Navigant Phase 2 and Rothschild Reports

PhaseIIReport
Presentedto:
TheSpecialCommitteeoftheBoardofCommissionersof
September2012

Presentedby:

PhaseIIReporttotheSpecialCommitteeofthePortAuthorityofNewYorkandNewJersey
TableofContents
I. II. EXECUTIVESUMMARY..............................................................................................5 OVERVIEW ...................................................................................................................11 .
BACKGROUND........................................................................................................................................................ 1 . 1 CURRENTLANDSCAPE............................................................................................................................................ 3 1 ACHIEVEMENTSANDINITIATIVESUNDERWAY..................................................................................................... 6 1 KEYOPERATINGPRINCIPLES................................................................................................................................. 7 1
III.
APPROACH&METHODOLOGY...........................................................................19
ORGANIZATIONALDESIGN&EFFECTIVENESS...................................................................................................... 9 1 OPERATIONALASSESSMENT.................................................................................................................................. 9 1 WTCCOSTREVIEW................................................................................................................................................ 9 1 CAPITALPLANNINGASSESSMENT......................................................................................................................... 0 2
IV.
CORPORATEGOVERNANCE.................................................................................21
OVERVIEW .............................................................................................................................................................. 1 . 2 CURRENTCOMMITTEECONFIGURATION.............................................................................................................. 2 2 OBSERVATIONS&FINDINGS.................................................................................................................................. 3 2
V.
ORGANIZATIONALDESIGN&EFFECTIVENESS...........................................26
CURRENTORGANIZATIONALSTRUCTUREOVERVIEW.......................................................................................... 6 2 OBSERVATIONS&FINDINGS.................................................................................................................................. 8 2 RECOMMENDATIONS.............................................................................................................................................. 9 2
VI.
LINEDEPARTMENTREVIEWAVIATION.......................................................35
OVERVIEW .............................................................................................................................................................. 5 . 3 FINANCIALRESULTS............................................................................................................................................... 6 3 OBSERVATIONS&FINDINGS.................................................................................................................................. 8 3 REVENUEENHANCEMENTOPPORTUNITIES.......................................................................................................... 9 3 COSTCONTAINMENTOPPORTUNITIES.................................................................................................................. 1 4 RECOMMENDATIONS.............................................................................................................................................. 1 4
VII. LINEDEPARTMENTREVIEWTUNNELS,BRIDGES&TERMINALS.......42
OVERVIEW .............................................................................................................................................................. 2 . 4 FINANCIALRESULTS............................................................................................................................................... 4 4 OBSERVATIONS&FINDINGS.................................................................................................................................. 5 4 NONTOLL/NONFAREREVENUEOPPORTUNITIES.............................................................................................. 7 . 4 RECOMMENDATIONS.............................................................................................................................................. 9 4
VIII. LINEDEPARTMENTREVIEWPATH.................................................................50 .
OVERVIEW .............................................................................................................................................................. 0 . 5 FINANCIALRESULTS............................................................................................................................................... 1 5 OBSERVATIONS&FINDINGS.................................................................................................................................. 3 5 NONFAREREVENUEENHANCEMENTOPPORTUNITIES....................................................................................... 4 5 RECOMMENDATIONS.............................................................................................................................................. 5 5
IX.
LINEDEPARTMENTREVIEWPORTCOMMERCE........................................56
OVERVIEW .............................................................................................................................................................. 6 . 5 FINANCIALRESULTS............................................................................................................................................... 7 5 OBSERVATIONS&FINDINGS.................................................................................................................................. 8 5
REVENUEENHANCEMENTOPPORTUNITIES.......................................................................................................... 9 5 COSTCONTAINMENTOPPORTUNITIES.................................................................................................................. 0 6 RECOMMENDATIONS.............................................................................................................................................. 1 6
X.
WORLDTRADECENTERPROGRAM ..................................................................62 .
OVERVIEW .............................................................................................................................................................. 2 . 6 SUMMARYOFKEYFINDINGS................................................................................................................................. 4 . 6 OBSERVATIONS&FINDINGS.................................................................................................................................. 5 6 RECOMMENDATIONS.............................................................................................................................................. 8 6
XI.
SHAREDSERVICEREVIEWPROCUREMENT ................................................70 .
OVERVIEW .............................................................................................................................................................. 0 . 7 OBSERVATIONS&FINDINGS.................................................................................................................................. 0 7 COSTCONTAINMENTOPPORTUNITIES.................................................................................................................. 3 7 RECOMMENDATIONS.............................................................................................................................................. 4 7
XII.
SHAREDSERVICEREVIEWENGINEERING...................................................76
OVERVIEW .............................................................................................................................................................. 6 . 7 OBSERVATIONS&FINDINGS.................................................................................................................................. 6 7 RECOMMENDATIONS.............................................................................................................................................. 9 7
XIII. SHAREDSERVICEREVIEWLAW.......................................................................80
OVERVIEW .............................................................................................................................................................. 0 . 8 OBSERVATIONSANDFINDINGS.............................................................................................................................. 1 8 RECOMMENDATIONS.............................................................................................................................................. 3 8
XIV. SHAREDSERVICEREVIEWREALESTATE&DEVELOPMENT................84
OVERVIEW .............................................................................................................................................................. 4 . 8 OBSERVATIONS&FINDINGS.................................................................................................................................. 6 8 REVENUEENHANCEMENTOPPORTUNITIES.......................................................................................................... 6 8 RECOMMENDATIONS.............................................................................................................................................. 7 8
XV.
CAPITALPLANASSESSMENT&FORECASTREVIEW ..................................89 .
OVERVIEW .............................................................................................................................................................. 9 . 8 SUMMARYOFKEYFINDINGS................................................................................................................................. 1 . 9 OBSERVATIONS&FINDINGS.................................................................................................................................. 1 9 RECOMMENDATIONS.............................................................................................................................................. 8 9
XVI. IMPLEMENTATIONPLAN&NEXTSTEPS.........................................................99 XVII. APPENDIXA:KEYINITIATIVESIMPLEMENTATIONPLAN..................100 XVIII.APPENDIXB:PROCUREMENTBUYINGGROUPS(DEFINED)................105 XIX. APPENDIXC:PROCUREMENTDEPT.RECOMMENDATIONS...............107 XX.

APPENDIXD:ACHIEVEMENTS&INITIATIVESUNDERWAY...............114
XXI. APPENDIXE:REPORTQUALIFICATIONS&DISCLAIMER ....................117 .
Tables
Table1Preliminary20112020CapitalPlan,byYear....................................................................................... 6 Table2Preliminary20112020CapitalPlan,byYear,withoutTollorFareIncreases................................ 6 Table3PreliminaryCapitalPlanfor20112020KeyProjects.......................................................................... 7 Table4NonToll/NonFareRevenueEnhancementImpact............................................................................ 8 Table5CostContainmentInitiatives.................................................................................................................... 9 Table6AverageAgeofFacilities,HistoricalCapitalSpendandAnticipatedInvestment......................... 3 1 Table7CumulativeCashFlowsbyFacility20072011.................................................................................. 4 1 Table8KeyMetricsbyLineDepartment:20072011 ..................................................................................... 5 . 1 Table9KeyOperatingPrinciples........................................................................................................................ 7 1 Table10SummaryofByLawCommitteeResponsibilities......................................................................... 2 2 Table11HighlightsofApprovedCommitteeChanges................................................................................... 4 2 Table12AviationPreliminary20112020CapitalPlan ................................................................................. 6 . 3 Table13AviationAnnualFinancialTrend........................................................................................................ 7 3 Table14AviationRevenueTrend&Components........................................................................................... 7 3 Table15TB&TSummaryStatistics..................................................................................................................... 2 4 Table16TB&Tpreliminary20112020CapitalPlan ...................................................................................... 3 . 4 Table17TB&TRevenueElements&KeyOperatingStatistics....................................................................... 4 4 Table18TB&TComponentsofFreeCashFlowatTB&T................................................................................ 4 4 Table19InterstateTransportationNetworkCashFlow.................................................................................. 5 4 Table20ProjectedInvestmentsinTB&TFacilities&ProjectedCashFlow.................................................. 6 4 Table21TB&TComparativeTolls...................................................................................................................... 7 4 Table22PATHPreliminary20112020CapitalPlan...................................................................................... 1 5 Table23PATHAnnualFinancialTrend............................................................................................................ 2 5 Table24PATHRevenueTrend&Components............................................................................................... 2 . 5 Table25PortCommerceFacilities,Locations&2011Revenue...................................................................... 6 5 Table26PortCommercePreliminary20112020CapitalPlan..................................................................... 7 5 Table27PortCommerce:RevenueTrend&KeyOperatingStatistics.......................................................... 7 . 5 Table28PortCommerce:ComponentsofFreeCashFlow ............................................................................. 8 . 5 Table29GovernmentFundingatComparablePorts(update)....................................................................... 9 5 Table30WTCEstimateandPotentialExposure(perPhaseIInterimReport)(update)............................. 3 6 Table31WTCEACandPotentialExposure...................................................................................................... 4 6
Table32PortAuthorityResponsetoPhaseIRecommendations................................................................... 6 6 Table33WTCIncurredandForecastCosts(GrossandNet).......................................................................... 7 6 Table34WTCFundingRequirementstoDateandThroughCompletion(Annually)................................ 8 6 Table35ProcurementAwardsbyAuthorizationLevel(2011)....................................................................... 0 7 Table36ConstructionContractsApprovedbyDirector(2011)...................................................................... 1 7 Table37ProcurementAwardsMadebyBuyingGroup(2011)...................................................................... 1 7 Table38ProcurementAwardsbyProcess(2011)............................................................................................. 2 7 Table39ConstructionCosts:Hardvs.Soft(20002011)................................................................................ 8 7 Table40Claims&MattersHandledbyLawDepartment(2011)................................................................... 0 8 Table41OutsideCounselRetainedin2011($in000s)................................................................................... 2 8 Table42PortfolioofRealEstate&InProcessDevelopments(updatetable)............................................... 4 8 Table43PortfolioofPortAuthorityOwnedandLeasedEmployeeOfficeSpace....................................... 5 8 Table44UnconstrainedCapitalNeedsbyCategory($inbillions)................................................................ 2 9 Table45UnconstrainedCapitalNeedsbyLineDepartment($inbillions).................................................. 3 9 Table4620092011BudgetedSpendagainstCapitalPlan($inbillions)..................................................... 4 9 Table4720082011UnplannedProjectswithActualSpend($inbillions).................................................... 5 9 Table48IllustrativeExampleofSoftCostSavings($inMillions)................................................................. 6 9 Table49MBDModelObservationsvs.NavigantModelEnhancements...................................................... 7 9
Figures
Figure1PortAuthorityKeyAssetBenchmarking2011................................................................................ 2 1 Figure2TotalOutstandingDebt20072011($billions)................................................................................. 6 1 Figure3KeyOperatingPrinciplesChartofInterdependencies..................................................................... 8 1 Figure4CurrentOrganizationalStructure........................................................................................................ 7 2 Figure5PreliminaryDraftOrganizationalChart............................................................................................. 0 3 Figure6TB&T:TollViolations(2011)................................................................................................................. 8 4 Figure7PATHvs.OtherModesofTransportation......................................................................................... 3 . 5 Figure8LawDepartmentvs.NewYorkCityMetro2011Compensation.................................................... 1 8
I.
EXECUTIVESUMMARY
WithrevitalizedAgencyleadership,theestablishmentofafoundationofKeyOperating Principles, thoughtful corporate governance and organizational design modifications, meaningfuloperatingimprovementsareunderway
ThePortAuthorityisinthemidstofasignificanttransformation.TheBoardofCommissioners, includingtherecentlyappointedChairmanandViceChairman,theExecutiveDirector,andthe Deputy Executive Director, are individually and collectively taking a proactive approach and are evidencing the resolve to drive change at all levels within the organization. If properly implemented,thischangewillhelptheAgencyriditselfofyearsofinefficiency.Nevertheless, the challenges and opportunities of the Port Authority over the next 10 years are enormous, including: Prioritizing, funding, and effectively executing over $11.4 billion in deferred capitalprojectsthatarenotpresentlyincludedinthe$26.9billionpreliminary2011 2020 Capital Plan but are necessary for the cost effective operation of the Agencysassets; Funding, without direct return, the public benefit of continued investment in commuter rail and maritime transportation systems (i.e., PATH and Port Commerce), that are central to the movement of people and goods, yet, absent federal or state subsidies commonly received by sector peers, represent business modelswithprojectedongoingmateriallynegativecashflows; Completing the WTC Program, a project of national significance and regional economicvitality,withinitsestimatedcostandmaximizingcostrecovery;and, Seizing the momentum of recent governance changes and organizational design improvements to successfully implement a variety of performance improvement initiatives.
Over the past five years, the Aviation line department has been the only positive free cashflowcontributortothePortAuthoritybutnowhassomeofthelargestupcoming capital expenditure needs. In addition, the Interstate Transportation Networks (Tunnels,BridgesandTerminals,PATHandtheFerryService),(ITN),operatingcash flowisinsufficienttocoveritsowncapitalexpenditureneeds AviationandITNcombinedwithPortCommerceandexpendituresforeconomicandregional development produced approximately $700 million in free cash flow over a five year period ending in 2011, which amounts to an average of approximately $140 million per year. This figureiswellbelowthesumsrequiredtofundcriticallinedepartmentcapitalprojectsthathave beendeferredorlimitedbecauseofcapitalconstraintsoftheAgency.
Thetollincreasesscheduledtogointoeffectoverthenextthreeyearsarenecessaryto meetthefundingrequirementsofthePortAuthoritysPreliminary20112020Capital Plan presented below, and combined with the pursuit of further nontoll, nonfare, revenue enhancements, as well as Agencywide cost structure improvements, will be criticaltomaintainongoingtransportationinfrastructureinaStateofGoodRepair Table1Preliminary20112020CapitalPlan,byYear
($ billions) Capital Plan + Increm ental WTC Costs ($27.8B): Base Case: Capital Capacity: Excess / (Shortfall): Cumulative: Dow nside Case: Capital Capacity: Excess / (Shortfall): Cumulative: $ 2011 2.9 $ 2012 4.0 $ 2013 4.6 $ 2014 4.3 $ 2015 3.0 $ 2016 2.3 $ 2017 2.2 $ 2018 1.7 $ 2019 1.4 $ 2020 1.5 $ Total 27.8
$ $ $
2.9 -
$ $ $
4.0 $ (0.0) $ (0.0) $
4.6 $ (0.0) $ (0.0) $
4.3 $ (0.0) $ (0.1) $
3.4 0.4 0.3
$ $ $
2.7 0.4 0.7
$ $ $
2.7 0.5 1.2
$ $ $
2.1 0.4 1.6
$ $ $
1.9 0.5 2.1
$ $ $
2.0 0.5 2.6
$ $
30.4 2.6
$ $ $
2.9 -
$ $ $
3.9 $ (0.1) $ (0.1) $
3.4 $ (1.1) $ (1.2) $
3.3 $ (1.0) $ (2.2) $
2.4 $ (0.6) $ (2.8) $
1.3 $ (1.0) $ (3.8) $
1.8 $ (0.4) $ (4.2) $
1.7 -
$ $
1.4 -
$ $
3.5 2.0 (2.2)
$ $
25.6 (2.2)
(4.2) $
(4.2) $
The Port Authoritys preliminary 2011 2020 Capital Plan of $26.9 billion grows to approximately$27.8billiononcetheincrementalWTCcosts(EACof$14.8billion)areaddedto thePreliminary20112020CapitalPlan.Table1examinestwoscenarios,includingtheBase CaseandDownsideCase.TheBaseCaseisthecurrentPortAuthorityforecast.TheDownside CaseisthePortAuthorityBaseCasemodifiedincoordinationwiththeAgencysFinancestaff toincludeconsiderationsforvolumedeclinesandsofteningoftheeconomicenvironment.In these situations, the Base Case shows capital capacity availability to fund a portion of the deferredprojectsmentionedintheReport.IntheDownsideCase,however,capitalcapacityis constrained. In either case, however, even with the toll increases enacted, the Port Authority willrequirecarefulprioritizingofspending,andimplementationoftheidentifiedperformance improvementinitiatives,toensuretheregionsinfrastructureneedsaremet.Furtheremphasis on financial forecast sensitivities are necessary to properly evaluate effective contingency planning under various scenarios, such as a longer than expected regional economic recovery leadingtorevenueslowerthanforecast. Absent the recent and scheduled toll increases, the Port Authority would need to significantlyreduceitsPreliminary20112020CapitalPlan,compromisingtheability tomaintaininfrastructureassetsinaStateofGoodRepair Table2Preliminary20112020CapitalPlan,byYear,withoutTollorFareIncreases
($ billions) Capital Plan + Increm ental WTC Costs ($27.8B): Base Case: Capital Capacity: Excess / (Shortfall): Cumulative: $ 2011 2.9 $ 2012 4.0 $ 2013 4.6 $ 2014 4.3 $ 2015 3.0 $ 2016 2.3 $ 2017 2.2 $ 2018 1.7 $ 2019 1.4 $ 2020 1.5 $ Total 27.8
$ $ $
2.9 -
$ $ $
4.0 $ (0.0) $ (0.0) $
2.9 $ (1.7) $ (1.7) $
2.9 $ (1.4) $ (3.1) $
2.4 $ (0.6) $ (3.7) $
1.0 $ (1.3) $ (5.0) $
0.8 $ (1.4) $ (6.4) $
0.7 $ (1.0) $ (7.4) $
2.2 0.8
$ $
2.3 0.8 (5.8)
$ $
22.0 (5.8)
(6.6) $
The Port Authority has estimated that it would have to reduce its capital plan by nearly $6 billion if the planned toll increases are not enacted. This would result in necessary projects being deferred, delayed, or cancelled altogether, many of which are required to maintain key facilitiesinastateofgoodrepair.

WhilethePortAuthorityspreliminary20112020CapitalPlantotaled$26.9billionin capitalexpenditures,thereisanadditional$17billionofknownprojects $26.9billionisincludedinthepreliminaryCapitalPlanfor20112020andanadditional$6.0 billion is expected beyond the 2020 budget period to complete projects initiated during the period. Table 3 lists the key projects associated with the preliminary Capital Plan for 2011 2020. Table3PreliminaryCapitalPlanfor20112020KeyProjects
($ in millions) PANYNJ Capital Needs State of System State & Revenue Good Enhancing Regional Producing Repair Projects Projects Projects 175 440 67 148 48 878 1,800 715 395 176 3,086 498 238 156 111 1,004 4,968 1,897 1,864 759 460 4,980 10 10 $ 9,958 3,460 $ 13,418 $ $ 300 64 365 1,246 1,246 206 147 353 108 66 53 226 2,190 484 274 122 184 1,064 40 20 60 3,314 1,320 4,634 $ $ 140 990 950 2,080 2,080 140 2,220 $ $ 605 817 215 20 1,657 159 124 102 384 2,041 206 140 186 531 2,870 2,870 5,442 770 6,212 $ $
Project Title LGA Redevelopment(1) EWR Terminal A Redevelopment(1) JFK Rehabilitation of Runw ay 4L-22R Runw ay Safety Area (RSA) Improvements JFK Delta Terminals 3 & 4 Redevelopment AirTrain (Primarily EWR) SWF Rehabilitation of Runw ays 9-27 and 16-34 EWR Rehabilitation of Runw ays 4-22 Subtotal Bayonne Bridge Navigational Clearance Program Lincoln Tunnel Access Project George Washington Bridge Suspender Cable Replacement Lincoln Tunnel Helix Project Goethals Design-Build-Finance-Maintain Program(2) Subtotal Signal Replacement Program Tunnel Mitigation Purchase of Railcars Harrison Station Platform Elongation Ductbank Tunnels Under-River Grove St. Station Modernization Substation - Washington St. New Railcars for 10-Car Operations Tunnel Floodgate Railcar Overhaul Program Subtotal Port Jersey Marine Terminal Global Terminal Development Cross Harbor Development Port New ark Port Street Capacity and Corbin St. Ramp Improvement Port Jersey Marine Terminal ExpressRail Intermodal Facility Elizabeth North Ave Corridor Improvements Port Jersey Marine Terminal Access Improvements Subtotal Subtotal - Line Departm ent Main Projects Remaining 378 Smaller Projects Remaining 226 Smaller Projects Remaining 119 Smaller Projects Remaining 95 Smaller Projects Subtotal - Rem aining Line Dept. Sm aller Projects World Trade Center Program Capital Infrastructure Fund Regional Programs Development Subtotal - Other Capital Program s Total Value of Projects in 2011 Capital Plan Subtotal - Value of Projects Funded Beyond 2020 Total Value of Funded Projects
Line Department M andatory Aviation Aviation Aviation Aviation Aviation Aviation Aviation Aviation Aviation TB&T TB&T TB&T TB&T TB&T TB&T PATH PATH PATH PATH PATH PATH PATH PATH PATH PATH PATH Port Commerce Port Commerce Port Commerce Port Commerce Port Commerce Port Commerce Port Com m erce All Aviation TB&T PATH Port Commerce All WTC CIF SRP Development All Other $ All All $ 269 39 308 160 160 469 282 10 8 240 541 3,350 3,350 4,359 310 4,669 $ $
Security 11 11 254 189 119 562 573 423 90 88 10 611 500 500 1,684 40 1,724
Total 1,080 817 440 269 215 201 148 48 3,219 1,246 1,800 715 395 176 4,332 498 254 238 206 189 160 156 147 119 111 2,078 159 124 108 102 66 53 611 10,240 3,292 2,378 978 1,079 7,728 6,900 990 950 30 8,870 26,838 6,040 32,878
Notes: 1) 2) IncludesonlythePFCfundedportionoftheproject Includesonlylandacquisition
Unmet needs of $11.4 billion have been identified, of which over 50 percent are required to maintainfacilitiesinaStateofGoodRepair. SignificantchangeatthePortAuthorityisalreadyunderway Todate,thePortAuthoritycompletedorhasunderwayover50distinctreforminitiativesthat rangefromaddressingappropriatecompensationandbenefitsstructures,tothemoreprofound measuresofadoptingKeyOperatingPrinciplesandrevampingofitsorganizationaldesign. Numerous key findings and resulting recommendations have been identified that primarily relate to revenue enhancements, monetization of asset value, and cost savings opportunities. Onetime benefits identified are preliminarily estimated to be in the hundreds of millions of dollars,mainlyfromevaluationofstrategicalternativesfromcertainrealestateassetsaswellas the review of air right developments over certain Port Authority infrastructure assets. Recurring annual benefits associated with these recommendations, which require significant furtherdiligenceandexecutionplanning,rangebetween$159.7millionand$339.8million(the sumofNonToll/NonFareRevenueEnhancementInitiatives),Table4,andCostContainment Initiatives.Someoftheseinitiativeshavebeensuggestedunderpreviousleadershipbutfailed to materialize for various reasons. Yet the significant opportunity and focus of current leadershipwarrantsfurtherexplorationoftheseopportunities(seeTable5). Table4NonToll/NonFareRevenueEnhancementImpact
$ in Millions Non-Toll Revenue Enhancem ent Initiatives Summary, by Line Department Aviation TB&T Port Commerce PATH Grand Total - 4 Line Segm ents Real Estate & Development (1),(2) Estimates in excess of $100MM One Tim e ($) Low High Annually ($) Low High Investm ent ($) Capex (One-Tim e) $90.0 $0.0 $21.0 $37.5 $148.5 $0.0 Annually ($) Opex (Ongoing) $0.0 $0.4 $8.0 $0.0 $8.4 $0.0
$15.8 $23.0 $19.0 $6.1 $63.9 $0.0
$25.7 $101.0 $24.3 $13.8 $164.8 $0.0
Total Revenue Enhancem ent Initiatives
$63.9
$164.8
$148.5
$8.4
Notes: 1) RealEstate&DevelopmentinitiativesincludestrategicevaluationofairrightsoverDyerStaswellastheNorthWingof thePortAuthorityBusTerminal;Thecurrentvalueofthepotentialdevelopmentoftheseairrightsisspeculativeatbestas significant cost considerations must be included to support infrastructure necessary for project completion; Air right valuationiscurrentlyunderreviewbyPortAuthoritymanagement The Executive Director announced that the Port Authority will explore the strategic alternatives for the Newark Legal CenteraswellastheTeleport
2)
Table5CostContainmentInitiatives
($ in millions) Cost Containm ent Initiatives Summary, by Line Department Aviation TB&T Port Commerce PATH Grand Total - 4 Line Segm ents Other Procurement (1) Capital Planning & Execution (2) Employee Benefits Work Rules for Represented Employees (3) Total Cost Containm ent Initiatives Grand Total: Revenue Enhancem ent plus Cost Containm ent (4) Savings Annually ($) Expected High End Investm ent ($) Capex (One-Tim e) $5.0 $0.0 $45.0 $0.3 $50.3 $3.0 $0.0 $0.0 $0.0 $53.3 $201.8 Annually ($) Opex (Ongoing) $0.0 $0.0 $0.3 $0.2 $0.4 $0.1 $0.0 $0.0 $0.0 $0.4 $8.8
$2.2 $0.0 $9.6 $0.7 $12.4 $9.7 $28.0 $35.8 $9.9 $95.8 $159.7
$2.2 $0.0 $12.0 $0.7 $14.9 $20.5 $84.0 $35.8 $19.8 $175.0 $339.8
Notes: 1) 2) 3) FurtherstudiesneedtobeperformedtodeterminethecostsavingsimpactofProcurementDepartmentrecommendations Potentialcostsavingsfromreductionsinsoftcostsforthepreliminary2011CapitalPlan(notcreditabletonetincome) Workrulechangesormodificationswilllikelyyieldsignificantcostsavings;However,theywillrequireunilateralactionsin somecasesandnewcollectivebargainingagreementsinothers;Asignificantamountofthesavingswouldlikelycomefrom areductioninovertime;In2011,$64millionofthe$99millioninovertimecamefromPublicSafetyandPATH;Targeting a10percentto20percentreductioninovertimewouldyieldthePortAuthority$9.9millionto$19.8millioninsavings Totalsavingsof$159.7millionand$339.8millionrepresents6.2%and13.3%,respectivelyof2012budgetedexpenses
4)
Evenwiththerevenuefromtheplannedtollincreases,thePortAuthorityispotentially at risk of not satisfying certain Ratings Agency metrics as early as mid 2014. Furthermore, to the extent that a near to intermediate term recession occurs, or the economic recovery underway stalls, the point at which these metrics may not be satisfied could be accelerated. Prompt and successful implementation of the performanceimprovementinitiativesisthereforecritical Giventightcreditmetricsandanambitiouscapitalplanwithmanycriticalprojects,therevenue and cost containment initiatives identified above should be prioritized and plans put in place with a level of urgency. In addition, the Port Authority should conduct revised sensitivity analysesutilizingmostrecenteconomictrenddataanddevelopcontingencyplansaccordingly. Contingency plans should include accelerated performance improvement initiatives, potential reprioritization of capital spending as well as pursuit of alternative sources of capital to supportitsinfrastructureinvestment.
The Port Authority has a unique opportunity to recruit and select key management leadership positions (e.g., Chief Operating Officer, (COO), Chief Financial Officer, (CFO),ChiefofCapitalPlanning,ExecutionandAssetManagement,andothersenior managementpositions)tosupporttheBoardofCommissioners,ExecutiveDirectorand Deputy Executive Director that will be vital to the successful transformation of the Agency Inpursuingtheplacementofthesepositions,strongconsiderationshouldbegiventoproviding competitivecompensationrelativetotheprivatesectorandAgencypeers,withstrongincentive based components for achieving the specific and documented targeted performance improvement initiatives. Competitive compensation with aligned incentives will be key to attractingthebesttalentandreinvigoratingtheAgencysperformanceprofile. Significantworkremains,andthecontinuedabsoluteresolveoftheAgencysleadership willberequiredtoensuretimelyimplementation Leadershiprecognizesdifficultdecisionsarerequiredtoprioritizeandallocateresources.The Port Authoritys roadmap to transformation is driven by key initiatives that are detailed in thisreportincluding: Full implementation of the recently approved restructuring of the Board of CommissionersCorporateGovernance; Adoption, throughout the Agency, of the Key Operating Principles established by the SpecialCommittee; Incorporation of the organizational design changes that will facilitate crossfunctional communicationandbreakdownexistingsiloswithintheagency; Centralization of command and control under a Chief Security Officer with careful consideration and thoughtful pursuit of the Chertoff Groups recommendations for enhancementstothesecurityapparatus; Relentless focus with designated oversight, requisite resources, and accountability standards to ensure successful implementation of revenue enhancement and cost containmentinitiativesacrossalllineandstaffdepartments;and, Moreeffectiveandefficientdeliveryofcapitalprojects,includingleveragingthirdparty expertiseandcapitalwhenitresultsinmoreefficientexecution,tomeetthecurrentand futureneedsoftheAgency.
10
II.
OVERVIEW
BACKGROUND
ThePortAuthorityregionisoneofthemostdiversifiedareasofthenationandserves asoneoftheworldsmajoreconomichubs The Port Authority region is a center of international banking and commerce as well as entertainment,newsmediaandmanufacturing.KnownasthePortDistrict,theregionincludes thefiveNewYorkboroughsofManhattan,Brooklyn,Queens,StatenIslandandtheBronx;the NewYorkcountiesofNassauandWestchester;andpartsofninenorthernNewJerseycounties of Bergen, Essex, Hudson, Middlesex, Monmouth, Morris, Passaic, Somerset and Union. This regioncanbefurtherdefinedbythefollowingstatistics: 3,900squaremiles; Populationof18million; 8.6millionjobs; Grossregionalproductofmorethan$1.0trillion,whichwouldrank15thamong worldwideeconomies,andisthesinglelargestmetropolitanregionintheU.S.; and, 27FortuneGlobal500companiesareheadquarteredinNewYorkandNewJersey generatinginexcessof$1.5trillioninglobalrevenues. Since the Agencys beginnings in 1921, the Port Authority has undergone remarkable evolution,expandingdramaticallyinscopeandbreadth ThePortAuthoritywasoriginallycreatedtoaddresstrafficcongestionintheNewYorkharbor during World War I that challenged both the private and public sector. Authorized by legislation, today the Agencys portfolio of infrastructure assets is vast, including airports, tunnels, bridges, bus terminals, rail services, and port commerce facilities that serve a crucial role in bistate commerce and regional economic growth. These assets serve a central role in enabling employment and generating revenue for the New YorkNew Jersey Metropolitan Regionandbeyond. Figure1benchmarksthePortAuthoritysoperatingdepartments,ascomparedtoothersimilar transportationinfrastructurerelatedagencies.
11
Figure1PortAuthorityKeyAssetBenchmarking2011
Aviation - Total Annual Passenger Traffic (millions)
120,000 105,516 100,000 88,454 83,400 80,000 67,062 62,631 60,000 150,000 100,000 40,000 50,000 20,000 PANYNJ PANYNJ BAA LTD (UK) Hartsfield-Jackson (Atlanta) Aeroports de Paris Chicago O'hare LA World Airports
TB&T - Total Annual Vehicle Traffic (000's)

350,000 291,714 238,300 247,600 224,228
103,948
300,000 250,000 200,000
50,414
MTA Bridge & New York Thruway Tunnel Authority Authority
Bay Area Toll Authority
Delaware River Port Authority of PANJ (Bridge only)
Port Commerce - Total Annual TEU's (000's)

8,000 7,230 7,000 6,000 5,000 4,000 3,000 2,000 1,000 PANYNJ Port of Los Angeles Port of Long Beach Port of Oakland Port of Houston 5,936 5,503
Rail Transit - Total Annual Passengers (000's)

