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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Suggested Citation:"Resource Papers." National Academies of Sciences, Engineering, and Medicine. 2005. Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow. Washington, DC: The National Academies Press. doi: 10.17226/13833.
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Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

Resource Papers

RESOURCE PAPER Meeting the Challenge to Reauthorize the Transportation Equity Act for the 21st Century Will System Performance Continue to Be “Gone with the Wind”? Geoffrey S. Yarema, Nossaman Guthner Knox & Elliott, LLP For the Second National Conference onTransportation Finance in Scottsdale, Arizona,August 20–23, 2000, the team of Bryan Grote, Jeffrey Parker, and David Seltzer prepared an excellent paper on reauthorization opportunities.1 As the touch- stone for their examination, they looked to the mad- cap, though ultimately frustrating, comedy film Planes, Trains and Automobiles. They saw this comedy as rep- resentative of a haphazard U.S. transportation system in need of serious fixing. In my effort to follow in their footsteps, the movie theme I draw on is the classic Gone with the Wind. That triumph of cinematic effort left little room for comedy in portraying an economic system at a crossroads, flawed in its goals and struggling to rebuild a new eco- nomic base. At this point in the history of our surface transportation network, the United States may be at its own crossroads, struggling to maintain system condi- tion and performance, with goals not clearly stated and needed resources yet to be identified. This resource paper is intended to spur discussion for the Third National Conference on Transportation Finance. To that end it gathers together material gener- ated from numerous congressional hearings, actual experience in project delivery at the state and local lev- els, and important academic and economic analyses completed since the 2000 conference. The issues raised here include the following: 1. What should be the goal of reauthorization? 2. Has the Transportation Equity Act for the 21st Century (TEA-21) met the goals of maintaining system condition and performance and improving safety? 3. What funding level will reauthorization need to establish to maintain condition and performance? 4. What measures can reasonably be taken to achieve the goals? It is hoped that this background, together with the presentations and discussions the conference will foster, will help participants come to a consensus on these issues and become effective advocates for the solutions. WHAT SHOULD BE THE GOAL OF REAUTHORIZATION? Prior to TEA-21, congressional funding decisions for the federal highway and mass transit programs2 were driven by the budget. Both programs were part of the domestic discretionary budget category, and the annual invest- ment level was set by what the overall domestic discre- 1 Grote, B., J. Parker, and D. Seltzer. Planes, Trains, and Automobiles: Multimodal Reauthorization Opportunities. In Conference Proceed- ings 24: Second National Conference on Transportation Finance, TRB, National Research Council, Washington, D.C., 2001, pp. 179–189. 2 This paper focuses primarily on highways and bridges and does not specifically address mass transit, except as noted. The analysis of cost to maintain condition and performance applies equally to transit, however. 6 1

tionary cap could afford. This approach left no link to the revenues coming into the Highway Trust Fund and no link to what the nation needed. As a result, into the early 1990s, road and bridge conditions in the United States deteriorated, and traffic congestion grew worse. Pete Ruane, President of the American Road and Transportation Builders Association (ARTBA), reminded Congress that TEA-21 fundamentally improved on this process by ensuring that all Highway Trust Fund revenues would be spent on transportation investment.3 In effect, highway and mass transit invest- ment levels under TEA-21 became revenue driven. Thus, as Highway Trust Fund revenues grew during the late 1990s, federal transportation investment experi- enced strong growth. What TEA-21 did not achieve is the establishment of a direct correlation between need and investment levels. That could well be the key challenge that TEA-21 reauthorization presents to Congress. What goal should drive the establishment of funding levels for surface transportation? In March 2001 ARTBA published A Blueprint for 2003 Reauthorization of the Federal-Aid Highway and Mass Transit Programs. After over a year of effort involv- ing numerous committees, including one I cochaired, ARTBA submitted for consideration the following goals for the 2004–2009 authorization program: 1. Cutting the number of deaths and injuries on America’s highways through targeted capital investments; 2. Ensuring that traffic congestion for the American public and business community does not get materially worse; and 3. Ensuring that the structural condition of federal- aid highways, bridges, and transit systems does not get materially worse. These goals do not go so far as to seek improvement in the performance of the transportation network. They seek improved safety and maintenance of the existing condition and performance. Soon after ARTBA threw down this gauntlet in August 2001, the American Association of State Highway and Transportation Officials (AASHTO)– Associated General Contractors of America (AGC)– ARTBA Joint Committee, of which I was a member, held its annual meeting. An important cooperative effort since the 1920s, the committee offered its sup- port for an increase in annual federal investment in highway and transit programs sufficient to maintain not only existing conditions but system performance as well.4 I submit the ARTBA goals for the consideration of the conference participants. Let us now examine the extent to which we are currently meeting these goals. HAS TEA-21 MET THE GOALS OF MAINTAINING SYSTEM CONDITION AND PERFORMANCE AND IMPROVING SAFETY? During the last week of September 2002, the public got its first peek at two long-awaited assessments of the condition and performance of the U.S. transportation system: the U.S. Department of Transportation’s (USDOT’s) biennial Conditions and Performance Report and AASHTO’s Bottom Line Report. Mary Peters, Administrator of the Federal Highway Administration (FHWA), offered a summary of the USDOT report’s conclusions on September 30, 2002, in testimony before the Senate Environment and Public Works Committee.5 AASHTO issued its Bottom Line Report on September 26, 2002. The two reports use vir- tually the same data and modeling techniques. The dif- ferences in their conclusions reflect only variations in base years, time spans, and modeling assumptions.6 At the heart of the Conditions and Performance Report are three measures for highways and bridges: the cost to maintain in current condition; the cost to maintain at current performance levels; and the cost to improve to the point where investment would no longer be cost-effective, assuming the availability of funds. In her testimony, Administrator Peters reported that TEA-21 has achieved some notable successes. Between FY 1998 and FY 2002, annual federal highway spend- ing increased by a whopping 48 percent. With this influx of new federal dollars, state and local govern- ments resisted the temptation to redirect their discre- tionary resources elsewhere and actually increased their transportation spending as well. In fact, the state share of highway capital investment from 1997 through 2000 increased to more than 60 percent of the total for the first time since 1959 and remained above that level through 2002. Thus, under TEA-21 combined invest- ment in highway infrastructure by all levels of govern- ment increased sharply—by 14 percent in constant 6 2 TRANSPORTATION FINANCE 3 Two Cents Makes Sense. Testimony of ARTBA before the Subcommittee on Highways and Transit, House Committee on Transportation and Infrastructure, July 16, 2002. 4 Recommendations of the AASHTO–AGC–ARTBA Joint Com- mittee (2001). 5 Statement of Mary Peters, Federal Highway Administrator, before Subcommittee on Transportation Infrastructure and Nuclear Safety, Senate Committee on Environment and Public Works, Sept. 30, 2002. 6 General Accounting Office. U.S. Infrastructure: Federal Agencies’ Approaches to Developing Investment Estimates Vary. Washington, D.C., July 2001.

dollars between 1997 and 2000 and by an even larger percentage in pure capital spending on highways. What has this money bought? As they have become leaner, meaner, and more efficient, state departments of transportation have directed their investments primarily toward maintenance of the existing system, possibly because system preservation projects frequently have shorter lead times and are less controversial than system expansion projects.7 The increase in system preserva- tion investment, Administrator Peters notes, has had a profound effect on the overall physical condition of the nation’s highway and bridge infrastructure. The fed- eral–state partnership during TEA-21 has generally provided the resources necessary to meet the cost to maintain the system network. Similarly, the 2002 Conditions and Performance Report, Administrator Peters tells us, will document continued improvement in the area of highway safety. She reports that highways have become safer even as travel has sharply increased, with the fatality rate per 100 million vehicle miles trav- eled (VMT) decreasing from 3.3 in 1980 to 1.5 in 2000. Despite these gains in system maintenance and high- way safety, one of the three goals we have set forth above for discussion clearly has not been met. Operational performance of infrastructure has steadily deteriorated during the past decade. While we have no statistical means of monitoring highway performance,8 AASHTO recently testified that increasing congestion and declining performance are common. The Texas Transportation Institute’s 2002 Urban Mobility Study was published earlier this year. The report examines congestion in 75 metropolitan areas and concludes that in metropolitan areas of all sizes, congestion lasts for longer periods and affects more of the transportation network in 2000 than in 1982. During that period, average annual delay per peak road traveler climbed from 16 to 62 hours. Delay more than quadrupled in areas of less than 1 million people. Increasing congestion of this magnitude is not diffi- cult to understand. At the same time, as states focused spending on the important job of condition mainte- nance, with little system expansion, between 1990 and 2000 VMT increased from 2.1 trillion to 2.7 trillion. AASHTO predicts another 600 billion in VMT growth between 2000 and 2010. Thus, we should credit the TEA-21 era with impor- tant, hard-fought gains—maintained condition and improved safety. Yet the third leg of the performance goal—maintained performance—remains a more dis- tant accomplishment. In fact, in Cape Canaveral, where I grew up as a child of the space program, we would respond to a situation like this by saying, “Houston, we have a problem.” WHAT FUNDING LEVEL WILL REAUTHORIZATION NEED TO ESTABLISH TO MAINTAIN CONDITION AND PERFORMANCE? According to Administrator Peters, the forthcoming Conditions and Performance Report will project that covering the cost to maintain highways and bridges will require average annual investment levels at $75.9 bil- lion for the 2001–2020 period, a 17.5 percent increase over the $64.6 billion of capital spending in 2000. AASHTO’s Bottom Line Report, on the basis of the same data but with variances mentioned earlier, pro- jects the need for an annual capital investment of $92 billion by all levels of government to cover the cost to maintain current conditions and performance. ARTBA believes that the $75.9 billion investment figure mentioned by Administrator Peters is under- stated for three reasons.9 First, it points out that the fig- ure is stated in constant dollars for 2000 and recommends that the report provide the estimate in inflation-adjusted dollars. Second, the $75.9 billion fig- ure, while potentially covering the cost to maintain existing conditions, will not cover the cost to maintain performance. Third, it explains that the report findings are based on an assumption that traffic growth will decline from 3 percent annually over the past 20 years to 2 percent annually over the next 20 years. Because less traffic means fewer highway and bridge repairs and less need for new capacity, understating travel growth is dangerous. ARTBA argues that every Conditions and Performance Report has underestimated travel growth and submits data suggesting that traditional travel growth would increase annual investment needs by almost 50 percent to $120 billion per year. AASHTO’s Bottom Line Report does not assign a federal share to its estimate of $92 billion required in annual capital investment over the next 20 years by all levels of government, nor does it factor in future price inflation. ARTBA points out in its recent testimony that, on the basis of the assumptions that the federal share of total highway capital investment during the 2004–2009 period will continue to be about 47 percent (the average share of the past 20 years) and that annual inflation will be 2.4 percent (the estimate used in the President’s FY 2003 budget), the Bottom Line Report 6 3MEETING THE CHALLENGE TO REAUTHORIZE TEA-21 7 AASHTO. The Changing State DOT, 1998. 8 Testimony of Joseph Perkins, AASHTO, before the Subcommittee on Transportation, Infrastructure, and Nuclear Safety, Senate Committee on Environment and Public Works, Sept. 30, 2002. 9 Testimony of ARTBA before the Subcommittee on Transportation, Infrastructure, and Nuclear Safety, Senate Committee on Environment and Public Works, Sept. 30, 2002.

