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

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10 LITERATURE REVIEW OF VALUE CAPTURE MECHANISMS The VC funding and finance approach has a wide audience in the United States and across the world. The literature in this area is large and comprehensive, and there are numer- ous applications around the world for highways and transit (Andelson 2000; Bowes and Ihlanfeldt 2001; Fensham and Gleeson 2003; Smith and Gihring 2006; Iacono et al. 2009; Mathur and Smith 2012; Kemp et al. 2013). Mechanisms and Practices Communities across the country have adopted practices to fund and finance transportation projects. To assist in the dis- cussion of these methods, this section provides a brief over- view of the top VC mechanisms listed from a compilation of recent studies as ways local governments, communities, and entities have approached transportation funding with respect to highways. Each of these mechanisms is discussed in sub- sequent sections of this chapter, and case examples of these mechanisms are discussed in chapter three. Recent docu- ments that provide a broad overview of VC-related mecha- nisms include AECOM 2007, Iacono et al. 2009, Levinson and Istrate 2011, Mathur and Smith 2012, and Kemp et al. 2013. The mechanisms listed are applicable to both high- way and transit, and mechanisms that have been discussed in recent literature and used in the country are documented in Figure 3. In addition to the nine listed, there are other mechanisms and tools that may be used across the country. Thus, this syn- thesis is aimed at discussing 10 broad categories—the nine shown in Figure 3 and one additional category of “other” mechanisms to include categories such as transportation cor- porations (TCs). The mechanisms discussed in Figure 3 and Table 1 are equally applicable to highways and transit, with the exception of the TUF. This synthesis focuses on highways predominantly, as will be seen in the case example chapter. A few transit examples are considered to the extent that the knowledge and application may be transferable to highways. For each mechanism, this review will focus on five broad elements: • Description of the mechanism; • Critical implementation considerations duration, fees or levies, service areas; • Legal considerations; • Applicability to transportation; and • Other implementation considerations. In all cases, procedural implementation considerations are typically investigated as part of initial feasibility studies. Geographic Scale and Conceptual Basis of Value Capture Mechanisms This synthesis focuses on covering the geographic scale and implementation considerations among other features of mech- anisms discussed in Figure 3, starting with the review included in this section and followed by the cases in the following chap- ter. A distinguishing feature or benefit of VC mechanisms is the geographic scale or dimension with respect to their imple- mentation. It will be seen that some VC mechanisms can work at the micro level geographic scale (a site, miles within a local- ity, across localities) or even at the meso scale, such as region- wide applications. The conceptual basis or general applicability to trans- portation and benefit basis of each mechanism listed in Figure 3 is different and is shown in Table 1. Table 1 also presents a summary of the examples included in this chap- ter. These are assimilated from several studies, including a Center for Transportation Studies legislative summary report and other sources (Lari et al. 2009; Mathur and Smith 2012). Lari et al. (2009) also present other features of a subset of VC mechanisms covering (a) coordination, (b) timing of levy, (c) allocation of revenues to specific costs (capital versus operations and maintenance), and (d) level of applicable government (local or state). All mechanisms are local government tools (Lari et al. 2009); however, many tools require enabling support by way of accompanying legislation. Value Capture Mechanisms—General Trends An examination of revenue source national data for year 2010 from FHWA shows that states fund their highways using a mix of revenue sources ranging from federal transfers such as fuel taxes, user fees such as gasoline taxes, toll revenues, and local government sources. Local government sources are a small percentage (2%) of overall state funding (Figure 4). Local government revenue sources for funding roads in 2008 chapter two OVERVIEW OF METHODS TO CAPTURE VALUE CREATED BY TRANSPORTATION INVESTMENTS—VALUE CAPTURE MECHANISMS

11 showed a national reliance of 17% on the property tax type mechanisms for local roads (Figure 5). IMPACT FEES Impact fees seek revenues from beneficiaries. They are a part of an evolving toolbox of financing mechanisms. An IF is a form of development exaction or a charge on new development to pay for the construction or expansion of infrastructure that is necessitated by and benefits new devel- opments. In practice, IFs are noted as mechanisms to bridge the gap between the cost of new municipal infrastructure and available funds. More specifically, they are exactions that are: • In the form of a predetermined money payment. • Assessed as a condition to the issuance of a building permit, an occupancy permit, or a plat approval. • Pursuant to local government powers to regulate new growth and development and provide for adequate pub- lic facilities and services. • Levied to fund large-scale, off-site, public facilities, and services necessary to serve new development. • In an amount that is proportionate to the need for the public facilities generated by new development (Pershing 2008). They are usually implemented to help reduce the eco- nomic burden on local jurisdictions that are trying to deal with growth within the area. IFs were pioneered by local governments in the absence of enabling legislation (Mullen 2012). Consequently, such fees originally were defended as an exercise of local government’s broad police power to protect the health, safety, and welfare of the community. Eventually, courts developed guidelines for constitution- ally valid IFs based on the rational nexus that must exist between the regulatory fee or exaction and the activity that is being regulated. Antecedents to IFs were in-kind exactions, land dedica- tions, or build/install requirements for the construction of specific facilities. IFs paid as monetary instead of in-kind contributions came into wide use beginning in the 1970s, providing a more efficient and flexible means of local infra- structure financing than negotiated or ad hoc exactions. The cities and counties of some states such as California, Colo- rado, Florida, and Texas have widely adopted IFs as a means of financing not only on-site but off-site infrastructure devel- opment. Their use and popularity quickly spread throughout the Sunbelt and Western states. According to recent national surveys, about 60% of all cities with more than 25,000 resi- dents and almost 40% of all metropolitan counties use some form of IFs. In California and Florida, the extent of cities and counties using IFs is at 90% and 83%, respectively (Nelson and Moody 2003; AECOM 2007). Nelson and Moody also note that IFs have become more common as a practical means of funding in large part because new infrastructure develop- ment has lagged under political and financial constraints, resulting in deteriorating infrastructure quality, congestion •One-time charges levied on development projects designed to finance new infrastructure and services associated with new development. Impact Fees (IF) •Members of the benefiting district pay a small property tax directly for the cost of improvement. Special Assessments— Property Tax (SAD) •Members of the benefiting district pay a small sales tax directly for the cost of the improvement. Sales Tax Districts (STD) •Similar to IF, with the exception that they are not typically applied to off-site infrastructure provisions but to contributions to local roads, etc. Negotiated Exactions (NE) •Establishment of development rights above (or below or adjacent) infrastructure asset that generates an increment in land value. Air Rights (AR) •Private partner provides facility or financial contribution for spatially coincidental infrastructure and adjacent private real estate development. Joint Development (JD) •Separate taxation of land portion of property to better capture the benefit of infrastructure investments, typically through split rate property tax. Land Value Tax (LVT) •Using the prospect of increased property increments resulting from the project to secure bonds; tax increment above baseline level is used to repay loan. Tax Increment Finance (TIF) •Fees assessed on properties based on amount of trips generated/use. Transportation Utility Fees (TUF) FIGURE 3 Most discussed VC mechanisms in the context of transportation funding.

12 Mechanism Conceptual Basis and Benefit or Levy Basis Applicable Purpose Highway-Related Examples (United States) IF New development to pay for facility use. One-time developer charges when permits are issued. Levied before and after an improvement. Cost recovery Oregon TSDC for existing and new capacity (multimodal) and examples from Washington, New Jersey SAD Local benefit accruing to all property due to transport access. Annually levied property owner charges in the service area before and after and improvement. Capture of project expansion benefits Virginia and Ohio TID, Illinois SSA STD Local benefit accruing to all property due to transport access. Annually levied sales in the service area before and after an improvement. Capture of project expansion benefits Illinois SSA; Missouri and Kansas TDD NE One-time ad hoc developer agreements before or after the improvement (discontinuous spot treatment). Capturing opportunity for value creation and cost recovery Virginia proffer AR Air space utilization above, below, under, and nearby/adjacent highway right-of-way for public and private benefit via transfer of rights and joint development. One-time developer-related opportunity typically after an improvement (on-site developments—discontinuous spot treatment). Capturing opportunity for value creation and cost sharing and revenue sharing with private sector Massachusetts Turnpike and several other examples such as Interstate 5, Washington State JD Public and private partnership in relation to land (works with air rights or by itself). One-time developer-related opportunity typically after an improvement (on- and off-site developments). Capturing opportunity for value creation and cost sharing and revenue sharing with private sector Massachusetts Turnpike and Washington Metropolitan Transit Authority LVT Land value capitalization due to access, incentivize development. Annually levied property owner changes before and after an improvement—taxes on value of land and a separate tax on value of buildings. Capture of project expansion benefits Pennsylvania counties TIF Increment in property values due to capitalization of access and amenity values. Annually levied property owner charges before and after an improvement. Capture of project expansion benefits Texas TRZ TIF-like mechanism TUF Public good nature of transport. Annually levied property owner charges before and after an improvement. This charge has been used only for defraying operating expenses as opposed to capital costs of projects. Cost recovery— operating and maintenance costs Oregon TUF for pavement maintenance Other—TC Funding tool only to aid value capture. Stakeholder support Missouri, Texas, Florida TABLE 1 APPLICABILITY OF VALUE CAPTURE MECHANISMS TO TRANSPORTATION AND EXAMPLES FROM LITERATURE REVIEW of existing facilities, and inadequate infrastructure to accom- modate new development. Implementation Considerations Beneficiary Basis (Who Pays?) and Incidence In an obvious sense, the developer pays the IF, at least in the short run. However, in the long run the developer may strive to shift the cost of the IF. This occurs as forward shifting to higher purchase prices or rents paid by the consumers of development, or as backward shifting to the original owner as a lower price for undeveloped land (National Association of Home Builders 2008). When the demand for buildable land is inelastic (relatively insensitive to changes in price) and the supply of raw land is elastic (relatively sensitive to market change), forward shifting is likely to occur, and it will be the home buyer who pays much of the fee. When the demand for buildable land is elastic and the supply of raw land is inelastic, backward shifting is likely to occur, and it will be the seller of

