Using the Economic Value Created by Transportation to Fund Transportation (2014)

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SUMMARY Transportation agencies today face increasing challenges. Demands on the transportation system capacity continue to increase while public revenues dedicated to developing and maintaining that system are decreasing. In addition, capital and maintenance costs are rising. The inevitable result is a shortfall between available funds and revenues needed to maintain the system and a consequent deceleration of the implementation of needed transportation improvements. State departments of transportation (DOTs) and other agencies charged with improving and maintaining the transportation network have had to become creative thinkers. Essen- tially, they are constantly trying to answer these questions: • How can we do more with less? • What efficiencies can we achieve by changing how we manage our assets? • Are there other funding methods to help make up the shortfall? Value capture (VC) is one mechanism for helping agencies meet these challenges. VC combines the concepts of measuring the aggregate benefit to stakeholders of a capital invest- ment in a given transportation asset (e.g., a newly expanded roadway) and recapturing a portion of that benefit for the entity that funded the asset’s development. In other words, determining VC involves quantifying, in dollars, the expected return to long-term stakehold- ers (e.g., landowners, developers, public agencies) on the capital investment and ongoing maintenance costs required to improve and sustain a discrete aspect of the transportation system. With that information, agencies can justify and employ various funding mechanisms (e.g., fees, taxes, etc.) to capture the value created by the investment, and use these funds to finance additional needed system improvements. Transportation system stakeholders may be direct beneficiaries (travelers benefiting from the new facility or service) and indirect beneficiaries (those receiving benefits other than improved travel, such as landowners). Capturing a fair estimate of how indirect beneficiaries should be assessed to help fund system improvements has been difficult in the past. Value capture has evolved into an umbrella term denoting a wide range of mechanisms to fund transportation investments based on levying charges or fees on indirect beneficiaries. Doing so allows agen- cies to assess development costs on beneficiaries of the system and recoup those costs in a fair, accountable way. This synthesis documents the current state of the practice with respect to how agencies capture the economic value created by transportation to fund the transportation system. This report examines the following aspects of VC in detail: • Methodology underlying the concept. • Legal framework enabling methods to be used for highway funding. • Ways local partnerships facilitate the process. – Benefit areas using each mechanism. – Cost efficiency of each mechanism in terms of revenues raised compared with proj- ect needs and costs. – Challenges to be expected when adopting each strategy. USING THE ECONOMIC VALUE CREATED BY TRANSPORTATION TO FUND TRANSPORTATION

2 Value capture can, for example, help agencies assess project expansion benefits for justi- fying cost-recovery methods or identifying opportunities for private-sector participation in a construction project. To help practitioners better understand the context and uses for differ- ent kinds of VC mechanisms, this report uses case examples to discuss the implementation aspects, challenges, and benefits involved in adopting each of the 10 mechanisms, which are listed here. • Impact fees (IF): one-time charges collected by local governments from developers to finance new infrastructure and services associated with new development. • Special assessment district (SAD): an additional fee assessed on properties project- ing a benefit owing to the geographic proximity of a new highway or transit facility. Typically, a vote of the district is needed for fees to be applied to an improvement. No projects can be undertaken without the district vote. • Sales tax district (STD): a kind of SAD that requires those benefiting from the project to pay a limited sales tax instead of a property tax. • Negotiated exaction (NE): one-time charges similar to IFs but not determined through a formal, formulaic process. Exactions can take the form of in-kind contributions to local road networks, parks, or other public goods as a condition of development approval, or they can be requested in the form of in-lieu fees. • Air rights (ARs): a form of joint development in which development rights above or below highway or transit facilities are used to generate and capture an incremental increase in land value. • Joint development (JD; or public-private partnership): development of a transit facil- ity and adjacent private real estate wherein a private-sector partner either provides the facility or makes a financial contribution to offset its construction costs. • Land value tax (LVT): a tax imposed on the value of land benefiting from transporta- tion infrastructure. • Tax increment financing (TIF): a mechanism allocating any increase in total property tax revenues toward public investment within a designated district. • Transportation utility fees (TUFs): utility fees assessed on characteristics thought to be more closely related to transportation demand than property taxes. • Other mechanisms [e.g., transportation corporations (TCs)]: funding tools used to build stakeholder support for any funding strategy. Chapter two provides an overview of these mechanisms, including a discussion of the four purposes for using them: (1) recovering costs, (2) capturing project expansion benefits, (3) capturing opportunity for value creation and cost recovery, and (4) capturing opportunity for revenue sharing with the private sector. All mechanisms strive to support the principles of benefit equity and to signal appropriate pricing levels if well-defined boundaries of a benefit zone for a given project can be established. Little is known about cost-efficiency related to VC mechanisms or the ability of mechanisms to generate returns to cover project costs, so this synthesis provides new and important information in that regard. Each mechanism is exemplified in chapter three by a case example that explores an agen- cy’s real-world experience. Other mechanisms, such as sales tax rebate agreements, are also explored. Chapter four summarizes findings of the synthesis, discusses benefits of employing VC mechanisms, and details future research needs in the field. The methodology and study approach for this synthesis feature two primary components: a literature review and seven detailed and 15 short case studies of VC related to highway capital-cost funding. The case examples are based on the literature review, responses from a screening survey, and interviews with key staff involved in implementing mechanisms in their areas. Case examples were also identified from a screening questionnaire, which was sent to state DOT representatives on the Standing Committee on Finance and Administration (SCOFA) and the Standing Committee on Planning (SCOP), both AASHTO committees.

