Highway to Hell Fixing Highway Finances in Pennsylvania

1. Highway to HellFixing Highway Finances in Pennsylvania Public Expenditure Analysis May 2007 Miles Mutilator Ingram Torrey Bloodthirsty Babson

2. Outline • Pennsylvania Highway Background • Stakeholders • Background • Infrastructure State of Affairs • Financial State of Affairs • PennDOT/Governor’s Proposal • Pennsylvania Turnpike Commission’s “Modest Proposal” • Revenue Bond Program • Congestion Fees: Regional Mobility Funds • Tolling of I-80 • Other Revenue Sources • A Closer Look at Some Assumptions • Discounting • Traffic Diversion • Secondary Markets • Passage of Regional Mobility Fund • Recommendations and Conclusion

4. Stakeholders • Pennsylvania Department of Transportation (PennDOT) • Pennsylvania Turnpike Commission (PTC) • Commonwealth of Pennsylvania • Citizens of Pennsylvania

5. Background PennDOT and PTC are separate, independent agencies, both reporting to and receiving funds from the Secretary of Transportation. • Pennsylvania Department of Transportation • Has jurisdiction over all PA roads other than the turnpike and its spurs • Is responsible for 40,500 miles of state roads and highways & about 25,000 bridges • Created from the former Department of Highways by the legislature on May 6, 1970 • Employs 11,000 people

6. Background Pennsylvania Turnpike Commission • The PTC was created in 1937, and has jurisdiction over I-76 and its various tolled spurs. It officially entered service on October 1, 1940 • The turnpike was financed by a loan from the New Deal's Reconstruction Finance Corporation for almost $41 million at 3.75 percent. The New Deal’s Works Progress Administration also provided another $29 million in grants • PTC employs around 2,250 people, or 4 people for every mile of road it oversees, including 480 managers

7. Infrastructure State of Affairs In February 28, 2005, Governor Rendell convened the nine-member Transportation Funding Reform Commission to study and make recommendations concerning the financing and operations of transportation systems in Pennsylvania. Their November, 2006 report found: • Pennsylvania’s “highway and bridge systems are in crisis…” • “Pennsylvania has more than twicethe percentage of structurally • deficient bridges than the national average, and more than a third of the 21,000 miles of state-owned secondary roads are rated “poor.” Pennsylvania’s state owned bridges are on average 50 years old.”

8. Infrastructure State of Affairs • Overdrive, an online trucking magazine, issued its rankings for our • country’s “Worst Roads” in December 2006: WORST ROADS1. Louisiana2. Pennsylvania3. California4. Illinois5. Michigan WORST ROAD1. I-10 Louisiana2. I-80 Pennsylvania3. I-40 Arkansas4. I-5 California5. I-40 Oklahoma • PA is “the state most frequently at the head of the Worst Roads list in its • 16-year history” Overdrive, December 2006 • The American Society of Civil Engineers gives Pennsylvania Roads a • grade of “D” in it’s Infrastructure Report Card for the state, entitled • “The Keystone is Crumbling”

9. Financial State of Affairs “The key to a successful infrastructure program is to have funds to support roadway construction, rehabilitation and emergency situations”ASCE Infrastructure Report Card for Pennsylvania The Governor’s Transportation Funding Reform Commission report also found: “Since the last increase in highway and bridge funding in 1997, PennDOT has lost approximately $350 million of its purchasing power due to inflation.” “the Commission believes an annual increased investment of $1.013 billion is needed with a heavy focus on system preservation and targeted capital investments.”

10. PennDOT Current Finances Other, Federal Funds, PA General Fund, Motor License Fund

11. Motor License Fund Revenues PennDOT 2006 Annual Report

12. PTC Current Finances

13. Benefits of Transportation Source: European Conference of Ministers of Transport

14. Competing Propositions Governor’s Plan • Lease or concession of Pennsylvania Turnpike system - $965 million/yr for road and bridge repair • Excise tax on oil company gross profits - $760 million/yr for transit projects • Total is greater than $1.7 billion Other Revenue Source Possibilities • New revenue by creating a $1 “congestion fee” in certain urban areas as a way to raise the necessary funds for infrastructure repair • A highly leveraged debt recapitalization of the Turnpike by the Pennsylvania Turnpike Commission or another public entity owned by the commonwealth

15. PTC’s “Modest Proposal” • Part A: Revenue Bonds • Part B: “Regional Mobility Fund” Congestion Fee • Part C: Tolling of I-80 • Part D: Other Revenue Sources

