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6 Funding Issues The port dredging stalemate results from a complex and interacting set of factors. Three barriers to new construction dredging or increased maintenance dredging are regularly identified: (1) lack of national funding, (2) institutional problems, and (3) environmental problems. This chapter addresses the first barrier. As discussed in Chapter 3, since 1824 the U.S. Army Corps of Engineers has had primary responsibility for both new construction and maintenance dredging of ports in the United States. Until 1970, there was a consensus that dredging would be paid for from general U.S. Treasury revenues. Beginning in the early 1970s, that consensus on funding began to unravel. Prior to the 1970s, struggles over port dredging occurred primarily in the context of the annual congressional appropriations process. The primary issues that had to be resolved each year concerned the level of appropriations and which ports should receive construction funding. Since 1970, the struggle over dredging has experienced a fundamental change. At issue now is whether additional new construction dredging is needed, and if it is, what the source of funding should be. No agreement exists about why the traditional consensus on funding came to an end. Four factors, however, are repeatedly identified as contributing to the erosion of the legislative consensus that funding should come from general revenues: the federal budget deficit the high cost of new construction dredging (and possibly increased maintenance dredging) problems of initiation after a long stalemate changing social values and attitudes These four factors are discussed in the succeeding section. FACTORS CONTRIBUTING TO THE FUNDING STALEMATE The most frequently identified factor in the funding stalemate is the growing size of the federal budget deficit. Starting in the 1970s and 59

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60 continuing into the 1980s, concern with deficits was driven, in part, by the unpredictable performance of the national economy. With declining confidence in the economy's ability to sustain predictable rates of growth, it was no longer possible to assume ever-growing tax revenues. In parallel, so-called nondiscretionary activities in the federal budget manifested a pattern of seemingly uncontrolled growth. One consequence of these two patterns was a growing concern with a future of large and rising budget deficits. In this environment, categories of federal expenditures that were perceived as being discretionary received increasing congressional attention. In the eyes of many, water-resources projects are seen as among the most discretionary of federal expenditures. Unlike the entitlements programs (e.g., Social Security) which require positive governmental action to achieve cuts, all that is necessary to achieve reductions in expenditures is inaction. By the late 1970s and early 1980s, appropriations for these projects were increasingly being handled by Congress with continuing resolutions. Under continuing resolutions federal agencies are allowed to continue spending for ongoing programs at the previous year's rate, but no new construction initiatives are possible. With arrival in the early 1980s of projected budget deficits of $200 billion per year and more, the prospects for finding majority support in Congress for major new water resources projects became even more doubtful. In this context, the second factor contributing to the funding stalemate--the high cost of many proposed construction dredging projects, takes on increased importance. Table 13 (Appendix G) suggests the magnitudes of these costs. Note that five of the seven largest ports (in tons handled) have proposals for new construction dredging. Estimates by the Corps of Engineers for each of these construction projects range from $371 million to $479 million. In a context of large deficits, new project initiatives of this size have raised serious questions. Although the Corps' benefit-cost analyses for each of the projects show a positive benefit-cost ratio, these new projects require additional appropriations, and therefore, they represent absolute increments in the federal deficit. A third factor frequently identified as contributing to the funding stalemate is self-amplifying. The longer the funding stalemate continues, the more difficult it becomes to reinitiate the old process. A brief recapitulation of the traditional time sequence associated with port dredging is useful in clarifying this third factor. New construction dredging projects completed during the 1970s were regularly initiated 20 years earlier. Although there was widespread criticism of the long lead times required, they had significant benefits for the traditional, congressional funding process. First, the funding costs were spread over many years, so the costs for any individual project for any given year were relatively low. Second, project costs started at very low levels and incrementally increased, so that the high costs were incurred at the end of a long period. Little opposition could be mobilized against the low dollar

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61 expenditures associated with initial feasibility studies which themselves might be spread over several years, and so it was with initial design study costs. By the time initial construction costs were called for, a different and seemingly powerful logic had intervened. It was two-fold. First, "This project has been studied and reviewed over a very long period of time and repeatedly found to be justified." Second, "It would be a substantial waste to have invested all of these initial funds and not complete the project." Given the expectation that authorization of a major new construction dredging project involved long years, individual ports were accustomed to an incremental process. So long as the expectation was that new construction dredging would ultimately be authorized but would inevitably take long periods of time, the mechanism for quid-pro-quo negotiations existed in the congressional appropriations process. Coalitions for support of individual projects could be built up in Congress based on the assumption that "if you support my beginning this year, I will support your beginning next year...or at some future date." The long incremental authorization and funding process, on the one hand, never provided any port with all it wanted, but on the other hand, provided most ports with some of what they wanted on a consistent basis. Most years, ports could expect that some incremental step would be taken toward satisfying their ~ aspirations. After more than a decade in which no significant new construction dredging has been initiated, the expectations of the various ports are very different. Rather than new construction proposals entering into an ongoing stream or process of authorization and appropriations, a number of major port construction projects are lined up together at the starting gate. With future funding uncertain, there is little incentive for any port to agree to be anything other than first out of the gate. In sum, the port community no longer appears capable of presenting a common front on priorities to Congress. Finally, many believe that the erosion of the consensus on how ports should be funded is, in part, a reflection of changing social attitudes and values. This argument suggests that opposition has grown to "big government" and to governmental activities which are perceived as using general tax revenues to benefit narrow economic interests. One response to the concern with "big government" is that many governmental activities would more appropriately be carried out in the private sector. Such ideas are reflected in proposals that call for the private sector to take over some of the services provided by the U.S. Weather Service. Where it does not appear feasible to transfer activities completely to the private sector, proposals are made to introduce market-like control mechanisms into the public sector. These views are summarized in a letter from five prominent economists to the chairman of the Senate Environment and Public Works Committee (October 18, 1983~: "new or increased user fees for ports and inland waterways, market-based pricing for hydroelectric power..., and increased cost sharing and financing by non-federal entities for all federal water resources" would "lead to a more rational federal water resources

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62 policy....Economists have shown that economic benefits are enhanced when a project's beneficiaries pay in accord with the costs they impose and the benefits they receive." The concept is generally reflected in proposals for raising port dredging money with user fees. These considerations, and others, have contributed to the demise of the consensus in Congress that general funds should be used to fund port dredging. What appears clear is that before new dredging programs can be undertaken, the old consensus must either be reestablished or a new method of funding must be found. The rapid rise in coal exports from the United States in 1980 resulting from the combination of the Iranian oil disruption, political difficulties in Poland and labor problems in Australia, together with the backlog of proposed port projects gave major impetus to the search for a new funding consensus. NECESSARY ELEMENTS FOR CONSENSUS Before a new funding consensus can be established for port dredging, and therefore, before stability can be returned to the port funding process, five interrelated issues will need to be resolved. First, formula must be established which determines who will pay for dredging. At its most general level, this choice involves deciding whether, and if so, what portion of funding will be paid for from general tax revenues. If that portion is anything less than 100 percent, then a determination will have to be made concerning who will be required to pay and what mechanisms will be used to collect the funds. Second, it will be necessary to determine who will collect the revenues. Revenue-raising responsibility can either rest totally with the federal government, totally with individual ports, or it may be shared. Shared responsibility ("cost sharing") implies that some portion of the revenues will be raised by the federal government and some portion by the individual ports, with an obviously important issue being what the relative portions are. Third, any new consensus that changes the arrangements concerning who pays for dredging and who collects the revenues will likely be connected with new arrangements for revenue allocation. The traditional process of congressional negotiations associated with annual appropriations bills will be questioned if such changes occur. Depending on how revenues are raised and who raises them, the payers and collectors of these revenues will likely insist on a process that assures a return on investment in a rapid manner that at least partially assures that major payers will be the major recipients of the benefits. Fourth, any changes to the above three sets of arrangements have the potential for changing the management and implementation role of the U.S. Army Corps of Engineers. For example, if the choice were for individual ports to raise all of their own funds for dredging, or a significant portion, it is quite possible that the individual ports would seek to exercise management control.

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63 Finally, the evolution of a new consensus on port funding will doubtless require modifications in, at a minimum, existing permit approval processes. These processes apply to the dredging projects initiated by ports (or other local interests) that the ports will fund. Most proposals for federally funded new construction dredging will involve port-funded dredging as well, and depending on the funding mechanism finally selected, the permit process could take on added importance or replace the Congressional process. The ports have in recent years pressed for changes in this process, arguing that it is indefinite and without fixed limits (see Chapter 7~. If required to raise and spend more for port dredging, the ports will likely demand more certain time horizons for investment decisions. The goal will be to accelerate the approval process and for that to occur, both legislative and regulatory changes may be necessary. FUNDING ALTERNATIVES Three options are possible as funding sources for dredging. The first, the traditional source, is general fund revenues. The second makes use of existing revenue sources at individual ports. The third involves new federal authorization for levying user fees or specialized taxes. In this latter connection, the right to levy user fees or other specialized taxes could be given either to the federal government, or to the individual ports, or to both. GENERAL FUND REVENUES Although proposals aimed at finding a new consensus on funding range across the spectrum, only one, the Reagan Administration's 1982 proposal, would totally eliminate general fund revenues as a source. However, if precedent is in any sense suggestive, the likelihood is high that general fund revenues will continue to pay some portion of dredging costs. For example, in 1982, according to the Energy Information Agency, slightly over half of the $23.3 billion in federal expenditures for transportation came from general fund revenues (Energy Information Administration, 1983~. Of that amount, roughly $337 million was expended on U.S. Army Corps of Engineers operations and maintenance dredging at ports. Based on the transportation precedent and the fact that, with the exception of the Reagan Administration's, all of the legislative proposals aimed at breaking the funding deadlock have included general fund revenues, it appears likely that any new consensus on funding will involve general tax revenues covering a portion of dredging costs. PRESENT PORT REVENUES Although some proposals aimed at breaking the funding deadlock have involved a combination of general fund revenues and revenues raised

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64 through new federally authorized user fees, one option is to leave the ports dependent on only those revenues that they could raise under authorities now available to them. Ports have various sources of revenue. They range from wharfage and warehousing charges through revenues from non-port activities in those instances where port authorities operate airports and commercial properties, to state and local tax revenues. The capacity of ports to fund new dredging varies greatly depending on the volume of cargo they handle, the range of funding they have available, and the costs of both construction and maintenance dredging. At one extreme are ports such as Los Angeles and Galveston, which faced with the present stalemate, are prepared to pay construction dredging costs. Los Angeles recently completed deepening of the harbor (in connection with federal dredging of the authorized project) to depths ranging from 45 ft to 51 ft at a cost to the port of $37 million. Galveston is committed to deepening its port to 56 ft at a cost of $139 million. The Port Authority of New York/New Jersey has indicated to Congress that it is willing to advance the $110 million cost of a channel- deepening project, if assured of an expedited permit-approval process. By comparison, "Baltimore continues to insist on 100 percent federal funding for its project because it is the only port authorized to be deepened with federal funds" (Energy Information Administration, 1983). At the other extreme, many small ports indicate that they are without the capacity to pay the costs of new dredging. A review of public statements by ports indicates that with very limited exceptions, some ports are either unwilling or incapable of paying for either routine maintenance dredging or new construction dredging until some new consensus has been formalized by legislative action. Considerable variation exists concerning the ability of ports to pay all or some share of routine maintenance dredging and new construction dredging. How ports are organized and how they perceive their roles influences the rates they charge for port services. Some, for example, are partially supported by state or local revenues, owing to their importance in local and regional economies and their competitive status with other nearby ports. Other ports contribute revenues to state or local governments. The range of port charters and institutional identities represent various interpretations of their mixed public- and private-sector nature. Ports vary in the degree of control exercised by state or local governments, and ports have differing recourse to state and local bond issues (as indicated in a succeeding section). Reviewing the existing rates levied by various ports in the United States (or charges they are now allowed to levy by federal law) evidences these disparities. Wharfage charges per ton of general cargo average $3.50 to $4.00 on the West Coast; $1.00 to $1.30 in the Gulf of Mexico, and $1.45 to $1.65 on the East Coast. Land leases and other port charges exhibit a comparable range. Because the range of costs among geographical regions in land, labor, and construction are not as great as the range of port charges, the principal reason for the remaining disparities would seem to be institutional differences.

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65 USER FEES New federally authorized user fees have been the most frequently proposed vehicle for building a consensus on funding. Substantial precedent exists for establishing port user fees as revenue sources. As previously noted, slightly less than half of the $23.3 billion expended by the federal government in 1982 for transportation was provided by user fees. A user fee in the form of an excise tax on motor fuels provides the revenues for the Federal Highway Trust Fund. Taxes on passenger tickets and other items provide the revenues for the Airport and Airway Trust Fund, and beginning in 1980, the Inland Waterways Trust Fund began receiving revenues from a fuel tax levied on barge operators. (The Inland Waterways Revenue Act of 1978 established a fuel tax of 4 cents per gallon of fuel for 1980, and 2-cent increases every 2 years ending in 1986 at 10 cents per gallon of fuel. Revenues in the trust fund are for new construction and major rehabilitation--e.g., of locks--on the inland waterways, but not for routine operation or maintenance.) In its 1982 budget submission, the Reagan Administration sought to eliminate the use of general fund revenues for dredging and replace them with funds raised through new user fees. Under the Administration's proposal, port user fees (together with inland waterway user charges) were expected to raise $2.1 billion in revenues over the 1983 to 1986 period (Office of Management and Budget, 1981~. As interpreted in an Energy Information Administration (1983) report: The Administration's proposal was aimed at removing the federal subsidy from navigation programs, reducing the growth in federal spending, and moving toward a balanced budget. Besides reducing federal budget deficits, the justification for user fees rests on the efficient and equitable allocation of limited federal funds. In this argument, a user fee system becomes an efficient market test whereby only economically viable projects are selected out of a multitude of proposals. Port development yields significant benefits to port users who are not only able to pay but should pay for the benefits. User fees ease the burden on federal funds thus promoting more efficient and equitable allocation of these limited funds among competiting purposes. As noted in this statement, the Administration and other advocates of user fees attribute three distinct advantages to them: (1) new revenues, (2) economic efficiency, and (3) economic equity. Faced with growing budget deficits and general resistance to increased taxes, governments at all levels in the United States have moved toward broader use of user fees. User fees offer the advantages of increased revenues while at the same time mobilizing minimum opposition. By tying user fees to the delivery of specific goods and services, payer opposition is diluted since the payers are also the beneficiaries. User fees are particularly efficacious revenue-raising

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66 instruments when the payer-beneficiary perceives a strong need for additional goods and services and is faced with the choice of either paying a fee or not receiving the needed good or service. Such appears to be the situation for those interests pushing vigorously for additional dredging. In theory, user fees are most attractive when they are levied such that the interests with the most pressing need pay the highest fees. In practice, however, that formula usually must be modified to take into account the capacity of the payer to pay. Part of the burden may be allocated to a broader set of users at high- value or high-volume ports (or both) without vigorous opposition if the absolute cost per ton or per dollar represents a small or insignificant addition to existing costs. However, even though the absolute cost per ton or per dollar may represent only a small addition to a large port's charges, it is very difficult to convince the larger ports (and their users) that they should be paying an amount in excess of that required for their own new construction or maintenance dredging if the surplus is funding the dredging of another port or ports. While specific commodities have been the focus of some proposals for new construction dredging, it must be remembered that all coastal ports compete with one another for general cargoes (OCP, or "overland common-point" cargoes). Second, some advocates of user fees explain their support by arguing that such charges provide the public sector a vehicle for simulating market-like allocation decisions. That is, user fees, appropriately formulated, are said to bring standards of economic efficiency into public sector choices. Where users are required to pay the full costs for public goods and services, fees provide users with accurate information with which to evaluate their options. For example, if shippers are required to pay both the full cost of port deepening and the full cost of lightering/topping-off, they will choose the most economically efficient of the two options. If that were topping-off, the pressure for some dredging needs would presumably no longer exist. In a similar vein, user fees are said to provide public managers with information which will allow them to evaluate both the quantity and the quality of the goods and services they provide. In theory, then, appropriately formulated user fees would ensure adequate port capacity while at the same time protect against excessive capacity. Third, user fees are advocated as vehicles for achieving equity. In theory, user fees require those interests who benefit from public goods and services to pay in proportion to the degree they receive benefits. Alternatively, those who don't benefit don't pay. In practice, establishing systems which achieve the stated benefits of user fees has turned out to be extremely difficult. In the case of port dredging, some interests simply reject the notion that standards such as efficiency and equity should be applied. Quite clearly, efficiency and equity standards applied in any pure form would have the result of closing certain ports. Where user fees threaten the existence of a port, efficiency and equity arguments have little appeal.

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67 An additional complication is the wide range of differences among the ports of the United States in physical characteristics. Those having naturally deep water and those having lower maintenance dredging requirements than other ports are opposed to user fees, particularly if these fees are assessed on a nationally uniform basis. Thus, the principle of those receiving the benefits paying the bill cannot be actualized through a uniform nationwide fee. For example, the Congressional Budget Office (1983) estimates that a system of full cost recovery from user fees for small ports (less than 100,000 tons per year) would require those ports to charge a user fee of $90 per ton to recover all the costs associated with operations and maintenance dredging now provided by the Corps of Engineers, but for large ports (over 10 million tons per year) the charge would be $.20 per ton. Even where there may be agreement in principle to the application of efficiency and equity standards, there is seldom agreement on the data base that should be used for calculating dredging needs and the establishment of a user fee system. First, in the case of new construction dredging, a central justification is always based on some projection of future need or opportunity. That, in turn, rests on projections of the future growth of the world economy and future trade patterns. We've already noted that there is little agreement to be found on these projections. What is clear is that if user fees were required to pay the full cost of construction dredging, they would likely be high at the beginning of the period of amortization and decline over time as the volume or value of cargo over which they were distributed grew. If the user fees are high on a per unit of cargo basis at the beginning, however, that may have the effect of diverting cargo to other, lower-cost ports, and the projected volume would never be achieved. There are other practical matters that weigh against the application of users fees to specific beneficiaries. Ports that have a number of terminals essentially in competition with one another as well as with terminals in other ports are already faced with equity problems in port pricing. As a general example (exclusive of cargoes handled), if a port has two similar terminals, one constructed 15 years ago and one constructed in today's market, the first may have been built at a total construction cost of $10 million and the second at $50 million. The difference in dollar amounts may provide a 5 percent to 10 percent increase in efficiency; that is, the difference in cost is greater than the difference in efficiency or cargo-handling capability. The terminal operator in the 15-year-old terminal is operating from the facility that has been amortized, but the operator in the new facility has $40 to $50 million to amortize. In practice, this essential difference in the competitive status of the two operators is resolved by the port: the port's demands for funds to support operations, maintenance, and development are calculated and distributed as equitably as possible over all competing terminals. As a result, the operator of the 15-year-old terminal pays somewhat more and the operator of the new terminal somewhat less than their respective amortization costs. An analogous situation would be

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68 created by new construction or maintenance dredging if the port pays the costs. It is not unlikely that if user fees for a deeper channel or other facilities and associated terminals are assessed to only the users of these facilities, the economic justification for the projects will appear questionable. Another issue of controversy revolves around the question of whether the users are the primary beneficiaries of dredging. The user fee concept rests on the assumption that the primary beneficiaries are the identifiable users of a publicly provided service. In the case of dredging, proposals for user fees generally call for a levy against ships. Shipping interests regularly argue that these proposals require them to carry the revenue burden for dredging, while in fact there are many other beneficiaries. Some economic analyses argue that in the case, for example, of coal exports, railroads, miners, and retail and wholesale businesses in mining regions would also be major beneficiaries. Others carry the argument much further, suggesting that deeper ports would have significant economic multiplier effects for the national economy. A recent study for the Corps of Engineers Los Angeles District (Data Resources, Inc., 1983) projects the economic benefits--in terms of total industrial production---from channel dredging and landfill developments in the ports of Los Angeles and Long Beach from the present to the year 2020. The following table gives a brief summary of the study's projected benefits in direct and indirect revenues and geographical component. While the direct effects are concentrated in the immediate area of the port, the indirect revenues are distributed across the country. Bushnell, Pearsall, and Trozzo, Inc. (1983) find similar indirect effects resulting from a uniform fee for maintenance dredging. Regional Distribution of Industrial Production Revenues from Channel Deepening and Landfill Developments, Los Angeles/Long Beach, California: 1983-2020 (total cumulative 1983 dollars in millions) Los Angeles Five-County Six-State County Region California Region National Direct 1,056.8 1,396.9 1,682.0 1,697.8 1,832.8 Indirect 179.3 249.7 456.2 711.0 4,830.7 Total 1,236.0 1,646.6 2,138.2 2,408.8 6,663.5 The argument at the national level is that (for example) increased coal exports would reduce our balance of trade deficit, lower unemployment (and with that, the need for federally funded social services), and so on, to the end that new construction dredging of ports should be paid for from general fund revenues since the nation benefits. In sum, in a complex economy it is simply impossible, so this argument goes, to sort out the primary beneficiaries of port dredging, with the result that levying fees against any specific set of users is inherently inequitable.

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69 Despite these difficulties, some analysts believe that the answer is institutional. That is, the way to create a market-like situation is to create competitive ports by withdrawing all federal support for dredging whether for new construction or maintenance. Under this arrangement, Congress would authorize the ports to levy user fees in any way or at any level they were to determine. Critics of this approach note that ports are inherently creations of government and cannot be made to operate as purely private-sector organizations. They note that the legal and institutional character of U.S. ports varies-- from ports managed by state governments to those that are the creations and responsibilities of city governments, and others run by relatively autonomous port authorities. These differing situations have potentially very different consequences for port financing. While there are many sound reasons for enhancing the market-like conditions of port operations to make the ports more profit-oriented, an underlying issue remains their public character; phrased differently, to whom do the ports really belong? The importance of international trade to the domestic economy of the United States, the dominance of oceanborne shipping in international trade, and the role of the ports in national security and defense suggest that the ports are national assets. Where ports are managed by agencies of the state government, or alternatively, city governments, they may be able to borrow money at reduced rates using the full faith and credit of either the state or the city. Where the ports have substantial political leverage, it is reasonable to assume that general tax revenues from either the state or the city might well be used to subsidize dredging costs. In the cases of those ports run by authorities that also manage airports and other commercial facilities, the possibility exists that profits from these non-port activities will be used to subsidize dredging and therefore potentially give those ports the ability to charge lower user fees with the associated competitive advantage. Financing arrangements for port dredging can make massive differences in the user fees that must be charged. For example, the ability to amortize capital costs over 50 years versus half that time or less can significantly affect financing costs. Similarly, the ability to borrow low-interest or no-interest money versus market-rate money can make a decisive difference. These factors are heavily influenced by the legal and institutional structure of the port and vary from one port to another. Finally, the form of the fee or tax obviously has very different implications for different interests as well as for the costs of collecting the fee. The key point is that while analysts may assess user fee options based on abstract standards, those interested in port dredging are concerned about who benefits and who pays. In the context of support for various port funding proposals, the divisions are clear. Low-volume ports with high-cost dredging requirements support a uniform national user fee. Such a fee is attractive because it requires high-volume, low-cost ports to provide them subsidies. For these very reasons, high-volume, low-dredging-cost ports prefer a user fee which is port specific.

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70 In the same vein, shippers of high-value, low-volume commodities favor a tonnage-based fee, whether national or port-specific. Alternatively, high-volume, low-value shippers prefer an ad valorem tax, whether levied on a nationally uniform basis or on an individual port basis. Finally, there are a number of issues that revolve around the efficient management of any user fee collection system. From the point of view of economic theory, the most efficient user fees are those that reflect the marginal uses. If user fees are to closely simulate a free market, the essential purpose is to assure that the marginal benefits of any new investment will be greater than the marginal costs of that investment. In the changing environment of international economies and trade, that requires detailed collection and analysis of data and a great amount of flexibility would have to be granted to those setting the fees. Collection, analysis, and management of this kind of data is, in and of itself, high cost, and a management system with this kind of flexibility also requires that governing bodies give a great deal of discretion to administrators to allow them to act quickly. The general pattern in the United States, however, is to resist building the kinds of large administrative systems necessary to manage user fees that are responsive to marginal costs and benefits, and similarly, legislative bodies generally resist giving broad discretionary authority to administrative organizations. Alternatively, the lowest cost and simplest user fees to administer are those that are broadly based and therefore incapable of distinguishing between marginal and non-marginal costs and benefits. As an example, the federal tax on motor fuels is broad and easy to collect. The nine cent per gallon tax on motor fuel is referred to as a "highway tax." It is actually collected from a small number of refiners and distributors and is cheap and easy to administer. Alternatively, it does not reflect any difference between cars and trucks and the amount of damage they do to highways. It therefore does not meet the more refined definitions of efficiency and equity which are frequently used to justify user fees. Two conclusions must flow from any review of the user fee debate. First, user fees are being proposed as a vehicle for finding a new national consensus on port funding. Second, there is no agreement on the role user fees should play or how they should be applied. If user fees turn out to be the structure around which a new funding consensus is evolved, it will be because they serve as a mechanism for evolving compromises. The conflict over funding is a conflict of values and goals, a conflict about who pays and who benefits. Those conflicts can only be resolved in the political process with political compromises. Intertwined with the proposals for alternative sources of revenues are various proposals concerning who should collect the revenues. Three categories of options exist. The first would have all revenue raised by the federal government. Clearly, if all revenues were to continue to be derived from general taxes, the dominant federal role would remain the same. Similarly, the Reagan Administration's

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71 proposal would retain the same federal dominance but would derive all dredging revenues from a new source, a user fee. Second, at the other extreme, individual ports could be made responsible for raising all revenues. This arrangement would exist if, on the one hand, ports were required to raise revenues from existing sources, or, on the other hand, if the federal government passed legislation authorizing ports to establish new taxes or user fees to be determined by individual ports. The third option would have both the federal government and individual ports raising some portion of the revenue. A review of the proposed legislation dealing with dredging indicates that every proposal with the exception of the Administration's first (100 percent cost recovery, later revised to 70 percent) calls for some form of joint funding by the federal government and the individual ports. Stated differently, most efforts to build a new consensus on port funding have included what are known as cost-sharing arrangements. Cost sharing between the federal government and state or local governments has a long history. Historically, cost-sharing has been an instrument used by the federal government to induce state and local governments to carry out new activities. The pattern has been for the federal government to establish programs which commit federal funds to paying for some percentage of given activities if state and local governments match those funds. Cost-sharing programs, for example, have been instrumental in the federal highway program; in the case of interstate highways, the federal share is 90 percent and the state share is 10 percent. Similar cost-sharing arrangements have been the instrument for initiating and carrying out a wide range of programs from environmental enforcement activities to a broad set of social welfare programs. In the case of port dredging, the motives behind cost sharing are different. Cost-sharing proposals in this sector have as their goal getting the ports to assume responsibility for a greater portion of funding for an activity which traditionally has been fully funded by the federal government (except for local sponsor costs). That is, cost sharing is a way to transfer what have traditionally been federal responsibilities and costs to the state and local level. To the extent that cost sharing is attractive to individual ports, it is because such cost sharing is seen as a way either to increase the absolute level of federal funding by offering a formula which would reduce the percentage or the proportion of federal funding, or to achieve some other benefit such as fast tracking of required regulatory review (discussed in the section, "Non-Funding Issues". Given the funding stalemate, many observers believe that the only way to increase federal dollars is for the individual ports to assume some greater portion of the costs. Cost sharing, then, may be attractive to the individual ports as a vehicle for prying loose additional federal dollars to pay for new construction dredging, or increased maintenance dredging, or for both. It must be emphasized that the cost-sharing concept does not inherently provide any answers to the question of who will pay. The federal government's portion of any cost-sharing formula could come

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72 from either general fund revenues or from a new tax or user fee. Similarly, in the case of individual ports, revenues for cost-sharing could come either from existing sources such as wharfage, dockage, stevedoring, and harbor transfers or from state or local tax revenues, or they could come from new federally authorized user fees. The key point is that although cost sharing is an integral part of most proposals aimed at finding a new consensus on funding, the principle does not by itself imply anything about the source of revenues. This point can be illustrated by looking at three simple hypothetical alternatives. If a 50-50 cost-sharing arrangement for all dredging were put in place which required the vessels using each port to pay the full costs of that port's operations and maintenance dredging, the average charge for small ports (under 100,000 tons) would still be $90 per ton of cargo, while for large ports it would be $.20 per ton (Congressional Budget Office, 1983~. The only qualification is that if both the federal goverment and the local ports were charging a tonnage fee as the sole basis for raising their share, the cost of two administrative structures to collect those fees might very well make the charge even higher. Alternatively, if there were a 50-50 cost-sharing arrangement, with the federal government levying a uniform national user fee, the federal levy needed to cover just operations and maintenance would be an average 12.7 cents per ton at all ports in the United States, while the local user fees would range between an average $45 per ton for small ports to an average $.10 per ton for large ports. (Congressional Budget Office, 1983~. Finally, if the cost-sharing arrangement took all of the federal share out of general fund revenues and the local ports had to pay their portion of a 50-50 split from user fees, the arrangement would be the same as above for the individual port with no user fees charged by the federal government. In sum, large ports would still charge an average $.10 per ton and small ports an average $45 per ton. The range of proposals for cost sharing is potentially infinite. What is clear is that if cost sharing is to be one of the elements of a new funding consensus, it will require the establishment of a formula that is broadly acceptable, and achieving acceptability will involve a complex set of political compromises. Most of the legislative proposals calling for some kind of cost sharing have sought to build consensus on port funding by establishing some kind of ceiling on how much money individual ports would have to pay in an effort to protect ports against excessive costs. Two different ceilings have characterized these proposals. One approach involves "grandfathering" depths, and the other establishing a tonnage-fee ceiling. For example, House and Senate bills considered by Congress in 1983-1984 (H. R. 3977; S.1389) set 14 feet as a threshold. That is, small ports with depths of 14 feet or less would not be required to pay any dredging costs. Another House bill used a 45-foot depth which retains the traditional federal role of paying the full cost of navigational projects, including both new construction

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73 and maintenance dredging to 45 feet of depth. Only improvement projects for dredging in excess of 45 feet would be subject to cost sharing. An alternative Senate bill proposed the adoption of a port-specific tonnage fee for maintenance dredging but set a maximum tonnage fee so that no port would have to pay an excessive amount. This bill, however, retained the port-specific cost recovery scheme for any new construction dredging. The most recent legislative acts and also the most nearly successful were two bills introduced in the 1984 legislative session. HR 3678, a water resources bill, passed the House by an overwhelming 7-1 margin. It contained many new authorizations and a large number of Reauthorizations of projects that had been on the Corps of Engineers program for several years without action. This bill contained what has now become a widely accepted principle for operation, maintenance, and new construction; that is, federal responsibility to 45 ft in depth and cost sharing for additional increments of depth. The bill also provided for a revolving fund to finance federal participation in both new construction and maintenance dredging. The fund would have a $2 billion reserve, all allocated from customs collections, which now amount to more than $7 billion annually ($6 billion/year from the coastal ports). Member ports of the American Association of Port Authorities overwhelmingly supported this bill. Senate bill 1739, which contained some of the features of HR 3678, was more restrictive on the handling of user fee collection and disposition. It did not contain as large a number of authorizations as the House water resources bill but did provide some port-specific flexibility to ports in the authorization and assessment of user fees; nevertheless, language concerning the collection of user fees from beneficiaries made the bill unworkable in the opinion of most of the major ports in the country. Senate Bill 1739 did not reach the floor of the Senate. Both bills were attached to their respective House and Senate continuing resolutions prior to the passage of the 1984/85 federal budget. Conflicts between House and Senate members over provisions of the two bills and strong opposition from the Office of Management and Budget resulted in both bills' being dropped from the continuing resolutions; thus, there was no action on water resources legislation in the 98th Session of Congress. As this brief review indicates, of the bills proposed and seriously considered by Congress to overcome the funding barrier, none was primarily concerned with equity and efficiency. ALLOCATION OF REVENUES Any changes in either the sources of revenue (e.g., new taxes or user fees) or in who collects those revenues (e.g., cost sharing) will likely create major pressures for modifications in the traditional processes for allocating revenues. The traditional process, in which Congress allocates General Fund revenues on a project-by-project basis in authorizations and appropriations, has involved long lead times.

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74 If new user fees were established, the collectors of those fees would doubtless seek to assert a greater role in the allocation process, both in an effort to accelerate dredging activities and to assure that the ports paying the primary portions of the fees would receive priority attention in the allocation process. Similarly, cost sharing, which makes individual ports collectors of the revenue, would likely see those ports demand some role in allocating the revenues. A variety of allocation mechanisms can be hypothesized. One option might involve the establishment of a national port plan. Such a plan in its extreme form might identify a limited number of ports that would have first priority for deep-draft capability (more than 45 feet) but it would clearly be extremely difficult to establish in the political context of the United States. Another approach might involve the establishment of a trust fund whose general allocation criteria would be laid out by Congress with an Executive Branch agency, such as the Corps of Engineers, formulating the detailed criteria and allocating the funds on a port- by-port basis. The model would be the highway or the airport and airways trust funds. Ports have generally expressed skepticism about the administration of such a fund, skepticism generated in part by the participation of many ports in the airport and airways trust fund. A third approach might be some kind of competitive bid situation in which those ports willing to participate in cost sharing would bid for first priority in revenue allocation. Under such a formula, the port willing to put up the largest percentage of matching funds, above some fixed percentage floor, would be given first priority for federal funds. The key point about revenue allocation is that any new consensus on funding that changes the source of the revenues and the organizations that collect and dispense the revenues will likely require the evolution of a new consensus on how those revenues should be allocated. Without such arrangements, the possibility exists of having new revenue sources but being unable to allocate the resources. The consequence would be that funding barriers would remain. MANAGEMENT AND IMPLEMENTATION OF PORT DREDGING So long as general fund revenues provided the monies for both maintenance and new construction dredging, the Corps of Engineers managed all major dredging projects. Such projects now require congressional authorization and are funded on an annual basis similar to other federally authorized programs. In the abstract, there are substantial advantages in having a single national management organization responsible for dredging. That is particularly the case where port dredging is interrelated with other social objectives. For example, in the case of the Port of New Orleans, the Corps has responsibility both for maintaining the navigational channels and for flood control. These two activities would appear to be nearly inseparable. Further, where the Corps has

