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Out of Control Policy Blog Archives: 12.8.13–12.14.13

It’s Time to Let the Wind Energy Production Tax Credit Expire

For the eighth time since its inception as part of the Energy Policy Act of 1992, the federal wind Production Tax Credit (PTC) is set to expire at the year’s end. While it has been extended every other time it has faced expiration, this year with Congress more focused on their latest budget battle it seems likely that Congress will allow the wind energy PTC to expire at the end of 2013. Ending the wind PTC, which was never intended to be permanent in the first place, will not only save taxpayers billions, but it will also allow the country to focus on energy innovation rather than continuing to subsidize an inefficient technology which in recent years has only shown very marginal improvements in quality.

The wind energy PTC currently subsidizes wind energy production at a rate of 2.3 cents for every kilowatt-hour of energy produced. Unlike other subsidies which decrease over time, as the technology improves, the current rate of wind energy subsidization is actually higher than the 1.5 cents/kilowatt-hour subsidy back when the program was implemented. Estimates of the cost to taxpayers of extending the wind energy PTC for 1 more year have ranged from $5 billion to $12.1 billion over the next 10 years.

The wind energy industry has also benefitted from state Renewable Portfolio Standards (RPSs) which mandate utility companies to acquire some of their energy from renewable sources. As such, wind has received a double whammy of government support and still can't compete with gas or coal in most places, hence the clamor by the wind cronies for continued subsidies under the PTC.

Writing for the Christian Science Monitor, energy consultant and blogger Geoffrey Styles explains that the subsidies have done as much as they possibly can to prop up the wind industry, and it’s time to end them. They’ve successfully increased wind energy production from under 2000 megawatts of capacity in 1992, to over 60,000 megawatts of capacity today. But the billions in subsidies for wind fail to address the single biggest hurdle standing in the way of wider adoption of the technology, which according to Styles is “its fundamental intermittency and disjunction with typical daily and seasonal electricity demand cycles”—in other words when there’s no wind, there’s no power. This sentiment is echoed by William Korchinski in a 2012 Reason Foundation study.

Critics argue that fossil fuel based energy producers will continue to receive billions in subsidies every year, but in terms of bang for the taxpayers buck renewable energy subsidies are far less efficient—the U.S. is actually paying more for less when it subsidizes renewable energy. In the Wall Street Journal, Bjorn Lomborg explains how fossil fuel subsidies amount to $4 billion per year, while renewable energy is subsidized at more than three times that figure, roughly $14 billion per year. In terms of energy produced, oil and gas added more than 20 times as much new energy output to the US economy as wind power did, and for roughly the same cost to taxpayers. To be clear, neither should be subsidized by taxpayers but fossil fuel subsidies clearly produce more energy at a lower cost.

Our recent Reason Foundation policy brief, “Stimulating Green Electric Dreams: Lobbying, Cronyism and Section 1705 Loan Guarantees”, agrees with Geoffrey Styles point in the Christian Science Monitor that the country should refocus on energy innovation, but subsidies aren’t the best way of achieving that. Since 1973, the Department of Energy has spent $154.7 billion (2012$) on “Energy Research and Development” but we have yet to see a significant energy technology produced that is commercially viable without subsidies. Our brief argues that a more efficient way of promoting innovation would be through a prize system that would only award money on technologies that meet specific energy output criteria. The concept is similar to the X-Prize Oil Cleanup Challenge, in which private philanthropists awarded $1 million dollars to whichever firm or individual could develop the most efficient skimmer technology for cleaning up oil spills. Prizes provide a much better incentive for innovation than blanket tax breaks or subsidies.

Even if the wind energy PTC isn’t extended, last year’s last minute extension of the PTC redefined how projects qualify for the tax credit, so any project that has either started significant work or spent 5% of its budget by year-end could still qualify for the current PTC in 2014. But for the sake of continued energy innovation and reigning in the U.S. budget, let’s hope the wind energy PTC suffers the same fate as the 573,000 birds that’ve had the misfortune of crossing paths with a wind turbine. 

