Transportation Policy Academy 2015 – DC – Maryland Secretary of Transportation Pete Rahn

Maryland Secretary of Transportation Pete Rahn was the keynote speaker at the opening dinner of the 2015 CSG Transportation Policy Academy in Washington, DC on May 11. Rahn, who was appointed by Governor Larry Hogan on January 21st of this year, is the first person to lead transportation departments in three different states—New Mexico, Missouri and now Maryland. In these excerpts of his remarks, Rahn touched on hot button topics like Hogan’s reassessment of two light rail projects in the state and recent decision to lower tolls on bridges and roadways in the name of tax relief. He also weighed in on how he thinks Congress might address expiring federal transportation program authorization and the dwindling Highway Trust Fund.

On what convinced him to take the job

Rahn: “Frankly, the challenge of Maryland is what I couldn’t resist because (the Maryland Department of Transportation) is a very unique organization. … It is the only DOT that actually has authority over all the transportation. … The reality is 5,500 miles of highways in the state. …  We have the Port of Baltimore, which is a hundreds-of-millions-of-dollars-a-year operation and a real economic engine for the state of Maryland. We have BWI Airport, which we own and so the busiest airport within the Capital Region—busier than Dulles or Reagan—is owned by the DOT. We have the Maryland Transportation Authority, which (operates) eight toll facilities. The Bay Bridge, the tunnels in Baltimore, all of these facilities are under the authority of Maryland Transportation Authority. We also have the Maryland Vehicle Administration … and I have to tell you I’m shocked out of all my administrations, that gets the least number of complaints and from looking at who is doing what, that’s the most innovative of the administrations. MVA is doing the most innovative stuff. … They’ve now put online a self-service emissions test. You go in, you put your credit card in, you put the hose on your pipes, you start it up, it gives you a printout, and on you go. You can do it seven days a week, 24 hours a day. To me, that’s the kind of service that we have to be looking at for citizens.”

On the population growth that is challenging the nation’s transportation system

Rahn: “We all have the same issues. I’m dealing with the same issues from New Mexico to Missouri to Maryland. And those issues are we need transportation facilities, we need facilities to move people and goods and that’s the challenge of your states and you don’t have the resources to do it. Even in a state like Maryland, which has invested heavily over the last three years in transportation, we still don’t have the kinds of resources that are going to be necessary to address the demands that are going to be placed on the system. … Sometime in the 1960s, the United States hit 200 million people. We hit 300 million people in 2006. It’s projected we’re going to hit 400 million in 2039. If you look back, it’s hard to argue that we handled the 200 million to 300 million growth very well from a transportation standpoint. Even though we were continuing to invest in the interstate system, it was completed by the early ‘80s and we’ve not made major investments since that time. And you can see that the excess capacity that was created with the interstate system has been consumed for most of the country. So, now what are we going to do for this next hundred million?”

On the importance of having a national transportation system

Rahn: “There’s a blogger out there called Ken Orski. … His position is essentially we don’t need to worry about (a lack of federal investment). The states are going to step up and they’re going to fund the pieces that the federal government is backing away from. And I have to tell you why you shouldn’t believe in that. … That is because we have to have a national transportation system. We cannot function with islands of good transportation … in a sea of mediocre and poor. It doesn’t work. And I’ve been concerned for a long time that as the national transportation system deteriorates and it becomes more expensive to operate from the center of our country, that we will see more and more of our industry and manufacturing moving to our coasts and that we will see an economic desert in the center of our country. … We have to have a national transportation system that allows equal opportunity for national and global marketplaces. We have to be able to have economic competitiveness for an organization or a company that wants to locate in South Dakota or wants to locate in New Mexico or Arkansas. They should have the same opportunities to compete for global business that anyone does anywhere else.”

