3
Federal Surface Transportation Programs and Freight

The federal surface transportation program governed by the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) exerts a major influence on the performance and development of intermodal freight transportation in the United States. This program is one of several federal public works programs that provide freight facilities. Other programs build, maintain, and operate the inland waterways; provide aid to airports; maintain the air traffic control system; and maintain harbors. The federal highway program in ISTEA is the largest of these programs and the most important for freight in the sense that trucking is the largest freight mode in terms of value of services provided. ISTEA was also important for intermodal freight because the act was the vehicle for declaring the new federal policy concern with intermodalism.

ISTEA was one of a series of reauthorizations of a program whose structure has remained essentially unchanged since the Federal Aid



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Policy Options for Intermodal Freight Transportation: Special Report 252 3 Federal Surface Transportation Programs and Freight The federal surface transportation program governed by the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) exerts a major influence on the performance and development of intermodal freight transportation in the United States. This program is one of several federal public works programs that provide freight facilities. Other programs build, maintain, and operate the inland waterways; provide aid to airports; maintain the air traffic control system; and maintain harbors. The federal highway program in ISTEA is the largest of these programs and the most important for freight in the sense that trucking is the largest freight mode in terms of value of services provided. ISTEA was also important for intermodal freight because the act was the vehicle for declaring the new federal policy concern with intermodalism. ISTEA was one of a series of reauthorizations of a program whose structure has remained essentially unchanged since the Federal Aid

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Policy Options for Intermodal Freight Transportation: Special Report 252 Highway Act of 1956. The revenues collected and disbursed under these acts have been exclusively excise taxes on highway users, and spending originally was limited to highways. Revenues are credited to the federal Highway Trust Fund and apportioned to states by formula. States have primary responsibility for selecting projects and for building and maintaining roads. Innovations in ISTEA gave states greater flexibility in selecting the roads and projects on which federal-aid funds are expended, substantially increased the influence of local governments in project selection, and made possible expenditure of federal aid on nonhighway freight projects in certain very limited circumstances. Extending allowed spending beyond highways has always been controversial. Starting with the 1973 highway act, a portion of highway user revenues was dedicated to mass transit. The 1991 act for the first time included categorical funding (most important, the Congestion Mitigation and Air Quality Program), which could be used by states for intermodal freight projects that included improvements to facilities (for example, rail lines and port facilities) that are not highways or highway appurtenances. A 1996 General Accounting Office (GAO) review concluded that the states have developed relatively few intermodal freight projects under these provisions; it identified 23 such projects involving $36 million in federal aid (GAO 1996, 4). Of course, virtually every highway project is of benefit to freight transportation. The debate on federal rules for allowable uses of transportation aid addresses one aspect of the fundamental question of the federal role in raising revenues, setting priorities, and choosing projects for transportation infrastructure. State and local governments argue that they usually are best positioned to identify needs and opportunities. However, national action may be most effective in certain circumstances. The 1988 report of the National Council on Public Works Improvement, created by Congress, specified the following principles for justifying federal, as opposed to strictly local government, involvement in public works (National Council on Public Works Improvement 1988, 86): The enumerated constitutional powers of the federal government justify its involvement. The fiscal magnitude of the project requires federal involvement. The project involves several states.

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Policy Options for Intermodal Freight Transportation: Special Report 252 Uniform activity is needed nationwide. Negative spillovers among states must be prevented. Efficiency or effectiveness can be significantly improved by a federal role. Redistribution of resources across the nation is needed. The council applied these principles in considering the federal role in intermodal freight and concluded: This issue [intermodal transportation] is nationwide in scope, important to the nation’s competitive position in world markets, and linked directly to interstate commerce and industry. It is not now being addressed, and no other level of government is capable of dealing with it. (National Council on Public Works Improvement 1988, 94) These guidelines seem reasonable, but, as noted in the preceding chapter, applying guidelines to specific projects (e.g., deciding whether efficiency can be significantly improved by a federal role) is difficult. The committee examined four issues affecting intermodal freight that are related to federal-aid program provisions. The first three, use of Highway Trust Fund revenues for nonhighway purposes, project selection priority for freight-related projects, and projects of national significance, are specifically freight issues. The final policy issue addressed in this chapter, the basic structure of the federal-aid program, concerns decisions that are important for all components of the surface transportation system, passenger as well as freight, but have special implications for freight. The study committee commissioned two papers on aspects of federal programs affecting intermodal freight. “Federal Surface Transportation Legislation and Freight,” by Jean Lauver, analyzes the provisions of federal programs affecting freight, reactions of the interested parties to the freight provisions of ISTEA, and the issues that were prominent in the debate over reauthorization of ISTEA. “Freight Projects of National Significance,” by Daniel Smith, examines how to define and identify such projects. These papers appear in Part 2 of this report.

