NJ Turnpike to secure borrowings of $37.6b with max 50% toll hikes 2010, 2014, 2018, 2022 + indexation

Governor Jon Corzine is proposing creation of a state owned but independently controlled Public Benefit Corporation (PBC) to take over New Jersey's tollroads under a toll concession that would raise $37.6b - for paydown of state debt and transport improvements. The concession agreement would allow maximum increases of 50% in toll rates in 2010 and further 50% toll hikes in 2014, 2018, and 2022, plus inflation adjustments on an annual basis.

50% increases in four years represent annual increase of 10.67%. With an assumed inflation indexing of 3% added in the toll caps would rise 13.67%/yr.

Toll revenues of the New Jersey Turnpike would soar. If the maximum rates were applied to constant traffic they would go from about $850m/year at present to $1,450m inn 2010, and $2,444m in 2018. That's close to a tripling in ten years.

By 2033 the revenues would be ten times their present level at about $8.8b/year, approximately the revenue of all toll facilities in the US combined currently.

The Governor's plan also brings in the Atlantic City Expressway in southern New Jersey and it puts tolls on NJ440, an expressway that goes west from I-287 at the Turnpike in the Metuchen-Woodbridge area (Exit 10 of the Turnpike) and heads east crossing under the Garden State Parkway as it approaches the Driscoll Bridge. NJ440 continues on to the Outerbridge Crossing into Staten Island NY. However these two are small beer compared to the Turnpike, which now encompasses the Garden State Parkway within its finances.

Tolls on the Turnpike are presently about 5c/mile (3c/km) and about 3c/mile (1.8c/km) on the Garden State Parkway.

In background material the Governor's office shows a passenger vehicle now paying $1.20 for a 22.9 mile trip as paying $2.05 in 2010, $3.45 in 2014, $5.85 in 2018, $9.85 in 2022 and $12.50 in 2033 - assuming 3% annual indexation along with the four 50% increases. Those are maximums allowed in the concession contract between the state and the corporation.

In per mile terms those are 5.2c, 9c, 15.1c, 25.5c, 43c.

Just an hour's flight north of New Jersey on 407ETR tollroad in Toronto tolls are to rise on Feb 2 from 28.3c to 32c/mile for cars traveling in peakhours on the busiest stretch - a maximum toll rate envisaged for the New Jersey Turnpike about 12 years off, and rates not attained by the Garden State Parkway under the Corzine hikes until about 2040.

Toronto tollpayers wouldn't blink an eyelid at the proposed NJ tolls.

The Toronto tolls are lower in offpeak periods (27c/mile) and in the less heavily traveled segments. So far 407ETR has managed to raise toll rates annually and also gain traffic. Comparisons only go so far. Toronto has a rapidly growing population whereas New Jersey is stagnant and 407ETR is only in its eleventh year as compared to the NJ Turnpike and Garden State Parkway which are over 50 years old.

on 407ETR tolls see http://www.tollroadsnews.com/node/3328

Tolls in southern California, France, Japan and other places are even higher than Toronto.

In metropolitan Tokyo where all expressways are tolled, the minimum toll is Y700 ($6.40) and with an average trip of about 5 miles that's over $1/mile.

Still this can be argued all kinds of ways. The percentage increases proposed by Gov Corzine are unprecedented in American tolling history. In Pennsylvania there is a 25% increase in 2009, then in essence indexation (3%pa). In Indiana and Chicago there were substantial initial increases then indexation.

No one else has proposed an 8-fold plus increase in tolls over 14 years and a ten fold increase over 25 years - see Index in tables.

The comeback is that no state is in quite such dire financial straits as New Jersey and no state has such unrealized tollroad potential locked up in low toll rates. You can argue this on and on.

A backgrounder of slides from the Governor's website is downloadable here

Governor's speech

Corzine detailed his plan in his annual State of the State address to the New Jersey legislature meeting in joint session in Trenton. His toll plan is the centerpiece of a fix to the state's budget, which he says is in crisis from ballooning debt and unfunded spending.

State debt of $32b plus an unfunded $25b state pension liabilities and $60b in retiree health benefits is $45k/household, 50% larger than federal debt and liability total - "scary" Corzine said.

