Innovation NewsBriefs- Can-Do States

July 24, 2013

“Can-Do” States
The growing phenomenon of States making their transportation programs more fiscally independent

Recently, Rep. Nick Rahall (D-WV) called for a $5.5 billion emergency federal program “to fix the nation’s backlog of deficient and structurally obsolete bridges”  (H.R. 2428).  He was responding to the well- publicized collapse of the  I-5 bridge  in Washington State . “It’s an emergency out there,” Rahall proclaimed at a news conference on Capitol Hill. ” We cannot afford for the next bridge to collapse. It’s time to act.”   Predictably, infrastructure advocates and lobbyists, never letting a serious accident go to waste, echoed Rahall, calling the I-5 bridge  incident a “wake-up call on the state of U.S. infrastructure”  and “a dramatic reminder that we need to make significant investments to bring our bridges to a state of good repair.” They conveniently ignored the fact that the collapse was caused not by any “structural deficiency” but by a semi truck with an oversized load hitting an overhead girder. The bridge is back in service with a temporary replacement span.  A permanent new span will be installed in late summer.

Significantly, Chairman Shuster and the Republican House and Senate leadership did not endorse the new  funding proposal. They recognized the funding demands for what they are —opportunistic calls for more federal infrastructure spending. Rep. Rahall’s bill is likely to meet the same fate as did former Rep.Oberstar’s call for a $25 billion emergency bridge repair program (backed by a five-cent gas tax increase)  in the wake of the Twin Cities bridge collapse in 2007 (I-35W).  The proposed legislation will soon be forgotten.

States taking initiative

No one disputes the infrastructure advocates’ claim that some of America’s transportation facilities are reaching the limit of their useful life and need reconstruction. Nor does any one disagree about the need to expand infrastructure to meet the needs of a growing population. But fiscal conservatives among infrastructure advocates across the political spectrum contend that this does not rise to the level of a national crisis requiring a massive federal response.

Instead, as we have argued in recent columns, most  deficiencies and inadequacies in the nation’s transportation infrastructure can be dealt with if each state undertook progressively to bring its transportation facilities up to a state of good repair. States would use their regular federal-aid highway funds and supplement them with their own, locally-raised revenue. Large-scale reconstruction and system-expansion projects that are beyond the states’ fiscal capacity to fund on a pay-as-you-go basis would be financed  through long-term credit instruments.

It looks like that is precisely what’s happening. A growing number of states aren’t waiting for the 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.

The  AASHTO Center for Excellence in Project Finance lists 30 states that are currently debating or have already passed measures aimed at increasing funding for transportation (“State Transportation Funding Proposals, April 2013). We list some outstanding examples below:

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.

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 Responsible Acceleration of Maintenance and Partnerships (RAMP) program which is expected to result in a 50% 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% 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.

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.

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.

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. The bill is expected to pass despite Gov. Deval Patrick’s threatened veto unless the bill allows for an increase in the state’s gasoline tax if tolls on the western portion of the Massachussetts Turnpike are removed as scheduled in 2017. In addition, the legislature has created a Public-Private Partnership Oversight Commission to facilitate the formation of public-private partnerships for transportation  infrastructure.

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 project 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 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 statewide highway and bridge improvements.

Ohio has passed a turpike toll-backed $1.5 billion bond issue for highway and bridge improvements. “By thinking outside the box (selling bonds against the turnpike’s future revenue) we’re attacking Ohio’s highway budget deficit without a tax increase and keeping Ohio’s highways in top condition,” Gov. John Kasich announced. Overall, the state plans to spend $3 billion statewide on 41 road and bridge projects over the next four years.

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 structurally-deficient bridges.

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 House has approved a constitutional amendment that would raise $800 million for the state’s highways by diverting some revenue  from its oil and gas production Rainy Day Fund.

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. The State’s Office of Public-Private Partnerships is seeking private investors to improve a 25-mile section of the heavily used cummuter 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 funding on two major projects, the Alaskan Way Viaduct tunnel and SR 520 floating bridge over Lake Washington (but vetoed planning funds for the proposed $3.4 billion Columbia River Crossing).

Financing new infrastructure

A July 12 Brookings Institution sponsored forum, entitled Can-Do States: A New Era for Infrastructure Investment, shined a spotlight on another revenue-raising strategy that is receiving increased attention by state authorities. This approach employs an array of innovative financing tools and credit instruments to raise funds for big ticket infrastructure projects. The tools include public-private partnerships, state infrastructure banks, revolving loan funds, private toll road concessions,  availability payments and private activity bonds (PABs).
Long-term credit and private financing have replaced federal dollars in virtually all large-scale highway/bridge infrastructure ventures today.  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) the proposed second  Detroit-Winsor Bridge Crossing (MI).

Except for the California High-Speed Rail and several mass transit projects, there are no major transportation facilities pending whose completion would require federal appropriations.

More examples of innovative financing are likely to be aired at ARTBA’s coming 25th Annual “P3 in Transportation” Conference in Washington on July 25-26.  The annual ARTBA event has traditionally served to bring together the Who’s Who in the world of innovative transportation financing and project delivery.  Both  U.S. Transportation Secretary Anthony Foxx and House Transportation & Infrastructure Committee Chairman Bill Shuster have been invited to address the Conference.

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Why are states asserting more fiscal autonomy?

The new “can-do” spirit is the states’ pragmatic response to the dwinding federal capacity to fund  transportation.  “Governors and state legislatures realize that the level of federal assistance beyond 2014 is highly uncertain and they are acting on a credible assumption that federal funding will remain at current levels or may even be cut back,” an association executive who is familiar with the thinking of senior-level state officials, told us.

States’ desire for more fiscal autonomy and self-sufficiency is strengthened by several other factors:  (1) a realization that the federal program has lost its sense of a mission and purpose and that many of its present functions are properly state and local rather than federal responsibility;  (2) a realignment in federal spending priorities that favors social programs at the expense of capital investments;  (3) a Highway Trust Fund that has lost its capacity to support large-scale transportation investments and has come to depend for its solvency on periodic injections of general fund revenue;  (4) a federal project approval and delivery process that is bogged down with procedural and regulatory requirements, causing delays and cost escalation in infrastructure reconstruction; (5) bipartisan absence of a political will in Congress to raise the federal gas tax (and understandably so: two-thirds of Americans oppose increasing this tax according to a recent Gallup poll); and (6) continued inability to identify another credible revenue source to supplement or replace the federal gas tax (a nationwide mileage-based user fee system is at best years away).

Short- and long-term implications

States’ growing involvement in funding transportation is a trend 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.  It has been estimated that to finance a six-year program at current spending levels would require roughly $320 billion ($53 billion/year). Trust Fund revenues and interest over the same period are expected to bring in only $240 billion according to CBO—- leaving an unfunded shortfall of $80 billion. Additional state-generated revenue may significantly narrow this gap and make a one- or two-year reauthorization a distinct possibility. 

In the longer run, greater state fiscal autonomy could modify the federal-state relationship in transportation. There would be less need for direct  financial aid to state highways, fewer federal requirements and mandates to comply with, and more emphasis on credit assistance and support of transportation investments of truly national scope and significance (High-Speed Rail in the Northeast Corridor comes to mind). “This is not devolution,” a thoughtful colleague listening to the Brookings forum presentations observed. “This is states acting responsibly to preserve their transportation assets and modernize their infrastructure— and taking charge, as they properly should, of their own transportation future.”

— Posted on July 18, 2013 at 7:48 pm by Ann