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Policy Options for Intermodal Freight Transportation: Special Report 252 USE OF HIGHWAY TRUST FUND REVENUES FOR NONHIGHWAY FREIGHT PROJECTS ISTEA strictly limited the kinds of projects that could receive federal-aid funding. In general, a nonroad project serving intermodal freight (for example, a rail line to a port) was ineligible unless the project could be shown to reduce pollutant emissions in a region that is not in compliance with air quality standards. Use of federal aid for nonhighway projects has been controversial. It has been opposed by the trucking industry and other highway interests and sometimes by state transportation agencies. Some freight groups support flexibility. The policy statements on ISTEA reauthorization of the Intermodal Association of North America (1996) and the American Association of Port Authorities (AAPA) (1996) both endorsed allowing state and local governments flexibility to use federal aid for nonhighway projects with few constraints. The Transportation Research Board (TRB) Committee for Study on Landside Access to Ports also recommended that the Federal Highway Administration (FHWA) adopt a liberal interpretation of ISTEA that would allow federal-aid funding of nonhighway projects that would relieve highway congestion (for example, facilities for coastwise shipping) (TRB 1993, 13). The National Commission on Intermodal Transportation (NCIT), a panel that included a balanced representation of interests, was more cautious in its 1994 recommendation: The Commission urges that these restrictions [on uses of federal trust funds] be minimized to allow states and MPOs the opportunity to evaluate investment decisions across modes and make modal tradeoffs…. Eligible projects should include: connectors that link the NHS, ports, … and … terminals; multimodal terminals … ; and rail and highway projects (e.g., bridge clearances, grade crossings, Amtrak, rail clearances, and other joint use projects that increase system capacity). The commission’s list of freight projects that should be eligible includes only facilities that have highway construction as a component.

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Policy Options for Intermodal Freight Transportation: Special Report 252 The policy options open to Congress are to significantly expand state flexibility to conduct nonhighway projects with federal surface transportation aid funds, leave limitations similar to those in ISTEA in place, or roll back project eligibility rules to prevent spending for nonhighway freight-related projects. A final alternative might be for Congress to delegate to the U.S. Department of Transportation (DOT) increased authority and flexibility to qualify projects for federal aid. The argument in favor of flexibility is that states should manage their transportation infrastructure programs by defining transportation objectives and then searching for the optimal means to obtain those objectives, and that effectively limiting the permitted solutions to highways is an arbitrary constraint that will lead to suboptimal investment solutions. For example, a state transportation department might find that measures to facilitate truck-rail intermodal in a corridor would reduce truck traffic in the corridor and thereby relieve congestion and improve mobility at lower cost than expansion of highway capacity (considering agency, user, and social costs). Nonhighway uses of trust fund revenues may be defended as offsetting the effects of imperfect pricing of highways. Highway users do not pay for the effects of air pollution and the congestion delay they cause for others, and user fee payments are not well matched to highway agency costs attributable to individual highway users. Serious arguments can be made against greatly increasing state and local flexibility in the use of federal-aid funds. First, the user-pays principle, however imperfectly it may be implemented, contributes to efficiency (because it ensures that users value the facility at least as much as the cost of providing it) and equity. If trust fund revenues are dispersed too widely, the alliance of interests that has supported the program will be eroded and the program will be in jeopardy. Second, liberal availability of federal aid may fuel uneconomic interstate rivalries in development of ports and other facilities. Finally, if government aid, and especially federal aid, were liberally available for intermodal projects, railroads or other transportation companies or shippers might come to routinely demand aid for infrastructure improvements and threaten loss of economic activity to other locales if aid were not forthcoming. The influx of federal aid would increase the total volume of such investment, but many projects receiving aid would have been undertaken with private money if no govern-

