Surface Transportation Newsletter #105

What reauthorization means for tolling and PPPs; Private high-speed rail investment?

In this issue:

Reauthorization, Tolling, and Public-Private Partnerships

The rather status-quo oriented MAP-21 reauthorization bill that was signed by the President offers a few positive developments for tolling and PPPs, but fails to address the continued erosion of the users-pay/users-benefit nature of the Highway Trust Fund.

On PPPs, one positive is that the conference committee deleted all three anti-PPP amendments that were included in the Senate bill as a parting gift from retiring Sen. Jeff Bingaman (D, NM). The other good news is the large-scale expansion of the TIFIA subordinated loan program and the removal of most of the program’s subjective selection criteria. Going forward, projects that meet all the financial criteria should have a high likelihood of funding, especially with the big boost in budget authority for the program. Given the large backlog of good projects, I would not be surprised if most of those projects get funded during the next few years.

On the other hand, neither bill addressed the likelihood that SAFETEA-LU’s $15 billion cap on issuance of tax-exempt private activity bonds (PABs) for PPP projects will be reached during the two-year MAP-21 period. TIFIA assumes that each project has senior debt that is rated investment grade, and if tax-exempt bonds are no longer available, the cost of capital for PPP projects will be increased. MAP-21 also fails to exempt interest on PABs from the Alternative Minimum Tax (AMT), as had been urged by various infrastructure groups. The bill also calls on FHWA to develop best practices and model PPP contract documents that states could use. That’s fine if those are voluntary guides, but I already hear worries that a future Congress or Administration might condition, say, a TIFIA loan on use of standardized federal documents that might or might not be a good fit for the specifics of a project.

On tolling, a whole raft of transportation organizations pushed hard for language that would “mainstream” the various tolling and pricing pilot programs enacted in prior reauthorizations, by removing numerical limits. Thus, all states, not just 15, could do projects under the Value Pricing Pilot Program, and all states, not just the current three, could reconstruct and modernize aging Interstate highways using toll finance. We ended up with less than what we were all hoping for. MAP-21 does revise Sec. 129, removing the requirement that for each tolling project the state and FHWA must negotiate and execute a separate tolling agreement. Instead, the ability to do those toll projects allowed by MAP-21 is codified—if a state complies with the substantive requirements, the tolling goes forward, making the provision self-enforcing. And since MAP-21 permits tolling all new capacity on Interstates, there was no longer any need for the (15-project) Express Lanes pilot program, which was terminated. The new law expressly permits the conversion of HOV lanes to toll lanes, as part of reconstruction or rehabilitation of an Interstate. And it also imposes sanctions on agencies whose HOV lanes fail to comply with federal performance requirements, which may increase states’ willingness to increase occupancy levels (thereby creating more capacity that can be sold to willing customers).

On the downside, of course, MAP-21failed to create even a handful of additional slots in the Interstate Reconstruction toll pilot program, meaning the eight or nine states that are considering such projects have no legal way forward. And it also failed to extend the 2015 sunset date for the companion Interstate Construction toll pilot program. Thus, the Tolling Coalition and its allies have additional work to do between now and the expiration of MAP-21in 2015.

Moreover, the overall bill failed to address the widening gap between federal highway and transit spending and the user-tax revenues that support the Highway Trust Fund. MAP-21 maintains current spending levels by once again dumping large sums of general fund money into the Trust Fund, which continues to violate the budgetary rules that exempt user-supported trust funds from across-the-board spending cuts only if they derive at least 90% of their revenue from user taxes and fees. In addition, the general-fund transfers are “paid for” largely by 10 years’ worth of projected new revenues from changes in federal pension laws—this to pay for a spending bill that covers just a bit over two years. One shudders to think what they will come up with when MAP-21 expires.

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Private HSR Investment?

