“To toll or not to toll”: State transport leaders singing the highway funding blues

John D. Schulz, Contributing Editor -- Logistics Management, 5/27/2008

WASHINGTON—State transportation budgets are being broken around the country by a decreased level of federal funding at a time when transport and logistics infrastructure needs are growing at an alarming rate.

That’s the conclusion of state transportation experts who convened at Infocast's Conference on Transportation Infrastructure held in Washington, D.C. on May 15-16. The conference drew about 100 experts and officials sounding alarms from states on the current state of infrastructure funding.

For instance, Pennsylvania recently ranked 50^th in a list of all states in number of structurally deficient bridges, according to Roy Kienitz, deputy chief of staff for Pennsylvania Gov. Edward G. Rendell.

“We have been able to triple our spending on structurally deficient bridges, but the result has been an increase in the number of our structurally deficient bridges,” Kienitz said.

“We are an old state with a lot of old bridges.”

 For that reason and others, Kienitz said, Gov. Rendell has pursued all avenues of increased funding. The most high-profile project is a proposed sale of the Pennsylvania Turnpike, a 543-mile system, to private operators. Kienitz declined comment on specifics of the turnpike sale because negotiations regarding the proposed sale are in a delicate stage.

And in a huge privatization deal, Pennsylvania recently announced that a Barcelona-based company, Albertis Infraesctrururas SA, and Citigroup will pay the state $12.8 billion for a 75-year lease on the 524-mile Pennsylvania turnpike. It is the largest U.S. infrastructure deal in history. The deal still requires approval from Pennsylvania legislators, but is expected to pass.

Kienitz said reliance on public-private partnerships is not steeped in philosophy. Rather, he said, it’s being forced out of financial necessity.

“The private guys are willing to be very aggressive,” Kienitz said, “while the public sector is not.”

But increasingly states are seeing shrinking federal dollars. “What used to be a program dominated by federal funds increasingly is not,” he said. “What the federal government is doing is shrinking by the year.”

Speaking for Gov. Rendell, Kienitz said the nation “needs to think better of itself” and find new and innovative ways for infrastructure funding. Shortly after taking office, Gov. Rendell approved a 40 percent increase in turnpike tolls, but all that increase is going solely into reconstruction and repair—not new capacity. Keeping tolls commensurate with inflation is mandatory to keep up with such costs, Kienitz said.

Cindy McKim, chief financial officer for the California Department of Transportation (CalTrans) said that California is running a $17 billion budget deficit. At the same time, experts are saying the state needs as much as $500 billion in total infrastructure needs. California currently spends about $55 billion a year in transportation projects.

Up until about 20 years ago, the primary means of funding transport projects in the Golden State was through the tradition “80-20” federal-state funding arrangements. But now, McKim says, the federal government is paying only about 15 percent of California’s share of highway funding. In addition, revenue from state gasoline taxes fell 5 percent in the past year as drivers revolt from $4-a-gallon gasoline.

“As long as California relies on gasoline tax revenues, that’s only going to exacerbate our funding woes,” McKim says. “Is there a better way to protect our economic growth? There is a better way to prepare for the future.”

The future includes higher tolls and user fees, congestion pricing, and other innovative funding mechanisms.

California is one of 15 states that have joined a new “Building America First” coalition. “We’re a very, very big state but we have very few toll roads,” McKim said. “Our question is, ‘To toll, or not to toll.’”

McKim, a 30-year veteran of CalTrans, estimates that as much as one-third of all California highways will be in “distressed” condition in the coming years. Unlike some states, California officials have been relatively cool to public-private partnership, so-called “P3s.” McKim says there is a role for P3s “where they make sense.”

The traditional P3 model can be a hard sell to politicians, some state officials said. But they emphasized that education of the public on the needs of the states can mute some criticism.

It’s not as if every toll road in the country will be turned over to private investors. In countries such as Canada and Britain, which have a longer experience with P3 financing, estimates are about 15 percent of toll roads are financed under such arrangements.

“No one standard solution will solve the problems we have,” McKim predicted. “There’s more than enough for everybody.”

Jay Gonzalez, Massachusetts’ undersecretary in the executive office for administration and finance, has been active in finding alternative funding mechanisms in that state. That state has what Gonzalez called a “dysfunctional” state highway system with nearly a score of state agencies and authorities charged with maintaining roads.

“There’s this system of different entities, totally unconnected, charged with running and maintaining these roads, which are all connected,” he said.

Massachusetts’ most expensive project is also it’s most notorious. The Big Dig tunnel project under Boston, which was originally expected to cost $2 billion, is now forecast to cost as much as $14.8 billion. After nearly two decades, it’s almost finished—but not quite.

“There is this perception that government is not managing its resources well,” Gonzalez said. 

Washington State is one state that hasn’t been shy in raising funds for a large backlog of projects. It raised state fuel taxes in both 2003 and 2005. The 2005 increase is in a four-year phase-in that will fund $9.5 billion in 210 projects through 2021. Some 36 projects are done; another 73 are scheduled for this year’s construction schedule.

It also has been active in public-private partnerships, though a top Washington State official such projects have to be properly sold to the public. Early on, it was a tough sell.

“Once people realized tolls were part of public-private partnerships, enthusiasm for those projects went away,” said David Dye, chief operating officer for the Washington State Department of Transportation.

Nowadays, because of the perception that more needs to be done outside government financial, such P3 deals are an easier sell, Dye said. Washington State currently works with the private sector on designing, bidding and building infrastructure projects and other innovative contracting. Toll project planning and development is guided by statewide tolling policies. There currently is a legislative moratorium on unsolicited public-private partnership proposals in effect through June of 2009. Dye said that deadline likely would be extended, largely because of political opposition. Still, the lure of P3s continues.

“We’re always looking for ways to share risks and rewards,” Dye said.