Transportation & Infrastructure Finance in the States

Presentation to Arkansas Blue Ribbon Committee on Highway FinanceSeptember 16, 2009 by Sean SloneTransportation Policy AnalystThe Council of State Governments

The Council of State Governments Founded in 1933 Serves the executive, judicial &

legislative branches of state government through leadership education, research and information services

Regionally-based, non-partisan forum

Headquartered in Lexington, KY with regional offices in New York, Chicago, Atlanta, Sacramento, Washington

The Council of State Governments

CSG Funding

Entrepreneurial Ef -forts (29%)Grants (28%)State Appropriations (43%)

Defining the Problem

America’s infrastructure crumbling 5-year investment of $2.2 trillion needed Needed annually to improve the nation’s

highways: $186 billion Current spending for highway capital

improvements: $70.3 billion ARRA funding for transportation

infrastructure projects: $48.1 billion

Transportation Funding

State Revenue Sources for Highways, 2007 Federal Funds

(24%)Fuel Taxes (24%)Bond Proceeds (15%)Vehicle & Truck Taxes (13%)State Investments (6%)General Funds (6%)Tolls (5%)Other (5%)Local Fund (2%)

Fuel Taxes

82% of federal transportation funding comes from federal fuel taxes

24% of state revenues for highways come from state fuel taxes

Motor fuel tax revenues continue to decline

Purchasing power has declined No longer sufficient to finance large

and growing infrastructure needs

Fuel Taxes

Converting from Cents Per Gallon Excise Taxes to an ad valorem tax

Indexing the fuel tax to some appropriate indicator such as the Consumer Price Index or the Construction Cost Index

Fuel Taxes

Several states adopted “variable rate” fuel taxes between 1974 and 1982.

Fuel prices fell rapidly in the 1980s and fuel tax revenues pegged to the price of fuel also produced dramatic reductions in revenue.

Michigan is the oft-cited example. About 15 states enacted some form of

indexing in the seventies or early eighties; most reversed themselves

Fuel Taxes

Indexing only a portion of the motor fuel tax

Coupling indexing with a “cap” on annual changes in the upward or downward direction in order to avoid wild fluctuations in tax revenue and in prices faced by consumers

Fuel Taxes Six states index their gasoline taxes to

inflation. Florida and Maine adjust gas taxes by the

CPI. Nebraska adjusts gas taxes by a state

funding formula. Kentucky, North Carolina and West Virginia

link their gas taxes to the fuel wholesale price.

Nine states also add a sales tax to gasoline purchases or tax fuel distributors or suppliers.

Recent Developments in the States Oregon enacted a law to increase fuel taxes by 25

percent and to raise registration, title and driver’s license fees.

Only three jurisdictions have enacted gas tax increases this year; Vermont and D.C. are the other two.

Minnesota increased their gas tax for the fourth time in 15 months this summer as part of a graduated increase approved by lawmakers last year.

Fifteen states considered raising state fuel taxes, motor vehicle fees , or both this year.

Tennessee’s gas tax of 21.4 cents per gallon has not been raised in 20 years.

Vehicle Fees

Relatively inexpensive to administer in relation to potential yield

Can be varied by vehicle size Can be set in rough relation to

highway cost responsibility Categorized as “very promising” as

both a short- and long-term funding option

Types: heavy truck fees, excise taxes on vehicle sales, personal property taxes

Other Tax & Fee Mechanisms Development Impact Fees Special Assessments Tax Increment Financing Community Facilities Districts Rental Car Taxes Cigarette Taxes Gambling/Lottery Revenues

Recent Developments in the States Colorado hiked vehicle registration fees to raise

about $250 million a year for transportation. Iowa lawmakers agreed to Gov. Culver’s plan to

borrow $830 million, with the bonds paid off from casino gambling profits.

Illinois financed a $31 billion construction program by legalizing video poker, raising fees and hiking taxes on candy, beauty products and alcohol.

North Carolina lawmakers approved legislation to allow counties to increase their sales taxes to support transportation projects.

Bonding Every state except South Dakota, Tennessee and

Wyoming has authority to issue state transportation bonds.

Bond funding provides states upfront capital to accelerate project delivery.

New state bond obligations in 2007 were valued at $19.8 billion.

At the end of 2006, outstanding state bond obligations reached a record $96.5 billion.

As credit markets have tightened, states seeking to issue bonds or access credit and private capital have encountered challenges.

