# Phase I Interim Report

Presentedto: 

## The Special Committee of the Board of Commissioners of 

# THE PORTAUTHORRYOF 

# NY&

# NJ
January 31, 2012



## Presented by: 

# NAVIGANTPhase I Interim Report to the Special Committee ofthe Poxt Authority of New York and NewJersey



## Table of Contents I. EXECUTIVE SUMMARY.............................................................................................. 5 PRELIMINARY ORGANIZATIONALDESIGN & OPERATIONALASSESSMENT..................................................5 INITIAL COSTREVIEW OF WTCPROGRAM....................................................................................................6 PRELIMINARY CAPITAL PLANNING ASSESSMENT .........................................................................................7 

### II. NATURE OF ENGAGEMENT & SCOPE .................................................................. 7 

### III. GENERAL APPROACH ................................................................................................ 9 COMPENSATION & BENEFITS REVIEW ............................................................................................................9 INITIAL COSTREVIEW OF 1BEWTCPROGRAM ............................................................................................9 PRELIMINARY CAPITALPLANNING ASSESSMENT .........................................................................................9 

### IV. BACKGROUND.............................................................................................................. 9 V. PORT AUTHORITY OVERVIEW ............................................................................. 11 Observations & Findings.......................................................................................................................13 Preliminary Recommendations & Next Steps ....................................................................................... 15 

### VI. PRELIMINARY GENERAL ORGANIZATIONAL OBSERVATIONS ............. 15 VII. PRELIMINARY COMPENSATION AND BENEFITS ASSESSMENT ............. 18 SCOPE ............................................................................................................................................................18 METIIODOLOGY,........................................................................,..............,..·..................................................l8 PRELIMINARY GENERAL0BSERVATIONS......................,..............................................................................l9 EMPLOYEE HEADCOUNT
................,..................,, ......................, , ,............,...................................................20 Observations & Findings .......................................................................................................................20 Preliminary Recommendations & Next Steps .......................................................................................22 COMPENSATION............................................................................................................................................22 Observations & Findings.......................................................................................................................23 PreliminanJRecommendations & Next Steps .......................................................................................28 BENEFITS .......................................................................................................................................................29 Observations & Findings.......................................................................................................................30 Preliminary Recommendations & Next Steps .......................................................................................34 REPRESENTED EMPLOYEES CONTRACT CONSIDERATIONS..........................................................................35 Observations & Findings .......................................................................................................................35 Preliminary Recommendations & Next Steps .......................................................................................36 

### VIII. INITIAL COST REVIEW OF WTC PROGRAM..................................................... 36 BACKGROUND...............................................................................................................................................36 SCOPE & METIIODOLOGY.............................................................................................................................37 Observations & Findings .......................................................................................................................38 Preliminary Recommendations & Next Steps ...................................................................................... .43 

### IX. PRELIMINARY CAPITAL PLANNING ASSESSMENT...................................... 44 BACKGROUND...............................................................................................................................................44 SCOPE & METHODOLOGY............................................................................................................................. 44 Observations & Findings........................................................................................................: ..............44 Preliminary Recommendations & Next Steps .......................................................................................45 

### X. OVERVIEW OF PHASE II .......................................................................................... 46 PHASE II- OillGINALMANDATE .................................................................................................................46

N/\VI CANT 2Phase I Interim Report to the Special Committee of the Port Authority of NewYork and NewJersey

PHASE II- ADDmONAL RECOMMENDATIONS ............................................................................................46 

### XI. APPENDIX - A .............................................................................................................. 48 XII. APPENDIX - B ............................................................................................................... 50 XIII. APPENDIX- C .............................................................................................................. 51

Tables Table 1 -PortAuthority Core Functions............................................................................................................... 12 Table 2- Cumulative NetIncome byLine Department (Inception- 2010) ......................................................13 Table 3- Summary FinancialTrends by Year (2001- 2011) ...............................................................................14 Table 4- Executive DirectorTenure ......................................................................................................................16 Table 5- "Actual" vs. "Authorized" Staffing Trends (2006- YTD Nov 2011) .................................................21 Table 6- Total CompensationTrend (2006- 2010)
.........................:....................................................................22 Table 7- Total Compensation &Benefits Trend per Active. Employee (2006

- 2010).....................................23 Table 8 -PortAuthorityBenchmarkingAmongPeers, Aviation ......................................................................25 Table 9- PortAuthorityBenchmarkingAmongPeers, TB&T ...........................................................................25 Table 10 -PortAuthority BenchmarkingAmongPeers, Port Commerce ........................................................26 Table 11 -PortAuthorityBenchmarkingAmongPeers, PATH.............................................................:...........26 Table 12- "Add-on" Compensationfor Non-Represented & Represented Employees (2010)
.....................27 Table 13- Existing "Add-on" CompensationPrograms for Non-Represented Employees
..........................27 Table 14 -Trendsin EmployeeBenefit Expenses (2006- 2010) .........................................................................29 Table 15 -BreakoutofHealthBenefitExpenses byEmployee Type (2010)......................................................30 Table 16- PortAuthority HealthBenefit Contribution vs. States ofNY and NJ.............................................31 Table 1:;:- Expected Savings from Health CareInitiatives..........................................,........................................31 Table 18 -PaidTime Off and Cash-OutPolicies ofPortAuthority vs. States ofNY & NJ.............................33 Table 19- Top 10 Overtime Recipients, Public Safety (2010) ..............................................................................36 Table 20- Public Safety Overtime (200j)- YTD Nov2011) .................................................................................36 Table 21- PeriodicWTC EAC Comparison (Dec 2006- CurrentEstimate) ....................................................37 Table 22 -PeriodicWTC EAC Comparison (Dec 2006- Nov 2008) ..................................................................39 Table 23- PeriodicWTC EAC Comparison (Nov 2008- CurrentEstimate) ....................................................40 Table 24- WTC CurrentEstimate and PotentialExposure ................................................................................42



### N/\VJGANT 3Phase I Interim Report to the Special Committee of the Port Authority of NewYork and NewJersey

Figures Figure 1- PortAuthority Key Historical Milestones...........................................................................................13 Figure 2- Operating Cash Flow Available for InvestmentinFacilities (2001

- 2010) ....................................14 Figure 3- StaffingAllocation Trend (2001- YTD Nov 2011) .............................................................................21 Figure 4 -Average Employee Base SalarybyPublic Agency & Authority (2010) ...........................................24 Figure 5 -Top25 EmployeesAverage Base Salary byPublic Authority (2010) ...............................................24 Figure 6- Number ofNon-Represented EmployeesbyEmployee Group

.........,............................................28 Figure 7- Average Cost ofVacation Day Exchange & Banking ofDays, per Employee (2006 -2010)

........32

N/\V I Gi\ NT 4Phase I Interim Report to the Special Conunittee ofthe Port Authority of New York and NewJersey



### I. EXECUTIVE SUMMARY The Port Authority of New York and New Jersey (the "Port Authority") is a complex organization, comprised of billions of dollars of vital infrastructure and transportation operations as well as significant real estate holdings. Navigant Consulting, Inc.'s ("Navigant") preliminary review revealed a challenged and dysfunctional organization suffering from a lack of consistent leadership, a siloed underlying bureaucracy, poorly coordinated capital planning processes, insufficient cost controls, and a lack of transparent and effective oversight of the World Trade Center (the "WTC") program that has obscured full awareness of billions of dollars in exposure to the Port Authority. The organization is at a crucial crossroads. The Port Authority must re-affirm its core mission, and support it with a viable long range strategic and capital plan and an organization with renewed focus on operating efficiency and effectiveness, in order to sustain its relevance as a primary contributor to the economic growth of the region in the 21st Century. A significant undertaking will be required including both organizational and financial realignments to properly position the agency to address the challenges inherited by the recently appointed leadership. The following represents certain preliminary findings associated with the Phase I report commissioned by the Special Committee of the Board of Commissioners of the Port Authority at the requestof the Governors of NewYork and New Jersey.

PRELIMINARY ORGANIZATIONAL DESIGN 

### & OPERATIONAL ASSESSMENT 

### {- The PortAuthority must co11duct a mea1ti11gjul top-to-bottom orga11izatio11al redesign focused 011 operati11g efficieltcies a11d rooted i11 clearly deji11ed roles a11d respo11sibilities, tra11sparmcy, accomttability, a11d alig11ed i1tce11tives

• The Port Authority is a long standingbureaucracy that is inherently resistant to change, lacks effective collaboration betweenits strategicbusinesses, and would benefit from the effective development of a shared support services function. • Promotionwithin the organizationis primarilybased on seniority, with little evidence of advancement or compensation being tied to performance. As a result, the organization has a concentration oflong tenured senior and middle managementemployees.
• The magnitude of growth in size and cost of the security apparatus warrants an in depth review ofits efficiency and relative effectiveness, as is currentlybeing conducted.
• Overtime and other forms of "add-on" compensation resulted in an additional $20,559 per employee in2010. Overtime expenses alone topped $85 million in 2010. • Total "add-on" compensation, when combined with all other benefits, results in incremental average cost per employee equivalent to approximately 70% of base salary,
a relatively high fringe benefitrate. • 93% of employees make no contribution to their health care; by contrast, 100% of New York State and NewJersey State employees contribute to health care. • Total cost of compensation and benefits for the average active Port Authority employee is estimated to exceed $143,000 annually.

N/\VIGANT 5Phase I Interim Report to the Special Committee ofthe Port Authority ofNewYork andNewJersey

• In addition to the scrutiny and curtailment of rapidly growing "add-on" compensation and benefit costs, represented labor contracts (and the current application of related practices) merit a detailed review with consideration of potential modifications to work rules to remove impediments to productivity and efficiency gains.

INITIAL COST REVIEW OF 

### WTC PROGRAM 

### --} WTC costs have gmwu significantly and gross costs will likely exceed approximately $14.8 

### billion, au increase of $3.8 

### billion since the last forecast in 2008. 

### The Port Authority's net funding obligation has gmwn from approximately $6.0 

### billion to approximately $7.7 

### billion, before consideration of additional potential net cost exposures of approximately $800 

### million

• The Port Authority was unable to produce supporting detail and source documents for the growth in cost estimates previously reported by prior Executive Directors to the Board of Commissioners and the Governors. Moreover, prior budgets for the WTC project did not include estimated tenant improvement and leasing costs associated with the commercial 

### (i.e., at One yY<,Jrld Trade Center) and retail space at the WTC, thus understating the expected cost atcompletion. • Total project costs have grown significantly from a previously reported $11 billion to approximately $14.8 billion, a $3.8 billion increase since the 2008 reforecast. Moreover, Navigant has identified additional potential exposures of approximately $1 billion that must be mitigated by the Port Authority to avoid further escalation in gross program costs. • The gross cost increase of approximately $3.8 billion is primarily driven by: (i) the scope evolution of the WTC Transportation Hub ("Hub") in response to the mandate to open the National September 11 Memorial and Museum (the "Memorial") by September 11, 2011, (ii) anticipated allowances to commercialize One World Trade Center ("1 WTC") and the retail spaces, (iii) projects performed by the Port Authority on behalf of thirdparties at the site 

### (i.e., related to the Memorial, existing subway operations, the campus security plan, and the Performing Arts Center), as well as, (iv) increases in financing and insurance expenses. • Exposure to third-parties (where the Port Authority has performed work for other parties and expects to be reimbursed in the future) now total an estimated $1.6 billion and represent the primary area of cost escalation since the 2008 reforecast. The most notable exposures are seen in: (i) the proposed Memorial project (which, by some estimates, has grown to a total project cost of approximately $1 billio11), (ii) the $300 million campus security plan developed by the City of New York, and (iii) the $200 million ofworkrequired to physically supportthe anticipated Performing Arts Center at the site. Assuring the collectability of these funds, particularly in instances such as the Memorial where funding obligations are already in dispute, mustbe a keypriority ofthe Port Authority. In the face of uncertainty of collections, the Port Authority should enforce strict controls and curtail development ofnon-essential third partyrequests.

N 1\V I GA i'-l T 6Phase I Interim Report to the Special Committee ofthe Port Authority of NewYork and NewJersey

• The Port Authority has significant, additional, potential cost risks 

### (i.e., above the $800 million identified in the Navigant report) relating to contingent financing commitments associated with otherWTC projects. • The Port Authority must implement enhanced transparency and accountability protocols to ensure the WTC redevelopment is completed without further costoverruns. Roles, responsibilities, and oversight need to be re-evaluated as the WTC program evolves from construction execution to that of an operating asset ofthe agency. • The post traumatic effect from September 11, including the loss of 84 employees, cannot be underestimated. Nonetheless, in the face of this tragedy long-tenured, dedicated, career service professionals provided interim stability. However, in the course of the next decade the Port Authorityhas been consumed with the additional responsibility for the rebuilding of the WTC. The opening of the Memorial represents an opportunity to restore the Port Authority's focus on its primary mission.

PRELIMINARY CAPITAL PLANNING ASSESSMENT
-¢- 

### The PortAuthorityneeds to align its capital strategy with its mission and objectives

• Exposure to debt has more than doubled over the past ten years, from approximately $9.1 billion in 2001 to approximately $19.5 billion at the end of 2011, and future cash flow from operationsalone is not sufficientto fund its ongoing capitalprojects. • The Port Authority has expanded beyond its stated mission as a transportation infrastructure organization and, by fate or design, has also become a major real estate developer and asset owner with investments that dwarf its past holdings. The Port Authority must structure its organization, use its internal resources, and, as appropriate,
use its private sector prowess. • The capital planning and execution function lacks a clear leader, does not have consistent reporting mechanisms, and fails to effectively address the challenges facing the Port Authority. There is a lack of proper accountability for development, construction and asset management to the Executive Director. A full review of organizational design of capital planning and implementationis warranted. 

