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States Get Creative to Fund Transportation Infrastructure

As the Highway Trust Fund runs low on cash, states come to the rescue with innovative funding initiatives

In 2008, the Washington region's transit agency began its largest expansion ever with construction of the Silver Line that will provide service from downtown D.C. to Dulles International Airport and several Northern Virginia suburbs. Photo: David Kidd
With federal transportation spending outpacing tax receipts by some $1.25 billion/month, the cash balance of the Federal Highway Trust is drawing perilously close to the point where the U.S Department of Transportation will be obliged to institute cash management strategies – such as reimbursing states weekly rather than on a daily basis – to keep the Trust Fund account solvent. Based on current spending and revenue trends, this point – a cash balance of $4 billion – may be reached as early as late July according to some estimates.

But the main concern focuses on what will happen at the end of the fiscal year when the existing surface transportation program is set to expire. While it is virtually certain that Congress will not allow the program to lapse, it is far from clear what form Congressional action will take.

The transportation stakeholders and Sen. Barbara Boxer (D-CA), chairman of the Senate Environment and Public Works (EPW) Committee, are pressing for a multi-year reauthorization and annual levels of funding equal to the current $54 billion/year, and preferably higher. The stakeholders are warning that failure to reauthorize the program at its current spending levels will oblige many states to tighten their belts, cut back on construction projects they planned to go forward with and forego any new capital investment.

However, the Trust Fund will not "run out of money" strictly speaking, AASHTO officials said. Gas tax revenue and interest will continue flowing into the Fund at an annual rate of $39 billion ($34 billion into the Highway Account, $5 billion into the Transit Account), allowing for a reduced level of spending next year even if no extra money is voted. That, in fact, is what House Budget Committee Chairman Paul Ryan (R-WI) had in mind when he proposed "aligning spending from the Trust Fund with incoming revenue collected."

Several ad hoc groups have sprung up alongside the traditional stakeholders to lobby for long-term transportation funding. They include the Alliance for American Competitiveness, a corporate partnership of BNSF Railway, Caterpillar, Dow, Honeywell and UPS; a group of 31 state chambers of commerce which have co-signed a letter to congressional leaders in support of a multi-year reauthorization; and a coalition of non-profits led by the Council on Competitiveness that includes the US Chamber of Commerce, the National Association of Manufacturers (NAM), the Building America's Future Coalition and the Brookings Institution. The latter coalition is planning a series of events during the week of May 12-16 designed to raise public awareness about the need for greater federal investment in infrastructure.

However, enacting a multi-year reauthorization and higher funding levels face long odds in this election year.  

Searching for Funds

A six-year transportation measure, which the transportation stakeholders contend is essential to plan for and implement large-scale multi-year projects – would require roughly $330 billion to maintain current, FY 2014 spending levels (an average of $55 billion/year adjusted for inflation). 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 $96 billion. Whether and how such a huge shortfall can be funded in this tax-averse, deficit-conscious pre-election Congress remains so far 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 solution to the impending Trust Fund shortfall. The Committee's new chairman, Ron Wyden (D-OR), has merely hinted that the Committee might look at private capital as one possible source of funding.

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, has not been widely accepted as an option. "I'm going to be very honest with you, I don't see support for raising the gas tax," Sen. Boxer told the audience at a February 26 AASHTO legislative briefing. Talk of increasing the gas tax remains anathema in Congress 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 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 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 third solution – a wider use of highway tolling – has been the subject of extensive discussion at the IBTTA legislative/policy/finance conference in Washington on March 10-11. Tolling has proven to be a viable and increasingly popular tool to fund major transportation infrastructure projects, says IBTTA. Existing toll roads in 28 states generate more than $10 billion/year in revenue – nearly one-third of the annual federal gas tax revenues. But revenues from tolling flow into state treasuries, not into the Highway Trust Fund. However beneficial increased tolling flexibility might be for the states' fiscal health, it would do nothing to augment federal transportation revenue or enhance the long-term solvency of the Highway Trust Fund.

