Future of Transportation Funding Still A Concern

E-newsletter Issue #103 | October 25, 2012

When Congress passed a federal surface transportation bill this summer after a nearly three-year wait, state transportation officials across the country were among those hailing the accomplishment. 

After all, they had weathered the uncertainty that multiple temporary extensions of the previous bill, known as SAFETEA-LU, had produced and largely avoided predicted cuts in federal transportation spending. The legislation that emerged, known as MAP-21 (for Moving Ahead for Progress in the 21st Century), is a two-year bill that maintains current funding levels. 

But as many of the provisions of MAP-21 kick in this month, state government officials, transportation experts and others remain concerned about the long-term future of the federal transportation program and the primary revenue mechanism that supports it—the federal gas tax. They also fear that the nation’s broader economic concerns could threaten MAP-21’s hard won achievements long before the legislation expires in 2014.

“It’s good to have long-term funding in place, if one can refer to … a two-year bill as long term,” said James Bass, chief financial officer of the Texas Department of Transportation, known as  TxDOT, who will speak during the Transportation Policy Task Force meeting at the CSG National Conference in Austin from 2:30 to 4:30 p.m. Dec. 1. “It’s a heck of a lot longer than three months or six months. But it relies upon general fund transfers to the federal Highway Trust Fund and that brings in another aspect of risk.”

That risk could be felt as early as Jan. 2, 2013. That’s when automatic cuts in all areas of government could kick in as part of the sequestration process, the result of the inability of the White House and Congress to reach a budget deal last year. A Congressionally mandated White House report released in September detailed what the across-the-board spending cuts might entail. Although Highway Trust Fund transportation programs would be exempted from the cuts, the general fund transfer used in MAP-21 to supplement the trust fund due to declining gas tax revenues would be subject to cuts. An estimated $1.5 billion could be cut from highways, transit and rail programs if Congress is unable to reach a deal in the lame-duck session and sequestration goes forward. 

“What people were hoping was a stable funding source and a stable plan for the next two years may not be as stable as originally hoped,” Bass said.

But avoiding that fiscal cliff could bring even deeper cuts to transportation programs. 
The Washington, D.C.-based think tank Taxpayers for Common Sense recommends cutting $11.4 billion from federal transportation spending in 2013 and $187 billion over the next decade as part of a plan for “Sliding Past Sequestration,” as the group’s recent report is titled.

Even if the federal transportation program somehow makes it back from the brink of the fiscal cliff and impending sequestration relatively unscathed, long-term sustainability of the federal program is still an issue. The unresolved nature of that larger issue is one of the things that prevented Congress from passing a longer term bill this summer. 

The uncertainty continues to wreak havoc on transportation project planning, Bass said. Right now, state departments of transportation like TxDOT are working on environmental studies and acquiring rights-of-way for projects that won’t be built until 2017 and later. The uncertainty of funding beyond the expiration of MAP-21 in 2014 makes that a huge guessing game.

That uncertainty in future funding makes it difficult to plan environmental studies, Bass said.
“You certainly don’t want to start and spend all those resources doing a study and then find out you don’t have the money to actually build the project in future years,” Bass said. 

Moreover, the inability of Congress to come up with a long-term plan for funding transportation could threaten the creditworthiness of the transportation sector and state and local governments, according to a new report from the Standard & Poor’s rating service.

“In our view, unless the federal government implements a targeted transportation policy with secure funding sources that extends beyond the short-term measures in the MAP-21 and recent Federal Aviation Administration reauthorization laws, substantial uncertainty will remain about where project funding will come from,” the report said. “Furthermore, with federal funding declining and that trend expected to continue, the burden to finance infrastructure projects will fall more heavily on local government entities or users in the form of higher rates or tolls … This scenario doesn’t bode well for getting these projects done, and it could test the credit quality of the agencies that are ultimately left to finish the job.”

Mileage-Based User Fees

Many transportation analysts believe developing a more sustainable federal transportation program and a secure funding source may involve transitioning to a system based on having motorists pay for each mile they drive rather than each gallon of gas they purchase. New fuel efficiency standards and other factors are likely to further erode gas tax revenues in the future. 

But while mileage-based user fees have been the subject of numerous pilot projects by state departments of transportation, universities and others, the concept has had some difficulty catching on among policymakers in Washington and the public. Richard Baker of the Texas A&M Transportation Institute says he knows why.

