Massachusetts Turnpike reducing toll collectors from 375 to 275

Massachusetts Turnpike Authority is reducing their toll collector staff from around 375 to 275, according to spokesman Mac Daniel. Under the terms of the labor contract with the toll collectors' union the Turnpike offered advantageous payoffs to one-fifth or twenty of the collectors. They signed a voluntary severance agreement and got letters this week sealing the deals for them to walk.

They get six months of full insurance plus four times normal holiday pay in addition to other severance entitlements.

Another 80 toll collectors will get notices of termination in the coming weeks.

Layoffs are estimated to save an average of about $75k/year or $7.5m in a full year once one-off termination costs are expensed.

The Turnpike Authority is under severe financial pressure and has proposed toll increases designed to garner an additional $90m on the metropolitan portion of the Turnpike which presently grosses about $170m/year. It faces the danger of credit downgrades that might trigger calls on up to $450 owed in swaps to UBS.

A final decision on toll rates cannot be made until Jan 15.

There is fierce criticism of the proposed toll increases which would double a nunber of tolls and increase others in the Boston area by 50%. Two of the Turnpike board of five say the increases are too large.

There are suggestions that gasoline and diesel fuel taxes be increased. A 4c/gallon increase statewide would substitute for the toll increases and a 10c/gallon increase would susbtitute completely for tolls.

Major objections to thiis are:

- residents outside the Boston area would be paying to subsidize Turnpike drivers within Boston and interstate travelers

- extra traffic from detolling would swamp the Turnpike and generate greatly increased congestion without any revenue stream to expand capacity or mechanism to manage traffic like variable pricing

- with fuel taxes higher than in nearby neighboring states there would be more fueling up outside Massachusetts and revenue losses

Last year an expert commission on the state's transport fianncing recommended a 5c/mile toll throughout the state as the most efficient and fairest approach, but the legislature has shown no sign of adopting this.

Another obvious measure is to impose a toll on the Big Dig underground roadway on I-93, presently untolled. With 170k/day an average $2 toll would garner $124m/year. Unfunded Big Dig debt incurred for untolled facilities is at the heart of the Turnpike's financial crisis.

Executive-director's testimony

Below is testimony given this week (Dec 9) to the joint transportation committee of the state legislature by Massachusetts Turnpike Authority (MTA) executive-director Alan LeBovidge:

"To understand the MTA's current situation, it is important that everyone understands how the MTA got into its current circumstances, what is being done to make the Authority efficient and transparent, and why it was necessary for the Authority's Board to propose a significant toll increase now.

"Prior to 1997, the MTA was, arguably, the operator of the best road in the Commonwealth and to many a "cash cow".  It was in 1997 that the then Legislature and Administration decided that the CA/T project, the "Big Dig", should become the responsibility of the MTA.

"The MTA would be operationally and financially responsible for completing this massive project.  To cover the escalating costs, the MTA borrowed massive amounts of monies ballooning its outstanding debt of approximately $400M by almost $2.4B.  These borrowings ($1.466B/1997 and $806M/1999) were secured by future toll revenues.  In addition, the MTA utilized approximately $440M of its reserves and assets to help finance this project.

"To help ease the MTA's cash flow needs, these borrowings were structured to require primarily "interest only" payments for the first ten years.  Significant principal payments were scheduled to begin 2009.

"Unfortunately, the revenue and expense projections set forth as part of the 1999 public offering statement ultimately did not accurately reflect operating results.  For example, the 2008 projected toll revenues were overstated by $25M.  The 2008 expenses were understated by $25M.

"For the period 2002-2007, revenues were $119M below estimates:  mandated Fast Lane Discounts ($62M/$12M annually), 2002 delayed toll increase ($29M), reduced traffic and ceiling panel collapse ($28M).

"Similarly, cost escalations resulting from double digit health insurance premiums, pension funds, state police pay increases, CA/T staffing levels and utility and property insurance especially at CA/T facilities were far in excess of the projected 3 percent annual increase.

