Pennsylvania Senate GOP has Turnpike Lease Study
An analysis of potential Turnpike lease by Moody's, commissioned the the PA Senate Transportation Committee, was released yesterday. Their findings are that a Turnpike lease might be beneficial, that $12.8 billion is a fair price, all things considered, and that price would yield about $590 million annually for the state. From the report summary:
A compelling argument can be made that a turnpike lease could be constructed to benefit both the Commonwealth and a private operator. Notably, by shifting the Commonwealth’s turnpike resources into other assets, the state government's overall fiscal condition would be less sensitive to fluctuations in economic activity. Likewise, a private firm with holdings in other countries and states could invest in the turnpike in order to diversify its assets and shelter them from risk. ...The estimate of $590 million annually is pretty much in line with our estimate (and doesn't include taxes paid, savings on payments to the Turnpike Commission, or the cost of state policy) - and significantly higher than the Turnpike Commission's payments under Act 44, absent I-80 tolling.
By factoring in assumptions about future inflation and interest rates, turnpike profits over time can be translated into their current cash value. The present value of a 75-year lease of the turnpike is estimated at $16.55 billion. However, a private firm bidding for the lease would not be willing to offer the full value of the asset. The private operator would also need to be compensated for taking on considerable risk. ...
Under the baseline scenario of a $12.8 billion gross bid invested in a fund structured to match that of the Pennsylvania State Employees’ Retirement System, $590 million per annum in infrastructure spending could be supported over the lifespan of the lease.
This study was largely a waste of taxpayer dollars, as it contains little information you couldn't get at TurnpikeFacts.com. And if Senators were waiting for these findings, that is unfortunate, as the Turnpike Commission continues to go deeper into debt.
If the Senate is serious about considering a Turnpike lease in the new session - and we have reasons to be skeptical of that - we have some recommendations of how to proceed.
9 comments:
The other reason that this study was a waste of taxpayer money is that the issue is, or should be, dead. It's hard to imagine that the message hasn't gotten through yet:
1) The turnpike lease is an unnecessary gamble with taxpayers' assets. It takes certain revenue and puts it against possible investment income, putting our assets at risk without ever discussing the propriety of financing government on that basis. Am I being naive? Has this become an accepted method of government finance in Pennsylvania without anyone ever having raised an eyebrow? What other major functions of our government are funded in large part through investment income?
2) The people are being pretty plain that we believe that Harrisburg should find infrastructure money in current revenues. We have given the government enough revenue streams already, thank you very much.
3) If the Turnpike Commission is, in fact, as corrupt as you say (and I believe this easily), then either the Commission should be disbanded and the turnpike placed under the care of a government agency, probably PennDOT, or the current leadership should be removed and an enforcer type installed to clean it up.
4) Even if all the above are addressed, there is still the issue of how to direct lease revenue, whether principal or investment, specifically toward infrastructure maintenance, prohibiting the legislature from using the money, especially the principal, for other purposes (also to force them to continue current spending levels per capita for infrastructure in the general fund).
Do you sense a theme? Put simply, we don't trust any of these guys, whether in the Legislature or on the Turnpike Commission. It makes no sense to switch responsibility from one untrusted organization onto another.
A lease proposal will not be palatable until each and every one of these issues are fully addressed.
Moody's....what a joke. Yet another Wall Street firm that has led investors like lambs to the slaughterhouse with their reccomendations on Wall Street. Anyone who listens to these morons, need to have their heads examined. That 13 Billion offered will be worth about 6 Billion in this market condition, and about to go a lot lower. the public has lost faith in Wall street, and the have every right for losing it. Moody's = Wall Street Scum.
Wait, you talk about replacing the Turnpike Commission with another governmental agency, like PennDOT. Are you kidding? I agree that a lease is not the way to go either, but replacing one governmental agency with another is not the solution.
Actually, my preference would be to strong-arm the Turnpike Commission into ridding itself of what patronage there might be and returning a more realistic amount (yet to be analysed) of money to the people of the Commonwealth. If their best return is insufficient to fund our infrastructure, then money should be found from existing revenue.
I believe that others have written that PennDOT is a possible alternative, and that it's better run, and so I included it as a possibility.
How about this? Instead of leasing the turnpike, we contract with a company to run it, at a set price and with a set return? Is this possible?
You "don't trust any of these guys'? Then why do you insist on letting them run your turnpike? Government players who aren't highly paid but have control over significant revenue streams -- and relationships with unions and contractors who support their campaigns -- are ripe for corruption.
Take the power to award hundreds of contracts away from them. Let one contract be awarded every 75 years in an open and public auction. Let people manage the roads who get paid more when the traffic flow increases and delays are eliminated. The Turnpike Commission folks are political appointees who are responsible for running one highway. The winning bidder will be a company that runs dozens of highways and makes more money when they do it well.
