ beforeȱ considerationȱ ofȱ additionalȱ potentialȱ netȱ costȱexposuresȱofȱapproximatelyȱ$800ȱmillionȱ

x TheȱPortȱAuthorityȱwasȱunableȱtoȱproduceȱsupportingȱdetailȱandȱsourceȱdocumentsȱforȱtheȱ growthȱ inȱ costȱ estimatesȱ previouslyȱ reportedȱ byȱ priorȱ ExecutiveȱDirectorsȱ toȱ theȱBoardȱ ofȱCommissionersȱ andȱ theȱGovernors.ȱ ȱMoreover,ȱ priorȱ budgetsȱ forȱ theȱWTCȱprojectȱdidȱnotȱincludeȱestimatedȱtenantȱimprovementȱandȱleasingȱcostsȱassociatedȱwithȱtheȱ commercialȱ (i.e.,ȱ atȱOneȱWorldȱ TradeȱCenter)ȱ andȱ retailȱ spaceȱ atȱ theȱWTC,ȱ thusȱunderstatingȱtheȱexpectedȱcostȱatȱcompletion.ȱ

x Totalȱprojectȱ costsȱhaveȱgrownȱ significantlyȱ fromȱ aȱpreviouslyȱ reportedȱ $11ȱbillionȱ toȱapproximatelyȱ$14.8ȱbillion,ȱaȱ$3.8ȱbillionȱincreaseȱsinceȱtheȱ2008ȱreforecast.ȱ ȱMoreover,ȱNavigantȱhasȱ identifiedȱadditionalȱpotentialȱexposuresȱofȱapproximatelyȱ$1ȱbillionȱthatȱmustȱbeȱmitigatedȱbyȱ theȱPortȱAuthorityȱ toȱavoidȱ furtherȱescalationȱ inȱgrossȱprogramȱcosts.ȱ

x Theȱgrossȱcostȱincreaseȱofȱapproximatelyȱ$3.8ȱbillionȱisȱprimarilyȱdrivenȱby:ȱ(i)ȱtheȱscopeȱevolutionȱofȱtheȱWTCȱTransportationȱHubȱ(“Hub”)ȱinȱresponseȱtoȱtheȱmandateȱtoȱopenȱtheȱNationalȱSeptemberȱ11ȱMemorialȱandȱMuseumȱ (theȱ“Memorial”)ȱbyȱSeptemberȱ11,ȱ2011,ȱ (ii)ȱanticipatedȱallowancesȱ toȱcommercializeȱOneȱWorldȱTradeȱCenterȱ (“1ȱWTC”)ȱandȱ theȱretailȱspaces,ȱ (iii)ȱprojectsȱperformedȱbyȱ theȱPortȱAuthorityȱonȱbehalfȱofȱ thirdȬpartiesȱatȱtheȱsiteȱ(i.e.,ȱrelatedȱtoȱtheȱMemorial,ȱexistingȱsubwayȱoperations,ȱtheȱcampusȱsecurityȱplan,ȱandȱtheȱPerformingȱArtsȱCenter),ȱasȱwellȱas,ȱ(iv)ȱincreasesȱinȱfinancingȱandȱinsuranceȱexpenses.ȱ

x Exposureȱ toȱ thirdȬpartiesȱ (whereȱ theȱ Portȱ Authorityȱ hasȱ performedȱ workȱ forȱ otherȱpartiesȱandȱexpectsȱ toȱbeȱreimbursedȱ inȱ theȱ future)ȱnowȱ totalȱanȱestimatedȱ$1.6ȱbillionȱandȱ representȱ theȱprimaryȱareaȱofȱ costȱescalationȱ sinceȱ theȱ2008ȱ reforecast.ȱ ȱTheȱmostȱnotableȱ exposuresȱ areȱ seenȱ in:ȱ (i)ȱ theȱ proposedȱ Memorialȱ projectȱ (which,ȱ byȱ someȱestimates,ȱhasȱ grownȱ toȱ aȱ totalȱprojectȱ costȱ ofȱ approximatelyȱ $1ȱ billion),ȱ (ii)ȱ theȱ $300ȱmillionȱ campusȱ securityȱ planȱdevelopedȱ byȱ theȱCityȱ ofȱNewȱYork,ȱ andȱ (iii)ȱ theȱ $200ȱmillionȱofȱworkȱrequiredȱtoȱphysicallyȱsupportȱtheȱanticipatedȱPerformingȱArtsȱCenterȱatȱtheȱsite.ȱ ȱAssuringȱtheȱcollectabilityȱofȱtheseȱfunds,ȱparticularlyȱinȱinstancesȱsuchȱasȱtheȱMemorialȱwhereȱfundingȱobligationsȱareȱalreadyȱinȱdispute,ȱmustȱbeȱaȱkeyȱpriorityȱofȱtheȱPortȱAuthority.ȱ ȱ Inȱ theȱ faceȱ ofȱ uncertaintyȱ ofȱ collections,ȱ theȱ PortȱAuthorityȱ shouldȱenforceȱstrictȱcontrolsȱandȱcurtailȱdevelopmentȱofȱnonȬessentialȱthirdȱpartyȱrequests.ȱ



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x TheȱPortȱAuthorityȱhasȱ significant,ȱadditional,ȱpotentialȱcostȱ risksȱ (i.e.,ȱaboveȱ theȱ$800ȱmillionȱidentifiedȱinȱtheȱNavigantȱreport)ȱrelatingȱtoȱcontingentȱfinancingȱcommitmentsȱassociatedȱwithȱotherȱWTCȱprojects.ȱ

x Theȱ Portȱ Authorityȱ mustȱ implementȱ enhancedȱ transparencyȱ andȱ accountabilityȱprotocolsȱtoȱensureȱtheȱWTCȱredevelopmentȱisȱcompletedȱwithoutȱfurtherȱcostȱoverruns.ȱȱRoles,ȱ responsibilities,ȱ andȱ oversightȱ needȱ toȱ beȱ reȬevaluatedȱ asȱ theȱWTCȱ programȱevolvesȱfromȱconstructionȱexecutionȱtoȱthatȱofȱanȱoperatingȱassetȱofȱtheȱagency.ȱ

x TheȱpostȱtraumaticȱeffectȱfromȱSeptemberȱ11,ȱincludingȱtheȱlossȱofȱ84ȱemployees,ȱcannotȱbeȱ underestimated.ȱ ȱNonetheless,ȱ inȱ theȱ faceȱ ofȱ thisȱ tragedyȱ longȬtenured,ȱdedicated,ȱcareerȱ serviceȱprofessionalsȱprovidedȱ interimȱ stability.ȱ ȱHowever,ȱ inȱ theȱ courseȱofȱ theȱnextȱdecadeȱtheȱPortȱAuthorityȱhasȱbeenȱconsumedȱwithȱtheȱadditionalȱresponsibilityȱforȱtheȱrebuildingȱofȱtheȱWTC.ȱ ȱTheȱopeningȱofȱtheȱMemorialȱrepresentsȱanȱopportunityȱtoȱrestoreȱtheȱPortȱAuthority’sȱfocusȱonȱitsȱprimaryȱmission.ȱ

PRELIMINARYȱCAPITALȱPLANNINGȱASSESSMENTȱ

� TheȱPortȱAuthorityȱneedsȱtoȱalignȱitsȱcapitalȱstrategyȱwithȱitsȱmissionȱandȱobjectivesȱ

x Exposureȱ toȱdebtȱhasȱmoreȱ thanȱdoubledȱoverȱ theȱpastȱ tenȱyears,ȱ fromȱapproximatelyȱ$9.1ȱbillionȱ inȱ2001ȱ toȱapproximatelyȱ$19.5ȱbillionȱatȱ theȱ endȱofȱ2011,ȱandȱ futureȱ cashȱflowȱfromȱoperationsȱaloneȱisȱnotȱsufficientȱtoȱfundȱitsȱongoingȱcapitalȱprojects.ȱ

x Theȱ Portȱ Authorityȱ hasȱ expandedȱ beyondȱ itsȱ statedȱ missionȱ asȱ aȱ transportationȱinfrastructureȱorganizationȱand,ȱbyȱ fateȱorȱdesign,ȱhasȱalsoȱbecomeȱaȱmajorȱ realȱestateȱdeveloperȱ andȱ assetȱ ownerȱwithȱ investmentsȱ thatȱ dwarfȱ itsȱ pastȱ holdings.ȱ ȱ Theȱ PortȱAuthorityȱmustȱstructureȱitsȱorganization,ȱuseȱitsȱinternalȱresources,ȱand,ȱasȱappropriate,ȱuseȱitsȱprivateȱsectorȱprowess.ȱ

x Theȱ capitalȱ planningȱ andȱ executionȱ functionȱ lacksȱ aȱ clearȱ leader,ȱ doesȱ notȱ haveȱconsistentȱ reportingȱmechanisms,ȱandȱ failsȱ toȱeffectivelyȱaddressȱ theȱchallengesȱ facingȱtheȱ Portȱ Authority.ȱ ȱ Thereȱ isȱ aȱ lackȱ ofȱ properȱ accountabilityȱ forȱ development,ȱconstructionȱ andȱ assetȱ managementȱ toȱ theȱ Executiveȱ Director.ȱ ȱ Aȱ fullȱ reviewȱ ofȱorganizationalȱdesignȱofȱcapitalȱplanningȱandȱimplementationȱisȱwarranted.ȱ

II. NATUREȱOFȱENGAGEMENTȱ&ȱSCOPEȱ

InȱAugustȱ2011,ȱinȱresponseȱtoȱaȱPortȱAuthorityȱrequested,ȱandȱsubsequentlyȱapproved,ȱtollȱandȱfareȱincreaseȱforȱitsȱbridgesȱandȱtunnels,ȱandȱtheȱPATHȱsystem,ȱtheȱGovernorsȱofȱNewȱYorkȱandȱNewȱ Jerseyȱ requestedȱ aȱ comprehensiveȱ reviewȱ ofȱ theȱ Portȱ Authority.ȱ ȱ Consequently,ȱ inȱSeptemberȱ 2011,ȱ theȱ Portȱ Authorityȱ establishedȱ aȱ Specialȱ Committeeȱ ofȱ theȱ Boardȱ ofȱCommissionersȱ (theȱ “SpecialȱCommittee”)ȱ toȱ retainȱ independentȱ consultantsȱ andȱ advisorsȱ toȱconductȱaȱ fullȱ reviewȱofȱ theȱPortȱAuthority’sȱpastȱandȱ currentȱgovernance,ȱandȱmanagementȱpracticesȱ(theȱ“Review”).ȱȱPursuantȱtoȱanȱagreementȱdatedȱasȱofȱNovemberȱ23,ȱ2011,ȱtheȱSpecialȱCommitteeȱretainedȱNavigantȱtoȱassistȱtheȱPortȱAuthorityȱ inȱreadyingȱtheȱrequirementsȱofȱtheȱReview.ȱȱTheȱbroadȱscopeȱofȱtheȱReviewȱisȱtoȱincludeȱbutȱisȱnotȱlimitedȱtoȱtheȱfollowing:ȱ



ȱ8

x Aȱ comprehensiveȱ analysisȱ ofȱ theȱ Portȱ Authority’sȱ tenȬyearȱ capitalȱ planȱ (theȱ “2011ȱCapitalȱ Plan”),ȱ inȱ anȱ effortȱ toȱ reduceȱ theȱ sizeȱ andȱ costȱ ofȱ nonȬrevenueȱ producingȱprojects,ȱ reprioritizingȱ existingȱ projectsȱ andȱ establishingȱ newȱ priorities,ȱ andȱ theȱmostȱeffectiveȱwayȱtoȱfinanceȱtheȱsame;ȱȱ

x Aȱ thoroughȱreviewȱofȱ theȱPortȱAuthority’sȱcapitalȱprojectsȱandȱspendingȱoverȱ theȱpastȱtenȱyearsȱ toȱdetermineȱ theȱ causesȱ andȱ fullȱ extentȱ of,ȱ asȱwellȱ asȱpotentialȱ remediesȱ toȱaddress,ȱcostȱescalationsȱofȱtheȱPortȱAuthority’sȱprojects,ȱwithȱaȱfocusȱonȱtheȱWTCȱsite;ȱ

x Aȱ topȬtoȬbottomȱ reviewȱ ofȱ theȱ Portȱ Authority’sȱ organizationalȱ structureȱ andȱeffectiveness,ȱ staffingȱ levels,ȱ compensation,ȱ benefits,ȱ andȱ financialȱ management,ȱincludingȱ accounting,ȱ audit,ȱ financing,ȱ consultingȱ andȱotherȱ contractualȱpracticesȱ andȱagreements,ȱ allȱ doneȱ toȱ furtherȱ lowerȱ costsȱ andȱ increaseȱ efficienciesȱwithinȱ theȱ PortȱAuthority;ȱandȱȱ

x Establishmentȱ ofȱ aȱ Projectȱ Managementȱ Officeȱ (“PMO”)ȱ toȱ coordinateȱ activitiesȱassociatedȱwithȱtheȱReview.ȱȱ

Inȱ additionȱ toȱNavigant,ȱ theȱ PortȱAuthorityȱ alsoȱ engagedȱ Rothschild,ȱ Inc.ȱ (“Rothschild”)ȱ toȱassistȱ inȱmeetingȱ theȱ requirementsȱ ofȱ theȱ Review.ȱ ȱ Rothschild’sȱ focusȱ isȱ toȱ adviseȱ theȱ PortȱAuthorityȱonȱevaluatingȱeffectiveȱfinancingȱstrategiesȱofȱtheȱexistingȱandȱnewȱcapitalȱpriorities.ȱ

Navigant’sȱengagementȱisȱdividedȱintoȱtwoȱphasesȱ(“PhaseȱI”ȱandȱ“PhaseȱII”).ȱ

PursuantȱtoȱtheȱengagementȱtermsȱwithȱtheȱPortȱAuthority,ȱtheȱscopeȱofȱPhaseȱIȱconsistsȱofȱtheȱfollowing:ȱ

x EstablishmentȱandȱstaffingȱofȱaȱPMOȱwhichȱwouldȱcoordinateȱactivitiesȱwithȱregardsȱtoȱNavigant’sȱscopeȱofȱworkȱinȱPhaseȱIȱ(asȱwellȱasȱoversight,ȱcoordination,ȱassimilationȱandȱintegrationȱofȱrelatedȱworkȱstreamsȱperformedȱbyȱthirdȱparties);ȱ

x Preliminaryȱorganizationalȱdesignȱandȱoperationalȱassessmentȱ focusedȱonȱaȱ reviewȱofȱcompensationȱandȱbenefitȱcostȱstructures;ȱ

x WTCȱcostȱreviewȱinȱconsultationȱwithȱtheȱSpecialȱCommittee;ȱandȱȱx InitiationȱofȱcapitalȱprojectsȱassessmentȱinȱconsultationȱwithȱtheȱSpecialȱCommittee.ȱȱ

PursuantȱtoȱtheȱengagementȱtermsȱwithȱtheȱPortȱAuthority,ȱtheȱscopeȱofȱPhaseȱIIȱofȱNavigant’sȱengagementȱwillȱincludeȱtheȱfollowing:ȱȱ

x PMOȱActivitiesȱ–ȱDirectȱoversight,ȱcoordination,ȱassimilationȱandȱintegrationȱofȱPhaseȱIIȱactivitiesȱfromȱbothȱNavigantȱandȱthirdȱpartyȱconsultantsȱorȱadvisorsȱasȱappropriate;ȱ

x Organizationalȱ andȱ operationalȱ assessmentȱ ofȱ theȱ Portȱ Authorityȱ forȱ focusȱ areasȱidentifiedȱinȱconsultationȱwithȱtheȱSpecialȱCommittee;ȱandȱ

x CompletionȱofȱcapitalȱprojectsȱreviewȱinȱconsultationȱwithȱtheȱSpecialȱCommittee.ȱ

TheȱpurposeȱofȱthisȱreportȱisȱtoȱdeliverȱNavigant’sȱinterimȱfindingsȱandȱrecommendationsȱwithȱregardsȱtoȱtheȱthreeȱidentifiedȱworkȱstreamsȱinȱPhaseȱI,ȱsubjectȱtoȱtheȱqualificationsȱofȱAppendixȱ–ȱC.ȱȱFurtherȱdetailsȱonȱtheȱanticipatedȱPhaseȱIIȱscopeȱofȱworkȱcanȱbeȱfoundȱinȱSectionȱX.ȱ



ȱ9

III. GENERALȱAPPROACHȱ

NavigantȱconductedȱanȱinitialȱmeetingȱwithȱtheȱSpecialȱCommitteeȱandȱselectȱmembersȱofȱPortȱAuthorityȱmanagementȱ inȱ earlyȱDecemberȱ 2011.ȱ ȱAtȱ thatȱ time,ȱ anȱ informationȱ requestȱwasȱsubmittedȱtoȱtheȱPortȱAuthorityȱaddressingȱtheȱspecificȱareasȱidentifiedȱforȱfocusȱinȱPhaseȱIȱasȱwellȱasȱprovidingȱadditionalȱinformationȱthatȱwillȱbeȱusefulȱinȱPhaseȱII.ȱȱToȱdate,ȱNavigantȱhasȱreviewedȱnumerousȱdocumentsȱfromȱtheȱPortȱAuthority.ȱȱInȱaddition,ȱNavigantȱhasȱconductedȱmanyȱmeetingsȱandȱ interviewsȱwithȱallȱ levelsȱofȱPortȱAuthorityȱemployeesȱasȱwellȱasȱcertainȱmembersȱofȱtheȱBoardȱofȱCommissionersȱandȱtheȱSpecialȱCommittee.ȱȱȱ

COMPENSATIONȱ&ȱBENEFITSȱREVIEWȱ

NavigantȱconductedȱinitialȱmeetingsȱwithȱtheȱPortȱAuthority’sȱChiefȱAdministrativeȱOfficerȱandȱHumanȱResourceȱdepartments.ȱȱSubsequentȱtoȱtheȱmeetings,ȱinformationȱrequestsȱwereȱsentȱinȱorderȱ toȱ facilitateȱ theȱ reviewȱ ofȱ keyȱ documentsȱ andȱ otherȱ pertinentȱ information.ȱ ȱNavigantȱreviewedȱmultipleȱ documents,ȱ conductedȱ numerousȱ inȱ personȱ andȱ telephonicȱ interviewsȱ asȱwellȱasȱperformedȱdetailedȱanalysesȱofȱbaseȱpay,ȱovertime,ȱ“addȬon”ȱcompensation,ȱhealthcareȱcosts,ȱandȱotherȱbenefitȱanalyses.ȱȱTheȱfindingsȱofȱtheseȱanalysesȱwereȱusedȱinȱaȱbenchmarkingȱreviewȱusingȱselectedȱpublicȱandȱprivateȱpeerȱgroups.ȱȱȱ

INITIALȱCOSTȱREVIEWȱOFȱTHEȱWTCȱPROGRAMȱ

Navigantȱ reconstructedȱ theȱ historicalȱ costsȱ ofȱ theȱWTCȱ programȱ usingȱ theȱ chronologyȱ ofȱperiodicȱ PortȱAuthorityȱ presentationsȱ byȱ priorȱ ExecutiveȱDirectorsȱ andȱmanagementȱ toȱ theȱBoardȱofȱCommissioners,ȱprojectȱ costȱ reportsȱ currentȱ asȱofȱOctoberȱ 2011,ȱ relatedȱdocuments,ȱandȱ theȱ findingsȱ ofȱ interviewsȱ toȱ provideȱ theȱ Specialȱ Committeeȱwithȱ theȱ analysisȱ ofȱ pastȱspendingȱ atȱ theȱWTCȱ site.ȱFurthermore,ȱNavigantȱpreliminarilyȱ andȱ independentlyȱ analyzedȱtheȱPortȱAuthority’sȱestimatedȱcostȱtoȱcompleteȱforȱitsȱreasonableness.ȱȱȱ

PRELIMINARYȱCAPITALȱPLANNINGȱASSESSMENTȱȱ

NavigantȱconductedȱmeetingsȱwithȱkeyȱPortȱAuthorityȱstaffȱ involvedȱ inȱcapitalȱplanningȱandȱbeganȱpreliminaryȱanalysisȱofȱ itsȱorganizationȱandȱprocesses.ȱ ȱInȱaddition,ȱNavigantȱcompiledȱvariousȱ reportsȱ ofȱ theȱPortȱAuthorityȱ intoȱ aȱ singleȱdatabaseȱ thatȱ allowedȱ forȱ analysisȱ ofȱ theȱcompositionȱofȱtheȱ2011ȱCapitalȱPlan.ȱ ȱNavigantȱalsoȱreviewedȱtheȱprojectsȱinȱtheȱ2011ȱCapitalȱPlanȱbyȱclassification,ȱtoȱbetterȱunderstandȱtheȱamount,ȱmaturityȱandȱpriorityȱofȱtheȱportfolioȱofȱcapitalȱprojects.ȱ

IV. BACKGROUNDȱ

TheȱPortȱAuthorityȱhasȱ enduredȱ significantȱadversityȱoverȱ theȱ lastȱ20ȱyears.ȱ ȱFromȱ theȱWTCȱbombingȱ inȱ Juneȱ 1993ȱ toȱ theȱ Septemberȱ 11ȱ terroristȱ attacks,ȱ theȱ PortȱAuthorityȱ hasȱ alwaysȱrespondedȱswiftly.ȱ ȱAfterȱtheȱJuneȱ1993ȱbombing,ȱtheȱPortȱAuthorityȱrestoredȱtheȱWTCȱtoȱfullȱfunctionȱwithinȱaȱremarkableȱtwoȱmonthȱtimeȱspan.ȱȱHowever,ȱtheȱdevastationȱandȱdestructionȱofȱtheȱSeptemberȱ11ȱattacksȱwereȱunprecedented.ȱȱTheȱlossȱofȱlifeȱincludedȱtheȱPortȱAuthority’sȱ



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ExecutiveȱDirectorȱandȱ83ȱofȱitsȱemployees,ȱcausingȱaȱsignificantȱemotionalȱtollȱonȱtheȱpsycheȱofȱtheȱorganization.ȱȱTheȱeventsȱofȱSeptemberȱ11ȱbecameȱaȱpatrioticȱrallyingȱpointȱtoȱdemonstrateȱtoȱ theȱworldȱ thatȱNewȱYork,ȱ theȱ nation’sȱ largestȱ cityȱ andȱheartȱ ofȱ itsȱ financialȱ sector,ȱ couldȱrespondȱandȱrebuildȱ inȱtheȱfaceȱofȱthisȱadversity,ȱ inȱdefianceȱofȱtheȱ intendedȱ intimidationȱandȱthreatȱbyȱtheȱterroristȱculprits.ȱȱȱ

Theȱ Portȱ Authorityȱ acceptedȱ theȱ monumentalȱ andȱ crucialȱ responsibilityȱ ofȱ whatȱ hasȱ nowȱbecomeȱtheȱsymbolȱofȱtheȱcountry’sȱresolveȱ–ȱtoȱrebuildȱtheȱWTC.ȱȱTheȱeventsȱofȱSeptemberȱ11ȱplacedȱanȱunexpectedȱandȱtremendousȱburdenȱonȱtheȱPortȱAuthority,ȱconsumingȱconsiderableȱresourcesȱandȱattentionȱ inȱsupportȱofȱtheȱredevelopmentȱefforts.ȱ ȱTheȱdistortiveȱ impactȱofȱthisȱeventȱhasȱcreatedȱaȱrippleȱeffectȱthatȱhasȱbeenȱfeltȱthroughoutȱtheȱorganizationȱaȱdecadeȱ later,ȱincludingȱ tumultuousȱchangesȱ inȱ itsȱ leadership,ȱ intensiveȱ focus,ȱandȱdedicationȱ toȱoneȱofȱ theȱlargestȱinfrastructureȱandȱdevelopmentȱprojectsȱinȱtheȱcountry,ȱasȱwellȱasȱextraordinaryȱgrowthȱofȱitsȱsecurityȱapparatus.ȱȱ

Consequently,ȱasȱtheȱscopeȱandȱdesignȱofȱtheȱWTCȱhaveȱevolved,ȱparticularlyȱinȱresponseȱtoȱtheȱnationalȱsymbolicȱobjectivesȱandȱsecurityȱconcernsȱ thatȱhaveȱpermeatedȱ theȱdevelopment,ȱ theȱrequiredȱcostsȱofȱrebuildingȱhaveȱcorrespondinglyȱexpanded.ȱ ȱTheȱobjectiveȱofȱcompletingȱtheȱMemorialȱbyȱtheȱtenȬyearȱanniversaryȱofȱSeptemberȱ11ȱbecameȱaȱpublicȱmandateȱtoȱreflectȱtheȱprofoundȱnationalȱsymbolismȱofȱtheȱWTC’sȱtimelyȱresurrection.ȱȱToȱmeetȱthisȱtimeline,ȱtheȱPortȱAuthorityȱ hadȱ toȱ incurȱ significantȱ costsȱ relatedȱ toȱ theȱ accelerationȱ ofȱ theȱWTCȱ constructionȱprogram.ȱ ȱ Theȱ levelȱ ofȱ dedicationȱ byȱ theȱ PortȱAuthority,ȱ fromȱ dailyȱ involvementȱ ofȱ certainȱmembersȱ ofȱ itsȱ Boardȱ ofȱ Commissioners,ȱ toȱ onȱ siteȱ constructionȱ personnel,ȱ hasȱ beenȱunwavering.ȱ ȱ Byȱ theȱ timeȱ ofȱ itsȱ completion,ȱ inȱ additionȱ toȱ thirdȱ partyȱ funding,ȱ theȱ PortȱAuthorityȱwillȱlikelyȱspendȱoverȱ$7.7ȱbillionȱdollarsȱofȱitsȱownȱcapitalȱinȱthisȱhistoricȱendeavor.ȱȱTheȱ recentȱ openingȱ ofȱ theȱ Memorialȱ onȱ Septemberȱ 11,ȱ 2011ȱ markedȱ theȱ endȱ ofȱ anȱextraordinarilyȱdifficultȱdecadeȱforȱtheȱagencyȱandȱtheȱbeginningȱofȱaȱnewȱchapterȱinȱitsȱhistory.ȱȱȱ

GivenȱtheȱstrongȱleadershipȱevidencedȱbyȱtheȱcurrentȱGovernorsȱofȱNewȱYorkȱandȱNewȱJersey,ȱandȱ theirȱ appropriateȱ andȱ intenseȱ focusȱ onȱ responsibleȱ government,ȱ increasedȱ transparency,ȱorganizationalȱ efficiencyȱ andȱ fiscalȱ responsibility,ȱ theȱ PortȱAuthorityȱ nowȱ hasȱ aȱwindowȱ ofȱopportunityȱtoȱdriveȱtheȱtransformationalȱchangesȱfundamentalȱtoȱaddressingȱtheȱchallengesȱofȱtheȱorganization.ȱWithȱtheȱrelativelyȱrecentȱappointmentsȱofȱaȱnewȱChairman,ȱViceȬChairman,ȱseveralȱCommissioners,ȱExecutiveȱDirectorȱandȱDeputyȱExecutiveȱDirector,ȱtheȱPortȱAuthorityȱhasȱaȱreinvigoratedȱfocus.ȱȱȱȱȱ