800,000 2,700,000 2,624,189 2,600,000 700,000 2,500,000 600,000 2,400,000 500,000 2,300,000 400,000 300,000
1,866
2,343
243,517 210,849 163,259 76,600 10,109
200,000 100,000 PANYNJ
Mass. Bay TA
Chicago TA
SE Penn TA
PA Transit Corp
MTA
The Port Authoritys mission statement represents the vital role and economic contributiontheAgencymakesinsupportoftheeconomiesofNewYorkandNewJersey Toidentifyandmeetthecriticaltransportationinfrastructureneedsofthebistateregionsbusinesses, 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 of the nationandtotheworld,whilestrengtheningtheeconomiccompetitivenessoftheNewYorkNewJersey MetropolitanRegion. According to a Port Authority study, as recently as 2009, air passengers and cargo generated $16.8billioninwagesand$48.6billioninsalestotheregionandsupportednearly415,000jobs; whilePortCommerceactivitysupportedover269,000jobsintheregion,$11.2billioninwages, and over $36 billion in sales. Nearly 240 million vehicles passed through and over Port Authority tunnels and bridges in 2011, and, over the same period, more than 150 million passengers traveled by way of PATH and Port Authority Bus Terminals across the bistate region.
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CURRENTLANDSCAPE
ThePortAuthorityfacedunprecedentedchallengesinthefirstdecadeofthe21stcentury. Changeinitscoretransportationbusinessesischallengingtheoperatingmarginsofthe LineDepartmentsjustastheAgencynearsthelaterstagesoftheusefullifeformanyof its core assets. This tension of weak to modest economic growth and declining operatingmarginsinthefaceofgrowingcapitalneedsisacentralchallenge A majority of the Port Authority assets have been in operation for more than half a century. Manyfacilitiessuchastheairports,tunnels,bridgesandterminalsarecapacityconstrainedand nearingtheendoftheirusefullives.AfocusonensuringtheStateofGoodRepair(SGR)of existinginfrastructureassets,combinedwiththedemandfordisciplinedcapitalspending,isan absolute necessity to advance safety, security and quality service to a diverse group of stakeholders.ThePortAuthoritysorganizationalstructuresmustbebetteralignedtomeetthis challenge. Overthenext10years(i.e.,duringthepreliminary20112020CapitalPlanbudgetperiod),the Agencys needs are significantly greater when compared to the prior 10 years, in large part attributabletodeferredmaintenancecapitalexpenditures.Table6belowpresentstheaverage ageofeachofthePortAuthorityscoreinfrastructureassets. Table6AverageAgeofFacilities,HistoricalCapitalSpendandAnticipatedInvestment
($ in millions) Average Age of Facilities Capital Spend 2001 - 2010 Unconstrained 2011-2020 Capital Plan Aviation 52 $ 6,077 $ 11,910 TB&T $ $ 75 2,071 14,520 $ $ PATH 72 1,345 5,330 Port Com m erce 57 $ 2,334 $ 3,290
While the Port Authority has generated operating cash flow from 2007 2011 of approximately $5.4 billion, the Agency was laden with over $7.8 billion in net capital requirements creating a cumulative free cash flow shortfall of approximately $2.5 billion Table7depictshistoricaloperatingcashflowsandfreecashflowfrom20072011segmented byLineDepartmentandbyFacility.
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Table7CumulativeCashFlowsbyFacility20072011
Cum ulative 2007 - 2011 PFCs, Operating Grants Cash & Other Expenses Flow (1) Free Cash Flow (2)
($ in M illions) Aviation LGA JFK New ark Teterboro Stew art Heliports Total Aviation INTERSTATE TRANSPORTATION NETWORK: TB&T Holland tunnel Lincoln Tunnel GW Bridge Bayonne Bridge Goethals Bridge Outerbridge Crossing GW Bus Station PA Bus Terminal Total TB&T PATH Ferry Service Total Interstate Transportation Netw ork Port Com m erce Port New ark Port Elizabeth Brooklyn Marine Terminal Red Hook How land Hook NYNJ Rail Port Jersey Total Port Com m erce World Trade Center Other Total Regional & Economic Development:(3),(4) Port Authority Captive Insurance Entity Total Other Grand Total
Gross Revenue
CAPEX
1,559.7 4,876.8 3,681.3 171.2 36.5 7.6 10,333.1
$ (1,160.2) $ (3,232.8) (2,036.5) (94.1) (71.0) (5.9) (6,600.6)
399.5 $ 1,644.0 1,644.8 77.1 (34.5) 1.7 3,732.5
368.5 629.0 419.2 48.5 16.4 0.1 1,481.7
(495.1) $ (1,283.5) (732.8) (129.0) (58.3) 14.5 (2,684.2)
272.9 989.5 1,331.2 (3.4) (76.5) 16.3 2,530.0
580.4 742.9 2,110.2 136.0 577.9 519.0 6.6 167.2 4,840.2 547.4 0.9 5,388.4
(346.8) (452.5) (531.9) (112.4) (123.1) (116.7) (38.2) (486.4) (2,207.9) (1,565.9) (13.5) (3,787.3)
233.7 290.4 1,578.2 23.6 454.8 402.3 (31.6) (319.1) 2,632.2 (1,018.5) (12.6) 1,601.1
2.4 5.2 2.9 0.7 0.7 0.7 0.2 36.3 49.1 69.3 4.2 122.7
(95.0) (129.1) (242.1) (52.8) (79.5) (13.1) (12.1) (196.6) (820.3) (1,360.8) (79.7) (2,260.8)
141.1 166.5 1,339.0 (28.4) 376.0 389.9 (43.6) (479.4) 1,861.1 (2,310.0) (88.1) (537.0)
408.3 516.0 25.9 15.8 80.1 3.7 52.9 1,102.7 380.6
(347.6) (139.3) (56.2) (30.0) (49.5) (14.6) (94.6) (731.8) (614.6)
60.7 376.7 (30.3) (14.3) 30.6 (10.9) (41.7) 370.8 (234.0)
10.9 3.2 (0.2) 0.0 0.3 5.1 19.2 3,252.6
(388.5) (411.0) 4.1 (1.0) (190.8) (15.5) (141.9) (1,144.6) (6,181.1)
(316.9) (31.2) (26.5) (15.3) (159.8) (21.3) (183.6) (754.5) (3,162.5)
501.1 0.0 501.1 $ 17,706.0
(566.5) (12.5) (579.0) $ (12,325.8) $
(65.5) (12.4) (77.9) 5,380.1 $
2.3 2.3 4,878.5
(422.8) (29.6) (452.4)
(486.0) (42.0) (527.9)
$ (12,752.6) $ (2,494.0)
Notes: 1) 2) 3) 4) Operatingcashflowisdefinedasgrossrevenueslessoperating&maintenanceexpensesandallocations FreecashflowisdefinedasoperatingcashplusPFCs,grants&other,lesscapitalexpenditures Includes Essex County Resource Recovery Facility, Newark Legal Recovery Center, Teleport and other real estate developmentprojects AmountincludesstateandregionalprogramsandfundsfortheCapitalInfrastructureFund
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With the exception of the WTC, which has been funded mainly through the issuance of debt and thirdparty reimbursements, such as insurance and FTA grants, Aviation was the only positivefreecashflowcontributortotheorganizationoverthepastfiveyears.Itisimportantto note,however,thatAviationisembarkinguponsignificantcapitalprojectsinthenextfewyears torevitalizeitsassetbase. Table 8 below shows the relative free cash flow, per Line Department, for every $1.00 of revenuereceived(includingPassengerFacilityChargesPFCs,Grants&Other). Table8KeyMetricsbyLineDepartment:20072011
Aviation Per Passenger Revenue: Free Cash Flow : Margin % $ $ 22.46 4.47 19.9% $ $ TB&T Per Vehicle 7.96 3.00 37.7% $ $ PATH Per Passenger 1.48 $ Port Com m erce Per Container 42.57 (28.33) -66.5% Cum ulative Per Unit $ $ 74.47 (23.97) -32.2%
(3.11) $ -210.1%
Aviationoperationsgenerated,onaverage,over$20.00inrevenueperpassengerandover$4.00 infreecashflowperpassengerfrom20072011.Tunnels,Bridges&Terminals(TB&T)on averagegeneratedover$7.50ofrevenuepervehicle,withfreecashflowofapproximately$3.00 after accounting for its capital expenditures. PATH alone produced a loss of $3.11 for every passenger carried. It should be noted that losses at mass transit systems like PATH in the UnitedStatesaretypical.Forexample,theMTA,ChicagoTransitAuthority,MassachusettsBay Transit Authority, SE Penn Transportation Authority, Bay Area Rapid Transit (San Francisco) are all systems that operate in a significant deficit position. In addition, the Port Authority receivesnoFederalorStatesubsidies,whileMTA,NJTransitandmostothermajorsystemsin theUnitedStatesreceivesubstantialexternalfinancialsupport. Given the integrated nature of the cross state transportation solutions, TB&T, PATH, and the FerryservicearereportedwiththePortAuthorityonaconsolidatedbasisastheITN.Forthe fiveyearperiod,ITNcombinedhadnegativefreecashflowofapproximately$537million.In addition,ITNisfacingenormousneartermcapitalneeds. PortCommerceproducedalossinexcessof$28.00percontainergiventhatitsincomerevenue stream from tenant rentals is insufficient to offset large, recurring capital projects, such as dredging,thatarerequiredtosupportoperations. In order to finance capital needs, the Port Authority has relied on debt issuance to bridgethefundinggap From 2007 2011, debt balances have grown significantly at a Compounded Annual Growth Rate(CAGR)of11.1percent(seeFigure2).
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Figure2TotalOutstandingDebt20072011($billions)
IncrementalDebtIssuance20072011: Less:DebtServiceInterest Less:DebtServicePrincipal Less:BondReserveRequirement: Less:Other NetIncrementalDebtIssuance: 6.7 (2.1) (0.6) (1.5) (0.1) 2.5
CAGR'07 '11: 11.1%
$19.5
$16.4 $14.5 $12.8 $13.1
2007
2008
2009
2010
2011
ACHIEVEMENTSANDINITIATIVESUNDERWAY
The recently appointed Chairman, Vice Chairman, Executive Director, Deputy Executive Director as well as the other Commissioners acknowledge the adversities that face the Port Authorityandhavetakenactiontoaddressthem. Over the course of the last year, the Board of Commissioners and senior management hastakenaproactiveapproachtoreinvigoratetheagency Over50initiativeshavecommencedinthiskeyperiodoftransitioninareassuchas: CorporateGovernance OrganizationalDesign EmployeeBenefits CapitalPlanning&Execution OperationalPerformanceImprovementswithinLineandStaffDepartments PublicSafetyandSecurity
Highlights of recent achievements and initiatives that have commenced in this key period of transitionaredetailedinAppendixD:Achievements&InitiativesUnderway. These initiatives, and the spirit of collaboration and cooperation from the Port Authoritys employeesinthepreparationofthisreport,evidencetheorganizationsfocusandcommitment todriveperformanceimprovement. To reinforce this determination, the Chairman, Vice Chairman and Special Committee, in collaborationwiththeExecutiveDirectorandDeputyExecutiveDirector,havedefinedasetof
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keyoperatingprinciplestoguideanddefinetheconductoftheAgencyintheexecutionofits responsibilitiesandmission:
KEYOPERATINGPRINCIPLES
Table9KeyOperatingPrinciples KeyOperatingPrinciplesofThePortAuthorityofNewYork&NewJersey
TheAgencymustproactivelycommunicate,betransparentinitsdecisionmaking,andsetclearexpectationswith theNewYorkandNewJerseystategovernments,localmunicipalities,relatedagenciesandthepublicitserves; TheAgencymustmakeprotectingtheassetsandconstituentsthehighestofprioritiesthroughoutallofits operations; TheAgencymustdevelopanoperatingstructuretoenableitstalentedprofessionalstoexecuteandmaximize performance; TheAgencymuststrivetoalignincentivesamongstallitsemployees,managementandlabor,toachieveits mission; TheAgencymustcontinuallyevaluateopportunitiesforrevenueenhancementfromnontollsources,improved productivity,bettercollectioneffortsandcosteffectiveexecutionindeliveryofitsservicestominimizethe monetaryburdenonitsconstituents; TheAgencymustcontinuetoprovidetimely,relevant,reliableandsuccinctanalysis,includinghistoricaland expectedperformancemetrics,toensuretheBoardofCommissioners,inexercisingitsoversightresponsibilities, canmakefullyinformeddecisionsanddriveaccountability; TheAgencymustreviewandcontinuouslyrefineeachofitsbusinessunitsstrategicandcapitalplans,with emphasisonactionableandmeasureablegoalsandobjectives; TheAgencymustcontinuallyevaluateandutilizeinnovativeandcreativewaystoefficientlydeployitscapital, effectivelymanagetheassetsthatitisentrustedtodevelopandsupport,andholditselfaccountablefordelivering measuredperformance; TheAgencymustcollaboratetocapturethevalueofitsemployeescollectiveknowledgeandexperience,and optimizetheuseofitsresourcestoprovidesharedservicessupporttothelinefunctions;and, TheAgencymustmanageenterpriseriskthroughconsistentidentification,education,andexecutionofmitigation strategies,whilemeasuringitsperformanceagainstitsgoals.
A set of operating principles can only provide guidance to the organization and meaningful changewillrequirealevelofsupportandcooperationthroughoutthechainofcommandinthe Agency. The chart below shows a representative view of all the interdependencies inherent throughoutthePortAuthorityorganization(seeFigure3).
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Figure3KeyOperatingPrinciplesChartofInterdependencies
The Port Authority of New York and New Jersey Mission Statement
Governor of New York
Governor of New Jersey
Board of Commissioners Chairman Vice Chairman
Board Committees
Key Operating Principles
Executive Director Deputy Executive Director
Key Initiatives
Line Departments COO
Shared Services
Aviation TB&T Port Commerce PATH
Port Authority leadership and Line Departments have identified, evaluated, and provided further recommendations that serve to enhance corporate governance and organizational design.Keyinitiativesthatdrivemeasureablechangearepresentedingreaterdetailherein.
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III.
APPROACH&METHODOLOGY
Navigant met with appropriate management personnel, issued various information requests, and conducted structured interviews with all levels of Port Authority staff, often involving personnelacrossmultipledepartmentsonaparticulartopicarea.Variousdocumentsreviewed have been considered in the development of this report. In addition, review sessions and discussions were conducted with members of the Board of Commissioners and the Special Committee.Sitevisitswereconductedasappropriate.Navigantsummarizeditsfindingsand recommendations in this report (subject to the limitations set forth in Appendix E: Report Qualifications&Disclaimer),referredtohereinafterasthePhaseIIReport.
ORGANIZATIONALDESIGN&EFFECTIVENESS
Toevaluatecorporategovernanceandorganizationaldesignstructuresandpractices,Navigant reviewedtheexistingPortAuthorityByLawsaswellasboardminutesandactionsundertaken duringboardsessions.Inaddition,NavigantconductedmultiplemeetingswiththeChairman, ViceChairman and members of the Special Committee as well as held numerous discussions withtheExecutiveDirectorandDeputyExecutiveDirector.Navigantalsoconsideredindustry best practices to provide a perspective of the appropriate balance between the structures utilizedbypublicversusprivateenterprises.
OPERATIONALASSESSMENT
NavigantfacilitatedmeetingswiththeheadsofeachLineDepartment,includingselectedkey personnel, as well as critical support services departments, including Procurement, Law, and Engineering. Subsequent to such meetings, further information requests were made with the purpose of understanding key issues and opportunities as it related to revenue enhancement, cost containment, and operational efficiency. Additionally, followup meetings were held to probe specific areas for improvement through collaborative work sessions with each department. Where appropriate, Navigant toured the Line Department facilities to establish firsthandknowledgeoftherespectiveoperationsandrelatedissues.
WTCCOSTREVIEW
To finalize the WTC Program Estimate at Completion (EAC), initiated in Phase I, Navigant facilitated working sessions with World Trade Center Construction (WTCC), World Trade Center Redevelopment (WTCRD), Finance, and key private sector partners to reach consensusonthebaselinecostbudget.Formalriskmodelingeffortswereemployedtoachieve increased levels of confidence in the total EAC presented in the Interim Report. These calculationsarebolsteredbyprojectspecificriskregistersthatallowforprobabilityassessments to be made on identified exposures. Finally, a series of collaborative meetings of all project participantsresultedinaqualitativevalidationofthetechnicalanalyses.
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CAPITALPLANNINGASSESSMENT
Navigant interviewed Capital Planning executives, Project Directors, Project Managers within LineDepartments,Engineeringdepartmentmanagement,seniorpersonnelinManagementand Budget Department, (MBD) and various professionals that report directly to the CFO, to betterunderstandtheevolutionoftheCapitalPlanningfunctionwithinthePortAuthorityand determinecurrentrolesandresponsibilitiesasitrelatestothedevelopmentandexecutionofthe capital plan. Subsequently, Navigant reviewed the Unconstrained Needs analysis that formed the foundation of the preliminary 2011 2020 Capital Plan and identified Unmet Needsbyassettypeandbusinessline.Navigantpersonneltouredvariousfacilities,including the WTC site, to have direct knowledge of intended improvements and planned investments. Additionally,NavigantworkedcollaborativelywithMBDandindividualLineDepartmentsto developanintegratedforecastmodeltoassesstheimpactonthecapitalcapacityoftheAgency of performance under various financial and operational scenarios. In addition, Navigant evaluated the targeted benefits of revenue enhancements, cost reductions and alternative financingstrategiesinmitigatingfundingshortfalls.
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IV.
CORPORATEGOVERNANCE
OVERVIEW
As the Governors of New York and New Jersey have mandated an enterprisewide review of theAgencytodrivetransformationalchangeandachievematerialproductivityandefficiency enhancements, the Board of Commissioners is leading by example and has examined its own effectivenessinitsstewardshipoftheAgency. The Port Authority was created out of the premise that neither federal, state and local governments nor the private sector could address the long standing harbor congestion in the late1800sandearly1900s.BothstatesofNewYorkandNewJerseybecameconvincedthata regional focus was the only real solution. What was born was a proud, public agency that extends across geopolitical boundaries. The formative legislation envisioned that there will alwaysbeaneedforeffectivecollaborationandconsensustoleadthisorganizationthroughthe challengesencounteredinpursuitoftheAgencysmission. The Port Authority essentially is a public jointventure between the two states, both with common, yet also potentially disparate, interests. By tradition, and acts of legislation, the ChairmanandDeputyExecutiveDirectorareeachappointedbytheGovernorofNewJersey, and the Vice Chairman and Executive Director are each appointed by the Governor of New York. Each respective Governor appoints six members of the Board of Commissioners. The Governors each retain veto rights of the minutes of the Board of Commissioners by which all major decisions of the Agency are approved. While this veto right exists, it has not been exercised in recent history. The relationship between the Executive Director and Deputy ExecutiveDirectorlacksdefinition;yetbyvirtueoftheirpresenceinthesameboxoftheformal organization charts, it suggests an equality of authority. In the absence of collaborative communication, concerted efforts to build bistate consensus, and reasoned approaches to resolution of conflicted interests, this duality of control can readily lead to challenges. Given this structural reality, the current Executive Director and Deputy Executive Director conscientiouslydemonstrateamutualcommitmenttoeffective,coordinatedmanagementthat isvitaltotheoverallsuccessoftheorganization. Thus,thefocusfromanorganizationaldesignandeffectivenessperspectiveshouldbetoensure that rules of engagement and the appointed professionals relationships are devoted to the successofthejointventureandthemissionitwascreatedtoexecute.Indeed,itcanbeargued thatitisthisdualityofcontrol,inherentinthedesignoftheexecutiveleadershipandBoardof Commissioners that allows the Agency to be effective by making consensus necessary in operationsandgovernance.AportionofthisReportfocusesonprovidingrecommendationsto establish rules of engagement to further facilitate effective consensus and decision making, whileefficientlyutilizingtheresourcesavailabletotheAgencyinthefurtheranceofitsmission. Aspreviouslyreported,severalfactors,includingresponsestothecrisisofSeptember11,2001, the subsequent rapid turnover of multiple Executive Directors, and lack of confidence in the prior Executive Director, has led the Board of Commissioners to necessarily insert itself into
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manyaspectsofthePortAuthorityoperations.Thatlandscapehaschangeddramatically,and the relationship between the Chairman/ViceChairman and Executive Director/Deputy Executive Director is serving to provide a crucial supporting foundation to the desired transformationoftheorganization.ThecommitteecompositionoftheBoardofCommissioners providesanimportantelementinthateffort.Itshouldbenotedthattheappointmentstothe BoardofCommissionersofthePortAuthorityareunpaid,highlyaccomplishedpublicservants whodedicateconsiderabletimeon aregular basistoprovideinsight,privatesectorexpertise, analyticalthought,andoversighttoPortAuthoritymatters. TheBoardofCommissionersatitsmostrecentmeetingapprovedawiderangingrestructuring of the board committees to underscore and reinforce the change underway at the Agency. These changes will allow for more active committees with regular meetings that have clear, focusedcharterstobetteraligntheBoardofCommissionerswiththeneedsoftheAgencyfor theforeseeablefuture.
CURRENTCOMMITTEECONFIGURATION
ThePortAuthorityhassevenByLawcommittees,(i.e.,thosethatwereestablishedunderthe ByLaws of the Port Authority) and two adhoc committees that were created in 2007 to addressdiscreetissuesofAgencyinterest. Thecommitteesmetanaverageoffivetimesin2011,withamajorityofmeetingstakingplacein publicsession.TheOperationsCommitteewasthemostactivewith10meetings.Ontheother hand,theadhocLaborCommitteehasnotmetsincefulfillingitsprincipalobjectivein2007and 2008 to address wage and benefits policy for nontrade unskilled labor service. Overall, the Committeeswereassignedapproximately132itemsfromtheBoardofCommissionersin2011 (seeTable10). Table10SummaryofByLawCommitteeResponsibilities
Committee Governance&Ethics CurrentResponsibilities OversightoverGovernance/EthicsActivities DevelopandMaintainAgencyCodeofEthics ReviewIndependenceandObjectivityoftheBoardofCommissioners MonitoringofCommittees Legal/ComplianceOversight ExecutiveDirectorPerformanceReviews EstablishAccountingPolicies&Procedures/OverseeCompliance Selection/Review/MonitoringofAuditors OversightoverAnnualAudit ReviewAnnualFinancialStatements Review/EstablishProceduresforInspectorGeneralReportReview
Audit
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Committee CapitalProgramsand AgencyPlanning
CurrentResponsibilities LeadDevelopmentofCapital/StrategicPlan Review LongTerm Planning for the Development of New Facilities IncludingRelatedStudies ContinualReviewofLineDepartmentMaintenanceandCapitalNeeds SupervisionOverPreparationofEconomicDevelopmentStudies OversightOverAllOperation/MaintenanceofFacilities ProcurementRelatedtoOperationalAspectsoftheAgency DirectSaleofPortAuthorityOwnedProperty OversightofPersonnelRelatedMatters ApproveSelectionofDepositories ApproveInvestmentsandReinvestmentsthereof ApproveInsurancePoliciesandSuretyBonds OversightofFinancialAffairsofthePortAuthority OversightofAllPortAuthorityConstructionMatters OversightofAgreements/ContractsforPropertyAcquisition OversightofAgreements/ContractsforConstructionMaterials OversightofSecurityRequirements OversightofSecurityRecommendations
Operations
Finance
Construction
Security
Toevaluatethecurrentcorporategovernancestructureandevaluateitseffectiveness,Navigant conducted a series of discussions with members of the Special Committee and the Executive Director, Deputy Executive Director and Secretary of the Board. Navigant also reviewed the ByLaws of the Agency to understand the historical basis of the committee configurations as well as documentation detailing board activities. Finally, Navigant compared the Agency to prevailingboardgovernancestrategiesinbothpublicagenciesandintheprivatesector.
OBSERVATIONS&FINDINGS
Bynecessity,theBoardofCommissionershavebecomeincreasinglyactiveintheday todayoperationsoftheAgency The rapid turnover of Executive Directors over the last decade as well as the Board of CommissionerslackofconfidenceinthepriorExecutiveDirectorcompelledthecommissioners tobecomeincreasinglyinvolvedinthedaytodayoperationsoftheAgency.In2011,theBoard committeeshadover132assignedactionitems,muchthatwastransactionalinnature.Now, the Board of Commissioners challenge as the governing body is to ensure keen focus on the strategicprioritiesoftheAgency,andtoprovidewellinformedguidance,insightsanddirection tomanagement,andholdtheAgencyultimatelyaccountableforitsmeasuredresults. Prioritieshaveevolved.Focusedcommitteesdrivetransformationalchangeandrequire reliable,relevant,andtimelyinformationtofulfilltheirfiduciaryduties The Port Authority operates in a unique context. The Board of Commissioners is ultimately accountable to the Governors, who appoint the Commissioners, while the respective state legislatures may make changes at the Port Authority if identical legislation is passed by both
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states.Further,eachoftheGovernorsalsopossessesaneffectivevetorightovertheactionsof theBoard. Inrecentyears,boardsofdirectorsintheprivateandpublicsectorhaveevolvedsignificantly frombeingreactiveadvisors,oftenservingthespecificinterestsoftheChiefExecutiveOfficer orelectedexecutivebranchofficial,toprovidingproactiveoversightrequiringtimely,reliable, andrelevantinformationtosupportdecisionmakingandensureaccountability.Privatesector corporategovernance,anditspubliccounterpart,hastrendedtowardgreatertransparencyand candorwithoutsidestakeholders.Thismarketenvironmentprovidesauniqueopportunityfor the Board of Commissioners to adopt private and public sector best practices in its effort to enhancetheexecutionofitsoversightresponsibilitiesandfiduciaryobligations,andtheBoard ofCommissionershasalreadymadetremendousprogress.Anumberoftheinitiativesrecently championedbytheBoardofCommissionerscanbefoundinAppendixD:Achievements& InitiativesUnderway. At its most recent board meeting, the Board of Commissioners reorganized its Committee structures to better align with the Agencys long term objectives. The restructuring maintains certain existing committee functionalities while consolidating relateddutiestomoreeffectivelymanagethecontinuumofoversightresponsibilities The consolidation of certain committees is based on functionalities, priorities and goals. Committees with clear charters will better harness the expertise of the Commissioners, direct the efforts of staff, create a more focused environment for decision making, and allow more effectiveoversightandaccountability.SeveralchangesimplementedarehighlightedinTable 11below. Table11HighlightsofApprovedCommitteeChanges CommitteeChanges
Consolidate/repurposetheCapitalPrograms andAgencyPlanning,andthe Constructioncommittees,intoanew CapitalPlanning,ExecutionandAsset ManagementCommittee(CPEAM) ExistingstandaloneWTCsubcommittee(with itscurrentresponsibilities)tobesubsumed intothenewlyformedCPEAMcommitteesa separatesubcommittee ExpandfocusoftheFinanceCommittee
Description
Capital planning, execution and asset management are a continuum of responsibilities that are inclusive of engineering and project management. This new committee is designed to ensure a level of cohesive oversight and accountability for components of capital projects delivery and the ongoing maintenanceoftheagencysdiverseinfrastructureandrealestateassetbase. Construction of the downtown redevelopment project is moving toward completion.Thus,assetmanagement,versusdevelopmentandconstruction,isthe evolvingpriorityoffocusforthesuccessofthisendeavor. IncollaborationwiththeCPEAM,theFinanceCommitteewillincludeevaluation of innovative debt and other alternative financing strategies, as well as review of related insurance matters. The current insurance working group becomes a standingsubcommittee. Integration of remaining functionality into appropriate primary ByLaw Committee(e.g.LaborintoOperations). Examples include moving compensation and employment agreement discussions intoOperations;EnterpriseRiskManagementintoAudit,etc.
Eliminateotherinactivesubcommittees Broadenthedefinedresponsibilitiesofcertain ByLawcommittees
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CommitteeChanges
CreatesubcommitteeundertheOperations CommitteetoaddressRegulatory, Government,InterAgency,andCommunity Relations EnhanceSecurityCommittee
Description
Create new subcommittee under the Operations Committee to address communicationswithregardstoregulatory,federal,stateandlocalissuesaswell ascommunityrelations.Enablesacomprehensive,Agencywideapproachtothese issuesandbettertransparencywithvariousgovernmentalandsisteragencies. PrioritygivenasaresultofrecommendationsfromtheChertoffreport,thatwere subsequently approved by Board of Commissioners creating the Chief Security Officefunction.
In addition to the revised structure of the Board Committees, the following actions will be implemented: The Board of Commissioners will schedule and conduct a full annual strategic planningsessiontoprovidededicatedfocusonlongtermagencymission,goalsand objectives,anddevelopmentandreviewofstrategicplanforachievingsame. TheBoardofCommissionerswilldevelopchartersforeachcommitteearticulating the guidelines for meetings, revised responsibilities, authorities, and objectives to alignwithprioritiesandneedsoftheAgency. The Board of Commissioners will work with the Port Authority senior management to establish and/or revitalize performance dashboards designed to monitor performance and progress on Agency key initiatives. Dashboards will be trackedbyeachrelevantCommitteeandconsolidatedforregularreviewbythefull BoardofCommissioners. TheBoardcommitteeswillcreatestructuredpointsofconnectivitybetweencertain committees to ensure effective communication and coordination (e.g., CPEAM quarterlymeetingwithFinanceCommittee,and/ormakereciprocalappointmentsof eachChairasmemberofthereciprocalcommittee). The Board of Commissioners will evaluate sequenced scheduling to allow for morefrequentcommitteemeetingsaswellaseffectiveandinformedreportingtofull Board(e.g.,monthlycommitteeandthenquarterlyfullBoardmeetings). The Board of Commissioners will make critical success factors a priority for governanceeffectiveness.Theseinclude: o Developingandarticulatingaclearstrategicplan; o Ensuringcommitteesarerelevant,focusedanddisciplined; o Maintaining transparency, conducting ongoing measured performance monitoring,anddrivingaccountability; o Continuing to appoint committee chairs and members with requisite expertiseandexperience; o Identifyingcommitteechairandmemberresponsibilitieswithclarity; o Providingdesignatedseniormanagementstaffparticipationandappropriate analyticalsupport;and, o Facilitatingwellinformeddecisionmaking.
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V.
ORGANIZATIONALDESIGN&EFFECTIVENESS
CURRENTORGANIZATIONALSTRUCTUREOVERVIEW
With key operating principles and a more efficient structure of corporate governance, the alignment of the Agency organizational structure to these constructs is required to fulfill the expectationsoftheBoardofCommissioners. TheInterimReportcontainedanumberofobservationsrelatedtothePortAuthorityscurrent organizationalstructure(seeFigure4).ThePortAuthoritysculturehastraditionallyfostered strongloyaltyamongitsemployeeswithahighlevelofdedicationandcommitmenttothePort Authoritys mission. It has produced strong line and staff department leaders with a deep knowledge base and skills. However, a significant number of appointed leadership changes resultedinalackofcontinuitynecessarytodrivecollaborationandaccountability.Asaresult, in the past the organization had elements of a siloed culture where department chiefs and directorsprioritiesseemedtohaveshiftedtoprotectingtheirfunctionalareasofresponsibility. In addition, core functions such as capital planning had been restructured and reorganized multiple times without follow through on critical implementation of functionality, fostering instability in the organization. Historically, all of these factors have inhibited communication and effective collaboration between Line Departments and the staff departments required to supportthem(i.e.,thesharedservicesfunctions).
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Figure4CurrentOrganizationalStructure
27
LineDepartmentswouldbenefitfromsharedservicefunctionsthatarebetteralignedto achieve efficiency and crossfunctional communication, as well as to eliminate redundantstructureswithintheorganization ThePortAuthoritysorganizationalstructurecurrentlyutilizesacombinationofdivisional(i.e., Lineareas:Aviation,PortCommerce,TB&T,PATH)andcentralized,staff/functional(i.e.,staff areas: Finance, Human Resources, Engineering, Public Relations/Marketing, Legal, Procurement, Capital Planning, etc.) departments. The Agencys Line Departments are semi autonomous units with certain shared services being provided by the staff/functional departments. A staff/functional department structure for shared services allows a relatively efficientspecializationoflabor,reductioninduplicationofwork,andeconomiesofscale.The PortAuthoritywouldbenefitfromanimprovedstaff/functionaldepartmentrelationshipwith theLineDepartmentsthatarethecoreoftheAgency. TheAgencysexistingorganizationalmodelisanearlystagematrixmanagementstructurethat combinesdivisionalandfunctionaldepartmentalizationtogaintheadvantageofbothsources of input. A matrix structure, if properly executed, is a flatter model and should allow for quickerresponsetimesbecauseinformationisexchangedmorerapidlyunderthisrubricthana hierarchical organization. To avoid potential role ambiguity and conflicts, the positions with dualreportingstructuresshouldhaveadirectreportingrelationshiptoLineDepartmentswith an indirect reporting relationship to staff/functional departments. However, to date, these expectedbenefitshavenotbeenfullyrealizedatthePortAuthority,sofurtherrefinement(with enhanced clarity of roles, responsibilities, and reporting relationships) should yield marked improvements. ThePortAuthoritywouldbenefitbothfromanAgencywidestrategydocumenttofocus andalignallLineDepartmentsandsharedservicefunctionsaswellasakeyinitiative planwithnecessaryspecificityforimplementation The last strategic plan prepared by the Port Authority dates back to 2006, well prior to the profound recession of 20082009. There have been multiple new appointments since then including:Chairman,ViceChairman,amajorityoftheCommissioners,aswellastheExecutive Director and Deputy Executive Director. Additionally, the recent retirements of the Chief Operating Officer and Chief Administrative Officer, and announced retirement of the Chief FinancialOfficerprovideauniquewindowtoshapetheorganizationandproperlypositionit foritsfuture.
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The Port Authority has made great strides at initial development of operational and financial scorecards/dashboards, but should enhance them to include specific quantifiableobjectivestoensureaccountabilityfortheirachievementatalllevelsofthe organization TheofficeoftheActingCOOhasbeenintheprocessofdevelopingdashboardsforusebyLine Departmentsinmeasuringtheirperformance.Thesedashboardsmustbeexpandedtocapture thestatusofkeyinitiativesandbetailoredwithappropriatelevelsofsupportingdetailforeach of Agencys constituencies including the Board of Commissioners, Executive Director and DeputyExecutiveDirectoraswellasLineDepartmentsandstaffsupportfunctions. TheAgencyisproficientinproducingenormousamountsofdatawithrespecttoitsbusinesses and operations. However, the data could be better organized to quickly view the status of operations.Accordingly,reportsreviewedbydirectorsandexecutivestaffshouldbesuccinct and focus the recipient on the relevant information necessary to make business decisions efficiently,addressproblems,andexploitopportunities. Theopportunityexistsforcurrentcompensationtobebetteralignedwiththeobjectives ofenhancedproductivityandefficiency,whiledifferentiatingbetweenmeritandtenure Thecurrentclassificationstrategyforemployeeandcompensationpolicieswasimplementedin the late 1980s. Incentives were historically nonmonetary rewards (e.g., enhanced vacation allowances,generoushealthbenefits,andpostretirementmedical,amongothers).Historically, over 70 percent of Port Authority management employees have been rated excellent or exceptional through internal performance reviews, defying conventional performance rating distribution guidelines. This general practice led to promoting employees based on seniority andanorganizationalstructurewithverybroadmiddleanduppermanagementranks. Employeemobilityiscriticaltoprovideclearpathstoalternativecareeropportunities acrossboththeLineDepartmentsandsharedservicefunctions Giventheheadcountreductionsandlimitedhiringsince1995,therehasbeenmoreofafocuson financialincentivestosupportverticalmovementratherthancareerenhancinglateralgrowth. Asaresult,thePortAuthoritymustidentifybusinessdrivenprogramsthatcanattract,retain, and motivate a worldclass workforce, given the expected higher rates of retirement and attritioninthenextseveralyears.
RECOMMENDATIONS
Figure 5 is a preliminary organizational design proposed to improve accountability, enhance capitaldeliveryefficiency,andfacilitatecoordinationamongLineandStaffDepartments.
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Figure5PreliminaryDraftOrganizationalChart
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Proposedorganizationalchangesareasfollows: EnhancetheroleofCOOtoallowforfullauthorityandpowertoleadanddirectLine Departments,andmaintaincontinuityinthefaceofinevitableturnoverofthepolitically appointedExecutiveDirectorandDeputyExecutiveDirector. Elevate Line Director titles (Aviation, TB&T, Port Commerce, and Rail Transit) to President to reflect the true nature of their profit and loss responsibility, and accountabilityforthedeploymentofcapital.AgenciessuchastheMTAhavePresidents overtheirkeyoperatingorganizations. FullyimplementChiefSecurityOfficerorganizationasrecommendedbytheChertoff Group,toserveasacentralizedpointofcommandandcontrolofthesecurityapparatus oftheAgency. EliminatetheChiefAdministrativeOfficerroleandreassignProcurementtoCFOand Operational Services & Operational Standards to office of COO to provide critical analyticalsupportandconductdeepdivesattheLineDepartments,asnecessary. Elevate Director of Human Resources to Chief of Human Capital and expand responsibilitiestoincludeLaborRelations.Giventhesignificantimportanceofhuman resourcestothePortAuthority,especiallyinlightofthesignificantsuccessionplanning issuesthatexist,itiscriticalthattheHumanResourceDepartmenthaveadirectlineto theExecutiveDirectorandDeputyExecutiveDirector.Inaddition,giventhecomplex nature of the existing union relationships, work rules and necessity for consistent complianceoveralllinedepartments,itislogicaltoincludeLaborRelationswithinthe HumanResourcesdepartment.Lackofcentralizedcompliancehasledtomanyofthe existingworkruleissues.ThePortAuthorityshouldalsoretainoutsidecounseltoassist intheongoingcollectivebargainingnegotiations. CreateacentralizedChiefofCapitalPlanning,ExecutionandAssetManagementwho would have authority, responsibility and accountability for the continuum of capital deployment from planning and engineering design through execution to drive accountability for ontime / onbudget delivery. The department would consist of the followingdirectreports: o Head of Capital Projects Planning that would lead the planning function by guidingthedevelopmentofthecapitalplanduringthefiscalyearaswellasperiodic updates. He/she would have the following direct reports, which are portions of responsibilitythatcurrentlyexistwithintheChiefofRealEstateandDevelopment: Assistant Director, Real Estate Acquisition & Disposition Guides all capital projectrelatedacquisitionordispositionofPortAuthorityrealestate. AssistantDirector,RealEstateDevelopmentPrograms&PlanningCurrently serves as a liaison with certain key projects such as Moynihan Station, redevelopment of the George Washington Bridge terminal, and the Port AuthorityBusTerminal,withparticularemphasisonrealestatematters. o Chief Engineer would serve as construction manager for all of the related capital projects but fall under centralized accountability with an indirect, dottedline reportingrelationshiptotheExecutiveDirector/DeputyExecutiveDirector.
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Head of Capital Projects Execution This individual would serve as the project management arm and coordinate all project management activities inside and outside the various line departments. Personnel would likely be sourced from the existing COO organization that includes a Program Director, Project Management Office,andOperationsPrograms. o Director, WTC Construction and Director of WTC Redevelopment would remain underOfficeofCapitalProjectsuntilconstructioniscomplete,atthattimethetwo areaswouldbecomeasinglelinedepartmentundertheChiefOperatingOfficer. CreateaChiefTechnologyOfficerpositionto betterdefinetechnologystrategygiven thegrowingimportanceoftechnologyforenhancedproductivityandefficiencywithin theAgency.TheneedtomigratetheAgencystechnologyenvironmenttowardcurrent andfutureindustrystandardsandbestpracticesrequiresasignificantallocationoftime and resources. The Port Authority currently has a myriad of systems with varying degrees of functionality. It is critical those systems be inventoried and managed centrally. Assimilate roles and responsibilities of the existing Real Estate department to the specific functional areas within the COO support staff and to the Capital Planning, Engineering & Execution function. Eliminate existing Chief role, splitting remaining rolesandresponsibilitiesasfollows: o OfficeSpaceServices&PropertyManagementisrecommendedtomoveunderthe COO. o Leasing&OperationsisrecommendedtomoveundertheCOO. o RealEstateAssetAcquisitionandDispositionisrecommendedtomoveunder CPEAM. o Development,ProgramsandPlanningisrecommendedtomoveundertheOfficeof CapitalProjectsPlanning,Execution&AssetManagement. Further centralize procurement by assimilating relevant aspects of the existing Department of Environmental and Energy Programs, and Department of Business DiversityandCivilRightsintotheprocurementfunction. Eliminate the Office of Strategic Initiatives, rationalizing redundancies between Planning and Regional Development and departments within the CFO organization. FunctionalitywouldbeabsorbedbyPlanningandRegionalDevelopment. Establish a Chief Compliance Officer that would have the responsibility to lead and coordinatethePortAuthorityscomplianceefforts.Thiswouldincludethedesignand implementationofinternalcontrols,policiesandprocedurestoassurecompliancewith applicable local, state and federal laws, regulations and third party guidelines. Responsibilitieswouldalsoincludemanagingauditsandinvestigationsintoregulatory and compliance issues, and responding to requests for information from regulatory bodies. It is expected that this position would create a centralized repository for all compliancerelatedissues. Assimilate the Office of Environmental & Energy Programs and the Office of BusinessDiversity&CivilRightsintotheChiefComplianceOfficer,Procurement,and CFOasfollows: o
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OfficeofEnvironmental&EnergyPrograms EnergyProcurement(Procurement); EnergyManagement(CFO); ComplianceandDueDiligence(ChiefComplianceOfficer); ExternalEnvironmentalPrograms(ChiefComplianceOfficer);and, SustainabilityInitiatives(ChiefComplianceOfficer). o OfficeofBusinessDiversity&CivilRights Maintenance of minority, womenowned, small and disadvantaged business enterpriseprogram(Procurement); PolicyDevelopment&Reporting(ChiefComplianceOfficer);and, CivilRights/TitleVICompliance(ChiefComplianceOfficer). Create matrix management hubs around certain shared service functions including finance, human resources, legal and information technology to encourage cross collaboration, operating efficiencies and enhanced client service levels. This would entail having representatives from each of the aforementioned areas have dotted line relationshipswithLineDepartmentsandcertainotherstafffunctions. Supportandacceleratechangesincompensationstructurestoallowforgreatereaseof movementforemployeesbetweenandacrossLineDepartmentsandstafffunctionsfor bothpromotionsandlateralmovements. Complete development of dashboards throughout the organization to regularly monitorandmeasureprogress,timelyidentifynegativevariances,andquicklyinstitute correctiveactions. o TheofficeoftheActingCOOisinprocessofdevelopingdashboardsincollaboration with the Line and Staff Departments of the Agency. The critical aspect for dashboard development includes achieving agreement on the relevant and reliable metrics at a summary level as well as the constructs of supporting detail for each LineandStaffDepartment. o Dashboardsmustaddressuserneedsandhavethefollowingattributes: CustomizedtorespectivelevelswithinthePortAuthority; Timelydistributioninordertotakeproactiveremedialactions; Abilitytoreviewsupportingdetailstoenhancediagnosisofissues; Visibilityandtrackingofhistoricaltrends; Datarelevanceandflowinsupportofobjectives;and, Focusonmetricsthatcanbeimpactedbyoperatinginterventions. CreateleadershipcommitteesattheChiefandLineDirectorleveltofocusonproactive problemsolvingandresolvingimpedimentstoAgencyobjectives. o AsthedefactoOfficeoftheCEOofthePortAuthority,theExecutiveDirectorand DeputyExecutiveDirectorshouldoverseethreerelatedcommittees:theOperating Management Committee, the Executive Committee, and the Capital Planning Council(theCPC),todirectandleadtheorganizationtoaccomplishitsgoalsand objectives. Effective councils invite full expression from respective members and unifytheireffortsinrespondingtoorganizationalneedsandobjectives. o
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Astheaforementionedseniorpositionsarefilled,strongconsiderationshouldbegiven toprovidingcompetitivecompensationrelativetotheprivatesectorandAgencypeers, with strong incentive based components for achieving the targeted performance improvementinitiatives.Competitivecompensationwithalignedincentiveswillbekey toattractingthebesttalentandreinvigoratingtheAgencysperformanceprofile. The Port Authority would benefit from establishment of a Key Initiatives ImplementationPlantodevelopandmonitorspecificAgencyobjectives,therespective status,assignedresponsibility,duedates,andnextsteps.AnillustrativeKeyInitiatives Implementation Plan can be found in Appendix A: Key Initiatives Implementation Plan
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VI.
LINEDEPARTMENTREVIEWAVIATION
OVERVIEW
On the basis of systemwide passenger traffic, the Port Authority airports are collectively the busiest in the world. The New York Metropolitan Regions population density, industry activity, link to global markets, and wealth of cultural and entertainment venues, make it a priority market for regional, domestic, and international airlines. As a critical gateway for passengers and cargo, the Port Authority airports handled 1.2 million flights, 106 million passengers, and 2.3 million tons of cargo in 2011. Also in 2011, traffic in and out of the Port Authoritys three major airports supported over 435,000 jobs, representing approximately $20 billioninannualwages,andcontributedtoover$55billioninsalesrevenueforenterprisesin theregion.TheAviationDepartmentscorefunctionsinclude: Providinggeneralmanagementoversightfortheregionsfiveairports; Developing, managing, and maintaining passenger terminals, runways, and cargo facilitiesincompliancewithFAAregulatorystandards; Negotiating agreements and handling tenant relationships with airlines that rent passengerterminalgatesandcargospace,aswellasretailmerchantsandconcession providers; Supervising outsourced contract services for various operational and maintenance activities;and, Managing security (including police and emergency response) and coordinating withtheTransportationSecurityAdministration(TSA).
TheAviationDepartmentderivesrevenuefromfourmajorsources:(i)leasingterminalandgate space to airlines, (ii) leasing cargo, retail, and restaurant facilities, (iii) charging flight fees to recover the cost to the Aviation Department of common elements of the airports used by all airlines,and(iv)parking,utilitypassthrough,andotherfees. Airlinepassengertrafficthroughtheregionhasincreased30foldsincethe1940swhenthePort Authority gained jurisdiction over its three major airports: JFK, Newark & LaGuardia. In addition,increasinglystringentregulatoryrequirementsunderPart139ofTitle14oftheCode ofFederalRegulations(Part139)haveaddedtotheAviationDepartmentsworkload,while atthesametimetheworkforcehasremainedgenerallyflatoverthepastfiveyears.Inaddition to FAA compliance matters, regular operations, and maintaining a state of good repair (approximately 49 percent of the preliminary 2011 2020 Capital Plan, as shown in Table 12 below),theAviationDepartmentiscurrentlyfocusedonanumberofrevenueproducingcapital projects. Approximately 39 percent of the Departments $6.5 billion preliminary 2011 2020 Capital Plan is devoted to such initiatives. The two largest of these initiatives are the redevelopment of the Central Terminal Building at La Guardia (LGA) and Terminal A at Newark (EWR), which on a combined basis, account for 30 percent of the preliminary 2011 2020CapitalPlan.
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Table12AviationPreliminary20112020CapitalPlan
$ in millions # of SubProjects 9 9 1 6 1 15 1 2 44 378 422 Mandatory $ 269 39 308 282 591 60 651 30 681 Security $ 11 11 423 434 434 260 694 Aviation Capital Plan Needs State of System Revenue Good Enhancing Producing Repair Projects Projects $ 175 $ 300 $ 605 817 440 215 67 64 20 148 48 878 1,897 2,775 220 2,995 1,980 4,975 365 484 849 410 1,259 2,110 3,369 1,657 206 1,862 310 2,172 10 2,182 Totals $ 1,080 817 440 269 215 201 148 48 3,219 3,292 6,511 1,000 7,511 4,390 11,901 % 17% 13% 7% 4% 3% 3% 2% 1% 49% 51% 100%
Project Grouping LGA Redevelopment(1) EWR Terminal A Redevelopment(1) JFK Rehabilitation of Runw ay 4L-22R Runw ay Safety Area (RSA) Improvements JFK Delta Terminals 3 & 4 Redevelopment AirTrain (Primarily EWR) SWF Rehabilitation of Runw ays 9-27 and 16-34 EWR Rehabilitation of Runw ays 4-22 Subtotal - 44 Projects Remaining 378 Projects Total Value of Aviation Projects in 2011 Capital Plan Value of Projects Funded Beyond 2020 Total Value of Funded Projects Value of Unfunded Projects Unconstrained Aviation Capital Projects
Notes: 1) The preliminary 2011 2020 Capital Plan has only the PFC related components associated with the Central Terminal BuildingatLGAandTerminalAatEWR.Totalprojectcostsforthetwoapproximate$5.4billion
Several projects are funded in whole or in part by PFCs. PFCs were first authorized by Congressin1990,andoriginallyallowedcommercialairportscontrolledbypublicagenciesto collectfeesupto$3.00foreveryenplanedpassenger.Currently,airportscanchargeupto$4.50 perenplanedpassenger.Sincetherateceilingisnotindexedtoinflation,therealvalueofthis funding source has eroded significantly during the past 22 years. Airports use these fees to fundFAAapprovedprojectsthatenhancesafety,security,orcapacity;reducenoise;orincrease air carrier competition. The Airports Council International has approached Congress to recalibrate PFC rates, among other PFC reforms. PFCs are included below Net Operating RevenueinTable13.
FINANCIALRESULTS
Aviation is the largest line segment in terms of revenue and total operating cash flow ($2.2 billion and $1.1 billion, respectively, in 2011) and is second largest based on headcount (with 964 personnel). Table 13 is a summary of cash flow generated by the Department after considering both inflows from grants and outflows from capital projects. Growth in revenue has outpaced growth in expenses while amounts invested in facilities have decreased. As a result, free cash flow has more than doubled since 2007 (refer to Table 13 below), which has positionedtheDepartmentforitsnextcycleofmajorcapitalprojects.
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Table13AviationAnnualFinancialTrend
Aviation Financial Sum m ary ($ in m illions) Revenue Expenses Net Operating Revenues % of Gross Revenue Grants, Contributions, AIP & PFCs Operating Cash Flow Invested in Faciilities Free Cash Flow % of Gross Revenue Annual Change Non Represented Employees Represented Employees Total Employees 2007 $1,918.0 (1,245.0) 673.0 35.1% 304.1 977.1 (673.0) $304.1 15.9% 2008 $2,025.9 (1,346.2) 679.7 33.5% 313.3 993.0 (631.2) $361.8 17.9% 19.0% 243 763 1,006 Actual 2009 $2,043.1 (1,306.1) 737.0 36.1% 287.4 1,024.4 (658.1) $366.3 17.9% 1.3% 245 801 1,046 2010 $2,125.0 (1,317.7) 807.3 38.0% 303.4 1,110.7 (504.7) $606.0 28.5% 65.4% 239 775 1,014 2011 $2,221.2 (1,385.6) 835.6 37.6% 273.5 1,109.1 (217.3) $891.8 40.1% 47.1% 228 736 964 Budget 2012 $2,219.9 (1,396.1) 823.8 37.1% 287.4 1,111.2 (452.4) $658.8 29.7% (26.1%) 263 779 1,042 CAGR '07 to '12 3.0% 2.3% 4.1% -1.1% 2.6% -7.6% 16.7%
201 765 966
As shown in Table 14 below, the primary source of revenue is rental fees charged for commercial use of airport space and services (e.g., airlines use of terminals, cargo handling services,restaurantandretailerspace,advertisingspace).Rentalrevenueislargelyfixed,based onmultiyearcontractswithairlinesandothertenants.The4.1percentannualrentalrevenue increase since 2007, despite the decline and rebound of passenger traffic, is the result of escalationclausesinexistingagreements,andthemarketbasedrentalrateincreasespreviously negotiatedwithairlinesthatreflectstheattractivenessoftheNewYorkmarket. Table14AviationRevenueTrend&Components
Aviation Financial Sum m ary ($ in m illions) Rentals: Terminal/Cargo, Concession & Other (1) Flight Fees (2) Parking, Utilities & Other Fees (3) Total Revenues Annual change Total PA Gross Revenue (from FRAP report) Percent of Total PANYNJ Revenue Key Operating Statistics Passengers Total Cargo-tons Total Plane Movements (000) (4) (4) (4) 2007 $841.3 547.0 529.7 $ 1,918.0 3,191.6 60.1% 2008 $916.3 569.8 539.8 $ 2,025.9 5.6% 3,527.6 57.4% Actual 2009 $936.3 597.7 509.5 $ 2,043.5 0.9% 3,552.2 57.5% 2010 $980.8 615.2 529.0 $ 2,125.0 4.0% 3,634.0 58.5% 2011 $1,047.6 633.9 539.7 $ 2,221.2 4.5% 3,815.0 58.2% Budget 2012 $1,030.0 645.4 544.5 $ 2,219.9 -0.1% 4,131.6 53.7% CAGR '07 to '12 4.1% 3.4% 0.6% 3.0%
109,069 2,620 1,271
106,214 2,343 1,249
101,482 1,921 1,181
103,691 2,207 1,168
105,518 2,261 1,185
108,385 2,451 1,274
-0.1% -1.3% 0.0%
Notes: 1) Terminal,Cargo&OtherRentalincludesrevenuefromtheleaseofspaceforadvertising,retailandrestaurantactivities.It alsoincludesrevenuefromSpecialProjectBonds(SPB)associatedwithterminalsatLGAandJFK.RevenuefromSPBs isexpensedfordebtserviceonadollarfordollarbasis Flight Fee reflects reimbursements from airlines that cover airport operating and capital expenses used to maintain and improvethePublicAircraftFacilities(commonairsideareasusedbyallairlines)andanallocationofAgencyexpenses The New York airports sell electricity, water, and chilled and hot water for temperature control at terminals. These are reflectedasutilityrevenue Passengertraffichasreboundedtonearpeak,prerecessionlevels,butplanemovementsaredown,inpartbecauseairlines have been using fewer aircraft to optimize utilization. Cargo volume remains suppressed since the recession, but shows evidenceofslowrecovery
2) 3) 4)
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The Port Authority airports also charge flight fees to airlines (i.e., landing fees or take off fees)thatreimbursetheairportsfortheexpenseofbuildingandmaintainingcommonairside areas used by the airlines. The flight fee level of approximately $7.00 per thousand pounds landedreflectsoldairportfacilities,thecostoflaborandsuppliesintheNewYorkMetropolitan area,andcurrenttrafficdemand.
Maintaining compliance with regulatory standards is crucial. Meeting progressively stringentrequirementswithoutaddingheadcountisincreasinglydifficultandexpensive TheFAAmandatesthatairportsmeetanexhaustivelistofoperationalandsafetystandardsto maintaintheircertificationunderPart139.Noncompliancewiththiscertificationcouldresult inseriousfinancialandoperationalconsequences.Althoughtheairportfacilitieshavereceived improved Part 139 inspection reports, they have historically struggled to fix violations in a timely manner, primarily as a result of budgetary constraints leading to insufficient maintenancestaff,andalackofinventoryofthenecessaryparts,suchaslightsandsigns.To properly align the workload associated with Part 139, the Department estimates that it needs additional personnel for enhanced oversight, training, wildlife management and safety management compliance. The net incremental cost would be mostly absorbed in flight fees paid by airlines, and may generate savings from overtime, with further efficiencies from avoidingredeploymentoflabor. Part139alsorequiresrunwaysafetyareas(RSAs)atbothendsofeveryrunway.RSAsarean incremental stretch of pavement or an Engineered Materials Arrestor System (EMAS) that providesadditionalroomintheunlikelyeventanaircraftoverrunsorundershootsarunway. TenofthePortAuthorityairports26runwayendsstillmustbemadecompliant.TheAviation Departmentexpectstoinvestnearly$500millionsystemwidetomeetPart139criteriaforRSAs bytheFAAs2015deadline. Beyond Part 139 initiatives, the Aviation Department has been limited in areas of preventive maintenanceandmajorworksprojectsduetothecapitalconstraintsoftheAgency.Asaresult, emergency and corrective work on critical assets primarily consumes staff and budget resources. Airportinfrastructureissignificantlyaged(averaging52yearsold).Budgetedupgrades andreplacementprojectsrequire$6.5billionofadditionalcapitalthrough2020 Signsofageatolderterminalsareobvious,andcausetheairportstorankamongtheworstin the country in terms of customer satisfaction.1 Buildings are nearing obsolescence, infrastructureisdeteriorating,andmaintenanceneedsaremounting.Theworseningcondition
1
2010surveysbyZagat&JDPower&Associates.
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of assets translates to escalating operating costs. Critical projects atthe main airports include DeltasexpansionofTerminal4atJFKtoreplaceTerminal3,theCentralTerminalBuildingat LGA,andTerminalAatEWR.Thesemodernizationeffortswillsignificantlyimprovetraveler servicelevels. The Port Authority airports are already operating at or near capacity due to FAA imposed caps on the number of hourly takeoff and landing combinations, or slot control. To grow further will require technological innovation, regulatory modifications,and/orphysicalexpansion Slot control is designed to limit delays by reducing the volume of aircraft using the regions airspace and airports. Even though the Aviation Department has invested heavily in delay reductiontechnology(bothgroundandairspacemanagementsystems)andhasimprovedon timeperformanceatitsairports,thecapsremaininplace.Addingbackjustoneslotperhour perairportwouldtranslateintoapproximately$6millioninadditionalAgencyrevenueand1.3 millionincrementalpassengersannually.Theestimatedeconomicimpacttotheregionwould beapproximately$680millioninsales,5,300jobs,and$250millioninwages.2 The FAAs NextGen program is an initiative of new technologies and operational and procedural changes that provides precision and flexibility to remove many of the airspace constraintsimposedbythegeographicproximityoftheregionsairports.PhaseIofNextGenis beingdeployedbytheFAAoverthecomingyearsthrough2018,andcouldaddthecapacityfor approximately20flightsperhour(systemwide,cumulativelyacrossEWR,LGAandJFK),that could amount to an estimated 26 million more passengers and $125 million of incremental revenueannually.2
REVENUEENHANCEMENTOPPORTUNITIES
Betweenaviationspecificandancillaryoperations,theAviationDepartmenthaspotentialfora varietyofincomestreams.Withsomeincrementalinvestmenttoactivateunderutilizedassets, the Department could generate approximately $15 million to $25 million annually in revenue fromnewaccessfeesandrentalsthatareinvariousearlystagesofplanningandanalysis. Incrementalrentalrevenuescouldbederivedfromredevelopedcargoandhotelfacilities atJFK Aviations JFK cargo redevelopment initiative seeks to provide strategic replacement of its agingassetbase,andincreasecargocapacityinamodernizedenvironment.Duetosuccessive years of constrained expense budgets, the Aviation Department has not had the resources to activelymarketitscargofacilities,manyofwhichareold,obsolete,orvacant.InJune2011,the Aviation Department conducted a study of the current level of demand and market trends
BasedondataprovidedbytheAviationDepartmentandthirdpartycommercialaviationconsultancy firmLandrum&Brown.
2
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affecting cargo at JFK, and developed a strategic plan to address cargo challenges facing the airport. While the study did not include specific dollar amounts of cost and benefit to the initiative, it outlined a number of issues, identified major categories of cost and benefit, and highlighted the need to initiate and accelerate marketing efforts to promote existing and redevelopedcargofacilities. The planned redevelopment would begin on the north side of the airport and spread to the other three cargo areas, each a mini campus on JFK grounds. Revenue would be derived frommultiyeargroundrentsorleases,forwhichpreliminaryestimatesareusedtoprojectthe potentialrevenuesnotedinthisreport. Aviation has selected developers for two hotels at JFK, one on the former Ramada hotel site, and another on the site of the existing TWA Terminal site (where a lease is currently being negotiated with the selected developer). Capital to construct each hotel is expected to be approximately $100 million to $115 million, and would be provided by the tenant. Revenue from each site would be generated from a minimum lease payment and percentage share of grosshotelrevenue.Thestartdatesfordevelopmentareuncertainpendingagreementamong the City of New York and various labor unions. Construction is expected to take up to 30 monthsineachcase. TheAgencyincurssignificantcoststosupportthirdpartycommercialbeneficiariesthat access its airports (i.e., offairport parking operators, etc.). Similar to other airports nationally,theAgencyshouldrecoupaportionofitscoststhroughmarketbasedaccess feeschargedtothesethirdpartycommercialbeneficiaries Offairportparkingoperatorsuseairportinfrastructure(i.e.,roads),andbenefitfromaccessto theairportandtravelerswithoutmakinganycurrentcontributionstothesupportcosts.This creates an unfair advantage over the onsite operators who pay fees designed to assist the airportsrecoveraportionoftheircosts. Sinceearly2010,Aviationhasdiscussedvariousrevenuesharingarrangementswithoffairport parking operators. Contemplated structures would involve either a percentage share of revenue or a perparkingspace fee at lots near EWR. The fee would offset erosion of the Agencys revenue from onairport parking. Currently, 11 out of 17 offairport parking operators have added $4.00 to $6.00 surcharges to their rates, but are not yet forwarding proceedsontothePortAuthority.Thisisanareaofcontroversyduetoperceivedinequityin thesituation. The Aviation Department should consider increasing the AirTrain fare at JFK to garner additional annual revenue from existing ridership volumes, net of revenue sharing arrangementswiththeairlines.AirTrainfaresareonlychargedtotravelersconnectingfromthe airport to railbased public transportation offairport, such as MTA or Long Island Railroad. TherevenueincreasewouldcontributetotheexpendituresassociatedwithanticipatedAirTrain component upgrades, and ultimate replacement given the system is approaching the second halfofitsusefullife.
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COSTCONTAINMENTOPPORTUNITIES
Given budgetary constraints, the Aviation Department has successfully limited spending by refining the procurement of contract services, mothballing and/or demolishing old buildings andreducingelectricityuse.Asaresult,totalcontribution,orproductivity,peremployeehas steadilyincreased(i.e.,2.6percentperyear,onaverage). Aviation could further reduce costs by: (i) better managing maintenance routines, and (ii)outsourcingmorelandsideelectricalwork In order to enhance productivity, the Aviation Department could replace its Maintenance ManagementInformationSystem(MMIS)withoneofseveralsystemscurrentlyavailableoff the shelf, and update its maintenance routines at each airport to achieve overtime savings, workload optimization, and better asset tracking that could reduce operating expenses by an estimated$2million peryear. Assuminganinitialcapital outlayof$5millionfor thesystem (like those currently used by the thirdparty EWR and JFK AirTrain operators), return on investment over 10 years would be approximately 35 percent. Improved tracking of airfield electrical repairs could also shorten electrical outages and further facilitate compliance with FAA regulations (Part 139). This type of asset management should be carefully coordinated withareconfiguredCPEAM. Aviationcouldreducelaborcostsbyoutsourcingmorelandsideelectricalwork(i.e.,relamping and other lowtech tasks). Cost savings would come in the form of reduced overtime costs, savingsfromnothavingtopayfullyburdenedpayrollexpenses,andreduceddelaysbecause AviationDepartmentelectricianswill beabletofocusonairsideneeds.Thisrecommendation pertainsprimarilytoelectriciansduetotheirrelativecontributioninmeetingFAAcompliance requirements.
RECOMMENDATIONS
Increase department headcount as appropriate to ensure compliance with FAA regulations,providedthattheincrementalcostsarerecoverablethroughflightfees ThePortAuthorityshouldappropriatelyevaluateandprioritizeAviationscapitalneeds givenitsmajorrelativecontributionbutdeterioratingassetbase Collaborate with other major airports to petition the FAA to recalibrate PFCs to an inflationadjusted level that would appropriately support critical, nonrevenue producinginfrastructureprojectstothebenefitoftheregion Activelysupportindustryeffortstoengageinslotcontrolreform,andmoveforwardon technologicalinnovationssuchasNextGen Similar to other major airports, the Port Authority should evaluate increases to commercialaccessfees AdvanceplanstobothenhancecargocapacityatJFKandpromoteexistingfacilitiesat JFKforadditionalrevenues As part of an Agencywide effort, implement new asset management system to better trackandimprovethecosttomaintaintheAviationDepartments$14billioninassets
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VII.
LINEDEPARTMENTREVIEWTUNNELS,BRIDGES&TERMINALS
OVERVIEW
TB&T manages and maintains six interstate vehicular crossings and two interstate bus terminals that are at the foundation of the transportation network that drives the economic engineoftheNewYorkNewJerseyregion.Thesefacilitiesserveasthecriticallinks,combined with PATH, in the Interstate Transportation Network that unifies the economies of the two statesintoasingleworldclasseconomiccenter,andfostersaqualityoflifeandcompetitivecost ofdoingbusinessthatsetstheregionapart.Annually,460millionpassengersand$326billion offreighttraversethesefacilities,makingthemsomeofthenationsbusiestandmostefficient transportationassets. Statisticsonage,revenueandvolumeforTB&TfacilitiesaresummarizedinTable15below: Table15TB&TSummaryStatistics
(millions) Facilities Bayonne Bridge Goethals Bridge George Washington Bridge Holland Tunnel Lincoln Tunnel Outerbridge Crossing Port Authority Bus Terminal George Washington Bus Station Tunnels, Bridges & Term inals Year opened 2011 Revenue 1931 $ 30.0 1928 131.8 1931 468.8 1927 132.0 1937/1945/1957 (three tubes) 164.0 1928 115.6 1957 35.5 1963 1.1 $ 1,079.0 2011 Volume (1) 3.5 13.1 52.4 16.8 20.6 14.9 2.3 0.3 124.0
Notes: 1) Volume for bridges and tunnels measured by eastbound vehicle traffic and for bus terminals by bus movements (bus passengersatthePABTandattheGWBusStationare64.6millionand4.6million,respectively)
Many of the facilities were hailed as engineering marvels when constructed, however, the majority are now over 80 years old and require significant capital to safely operate and keep pace with demand. There is a significant backlog of projects due to past deferral of maintenancecapitalexpenditures.Over$14.6billionofcapitalprojectshavebeenidentifiedfor TB&T:$6.7billionareaccountedforinthepreliminary20112020CapitalPlan,$3.6billionare fundedfortheperiodbeyond2020,and$4.3billionareunfunded(seeTable16below).
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Table16TB&Tpreliminary20112020CapitalPlan
($ millions) TB&T Capital Needs System Enhancing SGR Projects 1,800 715 395 176 3,086 1,864 4,950 2,830 7,780 2,630 10,410 1,246 1,246 274 1,520 730 2,250 1,490 3,740 Revenue Producing Projects 140 140 140 140 $
Project:
(1)
Mandatory 10 10 $ 10 10 20
Security 90 90 $ 90 120 210 $
Total 1,246 1,800 715 395 176 4,332 2,378 6,710 3,560 10,270 4,250 14,520
Bayonne Bridge Navigational Clearance Program Lincoln Tunnel Access Project George Washington Bridge suspender cable replacement Lincoln Tunnel Helix Project Goethals Design-Build-Finance-Maintain Program(2) Subtotal $ Remaining 226 smaller projects Total value of TB&T Projects in 2011 Capital Plan $ Value of projects funded beyond 2020 Total value of funded projects Value of unfunded projects Unconstrained TB&T Capital Projects
$ $
$ $
$ $
$ $
$ $
Notes 1) 2) RaisingtheBayonnebridgeisforthebenefitofPortCommerce Theexpendituresareforlandacquisitionfunds.ThePAplanstoattractprivatesectorcapitaltofundtherestofthe project
To fund, in part, the capital needs of the Port Authority assets, tolls were increased in September2011,thefirstincreasesince2008,andonlythethirdsince2001.Forautomobiles,E Z Pass tolls in peak hours increased from $8.00 to $9.50 (approximately 80% of drivers); cash tollsincreasedfurther,from$8.00to$12.00(approximately20%ofdrivers).EZPasstollsare scheduledtoincreaseby$0.75ineachDecemberfrom20122015,withthecashtollsincreasing byadollarineachinstance.
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FINANCIALRESULTS
Table17TB&TRevenueElements&KeyOperatingStatistics
Tunnels Bridges and Tem inals Revenue Sum m ary ($ in m illions) Revenue Tolls Bus Related Parking Other Total Revenues Annual change Key Operating Statistics (000) # of Vehicles in Tunnels # Vehicles in Bridges Total Vehicles in Bridges & Tunnels Annual change Bus Movements at PABT Bus Movements at GWBBS Total Bus Movem ents Annual change 2007 707.6 13.9 9.2 19.9 $ 750.6 2008 Actual 2009 2010 2011 Budget 2012 1,340.2 16.0 10.5 19.0 $ 1,385.7 28.4%
948.8 966.8 964.7 1,033.0 14.7 14.7 14.4 16.3 9.5 9.8 10.8 10.3 18.3 18.0 19.9 19.4 $ 991.4 $ 1,009.3 $ 1,009.9 $ 1,079.0 32.1% 1.8% 0.1% 6.8%
39,191 87,813 127,004
37,808 85,917 123,725 -2.6% 2,225 324 2,549 3.0%
36,857 84,643 121,500 -1.8% 2,240 295 2,535 -0.5%
37,251 83,955 121,206 -0.2% 2,220 300 2,520 -0.6%
36,419 82,731 119,150 -1.7% 2,264 307 2,571 2.0%
37,466 84,049 121,515 2.0% 2,309 313 2,622 2.0%
2,169 305 2,474
The vast majority of TB&Ts revenue comes from tolls (97 percent of the 2012 budget). Bus related revenues are modest and parking and other miscellaneous revenue account for the remainder. As shown in Table 18 below, revenue increased significantly when the tolls increased:March2008andagaininSeptember2011,andisforecasttofurtherincreasein2012 whenthefullyearimpactisfelt.Otherwiserevenuehasbeenrelativelyflat,slightlyabovethe modest negative growth in vehicle volume in tunnels and bridges that was reflective of uncontrollablefactorsincludingtherecessionandtherelateddecreaseinemployment.Vehicle traffic is budgeted to increase by 2.0% in 2012, however through the first six months, actual trafficwasdown2.3%versus2011duetotheelasticeffectsoftheSeptember2011tollincrease and sluggish economic recovery in the sectors that are important to travel demand at the bridgesandtunnels. Table18TB&TComponentsofFreeCashFlowatTB&T
Tunnels Bridges and Tem inals Cash Flow Sum m ary (m illions) Revenues Expenses Net Operating Revenues Net Operating Revenue margin Grants, Contributions Operating Cash Flow Invested in Facilities: Free Cash Flow Actual 2007 2008 2009 2010 2011 $ 750.6 $ 991.4 $ 1,009.3 $ 1,009.9 $ 1,079.0 435.8 436.6 436.8 437.8 461.0 314.8 554.8 572.5 572.1 618.0 41.9% 56.0% 56.7% 56.7% 57.3% 13.2 6.8 2.4 20.5 6.2 328.0 561.6 574.9 592.6 624.2 154.5 178.9 175.1 140.6 171.3 $ 173.5 $ 382.7 $ 399.9 $ 452.1 $ 452.9 Budget 2012 $ 1,385.7 459.5 926.2 66.8% 1.7 928.0 627.5 $ 300.4
TB&TisthesecondlargestLineDepartmentintermsofrevenueandoperatingcashflow($1.1 billion and $624 million, respectively, in 2011). As shown in the table above, TB&T has been able to keep expenses relatively steady despite increasing revenues, and as a result its net
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operatingrevenuemarginhasincreasedmeaningfullyoverthelastfiveyears,from41.9percent in2007toabudgetof66.8percentin2012.TB&Tgeneratesasignificantandgrowingamount of operating cash flow: $328 million in 2007 increasing to $928.0 million budgeted in 2012. Despitethisgrowth,thecapitalinvestedinTB&Tfacilitiesremainedintherangeof$140million to$180millionfor2007through2011;in2012investmentinfacilitiesisbudgetedtoincreaseto $627.5millionprincipallyduetoaccessprojectsunderwayattheLincolnTunnel. It is logical to consider TB&T and PATH together, as they form the nucleus of the Port AuthoritysNYNJITN. Table19InterstateTransportationNetworkCashFlow
Interstate Transportation Netw ork (1) Financial Sum m ary ($ in m illions) Revenue Expenses Net Operating Revenues % of Gross Revenue Grants & Contributions Operating Cash Flow Invested in Faciilities Free Cash Flow 2007 $850.2 (708.3) 142.0 16.7% 15.2 157.2 (344.7) ($187.5) 2008 $1,102.6 (731.3) 371.4 33.7% 12.1 383.4 (420.8) ($37.4) Actual 2009 $1,115.5 (738.7) 376.9 33.8% 8.9 385.7 (508.8) ($123.1) 2010 $1,119.8 (825.0) 294.8 26.3% 52.8 347.6 (468.1) ($120.4) 2011 $1,200.2 (783.6) 416.6 34.7% 41.8 458.4 (538.4) ($80.0) Budget 2012 $1,526.9 (797.6) 729.3 47.8% 36.4 765.7 (1,102.5) ($336.7) CAGR '07 to '12 12.4% 2.4% 38.7% 19.1% 37.3% 26.2% 12.4%
Notes: 1) ITNincludesTB&T,PATHandtheTransHudsonFerry;ThesenumbersdonotincludetheARCprojectwhichwas discontinuedinOctober2011oritemsrelatedtotheWorldTradeCenterHUB,bothofwhichareitemsthathavebeen includedinpastPortAuthorityITNdocumentation
The tunnels and bridges, bus terminals, PATH trains and Ferry service are all related as they operate to provide access between New York and New Jersey. On a consolidated basis, they generate positive net operating revenue, but negative free cash flow due to the required investments in facilities to meet demand and maintain State of Good Repair. Net operating revenueisbudgetedtoincreasefrom$416.6millionin2011to$729.3millionin2012largelydue tothetollincrease.However,freecashflowisstillbudgetedtobenegative$336.7milliondue tothehighcapitalcostsrequiredtomaintainandsecurethenetworksinfrastructure.
$6.7 billion of projects are included in the preliminary 2011 2020 Capital Plan to renovateTB&TsassetsandmaintainSGR The majority of the TB&T assets were built in the 1920s and 1930s. Significant investment is now required to renovate these structures, extend their useful lives, and maintain SGR. In response,thePortAuthorityhasincluded$6.7billioninitspreliminary20112020CapitalPlan asshowninTable20:
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Table20ProjectedInvestmentsinTB&TFacilities&ProjectedCashFlow
($MM) Operating Cash Flow Total Invested in Facilities Free Cash Flow Cummulative cash flow FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 10 year Actual Proj. Proj. Proj. Proj. Proj. Proj. Proj. Proj. Proj. Total $ 624.2 $ 916.0 $ 1,035.8 $ 1,161.1 $ 1,315.4 $ 1,460.6 $ 1,464.7 $ 1,444.1 $ 1,481.6 $ 1,618.6 $ 12,522.1 171.3 625.5 755.7 922.8 945.2 1023.4 712.9 574.4 459.4 505.8 6,696.4 $ 452.9 $ 290.4 $ 280.1 $ 238.3 $ 370.2 $ 437.2 $ 751.8 $ 869.7 $ 1,022.1 $ 1,112.9 $ 5,825.6 $ 743.3 $ 1,023.5 $ 1,261.8 $ 1,632.0 $ 2,069.2 $ 2,821.0 $ 3,690.6 $ 4,712.8 $ 5,825.6 n/a
In the 10 years ending 2020, TB&T is projected to generate approximately $12.5 billion of operatingcashflow:$6.7billionwillbeinvestedinitsfacilitieswhichwillleave$5.8billionin freecashflowbeforeinterestexpense.Thiscashflow,alongwiththeexecutionofvariousnon toll nonfare revenue enhancements, and operating cost reductions, will be necessary to fund the $3.6 billion of projects identified for beyond 2020 and the $4.3 billion of projects that are currentlyunfunded. Due to cost cutting efforts, for over eight years TB&T has not met its target of preventative maintenance routines, and this could be expected to ultimately lead to morecostlyemergencyrepairs Oneconsequenceofkeepingexpensesflatoverthelastseveralyearsisthatroutinepreventative maintenance has been cut back to offset other contractual expense increases, such as material and labor: in 2011, only 64 percent of all preventative routines were completed and only 76 percent of all priority preventative routines were completed. The cumulative effect of performing less than 80 percent of the routines is the increased risk of costly emergency repairs. In 2012, TB&T has $88 million budgeted for these routine maintenance expenses.Managementcurrentlyestimatesthatitwouldlikelycostanincremental$5million toreachthePortAuthoritys80percenttarget. Continued effort is required to address transportation capacity limitations and optimizetransHudsontravel.Solutionsinclude:differentiatedtollstructures,further adoptionoftechnologies,andimprovedbusnetworkefficiency TB&Ts crossings and terminals are at capacity during peak hours and will not be able to accommodate growth in traffic demand that will accompany economic growth in the region. Resulting congestion costs billions of dollars annually in lost productivity. Given that the bridges and tunnels are physically constrained, limited options exist to expand capacity. Solutionswillrequire: Increasedthroughputachievedbycoordinatingtransportationmodes; Enhanced roadway management (signing, striping, coning, construction coordinationetc.); Adopting new technologies (e.g. intelligent transportation systems such as traffic monitoringandincidenceresponsecapacities);and, Institutingpricingincentivestospreaddemand.
ImprovementstothetransHudsonbussystemsinclude: RenovationstothePortAuthorityBusTerminal(PABT); AdditionalstagingandbusloadingcapacityinNewYorkCity;and,
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ImprovementstothenetworkwestoftheHudsonRiver.
Overthenextthreeyears,thePortAuthoritymustimplementthescheduledannualtoll increases at the bridges and tunnels to ensure adequate funding of critical ITN and specificTB&Tcapitalprojects.Attheendofthethreeyearphasein,theproposedtoll increases will generate approximately $300 million of necessary incremental revenue annually ThepressandmanyelectedofficialswereapparentlycriticalofthemagnitudeoftheSeptember 2011 toll increases. However, as seen in Table 21, when comparing the cost of a roundtrip crossing,TB&TstollsareinlineorlowerthanthetollschargedontheMTANewYorkbridges. Table21TB&TComparativeTolls
Roundtrip Crossing Autom obile Cash Toll EZ-Pass $ 12.00 $ 9.50 $ 13.00 $ 9.60 Five-axle Truck Cash Toll EZ-Pass $ 65.00 $ 50.00 $ 70.00 $ 47.26
Port Authority TB&T New York MTA (1)
Notes 1) RobertF.KennedyBridge,VerrazanoBridge,BronxWhitestoneBridge,ThrogsNeckBridge,BrooklynBatteryTunneland theQueensMidtownTunnel
ThePortAuthorityneedstobettereducatethepublicthatitstollsarecomparablewiththetolls for the major MTA crossings. These users also need to be informed of the cost to modernize TB&Ts facilities and that the proceeds of increases are vital to fund Port Authority infrastructure projects. Informed public opinion and proactive addressing of misperceptions arenecessarytomitigatetheriskoftherescissionsofscheduledfuturetollincreases.
NONTOLL/NONFAREREVENUEOPPORTUNITIES
InitialrevenueopportunitiesidentifiedforTB&Trangefromapproximately$20millionto$100 millionannually. TB&T property could be used to generate an estimated $1 million to $2 million in additionalannualadvertisingrevenue In June, 2011, the PABTs faade was transformed by a massive, stateoftheart digital screen thatprojectshighresolutiongraphics,animatedtextandvideoatthecornerof8thAvenueand 42ndStreet.ThePortAuthorityreceivesapproximately$400,000peryearplusapercentageof revenue over certain thresholds for this screen. There are numerous other areas where advertising can be displayed without risking motorist distraction and related safety concerns. ThePortAuthorityhasanexclusivecontractwiththeoutdooradvertisingcompanyJCDecaux (Decaux),whocouldhelpthePortAuthorityadvanceaseriesofoutdooradvertisingdisplays on buildings, billboards, banners, light poles and other surfaces, and could potentially underwritethecapitalcostoftheprojects.
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Toll violation recovery efforts should be strengthened through increased staffing and supportivelegislativeactionstoenhanceenforcement,inordertogenerateanestimated $2millionto$4millionofadditionalrevenueannually Figure6TB&T:TollViolations(2011)
$4.8 $15.9 Uncollected Tolls Collected tolls
In 2011, the agencyexperienced over 2.6 million toll violations, or approximately 2 percent of totaltraffic.Thisrepresentedapproximately$20.7millionofunpaidtolls,asshowninFigure6 above.UtilizingTB&Tsexistingmultistepcollectionsapproach,theycollectedapproximately $4.8millionofthe$20.7million(andcollectedanadditional$7.2millioninadministrativefees). However, a significant portion remained: approximately $15.9 million in unpaid tolls and additional associated fees. A material share of the uncollected tolls and fees could likely be captured with two additional fulltime staff positions (in addition to the 1.5 fulltime equivalents managing the process now), costing approximately $350,000. More analysis is required to calculate expected additional recoveries but a range of $2 million to $4 million annually appears reasonable, which would far outweigh the additional cost. The success in collecting violations should also be bolstered by legislative support in New York and New Jerseytostrengthenpenaltiesandtosecureinteragencyagreementsforreciprocityacrossstate lines.Theagencypromoteditscollectioneffortsthroughitswallofshameearlierthisyear. ThePortAuthorityshouldevaluatealternativeplanstohelpfundfurtherinvestments inthebusterminals,whichhavesignificantcapitalneeds Commuter bus carriers are charged a $2.40 departure fee per bus. This compares to $43.90 charged to longdistance bus carriers. As a result of the unequal rates, while commuter bus carriers represent 85 percent of the traffic, they only represent 15 percent of the revenue. In 2001,theBoardapprovedaplanthatinitiatedafiveyearscheduletoincreaserateschargedto commutercarrierstoachieveparity.Therateswerecalculatedsuchthatattheendofthefive yearperiodtheywouldcoverthebusterminalsoperatingcosts(netofpublicsafetycostsand interestcosts).However,inanefforttoencouragethegeneraleconomicgrowthoftheregion, the increases were subsequently suspended. As a result, in 2011 the bus terminal lost $62 millionofnetoperatingrevenue.
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RECOMMENDATIONS
Review all options to achieve the Port Authoritys targeted completion rate of preventativemaintenanceroutines DevelopamarketingcampaigntoeducatethepubliconthecoststomodernizeTB&Ts assetsandengenderpublicsupportforcriticalinfrastructurerevitalizationefforts Initiate discussions and set goals to capture incremental revenue from additional advertising Enhancepersonneltopursuetollviolatorsandtollrevenuerecovery Initiate discussions with appropriate legislative bodies and government agencies to createtoolstoenforcetollviolations Reviewfeeschargedtobuscarriersanddevelopaplanofactiontoreducethelossatthe busterminals
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VIII. LINEDEPARTMENTREVIEWPATH OVERVIEW

