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Are We Ignoring the Obvious Solution to the Transportation Funding Crisis? (Cont’d)

Posted by Ken Orski on Friday, August 16th, 2013

Innovation Newsbriefs 
Vol. 24, No. 11

Congress adjourned for the summer with neither the House nor the Senate passing  Fiscal Year 2014 appropriations for transportation. The House bill ($44 billion) lacked the votes to pass it because some fiscally conservative Republicans abstained, feeling that the cuts weren’t deep enough. The Senate bill ($54 billion) failed to obtain the necessary  60 votes because it exceeded the Budget Control Act levels — the legislation that put in place the sequester cuts and requires Congress to meet previously-agreed upon spending levels. With only nine legislative days in September left before the end of the fiscal year, the most likely outcome will be a continuing resolution that, in effect, will maintain federal transportation funding at current FY 2013 levels.   

The inability of Congress to pass even a simple annual appropriations bill does not bode well for a congressional agreement on the much more complex and costly multi-year surface transportation bill  that must be reauthorized by October 2014.

A July 23 hearing on the Highway Trust Fund made it painfully clear that neither the government witnesses —U.S. DOT’s Undersecretary for Policy Polly Trottenberg and CBO analyst Kim Cawley — nor any of the participating members of the House Committee on Transportation and Infrastructure, had any clue as to how to pay for the hundreds of billions of dollars that transportation boosters say are needed to fund the next reauthorization. A six-year transportation bill would require roughly $320 billion ($53 billion/year) to maintain current spending levels. Trust Fund revenue and interest over the same period are expected to bring in only $240 billion according to CBO. This would leave an unfunded shortfall of $80 billion. Even a stop-gap one-year bill would require an extra $15 billion and increasing amounts in subsequent years to prevent future shortfalls if spending was maintained at the 2013 levels.

To be sure, the “peace dividend,” a 10-cent/gallon federal fuel tax increase, a mileage-based user fee and general fund revenue were all dutifully mentioned as possible sources of additional money –only to be shot down by one or more committee members as political non-starters

Nor do the Senators have any better idea as to where the money  would come from. This was the clear impression left by Sen. Barbara Boxer’s comments, made in a meeting with transportation industry representatives on July 25.  When asked to name some of the options for raising new money she begged off saying she did not want  “to get out in front” of her colleagues. Meanwhile, she added, the Senate Finance Committee, which will be in charge of  coming up with a funding plan for the next transportation bill, is looking for ideas by reviewing how states are funding their transportation programs.  Which brings us to our point…

There is another way…

Neither the House and Senate members nor the government witnesses have thought of suggesting what is perhaps the most obvious solution to the impending funding crisis:  let individual states bring their transportation facilities (including deficient bridges) up to a state of good repair using their regular federal-aid highway funds, supplemented with locally raised revenue. As for large-scale reconstruction and system expansion projects that are beyond the states’ fiscal capacity to fund on a pay-as-you-go basis, let them be financed with long-term credit and private investment capital. While this might  limit new investment to credit-worthy projects (i.e. those that generate revenue or are backed by dedicated taxes or “availability payments”), virtually all transportation megaprojects already fall in that category. 

It looks like that is precisely what’s happening across the land. A growing number of states aren’t waiting for the financially troubled federal government to come to the rescue with new money. They are taking matters into their own hands and taking control of their infrastructure agendas. Our  recently updated survey has identified as many as 24 such “Can-Do” states. This includes several  states whose legislatures have raised motor fuel taxes or are considering to do so (see attachment below). In addition, 10 states are financing big-ticket highway and bridge projects (so-called “mega-projects”) with long-term credit, “availability payments”  and private financing, without direct federal funding. Indeed, except for mass transit projects and the California High Speed Rail project there are no regionally-significant transportation facilities under construction or on the drawing board  whose completion hinges on federal appropriations. (elimination of congressional earmarks for transportation has had something to do with it).