Theȱ organization’sȱ newȱ leadershipȱ appearsȱ intentȱ onȱ drivingȱ theȱ changeȱ necessaryȱ toȱ bestȱpositionȱtheȱPortȱAuthorityȱtoȱmeetȱtheȱchallengesȱofȱtheȱ21stȱCenturyȱandȱtoȱprogressȱfromȱitsȱ“businessȱasȱusual”ȱapproach.ȱ ȱAȱmajorȱ themeȱ inȱ thisȱendeavorȱ isȱ increasedȱ transparencyȱandȱaccountabilityȱ throughoutȱ theȱ organization.ȱ ȱThisȱ isȱ evidentȱ byȱ theȱ recentȱ initiativesȱ alreadyȱundertakenȱ byȱ theȱ Boardȱ ofȱ Commissioners,ȱ underȱ theȱ leadershipȱ ofȱ theȱ newȱ Chairman,ȱincludingȱbutȱnotȱlimitedȱto:ȱȱ

x Appointmentȱofȱnew,ȱindependentȱauditors;ȱȱx Focusȱonȱimprovementsȱinȱtheȱcapitalȱplanningȱandȱprojectȱmanagementȱprocesses;ȱȱ



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x Strengtheningȱ ofȱ theȱ Portȱ Authority’sȱ internalȱ Enterpriseȱ RiskȱManagementȱ System,ȱpermittingȱ earlyȱ interventionȱbyȱ theȱBoardȱofȱCommissionersȱ throughȱproactiveȱ issueȱidentification;ȱȱȱ

x Reviewȱofȱpoliciesȱandȱproceduresȱinȱorderȱtoȱaddressȱgrowingȱovertimeȱexpenditures;ȱȱȱx Pursuitȱ ofȱ benefitȱ programȱ reformȱ includingȱ healthȱ careȱ contributions,ȱ vacationȱ

exchangeȱandȱpensionȱdesign;ȱȱx Demonstrationȱofȱitsȱcommitmentȱtoȱfullȱtransparencyȱthroughȱtheȱinitiationȱofȱcompleteȱ

disclosureȱonȱcompensationȱofȱallȱemployees;ȱx Creationȱofȱanȱ insuranceȱworkingȱgroupȱ toȱbetterȱanalyzeȱandȱ improveȱuponȱ theȱPortȱ

Authority’sȱcurrentȱriskȱmanagementȱpolicies;ȱx Fullyȱembracingȱ theȱ topȬtoȬbottomȱorganizationalȱreviewȱbeingȱfacilitatedȱbyȱNavigantȱ

andȱ Rothschildȱ inȱ pursuitȱ ofȱ actionableȱ interventionsȱ toȱ driveȱ operatingȱ andȱ capitalȱdeploymentȱ efficienciesȱ andȱ developingȱ waysȱ toȱ enhanceȱ theȱ financingȱ ofȱ itsȱ 2011ȱCapitalȱPlan;ȱandȱ

x Approvingȱpreliminaryȱoperatingȱandȱcapitalȱbudgetsȱforȱ2012ȱexpresslyȱsubjectȱtoȱanyȱmeasuresȱadoptedȱbyȱtheȱBoardȱofȱCommissionersȱasȱaȱresultȱofȱtheȱSpecialȱCommittee’sȱreview.ȱ

ThisȱinterimȱreportȱisȱbeingȱissuedȱinȱresponseȱtoȱlimitedȱareasȱofȱinitialȱinquiryȱthatȱtheȱSpecialȱCommitteeȱofȱtheȱBoardȱofȱCommissionersȱhasȱmandated.ȱ

V. PORTȱAUTHORITYȱOVERVIEWȱ

TheȱPortȱAuthorityȱisȱaȱcomplexȱorganization,ȱnowȱemployingȱoverȱ6,900ȱpeopleȱandȱgeneratingȱrevenuesȱofȱalmostȱ$4ȱbillion.ȱȱTheȱPortȱAuthority’sȱcurrentȱmissionȱisȱdefinedȱasȱfollows:ȱȱ

“ToȱidentifyȱandȱmeetȱtheȱcriticalȱtransportationȱinfrastructureȱneedsȱofȱtheȱbiȬstateȱregion’sȱbusinesses,ȱresidents,ȱandȱvisitors;ȱprovidingȱ theȱhighestȱquality,ȱmostȱefficientȱ transportation,ȱandȱportȱcommerceȱfacilitiesȱandȱservicesȱ thatȱmoveȱpeopleȱandȱgoodsȱwithinȱ theȱregion,ȱprovidingȱaccessȱ toȱ theȱrestȱofȱ theȱnationȱandȱtoȱtheȱworld,ȱwhileȱstrengtheningȱtheȱeconomicȱcompetitivenessȱofȱtheȱNewȱYorkȬNewȱJerseyȱMetropolitanȱRegion”.ȱ

TheȱPortȱAuthorityȱhasȱaȱvastȱarrayȱofȱassetȱholdingsȱsegmentedȱintoȱaviation,ȱportȱcommerce,ȱPATHȱ (i.e.,ȱ railȱ transit),ȱ tunnelsȱ /ȱ bridgesȱ /ȱ terminals,ȱ theȱ WTC,ȱ andȱ variousȱ realȱ estateȱdevelopmentȱassetsȱasȱidentifiedȱinȱTableȱ1.ȱ



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Tableȱ1ȱ–ȱPortȱAuthorityȱCoreȱFunctionsȱ

ȱInȱadditionȱtoȱitsȱresponsibilitiesȱrelatedȱtoȱtwoȱtunnels,ȱfourȱbridges,ȱfiveȱairports,ȱsixȱseaports,ȱandȱtheȱPATHȱsystemȱtheȱPortȱAuthorityȱcurrently:ȱ

x Managesȱoverȱ1ȱmillionȱsquareȱfeetȱofȱleasedȱspaceȱinȱ11ȱfacilities;ȱx Managesȱaȱ100ȬacreȱhighȬtechȱbusinessȱparkȱinȱStatenȱIsland;ȱx Ownsȱmultipleȱindustrialȱparks;ȱx Ownsȱandȱservesȱasȱdeveloperȱofȱtwoȱlargeȱwaterfrontȱprojects;ȱandȱx OwnsȱEssexȱCountyȱResourceȱRecoveryȱ(NJ’sȱlargestȱwasteȬtoȬenergyȱfacility).ȱ

CORE FUNCTIONS: KEY FACILITIES:

AVIATION• Manages & operates NY / NJ airports • JFK Airport• Manages related security apparatus • LaGuardia Airport• Manages operation & maintenance contracts for JFK & EWR • New ark Airport• Manages parking contracts • Stew art Airport• Manages utility and energy contracts • Teterboro Airport• Develops & maintains passenger terminals• Maintains runw ay infrastructure

PORT COMMERCE• Handles leasing & lease administration • How land Hook Marine Terminal / Port Ivory• Manages related security apparatus • Brooklyn Port / Red Hook• Planning & development alternatives for land use • Port New ark• Oversees capital programs including w aterw ay development • Port Elizabeth• Manages NY Greenville Cross Harbor Rail Freight Program • Port Jersey• Manages development of new MOTBY • Greenville Yard

PATH• Manages 24/7 operation of trains, passenger services and rail yards NY Stations NJ Stations• Manages related security apparatus • 9th Street • Exchange Place• Manages all of PATH assets & infrastructure including railcar f leet, pow er, signals & commuter services • 14th Street • Grove Street• Delivery of capital program • 23rd Street • Harrison• Safety & Security program management • 33rd Street • Hoboken• Manages all revenue programs (e.g. ,fare collection, & vendor contracts) • Christopher Street • Journal Square

• WTCTUNNELS, BRIDGES AND TERMINALS• Operates all Port Authority tunnels, bridges & terminals • Holland Tunnel• Manages related security apparatus • Lincoln Tunnel• Traff ic management of all vehicular crossings, bus terminals and pedestrian f low s • George Washington Bridge• Emergency response at all tunnels, bridges & terminal assets • Bayonne Bridge• Manages and staffs cash toll collection booths and all electronic payment systems • Goethals Bridge• Maintenance of all TB&T infrastructure • Outerbridge Crossing• Delivery of capital program • Port Authority Bus Terminal

• George Washington Bus StationWORLD TRADE CENTER• • 1 World Trade Center

• HUB• Manages security apparatus • 9/11 Memorial & Museum• Manages retail and tenant leasing of 1 WTC • Central Chiller Plant • Design & construction of WTC transportation HUB• 1 WTC Construction• Vehicular Security Center• Common Site infrastructure• Construction of September 11 memorial• Coordinate the design and construction of SPI tow ers 2,3 & 4• Performing Arts Center ("PAC")

REAL ESTATE DEVELOPMENT• Leases & manages over 1.1 million sq ft in NY & NJ • New ark Legal & Communication Center • Signif icant real estate ow ner and developer • Teleport• • Essex County Resource Recovery Facility

• Bathgate Industrial Park• • Industrial Park at Elizabeth

• Port Authority Bus Terminal Air Rights• Moynihan Station

Works w ith state development agencies in bringing underutilized development industrial sites to shovel ready status

Development, design, construction & coordination of WTC site in accordance w ith myriad of development agreements & stakeholders (MTA, NYSDOT, Silverstein Entities & Affiliates, Memorial, etc.)

Once online, the Port Authority w ill manage leasable space of approximately 3 million square feet as w ell as 0.5 million square feet of retail space at the WTC



ȱ13

Onceȱonline,ȱtheȱPortȱAuthorityȱwillȱmanageȱ leasableȱspaceȱofȱapproximatelyȱ3ȱmillionȱsquareȱfeetȱasȱwellȱasȱ0.5ȱmillionȱsquareȱfeetȱofȱretailȱspaceȱatȱtheȱWTC.ȱ

Observationsȱ&ȱFindingsȱ

� TheȱPortȱAuthorityȱinfrastructureȱcontinuesȱtoȱageȱandȱdeteriorateȱ

TheȱTransȬHudsonȱbridgesȱandȱtunnelsȱwereȱbuiltȱoverȱ70ȱyearsȱago.ȱ ȱWhileȱmanyȱfacilitiesȱatȱtheȱairportsȱandȱportsȱwereȱconstructedȱmoreȱ recently,ȱmuchȱofȱ thatȱ infrastructureȱalsoȱdatesȱbackȱhalfȱaȱcenturyȱorȱmoreȱ(Figureȱ1).ȱȱGoingȱforward,ȱtheȱPortȱAuthorityȱfacilitiesȱwillȱrequireȱsignificantȱcapitalȱinvestmentȱtoȱmaintain,ȱsecure,ȱandȱenhanceȱitsȱassets.ȱȱȱ

Figureȱ1ȱ–ȱPortȱAuthorityȱKeyȱHistoricalȱMilestonesȱ

Overȱtheȱnextȱtenȱyears,ȱtheȱPortȱAuthorityȱhasȱbudgetedȱapproximatelyȱ$25.1ȱbillionȱforȱcapitalȱspending.ȱ ȱOfȱ thisȱ amount,ȱ approximatelyȱ $15ȱ billionȱ hasȱ beenȱ earmarkedȱ forȱ stateȱ ofȱ goodȱrepair,ȱsecurity,ȱmandatoryȱcapitalȱexpendituresȱandȱsystemȱenhancementȱprojects.ȱȱȱ

� Historically,ȱ revenueȱ andȱ operatingȱ cashȱ flowȱ hasȱ beenȱ primarilyȱ generatedȱ byȱ PortȱAuthorityȱtunnels,ȱbridges,ȱandȱairportsȱ

Whenȱ investmentsȱ inȱ facilitiesȱ areȱ takenȱ intoȱ consideration,ȱ PATH,ȱ Ferryȱ Services,ȱ andȱ PortȱCommerceȱhaveȱrequiredȱsignificantȱallocationsȱofȱfundsȱ(Tableȱ2).ȱȱȱȱȱ

Tableȱ2ȱȬȱCumulativeȱNetȱIncomeȱbyȱLineȱDepartmentȱ(Inceptionȱ–ȱ2010)ȱ

ȱNotes:ȱ

1) FinancialsȱareȱprovidedȱfromȱtheȱdateȱaȱparticularȱPortȱAuthorityȱassetȱstartedȱtoȱgenerateȱfinancialȱresult.ȱ2) PassengerȱFacilityȱChargesȱ(ȈPFCsȈ)ȱwereȱestablishedȱinȱ1992ȱandȱaccountȱforȱtheȱvastȱmajorityȱofȱPFCs,ȱGrantsȱ&ȱOther.ȱ3) OperatingȱCashȱFlowȱ(“OCF”)ȱreflectsȱNetȱIncomeȱ/ȱ(Loss)ȱplusȱD&A,ȱNetȱInterestȱExpense,ȱandȱexcludesȱPFCs,ȱGrantsȱ&ȱOther,ȱwhichȱ

areȱgenerallyȱnotȱconsideredȱoperatingȱinȱnature.ȱȱ

50 YEARS

Port Authority Founded

1921

GoethalsBridge1928

Port Authority Founded

1921

Holland Tunnel1927

GeorgeWashington

Bridge1931

Lincoln Tunnel1937

LincolnTunnel1937

NewarkAirport1947

LaGuardiaAirport1947

JFKAirport1948

PortAuthority

Bus Terminal1950

PortElizabeth

1962

WorldTradeCenter1970

Exchange Place & WTC PATH

Reopened2003

9/11Memorial

2011

2011Port Authority

90th Anniverary

BrooklynMarine

Terminal1981

Essex County Resource

Center1990

20019/11

TerroristAttacks

2006New�WTC

Construction

MOTBY2010

1993WTC�TerroristBombing

($mm)Invested in

Facilities

GrossOperatingRevenues

OperatingExpenses

AllocatedExpenses D&A

Net InterestExpense

PFCs, Grants

& Other2

NetIncome / (Loss)

OperatingCash Flow

("OCF")3

OCF less Invested in

Facilities

Inception - 20101:Tunnels, Bridges & Terminals 4,544.5$ 19,126.8$ 8,672.5$ 1,650.6$ 1,917.1$ 1,337.6$ (77.4)$ 5,626.6$ 8,803.8$ 4,259.3$ PATH 5,493.4 2,250.9 5,154.9 902.0 1,611.0 812.1 (1,179.0) (5,050.1) (3,806.0) (9,299.4) Ferry Service 134.9 1.8 44.6 2.4 10.4 13.0 (3.7) (64.9) (45.2) (180.1) Access to Regions Core ("ARC") 131.7 - 79.4 - 2.5 2.8 - (84.7) (79.4) (211.1) Air Terminals 13,400.7 37,243.6 22,077.3 1,907.7 5,815.5 2,231.4 (3,187.8) 8,399.6 13,258.7 (142.0) Port Commerce 3,617.1 4,176.0 2,574.2 217.5 1,438.3 780.4 (35.7) (798.7) 1,384.3 (2,232.7) Economic / Waterfront Development 480.2 1,912.1 1,689.7 25.1 269.0 25.4 (2.4) (94.7) 197.3 (282.9) World Trade Center 3,601.5 7,193.0 4,010.6 299.7 749.2 711.9 (1,122.9) 2,544.6 2,882.7 (718.8) PA Insurance Captive Entity - 0.6 8.6 - - (11.1) - 3.1 (8.0) (8.0) Regional Development Programs 1,322.9 - 129.3 - 1,068.4 658.4 - (1,856.0) (129.3) (1,452.1) Other 1,477.1 2,062.3 497.8 - - 1.3 - 1,563.1 1,564.5 87.4 Total 34,204.0$ 73,967.2$ 44,938.7$ 5,004.9$ 12,881.4$ 6,563.1$ (5,608.9)$ 10,187.9$ 24,023.5$ (10,180.6)$



ȱ14

� Duringȱ theȱ lastȱ tenȱ years,ȱ Portȱ Authorityȱ cashȱ flowsȱ wereȱ insufficientȱ toȱ fundȱ theȱcapitalȱexpenditureȱprogramȱ

Inȱ theȱ lastȱ tenȱ years,ȱ theȱ totalȱ outstandingȱ debtȱ ofȱ theȱ Portȱ Authorityȱ hasȱ increasedȱ fromȱapproximatelyȱ$9.1ȱbillionȱinȱ2001ȱtoȱapproximatelyȱ$19.5ȱbillionȱasȱofȱDecemberȱ2011,ȱmainlyȱinȱsupportȱofȱtheȱcapitalȱprogramȱ(Tableȱ3ȱandȱFigureȱ2).ȱȱ

Tableȱ3ȱ–ȱSummaryȱFinancialȱTrendsȱbyȱYearȱ(2001ȱ–ȱ2011)ȱ

ȱNotes:ȱ

1) AȱsignificantȱportionȱofȱinvestmentsȱinȱfacilitiesȱisȱattributableȱtoȱtheȱWTC.ȱ2) PassengerȱFacilityȱChargesȱ(ȈPFCsȈ)ȱwereȱestablishedȱinȱ1992ȱandȱaccountȱforȱtheȱvastȱmajorityȱofȱPFCs,ȱGrantsȱ&ȱOther.ȱ3) OperatingȱCashȱFlowȱ(“OCF”)ȱreflectsȱNetȱIncomeȱ/ȱ(Loss)ȱplusȱD&A,ȱNetȱInterestȱExpenseȱandȱexcludesȱPFCs,ȱGrantsȱ&ȱOther,ȱwhichȱ

areȱgenerallyȱnotȱconsideredȱoperatingȱinȱnature.ȱ

Figureȱ2ȱ–ȱOperatingȱCashȱFlowȱAvailableȱforȱInvestmentȱinȱFacilitiesȱ(2001ȱ–ȱ2010)ȱ

ȱ

� Whileȱ futureȱ operatingȱ cashȱ flowȱ isȱ expectedȱ toȱ beȱ bolsteredȱ byȱ revenueȱ increasesȱprimarilyȱfromȱscheduledȱfares,ȱfeesȱandȱtollȱincreasesȱfromȱtunnels,ȱbridgesȱandȱPATH,ȱcontinuedȱaccessȱtoȱcapitalȱmarketsȱwillȱlikelyȱbeȱrequiredȱ

Overȱtheȱnextȱtenȱyears,ȱtheȱPortȱAuthorityȱisȱprojectingȱNetȱOperatingȱRevenuesȱ(i.e.,ȱdefinedȱbyȱ theȱPortȱAuthorityȱ asȱgrossȱoperatingȱ revenuesȱminusȱoperatingȱ expenses),ȱ toȱgrowȱ fromȱapproximatelyȱ$1.2ȱbillionȱinȱ2011ȱtoȱapproximatelyȱ$3.0ȱbillionȱinȱ2020,ȱaȱcompoundedȱannualȱgrowthȱrateȱofȱapproximatelyȱ9.3%.ȱȱFurthermore,ȱtheȱPortȱAuthorityȱisȱprojectingȱanȱoperatingȱ

($mm)Invested inFacilities1

GrossOperatingRevenues

OperatingExpenses

AllocatedExpenses D&A

Net InterestExpense

PFCs, Grants

& Other2

NetIncome / (Loss)

OperatingCash Flow

("OCF")3

OCF less Invested in

Facilities

Total YEOutstanding

Debt

Fiscal Year:FY 2001 311.4$ 2,742.9$ 1,894.4$ 149.8$ 442.8$ 193.7$ (153.6)$ 215.8$ 698.7$ 387.3$ 9,059$ FY 2002 1,522.7 3,258.0 1,839.1 159.9 435.2 238.9 (155.1) 740.0 1,259.1 (263.7) 9,335 FY 2003 1,918.5 3,446.3 1,788.2 149.1 521.1 277.8 (172.9) 883.0 1,509.0 (409.5) 9,756 FY 2004 1,275.2 2,864.8 1,846.4 139.9 614.2 332.8 (220.1) 151.5 878.5 (396.8) 10,961 FY 2005 1,237.6 3,000.7 1,952.3 139.0 686.7 316.8 (256.0) 161.9 909.4 (328.1) 10,984 FY 2006 1,589.3 3,038.5 1,974.7 140.0 724.3 319.9 (639.0) 518.6 923.8 (665.5) 12,330 FY 2007 2,272.9 3,191.6 2,071.5 180.4 691.9 246.9 (1,301.9) 1,302.9 939.7 (1,333.3) 12,751 FY 2008 2,375.2 3,987.4 2,282.4 183.2 715.5 496.6 (584.3) 894.1 1,521.8 (853.4) 13,037 FY 2009 2,621.5 3,771.9 2,253.3 202.1 786.9 329.3 (646.1) 846.4 1,316.6 (1,305.0) 14,450 FY 2010 2,966.0 3,689.7 2,411.1 190.0 865.5 499.3 (623.2) 346.8 1,088.5 (1,877.5) 16,309 FY 2011E 3,110.0 3,815.3 2,377.1 210.6 944.1 208.7 (654.1) 728.9 1,227.6 (1,882.4) 19,502 Total 21,200.3$ 36,807.0$ 22,690.6$ 1,843.9$ 7,428.2$ 3,460.7$ (5,406.3)$ 6,790.0$ 12,272.5$ (8,927.8)$ 19,502.1$

-

500

1,000

1,500

2,000

2,500

3,000

3,500

FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011

Investment�in�Facilities Operating�Cash�Flow

Gap funded by capital markets access & other

sources



ȱ15

marginȱ improvementȱ ofȱ approximatelyȱ 50%ȱ overȱ theȱ sameȱ period,ȱ drivenȱ mainlyȱ fromȱscheduledȱfareȱandȱtollȱincreasesȱinȱ2014ȱandȱsomeȱmodestȱgrowthȱinȱfacilityȱtraffic.ȱȱHowever,ȱgivenȱ theȱcapitalȱprogramȱcurrentlyȱpresentedȱbyȱ theȱPortȱAuthority,ȱcontinuedȱborrowingȱ inȱtheȱcapitalȱmarketsȱisȱexpectedȱtoȱbeȱrequired,ȱwithȱoutstandingȱindebtednessȱforecastedȱtoȱriseȱfromȱ$19.5ȱbillionȱinȱ2011ȱtoȱ$25.2ȱbillionȱbyȱ2020.ȱȱȱ

PreliminaryȱRecommendationsȱ&ȱNextȱStepsȱ

¾ DetailedȱcontributionȱanalysesȱforȱrevenueȱandȱnonȬrevenueȱproducingȱprojectsȱneedȱtoȱbeȱ conductedȱonȱallȱPortȱAuthorityȱbusinessȱ segmentsȱ toȱdetermineȱpotentialȱ revenueȱenhancementsȱandȱcostȱsavingsȱinitiativesȱtoȱimproveȱcashȱflow.ȱ

¾ Theȱlongȱrangeȱforecastȱmodelȱassumptionsȱshouldȱbeȱreviewedȱandȱanalyzedȱtoȱbetterȱunderstandȱtheȱvalidityȱofȱassumptionsȱsupportingȱexpectedȱmarginȱimprovementȱoverȱtheȱnextȱtenȱyears.ȱ

¾ Sensitivityȱanalysesȱshouldȱbeȱconductedȱaroundȱ“bestȱcase”,ȱ“worstȱcase”,ȱandȱ“likelyȱcase”ȱscenariosȱforȱtheȱentireȱportfolioȱofȱprojectsȱtoȱunderstandȱrelatedȱfinancialȱimpactsȱofȱ theȱ 2011ȱ Capitalȱ Plan,ȱ onceȱ finalizedȱ byȱ theȱ Specialȱ Committeeȱ andȱ Boardȱ ofȱCommissioners.ȱ

¾ Theȱ PortȱAuthorityȱ shouldȱdevelopȱ aȱ comprehensiveȱ analysisȱ ofȱ stateȱ ofȱ goodȱ repairȱ(“SGR”)ȱ projectsȱ toȱ understandȱ capitalȱ requirementsȱ forȱ transportationȱ infrastructureȱintegrity.ȱ

¾ Returnȱ onȱ assetȱ and/orȱ returnȱ onȱ investedȱ capitalȱ conceptsȱ shouldȱ beȱ consideredȱ inȱevaluatingȱfeasibilityȱofȱfutureȱcapitalȱprojects,ȱasȱwellȱasȱtheȱallocationȱofȱcapitalȱacrossȱtheȱvariousȱoperatingȱsegments.ȱ

VI. PRELIMINARYȱGENERALȱORGANIZATIONALȱOBSERVATIONSȱ

WhileȱtheȱcompletionȱofȱaȱcomprehensiveȱreviewȱofȱorganizationalȱdesignȱandȱeffectivenessȱwillȱbeȱaddressedȱinȱPhaseȱII,ȱtheȱfollowingȱpreliminaryȱobservationsȱareȱwarranted:ȱȱȱ

� Theȱ Portȱ Authorityȱ hasȱ expandedȱ itsȱ areasȱ ofȱ involvementȱ inȱ supportȱ ofȱ economicȱdevelopmentȱoverȱtheȱlastȱseveralȱdecades,ȱwhichȱcontinuesȱtoȱevolveȱ

Whileȱ theȱ Portȱ Authority’sȱ tunnels,ȱ bridges,ȱ andȱ airportsȱ continueȱ toȱ contributeȱ theȱ vastȱmajorityȱ ofȱ cashȱ flowȱwithinȱ theȱ organization,ȱ overȱ recentȱ decadesȱ theȱ Portȱ Authorityȱ hasȱbecomeȱaȱsignificantȱrealȱestateȱdeveloperȱandȱassetȱmanagerȱwithȱ itsȱownȱexpansiveȱsecurityȱforce,ȱ aȱ postureȱ thatȱwarrantsȱ furtherȱ evaluationȱ asȱ theȱ demandsȱ ofȱ theȱWTCȱ developmentȱapproachesȱ conclusion.ȱ ȱ Forȱ example,ȱ theȱ Portȱ Authorityȱ isȱ alsoȱ theȱ ownerȱ ofȱ aȱ resourceȱrecoveryȱfacility,ȱwhichȱconvertsȱwasteȱtoȱenergy.ȱȱFurthermore,ȱinȱlargeȱpartȱasȱaȱreactionȱtoȱtheȱWTCȱbombingȱinȱJuneȱ1993,ȱandȱtheȱeventsȱofȱSeptemberȱ11,ȱtheȱPortȱAuthorityȱhasȱassembledȱaȱsizeableȱsecurityȱapparatusȱincludingȱaȱpoliceȱforceȱnumberingȱoverȱ1,700ȱemployees.ȱȱȱ

Asȱ theȱPortȱAuthorityȱmovesȱ intoȱ theȱ 21stȱ century,ȱ itȱ isȱ imperativeȱ toȱ assureȱ alignmentȱwithȱindustryȱ trendsȱ inȱ technology,ȱ commerce,ȱ andȱ otherȱ areasȱ ofȱ growthȱ inȱ orderȱ toȱ ensureȱ itsȱcompetitiveȱ advantagesȱ toȱ stimulateȱ furtherȱ economicȱ developmentȱ andȱ prosperityȱ inȱ theȱregion.ȱ



ȱ16

� TheȱExecutiveȱDirectorȱposition,ȱ theȱdefactoȱCEO,ȱhasȱ turnedȱoverȱ sevenȱ timesȱ inȱ theȱlastȱtenȱyearsȱ

Withȱ suchȱ turnoverȱ atȱ theȱExecutiveȱDirectorȱ level,ȱ itȱ isȱdifficultȱ forȱ anyȱ significantȱ strategicȱinitiatives,ȱ goalsȱ andȱ objectivesȱ toȱ beȱ realizedȱ (Tableȱ 4).ȱ ȱ Organizationsȱ typicallyȱ becomeȱinwardlyȱfocusedȱandȱtendȱtoȱrunȱadriftȱinȱtheȱabsenceȱofȱleadershipȱcontinuity.ȱȱȱ

Tableȱ4ȱ–ȱExecutiveȱDirectorȱTenureȱ

ȱAdditionally,ȱ reviewȱ ofȱ theȱ PortȱAuthorityȱ organizationalȱ structuresȱ overȱ theȱ lastȱ tenȱ yearsȱshowȱaȱnumberȱofȱsignificantȱchanges.ȱȱCapitalȱplanningȱandȱprojectȱdelivery,ȱforȱexample,ȱhadȱfiveȱdifferentȱ“owners”ȱduringȱthisȱperiod.ȱȱCapitalȱplanningȱandȱprojectȱdelivery,ȱaȱcriticalȱareaȱofȱfocusȱwithinȱtheȱPortȱAuthority,ȱhasȱsufferedȱfromȱaȱlackȱofȱconsistencyȱinȱmanagementȱandȱleadership.ȱȱȱ

