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Completing Transportation Projects: Innovative Transportation Financing in the 21^st Century

November, 2001

By Reed F. Morris, NCSL Transportation Program

Contents

Summary
Introduction
The Federal Role in Transportation Finance
The State Role in Transportation Finance
Conclusion

Table 1. 2001 Application Cycle Projects Selected for TIFIA Credit Program
Table 2. Advantages of GARVEEs and Pay-As-You-Go Financing
Table 3. Statutory Authority to Issue GARVEEs
Table 4. States Considering GARVEE Legislation in 2001
Table 5. State Loan Agreements Through March 2001
Figure 1. Total Highway User Revenue Disbursements
Table 6. 1999 Gasoline Tax Increases
Table 7. 2000 Gasoline Tax Changes
Table 8. State Changes in Vehicle-Related Revenue
Table 9. 2001 State Legislative Changes to Vehicle-Related Revenue

Appendices

Summary

States facing transportation funding shortfalls continue to look for options. Where traditional pay-as-you-go is not adequately meeting the state's transportation needs, legislation to enable innovative financing mechanisms such as state infrastructure banks or GARVEE bonds can provide solutions. Increasing the state gasoline tax or licensing fees hardly seems innovative, but modified and more efficient means of collection can provide increased funds without increasing public expenses. Other traditional revenue sources such as tolls continue to be explored by states, but the role of the private sector and technology create new issues for legislators in this and other areas of transportation. Knowing the options is the key to timely and efficient completion of transportation projects.

Introduction

Congestion and mobility are key issues facing state legislatures. How to solve gridlock in an era of increased personal vehicle use and expanding urban growth are crucial questions facing today's state policymakers. Congestion relief measures undergo intense scrutiny by Americans and are influenced by strong lobbying efforts from environmental groups and industry. Philosophies on transportation and growth management differ; however, one constant is that sustained funding is necessary for transportation projects of all kinds to proceed.

Changes in state and local economies play a large role in transportation planning and financing by affecting available transportation funds. Fluctuating home and gasoline prices affect distances of daily commutes and the price Americans are willing to pay for their personal transportation. Freedom and safety in mobility affect quality of life. Legislators continue to look for ways to provide flexibility in transportation through development of new highways and roads, multi-modal transportation facilities, intelligent transportation systems and public transportation capable of serving the needs of the state. Fundamental to providing these services is the state's role in transportation finance.

Financial constraints bring delays in transportation project completion. The priority list for project completion extends 20 years or more in some states. The framework for transportation finance in each state must be established with careful planning in how the state will bear costs through fees, taxes and debt balanced against the public's interest in transportation project priorities.

State policymakers are looking at a variety of ways to provide adequate revenue and use revenue sources more efficiently to bring more transportation projects to completion more quickly. Transportation funding mechanisms have been refined in some areas so that states can implement timely transportation solutions where current funding levels are insufficient.

The State's Responsibility Transportation Finance

States are responsible for approximately 75 percent of the total capital expenditures for highway and mass transit programs. The majority of state transportation funding comes from highway-user revenues (e.g., gasoline taxes and other vehicle fees). The Transportation Equity Act for the 21^st Century (TEA-21), enacted June 9, 1998, brought unprecedented levels of federal funding for transportation enhancements. Like state transportation funding, federal transportation funds are comprised mainly of fuel taxes, which provide 90 percent of the revenues deposited into the Federal Highway Trust Fund.

Perhaps the most direct method of increasing state transportation revenue has been for states to increase motor fuel taxes, motor vehicle taxes and fees. Because this has been a politically sensitive area with summer gas prices approaching $2 per gallon in some areas, some states have increased transportation funding in other ways-by redirecting already collected revenue to state transportation funds or by improving the methods of tax and fee collection.

Using debt instruments to fund transportation projects has emerged as a popular alternative to pay-as-you-go financing. Although debt financing is not a generator of revenue, it provides a means for delivering transportation projects sooner through financial leveraging. With pay-as-you-go financing, infrastructure development is limited to existing funds. Debt financing provides immediate revenue that allows infrastructure service demands to be met that could not otherwise be afforded by government procurements at the outset.

State legislatures may need to enact legislation to remove barriers for issuing certain types of debt and to ensure efficient debt management. One type of debt financing considered by legislatures is Grant Anticipation Revenue Vehicles (GARVEE) bonds. GARVEEs allow future federal transportation aid receipts to be pledged for repayment of principal and interest on bonds issued for qualified federal aid transportation projects.

