Reauthorization: a missed opportunity for transportation funding reform (GUEST AUTHOR)
by Marcus J. Lemon
On June 18, 2009, the leaders of the House Transportation & Infrastructure (T&I) Committee published a blueprint of their proposed $450 billion six-year reauthorization of the federal surface transportation program.
The outline is authored by Committee Chairman James Oberstar (D-Minn.), Ranking Republican John Mica (R-Fla.), Highways and Transit Subcommittee Chairman Peter DeFazio (D-Ore.) and Subcommittee Ranking Republican John Duncan (R-Tenn.). This was followed by a draft of the proposed Surface Transportation Authorization Act of 2009 dated June 22, 2009.
The bill unfortunately does little to address the underlying problems in our transportation funding and planning process.
Most notably, there is no funding mechanism that gets anywhere near to generating the revenue needed. There is an approximate $200 billion shortfall in revenues for the $450 billion spending program.
Hardly half the STAA bill program is funded with present revenues!
Despite the word "authorization" in its title, there are no new funding initiatives, no hint of how the $450 billion will be found. Rep Oberstar has gone silent on his earlier idea of a vehicle-miles charge.
This means that the general fund deficit will likely be drawn on to fund the program, a move similar to what happened last time the Highway Trust Fund went broke in 2008. It was saved by deficit spending to the tune of $8 billion.
More earmarking, log-rolling, bridges-to-nowhere
This means that politics - not facility users, states, or congestion points - will determine which projects get funded. The bill is certain to be rife with earmarks, hardly a secret in light of Chairman Oberstar’s letter to each House member calling for their wish list of proposed projects.
As predicted, various programs and public-private partnership (“P3”) mechanisms have been reined in, if not eliminated all together.
Aside from the funding uncertainty, Secretary LaHood recently stated that an 18-month extension of SAFETEA-LU is the best legislative approach, allowing more time for reauthorization to occur in light of other impending legislative issues such as healthcare and the nomination of Judge Sotomayer to the U.S. Supreme Court – issues that are certain to dominate most of the legislative agenda.
An estimated $13 to $17 billion will be needed to fund the program extension. LaHood acknowledged that “ . . . there will be concerns raised about this approach . . . However with the reality of our fiscal environment . . . we should not rush the legislation."
Senator Barbara Boxer (D-CA), Chairman of the Senate Environment and Public Works (EPW) Committee, who will steer the Senate version of the authorization bill, endorses Secretary LaHood’s proposal.
"This will give us the necessary time to pass a more comprehensive multi-year bill with stable and reliable funding," she stated on record.
Conversely, Rep. Oberstar has called any temporary extension of the law beyond September 30, 2009, completely unacceptable. What we do know is that P3 projects are very difficult to plan, fund, or organize when there is uncertainty about the federal aid highway program and reauthorization, making it that much more difficult to jumpstart the economy using private investment or infrastructure projects.
Highways priority reduced from 79% to 75%
The proposed bill would provide $337.4 billion for the Federal Highway Program, $99.8 billion to mass transit, and $12.6 billion for safety-related programs. It would also provide $50 billion for high-speed passenger rail initiatives (from outside the Highway Trust Fund).
Highway improvements comprise 75% of the bill, and transit investment would make up 22%. In 2005, by comparison, the current authorization bill known as the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy For Users (“SAFETEA-LU”) provided 79% for highways and 18% for mass transit. All told, the T&I Committee’s draft constitutes a 48% increase in highway investment and a 90 percent increase in transit investment over SAFETEA-LU.
Regardless of when it is enacted, the new bill will likely make sweeping changes to the existing surface transportation program. Among other things, it proposes to:
(1) Consolidate the existing Interstate Maintenance, National Highway System (NHS), and Highway Bridge Programs into a new “Critical Asset Investment” Program. New capacity would not be eligible under this program and performance standards would be imposed to ensure highways and bridges on the NHS are in a state of good repair.
(2) Establish a “Metropolitan Mobility and Access” Program to reduce congestion and improve mobility. Funds would be distributed based on population and travel time delay and would be eligible for highway and transit capacity improvements.
(3) Combine the existing Projects of National and Regional Significance and the trade corridors and border infrastructure programs into a new discretionary “Projects of National Significance” Program to target large, high cost transportation projects. The program would make funds available for highway, transit and freight rail projects.
(4) Create a “National Infrastructure Bank” to provide credit assistance, loan guarantees and lines of credit to finance infrastructure projects. The infrastructure bank would support large-scale capital projects from the bill’s Metropolitan Mobility, Projects of National Significance, and high speed rail initiatives.
