Pa. Turnpike $7 billion in the red

The Pennsylvania Turnpike may be on the road to the poorhouse.

Required by a 2007 state law to provide billions of dollars for statewide road and bridge repairs and transit operations, the turnpike is spending more money each year than it makes, despite toll increases that have doubled the cost to travel the turnpike over the last 10 years.

To meet the financial demands created by the law, Act 44, turnpike officials have borrowed aggressively, leaving the agency deeper in debt each year.

The Turnpike Commission is now more than $7 billion in debt, up from $2 billion in 2002 and $4 billion in 2009. The burden continues to grow, with the turnpike required to make payments until 2057.

"Because of insufficient sources of cash flows from current operations, the commission plans to issue debt for the foreseeable future to finance its required payments to PennDOT," the commission's auditors reported in the agency's current annual financial report.

"There can be no assurance that the commission will be able to continue to issue debt on terms that are acceptable, or at all, to finance these obligations."

Highway and bridge projects around Pennsylvania have grown dependent on the money from turnpike toll-payers, and so have transit agencies such as SEPTA.

If the turnpike stopped making its $450 million-a-year payment to PennDot, the already strapped state transportation budget would lose about 12 percent of its financing.

That could cost SEPTA about $160 million of its state operating subsidy of $616 million a year, a 25 percent cut that would force fare hikes and service cuts for local bus and train riders.

If the turnpike defaulted on the payments on its Act 44 debt - which it says it will not do - state law would require taxpayers to pick up the tab through the gasoline tax.

The turnpike's liabilities now exceed its assets by more than $1.3 billion, a sharp turnabout since 2009, when its assets exceeded its liabilities by more than $150 million.

Meanwhile, tolls have risen sharply: Next January, the cash toll for driving a car from Ohio to New Jersey will rise to $39.10 and the E-ZPass toll will go to $30.77. In 2003, the cost was $14.70.

In 2014, tolls will increase by an additional 3 percent. And they will continue to rise every year after that.

State auditor general Jack Wagner, who has been warning for months about the financial condition of the turnpike, says the Turnpike Commission is "drowning in debt" and faces potential default on its financial obligations.

"We need to get the turnpike out of this tailspin or it will be in serious financial trouble soon," Wagner said in an interview. "The situation is unsustainable ... anyone with common sense can see that."

Turnpike officials say they can manage the finances by continuing to borrow money, raising tolls every year and cutting costs, including soon replacing human toll collectors with all-electronic tolling.

Chief executive Roger Nutt acknowledged in a letter to Wagner in January that "we certainly understand that, in the long term, the funding stream (toll increases) necessary to continue Act 44 funding may not easily be sustained, and so subsequent amendments to the funding requirements may need to be considered."

In an interview last week, Nutt said, "I don't know how long we can continue, clearly probably not for 46 more years. But there is clearly not an immediate crisis. Right now, we are managing it. We don't have any choice."

Concerned state lawmakers will hold hearings next month on the turnpike's finances, with both Nutt and Wagner expected to testify.

"You can't borrow your way out of trouble," said state Rep. Richard Geist (R., Blair), chairman of the House transportation committee. Senate transportation committee chairman Sen. John Rafferty Jr. (R., Montgomery) said state law "has had a significant impact" on the turnpike's finances, and "we're trying to get a handle on the numbers."

The root of the turnpike's financial woes is Act 44, the 2007 state law that required the turnpike to contribute $900 million a year for statewide roads, bridges and transit.

To come up with the money, state lawmakers authorized the Turnpike Commission to convert Interstate 80, which parallels the turnpike across northern Pennsylvania, to a toll road. But the federal Department of Transportation in 2010 denied the state's application to require tolls for I-80 travel.

So the turnpike's obligation to fund other roads and transit dropped in half in 2011, to $450 million a year, under terms of Act 44.

But even that amount may be too much for the Turnpike Commission to afford, after paying the cost of operating the Pennsylvania Turnpike and paying the burgeoning bill for principal and interest on its growing debt.

Currently, the turnpike brings in about $800 million a year in tolls and other operating revenue.

It spends slightly more than $300 million to run the turnpike. It pays about $300 million on its debt. And it pays the state $450 million as its Act 44 obligation.

That leaves a $250 million shortfall this year, although turnpike officials argue that because the $450 million is borrowed to pay the Act 44 obligation, it should not be counted against annual operating revenues.

In the next decade, the turnpike plans to borrow an additional $10.5 million, including $4.3 billion to make its Act 44 payments, according to the Turnpike Commission's financial plan presented in June to state budget secretary Charles Zogby.

"This leveraging of the turnpike revenue stream for non-turnpike investments will exert significant pressure on the turnpike's customer base and raise important affordability issues," Moody's Investors Service said this year in a report titled "Milking the Cash Cow."

Moody's, like other ratings agencies, continues to rate the turnpike's financial health fairly high: Aa3 on its debt for turnpike operations, and three notches lower, A3, on the debt for Act 44 payments.

Moody's has assigned a "negative" outlook for the future of the turnpike's debt because of "dependence on regular toll increases and modest traffic growth to support projected debt-service coverage ratios."

Turnpike officials are assuming that traffic will increase by 3 percent to 5 percent every year, according to their most recent traffic study.

Depending on traffic to grow, as tolls rise every year, is a risky bet. The number of revenue-miles traveled on the turnpike reached its high in 2003, and was 5 percent lower in 2011 than eight years earlier.

Already, turnpike officials have lowered their toll-revenue projection for this year by 4.4 percent, citing the nation's anemic economy.

Pennsylvania is one of several state and local governments that require toll-payers to pay for projects not directly related to the road or bridge that is tolled.

The New Jersey Turnpike Authority, the Triborough Bridge and Tunnel Authority in New York City, and the Harris County Toll Road Authority in the Houston area are among those that tap tolls for other projects.

In New Jersey, about 30 percent of toll revenue is transferred to the state Transportation Trust Fund Authority for use on statewide highway projects and transit operations.

Locally, the Delaware River Port Authority spent nearly $500 million over the last 15 years for "economic development" projects - such as stadiums and museums - to be repaid by revenue from its four toll bridges linking Philadelphia and South Jersey.

Moody's compared the financial strength of toll agencies that make transfers to local or state governments with toll agencies that do not.

The ratings agency concluded that tolling authorities that make such transfers "have materially weaker financial profiles," higher debt ratios, and higher debt-per-toll transaction. They need to raise tolls more frequently and at higher percentages, Moody's said.

The agencies also had less cash on hand: The Pennsylvania Turnpike had 171 days of cash on hand in 2010, down from 265 days in 2007, the lowest among the agencies analyzed by Moody's. That compared with an average of 334 days of cash on hand among agencies required to make transfers and 950 days among tolling agencies not required to make transfers.

In Pennsylvania, solving the turnpike's problem would create a costly new headache for lawmakers and Gov. Corbett. They would have to find $450 million a year or severely reduce transportation funding.

"If we don't do it, somebody's got to come up with the replacement money," Nutt said.