Surface Transportation

Robert Poole

In this issue:

• Performance-based transportation program
• Mileage-based user fees for trucks
• Privatizing Amtrak’s Northeast Corridor?
• Leasing existing toll roads
• Massive cut in highway user revenues
• How many jobs created or lost?
• Upcoming Conferences
• News Notes
• Quotable Quotes

Making the Federal Program More Performance-Based

My friends at the Bipartisan Policy Center last month released a new report called “Performance Driven: Achieving Wiser Investment in Transportation.” It’s a serious effort to adapt the principles of their 2009 report of a similar name to the constrained fiscal circumstances of today’s federal budget. It proposes major program consolidation, the elimination of a number of low-priority programs, and a total program size of $40 billion per year. And despite some downsizing, it would include a $2.35 billion a year Freight Improvement Program.

There are a number of things to like about this agenda. I certainly agree that it’s important to make the program more performance-based, especially in times of very limited resources. I applaud BPC’s courage in proposing the termination of such low-priority programs as the Appalachian Development Highway System, Recreational Trails, Scenic Byways, National Historic Covered Bridge Preservation, and many other mostly small programs. I like its emphasis on expanded tools for states to leverage federal funds, such as removing federal barriers to tolling, expanding TIFIA and Private Activity Bonds, etc.

However, I part company with BPC on two major factors which shape much of its approach. The first is mode-neutrality, one of the report’s (and BPC’s) core principles. In practical reality, since there is only one real funding source for surface transportation (highway fuel taxes), mode neutrality means requiring highway users to pay for everything. This undercuts the basic principle of users-pay/users-benefit, on which the federal Highway Trust Fund was based. It is quite possible to have a multi-modal federal transportation program, under which each mode’s users pay user taxes or user fees to generate the funds to invest in that mode—whether the users be trucks, freight railroads, ships, or barges. And potential investments within each mode should be judged on benefit/cost principles, so that whatever funds are generated get invested in the highest-priority projects. (The only exceptions to this appear to be urban transit and inter-city rail. The former should be a metro-area responsibility, not a federal concern. And the latter should only be done to the extent that users are willing to pay for it.)

My other major disagreement is over whose resources we’re talking about. The original rationale for the Highway Trust Fund was for the feds to help the states create a national network of superhighways, in which some corridors would be difficult to support solely from the fuel taxes generated within the state(s) traversed, but the overall network benefits would be felt nationwide. The resulting Interstate system consists of high-quality superhighways owned and operated by the states, with federal assistance. Over the last 50 years, however, the emphasis has changed as states and interest groups clamored for ever-expanding uses of Trust Fund money. Today, the prevailing assumption in much of Congress, in many think tanks (including BPC), and at countless interest groups is that this money belongs to the federal government, which should therefore be setting national goals and holding states accountable for complying with them.

Thus, BPC’s report (and BPC is far from alone in thinking this way) is based on five national goals for the federal transportation program: economic growth, national connectivity, metropolitan accessibility, energy security & environmental protection, and improved safety. To as great an extent as possible, BPC would condition federal money on states working toward achieving those goals—as opposed to simply developing projects that meet a state’s needs and pass a benefit/cost test.

The existing federal program, despite being encrusted with numerous sub-programs and funding categories, remains largely formula-driven—presumably on the grounds that states know best what their surface transportation needs are and that the federal program is there to help them meet those needs. That thinking also accounts for the efforts in the last three reauthorizations to ensure that no state recovers less than 92% of the user-tax revenues that it sends to the Highway Trust Fund. BPC, consistent with its different conception of the program, would abolish the $9 billion Equity Bonus program, the principal vehicle for ensuring those negotiated recovery factors.

Would it be possible to reform the federal program in a way that respected the original principles (users-pay/users-benefit, federal assistance with a state-directed program focused on national interconnectivity) but at the same time provided much stronger incentives for cost-effective investments? Believe it or not, something along those lines has been crafted by the House Transportation & Infrastructure Committee, as outlined July 7th by Chairman John Mica (R, FL). It, too, would dramatically consolidate federal highway and transit programs, and would provide only slightly less than BPC’s $40 billion per year: its annual contract authority would average $38.33 billion per year over its six-year period.