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Policy Options for Intermodal Freight Transportation: Special Report 252 ment aid were available, and those that would not have occurred without aid would be the marginal projects whose benefits would be most doubtful. States often would feel obligated to contribute just to avoid losing ground in economic development, but most would be no better off than if the federal aid had not been available at all. Meanwhile, the states would have less money to devote to traditional transportation priorities. To monitor the consequences of increased funding flexibility, and as an aid to Congress in deciding on changes in eligibility rules, specific information about the nonhighway projects that have been funded under the existing program would be valuable. GAO, in its review of federal-aid intermodal freight projects, noted that a database of public intermodal projects is necessary to assess the performance of the federal-aid program (GAO 1996, 5). Information about the kinds of projects that would be funded with increased flexibility would also be valuable. Supporters of expanded intermodal freight project funding should provide examples of projects they would put forth under more liberal rules (that is, intermodal projects that would be worthwhile and that would require federal government involvement but that cannot be funded under existing rules). Projects for which federal-aid approval was sought but rejected by FHWA under ISTEA may indicate how the states would use more flexible funding. If Congress expands eligibility, there may be provisions to mitigate some of the possible drawbacks described. For example, use of federal aid in nontraditional projects that met standards regarding user fee finance or private-sector participation might be allowed. PROJECT SELECTION AND PRIORITY FOR FREIGHT PROJECTS Freight interests have stated that in their experience, the provisions of ISTEA that emphasize flexibility and local participation in project selection have sometimes come into conflict with the goal of improving intermodal freight efficiency. AAPA, for example, has declared: AAPA will support continuation of the structure envisioned by ISTEA with decision making authority primarily at the local level, if

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Policy Options for Intermodal Freight Transportation: Special Report 252 changes are made to benefit freight. It must be recognized that local decision making favors passenger needs, and that freight projects, particularly those meeting regional or national needs, have difficulty obtaining funding under ISTEA. (AAPA 1996) Options that have been proposed for actions by the federal government to influence local decisions on project priorities or to raise the priority of freight-related projects include the following: Creation of a freight-related funding category in the federal-aid program; Restriction of the role of metropolitan planning organizations (MPOs) in project selection on the theory that these bodies are least capable of recognizing freight needs (ISTEA strengthened the influence of local governments, acting through their MPOs, to influence how states spend their federal-aid funds); Mandate of freight representation in MPO decision making; Planning requirements calling for states to identify freight problems and solutions; An increase in the overall funding available from the federal-aid program or other public or private sources to make it easier for states and local areas to rearrange funding priorities; and Direct federal funding of individual freight projects of national significance. Some of these options are probably politically infeasible. Addition of funding categories in the federal-aid program is opposed by the states; reduction of MPO authority also appears improbable. Federal planning requirements have yielded mixed results in the past. Although federal programs influence local decisions, problems concerning project selection priorities require local solutions. Nearly all project-level decisions in government programs for investment in surface transportation are essentially political decisions made at the state or local level. Recognition of freight-related needs in public works programs will depend on the interactions between freight users and local officials. The local level is where the greatest need exists for concrete, quantitative understanding of the value of freight service improvements and the workings of the freight industry. Some of the

