NATIONAL SURFACE TRANSPORTATION INFRASTRUCTURE FINANCING COMMISSION PAYING OUR WAY: A NEW FRAMEWORK FOR TRANSPORTATION FINANCE Final Report Briefing Presented by: Bryan Grote, Commissioner Principal, Mercator Advisors, LLC October 25, 2009 AASHTO Annual Meeting

About the Commission 2  Created in SAFETEA-LU (sec ) to:  Assess highway and transit investment needs  Examine federal HTF revenues, status, and projections  Consider alternative funding options and finance techniques  Report back to Congress with findings and recommendations  15 Commissioners  Diverse backgrounds, appointed by Congress or Secretary of Transportation  Open and transparent process  23 months of literature reviews, expert presentations, public comments, and commission debates  final report National Surface Transportation Infrastructure Financing Commission

Commission Focus & Principles  Three interrelated questions:  How much revenue is needed?  How should it be raised?  How should it be spent? (generally outside scope)  Six guiding principles:  Enhance mobility of all system users  Generate sufficient funding on a sustainable basis  Cause users to pay full cost of system use to greatest extent possible  Encourage efficient investment  Incorporate equity considerations  Support broader public policy goals (i.e., energy and environment) 3 National Surface Transportation Infrastructure Financing Commission

Starting (Obvious?) Observations  Demands outpacing investment  System maintenance competing with capacity expansion  Fuel taxes not sufficient (at current rates)  Need more revenue…and collected in ways more directly related to system costs  Need more investment…and more intelligent investment 4 National Surface Transportation Infrastructure Financing Commission

Findings – The Highway/Transit Funding Gap  Nationally:  Meeting only 1/3 of roughly $200 billion required each year to maintain and improve the system  Meeting only 1/5 when externalities such as congestion, environmental, and safety impacts are considered  Federal level (assuming current share of national needs):  HTF receipts projected to average $32 billion per year over next 25 years (2008 dollars)  To maintain system, projected to need additional $46 billion+ each year  To improve system, projected to need additional $64 billion+ each year 5 National Surface Transportation Infrastructure Financing Commission

Federal Funding Gap (current law) 6

National Surface Transportation Infrastructure Financing Commission Fuel Tax Projections over Long Term Fuel tax sustainability eroding quickly – unlikely to follow smooth path, with technology advances and heightened focus on global climate change. 7

Commission Recommendations Overview 8  No “silver bullet” solution  Current indirect user fees provide only weak price signals for system use  Financing approaches can help, but no substitute for required revenue  Long term, mileage-based user fee (VMT) system best choice  Sends clear signals about full costs of system use  Spurs more efficient use and investment  More consistent with broader federal policies  More sustainable as a funding source  Near term, need to bridge the gap with current sources  All options face political and practical challenges  Can’t just wait – new funding and spending reform must go hand-in-hand National Surface Transportation Infrastructure Financing Commission

Framework for Funding Options Assessment  Established 14 evaluation criteria:  Revenue stream considerations  Implementation and administration  Economic efficiency and impact  Equity considerations  Evaluated 40+ funding options:  Existing sources  New vehicle-related taxes and fees  New fuel-related taxes  Broad-based taxes  Freight-related sources  Tolling and pricing mechanisms 9 National Surface Transportation Infrastructure Financing Commission

Summary of Funding Options Assessment Options evaluated based primarily on relevance to direct federal funding or federal facilitation of state and local mechanisms 10

National Surface Transportation Infrastructure Financing Commission Comment on Freight-Related Options 11  Truck-related fees (incl. diesel tax) contribute more than one- third of HTF revenues  Short term, increasing these charges is best option:  Modest relationship to road use and impacts  Avoids distortions for particular user classes  Favorable from administrative cost standpoint  Downside – some charges have considerable revenue variability  Long term, move to VMT fee structure preferred  There are opportunities for targeted fees (e.g., customs duties, container charges) for dedicated investment categories

