Is it the End of Pay-as-You-Go in Transportation Finance?

The federal government is offering states some new ways to fund

transportation projects that may help get needed ventures off the
ground.
It's easy to be cynical about transportation systems. Building
and repairing highways, transit facilities, airports and railroads seem
to take forever and cost too much. Most of us can remember more than
once being stuck in traffic or in a crowded train station and mumbling to ourselves "Why don't they
do something about this?" In
many places, the answer is: They can't afford it.

State governments are the "they" most responsible for

much of America's transportation infrastructure. In 1998, states
collected and spent more than $81 billion ($37 billion from federal aid)
just for highway construction, maintenance and administration. They
spent billions more upgrading public transit, developing airport
facilities, maintaining rail systems and funding local transportation

projects.

Historically, states have funded transportation projects on a

'pay-as-you go' basis, paying for construction, maintenance
and administration as money became available from user fees and federal
grants. States have also financed projects by assuming debt that could
be paid back by state funds. Now, despite healthy economies, existing

revenues may not be enough. In many states, legislatures can't

solve transportation problems because they can't afford to. Rapid
growth has increased public demand for transportation services, strained
existing infrastructure and drained financial resources. Some states are
projecting budget shortfalls in the tens of billions of dollars for
transportation.

"There is a tremendous demand for transportation

services," says Max Inman, chief of the Federal Highway
Administration's (FHWA) Financial Management Division. "There
are significantly underfunded programs and maintenance needs beyond our
available funding capacity. Costs are going up, and we will need to do
more," he says.
In response to these growing concerns, state policymakers are
rethinking the old ways. With federal cooperation, some states are
exploring "innovative financing" for future transportation
needs. "Revenues are not keeping pace with growing demand,"
says Suzanne Sale, FHWA senior financial adviser. "Transportation
officials are looking for new approaches that allow them to use scarce
funds more effectively."

The Intermodal Surface Transportation Efficiency Act of 1991

(ISTEA) and the Transportation Equity Act for the 21st Century (TEA-21),
passed in 1998, encourage new state finance programs and offer federal
assistance to carry them out. Several of these techniques are gaining
acceptance in the states.

SPENDING YOUR CHICKENS BEFORE THEY'RE HATCHED

Grant anticipation revenue vehicles (GARVEEs) allow states to issue

bonds secured with the pledge of future federal aid funds. Prior to
TEA-21, states were prohibited from repaying their debt with federal
money. TEA-21 removes this hurdle by guaranteeing federal funding levels
through FY 2003 and includes an equity provision that ensures that each
state will get back a share of the Highway Trust Fund equal to 90.5
percent of its percentage contribution.

The new approach is good for states, says Ron Marino, an investment
banker with Smith Barney in New York. "Being able to leverage
federal dollars gives states more options."

Several states, including Colorado, New Mexico, Ohio, Mississippi,

New Jersey, Arkansas and Massachusetts, have already taken advantage of
GARVEEs to finance major construction projects.

Colorado Senate President Ray Powers says the GARVEE measure that
passed in his state last year was the key to adding lanes to congested I-25 and an $874 million
extension to Denver's light rail system,
"This gets us the money earlier so we can build projects as we need
them, rather than waiting for the money," says Powers. "We
need to construct highways right now, and this will make it
cheaper."

States can tailor GARVEEs to meet specific needs. Different GARVEE

structures give states options for repaying bonds, allowing states to
use future federal funds for bond repayment or as repayment insurance.
New Mexico will help pay for an expansion of State Route 44 from two to
four lanes with $100.2 million in GARVEE bonds, guaranteeing the entire
amount with future federal grant money.

Massachusetts sold $921.7 million in GARVEE bonds for the "Big

Dig" project in Boston to help pay for the reconstruction of part
of Interstate 93 as a tunnel. The state will pay off the bonds with a
mixture of federal aid and state gas tax money.
Ohio raised $90 million from GARVEE bonds to construct Interstate
670 and State Route 315 and improve traffic flow in downtown Columbus.
The bonds are primarily backed by future federal grant money. However,
the state structured the bonds so that several different revenue sources
can be used to pay them back if future federal money is not enough.
Lawmakers also made a "moral obligation" pledge to use state
gas tax revenue and general appropriations in the event of a federal
shortfall.

