States Launching a Quiet Revolution in Infrastructure Funding

States Launching a Quiet Revolution in Infrastructure Funding
February 28, 2014

Kenneth Orski

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

There is a quiet revolution in transportation funding underway these days. Faced with a depleted Highway Trust Fund and uncertain prospects for more money from a deficit-conscious Congress, many states are taking matters into their own hands and aggressively pursuing more fiscal independence.

A survey we recently conducted documents significant funding initiatives in 18 states. Some states have raised their gasoline taxes (MD, WY, MA, VT). Others have shifted to a tax on fuel at the wholesale level (e.g., PA). Still others have enacted dedicated sales taxes for transportation (e.g., AK, VA) or floated toll revenue bonds (e.g., OH).

Further evidence of such local initiatives came on Election Day last November when voters approved more than 70 percent of the ballot measures to increase or extend funding for local transportation.

‘Pragmatic Response to Realities’

A senior state transportation official commenting on our survey of funding initiatives told us, "What you are seeing is the governors' and state legislatures' realistic assessment and pragmatic response to the fiscal realities in Washington". He added, "We all realize the era of free-flowing federal dollars is over. . . . It’s up to us to find a new way."

So it would seem federal budgetary realities are helping to achieve de facto some of the federalist reform objectives that have been on the congressional agenda ever since they were first put forward back in the late 1990s by former Congressman (now Ohio Governor) John Kasich, later embraced by former Sen. Jim DeMint, and just recently revived through the Transportation Empowerment Act by Rep. Tom Graves and Sen. Mike Lee.

Admittedly, what we are seeing today is not "devolution," properly speaking, as envisioned in the Empowerment Act. But it’s a significant step in the direction of shifting more transportation decision-making to the state and local levels.

More Long-Term Financing

What is helping states become fiscally more independent is their growing embrace of long-term financing and easier access to private capital through public-private partnerships.

Costly multiyear infrastructure projects no longer have to rely on uncertain annual appropriations or to compete for scarce Trust Fund dollars. Instead, they are being financed with a variety of tools, such as private activity bonds, TIFIA loans, toll revenue concessions, availability payments, and private risk capital.

In turning away from "pay-as-you-go" funding and toward project financing, states are emulating a long-established practice in the private sector. All of the nation’s privately owned infrastructure has been, and still is, financed by borrowing front-end capital and repaying it over time rather than by relying on current cash flow. Now, states are adopting the same approach toward public infrastructure, convinced they no longer can count on a reliable, stable, and generous flow of federal transportation dollars.

Partnerships Worth $20 Billion

Our survey identified 20 jurisdictions that are undertaking major reconstruction projects with the help of long-term debt. In addition, states have entered into more than 30 public-private partnerships worth about $20 billion. This is on top of some $35 billion worth of municipal bonds that are annually sold to finance local transportation.

This may be only the beginning. As states acquire more sophistication and familiarity with credit transactions, and as federal budgetary restraints continue, long-term financing of large-scale capital-intensive projects through public-private partnerships (P3) and availability payments is bound to become the states’ primary method of expanding and modernizing aging infrastructure.

Nor will future P3 transactions be confined to roads and bridges. Maryland Gov. Martin O’Malley recently announced the Purple Line, a $2.2 billion, 16-mile light rail line connecting two suburban counties in the Washington metro area, will be built, financed, and operated through a  public-private partnership—the second of its kind (a system of commuter lines in Denver, the Eagle P3 Project, was the first)  and almost certainly not the last.

Immediate and Longer-Range Consequences

There are several potential consequences flowing from these developments.

With states becoming more fiscally independent, Congress might conclude there is less justification for increasing the transportation reauthorization spending levels or approving a long-term bill. A one- or two-year measure funded at current spending levels ($54B/year) now appears to be a distinct possibility, according to congressional sources in the House as well as in the Senate.

Even at those levels of expenditure, an extra $15-16 billion/year in new revenue would be required to close the gap in funding, according to the Congressional Budget Office. No one—neither in Congress, nor in the Obama administration, nor among the stakeholders—has come up with an answer as to where this money is to come from, not to speak of the $90 billion required to fund a six-year bill that many transportation stakeholders advocate.

Also, assuming costly multiyear projects will henceforth be financed with long-term debt, there will be fewer demands placed on the resources of the Highway Trust Fund—and thus less of a threat the Fund will go broke. However, it's doubtful that capital demands on the Fund will lessen sufficiently to stabilize it at its CBO-estimated revenue inflow level of $34 billion per year. So a funding shortfall will remain, posing a serious challenge for the congressional fiscal authorizers.

Kenneth Orski is publisher of Innovation Briefs. This article is based on remarks he delivered at the 2014 Conservative Policy Summit sponsored by Heritage Action, February 10, 2014.

Kenneth Orski

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