The Highway Ponzi Scheme Running Out of Suckers

One of the most important things a citizen can understand is why, after decades of cheering about “growth,” Oregon is in dire financial straits. And the answer is that we have become addicted to funds that are restricted to use for system expansion, and not allowed to be used for system maintenance and repair. So the funds that are easiest to get cannot be used for the most important needs, but instead are only allowed to be used to increase the total burden of highways and roadways in need of maintenance and repair — even as revenue for upkeep varies wildly with Oregon’s volatile tax revenues, which are almost wholly dependent on income tax revenues, and have no consumption component.

As with all Ponzi schemes, the Oregon Department of Transportation faces a rude crackup as the supply of new suckers willing to keep pouring money into new roadway miles is about tapped out. The first speaker for the 22 September meeting of the “Joint Interim Committee on Transportation and Modernization” outlined the fear gripping ODOT about the end of the gravy train:

Mr. Travis Brouwer:  [17:11] Madam Chair, members of the committee, I’m Travis Brouwer, the assistant director for ODOT. I have to apologize at the beginning for this nagging cold and cough I’ve got. It’s actually going to be good for you because it will encourage me to say less. Good for me because if you ask any questions I can’t answer, I’ll just engage in a coughing fit.

Hopefully, that will keep us on track. I was asked today to give you a funding overview of how Oregon funds the transportation system. I’m going to go through this at a fairly high clip, not in a great level of detail. There will be plenty of time, hopefully, for you to ask questions tonight, and in the future for us to dig in some of these topics.

For some of you this will be old hat. For others, this maybe a little bit new. I’m going to try to keep it at fairly high level. I’m going to start by talking to you about the major funding sources we received in the State of Oregon, and how we use them on the service transportation system.

[18:02] The first area of transportation funding I’d like to talk about is the federal government’s provision of funds to the State of Oregon. Each year, Oregon receives about $600 million in federal formula funds from the Federal Highway Administration, the Federal Transit Administration, as well as some additional discretionary grants on top of that.

[18:23] Most of that money from the formula grants comes from the federal gas tax, which is 18.4 cents per gallon. It has been 18.4 cents per gallon since 1993. That’s put into the Highway Trust Fund, and then flows down to the states and local governments. A lot of money though, in addition to gas tax, is now being placed in the Highway Trust Fund from the general fund because that has not been increased in recent years.

Let’s start talking about federal highway funding. Each year, ODOT receives about half a billion dollars, about $500 million in federal highway funding. That was flat or declining for years. Between 2010 and 2015, we actually lost significant ground, even before accounting for inflation.

Then in the end of 2015, Congress passed the FAST Act, which provides a slight increase in funding. Very exciting when you get a slight increase in funding after years of declines. What we see for the next four years, through 2020, we have certainty around the amount of funding that’s coming to Oregon, and we get a slight increase. Two cheers for the FAST Act.

The nice thing about the federal funding that comes to the state is it’s essentially a formula block grant. All that money flows to ODOT, and then it flows out to local governments as well in some cases. The state and local governments are able to select projects so long as they’re eligible. We have to follow all the federal processes, however.

There’s a lot of strings attached, from environmental rules, procurement rules, design rules, etc. Sometimes you’ll hear complaints that help increase the cost of projects. As I mentioned, a lot of that money ends up flowing to local governments. About a third of the federal highway funding that ODOT receives then flows out to local governments under a number of programs.

[20:01] One of the largest is the Surface Transportation Program, which provides, by federal formula, a block of grants to the large urban areas in Oregon. Salem‑Keizer, Eugene‑Springfield, and the Portland Metro region. Then through an agreement between ODOT cities and counties, provides money to all 36 counties, as well as all the cities that are with a population of 5,000 or more.

[20:22] There’s also an enhanced discretionary program that is including our Statewide Transportation Improvement Program or STIP. There’s a local bridge program that provides funding for local bridge repairs. We, in recent years, have started sharing more safety money with local governments because a significant portion of the fatalities and serious injuries are on local roads.

