Pennsylvania Turnpike "drowning in debt," faces bankruptcy if legislature doesn't repeal imposts - state auditor general
The Pennsylvania state auditor, Jack Wagner says the Turnpike is "drowning in debt" and faces bankruptcy if the state doesn't cease bleeding it for cash. The Turnpike Commission he writes "is sinking in debt because of financial obligations the General Assembly placed on it through Act 44 in 2007."
By our reading of the annual financial reports in the four fiscal years 2007 to 2011 just over $3 billion ($3,014m) was paid out by the Turnpike to PennDOT. During this same four years total gross revenues of the Turnpike were less than that: $2,722m. In addition the Turnpike had running costs of $1,505m, paid net interest of $761m, and charged depreciation of $998m.
Therefore it had losses of $541m but was expected to turn over $3 billion to the state DOT (PennDOT).
In order to do this the Turnpike debt was increased to $8.2b from $2.9 billion, a 2.8-fold increase over the four years of Act 44 payouts to the state.
Turnpike annual gross earning power rose just 25%, and assets went from $4.7b to $6.7b, a 1.4 fold increase.
Back in May 31 2007 (the end of the financial year) the Turnpike had net assets $1.76b (assets exceeding liabilities) while by the end of the latest financial year (2011) net liabilities (debt) exceeded total assets by $1.42b. That is the Turnpike balance sheet went rapidly into a deficiency in which its liabilities have outrun its assets.
By some definitions that means it is broke.
The state DOT was being funded during those years mostly for transit operating losses and scattered roadworks. This achieved not by Turnpike earnings but by the Turnpike getting rapidly into hock.
In the last four years annual toll revenue on the Turnpike was only raised about $160m or 25% from $610m to $759m.
Operating costs have been contained or kept flat at $360m to $370m (a high level perhaps but at least contained), allowing cash flow to grow from $240/year to $400m/year.
Interest costs have more than consumed greater cash flow and tolls
But interest on burgeoning debt has more than consumed that extra cash flow. Net interest expense has shot up from $70m/year in 2007 to $290m/year in 2011. The Turnpike was breaking even in 2007 but now is losing $170m a year - before making any of these huge payouts to PennDOT.
The state auditor writes that:"Like the City of Harrisburg or Jefferson County AL, the Turnpike Commission faces potential default on its obligations" if the vast payout obligations to the state DOT under Act 44 continue.
The Turnpike Commission in the spring of 2007 sponsored Act 44 as a defense against the then-Governor Ed Rendell's plan to abolish the Commission and sign a 75 year toll concession on the Turnpike with the investor owned toller Abertis.
Abertis offered Gov Rendell's administration to pay an upfront concession fee of $12.8 billion. The Turnpike countered in the legislature undertaking the obligation to make the many hundreds of millions of annual payouts - $900m/ year.
There would be substantial annual increases in tolls and growing traffic it assumed. Plus it counted for half the $900m on being able to collect tolls on I-80 across the north of the state as provided in Act 44. But it but never got permission from the US Government, so toll revenue has grown much more slowly than planned.
Without tolling I-80 the base rate obligation dropped to half but the heavy debt is incurred and there are continuing obligations of $450m without any positive cash flow to pay - just more debt to be raised through bond sales.
Jack Wagner, the Pennsylvania auditor general says in his letter to the Turnpike CEO Roger Nutt that if the looming bankruptcy of the Turnpike is not addressed quickly by repealing the Turnpike's Act 44 financial obligations there will be "dire consequences" for Pennsylvania taxpayers, turnpike users and the Turnpike Commission itself.
Annual report hadn't been noticed
The Turnpike's financial report (CAFR) for FY2011 has gone unnoticed until now, having been posted quietly to the Turnpike website before the Xmas/New Year break - without any alerts or notices.
The financial report shows the net deficiency in the balance sheet (liabilities exceeding assets) of around $1.4b at the end of FY2011 (May 31.)
The report avoids the ominous term 'net liabilities' or 'deficiency' in the balance sheet report and uses a cash flow term 'deficit' for the negative balance. (That confusion of a flow term with a balance term would have gained an 'F' where we learned accounting - editor.)
By some accounting definitions the Turnpike is now insolvent ("broke") by having total liabilities ($8.16b) greater than total assets ($6.74b) as of May 31 2011.
Wagner says only that the financial condition of the Turnpike is "extremely poor" and efforts to increase debt "will only worsen the problem."
"Not only will they limit the Turnpike Commission's ability to make infrastructure improvements on the turnpike, but (they) will also threaten the continued existence of the Turnpike Commission."
Bond rating agencies have been quietly warning of the dangers of the Turnpike's debt outgrowing its earning capacity but have not lowered their actual ratings. Lower ratings issued by Moody's and S&P would raise the cost of debt to the Turnpike.
The letter by the Auditor General concludes with the statement that it is "crystal clear" that the Act 44 obligations for large payouts to PennDOT have put its financial "survival" at risk. No entity Wagner says can continue to operate with big increases in longterm debt and depletion of its balance sheet as occurring at the Turnpike.