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Policy Options for Intermodal Freight Transportation: Special Report 252 recognized obstacles to better local investment decisions concerning freight are the lack of planning procedures that reliably identify projects that would yield high freight-related payoffs, the problems of coordinating multiple local jurisdictions to conduct regional projects, and the lack of well-established public-private relationships in planning and finance of freight-related projects. These local issues are both critical and difficult to address. Formal planning procedures like ISTEA’s requirements for intermodal management systems and consideration of freight access in local plans have met with limited success. Less formal activities like the industry-sponsored Freight Stakeholders’ National Network and FHWA’s National Freight Partnership initiative are seeking to foster working relationships between state and local government and the freight industry. Some state officials dispute the allegation that terminal access and other freight-related needs are routinely given too low a priority in state transportation programs. They argue that on the whole the states do an appropriate job of balancing freight and passenger interests in their programs, and that this balance is politically determined and is unlikely to be altered other than by increasing the amount of funds available from the federal government, the private sector, or the port authorities. Added funds would allow some projects to advance capital programs without retarding others. Certainly, one way to raise the priority of port access projects in state and local public works programs would be for ports to increase their contributions to highway projects that benefit them. Increased port contributions to local projects would enable local areas to capture more of the benefits of improved intermodal transportation and promote local support of projects in the national interest. The committee lacks evidence to evaluate the contention that state and local governments systematically underinvest in infrastructure needed to improve freight efficiency because freight interests have weak voices in local politics or because federal-aid program rules deny local governments flexibility to select investments with the greatest payoffs. It is important to know whether systematic underinvestment is occurring, because it could have serious consequences for the nation’s economic performance. The necessary information to evaluate whether local spending priorities are biased against freight transportation could be obtained only through the kinds of investment analyses and follow-

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Policy Options for Intermodal Freight Transportation: Special Report 252 up evaluations that the guidelines in Chapter 2 call for. Evaluations could be begun modestly, as a national or statewide pilot program involving a small sample of projects, to allow testing and demonstration of methods. In these evaluations, a consistent finding of relatively high rates of return in public freight projects would indicate underinvestment. Similar evaluation of competing government transportation investments would be needed to determine whether local priorities are skewed in favor of passenger transport. PROJECTS OF NATIONAL SIGNIFICANCE AND FEDERAL RESPONSIBILITIES NCIT and DOT’s National Freight Transportation Policy Statement refer to a category of projects of national significance as a sphere of federal responsibility. The DOT policy statement declares: Federal participation may be appropriate when infrastructure investment projects have a national or regional significance or when Federal involvement may facilitate the resolution of a freight transportation problem. (DOT 1996, 5) NCIT found: The national intermodal transportation system should ensure funding of projects of national or regional significance. ISTEA’s emphasis on local and State decision making means that projects of national significance which sometimes largely provide benefits beyond local or State jurisdictions, may not receive appropriate funding priority. Congress should provide special funding annually to support some number of intermodal projects that are truly of national or regional importance. The Secretary of Transportation should solicit projects from the States and MPOs…. This project-specific funding would augment, not replace existing … funding … (NCIT 1994, 32–33)

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Policy Options for Intermodal Freight Transportation: Special Report 252 Similarly, AAPA states, “There clearly is a vital role for USDOT in freight projects that cross multiple jurisdictions and that meet regional and national needs” (AAPA 1996). NCIT found that “such projects should be eligible for supplemental funds from the Federal government due to their national significance” (NCIT 1994, 16). These statements raise questions for public policy: Is there a category of freight infrastructure projects with national economic significance and in which a federal leadership role and federal funding participation are essential? Which specific needs (either identified freight problems or project proposals) qualify as projects of national significance? Are new mechanisms needed at the federal level to identify such projects, finance them, and carry them out, or are existing programs adequate? Are federal actions needed, other than funding participation, to overcome institutional obstacles to such projects? A “project of national significance” could be defined as a freight project that has important consequences for the performance of the nationwide freight system. However, the concept of a project with an essential federal government role is implicitly the definition that NCIT and DOT had in mind in the statements quoted earlier. State and local governments and private firms regularly carry out freight system improvements of large magnitude and nationwide importance without federal leadership. A “project of national significance,” as the term is used in the following, is defined as a project with an essential federal role. The NCIT and DOT statements envision a category of intermodal freight projects that require government involvement but that state or local governments cannot be expected to support adequately because the benefits are national in scope. Two assumptions that underlie this conception ought to be examined critically: (a) that local entities lack motivation to carry out projects whose benefits extend beyond local boundaries and (b) that national significance makes a project worthy of a federal subsidy. Neither assumption is true in all cases. Local economies have a vital interest, recognized by nearly all local governments, in sectors that serve