### II. NATURE OF ENGAGEMENT & 

### SCOPE In August 2011, inresponse to a PortAuthority requested, and subsequently approved, toll and fare increase for its bridges and tunnels, and the PATH system, the Governors ofNew York and New Jersey requested a comprehensive review of the Port Authority. Consequently, in September 2011, the Port Authority established a Special Committee of the Board of Commissioners (tl1e "Special Committee") to retain independent consultants and advisors to conduct a full review of the Port Authority's past and current governance, and management practices (the "Review"). Pursuant to an agreement dated as of November 23, 2011, the Special Committee retained Navigant to assist the Port Authority in readying the requirements of the Review. The broad scope ofthe Review is to include butis not limited to the following:

7Phase I Interim Report to the Special Committee ofthe Port Authority of New York and NewJersey

• A comprehensive analysis of the Port Authority's ten-year capital plan (the "2011 Capital Plan"), in an effort to reduce the size and cost of non-revenue producing projects, reprioritizing existing projects and establishing new priorities, and the most effective way to finance the same; • A thorough review of the Port Authority's capital projects and spending over the past ten years to determine the causes and full extent of, as well as potential remedies to address, costescalations ofthe PortAuthority's projects, with a focus onthe WTC site;
• A top-to-bottom review of the Port Authority's organizational structure and effectiveness, staffing levels, compensation, benefits, and financial management, including accounting, audit, financing, consulting and other contractual practices and agreements, all done to further lower costs and increase efficiencies within the Port Authority; and • Establishment of a Project Management Office ("PMO") to coordinate activities associated with the Review. In addition to Navigant, the Port Authority also engaged Rothschild, Inc. ("Rothschild") to assist in meeting the requirements of the Review. Rothschild's focus is to advise the Port Authority on evaluating effective financing strategies ofthe existing and new capitalpriorities. Navigant's engagementis· divided into two phases ("Phase I" and "Phase II"). Pursuant to the engagemenJ;

**t~rms** with the Port Authority, the scope of Phase I consists of the , following:

• Establishment and staffing of a PMO which would coordinate activities with regards to Navigant's scope ofwork in Phase I (as well as oversight, coordination, assimilation and integration ofrelated work streamsperformedby third parties);
• Preliminary organizational design and operational assessment focused on a review of compensation and benefit cost structures; • WTC costreview in consultation with the Special Committee; and
• Initiation of capital projects assessmentin consultationwith the Special Committee. Pursuant to the engagement terms with the Port Authority, the scope of Phase II of Navigant's engagementwill include the following:

• PMO Activities

- Direct oversight, coordination, assimilation and integration ofPhase II activities from bothNavigant and third party consultants or advisors as appropriate;
• Organizational and operational assessment of the Port Authority for focus areas identified in consultation with the Special Committee; and
• Completion ofcapitalprojects review in consultationwith the Special Committee. The purpose of this report is to deliver Navigant's interim findings and recommendations with regards to the three identified work streams inPhase I, subjectto the qualifications of

### Appendix

- C. Further details on the anticipated Phase II scope ofwork canbe found in 

### SectionX.

N/\VIGt\NT 8Phase I Interim Report to the Special Committee ofthe Port Authority of New York and NewJersey

III. GENERAL

### APPROACH Navigant conducted an initial meeting with the Special Committee and select members of Port Authority management in early December 2011. At that time, an information request was submitted to the Port Authority addressing the specific areas identified for focus in Phase I as well as providing additional information that will be useful in Phase II. To date, Naviganthas reviewed numerous documents from the Port Authority. In addition, Navigant has conducted many meetings and interviews with all levels of Port Authority employees as well as certain members ofthe Board of Commissioners and the Special Committee.

COMPENSATION & BENEFITS REVIEW Navigant conducted initial meetings with the Port Authority's ChiefAdministrative Officer and Human Resource departments. Subsequent to the meetings, information requests were sent in order to facilitate the review of key documents and other pertinent information. Navigant reviewed multiple documents, conducted numerous in person and telephonic interviews as well as performed ·detailed analyses ofbase pay, overtime, "add-on" compensation, healthcare costs, and other benefit.analyses. The findings of these analyses were used in a benchmarking review using selected public and private peer groups.

INITIAL COSTREVIEW OF THE WTCPROGRAM Navigant reconstructed the historical costs of the WTC program using the chronology of periodic Port Authority presentations by prior Executive Directors and management to the Board of Commissioners, project cost reports current as of October 2011, related documents, and the findings of interviews to provide the Special Committee with the analysis of past spending at the WTC site. Furthermore, Navigant preliminarily and independently analyzed the Port Authority's estimated costto complete for its reasonableness.

PRELIMINARY CAPITAL PLANNING ASSESSMENT Navigant conducted meetings with key Port Authority staff involved in capital planning and began preliminary analysis of its organization and processes. In addition, Navigant compiled various reports of the Port Authority into a single database that allowed for analysis of the composition of the 2011 Capital Plan. Navigant also reviewed the projects in the 2011 Capital Planby classification, to better understand the amount, maturity and priority ofthe portfolio of capital projects. 

### IV. BACKGROUND The Port Authority has endured significant adversity over the last 20 years. From the WTC bombing in February 1993 to the September 11 terrorist attacks, the Port Authority has always responded swiftly. After the February 1993 bombing, the Port Authority restored the WTC to full function within a remarkable two month time span. However, the devastation and destruction of the September 11 attacks were unprecedented. The loss oflife included the Port

N/\VlCANT 9 ,,' •'Phase I Interim Report to the Special Conunittee ofil1e Port Authority ofNew York and NewJersey

Authority's Executive Director and 83 of its employees, causing a significant emotional toll on the psyche of the organization. The events of September 11 became a patriotic rallying pointto demonstrate to the world that New York, the nation's largest city and heart of its financial sector, could respond and rebuild in the face of this adversity, in defiance of the intended intimidation and threatby the terroristculprits. The Port Authority accepted the monumental and crucial responsibility of what has now become the symbol of the country's resolve

- to rebuild the WTC. The events of September 11 placed an unexpected and tremendous burden on the Port Authority, consuming considerable resources and attention in support of the redevelopment efforts. The distortive impact of this event has created a ripple effect that has been felt throughout the organization a decade later, including tumultuous changes in its leadership, intensive focus, and dedication to one of the largest infrastructure and development projects in the country, as well as extraordinary growth ofits security apparatus. Consequently, as the scope and design of the WTC have evolved, particularly inresponse to the national symbolic objectives and security concerns that have permeated the development, the. required costs of rebuilding have correspondingly expanded. The objective of completing the Memorial by the ten-year anniversary of September 11 became a public mandate to reflect'the profound national symbolism of the WTC's timely resurrection. To meet this timeline, the Port Authority had to incur significant costs related to the acceleration of the WTC construction program. The. level 6£ dedication by the Port Authority, from daily involvement of certain members of its Board of Commissioners, to on site construction personnel, has been unwavering. By the time of its completion, in addition to third party funding, the Port Authority will likely spend over $7.7 billion dollars of its own capital in this historic endeavor. The recent opening of the Memorial on September 11, 2011 marked the end of an extraordinarily difficult decade for the agency and the beginning of a new chapterinits history. Given the strong leadership evidenced by the current Governors of New York and New Jersey, and their appropriate and intense focus on responsible government, increased transparency, organizational efficiency and fiscal responsibility, the Port Authority now has a window of opportunity to drive the transformational changes fundamental to addressing the challenges of the organization. With the relatively recent appointments of a new Chairman, Vice-Chairman, several Commissioners, Executive Director and Deputy Executive Director, the Port Authority has a reinvigorated focus. The organization's new leadership appears intent on driving the change necessary to best position the Port Authority to meet the challenges of the 21st Century and to progress from its "business as usual" approach. A major theme in this endeavor is increased transparency and accountability throughout the organization. This is evident by the recent initiatives already undertaken by the Board of Commissioners, under the leadership of the new Chairman, includingbutnot limited to:
• Appointment ofnew, independent auditors; • Focus onimprovements in the capital planning and projectmanagementprocesses;

N/\VICANT 10Phase I Interim Report to the Special Committee ofthe Port Authority ofNewYork and NewJersey

• Strengthening of the Port Authority's internal Enterprise Risk Management System, permitting early intervention by the Board of Commissioners through proactive issue identification; • Review ofpolicies and procedures in order to address growing overtime expenditures;
• Pursuit of benefit program reform including health care contributions, vacation exchange and pension design; • Demonstration of its commitmentto full transparency through the initiation of complete disclosure on compensation of all employees; • Creation of an insurance working group to better analyze and improve upon the Port Authority's currentriskmanagementpolicies; • Fully embracing the top-to-bottom organizational review being facilitated by Navigant and Rothschild in pursuit of actionable interventions to drive operating and capital deployment efficiencies and developing ways to enhance the financing of its 2011 Capital Plan; and • Approving preliminary operating and capital budgets for 2012

**exp~essly** subject to any measures adopted by the Board of Commissioners as a result of the Special Committee's review. This interim report is being issued in response to limited areas of initial inquiry that the Special Committee ofthe Board of Commissioners has mandated.



### V. PORT AUTHORITY OVERVIEW The Port Authority is a complex organization, now employing over 6,900 people and generating revenues of almost $4 billion. The PortAuthority's currentmissionis defined as follows: 

### "To identify and meet the critical transportation infrastructure needs ofthe bi-state region's businesses, residents, and visitors; providing the highest quality, most efficient transportation, and port commerce facilities and services that move people and goods within the region, providing access to the rest ofthe nation and to the world, while strengthening the economic competitiveness ofthe New York-New Jersetj Metropolitan Region". The Port Authority has a vast array of asset holdings segmented into aviation, port commerce, PATH 

### (i.e., rail transit), tunnels 

### I bridges 

### I terminals, the WTC, and various real estate development assets as identified in Table 1.

H/\ViCANT 11Phase I Interim Report to the Special Committee ofthe PortAuthority ofNewYork andNewJersey

Table 1- Port Authority Core Functions



# ..
AVIATION M::lnages & operates NY I NJ airports M::lnages related security apparatus Manages operation & rralntenance contracts for JFK & EWR fv1anages parking contracts M:mages utility and energy contracts Develops & maintains passenger terrrinals Mahtains runway infrastructure
PORT COMMERCE Handles leasing & lease adninistration Manages related security apparatus Aanning & development alternatives for land use Oversees capital prograrrs Including waterway development lv'anages NY Greenville Cross Harbor RaJ! Freight Program lv'anages developm:mt of new MOTBY
PATH lvlanages 24f7 operation of trains, passenger services and rail yards lvlanages related security apparatus 1111anages aU of PATH assets & Infrastructure including railcar fleet, power, signals & corrrruter services Delivery of capital program Safety & Security program rmnagement Manages

**a~** revenue prograrrs {e.g. ,fare collection, & vendor contracts) TUNNB..S, BRIDGES AND TERMINALS Operates all FbrtAuthority tunnels, bridges & terninals )v1anages

**r~lated** security_apparatus Traffic management of all velicular crossings, bus terrrinals and pedestrian flows Emergency response at all tunnels, bridges & terninal assets

·

**:~Au-iage~** and staffS cash !oll collection booths and all electronic payment systerm M::lintenance of all TB&T infrastructure Delivery of capital program WORLD TRADECENTER Development, design, construction & coordination of WTC site In accordance with rryriad of deve!oprmnt agreements & stakeholders {MTA, NYSOOT, Silverstein Entitles & Affiliates,

**1\11etn:~rial,** etc.) lvlanages security apparatus M::lnages retail and tenant leasing of 1 wrc Design & construction ofwrctransportation HUB 1 WTC O:mstructlon Vehicular Security Center ConYOOn Site infrastructure Construction of Seplerrber 11 merrorlal Coordinate the design and construct!on of SAtowers 2,3 & 4 PerforningArts Center {"PAC')
REAL ESTATE DEVB..OPMENT Leases & manages over 1.1 nilllon sq ft In NY & NJ Significant real estate owner and developer Works with state deve!opm:mt agencies in bringing underutilized deve!optn3nl industrial sites to shovel ready status Once online, the Fbrt Authority will manage leasable space of approximately 3 nilllon square feet as well as 0.5 trillion square feet of retail space at the WTC JFKA!rport LaGuardia Airport New arkAirport Stew artAirport Teterboro Airport

Howland Hook lvlarine Terrrina! I Fbrt Ivory Brooklyn Fbrt I Red Hook FbrtNewark Fbrt Bizabeth FbrtJersey Greenvme Yard

NY Stations 9th Street 14th Street 23rd Street 33rd Street Christopher Street WTC

Holland Tunnel Lincoln Tunnel George Washington Bridge Bayonne Bridge Goethals Bridge Outerbridge Crossing NJ Stations Exchange Race Grove Street Harrison Hoboken Journal Square

Fbrt Authority Bus Term'nal GeorgeWashington Bus Station

1 World Trade Center HUB 9/11 1\11etn:1rial & M.Jseum Central Oliller Rant

Newark Legal & Conm.mlcation Center Teleport Essex County Resource Recovery Facility Bathgate hdustrial Park hdustrial Park at Btzabelh Fbrt Authority Bus Terninal Air Rights M:lynihan Station In addition to its responsibilities related to two tunnels, four bridges, five airports, six seaports, and the PATH systemthe Port Authority currently:

• Manages over 1 million square feet of leased space in 11 facilities; • Manages a 100-acre high-techbusiness park in StatenIsland; • Owns multiple industrial parks; • Owns and serves as developer oftwo large waterfrontprojects; and • Owns Essex CountyResource Recovery (NJ's largestwaste-to-energy facility).

N/\VlCANT 12Phase I Interim Report to the Special Committee of the PortAuthority ofNew York andNewJersey

Once online, the Port Authority will manage leasable space of approximately 3 million square feet as well as 0.5 million square feet ofretail space at the WTC. 

### Observations & 

### Findings

**~** 

### The PortAuthority infrastmcture continues to age and deteriomte The Trans-Hudson bridges and tunnels were built over 70 years ago. While many facilities at the airports and ports were constructed more recently, much of that infrastructure also dates back half a century or more (Figure 1). Going forward, the Port Authority facilities will require significant capital investmentto maintain, secure, and enhance its assets.

Pori Authority

Founded

1921 Goethals llrldge 1929

llollandTUnn<>l 1921 Figure 1 - Pol't Authority Key Historical Milestones

George Washington

Bridge 1931 Part Lincoln Newark AIIIhadty Tunnel Airport BusTennlnal 1931 1947 1950

LaGuardia Alrpo.rl 1947 

### "" Airport 1948 50 YEARS

Wotld Trade Cantor 1910

Port Elitabelll

19S2 **Broo~lyn** Madna Tetrn!rlal

1981 EsoaxCounly Resource Comor 1990

1993 WTCTerrarlst

Bombing ExchangePlace &WTC PATH Roo!"'ned

2003



## ,.,. 9/11 Terrorist Attiicks MOTilY 2010



### '"" NeWWTC· Col!struotion 9/11 t!emorlal

2011

2011 PoriAulhor!ly

9D!h Ann!vorory Overthe 

### neid ten years, the Port Authority has budgeted approximately $25.1 billion for capital spending. Of this amount, approximately $15 billion has been earmarked for state of good repair, security, mandatory capital expenditures and systemenhancementprojects.