13 FIGURE 4 Sources of state highway funding in the United States in 2012. (Source: FHWA 2012.) State Highway User Tax Revenues 35% Road and Crossing Tolls 5% Imposts and General Funds 9% Miscellaneous Income 6% Bond Proceeds 17% Federal Government 26% Local Governments 2% raw land that pays the fee in the form of lower prices. Thus, it is surmised that the IF final incidence will always be split between all the players in the development process. Geographic Scale or Area of Applicability From a planning and implementation perspective, IFs can be levied or targeted to a specific geographic area or bound- ary area, also called service area, overlay area, or beneficiary area. These typically are geographic areas served by the transportation improvements. This provision is sometimes included or specified within legal requirements for establish- ing IFs. IFs can also be levied on an areawide basis, such as for an entire municipality. In such a case, the geographic area is referred to as the assessment district, as distinctly separate from the beneficiary area or benefit district. This synthesis covers examples of both types of scenarios. Many of the state acts require that the local government identify the scale or spe- cific area where the IFs will be collected based on the service provided to new development from a common set of facilities. Most acts require that IFs collected within a service area must be spent on capital improvements within that same service Highway User Tax Revenues 5% Tolls 3% Appropriations from General Funds 43%Property Taxes 17% Other Local Imposts 9% Miscellaneous Income 11% Bond Proceeds 12% FIGURE 5 Sources of local highway funding in the United States in 2008. (Source: FHWA 2008.) area. In general, local governments are allowed broad discre- tion in defining service areas, which can cover the entire juris- diction or only a subarea of the city or county. An exception is the Texas act that limits service areas for transportation IFs to no more than 6 miles (Mullen 2012). Mullen notes that as of 2012, 15 states specify an implementation requirement for a geographic service area. Duration, Land Uses, and Modal Coverage Impact fees are one-time developer charges, applied to new developments/construction only, such as when permits are issued (Libby and Carrion 2004). The fees require cash pay- ments in advance of the completion of development. They can be limited to specified land uses, such as commercial or residential, or include all uses. The charges can be used to defray capital costs for all modes, including highways speci- fied in the statutes, as well as operating and maintenance expenses. Legal Considerations When it comes to implementing IFs, there is a legal basis that must be considered. IF legislation identifies facilities in each state that are eligible uses. Highways and roads are consid- ered eligible uses. A 2011 review conducted by the National Governors Association in collaboration and support of the AASHTO Center for Excellence in Project Finance finds that 25 states have provisions to allow the use of IFs (State Smart Transportation Initiative 2012; Rall et al. 2011). Mullen (2012) provides a legal overview of states with IF provi- sions and notes that as of 2012, 27 states had adopted IFs enabling legislation for roads as an eligible category. A list- ing of these states is provided in Table 2. Figure 6 shows that IFs are currently not authorized in many states in the Midwest and East South Central using standard Bureau of Economic Analysis region classifica- tions. Fees should follow the rational nexus and roughly pro- portional rules or guidelines (Mullen 2012). There must be a connection between the new development and the need for the new facilities in the region. Florida is the only state seen to have used IFs without enabling legislation until 2006. Maryland lacks a general enabling act, but such legislation is in place in the six home rule counties. Virginia imposes road IFs and a form of devel- oper exactions known as cash proffers. Under this proffer system, there is no published fee schedule or required nexus. Instead, developers voluntarily offer land dedications, capi- tal improvements, or cash payments as part of their appli- cation of rezoning, but the decision to accept or reject the proffer remains entirely in the hands of the local governing body. Depending on the region or state, IFs can be classified under different types of names. Early on they were known as capital recovery or expansion fees. In some states, such

14 parks, public safety, and schools. The burden falls on the entire base of taxpayers. IFs are noted as a category of user fees to finance infrastructure and include all forms of exac- tions on new development (Alterman 1988). Cost sharing occurs when this revenue source is leveraged with other funds, such as when IFs pay the local share of facility costs with the rest coming from the state through its general fund or user fees. According to APA’s IF policy guide (APA 1997), when based on a comprehensive plan and used in conjunction with a sound capital improvement plan (CIP), IFs can be an effec- tive tool for ensuring adequate infrastructure to accommo- date growth where and when it is anticipated. It is important that communities rely on zoning and other land use regula- tions, consistent with a comprehensive plan, to influence as Oregon, they are known as system development charges, whereas in North Carolina, they are known as facility fees. No matter what they are called, they all function on the same premise (Mullen 2012). Applicability to Transportation—Some Specific Examples of Roadway-Related Impact Fee Statutes Justification of IFs Local jurisdictions have at their disposal many potential sources of revenue that can fund new infrastructure. These revenues come in three basic forms: general, user, and shared. General funding involves the use of general (rather than dedicated) taxes, typically property taxes but also sales and income, to build and maintain nonutility infrastructure, such as roads, Roads Year Citation Arizona (cities) x 1988 Arizona Revised Statutes Annotated § 9-463.05 (cities), § 11-1102 et seq. (counties) Arizona (counties) x 1988 Arizona Revised Statutes Annotated, § 9-463.05 (cities), § 11-1102 et seq. (counties) Arkansas (cities) x 2003 Arkansas Code, § 14-56-103 (cities only) California x, Multimodal 1989 California Government Code, § 66000 et seq. (mitigation fee act); § 66477 (Quimby Act) Colorado x 2001 Park dedication/fee-in-lieu; § 17620 et. seq. (school fees) Florida x 2006 Florida Statutes, § 163.31801 Georgia x 1990 Georgia Code Annotated, § 36-71-1 et seq. Hawaii x 1992 Hawaii Revised Statutes, § 46-141 et seq.; § 264-121 et seq. Idaho x 1992 Idaho Code, § 67-8201 et seq. Illinois x 1987 605 Illinois Compiled Statutes Annotated, § 5/5-901 et seq. Indiana x 1991 Indiana Code Annotated, § 36-7-4-1300 et seq. Maine x 1988 Maine Revised Statutes Annotated, Title 30-A, § 4354 Montana x 2005 Montana Code Annotated, Title 7, Chapter 6, Part 16 Nevada x 1989 Nevada Revised Statutes, § 278B New Hampshire x 1991 New Hampshire Revised Statutes Annotated, § 674:21 New Jersey x 1989 New Jersey Permanent Statutes, § 27:1C-1 et seq.; § 40:55D-42 New Mexico x 1993 New Mexico Statutes Annotated, § 5-8-1 et seq. Oregon x, Multimodal 1991 Oregon Revised Statutes, § 223.297 et seq. Pennsylvania x 1990 Pennsylvania Statutes Annotated, Title 53, § 10502-A et seq. Rhode Island x 2000 General Laws of Rhode Island, §45-22.4 South Carolina x 1999 Code of Laws of South Carolina, § 6-1-910 et seq. Texas (cities) x 1987 Texas Local Government Code Annotated, Title 12, § 395.001 et seq. Utah x 1995 Utah Code, § 11-36-101 et. seq. Vermont x 1989 Vermont Statutes Annotated, Title 24, § 5200 et seq. Virginia x 1990 Virginia Code Annotated, § 15.2-2317 et seq. Washington x, Multimodal 1991 RCW, § 82.02.050 et seq. West Virginia x 1990 West Virginia Code, § 7-20-1 et seq. (counties) Wisconsin (cities) x 1993 Wisconsin Statutes, § 66.0617 Note: Adapted from Mullen (2012) and Duncan Associates (2012). TABLE 2 IMPACT FEE LEGISLATION BY STATE

15 cifically authorized the use of IFs for municipal jurisdictions planning under the GMA. The GMA allows IFs for system improvements that reasonably relate to the impacts of new development and specifies that fees are not to exceed the pro- portionate share of the costs of improvements generated by the development. The transportation IFs under GMA are to be spent on system improvements, which can include physi- cal or operational changes to existing roads and streets and new roadway connections that are built in one location to benefit projected needs at another location. These are gen- erally projects that add capacity to accommodate growth in traffic volumes (new streets, additional lanes, widening, and signalization) and also may be pedestrian or transit related. Under the GMA, the county needs to meet specific provi- sions, including but not limited to: • The county must have an ordinance authorizing IFs. • Fees may apply only to improvements identified in a capital facilities plan. • One or more geographic service areas must be estab- lished for fees. • A formula or other method for calculating IFs must be established. • The fees cannot be used to finance the portion of improvements needed to pay for existing capacity deficiencies. • The fees can be used to recoup the cost of improve- ments already made that address the needs of future development. • The county cannot rely solely on IFs to pay for needed improvements. Oregon. Oregon Transportation System Development Charge (TSDC)—In 1989, the state of Oregon adopted the Oregon Systems Development Act [Oregon Statute (ORS) 223.297-223.314] to “provide a uniform framework for the imposition of system development charges by local govern- ments.” Since 1989, under Oregon law, jurisdictions can imple- ment TSDCs for five types of infrastructure: water, wastewater, storm drain, transportation, and park systems. System develop- ment charges are defined under ORS 223.297-223.314 as “a uniform framework for the imposition of system development charges by local governments, equitable funding for orderly growth and development of Oregon’s communities, and that the charges may only be used for capital improvements.” As described in the ORS, there are two types of TSDCs: • Reimbursement: a fee for costs associated with capital improvements already constructed or under construction when the fee is established, for which the local govern- ment determines that capacity exists. • Improvement: a fee for costs associated with capital improvements to be constructed. The system develop- ment charges are applicable for all modes of transporta- tion in Oregon. patterns of growth and more accurately predict new infra- structure needs. The guide also notes that IFs should not be considered a panacea for the funding of general capital improvements. The applicability to transportation stems from the benefi- ciary principle that the beneficiaries who receive the service pay for the service. Table 1 shows the applicability of IFs to trans- portation from a legal standpoint. Transportation and roads are statute-enabled eligible categories for which fees can be levied. Among them, three states have options to cover roads as part of a multimodal transportation funding plan. Those examples, in Washington, Oregon, and New Jersey, are discussed here. New Jersey’s legislation is discussed in greater detail because it points to the evolutionary process of the legislation, the long lag in implementation since it was first passed in 1990, the emphasis on a joint planning process (JPP), and some of the hurdles it has faced with regard to planning costs. The examples of IF statutes from Washington, Oregon, and New Jersey all require a geographic service area to be identified as part of implementation. Washington. The primary enabling mechanism for impos- ing IFs in Washington State is the Growth Management Act [GMA; Municipal Research and Services Center of Washington]. The GMA, passed in 1990, added Revised Code of Washington (RCW 82.02.050–100 regarding IFs and spe- States with Impact Fee Legislation 2012 FIGURE 6 States allowing IFs in 2012. (Source: Recreated with data from Mullen 2012.)