"No immediate crisis" - Turnpike CEO
Turnpike CEO Roger Nutt in a statement issued this afternoon in response to Wagner says there is "no immediate financial crisis." The rating agencies have not reduced their ratings since the down ratings they made after Act 44 about three years ago, he points out.
"Auditor General Wagner’s assertion that the commission is in a financial crisis today is simply not true. To the contrary, the Turnpike Commission remains in a healthy financial position because it has taken the steps necessary to ensure its financial stability."
But Nutt hedges his position saying that "sometime in the future" there may be problems in maintaining the payouts to PennDOT:
"We agree with the Auditor General that Act 44 funding may have a negative effect on Turnpike traffic, toll rates, customer service and other traveler benefits sometime in the future. We certainly understand that, in the long-term, the funding stream (toll increases) necessary to do so may not easily be sustained, and so subsequent amendments to the funding requirements may need to be considered. However, the PTC remains committed to meeting all its financial obligations — including obligations to bondholders — by sound management of our debt load and by reinvesting in our toll-road system."
He says that "easing the Act 44 debt load" may be needed but is "an issue that can only be resolved in a thoughtful, practical manner."
The state is so dependent on the Turnpike's payouts, Nutt says, that modification of these can only be discussed as part of "an analysis of alternative revenues."
The Turnpike CEO concludes:
"We look forward to any opportunity to work with the governor and state legislature to ensure the long-term financial stability of the Turnpike Commission while understanding that, at the same time, there must also be adequate funding to ensure the safe operation of the state’s entire transportation network. As we have over the past 70 years of our existence, this agency stands ready to continue its role as a major funding and transportation partner to the (state.)"
No forward financial plan published
So far amazingly the Turnpike has not published a forward financial plan showing the debt planned for and how revenues can be expected to grow to cover the costs and avoid default on obligations. There must be such plans internally but the auditor general does not seem to have got hold of anything.
The growth of debt and interest costs is so huge you might hope for some discussion in the Turnpike's annual report of how its financial plans are working out and where the debt and losses are headed. Not a word.
But pages are devoted to a 'Certificate of Achievement for Excellence in Financial Reporting' presented to the Turnpike for its 2010 annual report.
Statement by Auditor General:
For Immediate Release
Contact: Steve Halvonik 717-787-1381
Auditor General Jack Wagner Says Debt-Ridden Pa. Turnpike Commission’s Existence is in Jeopardy
Calls on General Assembly to lift onerous Act 44 funding obligations
HARRISBURG, Pa., Jan. 5, 2012 – Auditor General Jack Wagner warned today that Pennsylvania taxpayers could be on the hook for billions of dollars of additional debt if the General Assembly does not soon amend or appeal Act 44 of 2007, which requires the Turnpike Commission to provide $450 million a year in infrastructure funding to the Pennsylvania Department of Transportation.
Wagner noted that the agency’s long-term debt has increased by 181 percent, from $2.6 billion to $7.3 billion, since Act 44 was implemented. Since 2009 the Turnpike Commission’s total net assets plunged 997 percent, from a surplus of $156 million to a deficit of $1.4 billion. (Net assets is total assets less total liabilities of an organization. Assets include things such as cash, equipment, investments and buildings and liabilities include things such as accounts payable, interest payable, bonds payable etc.)
Wagner’s letter noted that, like the City of Harrisburg and Jefferson County, Ala., the Pennsylvania Turnpike was in danger of becoming financially insolvent and defaulting on its debt obligations. Under Act 44, the Turnpike Commission is required to make annual payments of $450 million to PennDOT for 46 more years without a new revenue source. This annual payment would add at least $20 billion in additional debt to the Pennsylvania Turnpike Commission. If the Commission were to default on the obligations then Pennsylvania taxpayers would be required to assume the Turnpike Commission’s debt obligations.
“The statistics show clearly that the Pennsylvania Turnpike Commission is drowning in debt due to the burdens placed on it by Act 44,” Wagner said. “With Pennsylvania facing nearly a half-billion dollar budget shortfall this year, the commonwealth cannot afford to take on any additional debt. Immediate action must be taken to ensure this important state entity can continue to meet its mission to serve Pennsylvania taxpayers with excellent roadway service and to ensure that taxpayers aren’t unfairly charged in the process,” Wagner said.
The General Assembly passed Act 44 on July 18, 2007, creating a “public-public partnership” between the Turnpike Commission and the Pennsylvania Department of Transportation to provide funding for roads, bridges and transit throughout the commonwealth. Under Act 44, a Lease and Funding Agreement was entered into by the Turnpike Commission and PennDOT on Oct. 14, 2007 for a period of 50 years, extending until 2057.
The funding agreement required the Turnpike Commission to make scheduled annual payments to PennDOT for funding for roads, bridges and transit. The Turnpike Commission’s obligation to pay the annual debt service on any special revenue bonds on a timely basis is also part of its payment obligation under the funding agreement. The funding agreement also gave the Turnpike Commission the green light to toll Interstate 80 in Pennsylvania as another source of additional revenue, pending approval by the Federal Highway Administration.