ThePortAuthorityTransHudsonCorporation(PATH)becameawhollyownedsubsidiaryof thePortAuthorityin1962asaresultoflegislationpassedbyNewYorkandNewJerseythat authorizedthedevelopmentandoperationoftheoriginalWorldTradeCenter,andacquisition oftheHudsonandManhattanRailroad(H&M). PATHs core function is to manage the 24/7/365 operation of trains, passenger services, rail yards,signalsystems,andtherelatedsafetyandsecurityprogramsinsupportofover250,000 passengertripseveryday.In2009,PATHranked20thand24thoutofthetop50largesttransit agencies in the United States based on passenger trips and passenger miles, respectively.3 PATH is an important alternate and complementary mode of transportation that relieves congestionforcommutersthatdriveacrosstheAgencysbridgesandtunnels.PATHsrevenue isprimarilybasedonflatfareswithnumerousquantitypurchasediscountoptions.PATHalso derives a small amount of revenue from advertising and retail leases primarily at the Journal SquareTransportationCenterinJerseyCity,NewJersey.Unlikeothertransitsystems,PATH receivesnofederalorstatesubsidies. PATH is currently focused on increasing capacity in anticipation of rising passenger volumes associated with the opening and further build out of the WTC and development around the Harrison and Exchange Place stations. Ongoing capacityrelated projects include station platform extensions to allow 10 railcar trains (vs. currently eight railcar trains) and signal system modernization. In addition, PATH recently replaced 350 railcars for its entire fleet of trains. PATHs preliminary 2011 2020 Capital Plan includes $3.1 billion for continued investmentinitsfacilities.ThekeyitemsareshowninTable22below:
Source:AmericanPublicTransportationAssociation2011FactBook
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Table22PATHPreliminary20112020CapitalPlan
($ millions) PATH Capital Needs State of Good Security Repair 498 254 238 189 156 119 111 562 1,004 88 759 650 $ 1,763 $ 20 670 20 690 110 1,873 1,560 3,433 System Enhancing Projects 206 147 353 122 475 $ 30 505 530 1,035 Revenue Producing Projects $ -
Project Signal Replacement Program Tunnel Mitigation Purchase of Railcars Harrison Station Platform Elongation Ductbank Tunnels Under-River Grove St. Station Modernization Substation - Washington St. New Railcars for 10-Car Operations Tunnel Floodgate Railcar Overhaul Program Subtotal Remaining 119 Smaller Projects Total value of PATH Projects in 2011 Capital Plan Value of projects funded beyond 2020 Total value of funded projects Value of unfunded projects Unconstrained PATH Capital Projects
Mandatory 160 160 8 169 $ 169 169
Total 498 254 238 206 189 160 156 147 119 111 2,078 978 3,057 160 3,217 2,110 5,327
% 16% 8% 8% 7% 6% 5% 5% 5% 4% 4% 68% 32% 100%
FINANCIALRESULTS
Compared with the three other major Line Departments, PATH is the smallest in terms of revenue($121millionin2011).However,PATHislargestbasedonheadcount(1,220in2011) primarilybecauseofanemphasisonusinginhousestafftocompletePATHshighlytechnical maintenance and capital projects during the few, short windows of time (approximately four hoursaday)permittedduringcontinuoustrainoperations.OtherthanAirTrainfeederservice to public transit at JFK and EWR, PATH is the only Port Authority Line Department that providesrapidtransitpublictransportation.Consistentwithnumerousotherrapidtransitrail systemsintheUnitedStates(allofwhichhavehighfixedcosts),PATHoperatesataloss(Net Operating Revenue in Table 23 below). Over the past five years, modest fare increases with relatively flat operating expenses and growing grants and contributions have reduced PATH lossestoapproximately$129millionofnegativeoperatingcashflow,or($1.65)perpassenger, by2012.
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Table23PATHAnnualFinancialTrend
PATH Financial Sum m ary ($ in m illions) Revenue Expenses (1) Net Operating Revenues % of Gross Revenue Grants & Contributions (2) Operating Cash Flow Invested in Faciilities (2) Free Cash Flow % of Gross Revenue Annual Change Non Represented Employees Represented Employees Total Employees 2007 $99.4 (266.9) (167.5) (168.5%) 2.0 (165.5) (158.2) ($323.7) (325.7%) 2008 $111.1 (290.3) (179.2) (161.3%) 2.7 (176.6) (227.8) ($404.4) (364.0%) 24.9% 164 925 1,089 Actual 2009 $106.1 (300.9) (194.8) (183.6%) 5.3 (189.5) (326.3) ($515.8) (486.1%) 27.5% 172 1,014 1,186 2010 $109.7 (385.7) (276.0) (251.6%) 32.3 (243.7) (307.4) ($551.2) (502.4%) 6.9% 171 1,050 1,221 2011 $121.1 (322.1) (201.0) (165.9%) 35.1 (165.9) (341.0) ($506.9) (418.5%) (8.0%) 173 1,047 1,220 Budget 2012 $141.0 (303.1) (162.1) (115.0%) 32.9 (129.3) (351.5) ($480.7) (340.9%) (5.2%) 173 1,042 1,215 CAGR '07 to '12 7.2% 2.6% -0.6% 75.0% -4.8% 17.3% 8.2%
163 934 1,097
Notes: 1) 2) 2010expensesinclude$88millionassociatedwithcertainWTCTransportationHubdesignwriteoffs InvestedinFacilitiesandGrants&ContributionsfiguresinthetableaboveexcludeamountsforWTCTransportationHub
Unlike PATH, most other public transportation providers around the country are subsidized (e.g., MTA, NJ Transit, Chicagos RTA, and San Franciscos BART). PATH is supported by surpluscashflowgeneratedmainlybyTB&T,itssisterLineDepartmentintheITN. Approximately95percentofPATHrevenueisderivedfromtrainfares,asshowninTable24 below.Mostpassengerstakeadvantageofdiscountedfares,asillustratedbyanaveragefareof $1.50 in 2011 despite a full fare of $2.00 (before the September 2011 $0.25 fare hike). Fare increases are reflected in 2008, 2011 and 2012, driving the 7.7 percent growth rate in fare revenue.Otherrevenueshaveremainedrelativelyflat. Table24PATHRevenueTrend&Components
PATH Financial Sum m ary Farebox Advertising Retail Other (Parking, Bus & Intercompany Rent) Total Revenue Annual Change Percent of Total PANYNJ Revenue Key Operating Statistics Total Passengers (000s) Passenger Weekly Average (000s) Average Fare 24-Hour On-time Performance 2007 $92.6 1.8 1.4 3.6 $99.4 3.1% 2008 $105.5 1.8 1.3 2.5 $111.1 11.8% 3.1% Actual 2009 $100.9 1.2 1.4 2.6 $106.1 -4.5% 3.0% 2010 $104.7 1.5 1.2 2.3 $109.7 3.4% 3.0% 2011 $114.7 1.5 1.7 3.2 $121.1 10.4% 3.2% Budget 2012 $134.3 2.2 1.6 2.9 $141.0 16.4% 3.4% CAGR '07 to '12 7.7% 4.1% 2.7% -4.2% 7.2%
71,594 242 $1.29 97.6%
74,956 253 $1.41 96.5%
72,281 243 $1.40 96.7%
73,912 247 $1.42 97.0%
76,556 256 $1.50 98.0%
78,400 265 $1.71 98.0%
1.8% 1.9% 5.8% NA
PATH is on pace to set a new record for ridership for the second consecutive year. Through June 2012, passenger volume of 39 million trips was approximately four percent favorable to 2011results.YeartodateresultsputPATHonpacetomeetorexceedbudgeted2012volumeof 78.4millionpassengertrips,upfromtherecord76.6millionloggedin2011.
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PATHhaskeptexpenseincreases(2.6percentannualgrowth,Table23)toaminimumrelative tooverallrevenueincreases(7.2percentannualgrowth,Table24),buthasgraduallyincreased representedheadcounttosupportcapitalprogramssince2007(2.2percentannualgrowth,from 934in2007to1,042in2012).
PATHoffersitspassengersahighstandardofontimeperformanceforarelativelylow flatfare,onethatisfarbelowthelevelnecessarytocoveroperatingexpenses Since transit pricing is not market based, PATH operates at a significant loss. Breakeven performanceisnotfeasibleunderthecurrentlycontemplatedfarestructureandtotalexpenses aligned with maintaining 98 percent ontime performance. As an indication of the futility of breaking even, in 2011 the $128 million labor expense alone exceeded total revenue of $121 million.Tobreakevenin2011,theaverageblendedfarepricewouldhaveneededtobe$4.12 (versus$1.50actual),orpassengertrafficwouldhaveneededtobenearlytriple(210.7million versus76.6millionactual),neitherofwhichappearsrealisticinthecurrentenvironment. PATH is attempting to reduce its losses with scheduled annual fare increases of $0.25 for the next three years that will bring the undiscounted full fare to $2.75 byOctober 2014. Figure 7 belowprovidesacomparisonofPATHfarestootherformsoftransportationinthearea. Figure7PATHvs.OtherModesofTransportation
$15.00 $10.00 $5.00 $5.00 $PATH Fare MTA Subway Fare NJ Transit(1) NJ Bus(1) Via Automobile(1),(2) $2.00 $2.50 $5.50 $12.13
Notes: 1) 2) Estimatedcostper15miletripfromNewark,NJtoManhattan Automobilecostiscomprisedof$9.50EZPasstollplus$2.63infuel;dailyparkingisnotincluded
Though PATH has analyzed certain distancebased and on/offpeak pricing strategies in the past, the Agency currently does not have plans to implement such policies. Despite certain drawbacks, alternative fare structures remain potentially important and may need to be explored again in the future to balance the need for revenue growth with policies PATHs publicridershipwillsupport.Expressserviceandzonepremiumscouldalsobeimplemented. However, each has offsetting complexities such as track capacity management, and relatively narrow zone demarcations as compared with distancebased systems in other cities that have moretrackmilesthanPATH.
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PATHisaddingcapacitybecauseofanticipateddemographicchangesthatareexpected toincreasepassengervolumeinlowerManhattanandNewJerseybyapproximately3 percentperyearonaveragethrough2020 Growthofapproximately3percentannuallythrough2020isexpectedduetotheopeningand remaining build out of WTC facilities as well as development around the Harrison and Exchange Place stations. An enhanced signaling system will increase capacity by allowing trainstorunatcloserintervals.UpgradingPATHsantiquatedsignalingsystemisalsoamatter ofmaintainingaStateofGoodRepair,andisrequiredbyfederalregulations.PATHisalsoin themidstofaprojecttolengthentrainplatformsatthesixstationsontheNewarktoWTCline to accommodate 10railcar trains up from eight (a 25 percent increase in capacity). PATH recently replaced its entire fleet of railcars (the last of 350 new railcars was delivered in early 2012). Thenew fleet will increase capacity by reducing outages to help PATH uphold its on timeperformancestandardswhilecontinuingtomeetstrictmaintenancerequirements. Spendingof$1.1billionisbudgetedinthepreliminary20112020CapitalPlanforsignaland platform modifications that will increase system capacity. Anticipated increases in passenger volume and scheduled fare increases will contribute a cumulative incremental $1.1 billion in revenueby2023,plusapproximately$130millionannuallythereafter.
NONFAREREVENUEENHANCEMENTOPPORTUNITIES
Given PATH already has scheduled fare increases planned through 2014, ancillary revenue generation opportunities remain important. The identified advertising and real estate development opportunities could yield $6 million to $14 million in incremental revenue after approximately$38millioninonetimecapitalexpenditures. PotentialexistsforPATHtogenerateadditionalrecurringrevenuebyleveragingrailcar andtrainstationpropertyforappropriatedisplayadvertising The PATH rapid transit system consists of 13 stations across 13.8 miles of rail both above groundandunderground.Acrossthatspan,brandmarketerscouldachieveimpressionsfrom morethan250,000passengertripseveryweekdaythatprovideacaptiveaudienceforvarious advertisingmessages.AlthoughPATHderivedapproximately$1.5million,or1.5percentofits revenues,in2011fromadvertising,andisonpacetoreach$2.2millionin2012,theopportunity existstoexpandthisrevenuesource. PATHslocationsareattractivetoadvertisersduetocommutertrafficvolumeandthelengthof time commuters spend during each trip. Incremental initiatives like themed advertising dedicatedtooneadvertiserprominentlydisplayedatasinglePATHstationforadefinedperiod of time, adding advertisements to schedules and other printed material, or railcar wrapping couldgenerateadditionaladvertisingrevenueatminimalincrementalcosttoPATH.
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PATH stations in New Jersey along the corridor between Newark and both Exchange Place and Hoboken are in attractive areas that offer retail, residential, and parking developmentopportunities Weekday commuter ridership growth at the PATH Harrison Station, coupled with significant newdevelopmentintheareaaroundthestation,isexpectedtoincreasepublicparkingdemand in the vicinity over the next 10 years. In early 2012, PATH conducted a study that found an existing100parkingspaceshortfallwillworsentoover2,000spacesinthenext10years.The AgencysRealEstateDevelopmentgroupisintheprocessofdiscussingparkingdevelopment with the City of Harrison and private, third party developers. Alternative deal structures include a possible publicprivate partnership or selling the land outright contingent upon the buyerdevelopingmoreparkinginfrastructure.
RECOMMENDATIONS
Pursuerailcarwrappingandshortterm,themedadvertisingbystationtoboostrevenue Implement already scheduled annual fare increases to offset operating losses and fundingofcriticalcapitalprojects MoveforwardwithevaluatingparkingoptionsfortheHarrisonstation Conduct further economic analysis to drive operating efficiencies and consider raising fares via palatable pricing strategies related to distance traveled or on/offpeak hour travel InsupportofPATHsplanneddemandgrowthandrelatedcapacityexpansion,further due diligence and analysis is required to understand and validate nonelective capital spending,andevaluatepotentialalternativefinancingscenarios Consideralternativemethodsandothersubsidiestooffsetongoingoperatinglosses
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IX.
LINEDEPARTMENTREVIEWPORTCOMMERCE
OVERVIEW
The Port of New York and New Jersey (Port), operated by the Agencys Port Commerce Department,isthethirdlargestportfacilitybyvolumeintheUnitedStates,exceededonlyby theportfacilitiesinLosAngelesandLongBeach,California.Itisamajorcomponentof,and contributorto,theregionaleconomy:in2010,over269,000jobsrepresentingnearly$11.2billion inannualwagesweresupportedbyenterprisesrelatedtothePort.Thesesameenterprisespaid nearly$5.2billioninfederal,stateandlocaltaxes. Port Commerces business is highly competitive, distinguishing it from the other three Line Departments in the Port Authority. Commercial users of port services are very sensitive to price,speedandreliability.However,thePortslocationsprovideasignificantadvantagedue totheirproximitytothehighpopulationdensityinthesurroundingareas.Shippersareableto reach20percentoftheU.S.populationwithineighthoursand30percentwithin48hours. PortCommercedoesnotdirectlyhandlecargoitself.Rather,asalandlordport,itleasesspace to terminal operators that handle cargo and it provides the infrastructure necessary for port operations.Morespecifically,itsresponsibilitiesinclude: All operations, marketing, security, environmental compliance, and infrastructure assetmanagementatthePortfacilities; TheleasingandadministrationofallPortCommerceDepartmentproperty; The planning, development, management and delivery of the departments major capitalprograms.Thisincludesprojectsupportandtechnicalassistanceformarine terminaldevelopmentandPortwiderailoperations;and, Thedevelopmentandimplementationofenvironmentalpolicyandinitiatives.
Port Commerce has seven facilities in New York and New Jersey listed in Table 25. The facilitiesarealmostfullyleased,withscarceunusedacreage. Table25PortCommerceFacilities,Locations&2011Revenue
($ in millions) Facilities Elizabeth Port New ark How land Hook Port Jersey Marine Terminal Brooklyn Marine Terminals Red Hook NYNJ Rail LLC Port Com m erce Location 2011 Revenue Elizabeth, NJ $119.8 New ark, NJ 73.0 Staten Island, NY 15.0 Bayonne & Jersey City, NJ 14.9 Brooklyn, NY 6.4 Brooklyn, NY 5.4 Jersey City, NJ 1.8 $236.5
Approximately $3.3 billion of capital projects have been identified for Port Commerce: $1.7 billionareinthepreliminary20112020CapitalPlan,$1.0billionareexpectedtobefundedfor theperiodbeyond2020,and$0.6billionarecurrentlyunfunded.Thecomponentsofthecapital planareshowninTable26below.
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Table26PortCommercePreliminary20112020CapitalPlan
(millions) Port Capital Needs System Revenue Enhancing Producing Projects Projects $ 159 $ 124 108 102 66 53 226 384 184 186 410 570 210 620 150 770 350 920 920
Project Port Jersey Marine Terminal Global Terminal Development Cross Harbor Development Port New ark Port Street Capacity and Corbin St ramp improvement Port Jersey Marine Terminal ExpressRail Intermodal Facility Elizabeth North Ave Corridor improvements Port Jersey Marine Terminal Access improvements Subtotal Remaining 96 smaller projects Total value of Port Com m erce Projects in 2011 Capital Plan Value of projects funded beyond 2020 Total value of funded projects Value of unfunded projects Unconstrained Port Capital Projects
M andatory 0 240 240 180 420 20 440
Security 0 10 10 0 10 50 60
SGR 0 460 460 300 760 340 1,100
Total 159 124 108 102 66 53 611 1,077 1,688 1,040 2,728 560 3,288
FINANCIALRESULTS
ThemajorityofPortCommercesrevenue(approximately70percent)comesfromleaseincome generatedfrommarineterminaltenants(seeTable27).Theseareprimarilyfixedratecontracts, with relatively small but growing volumebased components that are reflected in the ContainerThroughputlineitem. Table27PortCommerce:RevenueTrend&KeyOperatingStatistics
Port Com m erce Revenue Sum m ary ($ in m illions) Revenues Marine Terminals Tenants Container Throughput ExpressRail Lift Charges Cargo Facility Charge Other Total Revenues Percentage change Key Operating Statistics (000) Containers TEU (twenty foot equivalent units) Percentage change International w aterborne vehicles Percentage change Waterborne bulk commodities (in metric tons) Percentage change 2007 146.9 4.5 15.3 69.2 236.0 2008 157.2 3.9 18.1 22.1 201.3 -14.7% Actual 2009 161.3 9.9 15.8 18.9 205.9 2.3% 2010 168.7 16.0 20.1 18.4 223.1 8.4% 2011 164.9 26.6 4.4 22.9 17.7 236.5 6.0% Budget 2012 180.7 30.5 30.3 0.0 241.5 2.1%
5,298 790 4,396
5,249 -0.9% 724 -8.4% 4,556 3.6%
4,562 -13.1% 440 -39.2% 4,470 -1.9%
5,292 16.0% 493 12.0% 3,133 -29.9%
5,503 4.0% 388 -21.4% 3,767 20.2%
5,918 7.5% 502 29.5% 3,473 -7.8%
In2011PortCommerceinstitutedaCargoFacilityCharge(CFC)whichisacostrecoveryfee that, over time, funds rail and roadway infrastructure investments, and 25 percentof security operating costs. In 2012 it amounts to $4.95 per container and it is expected to generate approximately $30 million. The rationale behind the charge is that user beneficiaries should contributetofundportimprovements.PortCommerceistheonlyportinthecountrywiththis fee.TheDepartmentisactivelyworkingatthefederalleveltoencouragelegislationforthisfee tobeadoptedatotherportstolevelthecompetitivefield.
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As shown in Table 28, total revenue decreased in 2008 as a result of the general economic slowdown that caused cargo volume to decline. As revealed in Table 27 the number of internationalwaterbornevehicles(i.e.,newautomobileshipments)declinedsharplyin2009and again in 2011. The initial decline was due to the dramatic recessionary impact on the auto industry,andwasfurtheraggravatedbyacombinationoftheJapanesetsunami,andHyundai and Kia Motors relocation of operations to the port of Philadelphia, in itself a reduction of 85,000units. Table28PortCommerce:ComponentsofFreeCashFlow
Port Com m erce Cash Flow Sum m ary ($ in m illions) Total Revenues Total Expenses Net Operating Revenues Grants, Contributions Operating Cash Flow Invested in Facilities Free Cash Flow Actual 2007 2008 2009 2010 2011 $ 236.0 $ 201.3 $ 205.9 $ 223.1 $ 236.5 112.6 143.5 127.2 163.4 185.1 123.4 57.7 78.6 59.7 51.4 3.7 0.4 2.3 4.2 8.6 127.1 58.1 80.9 63.8 60.0 285.5 184.1 156.1 302.9 216.0 $ (158.3) $ (126.0) $ (75.2) $ (239.1) $ (156.0) Budget 2012 $ 241.5 178.8 62.7 50.2 112.9 345.9 $ (233.0) Actual 2007-2011 $ 1,102.7 731.8 $ 370.8 19.2 $ 390.1 1,144.6 $ (754.5)
Port Commerce is the third largest Line Department in terms of revenue and operating cash flow($236.5millionand$60.0millionrespectively,in2011).PortCommercegeneratespositive operatingcashflow,buthassubstantialnegativefreecashflowafteraccountingforitscapital expenditures.Forthefiveyearperiodended2011,operatingcashflowwas$390.1millionand investmentsinfacilitiestotaled$1.1billion;thereforefreecashflowwasnegative$754million.
Port Commerce faces fundamental challenges: (i) it operates a primarily fixed rental modelwithlimitedabilitytorecapturethemajorityofitscapitalexpenditures;(ii)itis not subsidized by federal or state dollars, but yet it is tasked with making capital investmentswithoutprospectsfordirectreturnsthatotherwisebenefittheregion;and (iii) it has to comply with certain federal laws, which makes a true market based approachtopricingdifficult Duetothemajorinfrastructureinvestmentsrequiredtomaintainacompetitive,modernport,it will be difficult for Port Commerce to ever generate free cash flow after capital expenditures underitscurrentbusinessmodel.WhileitdoescollectaCFCthatovertimewillrecovercosts related to rail and road infrastructure, it does not recover other major critical capital project costs, suchas dredging and raising the Bayonne Bridge. In the current environment, it is not possible to charge for those costs and remain a competitively priced East Coast port. Other portsthatitcompeteswithfacethesamechallengebutmostreceive governmentsubsidiesto fundmajorcapitalprojects,asshowninTable29.TheportsofLosAngelesandLongBeach, California are exceptions to this. They operate without continuing programmatic subsidies. Twoprincipalreasonstheyareabletodothisare: Higher volume (these two ports are contiguous and on a combined basis handled 150 percentmoretotalequivalentunitvolumethanPortCommercedidin2011)
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Higherperacreleaseratesdrivenby: o ProximitytoactiveFarEastexporters;and, o Adifferentbusinessmodelwheretheyownmoreoftheportinfrastructuresuch ascranesandtransportequipment,whichallowsthemtocommandhigherrates.
Despite these differences, Port Commerce should carefully review and evaluate market alignmentofthetenantleasesastheycomeupforrenewalinfutureyears. Table29GovernmentFundingatComparablePorts(update)
Comparable Ports Georgia Ports Authority Examples of Government funding State recently committed $250 million to finance dredging the Savannah River and the Port of Savannah Harbors and Channels are maintained at a depth of 55 feet by the federal government due to the presence of a US Navy base Various tax incentive programs, including one w hich offers a $25 tax credit per TEU Approximately $50 - $60 million annually as part of an ad valorem tax from Harris County taxpayers. State and City recently committed $450 million to finance a new tunnel connecting the Port of Miami w ith the roadw ay netw ork State recently committed $77 million to finance dredging the Port of Miami harbor Approximately $70 million annually from a surcharge that is part of Kings County real estate taxes State recently committed $300 million to finance dredging the Port of Charleston $30 -$35 million annually from the State Commonw ealth Port Fund w hich derives its money from a 4.2% allocation of the State of Virginia Transportation Fund
Port of Houston Authority Port of Miam i
Port of Seattle South Carolina State Port Authority Virginia Port Authority
REVENUEENHANCEMENTOPPORTUNITIES Identified revenue opportunities for Port Commerce range from approximately $20 million to $25millionannually. Newbusinessinitiativesthatwouldreduceasmanyas360,000wastetrucksannually from the transHudson crossings and New Jersey roads, as well as preventing considerable wear and tear on these infrastructure assets by barging containerized municipalsolidwastetotheHowlandHookintermodalrailfacility(HowlandHook) and to the Greenville Yard (Greenville) to be in turn transported by rail to landfill facilities, would present more cost effective transport for the City, a revenue opportunityforPortCommerce The waste in question is currently being trucked from New York City through New Jersey to landfills outside the region. In the alternative it will be sent by barge from waste transfer stationsinNewYorkCitytoHowlandHookandGreenvillewhereitwillbetransportedtoits finaldestinationbyrail.Theinitiativesarescheduledtocommencein2014.Thiswillbemore economical for the City of New York and eliminate wear and tear to road infrastructure associatedwithasmanyas360,000municipalwastetrucksannually.Asmuchas$4millionof related toll revenue will be lost, but congestion and maintenance capital expenditures associatedwithroadrepairwillalsobereduced. Continued efforts are needed to increase Port cargo volume. A 10 percent increase in containervolumewouldgenerateapproximately$15millioninadditionalrevenue The majority of Port Commerces land is already leased and therefore there is only a modest opportunity to generate additional revenue from adding tenants. However, the tenants have
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significant unused capacity, and therefore revenue can be generated by increasing their cargo volume. Port Commerce currently receives approximately $27.00 per container that travels throughtheport($21.95percontainerunderthetenantleaseand$4.95fromtheCFC).In2011 container volume was 5.5 million. Therefore, a 10 percent increase would equate to 550,000 additionalcontainersandapproximately$15millionofrevenue. A position should be added as an economic development specialist for warehouses and distribution facilities in close proximity to Port Commerces ports. This strategy has been executed successfully in Savannah, Georgia, where the port has attracted nearby warehouses and supply chain infrastructure for companies such as Home Depot and Bed Bath & Beyond which in turn increases volume at its port. This position should coordinate efforts with the relevant Economic Development offices in New York and New Jersey and evaluate and implementsuccessfulmarketingstrategiestoattractgreateruservolume. In addition, an indepth analysis currently underway should be completed to determine whethertoinstituteamonetaryincentivefornewcargo.Forexample,theportatLongBeach, California recently instituted a $20.00 per container incentive to mitigate the risk that some ships will use the expanded Panama Canal to bypass it for East Coast ports. Though this incentive reduces profitability, the offsetting volume induced is still accretive given the fixed costnatureofthebusiness. Since 2009, Port has lost a significant amount of auto processing business, with international waterbornevehiclesdecliningfrom724,000in2008to388,000in2011.Rebuildingthisbusiness segmentshouldbeatoppriority. COSTCONTAINMENTOPPORTUNITIES DevelopanaggressiveplantostaunchthelossesattheRedHookContainerTerminal (RedHook)inBrooklyn,thatabsentinterventioniscurrentlyprojectedtoloseover $100millionoverthenext10years Red Hook could lose over $100 million over the next 10 years largely because most inbound containersitreceivesneedtobebargedacrosstoNewJerseywheretherearerailconnections, andthatcostisbornebyPortCommerce.PortCommerceneedstoattractmorecustomerswith cargothatwillbeconsumedinBrooklynandotherareaseastoftheHudsonRiverandtherefore notneedtobebargedacrosstoNewJersey.ArecentsuccesshasbeentheadditionofPhoenix Beverage,alargebeveragedistributorwhoseproductsstayinNewYork.IfthelossesatRed Hookarenotcurtailed,considerationshouldbegiventoattemptingtotransfertheoperationof the facility to a third party with potential for operating efficiencies, or closing it due to its financiallyunsustainablelosses. Evaluate upgrading the utilities at the marine terminals to drive further operating efficienciesandsaveupto$1millionperyear Port Commerce should evaluate the most cost effective ways to upgrade the utilities at its facilitiesinordertoreduceoperatingcosts(i.e.,saveleakagefromwaterdistributionsystems,
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upgrade electrical distribution system to turn back over to the local utility, and improve fire protection systems). Initial estimates suggest that upgrading the water distribution systems couldsaveover$700,000peryear,upgradingtheelectricaldistributionsystematPortJerseyto includemeterscouldsaveover$200,000peryear,andupgradingthefireprotectionsystemsat piers9Band11inBrooklyncouldsave$20,000to$100,000peryear. Considerretaininganinhouseattorneywithaspecialtyinmaritimelawtosaveupto $1millionperyear Hiringanattorneyinhousewithaspecialtyinmaritimelawwouldbecosteffective,allowfor quicker response times, and provide consistent legal interpretations. Over the last five years, the Port Authority has paid outside counsel an average of $10 million per annum. Initial estimatessuggestaninhousemaritimeattorneycouldreduceoutsidelegalexpensesbyupto $1millionperyear.Theattorneysprimaryfocuswould beonleaseissuesandotherroutine items;litigationsupportwouldcontinuetobeoutsourcedtooutsidecounsel.
RECOMMENDATIONS
Aggressivelyworktoalignleaserateswithmarketwhentenantagreementsexpire Continue to pursue the opportunities to barge containerized waste, including securing thenecessaryleases Add an economic development specialist to attract warehouses and supply chain infrastructureinproximitytofacilitiesanddrivevolumegrowthofcontainersshipped Providefurthersupportofanindepthanalysistodeterminetheprofitabilityandrisks ofinstitutingamonetaryincentivefornewcargothroughthePort Continue to aggressively market new tenants for the Red Hook facility to drive down theoperatinglossesandevaluatethefeasibilityofacommerciallyviablebusinessplan, oralternativelyconsiderdivestitureorshutteringofthefacilities Selectively upgrade utility infrastructure where it will provide a positive return on investment Evaluate feasibility of obtaining appropriate federal and or state tax subsidies to contributetothesignificantinfrastructuredevelopmentcoststhatwillbenefittheentire economicregion Hireaninhouseattorneywithexpertiseinmaritimelawtoreduceannuallegalexpense
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X.
WORLDTRADECENTERPROGRAM
OVERVIEW
The World Trade Center program (WTC) is a highly complex development of interrelated, capitalprojectsmanagedbythePortAuthority,includingthefollowing: OneWorldTradeCenterTower(1WTC); VehicularSecurityCenter(VSC); streetsandutilitiessurroundingandtraversingthesite; commercialandretaildevelopment;and, Transportation Hub, in part, a Federal Transit Administration (FTA) funded project.
The integration of the site requires numerous other projects associated with common infrastructure supporting appurtenant facilities, building systems, operations andparking. In addition,thePortAuthorityismanagingtheexecutionofworkonbehalfofotherstakeholders, such as, the National September 11 Memorial and Museum (Memorial) for a private foundation, the Performing Arts Center (PAC) for a private foundation, and the No. 1 Subway Line, Cortlandt Station, for the MTA (together the entirety of these projects is the Program). TheInterimReportpreparedanEstimatesatCompletion(EAC)throughareviewofproject 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 wassubjectedtoqualitativeriskanalysistodeveloparangeofpotentialincrementalfinancial exposure to the Current Estimate. As reported in the facts, figures and tables in the Interim Report,theEACwasestimatedtobeapproximately$14.8billionwithapproximately$1billion of identified potential exposures (see Table 30). Importantly in the Interim Report, Navigant identified the net cost to the Port Authority, at approximately $7.7 billion, with potential additional exposures of approximately $0.8 billion. As reported by the Port Authority, there havebeennoauthorized,materialscopechangestotheProgramsincethereleaseofthePhaseI Interim Report dated January 31, 2012 by Navigant (theInterim Report). Detailed analyses reaffirm the gross Program estimate at completion and net cost to the Port Authority as providedintheInterimReport.
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Table30WTCEstimateandPotentialExposure(perPhaseIInterimReport)
January31,2012InterimReport ($Billion) P rojectTitles: WTCTransportationHub 1WorldTradeCenter Vehic ularS ec urityCenter1 S iteInfrastruc ture WTCRetail S treetsandUtilities CortlandtS t.#1S tation 9/11Memorial 9/11Memorial(PA) 9/11Memorial(3rdParty) CampusS ec urityPlan ProgramContingenc y AdditionalFinanc ialExpense WTCTOTAL Reimbursements/Funding NETP ROGRAMCOSTTOP A 0.20 0.83 0.30 0.35 0.35 $14.79 (7.08) $7.71 0.05 $ 1.03 (0.21) $ 0.82 $3.74 3.95 0.70 2.17 1.72 0.33 0.15 $ 0.21 0.01 0.01 0.22 0.45 0.03 0.05
(1)(4) (4) (2) (3) (3)(5) (5) (5)
P rogram Estimate
P otential Exposures
Notes: 1) 2) 3) 4) 5)
Potentialforunderfundedcontingency Potentialaccelerationcosts PotentialscopechangesforChillerPlant,VSCandSecurity Potentialexposuretocontractornonperformance PotentialcostgrowthforStreets,CortlandtStationandPAC
As part of its Phase II work, Navigant was asked by the Special Committee to affirm the findings included in the Interim report. To confirm the findings of the Interim Report, significant efforts have made by the Port Authority to complete a comprehensive and collaborative risk assessment of the Program. Prudent, and industry standard, risk modeling efforts were employed to achieve increased levels of confidence in the total EAC, that is, the total cost of the development of the site under the current program. These calculations are bolsteredbyprojectspecificriskregistersthatallowforqualitativeprobabilityassessmentson identified exposures. In addition, Navigant reviewed numerous documents and conducted multipleinterviewswithmembersoftheWTCconstructionstaff,selectmanagementofthePort Authority and other persons with direct knowledge of the history of construction at the site. The collectability of expected reimbursements from third parties is based on interviews and representationsbyPortAuthoritypersonnel.Theentiretyofthisworknowformsthebasisof standardized monthly reporting protocol and reflects the Agencys ongoing efforts to ensure consistentmonitoringofthecostoftheProgram(seeTable31).
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Table31WTCEACandPotentialExposure (CurrentRiskModeledEstimatewithnotedVariancetoInterimReport)
Current Risk M odeled Estimate ($ Billion) Project Titles: WTC Transportation Hub 1 World Trade Center Vehicular Security Center 1 Site Infrastructure WTC Retail Streets and Utilities Cortlandt St. #1 Station 9/11 Memorial 9/11 Memorial (PA) 9/11 Memorial (3rd Party) Campus Security Plan Program Contingency Additional Financial Expense WTC TOTAL Reimbursements / Funding (5) NET PROGRAM COST TO PA Program Estim ate Potential Exposures
3.74 3.95 0.70 2.17 1.72 0.33 0.15 0.20 0.83 0.30 0.35 0.35 14.79 (7.38) 7.41
0.26 (0.11) 0.02 0.41 0.39 (0.08) 0.14
(1)(2) (2)(3) (2) (2)(4) (3) (3)(4) (2)
0.02
(2)
$ $
$ $
0.05 1.09 1.09
ExposureVariancesfromInterimReport: 1) ProgramEstimateincludesapproximately$200millionofsoft,hardandaccelerationcostsidentifiedby,andincurredby, the Port Authority associated with the deck over and landscaping changes related to the Memorial; these costs have been carriedintheProgramEstimatesince2008 Potential exposures driven largely by a change in estimating methodology that required an increase in contingency to achieveagreaterthan70%certaintyofcompletingtheidentifiedprojectattheProgramEstimateafteruseofnomorethan theavailablecontingencyamount DecreasedormitigatedexposuresresultinginreducedcontingencyreservesthatwereincludedintheInterimReport. Scopetransferbetweenprojects(i.e.,transferofChurchStreetfromStreetsandUtilitiestoSiteInfrastructure). Additional Net Reimbursements / Funding related to increased recognition of insurance proceeds offset by reductions in anticipatedthirdpartyreimbursements
2)
3) 4) 5)
SUMMARYOFKEYFINDINGS
These detailed analyses reaffirm the gross Program estimate at completion as provided in the Interim Report of approximately $14.8 billion with potential additionalexposuresofuptoapproximately$1.1billion(seeTable31); ThenetcosttothePortAuthorityis$7.4billionto$8.5billion.Netcostrepresents the gross cost after funding of insurance proceeds and reimbursement by third parties,occasionedbyworkperformedontheirbehalf(seeTable31andTable32); The Port Authority has identified, or is in the process of identifying, substantive actionsthatwilldelivertheProgramwithintheexpectedrangeoftheEAC; The Port Authority has instituted greater transparency and consistency in the reporting of the EAC that has resulted in the reliable identification of proposed scope additions and budget increases. The improvements in reporting and the
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existingcontrolsenvironmentallowfororderlyanalysis,acceptance,modificationor denialoftheproposedscopechanges;and, Thecertaintyofreimbursementbythirdpartiescontinuestoimprovewithnearly90 percent of anticipated funds received or committed as of this Report. The Port Authority reports that active negotiations are in process to recover remaining amountsduefromthirdparties.
ThePortAuthorityhastakenactionsvastlyimprovingthetransparencyandfrequency of EAC reporting including a collaborative, crossdisciplinary process for identifying andvalidatingcostsandpotentialimpacts InlightoffocusofseniormanagementandtheBoardofCommissionersoncostgrowthatthe WTC, Navigant notes meaningful change in the Agencys certainty, transparency and consistencyinthereportingoftheEACsincetheInterimReport: Agency communication on WTC costs is vastly improved. The WTC Construction (WTCC)andWTCRedevelopment(WTCRD)departments,inconjunctionwith theapplicabledepartmentswithinFinanceatthePortAuthority,haveintegratedthe components of the WTC into a single comprehensive estimate of gross costs that together create the EAC. This process necessarily involved frequent, interactive working sessions of all project stakeholders, including insights of private sector partners, to vet the accuracy of estimates and avoid errors of duplication or omission; APortAuthorityworkinggroupcomprisedofmemberoftheWTCC,WTCRDand Finance departments, has formulated and adopted a standard method of reporting cost estimates to the Board of Commissioners. This leading practice approach createsaconsistentmeansofdocumentingchangeandidentifyingareasofriskfor allinterestedpartiesrelatedtothiscomplexendeavor;and, The Port Authority has completed a thorough and collaborative risk assessment of theWTC.TheEAChasbeenprudentlyevaluatedthroughtheutilizationofindustry leadingmodelingtechniquestoassesstheprobabilityofdeliveringtheWTCwithin therangeidentifiedintheInterimReportandthisReport.
Quantitative probability and sensitivity analysis performed on the identified risks and exposurestotheEACallowforanassessmentoftheadequacyofavailablecontingency.Formal riskmodelingtoolswereemployedtoachieveconventionallevelsofconfidence(e.g.,minimum of 70 percent statistical probability in achieving the current estimate together with potential exposures) to each project within the WTC and associated adjustments were made to project levelcontingencybudgets. These analyses affirm the WTCs range of gross cost and net cost as presented in the Interim Report.Specifically,asindicatedinTable31,thepotentialexposuresincreasedbylessthan$60 million,orlessthan0.4percent,fromthefindingsoftheInterimReport.
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The Port Authority has implemented numerous initiatives that have enhanced the internalcontrolsenvironmentandthereliabilityofgrossandnetcostforecasts IntheInterimReport,Navigantwascriticalofthedocumentationquality,accuracyofestimates, and transparency of communication surrounding the EAC. The summary below lists certain recommendationsandactionsthatstemmedfromtheInterimReportandabriefdescriptionof theconstructiveresponsebythePortAuthoritytoeach: Table32PortAuthorityResponsetoPhaseIRecommendations
PhaseIInterimReportRecommendation Performacomprehensiveforensicconstructioncost auditoftheentireWTCprogramtovalidatethe costsexpended,theCurrentEstimateandtoidentify anyadditionalexposureitems. Conductafocusedreviewofthedevelopment budgetassociatedwithassetmanagementandthe futureoperationsofthe1WTCandtheRetailproject thatinvolvesallconstituents. Pursuereimbursementfromthirdpartiesfor completedworkandanypendingcommitmentsfor workproductconductedingoodfaith. Priortocommittingtoorinitiatinganyadditional workrequestsfromotheragenciesandparties, secureadequateevidenceoffundingor reimbursementcapacity. AssessthecontingentliabilitiesofthePortAuthority andriskassesssameintheEACfortheProgram. PortAuthorityResponse ThePortAuthorityhasdirectedareviewofselectlargercontractsasa componentofcontinuousriskmanagement.
ThePortAuthorityhasanalyzedthecommercializationaspectsofthe 1WTCandRetailprojectsinordertovalidatethecapitalinvestment requiredtoexecutecommercializationstrategiesleveragingthe expertiseofcommercialpartners. ThePortAuthorityhasenteredintostructurednegotiationstoensure thatfirmcommitmentsareinplacewitheachthirdpartystakeholder. ThePortAuthorityhasrestrictedanyfurthercommitmentstoperform workonbehalfofthirdpartiesabsentaspecificscopeofworkand subjecttofirmandclearlydocumentedfundingobligations.
ThePortAuthorityhasevaluatedthepotentialimpactofcontingent liabilitiesintheEACoftheProgram,asdiscussedinmoredetailin thisReport. ThePortAuthorityhasnotimplementedanyunplannedscope changessincetheInterimReport.Therecentlyadoptedcostreporting formatfortheWTCincludesasectionfortheconsistentreportingof anynewscopemakingnecessarytransparentandconstructive dialogueintheultimatedispositionofaspecificitem. ThePortAuthorityhasdevelopedriskregistersforeachprojectand performedanindustryrecognizedriskprobabilityassessmentofthe EACthataffirmedthefindingspresentedintheInterimReport.
Unlessintendedtocreateconstructionefficienciesor producedirectcostreduction,freezedesigntothe extentpossible.
Prepareacomprehensiveriskregister,probability assessbeneficialoradverseoutcomesona continuousbasistoincreasetheaccuracyoftheEAC basedoncontemporaneousinformation. Performsensitivityanalysisonbest,worseand likelyscenariostounderstandrelatedcostimpacts ontheEACandinparticularwhetherornot adequatecontingenciesareavailable.
Throughtheperformanceoftheriskassessment,thePortAuthority confirmedtheadequacyofthecontingencylevelsincorporatedinthe InterimReportEACataminimumof70percentprobabilitylevelfor themajorprojectscomprisingover85percentoftheProgramsEAC.
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PhaseIInterimReportRecommendation Integratedevelopmentandconstructionbudgets andaholisticreportingoftheProgramina standardizedformatonamonthlybasistothe ExecutiveDirectorwhoshalltakeultimate responsibilitytotheBoardofCommissionersfor CapitalPlanperformance.
PortAuthorityResponse AttheAgencysdirection,NavigantworkedwiththeWTCC, WTCRDandFinanceDepartmentstodevelopmonthlyEAC reportingprotocolstoincreasetransparencyandallowforearly determinationand,wherefeasible,correctiveactionsfornegativeEAC variances.DistributionofthesereportstotheExecutiveDirectorand BoardofCommissionershasbegun.
Certaintyofthirdpartyreimbursementhasshownimprovementwithnearly90percent ofanticipatedfundingnowreceivedorcommittedthroughsubstantivedocumentation AsindicatedinTable33,thecertaintyofreimbursementbythirdparties,andtheimplications on the net cost of the WTC for the Port Authority, continues to improve. Assuming that reimbursementsfromthirdpartiesaresecuredconsistentwithPortAuthorityexpectations,the netcosttothePortAuthoritywillbeapproximately$7.4billion. Approximately $2.7 billion of insurance proceeds and approximately $2.6 billion of federal governmentgrantsthathavebeenreceivedby,orareunderthetermsofspecificcontractswith, the Port Authority. Together, these two sources represent approximately $5.3 billion, or just over 70 percent, of the total expected reimbursement. An additional $1.4 billion of funding fromvariousagencieshasbeenreceived,orconfirmedthroughcontractualagreement,bringing the balance of verified thirdparty funding to $6.7 billion, or approximately 90 percent of anticipated reimbursements as represented by the Port Authority. The remainder, or $0.7 billion,isbeingcloselymonitoredbythePortAuthoritywithactivenegotiationsinprocessto recovertheseamounts. ThefollowingtablepresentsthecurrentstatusoftheWTCProgramanddepictsthegrosscosts and net obligations of the Port Authority through the anticipated completion of the Program. Ofnote,justover60percentofthirdpartyreimbursementshavebeencollectedandappliedto the Program. As a result, approximately $5.0 to $6.0 billion (i.e., accounting for the range of EACexposure)ofremainingfundstobeappliedtotheProgramisthedirectresponsibilityof thePortAuthority. Table33WTCIncurredandForecastCosts(GrossandNet)
Current Risk M odeled Estimate ($ billion) WTC Total Program Estim ate Reimbursements / Funding NET PROGRAM COST TO PA Program Estim ate 14.79 (7.38) 7.41 Expended thru 2011 7.13 (4.75) 2.38 Rem aining Baseline 7.66 (2.63) 5.03 Potential Exposures 1.09 1.09 Rem aining w/ Exposures 8.74 (2.63) 6.11
Table 34 conservatively presents the capital needs over time including potential exposures. TheseamountswillbereflectedandaccountedforinthefuturecapitalplanningoftheAgency.
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Table34WTCFundingRequirementstoDateandThroughCompletion(Annually)
Current Risk M odeled Estimate ($ Billion) WTC Total Program Estim ate Reimbursements / Funding NET PROGRAM COST TO PA Expended thru 2011 7.13 (4.75) 2.38 Rem aining w/ Exposures 8.74 (2.63) 6.11 2012 2013 2014 2015 2016+
2.94 (0.53) 2.41
2.85 (0.75) 2.10
1.87 (0.70) 1.17
0.63 (0.45) 0.18
0.46 (0.20) 0.25
AgreementsrelatedtothedevelopmentofTowers4and3createpotentialliabilitiesfor thePortAuthority;continuedmonitoringisrecommended Under the terms of a municipal financing structure, the Port Authority has agreed to provide creditsupportonLibertyBondsissuedforthedevelopmentofTower4attheWTC.ThePort Authorityprovidesthiscreditsupport,inlargepart,throughdeferralofleaseincomeallowing thepropertydevelopertofocusonoperatingexpensedeficits,certaincapitalexpenditures,and limitedconstructionandleasingoverruns,aswellasinterestpaymentsondebt.Becausethese subsidized amounts would remain due from the property developer and have an accrued interestfeature,theexposuretothePortAuthorityisintheformoftimingdifferencesthrough thedeferralcitedabove.Aboveall,thisstructuremotivatesthecontinueddevelopmentofthe sitethatisintheinterestsofallconstituents. TheconstructionoftheofficeportionofTower3isconditioneduponrealizingcertainprivate market triggers. In order to encourage continued restoration of the site, the achievement of these hurdles triggers an investment by the Port Authority for the construction of the tower. TheStateofNewYorkandCityofNewYorkhavealsoagreedtoparticipateinthisprospective venture.RepaymenttothePortAuthorityismadefromfuturetowercashflows,priortothe propertydeveloperreceivinganyprofitfrombuildingoperationsorcapitalevents/investments. Taken together, given that the development of Tower 3 is contingent upon achievement of hurdlesthatsignalmarkethealthandinvestmentviabilityandbecauseofthepriorityposition the Port Authority holds for repayment of any invested funds, the contingent liabilities associatedwithTower3areunlikelytoresultinmaterialrisk.
RECOMMENDATIONS
Given the significant remaining Program work to be committed and funded (i.e., approximately 30 percent and 50 percent against the current EAC of $14.8 million, respectively), the Port Authority should continue the monthly practice of the rigorous risk assessment, probability and sensitivity analysis, and prudent modeling methods substantiallysimilartothoserecentlycompleted.Thismethodologyshouldbeapplied acrossallProgramelements The Port Authority has worked collaboratively to develop a comprehensive reporting packagetotracktheprogressoftheEACandstatusofvariouspotentialriskexposures. The Port Authority should continue this practice on a monthly basis until project completion to ensure all relevant stakeholders are informed on the progress of the Program, and early corrective interventions can be pursued if variances from expectationsbegintoemerge
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Given the numerous integrated projects with various stakeholders, the Port Authority should continue to assess, as well as consistently, reliably and timely document, the methodologyandimpactofcostallocationsonthecostperformanceofspecificprojects withintheProgram ThePortAuthoritymustcontinuetocloselymonitorthefinalnegotiationandultimate resolutionofanycurrentdisputedorundocumentedamountsrelatedtorecoupmentof WTC costs from thirdparties. Once finalized, the Port Authority should report any negative variances from expectations and actively track full compliance with these obligations
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XI.
SHAREDSERVICEREVIEWPROCUREMENT
OVERVIEW
The Procurement Department (Procurement) is a crucial hub for sourcing products and services that support Port Authority operations and capital projects. In 2011 alone, the departmentwasresponsibleforawarding2,225contractswithtotalvalueof$2.4billion. As a public agency, the Procurement Departments core values have been to ensure competition,integrity,transparency,andcostcontrol.However,overtheyears,Procurements rolehasbecomeincreasinglymorecomplex,intermsofnumberanddollarvalueofawards,in typesofsolicitations,andinrelatedprocesses,withfeweremployeestohandletheincreasing workload. As the Agency desires to move quicker in capital deployment and to enhance services levels achieved for client departments, an opportunity exists to reengineer existing controls,processes,policiesandauthoritylevelstoimproveoutcomesforboththeProcurement Departmentanditsinternalclients. Aspartofitsanalysis,NavigantreviewedProcurementawarddatafrom2009to2011,totaling over6,500awardswithavalueofapproximately$8.0billion.Inordertoidentifyopportunities for increased efficiency in the departments activities, the following factors were analyzed: buyinggroup,solicitationtype,originofrequest,dollaramountoftheaward,andnumberof daysfromclientrequisitiontocontractaward.
Current approval levels and policies contribute to more lengthy processes that burden Procurement and internal clients. Although less than 10 percent of contracts required approvalfromtheBoardofCommissioners,alimitedboardcyclecoupledwithmultiple approvalprocesses(i.e.,checksandbalancesduringthereviewperiod),contributetothe contractsapprovedbytheboardhavingthelongesttimetoawardandultimatelycreate addedburdenonthestaff Table 35 below details the awards made at various authorization levels, demonstrating that DirectorApprovalisbyfartheshortest,atanaverage26daysfromclientrequisitiontoaward ofcontract,comparedto96daysattheBoardlevel. Table35ProcurementAwardsbyAuthorizationLevel(2011)
2011 ($ in 000's) Board Approval Executive Director Approval Director Approval Total Procurem ent # of Aw ards 135 59 2,031 2,225 $ Amount $ 1,823,437 138,281 427,611 $ 2,389,329 % Total % of $ $ per Aw ard 6.1% 76.3% $ 13,507 2.7% 5.8% 2,344 91.3% 17.9% 211 100% 100% $ 1,074 Avg # of Days 96.0 71.4 26.2 26.8
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Currently, authorization is based solely on the value of a contract, with no consideration for type of commodity or service required. This often leads to the Board of Commissioners approving standard, lowrisk contracts (i.e., cleaning and landscaping services, auto parts, softwarerenewals)thatcouldsafelybeawardedatalowerauthorizationlevelreducingcycle timeandresourcecommitmentstotheapprovalprocess.Ifsuchresponsibilityweredelegated totheExecutiveDirector,Procurementclientsandinternalsupportdepartmentswouldrealize timeefficiencies.EffectingthischangewillrequireamendmentstothePortAuthoritysPolicies and Procedures, as well as collaboration with the Office of the Secretary (OSEC), Law, and seniorstaff. Table36ConstructionContractsApprovedbyDirector(2011)
2011 (Whole $) # of Aw ards Total $ Amount Avg # of Publicly Advertised Bid 21 $ 18,551,428 Set Aside 6 2,270,883 Pre-Qualified 11 16,358,562 Other 4 10,568,878 Total 42 $ 47,749,751 Days 32.1 37.0 36.0 54.0 37.0
Constructioncontractsrelatedawards(upto$1.5million),extensions,andsupplementsrequire Agencywide review and Department Director written approval via a Memorandum of Authorization (MA) that can range from several weeks to 2 months. Procurement is collaborating with Engineering, Line Departments, and OSEC to streamline approval documentation and delegate approval authority to the program manager, and related dollar thresholds; trends in identified issues were consistent across all departments. Such improvementscouldshortendeliverytimeby3060daysforconstructionrelatedawardsand up to two to three weeks for contract supplements. Further detail regarding such approval recommendations,notdirectlyrelatedtotheprocurementprocess,canbefoundinAppendix C:ProcurementDept.Recommendations. Procurementbuyinggroupefficiencyistieddirectlytothenumberandaveragevalueof contractsawardedbyeachgroup Table37belowdetailsthenumberofcontractsandassociateddollarvalueawardedbyeachof the buying groups in 2011. See Appendix B: Procurement Buying Groups (Defined) for descriptionsandresponsibilitiesofeachbuyinggroup. Table37ProcurementAwardsMadebyBuyingGroup(2011)
2011 ($ in 000's) Professional Tech. & Advisory Commodities & Services Technology Services Construction World Trade Center/Federal Proc. Total Procurem ent # of Aw ards 1,158 724 192 85 66 2,225 $ Amount $ 191,911 484,220 219,596 413,786 1,079,816 $ 2,389,329 % Total % of $ $ per Aw ard 52.0% 8.0% $ 165,726 32.5% 20.3% 668,812 8.6% 9.2% 1,143,730 3.8% 17.3% 4,868,072 3.0% 45.2% 16,360,848 100% 100% $ 1,073,856 Avg # of Days 15.1 49.2 39.5 42.0 99.6 26.8
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WhiletheProfessional,TechnicalandAdvisory(PTA)hastheshortesttimelinetocontractan award(15days),largelyduetothepreapprovaloftheformofcontractandviablecandidates, even small improvements to process can yield a large savings given volume of agreements issued(1,158in2011).Avastmajority(88percent)ofPTAawardsuseaCallinConsultant list.CallinEngineeringagreementsaretypicallyawardedonafouryearbasis;however,each contractisrequiredtobewritten,reviewed,andauthorizedannually.Considerationshouldbe giventoallowforcontractstoberenewedonceoverthefouryearperiod. InCommodities&Services,wherepurchasesaccountfor33percentofallawards,opportunities for improvement exist as it is the second lengthiest process to award a contract (49 days). Factors influencing these purchases include inadequate client scope delineation, advertising thresholds, and the delegation of authority limits. The Commodities and Services division principally uses the Lowest Qualified Bid and Government Contract methods of procurement. Policiesthatrequireuseofapubliclyadvertisedsolicitationprocessshouldberevised to allow for discretionary purchases of lower value commodities and services that wouldacceleratedelivery,andlowercoststoexecute,whilemaintainingtransparency Table38ProcurementAwardsbyProcess(2011)
2011 ($ in 000's) Call-in Consultant Other Procurements Government Contracts Sole Source RFP Pre-Qualified Low est Qualified Bidder Total Procurem ent # of Aw ards 1,024 103 288 245 117 22 426 2,225 $ Amount 104,029 394,222 103,764 42,145 1,053,009 157,043 535,116 $ 2,389,329 $ % Total % of $ $ per Aw ard 46.0% 4.4% $ 101,591 4.6% 16.5% 3,827,400 12.9% 4.3% 360,292 11.0% 1.8% 172,022 5.3% 44.1% 9,000,076 1.0% 6.6% 7,138,340 19.1% 22.4% 1,256,140 100% 100% $ 1,073,856 Avg # of Days 14.8 22.0 34.7 46.5 53.1 57.5 61.4 26.8
A majority of solicitations using the lowest qualified bidder method (nearly 20 percent of awards)typicallyuseapublicadvertisingprocess,despitethefactthattheseprocessesarethe least efficient, requiring 61 days to award a contract. With the exception of government contracts, under current policy, the defined nature of certain purchases makes a publicly advertised solicitation the only authorized means to award a contract for commodities and services, regardless of the relative inefficiency. The current $25,000 threshold (unadjusted for over20years),shouldbereexaminedasraisingtheadvertisingthresholdreducesthenumber of publicly advertised solicitations, saving commodities and services two to three weeks per solicitation and eliminating related advertising costs. To facilitate this change, the Agency wouldalsoneedtocreatemorerobustvendorliststomoreeffectively,directlysolicitvendors basedontypeofserviceorgoodprovided. Forawardsthatcontinuetorequireapubliclyadvertisedprocess,variousimprovementssuch as a shift in the advertising window and use of media will save both time and dollars. Currently,anadvertisementisnotmadeuntilthescopeisfinalized,andismadebothonline,as
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well as print media, such as newspapers and trade magazines. By advertising prior to the finalization of scope, the Agency may save two to three weeks without compromising the communicationoftheneedtothevendor. OperatinginazeroexpensegrowthenvironmenthaslimitedProcurementsabilityto implement new, interactive procurement systems technology that would improve efficiency Historically, the Agency has been slow to adopt new technologies due to upfront cost, regardless of the longterm benefits. In the future, technology investments should be consideredfromacost/benefitandreturnoninvestmentratherthanasolelycostperspective. Implementation of a fully integrated EProcurement system is crucial for the department to completestandardizationofdocuments,processandinformationacrossalldivisions,aswellas enhancecommunicationbetweenProcurement,potentialvendors,consultants,contractors,and Agencyclients.Procurementhasalreadyidentifiedseveralpotentialsystemsolutionsandthe Technology Services Department estimated the potential cost to be up to $2.5 million, with additionalstaffrequiredtoimplement.Additionally,theecommerceinitiativewilllinktothe warehouses through mobile applications at an estimate of $500,000 in onetime costs for equipment. Benefits to a fully electronic procurement process include reductions in total procurement cycle, administrative costs per purchase, sourcing cycles, and data errors during bidsubmissionandevaluation.
COSTCONTAINMENTOPPORTUNITIES
Efficient delivery of capital projects is one of the largest opportunities for cost containmentatthePortAuthority,andtheProcurementDepartmentplaysavitalrole Procurement plays an important upfront role in the efficient delivery of capital projects (and ultimatelyimpactstotalsoftcostsincludedincapitalexpenditureoutlays)throughtheproject authorization process. If the Agency is able to reduce its capital delivery time, resulting in reducedsoftcosts,thepotentialcostsavingsarelikelytobesubstantial(pleaseseeadditional information regarding capital delivery savings in Section XV Capital Plan Assessment & ForecastReview). ImprovedvendorinteractionwiththePortAuthoritywilllikelyreduceoverallcostsof goodsandservicesprocuredbytheAgency The Agency has a reputation for rigorous procurement processes and terms and conditions (insurance requirements, indemnification, liability, etc.) that are perceived to be onerous (not marketpractices)anddifficulttonegotiate.Becauseofthis,vendorsareanecdotallyknownto factorinaPortAuthorityPremium.While,itisdifficulttoquantifyexactlywhatthePort Authority Premium might be, experience would suggest that it could be 0.5% to 1.0% of annual purchases, excluding Commodities. Eliminating vendors use of a Port Authority Premiumcouldyieldpotentialannualsavingsof$8.5millionto$19.0million.
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If identified initiatives are fully implemented, the Procurement Department expects greaterefficiencyinitsabilitytoprovideservicestoitsclientdepartments The Procurement Department has been handling a large and growing volume of solicitations with fewer employees and is in the process of implementing more efficient and streamlined processestoincreaseitscapacity(FTE)utilizationandtobemoreresponsivetotheneedsofits client departments. That said, if the identified initiatives are fully implemented, the Procurement Department believes that five (5) FTE reductions in Procurement staff may be feasible. This could mean potential savings of approximately $600,000 in annual salary and benefits. Streamlined processes and reduction in average number of days to award contracts should have an associated derivative impact on improving client departments productivity, as expedited delivery of required goods and services will accelerate executionofdutiesandprojects Analysis should be performed to further refine quantification of the associated derivative impactonclientdepartments.However,ataminimum,approximately20FTEsarededicated by Line Departments to facilitate procurement processes (i.e. interfacing with Procurement Department,scopedevelopment,contractmanagement,boardapprovalprocess,etc.).Thetotal compensation and benefit costs of 20 FTEs are approximately $3.0 million. If procurement efficiency gains by Line Departments are estimated at 20 percent to 30 percent, the implied potentialannualcostsavingswouldbe$0.6millionto$0.9millionperannum.
RECOMMENDATIONS
Procurement has identified more than 20 initiatives, and associated recommendations, that, if fully implemented, would markedly improve vendor interaction with the Port Authority, shortentheapprovalprocess,eliminateunnecessaryadministrativetasks,andexpeditedelivery ofproductsandservicestothelineandstaffdepartments.Afterdiligentprioritization,based on a combination of factors (i.e., cost to implement, potential cost savings, implementation timeframe),theseinitiativesshouldbeadopted.Acompletelistofrecommendationsisdetailed in Appendix C: Procurement Dept. Recommendations. Key recommendations are noted below: IncreaseAuthorityoverStandardContracts&Processes Raise the advertising thresholds and develop more vendor category lists for enhanced directsolicitationsforappropriatecommoditiesandservicescontracts DelegateauthoritytotheExecutiveDirectorforroutine,lowriskagreements,regardless ofthevalueofthecontract StreamlineProcessesandEliminateRedundancy Eliminate annual renewals for Callin Engineering agreements and require approvals oncepercontractterm(i.e.,fouryears)
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Allow an expedited advertising process during scope finalization and eliminate print advertisingtoreducecosts Forvalueaddprocurements,suchasbankers,consultants,andotheradvisors,allowthe individualmostcloselytiedtotheselectedassignmenttoleadtheprocurementprocess (i.e., selection of an aviation consultant should be led by a member of Aviation Departmentinvolvedinoversightoftheassignment) ImplementLatestProcurementTechnologytoEnhanceProcesses Prepare a phased Electronic Procurement Management System plan for a fully integrated approach to electronic document creation; online bid distribution and submission; enhanced vendor, contractor, and consultant communication; integration withSAPandotherPortAuthoritysoftwaresystems;andutilizationofmetricstotrack Agencyprocurementefficiencies,andcontractor,consultant,andvendorperformance
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XII.
SHAREDSERVICEREVIEWENGINEERING
OVERVIEW
With over 500 employees, the Port Authoritys Engineering Department is responsible for the delivery of architectural, engineering, and construction management services to the Line Departments,aswellasensuringthecontinuedstructuralsafetyandcomplianceofthevarious PortAuthorityfacilities.Duetothedepartmentsexpertiseandinstitutionalknowledgeofthe assetbase,Engineeringisacentralparticipantindevelopinganddeliveringthecapitalplan.As stewardsofthecapitaldeliveryprocess,theDepartmentcanandshouldplayanimportantrole inreducingsoftcostsinconstructionprojects. Despite efforts made by Engineering, COO, and the Capital Planning Oversight Committee, (CPOC) since 2005 to create a centralized Project Management Department (PMD) that would eliminate duplication and provide coordinated Agencywide leadership in project delivery, the critical function never fully developed and the PMD was dissolved with project managers decentralized and dispersed amongst the line departments. This left Engineering fullyresponsibleforEngineering,ArchitecturalDesign,andConstructiondelivery,withoutthe requisitesupport.FurtherdetailandrecommendationsarediscussedinSectionXVCapital Plan Assessment & Forecast Review. Due to the numerous projects in progress or athand, current Agency project delivery processes need to be reexamined to facilitate appropriate prioritization,timing,anddelivery. Tofacilitatereview,meetingswereheldwiththeEngineeringDepartment,includingtheChief Engineer and select management, in order to obtain insight into the current roles and responsibilities the department plays in the delivery of capital projects, and to determine if efficiencies in the process may be realized. Prior to the meetings, Engineering collaborated through various work sessions with the COO, Management & Budget Department, and Line Departments (including security) to perform a critical review of 50 select projects. The result was the identification of several key initiatives that, if enacted, would allow for enhanced facilitation in the execution of Port Authority projects. These considerations were thoroughly reviewedwiththedepartmentandselect,keyinitiativesaredetailedbelow.
AnAgencywideassetmanagementprocessshouldbefurtherdeveloped An Agency asset management process will enhance theability to aggregate and prioritize the numerouscapitalandoperatingprojectsacrossthePortAuthoritysfacilities.WithmanyPort Authorityassetspasttheirusefullife,theabilitytodeterminewhichprojectsrequireimmediate attentionwillbeacrucialtaskgoingforwardtoensurethesafetyandreliabilityoftheseassets. In the past few years, the COOs Office has led the preliminary effort to develop an Agency wide asset management process. It would behoove the Port Authority to reevaluate who is bestsuitedtooverseetheassetmanagementprocess,aswellasdedicateappropriatestaffand
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funding to Agencywide asset management that will identify current conditions and forecast the long term investment necessary to improve the state of each facility, inclusive of engineeringsprogramsandindustrybestpractices. The speed of delivery for capital projects is dependent on project delivery processes, including board authorization, procurement and careful coordination among Engineering, Line Departments, and Construction, to optimize workflow and drive accountability Several departments across the agency have met to discuss ideas to improve the speed of delivery for capital projects by allowing for higher delegation of authority at the Executive DirectorandDirectorlevels.Currentcapitalauthorizationpoliciesrequireallprojectstopass through a threestep process (i.e., planning authorization, project authorization, and contract authorization), with specific exceptions for StateofGoodRepair, Mandatory, and Security projects. While delays in project delivery are certainly attributable to time consuming Board approval, considerationforthefullprojectlifecycleshouldbegiventofurtheridentifyinefficienciesand driveenhancementstothecapitaldeliveryprocess. Increased clarity in project definition and scope development, between Line Departments and Engineering, specifically during the project planning phase, will improveprojectdeliveryandreducecosts Therearefivedefinedstagesinaprojectlifecycle:initiation(prestage1),conceptualdesign (stage 1), preliminary design (stage 2), final design (stage 3), and construction and commissioningoftheproject(stage4).Whentakingall stagesintoconsideration,thereare severalpointsofinefficiencythatcouldberesolvedtoenhanceprojectdelivery. Itisimperativethatarobustprojectinitiationprocessoccur,includingEngineeringsinputon project schedules and estimates prior to their inclusion in the Capital Plan. A clearly defined scopeoutliningfinancialandoperationalconstraintsneedstobeestablishedwiththeconsensus of all key stakeholders. An exception would be made for small routine projects being implementedviaastreamlinedprocess.Inaddition,asetlistofstage1deliverablesincluding an executive summary, conceptual estimate, life cycle cost analysis, preliminary operational staging plans, preliminary hours of work, and a preliminary schedule highlighting project stagesandsignificantmilestones,mustbedeliveredwithrigorsothatacommitmenttoproceed withtheselectedalternativecanbemadeattheendofstage1.Withoutsuch,thesedeliverables becomeguesstimatesatbestandprojectsareheldtoastandardthatisnotfullygroundedin reality,resultinginalackofappropriatefundingand,ultimately,costoverruns. Tobetterassureprojectsaredeliveredwithintheauthorizedbudgetandschedule,thereneeds to be an understanding and agreement of project risks, and associated financial impacts, betweentheLineDepartmentsandEngineeringbeforeitemsgobeforetheBoardforplanning andprojectauthorization.Theframeworkforthisiscurrentlyinplacewiththeriskassessment program; however, more rigors should be placed in defining risks and providing upfront transparencyinitemsmovingforwardtotheBoard.
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Another relative point of inefficiency is drawn out during the multiple design reviews throughoutstages13ofaproject.Currently,designsaresentoutforAgencywidereviewat50 percent, 90 percent and 100 percent completion. An allinclusive review process can add a monthtothereviewand,ifthe50percentand90percentstageswerereviewedstrictlyonan onboardbasis,meaningonlythoseindividualsintimatelyinvolvedintheprojectparticipate, more efficient allocation of company resources and expedited delivery of projects could be realized.Todate,Engineeringhaseliminatedthe90percentsubmissioninanefforttoexpedite projectdelivery. Delaysinprojectdeliveryandexecutionhaveledtocostoverruns.TheAgencywould benefit from a revamping of project delivery processes to ensure completion of capital andoperatingprojectsontimeandonbudget The timing of project delivery, execution, and, ultimately, costs incurred, can be improved through enhanced schedule management in Engineering. The majority of Port Authority managedconstructionprojectshavetightrestrictionsoncontractorhoursofwork,relatedtothe operational requirements of each facility (i.e., work on tunnels or bridges can onlybe done in offpeak hours) to minimize the inconvenience to the public. These set hours need to be re evaluatedtodetermineifhourscanbeextendedwithoutcompromisingfacilityoperations. Further efficiency in project delivery can be obtained by mitigating, if not eliminating, scope changes during stages 24 of a project. Even when minimal changes are made, a new scope submittal and approval process is required, causing delays in project delivery. This leads to projects completed outside of the authorized budget and schedule. A recent study was conducted comparing hardcosts (i.e., construction, facility forces, and insurance) versus soft costs (i.e., site acquisition, planning and engineering, project contingencies, general and administrative,andfinancingexpenses)forallprojectssince2000;Table39belowsummarizes thefindings. Table39ConstructionCosts:Hardvs.Soft(20002011)
($ in 000s) # of Projects Hard Costs Soft Costs Total Costs Percent Hard Costs Percent Soft Costs < $1.0m m 111 $38,197 25,021 $63,218 60% 40% $1.0m m $4.9m m 217 $344,237 199,289 $543,526 63% 37% $5.0m m $9.9m m 102 $492,787 227,834 $720,621 68% 32% $10.0m m $24.9m m 81 $924,444 365,564 $1,290,008 72% 28% $25.0m m $49.9m m 34 $895,261 258,390 $1,153,651 78% 22% $50.0m m $99.9m m 13 $654,571 242,659 $897,230 73% 27% $100.0m m $500.0m m 14 $1,979,759 443,237 $2,422,996 82% 18% Total 572 $5,329,256 1,761,994 $7,091,250 75% 25%
Thesoftcostpercentageforprojectswithatotalprojectvaluelessthan$10millionrangedfrom 32 percent to 40 percent of total project costs, versus 25 percent for larger, more complex projects.Whilemoreattentionshouldcertainlybegiventolarger,morecomplexconstruction projects, the smaller, simpler projects should have a more efficient process in design, authorization,anddelivery,therebyreducingthesoftcostpercentage.WorkingwiththeLine Departments, Engineering has implemented the following recommendations for small scale projectdeliverytokeepsoftcostsataminimumandincreaseefficiencyintheprojectplanning
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and delivery process: increased use of unit cost contracts, expanded budget and scope for immediate repair contracts, structural integrity program streamlining, expedited Agency authorizationprocesses,andprocurementprocessimprovements.
RECOMMENDATIONS
Tofacilitateandsupplementtheotherrecommendationsrelatingtotheenhancementofcapital project delivery, the following initiatives are recommended. While these recommendations would save significant time in project delivery and costs, total quantification of savings is difficulttodeterminegiventhatsuchimpactwouldberealizedacrossmultiplePortAuthority departments. Reorganize the Engineering Department to fall under the purview of the new, centralizedChiefofCapitalPlanning,Execution,andAssetManagementOffice(referto SectionVOrganizationalDesign&Effectivenessforfurtherdetail) ProjectAuthorizationThresholds Increase current authorization thresholds to be managed by the Executive Director to allowprojectstoadvancedirectlytocontractawardbyincreasinglimitsforthevarious project categories (StateofGoodRepair, Mandatory, System Enhancing, and Security), Capital and Operating Major Works Programs (planning related expenditures), discretionaryprojects,andnewinitiative. ProjectPlanning Develop rigorous Stage 1 scoping document with key project stakeholders prior to moving forward to next stage by (with the exception of small routine projects) clearly defining financial and operational constraints; limiting design alternatives and review; includepreliminaryoperationalstagingplans,preliminaryhoursofwork;andassuring projectchargecodesandfundingisavailablepriortothestartofdesign. ContinuethedevelopmentofanAgencyAssetManagementprocesstobetterenabledecisions as to projects; asset readiness/need to move into capital plan, including evaluation of the best suiteddepartmenttomanagetheassetmanagementprocess;agencyvisionwithclarifiedroles established for key stakeholders; asset lifecycle expectancy, condition, and rehabilitation analysis;andenhancedmethodstoincorporateareassuchasmechanicalandelectricalsystem analysis,roofingandundergroundutilitiesintoanAgencywideassetmanagement. ProjectDeliveryandExecution Improve schedule management by allowing for greater flexibility for hours of work wheneverpossible;limitingandinsomecaseseliminatingscopechanges;implementing efficiencies to reduce soft costs for small scale projects; clarifying roles and responsibilitiesofthekeystakeholdersintheprojectdelivery. o ImplementAgencywideprojecttrackingsystem;performingriskassessmentsonall projects in the Capital Plan; and continuing of the Engineering/Procurement initiativetostreamlinetheprocurementprocessasitrelatestoprojectdelivery.
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XIII. SHAREDSERVICEREVIEWLAW OVERVIEW

