States Are Working to Avert Feds' Transportation Funding Crisis

States Are Working to Avert Feds' Transportation Funding Crisis
October 14, 2013

Kenneth Orski

Kenneth Orski (korski@verizon.net) is editor and publisher of the Innovation Briefs newsletter. (read full bio)

A recent hearing of the Senate Environment and Public Works (EPW) Committee on "The Need to Invest in America's Infrastructure and Preserve Federal Transportation Funding" made it painfully clear that neither the assembled witnesses nor any of the attending senators had any clue as to how to come up with the hundreds of billions of dollars that transportation boosters say are needed to fund the next reauthorization.

A six-year transportation bill would require roughly $320 billion ($53 billion/year) to maintain current spending levels. Trust Fund revenue and interest over the same period are expected to bring in only $240 billion, according to the Congressional Budget Office. This would leave an unfunded shortfall of $80 billion. Even a stopgap one-year bill would require an extra $14-15 billion to maintain transportation spending at current, FY2013 levels.

To be sure, all the familiar suggestions for augmenting federal transportation revenue were dutifully dusted off. These include increasing and indexing the federal fuel tax, transitioning to a mileage-based user (VMT) fee, supplementing the trust fund with general fund revenue, and increasing transportation revenue in the context of a more comprehensive tax reform. (The "peace dividend," mercifully, was not mentioned.)

No Way Ahead Seen

The only fresh proposal came from Committee chairman Barbara Boxer (D-CA) who pronounced herself leaning in favor of replacing the per-gallon fee at the pump with a sales fee "as they have done in Virginia and Maryland." None of the suggestions emerged as a clear favorite, and some were dismissed as impractical.

For example, both the mileage fee and the comprehensive tax reform were deemed not ready to be implemented by October 2014 when the federal transportation program has to be reauthorized. As for the always-predictable proposal to increase the gas tax, it met with no discernible sympathy from the committee members and elicited support from only two industry witnesses.

Senate Finance Committee Chairman Max Baucus (D-MT), who is also an EPW Committee member, warned that the patchwork funding mechanisms employed to pay for the MAP-21 bill would not be used again in 2014. Nor was general revenue considered an option in the opinion of the attending senators and most of the witnesses.

This left the listeners wondering what other options were there left for the committee to consider, other than adjusting the scope of the future program to the available funding levels. This, indeed, was one of three "alternative paths" listed (but rejected) by hearing witness Janet Kavinoky, the U.S. Chamber of Commerce's transportation director.

Financing Instead of Funding

Quite a different path was suggested by Sen. Jay Rockefeller (D-WV), chairman of the Senate Commerce Committee, at a September 24 hearing of the Senate Subcommittee on Surface Transportation on "Rebuilding the Nation's Infrastructure: Leveraging Innovative Financing to Supplement Federal Investment":

"I wish I were confident that ... there would be a genuine bipartisan effort to dramatically increase investment in the nation's infrastructure," Rockefeller said. "However, I'm afraid that simply won't be the case.... So where do we go from here? I say it's time to look beyond just the federal ledger. We need to use the limited federal funds we have wisely, by leveraging them to attract other sources of capital."

What Rockefeller suggested is perhaps the most obvious solution to the impending funding crisis. It is to allow multiyear, capital-intensive transportation projects—investments that are beyond the states' fiscal capacity to fund on a pay-as-you-go basis—to be financed with long-term credit, both public and private. This would be consistent with a fundamental principle of public finance that infrastructure should be financed with capital raised up-front and paid for over time rather than funded out of current cash flow.

While this approach might limit new investments to creditworthy projects—i.e., those that generate revenue (such as toll facilities) or backed by dedicated taxes or "availability payments"—virtually all transportation megaprojects already fall in that category. Indeed, except for mass transit projects and the California High Speed Rail project, there are no costly, regionally significant transportation facilities under construction or on the drawing board the completion of which hinges on federal appropriations. 

It looks like Rockefeller's idea is precisely what's happening across the land. Many states aren't waiting for the financially troubled federal government to come to the rescue with new money. They are taking matters into their own hands and assuming control of their infrastructure agendas by using "other sources of capital."

Partnering With Private Sector

A July 12 forum sponsored by the Brookings Institution shined a spotlight on the states' increasing efforts to partner with the private sector to rebuild and modernize their transportation infrastructure. The same theme was struck at ARTBA's 25th Annual "P3 in Transportation" Conference in Washington on July 25-26, where state efforts to deliver major transportation investment projects through public-private partnerships were featured in a plenary session.

Virginia, Texas, Pennsylvania, Florida, and Indiana were singled out as leaders in the private delivery of infrastructure projects, but other states are expected to follow. Our own recent survey identified 18 jurisdictions that are financing big-ticket highway and bridge "mega-projects" without federal funding. Instead, they are using long-term credit (private and TIFIA), "availability payments," private equity risk capital, and concession agreements.