**~** 

### Historically, revenue and operating cash flow has been primarily generated by Port Authority tunnels, bridges, and airports When investments in facilities are taken into consideration, PATH, Ferry Services, and Port Commerce have required significant allocations of funds (Table 2). Table 2- Cumulative NetIncomebyLine Department (Inception- 2010)

lncapt!otl • 20101: TUtltle!s, Bridges &Terninals $ 4,544.5 $ 19,126.8 8,672.5 $ 1,650.6 $ 1,917.1 1,337.6 (77.4) 

# ' 5,626.6 

# ' 8,803.8 $ 4,259.3 PATH 5,493.4 2,250.9 5,154.9 902.0 1,611.0 812.1 (1,179.0) (5,050.1) (3,806.0) (9,299.4) Ferry Servk:e 134.9 1.8 44.6 2.4 10.4 13.0 (3.7) (1!4.9) (45.2) (180.1) Access to Regions Core ('ARC') 131.7 79.4 2.5 •.8 (84.7) (79.4) (211.1) Air Terninals 13,400.7 37,243.6 22,077.3 1,907.7 5,815.5 2,231.4 (3,187.8) 8,399.6 13,258.7 (142.0) Pod Colll"mrce 3,617.1 4,176.0 2,574.2 217.5 1,438.3 780,4 (35.7) (798.7) 1,384.3 (2,232.7) Econonic I Waterfront Deve!oprrenl 480.2 1,912.1 1,689.7 25.1 269.0 25.4 (2.4) (94,7) 197.3 (282.9) World Trade Center 3,601.5 7,193.0 4,010.6 299.7 749.2 711.9 (1,122.9) 2,544.6 2,882.7 (718.8) PA hsurance Captive Entity 0.6 8.6 (11.1) 3.1 (8.0) (8.0)· Regional Developrmnt Ftograrrn 1,322.9 129.3 1,068.4 658.4 (1,856.0) (129.3) (1,452.1) O!her 1,477.1 2,062.3 497.8 1.3 1,563.1 1,564.5 87.4 !Total $ 34,204.0 $ 73,967.2 $ 44,938.7 $ 5,0(}4.9 $ 12,881.4 6,563.1 $ (5,600.9) $ 10,187.9 $ 24,023.5 $ {10,180.6>1 Notes: 1) Fimmcials areprovided from the date aparticularPortAuthorityasset started to generate financial result. 2) PassengerFacility Charges ("PFCs") were established in1992 and accountfor the vast majorihjofPFCs, Grmtts & Otlter. 3) Operating Cash Flow ("OCF") reflects Net Income I(Loss) plus D&A, Net Interest Expense, and excludes PFCs, Grants & Other, which
aregenerally not consideredoperating in nature.
N/\VJG/\NT 13Phase I Interim Reportto the Special Committee of the Port Authority of New York and NewJersey

-¢-- 

### During the last ten years, Port Authority cash flows were insufficient to fund the capital expenditurep1'Dgram In the last ten years, the total outstanding debt of the Port Authority has increased from approximately $9.1 billionin 2001 to approximately $19.5 billion as ofDecember 2011, mainly in support ofthe capital program (Table 3 and Figure 2). Table 3- SummaryFinancialTrendsbyYear (2001- 2011)

Fiscal Year: FY 2001 $ 311.4 $ 2,742.9 $ 1,894.4 $ 149.8 

# ' 442.8 

# ' 193.7 $ (153.6) $ 215.6 

# ' 698.7 $ 387.3 $ 9,059 FY 2002 1,522.7 3,258.0 1,839.1 159.9 435.2 23&9 (155.1) 740.0 1,259.1 (2617) 9,335 FY 2003 1,918.5 3,446.3 1,788.2 149.1 521.1 277.8 {172.9) 883.0 1,509.0 (409.5) 9,756 FY 2004 1,275.2 2,864.8 1,846.4 139.9 614.2 332.8 (220.1) 151.5 878.5 (396.8) 10,961 FY 2005 1,237.6 3,000.7 1,952.3 139.0 686.7 316.8 (256.0) 161,9 909.4 (328.1) 10,984 FY 2006 1,589.3 3,038.5 1,974.7 140.0 724.3 319.9 (639.0) 518.6 923.8 {665.5) 12,330 FY 2007 2,272.9 3,191.6 2,071.5 180.4 691.9 246.9 (1,301.9) 1,302.9 939.7 (1,333.3) 12,751 FY 2008 2,375.2 3,987.4 2,282.4 183.2 715.5 496.6 (584.3) 894.1 1,521.8 (853.4) 13,037 FY 2009 2,621.5 3,771.9 2,253.3 202.1 786.9 329.3 (646.1) 846.4 1,316.6 (1,305.0) 14,450 FY 2010 2,966.0 3,689.7 2,411.1 190.0 865.5 499.3 {623.2) 346.8 1,088.5 (1,877.5) 16,309 FY 2011E 3,110.0 3,815.3 2,377.1 210.6 944.1 208.7 (654.1) 728.9 1,227.6 (1,882.4) 19,502 !Total 

# • 21,200.3 $ 36,807.0 $ 22,690.6 

# ' 1,843.9 7,428.2 

# ' 3,460.7 $ (5,406.3) s 6,790.0 12,272.5 

# ' (8,927.8} $ 1s,5o2.1 I Notes: 1) A significantportion of investments infacilities is attributable to the WTC. 2) PassengerFacility Charges

**("Ff~Cs")** were establisl1ed in 1992 and account for the vast majority ofPFCs, Grants & Other. 3) Operating Cash Flow ("OCF") reflects Net Income I(Loss) plus D&A Net Interest Expense and excludes PFCs, Grants & Othet,'whicli
aregenerally not consideYedoperating in nature.

Figure 2- Operating CashFlowAvailable for Investmentin Facilities (2001- 2010)

3,500 3,000

- 2,500 2,000 1,500 1,000

500

FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 -+-Investmentin Facilities , ...**,,~?"'Operating** Cash Flow ' Gap funded by

# I

capital markets access & other sources ! ;'' ,,,... r\

**-""~"-"{;:"'""""'""""""'':~·"'"~~;.**

FY2009 FY2010 FY2011

-¢-- 

### While future opemting cash flow is expected to be bolstered by revenue increases primarilyfrom scheduledfares,fees and toll increasesfrom tunnels, bridges and PATH, continued access to capital markets willlilcely be required Over the next ten years, the Port Authority is projecting Net Operating Revenues (i.e., defined by the Port Authority as gross operating revenues minus operating expenses), to grow from approximately $1.2 billion in 2011 to approximately $3.0 billion in 2020, a compounded annual growth rate of approximately 9.3%. Furthermore, the Port Authority is projecting an operating

N/\VJ CAI'H 14Phase I Interim Report to the Special Committee ofthe Port Authority ofNew York and NewJersey

margin improvement of approximately 50% over the same period, driven mainly from scheduled fare and toll increases in 2014 and some modest growth in facility traffic. However, given the capital program currently presented by the Port Authority, continued borrowing in

· the capital markets is expected to be required, with outstanding indebtedness forecasted to rise

from $19.5 billion in 2011 to $25.2 billion by 2020. 

### Pteliminary Recommendations & 

### Next Steps );> Detailed contribution analyses for revenue and non-revenue producing projects need to be conducted on all Port Authority business segments to determine potential revenue enhancements and cost savings initiatives to improve cash flow. );> The long range forecast model assumptions should be reviewed and analyzed to better understand the validity of assumptions supporting expected margin improvement over the next tenyears. );> Sensitivity analyses should be conducted around "best case", "worst case", and "likely case" scenarios for the entire portfolio of projects to understand related financial impacts of the 2011 Capital Plan, once finalized by the Special Committee and Board of Commissioners. 

## >- The Port Authority should develop a comprehensive analysis of state of good .repair .("SGR") projects to understand capital requirements for transportation infrastructui-e integrity. 

## >- Return on asset and/or return on invested capital concepts should be considered in evaluating feasibility of future capital projects, as well as the allocation of capital across the various operating segments. 

### VI. PRELIMINARY GENERAL ORGANIZATIONAL OBSERVATIONS While the completion of a comprehensivereview of organizational design and effectiveness will be addressed in Phase II, the following preliminary observations are warranted:

**~** 

### The Port Authority has expanded its ateas ofinvolvement in support ofeconomic development over the last seveml decades, which continues to evolve While the Port Authority's tunnels, bridges, and airports continue to contribute the vast majority of cash flow within the organization, over recent decades the Port Authority has become a significant real estate developer and asset manager with its own expansive security force, a posture that warrants further evaluation as the demands of the WTC development approaches conclusion. For example, the Port Authority is also the owner of a resource recovery facility, which converts waste to energy. Furthermore, in large part as a reaction to the WTC bombing in February 1993, and the events of September 11, the Port Authority has assembled a sizeable security apparatus including a police force numbering over 1,700 employees. As the Port Authority moves into the 21'1 century, it is imperative to assure alignment with industry trends in technology, commerce, and other areas of growth in order to ensure its



### N/\VICANT 15Phase I Interim Report to the Special Committee of the Port Authority ofNewYork and NewJersey

competitive advantages to stimulate further economic development and prosperity in the region.

**~** 

### The Executive Di1'ecto1' position, the defacto CEO, has tumed ove1' seven times in the last ten years With such turnover at the Executive Director level, it is difficult for any significant strategic initiatives, goals and objectives to be realized (Table 4). Organizations typically become inwardly focused and tend to run adriftin the absence ofleadership continuity. Table 4- Executive DirectorTenure

1 Patrick J. Faye 2 Christopher 0. Ward 3 Anthony Shorris 4 Kenneth J. Ringler, Jr. 5 Joseph J. Seym::>Ur 6 Neil D. Levin 7 Robert E Boyle 2011
M CUrrent 2008- 2011 2005-2008 2004-2005 2001-2004 2001 1997- 2001 Additionally, review of the Port Authority organizational structures over the last ten years show a number of significant changes. Capitalplanning and project delivery, for example, had five different "owners" during this period. Capitalplanning and project delivery, a critical area of focus within the Port Authority, has suffered from a lack of consistency in management and · leadership.

**~** 

### The non-appointed senior career services professionals ofthe PortAuthority have an unusually long tenure, averaging24 years of service The senior management organization is very respectful, cordial, and appears to have a high level of dedication and commitment to the Port Authority's mission. In addition, senior managementpossesses a critical knowledge base and skills thatneeds to be transferred through integrated training programs to junior staff. In the absence of appointed leadership continuity driving collaboration and accountability, it is only natural for such a long tenured work force to develop a self-protective culture.

**~** 

### The PortAuthority is a siloed organization With chronic leadership changes, bureaucratic organizations will often inadvertently reinforce the barriers to strategic business unit collaboration, as well as the ability to obtain operating efficiencies derived through shared services. Non-appointed, career service professionals often will adopt strategies that protect control, and perpetuation, of their functional areas of responsibility. The Port Authority resident culture reflects many of the characteristics associated with this phenomenon. Examples include the capital planning process, security apparatus, and the existingWTC construction organization.

N/\VIGANT 16Phase I Interim Report to the Special Committee of the Port Authority ofNewYork and NewJersey

**~** 

### The relatively recent appointments of a new Chairman, Vice Chairman, several Commissioners, Executive Director and Deputy Executive Director, provide the impetus for renewedfocus andgovemance in driving future PortAuthority strategy In the aftermath of September 11, the Port Authority's mission was in large part redirected to the rebuilding efforts around the WTC site. The organizational toll on the Port Authority during the last decade cannot be underestimated. Under the previous Executive Director, trust and confidence between the Board of Commissioners and its executive management reportedly deteriorated; as a result, the Board of Commissioners adopted roles and responsibilities in daily operations and management atypical for a governing board. The loss in confidence was largely ascribable to sentiments by the Board of Commissioners that they were not being timely presented with meaningful and reliable information to make informed decisions. While the response of the Board of Commissioners may be understandable given the circumstances, its new leadership has recognized the importance of restoring an elevated focus on the Port Authority's broader vision, mission and the revitalization of its strategies, supporting policies and oversightas itadvances to meetits challenges. The Port Authority would likely benefit from a meaningful organizational redesign to focus on its strategic business units and cost saving shared services functions. To be successful, entrusted appointed senior leadership needs effective command and control to manage change ·and drive accountability throughout the organization. Career service man:ageinerif must 'Proactively communicate reliable and relevant information in proper context so that appointed leadership is best positioned for effective decision making. Management and represented/nonrepresented employees must collaborate on the manner and means that will allow the Port Authority to operate with the highest levels of productivity and efficiency. Migration from a culture based on tenure to one based on meritocracy willbe essential to its continued success.

**~** 

### The Port Authority is a transportation infrastmcture asset manager and must deploy its capital withproper attention to preservation of infrastructure integrity The capital constraints of the organization may necessitate a top-down budgeting process. However, a comprehensive analysis of need with a standardized method of prioritizing capital spend is equally required. The Port Authority is an asset manager that owns and manages billions of dollars ofinfrastructure and must devote a significant portion ofits capital to support the state of good repair of this portfolio as well as provide for new investments in the system with discipline. A systematic evaluation of needs must be conducted to balance the capital capacity constraints of the Port Authority with the imperatives of the operating businesses, while appropriately providing for contingencies in an aging asset base. In addition, while the Port Authority has made progress in identifying a hierarchy to better manage the stewardship of capital, effective command and control over planning processes and disciplined project delivery mustbe established.

**~** 

### The PortAuthorityneeds tofurther develop tools to drive accountability The Port Authority should consider aligning its key operating departments as strategic business units ("SBUs"). As SBU's, quantifiable metrics should be developed, measured and consistently

N/\VIC/\NT 17Phase I Interim Report to the Special Committee of the Port Authority of NewYork and NewJersey

monitored to drive accountability in achieving the Port Authority's m1sswn and specific operating objectives. The Executive Director and Board of Commissioners are developing a "dashboard" that provides quick feedback and status of financial and operational performance, key initiatives, and capital program delivery.
-¢- 

### The Port Authority's compensation stmctures must be aligned with the mtsswn statementand relatedgoals and objectives to ensure appmpriate targets are achieved Compensation structures need to be aligned throughout the Port Authority organization including management and all levels of represented and non-represented employees. Consideration should be given to adopting "at risk" elements of management compensation that are contingentupon the achievement of operating objectives. 

### VII. PRELIMINARY COMPENSATIONAND BENEFITS ASSESSMENT

SCOPE Navigant has been asked to perform an assessment ofthe organizational design and operations of the Port Authority, with an initial focus on labor costs, including both compensation and benefits. Findings from Navigant's review are meant to provide a framework for recommendations that can ultimately be implemented as a series of parallel• •initiatives
•·...beginning in 2012. The scope of the labor costs assessment included .· beriehinarking compensation and benefits by major job categories and reviewing benefits packages against prevailing practice inthe public and private sector.

METHODOLOGY The benchmarking exercise included review of compensation and benefits for the State of New York and the State of New Jersey and significant public authorities in the New York City metropolitan region. In addition, with respect to compensation benchmarking of the Port Authority's four largest line departments, five to seven public sector agencies and five to ten private sector companies were initially identified and reviewed for as potential peer comparables. Keybusiness attributes of each potential peerwere carefully scrutinized 

### (e.g., size of operation, number and age of facilities, operatorvs. infrastructure provider, etc.). Ultimately,
a smaller subset of peer groups was selected for each line department of the Port Authority based onreview ofthese attributes (please refer to Appendix- A for details). To complete the initial review of compensation and benefit costs of the Port Authority, Navigantreviewed numerous documents (including union labor contracts), conducted multiple in-person and telephonic interviews and discussions, as well as performed detailed analyses of base pay, overtime, "add-on" compensation, healthcare costs, and otherbenefits analyses. The following provides Navigant's preliminary observations, findings, and recommendations with respect to (i) employee headcount, (ii) compensation, (iii) benefits, and (iv) represented employee contracts.

NAVI GANT 18Phase I Interim Report to the Special Committee ofthe Port Authority ofNewYork andNewJersey

PRELIMINARY GENERAL 0BSERV ATIONS

• The Port Authority's actualheadcount as of November 2011 totaling 6,913 was relatively flat when compared to the 2001 headcount of 6,954. While the line department and staff services headcount levels have actually decreased, this has been offsetby growth of over 27% in the security function in an apparent protracted reaction to the events of September 11.

• The overall organizational structure of the Port Authority is heavily concentrated in senior and middle management. This structural characteristic in large part is driven by the long-tenured nature of the employee workforce that has been promoted based on seniority and not necessarily merit. In part, the broad middle management of the organization is attributable to the large number of highly skilled engineers required to support its asset management and development responsibilities. As a byproduct of this historical trend, comparison of the average compensation of the Port Authority to its peer group reveals that the Port Authority, when evaluating average employee compensation costs, is at the top of average payranges.