ThePortAuthoritysLawDepartment,managedbytheGeneralCounsel,providescentralized legalservicesfortheentiretyofthePortAuthority,includingselection(subjecttotheapproval of the Executive Director) and management of any outside counsel. Within the Law Department are two practice areas: Corporate and Litigation, Risk Management & Corporate Security.In2011,theLawDepartmentwasresponsibleforprocessingover12,000claimsand matters divided evenly between the two practice areas (Table 40 below shows the number of claimsandmattershandledbyeachdivision). Table40Claims&MattersHandledbyLawDepartment(2011)
Legal Division Corporate Law Business Transactions & Regulatory Compliance Employment Relations Finance Totals Litigation, Risk Managem ent & Corporate Security Claims Corporate Security Litigation Worker's Compensation Totals Outside Counsel (Directly Retained) Total Claims Handled in 2011 2,200 123 1,509 1,196 5,028 87 9,952 765 2,965 126 1,689 1,469 6,249 91 12,328 24.1% 1.0% 13.7% 11.9% 50.7% 0.7% 100.0% 2,633 1,366 838 4,837 561 397 193 1,151 3,194 1,763 1,031 5,988 25.9% 14.3% 8.4% 48.6% Open Closed Total % Total
3
180 273 1,221 4 2,376
TheLawDepartmentutilizesLawManager,alegaldatabase,totrackitsactivity,including thetypesofclaims,clientorigination,andlegaldivisionresponsible;however,itdoesnotcover alllegalmattersandclaims,norwasitdesignedtotrackthedatarequiredtodeterminethecost efficiencyoftheLawDepartmentswork.Forexample,whiletheLawDepartmentprocessed nearly6,000matters,thedatabasefailstotrackseverallargescaleaccomplishmentsoftheLaw Department,including: Providing bond, disclosure, and tax counsel in connection with the $2.6 billion in PortAuthorityConsolidatedBondsand$1.0billionincommercialpaper; Providinglegalandbondcounselsupportingtheissuanceof$1.3billioninLiberty RevenueBondsfor1WTC; Led negotiation, document preparation, and closing for the lease of onemillion squarefeetat1WTC;and, Ledthenegotiation,documentpreparation,andclosingofthejointventurebetween theDurstOrganizationandthePortAuthorityrelatingto1WTC.
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There are 132 employees at the Law Department, including 63 attorneys and 69 supporting staff. An average attorneys cash compensation represents approximately $125,000 with additional$47,000inbenefitsforatotalcompensationof$172,000.ShowninFigure8below, thisislowrelativetoaverageattorneysalariesattheNewYorkCityMetroarea,suggestingthat handling legal matters inhouse is likely more cost effective than outsourcing the work (will require some level of profit), provided that the appropriate expertise exists inhouse and attorneysaresufficientlyutilized. Figure8LawDepartmentvs.NewYorkCityMetro2011Compensation
200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 Attorneys Paralegals and Legal Assistants Legal Support, All Other $58,830 $66,767 $56,580 $56,860 $125,653 $171,460 NYC Average All Legal $138,120 PA Average All Legal $92,245
New York City Metro (1)
Port Authority (2)
Notes: 1) 2)
NewYorkStateDepartmentofLaborStatistics PortAuthoritypayroll2011;includesbasesalaryandaddoncompensation,excludeshealth,pension,andOPEB benefits
To facilitate review, meetings were held with the Law Department to review the roles and responsibilities of the Law Department and determine the nature of the various litigation matters and nonlitigation (transactional, document preparation, negotiation, regulatory, advisory, compliance) functions handled by each division. Data was also reviewed that detailedalllegalmatterscurrentlyopen,aswellasthoseclosedovertheperiodof20092011,to develop a more complete picture of the allocation of various activities within the Law Department.Atotalofnearly15,000claimsandmatters,excludingthoserelatedtoSeptember 11 inhalation claims, were reviewed and classified by law division, subdivision and claims types(seeSectionXIIISharedServiceReviewLawformoredetail).
OBSERVATIONSANDFINDINGS
The Law Department must continue to balance enabling business objectives of client departments while protecting the Agencys interests and reducing exposure to future litigation Consistent with other public agencies, the Port Authoritys Law Department has traditionally servedtocontrolrisk.Whileapublicsectorframeworkservesthispurposeeffectively,itcanbe
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limited in its ability to balance risk vs. opportunity to determine alternative riskmitigating solutions. From 2007 to 2008, the Law Department underwent organizational redesign in efforts to streamline the department to better serve its clients, including the appropriate use of outside counsel.However,theclientdepartmentsstillhavesomeperceptionthattheLawDepartment coulddomoretoprovidealternativesolutionstobusinessproblemsratherthanreasonsnotto pursuethegoal. The mix of inhouse versus outofhouse services needs to be objectively, quantitatively, andqualitativelyevaluatedforopportunitiestoimproveefficiencyandeffectiveness ThePortAuthorityatpresentutilizesablendedmodelwheretheorganizationsinhouseLaw Department has primary responsibility for handling the legal issues that arise, but the Law Departmentwillretainoutsidecounselonspecificmattersthatextendbeyonditsexpertiseor when the volume of cases (i.e., personal/property injury litigation claims) require different capabilities. The department proactively manages outside counsel with an inhouse attorney overseeing the respective work to ensure that performance is consistent with expectations. Table41belowdetailsthevariousmattershandledbyoutsidecounselin2011. Table41OutsideCounselRetainedin2011($in000s)
AreaofConcentration
Public Liability Transportation Leases/Business Agreements/Terminal Matters Audit Committee/Bankruptcy/Captive Insurance Employment and Labor Law Intellectual Property World Trade Center Issues Totals
No.ofFirms
9 4 4 3 1 1 1 23
No.ofCases
28 7 34 3 7 5 3 87
%TotalCases
32% $ 8% 39% 3% 8% 6% 3% 100% $
2011$'s
5,761.9 935.5 18,606.8 508.1 802.8 297.7 11,303.5 38,216.3
%Total$'s
15% 2% 49% 1% 2% 1% 30% 100%
With the organizational reform in 2007 and 2008, noted prior, the Law Department issued a Memorandumtoprovidenewguidelinesfortheappropriateuse,selection,andmanagementof outsidecounsel,withthegoalofachievingabalanceofinternalandexternallegalresourcesto effectively and efficiently advance the Port Authoritys business objectives. In addition, the Memorandumindicatedwhetherthereareinhouseandoutsideresourcesthatwouldproduce amorecostefficientresultandwhethertheworkmaybeaccomplishedlessexpensivelyby outside counsel. The Law Department anticipates that, in time, up to half of transactional mattershandledbytheLawDepartmentmayinvolveretentionofoutsidecounsel. In2011theLawDepartmentretainedoutsidecounselforlessthan1.0percentoftotalvolumeof work in 2011, and nearly $38.0 million dollars were spent, with approximately 50.0 percent relating to leases, business agreements, and terminal matters. As the Law Department considers increased use of outside counsel, it will be necessary to track both time and cost associated with each case or matter to determine which cases or matters would be more effectivelyservedbyoutsidecounsel.
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The Law Department is a major shared service expense and currently lacks readily attainable key performance indicators and metrics to reliably evaluate its current serviceperformance There is currently insufficient data available to track and measure the internal hours spent working on a case, attorney utilization and their overall productivity. Without having performancemetrics,itisdifficultto:(i)knowwhethertheLawDepartmentissucceedingatits objectives; (ii) demonstrate the value of the legal function to executive management; (iii) manage internal resources to ensure the Law Department is focusing on the right things; (iv) institute proper makeversusbuy decisions; (v) effectively manage external law firms to control costs, (vi) develop useful information about matters and fee arrangements; and (vii) benchmarkagainstpastperformanceaswellasotherlegaldepartments. Someoftheusefulmetricstoquantitativelymeasureperformanceandefficiencyare: Overall caseload, matters per lawyer, time spent on matters by type, and trends in typesofmatters; Totalandaverageexposurefacingthecompanypermatter,andbytypeofmatter; Trackingoftotalcosts(employeeandoverhead)permatter,andbytypeofmatter; and, Averageblendedratesintotalandbymatter(useinbenchmarking).
Anothertoolcommonlyusedbyinhouselegaldepartmentsisclientsatisfactionsurveys.This can serve as a communication tool between the client departments and the Law Department, allowing for more direct feedback about service and performance levels. Utilizing a combination of both quantitative and qualitative metrics will ensure the Law Department a higherprobabilityofachievingitsobjectives.
RECOMMENDATIONS
ToensurethattheLawDepartmentisachievingappropriateandefficientoutcomesforitsclient departments, as well as managing risks for the Port Authority, the following should be considered: Identifyandimplementnewtechnologytoestablish,monitor,andmeasureperformance metricsfortheLawDepartmentandcommunicatetoitsstakeholders: o o o o Determine business objectives and executive management and client department needs; Get buyin from internal legal team to rigorously collect information and measure performance; Putinplaceproperinformationsourcesandsystemstocapturerequireddata;and, Continuously improve the accuracy and usability of the information and the processesforsharinginformationovertime.
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XIV. SHAREDSERVICEREVIEWREALESTATE&DEVELOPMENT OVERVIEW

