# March ?014

Mitchell 

## L. Moss Hugh O'NeillMitchell L. Moss is Director ofthe Rudin Centerfor Transportation Policy and Management at NewYork University, and Henry Hart Rice Professor ofUrban Planning at NYU's Wagner School ofPublic Service. Hugh O'Neill is President ofAppleseed, an economic development consulting firm based in NewYork City. From 1985 to 1991, he was Assistant Executive Director ofthePortAuthority ofNewYork and NewJersey.

'I11is report and additional information on the Rudin Center, are available at \N\vw.NYlfRudinCenter.com

# Executive Summary

The Port Authority ofNew York and New Jersey has been a vital force in the physical and economic growth of the New York-New Jersey region. During the past few years, however, public attention has focused on the Port Authority's spending, management, and political interferencein theagency's operations. In recent weeks, several sources have called for reform, restructuring, or even abolition ofthe PortAuthority. However, the critical problem facing the Port Authority today is not mismanagement, political abuse, or rivalry between New York and New Jersey. The fundamental challenge is that the business model under which the Authorityhas operated for thepast thirtyyears is no longer sustainable. For the New YorkNew Jersey region to grow over the next fifty years, thePortAuthoritymustrethinknotonly how it manages its business, but also how it defines what that business is.


## Evolution ofthe Port Authority's Business Model
Since the 1930's, the Port Authority's consolidated funding structure has allowed it to use surplus revenues fromits 1nostprofitable facilities (such as the George Washington Bridge andJohn

### F. Kennedy International Airport) for two important purposes:

• To help meet the capital and operating needs ofPortAuthorityfacilities that don't generate sufficient revenue to cover their own costs;

• To allow the Port Authority to invest in new facilities that over time will help to growbothits own revenues andtheregion's economy. While this basic framework remains in place today, theways in whichitis usedhave evolved over time.



### • In the late 1960's the Port Authority took on responsibility for rehabilitation and ongoing operation of the PATH system

- a rail transit system that, as the PA and leaders ofboth states realized, would never cover its operating costs, let alone provide a return on the P A's investment.

• In the early 1980's (and with the approval of both states), the Authority's mission expanded again, as the Port Authority took on a series ofeconomic development projects. While it was hoped that these projects would be self-sufficient, they were not expected to generate significant new revenues.



### A PortAuthorityThatWorks 4• At the same time, the PA began to allocate a portion of its surplus revenues and its limited capital capacity to projects selected by the governors of the two states, many of which bore little or no relationship to the Authority's mission or its existing businesses. These projects were not required to achieve the rates ofreturn the PA normally required on its own projects; and many of them generated no revenue at all.


## An Era ofGrowth- but an Eroding Base Throughout the 1980's and 1990's, this arrangement appeared to be working well, as the Port Authority invested in upgrading the PATH system, oversaw the development of new terminals at its airports and rail links to Newark and JFK, and improved the competitive position ofthe region's ports. Air passenger traffic at the three airports has more than doubled since 1980; and since 1991, the volumeofcontainercargo movingthrough the region's ports has tripled.
Fundamental changes undermined the assumptions on which the Authority's early1980's business model were based

- in particular, assumptions about the Authority's own operating and capital needs, and its revenue-generating capacity. • Since the early 1980's, the burden that the PATH system's operating deficits and zero-return capital requirements impose on the PortAuthority's revenue-generating businesses have grown larger. PATH's deficit in 2012 totaled $370 million; and duringthesame yearPortAuthoritycapital spending on PATH (excluding the cost of the new PATH station at the World Trade Center) totaled $179 million.

• The combined operating deficits of the Port Authority Bus Terminal and the bus station at the George Washington Bridge have also risen to $112 million in 2012.

• During the past fifteen years, the Port Authority's marine terminals have gone from a nearly break-even business to one that in 2012 had an operating deficit of more than $100 million.

• In 2012 the World Trade Center- which in 2000 generated mote than $33 million in net revenue for the Port Authority

- incurred a net loss of $46 million. In the years since the September 11 attack, the Port Authority has invested billions of dollars in rebuilding the World Trade Center.

