State of New Jersey The Asset Evaluation Program: A Progress Report - - PowerPoint PPT Presentation

State of New Jersey

May 29, 2008

The Asset Evaluation Program: A Progress Report

Council of State Governments 2008 Spring Conference

1

The Fiscal and Transportation Funding Problems Facing New Jersey are Not Unique…..

23 states, including New Jersey, are facing budget shortfalls in 2009 New Jersey, like many states, is facing significant liabilities in pension and health care costs All states face rising costs and shrinking federal support for transportation investment

…..But our approach to tackling them is:

We recognized the direct correlation between New Jersey‟s fiscal constraints and our inability to invest sufficient funds in transportation and infrastructure The asset evaluation review began in 2006 resulting in a proposal that upon implementation was capable of producing a positive and transformative effect on several key issues confronting the State and brought the scope

• f these challenges into the public dialogue

Provided long term investment in the toll roads Provided long term funding for investment in the statewide transportation network Provided funds to pay off one half of the State‟s debt

2

Where we Started: The Problem - Financial Emergency

20 years of short-sighted financial decisions by both parties left us in a deep hole

Misspending Overspending Irresponsible Borrowing

3

New Jersey Is Not Funding all of our Long-Term Obligations

„98 „99 „00 „01 „02 „03 „04 „05 „06 5 10 15 30 20 25 $35 Net Tax-Supported Debt Outstanding

($ in Billions)

Fiscal Year „07

CAGR = Compound Annual Growth Rate = debt issued since June 2007

„97 „96 „92 „93 „94 „95 „91 „90 FY 2008 Funding of Long-Term Obligations Transportation Capital Funding 9.8 4.9 0.0 2.0 4.0 6.0 8.0 10.0 12.0 Annually R equired Contributions F Y 2008 Actual Contribution F Y 2008 ($bn) Post R etirement Medical Expense Unfunded Pension Expense Debt Service 42.0 4.0 0.0 10.0 20.0 30.0 40.0 50.0 10-year Capital Plan Existing State F unding ¹ ($bn)

1 Available Transportation Trust Fund funding

4

Transportation Investment Continues to Require Focus and Money

New Jersey… most densely populated corridor state Highly dependent on our transportation network Almost $2 billion in annual federal funding at risk after 2011 $40 billion in transportation needs over the next decade for safety and congestion relief

– 700 deficient bridges – 10,000 miles of highways to be resurfaced

• 2nd rail tunnel under the Hudson River

5

Governor Corzine Chose to Investigate Public-Private Partnerships (PPPs) as a Possible Solution…

30yrs 99yrs 30yrs 99yrs

Net Revenue Net Revenue Municipal Revenue Projections Municipal Bond Investor Loan Capacity Private Sector Projections Incremental Value Generated by Private Sector Risk Tolerance

Municipal Model PPP / Concession Model Capitalization of Net Revenues from an Infrastructure Asset PPPs can

Provide the public sector access to private sector discipline, expertise, efficiencies and sources of capital Allow the public sector to transfer financial, construction and operating risks

Significant Value can be Generated by Private Sector Financing

6

Where Did We Start?

The starting point for our work was to inventory the major State Asset Classes and identify those that merit the State’s near-term focus

Asset Classes

Key Criteria Lottery Naming Rights Rights-

• f-Way

Toll Roads Real Estate Development/ Train Stations Convention Centers, Stadiums and Other 1 Newly- Tolled Facilities Waterways and Ports Hospitals Student Loans Transit Airports Water/ Wastewater Facilities Existing Prisons Solid Waste Facilities Recreation Facilities (Parks) Equipment

S tand Alone Operation + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +

• + +
• Output/S

ervice Delivery Driven + + + NA NA + + + NA + + + + + + + + + + + + + + + + + + + + + + +

• S

ubstantial Operating Component + + + NA NA + + + NA + + + + + + + + + + + + + + + + + + + + + + + + + + + + + NA Alternative Use of Asset