Real Estate and Development (RED) manages a portfolio of the Port Authoritys real estate associated with Line Department activities, the Agencywide Capital Plan, and economic development for the good of the wider region. The group exists to optimize the value of the Agencysassetsbyperformingawidearrayofrealestatefunctionsinhouseincluding,butnot limitedto: Transitorienteddevelopment; Arrangingforpropertyacquisitionsanddispositions; Promotingregionaleconomicdevelopment; Negotiatingretailandcommercialleaseandsalesagreements; Developingandmanagingjointventuresandotherpublicandprivatepartnerships; Managingretail,industrialandofficespace;and, Coordinatingstrategyandexecutionofadvertisinginitiatives.
REDs functions are managed in three broad categories: office space services and property management,assetacquisitionanddisposition,andleasingandoperations.AsnotedinTable 42 below, RED is involved in a wide cross section of Agency activities. Accordingly, the portfolio of real estate assets and inprocess projects is wideranging and complex. REDs interestscurrentlyincludebothtransitandnontransitrelatedassetsandprojects. Table42PortfolioofRealEstate&InProcessDevelopments(updatetable)
NON-TRANSIT OWNED REAL ESTATE New ark Legal & Comm Center Teleport Essex County Resource Recovery Facility Bathgate Industrial Park Industrial Park at Elizabeth 2 Montgomery Street Office Building IN-PROCESS DEVELOPMENT PROJECTS Real Estate Initiatives In Support of Transit Port Authority Bus Terminal (PABT) George Washington Bridge Bus Station PATH Harrison Station Redevelopment Journal Square Redevelopment Washington Street Pow erhouse Goethals Bridge (Right of Way) Bayonne Bridge (Air Rights Deal) West Midtow n Properties Air Rights Portfields Initiative PATH Substations Non-Transit Economic Development Initiatives Hoboken South Waterfront Development Queens West Waterfront Development Railroad Property Transactions
th
Since the events of September 11 that destroyed the main location for Agency office operations, headquarters and support functions have been housed in 12 separatelocations, as shown in Table 43. RED coordinates space in these locations as well as personnel mobility amonglocations,whichhasbeenadministrativelycumbersome.
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Table43PortfolioofPortAuthorityOwnedandLeasedEmployeeOfficeSpace
Leased Property 100 Broadw ay 115 Broadw ay (5,6,7 & 10) 115 Broadw ay (8, 9 & 19) 115 Broadw ay (14) 116 Nassau St 225 Park Ave. S. 225 Park Ave. S. (17th Fl) 233 Park Ave. S. JFK / KAL JFK / KAL (8/11/2003) JFK / KAL (2/1/2009) NY Total NEW YORK LEASED PROPERTIES Landlord MM100 Broadw ay LLC Trinity Centre LLC Trinity Centre LLC Trinity Centre LLC Abacus Federal Savings Bank 225 Fourth, LLC c/o Orda Mgt International Master Publishers, Inc. 225 Fourt, LLC Korean Air Lines Co., Ltd. Korean Air Lines Co., Ltd. Korean Air Lines Co., Ltd. RSF 55,547 76,448 61,180 19,575 9,990 224,728 9,381 80,898 2,648 840 4,863 546,098 Exp Date 12/31/2015 12/31/2016 7/31/2015 3/31/2012 1/31/2016 10/31/2016 8/11/2016 10/31/2016 2/24/2012 1/2/2012 1/31/2019
Leased Property 5 Marine View Gatew ay I Gatew ay Plaza II Gatew ay Plaza III 777 Jersey Ave PA Technical Center NJ Total
NEW JERSEY LEASED PROPERTIES Landlord Hoboken Associates, L.P. Gatew ay I New ark LLC Gatew ay Associates LLC Prudential Insurance Co. of America JHR Realty Co. LLC Trends Urban Renew al Assn Ltd
RSF 10,608 1,135 157,863 38,354 80,027 305,546 593,533
Exp Date 12/31/2014 8/31/2016 8/31/2015 12/20/2014 12/19/2013 2/29/2020
PORT AUTHORITY OWNED PROPERTIES Property 2 Montgomery PA Total Ow ned Properties SF 83,000 83,000
Inadditiontoassetspecificactivities,thePortAuthorityworkswithoutdoormediacompany Decaux on advertising campaigns in support of various Port Authority assets. Advertising requires internal Agency coordination among the RED group and Line Departments. In addition,theGovernmentandCommunityRelations(GoCor)groupweighsinonadvertising content. Asevidentfromitsportfolioofproperties,projectactivities,andcorefunctions,itisclearRED dealswithawidebreadthofrealestatetypesandissueswithvaryinglevelsofcomplexity.The natureoftheAgencyencouragesREDsscopetogobeyondtransitorientedassetsandtodrive revenue enhancement from existing assets. Often this involves relationships with constituencies having disparate interests including municipalities, special interest groups, private developers, contractors, and other commercial parties. There is a view that RED activitiesshouldbestreamlinedtofocusontransitorientedactivities.
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The Agency has noncore assets that are not strategic to the Line Departments and consumecapitalandmanagementresources Overtheyears,thePortAuthorityhasaccumulatedaportfolioofdiverse,noncoreassets(i.e., buildings, leaseholds, lands, etc.). The Port Authority has already taken action recently announcingtherestructuringofitsinterestintheEssexCountyResourceRecoveryfacilityand is in process of reviewing strategic alternative with regards to Newark Legal Center and Teleport. Many of these assets are not strategic to the business and are immaterial in value relativetocoreassets,whileconsumingcapitalandmanagementresources.ThePAhasstarted areviewofthesenoncoreassetstoanalyzethepotentialforsale. Consideration should be paid to decentralizing the Office Space Services & Property ManagementandLeasing&OperationsfunctionswithinCOO/linedirectsupportand Real Estate Acquisition & Disposition and Real Estate Development functions into CapitalPlanning,ExecutionandAssetManagement With reduced emphasis on noncore regional economic development projects and managing economic development facilities; continued divestitures of noncore assets; and currently decentralized leasing and acquisition staff for the Aviation and Port Commerce Departments, the planning and development elements of the RED function may be best served by being incorporatedintothenewCPEAMfunction. The Agencys leasing function (i.e., terminals, retail, advertising, parking, etc.) for the Line Departments has been decentralized since the mid 1970s. In 1999, RED expanded its role to includethemanagementofcommercialleasingforTB&TandPATH.UnlikeAviationandPort Commercedepartments,leasingisnotacoreoperationforTB&TandPATH. The Agency has certain adjacent real estate holdings that have value that may potentiallybeunlockedormonetizedviapublicprivatepartnerships ThePortAuthorityhaspropertiesaroundthePABTandterminusoftheLincolnTunnelaswell aspropertiesaroundtheJournalSquarestationinJerseyCitythatofferopportunityforvalue addedrealestatedevelopment.
REVENUEENHANCEMENTOPPORTUNITIES
TB&TpropertyaroundthePABTinMidtownManhattanandterminusoftheLincoln Tunnel (Dyer Avenue) offers the potential opportunity for valueadded real estate development that could generate hundreds of millions of dollars over a 10 to 15 year period ThePortAuthorityshouldconductathoroughmarketappraisalfortheDyerAvenuecorridor air rights. This value is before substantial infrastructure costs that could potentially include buildingplatformsonwhichtoconstructthebuildings,andexpensestoaccommodatecomplex engineering requirements related to issues such as ventilation and security and building over
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active roadways and bus facilities. These costs could be significant depending on the type of developmentpursuedanditspreciselocation.Arecentlycontemplateddealfor650,000square feet of air rights was for $115/square foot after taking into consideration the infrastructure required.Thisdealfellthroughinearly2012duetofinancingdifficultiesbythedeveloper.Not alloftheairrightsmaybedevelopedduetocomplicatingfactorsincludingzoningapprovals andopenspacerequirements.Alternativemonetizationopportunitiesmayarisetoselltheair rightstoadjacentpropertyownersthatcouldusetheseassetstoincreasetheheightanddensity oftheirbuildings. TheairrightsabovethePABTNorthWingalsopresentadevelopmentopportunity.Whenthe North Wing was constructed in the late 1970s, it was designed to support an overbuild structure. There is an estimated 1.3 million square feet that has been envisioned to be developedintohighendmixedusepropertythatcouldgeneratepotentialonetimetransaction proceeds of hundreds of millions of dollars plus potential ongoing annual revenue. The development may require improvements before a third party real estate developer is able to work with the area. An anchor tenant may also be crucial to advancing the design and constructionofthearea.Anagreementwithadeveloperforthesiterecentlyexpiredandthe PortAuthorityisexploringotheralternatives. PATH property around the Journal Square station in Jersey City offers a potential opportunityforrealestatedevelopmenttotakeadvantageoftherisingpropertyvalues inthearea AprominentdeveloperinJerseyCityhasadvancedplansforaseventotenyearJournalSquare revitalizationprojectbasedondevelopmentofthree4050storymixedusebuildingswith800 new apartments. Recent Jersey City zoning and tax increment financing incentives mitigate someoftheriskandmaketheprojectattractive.PATHwouldbenefitfromincreasedpassenger trafficandretailactivity.Evenlongerterm,inaphaseIIJournalSquarerenaissance,PATH could engage in a publicprivate partnership to tear down and rebuild the office space above thetransportationcenter.
RECOMMENDATIONS
Continuetheprogramofnoncoreassetdivestitures Provide oversight and consultative guidance related to major real estate transactions (leasesandfeeinterestacquisition/disposition,andeasements,condemnation,etc.) Appointafocused,crossfunctionalworkinggroupwithinthePortAuthority,including Board of Commissioner involvement, for appropriate master planning of the Bus Terminal for purposes of revenue enhancement. Opportunities for enhancement will include: o Assessment of the value of Port Authority air rights along Dyer Avenue and the Lincoln Tunnel Expressway (between 9th and 10th Avenues from 30th to 42nd Streets) in todays market. Recommend strategies to maximize value, while enhancingcurrentandfuturetransportationoperations;and,
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Executearenewedsolicitationprocesstosecurefeasiblealternativestodevelopthe estimated1.0millionsquarefeetofairrightsabovethePABTNorthWing. InvestigatetherealestatedevelopmentopportunitiesaroundtheJournalSquarePATH stationinJerseyCity o
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XV.
CAPITALPLANASSESSMENT&FORECASTREVIEW
OVERVIEW
Thepreliminary20112020CapitalPlanofthePortAuthorityofNewYorkandNewJerseyis a 10year, approximately $26.9 billion4 commitment to the maintenance and enhancement of select transportation and other infrastructure in the New York and New Jersey region. The preliminary 2011 2020 Capital Plan is the second edition of such an effort by the Port Authority. The first, substantially similar effort to produce a 10year capital plan for the Agency was released in 2007 (2007 Capital Plan) for the period 2007 2016 that was subsequentlyrevisedin2008(2008UpdatedCapitalPlan). Thepreliminary20112020CapitalPlanwasdevelopedaftercollection,review,andanalysisof thePortAuthoritysidentifiedunconstrainedneedsof$44.3billion;thatis,initiallywithout regardforthelimitationsthatcapitalavailabilitywouldputonaportfolioofprojects.Asubset of projects totaling $26.9 billion or 61 percent of the Agencys identified, unconstrained needs was selected for inclusion in the preliminary 2011 2020 Capital Plan given that the capital capacityofthePortAuthoritywasforecastedtobeapproximately$2.5billionperannum. The preliminary 2011 2020 Capital Plan comprises 923 projects5 that are classified in six descriptivecategories: MAND or Mandatory projects that are required by law, governmental rule or regulation,orbyapolicyoftheBoardofCommissioners; SEC or Security projects that through technical assessment are designed to meet theAgencysSecurityPlantoreducetheopportunityforandmitigatetheimpactof terroristactsagainstinfrastructureassets; SGRorStateofGoodRepairprojectsthatareidentifiedthroughengineeringand lifecycleassessmentstomaintainthecontinuingoperationofPortAuthorityassets ranging from parking lot pavements repair at LaGuardia airport to the suspender ropesreplacementattheGeorgeWashingtonBridge;and, RPP or Revenue Producing Projects where an investment hypothesis with a positivefinancialreturnhasbeenofferedbythesponsoringentitytoprovidesystem enhancements,improvedcustomerserviceand/orregionalbenefits;
Although referred to as the $25.1 billion Capital Plan, the preliminary 20112020 Capital Plan is actually a $26.9 billion CapitalPlansincetheAuthorityincludeda$1.8billionadjustmenttitledlag.Thisadjustmentfactorrepresentstheestimated amountoffundsthatwillnotbeexpendedwithinthehorizonoftheCapitalPlan.Becauselagisatimingadjustmentandnota discountonestimatedprojectcosts,thisadjustmenthasbeenexcludedintheanalysesoftheportfolioofunconstrainedneeds.
4 5
The923projectshadatotalestimatedcostof$32.9billion,ofwhich$26.9billionwasplannedtobedeployedbetween2011and 2020.
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SEPorSystemEnhancingProjectsinvolveabeneficialimpactontheoperationsof the Port Authority, improved customer service levels, and/or regional benefits but donotyieldapositivefinancialreturntotheAgency;and, SRP or State and Regional Projects that advance the objectives of the Port Authority, but may not directly contribute to assets operated by the Agency. Such projectsareinitiatedattherequestofoneofthetwostates.
Inaddition,thePortAuthorityutilizesanumericalsequencetodesignatethestatusofacapital project,asfollows: Stages1andstage2representprojectsintheplanning,feasibilityandearlydesign phasesofthecapitalinvestmentlifecycle;and, Stage3andstage4areprojectsinfinaldesignandunderconstruction.
The 2011 Capital Plan includes the World Trade Center program (for more see Section X WorldTradeCenterProgramofthereport). In order to further refine the process and relevance of capital planning, the Port Authority is updating its 10year Capital Plan (2013 Capital Plan) and establishing a 5year Capital Program (2013 Capital Program), that will serve as a rolling tactical plan, subject to annual performancemeasurementandverification. A key element of the formulation of the 2013 Capital Plan and 2013 Capital Program is an enhanced scoring and ranking protocol to establish priorities in capital deployment. This ongoing effort has significantly enhanced the discipline and transparency of the capital planningprocess,andisapriority fortheAgency.TheprogressofthePortAuthorityonthis keyinitiativeintheshorttimesincetheInterimReportislaudable. In addition to the prioritization of capital projects, the Special Committee has focused on the capacity of the organization to fund known needs under a fiscallyresponsible plan. Accordingly, an integrated, dynamic, longrange financial model was prepared that captures thekeyeconomicandoperatingrequirementsofeachLineDepartmentandstresstestscapital planfundingcapacity(theModel). The Model includes GAAP financial statements at a consolidated level as well as individual Line Department and facilitylevel income statements. The Model serves to provide relevant andtimelyoutputfortheAgencyonrevenue,expenseandcapitalfundingcapacity,financing alternatives,debtservicerequirements,andprovidesoutputon: Netrevenues; Capitalneeds; Debtissuance; Debtcapacity; The ability to comply with statutory bond covenant and ratings agency requirements;and, ThefundingcapacityoftheAgency.
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SUMMARYOFKEYFINDINGS
ProjectsrelatedtoandclassifiedasSGRarethelargestareaofexposureforthePort Authority, totaling nearly 40 percent, or approximately 100 projects, of the total unfunded projects and 55 percent, or $6.2 billion, of unfunded costs for the preliminary20112020CapitalPlan; ThePortAuthoritymustintegratetheCapitalPlananddevelopannualbudgetsin support thereof, allowing appropriate contingency and flexibility for necessary change; Meaningful opportunities for cost savings may be realized through scrutiny of the driversofacapitalprojectslifecycle;and, By continuing to develop the capital planning organizational structure and improvingupontheexistingfinancialforecastprocess,thePortAuthorityiscreating a more robust decisionmaking process for capital project prioritization, execution andimplementation.
The Agency identified over $44.3 billion of known investment needs, of which, $26.9 billionisincludedinthepreliminary20112020CapitalPlan;oftheremainingunmet needs of $11.4 billion, $6.2 billion is related to SGR and must be addressed in future capitalplans The preliminary 2011 2020 Capital Plan represented the first time that the Port Authority identified projects unconstrained by capital availability or capacity. The Agency identified, through a systematic process, capital needs totaling $44.3 billion. The $44.3 billion of capital needsiscomprisedof: 923projectstotaling$26.9billionrelatedtospendingduringthe20112020Capital Plan; $6.0billionrelatedspendontheseprojectsthatextendsbeyondthe20112020time horizon;and, $11.4billionofknown,unmetneedsacrossarangeofprojectclassifications,which representprojectsinexcessofexistingcapitalcapacity.
In light of the historical capital limitations of the Port Authority, the development of the preliminary20112020CapitalPlanincludedanindependentassessmentviaascoringprocess of each identified unconstrained need, and a subsequent evaluation by the Line Department managers,engineering,theofficeoftheCOO,andCPOC.. In summary, capital capacity constraints resulted in the preliminary 2011 2020 Capital Plan thatincluded61percentoftheidentified,unconstrainedneedsoftheAgency.
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Table44UnconstrainedCapitalNeedsbyCategory($inbillions)
Met Needs Category # Projects WTC Stages 3&4 MAND SEC SGR SEP RPP SRP All Needs 22 380 26 45 323 79 36 12 923 2011-2020 % of Plan Plan $6.90 $4.88 $0.49 $0.38 $7.40 $3.08 $1.77 $1.95 $26.9 26% 18% 2% 1% 28% 11% 7% 7% 100% Beyond 2020 $0.15 $0.37 $0.06 $0.02 $3.37 $1.39 $0.56 $0.13 $6.0 Total Project Costs $7.05 $5.25 $0.55 $0.40 $10.77 $4.47 $2.33 $2.08 $32.9 278 $11.4 100% 2 53 108 109 4 $0.04 $0.42 $6.23 $4.46 $0.16 0% 4% 55% 39% 1% Unm et Needs # Projects 2 Total Project Costs $0.07 % of Unm et 1% Unconstrained Capital Needs # Projects 24 380 28 98 431 188 40 12 1,201 Total Project Costs $7.12 $5.24 $0.59 $0.82 $17.01 $8.93 $2.50 $2.08 $44.3 Unfunded
3
% of Unfunded 1% 2% 1% 3% 55% 34% 4% 1% 100%
$0.22 $0.37 $0.09 $0.44 $9.60 $5.85 $0.72 $0.13 $17.4
Notes: 1) CategoryacronymsabbreviateWTCWorldTradeCenter,Stages3&4,MANDMandatory,SECSecurity,SGRState ofGoodRepair,SEPSystemEnhancing,RPPRevenueProducing,andSRPStateandRegionalprojects,respectively 2) Excludespreliminary20112020CapitalPlan(Version#3E)LagFactor:$1.8billion 3) Includesunmetneeds(totalof$11.4billion)andthecostsofmetneedsbeyond2020(totalof$6.0billion) Sources: Preliminary20112020CapitalPlan(Version#3E) Preliminary20112020CapitalPlanTPCtoNavigantDecember22,2011 UnmetNeedsVersion#3E
SGR projects represent a significant portion of required investment and future Capital Plans andProgramsofthePortAuthorityandmustaccommodatethisneed.Infact,mostprevalent amongthe$11.4billioninknownandunmetneedswereSGRprojectsthatcomprise39percent oftotalprojectsand55percentoftotalunmetcosts(seeTable44).Inlightoftheagingand criticalnatureoftheAgencyinfrastructure,themagnitudeofknowndemands,thoseidentified needsoverthenextdecade,andthelikelyconstraintsonthecapacityoftheorganizationforthe foreseeablefuture,theneedtoprioritizetheuseofcapitalandsourcethenecessaryfundingis paramounttomaintaintheassetsandachievetheobjectivesoftheorganization.
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A review of the unmet needs by Line Department (see Table 45) reveals that the greatest requirementsareassociatedwithAviation,$4.4billion,andTB&T,$4.3billion. Table45UnconstrainedCapitalNeedsbyLineDepartment($inbillions)
Met Needs Line Departm ent WTC Aviation TB&T PATH Port Commerce Regional Development Capital Infrastructure Fund All Needs 2011-2020 # Projects % of Plan Plan 22 422 232 129 101 11 5 1 923 $6.90 $6.51 $6.72 $3.06 $1.69 $0.95 $0.03 $0.99 $26.9 26% 24% 25% 11% 6% 4% 0% 4% 100% Beyond 2020 $0.15 $1.00 $3.56 $0.16 $1.03 $0.00 $0.00 $0.13 $6.0 Total Project Costs $7.05 $7.51 $10.28 $3.22 $2.72 $0.95 $0.03 $1.12 $32.9 Unm et Needs # Projects 2 125 55 71 25 Total Project Costs $0.07 $4.39 $4.25 $2.11 $0.56 % of Unm et 1% 39% 37% 19% 5% Unconstrained Capital Needs # Projects 24 547 287 200 126 11 5 1 1,201 Total Project Costs $7.12 $11.90 $14.53 $5.33 $3.28 $0.95 $0.03 $1.12 $44.3 Unfunded $0.22 $5.39 $7.81 $2.27 $1.59 $0.00 $0.00 $0.13 $17.4 % of Unfunded 1% 31% 45% 13% 9%
1% 100%
278
$11.4
100%
Notes: 1) Excludes20112020CapitalPlan3ELagFactor:$1.8billion 2) Includesunmetneeds(totalof$11.4billion)andthecostsofmetneedsbeyond2020(totalof$6.0billion) Sources: 20112020CapitalPlanVersion#3E 20112020CapitalPlanTPCtoNavigantDecember22,2011 UnmetNeedsVersion#3E
The Port Authority must embrace its capital plans and develop supporting annual
budgets that consider appropriate contingencies. The 2008 Updated Capital Plan and supportingannualbudgetsshowed24percentofplannedprojectswereunderbudgeted and 7 percent of total budgeted dollars were related to projects not anticipated in the plan Ahistoricalreviewofthe2008UpdatedCapitalPlanandassociatedbudgetsforFY2009FY2011 revealedthefollowing(seeTable46): ThePortAuthorityunderbudgetedcapitalexpendituresby$3.4billionor24percent (allplannedprojectsper2008UpdatedCapitalPlanlessallbudgetedprojects); Only 383 projects of the 545 identified in the 2008 Updated Capital Plan were actually included in the budget and, in total, the 2008 Updated Capital Plan identifiedprojectswereunderbudgetedby33percent;and, 284projectsthatwerenotincludedinthe2008UpdatedCapitalPlanwereallocated 7percentofthebudget,or$0.8billion,duringthisperiod,mostofwhichpertainto Aviation.
Whilethereisnoclearpatterntothese284budgetedandunplannedprojectsitisnotablethat halfoftheprojectsandapproximatelyonequarterofspendisassociatedwiththeAviationLine Department.Whileitisnotuncommontorealizeunidentifiedandemergentneedsinabudget cycle,theamountoforiginallyunplannedneedsinthebudgetreiteratestheneedtocarefully identify,communicateandprioritizethemostcrucialneedsinitscapitalplan(seeTable46).
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Table4620092011BudgetedSpendagainstCapitalPlan($inbillions)
Capital #Projects AllPlannedProjects(perCapitalPlan) NotBudgeted,PlannedProjects BudgetedandPlannedProjects +Budgeted&UnplannedWTC +Budgeted&UnplannedARCTunnel +Budgeted&Unplannedfor20092011 +Budgeted&UnplannedinCapitalCycle AllBudgetedProjects 545 162 383 11 1 79 284 758 Plan Spend $14.06 $2.69 $11.37 $7.64 $0.57 $1.44 $0.26 $0.78 $10.69 71% 5% 13% 2% 7% $3.37 24% $3.73 33% Budget % Budget Capital Plan Budget Underbudget Againstthe Plan
Notes: 1) Excludes37plannedprojectsidentifiedasLagFactor 2) ExcludesAllFacilitiesProvisionforProjectsinDevelopment:(categoryCXXX001) 3) Excludes2008and2012metricsastheprecedingyearswereplanningyears:thebudgetsmatchtherespectiveplans Sources: 20072016UpdatedCapitalPlan 20082011ActualSpending 2011ActualsbyProject
The Agency expended significant capital on projects that were unaccounted for during the planning and budgeting cycles for the period 2008 2011 (see Table 47). While allotting for certain contingencies, the Agency expended a total of nearly $350 million more than was plannedthroughthesereserves.Themajorityofthespendinthisperiodwason360different projects, excluding those at the World Trade Center and Capital Major Works Projects (CMWP), that were not included in the 2008 Updated Capital Plan. Again, Aviation representsnearlyhalfofthisinvestmentwithrehabilitationprojectsonrunways,lightingand support systems predominating the mix; enhanced asset management plans would allow the Agencytobetteranticipatethesedemands.
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Table4720082011UnplannedProjectswithActualSpend($inbillions)
20082011per20072016UpdatedCapitalPlan 20112020CapitalPlanVersion#3E CurrentStatusTotal #Projects TotalRemaining ProjectCosts
#Projects ProvisionforProjectsinDevelopment CMWPContingency Unallocated,PlannedSpend UnplannedCMWPwithSpend ClosedProjectswithAdjustments UnplannedProjectswithSpend UnplannedProjectswithSpend 240 145 360 745
Plan $0.12 $0.24 $0.36 $0 $0 $0 $0.36
Spend
SpendPlan
$0.10 ($0.18) $0.79 $0.71 $0.35
240 145 360 745
$0.15 $0.02 $4.48 $4.65
Notes: 1) 2) ExcludesWorldTradeCenter ExcludesProject#CF92001formerlyknownasARCTunnel,whichwascancelledinOctober2011.Commitmentsnow reassignedtorepresenttheCapitalInfrastructureFund
Sources: 20072016UpdatedCapitalPlan 20082011ActualSpending 2011ActualsbyProject Preliminary20112020CapitalPlanVersion#3E UnmetNeedsVersion#3E Preliminary20112020CapitalPlanTPCtoNavigantDecember22,2011
Whiletheidentificationofnewneeds,referredtobytheAgencyasaddedstarterstoamore limitedextentisunderstandable,thelackofproperidentificationofneedsduringtheprevious planningandprogrammingcyclesisevidentwhenananalysisofthoseunplannedprojectsthat consumed$0.7billionfrom20082011include$4.7billionintotalremainingprojectcosts.The impact of needs unidentified during the planning process but included as added starters clearly exacerbates the Agencys ability to execute those projects previously included in the CapitalPlans. Executionanddeliveryofcapitalprojectsisequallyasimportant.IftheAgencyisable toreduceitscapitaldeliverytime,resultinginreductionofsoftcosts,thepotentialcost savingsarelikelytobesubstantial Soft costs represent all costs not directly attributable to the construction contract governing a project.IndustrysourceswouldsuggestthatthePortAuthoritymaybeabletorealizeuptoa5 percent improvement on certain types of capital projects from the current level of 25 percent. Attheselevels,thePortAuthoritywouldbeexceedingleadingpractice.Bywayofillustration, everyonepercentagepointreductioninsoftcosts(historically25percentoftotalprojectcosts) represents approximately $348.9 million in savings (from a combination of capital outlay, as well as cost of capital) over a 10 year period, representing approximately $34.8 million of potentialsavingsperannum.
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The magnitude of cost savings is a compelling motivation for the Port Authority to focus on optimizing the Capital Planning, Engineering and Execution Office to ensure effective coordination and execution among the departments to achieve a wellfunctioning complete project lifecycle (i.e., Procurement, Engineering, Construction, and Project Management) (See Table48). Table48IllustrativeExampleofSoftCostSavings($inMillions)
2011 - 2020 Proposed Capital Plan $
2
Avg. Annual Savings in Capital Outlay3,4
($ in Millions) Capital Expenditures 1 Hard Costs (Hisotically at 75%)
Total Avg. Annual Total Savings Savings in Savings on Cost on Cost of Capital Outlay of Capital3,4 Capital
Average Annual Savings
Total Savings
26,900.0 20,175.0 6,725.0
Soft Costs (Historically at 25%)2 $ Potential Savings on Soft Costs: Soft Costs at 24% Soft Costs at 23% Soft Costs at 22% Soft Costs at 21% Soft Costs at 20% $ $ $ $ $
6,456.0 6,187.0 5,918.0 5,649.0 5,380.0
$ $ $ $ $
26.9 53.8 80.7 107.6 134.5
$ $ $ $ $
269.0 538.0 807.0 1,076.0 1,345.0
$ $ $ $ $
8.0 16.0 24.0 32.0 39.9
$ $ $ $ $
79.9 159.8 239.7 319.6 399.5
$ $ $ $ $
34.9 69.8 104.7 139.6 174.4
$ $ $ $ $
348.9 697.8 1,046.7 1,395.6 1,744.5
Notes: 1) 2) 3) 4) Preliminary201110yearcapitalplanof$26.9billion(excludes6.0billionforamountsbeyond2020and9.0billionfor WTCandRegionalTransportationprojects) Perstudyofcompletedprojectsfrom20002011 Assumescapitalisdeployedevenlyover10years Assumescostofcapitalof5.4%.
ProcessimprovementsthathavebeenintroducedandembracedbytheAgencyhaveled tosignificantenhancementsintheCapitalPlanningprocess,particularlyinthecritical areaofprojectprioritization In response to these shortcomings and challenges, the preliminary 2011 2020 Capital Plan involved a much higher level of collaboration of various stakeholders and shared service functionswithintheAgency. Processimprovementsuggestionshavebeenadoptedtoexpandthedepthandbreadthofthe scoring, ranking and prioritization process utilized by the Agency in development of the preliminary 2011 2010 Capital Plan in 2011, allowing input from all levels of the Port Authority.Leadamongthesehasbeenincreasedemphasisontheindependentassessmentand properbalanceofkeyevaluativecriteria,including:(i)assetcondition,(ii)operationalimpact, (iii)implementationreadiness,and(iv)executionconstraints. Thesemodificationsarewellunderway.TheAgencysplanningeffortfor2013hascommenced andisutilizingtheenhancedscoringandprioritizationprocessforthedevelopmentofthe2013 CapitalPlanand2013CapitalProgram.
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The Port Authority has committed to and initiated ongoing improvements in the developmentandexecutionoftheCapitalPlanandProgrambyevaluatingitsexisting organizational structure and improving upon the existing financial forecast, which helpsguidecapitalplanningcapacitydecisions The Port Authority has acknowledged these challenges and, in an effort motivated by the Interim Report, is actively evaluating the Capital Planning organizational structure, reporting metrics and project controls. Section V Organizational Design & Effectiveness provides a more detailed discussion regarding modifications in the organization of the Capital Planning function. Finally,therecentdecisionbytheAgencytocontinuethedevelopmentandperiodicrevisionof a10yearcapitalplanonathreeyearcycleandtoestablishwithinthatplanamoredetailed5 yearprogramthatwillberevisitedeveryyearisconsistentwithleadingindustrypractice.This vigilancewillsetthefoundationforperformancemonitoringandgivetheAgencyamoreactive postureinthemanagementofitsassetbase. KeyareasforimprovementinthePortAuthoritysexistingfinancialmodelwereidentifiedand remedied through the development of an enhanced forecasting tool that allows for more reliable decisionmaking on capital capacity and contingency planning under a variety of scenarios. Upon review of the Port Authoritys existing model utilized by the Management & Budget Department (MBD) to produce the budget and longrange forecast, key areas for improvementandaccompanyingenhancementswereidentifiedthatguidedthedevelopmentof theModelincluding(seeTable49): Table49MBDModelObservationsvs.NavigantModelEnhancements
Area for Im provem ent No centralized assumptions tab driving model output Inability to run sensitivities in integrated model - different scenarios maintained in separate model versions Consolidating model only - line departments kept in separate models No long-range balance sheet No consolidating cash flow statement for three cash / investment funds (Reserve Fund, Capital Fund, and Operating Fund); inability to forecast operating cash fund Passive calculation of financial income Standard covenant / rating agency testing disclosure No supporting capital plan details incorporated in the model Enhancem ent Clear and identifiable assumptions "command center" to drive model output Full functionality to toggle multiple sensitivities w ithin one centralized model Centralization of individual line departments and associated facilities and consolidating model into one place Detailed long-range balance sheet linked up to cash flow and income statement Consolidated long-term cash flow statement capturing all cash funds, inflow s and outflow s, as w ell as w orking capital movements Fully linked and automated calculation of financial income Defined tab for comprehensive covenant / rating agency calculations and compliance Detailed build-up of all 923 existing proposed capital projects by line department and by facility w ith ability to run sensitivities on different project mixes Color coded output tabs summarizing key model output and financial information
No tabs summarizing model output
Modelenhancementsincludeagreaterlevelofintegrationofkeycomponentsatthecorporate levelandLineDepartmentlevelsallowingforcapitalplancapacityassessmentsunderavariety ofscenarios.Thisisevidentbytheinclusionofintegratedfinancialstatements;incorporationof Line Department forecasts into a single, centralized Model; buildup of individual capital
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projectsbyfacilitylevelwiththeassociatedflexibilitytoincludeorexcludeindividualprojects; andpromptturnaroundofproducedoutputdrivenbyvariousscenariosonanautomatedbasis. ThePortAuthoritywouldbenefitfrommorerobustsensitivityanalysisoftheAgencys financialforecaststhatprojectdisruptiveimpactssuchaseconomicrecessions. Continuous stress testing of the Port Authoritys business model allows for appropriate contingency plans to be identified that include (i) reprioritization of capital spending, (ii) revenue enhancement and cost containment initiatives to realign financial performance in a changingenvironment,and(iii)useofalternativesourcesofcapitaltosupportinfrastructure investment.
RECOMMENDATIONS
The Port Authority must shift focus in the near term to the integrity of its portfolio of assets. The volume of SGR projects that face the Agency for the coming decade and beyond require diligent prioritization of SGR and a cessation of all discretionary projects.TheAgencyismakingmeaningful,neartermprogressinthisregard; Thecapitalplanningprocessmustacknowledgechallengesinhistoricalperformancein the Agencys ability todevelop and execute acapital plan. The 2013Capital Plan and Program must account for an overall contingency for emergency projects previously unidentified, other strategic initiatives, or unknown needs on projects already in construction. The status of progress of the 2013 Capital Plan and Program should be comprehensively, reliably, and consistently reported to senior management and the BoardofCommissioners; The inclusion of a specific project in the 2013 Capital Plan and Program should be consistentwiththeAgencysrankinganditsoverallstrategyandlessdependentonthe financialperformanceofparticularLineDepartments; The Agency must determine to what extent the historical run rate of $1.3 billion in capital delivery per annum is limited by capital capacity, engineering, project management, facility management, and/or operating limitations to maximize capital deploymentandreducesoftcosts; The Agency must enhance its focus on the implementation of capital projects and the establishment of associated governance to monitor and drive execution, effectiveness, andefficiency; Financial forecast evaluation should include a range of stress tests and incorporate recessionary impacts as well as support the assessment of revenue enhancements, cost savingsopportunities,andfinancingstrategiesandultimateimpactontheCapitalPlan; and, AdopttheModel,includingtrainingofkeypersonnel,andutilizethistooltoanticipate fundingrisks.
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XVI. IMPLEMENTATIONPLAN&NEXTSTEPS
Crucial to any restructuring or reorganization is a concise implementation plan to ensure all effortsaretargetedatgettingtomeasureableresults.Itisappropriatefortheimplementation plan to be shared throughout the organization and existing dashboards be modified to encapsulateeachinitiative.Theimplementationplanshouldbeorganizedtoinclude: Actionsteps; Responsibleparties; Targetdate; Status;and, Nextsteps
Eachinitiativeshouldbetrackedandasmanyactionstepsdetailedasnecessarytocompletethe taskincludedsothatresponsiblepartiesareclearontheactionsexpectedandassociatedtiming. The senior management team must oversee and ensure execution of the Key Initiatives ImplementationPlan,whichincludesthefollowingmajoritems: Implementeffectivecorporategovernance Implementorganizationalredesign Createdynamiccapitalplanning,executionandassetmanagementfunctionalitythatis fiscally responsible with appropriate prioritization of capital and accountability for returnonassetsandcapitalthePortAuthoritydeploys Createcultureofaccountability,meritocracyandtransparency Completerenegotiationofmajorcollectivebargainingagreements Reorient financial performance around continual identification of nontoll / nonfare revenueenhancementandcostsavingsinitiatives Completeanalysisanddivestitureofselectednoncoreassets Implement effective Enterprise Risk Management System that is quantifiable and measureable Createandimplementamarketingandcommunicationplantoeffectivelyconnectwith allPortAuthorityconstituents DevelopmentofAgencywidestrategicplan
AdetailedworkplanassociatedwithinitiativescanbefoundinAppendixA:KeyInitiatives ImplementationPlan.
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XVII. APPENDIXA:KEYINITIATIVESIMPLEMENTATIONPLAN
1. Action Steps: Im plem ent effective corporate governance A. Finalize key operating principles for board ratification B. Conduct board survey through designated questionnaire C. Realign committee structures along key agency functionalities D. Establish committee charters E. Establish committee / board meeting schedule dates F. Designate senior management participation and provide appropriate analytical support G. Create performance dashboards, w hich embody key tenets of the strategic plan and can be effectively deployed throughout the organization Developm ent of Agency-w ide strategic plan A. Commence and agree upon strategic planning process B. Identify all related mandates to the organization ("musts") that the organization needs to address C. D. E. F. G. Development or reaffirmation of mission statement Perform external assessment of Strengths, Weaknesses, Opportunites & Threats ("SWOT") Perform internal assessment of SWOT Combine external and internal assesment into SWOT analysis Identification of strategic issues (fundamental policy questions affecting Agency's mandates, mission, value, stakeholders, revenues, costs, financing requirements, management or organizational design Develop ment of action plans/solutions to address strategic issues Creation of strategic planning document Bi-state agency review Internal management review and discussion Finalization of strategic planning document Board of Commissioner approval Responsible Party Due Date Status
2.
H. I. J. K. L. M.
N. Creation of performance dashboards, w hich embody key tenets of strategic plan and objective performance measures, w hich can be deployed through the organization, from Board level to Line Department / Shared Service
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Action Steps: Im plem ent organizational redesign A. Create organizational transformation w orking group to establish key priorities of the planned changes, as w ell as timing, including appropriate Board of Commissioner participants B. CSO - Implementation of recommendations from Chertoff Group in support of creation of centralized Chief Security function C. COO - Establish clear roles and responsibilities. D. COO - Develop a recruitment plan including evaluation of existing COO E. COO - Realignment of Public Safety to Chief Security Officer and PMO to Capital Planning F. COO - Assimilation of Operational Standards and Operations Services G. Change Line Department Titles to President H. Elimination of CAO role and consolidation of Procurement and Operational Services Elevate Director of Human Resources to Chief of Human Capital and expand responsibilities to include Labor Relations J. Integrate parts of the Office of Environmental & Energy Programs and Office of Business Diversity & Civil Rights into the Chief Compliance Officer, Procurement, and Chief Financial Officer K. Creation of centralized Chief of Capital Planning, Execution & Asset Management I. L. Creation of Chief Technology Officer role M. Assimilation of Real Estate department into Line Department and Shared Service functions N. Elimination of Office of Strategic Initiatives O. Establishment of Chief Compliance Officer role P. Implementation of Matrix Management w ith Line Departments w ith focus on Human Resources, Finance & Legal Q. Development of outsourcing analysis framew ork around Operational Servcies and Legal Department R. Creation of centralized Chief of Capital Planning, Execution & Asset Management to incorporate planning, engineering, execution and asset management functionalities Responsible Party Due Date Status
3.
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Action Steps: Create dynam ic capital planning, execution & asset m anagem ent functionality that is fiscally responsible w ith appropriate prioritization of capital w ith accountability for return on assets and capital w e deploy A. Complete evaluation of capital planning organizational redesign to include planning, execution and asset management functions B. Develop processes and procedures w ith clear roles and responsibilities as w ell as accountability measure through key performance metrics i. Redefine capital planning calendar a. Establish parameters for 10-year capital plan and 5-year capital program ii. Review and revise documentation requirements for each step in the capital planning process and redefine critical success factors iii. Redefine scoring templates for SEP / RP projects C. Creation of baseline timetables for delivery w ith a focus on speed to market D. Determine critical path processes to ensure on-budget execution of capital plan dollars 5. Create culture of m eritocracy, accountability, and transparency A. Implement new compensation philosophy and culture that fosters meritocracy and transparency rather than tenure and entitlement B. Flatten the compensation bands from 12 to 7 broad bands, to make the organization less hierarchical and allow greater flexibility and mobility for career grow th and cross functional competency development C. Benchmark and re-price positions based on current market compensation for similar positions (both public and private sectors) to set new base lines. D. Promote career lattice concept and encourage multi-directional movement as a method of career grow th, enrichment, and diversification. E. Implement a merit base pay for the top performers through relative rating of Port Authority nonrepresented employees. F. Educate, empow er and support managers to use new compensation philosophy and performance management to differentiate performance among employees (force a normalized distribution) G. Create functioning "Councils" w hich drive cross-functional problem solving: - Executive Council - Executive Director and "Chiefs" that report to Executive Director - Operating Council - Executive Director, line presidents, and COO - Capital Projects Council - Drive capital plan oversight and implementation led by Chief of Capital Planning, Execution, and Asset Management
4.
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Action Steps: Com plete renegotiation of m ajor collective bargaining agreem ents A. Develop w orking team to establish strategy and base analysis parameters B. Retain outside counsel to assist in evaluation / negotiation process C. Schedule introductory meetings w ith existing labor relations staff D. Identify key goals out of planned negotiation sessions E. Develop comprehensive inventory of compensation and benefits by contract F. Develop comprehensive inventory of w ork rules and understand application by key facility and key collective bargaining agreement G. Understand grievance process and conduct relevant benchmarks H. Identification of negotiation strategies 7. Reorient financial perform ance around continual identification of non-toll / fare revenue enhancem ent and cost savings initiatives A. Create revenue enhancement and cost containment team to prioritize, evaluate, and implement key initiatives B. Develop key initiatives list by Line Department C. Prioritize and group betw een revenue enhancement and cost containment F. Segment by line department / shared service organization G. Determine strategies for implementation including: (i) timeline, (ii) costs, (iii) ease of implementation, (iv) external and internal constituency impact, (v) total impact H. Develop detailed w ork plan for each initiative I. J. K. L. M. O. Develop key mileposts, critical success factors, and performance metrics Begin implementation of initiative Track progress through incorporation on individual strategic dashboards Take corrective actions, w here necessary Complete initiative Post-completion tracking to ensure progress is maintained
6.
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Action Steps: Com plete analysis and divestiture of selected non-core assets A. Identification of non-core assets for evaluation of strategic alternatives B. Develop individual asset profiles C. From profile analysis develop list of strategic alternatives D. Develop sensitivity analyses to determine best outcome E. Prepare w rite-up and summary depicting divestiture strategy and expected outcome F. Obtain board approval for disposition strategy G. Implementation of disposition strategy Im plem ent effective Enterprise Risk Managem ent System that is quantifiable and m etric based A. Create ERM cross-functional team B. Establish ERM planning process C. Completion of internal insurance review D. Study existing risk practices (self-assessment, comprehensive survey of existing risk practices)
8.
9.
E. Establish context (both internal and external environmental factors) F. Identify risks by category and / or function w ith the organization G. Quantify existing goals and targets for achievement H. Identify specific risk events I. Perform Risk Assessments J. Evaluate risk response through determined dashboard K. Implementation of control activities L. Provide information and communication monitoring on a real-time basis M. React and provide assessment / outcome of risk events 10. Create and im plem ent m arketing and com m unication plan to effectively connect w ith all Port Authority constituents A. From board committee, create standing w orking group to provide direction B. Evaluate / inventory existing media plans by line department, Agency focus C. Develop constituency list and identify key areas of focus D. Identify key messaging targets E. Work w ith outside advertising agency to identify key implementation plan F. Identify Line Department messaging G. Coordinate economic development efforts and communication w ith adjacent communities and states H. Create consortium of sister agencies to target issues that share commonality I. Implement plan
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XVIII. APPENDIXB:PROCUREMENTBUYINGGROUPS(DEFINED)
BuyingGroup 1 Construction Procurements& IntegrityPrograms Division Description/Responsibilities Promotesacompetitivebiddingenvironmenttoensurethebestpriceforconstructionworkandmanagesthebiddingand awardprocesses(includingminorityparticipation,financialandbondingissues).Outreacheffortswiththecontracting communityhavebeenenhancedtoencouragesubmissionofbidsandqualifybidders.TheDivisionmanagesthevendor integrityprocessforallagencycontractsandprotestsfiledbyvendors.StaffworkswiththeOfficeoftheSecretary,Law DepartmentandOfficeofInspectorGeneralonmattersrelatingtointegrity,conflictsofinterest,andreleaseofFOI informationandprovidessupporttotheotherDivisionsintheDepartmentonmattersrelatingtoconstruction. EnsuresthatallFederallyfundedprocurementactions,includingpostawardcontractchanges,areconductedin compliancewithallrequisiteagencyandgrantadministrationguidelines.Infurtheranceofitsmission,theWTCSite/ FederalProgramsComplianceDivisionsupportsvariouslinedepartmentsbyprovidingoverallprocurementprocess supportandmanagementforPortAuthoritysolicitationsandthirdpartysolicitationsonbehalfofthePortAuthority.In addition,theDivisionprovides(a)guidanceonsolicitationpackagedevelopmenttoensurethatgrantcomplianttermsand conditionsarecontainedwithin;(b)supportduringnegotiationswithcontractors/firmsonpricingandtermsand conditions;(c)managementofthechangeorderprocessforchangestoFederallyfundedprofessionalservicesand constructioncontracts;and(d)complianceauditsupport. WhiletheFederalProgramsComplianceDivisionisprimarilyinvolvedwiththeFederalTransitAdministrationfunded reconstructionoftheWorldTradeCenterSiteandallprocurementsatthesite,thedivisionassistsotherlinedepartments withgrantsfromFederalagenciessuchasEPA,FEMA,FHWA,FRA,FAA,andHUD. 3 Technology ServicesDivision HandlescomplexandhighdollarAgencywideanddepartmentaltechnologyprocurements,suchasaccesscontrolsystems andsupport,CCTV,hardware/softwareselection,servicelevelbasedongoingapplicationmaintenanceinadditiontostate ofthearttechnologiessuchasbiometricsandsituationalawarenesssolutions.Thegroupmanagestechnologybased procurementsforenterpriseserviceshandledcentrallythroughTechnologyServices,individualclientdepartmentbusiness specificsolutionsandhybridprocurementsthatspanbothtechnologyandotherprocurementdivisionsservices.Staff ensuresconformancewithrequisiteagencygoalsinkeyareassuchasIntellectualProperty,InformationSecurity,grant managementandtreatmentofconfidentialandprivilegeddocuments.Becauseoftherapidlychangingadvancesin technology,thesecuritysensitiveissues,anditspertinencetoalldepartments,thefunctioniscontainedintheDirectors Office.
WTCSite/Federal Programs Compliance Division
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BuyingGroup 4 Professional, Technical& Advisory Procurements Division TheCommodities andServices Division Description/Responsibilities Managestheprocurementofprofessional,technical,andadvisoryservices,includingprocurementmethodology, documentdevelopment,solicitationmanagement,negotiationofcontracttermsandcompensation,proposerdebriefings, authorizationofconsultantexpenditures,attendsoutreachfunctionsasrequiredtofamiliarizetargetfirmswithagency needs,anddevelopsagencyguidelinesforprocurementofconsultantsoneitheraprojectorcallinbasis.
Managescommodityprocurementsandoperations,maintenance,customerservice,transportation,securityguard, janitorial,seasonal,andenergyserviceprocurements.TheDivisionimplementskeyinitiativestoachieve Minority/Women/SmallBusinessEnterprise(MWSBE)goalssuchassetasideandpricepreferenceprogramsandensures compliancewithlabor/harmonyrequirements.TheDivisionreviewssolicitationandauthorizationdocuments,prepares contractrenewalplans,identifiesopportunitiestobuyfromgovernmentcontracts,holdsvendorforumsandmediates contractdisputes.
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XIX.
Item or Rank
APPENDIXC:PROCUREMENTDEPT.RECOMMENDATIONS
CurrentPractice Recommendation (DescriptionofProposedChange) Benefit (NoteKeyFactsandQuantifiable Results:TimeSaved,$Saved,etc.)
Reducesthenumberofpublicly advertisedbidsby13.5% Reducestheprocurementprocess by23weeksforcompetitive opportunitieswithinthreshold
TitleofProposal
*SubjecttoApprovals AnticipatedTimeline& CosttoImplement (CapitalInvestment$,FTEs,etc.)