• Even as the Port Authority's financial foundations were eroding, the Authority continued to finance projects chosen by the governors. Between 2002 and 2012, the Port Authority spent more than



### A Port

### AuthorityThatWorks 5$800 million on such "regional projects." During the next few years, PA spending on zero-return state projects 

### will increase even further, as a result of the Authority's agreement to provide $1.8 billion to fund the rehabilitation of state highways and bridges in NewJersey.
As a result ofthese trends, the Port Authority has, year 

### by year, become more reliant on the revenues generated by its money-making facilities- its network ofinterstate bridges and tunnels, most notably the GeorgeWashington Bridge, and John F. Kennedy, LaGuardia and Newark Liberty airports

- to subsidize the operation of, and investment in, those that can't cover their costs, and to helpfinance state capital projects that provide no return to the PortAuthority.
The increases in bridge and tunnel tolls that theAuthorityhas implemented in recent years are a direct result ofits continuing reliance on its bridges, tunnels, and airports to fund its money-losing operations and to finance both its own and the states' capital projects.



## New Rules forthe Port Authority
The current leadership ofthe Port Authority deservescredit for its renewed focus oneffective managementoftheAuthority's operations and financial resources. But management reforms are not enough. It is essential to reconsider the purposes the Port Authority should serve, and how its limited resources can be used most productively. The leadership ofthe state governments and the Port Authority should consider these proposed guidelines:

• The Port Authority's financial resources are to be used solely for facilities, services, projects, and programs that are clearly aligned with its core mission. This doesn't mean the Port Authority can't take on new projects

- but those that it takes on should be closely alignedwith the PA's core businesses.

• It is no longer possible for the Port Authority to adequately fund its own facilities and services while simultaneously allocating hundreds of millions for nonrevenue-generating state projects. The governors of New York and New Jersey and the leadership of the Port Authority should agree to end the practice of using the Port Authority to fund zero-return state projects.

• At the same time, the Port Authority should subject its own investment decisions to rigorous cost-benefit analysis. Any proposed projects that are not selfsustaining must be strategically justified. Several projects includedin theAuthority's recently approved ten-year capital plan

- such as the proposed extension of the PATH system to Newark Liberty Airport -haveyet to be evaluated on a cost-benefit basis.

• To focus on protecting the health of its revenue-generating facilities, the Port



### A PortAuthorityThatWorks 6

### •



### • Authority must give heightened attention toitsthree majorairports. 

### Theyare essential notonlyto theAuthority's financial health, but to the continuedgrowth ofthe region's economy as well. The priorities should include: redevelopment of the Central Terminal at LaGuardia, modernization of NewarkTerminalA, runwayimprovements at JFK and LaGuardia, accelerated deployment of next-generation air traffic control technology, and ground access improvements at all three airports.
While redevelopment ofthe World Trade Center must remain one of the agency's top priorities, most ofthe PortAuthority's othercommercial and industrial properties are peripheral to its core businesses. Itmay be time to dispose ofthese properties.
The Port Authority and the two states need to consider the long-term future of the PATH system. PATH is todaythe only major rail transit system in the U.S. that is funded entirely through a combination of farebox revenues and subsidies from other transportation facilities, without any support from broader-based tax revenues. Without some broader base of support, the next decade is likely to see continued escalation ofbridge and tunnel tolls and PATH fares, increased pressure to cannibalize revenues from other Port Authority businesses to further subsidize PATH, sharp reductions in service

- or some combination ofall three. • It will be difficult to pursue the policies proposal in this report unless the states agree to end the division of the Port Authority into separate political fiefdoms. 1l1is will require multiple changes in the way the agency is run, but there is probably one change on which the success ofall others depends- reintegration offull responsibilityfor managementoftheentire organization in the position of Executive Director.
It should be stipulated, for example, that the Deputy Executive Director (even 

### if nominatedbytheGovernorofNewJersey) works solely for the Executive Director. Moreover, elected officials (ofeither state) should rely on the Executive Director to appoint qualified individuals to highlevel management positions at the Port Authority.
The leadership of the Port Authority must recognize that its current business model and division into separate political fiefdoms are undermining the organization's capacity to fulfill its mission. It may be easier to ignore these problems than to fix them. Butwith each passing year, ignoring them 

### will only make them worse.



### A Port

### AuthorityThatWorks 7

# Challenges for the Future

The PortAuthority ofNewYork and New Jersey, created in 1921, is a vital force in the physical and economic development of the New York-New Jersey region. In the 1920's and 1930's, it built the bridges and tunnels thatconnectedthe two states morecloselyrhan theyhadever been connectedbefore.
After the Second World War, it developed and managed the airports that made the New York region the nation's leading gateway for international air travel. In the 1950's it built the world's first container port, and what is now the world's busiest bus terminal. In the 1960's and 1970's, it built the World Trade Center- andis nowbuildingitagain. Onboth sides ofthe Hudson, hundreds ofthousands of people depend on the infrastructure of trade and transportation built and managed by the PortAuthority. During the past few years, the Port Authority has been the focus of public attention for other reasons, with various proposals for its reform, abolition, and restructuring. In 20II, the governors of New York and New Jersey criticized the agency for construction cost overruns at the World Trade Center, for poor management, for having strayed from its core mission, and for excessive perks awarded to senior managers. 