3 This synthesis groups VC mechanisms by scale of application (e.g., at the site/project level, corridor level, or county/city/regional level) and by whether or not they are applied as part of project-based funding or on a programmatic basis. The case examples document vari- ous elements of the mechanisms in terms of: • Political acceptability. • Transaction costs (including implementation-related costs to agencies) and general cost-efficiency. • Practicality (e.g., design and implementation) considerations, including benefit zones. • Roadway ownership (e.g., local or on the state system). • Local partnerships involved. • Equity with regard to burden across different income groups and equity of revenues and costs. The studies also demonstrate macro- and micro-level variability in terms of pragmatic and technical aspects of implementation. Each example application presented in chapter three addresses the development, context, and implementation of a given project and showcases some or all of the considerations noted here: • Background and context for the project and funding. • Legal authority. • Implementation issues, including design aspects of each mechanism (e.g., duration, rev- enue potential in relation to project needs defined by costs, performance, and consid- eration of equity), levy basis (who pays, the kind of funding mechanism involved, and what percentage is devoted to transportation), and area relevant to the project (boundary/ service areas). • Local partnerships, including the beneficiaries and, where possible, the project initiator(s). • Lessons learned, as reported by respondents. This report does not offer advice on the adoption of any specific mechanism or set of mechanisms. Each approach has its advantages and disadvantages, and not all mechanisms are equally applicable in all situations. Based on the experiences of survey respondents and the findings of the state-of-the- practice review, VC mechanisms can be a helpful part of a mix of capital budgeting tools to fund infrastructure improvements. As noted by respondents, VC mechanisms are particularly valuable as short- to medium-term complementary funding solutions, especially when get- ting a project off the ground. Most mechanisms also demonstrate a moderate to high cost- efficiency factor. Mechanisms—such as assessment districts, TIF, and sales taxes that rely on healthy real estate markets and economies—require risk-management planning in the event that a decreasing market generates lower-than-expected tax revenues needed to meet debt or loan obligations. Many of the implementation considerations discussed are interconnected and typically are approached by feasibility assessments or studies conducted in early stages of adoption. This study provides examples that showcase how real estate risk can be handled in the planning process. As discussed in chapters three and four of this report, several factors could facilitate or hinder the ability of agencies to adopt a mechanism, including: • Coordination between multiple jurisdictions. • Support from private developers and property owners. • Project location and design. • Macroeconomic conditions. • Legal considerations.

4 Still, after multiple mechanisms’ applications by all levels of agencies were studied, some common findings became evident: • The need for a legal framework (which might require political will to implement) sup- porting the VC mechanism chosen. • The need for a high level of collaboration and cooperation among stakeholders com- bined with a vision for the project area. • The need for creative thinking regarding which mechanisms might be useful for a given project. • The need for a vision to use these mechanisms as part of a strategy to complement a larger set of funding tools. • The need to consider these mechanisms in the context of long-range plans, where possible. There are three primary categories of VC mechanism benefits: • Accelerated delivery. VC mechanisms facilitate project delivery by making invest- ments available earlier in the development process. • Local funding matches. In three of the case examples, revenues provided local fund- matching opportunities to finance project costs. • Getting a project off the ground. VC mechanisms can identify scarce seed fund- ing through revenue streams, such as loan or bond financing, and can become part of resource pooling strategy for most critical projects. Topics addressed by the report’s research recommendations include the following: • Ways to engage stakeholders and identify beneficiaries. • The need to more fully understand VC mechanism costs and benefits and how to inte- grate VC more effectively into planning processes. • The impacts of example projects presented that have been under way for a while.