[20:39] We want that money to flow to the most important, highest priority, safety projects. Local governments get about half of that safety funding through the All Roads Transportation Safety Program. There’s also a program called CMAQ. Congestion, Mitigation, Air Quality Improvement that funds projects in a small number of eligible areas that have air quality challenges.

[21:01] That includes the Portland Metro region as well as the Rogue Valley. Klamath Falls, Lakeview, Oakridge, as well as now Salem‑Keizer and Eugene‑Springfield have been added by decision of the Federal Highway Administration this year.

[21:13] There’s also a Federal Lands Access Program that provides an additional allocation of funds, that ODOT and local governments share for projects on any road that provides access to, or is on federal lands. In Oregon we get one of the largest allocations of [inaudible] in the nation under that program.

[21:29] As I said, about a third of the funding flows to local governments. That’s actually increased. Under the FAST Act, local governments are receiving a larger share of funding from the federal government. That’s largely because the larger urban areas in the state are now receiving a larger amount of money under the formula set by Congress.

[21:52] There’s also an allocation of federal transit funding that comes to Oregon. Each year Oregon gets about $100 million in formula grants. We’ve been successful, particularly in the Lane County area and then the Portland Metro region, in also securing significant federal grants for building out light rail and bus rapid transit.

[22:10] Each year, we get a base, about $100 million, that comes to the state in formula grants, primarily to urban areas. As you can imagine, most of the transit is in urban areas. For example, the Portland Metro region gets a little over half the money. Then the other urban areas get funding as well. That money goes directly from the Federal Transit Administration to those urban areas.

[22:30] ODOT receives the funding for rural areas, and distributes that to some of those smaller town transit services, anything in an area under 50,000.

[22:39] Let me shift now to the State Highway Fund. There’s a pretty important distinction in recent years between how we use our federal funds versus how we use our State Highway Funds. Federal funds have to be used for capital expenditures.

[22:52] We take all those federal funds, we put it into our Statewide Transportation Improvement Program, and they’re used for projects.

[The] State Highway Fund though is, at this point, largely used for basic day‑to‑day maintenance. That’s picking up dead deer, fixing potholes, plowing snow, etc. It is also now to a significant extent used for debt service, which I’ll show you a little bit later in the presentation, as well as for the agency operations.

[23:18] A relatively little amount is left, after those needs are met, for using for capital programs in the STIP. Other than, of course, the JTA projects. The Jobs and Transportation Act projects that are currently under construction, although most of those are now complete. It is essentially fully committed to those debt service, maintenance and agency operations.

[23:40] One of the key features of the State Highway Fund is that it is dedicated by the Oregon Constitution, Article 9 Section 3. Any revenue from motor fuels, as well as any revenue from the ownership, operation or use of motor vehicles, is automatically placed into the State Highway Fund, and can only be used for highway projects and uses, which includes bicycle and pedestrian infrastructure that is located within the highway right of way.

[24:11] The State Highway Fund, in Oregon we have a very well‑balanced revenue portfolio. We have three major sources of funds. The first and largest is the motor fuel tax, which is just a little under half, 44 percent in the last fiscal year, about $530 million a year in total. Then we also have DMV fees, which would largely be title, registration, and driver licenses that account for about $336 million or 28 percent.

[24:41] The third area is the motor carrier taxes and fees. This is the larger, the weight -mile taxes, as well as truck registration fees. Under the Oregon Constitution we have a requirement for cost responsibility between heavy and light vehicles.

[24:54] As a result, when those amounts that passenger vehicles are increased, those amounts that the trucking industry pay are adjusted upward to account for the disproportionate wear and tear the large trucks have on the transportation system. Again, a very well‑balanced revenue portfolio with a variety of sources.

[25:15] Now, in terms of how that money goes out the door, there are a number of things that come off the top of the State Highway Fund. For example, there are the costs of collections. The cost of collecting money at the DMV, the cost of administering the fuel tax program. That comes off the top, as does a number of transfers that go out to other agencies.