• -
• + +

+ + + + + + + + +

• - -
• + +
• - -
• -
• - -

+

• - -

Innovation in Delivery + + + + + + + + + + + + + + + + + + + + +

• -

Long-Term Availability + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +

• Minimum

Transfer of S

• cial Control

+ + + + + + + + + + + + +

• - -

+

• +
• -
• - -

+

• - -

+ + Manageable S ecurity/ S afety Issues + + + + + + + + +

• +
• - -

+ + +

• - -

+

• - -
• -

+ + + + + R isks Commercial in Nature + + + + + + + + + + + + + + + + + + + + + + +

• - -

+ +

• +

+ Manageable S ize + + + + + + + + + + + + + + + + + + + + + + + + + + + +

• -
• Overall

P

• tential

+ + + + + + + + + + + + + + + + + + + + + + + + + + + / -

• +++ Very F

avorable ++ F avorable + S

• mewhat F

avorable – S

• mewhat Unfavorable

– – Unfavorable – – – Very Unfavorable NA: Not Applicable

Note: 1 Other includes racetracks, concert halls and meeting spaces

7

The State‟s Asset Review

Feasibility 3 Relative Value 1

High Low Low High

F iber Optic Network ⁴ AC International Airport HE S AA Development R ights at NJ Transit S tations NJ Turnpike ⁴ NJ Lottery ⁶ NJ Turnpike Authority Assets NJ S E A ² Naming R ights Newly-Tolled F acilities HOT Lanes GS P arkway 4 AC E xpressway P NC Bank Arts Center 4

Source: UBS report dated November 2006 Notes: 1 Relative value net of any directly associated debt 2 Reflects a group of 7 venues 3 Indicates likelihood of completion; Includes Market Acceptance, Risk Profiles and Relative Lack of Complexity

The State began a review in the fall of 2006 to determine which assets could generate value While several different opportunities were identified, the monetization of toll roads was identified as being the most valuable, feasible and market ready

4 Included in NJ Turnpike Authority Assets which are not individually available without total NJ Turnpike Authority debt defeasance 5 Bubble size indicates the level of market readiness for each Asset 6 Value is net of projected reductions to General Fund contributions

Market Readiness⁵

Low Medium High

8

Summary of the Initial Phase of Study

The initial evaluation process can be summarized as follows:

Asset Class Evaluation Individual/Discrete Asset Evaluation Market/Investor Interest Assessment Pathfinder Analysis ¨ Net Value to the State ¨ Feasibility ¨ Market Readiness

¨ The study concluded that the Assets generally fall into four Tiers based on their Net Value to the State, Feasibility and Market Readiness ¨ All of the Assets in Tier 1 and Tier 2 should be considered in P ¨ Atlantic City Expressway ¨ Development Rights at New Jersey Transit Stations ¨ Garden State Parkway ¨ New Jersey Lottery ¨ New Jersey Turnpike ¨ Atlantic City International Airport ¨ Fiber Optic Network ¨ High Occupancy Toll Lanes ( “ HOT Lanes ” ) ¨ Naming Rights ¨ Newly-Tolled Facilities ¨ PNC Bank Arts Center Tier 1 Tier 2

Asset Class Evaluation Individual/Discrete Asset Evaluation Market/Investor Interest Assessment Pathfinder Analysis ¨ Net Value to the State ¨ Feasibility ¨ Market Readiness Asset Class Evaluation Individual/Discrete Asset Evaluation Market/Investor Interest Assessment Pathfinder Analysis ¨ Net Value to the State ¨ Feasibility ¨ Market Readiness

