Innovation Newsbriefs
Vol. 24, No. 15
Those who champion higher federal spending for transportation infrastructure face a vexing reality: the Highway Trust Fund no longer can serve as an adequate and reliable means of funding the nation’s transportation needs. It’s “a sinking ship,” declared a spokesman for Transportation for America (T4America), a liberal advocacy group.
For example, a six-year transportation bill— which infrastructure boosters contend is essential to enable large multi-year projects and keep the nation’s infrastructure in a state of good repair— would require roughly $327 billion (an average of $54 billion/year) to maintain current spending levels. Trust Fund revenue and interest over the same period are projected to bring in only $242 billion according to the Congressional Budget Office (CBO). This would leave an unfunded shortfall of $85 billion. Even a stop-gap one-year bill would require an extra $12-13 billion in new revenue to maintain transportation spending at current (FY2013) levels.
Where is that money to come from? No one—neither in Congress, nor in the Administration, nor among the stakeholders —has come up with an answer.
To be sure, all the familiar suggestions for augmenting federal transportation revenue are regularly dusted off at congressional hearings and transportation meetings. These include increasing and indexing the federal fuel tax; tolling the Interstate highways; transitioning to a mileage-based user (VMT) fee; supplementing the trust fund with general fund revenue; and increasing transportation revenue in the context of a more comprehensive tax reform. (President Obama’s favorite funding source – the so-called “peace dividend,”— is seldom mentioned any more.)
The only fresh proposal has come from EPW Committee chairman Barbara Boxer (D-CA) who pronounced herself in favor of following in the footsteps of Virginia and Maryland and replacing the federal per-gallon fee at the pump with a sales tax on gasoline collected at wholesale level.
But none of the above suggestions have gained traction, not to speak of bipartisan support.
The perennial proposal to increase the federal gas tax remains anathema in Congress—and for good reason: A Gallup poll in April found two-thirds of Americans opposed to a gas tax hike even if it went toward infrastructure improvements. Interstate tolling is viewed only slightly less skeptically; it faces opposition from the powerful trucking interests and many state legislatures. The use of general funds to supplement Highway Trust Fund revenue finds few supporters in Congress. The mileage fee and comprehensive tax reform are deemed not to be ready for prime time, i.e. they are not implementable by October 2014 when the federal transportation program needs to be reauthorized.
As for more unconventional approaches, Senate Finance Committe Chairman Max Baucus (D-MT) has warned that the patchwork funding mechanisms and “accounting gimmicks” that were employed to pay for the MAP-21 bill would not be used again in 2014.
This leaves observers wondering what other options are there left for Congress to consider— other, perhaps, than the proposal once offered by House Republicans (and soundly rejected by Democrats) to adjust the scope of the future program to the tax receipts credited to the Highway Trust Fund — still a hefty $40 billion a year.
There is another way…
But in fact, there is a way to fund transportation infrastructure that would allow the aggregate level of investment to exceed Trust Fund revenues without creating a funding shortfall or contributing to the deficit This approach— largely overlooked or ignored by the Beltway community and liberal advocacy groups which are single-mindedly focused on federal funding solutions– would shift responsibility for major transportation investments to the states, and finance these investments with long-term debt.
There is a long-established precedent for financing infrastructure with capital raised up-front and paid for over time rather than funding it with current cash flow. All of the nations’ private transportation/communication infrastructure has been financed this way —including the vast voice and data transmission networks, high voltage transmission lines, pipelines, airports and freight railroads. Equally importantly, long term credit is the foundation underlying the $3.7 trillion municipal bond market —a market that would not exist, were it not for debt issued by cities and local public utilities to finance their capital infrastructure needs.
True, debt financing limits states to investing only in credit-worthy projects—i.e. projects that generate a stream of revenue (such as tolls) or are backed by dedicated taxes or availability payments— but then, virtually all transportation megaprojects already fall in this category.
In fact, except for mass transit projects, waterways and the California High Speed Rail project, no major transportation facilities planned or under construction today are funded with federal appropriations.