“The public does not really understand how we currently pay for transportation infrastructure development,” said Baker, who has conducted research into public attitudes and perceptions regarding mileage-based user fees. He will discuss his findings at the Austin meeting. “The transportation community has been looking at mileage-based fees as a replacement for the existing system and mileage fees—depending on the type of system that’s being talked about—appear to be much more complex, much more intrusive, much more expensive than the current system and so the public doesn’t really see why we’re even talking about this sort of thing.”

Concerns about privacy seem to be a significant obstacle to overcome with the public, Baker said. All the early pilot projects used some form of in-vehicle device capable of tracking not only mileage, but also location. More recent pilots have moved away from a single, government-mandated technology to track mileage to offer users a range of technology options. But privacy concerns remain strong. 

The cost of implementing such a system also could be a concern.

“Most estimates put the cost of current fuel tax collection at about 1 percent of gross revenues,” Baker said. “We don’t really have a lot of good estimates for what a mileage-based fee system—particularly a national system—(would cost) but most estimates put it at about 7 percent, at least.”  

But Baker said ongoing mileage-based pilot projects in states such as Minnesota, Nevada and Oregon could help change some minds about mileage-based user fees.

“I do believe that, yes, success at the state level would facilitate this being looked at more seriously at the federal level,” he said. “Let’s remember that the fuel tax started out in Oregon and it wasn’t until a lot of states had implemented fuel taxes that the federal government sort of got on board and said ‘Well hey, this is a great idea. We should be looking to do this ourselves.’”

While no state has adopted a statewide mileage-based user fee, that could happen as early as next year, some analysts believe.

“Oregon is sort of leading the charge,” Baker said. “If it’s going to happen, it’s probably going to happen there first.” 

Texas’ Innovative Finance

With the uncertainty about the federal transportation program, states like Texas have moved forward on their own to address infrastructure needs with innovative financing.

In particular, public-private partnerships and tolling have become essential parts of the equation in the Lone Star State. 

An extension of State Highway 130, a toll road between Austin and San Antonio with the nation’s fastest speed limit at 85 miles per hour, opened to traffic Oct. 23. The private sector funded the $1.3 billion capital project.

“They did all the construction work and in exchange they will then operate and maintain the facility for 50 years,” said Bass of TxDOT. The state will share in toll revenue. “It’s a facility that we had looked at funding or financing before and there was no way that we as a governmental entity were (going to be) able to do that with all the other competing needs in the state.”

Bass said the opening of the state’s first privately financed highway project will help dispel some myths about public-private partnerships, perhaps paving the way for expanded use of the project financing and delivery mechanism.

“People will be able to look at the actual project that’s underway and operating and gain a better understanding of how these agreements actually function,” he said.  

Bass also touts the importance of the state’s infrastructure bank and various bonding programs approved by the legislature in helping to meet the state’s transportation needs. 

Infrastructure investments in Texas appear to have paid off. Earlier this year, the state came in first in CNBC’s Top States for Business rankings based in part on having the nation’s best infrastructure.

But the state’s economic success and remarkable growth in recent years mean Texas also faces numerous challenges. A recent report from the nonprofit transportation research organization TRIP said Texas, which has seen population growth of more than 50 percent since 1990, must “improve its roads, highways and bridges to foster economic growth and keep businesses in the state” as well as “to ensure safe, reliable mobility and quality of life for all Texans.” The report said inadequacies of the state’s transportation system cost Texas residents $23.2 billion annually in the form of traffic crashes, additional vehicle operating costs and congestion-related delays. 

In addition, the recent boom in oil and gas production has taken a toll on the condition of some Texas roads. Officials from TxDOT, county governments and the energy sector have formed a task force to discuss how to fund the repair of roads damaged by drilling activity. 

Members of the Texas legislature also are batting around ideas for potential new sources of transportation revenue to consider in 2013. Strategies under consideration reportedly include a $50 hike in the vehicle registration fee and the dedication of vehicle sales taxes to pay for roads. Gov. Rick Perry has said he wants to stop the diversion of transportation funds to unrelated government expenses. 

Bass said that while his department must remain agnostic on specific policy options, it would certainly welcome any and all additional revenues.

“I think if it provides additional funding to TxDOT and our programs, the obvious answer is yeah, we would view that as a benefit that would allow us to, at the end of the day, deliver more mobility, maintain more of our system than without it, so we’d definitely see that as a good thing,” he said.

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