¨ The study ¨ All of the Assets in Tier 1 and Tier 2 should be considered in Phase 2. These include: ¨ Atlantic City Expressway ¨ Development Rights at New Jersey Transit Stations ¨ Garden State Parkway ¨ New Jersey Lottery ¨ New Jersey Turnpike ¨ Atlantic City International Airport ¨ Fiber Optic Network ¨ High Occupancy Toll Lanes ( “ HOT Lanes ” ) ¨ Naming Rights ¨ Newly-Tolled Facilities ¨ PNC Bank Arts Center Tier 1 Tier 2 ¨ Atlantic City Expressway ¨ Development Rights at New Jersey Transit Stations ¨ Garden State Parkway ¨ New Jersey Lottery ¨ New Jersey Turnpike ¨ Atlantic City International Airport ¨ Fiber Optic Network ¨ High Occupancy Toll Lanes ( “ HOT Lanes ” ) ¨ Naming Rights ¨ Newly-Tolled Facilities ¨ PNC Bank Arts Center Tier 1 Tier 1 Tier 2 Tier 2

9

How Can we “Unlock” the Value of our Assets?

Public Authority Model Public Benefit Company “PBC” Long-Term Concession IPO Transaction Description

Authority is created / retained by the State and given ability to develop, finance, manage, and operate the asset State assigns the right to set and collect tolls and manage the roads for a defined period of time per parameters stipulated in an agreement in exchange for monetary payment(s) by a stakeholder- controlled entity for the benefit of the road users and the transportation system in the State of New Jersey State assigns the right to set and collect tolls and manage the roads for a defined period of time per parameters stipulated in an agreement in exchange for monetary payment(s) by a private sector concessionaire State assigns the right to set and collect tolls and manage the roads for a defined period of time per parameters stipulated in an agreement in exchange for monetary payment(s) by a concessionaire whose shares will be publicly traded

10

Public Authority Model Public Benefit Company “PBC” Long-Term Concession IPO Generate Net Cash Proceeds Pay Down Debt Capital Investment Limit Toll Increases Retain Upside

Financial

Limit Execution Risk Maintain or Enhance Service Quality and Safety – Impose penalties for noncompliance Protect Employees – Preserve long-term collective bargaining ability – Pension parity – Shift Maintenance Cost & Capital Ex Risk Preserve Existing Contracting Structure

Policy

Maintain Regulatory Oversight Key: Meets/ Maximizes objective Partially meets objective Counter to / Does not meet objective

How are Key Considerations of the State Addressed in these Alternative PPP Structures?

11 11

Can We Capture the Value of Our Toll Roads within the Parameters of The Corzine Principles?

New Jersey’s roadways will not be sold; and they will not be leased to a for-profit or foreign operator Allowable use of proceeds (reducing State debt and capital investments) will be identified upfront and subject to a public and/or legislative approval with safeguards against diversions for other uses New Jersey citizens will retain ownership and the benefits from initial proceeds and

• ngoing operations

Safety, maintenance and operating standards will be provided at current or improved levels Sufficient funding to meet the long-term capital needs required to improve our roadways and reduce congestion will be provided Terms and conditions of employment for current employees and contractors will remain unchanged with prevailing wage and competitive contracting procedures retained Toll schedules will be open, predictable and available to the public There will be a substantial, open and public discussion in advance of any transaction. I will hold 21 town hall meetings in 21 counties

12 12

The Proposed Solution: The Public Benefit Corporation (PBC)

Public Benefit Corporation - Non Profit Operator of the Toll Roads State Agency - Owner of the Toll Roads Citizens Oversight Board, Inc. - Representing the Public Interest

Concession Initial payment and future periodic payments Vote for PBC Board Members Agreement

PBC Board of Directors Lenders/ Bondholders Attorney General

Oversight of non-profit

• rganizations

Public reporting

13

What Does the PBC Solution Accomplish?

Provides for significant capital investment in the tolled facilities Provides a long term funding source for statewide transportation investment by retaining the excess funds from PBC operations within the State rather than providing returns to external equity investors Significantly reduces the State‟s transportation and general fund debt Creates an independent, non-governmentally operated or controlled non-profit corporation to operate, invest and maintain the tolled facilities more like a business

What it does What it doesn’t do

Generate funding for long term pension or health benefit liabilities Provide funding for non-transportation infrastructure investment

14 14

How does PBC Raise Funds to Pay for the Right to Operate, Maintain and Invest in the Toll Roads?

