Free analysis of costly Turnpike study

Toll Roads News offers some comments on the $75,000 taxpayer-funded “study” on a Turnpike lease.

The Caucus report is in its nature hypothetical. It is based on a set of assumptions about the Administration’s concession contract terms not yet announced, and about private sector bids that can only be tested in a real procurement. …

The report summarily dismisses the notion that a private operator could run the Turnpike more efficiently and at lower cost than the Turnpike Commission or that it could offer better value to motorists through improved customer service. It follows from the dismissal of private sector efficiency that “cost of capital becomes the most significant value driver.”

The report asserts that private sector capital costs are higher and that it therefore cannot offer as much to the state as the Turnpike Commission – the very issue the Governor is proposing to test.

Why do we need a study guessing what a Turnpike lease would fetch, when all we need to do is have a competitive bidding process? Of course, the study was authorized by defenders of Act 44 to prevent competitive bidding on a Turnpike lease. Here are more flaws in this study:

Investment Return

The report questions the 7-9% return on investing a lease payment:

Given historic investment returns, to obtain the 7% to 9% level of return forever would require investing in risky securities such as common stock, lower quality corporate bonds, hedge funds or sub-prime housing loans—investments that are inappropriate for the Commonwealth and its entities.

If that is the case, then our state pension funds, SERS and PSERS – which project annual returns of 8.5% – should get out of “risky” and “inappropriate” investments, right? Of course, we would have to cut back dramatically on pensions for state employees and legislators by accepting far lower return on investment.

Present Value

The report asserts a “present value” of $14.8 billion for a Turnpike lease – which of course, involves them guessing on the price of a bid – but a present value of $26.5 billion under Act 44 – but this includes tolling of I-80. If I-80 is not tolled, then Act 44 requires $22.5 billion in payments over 50 years – which has a “present value” (i.e. taking inflation/interest rates into account) of only $9 billion.

Of course, if lawmakers insist on getting more money by tolling I-80, then that too should be competitively bid and leased to a private operator – thus the state can get the most revenue, and tolls can be kept at the lowest level bid.

Misspent Revenues

The report also worries that a lease payment will be misspent by lawmakers on non-transportation funding. While I am glad House Democrats are admitting our elected officials are poor stewards of public monies, the proper remedy is a constitutionally protected fund.

In addition, there exists the option to use “revenue sharing” in a lease deal, rather than an upfront payment. In this arrangement, the state would receive funding from a private operator on an annual basis, based on their actual revenue (and limiting their “profit”). For some reason, the report commissioned by House Democrats forgot to mention this option. Our report on Public Private Partnerships does detail this option – and that didn’t cost taxpayers $75,000 to produce.

Traffic Growth

To show that a Turnpike lease could not generate enough revenue, the authors assume that traffic growth would be 1% annually (pg. 17). But they assume that under Act 44, Turnpike traffic would grow 2.5% per year (pg. 18). This difference means that at the end of 50 years, the Turnpike would have 80% more traffic under the PTC than under a lease. Why did the authors’ assume greater traffic growth under Act 44? I can only think of one reason–to ensure that Act 44 looks better on paper.

Here is our News Release on the study commissioned by House Democrats .

Here is more free research on a Turnpike lease.