[25:35] For example, recreational vehicle administration fees go to state parks, under the constitution. Motor fuel taxes that are used by boats go to the Marine Board, etc. After taking those things out, and then covering debt service, the State Highway Funds is apportioned by formulas and state law. There’s actually a number of them.

[25:56] What it amounts to though generally, after taking these things out, ODOT gets about half. Then counties get about 30 percent, and cities get about 20 percent. It is a very even split between the state and local governments in terms of how that money goes out the door.

[26:14] In terms of how that money is distributed among counties and cities, as I said, 30 percent of the State Highway Fund and particularly 30 percent of any new revenue that is raised typically goes to counties.
[26:25] That in ’15, ’16 amounted to $243 million in that year. It’s distributed among the 36 counties based on the number of vehicles registered in the county. As you can see, that leads to some significant differentials in what each county gets. $41.4 million for Multnomah County. About a $140,000 for Wheeler County.

[26:47] This is not based in any measure of need, road mileage, or anything like that, just on the number of motor vehicles. There are a program for small counties that does help address some of those differentials. That does provide a little bit of money to the small counties. It’s a very small amount.

[27:06] Cities are similar. They receive about 20 percent of the State Highway Fund, and then 20 percent of any new revenue typically goes there, for about a $164 million. That’s distributed over 200 cities, based on population. For example, the little town of Lone Rock received $1,186 last year. The City of Portland receives a little bit more than that.

 As for the counties, there is a small cities program that is half the funding provided by ODOT, half the funding provided by cities. That then is distributed in grants for small cities, to ensure they have at least some funding opportunities available to them. The third major category funds, after federal funds and the State Highway Fund, is the ConnectOregon Program of Lottery Backed Bonds.

[27:57] This is created by the legislation in 2005 and since then has provided $427 million in Lottery Backed Bonds. That fund is not highway infrastructure. Transit, rail, marine infrastructure, aviation, as well as bicycle and pedestrian infrastructure, was added back in 2013. That is focused on integrating the modes, and improving the efficient flow of goods and people.

[28:20] That has been a very important funding source in recent years for those non‑highway modes, that otherwise cannot receive any of the funding from the State Highway Fund. When you look at these refunding sources, what you see is between the three of them, we’re able to cover all the modes of transportation, but some of them we have a much more difficult time.

[28:40] For example, highways, bicycle and pedestrian are relatively easy to fund out of federal and state funds. There are more limited opportunities for rail ports and aviation. Particularly, we find transit operations and rail operations are where there’s oftentimes a big hole in the funding that is available from these various sources.

[28:57] None of them are necessarily adequate, but we at least do have opportunities to fund different types of projects. There are a number of other miscellaneous revenue sources I thought I would mention. Most of these float to non‑highway purposes, because they’re not subject to the constitutional dedication.

[29:10] Custom license plates, because you’re paying a surcharge. That goes into the Passenger Rail Program. The Transportation Operations Fund. We affectionately call that the lawn mower fund because if you fill up your lawn mower with gas, you’re technically using an off‑road. I hope you’re using it off‑road.

 [29:27] You’re entitled to a refund on that gas tax you paid, but very few people fill out that paperwork. That money then flows into that Transportation Operations Fund, largely used for passenger rail, as well as for senior and disabled transit. Identification cards, again, that goes to senior and disabled transit. A small amount of cigarette tax, about $6.6 million [inaudible] , goes into senior and disabled transportation. There’s also a little bit of general fund money.

[29:54] I thought I’d also mention, there are a number of local resources for transportation. Although the local governments do depend in Oregon fairly heavily on the federal transportation funding and the State Highway Fund for roads. There are also 26 cities and two counties that levy a local gas tax. We’re seeing that number increase recently.

Street utility fees are often used as an add‑on to utility bills the city send out to increase transportation funding. Some cities use a portion of the property tax for transportation. Multnomah County has a vehicle registration fee that’s paying for a portion of the Sellwood Bridge.