Another method, state infrastructure banks (SIBs), can compliment traditional funding mechanisms through direct loans, lines of credit and other credit enhancements. The Intermodal Surface Transportation and Equity Act (ISTEA) and TEA-21 provided federal seed money for SIBs in some states through pilot programs. Funding the SIB with state funds allows greater flexibility by broadening the funding range transportation projects outside the federal highway system. The federal Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA), part of the TEA-21 legislation, also can provide credit assistance for regionally or nationally significant transportation projects and aims to increase public investment in transportation projects.

This myriad of transportation funding options available at the state level often is referred to as "innovative finance." Understanding the complexities of transportation financing and how these financing mechanisms can be used simultaneously for projects is an onerous task. Legislatures are the key to successful implementation of efficient transportation financing in the states through policy programs, oversight, approval and funding. This report provides information for state policymakers to use as they address transportation finance. The report includes an explanation of the federal role in transportation finance and a discussion of several innovative finance mechanisms; an overview of the state role in transportation finance; offers a conclusion; and provides several appendices with useful information.

The Federal Role in Transportation Finance

Motor fuel taxes were first collected by the federal government in 1932 when a 1-cent per gallon tax was imposed on gasoline. In 1952, the first federal diesel fuel tax was assessed when both gasoline and diesel were taxed at 2 cents per gallon. Today, the federal gasoline tax rate is 18.4 cents per gallon and the diesel rate is 24.4 cents per gallon. The federal government also charges other user fees for trucks and trailers, tires and use (heavy vehicles that weigh more than 55,000 pounds gross weight). These sources of federal revenue are deposited into the Federal Highway Trust Fund, the funding source for the federal aid highway program.

The Federal Highway Trust Fund

The Federal Highway Aid Act of 1956 established the Federal Highway Trust Fund (FHTF). The FHTF contains two main accounts, the Highway Account and the Mass Transit Account; more than 86 percent of money collected flows into the Highway Account¹. This means that 15.44 cents of the 18.4 cents federal gasoline tax go to the Highway Account, and 2.86 cents go to the Mass Transit Account². The minimum guarantee legislated in TEA-21 ensures state apportionment of at a minimum 90.5 percent of its contribution to the Highway Account.

FHTF disbursements are not simply a return of the revenues paid into the fund by each state. Disbursements are made to the states based on formulas legislated in TEA-21 with factors that include lane miles, miles traveled on arterial routes, and population. These formulas leave some states as donor states (receiving less than they paid into the fund) and some as recipient states (receiving more than they paid)³.

TEA-21 expanded the federal government's role in innovative finance through several key programs. The Transportation Infrastructure and Innovation Act (TIFIA), authorized by TEA-21, provides credit assistance to public and private sponsors of major transportation projects. TEA-21 also continued federal funding for four states' State Infrastructure Banks (SIB). Authorization of the use of federal transportation funds to repay debt (originally authorized by the National Highway Systems Act of 1995) also was continued through fiscal year 2003 through TEA-21 provisions. This allows states to pledge future federal highway trust fund disbursements for bonds, called GARVEEs, that are issued for certain transportation projects.

State legislatures may consider transportation financing policies to use the innovative options thus provided by the federal government. States also can create their own SIB or supplement the existing SIB federal pilot seed money with state funds. For GARVEEs, states may need to remove or revise statutory or constitutional constraints (with voter approval when necessary) before issuing this type of debt.

Transportation Infrastructure Finance and Innovation Act (TIFIA)

The federal credit assistance under TIFIA expands the role of federal credit in transportation finance by enabling the U.S. Department of Transportation (U.S. DOT) to provide up to $10.6 billion in credit assistance through three forms of credit assistance-secured (direct) loans, loan guarantees, and standby lines of credit. This level of funding extends through fiscal year 2003-the life of TEA-21. By providing credit assistance rather than grants, TI01FIA hopes to stimulate private investment in transportation as has been done by federal agencies in the education and housing sectors.

The TIFIA program's goal is to attract non-governmental investors to major transportation projects by demonstrating their feasibility. The TIFIA credit assistance can support no more than 33 percent of the eligible project costs of projects that are budgeted at $100 million or more. Dedicated revenue streams (e.g., tolls for highway projects) must support eligible projects. By providing credit assistance and allowing state and local governments to leverage limited federal resources, the TIFIA program hopes private investors will be attracted to the long-term feasibility of each project, while the federal credit closes funding gaps and alleviates investor conscience.