16 ning efforts, and the TDD funds cannot be used to recoup costs incurred during the planning and implementation process. • Transportation decision making with regard to new development proposals is fragmented at various levels of government. • Transportation planning is not a well-developed prac- tice as part of the municipal planning process. Very few master plans and zoning codes have been adequately tested for their impact on transportation infrastructure. • The role of counties in the transportation planning pro- cess limits the opportunities for them to facilitate the intergovernmental cooperation needed to balance com- peting local, regional, and state interests with regard to transportation (Pershing 2008). Comprehensive Improvement Plans Rappa (2002) notes that even when statutes allow for trans- portation infrastructure, they do not stipulate an applicable service area, nor do they always require a CIP or a long- term plan that identifies current and future needs. As of 2002, 14 states required both service areas and CIPs to be satis- fied. Some states, such as Texas, Utah, and Wisconsin, allow fees to be used only for existing infrastructure affected by new development. Mullen (2012) notes that as of 2012, 20 of 27 states required that projects be based on a CIP. Some of these capital plan requirements simply mandate that a list of projects be developed on which fees will be spent. Some Examples of IF Use In 1998, a Congressional Budget Office study discussed the use of IFs in the funding and financing of two toll roads in the country: Colorado’s E470 and Orange County, Califor- nia’s Transportation Corridor Agencies. The report discusses the Colorado DOT agreement to lend as much as $20 mil- lion (subject to annual appropriations) to match contribu- tions from local governments. The E470 authority also has the power to assess and collect highway expansion fees from developers of land within 1.5 miles of the center line of the highway. For businesses, the fee is based on square footage and distance to an interchange; for residential property, the fee is based on an estimate of relative use of the project by residents. The charges are one-time and generally are levied on both residential and nonresidential development within the established area of benefit of a roadway. Other Implementation Considerations Rational Nexus Between IFs and System Improvements Across the nation, as IFs have been challenged in court cases, a principle known as the rational nexus test is used to determine New Jersey. N.J. STAT. ANN. 40:55D-42. The Transpor- tation Development District Act of 1989 allows the creation of transportation improvement districts (TIDs) and transpor- tation development districts (TDDs). The districts are formed by the New Jersey Department of Transportation (DOT) on petition of local officials. The legislation provides for the development of a master traffic plan to measure the extent of existing deficiencies and the impact of future development. IFs may then be charged to new development based on spe- cific impacts and any projects necessary to offset the impacts. The legislature recognized that growth corridors and growth districts were heavily dependent on the state’s transportation system for current and future development yet placed enor- mous burdens on the existing transportation infrastructure contiguous to new development and elsewhere. The legisla- ture determined that it would be “appropriate for the State to make special provisions for the financing of needed transpor- tation improvements in these areas, including the creation of special financing districts and the assessment of special fees on those developments which are responsible for the added burdens on the transportation system” (N.J. STAT. ANN. § 27:1C-2[c]; Pershing 2008). The Transportation Development District Act authorizes the governing body of any county to apply to the state trans- portation commissioner for the designation of a TDD. Fol- lowing any such designation, a county is required to initiate a JPP for the TDD with opportunity for participation by the state, all affected counties and municipalities, and private representatives. A transportation project is broadly defined to include “public highways and public transportation projects, any equipment, facility or property useful or related to the pro- vision of any ground, waterborne or air transportation for the movement of people or goods.” As of July 2000, only four counties had engaged in a TDD planning process under the TDD Act. They include Mercer County, which had a TDD plan approved in 1992 that is operational; Atlantic County, which had two former TIDs grandfathered under the TDD Act; and Hunterdon County and Union County, which had TDD applications approved in the 1990s but had no approved TDD plan and the TDDs are not operational. The New Jersey Legislature was concerned about the underutilization of the TDD Act and in 1998 made recommendations for modifications to the TDD Act “which would encourage regional and intergovernmental transporta- tion concerning transportation planning decisions” (Pershing 2008). Some findings, which are applicable for purposes of this report, are as follows: • The TDD requires coordination and cooperation between municipalities, counties, the New Jersey Department of Transportation (DOT), New Jersey Transit, and the pri- vate sector during the JPP. • The costs associated with the TDD planning process are high for counties and municipalities. There is no clearly defined source of funding to support TDD plan-

17 10. Provisions must be included in the ordinance to permit refunds for projects that are not constructed because no impact will have manifested. 11. IF payments typically are required to be made as a condition of approval of the development, at the time that either the building or the occupancy permit is issued. The rational nexus requirement was established in Nollan v. California Coastal Commission, 483 U.S. 825 (1987). In that case, the United States Supreme Court held that permit conditions must be sufficiently related to the government’s regulatory interests. The Court added the “proportional- ity” requirement in Dolan v. City of Tigard, 512 U.S. 374 (1994). In the Dolan case, the Court held that when gov- ernments impose permit conditions, there must be “rough proportionality” between the condition’s requirements and the impacts of the development. Thus, the use of IFs must satisfy the nexus and proportionality rules as laid out by the Constitution. Other Considerations Four additional considerations have been listed in the litera- ture as important for resorting to IFs: • Political acceptability is vital in jurisdictions, as is the acceptability of the constitutionality of IFs, particularly in states that do not have enabling statutes. • Strong real estate market conditions and growth are important for rapidly growing cities and regions. There have been quite a few instances in more recent economic times when IFs have been temporarily placed on hold or deferred to incentivize development. • Institutional capacity in terms of clear-cut guidance on implementation and usage, proper legislation, and finally administrative and technical abilities to institute and man- age IFs are important factors in deciding to move ahead with IFs. • IFs can have built-in equity implications. The onus of establishing the rational nexus test lies on adopters to ensure fairness of the fees and rate structures. This test requires a demonstration of a need for the improvement as caused by the development, a cost basis for the rates apportioned to the development, and a benefit for those who pay with guidelines on how the money should be spent and placed in a fund that is separate from the local government or municipality’s general fund (Mathur and Smith 2012). SPECIAL ASSESSMENT DISTRICTS Special assessment districts (SADs) are an institutional mech- anism for financing local infrastructure investments by allow- ing an added fee on a defined district that most benefits from the improvements. The most typical SAD is unique in that it the legitimacy of an IF. IFs may be imposed only for capi- tal expenses necessitated by and directly attributable to the cost of system improvements needed to serve new growth and development. The three nexus tests of IFs developed in the courts to meet constitutional challenges to IFs include (1) the reasonable relationship test, which requires a rea- sonable connection between the fee charged the developer and the needs generated by that development; (2) the specifi- cally and uniquely attributable test, which confirms that the fee charged to the developer is directly and uniquely attrib- utable to the development; and (3) the rational nexus test, which requires rough proportionality between the amount charged to the developer and the type and amount of facili- ties demand generated by the development and that there be a reasonable connection between the use of fees and the benefits accruing to the development (Nollan v. California Coastal Commission 1987; Dolan v. City of Tigard 1994; Pershing 2008). The APA sets out the following 11 standards for IFs that were ratified by the Board of Governors in Cin- cinnati and San Diego. 1. The imposition of a fee must be rationally linked (the rational nexus) to an impact created by a par- ticular development and the demonstrated need for related capital improvements pursuant to a CIP and program. 2. Some benefit must accrue to the development as a result of the payment of a fee. 3. The amount of the fee must be a proportionate fair share of the costs of the improvements made neces- sary by the development and must not exceed the cost of the improvements. 4. A fee cannot be imposed to address existing defi- ciencies except where they are exacerbated by new development. 5. Funds received under such a program must be segre- gated from the general fund and used solely for the purposes for which the fee is established. 6. The fees collected must be encumbered or expended within a reasonable time frame to ensure that needed improvements are implemented. 7. The fee assessed cannot exceed the cost of the improve- ments, and credits must be given for outside funding sources (such as federal and state grants and developer- initiated improvements for impacts related to new development) and local tax payments that fund capital improvements, for example. 8. The fee cannot be used to cover normal operation and maintenance or personnel costs but must be used for capital improvements or, under some linkage pro- grams, affordable housing, job training, child care, or such. 9. The fee established for specific capital improvements should be reviewed at least every 2 years to deter- mine whether an adjustment is required, and simi- larly the CIP and budget should be reviewed at least every 5 to 8 years.

18 5. Initial project funding procurement. 6. Challenges and legal appeals. 7. Lien position. SAD Geographic Boundaries or Areas of Applicability Because most SADs are conceptually driven by micro ser- vice area geography or benefit areas for projects for which they are developed, they are used in the context of ser- vice areas or specified boundaries. The service area itself and the rate determination are the two most difficult ele- ments of SADs (Rolon 2008). These boundaries are deter- mined by engineering or economic analysis. There are often determined after consideration of two geographic areas: a broader aggregate district where communities receive gen- eral benefits and a second one that is a more restricted or a smaller service area comprised of those receiving spe- cial benefit. This is an important technicality because once properties are assigned to a benefit area, they belong in that zone until expiration of the SAD (a duration specified by the statute of the state). Boundary development is based on an assessment of the extent of special benefit that is delivered by the project. There are no guiding principles for boundary determination or rate setting (Mathur and Smith 2012; Zhao and Larson 2012). The notion of a generally open system combined with local benefit presents agencies wishing to pursue this route with a problem as to how the areas served/benefit areas/ catchment areas can be defined and drawn for the purpose of levying the special assessment. This is a practical difficulty in implementation. Theoretically, the service area would estab- lish a link between the project and the beneficiaries, a task that is in principle marred by the difficulty in establishing the beneficiaries for open systems such as roadways. As a practical matter, many agencies bypass this technicality and adopt distance-driven thumb rules for establishing service areas. In rare instances, SADs of a special kind are found at a macro areawide scale. An example of an areawide example is discussed in chapter three. These areawide examples are driven by general benefit considerations (as opposed to spe- cial benefit) and are generally used in a more programmatic basis. In such cases, a flat rate tax is often levied to fund transportation. Assessment Rate/Fees A second problem arises with the determination of the rate or levy basis. In principle, much like boundary areas and user charges, levy rates or fees have a relation to the benefit on the property. However, the research still needs to advance how rates can be assessed in ways that can be attributed to the proposed improvement. There is another difficulty asso- ciated with future improvements because the benefit cannot refers to a unique district in which a local government can levy a fee (special assessments) against real estate parcels to pay for certain types of public projects. According to the U.S. Census Bureau, special assessments represent 0.31% of total state and local government revenues in the United States and 0.47% of local government revenues as of 2008–2009. Zhao and Larson (2012) present an excellent overview of SADs and their history in the United States. Implementation Considerations Sources of Value Creation for SADs and Beneficiary Basis The rationale for SADs is proximity driven and based on the benefits derived largely from transportation investments and accessibility changes (Rolon 2008). Those closer to an improvement receive greater benefits than do those farther away or the larger community. The literature sometimes refers to these as special benefits. Thus, SADs attempt to isolate that value created to properties in areas that benefit from an improvement and channel that toward funding and financing the cost of a transportation project. The main benefit driver or source of value creation in these cases is the change in access in terms of reductions in travel time, travel costs, and distance made possible as a result of these investments. The main ben- eficiaries of this created value are the entities or affected com- munity for whom the value is created. Special assessment districts are common in the case of transit and transit-oriented development (Center for Transit- Oriented Development 2008). Zhao and Larson (2012) provide a succinct summary of public-transportation–related special assessments. They provide several examples of cities and transit districts using SADs to transit-improvement–related SADs. Like IFs, roadway improvements and construction are an authorized use of special assessments in the United States (Hagman and Misczynski 1978). Several authors have pointed out that SADs are now used to compensate for increas- ingly constrained state and local transportation improvements and maintenance budgets (Hough et al. 1997; Kogan and McCubbins 2008). Establishment of SADs The steps involved in the initiation are laid down in state statutes, and there are some variations across states, but the following mostly sequential steps are typical of most SADs (Zhao and Larson 2012): 1. Initiation. 2. Feasibility studies. 3. Public notice requirements to affected community members. 4. Appraisal assessments (RCW §35-43-250 and Virginia Code §15.202407).

