Placing Transportation Funding on the Political Agenda

Finding the means to repair and rebuild the nation’s aging transportation infrastructure has become a subject of growing attention on Capitol Hill, within the Washington transportation community and, importantly, in the state capitals, as recent events attest.

June 29, 2008

Ken Orski, Innovation NewsBriefs

Three initiatives have signaled the beginning of an effort to place the challenge of transportation funding on the political agenda. In our previous NewsBrief ( No. 13, June 7) we already noted one of those initiatives — the launching of the Transportation Transformation (T2) Group, an alliance of state government and private industry leaders advocating a complete transformation of U.S. transportation policy. The T2 Group is urging Congress to establish a new long-range vision for the national surface transportation program — a vision that would enable states to employ new strategies and innovative financing techniques such as tolling, congestion pricing and public private ventures to supplement the stagnating transportation revenues of the federal and state governments.

The U.S. Chamber of Commerce Initiative

Closely following the T2 announcement came the launching on June 23 of a national advocacy campaign that intends to place transportation funding front and center as a major issue in the 2008 elections season. The campaign, led by the U.S. Chamber of Commerce, aims to educate presidential and congressional candidates about the importance of revitalizing the nation’s infrastructure and substantially increasing federal investment in transportation. At a press conference, spokesmen for the new coalition, Tom Donohue, President of the U.S. Chamber, Pete Ruane, President of the American Road & Transportation Builders, and Terrence O’Sullivan, President of the Laborers International Union, tiptoed gingerly around the issue of raising the gas tax, neither endorsing nor precluding it in the long run. They admitted that it will not be easy to convince Congress to raise taxes or abandon its traditional practices (read "earmarks") but agreed that the time has come to chart a new course and make investment in infrastructure a new national priority.

Brookings’ "A Bridge to Somewhere" Report

The Brooking Institution joined the fray with a June 22 release of a report on the challenge of rebuilding the nation’s transportation infrastructure. Asserting that the federal transportation program has lost its focus and lacks any overarching vision, goals or purpose, the report’s authors recommend a three-pronged strategy to revitalize the transportation program: (1) Forming a permanent, independent commission— the Strategic Transportation Investments Commission (STIC)— to prioritize federal investment in three key areas of federal interest: the interstate highway system, an intermodal freight system and an intercity passenger system; (2) Giving major metro areas more direct funding and authority to manage their road networks through market mechanisms and pricing policies; (3) Tying the federal transportation program to an explicit set of outcomes and targeting the program on congested areas, gateways and corridors of national significance.

The three initiatives join an already substantial body of ideas, proposals and recommendations to reform the nation’s transportation program. These include the report of the congressionally-chartered National Transportation Policy and Revenue Commission, the outreach activities of the Rockefeller Foundation-supported "Building America’s Future" coalition, the report of the Intergovernmental Forum on Transportation Finance, and the proposal of the American Road and Transportation Builders Association for a program of "Critical Commerce Corridors."

At least three more contributions can be expected in the months ahead— the final report of the Congressionally-mandated National Transportation Infrastructure Financing Commission, a report of the National Transportation Policy Project of the Bipartisan Policy Center, and the U.S. DOT’s White Paper presenting the Bush Administration’s proposals for a future federal transportation program.

Through all these initiatives runs a common thread: the nation’s transportation infrastructure is broken and needs to be restored with a significant boost in funding. But beyond these broad generalities (which have a powerful rhetorical appeal but do not fully reflect the reality) there is little agreement on where the money should come from. Some proposals would have the federal government continue playing a central role in financing new infrastructure, other initiatives would rely more heavily on private investment. Proponents of a strong federal role tend to look upon the gas tax as the principal source of financing. Advocates of private sector involvement tend to favor user fees, toll financing and private equity capital. The quest for new sources of infrastructure funding seems to have reawakened the old tensions and philosophic differences about the role of central government in a private market-based economy. Reconciling the two points of view will not be easy.

The Quiet Revolution" at the State Level

Those who would focus entirely on action in Washington and count on Congress to resolve the funding dilemma, however, are missing an important emerging trend. It is becoming increasingly evident that states rather than the federal government will be the driving force in the financial reform of the nation’s transportation program. As Transportation Secretary Mary Peters observed, "States are leading a quiet revolution in transportation financing and in the way we build, maintain and operate our infrastructure."

