Innovation in Funding Transportation Projects
A recent headline in the Baltimore Business Journal warned: “Cash running low for transportation projects.” The article is about Maryland’s struggle to pay its share of the Woodrow Wilson Bridge project, but the same words could just as easily apply to the financial challenges faced by New York, North Carolina, or any number of states.
Across the nation, states are battling budget deficits for fiscal year 2004 that could exceed $80 billion combined, according to one study. In many cases, that means less money is available for needed transportation projects.
“States have not been able to spend money on transportation as they had in the past,” says Gary Neuwerth, PhD, PE, head of Dewberry’s Northeast Region. “Due to budgetary shortfalls the states are looking for alternative financing, such as issuing transportation bonds, to fund their transportation needs. New York State, which is facing an almost $10 billion shortfall in fiscal 2004, is looking to the federal government to bear a significant portion of the cost to rebuild lower Manhattan and its transportation network.”
Like many state departments of transportation, the New York State DOT is also looking to cut costs. Governor George Pataki’s proposed fiscal year 2004 budget includes a $100 million reduction in spending on highway and bridge projects. The DOT says the proposed $1.65 billion budget is sufficient to get needed transportation projects done; however, the department now plans to cut its workforce by more than 900 positions through a retirement incentive program.
The belt tightening is affecting transportation budgets all over. Late last year, the North Carolina legislature incensed the design and construction community there by diverting $375 million in tax revenue from the highway trust fund to the general fund to offset a statewide budget deficit. At the time, the highway division chairman for the Carolinas Associated General Contractors wrote, “This situation might be tolerable if the transportation needs weren’t so large and the available funds so inadequate.”
As state budgets go…
Because state spending is the hub of transportation project financing, when state transportation budgets dwindle, the negative effects radiate to all points along the cycle. “Cities and counties get a lot of their money for transportation projects from the states,” says Neuwerth. “When you cut the state funding, there’s less money to trickle down to the cities and counties.”
The amount a state has to spend on transportation projects can also influence the federal money it gets. Former Maryland Transportation Secretary John D. Porcari, in the Baltimore Business Journal article on the state’s budget woes, said the inability to find new sources of revenue for transportation projects would cause the state to lose matching federal funds.
With money sources scarce and the backlog of necessary highway and bridge projects growing, some states are exploring innovative ways to get projects funded and done.
“What designers, engineers, and people in transportation need to do is look for new, more creative ideas for how to solve these problems,” says Kurt Thompson, PE, head of infrastructure planning and design for Dewberry’s Mid-Atlantic Region. “These things don’t happen overnight. New ideas have to be floated and debated by experts representing a variety of technical and financial interests. The most worthy ideas need to be taken to the public by the public agencies and officials who are responsible for charting solutions to the transportation infrastructure needs. There has to be a public dialogue.”
The lure of public-private partnerships
When public funding falters or a transportation project struggles to get off the ground, the private sector can often step into the breach. Jim Atwell, president of Commonwealth Service Company and the former assistant commissioner of finance for the Virginia Department of Transportation (VDOT), says that more states are enacting laws to allow for public-private partnerships in transportation infrastructure construction.
“Even though the transportation organizations want more money to come out of federal programs, the reality is that the president sent a transportation budget that’s lower than the current level,” says Atwell. “With the budget shortfalls in many states, and with the increasing price of gasoline potentially causing reduced travel and less tax revenue, you can expect to see reduced transportation revenue.”
Atwell says states have three choices: look for new sources of revenue, leverage existing sources of revenue, or partner with the private sector. “I see the biggest opportunity in partnering with the private sector,” he says. A private entity can bring better efficiency, broader experience, and more sources of funding to the project, says Atwell.
Public-private partnerships have a long history in Virginia, even pre-dating the 1995 enactment of the Commonwealth’s Public-Private Transportation Act (PPTA). In 1987, the Virginia General Assembly passed legislation allowing the formation of special tax districts. In late 1987, Fairfax and Loudon Counties formed the Route 28 Transportation Tax District to pay for and expedite improvements to a section of Route 28 serving Washington Dulles International Airport.
The Route 28 district operates on a levy of $0.20 per $100 assessed value on commercial and industrial zoned property, or property used for commercial or industrial purposes within the district. This tax does not apply to residential property.