On Maryland’s recent moves to further invest in transportation

Rahn: “In Maryland we are investing heavily now. In 2013, the legislature passed a significant increase in revenues for transportation—it’s called the Transportation Act and (the additional revenues from it go) into the Transportation (Trust) Fund. In 2014, the voters passed a constitutional amendment creating a lockbox so the money that goes into the trust fund can only be used for transportation. The taxes that were passed in 2013 included a stair-stepped sales tax on gasoline. It (is) imposed every six months. The sales tax on gasoline increased from 1 percent to 2 percent. … Three percent takes effect July 1. Four percent, January 1. July of next year, the fifth cent comes into place. So there’s a five-cent sales tax on gasoline, which is on top of the fuel tax and the fuel tax has been indexed to (the Consumer Price Index). So they’ve put in place significant increases to the fuel tax. My observation of Maryland’s funding mechanism though is that I get the sense that we’re still allowing drivers to fund transportation for all the modes.”

On why it’s still not enough

Rahn: “Maryland is very aggressive with the taxes they collect and have dedicated to transportation. But even with that, our annual budget for all of our modes is $4.9 billion and our highway portion for the five years of our … Consolidated Transportation Program … is $7.1 billion. That’s a lot of money. But when you’re talking about the metropolitan area if you look at the Texas Transportation Institute’s (Urban Mobility Report), it said that Washington, DC was the second most congested area in the country and Baltimore was the fifth. Within Maryland, we have number 2 and number 5 for the most congested areas in the country. Congestion is a huge issue. It is very expensive to deal with. … How do we address I-270, which is the most congested corridor in the state? How do you address an interstate that there is no room to expand? How do you deal with the Washington Beltway that can no longer be expanded and it needs to be reconstructed because we have mush underneath it and the system frankly has got to be taken right down to the dirt and brought back up?”

On the Purple Line and Red Line light rail projects

Rahn: “We’re looking at what’s called the Purple Line, which is a light rail connecting loop that’s to connect the various Metro lines that run north from here (in DC) into Maryland and this 16-mile piece of light rail is (projected to cost) $2.4 billion. We have a light rail system (called the Red Line) being considered for Baltimore (projected to cost) $2.9 billion. When you start dealing with such congested areas, the cost just balloons. So even when you have large amounts of revenue, it gets consumed very easily when you’re talking about congested urban areas. And unfortunately when you deal with areas that are so developed … you can’t put a road there. There’s nowhere to put a road. So we are dealing with those issues right now. The governor is considering right now whether we will proceed with the Purple Line.”

“When Gov. Hogan was running for election, he said he believed the Purple and Red Lines were too expensive and that he believed the emphasis in Maryland should be on roads and bridges and that he questioned the investment of $5 billion into two transit projects when there were significant needs in highways and bridges. To emphasize this point, I was watching television three days after I became Secretary … and they’re showing this big chunk of concrete that had fallen off a bridge and smashed a car and they didn’t say where that was at and all I could think of was ‘man, am I glad that wasn’t Maryland.’ The next morning I find out that was Maryland and it was out here on 395 or 495. … I ordered an immediate inspection of all the similar bridges. We identified 29 bridges that needed additional work on a rapid turnaround. But it sort of made the point. It emphasized the position of the governor that we needed to put more money into highways and bridges. So what we’ve been working on for the last four months now is what could we put in the form of additional investment into highways and bridges … and what would a skinny-ed-down Purple and Red Line look like.”

“I was a huge proponent of a program that we called Practical Design in Missouri, which was that we have to emphasize and prioritize the needs of the system over the wants of a project. The idea is that we want a good system not a great project. That process in Missouri saved about 14 percent of our annual program that allowed us to do significantly more work on the program. So we’ve applied practical design to these (light rail projects) and ultimately we won’t know what’s acceptable to the governor until the governor makes that decision. But I believe we will see a decision coming out of the governor’s office soon on the Purple Line. It may at the same time very well be we’d see a decision on the Red Line. I’m just not sure where the governor’s at on that. We are using P3 (public-private partnership) for delivery of the Purple Line, which is pretty innovative. … I’m not sure that’s the best use of P3 but we’re in the midst of the procurement so we’re going to make it work.”