Its performance-basis would come from greatly expanding the TIFIA program from the current $122 million/year to $1 billion/year. TIFIA provides three key hurdles that projects must meet in order to qualify for a TIFIA loan. First, the project must have a dedicated revenue stream capable of repaying the original investment. Second, the project’s senior debt must gain an investment-grade rating. And third, since TIFIA is intended as gap financing by means of a subordinated loan, the maximum size of the TIFIA loan is 33% of the total project cost. Boondoggles need not apply! Assuming those hurdles are retained in the expanded program, a $1 billion/year TIFIA program could generate projects worth up to $33 billion/year. (Example: for a $100 million bridge project, a 33% TIFIA loan would be $33 million. Budget scoring rules would score that at 10% of the face amount--$3.3 million. That’s 3.3% of the total project cost. Thus, a budgetary allocation of $1 billion/year yields up to $33 billion/year worth of projects.) Assuming states are able to generate enough qualifying projects, that means the House bill is actually worth about $71 billion per year, nearly half of which is performance-based.

As I wrote in my recent blog post on the National Journal transportation blog, with some tweaking regarding tolls and PPPs, the Mica bill could be the most performance-based reauthorization bill in history. (http://transportation.nationaljournal.com/2011/07)

Mileage-Based User Fees for Trucks?

Quite a few transportation people who question the long-term viability of fuel taxes for highway funding have suggested that it might be more feasible to begin such a transition with trucks rather than cars. The number of vehicles is much smaller, many operate in corporate fleets, and many are also equipped with fleet-management technology for location and communications. But is there any reason why trucking companies would be interested in such a transition? Conventional wisdom says no, but an interesting new study presents a more optimistic assessment.

“A Practical Approach to Truck VMT Fees” (April 2011) was developed by a team led by Delcan Corporation with support from several public agencies in New York State. The aim was to examine whether a simple system could be developed toreplace all existing truck user taxes and to see if there would be benefits for trucking companies in shifting to such a system. Several New York-based trucking companies took part in the study, providing significant input and feedback. It turns out they like the idea of replacing the current array of fuel taxes, registration fees, tire taxes, mileage fees, and tolls with a single mileage-based charge. They were also supportive of making use of the technology already installed in their trucks for fleet management purposes, which the study found was sufficiently accurate to determine the routes traversed and to communicate required information.

One important finding was that although collection costs for the proposed system would be higher than the very low cost of collecting fuel taxes, it would be lower than the costs of collecting all the other taxes and fees trucking companies must pay. Another finding was that “near-real-time data on truck travel would help to identify when and where truck bottlenecks exist and to help measure their severity.” This could be used to target funds raised from the mileage charge to bottleneck alleviation. As the report notes, “This is an important argument for equity and efficiency—spending should match the needs of those who provide the funding.”

Several alternative fee structures were developed. One would charge higher rates on secondary roads, as an incentive for trucks to use major highways that are generally designed for heavier loads. Another would vary the rates by time of day, in a form of congestion pricing. Generally, the participating companies preferred the simplest system—the same rate for all roads for all times of day.

Although the system was designed to be revenue-neutral, its analysis found some revenue shortfalls compared with what should be being collected, based on the amount of truck traffic in the state. This could be due to some interstate truckers under-reporting mileage in high-tax states (such as New York) and over-reporting mileage in low-tax states, via their quarterly reports to the International Fuel Tax Association (IFTA) which balances truck fuel tax payments among the states. The mileage-based user fee system would prevent that kind of finagling. Participating trucking companies were open to the possibility of a fee system that would generate more revenue than today’s array of truck taxes—as long as those funds were dedicated to highway investments.

The report suggests two possible next steps, which I hope get funded. One would be to actually operate a voluntary system within a state, under which companies could choose the new mileage-based system in place of all current user taxes. Another would explore the feasibility of using IFTA data to support a nationwide truck user fee system. The latter would substitute for all current truck user taxes.

How Realistic is Privatizing Amtrak’s Northeast Corridor?

