east busway project presentation

8/12/2019 East Busway Project Presentation

1/46

The Martin Luther King Jr.East Busway

A Cost-Benefit Analysis


2/46

Overview

Pre-1978 History

Port Authoritys CBA (1978)

Revising Port Authoritys CBA

Actual Results


3/46

History of the East Busway

The busway was part of theEarly Action Plan (EAP)

EAP consisted of 3 otherprojects

EAP was largest transit projectin Pennsylvania ever

Construction was to begin in1971


4/46


5/46

Delay of the East Busway

Lawsuit delayed the project 6 years until1978

Factors that increased project costs:Oil crises

Spiraling inflation

Right of way dispute with railroads

Construction was completed in 1983


6/46

Port Authoritys 78 CBA

Capital Costs

Operating Costs

Benefits

Benefit Cost Ratio


7/46

Capital cost estimates grew

during the delay

15

3440

78

110

9

21

33

68

110

0

20

40

60

80

100

120

70 71 72 73 74 75 76 77 78

Year

Cost(Million

s)

1978 Dollars Nominal Dollars


8/46

Port Authoritys Capital Costs

Project Costs

Original Project $20,000,000

Cost of Delay (from inflation) $20,000,000

Additional Cost of Property Over Estimate $6,800,000

Costs for Adjustments to Conrail

Cost to Accommodate Conrail $36,900,000

Vertical Separation $6,000,000

Improvement CostsNeville Ramp Addition $10,600,000

East Liberty Station Improvements $3,200,000

Additional Changes $6,500,000

Capital Costs Total $110,000,000


9/46

Port Authoritys Operating Costs

Per Year

Maintenance Costs $700,000

Total Operating Costs $700,000


10/46

Port Authoritys Financing Costs

Per Year

Busway cost: $110M at 5.6% for 30

years

$6,160,000

Total Costs $6,160,000


11/46

Benefits promised during the delay

Quantified Benefits: $82.4M time savings for current passengers $29.4M savings for new passengers (time and auto costs) $21.8M in time savings for drivers from reduced congestion $11M in additional property tax revenue

At the peak construction level, 670 workers will be employed on the PATways. Theirearnings will total $13 million.

Non-quantified benefits: provide benefits to job opportunities, urban renewal and economic development have been

calculated in the hundredes of millions of dollars unquantifiable quality of life benefits" "intangible benefits of new mobility will not be measurable in dollars and cents"

improve mobility in decaying neighborhoods, raising property values and inspiring renewal. inspire new construction of all kinds --- commercial, residential, and industrial. provide "new suburban employment, medical, and recreational opportunities to ghetto

residents. enhance environmental quality, pollution reduced due to fewer cars on the road


12/46

Port Authoritys Benefits

Project Benefits

Operating Time Savings $ 819,000

(97 hours per day @ $28 per hour) (=29,100 hours/year)

Riders Time Savings $7,770,000

(10 minutes per round trip for 54,000 daily riders)

(8633 hours per day @ $3 per hour) (=300 days/year)

Sub-Total $8,589,000

Less Annual Maintenance Cost $ 700,000

Total Net Benefits $7,889,000


13/46

The Rise and Fall of 82 Ridership

ProjectionsProjected Ridership

46

60

74

9080

0

20

40

60

80100

1973 1975 1976 1978 1982

Thousands

ProjectedRidership


14/46

Port Authoritys CBA


15/46

Whats missing from Port

Authoritys analysis?

Missing benefits

No loan principal No NPV

No discount rate

The benefit-cost ratiomay be inflated


16/46

Port Authoritys Benefit Problems

78 analysis indicates many potential benefitswithout any attempt at measurement: Vehicle Emissions

Safety 78 analysis points to future benefits ($10

million/yr) for future riders without analyzingassociated costs:

Service ExpansionUnidentified Improvements

Previously mentioned benefits gone!


17/46

Port Authority inflated BC ratio

using annualized costs Their BC ratio = 1.28

Used annualized values basedon a representative year

This hides the fact that benefitsdo not start until five yearsafter costs.