At the same time spending has been increasing 6 to 7% a year compared to base revenues growing 2 to 3%. He called this "the end of the line."

Corzine said he will propose a budget that freezes spending. Future budgets should not be allowed to spend beyond recurring growth of revenues. All future debt must have a dedicated revenue source or else be approved by voters inn a referendum. The tollroads part of the plan proposes to pay down half of the state's debt and fund transport improvements "for a generation."

Extended excerpts

Here are the pertinent parts of the Governor's speech as delivered:

"I know full well this is the “tough love” part of the restructuring…and my recommendation doesn’t come lightly.

It is simply the best available option.

I have two objectives with the toll road element of the plan.

First, cut the state’s overall bonded debt in half.

This means, we pay back in short order $16 billion or more in debt and reduce the annual debt payments by about one billion dollars.

In one fell swoop, we wipe out one-third of the structural deficit.

The resulting benefit for our taxpayers and budget balance are self-evident.

The second objective of the plan is to provide a long term funding source for statewide transportation needs across New Jersey’s broad, multi-modal transportation network.

As you know, we have massive transportation demands, but no money after 2011 to meet them.

We are a densely populated corridor state that is absolutely dependent on our transportation network for our quality of life and our economic well-being.

In the next 10 years, we have over 10,000 miles of highways that need to be resurfaced so that, in turn, we can save drivers hundreds of millions in vehicle repairs, reduce time lost in congestion, and make the roadways safe.

We have 700 bridges, deficient bridges that need repairs and we shouldn't wait for a tragedy to motivate us to fix them.

We need to expand mass transit so as to get cars off the roads and carbon out of the air … be it light rail into Gloucester County, or the Northern branch through Bergen County. I guess we got a few Bergen County people here.

We should widen the Atlantic City Expressway to support the expected $15 billion of new investments and thousands of private jobs in tourism and gaming coming in the next decade.
The public has been promised a widening of both the Turnpike and the Parkway… but there’s no money to pay for it.

And the state needs by this summer… again I reference you to our congressional delegation … a ‘source certain’ of $3 billion to move forward with the monumental Hudson Tunnel, or we risk losing matching federal dollars that make the $7 billion-plus investment possible.
The same match issue is true for the nearly $2 billion in annual transportation funding we get from Washington.

All in all, we need close to $40 billion over the next 10 years to fix and expand our bridges, roads, and mass transit systems.

The truth is, we have few practical ideas of where the money will be found.

As a thirty year veteran of financial markets, I know there is no magic to finance.

No plan, no investment comes without cash.

I want to be clear and honest upfront – my plan involves significant toll hikes.

Those toll hikes will be predictable, fair and reflect increases in the cost of living… past, present and into the future.

Toll increases will be imposed equally on all users – a majority of whom are commercial and out-of-state drivers.

The toll increases will reflect a maximum schedule… one that could be reduced by productivity gains, strategic investments, and partnerships – (and Raymond, maybe even windmills.)

The first increase will come in 2010 and will be 50%.

Three other increases of up to 50% will come in successive four-year intervals ending in 2022.

In addition, there will be annual cost-of-living adjustments.

We need to put this toll schedule into some historical perspective.

Toll rates have never kept pace with inflation or the obvious capital needs of the roadways.

Parkway tolls haven’t been increased since 1989.

The first and only time the tolls went up on the Parkway, a gallon of gas was $1.13, a movie ticket was $4, and almost no one had cell phones or email.

The world changes, traffic grows, populations shift.

I know the public is going to hear a lot of crazy numbers about what it will cost to drive on the Turnpike in 50, 75, or a thousand years.

Here's what really matters ... the cost of an average trip on the Turnpike … which is 3 exits.

Under the proposal, in five years that trip will be $2.05.

In 10 years, it will be $5.80.

By comparison, the average trip today is $1.21.

Before critics rush to judgment, this toll schedule needs to be contrasted with equally robust alternatives of tax increases or budget cuts that would produce the same results.

What we do know with certainty is that to fix only the toll-road bridges and only widen the Turnpike will take at least a 45 percent increase in tolls – or $1.75 for an average Turnpike trip.

By comparison, we know that to accomplish even this limited objective would take at least a 12-cent hike in the gas tax.