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What to Make of Struggling P3 Toll Roads

I've received several queries about a Nov. 21st front-page story in the Wall Street Journal about financial difficulties at a number of U.S. toll-concession projects. Besides noting the bankruptcies of the South Bay Expressway in San Diego, Virginia's Pocahontas Parkway, and American Roads (a holding company for the Detroit-Windsor Tunnel and four Alabama toll roads), the article pointed to possible financial restructurings of the SH 130 toll road between Austin and San Antonio and of the Indiana Toll Road. In nearly every case the problem stems at least in part from overly optimistic traffic and revenue forecasts made prior to the start of the Great Recession in 2008. In several cases, the financial structure appears to be overly aggressive, with large payments coming due in the next year or two that exceed what is likely to be available from toll revenues and reserve funds. 

Not all P3 toll roads are in such difficulties, which is hard to discern from the WSJ article. Not mentioned at all is the 91 Express Lanes in Orange County, CA—the country's first toll concession and one whose traffic and revenues remain robust (though it had been in operation nearly 13 years by the time the 2008 crunch began). Mentioned only briefly or not at all are the Chicago Skyway, the Dulles Greenway, the I-495 Express Lanes on the Beltway in northern Virginia, the Northwest Parkway in Colorado, and the 407ETR in Toronto. Several of those have less than projected traffic, but to the best of my knowledge, none is in serious distress—and the 407 in Toronto is thriving. In addition, though not a P3 concession, the Inter County Connector in Maryland recently completed its first year of tolled operations, with toll revenue almost exactly at forecast level, and 40,000 vehicles per weekday on average. 

It's well-known that start-up toll roads are relatively risky endeavors, since highly accurate traffic and revenue forecasts are still more of an art than a science. And that's one reason I have long advised legislators and state DOTs against saddling taxpayers with traffic and revenue risk. One of the most important benefits of long-term toll concessions is shifting such risks (along with the risk of construction cost overruns, late completion, and operating & maintenance risks) to willing investors. I was interviewed about this issue by David Mildenberg for a Bloomberg article published on Nov. 27th, "Private Toll Road Investors Shift Revenue Risk to States." It documented the recent trend of companies that compete for mega-project concessions to push for availability-pay concessions rather than toll concessions. Both are long-term agreements in which construction, completion, and O&M risks are transferred, but in these newer concessions the company is paid by the state over the life of the agreement, with only minor variations depending on how available the lanes are 24/7 and what condition they are in. As Mildenberg's article points out, that leaves the largest risk—traffic and revenue--with the state, aka the taxpayers.

I've written about this point for several years, because one of the long-standing problems with US highway infrastructure is poorly justified projects that get approved and built more for political than for economic reasons. If a realistic projection of traffic and revenues doesn't come close to covering the capital and operating costs of a major highway or bridge, there's a serious question whether it's a wise investment. "Economic development" is usually trotted out in such cases, a kind of "field of dreams" premise. But let's face it: this country has a large and growing need for productive highway investment (such as rebuilding and modernizing the Interstates and building urban express toll networks) and a serious shortage of funding to meet those needs. Requiring such projects to pass a credible return-on-investment test is a way to separate the high-value investments from the cats and dogs. 

To be sure, there are cases where, for policy reasons, not charging a toll on a new facility intended to divert traffic from other facilities can make sense (e.g., the Port of Miami Tunnel, being developed as a pure availability-pay concession).  And there can be cases where a hybrid toll/availability structure is the best that can be done, due to specialized circumstances. But those should be the exceptions, not the rule. If this country shifts to a largely availability-pay model, we will lose a powerful means of ensuring the wisest allocation of inevitably limited highway investment funds. 

Incidentally, Moody's early this month changed its outlook for toll roads from negative to stable. That change was based on the recovery of traffic growth, which Moody's projects as averaging 1.5% for 2014 for the toll roads it rates. 