TimelineShort Nocostsanticipated
Revise Advertisement Thresholdsand CreateVendor ListforDirect Solicitations
Advertisingisrequiredforpublic solicitationsvaluedat$25,000or more
Foropportunitiesvaluedatless than$250,000,nolongerpublicly advertise.Competitionforsuch opportunitieswillensuefromthe followingsteps: 1. Createavendorlist,categorized bytypeofserviceandgoodswith referencestopreviouspublicly advertisedsolicitationsfromthe Authority,andsendemail notificationtothoseregistered withinselectedcommodity& servicecodes;and, 2. Directlysolicitfirmsonthe vendorlistforopportunitiesthat werepubliclyadvertisedand competitivelyprocuredinthe recentpast. Note:Theabovestepsensurethatfirms willnotbedisadvantagedbythe recommendationandprovidevendors withanincentivetoregisterinthe vendordatabase. Publiclyadvertiseanabstractof thescopeofworkbefore finalizationofsolicitation document
ShiftTimingof Advertisement
Opportunitiesarepublicly advertisedafterfinalizationof solicitationdocuments
Savesbetween23weeksinthe postsolicitationprocurement process Developbidderslistwithaccurate contactinformationtofacilitate communications
Immediateimplementation Nocostanticipated
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Item or Rank TitleofProposal CurrentPractice Recommendation (DescriptionofProposedChange) Benefit (NoteKeyFactsandQuantifiable Results:TimeSaved,$Saved,etc.)
Savesuptothreedaysper solicitation Reduceadvertisingcostsby approximately$400,000annually Transferssolesourcesvalidation tothemarketplace Basedonthevalueoftheservices forcommodities,couldreduce timeofprocurementbytotwo weeks Providestransparency Eliminatestheneedtoreadvertise renewalsofvalidatedsolesource acquisitions,savinguptotwoto threeweeks Timelyawardofnewcontracts withapprovedalternates. Increasingthelikelihoodof approvedalternateproduct. Increasedlikelihoodforprice certainty. Contractawardtimeframe anticipatedtobereducedbya minimumofonemonth. Anticipatedtosaveapproximately onemonth

Immediateimplementation Nocostsanticipated
EliminatePrint Advertisingfor Most Solicitations Streamlined Approvals Requiredfor SoleSource Procurements
Procurementsareadvertisedin newspapersandothermedia
Relysolelyonadvertisingonthe Authorityswebsite Professionaljournalsandother mediausedasnecessaryfor uniquesolicitations Utilizewebsiteforplanned procurementsonasolesource basis MarketplacetoAffirmofsole sourcenatureofproduct/services Cumulativeonlinelistingof validatedsolesourceacquisitions
Multiplelayersofapprovalare requiredforallsolesource procurementsbasedonvalue, whichcantake2to3weeks, includingjustification,validation andapproval
Timeline:Short Nocostsanticipated
Approved Alternate ProductList (Currently Underway)
Currentpracticeisamultilayered, paperburdenedprocesstoreview andapproveproposedalternate productsbeforetheexpirationof anexistingcontract
Establishandmaintainan ApprovedAlternateProductslist withthepotentialalternate productsevaluatedonanongoing basis
Phasedimplementationbeginning withinthreemonths Nocostsanticipated
6 Increased Delegationof Authoritytothe Executive Directorfor standard purchases

Authorizationiscurrentlybased onvalueandprocurementmethod Purchasesforstandard,lowrisk commoditiesandoperational serviceshavethesameapprovalas atypicalprocurements Delegateallauthorizationtothe ExecutiveDirectorforroutine servicesandcommodities
Timeline:Short Nocostsanticipated
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Savingsofupto12monthsfor constructionrelatedawards Savingsofuptotwotothree weeksforcontractsupplementsof increasesauthorizedwithinstaff authority Extendsrelationshipswithhigh performingvendors,and favorablepricingpreviously negotiated Savingsofupto3to6monthsby eliminatingthetypical procurementprocess Promotesoperationalstabilityand eliminatestransitioningandstart upcosts Fosterspredictabilityin operationalbudgeting Encouragesoptimalperformance fromcontractedvendors Streamlined,moreefficient operations Increasesinventoryaccuracy Moreefficientadministrationof CallInprogram Timesavings(forProcurement Departmentonly) CostSavings(forProcurement Departmentonly:$130,000)

Timeline:Immediate/Short Nocostsanticipated
Streamlined approvalprocess
Constructioncontractrelated awards,extensionsand supplementsrequireAgencywide reviewandDepartmentDirector writtenapproval,usuallya2 monthprocess Publicsolicitationpriorto expirationofacontract
Streamlineapproval documentationanddelegate authoritytoProgramManager Reducenecessaryreviews Incasesofdocumented exceptionalcontractor performance,negotiateaonetime extensionwiththeincumbent Developstandardlanguagefor newsolicitationsthatwillpermit suchonetimeextensions
Extending Contractswith highperforming vendors
Timeline:Short,threetofour months Nocostsanticipated
Mobilitysolution forwarehouse operation
Laborintensive,paperladen proceduresandnonautomated warehouseoperationforthe receiptofreturnofgoods CallInprogramsaretypically solicitedfora4yeartermbut requireannualcontractrenewals
Automatetheprocessthroughthe useofhandhelddeviceslinkedto Agencyscomputerizedinventory managementsystem Allowagreementstobeawarded forthefullprogramsterm
Estimatedtimetoimplementis fourtosixmonths Estimatedcostisapproximately $500Kforequipment Immediateimplementation Nocostsanticipated
10
Eliminatethe needforAnnual Renewalsof ConsultantCall InAgreements
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Savingsof300to500hours annually Savingsof$50,000annually

CompletedBETAtesting.Full rolloutunderway
11
Online Professional ServiceFirm Questionnaire (Currently Underway)
Tenstepprocessutilizedin reviewingandvalidatingvendors forprequalification
Allowvendorfirmstoentertheir owninformationintoawebbased system
12
UtilizeLump SumStructure forCertainCall inPrograms
Thestandard,timeintensive processisusedforcontractsof minimalcost
Provideforanegotiated,onetime lumpsumpaymentupon completionoftheservices
Reducesadministrativeburden Incentivizesconsultantstoassign mostqualifiedstaffinaneffortto expediteprojectcompletion Expeditesinvoicereviewand paymentprocess Expeditescompletionofdesign services
13
Centralized Electronic RepositoryOf Government Contracts
Foreachsolicitation,Agency buyerconductsresearchto identifyavailablegovernment contracts Ifagovernmentcontractisnot identified,otherlengthier procurementmethodsarepursued
CreateafulltimeResearch Associatepositionsto: 1. Identifyapplicable governmentcontracts,then createandmaintainan electronicrepository;and, Researchthesolicitation librarytodetermine appropriatestandardsfor futuresolicitations.
2.
Reducestimetoresearchand identifygovernmentcontracts Potentiallyexpandstheuseof governmentcontracts Savestimeindocument generation Promotesstandardization
Timeline:Short Cost:EstimatedattwoFTEs
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Providessecuredaccesscontrolof documents/folders,templatesetc. Providesincreasedefficiency Facilitatesreviewbyincorporating supportingdocumentswithother materialsbeingreviewed Savingsofuptotwomonths

Timelineatleastsixmonths Estimatedcost:$750Ksystem& implementationand1additional parttimeprocurementFTE
14
Document Management SystemFor Document Integration Leverage Competition amongstactive Government Contracts
Entireprocuretopayprocessis managedbySAP Accompanyingorsupporting documentsaresubmitted independentlyandnotthrough SAP Buyeridentifiesfirmsthathave governmentcontractsforthe desiredgoods/services,and solicitsproposals Similartotheevaluationprocess forRFPs,proposalsarereviewed andevaluatedthroughmultiple steps Procurementcanpiggybackonly oncontractsbetweenvendorsand otherpublicentities.Procurement cannotpiggybackonitsown contracts Onlinevendorregistrationsystem requiresnightlyinterfaces PublicSolicitationsarepostedon lineandreceivedviapapermail PublicBidopeningsareinperson BidresultsarepostedonthePA website Thismultistepprocessinvolves emailsanddataentrytoproduce solicitationdocuments
Usedocumentmanagement solution(s)tofacilitatedocument attachmentsinSAP
15
Acceleratedprocurementfrom qualifiedfirmsholding governmentcontracts Pricingonlysolicitedfrombest qualifiedfirms
Immediateimplementation alreadypilotedontwo procurementssuccessfully. Nocostsanticipated
16 Remove constraintsin piggybackingon Government Contracts Electronic Procurement
Permitpiggybackingonthe Authoritysactivecontractsona limitedbasisaccordingto specificallydefinedguidelines andcriteria Developofacomprehensivee commercestrategyforthe Authority 1. Identify&implementa comprehensive,interactive onlinebiddingsolution addressingkeyprocurement areas;and, ImplementElectronic SolicitationDocument Formation.Leverageproven technologytodevelopandstore electronicdocumentsincluding workflow,versionmanagement andSAPintegration.
Useofcommonlyknown StandardizedTerms&Conditions willsaveconsiderabletime
17
2.
Significantimprovementsin efficiency&procurementcycle time,enhancedtransparencyand flexibilitytoquicklyadapt procurementprocessesto changingbusinessenvironments Seamlessintegrationwiththe Agencysexistingfinancial& documentmanagementsystems, whereappropriateandpractical, willalsosupportobtaining optimalresultsfromthesetools
Thisisamajorundertakinginbreath andcomplexity Timelineanticipatedisbetween6 monthsand1yeardepending uponsolution Costtobedeterminedbut anticipatedupto$2.5million. Costwillvarydependingon scope/phase&product;fromcost incurredbyvendors Dedicatedstaffandserviceswill berequiredtodetailrequirements andimplementcomprehensive solutionstoaddressthevarious procurementtypesandprocesses
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Timesavingsofapproximately1 weekinprocessingthe distributionofproposals. ContributestothePAs environmentalgoals(lesspaper), andprovidesproposerswithtime andmaterialssavings. Pagelimitationswillreducethe reviewtime. Easieraccess&collectionof internalandexternaldocuments. Fastersubmissionandreview time. Costreductionsachievedthrough collaboration&maintenanceofa singlesourceofallrelevantproject data. Timesavingsinthedistribution andprintingprocess. Securityfeaturescanbe incorporated. Actualprintingcostassignedto thepotentialcontractors.

PhasedImplementation: AnticipatedforPhase1 Short36monthstoimplement. Cost:Approximately$200Kfor standalonesystemandresources.
18
RFP Management Distribution Proposal Submission /Receipt and Evaluation process
Proposalsofvaryinglengthsare receivedviamailand disseminatedviamailto stakeholdersinthePA. Multistep,multiparticipant paperbasedRFPresponseand evaluationprocess. Distributionprocessispartially electronicwithdocumentsposted online.
Interim Requireelectroniccopiesof proposals. Disseminatetoparticipants electronically. Wherepossible,restrictthelength ofproposals. LongerTerm SelectaflexiblewebbasedRFP managementsystemwithboth externalandinternalcomponents. Implementinaphasedapproach.
19
Distributing Construction Contracts Documents (Drawings&Bid books) (PilotPrograms areOngoing)
Drawingsareprinted(per contract)anddistributedmanually viamailand/orpickedupafter paymentissubmitted.
Usethirdpartyreprographerwith secureonlinewebportalallowing contractorstoview&order,and paydirectlyfordocumentsonline. Allowelectronictakeoffsof constructiondocuments eliminatingtheneedforpaper distribution.
TimelineShort. Nocostsanticipated. Pilotprojectshavebeencarried outinlastfewyears,andwill continue
20
ReverseAuctions Underway
Reverseauctionswerefirstusedin 2010fortoprocureelectricity. Thiswasdonethroughaspecific thirdpartyspecializinginreverse auctionsforenergy.
Useawebbasedservicefor reverseauctions. Forindustryspecificareasi.e., utility(electric/gas/fuel),use3rd partyauctioneer. Foranyotheronetime,large, purchaseofcommodities(i.e.,IT equipmentetc.)useareverse auctionprocess.
12%savingsonestimated electricityusageforNJfacilities. Increasedprocessefficiencies& timesavings. Realtimemarketpricing& increasedcompetition.
AnticipatedtimelineShort. Reverseauctioncouldbeeither feebased,oraninhousesolution canbedeveloped. Estimate$100Kforsystemand resources.
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ReducedtimespentbyPAstaffto stagevehicles. Vehiclescanbesoldasthey becomeavailable,potentially savingupto6months. Providesmoretransparency& participationfromthegeneral publicpotentiallyincreasingthe salevalue. Reducedapprovaltimeline.

Expectedtopayahigher commissionhoweverthiscanbe offsetbypotentialhighersale valueandefficienciesintime. Nosetupcost. TimelineShortterm,onetime.
21
FleetVehicle Auctions (Currently Underway)
Currentlyfleetvehicles& equipmentforauctionarestaged &thentransferredtothirdparty auctioneerslot. Auctionsoccur23timesayear. Theprocess&contract administrationismanual&paper based. TypicallyLawDepartmentreview andapprovalisobtainedforitems suchassolicitationdocuments, addenda,namechanges, governmentcontracts,solesource contracts,anddeterminationson nonresponsivevendors.
Usethirdpartyauctioneerswho willpickupvehiclesfromPA, preparethemforsale,andsell themusinganonlineplatform. Performapilotprojectforfleet vehicleauctions&potentially extendtoabandonedvehicles basedonpilotresults.Pilot agreementexpectedtobeineffect September2012. AllowProcurementContract ReviewStafftodetermineLaw Departmentinvolvementbasedon thenatureofthetransaction.
21
ExpandInternal Departmental Review Authority
Timeline:Shortterm. Nocostsanticipated.
22
Realign Responsibility forProducing Freedomof Information (FOI)Responses
TheOfficeoftheSecretarysends FOIrequeststoProcurement seekingdocuments. Procurementstaffassembles documentsanddraftsresponse.
Allowdepartmentstodirectly submitresponsestoOSEC. ProcurementDept.wouldprovide procurementrelatedinformation only.
TimesavingsinProcurement.
Timeline:ImmediatetoShort term. Nocostsanticipated.
23
Administrative PurchaseOrders
ProcurementDept.processes administrativepurchaseorders involvingnoprocurementaction.
Allowline/staffdepartmentsto directlyprocessadministrative purchaseorders.
TimesavingsinProcurement.
Timeline:Shortterm. Nocostsanticipated.
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XX.
Item Agencywide
APPENDIXD:ACHIEVEMENTS&INITIATIVESUNDERWAY
Description
ChairmanandViceChairmanhaveundertakenareviewresultinginchangestothecurrentcommitteestructures,approvedduringthe mostrecentBoardmeeting,todriveenhancedfocusonkeyinitiativesandoversightoftheorganization Staffmeetingswithvendorspreclearedwithprocurement EstablishedmonthlyupdatestoBOConWTCexpenditures&schedules Approvalofnewcorporategovernancestructure AuditCommittee: Formalreviewofleasingfunctions Adoptionoffinancialstatements ChangeinexternalAuditorsforfirsttimein31years Postedtensofthousandsofdocumentsforpublicreview RevisedFreedomofInformationActpoliciesandprocedures Implementationofnewtravelpolicyrestrictions Reviewingandmodifyingtheorganizationaldesigntoallowittooperatemoreeffectivelyandefficiently Conducting,underthedirectionoftheSpecialCommittee,anAgencywidereviewtoidentifypotentialareasforperformance improvementintheorganization HiringofNavigant,RothschildandChertofftoconductindependentreviews InsurancegrouptostreamlineRiskManagementandInsuranceCosts Reducedemployeeheadcountby243andpayrollby$10.5millionin2010and2011fromemployeebuyouts Boarddeclarationofitsexpectationthatallfuturelaboragreementsforrepresentedemployeeswillincludeacontributiontohealthcare EliminationoffreeEZPassformostnonrepresentedemployees EliminationofPATHpassesfornonrepresentedemployees EnforcementofPANYNJpolicyonpoliticalactivity Changestocommunitycontributionsbudget Saleofhelicoptersendingusebyexecutives Eliminationoffirstclass/businesstravel Reductioninexecutiveassignedvehicles InstitutedquarterlyovertimereportstoCommissioners&NYStateComptroller Eliminatedvacationexchangeandextraallowancesforcashinginvacationdaysuponseparation,expectedtogenerateapproximately$7.8 millionofsavingsin2013. Implementedrevisedvacationschedule,eliminatedcertainexcesspositionsaswellascertainaddoncompensationprograms(i.e.,FICA, contractualdeath,managementexcuseddays,longevityprograms,anddeathgamblebenefits)expectedtogenerateapproximately$13.3 millionofsavingsin2012 ImplementedenhancedwebbasedtotalcompensationdisclosureforallPAemployees,evidencingitscommitmenttotransparency
CorporateGovernance
TravelPolicy OrganizationalDesign
EmployeeBenefits
114

Item Description
Institutedmultiplehealthcareplanchoices,expectedtogenerateapproximately$3millionofsavingsin2013 ImplementedhealthcarecontributionforNonrepresentedemployeesandretirees,expectedtogenerateapproximately$4.6millionin savingsin2012 Implementednewscoringprocessforcapitalprojects,toestablishenhanceddeterminationofprioritiesinthedeploymentofitscapital Flatoperatingbudget Salaryfreeze/noraisebudgets ConsolidatedthesecurityfunctionunderaChiefofSecurityandcommissionedtheChertoffGrouptoconductathoroughreview,develop andassistinanimplementationplantodriveenhancedsecurityandaccountabilityofthepersonnelentrustedtoprotecttheinfrastructure assetsandpublicthatrelyuponthem Restructuredseniorleadershiptoprovidebetteraccountability MovedInternalAffairsoutofPublicSafetytoInspectorGeneralsofficetoprovidebettertransparencyandaccountability
CapitalProjectsPrioritization OperationalImprovements
PublicSafety
EstablishChiefSecurityOfficer function LeadershipChanges OrganizationalChanges
Aviation
CompletedUSAirwaysgate swapwithDelta DeltaExpansion ApprovedJetBlueexpansionat JFK RequestforInformation regardingreplacementofLGA CentralTerminalBuilding RequestforInformation regardingreplacementof TerminalAatNewark GateswaptoallowDeltatobuildoutlargerhubpresenceatLGAandaccommodateadditionalpassengervolumesandassociatedeconomic stimulusfortheregionresultingina$100millioninvestmentinterminals DeltaexpansionatJFKofapproximately$1.0billion Allowsforadditionalinternationaltrafficandassociatedeconomicbenefitofapproximately$150$200million PursuingoutsideexpertisetoassistintheultimatereplacementofCentralTerminalBuildingandexplorealternativefinancingarrangements; estimatedvalueoftheCTBbuildingprojectis$3.6billion PursuingoutsideexpertisetoassistintheultimatereplacementofTerminalAbuildingatNewarkAirportandexplorealternativefinancing arrangements;estimatedvalueoftheTerminalAbuildingprojectis$1.7billion
TB&T
Implementedtollcollection wallofshame BeganLincolnTunnelHelix Project GeorgeWashingtonBridge SuspenderCableReplacement Project Allowsforpublicationoftollviolatorstoencouragerepaymentandenhancecollections Helixrepairtotunnelstructurethatisover70yearsold InitiatedmajorprojecttoreplacesupportcablesonentireGeorgeWashingtonBridge
115