� TheȱnonȬappointedȱ seniorȱ careerȱ servicesȱprofessionalsȱofȱ theȱPortȱAuthorityȱhaveȱanȱunusuallyȱlongȱtenure,ȱaveragingȱ24ȱyearsȱofȱserviceȱ

Theȱ seniorȱmanagementȱ organizationȱ isȱveryȱ respectful,ȱ cordial,ȱ andȱ appearsȱ toȱhaveȱ aȱhighȱlevelȱ ofȱ dedicationȱ andȱ commitmentȱ toȱ theȱ Portȱ Authority’sȱ mission.ȱ ȱ Inȱ addition,ȱ seniorȱmanagementȱpossessesȱaȱcriticalȱknowledgeȱbaseȱandȱskillsȱthatȱneedsȱtoȱbeȱtransferredȱthroughȱintegratedȱtrainingȱprogramsȱtoȱjuniorȱstaff.ȱȱInȱtheȱabsenceȱofȱappointedȱleadershipȱcontinuityȱdrivingȱcollaborationȱandȱaccountability,ȱitȱisȱonlyȱnaturalȱforȱsuchȱaȱlongȱtenuredȱworkȱforceȱtoȱdevelopȱaȱselfȬprotectiveȱculture.ȱ

� TheȱPortȱAuthorityȱisȱaȱsiloedȱorganizationȱ

Withȱchronicȱ leadershipȱchanges,ȱbureaucraticȱorganizationsȱwillȱoftenȱ inadvertentlyȱreinforceȱtheȱbarriersȱ toȱ strategicȱbusinessȱunitȱ collaboration,ȱasȱwellȱasȱ theȱabilityȱ toȱobtainȱoperatingȱefficienciesȱderivedȱthroughȱsharedȱservices.ȱȱNonȬappointed,ȱcareerȱserviceȱprofessionalsȱoftenȱwillȱ adoptȱ strategiesȱ thatȱ protectȱ control,ȱ andȱ perpetuation,ȱ ofȱ theirȱ functionalȱ areasȱ ofȱresponsibility.ȱ ȱ Theȱ Portȱ Authorityȱ residentȱ cultureȱ reflectsȱ manyȱ ofȱ theȱ characteristicsȱassociatedȱwithȱ thisȱ phenomenon.ȱ ȱ Examplesȱ includeȱ theȱ capitalȱ planningȱ process,ȱ securityȱapparatus,ȱandȱtheȱexistingȱWTCȱconstructionȱorganization.ȱ

� Theȱ relativelyȱ recentȱ appointmentsȱ ofȱ aȱ newȱ Chairman,ȱ Viceȱ Chairman,ȱ severalȱCommissioners,ȱExecutiveȱDirectorȱandȱDeputyȱExecutiveȱDirector,ȱprovideȱtheȱimpetusȱforȱrenewedȱfocusȱandȱgovernanceȱinȱdrivingȱfutureȱPortȱAuthorityȱstrategyȱ

Inȱ theȱaftermathȱofȱSeptemberȱ11,ȱtheȱPortȱAuthority’sȱmissionȱwasȱ inȱ largeȱpartȱredirectedȱ toȱtheȱ rebuildingȱ effortsȱ aroundȱ theȱWTCȱ site.ȱ ȱ Theȱ organizationalȱ tollȱ onȱ theȱ PortȱAuthorityȱ

# Executive Directors Tenure

1 Patrick J. Foye 2011 - Current2 Christopher O. Ward 2008 - 20113 Anthony Shorris 2005 - 20084 Kenneth J. Ringler, Jr. 2004 - 20055 Joseph J. Seymour 2001 - 20046 Neil D. Levin 20017 Robert E. Boyle 1997 - 2001



ȱ17

duringȱtheȱlastȱdecadeȱcannotȱbeȱunderestimated.ȱȱUnderȱtheȱpreviousȱExecutiveȱDirector,ȱtrustȱandȱconfidenceȱbetweenȱtheȱBoardȱofȱCommissionersȱandȱitsȱexecutiveȱmanagementȱreportedlyȱdeteriorated;ȱasȱaȱresult,ȱtheȱBoardȱofȱCommissionersȱadoptedȱrolesȱandȱresponsibilitiesȱinȱdailyȱoperationsȱandȱmanagementȱatypicalȱforȱaȱgoverningȱboard.ȱȱTheȱlossȱinȱconfidenceȱwasȱlargelyȱascribableȱ toȱ sentimentsȱ byȱ theȱ Boardȱ ofȱ Commissionersȱ thatȱ theyȱ wereȱ notȱ beingȱ timelyȱpresentedȱwithȱmeaningfulȱ andȱ reliableȱ informationȱ toȱmakeȱ informedȱdecisions.ȱ ȱWhileȱ theȱresponseȱofȱ theȱBoardȱofȱCommissionersȱmayȱbeȱ ȱunderstandableȱgivenȱ theȱcircumstances,ȱ itsȱnewȱ leadershipȱ hasȱ recognizedȱ theȱ importanceȱ ofȱ restoringȱ anȱ elevatedȱ focusȱ onȱ theȱ PortȱAuthority’sȱbroaderȱvision,ȱmissionȱandȱ theȱrevitalizationȱofȱ itsȱstrategies,ȱsupportingȱpoliciesȱandȱoversightȱasȱitȱadvancesȱtoȱmeetȱitsȱchallenges.ȱȱȱ

TheȱPortȱAuthorityȱwouldȱlikelyȱbenefitȱfromȱaȱmeaningfulȱorganizationalȱredesignȱtoȱfocusȱonȱitsȱ strategicȱ businessȱ unitsȱ andȱ costȱ savingȱ sharedȱ servicesȱ functions.ȱ ȱ Toȱ beȱ successful,ȱentrustedȱappointedȱseniorȱleadershipȱneedsȱeffectiveȱcommandȱandȱcontrolȱtoȱmanageȱchangeȱandȱ driveȱ accountabilityȱ throughoutȱ theȱ organization.ȱ ȱ Careerȱ serviceȱ managementȱ mustȱproactivelyȱcommunicateȱreliableȱandȱrelevantȱinformationȱinȱproperȱcontextȱsoȱthatȱappointedȱleadershipȱisȱbestȱpositionedȱforȱeffectiveȱdecisionȱmaking.ȱȱManagementȱandȱrepresented/nonȬrepresentedȱ employeesȱmustȱ collaborateȱ onȱ theȱmannerȱ andȱmeansȱ thatȱwillȱ allowȱ theȱ PortȱAuthorityȱ toȱoperateȱwithȱ theȱhighestȱ levelsȱofȱproductivityȱandȱefficiency.ȱ ȱMigrationȱ fromȱaȱcultureȱbasedȱonȱtenureȱtoȱoneȱbasedȱonȱmeritocracyȱwillȱbeȱessentialȱtoȱitsȱcontinuedȱsuccess.ȱ

� TheȱPortȱAuthorityȱ isȱaȱ transportationȱ infrastructureȱassetȱmanagerȱandȱmustȱdeployȱitsȱcapitalȱwithȱproperȱattentionȱtoȱpreservationȱofȱinfrastructureȱintegrityȱ

Theȱ capitalȱ constraintsȱ ofȱ theȱ organizationȱmayȱ necessitateȱ aȱ topȬdownȱ budgetingȱ process.ȱȱHowever,ȱaȱcomprehensiveȱanalysisȱofȱneedȱwithȱaȱstandardizedȱmethodȱofȱprioritizingȱcapitalȱspendȱ isȱ equallyȱ required.ȱ ȱTheȱPortȱAuthorityȱ isȱ anȱ assetȱmanagerȱ thatȱ ownsȱ andȱmanagesȱbillionsȱofȱdollarsȱofȱinfrastructureȱandȱmustȱdevoteȱaȱsignificantȱportionȱofȱitsȱcapitalȱtoȱsupportȱtheȱstateȱofȱgoodȱrepairȱofȱthisȱportfolioȱasȱwellȱasȱprovideȱforȱnewȱ investmentsȱ inȱtheȱsystemȱwithȱdiscipline.ȱ ȱAȱ systematicȱ evaluationȱ ofȱneedsȱmustȱ beȱ conductedȱ toȱ balanceȱ theȱ capitalȱcapacityȱ constraintsȱ ofȱ theȱ PortȱAuthorityȱwithȱ theȱ imperativesȱ ofȱ theȱ operatingȱ businesses,ȱwhileȱappropriatelyȱprovidingȱforȱcontingenciesȱinȱanȱagingȱassetȱbase.ȱ ȱInȱaddition,ȱwhileȱtheȱPortȱAuthorityȱhasȱmadeȱprogressȱinȱidentifyingȱaȱhierarchyȱtoȱbetterȱmanageȱtheȱstewardshipȱofȱ capital,ȱ effectiveȱ commandȱ andȱ controlȱ overȱ planningȱ processesȱ andȱ disciplinedȱ projectȱdeliveryȱmustȱbeȱestablished.ȱȱȱ

� TheȱPortȱAuthorityȱneedsȱtoȱfurtherȱdevelopȱtoolsȱtoȱdriveȱaccountabilityȱȱ

TheȱPortȱAuthorityȱshouldȱconsiderȱaligningȱitsȱkeyȱoperatingȱdepartmentsȱasȱstrategicȱbusinessȱunitsȱ(“SBUs”).ȱȱAsȱSBU’s,ȱquantifiableȱmetricsȱshouldȱbeȱdeveloped,ȱmeasuredȱandȱconsistentlyȱmonitoredȱ toȱ driveȱ accountabilityȱ inȱ achievingȱ theȱ Portȱ Authority’sȱ missionȱ andȱ specificȱoperatingȱ objectives.ȱ ȱTheȱExecutiveȱDirectorȱ andȱBoardȱ ofȱCommissionersȱ areȱdevelopingȱ aȱ“dashboard”ȱthatȱprovidesȱquickȱfeedbackȱandȱstatusȱofȱfinancialȱandȱoperationalȱperformance,ȱkeyȱinitiatives,ȱandȱcapitalȱprogramȱdelivery.ȱ



ȱ18

� Theȱ Portȱ Authority’sȱ compensationȱ structuresȱ mustȱ beȱ alignedȱ withȱ theȱ missionȱstatementȱandȱrelatedȱgoalsȱandȱobjectivesȱtoȱensureȱappropriateȱtargetsȱareȱachievedȱ

Compensationȱ structuresȱ needȱ toȱ beȱ alignedȱ throughoutȱ theȱ Portȱ Authorityȱ organizationȱincludingȱ managementȱ andȱ allȱ levelsȱ ofȱ representedȱ andȱ nonȬrepresentedȱ employees.ȱConsiderationȱ shouldȱbeȱgivenȱ toȱ adoptingȱ “atȱ risk”ȱ elementsȱofȱmanagementȱ compensationȱthatȱareȱcontingentȱuponȱtheȱachievementȱofȱoperatingȱobjectives.ȱ

VII. PRELIMINARYȱCOMPENSATIONȱANDȱBENEFITSȱASSESSMENTȱ

SCOPEȱ

Navigantȱhasȱbeenȱaskedȱtoȱperformȱanȱassessmentȱofȱtheȱorganizationalȱdesignȱandȱoperationsȱofȱ theȱPortȱAuthority,ȱwithȱ anȱ initialȱ focusȱonȱ laborȱ costs,ȱ includingȱbothȱ compensationȱ andȱbenefits.ȱ ȱ Findingsȱ fromȱ Navigant’sȱ reviewȱ areȱ meantȱ toȱ provideȱ aȱ frameworkȱ forȱrecommendationsȱ thatȱ canȱ ultimatelyȱ beȱ implementedȱ asȱ aȱ seriesȱ ofȱ parallelȱ initiativesȱbeginningȱ inȱ 2012.ȱ ȱ Theȱ scopeȱ ofȱ theȱ laborȱ costsȱ assessmentȱ includedȱ benchmarkingȱcompensationȱ andȱ benefitsȱ byȱmajorȱ jobȱ categoriesȱ andȱ reviewingȱ benefitsȱ packagesȱ againstȱprevailingȱpracticeȱinȱtheȱpublicȱandȱprivateȱsector.ȱ

METHODOLOGYȱ

TheȱbenchmarkingȱexerciseȱincludedȱreviewȱofȱcompensationȱandȱbenefitsȱforȱtheȱStateȱofȱNewȱYorkȱ andȱ theȱ Stateȱ ofȱNewȱ Jerseyȱ andȱ significantȱ publicȱ authoritiesȱ inȱ theȱNewȱ Yorkȱ Cityȱmetropolitanȱ region.ȱ ȱ Inȱ addition,ȱwithȱ respectȱ toȱ compensationȱ benchmarkingȱ ofȱ theȱ PortȱAuthority’sȱ fourȱ largestȱ lineȱdepartments,ȱ fiveȱ toȱsevenȱpublicȱsectorȱagenciesȱandȱ fiveȱ toȱ tenȱprivateȱ sectorȱ companiesȱ wereȱ initiallyȱ identifiedȱ andȱ reviewedȱ forȱ asȱ potentialȱ peerȱcomparables.ȱȱKeyȱbusinessȱattributesȱofȱeachȱpotentialȱpeerȱwereȱcarefullyȱscrutinizedȱ(e.g.,ȱsizeȱofȱoperation,ȱnumberȱandȱageȱofȱfacilities,ȱoperatorȱvs.ȱinfrastructureȱprovider,ȱetc.).ȱȱUltimately,ȱaȱ smallerȱ subsetȱofȱpeerȱgroupsȱwasȱ selectedȱ forȱ eachȱ lineȱdepartmentȱofȱ theȱPortȱAuthorityȱbasedȱonȱreviewȱofȱtheseȱattributesȱ(pleaseȱreferȱtoȱAppendixȱ–ȱAȱforȱdetails).ȱȱȱȱȱ

Toȱ completeȱ theȱ initialȱ reviewȱ ofȱ compensationȱ andȱ benefitȱ costsȱ ofȱ theȱ Portȱ Authority,ȱNavigantȱreviewedȱnumerousȱdocumentsȱ(includingȱunionȱlaborȱcontracts),ȱconductedȱmultipleȱinȬpersonȱandȱtelephonicȱinterviewsȱandȱdiscussions,ȱasȱwellȱasȱperformedȱdetailedȱanalysesȱofȱbaseȱpay,ȱovertime,ȱ“addȬon”ȱcompensation,ȱhealthcareȱcosts,ȱandȱotherȱbenefitsȱanalyses.ȱ

Theȱ followingȱprovidesȱNavigant’sȱpreliminaryȱobservations,ȱ findings,ȱandȱ recommendationsȱwithȱ respectȱ toȱ (i)ȱ employeeȱheadcount,ȱ (ii)ȱ compensation,ȱ (iii)ȱbenefits,ȱ andȱ (iv)ȱ representedȱemployeeȱcontracts.ȱȱȱ

PRELIMINARYȱGENERALȱOBSERVATIONSȱ

x TheȱPortȱAuthority’sȱactualȱheadcountȱasȱofȱNovemberȱ2011ȱtotalingȱ6,913ȱwasȱrelativelyȱflatȱwhenȱcomparedȱtoȱtheȱ2001ȱheadcountȱofȱ6,954.ȱȱWhileȱtheȱlineȱdepartmentȱandȱstaffȱservicesȱheadcountȱlevelsȱhaveȱactuallyȱdecreased,ȱthisȱhasȱbeenȱoffsetȱbyȱgrowthȱofȱoverȱ



ȱ19

27%ȱ inȱ theȱ securityȱ functionȱ inȱ anȱ apparentȱ protractedȱ reactionȱ toȱ theȱ eventsȱ ofȱSeptemberȱ11.ȱȱ

x Theȱ overallȱ organizationalȱ structureȱ ofȱ theȱ PortȱAuthorityȱ isȱ heavilyȱ concentratedȱ inȱseniorȱandȱmiddleȱmanagement.ȱȱThisȱstructuralȱcharacteristicȱinȱlargeȱpartȱisȱdrivenȱbyȱtheȱ longȬtenuredȱnatureȱofȱ theȱemployeeȱworkforceȱ thatȱhasȱbeenȱpromotedȱbasedȱonȱseniorityȱ andȱ notȱ necessarilyȱmerit.ȱ ȱ Inȱ part,ȱ theȱ broadȱmiddleȱmanagementȱ ofȱ theȱorganizationȱ isȱattributableȱ toȱ theȱ largeȱnumberȱofȱhighlyȱskilledȱengineersȱrequiredȱ toȱsupportȱitsȱassetȱmanagementȱandȱdevelopmentȱresponsibilities.ȱȱAsȱaȱbyproductȱofȱthisȱhistoricalȱ trend,ȱ comparisonȱofȱ theȱ averageȱ compensationȱofȱ theȱPortȱAuthorityȱ toȱ itsȱpeerȱ groupȱ revealsȱ thatȱ theȱ Portȱ Authority,ȱ whenȱ evaluatingȱ averageȱ employeeȱcompensationȱcosts,ȱisȱatȱtheȱtopȱofȱaverageȱpayȱranges.ȱȱȱ

x However,ȱfurtherȱanalysisȱrevealsȱthatȱtheȱaverageȱcompensationȱofȱtheȱmostȱsenior,ȱasȱwellȱasȱtheȱtopȱ25ȱpositionsȱwithinȱlineȱdepartmentsȱisȱatȱtheȱmedianȱorȱbelowȱtheȱpeerȱgroup.ȱ ȱThus,ȱtheȱfactȱthatȱtheȱaverageȱemployeeȱcompensationȱresidesȱatȱorȱaboveȱtheȱPortȱ Authority’sȱ peerȱ groupȱ isȱ ascribableȱ toȱ theȱ veryȱ broadȱ middleȱ andȱ seniorȱmanagementȱgroupȱofȱ theȱorganization,ȱandȱnotȱ theȱ compensationȱofȱ theȱmostȱ seniorȱpersonnel.ȱȱ

x Fromȱ 2006ȱ toȱ 2010,ȱ totalȱ grossȱ compensationȱ atȱ theȱ PortȱAuthorityȱ grewȱ fromȱ $629.3ȱmillionȱtoȱapproximatelyȱ$749.3,ȱrespectively.ȱ ȱOfȱthisȱamount,ȱbaseȱsalariesȱgrewȱfromȱ$507.6ȱ millionȱ toȱ $581.1ȱ million,ȱ aȱ compoundedȱ annualȱ growthȱ rateȱ ofȱ onlyȱ 2.7%.ȱȱHowever,ȱ otherȱ amountsȱ ofȱ compensation,ȱ (i.e.,ȱ “addȬon”ȱ compensation)ȱ suchȱ asȱpayȱassociatedȱwithȱtheȱvacationȱexchangeȱprogramȱandȱcertainȱlongevityȱprogramsȱgrewȱbyȱcompoundedȱannualȱgrowthȱratesȱofȱ10.6%ȱandȱ5.5%,ȱrespectively.ȱȱOvertime,ȱtheȱlargestȱpercentageȱ ofȱ “addȬon”ȱ compensationȱ representsȱ 23%ȱ ofȱ theȱ totalȱ baseȱ payȱ forȱrepresentedȱemployees.ȱ ȱMoreover,ȱ“addȬon”ȱ compensationȱandȱbenefitsȱ forȱallȱactiveȱemployeesȱwhenȱcombinedȱandȱ takenȱasȱaȱpercentageȱofȱbaseȱ salaryȱ isȱapproximatelyȱ70%.ȱ ȱ Theseȱ “addȬon”ȱ compensationȱ costsȱ areȱ relativelyȱ rapidȱ growingȱ andȱ tendȱ toȱobfuscateȱactualȱtotalȱcostsȱperȱemployeeȱbeingȱabsorbedȱbyȱtheȱPortȱAuthority.ȱȱ

x Benefitsȱhaveȱ increasedȱapproximatelyȱ35%,ȱ fromȱ$340.7ȱmillionȱ inȱ2006ȱ toȱoverȱ$458.8ȱmillionȱinȱ2010,ȱdrivenȱbyȱgrowthȱinȱhealthcareȱandȱtheȱpopulationȱofȱretireesȱthatȱdrivesȱupȱ pensionȱ costsȱ andȱ otherȱ postȱ employmentȱ benefitsȱ (“OPEB”).ȱ ȱWhenȱ combined,ȱcompensationȱandȱbenefitsȱperȱactiveȱemployeeȱgrewȱtoȱanȱestimatedȱ$143,060ȱbyȱ2010.ȱȱȱȱ

x Inȱanȱeffortȱtoȱreduceȱtheseȱhighȱcosts,ȱtheȱBoardȱofȱCommissionersȱisȱactivelyȱpursuingȱpolicyȱchangesȱrelatedȱtoȱhealthcareȱcontributions,ȱvacationȱpolicies,ȱasȱwellȱasȱ“addȬon”ȱcompensationȱandȱincentiveȱprograms.ȱȱCurrentȱinitiativesȱbeingȱevaluatedȱinclude,ȱbutȱareȱnotȱlimited,ȱto:ȱ

o Increaseȱinȱhealthȱcareȱbenefitȱcontributions,ȱwhichȱifȱimplementedȱwouldȱresultȱinȱexpectedȱsavingsȱoverȱtheȱnextȱfourȱyearsȱofȱapproximatelyȱ$103.8ȱmillion.ȱ



ȱ20

o Eliminationȱ ofȱ longevityȱ andȱ unusedȱ vacationȱ exchangeȱdaysȱ payoutȱ forȱ nonȬrepresentedȱ employees;ȱ basedȱ onȱ preliminaryȱ reviewȱ ofȱ payrollȱ files,ȱ annualȱcostsȱforȱtheseȱprogramsȱwereȱapproximatelyȱ$9.1ȱmillionȱinȱ2010.ȱȱ

x Itȱisȱimportantȱtoȱnoteȱthatȱtheȱrepresentedȱlaborȱforce,ȱatȱapproximatelyȱ68%ȱofȱtotal,ȱisȱtheȱ largestȱ partȱ ofȱ theȱ PortȱAuthorityȱ employeeȱ base.ȱ ȱ Theȱ Boardȱ ofȱCommissionersȱrecognizesȱ itȱwillȱ beȱ criticalȱ toȱworkȱ collaborativelyȱwithȱ bothȱ representedȱ andȱ nonȬrepresentedȱemployeesȱ toȱ improveȱefficiencyȱandȱproductivity.ȱ ȱ Inȱ furtheranceȱofȱ thatȱobjective,ȱexpiredȱunionȱcontractsȱareȱbeingȱcarefullyȱevaluatedȱnotȱonlyȱ forȱunitȱ laborȱcostsȱandȱbenefits,ȱbutȱalsoȱwithȱparticularȱfocusȱonȱworkȱruleȱmodificationsȱthatȱwouldȱbeȱ constructiveȱ inȱ advancingȱ theȱ efficiencyȱ andȱ effectivenessȱ ofȱ theȱ PortȱAuthority’sȱoperations,ȱpriorȱtoȱcollectiveȱbargainingȱnegotiations.ȱ

PhaseȱIIȱofȱNavigant’sȱengagement,ȱwhichȱ isȱexpectedȱ toȱbeȱcompletedȱbyȱ lateȱJuneȱ2012,ȱwillȱincludeȱanȱorganizationalȱdesignȱreviewȱandȱspecificȱrecommendationsȱtoȱfurtherȱenhanceȱtheȱactionsȱ ofȱ theȱ Boardȱ ofȱCommissioners.ȱ ȱ Theȱ followingȱ interimȱ reportȱ isȱ inȱ responseȱ toȱ theȱSpecialȱ Committee’sȱ requestedȱ areasȱ ofȱ initialȱ focusȱ andȱ providesȱ Navigant’sȱ preliminaryȱobservations,ȱfindings,ȱandȱrecommendationsȱwithȱrespectȱtoȱ(i)ȱemployeeȱheadcountȱtrends,ȱ(ii)ȱcompensationȱ benchmarking,ȱ (iii)ȱ benefitsȱ benchmarking,ȱ andȱ (iv)ȱ representedȱ employee’sȱcontractȱconsiderations.ȱȱȱ

EMPLOYEEȱHEADCOUNTȱ

Theȱ totalȱemployeeȱheadcountȱhasȱremainedȱrelativelyȱflatȱoverȱ theȱ lastȱdecadeȱ(fromȱ6,954ȱ inȱ2001ȱtoȱ6,913ȱasȱofȱNovemberȱ2011).ȱȱȱ

ȱObservationsȱ&ȱFindingsȱ

� Headcountȱmixȱhasȱshiftedȱfromȱlineȱdepartmentsȱandȱstaffȱservicesȱtoȱpublicȱsafetyȱ

Fromȱ2001ȱtoȱ2010,ȱlineȱdepartmentȱheadcountȱdeclinedȱbyȱ4.3%ȱ(fromȱ3,279ȱtoȱ3,139)ȱandȱstaffȱservices,ȱ engineeringȱ&ȱ otherȱ headcountȱ declinedȱ byȱ 11.9%ȱ (fromȱ 2,296ȱ toȱ 2,022)ȱ (Figureȱ 3).ȱȱHowever,ȱpublicȱ safetyȱ headcountȱ increasedȱ byȱ 27.1%ȱ (fromȱ 1,379ȱ toȱ 1,752).ȱ ȱTheȱ growthȱ inȱpublicȱsafetyȱisȱinȱresponseȱtoȱSeptemberȱ11ȱandȱheightenedȱsecurityȱeffortsȱthroughoutȱtheȱPortȱAuthorityȱorganization.ȱ



ȱ21

Figureȱ3ȱ–ȱStaffingȱAllocationȱTrendȱ(2001ȱ–ȱYTDȱNovȱ2011)ȱ

ȱ

� PortȱAuthorityȱmanagesȱheadcountȱtoȱȈauthorized”ȱvs.ȱ“actual”ȱ

Managingȱ headcountȱ toȱ anȱ annuallyȱ budgeted,ȱ authorizedȱ numberȱ (approximatelyȱ 7,200ȱ inȱ2006)ȱcanȱ resultȱ inȱdelayedȱ interventionȱ inȱaȱ recessionaryȱenvironment.ȱ ȱTheȱPortȱAuthority’sȱactualȱheadcountȱincreasedȱfromȱ6,918ȱtoȱ7,200,ȱorȱ4.0%,ȱduringȱtheȱrecessionȱofȱ2008ȱandȱ2009ȱbeforeȱ ultimatelyȱ decliningȱ inȱ 2010.ȱ ȱ Theȱ Portȱ Authorityȱ wouldȱ haveȱ benefitedȱ fromȱ anȱexpeditedȱ reviewȱ andȱ timelyȱ adjustmentȱ toȱ authorizedȱ headcountȱ goingȱ intoȱ theȱ recession.ȱȱHowever,ȱ theȱ adjustmentȱ toȱ authorizedȱ headcountȱwasȱ notȱmadeȱ untilȱ 2009,ȱ andȱ theȱ actualȱheadcountȱreductionȱwasȱnotȱimplementedȱuntilȱ2010,ȱprimarilyȱthroughȱretirementȱincentivesȱ(Tableȱ5).ȱ

Tableȱ5ȱ–ȱ“Actual”ȱvs.ȱ“Authorized”ȱStaffingȱTrendsȱ(2006ȱȬȱYTDȱNovȱ2011)ȱ

ȱ

� Productivityȱ levelsȱatȱAviation,ȱTunnels,ȱBridgesȱandȱTerminals,ȱandȱPortȱCommerceȱappearȱtoȱhaveȱincreasedȱsinceȱ2001,ȱwhileȱPATHȱappearsȱtoȱhaveȱdecreasedȱ