• However, further analysis reveals that the average compensation of the most senior, as well as the top 25 positions within line departments is at the median or below the peer group. Thus, the fact that the average employee compensation

**r~si<;l.es** at or above the Port Authority's peer group is ascribable to the very broad middle and senior management group of the organization, and not the compensation of the most senior personnel.

• From 2006 to 2010, total gross compensation at the Port Authority grew from $629.3 million to approximately $749.3, respectively. Of this amount, base salaries grew from $507.6 million to $581.1 million, a compounded annual growth rate of only 2.7%. However, other amounts of compensation, 

### (i.e., "add-on" compensation) such as pay associated with the vacation exchange program and certain longevity programs grewby compounded annual growthrates of 10.6% and 5.5%, respectively. Overtime, the largest percentage of "add-on" compensation represents 23% of the total base pay for represented employees. Moreover, "add-on" compensation and benefits for all active employees when combined and taken as a percentage of base salary is approximately 70%. These "add-on" compensation costs are relatively rapid growing and tend to obfuscate actualtotal costs per employee being absorbed bythe Port Authority.

• Benefits have increased approximately 35%, from $340.7 million in 2006 to over $458.8 million in 2010, driven by growthin healthcare and the population ofretirees that drives up pension costs and other post employment benefits ("OPEB"). When combined, compensation and benefits per active employee grew to anestimated $143,060 by 2010.

• In an effort to reduce these high costs, the Board of Commissioners is actively pursuing policy changes related to healthcare contributions, vacation policies, as well as "add-on"

N/\VICi\NT 19Phase I Interim Report to the Special Committee ofthe Port Authority of NewYork and NewJersey

compensation and incentive programs. Currentinitiatives being evaluated include, but
are not limited, to: o Increase in health care benefit contributions, which if implemented would result in expected savings over the next four years of approximately $103.8 million.
o Elimination of longevity and unused vacation exchange days payout for nonrepresented employees; based on preliminary review of payroll files, annual costs for these programs were approximately $9.1 million in 2010.

• Itis important to note that the represented labor force, at approximately 68% of total, is the largest part of the Port Authority employee base. The Board of Commissioners recognizes it will be critical to work collaboratively with both represented and nonrepresented employees to improve efficiency and productivity. In furtherance of that objective, expired union contracts are being carefully evaluated not only for unit labor costs and benefits, but also with particular focus on work rule modifications that would be constructive in advancing the efficiency and effectiveness of the Port Authority's operations, prior to collective bargaining negotiations. Phase II of Navigant's engagement, which is expected to be completed by late June 2012, will include an organizational design review and specific recommendations to further enhance the

. actions of the Board of Commissioners. The following interimreport is in response to the

Special Committee's requested areas of initial focus and provides Navigant's preliminary observations, findings, and recommendations with respectto (i) employee headcounttrends, (ii) compensation benchmarking, (iii) benefits benchmarking, and (iv) represented employee's contract considerations.

EMPLOYEE HEADCOUNT The total employee headcount has remained relatively flat over the last decade (from 6,954 in 2001 to 6,913 as ofNovember 2011). 

### Observations & 

### Findings {-- Headcountmix has shifted from line departments and staffservices topublic safety
From 2001 to 2010, line department headcount declined by 4.3% (from 3,279 to 3,139) and staff services, engineering & other headcount declined by 11.9% (from 2,296 to 2,022) (Figure 3). However, public safety headcount increased by 27.1% (from 1,379 to 1,752). The growth in public safety is inresponse to September 11 and heightened security efforts throughout the Port Authority organization.

N/\VI CANT 20Phase I Interim Report to the Special Committee of the Port Authority of New York andNewJersey

Figure 3- StaffingAllocation Trend (2001- YTD Nov 2011)

2001

YTDNov

2011

2,000 1,379

373

4,000 6,000 Total '{Headcount: 6,954

Total Headcount:

6,913

8,000

lifUne Departments ; --Public Safety & Security oStaffServices, Engineering & Other


### -9- PortAuthoritymanages headcount to "authorized" vs. "actual" Managing headcount to an annually budgeted, authorized number (approximately 7,200 in 2006) can result in delayed intervention in a recessionary environment. The Port Authority's actual headcount increased from 6,918 to 7,200, or 4.0%, during the recession of 2008 and 2009 before ultimately declining in 2010. The Port Authority would have benefited from an 1··,
- . .• expedited review and timely adjustment to authoriz(;'d headcount going into the recession

.

.- - .::

**~** ; 1 ' • •• ., However, the adjustment to authorized headcount was not made until 2009, and the actual headcount reduction was not implemented until2010, primarily through retirement incentives (Table 5).Table 5- "Actual"vs. "Authorized" StaffingTrends (2006- YTD Nov 2011)

t''<"c;

**'~"'"'"** ".,>""'='--"'-=:"-'}'"-,'

**~,\-o** ,1c-,J':::.4:;

__ "" ,_

**'Ll"'~"o'oo;** '

-- , '

**~---** ' ,- -NOV



## [# **~**

## In

**qoirs:'~~~;pt ie~~ciJnfi~=~~)~-"'t::** **~,~~ lc~** **,-~~~, ~~~~,:;**  **,~zOost ~**  o:"



## ~QO'C', **~~2oOa~:~,;**20o9, ":'



## ~**·~o1o~.~; ~**  **-~o11,** Total Year End Actual Headcount 61935 6,918 7,200 7,163 6,848 6,913 YOY Change (#) (31) (17) 

## ® (37) 

### @ 65 Total Authorized Staffing 71181 7,128 71127 6,977 6,977 6,777 YOY Change (#) (13) (53) (1) ({1§!1}! (200) ·Actual ·Workfor.ce Greater Than I (Less.Than') Auth. (246) (210) 73 186 (129) 136 : %Variance (4%) (3%) 1% 3% (2%) 2% 

### -9- Productivity levels at Aviation, Tunnels, Bridges and Terminals, and Port Commerce appem· to have incteased since 2001, while PATH appears to have decreased The slight headcount reduction and increased traffic at Aviation, TB&T, and Port Commerce suggests a level ofproductivityincrease, and likely reflects a combination of technology and the fixed aspect nature of individual facility labor requirements. PATH was the only line deparhnent where actual headcount increased during this period, while traffic essentially remained flat, implying lower productivity.

N/\VICANT 21PhaseI Interim Report to the Special Committee of the PortAuthority of NewYork andNewJersey

**~** 

### Redundantsupportservices exist in multiple areas of the organization
A number of areas exist within the Port Authority where certain functions are partially replicated in both line departments as well as administrative departments 

### (e.g., elements of Human Resources, Risk Management, Finance, Technology, Planning & Development, Real Estate and Security). 

### Preliminary Recommendations & 

### Next Steps 

## » Focus onreal-time, actual, as well as authorized, headcount to more proactively manage size oflabor force. 

## » The significant headcount increase in public safety & security should be further analyzed in the context of a special security report being prepared by The Chertoff Group. }> Identify useful productivity metrics to determine appropriate staffing levels for nonrepresented and represented employees. 

## » Review redundant areas of support services to determine the most effective organizational design and identify opportunities for cost savings.

COMPENSATION -.r· Since 2006, the total gross compensation

**increased.fr~in** $629.3 million to $749.3 million (before capitalized labor), a compounded annual growth rate increase of 3.6%. As a percentage of revenue, it has essentially remained flat at 21%. In the same period, base salary has increased from $507.6 million to $581.1 million, a compounded annual growth rate increase of 2.7%. However, longevity and unused vacation exchange days payout grew at a compounded annual growthrate of5.5% and 10.6%, respectively (Table 6). Table 6- Total CompensationTrend (2006- 2010)

Revenue Employee Compensation

Base

Notes:Overlirra Longevity Unused Days Payout Other Additional Corrp. Gross Compensation, before Accruals

As a %ofRevenue Accrued Payroll and Other Accrued (1) Total Compensation, Gross

As a %ofRevenue capitalized Labor, Corrpensalion (2) Total Compensation, Net (on P&L)

As a %ofRevenue $3,038,538
507,623 86,763 11,863 8,851

193 $3,191,626 $3,527,552 $3,552,243
524,927 546,431 575,957 96,025 103,234 88,560 12,290 12,800 14,942 10,567 9,869 12,218

(1) Amounts earned by employees during agiven year thatare not expected topaid during the sameyear. (2) Laborcosts in supporfof capitalproject spending.
N/\VI GANT $3,634,023 3.6%
581,099 2.7% 85,376

**~0.3%** 15,514 5.5% 14,626 .10.6%

22Phase I Interim Report to the Special Committee of the Port Authority ofNew York and NewJersey

In 2010, the average compensation ofPort Authority employees, excluding costs ofbenefits, was $105,416 (base salary of $84,857 plus "add-on" compensation of $20,559). "Add-on" compensation is comprised of overtime, longevity payments, unused vacation exchange days payout, and other compensation together comprising approximately 24% of base salary (Table 7). Table 7- Total Compensation & Benefits Trend perActive Employee (2006- 2010)

Revenue ($in GOO's) Average 8np!oyee Compensation

Base Overtime Longevity Unused Days Payout otherAdditional Corrp.

Total Average Compensation (1) Total Employee Comp. as a% ofRevenue Average Health Benefit per Errployee (2) 3,038,538
$73,197 12,511 1,711

Average Pension, OPES, & Other Benefits Cost per Errployee {3)
**-'-...:""';;.----,~~--,.;;cc;:;,;--..C~~--i::i'**

Total Compensation & Benefits per E"mployee Total Compensation & Benefits Expense per Employee Notes: 1) Calculated before the allocation of capitalized laborandpayrol!.accr,uals 3.6%

3.0%

**~0.1%**

2) Primarily comprisedofhealtlt i11surance, butalso include; "visiol1,

**·d~lttal,** life, mid long-term disability insurance,foractive employees only. 3) Calculated taking tlte total Pension, OPEB & OtherBenefits costa11dapplyiug apro-ratapercentage basedon active employees versus both active and retired. Other additional compensation is comprised of retroactive payments, one-time payments 

### (i.e., those made annually in a lump sum, such as grievance awards, attendance incentives, uniform allowances and lump sum merit increases), and miscellaneous payments such as short term disabilitypayments. The health related benefit costs per employee (excluding retirees) were $23,380 (for detail see Table 15). Pension, OPEB, and other benefits combined to approximately $14,264 (active employee estimate, assuming same costs per active vs. per retired). In the aggregate, the estimated, average, total cost of compensation and benefits for a Port Authority employee was $143,060 (Table 7). In total, approximately 70% of base salary is comprised of "add-on" compensation and benefits (active employees only). 

### Observations & 

### findings -?- 

### The avemge base salaryfor Port Authority's employees, as well as the salaries ofthe top 25 employees, are amongst the highest1·elative to peergroup Except for New York Power Authority, the average base salary of $84,857 for the Port Authority is higher than New York and New Jersey state employees and other peer group public authorities in the metropolitanregion (Figure 4).

N/\VIGANT 23Phase I Interim Report to the Special Committee of the Port Autho1·ity of New York and NewJersey

Figure 4- Average Employee Base SalarybyPublic Agency & Authority (2010)
$100,000 $90,000 $87,725 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $-

Furthermore, the average of the top 25 base salaries of $226,934 at the Port Authority is the highest when compared to the average top 25 salaries of all other public authorities in the metropolitan region (Figure 5). Figure 5- Top 25 Employees Average Base SalarybyPublic Authority (2010) $250,000 $226,934 $213,161 $200,000
$150,000
$100,000

..

$50,000
$-

While the Port Authority seems to be compensated higher than other public peers, it is important to note the complexity of the Port Authority's operations (i.e., operating in transit, construction, asset management, etc.) in comparison to other organizations, such as New Jersey Transit 

### (i.e., only operating in transit). Likewise, the Port Authority believes, due to the complex natnre of the organization, many employees tend to be highly educated and specialized 

### (i.e., engineers, career professionals), therefore commanding higher compensation. In this regard, the New York Power Authority exhibits a similar employee profile (primarily engineering staff), yielding higher compensation, onparwith the Port Authority.

N/\VICANT 24Phase I Interim Report to the Special Committee of the Port Authority ofNew York and NewJersey

**~** 

### The average ofthe top 25 

### base salaries, as well as the salanJfor the seniorposition, at the Port Authority'sfour largest line departments compared to the Port Authority's peergroup (both public authorities andprivate sector companies) reflects that the Port Authority is competitive and tends tofall in the median range The average salary for 

### Aviation line department employees is highest among its peer group, even when compared to the private sector. However, the most senior position, as well as the top 25 salaries, falls between those of their public sector peers, and are significantly below the Port Authority's private sector peers (Table 8). Table 8- PortAuthority BenchmarkingAmongPeers, Aviation

Chicago O'hare (Chicago) 3 Public Los Angeles World Airports (LA) $60,623 GM $326,856 4 Private BAA Airports Lirrited (UK) $59,625 CB) $1,504,661 5 Private Aeroports de Paris (France) $51,020 Chairman & CEO $480,926 6 Public Hartsfield-Jackson

**(~tlanta)** NA NA $221,000 The average salary of 

### Tunnels, Bridges & 

### Terminals ("TB&T") employees ranks second among its peer group. Average compensation for the top 25 highest paid employees, as well as the top position, align in a similar fashion to the average salaries for all employees, and appears to be withinrange ofits peers (Table 9). · Table 9- Port Authority BenchmarkingAmong Peers, TB&T

Port Authorrry of NYNJ, lB&T(NYC) 3 Public MfA Bridge & Tunnel Authority (NYC) R-esident 4 Public New York Thruway Authorrry (Albany) Executive Director 5 Ftivate Cofiroute (France) CB) 6 Public Delaware River Port Authority (Philadelphia) NA NA 7 Private Macquarie Atlas Roads Group (Australia) NA NA Average salaries for employees of the 

### Port Commerce line department are second highest in comparison to the peer group, and the highest excluding North Queensland Port Corp. (a private sector company). However, average salaries for the top 25 highest paid employees, as well as the most senior individual, fall much lower than any of their peers (Table 10).

N/\ViCt\NT 25Phase I Interim Repm"t to the Special Committee ofthe Port Authority ofNewYork andNewJersey

Table 10 -PortAuthority BenchmarkingAmong Peers, Port Commerce

2 $90,954 $144,510 Director $216,320 3 Private Fbrt of Taraunga (New Zealand) $85,926 $206,100 EE#1 $558,807 4 Public Fbrt of Long Beach (LA) $64,176 $160,851 Executive Director $336,692 5 Public Fbrt of Los Angeles (LA) $61,140 $235,706 General tv1anager $307,751 6 Public Fbrt of Corpus Christie (1X) NA NA NA Average salaries for employees of PATH are competitive to the peer group and PATH's compensation is very competitive with the MTA, the operator of the New York City subway system. Due to fare structure, size of operation, and geographical reach, private sector companies were excluded from the peer group (Table 11).

