Future Financing Options to Meet Highway and Transit Needs (2006)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs A-1 Appendix A Needs and Revenue Forecast Assumptions This appendix explains the derivation of the highway and transit investment needs and revenue projections discussed in Section 2.0 of the technical memorandum. „ Needs The 2004 Conditions and Performance1 report estimated that an annual capital investment of $89.4 billion (in 2002 dollars) was needed to “maintain” the condition and performance of the nation’s highway and transit systems. The C&P capital investment costs were updated from 2002 to 2006 using an inflation factor of 12.7 percent which represents the change in Consumer Price Index (CPI). Since both benefits and costs changed by this amount, this CPI adjustment is applied directly to estimated needs. An additional adjustment was included to account for the increase in highway construction costs over that period, as evidenced by the Producer Price Index (PPI) for Highway and Street Construction.2 According to recent analysis conducted by FHWA and FTA, the elasticity of needs, given a 1 percent increase in PPI over and above the increase in the CPI, is esti- mated at 1.0 (highways) and 0.56 (transit) for the need to “maintain” scenario.3 Therefore, the additional PPI adjustment over that period was estimated at an additional 29.2 percent and 16.3 percent for the highway and transit needs, respectively. After these adjustments were applied, the C&P needs to “maintain” in 2007 are estimated at $131 billion. In the past, the PPI and the CPI were increasing at about the same rate. However, the recent experience of the more rapid increase in the PPI requires the additional adjustment. Since not all projects are still cost-effective if costs rise faster than benefits, this “dual” adjust- ment is needed. 1 U.S. Department of Transportation, Federal Highway Administration, and Federal Transit Administration. 2004 Status of the Nation’s Highways, Bridges and Transit: Conditions and Performance – Report to Congress, Washington, D.C., February 2006. 2 U.S. Department of Labor, Bureau of Labor Statistics. Available at http://www.bls.gov/ppi/ home.htm. 3 Note: We used the different FHWA and FTA elasticity assumptions for the 2004 C&P while recognizing that there is not adequate documentation to explain reasons for the different assumptions by the two agencies

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs A-2 . The costs of operations, maintenance, administration, debt service, and other noncapital costs (collectively, “O&M”) must be added to annual capital needs to estimate the total expenditure needed to maintain the nation’s highway and transit systems. The Federal Highway Administration (FHWA) reported that $69 billion was spent in 2004 on highway and bridge O&M.4 The average annual O&M real growth rate (i.e., the rate of growth over and above the change in CPI) over the last 25 years of 1.6 percent has been used to forecast O&M needs. This yields an annual O&M need in 2007 of $78.6 billion. Finally, the Federal Transit Administration (FTA) reported that $25.4 billion was spent in 2004 on transit O&M. Transit O&M real costs have grown at a rate of 1.7 percent annually, resulting in a projected annual O&M need in 2007 of $29 billion.5 The total of highway and transit capital and operating investments needed to maintain the nation’s surface transportation systems in 2007 is estimated to be between $238 billion (2004 C&P Adjusted + O&M). Table A.1 displays the breakout of needs by highway and transit. Table A.1 Summary of Investment Needs to “Maintain” in 2007 Billions of YOE Dollars Capital O&M Total 2004 C&P Adjusted Highway $109.8 $78.6 $188.4 Transit $20.9 $29.0 $49.9 Total $130.7 $107.6 $238.3 Note: Totals may not add up due to rounding. Additional investment is needed to “improve” the highway and transit systems. The PPI adjustment for the “improve” scenario, as estimated by FHWA and FTA, indicates that a 