Vol. 25, No. 4 rev
For the transportation community, anxious about the uncertain future of the surface transportation program, recent events offered little reassurance. The President’s proposal for a four-year $302 billion transportation reauthorization, part of the administration’s FY 2015 Budget, met with a skeptical reception on Capitol Hill. “This budget isn’t a serious document; it’s a campaign brochure,” House Budget Committee Chairman Paul Ryan (R-WI) said dismissively. “Perhaps the most irresponsible budget yet,” commented House Speaker John Boehner (R-OH). The lawmakers’ negative reaction was no doubt amplified by the fact that the President’s budget ignored the spending levels painfully negotiated by Sen. Patty Murray (D-WA) and Rep.Ryan just last December. The Administration’s proposal exceeds the bipartisan budget agreement by $56 billion.
Nor has the criticism been confined to House Republicans. The President’s proposal, to fund half of the $302 billion reauthorization with “transition revenue generated from business tax reform,” met with an equally skeptical reaction from the transportation community. “Proposing to pay for infrastructure with short-term, highly-speculative gains from a tax reform bill that may or may not happen this year does nothing to restore the long-term fiscal integrity of the Highway Trust Fund” one transportation industry lobbyist observed. “The President’s proposal… falls short of what is required because it does not provide a sustainable funding solution for the nation’s transportation problems,” said a statement by AAA..” “…It provides no real funding solutions for the long-term health of our infrastructure,” echoed ATA President Bill Graves.
An equally problematic solution is Rep. David Camp (R-MI) proposal for a comprehensive tax overhaul that would provide a one-time $126.5 billion infusion into the Highway Trust Fund over a period of eight years. While Camp’s proposal received a respectful bipartisan reception, both parties agree it should be viewed as a basis for further discussion rather than as a legislative initiative ripe for action during this session of Congress.
Searching for Funds
A six-year transportation bill—which transportation stakeholders at a recent House hearing contended, is essential to plan for and implement large-scale multi-year projects—would require roughly $324 billion (an average of $54 billion/year) to maintain current (FY 2014) spending levels. Trust Fund revenue and interest over the same period are projected to bring in only $234 billion according to the latest (February 2014) Congressional Budget Office estimate.This would leave a staggering funding gap of $90 billion. Whether such a huge shortfall is fundable in this tax-averse, deficit conscious Congress so far remains unanswered.
“The hunt has been under way for the last year and a half to find a funding mechanism to fund our infrastructure needs,” House Speaker John Boehner (R-OH) told reporters on February 27. “I wish I could report to you that we’ve found it, but we haven’t.” Nor has the Senate Finance Committee been any more successful in finding a sustainable funding source. The reauthorization proposal which Senate EPW Chairman Barbara Boxer (D-CA) hopes to unveil in April will lack the crucial finance chapter.
The most straightforward solution —- increasing and indexing the federal gas tax— recently resuscitated by Rep. Earl Blumenauer (D-OR) and endorsed by the U.S. Chamber of Commerce, remains anathema in Congress even among fellow Democrats — and for a good reason: a Gallup poll in April 2013 found two-thirds of Americans opposed to a gas tax hike even if it went toward infrastructure improvements. “I’m going to be very honest with you, I don’t see support for raising the gas tax,” said Sen. Boxer at a February 26 AASHTO legislative briefing. Nor has the White House changed its negative stance on this matter Even progressives are ambivalent because of the gas tax hike’s regressive nature.
Another solution —using general funds to supplement Highway Trust Fund revenue —has been severely limited if not totally ruled out by the bipartisan budget agreement which requires any General Fund transfers into the Highway Trust Fund to be fully offset during the year in which the transfer occurs.
States are taking matters into their own hands
Fortunately, the need for increased federal assistance is lessening as states and local governments assume a larger role in funding transportation. Having concluded that they no longer can count on a stable and growing stream of federal revenue, states and local jurisdictions are taking matters into their own hands.