This article also appears in Robert Poole’s Surface Transportation Newsletter #122 What to Make of Struggling P3 Toll Roads

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Alaska Governor Proposes $3 Billion Towards Paying Down Pension Debts

In 2005, Alaska was one of the first state governments to implement significant pension reform, phasing out the traditional defined benefit plan for employees hired on or after July 1, 2006 in favor of a defined contribution plan. The reasons Alaska made this overhaul are the same set of reasons that are prompting increasing numbers of state and local governments to consider doing what Alaska did: rising pension costs and growing unfunded liabilities.

In 2005, Alaska found itself with rapidly growing pension costs for the state Public Employees Retirement System (PERS) and the Teachers Retirement System (TRS). From 2003 to 2005, Annual Required Contributions (ARCs) to PERS had grown nearly four-fold, from $63.3 million to $234.4 million. Worse, under the old system, employees were not sharing any of the costs of this burden. Consequently, Alaska legislators failed to make the full ARC towards PERS beginning in 2005, and has failed to make the full ARC towards PERS ever since. This is similarly true with the TRS, which from 2003 to 2005, also experienced rising pension costs, from $37.8 million to $152.2 million. When the pensions for PERS and TRS are coupled with their respective state retiree health care plans, the costs skyrocketed even further. Taken together, the systems faced approximately $4.5 billion of unfunded liabilities.

In light of this, Alaska transitioned to a cost saving defined contribution plan that shares costs between employees and Alaska taxpayers. The plan works as follows: employees hired on or after July 1, 2006 contribute 8 percent of their pre-tax paycheck towards their retirement plan. This contribution is then matched with a five and seven percent contribution from employers, respectively, for general employees and teachers. The true extent and impact of this reform is unlikely to be felt for years, as the reform only applied to new hires.

Despite this significant overhaul, Alaska continues to deal with the same problems that prompted the reforms. On December 5th, Alaska Governor Sean Parnell issued a press release announcing a fiscal year 2015 plan to use $3 billion of state savings to pay down a portion of the state pension systems now $11.9 billion unfunded liability. This year, Alaska had to contribute $600 million towards its state employee and teacher defined benefit pension systems; next year, Alaska projects it will have to contribute $700 million. Should legislators approve of this measure, Alaska would be able to cap annual payments towards the pension systems (and unfunded liabilities) at $500 million annually, giving state budgeters a bit of breathing room.

Paying down unfunded pension liabilities is a long and arduous process, which is why state and local governments have been content kicking the proverbial can down the road instead. As opposed allocating funds towards services taxpayers need or freeing budget surpluses in the form of tax cuts, paying down unfunded pension liabilities is much harder to do and easier to ignore.

Even so, Alaska is in a better situation than many other pension systems to do just that. However, seven years after pension reform, Alaska continues to deal with rising costs and growing unfunded liabilities. For state and local governments that have yet to take seriously into consideration the option of phasing out the costly, assumption-riddled defined benefit model, the longer they wait, the bigger the problem will be.

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Baltimore City School District Has Come a Long Way since 2007, but There's Still Work to Be Done

In Reason Foundation’s recently published Weighted Student Formula Yearbook 2013, Baltimore City Public School (BCPS) district received an overall “F” grade and ranked last among the school districts highlighted in the report. But the poor grade in the Yearbook – which measures student academic outcomes and implementation of each district’s student-based budgeting policy – does not mean that the district hasn’t made notable gains over the past few years.

HBO’s The Wire showed the startlingly accurate portrayal of the district’s public school system when its fourth season aired in 2006. Juvenile crime and truancy were rampant while the school district bureaucracy faced a $50 million budget deficit and continued to fail to improve academic outcomes. Most of the school districts in the Yearbook did not face the concatenation of hurdles that needed to be overcome as did Baltimore upon embarking on their journey of school finance reform.

Andres Alonso took the job of Baltimore City Public Schools Chief Operating Officer in 2007, at a time when (among other things) the district’s juvenile homicide rate was almost five times higher than the Maryland rate and over eight times higher than national rate. Also, the district’s annual dropout rate was more than twice that of the state average, suspension rates were 30 percent higher than other Maryland school districts, and negative punishment were extremely disproportionate based on race and poverty. In his first months as CEO, Alonso took initiative to address these issues in Baltimore City Public School’s comprehensive school safety plan, Creating and Sustaining Environment to Support Teaching and Learning.