GARVEEs are not just useful for highway and road construction. Last
year, the New Jersey Transit Corporation issued $151.5 million in GARVEE
bonds to purchase 500 new buses. The bonds--sold in March 1999--were the
first transit debt issued under TEA-21 and are backed solely by a pledge
of future Federal Transit Administration (FTA) funding.

WHEN A LITTLE HELP IS ALL THAT'S NEEDED

One part of TEA-21, the Transportation Infrastructure Finance and

Innovation Act (TIFIA), helps states pay for large projects that have
some funding, but need additional loan money for completion. Under the
act, the federal government gives states credit assistance, rather than
grants. They can get a direct loan or the feds can guarantee a loan or
provide a standby line of credit.

This year, the U.S. Department of Transportation can support up to

$1.6 billion in state loans under the program. An additional $9 billion
in credit assistance is available through FY 2003.

Last September, the department gave out the first awards: $1.3
billion for the Miami Intermodal Center, $749 million for the
Farley-Pennsylvania Station in New York City, $397 million for the State
Route 125 project in San Diego, $1.7 billion for the Tren Urbano rapid
transit line in San Juan, Puerto Rico, and $2.3 billion for the
Washington Metro Capital Program. The Federal Railroad Administration should issue rules for a
similar railroad infrastructure improvement
program this year.

GETTING SEED MONEY TO BLOOM

The State Infrastructure Banks (SIBs) are a promising innovative

financing tool that now faces declining support from Congress.

Established by the 1995 National Highway System Designation Act,

these banks use seed money from the federal or state government to get
started and offer customers a range of loans and credit enhancement.
State and local government agencies borrow money from SIBs to finance
transportation projects.

The program is particularly effective for smaller projects.

"Local agencies like it because it's cheap money, a simple
application process, you don't have to pay lawyers, low rates, and
you don't have to go to the bond market," says Kris
Wisniewski, the SIB coordinator for Michigan.

The problem in Michigan and in other states is lack of funding.

Congress authorized 38 states and Puerto Rico to develop these banks in
1995 and 1996. In TEA-21, however, Congress prohibited all but four
states from using federal money to support their SIBs. Although the
original 39 jurisdictions are authorized to continue the programs, only
California, Florida, Missouri and Rhode Island can finance their banks
with federal transportation funds authorized through FY 2003.

This move stripped financial support from many of the state

infrastructure banks. Now, state legislatures may need to fill the gap
for them to succeed.

"We can't use federal money for it at this point,"

says Wisniewski. "Although we have support at the state level, we

never promoted ourselves to the Legislature for funding, and we are

running out of money. We need to resolve the issue of financing so the
program can sustain itself permanently."

TWO THINGS AT ONCE SAVES TIME AND MONEY

Traditionally, a transportation project was first designed and then

built under a separate bid. Now, under time and money saving
design-build programs in 20 states and the District of Columbia, a
single team submits a plan based on technical factors and price. Since
one team performs the design and construction, construction can start
before all design details are finished.

Design-build contracting is being used for the 1-15 project in

Utah. The state began expanding this major north-south arterial in Salt
Lake City to eight lanes in 1997. The project adds two lanes along 16.5
miles of highway and will include HOV lanes in each direction. Using the
design-build approach, Utah will be able to complete the project in four
and a half years, saving an estimated three years of time under
traditional contracting methods while keeping costs well in line with
previous estimates.

"If we had it to do over, we would do it exactly the same

way," says Joe Walker, supervisor of public information at the Utah
Department of Transportation.

"When we first looked at the project," Walker adds,

"we were looking at an eight- to nine-year period. But when we got
the Olympics in Salt Lake City, the feeling was that we needed to speed
up the process. Design-build absolutely saved time. When we finished the
design portion of the project, we were already at the halfway point in
construction. Under normal methods, we would have been just breaking
ground."

TEA-21 allows states to use federal aid funds for design-build

contracts after receiving FHWA approval. Projects have been approved in
Alabama, Alaska, Arizona, California, Colorado, District of Columbia,
Florida, Indiana, Hawaii, Maine, Maryland, Michigan, Minnesota, New
Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, South
Carolina and Utah.

