Highway to Hell Fixing Highway Finances in Pennsylvania Miles Mutilator Ingram Torrey Bloodthirsty Babson Public Expenditure Analysis May 2007

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

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

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

Background 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 Pennsylvania Turnpike Commission

Pennsylvania’s “highway and bridge systems are in crisis…” “Pennsylvania has more than twice the 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.” Infrastructure State of Affairs Their November, 2006 report found: 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.

Infrastructure State of Affairs WORST ROADS 1. Louisiana 2. Pennsylvania 3. California 4. Illinois 5. Michigan WORST ROAD 1. I-10 Louisiana 2. I-80 Pennsylvania 3. I-40 Arkansas 4. I-5 California 5. 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 Overdrive, an online trucking magazine, issued its rankings for our country’s “Worst Roads” in 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”

“the Commission believes an annual increased investment of $1.013 billion is needed with a heavy focus on system preservation and targeted capital investments.” “Since the last increase in highway and bridge funding in 1997, PennDOT has lost approximately $350 million of its purchasing power due to inflation.” 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:

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

PennDOT 2006 Annual Report Motor License Fund Revenues

PTC Current Finances

Direct Transport Supply Direct Transport Demand Indirect Microeconomic Indirect Macroeconomic Income from transport operations (fares and wages) Access to wider distribution markets and niches Improved accessibility Time and cost savings Productivity gains Division of labor Access to a wider range of suppliers and consumers Economies of scale Rent income Lower price of commodities Higher supply of commodities Formation of distribution networks Attraction and accumulation of economic activities Increased competitiveness Growth of consumption Fulfilling mobility needs Benefits of Transportation Source: European Conference of Ministers of Transport

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

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

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

Part B: Congestion Fees Metropolitan Area Number of Taxed Exits Projected Annual Revenue Pittsburgh 8$50,000,000 Philadelphia 14$83,500,000 Harrisburg 5$13,000,000 Scranton/Wilkes- Barre 6$12,000,000 Total $158,500,000 $1 increase on turnpike exits around Pennsylvania’s major metropolitan areas

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

Road Tolling: Fixing Market Failure Time and Money Costs Road Trips Excess Burden P current (includes personal travel costs of time and money) Q current D Marginal Social Costs Average Private Costs

Time and Money Costs Road Trips P toll Q toll D Marginal Social Costs Average Private Costs Road Tolling: Fixing Market Failure Toll Toll Revenue Social Equilibrium

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

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

PTC’s Projected Cashflows

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? A Closer Look at Some Assumptions

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: Discount Rates RatePV of Cash Flows Undiscounted$37, %$22, %$20, %$18, %$17, %$16, %$15, %$14,469.32

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

Diversion Rate Impact on Toll Revenues

Social Costs in Excess of Private Costs – Dollars/Vehicle Mile 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 Source: Transportation CBA – Roadway Costs, Victoria Transportation Policy Institute 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. Secondary Markets: Secondary Roadway Costs

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

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!!!

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) Sensitivity Analysis Conclusions

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.

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