Item
CompletedRFPforGoethals bridgereplacement RaisingBayonneBridge
Description
CompletedRFPtoevaluatealternativesforreplacingexistingGoethalsbridgewithnewstructure ImplementingacceleratedscheduletoraiseBayonneBridgedeckinsupportofincreasedclearancefortallerships Completedpurchaseof340newPATHrailcarstosupportadditionalcapacitygrowthandagingassets Inprocessofimplementingnewsignalsystem,allowingforadditionalcapacity,efficiencyandreliability
PATH
Completionofnewcar acquisition ImplementationofAutomatic TrainControl(ATC)Signal System&10carPlatform Expansion
PortCommerce
PanamaCanalexpansion planning Comprehensivedredging program Intermodalrailprogram AccelerationofraisingofBayonneBridgeandsupplementaldredgingtosupportlargerships 50footHarborDeepingProjectwilladdresscompetitiveissueswithregardstoPortCommercebeingabletohandleeverlargercontainer ships Planningforconnectivityofallportoperationsthroughrailsystemtoallowforsignificantlyenhancedefficiency
RealEstateDevelopment
Noncoreassets BusTerminals EssexCountyResourceFacility AnnouncedstrategicalternativeevaluationofTeleportandNewportLegalCenter RedevelopmentofPortAuthorityandGWBBusTerminals ContractualrenegotiationofEssexCountyResourceFacilitytoeliminatefuturecapitalobligationstoPortAuthority
WorldTradeCenterProgram
FinancialControls Retailventurewithcommercial partnerWestfield Communicationsfacilityat 1WTC Observationdeck Implementedsignificantlymorestringentfinancialandoperationalcontrolstoensureappropriateaccountabilityandtransparency Announced$625millioninvestmentbyWestfieldtosupportretailventureat1WTC JointventurewiththeDurstOrganizationtobuildandoperatestateoftheartbroadcastfacilitiesat1WTC. InitiatedRFPfor1WTCobservationdeck,whichisexpectedtohavesignificantrevenuegenerationopportunitiesfor1WTC
116
XXI.
APPENDIXE:REPORTQUALIFICATIONS&DISCLAIMER
THISCONFIDENTIALREPORTHASBEENPREPAREDFORTHESPECIALCOMMITTEEOFTHEBOARDOFCOMMISSIONERSOFTHEPORTAUTHORITYINCONNECTION WITH NAVIGANTS PHASE II REPORT 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 GOVERNMENTALAUTHORITYHAVINGJURISDICTIONOVERTHEPORTAUTHORITY,CANNOTBEDISTRIBUTEDWITHOUTTHEWRITTENCONSENTOFNAVIGANTAND MAYNOT,INANYCASE,BERELIEDUPONBYANYTHIRDPARTIESWITHOUTNAVIGANTSPRIORWRITTENCONSENT. DUETOTIMEANDOTHERLIMITATIONS,THISREPORTHASBEENPREPAREDUTILIZINGLIMITEDDUEDILIGENCE.ITISBASEDONASSUMPTIONS,FORECASTSAND 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.ANYFINANCIALSTATEMENTSOROTHERDATACONTAINEDHEREIN,INCLUDINGANYFORECASTS,ARETHEFINANCIALSTATEMENTSANDFORECASTSOF MANAGEMENT,NOTNAVIGANT.NAVIGANTHASNOTSUBJECTEDTHEINFORMATIONCONTAINEDHEREINTOANEXAMINATIONINACCORDANCEWITHGENERALLY ACCEPTED 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 OPINIONORANYOTHERFORMOFASSURANCEONTHEFINANCIALINFORMATIONANDDOESNOTASSUMERESPONSIBILITYFORTHEACCURACYORCORRECTNESS OFTHEHISTORICALANDFORECASTEDFINANCIALDATA,INFORMATIONANDASSESSMENTSUPONWHICHTHISREPORTISPRESENTED. IN ADDITION BUT NOT IN ANY WAYS LIMITING THE FOREGOING, IT SHOULD BE NOTED THAT THE SOURCE OF ALL FINANCIAL INFORMATION OR OTHER INFORMATIONRELATINGTOTHEPORTAUTHORITYCONTAINEDINTHETABLES,FIGURESANDBODYOFTHISREPORTWASINFORMATIONPROVIDEDTONAVIGANT BYPORTAUTHORITYPERSONNEL. 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 PROJECTIONSWILLBEACHIEVEDORREALIZED. NAVIGANTISNEITHERALAWFIRMNORACERTIFIEDPUBLICACCOUNTINGFIRM.ACCORDINGLY,THEINFORMATIONCONTAINEDHEREINISNOTINTENDEDTOBE ANDSHOULDNOTBERELIEDUPONASLEGAL,AUDITINGORACCOUNTINGADVICE.
117
Final Report
Presented to the Special Committee of the Board of Commissioners Port Authority of New York and New Jersey
Disclaimer
This report was prepared by Rothschild Inc. (Rothschild) for the benefit and use of the Special Committee of the Board of Commissioners (the Special Committee) of the Port Authority of New York and New Jersey (the Port Authority or the Company). In providing this report, Rothschild has relied upon information that is publicly available or has been provided to Rothschild under the terms of a confidentiality agreement. The report reflects Rothschilds view and prevailing financial and market conditions as of the date hereof, all of which are accordingly subject to change. Rothschild has not assumed any responsibility for independent verification of any of the information contained herein including, but not limited to, any forecasts or projections set forth herein. In addition, Rothschild assumes no obligation to update or to correct any inaccuracies which may become apparent in this material and the analyses contained herein are not and do not purport to be appraisals of the assets or business of the Company. Nothing contained herein shall be deemed to be a recommendation from Rothschild to any party, including, without limitation, the Company to enter into any transaction or to take any course of action.
Table of Contents
Introduction ............................................................................................................................................ 1 Executive Summary ................................................................................................................................. 1 Long Range Forecast Review ................................................................................................................... 3 Long Range Forecast Review Operating Division: Aviation Department ................................................... 4 Long Range Forecast Review Operating Division: Port Commerce Department........................................ 6 Long Range Forecast Review Operating Division: Tunnels, Bridges and Terminals Departments............... 7 Long Range Forecast Review Operating Division: PATH Department........................................................ 8 Long Range Forecast Review Operating Division: World Trade Center (WTC)...................................... 10 Consolidated Bond Structure: Background and Description ................................................................... 12 Municipal Market Trends....................................................................................................................... 16 Capitalization Forecast .......................................................................................................................... 19 General Reserve Requirement............................................................................................................... 20 Net Revenues Test Consolidated Bond Issuance.................................................................................. 20 Net Revenues Test VSO Issuance ........................................................................................................ 21 Maximum Variable Rate Debt................................................................................................................ 22 Credit Rating Agency Considerations ..................................................................................................... 24 Credit Rating Metric: Debt Service Coverage ......................................................................................... 24 Credit Rating Metric: Total Obligations / Gross Revenues ...................................................................... 25 Credit Rating Metric: Coverage of Next 2 Years Debt Service ................................................................. 25 Credit Rating Metric: Consolidated Bond Reserve Minimum.................................................................. 25 Ratio Analysis: Implied Debt Capacity .................................................................................................... 26 Debt Capacity Assessment..................................................................................................................... 27 Peer Group Analysis: Airports................................................................................................................ 28 Peer Group Analysis: Ports .................................................................................................................... 29 Peer Group Analysis: Rail / Toll Roads.................................................................................................... 31 Peer Group Analysis: Infrastructure Conglomerates............................................................................... 33 Peer Group Assessment......................................................................................................................... 35 Credit Rating Considerations ................................................................................................................. 37 Public Private Partnership Considerations ............................................................................................. 40 Conclusions ........................................................................................................................................... 42
Introduction
This report is provided to the Special Committee of the Board of Commissioners of the Port Authority of New York and New Jersey in order to assist the Special Committee in its comprehensive review of the Port Authoritys operational and financial structure. The primary focus of Rothschilds work product is the Port Authoritys financing strategy and considerations related to the long-term funding of the capital investment needs identified by Port Authority staff. This report is divided into four sections: Review of the primary components of the Port Authoritys long-term financial forecast (the Long Range Forecast) Analysis of the Port Authoritys existing capital structure and corresponding outlook for liquidity and credit profile Comparative capital structure analysis of industry peers and implications for the Port Authoritys financing strategy Discussion of considerations regarding potential Public Private Partnerships (PPPs)
Executive Summary
Rothschilds scope of work involves assessing the Port Authoritys Long Range Forecast and accompanying capital expenditure plan in order to analyze the organizations financing strategy and capability. The assessment involves both a specific review of the Port Authoritys financing strategy and a cross-category comparison with peer benchmarks for financial leverage and cost of financing. Preliminary conclusions are provided below: (1) Based on achieving the Long Range Forecast, the Port Authority has sufficient debt capacity to fund the capital expenditures plan while satisfying the principal credit metrics included in its financing obligations and those analyzed by the credit rating agencies The Long Range Forecast is premised on numerous underlying assumptions including continued economic recovery in the region, improvement in realized pricing (including the effect of the scheduled toll and fare increases) and estimates for the operating cost structure of the Port Authority. Successful achievement of the key financial targets is important both (i) for the ability to issue new Consolidated Bonds and (ii) maintaining the Port Authoritys strong AA- credit rating. As detailed herein, the Long Range Forecast satisfies the identified credit ratio targets with the level of cushion varying principally based on timing of capital expenditures and ramp of revenues. As a result, the financial analysis indicates the Port Authority has adequate debt capacity to support the significant capital expenditures forecast through 2020. However, the level of cushion in the early years of the forecast period is relatively limited. Without the schedule toll and fare increase (or other financial underperformance versus the forecast), the analysis indicates a shortfall versus target credit metrics and thereby risk to the stability of the credit rating and financing terms. 1
The chart below delineates the financial metrics analyzed in this report based on successful achievement of the Long Range Forecast. Table 1 Overview of Financial Tests Financial Metric General Reserve Requirement Net Revenues Test Consolidated Bond Issuance Net Revenues Test VSO Issuance Maximum VSO Debt Debt Service Coverage Total Obligations / Gross Revenues Coverage of Next 2 Years Debt Service Consolidated Bond Reserve Minimum Type Statutory requirement Test for permitted issuance of Consolidated Bonds Test for permitted issuance of VSO debt Test for permitted issuance of VSO debt Credit rating agency metric Credit rating agency metric Credit rating agency metric Credit rating agency metric Estimated Result
(2) The Port Authoritys financing strategy, principally conducted through the Consolidated Bond program, has effectively sourced capital at a competitive and relatively stable cost. Market data indicates the Port Authority has successfully achieved a relatively stable cost of financing amidst the volatility of the past decade with the cost comparing favorably to similarly rated municipal debt and public market issuances from other transportation infrastructure operators. This favorable cost is additionally noteworthy since the municipal benchmarks are primarily tax exempt debt and therefore expected to register lower cost versus the overall Port Authority issuances which represent a mixture of taxable and tax exempt obligations. The Port Authoritys stable financing cost is due, at least in part, to the stability of the credit rating and the demonstrated managerial focus on satisfying the primary financial metrics necessary to maintain the AA- rating. (3) Public Private Partnerships (PPPs) may represent an opportunity for the Port Authority to execute certain of its significant capital projects but need to be evaluated in context with other available alternatives. The Port Authority has demonstrated success in PPP structures with recent examples including the retail development at the World Trade Center and the Terminal 4 redevelopment at JFK. Given the availability of the successful Consolidated Bond program, PPP proposals should be considered based on the benefits and issues including both the financial considerations (e.g. impact on net cashflows, debt capacity, credit scoring, etc.) and non-financial items (e.g. particular operational considerations or risk transfer).
Long Range Forecast Review

For purposes of evaluating the Port Authoritys capitalization and long-term financing needs, Rothschild conducted a due diligence review of the Port Authoritys Long Range Forecast and supporting Capital Plan. Rothschilds review is based on in-person sessions with operating and finance staff from each of the Authoritys principal operating divisions as well as a review of supporting documentation provided by the Port Authority. Rothschilds analysis is based on the consolidated Long Range Forecast as summarized in Table 2 and the corresponding capital plan as presented in Table 3. Table 2 Summary of Long Range Forecast ($m)
2012 Revenues Aviation PATH Ports TB&T WTC Development Gross Revenues Total O&M Expenses Other adjustments Net Operating Revenues Margin % Financial Income Passenger Facility Charge WTC - Non-operating Other Net Revenues Capital Expenditures Net Revenues less Capex $2,220 141 241 1,373 48 95 4,119 (2,333) (228) 1,558 38% 40 215 179 529 2,521 (3,827) (1,305) 2013 $2,294 161 249 1,496 39 95 4,335 (2,417) (230) 1,688 39% 55 221 347 438 2,750 (4,532) (1,782) 2014 $2,365 182 271 1,625 121 97 4,662 (2,529) (229) 1,904 41% 58 226 296 374 2,859 (4,430) (1,570) 2015 $2,477 200 289 1,779 217 99 5,061 (2,636) (237) 2,188 43% 79 231 188 359 3,046 (3,041) 4 2016 $2,581 220 305 1,939 286 100 5,431 (2,695) (234) 2,502 46% 110 236 168 129 3,144 (2,255) 889 2017 $2,630 236 315 1,950 323 103 5,557 (2,788) (216) 2,553 46% 138 241 141 39 3,111 (2,189) 922 2018 $2,659 253 329 1,932 347 105 5,626 (2,873) (221) 2,532 45% 161 246 65 39 3,042 (1,619) 1,423 2019 $2,749 269 353 2,131 380 107 5,989 (2,936) (221) 2,832 47% 161 251 65 39 3,347 (1,461) 1,886 2020 $2,794 285 372 2,162 397 108 6,119 (3,003) (222) 2,894 47% 167 257 65 39 3,422 (1,526) 1,895 CAGR % 3% 9% 6% 6% 30% 2% 5% 3% 8%
Source: Port Authority
The capital plan incorporated into the analyses herein includes both the Port Authoritys base $25.1 billion plan (covering the period 2011 2020) and additional expenditures for the World Trade Center based on updated cost estimates ($2.7 billion). The resulting total of $27.8 billion is analyzed for the future period of 2012 2020 (excluding 2011) with a total expenditure of $24.9 billion as summarized below. Table 3 Summary of Capital Plan by Project Category ($m)
Category MAND RPP SEC SEP SRP SGR Subtotal Efficiency and Phasing Total Projects 83 55 84 106 16 485 829 2012 $1,118 1,197 360 153 505 738 4,073 (246) $3,827 2013 $1,588 1,056 347 231 566 1,186 4,975 (444) $4,532 2014 $1,773 587 222 366 576 1,401 4,924 (494) $4,430 2015 $918 349 90 430 536 911 3,233 (192) $3,041 2016 $220 299 52 517 568 761 2,417 (162) $2,255 2017 $304 268 47 591 336 776 2,322 (133) $2,189 2018 $72 215 39 529 236 631 1,723 (104) $1,619 2019 $140 133 42 259 236 650 1,461 -$1,461 2020 $137 272 10 180 229 697 1,526 -$1,526 TOTAL $6,271 4,378 1,209 3,256 3,790 7,751 26,654 (1,775) $24,880
Table 4 Description of Project Categorization Project Category Identifier Description Mandatory MAND Projects required by law, governmental rule or regulation Revenue Producing RPP Projects which provide system enhancements, improved customer service levels, and/or regional benefits and which yield a positive financial return on invested capital to the Port Authority Security SEC Projects that are necessary to meet the agencys security plan System Enhancing SEP Projects that provide system enhancements, improved customer service levels, and/or regional benefits but do not yield a positive financial return to the Port Authority Regional SRP Projects undertaken by the Port Authority which advance the objectives of the Port Authority but are not operated by the Port Authority State of Good Repair SGR Projects that are necessary to maintain the continued functioning of the Port Authoritys assets consistent with the agencys business objectives, especially those necessary to maintain critical structural integrity and operational capability of facilities
Although Rothschilds analysis relies on the Long Range Forecast in a consolidated context, the diverse nature of the Port Authoritys operations requires a distinct due diligence review by operating division. Rothschilds due diligence for each operating division incorporated a review of forecasting methodology and underlying assumption drivers. While Rothschilds scope of work does not include a critical assessment of the Long Range Forecast, the material included herein is an important informational foundation for the capital structure and financing analysis. Rothschilds analysis and conclusions are premised on the achievement of the Long Range Forecast; actual results may vary and the impact of such variations may be material.
Operating Division: Aviation Department

Forecasting Methodology The Aviation Department forecasts revenue streams in four primary categories: cost recovery, activity related, fixed rentals and other. Cost recovery revenues represent the largest source of income for the Aviation Department and include flight fees, monorail fees, sale of electricity and water, security and fuel fees. These revenues are realized based on long-term cost recovery agreements with airlines and other third parties and are subject to an annual audit. The cost recovery agreements provide a forecastable return on investment for capital and operating expenses and help to reduce execution risk of the Aviation Department forecast. Activity related revenue is forecasted based on estimates of passenger activity for each of the airports operated by the Aviation Department. The additional primary source of revenue for the Aviation Department is fixed rental agreements. The forecast relies on the 4
contractually set rents and is adjusted for staff estimates for rent increases related to terminals that are currently in planning / development stage. Other revenue, which represents approximately 2% of 2012 revenue, is estimated to remain relatively flat during the forecast period. Principal categories of forecasted operating expenses include labor, city rent, utilities, contract services (e.g. security, customer care, snow removal, etc.), engineering and allocations. These items are forecasted to increase based on CPI projections and/or contractually known terms. Table 5 Aviation Department Forecast ($m)
2012 Revenues Flight fees Other Activity Fixed Rentals Other Total Revenues O&M Expenses Labor M&S costs City Rent Overhead Total O&M Expenses Net Revenues Margin % Capital Expenditures Net Revenues less Capex Source: Port Authority $639 791 682 108 2,220 313 701 225 72 1,311 909 41% (452) 457 2013 $653 821 694 125 2,294 327 716 225 85 1,353 941 41% (1,103) (162) 2014 $661 840 684 180 2,365 341 716 225 89 1,370 995 42% (1,396) (401) 2015 $671 855 703 249 2,477 351 726 224 88 1,389 1,088 44% (853) 236 2016 $678 892 736 274 2,581 361 740 227 90 1,418 1,163 45% (571) 592 2017 $687 903 752 288 2,630 372 755 255 92 1,474 1,156 44% (601) 555 2018 $692 919 750 299 2,659 383 770 255 94 1,503 1,156 43% (489) 667 2019 $691 961 794 303 2,749 395 786 255 96 1,532 1,217 44% (291) 926 2020 $694 981 815 303 2,794 406 801 255 99 1,562 1,233 44% (449) 784 CAGR % 1% 3% 2% 14% 3% 3% 2% 2% 4% 2% 4%
Capital Projects The Aviation Department capital plan includes significant, high-profile investments during the forecast period with total investment estimated at approximately $6.2 billion. The large-scale development and modernization of the regions airports includes terminal redevelopment and runway expansion / rehabilitation at all three of the regions primary airports. In particular, the capital plan for the project at LaGuardia Airport Central Terminal is limited to costs recoverable via passenger facility charges. This capital plan is anticipated to provide additional revenue streams and system capabilities, in addition to maintaining the essential operating condition of the facilities. A summary of the capital program is outlined below. Table 6 Aviation Department Capital Plan ($m)
Category MAND RPP SEC SEP SGR Total Projects 44 26 40 63 210 383 2012 $65 72 35 59 221 $452 2013 $131 128 141 127 577 $1,103 2014 $99 206 156 179 757 $1,396 2015 $64 262 56 94 377 $853 2016 $65 265 16 49 175 $571 2017 $91 243 4 74 190 $601 2018 $9 193 -99 188 $489 2019 $5 122 -59 106 $291 2020 $2 265 -117 66 $449 TOTAL $531 1,755 407 855 2,657 $6,205
Source: Port Authority Note: Categories include Mandatory, Revenue Producing, Security, System Enhancing and State of Good Repair
Operating Division Forecast: Port Commerce Department

Forecasting Methodology The Port Commerce Department (PCD) revenues are largely divided between fixed rents for land and building usage (69% of 2012 forecasted revenue) and variable revenue based on cargo throughput, cargo facility charges and fees for dockage and wharfage. In developing the Long Range Forecast, PCD staff utilized an independent container volume projection developed by forecasting firm Global Insight. The Global Insight forecast provides volume outlook by cargo type and both import and export levels by foreign country. PCD staff made certain adjustments to the Global Insight forecast to aggregate forecasted traffic by region and also align the volume outlook with observed trends. The resulting volumes were incorporated into PCDs forecasting model based on four types of volume: container, rail, auto and bulk / general cargo. These volumes determine the variable revenue outlook for PCD along with estimates for wharfage fees and dockage fees. Fixed revenue rents were forecast based on CPI estimates. Additionally PCD forecasts revenue related to cargo facility charges (based on contractual provisions) and containerized municipal solid waste. Forecasted operating expenses are developed based on guidance from the Budget Department and influenced by existing trendlines and known parameter restrictions such as the zero growth headcount policy. Table 7 Port Commerce Department Forecast ($m)
2012 Revenues Variable Rentals Percentage Rentals Other Fixed Rentals Total Revenues O&M Expenses Labor M&S costs City Rent Overhead Total O&M Expenses Net Revenues Margin % Capital Expenditures Net Revenues less Capex Source: Port Authority $13 30 32 166 241 31 103 19 16 170 71 29% (346) (275) 2013 $14 34 35 167 249 33 86 19 20 159 91 36% (301) (210) 2014 $14 42 39 177 271 34 82 19 18 153 119 44% (177) (58) 2015 $15 44 45 185 289 35 79 16 19 149 141 49% (157) (17) 2016 $17 47 51 190 305 36 80 16 18 151 154 51% (113) 41 2017 $18 50 56 191 315 37 82 17 19 155 160 51% (126) 34 2018 $19 55 61 194 329 38 84 17 19 159 171 52% (113) 57 2019 $20 60 75 198 353 39 86 17 20 162 191 54% (83) 108 2020 $21 66 87 198 372 41 88 17 20 166 206 55% (87) 119 CAGR 6% 10% 13% 2% 6% 3% (2%) (1%) 3% -14%
Capital Projects The PCD capital plan is estimated at approximately $1.5 billion total cost with over 100 projects identified. Of this overall capital plan, over 60% is targeted for revenue producing and/or system enhancing projects (approximately $928 million estimated cost). The capital plan also includes significant investment state of good repair work ($432 million) and projects categorized as mandatory ($130 million). A summary of identified projects is presented below based on project category.
Table 8 Port Commerce Department Capital Plan ($m)

Category MAND RPP SEC SEP SGR Total Projects 13 23 5 14 32 87 2012 $76 167 3 49 50 $346 2013 $14 177 8 47 55 $301 2014 $13 73 -28 63 $177 2015 $21 49 -44 43 $157 2016 $3 18 -53 40 $113 2017 $1 17 -63 45 $126 2018 $1 21 -45 46 $113 2019 $1 12 -25 45 $83 2020 $1 8 -33 45 $87 TOTAL $130 541 11 387 432 $1,502
Operating Division: Tunnels, Bridges and Terminals Department

The Port Authority operates three services which together form the Interstate Transportation Network (ITN). The first of these departments is the Tunnels, Bridges and Terminals Department (TB&T). The long-term forecast for TB&T relies principally on estimated traffic volumes for the department assets and secondarily on macroeconomic variables including office employment, fuel prices, consumer spending. Estimates for these factors, along with particular explanatory variables including snowfall patterns and toll levels, are input into an econometric model in order to develop TB&T forecasts for traffic volumes. This forecast is separately developed for the four primary types of traffic: auto, bus, light truck and heavy truck. These volume forecasts drive the revenue outlook for TB&T which also includes staff estimates for EZ Pass adoption rates. Given the pricing difference between cash payment and EZ Pass, this assumption may meaningfully influence the realized revenues. A key driver of the anticipated improvement in revenues is the toll and fare increase implemented in 2011 (with increases scheduled for each year through 2015.) Principal categories of forecasted expense include labor, overheads, maintenance/service, EZ Pass fees, engineering and insurance. These items are generally forecasted based on CPI estimates with certain items such as EZ Pass fees adjusted based on contractual estimates.
Table 9 TB&T Department Forecast ($m)

2012 Revenue Toll and Fare Other Activity Fixed Rentals Total Revenues O&M Expenses Labor M&S costs Overhead Other Total O&M Expenses Net Revenues Margin % Capital Expenditures Net Revenues less Capex Source: Port Authority $1,329 25 19 1,373 $191 145 58 8 402 972 71% (626) 346 2013 $1,449 26 21 1,496 $200 156 61 9 426 1,071 72% (756) 315 2014 $1,574 26 25 1,625 $205 153 72 9 439 1,185 73% (923) 262 2015 $1,727 27 25 1,779 $210 155 74 9 448 1,331 75% (945) 386 2016 $1,886 27 25 1,939 $216 160 76 9 460 1,479 76% (1,023) 455 2017 $1,896 28 26 1,950 $221 164 77 9 472 1,479 76% (713) 766 2018 $1,877 28 27 1,932 $226 169 79 22 496 1,435 74% (574) 861 2019 $2,075 29 27 2,131 $232 174 81 22 509 1,622 76% (459) 1,162 2020 $2,105 30 28 2,162 $238 180 83 22 523 1,638 76% (506) 1,132 CAGR 6% 2% 5% 6% 3% 3% 5% 13% 3% 7%
TB&T Capital Plan The capital investment plan for the TB&T Department includes over 200 identified projects including several multi-year state of good repair projects designed to renew the critical infrastructure assets managed by TB&T. Significant projects include (i) structural modifications to the Bayonne Bridge, (ii) infrastructure projects at the Lincoln Tunnel to accommodate increasing traffic volumes and reduce congestion and (iii) state of good repair work with the George Washington Bridge required due to the useful life of the bridge infrastructure. The TB&T capital investment plan also incorporates anticipated capital savings from a contemplated PPP structure for the Goethals Bridge modernization project. A summary of the TB&T capital plan is presented below. Table 10 TB&T Department Capital Plan ($m)
Category MAND RPP SEC SEP SRP SGR Total Projects 9 2 21 14 3 157 206 2012 $4 35 11 14 343 217 $626 2013 $2 38 29 21 353 313 $756 2014 $1 25 29 119 376 372 $923 2015 -22 7 233 375 308 $945 2016 -5 4 330 353 331 $1,023 2017 ---384 -329 $713 2018 ---303 -272 $574 2019 ---92 -367 $459 2020 ---14 -492 $506 TOTAL $8 126 80 1,511 1,800 3,001 $6,525
Operating Division: PATH Department

In addition to the TB&T Department, the ITN includes the PATH Department which provides rail service between Hoboken / Jersey City / Newark, New Jersey and Manhattan. The PATH long-term forecast relies on ridership forecasts to estimate revenues and gauge customer service and capital investment needs. Beginning in 2009, PATH developed a detailed statistical forecasting model for estimating ridership based on economic development, demographic trends, observed travel patterns and key Port 8
Authority infrastructure projects including the completion of One WTC and development / growth of the areas in the immediate vicinity of PATH stations. The PATH operation is forecasted to continue generating operating losses throughout the forecast period with costs substantially exceeding revenues despite record ridership in recent years. Difficulty with increasing fares as well as an underlying infrastructure with maintenance requirements determined by federal regulation contribute to the profitability challenges experienced by PATH. Total funding requirements are further compounded by ongoing capital investment needs principally related to State of Good Repair projects. PATHs forecasted deficit is consistent with financial performance of other mass transit rail operators as indicated herein on page 31. Table 11 PATH Department Forecast ($m)
2012 Revenues Tolls and Fares Percentage Rentals Fixed Rentals Other Total Revenues O&M Expenses Labor M&S costs Overhead Total O&M Expenses Net Revenues Margin % Capital Expenditures Net Revenues less Capex Source: Port Authority $136 3 1 1 141 169 71 19 259 (118) (84%) (351) (470) 2013 $156 3 1 1 161 177 77 19 272 (111) (69%) (327) (439) 2014 $177 3 1 1 182 184 77 20 281 (100) (55%) (289) (388) 2015 $195 3 1 1 200 189 79 21 288 (89) (44%) (299) (387) 2016 $215 3 1 1 220 194 81 21 295 (76) (34%) (375) (450) 2017 $230 3 1 1 236 198 83 22 303 (67) (28%) (357) (424) 2018 $247 3 2 1 253 203 85 22 310 (57) (23%) (278) (336) 2019 $264 3 2 1 269 208 87 23 318 (49) (18%) (257) (305) 2020 $280 3 2 1 285 214 89 23 326 (40) (14%) (121) (161) CAGR 9% 2% 3% -9% 3% 3% 3% 3% (13%)
PATH Capital Plan Table 12 PATH Department Capital Plan ($m)

Category MAND RPP SEC SEP SGR Total Projects 3 0 16 13 84 116 2012 $5 -85 13 249 $351 2013 $7 -51 28 241 $327 2014 $9 -37 36 207 $289 2015 $36 -27 55 180 $299 2016 $45 -32 82 215 $375 2017 $31 -43 71 213 $357 2018 $33 -39 82 124 $278 2019 --42 82 132 $257 2020 --10 17 94 $121 TOTAL $165 -367 467 1,655 $2,654
A summary of the long-term forecast for the ITN (including the TB&T Department, the PATH Department and the Ferry operation) is presented below for reference purposes. Table 13 ITN Forecast ($m)
2012 Revenues Tolls and Fares Other Activity Percentage Rentals Fixed Rentals Other Total Revenues O&M Expenses Labor M&S costs Overhead Other Total O&M Expenses Net Revenues Margin % Capital Expenditures Net Revenues less Capex $1,465 25 3 20 1 $1,514 $361 216 77 8 661 853 56% (977) (124) 2013 $1,605 26 3 23 1 $1,657 $377 232 81 9 698 959 58% (1,083) (124) 2014 $1,751 26 3 26 1 $1,806 $389 230 92 9 721 1,086 60% (1,211) (126) 2015 $1,922 27 3 26 1 $1,979 $399 233 95 9 736 1,243 63% (1,244) (1) 2016 $2,101 27 3 27 1 $2,159 $409 241 97 9 756 1,403 65% (1,398) 5 2017 $2,127 28 3 27 1 $2,186 $419 247 99 9 774 1,412 65% (1,070) 342 2018 $2,124 28 3 28 1 $2,185 $430 254 101 22 807 1,378 63% (853) 525 2019 $2,339 29 3 29 1 $2,400 $441 261 104 22 827 1,573 66% (716) 857 2020 $2,384 30 3 29 1 $2,447 $452 269 106 22 849 1,598 65% (627) 971 CAGR 6% 2% 2% 5% (2%) 6% 3% 3% 4% 13% 3% 8%
Operating Division: World Trade Center Department (WTC)

The long-term forecast for the WTC exhibits a ramp up in revenue generation due to the current state of the redevelopment project. Rental revenue first reaches the long-term level in 2017. This rental forecast is developed by WTC staff with input from private sector market participants to gauge the reasonability of the estimated rental rates. Additionally, the WTC forecast incorporates a financial overlay for the retail joint venture with Westfield and 1 World Trade Center joint venture with Durst. In developing the long-term forecast, WTC staff have identified upside and downside sensitivities, with the primary distinction being the timetable for occupancy and therefore ramp up in revenue collections. Given the ongoing construction during the forecast period, the WTC financial outlook includes near-term operating losses as the site comes online with operating profits projected for the 2016 and onward period and cashflow profitability beginning in 2017.
10
Table 14 WTC Department Forecast ($m)

2012 Revenues Variable rentals Fixed rentals Intercompany rent WT / NLC Net Leases Total Revenues O&M Expenses Labor M&S Costs Rent PILOTs Overhead Other Total O&M Expenses Net Revenues Margin % Capital Expenditures Net Revenues less Capex Source: Port Authority $5 10 4 29 48 15 38 6 10 3 0 72 (23) (48%) (2,431) (2,454) 2013 $5 11 -23 39 16 53 2 21 3 15 111 (71) NM (2,453) (2,524) 2014 $7 16 61 37 121 17 72 23 36 3 38 190 (69) (57%) (1,803) (1,872) 2015 $21 17 144 35 217 17 74 5 78 3 90 267 (50) (23%) (586) (636) 2016 $25 17 219 25 286 18 76 6 94 3 76 273 13 5% (203) (190) 2017 $27 18 282 (4) 323 18 78 7 96 3 82 284 38 12% (100) (62) 2018 $29 19 302 (2) 347 18 80 8 98 4 95 303 45 13% (31) 14 2019 $30 21 309 20 380 19 82 9 101 4 97 311 69 18% (135) (66) 2020 $31 20 319 28 397 19 84 9 103 4 101 320 77 19% (135) (57) CAGR % 26% 8% 74% (1%) 30% 3% 11% 5% 34% 3% 238% 21% NM
Table 15 WTC Department Capital Plan ($m)

Category MAND RPP SEC SEP SRP SGR Total Projects 17 4 1 1 1 -24 2012 $1,224 923 226 17 41 -$2,431 2013 $1,575 714 117 5 41 -$2,453 2014 $1,483 284 --36 -$1,803 2015 $570 16 ----$586 2016 $193 10 ----$203 2017 $93 7 ----$100 2018 $29 2 ----$31 2019 $135 -----$135 2020 $135 -----$135 TOTAL $5,437 1,956 343 22 119 -$7,876
Source: Port Authority Note: Categories include Mandatory, Revenue Producing, Security, System Enhancing, Regional and State of Good Repair
11
Consolidated Bond Structure: Background and description

The roots of the Port Authoritys existing capital structure date to 1925 when the Port Authority issued its first series of bonds. In 1931, the General Reserve Fund was established to coordinate and combine revenue flow from the various assets operated by the Port Authority. In 1935, the General and Refunding Bond Program was established which built upon the organization of the General Reserve Fund with the Lincoln Tunnel being the first project financed thereunder. The Consolidated Bond program was instituted in 1952 and since that time has served as the primary method of general financing for the Port Authority. As outlined in the Consolidated Bond Resolution, the Port Authority may issue Consolidated Bonds for broad purposes1 subject to the satisfaction of the Net Revenues Test (as referenced above). Additionally, issuance of Consolidated Bonds in connection with additional facilities requires multiple certifications stating that such issuance will not (i) adversely impact the sound credit standing of the Port Authority, (ii) adversely impact the investment status of the Consolidated Bonds, (iii) materially impair the ability of the Port Authority to fulfill its commitments (whether statutory or contractual) including its obligations to holders of previously existing Consolidated Bonds. Consolidated Bonds are equally and ratably secured by a pledge of the net revenues of all existing facilities of the Port Authority and any additional facility which may be financed in whole or in part by Consolidated Bonds in the future. Consolidated Bonds are further secured by a pledge of the Consolidated Bond Reserve Fund and by a pledge of the General Reserve Fund, in that case such pledge is pari passu with other obligations which have a pledge of the General Reserve Fund. As the primary source of debt funding, the Consolidated Bond Program has grown meaningfully in recent years as the level of Port Authority capital investment has substantially increased in connection with the redevelopment of the World Trade Center site and other large scale Port Authority infrastructure projects. Indebtedness under the program has risen from approximately $5.7 billion in 2000 to a current level of $15.5 billion (as of December 31, 2011). The Long Range Forecast anticipates additional issuance with total outstanding Consolidated Bonds reaching $26 billion in 2020 (see next page Figure 1).
Authorized purposes defined as purposes for which pledges of the General Reserve Fund are permitted.
12
Figure 1 Consolidated Bonds Outstanding: 2000 2020 ($bn)
Despite the increase in outstanding debt obligations, the Port Authority has been successful in maintaining its credit rating and as a result maintaining a relatively consistent cost of debt. Benchmarked against municipal bond indices for A and AA ratings, the Port Authoritys overall interest cost has registered a high degree of stability with average borrowing costs lower than the overall market during the volatile period since 2008 (see Figure 2 on following page). This attractive financing cost has been achieved with a combination of taxable and tax-exempt issuances even as the municipal index comparison is composed of predominantly tax-exempt issuances.
13
Figure 2 Municipal Yields vs. Port Authority Cost of Debt: 2003 2011
7%
6%
5%
4%
3%
2%
1%
0% 2003 2004 2005 AA+ 2006 AA2007 A+ 2008 2009 Port Authority 2010 2011
Source: Bloomberg, Port Authority Note: Municipal bond yields based on 30 year Transportation Industry Revenue Obligation bonds
Commentary from credit rating agencies provides insight into the Port Authoritys attractive cost of debt versus market benchmarks. Recent reports emphasize the credit strength from the consolidated nature of the financing underpinned by a stable revenue base from an expansive, diverse portfolio of transportation and commerce related assets. Table 16 Credit Rating Considerations Rating Drivers Strengths Critical nature of infrastructure assets Stable revenue base Rate-setting flexibility Leverage levels and coverage ratios Fixed rate capital structure Large reserve balance Strong financial performance
Fitch
Moodys
S&P
Source: Fitch Ratings credit report (June 8, 2012); Moodys credit report (June 11, 2012) and Standard and Poors credit report (June 12, 2012)
This diverse portfolio credit strength contrasts with the credit rating methodology of the 2011 Liberty Bonds. Based on the subordinated position of the Liberty Bonds, the issuance is notched below the current rating of the Port Authority and the New York City General Obligation (GO) rating. Moodys notes we based the rating on the credit characteristics of the revenues available for debt service. . . 14
According to our criteria, should either the consolidated bond or GO bond rating change, the rating on the 2011 bonds will continue to be a notch below the lower of the two ratings.2 Despite the lower notch credit rating, the current market yield for 2011 series Liberty Bonds is not meaningfully more costly than recent consolidated bond issuances of similar term. Figure 3 Comparison of Implied Yield Curve: Recent Consolidated Bond Issues vs. Liberty Bonds
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0% 2012
2017
2023 171st Series
2028 172nd Series
2034 173rd Series
2039 2011 Liberty Bonds
2045
2050
Source: Bloomberg
Source: Standard and Poors. Port Authority of New York & New Jersey; Appropriations; CP; Note; Ports/Port Authorities, June 12, 2012.
15
Municipal market trends

Municipal bond issuance in 2012 has resumed strongly after relatively lower volume activity in 2011. Year to date issuance volume for Revenue bonds was $82.1 billion, an increase of 71% versus the year ago period. Similarly, year to date General Obligation bond volume of $67.1 billion represents an increase of 94% versus prior year. Issuance for new capital continues to grow the market, representing $55.2 billion of year-to-date issuance. The cessation of the Build America Bond program has reduced volume of taxable issuance markedly versus the expanded levels seen in 2008-2009. Long-term issuance trends are illustrated below; notably 2011 represented the lowest total issuance volume since 2001. Figure 4 Municipal Bond Issuance: 1990 Current ($bn)
Source: Securities Industry and Financial Markets Association
Investor flow into the municipal market has also returned to positive net inflows during the last nine months after registering sizeable outflows in 2010 and early 2011.
16
Figure 5 Municipal Bond Market: Net Inflow / (Outflow) ($bn)

$15
$10
$5
--
($5)
($10)
($15) Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
Source: Investment Company Institute
These net flow dynamics have pushed the market to an effective net demand position and therefore provided downward pressure on market yields. The chart below illustrates the tightening yield curve for representative Transportation Industry Revenue Bonds with rating AA-; yields have tightened by 0.33% at the shortest term with the most contraction occurring at the 10 year mark by 1.60%.
17
Figure 6 Municipal Bond Yield Curve: AA- Transportation Revenue Bonds

6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
-3 month 6 month 1 year 2 year 3 year 4 year 5 year 7 year 9 year 10 year 12 year 14 year 15 year 17 year 19 year 20 year 25 year 30 year 7/23/12
12/31/10
12/31/11
Source: Bloomberg
Although current market dynamics are relatively strong, market sentiment continues to be impacted by uncertainty regarding federal and state policy. The Obama Administrations fiscal 2013 included several provisions potentially impacting municipal debt including (i) limiting tax exemption for individual filers to 28% and (ii) the extension and expansion of the Build America Bond program. These potential policy changes, among other less significant items, continue to occupy the municipal bond headlines with as of yet little visibility on potential resolution. In addition to ongoing tax policy uncertainty, several recent municipal bankruptcies in California have sparked discussion regarding the perceived low risk nature of municipal investments. Despite this recent uptick, the strong technical fundamentals in the market have not been meaningfully offset due to (i) the relatively small debt implicated in the bankruptcies, (ii) widespread anticipation of the larger defaults (e.g. Jefferson County) and (iii) expectation of minimal creditor impairment.
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Capitalization Forecast
The Long Range Forecast incorporates Port Authority staff estimates for financing of capital investment from a variety of sources including issuances of Consolidated Bonds (primary capital source), proceeds from passenger facility charges, grants and capital inflows from joint venture agreements. Rothschild evaluated this forecast from both the perspective of forecasted liquidity as well as achievement of financial covenant compliance, in particular, compliance with the terms of the Consolidated Bond Structure. The analysis herein assumes successful achievement of the Long Range Forecast; actual results may vary and the impact of such variations may be material. The Port Authority liquidity outlook is a multi-stage calculation including (i) forecasted net revenues, (ii) reserves in excess of the General Reserve Fund requirement, (iii) anticipated debt service, (iv) capital investment and (v) forecasted capital raising. As illustrated in Figure 7 below, the Long Range Forecast anticipates maintaining $2 billion or greater liquidity throughout the projection period. Figure 7 Liquidity Forecast ($bn)
19
In terms of covenant compliance, the Port Authority is subject to four primary financial tests based on terms of the Consolidated Bond Structure, provisions of the Versatile Structure Obligations (VSOs) program and applicable statutes. These include: Table 17 Overview of Financial Tests Financial Test Type General Reserve Requirement Statutory requirement Net Revenues Test Consolidated Bond Issuance Test for permitted Consolidated Bond issuance
Net Revenues Test VSO Issuance Maximum VSO Debt

Notes: (1) (2) (3)
Test for permitted VSO issuance Test for permitted VSO issuance
Description General Reserve Fund balance of at least 10% of applicable debt Net Revenues (1) of at least 1.30x future maximum debt service for the Consolidated Bonds then outstanding Net Revenues of at least 1.15x future maximum debt service for total debt (2) VSO Debt of no more than 25% of total debt (3)
Net Revenues measured as peak 12 month level during prior 3 year period. For purposes of calculation, Total Debt excludes commercial paper. Excludes Special Project Bonds, Commercial Paper and Port Authority Equipment Notes.
General Reserve Requirement

Based on applicable statute, the Port Authority is required to maintain a General Reserve Fund in the amount of 10% of the par value of applicable debt outstanding. Based on the Long Range Forecast, the Port Authority continues to satisfy this requirement throughout the forecast period, as illustrated below. Table 18 Forecasted General Reserve Fund Test ($m)(1)
2012 Projected applicable debt Reserve level Implied General Reserve Forecasted total reserves Cushion - $ Source: Port Authority Notes: (1) Long Range Forecast adjusted as necessary in order to optimize mix of debt and equity used to finance the Port Authoritys capital program. Current forecast based on 60% appropriated reserves / 40% cash $20,283 10% $2,028 $3,545 $1,516 2013 $22,090 10% $2,209 $3,831 $1,622 2014 $24,333 10% $2,433 $3,817 $1,384 2015 $25,739 10% $2,574 $3,946 $1,372 2016 $26,714 10% $2,671 $4,358 $1,687 2017 $27,538 10% $2,754 $4,486 $1,732 2018 $27,681 10% $2,768 $4,445 $1,676 2019 $27,531 10% $2,753 $4,457 $1,704 2020 $27,672 10% $2,767 $4,645 $1,878
Net Revenues Test Consolidated Bond Issuance

Based on the originating statute establishing the Consolidated Bond Structure, the Port Authority is limited in its ability to issue additional Consolidated Bonds based on a test of (i) net revenues from projects subject to the Consolidated Bonds versus (ii) estimated maximum debt service cost for the 20
Consolidated Bonds outstanding following the proposed issuance. The level of the test is set at a 1.30x requirement which provides a 30% extra coverage above the forecasted need. The effect of the test is to require sufficient historical financial performance to satisfy future financing obligations. This may be operationally limiting in a circumstance of needed capital investment to drive long-term development as the benefit to financial performance is primarily in the future period and may not be captured in the calculation of the covenant ratio. Additionally, to the extent the capital investment is not anticipated to generate additional revenue (e.g. maintenance, certain state of good repair projects), the ability to maintain the 1.30x ratio may be impacted. With recent capital investment levels for the Port Authority significantly in excess of normal levels, the Long Range Forecast demonstrates both of these dynamics. As a result, the projected ratio is moderately strained in the early years of the projection period as incremental revenue projects are starting to come online. Given the importance of the Consolidated Bond Structure, the maintenance of this issuance covenant functions as a key component of financing strategy for the Port Authority and sets an upper limit on its traditional financing source. Table 19 Forecasted Consolidated Bond Net Revenues Test ($m)
2012 Net revenues
(1) (2)
2013 $2,521 1,518 1.66 x 1.30 x $547 22%
2014 $2,750 1,667 1.65 x 1.30 x $582 21%
2015 $2,859 1,780 1.61 x 1.30 x $546 19%
2016 $3,046 1,858 1.64 x 1.30 x $631 21%
2017 $3,144 1,930 1.63 x 1.30 x $636 20%
2018 $3,144 1,971 1.60 x 1.30 x $582 19%
2019 $3,144 2,010 1.56 x 1.30 x $531 17%
2020 $3,347 2,062 1.62 x 1.30 x $666 20%
$2,270 1,399 1.62 x 1.30 x $452 20%
Future max debt service Level for Issuance Test
Implied service multiple
Cushion - Net Revenues $ Cushion - % of Net Revenues Source: Port Authority Notes
(1) For purposes of this calculation, net revenues is based on peak 12 month net revenues during the prior 3 year period. (2) Future maximum debt service is limited to debt service of the Consolidated Bonds for purposes of the ratio.
Net Revenues Test VSO Issuance

In addition to the Consolidated Bond Program, the Port Authority established an issue of special obligations known as Port Authority Versatile Structure Obligations in 1992. The resolution establishing the VSO program includes a Net Revenues Test similar in construct to the Net Revenues Test contained in the Consolidated Bond Program. In order to issue additional VSOs, the Port Authority must satisfy a test of 1.15x based on the ratio of (a) net revenues versus (b) maximum future debt service for all debt which is secured by net revenues excluding commercial paper. The broader scope of the debt service, as compared to the Consolidated Bond Net Revenue Test, results in lower projected metrics. However, the lower 1.15x threshold results in substantial capacity to satisfy the test as illustrated below. Nonetheless, the Long Range Forecast does not indicate further issuance of VSOs, with the most recent issue having been fully repaid in 2011.
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Table 20 Forecasted VSO Net Revenues Test

2012 Net revenues Debt service
(1)
2013 $2,521 1,610 1.57 x 1.15 x $670 27%
2014 $2,750 1,768 1.55 x 1.15 x $716 26%
2015 $2,859 1,897 1.51 x 1.15 x $678 24%
2016 $3,046 1,994 1.53 x 1.15 x $753 25%
2017 $3,144 2,105 1.49 x 1.15 x $724 23%
2018 $3,144 2,155 1.46 x 1.15 x $666 21%
2019 $3,144 2,194 1.43 x 1.15 x $621 20%
2020 $3,347 2,247 1.49 x 1.15 x $764 23%
$2,270 1,478 1.54 x 1.15 x $570 25%
(2)
Implied service multiple Level for Issuance Test Cushion - Net Revenues $ Cushion - % of Net Revenues Source: Port Authority Notes
(1) For purposes of this calculation, net revenues is based on peak 12 month net revenues during the prior 3 year period. (2) Future maximum debt service excludes debt service related to Commercial Paper.
Maximum Variable Rate Debt