Both of these options fail to achieve our broader goals of paying down half of State debt, funding the TTF for 75 years, and providing for necessary capital investments on the Turnpike, the Parkway, and the Atlantic City Expressway.

To accomplish these broader goals would require a 20% across the board increase in income taxes. I am not recommending that.

That 20% increase would be permanent and apply to every taxpayer – not just millionaires.

If people think that is too burdensome, we could instead levy a 30% increase in the sales tax…

And if you don’t like the first two options, we could propose an increase in the gas tax of about 45 to 50 cents.

I think it’s clear… if we were to pursue any of these tax alternatives ... we would “lead the league” in the chosen category.

If we were to achieve our robust objectives through spending cuts, it would take an annual recurring $2.5 billion cut, in addition to the cuts we’re proposing for this year’s budget.

That’s $5 billion, folks, or 15 percent of the budget. Of course, there are many combinations of these revenue raisers and cuts we could consider.

That said, I believe all of these options are bad for our economy ...would drive our tax burden drastically higher ...or impossibly damage the ability of the government to fund schools, provide property tax relief, or public safety and welfare.

Do the numbers ...I have.

Please ... let’s not insult each other or the public with empty rhetoric about that we can pay down the debt and fund transportation improvements if we “just cut more spending and get rid of all waste, fraud and abuse.”

We will cut spending.

We will direct trust fund monies to their proper place ...

We will challenge fraud and raise accountability standards ...
and we will end spending gimmicks…

But pigs will fly over the Statehouse before there’s a realistic level of new taxes or spending cuts that can fix this mess.

The Hudson tunnel is critical.

The structural deficit must be closed.

So ... if you all refuse to accept the toll road schedule, I ask you to present an alternative.

Now – I fully appreciate the challenge of getting one’s mind around these various options. And I don’t expect you to walk out and say “I’ll sign up.”

That’s why there will be 21 town hall meetings, in 21 counties.

That’s why we will have an open, honest, public dialogue with all of you over the next two months.

So how does the toll road plan work? Who is accountable?

Let me first say… This plan is unique. We went to school on the experiences of other states and we have improved what we saw wrong with their proposals.

Here are the basics:

The roadways that will be affected are the Turnpike, the Parkway, the Atlantic City Expressway and a small piece of Route 440.

Flat out ... the roadways will not be sold, leased or anything else to a for-profit or foreign operator…Flat out.

They will continue to be owned by the State of New Jersey.

A New Jersey non-profit, public benefit corporation will be formed for the purpose of managing, not owning, the day-to-day operations of the roads.

We call this a “public benefit corporation,” or PBC, because all of the benefits the new corporation earns are expressly dedicated for the public use.

The new PBC will have its own independent, non-political Board of Directors.

The PBC and the State will create a concession agreement that dictates all of the conditions of its operations and obligations.

This is the governance plan.
-- The terms and conditions for current employee contracts will remain unchanged, prevailing wage and competitive contracting procedures will be retained.
-- The agreement will include a specific listing of all the capital projects that must be met and establish triggers that will result in additional projects being developed.
-- The operating standards for the roads will be specified in the agreement and monitored by the State Department of Transportation.

All safety, maintenance, roadway standards, will be delivered at current or improved levels.

This means that snow removal, pothole repair, emergency assistance, garbage clean up --the same high standards we know today.
-- The State Police will continue to patrol the roadways and environmental rules will still apply.
-- There will be significant financial penalties if any of the agreed upon standards are not met.
-- With respect to the financial aspects of the plan ... the initial payment of monies raised will be contractually dedicated to State debt reduction and to transportation improvements.
-- Any future payments above and beyond operating costs and capital needs of the roadway will be reinvested in transportation improvements across the state.

This is really the point that is different about our model.

Under this plan, any future financial benefits from the roadways stay exclusively in New Jersey to be used for the benefit of the citizens and motorists of New Jersey.

It is our estimate that the PBC will be able to raise between $32-$38 billion, based on our concession agreement, toll schedule, traffic projections and current debt market conditions.
The use of proceeds from the amount raised by the PBC are:

-- $10 billion to eliminate existing debt on the toll roads and to create the appropriate bond reserves.
-- $4 billion in a capital reserve for toll road improvements and widenings.
-- And ... an upfront payment in the range of $18-24 billion to reduce state debt and fund transportation improvements.