Debt Financing

State Credit Assistance Federal Credit Assistance GARVEE Bonds Section 129(a) Loans Private Activity Bonds Build America Bonds Recovery Zone Bonds

State Infrastructure Banks Authorized by Congress in 1995 In 35 states and Puerto Rico Allow for leveraging of federal and state

resources by lending rather than granting federal-aid funds

Can be used to attract non-federal public and private investment

Revenues from loan repayment and interest are used to fund subsequent loans

Vary widely in size, from less than $1 million to more than $100 million

South Carolina is the leader in SIB financing

State Infrastructure Banks - Advantages Interest rate is set by the state Maximum loan term is 35 years State may be willing to take more

risk than a commercial bank would for a project with significant public benefits

A state infrastructure bank loan can make a large project affordable by allowing for smaller annual payments

State Infrastructure Banks - Obstacles States lacked legislative authority to

leverage their funds and increase the capitalization level of the bank

Complexity of federal requirements Requirements for smaller projects

can delay construction schedules and increase costs

Insufficient demand for loans due to limited marketing efforts

Alternative Transportation Funding Mechanisms Public-Private Partnerships Tolling Congestion Pricing Vehicle Miles Traveled Charges

Public-Private Partnerships

Collaborations between governments and private companies that aim to improve public services

and infrastructure by capturing efficiencies associated with private

sector involvement while maintaining the public accountability

of government involvement

Public Private Partnerships Full-Service Long-Term Concession or Lease Multimodal Agreement Joint Development or Transit-Oriented Development Build-Own-Operate Build-Operate-Transfer or Design-Build-Operate-

Maintain Design-Build-Finance-Operate Design-Build with Warranty Design-Build Design-Bid-Build Construction Manager at Risk Fee-Based Contract Services & Maintenance

Public-Private Partnerships More capital can be raised for a project Operating risk shifted to private investors and operators Costs and risks to taxpayers minimized Help taxpayers unlock the inherent value in toll roads lost

under government ownership Maximize the strengths of both the public and private

sectors Take advantage of the more businesslike approach of

private sector firms Private firms quicker to adopt cost-saving and customer-

service oriented technology Take advantage of the private sector’s diversified

knowledge and awareness of new methods in design, construction, operations and maintenance

Public-Private Partnerships Transparency & public participation Use of concessions Conflicts of interest Better value for the money Private partner must adequately maintain No non-compete clauses Facility will revert to the state Capping the rate of toll increases Revenue-sharing Length of agreement term

Tolling More than 5,000 miles of roads, bridges and

tunnels in the United States are tolled. State and local governments used $6.6

billion in toll revenues for highway investments in 2004 (7% of total revenues).

Increasing tolling on existing roads may be a challenging proposition.

Tolling on new roads or when adding additional lanes hold potential for generating new revenue.

Recent Developments in the States Legislators in Nevada rejected the state Department

of Transportation’s requests to have authority to pursue toll roads and public/private partnerships.

Texas failed to act to extend the state DOT’s ability to enter into new P3s.

Arizona and North Carolina’s Governors signed legislation allowing their state DOTs to enter into P3s.

West Virginia Turnpike increased tolls this year for the first time in 28 years.

Toll opponents in Massachusetts have filed ballot measures to eliminate all turnpike, tunnel and bridge tolls in the state.

Congestion Pricing

Mechanism that seeks to assess vehicles for the costs they impose on society, which may include time costs, external congestion costs and other variable costs, such as environmental and governmental

Types include: tolling the entire roadway, tolling existing lanes, tolling new capacity, imposing a “cordon fee” on any vehicle that enters a designated area.

Congestion Pricing Easy to implement Affordable and feasible administratively Makes enforcement more effective Manages demand on congested facilities,

thereby reducing traffic Can generate additional revenues that could

be used to expand highway and transit capacity in the corridor to further reduce congestion

Encourages the use of other routes and other modes of travel, such as public transportation

Congestion Pricing Impact on lower-income commuters Drivers unable to accept the notion that

they should be charged for congestion and don’t want to pay for roads currently free

Commuters feel they already “pay” for congestion through delays and stress.

Commuters don’t consider traffic conditions to be bad enough to warrant congestion pricing

Privacy concerns

VMT Charges Fee based on miles driven in the state,

collected at gas stations Oregon conducted a year-long pilot project;

other states have ongoing research projects GPS-based receiver estimates miles driven in

different zones Mileage data transmitted wirelessly to

receivers at gas stations Revenues directly reflect the amount of

travel VMT-based fees are in place in Europe

VMT Charges Technological and institutional challenges

remain University of Minnesota added to the body of

evidence recently NCHRP also recently addressed strategies for

shifting to VMT Three national commissions have said U.S.

should adopt a mileage-based approach Premature to rule out other types of taxes

and fees to supplement traditional fuel tax revenues

Criteria for Evaluating Revenue Mechanisms Revenue potential Sustainability Political viability Ease/cost of implementation Ease of compliance Ease/cost of administration Level of government Promotes efficient use Promotes efficient investment Promotes safe and effective system operations/management Address externalities Minimize distortions Promotes spatial equity Promotes social equity Promotes generational equity

Questions?

Sean SloneTransportation Policy Analyst

The Council of State Governmentssslone@csg.org (859)244-8234