GETTING A HAND FROM BUSINESS PARTNERS

More than a dozen states allow agreements with highway construction

contractors, engineering consulting firms, toll facilities, private
developers and the financial community to pay for transportation
construction and operations. Sometimes it works, sometimes it
doesn't.

One success story is California: State Route 91, a 10-mile toll

road that connects Anaheim and Riverside County. The $126 million
project is the first completed under California legislation passed in

1991. The California Private Transportation Company has a 35-year

franchise agreement with the state to operate the four-lane highway. The
company broke even with more than $20 million in revenues in 1998. The
California Highway Patrol enforces traffic laws on the toll road, and
the state transportation department takes care of maintenance. Both
agencies are paid from toll revenues. An interesting aspect of SR
91's operation is time-of-day road pricing. Tolls are set based on
congestion and number of people in a car, thereby ensuring a
congestion-free ride for those who pay the $.75 to $3.50 toll.

In Virginia, a public-private partnership for a toll road from

Dulles International Airport has been a disappointment. The Dulles
Green-way--touted as the model for constructing public facilities with
private funds--failed to meet expectations. Planners hoped the 14-mile,
four-lane highway from Dulles International Airport to Leesburg would
attract thousands of commuters from fast growing Loudon County and raise
some $40 million a year by 1998. But it didn't happen. The project
was completed late and over budget. After the road opened in 1995,
travel and revenues were much lower than expected. The private owners
missed their scheduled debt payments and defaulted for three years on
the original bonds used to fund construction. Recently, they've
sold more than $300 million in bonds to try to rescue the project.

TAKING THE TOLL OUT OF TOLL ROADS

Tolls are a growing source of money for highways. There are toll

roads in 29 states, and they are bringing in more than $4 billion a

year. Typically, tolls pay for maintenance as well as debt service on
bonds for the initial construction.

Tolls and similar sources of "new" transportation revenue

are not likely to become the panacea for financing shortfalls. They
aren't always popular with the public, and since all roads
can't be toll roads, it is at best a limited source of new revenue.

Toll financing is popular for some roads, however, because it is a

precise way of linking benefit to user costs. Only those using the road
pay for it. Though it is sometimes called double taxation--since
motorists pay state and federal gasoline taxes at the pump--it's
not. Tolls cover only the cost of the particular project. In addition,
drivers on the "free" roads enjoy less congestion, as some
cars move to adjacent toll roads.

Three factors may make toll financing standard practice in the

years ahead. First, the need to preserve and rehabilitate existing roads
will grow large enough to take all available public funds, leaving
little or none for new road construction. Second, electronic variable
pricing systems can be raised during peak times to limit the number of
vehicles, thereby ensuring free flowing traffic. Third, advances in
technology will make toll collection invisible. Motorists of the future
will be scanned as they pass toll booths and receive a monthly bill.

A pilot program established in TEA-21 allows toll collection on

existing interstate highways, bridges or tunnels to pay for
reconstruction projects. In addition, pilot states can turn high
occupancy vehicle (HOV) lanes into HOT lanes (high occupancy toll),
charging single occupant vehicles a fee to use them. These HOT lanes,
also known as "Lexus lanes," are a way to get more bang from
underused HOV lanes and reduce congestion on "free" roads.
States setting up HOT lanes must develop an analysis of the potential
impacts on low-income drivers.

LEGISLATURES TAKE LEADING ROLE

State legislatures are key to many of the new innovative financing

ideas. Legislative authorization is required for innovative financing
such as GARVEEs, design-build contracting and public-private
partnerships. State lawmakers also can provide the funding needed to
support SIB programs. "Legislators need a good understanding of
what's available," says FHWA's Inman. "It's not
simple. You can't just build a bridge any way you want to build a
bridge."

It is easy to write off innovative finance proposals as merely new

ways to increase state debt. The new financing, however, promises to
help states afford current transportation needs.

So is the era of pay-as-you go over? Probably not, say many

experts. "Grant financing is still the predominant way to go,"

says Inman. "This is not replacing pay-as-you-go. However, many
projects, particularly big item projects, need some sort of debt
mechanism to help supplement the funding. The advantage collectively is
to build things quicker at lower costs and to give states and local
governments a variety of different options. By building early, the state
can save money and get the facility into the community earlier."