TIFIA credit assistance, including two projects for fiscal year 2001 (see Table 1), has supported transportation investments worth nearly $12 billion at a cost of $194 million to the federal government (10 projects total). For the two projects selected for fiscal year 2001, every TIFIA dollar spent contributes to more than $36 in total capital investment⁴.

Table 1. 2001 Application Cycle Projects Selected for TIFIA Credit Program

Source: U.S. Department of Transportation, Office of Public Affairs. November 22, 2000.

Grant Anticipation Revenue Vehicles (GARVEES)

Grant Anticipation Revenue Vehicles (GARVEEs) provide a mechanism by which states can accelerate future federal revenues to fund transportation projects. GARVEEs are bonds or notes that are bought by investors with the debt to be repaid by the issuer's pledge of future federal highway funds. GARVEES, also known as grant anticipation notes (GANs) can come in many forms. They may stand alone (backed solely by federal funds to repay debt service) or may be backed by additional state funds. They may be backed by either federal highway or transit funds and may be insured or uninsured. Another subset of GARVEEs is federal reimbursement anticipation notes (FRANs), which are secured by future federal reimbursements rather than grants. FRANs offer greater flexibility in the types of transportation projects for which they can be issued.

The minimum guarantee legislated in TEA-21 increased the predictability of future federal aid the states will receive and makes GARVEEs a more attractive alternative financing vehicle for transportation projects. Before passage of the National Highway Systems Act of 1995, states could use federal grants only to repay the debt principal and were restricted from using federal aid highway funds to repay debt. Several of the benefits of GARVEEs (table 2) are representative of infrastructure debt financing as a whole, but these are issues that legislators typically will consider when they consider GARVEE authorization legislation.

Table 2. Advantages of GARVEEs and Pay-As-You-Go Financing.

Authority to Issue GARVEEs

Several state legislatures have granted the authority to issue bonds backed by future federal funds to be used for transportation projects (table 3). In 2001, at least six other states considered GARVEE legislation (table 4).

Table 4. States Considering GARVEE Legislation in 2001

State Infrastructure Banks

State infrastructure banks (SIBs) are designed to compliment traditional transportation funding mechanisms. These state or multi-state funds operate in the same manner as private banks and provide flexible transportation funding in the form of loans, lines of credit and other credit enhancements to allow states to accelerate the completion of transportation projects.

The original SIB pilot program under the National Highway Systems (NHS) Designation Act of 1995 included 38 states and Puerto Rico. The pilot program extended in TEA-21 supplements the existing SIB pilot program in only four states-California, Florida, Missouri and Rhode Island. These four states may capitalize their SIBs with federal funding. The remaining 34 states and Puerto Rico will continue to operate under the initial program and continue to make loans to transportation projects, but they cannot use federal funds to capitalize their SIBs through the life of TEA-21 (through FY 2003).

Activity in states' SIBs continues. As of March 2001, 32 states have entered into loan agreements with 32 new loan agreements totaling more than $156 million since October 2000 (table 5).

Table 5. State Loan Agreements Through March 2001

Source: Federal Highway Administration, Innovative Finance Quarterly (Winter/Spring 2001).

The State Role in Transportation Finance

State governments will contribute approximately 75 percent ($48.3 billion of the $64.8 billion total) of all highway capital expenditures in 2001⁵. Although the Transportation Equity Act for the 21^st Century brought significant increases in federal transportation funds for capital projects, the states remain the primary sources of financing. States are using a variety of innovative to meet the financial burden of transportation projects.

A variety of funding sources are available at the state level. Each legislature must decide how to most prudently collect and distribute these funds for the state's needs. Most transportation funding sources at the state level are user taxes and fees-state motor fuel taxes, vehicles licenses and registration fees, and sales taxes. In many states, local governments also can impose gas and sales taxes. Legislatures are continuing to look for new and efficient ways to use these existing resources to meet transportation needs.

Highway user fees are the fundamental source for state transportation funding. Such fees are considered to be an equitable and efficient way to spread the financial burden of transportation projects. At the federal levels, user fees fund nearly all federal transportation disbursements. At the state and local level, transportation fee and tax structures vary greatly in both revenue collected and disbursements made for state needs other than transportation. In 2001, 84 percent of all state highway disbursements (an estimated $126.2 billion) will come from highway user revenues (tolls, taxes and fees), leaving $12.8 billion of highway-user revenue designated to other governmental purposes⁶ (figure 1). How states structure highway user revenues plays a crucial role in the availability and strength of transportation funds.

