2Restructure the Port Authority to function as a regional infrastructure bank

The Port Authority is a classic conglomerate. The primary advantage of such a structure is to allow profitable assets, such as the airports and Hudson River crossings, to cross-subsidize important, but money-losing, operations such as PATH and the Port Authority Bus Terminal. The structure also allows the Port Authority to plan, operate, and coordinate key elements of its transportation infrastructure. 

Unfortunately, there are also significant disadvantages. Senior management, for example, with so much under its purview, is unable to undertake the kind of in-depth strategic planning that each asset requires. The Port Authority’s current structure shields many underperforming assets from scrutiny. Rather than incentivizing creativity and bold actions, the multiple management layers of the Port Authority result in indecisiveness and inaction. The structure of the Port Authority as a two-state organization also makes it susceptible to abuse and political interference.

As a result, many capital projects become too expensive and are delayed, disruptions rise, debt increases, and crucial maintenance and repairs are deferred. The Port Authority is unable to meet the growing infrastructure needs of the region at a time when our aging infrastructure requires modernization and new capacity for regional growth.

The Port Authority faces many challenges, including:

• Political interference: Overt political interference and scandal in recent years have undermined the organization. The authority’s current structure depends on the governors of New York and New Jersey to serve as the key points of political accountability and serve the public interest. They have the power to appoint commissioners and veto board actions. Gubernatorial authority and accountability, however, cannot excuse overt political interference and diversion of Port Authority resources to serve narrow political ends. A governance structure intended to safeguard the interests of both states has instead produced internal division and a lack of managerial accountability. The governors and legislatures of New York and New Jersey should agree on a series of transformational reforms that minimize the potential for political interference through greater transparency and accountability in decision-making and gubernatorial involvement.
• Financial capacity: The combination of  the extraordinary cost of rebuilding Lower Manhattan after 9/11, and a growing list of projects that user fees will not be able to cover has turned the Port Authority into an unwieldy conglomerate of disparate entities and weakened its once-strong financial position. Major investments critical to long-term success of the region—including the Gateway project, increased capacity at JFK and Newark airports, a renovated bus terminal, and increased PATH capacity—are unlikely to be completed because the authority’s cash flow and projections cannot sustain the anticipated debt service. To address the situation, the Port Authority will require new revenue sources, such as value capture, to supplement its user fees.
• Cross-subsidization: The practice of cross-subsidization between the authority’s different business units without sufficient transparency has, over time, masked inefficiencies and inhibited much-needed  investments. These inefficiencies in operations, including public security, seaports, and mass transit, have survived because the enormous profits generated by the airports and Hudson River crossings could be used to cover ongoing deficits. While transit operations will always require subsidies, the current structure has allowed costs to grow unchecked and thereby stymied innovation, such as contracting for services or merging with other public entities that could achieve economies of scale. The Port Authority should be restructured to act like an infrastructure bank, providing financing to critical initiatives, while also allowing innovative management and operations to flourish within its operating divisions.

Delivering services more efficiently and investing in the next generation of infrastructure projects will require fundamental structural change to how the Port Authority is organized and governed. 

There needs to be more separation between operating the system and financing long-term capital improvements. The Port Authority’s line agencies would benefit from a clearer mandate to provide the best possible service, with long-term investments planned, financed, and delivered by separate entities. Planning and investing in large capital projects, such as new tunnels or airport runways, requires a different set of competencies and authority than maintaining good day-to-day service and efficient operations. Large capital projects have economic, fiscal, and environmental impacts that extend well beyond the users of a particular facility and require a different set of political, planning, and financial expertise to execute.

Operating agencies need greater financial and performance accountability. The Port Authority’s consolidated bond structure obscures how businesses are cross-subsidized and reduces incentives for efficient service delivery and capital construction. The different business units at the Port Authority, which are the by-product of a century of growth rather than any strategic plan, should be organized into distinct corporate entities with facilities that have tight operating synergies. These entities need to have clear fiscal responsibility to deliver the best service at the lowest cost, including incentive structures to drive innovation and efficiency, and be held accountable for their performance. These separate units should have expert-led governing boards that regularly hold open meetings and are required to report periodically to the public and elected officials on their operations, finances, and plans. This would allow both affected stakeholders and the media greater access to information and decision-making surrounding each of those operations.

Allowing private investors to have a stake in operations, and potentially capital investments, would help balance political decision-making with financial objectives. There may be good reasons for the Port Authority’s business operations to make investments that will never yield a positive return. But these decisions must be weighed against the needs of the rest of the system, with a clear analysis of the full costs and benefits. The Port Authority has succeeded in recent years in delivering critical infrastructure projects through public-private partnerships, such as the Goethals Bridge and a future LaGuardia Airport. Leveraging the private sector through the use of well-structured partnerships could encourage innovation, discipline, and risk-transfer in the delivery of the agency’s capital projects, as well as management of the agency’s assets. This approach could be expanded to other business units. Having public-private partnerships manage some of the Port’s assets, such as the PATH or seaport, would introduce financial incentives to decision-making to balance against other goals. There are different ways of structuring private-sector partnerships that should be carefully explored. While each operating entity may require a different approach to achieve the greatest efficiency, these reforms could be achieved without violating existing bond covenants or changing the entity’s governing legislation.

Enact and implement reform recommendations

The Port Authority would be run by a chief executive, with a clearly defined role, who ultimately answers to the Board of Commissioners. New York and New Jersey governments must concur on a series of transformational reforms that minimize the potential for political interference through greater transparency concerning Port Authority decision-making, public and legal accountability, and gubernatorial oversight for their own actions relative to the Port Authority.