(5) Initiate a new “Freight Improvement” Program to make goods movement more efficient and reliable. Funds would be distributed to all states by formula.
(6) Change the existing transportation planning process to focus on reducing greenhouse gas emissions and promote land use planning and livability.
(7) Establish an “Office of Livability” in the Federal Highway Administration (FHWA) to: “provide[s] leadership to expand surface transportation options; advance sustainable modes of transportation including transit, walking, and bicycling; enhance integrated planning to support the creation of livable communities; and serve as a clearinghouse of information and statistics related to livability and sustainability.”
(8) Call for an “Office of Expedited Project Delivery” (OEPD) in both FHWA and the Federal Transit Administration (FTA) to remove obstacles delaying highway and transit projects. OEPD would focus on coordinating all of the agencies involved in the project delivery process. The bill would eliminate duplications in the environmental review and transportation planning processes. The plan also calls for timetables for the issuance of Records of Decision after the review process is complete. Finally, the five-state delegation pilot program for environmental reviews would continue and be opened to all states that wish to participate and that can meet the necessary requirements.
(9) Restructure the existing Highway Safety Improvement Program to focus on reducing fatalities and injuries. The current highway-rail crossing and high risk rural roads set-asides are eliminated to allow states to use funds where the safety need is the greatest.
(10) Impose penalties on the 21 states that do not have a primary seat belt law and the 41 states that do not require installation of ignition interlock devices for first-time alcohol-related driving offenses. The draft does not explain what the penalties would be, but in the past withholding highway funds from states has been used as a tool to influence states to adopt certain congressional priorities. Currently, FHWA only has one option - cut off of all funding – to combat this problem.
(11) Remove the existing prioritization of Congestion Mitigation and Air Quality program funds for diesel retrofit projects.
(12) Streamlines the New Start/Small Start process for transit capital projects by eliminating a number of programmatic steps and requirements. Among other things, the bill would prohibit the use of FTA’s current Cost Effectiveness Index.
(13) Restricts tolls on the interstate except under narrowly defined circumstances. The bill would establish a series of so-called public protections for toll projects and require transparency in the development of public-private partnerships.
(14) Emphasize the use of performance standards, accountability and oversight in virtually every program to assure national objectives are being achieved.
Although the bill proposes significant new investment in highways and transit, it is deficient because it fails to address several underlying problems in how we look at funding and prioritizing transportation projects in America.
First, the bill does not go far enough in encouraging P3s and the use of tolling or other “user-pay” systems, such as a Vehicle Miles Traveled charge.
As many successful projects in the U.S. and Europe have shown, public-private partnerships deliver significant private investment, private sector due diligence and accountability, enhanced project delivery speed, system performance measures, and improved accountability – not to mention large concession payments and revenue sources, as seen with examples such as the Chicago Skyway and Indiana Toll Road example. A VMT would establish a user-pay system but would not likely entice private investment as much as P3 alternatives could.
Power the issue
The underlying problem is twofold:
(1) Power is at the root of this issue. Congress generally disfavors the use of public-private partnerships because they reduce the “federal” share of the pie, and diminish earmarking capability, thereby reducing the power and influence of the Federal legislative branch.
In other words, P3s substitute for large public funding by injecting private sector investment into the system which sometimes supplants the “power of the purse” from Congress. Many in Congress don’t like to see any reduction of their power to control the purse strings because they want to determine which projects are advanced rather than having the private sector, in consultation with local and state governments, make those decisions; and
(2) Policymakers and transportation officials have failed to adequately explain to the American public why P3s – including tolling, pricing, concessions, and user pay systems – actually benefit them directly through reduced congestion, improved capacity, and lower costs.
Instead, the public has come to see tolling as a “double tax”, imposed atop an 18.4 cent per gallon gasoline tax that already affects every consumer. While this is a legitimate concern, what most consumers don’t realize is that when the federal government controls the purse strings only about 60 percent of the funds actually make it to a real federal highway project.
The rest is expended on moose overpasses, salamander underpasses, Bridges to Nowhere, bike paths, and Historic Byways – none of which ultimately reduce congestion or improve system capacity.
P3s do not suffer from the same inadequacies.
Second, the bill does little to alter the inequities of the gas tax and Federal Highway Trust Fund. It fails to establish a means by which states can control the fuel tax collection and spending themselves, using the revenues where they see fit based on their own transportation needs. Nor does it propose elimination of the failed gas tax funding scheme.
