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Let’s Break Up the Port Authority

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Let’s Break Up the Port Authority

The bistate agency can and should be restructured, but reformers must reckon with fiscal reality. Summer 2016
Infrastructure and energy
New York

The New York City region faces what might be called “First World problems” in infrastructure: how to invest more in tunnels, transit, aviation, and the like to keep pace with growth. In a world of considerable but not limitless resources, billions of dollars hinge on the distinction between attractive projects and essential ones. “Regional” government should, in theory, help rationalize infrastructure priorities, but that’s something that the Port Authority of New York and New Jersey, as currently configured, can’t seem to do. In fact, the Port Authority has enough trouble performing its key tasks—which began, in 1921, with managing port commerce, but have since extended to overseeing infrastructure that includes bridges and tunnels, running five airports and a commuter rail line, and administering a vast real-estate portfolio. Bloated in size, facing more than $20 billion in total debt, and unable to make investments where they’re needed, the agency, founded on the Progressive-era promise of public efficiency, serves the public poorly.

At the core of the agency’s problems is its cost structure—both in terms of what it requires to operate and how those costs get passed along to the public. Powerful public-sector unions have ensured that Port Authority workers rank among the best-paid in government, with high average salaries—rail workers averaged $91,000 in base pay in 2014—driven even higher by out-of-control overtime costs and lucrative benefit and pension packages. (See “Bloated, Broke, and Bullied,” Spring 2016.) Such costs are a major reason that the Port Authority Trans Hudson (PATH) commuter rail system needs $400 million in annual subsidies to operate. The Authority’s real-estate holdings, too, the most expensive part of its portfolio, have drained resources, with the redevelopment of the World Trade Center doubling its debt. The new World Trade Center Transportation Hub, projected to cost $2 billion to construct, wound up costing more than twice that sum.

To pay for it all, the Port Authority levies exorbitant fees on commuters at its bridges and tunnels. New York–area drivers now pay $15 to cross Port Authority bridges, up from $8 in 2008. The airports, though profitable, are enormously expensive to operate, too, and risk driving away business with their skyrocketing fees. United Airlines filed a complaint with the FAA against Newark Airport, for instance, saying that flying out of Newark is more than twice as expensive as traveling out of airports in Boston or San Francisco.

Yet the Port Authority has little to show for its revenues, not only because its employee costs are so high but also because the profitable units subsidize the unprofitable ones. Thus, little has been left over to invest in areas, such as the airports, that badly need upgrades, let alone to invest in genuinely needed new infrastructure. Vice President Joe Biden famously likened LaGuardia to a Third World airport. The Port Authority can’t afford the new $10 billion bus terminal that it plans to build over the next decade. And no one knows where the Authority will find the money to help cover the costs (half paid by the federal government) of the estimated $20 billion construction of two new rail tunnels under the Hudson River, a project that falls squarely within its traditional scope of responsibilities. In short, the Port Authority is too indebted, overextended, and disorganized to fulfill its responsibilities.

The solution? Break the whole thing up, forcing the individual units to learn how to thrive independently and ending the counterproductive and costly system of cross-subsidy. The timing for such a major overhaul is auspicious, not only because of the financial realities but also because the reputation of the nearly 100-year-old agency has reached a low point. A spate of scandals revealing incompetence, waste, and corruption has strengthened interest in far-reaching reform. But proposals for dramatic restructuring must reckon with fiscal reality. New subsidies would have to be identified for unprofitable operations, and obligations to bondholders must be honored. These obstacles don’t render reform impossible, but they do make it a formidable challenge.

