How to Lose Billions of Dollars

Turnpike Commission plan will cost taxpayers $37.4 billion

HARRISBURG, PA — Today, as the Pennsylvania Turnpike Commission unveiled its plans for new tolling plazas along I-80, the Commonwealth Foundation reiterated its call to competitively bid the tolling of the interstate highway.

“We don’t believe it is necessary to toll I-80,” said Matthew Brouillette, president of the Commonwealth Foundation. “But if policymakers are determined to do so—and Pennsylvania receives federal permission—we should go to the marketplace and see what the private sector will bring to the table.”

“The last thing we should do is merely hand over the tolling of I-80 to the Turnpike Commission,” he said. “Not only is it bad public policy not to seek competitive bids on such a major transportation project, but it will likely cost taxpayers billions of dollars.”

An analysis conducted by the Commonwealth Foundation, found that if the federal government rejects the request to toll I-80—and the state fails to lease the Turnpike for $12.8 billion—the state will lose $37.4 billion over the next 50 years. Similar losses will likely be incurred if the Turnpike Commission is given control of I-80 without a competitive bidding process.

The following are the calculations prepared by the Commonwealth Foundation on the comparative values of a Turnpike lease and Act 44 (with I-80 tolling) over the first 50 years.

1. The Commonwealth Foundation projects that interest on the Turnpike lease payment would yield $50.151 billion over the next fifty years. Calculations include:
   • An estimated 7.5% rate of return (below Gov. Rendell’s projected 12% rate of return).
   • A corpus of $10.5 billion: the $12.8 billion lease payment less $2.3 billion to retire Turnpike debt and pay other costs related to the lease.
   • A 2.5% annual increase in the amount drawn down by the state.
   • Annual payments that would exhaust the corpus only at the end of the 75-year lease.
2. The $2.3 billion used to pay Turnpike Commission debt and other expenses was then added to the value of the lease deal.
3. The Turnpike Commission currently reimburses the state $33 million annually for the cost of state police on the Turnpike. Over 50 years, assuming 2.5% annual increases, this cost results in $3.2 billion, which was deducted from the value of the Turnpike lease.
4. The Turnpike Commission currently receives $87 million annually in subsidies from the state Motor License Fund and Oil Company Franchise Tax. This subsidy is not included in the Turnpike Lease, and represents a 50-year savings for the state (assuming 2.5% annual increases) of $8.5 billion, which was added to the value of the lease.
5. The Lessee (Pennsylvania Transportation Partners) would pay the state Corporate Net Income Tax. Based on an estimate of $3.3 to $4.2 billion over the 75-year lease, the Commonwealth Foundation projects the 50-year value of this tax would be $2.2 billion, which was added to the value of the lease.
6. Under Act 44, the Turnpike Commission will pay $450 million annually to the state if I-80 is not tolled (for whatever reason). The fifty-year value of this payment is $22.5 billion.

For comparison on a present value basis, the lease would provide $21.6 billion in value to improve Pennsylvania’s infrastructure and transportation (i.e., $12.8 billion in upfront cash, $5.5 billion in committed capital requirements and $3.3 billion in new taxes paid). Without the tolling of I-80, Act 44 is a “promise to pay” $450 million over the next 50 years, which we have calculated as $5.2 billion in present value, which is $16.4 billion less than the lease in present value.

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The Commonwealth Foundation (www.CommonwealthFoundation.org) is an independent, non-profit public policy research and educational institute based in Harrisburg, PA.

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