Testimony of John Horsley

Executive Director, the American Association of State Highway and Transportation Officials

Before The

Senate Finance Committee

and

Senate Environment and Public Works Committee

Washington, DC

September 25, 2002

 

Mr. Chairmen and members of the Committees, my name is John Horsley.  I am the Executive Director of The American Association of State Highway and Transportation Officials (AASHTO).  I am here today to testify on innovative and other financing issues as the Congress begins consideration of legislation to reauthorize the federal-aid highway and transit programs.

 

First, I want to thank you both for your leadership in fully restoring highway funding for FY 2003 to $31.8 billion as AASHTO, the National Governors’ Association and many others have urged.  As I will discuss today, RABA needs to be fixed next year to avoid radical swings in funding levels, but without your help, we would still be facing a disastrous cutback this year.

 

Senator Baucus, AASHTO would like to commend you for your leadership in transferring the 2.5 cents per gallon of gasohol tax revenues from the General Fund to the Highway Trust Fund and for your efforts to credit interest to the Highway Trust Fund where it belongs and will help greatly. 

 

In addition, I want to thank both Chairmen for demonstrating their leadership by scheduling this very important hearing.  I am honored to be invited to testify on these important issues and to offer the views of AASHTO on a variety of financing issues.

 

Mr. Chairmen, I would like to begin by recognizing the contribution that TEA-21 has made to address the nation’s need to invest in our highway and transit systems. We have seen record level investment made possible by that legislation and we at AASHTO commend the Congress and these two Committees for your contributions to achieving that result. However, as much as that investment has contributed ($208 billion), the national needs continue to far outstrip the available resources. Your holding this hearing gives us the opportunity to recognize those needs and to suggest ways that working together we can increase investment in surface transportation as part of the reauthorization bill while maintaining fiscal discipline.

 

HIGHWAY AND TRANSIT FINANCING HISTORY

 

Mr. Chairmen, the federal-aid highway program since 1956, and since 1982 the mass transit program, have financed critical national transportation investments primarily from the dedicated depository of revenue the Highway Trust Fund.  There are a variety of fees deposited in the Trust Fund, but the largest source of income by far has been fees levied on motor fuels (gasoline and diesel).  Although the needs for highway and transit investment have dramatically increased, fuel-related user fees have been adjusted only on a sporadic basis.  The following chart provides a history of changes in rates since the creation of the Trust Fund in 1956.

 

 

 

 

 

 

 

Changes in Gasoline Tax: 1956-Present

 

 

 

 

 

 

Year

Total Tax

Highway Account

Mass Transit Account

Deficit Reduction

Leaking Underground Storage Tank

1956

3

3

-

-

 

1959

4

4

-

-

 

1983

9

8

1

-

 

1987

9.1

8

1

-

0.1

1990

14.1

10

1.5

2.5

0.1

1993

18.4

10

1.5

6.8

0.1

1995

18.4

12

2

4.3

0.1

1997

18.4

15.44

2.86

-

0.1

 Source:  FHWA, “Financing Federal Aid Highways,” 1999

 

 

 

 

 

 

 

        

In concert with increases in user fees there was growth in funding for both the highway and transit programs.  The most dramatic growth occurred since 1991 starting with the enactment of ISTEA and reinforced by TEA-21.  However, in spite of this growth, needs continue -- by anyone’s measures -- to far outstrip available federal, state and local resources.  At its completion, TEA-21 will have provided $208 billion for highways, transit and safety, but the needs as measured by the U.S. Department of Transportation are far greater than even this record level investment.

 

In the 1990s, various innovative financing techniques were piloted and then enacted into law through the National Highway System Designation Act and TEA-21.  Among the tools that now are part of many state DOT financing approaches are:  eligibility of federal-funding to pay debt service for project financings; grant anticipation notes also known as GARVEE Bonds; tapered match, which allows states to manage matching shares over the life of a project; and the Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) program introduced in TEA-21 that provides secured loans, loan guarantees and standby lines of credit to surface transportation projects of national or regional significance.  These tools are useful but only fill a niche in the program and project financing toolkit.  We clearly need to do more with innovative financing in the future to enhance the mechanisms, and apply innovative financing to more areas of surface transportation.  I will provide ideas for the Committees’ consideration later in my testimony.

 

AASHTO’S PROPOSED FUNDING LEVELS FOR REAUTHORIZATION AND FINANCING OPTIONS.