As Sen. Roger Wicker (R-MS) noted at the Senate EPW Committee hearing, “states are becoming laboratories for fiscal experimentation.” Former governor Ed Rendell. co-chairman of the infrastructure coalition Building America’s Future, concurred. “When it comes to taking action on our long-term infrastructure needs,” he said, “we know we can count on Governors.” And indeed, a growing number of Governors and state legislatures are making transportation funding their priority.
Our survey of “Can-Do” states documented significant revenue initiatives in 25 states during 2013 (see Appendix A). Some states have raised their gasoline taxes ( MD, WY, MA, VT). Others have shifted to a tax on fuel at wholesale level (e.g. PA). Still others have enacted dedicasted sales taxes for transportation (e.g. AK, VA) or floated toll revenue bonds (e.g. OH).
As 2014 legislative sessions get underway, it looks like it will be another big year for transportation funding measures, reports the National Conference of State Legislatures (NCSL). So far, six states have introduced bills to raise state gas taxes or index them to inflation, They include Idaho, Iowa, New Hampshire, New Mexico, South Carolina and Utah. Transportation funding also is being debated in the states of Washington, Minnesota, Massachusetts and Michigan.
Further evidence of local willingness to assume greater fiscal responsibility for transportation came on election day in 2013 when voters approved over 70 percent of ballot measures to increase or extend funding for surface transportation. These included four bond initiatives and 12 measures to increase, extend or renew transportation sales taxes. In California, 80 percent of the state’s population already lives in counties that tax themselves to support local transportation.
A senior state transportation official commenting on our survey of funding initiatives observed, “What you are seeing is the governors’ and state legislatures’ realistic assessment and pragmatic response to the fiscal realities in Washington”. He added, “we all realize the era of free flowing federal dollars is over …its up to us to find a new way.”
He could have added that those “fiscal realities in Washington” also have achieved de facto what various attempts over the years failed to accomplish legislatively: i.e.an enhanced state role in transportation —and a correspondingly diminished federal role.
Long-term financing is replacing “pay-as-you-go” funding
Helping states to become fiscally more independent is their growing embrace of long-term financing and easier access to private capital through public-private partnerships.
Costly multi-year infrastructure projects no longer have to rely on uncertain federal annual appropriations or to compete for scarce Trust Fund dollars. Instead, they are being financed with a variety of tools, such as private activity bonds, TIFIA loans, toll revenue concessions, availability payments and private risk capital. (For an explanation of “availability payments” see Appendix C below).
In turning away from “pay-as-you-go” funding and toward project financing, states are emulating a method long practiced in the private sector. All of the nations privately owned transportation infrastructure has been, and still is, financed by borrowing front-end capital and repaying it over time rather than being funded with current cash flow. Now, states are adopting the same approach toward public infrastructure, convinced that they no longer can count on a steady and generous flow of federal transportation dollars.
Our survey has identified 20 jurisdictions that are undertaking major reconstruction projects with the help of long term debt and availability payments. In addition, 11 states states have public-private partnership procurements underway worth about $15 billion, reports the financial newsletter, Public Works Financing in its February 2014 issue. This is on top of some 35 billion dollars worth of municipal bonds that are annually sold to finance local transportation. (see Appendix B below, “Financing Large-Scale Infrastructure Projects”)
Nor are public-private partnerships (P3) transactions confined to roads and bridges any more. Maryland’s Governor Martin OMalley recently announced that the Purple Line, a $2.2 billion, 16-mile light rail line connecting two suburban counties in the Washington metro area, will be built, financed and operated through a public-private partnership-the second of its kind but almost certainly not the last. (the first P3 transit project was a system of commuter lines in Denver, known as Eagle P3 )
In other words, a transition from pay-as-you-go funding to long-term financing of costly infrastructure is already well underway. It’s a trend that has been recognized and is being encouraged by the National Governors’ Association. (See Appendix D below)
A 21st Century Approach to Transportation Funding
As states acquire more familiarity with credit transactions and develop more capacity to pursue public-private partnerships, and as federal budgetary constraints continue, long term financing of new transportation facilities and of multi-year reconstruction programs could become the states primary method of expanding and modernizing aging infrastructure. At the same time, states’ growing fiscal independence points to a new approach to funding the nation’s transportation needs in the 21st century.