Third, the bill does not adequately address how the program will be funded, nor how that funding mechanism ties into any strategy to encourage user behavior in the highway system – something that would immediately impact congestion, just-in-time delivery, safety, reduced idling of Diesel trucks, wasting of fuel in congested areas, and reduced dependence on foreign oil.
Instead, I would urge Congress to adopt the following improvements to the draft:
(1) Expand the Transportation Infrastructure Finance and Innovation Act (“TIFIA”) Program
Congress should reauthorize TIFIA with a larger volume of credit capacity and greater flexibility, increasing its budget authority of $500 million per year to enable funding of all projects up to 50% of eligible project costs, instead of 33.3%.
Congress should also eliminate the “springing lien” requirement that activates in the event of default or bankruptcy, elevating the TIFIA loan to on-par status with senior project debt, a restriction that currently hinders the ability of senior project debt to obtain investment grade ratings.
At a time when credit and capital are increasingly tightened across the board there is no better time for expanding TIFIA than now. At its inception, TIFIA had problems finding projects; now it has so many that they had to prioritized at the end of the Bush Administration.
TIFIA has been remarkably successful with no defaults. Moreover, it has launched many major projects that otherwise would not have come to fruition without TIFIA assistance, including the Intercounty Connector Project in Maryland, the Capital Beltway/I-495 HOT Lanes Project, and the Miami Intermodal Center, to name a few.
(2) Eliminate the cap on Private Activity Bonds (“PABs”)
Congress should immediately expand the PAB Program, which has successfully provided additional funding opportunities to many important projects across the country by allowing private investment to receive tax exempt status, much like a public bond. The overall limit of PAB allocations of $15 billion should be increased or eliminated altogether.
The current exemption from the Alternative Minimum Tax should be made permanent as well. The bill should also eliminate the prohibition on the accumulation of interest on PABs, deemed to be working capital, in order to increase the attractiveness of PABs for new projects. Again, the current fiscal environment, which includes more stringent lending requirements and capitalization constraints, necessitates the increased use of PABs.
The PAB program has been remarkably successful and is lead by an outstanding group of people of FHWA, encouraging private investment in infrastructure projects through innovative means.
(3) Promote congestion relief programs and tolling
Congress should expand, beyond the current five-city pilot initiative, the successful DOT Urban Partnerships Program (“UP”), designed to mitigate traffic congestion through dynamic tolling within identified urban centers. Funding should be increased from $1 billion to $10 billion, focusing on tolling, transit, technology and telecommuting, allowing for innovative ways to address congestion problems we see in every major city.
Coordinated and planned tolling directly reduces congestion – especially when used as variable pricing during peak congestion periods – and ensures that system users are rational in their decision making about when to use the system (only when needed), therefore reducing congestion, increasing flow, improving just-in-time delivery, and safety. If you think about it, tolling encourages people to use the system much like they use electricity at home: you never turn on a light unless you’re willing to pay for the electric bill. You know that the more electricity you use, the more you will pay.
Therefore, you don’t use electricity when you don’t need it, thus reducing consumption and system usage. This rational decision-making in the marketplace is needed in our federal highway system to reduce congestion and fund the system – with tolling as the conduit. Congress should encourage rationalization in system usage, while ensuring that users of the system pay for its upkeep and capacity expansion.
Congress should expand all tolling programs under Title 23 of the U.S. Code, allowing the states, not FHWA, to ultimately determine if tolling should be permitted on any given part of the system.
States should also be permitted to automatically toll their entire system, without FHWA approval.
(4) Amend the Internal Revenue Code treatment of concessions and fuel taxes
P3s for transportation should not be treated differently from franchises for other asset classes, as they currently are in the Internal Revenue Code (“IRC”). The U.S. Treasury has stated that foreign investors may be subject to the Foreign Investment in Real Property Tax (“FIRPTA”), if tolling rights are a type of real property interest, as opposed to an intangible interest.
Recent legislation drafts have also proposed coextensive amortization periods for tolling rights and underlying leases, treating the tolling right as a “real property interest” and therefore extending the amortization period beyond a typical 15 year depreciation period for intangible assets, thus subjecting concessionaires to withholding taxes, significantly affecting after-tax returns for private investors.
The better method would be to encourage state and local governments to establish “best practices” instead of singling out P3s through discriminatory tax treatment of tolling concessions.
