Massachusetts' mismanagement of turnpike detailed

Plans to end tolls on the Massachusetts Turnpike are excoriated in a lengthy report of a transport finance commission (MTFC) set up by the state legislature. Sub-titled "An unsustainable system" the report says the Romney administration and its predecessors have left a shocking financial legacy of high cost but skimped maintenance even while going deeper into debt to cover current costs - a tale of the Big Dig writ large in widespread mismanagement of the state's highways.

The Massachusetts Highway Department (MassHighway) funds such mundane operations as grass cutting out of 20 year bonds. Even the Turnpike, says the report, which has the most potential control over its revenues "operates at a deficit, choosing to rely on short-term, non-sustainable revenue strategies..."

The 12-person commission was appointed by the legislature in 2004 and was led by Stephen J Silveira of ML Strategies a management consulting offshoot of the Mintz Levin law firm. They say the situation is "dire" and that a continuation of business as usual won't work. Virtually all transport providers are running structural deficits and resorting to short-term fixes that hide systemic financial problems. The conditions of roads, bridges and transit are in broad decline, and there is insufficient revenue for maintenance let alone enhanced capacity.

More toll revenues are needed, the report says, and freezing tolls for long periods has left the turnpike in a state of decline. Plans to turn it over to the Highways Department (MassHighway) as a free road in 2017 are a fantasy, the report suggests, since the free roads agency is unable to properly maintain its existing inventory of roads, and has no way to fund maintenance of the Turnpike toll-free.

MassHighway now has over four-fiths of its workforce on payroll funded by bond issues even though most of them are working on current maintenance and operations. In addition to payroll "items such as rent, office supplies and litter pick-up are being amortized over 20 years" by using bond proceeds to fund them. Future revenues are being mortgaged in the notorious federal Grant Anticipation Notes and by various other 'innovative' funding techniques, the commission reports.

The use of debt for funding sees 44% of highway funds on debt service - the highest in the country (CT 30%, NJ 20%, NY 19%, AZ17%, DE 16%.... US average 6%).

Comments the commission: "Moderate use of debt for longterm capital assets is reasonable. Use of debt to pay for day to day operations such as grass cutting is symptomatic of a broken system."

The commission laments the mortgaging of $1.5b of future federal grants with federally approved borrowings (GANs or GARVEEs). The feds have also encouraged stop-gap borrowing by allowing "advance construction" or spending ahead of federal appropriations.

The commission criticizes the assignment of many bridges (187) and parkways (275 centerline miles) to control of a Department of Conservation and Recreation, a parks agency which it says gives them low priority and as a result they are "in a seriously poor condition."

MassHighway has maintenance needs of $1.44b/yr over the next 20 years and prospective funding of $983m, a shortfall of $458m/yr. The Turnpike has maintenance needs of $470m (of which $317m is Boston Big Dig and tunnels), revenues of $387m (assuming continuation of tolls) and a gap of $83m/yr.

The "needs" make no allowance for any increase in capacity at all. They are only to keep the present system in a safe and good state of repair. The commission says it has culled out 'wish list' items. Transit is in similar straits.

Turnpike uses "deficit masking" techniques

The Massachusetts Turnpike (Mass Pike) has been put in a "precarious" financial condition by decisions on the Big Dig project and by the use of "deficit-masking financing techniques," according to the report. The Turnpike is expected to operate the Big Dig tunnels toll-free (except for the Williams Tunnel) at an estimated cost of $35m in maintenance and operations expenses.

The state legislature has also legislated a special local residents' discount on the cross Bay tunnels (40c vs $3 normal toll) which is costing $17m/yr in lost revenue.

Further the turnpike authority has masked its financial situation by sale of properties and by using a financial technique called swapations that gained it upfront cash but at the price of a gamble on future interest rate movements. Turnpike debt is $2.4b much of it committed to build the Big Dig most of which generates no revenue and is a large net obligation.

A planned toll increase of 25% is needed in 2008 or the Turnpike will be in breach of the 1.35 coverage ratio in its bond covenants.

Turnpike West is in a less dire situation since it has not been loaded up with Big Dig debt, but the freezing of toll rates since 1990 and the exemption of cars from tolls on 51 miles (82km) at the far western end (costing $12m/yr) has led to a steady deterioration, and in 2008 it will go into deficit also.

On present plans by 2017 "the Turnpike will have drawn down its reserves and neither the Turnpike nor MassHighway will have the resources available to operate, maintain and rehabilitate this vital transportation link."

The commission says that the Turnpike is significantly underfunding capital reinvestment or longterm maintenance in both its operating arms, Turnpike West and Turnpike Boston (officially the a so-called Metropolitan Highway System). The two portions are divided as separate financial units at State Route 128 (MA128), often termed Boston's beltway.

