Penn Pike's debt-to-fund-handouts model continues to be issue in state legislature - 3 years of insolvency

November 14, 2012

2012-11-13: State auditor general Jack Wagner said again today in a legislative hearing that the Pennsylvania Turnpike "will go over a financial cliff at some point" unless it is relieved of the obligation to hand over $450 million each year to the state DOT for free roads and transit subsidies. He called the mid-2007 law (Act 44) requiring the payments "a financial noose" around the neck of the Turnpike.

The Turnpike "faces bankruptcy" the auditor general said if it has to keep borrowing more to make the handouts. It was "not a sustainable business model." Wagner alluded to the top of the toll rates/revenue curve where losses of traffic equal the percentage by which toll rates are raised and no more revenue can be extracted from the Turnpike.  

"Tipping point"

He called this a "tipping point" at which the financial model could be overturned.

Turnpike officials say this isn't a present threat, that it has a sound longterm financial plan, that the Turnpike bonds are still highly rated and the management of the Turnpike is aggressively cutting costs to produce an operating surplus that can help pay for its interest and state-handout obligations.

AET money saver

The biggest money saver in prospect is the conversion to all-electronic tolling by 2017, and the elimination of about 500 toll collector jobs.

But there could be financial problems before that's in place.

If it were a traded company...

If the Pennsylvania Turnpike were a traded company the stock exchanges would have suspended trading in its shares about three calender years ago - some time in the fall of 2009. That is when its financial reports show its liabilities first exceeded its assets. It had negative net worth, and it has been getting steadily more negative.

In accounting terms America's oldest state Turnpike  has been insolvent since it made its second Act 44 payment to PennDOT in July 2009. And getting deeper in a financial hole.

2003 through 2007 it had net worth (assets minus liabilities) stable in the range $1.5 to $1.8b. Interest costs were in the range $110m to $140m/year.

2008 saw everything change with the first annual Act 44 handovers to the state DOT. Liabilities that had grown from $2.25b to $2.90b or $650m in the four years 2003 to 2007 grew $5,260m, over eight times as fast in the four years 2007 to 2011. Liabilities have grown to $8.16b as of the end of May 2011, the last year for which it has reported.

Increasingly insolvent

The negative net worth of the Turnpike was first reported in 2010 as $840m and was 63% larger at $1,370m in May of 2011. Our back of the envelop calculations are that by end-May 2012 the debt of the Turnpike exceeded the value of its assets by $1,700m to $1,800m, and that by now the number must be over $2b.

Annual interest expenses have soared 2007 to 2011 from $140m to $330m or 2.3 fold. And this in a low interest rate capital market. They are likely to be over $400m by now.

Strong increase in operating profit

The positive news from nine years of financial reports is that the last several years have seen operating costs including depreciation allowances stabilized at around $640m while toll revenue has grown by $130m or nearly a quarter. Monthly year-to-date traffic and revenue reports show FY2012 was up $40m in revenue or 5.6% so the operating surplus for the year to end May 2012 could go to $170m.

By 2017 the AET conversion - costing about $320m upfront - could reduce operating costs by as much as $70m/year, producing an operating surplus, other things being equal, of $240m.

Trouble is this still falls way short of covering annual Act 44 payments of $450m plus interest expenses of about $400m. 240/850 or 28%. The current operating surplus or profit of $170m before interest expense only goes a fifth of the way to covering those two huge obligations.

The only way these obligations can be covered is by loading up on more debt each year. $500m more debt annually at present.

Second problem is that traffic is flat - contrary to assumptions in the forecasts.

Traffic in FY2012 was 189,086,000 versus 189,042,000 in FY2011, which takes you out  to five decimal places to find an increase. So almost all the $41m or 5.6% increase in revenue to $781m in the past year has come from toll rate increases and a slight shift in composition of traffic away from cars toward higher tolled trucks. Truck traffic (classes 2-9) was up 1.3% and car traffic (class 1) down 0.2%.

Can toll rates be raised that far and still generate extra $s

Third problem is growing political resistance to raising toll rates year by year as required in the Act 44 model - acceptable in times of prosperity, but a harder sell in a prolonged recession.

Fourth is wondering how good is the modeling of elasticity of demand at the higher toll rates - the estimated response of motorists in using the tollroad relative to the higher tolls. How far off is the revenue maximizing toll rate - the toll rate at which traffic is discouraged in direct proportion to the increase in toll rates and no extra toll revenue can be gotten.

Any doubts about the calculations by the traffic and revenue forecasters and the net worth may suddenly cause a rise in the Turnpike's cost of borrowing. Of course when this would happen is not predictable.

TOLLROADSnews 2012-11-13

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