Texas Department of Transportation CFO James Bass Talks MAP-21, Innovative Transportation Finance

James Bass is Chief Financial Officer of the Texas Department of Transportation (TxDOT). He will speak to members of the CSG Transportation Policy Task Force at the CSG National Conference in Austin on December 1, 2012 (see the task force agenda here and register for the conference here). I interviewed Bass for an article in the October 25th issue of the Capitol Ideas E-Newsletter. Below is an extended transcript of our conversation. He discusses federal transportation funding, the use of public-private partnerships and tolling in Texas, and the Lone Star State’s future transportation revenue needs.

CSG: I imagine that state DOTs including TxDOT are happy to have a longer-term bill in place after nearly three years of extensions of SAFETEA-LU. But beyond that added certainty, what do you like about the bill? What do you dislike? And do you anticipate any challenges for state DOTs in implementing the legislation?

James Bass: “The funding levels being maintained at or near the earlier SAFETEA-LU levels obviously is a good thing. I think one of the biggest benefits for Texas and a number of other growing states is going to be the expansion of the TIFIA program and really bumping that program up to almost six times and then almost seven, eight times than what it had been. It had been funded at around $120 million and in 2013 I think it’s around ($750 million) and then $1 billion in (2014). Normally those funding levels U.S. DOT is able to leverage 10 times over to provide 10 times that level of assistance to projects throughout the state. We see that as a big opportunity for us and others. The one concern or question is kind of a double-edged sword: It’s good to have long-term funding in place if one can refer to in effect a two year bill as long term. But 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 historically hasn’t been part of the Highway Trust Fund. As an example, there’s some debate and discussion going on right now if those future transfers of General Fund (dollars) into the federal Highway Trust Fund will be subject to sequestration if and when we actually get to that point at the Congressional level. 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 for or as originally thought.”

CSG: One thing that MAP-21 did not address is what happens beyond 2014 as far as the future sustainability and solvency of the Highway Trust Fund and the reliability of the federal gas tax as a revenue source. Does that make you concerned about the future of the federal program and what it means for Texas?

Bass: “All states have that concern. What is going to be that long term, sustainable funding source because as you mentioned the gas tax in and of itself is in question especially with the new CAFÉ standards expected to come into being and the increased fuel efficiency in the overall fleet of the nation, the impact that could potentially have to the primary funding source for the program is concerning to planners as you look forward. And one of the things that often times gets overlooked is in visiting with our engineers, in order to do a construction project, that development and planning time takes six to eight years to go through and acquire the right-of-way and do the environmental (studies). And so my point is as we’re looking at now the environmental studies and the beginning of the right-of-way acquisition process that we should be beginning today are for projects that are going to be awarded in 2017, 2018 and beyond. And not knowing what that funding level is going to be in the future, it makes it difficult to know how many environmental studies should be started today because 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 because then some may question why you did the study. And because it’s so uncertain, you have to kind of try and balance those factors.”

CSG: In the face of that uncertainty about the federal program, what is Texas doing to move forward on its own in the area of innovative finance of transportation?

Bass: “We’ve looked at partnerships both with the private sector and other public entities in Texas that deliver transportation. One example would be the public-private partnerships that we have going on. The first one (State Highway 130) is scheduled to open to traffic here in the next couple of weeks actually. It’s an extension of an existing toll road in the Austin area and taking it 40 miles or so south to near San Antonio. It’s roughly a $1.3 billion capital project and the private sector provided all of the funding for that. They did all the construction work and in exchange they will then operate and maintain the facility for 50 years. But the state of Texas gets a revenue share of all the revenue that’s generated on that facility. And 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 able to do that with all the other competing needs in the state.”

“In addition to that we have other managed lane projects … It’s in effect a tolled HOV lane, if you will. It’s in the middle of a “free facility” but drivers have the option to get on the managed lane and pay a fee for the benefit of the time savings on there.”

“The other thing we’ve done, we manage a state infrastructure bank, which is a revolving loan fund that we as the DOT make available to cities and counties and other local toll entity providers to normally provide maybe a subordinated loan if it’s part of a project revenue financing and generally speaking perhaps more flexible terms then they might be able to get in the marketplace. And we’re able to do that obviously in the spirit of partnership to deliver the project at the end of the day.”

“Then similar to that we did what we call a toll equity loan agreement, where it’s almost like a line of credit that we’ve made available to the North Texas Tollway Authority, the local toll provider in the Dallas-Fort Worth metroplex, that’s assisting them in delivering two critical projects in the metroplex up there—State Highway 161 and a Chisholm Trail project, where they’ve gone out and done the financing and over the next 40 years—the life of the debt—if the revenues haven’t come in as expected, we will be able to loan money to them for certain eligible costs that they can then use to make debt service payments or operations and maintenance payments. So it gave those projects a credit lift from a likely triple B category into a double A. So of course with the higher credit rating, they got a lower cost of borrowing to do that and helped those projects get delivered sooner. That one’s a little unique … but it’s really just a financial assistance agreement between us as the state DOT and a local toll provider that brought benefits to them by lower borrowing cost.”    

