Taking the High Road to Funding?

States Debate the Value of Tolling to Pay for Highways in an Age of Revenue Shortfalls

March/April 2007

Mary Buckner Powers, CONSTRUCTOR

State highway construction projects are in a battle about funding. the struggle has spurred some states to look at toll roads as one possible solution. Still, Many highway funding experts are not convinced that tolling is the best answer.

One thing is clear: the need for increased highway funds is becoming more critical. Building even the simplest roads can cost millions of dollars a mile, and federal highway funds barely cover the cost of maintaining existing roads. Meanwhile, voters generally do not support higher state taxes, and Congress is not interested in raising the federal fuel tax, which has funded most state highway projects in the past.

The federal government is not going to double the 18.4¢-per-gallon fuel tax to cover new road construction needs across the country. So in an attempt to save themselves from a slow, painful death, states are looking for new ways to adequately fund their transportation needs, says Harold Linnenkohl, commissioner of the Georgia Dept. of Transportation.

“We’re facing congestion and safety problems even in rural areas, and we have to face those issues,” says Linnenkohl, who has been with the agency for 38 years. Georgia removed $7.7 billion in highway projects from its priorities list after the state’s share of federal fuel tax revenue was cut from $19.2 billion to $11.5 billion over six years. That forced Georgia to follow the lead of other states in looking at toll roads as a means to fill funding gaps.

In 2006, the floodgates opened for states to seriously look at tolling as a funding solution when Indiana decided to lease an existing 50-year-old toll road to a concessionaire, says Brian Deery, senior director, highway and transportation division of the Associated General Contractors of America, Washington, D.C.

The highest bidder, Macquarie-Cintra, offered Indiana $3.85 billion to operate and maintain the 58-mile-long Indiana Toll Road for 75 years. The toll road under state operation had been underperforming for years and often lost money because tolls had not been raised since 1982. “Politically, it could not be done,” says Dennis Faulkenberg, a lobbyist for the Indiana Dept. of Transportation.

Now the highway’s old toll booths are being removed and electronic tolling will begin in six months. Macquarie-Cintra’s payment, which was made up front and has earned $113 million in interest since July, will fund Indiana’s 10-year infrastructure plan. The state put $500 million into a trust for future highway construction. The concessionaire agreed to add lanes in congested areas. “They have already awarded $250-million worth of improvements to the highway,” says Faulkenberg. The award went to Goshen, Ind., contractor Reith-Riley. The concessionaire plans to spend another $4.4 billion on upgrades during the lease.

Tolling enterprises are not always an easy sell. Even Indiana, which has had such a tremendous success with the Macquarie-Cintra deal, faces a tough challenge on the next proposal, Faulkenberg says. Gov. Mitch Daniels has proposed building a new 75-mile toll road as an outer loop around Indianapolis and would use the proceeds to build the last remaining link of Interstate 69 from Evansville to Indianapolis. That road originally was proposed as a toll road, but Indiana residents wanted it to be a free Interstate. Now, the public-private toll road faces opposition from privatization opponents in the state’s House of Representatives.

Georgia also faces opposition to its privatization plans. “People have not accepted the fact that they need to pay for the privilege [of driving],” Linnenkohl says.

Still, a December survey by the American Automobile Association found that 52% of the respondents would rather pay a toll than a tax to support highway construction. “The most popular options are those that add tolls only to new roads and highway lanes,” AAA officials say.

How states ultimately deal with the funding shortfalls will be the deliberate choice of their legislatures, says Tom Warne, a highway consultant and former chief of the Utah Dept. of Transportation. “Every project will be treated differently and the culture of the state will drive the decisions,” he says.

Willpower

No projects go forward unless there is political will, adds Mark Bader-Hellstrom, senior vice president for business development at Washington Group International, Boise. “Gov. Mitch Daniels stuck his neck way out. There was a lot of controversy, but he gave Indiana a tremendous amount of money to build more of the roads they need,” Bader-Hellstrom says.

