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States’ Growing Role in Funding the Nation’s Transportation Infrastructure

Posted by InfraUSA on Friday, January 17th, 2014

Innovation Newsbriefs
Vol. 25, No. 1

As we enter the new year (celebrating our 25th year of publication), and as the deadline for reauthorization of  the surface transportation program draws closer,  those who want the new bill to sharply increase federal spending for transportation face a vexing reality. The Highway Trust Fund, a vital source of  support for the federal surface transportation program for over half a century, no longer can keep up with the nation’s growing transportation needs. A combination of more fuel-efficient cars, rising CAFE standards and consumer embrace of hybrid vehicles has kept gas tax revenue stagnant, throwing the Trust Fund out of balance with the rising demand for transportation funds. A possible decline in per capita travel could cause the future imbalance to grow even larger.  

A practical example illustrates the Trust Fund’s lagging performance. A six-year transportation bill—which infrastructure boosters contend is essential to plan for and implement large-scale multi-year projects—would require roughly $327 billion (an average of $54 billion/year) to maintain current (FY 2013) 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, FY 2013-14  levels.  

Where is the money to come from?

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 compound the challenge, the recently passed bipartisan budget deal which allows discretionary expenditures to increase by $62 billion during the next two years, has made any ambitious new spending initiatives during 2014 highly problematic according to congressional observers.

To be sure, all the familiar suggestions for augmenting federal transportation revenue are regularly dusted off at congressional hearings, transportation gatherings and advocacy group press conferences. These include increasing and indexing the federal fuel tax; tolling the Interstate highways; transitioning to a mileage-based user (VMT) fee; and supplementing the trust fund with general fund revenue. (Comprehensive tax reform and the so-called  “peace dividend” as vehicles for increasing transportation revenue are seldom mentioned any more.)

The only fresh proposal has come from Sen. Boxer (D-CA) who pronounced herself in favor of following in the footsteps of Virginia and Pennsylvania 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, recently resuscitated by Rep. Earl Blumenauer (D-OR) and endorsed by several Washington interest groups but finding little support even among fellow Democrats on Capitol Hill, remains anathema in Congress— 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. Nor has the White House changed its negative posture on this matter. Even progressives are ambivalent about a gas tax increase because of its regressive nature.   

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 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.   

A federal mileage fee is deemed at best a long-term solution, not ready for implementation any time soon.  

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 $38 billion a year.  

There is another way…

But in fact, there is a way to let the aggregate level of investment rise above Trust Fund receipts without creating funding shortfalls or requiring General Fund infusions. This approach— largely overlooked or ignored by the Beltway community of stakeholders and advocacy groups which are single-mindedly focused on federal funding solutions— would make a distinction between routine expenditures and capital investments. Regular highway maintenance and system preservation would continue to be paid for with local revenue and federal-aid highway funds on a pay-as-you-go basis. But major construction and reconstruction projects would be financed with long-term debt and availability payments and employing public-private partnerships. 

There is a long-established precedent for financing costly infrastructure projects with capital raised up-front and paid for over time rather than funding them with current cash flow. All of the nations’ privately owned  transportation/communication infrastructure has been financed  this way —including the vast voice and data transmission networks, pipelines, freight railroads and high voltage transmission lines.

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 agencies to finance their capital infrastructure needs. Approximately $35 billion worth of loans are made annually explicitly for local transportation, according to Matt Fabian, Managing Director of  Municipal Market Advisors.

True, debt financing limits investments to 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 that category.

There are at least 20 state and local jurisdictions that are reconstructing or proposing to reconstruct highways and bridges without the help of federal grants, although some of these projects do benefit from federal credit (TIFIA) assistance. A variety of financing techniques are used, including private activity bonds (about $5 billion worth of these bonds are still available from the $15 billion authorized eight years ago), long-term loans and loan guarantees, availability payments, toll revenue concessions and private risk capital  (for a listing, see appendix below, “Financing Large-Scale Infrastructure Projects”).

In addition, 33 states have laws authorizing public-private partnerships (P3) for transportation projects. Thirty-six P3 partnerships have been entered into by state DOTs to date, and about $20 billion worth of P3 projects employing availability payments and other public-private financing arrangements, are currently being pursued by state governments, reports the financial newsletter, Public Works Financing.

In other words, a transition from outright federal funding to public and private financing of costly transportation infrastructure is already well underway —and it is likely to continue and grow, given pressures to reduce federal discretionary spending. 