Within days of the California Legislature voting to authorize the sale of $4.6 billion in general obligation bonds to build the initial 130-mile (Central Valley) stretch of the state’s high speed rail projects, three startling developments occurred. First, Moody’s Investor Services tripled its estimate of California’s unfunded public pension liability (from $38.5 billion to $109.1 billion), calling into question whether the bonds can get an investment-grade rating. Second, a UCLA economic analysis of Japan’s HSR system concluded that the introduction of HSR service had no discernable effect on economic growth in Japan over a 30-year period. The alleged economic benefit of HSR is one of proponents’ main arguments for the California project.

But to me the most shocking development—also coming to light after the Legislature’s vote—was the hitherto suppressed information that French railway operator SNCF in 2010 had approached California officials with an offer to build an HSR line between Los Angeles and San Francisco. Because SNCF had private investors lined up, it had no intention of building the very costly, circuitous route planned by the California High Speed Rail Authority, with stations in every town up and down the Central Valley. Instead, SNCF proposed a direct route along I-5, with possible spurs to some of the various Valley downtowns. According to follow-up news reports, CHSRA was so dismissive of the idea that SNCF never followed up with a formal proposal.

It’s not clear to what extent SNCF’s formal proposal would have required state and federal funding in addition to the private funding the company implied it had commitments for. Even with the proposed route along state-owned I-5 right of way, the connections into the San Francisco Bay Area on the north and the Los Angeles area on the south would still be enormously expensive. And SNCF’s one French PPP rail project, from Tours to Bordeaux, involves government grants for 50% of the capital cost, with the balance financed by debt and equity. Still, since SNCF’s California project would have been driven far more by economic than political considerations, its capital cost I’m sure would have been far less than CHSRA’s current $68 billion for the Los Angeles-San Francisco Phase 1.

Could a less ambitious project ever be self-supporting? Only two HSR projects worldwide claim to be so, the first Shinkansen line between Tokyo and Osaka and the first TGV line between Paris and Lyons. But a proposal in Florida is claiming it will be the first such project in the United States. Unveiled last year by investor-owned Florida East Coast Railway, the “All Aboard Florida” project would use 200 miles of existing FEC right of way from Miami to the Cape Canaveral area plus 30 miles of newly acquired right of way from there to Orlando. In a presentation last week at the Floridians for Better Transportation’s annual conference, FEC’s Husein Cumber gave an update on the project.

In his presentation, Cumber reported that the traffic and revenue study has been completed, and based on its results, FEC is moving forward to develop the project, targeted to open by the end of 2014. Current plans call for hourly service between Miami and Orlando, between 6 AM and 9 PM, in three hours or less. Intermediate stops would be just two: Fort Lauderdale and West Palm Beach. Speeds would be “up to 110 mph, maybe 125 mph.” FEC is far enough along that it plans to order 10 trainsets this summer, and to be under way with construction (including some double-tracking) by the first half of next year. Total capital cost is estimated at $1 billion, all apparently to come from FEC itself.

This is not “high-speed rail” as the term is used internationally. However, it is faster than most of the Amtrak upgrades being funded by the Administration over the last three years under the rubric of HSR. As a professional skeptic about passenger rail in the United States, I’m not persuaded that there will be enough demand for this service to make it self-supporting. But as a life-long railfan, I hasten to add that I will be happy to be proven wrong.

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Are U.S. Managed Lanes Self-Supporting?

One of the most successful recent managed lanes projects is the one on I-95 in Miami, helped into existence by a federal Urban Partnership Agreement competitive grant award. The initial 7-mile segment, with two lanes each direction, has dramatically improved peak-period travel on the most-congested portion of I-95 in Florida. And the existence of reliably uncongested express lanes has led to very impressive growth in express bus ridership between Broward County (Fort Lauderdale area) and downtown Miami. Phase 2, which will extend the project another 14 miles to downtown Fort Lauderdale, is now under construction. And the lanes are so popular that the maximum peak-period toll, which is now $7, is likely to be increased to $9 or more later this year.

Given that success story, I was taken aback by an article in the South Florida Sun-Sentinel early this year, sub-headlined “Fast lanes speed traffic, but do not cover their costs.” Over the next 10 years, wrote transportation reporter Michael Turnbell, FDOT expects annual losses to range from $971,000 to $3.5 million. The news story prompted a lead editorial in the paper a week later, headlined “Cut Express Toll Lane Costs.”

