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Creative Funding

January 4, 2013

After extending the old federal transportation bill repeatedly for three months at a time, legislators finally passed a new federal transportation-funding bill — one that falls short and does not resolve how we’ll pay for transportation infrastructure in the long term, according to the NATIONAL Vibrant transit with different options will make regions more competitive to attract employers — and homebuyers. Creative Funding With federal funding lacking, how will local and state municipalities pay for roads and transit? ASSOCIATION OF REALTORS® (NAR). “The majority of the federal transportation program is funded by federal gas tax dollars and that funding source is drying up,” says Darren Smith, the NAR policy representative on smart growth and state/local affairs. According to a recent article in USA Today, “that’s because the federal tax on gasoline, the primary method since 1956, has lost one-third of its buying power since it was last raised in 1993. States add their own tax on top of that, but the federal tax accounts for about 45 to 50 percent of capital spending for transportation.” Says Smith, “With more fuel-efficient cars, this revenue has decreased.”

Supporting transit and transportation projects is an easy “yes” for real estate associations and professionals. Not only does it enhance the local areas, but it also makes those areas more appealing places to work and live. Vibrant transit with different options will make regions more competitive to attract employers — and homebuyers.

So, how will we fund the necessary infrastructure upkeep and transportation systems? State and local governments have had to get creative with financing transit and road projects.

Local Tax Financing

From public/private partnerships to increased sales taxes, funding has to come from a broad variety of sources — each with its set of hoops to jump. For example, in Georgia, on July 31, 2012, a measure to add one percent to the sales tax to pay for transportation improvements passed in only three of the 12 regions in the state. More importantly, the measure failed in Atlanta. “At the end of the day, people believed the inaccuracies that were being spread about this measure, such as that the money wouldn’t actually go to transportation projects,” says Beth McGinn, director of public affairs for the American Road and Transportation Builders Association.

Another group hoping to get a local income tax approved is a coalition of business leaders and organizations that includes the Metropolitan Indianapolis Board of REALTORS®. The group is currently seeking authorization from state legislators to hold a referendum by county to adopt a local income tax that will go toward transportation systems. The group was unsuccessful previously.

“We need a 0.3 percent increase in local option income tax in at least two of our counties, with long-term plans to touch six to eight other counties,” says Chris Pryor, government affairs director for the Metropolitan Indianapolis Board of REALTORS®. The initial phase focuses on Marion County, the urban core, and Hamilton County, the area’s most populous suburban area. “We’re looking at a combination of federal, state and local dollars, as well as transit fares, to operate and maintain a plan that includes bus rapid transit, light rail, sidewalks and trails,” he says.

In addition to the additional income tax, the group hopes to take advantage of existing ad valorem taxes allocated from property taxes that go towards their current bus systems. “We’re anticipating those dollars will be directed toward this project,” says Pryor.

For the Indianapolis coalition, they’ll also be raising money for a special election. “We’ll be presenting another bill asking for authorization to hold that referendum during our 2013 session, which runs from We’re looking at a combination of federal, state and local dollars, as well as transit fares, to operate and maintain a plan that includes bus rapid transit, light rail, sidewalks and trails. January to April,” says Pryor. “If it gets passed, we’ll hold a special election in November 2013, so we’re asking our coalition partners to contribute a significant chunk of money, and we will be asking NAR (who contributed to the previous lobbying effort) for additional funds,” says Pryor.

Vehicle Miles Tax

With the loss of revenues from the federal gas tax, states like California and Oregon tested a Vehicle Miles Tax pilot project, which proposed a tax based on how many miles you drive, not how much gas you buy. This idea was met with a host of concerns: What if you drive out of state? Which state gets that money? One possible method of collecting the tax is an electronic odometer and a Global Positioning System (GPS) to record miles. When the car pulls into a gas station, its mileage is uploaded to a wireless reader, which sends the information to the gas station’s computer. It’s then compared to the car’s last reported mileage. Taxable miles are computed, and the tax is assessed. However, there are privacy concerns about this tracking, McGinn indicated.