Commission Recommendations: Transition to Mileage-Based User Fee  Begin transition to VMT as soon as possible  Set federal fee at level sufficient to fund federal share of national needs  Approximately 2¢ per mile for autos under current policies and estimates  Additional charges at state/local level  Including for congestion, emissions, special tolled facilities, etc.  Reduce/eliminate HTF reliance on fuel and vehicle-based taxes (carbon charges may still be required)  Ancillary benefits – ITS (traveler info) and VII (safety applications) 12 National Surface Transportation Infrastructure Financing Commission

Transition to VMT (cont’d) 13  Significant but resolvable issues:  System reliability / security / enforceability / fairness  Privacy protection  Implementation and administration costs  Technologies and standards, equipping vehicles  Next steps:  R&D programs (technologies and standards)  Pilot programs and state-level VMT initiatives  Extensive public outreach to address concerns and problems, explain possible solutions  Independent advisory committee or policy oversight body to coordinate efforts National Surface Transportation Infrastructure Financing Commission

Commission Recommendations: Immediate Action – Existing Sources 14  Protect and preserve Highway Trust Fund  Increase existing HTF revenue sources:  Modest fuel tax increases (10¢ gas, 13¢ +2¢ diesel)  Increase (double) Heavy Vehicle Use Tax (HVUT)  Index motor fuels tax, HVUT, and truck tire tax to inflation  Together these short-term measures will:  Generate $20B annually, recapture lost purchasing power since 1993  Close 30-40% of combined federal funding gap (current policies)  Enable continuation of current program spending levels  The proposed gas tax increase will cost the typical household only $9 per month ($5 per vehicle, ½¢ per mile). National Surface Transportation Infrastructure Financing Commission

Commission Recommendations: Facilitate Non-Federal Investment 15  Tolling Initiatives  Allow tolling for new Interstate capacity, existing Interstates in major metro areas for congestion relief  Expand Interstate System Reconstruction and Rehab Pilot Program  Residual revenues for surface transportation  Tolling standardization and pricing information for travelers  Financing Incentives  Enhance federal credit (TIFIA) and re-capitalize State Infrastructure Banks  Financial incentives for user-backed projects ($700M per year)  Expand private activity bond program, consider additional targeted tax subsidies (tax credit bonds)  Private Sector Financial Participation (PPPs)  Facilitate private participation in project development, financing, and O&M  Ensure controls to protect the public interest, support state oversight National Surface Transportation Infrastructure Financing Commission

Commentary on the NIB Concept 16  Confusion about the fundamental policy objectives:  What problem(s) will it solve?  What is the appropriate federal role?  Key questions yet to be answered clearly:  Is overall objective to improve resource allocation or provide financing?  What investments are being targeted for federal assistance?  How will projects be selected (at the federal level)?  Do they require funding (grants) or financing (loans)?  Is such assistance not available from existing public or private sources?  What revenue source(s) will be used to fund this assistance?  How will this be more effective than existing programs?  Recommendations (if this is pursued):  Focus on nationally significant projects  Provide cost-effective financing with direct federal credit, building on TIFIA  No substitute for new revenue! National Surface Transportation Infrastructure Financing Commission

Other Recommendations 17  Research, Development and Demonstration Initiatives  VMT next steps  System cost impacts of certain users/vehicles  PPP guidelines for transparency and accountability  Technical assistance to states  Funding Allocation (“Bucket 3” Issues)  Safety as high priority  Performance-based funding allocation  Comprehensive and cohesive surface transportation system  Transparent process for, and explicit limits on, earmarking  Contracting to achieve life cycle costing and optimal asset management National Surface Transportation Infrastructure Financing Commission

Concluding Thoughts “Looking to the future, the Commission supports transitioning to a funding approach based more directly on use of the transportation system – ideally a mileage-based user fee – as the right foundation.”  Who pays now?  Average user pays 3¢ per mile in motor fuel taxes (compared to direct cost of 10¢ to 29¢ per mile on congested highways).  Who pays in the future?  We still pay…  Question is how much, when, and what do we get in terms of greater congestion, reduced personal mobility, lower economic growth, worse environment, and reduced safety. 18 National Surface Transportation Infrastructure Financing Commission

For More Information 19-March National Surface Transportation Infrastructure Financing Commission