2 3 4 5 6 Public F\.Jblic Public Public Public Public Table 11- Port Authority BenchmarkingAmong Peers, PATH

MfA (NYC) $72,514 $173,902 R-esident $229,000 PATI-l (NYC) $71,654 $141,424 Director and GM $215,020 01icago Transit Authority (Chic8go) $61,772 $152,248 President $198,000 f\A::lssachussets Bay Trans.)\pth. (NV\) NA $121,887 General Counsel $170,523 SE Penn Transit Authority (Phfladelphia) NA NA NA NA Fbrt Authority Transit Corp. (Philadelphia) NA NA NA NA

**~** 

### Overtime, longevity, and unused vacation exchange days payout and other compensation increase base pay by approximately 25% In 2010, average "add-on" compensation per recipient was $22,866 with an average of $20,559 per employee (6,157 employees received some form of "add-on" compensation in a total headcount of 6,848 employees). The Port Authority's "add-on" compensation is a long established practice and is a material contributing cost in overall compensation (Table 12). Over the years, the Port Authority has utilized "add-on" compensation programs, excluding overtime, as incentives (i.e., retention, merit and productivity) to supplement base pay of nonrepresented employees. For example, the "Longevity IIB" program was authorized in 2008 by the Executive Director for non-represented staff with 25 or more years of service in recognition of satisfactory performance and contribution to the Port Authority over time. While management received little or no increase in base pay, total compensation did indeed increase
as a result ofthe program. Longevity I was a targeted retention program offered in 2003, for the purpose of retaining certain key executives post September 11 for at least three years. At inception, the program was expected to last only three or four years and was not intended to become a permanentfeature ofthe compensationplan.

N/\VIGAI'H 26Phase I InterimReport to the Special Committee of the PortAuthority of New York and NewJersey

Table 12- "Add-on" Compensationfor Non-Represented & Represented Employees (2010)

Unused Vacation Exchange Days

Total Headcount (2) Recipients as a% of Total Headcount Add-on Camp. per Employee Notes: 2,193 63% $7,212 4,655 100% $26,847 6,848 90% $20,559

1) Total Recipients does notequal the sum of theparts above; many employees receive multiple types of"add-on"compensation and ·wotlldbe double counted bysimple sum alone. 2) Total headcount is ayear-end numberand can be less tlmn total recipients, since headcount fluctuates during the year. 100% of the represented employees have material elements of "add-on" compensation, largely ascribable to cumulative terms and work rules embedded in union contracts. Approximately 60% of non-represented employees also benefit from these programs (Table 13). Most of these programs emerged over the course of the last decade (see Appendix

- B for detailed descriptions of various compensation programs). Ongoing costs will be further evaluated during Phase II. Table 13- Existing" Add-on" Compensation Programs for Non-Represented Employees

. Rfogram

- •'Rrogram' ,- , , , Year of ·,

**Active~** ,,-' ' T)rpe' '; ,'- Dilscr.iptio'n · 

## i ·. ,--,,,;': ,., ,
**',lncep~iori'** Participants Merit • FICA Benefit1 1969 14 • Contractual Death Benefit 1989 1 • Management Excused Days 2001 17 • High Potential Program 2008 204
• High Potential Program 2009 296 Career Service • Service Incentive Confidential Clerical 1993 43 • Longevity Police Superior n/a 22 • Career Service Plan 40+ 2003 5 • Career Service Plan 25+ Longevity II 2008 642 Retention • Death Garrble

- GTLII 2001 24 • WTC Retention Program 2000 47 • Parity I Retention Program- Longevity I 2003 3 Productivity • Vacation Exchange 1975 533 • Cumulative Retirement Days
- Police n/a 22

Superiors Only Note: 1) Benefitprogram initiated in lieu of abase salanJ increase in 1969 tltatallowed for additionalpay equal to t11e amountof FICA liability ill thatyear. Currently, there are 14 eligible employees.

N/\VICANT 27Phase I Interim Report to the Special Committee of the Port Authority ofNewYork and NewJersey

-<?- 

### The organizational structure ofnon-represented employees ofthe Port Authority is a diamond shape, reflecting a very broad middle and upper management with limited span of control The general practice of promoting employees based on seniority has resulted in a diamond shaped organizational structure for non-represented employees, with approximately 60% (1,340 out of 2,216 employees) classified in the highest four salary band categories 

### (i.e., Service A, Senior Executive Management, Executive Management, and Middle Management). Furthermore, a majority of these employees are also in the top third of the salary range within their respective categories (Figure 6). Figure 6- Number of Non-RepresentedEmployeesbyEmployee Group

**,~------------------------------------------------------------------------------------------------------------------------,** t 24 fi22J ServiceA

**~** f 144 Fg;'+JJ?:£YifYt'-}f{jj;_:;';?] B(Senioc Exec Mgmt) j ! 652

**fl** **;HI;~tJfl~f~£~jlf~~i2Y]i~f.i(:;);~g~'tJf~~R'~~l§;;~?;:'l';J*?I~I0:~~g** B(ExocMgmtJ !



## [,~) 

# L

..............**520._tiii£,L')l\l;!~~~~\ljjii'~)~(Mi'".~.M.~mt!**.............

# !

**"~ :~**  **l** 26 II DS-11 (SpeclallzOO, Ta:h)

**'~j** 409 ---; E/EDP(Englneers) ]$] 3 I ECT {PATH Clerical)

**~~** liiili.tBII Exempt Ploo F 

# • • /Jl! 7 a MT (PATH Mgmt)
i__

**~** 2 t ET (PATI-1 Engi[Jee(sj

**~~** 

### J 3 I FMN(PATHFie'd&.pervlsar) 22 lilil'l FP(PollcaCap!Blll) 48 IIIII NCL(Non-RepPACietiC<ll)

**-~-~~-,:~Ef!!WBeM~~,~~:;!-::,-** The Human Resources department plans to propose a new compensation program for management and engineering staff to increase mobility and encourage lateral moves across the organizationwhile simultaneously flattening the compensationbands.

-<?- 

### The existingperformance meritincrease program of the PortAuthority is not effective in rewarding, retaining, and motivatinghighperfonners Traditionally, the Port Authority has lacked effective performance review processes, as well as reward programs for high performers. The existing performance merit increases do not distinguish between high, average, or poor performers and have essentially become a form of cost ofliving adjustment. Typically, the difference between meritincreases for a high performer
vs. an average performer has been 1.5% to 2.0% of base salary, thus not providing much incentive. Accordingly, the Port Authority has, from time-to-time, relied on some form of "addon" compensation to replace ineffective and insufficientperformance meritincreases. 

### Preliminan;Recommendations & 

### Next Steps J> Evaluate the costs of pension, OPEB, and other benefits for active vs. retired employees and require a segregation ofthese benefits.

N/\VIC/INT 28Phase I Interim Report to the Special Committee of the PortAuthority of New York and NewJersey

)> Eliminate the "FICA Benefit" (FICA is the Port Authority term used for additional pay, apart from base pay, equal to the amount of their FICA liability) and "Longevity" programs for non-represented employees. The annual savings, based on 2010 costs, from eliminating longevity and unused vacation exchange days "add-on" compensation for non-represented employees would be approximately $9.1 million. )> The Special Committee of the Board of Commissioners should consider eliminating all other remaining "add-on" compensation as shown in Table 13 for non-represented employees. )> Implement an incentive driven compensation program that ties meaningful rewards to achievement ofperformance objectives, targets, and key initiatives. J> Overtime reduction shouldbecome a policyfocus ofthe PortAuthority. J> Conduct a departmental review of proper span of control for management personnel and re-evaluate tenure vs. meritbased pay policies. };> Work rules established under collective bargaining agreements should be re-evaluated and collaborative efforts between management and union representatives should address impediments to enhanced productivity and efficiency. J> Evaluate the financial impact of the Human Resource department's proposed new compensationprogram and implement as indicated.

BENEFITS Since 2006, the overall employee benefits expense (including both active and retired employees) has increased 35% (from $340.7 million to $458.8 million) even though actual head count has decreasedby 1.3% (from 6,935 to 6,848 employees). This trend is largely due to continued rising costs of health insurance, and a growing population of retirees that drive increases in healthcare, OPEB, and pension expenses (Table 14). Table 14- Trends inEmployee BenefitExpenses (2006- 2010)

Revenue $3,038,538 $3,191,626 $3,527,552 $3,552,243 $3,634,023 3.6% Employee Benefits

Health (2) 183,089 201,490 218,221 240,650 256,818 7.0% Pension 89,623 88,992 90,447 88,368 123,249 6.6% OPES 24,938 33,496 17,695 24,058 34,665 6.8% Other (S.S and Other Insurance) Total Employee Benefits Total Employee Benefits as a% ofRevenue 11% 12% 11% 11% 13% Note: 1) Represents only active employees as of December31st; however, be11ejits include amountsfor retirees as well. 2) Primarily comprisedof health insurance, but also includes vision, dental, life, andlong-term disability insurance. Unfortunately, rampant cost escalation in the area ofbenefits has been a common experience in the public sector. Both Governor Cuomo and Governor Christie have proposed multiple initiatives designed to: (i) stop the apparent abuse of sick and vacation benefits or supplemental compensation, (ii) curtail the rapid rise in health care benefits by mandating greater employee
N/\VIC;\NT 29Phase I Interim Report to the Special Committee of the Port Authority ofNewYork and NewJersey

contribution, and (iii) address underfunding and eliminate abuses in pension practices. The following are some ofthe policy reforms being promoted by the States of NewJersey and New Yark that shouldbe supported and/or emulatedby the PortAuthority.

• Create new health plans that would offer fewer benefits at lower prices, including at least one high-deductible plan. • All public employees would pay a percentage of their health care premiums in a tiered systembased on salaries. • In New Jersey, police and firefighters would contribute an additional 1.5% of their salaries toward pensions, for a total of 10% and non-uniformed public workers would contribute an additional2.0% oftheir salaries, for a total of7.5%.
• In NewJersey, phase outthe practice of distributing cash payouts for sick days.
• In NewJersey, limiting cashpayouts for unused vacation exchange days.
• In New York, introduction ofTier 6 to the pension systemto ease long term costs (seep. 34 for detail). 

### Observations & 

### Findi1igs -} Only 7% 

### ofthe Port Authority's active employees provide contributions towards their healthcare costs; they contribute at rates well below the market nann, and they have
access to health plans .that offer more benefits than New York and New Jersey state employees For 2010, total medical insurance (health and dental) expense was $147.5 million for total active employees (Table 15). Port Authority employee contributions totaled less than 1% at $1.5 million of aggregate employee contributions, with less than 10% of employees currently contributing, compared to 100% of employees contributing for the States of New York and New Jersey (Table 16). Table 15 -Breakout ofHealth Benefit Expenses byEmployee Type (2010)

Dental 4,757

Total Medical Insurance $51,612 Employee Coiltributions 1,475 As a %ofT otal Cost 2.9% Life Insurance 4,426 8,219 12,645 L T Disabllily

Total Health Related Benefits Year-end Headcount 2,193 4,655 6,848 7,314 14,162 Total Costper Employee $25.553 $22,357 $13,223

N/\VJCAf'-IT 30Phase I Interim Report to the Special Committee of the Port Authority of New York and NewJersey

Table 16- Port Authority Health Benefit Contribution vs. States of NY and NJ " New JirseyState ,

Benefits 1st, 2005 10% (single) and 18% (dependent) of preniurm for those hired post-July 1st, 2005 below: 12% (single} CSEA & PEF and 27% (dependent) Unions Pay grade 10 and above: 16% (single) and 31% (dependent) preniums based on annual salary and coverage levels

In addition, the Port Authority's employees enjoy access to health plans that offer superior benefits, with lower deductibles and lower out-of-pocket costs, in comparison to the state agencies ofNewYork and NewJersey. 

### {- Tite 

### Human Resource department is 

### ready to propose to the Board ofCommissioners initiatives to reduce healthcare costsfor both active represented and non-represented employees The largest, controllable benefit expenses at the Port Authority are those related to providing healthcare related benefits for both active and retired employees. The Human Resource department's new initiative would require every employee ofthe organization to contribute (up to 35% but not less than 1.5% of salary) towards their health care premiums in a tiered system ' •· based on salaries; In addition, the Port Authority plans to offer HMO, PPO, and· High Deductible plan options to reduce overall plan costs as well as lower the cost to employees. The expected savings over the course of the next four years is approximately $103.8 million. Reduced health planbenefits will have direct effect on other post-employmentbenefit costs for retirees as well (Table 17). Table 17- Expected Savings from Health CareInitiatives

Non-Represented Represented Total Savings from Rate Changes Health Plan Redesign

. Selection of UHC "Choice Rus Fro" Ran Alternative Lower Cost Options Passive Dental PPO Total Savings from Redesign Total Expected Savings from Initiatives

_ **_;:;,;;:~**_ **_;:;,;;:~-_;~~-_;~~-,;:;,;:;;;;;:;;d**

N/\VJCANT 31Phase I Interim Report to the Special Committee ofthe Port Authority of New York and New Jersey

-¢>- 

### The vacation exchangeprogram and "banking of days" has led to significant costs Since 2006, the cost of cashing out vacation days has increased 64%, from $8.9 million to $14.6 million, mainly from non-represented employees (from $7,100 per employee in 2006 to $11,400 per employee in 2010). Furthermore, the true cost of these payments is a multiple ofthe initial payout costs since they are included in the calculation for the determination of pension payments if they are incurred during the "pensionable period" 

### (i.e., three years prior to retirement) (Figure 7). Figure 7- Average 

### Cost ofVacation DayExchange & Banking 

### ofDays,perEmployee (2006

- 2010) $12,000 2,000
$10,000 1,500

$8,000 $6,000 1,000
$4,000 500

$0 2006 2007 2008 2009 2010

· All PA Employees ($) .....,.... Represented EE's ($)

**!5fd)P,g~,.:--,·l** Non-represented EE's ($} -----Numberof Recipients

A review ofpaid-time-off and cash-out policies of the Port Authority vs. the States of New York and New Jersey reveals that the Port Authority offers less of a vacation allowance, is more liberal on cash exchange of unused vacation exchange days, and does not allow cash payout or accrual ofsick days (Table 18).

32Phase I Interim Report to the Special Committee ofthe PortAuthority of New York and NewJersey



### Table 18 -PaidTime Off and Cash-OutPolicies ofPortAuthority vs. States of NY & 

### NJ

**r=c-c-=-~--J** ,t_

**~** -

**~ ~~,**  _ **"~-"-0** o5'Y->t> ,, ,

**~ ,~-**  **~: ;;;;c~**  **r~ ~,**  • = , " , W::-c.c: ,_

**~** _**~ J'~**  , ,; "• "

**<,x~** •

Paid Vacation • After 1 year, 17 days • After 1 year: 10-18 • After 1 year, 26 d8ys • After 1 year, 31 days • After 1 year, 30 days Days increasing to a days (depending on

Paid Sick Days

Vacation Carryover

Vacation Payout upon Separation

Vacation Exchange (1)

.