Additionally, Congress could shut down the opponents of P3s and tolling simply by amending the law to provide a phase out of the gas tax and an immediate ability for users to deduct from their gross income all tolls or user fees paid in the system. This would eliminate the problem of double taxation through the gas tax and tolling.
(5) Enhance and Fund the Innovative Program Delivery Office as a P3 Leader
Congress should further fund and enhance the FHWA Innovative Program Delivery Office (“OIPD”), establishing it as an FHWA division, and appointing it as the national leader, educator, and facilitator for P3 projects and P3 legislation around the country.
Congress should also adopt the National Surface Transportation Infrastructure Financing Commission’s recommendations for the development of a centralized repository for P3 best practices, transparency guidelines, and strategies for accountability, perhaps through a “Center For Excellence” in P3s.
The Center, either within or along with the OIPD, would assist state officials with development of P3 statutes that define a clear procurement process, develop standardized contract terms and ways to develop and monitor contract performance. Successful examples include similar state level P3 support offices in Texas, California, Michigan and Virginia. Currently many states desire assistance from FHWA both on a technical and procedural level in developing P3 projects; this enhancement would facilitate that assistance.
(6) Establish federal guidelines for P3 insurance coverage
P3-managed and controlled insurance programs for infrastructure construction projects could reduce insurance costs by up to 2% of the total contract value. Congress should allow for P3 managed and controlled insurance programs to help project developers obtain broader coverage, lower debt costs, increase transparency, enhance safety and promote DBAs.
(7) Expand and permit commercialization of highways
Congress should expressly permit states to commercialize any rest area or right-of-way on the national highway system as a means for states to fund infrastructure improvement and capacity expansion. The Special Experimental Projects (“SEP-15”) Program should be expanded, funded, and enlarged, in conjunction with removal of any statutory prohibition against commercialization. Potentially successful opportunities for immediate pilots exist in California, Oregon, and Nevada, among other places.
Other states have also expressed interest in commercialization and use of advertising as a revenue stream. Current Amber-alert or Traffic-Alert billboards could be expanded to provide advertising revenues. Safety concerns have not been borne out in empirical data that would indicate an increase in accidents or distraction from such commercialization or advertising. In fact, off right-of-way areas are currently cluttered with large amounts of billboards, murals, artwork, and advertising.
Commercialization through use of alternative fuel stops, in conjunction with other commercial activities such as food and concessions, while supporting gas, electric, and other alternative fuel vehicles, would encourage use of such vehicles for longer trips, reduce dependence on foreign energy sources, and allow for new revenue sources that would fund infrastructure development and redevelopment.
(8) Address geographic inequity
The southern and Great Lakes states are currently shortchanged at the expense of no-growth/slow growth northeast.
The current mathematical formulas embedded in legislation that attempt to match payments from the gas tax in federal highway programs to the scope and usage of each state’s surface transportation system is broken, and shortchanges states in the South and Great Lakes areas, benefiting slow growing, high income states in the northeast.
For example, Mississippi, the poorest state (a donor state) has subsidized motorists in Connecticut, the richest state (a donee state). Flaws in the system have cost Texas $615 million and Florida $286 million in 2007 alone.
Instead, Congress should restructure the entire system to provide that the states (which currently own the highway system) have the sole right to collect and keep any fuel or VMT tax and revenues. This would allow the states to spend revenues on their own surface transportation priorities of their own choosing. Again, a reduction in federal authority and power – something Congress is unlikely to advance. Congress should eliminate the fuel tax or turn over its control to the states. The Donor State Working Group could lead this effort.
The DOT and U.S. Treasury estimate that, at best, the federal fuel tax is expected to generate only about $300 billion in revenue over the next six years. At this point, it is unclear what position the Ways and Means Committee will ultimately adopt with an eye toward the level of funding and how to bridge the potential $200 billion gap. Potentially encouragement of tolling, a robust P3 program and incentives for private investment could help bridge the funding gap but this bill seems to turn the clock back on all these opportunities.
Earmarks, the gas tax, the Highway Trust Fund, and formula distribution have not worked in the past and are unlikely to work any better in the current economic environment. A bold, new, innovative approach to funding and system usage is desperately required, but is not contained in this business-as-usual bill.
On TIFIA projects see http://tifia.fhwa.dot.gov/projects/approved.cfm
On private activity bonds see http://www.fhwa.dot.gov/PPP/tools_pabs.htm
On "livability" issues see http://www.heritage.org/Research/SmartGrowth/bg2269.cfm
The author is former Chief Counsel, Federal Highway Administration, now partner Baker & Miller, PLLC.