The plan included three objectives – to identify factors contributing positively or negatively to school safety, climate, and learning environments, to create and implement comprehensive school-based plans for creating safe and supportive learning environments, and to create and support a multi-agency Steering Committee that would provide support services to students, community and family leaders, and youth during the development and implementation of the new school safety plan.

When released, the school safety plan was unique in that it focused on keeping kids in schools rather than shooing them out like the “zero tolerance” plans popularized in the 1990s. Since then the district has continued to work towards more tolerance and flexibility as well as in-school safety, cleanliness, and discipline to keep kids off the street and out of the juvenile justice system.

For instance, in 2009 legislation passed that now prohibits schools from suspending or expelling students based solely on attendance-related offences including cutting class, tardiness, and truancy. Also in 2009, Baltimore City Schools collaborated with the MacArthur Foundation’s Model for Change DMC Action Network and Baltimore’s Department of Juvenile Services to start the Baltimore City Educational Project. The project helps youth leaving detention to reenter schools and insures that these students are placed in academic programs within five days of release from detention.  

The initiatives taken to form more in-school responses to misbehavior have shown compelling outcomes, especially among high school students. Juvenile shootings in Baltimore city were down by 67 percent, and juvenile arrests were down by 57 percent between 2007 and 2011. Over the same period, truancy was down 86 percent, and suspensions down 34 percent.

Shortly after launching the district’s school safety plan, Alonso and his staff worked to solve the district’s financial woes and increase the quality of the district’s schools. On April 15, 2008, in a nine to seven vote by the Board of School Commissioners BCPS adopted Fair Student Funding – a plan to decentralize school finances, empower principals, and offer parents more choice.

Prior to Fair Student Funding (FSF), school funding was driven by a staffing model where schools received staff rather than dollars. This antiquated funding model created vast inequities in per-pupil spending due to differences in seniority and personnel costs school to school. Conversely, under Fair Student Funding per-pupil funding is allocated based on each student’s unique needs, following them to the school of their choice.

The district’s most recent FSF formula for FY 2014 allocates a base of $5,190 per student which is supplemented by the following “weights” for students with particular needs:

  • Add $1,000 for each student performing at the basic level;
  • Add $1,000 for each student performing at the advanced level;
  • Add $641 for each student with disabilities; and
  • Add $650 for each high school student at risk of dropping out.

Each student’s funding then follows them to the school of their choosing through Baltimore City’s open enrollment policy – an essential component of Alonso’s 2008 reforms. Now, parents can go online and fill out one application, listing in order of preference the middle or high school they would like to enroll their child in.

Adding to the diverse portfolio of programmatic options, BCPS parents also have the choice of enrolling their child in a district charter school. In the 2013–14 school year BCPS has a total of 31 charter schools plus an additional19 schools managed by external operators enrolling Baltimore City students.

The district’s push for school choice has created an environment for healthy competition between schools to attract and retain students and the funding that is attached to them. Consequently, Baltimore’s open enrollment policies act as a market mechanism, revealing parent and student demand for each school to BCPS administrators.

In keeping with its belief that resources should be in the schools, not in the central office, under Fair Student Funding BCPS has been able to cut district office positions by 33 percent (from 1,496 in FY 2008 to 1,001 in FY 2012) and moved $164 million in additional dollars to schools. Slimming down the central office and redirecting those funds directly to schools has resulted in direct school funding increases every year since FY 2008. This means that more dollars are going to school principals so that they have more autonomy over how their school operates and can decide how to best serve their students.

In exchange for added autonomy over their finances, schools are held accountable for their performance through school-level profiles which cover things like academic achievement and utilization. The district CEO and Board of School Commissioners review school profiles annually and can strategically close the lowest-performing and under-enrolled schools and expand high performing, high demand schools in order to move students to higher-quality schools.