On financing and public-private partnerships

Rahn: “I get very concerned when I hear at both the federal and state levels that we just need some innovative finance and (public-private partnerships). The reason that concerns me … is we don’t need financing, we need funding. That’s the problem. And for too many years we’ve considered financing to be the same as funding. In 1980, state DOTs across our country had $18.4 billion of state highway debt. In 2012, which is the most recent number available, there was $164 billion of state highway debt. So we’ve created a problem for ourselves and I have to tell you, I’ve issued a lot of debt in my 20 years now (at the three state DOTs). I am proud to say I never issued debt that I didn’t have a new revenue source to pay for because issuing debt and eating your seed corn just doesn’t make any sense. But what we have is this idea that said we don’t have to raise taxes because we’re just going to borrow the money and we’ll provide the projects. But we’ve now created an expectation with the public that (says) ‘wait a minute. You haven’t raised taxes in 20 years and we’ve been building road projects all this time and now you say that we have to raise taxes because we don’t have enough money? So you’ve had enough for 20 years and now you don’t? So clearly there is an issue of competence here and this has to be an issue of fraud, waste and abuse so you just need to use your money better and we wouldn’t have to raise taxes and we can continue building projects like we have been building for the last 20 years.’ We’ve created an expectation as a state DOT industry that you don’t have to pay for this stuff because we’ll just keep borrowing. But this line that goes from $18 billion to $164 billion is not sustainable. We cannot just continue to borrow and finance our way into prosperity.”

“I hear members of Congress say ‘we just need P3s.’ So my comment is ‘okay, so you support tolls?’ And they’re going ‘well, I don’t support tolls.’ Business isn’t doing this for free. They want to get repaid for their investment in these programs and so there’s a real disconnect with some of our members in Congress. They think we don’t need to raise taxes because we just need to let business invest in (roads). But business wants to get repaid and one of two things has to happen: either they need to collect tolls to provide them the revenue stream so they get repaid or (the state) has to provide the availability payment … You haven’t grown the pie when you do availability payments. So the critical piece here is we’ve got to come up with a way to fund transportation in this country. We have to have a national source and program of transportation. We can’t keep having these islands of good in a sea of bad. And the funding mechanism needs to be sustainable. Those are the critical pieces that we have to be talking about and it doesn’t matter what state you’re in, these are the same issues.”

On Hogan’s decision to lower toll rates on Maryland facilities in the name of tax relief

Rahn: “The governor had equated during his campaign two significant toll increases … to tax increases and had said that he was committed to reducing taxes in the state. In looking at tolling, we tested our revenues against certain financial commitments that we’ve made for trust agreements and bond covenants and management letters as far as what our cash balances would be and our overall coverages by policy rather than just by covenant. We tested all of those and we determined that we could lower tolls by $54 million a year or a quarter billion dollars over a five-year period. We could do that and still deliver on our capital program to maintain our systems in good condition and so we did it. Are there things that we’re not going to do as a result? I guess anytime you make a choice. What are you going to do with a dollar? In this case, there’s going to be some things that would have occurred but I don’t believe we will not be doing anything that is critical to the condition and safety of our system. It’s a policy choice that the governor has made and I support it because we still have a program in place that’s going to do what’s necessary to protect our facilities and the public and the long-term health of these toll facilities.”

On whether High-Occupancy Toll (HOT) lanes like the ones in Virginia could be in Maryland’s future

Rahn: “When you hear someone tell you as a legislator that you just need to do either HOT lanes or toll the facility or whatever, unless you have a facility like the Indiana Toll Road that you’re just going to simply turn over (to the private sector), almost any project—even those that are going to be supported with tolls—requires gap funding. That gap funding is the difference between the costs of the project and what can be supported by leveraging the tolls collected on it. The I-495 HOT lanes in Virginia that you might have seen took a $700 million gap funding component for that project to move forward. So it’s still not free. You still have to have substantial investments in capital to move these projects forward.”

