January 31, 2012
The Honorable Chris Christie Governor StateofNew Jersey StateHouse Trenton, NJ 08625 Dear Governors: 

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TheHonorable Andrew M. Cuomo Governor State ofNew York State Capitol Albany, NY 12224

In response to last year's toll and fare increase, on August 18, 2011, you charged the Board of Commissioners of the Port Authority of New York and New Jersey to undertake a comprehensivereview and auditoftheentb:e agency, coveringits finances, operations, and tenyear Capital Plan. On September 19, 2@11, a Special Corrunittee of the Board was organized to oversee..thatdirective, and thereafter itretained the international firms ofNavigant Consulting, Inc. and Rothschild Inc. to assistinthis effort. · ··· ·'

· Wepresentherewith thePhasel Interim Report. 

### Itis the SpecialCommittee's infennh:at·. this Repoi:t together withour subsequent final report will presenta thorough assessment ofthe PortAuthority's currentbusiness model, finances, and operations, as well as provide corrective· recommendations and measures. The findings and recommendations of the Report will be presentedto the PortAuthority'sBoard for consideration and appropriateaction. We note thatthe Report finds an "organization at a crossroads" and indicates that the Port Authority needs a top-to-bottom overhaul of its management stmchlre. Navigant's preliminary review revealed, in their assessment, "a challenged and dysfunctional organJ.zation suffering from a lack of consistent leadership, a siloed underlying bureaucracy, poorly coordinated capital planningprocesses, insufficient cost controls, and a lack .oftransparentand effective oversight of the World Trade Center program that has obscured full awareness of billions ofdollars in exposure to thePortAuthority." As canbe seen in theReport, theWorldTrade Centerredevelopmentcosts grew from an estimate of approximately $11 billion in 2008 to a current estimate of approximately $14.8 billion, with the estimated net cost to the Port Authority after third-party reimbursements growingfrom approximately $6billion to approximately 

### $7.7.billion. Given thatenormousburden, we are committed to taking the stepsnecessary tomftlgate thePortAuthority'sexposureat the World Trade Centersiteby:

• Establishing new financial and management controls, and value engineering all possible aspects oftheWorld Trade Center project.This cmcial step shouldhelp
225ParkAvenue South New York, NY I 0003 T:2124357000

## THEPORTAUTHORnYOFNY&NJ Hon. Chris Christie Hon. Andrew M. Cuomo - 2- January 31, 2012



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## • limit or mitigate the approximately $1 billion of potential incremental cost exposure identified in the Report; Maximizing the recovery ofcosts spenton behalfofthird-party stakeholders and strictly limiting any new financial commitments related to increased scope and third-party work. As noted in the Report, the Port Authority already needs to recover approximately $1.6 billion from public agencies and private entities, such as the National September 11 Memorial & Museum; Leveraging private sector expertise. The Port Authority has made advances in this direction by forming ajointventure with the Durst Organization on Tower 1 and actively negotiating ajoint venture with Westfield on the retail components of the World Trade Center site. As suggested by the Report, the Port Authority underestimated approximately $1 billion of costs that were subsequently identified by the involvement ofexperienced, private partners. There may have been an opportunity to mitigate some..**~{.these** costs had they been identified earlier; and Pursuing the feasibllity of third-party capital sources to fund the commercial aspects of the site. Alternative methods 

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### moneti~i.Dg certain assets at the World Trade Center site. The amount of debt at the end of 2001 ($9.1 billion) grew to $19.5 billion at year-end 2011, and is expected to increase further to approximately $20.8 billion by the end of 2012. This significant increase in the agency's debtload willremain a burden for years to come. Gross compensation at the I-'ort Authority has grown in the last five years by approximately 19%, from $629 million to $749 million, primar)Jy as the result of "add-on" compensation such as overtime, unused vacation exchange and "longevity" programs. During this same Hrneframe, the cost ofbenefits for employees increased by approximately 35%, from $341 million to morethan $458 million. · These findings underscore the Special Committee's objective of finding ways of lowering operating costs and increasing operational efficiencies across the agency. The Special Committee is strongly committed to bringing employee compensation and benefits in line with appropriate public employee benchmarks and has already asked our executive management team to examine the following measures:
• Requiring contributions to l;tea1thcare. If in1plemented for all employees, these contributions would result in_ expected savings of approximately $103.8 million over the course ofthe nextfour years;