States’ efforts are getting attention

The states’ drive toward fiscal independence in transportation is getting noticed. Both Rep. Bill Shuster (R-PA), chairman  of the House T&I Committee and Ranking Member Nick Rahall (D-WV)   have made specific references to the new trend. “I believe the states have the flexibility to do what they need to do, and I would hope that states make those investments,” said Shuster when asked why he would not call up the proposed $5 billion “Safe Bridges Act.”  Echoed  Rep. Rahall at the July 23 hearing on the Trust Fund, “States are increasingly coming up with their own plans for raising additional transportation revenues.” 

Testifying to the same effect was a prominent infrastructure advocate, former Gov. Ed Rendell, co-chairman of the Building America’s Future coalition.   “Many at the state and local levels are weary of waiting for Washington to act and have begun to take matters into their own hands.” he observed at a July 24 hearing of the congressional Joint Economic Committee.  

Even Transportation Secretary Anthony Foxx has taken notice of  the states’ growing role in infrastructure financing.  “America’s governors are solving transportation challenges,” he wrote in his blog, the Fast Lane,  on August 6. He made it more explicit in his prepared remarks before the National Conference of State Legislatures’ Transportation Summit on August 12. “This year,” he told the delegates,  “half of all state legislatures have considered or approved measures dealing with transportation funding. Fourteen states have at least discussed raising their fuel taxes…”

 “There has been a subtle shift in the tone of the Secretarial rhetoric,” a veteran DOT watcher told us. “As a former mayor, Secretary Foxx is more attuned and sympathetic to what’s going on in the state capitals and  he is more supportive of the states’ increased assertion of fiscal independence. … He readily admits that the feds can’t do it all.”  

States are partnering with the Private Sector

A July 12 forum sponsored by the Brookings Institution shined a spotlight on another aspect of   “Can-Do” states: their increasing efforts to partner with the private sector. So did  ARTBA’s 25th Annual “P3 in Transportation”  Conference in Washington on July 25-26, where state efforts to deliver major transportation investment projects through public-private partnerships were featured in a plenary session.  Virginia, Texas, Pennsylvania, Florida and Indiana were singled out as leaders in the private delivery of  infrastructure projects. “What you are seeing is the governors’ and state legislatures’ pragmatic response to the dwindling federal capacity to fund major infrastructure,”  one attending senior state official told us. “We are convinced this trend will continue…”

This also is the view of the transportation industry, six of whose leaders (Star America, Fluor, Kiewit, Skanska,Cintra and ACS Infrastructure) have launched a new organization —the Association for the Improvement of American Infrastructure (AIAI)— “to help shape the direction of the national Public Private Partnership marketplace.”  

Underscoring this sentiment on the legislative front has been the formation of a new bipartisan Congressional Caucus on Public Private Partnerships whose purpose will be to encourage and raise awareness of the use of public-private partnerships in building, financing and maintaining the nation’s transportation infrastructure. “We have a tremendous backlog of infrastructure needs, but the federal government simply can’t fund them all,” said Rep. Mike Rogers (R-AL) one of the founders of the caucus. He was being charitable. The truth is that Washington can only fund a shrinking fraction of the nation’s backlog of infrastructure needs. It will be up to the states and the private sector to take up the slack. 

Short- and long-term implications

States’ growing involvement in funding transportation is a phenomenon of far-reaching consequences. In the short run, more state revenue dedicated to transportation will lessen the pressure on Congress to come up with increased resources to fund the next reauthorization. A one- or two-year bill is now a distinct possibility according to congressional sources.

In the longer run, greater state fiscal autonomy and financial sophistication could modify the federal-state relationship in transportation. There would be less need for direct financial aid to state DOTs and more emphasis on credit assistance to support transportation investments of truly national scope and significance. (High-Speed Rail in the Northeast Corridor comes to mind).  At the same time, federal oversight of state transportation programs could be reduced to reflect  the smaller  federal fiscal footprint.

This is not devolution. This is the new reality of states acting responsibly  to preserve their transportation assets and modernize their infrastructure in the absence of adequate federal assistance and a coherent long-term national transportation finance strategy. And in the process of doing so, states will be helping to relieve the Congress of the politically embarrassing task of  having to dip repeatedly into the General Fund to bail out the ailing Highway Trust Fund.  