The Commission says that the legislature's plan to eliminate tolls on the Turnpike West in 2017 is infeasible. It estimates that the costs of operating, maintaining, policing and rehabilitating it to maintain its present standard of service will be $1.09b in the next nine years or $112m/yr ($65m rehab, $56m for maintenance, operations including policing). The only income to cover this will be $29m/yr from traffic fines, truck permits, service plaza rentals) leaving a gap of $83m/yr.

Without new toll revenue on the Turnpike West the condition of the 50 year old pavement and bridges "will deteriorate quickly, with severe negative impacts.

Looming is:

(1) reduced safety as pavement and bridges crumble an guardrails are not maintained

(2) much greater expense in major rehabilitation and rebuilding as a result of neglect of maintenance

(3) the Turnpike will be in too poor a condition for MassHighway to accept it

Turnpike revenues "needed"

Under the heading "Turnpike revenues are still needed despite moves to eliminate them" the report argues that "significant toll increases" are anticipated to meet the Turnpike's large debt obligations. It comments that toll rates on the Turnpike West are now "among the lowest of any tollroad in the country."

A reference to Gov Romney's detoll plan says simply that they "failed to include an adequate discussion on how to replace what would be $1.2b in foregone toll revenue between 2007 and 2026."

They say adding another 123 miles (198km) to the existing free road system "is certainly not affordable without a solid plan to generate new revenues.

Year by year projections of revenues and costs show the Turnpike West going from a small current annual deficit of $13.4m in 2007 to $23.2m in 2010 to $39.3m in 2015 - the product of relentless growth in operating costs and toll revenue increases based on much smaller increases in traffic volumes. Needed capital reinvestment would worsen the deficit by $13m/yr rising to $17m/yr.

Without tolls from 2017 as provided in current legislation would see the deficit on the Turnpike West rise to $79m/yr in 2018 and grow to $105m/yr by 2026. The state has no plan on how to cover these huge deficits, the commission notes.

The Turnpike in Boston, the so-called Metropolitan Highway System consisting of the three cross-Bay toll tunnels, the tolled Boston Extension, and the untolled Big Dig is expected to operate at a deficit even with toll increases - 25% in 2008 and 20% every 6 years thereafter - planned in 1999.

This year tolls are $148m, operating expenses $96m, debt service $74m and there are other expenses for a deficit of $77m. Over the next 20 years based on present plans deficits will average $27m, despite the toll increases.

This would produce a default on the bond covenant debt coverage ratio of x1.35, the report says.

Default imminent without Jan 2008 toll increase

The commission estimates that the the Turnpike Boston (MHS) will default in debt coverage this year dropping to x1.23 and even with the 25% toll increase will be $26m short of meeting the x1.35 coverage in 2008. Without the toll increase on Jan 1 2008 the Turnpike MHS would drop below x1.00 and be in fullscale default to bondholders.

The legislature pays the Turnpike $25m/yr toward operating and maintenance costs of the untolled segments of the Big Dig, but the subsidy payment is capped while costs are increasing, and the Turnpike will soon be losing on the deal in future unless it is revised. Moreover the present plans underfund capital reinvestment in the elaborate largely underground Boston facilities, the commission says.

Tobin Bridge doing alright

The one bright spot is Massachusetts Port Authority's Tobin Bridge which is operating profitably - revenues of $28m, operating expenses $10m, trivial debt expense and $7m depreciation charge produces a surplus of $10. Profitability likely to grow if toll rates remain aligned with cross-Bay tunnel tolls.

No financial basis for new transit

The report says the state's transport finance picture is so dire there is no money for expansions or enhancements in any mode. Yet it says billions of dollars in rail transit projects are being planned that have no chance of being funded, and if they were funded there would be no way to cover the operating losses. Yet tens of millions are spent on planning studies and design work.

The commission makes no recommendations on how to fill the yawning funding gaps.

Remember Romney's detoll move!

COMMENT: Mitt Romney is making a strong pitch to conservatives and free marketeers in his run for Republican nominee for president in 2008. However one action alone should disqualify him. That was his irresponsible, opportunistic and inept plan of October last year to abolish tolls on the Mass Pike.

He may not have been aware of the full depth of the financial problems revealed by this commission but his claim that tolls could be abolished without increased taxes was snake-oil pandering politics at its worst.

Free marketeers support user fees like tolls, they don't propose dismantling them.

It was most satisfying to see how the voters of Massachusetts last November saw through Romney's legerdemain, and rejected his chosen successor by a decisive 55/34. He failed to gain support even where the supposed beneficiaries of the detoll were concentrated - in the electoral districts along the route of the Turnpike.

This cynical and stupid move, together with his overseeing the worst-run state government of all fifty in the United States should disqualify Romney from any further role in government at any level.

TOLLROADSnews 2007-04-01 (Small corrections 2007-04-11)