Several states have modeled their public-private partnership legislation after Virginia’s PPTA, says Atwell. The Virginia law allows private entities to undertake transportation improvements, provides for solicited and unsolicited proposals, is exempt from the Public Procurement Act under certain conditions and allows for innovative financing concepts.
Tolls, HOT lanes gain momentum
The Dulles Greenway also predates Virginia’s PPTA. A 14-mile limited-access freeway extension of the Dulles Toll Road, the Greenway was completed in 1995. The first private toll-highway development in Virginia in 170 years, it is one of the few 100% privately owned toll roads in the country.
It’s also a prime example of how public-private partnerships can get a project done and done quickly. “The team representing the private interests developed solutions to a myriad of problems and issues that the public and investors were willing to support,” says Dewberry’s Thompson.
A debt-equity financing package involving institutional investors and a multi-national bank group was finalized in 1993 and construction started immediately. Opening ceremonies were held exactly 24 months later on September 29, 1995, six months ahead of schedule.
“On a project like this, you can’t talk about financing if you have not adequately addressed the problems so as to produce reliable cost estimates,” adds Thompson. “You need to know what you’re going to get and what it’s going to cost. The government agencies are not obligated to fund the project development costs, but it’s a risk the private sector is willing to take. At Dewberry, we were willing to produce studies, elevate awareness, and look at things differently, with the opportunity to be part of the revenue stream that it takes to implement the project.”
While public and private toll roads account for an estimated 10% of all highways in the US, many states have avoided the temptation to charge drivers a highway user fee—until now. North Carolina A&T State University is conducting a state-sponsored 18-month study to see if toll roads could be established on Interstate 40.
For similar reasons, but with a slightly different goal, the Virginia Department of Transportation has requested a federal grant of more than $1 million to study the feasibility of high occupancy/toll (HOT) lanes, which allow solo drivers to pay for the privilege of driving in high occupancy vehicle (HOV) lanes.
HOT lanes come with their share of controversy, having earned the nickname “Lexus Lanes” on the belief that wealthy drivers could pay to avoid traffic jams. In 2001, Maryland Governor Parris Glendening canceled plans to test HOT lanes, saying “It is unfair to link an easier commute with a person’s ability to pay; our goal is to ease congestion for all.”
But that hasn’t stopped other states, including Texas and California, from implementing HOT lanes. “HOT lanes bring other money to the table that the state wouldn’t otherwise have,” says Thompson. “You have different states with different views on tolls and HOT lanes. If you’re looking for other funds to leverage, tolls and HOT lanes are going to be considered.”
Recognizing that times have changed
The fiscal condition of many states seems to grow more dire every day. The bright side of this situation is that it is forcing some government officials and agencies to become more creative in how they get transportation projects done.
Design-build-finance was the method that was used on the recently completed Atlantic City/Brigantine Connector in Atlantic City, New Jersey according to Lou Robbins, PE, DBIA, Dewberry’s New Jersey Operations Manager. “For that $330 million dollar project the financing was split equally between the developer, the South Jersey Transportation Authority and the New Jersey Department of Transportation. As part of the Program Manager team, we were able to have a design-build package on the street in five months and construction completed in three short years after initial designs started.”
One possible outfall of the budget crunch is the continued growth of design-build and design-build-finance as delivery methods for transportation projects. Dewberry is the designer in a design-build relationship with Route 28 Corridor Improvements, LLC, led by Clark Construction Group, Inc. and its road and bridge construction subsidiary, Shirley Contracting Company, on the next phase of the Route 28 Corridor Improvements Project. This most recent public/private partnership initiative in Virginia is converting a 14 mile section to freeway standards by fast-tracking the design and construction of 10 planned interchanges with widening Route 28 from six to eight lanes. The initial phase in the design-build agreement with the Commonwealth of Virginia includes six high capacity interchanges and provides a combined commitment of $200 million dollars in improvements to the corridor over the next four years by leveraging the funding and bonding capacities of the Route 28 Transportation Tax District.
“When it’s done right, you’re bringing in new ideas and new money, you’re securing permits and plan approvals, faster and you’re delivering the public improvements earlier than would have otherwise been possible” says Thompson. “And you’re adding more value, which the traveling public, the affected communities, the review and regulatory agencies, and elected officials can see. Public/private partnerships are providing the opportunity to successfully complete much needed infrastructure projects ahead of schedule.”