Theȱ slightȱheadcountȱ reductionȱandȱ increasedȱ trafficȱatȱAviation,ȱTB&T,ȱandȱPortȱCommerceȱsuggestsȱaȱlevelȱofȱproductivityȱincrease,ȱandȱlikelyȱreflectsȱaȱcombinationȱofȱtechnologyȱandȱtheȱfixedȱ aspectȱ natureȱ ofȱ individualȱ facilityȱ laborȱ requirements.ȱ ȱ PATHȱ wasȱ theȱ onlyȱ lineȱdepartmentȱ whereȱ actualȱ headcountȱ increasedȱ duringȱ thisȱ period,ȱ whileȱ trafficȱ essentiallyȱremainedȱflat,ȱimplyingȱlowerȱproductivity.ȱȱ

ȱ

3,279

3,139

1,379

1,752

2,296

2,022

- 2,000 4,000 6,000 8,000

2001

YTD Nov 2011

Line Departments Public Safety & Security Staff Services, Engineering & Other

(140) (274)373

Total Headcount:

6,954

Total Headcount:

6,913

Nov(#'s in 000's, except Headcount) 2006 2007 2008 2009 2010 2011

Total Year End Actual Headcount 6,935 6,918 7,200 7,163 6,848 6,913 YOY Change (#) (31) (17) 282 (37) (315) 65

Total Authorized Staffing 7,181 7,128 7,127 6,977 6,977 6,777 YOY Change (#) (13) (53) (1) (150) - (200)

Actual Workforce Greater Than / (Less Than) Auth. (246) (210) 73 186 (129) 136 % Variance (4%) (3%) 1% 3% (2%) 2%



ȱ22

� Redundantȱsupportȱservicesȱexistȱinȱmultipleȱareasȱofȱtheȱorganizationȱ

Aȱ numberȱ ofȱ areasȱ existȱ withinȱ theȱ Portȱ Authorityȱ whereȱ certainȱ functionsȱ areȱ partiallyȱreplicatedȱ inȱ bothȱ lineȱ departmentsȱ asȱwellȱ asȱ administrativeȱ departmentsȱ (e.g.,ȱ elementsȱ ofȱHumanȱ Resources,ȱ RiskȱManagement,ȱ Finance,ȱ Technology,ȱ Planningȱ&ȱDevelopment,ȱ RealȱEstateȱandȱSecurity).ȱ


¾ FocusȱonȱrealȬtime,ȱactual,ȱasȱwellȱasȱauthorized,ȱheadcountȱtoȱmoreȱproactivelyȱmanageȱsizeȱofȱlaborȱforce.ȱ

¾ Theȱ significantȱ headcountȱ increaseȱ inȱ publicȱ safetyȱ &ȱ securityȱ shouldȱ beȱ furtherȱanalyzedȱ inȱ theȱ contextȱ ofȱ aȱ specialȱ securityȱ reportȱ beingȱ preparedȱ byȱ Theȱ ChertoffȱGroup.ȱ

¾ Identifyȱ usefulȱ productivityȱmetricsȱ toȱ determineȱ appropriateȱ staffingȱ levelsȱ forȱ nonȬrepresentedȱandȱrepresentedȱemployees.ȱ

¾ Reviewȱ redundantȱ areasȱ ofȱ supportȱ servicesȱ toȱ determineȱ theȱ mostȱ effectiveȱorganizationalȱdesignȱandȱidentifyȱopportunitiesȱforȱcostȱsavings.ȱ

COMPENSATIONȱ

Sinceȱ2006,ȱtheȱtotalȱgrossȱcompensationȱincreasedȱfromȱ$629.3ȱmillionȱtoȱ$749.3ȱmillionȱ(beforeȱcapitalizedȱ labor),ȱ aȱ compoundedȱ annualȱ growthȱ rateȱ increaseȱ ofȱ 3.6%.ȱ ȱAsȱ aȱ percentageȱ ofȱrevenue,ȱitȱhasȱessentiallyȱremainedȱflatȱatȱ21%.ȱ ȱInȱtheȱsameȱperiod,ȱbaseȱsalaryȱhasȱincreasedȱfromȱ $507.6ȱmillionȱ toȱ $581.1ȱmillion,ȱ aȱ compoundedȱ annualȱ growthȱ rateȱ increaseȱ ofȱ 2.7%.ȱȱHowever,ȱlongevityȱandȱunusedȱvacationȱexchangeȱdaysȱpayoutȱgrewȱatȱaȱcompoundedȱannualȱgrowthȱrateȱofȱ5.5%ȱandȱ10.6%,ȱrespectivelyȱ(Tableȱ6).ȱ

Tableȱ6ȱ–ȱTotalȱCompensationȱTrendȱ(2006ȱ–ȱ2010)ȱ

ȱNotes:ȱ

(1) Amountsȱearnedȱbyȱemployeesȱduringȱaȱgivenȱyearȱthatȱareȱnotȱexpectedȱtoȱpaidȱduringȱtheȱsameȱyear.ȱ(2) Laborȱcostsȱinȱsupportȱofȱcapitalȱprojectȱspending.ȱ

2006-2010($ In 000's) 2006 2007 2008 2009 2010 CAGRYear-end Headcount 6,935 6,918 7,200 7,163 6,848 -0.3%

Revenue $3,038,538 $3,191,626 $3,527,552 $3,552,243 $3,634,023 3.6%

Employee CompensationBase 507,623 524,927 546,431 575,957 581,099 2.7%Overtime 86,763 96,025 103,234 88,560 85,376 -0.3%Longevity 11,863 12,290 12,800 14,942 15,514 5.5%Unused Days Payout 8,851 10,567 9,869 12,218 14,626 10.6%Other Additional Comp. 20,193 23,069 31,226 35,953 25,270 4.6%Gross Compensation, before Accruals $635,293 $666,879 $703,560 $727,629 $721,885 2.6%

As a % of Revenue 21% 21% 20% 20% 20%

Accrued Payroll and Other Accrued (1) (6,038) 17,465 7,776 7,931 27,425 NATotal Compensation, Gross $629,255 $684,343 $711,336 $735,560 $749,310 3.6%

As a % of Revenue 21% 21% 20% 21% 21%

Capitalized Labor, Compensation (2) ($83,904) ($86,975) ($94,773) ($108,327) ($115,327) 6.6%Total Compensation, Net (on P&L) $545,352 $597,369 $616,562 $627,234 $633,983 3.1%

As a % of Revenue 18% 19% 17% 18% 17%



ȱ23

Inȱ2010,ȱtheȱaverageȱcompensationȱofȱPortȱAuthorityȱemployees,ȱexcludingȱcostsȱofȱbenefits,ȱwasȱ$105,416ȱ (baseȱ salaryȱ ofȱ $84,857ȱ plusȱ “addȬon”ȱ compensationȱ ofȱ $20,559).ȱ ȱ “AddȬon”ȱcompensationȱ isȱcomprisedȱofȱovertime,ȱ longevityȱpayments,ȱunusedȱvacationȱexchangeȱdaysȱpayout,ȱandȱotherȱcompensationȱtogetherȱcomprisingȱapproximatelyȱ24%ȱofȱbaseȱsalaryȱ(Tableȱ7).ȱ

Tableȱ7ȱ–ȱTotalȱCompensationȱ&ȱBenefitsȱTrendȱperȱActiveȱEmployeeȱ(2006ȱ–ȱ2010)ȱ

ȱNotes:ȱ

1) Calculatedȱbeforeȱtheȱallocationȱofȱcapitalizedȱlaborȱandȱpayrollȱaccrualsȱ2) Primarilyȱcomprisedȱofȱhealthȱinsurance,ȱbutȱalsoȱincludesȱvision,ȱdental,ȱlife,ȱandȱlongȬtermȱdisabilityȱinsurance,ȱforȱactiveȱemployeesȱonly.ȱ3) CalculatedȱtakingȱtheȱtotalȱPension,ȱOPEBȱ&ȱOtherȱBenefitsȱcostȱandȱapplyingȱaȱproȬrataȱpercentageȱbasedȱonȱactiveȱemployeesȱversusȱbothȱ

activeȱandȱretired.ȱ

Otherȱadditionalȱcompensationȱ isȱcomprisedȱofȱretroactiveȱpayments,ȱoneȬtimeȱpaymentsȱ (i.e.,ȱthoseȱmadeȱannuallyȱinȱaȱlumpȱsum,ȱsuchȱasȱgrievanceȱawards,ȱattendanceȱincentives,ȱuniformȱallowancesȱ andȱ lumpȱ sumȱmeritȱ increases),ȱ andȱmiscellaneousȱpaymentsȱ suchȱ asȱ shortȱ termȱdisabilityȱpayments.ȱ

Theȱhealthȱ relatedȱbenefitȱcostsȱperȱemployeeȱ (excludingȱ retirees)ȱwereȱ$23,380ȱ (forȱdetailȱseeȱTableȱ 15).ȱ ȱ Pension,ȱ OPEB,ȱ andȱ otherȱ benefitsȱ combinedȱ toȱ approximatelyȱ $14,264ȱ (activeȱemployeeȱ estimate,ȱ assumingȱ sameȱ costsȱ perȱ activeȱ vs.ȱ perȱ retired).ȱ ȱ Inȱ theȱ aggregate,ȱ theȱestimated,ȱaverage,ȱtotalȱcostȱofȱcompensationȱandȱbenefitsȱforȱaȱPortȱAuthorityȱemployeeȱwasȱ$143,060ȱ (Tableȱ 7).ȱ ȱ Inȱ total,ȱ approximatelyȱ 70%ȱ ofȱ baseȱ salaryȱ isȱ comprisedȱ ofȱ “addȬon”ȱcompensationȱandȱbenefitsȱ(activeȱemployeesȱonly).ȱ


� Theȱaverageȱbaseȱsalaryȱ forȱPortȱAuthority’sȱemployees,ȱasȱwellȱasȱtheȱsalariesȱofȱtheȱtopȱ25ȱemployees,ȱareȱamongstȱtheȱhighestȱrelativeȱtoȱpeerȱgroupȱ

ExceptȱforȱNewȱYorkȱPowerȱAuthority,ȱtheȱaverageȱbaseȱsalaryȱofȱ$84,857ȱforȱtheȱPortȱAuthorityȱisȱ higherȱ thanȱ Newȱ Yorkȱ andȱ Newȱ Jerseyȱ stateȱ employeesȱ andȱ otherȱ peerȱ groupȱ publicȱauthoritiesȱinȱtheȱmetropolitanȱregionȱ(Figureȱ4).ȱȱ

2006-2010(Whole $, unless otherwise noted) 2006 2007 2008 2009 2010 CAGRYear-end Headcount 6,935 6,918 7,200 7,163 6,848 -0.3%

Revenue ($ in 000's) 3,038,538 3,191,626 3,527,552 3,552,243 3,634,023 3.6%

Average Employee CompensationBase $73,197 $75,878 $75,893 $80,407 $84,857 3.0%Overtime 12,511 13,880 14,338 12,364 12,467 -0.1%Longevity 1,711 1,776 1,778 2,086 2,265 5.8%Unused Days Payout 1,276 1,527 1,371 1,706 2,136 10.8%Other Additional Comp. 2,912 3,335 4,337 5,019 3,690 4.9%

Total Average Compensation (1) $91,607 $96,398 $97,717 $101,582 $105,416 2.8%Total Employee Comp. as a % of Revenue 21% 21% 20% 20% 20%

Average Health Benefit per Employee (2) 16,318 $18,042 $18,488 $20,757 $23,380 7.5%Average Pension, OPEB, & Other Benefits Cost per Employee (3) 11,419 12,333 10,941 11,610 14,264 4.5%

Total Compensation & Benefits per Employee $27,737 $30,376 $29,429 $32,367 $37,645 6.3%

Total Compensation & Benefits Expense per Employee $119,344 $126,773 $127,145 $133,948 $143,060 3.7%



ȱ24

Figureȱ4ȱȬȱAverageȱEmployeeȱBaseȱSalaryȱbyȱPublicȱAgencyȱ&ȱAuthorityȱ(2010)ȱ

ȱFurthermore,ȱ theȱ averageȱofȱ theȱ topȱ 25ȱbaseȱ salariesȱofȱ $226,934ȱ atȱ theȱPortȱAuthorityȱ isȱ theȱhighestȱwhenȱ comparedȱ toȱ theȱ averageȱ topȱ 25ȱ salariesȱ ofȱ allȱ otherȱ publicȱ authoritiesȱ inȱ theȱmetropolitanȱregionȱ(Figureȱ5).ȱ

Figureȱ5ȱȬȱTopȱ25ȱEmployeesȱAverageȱBaseȱSalaryȱbyȱPublicȱAuthorityȱ(2010)ȱ

ȱWhileȱ theȱ Portȱ Authorityȱ seemsȱ toȱ beȱ compensatedȱ higherȱ thanȱ otherȱ publicȱ peers,ȱ itȱ isȱimportantȱ toȱnoteȱ theȱ complexityȱofȱ theȱPortȱAuthority’sȱoperationsȱ (i.e.,ȱoperatingȱ inȱ transit,ȱconstruction,ȱassetȱmanagement,ȱetc.)ȱinȱcomparisonȱtoȱotherȱorganizations,ȱsuchȱasȱNewȱJerseyȱTransitȱ (i.e.,ȱ onlyȱ operatingȱ inȱ transit).ȱ ȱ Likewise,ȱ theȱ Portȱ Authorityȱ believes,ȱ dueȱ toȱ theȱcomplexȱ natureȱ ofȱ theȱ organization,ȱ manyȱ employeesȱ tendȱ toȱ beȱ highlyȱ educatedȱ andȱspecializedȱ (i.e.,ȱengineers,ȱcareerȱprofessionals),ȱ thereforeȱcommandingȱhigherȱcompensation.ȱȱInȱ thisȱ regard,ȱ theȱNewȱYorkȱPowerȱAuthorityȱexhibitsȱaȱ similarȱemployeeȱprofileȱ (primarilyȱengineeringȱstaff),ȱyieldingȱhigherȱcompensation,ȱonȱparȱwithȱtheȱPortȱAuthority.ȱ

$84,857 $87,725

$68,317

$59,497

$51,366 $46,502

$59,263

$49,243 $56,729 $57,257

$-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

$100,000

$226,934 $213,161

$183,415

$127,584

$177,626

$135,644

$167,960

$-

$50,000

$100,000

$150,000

$200,000

$250,000



ȱ25

� Theȱaverageȱofȱtheȱtopȱ25ȱbaseȱsalaries,ȱasȱwellȱasȱtheȱsalaryȱforȱtheȱseniorȱposition,ȱatȱtheȱPortȱAuthority’sȱ fourȱ largestȱ lineȱ departmentsȱ comparedȱ toȱ theȱPortȱAuthority’sȱpeerȱgroupȱ(bothȱpublicȱauthoritiesȱandȱprivateȱsectorȱcompanies)ȱreflectsȱthatȱtheȱPortȱAuthorityȱisȱcompetitiveȱandȱtendsȱtoȱfallȱinȱtheȱmedianȱrangeȱ

Theȱaverageȱsalaryȱ forȱAviationȱ lineȱdepartmentȱemployeesȱ isȱhighestȱamongȱ itsȱpeerȱgroup,ȱevenȱwhenȱcomparedȱ toȱ theȱprivateȱsector.ȱ ȱHowever,ȱ theȱmostȱseniorȱposition,ȱasȱwellȱasȱ theȱtopȱ25ȱsalaries,ȱfallsȱbetweenȱthoseȱofȱtheirȱpublicȱsectorȱpeers,ȱandȱareȱsignificantlyȱbelowȱtheȱPortȱAuthority’sȱprivateȱsectorȱpeersȱ(Tableȱ8).ȱ

Tableȱ8ȱȬȱPortȱAuthorityȱBenchmarkingȱAmongȱPeers,ȱAviationȱȱ

ȱTheȱaverageȱsalaryȱofȱTunnels,ȱBridgesȱ&ȱTerminalsȱ(“TB&T”)ȱemployeesȱranksȱsecondȱamongȱitsȱpeerȱgroup.ȱȱAverageȱcompensationȱforȱtheȱtopȱ25ȱhighestȱpaidȱemployees,ȱasȱwellȱasȱtheȱtopȱposition,ȱalignȱinȱaȱsimilarȱfashionȱtoȱtheȱaverageȱsalariesȱforȱallȱemployees,ȱandȱappearsȱtoȱbeȱwithinȱrangeȱofȱitsȱpeersȱ(Tableȱ9).ȱ

Tableȱ9ȱȬȱPortȱAuthorityȱBenchmarkingȱAmongȱPeers,ȱTB&Tȱ

ȱAverageȱ salariesȱ forȱ employeesȱofȱ theȱPortȱCommerceȱ lineȱdepartmentȱareȱ secondȱhighestȱ inȱcomparisonȱ toȱ theȱ peerȱ group,ȱ andȱ theȱ highestȱ excludingȱNorthȱQueenslandȱ Portȱ Corp.ȱ (aȱprivateȱsectorȱcompany).ȱ ȱHowever,ȱaverageȱsalariesȱforȱtheȱtopȱ25ȱhighestȱpaidȱemployees,ȱasȱwellȱasȱtheȱmostȱseniorȱindividual,ȱfallȱmuchȱlowerȱthanȱanyȱofȱtheirȱpeersȱ(Tableȱ10).ȱ

All Employees 25 Salaries Highest PositionAviation Average Average Name Salary

1 Public Port Authority of NYNJ, Aviation (NYC) $81,035 $168,476 Director $230,0222 Public Chicago O'hare (Chicago) $67,793 $126,709 Comm. of Aviation $179,1093 Public Los Angeles World Airports (LA) $60,623 $190,086 GM $326,8564 Private BAA Airports Limited (UK) $59,625 NA CEO $1,504,6615 Private Aeroports de Paris (France) $51,020 NA Chairman & CEO $480,9266 Public Hartsf ield-Jackson (Atlanta) NA NA NA $221,000

All Employees Top 25 Salaries Highest PositionTunnels, Bridges & Terminals Average Average Name Salary

1 Public Bay Area Toll Authority (San Francisco) $82,430 $166,611 Executive Director $271,7942 Public Port Authority of NYNJ, TB&T (NYC) $71,752 $148,558 Director $193,4143 Public MTA Bridge & Tunnel Authority (NYC) $67,063 $153,117 President $205,0004 Public New York Thruw ay Authority (Albany) $46,502 $135,644 Executive Director $165,7095 Private Cofiroute (France) $45,906 NA CEO $218,4156 Public Delaw are River Port Authority (Philadelphia) NA NA NA NA7 Private Macquarie Atlas Roads Group (Australia) NA NA NA NA



ȱ26

Tableȱ10ȱȬȱPortȱAuthorityȱBenchmarkingȱAmongȱPeers,ȱPortȱCommerceȱ

ȱAverageȱ salariesȱ forȱ employeesȱ ofȱ PATHȱ areȱ competitiveȱ toȱ theȱ peerȱ groupȱ andȱ PATH’sȱcompensationȱ isȱveryȱcompetitiveȱwithȱ theȱMTA,ȱ theȱoperatorȱofȱ theȱNewȱYorkȱCityȱsubwayȱsystem.ȱ ȱ Dueȱ toȱ fareȱ structure,ȱ sizeȱ ofȱ operation,ȱ andȱ geographicalȱ reach,ȱ privateȱ sectorȱcompaniesȱwereȱexcludedȱfromȱtheȱpeerȱgroupȱ(Tableȱ11).ȱ

Tableȱ11ȱȬȱPortȱAuthorityȱBenchmarkingȱAmongȱPeers,ȱPATHȱ

ȱ

� Overtime,ȱ longevity,ȱ andȱ unusedȱ vacationȱ exchangeȱ daysȱ payoutȱ andȱ otherȱcompensationȱincreaseȱbaseȱpayȱbyȱapproximatelyȱ25%ȱ

Inȱ2010,ȱaverageȱ“addȬon”ȱcompensationȱperȱrecipientȱwasȱ$22,866ȱwithȱanȱaverageȱofȱ$20,559ȱperȱ employeeȱ (6,157ȱ employeesȱ receivedȱ someȱ formȱ ofȱ “addȬon”ȱ compensationȱ inȱ aȱ totalȱheadcountȱ ofȱ 6,848ȱ employees).ȱ ȱ Theȱ Portȱ Authority’sȱ “addȬon”ȱ compensationȱ isȱ aȱ longȱestablishedȱpracticeȱandȱisȱaȱmaterialȱcontributingȱcostȱinȱoverallȱcompensationȱ(Tableȱ12).ȱȱȱ

Overȱ theȱyears,ȱ theȱPortȱAuthorityȱhasȱutilizedȱ “addȬon”ȱ compensationȱprograms,ȱ excludingȱovertime,ȱasȱincentivesȱ(i.e.,ȱretention,ȱmeritȱandȱproductivity)ȱtoȱsupplementȱbaseȱpayȱofȱnonȬrepresentedȱemployees.ȱȱForȱexample,ȱtheȱ“LongevityȱIIB”ȱprogramȱwasȱauthorizedȱinȱ2008ȱbyȱtheȱExecutiveȱDirectorȱforȱnonȬrepresentedȱstaffȱwithȱ25ȱorȱmoreȱyearsȱofȱserviceȱinȱrecognitionȱofȱ satisfactoryȱ performanceȱ andȱ contributionȱ toȱ theȱ Portȱ Authorityȱ overȱ time.ȱ ȱ Whileȱmanagementȱreceivedȱlittleȱorȱnoȱincreaseȱinȱbaseȱpay,ȱtotalȱcompensationȱdidȱindeedȱincreaseȱasȱaȱresultȱofȱtheȱprogram.ȱȱLongevityȱIȱwasȱaȱtargetedȱretentionȱprogramȱofferedȱinȱ2003,ȱforȱtheȱpurposeȱ ofȱ retainingȱ certainȱ keyȱ executivesȱ postȱ Septemberȱ 11ȱ forȱ atȱ leastȱ threeȱ years.ȱ Atȱinception,ȱ theȱprogramȱwasȱexpectedȱ toȱ lastȱonlyȱ threeȱorȱ fourȱyearsȱandȱwasȱnotȱ intendedȱ toȱbecomeȱaȱpermanentȱfeatureȱofȱtheȱcompensationȱplan.ȱȱ

All Employees Top 25 Salaries Highest PositionPort Commerce Average Average Name Salary

1 Private North Queensland Port Corp. Ltd. (Australia) $93,446 NA CEO $297,4892 Public Port Authority of NYNJ, Port (NYC) $90,954 $144,510 Director $216,3203 Private Port of Taraunga (New Zealand) $85,926 $206,100 EE #1 $558,8074 Public Port of Long Beach (LA) $64,176 $160,851 Executive Director $336,6925 Public Port of Los Angeles (LA) $61,140 $235,706 General Manager $307,7516 Public Port of Corpus Christie (TX) NA NA NA NA

All Employees 25 Salaries Highest PositionRail Transit Average Average Name Salary

1 Public MTA (NYC) $72,514 $173,902 President $229,0002 Public PATH (NYC) $71,654 $141,424 Director and GM $215,0203 Public Chicago Transit Authority (Chicago) $61,772 $152,248 President $198,0004 Public Massachussets Bay Trans. Auth. (MA) NA $121,887 General Counsel $170,5235 Public SE Penn Transit Authority (Philadelphia) NA NA NA NA6 Public Port Authority Transit Corp (Philadelphia) NA NA NA NA



ȱ27

Tableȱ12ȱ–ȱ“AddȬon”ȱCompensationȱforȱNonȬRepresentedȱ&ȱRepresentedȱEmployeesȱ(2010)ȱ

ȱNotes:ȱ

1) TotalȱRecipientsȱdoesȱnotȱequalȱtheȱsumȱofȱtheȱpartsȱabove;ȱmanyȱemployeesȱreceiveȱmultipleȱtypesȱofȱ“addȬon”ȱcompensationȱandȱwouldȱbeȱdoubleȱcountedȱbyȱsimpleȱsumȱalone.ȱ

2) TotalȱheadcountȱisȱaȱyearȬendȱnumberȱandȱcanȱbeȱlessȱthanȱtotalȱrecipients,ȱsinceȱheadcountȱfluctuatesȱduringȱtheȱyear.ȱȱ

100%ȱofȱtheȱrepresentedȱemployeesȱhaveȱmaterialȱelementsȱofȱ“addȬon”ȱcompensation,ȱlargelyȱascribableȱ toȱcumulativeȱ termsȱandȱworkȱrulesȱembeddedȱ inȱunionȱcontracts.ȱ ȱApproximatelyȱ60%ȱofȱnonȬrepresentedȱemployeesȱalsoȱbenefitȱfromȱtheseȱprogramsȱ(Tableȱ13).ȱȱMostȱofȱtheseȱprogramsȱ emergedȱ overȱ theȱ courseȱ ofȱ theȱ lastȱ decadeȱ (seeȱ Appendixȱ –ȱ Bȱ forȱ detailedȱdescriptionsȱ ofȱ variousȱ compensationȱ programs).ȱ ȱ Ongoingȱ costsȱ willȱ beȱ furtherȱ evaluatedȱduringȱPhaseȱII.ȱ

Tableȱ13ȱ–ȱExistingȱ“AddȬon”ȱCompensationȱProgramsȱforȱNonȬRepresentedȱEmployeesȱ

ȱNote:ȱ

1) Benefitȱprogramȱinitiatedȱinȱlieuȱofȱaȱbaseȱsalaryȱincreaseȱinȱ1969ȱthatȱallowedȱforȱadditionalȱpayȱequalȱtoȱtheȱamountȱofȱFICAȱliabilityȱinȱthatȱyear.ȱȱCurrently,ȱthereȱareȱ14ȱeligibleȱemployees.ȱȱȱȱȱ

Non-Represented Employees Represented Employees Total Port AuthorityNo. of Avg. per No. of Avg. per No. of Avg. per

Recipients Recipient Total $ Recipients Recipient Total $ Recipients Recipient Total $Overtime 463 $10,681 $4,945,153 4,689 $17,153 $80,430,635 5,152 $16,571 $85,375,788Longevity 720 3,174 $2,285,245 3,576 3,699 13,228,617 4,296 3,611 15,513,862 Unused Vacation Exchange Days 603 11,381 $6,862,969 1,150 6,751 7,763,359 1,753 8,344 14,626,328 Other 448 3,843 $1,721,564 4,180 5,634 23,548,753 4,628 5,460 25,270,317

Total (1) 1,388 $11,394 $15,814,931 4,769 $26,205 $124,971,364 6,157 $22,866 $140,786,295% of Total Recipients 23% NA 11% 77% NA 89% 100% NA 100%

Total Headcount (2) 2,193 4,655 6,848Recipients as a % of Total Headcount 63% 100% 90%Add-on Comp. per Employee $7,212 $26,847 $20,559

ProgramType

ProgramDescription

Year of Inception

ActiveParticipants

Merit • FICA Benefit1 1969 14• Contractual Death Benefit 1989 1• Management Excused Days 2001 17• High Potential Program 2008 204• High Potential Program 2009 296

Career Service • Service Incentive Confidential Clerical 1993 43• Longevity Police Superior n/a 22• Career Service Plan 40+ 2003 5• Career Service Plan 25+ Longevity II 2008 642

Retention • Death Gamble - GTLII 2001 24• WTC Retention Program 2000 47• Parity / Retention Program - Longevity I 2003 3

Productivity • Vacation Exchange 1975 533• Cumulative Retirement Days - Police Superiors Only

n/a 22



ȱ28

� Theȱorganizationalȱ structureȱofȱnonȬrepresentedȱ employeesȱofȱ theȱPortȱAuthorityȱ isȱaȱdiamondȱ shape,ȱ reflectingȱ aȱ veryȱ broadȱmiddleȱ andȱ upperȱmanagementȱwithȱ limitedȱspanȱofȱcontrolȱ

