New Jersey could use the money for needed transportation projects like the unfunded Gateway tunnels project or to reduce the state’s public pension debt.
Los Angeles (August 25, 2020) — A new Reason Foundation study finds New Jersey could net between $11.6 billion and $23.2 billion by leasing the New Jersey Turnpike and Garden State Parkway, giving the state much-needed money to fund other transportation projects or pay down growing public pension liabilities.
Using data from comparable long-term toll road leases worldwide, the Reason Foundation report estimates that the medium-range net proceeds (after paying off outstanding Turnpike bonds) would be $17.4 billion for a 50-year lease of the New Jersey Turnpike and Garden State Parkway. The lease would actually generate $23 billion to $34.7 billion in gross revenues for the state, but the Turnpike’s debt levels reduce the net proceeds. New Jersey would likely be able to choose to receive the proceeds in either a lump-sum up-front payment or annual lease payments.
“New Jersey toll-payers were recently hit with a large, unexpected toll rate hike,” said Robert Poole, author of the study and director of transportation at Reason Foundation. “Today, most toll road leases limit annual toll rate increases to the rate of inflation, so drivers would be protected. The lease agreement would ensure meaningful state oversight of the toll rates and key performance indicators for the Turnpike and Parkway, while providing greater accountability and transparency for the public and toll-payers.”
The study stresses that each state must determine the best uses for the money from a deal, but outlines three possible uses of the proceeds New Jersey would receive from a long-term lease:
- Funding major unfunded transportation needs, such as New Jersey's share of the still-unfunded $12 billion Gateway project for new tunnels under the Hudson River.
- Reducing state debt, with the aim of achieving a higher bond rating, to permit financing at lower interest rates.
- Reducing the unfunded liabilities of state public employee pension funds. The mid-range $17.4 billion in net proceeds could cover 24 percent of the state’s 2018 unfunded pension liabilities.
“As an investor-financed business, a toll road company would likely speed up modernization efforts on the Turnpike and allow the state to fund other infrastructure projects,” Poole said. “The state could ensure there are significant penalties for failing to meet performance metrics and that the lease could be terminated if the company continued not measuring up to expectations.”
Five U.S. toll roads have entered into long-term leases in recent years, including the Chicago Skyway and Indiana Toll Road. The Chicago Skyway lease is now held by a consortium of Canadian public pension funds and the Indiana Toll Road lease is held by a consortium of U.S. pension funds.
Many modern toll roads in Australia, France, Italy, Portugal, and Spain are operated under long-term public-private partnership (P3) leases. The current global model calls for long-term leases organized as public-private partnerships, analogous to franchises for investor-owned electric utilities. The report examines how these countries have utilized P3s, surveys the companies and investment funds that are most active in this sector, and reviews how lease revenues can be put to use. The study provides estimates for the proceeds that nine state-owned toll road systems could generate via long-term leases.
“States like New Jersey need to examine if they are maximizing the value of their existing toll roads. Based on the valuations of overseas toll roads in recent transactions, we found New Jersey would have significant net proceeds after paying off outstanding tax-exempt toll road bonds as required by U.S. tax law,” Poole said. “Despite the pandemic and recession, car usage is nearly back to normal levels in some areas and there continues to be great interest in long-term investing in U.S. toll roads. With today’s low interest rates, these types of acquisitions are still attractive to global toll road companies, infrastructure investment funds and pension funds.”
Executive Summary — Why Governments Should Lease Their Toll Roads
Full Study — Should Governments Lease Their Toll Roads?
Frequently Asked Questions — Why Should States Consider Leasing Their Toll Roads?
Reason Foundation is a nonprofit think tank dedicated to advancing free minds and free markets. Reason Foundation produces respected public policy research on a variety of issues and publishes the critically acclaimed Reason magazine and its website. For more information please visit Reason.org.