Creating a highway bond fund and
allowing state spending on toll roads

(SJR 16 by Shapiro/Brimer, et al.)

Texas Constitution, Art. 3, sec. 52-b requires the Texas Turnpike Authority (TTA) or its successor agency to repay to the State Highway Fund any monies spent by the Texas Department of Transportation (TxDOT) on toll roads, toll bridges, or turnpikes. Art. 8, sec. 7-a dedicates three-fourths of net motor-fuel tax revenue to the highway fund (designated by the Comptroller's Office as Fund 6), which also receives revenue from motor-vehicle registration fees and sales taxes on lubricants. Fund 6 money may be appropriated only for specific highway-related purposes.

Art. 3, sec. 49 of the Constitution prohibits state debt, generally requiring that voters approve bonded indebtedness before the state may incur it. Sec. 49-j limits annual state debt payable from state general revenue to 5 percent of the annual average amount of nondedicated general revenue for the three preceding fiscal years.

Digest

Proposition 15 would add Art. 3, sec. 49-k to the Constitution, creating the Texas Mobility Fund in the state treasury. The Texas Transportation Commission (TTC) or its successor would administer this revolving fund to finance acquisition, construction, maintenance, reconstruction, and expansion of state highways, including design and right-of-way purchases. Money in the fund also could be spent on public toll roads and other public transportation projects.

TTC could issue bonds pledged against the fund to be repaid from the fund balance. Bond proceeds could be used for refunding obligations and related credit agreements, creating reserves, and paying issuance costs and interest on bonds.

The Legislature could dedicate to the fund one or more specific revenue sources or portions of other state revenues, as long as the sources were not otherwise dedicated by the Constitution. Motor-vehicle registration fees and taxes on motor fuels and lubricants could not be dedicated to the fund. Dedicated revenue would be considered appropriated when received by the state, deposited automatically into the fund, and used as provided by Proposition 15 and any law enacted under its authority without any further appropriation.

The dedication of a specific source or portion of revenue, taxes, or other money could not be reduced, rescinded, or repealed unless two conditions were satisfied. First, the Legislature by law would have to dedicate a substitute or different source that the comptroller projected to be of equal or greater value than the dedicated source. Second, the Legislature would have to authorize TTC to guarantee payment of any bonds, notes, other obligations, or credit agreements by pledging the state's full faith and credit if dedicated revenue were insufficient to cover the payment. If TTC took such action and dedicated revenue was insufficient, the first revenue deposited into the state treasury not otherwise dedicated constitutionally would be appropriated to pay principal and interest on the obligations or agreements, less any fund amount available for payment.

If approved by the attorney general, obligations and credit agreements issued in conjunction with the fund would be considered incontestable. Judicial enforcement would be delegated to a Travis County district court.

The fund's obligations and credit agreements would not be included in computing the constitutional limit on state debt under Art. 3, sec. 49-j, except to the extent that the comptroller projected that general revenue would be needed to pay the amounts due should TTC exercise its authority to pledge the state's full faith and credit or that money were dedicated to the fund from an unspecified source.

Proposition 15 also would amend Art. 3, sec. 52-b to authorize TxDOT to lend or grant money for acquisition, construction, maintenance, or operation of turnpikes or toll roads and toll bridges. The amendment would repeal the constitutional requirement to repay Fund 6 from tolls or other turnpike revenue.

The ballot proposal reads: "The constitutional amendment creating the Texas Mobility Fund and authorizing grants and loans of money and issuance of obligations for financing the construction, reconstruction, acquisition, operation, and expansion of state highways, turnpikes, toll roads, toll bridges, and other mobility projects."

Proposition 15 would establish an innovative mechanism for stretching state highway- funding dollars to build badly needed highways sooner. Texas' traditional "pay-as-you-go" approach to highway finance no longer is viable. The state's phenomenal population growth has led to more vehicle-miles traveled, greater traffic congestion, clogged border crossings, deficient rural roads, and many unsafe bridges. Demand has far outstripped capacity while spending has lagged. Texas never will catch up with demand if it does not prepare itself to innovate, as allowed by Proposition 15.

Highways are the only major capital projects for which the state does not borrow money by issuing bonds. That policy no longer is defensible in the face of spiraling needs, lost economic opportunities, and reduced quality of life. Cities and counties routinely finance street and road projects with bonds. There is no good reason why the state should not avail itself of this financing tool as well, subject to appropriate constraints.

The Texas Mobility Fund would supplement federal and state highway revenue without jeopardizing either. It would provide both flexibility and structure, allowing spending on a variety of transportation projects while keeping the fund balance secure. The balance would be used primarily to leverage highway bonds, enabling projects to begin sooner and reducing the impact of construction inflation. The interest earned would generate money for even more projects.

It would be up to future legislatures to dedicate revenue to the fund, either through greater efficiencies, increased appropriations, or new sources. However, it is important to establish the fund now as a policy statement until adequate funding can be obtained.

