Rethinging the Way Transportation Infrastructure is Funded

States are taking matters into their own hands

It may come as a surprise to you, but there is a quiet revolution in transportation funding underway these days. Faced with a depleted Highway Trust Fund and uncertain prospects for more money from a deficit-conscious Congress, many states are taking matters into their own hands and aggressively pursuing more fiscal independence.

A survey we have recently conducted documents significant funding initiatives in 18 states. Some states have raised their gasoline taxes (MD, WY, MA, and VT). Others have shifted to a tax on fuel at the 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).

Further evidence of local initiatives came on election day last November when voters approved over 70 percent of ballot measures to increase or extend funding for local transportation…

A senior state transportation official commenting on our survey of funding initiatives told us, “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 …it’s up to us to find a new way.”

So it would seem that the federal budgetary realities are helping to achieve de facto some of the federalist reform objectives that have been on the congressional agenda ever since they were first put forward back in the late 1990s by former Congressman (now Ohio Governor) John Kasich, later embraced by former Sen. DeMint, and just recently revived through the Transportation Empowerment Act by Rep. Graves and Sen. Lee.

Admittedly, what we are seeing today is not “devolution” properly speaking as envisioned in the Empowerment Act. But it’s a significant step in the direction of shifting more transportation decision-making to the state and local level.

States are embracing long-term financing

What is 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.

Costly multi-year infrastructure projects no longer have to rely on uncertain annual appropriations or to compete for scarce Trust Fund dollars. Instead, they are being financed with a variety of tools, such as private activity bonds, Transportation Infrastructure Finance and Innovation Act (TIFIA) loans, toll revenue concessions, availability payments and private risk capital.

In turning away from “pay-as-you-go” funding and toward project financing, states are emulating a long-established practice in the private sector. All of the nation’s privately owned infrastructure has been, and still is, financed by borrowing front-end capital and repaying it over time rather than by relying on current cash flow. Now, states are adopting the same approach toward public infrastructure, convinced that they no longer can count on a stable, reliable 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 debt. In addition, states have entered into more than thirty public-private partnerships worth about $20 billion. This is on top of some 35 billion dollars’ worth of municipal bonds that are annually sold to finance local transportation…

And this may only be the beginning. As states acquire more sophistication and familiarity with credit transactions, and as federal budgetary restraints continue, long term financing of large-scale capital-intensive projects through public-private partnerships (P3) and availability payments is bound to become the states’ primary method of expanding and modernizing aging infrastructure.

Nor will future P3 transactions be 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 has been a system of commuter lines in Denver, known as the Eagle P3).

Immediate and Longer-Range Consequences

There are several potential consequences flowing from these developments. With states becoming more fiscally independent, Congress might conclude that there is less of a justification to increase the transportation reauthorization spending levels or to approve a long-term bill. A one- or two- year measure funded at current spending levels ($54B/year) now appears as a distinct possibility according to congressional sources.

Even at those levels of expenditure, an extra $15-16 billion/year in new revenue would be required to close the gap in funding, according to the Congressional Budget Office. No one — neither in Congress, nor in the Administration nor among the stakeholders — has come up with an answer as to where this money is to come from, not to speak of the $90 billion required to fund a six-year bill that many transportation stakeholders are advocating.

Secondly, assuming that costly multiyear projects will henceforth be financed with long term debt, there will be fewer demands placed on the resources of the Highway Trust Fund — and thus less of a threat that the Fund will go broke. However, it’s doubtful that capital demands on the Fund will lessen sufficiently to stabilize it at its CBO-estimated revenue inflow level of $34 billion/year. So a funding shortfall will remain, posing a serious challenge for the congressional fiscal authorizers.

Lastly, future infrastructure investments will depend on an ample supply of long term credit. While TIFIA is likely to continue as a key source of publicly-provided credit assistance, an accumulated backlog of infrastructure repairs and modernization may justify additional credit facilities. Sen. Mark Warner’s proposal for a National Infrastructure Financing Authority (IFA) and Rep. John Delaney’s proposed $50 billion American Infrastructure Fund (AIF) provides two potential models for addressing this issue.

Source:Remarks by Kenneth Orski, Publisher of Innovation Briefs, prepared for delivery at the 2014 Conservative Policy Summit sponsored by Heritage Action, February 10, 2014

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