January 29, 2014

States Explore Highway Funding Methods

The following piece, written for the October 1986 AASHTO Quarterly by AASHTO Information Director Sunny Schust, discusses the transportation financing options discussed at the first AASHTO National Conference on State Highway Finance in August of that year. Many of the options state transportation departments discuss here are ones still being explored and implemented by those departments today, as state DOTs are still grappling with funding gaps of what is available versus what is needed to adequately maintain and grow state transportation networks. Check out the piece below to see the similarities and changes from almost three decades ago.

The future of America's highways reveals an alarming gap between estimated highway needs and existing state and federal resources. The search for a means to bridge that gap brought state officials to Smuggler's Notch, Vermont August 17-19 for AASHTO's first National Conference on State Highway Finance.

State transportation officials, legislators and finance officers were among the 150 participants who studied both new and traditional means of highway financing, and then explored in working sessions how those methods fit the politics and practicalities of individual states.

Getting on with the Solution

The stage for the three-day conference was set in a keynote address by newly appointed Federal Highway Deputy Administrator Robert Farris who in recent months as chairman of the National Council on Public Works Improvements has focused on the nation's infrastructure needs and solutions. Farris said that by anyone's assessment, highway financing needs are enormous, but added, “It's time to quit worrying about the size of the problem and get on with the solution.”

The solution will spring not from the federal government, Farris said, but from the states, who will be called upon to shoulder greater responsibilities as federal aid and influence declines. Farris likened the federal government to a formerly rich uncle who “comes too often, stays too long, and offers too much advice.” He added that the federal government is no longer an “artesian well” of financial resources, and it is time for state and local governments to examine “what are we able to do for ourselves.”

Illustrating the vital role transportation facilities play in economic development, Farris noted that the state of Tennessee, where he was formerly Commissioner of Transportation, is building eight major Interstate quality highways with 100 percent state funding.

The nation is at a crucial crossroads, Farris said, being attacked economically in the marketplace of the world. As stewards of the transportation network which unites the nation, Farris concluded that transportation officials have a tremendous responsibility to set policies that will keep the country stimulated economically and to allow it to continue as a bastion of freedom to the world.

Centerpiece of Economic Prosperity

The National Conference on Highway Finance was conceived by the AASHTO Policy Committee last year, and was funded by contributions of the states. Focused on the theme “Understanding the Highway Financing Evolution/Revolution,” the conference was designed to sharpen state officials' understanding of finance options available to them and to share the states' experiences in using them. The Conference was planned by an AASHTO Task Force chaired by Minnesota Transportation Commissioner Richard Braun. Braun told participants that the overall objective is to “restore the nation's highway program as the centerpiece of a new era of economic prosperity.” Braun said that with federal-aid declining, the funding gap must be closed at the state and local level, and states must share their knowledge of potential financing options.

Imagination More Important than Knowledge

Urging participants to be open to new ideas, Gary Brosch, director of the Rice Joint Center for Urban Mobility Research, cited a quotation from Albert Einstein that “imagination is more important than knowledge.” Quoting a more modern day philosopher, Brosch added words of advice from “the Boss” Bruce Springsteen—“In the end, nobody wins unless everybody wins.” Combining those two approaches would aid officials in their mission of finding innovative solutions to the problems of today, he said.

While there will always be a role for the federal government in transportation, Brosch said, in an environment of change all levels of government must look for new funding methods. A diversified plan for highway finance could include elements of traditional financing, alternative funding sources, cost savings and debt financing techniques, he said. Brosch highlighted a broad range of funding techniques, including local option motor fuel taxes, toll financing, private development, leasing airspace, benefit assessments, special assessments, tax increment financing and private donations.

While the options appear numerous, state officials must evaluate them on the basis of revenue potential; sensitivity to inflation, legal feasibility, administrative feasibility and public acceptance. The best financing system will be the one that captures funds from the most beneficiaries. But state officials also need to be sure that the public sets the highway priorities and the contributions from the private sector.

Financing Highways with General Revenue Sources

Harold A. Hovey, a transportation consultant from Alexandria, Va., stated that property taxes, income taxes and sales taxes can represent terrific revenue sources, where capturing a tax of only one percent can virtually double a state highway budget. But Hovey noted that general revenue taxes have already been discovered by other constituencies who fight hard to protect their source of income.

During group discussions, participants concluded that:

• While most states choose to avoid non-user fee funding, in a critical situation, with public and business support, general revenue taxes can be utilized, particularly for specific projects.
• States need to examine and cleanse user fee funding to eliminate inappropriate uses of highway generated revenues; and
• State and local government must work cooperatively when seeking non-user revenues for highway projects.

Special Benefit Fees

James C. Nicholas, professor of urban and regional planning of the University of Florida, explained that as federal aid has declined, and governments have faced the enactment of “Proposition 13” type limits on property taxes, state and local governments have sought alternative methods to acquire funding for particular needs. Options such as impact fees, special assessments, and tax increment financing shift the tax burden to individuals but give them a specific benefit in exchange.

State participants agreed that such funds are best used in major growth areas, for capital expenditures, not maintenance. At best, the option can provide only supplemental revenue for a highway program, ranging from 2 to 20 percent, with an average estimate of 10 percent of a state highway budget. The imposition of the fees must be tied directly to whomever is receiving the transportation benefits, and participants expressed concern that use of such fees can affect a state's transportation priorities. Application of benefit fees requires a great deal of state and local government cooperation and coordination of land use and transportation decisions.