### 

States funding initiatives

This survey benefited from the generous response from our readers in state government and state legislatures whom we had solicited for input. We also consulted NCSL’s Transportation Funding Legislation Database and AASHTO’s Center for Excellence in Project Finance (State Transportation Funding Proposals). The survey will be periodically updated as new information comes to our attention. 

Arkansas has approved a dedicated one-half cent sales tax  increase whose proceeds will back a $1.3 billion bond issue to fund highway construction over the next ten years.
California’s Transportation Commission has approved a record $487 million for  transportation improvements. The funding will cover a total of 82 construction projects statewide. 
Connecticut has enacted a new 3.6 cent wholesale gasoline tax increase. This brings the state’s combination of retail and wholesale gas taxes up to 49.6 cents per gallon, (25 cents/gallon retail plus 24.6 cents/gallon wholesale). 
Colorado’s Department of Transportation has launched the Responsbible Acceleration of Maintenance and Partnerships (RAMP) program which is expected to result in a 50 percent increase in road construction over the next five years. Its Bridge Enterprise program is meant to replace the most deficient and obsolete bridges, bringing 96 percent of bridges to a good/fair condition, according to a DOT spokeswoman. In addition, CDOT has entered into its first Public-Private Partnership (P3) accelerating a critical capital project by 20 years. Denver’s Regional Transit District has entered into three public-private partnerships to build almost 70 miles of new light rail transit.
Florida has enacted a record $8.7 billion transportation budget. It also has changed its state law to permit tolls on all new lanes on its state highway system, Interstates and new bridges. Within the next five years the state expects to have 191 miles of priced managed lanes in major urbanized areas according to a senior FDOT official. In late July FDOT and the Orange County Expressway Authority began a $1.5 billion Wekiva Parkway project , a 25-mile toll road to run around metropolitan Orlando.  The parkway, to be completed  in 2021, will be financed with toll revenue.   
Illinois enacted in 2009 a six-year $31billion infrastructure improvement program known as “Illinois Jobs Now!” of which $14.5 billion is dedicated to transportation. According to a DOT spokesman, the program has enabled reconstruction of 7,200 miles of road pavement and 1,170 bridges as well as provided funds for Chicago transit improvements and matching money for the Chicago-St.Louis high speed rail program.
Maryland has passed a series of increases in the gas tax in the years to come to fund major transportation projects. The measure, which will raise the state gas tax by 12.1 cents a gallon by July 2015 is expected to bring in an additional $4.4 billion for transportation projects from fiscal 2014 to 2019. Gov. Martin O’Malley announced that the state will seek a private company to build and operate the planned $2.2 billion light-rail Purple Line, marking the first time that the state has used a public-private partnership to finance a public transit project.
Maine – Gov. Paul LePage has proposed a $100 million transportation bond to fix roads and bridges. Both parties say they support the measure. The only disagreement is over how quickly the bond measure needs to be approved.   
Massachusetts legislature has passed a bill that would raise $800 million in new revenue by 2018 for transportation infrastructure improvements. The measure will increase the state’s gasoline tax by 3 cents to 24 cents/gallon and index it for inflation. In addition, the legislature has created a Public-Private Partnership Oversight Commission to facilitate the formation of public-private partnerships for transportation infrastructure.
Michigan – Michigan DOT has begun conversations with businesses to gauge their interest in creatring public-private partnerships for transportation infrastructure projects across the state. In late July, MDOT began accepting letters of interest from private sector companies on several PPP projects. Proposals are being sought notably on long-term contracts to finance, design, construct and maintain bridges by using innovative technologies and materials.
Mississippi– A state Senate transportation panel has recommended $360 million in higher gasoline taxes to support highway and bridge preservation efforts   
Missouri’s Safe & Sound Bridge Improvement Program recently repaired or replaced 802 of Missouri’s lowest rated bridges in 3-1/2 years — two years ahead of schedule, according to a MoDOT spokesman. The state sold bonds to pay for the $685 million program and is repaying them with federal funds it receives each year. Missouri Gov.Jay Nixon has endorsed a proposed one-cent sales tax for transportation that would raise money to rebuild Interstate 70 and various road and bridge projects. The proposal passed the state House earlier this year but died in the Senate.