suggests that the federal share of the investment needed just to maintain safety, structural, and traffic congestion conditions at the 2000 level would be $47.7 billion in FY 2004 and would rise to $53.6 billion in FY 2009. According to current projections of the Congressional Budget Office, the Highway Account of the Highway Trust Fund, which took in $30.3 billion in FY 2000, will only support a program that spends $35 billion to $36 billion annually. Moreover, Administrator Peters states that if investment were to remain at anticipated levels through 2003, recent trends observed in the condition and performance of the highway system would con- tinue—physical conditions and safety performance would improve, but the operational performance of the highway system would deteriorate further. Average speeds would decline, the amount of delay experienced by drivers would increase, and the average length of con- gested periods on the nation’s urban principal arteries would increase. WHAT MEASURES CAN REASONABLY BE TAKEN TO ACHIEVE THE GOALS? If we stick to the goals of covering the cost to maintain system condition and performance and improved safety, FHWA, AASHTO, and ARTBA would all agree that performance will not be maintained without reautho- rization funding at levels greater than those of TEA-21. Where might this money come from? While there is no single panacea, this paper addresses four categories of revenue sources: enhancements to the fuel excise tax, tax credit bonds, alternative revenue sources, and tolling. Enhancements to the Fuel Excise Tax Currently, fuel taxes provide approximately 90 percent of the revenues deposited in the Highway Trust Fund. Any moves to increase the gas tax are certainly fraught with political difficulty. Congress has raised the tax lev- els on motor fuels on five occasions, but in only two of those instances (1959 and 1982) was the need for more infrastructure the reason for the increase. So where is the “low-hanging fruit”? In a recent article, Transportation Weekly summarized three sources that have received significant attention in the run-up to reauthorization: indexing the tax for inflation, captur- ing interest on the Highway Trust Fund, and changing the federal tax structure on gasohol sales.10 Indexing the tax to compensate for inflation would reverse its eroding buying power and eventually would provide significant revenue benefits. The tax-writing committees are, however, famously hesitant to cede any of their revenue-raising authority to some kind of auto- matic formula, such as a link to the Consumer Price Index (CPI). According to the General Accounting Office, the fed- eral tax treatment of gasohol sales has lost the Highway Trust Fund $6 billion during TEA-21, a loss that will grow to $20 billion over the next 10 years unless cor- rective action is taken. Gasohol (gasoline mixed with ethanol) tax policy has two effects on the Highway Trust Fund. First, the tax rate on gasohol is lower than the tax on gasoline or diesel (up to 5.1 cents per gallon lower, depending on how much ethanol is in the mix). As the article points out, this encourages consumers to purchase gasohol and keeps corn growers happy. Second, of the remaining gasohol tax, 2.5 cents per gal- lon goes to the general fund for deficit reduction (a holdover from the 1990 budget summit) rather than being put into the trust fund. Highway advocates have sought the transfer of the 2.5 cents from the general fund to the Highway Trust Fund for some time, and implementing legislation (S. 1306/H.R. 2808), unop- posed by the corn growers, has been introduced in Congress. The issue of either eliminating the ethanol subsidy or requiring the general fund to reimburse the trust fund for the subsidized amount is slightly more controversial. Recent legislation would mandate that at least 5 billion gallons of gasohol be sold in the United States each year, a number that would cause a signifi- cant reduction in Highway Trust Fund receipts if the subsidy is not eliminated or reimbursed. So far as interest on the Highway Trust Fund is con- cerned, all federal trust fund accounts other than the Highway Trust Fund are credited with interest on their unexpended balances. The Highway Trust Fund, Transportation Weekly recalls, gave up its interest in 1998 as part of the deal to ensure that all of the money is actually spent. The crediting of the Highway Trust Fund with interest would add revenue to the fund that, if revenue-aligned budget authority (RABA) is reen- acted, would then be spent. That would, however, also move the program away from the principle of 100 per- cent user financing, since those interest payments, were they to be spent in the real world, would have to come from somewhere, probably the general fund, which would create a sort of general fund subsidy for the high- way program. The crediting of interest (along with RABA) would, however, still bring in real money and would be politically easier to accomplish than a gas tax increase. Senate Finance Chairman Max Baucus has prepared his Maximum Economic Growth for America Through the Highway Trust Fund (MEGA Trust Act) for reau- thorizing the Highway Trust Fund next year. This legis- 6 4 TRANSPORTATION FINANCE 10 Transportation Weekly, Vol. 3, No. 42, Aug. 19, 2002.

lation includes the above low-hanging fruit except for indexing. Transportation Weekly calculates that the mea- sure, if enacted, would bring in about $3 billion in FY 2004 and perhaps $7 billion in FY 2009. These numbers are difficult to predict since the unobligated balance, on which interest would be predicated, is an enigma within a riddle. Together, these measures would get us to between $33 billion in 2004 and perhaps $42 billion in 2009. A significant gap would still need to be filled to reach a $50 billion target (to meet the cost to maintain condi- tion) or a $60 billion target (to meet the cost to maintain performance). ARTBA and the American Society of Civil Engineers (ASCE) propose to tackle this gap head-on, albeit in dif- ferent ways. ARTBA became the first major group to advocate publicly a gas tax increase beyond indexing inflation. Its “Two Cents Makes Sense” plan incorpo- rates all the low-hanging fruit mentioned earlier and proposes other measures: • Assessing six annual $0.02 increases in the fuel excise tax over the reauthorization period; • Providing automatic adjustments in the fuel tax rate if the Highway Trust Fund experiences deficits during any fiscal year; • Adopting true pay-as-you-go funding, which would replace TEA-21’s current requirements that rev- enues be deposited in the Highway Trust Fund and “warehoused” a year before apportionment to the states; and • Including a “maintenance of effort” provision that would make state access to increased apportioned federal funds contingent on state investment levels consistent with prior investment. ASCE recently joined ARTBA in calling for a fuel tax increase.11 Its proposal recommends • Indexing the gas tax to the CPI, • Raising the gas tax by $0.06 per gallon at the onset of reauthorization, and • Decreasing the volatility of RABA adjustments. Many even discount the possibility of serious consid- eration, much less passage, of gas tax increases next year. Some would respond that President Reagan could sup- port a significant gas tax increase in the economic envi- ronment of 1982, and the justification today may be equivalent or better. Moreover, experience at the state level is a useful reference. Since 1997, 15 states increased their motor vehicle excise tax, with 10 legislatures expressly voting to raise taxes (between 2.6 cents per gal- lon in Maine and 5 cents per gallon in Utah) and five states increasing their excise annually (through automatic indexing, without legislative action). Tax Credit Bonds As John Horsley recently outlined for Congress,12 AASHTO is exploring the feasibility of leveraging new revenues through a Transportation Finance Corporation (TFC), which, among other things, would issue approx- imately $60 billion in bonds between 2004 and 2009. TFC would distribute approximately $35 billion of the bond proceeds to the highway program through FHWA according to an apportionment formula determined by Congress (perhaps similar to the current federal-aid highway funding formula), and approximately $8.5 bil- lion would be distributed to transit agencies on a basis to be determined. From the recipients’ perspective, these funds would essentially be indistinguishable from regu- lar federal-aid apportionments. The states would not be liable for the repayment of the bonds. TFC would set aside at issuance and deposit into a sinking fund approximately $17 billion of the bond pro- ceeds, which would be invested in federal agency or other high-grade instruments. According to Horsley, at maturity the sinking fund would have grown sufficiently to repay the bond principal. In lieu of interest, the bondholders would receive tax credits that could be applied against the holder’s federal income tax liability. Such tax credits would themselves represent taxable income to the holders. Horsley sug- gests that a new source of income be found to produce additional Highway Trust Fund receipts that would reimburse the Treasury for the budgetary cost of the tax expenditures associated with the tax credits. AASHTO is still investigating the strengths and weaknesses of this proposal. Moreover, the General Accounting Office, at the request of the Senate Committee on Finance and the Senate Committee on Environment and Public Works, is including the tax credit bond proposal in its examination of a range of alternative financing approaches for surface transporta- tion.13 In the meantime, Senator Baucus is acting. On October 10, 2002, he introduced the MEGA Trust Act, 6 5MEETING THE CHALLENGE TO REAUTHORIZE TEA-21 11 Testimony of Thomas Jackson, ASCE, before the Subcommittee on Transportation, Infrastructure, and Nuclear Safety, Senate Committee on Environment and Public Works, Sept. 30, 2002. 12 Testimony of John Horsley, AASHTO, before a Joint Hearing of the Senate Committee on Finance and the Senate Committee on Environment and Public Works, Sept. 25, 2002. 13 Statement of Jayetta Hecker, General Accounting Office, before a joint hearing of the Senate Committee on Finance and the Senate Committee on Environment and Public Works, Sept. 25, 2002.