19 ment. In many states, legislatures have passed new enabling legislation that allows special districts to be used to finance a broader range of facilities than was allowable in the past. The most common use is for environmental and housing services, followed by the provision of other public infra- structure services, excluding transport. These districts often go by such names as improvement districts, road districts, metropolitan districts, and building authorities. In most cases, the districts serve the same general purpose as the traditional SAD, but they often are not limited to the use of assessments on property, such as front footage charges or acreage fees (AASHTO Center for Excellence in Project Finance 2013). Special assessment districts appear in a variety of forms based on legal provisions in the United States. They are operationalized through the service areas that appear with different names in different states. They are also referred to as benefit assessment districts (California Benefit Assess- ment Act 1982), local improvement districts (Washington), business improvement districts, community improvement districts (Missouri), downtown improvement districts, TIDs (Virginia, Ohio), and special service areas (SSAs; Illinois), all of which operate under the same general defining principles. Some states, such as Minnesota, Michigan, and Nevada, call them SADs (League of Minnesota Cities 2011). Other forms of special districts allow for other types of levies, taxes, and fees to be imposed, including transportation benefit districts (TBDs) and TDDs. The typical SAD refers to a benefit where property fee type levies are the primary basis for charging, and no other types of taxes are used. SADs and Rural Roadways A form of SAD called rural improvement district is used in Montana and North Dakota. For example, in Montana, state law allows for property owners to petition counties to initi- ate infrastructure improvements when at least 51% of prop- erty owners approve the measure. Similarly, Cass County in North Dakota requires 60% of landowners to support the assessment fee. In these cases, property owners are responsi- ble for all costs of the improvement, although county govern- ments undertake the actual construction (Hough et al. 1997; Zhao and Larson 2012). Applicability to Transportation Special assessments have been used as a source of transpor- tation funding by means of assessing property owners who are benefited by access changes brought about by the trans- portation project being constructed. The revenues are used to cover a portion of the project costs. As with IFs, statutes define the role of transportation as an eligible category for establishment of an assessment district and authorize the use of the fees on properties to fund transportation. be anticipated in relation to the adoption of the SAD, which complicates rate setting. Some of these rules are discussed in the literature: • A flat rate for all uses. • A graduated levy based on perceived benefit distance, which may or may not vary by land use type. In this case, the rate can be a variable rate where the rate is stepped up by a distance factor indicating how far the property is from the improvement. This is often seen in the case of transit. • A levy with a cost basis in which rates are set on the basis of cost recovery. These examples can include both types listed earlier and two other categories: – Rates based on cost apportionment of anticipated ben- efits received as a result of increases in land or property value. – Rates that are zone- or area-based, based on distance from the improvement. In this case, they could be graduated distance-based levies or flat. • Frontage-based levies proportional to the frontage occu- pied by each landowner adjacent to the improvement or proportional to the area occupied by the parcel in the SAD. The rate may or may not vary by land use type. An example in this case is the Los Angeles Metro politan Transit Authority rate calculation, for which the annual assessment rate is determined by dividing the bond repay- ment by the assessable square footage and factoring in the last 3 years of delinquency rates. The rate is then levied on the gross square footage of the assessable improvement or parcel area, whichever is greater. It is also fixed for all uses and independent of how close or far one is from the reference point (in the case of the Los Angeles Author- ity, a station; Rolon 2008). This is equally applicable for transit or highways. • Equity criteria may be combined in rate formulas by making adjustments in the rate formula if equity is of concern. Another technicality linked to rate setting is the ad valorem versus non-ad valorem basis for rates. The definitions for VC suggest the ad valorem basis; however, the practice appears to be mixed in this regard. The payments for infrastructure occur along two different lines: (a) pay as you go, which implies funds are paid out as they are collected; and (b) pay as you use, which implies SAD-backed bonds cover the up-front costs of the infrastruc- ture (Mathur and Smith 2012). Legal Considerations Special assessments are authorized in all 50 states either under explicit enabling legislation or under state constitu- tional provisions. Virtually all SADs require some type of landowner or voter approval of inclusion in the districts or as an appeal to dissolve the district to not fund the improve-

20 The Illinois SSA statute allows creation of SSAs that tran- scend municipal boundaries. Thus, the SSA enables a self- taxing district to be formed, primarily created to fund physical improvements such as infrastructure, commercial area man- agement and promotions, and recreational and public safety facilities. Improvements may be funded through tax revenues generated through SSA and other funds, usually when a devel- opment proposal is in place by private developers for the area. Capital for improvements is obtained by debt issuance. The tax or additional revenue generated by the SSA normally takes the form of additional levies on individual properties, which are then used to amortize debt. The SSA taxes are collected by the county and remitted to the municipality (Illinois General Assembly). Common Elements of SSAs and TIDs Almost all types of transportation SADs discussed, SSAs and TIDs, have some common elements built into the implemen- tation process with respect to boundary determination. The Virginia statute specifies contiguity within single jurisdiction/ locality and contiguity across localities/jurisdictions. This is a common element for almost all forms of special districts. Another common element is that both are property tax-based assessment districts, but the SSA can levy other charges or fees. In addition, the SSA fee is collected through the prop- erty tax system and is calculated on the basis of benefit but is not a part of the Illinois real property tax system; in other words, the tax is considered non-ad valorem. Revenue Stability One of the justifications for using SADs has been that they offer a stable source of funding for bond financing. The lit- erature suggests that they cannot be used to finance facilities that provide general, communitywide benefits. This specifi- cally differentiates taxes and fees in the context of VC. Econo- mists generally define tax as a way to generate revenue. On the other hand, a fee is strictly a type of a user charge, often used to defray the cost of providing the service or, in the case of special assessments, one that is proportionate to the spe- cial benefit generated by the improvement. This requirement makes the implementation of special assessments for specific purposes more complex and more legally difficult to institute than general-purpose taxes. However, there are instances when SADs have been used as a dedicated source of transport fund- ing based on state-level initiatives suggested in the review. Usage Potential for Transportation (Highway or Transit) Funding Because SADs are benefit based or access driven, they may be justified when a transport project alters access significantly and enhances the affected community positively through higher land values. Although access is critical, access is not the only driver for lasting economic value created for the Transportation-Related SADs Special assessment districts are authorized in 50 states in dif- ferent forms. SAD funding/financing mechanisms vary by district, and not all authorize transportation as valid service or public work category, and when they do, they often require an institutional mechanism for facilitating its use. This report discusses two of the most common types of SADs used in the United States that are applicable for transportation funding purposes. The first is known as the TID, adopted in Virginia and Ohio, using only property taxes dedicated specifically for transportation. The second one is the SSA (Illinois), which is a more typical type of SAD; transport infrastructure is among the many public works and services that an SSA can benefit. SADs also need to be supported by the majority of the property owners. The Transportation District Act of 1964 was enacted to promote regional development of transportation systems. The Virginia TID is encapsulated in Virginia Acts of Assem- bly, Virginia Code. It applies equally to highways and transit. This act allows for the development of special local transpor- tation districts, transportation tax districts, or TIDs: • Chapters 13 and 15 of Title 33.1 of the Code of Virginia, Va. Code §33.1-409 et seq. • Va. Code §33.1-430 et seq. • Va. Code §58.1-3221.3. These TIDs are responsible for construction, expansion, improvement, and operation of transportation improvements in the district. The Route 28 TID is one example of such a district. The Ohio TID is included as part of the Ohio Revised Code, Title 55, Chapter 5540, Section 5540.01. The Ohio TID is also a generic transportation project funding district not nec- essarily restricted to highways, for which a project is noted to include a street, highway, parking facility, freight rail tracks and necessary related freight rail facilities, or other transpor- tation project constructed or improved under this code. An SSA is a common financing mechanism to establish and support a variety of services, physical improvements, and other activities within a specific geographic area of a municipality. The Illinois SSA is a type of non–transportation-specific SAD that allows for transportation as one of the several types of ser- vices or infrastructure that can be funded through this financ- ing mechanism. The SSA is authorized in Illinois pursuant to Special Service Area Tax Law Article 27 35 ILCS 200/27-5 as amended (Illinois General Assembly 35 ILCS 200/27-5). SSA financing can improve or maintain designated areas within a community, and its boundary must consist of con- tiguous properties that benefit from expanded services and improvements. SSA financing also enables a municipality to provide public services to a portion of its jurisdiction with- out burdening the entire community with increased debt or operating taxes.

21 • They apply only to properties within a designated area for their location-specific special benefits from the improve- ments. This emphasizes the beneficiary basis of SADs as a funding mechanism. • The amount of the charge may be related to the value of the benefits the properties receive, which are estimated based on certain assessment methods. • Special assessments are collected in property tax bills. Therefore, jurisdictions may use special assessments to finance infrastructure improvements even if they have reached their property tax limits. Thus, SADs’ assess- ments are typically non-ad valorem in that they are directly tied to the improvement of property as a result of the improvement. • SADs can issue bonds for financing infrastructure projects. • SADs appear to lack conceptual basis with respect to beneficiary areas. SALES TAX DISTRICTS Sales tax districts (STDs) are primarily a type of SADs, with the only difference being that they allow the use of only the sales tax (instead of the property tax). Much like SADs, they are levied in service areas that are benefit driven. SADs can sometimes also combine property fees and sales tax elements in one geographic area (Illinois SSA, for instance). Implementation Considerations Geographic Boundaries or Area of Applicability Much of the discussion on SADs is applicable to STDs. Unlike SADs, STDs are more frequently implemented on a macro regional scale benefit area, such as at the level of a municipal- ity or areawide, and are not always limited to specific service areas. Sometimes, they may cover more than one municipality or county. Rates The maximum rates of STDs are stipulated by statutes. Unlike SADs, there is not a process for establishing rates for levy. The sales taxes are levied on all purchases within the area defined as the service area, unlike special assessments, for which fees are levied in some proportion to the benefit. Thus, the rates in this case may be considered as very low rate taxes. Applicability to Transportation Sales tax districts have been used as a source of transpor- tation funding by means of levying a low-level sales tax on all transactions in an area benefited by the transporta- tion project(s). The revenues are used to cover a portion of the project costs. As with IFs, statutes define the role of transportation as an eligible category for establishment affected community. There is also a threshold or limit when marginal changes to access on networks will stop leading to benefits in terms of land values or other economic benefits. There is adequate evidence on this in terms of mature net- work land values (Dabinett 1998; Ingram 1998). There are very few examples of SADs being used for large-scale projects because they are driven by local ben efit and implemented by local governments. When that happens, the jurisdictions should have provisions in their codes for allowing interjurisdictional collaborations. In Ohio, adjacent municipalities can share costs of a street improvement when the improvement crosses municipal boundaries. The munici- palities must first agree on the proportion each will contribute to the improvement project. From there, each municipality can decide whether the improvement will be paid for out of general funds or through special assessments. Then the municipalities must agree to designate one of them as the project adminis- trator, responsible for construction of the improvement (Ohio Revised Code §727-41). Virginia has specific provisions for multijurisdictional TIDs. Recently, the Dulles Rail Transit Improvement District in Vir- ginia attempted to develop a cross-jurisdictional SAD covering Fairfax County and Loudoun County, near Washington, D.C., to finance the construction of an extension of Washington Metropolitan Area Transit Authority’s (WMATA’s) Orange Line. However, they were unable to gain the required public support in the larger district, and the boundaries were scaled back to Fairfax County alone (Center for Transit-Oriented Development 2008). This failure underscores the political difficulties in setting up SADs across multiple jurisdictions. Other Implementation Considerations This mechanism may be most applicable in the following cases: • Growth areas that are underserved in terms of transport infrastructure relative to growth in that the improve- ment addresses a need. • Areas or advanced transport networks where a signifi- cant increment in accessibility exists (such as new river or bridge crossings), allowing separate systems to merge. • Areas or advanced transport networks with significant bottlenecks (Rolon 2008). Political acceptability is significantly affected by the design considerations of SADs and specific types of parcels included in the geographic area. In some situations, it has been noted that the exclusion of existing parcels/developments from ser- vice areas may enhance political acceptability (Mathur and Smith 2012). In summary, the key features of SADs are: • Special assessments are levied against property owners to finance certain public improvements and provide a steady stream of revenues.