Theȱ generalȱ practiceȱ ofȱ promotingȱ employeesȱ basedȱ onȱ seniorityȱ hasȱ resultedȱ inȱ aȱ diamondȱshapedȱorganizationalȱstructureȱforȱnonȬrepresentedȱemployees,ȱwithȱapproximatelyȱ60%ȱ(1,340ȱoutȱ ofȱ 2,216ȱ employees)ȱ classifiedȱ inȱ theȱ highestȱ fourȱ salaryȱ bandȱ categoriesȱ (i.e.,ȱ ServiceȱA,ȱSeniorȱ Executiveȱ Management,ȱ Executiveȱ Management,ȱ andȱ Middleȱ Management).ȱȱFurthermore,ȱaȱmajorityȱofȱtheseȱemployeesȱareȱalsoȱinȱtheȱtopȱthirdȱofȱtheȱsalaryȱrangeȱwithinȱtheirȱrespectiveȱcategoriesȱ(Figureȱ6).ȱ

Figureȱ6ȱ–ȱNumberȱofȱNonȬRepresentedȱEmployeesȱbyȱEmployeeȱGroupȱ

ȱTheȱ Humanȱ Resourcesȱ departmentȱ plansȱ toȱ proposeȱ aȱ newȱ compensationȱ programȱ forȱmanagementȱandȱengineeringȱstaffȱtoȱincreaseȱmobilityȱandȱencourageȱlateralȱmovesȱacrossȱtheȱorganizationȱwhileȱsimultaneouslyȱflatteningȱtheȱcompensationȱbands.ȱ

� TheȱexistingȱperformanceȱmeritȱincreaseȱprogramȱofȱtheȱPortȱAuthorityȱisȱnotȱeffectiveȱinȱrewarding,ȱretaining,ȱandȱmotivatingȱhighȱperformersȱ

Traditionally,ȱtheȱPortȱAuthorityȱhasȱlackedȱeffectiveȱperformanceȱreviewȱprocesses,ȱasȱwellȱasȱrewardȱ programsȱ forȱ highȱ performers.ȱ ȱ Theȱ existingȱ performanceȱ meritȱ increasesȱ doȱ notȱdistinguishȱbetweenȱhigh,ȱaverage,ȱorȱpoorȱperformersȱandȱhaveȱessentiallyȱbecomeȱaȱ formȱofȱcostȱofȱlivingȱadjustment.ȱȱTypically,ȱtheȱdifferenceȱbetweenȱmeritȱincreasesȱforȱaȱhighȱperformerȱvs.ȱ anȱ averageȱ performerȱ hasȱ beenȱ 1.5%ȱ toȱ 2.0%ȱ ofȱ baseȱ salary,ȱ thusȱ notȱ providingȱmuchȱincentive.ȱȱAccordingly,ȱtheȱPortȱAuthorityȱhas,ȱfromȱtimeȬtoȬtime,ȱreliedȱonȱsomeȱformȱofȱ“addȬon”ȱcompensationȱtoȱreplaceȱineffectiveȱandȱinsufficientȱperformanceȱmeritȱincreases.ȱ


¾ Evaluateȱtheȱcostsȱofȱpension,ȱOPEB,ȱandȱotherȱbenefitsȱforȱactiveȱvs.ȱretiredȱemployeesȱandȱrequireȱaȱsegregationȱofȱtheseȱbenefits.ȱȱ

Service A

B (Senior Exec Mgmt)

B (Exec Mgmt)

B (Middle Mgmt)

B (Junior Mgmt)

D6-11 (Specialized, Tech)

E/EDP (Engineers)

ECT (PATH Clerical)

Exempt Plan F

MT (PATH Mgmt)

ET (PATH Engineers)

FMN (PATH Field Supervisor)

NCL (Non-Rep PA Clerical)

FP (Police Captain)

24

144

652

520

291

26

409

7

2

3

22

48

3

Number of Employees

Empl

oyee

Cat

egor

ies



ȱ29

¾ Eliminateȱtheȱ“FICAȱBenefit”ȱ(FICAȱisȱtheȱPortȱAuthorityȱtermȱusedȱforȱadditionalȱpay,ȱapartȱ fromȱ baseȱ pay,ȱ equalȱ toȱ theȱ amountȱ ofȱ theirȱ FICAȱ liability)ȱ andȱ “Longevity”ȱprogramsȱ forȱ nonȬrepresentedȱ employees.ȱ ȱ Theȱ annualȱ savings,ȱ basedȱ onȱ 2010ȱ costs,ȱfromȱeliminatingȱlongevityȱandȱunusedȱvacationȱexchangeȱdaysȱ“addȬon”ȱcompensationȱforȱnonȬrepresentedȱemployeesȱwouldȱbeȱapproximatelyȱ$9.1ȱmillion.ȱȱ

¾ TheȱSpecialȱCommitteeȱofȱ theȱBoardȱofȱCommissionersȱshouldȱconsiderȱeliminatingȱallȱotherȱ remainingȱ “addȬon”ȱ compensationȱ asȱ shownȱ inȱ Tableȱ 13ȱ forȱ nonȬrepresentedȱemployees.ȱȱ

¾ Implementȱanȱ incentiveȱdrivenȱcompensationȱprogramȱthatȱtiesȱmeaningfulȱrewardsȱtoȱachievementȱofȱperformanceȱobjectives,ȱtargets,ȱandȱkeyȱinitiatives.ȱ

¾ OvertimeȱreductionȱshouldȱbecomeȱaȱpolicyȱfocusȱofȱtheȱPortȱAuthority.ȱȱ¾ Conductȱ aȱdepartmentalȱ reviewȱofȱproperȱ spanȱofȱ controlȱ forȱmanagementȱpersonnelȱ

andȱreȬevaluateȱtenureȱvs.ȱmeritȱbasedȱpayȱpolicies.ȱ¾ WorkȱrulesȱestablishedȱunderȱcollectiveȱbargainingȱagreementsȱshouldȱbeȱreȬevaluatedȱ

andȱ collaborativeȱ effortsȱ betweenȱ managementȱ andȱ unionȱ representativesȱ shouldȱaddressȱimpedimentsȱtoȱenhancedȱproductivityȱandȱefficiency.ȱ

¾ Evaluateȱ theȱ financialȱ impactȱ ofȱ theȱ Humanȱ Resourceȱ department’sȱ proposedȱ newȱcompensationȱprogramȱandȱimplementȱasȱindicated.ȱ

BENEFITSȱ

Sinceȱ2006,ȱtheȱoverallȱemployeeȱbenefitsȱexpenseȱ(includingȱbothȱactiveȱandȱretiredȱemployees)ȱhasȱ increasedȱ35%ȱ (fromȱ$340.7ȱmillionȱ toȱ$458.8ȱmillion)ȱevenȱ thoughȱactualȱheadȱcountȱhasȱdecreasedȱbyȱ1.3%ȱ(fromȱ6,935ȱtoȱ6,848ȱemployees).ȱȱThisȱtrendȱisȱlargelyȱdueȱtoȱcontinuedȱrisingȱcostsȱ ofȱ healthȱ insurance,ȱ andȱ aȱ growingȱ populationȱ ofȱ retireesȱ thatȱ driveȱ increasesȱ inȱhealthcare,ȱOPEB,ȱandȱpensionȱexpensesȱ(Tableȱ14).ȱȱȱ

Tableȱ14ȱ–ȱTrendsȱinȱEmployeeȱBenefitȱExpensesȱ(2006ȱ–ȱ2010)ȱ

ȱNote:ȱ

1) RepresentsȱonlyȱactiveȱemployeesȱasȱofȱDecemberȱ31st;ȱhowever,ȱbenefitsȱincludeȱamountsȱforȱretireesȱasȱwell.ȱ2) Primarilyȱcomprisedȱofȱhealthȱinsurance,ȱbutȱalsoȱincludesȱvision,ȱdental,ȱlife,ȱandȱlongȬtermȱdisabilityȱinsurance.ȱ

Unfortunately,ȱrampantȱcostȱescalationȱinȱtheȱareaȱofȱbenefitsȱhasȱbeenȱaȱcommonȱexperienceȱinȱtheȱ publicȱ sector.ȱ ȱ Bothȱ Governorȱ Cuomoȱ andȱ Governorȱ Christieȱ haveȱ proposedȱ multipleȱinitiativesȱdesignedȱto:ȱ(i)ȱstopȱtheȱapparentȱabuseȱofȱsickȱandȱvacationȱbenefitsȱorȱsupplementalȱcompensation,ȱ(ii)ȱcurtailȱtheȱrapidȱriseȱinȱhealthȱcareȱbenefitsȱbyȱmandatingȱgreaterȱemployeeȱ

2006-2010($ in 000's) 2006 2007 2008 2009 2010 CAGRYear-end Headcount (1) 6,935 6,918 7,200 7,163 6,848 -0.3%

Revenue $3,038,538 $3,191,626 $3,527,552 $3,552,243 $3,634,023 3.6%

Employee BenefitsHealth (2) 183,089 201,490 218,221 240,650 256,818 7.0%Pension 89,623 88,992 90,447 88,368 123,249 6.6%OPEB 24,938 33,496 17,695 24,058 34,665 6.8%Other (S.S and Other Insurance) 43,092 48,687 48,264 53,776 44,098 0.5%Total Employee Benefits $340,742 $372,665 $374,627 $406,852 $458,830 6.1%Total Employee Benefits as a % of Revenue 11% 12% 11% 11% 13%



ȱ30

contribution,ȱ andȱ (iii)ȱ addressȱunderfundingȱ andȱ eliminateȱ abusesȱ inȱpensionȱpractices.ȱ ȱTheȱfollowingȱareȱsomeȱofȱtheȱpolicyȱreformsȱbeingȱpromotedȱbyȱtheȱStatesȱofȱNewȱJerseyȱandȱNewȱYorkȱthatȱshouldȱbeȱsupportedȱand/orȱemulatedȱbyȱtheȱPortȱAuthority.ȱȱ

x Createȱnewȱhealthȱplansȱ thatȱwouldȱofferȱ fewerȱbenefitsȱ atȱ lowerȱprices,ȱ includingȱ atȱleastȱoneȱhighȬdeductibleȱplan.ȱ

x Allȱpublicȱemployeesȱwouldȱpayȱaȱpercentageȱofȱtheirȱhealthȱcareȱpremiumsȱinȱaȱtieredȱsystemȱbasedȱonȱsalaries.ȱ

x InȱNewȱ Jersey,ȱ policeȱ andȱ firefightersȱwouldȱ contributeȱ anȱ additionalȱ 1.5%ȱ ofȱ theirȱsalariesȱ towardȱpensions,ȱ forȱaȱ totalȱofȱ10%ȱandȱnonȬuniformedȱpublicȱworkersȱwouldȱcontributeȱanȱadditionalȱ2.0%ȱofȱtheirȱsalaries,ȱforȱaȱtotalȱofȱ7.5%.ȱ

x InȱNewȱJersey,ȱphaseȱoutȱtheȱpracticeȱofȱdistributingȱcashȱpayoutsȱforȱsickȱdays.ȱȱx InȱNewȱJersey,ȱlimitingȱcashȱpayoutsȱforȱunusedȱvacationȱexchangeȱdays.ȱȱȱx InȱNewȱYork,ȱintroductionȱofȱTierȱ6ȱtoȱtheȱpensionȱsystemȱtoȱeaseȱlongȱtermȱcostsȱ(seeȱp.ȱ

34ȱforȱdetail).ȱȱȱ


� Onlyȱ7%ȱofȱtheȱPortȱAuthority’sȱactiveȱemployeesȱprovideȱcontributionsȱtowardsȱtheirȱhealthcareȱcosts;ȱ theyȱcontributeȱatȱ ratesȱwellȱbelowȱ theȱmarketȱnorm,ȱandȱ theyȱhaveȱaccessȱ toȱhealthȱplansȱ thatȱofferȱmoreȱ benefitsȱ thanȱNewȱYorkȱandȱNewȱ Jerseyȱ stateȱemployeesȱ

Forȱ2010,ȱtotalȱmedicalȱinsuranceȱ(healthȱandȱdental)ȱexpenseȱwasȱ$147.5ȱmillionȱforȱtotalȱactiveȱemployeesȱ (Tableȱ 15).ȱ ȱ PortȱAuthorityȱ employeeȱ contributionsȱ totaledȱ lessȱ thanȱ 1%ȱ atȱ $1.5ȱmillionȱ ofȱ aggregateȱ employeeȱ contributions,ȱ withȱ lessȱ thanȱ 10%ȱ ofȱ employeesȱ currentlyȱcontributing,ȱcomparedȱtoȱ100%ȱofȱemployeesȱcontributingȱforȱtheȱStatesȱofȱNewȱYorkȱandȱNewȱJerseyȱ(Tableȱ16).ȱ

Tableȱ15ȱȬȱBreakoutȱofȱHealthȱBenefitȱExpensesȱbyȱEmployeeȱTypeȱ(2010)ȱ

ȱȱȱ

($ in 000's) Non-Rep RepTotal Active Employees Retirees

Total Recipients

Health $46,855 $87,016 $133,871 $83,861 $217,733Dental 4,757 8,835 13,592 8,486 22,078

Total Medical Insurance $51,612 $95,851 $147,463 $92,347 $239,811Employee Contributions 1,475 - 1,475 1,682 3,157 As a % of Total Cost 2.9% 0.0% 1.0% 1.8% 1.3%

Life Insurance 4,426 8,219 12,645 3,930 16,575 LT Disability - - - 433 433

Total Health Related Benefits $56,038 $104,070 $160,108 $96,710 $256,818

Year-end Headcount 2,193 4,655 6,848 7,314 14,162 Total Cost per Employee $25,553 $22,357 $23,380 $13,223 $18,134



ȱ31

Tableȱ16ȱ–ȱPortȱAuthorityȱHealthȱBenefitȱContributionȱvs.ȱStatesȱofȱNYȱandȱNJȱ

ȱInȱ addition,ȱ theȱ PortȱAuthority’sȱ employeesȱ enjoyȱ accessȱ toȱ healthȱ plansȱ thatȱ offerȱ superiorȱbenefits,ȱ withȱ lowerȱ deductiblesȱ andȱ lowerȱ outȬofȬpocketȱ costs,ȱ inȱ comparisonȱ toȱ theȱ stateȱagenciesȱofȱNewȱYorkȱandȱNewȱJersey.ȱ

� TheȱHumanȱResourceȱdepartmentȱ isȱ readyȱ toȱproposeȱ toȱ theȱBoardȱofȱCommissionersȱinitiativesȱ toȱ reduceȱhealthcareȱ costsȱ forȱbothȱactiveȱ representedȱandȱnonȬrepresentedȱemployeesȱ

Theȱ largest,ȱcontrollableȱbenefitȱexpensesȱatȱ theȱPortȱAuthorityȱareȱ thoseȱrelatedȱ toȱprovidingȱhealthcareȱ relatedȱ benefitsȱ forȱ bothȱ activeȱ andȱ retiredȱ employees.ȱ ȱ Theȱ Humanȱ Resourceȱdepartment’sȱnewȱinitiativeȱwouldȱrequireȱeveryȱemployeeȱofȱtheȱorganizationȱtoȱcontributeȱ(upȱtoȱ35%ȱbutȱnotȱlessȱthanȱ1.5%ȱofȱsalary)ȱtowardsȱtheirȱhealthȱcareȱpremiumsȱinȱaȱtieredȱsystemȱbasedȱ onȱ salaries.ȱ ȱ Inȱ addition,ȱ theȱ Portȱ Authorityȱ plansȱ toȱ offerȱ HMO,ȱ PPO,ȱ andȱ HighȱDeductibleȱplanȱoptionsȱtoȱreduceȱoverallȱplanȱcostsȱasȱwellȱasȱlowerȱtheȱcostȱtoȱemployees.ȱȱTheȱexpectedȱ savingsȱ overȱ theȱ courseȱ ofȱ theȱ nextȱ fourȱ yearsȱ isȱ approximatelyȱ $103.8ȱ million.ȱȱReducedȱhealthȱplanȱbenefitsȱwillȱhaveȱdirectȱeffectȱonȱotherȱpostȬemploymentȱbenefitȱcostsȱforȱretireesȱasȱwellȱ(Tableȱ17).ȱ

Tableȱ17ȱȬȱExpectedȱSavingsȱfromȱHealthȱCareȱInitiativesȱ

ȱȱ

ȱ

ȱ

ȱ

New Jersey State

Non-RepresentedNon-Represented(varies by Union) Non-Represented

Non-Represented(varies by Union) All Groups

Health RelatedBenefits

• 0% if hired pre-July 1st, 2005• 10% (single) and 18% (dependent) of premiums for those hired post-July 1st, 2005

• 0% for all employees • Pay grade 9 and below : 12% (single) and 27% (dependent)• Pay grade 10 and above: 16% (single) and 31% (dependent)

• Same as Represented • CSEA & PEF Unions

• 1.5% - 35% of premiums based on annual salary and coverage levels

Port Authority New York State

Total($ in millions) Year 1 Year 2 Year 3 Year 4 SavingsEmployee Contribution Rate Changes

Non-Represented $3.0 $6.1 $9.5 $13.1 $31.7Represented 5.1 10.5 16.2 22.2 $54.0

Total Savings from Rate Changes $8.1 $16.6 $25.7 $35.3 $85.7

Health Plan RedesignSelection of UHC "Choice Plus Pro" Plan 5.9 0.0 0.0 0.0 $5.9Alternative Low er Cost Options 3.0 2.4 2.4 2.4 $10.2Passive Dental PPO 2.0 0.0 0.0 0.0 $2.0

Total Savings from Redesign $10.9 $2.4 $2.4 $2.4 $18.1

Total Expected Savings from Initiatives $19.0 $19.0 $28.1 $37.7 $103.8



ȱ32

� Theȱvacationȱexchangeȱprogramȱandȱ“bankingȱofȱdays”ȱhasȱledȱtoȱsignificantȱcostsȱȱ

Sinceȱ2006,ȱtheȱcostȱofȱcashingȱoutȱvacationȱdaysȱhasȱincreasedȱ64%,ȱfromȱ$8.9ȱmillionȱtoȱ$14.6ȱmillion,ȱmainlyȱfromȱnonȬrepresentedȱemployeesȱ(fromȱ$7,100ȱperȱemployeeȱinȱ2006ȱtoȱ$11,400ȱperȱemployeeȱinȱ2010).ȱȱFurthermore,ȱtheȱtrueȱcostȱofȱtheseȱpaymentsȱisȱaȱmultipleȱofȱtheȱinitialȱpayoutȱ costsȱ sinceȱ theyȱ areȱ includedȱ inȱ theȱ calculationȱ forȱ theȱ determinationȱ ofȱ pensionȱpaymentsȱ ifȱ theyȱ areȱ incurredȱ duringȱ theȱ “pensionableȱ period”ȱ (i.e.,ȱ threeȱ yearsȱ priorȱ toȱretirement)ȱ(Figureȱ7).ȱ

Figureȱ7ȱ–ȱAverageȱCostȱofȱVacationȱDayȱExchangeȱ&ȱBankingȱofȱDays,ȱperȱEmployeeȱ(2006ȱ–ȱ2010)ȱ

ȱAȱreviewȱofȱpaidȬtimeȬoffȱandȱcashȬoutȱpoliciesȱofȱtheȱPortȱAuthorityȱvs.ȱtheȱStatesȱofȱNewȱYorkȱandȱNewȱ Jerseyȱ revealsȱ thatȱ theȱ PortȱAuthorityȱ offersȱ lessȱ ofȱ aȱ vacationȱ allowance,ȱ isȱmoreȱliberalȱonȱcashȱexchangeȱofȱunusedȱvacationȱexchangeȱdays,ȱandȱdoesȱnotȱallowȱcashȱpayoutȱorȱaccrualȱofȱsickȱdaysȱ(Tableȱ18).ȱȱ

-

500

1,000

1,500

2,000

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

20102009200820072006

All PA Employees ($) Represented EE's ($)

Non-represented EE's ($) Number of Recipients



ȱ33

Tableȱ18ȱȬȱPaidȱTimeȱOffȱandȱCashȬOutȱPoliciesȱofȱPortȱAuthorityȱvs.ȱStatesȱofȱNYȱ&ȱNJȱ

ȱNote:ȱ

1) Vacationȱdays,ȱwhenȱexchange,ȱareȱconsideredȱunusedȱvacationȱexchangeȱdaysȱcompensation.ȱȱ

ȱ

ȱ

New Jersey State

Non-RepresentedRepresented

(varies by Union) Non-RepresentedRepresented

(varies by Union) All GroupsPaid Vacation

Days• After 1 year, 17 days increasing to a maximum of 35 days after 30 years (43 days max for Senior Executives)

• After 1 year: 10-18 days (depending on union group)• After 5-26 years: 27- 39 days (depending on union group)

• After 1 year, 26 days increasing to a maximum of 38 days after 35 years



Paid Sick Days • Employees can take sick days based on a calculation dependent on tenure. In no case can employees receive cash for these days or accrue them

• Employees can take sick days based on a calculation dependent on tenure. In no case can employees receive cash for these days or accrue them

• 200 hour max sick bank, payout available upon retirement• Banked sick leave can be used to offset the cost of monthly insurance premiums upon retirement

• 200 hour max sick bank, payout available upon retirement• Banked sick leave can be used to offset the cost of monthly insurance premiums upon retirement

• $15,000 max sick payout upon retirement

Vacation Carryover

• A maximum of 10 days per year, w ith no more than 1 year current allow ance in total carryover (2 years for pre-9/11 hires)

• Up to one year of allotment• PATH allow s no carryover

• 40 days max • 40 days max • No limit

Vacation Payout upon Separation

• 1 year’s allow ance max payout, if hired after 9/11 (see above for allow ances)• 2 year’s allow ance max payout, if hired before 9/11 (see above for allow ances)

• One year of allow ance or no limit in a few circumstances (see above for allow ances)• PATH allow s no payout

• 30 day max payout and 200 hours max sick bank

• 30 day max payout and 200 hours max sick bank

• 1 year’s allow ance max payout and $15,000 max sick payout upon retirement (see above for allow ances)

Vacation Exchange (1)

• If perfect attendance and 30 days or more allow ance, can exchange all but15 days • If perfect attedance and few er than 30 days allow ance, can exchange all but 10 days• Payments are bi- w eekly and pensionable

• Varies greatly based on Union• PATH allow s no exchange• Payments are made in lump sums and not pensionable

• Employees up to Grade 24 can exchange 3 or 6 days for $500 or $1,000 credit to offset health insurance costs

• Employees up to Grade 24 can exchange 3 or 6 days for $500 or $1,000 c credit to offset health insurance costs

• N/A

Port Authority New York State



ȱ34

� Theȱ Portȱ Authorityȱ hasȱmadeȱ certainȱmodificationsȱ toȱ theȱ vacationȱ allowanceȱ andȱpoliciesȱ forȱ cashingȱ outȱ unusedȱ vacationȱ exchangeȱ days,ȱ andȱ isȱ contemplatingȱadditionalȱactionsȱtoȱconformȱcloselyȱtoȱNewȱJersey’sȱpolicyȱreformȱ

TheȱPortȱAuthority’sȱvacationȱexchangeȱpolicyȱwasȱextendedȱforȱ2012;ȱhowever,ȱitȱwasȱamendedȱwithȱtheȱfollowingȱchanges:ȱ

x NeitherȱtheȱExecutiveȱDirectorȱnorȱDeputyȱExecutiveȱDirectorȱwillȱbeȱeligible.ȱx Employeesȱwithȱatȱleastȱ30ȱdaysȱofȱvacationȱallowanceȱcanȱexchangeȱallȱbutȱ15ȱdays.ȱx Employeesȱwithȱfewerȱthanȱ30ȱdaysȱcanȱexchangeȱallȱbutȱtenȱdays.ȱx Attendanceȱrequirementsȱtoȱbeȱeligibleȱforȱthisȱexchangeȱremainȱunchanged.ȱ

Inȱaddition,ȱ theȱPortȱAuthority’sȱHumanȱResourceȱdepartmentȱhasȱproposedȱ (butȱhasȱnotȱyetȱimplemented)ȱ aȱ revisedȱ vacationȱ allowance,ȱ effectiveȱ Januaryȱ 1,ȱ 2012,ȱ thatȱwouldȱ provideȱ aȱmaximumȱ ofȱ 27ȱ vacationȱ daysȱ forȱ generalȱ nonȬrepresentedȱ employeesȱ andȱ 30ȱ forȱ seniorȱexecutiveȱmanagementȱ(downȱfromȱ35ȱdaysȱandȱ42ȱdays,ȱrespectively).ȱȱHowever,ȱthisȱrevisionȱwillȱonlyȱapplyȱtoȱnewȱhiresȱgoingȱforwardȱandȱallȱemployeesȱalreadyȱatȱorȱpastȱtheȱ27ȱandȱ30ȱvacationȱ dayȱ milestonesȱ willȱ beȱ grandfatheredȱ inȱ andȱ retainȱ theirȱ currentȱ allotment.ȱȱFurthermore,ȱ inȱ 2013,ȱ theȱ Humanȱ Resourceȱ departmentȱ recommendsȱ vacationȱ exchangeȱpaymentsȱ beȱ madeȱ inȱ lumpȬsum,ȱ ratherȱ thanȱ biȬweekly,ȱ whichȱ wouldȱ meanȱ thatȱ theseȱpaymentsȱwillȱnoȱlongerȱbeȱ“pensionable”.ȱ

� TheȱStateȱofȱNewȱYorkȱhasȱproposedȱaȱnewȱbillȱtoȱ introduceȱaȱTierȱ6ȱ intoȱtheȱpensionȱsystemȱ inȱ anȱ attemptȱ toȱ significantlyȱ cutȱ backȱ longȬtermȱ expensesȱ toȱ employersȱ andȱmitigateȱabuseȱbyȱtheirȱemployeesȱ

Ifȱpassed,ȱtheȱbillȱwouldȱaddȱaȱnewȱpensionȱtierȱforȱallȱnewȱemployeesȱofȱtheȱNewȱYorkȱStateȱandȱ localȱ governments,ȱ asȱ wellȱ asȱ thoseȱ coveredȱ byȱ Newȱ Yorkȱ Cityȱ pensions.ȱ ȱ Theȱ PortȱAuthority’sȱ fullȬtimeȱ employeesȱ areȱ requiredȱ toȱ joinȱ oneȱ ofȱ twoȱ costȬsharingȱdefinedȱ benefitȱpensionsȱplans,ȱtheȱNewȱYorkȱStateȱandȱLocalȱEmployees’ȱRetirementȱSystemȱorȱtheȱNewȱYorkȱStateȱandȱLocalȱPoliceȱandȱFireȱRetirementȱSystem.ȱȱKeyȱchangesȱinȱthisȱtierȱrelateȱtoȱincreasingȱemployeeȱcontributionsȱandȱretirementȱages,ȱdisallowingȱovertimeȱasȱpartȱofȱbaseȱsalary,ȱsettingȱstrongerȱantiȬsalaryȬspikingȱmechanisms,ȱandȱeliminatingȱprovisionsȱaroundȱtheȱcashingȱoutȱofȱsickȱdaysȱforȱadditionalȱserviceȱcreditȱuponȱretirement.ȱ


¾ Implementȱreforms,ȱasȱproposedȱbyȱtheȱPortȱAuthority,ȱrequiringȱcontributionȱfromȱallȱnonȬrepresentedȱ andȱ representedȱ employeesȱ andȱ offeringȱ healthȱ plansȱ withȱ lessȱexpansiveȱandȱcostlyȱcoverage.ȱ

¾ Uniformlyȱ applyȱ shortenedȱvacationȱ schedulesȱ toȱ allȱ employeesȱ (i.e.,ȱnotȱonlyȱ toȱnewȱhiresȱgoingȱforward).ȱȱ

