Auditor General Jack Wagner said that an audit released Tuesday of the Pennsylvania Turnpike Commission found that the turnpike’s involvement in interest-rate swaps has cost Pennsylvania taxpayers and turnpike motorists at least $108.9 million. Wagner said the turnpike’s strategy was to use the swaps to save money, but instead proved to further saddle the debt-ridden commission by not using conventional fixed-rate bonds to finance its debt.
Wagner’s said, “The Turnpike Commission should terminate its swap deals and ban all swap use in the future for the sake of Pennsylvania taxpayers and the motoring public as soon as it is financially feasible to do so.”
Interest-rate swaps are legal agreements between two parties – a debt-financing entity and an investment bank – on which way interest rates will move. The party that guesses correctly gets paid, and the party that guesses incorrectly must pay. The payments are determined by the amount of public debt financed with variable-rate loans.
Wagner’s audit – between period Jan. 1, 2007 through Aug. 31, 2011 – found that the turnpike’s 23 active swaps had a negative book fair value of $29.3 million as of May 31, 2011. Furthermore, Wagner’s audit revealed that the turnpike had paid $59 million in fees and interest for terminated swaps, and $49 million in fees and interest on active swaps, for a total of $108,972,133 paid out in swaps losses between Dec. 1998 and Aug. 2011.
“Swaps may be perfectly acceptable for the private sector, where private citizens are free to decide how much risk they can tolerate when their own money is at stake, but swaps should have no role in government, where the taxpayers’ money is at stake,” Wagner said.
In addition to recommending that the Turnpike Commission terminate all remaining swaps as soon as it is fiscally responsible and refinance, if necessary, Wagner also recommended that the Turnpike Commission promptly adopt a resolution unequivocally and permanently prohibiting the use of swaps in the future.
In all, Wagner’s audit made a total of six findings related to the operation and maintenance of the Pennsylvania Turnpike, and offered 20 recommendations to fix the noted deficiencies:
· Turnpike Commission let employees ride the turnpike toll-free, even for personal travel
· Turnpike Commission provided more than $4.1 million of toll free travel to nearly 5,000 consultants, contractors, and other state government officials
· Turnpike Commission is overly generous and permissive when reimbursing commissioners for expenses, and lacks transparency and accountability with regard to those expenses.
· Turnpike Commission actively monitored the E-ZPass system to ensure correct fares are charged
· Turnpike Commission monitored, maintained, and inspected its tunnels, but it has not implemented fire detection systems in two of the five tunnels (Allegheny and Tuscarora) and critical project management practices that would ensure recommendations resulting from tunnel inspections are not overlooked.
Wagner’s found that the turnpike’s policy of providing toll-free rides to turnpike employees and vendors, not only for business but for personal travel as well, amounted to 7,000 free rides and at least $7.7 million in lost toll revenue between January 2007 and August 2011.
Traffic volume on the turnpike has remained stagnant for the past five years. During fiscal year 2010-11, traffic volume on the Pa turnpike totaled over 189 million vehicles, including 165 million passenger vehicles (87%) and 24 million commercial vehicles (13%). The total net revenue generated from tolls in fiscal year 2010-11 was $763 million ($436 million or 57% from passenger vehicles, and $328 million or 43% from commercial vehicles).
Meanwhile, the Pennsylvania Turnpike Commission Acting Chief Executive Officer Craig R. Shuey responded to the audit report:
“In general terms, we believe the findings in the audit suggest that the Commission is fulfilling its mission and serving the public well as a steward of the responsibility for improving, operating and maintaining the nation’s first superhighway,” Shuey wrote in a cover letter submitted Jan. 2.
“The topic areas of the audit findings and recommendations…suggest that the Turnpike is a well-run operation given our areas of responsibility, breadth of geographic coverage and age of the system,” Shuey stated.
Acting CEO Shuey promised to look into ways to increase answer-ability for the practice.
“As we believe (the audit) correctly pointed out, the Commission must implement an added measure of accountability with regard to non-revenue travel on the Turnpike; and as a simple matter of fact, some data you requested simply does not exist,” Shuey stated. “As a result of this reality, we commit to exploring ways to ensure that this data, where practical, can be generated and that greater accountability is achieved system-wide. “
A complete copy of Wagner’s audit of the Pennsylvania Turnpike Commission is available at www.auditorgen.state.pa.us and the full text of the Pennsylvania Turnpike Commission’s response are available at www.paturnpike.com.