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Transportation Policy and Funding in the Post-Election Climate

Posted by Ken Orski on Wednesday, November 12th, 2014

Innovation Newsbriefs
Vol. 25, No. 15

The mid-term elections have put an end to any lingering hope of passing a long-term  transportation bill during the congressional lame duck session. Such hope was recently expressed by Transportation Secretary Anthony Foxx, and two Democratic senators, Tom Carper (D-DE) and Barbara Boxer (D-CA), Chairman of the Senate Environment and Public Works Committee. In an October 9 letter to Congressman David Camp, Chairman of the House Ways and Means Committee. Boxer wrote, “We cannot afford to wait for action until the deadline which falls at the beginning of the critical summer construction season, or to kick the can down the road any longer.” Secretary Foxx echoed in a radio interview on October 16,  “I don’t think we are going to find ourselves in a better moment to do something than we will over the next few months.”   

But with the November elections heralding a fiscally more conservative political climate and with Congress preoccupied with a whole lot of unfinished business, passing a massive multi-year multi-billion funding bill for transportation during the lame duck session will be the last thing on the lawmakers’ minds. 

Even before the election, House leadership had been already expressing opposition to hasty action on the transportation bill. “Those who argue for the short deadline, declared Congressman Camp in an obvious allusion to Sen. Boxer,  “are using it as a ploy to enact a massive increase in the gas tax during the lame duck session when only a very few lawmakers are present or have any say in the matter.” With infrastructure hardly mentioned as a campaign issue and with the election signalling a sharp turn to the right, Mr. Camp and his fellow Republicans will surely have their way. 

 A Post-Election Scenario 

What about next year? Is there a likelihood of Congress passing a multi-year reauthorization by late May when the current short-term extension is set to expire? 

A six-year surface transportation measure which Sen. Boxer and transportation stakeholders long for, would require roughly $330 billion to maintain current (FY 2014) spending levels. But Trust Fund revenue and interest over the same period are projected by the Congressional Budget Office to bring in only $230 billion—leaving a truly staggering funding gap of $100 billion.

The only feasible way to raise this kind of money would be to very substantially increase the federal gas tax—a solution favored by many in the transportation industry. But a boost in the gas tax remains political anathema. Only three Senators— Democrats Tom Carper of Delaware and Chris Murphy of Connecticut and Republican Bob Corker of Tennessee— and one House Democrat — Earl Blumenauer of Oregon— have come out publicly in favor of raising the federal gas tax.

Lining up against them is a solid majority of congressional Republicans and Democrats, the White House and the public at large. A Gallup poll in April 2013 found that two-thirds of Americans are against raising the fuel tax –even if it went toward infrastructure improvements. An Associated Press poll released on August 5, 2014 confirmed these results: only 14 percent of those polled would support a boost in the federal gas tax while 58 percent would oppose it. There is no evidence that the recent dramatic fall in the price of gas at the pump has changed any minds.Nor has the idea of a tax on repatriated money —President Obama’s proposed source of funding for a long-term transportation  bill—gained a critical mass of support among  Republicans on Capitol Hill.

What, then, is the most probable course of action come next May? With fiscally conservative Rep. Paul Ryan (R-WI) and Sen. Orrin Hatch (R-UT) in control of the fiscal and taxation policy in Congress (as chairmen of  the House Ways and Means Committee and the Senate Finance Committee respectively), and with the 2016 presidential elections casting a shadow over any new proposal to raise taxes, there will be a huge temptation for the lawmakers to defer costly multi-year legislation beyond the presidential election, to the next Congress. 

“We will oversee a legislature in which ‘bigger’ isn’t automatically equated with ‘better’ when it comes to writing and passing bills,” wrote House Speaker John Boehner and future Senate Majority Leader Mitch McConnell in a joint post-election opinion piece in the Wall Stret Journal.

We don’t know if they had a multi-year infrastructure bill specifically in mind. But their message: was unambiguously clear: there will be no massive splurge in spending.  A  likely congressional response will be a  two-year extension of the current surface transportation program at current spending levels.   

States Are Striking Out On Their Own

Fortunately—as we have been documenting over the past year and a half— many individual states are trying to compensate for the lack of congressional action on long term funding by taking steps to raise additional transportation revenue of their own  For a growing number of states that have done so and have secured a stable, recurring source of funding for their transportation programs, a long-term federal transportation authorization no longer is an imperative.

Surveys conducted by the American Road and Transportation Builders Association (ARTBA),  the National Conference of State Legislatures and AASHTO’s Center for Excellence in Project Finance have identified more than 30 states that have passed transportation-related fiscal initiatives in the past three years. The surveys show that state governments have become veritable laboratories for fiscal experimentation. Six states have increased local fuel taxes (MD, WY, MA, VT, NH, MA). Others have introduced fuel taxes at the wholesale level (e.g. PA, VA), floated toll revenue bonds (e.g. OH) or raised highway tolls (e.g. DE, FL). Still others have enacted or contemplate enacting dedicated sales taxes for transportation (AK, VT, WI, MN). Two states have taken steps to protect their transportation revenue against diversion to other programs.  (MD, WI).   