Just like the Turnpike and the Parkway do today ... the PBC will borrow funds based on the identified and dedicated revenues of tolls… just as is commonly practiced for toll roads and ports all across the globe.

Let me be clear… PBC borrowing isn’t state borrowing.

There is no general obligation ... there's no moral obligation on the part of the State of New Jersey for the debt of the PBC.

The bonds issued are not State debt – in any way, shape, or form.

So that’s the restructuring plan.

It's a plan to restore the financial health of our great state while meeting vital transportation needs.

It is a plan to restore the public’s confidence in government’s ability to manage its finances.

And it's a plan to meet our collective responsibilities.

It works financially by providing the resources for our State to restructure our fiscal foundation while placing real limits on borrowing and spending in the future.

The combination of the four elements will transform New Jersey’s finances from a basket case to a solid foundation for facing our future.

Above all, it changes the rules of the game.

The rules have to change ... considering the damage the status quo has brought.

The culture that created one of the nation’s highest debt burdens must end.

The fiscal practices of the past have exacted a high price on our "taxpayers wallet" and in their trust of government.

When the first $1,000 in taxes our citizens pay goes to debt and principal instead of teachers and doctors, something is very wrong.

We are making fewer investments in our future each passing year and it is a direct result of growing debt crowding out our capacity to meet citizens' needs.

The crowding out is already painful … just look at the condition of our mental health institutions, our hospitals, the circumstances of those who look to the hope of stem cell research, or our basic infrastructure.

We can’t allow what gets crowded out -- to be the only choices we make.

This isn’t just a rhetorical game of chicken or gotcha.

There is a truck barreling down the road.

If you don’t fix it on my watch, you’ll fix it on someone elses.

It should have been stopped long ago that truck ... but instead ...it’s just picking up speed.

This June, our national guardsmen won’t be debating why America is in Iraq when they stand up for duty … they won’t push the responsibility onto somebody else.

They will serve … and they will serve with pride.

We too should serve with pride …We owe our guardsmen and every citizen, no less.

Let’s live up to the good sense and high standards of our people as a motivation to do the right thing.

This is a problem for all of us to face.

Fixing the fiscal foundation is all of our responsibilities …

Republicans and Democrats ... the Legislature and the Governor ... working together for the common good.

It is my expectation that over the next two months we can review and debate the details, but we must come to judgment by the middle of March so that we can go forward responsibly in the new fiscal year.

This is a comprehensive, sober proposal.

Controversial ... most certainly … but it goes to the heart of our State's fundamental challenge.

One plan ... Four elements.

One … freeze spending now.
Two … limit future spending to revenue growth.
Three … capture the enterprise value of our tollways to pay down debt and make capital investments.
Four … limit borrowing by requiring voter authorization.

If there is a better plan – I am open to its consideration – put it on the table.

[ends extended excerpts from Corzine speech]

BACKGROUND

How does the $37b compare with other privatizations and monetizations?

The only one on a potentially similar scale to New Jersey is Pennsylvania Turnpike (Act 44) which will raise $9,080m on borrowings through 2021. It claims to provide $83b over 50 years but that aggregates all kinds of stuff and the present value of that is much lower, maybe $20b to $25b? Also the fate of PA Act 44 is most uncertain given its dependence on tolling presently free I-80 and the need to get federal permission (unlikely). Also the governor (Ed Rendell) is pursuing a privatization (longterm lease/concession) of the Turnpike which would negate Act 44. So it is potentially in the same mega-league as NJ, but it is highly uncertain.

Trans Texas Corridor 35 Laredo to Dallas was described as a $7.3b project but it too is uncertain. Only project development work is contracted and there was been a strong reaction against concessions in the Tx legislature and it is unclear how much will really happen.

Other large ones contracted in the past several years are all a fraction of the size of NJ monetization:

Indiana Toll Road $3,850m
Chicago Skyway $1,830m
Dallas TX SR121 $3,400m
Capital Beltway nor VA $1,400m
NW Parkway Denver $603m
SR130/5&6 Austin TX $1,300m

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