Pennsylvania auditor general tells legislators state Turnpike will face bankruptcy within "no more than a couple of years"
2012-09-25: The Pennsylvania Turnpike Commission will face bankruptcy in "no more than a couple of years" according to the state's Auditor General Jack Wagner speaking to a joint hearing of the transportation committees of the state legislature in Harrisburg Tuesday. Wagner called for an immediate repeal of Act 44 - the 2007 law that committed the Turnpike to $450m/year payments to the state department of transportation, PennDOT.
Following Wagner the Turnpike's CEO Roger Nutt said the Turnpike faced no crisis and has a sound financial plan for funding the $450m/year payments over the 50 years to 2057 as provided by Act 44. Rating agencies had not downrated the Turnpike's bonds in three years.
And investors are hungry for Turnpike bonds, even subordinate bonds, at 4 percent, Nutt said. A recent bond issue of $200m could have raised $700m.
Commissioners and staff at the Turnpike would never allow a bankruptcy, according to the Turnpike CEO, who sang the prizes of his staff and the commissioners.
"Flim flam financing"
The state auditor general Wagner began by calling the Turnpike Commission's approach to paying $450m/year to the state DOT "film flam financing."
Without the toll revenues from I-80 envisaged by its primary sponsor state senate leader Vincent Fumo the Turnpike was only managing to make the PennDOT payouts by adding substantially to debt each year. With the addition of its own debt financing this was adding a "crushing debt" burden on the Turnpike books, Wagner insisted.
He drew an analogy with a householder who was able to meet his own mortgage payments on his house but is suddenly required to take on servicing his his neighbor's mortgage as well. And only does so by taking out new loans each year.
Debt gone from $2.6b to $7.3b in five years
In five years of Act 44 payouts to PennDOT by the Turnpike its debt has risen from $2.6 billion to $7.3b. And it has gone from having a balance sheet of net assets of $156m to having negative net worth of $1.4b.
The Turnpike will soon be "under water," Wagner declared with debt greater than the $12.8b the private sector valued the Turnpike at.
Act 44, he said "fundamentally transformed the Pennsylvania Turnpike Commission (PTC) from a self-sustaining entity charged with operating and maintaining a toll road system to one responsible for issuing and servicing debt for another state agency, Penn DOT."
"The debt you are seeing is just the beginning," Wagner said, and its financial plan shows it needs to issue $13.5b in new debt and will incur debt service costs of $32.3b.
The whole state government in Pennsylvania has debt of $10 billion, by comparison.
On bond ratings the auditor general said that ratings are "on the way down." In 1998 the Pennsylvania Turnpike had the highest bond rating of any turnpike in the country, a position it has since lost. As debt increases ratings are going to fall, Wagner said.
"It's very existence is at risk because it can't continue to operate with significant increases in long-term debt and the continued serious depletion of (net) assets caused by Act 44."
Wagner also criticized the Turnpike for 26 interest rate swaps which he said puts $145m in jeopardy. The interest rate swaps are "dangerous," the auditor general said, and that such "gambling" should be no part of public finance. If the Commission made the wrong bets on interest rates its financial problems would suddenly be more serious.
Nutt concedes nuttin'
Turnpike CEO Nutt conceded nothing.
"The Commission is not facing a financial crisis. I can't say that too strongly. The Turnpike's rating by the nation's leading rating agency has not changed on the commission's senior bonds for over 3 years."
On the ease with which the Turnpike sells bonds he said: "Obviously in addition to the rating agencies the investor community thinks we are a good buy. Our investor provide another independent and favorable view of our debt structure and what we are doing."
Nutt said the Turnpike's financial plan for delivering Act 44 payments to PennDOT was "a sound fiscally responsible capital funding program."
"I can't see any of our commissioners doing anything that would result in the bankruptcy of the Penn Pike," said the CEO. "There is no commissioner there I can tell you that would vote to permit us to go into bankruptcy."
In all his years of experience as a senior manager he said "I haven't witnessed a more professional dedicated and competent staff in all areas of management than we have at the Pennsylvania Turnpike.
"You should feel comfortable that we have a very competent staff in all areas, financial, maintenance, construction, I am very happy with the competency of those staff. And we wouldn't let the Pennsylvania Turnpike go bankrupt either."
Nutt also said tne Turnpike was in a "far better situation" thanks to Act 44 than if Governor Ed Rendell had been allowed to proceed with privatization. That had only promised to raise $12.8 billion ($9b to $10b after debt defeasance) whereas Act 44 would raise $23b.
Commissioners prepared to "do what is necessary" with toll increases
The Turnpike CEO also dwelled on the willingness of his commissioners to support necessary toll increases as a measure of the financial viability of the Turnpike. He had recently got unanimous support from his commissioners to increase tolls annually for three years. This amounted to "saying to people we are responsible, we're going to do what we need to do."
He continued: "It is good for the rating agencies to know because they were asking does the Turnpike leadership) have the will to increase tolls. Our commissioners have stood up and have done what is necessary."
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