Lease the Turnpike? A real no-brainer

Pennsylvania lawmakers have the unique opportunity to allow taxpayers to earn interest rather than pay it. On May 19, Gov. Ed Rendell announced that the Commonwealth of Pennsylvania could receive an upfront payment of $12.8 billion from an experienced team of investors and operators in return for a 75-year lease of the Turnpike.

The deal could earn taxpayers over $1 billion per year in interest alone—money that should be dedicated to Pennsylvania’s crumbling transportation infrastructure. Sounds like a real “no-brainer.” The offer, however, must first win approval from the General Assembly.

Last year, under Act 44 of 2007, a majority of members opted to raise needed transportation funds by allowing the Pennsylvania Turnpike Commission to erect new tolls on I-80 (pending federal approval), increase tolls on the Turnpike by a minimum of 25% in 2009 and 3% every year thereafter, and issue nearly $14 billion in new bonded debt. The taxpayers and toll-payers will eventually pay it all back, plus $11 billion in interest over the next 35 years.

Unfortunately, Act 44 fell well short of the identified annual funding need of $965 million for our roads, highways and bridges. Indeed, even with the tolling of I-80 the plan does not generate that amount until the year 2037. Without the tolling of I-80, the annual payment from the Turnpike Commission drops to only $200 million for roads, highways and bridges, and $250 million for mass transit. For these reasons, Gov. Rendell wisely continued a pursuit of a Turnpike lease.

Until recently, financial analysts could only guesstimate what the Turnpike might fetch in the open market. The $12.8 billion bid is obviously a lot of money. But is it a reasonable and adequate amount for the 537-mile toll road?

One way to assess the bid is to consider the effective “bid” of the Turnpike Commission under the terms of Act 44 of 2007. The Commission did not officially submit a bid, but if the Federal Highway Administration denies their application to toll I-80, the Commission would be required to pay a total of only $450 million per year.

This annual payment suggests that the Commission is effectively providing the state with an upfront lease payment of $5.294 billion—the amount necessary to generate $450 million per year, assuming an 8.5% annual return on investment. The Turnpike Commission’s “bid” drops to a mere $3.75 billion if we assume the State Employees Retirement System’s 20-year average return on investment of 12%.

This suggests that if the General Assembly rejects the private-sector offer of $12.8 billion, Act 44 would leave approximately $7.5 – $9 billion on the table—money that will eventually be paid by taxpayers and toll-payers. Based solely on the numbers, the decision should be easy. Instead of placing more debt on our children, erecting new tolls on a currently free highway, and the likely need to raise taxes in the near future, we can pay for our roads, highways, and bridges with the interest from the lease payment alone. But there are other factors that make leasing the turnpike a good public policy decision too.

A turnpike lease would drive out the corruption and patronage of the Turnpike Commission, which has a well documented history as a means for delivering political paybacks for both political parties. Most recently, the Turnpike Commission was cited numerous times in the 139-count federal indictment of state senator and Turnpike patron Vince Fumo for no-work contracts and inappropriate expenditures of money.

Getting rid of the Turnpike Commission and bringing in a private operator would also likely improve the toll road’s efficiency. A recent study by the Reason Foundation found that the Turnpike Commission spends 62.4% of toll revenues on operations. Of the 35 toll roads studied, only the Massachusetts and West Virginia turnpikes spend a higher percentage. Private-sector toll road operators are far more efficient, averaging only 23.4% of revenues spent on operations.

Under a lease agreement, the state maintains control of the turnpike and will be able to hold its private-sector partner to a higher and more rigorous standard than the Turnpike Commission through a performance-based contract. If the company fails to comply with the terms of the agreement—whether related to operation and maintenance requirements or snow and road-kill removal—it could be financially penalized or even stripped of its lease.

It is rare that policymakers can choose to earn interest rather than pay it. Yet this is the choice before the General Assembly. Continuing with Act 44 will mean more bonded debt on our children, higher turnpike fees, and possibly new tolls on I-80. In contrast, a lease of the turnpike will provide more revenue for our transportation infrastructure without raising taxes, new tolls, or more debt. Sounds like a real “no-brainer.”

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Matthew J. Brouillette is president and CEO of the Commonwealth Foundation (, an independent, non-profit public policy research and educational institute based in Harrisburg, PA.