which would allow the Treasury to issue $3 billion per year in tax credit bonds. Alternative Revenue Sources In the past several years several papers and studies have been prepared on the potential for generating alternative sources of transportation revenue to replace, over time, revenues lost as the revenues derived from the current method of taxation based on motor fuels decline. A thor- ough recitation of these alternatives is beyond the scope of this paper. Instead, refer to NCHRP Report 37714 and two resource papers prepared for the Second National Conference on Transportation Finance.15, 16 These analy- ses summarize numerous alternative revenue sources and evaluate them in accordance with a variety of criteria. On the basis of this work and the policy analyses of oth- ers, the AASHTO–AGC–ARTBA Joint Committee advo- cated the creation of a blue ribbon task force to recommend to Congress alternative motor vehicle fuels and new user fees to be levied to ensure that Highway Trust Fund rev- enues are sufficient to maintain system performance. This conference is an opportunity to push this recommendation further toward reality during reauthorization. Tolling If Congress fails to adopt maintaining system perfor- mance as a goal, state departments of transportation and regional transportation authorities may neverthe- less pursue the resources they need to cover such costs. In recent years new state and local sources of revenue for transportation have proliferated. One of them, which varies widely in acceptability from region to region, is the use of toll revenues to cover at least a portion of the costs of the development of new capacity. In both the Intermodal Surface Transportation Efficient Act of 1991 and TEA-21, Congress opened the door to limited tolling of the Interstate system. While a few states have placed a tentative toe in the water, most toll projects have focused on new bridge spans and greenfield projects off the Interstate system. Acceptance of new toll road financing tools has varied. In deliver- ing these projects, sponsors have used a range of tools, which are discussed in more detail elsewhere.17 They include the following: • The franchise or concession financed with equity and taxable debt; • The 63-20 nonprofit corporation as the obligor on tax-exempt debt, with private involvement maxi- mized under the Internal Revenue Service management contract rules; • A state or regional toll authority’s issuance of tax- exempt revenue bonds, with award of a design–build or a design–build–maintain contract to manage project cost and schedule risk; and • A state agency’s issuance of general obligation bonds to finance a new toll facility, which in effect retains toll revenue risk. Each of these approaches has strengths, weaknesses, and suitability criteria. The following are examples of toll road developments since the Second National Conference on Transportation Finance: • The Tacoma Narrows Toll Bridge is being developed through a design–build contract awarded to a Bechtel- Kiewit team and financed by the state of Washington through the issuance of general obligation bonds. • The Central Texas Turnpike Project, a network of new toll roads near Austin, is being developed in part by an enhanced form of design–build–maintain con- tract awarded to Fluor Daniel and Balfour Beatty18 and financed by a combination of tax-exempt revenue bonds issued by the Texas Transportation Commission, general obligation bonds issued by localities, a Transportation Infrastructure Finace and Innovation Act (TIFIA) loan backed by toll revenues, and gas tax funding commitments by the state. • The Las Vegas Monorail is being developed by a design–build–operate–maintain contract awarded to a Granite/Bombardier team and financed with fare box/adver- 6 6 TRANSPORTATION FINANCE 14 Reno, A. T., and J. R. Stowers. NCHRP Report 377: Alternatives to Motor Fuel Taxes for Financing Surface Transportation Improvements. TRB, National Research Council, Washington, D.C., 1995. 15 Clary, L., C. Hand, R. Creamer, and G. Branagan. Alternative Transportation Revenue Sources. In Conference Proceedings 24: Second National Conference on Transportation Finance, TRB, National Research Council, Washington, D.C., 2001, pp. 137–144. 16 Bemis, G. Expected Future Availability and Cost of California Gasoline and California Excise Tax Revenue Projections. In Conference Proceedings 24: Second National Conference on Transportation Finance, TRB, National Research Council, Washington, D.C., 2001, pp. 157–167. 17 For descriptions of the many forms public–private partnerships can take, see the following: Hedlund, K., Public–Private Partnerships: The Public Owner’s Perspective, in Design–Build for the Public Sector (M. C. Loulakis, ed.), Aspen Publishers, 2002; Allison, B., C. Boock, K. Hedlund, B. Papernik, N. Smith, and G. Yarema, Surface Transportation: Tools in the Privatization Tool Box, in Privatizing Governmental Functions, Law Journal Press, 2001; and Yarema, G. S., Transportation Project Delivery: Options, Public–Private Roles and Suitability Criteria, in AASHTO Project Finance Institute Proceedings, 2002. 18 Russell, P. E., and J. Curren. The Texas SH 130 Procurement. Public Works Financing, Vol. 165, Oct. 2002, pp. 28–33.

tising revenue bonds, interested-party subordinate debt, and private-sector donations.19 • Macquarie purchased California Transportation Ventures’ Caltrans franchise to develop and operate the SR-125 toll road, with construction planned to be financed later this year through the placement of equity and taxable debt supported by a TIFIA loan. • Legislative approval has been obtained for the Orange County Transportation Authority to acquire in early 2003 the already operating SR-91 express lanes, assuming the taxable nonrecourse debt with a likely tax-exempt refinancing later in 2003. • The Transportation Corridor Agency recently announced plans to combine the credit of the San Joaquin, Foothill, and Eastern toll roads. Any generalizations about trends these transactions suggest is dangerous, but allow me a little risk-taking. Absent any change in federal law or policy, we might expect the following: • Some jurisdictions will drive financing outcomes toward the lowest cost of money, even if that diminishes private-sector innovation and risk shifting. • TIFIA, Grant Anticipation Revenue Vehicle bonds, and state infrastructure banks have proved to be valuable tools in highway financings. • The requirement that all debt senior to TIFIA be investment grade inhibits the use of developer equity or subdebt, which in and of themselves are valuable tools in financial structuring. • TIFIA’s springing lien provision will drive projects into the hands of insolvency-proof borrowers (i.e., pub- lic agencies with significant tax revenues) and away from single-purpose private or nonprofit borrowers, which again are valuable structuring tools. • The cost and schedule certainty that the Federal Transit Administration requires in full funding grant agreements for new-start transit projects, that rating agencies require for start-up toll bonds, and that owners are requiring to avoid all-too-common “sticker shock” differences between estimated and actual construction costs20 will continue to drive issuers toward design–build and design–build–operate–maintain contracts,21 impor- tant procurement tools that have gained wide commer- cial acceptance. • Traffic and revenue consultants, rating agencies, and bond insurers will continue trending toward more conservative projections. • In many jurisdictions (Texas and Florida being notable exceptions) tolling will remain a tough sell for several reasons. First, where the need is great- est—rehabilitation and improvement of existing “free” facilities—there is little precedent nationally and indeed a broad perception among the public that they have already paid for the facilities—they should not have to pay for the facilities again. Second, local- ities, on the basis of campaign promises of some can- didates for local and state office, often wrongly believe that plenty of money is available, and if they only push hard enough, they can out-politic their neighbors for gas tax allocations and avoid tolling. Third, as Grote et al. have pointed out, communities generally underestimate the consequences of waiting for public funding: construction cost escalation, costs of congestion and accidents, and missed eco- nomic gain from early project completion. Fourth, where courageous leaders do crop up to campaign for tolls as the best means to grow the pie, federal policy offers little incentive to rebut local interests with a stake in the status quo, antiacceleration, “keep it in the slow pipeline” philosophy. • The tax-exempt credit markets have proved to be highly efficient in pricing project risk. The advantage to toll road sponsors of this market, unique in the world, will continue to drive financing and project delivery structures away, with an exception here and there, from the taxable debt/private equity model. • Few tolled facilities will produce borrowing capacity sufficient to cover all of their costs. This will drive finance plans for a single project quite logically and efficiently toward combining state and federal gas taxes, local government contributions, revenue bonds, and, if available, TIFIA. If we assume these observations to be true and assume further that tolling would be a desirable outcome, what can we do to encourage more tolled capacity? I hope this conference can offer a concrete list of suggestions, but the following will serve as food for thought: • Toll road financings would benefit from the combi- nation of tax-exempt debt, private equity, and incentive- based service contracts, an end that can be accomplished by changes to the Internal Revenue Code. Legislation to do just that passed both houses since TEA-21, but President Clinton vetoed the larger bill for other reasons. • While other states have struggled, we need to understand what Texas and Florida have done right in 6 7MEETING THE CHALLENGE TO REAUTHORIZE TEA-21 19 Testimony of Robert Broadbent, Las Vegas Monorail Company, before the Subcommittee on Housing and Transportation, Senate Committee on Banking, Housing, and Urban Affairs, June 26, 2002. 20 Flyvbjerg, B., M. S. Holm, and S. Buhl. Underestimating Costs in Public Works Projects: Error or Lie? APA Journal, Vol. 68, No. 3, Summer 2002, pp. 279–295. 21 For excellent discussions of design–build contracting, see Smith, N., and C. D. Ryan, Design-Build for Highways, Bridges, Rail, Mass Transit and Airports, in Design–Build for the Public Sector (M. C. Loulakis, ed.), Aspen Publishers, 2002; and Boock, C., B. Papernik, and N. Smith, Design–Build Contracting and State and Local Agencies, in Design–Build Handbook, Aspen Publishers, 2001.

securing state leadership and local acceptance sufficient to “sell” tolling for new projects. • We should not force policy makers to choose between tax-exempt financing on the one hand or pri- vate-sector innovation and equity on the other. My partner, Karen J. Hedlund, has written an excellent piece on this issue,22 and she will be speaking later in the conference about it. • Federal policy should provide states and regional authorities with a greater incentive to create new toll revenues than the existing toll credit mechanism, akin to the original state infrastructure bank program. Access to a small amount of new grant funds will pro- vide much-needed support for making politically diffi- cult decisions. • TIFIA is worthy of reauthorization.23 Nevertheless, existing and prospective borrowers have suggested a number of revisions, and TIFIA supporters will need to respond thoughtfully to those resisting funding TIFIA “off the top” when it has proved difficult to estimate annual program demand. CONCLUSION While FHWA, AASHTO, and ARTBA may quibble about how to calculate the exact cost of maintaining sys- tem condition and performance, they would all agree on certain key findings. Despite significant increases in fund- ing at all levels of government since 1997, we are not covering the cost of maintaining system performance. As a result, congestion is increasing. This conference has a unique opportunity to send a clear message—that the goal of reauthorization must be to avoid this degradation in critical mobility for goods and people. Achieving this standard will require difficult decisions by elected and appointed officials at all levels of government: federal gas tax revenue enhancement, continued and wider use of innovative financing tools, and more extensive use of tolling and planning for alternative dedicated funding to supplement the gas tax by 2010, among many others. The prospect of maintaining system performance may not yet be “gone with the wind,” but it is certainly, in Bob Dylan’s words, “blowing in the wind.” 6 8 TRANSPORTATION FINANCE 22 Hedlund, K. J. The Case for Tax-Exempt Financing of Public–Private Partnerships. Reason Public Policy Institute, 1998. 23 Transportation Infrastructure Finance and Innovation Act: Report to Congress. U.S. Department of Transportation, 2002.