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Policy Options for Intermodal Freight Transportation: Special Report 252 markets outside the region. Local economies are essentially export economies in the sense that a large share of all production of a local area is consumed outside the area (either in other regions of the country or outside the country). The local “export” sector is a primary source of jobs, income, and tax revenues. Local governments can capture a portion of the nationwide benefits of a transportation facility serving national needs through user fees and taxes. If the public facility or service is economically justifiable, revenues from these sources ought to be at least sufficient to cover the government’s cost of providing them and may even generate a local surplus, as some U.S. seaports do. Criteria for deciding whether a freight project should receive a federal or local government subsidy are described in Chapter 2. In that chapter it is argued that a federal subsidy is justified when a project produces external benefits that extend nationwide or when a project reduces a local cost, like air pollution produced by factories, that consumers nationwide ought to pay for but are not. A project will not meet the criteria justifying a federal subsidy solely on the grounds that its benefits extend nationwide. Nationwide transportation cost savings and the economic consequences of these cost savings are not external benefits, because the owners of local facilities can capture part of these benefits by charging users. Federal involvement may also be necessary in projects that do not receive subsidies. Some projects can support themselves yet require government involvement because they fulfill an established government responsibility. Of these projects, some require federal involvement because the scale or complexity of the project puts it beyond local capabilities, the risk can be borne more efficiently at the national level, or essential federal responsibilities are involved (for example, customs). A federal responsibility may be indicated when a public transportation infrastructure project is national in geographic extent and requires uniform design standards. Examples are the Interstate highway system, possibly certain multistate multimodal corridors such as the proposal described in the following section, and the air traffic control system. Some candidate projects of national significance are described in the following section. The descriptions and the discussion of policy options that follows make use of two papers commissioned by the study committee: Daniel Smith, “Freight Projects of National Significance: Toward a Working Definition,” and John E. Petersen, “Public-Sector Financing in Intermodal Freight Transportation.” The conclusions are those of the committee.

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Policy Options for Intermodal Freight Transportation: Special Report 252 Examples A few locations, especially Chicago and Los Angeles, are mentioned repeatedly in discussions of national freight problems. The Alameda Corridor port access project in Los Angeles was NCIT’s example of a project of national significance. GAO used the two cities as its cases of critical intermodal freight bottlenecks in a study of how local governments are using ISTEA provisions (GAO 1996, 6–7). The National Freight Partnership, a federal initiative to develop cooperative links between government and the private sector to identify and correct freight bottlenecks, has identified four projects as high national priorities: the Alameda Corridor, Chicago area intermodal interchanges, and two border crossings, El Paso and Laredo, Texas (FHWA n.d.). The Alameda Corridor is a project to construct a consolidated rail route and an improved highway route to carry truck and rail traffic to and from the ports of Long Beach and Los Angeles. It would consist of 32 km (20 mi) of double track with 16 grade separations and reconstruction of a parallel highway (Smith, Part 2). The estimated total cost is $2.0 billion (Preusch 1997). The project will be paid for with revenues from port fees, a fee on trains using the corridor, state and local government commitments of shares of federal surface transportation aid, and local tax revenues. A crucial component of the financing is a $400 million subordinate loan from the federal government provided by act of Congress. The neighboring ports of Los Angeles and Long Beach are the nation’s largest container ports, handling nearly one-third of all containers entering or leaving the United States by water in 1995 (Maritime Administration 1996, 17–18). Rail traffic to and from the ports is projected to triple, to 100 trains per day, by 2020 (Alameda Corridor Transportation Authority n.d.). Proposals have been made for comprehensive access projects at other U.S. seaports, with aims similar to those of the Alameda Corridor project. Chicago is a principal intermodal freight transportation hub because it is the interchange between the eastern and western rail systems. At least 18 major facilities load, unload, and transfer intermodal trailers and containers, generating a steady stream of local interchange movements by rail and truck. These facilities generated an estimated 14,200 truck trips per day in 1996. Interchange movements conflict with local traffic and can be an important source of delay in the nationwide intermodal freight network. The Chicago Intermodal Connectors