 

Mr. Chairmen, we believe the central issue in reauthorization will be how to grow the program.  Huge safety, preservation and capacity needs exist in every region of the country.  AASHTO will release shortly its Bottom Line Report, which projects needed highway investment to assure American mobility and to advance our economy.

 

The report will show that the annual level of investment needed to maintain current conditions and performance of our highway systems is $92 billion.  The estimated annual level of investment needed to maintain the current conditions and performance of the nation’s transit systems is $19 billion.  These investment levels far exceed current investment and we recognize that the magnitude of increase needed is not likely to be made available through the federal-aid highway program.  

 

However, to begin to address these needs, AASHTO is seeking a substantial increase in funding over TEA-21 for both the highway and transit programs.  Overall, as compared to TEA-21[1] obligation levels for highways and funding for transit, we seek to grow the program from at least $34 billion in FY 2004 to at least $41 billion in FY 2009 for highways and, likewise, from at least $7.5 billion in FY 2004 to at least $10 billion in FY 2009 for transit.  These minimum figures represent 35% and 45% program increases, respectively. 

 

The challenge is how to fashion a funding solution that can achieve these goals and garner the bipartisan support needed for enactment next year.

 

New sources of funding are needed to significantly grow the program.  Without the introduction of new sources of funding, growth in the highway and transit programs will rely on additional revenues from increased travel and truck sales.  Based on the latest data available to AASHTO, these revenues would translate to about a 10 percent program increase for highways over the life of a six year reauthorization bill. 

 

This increase would not even come close to keeping up with the loss of purchasing power due to inflation.  From 1996 projecting through 2009, inflation as measured by the Consumer Price Index results in a 26 percent decline in purchasing power.  If reauthorization of TEA-21 includes only “status quo” options for achieving a larger program, we will soon find that the status quo is actually a rather a dramatic decline in investment due to the erosion of purchasing power.  The following graph illustrates the impact of inflation on the current user fee rates. 

 

Put another way, based on the Bureau of Labor Statistics inflation calculator, merely to have maintained the purchasing power of the three cent gasoline tax as was instituted in 1956, the gasoline tax today would need to be 20 cents.

 

Maintaining the status quo is not an option; however, as I said, the challenge is to develop a solution that attains at least $41 billion for highways and $10 billion for transit by 2009 that garners bipartisan support.  The AASHTO Board of Directors is considering a menu of funding options to create additional revenues that includes drawing down the Highway Trust Fund reserves; capturing 2.5 cents per gallon gasohol revenues currently going to the General Fund for the Highway Trust Fund; transferring the equivalent of 5.3 cents per gallon of gasohol tax from the General Fund to the Highway Trust Fund to make up for the rate differential between gasohol and gasoline; capturing interest on Highway Trust Fund reserves; increasing General Fund support for transit; selling financial instruments; and indexing and raising federal fuels taxes.

 

Although the program could grow somewhat without raising taxes, it would fall short of meeting national needs.  AASHTO recognizes that the Congress needs funding and financing options beyond the traditional user fee increase approach.  The Board also directed the AASHTO staff to explore the feasibility of leveraging new revenues through a Transportation Finance Corporation.  While most of AASHTO’s funding options are very straightforward, I would like to take a few minutes to describe the proposal to create a Transportation Finance Corporation, which could achieve AASHTO’s goals for highway and transit funding without indexing or a tax increase, in more detail. 

 

TRANSPORTATION FINANCE CORPORATION

 

In order to help close the sizable funding gap between surface transportation investment needs and projected resources available in the Highway Trust Fund, AASHTO is exploring including among its menu of funding options the concept of establishing a new tax credit bond program to raise revenue in the capital markets.  We describe this concept as program finance, rather than project finance.

 

AASHTO proposes that Congress consider chartering a private, non-profit organization—the Transportation Finance Corporation—to serve as the centralized issuer of tax credit bonds.  Approximately $60 billion in bonds would be issued between 2004 and 2009.  From the bond proceeds, approximately $34 billion would be distributed to the highway program through FHWA according to an apportionment formula determined by Congress (perhaps similar to the current Federal-aid highway funding formula).  About $8.5 billion would be made available to transit agencies on a basis to be determined.  From a State (or transit agency) perspective, these funds would essentially be indistinguishable from regular federal-aid apportionments:  states would be required to comply with all Title 23 requirements to use the funds.  In summary, the TFC would leverage approximately $18 billion in new revenues into an increase of nearly $43 billion in program funding for FY 2004-2009.