In addition to the Net Revenues Test described above, the VSO program also requires issuance be limited such that total variable rate debt does not exceed 25% of total Port Authority debt. Although a contractual requirement, this test does not present a practical limitation due to the tighter restriction imposed by the Net Revenues Test. Table 21 Forecasted Variable Rate Debt % ($m)
2012 Variable Rate Debt Total Debt % of Total Debt Maximum % Source: Port Authority $451 20,283 2% 25% 2013 $451 22,090 2% 25% 2014 $451 24,333 2% 25% 2015 $451 25,739 2% 25% 2016 $451 26,714 2% 25% 2017 $451 27,538 2% 25% 2018 $451 27,681 2% 25% 2019 $451 27,531 2% 25% 2020 $451 27,672 2% 25%
Although the Port Authority has wide latitude for variable rate issuance under the VSO test, the current market environment favors fixed rate issuance in order to lock-in historically low borrowing costs. Consistent with the broader fixed income market, municipal bond yields are at or near all-time lows across a variety of indices (see Figure 8 on following page).
22
Figure 8 Municipal Bond Yields: 2000 to Present

8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
--
NY GO
NJ GO
Market GO
Market RO
Although the current long-term rate environment is highly favorable, shorter term, variable rate financing may be considered within the overall financing strategy of the Port Authority: Table 22 Variable Rate Financing: Benefits and Considerations Benefits Considerations Lowest current cost of borrowing in the short- Short-term variable and fixed rate yield curves term variable rate market have approximately converged Balanced risk exposure to municipal market Ability to refinance cost effectively is essential yield curve to avoid adverse rate spike (e.g. auction rate securities market risk) Port Authority capital investment and returns are inherently geared toward long-term horizon
23
Credit Rating Agency Considerations

In addition to managing the statutory and contractual financial tests, the Port Authoritys financing strategy is operated to maintain its strong AA- credit rating which involves additional debt ratios based on credit rating agency input. Primary credit ratio benchmarks are identified below. These ratios, along with the financial covenant tests, are instructive in assessing the Port Authoritys theoretical debt capacity. A multi-ratio benchmarking analysis is included at the end of this section. Table 23 Overview of Credit Rating Agency Metrics Financial Metric Description Debt Service Coverage Ratio of Net Operating Revenues and Financial Income versus Bonded Debt Service. Targeted level of 1.8x or greater Total Obligations / Gross Revenues Ratio of Total Obligations (1) versus Gross Revenues. Targeted level of 5.0x or less Coverage of Next 2 Years Debt Service Sum of the General Reserve Fund and Consolidated Bond Reserve Fund to be in excess of the currently outstanding Consolidated Bonds projected interest and principal payments for the coming 2 year period (2) Consolidated Bond Reserve Minimum Minimum balance of $750 million
Notes (1) Excludes Special Project Bonds (2) Debt service measurement limited to Consolidated Bonds
Credit Rating Metric: Debt Service Coverage

The Debt Service Coverage metric assesses the Port Authoritys ability to fund debt service as measured by current year interest (excluding capitalized interest and interest paid from reserves) and principal payments based on inflows from net revenues and financial income. As illustrated below, the Long-Term Forecast indicates an ability to satisfy this ratio at the 1.8x level. Table 24 Forecasted Debt Service Coverage ($m)
2012 Net Operating Revenues Financial Income Subtotal Bonded Debt Service Forecasted Ratio Target Level Cushion $ Cushion % $1,558 40 1,598 725 2.2 x 1.8 x $163 10.2% 2013 $1,688 55 1,743 748 2.3 x 1.8 x $220 12.6% 2014 $1,904 58 1,963 932 2.1 x 1.8 x $158 8.1% 2015 $2,188 79 2,267 1,124 2.0 x 1.8 x $135 6.0% 2016 $2,502 110 2,612 1,269 2.1 x 1.8 x $182 7.0% 2017 $2,553 138 2,691 1,368 2.0 x 1.8 x $127 4.7% 2018 $2,532 161 2,693 1,460 1.8 x 1.8 x $35 1.3% 2019 $2,832 161 2,993 1,638 1.8 x 1.8 x $25 0.8% 2020 $2,894 167 3,061 1,550 2.0 x 1.8 x $150 4.9%
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Credit Rating Metric: Total Obligations / Gross Revenues

The credit rating agencies also examine overall relative indebtedness via the Total Obligations / Gross Revenues metric. For purposes of this calculation, Total Obligations is broadly defined including (i) Consolidated Bonds, (ii) Consolidated Notes, (iii) VSOs, (iv) Variable Rate Master Notes, (v) Commercial Paper and (vi) the Port Authority Equipment Notes. The Long-Term Forecast manages the debt balance below the 5.0x target level. As discussed in the review of the Long-Term Forecast, the early years of the projection period are impacted by above long-term levels of capital investment and do not yet benefit from the full ramp up level of revenues at critical redevelopment projects including the World Trade Center site. As a result, the Total Obligations / Gross Revenues metric has less cushion in the early part of the projection. Table 25 Forecasted Total Obligations / Gross Revenues Ratio ($m)
2012 Total Obligations Gross Revenue Forecasted Ratio Target Level Cushion $ Cushion % $18,607 4,119 4.5 x 5.0 x $1,989 10.7% 2013 $20,485 4,335 4.7 x 5.0 x $1,188 5.8% 2014 $22,803 4,662 4.9 x 5.0 x $507 2.2% 2015 $24,288 5,061 4.8 x 5.0 x $1,019 4.2% 2016 $25,323 5,431 4.7 x 5.0 x $1,834 7.2% 2017 $26,210 5,557 4.7 x 5.0 x $1,577 6.0% 2018 $26,435 5,626 4.7 x 5.0 x $1,692 6.4% 2019 $26,380 5,989 4.4 x 5.0 x $3,565 13.5% 2020 $26,593 6,119 4.3 x 5.0 x $4,000 15.0%
Credit Rating Metric: Coverage of Next 2 Years Debt Service

The Port Authoritys strong credit rating is supported by its substantial capital reserves. The relative strength of the reserves is measured versus the forecasted Consolidated Bond debt service for the forward-looking 2 year period. The Long-Term Forecast projects the Port Authority will maintain this level of reserves with the cushion reaching a low point in 2014. This metric improves steadily thereafter due in part to the ramp up in revenues from the World Trade Center. Table 26 Forecasted Coverage of Next 2 Years Debt Service ($m)
2012 Forecasted Reserve 2 Years Debt Service Cushion $ Cushion % $3,545 2,232 $1,313 37.0% 2013 $3,831 2,500 $1,331 34.8% 2014 $3,817 2,823 $994 26.0% 2015 $3,946 3,072 $874 22.1% 2016 $4,358 3,263 $1,096 25.1% 2017 $4,486 3,566 $920 20.5% 2018 $4,445 3,625 $820 18.4% 2019 $4,457 3,539 $918 20.6% 2020 $4,645 3,609 $1,036 22.3%
Credit Rating Metric: Consolidated Bond Reserve Minimum

In addition to the metrics discussed above, the Port Authority targets a Consolidated Bond Reserve Fund (the CBRF) of at least $750 million due in part to support the organizations $500 million commercial paper program which thereby avoids the expense of a third-party liquidity facility. The Long-Term Forecast estimates the CBRF in excess of the $750 million level in each year of the projection. Table 27 Consolidated Bond Reserve Minimum ($m)
2012 Forecasted CBRF Target Level Cushion $ Cushion % $1,516 750 $766 50.5% 2013 $1,622 750 $872 53.8% 2014 $1,384 750 $634 45.8% 2015 $1,372 750 $622 45.3% 2016 $1,687 750 $937 55.5% 2017 $1,732 750 $982 56.7% 2018 $1,676 750 $926 55.3% 2019 $1,704 750 $954 56.0% 2020 $1,878 750 $1,128 60.1%
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Ratio Analysis: Implied Debt Capacity

Analyzed in a coordinated context, the applicable financial covenants and credit rating metrics provide insight into the achievable debt capacity of the Port Authority. As summarized below, the Long-Term Forecast indicates debt capacity is predominantly most restricted based on the Total Obligations / Gross Revenues ratio (credit rating agency metric). The analysis indicates debt capacity modestly above the projection funding level with the smallest cushion in 2014 at approximately $500 million (equivalent to $100 million revenue based on the 5x metric). An important consideration related to this test is the benefit the Port Authority receives from the toll and fare increase implemented in 2011. Absent the revenues from the toll and fare increase, the Long-Term Forecast indicates a shortfall versus the target credit tests (in particular the Total Obligations / Gross Revenues metric) which may in turn risk the stability of the Port Authoritys credit rating and cost of financing. Table 28 Implied Debt Capacity Based on Credit Tests ($bn)
2012 Credit Tests General Fund Requirement Debt Service Coverage Total Obligations / Gross Revenues Minimum $36.6 19.3 20.6 $19.3 $39.5 21.1 21.7 $21.1 $39.2 23.7 23.3 $23.3 $40.5 27.4 25.3 $25.3 $44.7 31.5 27.2 $27.2 $46.1 32.5 27.8 $27.8 $46.3 32.5 28.1 $28.1 $46.4 36.1 29.9 $29.9 $48.3 37.0 30.6 $30.6 2013 2014 2015 2016 2017 2018 2019 2020
Forecasted Total Debt Cushion - $
$18.6 0.7
$20.5 0.6
$22.8 0.5
$24.3 1.0
$25.3 1.8
$26.2 1.6
$26.4 1.7
$26.4 3.6
$26.6 4.0
26
Debt Capacity Assessment

Rothschilds assessment of the Port Authoritys potential debt capacity incorporates a review of selected comparable peer group organizations in order to benchmark the Port Authoritys capital structure and credit profile. In order to compile the peer group, Rothschild targeted public and private organizations, both domestic and foreign, that operate in four primary categories: (i) Airports, (ii) Ports, (iii) Rail / Toll Roads and (iv) Infrastructure Conglomerates. Table 29 Selected Peer Group Airports Ports Atlanta Hartsfield DP World Limited Jackson Port of Corpus International Airport Christie Aeroports de Paris Port of Long Beach BAA Port of Los Angeles Greater Toronto Port of Rotterdam Airports Authority Port of Tauranga Los Angeles World Virginia Port Airports Authority Sydney Airport Corporation Limited
Rail / Toll Roads Chicago Transit Authority Delaware River Port Authority Massachusetts Bay Transit Authority Metropolitan Transportation Authority Metropolitan Transportation Commission New Jersey Transit Corporation New Jersey Turnpike Authority New York Thruway Authority Pennsylvania Turnpike Commission Southeastern Pennsylvania Transportation Authority
Conglomerates Abertis ACS Atlantia Ecorodovias Eiffage Ferrovial Groupe Eurotunnel Macquarie Atlas Transurban Vinci
27
Peer Group Analysis: Airports

In determining the comparable group of airport operators, Rothschild focused on companies which operate major international airports and that control many, if not all, of the airports in a single market. Table 30 Airport Peer Group Peer Company Description Atlanta Hartsfield Operates HartsfieldJackson International Jackson, the primary Airport Atlanta, GA airport Total assets: $6.7bn Aeroports de Paris Owns and operates the 3 major airports in Paris, including Charles de Gaulle, as well as 10 airfields in France Total assets: $11.5bn Owns and operates airports in the UK including Heathrow, Stansted and 4 other smaller regional airports Total assets: $20.3bn Owns and operates airports in the Toronto metropolitan area Total assets: $7.1bn Owns and operates all 5 airports in the Los Angeles metropolitan region Total assets: $8.3bn Owns and operates the Sydney Airport Total assets: $12.1bn
Financial Summary ($m) 2009 Revenue $390 Operating Costs 179 Net Profit 211 % margin 54% 2010 Revenue $3,326 Operating Costs 2,089 Net Profit 1,236 % margin 37% 2010 $3,239 1,729 1,510 47% 2010 $1,118 459 659 59% 2010 $752 617 135 18% 2010 $929 155 773 83%
2010 $401 210 191 48% 2011 $3,250 1,988 1,263 39% 2011 $3,549 1,787 1,762 50% 2011 $1,119 451 668 60% 2011 $855 617 239 28% 2011 $968 178 790 82%
BAA
Revenue Operating Costs Net Profit % margin
Greater Toronto Airports Authority
Revenue Operating Costs Net Profit % Margin Revenue Operating Costs Net Profit % margin Revenue Operating Costs Net Profit % margin
Los Angeles World Airports
Sydney Airport Corporation Limited
A financial review of the airport peer group reveals a high level of operating profitability (Los Angeles World Airports is a clear outlier) and stable revenue base likely attributable to the broad scope of the operators reach within the particular regions of service. The sector has undergone significant stress since the 2008 financial crisis which has led to the sector accumulating debt in order to finance capital investment needs. As a result, the sector exhibits a relatively high degree of leverage with a 28
mean/median leverage metric of 10.7x / 11.5x. Despite these leverage metrics, the sectors cost of debt capital is in relatively moderate with mean / median cost of debt of 5.0% / 4.8%. In terms of capitalization strategy, the peer group demonstrates a clear preference for consolidated holdco financing with the single exception being Atlanta Hartsfield-Jackson International Airport which has a tranche of debt issued at the operating company level and secured by PFC revenues (cost of capital was in line with existing holdco debt). The sector generally exhibits a preference for fixed rate debt with the exception of BAA which is relatively balanced in the distribution of fixed versus floating rate debt. Relatedly, Atlanta Hartsfield has recently indicated its intention to retire its floating rate debt in order to limit exposure to interest rate risk. Table 31 Airport Peer Group: Credit Analysis Credit Rating Peer Company Atlanta Hartsfield-Jackson International Airport Aeroports de Paris BAA Greater Toronto Airports Authority Los Angeles World Airports Sydney Airport Corporation Limited Port Authority Mean Median
Note: (1) Of this amount, $3.54B for commercial paper obligations, variable rate master notes, versatile structure obligations, MOTBY obligation, Tower 4 liberty bonds, and special project bonds are not secured by or payable from the General Reserve Fund. All debt balances are calculated at par value.
Total Debt $2,236 4,496 23,711 7,585 3,741 6,911 19,524(1)
Leverage 11.7x 3.6x 13.5x 11.3x 15.7x 8.8x 10.1x 10.7x 11.5x
Fitch NR AAANR NR BBB AA-
Moodys NR NR NR A1 NR Baa2 Aa2
S&P NR A+ AA AA BBB AA-
Interest Rate 4.5% 3.4% 5.1% 5.6% 4.3% 7.1% 4.9% 5.0% 4.8%
% Floating 23.4% 16.6% 41.1% -3.1% 69.8% 2.4% 25.7% 20.0%
Peer Group Analysis: Ports

In determining the comparable group of port operators, Rothschild selected the operators of major ports globally. The companies below are each pure port operators, as distinguished from the infrastructure conglomerates that have non-port operating activities. Table 32 Ports Peer Group Peer Company Description DP World Limited Develops and operates marine terminals and related services worldwide Total assets: $13.9bn Port of Corpus Christie Operates the Port of 29
Financial Summary ($m) 2010 Revenue $3,189 Operating Costs 1,948 Net Profit 1,240 % margin 39% 2010
2011 $2,978 1,670 1,307 44% 2011
Corpus Christie, Texas Total assets: $400m
Revenue Operating Costs Net Profit % margin Revenue Operating Costs Net Profit % margin Revenue Operating Costs Net Profit % margin Revenue Operating Costs Net Profit % margin Revenue Operating Costs Net Profit % margin Revenue Operating Costs Net Profit % margin
Port of Long Beach
Operates the Port of Long Beach, California Total assets: $3.5bn
Port of Los Angeles
Operates the Port of Los Angeles, California Total assets: $3.9bn
Port of Rotterdam
Operates the Port of Rotterdam, Netherlands Total assets: $4.2bn
Port of Tauranga
Operates the major port in New Zealand Total assets: $773m
Virginia Port Authority
Owns and operates marine terminals in the state of Virginia including the Norfolk Port Total assets: $1.1bn
$52 35 17 33% 2010 $322 98 224 70% 2010 $407 246 161 40% 2010 $739 297 443 60% 2010 $136 65 70 51% 2010 $208 179 29 14%
$59 37 22 37% 2011 $345 81 264 77% 2011 $401 209 191 48% 2011 $764 297 467 61% 2011 $155 76 79 51% 2011 $284 257 27 9%
Rothschilds financial review of the port peer group indicates a consistent financing construct across the sample set. Profitability metrics for the port peer group are relatively strong an average margin of 47%. In terms of capitalization, the Port Group is the least indebted with mean/median leverage metrics of 3.0x / 2.4x3. This relatively low debt burden is accompanied by a cost of debt which stratifies between the US ports in the 4.5% - 5.7% range versus the foreign ports with interest costs of 4.9% - 12.4%. Additionally the US port operators are each capitalized with similar guidelines: financing is via fixed rate bonds issued at the consolidated holdco level and secured by port revenue.
Mean / median calculation excludes Virginia Port Authority as an outlier.
30
Table 33 Ports Peer Group: Credit Analysis Credit Rating Peer Company DP World Port of Corpus Christie Port of Long Beach Port of Los Angeles Port of Rotterdam Port of Tauranga Virginia Port Authority Port Authority Mean Median Total Debt $7,707 $7 723 982 990 161 474 19,524 Leverage 5.9x 0.3x 2.7x 5.1x 2.1x 2.0x 17.6x 10.1x 3.0x 2.4x Fitch BBBNR AA NR NR NR AA+ AAMoodys Baa3 A1 NR NR NR NR A1 Aa2 S&P NR A+ NR AA+ NR BBB+ AA+ AAInterest Rate 4.9% 5.7% 4.6% 4.5% 12.4% 6.9% 5.3% 4.9% 6.3% 5.3% % Floating 56.6% ---54.4% 99.7% -2.4% 30.1% --
Peer Group Analysis: Rail / Toll Roads

The analysis group for the Rail / Toll Roads sector includes a broad mix of organizations that operate public transit and/or toll-funded infrastructure assets in major metropolitan areas throughout the United States. The selected organizations are detailed below, segmented between rail operators and operators of toll roads and/or bridges. Table 34 Rail / Toll Roads Peer Group: Rail Operators Peer Company Description Chicago Transit Authority Operates the public transportation system for the City of Chicago Total assets: $6.9bn Massachusetts Bay Transit Authority Operates public transportation in the Massachusetts Bay area Total assets: $9.6bn Operates the public transportation system for the City of New York Total assets: $62.5bn Operates public transit in New Jersey Total assets: $9.8bn
Metropolitan Transportation Authority
New Jersey Transit Corporation
Southeastern
Operates the public 31
Financial Summary ($m) 2009 Revenue $565 Operating Costs 1,649 Net Profit (1,085) % margin NM 2010 Revenue $500 Operating Costs 1,298 Net Profit (798) % margin NM 2010 Revenue $6,419 Operating Costs 10,709 Net Profit (4,290) % margin NM 2010 Revenue $839 Operating Costs 1,820 Net Profit (981) % margin NM 2010
2010 $548 1,165 (617) NM 2011 $511 1,321 (809) NM 2011 $6,939 11,690 (4,751) NM 2011 $943 1,876 (934) NM 2011
Pennsylvania Transportation Authority
transit for the Philadelphia region Total assets: $4.3bn
$426 1,514 (1,089) NM
$470 1,581 (1,110) NM
Table 35 Rail / Toll Roads Peer Group: Toll Road / Bridge Operators Peer Company Description Financial Summary ($m) Delaware River Port Operates the bridges and 2009 Authority ferries that cross the Revenue $273 Delaware River in the Operating Costs 140 Philadelphia region Net Profit 133 Total assets: $1.8bn % margin 49% Metropolitan Transportation planning 2010 Transportation and financing agency for Revenue $487 Commission the San Francisco Bay Operating Costs 118 area Net Profit 369 Total assets: $4.5bn % margin 76% New Jersey Turnpike Operates the turnpikes 2010 Authority and roadways in New Revenue $1,034 Jersey Operating Costs 565 Total assets: $9.4bn Net Profit 469 % margin 45% New York Thruway Operates toll road in New 2010 Authority York state Revenue $672 Total assets: $5.6bn Operating Costs 457 Net Profit 215 % margin 32% Pennsylvania Turnpike Owns and operates toll 2010 Commission roads in Pennsylvania Revenue $710 Total assets: $6.7bn Operating Costs 378 Net Profit 332 % margin 47%
2010 $275 154 120 44% 2011 $623 151 472 76% 2011 $1,033 553 480 46% 2011 $665 478 187 28% 2011 $759 360 399 53%
As distinguished from other sectors analyzed, the Rail / Toll Road peer group diverges with rail operators exhibiting operating losses whereas the toll road / bridge operators generate net profits. Additionally, many of these operators benefit from government funding (local, state and/or federal) in order to meet operating costs and capital investment. Despite the profit performance, the essential nature of the service and governmental backing enable the operators to attract private debt financing at a cost of capital in line with the other infrastructure sectors reviewed. Mean/median metrics for cost of debt for the selected operators are 4.8% / 4.8% amidst highly leveraged credit metrics for the group overall. The sector also exhibits a preference for fixed rate borrowings with Delaware River Port Authority and SEPTA being the only operators with a meaningful level of floating rate indebtedness. Debt financing is almost exclusively via revenue bonds at the consolidated operator level. 32
Table 36 Rail / Toll Roads Peer Group: Credit Analysis Credit Rating Peer Company Chicago Transit Authority Delaware River Port Authority Massachusetts Bay Transit Authority Metropolitan Transportation Authority Metropolitan Transportation Commission New Jersey Transit Corporation New Jersey Turnpike Authority New York Thruway Authority Pennsylvania Turnpike Commission Southeastern Pennsylvania Transportation Authority Port Authority Mean Median Total Debt $3,418 1,393 5,587 32,179 9,379 Leverage NM 11.6x 6.9x NM 19.9x Fitch NR NR NR A NR Moodys A1 A3 Aa1 A2 NR S&P AA A AAA A NR Interest Rate 5.9% 5.2% 5.1% 4.6% 3.8% % Floating -50.0% 5.2% 2.8% --
1,971 8,322 3,085 7,720 353
NM 17.3x 16.5x 19.4x NM
A+ A+ AA A+ AA
NR A1 NR Aa3 A1
NR A+ AA A+ A+
5.1% 5.7% 3.3% 4.5% 4.5%
-18.0% -17.4% 33.5%
19,524
10.1x 15.3x 16.9x
AA-
Aa2
AA-
4.9% 4.8% 4.8%
2.4% 12.7% 4.0%
Peer Group Analysis: Infrastructure Conglomerates

In addition to operators which focus on a specific type of infrastructure assets, Rothschild analyzed a selection of large publicly-traded infrastructure conglomerates which are more diverse in scope, similar to the Port Authority itself. Although the identified companies are exclusively European or Australian headquartered corporations, the operating activities are global in reach. Table 37 Infrastructure Conglomerates Peer Group Peer Company Description Abertis Infraestructuras Owns, operates and S.A. constructs toll roads, parking lots, logistics centers and transport centers. Abertis also owns interests in 29 airports 33
Financial Summary ($m) 2010 Revenue $957 Operating Costs 85 Net Profit 872 % margin 91%
2011 $1,359 99 1,261 93%
Actividades de Construccion y Servicios, S.A. (ACS)
Atlantia
Ecorodovias
Total assets: $17.2bn Owns, operates and constructs toll roads, railways, airports and port infrastructure Total assets: $62.3bn Owns, operates and constructs toll roads worldwide with predominant focus in Italy Total assets: $30.1bn Integrated operation of highway concessions and logistics assets in Brazil Total assets: $2.2bn Owns, operates and constructs toll roads, railways and buildings. Also provides engineering services Total assets: $33.1bn Owns, operates and constructs airports, toll roads, railways, parking lots, port infrastructure and buildings. Also provides engineering services Total assets: $29.8bn Operates the channel tunnel infrastructure and rail networks between France and the UK Total assets: $9.4bn Develops and operates toll roads, bridges and tunnels Total assets: $1.6bn Develops, operates and maintains toll roads in Australia Total assets: $10.4bn Owns, operates and 34
Eiffage S.A.
2010 Revenue $19,214 Operating Costs 17,294 Net Profit 1,920 % margin 10% 2010 Revenue $4,990 Operating Costs 1,948 Net Profit 3,042 % margin 61% 2010 Revenue $920 Operating Costs 402 Net Profit 518 % margin 56% 2010 Revenue $18,174 Operating Costs 15,736 Net Profit 2,438 % margin 13% 2010 $12,606 10,934 1,672 13%
2011 $36,989 33,977 3,011 8% 2011 $5,166 2,067 3,099 60% 2011 $1,065 508 557 52% 2011 $17,930 15,489 2,441 14% 2011 $9,693 8,629 1,064 11%
Ferrovial, S.A.
Groupe Eurotunnel, S.A.
Revenue Operating Costs Net Profit % margin Revenue Operating Costs Net Profit % margin Revenue Operating Costs Net Profit % margin
Macquarie Atlas Roads Group
Transurban Group
Vinci S.A.
2010 $988 537 451 46% 2010 $103 70 33 32% 2010 $817 290 527 65% 2010
2011 $1,110 586 524 47% 2011 $92 176 (84) NM 2011 $1,037 433 604 58% 2011
constructs toll roads, railways, airports, buildings and parking lots Total assets: $78.7bn
Revenue $45,595 Operating Costs 38,893 Net Profit 6,703 % margin 15%
$48,907 42,066 6,841 14%
From a capital structure benchmarking perspective, the infrastructure conglomerate peer group exhibits certain notable differences versus the single category operators analyzed previously. Leverage metrics generally fall in between the range created by the lower leverage ports and the higher leverage airports / rail / toll roads. This result is consistent with the operations of the conglomerates which include each of the different infrastructure asset categories. Cost of financing for the group registers a mean / median level of 6.5% / 5.8% which most closely approximates the interest cost of the Ports category. Apart from these similarities, the capital structure trends of the Conglomerates peer group diverge with respect to frequency of floating rate debt (mean metric of 48%) and the usage of asset-specific financing structures rather than consolidated holdco financing. Additionally relevant is the lack of a municipal bond market in the applicable jurisdictions which constrain financing options for the Infrastructure Conglomerates. Table 38 Infrastructure Conglomerates Peer Group: Credit Analysis Credit Rating Total Leverag Peer Company Debt e Fitch Moodys Abertis Infraestructuras $14,283 11.3x ANR ACS 21,430 7.1x NR NR Atlantia 13,585 4.4x ABaa1 Ecorodovias 899 1.6x NR NR Eiffage 17,441 7.1x NR Baa3 Ferrovial 10,276 9.7x BBBBBBGroupe Eurotunnel 5,030 9.6x NR Baa2 Macquarie Atlas Roads 1,765 NM NR NR Group Transurban Group 5,862 9.7x ABaa1 Vinci S.A. 26,399 3.9x BBB+ Baa1 Port Authority 19,524 10.1x AAAa2 Mean 7.2x Median 7.1x
S&P BBB NR BBB+ AA+ BBBNR NR NR ABBB+ AA-
Interes t Rate 4.7% 7.4% 5.1% 11.2% 5.0% 6.9% 5.8% 5.8% 8.6% 4.2% 4.9% 6.5% 5.8%
% Floating 13.4% NA 14.4% 100.0% NA 37.7% 35.4% 85.8% 61.3% 33.0% 2.4% 47.6% 36.6%
Peer Group Assessment

Comparison analysis of the identified peer group versus current and projected metrics of the Port Authority places the Port Authority moderately less leveraged than the Airport peer group and moderately higher debt than the Infrastructure Conglomerates. This comparison extends to cost of debt where the analysis indicates the Port Authority enjoys a comparable cost of debt to that of the Airport group and lower cost than both the Ports peer group and the Infrastructure Conglomerates. Based on
35
2011 reported financial results, the Port Authoritys overall cost of debt was approximately 4.85% versus the mean/median rates of the peer group of 5.7% / 5.1%. Figure 9 Leverage Metric Analysis: Peer Group vs. Port Authority
Source: Public filings; Port Authority Note: Port Authority Current metric based on 2011 reported financials. Projected Peak represents the maximum leverage level during the Long Range Forecast.
36
Figure 10 Cost of Debt Analysis: Peer Group vs. Port Authority
Source: Public filings; Port Authority Note: Port Authority Cost of Debt metric based on weighted average interest cost of debt outstanding as of December 31, 2011
Credit Rating Considerations

The Port Authority has enjoyed a stable credit rating history with current ratings in the upper tier of investment grade. In providing their rating outlooks, the credit rating agencies delineate possible factors for a ratings change; recent commentary is provided below. In terms of downgrade action, the agencies highlight risk related to (i) revenue underperforming expectations, (ii) worsening of leverage and/or debt coverage ratios and (iii) ongoing development of the World Trade Center site and potential for cost overruns. Table 39 Credit Rating Agency Guidance Rating Agency Outlook Commentary Fitch What could trigger a rating action: Current rating: AA Weaker financial margins due to slow revenue growth and/or higher Outlook: Stable rates of growth in operating expenses Additional leveraging beyond the current plan to debt finance approximately 40%-50% of capital expenditures over the next 10 years not supported by commensurate revenue increases to maintain DSCRs at or above 1.8-2.0x 37
Moodys Current rating: Aa2 Outlook Negative
Standard & Poors Current rating: AAOutlook: Stable
Actions by either the State of New York or New Jersey to limit the authoritys ability to raise tolls to cover growing debt service obligations What could change the rating UP Accelerated growth in the regional economy that results in significantly higher facility utilization and revenues, as well as the continued implementation of rate adjustments as planned to ensure self-sufficient operations for component enterprises, DSCRs consistently well above 2.0 times; continued successful delivery of WTC site components on schedule and within current budget and more clarity regarding the not yet adopted 10-year CIP could stabilize the rating outlook and exert positive credit pressure What could change the rating DOWN A significant increase in debt without a commensurate increase in revenues that results in DSCRs of less than 1.75 times on a bond ordinance basis or less than 1.4 times on a net revenue basis; debt to operating revenues above 5 times, or reduced liquidity below historic levels could place downward pressure on the rating. A protracted downturn of the regional economy, or the assumption of greater financial responsibility for non revenue-producing projects including significant cost escalations in the development of the WTC site, also could negatively pressure the rating. The stable outlook reflects our view of the strong regional essentiality of the authoritys facilities and managements ability to adjust revenues, expenses, and capital spending accordingly to protect sound financial operations. We could lower the ratings if PANYNJs liquidity and financial margins erode considerably. We do not expect to raise the ratings during the next two years due to the authoritys significant additional debt needs.
Source: Fitch Ratings credit report (June 8, 2012); Moodys credit report (June 11, 2012) and Standard and Poors credit report (June 12, 2012)
Although the potential impact to cost of capital of a credit downgrade is inherently speculative, the current forward yield curve for transportation revenue bonds of differing ratings provides a market perspective. Based on similar maturities, the spread between the yield of AA- revenue bonds (which corresponds to the Port Authoritys current credit rating) and the yield of A- revenue bonds (2 credit rating notches down) is at its maximum at 25 year term with a variance of 0.66% (4.25% yield versus 4.91%). Overall, the yield is 0.39% higher for the lower rated securities as illustrated in Figure 12. As observed above, recent Port Authority debt issuances have outperformed these sector metrics, both based on yield at issuance and current market trading levels. As a result, the indexed yield cost of A+ and A- transportation revenue bonds may exceed a similarly rated Port Authority issuance.
38
Figure 11 Forward Curve of Transportation Revenue Bonds: Impact of Credit Rating

6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
-3 month 6 month 1 year 2 year 3 year 4 year 5 year 7 year 9 year 10 year 12 year 14 year 15 year 17 year 19 year 20 year 25 year 30 year Transportation A-
Transportation AA-
Transportation A+
Source: Bloomberg
39
Public Private Partnership Considerations

In recent years as municipal and state organizations have faced challenging budgets, PPPs have been widely evaluated and implemented. Primary sectors of PPP activity include healthcare facilities, transit facilities, roads, waste management facilities, correctional facilities and social housing. PPP activity is difficult to measure given the variety of definitions employed across countries and sectors. Public Works Financing maintains a database of PPP projects with 377 PPP infrastructure projects funded in the United States between 1985 and 2011; 104 of which were transportation projects. The majority of transportation PPP projects (81%) were highways, bridges and tunnels with the balance predominantly rail related.4 Industry analysts often cite the stability of revenues as a primary consideration in determining the suitability of a PPP structure in transit infrastructure projects. Project development may involve independent traffic studies and demographic analysis to assess the revenue outline and develop baseline financial forecasts. Recent financial troubles for certain PPP projects have heightened the focus on revenue stability (see Table 40 below). Table 40 Distressed PPP Transit Projects PPP Project Date Dulles Greenway 1995
Indiana Toll Road Las Vegas Monorail South Bay Expressway
2006 2004 2003
Description Faced with traffic volumes below forecast, private debt was restructured in 1999 following successive changes to toll intended to boost usage Sold to Macquarie in 2005 Speculation of possible upcoming debt default Filed for bankruptcy in 2010 as ticket revenue fell short of debt service requirements Traffic revenues underperformed, leading to bankruptcy filing in 2010 Sold to consortium of San Diego area governments in 2011
The Port Authority itself has wide-ranging experience with PPP projects including the Terminal 4 redevelopment at JFK, the World Trade Center joint ventures with the Durst Organization and Westfield, the exploratory work currently underway with respect to a PPP for the Goethals Bridge replacement project and the RFI issued for the LaGuardia Airport Central Terminal modernization. As the Port Authority reviews its capital plan for possible PPP activity, a systematic approach with defined criteria for evaluation should be utilized. Suggested evaluative criteria include: (i) size of capital investment required, (ii) stability of revenues, (iii) level of financial, technical and/or operational risk, (iv) ability to support public goals of service quality and safety. Subject to these considerations, three major projects are identified as potentially suitable for a PPP structure either in whole or in part (e.g. parking facility at Newark Airport).
4
Brookings-Rockefeller Project on State and Metropolitan Innovation. Moving Forward on Public Private Partnerships: U.S. and International Experience with PPP Units. December 2011.
40
Table 41 Major Projects for PPP Consideration Project CTB Modernization (1) Goethals Bridge Modernization (1) Terminal A Redevelopment
Source: Port Authority (1) Currently under consideration for PPP structure
Asset LaGuardia Airport Goethals Bridge Newark Airport
Estimated Cost: 2012 - 2020 $1.1bn $282m $812m
Given the importance of revenue stability to the Port Authoritys current financing strategies, pursuing a PPP structure for specific projects may impact the theoretical debt issuance available under the Consolidated Bond program. Analytical evaluation of this financing consideration should be undertaken as a part of the PPP candidate screening effort. Following this selection, a competitive RFI / RFP process can be effective at creatively identifying feasible project structures within the economic framework of the proposed project. Successful PPP projects are able to distribute the financial and operational risk between the municipal authority and the PPP counterparty. For example, availability payment structures are increasingly utilized as an alternative to a long-term sale/lease. The availability payment reduces the operational risk of traffic volumes to the PPP counterparty while the municipal authority benefits by maintaining ownership of the project asset. Ultimately the decision to execute a PPP project is dependent on the balance of benefits and issues. Primary considerations are outlined below in Table 42 and generally vary based on the level of ownership / control transferred to the private counterparty. Table 42 Key Considerations for PPP Decisionmaking Benefits Issues Efficient delivery: private sector expertise and Cost of capital typically higher discipline improve project execution / cost Contractual limitations (e.g. interplay with Alleviate strained capital budgets ability to existing financing agreements) address immediate infrastructure needs amidst PPP structure / extent of risk transfer capital constraints Selection of private counterparty Manage construction risk / cost overruns Asset maintenance / quality of service available Share or transfer staffing cost
41
Conclusions
Rothschilds work as presented herein supports the following observations: Table 43 Observations and Conclusions The Port Authoritys financing strategy, principally through the Consolidated Bond structure, has effectively sourced capital at competitive cost Market data indicates Port Authority bonds have registered lower cost than comparable issuances based on a variety of benchmarks including similarly rated municipal debt and public market issuances from other transportation infrastructure operators YTD volumes are outpacing the prior year across the spectrum of bond categories Market yields have tightened as the overall yield curve has compressed Recent high profile bankruptcies have not dampened investor appetite The Port Authoritys forecasted credit metrics exceed the levels of the relatively unlevered port operators but rank below the high leverage of airline specific and rail/toll road operators The credit profile is estimated to be broadly in line with the diversified infrastructure conglomerates Long-Term Forecast estimates compliance with the Port Authoritys financial metric tests and credit rating targets. Following a number of high profile distress situations, revenue stability has gained emphasis in PPP analysis Segregating highly revenue stable projects for PPP consideration may limit the Port Authoritys ability to obtain financing under the existing bond program
Although subject to ebbs and flows consistent with the overall capital markets, the municipal bond market continues to exhibit demand for new issuances
Based on the Long Range Forecast, the Port Authority is projected to score credit metrics in line with the peer group
PPP structures may provide an attractive financing alternative but an evaluation needs to consider the potential impact on the Port Authoritys primary sources of financing
42
Tables
Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8 Table 9 Table 10 Table 11 Table 12 Table 13 Table 14 Table 15 Table 16 Table 17 Table 18 Table 19 Table 20 Table 21 Table 22 Table 23 Table 24 Table 25 Table 26 Table 27 Table 28 Table 29 Table 30 Table 31 Table 32 Table 33 Table 34 Table 35 Table 36 Table 37 Table 38 Table 39 Table 40 Table 41 Table 42 Table 43 Overview of Financial Tests.................................................................................................................... 2 Summary of Long Range Forecast........................................................................................................... 3 Summary of Capital Plan by Project Category ......................................................................................... 3 Description of Project Categorization ..................................................................................................... 4 Aviation Department Forecast................................................................................................................ 5 Aviation Department Capital Plan........................................................................................................... 5 Port Commerce Department Forecast .................................................................................................... 6 Port Commerce Department Capital Plan............................................................................................... 7 TB&T Department Forecast.................................................................................................................... 8 TB&T Department Capital Plan............................................................................................................... 8 PATH Department Forecast.................................................................................................................... 9 PATH Department Capital Plan............................................................................................................... 9 ITN Forecast......................................................................................................................................... 10 WTC Department Forecast................................................................................................................... 11 WTC Department Capital Plan.............................................................................................................. 11 Credit Rating Considerations................................................................................................................ 14 Overview of Financial Tests .................................................................................................................. 20 Forecasted General Reserve Fund Test................................................................................................. 20 Forecasted Consolidated Bond Net Revenues Test ............................................................................... 21 Forecasted VSO Net Revenues Test ...................................................................................................... 22 Forecasted Variable Rate Debt %.......................................................................................................... 22 Variable Rate Financing: Benefits and Considerations.......................................................................... 23 Overview of Credit Rating Agency Metrics............................................................................................ 24 Forecasted Debt Service Coverage ....................................................................................................... 24 Forecasted Total Obligations / Gross Revenues Ratio............................................................................ 25 Forecasted Coverage of Next 2 Years Debt Service ............................................................................... 25 Consolidated Bond Reserve Minimum.................................................................................................. 25 Implied Debt Capacity Based on Credit Tests ........................................................................................ 26 Selected Peer Group ............................................................................................................................ 27 Airport Peer Group............................................................................................................................... 28 Airport Peer Group: Credit Analysis ..................................................................................................... 29 Ports Peer Group ................................................................................................................................. 29 Ports Peer Group: Credit Analysis........................................................................................................ 31 Rail / Toll Roads Peer Group: Rail Operators ........................................................................................ 31 Rail / Toll Roads Peer Group: Toll Road / Bridge Operators .................................................................. 32 Rail / Toll Roads Peer Group: Credit Analysis........................................................................................ 33 Infrastructure Conglomerates Peer Group............................................................................................ 33 Infrastructure Conglomerates Peer Group: Credit Analysis................................................................... 35 Credit Rating Agency Guidance............................................................................................................. 37 Distressed PPP Transit Projects ............................................................................................................ 40 Major Projects for PPP Consideration................................................................................................... 41 Key Considerations for PPP Decisionmaking ......................................................................................... 41 Observations and Conclusions.............................................................................................................. 42
43
Figures
Figure 1 Figure 2 Figure 3 Figure 4 Figure 5 Figure 6 Figure 7 Figure 8 Figure 9 Figure 10 Figure 11 Consolidated Bonds Outstanding: 2000 2020.................................................................................... 13 Municipal Yields vs. Port Authority Cost of Debt: 2003 2011 ............................................................. 14 Comparison of Implied Yield Curve: Recent Consolidated Bond Issues vs. Liberty Bonds....................... 15 Municipal Bond Issuance: 1990 Current............................................................................................ 16 Municipal Bond Market: Net Inflow / (Outflow)................................................................................... 17 Municipal Bond Yield Curve: AA- Transportation Revenue Bonds......................................................... 18 Liquidity Forecast................................................................................................................................. 19 Municipal Bond Yields: 2000 to Present............................................................................................... 23 Leverage Metric Analysis: Peer Group vs. Port Authority...................................................................... 36 Cost of Debt Analysis: Peer Group vs. Port Authority ........................................................................... 37 Forward Curve of Transportation Revenue Bonds: Impact of Credit Rating........................................... 39
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XVI. IMPLEMENTATIONPLAN&NEXTSTEPS.........................................................99 XVII. APPENDIXA:KEYINITIATIVESIMPLEMENTATIONPLAN..................100 XVIII.APPENDIXB:PROCUREMENTBUYINGGROUPS(DEFINED)................105 XIX. APPENDIXC:PROCUREMENTDEPT.RECOMMENDATIONS...............107 XX.

XXI. APPENDIXE:REPORTQUALIFICATIONS&DISCLAIMER ....................117 .

4.0 $ (0.0) $ (0.0) $

4.6 $ (0.0) $ (0.0) $

4.3 $ (0.0) $ (0.1) $

3.4 0.4 0.3

2.7 0.4 0.7

2.7 0.5 1.2

2.1 0.4 1.6

1.9 0.5 2.1

2.0 0.5 2.6

3.9 $ (0.1) $ (0.1) $

3.4 $ (1.1) $ (1.2) $

3.3 $ (1.0) $ (2.2) $

2.4 $ (0.6) $ (2.8) $

1.3 $ (1.0) $ (3.8) $

1.8 $ (0.4) $ (4.2) $

3.5 2.0 (2.2)

4.0 $ (0.0) $ (0.0) $

2.9 $ (1.7) $ (1.7) $

2.9 $ (1.4) $ (3.1) $

2.4 $ (0.6) $ (3.7) $

1.0 $ (1.3) $ (5.0) $

0.8 $ (1.4) $ (6.4) $

0.7 $ (1.0) $ (7.4) $

2.3 0.8 (5.8)

Notes: 1) 2) IncludesonlythePFCfundedportionoftheproject Includesonlylandacquisition

$15.8 $23.0 $19.0 $6.1 $63.9 $0.0

$25.7 $101.0 $24.3 $13.8 $164.8 $0.0

Total Revenue Enhancem ent Initiatives

TB&T - Total Annual Vehicle Traffic (000's)

300,000 250,000 200,000

MTA Bridge & New York Thruway Tunnel Authority Authority

Bay Area Toll Authority

Delaware River Port Authority of PANJ (Bridge only)

Port Commerce - Total Annual TEU's (000's)

Rail Transit - Total Annual Passengers (000's)

243,517 210,849 163,259 76,600 10,109

200,000 100,000 PANYNJ

1,559.7 4,876.8 3,681.3 171.2 36.5 7.6 10,333.1

$ (1,160.2) $ (3,232.8) (2,036.5) (94.1) (71.0) (5.9) (6,600.6)

399.5 $ 1,644.0 1,644.8 77.1 (34.5) 1.7 3,732.5

368.5 629.0 419.2 48.5 16.4 0.1 1,481.7

(495.1) $ (1,283.5) (732.8) (129.0) (58.3) 14.5 (2,684.2)

272.9 989.5 1,331.2 (3.4) (76.5) 16.3 2,530.0

408.3 516.0 25.9 15.8 80.1 3.7 52.9 1,102.7 380.6

(347.6) (139.3) (56.2) (30.0) (49.5) (14.6) (94.6) (731.8) (614.6)

60.7 376.7 (30.3) (14.3) 30.6 (10.9) (41.7) 370.8 (234.0)

10.9 3.2 (0.2) 0.0 0.3 5.1 19.2 3,252.6

(388.5) (411.0) 4.1 (1.0) (190.8) (15.5) (141.9) (1,144.6) (6,181.1)

(316.9) (31.2) (26.5) (15.3) (159.8) (21.3) (183.6) (754.5) (3,162.5)

501.1 0.0 501.1 $ 17,706.0

(566.5) (12.5) (579.0) $ (12,325.8) $

(65.5) (12.4) (77.9) 5,380.1 $

2.3 2.3 4,878.5

(422.8) (29.6) (452.4)

(486.0) (42.0) (527.9)

CAGR'07 '11: 11.1%

$16.4 $14.5 $12.8 $13.1

Governor of New York

Governor of New Jersey

Board of Commissioners Chairman Vice Chairman

Key Operating Principles