22 • Contract with the Missouri Highways and Transporta- tion Commission (MHTC) or the local transportation authority to receive revenue from the district to apply to project costs. Similarly, Kansas uses its own version of the TDD. Extent of Use Missouri authorized TDDs in 1990. The first TDD was estab- lished in Missouri in 1997 and as of December 31, 2009, 166 TDDs had been established (see Figure 7), making Missouri one of the more active states in applying this technique (State Auditor’s Report 2011). Kansas also has several TDDs but not to the extent of Missouri. Other Implementation Considerations Political acceptability of sales taxes is a vital implementa- tion consideration. Many of the additional considerations discussed under SAD are also applicable to STD, including healthy economic and real estate conditions. NEGOTIATED EXACTIONS AND CONTRIBUTIONS—DESCRIPTION Negotiated exactions (NE) and contributions are similar to IFs in that they are also charges or exactions to new devel- opers for necessary growth-related services, but they differ in one significant way. Negotiated contributions are negotiated on a case-by-case basis and apply very locally to on-site improvements related to the new development. An exaction is a condition for development that is placed on a parcel, and it requires developer mitigation of adverse impacts of the development (existing or proposed). NEs can also take the form of private provision of land or construction of roads and in-kind contributions to local roads, parks, or other public goods as a condition of development approval, or can be requested in the form of in-lieu fees. IFs, on the other hand, are determined through a formal calculation of improvement of an STD and authorize the levy of sales taxes to fund transportation. Transportation-Related STDs In addition to the Illinois SSA, there are some examples of transportation-specific STDs, including Missouri and Kan- sas TDDs. Both of these TDDs allow property and sales tax as the basis of levies; however, all implementation exercises have been only in relation to sales tax. In 1997, the Missouri General Assembly passed Senate Bill 303, amending the Transportation Development District Act to make it more flexible and usable by local communi- ties. The Missouri TDD is an independent political subdivi- sion and is defined as a transportation project development tool, governed by state statute, which is available for use by registered voters, local communities, and property owners throughout Missouri. A TDD is designed to facilitate specific public transportation improvements through the collection of taxes and the borrowing of funds. A TDD has geographical jurisdiction and is created by vote of qualified voters; the vote is then approved by the circuit court. The revenue of a TDD (most frequently sales tax) can be used only for pub- lic transportation and transportation-related improvements (Missouri DOT, Missouri General Assembly). The TDD can do all of the following and more: • Fund, promote, plan, design, construct, improve, main- tain, and operate one or more projects or assist in doing so; in addition, it is a political subdivision of the state. • Work with projects that include bridges, streets, roads, highways, access roads, interchanges, intersections, signing, signalization, parking lots, bus stops, sta- tions, garages, terminals, hangars, shelters, rest areas, docks, wharves, lake or river ports, airports, railroads, light rail, other mass transit, and any similar or related improvement of infrastructure. • Form a board of directors who will possess and exercise all of the district’s legislative and executive powers after qualified district voter approval. FIGURE 7 Number of TDDs in Missouri as of 2009. (Source: Recreated with data from State Auditor’s Report 2011.) 0 5 10 15 20 25 30 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 N um be r o f T DD s I ni ti at ed Year

23 AIR RIGHTS—DESCRIPTION Air rights are a VC financing mechanism in which a private agency partly compensates the public agency for the cost of an investment through cost-sharing agreements. The pub- lic agency can also share in the future revenues from the development. ARs involve the development of highway air space. The term “air space” is a legal term and refers to the right to use and control the open space above the property owned by another party, and ARs typically have been granted for the space above railways, highways, or other property. It is assumed that the parcel owner has the capacity to build within the limits imposed by zoning laws (Savvides 2004). Leasing ARs above, below, or adjacent to transit centers or highway facilities (when applicable) allows for development in prime locations without the demolition of existing structures or the displacement of current residents. In 2008, New York City alone documented 83 transportation infrastructure sites, comprising nearly 1,000 acres of roads, rail corridors, and rail yards that could provide areas for new surface development (Friedman 2012). Air rights often occur through a transfer of development rights (TDR). In the United States, the first application of ARs was New York’s Grand Central Station Terminal and Park Avenue development constructed over Central Railroad in 1913 (Campbell 2009). Today, we have examples of ARs developments over highway rights-of-way as well as transit stations and transit corridors. More recently, in the transit arena, WMATA has been at the forefront of ARs development mechanisms. It has used ARs leases to help finance two of its transit stations. Simi- larly, Georgia’s Metropolitan Transit Authority (MARTA) has successfully used ARs to generate revenues for transit projects. In the case of highways, many cities began to recon- sider the sale of ARs over freeways to reconnect neighbor- hoods that had been split by their construction. Examples of such projects include: • An esplanade built above East River Drive Highway in New York City intended to preserve a waterfront over- look at Carl Schulz Park. • A city park constructed in Duluth, Minnesota, over Interstate 35, connecting the Lake Superior lakefront to downtown Duluth. • A freeway park in Seattle, constructed over an interstate in downtown Seattle and comprised of both a large urban park and a 21-story office building. • Union State Place on a land bridge across Interstate 670 in Columbus, Ohio. This bridge can support one- story buildings containing 27,000 square feet of retail space. Public agencies in Boston have been among the most aggres- sive in pursuing ARs development over interstate highways. The Prudential Tower, a $200 million mixed-use residential costs and may involve larger area, off-site transportation improvements. Implementation Considerations Usage of Exactions The usage of NEs is rather similar to that of IFs; in some sense, NEs preceded IFs. Much like IFs, exactions are an attractive means of ensuring the provision of needed infra- structure in high-growth areas and where a jurisdiction’s fis- cal capacity is limited. The adoption of exactions as a method of infrastructure provision appears to be even more common and widespread than that of IFs (Iacono 2009). Geographic Scale Negotiated exactions are determined on an ad hoc, project- by-project basis through the development approval pro- cess. Thus, the scale of application is at one or more site(s) for any given project. The NE often takes the form of in- lieu fees for situations when the size of the development is rather small to individually dedicate land or facilities (Kolo and Dicker 1993). For larger developments, the local entities can enter into development agreements where a NE will involve the dedication of land and/or facilities by developers. Legal Considerations As with IFs, the legality of NEs is grounded in the establish- ment of a rational essential nexus and proportionality rules between the required exaction and the services provided. Virginia proffers are an example of NEs. NEs need to be authorized legally and are almost always applicable for on- site improvements. They also require formal traffic impact studies (Lari et al. 2009). Applicability to Transportation Highway and transit agencies and developers can negotiate a payment for capital improvements that are designed to provide access or service to the site that is being developed. They are equally applicable to new or existing developments. Munici- palities themselves may also serve as administrators of such exactions. Other Implementation Considerations Additional legal scrutiny of all land use negotiations is an important consideration for NEs. Recent Supreme Court rulings on land use negotiations, such as Koontz v. St Johns River Water Management District (Ewing 2013) may act as a deterrent in future.

24 market, this has led to the consideration of how ARs agree- ments may be developed or structured, including: • Up-front, one-time payments versus conventional lease agreements. • Long- and short-term leases: The lease provides access to air space as well as any land required for support or access to that air space for a defined period of time. ARs leases have been structured similarly to ground leases, including renewal options that usually last 99 years (Larson and Zhao 2010). • Fee simple ownership rights: First, public entities may decide to sell both ground and ARs outright. This prac- tice has been followed by the highway or railway agency obtaining a long-term or perpetual easement through or below the development (Prudential Tower in Boston, is an example of this approach). In such an instance, the public entity loses long-term control of the parcel but may reap a large enough financial gain to adequately compensate itself for this loss (Larson and Zhao 2010). • Sale of ARs with grant of easement: Easements create a long term or perpetual term during which the landowner grants a nonpossessory interest to another entity to use part of a property for a specific purpose. Easements are often used to ensure that developers have access to the ground for construction (Larson and Zhao 2010). Valuation Considerations Airspace utilization requires an explicit valuation of the air- space. For instance, the FHWA policy already stipulates that the DOT shall charge fair market value for use of land for any purpose not related to highways and that the income received from airspace leases has to be used for transportation purposes, as specified in 23 CFR 710.403 (e). Valuation and appraisal are critical parts of this implementation process. Valuation is noted as important in all VC ARs examples reviewed in this synthesis and in all other uses of air space not related to highways. Legal Considerations Peters (1986) notes that FHWA issued a policy in 1986 to use airspace for the highway program. The current FHWA airspace guidelines are encapsulated in Title 23 Code of Federal Regulations (CFR; CFR 710.405-710.407; FHWA 2010). The FHWA guidelines cover airspace leases only for interstate ARs. ARs do need to be legally allowed to be used in, near, or adjacent to highway or transit corridors. The APA notes that legal and financial considerations influence the type of ARs conveyed (APA 1964). Applicability to Transportation Use of airspace over, under, and adjacent to highway rights- of-way allowing for real estate development opportunities redevelopment project, was the first major ARs development in Boston, built in 1957 using ARs over a Massachusetts Turnpike exit ramp (Larson and Zhao 2010). Peters (1986) provides an excellent review of highway- related interstate air space projects, some of which include Washington DOT’s ARs lease options over Interstate 5 to develop the Gateway Tower; use of air space under Inter- state 5 at Spokane Street Interchange for a new maintenance facility; and the Massachusetts Turnpike Authority use of air space over and around the turnpike to develop Copley Place and other similar developments. Implementation Considerations The lease or sale of ARs presents an opportunity for transit and highway agencies to generate much-needed revenue, but successful projects require time and extensive planning. Lay- ing the groundwork for and building secure partnerships with key stakeholders is a must. Geographic Scale or Area of Applicability Air rights projects are very location-specific and possible only at the parcel level. ARs projects are highly susceptible to changes in the commercial real estate market. Sustainable ARs Air rights are most effective in communities with strong real estate markets. The sustainability of financing mechanisms, such as ARs for agencies and local governments, is often evaluated using considerations such as: • The presence of a clear policy framework in place to guide JD activities. • The presence of strong local government and transit institutional capacity to successfully plan, implement, and manage JD projects. • The support or opposition of local stakeholders, including local residents who can make or break a project. • The need to ensure that agreements are equally benefi- cial to all partners (Mathur and Smith 2012). Structure of AR Transactions Highway and transit agencies have dealt with the structure of the AR contracts in a number of ways. Four different meth- ods of conveying ARs have been employed, one of which involves a leasehold and three of which involve granting the developer a fee interest in the air space [Goldschmidt 1964; American Planning Association (APA) 1964]. Because they are related very strongly to the performance of the real estate