Note: . maxim.Jm of 35 days union group) after 30 years (43 • After 5-26 years: 27- days max for Senior 39 days (depending on Executives) union group)

• &rployees can take • &rployees can take

sick days based on a slckdays based on a calculation dependent calculation dependent on tenure. In no case on tenure. In no case can errployees receive can employees receive cash for these days or 1cash for these days or accrue them accrue them 

### I
• A rraxirrum of 10 days • Up to one year of per year, with no rmre allotln3nt than 1 year current • PATH allows no allowance in total carryover carryover (2years for pre-9/11 hires)

• 1 year's allow anee i" One year of allowance

max payout, if hired or no lirrit in a few after 9/11 (see above circumstances (see for allowances) above for allowances) • 2 year's allowance • PATH allows no

max payout, if hired 

# I payout before 9/11 (see above for allowances) ,

• If perfect attendance and 30 days or rrore al!ow ance, can exchange all but15 days • If perfect attedance and fewer than 30 days allowance, can exchange a!! but 10 days • Payments are blpensionable weekly and il• Varies greatly based on Union • PATH allows no exchange • Payrrents are made In

lurrp surrs and not pensionable increasing to a rraxiiTJJm of 38 days after 35 years

• 200 hour rrux sick

bank, payout available upon retiremmt • Banked sick leave can

be used to offsetthe cost of rmnthly insurance preniums upon retirerrent

• 40 days rrax

• 30 day max payout

and 200 hours max sick bank

• Brployees up to Grade 24 can exchange 3 or 6 days for $500 or $1,000 credit to offset health insurance costs increasing to a rraxirrum of 43 days after 35 years

• 200 hour rrax sick

bank, payout available upon retirermnt • Banked sick leave can

be used to offset the cost of m::mthly insurance preniums upon retirerrnnt

• 40days max

• 30 day max payout

and 200 hours max sick bank

&rployees up to Grade 24 can exchange 3 or 6 days for $500 or $1,000 c credit to offset health insurance costs

1) Vacation days, when exchange, are considered unusedvacation exclumge days compensation.

N/\VtCANT increasing to a maxiiTJJm of 43 days after 20 years

• $15,000 max sick payout upon retiremmt

• No lirrit

• 1 year's allowance

rrax payout and $15,000 rmx sick payout upon retirerrent {see above for allowances)

• NIA

33Phase I Interim Report to the Special Committee of the Port Authority ofNewYork andNewJersey

**~** 

### The Port Authority has made certain modifications to the vacation allowance and policies for cashing out unused vacation exchange days, and is contemplating additional actions to conform closely to NewJersey's policy reform The PortAuthority's vacation exchange policy was extended for 2012; however, itwas amended with the following changes:

• Neither the Executive Director nor Deputy Executive Directorwillbe eligible.
• Employees with at least 30 days of vacation allowance can exchange all but 15 days.
• Employees with fewer than 30 days can exchange all butten days.
• Attendance requirements to be eligible for this exchange remain unchanged.
In addition, the Port Authority's Human Resource department has proposed (but has not yet implemented) a revised vacation allowance, effective January 1, 2012, that would provide a maximum of 27 vacation days for general non-represented employees and 30 for senior executive management (down from 35 days and 42 days, respectively). However, this revision will only apply to new hires going forward and all employees already at or past the 27 and 30 vacation day milestones will be grandfathered in and retain their current allotment. Furthermore, in 2013, the Human Resource department recommends vacation exchange payments be made in lump-sum, rather than bi-weekly, which would mean that these · payments will no longerbe "pensionable".

**~** 

### The State of New York has proposed a new bill to introduce a Tier 6 

### into the pension system in an attempt to significantly cut back long-term expenses to employers and mitigate abuse by their employees If passed, the bill would add a new pension tier for all new employees of the New York State and local governments, as well as those covered by New York City pensions. The Port Authority's full-time employees are required to join one of two cost-sharing defined benefit pensions plans, the New York State and Local Employees' Retirement System or the New York State and Local Police and Fire Retirement System. Key changes in this tier relate to increasing employee contributions and retirement ages, disallowing overtime as part ofbase salary, setting stronger anti-salary-spiking mechanisms, and eliminating provisions around the cashing out of sick days for additional service credituponretirement. 

### Preliminary Recommendations & 

### Next Steps )>- Implement reforms, as proposed by the Port Authority, requiring contribution from all non-represented and represented employees and offering health plans with less expansive and costly coverage. J>- Uniformly apply shortened vacation schedules to all employees (i.e., not only to new hires going forward). J>- Significantly reduce allowed vacation exchange days or eliminate the program for all employees oftl1e PortAuthority.

N/\VICMH 34Phase I Interim Report to the Special

**C~mmittee** of the Port Authority of New York and NewJersey

}- Eliminate the delineation between employees for cashing in vacation days upon separation so that all employees have the value of one year of vacation allowance as a maximum 

### (i.e., eliminating the extra year of allowance for employees hired before September 11). }- Endorse the currentproposedbill that allows the inclusion of a Tier 6 into the NewYork State pension system for both civilian and police and fireman that would have a significantpositive impact on the long-term pension cost. }- Evaluate the feasibility of changing the structure of the existing pensionplan, ultimately pursuing defined contributionplans in place of defined benefit programs.

REPRESENTED EMPLOYEES CONTRACT CONSIDERATIONS
The Port Authority union contracts cover approximately 4,691 personnel, or 68%, of the Port Authority's 6,913 actual employees. The vast majority of these contracts has either expired or will expire in 2012. Navigant conducted a preliminary review of key terms and conditions of six primary union contracts related to salary, health and life insurance benefits, vacation and

**p~id** time off, other compensation incentives, as well as historical past practices often used to establish implied benefits. In addition, work rules that could have an impact on impeding

., pt,oductivity or by driving additional compensation 

### (i.e., overtime and related benefits) were

. considered.



### Observations & 

### Findings

**~** 

### Complex work rnles subject to inconsistent application can often lead to excessive overtime and compensation for certain represented employees
In 2010, the Port Authority's total overtime expenses were $85.4 million. Approximately 95% ($80.4 million) was earned by represented employees and 42% ($33.6 million of $80.4 million)
was related to public safety. The top ten overtime earners in public safety averaged 105.4% of their base salary. The Port Authority implemented a number ofinitiatives to reduce overtimein Public Safety and it appeared that the Port Authority was making a good progress in 2009 and 2010, after peaking in 2008. However, this positive trend was reversed by November 2011 as overtime had increased 23% over the prior full year (up to $41.4 million from $33.6 million). Police work rules are complicated and appear to create significant staffing challenges and inefficiency 

### (e.g., alteration from regularly scheduled duty tours, or regularly assigned facility automatically results in an extra four hours ofpay in addition to pay at straighttime rate for the full tour) (Table 19 and Table 20).

N/\VIC,ANT 35Phase I Interim Report to the Special Committee of the Port Authority of NewYork and NewJersey

Table 19- Top 10 Overtime Recipients, Public Safety (2010)

F\:lllce Sergearll $103,964 $132,286 127.2% 2 Fblice Sergeant 103,964 129,043 124.1% 3 Fblice Sergear1t 107,911 126,338 117.1% 4 FU!ice

**Sergear~t** 107,911 123,884 114.Bo/o 5 Fblice lieutenant 124,098 112,467 90.6% 6 F\llice Sergeant 103,964 104,916 100.9% 7 Fblice

**Sergear~!** 100,960 104,687 103.7% Fbllce Sergeant 103,964 102,340 98.4% 9 Police Sergeant 99,375 100,405 101.0% 10 Fblice lieutenant
Table 20- Public Safety Overtime (2006- YTD Nov 2011)



# .

'

**~.** R o " 2006 $44,075,892 NA 1,577 $27,949 NA 2007 $49,781,632 12.9% 1,633 $30,485 9.1% 2008 $52,663,459 5.8% 1,857 $28,359 (7.0%) 2009 $38,364,269 (27.2%) 1,777 $21,589 (23.9%) 2010 $33,644,953 (12.3%.) 1,723 $19,527 (9.6%) YTD Nov 2011 $41,405,876 23.1% 1,688 $24,530 25.!?% 

### Preliminary Recommendations & 

### Next Steps



### VIII.)> Conduct analysis necessary to evaluate the current work rules as applied and practiced with the assistance of special labor counsel and establish priorities; in collaborationwith represented labor, to focus on improved efficiency and productivity. )> Work rules and contractual obligations should be evaluated and potentially modified to effectively manage the police department productivity and efficiency and to control overtime. )> Evaluate effectiveness of command and control function of public safety & security in light of what appears to be chronic excessive overtime, as well as other apparent inefficiencies. )> Carefully consider findings of the pending Chertoff Report in evaluating current costs and practices relative to the effectiveness ofthe security apparatus. 

### INITIAL COST REVIEW OFWTC PROGRAM
BACKGROUND From June to November 2008, the Port Authority conducted a comprehensive analysis to determine what the true scope and design of the WTC Program was expected to be, including the related impact of the mandate to complete the Memorial by September 11, 2011. As a result of this effort, the Port Authority was required to materially alter the phasing of construction, redesignmajor elements ofthe WTC program resulting in an increase in cost, as well as balance the needs· of a variety of disparate functions and stakeholders (both public and private). Furthermore, given the high level of integration of the various projects at the site, the Port Authority was oftenrequired to perform significant work for other agencies and third parties in an effort to deliver on expectations. As the WTC program has evolved, the Port Authority has

N/\VJGANT 36Phase I Interim Report to the Special Committee ofthe Port Authority ofNewYork and NewJersey

also absorbed the increased costs of financing and insuring the projects at the site, at no minor expense. In addition, efforts to accurately reflect the cost of marketing, leasing and improving the retail and office elements of the site with the input of the Port Authority's commercial partners were not made until recently, further increasing the estimated cost of the WTC program. It is important to note, however, that these total project costs are off-set, in part, by anticipated reimbursements from certain parties and sources of outside the Port Authority, includingthe Federal TransitAdministration and insurance carriers, among others.

SCOPE & METHODOLOGY Navigant reviewed numerous documents and conducted in excess of 50 hours of interviews witl1 members of the WTC construction staff, select management of the Port Authority and other persons with direct knowledge of the history of construction at the site. From this foundation, Navigant reconstructed the historical costs of the WTC program using the chronology of periodic presentations by prior Executive Directors and management to the Board of Commissioners, project cost reports current through October 2011, related documents, and other communications ofthe PortAuthority (Table 21). Table 21- Periodic WTC EAC Comparison (Dec 2006 :-CurrentEstimate)

Project Title: WTC Transportation Hub $ 1,921 $ 2,442 $ 3,200 $ 3,291 $ 3,440 $ 3,737 1 World Trade Center 2,478 2,877 3,100 3,190 3,190 3,949 9/11 M>rmrial (PA) 785 195 195 195 195 195 Vehicular Security Center 1 472 478 633 667 667 698 Site Infrastructure 1,048 1,255 1,525 1,563 1,661 1,965 WfCRetail 1,337 1,301 1,450 1,550 1,550 1,722 Streets and Utilities 254 254 274 274 334 Oxllandt St. #1 Stallon 150 150 150 Perforning Arts Center 182 9/11 M>rmrial (3rd Party) 833 Contingency 600 600 352 352 Additional Rnance Expense 352 NYPD Carrpus Ran 300 NYSOOT 20

Reconstructing the WTC program historical costs and the interim Estimates at Completion (the "EAC") tlwough various sources was necessary because the Port Authority's staff were unable to produce supporting detail and source documents, for any of the presentations, prior to February 2011, that traced historical cost growth previously reported by prior Executive Directors to the Board of Commissioners and, at times, the Governor of New York. To assess the reasonableness of the EAC of the WTC program, Navigant evaluated the record of each component project to identify the level of cost risk associated with delivering the project within currentexpectations.



### N/\VJCAI'JT 37Phase I Interim Report to the Special Committee of the Port Authority of New York andNew Jersey

Takentogether, Navigant's analysis reveals that cost growth at the WTC is primarily causedby: (i) the commitment to open the Memorial by September 11, 2001, (ii) work for third-parties that
was required due to the inter-related nature of struch1res at the site 

### (e.g., portions of the Performing Arts Center ("PAC") foundation that are integral to underground infrastructure including the Vehicle Security Center ("VSC")), and (iii) the omission in prior budgets of allowances for the marketing, leasing and tenant improvements for the commercial office and retail space at 1WTC and Retail projects. These findings are summarized in an EAC prepared by Navigant through a review of project cost reports, documented change orders and allowances for known exposures represented in the records of the Port Authority (the "Current Estimate"). In addition, the Current Estimate
was subjected to a qualitative risk analysis. Navigant identified areas of cost risk through project cost reports, relevant documents and probability assessed these items through interviews with knowledgeable project participants. From this basis, Navigant developed a range of possible scenarios and selected a probable outcome to report incremental risk or potential exposure to the CurrentEstimate. 

### Observations & 

### Findings
{> 

### The evolution ofdesign and the challenges the Port Authorityfaced to deliver the Memorial by September 11, 2011 resulted in the November 2008 reforecast from $8 billion to $11 billion In December 2006, the program for the WTC was estimated at approximately $8 billion. In November 2008, as a result of a focused effortbythe Port Authority to understand the evolution ofthe project, the impact ofthe commitmentto openthe Memorial plazaby September 11, 2011, and to systematically reforecast the WTC program, the EAC was increased to approximately $11 billion (the "November 2008 Forecast"). The November 2008 Forecast revealed that the approximately $3 billion increase was largely due to impacts from changes in scope and the evolution of design. An integral component of the design evolution was the coordination amongst the program stakeholders to timely deliver the subterranean structures and infrastructure prior to certain key dates and within expected costs. Accordingly, the largest variances occurred in the more complex projects at the site, including: (i) the WTC Hub at approximately $1.3 billion, (ii) 1 WTC at approximately $0.6 billion, and (iii) below grade site infrastructure at approximately $0.5 billion (Table 22).

N/\VlCJt\NT 38Note: (1) Phase I Interim Report to the Special Committee ofthe Port Authority of NewYork and NewJersey

Table 22- PeriodicWTC EAC Comparison (Dec 2006- Nov 2008)

Project Title: WfC Transportation Hub $ 1,921 $ 3,200 $ 1,279 66.6% 1 World Trade Center 2,478 3,100 622 25.1% 9/11 Metrorial (PA) 785 195 (590) -75.2% Vehicular Security Center 1 472 633 161 34.2% Site Infrastructure 1,048 1,525 477 45.5% WTCRetail 1,337 1,450 113 8.5% Streets and Utilities 254 254 0.0% Contingency 600 600 0.0% 

# I Total $ 8,041 $ 10,957 $ 2,916 36.3%1 Reirrbursements I Funding (4,490) (5,016) (526) 11.7% 

# I Net Program CosI to the Port Authority $ 3,551 $ 5,941 $ 2,390 67.3%1

Positive variance reflects increased costs.

**~** 

### Site-wide coordination in the accelerated development of the WTC program has required the PortAuthority to perfonn workfor other agencies and entities resulting in further expansion in the scope that increased the $11 billion reforecast to a Current

·Estimate of $14.8 billion The Current Estimate for the WTC program is approximately $14.8 billion. This increase of approximately $3.8 billion since the November 2008 Forecast was not primarily driven by cost growth in the original scope of the WTC program. Rather, this increase stems from additional projects being performed by the Port Authority on behalf of other agencies and parties (approximately $1.57 billion). In large part, this work was necessary to advance inter-related elements of the site and assure the opening of the Memorial by September 11, 2011. Simultaneously, the Port Authority has begun to refine the program associated with the commercialization ofthe site. A recently developed budgetfor the leasing and operation ofthe Retail and 1 WTC projects performed in conjunction with the Port Authority's operating partners, The Durst Organization Inc. ("Durst") and Westfield Group ("WDC"}, reflected an increase of approximately $1 billion in the Current Estimate. Lastly, additional and typical finance and insurance expenses on a more costly program occurring over a longer duration of approximately $0.6 billion are included in the Current Estimate. The balance of the increase is driven by scope changes related to site-wide infrastructure (approximately $0.3 billion), and project execution costs (approximately $0.3 billion). These impacts occur throughout various components ofthe program. The following table presents the variance in costs from November 2008 to the CurrentEstimate by individualproject (Table 23).