6 9 RESOURCE PAPER Accelerating Project Development Approaches and Techniques for Expedient Project Delivery Sharon Greene, Sharon Greene and Associates Michael Schneider, PB Consult Despite a number of recently developed tools andtechniques for innovative financing of surfacetransportation projects, relatively few such pro- jects have experienced substantial acceleration in actual delivery to the public. States, municipalities, and special- purpose authorities have used new methods to leverage traditional sources of funds, which in many cases have allowed the delivery of projects that would have had to wait for pay-as-you-go financing. However, the value of such innovation in the more rapid delivery of trans- portation projects is often lost because of factors that substantially inhibit their effective use. The purpose of this resource paper is to encourage and stimulate discussion about methods by which more projects may be delivered more expediently. Not surpris- ingly, many nonfinancial factors interact in project deliv- ery, which in combination reduce the value of new methods for generating and utilizing funds for capital project development. This paper will explore such factors and their relationship to innovative finance, with the principal objective of defining more effective approaches for consideration in the “Next TEA” reauthorization process. Succinctly stated, the full value of innovations in financing methods for surface transportation programs will only be realized when they are paired with compan- ion innovations in the project definition, development, approval, and implementation processes. INNOVATIVE FINANCE FRAMEWORK According to the Federal Highway Administration (FHWA), “innovative finance” is a broad term that refers to moving the traditional federal-aid transporta- tion process from a single strategy of federal funding on a “grants reimbursement” basis to a diversified approach that includes innovative financing concepts developed from both the public and the private sectors. As is well known to conference participants, the federal government has traditionally financed transportation infrastructure primarily through outright 80 percent grants. With the Intermodal Surface Transportation Efficiency Act of 1991, the National Highway System Designation Act of 1995, and the Transportation Equity Act for the 21st Century (TEA-21), the U.S. Department of Transportation (USDOT) began providing alternative or “innovative” forms of nongrant assistance, as well as means by which the traditional federal grants process could be made more flexible. This definition conveys a rather large playing field for innovation, which encom- passes virtually all programs that utilize borrowing, guarantees, and other means of leveraging funds. By this definition, a significant number of transportation pro- jects in the past 12 to 15 years have taken advantage of innovative financing. Many are now in operation; oth- ers are in the final stages of development, environmental clearance, and preliminary and final design. As paraphrased by the U.S. General Accounting Office in its September 25, 2002, testimony before the Committee on Finance and the Committee on Environment and Public Works, the goals for the FHWA Innovative Finance Program are as follows:1 1 Statement of JayEtta Z. Hecker, Director, Physical Infrastructure Issues, United States General Accounting Office, testimony before the Senate Committee on Finance and the Committee on Environment and Public Works, Sept. 25, 2002.

• Accelerate projects by reducing inefficient and unnecessary constraints on states’ management of federal highway funds; • Expand investment by removing barriers to private investment; • Encourage the introduction of new revenue streams, particularly for the purpose of retiring debt obligations; and • Reduce financing and related costs, thus freeing the savings for investment into the transportation system itself. FHWA’s familiar diagram (Figure 1) summarizes the various federal innovative financing mechanisms and illustrates how these mechanisms fit with different types of transportation projects. Within this basic framework, mechanisms in trans- portation finance continue to evolve. TEA-21 provided important new mechanisms that have supported innov- ative solutions to fund transportation improvements. Many of these began as pilot programs that have been shaped into more formalized federal and state programs and an increasingly common language of acronyms, such as TIFIA (Transportation Infrastructure Finance and Innovation Act), SIB (state infrastructure bank), and GARVEE (Grant Anticipation Revenue Vehicle). In preparation for the reauthorization of TEA-21, confer- ences such as this will provide significant input to fur- ther refine, broaden, and expand innovative finance concepts for the remainder of the decade and beyond. INNOVATIVE FINANCE: THE BROADER CONTEXT This paper will not review the frequently cited and well- known projects throughout the United States and abroad that have achieved success and notoriety through their use of unique and innovative financial mechanisms. Indeed, the program for this conference focuses through its many sessions on just such specific examples and issues. The statistics are impressive: as of June 2002, 32 states with established SIB programs with about $4.06 billion in the dollar value of loan agreements, six states with $2.3 billion in GARVEE bonds outstanding and more states with enabling legis- lation contemplated, and nine states under agreement for TIFIA credit assistance for 11 projects with $15.4 billion in transportation investment.2 And the list of successes continues to grow. Rather than focus on the financial aspects, this paper will focus primarily on the nonfinancial aspects of these innovative projects and promote dialogue throughout the various conference sessions on the plethora of devel- opmental factors that must also be improved through innovation, together with financing innovations. It is our contention that without supporting legislative, administrative, and programmatic changes in the over- all project development and delivery system, the finan- cial innovations become far less compelling. A review of projects that have been completed and are now in service reveals certain predictable patterns. First, it is clear that projects that do not require full environmental documentation and that do not have jurisdictional opposition from local governments or special-interest groups can be brought online signifi- cantly more rapidly than projects requiring full envi- ronmental clearance or having even modest political or public opposition. Second, projects that do not require direct use of federal funds or funding programs and thereby avoid the federal environmental impact study process generally can be completed several years sooner than otherwise. And finally, the morass of clear- ances and regulatory issues that must be considered as a prerequisite for project development adds signifi- cantly to the average time necessary to bring a project online. While none of us here would advocate that environ- mental, permitting, and public involvement processes should be eliminated to expedite project delivery, it is clear that the hurdles that must be overcome in the pub- lic works delivery process today have become enor- mously complex, costly, and in many cases virtually insurmountable. While sound planning requires that political, institutional, environmental, and financial fac- tors all be taken into consideration together with tech- nical factors in the project development process, many understandably believe that by so doing we have pro- vided tools used solely and consciously to delay and inhibit project delivery. To make use of many of the financial engineering innovations that have been put into play, it would be highly advantageous to be able to estimate more effec- tively the time, cost, and degree of difficulty associated with the development process for specific projects. As a small but marginally influential industry, we should be willing to broaden our focus to aspects of project deliv- ery not directly related to innovative finance, precisely in order to take greater advantage of the available funding and financing tools that have become available. IMPEDIMENTS TO PROJECT DELIVERY In addition to technology, cost, and financial capacity, the obstacles to expedient project delivery tend to fall generally into three broad categories: 7 0 TRANSPORTATION FINANCE 2 Statement of JayEtta Z. Hecker, testimony before the Senate Committee on Finance and the Committee on Environment and Public Works, Sept. 25, 2002.

• Environmental clearance and statutory requirements, • Political and institutional factors, and • Community involvement and sustainability issues. There have been countless edicts, administrative orders, and academic studies aimed at streamlining and increasing the effectiveness of the planning and devel- opment process. However, with the increased con- sciousness concerning the impacts and sustainability of the built environment, the sheer number of require- ments and processes that must be incorporated has grown exponentially, and the term “streamlining” appears oxymoronic to many. Particularly germane to our agenda at this conference is the irony that to take greatest advantage of many of the tools and techniques available in the financial sector to deliver projects faster, the capital markets seek increased certainty at the same time that the project delivery process is experiencing increased uncertainty. This paradox is highly relevant, since the reauthoriza- tion process will almost certainly recommend methods for increased participation of the private sector and part- nerships between government and business for trans- portation project development. For private enterprise to become integrally involved in the transportation project finance and development process, third party–related project development risk must be substantially elimi- nated. Even within the public sector, increasingly com- mon project delivery systems, including design–build and design–build–operate–maintain, require reliance on principles of project finance that in turn demand greater certainty in the budgeting and scheduling of project development and delivery. However, the various require- ments and measures associated with project delivery have the combined effect of moving the development process in exactly the opposite direction. The dichotomy is evident. Solutions must evolve that meet the often competing but equally legitimate objec- tives of prudent and sustainable project development and practical and expedient project delivery. This con- ference is the right setting to focus on the definition and recommendation of such solutions. ENVIRONMENTAL CLEARANCE AND STATUTORY REQUIREMENTS About a month ago, on September 18, President Bush issued Executive Order 13274, “Environmental Stewardship and Transportation Infrastructure Project Reviews.” Similar to the war powers resolution recently adopted by Congress, this order presumably provides the administration with unfettered capability to declare war on environmental regulations and redundancies in pro- ject review. Among other provisions, the newest edict on environmental streamlining provides for the following:3 • Each agency required by law to conduct environ- mental reviews “shall ensure completion of such reviews in a timely and environmentally responsible manner.” • USDOT shall establish the “interagency ‘Trans- portation Infrastructure Streamlining Task Force’ to (1) monitor and assist agencies . . . to expedite reviews, issue permits, or similar actions, as necessary; (2) identify and promote policies aimed at streamlining the process of approvals for transportation infrastructure projects; and (3) review a list of ‘priority projects’ for addition or amendment at least quarterly.” • The membership of the task force includes the sec- retaries of agriculture, commerce, interior, defense, and 7 1ACCELERATING PROJECT DEVELOPMENT • Loans • Guarantees • Standby Lines of Credit • Other • Loans • Guarantees • Standby Lines of Credit • Other • Advance Construction • Flexible Match • Grant-Supported Notes and Bonds Marketable Revenue-Based Projects Revenue Projects Requiring Credit Assistance Traditional Non-Revenue-Generating Transportation Projects State Infrastructure Banks Grand Management Techniques External Financing Federal Credit Program State/Regional Projects Projects of National Significance FIGURE 1 Innovative finance: FHWA perspective. 3 Executive Order 13274, “Environmental Stewardship and Transportation Infrastructure Project Reviews.” Federal Register, Vol. 67, No. 184, Sept. 23, 2002, p. 59449. From the Federal Register Online via GPO Access, wais.access.gpo.gov.