Figure 1. Total Highway User Revenue Disbursements

Source: Office of Highway Policy Information, Federal Highway Administration: Bulletin, Highway Funding 1998-2001, March 6, 2001.

Legislative Shifts In Motor Vehicle Taxes and Fees

Motor fuel taxes are the primary revenue source for transportation financing in many states. Technological advances in alternative fuel technologies and changing driver demographics can affect motor fuel revenue levels. According to the core tables of the 2000 Census Supplemental Survey released in August 2001, 9.2 percent of American workers use public transportation, and more than 91 percent of households have at least one vehicle available. Factors such as increased miles-per-gallon fuel consumption and efficient collection of fuel taxes are important in fiscal analysis of motor fuel tax policy.

Increased motor fuel revenue can come directly from increasing the motor fuel tax. In 1999, nine states increased their gasoline taxes (table 6). Some 1999 legislative changes also affect subsequent years. In 1999, for example, Arkansas enacted legislation that incrementally increased the gasoline tax, with subsequent increases taking effect through 2003. However, in 2000, no states saw new legislative increases in gasoline taxes and one state-Connecticut-decreased its gasoline tax. (Table 7).

Table 6. 1999 Gasoline Tax Increases

(cents per gallon)

Source: NCSL, State Tax Actions 1999; NCSL Special Fiscal Report, 2000.

Table 7. 2000 Gasoline Tax Changes

(Cents per gallon)

Source: NCSL, State Tax Actions 2000; NCSL Special Fiscal Report, 2001.

Connecticut decreased taxes on both gasoline and gasohol by 7 cents per gallon in 2000 (gasohol was decreased from 31 cents per gallon to 24 cents per gallon). This act also mitigated the severe reduction in transportation funds by redirecting sales taxes from casual sales (purchases other than from a licensed dealer) of motor vehicles to the Special Transportation Fund (STF). The act also included an annual increase of $10 million for the STF from revenue collected from petroleum products gross earnings tax revenues that previously had been directed to the general fund.

Vehicle-related revenue sources are viable methods of funding transportation projects. Each type of fee-whether it is vehicle registration, emissions fees or sales taxes impose on vehicle-related parts-is related in some way to use. As is the dilemma with vehicles and gas mileage, each type of vehicle-related revenue is not exactly proportional to the vehicle's use of the state transportation system. For example, vehicle weight and gasoline efficiency are variables that play into the proportionality of road use per gallon of gasoline consumed. Nevertheless, motor vehicle-related fees typically are viewed as a fair and politically acceptable way for a state to increase transportation revenues.

During the past three years, several states have made changes to a variety of vehicle-related revenue sources (table 8 and table 9). How the revenue for each vehicle-related fee is dedicated also must be considered by legislatures. Because many vehicle-related fees-or portions of them-are dedicated to state general funds, actual fiscal effects of increasing or decreasing vehicle-related fees may not substantially affect transportation funding. Redirecting vehicle-related revenues to state transportation funds are discussed below a way that state legislatures have been able to increase transportation funding without increasing taxes or fees.

Table 8. State Changes in Vehicle-Related Revenue

Source: NCSL, State Tax Actions 2000; NCSL Special Fiscal Report, 2001.

Table 9. 2001 State Legislative Changes to Vehicle-Related Revenue.

Alternatives to Increasing Taxes and Fees

Summer gasoline prices in 2000 and 2001 have ignited political debate over motor fuel taxes. Indiana and Illinois suspended their state sales taxes on gasoline in the summer of 2000. Governors in other states also considered exercising their executive power to suspend state gas taxes in 2000. Legislative staff in several states have indicated that their governors would veto any proposed increases in gasoline taxes in 2001. Some states-such as Wisconsin and Florida-statutorily tie increases in gasoline taxes to formulas based on inflation measures. This has allowed an increase in gas taxes without facing a popular vote.

The national average for state gasoline taxes currently is 23.6 cents per gallon⁷. After adding in federal motor fuel taxes, the average national gasoline tax was 42 cents per gallon and 48.2 cents per gallon for diesel in February 2001. State-by-state comparisons of gasoline taxes are difficult because some states levy local gas taxes and other taxes (for example environmental taxes) (see Appendix A). Overall, from April 2000 to February 2001, the nationwide gasoline tax has dropped by 0.2 cent per gallon for gasoline and 0.3 cent per gallon for diesel⁸.