 

The States would not in any way be liable for the repayment of the bonds.  A portion of the bond proceeds (approximately $17 billion) would be set aside at issuance and deposited in a sinking fund, which would be invested in Federal agency or other high-grade instruments. At maturity, the sinking fund will have grown to be sufficient to repay the bond principal.  These taxable bonds would have a term of 20-25 years.  

 

In lieu of interest, the bond holders would receive taxable tax credits that could be applied against the holder’s Federal income tax liability.  There is a cost to the U.S Treasury for this type of tax credit program.  The Treasury would be reimbursed for the budgetary cost of the program (arising from tax expenditures) by additional Highway Trust Fund receipts derived from a new net source of revenue.  Thus, there would be no impact on the federal deficit.

 

This summer, AASHTO met with seven major bond underwriting firms (investment banks), two ratings agencies, and a bond insurer to assess the viability of the Transportation Finance Corporation proposal from the perspective of the financial community.  In our due diligence we investigated the ability of the capital markets to absorb an additional $60 billion in investment; overall marketability of the bonds, including necessary and preferred characteristics of the financial instruments; potential investors; and credit assessment.

 

In addition, the TFC proposal contemplates up to $5 billion of federal funding being used to fund a Capital Revolving Fund, which would make available direct loans, loan guarantees and standby lines of credit to a variety of surface transportation projects not readily fundable under existing Federal programs.  This fund would be a catalyst to leverage capital for an expanded list of transportation to include, highways, transit, freight rail, passenger rail and security infrastructure. This funding would assist in promoting public private partnerships and attract new private capital to transportation projects.

 

Overall, we found a high level of interest in the program due to the equity and efficiency advantages of using debt proceeds to finance long-term infrastructure investments.  Our key findings:

 

Tax credit bonds are marketable.  The Corporation should be authorized to de-couple the principal from the stream of tax credits, and market each portion of the financing instrument to different groups of buyers on a discounted basis.  For example, the principal component is likely to appeal to pension funds, and tax credits should be attractive to financial institutions & corporations.  Major individual investors anticipating federal income tax liability in future years are also potential purchasers of the tax credits, as are individual investors interested in safe, long-term investments.  Securities firms would maintain an active and continuous secondary market in both the principal and tax credit portions to assure their liquidity. 

 

Capital markets can absorb TFC paper.  The proposed size of the program (an average of $10 billion per year over 6 years) equals 0.2% (two tenths of one percent) of the U.S. bond markets’ $4.6 trillion debt issuance volume in 2001. 

 

Marketability and liquidity are enhanced by a central issuer.  Larger, more homogenous issues than the fragmented Qualified Zone Academy Bond (QZAB) school construction program should result in a more efficient secondary market and reduced transactions fees as well as centralized investor information leading to price transparency.  A centralized issuer also mitigates tax compliance risk and ensures that all states benefit from the program rather than only states using debt financing.

 

There is a broad potential investor base.  Decoupling tax credits from principal will be more efficient and result in a broader investor base.  The principal component should appeal to pension funds; tax credits are likely to be attractive to financial institutions and corporations; and allowing individuals to buy credits will broaden the market.  The TFC will need to mount an investor education program to develop an efficient market.

 

Other aspects of the due diligence show that tax credit bonds are likely to be investment grade and, of course, that specific terms of the legislation will be critical to the success of the program.

 

Our analysis shows that AASHTO’s funding targets through FY 2009 could be achieved through the Transportation Finance Corporation without indexing or raising fuel taxes.  However, the program level would drop below FY 2009 slightly for the following three years before it resumes positive growth in 2013.  In our modeling, when the TFC concept was combined with indexing, the program continues healthy growth from FY 2010 on.  As you can see, the AASHTO staff and our Financial Issues Work Team have developed a creative proposal that appears feasible and has been well received.  We commend it to you for your consideration. 

 

Potential Program Growth Summary

 

The following charts illustrate potential sources of growth in highway and transit program funding.

“Incremental” represents revenues from travel growth, 2.5 cent per gallon gasohol transfer, and drawing down the Highway Trust Fund.

 

Innovative Financing Options

 

In addition to the menu of funding options, AASHTO wants to work with the Congress to enhance and strengthen current Innovative Financing tools. These changes include enacting legislation to extend the legislative authority in TEA-21 for State Infrastructure Banks to all states, assuring the continuance of the current innovative financing provisions and making improvements to the TIFIA program. Specifically, regarding TIFIA we recommend that the current $100 million threshold be reduced to $50 million which will serve to expand the universe of projects that can take advantage of this financing tool. In addition we urge the Congress to make clear the intent of the program is to be a minority investor and thus to demonstrate more flexibility in taking credit actions under TIFIA. This is not to suggest that care should not be taken in transactions involving taxpayer money but rather to meet the program goals which are to round out financing of projects with federal assistance.