25 Implementation Considerations Geographic Scale or Area of Applicability Joint development VC agreements are much like ARs and exactions. They tend to be used on a site-specific basis (proj- ect by project). Models of JD VC At least two kinds of VC-related JD modes have been pre- sented in the literature, both of which are applicable to transit and highways (Zhao et al. 2012). • Public ownership of land model: The public sector may sell or lease public-owned properties for funding where the transportation agency owns land adjacent to its facil- ities but does not need the property for immediate use, or where the parcel is not being used to its full potential. As pointed out, these contracts can be structured in dif- ferent ways. The variations in this scenario in the United States include: – Transactions of publicly owned land. – Land banking as a revenue-sharing mechanism. – Commercial space leasing as a cost-sharing mecha- nism undertaken by an agency (common with transit agencies). – Transactions involving development rights in which a public agency owns land adjacent to its facilities and it sells, leases, or awards associated development rights to encourage development of a site and generate reve- nues. Many of the ARs projects belong in this category. – Development rights awards in which a private sec- tor builds the facility (e.g., light rail) in return or exchange for developing the property around the site (e.g., station). • Private ownership of land model: A public entity, or a developer working with a public entity, may exact land from private property owners who, in exchange, receive benefits in the form of property improvements. – Transactions involving privately owned property, which is not common in the United States. – Transactions involving development rights, such as density bonuses used in New York City geared at increasing the floor-to-area ratio. Extent of Use Joint development is more common with transit agencies. According to the Government Accountability Office (2010), 32 of the 55 transit agencies surveyed noted the use of JD. Although many of these JD projects were quite small, con- sisting of only a single parcel near a transit station, some were much larger, neighborhood-scale joint projects. WMATA, the agency receiving the largest amount of revenue from JD in 2008, generated $8.8 million. Outside the United States, is also VC. Because ARs are unused or excess development rights (such as building density or lot size) are gauged by the square foot and transferable, when permitted, from one buildable lot to another, they typically are activated through a TDR, which embodies the notion that these rights are a saleable and transferable commodity (Mills 1980). Thus, this mechanism relies on seizing the opportunities presented by air space when legally allowed to enable real estate develop- ment. The utilization of ARs has been a source of transporta- tion project funding in the case of highways and transit in the dense cities of states such as Massachusetts and New York. Other Implementation Considerations There are no major additional implementation considerations in this case. JOINT DEVELOPMENT—DESCRIPTION Joint development is defined as “an effort by a public agency and a private developer to undertake a construction project.” JD is usually a voluntary joining of governmental entities with private for-profit organizations to undertake mutually beneficial development in connection with public infrastruc- ture. It is generally a more encompassing and broader concept than traditional VC. A JD agreement generally contains formal legally binding language between a public entity and a private individual. Projects may be initiated through a codevelopment, which is an informal working arrangement in which the public agency and the private developer work together to complete their individual projects in a mutually beneficial way (FHWA 1996). These are general definitions that envelope public– private partnerships of all kinds. The JD concept is a public– private partnership agreement of the broadest kind. In the case of VC, it is a cooperative agreement between the public sector, private partners, and real estate developers to share the financial burden or cost of the transportation investment. The definition that is most pertinent to the context of VC is that provided by Sedway Kotin Mouchly Group (1996), which defines JD as “real estate transactions involving the development of private projects using publicly owned land or air rights.” From the VC perspective, JD allows the capture of pri- vate benefits created by infrastructure improvements through specific JD arrangements to support the initial cost of the improvements. In this sense, successful JD projects may help alleviate funding shortages and improve market efficiency by better linking costs and benefits of transportation improve- ments. JD agreements typically accompany AR agreements, but other types of JD agreements are possible, including a lease of land or space to a developer; sale of land for specific types of development; joint construction of a transit or high- way facility and private development; and others. Public and private partners can share costs, revenues, or financial risk, depending on the particular arrangement.

26 LAND VALUE TAX—DESCRIPTION The land value tax (LVT) is a variant of the property tax that imposes a higher tax rate on land than on improvements, or taxes only the land value. The most famous case for land value taxation is found in Henry George’s 1879 book Prog- ress and Poverty. More than 30 countries around the world have implemented land value taxation, so it is not a uto- pian proposal. In the United States, experience with land value taxation dates to 1913, when the Pennsylvania legis- lature permitted Pittsburgh and Scranton to tax land values at a higher rate than building values. A 1951 statute gave smaller Pennsylvania cities the same option to enact a two- rate property tax. Although most municipal governments in the state have not adopted two-rate taxation, a few have tried and then rescinded it. There are some communities that currently use this type of tax program. Now, LVT has been enacted in 17 jurisdictions in Pennsylvania (Speirs 2010). However, Pennsylvania’s experience has had one setback since it was initiated. In 2001, Pittsburgh rescinded its two- rate system of property taxation after nearly nine decades, not because of the LVT mechanism itself, but because of deficiencies in assessment practices. The state of Hawaii also has experience with two-rate taxation, and in recent years, the Commonwealth of Virginia and state of Connecti- cut have authorized a few municipalities to choose a two- rate property tax, although none of the communities have yet adopted it. Connecticut adopted LVT for one munici- pality as recently as April 2013 after the bill was passed in December 2012. In this mechanism, the burden of property taxation is taken away from labor and capital investments implicit in build- ings to one that taxes only land. The shift of taxation away from buildings is a development incentive and incentivizes growth, while providing the municipality revenues to run the city from the tax revenues. For example, a drop of 5% in the building tax rate would require that revenue loss be made up by an increase in the tax rate on land values. The direct effect is to put a greater reliance on publicly created value (land) rather than privately created wealth (buildings, commerce, or wages). A higher tax on land has the acknowledged effect of removing the distortions on markets that traditional taxes create. It is more progressive than the current system, and studies have noted that it incentivizes vacant land into better use. Across the world, land value taxation has been adopted in 40 countries, with the earliest adopter being New Zealand, in 1849 (Dye and England 2010). Based on their extensive review, Dye and England comment that land value taxation is a mechanism that has worked at every level of government. Land value taxation is also touted for its positive impact on smart growth because of its split-rate structure (Speirs 2010), although many aspects, such as density effects and compactness, are the subjects of ongoing investigation. The smart growth effects arise from the split rate structure, as noted. Speirs notes that when the tax rate is increased on the land part of the property and decreased on the building, JD projects are common in Asian cities primarily for tran- sit. Some widely discussed examples of JD include Hong Kong’s rail-property (R+P) model, the land consolidation model used in several Taiwanese cities, and Tokyo’s land readjustment model. The success of these cases is attribut- able in part to their unique regional contexts, including high population densities, booming property markets, and favor- able political, legal, or regulatory environments for JD (Zhao et al. 2012). However, such cases may not be entirely trans- ferable to the United States. Legal Considerations The use of JD in the United States goes back to the Pacific Railroad Act of 1862, which provided land grants to the Union Pacific and Central Pacific Railroads for the construction of the transcontinental railroad. Each railroad was given 400 feet rights-of-way plus 10 square miles for every mile of track built. The federal government expected the railroads to sell their acquired land to pay for the transcontinental railroad’s construction. However, railroads later turned to government bonds to pay for the railroad’s construction (Cox 2009). As of 2010, regulatory barriers and public opposition pre- vented the widespread use of JD mechanisms in the United States, although 23 states had enacted legislation authorizing some types of public–private partnership. In addition, many states limit the number of JD projects or place constraints on the volume of development (U.S. DOT 2004). Despite these limitations, several public (mostly transit) entities have employed JD with varying levels of success. In 2004, New York City led the nation in the number of transit-related JD projects, primarily in the form of density bonuses provided to developers. The WMATA collected the most revenue or offloaded the most cost (Cervero et al. 2004) through JD. In addition to New York City and Washington, D.C., cities such as Portland, Oregon, and Philadelphia, Pennsylvania, use a variety of JD models (Zhao et al. 2012). Applicability to Transportation Joint development refers to public-private partnerships in relation to real estate that is benefited from the transport investment or where there is a mutual dependency between the development and transport infrastructure. JD agreements can include ARs parcels or other parcel types and allow VC through real estate development and developer partnerships. Other Implementation Considerations Additional legal scrutiny of all negotiations may be an impor- tant consideration in some JD agreements. Recent Supreme Court rulings on land use negotiations, such as Koontz v. St Johns River Water Management District (Ewing 2013), require a closer look at land use-related agreements. Admin- istratively, JD agreements are complex to manage.

27 to services and transport networks. Thus, historically it has been used to support a range of services. In the United States, in a few regions it has also been used to support transport. Other Implementation Considerations There are no major additional implementation considerations. TAX INCREMENT FINANCE—DESCRIPTION Tax increment financing is the most widely used local gov- ernment program for financing economic development in the United States. TIF is authorized in almost all states and the District of Columbia and has been implemented in vir- tually every kind of community—central business districts, gritty urban industrial neighborhoods, small towns, suburbs, and even farmlands on the urban fringe. Typically, it is the first tool that local governments pull out of their economic development toolbox. All of the states except Arizona have TIF-enabling legislation. Most states require the finding of blight for TIF use, although some interpret the condition more liberally than others. Vermont has the most liberal legislation, allowing TIF to be used for development, job creation, or even simply to increase tax revenue (Mathur and Smith 2012). However, TIF is most typically an economic development tool and has not typically been used for financing transpor- tation directly. In transportation, the most widespread use is for transit-oriented development, and its’ consideration in the context of highway projects is limited, Although Batt (2001) showed VC could have been used to finance a portion of New York State’s Interstate highway system, a 9-mile stretch of I-87 known as Northway, from its southern terminus to the point where it crosses the Mohawk River in Albany County. The theory of TIF is that the revenue growth generated within a territorially defined district is earmarked, for a period of years, to pay for physical infrastructure and other expenditures designed to spur economic growth within that district. By generating new growth, those improvements and expenditures produce the incremental revenues that are used to pay for the program that sparked the growth in the first place. TIF is typically presented as self-financing, with its expenditures paid for by the increased revenues resulting from the growth it finances, without a tax increase. Implementation Considerations Geographic Areas, Boundaries, or Area of Applicability Much like SADs, TIFs are associated with service areas. In the Texas example, a geographic zone is designated a transportation reinvestment zone (TRZ) and the generated increments are used to fund and finance transportation proj- ects. However, the problems associated with rate structures are not an issue with TIFs because they are increment based it leads to a negative capitalization effect on land, result- ing in land being priced closer to its true market value. On the other hand, the availability of buildable infill lots at competitive prices can make that land more attractive to builders. The decreased tax on building improvements has a positive capitalization effect, similar to property tax abatements providing an incentive to develop densely and compactly. One of the major advantages of land value taxation is based on the nature of the fixed supply of land and is noted as “when a tax does not affect the amount of the commod- ity produced or consumed, there is no additional cost, and such a tax is more efficient (less costly to the local econ- omy) than other taxes that reduce production” (Dye and England 2010). Implementation Considerations Administrative Aspects Introducing a LVT to replace a traditional property tax can be a straightforward procedure. No additional staff or expenses are required. Because most appraisal districts automatically divide the assessment into land and improvement values, only a software update is needed for billing. However, because it can affect significant changes for some property owners, a LVT normally is phased in over time, usually 6 to 10 years (Speirs 2010). A major hurdle to the adoption of a LVT or split-rate prop- erty tax is political feasibility. As is typical with property taxes, the broad base and high visibility of property taxes can make them a focal point for conflict over public finance and budgetary practices at the local level. Any shift toward a land-based tax would also need to be phased in gradually to avoid large and abrupt increases in tax liability for certain types of property owners (Iacono et al. 2009). Geographic Scale Land value taxation typically has been applied at the macro level on a regionwide or areawide scale, as is evident from the Pennsylvania counties. Rate Setting and Valuation Land value taxation requires that appraisal districts value land and buildings separately and that rates be established by land use types. Applicability to Transportation Land value taxation is motivated by the notion of all land pay- ing for a benefit received or specifically paying for the access