Much of the groundwork for essential reform has already been laid by the Special Panel on the Future of the Port Authority, which issued recommendations in 2014. Among other internal reforms, the Special Panel proposed creating a single CEO position, hired and directed by the Board of Commissioners, replacing the current chair and vice chair with two co-chairs (recommended to the board by the governors of each state), and establishing an Office of the Chair comprising the co-chairs and CEO to function as the senior operating committee of the Authority. The Special Panel’s proposals would better maintain the political independence of the Authority’s executives and afford them greater autonomy from undue political influence. The Authority’s professional managers should be empowered—and also be held accountable—to deliver projects and provide services to the best of their abilities.

Lawmakers in each state have also proposed additional reforms to improve transparency and accountability to the public. Even as the CEO and managers are afforded more autonomy in making decisions, they should also be held accountable through clear, uniform legal obligations to provide detailed information to the public, provide protections to whistleblowers, and be subjected to uniform judicial review in the courts of either state. 

The governors and legislators of New York and New Jersey should convene to reconcile these reforms and develop and pass identical comprehensive reform legislation to guide the governance of the Authority. These reforms should be enacted into law so they are long lasting, judicially enforceable, and cannot be discarded or disregarded by gubernatorial or board fiat. These steps will be necessary to re-balance the Port Authority and properly shield it from inappropriate political pressure.

Allow the Port Authority to capture more of the value it creates

As outlined in other sections of this plan, the Port Authority will be required to finance major public capital investments over the next generation, including a new commuter rail tunnel under the Hudson River, runways at JFK and Newark airports, and a new bus terminal in New York City. The Port Authority may also be asked to assume financial, design, and/or operational responsibilities for coastal resiliency measures needed to protect authority assets and the entire port region from rising sea levels and more severe storms. Even if the Port Authority succeeds in generating more efficiencies from current operations, such as the PATH system and bus terminal, it cannot finance these investments from the profits generated by the Hudson River crossings and airports. 

The investments that are made will generate enormous growth and productivity that can be used to acquire additional funding. Consideration should be given to capturing some of the real estate value created by the PATH system and Gateway tunnel; charging motorists to access the airports; or redeveloping and monetizing underutilized real estate assets. The World Trade Center and certain other Port Authority real estate holdings are not core to its mission as builder and manager of transportation facilities, but they do represent valuable sources of long-term revenue. The Port Authority should determine how to redeploy its real estate holdings in a way that maximizes their long-term value, and therefore the entity’s financing capacity, while minimizing the effort to manage them. This could involve engaging in joint ventures, handing off assets to real estate investment trusts, or divesting them through an IPO.

Create independent corporate entities for operating and maintaining the Port Authority’s assets

The Port Authority should change the relationship between its central functions and operating assets. These should be reconstituted as independently managed units with management devolved down to the asset level, reporting on both the operational and financial performance in a clear and transparent way. 

By doing so, the Port Authority would create separate corporate entities that receive a long-term franchise to operate each division of the authority’s assets—airports, ports, bus terminal, and PATH—in return for a first call on revenues sufficient to pay off the related debt. These operating entities could then be organized in ways that would best serve each entity. For example, the container ports subsidiary could be operated by a for-profit entity; airports could remain quasi-independent public agencies; the PATH train franchise (which would include an ongoing subsidy rather than a payment obligation) could be operated by New Jersey Transit, the MTA, or a private transit operator.

Contracts between the Port Authority and the operating entities would specify performance standards and the flow of funds between them. The Port Authority would establish how much each subsidiary would contribute toward the Port Authority’s existing consolidated bond debt service and how much Port Authority cross-subsidy (from landing fees, bridge and tunnel tolls, and real estate revenue) should underwrite critical services that need it (PATH and bus terminal operations). The operating entities would determine fares and fees to meet contract provisions, but the Port Authority could establish and enforce levels of service, asset conditions, labor standards, and other public interest conditions. Beyond these bond requirements and cross-subsidy agreements, the operating assets would have incentives to provide services at a competitive cost. They would control operating revenues and determine how to spend them, creating incentives for the operating assets to provide high-quality, cost-effective service.

Create a regional infrastructure bank

Under the structure proposed above, the management relationship between the Port Authority and its operating assets would be diminished and the financial relationship between the agency and these assets would change. In effect, the Port Authority would function as a regional infrastructure bank, collecting certain revenues from the operating units, paying consolidated debt service, and distributing surplus revenues back to the operating units or investing in new bi-state infrastructure. 

Operating entities could apply for financing, and the board and management would evaluate requests based on financial and service criteria, as well as other public interests, including community, health, economic, and environmental impacts. The bank could also initiate planning for large projects, and establish single-purpose entities to design and build them, as it has done for the Gateway project. 

Designating independent operating entities and converting the Port Authority into an infrastructure bank would have two primary outcomes. By creating greater transparency and independence in making capital allocation decisions, the proposal would create incentives for more efficient, customer-focused service for each of its operating subsidiaries. It would also help ensure the most important and cost-effective projects are prioritized. Both of these outcomes should increase public confidence in the authority, thus making it easier to attract public and private capital.

Restructuring the Port Authority would require significant legal and administrative expenses to negotiate financial structures that allocate revenues fairly while maintaining bond ratings, complying with bond covenants, providing operational incentives, and winning political approval for a governance structure that provides greater independence. But over time, the cost of delivering operations and capital projects would decrease due to the more efficient and effective structure.