Nebraska has enacted a new law that dedicates one-quarter of a cent from the state’s existing 5.5 cent sales tax for 20 years for road improvements. The law is expected to raise $65 million a year.  At least 17 major road projects will benefits from the funds over the next decade, according to the DOT. 
North Carolina’s Bridge Improvement program aims to replace over 700 structurally deficient bridges and refurbish another 475 via “express design-build”. The state has adopted a new “Strategic Mobility Formula”  that revised the manner in which $1.5 billion in state and federal highway funds get spent annually by emphasizing projects that will ease congestion and promote economic growth. 
Ohio has passed a turpike toll-backed $1.5 billion bond issue for highway and bridge improvements. “We have not sat back and waited for a solution from Washington,” said ODOT Director Jerry Wray. The state plans to spend $3 billion statewide on 40 key road and bridge projects over the next four years. About $1.5 billion of that $3 billion total will come from the Turnpike bonds. 
Oregon has adopted a voluntary  mileage-based user fee system in lieu of a state fuel excise tax. The bill will allow up to 5,000 participants to pay 1.5 cents per mile in place of paying the state gas tax at the pump. This limited program may pave the way for a statewide “VMT” program, the first of its kind. 
Pennsylvania DOT has issued an invitation for companies to submit proposals  for unsolicited public-private partnerships authorized under the “Public and Private Partnerships for Transportation Act” passed last September. The PPP process may be used to contract with private firms to reduce the state’s backlog of over 1000 structurally deficient bridges using “availability” payments.
South Carolina has passed a transportation funding bill that will raise up to $1 billion to improve transportation infrastructure throughout the state.  The new law uses a combination of borrowing and sales taxes to raise the new funding  over the next ten years. The 16-cent fuel tax rate remains unchanged  since 1987. 
Texas legislature approved a constitutional amendment that would 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. The bill will now be placed on the ballot for voters’ approval in November 2014. 
Utah uses vehicle-related sales taxes to fund a multi-year multi-billion dollar highway system, including the completion of its $1.7 billion I-15 corridor expansion project. In FY 2014 this tax is projected to generate more than $500 million according to a DOT spokesman. The state’s highway  budget is largely self-sufficient;  federal funds make up only 17 percent of the total. 
Virginia has overhauled its transportation financing system by eliminating its 17.5 cents per gallon gas tax and replacing it with a 3.5 percent sales tax on the wholesale price of gasoline and a 6 percent sales tax on the wholesales price of diesel fuel.  The tax reform is expected to provide  $5.9 billion in additional  transportation funding over the next five years. Virginia’s shift to sales-tax focused transportation finding may provide a model for other states seeking alternatives to the gas tax. The State’s Office of Public-Private Partnerships is seeking private investors to improve a 25-mile section of the heavily used commuter highway (I-66) and possibly intends to finance the project through tolled express lanes. 
Vermont  and Wyoming have sharply raised their state fuel taxes—by 5.9 cents, and 10 cents per gallon respectively.
Washington State Gov. Jay Inslee has signed off on a $8.7 billion transportation budget that includes continued state funding for two major projects, the Alaskan Way Viaduct tunnel and the SR 520 floating bridge over Lake Washington (but vetoed planning funds for the proposed $3.4 billion Columbia River Crossing).  

Financing large-scale infrastructure
projects 

Long-term credit, private financing and “availability payments” have replaced federal dollars in virtually all large-scale highway/bridge infrastructure projects.  Prominent examples (and their state sponsors) include:  

(1) I-495 Beltway HOT lanes project in Northern Virginia (VA)
(2) New York Tappan Zee Bridge replacement (NY)
(3) San Francisco Bay Bridge Eastern Span replacement (CA)  
(4)(5)  Highway 520 floating bridge and Alaskan Way Viaduct in Seattle (WA)
(6) Midtown tunnel linking Norfolk and Portsmouth (VA)
(7) East End Crossing over the Ohio River near Louisville (IN) 
(8) PortMiami Tunnel (FL) 
(9) Goethals Bridge linking New York City and New Jersey (NY-NJ)
(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)
(13) Intercounty Connector in suburban  Washington D.C. (MD)
(14) LBJ Expressway Project, Dallas (TX)
(15) Presidio Parkway (CA)

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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