Graph by Alberto Mena

Mission creep is the common explanation given for how one government agency gained control of five airports, the PATH system, six cross-Hudson bridges and tunnels, 45 million square feet of retail, industrial, and office space, the world’s busiest bus facility, and six seaport facilities in New Jersey and New York. But “mission creep” implies that the Port Authority once had a distinct, consistently maintained mission, which was never true. The original 1921 interstate compact spoke only of “a body, both corporate and politic, with full power and authority to purchase, construct, lease and/or operate any terminal or transportation facility within [the port] district.” (The Port Authority’s “district” encompasses a 25-mile radius from the Statue of Liberty.) The agency’s founders were chiefly preoccupied with the need for a government role in organizing freight rail operations on both sides of the Hudson. They lost sight of this goal within a few years, though, largely because railroad firms declined to cooperate. Eager to justify its existence, the Port Authority quickly pivoted to cars and trucks: construction started on the Goethals Bridge in 1923, and the building of the Bayonne and George Washington Bridges and acquisition of the Holland Tunnel followed soon thereafter. Though rightly heralded as engineering marvels, these projects also represented a self-serving change of course for the agency. As Herbert Kaufman, a distinguished scholar of public administration, once explained to leading Port Authority historian Jameson Doig: “I always cite the Port Authority as a classic case . . . of switching proclaimed missions in the interest of organizational survival, the paramount value. It went from promoting the unification of rail service in the port to a host of activities that helped diminish use of the railroads. . . . [T]he Authority changed sides to protect its own existence.”

By the time its respected executive director Austin Tobin stepped down in 1972 after a 30-year term, the Port Authority had assumed its current Frankenstein-like form. Good-government types admire Tobin for how he guarded his agency’s independence. But as with Robert Moses, a contemporary with whom he is often compared, Tobin left an ambivalent legacy. His high-handed leadership style led to a backlash against the Progressive-era notion of independent public authorities that has never abated.

Tobin also developed the World Trade Center, which proved a big mistake for the Port Authority, for two reasons. First, real-estate development remains a highly controversial interpretation of the agency’s responsibilities. It’s hard to believe that lower Manhattan would have languished if not for the investment of hundreds of millions in government funds. “[S]ocialism at its worst” is what motivated the World Trade Center development, according to liberal transit advocate Theodore Kheel in a blistering 1969 New York piece. Second, getting New Jersey officials to agree to the World Trade Center, a New York priority, required taking responsibility for the insolvent Hudson & Manhattan railroad, renamed PATH when it was brought under the Port Authority’s governance. Tobin resisted taking over PATH for several years before agreeing to do so. In retrospect, it’s clear that some government entity was going to have to take on PATH, but the “what’s in it for me” structure of the deal that Tobin brokered between the two states set a damaging precedent.

The Port Authority’s greatest institutional flaw lies in its bistate structure, which guarantees that New York and New Jersey officials will always suspect that one state is profiting at the other’s expense. These concerns predate the agency’s founding. During the deliberations leading up to the 1921 compact, one associate of New York mayor John F. “Red Mike” Hylan predicted that “if this bill goes through, there won’t be any port of New York. It will be the port of New Jersey and Newark Bay.” In the 1990s, both Mayor Rudolph Giuliani and Public Advocate Mark Green, bitter enemies on virtually every other issue, released reports arguing that the Port Authority showed bias toward New Jersey residents. Rivalry between the two states has resulted in fragmented leadership. A few years after the World Trade Center deal, the states agreed that New Jersey would appoint the chairman and New York would name the executive director. The chain of command grew murkier when, in the early 1990s, New Jersey demanded and got a “deputy executive director” who would function essentially like a co-CEO, not the executive director’s subordinate.

An independent public authority supposedly runs like a business, but only a government agency would come to the conclusion that a divided board and CEO structure makes sense. The Progressives embraced cooperation because of their distrust of competition, in both the private and public sectors. But the ratcheting-up effect of interstate rivalry between New York and New Jersey—competition under the guise of cooperation—has made a mockery of the “great economies” promised by the original 1921 compact. As Port Authority chairman John Degnan recently explained to the Bergen Record, “The way the Port Authority always works is there are projects of immediate priority in both states. . . . For one to get done, the other has to get done.”