25 percent increase in highway capital costs, over and above the CPI adjustment, would increase the needs for the improve conditions and performance scenario by 11.2 percent, and by 9 percent for transit capital needs. Therefore, the adjustment factor to PPI increases over normal CPI inflation for the “improve” scenario is estimated at 0.448 percent for each additional 1 percent increase of the PPI over and above the CPI for the highway needs, and by 0.36 for the transit needs. The additional PPI adjustments for the 2004 C&P “improve” needs were estimated at 13.1 percent and 10.5 percent for the highway and transit needs, respectively. The 2004 C&P report estimated that an annual capital investment of $142.9 (in 2002 dollars) were needed to “improve” the nation’s highway and transit systems. When these estimates are updated to 2007 and highway and 4 Federal Highway Administration, 2004 Highway Statistics, Table HF-10. 5 Federal Transit Administration, National Transit Database. Available at http://www.ntdprogram.com.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs A-3 transit O&M costs are added, an annual expenditure between $293 billion (2004 C&P Adjusted + O&M) is needed in 2007 to “improve” the nation’s highway and transit sys- tems. Table A.2 displays the breakout of needs for highway and transit. PPI adjustment factors for both the needs to “maintain” and “improve” scenarios are summarized in Table A.3. Table A.2 Summary of Investment Needs to “Improve” in 2007 Billions of YOE Dollars Capital O&M Total 2004 C&P Adjusted Highway $154.8 $78.6 $233.4 Transit $30.5 $29.0 $59.5 Total $185.3 $107.6 $293.0 Note: Totals may not add up due to rounding. Table A.3 PPI Adjustment Factors (1) ΔCPI/ΔPPI (2) ΔCPI (3) ΔPPI (4) = (3)-(2) PPI-CPI (5) = (1)x(4) PPI Adjustment Highway C&P Maintain 25/25 = 1.0 12.7% 41.9% 29.2% 29.2% C&P Improve 11.2/25 = 0.448 12.7% 41.9% 29.2% 13.1% Transit C&P Maintain 14/25 = 0.56 12.7% 41.9% 29.2% 16.3% C&P Improve 9/25 = 0.36 12.7% 41.9% 29.2% 10.5% Needs are traditionally reported by the FHWA in constant dollars. This can sometimes be confusing to readers because highway and transit multiyear revenue are in current dol- lars. For purposes of this report, all needs and revenues are cited in current year dollars. Tables A.4 and A.5 summarize the needs forecast through 2017, based on FHWA needs estimates to “maintain” and to “improve” the nation’s highway and transit systems.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs A-4 . Table A.4 Summary of Investment Needs to “Maintain” 2007-2017 (Billions of YOE Dollars) FHWA/FTA 2004 C&P Adjusted + O&M Highway Transit Highway and Transit Year Capital O&M Total Capital O&M Total Capital O&M Total 2007 109.8 78.6 $188.4 20.9 29.0 $49.9 130.7 107.6 $238.3 2008 112.2 81.6 $193.8 21.4 30.1 $51.5 133.5 111.7 $245.3 2009 114.6 84.7 $199.4 21.8 31.3 $53.1 136.5 116.0 $252.5 2010 117.2 87.9 $205.1 22.3 32.5 $54.8 139.5 120.5 $259.9 2011 119.7 91.3 $211.0 22.8 33.8 $56.6 142.5 125.1 $267.6 2012 122.4 94.8 $217.1 23.3 35.1 $58.4 145.7 129.9 $275.5 2013 125.1 98.4 $223.4 23.8 36.5 $60.3 148.9 134.8 $283.7 2014 127.8 102.1 $229.9 24.3 37.9 $62.2 152.2 140.0 $292.1 2015 130.6 106.0 $236.6 24.9 39.4 $64.2 155.5 145.3 $300.8 2016 133.5 110.0 $243.5 25.4 40.9 $66.3 158.9 150.9 $309.8 2017 136.4 114.2 $250.6 26.0 42.5 $68.5 162.4 156.7 $319.1 Table A.5 Summary of Investment Needs to “Improve” 2007-2017 (Billions of YOE Dollars) FHWA/FTA 2004 C&P Adjusted + O&M Highway Transit Highway and Transit Year Capital O&M Total Capital O&M Total Capital O&M Total 2007 154.8 78.6 $233.4 30.5 29.0 $59.5 185.3 107.6 $293.0 2008 158.2 81.6 $239.8 31.2 30.1 $61.3 189.4 111.7 $301.2 2009 161.7 84.7 $246.4 31.9 31.3 $63.2 193.6 116.0 $309.6 2010 165.2 87.9 $253.2 32.6 32.5 $65.1 197.8 120.5 $318.3 2011 168.9 91.3 $260.2 33.3 33.8 $67.1 202.2 125.1 $327.3 2012 172.6 94.8 $267.3 34.0 35.1 $69.2 206.6 129.9 $336.5 2013 176.4 98.4 $274.7 34.8 36.5 $71.3 211.2 134.8 $346.0 2014 180.3 102.1 $282.4 35.6 37.9 $73.5 215.8 140.0 $355.8 2015 184.2 106.0 $290.2 36.3 39.4 $75.7 220.6 145.3 $365.9 2016 188.3 110.0 $298.3 37.1 40.9 $78.1 225.4 150.9 $376.3 2017 192.4 114.2 $306.6 38.0 42.5 $80.5 230.4 156.7 $387.1