transportation (task force chair); administrator of the Environmental Protection Agency; and the chairs of the Council on Environmental Quality and the Advisory Council on Historic Preservation. Perhaps most important with respect to expediting projects that make use of innovative financing, Section 2(a) of Executive Order 13274 requires the secretary of transportation to “designate . . . a list of high priority transportation infrastructure projects that should receive expedited agency reviews, and . . . amend such list from time to time as the Secretary deems appropriate.” For projects on the secretary’s list, “agencies shall to the max- imum extent practicable expedite their reviews for rele- vant permits or other approvals, and take related actions as necessary, consistent with available resources and applicable laws.” Over the past several years, many of us here have been working with various members of Congress and the Clinton and Bush administrations to develop a process designating projects as high priority. Such prior- itization is particularly important with respect to pro- jects in which development risk is shifted wholly or partially to the private sector or in which financing is being arranged nontraditionally through project financ- ing or a capital markets approach. Section 2(a) of the executive order appears to respond to that body of requests by giving discretionary authority to the secre- tary to designate projects of his choosing for such prior- itization, with no particular criteria for “discretion” provided in the executive order. While the concept of streamlining the environmental approval process is cer- tainly not new, the president’s declaration is the first time that a special class of “environmentally expedited” projects has been provided for by law or executive order. One might imagine a typical question among attendees at next year’s transportation finance conference to be, “Where is your project on the 2(a) list?” Despite the obvious intention of Executive Order 13274, it remains to be seen how well certain of the fed- eral resource agencies—notably the U.S. Environmental Protection Agency—will respond to the order’s intent, or whether such agencies will continue to do environ- mental business as usual, particularly in the review and approval process for projects designated “high prior- ity” by the secretary of transportation. You may recall that some years ago, Section 1309 of the TEA-21 legis- lation also called for significant environmental stream- lining and laid out an extensive process by which a “coordinated environmental review process” would expedite review of federal highway and transit projects. A detailed memorandum of understanding was entered into by the transportation and resource agencies, and there was much excited talk about finally clearing the logjam from the clearance process. After watching and actively participating in this new “cooperative spirit” among the agencies, I believe many of us fully under- stand why the administration thought it necessary to issue an executive order. Furthermore, an important issue to be resolved is how the USDOT modal administrations respond to the presidential initiative to expedite high-priority projects. Many believe that FHWA and Federal Transit Admin- istration (FTA) staff typically bend over backwards to cooperate with the resource agencies, despite what sometimes seems like an intent by many midlevel staffers within these agencies to slow the environmen- tal review process. Much of the delay encountered with respect to highway projects, in particular, results from deliberate inaction by resource agency staff, who allow project approvals to languish and then request the opin- ion of those close to the situation concerning “addi- tional time” for review or ask for lengthy written responses from project sponsors to nonpertinent or redundant questions. The USDOT policies must change to reflect a more proactive approach in dealing with sister agencies, despite the commendable efforts of many in FHWA and FTA to cooperate in interagency reviews and appropriate plan- ning processes in accordance with the Section 1309 man- date. The good news is that many in the government sector appear to be gaining understanding of the critical differences in the degree of certainty and expediency nec- essary for projects that make use of financing mechanisms other than traditional federal grants and pay-as-you-go approaches. It will be our job to further this educational process if we are to continue to benefit from existing and new programs to better find and leverage sources of funds for transportation projects. Over the next few months, USDOT will develop gen- eral guidelines, criteria, and rules for projects to be des- ignated in the high-priority list as provided in the executive order. This sounds like a marvelous opportu- nity for some modest lobbying by those of us within the innovative finance community. POLITICAL AND INSTITUTIONAL FACTORS There is a clear and unequivocal rule of public works: large-scale projects that are nontraditional in virtually any respect—technologically, institutionally, or finan- cially—gain significant exposure in the political arena. (This could be considered the infrastructure corollary to Tip O’Neill’s long-standing observation that “all poli- tics is local.”) In some cases, of course, such exposure is helpful to project development, while in other cases political forces are highly destructive to infrastructure delivery. Often, however, infrastructure projects are delayed, maimed, and occasionally killed by political 7 2 TRANSPORTATION FINANCE

issues only tangentially related to the project’s attrib- utes with respect to improving mobility and safety with minimum impact on the environment. Political and institutional factors in infrastructure development often appear most acute for transportation projects and stem, of course, from the very nature of transportation. Unlike most other public works pro- grams, transportation projects generally transcend polit- ical and jurisdictional lines, often at multiple levels involving local governments, regional authorities, and state and federal districts. In those frequent cases when adjacent local governments or political districts differ with respect to any of a host of growth, development, and environmental issues, expediting the delivery of trans- portation infrastructure often bears the brunt of the debate. Thus, regardless of the degree of innovation planned for funding and financing such projects, expediting them becomes futile—even if the financing scheme was brilliantly conceived and effectively communicated by people in this very room. This combination of factors, coupled with the inability of most transportation pro- jects to cover their costs through project-generated rev- enues, makes for an environment hostile to the encouragement of private-sector investment. If privati- zation is sought, it is often with a “runt of the litter” mentality whereby low-risk projects that generate higher revenues are kept (and sometimes brought back) within the public domain while the high-risk runts that generate low or uncertain revenues are made available for private-sector investment. An excellent example of difficulties created by polit- ical and institutional factors was recently demonstrated with the SR-91 express lanes project—the only California AB 680 toll revenue project in operation of the four originally franchised by the state. Perhaps the best demonstration of the efficacy of the high-occu- pancy toll lane concept—under which users pay vari- able tolls to use reserved lanes as congestion waxes and wanes on the mainline facility—SR-91 bisects the Orange County–Riverside County line in Southern California. Orange County has jobs, wealth, and a vibrant economy; Riverside County has massive tracts of reasonably affordable homes occupied by young families struggling to make mortgage payments. Owing to the demographics, the SR-91 corridor experiences massive traffic demand and a classic peak-hour direc- tionality. However, it is the employees in Riverside County who pay the $5.00+ one-way toll every day, not the employers in Orange County. Thus, the local politi- cians in Riverside County supported their constituents and sought a way to create free adjacent capacity. The private owners of the express lanes pointed to the “non- compete” clause in the franchise agreement that was necessary to ensure private financing, initially by a bank consortium. Orange County political leadership was muted and ambivalent as long as employees were will- ing to make the trek and punch their employers’ time clocks at appointed hours. We all know the resolution of this classic political dilemma: the Orange County Transportation Authority has agreed to purchase the SR-91 express lanes facility from its private owners by repayment of equity to the express lanes’ owners and a takeout using tax-exempt bonds. In effect, to solve the political disagreement (at least perceptually and perhaps only temporarily), the taxpayers are paying additional costs by subsidizing tax-exempt bonds, and the users will still pay tolls to a newly created public authority. Party politics also plays an occasionally significant role in creating impediments to project delivery. Interestingly, it seems that there is often no real philosophical difference between Democrats and Republicans with respect to infra- structure development, but merely a contest to determine which party—and which party leadership—can appear to be more “in touch” with constituencies. Populism is in vogue, regardless of affiliation. One would expect, for example, that the Republican Party would typically be more prone than the Democratic Party to favor elements of privatization in the delivery and provision of public works projects. Many will recall, however, the acclaimed Washington State program for transportation partnerships, which succeeded in encouraging the expenditure of millions of dollars by a number of engineering, construction, and banking organizations in the pursuit of a series of pro- jects of statewide significance. Unfortunately, infra- structure projects generally extend across the terms of elected representatives. As the state legislature turned from a Democratic majority (that clearly endorsed the program for utilization of private investment) to a Republican majority, the legislature effectively vetoed the program. What remains of the multiproject pro- gram that would have brought billions of dollars of pri- vate capital into Washington State is the Tacoma Narrows Bridge, which will now be done as a tax- exempt project using certain financial innovations but without the financial involvement of the private sector. Unfortunately, there is no executive order in the works for “institutional streamlining.” Regional politics will need eventually to come to the realization that internecine conflict is not good for project delivery. Particularly in cases like SR-91, where each affected political subdivision recognizes and supports the immediate need for increased travel capacity, perhaps it would be advantageous to implement an ombudsman concept under which arbitra- tion by neutral third parties could facilitate political com- promise without local officials appearing to either win or lose. When infrastructure projects become the prize in a political test of wills, the ability to bring the stability nec- 7 3ACCELERATING PROJECT DEVELOPMENT