States are taking matters into their own hands

Fortunately, as we have pointed out in a series of columns over the past several months, 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.

Sen. Roger Wicker (R-MS) took note of this fact at the February 12 Senate EPW Committee hearing on the surface transportation reauthorization by pointing out that states are becoming "laboratories for fiscal experimentation." And indeed, a growing number of Governors and state legislatures are engaged in fiscal innovation aimed at generating more funds for transportation.   

Our survey of "Can-Do" states documented significant transportation-related revenue initiatives during 2013 in 26 states. 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 dedicated 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 (NCSL), listing six states that have introduced bills to raise state gas taxes or index them to inflation. An independent review by the American Road & Transportation Builders Association (ARTBA) shows 14 state legislatures currently considering bills to increase funding for state transportation programs.

Further evidence of a 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 state 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’s up to us to find a new way."

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.

A growing number of costly infrastructure projects that are credit worthy – i.e. that generate a revenue stream, such as tolls, or are backed by dedicated taxes – no longer rely on uncertain federal annual appropriations or 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.

In turning away from "pay-as-you-go" funding and toward long term financing, states are emulating a method long practiced in the private sector. All of the nation’s privately owned transportation infrastructure has been, and still is being financed by borrowing front-end capital and repaying it over time rather than 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 credit and availability payments. In addition, 11 states have public-private partnership procurements underway amounting to $15 billion, reports the financial newsletter, Public Works Financing in its March 2014 issue. This is on top of some 35 billion dollars’ worth of municipal bonds that are annually sold to finance local transportation.

Nor are public-private partnership (P3) transactions confined to roads and bridges any more. Maryland's Governor Martin O’Malley 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 facilities is already well underway. It's a trend that has been recognized and is being encouraged by the National Governors Association.

Looking to the Future: A New Approach to Paying for Transportation Infrastructure

As states acquire more familiarity with credit transactions and develop more expertise to pursue public-private partnerships, and as federal budgetary constraints continue, long term financing could become the states’ primary method of expanding transportation capacity and modernizing aging infrastructure.

That is not to say that the Highway Trust Fund will become superfluous. User fees in the form of state and federal gas tax revenue will continue to play an essential part in helping to maintain and preserve the nation's highway and transit systems. But Trust Fund revenue will no longer be required to fund multi-year capital-intensive reconstruction programs and new transportation facilities. The latter investments will increasingly be financed through public-private partnerships employing long term credit and availability payments.

Provision of credit will remain a shared responsibility of the public and private sectors. Private Activity Bonds, the TIFIA program and State Infrastructure Banks will 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). As Mr. Delaney testified at the April 8 House hearing on public-private partnerships, his 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.

As for private sources of credit, institutional investors – insurance companies, pension funds, sovereign wealth funds and other private nonbank lenders – "are well positioned and increasingly inclined to allocate more of their capital to infrastructure," said Doug Peterson, CEO of McGraw Hill Financial, parent company of Standard & Poor's, at the U.S. Chamber Capital Markets Summit. "We estimate that institutional investors are targeting about four percent of their portfolios to infrastructure," Peterson went on to say. "This would provide about $200 billion in additional infrastructure funding each year, and $3.2 trillion by 2030."

An ample supply of long-term credit – both public and private – will ensure that the nation's infrastructure needs are fully met. At the same time, the Highway Trust Fund – freed from the obligation to fund costly new infrastructure – will be placed on a sound financial footing. By becoming fiscally more independent, states and localities will be able to plan and fund infrastructure improvements on their own terms and according to their own priorities, free of burdensome federal oversight.

In sum, a combination of user fee revenue and public and private financing may offer the best long term solution to the perplexing infrastructure funding problem. It's an approach that will ensure the solvency of the Highway Trust Fund without requiring constant general fund bailouts that only contribute further to the nation's deficit.   

Kenneth Orski is the Editor/Publisher of Innovation NewsBriefs