In addition to dividing up power inefficiently, the commitment to “interstate cooperation” has encouraged unusual expansions in the Port Authority’s scope of responsibilities. The late 1970s–early 1980s “regional development” program begun under executive director Peter Goldmark was the regrettable, if natural, result of the World Trade Center deal two decades earlier. Wrongheaded to begin with, the plan swelled out of proportion because every project on the east side of the Hudson (Bathgate Industrial Park, the Industrial Park at Yonkers, the Teleport on Staten Island) necessitated another to the west (Essex County Resource Recovery Facility, the Industrial Park at Elizabeth, Newark Legal Center). These “regional” projects were really designed for the parochial benefit of New York or New Jersey residents. As SUNY political science professor Gerald Benjamin aptly put it, “Efficiency in pursuit of regional interests had given way to equity in pursuit of state interests.” The same tit for tat drove the passage of special legislation in 2007 granting each state the right to one additional air terminal outside the Port Authority’s legal boundaries. That year, the Authority signed a lease to run Stewart International Airport in New York’s Hudson Valley; in 2013, the Authority began consulting with Atlantic City International Airport.

The failure of interstate cooperation was a factor in Bridgegate—the 2013 episode in which a staffer for Jersey governor Chris Christie sent the infamous “time for some traffic problems in Fort Lee” e-mail to then–Port Authority official David Wildstein, a Christie appointee. The message apparently called for lane closures on the George Washington Bridge in an act of political retribution against the mayor of Fort Lee, New Jersey, who had declined to endorse Christie for reelection. During the lane closures, deputy executive director Bill Baroni kept executive director Patrick Foye, a New York appointee, in the dark—even though Foye was Baroni’s titular superior.

Reform efforts in the wake of Bridgegate have led to the elimination of the deputy executive director position. But public distrust of the Port Authority remains widespread, fueled by a suspicion that the agency’s unelected administrators have too much power—and that they use it for the benefit of constituents on the other side of the Hudson. Tobin and Moses may have resisted politicians’ demands for pork and patronage, but they also enjoyed a level of deference from the public and the media that is inconceivable today. In their 1960 study Governing New York City, Herbert Kaufman and Wallace Sayre noted Tobin’s and Moses’s extraordinarily successful PR efforts, which “created a strong public image of the authorities as efficient, free of politics, dynamic, and public-welfare conscious. . . . [They] have enjoyed the support of the press in most of the controversies in which they have become involved. They have generally been portrayed sympathetically, and their virtues widely extolled.”

Now, however, in addition to Bridgegate, the Port Authority is most commonly associated with the long-delayed World Trade Center rebuilding and the $4.4 billion World Trade Center Transportation Hub, the original design for which contained a massive wingspan overlaying the facility to honor New York’s ascent from 9/11. After security concerns required added structural reinforcements, however, the station now looks more like a stegosaurus, thus reflecting some critics’ conception of the inept, lumbering Port Authority itself.

Far from enjoying the benefit of the doubt, the Port Authority has been the target of numerous investigative-journalism exposés in recent years, and infringements on its independence have been sustained and varied. State legislatures on both sides of the Hudson have been pursuing Port Authority reform, the goal being more transparency and oversight.

Illustration by Arnold Roth

But how, then, can the Port Authority be reformed? Many politicians have raised the idea of restructuring the agency, including Governors Christie and Cuomo, former New York mayor Rudolph Giuliani, and former New York governor George Pataki. Giuliani went the furthest, developing a plan to create a New York City Airport Authority that would own JFK and LaGuardia and privatize their management. He charged, with some justification, that the Port Authority had underinvested in JFK and LaGuardia in order to keep PATH fares low.

At one point during the privatization debate, the Port Authority invoked an argument that, decades earlier, Tobin had used to resist calls to take over the insolvent Hudson & Manhattan: altering the agency’s structure would threaten the claims of bondholders. “All [bond] covenants can be defeased, and the Port Authority knows that,” the Giuliani administration countered. Defeasance is a financial maneuver through which outstanding bonds are retired in advance of their maturity date. The Port Authority currently has $21 billion in outstanding “consolidated bonds”: long-term debt obligations backed by the fees and charges imposed at its various facilities. Taxpayers don’t subsidize the Port Authority; rather, profitable operations such as JFK airport and the GW Bridge cover the deficits incurred by PATH, the Port Authority Bus Terminal, and other money-losers. All revenues go into the same pot, which backs all debt issued to reinvest in any component unit. (For example, money for JFK enhancements doesn’t come exclusively from JFK fees and charges.)

To achieve operational restructuring, the Port Authority would have to restructure its consolidated debt.