[30:29] Then oftentimes, cities in particular will use system development charges for paying for the cost of growth that new housing and other infrastructure imposes on the system. That was the whirlwind tour through how we fund transportation. Now I’ll walk you through pretty quickly about some of the trends and issues we see here in these funding sources.

[30:50] This is our famous mountain chart, which shows you the construction programs that ODOT has, including the Statewide Transportation Improvement Program, or STIP, as well as the OTIA, the Jobs and Transportation Act, the Recovery Act, and the ConnectOregon program.

[31:04] As you can see, we’ve come over the tall part of the mountain, and we’re now on the downward coast down that hill. By 2021, we’re actually going to be at a lower level in terms of absolute dollars, not even accounting for inflation, than we were back in 2000/2001 before the legislature passed the OTIA program.

[31:23] A lot of people wonder how that is. There’s really a number of factors in transit, and issues that we’re dealing with right now. Let me walk you through some of those.

[31:35] The first off is simply that a lot of these one‑time programs are coming to an end. We’ve completed the OTIA program. The Jobs and Transportation Act program is now largely behind us. We have a number of programs still out there. There’s also a lot of uncertainty around federal funding in the long‑term, and I’ll walk you through that as well.

[31:48] Our debt service obligations that have been issued as a result of many of the funding packages in recent years continue out for the next couple decades, so that will limit the funding we have in free cash for new projects. We also see that construction cost increases have really eroded the purchasing power of our revenue streams due to inflation.

[32:08] A recent trend that we’re seeing is fuel efficiency is increasing, and that as a gesture toward non‑highway funding, particularly from the state level, is fairly minimal. It’s not adequate in a lot of cases to cover some of the needs that are out there. Let me walk you through those.

[32:25] As I mentioned, federal funding is uncertain. The FAST Act goes through 2020, so near to the end of the current statewide transportation program we’re working through, but in 2021, it goes negative. The reason is that the federal gas tax has not been raised since 1993, and so its revenue has been flat‑out declining for years.

[32:44] In order to keep funding at a high level…As you can see in this chart, expenditures are well above the revenues and interest. That means that the Congress has had to shovel a significant amount of money into the Highway Trust Fund from the General Fund.

[33:02] Since a number of our leading transportation officials have said it, including Congressman DeFazio, to a significant extent, there were budget gimmicks used to transfer the money in the Highway Trust Fund. In 2021, that cash runs out, and all of a sudden we’re faced with a major hole of about a third.

[33:18] If Congress does nothing in 2021 to provide additional revenue, we’ll see our federal transportation funding fall by about a third. As you can imagine, since in the transportation world we work on 5, 10‑year development cycles, that makes it really hard to plan for the long‑term.

[33:34] The other challenge we’ve seen in recent years is really debt service increasing to fund many of our important programs. Now, in 2001 we were largely a pay‑as‑you‑go state but we’ve moved more toward a debt financing model. There’s nothing wrong with that. Most of us in this room probably have or have had a mortgage at some point.

[33:56] Bonding’s a lot like a mortgage. You take out a mortgage in order to buy a house a lot faster than you could if you had to pay cash up front. In this case, we took out a mortgage essentially through bonding to buy a lot more highway projects than we would have been able to if we just did them on a cash flow basis.

[34:11] Over the last decade, or over the last 15 years, we’ve built a lot of highway projects. A lot of really important projects, and a lot of other projects as well. We’ve gotten good value out of that. We’ve had very low‑interest rates, and our debt at ODOT, we have a very prudent rating, a very prudent debt management program.

[34:30] We have only about a third of our revenues are dedicated towards debt service, and that’s a good revenue. We wouldn’t recommend going a lot above that because that has a lot of stuff. Good interest rates, we have a AAA rating from one bond rating agency, and generally are able to get a very good deal on this debt.

[34:48] What it means is that as you can see, we have a lot of money going out the door toward debt service over the next couple of decades that isn’t available for new projects. It’s just paying for the projects that are already done.