“The idea of what we call ETLs versus the HOT lanes. … HOT lanes are converted HOV lanes into tolled lanes and what it means you have to do is an HOV to a HOT lane means that you still have to provide toll-free conveyance for people that met the test of HOV. People who have three people in a car don’t pay the toll on a HOT lane. If you have an ETL like we have, that just means it’s an Electronic Toll Lane. Everybody pays it regardless of how many people they have because we never had an HOV lane there before. We still had to come up with substantial gap funding and the rest of the system is paying a higher toll to subsidize that lane. So whether we would add those to I-270, again gap funding, higher tolls. It’s hard to make that case. But I think what we will see there is because the flow of traffic on 270 is two-thirds of the traffic coming in in the morning and two-thirds going out in the evening, it gives us the opportunity to try to do some reversible lanes on the other side’s traffic. So we would take a lane out of the opposing traffic and reverse it in the morning and then do the opposite of that in the evening. So I think there are some chances for us to do stuff like that.”                                       

On how significantly tolls will factor into the state’s future

Rahn: “In the case of Maryland, the next project that is probably going to need investment is going to be the (Gov. Harry W.) Nice Bridge (aka the Potomac River Bridge), which is a bridge between Virginia and Maryland. The problem with Maryland’s situation with bridges between it and surrounding states is that when the colony was founded, the colony’s boundaries went to the high-water mark on the opposing bank. So it might have been great at one point but what that means now is when we build a bridge, Maryland has to pay for the whole bridge. We don’t get to split them 50-50. The other state just simply has to build the abutment up to the bridge.”

“Will tolls be a feature in the future? I think tolls will continue to be an important part of Maryland’s transportation program but the example of the Nice Bridge, (which is) estimated at $1 billion. … I believe we could substantially reduce those costs using practical design. We could come up with something less expensive but it’s still probably $700 million and there are 18,000 cars a day (on the bridge). So the traffic on that bridge is not going to pay for that bridge and so it’s going to have to be spread throughout the whole system and the only way that occurs is you have to raise tolls. So you have to raise the tolls on everybody else to pay for this one bridge. So it becomes difficult and I don’t see this governor raising tolls. I just don’t. I think the facilities we have tolled now are going to be what we have for the future. I don’t see rates changing much.”

On what Congress will do about expiring federal transportation program authorization and the solvency of the Highway Trust Fund

Rahn: “I think they’re going to kick the can down the road like they always do. I think it might get right up to the edge like they always do. And I think they will do a short-term extension and I think they’re going to keep doing extensions until after the presidential election in November of ’16. I think (2017) is when we will see something occur. I know there’s a lot of hope out there that Congress will do something differently but I have a hard time seeing that. The mechanics of it don’t feel right. We still have the issue of no one wanting to talk about a federal gas tax increase and ultimately I don’t know how they’re going to address the federal program without raising the federal gas tax. … The problem is Congress has created for itself a hole that they’re digging deeper and deeper and that is with these General Fund transfers into the trust fund, now they are in excess of $15 billion needed to be transferred for this next year to fund the highway and transit program. … One penny of gas tax federally produces $1.7 billion. Divide 1.7 into 15 billion. That tells you how many pennies of gas tax they need to put in place to just simply bring the trust fund up to its current program. … Congress will have to raise the gas tax seven to eight cents to provide the public nothing. The public will see no advantage from raising the gas tax eight cents. And if they raise the gas tax a dime, for instance, if that’s the number they were to focus on, two cents is the net that would be put out in the form of new programs. Again, not a significant amount. And so Congress has put themselves in a position that if the gas tax is ultimately the choice of how they’re going to get this program out of the basement, they’re going to have to raise the tax 15 cents or more and that’s a big slug to haul. So there (are) some real problems here.”

Further Reading