essary to accommodate financial innovation is often ephemeral. COMMUNITY INVOLVEMENT AND SUSTAINABILITY Closely linked to environmental permitting and local governance is the area of community and public involve- ment. It is virtually impossible in the United States today to enter into the planning and development of an infra- structure project of any significance without suitable and acceptable roles for community groups, special- interest organizations, and the general public. The pub- lic participation process is provided for and facilitated by a huge body of federal and local legislation. Advisory committees, public members of agency boards, and required responses to all input are but a few of the poli- cies and programs that have promoted the key role of citizens in the planning and approval process. Has this role exceeded the bounds of practicality? Short of entering into an open-ended debate, there is lit- tle merit to attempting to answer the question. From a more cynical perspective, the following are the more appropriate questions: • Have we conferred too much power (indeed, in many cases a veto power) on average citizens to affect or even stop the development of infrastructure that a coalition of informed elected representatives has sanctioned? • Has our form of participatory democracy trans- ferred too great a power of assent to nonrepresentative groups or individual citizens, while at the same time allow- ing duly elected officials to shirk their decision-making duty by chanting “let the public speak?” • Have our federal environmental laws facilitated a process that encourages and facilitates capricious litiga- tion by individuals and special-interest groups often simply aimed at delaying or eliminating infrastructure projects rather than providing constructive input to project sponsors? • Should federal law, like many of the state environ- mental laws, have a statute of limitations, which, after expiration, permits no suits, litigation, or other action by the public that could affect the project in ways potentially significant to the financial marketplace? EXPEDITING PROJECT DELIVERY: A CHALLENGE TO THE TRANSPORTATION FINANCE COMMUNITY In our view, there are four keys to fully unlocking the plethora of innovative financial tools available for expediting transportation infrastructure projects: • Stability, • Predictability, • Continuity, and • Acceptability. Aside from forming a clever acronym (SPCA), these four characteristics are the most relevant attributes for projects seeking innovative financing. Simply defined, the characteristics are as follows: • Stability is the ability to trust that multiyear fund- ing commitments pledged for repayment of traditional and innovative financing instruments, such as GARVEEs, SIB loans, and TIFIA credit assistance, will be met with minimized revenue risk. • Predictability is the ability to predict what a pro- ject will cost and when it will be implemented. This minimizes cost risk and implementation risk. • Continuity is the ability to trust that the political will to get a project done will continue across changes in political office—the ability to know that agency deci- sions made will be maintained over the project devel- opment process. This minimizes political risk and its close relative, implementation risk. • Acceptability is the ability to streamline and expedite the process for achieving substantial effective consent (if not consensus) among involved agencies and the ability to have lead agencies function as ombudsmen—or, in the language of the executive order, as environmental stewards—throughout the process. To take best advantage of the executive order in cre- ating the list of priority projects, financial and nonfi- nancial aspects must both be addressed to ensure stability, predictability, continuity, and acceptability. During this period of reauthorization, it is important that we stand back and focus also on the required statu- tory changes and innovations in the nonfinancial aspects of projects that are companion to innovations in financing. Such statutory changes and innovations do not require bypassing the environmental and regulatory process, but rather managing the process to create a more SPCA-friendly environment within which projects can be built. In determining the likelihood of expedited project delivery—whether by using traditional or nontradi- tional financing methods—methodologists could calcu- late an “SPCA index” that could be an indicator of potential success. This requires looking beyond innova- tive finance to focus energy on the political, institu- tional, and regulatory side of the project development process and allowing SPCA to take care of the runts of the litter. 7 4 TRANSPORTATION FINANCE

7 5 RESOURCE PAPER Institutional Framework for Innovative Transportation Finance James T. Taylor II, Bear, Stearns & Co., Inc. One of the purposes of this resource paper is tostimulate discussion of the long-term implica-tions of innovative transportation finance strategies. Are we creating financing mechanisms that will facilitate continued and timely investment in our nation’s transportation infrastructure over the next 40 to 50 years, or are we simply addressing our most pressing short-term capital needs? As a starting point, the following highlights some of the new financing vehicles and partnership structures developed under the umbrella of “innovative finance” and questions where they might be leading us. The second half of the paper examines certain insti- tutional factors that may have influenced the types of financing approaches taken to date or that could inhibit further innovation. By acknowledging and addressing some of the tensions within and among the key players, transportation policy makers may be able to craft more effective strategies for fostering collaboration and increasing the overall level of transportation investment. IMPLICATIONS OF KEY FINANCING INITIATIVES In the late 1980s, with the Interstate highway system essentially completed, the focus of federal surface trans- portation policy shifted from expanding the nation’s highway network to developing a more efficient national transportation system with improved linkages between highways, rail, transit, ports, and airports. This broader mandate has been coupled with a con- certed effort to develop new financing techniques to complement and enhance existing federal grant reim- bursement programs. These techniques can be grouped into four basic “innovative finance” strategies: • Modify rules and regulations governing federal aid to allow states to make more efficient use of existing resources, • Facilitate debt financings that leverage future federal-aid reimbursements, • Encourage development of new toll facilities and other revenue-generating assets, and • Provide state and federal credit assistance to sponsors of eligible projects. Innovative Management of Federal Funds What Is This Strategy Intended to Accomplish? The federal government has traditionally supported the financing of the nation’s highway network by providing grants to reimburse state governments for a portion of the funds they spend on certain types of projects. This basic approach was established in federal legislation enacted between 1912 and 1922 and reaffirmed in the landmark legislation that created the Highway Trust Fund in 1956. Over the years, a complex set of rules and regulations governing the distribution of the federal aid has been established to provide for an equitable apportionment of the funds among the states, to ensure accountability, and to direct or encourage certain expenditures desired by Congress.

Many of the innovative finance initiatives undertaken by the federal government in recent years involve admin- istrative or legislative changes to ease those restrictions. Some of the changes allow states to manage when and how federal-aid reimbursements are obligated. Others broaden the range of options for meeting the nonfederal matching share requirements. Though the changes do not increase the total amount of federal aid available to the states, they create opportunities to expedite certain projects and to leverage state and local resources. Where Is This Strategy Leading Us? The federal funds management tools have been well received (most were actually requested by states under the TE-045 Innovative Finance Test and Evaluation Project) and are generally noncontroversial because they do not create a bias toward or against any partic- ular type of project. In addition, they are relatively easy to implement and usually do not require any legislative action at the state level. The major issue with this approach is where to draw the line. If giving state and local officials greater authority and flexibility in funding transportation is such a good idea, why not reduce the scope of the fed- eral-aid highway program and give the federal taxes on motor fuels back to the states? While that may seem extreme, bills supporting devolution have been intro- duced in Congress. A more likely scenario, though, may be a continuing effort to reduce the federal influ- ence in transportation development. Proposals that may be considered include increasing the minimum guaranteed apportionments to states, collapsing vari- ous funding categories into block grants, streamlining federal environmental reviews, reducing or waiving state match requirements, and eliminating required set- asides for enhancement projects (bicycle and pedes- trian facilities, historic preservation, and landscape and beautification). Debt Financings Payable from Federal Aid What Is This Strategy Intended to Accomplish? Debt is primarily used to accelerate construction of major projects. By expediting construction, states can avoid cost escalation due to inflation and realize the safety and economic benefits of projects sooner. In addi- tion, bonding against future federal-aid reimbursements spreads the cost of a facility over its expected useful life. Although it is probably not fair to say that the fed- eral government is advocating debt financing, it has been a significant enabler. Since 1995, several changes have been made to the federal-aid highway program that facilitate bond financing by state departments of transportation and other recipients of federal aid: • Interest and certain costs associated with issuing debt were made eligible for federal-aid reimbursement. • Restrictions on the amount and timing of advance construction authorizations were eliminated. • Title 23 of the United States Code was amended to clarify that a pledge of federal aid as a source of repayment for a bond issue does not represent a federal guarantee of the debt. • Funding guarantees and budgetary firewalls in the Transportation Equity Act for the 21st Century (TEA- 21) enhanced investor confidence that future federal-aid apportionments can be a reliable source of repayment for bond issues. These changes have led to the creation of Grant Anticipation Revenue Vehicle (GARVEE) bonds, securi- ties that are backed primarily by future federal highway grant reimbursements. Between 1998 and 2001, 10 states issued approximately $5.2 billion of GARVEE- type debt to finance various highway and bridge pro- jects and transit equipment. Several other states are actively considering bonding or seeking legislative authority to issue GARVEEs. Where Is This Strategy Leading Us? Leveraging future federal aid increases reliance on a rev- enue stream that many argue will decline over time with the introduction of alternative fuels and technological advances in vehicle fuel mileage. To date, state legislatures (and rating agencies) have limited the amount and term of the GARVEE-type debt that has been issued. As highway travel demand and congestion increase, however, the temptation to overleverage may be more difficult to resist. The challenge for states is to use bonding in ways that complement other innovative finance initiatives, such as investing in revenue-generating assets. Development of Toll Facilities What Is This Strategy Intended to Accomplish? Interest in facilitating the development of toll facilities reflects a desire to create new revenue sources to sup- port transportation investment by public and private entities. When the federal-aid highway program was created in 1916, Congress explicitly prohibited the 7 6 TRANSPORTATION FINANCE

imposition of tolls on any facility that received federal funds. Exceptions to that policy have been established over the years. Nevertheless, today less than 4 percent of the National Highway System is tolled. In large part, that is because political opposition to tolling existing facilities remains a significant hurdle. No states, for example, have taken advantage of provisions estab- lished in TEA-21 that allow reconstructed or rehabili- tated Interstate segments or bridges to be converted to toll facilities. In addition to using it to generate revenue, there is growing interest in using tolling to manage highway capacity in congested corridors. In response to higher fees charged during periods of peak use, some users will shift to less congested routes or travel times. To support development of value pricing strategies, the federal gov- ernment established a Value Pricing Pilot Program in TEA-21 to provide up to $51 million of support (80 per- cent federal share) for projects incorporating peak-period pricing and related concepts. Where Is This Strategy Leading Us? Successful development of start-up toll facilities requires a unique blend of public and private resources and expertise. To meet the challenge, new public–private partnership structures and financing vehicles were created to facilitate the allocation of risk and benefits. Regional toll authorities such as the Transportation Corridor Agencies in California and the E-470 and Northwest Parkway Public Highway Authorities in Colorado worked closely with private design–build teams to finance and develop their projects. Private nonprofit corpora- tions, created to facilitate access to the tax-exempt markets, secured funding for the Southern Connector project in South Carolina and the Route 895 Connector in Virginia. Although efforts to promote private development of public infrastructure continue (including proposals to create a new class of tax-exempt private activity bonds for toll projects and certain multimodal facilities), state and local governments are increasingly willing to take the lead themselves. As a result, many new toll facili- ties may be developed by using an old model: state and local toll authorities. The Texas Turnpike Authority, for example, recently entered the bond markets to finance a $2.9 billion Central Texas Turnpike system. Georgia, Colorado, North Carolina, and Louisiana are consid- ering the use of existing or new state toll authorities to develop and operate projects. Although the states will likely use some form of design–build, the amount of risk transferred to private entities may be limited. State and Federal Credit Assistance What Is This Strategy Intended to Accomplish? By providing other forms of assistance besides grants, the federal government and states can help project sponsors accelerate construction of certain projects and attract additional investment for transportation infra- structure from local and private entities. Federal credit assistance has the added benefit of being scored for fed- eral budget purposes on the basis of anticipated cash disbursements that may not be repaid rather than the total amount committed. The vehicle for providing credit assistance at the state level is the state infrastructure bank (SIB). SIBs can be structured in a variety of ways, but most are revolving loan funds. As of October 1, 2001, 32 states had entered into 245 loan agreements with a dollar value of nearly $2.9 billion. The South Carolina Transportation Infra- structure Bank initiated approximately $1.5 billion of the total loan activity. Capitalized primarily with state funds (including a share of the state gas tax and truck registra- tion fees), it has facilitated the development of nearly $2.4 billion of projects. At the federal level, credit assistance is provided under the Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA). It authorizes the U.S. Department of Transportation (USDOT) to provide up to $10.6 billion of credit assistance to surface transportation projects of national or regional significance. As of August 2002, USDOT had committed nearly $3.6 billion in assistance to 11 projects, primarily in the form of direct federal loans. The total budgetary cost of providing that support, based on federal guidelines, was approximately $200 million. Where Is This Strategy Leading Us? Most states have experimented with the SIB concept, but few have used it extensively. It is not clear that loan activity will increase if all states are allowed to capital- ize their SIBs with federal-aid funds (TEA-21 only authorized four states to do so), but the consensus is that each state should at least be given the option. It is too early to tell whether TIFIA can be more than a niche program. As noted in the report to Congress on TIFIA, a limited number of projects fit the TIFIA profile, and they typically take 5 to 10 years to secure necessary planning approvals and environmental clearances. There are proposals to lower the minimum threshold for eligi- ble costs from $100 million to $50 million, but sponsors of smaller projects are likely to wait for funding through traditional processes or to pursue a direct congressional earmark. 7 7INSTITUTIONAL FRAMEWORK FOR INNOVATIVE TRANSPORTATION FINANCE

