As the Highway Trust Fund Runs Low, States Come to the Rescue – Part II

(Part I of this article was run in the Jefferson Policy Journal on May 8, 2014)

Fortunately states and local governments are assuming a larger role in funding transportation, thus lessening the pressure to increase the level of federal assistance.

Having concluded that they no longer can count on a reliable 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 a February 12 Senate EPW Committee hearing on the surface transportation reauthorization when he pointed 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 raised their gasoline taxes ( MD, WY, MA, VT). Others shifted to a tax on fuel at wholesale level (e.g. PA). Still others 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.  (For the latest status of state revenue initiatives, see Appendix A)

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 …it’s up to us to find a new way.”

It’s encouraging to note that Transportation Secretary Anthony Foxx has expressed a willingness to help states in their search to find “a new way”  to fund infrastructure. One possible example: ease federal requirements for interstate highway tolling.

Long-term financing is replacing “pay-as-you-go” funding

Also 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.  (For an explanation of “availability payments” see Appendix C below).

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. Generations of locally-owned utilities and public facilities have likewise been financed with tax-free “muni” bond issues. Now, states are adopting the same approach toward state-owned infrastructure, convinced that they no longer can count on a steady and generous flow of federal transportation dollars.

Our survey has identified 21 jurisdictions that are undertaking major reconstruction projects with the help of long term credit, mostly in the form of 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. (see Appendix B below, “Financing Large-Scale Infrastructure Projects”)

Nor are public-private partnership (P3) transactions confined to roads and bridges any longer. 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 transportation facilities is already well underway. It’s a trend that has been recognized and is being encouraged by the National Governors’ Association and the Council of State Governments (See Appendix D below).

Looking to the Future

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). The latter 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,”  (“Funding America’s Future,” March 19, 2014).

Long-term Implications  

States’ growing fiscal independence and their expanded use of long-term financing could have profound consequences:

+ The Highway Trust Fund, freed from the obligation to fund costly new infrastructure, would no longer lurch from one crisis to another;

+ The need for multi-year transportation authorizations would become less urgent since large-scale projects that formerly required a guarantee of government funding over several years, would now be financed with long-term credit;

+ State governments, no longer relying on federal grant assistance for major construction, would gain more freedom to plan and prioritize infrastructure improvements on their own terms, free of burdensome federal oversight;

+ Lastly, reduced dependence on federal transportation funds would achieve de facto what various attempts over the years have failed to accomplish legislatively: i.e. it would substantially enhance the state role and narrow the federal role in transportation.