28 not allocate expenditures for capital costs even in the case of transit, and most expenses were used for transit oriented development. However, TRZs do not receive favorable devel- opment benefits such as those that are common in TIF mecha- nisms by way of tax abatements or other subsidies or waivers. The TRZ is a variant of TIF in that it does not rely on a board for governance. The governance is within the hands of the local government that initiates the TRZ because the approach is grounded in voluntary partner agreements. Applicability to Transportation Tax increment financing districts generate funding by means of assessing property owners who are benefited by access changes brought about by the transportation project being constructed. The revenues are used to cover a portion of the project costs. TIF is authorized in almost every state of the United States except Arizona (Council on Development Finance Agencies 2006). However, there are few instances of actual TIF or TIF-like experiments used to fund highway projects, and they are much more common in relation to transit-oriented development projects. Other Implementation Considerations There are no major additional implementation considerations in this case. TRANSPORTATION UTILITY FEES—DESCRIPTION The reasoning behind TUFs holds that the transportation sys- tem functions as a public utility comparable to municipal water and sewer systems. Utilities are funded by charging users based on how much they use the systems. Properties that cause more traffic by the nature of their use are responsible for a greater portion of the wear and tear on transportation infrastructure and might reasonably be expected to make larger contribu- tions toward maintenance expenses. TUFs are most commonly applied to roads and used to fund preventive maintenance of existing facilities rather than capital projects (Ewing 1993; Iacono et al. 2009; Junge and Levinson 2012). A TUF is not a user fee in the classic sense. It is not voluntarily paid and does not fund a service that benefits specific individuals to the exclu- sion of those who do not pay fees. In this sense, it is more akin to a tax than a fee. The adoption of TUFs is simpler than a tax because, as a fee, it can be established without the requirement of a public referendum. It also goes by other names, such as street maintenance charges or street lighting fees. The first TUF application was in Fort Collins, Colorado, in 1984, which tied the level of the fee to the amount of street frontage on each parcel. This fee system was abandoned in 1987 after a legal challenge by local residents, but TUFs are widely used in Oregon (League of Oregon Cities 2008) and Florida. The League of Oregon Cities indicates that 19 regions/ cities were using TUFs as of 2008 (13 are shown in Figure 8). and do not involve the imposition of new taxes and thus tend to be more politically acceptable than are SADs. Institutional Capacity Again, TIFs, such as SADs, require institutional capacity for ensuring compliance of TIF-like mechanisms and to garner support for the mechanism at the local levels (Mathur and Smith 2012). Political Feasibility In terms of political feasibility, TIF districts have the advan- tage of shielding general taxpayers within a jurisdiction from broad-based tax increases and thus benefit from low politi- cal visibility. This perception that tax-increment financed projects pay their own way may mute local opposition and increase public acceptance (Iacono et al. 2009). It is impor- tant to point to the example of North Carolina’s adoption of the Project Development Financing Act in 2003, which supports a TIF-like mechanism for issuing debt for streets, public transportation projects, and airport facility funding (North Carolina Legislature Article 6, Chapter 159 § 159– 101; Rivenbank et al. 2007; Purvis 2008). This provision has not been used at all. Thus, this example shows that having an enabling framework is not sufficient. In North Carolina’s case, feasibility is tied to a lack of fuller understanding of how the mechanism could work. Legal Considerations According to the Council of Development Finance Associ- ates, TIFs are the mostly adopted mechanism in the country and are legally allowed in almost every state in the country, with the exception of Arizona. They appear in a variety of forms. In Texas, they are called tax increment reinvestment zones (TIRZs) and in Georgia, tax allocation districts (TADs). TIFs in any form are typically used in the context of financing transit-oriented development and minor streetscapes. They have not been used in the context of financing capital costs of major transportation infrastructure. North Carolina passed the Project Development Financing Act, a TIF-like mechanism for issuing debt for streets, public transportation projects, and airport facility funding (North Carolina Legislature Article 6, Chapter 159 § 159–101). This made North Carolina the 49th state to allow TIFs, but one of the few allowing TIF for trans- portation capital spending. Recently, some states, including Texas, have developed TIF-like mechanisms specifically designed for funding and financing state highway projects. Texas’s legislation puts forth an institutional concept called the TRZ to allow for TIF-like funding and financing for single and multiple jurisdictions with local governmental coopera- tion (Texas Transportation Code; Vadali et al. 2010a). Texas’s law was first introduced in 2007. Vadali et al. (2010a) also explored more than 100 TIFs and found that typical TIFs do

29 maintenance expenses but also capital expenditures, thereby expanding the scope of recoverable expenditures (Ewing 1993). Carlson et al. (2007) provide an excellent overview of TUF activity through 2006. Implementation Considerations Geographic Area or Area of Applicability Transportation utility fees typically are levied on an areawide basis. Fee Basis The fee basis for TUFs is much like that for IFs. The esti- mated number of trip ends attributable to each property type using the procedures found in the Trip Generation manual published by the Institute of Transportation Engineers (ITE The extent of adoption depends on the legality of the fees, which varies by state and the wording of the particular fee in question. The Fort Collins fee was challenged by residents and discontinued by the city. The fee in Pocatello, Idaho, met a similar fate in 1986, but litigation continued in both cases until reaching the state supreme courts. The first TUF in Oregon was not challenged, encouraging the governments to consider it as a viable transportation funding source. The concept was accepted in Texas, where Beaumont introduced a fee, and then Florida, where the Port Orange fee drew opposition and was overturned. In general, the 1990s were characterized by much interest in TUFs. In 1991, Palm Bay, Florida, instituted a TUF but had to drop the fee after the policy was ruled unconstitutional because the fee charged was not related closely enough to usage. A year later, the communities of Medford, Oregon, and Austin, Texas, took advantage of the successful TUF implementations in their states and implemented fees of their own. The TUF in Med- ford is notable because it recovered not only operations and FIGURE 8 Oregon cities collecting TUFs as of 2008. (Source: Recreated from League of Oregon Cities 2008.)

30 Transportation Corporations Transportation corporations are not funding mechanisms in themselves. TCs are governance mechanisms that have been used to enable and mobilize the use of other funding mechanisms toward the planning and project development of transportation projects. They have been primarily noted in the context of highway projects but in concept could be used for transit also. A TC is a group of private individuals and local governments who come together to form a nonprofit corporation for the planning and project development of transportation projects. These corporations primarily focus on implementing or expediting major transportation projects and are governed by a board of directors, under the oversight of a state transportation commission. Extent of Use—Examples At least three states—Missouri, Florida, and Texas—have allowed for TCs. In Missouri, TCs were authorized under the 1990 Missouri Transportation Corporation Act, which allows localities to form nonprofit, quasigovernmental agen- cies called TCs to develop and oversee transportation proj- ects. The most recent codes authorizing them are listed under §§ 238.300-238.367 Revised Code of Missouri. The goal of the Missouri TC is set as one that is “created to fund, promote, plan, design, construct, maintain or operate any transportation- related project in connection with the Missouri highways and transportation system” (Missouri DOT). A TC can be used only for projects that are owned by the state. The Revised Code of Missouri allows any local governmental entity or private party to file a petition with the MHTC, and TCs are approved based on public hearings (Missouri DOT Program Guide 2004). The program guide defines the Missouri TC as “special- ized, temporary, private, not-for-profit corporations allowed under state law and that can be organized to plan, develop, and finance a particular transportation project” but cannot be com- pensated. The TC in Missouri is mostly used in connection with the development of STDs—the TDD can combine other VC mechanisms and direct user fees such as tolls. The process of TC establishment can also occur concurrently with the devel- opment of innovative funding mechanisms involving both VC and direct user fees. The purposes of the TC are to: • Promote and develop public transportation facilities and systems and economic development in Missouri by new and alternative means. • Perform many functions normally undertaken by the MHTC. • Secure and obtain right-of-way. • Assist in the planning and design of transportation sys- tems and sell and convey excess rights-of-way at fair market value. • Contract with federal agencies, states or their agencies, political subdivisions, MHTC, transportation authorities, corporations, partnerships, or individuals regarding fund- 2003) is often used as the basis. Residential trip rates are given per unit and commercial rates per gross floor area and per employee. Jurisdictions may instead use flat or per-unit fees that vary only by property type, or fees based on land area, floor area, or frontage. Because all of these are esti- mates, rather than measurements of exact usage for individ- ual properties as with water or sewer service, the connection between cost and service is less solid than for other utilities. For TUFs, the legality of the rates rests on the validity of the proxies used to approximate usage. The methods presented in Trip Generation have been noted to be more likely to with- stand legal scrutiny than estimates based on lot size or other property size attributes. The ITE trip rates are meant to apply nationally, but some of the trip rates given may be based on very small sample sizes and may show little correlation to usage. If they are used as the basis for utility fees, the accu- racy of the estimated rates may be improved by adjusting based on local traffic counts. Subsequent TUFs have used a number of different bases for setting fee rates, including flat fees, fees that apply per unit of housing or per parking space, fees based on square footage or gross floor area, fees that vary with the trip gen- eration rate for a given property type, and fees that are set at the discretion of local city councils. It remains unclear how well these different indicators correlate with transportation demand, with the exception of trip generation rates for dif- ferent property types, which are published for planning pur- poses by the ITE’s Trip Generation Handbook. Legal Considerations Much like IFs, a TUF may require showing compliance on three aspects: (1) that it is associated with a particular ben- efit to the party being charged—one that is not shared by other members of the community; (2) that payment of the fee is voluntary; and (3) that the fees are earmarked only for expenditures that are reasonably related to transportation infrastructure costs. Applicability to Transportation The applicability of TUF to transport lies in the idea that transportation is a service sector much like utilities, and use of transportation services requires a fee by beneficiaries. Other Implementation Considerations There are no major additional implementation considerations. OTHER MECHANISMS—DESCRIPTION In addition to the nine mechanisms reviewed, a few others, such as TCs, are discussed.