Total: BC Ratio = 1.06

Result: BC Ratio = 1.25

Year Time Total Cost Total Benefit Ratios

1978 0 -6,160,000 0

1979 1 -6,160,000 0

1980 2 -6,160,000 0

1981 3 -6,160,000 0

1982 4 -6,160,000 0

1983 5 -6,860,000 8,589,000 1.25

1984 6 -6,860,000 8,589,000

1985 7 -6,860,000 8,589,000

Total -202,300,000 214,725,000 1.06


18/46

Their Way

Time Savings 7,770,000

Operating Savings 819,000

Maintenance Cost -700,000

Annualized Benefits 7,889,000

Finance Cost -6,160,000

Annualized Costs -6,160,000

Annualized BC Ratio 1.28


19/46

Our Way

Time Savings 7,770,000

Operating Savings 819,000

Annualized Benefits 8,589,000

Finance Cost -6,160,000

Maintenance Cost -700,000

Annualized Costs -6,860,000

Annualized BC Ratio 1.25


20/46

Adding the loan principal makes a

difference

No principal payments:

NPV = 12,425,000

With principal payments:

NPV = -32,346,343

Assumes 0% discount rate over 30 years. Thus NPV = net benefits


21/46

Estimating a discount rate for 1978

Nominal yields on corporate AAA bonds 8%

Nominal T-bill rates 7.57%

Inflation 7.6% Corporate tax est.40%

Individual tax est. 20%


22/46

Reasonable social or

institutional nominal discountrates range from 7.5% to 13%

rz= Marginal Rate of Return on Private InvestmentAAA Corporate Bond Yields 8.00%

Average corporate investment taxes 40%

After tax nominal rate (bond yield/1-tax rate) 13.33%

pz= Marginal Social Rate of Time Preference

T-bill Rate of Return 7.57%Average personal investment taxes 20%

After tax nominal rate (T-bill rate/1-tax rate) 9.46%


23/46

Discounting actually

improves NPV

Rate NPV

Undiscounted 0% -32,346,344Untaxed Rz 7.57% -31,284,651

Aftertax Rz 8.00% -31,141,424

Untaxed Pz 9.46% -30,635,167

Aftertax Pz 13.33% -29,230,007


24/46

Discounting improves NPV because it reduces the presentvalue of heavy loan payments during first few years

T

e

Benefits 1/(1+r)^t

scoun e a

13.33%

0 -7,652,378 1.00 -7,652,378

1 -7,652,378

0.88 -6,752,297

2 -7,652,378 0.78 -5,958,084

3 -7,652,378 0.69 -5,257,288

4 -7,652,378 0.61 -4,638,920

5 236,622 0.53 126,570

6 236,622 0.47 111,683

7 236,622 0.42 98,5468 236,622 0.37 86,955

Textbook problems usually assume costs occur at T=0, but if costs happen

later, they get discounted too.


25/46

Additional problems with Port

Authoritys analysis Funding too aggregated

Economic impact of taxes ignored

Time savings understated

Option value ignored

Accounting for futureinflation ignored

No recognition of uncertainty


26/46

Funding was more complicated

than a single bond issue

$88M federal grants

$11M in statecontributions

$11M local funding

10%

10%

80%

Federal

State

Local


27/46

How were funds raised?

Locally, Port Authority intended sell bonds

(30 years, @5.6% payment=$765K)

Likely serviced debt with county propertytaxes

State funding: 50% income and 50% sales

taxes Federal funding: income taxes


28/46

When were the funds raised?

State and federal fundingto be appropriated eachyear over the construction

project (4-5yrs)

Local funding servicedover 30 years

Distribution of Funding

18%

21% 22% 21%

18%

0%

5%

10%

15%

20%

25%

Y1 Y2 Y3 Y4 Y5

Construction Year


29/46

How much did they cost to raise?