And Mr. Ploy, yes, all government institutions invest excess capital so as to generate returns. It's called finance, and while its image is a git tarnished rught now, the concept of using capital to generate investment returns -- it's called capitalism -- is still accepted as a pretty good way to run the economy.
Get government out of the road business.
All well and good, and I agree with you in principle. I just don't see the deal presented to us as a good deal.
There's a difference between investing excess revenue (say, due to a good year for tax collections, maybe to carry a fund balance against possible down years) and the current deal, which is to give up pledged revenue of $475M/yr, or a total of $35.6B over 75 years, in order to obtain upfront money of $12B and rely _completely_ on investment income. Aside from my objections about funding government through investment income, why should we shoulder any risk at all in the deal? We already own the asset!
By the way, I realize that the $475M obligation involves a proposal to toll I-80, which I also oppose. My position is that money for maintenance of commonly held property should be first priority spending, and so the money should be found in existing revenue streams.
We hand Harrisburg more and more ways to make money, and, in this case, we propose to hand it to them in the name of limited government! Why would we contract government in one direction only to expand it in another, perhaps more risky, direction?
As far as government being in the road business, again, I agree with you in theory, but it's not as though government hasn't been in the road business for as long as there's been government. If there's benefit, sure, we may divest ourselves of a road. I just don't see that as the case right now.
Again I wonder out loud, would we be able to get a contractor to run the turnpike on the basis of a certain payment due us per year for the privilege? Could we better the amount now pledged by the Turnpike Commission? I could get on board an idea such as that.
Ed,
In response to your last question - yes, we could enter into an annual lease payment or revenue sharing, rather than an up front lease payment. Though the previous leases (Indiana and Chicago) were done via up front payments, and that is what Governor Rendell negotiated with the original bid, several P3's for new projects/toll roads were set up to share revenue with the state (the Pocahontas Parkway in VA being one example).
As for "why should we shoulder any risk at all in the deal? We already own the asset!" - we are currently shouldering a great deal of risk under Act 44. The annual payments from the Turnpike Commission are based on borrowing (for which the taxpayers are liable) and future toll increases on motorist (which are not limited by statute).
Consider this analogy: if you owned an office building, would it be more or less risky to rent out some of the offices to another business, or use all the offices yourself? I would suggest, that - if you weren't a lawyer - it would be better to rent to a law firm (which will make a profit) than try to run a law firm yourself. Yet in the case of the Turnpike, our elected officials hired a profession political fundraiser to oversee management of the toll road. Perhaps renting it to a more productive business would yield a better return on "our property."
Mr. Benefield, thank you for your reply,
Re: Act 44 and our risk, I can certainly agree, and I can't say that I support that risk (I did ask in response to a question in another post; what happens if the Turnpike Commission goes bankrupt?). Perhaps a re-visiting of their charter is in order. Regardless, should we be shifting one risk to another risk, or would it be better to shift from risky to safe?
Re: your analogy, certainly if I own a thing and am using it at less than its capacity, it would make sense to rent out the extra capacity, but that's not what's being contemplated here. I think the analogy would be more accurate if it were based on building management services rather than rents, and the upshot for me is that if I hired a manager to operate my building, I would be more likely to pay a percentage of expected revenue or a set fee, rather than to accept a one time payment from the contractor based on 1/3 of my expected profit during the term of the contract, and surrender all profit for that term!
And if I did accept that up front payment, I would do it as a private citizen and a property owner, not as a government and caretaker of common property.
My objection isn't to the lease/contract per se, it's to the deal that's being proposed, and the concept of funding infrastructure maintenance, of property held in trust for the people, with investment income.
If I may co-opt your last sentence, the return currently being proposed isn't a return on our property, it's a speculative return based on "proper investing." It's not only unwise, it's a major shift in how governments are funded, and not necessarily a good shift.
Thankfully, the proposal to lease the turnpike for 75 years -- something tantamount to its sale -- is dead because of the current economic environment, but even if things were different it would be a non-starter for anyone who is prudent and wise.
Why? We would be giving up an asset that generates revenue reliably in good times and bad in return for sacrificing the money we received from its sale to the vagaries of the market.
First, the numbers cited in the above posts are not accurate, according to what I've read. The amount available for investment after the deal was done would have been between $8.5 billion and $9 billion in order to cover existing debt obligations and significantly less than that after transaction costs were tallied.
So, the state would have, say, $8 billion to invest, hoping to generate $500 million or so for infrastructure improvements. That's roughly a 6 percent return -- impossible to do safely even before the crash -- and the proceeds were to have been spent, not retained, so the asset (the $8 billion) would have been a diminishing one.
But, of course, came the crash. If that money had been deployed in government securities, it might have thrown off 2 percent or 3 percent in interest, minus fees. If it had been put into "safe" index funds, about 40 percent of it would have been vaporized.
It would have been a catastrophe of the first order -- one that would have changed the political landscape forever -- so I'm surprised we're still talking about it. We should be saying, "Whew, weren't we lucky to have escaped this whole thing!"
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