Based on my more than two decades of work on managed lanes, this story struck me as highly unlikely. I could imagine that a managed lane project in Minneapolis or Salt Lake City, say, might not relieve enough congestion to cover its costs out of toll revenues. But congestion on I-95 in Miami was nearly as bad as on the Los Angeles freeways, and the prices charged during peak periods are considerably higher than on many other managed lanes around the country. So I did some digging.

First, I asked FDOT for their figures on the I-95 Express Lanes revenues and expenses. They provided a 10-year spreadsheet, projecting data for fiscal years from 2012-13 to 2021-22. The “costs” part of the spreadsheet included not only operating & maintenance (O&M) costs but also (a) FDOT capital costs for phases 1 and 2, (b) a reserve fund/sinking account, and (c) transit operating subsidies. Including all those items did, indeed, show an operating loss in all but one of the 10 years.

My next step was to contact all the other managed lanes projects currently in operation around the country to ask how they define costs. I got replies from those involved with I-15 in San Diego, SR 167 in Seattle, I-25 in Denver, I-35W and I-394 in Minneapolis, I-10 in Houston, and I-85 in Atlanta. (I did not bother with SR 91 in Orange County, CA, since I already know they are covering both capital and operating costs out of toll revenues.) All reported that they cover their O&M costs from toll revenues, with some defining O&M a bit more broadly than others—and all report to the public that their managed lanes are self-supporting out of toll revenues. And MinnDOT expects to have recovered all capital costs on I-394 by 2014. None includes transit in their cost base.

When I adjusted the FDOT spreadsheet numbers to take out the transit subsidy, the 10-year total was a surplus of $27.3 million, even after covering capital costs. If the reserve fund (which none of the others have) is also omitted from the spreadsheet, the 10-year surplus is $67.3 million. In both cases, the Express Lanes would be in the black in every one of the 10 years, based on the criteria used by other state DOTs.

Dave Schumacher from SANDAG, which runs the I-15 lanes in San Diego, noted that “We provide funding to transit through excess revenue.” And that, in my view, represents a far more transparent approach to the toll-paying public than what FDOT is doing. Transit is not an “operating expense” of managed lanes; the transit services using the I-95 Express Lanes are not run by FDOT but by the Broward County and Miami-Dade County transit agencies. The proper accounting treatment is that transit subsidies are a use of surplus revenue.

There is also a longer-term issue at stake here. FDOT, like many other state DOTs responsible for expressway systems in major urban areas, is planning to develop an extensive network of managed lanes, most of which will involve new construction. Nearly all the currently operational managed lanes projects have been developed primarily or entirely by converting existing HOV lanes, meaning their capital costs were modest. Thus, the cost per lane-mile of a managed lanes network will be far higher than the cost per lane-mile of first-generation HOV conversion projects. To condition the public to believe that managed lanes generate significant surplus revenue for transit subsidies is foolish, since for the networks actually planned that will not happen.

It would be helpful for the growth and acceptance of managed lanes if state DOTs would agree on a common definition of the capital and operating costs of such projects. That way, apples versus apples comparisons could be made among projects, enabling researchers and policymakers to get a better handle on managed lanes economics.

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PPP Bridges and Tunnels Proliferate

From large to small, new or replacement toll bridge and tunnel projects are proliferating around the country, as state DOTs and city governments cope with diminished fuel-tax revenue.

One of the largest projects reached financial close in April: the $2.1 billion Midtown Tunnel project in the Hampton Roads/Norfolk, Virginia area. Financing for the toll tunnel includes $675 million in tax-exempt private activity bonds, a $422 million TIFIA loan, sponsor equity, and a state (VDOT) contribution of $395 million. The Skanska/Macquarie joint venture holds a 58-year concession for the project. The new tunnel will supplement an existing tunnel, with both being tolled to generate enough revenue to pay for the project, which is expected to reduce trip times by 30%.