As a result, academic outcomes have been on an upward trend.  Baltimore City’s five-year graduation rate for the Class of 2012 is 71.7 percent, compared to 70.6 percent for the Class of 2011 and 66.7 percent for the Class of 2010. Also, dropout rates are down from 23.8 percent for the Class of 2010 to 14.1 percent for the Class of 2012. Similarly, 2013 reading proficiency rates on the Maryland State Assessment improved from the previous year.

Despite these positive outcomes, BCPS still has work to do improving academic achievement, as shown in Reason’s Weighted Student Formula Yearbook 2013. Tisha Edwards, who was recently appointed Interim Chief Executive Officer of Baltimore City schools, recognizes the need to continue and strengthen the reforms put in place by her predecessor, Andres Alonso. Upon assuming the position of Interim CEO, Edwards stated that it is her priority to continue to move forward that work accomplished under the leadership of Dr. Alonso and to keep the focus on the success of BCPS students.

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Mileage Based User Fees or Road Usage Charges—Some Thoughtful Commentary

The August/September issue of Thinking Highways (North American edition) includes a pair of articles by Jack Opiola and colleagues from D'Artagnan Consulting on the subject of road usage charging (RUC), otherwise known as mileage-based user fees (MBUFs). One article explains points of similarity and difference between traditional tolling and RUC, primarily with the former typically being facility-based while the latter is envisioned as system-based (as in a whole state's roadway system). 

But what I especially want to call to your attention is their other article, "Let There Be RUC." That one was written as a response to a previous article that argued for fuel tax increases rather than starting the transition away from paying per gallon to paying per mile. In this article, Opiola and colleagues take on a number of arguments being raised against what I will continue to refer to as MBUFs. Of the seven points in the article, I will focus on three that I think most need wider understanding.

First, why should we start the transition now rather than waiting until alternatively propelled vehicles start achieving large market shares? The main reason, write the authors, "is to keep infrastructure revenues on pace with the rapid increase in fuel efficiency of the internal combustion engine." For model year 2013, the average mpg reached 24.7 mpg, on the way toward the 34.5 mpg required by federal CAFE standards by model year 2016. And assuming they are not rolled back, the 2025 standards require 54.5 mpg for cars and 40 mpg for trucks. Thus, by 2025, the average new car will go twice as far on a gallon of gas as today's average new car. Unless you think it is politically realistic to double fuel taxes between now and then, highway funding is in big trouble. 

A second key point is that a variety of affordable, adaptable off-the-shelf technologies for implementing MBUFs is available today—and I don't mean mandated GPS boxes in every vehicle. A good illustration is the current Oregon pilot program (on which Opiola and company have served as advisors). It offers a number of options, beginning with a no-technology version in which one can opt for the maximum annual miles (set at 98th percentile) for a flat annual fee. Another is a simple device that plugs into the diagnostic port and records total miles traveled—but not where or when. A third option is a smart-phone app that report odometer data, using cell phone towers to distinguish between in-state miles and out-of-state miles. A fourth option is to use built-in telematics (if the vehicle is so equipped) such as GM's OnStar or Ford's SYNC to record and report mileage. These options are selected by the vehicle owner, not imposed by the DOT. 

A third critically important point is that the cost of collection will not be anywhere near the alleged 10 to 20 times the cost of collecting fuel taxes. A simple mileage-based system would not require any new infrastructure on the roadway, and it would not require "a whole new government bureaucracy" for billing and collections. Large-scale, very low-cost billing and collections services are widespread in our economy, for credit cards and telecommunications in particular. And the authors cite the important 2012 Reason Foundation study by Daryl Fleming, et al., finding that the true cost of fuel-tax collection is closer to 5% of the revenue collected than the widely believed 1% and that the cost of all-electronic tolling (using a streamlined business model) is approaching 5% of the revenue collected. And Opiola points out that New Zealand already has a functioning MBUF system for 500,000 diesel cars, whose cost of collection is less than 5% of the revenue collected. 

There's a lot more in this article than I have summarized here, so I commend it (and the companion piece) to your attention. 

This article also appears in Robert Poole’s Surface Transportation Newsletter # 121

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