 

The Board of Directors will be making final decisions on AASHTO’s reauthorization financing recommendations in the late fall and I note that Chairman Baucus has included a number of items similar to those on the menu of options in legislation he recently introduced. 

 

 

OTHER FINANCING ISSUES

 

Guaranteed Spending

 

One of the key features of TEA-21 is guaranteed spending.  The assurance of stable, predictable funding has made it much easier for states to plan and carry out programs.  AASHTO has adopted as a top priority ensuring the continuation of funding guarantees. Funding guarantees are essential to meeting our commitment to the traveling public, which pays the dedicated user fees for highways and transit programs, that they are receiving the benefits of their fees.  The return on this investment in transportation programs is ensuring a competitive economy with hundreds of thousands of high-paying American jobs.   

 

RABA Calculations

 

Another key feature of TEA-21 is the budgetary mechanism known as Revenue Aligned Budget Authority (RABA).  This mechanism was designed to ensure that the receipts coming into the Highway Trust Fund Highway Account are fully utilized by the program.  This mechanism added over $9 billion to the program thorough FY 2002.  However, due to the downturn in the economy, the look-ahead provision of RABA substantially overestimated FY 2001 revenues; thus the RABA adjustment for FY 2003 would have reduced the obligation levels for the highway program by $8.6 billion or 26 percent. AASHTO is pleased that the Congress is moving to restore this much needed investment funding.

 

AASHTO believes that it is necessary to preserve a RABA mechanism.  However, action is necessary to ensure a more stable and predictable outcome.  Therefore, we offer an option that would eliminate the look-ahead provision of current law and replace it with a provision that retains the look-back part of the calculation.  This likely will make the program funding more stable but also will cause a buildup of revenue in the Highway account.  Therefore to ensure full use of the revenue we also recommend including a provision that would reduce the cash balance in the Highway Account to a fixed minimum by raising the program level in the last year of the authorization bill to a level sufficient to reduce the balance. 

 

Long-term Financing

 

Given the advent of more fuel efficient vehicles and the increasing use of alternative fuels, income to the Highway Trust Fund may be significantly reduced.  In order to prepare for future reauthorizations AASHTO recommends that Congress create a Blue Ribbon Commission to study financing options and report its findings prior to the next reauthorization cycle.

 

CONCLUSIONS

 

The federal-aid highway and transit programs have a long history of strong partnership with the States and have made major contributions to creating surface transportation systems that are among the best and safest in the world.  However, by all measures surface transportation needs far outstrip investment resources.

 

AASHTO recognizes the need for additional investment and has proposed program increases of 35 and 45 percent for highways and transit.  This increased investment is vital to the nation’s economy and assures the continuance of high paying jobs in the transportation sector.

 

Recognizing the need to offer creative solutions for revenue generation, AASHTO is considering including a proposal for the creation of a Transportation Finance Corporation in its menu of funding options.  This federally-chartered non-profit corporation would leverage funds for the program and take advantage of the private capital markets for bringing revenue into the program.  In addition, the TFC would include a Capital Revolving Fund that could leverage as much as $30 billion in credit support for a variety of transportation programs including, highways, transit, freight, and passenger rail and security infrastructure.  This fund will likely serve as a catalyst for generating public/private partnerships and thus further expand investment in transportation programs.

 

Guaranteed spending is a key feature of TEA-21.  It provides predictable funding so that States can plan with a greater degree of certainty.  It assures that dedicated user fees are spent on the programs for which they were collected in a timely manner.  One of AASHTO’s reauthorization goals is to preserve guaranteed spending.

 

RABA has served to ensure that increased revenue is utilized for programs without having to wait until the next reauthorization cycle to increase program levels in highways.  There needs to be adjustments to the RABA mechanism to make the results more predictable and AASHTO has offered a solution that could accomplish that end.

 

In the long-term, consideration needs to be given to possible new sources of income and way to collect income to ensure that there is sufficient income to make the investments in transportation necessary to meet the nation’s needs in the future.

 

We look forward to working with the Congress to enact legislation that will ensure continuing maximum possible investment in our transportation system.


[1] Growth calculations:  Highways baseline of $168.7 billion includes TEA-21 obligation limitation, exempt and RABA.  Transit baseline includes guaranteed funding of $36.35 billion.