On the other hand, there are at least 18 jurisdictions that currently are constructing or proposing to construct new highway and bridge facilities without the benefit of federal dollars.(See appendix below, “Financing large-scale infrastructure projects”) Instead, they are using bond issues, long-term loans, availability payments, toll concessions and private equity risk capital. (Note: availability payments are used for facilities that are not expected to generate sufficient revenue to pay for themselves. Payments are made out of toll revenue collected by the sponsoring public agency, dedicated sales taxes or other sources of dedicated revenue.)
In other words, a transition from federal funding to public and private financing of new transportation infrastructure is already well underway —and it is likely to continue and grow given persistent deficits and pressures to reduce federal discretionary spending. Automatic sequester cuts which are to rise from $84 billion in 2013 to $109 billion in 2014, could place ever tighter constraints on government’s ability to increase spending for infrastructure in the years ahead.
Short- and long-term implications
Since we first looked into this issue in April 2013 (“States Seek to Become More Self-Reliant”), and again in July 2013 (“ ‘Can-Do’ States: The growing phenomenon of States making their transportation programs more fiscally independent”) , States’ efforts to compensate for inadequate federal financial transportation assistance with other sources of capital have grown and multiplied. Our survey of “Can-Do” states documented such efforts in 24 states.
A further sign of states’ willingness to assume financial responsibility for transportation came on election day when voters approved 72 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.
What conclusions can we draw from this growing state involvement in financing transportation infrastructure?
In the short run, more state revenue dedicated to infrastructure will lessen the pressure on Congress to come up with increased resources to fund the next surface transportation reauthorization. A one- or two-year bill funded at current spending levels now appears as a distinct possibility according to some congressional sources. Evidence of a growing ability and willingness of states to fund their transportation needs is cited as the reason.
In the longer run, greater state fiscal autonomy and financial sophistication could modify the federal-state relationship in transportation in a permanent way. There would be less need for direct federal financial aid to state DOTs and more emphasis on credit assistance to support transportation investments of truly national scope and significance. More generous credit assistance could come through expanded federal credit facilities such as Sen. Mark Warner’s (D-VA) National Infrastructure Financing Authority or Rep. John Delaney’s (D-MD) Partnership to Build America bonds.
Over time, there could evolve a twin system of funding of the nation’s transportation needs. Locally raised revenue, supplemented with federal-aid highway funds from the Highway Trust Fund (approximately $30 billion/year) would be used by states to maintain their roads and bridges in a state of good repair. On the other hand, large-scale reconstruction and system expansion projects of regional or national significance —projects that are beyond the states’ fiscal capacity to fund on a pay-as-you-go basis— would be financed with long-term credit (both public and private) and availability payments.
The Highway Trust Fund— no longer expected to pay for new infrastructure but only to help maintain and preserve existing infrastructure —would be restored to a sound financial footing, while the transportation community would be spared a constant worry about the uncertainty of the nation’s infrastructure program.
It’s a tempting –and persuasive— scenario to contemplate as we approach a new reauthorization cycle in a severely constrained fiscal environment.
This column has been adapted from remarks delivered at the Conference of the American Dream Coalition, October 28, 2013.
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APPENDIX
Financing large-scale infrastructure projects
Long-term credit, private financing and availability payments have replaced federal dollars 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 project in Northern Virginia (VA, $1.9B)
(2) New York Tappan Zee Bridge replacement (NY, $6.4; 16B with rail/bus)
(3) San Francisco Bay Bridge Eastern Span replacement (CA, $6.4B)
(4)(5) Highway 520 floating bridge and Alaskan Way Viaduct in Seattle (WA, $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, $0.86B)
(9) Goethals Bridge replacement, linking New York City and New Jersey (NY-NJ, $1.5B; $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, Dallas (TX, $2.6B)
(15) Presidio Parkway (CA, $0.36B)
(16) Interstate-595 reconstruction (FL, $1.6B)
(17) I-95 HOT Lanes (VA, $0.92B)
(18) Proposaed Illiana Expressway (IN-IL, $1.6B)
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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 24th year of publication.
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