A Lasting Solution to the Transportation Funding Dilemma

President Obama's FY 2014 budget request includes $77 billion for the Department of Transportation and an additional $50 billion  "for immediate transportation investments." His next transportation bill to follow the current MAP-21, calls for a 25 percent increase in funding over current levels and assumes a transfer of $214 billion to the trust fund over six years "to maintain trust fund solvency and pay for increased outlays." To offset this spending, the Administration proposes using the "savings" or "peace dividend" from winding down the war in Afganistan. 

House T&I Committee Chairman Bill Shuster (R-PA) was not impressed.  "The President's budget," he said,  "repeats his call to increase spending without identifying a viable means to pay for it. .... You can't just keep on spending money that you don't have."  "A proposal we have seen three times before," observed Rep. Tom Latham (R-IA), House Transportation Appropriation Subcommittee chairman referring to the $50 billion request. With massive stimulus spending politically out of fashion, the Administration is repackaging it as "transportation investment." Bill Graves, president of the American Trucking Association, spoke for many stakeholders when he remarked, "For five years, we've waited for President Obama to clearly state how we should pay for these critical needs and, I'm sad to say, we continue to get lip service about the importance of roads and bridges with no real road map to real funding solutions." As for the "peace dividend," the idea has been dismissed as "budgetary gimmickry"  by congressional Democrats and  Republicans alike.

In sum, a large segment of congressional and public opinion has pronounced the White House proposals variously as "vague", "repetitive," "unrealistic," "implausible" and "politically unachievable." Even the President's most loyal supporters in the transportation community, the liberal advocacy groups, seemed disappointed and circumspect in their comments.  

This said, no one disputes President Obama's and the infrastructure advocates’ claim that some of America’s transportation facilities are reaching the limit of their useful life and need reconstruction. Nor does any one disagree about the need to expand infrastructure to meet the needs of a growing population. But fiscal conservatives among infrastructure advocates (and we count ourselves among them) contend that this does not rise to the level of a national crisis requiring a massive $50 billion federal crash program as proposed in the President's budget message, or the expenditure of more than $100 billion per year as recommended by the American Society of Civil Engineers (ASCE) in its latest "Report Card."

Instead, as we have argued in recent columns, the challenge can be met if each state did its part to progressively bring up its transportation facilities (including its Interstate highway segments) to a "state of good repair," using its own tax revenues and its formula allocation of the Highway Trust fund dollars (which are expected to total $38-41 billion per year over the next decade.)  As numerous news dispatches attest, that's precisely what is happening (see below). A large number of states are not waiting for the federal government to come to the rescue. They are using their own resources and raising additional revenue to pay for reconstruction and modernization of their aging facilities and to maintain their transportation systems in good working condition. "Governors and state legislatures realize that the level of federal assistance beyond 2014 is highly uncertain and they are acting on a credible assumption that federal funding will remain at current levels or may even be cut back," an association executive who is familiar with the thinking of senior-level state officials, told us.

What about large-scale reconstruction and system-expansion projects that require billions of dollars---transportation investments that are beyond the states' fiscal capacity to fund on a pay-as-you-go basis out of annual cash flow? Those investments,  provided they are credit-worthy (i.e. are revenue producing or backed by dedicated tax revenue),  will be mostly financed through long-term credit instruments  and public-private partnerships. The future of capital-intensive infrastructure projects is intimately tied to the financial involvement of the private sector and to a wider use of  tolling, "availability payments,"  and innovative credit instruments such as TIFIA and private activity bonds (PABs), a veteran facilitator of public-private partnerships told us. We list below some of the transportation megaprojects that are being financed (or are planned to be financed) largely with public and private credit rather than with federal dollars out of congressional appropriations.

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Lending credibility to the above funding scenario and hastening its adoption are the new realities underlying the federal role in transportation today. Those realities include: (1) a federal program that no longer has a clearly defined mission or purpose and many of whose functions are properly a state and local responsibility;  (2) a  Highway Trust Fund that has lost its capacity to support large-scale transportation investments and that has come to depend for its solvency on periodic injections of  general funds;  (3) a bipartisan absence of political will to raise the federal gas tax and (4) continued inability to identify another credible revenue source  to supplement or replace the gas tax.  

In sum, having the states assume financial responsibility for fixing their aging transportation facilities and for preserving them in a state of good repair,  while employing public and private financing for major capital-intensive infrastructure investments, offers the best solution to the current  federal funding dilemma.

NOTE: States that recently have undertaken to raise additional funds for transportation include: Virginia and  Maryland (broad transportation funding overhaul  that includes a dedicated sales tax applied to the wholesale price of gasoline.  A sales tax, it has been argued, is no less a "user fee" than the gas tax since every consumer who pays a sales tax also is served by or "uses"  the highway system for goods delivery );  Arkansas (one-half cent sales tax increase to back a $1.3 billion bond issue to fund highway construction over the next ten years);  Illinois (six-year $12.6 billion statewide construction program to improve roads and bridges);  Massachusetts ($13.7 billion bond-financed transportation plan); Maine ($100 million transportation bond proposal) Michigan ( $1.5 billion road plan funded with vehicle registration fees and a tax on fuel at the wholesale level); Missouri (proposal for a dedicated one-cent sales tax for transportation; the tax is expected to raise $7.9 billion over ten years); New Hampshire (12-cent hike in the gas tax over three years approved by the House; Senate approval uncertain);  Ohio (turnpike toll-backed $1.5 billion bond issue for highway and bridge improvements);  Pennsylvania ($2.5 billion Senate transportation funding plan; House approval uncertain); Texas (statewide tolling);  Wisconsin ($824-million boost to the state transportation fund);  Wyoming (10-cent fuel tax increase, the first in 15 years); and California, Oregon and Washington (exploring new mechanisms for project finance through the cooperative West Coast Infrastructure Exchange). In addition, several states which derive significant revenue from their tollroads have raised toll rates. See also, "State Transportation Funding Proposals,  AASHTO Center for Excellence in Project Finance, April 2013

Recent major transportation infrastructure projects largely financed,or to be financed, with long-term credit instruments rather than federal dollars include: the I-495 Beltway HOT lanes project in Northern Virginia; New York's Tappan Zee Bridge replacement; the San Francisco Bay Bridge Eastern Span replacement; the I-5 Columbia River Crossing;  the Highway 520 floating bridge and the Alaskan Way Viaduct in Seattle, the Midtown tunnel linking Norfolk and Portsmouth, VA; East End Crossing over the Ohio River near Louisville; and the PortMiami Tunnel. Please note that, except for the California High-Speed Rail venture, there are no transportation megaprojects currently being planned whose construction would depend primarily on federal appropriations.