In this prospective new model, routine highway maintenance and system preservation would continue to be funded on a pay-as-you-go basis with current state and local tax revenue as supplemented with federal-aid highway dollars from the Highway Trust Fund . However, capital-intensive multi-year reconstruction programs and new capacity expansion projects —investments that are beyond the states’ fiscal capacity to fund out of current revenue — would be financed largely through public-private partnerships employing long-term credit and availability payments.
Provision of credit would remain a shared responsibility of the public and private sectors. Private Activity Bonds, the TIFIA program and State Infrastructure Banks would continue to serve as the main public sources of credit assistance while additional public credit facilities could be created, if need be, to handle a growing backlog of reconstruction needs. Potential candidates include Sen. Mark Warner’s National Infrastructure Financing Authority (IFA) and Rep.John Delaney’s $50 billion American Infrastructure Fund (AIF). The latter proposal would capitalize the AIF by selling bonds to U.S. companies. In exchange for purchasing the bonds, companies would be able to repatriate a portion of their overseas earnings tax-free. (A somewhast similar approach forms part of Rep.Camp’s tax reform proposal).
The Highway Trust Fund— freed fom the obligation to fund new infrastructure and large reconstruction programs on a cash basis—would be placed on a more stable financial footing, while an ample supply of long-term credit —both public and private—would reduce the need for contract authority and multi-year transportation authorizations. Meanwhile, states and localities would gain more independence to plan and fund infrastructure improvements on their own terms, free of excessive federal regulatory oversight.
It’s a highly plausible answer in our judgment to the nation’s search for a long-term solution to the infrastructure funding problem.
Earlier versions of this commentary were presented at the Transportation Research Board workshop, “States are leading the charge on transportation revenue initiatives,” January 12 2014; at the Conservative Policy Summit of the Heritage Foundation on February 10, 2014; and in a Governing magazine interview dated February 27, 2014.
A. Significant State Revenue Initiatives
In 2013, legislatures in Maryland, Wyoming, Massachusetts and Vermont raised state gas taxes. Pennsylvania approved a massive $2.3 billion bill for roads, bridges and mass transit by lifting the cap on gasoline tax at wholesale level (resulting in a 28 cents/gallon increase in the price of gas at the pump over the next five years). Virginia enacted a landmark legislation that will provide $3.4 billion for transportation over the next five years. Arkansas approved a dedicated one-half cent sales tax increase whose proceeds will back a $1.3 billion bond issue for highway construction over the next ten years. Ohio passed a toll-backed $1.5 billion bond issue for highway and bridge improvements.
Also in 2013, Oregon adopted a voluntary mileage-based user fee system that may pave the way for a statewide “VMT” program, the first of its kind. South Carolina’s legislature provided additional $91 million in recurring annual funding for bridge, resurfacing and interstate projects. Texas legislature adopted a constitutional amendment that might raise $1.2 billion per year for the state’s highways by diverting half of the revenue from its oil and gas production Rainy Day Fund. Florida‘s Governor Rick Scott announced an $8.8 billion program of transportation infrastructure improvements across the state. Delaware‘s Governor Jack Markell expressed support for raising the state gas tax by 10 cents. Maine‘s Governor LePage announced a $2 billion program of infrastructure modernization over three years. Missouri legislature considered a one-percent hike in the state sales tax to be dedicated to highways. A House panel of Iowa‘s state legislature recommended a 10-cent gas tax increase. Wyoming‘s Governor Matthew Mead proposed a $15.7 billion program of road rehabilitation. Colorado’s Governor John Hickenlooper proposed the formation of an enterprise dedicated to fostering public-private partnerships to fund transportation infrastructure projects.