Private Participation in Financing Highway Projects

While neither new nor a panacea for highway funding needs, private participation can provide leverage to accelerate transportation projects, particularly in growth areas, according to C. Michael Walton of the Center for Transportation Research of the University of Texas at Austin. States must consider a number of policy issues such as financial implications, equity issues, the long-term impact of additional mileage on a highway system and the legal feasibility. A state agency can play a passive, a moderate or an aggressive role in promoting private participation, but overall private participation cannot be expected to satisfy more than 6 percent of total needs, Walton said. In additiona, such funding is not necessarily stable or reliable.

Participants concluded that a serious issue to be considered is the potential for “buying priority” in a state's transportation plan by reducing the cost of a project, affecting the overall state of the program. Consideration should also be given to the long-term impacts of private financing and the relation of the project to land use. The danger also exists that funds contributed from the private sector will be used to supplant rather than supplement public funding. Nonetheless, participants agreed that private financing may have a role in developing states or areas.

Debt Financing

Thomas Bradshaw, of the First Boston Corporation, and a former Secretary of the North Carolina Department of Transportation, briefed participants on the intricacies of debt financing, exploring both traditional and nontraditional capital funding approaches. Bradshaw advised that state transportation officials must become as efficient in managing finances as in managing construction programs.

Participants agreed that financial management should be a part of a long-range strategy, and not just a tool used to react to funding problems. While the use of bonds can serve as a means to accelerate projects, it is important to examine the cost and benefits to determine if the benefits will actually accrue to the highway users who will pay. Participants suggested that AASHTO should become more involved in the issue of financial policy analysis.

User Fees

Gary Allen, senior research scientist for the Virginia Highway and Transportation Research Council, stated he had observed a trend to substitute general fund taxes for user fees, the traditional funding mechanism for the nation's highways. User fees present a fair and equitable method of financing highways and also result in the efficient allocation of resources, Allen said. While user fees offer a good foundation for funding, structural details must be revised to reflect change such as smaller vehicle size, increasing fuel efficiencies, increasing axle weights and other factors. Allen emphasized that consumers fail to realize how little it costs to use a highway, roughly only 7.6 percent of the total cost of owning and operating a car, and warned that user fees have failed to keep pace with inflation.

Norm Wuestefeld, executive vice president of Wilbur Smith and Associates, provided a history and overview of toll roads, citing both advantages and disadvantages. He noted that toll financing more precisely links costs and revenues, and that toll projects can often be implemented more quickly than tax-supported projects. Toll facilities financed with revenue bonds are subject to close scrutiny prior to financing, and continual monitoring by the investment banking community, resulting in a higher level of attention to project condition and terms of operation. Tolls also offer a method of congestion pricing, encouraging users to make more efficient route or mode choices, Wuestefeld said. Among the disadvantages of toll financing are the interest cost of borrowing funds; the cost of toll collection, time delays for toll payments, and the fact that motorists who pay tolls also pay motor fuel taxes. Among the other issues discussed by Wuestefeld were the imposition of tolls on existing highways and the use of toll income to finance improvements off the toll system.

In group discussions participants agreed that user fees will continue to provide the majority of highway funding in the future, and represent a revenue source with a significant potential for increase, with taxpayers willing to pay higher fees if the state can show tangible improvements. Among the issues cited in the discussions were a need for definition of user fees; a need for better collection methods; a need for information exchange; a need to market a total revenue package; and a need to develop a better working relationship with the trucking industry.

Consensus Needed for the Future

Also speaking during the course of the conference was Les Lamm, president of the Highway Users Federation, who said that the industry is far behind in planning for future highway needs beyond the completion of the Interstate program. Lamm noted that the Highway users Federation had organized a coalition to press for immediate Congressional enactment for federal highway reauthorization legislation by September 30. But he added that the group must then set its sights on a long range highway program. Lamm concluded that the nation is at as great a crossroads in highway building as before enactment of the Interstate program in 1956, and that a consensus on a new program must be developed.

William Ordway, former director of the Arizona Department of Transportation, described for the conference the enactment in Arizona of a three-cent gasoline tax increase, coupled with a local sales tax option allowing counties to tax themselves for specific highway improvements. Due in large part to the enthusiastic support of the business community, Maricopa County has enacted a half-cent sales tax that will be utilized to build a $5.5 billion freeway system in Phoenix. Other urban counties are also posing such options to the voters by referendum. Ordway emphasized the need for extensive cooperation and planning with local government and the need for public support in successfully implementing such a revenue package.

Transportation consultant Alan Pisarski provided an international perspective on highway financing, noting that the United States is one of the few nations which has a dedicated highway fee. While many people think that the dedicated revenues protect highway user fees from raiders, the actual effect is to put an upper limit on highway fees and taxes. Without dedication, Pisarski said, there is no limit to where highway taxes may rise.

The effect of non-dedication is not on road quality, but on road costs, with nations often collecting four to five times in revenue what is spent on roads. In many European nations, “highway use is a cash cow,” Pisarski said, with highway pricing policy used to enforce social goals.

New Product, New Process

At the conclusion of the conference, AASHTO President Thomas Larson told the conference that the highway industry has come to the end of the Interstate construction era, and now must develop a new product and a new process, discarding old metaphors and accepting new ones. The vision, Larson said, is to develop startegies for the future that meet citizen expectation. These must be developed in an authorizing environment which includes lawmakers, local government, developers, and truckers, and must be evolved based on what those groups demand and why they will permit.

States must develop the organizational capacity to achieve their mission, drawing on other state agencies as well as the resources of other states, shared through AASHTO. AASHTO must become more functionally-oriented to help the states respond to these needs, Larson said, and should explore the publication of guidelines for financial management, statistical analyses, and providing assistance to states that need immediate help. At the same time, states must be open to innovation taking good designs and fine tuning them to meet future needs, he said.

Larson emphasized that while AASHTO will continue to explore means to address the issues of long-term financing of highways, the most important priority now is the enactment of a multi-year reauthorization bill by the U.S. Congress.

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