Pennsylvania sec trans Schoch: "safer" to lift burden of debt on Penn Pike by repeal of Act 44

September 27, 2012
By Peter Samuel

2012-09-26: Barry Schoch the Pennsylvania secretary of transportation said toward the end of a long hearing in the state legislature this week that it would be the "safer" course to repeal Act 44 and lift the burden of debt on the Turnpike and get alternative funding for PennDOT. Schoch disagreed with Jack Wagner the state auditor-general who said the Turnpike's use of new debt to fund the legislated payments of $450m/ year could cause a financial crisis within as little as "a couple of years."

Wagner urged the immediate repeal of the law requiring the $450m/year payments. We reported yesterday Turnpike CEO Roger Nutt's all-out defense of Act 44 and his complete rejection of the Auditor General's alarms.

By contrast with Nutt, secretary Schoch made a point of saying "I am not opposed to repeal of Act 44."

The question was what the state would do if it lost that $450m annual revenue stream - $200m/year which goes for PennDOT's untolled roads and bridges and $250m/year which helps cover transit losses, mostly loser rail operations in Philadelphia and Pittsburgh.

Like home equity line of credit

Schoch who was by a mile the most articulate official at the legislative hearing spent time initially putting the best face on Act 44 financing with an analogy of a younger man who uses an expanding home equity line of credit in the early years when he can't afford debt service. But as his income grows he is steadily more prosperous and increasingly able to service the main debt on his home loan from cash flow. Then  in the third phase when he's wealthy he can pay down his debts.

"In essence what's happening here is every year we are taking a new home equity line on the turnpike and then every year we are raising the revenue of the Turnpike and as you get further out into this 50 year deal the revenue increases exceed the cost of the home equity line so then you start paying down this debt you are running up now.

"When you look at the forecasts of Act 44 it always had a high peak and then started to go down because the revenue covers more than the debt service..."

That's "The Plan"

But he then stopped abruptly and said: "That's the plan."

As if to say: of course all plans can go awry.

Schoch then moved the conversation to the uncertainties of price elasticity of demand: "Now the big question is 10 years from now, 15 years from now, the issue is: could we raise the tolls so much on the Turnpike that people will divert and not use it. And the only way you can answer that question is to know what the price of gas(oline) is, and whether there are tolls on other facilities. To divert you have to decide what it's going to cost me to divert."

He noted that the Turnpike so far has seen little diversion.

"That's what we've seen so far."

And indeed the traffic record of the Turnpike over the past decade shows its usage has varied remarkably little from year to year. The high year was 2008 with 189.6m transactions and the low year was 2007 with 185.9m. Those are average daily traffic numbers of 519k and 509k. (see traffic and revenue panel below)

Tipping points

Quite sharp toll increases 2009 through 2012 (see panel nearby) - roughly a third up for electronic tolls and a half greater for cash tolls - had no discernible effect on traffic at all.

And the economy was certainly not supporting traffic!

The hearing then went into a discussion of so-called "tipping points."

Turnpike executive director Nutt was asked:

Q: where is the tipping point for tolls where we see ridership actually decline?  I'm sure you've done studies. The public has been hammered (emphasis) with increased tolls for the last two years and they are really becoming prohibitive for a lot of folks, particularly for people who pay cash and don't use it every day. So have you projected out where the tipping point is where tolls are raised, and ridership declines?

The Philadelphia Inquirer reported: "Turnpike officials believe 'there is no tipping point' at which drivers would divert to other roads because of high toll costs, Nutt said."

Nutt said nothing so sweeping, just that "there is no tipping point presently identified."

And he went on to note that traffic had declined slightly with the economic crisis of 2007-8 but has largely returned to previous levels despite substantial toll increases.

Schoch and Nutt were saying that at present and in the immediate future demand shows few signs of being elastic - in economic jargon there's a very low price elasticity of demand.

That provides reassurance that in the immediate future the Turnpike will get strong increases in revenue from strong toll increases. That's a fact.

Nutt again: "the recent toll increases will from our standpoint have no real effect on diverting traffic.

"As a practical matter if you want to go from New Jersey to Ohio or Philadelphia to Scranton really what are your choices. We want to make it as cheap as we can, but when you look at diversion you've got to have something they can divert to that is somewhat equivalent in time or cost, as the secretary said, and we don't see that.

"But that doesn't mean we don't keep the tolls down to the minimum. I'm not saying we take advantage of (alternates being) non-competitive but our report to the budget secretary says that we don't hit that point (of higher elasticity and substantial diversion). Now there's a lot as the secretary says, of assumptions in there and the assumptions as based on financial advice is that we don't hit that point."

Toll rates still not high per mile

Toll rates on the Turnpike are still under 10c/mile for those with electronic toll accounts and under 50c/mile for a big laden tractor trailer.

But price elasticities are no straight line affair.

A road with low price elasticity at one toll rate can show a much higher elasticity at higher tolls. And even with few alternatives customers can be so burdened by the cost they don't 'divert' - they simply make fewer trips or move away completely.

Thus the importance of CEO Nutt's qualifier "presently identified" in his statement: "there is no tipping point presently identified."

He leaves open the possibility that at higher rates there will be reduced traffic - price elasticity that isn't currently seen.

The Turnpike's report in June to the state budget secretary on the Act 44 financing contains the warning: "While PTC's financial plan is based on reasonable financial assumptions, it is important to recognize that there are inherent uncertainties in projecting resources and obligations over a 44 year time period. Downside risks to the financial plan include lower than expected traffic and toll revenues, higher interest and inflation rates, and/or greater than projected cost increases..."

Schoch in his comments said the Turnpike would be "better off" and "safer" without the legislated commitments.

our initial report on this hearing yesterday:

http://www.tollroadsnews.com/node/6202

Turnpike's June report on Act 44 financial plan:

http://tollroadsnews.com/sites/default/files/Act44FinPlan201206.pdf

TOLLROADSnews 2012-09-26

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