¾ Significantlyȱ reduceȱ allowedȱvacationȱ exchangeȱdaysȱorȱ eliminateȱ theȱprogramȱ forȱ allȱemployeesȱofȱtheȱPortȱAuthority.ȱ



ȱ35

¾ Eliminateȱ theȱ delineationȱ betweenȱ employeesȱ forȱ cashingȱ inȱ vacationȱ daysȱ uponȱseparationȱsoȱ thatȱallȱemployeesȱhaveȱ theȱvalueȱofȱoneȱyearȱofȱvacationȱallowanceȱasȱaȱmaximumȱ (i.e.,ȱ eliminatingȱ theȱ extraȱ yearȱ ofȱ allowanceȱ forȱ employeesȱ hiredȱ beforeȱSeptemberȱ11).ȱȱ

¾ EndorseȱtheȱcurrentȱproposedȱbillȱthatȱallowsȱtheȱinclusionȱofȱaȱTierȱ6ȱintoȱtheȱNewȱYorkȱStateȱ pensionȱ systemȱ forȱ bothȱ civilianȱ andȱ policeȱ andȱ firemanȱ thatȱ wouldȱ haveȱ aȱsignificantȱpositiveȱimpactȱonȱtheȱlongȬtermȱpensionȱcost.ȱȱȱ

¾ Evaluateȱtheȱfeasibilityȱofȱchangingȱtheȱstructureȱofȱtheȱexistingȱpensionȱplan,ȱultimatelyȱpursuingȱdefinedȱcontributionȱplansȱinȱplaceȱofȱdefinedȱbenefitȱprograms.ȱ

REPRESENTEDȱEMPLOYEESȱCONTRACTȱCONSIDERATIONSȱ

TheȱPortȱAuthorityȱunionȱ contractsȱ coverȱapproximatelyȱ4,691ȱpersonnel,ȱorȱ68%,ȱofȱ theȱPortȱAuthority’sȱ6,913ȱactualȱemployees.ȱ ȱTheȱvastȱmajorityȱofȱtheseȱcontractsȱhasȱeitherȱexpiredȱorȱwillȱexpireȱ inȱ2012.ȱ ȱNavigantȱconductedȱaȱpreliminaryȱreviewȱofȱkeyȱtermsȱandȱconditionsȱofȱsixȱprimaryȱunionȱcontractsȱ relatedȱ toȱsalary,ȱhealthȱandȱ lifeȱ insuranceȱbenefits,ȱvacationȱandȱpaidȱ timeȱoff,ȱotherȱcompensationȱ incentives,ȱasȱwellȱasȱhistoricalȱpastȱpracticesȱoftenȱusedȱ toȱestablishȱ impliedȱ benefits.ȱ ȱ Inȱ addition,ȱworkȱ rulesȱ thatȱ couldȱ haveȱ anȱ impactȱ onȱ impedingȱproductivityȱorȱbyȱdrivingȱ additionalȱ compensationȱ (i.e.,ȱovertimeȱ andȱ relatedȱbenefits)ȱwereȱconsidered.ȱ


� Complexȱworkȱ rulesȱ subjectȱ toȱ inconsistentȱ applicationȱ canȱ oftenȱ leadȱ toȱ excessiveȱovertimeȱandȱcompensationȱforȱcertainȱrepresentedȱemployeesȱ

Inȱ2010,ȱ theȱPortȱAuthority’sȱ totalȱovertimeȱexpensesȱwereȱ$85.4ȱmillion.ȱ ȱApproximatelyȱ95%ȱ($80.4ȱmillion)ȱwasȱearnedȱbyȱrepresentedȱemployeesȱandȱ42%ȱ ($33.6ȱmillionȱofȱ$80.4ȱmillion)ȱwasȱrelatedȱtoȱpublicȱsafety.ȱȱTheȱtopȱtenȱovertimeȱearnersȱinȱpublicȱsafetyȱaveragedȱ105.4%ȱofȱtheirȱbaseȱsalary.ȱȱTheȱPortȱAuthorityȱimplementedȱaȱnumberȱofȱinitiativesȱtoȱreduceȱovertimeȱinȱPublicȱSafetyȱandȱitȱappearedȱthatȱtheȱPortȱAuthorityȱwasȱmakingȱaȱgoodȱprogressȱinȱ2009ȱandȱ2010,ȱafterȱpeakingȱ inȱ2008.ȱ ȱHowever,ȱ thisȱpositiveȱ trendȱwasȱreversedȱbyȱNovemberȱ2011ȱasȱovertimeȱhadȱ increasedȱ23%ȱoverȱ theȱpriorȱ fullȱyearȱ (upȱ toȱ$41.4ȱmillionȱ fromȱ$33.6ȱmillion).ȱȱPoliceȱ workȱ rulesȱ areȱ complicatedȱ andȱ appearȱ toȱ createȱ significantȱ staffingȱ challengesȱ andȱinefficiencyȱ (e.g.,ȱalterationȱ fromȱregularlyȱscheduledȱdutyȱ tours,ȱorȱregularlyȱassignedȱ facilityȱautomaticallyȱresultsȱinȱanȱextraȱfourȱhoursȱofȱpayȱinȱadditionȱtoȱpayȱatȱstraightȱtimeȱrateȱforȱtheȱfullȱtour)ȱ(Tableȱ19ȱandȱTableȱ20).ȱ



ȱ36

Tableȱ19ȱȬȱTopȱ10ȱOvertimeȱRecipients,ȱPublicȱSafetyȱ(2010)ȱ

ȱ

Tableȱ20ȱȬȱPublicȱSafetyȱOvertimeȱ(2006ȱ–ȱYTDȱNovȱ2011)ȱ

ȱ


¾ Conductȱanalysisȱnecessaryȱtoȱevaluateȱtheȱcurrentȱworkȱrulesȱasȱappliedȱandȱpracticedȱwithȱtheȱassistanceȱofȱspecialȱlaborȱcounselȱandȱestablishȱpriorities,ȱinȱcollaborationȱwithȱrepresentedȱlabor,ȱtoȱfocusȱonȱimprovedȱefficiencyȱandȱproductivity.ȱ

¾ Workȱrulesȱandȱcontractualȱobligationsȱshouldȱbeȱevaluatedȱandȱpotentiallyȱmodifiedȱtoȱeffectivelyȱmanageȱ theȱ policeȱ departmentȱ productivityȱ andȱ efficiencyȱ andȱ toȱ controlȱovertime.ȱ

¾ Evaluateȱeffectivenessȱofȱcommandȱandȱcontrolȱ functionȱofȱpublicȱsafetyȱ&ȱsecurityȱ inȱlightȱ ofȱ whatȱ appearsȱ toȱ beȱ chronicȱ excessiveȱ overtime,ȱ asȱ wellȱ asȱ otherȱ apparentȱinefficiencies.ȱ

¾ Carefullyȱconsiderȱ findingsȱofȱ theȱpendingȱChertoffȱReportȱ inȱevaluatingȱcurrentȱcostsȱandȱpracticesȱrelativeȱtoȱtheȱeffectivenessȱofȱtheȱsecurityȱapparatus.ȱȱ

VIII. INITIALȱCOSTȱREVIEWȱOFȱWTCȱPROGRAMȱ

BACKGROUNDȱ

Fromȱ Juneȱ toȱ Novemberȱ 2008,ȱ theȱ Portȱ Authorityȱ conductedȱ aȱ comprehensiveȱ analysisȱ toȱdetermineȱwhatȱtheȱtrueȱscopeȱandȱdesignȱofȱtheȱWTCȱProgramȱwasȱexpectedȱtoȱbe,ȱincludingȱtheȱrelatedȱimpactȱofȱtheȱmandateȱtoȱcompleteȱtheȱMemorialȱbyȱSeptemberȱ11,ȱ2011.ȱȱAsȱaȱresultȱofȱ thisȱeffort,ȱ theȱPortȱAuthorityȱwasȱ requiredȱ toȱmateriallyȱalterȱ theȱphasingȱofȱconstruction,ȱredesignȱmajorȱelementsȱofȱtheȱWTCȱprogramȱresultingȱinȱanȱincreaseȱinȱcost,ȱasȱwellȱasȱbalanceȱtheȱ needsȱ ofȱ aȱ varietyȱ ofȱ disparateȱ functionsȱ andȱ stakeholdersȱ (bothȱ publicȱ andȱ private).ȱȱFurthermore,ȱ givenȱ theȱ highȱ levelȱ ofȱ integrationȱ ofȱ theȱ variousȱ projectsȱ atȱ theȱ site,ȱ theȱ PortȱAuthorityȱwasȱoftenȱrequiredȱtoȱperformȱsignificantȱworkȱforȱotherȱagenciesȱandȱthirdȱpartiesȱinȱanȱeffortȱtoȱdeliverȱonȱexpectations.ȱȱAsȱtheȱWTCȱprogramȱhasȱevolved,ȱtheȱPortȱAuthorityȱhasȱ

OT as a %Title Base Salary Overtime of Base

1 Police Sergeant $103,964 $132,286 127.2%2 Police Sergeant 103,964 129,043 124.1%3 Police Sergeant 107,911 126,338 117.1%4 Police Sergeant 107,911 123,884 114.8%5 Police Lieutenant 124,098 112,467 90.6%6 Police Sergeant 103,964 104,916 100.9%7 Police Sergeant 100,960 104,687 103.7%8 Police Sergeant 103,964 102,340 98.4%9 Police Sergeant 99,375 100,406 101.0%10 Police Lieutenant 129,449 98,310 75.9%

$1,085,560 $1,134,677 Avg: 105.4%

Overtime ($s) YoY (%) Count Per Recipient YoY (%)2006 $44,075,892 NA 1,577 $27,949 NA2007 $49,781,632 12.9% 1,633 $30,485 9.1%2008 $52,663,459 5.8% 1,857 $28,359 (7.0%)2009 $38,364,269 (27.2%) 1,777 $21,589 (23.9%)2010 $33,644,953 (12.3%) 1,723 $19,527 (9.6%)YTD Nov 2011 $41,405,876 23.1% 1,688 $24,530 25.6%



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alsoȱabsorbedȱtheȱincreasedȱcostsȱofȱfinancingȱandȱinsuringȱtheȱprojectsȱatȱtheȱsite,ȱatȱnoȱminorȱexpense.ȱȱInȱaddition,ȱeffortsȱtoȱaccuratelyȱreflectȱtheȱcostȱofȱmarketing,ȱleasingȱandȱimprovingȱtheȱ retailȱ andȱ officeȱ elementsȱ ofȱ theȱ siteȱwithȱ theȱ inputȱ ofȱ theȱ PortȱAuthority’sȱ commercialȱpartnersȱ wereȱ notȱ madeȱ untilȱ recently,ȱ furtherȱ increasingȱ theȱ estimatedȱ costȱ ofȱ theȱ WTCȱprogram.ȱ ȱItȱ isȱ importantȱtoȱnote,ȱhowever,ȱthatȱtheseȱtotalȱprojectȱcostsȱareȱoffȬset,ȱ inȱpart,ȱbyȱanticipatedȱ reimbursementsȱ fromȱ certainȱ partiesȱ andȱ sourcesȱ ofȱ outsideȱ theȱ PortȱAuthority,ȱincludingȱtheȱFederalȱTransitȱAdministrationȱandȱinsuranceȱcarriers,ȱamongȱothers.ȱȱ

SCOPEȱ&ȱMETHODOLOGYȱ

Navigantȱ reviewedȱnumerousȱdocumentsȱ andȱ conductedȱ inȱ excessȱofȱ 50ȱhoursȱofȱ interviewsȱwithȱmembersȱ ofȱ theȱWTCȱ constructionȱ staff,ȱ selectȱmanagementȱ ofȱ theȱ PortȱAuthorityȱ andȱotherȱ personsȱ withȱ directȱ knowledgeȱ ofȱ theȱ historyȱ ofȱ constructionȱ atȱ theȱ site.ȱ ȱ Fromȱ thisȱfoundation,ȱ Navigantȱ reconstructedȱ theȱ historicalȱ costsȱ ofȱ theȱ WTCȱ programȱ usingȱ theȱchronologyȱ ofȱ periodicȱ presentationsȱ byȱ priorȱ Executiveȱ Directorsȱ andȱmanagementȱ toȱ theȱBoardȱofȱCommissioners,ȱprojectȱcostȱreportsȱcurrentȱthroughȱOctoberȱ2011,ȱrelatedȱdocuments,ȱandȱotherȱcommunicationsȱofȱtheȱPortȱAuthorityȱ(Tableȱ21).ȱȱ

Tableȱ21ȱ–ȱPeriodicȱWTCȱEACȱComparisonȱ(Decȱ2006ȱ–ȱCurrentȱEstimate)ȱ

ȱReconstructingȱtheȱWTCȱprogramȱhistoricalȱcostsȱandȱtheȱinterimȱEstimatesȱatȱCompletionȱ(theȱ“EAC”)ȱthroughȱvariousȱsourcesȱwasȱnecessaryȱbecauseȱtheȱPortȱAuthority’sȱstaffȱwereȱunableȱtoȱ produceȱ supportingȱ detailȱ andȱ sourceȱ documents,ȱ forȱ anyȱ ofȱ theȱ presentations,ȱ priorȱ toȱFebruaryȱ 2011,ȱ thatȱ tracedȱ historicalȱ costȱ growthȱ previouslyȱ reportedȱ byȱ priorȱ ExecutiveȱDirectorsȱtoȱtheȱBoardȱofȱCommissionersȱand,ȱatȱtimes,ȱtheȱGovernorȱofȱNewȱYork.ȱ ȱToȱassessȱtheȱ reasonablenessȱ ofȱ theȱEACȱ ofȱ theȱWTCȱprogram,ȱNavigantȱ evaluatedȱ theȱ recordȱ ofȱ eachȱcomponentȱprojectȱtoȱidentifyȱtheȱlevelȱofȱcostȱriskȱassociatedȱwithȱdeliveringȱtheȱprojectȱwithinȱcurrentȱexpectations.ȱȱȱ

($mm)December

2006January

2008November

2008May2010

February2011

Current Estimate

Project Title:WTC Transportation Hub 1,921$ 2,442$ 3,200$ 3,291$ 3,440$ 3,737$ 1 World Trade Center 2,478 2,877 3,100 3,190 3,190 3,949 9/11 Memorial (PA) 785 195 195 195 195 195 Vehicular Security Center 1 472 478 633 667 667 698 Site Infrastructure 1,048 1,255 1,525 1,563 1,661 1,965 WTC Retail 1,337 1,301 1,450 1,550 1,550 1,722 Streets and Utilities - 254 254 274 274 334 Cortlandt St. #1 Station - - - 150 150 150 Performing Arts Center - - - - - 182 9/11 Memorial (3rd Party) - - - - - 833 Contingency - - 600 600 352 352 Additional Finance Expense - - - - - 352 NYPD Campus Plan - - - - - 300 NYSDOT - - - - - 20 Total 8,041$ 8,802$ 10,957$ 11,480$ 11,479$ 14,789$ Reimbursements / Funding (4,490) (4,490) (5,016) (5,016) (5,016) (7,076) Net Program Cost to the Port Authority 3,551$ 4,312$ 5,941$ 6,464$ 6,463$ 7,713$



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Takenȱtogether,ȱNavigant’sȱanalysisȱrevealsȱthatȱcostȱgrowthȱatȱtheȱWTCȱisȱprimarilyȱcausedȱby:ȱ(i)ȱtheȱcommitmentȱtoȱopenȱtheȱMemorialȱbyȱSeptemberȱ11,ȱ2001,ȱ(ii)ȱworkȱforȱthirdȬpartiesȱthatȱwasȱ requiredȱ dueȱ toȱ theȱ interȬrelatedȱ natureȱ ofȱ structuresȱ atȱ theȱ siteȱ (e.g.,ȱ portionsȱ ofȱ theȱPerformingȱArtsȱCenterȱ (“PAC”)ȱ foundationȱ thatȱ areȱ integralȱ toȱ undergroundȱ infrastructureȱincludingȱ theȱ Vehicleȱ Securityȱ Centerȱ (“VSC”)),ȱ andȱ (iii)ȱ theȱ omissionȱ inȱ priorȱ budgetsȱ ofȱallowancesȱforȱ theȱmarketing,ȱ leasingȱandȱ tenantȱ improvementsȱforȱ theȱcommercialȱofficeȱandȱretailȱspaceȱatȱ1ȱWTCȱandȱRetailȱprojects.ȱ

Theseȱ findingsȱareȱsummarizedȱ inȱanȱEACȱpreparedȱbyȱNavigantȱ throughȱaȱreviewȱofȱprojectȱcostȱ reports,ȱdocumentedȱ changeȱordersȱandȱallowancesȱ forȱknownȱexposuresȱ representedȱ inȱtheȱrecordsȱofȱ theȱPortȱAuthorityȱ (theȱ“CurrentȱEstimate”).ȱ ȱ Inȱaddition,ȱ theȱCurrentȱEstimateȱwasȱ subjectedȱ toȱ aȱ qualitativeȱ riskȱ analysis.ȱ ȱNavigantȱ identifiedȱ areasȱ ofȱ costȱ riskȱ throughȱprojectȱ costȱ reports,ȱ relevantȱ documentsȱ andȱ probabilityȱ assessedȱ theseȱ itemsȱ throughȱinterviewsȱwithȱ knowledgeableȱ projectȱ participants.ȱ ȱ Fromȱ thisȱ basis,ȱNavigantȱdevelopedȱ aȱrangeȱ ofȱ possibleȱ scenariosȱ andȱ selectedȱ aȱ probableȱ outcomeȱ toȱ reportȱ incrementalȱ riskȱ orȱpotentialȱexposureȱtoȱtheȱCurrentȱEstimate.ȱ


� Theȱ evolutionȱ ofȱ designȱ andȱ theȱ challengesȱ theȱ Portȱ Authorityȱ facedȱ toȱ deliverȱ theȱMemorialȱ byȱ Septemberȱ 11,ȱ 2011ȱ resultedȱ inȱ theȱ Novemberȱ 2008ȱ reforecastȱ fromȱ $8ȱbillionȱtoȱ$11ȱbillionȱ

InȱDecemberȱ 2006,ȱ theȱprogramȱ forȱ theȱWTCȱwasȱ estimatedȱ atȱ approximatelyȱ $8ȱ billion.ȱȱ InȱNovemberȱ2008,ȱasȱaȱresultȱofȱaȱfocusedȱeffortȱbyȱtheȱPortȱAuthorityȱtoȱunderstandȱtheȱevolutionȱofȱtheȱproject,ȱtheȱimpactȱofȱtheȱcommitmentȱtoȱopenȱtheȱMemorialȱplazaȱbyȱSeptemberȱ11,ȱ2011,ȱandȱ toȱ systematicallyȱ reforecastȱ theȱWTCȱprogram,ȱ theȱEACȱwasȱ increasedȱ toȱapproximatelyȱ$11ȱ billionȱ (theȱ “Novemberȱ 2008ȱ Forecast”).ȱȱTheȱNovemberȱ 2008ȱ Forecastȱ revealedȱ thatȱ theȱapproximatelyȱ$3ȱbillionȱ increaseȱwasȱ largelyȱdueȱ toȱ impactsȱ fromȱ changesȱ inȱ scopeȱandȱ theȱevolutionȱ ofȱ design.ȱ ȱAnȱ integralȱ componentȱ ofȱ theȱ designȱ evolutionȱwasȱ theȱ coordinationȱamongstȱ theȱ programȱ stakeholdersȱ toȱ timelyȱ deliverȱ theȱ subterraneanȱ structuresȱ andȱinfrastructureȱpriorȱ toȱ certainȱkeyȱdatesȱ andȱwithinȱ expectedȱ costs.ȱ ȱAccordingly,ȱ theȱ largestȱvariancesȱ occurredȱ inȱ theȱmoreȱ complexȱ projectsȱ atȱ theȱ site,ȱ including:ȱ (i)ȱ theȱWTCȱHubȱ atȱapproximatelyȱ$1.3ȱbillion,ȱ (ii)ȱ1ȱWTCȱatȱapproximatelyȱ$0.6ȱbillion,ȱandȱ (iii)ȱbelowȱgradeȱsiteȱinfrastructureȱatȱapproximatelyȱ$0.5ȱbillionȱ(Tableȱ22).ȱȱ



ȱ39

Tableȱ22ȱȬȱPeriodicȱWTCȱEACȱComparisonȱ(Decȱ2006ȱ–ȱNovȱ2008)ȱ

ȱNote:ȱ

(1) Positiveȱvarianceȱreflectsȱincreasedȱcosts.ȱ

� SiteȬwideȱ coordinationȱ inȱ theȱ acceleratedȱ developmentȱ ofȱ theȱ WTCȱ programȱ hasȱrequiredȱtheȱPortȱAuthorityȱtoȱperformȱworkȱforȱotherȱagenciesȱandȱentitiesȱresultingȱinȱfurtherȱ expansionȱ inȱ theȱ scopeȱ thatȱ increasedȱ theȱ $11ȱ billionȱ reforecastȱ toȱ aȱCurrentȱEstimateȱofȱ$14.8ȱbillionȱ

TheȱCurrentȱEstimateȱ forȱ theȱWTCȱprogramȱ isȱ approximatelyȱ $14.8ȱbillion.ȱ ȱThisȱ increaseȱofȱapproximatelyȱ$3.8ȱbillionȱsinceȱtheȱNovemberȱ2008ȱForecastȱwasȱnotȱprimarilyȱdrivenȱbyȱcostȱgrowthȱinȱtheȱoriginalȱscopeȱofȱtheȱWTCȱprogram.ȱȱRather,ȱthisȱincreaseȱstemsȱfromȱadditionalȱprojectsȱ beingȱ performedȱ byȱ theȱ Portȱ Authorityȱ onȱ behalfȱ ofȱ otherȱ agenciesȱ andȱ partiesȱ(approximatelyȱ$1.57ȱbillion).ȱ ȱ Inȱ largeȱpart,ȱ thisȱworkȱwasȱnecessaryȱ toȱadvanceȱ interȬrelatedȱelementsȱ ofȱ theȱ siteȱ andȱ assureȱ theȱ openingȱ ofȱ theȱ Memorialȱ byȱ Septemberȱ 11,ȱ 2011.ȱȱSimultaneously,ȱ theȱ Portȱ Authorityȱ hasȱ begunȱ toȱ refineȱ theȱ programȱ associatedȱ withȱ theȱcommercializationȱofȱtheȱsite.ȱȱAȱrecentlyȱdevelopedȱbudgetȱforȱtheȱleasingȱandȱoperationȱofȱtheȱRetailȱ andȱ 1ȱ WTCȱ projectsȱ performedȱ inȱ conjunctionȱ withȱ theȱ Portȱ Authority’sȱ operatingȱpartners,ȱTheȱDurstȱOrganizationȱ Inc.ȱ (“Durst”)ȱ andȱWestfieldȱGroupȱ (“WDC”),ȱ reflectedȱ anȱincreaseȱ ofȱ approximatelyȱ $1ȱ billionȱ inȱ theȱCurrentȱ Estimate.ȱ ȱ Lastly,ȱ additionalȱ andȱ typicalȱfinanceȱandȱinsuranceȱexpensesȱonȱaȱmoreȱcostlyȱprogramȱoccurringȱoverȱaȱlongerȱdurationȱofȱapproximatelyȱ$0.6ȱbillionȱareȱincludedȱinȱtheȱCurrentȱEstimate.ȱȱTheȱbalanceȱofȱtheȱincreaseȱisȱdrivenȱ byȱ scopeȱ changesȱ relatedȱ toȱ siteȬwideȱ infrastructureȱ (approximatelyȱ $0.3ȱ billion),ȱ andȱprojectȱexecutionȱcostsȱ (approximatelyȱ$0.3ȱbillion).ȱ ȱTheseȱ impactsȱoccurȱ throughoutȱvariousȱcomponentsȱofȱtheȱprogram.ȱȱTheȱfollowingȱtableȱpresentsȱtheȱvarianceȱinȱcostsȱfromȱNovemberȱ2008ȱtoȱtheȱCurrentȱEstimateȱbyȱindividualȱprojectȱ(Tableȱ23).ȱ

($mm)December

2006November

2008Variance

$1Variance

%

Project Title:WTC Transportation Hub 1,921$ 3,200$ 1,279$ 66.6%1 World Trade Center 2,478 3,100 622 25.1%9/11 Memorial (PA) 785 195 (590) -75.2%Vehicular Security Center 1 472 633 161 34.2%Site Infrastructure 1,048 1,525 477 45.5%WTC Retail 1,337 1,450 113 8.5%Streets and Utilities - 254 254 0.0%Contingency - 600 600 0.0%Total 8,041$ 10,957$ 2,916$ 36.3%Reimbursements / Funding (4,490) (5,016) (526) 11.7%Net Program Cost to the Port Authority 3,551$ 5,941$ 2,390$ 67.3%



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Tableȱ23ȱȬȱPeriodicȱWTCȱEACȱComparisonȱ(Novȱ2008ȱ–ȱCurrentȱEstimate)ȱ

ȱNotes:ȱ

(1) Positiveȱvarianceȱreflectsȱincreasedȱcosts.ȱ(2) Superstructureȱconcreteȱandȱsteelȱ(~$150ȱmillion),ȱtradeȱcontractorȱperformanceȱ(~200ȱmillion),ȱandȱfinancialȱexpenseȱ(~$100ȱmillion).ȱ(3) Redevelopmentȱbudgetȱforȱcommercializationȱ(~$700ȱmillion)ȱandȱfinancialȱexpenseȱ(~$100ȱmillion).ȱ(4) Financialȱexpenseȱandȱscheduleȱaccelerationȱ(~$65ȱmillion).ȱ(5) SiteȬwideȱinfrastructureȱscopeȱ(~$300ȱmillion)ȱandȱRedevelopmentȱrequirementsȱatȱPMF/CommercialȱParkingȱ(~$100ȱmillion).ȱ(6) Redevelopmentȱbudgetȱforȱcommercializationȱ(~$275ȱmillion).ȱ(7) ChurchȱSt.ȱ(~$50ȱmillion).ȱ(8) Budgetȱtoȱbringȱstructureȱtoȱgrade.ȱ

� ThirdȬpartyȱfundingȱcommitmentsȱandȱvariousȱsourcesȱofȱexternalȱcapitalȱhave,ȱorȱareȱexpectedȱto,ȱlimitȱtheȱPortȱAuthority’sȱcostȱforȱtheȱWTCȱprogramȱtoȱ$7.7ȱbillionȱbeforeȱaccountingȱforȱfurtherȱriskȱexposureȱidentifiedȱinȱNavigant’sȱreviewȱ

TheȱPortȱAuthorityȱisȱperformingȱaȱsetȱofȱprojectsȱforȱotherȱagenciesȱandȱentitiesȱforȱwhichȱitȱhasȱcontractualȱ orȱ oralȱ commitmentsȱ forȱ reimbursement.ȱ ȱ Forȱ example,ȱ theȱ Currentȱ Estimateȱincludes:ȱ theȱCortlandtȱ St.ȱ Stationȱdevelopmentȱbeingȱperformedȱ atȱ theȱ requestȱofȱ theȱMTA,ȱworkȱ inȱprocessȱ forȱ theȱ9/11ȱMemorialȱFoundationȱ (theȱ“MemorialȱFoundation”),ȱcertainȱsubȬgradeȱ workȱ thatȱ willȱ benefitȱ theȱ PACȱ andȱ similarȱ infrastructureȱ commitmentsȱ forȱ otherȱagencies.ȱ ȱGivenȱ theȱ Currentȱ Estimate,ȱ theȱ PortȱAuthority’sȱ netȱ costȱ forȱ theȱWTCȱ programȱwouldȱ beȱ approximatelyȱ $7.7ȱ billion,ȱ representingȱ approximatelyȱ $14.8ȱ billionȱ ofȱ totalȱ grossȱcosts,ȱlessȱapproximatelyȱ$7.1ȱbillionȱinȱreimbursementsȱbyȱthirdȱpartiesȱandȱfundingȱprovidedȱbyȱinsuranceȱproceeds,ȱpublicȱfundsȱandȱprivateȱsources.ȱȱ