The stipulation in Proposition 15 that revenue dedicated to the mobility fund automatically be appropriated for purposes of the fund is not unprecedented. The Legislature appropriated money to many state agencies in that manner prior to a change in policy beginning in the 1980s. The goal is to ensure investors that money earmarked for highway bonds will be there by preventing the Legislature from "raiding" the fund by appropriating for non-highway purposes the revenue dedicated to the fund before it reaches the fund. The Legislature already delegates spending decisions to TTC in an effort to depoliticize the highway project-selection process. The amendment merely would place that sound policy in the Constitution as it pertains to the mobility fund.

Allowing the state to spend money up front on toll roads would hasten construction of much-needed highway projects. Forgoing repayment to TxDOT of state funding for toll roads would alleviate the double-edged problem most new toll projects face, that of two liens - one to TxDOT and the other to bondholders. Providing toll equity - shorthand for the value of the state's unreimbursed investment in toll projects - would alleviate some of the burden of capital outlay for toll-road startup costs. This would make toll projects more attractive to investors, accelerate debt retirement, and hasten production of toll revenue.

Making it possible for projects to proceed as toll roads, rather than be financed conventionally, also would reduce contributions by local governments, which eventually would derive even more benefits from additional projects built in their areas with revenue generated from toll roads. Toll equity would free more state dollars for other projects because the state's spending share of a toll project would be much less than if it paid entirely for the same project without tolls. This also could mean more money spent overall in certain areas when the value of toll projects is combined with conventional TxDOT spending.

Four potential toll projects being planned by TTA for Central Texas likely would benefit the most from the innovative financing proposed by Proposition 15. Three other prospective projects (two in San Antonio and one at South Padre Island) also could benefit, as well as five projects being planned in Dallas/Fort Worth by the North Texas Tollway Authority and five projects planned by the Harris County Toll Road Authority.

Taxes pay for many roads that some motorists never use. Toll roads make sense as alternative routes to high-traffic areas, available for a nominal user fee. However, tollways never will replace non-toll roads; free routes always will exist. Any plan that provides more money for highway construction while retaining state fiscal control would benefit all motorists.

Borrowing money by issuing bonds would make highways more expensive in the long run because of debt service, underwriting, and issuance costs. This would drain precious resources from the task of providing transportation efficiently and would encumber revenue that otherwise could be used on other projects. Bonding would not generate new money for highways; it merely would reallocate it and tie it up for the future. Over commitment would limit Texas' ability to meet unforeseen needs. The state lacks the resources to make bonding viable soon enough to have a significant impact on Texas' transportation crisis. The Legislature either should find sufficient money in general revenue or should increase the gasoline tax, the closest thing to a user fee for all motorists.

Toll roads represent double taxation. Motorists already pay for highways at the gasoline pump, vehicle registration counter, and at auto supply retailers. They should not have to pay for highways again when they exercise their right to travel on them.

The amendment could create a potentially open-ended draw on general revenue to pay for highway bonds if dedicated revenue in the fund were insufficient to pay the principal and interest. There is nothing in Proposition 15 itself that would limit the amount of bonds that could be issued as long as general revenue or some other source were available to cover any shortfall in revenue dedicated to the fund. It also is unclear whether the language in the amendment only applies to an unforeseen deficit. This could encourage the deliberate issuance of more bonds than the revenue dedicated to the fund alone could cover.

Proposition 15 would undermine legislative oversight by appropriating automatically to the mobility fund any revenue dedicated to the fund. The revenue could be used as provided by the amendment and the enabling law "without further appropriation" by the Legislature. This rare bypassing of legislative control of a treasury-based fund effectively would delegate spending authority to TTC. The Legislature would have to enact statutes to direct, preempt, or change any TTC spending decisions because the amendment would preclude lawmakers from doing so through the appropriations process.

It would be pointless to create a fund with no revenue, not unlike opening a bank account with no deposit. The Legislature should postpone this idea until it is prepared to pay for it. Texans need more money for roads now, not the legislative equivalent of a promissory note. Borrowing against an almost-sure thing, such as federal highway funds, would provide a quicker and more meaningful infusion of capital than waiting for a better economy to create a budget surplus or for a consensus to form around a politically sensitive tax hike, either of which could take years to materialize, if ever.

The mobility fund would have to contain at least 110 percent of the money necessary to pay principal and interest on all obligations issued each year. Subject to this limit, TTC could guarantee payment of all obligations by pledging the state's full faith and credit in the event that revenue dedicated to and on deposit in the fund were insufficient. TTC could issue no obligations until TxDOT had developed a strategic plan detailing proposed expenditures and expected benefits to the state. To the extent that money was on deposit in the fund in excess of that required to pay all obligations of the fund, TTC could use the money for any purpose for which obligations could be issued.