[34:58] Another major factor is that the transportation fees and taxes are not, in any way, adjusted for inflation. With most taxes, as property taxes rise, as property values go up, income taxes increase, total collections increase as incomes go up, sales taxes with prices, etc., gas taxes, vehicle registration fees are set at a flat level, so over time they’re eaten away by inflation.

[35:25] We looked at what the federal gas tax would have to be today to have the same purchasing power, just in absolute terms of the consumer price index. In 1993, it was 18.4 cents per gallon. Today, to have that same purchasing power, it would have to be over 30 cents a gallon.

[35:41] The same with the state gas tax. Even though the state legislature raised that in 2009 in the JTA, it has not kept pace with inflation since 1993. To have that same purchasing power today, it would have to be about 40 cents per gallon, as opposed to the 30 cents that it is today.

[35:55] We put that into infographic form to help people understand this, in part because we don’t just face the consumer price index at ODOT. We actually face price increases that are higher because we buy construction commodities, which have seen very rapid increases.

[36:09] Everybody knows that household good prices go up. You can buy a lot less of bread, or coffee, or milk for the same amount of money in 2014 than you could in 1993, the last time the federal gas tax was raised. It’s the same thing for our construction commodities, except worse.

[36:27] For the amount we paid for 2,000 pounds of rebar in ’93, we can only buy 900 pounds today. 10 yards of concrete in 1993, we can only buy 5 yards today. 10 tons of asphalt in 1993, we can only buy three and a half tons today. That means that in all those cases, the price of all those commodities have at least doubled, and in the case of asphalt, about tripled.

[36:50] What that means is that for every mile of road we could build for a given amount in 1993, we can build half as much today, which is obviously a significant challenge for us. In the last couple of years, we’ve also had one whammy in terms of the inflation. Now we have the double whammy of fuel efficiency increasing.

[37:14] For years, fuel efficiency stayed about the same, but then in 2009, the federal government imposed new corporate average fuel economy standards that are increasing the fuel efficiency of the fleet significantly. In the last few years, since 2008, fuel efficiency of the entire Oregon fleet increased by about seven and a half percent. Last year alone, it was one and a half percent.

[37:33] We’re seeing that expected into the future, for the foreseeable future. What that means is that the number of gallons of gasoline used by the vehicle fleet is going to peak in a couple of years, and then began a long, inexorable decline.

[37:45] That’s good for consumers. That’s good for the environment, but it’s not so good when your main funding source, that’s about half of your state funding, and most of your federal funding is based on how many gallons of gasoline you sell. This is going to be a major challenge as we look to the future and our fuels tax revenue starts to decline, and continues to decline going into the future.

[38:10] What was really interesting, when we took a look at what this means overall, when you factor in inflation and fuel efficiency and all the other factors here, what we’re seeing is there’s really a double whammy. That means the amount that Oregonians contribute to the State Highway Fund is actually falling over time, unless and until the legislature increases any of the taxes and fees.

[38:35] Our economists calculated that in 1971, the average Oregonian, per capita, paid $52.70 into the state highway fund in 1971 dollars. In 2016, the average Oregonian, on a per capita basis, will pay $42.80. That’s essentially close to a 20 percent tax cut in terms of what your bill to the state highway fund is over that period of time.

[38:56] Now, one of the reasons for this is that compared to many Western states, Oregon actually has relatively low automobile related taxes. That’s not to say our gas tax is particularly low because it is right in the middle of the pack among the Western states. 30 cents per gallon, most of the other Western states are somewhere in that range.

[39:17] What we have in Oregon though, is the lowest driver and motor vehicle fees of any state in the nation. When you buy a motor vehicle in Oregon, you pay for a title for $77, and registration is $43 a year, so 120 bucks for your first year of ownership.

[39:32] Most states, you pay a sales tax, or an ad valorem tax, or some sort of tax, a registration piece sometimes based on size or weight. Most of those are much lower. Even our combined title and registration are literally the lowest of any state in the nation. With that, I will wrap up my presentation.