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Policy Options for Intermodal Freight Transportation: Special Report 252 project is a proposed coordinated package of street and highway improvements intended to facilitate these intermodal connector movements. Thus the project addresses the major established government responsibility for intermodal freight, the highway system, but does not entail intervention into the private-sector relationships among rail carriers and drayage companies, which are also critical for the performance of interchange functions (Smith, Part 2). International border crossings involve a clear federal responsibility. The highway crossings of the Mexico-U.S. border at Laredo and El Paso, Texas are congested, and customs procedures and state truck inspections add to delay. A complete plan is not in place, but the need for substantial highway and bridge capacity additions together with changes in border processing facilities and procedures is recognized. Meanwhile, the Union Pacific Railroad has invested in yard facilities and improved customs procedures to speed rail freight at the border (Smith, Part 2). Proposals also have been made for interstate corridor projects, which would involve the federal government, multiple states, local governments, and carriers in coordinated plans to improve long-distance freight corridors. Examples are the Southwest Passage Los Angeles–to–Houston corridor proposal of the Southern California Council of Governments (Smith, Part 2) and proposed north-south Canada-to-Mexico trade routes to handle anticipated traffic growth resulting from the North American Free Trade Agreement (Texas A&M University 1996). Apparently no long-distance freight corridor project has advanced past the preliminary concept stage. Corridor projects are more complex and their goals less well defined than local terminal projects. Special federal involvement has been proposed in all these examples. Many projects that have national importance are conducted without federal involvement or within established federal programs. State and local governments on their own initiative as well as the private sector have made substantial investments in expanding freight transportation capacity. Common Features of the Proposals Most project proposals are defined by their concentration on a freight hub (a seaport, border crossing, airport, or rail interchange point) or freight

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Policy Options for Intermodal Freight Transportation: Special Report 252 corridor. Major hubs and corridors are the logical places to begin a systematic search for additional candidate projects of national significance. The examples also illustrate that a candidate project of national significance is likely to be far more complex than a straightforward construction project. The proposed projects deal with situations that involve institutional and organizational bottlenecks (like border crossings or Chicago container connections) and multiple jurisdictions. Solutions might not have a single big construction project as the centerpiece. The qualifications of even the few often-cited examples as true projects of national significance have been controversial, and the small number of such recognized examples suggests that there may not be a large backlog of projects of similar scale, complexity, and nationwide importance. The Alameda Corridor met resistance from some port users and railroads (Burns 1994), and officials of other ports have argued that from a national perspective, there is no shortage of potential port capacity, so the main effect of the Alameda Corridor will be to protect Los Angeles–Long Beach’s market share, a goal of local rather than national significance. In the case of Chicago, the character of the interchange problem may be substantially altered by pending or future rail mergers, and so the appropriate scope of government intervention remains unclear. Federal involvement in a freight project may be justified in cases where local and national interests diverge. The most frequent such circumstance may be the familiar “NIMBY” (“not in my backyard”) hurdle that most large developments face. Cases of local opposition to projects that are important for the national freight system most often involve small jurisdictions rather than metropolitan areas or states. A small community can suffer severe harm and gain little or no benefit from a major transportation project. For the citizens of a small jurisdiction, all effects may be negative unless there is a way to compensate them. However, at the level of a metropolitan area or state, examples of the local jurisdiction undervaluing a nationally vital project are difficult to find. As noted earlier, all local areas in the United States depend on their “export base,” the goods and services produced locally and marketed nationally or internationally that give the local area the buying power to obtain goods and services not produced locally. Rather than “NIMBY” problems of local opposition to freight projects of national significance, there is more evidence of the opposite problem, local eagerness to develop projects of questionable value in the