In North Carolina, a commercial close (agreement on all terms, prior to doing the financing) is expected this summer on the Mid-Currituck Bridge, a new bridge in connecting the mainland to beach communities on the Outer Banks. The $651 million project will be developed under a 50-year concession by a 15-member team led by ACS Infrastructure Development. The financing package is expected to be similar to that used for the Midtown Tunnel in Virginia.

At the other end of the size scale, a replacement for the obsolete (closed) South Norfolk Jordan Bridge in Chesapeake, Virginia is expected to open late this summer. The bridge replacement resulted from an unsolicited proposal by Figg Bridge in December 2008, which was accepted by the city council the following month. In exchange for a perpetual franchise (build-own-operate), the consortium called United Bridge Partners (financier American Infrastructure MLP Funds and Figg Bridge Builders) is funding 100% of the $140 million bridge in exchange for the right to all toll revenues. The franchise includes a commitment by UBP to expand the bridge beyond its initial two lanes when traffic growth warrants doing so. The bridge is just over a mile long.

The same team reached an agreement in May to develop another bridge under the same kind of franchise agreement, this one in East Chicago, Indiana. As was the case in Chesapeake, VA, the current bridge was closed as unsafe in 2009, but the city of 32,000 did not have the funds to build a replacement. The new Cline Avenue Bridge will be four lanes and 1.3 miles long, and will cost in the vicinity of $200 million. Indiana Gov. Mitch Daniels hailed the agreement, terming it “a creative move by Mayor Copeland and the City of East Chicago that puts Indiana further in front as a leader in private sector infrastructure investment.”

Speaking of Indiana, that state is partnering with neighboring Kentucky on the Ohio River Bridges Project, connecting Louisville with southern Indiana. While Kentucky will employ conventional contracting for its portions of the project (the Downtown Crossing and reconstruction of the Kennedy Interchange), Indiana will use a PPP concession approach for its portion (the East End Bridge and its approaches). In April the Indiana DOT announced the four short-listed teams invited to submit proposals for the $1.2 billion bridge, whose funding will include tax-exempt private activity bonds backed by toll revenues (although the concession firm will be compensated by availability payments). Indiana is also planning to use PPP procurements for the 47-mile Illiana Expressway to Illinois and to reconstruct U.S. 31 north of Indianapolis.

Ohio DOT, newly equipped with PPP enabling legislation, has two major bridge projects in mind: the Brent Spence Bridge in Cincinnati and a second Innerbelt Bridge in Cleveland. Finally, the replacement for the Scudder Falls Bridge between Pennsylvania and New Jersey, a project of the Delaware River Joint Toll Bridge Commission, is expected to be done as a PPP toll concession, as requested by the governors of both states. The 1961 four-lane bridge is functionally obsolete; the replacement design calls for six lanes plus auxiliary lanes. It will be designated as I-295 when completed.

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Smart Growth Questioned in Britain

Much of the inspiration for what is today called Smart Growth—concentrating development in urban centers, urban growth boundaries, higher densities and expanded transit—originated in the U.K. long before it was embraced by many urban and transportation planners in this country. Consequently, it’s newsworthy when respected U.K. figures question some of these long-embraced policies.

The Spring 2012 issue of the Journal of the American Planning Association carries an analysis by four U.K. academic urban planners (Marcial Eschenique, Anthony Hargreaves, Gordon Mitchell, and Anil Namdea) titled “Growing Cities Sustainably: Does Urban Form Really Matter?” One of its principal conclusions is that “The current planning policy strategies for land use and transport have virtually no impact on the major long-term increases in resource and energy consumption. They generally tend to increase costs and reduce economic competitiveness.”

The authors created a model of land use and travel behavior, using data from three areas in England: the London metro area, the Newcastle area, and the Cambridge sub-region. For each one, they modeled the impact of three alternative land use policies: compact development, planned development, and dispersal (similar to the suburbanization common in the United States and Australia for most of the post-World War II period). Although land uses differed somewhat among the three models, outcome variables such as transportation energy use, greenhouse gas emissions from transportation and houses, and air pollution showed very minor differences. Projected economic costs by 2031 were lowest for the dispersed model and highest for the compact one.