Mat Sundeen tracks transportation finance issues for NCSL. James B.

Reed directs the NCSL Transportation Program.

WHAT BIG PROJECTS NEED FINANCING?

The federal highway department says there are 31 large

transportation projects that need a total capital investment of $50
billion to complete. Here's sampling:

PROJECTS PROJECTED COSTS

* Dalton Highway project in Alaska $165 million
* Hoover Bridge construction in Arizona and Nevada $120 million
* California high speed rail $16.8 billion
* Florida Overland Express $5.3 billion
* U.S. 82 Mississippi River Bridge $166 million
* Shreveport to Kansas City High Priority Corridor $2.38 billion
* Miami Intermodal Center $1.7 billion

* South-North Light Rail Transit Project in Portland, Ore. $1.3 billion

AVIATION FUNDING TAKES OFF

States and airport operators are breathing

easier now that Congress
and the president agreed in March to a new,
three-year, $40 billion
reauthorization of the Federal Aviation
Administration and the Airport
Improvement Program. The legislation frees
$1.9 billion this year in
grants for airport infrastructure upgrades, technological improvements,
noise mitigation and safety compliance. Funding, which comes from the
Airport and Airway Trust Fund, increases significantly to $3.4 billion
in FY 2003.

Disagreements between the House and Senate over taking the trust
fund off-budget stalled reauthorization. States and airport operators
have been without grant funds since Sept. 30, 1999, and numerous
projects have been delayed. The budget impasse was resolved by an
agreement to use parliamentary points of order to ensure that authorized
levels of spending are actually appropriated, rather than taking the
trust fund off-budget.

Though the lapse in funding was a significant problem for states,

they are not without their own resources. States invest about $450
million annually in planning, operations, infrastructure development,

maintenance and navigational aids at more than 5,000 airports across the
country.

CITIZEN TAX REVOLT KILLS TRANSPORTATION FUNDING

Washington state faces a particularly difficult situation for

transportation project money after a voter initiative went into effect
in January.

Voters passed a popular antitax measure-Initiative 695-last

November. It eliminates the state's excise tax on cars, replacing
it with an annual $30 license fee. Some citizens had paid as much as
$1,200 per vehicle.

The move slashed $750 million a year from state revenues, as well
as $2.4 billion in major road construction projects that were approved
in the 1998 election. The state department of transportation lost a
third of its budget under the measure, and many local governments lost
money needed to pay for police and transit operations.

The Legislature is struggling to make up this loss in the coming

fiscal year and devise a long-range plan to replace the lost revenues.

DO NEW LANES MEAN MORE TRAFFIC?

If you build them, will they come? States faced with congested

roads often send in construction crews to add new lanes. In theory,

bigger highways should unclog traffic and reduce travel times.

But some engineers and researchers argue that those new miles of
lanes will draw new traffic, in a phenomenon the call "induced
travel." It occurs when motorists take advantage of new lanes to
take more or longer trips or to switch from transit to driving. New
development along newly widened roads also generates new traffic, adding
to congestion.

New research finds that from a quarter to a half of new highway

lanes are filled up with induced traffic. A study using 26 years of data
from Maryland, Virginia and North Carolina found that drivers who
hadn't been suing the road before, used up a third of the new lanes
on major highways. For Maryland, induced travel took up 45 percent of
new capacity. In Virginia it was 51 percent. Another study, focusing on
15 year of data from major American metropolitan areas, found a 28
percent induced travel effect. Both studies concluded that population
growth and increasing wealth were the leading causes of induced travel.

Environmentalists and some urban planners contend that induced

travel reduces the benefit of new roads, worsens congestion, promotes
sprawl and wastes transportation money that could be invested in transit
or other alternatives. In booming Colorado, opponents of a $700 million
expansion of I-25 argue that induced traffic will clog new lanes. By the
year 2020, they projected that the wider highway will save drivers only

a minute off their existing commutes.

Others doubt the induced traffic phenomenon exists. Many road

builders and highway engineers contend that greater numbers of people,
more women in the workforce and the economic boom are all much bigger
factors. They question whether induced travel is a big cause of
congestion and argue that new and better roads are essential for
economic development.

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