To achieve any meaningful operational restructuring—such as separating the airports from the bridges and tunnels—the Port Authority would have to restructure its consolidated debt. Some issuances aren’t scheduled to be repaid until 2065. The agency refunds debt every year, mainly to take advantage of lower interest rates. In the last decade, the authority has issued more than $9 billion in consolidated bonds for refunding purposes, saving more than $700 million on interest payments. Refunding bonds is like refinancing a home mortgage. Say that a city issues $100 million in debt at 5 percent interest, due in 30 years, but 15 years into that issuance, interest rates drop to the point where a 4 percent rate becomes available. The city would then exercise a “call” option on the issuance, pay back the bondholders in full, and reissue the debt at the lower interest rate. But investors are typically protected against having their bonds called until ten years after the initial date of issuance. When issuers want to refund debt but can’t call it, they must defease existing bonds. This entails setting up an escrow account filled with Treasury securities sufficient to pay bondholders their interest and principal until the call option may be exercised—at which point, the issuance is fully refunded. (As a technical matter, the Port Authority has sought but has not yet obtained the legal authority to defease bonds—that is, remove them from its balance sheet. It has, however, defeased bonds in the economic sense of issuing debt to refund them before they mature.)

The mechanics of refunding are crucial to Port Authority reform. Debt obligations must be honored. (Politicians looking for an excuse to block reform would likely point out that breaking debt commitments could prompt downgrades for other government issuers, such as the MTA and New Jersey Transit.) America is a nation of contracts, and, in contrast with recent investors in Puerto Rico or the Chicago Public Schools or other risky credits, Port Authority bondholders aren’t speculators. An absolute dissolution would be illegal, anyway. The Port Authority’s $21 billion in consolidated bonds is backed by a contractual commitment, spelled out in bond documents, that no change to the consolidated funding structure “shall alter or impair the obligation of the Port Authority, which is absolute and unconditional, to pay the principal and interest of any bond at the time and place and at the rate or amount and in the medium of payment prescribed therein, or shall alter or impair the security of any bond, or otherwise alter or impair any rights of any bondholder.” Breaking up the Port Authority without making bondholders whole would prompt an avalanche of litigation.

Moody’s rates the Port Authority strongly, at Aa3, thanks in part to what analysts describe as “the authority’s near monopoly control over critical transportation infrastructure in its large and economically diverse service area.” The bond market likes monopolies because they strengthen investors’ confidence that nothing threatens the stream of fees or tolls that lies behind an issuer’s promise to pay back the debt on time. All things being equal, a public authority that owns six cross-Hudson bridges and tunnels will boast a stronger bond rating—and thus a lower borrowing rate—than six separate agencies competing with one another for toll revenues. If the Port Authority gets broken up, new debt will have to be issued to refund old debt, and New York and New Jersey would almost certainly look to newly created authorities, not themselves, to back the refunding debt. Any new agencies—such as, say, a “New York–New Jersey Airport and Port Commerce Authority”—must be highly creditworthy to help refund debt at an affordable interest rate. A rise in interest rates will give crucial leverage to restructuring opponents because it may require the issuance of expensive debt to refund cheap debt. Again, the fiscal and political implications of a breakup plan are deeply interwoven.

The Port Authority’s consolidated funding structure, allowing cross-subsidization and monopolistic control over key assets, has enabled officials to procrastinate on reform. And ratings agencies and bondholders are not enthusiastic about talk of radical restructuring because of what it might mean for existing debt obligations. Thus, the interests of the public and of the bond market are not perfectly aligned in the Port Authority’s case.

The pathologies of the public sector account for the Port Authority’s woes. But its quasi-corporate character enables it to draw from the private sector for reform ideas, as a Rothschild Inc. report commissioned by the Giuliani administration explained: “As AT&T and other huge companies have proven, the best way to deal with large and complex bureaucracies [such as the Port Authority] is to break them apart structurally.” Bondholders’ rights are not unlimited. They do not extend, for example, to particular assets. So the Port Authority can be restructured—that is, broken up—and shrunk.