By adopting more efficient methods of collecting motor fuel taxes, some states have been able to increase transportation revenue without increasing taxes or fees. States also examined where motor vehicle revenue is directed. By directing motor vehicle fees and taxes to transportation, transportation coffers can be filled without increasing fees or taxes. The following examples show how three states increased their transportation funds without increasing taxes or fees in the state.

Changing The Methods of Collection: Vermont, Virginia and Texas

Under previous law, the diesel tax collected at the pump was $.16 per gallon plus $.01 for petroleum cleanup; certain diesel vehicles (based on weight and registration) paid an additional $.09 per gallon surcharge in quarterly use reports filed with the Department of Motor Vehicles (DMV). Effective July 1, 2000, the diesel tax rate was increased to $.26 per gallon and now is collected entirely at the pump, significantly reducing the DMV's workload.

Source: NCSL, State Tax Actions 2000; NCSL Special Fiscal Report, 2001.

Under previous law, the motor fuel tax was collected by retailers and remitted to the Department of Motor Vehicles (DMV) by dealers and jobbers. Effective January 1, 2001, the motor fuel tax was changed and now is collected at the terminal and supplier levels. The point where the tax is imposed was changed from the retailer to the point at which fuel is removed from the terminal. Licensed suppliers, acting as trustees for tax payments received, now remit the taxes to the DMV.

Source: NCSL, State Tax Actions 2000; NCSL Special Fiscal Report, 2001.

For the fiscal year ending August 31, 2000, 73 percent of Texas motor fuel taxes were deposited in the state highway fund. Motor fuel taxes comprise 44 percent of the Texas Department of Transportation's total highway fund receipts. The transportation revenue increases from this act are two-fold. At the state level, the estimated $30 million per biennium will come from directly from tax receipts on diesel. This increase in revenue is parlayed into an estimated $100 million total due to the increase in federal diesel tax collection and the increase in resulting federal highway disbursements.

Source: NCSL, State Tax Actions 2000; NCSL Special Fiscal Report, 2001.

Designating Transportation User Taxes to Transportation: Florida

Florida's Largest ever transportation funding increase-Mobility 2000-was made without raising taxes. The increase will directly fund or advance $6 billion in transportation improvements statewide. Mobility 2000 brings together several transportation finance options, including $2.5 billion in increased transportation revenue over 10 years that previously had been designated to the state general fund. The Mobility 2000 initiative funds are to be used to improve mobility in major urbanized areas, corridors that link Florida's trade and tourism corridors, and access routes for hurricanes and other emergencies from coastal communities. Overall, the Mobility 2000 initiative is slated to complete in 10 years or less projects that were scheduled for completion more than 20 years in the future.

Florida imposes a rental car surcharge of $2 per day (up to 30 days) on any lease or rental of a motor vehicle. The Mobility 2000 legislation increased from 75 percent to 80 percent the portion of this surcharge that is deposited into the State Transportation Trust Fund (Fla. Stat. §212.0606). In addition, Fla. Stat. §320.072 provides for a fee-also known as the "new wheels on the road" fee-of $100 to be collected for the initial registration of certain motor vehicles. Mobility 2000 designated 30 percent of these funds, which previously were deposited in the General Revenue Fund, to the State Transportation Trust.

The Florida Department of Transportation (FDOT) is charged with allocating sufficient funds to implement this initiative and amend the current work program through FY 2004-2005 to include eight Mobility 2000 projects. The Legislature appropriated $30 million from general revenue to the Transportation Trust Fund and further apportioned more than $16 million from the Transportation Trust Fund to fund the eight projects, which are composed of a mix of air, rail, road and intermodal components.

Other Mobility 2000 funding provisions:

• Creation of a state-funded state infrastructure bank (SIB).

• Authorization for FDOT to issue up to $325 million through the Grant Anticipation Revenue Vehicle (GARVEE) bond program.

Deciding How State Transportation Funds Are Spent

Depending upon how a particular tax or fee is statutorily designated, collected revenue may be administered differently by a state's fiscal, highway or transportation departments. Whether particular transportation revenue is a "fee" or a "tax" is an important distinction for legislative committees that have the power to enact non-tax fees. The delegated power to executive departments to set fees also hinges on the distinction between "fees" and "taxes." How the user fees and taxes are structured statutorily plays an important role in how states' transportation funds are spent.