"In addition, in order to (a) avoid the need for a toll increase between 2002 and 2008, (b) fund the Fast Lane discount program, (c) achieve the 1.35 coverage goal and (d) to provide a modest capital program, the MTA entered into a series of swaptions with UBS and Lehman Brothers for which it received $29M and $35M respectively.  As of January, 2009 all of the UBS swaptions have been exercised and will cost the MTA approximately $24M annually in additional interest payments.

"Upon becoming the Executive Director one year ago, I was asked by the Board to prepare a 60-day review of the Authority.  Operations were dysfunctional.  There had been a high, continual staff turnover.  Basic financial tools were not being utilized.  While my mission was "reform before revenue", my first task was to organize a management team and get operations in working order.  This has been accomplished.

"With a team in place, we focused on both revenue opportunities and costs reductions.

"Short-term, recurring revenue opportunities were non-existent.  We have looked at the potential for one-time revenues such as privatization, securitization of revenue streams and sales of assets, but these are complex and do not lend themselves to quick hits.

"On the expenditure side, however, we were able to make inroads.  When one compares the periods of January through October for 2007 and 2008, significant cost reductions have been made.

"The following is a listing of some of the cost savings and efficiencies realized:

Reduction in salary expenditures $4.8m

Reduction in overtime expenditures $2.4m

Reduction in outside consultant expenditures $21.0m

Electricity cost reduction $2.2m

Fast Lane conversion $0.5m

Savings from in-house paving $0.5m

Reimbursement of legal expenses $0.25m

Total 10-month year-to-year cost reductions: $ 31.65m

"We continue to look for more cost savings opportunities, especially in the area of toll operations.  Despite all of these improvements, it is clear that the MTA cannot cost cut its way out of its problems.

"In addition to funding operating costs, the MTA also provides monies for capital out of operating revenues.  The MTA does not bond for its capital needs.  With its current bond rating, borrowing for capital is impossible.

"10-year projections have been distributed to you.  As you look at these projections, please focus on the MHS numbers.  In summary, after operating expenses and debt service, the MHS is in a deficit position.  There isn't a dollar available for a capital project.  The projections you have show that, on average, the MHS needs to expend $100M annually to meet its capital needs.

"In addition to its cash flow needs, the MTA needs to be concerned about its required bond coverage ratios, the requirement under its bond indentures that the roads be kept in good condition, and the impact of a further bond downgrade as it relates to the Lehman swaptions.

"The outside bond rating agencies, Moody and Fitch, are looking to the MTA to increase its recurring revenue streams if it is to avoid a bond rating downgrade.  If the MTA does not maintain its required coverage ratios, this will trigger a bond downgrade.  Even if the legal minimum coverage (1.15) is met, the ratings agencies are looking for coverage in excess of 1.35 (our historic level) to avoid a downgrade.  Without a toll increase now, our only legally allowable method of raising recurring revenues, a downgrade is certain to occur.

"Putting aside what a downgrade (to junk bond status) would mean to the MTA's bondholders, a downgrade would trigger a 'termination event' for the unexercised Lehman swaps.  This would mean that, at today's valuation, the MTA would be required to pay Lehman approximately $45M.

"The triggering of a 'termination event' for the exercised UBS swaps is, at this point, dependent on the credit rating of our outside insurer, Ambac.  The MTA's bond rating has already crossed the triggering point.  If Ambac is downgraded one more level, UBS's termination value, currently $423M, would be due.  The MTA hopes to bring up its credit rating over time by implementing the currently proposed toll increase.  This would prevent any triggering of the UBS termination value event if Ambac's rating declines.

"With the increasing operating costs, expanding capital needs and credit rating issues, the MTA's only option was to increase tolls now.  Management looked at a multitude of toll increase scenarios trying to weigh the cost to customers and the cost of inaction.  In the end, the Board concluded that it was no longer acceptable to defer the problems at hand.  Thus, the proposed toll increases you have read about.  The Board wanted a proposal that would not require another toll increase for five years.

"These proposed toll increases will finally put the MTA, specifically the MHS, on a road to financial stability.  It does not rely on one-time revenues that defer the problem to another day.  It does take the steps necessary to restore the MHS to its reputation of having the best roadway in the Commonwealth.  A roadway that now includes the CA/T project.

End of testimony by Alan LeBovidge, Executive Director

TOLLROADSnews 2008-12-12