### A report prepared by NavigantConsultingInc. attherequestofboth governors characterized the PortAuthority as: ....a challenned b and dysfunctional organization suH"t:ring from a lack of consistent leadership, a siloed underlying bureaucracy> poorly coordinated capital p.lanning processes, insufficient cosr controls, and a lack oF transparent and 

### effCctive oversight 

### of the \X'orld 'Tl-ade Center**(''~rrc»)** program.... 1
In the fall of2013, thereconfiguration oftraffic lanes on the New Jersey side of the George Washington Bridge caused massive traffic jams in Fort Lee, New Jersey. This incident has been the impetus for investigations by several governmental entities. There is now broad recognition that the Port Authority (especially in New Jersey) has served as a source of patronage for political appointees, and that there are conflicts within the agency between those who see themselves as serving theinterests ofeither NewJersey orNewYork, rather than the mutual interests ofboth. Many of the charges leveled at the Port Authority are justified. Cost overruns at the World Trade Center are serious

- although they are in part a result of flawed planning decisions made by New York State in the five years after the September 11 attacks, before
1. Navigant Consulting Inc., Phase I Inrerim Report, Presented to the Special Committee of the Board of Commissioners ofthe PortAuthorirv ofNew York and NewJersey,January312012,p. 5. ,



### A PortAuthorityThat Works 9the Port Authority took back responsibility for redevelopment of the site. The longevity bonuses and other benefits awarded to some top managers were hard to justifY, given the agency's financial problems and the austerity measures that other public agencies had been forced to adopt. Like other large, politically insulated organizations, the PortAuthoritywas overdue for a management shake-up. However, the critical problem facing the Port Authority today is not mismanagement, political abuses, or rivalries between NewYork and New Jersey. The fundamental challenge is that the business model under which the Authority has operated for the past thirty years is no longer sustainable. 

### To fulfill its mission and to help the NewYork-NewJersey region thrive over the next fifty years, the Port Authority needs to rethink not only how it manages its business, but how it defines what that business is.



### A PortAuthorityThatWorks 10

## The Evolution ofthe Port Authority's Business Model
To understand why this is the case, some history is in order. When the Port Authority was created in 1921, it was charged with developing facilities needed to supportthe flow of commerce in the 1,500 square-mile Port District; but it initially lacked the financial resources needed to fulfill its broadly defined mission.
Within a few years, however, the rapid growth ofautomobile and truck traffic created both a needforandawaytofinancenewinfrastructure. The agency assumed responsibility for the operation ofthe HollandTunnel and in quick succession built the Goethals, Bayonne, and George Washington bridges as well as the Outerbridge Crossing. Starting in the 1930's, the Port Authority operated under the assumption that these facilities would generate sufficient revenue to enable the agency to finance the development of new projects, which would eventually become self-sustaining, and would in turn contribute to the financing ofstill other new investments. Following this model, the Authority from the 1930's through the 1950's undertook infrastructure projects that have contributed to the growth of the region's economy, and to its day-to-day functioning, including the Lincoln Tunnel, Idlewild (now John 

### F. Kennedy) International Airport, the Elizabeth Marine Terminal, and the Port Authority Bus Terminal.
A significant change in this model occurred in the 1960's,when the PortAuthoritydeveloped the World Trade Center. In exchange for his sign-offon the project, New Jersey Governor Richard Hughes persuaded New York's Governor Nelson Rockefeller to have the Port Authority take over, rehabilitate and operate the privately-owned Hudson & Manhattan Railroad (now PATH).
The World Trade Center represented a significant expansion of the Port Authority's scope - but it followed a well-established approach to financing new projects, with surplus revenues from existing facilities being used to underwrite the up-front cost of developing new facilities, which were expected to become net revenue generators in the future. The Port Authority's assumption of responsibility for the PATH system, however, representedasignificantdeparturefrom its past practice. The Port Authority was not merely getting into another line ofbusiness

- it was taking on an ailing rail transit networkthat (as all parties acknowledged upfront) wouldnever cover its operating costs, let alone provide any return on'theAuthority,s investment.2

2 'ThePortAurhoritv's initial resistance to takingon this



### n~'" commitment



### w~s rdlccred in an insenion imo the Authorirv's bond covenants of a provision prohibiting any funi1er PA involvement (beyond PATJ--I) in rhe operations or financing of deficit rail transit systems. \'7bile this provision was dropped from new PA bond covcnanrs afler 1971, it rernaincd in dt"Cct until the 1990's.