However, FHWA prohibited the tolling of I-80 on April 6, 2010, leaving the Turnpike Commission with the ability only to raise turnpike tolls and to increase borrowing as the only funding mechanisms for meeting its annual funding obligations to PennDOT.
Wagner said that the Commonwealth of Pennsylvania’s Comprehensive Annual Financial Report audit for the year ended June 30, 2011, which was jointly completed by his department and a private accounting firm, shows that the Turnpike Commission will be forced to pay Act 44 debt by assuming additional bond debt, placing a severe negative impact on the Commission’s financial position. Wagner said the Turnpike Commission’s stated intent to finance its payments to PennDOT solely through the issuance of new debt for the foreseeable future was especially troubling.
The Turnpike Commission’s financial position has deteriorated rapidly in recent years, Wagner noted.
In 1998, the Pennsylvania Turnpike Commission was awarded with the highest bond rating of any turnpike agency at that time by one of three bond rating companies, and by 2008, this same bond rating company downgraded the Turnpike’s bond rating stating: we have “raised a caution flag about the Pennsylvania Turnpike’s financial future because of the transportation funding bill that the state Legislature passed last summer [Act 44].”
“It is crystal clear that, with the passage of Act 44, the Pennsylvania Turnpike Commission has been placed in a position where its very existence is at risk,” Wagner said. “No entity can continue to operate with significant increases in long-term debt and the continued serious depletion of assets caused by Act 44. It is time to rescue the Pennsylvania Turnpike Commission by repealing Act 44.”
The Turnpike Commission was created in 1937, and is governed by five board members, one of whom is the Secretary of Transportation. In its sixth decade of service, the original 160-mile route has been expanded to over 500 miles, carrying 156.2 million vehicles a year and is funded by multiple sources, including state and federal funds and revenues it generates from turnpike operations.
Auditor General Jack Wagner is responsible for ensuring that all state money is spent legally and properly. He is the commonwealth’s elected independent fiscal watchdog, conducting financial audits, performance audits and special investigations. The Department of the Auditor General conducts thousands of audits each year. To learn more about the Department of the Auditor General, taxpayers are encouraged to visit the department’s website at www.auditorgen.state.pa.us.
Response from the Turnpike:
Pa. Turnpike Chief Responds to Auditor General Wagner’s Claims of Financial Chaos
Statement from Pa. Turnpike Commission CEO Roger Nutt:
The Pennsylvania Turnpike Commission (PTC) is not facing any immediate financial crisis as the Auditor General states. The nation’s major rating agencies have not changed their underlying ratings of Pa. Turnpike bonds for more than three years. During that period, the Turnpike has provided more than $3 billion to the commonwealth for statewide investment in transportation systems. Furthermore, the continued existence of the Turnpike Commission is not in jeopardy, as he alleges, because the PTC has developed a sound, fiscally responsible approach to meet all of its financial obligations, including the $450 million annual payments to PennDOT under Act 44. Last June, the PTC approved a funding plan for all of its financial obligations for the next three years.
Auditor General Wagner’s assertion that the commission is in a financial crisis today is simply not true. To the contrary, the Turnpike Commission remains in a healthy financial position because it has taken the steps necessary to ensure its financial stability. The commission — at the same time it adopted its financial plan last summer — included an expanded capital plan to continue to enhance the highways and bridges under its jurisdiction.
Since the first Act 44-necessitated toll increase on the Pa. Turnpike in 2009, we have made it clear to our customers, to elected officials and to citizens of the commonwealth that annual rate hikes are needed to fund the Act 44 debt, as witnessed by wide coverage of that topic in the media over the past few weeks. We have been clear in public statements that the increases will be implemented annually to cover the debt-service cost of the payments to PennDOT.
We agree with the Auditor General that Act 44 funding may have a negative effect on Turnpike traffic, toll rates, customer service and other traveler benefits sometime in the future. We certainly understand that, in the long-term, the funding stream (toll increases) necessary to do so may not easily be sustained, and so subsequent amendments to the funding requirements may need to be considered. However, the PTC remains committed to meeting all its financial obligations — including obligations to bondholders — by sound management of our debt load and by reinvesting in our toll-road system.
To ensure that the commonwealth can continue to provide travelers with adequate transportation infrastructure, easing the Act 44 debt load of the Turnpike Commission is an issue that can only be resolved in a thoughtful, practical manner. The payments we make have become an integral part of the overall funding package needed to keep our state’s roads, bridges and transit systems functioning sufficiently on a daily basis. We also understand that to replace Act 44 payments will necessitate a thorough analysis of available, and attainable, funding alternatives.
We look forward to any opportunity to work with the governor and state legislature to ensure the long-term financial stability of the Turnpike Commission while understanding that, at the same time, there must also be adequate funding to ensure the safe operation of the state’s entire transportation network. As we have over the past 70 years of our existence, this agency stands ready to continue its role as a major funding and transportation partner to the commonwealth.
— Pa. Turnpike Commission CEO Roger Nutt
latest annual financial report, FY2011: