Forecasting Transportation Revenue Sources: Survey of State Practices (2015)

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19 This chapter summarizes results of the survey that relate to institutional and organizational approaches to forecasting. Quite a bit of variation was reported among states, including organizations responsible for data inputs, developing and run- ning the forecasting models, and publishing the results. The survey also addressed the role of private consultants in the fore- casting process and the ways in which they are brought in from time to time to help improve states’ approaches to forecasting. STATE DEPARTMENTS OF TRANSPORTATION In many cases, one person or a small team of staff members in the state’s DOT undertakes the process of forecasting trans- portation revenue. For short-term forecasting, 26 states reported that the process is handled entirely within the state DOT, and another five reported that their DOT collaborates with at least one additional entity. For long-term forecasting, 28 state DOTs handle the process themselves, and another three collaborate with other entities. OTHER, NON-DOT AGENCIES Twelve (12) states reported that revenue forecasting is done outside their DOTs by other agencies or organizations. In some cases, a panel of experts and/or staff members is convened regularly, and one or more representatives from the state’s DOT are included in that process. In other cases, exemplified by New York, the task of forecasting revenue is entirely con- trolled by state’s Division of Budget, which is external to the DOT. The changes to the dollar amounts in future year projec- tions reflect current law and the “latest information regarding the states various tax and fee sources.” For the transportation fund, these changes include a more conservative estimate of gasoline price forecast from the previous year. In some states, statutes mandate the preparation and adop- tion of economic and revenue forecasts. In Washington, the Office of Financial Management carries out its forecast respon- sibilities for transportation revenues through the Transportation Revenue Forecast Council. The process is described as follows: “Each quarter, technical staff of the Department of Licensing, Department of Transportation, Washington State Patrol and the Office of Forecast Council produce forecasts. The transporta- tion revenue forecasts agreed upon by the Transportation Rev- enue Forecast Council members become the official estimated revenues under RCW 43.88.020 21.” PRIVATE CONSULTANTS A few states have retained consultants to prepare revenue forecasts, and it appears that two firms have been most actively involved in revenue forecasting at the state level: Cambridge Systematics (CS) and HDR|HLB Decision Eco- nomics (HDR|HLB). The services of these companies have been retained by several states for two purposes: to perform revenue forecasting directly and/or to analyze and recommend improvements to the forecasting models maintained and oper- ated by the state DOTs. CASE EXAMPLE: PROPOSED REVISIONS TO MISSOURI’S DEPARTMENT OF TRANSPORTATION FORECASTING MODELS Missouri’s DOT (MoDOT) entered into a contract with HDR|HLB to review and critique its revenue forecasting model. HDR|HLB conducted a review of the existing model and the forecasting assumptions, and made recommendations in a report entitled Review and Critique of MoDOT’s State Rev- enue Forecasting Model, which was prepared in 2007. In this report, HDR|HLB reviewed the current practices of Missouri’s DOT and recommended updating the modeling process to one that was significantly more complex (HDR|HLB 2007). chapter four INSTITUTIONAL ARRANGEMENTS FOR STATE REVENUE FORECASTING Proposed Revision to Missouri’s DOT Forecasting Models The proposed revised forecasting models employed the basic econometric modeling framework, but altered the individual models by adding independent variables and by introducing dummy variables to account for changes in fees as a result of legislation that took effect in particular years. Where appropri- ate, the proposed changes also introduced autoregressive terms or moving averages. The recommendations were based on a “risk analysis framework,” which provided users median (most likely) forecasts as well as lower and upper bounded forecasts showing the range of the resulting forecasts from 10% to 90% of variation within 95% confidence bands. Figure 3 shows an example of model outputs and Figure 4 is a flow chart that shows the process for forecasting that was recommended by the consultants. Interestingly, in the very short term—two to four years from the date of the forecasts—small differences in forecasted revenues from each source resulted from comparisons between the older MoDOT forecasts and those resulting from the recommended improvements. As forecasts reached farther into the future, the forecasting results from the newer models diverged from the older forecasts to a greater extent.

20 In 2007, Missouri’s revenue for transportation came pri- marily from five sources: 1. Motor Fuel Tax—A tax on the sale of motor fuel (gasoline, diesel, and blends) paid by the fuel sup- plier and passed on to the consumer. The state tax rate was 17 cents per gallon at the time of the study, and MoDOT’s share was estimated at 73% of total receipts. 2. Motor Vehicle Sales Tax—A tax on the purchase of any new or used motor vehicle or trailer in Missouri. The tax rate was 4.225% at the time of the study. 3. Motor Vehicle Use Tax—a tax on vehicles purchased out of the state and titled in Missouri and on the sale of a vehicle between individuals within Missouri. The tax rate was 4.225% at the time of the study. 4. Driver’s License Fees—A fee imposed every three years or six years on operators of motor vehicles in Missouri for the issuance of a driver’s license. The fee varied from $10 to $22.50 for a three-year license depending on the type of license. 5. Motor Vehicle Fees—A one- or two-year fee for the reg- istration of motor vehicles. The fee varied with the gross weight of commercial vehicles, horsepower of other vehicles, or seating capacity for passenger-carrying commercial motor vehicles. These remain the main sources of state transportation rev- enues today, and the rates are unchanged. At the time of the study by the consultants, MoDOT pro- jected each of these sources of revenue using six separate regression models (different models were used for gasoline and diesel fuel tax revenues) and annual data for the independent variables for the last 20 years. The resulting estimates were summed to arrive at annual projections of future revenue. The MoDOT models did not at that time include autoregressive or moving average terms. After considering the report, however, MoDOT staff con- cluded that implementing the revised process was unnecessary. In an interview, a representative of MoDOT reported that the decision not to adopt the proposed changes was likely because of the complexity of the recommended process. Reviewing both the existing modeling practice and the consultant’s rec- ommendations, it is clear that the consultants recommended an approach that was methodologically more complex and demanding of data than the process used by the state. There is no objective method by which one can measure whether the recommended change in forecasting methodology, had it been implemented, would have produced forecasts that were more accurate than those produced by the simpler methods used by MoDOT and by most other states. MoDOT does track and report quarterly on the accuracy of its revenue forecast. Since the agency began reporting the accuracy in 2007, the variance has always been in the band of ±5%. Those variances are then taken into account in the forecast for the subsequent year. FIGURE 3 Example of HDR|HLB Risk Analysis Forecast Output for Missouri’s DOT.

21 PUBLICATION AND DISTRIBUTION OF RESULTS Of the 45 states responding, 13 reported that revenue fore- casts are regularly published and made widely available: Arizona, Colorado, Connecticut, Georgia, Maine, Michi- gan, Minnesota, Oregon, Pennsylvania, Texas, Utah, Ver- mont, and Washington. In these states, short-term revenue forecasts either are published as a separate document on the DOT website or included in the state’s annual budget documents. Long-term revenue forecasts are generally published in the State Transportation Improvement Pro- gram (STIP). The remaining states did not provide information about where the forecasting models could be found or how they disseminated their forecasts. They mentioned that the results can be made available in response to requests for them made by contacting DOT staff. FIGURE 4 Flow chart describing HDR|HLB’s recommended approach. Case Example: Vermont Consensus Revenue Forecast In Vermont, transportation revenues are forecast by consensus by a designated group of experts. The state revises and publishes the “Consensus Revenue Forecast” at least twice a year, in January and July, or more often when it is deemed necessary. Two state economists prepare the forecast, one representing the adminis- tration and the other representing the legislature. The forecast is then discussed and ultimately adopted officially by the Vermont Emergency Board, which includes the governor and the chairs of certain legislative standing committees (Senate Appropriations, Senate Finance, House Appropriations, and House Ways and Means). The reports prepared by the administration’s economist are posted in PDF format on the website of the Vermont Depart- ment of Finance and Management. Each biannual report for the past five years is available on the website. Table 12 shows the rec- ommendations of the Vermont Emergency Board for changes in revenue forecasts based on emerging trends. The consensus fore- cast is not limited to transportation, but also includes general fund and education fund estimates.

22 Staff Recommended Consensus Forecast Update— Difference from July 2013 Forecast 2014 2015 2016 Dollars Percent Dollars Percent Dollars Percent General Fund $8.4 0.6% –$0.4 0.0% –$13.8 –1.0% Transportation Fund $4.2 1.7% $1.1 0.4% –$0.6 –0.2% Education Fund $1.1 0.6% –$0.1 –0.1% –$0.5 –0.3% Total $13.7 0.8% $0.5 0.0% –$15.0 –0.8% Source: Revised 2014–2016 Revenue Outlook) Dollars in millions. TABLE 12 VERMONT EMERGENCY BOARD CONSENSUS UPDATE TO FUND FORECASTS California Gas Tax Swap: A Unique Case An interesting example of an innovation in transportation financing that relates to forecasting is the policy innovation in California that is known colloquially as the “gas tax swap.” In California, the responsibility for forecasting motor fuel tax revenue lies with the State Department of Finance rather than Caltrans, the state DOT, but this case is of interest because the forecasting of revenue is central to the innovation itself. This case example makes clear how complex relationships can be among state agencies, how different organizations— the legislature, other state agencies, and state DOTs—can all play roles in forecasting; and that forecasting methods can be prescribed in legislation and become central to the receipt by the state of revenues for transportation programs. It also illustrates that current innovations affecting transportation revenue depend on past legislative decisions as well as recent ones and that this institutional history complicates the pro- cess of forecasting revenues. This complexity makes it dif- ficult to generalize about the ways in which forecasts can be updated or forecasting methods can be changed by state DOTs on their own initiative. Prior to 2010, California collected a per-gallon excise tax and an additional sales tax on each gallon of gasoline and diesel fuel sold in the state; the revenue from these two taxes constituted the largest sources of state revenue for transpor- tation programs. There were two separate fuel taxes because until 1971 the sale of gasoline had been exempted from the general state sales tax in recognition of the existence of the separate excise tax levied on the sale of each gallon of motor fuel. In 1971, to address what was then seen as a critical short- fall in transportation revenues, the legislature enacted, and the governor signed, the Transportation Development Act (TDA). That law raised the statewide sales tax rate on all goods by 0.25% to a total of 5%, applied the sales tax to motor fuel for the first time, and specified that 0.25% of the total state sales tax revenue (on all goods to which the tax applied) be designated for expenditures on transportation. Any money generated by the state sales tax on motor fuel over and above the amount required to compensate for the 0.25% change in the state sales tax was known as “spillover” money and was designated by the TDA to the support of public transit. Each year, the state compared an estimate of revenue generated by a state sales tax rate of 5% on all goods except motor fuel with the revenue generated by a sales tax rate of 4.75% on all goods including fuel. If the amount estimated at 4.75% was greater than the amount estimated at 5%, the difference was designated to “spill over” to the state’s Pub- lic Transit Account (PTA). One-quarter of all PTA funds were designated for transit capital improvements and 75% to the State Transit Assistance (STA) program, which provides flex- ible funds to transit operators and are largely used to support transit operations. Because spillover money was available in any given year only when 5% the amount spent on California gasoline exceeded 0.25% of the amount spent on all sales taxable goods in the state, that important source of revenue—the only state support exclusively designated for transit—was difficult to forecast. The availability of revenue depended on changes in fuel prices and over time those became more volatile (MacKechnie 2014). As is the case in many other states, the per-gallon excise tax was “earmarked” to transportation under Article XIX of the state constitution, whereas the sales tax on motor fuels, and hence the spillover funds that were critical for public transit, were not protected for transportation uses in the same manner. In 2003 voters had approved Proposition 42, which ensured that most of the revenue derived from the sales tax on gaso- line would be designated for expenditures on transportation, but that exceptions could be made under conditions of fis- cal emergency. During the economic downturn of 2008–10, the governor of California declared fiscal emergencies and for several years redirected some of the sales tax revenue on gaso- line to other state purposes. This led to concern on the part of transportation interests, especially transit operators, that in an atmosphere of declining motor fuel excise tax revenues, the proceeds of the sales taxes could not be lost without severe consequences. In response to those concerns, the passage of AB 6 in 2010 affected four different taxes: the state portion of the sales tax on gasoline, the excise tax on gasoline, the state portion of the sales tax on diesel fuel, and the excise tax on diesel. Local sales taxes remained unchanged and continued

23 to include gasoline and diesel fuel. AB 6 resulted in the fol- lowing key changes (http://www.mtc.ca.gov/legislation/state_ budget_3-10.htm): • Beginning July 1, 2010, it eliminated the 6% statewide sales tax on gasoline, and with it, the funding source addressed by Proposition 42 (the 2003 constitutional amendment that required most gasoline sales taxes to go to transportation) and funded the spillover, as the source of funding for public transit. • It raised the excise tax on gasoline by 17.3 cents on July 1, 2010, resulting in a total excise tax of 35.3 cents per gallon. Starting March 1, 2011, and each March 1 there- after, the action authorized the State Board of Equaliza- tion (BOE) to estimate how much revenue would have been raised by the sales tax on gasoline if it had contin- ued to exist and to adjust the gasoline excise tax in order to produce an equivalent amount of revenue. Under this provision, the tax may sometimes have to be lowered and sometimes raised. For example, on July 1, 2013, the tax was $0.395 per gallon, and on July 1, 2014, it was reduced to $0.36 per gallon (CSPnet.com 2014) • It retained the existing sales tax on diesel fuel and raised it by another 1.75% on July 1, 2011, to generate about $120 million in additional funds for public transit, for a total of approximately $436 million in FY 2011–12. This was intended in part to compensate for the loss of the “spillover” funds. • It offset the diesel sales tax rate increase by lowering the diesel excise tax from 18 cents per gallon to 13.6 cents, effective July 1, 2011. Like the gasoline excise tax, the excise tax on diesel fuel is now adjusted by the BOE on March 1st of each year to maintain revenue neutrality. The legislature also passed, and the governor signed, a companion bill, SB 70, to exempt some consumers of diesel fuel (including freight rail, commuter rail, transit buses, and off-road vehicles) from the diesel fuel sales tax rate increase. Since these sectors are not subject to the diesel excise tax, they would have experienced a sales tax increase without this exemption (California State Board of Equalization, 2014). The overall tax swap was designed to protect the sales tax revenues on fuel for application to transportation programs. At the same time, it was designed to be “revenue neutral” in order to allow passage by the legislature by a simple majority vote rather than a supermajority of two-thirds required for “new” and “special taxes.” Public transit operators in California were estimated collectively to lose more than $1 billion annually owing to the elimination of the sales tax on gasoline, so some measures were taken to address that loss. This case is relevant to this synthesis for two reasons. First, both the earlier spillover funding and the new funding levels are dependent upon forecasts of sales tax revenues that are specified in law, but in both cases the required fore- casts are made for the short term and in both cases the relevant forecasts are not made by transportation agencies. The forecasting of tax revenue, required to be performed annually by the BOE, is part of the policy innovation itself, and it is the only apparent recent case that such a fore- casting requirement is incorporated into law. Secondly, the complex changes in state transportation policy initiated by this legislative action illustrate the kinds of challenges that arise when innovations in transportation revenue are undertaken in the current political environment. Entirely new revenue sources were not created and new forecast- ing methods were not adopted, yet fundamental changes in transportation finance policy in California created pro- grammatic changes that imposed forecasting challenges for several agencies in order to achieve modest but useful revenue stability.