### A PortAuthorityThatWorks 11

## An Expansive Agenda
In the late 1970's and early 1980's, under the leadership offormer Executive Director Peter Goldmark, the scope of the Port Authority's business was expanded to include: industrial parks in the Bronx, Yonkers, and Elizabeth, a satellite communications and office complex on Staten Island, a new office building, and a waste-to-energy plant in Newark and mixeduse waterfront development projects in Hoboken andin Hunters Point, Queens.
All of these projects were envisioned as new ways for the Port Authority to contribute to the revitalization of the region,s economy. While they were generally expected to be selfsustaining, none were expected to generate significant new net revenues**f~:n·** the Port Authorityorto addto itscapital capacity. Their primarypurposewas economic development.
The early 1980'salso saw anothermajorchange at the Port Authority. As demand for World Trade Center office space surged, Goldmark saw an opportunity to replace New York State government agencies

- which since the early 1970's hadoccupiedseveral million square feet of space at the Trade Center

- with higherpaying private-sector tenants. But instead of having the PortAuthority keep the additional rent revenues, Goldmark proposed that they be used to fund a "regional bank" program, underwhich the PortAuthoritywould finance aseries ofcapitalprojects thatwould bechosen



### A PortAuthorityThatWorks 12by the governors ofNewYork and NewJersey. Both states readily accepted the proposal.
The concept of using surplus Port Authority revenues to fund state projects was expanded a few years later, when the Authority and the states agreed that a portion of the new revenues generated by a proposed toll increase would also be set aside to fund "regional development)) projects of the governors' choosing. These projects

- like those funded out ofWorld Trade Center revenues - would not be required to achieve the rates of return rhe PA normally required on its own projects. In fact, theywould not be required to generate any revenue at all.


## An Eroding Base
For several decades thePortAuthoritybusiness model seemed to work well. In the 1980's and 1990's and into the present, the agency recorded some notable achievements.



### •

• Much like the rebuilding of New York's transitsystem {although onamuch smaller scale), the Port Authority's commitment to rebuilding PATH and providing reliable, low-cost,trans-Hudsonrail service contributed to the revitalization ofLower Manhattan, and helped make possible the redevelopment of the Hudson County waterfront. Major capital improvements at the region's airports - new and expanded terminals, new airport rail systems at JFK and Newark, and other improvements-helped build a foundation for continued growth of the region's aviation industry. Between 1980 and 2013, air passenger traffic at JFK, Newark, and LaGuardia more than doubled

- from 53.5 to 112 million passengers.

• TheNewYork-NewJerseyportsignificantly improvedits capacitytocompeteeffectively with other U.S. ports. Improvements included modernized terminal facilities in Newark and Elizabeth, the dredging of the harbor to accommodate larger ships, a major expansion ofthe Howland Hook terminal on Staten Island, and major investments in intermodal rail freight facilities serving the port.



### • As aresultofthese improvements, theNew York-New Jersey port was well positioned to take advantage ofthe continued growth ofworld trade. Between 1991 and 2012, thevolume ofcontainerized cargo moving through the New York-New Jersey port nearly tripled, from 1.87 million to 5.53 million twenty-foot-equivalent units. Despite a slow start, by the mid-1980's the World Trade Center had become a solid commercial success, a major contributor to the revitalization ofLower Manhattan, and a money-maker for the PortAuthority.



### A PortAuthority 1hatWorks 13

### • The two states used Port Authority regional development funds to finance a variety of worthwhile projects, including improvements in New Jersey Transit's rail infrastructure that improved the connectivity on NJ Transit's rail network, rail freight improvements in New York City- as well as someothersof!essermerit.
But even as the Port Authority was recording these and other successes, changes were occurring

- both at the Port Authority itself and in the wider world in which it operates

- that undermined the assumptions on which the Authority's early-1980's business model were based

- in particular, assumptions about the Authority's own operating and capital needs, and its revenue-generating capacity. • The burden that the PATH system's operating deficits and zero-return capital requirements impose on the Port Authority's revenue-generating businesses has, since the early 1980's, steadily grown larger.
Year by year, the gap between PATH's costs and revenues has increased. Between 2000 and 2012, PATH operating revenues grew at an average annual rate of 4.5 percent, while its operating costs grew at an average of 5.9 percent. As a result, the system's net operating deficit rose during the same period from $158 million to $370 million

- an increase of 133 percent, or an average of7.3 percent annually.



### A PortAuthority 1hatWorks 14

### • Since 2011, the growth ofthe PATH deficithasbeen slowedbyfare increases, with the single-ride fare rising from $1.75 to $2.50 as of December 2013, with additional increases scheduled for December 2014 and 2015. Nevertheless, even with these increases, PATH operatingdeficits will continue to impose a growing burden on the Port Authority's net-revenuegenerating facilities.
Net capital investments in the PATH

system have also risen sharply, from $70 million in 2002 to ahigh of$393 million in 2011. Between 2002 and 2012 the Port Authority's investments in PATH

- excluding the cost of developing a newPATH station at the World Trade Center

- cumulatively totaled nearly $2.1 billion.
In addition to this eleven-year total, from 2010 through 2012 the Port Authorityspent nearly $1.4 billion on construction ofthe new PATH station at theWorldTrade Center.
The cost ofoperating and mainraining the PortAuthority's midtown bus terminal and the GeorgeWashington Bridge bus station has also escalated, with the combined deficit generated by these two facilities rising from about $59.5 million in 2000 to $112 million in 2012. This deficit is in effect a subsidy provided by the Port Authority's money-making businesses to those who commute across the Hudson River bybus.

• During the past thirty years, the maritime industry'sshifttowardever-largercontainer ships, competition among U.S. ports, and heightened concerns about security have led the Port Authority to increase investments in its marine cargo terminals. At the same time, competition with other ports has constrained the agency's ability to.raise rents and other charges to levels that would cover its increased costs. 

### As a result, the Authority's port business has gradually shifted from one that was solidly self-sustaining to one that now generates a substantial annual deficit

- going from a netloss of$8.9 million in2000 to a loss of $100.2 million in 2012- and like PATH, must be subsidized by the Authority's money-maldng businesses.

• Several of the economic development projects undertaken by the PortAuthority in the 1980's have not performed as well as anticipated (and a few, such as development of a commercial fishing complex at Erie Basin 

### in Brooldyn, failed outright and were quicldy shut down). Although they represent only a small part ofthe agency's operations and budget, the remaining economic development projects



### A PortAuthorityThatWorks 15- including the Essex County Resource Recovery plant, the Staten Island leleport and the Newark Legal Center- collectively generated losses ofnearly $I 1.3 million in 2012.

• In addition to takingmorethan2,900lives, the 2001 attackon theWorldTrade Center destroyed one ofthe PortAuthority's most valuable assets. In 2000, the World Trade Center produced more than $33.2 million in net revenues for the Port Authority; in 2012, it generated a net operating loss of $46.8 million.
The Port Authority has become increasingly reliant on the revenues generatedbyits money· making facilities

- its network of interstate bridges and tunnels, most notably the George Washington Bridge, and John 

### F. Kennedy, LaGuardia and Newark Liberty airports

- to subsidize the operation of and investment in those that fail to cover their costs. Figure I highlights the net revenues and net losses generated by Port Authority facilities and programsin 2012; Figure 2 shows the location, net revenues, andlosses for major PA facilities.



### A PortAuthorityThatWorks 16>. ...., ·;:: 0 ..c ..... ::J <( +-' **~**
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### Figure 2: Map ofMajor Port Authority Facilities

Facilities in red postednetlosses,while those in black posted netrevenues in 2012.
Net losses/revenuesin$thousands. 

## '\ Ste\vcntAirpol't 

### +**·~5A,f5** GeorgeWashington Bridge/ BusTerminal, $359,985 TeterboroAirport 

### + • Bathgate Industrial Park, $1,267 $267

LincolnTunnel hle·Ni:llk l('{i<'.l Cr:nter $48,915 

### + LaGuardia Airport, *$30,936 ':>l,:'IB 11 !•ortAuthotJtyBusTermlna!,-$10:>,550 \ f'AlH 

# J

.. {**~** -9**\~1403,570** Essex Co 1 t··· HollandTunnel, $58,890**Rbo~•rC""** Cent-21 *--. -'*\l"orld Tr,1{:eCentN, $46,7BO

-$9.652 Greenville PortNewark Yards, NewarkUberty 

### + 1m -$51,301 ./$348 M**R~d** Ho()kTe1rnlnal, -$_14,28'1 *$178,654 0**Ellz~beth** fill Pmijersey -'?20,405 Manne · Howland Hook, -$3/..?:36 Goethals Bridge, $104,553 -......**~1** Terminal, $18,577 I BayonneBridge, -$3,301 "TelepOrt, -S 1_,302

OuterbrldgeCrossing $96,515 

### + JFK Airport *$190,391 N 

# A

*In additiontonetrevenuesfrom airportoperations,JFK, LaGuardia and Newark libertytogether providedtothePortAuthority $118,896,000in netincomefrom passengerfacility charges. 

## '".

....**~'~·'======'~**

## .......... .-'' • Miles



### A Port Authority 1hatWorks 18

## Paying forZero-Return Projects
But even as the Port Authority's financial foundations were eroding) it continued to provide free financing for projects chosen by the governors. Between 2002 and 2012, the Port Authority spent more than $800 million on these "regional projects."
1he Port Authority also kept taking on expensive new commitments to other zeroreturn projects favored by the two states. The PA committed$3billionto constructionofthe ARC rail tunnel- and spent $161 million on the projectbefore it was canceled by Governor Christie. After the Governor insisted that the $3 billion previously committed to ARC be treated as "NewJersey's money," the Authority agreed to allocate $1.8 billion for rehabilitation of New Jersey state highways and bridges, including the Pulasld Skyway.
1he problem with such projects is not that they lack merit

- it's that the assumptions about the Port Authority's revenue-generating capabilities and capital capacity on which they ate based are increasingly disconnected from reality.
The states' failure to acknowledge the limits of the agency's finances

- and in particular, the practice of treating it as a source offree money - has seriously distorted the Port Authority's investment priorities. In its 2012 capital budget, the PA allocated $343 million to state, highway, and bridge projects in New Jersey

- substantially more than the $282 million allocated to the agency's own network of tunnels, bridges, and bus terminals, and nearly as much as the Port Authority planned to invest in 2012 in all of its port facilities ($345 million).



## TheWorldTrade Center
Some New Jersey officials might see the PA's funding of New Jersey highway and bridge projects as simply balancing the books against the agency's spendingon redevelopment ofthe World Trade Center site. At first glance this might seem reasonable. The Port Authority has spent and continues to spend billions of dollars on rebuilding the Trade Center; in September 2012 Navigant estimated that by the time the project is completed (and after deducting insurance payments, federal funds and other reimbursements), the PA will have spentabout$7.4billion from its own funds on WTCredevelopment. Nevertheless, linldng the PA's spending on New Jersey highway and bridge projects to its investment in rebuilding the World Trade Centeris misleading in several respects.



### • In contrast to these and other zero-return projectssoughtbythetwo states, theWorld Trade Centerwill generate substantialnew revenuesforthePortAuthority. Duringthe past few months alone, the announcement



### APortAuthorityThatWorks 19that Group M is leasing 516,000 square feet ofspace in 3 WorldTrade Center, and Westfield's decision to pay $800 million to buy the Port Authority's share of the Westfield-AP joint venture that has been developing the WTC's retail space, have reaffirmed the Trade Center's status as one ofManhattan's most valuable commercial properties. Over the next several decades, theleasepaymentsbySilverstein Properties and by tenants in 1 World Trade Center, combined with the PA's share of retail rents and otherWTC-related income, will generate billions ofdollars in revenues for the PortAuthority.

• It is useful to remember that the original interstate

### quid pro quo for thedevelopment of the World Trade Center was the rebuilding and ongoing operation of the PATH system. Based on the Port Authority's last ten-year capital plan, we estimate that between 2002 and 2020 (a period roughly corresponding to the timeline for rebuilding the World Trade Center), the PA will have spent more than



### APortAuthority 1hatWorks 20$4.6 billion in zero-return capital on the PATH train, plus mote than $1 billion in unfunded spendingon a newWorldTrade Center PATH station. Moreover, based on current trends in PATH's operating costs and revenues, we estimate that during the same period the Port Authority could spend an additional $5 billion to cover PATH's operatingdeficit.
In 2020, the Port Authority will have at the World Trade Center a great locus of commerce and a revenue-producing asset. In PATH it will have a well-maintained, well-run, and economically vital mass transit network- anda seaofred ink. New Jersey officials may feel that they're owed something in exchange for supporting redevelopment ofthe WorldTrade Center. But in fact they've already gotten it

- several times over. 

