NY Thruway's understated debt, stagnant traffic, big health costs, cheap truck tolls pose financial crisis - Navigant Capital Advisors
2012-06-07: Navigant Capital Advisors say the New York State Thruway has been seriously mismanaged over the past decade, accumulating dangerous levels of short-term debt, allowing operating costs to swell while revenue lags, failing to charge competitive tolls for trucks, and falling well short of stated objectives in roadway rehabilitation.
Moreover the state canal system - largely recreational - and untolled interstate I-84 and I-287 supported by the Thruway are a growing burden which are deceptively excluded from covenant calculations.
An immediate crisis exists, Navigant says in refinancing $868m of short-term debt - called BANs or Bond Anticipation Notes - that were not properly reported previously by the Thruway, and presently lack a revenue stream to support them. Proper accounting for the BANs and projection of revenues and expenses puts the real debt service coverage (DSCR) of the Thruway as heading below the covenanted minimum 1.2x by next year.
A Navigant slide says: "In order to maintain acceptable DSCR, a combination of revenue enhancement, cost containment and capital spending reduction initiatives should be urgently pursued."
Reliance on opaque risky short term debt
There has been "mounting debt and reliance on opaque and potentially risky, short-term funding," the report says. Navigant was called in last November to report on the condition of the Thruway by new board and management appointed by Governor Andrew Cuomo.
A 45% increase in truck tolls has already been approved by the board, as one of the immediate measures needed to restore the Thruway's finances. The toll rates which bring the Thruway into line with the Pennsylvania and New Jersey Turnpikes and other long distance truck tolls will be implemented this fall, a Thruway official told us today.
The Navigant report is referred to in the text as a "confidential report" prepared for the Thruway, but it was formally accepted by the Thruway board at their last meeting and became a public document. It is now posted to the Thruway website.
The posting includes a 3-page letter to the Board by Governor Cuomo's chairman Howard Milstein endorsing the Navigant report, and saying "the Thruway must act immediately to get its house in order."
Milstein also writes: "In order to correct the mistakes of the past and secure the Authority's future... the Authority intends to follow through on aggressive fiscal management reform paired with significant spending reductions. These actions (will) be supplemented with a modest toll increase on high axle commercial trucks... The Authority will do more with less as all state agencies and authorities have done under Governor Cuomo's leadership."
The report's harshest criticism is of a 2009 Thruway board decision on $680m of covenant-evading BAN debt which has since increased to $868m.
Navigant: "Questions abound regarding the prudence of the (BAN) decision, including:
- "Risk established with debt markets' perceptions of potentially 'gaming' the capital structure with a sizable piece of near?term paper
- "Mismatch of short?term debt against long?term assets in a weak operating environment
- "Potential consequences of refunding risk on future cost of capital, depending on rating agency review, credit underwritings, and interest rate environment"
The published debt service coverage ratio (DSCR) has been in decline - from 2.63x in 2000 to 1.77x in 2011, but deceptively the published DSCRs exclude growing short term debt called BANs, and state canal obligations.
"BANS are not intended for serial issuance but rather (as a) short term bridge to long term debt. By issuing in this fashion, (the Thruway) avoided inclusion in the covenant calculation... reflecting stronger coverage than what would need to be serviced, and avoided restricted covenants designed to restrain issuance of excess amounts of debt."
Navigant has a graph showing DSCRs as published improving due to exclusion of BANs from debt and a dashed line showing the real DSCR heading downward below the 1.2x limit set in bond covenants.
"Until recently, management and the Board of Directors failed to demonstrate fiscal responsibility and curtail the ballooning deficits, electing instead to 'kick?the?can' for decades, consequently allowing debt to grow from $237m in 1990 to $3.2 billion a (compound annual growth rate) CAGR of 13.1%."
Dangerous levels of debt
Instead of addressing the bottom line past management and board have got dangerously into debt, Navigant says, failing to adjust an ambitious capital program conceived in the mid-decade boom years to recession-depressed revenues.
Operating costs at NYSTA have grown 66% in the past decade while traffic has been stagnant. Health benefits for Thruway employees are a growing burden with only 6% paid by employees, two thirds of whom pay nothing for their health care.
To gain the confidence of capital markets, Navigant says, the Thruway must move within 60 days to raise toll revenues, implement immediate cost containment measures, authorize an independent third party to conduct a top-to-bottom agency review to improve the authority's bottom line, and put on hold the 2012-2017 capital program.
Over a 60 to 180 day period the Authority must complete labor negotiations to allow for enhanced productivity, and produce a new sustainable capital program, the Navigant report says. Financing for replacement of the Tappan Zee Bridge needs to be a separate standalone financial plan since foreseeable Thruway revenues are needed to meet existing commitments.
Trucks don't pay their way
Navigant says truck traffic is not paying its way on the Thruway with truck traffic in decline over the past six years (2005 32.5m, 2011 25.2m, down 23%, 4.2%pa) and toll rates well below other comparable tollroads and failing to pay for pavement damage.
Traditionally truck revenues on the Thruway have been over 40% of total revenue (in 2000 they were 41%) but last year they had declined to 36%.
Also, state law prevents the Thruway from realizing violations revenues - they go to local government - reducing the Thruway's incentives to manage the problem of unpaid tolls.
Toll collection and traffic services costs have been contained showing virtually no growth over the past eleven years but total operating costs are up by two-thirds. Non-revenue facilities such as the Canal, I-84 and I-287 have grown in cost at a compound rate of 4.4% a year.
The State Canal costs the Thruway about $85m a year but brings in a mere $2m of revenue!
Costs growing faster than revenues
Health insurance costs at the Thruway have been growing at 8% a year since 2000 and pension costs by 13% annually. The per employee cost of health insurance provided by the Thruway is $11,184 while the contribution per average employee is $699.
Fringe benefits have gone from 32% of salary in 2000 to 54% in 2011.
Average expense per employee at the Thruway is now close to $90,000 compared to under $60,000 in 2000.
Total compensation is higher at the Thruway than at NYSDOT "in the vast majority of (work) categories."
Says Navigant: "Operating expense growth has materially outpaced revenue growth."
Mismanagement of capital program
The Navigant report is scathing about the Thruway's past management of its capital program. For example its target in the 2005-2011 capital plan was rehabilitation of 105 miles of the Thruway's roadway but only 44 miles (42% of the target) got done. Reconstruction also fell short of the target, though by less (19%).
2000 to 2005 about half the Thruway's capital program was funded by net revenues but in the past several years that ratio has dropped to under 20% requiring a doubling of Thruway debt. Elimination of barrier tolls at Black Rock and City Line and over-large E-ZPass discount rates robbed the Thruway of needed revenues.
The Thruway is criticized as lagging seriously behind its peers in other states in concession revenues, sponsorships and advertising revenue.
Navigant says the Thruway must urgently:
- sell or lease surplus land
- shift employees to health plans to which they contribute
- cut sick leave and accumulated vacation entitlements
- reduce the Thruway police force
- consolidate E-ZPass walk-in centers
- reduce staffing of toll lanes, move to "automated" toll equipment
- reduce overtime
Thruway moving to increase tractor trailer tolls 45% by fall
At their recent meeting the seven member board of the New York State Thruway directed the executive director to implement a recommended 45% increase in tolls for heavy trucks. A public comment period and public hearings are being scheduled with the aim of having the higher truck tolls in place this fall (2012).