CSG: At the InfraAmericas conference in New York this summer, you talked about the importance of the opening this fall of the first privately-financed highway project there in the Austin area as far as having a finished project to tout and show people and potentially win support for future deals. Why is that important?

Bass: “I kind of go back to the time we had here in the Austin area before our toll roads that are currently operating opened up. There was a lot of anxiety by some, not really understanding how the toll roads would operate and function. So there were a lot of different myths that were floating around in different social media or different types of things like that were not really based in fact. But I understand that people had concerns because it was something that was unfamiliar to them. And so my comments were saying I think some of that anxiety, misunderstanding or uncertainty in how the road will operate and function I think exists with (public-private partnerships). And I think that once the road opens and has been operating for a few months, I think some of those myths will go away and some of the misunderstandings will be replaced with understanding because there will be a live project rather than a theoretical discussion of how it will work. 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.”

CSG: Is there any danger of reaching a saturation point with tolling and Texans experiencing “toll fatigue?”

Bass: “That is part of the analysis when you look at any potential toll revenue project in the traffic and revenue study … How (do) the drivers in that area value time and is the roadway going to deliver time savings to them such that they see it has value and (are) willing to pay for that value and that time savings? That’s part of the analysis in any project that’s looked at and I think will continue to be as you go forward. But so far I think drivers have appreciated having that option. And it may not be something that they utilize on their daily commute but on those days when they need to get to their son or daughter’s dentist appointment or soccer game or whatever it may be or they need to get to that important meeting with a client, it’s something that they’ve appreciated having that option available to them.”

CSG: The nonprofit transportation research organization TRIP released a report that came out a couple of weeks ago on the price tag Texas faces to meet mobility needs in the years ahead. As you look at the impact of growth on congestion and the need to maintain mobility, what are the fiscal challenges Texas faces?

Bass: “We’ve been fortunate in that our state legislature number one granted us the authority and opportunity to pursue some of these public-private partnerships to help address our mobility issue. In addition to that, they’ve provided different bonding programs or debt programs to us as a state DOT. The most recent one is a $5 billion state (general obligation) program. The debt is paid back by the general funds of the state, not our typical historic state highway funds. So it really allowed us to expand the program. Our legislature operates in two-year cycles and does a biennial budget and so they’re providing the solutions which are very helpful in two and four year increments and they’ve allowed us to deliver a lot of infrastructure today and in the past. The challenge is as we look into the future, as we begin to fully utilize those different bonding programs that have been authorized for us, the challenge or the question is what’s next. And we’ll continue to pursue the P3, public-private partnership projects and then we’ll really just be available to our legislature as a resource as they debate and discuss what other opportunities they may see to fund transportation. I think this is true with other states and other areas but we as a DOT, as a state agency, we don’t lobby for a particular solution one way or the other. We just serve as a resource to our legislators as they kind of work through one of the many challenges they face on the budget front.”

CSG: The Texas Tribune had an article the other day that said the legislature is batting around a couple of transportation revenue ideas for next year’s legislative session, namely a $50 hike in the vehicle registration fee and the dedication of vehicle sales taxes to pay for roads. Do you think those ideas might have some appeal?

Bass: “From our standpoint, I think we’re somewhat agnostic. Both deliver additional funding for transportation, which is for a DOT charged with trying to address mobility challenges in the state, those are both good because they provide more funding opportunities for us to achieve our mission and goals. I think they’d both be good and look forward to hopefully the legislature debating and discussing those.”

CSG: Gov. Perry said the other day he wants to stop the diversion of transportation funds to unrelated expenses. Would that be a step in the right direction?

Bass: “Again 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.”

CSG: Texas has also been looking at the toll taken on the condition of roads by the recent boom in oil and gas production. What kind of fiscal needs is Texas facing from that and what solutions are you looking at to meet those needs?

Bass: “There is ongoing work right now with the energy task force that involves TxDOT, some representatives from our county government level, and then also representatives from the energy sector itself kind of working through that issue and that challenge. Of course it’s a good challenge to have because that activity is certainly helping the overall economy of our state and providing a number of needed jobs. So it’s a good challenge to have. Of course what it is doing is putting additional demand on maintaining our existing system. So they’re working with them to try to go through that. We’ve included in our legislative appropriations request that we delivered a couple of months ago what in the Texas process we call an exceptional item, where for 2014 and 2015 we’ve asked for a total of around $1.6 billion to address the infrastructure needs related to that increased activity and roughly $400 million of that is to go out and repair damage that has been done to some of the most impacted areas and then another $1.2 billion to go out before certain roadways get degraded to a certain point and it becomes much more expensive to then repair and maintain them to what our Executive Director refers to as kind of “armoring up” those roads, putting in a deeper base or a thicker layer of asphalt, kind of redesign and rebuild them for this increased activity that they’re experiencing. One of the things that this advisory committee or group is looking at again with TxDOT, county officials and the energy sector is what those long term demands might be and then opportunities to address them.”

CSG: Do you think there will be a significant role for the energy sector—the industry itself—to play in financing some of those repairs?

Bass: “I think that’s a topic that will certainly be discussed and where it ultimately ends up, I guess I’d leave that up to that advisory committee and our legislature. But I think that’s something that will certainly be discussed.”