Is it the End of Pay-as-You-Go in Transportation Finance?

• Author: Sundeen, Matt
• Position: Statistical Data Included

The federal government is offering states some new ways to fund transportation projects that may help get needed ventures off the ground.

It's easy to be cynical about transportation systems. Building and repairing highways, transit facilities, airports and railroads seem to take forever and cost too much. Most of us can remember more than once being stuck in traffic or in a crowded train station and mumbling to ourselves "Why don't they do something about this?" In many places, the answer is: They can't afford it.

State governments are the "they" most responsible for much of America's transportation infrastructure. In 1998, states collected and spent more than $81 billion ($37 billion from federal aid) just for highway construction, maintenance and administration. They spent billions more upgrading public transit, developing airport facilities, maintaining rail systems and funding local transportation projects.

Historically, states have funded transportation projects on a 'pay-as-you go' basis, paying for construction, maintenance and administration as money became available from user fees and federal grants. States have also financed projects by assuming debt that could be paid back by state funds. Now, despite healthy economies, existing revenues may not be enough. In many states, legislatures can't solve transportation problems because they can't afford to. Rapid growth has increased public demand for transportation services, strained existing infrastructure and drained financial resources. Some states are projecting budget shortfalls in the tens of billions of dollars for transportation.

"There is a tremendous demand for transportation services," says Max Inman, chief of the Federal Highway Administration's (FHWA) Financial Management Division. "There are significantly underfunded programs and maintenance needs beyond our available funding capacity. Costs are going up, and we will need to do more," he says.

In response to these growing concerns, state policymakers are rethinking the old ways. With federal cooperation, some states are exploring "innovative financing" for future transportation needs. "Revenues are not keeping pace with growing demand," says Suzanne Sale, FHWA senior financial adviser. "Transportation officials are looking for new approaches that allow them to use scarce funds more effectively."

The Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) and the Transportation Equity Act for the 21st Century (TEA-21), passed in 1998, encourage new state finance programs and offer federal assistance to carry them out. Several of these techniques are gaining acceptance in the states.

SPENDING YOUR CHICKENS BEFORE THEY'RE HATCHED

Grant anticipation revenue vehicles (GARVEEs) allow states to issue bonds secured with the pledge of future federal aid funds. Prior to TEA-21, states were prohibited from repaying their debt with federal money. TEA-21 removes this hurdle by guaranteeing federal funding levels through FY 2003 and includes an equity provision that ensures that each state will get back a share of the Highway Trust Fund equal to 90.5 percent of its percentage contribution.

The new approach is good for states, says Ron Marino, an investment banker with Smith Barney in New York. "Being able to leverage federal dollars gives states more options."

Several states, including Colorado, New Mexico, Ohio, Mississippi, New Jersey, Arkansas and Massachusetts, have already taken advantage of GARVEEs to finance major construction projects.

Colorado Senate President Ray Powers says the GARVEE measure that passed in his state last year was the key to adding lanes to congested I-25 and an $874 million extension to Denver's light rail system, "This gets us the money earlier so we can build projects as we need them, rather than waiting for the money," says Powers. "We need to construct highways right now, and this will make it cheaper."

States can tailor GARVEEs to meet specific needs. Different GARVEE structures give states options for repaying bonds, allowing states to use future federal funds for bond repayment or as repayment insurance. New Mexico will help pay for an expansion of State Route 44 from two to four lanes with $100.2 million in GARVEE bonds, guaranteeing the entire amount with future...