State legislatures face similar issues with incoming federal transportation funds. How the federal funds flow to state highway and transportation departments is an important step in the transportation process. Some states-such as Nevada-"authorize the expenditure" of the federal transportation funds. Once authorized, the legislature may have little or no control over how the transportation department spends these funds. Legislative authority to designate funds from the state transportation or general funds for particular projects is the most direct form of legislative oversight. However, with the vast number of ongoing transportation projects in any particular state, a legislature typically appropriates funds through the state budget to the transportation or highway department.

The amount of funding the transportation department receives typically is based on long-term plans delivered to designated legislative committees for review. The proposals delivered to the legislature can be broken down into years with project goals and proposed funding for priority projects extending from one year or three years or up to 20 years. The following examples illustrate how the flow of funding and legislative oversight operates-Florida and Nevada.

Each year the Florida Legislature authorizes a budget for the Florida Department of Transportation called the Department's Work Program. Federal transportation funds are never touched by the Legislature and the process for federal funds is run through the Metropolitan Planning Organization (MPO) process. MPOs suggest projects to the department with an appeals process in place and the department devises a budget that is approved by the Legislature.

The Transportation Department's Work Program is a detailed listing of each project and how the transportation funds are to be spent. The Work Program is structured to represent five-year blocks of the state's transportation projects and is approved annually by the legislature. The projects in the first three years of the Work Program are locked into the Work Program by the legislature and cannot be moved out. The projects in the forth or fifth years of the Work Program can be moved in and out of the Work Program by the department, based on decisions by MPO and county commissioners.

For federal funds, the Legislature "authorizes the expenditure" based on a report the Nevada Department of Transportation (NDOT) of what the state is qualified for. NDOT then expends funds and submits reimbursement of the federal funds at the completion of the efforts.

NDOT regularly reports to the Legislature on priority projects and also submits progress reports on current projects. NDOT has wide discretion on use of transportation funding and expenditures of highway funds, and little input can be made by the Legislature. In recent years the legislature has attempted to make changes to the Nevada Transportation Board to provide greater legislative oversight.

The seven-member Transportation Board in Nevada is weighted heavily with constitutional officers, including the governor, lieutenant governor, attorney general and controller. Three public members also sit on the board. (Several other states have similar transportation boards or commissions, and methods of appointing the administrative heads of highway or transportation departments vary greatly throughout the states [see appendix A and appendix B]). A 1999 bill proposed adding two legislators to the Transportation Board as non-voting members (SB 336) but did not pass. Even more substantial changes to Nevada's transportation planning structure were introduced in the 2001 session.

The 2001 legislation would have created a legislative oversight committee on transportation, consisting of two members each from the House and Senate. The legislation proposed that the Transportation Board, as custodian of the state highways, would consult with the oversight committee and also issue copies of reports to the committee for evaluation. The committee's powers would have been limited to recommending up to five measures per regular session. On final passage, the bill creating the Legislative Oversight Committee on Transportation passed the Senate by a vote of 21-0 and the Assembly by a vote of 39-1; however, the governor vetoed the bill on June 15, 2001. This measure will likely return in the 72^nd Legislature (2002) for override consideration that would require two-thirds majority of both houses.

Public-Private Partnerships and Toll Roads

Legislatures are turning to the private sector for assistance in improving efficiency and meeting the financial demands of maintaining and improving transportation systems. Transportation facilities represent an area where the private sector is willing to invest in projects by providing financing. The prospect of profitable toll roads is one area to which states have successfully attracted private-sector participation.

Traditionally, states contract with private entities to build and/or design roads. With public-private partnerships, road builders also have a greater stake in the outcome of the project through warranties. Increasing the stake in the outcome provides incentives. However, without control over any of the design phase of projects, contractors may be less willing to provide a warranty for their work. Balancing these considerations has spawned a variety of public-private partnerships, which differ by the extent of private debt and equity and the degree of design, operation, oversight and maintenance.

Some public-private partnerships involve private firms that take on the finance, design and construction of a toll project. Governments still must be involved in permitting the collection of tolls, assessing workmanship and ensuring that environmental regulations are met. The degree of private sector involvement depends first upon legislative authorization to enter into the agreements.