Deliveryȱ ofȱ theȱWTCȱ programȱ atȱ thisȱ netȱ costȱ assumesȱ fullȱ reimbursementȱ ofȱ thirdȱ partyȱfundingȱcommitments.ȱȱTheȱreimbursementȱofȱtheseȱfundingȱcommitmentsȱisȱsubjectȱtoȱongoingȱdiscussionsȱwithȱvariousȱ stakeholdersȱandȱmayȱbeȱ subjectȱ toȱdisputeȱandȱ collectionȱ risk.ȱ ȱToȱ

($mm)November

2008Current Estimate Variance $(1) Variance %

Project Title:WTC Transportation Hub 3,200$ 3,737$ 537$ (2) 16.8%1 World Trade Center 3,100 3,949 849 (3) 27.4%9/11 Memorial (PA) 195 195 - 0.0%Vehicular Security Center 1 633 698 65 (4) 10.3%Site Infrastructure 1,525 1,965 440 (5) 28.9%WTC Retail 1,450 1,722 272 (6) 18.8%Streets and Utilities 254 334 80 (7) 31.5%Cortlandt St. #1 Station - 150 150 0.0%Performing Arts Center - 182 182 (8) 0.0%9/11 Memorial (3rd Party) - 833 833 0.0%Contingency 600 352 (248) -41.3%Additional Finance Expense - 352 352 0.0%NYPD Campus Plan - 300 300 0.0%NYSDOT - 20 20 0.0%Total 10,957$ 14,789$ 3,832$ 35.0%Reimbursements / Funding (5,016) (7,076) (2,060) 41.1%Net Program Cost to the Port Authority 5,941$ 7,713$ 1,772$ 29.8%



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mitigateȱtheȱfinancialȱimpactȱofȱnonperformanceȱbyȱotherȱstakeholders,ȱtheȱPortȱAuthorityȱmayȱchooseȱtoȱestablishȱcertainȱfinancialȱreserves.ȱȱȱ

Inȱaddition,ȱsubjectȱtoȱtheȱrequirementsȱofȱexistingȱcontractualȱagreements,ȱtheȱPortȱAuthorityȱmayȱ electȱ toȱ curtailȱdevelopmentȱ ofȱ thirdȬpartyȱ elementsȱ andȱ limitȱ theȱ exposureȱ ofȱ theȱPortȱAuthorityȱtoȱonlyȱthatȱprojectȱscopeȱnecessaryȱforȱtheȱoverallȱadvancementȱofȱtheȱprogram.ȱȱForȱexample,ȱtheȱPortȱAuthorityȱhasȱsignificantȱthirdȱpartyȱstakeholderȱexposureȱonȱtheȱMemorial.ȱȱWhileȱtheȱPortȱAuthority’sȱoriginalȱfinancialȱcommitmentȱwasȱestimatedȱatȱ$195ȱmillionȱoutȱofȱaȱtotalȱprojectȱ costȱofȱ$500ȱmillion,ȱ theȱdesignȱandȱ scopeȱofȱ theȱprojectȱhaveȱevolvedȱ suchȱ thatȱsomeȱ estimatesȱ indicateȱ theȱ projectȱmayȱ nowȱ costȱ approximatelyȱ $1ȱ billion.ȱ ȱ TheȱMemorialȱFoundationȱ andȱ theȱ Portȱ Authorityȱ areȱ alreadyȱ disputingȱ significantȱ costsȱ relatedȱ toȱ theȱconstructionȱ impactsȱ ofȱ theȱ Memorial,ȱ andȱ totalȱ exposureȱ toȱ theȱ Portȱ Authorityȱ isȱ nowȱestimatedȱ atȱ approximatelyȱ $300ȱmillion.ȱ ȱ TheȱMemorialȱ Foundationȱ isȱ relyingȱ heavilyȱ onȱprivateȱ fundraisingȱ effortsȱ inȱ aȱ recessionaryȱ environment,ȱ callingȱ intoȱ questionȱ theȱ PortȱAuthority’sȱ abilityȱ toȱ collectȱ onȱ fundsȱ bothȱ committedȱ andȱ expendedȱ forȱ theȱ benefitȱ ofȱ theȱMemorialȱFoundation.ȱ ȱConsistentȱwithȱ theȱapproachȱoutlinedȱabove,ȱ theȱPortȱAuthorityȱhasȱelectedȱtoȱsignificantlyȱreduceȱtheȱconstructionȱpersonnelȱdeployedȱonȱtheȱmuseumȱportionȱofȱtheȱMemorialȱprojectȱandȱ limitȱ theȱagency’sȱexposure,ȱensuringȱ thatȱonlyȱcertainȱconstructionȱcontinuesȱpriorȱtoȱtheȱresolutionȱofȱtheȱcostȱreimbursementȱdispute.ȱȱȱȱȱ

� Navigant’sȱreviewȱofȱtheȱreasonablenessȱofȱtheȱCurrentȱEstimateȱsuggestsȱtheȱpotentialȱforȱincrementalȱcostȱexposureȱtoȱtheȱPortȱAuthorityȱofȱ$0.8ȱbillionȱorȱ$8.5ȱbillionȱofȱtotalȱfundingȱbyȱtheȱPortȱAuthorityȱforȱcompletionȱofȱtheȱWTCȱprogramȱ

TheȱCurrentȱEstimateȱhasȱbeenȱpreparedȱconsistentȱwithȱindustryȱprotocols;ȱhowever,ȱbasedȱonȱaȱpreliminaryȱriskȱanalysisȱthereȱmayȱbeȱpotentialȱtotalȱprojectȱcostȱexposureȱofȱapproximatelyȱ$1ȱbillion.ȱ ȱThisȱpotentialȱ forȱprogramȱ levelȱ costȱgrowthȱmayȱ increaseȱ theȱnetȱobligationȱ (i.e.,ȱafterȱexpectedȱreimbursementsȱfromȱthirdȱparties)ȱofȱtheȱPortȱAuthorityȱbyȱ$0.8ȱbillion,ȱtoȱ$8.5ȱbillionȱinȱtotalȱexpendituresȱfundedȱbyȱtheȱPortȱAuthorityȱforȱcompletionȱofȱtheȱWTCȱprogram.ȱ

Theȱprincipalȱdriversȱofȱ theȱpotentialȱprogramȱ levelȱ increaseȱare:ȱ(i)ȱanticipatedȱcosts,ȱandȱ theȱassociatedȱ impactȱ onȱ contingency,ȱ stemmingȱ fromȱ continuedȱ evolutionȱ ofȱ theȱ Retailȱ projectȱ(approximatelyȱ$0.4ȱbillion);ȱ(ii)ȱcostȱofȱworkȱforȱthirdȱparties,ȱmostȱnotablyȱforȱtheȱNewȱYorkȱPoliceȱDepartmentȱ(“NYPD”)ȱandȱscopeȱchangesȱtoȱCortlandtȱStreetȱStationȱ(approximatelyȱ$0.2ȱbillion)ȱbothȱexpectedȱ toȱbeȱreimbursedȱbyȱ thirdȱpartiesȱasȱpreviouslyȱdescribed;ȱandȱ (iii)ȱsoftȱcostȱ escalation,ȱ extraȱ work,ȱ andȱ delayȱ mitigationȱ costsȱ inȱ theȱ completionȱ ofȱ theȱ Hubȱ(approximatelyȱ $0.2ȱ billion).ȱȱ Theȱ remainingȱ approximatelyȱ $0.2ȱ billionȱ isȱ comprisedȱ ofȱmiscellaneousȱ elements,ȱ suchȱ asȱ incrementalȱ financeȱ expense,ȱ additionalȱ designȱ andȱcoordinationȱforȱsiteȱinfrastructureȱwork,ȱtradeȱcontractorȱfinancialȱdeficiency,ȱandȱdesignȱcostsȱinȱ theȱVSCȱ (Tableȱ 24).ȱ ȱAgain,ȱ tacticsȱ forȱ theȱmitigationȱ ofȱ aȱ portionȱ ofȱ theseȱ risksȱ includeȱenforcementȱofȱ reimbursementȱ commitments,ȱestablishingȱ reservesȱorȱ curtailingȱ certainȱworkȱwithinȱtheȱprogram.ȱȱ

ȱ



ȱ42

Tableȱ24ȱ–ȱWTCȱCurrentȱEstimateȱandȱPotentialȱExposureȱ

ȱNote:ȱ

(1) Potentialȱforȱunderfundedȱcontingency.ȱ(2) Potentialȱaccelerationȱcosts.ȱ(3) PotentialȱscopeȱchangesȱforȱChillerȱPlant,ȱVSCȱandȱSecurity.ȱ(4) PotentialȱexposureȱtoȱcontractorȱnonȬperformance.ȱ(5) PotentialȱcostȱgrowthȱforȱStreets,ȱCortlandtȱStationȱandȱPAC.ȱ

� TheȱPortȱAuthorityȱmayȱhaveȱotherȱcostȱriskȱinȱtheȱformȱofȱcontingentȱliabilitiesȱ

BasedȱonȱtheȱPortȱAuthority’sȱbondȱofferingȱstatementȱdisclosures,ȱitȱappearsȱtheȱPortȱAuthorityȱhasȱmadeȱcertainȱfinancialȱobligationsȱ inȱconnectionȱwithȱcertainȱWTCȱsiteȱbondȱfinancingsȱofȱupȱ toȱ$600ȱmillionȱofȱgrossȱ creditȱ supportȱonȱotherȱprojectsȱatȱ theȱWTCȱ site,ȱ$400ȱmillionȱofȱwhichȱareȱreimbursableȱbyȱtheȱStateȱofȱNewȱYorkȱandȱNewȱYorkȱCity,ȱleavingȱ$200ȱmillionȱofȱnetȱ exposure.ȱ ȱ Inȱ addition,ȱ inȱNovemberȱ 2011,ȱ $1.2ȱ billionȱ ofȱ Libertyȱ Bondsȱwereȱ issuedȱ toȱfinanceȱtheȱprivateȱdevelopmentȱatȱtheȱTowerȱ4ȱsite.ȱȱTheȱPortȱAuthority,ȱinȱadditionȱtoȱbeingȱaȱfutureȱmajorȱ tenantȱ atȱ theȱ building,ȱ hasȱ agreedȱ toȱ provideȱ creditȱ supportȱ forȱ thisȱ financingȱthroughȱaȱcomplexȱarrangementȱofȱ interestȱrateȱsupport,ȱrentȱdeferrals,ȱandȱrentȬfreeȱperiods.ȱȱEstimatingȱ theȱ outcomeȱ ofȱ theseȱ arrangementsȱ isȱ speculative,ȱ asȱ multipleȱ eventsȱ needȱ toȱtranspireȱforȱtheȱobligationsȱofȱtheȱPortȱAuthorityȱtoȱbeȱtriggered,ȱtherefore,ȱNavigantȱhasȱnotȱincludedȱaȱprovisionȱ forȱ theseȱ figuresȱ inȱ theȱCurrentȱEstimateȱorȱ inȱanyȱpotentialȱexposures.ȱȱFurtherȱ researchȱ andȱ analysesȱ relatingȱ toȱ theȱ underlyingȱ contractsȱ thatȱ documentȱ theseȱcommitmentsȱwillȱbeȱconductedȱinȱPhaseȱIIȱofȱNavigant’sȱwork.ȱ

($mm)Current Estimate

Amount $ Amount %

WTC Transportation Hub 3,737 213 (1) 6%1 World Trade Center 3,949 10 (1) 0.3%9/11 Memorial (PA) 195 Vehicular Security Center 1 698 10 (2) 1%Site Infrastructure 1,965 210 (3) 11%WTC Retail 1,722 452 (1) 26%New Projects 1,499 87 (4) 6%

Streets and Utilities ($334)Cortlandt St. #1 Station ($150)Performing Arts Center ($182)9/11 Memorial (3rd Party) ($833)

Other CostsProgram Contingency 352 Additional Financial Expense 352 46 13%

WTC TOTAL 14,469 1,028 7%

NYPD Campus Plan 300 NYSDOT 20

Total w ith 3rd Party Stakeholders 14,789 1,028 7%Reimbursements / Funding (7,076) (212) 3%Net Program Cost to the Port Authority 7,713 816 11%

3rd Party Stakeholder - Add'l Potential Exposure:

Potential Exposures

Project Titles:



ȱ43


¾ Identifyȱ aȱ singleȱ candidateȱ reportingȱ toȱ theȱ Executiveȱ Directorȱ withȱ theȱ soleȱresponsibilityȱtoȱmanageȱtheȱsuccessfulȱconstruction,ȱcompletion,ȱandȱcommercializationȱofȱtheȱWTC.ȱȱ

¾ Reevaluateȱ theȱ roles,ȱ responsibilities,ȱ requisiteȱ experience,ȱ andȱ appointmentsȱ ofȱ theȱWTCȱSubȬcommitteeȱasȱtheȱWTCȱevolvesȱfromȱaȱfocusȱonȱconstructionȱexecutionȱtoȱassetȱmanagement.ȱ

¾ PerformȱaȱcomprehensiveȱforensicȱconstructionȱcostȱauditȱofȱtheȱentireȱWTCȱprogramȱtoȱvalidateȱ theȱ costsȱ expended,ȱ theȱ Currentȱ Estimateȱ andȱ toȱ identifyȱ anyȱ additionalȱexposureȱitems.ȱ

¾ Conductȱ aȱ focusedȱ reviewȱ ofȱ theȱ developmentȱ budgetȱ associatedȱ withȱ assetȱmanagementȱandȱtheȱfutureȱoperationsȱofȱtheȱ1ȱWTCȱandȱtheȱRetailȱprojectȱthatȱinvolvesȱallȱconstituents.ȱ

¾ Pursueȱ reimbursementȱ fromȱ thirdȱ partiesȱ forȱ completedȱ workȱ andȱ anyȱ pendingȱcommitmentsȱforȱworkȱconductedȱinȱgoodȱfaith.ȱ

¾ Priorȱ toȱcommittingȱ to,ȱorȱ initiating,ȱanyȱadditionalȱworkȱrequestsȱ fromȱotherȱagenciesȱandȱ parties,ȱ secureȱ contractualȱ evidenceȱ ofȱ fundingȱ commitmentsȱ asȱ wellȱ asȱreimbursementȱcapacity.ȱ

¾ Assessȱ theȱcontingentȱ liabilitiesȱofȱ theȱPortȱAuthorityȱandȱriskȬassessȱsameȱ inȱ theȱEACȱforȱtheȱWTCȱprogram.ȱ

¾ Unlessȱ intendedȱ toȱ createȱ constructionȱ efficienciesȱ orȱ produceȱ directȱ costȱ reductions,ȱfreezeȱdesignȱtoȱtheȱextentȱpossible.ȱ

¾ Prepareȱaȱcomprehensiveȱriskȱregister,ȱprobabilityȱassessȱbeneficialȱorȱadverseȱoutcomesȱonȱaȱcontinuousȱbasisȱ toȱ increaseȱ theȱaccuracyȱofȱ theȱEACȱbasedȱonȱcontemporaneousȱinformation.ȱ

¾ Evaluateȱ currentȱ WTCȱ relatedȱ insuranceȱ programsȱ forȱ costȱ effectivenessȱ andȱcounterpartyȱcreditȱriskȱforȱexistingȱcoverage.ȱ

¾ Performȱ sensitivityȱ analysisȱ onȱ optimistic,ȱ pessimisticȱ andȱ probableȱ caseȱ scenariosȱ toȱunderstandȱcostȱimpactsȱonȱtheȱEACȱandȱinȱparticularȱtheȱadequacyȱofȱcontingency.ȱȱ

¾ Integrateȱdevelopmentȱandȱ constructionȱbudgets,ȱprovidingȱaȱholisticȱ reportingȱofȱ theȱWTCȱprogramȱ inȱaȱ standardizedȱ formatȱonȱaȱmonthlyȱbasisȱ toȱ theȱExecutiveȱDirectorȱandȱBoardȱofȱCommissioners.ȱ

¾ InȱlightȱofȱtheȱinfluenceȱofȱtheȱWTCȱonȱtheȱcapitalȱneedsȱandȱexecutionȱresourcesȱofȱtheȱPortȱAuthority,ȱperformȱaȱdetailedȱimpactȱevaluationȱanalysisȱonȱtheȱ2011ȱCapitalȱPlan.ȱȱ

¾ Evaluateȱ potentialȱ monetizationȱ ofȱ theȱ incomeȱ producingȱ elementsȱ ofȱ WTCȱ asȱ anȱalternativeȱformȱofȱcapitalȱforȱtheȱPortȱAuthority.ȱȱ



ȱ44

IX. PRELIMINARYȱCAPITALȱPLANNINGȱASSESSMENTȱ

BACKGROUNDȱ

Theȱ 2011ȱ Capitalȱ Planȱ isȱ comprisedȱ ofȱmoreȱ thanȱ 900ȱ projectsȱ totalingȱ approximatelyȱ $25.1ȱbillion.ȱȱOfȱthis,ȱapproximatelyȱ$18.2ȱbillionȱisȱplannedȱforȱtheȱPortȱAuthority’sȱassetsȱexcludingȱtheȱWTCȱsiteȱ (approximatelyȱ$6.9ȱbillion).ȱȱOfȱnote,ȱwhileȱaddressingȱ theȱcapitalȱneedsȱofȱ theȱWTCȱsiteȱinȱtheȱperiodȱfromȱ2002ȱȬȱ2010,ȱtheȱPortȱAuthorityȱinvestedȱapproximatelyȱ$13ȱbillionȱinȱitsȱotherȱassets.ȱȱȱ

SCOPEȱ&ȱMETHODOLOGYȱ

ContinuingȱfromȱtheȱworkȱconductedȱonȱtheȱWTC,ȱNavigantȱperformedȱaȱpreliminaryȱreviewȱofȱtheȱcompositionȱofȱ2011ȱCapitalȱPlanȱandȱtheȱcapitalȱplanningȱprocess.ȱȱȱ

NavigantȱconsideredȱdocumentsȱandȱconductedȱinterviewsȱwithȱselectȱmanagementȱofȱtheȱPortȱAuthority.ȱȱ Inȱaddition,ȱNavigantȱpreparedȱaȱdatabaseȱofȱallȱprojectsȱ inȱ theȱ2011ȱCapitalȱPlanȱandȱattendedȱmeetingsȱofȱtheȱCapitalȱPlanningȱOversightȱCommitteeȱ(theȱ“CPOC”).ȱ


� TheȱPortȱAuthorityȱneedsȱtoȱassureȱthatȱtheȱlongȬrangeȱcapitalȱstrategyȱalignsȱwithȱitsȱmissionȱandȱobjectivesȱȱȱ

Theȱ Boardȱ ofȱCommissionersȱ recognizesȱ that,ȱ inȱ lightȱ ofȱ theȱ demandsȱ ofȱ theȱWTCȱ andȱ theȱimpactȱ ofȱ theȱ recessionaryȱ environment,ȱ theȱ Portȱ Authorityȱ doesȱ notȱ strategicallyȱ allocateȱcapitalȱbyȱbusinessȱunitȱorȱinȱconcertȱwithȱtheȱoverallȱobjectivesȱofȱtheȱorganization.ȱȱRather,ȱlineȱfunctionsȱ promoteȱ projectsȱ thatȱmaintainȱ aȱ particularȱ assetȱ baseȱ andȱ fitȱwithinȱ anȱ internallyȱmandatedȱ budgetȱ constraint.ȱ ȱManyȱ ofȱ theȱ projectsȱ inȱ theȱ 2011ȱ Capitalȱ Planȱ areȱ inȱ initialȱplanningȱstagesȱandȱareȱapprovedȱ inȱtheirȱentiretyȱwhenȱtheȱtotalȱscope,ȱbudgetȱandȱpotentialȱimpactsȱareȱnotȱyetȱmature.ȱȱThisȱapproachȱfurtherȱconstrainsȱtheȱabilityȱofȱtheȱPortȱAuthorityȱtoȱreassessȱprioritiesȱandȱalignmentȱwithȱaȱdynamicȱcapitalȱstrategy.ȱȱTheȱPortȱAuthorityȱneedsȱtoȱassureȱthatȱtheȱstrategyȱforȱtheȱallocationȱofȱcapitalȱalignsȱwithȱtheȱmissionȱandȱobjectivesȱofȱtheȱorganizationȱ forȱ theȱ 21stȱ century.ȱ ȱ Inȱ Phaseȱ II,ȱ Navigantȱ willȱ evaluateȱ withȱ theȱ SpecialȱCommitteeȱtheȱactionsȱnecessaryȱtoȱreȬpositionȱtheȱcapitalȱstrategyȱofȱtheȱagencyȱforȱtheȱcomingȱdecade.ȱȱȱ

� Theȱinitialȱreviewȱofȱtheȱcapitalȱplanningȱandȱexecutionȱprocessȱindicatesȱthatȱrolesȱandȱresponsibilitiesȱmayȱnotȱbeȱclearlyȱdefinedȱ

Theȱ currentȱmanagementȱ oversightȱ ofȱ theȱ executionȱ ofȱ theȱCapitalȱPlanȱ isȱperformedȱbyȱ theȱCPOC.ȱ ȱWhileȱCPOCȱ isȱ conceptuallyȱaȱ soundȱapproach,ȱ theȱ executionȱ fallsȱ shortȱofȱ industryȱpracticeȱasȱitȱlacksȱaȱclearȱleader,ȱisȱmanagedȱbyȱcommittee,ȱdoesȱnotȱhaveȱconsistentȱreportingȱmechanismsȱ orȱ aȱ communicationȱ protocol,ȱ andȱ isȱ unfocusedȱ withoutȱ anȱ agreedȬuponȱmaterialityȱthresholdȱforȱitemsȱunderȱdiscussion.ȱȱInȱaddition,ȱtheȱobservedȱinconsistencyȱinȱtheȱcommandȱandȱcontrolȱstructureȱdidȱaggravateȱ theȱ timelyȱcommunicationȱofȱchallengesȱbyȱ theȱ



ȱ45

ExecutiveȱDirectorȱ toȱ theȱ Boardȱ ofȱCommissioners.ȱ ȱ Lackȱ ofȱ accountabilityȱ ofȱ development,ȱconstructionȱandȱassetȱmanagementȱfunctionalȱleadersȱtoȱtheȱExecutiveȱDirectorȱexacerbatesȱthisȱcondition.ȱ ȱ Aȱ reviewȱ ofȱ theȱ organizationalȱ designȱ ofȱ theȱ capitalȱ planningȱ andȱ executionȱfunctionsȱwithinȱtheȱPortȱAuthorityȱwillȱbeȱanȱareaȱofȱfocusȱinȱPhaseȱIIȱofȱNavigant’sȱwork.ȱȱȱ

� Performanceȱ metricsȱ limitedȱ toȱ budgetȱ complianceȱ canȱ impedeȱ anȱ effectiveȱ capitalȱprojectȱplanningȱandȱexecutionȱprocessȱȱȱ

Theȱmostȱ successfulȱ organizationsȱ createȱ aȱ capitalȱ plan,ȱ constructȱ aȱ conformingȱ budgetȱ andȱmonitorȱ progressȱ againstȱ keyȱ performanceȱmetrics,ȱwhereȱ budgetȱ complianceȱ isȱ justȱ oneȱ ofȱseveralȱmeasures.ȱȱ Theȱ PortȱAuthorityȱ shouldȱ considerȱ expandingȱ theȱmethodsȱ byȱwhichȱ itȱmonitorsȱprojectȱperformanceȱandȱcreateȱtheȱopportunityȱtoȱproactivelyȱaddressȱareasȱofȱunderȬperformance.ȱȱToȱmaximizeȱeffectiveness,ȱsuchȱanȱinitiativeȱwouldȱrequireȱchangeȱmanagementȱwithinȱtheȱorganizationȱasȱaȱcomprehensiveȱdefinitionȱofȱexecutionȱwouldȱbecomeȱtheȱmeasureȱofȱperformance.ȱȱPhaseȱIIȱofȱNavigant’sȱworkȱwillȱaddressȱthisȱorganizationalȱconcept.ȱȱȱ

PreliminaryȱRecommendationsȱ&ȱNextȱStepsȱȱ

¾ PhaseȱIIȱshouldȱinclude,ȱbutȱnotȱbeȱlimitedȱto:ȱo AnȱevaluationȱofȱtheȱformationȱofȱaȱCapitalȱProjectsȱOfficeȱthatȱreportsȱdirectlyȱtoȱ

theȱExecutiveȱDirector.ȱ ȱThisȱ officeȱwouldȱ beȱ responsibleȱ forȱ theȱdevelopmentȱandȱ executionȱ ofȱ theȱ capitalȱ planȱ andȱ effectiveȱ communicationȱ ofȱ same.ȱȱNavigantȱ anticipatesȱ thatȱ aȱ Capitalȱ ProjectsȱOfficeȱwouldȱ beȱ ledȱ byȱ aȱ single,ȱseniorȱexecutive.ȱ

o Anȱanalysisȱofȱ theȱunconstrainedȱneedsȱofȱ theȱPortȱAuthorityȱagainstȱ theȱ2011ȱCapitalȱPlanȱtoȱidentifyȱareasȱofȱpotentialȱrisk.ȱ

o Aȱ reviewȱ ofȱ recentȱ executionȱ performanceȱ againstȱ theȱ previousȱ capitalȱ planȱdevelopedȱinȱ2007ȱandȱupdatedȱinȱ2008.ȱ

o Anȱ assessmentȱ ofȱ proposedȱ projectsȱ inȱ theȱ 2011ȱCapitalȱ Planȱ for,ȱ nonȬincomeȱproducingȱassetsȱ toȱevaluateȱ theȱbenefitȱofȱsame;ȱ thisȱdoesȱnotȱ includeȱprojectsȱintendedȱforȱsafetyȱandȱsecurityȱofȱinfrastructureȱassets.ȱ

o AȱstudyȱofȱtheȱfeasibilityȱofȱmonetizingȱnonȬcoreȱassetsȱtoȱprovideȱanȱalternativeȱformȱofȱcapitalȱforȱtheȱfundingȱofȱtransportationȱinfrastructure.ȱ

¾ Establishȱaȱtaskȱforceȱtoȱdevelopȱaȱ longȬrangeȱcapitalȱstrategyȱthatȱalignsȱwithȱtheȱPortȱAuthority’sȱevolvingȱmissionȱandȱobjectives.ȱ

¾ Instituteȱ aȱ systematicȱmethodȱ forȱprioritizingȱprojectȱneedsȱwithinȱ constrainedȱ capitalȱcapacityȱandȱconductȱannualȱassessments.ȱ

¾ Developȱ aȱ protocolȱ toȱ measureȱ andȱ assessȱ executionȱ progressȱ againstȱ performanceȱmetrics;ȱaddressȱareasȱofȱunderȬperformanceȱagainstȱgoals.ȱ

¾ Continueȱcriticalȱreviewȱofȱallȱprojectsȱinȱtheȱ2011ȱCapitalȱPlan.ȱ



ȱ46

X. OVERVIEWȱOFȱPHASEȱIIȱ

PHASEȱIIȱ–ȱORIGINALȱMANDATEȱ

InȱconjunctionȱwithȱtheȱReview,ȱPhaseȱIIȱofȱNavigant’sȱengagementȱisȱexpectedȱtoȱbeȱcompletedȱandȱtheȱreportȱdeliveredȱbyȱendȱofȱJuneȱ2012.ȱȱPursuantȱtoȱNavigant’sȱexistingȱengagementȱandȱasȱdiscussedȱwithȱtheȱSpecialȱCommitteeȱduringȱtheȱinterviewȱprocess,ȱPhaseȱIIȱwillȱincludeȱ(asȱrefinedȱbyȱmutualȱagreement):ȱ