NJ\VI C;\NT 39Phase I InterimReport to the Special Committee of the PortAuthority of New York andNewJersey

Table 23- PeriodicWTC EAC Comparison (Nov 2008- CurrentEstimate)

Project Title: WTC Transportation Hub $ 3,200 $ 3,737 $ 537

**~)** 16.8% 1 World Trade Center 3,100 3,949 849 (3) 27.4% 9/11 Meroorial (PA) 195 195 0.0% Vehicular Security Center 1 633 698 65 (4) 10.3% Site lnfrastructure 1,525 1,965 440 (5) 28.9% WTCRetail 1,450 1,722 272 (6) 18.8% Streets and Utilities 254 334 80 (7) 31.5% Cortlandt St. #1 Station 150 150 0.0% Performing Arts Center 182 182 (B) 0.0% 9/11

**Me~mrial** (3rd Party) 833 833 0.0% Contingency 600 352 (248) -41.3% Additional Finance Expense 352 352 0.0% NYPD Campus Ran 300 300 0.0% NYSOOT

Notes: (1) Positive variance reflects increased costs. (2) Superstructure concrete andsteel (-$150 million), trade contractorperfornmnce

**(~200** million), and financial expense (-$100 million). (3) Redevelopment budget for commercialization (-$700 million) and financial expense

**(~$100** million). (4) Financial expense and schedule acceleration (-$65 million). (5) Site-wide infrastructure scope

**(~$300**million) andRedevelopment requiremwts atPMF!Commercial'Parking (-$100 million). (6) Redevelopment budget for commercialization (-$275 million). (7) Clturclt St.

**(~$50** million). (8) Budget to bring structure to grade.

**~** 

### Third-partyfunding commitments and various sources ofextemal capital have, or are expected to, limit the Port Authority's costfor the WTC program to $7.7 billion before accounting forfurther risk exposure identified ittNavigant's review
The PortAuthority is performing a set ofprojects for other agencies and entities for which ithas contractual or oral commitments for reimbursement. For example, the Current Estimate includes: the Cortlandt St. Station development being performed at the request of the MTA, work in process for the 9/11 Memorial Foundation (the "Memorial Foundation"), certain subgrade work that will benefit the PAC and similar infrastructure commitments for other agencies. Given the Current Estimate, the Port Authority's net cost for the WTC program would be approximately $7.7 billion, representing approximately $14.8 billion of total gross costs, less approximately $7.1 billion in reimbursements by third parties and funding provided by insurance proceeds, public funds and private sources. Delivery of the WTC program at this net cost assumes full reimbursement of third party funding commitments. The reimbursement ofthese funding commitments is subject to ongoing discussions with various stakeholders and may be subject to dispute and collection risk. To

N/\V!CANT 40Phase I Interim Report to the Special Committee ofthe Port Authority of New York andNewJersey

mitigate the financial impact of nonperformance by other stakeholders, the Port Authority may choose to establish certain financial reserves. In addition, subject to the requirements of existing contractual agreements, the Port Authority may elect to curtail development of third-party elements and limit the exposure of the Port Authority to only that project scope necessary for the overall advancement of the program. For example, the Port Authority has significant third party stakeholder exposure on the Memorial. While the Port Authority's original financial commitmentwas estimated at $195 million out of a total project cost of $500 million, the design and scope of the project have evolved such that
some estimates indicate the project may now cost approximately $1 billion. The Memorial Foundation and the Port Authority are already disputing significant costs related to the construction impacts of the Memorial, and total exposure to the Port Authority is now estimated at approximately $300 million. The Memorial Foundation is relying heavily on private fundraising efforts in a recessionary environment, calling into question the Pmt Authority's ability to collect on funds both committed and expended for the benefit of the Memorial Foundation. Consistent with the approach outlined above, the Port Authority has elected to significantly reduce the construction personnel deployed on the museum portion of the Memorial project and limit the agency's exposure, ensuring that only certain construction continues prior to the resolution ofthe costreimbursement dispute.

**~** 

### Navigant's review ofthe reasonableness 

## ojthe Current Estimate suggests thepotential for incremental cost exposure to the PortAuthority of $0.8 billion or$8.5 billion of total funding by the PortAuthority for completion of the WTCprogram The CurrentEstimate has been prepared consistent with industry protocols; however, based on a preliminary risk analysis there may be potential total project cost exposure of approximately $1 billion. This potential for program level cost growth may increase the net obligation 

### (i.e., after expected reimbursements from third parties) of the Port Authority by $0.8 billion, to $8.5 billion in total expendituresfunded by the PortAuthority for completion ofthe WTC program. The principal drivers of tl1e potential program level increase are: (i) anticipated costs, and the associated impact on contingency, stemming from continued evolution of the Retail project (approximately $0.4 billion); (ii) cost of work for third parties, most notably for the New York Police Department ("NYPD") and scope changes to Cortlandt Street Station (approximately $0.2 billion) both expected to be reimbursed by third parties as previously described; and (iii) soft cost escalation, extra work, and delay mitigation costs in the completion of the Hub (approximately $0.2 billion). The remaining approximately $0.2 billion is comprised of miscellaneous elements, such as incremental finance expense, additional design and coordination for site infrastructure work, trade contractor financial deficiency, and design costs in the VSC (Table 24). Again, tactics for the mitigation of a portion of these risks include enforcement of reimbursement commitments, establishing reserves or curtailing certain work within the program.

N/\VIC.JMH 41Phase I Interim Report to the Special Committee ofthe PortAuthority of New York and NewJersey

Table 24- WTC CurrentEstimate and PotentialExposure

Project Titles: WTC Transportation Hub 1 World Trade Center 9/11 fo/ermrial (PA) Vehicular Security Center 1 Site Infrastructure WTCRetail New Frojects Streets and Utiltties ($334) Cortlandt St. #1 Station ($150) Performing Arts Center ($182) 9/11 fo/eroorial (3rd Party) ($833) Other Costs

3rd Party Stakeholder- Add'l F\ltential Exposure: NYPD Cempus Ran NYSOOT

Note: (1) Potential for underfunded contingenctj. (2) Potential acceleration costs. (3) Potential scope changes for ChillerPlant, VSC and Security. (4) Potential exposure to contractornon-performance. (5) Potential costgrowthfor Streets, Cortlmtdt Station andPAC. 3,737 213 (1) 6% 3,949 10 (1) 0.3%

195 698 10 (2) 1% 1,965 210 (3) 11% 1,722 452 (1) 26% 1,499 87 (4) 6%

352



### -9- 

### The PortAuthority may have other cost risk in theform of contingent liabilities Based onthe Port Authority'sbond offering statementdisclosures, it appears the PortAuthority has made certain financial obligations in connection with certain WTC site bond financings of up to $600 million of gross credit support on other projects at the WTC site, $400 million of which are reimbursable by the State of New York and New York City, leaving $200 million of net exposure. In addition, in November 2011, $1.2 billion of Liberty Bonds were issued to finance the private development at the Tower 4 site. The PortAuthority, in addition to being a future major tenant at the building, has agreed to provide credit support for this financing through a complex arrangement of interest rate support, rent deferrals, and rent-free periods. Estimating the outcome of these arrangements is speculative, as multiple events need to transpire for the obligations of the Port Authority to be triggered, therefore, Navigant has not included a provision for these figures in the Current Estimate or in any potential exposures. Further research and analyses relating to the underlying contracts that document these commitments will be conducted in Phase II ofNavigant's work.



### N/\VJCANT 42Phase I Interim Report to the Special Committee ofthe Port Authority ofNew York and NewJersey


### Preliminmy Recommendations & 

### Next Steps );> Identify a single candidate reporting to the Executive Director with the sole responsibility to manage the successful construction, completion, and commercialization oftheWTC. );> Reevaluate the roles, responsibilities, requisite experience, and appointments of the WTC Sub-committee as the WTC evolves from a focus on construction execution to asset management. );> Perform a comprehensive forensic construction cost audit of the entireWTC program to validate the costs expended, the Current Estimate and to identify any additional exposure items. );> Conduct a focused review of the development budget associated with asset management and the future operations ofthe 1 WTC and the Retail project that involves all constituents. );> Pursue reimbursement from third parties for completed work and any pending commitments for work conducted in good faith. );> Prior to committing to, or initiating, any additional work requests from other agencies and parties, secure contractual evidence of funding commitments as well as reimbursement capacity. );> Assess the contingent liabilities of the Port Authority and risk-assess same in the EAC for the WTC progrm;n. ·· . · · );> Unless intended to create construction efficiencies or produce direct cost reductions, freeze design to the extent possible. );> Prepare a comprehensive risk register, probability assess beneficial or adverse outcomes
on a continuous basis to increase the accuracy of the EAC based on contemporaneous information. );> Evaluate current WTC related insurance programs for cost effectiveness and counterparty creditrisk for existing coverage. );> Perform sensitivity analysis on optimistic, pessimistic and probable case scenarios to understand costimpacts onthe EAC and inparticular the adequacy ofcontingency. );> Integrate development and construction budgets, providing a holistic reporting of the WTC progra:tn in a standardized format on a monthly basis to the Executive Director and Board ofCommissioners. );> In light of the influence of the WTC on the capital needs and execution resources of the Port Authority, perform a detailed impactevaluation analysis onthe 2011 Capital Plan. );> Evaluate potential monetization of the income producing elements of WTC as an alternative form of capital for the Port Authority.

N/\ViGi\NT 43Phase I Interim Report to the Special Committee ofthe Port Authority of New York and NewJersey



### IX. PRELIMINARY CAPITAL PLANNING ASSESSMENT

BACKGROUND The 2011 Capital Plan is comprised of more than 900 projects totaling approximately $25.1 billion. Of this, approximately $18.2 billion is planned for the Port Authority's assets excluding the WTC site (approximately $6.9 billion). Of note, while addressing the capital needs of the WTC site in the period from 2002

- 2010, the Port Authority invested approximately $13 billion inits other assets.

SCOPE & METHODOLOGY Continuing from the work conducted on theWTC, Navigantperformed a preliminaryreview of the composition of 2011 Capital Plan and the capital planningprocess. Navigant considered documents and conducted interviews with select management ofthe Port Authority. In addition, Navigant prepared a database of all projects in the 2011 Capital Plan and attendedmeetings ofthe Capital Planning Oversight Committee (the "CPOC"). 

### Observations & 

### Findings

**~** 

### The PortAuthority needs to assure thatthe long-range capital strategy aligns with its mission and objectives The Board of Commissioners recognizes that, in light of the demands of the WTC and the impact of the recessionary environment, the Port Authority does not strategically allocate capitalbybusinessunitor in concertwiththe overall objectives ofthe organization. Rather, line functions promote projects that maintain a particular asset base and fit within an internally mandated budget constraint. Many of the projects in the 2011 Capital Plan are in initial planning stages and are approved in their entirety when the total scope, budget and potential impacts are notyet mature. This approach further constrains the ability of the Port Authority to
reassess priorities and alignment with a dynamic capital strategy. The Port Authority needs to
assure that the strategy for the allocation of capital aligns with the mission and objectives ofthe organization for the 21'' century. In Phase II, Navigant will evaluate with the Special Committee the actions necessary to re-position the capital strategy ofthe agency for the coming decade.

**~** 

### The initial review of the capitalplanning and executionpmcess indicates that roles and responsibilities maynotbe clearly defined The current management oversight of the execution of the Capital Plan is performed by the CPOC. While CPOC is conceptually a sound approach, the execution falls short of industry practice as it lacks a clear leader, is managed by committee, does not have consistent reporting mechanisms or a communication protocol, and is unfocused without an agreed-upon materiality threshold for items under discussion. In addition, the observed inconsistency inthe command and control structure did aggravate the timely communication of challenges by the

N/\VICANT 44Phase I Interim Report to the Special Committee of the Port Authority of NewYork and New Jersey

Executive Director to the Board of Commissioners. Lack of accountability of development, construction and asset management functional leaders to the Executive Director exacerbates this condition. A review of the organizational design of the capital planning and execution functions within the Port Authority will be an area offocus in Phase II of Navigant's work. 

### -9- 

### Pelfonnance metrics limited to budget compliance can impede an effective capital projectplanning and executionprocess The most successful organizations create a capital plan, construct a conforming budget and monitor progress against key performance metrics, where budget compliance is just one of several measures. The Port Authority should consider expanding the methods by which it monitors projectperformance and create the opportunityto proactively address areas ofunderperformance. To maximize effectiveness, such an initiative would require change management within the organization as a comprehensive definition of execution would become the measure ofperformance. Phase II ofNavigant's workwill address this organizational concept. 

### Preliminary Recommendations & 

### Next Steps )> Phase II shouldinclude, butnotbe limited to: o An evaluation of the formation of a Capital Projects Office that reports directly to the Executive Director. This office wouldbe responsible for the development and execution cif the ,capital plan and ,effective communication of same. Navigant anticipates that a Capital Projects Office would be led by a single, senior executive. o An analysis of the unconstrained needs of the Port Authority against the 2011 CapitalPlan to identify areas ofpotentialrisk. o A review of recent execution performance against the previous capital plan developed in 2007 and updated :in 2008

.. o 

### An assessment of proposed projects :in the 2011 Capital Plan for, non-income producing assets to evaluate the benefit of same; this does not include projects intended for safety and security ofinfrastructure assets. o A study of the feasibility of monetizing non-core assets to provide an alternative form of capital for the funding of transportation infrastructure. )> Establish a task force to develop a long-range capital strategy that aligns with the Port Authority's evolving mission and objectives. )> Institute a systematic method for prioritiz:ing project needs within constra:ined capital capacity and conduct annual assessments. )> Develop a protocol to measure and assess execution progress against performance metrics; address areas ofunder-performance against goals. )> Continue criticalreview of all projects in the 2011 Capital Plan.

N/\ViCANT 45Phase I Interim Report to the Special Committee of the Port Authority of New York and NewJersey

X. OVERVIEW OF PHASE II

PHASE II- ORIGINALMANDATE In conjunction with the Review, Phase II of Navigant's engagementis expected to be completed and the report delivered by end ofJune 2012. Pursuant to Navigant's existing engagement and
as discussed with the Special Committee during the interview process, Phase II will include (as refined by mutual agreement):
ProjectManagement Office

• Oversight and coordination of organizationalreview and operational assessment.
• Oversight and coordination offinalization ofWTC cost review.
• Coordination often-year Capital PlanReview through Rothschild. Organizational Design and OperationalImprovement

• Review business segment operatingbudget. • Review ContractService expense categoryto reduce costs. • Review Material, Equipment and Other expense categories to reduce costs. • Summarize findings andrec.ciiillilendatioris into a strategic framework. FinalizationofWTC Cost Review

• Review of avoidance costs. • Assessment of accuracy of design and construction cost-to-complete, including timeline of completion. • Identify key drivers of variances in project costs and record lessons learned for mitigationinfuture endeavors. CapitalProjects Assessment

• Complete preliminaryrank orderprioritization. • Complete scorecards for designated capital projects with support of Port Authority personnel. • Establish a dynamic evaluation methodology for ongoing update of capital projects and planningprocesses. • Identification of considerations with regard to financing implications and alternatives.

