For decades, the Port Authority of New York and New Jersey has been one of the region’s key economic drivers, pulling in ever-increasing revenues from its airports, cargo ports and bridge and tunnel tollbooths and pumping that money back into the economy in massive job-creating infrastructure projects.
Now it’s the Port Authority that’s overextended and strapped for revenue, as its unprecedented request for a $1 billion-a-year toll and fare hike shows. The plan would raise bridge and tunnel tolls, which were just increased from $6 to $8 three years ago, to $12 next month and to $14 in 2014, and would hike PATH fares next month from $1.75 to $2.75.
While the proposal has been in the works for months, the Port Authority announced its plan through a press release issued on Friday afternoon — the favorite time to release bad news so that it gets the least attention. It immediately put the toll and fare hikes on a fast track, with nine public hearings to be held in a single day on August 16 and the final vote at the Port Authority board meeting scheduled for August 19.
That would be just over three weeks before the scheduled unveiling of the 9/11 Memorial on the tenth anniversary of the terrorist attacks that brought down the Port Authority’s Twin Towers. The escalating $11 billion cost of the World Trade Center site redevelopment is one of the main reasons for the proposed toll and fare hike, and the Port Authority is already warning that failure to approve the toll hikes could jeopardize completion of the project.
New Jersey Gov. Chris Christie and New York Gov. Andrew Cuomo both have the power to veto the proposed toll hikes, and they signaled their intention to take a hard line with a joint press release: “While we understand the Port Authority leadership’s concerns about a potential downgrade to its bond rating if toll increases are not instituted, our primary concern with this proposal is its impact on our respective states’ residents and commercial users of the crossings… As families must carefully and effectively manage their finances at this difficult time, so must government.”
The Port Authority is promising the governors a 10-year, $33 billion capital program that it says would create 167,000 jobs at a time when no new stimulus program is expected from Washington. This would mark a significant increase from the $29.5 billion 10-year capital program in place in 2008 that was reduced to a $24.5 billion program the following year when revenues continued to decline.
But for Christie, this is a particularly tricky call because at least 55 percent of the bridge and tunnel tolls and at least 80 percent of the PATH fares are paid by New Jersey residents. The Port Authority traditionally funds projects equally in the two states, but the massive $11 billion World Trade Center redevelopment that will bring jobs to Lower Manhattan is being regarded as a special case and thus does not count in the 50-50 mix.
Christie has previously said he might support a 25 percent toll increase, which would push the Port Authority’s bridge and tunnel tolls to $10. But that would not come close to providing the revenue needed to support the Port Authority’s 10-year capital plan, including billions of dollars in New Jersey transportation projects that Christie needs the Port Authority to fund so that he does not have to raise the state’s gas tax.
The Port Authority proposal would raise $720 million a year starting in September with the $4 bridge and tunnel toll hike and the $1 PATH increase, plus another $290 million a year starting in 2014, by bringing bridge and tunnel tolls up another $2 to $14.
Transit experts agree that the Port Authority is facing the most serious fiscal crisis in its history due to a series of “unprecedented challenges”:
The Lingering Recession
Revenue from all Port Authority businesses — aviation passengers , port containers unloaded, vehicle traffic on bridges and tunnels and PATH rail ridership — began to drop in 2008 and declined further in 2009 before beginning to climb again last year. However, economic growth has been so sluggish in the “jobless recovery” that followed the Great Recession of 2007 to 2009 that revenues in all four of the major areas are expected to be significantly lower than anticipated when the Port Authority put together its original 10-year capital budget three years ago.
According to the Port Authority’s 2011 budget, toll receipts are expected to be 7.5 percent lower, PATH receipts down 12 percent, the number of aviation passengers fewer by 9.2 percent, and port containers down by 11.4 percent. It will take until 2014 for port container traffic, 2015 for air travel and PATH ridership and 2020 for bridge and tunnel traffic to reach the levels originally expected this year.
“When consumer spending is down and unemployment is up, there are fewer goods being shipped and trucked, fewer people commuting to jobs that no longer exist and fewer people flying to destinations that are no longer affordable,” the Port Authority noted in its budget document. “Thus, toll and fare revenue is down, as is revenue derived from flight fees, airport parking and concessions, and container and other Port-related fees, among other facility revenue sources. As a result, projected net revenue from our core business activities over the current ten-year capital plan period has declined by approximately $1.8 billion.”
As U.S. Senator Frank Lautenberg (D-NJ), and other politicians, motorists and rail passenger advocates have pointed out, however, families that have been hard-hit by the recession will find it hard to pay the extra $1,000 a year in bridge and tunnel tolls that the Port Authority is proposing to impose starting next month, and a majority of those people live in New Jersey.
Soaring Costs at World Trade Center Site
Redeveloping the World Trade Center site bigger and better than before as a mark of patriotic spirit has been a basic political tenet, particularly for New York and New Jersey elected officials — so much so that New York Times columnist Joe Nocera acknowledged a year ago that it seemed “sacrilegious” for him to ask questions about the project cost in his article, “In Skyscraper at Ground Zero, Sentiment Trumped Numbers.”
Nevertheless, it seems clear — contrary to years of promises by elected officials — that tollpayers will be subsidizing at least some of the World Trade Center project, partly because long delays in getting the project underway resulted in ever-increasing costs. What was anticipated to be a $9 billion project just a few years ago is now listed at $11 billion, with the Port Authority admittedly on the hook for the cost increases.