ȱ

ProjectȱManagementȱOfficeȱ

x Oversightȱandȱcoordinationȱofȱorganizationalȱreviewȱandȱoperationalȱassessment.ȱx OversightȱandȱcoordinationȱofȱfinalizationȱofȱWTCȱcostȱreview.ȱx CoordinationȱofȱtenȬyearȱCapitalȱPlanȱReviewȱthroughȱRothschild.ȱ

OrganizationalȱDesignȱandȱOperationalȱImprovementȱ

x Reviewȱbusinessȱsegmentȱoperatingȱbudget.ȱx ReviewȱContractȱServiceȱexpenseȱcategoryȱtoȱreduceȱcosts.ȱx ReviewȱMaterial,ȱEquipmentȱandȱOtherȱexpenseȱcategoriesȱtoȱreduceȱcosts.ȱx Summarizeȱfindingsȱandȱrecommendationsȱintoȱaȱstrategicȱframework.ȱ

FinalizationȱofȱWTCȱCostȱReviewȱ

x Reviewȱofȱavoidanceȱcosts.ȱx AssessmentȱofȱaccuracyȱofȱdesignȱandȱconstructionȱcostȬtoȬcomplete,ȱincludingȱtimelineȱ

ofȱcompletion.ȱx Identifyȱ keyȱ driversȱ ofȱ variancesȱ inȱ projectȱ costsȱ andȱ recordȱ lessonsȱ learnedȱ forȱ

mitigationȱinȱfutureȱendeavors.ȱ

CapitalȱProjectsȱAssessmentȱ

x Completeȱpreliminaryȱrankȱorderȱprioritization.ȱx Completeȱ scorecardsȱ forȱ designatedȱ capitalȱ projectsȱ withȱ supportȱ ofȱ Portȱ Authorityȱ

personnel.ȱx Establishȱaȱdynamicȱevaluationȱmethodologyȱforȱongoingȱupdateȱofȱcapitalȱprojectsȱandȱ

planningȱprocesses.ȱx Identificationȱofȱconsiderationsȱwithȱregardȱtoȱfinancingȱimplicationsȱandȱalternatives.ȱ

PHASEȱIIȱ–ȱADDITIONALȱRECOMMENDATIONSȱ

Areasȱofȱ importanceȱforȱfurtherȱreviewȱhaveȱbeenȱ identifiedȱandȱrecommendedȱ inȱtheȱPhaseȱIȱreportȱthatȱareȱnotȱincludedȱinȱtheȱengagementȱscopeȱandȱtermsȱofȱtheȱoriginalȱPhaseȱIIȱmandateȱofȱNavigant’sȱ consultingȱ arrangement.ȱ ȱAȱ preliminaryȱ listȱ ofȱ thoseȱ groupsȱ byȱ relatedȱworkȱstreamȱisȱdetailedȱbelow:ȱ

ȱ



ȱ47

OrganizationalȱDesignȱandȱOperationalȱAssessmentȱ

x Facilitateȱ theȱ Boardȱ ofȱ Commissionersȇȱ evaluationȱ ofȱ theȱ Portȱ Authority’sȱ vision,ȱmission,ȱandȱstrategyȱtoȱmeetȱtheȱchallengesȱofȱtheȱ21stȱcentury.ȱ

x Developȱandȱrecommendȱpayȱforȱperformanceȱincentiveȱsystems.ȱx AssistȱtheȱBoardȱofȱCommissionersȱinȱitsȱevaluationȱofȱtheȱPortȱAuthority’sȱovertimeȱandȱ

“addȬon”ȱcompensationȱpolicies.ȱx Conductȱ detailedȱ analysisȱ ofȱ unionȱ contractȱworkȱ rulesȱ (inȱ conjunctionȱwithȱ specialȱ

counselȱ andȱ businessȱ segmentȱ managers),ȱ theȱ currentȱ applicationȱ ofȱ same,ȱ andȱ theȱpotentialȱcorrectiveȱactionsȱ toȱremoveȱ impedimentsȱ toȱproductivityȱandȱefficiency,ȱandȱestablishȱ aȱ foundationȱ ofȱ focusȱ onȱ expiredȱunionȱ contractȱ termsȱ andȱdevelopȱ specificȱrecommendationsȱforȱincorporationȱinȱsame.ȱ

x Review,ȱ analyze,ȱ andȱ recommendȱ consolidationȱ ofȱ certainȱ duplicateȱ sharedȱ serviceȱfunctions,ȱ identifyȱ theȱ expectedȱ annualȱ costȱ savingsȱ andȱ developȱ aȱ detailedȱimplementationȱplanȱsupportingȱsame.ȱ

x ReviewȱOPEBȱandȱmakeȱrecommendationsȱregardingȱpotentialȱbenefitȱmodificationsȱforȱretirees.ȱ

x Assistȱinȱtheȱdevelopmentȱofȱexecutiveȱ“dashboard”ȱtoȱreliablyȱandȱtimelyȱreportȱstatusȱofȱkeyȱfinancialȱandȱoperationalȱperformanceȱmetrics.ȱ

x Identifyȱ keyȱ revenueȱ enhancements,ȱ includingȱ lesseeȱ passȬthroughȱ costȱ collection,ȱopportunitiesȱ andȱ assistȱ inȱ theȱ developmentȱ andȱ implementationȱ ofȱ enforcementȱstrategies.ȱ

WTCȱCostȱReviewȱ

x PerformȱaȱcomprehensiveȱforensicȱconstructionȱcostȱauditȱofȱtheȱentireȱWTCȱprogramȱtoȱvalidateȱtheȱcostsȱexpended,ȱtoȱidentifyȱadditionalȱexposureȱitems,ȱandȱprovideȱpotentialȱmitigationȱstrategies.ȱ

x Evaluateȱcontractorȱexposuresȱincludingȱstatusȱofȱcurrentȱclaims.ȱx Developȱandȱ implementȱ strategiesȱwithȱ regardsȱ toȱ reimbursementsȱ fromȱ thirdȱpartiesȱ

forȱcompletedȱworkȱandȱanyȱpendingȱcommitmentsȱforȱworkȱconductedȱinȱgoodȱfaith.ȱx EvaluateȱWTCȱrelatedȱinsuranceȱprogramsȱforȱcostȱeffectivenessȱandȱcounterpartyȱcreditȱ

risk.ȱx Integrateȱdevelopmentȱandȱ constructionȱbudgets,ȱprovidingȱaȱholisticȱ reportingȱofȱ theȱ

WTCȱprogramȱ inȱaȱ standardizedȱ formatȱonȱaȱmonthlyȱbasisȱ toȱ theȱExecutiveȱDirectorȱandȱBoardȱofȱCommissioners.ȱ

CapitalȱProjectsȱAssessmentȱ

x DevelopȱaȱmechanismȱtoȱmoreȱreliablyȱdetermineȱlevelsȱofȱstateȱofȱgoodȱrepairȱnecessaryȱtoȱensureȱPortȱAuthorityȱinfrastructureȱintegrity.ȱ

x Implementȱ aȱ comprehensiveȱ reorganizationȱ ofȱ theȱ capitalȱ planningȱ andȱ executionȱfunction,ȱ identifyingȱkeyȱ leaders,ȱroles,ȱresponsibilities,ȱprocesses,ȱandȱmechanismsȱforȱtrackingȱprogressȱonȱcost,ȱriskȱmanagementȱasȱwellȱasȱdelivery.ȱ

x PerformȱaȱstudyȱofȱtheȱfeasibilityȱofȱmonetizingȱnonȬcoreȱassetsȱtoȱprovideȱanȱalternativeȱformȱofȱcapitalȱforȱtheȱfundingȱofȱtransportationȱinfrastructure.ȱ

ȱ

ȱȱȱȱȱȱȱȱȱȱȱȱȱȱȱȱȱȱȱȱȱȱȱȱȱȱ 48

XI. APPENDIXȱ–ȱAȱDEFINED�PEER�GROUP�

ȱ

Publicȱ(i.e.,ȱStateȱAgencies,ȱetc.)ȱ

PrivateȱSectorȱ(incl.ȱPubliclyȱTradedȱCo.)ȱ

Notesȱȱ

PublicȱAuthoritiesȱandȱStateȱAgenciesȱ

1) NewȱYorkȱPowerȱAuthorityȱ2) MetropolitanȱTransitȱAuthorityȱ(MTA)ȱ3) NewȱJerseyȱTurnpikeȱAuthorityȱ4) NewȱYorkȱThruwayȱAuthorityȱ5) NewȱYorkȱCityȱDepartmentȱofȱTransportationȱ6) NewȱYorkȱCityȱGovernmentȱ7) NewȱYorkȱStateȱGovernmentȱ8) NewȱJerseyȱStateȱGovernmentȱ

x NA:ȱPrivateȱSectorȱpeersȱwereȱ“notȱapplicable”ȱgivenȱthisȱgroupȱwasȱfocusedȱonȱpublicȱauthoritiesȱandȱagenciesȱinȱtheȱNewȱYorkȱandȱNewȱJerseyȱregionȱ

x KeyȱattributesȱincludeȱbeingȱaȱpublicȱauthorityȱorȱstateȱagencyȱwithȱjurisdictionȱinȱmajorȱNewȱYorkȱȱandȱNewȱJerseyȱmetroȱregionsȱ

x Mustȱhaveȱresponsibilityȱinȱtheȱareasȱofȱtransportation,ȱrealȱestate,ȱorȱeconomicȱdevelopmentȱ(preferablyȱtheȱformer)ȱ

x Ifȱpossible,ȱfocusȱshouldȱbeȱonȱauthorities/agenciesȱthatȱDOȱNOTȱreceiveȱtaxȱrevenueȱ

Tunnels,ȱBridgesȱ&ȱTerminalsȱ

9) MTAȱBridgeȱ&ȱTunnelȱAuthorityȱ(NYȱCity)ȱ10) BayȱAreaȱTollȱAuthorityȱ(SanȱFrancisco,ȱCA)ȱ11) DelawareȱRiverȱPortȱAuthorityȱofȱPAȱ&ȱNJȱȱ12) NewȱYorkȱThruwayȱAuthorityȱ(NYȱState)ȱ

ȱ

1) MacquarieȱAtlasȱRoadsȱGroupȱ(Australia)ȱ2) Cofirouteȱ(Germany,ȱFrance,ȱUK,ȱUSA)ȱ

x Keyȱattributesȱofȱpeersȱshouldȱincludeȱoperationȱofȱbothȱbridgesȱandȱtunnelsȱ(ageȱofȱassetsȱisȱalsoȱpertinent)ȱȱȱ

x Operationȱofȱtollȱroadsȱisȱapplicable,ȱbutȱlessȱsoȱifȱoperationsȱareȱhighlyȱconcentratedȱinȱsuchȱactivities.ȱȱȱ

x OlderȱassetsȱatȱaȱpeerȱalignȱmoreȱcomparablyȱtoȱtheȱPortȱAuthority’sȱassetsȱ(i.e.,ȱbridgesȱbuiltȱinȱ1920sȬ30s).ȱ

x DelawareȱRiverȱPortȱAuth,ȱthoughȱmuchȱsmallerȱinȱsize,ȱwasȱselectedȱdueȱtoȱitȱbeingȱaȱbiȬstateȱauthorityȱwithȱtiesȱtoȱNewȱJersey,ȱasȱwellȱasȱaȱfocusȱonȱtransportationȱ

PATHȱRailȱSystemȱ

1) MassachusettsȱBayȱTransportationȱAuthorityȱ(Boston,ȱMA)ȱ2) SoutheasternȱPennsylvaniaȱTransportationȱAuthorityȱ

(Philadelphia,ȱPA)ȱ3) DelawareȱRiverȱPortȱAuthorityȱofȱPAȱ&ȱNJȱ(WesternȱNJ)ȱ4) MTAȱ(NYȱCity)ȱ5) ChicagoȱTransitȱAuthorityȱ

x NA:ȱPrivateȱsectorȱpeersȱareȱnotȱcomparableȱdueȱto:ȱ¾ Differentȱfareȱstructureȱ(notȱflatȬfee;ȱinstead,ȱbasedȱonȱ

distanceȱtraveled)ȱȱ¾ Compensationȱsystemsȱinȱforeignȱcompaniesȱisȱdifferentȱ

thanȱinȱtheȱU.S.,ȱnamelyȱforȱtheȱPA,ȱwhichȱlimitsȱcomparabilityȱ

¾ PrivateȱownershipȱofȱrailȱsystemsȱdoesȱnotȱoccurȱinȱtheȱU.S.ȱ

x KeyȱattributesȱofȱpeersȱshouldȱincludeȱaȱflatȬfeeȱfareȱstructureȱandȱtheȱabsenceȱofȱanyȱfederalȱorȱstateȱtaxpayerȱsubsidies,ȱwithȱlocationȱinȱaȱmajorȱmetroȱwithȱhighȱtrafficȱvolumeȱ

x Ageȱofȱassetsȱwereȱconsideredȱasȱthisȱwillȱyieldȱaȱlargerȱstaffȱofȱmaintenanceȱandȱengineeringȱemployeesȱȱ

x DelawareȱRiverȱPortȱAuth,ȱthoughȱmuchȱsmallerȱinȱsize,ȱwasȱselectedȱdueȱtoȱitȱbeingȱaȱbiȬstateȱauthorityȱwithȱtiesȱ

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Publicȱ(i.e.,ȱStateȱAgencies,ȱetc.)ȱ

PrivateȱSectorȱ(incl.ȱPubliclyȱTradedȱCo.)ȱ

Notesȱȱ

x PrivatelyȱownedȱandȱoperatedȱcommuterȱrailȱsystemsȱinȱTokyo,ȱHongȱKong,ȱBerlinȱandȱTaiwanȱwereȱidentifiedȱbutȱeliminatedȱfromȱpeerȱgroupȱforȱreasonsȱnotedȱabove.ȱ

toȱNewȱJersey,ȱasȱwellȱasȱaȱfocusȱonȱtransportationȱȱ

ȱ

Aviationȱ

1) ChicagoȱO’HareȱInternationalȱAirportȱ(ORD)ȱ2) LosȱAngelesȱWorldȱAirportsȱ(LAWA)ȱ3) HartsfieldȬJacksonȱAtlantaȱInternationalȱAirportȱ(ATL)ȱ

1) AeroportsȱdeȱParisȱ(France)ȱ2) BAAȱAirportsȱ(UnitedȱKingdom)ȱ

x Keyȱattributesȱofȱpeersȱshouldȱincludeȱaȱhighȱvolumeȱofȱinternationalȱpassengerȱandȱaircraftȱtrafficȱinȱmajorȱcities,ȱandȱfocusedȱexecutionȱofȱairportȱinfrastructureȱoperationsȱ(notȱincludingȱretailȱandȱconcessionȱactivities,ȱbaggageȱhandling,ȱorȱotherȱairlineȱandȱpassengerȱservices).ȱ

x Ifȱpossible,ȱpeersȱshouldȱoperateȱmultipleȱfacilities,ȱwhetherȱcommercialȱorȱprivate.ȱ

PortȱCommerceȱ

1) PortȱofȱLosȱAngelesȱ(California)ȱ2) PortȱofȱLongȱBeachȱ(California)ȱ3) PortȱofȱCorpusȱChristieȱ(Texas)ȱ

1) PortȱofȱTaurangaȱLtdȱ(NewȱZealand)ȱ–ȱNZSE:ȱPOTȱ2) NorthȱQueenslandȱPortsȱCorporationȱLimitedȱ(Northeasternȱ

Australia),ȱaȱGovernmentȱOwnedȱCorporationȱȱ

Note:ȱTheȱdefiningȱcharacteristicsȱofȱGOCsȱareȱthatȱtheyȱhaveȱaȱdistinctȱlegalȱformȱandȱtheyȱareȱestablishedȱtoȱoperateȱinȱcommercialȱaffairs.ȱWhileȱtheyȱmayȱalsoȱhaveȱpublicȱpolicyȱobjectives,ȱGOCsȱhaveȱfinancialȱobjectivesȱtoȱsatisfyȱshareholdersȱwithȱROIȱandȱdividends.ȱ(Source:ȱWikipedia,ȱcitationȱneeded)ȱ

x Keyȱattributesȱofȱpeersȱareȱthatȱtheirȱactivitiesȱbeȱfocusedȱonȱportȱinfrastructureȱoperationsȱandȱcoordinatingȱcapitalȱinvestmentȱinȱportȱfacilities.ȱȱSecondarily,ȱpeersȱwithȱsimilarȱgeographicȱsizeȱandȱvolumeȱwouldȱalsoȱcomparable.ȱ

x Portȱoperationsȱlikeȱstevedoring,ȱcargoȱhandlingȱandȱtowageȱservices,ȱamongȱmanyȱothers,ȱareȱactivitiesȱperformedȱbyȱPortȱAuthorityȱlesseesȱandȱdoȱnotȱprovideȱaȱbasisȱofȱcomparisonȱwithȱtheȱPortȱAuthority.ȱ

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XII. APPENDIXȱ–ȱBȱ

EXAMPLESȱOFȱ“ADDȬON”ȱCOMPENSATIONȱ

ȱNote:ȱ

(1) DescriptionsȱhaveȱbeenȱprovidedȱbyȱtheȱPortȱAuthorityȱHRȱdepartmentȱforȱvariousȱprogramsȱlistedȱabove.ȱ

ȱ

ȱ

Pay Category Pensionable Description1 # Staff

Fica Benefit Bi-Weekly Payout Yes As an offset and in lieu of a base salary increase in 1969, this program allow ed employees to opt for additional pay, apart from base pay, equal to the amount of their FICA liability in that year. Currently 14 employees remain w ho receive this pay.

14

Vacation Exchange YesAs a program, initially authorized by the Board in April 1976, current employees w ith perfect attendance may opt to prospectively exchange their upcoming year's vacation for cash to be paid in bi-w eekly increments. Employees can exchange all but 10 vacation days from their annual allotment. Service A employees had no attendance requirement up to 2012.

533

Longevity Clerical YesOriginally authorized in 1993, this is a career service payment for non-represented clerical staff to encourage retention and rew ard sustained satisfactory performance. After 5 years the employee receives an annual incentive payment of $500 in bi-w eekly increments, w hich increases every 5 years to a maximum of $2500 after 40 years of service.

43

Group Term Life II (Death Gamble)

YesAs a retention mechanism, in 2002 Tier 1 employees w ere provided w ith additional life insurance coverage to address a potential reduction in benefit that could occur for beneficiaries of Tier 1 employees currently eligible for retirement, but w ho choose to continue to w ork at the Port Authority. The earnings offset the imputed value of that additional life insurance.

24

Longevity I (Retention Program-2003)

Yes A targeted retention incentive payment offered in 2003, at the then Executive Director's discretion, for the purpose of retaining certain key executives post 9-11 for at least three years. Pay is currently received by three key executives.

3

Longevity IIA (40+ Yr Career Service Plan)

Yes A career service payment authorized in 2003 for non-represented staff not on a longevity schedule and having 40 or more years of service. Payment in recognition of their four decades of sustained satisfactory performance and contribution to the Agency.

5

Longevity IIB (25+ Yr Career Service Plan)

YesA career service payment authorized in 2008 for non-represented staff w ith 25 or more years of service in recognition of their sustained satisfactory performance and contribution to the Agency over time. Longevity IIA, the 40-year plus longevity program, w as rolled up into this program same year.

642

For Police Superiors Only

Longevity FP (Police Superior Longevity)

YesPayment made to Police Superiors in recognition of their years of experience. Police Superior longevity is a f lat rate based on Detective Lieutenant longevity and years of police service, starting w ith one year of police service and currently topping out at 30 years police service w ith a current annual rate of $20,020.

22

Cumulative Retirement Days Yes An incentive for Police Superiors to maintain perfect attendance throughout their careers. 22

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ȱ

XIII. APPENDIXȱ–ȱCȱ

ȱ

NAVIGANTȱREPORTȱQUALIFICATIONSȱANDȱDISCLAIMERȱ

ȱTHISȱCONFIDENTIALȱREPORTȱHASȱBEENȱPREPAREDȱFORȱTHEȱSPECIALȱCOMMITTEEȱOFȱTHEȱBOARDȱOFȱCOMMISSIONERSȱOFȱTHEȱPORTȱAUTHORITYȱINȱCONNECTIONȱWITHȱNAVIGANT’SȱPHASEȱ IȱWORKȱPURSUANTȱTOȱTHEȱAGREEMENT,ȱDATEDȱASȱOFȱNOVEMBERȱ23,ȱ2011,ȱBYȱANDȱBETWEENȱNAVIGANTȱANDȱTHEȱPORTȱAUTHORITY.ȱȱTHISȱREPORTȱCONTAINSȱINFORMATIONȱRELATEDȱTOȱTHEȱPORTȱAUTHORITYȱANDȱISȱBEINGȱPROVIDEDȱONȱAȱSTRICTLYȱCONFIDENTIALȱBASIS.ȱȱTHEȱCONTENTȱOFȱTHISȱREPORTȱISȱNOTȱTOȱBEȱUSEDȱFORȱANYȱOTHERȱPURPOSEȱAND,ȱEXCEPTȱASȱMAYȱBEȱREQUIREDȱBYȱLAWȱORȱANYȱOTHERȱREGULATORYȱORȱGOVERNMENTALȱAUTHORITYȱHAVINGȱJURISDICTIONȱOVERȱTHEȱPORTȱAUTHORITY,ȱCANNOTȱBEȱDISTRIBUTEDȱWITHOUTȱTHEȱWRITTENȱCONSENTȱOFȱNAVIGANTȱANDȱMAYȱNOT,ȱINȱANYȱCASE,ȱBEȱRELIEDȱUPONȱBYȱANYȱTHIRDȱPARTIESȱWITHOUTȱNAVIGANT’SȱPRIORȱWRITTENȱCONSENT.ȱ

DUEȱTOȱTIMEȱANDȱOTHERȱLIMITATIONS,ȱTHISȱREPORTȱHASȱBEENȱPREPAREDȱUTILIZINGȱLIMITEDȱDUEȱDILIGENCE.ȱȱITȱISȱBASEDȱONȱASSUMPTIONS,ȱFORECASTSȱANDȱESTIMATESȱMADEȱBYȱTHEȱMANAGEMENTȱOFȱTHEȱPORTȱAUTHORITY,ȱ INFORMATIONȱPROVIDEDȱTOȱNAVIGANTȱBYȱPORTȱAUTHORITYȱPERSONNEL,ȱ INFORMATIONȱPROVIDEDȱBYȱ INDUSTRYȱSOURCES,ȱAND,ȱ INȱSOMEȱCASES,ȱASSUMPTIONSȱMADEȱBYȱNAVIGANT,ȱWHICHȱMAYȱNOTȱHAVEȱBEENȱREVIEWEDȱWITHȱPORTȱAUTHORITYȱMANAGEMENT.ȱȱȱANYȱHISTORICALȱFINANCIALȱ INFORMATIONȱORȱOTHERȱ INFORMATIONȱGIVENȱTO,ȱANDȱSUBSEQUENTLYȱPRESENTEDȱBYȱNAVIGANTȱMAYȱNOTȱBEȱRELIABLE.ȱȱANYȱFINANCIALȱSTATEMENTSȱORȱOTHERȱDATAȱCONTAINEDȱHEREIN,ȱINCLUDINGȱANYȱFORECASTS,ȱAREȱTHEȱFINANCIALȱSTATEMENTSȱANDȱFORECASTSȱOFȱMANAGEMENT,ȱNOTȱNAVIGANT.ȱNAVIGANTȱHASȱNOTȱSUBJECTEDȱTHEȱINFORMATIONȱCONTAINEDȱHEREINȱTOȱANȱEXAMINATIONȱINȱACCORDANCEȱWITHȱGENERALLYȱACCEPTEDȱAUDITINGȱORȱATTESTATIONȱSTANDARDSȱORȱTHEȱSTATEMENTSȱONȱSTANDARDSȱFORȱPROSPECTIVEȱFINANCIALȱ INFORMATIONȱ ISSUEDȱBYȱTHEȱAICPA.ȱFURTHER,ȱ THEȱ WORKȱ INVOLVEDȱ DIDȱ NOTȱ INCLUDEȱ Aȱ DETAILEDȱ REVIEWȱ OFȱ ANYȱ TRANSACTIONS,ȱ ANDȱ CANNOTȱ BEȱ EXPECTEDȱ TOȱ IDENTIFYȱ ERRORS,ȱIRREGULARITIESȱORȱ ILLEGALȱACTS,ȱ INCLUDINGȱ FRAUDȱORȱDEFALCATIONSȱ THATȱMAYȱ EXIST.ȱACCORDINGLY,ȱNAVIGANTȱCANNOTȱANDȱDOESȱNOTȱ EXPRESSȱANȱOPINIONȱORȱANYȱOTHERȱFORMȱOFȱASSURANCEȱONȱTHEȱFINANCIALȱINFORMATIONȱANDȱDOESȱNOTȱASSUMEȱRESPONSIBILITYȱFORȱTHEȱACCURACYȱORȱCORRECTNESSȱOFȱTHEȱHISTORICALȱANDȱFORECASTEDȱFINANCIALȱDATA,ȱINFORMATIONȱANDȱASSESSMENTSȱUPONȱWHICHȱTHISȱREPORTȱISȱPRESENTED.ȱȱȱȱ

INȱ ADDITIONȱ BUTȱ NOTȱ INȱ ANYȱ WAYSȱ LIMITINGȱ THEȱ FOREGOING,ȱ ITȱ SHOULDȱ BEȱ NOTEDȱ THATȱ THEȱ SOURCEȱ OFȱ ALLȱ FINANCIALȱ INFORMATIONȱ ORȱ OTHERȱINFORMATIONȱRELATINGȱTOȱTHEȱPORTȱAUTHORITYȱCONTAINEDȱINȱTHEȱTABLES,ȱFIGURESȱANDȱBODYȱOFȱTHISȱREPORTȱWASȱINFORMATIONȱPROVIDEDȱTOȱNAVIGANTȱBYȱPORTȱAUTHORITYȱPERSONNEL.ȱ

ITȱMUSTȱBEȱRECOGNIZEDȱTHATȱANYȱPROJECTIONSȱOFȱRESULTSȱORȱBENEFITSȱ SETȱ FORTHȱ INȱTHEȱATTACHEDȱMATERIALSȱAREȱNECESSARILY,ȱBYȱTHEIRȱNATURE,ȱINHERENTLYȱUNCERTAIN,ȱANDȱNOȱWARRANTYȱORȱREPRESENTATIONS,ȱEXPRESSEDȱORȱ IMPLIED,ȱ ISȱGIVENȱTHATȱTHEȱRESULTSȱORȱBENEFITSȱSETȱFORTHȱ INȱSUCHȱPROJECTIONSȱWILLȱBEȱACHIEVEDȱORȱREALIZED.ȱ

NAVIGANTȱISȱNEITHERȱAȱLAWȱFIRMȱNORȱAȱCERTIFIEDȱPUBLICȱACCOUNTINGȱFIRM.ȱȱACCORDINGLY,ȱTHEȱINFORMATIONȱCONTAINEDȱHEREINȱISȱNOTȱINTENDEDȱTOȱBEȱANDȱSHOULDȱNOTȱBEȱRELIEDȱUPONȱASȱLEGAL,ȱAUDITINGȱORȱACCOUNTINGȱADVICE.ȱȱȱ

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port authority audit part 1

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