Toll Roads

In 1772, Pennsylvania chartered the first turnpike in America. The Philadelphia and Lancaster Turnpike Road, opened in 1774, was the first crushed stone and gravel surfaced road. In the late 18^th and early 19^th centuries, before rail transportation became widely available, many privately owned turnpikes were built by private investors. Today, 29 states collect toll revenue in some form, either through roadway or bridge tolls or ferry fares⁹. Some states now are considering tolls as a way to finance transportation projects. Toll collecting often is viewed as the purest form of user-related revenue because the user is directly charged for the services used.

Perhaps the most common characteristic of state toll road legislation is the creation of an independent state toll authority or commission. By establishing a separate legal entity (and defining its scope, duty, purpose, etc.), the responsibility of operation and maintenance of toll facilities after completion can lie outside the state transportation or highway department. One states-Louisiana-established a similar independent authority this year (see discussion below) The authority also may be bi-state, such as The Port Authority of New Jersey and New York. By isolating the toll authority from the state transportation department, the toll authority is able to set and revise tolls, use tolls, issue bonds and invest bond proceeds. Legislators may wish to consider in toll enabling legislation other oversight provisions such as reporting to the legislature or having boards or commissions that include as a member the administrative head of the transportation or highway department.

Integration of intelligent transportation systems (ITS) in toll road operations has increased attractiveness and viability of toll collection. Using computer and wireless technology at collection points, electronic toll collection (ETC) increases efficiency and traffic flow by allowing motorists to pay tolls electronically without physically stopping at toll booths. Manned tollbooths still may be necessary, however, to accommodate vehicles that are not equipped with ETC devices. Integrating this technology comes at a cost, and state legislatures often need to remove financial barriers for studies and implementation. Legislatures also may need to grant authority for ETC integration, or they may wish to enact legislation to ensure efficient and accurate operation. ITS includes hundreds of other computer technologies employed for transportation management at all levels of government in such areas as traffic light patterns and emergency response¹⁰.

The following example highlights the 2001 creation of the Louisiana Transportation Authority. Missouri and North Carolina also considered toll authority legislation this year.

The newly created Louisiana Transportation Authority is granted full corporate power to " ... to promote, plan, finance, develop, construct, control, regulate, operate, and maintain any tollway or transitway to be constructed within its jurisdiction." (2001 Act 1209).

The Louisiana Legislature found that state and federal revenue for transportation projects was not sufficient to meet the state's transportation needs, and the creation of the authority is necessary to implement transportation funding initiatives including, tolls and public-private partnerships to supplement existing revenues.

The nine-member board of directors, the governing body of the authority, has the power to promulgate rules and regulations for the operation of the authority, subject to the approval of both the House and Senate Transportation, Highways and Public Works committees.

The authority has the power to contract with any person, partnership, association or corporation that wishes to use any part of a transportation project. The authority also can enter into agreements with private entities to construct, maintain or operate transportation projects.

Conclusion

At nearly the half-way point of TEA-21 authorization, states are adjusting to federal changes and opportunities in transportation funding. Although the majority of transportation funding comes from the state, federal funds are crucial to sustainable transportation infrastructure. With funding guaranteed only through fiscal year 2003, Congress will have to act through TEA-21 reauthorization to ensure that funding is available for states to repay GARVEE bonds already issued that are backed by future federal transportation funds. Uncertainty could make GARVEEs less attractive as an investment, and the state issuing the GARVEE could face a situation where future federal funds are used more quickly to repay debt, leaving little for funding current projects.

Legislators will want to consider how to communicate with the voters to meet both the public demands for mobility, congestion relief and road repair, and the need for state transportation revenues that are heavily dependant upon user fees and taxes. An issue that has been hotly debated in legislatures is who bears the burden of transportation projects through imposition of fees and taxes. Considering where the miles are traveled and collections are made in the state and where the funds flow for transportation projects are issues legislators face when they increase transportation user fees. Also important is making sure that user fees are collected efficiently and disbursed fairly between rural and urban areas.

Deciding the appropriate mix of user fees and taxes is another key legislative issue. Technology advancements will affect future fuel-related revenue, and technology also can bring greater efficiency in collection of motor vehicle fees and taxes. Population growth and budget shortfalls are major concerns for legislatures as they consider transportation finance. Through efficient implementation of innovative financing options, however, it is possible that the quality of life in the state can be improved.