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Policy Options for Intermodal Freight Transportation: Special Report 252 freight marketplace. Sometimes, availability of external aid in the form of tax-exempt bond finance and federal grants can induce local governments to undertake projects that do not efficiently serve freight demand. Policy Options Two options for a formal program to identify and carry out projects of national significance are (a) a top-down federal program, under which a federal agency actively identifies, develops, and evaluates projects and (b) a bottom-up approach, under which local governments and private parties develop proposals and seek federal participation. The federal government would assess proposals in terms of their overall likely payoff and the national distribution of net benefits. The bottom-up program could be institutionalized and administered by a federal agency. Such a program could be competitive, as NCIT, in the quotation given earlier, recommends. Some projects would inevitably be considered individually by Congress. The top-down model may be necessary in a few cases where the primary federal responsibility is established. For most projects, the bottom-up approach has advantages. Projects would depend on the efforts of the immediately affected parties. Experience suggests that local public and private leadership and predominantly local and user funding tend to produce the most successful projects, whereas proposals heavily dependent on federal grants are risky and should be closely scrutinized. The federal government should require that projects receiving its backing be largely self-financing. All the candidates that have been suggested as projects of national significance would have substantial potential for generating revenues through user fees or other mechanisms (assuming they were successful as transportation projects). The revenue potential reflects the direct private benefits that the projects would generate. These benefits are the major justification for the investments and should be the source of the revenues that pay the costs of the projects. The federal government’s most effective role in such projects would be as a provider of backup credit and as an absorber of risk rather than as a source of grants. Making the payoff to the public investment visible by putting the government contribution on the books of the project as a loan renders the project accountable for its performance and would tend to improve project selection (Petersen, Part 2). Grants and other subsidies that are not justified by documentable external benefits will

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Policy Options for Intermodal Freight Transportation: Special Report 252 lead to overcapacity that reduces the efficiency of the intermodal freight system. BASIC STRUCTURE OF THE FEDERAL-AID PROGRAM Decisions that Congress makes on the overall shape of the federal program—its size, the extent of federal control, and the taxes that support it—usually are not driven by considerations of how freight will be affected. However, these decisions have implications for freight transportation. Size of the Program The overall size of the federal surface transportation program—the dollars authorized and disbursed for highways and other transportation projects—is the characteristic of the present program with the greatest effect on freight. Highways are the major government responsibility affecting the intermodal freight system. Highway transport accounts for 25 percent of domestic intercity ton miles but 80 percent of the value of freight transportation services in the United States (Wilson 1996, 40, 44), and most intermodal freight movements include a truck leg. Transportation agency studies as well as independent analyses have concluded that opportunities exist for high-payoff improvements in the highway system (Eno Transportation Foundation 1996, 16–18). Any reordering of priorities in state surface transportation capital spending programs in favor of projects important for intermodal freight is far more difficult to achieve in a period of static or declining overall funding, when moving freight-related projects up in priority requires demoting other projects, than it would be in a period of increasing funding. Extent of Federal Control When it designs federal surface transportation aid programs, Congress must decide on allocating control of spending between the federal government and the states. The policy options among which Congress can choose are to continue the traditional mechanisms of federal control in the surface transportation program (principally, categorical funding and

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Policy Options for Intermodal Freight Transportation: Special Report 252 allocation of funds among states reflecting national priorities), to make further incremental extensions of state and local flexibility by reducing the number of categorical programs and other restrictions (as ISTEA did), or to fundamentally alter the program so that it simply passes federally collected taxes on to the states with minimal conditions and little or no redistribution. Each of these options has advocates, and each has implications for intermodal freight programs. When the centerpiece of the federal-aid highway program was the Interstate system, a well-defined national objective, a strong consensus supported federal decisions that redistributed highway fund revenues among the states, set national design standards, and channeled spending into federally defined project categories. With the completion of the Interstates, the program lost this focus. Calls became frequent, especially from certain state governments, for minimizing federal control over spending decisions and federal geographic redistribution. The argument for weakening federal control is that local political and economic forces usually are the most reliable guide to good decisions. Interests favoring certain program objectives in need of federal support, for example environmental groups and public ports, have urged a continued strong federal role, with funding categories or other strong provisions to influence states to give priority to certain types of projects. The case for continued federal control is that it is necessary in situations where the national interest diverges from local interest. Investments made purely on the basis of local considerations may not address the highest national priorities. Systemwide effects may be difficult to assess from the local perspective and may not carry great weight with local decision makers. For example, local residents might oppose a project of value to the nationwide freight system because of expected negative local spillovers (e.g., congestion, pollution, or unwanted development). Conversely, local groups might support a project (e.g., port improvements to retain traffic) that is not the best solution to the transportation problem from a national perspective for the sake of local economic development. The goal of system optimization and the decentralized nature of decision making in the U.S. economy and government are not inherently in conflict. If state and local governments have mechanisms for recouping costs of publicly provided facilities through user fees, means are available to compensate parties that bear the spillover costs of development projects, and local governments are not induced by the availability of external aid to undertake uneconomic projects, then local decisions can be