Amount Rate METB

Local property taxes 22,957,134 17.0% 3,902,713

State income taxes 5,500,000 25.0% 1,375,000

State sales taxes 5,500,000 43.5% 2,392,500

Federal income taxes 88,000,000 43.5% 38,280,000

Total 45,950,213


30/46

With METB and more realistic fundingassumptions NPV gets worse, except for

undiscounted case

Rate NPV

Undiscounted 0% -32,346,344

Untaxed Rz 7.57% -31,284,651

Aftertax Rz 8.00% -31,141,424

Untaxed Pz 9.46% -30,635,167

Aftertax Pz 13.33% -29,230,007

Rate NPV

Undiscounted 0% 29,317,653

Untaxed Rz 7.57% -68,520,605

Aftertax Rz 8.00% -70,579,163

Untaxed Pz 9.46% -76,261,658

Aftertax Pz 13.33% -84,552,731

Previous Assumptions With realistic funding and METB


31/46


32/46

Port Authoritys benefits could have

been higherProject Benefits


(97 hours per day @ $28.00 / hour) (29,100 hours/year)


18.5 minutesper round trip for 34,300daily riders

10,617hours per day @ $3 per hour, 256days/year


Option Value

(Assumes Bus Commuters to Car Commuters 1:1)

(6 trips per driver a year @ $0.57/trip) $ 184,700

Total Measurable Benefits $9,103,700


33/46

Port Authoritys Benefits

Project Benefits


(97 hours per day @ $28 per hour) (29,100 hours/year)


10 minutesper round trip for 54,000 daily riders

8633hours per day @ $3 per hour 300days/year


Less Annual Maintenance Cost $ 700,000

Total Net Benefits $7,889,000


34/46

New benefits improve NPV, but not

much

Rate NPV


Untaxed Rz 7.57% -68,520,605

Aftertax Rz 8.00% -70,579,163

Untaxed Pz 9.46% -76,261,658

Aftertax Pz 13.33% -84,552,731

Rate NPV


Untaxed Rz 7.57% -64,261,841

Aftertax Rz 8.00% -66,540,683

Untaxed Pz 9.46% -72,867,239

Aftertax Pz 13.33% -82,314,537


35/46

Inflation/Uncertainty

-64 -82M NPV?

Why bother!


36/46


37/46

Actual results: the good news

Capital costs were less than 110M

75 to 101M in 78 dollars

Maintenance cost 200K rather than 700K

People reported saving time by riding thebusway


38/46


39/46

Thus ridership benefits were

overstated by about 3.6M a yearAssuming Port Authoritys assumptions

about time savings were true except for

ridership, having 30,000/week rather than54,000 per week cuts time savings in half!


40/46

Adding Insult to Injury

In 1978 Moodys downgraded the countysrating from A-1 to BAA-1.

Standard & Poors did not follow suit, butbankers (unsurprisingly) insisted on the highercoupon rate.

Pitt. Press reported a sale of $31M in countybonds at the rate of 6.47% (not 5.6%). A portionwas to go to the East Busway.


41/46

Conclusions

Promises change when you ask for money

Port Authority CBA wholly inadequate

Even w/ other benefits, hard to say thebusway was worth it

In 78 inertia won again

Still going however


42/46


43/46

Look at these great benefits!

The extension will attract newcustomers to the system

13,000 riders (4,000 new)

Environmental benefits

Decreases travel times

Eases traffic congestion

Adds a decorative greenspace along most of theBusway corridor

Construction is

rehabilitating desolate anddeserted areas.

Provides, at no cost tocommunity residents, variousneighborhood enhancements,such as the rehabilitation of thehistoric Edgewood TrainStationamong many otherimprovements.

Cost:$62M


44/46

Thank You!


45/46


46/46

Capital cost results: looks to be under '78

budget, but nobody ever bragged about it

9

21

33

68

110115

156

15

3440

78

110

75

101

0

20

40

60

80

100

120

140

160

180

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87

Year

Cost(Millions)

Nominal Dollars 1978 Dollars

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