INSTITUTIONAL FACTORS INHIBITING INNOVATION The innovative finance strategies pursued to date have been constrained to some extent by the established roles and relationships among the various institutions involved in developing transportation infrastructure in the United States. The parties (federal, state, and local governments and the private sector) have significant experience in working together to construct projects, so the natural focus of their initial efforts to address trans- portation funding gaps is to enhance approaches to pro- ject delivery. Each party can bring something to the table (more flexible rules, design–build, nonrecourse financ- ing, etc.), and the outcome can be measured in terms of the number of projects advanced or the dollar amount of savings. The challenge facing the transportation com- munity, however, is not how to build projects more quickly but how to develop sustainable sources of fund- ing for transportation investment and partnering with relevant stakeholders to address mobility issues. To that end, the following discussion attempts to highlight some of the institutional dynamics that may need to be addressed before more beneficial change can occur. Federal Government Does Not Develop Projects With the exception of certain roads on Indian reserva- tions, in national parks, and on other federal lands, the federal government does not build, own, or operate spe- cific projects. Therefore, despite billions of investment, there are no federal transportation assets to sell or secu- ritize. In addition, the federal government does not ini- tiate projects, and it is not considered the logical sponsor for private transportation concessions. As a result, private companies interested in playing a signifi- cant role in U.S. transportation finance must pursue opportunities in several states to find projects of suffi- cient scope and number to justify a major commitment of resources. Potential strategy: Assign development responsibility for a “megaproject” of national significance, such as truck tollways or North American Free Trade Agreement superhighways, to the federal government. USDOT could outsource most services and would work closely with state and local partners. Federal Transportation Policy Is Influenced by Many Competing Interests Transportation issues affect every individual and business, so a number of entities effectively have standing when it comes to federal transportation policy, including the Departments of Treasury and Labor, the U.S. Environ- mental Protection Agency, and the Office of Management and Budget. As a result, some innovative transportation finance proposals are never fully considered. The follow- ing are among the issues that face continued resistance and debate: • Increasing federal motor fuel taxes; • Issuing debt at the federal level for transportation purposes; • Using general fund resources to fund transporta- tion; • Allocating federal transportation funds on the basis of need or the level of effort put forth by each state to finance its infrastructure; • Limiting the amount of congressional earmarks for specific projects; and • Easing requirements related to environmental, labor, and other social objectives. Potential strategy: Build strategic coalitions with tra- ditional opponents of innovative finance proposals and directly address their issues, such as double taxation and urban sprawl. State Departments of Transportation Caught in the Middle Standards and performance measures for the traditional services provided by state departments of transportation are well defined. In addition, several processes have been established to ensure accountability, such as competitive bidding and program audits. As the missions of state departments of transportation expand and new services are added (innovative finance, intelligent transportation systems, etc.), similar “institutionalization” must occur. The following are issues related to transportation finance: • Negotiating the appropriate level of public subsidy for project financings, • Managing noncompete provisions and other poli- cies designed to facilitate private development of infra- structure, • Developing standards for “best value” procurements, • Designing projects to maximize revenue, • Selecting which projects are developed in-house and which can or should be done privately, • Managing various intermediaries (consultants, bankers, lawyers, etc.) involved in project financings, • Building public involvement and support for inno- vative finance initiatives, and • Facilitating the sale and purchase of public infra- structure projects. 7 8 TRANSPORTATION FINANCE

Potential strategy: Create a standing advisory com- mittee with broad representation from various trans- portation interests to help identify and evaluate relevant policy issues. Local Resistance to Innovative Finance Initiatives It is difficult for local communities to evaluate and build consensus on whether a tolled project delivered in 3 years is better than a toll-free facility delivered in 10 years. Similarly, there is no incentive for localities to understand or accept that transportation resources may need to be distributed unequally to address mobility issues in different areas of a state effectively. Potential strategy: Create financial incentives that reward locally developed transportation solutions. The opinions expressed in this resource paper are those of the author and do not represent the views of Bear, Stearns & Co., Inc. 7 9INSTITUTIONAL FRAMEWORK FOR INNOVATIVE TRANSPORTATION FINANCE

8 0 RESOURCE PAPER Finance and the Visible Hand of Technology Joseph M. Giglio and Daniel J. McCarthy, Northeastern University Finance is about more than just money. This is notan easy sentence to say with a straight face, norone that many people necessarily will believe. Obviously, money is important, since how much we have determines how much we can build and how well we can manage the assets we have. The consensus is that money will be harder to find for TEA-3 than for TEA-21, a result of improving fuel economy, slower economic growth, higher oil prices, a tighter federal budget, and perhaps some resentment over the success achieved 6 years ago. This implies that we need ideas that involve more than changes to our current financial toolbox. Such changes, in turn, may open the door to approaches that go beyond the tradi- tional broad-based user fees, with or without some leveraging. My discussion today will not solve any immediate problem, but it could help with the next big piece of legislation—TEA-4? BACKGROUND How we raise money affects what we do and how well we do it. I am not just talking about Transportation Infrastructure Finance and Innovation Act versus federal apportionments or one flavor of Grant Anticipation Revenue Vehicle bonds versus another. Rather, the issue relates to the fundamental economic linkages between prices and service quality. Put another way, in the best of all worlds we should be able to generate funds in ways that encourage better service and operating efficiency as well as ways that provide an adequate level of funds. This sounds a lot like what a successful private-sec- tor business does—simply provide a useful service, control costs, and generate enough money to cover capital and operating costs as well as a return for future investment. Finance is really about prices. In the private sector, prices reflect the quality of the product sold or the value of the service provided. That is, the amount of revenue a firm books relates directly to the quality of the service that it provides relative to that of its competition. Feedback between quality and the amount of busi- ness a firm receives can be rapid, particularly in busi- nesses that deal directly with the retail customer. This is often very personal. We all have been asked by our waiter or waitress about the quality of our meal—and may even have had an entrée dropped from the bill if we expressed dissatisfaction. How often has the state secretary of transportation or the district engineer asked us if we were satisfied with our daily commute, let alone offer a refund as a sign of a commitment to improve? This process is part of what Adam Smith termed “the invisible hand” that balances supply and demand and thus shapes the economy. While highway finance has long relied on a set of broad user fees or benefit taxes, these reflect long-term values rather than near-term ser- vice quality. As long as the level of highway revenues bears at best an indirect linkage to the quality of service received by the public, we will be forced to work with a very “visible hand.” Intelligent transportation system (ITS) and telematics technologies may offer a way to make the idea of a visible hand practical.

In sum, I believe that there is an interaction among finance, technology, customer service, and the manage- ment of departments of transportation (DOTs). If we look at finance alone, we risk continued frustration— and a transportation system that fails to meet our eco- nomic and social needs. If we work to improve management alone, we miss using one of the more effective tools for efficiency and customer satisfaction. To set the stage for this argument, I will address two trends that are broader than finance itself: first, the move by secretaries of transportation and many other transport administrators to emphasize their role as man- agers of a business, and second, changes in technology that make it possible to measure highway performance directly. MANAGEMENT Today, the most imaginative DOT leaders think and act as if they are running a business—indeed, most state secretaries of transportation now call themselves CEOs rather than CAOs or chief administrative officers. This has generated interest in new management techniques and approaches. For example, asset management is now a hot topic, albeit one that remains dominated by engineering-based techniques and measures rather than financial measures and economic efficiency. Asset management offers promise, but few systems have been implemented that examine assets the way a private enterprise would. One reason is simply that our surface transportation systems do not operate in a free market. Our ability to generate a breakthrough in this regard could take one of two paths: 1. Direct competition. To be effective, this needs to be more than transit versus highways, since it is tough to have competition when one entity has 95 percent of the market and its competitor 5 percent. Thus, despite the ideological appeal of public–private partnerships, we are unlikely to have more than one DOT per state. 2. True measures of performance. If real competi- tion is unlikely, then at least we can try to improve our measurement of service. Once we measure the perfor- mance of the highway system on a consistent and rou- tine basis, we can start to develop a pricing system that sends market signals to travelers and providers alike. Because there is no true competition for local high- ways and transit, there is no incentive to develop true measures of customer satisfaction or system perfor- mance. How do we do this without the invisible hand of the marketplace? Perhaps we can use technology to create a smarter visible hand. This will never replace the elegance and effectiveness of Adam Smith’s invisible hand, but a good second best is much better than what we have now. Transportation depends on assets, but this emphasis ignores the routine economic and social values that it provides. For example, while volume–capacity ratios and levels of service provide one measure of congestion, the consumer of transportation services probably relies on a much more basic measure: Did I get where I want to go on time? Or more broadly, what fraction of peak-hour trips arrived on time this morning? What fraction of sup- ply chain shipments arrived on time? This is similar to measures used by the airline industry today. Again, this requires a direct and personal measure of highway per- formance—something that a vehicle-oriented technology might provide. TECHNOLOGY Technology refers to human knowledge about products and services and the way they are made and delivered. This is a fairly broad definition and is certainly relevant to the surface transportation industry. Advances in technology can dramatically alter the surface trans- portation industry’s landscape. They make it possible to produce new and better service at lower cost and help create new revenue sources. Technology also offers a possible way to measure direct performance. Certainly one dream of the ITS community has been roadway sensors that make it pos- sible to know traffic speeds on all roadways, all the time. Such information could then be used both to manage the system better and to provide information to the travel- ing public. In reality, over the past dozen years the pace of deployment has been glacial, with only 22 percent of urban expressways having sensors of any kind by 1999 and fewer than 10 percent of major arterials (Figure 1).1 In recent years the rate of growth has rocketed to 3 per- cent per year—which means that the problem will not be solved in my lifetime. As Phil Tarnoff from the University of Maryland points out,2 advances have been made that include the following: • Sophisticated side-fire radar detectors capable of providing traffic flow data by lane; • Video imaging that can now provide reliable measurements of traffic speeds, counts, and queues; 8 1FINANCE AND THE VISIBLE HAND OF TECHNOLOGY 1 Tarnoff, P. J. Getting to the INFOstructure. Prepared for TRB Roadway INFOstructure Conference, Aug. 2002. 2 Tarnoff, P. J. Getting to the INFOstructure. Prepared for TRB Roadway INFOstructure Conference, Aug. 2002, p. 7.