Any restructuring plan should be guided by two principles. First, in addition to honoring commitments to bondholders, transition costs should be kept to a minimum. Second, the past should not dictate the Port Authority’s responsibilities. Reforming the Port Authority should be seen as a question of giving historical clarity to its function, not an attempt to revive the golden age of public administration.

The most fiscally realistic breakup scenario involves severing the Port Authority at its natural joints—aviation, port commerce, Hudson crossings, real estate. Two new agencies would be created: one responsible for the bridges, tunnels, and PATH; and the other for the airports and port commerce (which also runs a deficit, though one not nearly as deep as PATH’s). The chief benefits of this plan would be greater focus on core infrastructure and individual revenue streams. Whereas many governments these days face a revenue crisis, the Port Authority’s challenge is better understood as how to make optimal use of its profits.

Spinning off the airports and putting them under a newly created authority would address the long-standing complaint that aviation revenues are often diverted from aviation operations. The three major airports should remain under the same, new authority because separating them could threaten the airports’ credit quality—a serious concern, given that this new authority would have to issue debt to refund a portion of the Port Authority’s debt.

Spinning off the airports would address the complaint that revenues are often diverted from aviation operations.

Selling off the World Trade Center and other real estate is important for financial as well as symbolic reasons. The Port Authority’s engagement in the redevelopment of lower Manhattan and other struggling areas dates back to an era of deindustrialization and urban decay, when many government officials took an “all hands on deck” attitude toward economic stimulus. But now that it’s clear that New York is not going the way of Buffalo, Detroit, and other struggling cities, government-sponsored economic development seems even less justifiable than it did 40 years ago. And misgivings always existed about the Port Authority’s drift into real estate. From New York governor Hugh Carey in 1980 to current chairman Degnan, calls have gone up regularly to sell off the World Trade Center. A 2014 report by the Special Panel on the Future of the Port Authority, in which both the chairman and the vice chairman participated, recommended “phas[ing] out real-estate ownership and development as an element of the Port Authority’s mission,” including the “ultimate divesture” of World Trade Center assets. The Authority’s continued ownership of the World Trade Center and other noncore assets demonstrates the disingenuousness of its rhetoric about getting back to basics. Only a broader restructuring that includes a real-estate liquidation is likely to strengthen the agency’s resolve to get out of nonessential infrastructure. Though a real-estate sale would have to be gradual to ensure the highest return, proceeds could be used to refund debt or help fund future capital needs, such as the new bus terminal and Amtrak’s Gateway Program.

The Port Authority should retain control of all six bridges and tunnels, and of PATH, which, with its $400 million deficit, will always need subsidies. Past proposals to change PATH’s governance structure include incorporating it into New Jersey Transit—itself subsidized to the tune of $1 billion annually—or the New York City subway system. But New Jersey officials, who could veto any breakup plan, would almost certainly resist restructuring proposals that require raising taxes to replace the lost subsidies from bridges, tunnels, and airports. If the Port Authority remains somehow responsible for funding PATH, as seems likely, it should also run it. While subsidies from the bridge and tunnel revenue would remain crucial to its operations, PATH should also be forced to get control of its cost structure, which means raising fees and pushing back on union demands, come contract time.

Even if still responsible for the money-losing PATH, this scaled-down Port Authority would be less indebted and better positioned to take on two looming megaprojects: a new bus terminal in midtown Manhattan; and the Gateway Program, at the heart of which is a new cross-Hudson tunnel into Penn Station. The agency’s board makeup would have to remain interstate, since these two projects, though providing the most direct benefit to New Jersey commuters, lie within New York’s jurisdiction.

Opponents of restructuring, heirs to the Progressive tradition of valuing cooperation over competition, argue that a breakup would make a bad situation worse, especially in light of the New York City metro area’s extreme political fragmentation. But their solution—more independence for Port Authority board members and staff—is impractical in a modern context. No doubt, many infrastructure challenges would go unsolved by restructuring the Port Authority, but that doesn’t mean that it wouldn’t be worth doing. A smaller Port Authority would be a more disciplined Port Authority.

Research for this article was supported by the Brunie Fund for New York Journalism. This is the third in a series of articles on the Port Authority.

Top Photo by Spencer Platt/Getty Images

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