First increase is in 2010 and is a maximum of 50% plus inflation adjustment Three other increases of up to a maximum of 50% plus inflation adjustment will come in 2014, 2018, and 2022; then only inflationary increases thereafter

New J ersey Turnpike 1 Concession Year 2010 2014 2018 2022 Passenger Vehicle Average Trip 2 $2.05 3.45 5.85 9.85 Garden State Parkway 1 Concession Year 2010 2014 2018 2022 Average Trip 3 0.60 0.95 1.60 2.70 Atlantic City Expressway 1 Concession Year 2010 2014 2018 2022 $0.50 Toll Barrier 4 0.85 1.45 2.40 4.05

Notes: 1 Assumes 3% Annual CPI Increases 2 Assumes 22.9 mile average trip 3 Assumes 15 mile average trip 4 $0.50 ramp tolls are the majority of the ACE toll points

Proposed Toll Schedule

PBC issues its own bonds secured by the revenues to be derived from the tolls collected pursuant to the long term concession agreement

15 15

NJ Tolls within the Historical Context of Inflation

Notes 1 US Bureau of Labor Statistics 2 New York Times and Associates Press 3 Average ticket price based on Goodman & Company survey of all admissions to movie theaters 4 The Garden State Parkway end-to-end toll is based on average of a full length trip northbound and full length trip southbound

Over the period 1950-2007 prices on everyday staple items have increased far more Since they opened, tolls for traveling the full length of these roads have increased modestly and have failed to keep pace with inflation

100 200 300 400 500 600 700 800 900 1,000 1,100 1,200 1,300 1,400 1,500 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2007 Indexed Pricing CPI Bread¹ US Postage Stamp New J ersey Minimum Wage¹ Hamburger² Movie Ticket³ New J ersey Turnpike Garden State Parkway⁴ Atlantic City Expressway

16

Where is the State of New Jersey in the Process Today?

The Administration is currently focused on adopting a Fiscal 2009 Budget that is lower than the one adopted in Fiscal 2008 The Governor has indicated that he does not believe there are sufficient votes to pass the PBC plan as proposed Alternative ideas that are being proposed by members of the legislature and other interested parties are being reviewed The Governor remains committed to finding solutions to the State‟s significant problems, including:

Fiscal Restructuring

–Fiscal 2009 proposed budget is LOWER than the Fiscal 2008

appropriations act

–Governor Corzine is committed to limiting future expenditures to

recurring revenues

Debt Reduction

–Fiscal 2009 proposed budget includes the use of $650 million of non-

recurring fiscal 2008 revenues for debt defeasance, producing $130mm of recurring expenditure savings. A modest first step toward reducing the State‟s debt burden

–The Governor supports a proposed constitutional amendment to limit

newly authorized borrowing only to voter approved debt

17

Transportation Investment Funding Options

Governor Corzine proposed the Public Benefit Corporation, which could have provided over $15 billion of funding for toll road and statewide transportation capital investment immediately, and subsequently provided billions more over time. Alternative proposals include:

– Gas tax increase and future indexing – Tolling of un-tolled interstates – Increased tolls on current roads, but at lower rates than in PBC proposal and

subsequent indexing

– Sale or lease of the New Jersey Lottery

ANY OF THESE OPTIONS COULD BE PART OF A STRATEGY FOR TRANSPORTATION INVESTMENT IN NEW JERSEY THE LEGISLATURE AND THE ADMINISTRATION WILL HAVE TO WORK TOGETHER TO FIND A SOLUTION THAT IS ACCEPTABLE TO ALL

18

FAILURE TO FIND A RECURRING FUNDING SOURCE FOR THE STATE’S ESSENTIALTRANSPORTATION INFRASTRUTURE IS UNACCEPTABLE OUR FUTURE ECONOMIC GROWTH AND FISCAL INTEGRITY DEPEND UPON IT

19

APPENDIX

20

New Jersey Roads