As 2014 legislative sessions get underway, it looks like it will be another big year for transportation funding measures So far, six states have introduced bills to raise state gas taxes or index them to inflation, according to the National Conference of State Legislatures (NCSL). They include Idaho, Iowa, New Hampshire, New Mexico, South Carolina and Utah. Transportation funding also is being debated in the states of Washington, Minnesota, Massachusetts and Michigan.
(For more details, see NCSL’s Transportation Funding and Finance Legislation Database and AASHTO’s Center for Excellence in Project Finance.)
B. Financing large-scale infrastructure projects
Long-term credit, private capital and availability payments have replaced federal grants in virtually all large-scale, capital-intensive highway/bridge infrastructure projects. Prominent examples (and their state sponsors and total cost in $ bilions) include:
(1) I-495 Beltway HOT lanes in Northern Virginia (VA, $2.1B)
(2) New York Tappan Zee Bridge replacement (NY, $6.4; $4.8B in TIFIA loan)
(3) San Francisco Bay Bridge Eastern Span replacement (CA, $6.4B)
(4)(5) Highway 520 floating bridge and Alaskan Way Viaduct in Seattle (WA, $4.1B, $3.2B)
(6) Elizabeth River tunnels linking Norfolk and Portsmouth (VA, $2.1B)
(7) East End Crossing over the Ohio River near Louisville (IN, $1.15B)
(8) PortMiami Tunnel (FL, $1.1B)
(9) Goethals Bridge replacement, linking Staten Island and New Jersey (NY-NJ, $1.4B;$474M in TIFIA loan)
(10) I-69 “Section 5” project (a 21-mile stretch of the I-69 Canada-to-Mexico corridor) (IN)
(11) Proposed second Detroit-Winsor Bridge Crossing (MI)
(12) North Tarrant Express project in the Fort Worth area (TX, $2.0B, $531M in TIFIA loan)
(13) Intercounty Connector in suburban Washington D.C. (MD, $2.4B)
(14) LBJ Expressway Project/managed lanes, Dallas (TX, $2.6B)
(15) Presidio Parkway (CA, $0.85B)
(16) Florida I-595 reconstruction/managed lanes (FL, $1.6B)
(17) Virginia I-95 HOT Lanes (VA, $0.92B)
(18) Proposed Illiana Expressway (IN-IL, $1.6B);
(19) Nevada I-15 reconstruction (Project NEON) (NV, $1.5B)
(20) Florida I-5 reconstruction ((FL, $2.1B)
C. Note on Availability Payment Debt Financing
The risks associated with forecasting demand and revenue have shifted the interest from toll revenue concessions to availability payments—a method of financing used for infrastructure projects that are not expected to generate a sufficient revenue stream to pay for themselves. Availability payments are funded by toll revenue collected by the sponsoring public agency or by dedicated fuel and sales taxes, with state transportation budgets making up any shortfall. Of the 12 major road projects under construction today, all but two are being financed with availability payments, reports Public Works Financing. To quote that publication, “The availability payment-for-performance model offers timely completion, long-term budget certainty, contractually defined performance standards, taxpayer protection from costy overruns, built-in warranty for defective design and construction, and lower life-cycle costs. …However, for projects that don’t have their own revenue stream, it is a matter of debate whether this method of financing is wise or sustainable.”
D. National Governors Association’s Guiding Principles
“2.2.4 Funding and Finance. All options must be on the table for ongoing evaluation because existing revenue sources are no longer adequate to support the various federal trust funds that help to finance transportation and infrastructure. Facilitating investment in infrastructure projects through existing and new self-sustaining financing mechanims can help mitigate public funding shortfalls, Successful mechanisms leverage capital markets and require borrowers to use revenue from projects to repay the financing, making capital available to lend to new projects.”
C. Kenneth Orski is a public policy consultant and former principal of the Urban Mobility Corporation. He has worked professionally in the field of transportation for over 30 years, in both the public and private sector. He is editor and publisher of Innovation NewsBriefs, now in its 25th year of publication.