31 • The promotion and development of transportation facil- ities and systems that are public, not private, in nature, although these facilities and systems may benefit pri- vate interests as well as the public (Texas Transporta- tion Code, Title 6, Chapter 431). The Texas TC powers are limited to “the promotion and development of public transportation facilities and systems” (Texas Transportation Code, Title 6, Chapter 431). There are some TCs set up in Texas. Transportation corporations in Florida are authorized under the Florida Transportation Corporation Act, Sections 339.401-.421, Florida Statutes (Florida Administrative Code and Register 1999). Among the specific activities of TCs authorized under Florida statutes are: • Acquiring, holding, investing, and administering prop- erty and transferring title to the Florida DOT for project development. • Performing preliminary and final alignment studies. • Receiving contributions of land for right-of-way, and cash donations to be applied to the purchase of right-of- way or design and construction projects. • Making official presentations to groups concerning the project and issuing press releases and promotional materials. Transportation corporations in Florida cannot issue bonds and are not empowered to enter into construction contracts or undertake construction. They are enabled to otherwise bor- row money or accept donations to help defray expenses or needs associated with the corporation of the transportation project (Williams 2006). There are no TCs established in Florida (Williams 2006). Other Implementation Considerations There are no additional implementation considerations in the case of TCs. GENERAL EFFICIENCY, EQUITY, AND OTHER CONSIDERATIONS According to public finance theory, funding methods or mechanisms should conform to the benefit principle, which states that the benefit of a service financed through fees or taxes goes directly to the taxpayer (Musgrave 1959). Lari et al. (2009) and Zhao et al. (2012) evaluate IFs, TIFs, SADs, LVTs, NEs, JDs, ARs, and TUFs on five criteria: (a) effi- ciency, (b) equity on the basis of cost benefit and ability to pay principles, (c) sustainability, (d) political and adminis- trative feasibility, and (e) implementation requirements both general and in the context of Minnesota. Their evaluation is broad based, and much of it is transferable to other regions/ states. ing, promotion, planning, designing, constructing, improv- ing, maintaining, operating, or assisting in a project. • Limit and secure access to a project. When considering the creation of a corporation, the com- mission is directed to hold a public hearing and notify the general public and all affected property owners and juris- dictions in the designated area. The governing body of each affected county, city, town, or village must approve the pro- posed project and the formation of the corporation by the commission. The commission must also find that the project is a necessary or desirable extension or improvement of the state transportation system and that the proposed corpora- tion will have adequate funds to finance the proposed project. The commission may also require revisions to the plans and specifications and may authorize creation of one or more cor- porations to act within the same designated area, pursuant to specific stated public purposes (§238.330.1). The corporation may issue bonds, notes, or other obliga- tions to pay all or any part of the cost of a project. The obliga- tions may be payable out of any of the property and revenues of the corporation. Such revenues may include payments derived from other entities pursuant to an intergovernmen- tal cooperation agreement and fees, tolls, and charges by the corporation for use of the project (Missouri Revised Statutes §238.330.1). There are several TCs set up in Missouri in con- nection with highway projects. Implementation Considerations There are no specific implementation considerations in the case of TCs. Legal Considerations Texas TCs are authorized under Texas Transportation Code, Title 6, Chapter 431. The Texas Transportation Corporation Act of 1995 authorized the creation of nonprofit entities with broad powers to plan, develop, and maintain transportation facilities that are part of the federal or state highway system in areas with a population of 500,000 or more or one that is adjacent to one with such a population. Stated purposes of TCs in the state of Texas are: • The promotion and development of public transporta- tion facilities and systems by new and alternative means. • The expansion and improvement of transportation facilities and systems. • The creation of corporations to secure and obtain rights- of-way for urgently needed transportation systems and assist in the planning and design of those systems. • The reduction of burdens and demands on the limited funds available to the commission and an increase in the effectiveness and efficiency of the commission.

32 Efficiency Lari et al. (2009) and Zhao et al. (2012) evaluate efficiency aspects of mechanisms based on price signals. Peterson (2008) notes that underlying the use of land-based funding mecha- nisms to pay for infrastructure is the principle that the benefits of infrastructure projects are capitalized into land values. As long as the spatial distribution of project benefits can be inter- nalized within a well-defined benefit zone, the mechanisms can be economically efficient. This same principle allows the mechanisms to be justified on the grounds of benefit equity. Cost efficiency is another measure of efficiency and is based on the extent to which costs incurred are recouped by the rev- enues generated (Dye and Sundberg 1998); this aspect has so far not been investigated with respect to transportation-related mechanisms. The current synthesis explores this dimension of mechanisms in chapters three and four. Equity Rosenbloom (2009) notes that benefits received and ability to pay are the most traditional and familiar equity concepts. The benefits-received concept argues that equity increases when individuals pay in proportion to the benefits they receive from the service being financed, and this concept underlies the tra- ditional user-fee approach to highway financing embodied in the gas tax. Ability to pay is based on the principle that those with greater income or wealth should pay more to support public services and is a basis for income and property taxes. Most mechanisms conform to the general benefit principle, where there is a still a link between the payer and the ben- efit, but the link is indirect and the benefit is not necessarily in direct proportion to the payment. In some cases, such as SADs, increment-based approaches, and IFs, the notion of special benefit also applies (Dalvi 1998). Altshuler and Gomez-Ibanez (1993) evaluate IFs based on market price approximations of rates set and ability to recover costs. The researchers note that IFs can be efficient if rates approximate market prices. Similarly, a National Surface Transport Policy and Revenue Commission report (2007) evaluates IFs on 12 distinct criteria categories, includ- ing three types of equity (geographic, vertical across income groups, and horizontal across vehicle user classes). Williams (2006) provides a detailed assessment of the pros and cons of TCs. Zhao et al. (2012) provide a detailed examination of JD. Mathur and Smith (2012) also discuss some of these mechanisms based on similar criteria. Lari et al. (2009) argue that IFs can be both efficient and equitable. The nexus tests are important for ensuring proportionality. Table 3 is a sum- mary of the evaluations and has been adapted from Lari et al. (2009), who note that ability to pay equity of mechanisms varies in terms of actual incidence based on how rates are established, exemptions that are provided, and transportation modes covered. SUMMARY Nine specific VC mechanism categories were reviewed: IFs, SADs, STDs, NEs, ARs, JDs, LVTs, TIFs, and TUFs. A 10th category, “other,” addresses TCs. Different mechanisms lend themselves to different VC pur- poses. For example, IFs are aimed at cost recovery, whereas special assessments and increment finance are more relevant to project expansion benefits. The geographic scope of a study— within a local area, across local jurisdictional boundaries, and such—is also an important concern when choosing a VC mechanism. Other considerations for choosing a mechanism include efficiency for the purpose intended, legal framework, and equity (e.g., benefits received, ability to pay). Brief sum- maries of each mechanism are provided here. Mechanism 1—Impact Fees Impact fees are a one-time charge levied on a development project to finance new infrastructure and services associated with new development. They can be effective across a range of geographic areas. Mechanism 2—Special Assessment Districts Special assessments (e.g., property taxes) require local com- munity members whose property benefits from the improve- ment to pay a small property fee to help offset the cost. Boundaries for the service or “benefit” area are usually small and rigorously defined, although in some instances macro area assessments are possible. Mechanism 3—Sales Tax Districts Sales tax districts, a specific form of SADs, require bene- ficiaries of the project to pay a small sales tax intended to offset project costs. The nature of STDs makes them more common at the macro level than SADs. Mechanism 4—Negotiated Exactions Similar to IFs, NEs are one-time levies negotiated on a case- by-case basis. They apply to discrete, local improvements deriving from the development. Mechanism 5—Air Rights Air rights involve utilizing rights above, below, or adjacent to a highway improvement right-of-way for development that creates enhanced land value. These rights may be leased from the owning entity (e.g., from the highway agency owning the rights) by, for example, a private company and are limited at the parcel level.

33 Mechanism Efficiency Equity Political Feasibility Administrative Feasibility IF Can be efficient in principle. Uncertain if implemented rates satisfy efficient pricing rules (Altshuler and Gomez- Ibanez 1993). Benefit equity. Slightly regressive. Equity via rates, modal equity and exemptions (TSDC legislation, for instance, Oregon). High. Most states can legally implement. Three states have multimodal capabilities. Low costs NE Efficient in terms of price signals and growth (Lari et al. 2009). Benefit equity High Simple SAD Efficient in terms of price signals and growth. Benefit equity. Can be regressive. Equity via rates, land use exemptions. Low. Few states have enabling legislation. Requires political will and stakeholder support. Can be difficult to implement. Requires coordination. STD Efficient in terms of price signals and growth. Benefit equity Medium. Few states have enabling legislation. Easier to implement than SAD. AR Efficient in terms of price signals and growth. Benefit equity Neutral to progressive in equity Medium Complex JD Efficient in terms of price signals and growth. Benefit equity Neutral to progressive in equity Medium Complex and can be a lengthy process. LVT Efficient in terms of price signals and growth. Approximates the theoretical; efficient in value capture. Most studied in this context (Speirs 2010). Benefit equity Can be regressive Exemptions via rates and land uses or other mechanisms. Low. Very limited experience Easy to administer because appraisal districts already appraise based on land and buildings (Speirs 2010). TIF Can be efficient. Benefit equity Can be regressive; mitigate concerns. Medium Dependent on political will. Mostly applied for transit- oriented development and not capital costs. Few examples of usage for capital costs for transportation. Less difficult to implement than SAD. TUF Efficient in terms of price signals and growth. Benefit equity (Ewing, 1993). Can be regressive. Medium. Can be legally challenged if nexus tests are not applied. Simple. Occurs through utility companies. TC (Williams 2006) Not applicable Not applicable Good as long as it is legally possible. Useful for garnering support and for project management. Good. Can support debt liability (Williams 2006). Compiled from Lari et al. (2009), Iacono et al. (2009), and Mathur and Smith (2012). TABLE 3 EVALUATION OF VALUE CAPTURE MECHANISMS

34 Mechanism 6—Joint Developments Joint development is a public–private partnership to develop private construction projects using public land or using ARs. In general, JD occurs on a site-specific basis and typically accompanies AR agreements. Mechanism 7—Land Value Taxes A variant of the property tax (distinguished by a split rate on land and buildings), the LVT is specifically aimed at captur- ing the improvement benefit as realized by the land portion of property (separate from structural improvements). The LVT is typically applied at the regional or macro scale (e.g., county or city) level. Mechanism 8—Tax Increment Financing The most widely used local finance option in the United States, TIFs use anticipated property value increases result- ing from improvements to secure bonds or allow loans to fund the improvements. Small service areas typify the geo- graphic application of TIFs. Mechanism 9—Transportation Utility Fees Transportation utility fees based on the principle that the transportation system functions as a public utility. Thus, users pay based on how often they use the system. TUFs are most commonly used to fund preventive road maintenance on existing facilities. Mechanism 10—Other (e.g., Transportation Corporations) Transportation corporations represent a nonprofit group com- posed of private individuals and local governments that plans and develops transportation projects. Governed by a board of directors and overseen by a state’s transportation commis- sion, TCs expedite major transportation projects. The corpo- ration can issue bonds, notes, or other obligations to pay for project costs. They are a funding tool in that TCs often serve as project champions and obtain much-needed stakeholder support by doing so. Applicability of Mechanisms to Transportation Assessment-based mechanisms (SADs), increment-based mechanisms, and land value taxation are conceptually driven by transportation accessibility-induced capitalization bene- fits to beneficiaries. IFs are driven by benefiting new develop- ment in areas associated with transportation improvements. TUFs are driven based on the public utility nature or service- sector aspect of transportation, such as airlines and utility companies that charge a fee for a service provided. STDs are driven based on grounds of general benefits to regions and areas served by transportation infrastructure and charge a low-level sales tax levied on all goods and services to pay for transport. ARs and JDs are driven by the opportunities afforded for real estate development through land use tools and public–private partnerships. Modal Basis The state-of-the-practice review suggests that most of the mechanisms could be used for roads or transit. However, the following case examples need to be highlighted: • The TUF as a mechanism is applicable only for the specific use of pavement maintenance and operating expenses. It is not a mechanism that can be used for funding and financing capital costs of improvements. The current review documented only one case in Oregon in which a TUF also covered capital costs. • Many states have IFs just for local roads. Mullen (2012) notes that almost 14 states have roads as a set-aside category for IFs. At least 27 states were noted as having statutes specifically requiring the fees to be multimodal in nature and compliant with some form of a CIP. Ore- gon’s IFs, known as system development charges, are multimodal in focus and have a process that filters from goals down to rate structures.