Business Improvement Districts

Leaders in Nashville, Tenn., are looking at even more creative ways to fund transit and transportation projects. “We received a $10,000 grant from NAR to launch and fund the Transit Citizens Leadership Academy in cooperation with the Middle Tennessee Transit Alliance,” says Don Klein, association executive of the Greater Nashville Association of REALTORS®. The group is engaged in helping community members make educated decisions about the types of transit needed in the area. “Two sessions ago, the state legislature passed some empowering legislation that would allow for multi-county funding authority so that if we created a significant mass transit plan for the region, it gives us a way to create a mechanism to pay for it,” says Klein.

One such project is the East-West Connector bus rapid transit system. “After a federal study, the recommendation was that we build a bus rapid transit system through an eight-mile corridor through the heart of Nashville,” says Ed Cole, executive director of The Transit Alliance of Middle Tennessee in Nashville. “We’re looking at a combination of urban street car and bus rapid transit, which is much less expensive than light rail, but can emulate the same performance.”

But, funding that project is proving tricky. Early construction estimates show that it’s a $174-million project. Some funding ideas include “some form of business improvement district,” says Cole. “Basically, you create a district and under state law, property owners (residential is typically exempt) in that district would vote to impose a fee on themselves. The proceeds would pay for the transit.”

In addition to the business improvement district, the Transit Alliance is looking at value capture funding. “In tax increment finance, if investment in transit is made and business and property values increase because of it, a portion of the increase in tax revenue will be put back into the service to pay for the initial cost.”

Tolls

Of course, the most talked about and perhaps most misunderstood type of transportation and transit funding is the toll road.

One form of toll road is through The Value Pricing Pilot (VPP) program, part of the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU). The Act encourages implementation of value pricing pilot projects to manage congestion on highways through tolls and other pricing mechanisms. However, it’s clear from many studies that tolls only pay for a small portion of transportation costs.

According to a report from the U.S. Public Interest Research Group: “Do Roads Pay For Themselves?”, the answer is “no.”

In a study by Policy Matters Ohio, an Ohio-based non-profit research organization, more than $5 billion is spent every year to operate and maintain Ohio roads. Tolls provide only 4 percent of that total. Ohio is not alone in this conclusion. Thus, the gap in funding has to be closed elsewhere.

alone in this conclusion. Thus, the gap in funding has to be closed elsewhere.

Public/Private Partnerships

That’s where public/private partnerships (PPP) may come into play. According to the U.S. Department of Transportation, Federal Highway Administration, “A successful toll road project can be built with virtually any mix of public and private financial sponsorship.”

Both the Nashville project and the Indianapolis project are considering PPPs as part of the funding for their transit projects. As with any type of partnership, there are several ways to go about PPPs. According to the study, “Moving Forward on Public/Private Partnerships,” by the Brookings Institution, a public entity in transportation (a state government, local government or transit agency) decides, plans and finances construction of a new piece of infrastructure and ultimately maintains and operates it. Different private entities (e.g., an engineering firm and a private contractor) bid for the individual tasks of first designing, then later, constructing it. In a design-build arrangement, these operations are bundled into one fixed-fee contract with a private entity that assumes the delivery of these services. The Bay Area Rapid Transit extension to the San Francisco International Airport is an early case of design-build.

A design-build-operate-maintain contract adds private entity responsibilities after construction, in terms of the operation and maintenance. In these cases, the public entity is in charge of financing and assumes all the risks related to operating costs and revenues. The Hudson- Bergen light rail system in New Jersey is one example.

Some PPPs include a private finance component. The Denver Eagle Commuter Rail project has a designbuild- finance-operate-maintain arrangement. In such projects the private party is also responsible for all or a major part of the project’s financing and is generally paid through revenues directly related to the project itself (e.g., tolls or fares) while the public sector retains ownership.

Flushing Out Funding

The truth is, most localities and states will have to take control of financing transportation projects going forward. Which, according to Smith and NAR, isn’t ideal. “There is a federal responsibility for transportation. If we do away with federal funding and let the states and localities handle it themselves, it would lead to no consistent uniformity as far as highway design and funding.”

 

Tracey C. Velt is an Orlando-based business writer.