Appendices

Notes

1. Federal Highway Administration, Federal Highway Statistics 1999, (Springfield, VA: FHA, 2000), Table FE-9.
2. For diesel fuel, 21.44 cents of the diesel tax are deposited into the highway account and 2.86 cents are deposited into the Mass Transit Account. For both gasoline and diesel, .01 cent is deposited into the Leaking Underground Storage Tank Trust Fund. The federal tax on gasohol is divided similarly; however, the General Fund of the Treasury receives 2.5 cents per gallon where the alcohol source is not a petroleum product. For higher alcohol blends (greater than 10 percent), the General Fund receives an additional .6 cent per gallon.
3. Federal Highway Administration, Federal Highway Statistics 1999, (Springfield, VA: FHA, 2000),, Table FA-4A.
4. U.S. Department of Transportation, Press Release: "U.S. Transportation Secretary Slater Announces $880 Million in Innovative Federal Financing for Two Projects Totaling $3.46 Billion," Wednesday, November 22, 2000.
5. Federal Highway Administration: Bulletin, Office of Highway Policy Information, Highway Funding 1998 - 2001, Office of Highway Policy Information (Springfield, VA: FHA, March 6, 2001).
6. Ibid.
7. American Petroleum Institute, Policy Analysis and Statistics Department, Background Paper: Nationwide and State-by-State Motor Fuel Taxes, (Washington, D.C.: API, March 2001). http://www.api.org/consumer/taxfacts.htm
8. Ibid.
9. Federal Highway Administration, Federal Highway Statistics 1999, (Springfield, VA: FHA, 2000), Table SF-3B.
10. For a detailed discussion of intelligent transportation systems see: Janet B. Goehring and Melissa A. Savage, "Intelligent Transportation Systems Update," Transportation Series No. 16 (Denver, Colo.: NCSL , March 2001); and Matt Sundeen and Jan B. Goehring, "State Intelligent Transportation Systems in the Year 2000," Transportation Series No. 12 (Denver, Colo.: NCSL , June 1999).

References:

American Association of State Highway and Transportation Officials, Administrative Subcommittee on Personal and Human Resources. AASHTO Member Departments Organizational Charts 2000. Washington, D. C.: American Association of State Highway and Transportation Officials, 2001.

American Petroleum Institute. Nationwide and State-by-State Motor Fuel Taxes. Policy Analysis and Statistics Department Background Paper, Washington, D.C.: API, March 2001.

American Petroleum Institute. State Motor Fuel Tax Rates, July 1, 2001. Obtained from Internet.

Lewis, Paul G., and Mary Sprague. Federal Transportation Policy and the Role of Metropolitan Planning Organizations in California. San Francisco: Public Policy Institute of California, 1997.

Mackey, Scott. The Appropriate Role of User Charges in State and Local Finance. Denver: National Conference of State Legislatures, 1999.

Rafool, Mandy. State Tax Actions 2000. Denver: National Conference of State Legislatures, 2001.

Rafool, Mandy. State Tax Actions 1999. Denver: National Conference of State Legislatures, 2000.

U.S. Department of Transportation, Highway Funding and Motor Fuels Division. Highway Taxes and Fees, How They Are Collected and Distributed. Federal Highway Administration, Office of Highway Policy Information. FHWA-PL-01-029. Washington, D.C., 2001

U.S. Department of Transportation, Financing Federal-Aid Highways, Federal Highway Administration, Office of Legislation and Strategic Planning. FHWA-PL-99-015. Washington, D.C., August 1999.

U.S. Department of Transportation, Highway Statistics 1999. Federal Highway Administration, Office of Highway Policy Information, Washington, D.C., 2000.

On-Line References

National Conference of State Legislatures

National Cooperative Highway Research Program: Innovative Finance

Ohio Department of Transportation State Infrastructure Bank

U.S. D.O.T., FHWA: Innovative Finance

U.S. D.O.T., FHWA: TEA-21

U.S. Census Bureau

Federal Highway Administration Contact:

Frederick Werner
Innovative Finance Specialist
US DOT Federal Highway Administration
Southern Resource Center
61 Forsyth Street, S.W., Suite 17T26
Atlanta, GA 30303
(404) 562-3680

NCSL Contacts:

Jim Reed
Transportation Program Director

Arturo Pérez
Fiscal Affairs Senior Policy Specialist

Matt Sundeen
Transportation Senior Policy Specialist

National Conference of State Legislatures
1560 Broadway, Suite 700
Denver, CO 80202
(303) 364-7700

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