"What you are seeing is the governors' and state legislatures' pragmatic response to the dwindling federal capacity to fund major infrastructure," one senior state official attending the ARTBA conference told us. "We are convinced this trend will continue."

More support for this point of view came from witnesses at the September 24 hearing of the Senate Subcommittee on Surface Transportation. Although discussion focused primarily on the role of federal fiscal assistance, all witnesses agreed private capital must play an essential part in helping states rebuild and modernize their infrastructure.

Construction Industry Agrees

That also is the view of the transportation construction industry, six of whose leaders (Star America, Fluor, Kiewit, Skanska, Cintra, and ACS Infrastructure) have launched a new organization—the Association for the Improvement of American Infrastructure (AIAI)—"to help shape the direction of the national Public Private Partnership marketplace."

The same sentiment has motivated the sponsors of a new bipartisan Congressional Caucus on Public Private Partnerships, whose aim is "to encourage and raise awareness of the use of public-private partnerships in building, financing and maintaining the nation's transportation infrastructure."

"We have a tremendous backlog of infrastructure needs, but the federal government simply can't fund them all," Rep. Mike Rogers (R-AL), one of the founders of the caucus, said in what is a huge understatement. The truth is that Washington can fund but a small fraction of the nation's future infrastructure needs even under the most optimistic assumptions.

And although several initiatives to supplement traditional funding streams with new federally sponsored financing instruments are winding their way through Congress—notably, Sen.Mark Warner's (D-VA) National Infrastructure Finance Authority and Rep. John Delaney's (D-MD) Partnership to Build America bonds—their chances of becoming law in this Congress are slim. Public-private partnerships—engineered and managed by states—seem a more likely instrument of modernizing and expanding the nation's transportation infrastructure in the foreseeable future.

States' Efforts Receiving Attention

The states' drive toward fiscal independence in transportation has been noticed and is being favorably mentioned.

  • Six southeastern states listed in our summary of "Can-Do" states were cited in an August 27 resolution of the Southeastern Association of State Highway and Transportation Officials (SASHTO) as examples of states that are "creating, implementing and sharing solutions to the impending transportation funding crisis." Echoing our own conclusion, the SASHTO Resolution states, "These and other states have acted responsibly to preserve their transportation assets and modernize their infrastructure in the absence of adequate federal assistance or a coherent national transportation finance strategy."
  • Both Rep. Bill Shuster (R-PA), chairman of the House T&I Committee, and Ranking Member Nick Rahall (D-WV), have made specific references to the new trend. "I believe the states have the flexibility to do what they need to do, and I would hope that states make those investments," said Shuster when asked why he would not call up the proposed $5 billion "Safe Bridges Act." Echoed Rep. Rahall at the July 23 hearing on the Trust Fund, "States are increasingly coming up with their own plans for raising additional transportation revenues."
  • Even Transportation Secretary Anthony Foxx has taken notice of the states' growing role in infrastructure financing. "America's governors are solving transportation challenges," he wrote in his blog, the Fast Lane, on August 6. He was more specific in his prepared remarks before the National Conference of State Legislatures' Transportation Summit on August 12. "This year," he told the delegates, "half of all state legislatures have considered or approved measures dealing with transportation funding. Fourteen states have at least discussed raising their fuel taxes."

As a former mayor, Secretary Foxx is more attuned and sympathetic to what's going on in the state capitals, and more supportive of the states' increased assertion of fiscal independence, than his predecessor was. Indeed, the Secretary appears ready to concede the feds can't do it all.

New Federal-State Relationship?

States' growing involvement in funding transportation is a phenomenon of far-reaching consequences. In the short run, more state revenue dedicated to transportation will lessen the pressure on Congress to come up with increased resources to fund the next reauthorization. A one- or two-year bill now appears as a distinct possibility, according to some congressional sources. Evidence of a growing willingness of states to fund their transportation needs is cited as the reason.

In the longer run, greater state fiscal autonomy and financial sophistication could modify the federal-state relationship in transportation. There would be less need for direct financial aid to state DOTs and more emphasis on credit assistance to support transportation investments of truly national scope and significance. (High-speed rail in the Northeast Corridor comes to mind.) At the same time, federal oversight of state transportation programs could be reduced to reflect the smaller federal fiscal footprint.

This is not devolution. This is the new reality of states acting responsibly to preserve their transportation assets and modernize their infrastructure in the absence of adequate federal financial assistance and a coherent national transportation investment strategy. In doing so, states will be helping to relieve the Congress of the politically embarrassing task of having to dip repeatedly into the General Fund to bail out the ailing Highway Trust Fund.

Used with permission of Innovation NewsBriefs.

Kenneth Orski

Kenneth Orski (korski@verizon.net) is editor and publisher of the Innovation Briefs newsletter. (read full bio)