### Rising Pressure onTolls
The combination of an eroding financial foundation and the states' deployment ofPort Authorityfunds for theirownpurposes has also put increasing pressure on bridge and tunnel tolls. Since 2007, cash tolls on Port Authority crossings have increased by 117 percent, to $13 round-trip; and peak-period E-ZPass tolls by 120 percent, to $11 round-trip. Additional increases are scheduled for 2014 and 2015, when cash tolls will rise to $15, and peakperiod E-ZPass tolls to $12.50. Truck tolls have risen even more rapidly. Contrary to what many of the Authority's critics have alleged, the toll increases that have occurred since September 2011 were not driven primarily by the need to cover cost overruns at the World Trade Center, or by mismanagement. Toll increases were needed primarily to:



## Table 1: PA Cash and E-ZPassTolls, 2007-2013

A PortAuthority'ThatWorks 21• Cover PATH's ever-increasing operating deficits and capital requirements;

• Finance major investments in the PA's bridge and tunnel network; and

• Cover the costofzero-return state projects.
If it is to keep future toll increases under control,thePortAuthoritywill needto redefine its business, and recognize its limits. 

## Going Forward
The current leadership of the Port Authority deserves credit for its renewed focus on effective management of its operations and financial resources. But management reforms are not enough. It is essential to reconsider the purposes the Port Authority should serve, and howits limited resources can be used most productively. The leadership of the two state governments and the Port Authority should considerthese proposed guidelines:

• The Port Authority's financial resources shouldbe used solely for facilities, services, projects, and programs that ate clearly aligned with its core mission. This doesn't mean the PortAuthoritycan't take on new projects

- but those it takes on should be closely aligned with the agency's core businesses. Investments in StewartAirport and the former Military Ocean Terminal in Bayonne are a logical extension of the Port Authority's business - but initiatives such as taldng over Atlantic City Airport are not.

• The assumption that the Port Authority could adequately fund its own facilities and services and at the same time throw offhundreds ofmillions oreven billions of dollars to pay for non-revenue-generating state projects was appealing thirty years ago. Butit is no longer sustainable.
The culture of taking money from the Port Authority for state projects will not be easy to change; from 2014 through 2023, the agency's recently-published tenyear capital plan allocates $943 million to these "regional" projects. Nevertheless, the governors ofNewYork andNewJersey and theleadership ofthePortAuthority should agree to end this practice immediately. They should agree not only to foreswear this practice in the future

- starting this year, they should begin to cut back sharply or cancel outright any outstanding commitments ofPort Authority funds for stateprojects, includingmoneycommitted to (but not yet spent on) NewJersey state highway projects.
Withoutthisdiscipline,thePortAuthority's long-term capacity to invest adequately in the region's airports, ports, and interstate transportation facilities will be seriously jeopardized.



### A PortAuthority cfl1at

### Works 22• At the same time, the PortAuthority itself needs to be more disciplined in its own investment decisions. lhis will require a stronger emphasis on the financial feasibility of proposed projects, strong justification in strategic and cost-benefit terms for those that are not self-sustaining

- and after projects have been approved, a relentless focus on controlling costs. In an era oflimited capital capacity, it will also requireawillingnesstoensuretheadequacy of the Port Authority's investment in the facilities that ate most critical both to the region's economyand to the agency's longterm financial strength

- most notably the three major airports and the George Washington Bridge. Although the agency has made progress in this area in thelast fewyears, its recent tenyearcapitalplan neverthelessincludes some projects that warrant a serious cost-benefit analysis, such as the proposed extension of PATH from Newark Penn Station to Newark Liberty Airport. Improving access to all three of the region's major airports should (as discussed below) be a priority for the Port Authority. But there may be more effective, quideer andless cosdyways to achieve rhis objective.
The agency should also continue its recent efforts to engage the private sector in the development of Port Authority facilities. It has done so successfully at the World



### A PortAuthority 1hatWorks 23Trade Center, and is seeking to enlist private partners in the redevelopment of the CentralTerminal at LaGuardia, and in the construction ofanew Goethals Bridge.

• As part ofits new financial discipline, the Port Authority should seek to limit crosssubsidization among its various lines of business. Perhaps most important, the PA (with the support of the governors) should adhere to a policy ofusing bridge and tunnel toll revenues only to fund the operating and capital needs of the Authority's interstate transportation network

- bridges and tunnels, bus and ferry terminals and PATH. The flip side of this policy, however, is that no Port Authority revenues other than bridge and tunnel tolls should be used to subsidize PATH or other money-losing components ofthe interstate network. As it begins to focus mar," sharply on protecting the health of its revenuegenerating facilities, the Port Authority must give heightened attention to its three major airports. These facilities are essential not only to the Port Authority's financial health, but to the continued growth of the region's economy as well. Theyare vital to the region's role as an1ajor gateway for international trade, travel, and tourism. Further, they are essential to New York City's role as a world center of finance, professional and creative services, communications and culture. Through JFK and Newark (and to a lesser extent LaGuardia), theNewYork-NewJersey area is connected by non-stop flights to more international cities than any other city or region in the U.S