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Policy Options for Intermodal Freight Transportation: Special Report 252 expected to harmonize with national interests. Since these three conditions are not always met, instances of divergence of national and local interests can occur. The significance of this problem is not well documented and needs to be assessed and illustrated with case study analyses. User Fee Finance Federal aid for surface transportation improvements is paid for with revenues from the federal motor vehicle fuel tax and other excises on highway users. User fee finance historically has been justified on grounds of fairness. It is also important for the efficient use and development of the highways because it functions as a rough and imperfect pricing mechanism. The policy options for Congress are to maintain approximately the existing tax structure and user-pays financing principle, weaken the user-pays constraint by allowing more spending on diverse kinds of projects or by discarding trust fund finance, or reinforce the principle by tying fees more closely to the cost of service. The latter two options are not mutually exclusive; user fee reform coupled with increased spending flexibility might improve equity as well as the performance of the freight transportation system. Use of Highway Trust Fund revenues for nonhighway purposes is a departure from the user-pays tradition. Arguments for and against nonhighway uses were presented earlier in this chapter. One possible justification for such uses is that the existing highway user fee system is highly imperfect. An alternative response to this problem would be to improve the fee system. Several studies have concluded that changes in highway user fees that brought highway user taxes, including truck taxes, more in line with the costs each user generates would have economic benefits (Small et al. 1989; TRB 1996). Prospects for refining freight transportation user fees are examined in Chapter 4. A final alternative that would allow expanded funding for intermodal freight projects and maintain the user-pays principle would be creation of a multimodal trust fund that would be available for multimodal public works projects and into which users of all freight modes as well as port operators would pay. Such arrangements exist in a few states, and the TRB Committee for Study on Landside Access to Ports recommended in its 1993 report that other states adopt the mechanism

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Policy Options for Intermodal Freight Transportation: Special Report 252 (TRB 1993, 138). No detailed proposal for a federal multimodal trust fund has been made. REFERENCES Abbreviations AAPA American Association of Port Authorities DOT U.S. Department of Transportation FHWA Federal Highway Administration GAO General Accounting Office NCIT National Commission on Intermodal Transportation TRB Transportation Research Board AAPA. 1996. AAPA Platform on ISTEA. Alexandria, Va. Alameda Corridor Transportation Authority. n.d. Alameda Corridor: A National Priority. Burns, J. 1994. Union Pacific Facing Political Flack over Opposition to Alameda Corridor. Traffic World, April 11, pp. 33–34. DOT. 1996. National Freight Transportation Policy Statement. Eno Transportation Foundation, Inc. 1996. Economic Returns from Transportation Investment. Lansdowne, Va. FHWA. n.d. 1995 Research and Technology Program Highlights. U.S. Department of Transportation. GAO. 1996. Intermodal Freight Transportation: Projects and Planning Issues. July. Intermodal Association of North America. 1996. Policy Statement on Reauthorization of ISTEA. Riverdale, Md. Maritime Administration. 1996. Report to Congress on the Status of the Public Ports of the United States 1994–1995. U.S. Department of Transportation, Oct. National Council on Public Works Improvement. 1988. Fragile Foundations: A Report on America’s Public Works. Feb. NCIT. 1994. Toward a National Intermodal Transportation System: Final Report. Washington, D.C., Sept. Preusch, J.A. 1997. Plan of Finance: The Alameda Corridor Project. Presented at 76th Annual Meeting of the Transportation Research Board, Washington, D.C. Small, K. A., C. Winston, and C. Evans. 1989. Road Work: A New Highway Pricing and Investment Policy. Brookings Institution, Washington, D.C. Texas A&M University. 1996. Trade Corridors. Borderlink. Oct. http://rce.tamu.edu/borderlink/corridor.html TRB. 1993. Special Report 238: Landside Access to U.S. Ports. National Research Council, Washington, D.C. TRB. 1996. Special Report 246: Paying Our Way: Estimating Marginal Social Costs of Freight Transportation. National Research Council, Washington, D.C. Wilson, R.A. 1996. Transportation in America. Eno Transportation Foundation, Inc., Lansdowne, Va.