• Cellular geolocation technology with the capabil- ity of tracking individual vehicles to measure their speeds and travel times; • Tracking of vehicles with toll tags to measure speeds and travel times; • Tracking of vehicles through the use of license plate readers that measure speeds and travel times; and • Development of systems of instrumented probe vehicles that use the Global Positioning System for posi- tioning and other sensors to measure travel speed, weather, and pavement conditions. Frustration with the slow pace of deployment despite the range of technical solutions has led to some new approaches. The U.S. Department of Transportation’s INFOstructure plan, for example, calls for a nationwide network of traffic sensors and video monitors. On the one hand, this is ambitious and offers benefits for Homeland Security. On the other hand, the cost is high ($5 billion has been mentioned), and the plan faces a problematic future in our new world of growing budget deficits. It also represents a continuation of existing technologies, just with a fixed schedule and more funds to back them. Technology, however, can also develop along nonlin- ear or divergent paths. These types of changes are hard to foresee, in part because many fail or remain dormant until the time is right. When they do occur, they can cre- ate a chain reaction of changes well beyond the immedi- ate area of focus. Examples abound in our daily lives, with the most obvious coming from the Internet, wireless communication, and the personal computer. Examples from previous generations include the automobile, jet aircraft, the Interstate highway system, and so on. While progress continues, transportation technology has yet to see such a breakthrough. Within the world of traffic sensors, we may be on the verge of a nonlinear shift. This revolution will be based on vehicle-based sensors rather than those reporting from specific points along the highway infrastructure. Floating car data and vehicle probes appear more pow- erful and cost-effective than fixed, infrastructure-based sensors. Vehicle-based sensors offer several advantages: • They provide a direct measure of performance as seen by the roadway customer, rather than measures inferred from volume–capacity ratios. • They can do this across all roads in all parts of the country at the same time. • They can provide measures that are consistent from road to road and from city to city. • They provide geographic detail that can be reshaped to meet a variety of public and private purposes. Such data, in turn, will support most traditional traf- fic management activities. Because of the direct link with roadway performance, they also provide the foun- dation for a profound shift in transportation manage- ment. This has implications for such activities as day-to-day management, financing, and emergency sup- port. The same data provide the long-sought informa- tion needed by the traveler information portion of the telematics industry. It may even be possible for more than one of these firms to make money! Vehicle-based sensors are well along the develop- ment path. Floating car data systems exist on small scales in Europe. OnStar in the United States has units in some 3 million vehicles. These represent more than 1 percent of the nation’s fleet—which should be enough to estimate travel speeds by roadway link. Of course, a number of communication and financial issues need to be resolved before this becomes commercial reality. At the same time, some 600,000 commercial vehicles already have tracking equipment as part of the fleet management industry, with Qualcomm the leader. Other systems propose the use of cell phones as data probes to provide location, speed, and acceleration information. Progress is being made in enforcing the Federal Communications Commission’s E-911 mandate to convert the nation’s 100 million cell phones into probes, although this process is well behind schedule. As one example, the British firm ITIS Holdings has deployed a floating vehicle system that converts high- mileage vehicles into probes and provides regular reports on more than 8,000 miles of motorway and major arterials in the United Kingdom. Commercial customers include the British AA, BMW, and OnStar. Other than this, no vehicle-based system has been deployed on a significant scale. All have one or more problems to resolve, most of which are finance-related. But the time is right for a new way to collect traffic data. The technology exists, and several commercial enterprises have begun to deploy their networks. Vehicle-based systems will support activities and busi- 8 2 TRANSPORTATION FINANCE 1990 1995 2000 2005 2010 10 20 30 40 50 Insta lled Optimistic Projection Pessimistic Projection 6% in 1990 16% in 1997 22% in 1999 55% in 2010 44% in 2010 Year % U rb an F re ew ay M ile s In st ru m en te d FIGURE 1 Percentage of urban freeway miles instrumented.

nesses well beyond traditional traffic problems. How might the public sector play a role in this movement, and what implications might this have for how we manage and fund transportation? IMPLICATIONS If, through some bizarre twist of fate, I were named benevolent transportation czar, I would want to manage and fund my transportation system a bit differently. I would take a lesson from the best of the private firms and set a big hairy objective. Why not work so that all important trips are completed on time—or at least bet- ter than the airline industry? Such an objective would have implications for a very different transportation sys- tem, both in how it is managed and in how it is funded. What might such a transportation system look like? • Part of this would involve having information on system reliability that could be communicated to trav- elers in advance so that they could manage their own travel. I am not naive enough to believe that this would cause people to shift modes, but they could –Change the time they travel, –Shift routes to take full advantage of available capacity, and –Call ahead to minimize disruption. • Part of this would mean that I would manage my system to a preset performance standard: –Average speeds better than 50 mph, for example; –All routine maintenance and construction work in off-peak hours; and –All incidents cleared in X minutes, and so forth. • Part would involve a more personal relationship with the traveler. I would even go so far as to provide rebates if performance standards were not met. Again, technology in the form of transponders offers a direct way to implement a “money-back guarantee.” • Part would involve knowing the relative value of a timely trip completion (just-in-time inventories provide a direct example for freight). • Part would involve direct cooperation with cer- tain major transportation customers, ranging from sporting events, to job locations, to individual indus- tries. This knowledge would provide a source of money (as shown by the use of variable tolls on SR-91 and the San Diego high-occupancy toll lane to ensure a given quality level). It would also require direct cooperation between the transportation provider and its customers. • Part would involve a different set of internal stan- dards for district engineers. For example, knowing that it was possible to measure the average speed for the morning or afternoon commute would change the incentives for the district engineers. The British high- way authority already does this when it outsources maintenance work, with part of the compensation dependent on the lack of congestion as measured by the amount of time that design speeds are met. Let me return to the finance question once again. Today, highway travelers in the United States pay a low average rate—only pennies per mile traveled. This is much less than the 35 cents per mile that it costs to own and operate their vehicles. Financing is based on the long-term average cost of highways, with a correspond- ingly average quality of service. The ability to provide high-quality service begins with the ability to measure performance, but it allows a price that more closely reflects the value of the completed trip. The technology to measure highway performance on a link-by-link basis also opens the door to a host of financial and performance initiatives. This creates the opportunity to unleash some of the creativity and man- agement techniques that the invisible hand of the mar- ketplace stimulates in other industries. The gains from this could occur along several dimen- sions. While only one of these changes has a direct link to increased funds, each should improve the financial health of the transportation agency. The following are examples: • Improved customer satisfaction. Most travelers take traffic for granted as something imposed on their daily lives, much like the weather. Direct measurement of highway performance will permit a host of changes that will show that the DOT cares—money-back guarantees in case service is poor. • Improved day-to-day management. Most DOTs rely on important but indirect measures. A more direct set of measures—such as average speeds during the morning commute—will result in improvements. • Increased revenues. Higher-quality service is not free. The technical ability to charge travelers more when the service is better (the flip side of a money-back guarantee) will generate more resources. This will be independent of automobile fuel economy and the motor fuel tax in general. • A more efficient economy. The combination of performance measures related to travel times by indi- viduals and corporations and financial incentives to encourage improvement should also improve economic productivity. The rapid progress in the development of these tech- nologies sets the stage for providing better service to the surface transportation industry’s customers. Yes, cus- tomers. Not motorists or travelers or taxpayers but cus- tomers. The distinction is key if you want to pursue performance pricing successfully. If you are going to be 8 3FINANCE AND THE VISIBLE HAND OF TECHNOLOGY

successful in running surface transportation systems in an efficient way and charge fair prices for using the ser- vice, industry management must develop a service ori- entation and consider those who use surface transportation systems as customers first and foremost. The customer is someone who is a willing buyer of what you have to sell at the particular price you are charging. What makes someone a willing buyer? The judgment about whether the value to him or her of what you are selling is greater than the price you are charging. The goal of creating customers is just as important for public entities as it is for the private sec- tor. How do you create customers? By heightening the perception that what you are selling is worth more than the price you are charging. You can do this in the surface transportation industry by using these new technologies to improve the quality of what you are selling. 8 4 TRANSPORTATION FINANCE

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TRB Conference Proceeding 33--Transportation Finance: Meeting the Funding Challenge Today, Shaping Policies for Tomorrow summarizes the Third National Conference on Transportation Finance, held October 2002 in Chicago, Illinois and includes committee findings and recommendations developed largely on the basis of information presented and discussion held at the conference. The conference examined new transportation infrastructure and operations financing mechanisms, their structure, and the benefits and costs of implementing such techniques; and explored the development of additional new funding mechanisms and sources.

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