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• Eliminating "add-on" compensation programs, such as unused vacation exchange and "longevity." The estimated annual savings for eliminating these programs for non-represented employees is approximately $9.1 million; • Implementinga merit drivencompensationprogram; • Imposing stronger controls on overtime; and • Revising vacation and othercompensated time policies. Aside from these findings and recommendations, the Report includes preliminary observations on the Port Authority's current $25.1 billion Capital Plan and underlying capital planning process. The majority of that capital, more than $18 billion, is planned for assets excluding the World Trade Center site, re£leeting significant state-of-good-repair and other needs of our core transportation assets. Yet the Report observes that the capital planning process does not necessarily align with the agency's.9verall priorities. Line functions promote projects to maintain their own asset base, while management roles and responsibility for oversight of the planning and project execution

**p~(JC~ss** are not clearly defined. Furthem<ore, senior management lacks key performance metrics. to drive accountability for the execution of the CapitalPlan. .i

.. · TI1e next phase of the Special Committee's work will further the detailed review of the hundreds of projects in the Capital Plan. However, it is clear that the Port Authority must refocus its organization and processes to increase the speed of project delivery and reduce projectcosts. Already, our executive management team is focusing on various steps to achieve these goals, including:

• Streamliningpre-construction approvalprocesses; • Reducing "softcosts'' associated withprojectdevelopment; • Requiring financial department review ofall transactions before they are brought to theBoard; and • Improving communications internally to foster better collaboration and dedsionmakingfor critical projects. These important steps, together with other improvements such as greater use of electronic systems to improve management of our real estate and leasing contracts, and improving the timely collection ofrevenues owed to us, will improve the value to the agency, and to the public, ofthe capital dollars we spend.· The above findings, along with the others in the Report, make abundantly clear something that we already knew: we must now move to a new era £or the Port Authotity. In 2011, the Board had already begun this process by implementing significant changes to

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### NJ Hon. Chris Christie Hon. Andrew M. Cuomo -4- January 31, 2012 reinvigorate the agency. For example, in the pastmonths it has moved forward in a proactive way with positive changesingovernance and transparency by:
• Posting online the compensation of all employees of the Port Authority and committing the agency to quarterly updates; • Implementing the elimination o£ the non-revenue component of the Port Authority's E-ZPass program for certain employees and retirees; • Hiring the first new independent auditor for the agency in 31 years; • Strengtheni11g the Port Authority's internal Enterprise Risk Management System to allow theBoard to betteranticipate and mitigate potentialproblems; • Establishing an Insurance Working Group to examine the Port Authority's insurancepractices and costs; and • Approving Preliminary Operatingand Capital Budgets for 2012 expressly subject to any measures adopted by the Bpard as a result of the Special Committee's review. Beyond these recent steps and tl')e

**afor~rnentioned** commitments, much more needs to be done. The Special Committee's continued re.view .will serve as the vehicle for this change, and as we move into Phase II with the guidance of Navigant and Rothschild, the principal objectives will remai11 tl1e same: to reduce costs, improve efficiencies, .and fulfill the Port Authority's mission as the engine for economic growth andjob creation in the New York/New Jersey region. We lool< forward to yourcontinued support.

DavidSamson Chairman
William "Pat" Schqber Commissioner Respectfully,

THE SPECIAL COMMITTEE OF THE BOARD OF COMMISSIONERS OF THE PORTAUTHORITY OF NEW YORK AND NEWJERSEY ScottRechler Vice-Chairman Jeffrey Lynford Commissioner