Some states like Texas are moving rapidly to build long new toll corridors, but others are testing the waters with smaller projects. Georgia has the laws to allow it to develop a public-private toll road but has not yet exercised the option. Washington Group has proposed adding new toll lanes to Georgia Highway 400, a congested 53-mile-long highway north of Atlanta. The southernmost six miles of the road is tolled. “Our proposal would widen all of Ga. 400,” Bader-Hellstrom says. “We would keep the current lanes free and toll the new lanes.”

WGI was willing to fully finance the project, but the state now wants to pay a portion of the capital costs to lower the tolls. WGI hoped to have a letter of intent from the state to move ahead with the project by the end of March, Bader-Hellstrom says.

The new toll lanes adjacent to free lanes on Ga. 400 would be high-occupancy toll (HOT) lanes, the latest trend in tolling. Some states are adding more HOT lanes on existing highways rather than building huge new toll road projects.

Utah is opposed to toll roads but not to HOT lanes. The state opted to toll its existing HOV lanes by selling stickers that allow single drivers to use the less-congested lanes. “The stickers sold out in just a few hours,” Utah consultant Warne says. “Drivers were willing to pay for the privilege of entering the carpool lane.”

Both toll roads and HOT lanes are becoming much more palatable, says AGC’s Deery. While few states are expected to follow Utah’s lead and allow drivers to simply purchase a sticker, most are considering electronic tolling, which makes the process less cumbersome and more appealing.

HOT lanes are considerably different  from the toll roads of old where collections were used to pay off construction bonds. HOT lanes are a transportation management tool meant to flatten travel peaks and relieve congestion, and they are priced accordingly—high toll rates during rush hour and lower rates at other times. This has earned them the nickname “Lexus lanes.”

“That’s one of the issues under debate,” Deery says, noting, “Are [HOT lanes] only for the rich, or do they relieve congestion on the free lanes?”

The physical space on a road is the key to the value of HOT lanes, not construction costs, says Neil Gray, director of government affairs for the International Bridge, Tunnel & Turnpike Association,  Washington D.C. When the value shifts to traffic management, it allows toll collections to be used elsewhere in the state. But that can be a big issue for drivers, who expect to reap the direct benefits of the tolls they pay, Gray says.

Texas addressed the issue in 2001 by establishing regional authorities—independent agencies that build, operate and maintain toll roads—and the collections are kept in the region. “It defuses the issue of where the money is going,” Gray says.

Following Shadows

Texas also is making use of a tolling model commonly used in the U.K. called pass-through tolls or shadow tolls. Contractors sell the bonds to pay for the construction of a road, and the state pays the contractor based on the number of vehicles that use the road. In the U.S., such bonds are tax exempt, which significantly lowers development costs.

J.D. Abrams LP, Austin, proposed a 7-mile shadow toll road in El Paso in 2005. The Texas Dept. of Transportation put the plan out for bid, and San Antonio’s Zachry Construction was the only contractor to bid against J.D. Abrams. Abrams was selected Dec. 8 as the best-value proposal and is now negotiating a pass-through agreement with TxDOT.

“We have a governor, Rick Perry, who understands that the economic viability in Texas starts with transportation,” says Bill Burnett, vice president of project development at Abrams. Industry participants agree that large-project developers need local help to get the political support for projects. “Local contractors know the materials sources, the labor market, even the ground conditions,” says Deery.

There is no doubt that some form of tolling is here to stay as long as public funding for highways remains low, say industry sources. Virginia, Texas, Georgia and Florida are the leaders in tolling enterprises, but many other states are in the formative stages and moving toward more participation.

Transportation experts say only 5 to 10% of current funding needs can be met by public-private partnerships, so toll roads are not a silver bullet to replace traditional public funding for highways. Still, highway contractors like J.D. Abrams favor toll roads. “We like toll roads because we like to build roads,” Burnett says. “It’s more opportunity for us.”