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs A-5 „ Revenues This section describes the data, projections, and assumptions used to forecast future reve- nues. Key resources included: • Growth of vehicle miles of travel (VMT) from the FHWA Highway Performance Monitoring System (HPMS);6 • Fuel-efficiency projections from the Department of Energy (DOE);7 • Consumer Price Index (CPI) projections from the Congressional Budget Office (CBO);8 and • Gross domestic product (GDP) growth rates from the CBO.9 The January 2006 forecast shows nominal GDP growth declining gradually from 6.3 percent in 2005 to 4.4 percent in 2014. For the purpose of our revenue forecasts, any revenue source assumed to increase at the GDP rate was assumed to grow at the long-term rate of 4.4 percent rather than the higher short-term rate. This was the maximum annual growth rate projected for any revenue source except tolls. Data on revenue sources used for highway and transit projects were obtained from the 2004 Highway Statistics and 2004 National Transit Database, respectively. Baseline revenues include the following sources: user fees (Federal fuel taxes, state/local fuel taxes, other vehicle taxes, tolls, and transit operating revenues), specialized taxes, and general taxes. The baseline revenue model includes actual data for fiscal year (FY) 2004, with revenue projections beginning in 2005. User Fees Federal Fuel Taxes In 2004, $31.0 billion spent on highways and transit came from the Federal fuel tax. The current Federal gasoline tax rate is 18.4 cents per gallon, of which 15.44 cents are dedicated 6 Highway Performance Monitoring System (HPMS)-based vehicle-miles of travel (VMT) forecasts as used in the Federal Highway Administration’s Condition and Performance Report to Congress, 2004. 7 Department of Energy. Annual Energy Outlook 2006 with Projections to 2030. Table 7, Transportation Sector Key Indicators and Delivered Energy Consumption, February 2006. Available at http:// www.eia.doe.gov/oiaf/aeo/aeoref_tab.html. 8 Congressional Budget Office. The Budget and Economic Outlook: Fiscal Years 2007 to 2016. Appendix E, Table E-1, January 2006. 9 Ibid.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs A-6 . to the Highway Account of the Highway Trust Fund (HTF), and 2.86 cents are dedicated to the Mass Transit Account. The tax rate on diesel fuel is 24.4 cents, and 21.44 cents and 2.86 cents are deposited into the Highway Account and Mass Transit Account, respectively. One-tenth of a cent of both the gasoline and diesel fuel taxes go the Leaking Underground Trust Fund. The baseline projections assume that the current fuel tax rates will remain constant. The fuel tax yield is adjusted annually assuming a 2.07 percent growth rate, based on VMT annual growth projections from the Condition and Performance Report. Revenue projections also are adjusted using fuel efficiency projections from the DOE. State and Local Fuel Taxes State and local motor fuel taxes generated $30.9 billion in 2004, as reported in the 2004 Highway Statistics and the National Transit Database. The annual growth of state fuel tax revenue was assumed to be equal to the projected VMT annual growth rate of 2.07 percent from the Condition and Performance Report, and adjusted for changes in fuel efficiency, based on fuel efficiency projections from the DOE. The highway revenue model for state motor fuel tax included an adjustment to account for those states that adjust their fuel tax rates annually. Currently, three states – Florida, Maine, and Wisconsin – adjust their motor fuel tax rates to account for inflation, while few others – Nebraska, New York,10 North Carolina, and West Virginia – adjust their fuel tax rates based on the average wholesale price of motor fuel. The CPI adjustment