Policy Study

The Emerging Paradigm: Financing and Managing Pennsylvania’s Transportation Infrastructure and Mass Transit

In November 2006, Governor Ed Rendell’s Pennsylvania Transportation Funding and Reform Commission identified a $1.7 billion annual shortfall in funding for the Commonwealth’s transportation infrastructure and mass transit services. The Commission suggested an additional $900 million for state highways and bridges, $65 million for local highways and bridges, and $700 million for mass transit is needed on an annual basis to sufficiently meet Pennsylvania’s transportation funding needs.

In order to fill this funding gap, the Commission recommended multiple tax increases, including increases in the gas (Oil Company Franchise) tax, higher license and vehicle fees, and an increase of the Realty Transfer Tax. The Commission also proposed increases in local taxes for mass transit funding, including a higher local sales tax, a higher local Earned Income Tax, or a higher local realty transfer tax.

In addition, the Commission identified $180 million in savings by improving efficiencies ($120 million in highways, $60 million in transit) and recommended the utilization of Public- Private Partnerships (P3s) in both road and transit services. P3s are a means of leveraging private capital and expertise to provide a public service.

Governor Ed Rendell delivered his fiscal year 2007-08 budget proposal to the General Assembly in February 2007 in which he proposed a new 6.17% Oil Company Gross Profits Tax (to generate $760 million in new revenue) to fund mass transit in Pennsylvania, and a possible lease of the Pennsylvania Turnpike to a private contractor to generate $965 million per annum for roads and bridges.

The decision to explore the potential lease of the Pennsylvania Turnpike represents the emergence of a new funding paradigm in transportation. Instead of relying solely on traditional revenue sources-gas and vehicle taxes-state and local transportation agencies are increasingly looking to supplement those sources with private investment through Public-Private Partnerships (P3s). P3s can build new infrastructure, maintain existing infrastructure, and operate existing services, particularly mass transit.

The Emerging Paradigm explores these options for funding and managing Pennsylvania’s transportation infrastructure and mass transit services by considering the P3 experiences of other states and cities. For example, in 2005, leases of two toll roads-the 99-year lease of the 7.8-mile Chicago Skyway and the 75-year lease of the 157-mile Indiana Toll Road-garnered the City of

Chicago nearly $2 billion and the State of Indiana more than $3.8 billion. The upfront payment to Indiana is generating more than $500,000 in interest per day to fund its transportation needs without raising taxes or fees.

Pennsylvania could also utilize P3s in mass transit through “competitive contracting.” Pennsylvania’s two major public transit agencies-the Philadelphia-based Southeastern Pennsylvania Transportation Authority (SEPTA) and the Pittsburgh-based Port Authority Transit (PAT)-are facing a financial crisis. However, the crises at SEPTA and PAT are cost, not revenue-driven. Despite the fact that only 1% of all travel in Pennsylvania is done via mass transit, it receives 25% of all transportation subsidies.

American cities like San Diego, Denver, Los Angeles, San Francisco and Boston, as well as foreign cities such as London, Copenhagen, Stockholm, Melbourne and Tokyo, have successfully embraced “competitive contracting” of transit services whereby private contractors take over the operation of transit services through a contract with the government entity. The City of London has reduced bus costs by approximately 50% since 1985, and Stockholm has reduced bus, subway, and commuter rail costs approximately 20% since the early 1990s.

The experience of the City of San Diego-which has contracted out its bus system-compared to PAT is revealing. If SEPTA would have controlled costs as well as the San Diego Transit Bus System, the 2002 operating costs would have been 57.8% lower ($432.5 million less). And if PAT would have controlled costs as well as the San Diego Transit Bus System, the 2002 operating costs would have been 62% lower ($167.9 million less).

The Emerging Paradigm also explores additional opportunities for P3 utilization in transportation. The report concludes with a discussion about the benefits of P3s and addresses the common concerns about Public-Private Partnerships.