Some of the evidence of this quiet revolution was on display at a "State Summit on Innovative Transportation Funding and Financing" convened by the National Governors Association and its Center for Best Practices on June 24-25. The conference brought together governors’ senior policy advisors, state DOT officials and state budget and finance officers from 38 states to explore the role of innovative funding and financing strategies. Presentations at the Summit meeting showed just how creatively many state governments are coping with budget shortfalls and confronting the prospect of shrinking federal assistance.

Examples described at the meeting included Missouri’s Safe and Sound Bridge Improvement Program which will use "availability payments" to rehabilitate 800 of its structurally deficient bridges; Chicago’s parking garage concessions that generate funds for the upkeep of neighborhood parks; Virginia’s use of public-private partnerships to provide new lane capacity on the Capital Beltway and in the I-95 corridor at virtually no cost to the taxpayer; New Jersey’s proposed Public Benefit Corporation, a novel financial vehicle to provide long-term stable funding for transportation; California’s bond-financed $222 billion Strategic Growth Plan of which $107 billion is dedicated to transportation over 10 years; Utah’s Transportation Investment Fund that relies on a variety of public and private revenue sources and the Utah legislature’s philosophy that federal assistance should not be viewed as the principal source of transportation funding; Virginia’s and Texas’ concession agreements with the private sector that involve profit sharing arrangements; Indiana’s toll road concession agreement whose front-end payment is fully funding a 10-year statewide program of transportation improvements; Pennsylvania’s proposed Turnpike concession which would ensure the funding of a long-term capital improvement program without any federal assistance; Washington State’s proposal to impose tolls on an existing bridge (SR 520) and use the proceeds to finance its replacement; and variable pricing of express lanes and parking facilities in several cities across the country as a source of operating revenue and a means of improving facility performance.

What has led the states and localities to embrace these novel financing strategies? We posed this question to several state officials during the conference. Their answers were quite revealing:

+ Many states have concluded that there is little prospect for a substantial increase in federal aid, given Congressional reluctance to raise the federal gas tax and the prospect of declining tax revenues caused by improvements in vehicle fuel economy and a possible slowdown in the growth of vehicle-miles traveled (VMTs.) As one governor’s senior aide told us earlier, "since Congress is not likely to come up with adequate resources to help us meet our future infrastructure needs, we have no option but to move on our own and find new ways of funding our capital needs."

+ A new generation of entrepreneurial governors, state legislators and state and local transportation officials has emerged across the nation. These public officials are not afraid to embrace innovative ideas and they have the political courage to champion them in the public forum. "A coalition of change agents at state level will bring about a fundamental reorientation in the way we approach transportation funding" one state financial official observed.

+ Last but not least has been the Influence of Secretary Peters and her policy team at US DOT. The importance of their role was summed up succinctly by one senior state transportation official when we asked him what in his opinion accounts for the new state-level receptivity to financial innovation, specifically the willingness of state policymakers to embrace tolling, congestion pricing and public-private ventures. Our latest count, we told him, shows no less than 22 states actively pursuing these strategies. "No doubt the current budget shortfalls and poor prospects for more federal help have had a lot to do with it," he responded, "but I would give a lot of credit to Secretary Peters. She has made it legitimate and politically respectable for us to champion approaches that previously were considered unorthodox and risky."

Toward A New Funding Paradigm

In the end, we shall probably end up with a hybrid funding system. Traditional gas taxes will continue in the foreseeable future as the primary means of funding the federal portion of the nation’s transportation program, but the federal gas tax revenue with its steadily declining purchasing power will be increasingly preempted  by demands for preservation and reconstruction of existing infrastructure. A federal capital budget for infrastructure in the form of the proposed National Infrastructure Bank (S.1926 and HR 3401) or the National Infrastructure Development Corporation (HR 3896) would provide some additional investment capital, but the amounts of funds attached to those two legislative proposals — a one-time grant of $60 billion in the case of the National Infrastructure Bank and a $9 billion revolving fund in the case of NIDC— would hardly suffice to make up for decades of underinvestment. These initiatives would fund only a small fraction of the future transportation needs of a growing population and economy. Clearly, a federal-centric approach does not offer an adequate solution to the transportation funding dilemma.

A truly effective program of infrastructure modernization will require major contributions of private capital and financial innovation at state level to supplement steadily declining federal assistance. States will need to employ a diverse mix of approaches like tapping private equity, partnering with the private sector, creating state infrastructure banks, using toll financing and availability payments, and entering into toll road concession agreements with private consortia. Developing familiarity with these new tools and obtaining political acceptance for them will take time. The good news is that, as the State Summit has shown, there is no lack of inventiveness and plenty of resolve among governors, state legislatures and state departments of transportation to make a successful transition to the new funding paradigm.