was repealed in Wisconsin, and will be eliminated starting in 2007. The revenue model for state motor fuel tax receipts incorporates this adjustment based on the share of motor fuel tax receipts from the states that index the motor fuel tax rates to the motor fuel tax receipts for highway vehicle use. Motor fuel tax receipts by state were obtained from Highway Statistics (Table MF-3) for 2000 through 2004. In 2004, 18.4 percent ($5.4 billion) of the motor fuel tax receipts used for highways came from the states mentioned above. The model also assumes that Wisconsin motor fuel tax revenues will not be adjusted by CPI beyond 2006. Other Vehicle Taxes – Federal The Federal government levies certain heavy vehicle fees that are deposited into the Highway Account of the HTF. These fees include: a tax based on tire weight; a retail tax on trucks weighing more than 33,000 pounds; and a heavy vehicle use tax. In 2004, Federal vehicle taxes generated $3.1 billion. Other vehicle tax projections from the FY 2007 President’s budget show an average annual growth of 5.1 percent through 2011. The historical annual growth of Federal vehicle taxes was estimated at 3.1 percent over the 10 In New York, the Petroleum Business Tax (PBT) is adjusted annually using the PPI on petroleum products. Highway Statistics include the PBT as part of the motor fuel tax rate, and its revenues as part of the state motor fuel revenues.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs A-7 last 10 years. We have assumed a 4.4 percent growth rate, which is equivalent to the long- term GDP forecast from the CBO. Other Vehicle Taxes – State and Local At the state and local government levels, vehicle taxes generated $17.6 billion in 2004. Historical data from the Highway Statistics (Tables SF-1 and LGF-1) indicate that state and local receipts on vehicle taxes have increased at an average annual rate of 4.0 percent over the last 10 years. Revenue forecasts from this source were generated assuming an annual growth rate equivalent to the CPI forecast from CBO. Tolls Historically, toll revenues have grown at an average annual rate of 5 percent over the last 10 years. The 2004 Highways Statistics reported $6.6 billion in toll revenues. This historical growth rate was applied to estimate future tolling revenues for the base case. Transit Operating Revenues Transit operating revenues include fares and other operating income (e.g., from adver- tisement and lease agreements). Fare revenues are assumed to increase at 1.5 percent per year over inflation, based on ridership growth assumptions from the 2004 C&P Report. The same growth rate also was applied to other operating revenues. Specialized Taxes Specialized taxes include property, sales, and other taxes (e.g., local option taxes) that are dedicated for highway and transit expenditures. In 2004, this revenue source generated $24.9 billion, of which $15.4 billion was used for highway expenditures and the remaining $9.5 billion was used for transit. Historically, these sources have tracked closely with the GDP growth rate on the highway side, so the future annual growth of this funding source is assumed to be equal to the long-term GDP annual growth rate, as forecast by the CBO. In the case of specialized taxes for transit, revenues have grown at an average annual rate of 8.0 percent over the last 10 years, mainly because of the increasing number of states and local governments that have passed referenda and legislation in recent years dedicating local taxes to transit agencies. For the purpose of this analysis, we use the CBO forecast of long-term GDP to project the growth of specialized taxes revenues, as most transit agen- cies already have a dedicated funding source in place, and the impact of additionally implemented local taxes is likely to be limited. The CBO forecast a long-term GDP annual growth rate of 4.4 percent by 2014.