Several weeks before the House Transportation & Infrastructure Committee introduced its Amtrak privatization bill, the committee held a hearing on high-speed rail (HSR) for the Northeast Corridor (NEC). Reason Foundation’s invited testimony reviewed globally recognized success factors for HSR, heavily criticized Amtrak’s $117 billion NEC HSR proposal, documented the large degree of passenger rail subsidy in Europe (based on a report by the Amtrak Inspector General), reviewed recent HSR public-private partnership deals in Europe, and then gave our suggestions for a PPP approach for the NEC. (http://reason.org/news/show/upgrading-to-high-speed-rail-on-amt)

We explained that most rail PPPs in Europe are funded by government availability payments, under which the private-sector partner is responsible for cost-overrun risk but not ridership/revenue risk. There are two recent HSR PPP deals in which the private sector does take revenue risk, but these are still very heavily subsidized. The just-financed Tours-Bordeaux route in France is a case in point. Of its total infrastructure cost of $11 billion, only $2 billion (18%) is actually private money. Just over half ($5.6 billion) is an outright grant from the government, and most of the rest is various kinds of government-guaranteed loans. (“France Funds $11B Rail Concession,” Public Works Financing, June 2011)

Consequently, we recommended a cautious approach. Don’t set arbitrary speed or trip-time requirements; don’t require specific stations to be served; exempt the deal from Buy America regulations; consider exemptions from various labor relations mandates; etc. The idea would be to put out a Request for Information, to see what the private sector thinks makes good business sense. If credible firms have promising approaches, issue an RFP for a long-term concession with no operating subsidies, with a key selection factor being the lowest need for capital cost subsidy.

Well, we tried. The bill unveiled several weeks later would require 2-hour service between DC and New York, and 2.5 hours from New York to Boston. It would grant the winning bidder a 99-year lease of the NEC but require access for all current commuter and freight traffic, plus a doubling of the total number of trains on the NEC. One of the selection factors would be the least amount of federal subsidy requested.

In addition to taking the NEC away from Amtrak, the bill would also open up Amtrak’s state-aided commuter routes to competitive bidding (which to some extent already happens), and would have DOT do likewise for Amtrak’s long-distance routes, with DOT required to award to the route to the lowest-subsidy bidder.

Not surprisingly, Amtrak’s various constituencies are up in arms over the proposal. One of their most interesting arguments is that “privatizing” Amtrak is unconstitutional, based on a report from the Congressional Research Service. CRS first argues that having the DOT take back the NEC would violate the “takings” clause, because Amtrak is nominally a private corporation. But in making its second argument, that the bill’s proposed Northeast Corridor Committee is unconstitutional, CRS says that Amtrak is enough of a federal government entity to require that appointments to such a body must be made by the President, with the advice and consent of the Senate. You can’t really have it both ways.

Interestingly, just as all this was being debated, on June 22 the U.S. District Court in Cincinnati dismissed a lawsuit against Amtrak by the corporate descendant of the Penn Central Railroad, the largest holder of (worthless) Amtrak common stock. The court dismissed the suit, under which the company had no case to demand a positive payment from Amtrak for worthless shares. Thus, unless that ruling is overturned, the CRS argument about “takings” would appear to be without merit.

Leasing Existing Toll Roads Makes a Comeback

Last month the Commonwealth of Puerto Rico selected a joint venture of Spanish toll operator Abertis and Goldman Sachs’ GS Global Infrastructure Partners II to lease two existing toll roads for 40 years. PR 22 is 52 miles long and up to 10 lanes wide; PR 5 is a 5-mile urban connector from PR 22 to San Juan’s western suburbs. This is the first of three such leases, with a second one to lease PR 52 and PR 20 and a third to lease toll roads in the eastern part of the island. A fourth concession will be to construct and operate a western extension of PR 22.

These transactions give new life to what the industry calls “brownfield” leases—i.e., using a long-term concession to operate and maintain an existing toll road, as opposed to “green field” transactions that involve building and operating new capacity. In fact (as is the case with most brownfield leases), the PR 22 concession will involve considerable capital improvements. The draft concession agreement requires the concession company to improve pavement quality, signage, lighting, and safety barriers, to correct the “subpar condition of the toll roads.” And a lease term of 40 years will require considerable preventive maintenance and some reconstruction of older sections. The earliest portions of PR 22 date to the 1960s, so they are nearing 50 years, a typical useful life for major highways.

It has always struck me as bizarre that some outspoken opponents of toll road concessions can accept it as valid for an investor-owned company to finance, build, operate, and maintain a new toll road, but consider it unconscionable for such a firm to acquire the responsibility to operate, maintain, and reconstruct an existing toll road. Other network utilities—electricity, gas, water, telecoms—are bought and sold fairly routinely in market economies like the United States, Europe, and Australia. Nobody (well, hardly anybody) thinks the private sector is only a legitimate provider of electricity if it builds a new power plant, as opposed to buying an existing one from some other utility firm.