States and Local Governments are taking matters into their own hands

The shift from funding to financing of transportation infrastructure is part of a larger trend of states and local governments assuming greater responsibility for funding capital costs of  transportation improvements. Having concluded that they can no longer count on ever growing federal largesse, states and local jurisdictions are taking matters into their own hands. ”When it comes to taking action on our long-term infrastructure needs, we know we can count on Governors,” says former governor Ed Rendell, co-chairman of the infrastructure coalition Building America’s Future. And indeed, a growing number of Governors are making infrastructure investments a priority.     

Since we first drew attention to this matter 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. 

Pennsylvania became the latest state to approve a massive $2.3 billion bill for roads, bridges and mass transit by lifting the cap on gasoline tax at the wholesale level (resulting in a 28 cents/gallon increase in the price of gas at the pump over the next five years). Earlier in 2013, Virginia enacted a landmark legislation that will provide $3.4 billion for transportation over the next five years.

Also in 2013, Arkansas 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. Ohio passed a toll-backed $1.5 billion bond issue for highway and bridge improvements. Oregon adopted a voluntary mileage-based user fee system that may pave the way for a statewide “VMT” program, the first of its kind. 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. Colorado’s Governor John Hickenlooper has proposed the formation of an enterprise dedicated to fostering public-private partnerships to fund transportation infrastructure projects.  

Maryland, Wyoming, Massachusetts and Vermont all raised their gas taxes. And  in California, 80 percent of the state’s population lives in counties that tax themselves to support local transportation. (for further examples, see NCSL’s Transportation Funding and Finance Legislation Database and AASHTO’s Center for Excellence in Project Finance.) 

A further sign of states’ new willingness to assume greater financial 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.

“What you are seeing is the governors’ and state legislatures’ pragmatic response to the dwindling federal capacity to fund transportation infrastructure,” a senior state DOT official told us. “We are convinced this trend will continue…” Similar sentiments were expressed at a  roundtable of state DOT leaders at the annual meeting of the Transportation Research Board. 

Short- and long-term implications

What conclusions can we draw from this growing state and local government involvement in financing transportation infrastructure? 

In the short run, more state and local revenue dedicated to transportation could 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 (FY 2013-14) spending levels now appears as a distinct possibility according to congressional sources. They cite the growing ability and willingness of states to fund needed transportation improvements as the reason why increasing federal spending levels is not necessary.  

In the longer run, greater state and local government fiscal autonomy and financial sophistication could modify the federal-state relationship in transportation in a more permanent way. There would be less need for direct federal grant aid to state DOTs and more emphasis on credit assistance to support large-scale transportation investments. More generous credit assistance could come through expanded federal credit facilities such as Sen. Mark Warner’s (D-VA) proposed National Infrastructure Financing Authority (IFA) or Rep. John Delaney’s (D-MD) proposed $50 billion American Infrastructure Fund (AIF).

A New Funding Paradigm

Over time, there could emerge a new approach to funding the nation’s transportation needs. Routine highway maintenance and system preservation would continue to be supported on a pay-as-you-go basis with state and local tax revenue as supplemented with federal-aid highway dollars from the Highway Trust Fund (to the tune of approximately $40 billion/year). However, costly multi-year facility reconstruction and system capacity expansion —projects that are beyond the states’  fiscal capacity to fund out of current revenue — would be financed with long-term credit and availability payments through public-private partnerships.

The Highway Trust Fund— no longer expected to pay for new infrastructure but only to help maintain existing facilities in a state of good repair —would be saved from insolvency, while the transportation community would be spared a constant worry about the uncertainty of the nation’s infrastructure program.

It’s a tempting –and we think realistic—scenario to contemplate as we approach a new reauthorization cycle in a severely constrained budgetary environment.

An abbreviated version of this column was presented at  the Transportation Research Board workshop,  “States are leading the charge on transportation revenue initiatives,” January 12, 2014

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APPENDIX

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, $1.9B) 

(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, $0.86B)  

(9) Goethals Bridge replacement, linking Staten Island 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/managed lanes, Dallas (TX, $2.6B)

(15) Presidio Parkway (CA, $0.36B)

(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)

Note: Availability payments are used for large construction and reconstruction projects that are not expected to generate a sufficient revenue stream to pay for themselves. The risk associated with forecasting demand and revenue has shifted the interest from toll revenue concessions to this method of financing. Payments are made out of toll revenue collected by the sponsoring  public agency or dedicated sales taxes, with state transportation budgets making up any shortfall. Of  the 12 major road  projects under construction today, six are being financed with availability payments according to 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.”

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.

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