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs A-8 . General Taxes The general taxes category includes General Fund appropriations from all levels of gov- ernment and miscellaneous revenue. In 2004, general taxes generated $43.9 billion for both highway and transit expenditures. General taxes were divided into Federal and state/local, and estimated separately for highway and transit uses. Federal general taxes for highway expenditures include some General Fund discretionary appropriations for specific highway projects and investment income. In FY 2004, Federal general taxes for highways were estimated at $2.0 billion; we assume that this amount will remain constant in real dollars throughout the analysis period. The state/local portion of general taxes used for highway expenditures is assumed to grow at 3.7 percent, which assumes that general taxes will increase at the historical real growth rate of 1.5 percent over inflation. Federal general taxes for transit expenditures for fiscal years 2006 through 2009 corre- spond to appropriation levels enacted in SAFETEA-LU, and assumed to remain constant beyond 2009. Historically, general funds account for 20 percent of the total Federal funding for transit. State/local general taxes for transit investments are assumed to increase at 3.7 percent, consistent with the highway funding assumptions. Summary of Revenue Forecast Tables A.6 through A.8 summarize the results from the revenue forecast model for high- way and transit expenditures through 2017.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs A-9 Table A.6 Highway Revenues 2007-2017 (Billions of YOE Dollars) User Fees Taxes Year Direct Indirect Specialized General Total 2007 7.6 84.7 17.5 34.5 $144.3 2008 8.0 86.7 18.2 35.7 $148.6 2009 8.4 88.6 19.0 36.9 $152.9 2010 8.8 90.5 19.8 38.2 $157.4 2011 9.2 92.4 20.7 39.5 $161.9 2012 9.7 94.4 21.6 40.9 $166.6 2013 10.2 96.3 22.5 42.4 $171.4 2014 10.7 98.2 23.5 43.9 $176.3 2015 11.2 100.2 24.5 45.4 $181.3 2016 11.8 102.2 25.6 47.0 $186.6 2017 12.4 104.2 26.7 48.7 $192.0 Table A.7 Transit Revenues 2007-2017 (Billions of YOE Dollars) User Fees Taxes Year Direct Indirect Specialized General Total 2007 12.4 6.6 10.9 13.5 $43.3 2008 12.8 6.7 11.3 14.1 $45.0 2009 13.3 6.9 11.8 14.6 $46.6 2010 13.8 7.0 12.4 15.1 $48.2 2011 14.3 7.1 12.9 15.6 $49.9 2012 14.8 7.2 13.5 16.1 $51.6 2013 15.4 7.3 14.1 16.6 $53.4 2014 16.0 7.4 14.7 17.2 $55.2 2015 16.6 7.5 15.3 17.7 $57.2 2016 17.2 7.7 16.0 18.3 $59.1 2017 17.8 7.8 16.7 18.9 $61.2

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs A-10 . Table A.8 Highway and Transit Revenues 2007-2017 (Billions of YOE Dollars) User Fees Taxes Year Direct Indirect Specialized General Total 2007 20.0 91.4 28.3 48.0 $187.6 2008 20.8 93.4 29.6 49.7 $193.5 2009 21.7 95.5 30.8 51.6 $199.6 2010 22.6 97.5 32.2 53.3 $205.6 2011 23.6 99.5 33.6 55.1 $211.8 2012 24.6 101.6 35.1 57.0 $218.2 2013 25.6 103.6 36.6 59.0 $224.8 2014 26.7 105.7 38.2 61.0 $231.5 2015 27.8 107.7 39.8 63.1 $238.5 2016 29.0 109.8 41.6 65.3 $245.7 2017 30.2 111.9 43.4 67.6 $253.2 „ The Shortfall Tables A.9 and A.10 summarize the funding gap to “maintain” and to “improve,” respec- tively, the nation’s highway and transit systems.

NCHRP 20-24(49) – Future Financing Options to Meet Highway and Transit Needs A-11 Table A.9 Funding Gap to “Maintain” 2007-2017 (Billions of YOE Dollars) FHWA/FTA 2004 C&P Adjusted + O&M Gap Year Highway Transit Total 2007 44.1 6.6 $50.7 2008 45.2 6.5 $51.7 2009 46.5 6.5 $52.9 2010 47.7 6.6 $54.3 2011 49.1 6.7 $55.8 2012 50.5 6.8 $57.3 2013 52.0 6.9 $58.9 2014 53.6 7.0 $60.6 2015 55.3 7.1 $62.3 2016 56.9 7.2 $64.1 2017 58.7 7.3 $66.0 2007-2017 $559.7 $75.0 $634.7 Table A.10 Funding Gap to “Improve” 2007-2017 (Billions of YOE Dollars) FHWA/FTA 2004 C&P Adjusted + O&M Gap Year Highway Transit Total 2007 89.1 16.2 $105.3 2008 91.3 16.4 $107.6 2009 93.5 16.6 $110.0 2010 95.8 16.9 $112.7 2011 98.2 17.2 $115.4 2012 100.7 17.5 $118.3 2013 103.3 17.9 $121.2 2014 106.1 18.2 $124.3 2015 108.9 18.6 $127.4 2016 111.7 18.9 $130.6 2017 114.7 19.3 $133.9 2007-2017 $1,113.3 $193.6 $1,306.9