At any rate, now that Puerto Rico has broken the ice, we may see other leases of existing toll roads. The Ohio legislature early this month passed HB 153 allowing the state’s Director of Budget and Management to lease the Ohio turnpike. And there is discussion in Colorado about possible leases of the Northwest Parkway and E-470, both part of the beltway around metro Denver.

There is still some opposition to such deals in Congress. Sen. Dick Durbin (D, IL) has introduced a bill called the Repaying and Protecting Taxpayers in Transportation Asset Transfers Act (RPTTATA). It would require U.S. DOT to attach a federal lien to transportation assets worth $500 million or more that have received at least $25 million in federal funds. Any such asset that is leased or sold would be required to pay DOT the un-depreciated portion of the federal aid. In addition, they would have to get DOT’s permission before doing the sale or lease and execute agreements with DOT providing various forms of disclosure.

Administration Proposes Massive Cut in Highway User Revenues

That was the startling headline in a story last week in Transportation Weekly (July 7, 2011). The focus of the story was the Administration’s latest proposal for dramatic increases in federal Corporate Average Fuel Economy (CAFÉ) standards. Those standards were increased last year to require that new vehicle fuel economy increase from the current 27.5 mpg to 37.8 mpg by 2016, just five years from now. The proposed new CAFÉ standards would increase that to 56 mpg by 2025.

What Transportation Weekly editor Jeff Davis does in the article is to convert the current federal gas tax rate for the Trust Fund’s highway account from cents per gallon to cents per mile. Unless the gas tax rate is increased significantly, the amount paid per mile driven (by new cars) will plummet, with severe consequences for Trust Fund revenue. Today, drivers of new cars pay 0.561 cents/mile in federal fuel taxes. This will decline to 0.408 cents/mile in 2016, the likely expiration date of a six-year reauthorization bill (which all agree will have no increase in the gas tax rate). And if CAFÉ is increased to 56 mpg by 2025 per the Administration’s current proposal, the amount paid by drivers of new cars in 2025 would drop to 0.276 cents/mile.

Those amounts are in nominal dollars. If you use inflation-adjusted dollars instead, using the latest Congressional Budget Office CPI projections, the amount paid per mile by new-car drivers will be cut in half by 2016 from its high point in 1998.

Translating those new-car numbers into annual fleet-wide revenue is more complex, requiring assumptions about the average service life of new cars (which tends to be about 20 years). Davis did not attempt that calculation, but since it does take time for older, less-fuel-efficient vehicles to wear out and be scrapped, the full impact on Trust Fund revenues would take several decades.

I have no idea how likely it is that the 56-mpg-by-2025 requirement will be implemented. But from the standpoint of adequate highway funding, just the existing 37.8 mpg requirement for 2016 is bad enough. All the more reason for Congress to include serious research and pilot programs on mileage-based user fees in the reauthorization legislation.

Games with Numbers: How Many Jobs Created or Lost?

Critics of proposals to fund the federal surface transportation program at the level supportable by Highway Trust Fund revenues are claiming that such a drastic funding cut (from the outsized stimulus-boosted totals of the last two years) would cost nearly 500,000 jobs. Thanks to a new report from the Government Accountability Office, we know that number is a huge exaggeration.

Those using that number base it on a 2007 Federal Highway Administration model that claims each $1 billion in federal transportation spending creates (or saves) 34,779 jobs. What GAO did was to carry out a reality check on such job creation claims, by analyzing the 2009 stimulus (ARRA) spending. That extra $27.5 billion, which did not require the normal 20% state match, is equivalent to $22 billion in normal federal highway funds. Thus, it should have produced 765,138 jobs (22 x 34,779). The ARRA money in fact created a mere 65,110 direct jobs at any one time. Since the FHWA model estimates there are 1.98 “downstream” jobs for every direct job created, the total (direct + downstream) should be about 195,000. That’s only about 25% of the 765,138 predicted by the FHWA model.

Thus, when you encounter scary-sounding numbers like 500,000 jobs at risk from a live-within-our-means reauthorization budget, you’d be on pretty safe grounds to divide that number by four.