At the local level, things have not been standing still either. A growing number of local jurisdictions have been approving bond issues and dedicated sales taxes to support local transportation improvements. Collectively, these measures are generating billions of additional revenue for state and local transportation programs— and making up for the absence of increased federal funding. According to the American Road and Transportation Builders Association’s (ARTBA) Transportation Investment Advocacy Center, state and local transportation initiatives that were on the November ballot (TX, MD, WI, RI, CA) alone, will provide nearly $21 billion in additional revenue.  (“Another Big Election Winner: Transportation Funding Initiatives,” Nov 5, 2014)    

Financing Major Transportation Investments

To further make themselves fiscally independent, many states have turned to financing large-scale construction projects by borrowing front-end capital and repaying it over extended periods of time using dedicated sources of revenue.  To raise capital, states are employing a variety of financing tools such as TIFIA loans, Private Activity Bonds, toll revenue bonds, State Infrastructure Banks and private equity contributions. As many as 22 jurisdictions have done so in the last several years. (see Appendix)

In turning to long-term credit to finance transportation investments, states are following in the footsteps of the private sector. All of the nation’s privately owned infrastructure— railroads, pipelines, telecommunications networks, power plants and refineries— have been funded with borrowed capital. So have many transportation improvements at the local level, using tax-exempt municipal bonds. Now, states are joining the ranks of private industry and local government in employing debt financing to modernize their infrastructure. Some  recent examples include the reconstruction of  New York’s Tappan Zee Bridge, the Eastern Span of the San Francisco Bay Bridge and the Goethals Bridge in New Jersey.

Another way in which states are procuring costly new facilities is by entering into public-private partnerships that allow public authorities to shift the burden of financing large-scale construction projects to private contractors and concessionaires. Under these arrangements,  private companies fund the front end cost of highway construction and get repaid over time with so-called “availability payments.”  In the last two years six states have entered into such  partnerships. More of them are expected in the future as states gain familiarity with this type of financing arrangements.

In sum, states are not standing idly by, waiting for Congress to come to the rescue with more money. Instead, Governors, state legislatures and local governments are taking aggressive steps to make themselves less dependent on federal aid. They are passing local bond referenda, financing large-scale construction projects with long term credit, and entering into investment partnerships with the private sector. With Republicans having increased their majorities among the governors  and in state legislatures  to historic highs not seen since the 1920s, the movement toward greater decentralization, self-sufficiency and fiscal innovation is likely to grow in strength.

Putting an End to Trust Fund Shortfalls

Will the states’ growing fiscal independence— this de facto devolution as some call it— make the Highway Trust Fund superfluous? Not likely —certainly not in the foreseeable future. At an estimated $34 billion a year, federal motor fuel taxes provide the states with essential, hard to replace revenue to maintain and modernize the Interstate Highway System and a core national highway network. 

However, big-ticket construction projects will no longer need to be funded with Trust Fund revenue. They will be increasingly financed with private capital. At least that’s the scenario envisioned by some forward-looking governors exploring new ways of financing infrastructure mega-projects.  .

“The practical facts are that if we are going to have any large infrastructure projects in the foreseeable future, it’s going to have to involve the private sector,” said Kentucky’s Democratic Governor Steve Beshear whose state has entered into a partnership with the state of Indiana to build and finance two new bridge spans across the Ohio River at Louisville with private capital. “The old model of relying on federal funding is no longer viable,” the Governor said. 

That is also the view of U.S. Secretary of the Treasury, Jack Lew who remarked during a September 9 infrastructure conference with private investors and state officials that “tighter budgets will demand creative ways of putting private capital to work.”    

Shifting large-scale capital expenditures out of the Trust Fund would help align spending from the Fund more closely with incoming tax revenues as proposed in this year’s House Budget Resolution. It  would put an end to the recurrent Trust Fund shortfalls of the past decade, eliminate the need for periodic bailouts and make the Trust Fund structurally sound in a permanent way.

As for the states, greater fiscal independence will help them gain a substantially enhanced role in transportation, says Senator Mark Norris, Republican Majority Leader of the Tennessee Senate and sponsor of the Council of Governments’ Federalism Initiative. It will empower them to set their own spending priorities and allow them to do away with burdensome federal mandates. Conversely, increased state fiscal autonomy combined with continuing  spending constraints at the federal level, will lead to a diminished, more clearly focused federal role in transportation. It’s a trend that Sen. Norris and other federalism advocates welcome as long overdue.  

Appendix: Financing  transportation mega-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 $ billions) 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 Midtown 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,  (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/managed lanes, Dallas (TX, $2.6B, $850M in TIFIA loan)
(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) Illiana Expressway (IN-IL, $1.6B);

(19) Nevada I-15 reconstruction (Project NEON) (NV, $1.5B)
(20) Pennsylvania’s Rapid Bridge Replacement Project (PA)

(21) Florida I-4 reconstruction in Orange/Seminole counties, incl. managed lanes (FL, $2.3B)

(22) North Carolina’s I-77 managed lanes, north of Charlotte (NC, $0.65)

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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