The Federal Transit Administration committed $4.25 billion in 2003 toward the Lower Manhattan Redevelopment Project, including $2.261 billion for the new underground PATH station and $478 million for the Vehicle Safety Center designed to safeguard the building against terrorist attacks.
But it was not until May 2007 — five years and eight months after the terrorist attack — that insurance companies negotiating with New York Gov. Eliot Spitzer’s administration agreed to pay $4.55 billion in settlement for the attacks. That was more than the $3.5 billion policy that developer Larry Silverstein had obtained, but not enough to rebuild the towers (Silverstein had originally wanted to pay for only $1.5 billion in insurance coverage, while his bankers wanted him to get $5 billion).
And it was not until March 2010 that Silverstein, the Port Authority and New York officials worked out final financing agreements. Over the years, steel prices and construction costs rose steadily from the original estimates. The cost of the Vehicle Safety Center rose from $478 million to $633 million. Last February, the cost of the winged hub PATH Station at the World Trade Center site jumped another $180 million to $3.44 billion, partly because of the need to use reinforced steel in the station for security purposes. (Overall, the Port Authority estimates that its security costs have jumped from a projected $2 billion to a total of $6 billion.)
The 408-foot spire added to 1 World Trade Center to bring the building to exactly 1,776 feet high added significantly to the cost. Under pressure from politicians and family members of victims, the Port Authority authorized an additional $75 million in construction costs for work changes that will ensure that the 9/11 Memorial will be open in time for the tenth anniversary observance at Ground Zero next month. Because the 9/11 Memorial will rest on the roof of a planned transportation hub that has not yet been completed, the Port Authority changed its plans to build the roof and deck first, then finish the rest of the transportation hub later. The Port Authority and the customers who support its operations have to worry not only about construction overruns, but also the future rental market.
“1 World Trade Center is the most expensive skyscraper ever constructed in the United States, with a price tag currently estimated at $3.3 billion” Nocera noted in his New York Times article. By contrast, the spanking new Bank of America Tower in Midtown Manhattan cost about $2 billion. Just to break even, 1 World Trade Center will require rents far higher than the going rate in Midtown, much less downtown New York, where the building is located and where rents are considerably lower.
“Since 1 World Trade Center is owned by the Port Authority of New York and New Jersey, it seems fair to assume that any shortfall between the building’s annual rental income and its carrying costs will most likely be borne by the people who pay the toll to cross the George Washington Bridge, or use the Lincoln Tunnel, or ride the PATH rail system.”
Nocera projected that 1 World Trade Center would need to charge $130 per square foot to break even, but the Lower Manhattan real estate market rents at $55 to $60 and no more than $80 per square foot. Furthermore, the vacancy rate for office space in Lower Manhattan is projected to average 14 percent this year, the highest level since 1997, and the 2.6 million square feet of office space in World Trade Center 1 is just the beginning of a total of 10 million square feet planned for the site.
Recently, urban planners have quietly begun to question why the government is building office real estate that the private sector would never finance.
Keeping the Governors Happy
The WTC project is not the only development headache facing the authority. Additional pressure has been exerted by Governors Christie and Cuomo, who, like their predecessors, want the bistate agency they control to finance infrastructure projects that otherwise would have to come out of their state budgets or transportation trust funds.
Despite the Port Authority’s downturn in revenues, increased costs at the World Trade Center site and other fiscal problems, Christie made sure that $1.8 billion of the $3 billion that the Port Authority originally committed to the ARC (Access to the Region’s Core) rail tunnel under the Hudson that he cancelled was redirected to the Pulaski Skyway and other projects on the New Jersey side of the river.
Similarly, Cuomo is making sure that $380 million in Port Authority money is redirected to pay for the last three years of the Metropolitan Transportation Authority’s capital program.
“The real question is whose projects get priority if the Port Authority has to cut its capital program significantly because the governors are unwilling to sign off on such a major increase in tolls and PATH fares,” said one mass transit expert who asked not to be identified.
Interest Rates and High Finance
Maybe the markets are trying to tell the Port Authority something.
The Port Authority’s 2011 budget disclosed that the it originally anticipated “over $2.5 billion of funding from Special Project Bond proceeds issued and secured by the anticipated lease revenues to be generated” from 1 World Trade Center. However, “the bond market for financing speculative office space has… evaporated.” For the Port Authority, this means that this form of borrowing has had to be replaced with higher-interest rate taxable debt.
Similarly, the Port Authority had anticipated borrowing $4 billion on the variable rate debt market, which also collapsed, forcing the agency to rely on fixed-rate bonds at interest rates 2.5 percent higher. “Coupled with the previously disclosed construction cost increases at the World Trade Center site that also required the use of higher rate taxable debt” the Port Authority’s debt service costs jumped approximately $1 billion through 2016, according to the budget document.
On the other side of the interest ledger, the Port Authority’s anticipated revenue from its investments in U.S. Treasury notes will be $500 million less over the period of the 10-year capital plan because “since September 2007, the U.S. Federal Funds Rate has dropped from nearly 4.75% to a historic low of between 0% and 0.25%,” the 2011 budget document noted.