.. Figure 3 shows 122

A 

### PortAuthority

### ThatWorks 24non-U.S. cities that as ofDecember 2011 were served by non-stop flights from the three airports. Topprioritiesfortheregion'sairportsshould includemovingaheadas quicldyas possible with the redevelopment of the Central Terminal at LaGuardia, modernization of NewarkTerminalA, runwayimprovements at both JFK and LaGuardia and ground
access improvements at all three airports. And together with the Port Authority, the two states and their Congressional delegations should make accelerated deployment of next-generation air traffic control technology

- which could expand theeffective capacityofall three airportsby 

### 15 to 20 percent

- a top priority in their dealings with Washington. • Many Port Authority cnt1cs

- and over time,manyoftheagency'sownleaders,have expressed theview that the Port Authority should notbe in the business ofdeveloping and managing commercial real estate. Nevertheless, the World Trade Center is today one of the Port Authority's core businesses, and has been so for more than 45 years. Moreover, the agency's financial strength over the next several decades will depend in part on how successful it is in managing the redevelopment process, and in returning the complex to its pre-2001 position as a net revenue generator for the Port Authority. Ifonlyfor that reason (and there are many others that could be cited), redevelopment ofthe World 1hde Center must for now remain one ofthe P A:s top priorities.



### Figure 3; Cities Served 

### by Non-Stop International Flights from JFK, LaGuardia, and Newark Airports

-

**~** ; 

### ••



# •.•

A PortAuchority 1hatWorks 25Most of the Port Authority's other commercial properties, ln contrast, are peripheral to its core businesses. And although they are generally not a major drain on the PAs financial resources, most of them lose money. As Pat Foye, the Port Authority's Executive Director has suggested, it may be appropriate for the Port Authority to dispose ofits industrial properties, the Essex County resource recovery plant, the Teleport and the NewarkLegal Center.

• During the next several years, the Port Authority and the two states need to consider the future of the PATH system. PATH is today the only major rail transit system in the U.S. that is funded entirely through a combination offareboxrevenues and subsidies from other transportation facilities, without any support from broader-based tax revenues. Withoutsome broader base of support for PATH, the next decade is likely to see: Continued escalation of bridge and

tunnel tolls and PATH fares, at rates well above the rate ofinflation; or
Substantial reductions in service;

- Increasedpressuretocannibalizerevenues from other Port Authority businesses inordertosubsidizethePATH system, and to reduce investment in the 

### PA's most productive assets; or Some combination ofall three.



### A PortAuthority 

### 1hatWorks 26• An overhaul of the Port Authority's business model is just the first of several steps that are necessary to ensure the longterm viabilityofthe 

### PA's airport, port, and trans-Hudson transportation businesses. One of the silver linings in the GWB scandal is that it has cast a sharp light on just how deeply dysfunctional the division ofthe PortAuthorityinto separate political fiefdoms has become. It will be difficult to turn the agency around unless both states agree to end this division. Doing so will require multiple changes in the way the agency is run, but there is probably one change on which the success ofallothersdepends- reintegration of full responsibility for management of the entire organization in the position of Executive Director. 1bis 

### will require two changes.
While having the Governor of New

Jersey nominate a Deputy Executive Director (apracticethatstartedonlyin 1995) might continne, the governors and the Port Authority's Board of Commissioners should agree that the person who holds this job works for the Executive Director. He or she may be informally responsible for keeping an eye on Port Authority matters that are ofparticularinterestto NewJersey; but the Deputy Executive Director should report only to the Executive Director- not to the Governor, or the Governor's staff, or the Port Authority BoardChairman. Hisorherjobshould be to serve as the Executive Director's second in command- notas aseparate executive director for NewJersey.
Elected officials (ofeither state) should



### rely on the Executive Director to appoint qualified individuals to high level positions at the Port Authority. Subjectin afew cases to approvalbythe Board ofCommissioners, the hiring of PortAuthoritymanagersshouldbeleft to the Executive Director, other top executives, and department directors.
It is not enough to focus on political abuses or to create a "blue ribbon panel" to review the Port Authority's managerial structure, as some experts have proposed. The leadership of the Port Authority must recognize that its current business model and division into separate politicalfiefdoms undermine the organization's capacity to fulfill its mission. It may be easier to ignore these problems than to fix them. But witheach passingyear, ignoringthemwill only make them worse.



### A PortAuthority 1hatWorks 27

### March2014