PHASE II- ADDITIONAL RECOMMENDATIONS Areas of importance for further review have been identified and recommended in the Phase I report that are not included inthe engagement scope and terms ofthe originalPhase II mandate of Navigant's consulting arrangement. A preliminary list of those groups by related work streamis detailed below:



### NJ\VJCJMH 46Phase I Interim Report to the Special Committee ofthe Port Authority of NewYork and NewJersey

Organizational Design and OperationalAssessment

• Facilitate the Board of Commissioners' evaluation of the Port Authority's vision, mission, and strategy to meet the challenges ofthe 21st century. • Develop and recommend pay for performance incentive systems. • Assist the Board of Commissioners in its evaluation of the Port Authority's overtime and "add-on" compensationpolicies. • Conduct detailed analysis of union contract work rules (in conjunction with special counsel and business segment managers), the current application of same, and the potential corrective actions to remove impediments to productivity and efficiency, and establish a foundation of focus on expired union contract terms and develop specific recommendations for incorporation in same. • Review, analyze, and recommend consolidation of certain duplicate shared service functions, identify the expected annual cost savings and develop a detailed implementationplan supporting same. • Review OPEB and make recommendations regarding potentialbenefit modifications for retirees. • Assist in the development of executive "dashboard" to reliably and timely report status ofkey financial and operational performance metrics. • Identify key revenue enhancements, including lessee pass-through cost collection, opportunities and ·assist in the ·development and implementation of enforcement strategies. WTC Cost Review

• Perform a comprehensive forensic construction cost audit of the entire WTC program to validate the costs expended, to identify additional exposure items, and provide potential mitigation strategies. • Evaluate contractor exposuresincluding status of current claims. • Develop and implement strategies with regards to reimbursements from third parties for completed work and any pending commitmentsfor work conducted in good faith.
• Evaluate WTC related insurance programs for cost effectiveness and counterparty credit risk. • Integrate development and construction budgets, providing a holistic reporting of the WTC program in a standardized format on a monthly basis to the Executive Director and Board ofCommissioners. CapitalProjects Assessment

• Develop a mechanismto more reliably determine levels ofstate of good repair necessary to ensure PortAuthority infrastructure integrity. • Implement a comprehensive reorganization of the capital planning and execution function, identifying key leaders, roles, responsibilities, processes, and mechanisms for tracking progress on cost, risk management as well as delivery. • Perform a study ofthe feasibility of monetizing non-core assets to provide an alternative form ofcapital for the funding oftransportation infrastructure.

N!\VI CANT 47XI. APPENDIX- A DEFINED PEER GROUP

. Public · .·. Private'.Sedoi' Notes

(i.e., State Agencies, etc.) . (inCL PubliclyTtaded Co.)

Public· Authorities arid State Agencies ·. ' .. · .· · ..

1) New York Power Authority • NA: Private Sector peers were "l"l:ot applicable" given this • Key attributes include being a public authority or state

2) Metropolitan Transit Authority (MTA) group was focused on public authOrities and .. agencies in the agency with jurisdiction in major New York and New

3) New Jersey Turnpike Authority New York and New Jersey regiori. · Jersey metro regions

4) New York Thruway Authority • Must have responsibility in the areas of transportation,

5) New York City Department of Transportation real estate, or economic development (preferably the

former)

6) New York City Government • H possible, focus should be on authorities/agencies that

7) New York State Government DO NOT receive tax revenue

8) New Jersey State Government Tunnels, BridgeS & Terminals ..

9) MTA Bridge & Tunnel Authority (NY City) 1) Macquarie Atlas Roads Group (Australia) . Key attributes of peers should include operation of both

10) Bay Area Toll Authority (San Francisco, CA) 2) Cofiroute (Germany, France, UK, USA) bridges and tunnels (age of assets is also pertinent)

11) Delaware River Port Authority of PA & NJ • Operation of toll roads is applicable, but less so if

12) New York Thruway Authority (NY State) operations are highly concentrated in such activities.

• Older assets at a peer align more comparably to the Port

Authority's assets (i.e., bridges built in 1920s-30s).

. Delaware River Port Auth, though much smaller in size,

was selected due to it being a bi-state authority with ties

to New Jersey, as well as a focus on transportation

PATH Rail System . ..... . .

.·· .· .··

1) Massachusetts Bay Transportation Authority (Boston, MA) • NA: Private sector peers are not comparable due to: • Key attributes of peers should include a flat-fee fare

2) Southeastern Pennsylvania Transportation Authority >- Different fare structure (not flat-fee; instead, based on structure and the absence of any federal or state

(Philadelphia, P A) distance traveled) taxpayer subsidies, with location in a major metro witl1

3) Delaware River Port Authority ofPA & NJ (Western NJ) >- Compensation systems in foreign companies is different high traffic volume

4) MTA (NY City) than in the U.S., namely for the PA, which limits • Age of assets were considered as this 'Will yield a larger

5) Chicago Transit Authority comparability staff of maintenance and engineering employees

Private ownership of rail systems does not occur in the • Delaware River Port Auth, though much smaller in size,

u.s. was selected due to it being a bi-state authority with ties

·--

NJ\V!GANT 48Public.PrivatesectorNotes.etc.).•(inchPubliclyTradedCo.).PrivatelyO'WlledandoperatedcommuterrailsystemsintoNewJersey,aswellasafocusontransportationTokyo,HongKong,BerlinandTaiwanwereidentifiedbuteliminatedfrompeergroupforreasonsnotedabove.AViation•..'.....'·.·...'...•'·.·!1)ChicagoO'HareInternationalAirport(ORD)1)AeroportsdeParis(France)"Keyattributesofpeersshouldincludeahighvolumeof;'2)LosAngelesWorldAirports(LAWA)2)BAAAirports(UnitedKingdom)intemationalpassengerandaircrafttrafficinmajor3)Hartsfield-jacksonAtlantaInternationalAirport(ATL)cities,andfocusedexecutionofairportinfrastructureoperations(notincludingretailandconcessionactivities,baggagehandling,orotherairlineandpassengerservices)."Ifpossible,peersshouldoperatemultiplefacilities,whethercommercialorprivate.PortCommerce.·........·.·.·....·...·····...'·......·.....1)PortofLosAngeles(California)1)PortofTaurangaLtd(NewZealand)-NZSE:POT•Keyattributesofpeersarethattheiractivitiesbefocused2)PortofLongBeach(California)2)NorthQueenslandPortsCorporationLimited(Northeasternonportinfrastructureoperationsandcoordinating3)PortofCorpusChristie(Texas)Australia),aGovernmentOwnedCorporationcapitalinvestmentinportfacilities.Secondarily,peerswithsimilargeographicsizeandvolumewouldalsoNote:ThedefiningcharacteristicsofGOCsarethattheyhaveacomparable.distinctlegalformandtheyareestablishedtooperatein•Portoperationslikestevedoring,cargohandlingandcommercialaffairs.'Whiletheymayalsohavepublicpolicytowageservices,amongmanyothers,areactivitiesobjectives,GOCshavefinancialobjectivestosatisfyshareholdersperformedbyPortAuthoritylesseesanddonotprovidevvithROIanddividends.(Source:Wikipedia,citationneeded)abasisofcomparisonwiththePortAuthority.N/\VIGANT49XII.APPENDIX-BYesYesYesYes!(RetentionProgram-2003)YesLongevityI!A.(40+YrCareerServicePlan)YesLongevityliB(25+YrcareerServicePlan)YesLongevityFP(PoliceSuperiorLongevity)Yes1CumulativeRetirementDaysYesNote:EXAMPLESOF"ADD-ON"COMPENSATIONanoffsetandinlieuofabasesalaryincreasein1·969,thisprograma!lowedemployeestooptforadditionalpay,apartfrombasepay,equaltothearrountoftheirFICAliabilityinyear.Currently14employeesremainwhoreceivethispay.aprogram,initiallyauthorizedbytheBoardiiiApri11976,currentemployeeswithperfectattendancernayopttoprospectivelyexchangetheirupconingyear'svacationforcashtobepaidinbi-weeklyEmployeescanexchangeallbut10Ivacationdaysfromtheirannualallotment.ServiceAemployeeshadnoattendancerequiretrentupto2012.Originallyauthorizedin1993,thisisacareerservicepaymentfornon-representedclericalstafftoencourageretentionandrewardsustainedsatisfactoryperforrrance.After.5yearstheerrployeereceivesanannualincentivepaymentof$500inbi·increments,whichincreasesevery5yearstoaof$2500after40yearsofservice.aretentionmechanism,in20021ier1errployeeswereprovidedwithadditionallifeinsurancecoveragetoaddressapotentialreductioninbenefitthatcouldoccurforbeneficiariesoflier1employeescurrentlyeligibleforretirement,butwhochoosetocontinuetowarkatthePortAuthority.Theearningsoffsettheimputedvalueofthatadditionallifeinsurance.retentionincentivepaymentofferedin2003,atthethenExecutiveDirector'sdiscretion,forthepurposeofretainingkeyexecutivespost9·11foratleastthreeyears.Payiscurrentlyreceivedbythreekeyexecutives.careerservicepaymentauthorizedin2003fornon-representedstaffnotonalongevityscheduleandhaving40ormoreyearsPaymentinrecognitionoftheirfourdecadesofsustainedsatisfactoryperforrranceandcontributiontotheAgency.paymentauthorizedin2008fornon-representedstaffwith25orrr.oreyearsofserviceinrecognitionoftheirIsustainedsatisfactoryperforrranceandcontributiontotheAgencyovertime.Longevity!lA,the40-yearpluslongevityprogram,upintothisprogramsameyear.toPoliceSuperiorsinrecognitionoftheiryearsofexperience.PoliceSuperiorlongevityisaflatratebasedonjDetectiveLieutenantlongevityandyearsofpoliceservice,startingwithoneyearofpoliceserviceandcurrentlytoppingoutat30servicewithacurrentannualrateof$20,020.incentiveforPoliceSuperiorstorraintainperfectattendancethroughouttheircareers.(1)DescriptionshcroebeenprovidedbythePortAutlwrityHRdepartmentforvariousprogramslistedabove.N/\VJGANT14533432435642222250XIII. APPENDIX-C NA VIGANT REPORT QUALIFICATIONS AND DISCLAJMER

THIS CONFIDENTIAL REPORT HAS BEEN PREPARED FOR THE SPECIAL COMMITTEE OF THE BOARD OF COMMISSIONERS OF THE PORT AUTHORITY IN CONNECTION

WITH

NAVIGANT'S PHASE I WORK PURSUANT TO THE AGREEMENT, DATED AS OF NOVEMBER 23, 2011, BY AND BETWEEN NAVIGANT AND THE PORT AUTHORITY.

THIS

REPORT CONTAINS INFORMATION RELATED TO THE PORT AUTHORITY AND IS BEING PROVIDED ON A STRICTLY CONFIDENTIAL BASIS. THE CONTENT OF THIS

REPORT

IS NOT TO BE USED FOR ANY OTHER PURPOSE AND, EXCEPT AS MAY BE REQUIRED BY LAW OR ANY OTHER REGULATORY OR GOVERNMENTAL AUTHORITY

HAVING

JURISDICTION OVER THE PORT AUTHORITY, CANNOT BE DISTRIBUTED WITHOUT THE WRITTEN CONSENT OF NAVIGANT AND MAY NOT, IN ANY CASE, BE

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UPON BY ANY THIRD PARTIES WITHOUT NAVIGANT'S PRIOR WRITTEN CONSENT.

DUE TO TIME AND OTHER LIMITATIONS, THIS REPORT HAS BEEN PREPARED UTILIZING LIMITED DUE DILIGENCE. IT IS BASED ON ASSUMPTIONS, FORECASTS AND

ESTIMATES

MADE BY THE MANAGEMENT OF THE PORT AUTHORITY, INFORMATION PROVIDED TO NAVIGANT BY PORT AUTHORITY PERSONNEL, INFORMATION

PROVIDED

BY INDUSTRY SOURCES, AND, IN SOME CASES, ASSUMPTIONS MADE BY NAVIGANT, WHICH MAY NOT HAVE BEEN REVIEWED WITH PORT AUTHORITY

MANAGEMENT.

ANY HISTORICAL FINANCIAL INFORMATION OR OTHER INFORMATION GIVEN TO, AND SUBSEQUENTLY PRESENTED BY NAVIGANT MAY NOT BE

RELIABLE.

ANY FINANCIAL STATEMENTS OR OTHER DATA CONTAINED HEREIN, INCLUDING ANY FORECASTS, ARE THE FINANCIAL STATEMENTS AND FORECASTS OF

MANAGEMENT, NOT NAVIGANT. NAVIGANT HAS NOT SUBJECTED THE INFORMATION CONTAINED HEREIN TO AN EXAMINATION IN ACCORDANCE WITH GENERALLY

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AUDITING OR ATTESTATION STANDARDS OR THE STATEMENTS ON STANDARDS FOR PROSPECTIVE FINANCIAL INFORMATION ISSUED BY THE AICPA.

FURTHER,

THE WORK INVOLVED DID NOT INCLUDE A DETAILED REVIEW OF ANY TRANSACTIONS, AND CANNOT BE EXPECTED TO IDENTIFY ERRORS,

IRREGULARITIES

OR ILLEGAL ACTS, INCLUDING FRAUD OR DEFALCATIONS THAT MAY EXIST. ACCORDINGLY, NAVIGANT CANNOT AND DOES NOT EXPRESS AN

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OR ANY OTHER FORM OF ASSURANCE ON THE FINANCIAL INFORMATION AND DOES NOT ASSUME RESPONSIBILITY FOR THE ACCURACY OR CORRECTNESS

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IN ADDITION BUT NOT IN ANY WAYS LIMITING THE FOREGOING, IT SHOULD BE NOTED THAT THE SOURCE OF ALL FINANCIAL INFORMATION OR OTHER

INFORMATION

RELATING TO THE PORT AUTHORITY CONTAINED IN THE TABLES, FIGURES AND BODY OF THIS REPORT WAS INFORMATION PROVIDED TO NAVIGANT

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PORT AUTHORITY PERSONNEL.

IT MUST BE RECOGNIZED THAT ANY PROJECTIONS OF RESULTS OR BENEFITS SET FORTH IN THE ATTACHED MATERIALS ARE NECESSARILY, BY THEIR NATURE,

INHERENTLY

UNCERTAIN, AND NO WARRANTY OR REPRESENTATIONS, EXPRESSED OR IMPLIED, IS GIVEN THAT THE RESULTS OR BENEFITS SET FORTH IN SUCH

PROJECTIONS WILL BE ACHIEVED OR REALIZED. NAVIGANT IS NEITHER A LAW FIRM NORA CERTIFIED PUBLIC ACCOUNTING FIRM. ACCORDINGLY, THE INFORMATION CONTAINED HEREIN IS NOT INTENDED TO BE

AND

SHOUW NOT BE RELIED UPON AS LEGAL, AUDITING OR ACCOUNTING ADVICE. N/\V!GANT 51