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75 sole responsibility, procedures involved in carrying out dredging are the same nationwide. And finally, the Corps--with its broad base of experience and its research and development program--provides a technically competent organization. As sources of funds and revenue-raising responsibilities change, the possibility exists that the Corps' role might change in fundamental ways. The range of possibilities is broad. At one extreme, individual ports might insist that they be the managers of their port dredging activity, contracting with private consultants and private dredging companies for all of the work, with the Corps' role being reduced to that of an approver of permits. Alternatively, the Corps might become a contractor to the ports for design, or it is possible that some ports would allow the Corps to play its traditional role for federal projects, the only difference being the source of funding. The key point is that any change in funding sources and collection arrangements has the potential for requiring changes in traditional management procedures. Again, these changes, depending on how they are worked out, could themselves become barriers to timely port dredging. NON-FUNDING I SSUES Almost without exception, proposals for new funding and collection arrangements aimed at finding a new consensus on port dredging have involved calls for what has become known as fast tracking. Most of the parties interested in port dredging find the present 20-year (or more) lead time which has characterized completed projects to be unacceptable. So long as general funds were the source of dredging money, these long lead times served to provide a stable environment within which priorities for port projects could be evolved. With the arrival of the funding stalemate, however, demands for fast tracking have received increasing attention. What fast tracking would involve seems to vary. Discussions pursuant to finding a new consensus have ranged from escaping the requirement for congressional authorization for new construction dredging to substantially accelerated permit approval for locally funded dredging and filling projects by the involved federal and state agencies. Fast-tracking--that is, reducing the lead times either for congressional project authorizations or for agency permit approvals-- becomes increasingly important with progressively lower federal funding for port dredging. When the federal government paid a major portion of the costs for new construction dredging, the time value of money did not become a major issue. However, if individual ports assume all or a major portion of the costs for new construction dredging, the present long lead times and the present and future time factors of inflation and money may change the balance of benefit-cost ratios. Certainly for dredging/filling projects necessary to the development of a new terminal, securing outside financing is likely to be the critical factor in proceeding with the project, and the ability

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76 to secure tenant financing will be impossible if the prevailing long lead times continue. The same considerations apply to projects involving dredging or filling that the ports have traditionally funded but that need permit approvals. For any major port-funded project, the single issue of greatest importance in the present open-ended and indefinite permit-approval process is the inability to fix the time horizon of decision making, or to identify an end-point. The point to be emphasized is that any changes in any of the above four categories of issues will doubtless also require some kind of modification in, at a minimum, the dredging approval process. Without that, the possibility of a funding consensus appears dim, and without some agreement on fast tracking, all of the other points could be resolved and the nation would find itself with a continued lack of dredging. CONCLUSIONS Any new consensus on port funding that allows the funding barrier to be overcome will require the resolution of five issues: (1) the source of revenues, (2) who will collect the revenues, (3) how the revenues will be allocated, (4) who will handle the management and implementation of port dredging, and (5) the integration into this process of some kind of modification in approval processes that allows more expeditious initiation and completion of port dredging to occur. It is essential that the political process address all of these issues if a new consensus on port funding is to be found that allows the nation to overcome the funding barrier. REFERENCES Bushnell, Pearsall, and Trozzo, Inc. (1983), "Economic Effects of Levying a User Charge on Foreign and Domestic Commerce to Finance Harbor Maintenance," Report to the Economic Development Administration, U.S. Department of Commerce. Congressional Budget Office (1983), Reducing the Deficits: Spending and Revenue Options (Washington, D.C.: Government Printing Office). Data Resources, Inc. (1983), Los Angeles/Long Beach Landfill Development and Channel Improvements: An Economic Analysis of the Army Corps of Engineers Master Plan to the Year of 2020, Executive Summary (Lexington, Mass.: DRI, Inc.~. Energy Information Administration (1983), Port Deepening and User Fees: Impact on U.S. Coal Exports, Report No. DOE/EIA-0400 (Washington, D.C.: Government Printing Office). Office of Management and Budget (1981), Fiscal Year 1982 Budget Reviews (Washington, D.C.: Government Printing Office).