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

17. Part B: Congestion Fees $1 increase on turnpike exits around Pennsylvania’s major metropolitan areas

18. Part C: I-80 Tolling Financial Projections • Initial toll of 8 cents per mile on passenger vehicles and 30 cents for commercial vehicles • 3% annual increase in tolls

19. Road Tolling: Fixing Market Failure Time and Money Costs D Marginal Social Costs Excess Burden Average Private Costs Pcurrent (includes personal travel costs of time and money) Qcurrent Road Trips

20. Road Tolling: Fixing Market Failure Time and Money Costs D Marginal Social Costs Social Equilibrium Ptoll Average Private Costs Toll Revenue Toll Qtoll Road Trips

21. Part D: Other Revenue Sources • PTC projects revenue of over $12.5 billion between 2008 – 2038 from increase in tolls on I-76 • PTC assumes 25% turnpike toll increase 2010, and 3% annual increases thereafter

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

23. PTC’s Projected Cashflows

24. A Closer Look at Some Assumptions • Cash flows are NOT discounted • Traffic diversion due to tolls assumed at 20% for cars and 1% for trucks • Secondary markets are not considered • Will the Regional Mobility Fund pass the legislature?

25. Discount Rates • Currently, future cash flows are not discounted! The sum of non-discounted cash flows to the PTC is $37.8 billion. • The PTC report assumes an annual interest rate of 5.5% on issued bonds, and an annual inflation rate on costs of capital of 4% • The following table shows the sum of cash flows at various discount rates:

26. Traffic Diversion Rates Passenger Vehicles: • Passenger vehicles currently make up 87% of I-80 traffic. The average length of an I-80 trip is about 30 miles, therefore diversion to secondary roadways will be possible for most trips • Passenger vehicle diversion (20%) will therefore have a significant effect on secondary roadways. Commercial Trucks: • I-80 is the one of the primary highways used for commercial trucks traveling west from New York and New Jersey ports, and is currently the only major east-west highway in the region that is not tolled • Commercial truck diversion (1%) will therefore be significantly lower than passenger vehicle diversion

27. Diversion Rate Impact on Toll Revenues

28. Secondary Markets: Secondary Roadway Costs Social Costs in Excess of Private Costs – Dollars/Vehicle Mile Source: Transportation CBA – Roadway Costs, Victoria Transportation Policy Institute • Diversion = 20% car, 1% truck • I-80 = 9,315,549 vehicle miles/day, 87% is passenger and 13% commercial • 2.36 billion passenger miles and 437 million commercial miles in year 1

29. Secondary Markets: Secondary Roadway Costs

30. Secondary Markets: Secondary Roadway Costs • Traffic diversion to secondary roadways will result in increased maintenance and construction costs on these roadways • At a discount rate of 4%, the present value of these costs will be $185 million • This money represents a transfer of costs from PTC (I-80) to PennDOT (secondary roads), but not an overall increase in spending on road maintenance, therefore there are no price effects.

31. Secondary Markets: Gasoline Prices The Mackinac Center for Public Policy (Michigan-based public policy research institute) found the long-run price elasticity of demand for gasoline to be .7 A meta-analysis of many studies in the Energy Journal found the elasticity to be .58

32. Regional Mobility Fund Passage Present value of cash flows to the PTC with the Regional Mobility Fund: $18,972 million at 4% Present value of cash flows to the PTC without the Regional Mobility Fund: $12,696 million at 4% A difference of $6.3 billion!!!

33. Sensitivity Analysis Conclusions What is the PTC analysis MOST SENSITIVE to?? • Discount Rate (very sensitive) • Passage of the Regional Mobility Fund (very sensitive) • Gas Prices (toll revenues are very sensitive, overall financing is less sensitive, and effects are hard to project) • Traffic Diversion (not so sensitive for cars, more so for trucks)

34. Recommendations • NPV should be included in all PTC financial projection!!! • Research the political feasibility of the Regional Mobility Fund, exploring options for incremental phase-in of fees. • Research I-80 traffic flows: • Where are commercial vehicles coming from? Where are they going? • How much is in-state and out-of-state traffic? Who is using the road and who is paying for the road? • Research the effects of gas prices on long-term financial outlook. • Leasing of the Turnpike should be considered, but only with strict road maintenance stipulations.

35. Conclusions • At this time, PA has neither the money nor the political will to fix its roads and bridges • PTC’s report is seriously flawed • For now, we’re on a Highway to Hell