An article on the NewGeography site (June 28) provides useful extracts from the paper, two of which I found especially interesting:

“One of the main arguments for the dispersed city is that there is no longer a single center where most jobs and services occur. Urban areas, rather, exhibit a dispersed and often polycentric structure, bringing jobs and services closer to residents with a more complex movement pattern not readily served by public transport.”

“Smart growth principles should not unquestioningly promote increasing levels of compaction on the basis of reducing energy consumption without also considering its potential negative consequences. In many cases, the potential socioeconomic consequences of less housing choice, crowding, and congestion may outweigh its very modest CO2 reduction benefits.”

Shortly after reading this, I read the 16-page “Special Report: London,” included in the June 30th issue of The Economist. In the section on housing, after noting the very high cost of housing in the London metro area, the author identified the Green Belt—a donut-shaped area up to 50 miles wide intended as the world’s first urban growth boundary—as the biggest constraint on development and hence as a major contributor to high housing prices. “This has not stopped growth, but it has pushed it into the greater south-east, thus spoiling the countryside across a bigger area. It has also raised the cost of housing and forced workers to travel farther. Commuting costs in London are now higher than in any other rich-world capital.” As a remedy, the report suggests that “Taking a mile of the Green Belt all around London would release around 25,000 hectares [62,000 acres], the equivalent of a sixth of London’s area—far more than would be needed to make a huge difference to housing affordability.”

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Upcoming Conferences

Note: I don’t have space to list all the transportation conferences going on; below are those that I am (or a Reason colleague is) participating in.
IBTTA Summit on All-Electronic Toll Collection, July 22-24, Loew’s Hotel, Atlanta, GA (Daryl Fleming speaking) Details at: www.ibtta.org/Events/EventDetailwithVideo.cfm?ItemNumber=5681.

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News Notes

State PPP Legislation Advancing. In early July, Pennsylvania Gov. Tom Corbett signed H.B. 3, a general enabling law for transportation public-private partnerships. It allows PPPs for both new (green-field) facilities and for the refurbishment and modernization of existing ones (except for the Pennsylvania Turnpike). It permits both toll concessions and availability-payment concessions, allows unsolicited as well as solicited proposals, and provides concession terms up to 99 years. It also creates a seven-member board to assist PennDOT in reviewing proposed projects. In New York State, a PPP enabling bill was approved by the Senate Transportation Committee in June, but its prospects are uncertain.

Los Angeles Truck-Only Lanes Reach Another Milestone. The first phase of what could eventually be a 70-mile set of truck-only lanes between the Ports of Los Angeles and Long Beach and the distribution centers of the Inland Empire is now in the final stages of environmental review. The draft EIR was released in June by Caltrans and LA Metro for a 60-day public comment period. The plan would rebuild I-710 between the ports and Bandini Blvd. near where the 710 intersects I-5, with two new truck-only lanes in each direction. The project would also widen the rest of the freeway, mostly to 10 general purpose lanes.

The Return of Two-Way Bridge Tolls? During the 1980s, tolling on a number of major bridges was switched from two-way to one-way, to reduce the daily back-ups at toll plazas. But that well-meaning change has led to toll avoidance in some cases, such as on the Verrazano Narrows in New York, where “thousands of toll-avoiding trucks flood through lower Manhattan” every day, using Verrazano only in the non-tolled direction and the non-tolled East River bridges plus the one-way-tolled Holland Tunnel in its non-tolled direction. Rep. Jerrold Nadler is pushing to change that, as part of the forthcoming plan to switch MTA’s bridges and tunnels to all-electronic tolling (AET) using E-ZPass. The Villager reported (June 14) that Nadler hopes to get a commitment from the MTA that two-way AET will be part of the change. Charging electronic tolls both ways would also facilitate peak-period tolling, which can only be done in one direction with one-way tolls.

Revisionist Thinking on Streetcars. I’ve noted in previous issues that “modern streetcars” are best thought of as an economic development tool, rather than a serious transportation improvement. Even that premise is questioned in a powerful new paper from the Cato Institute. In “The Great Streetcar Conspiracy,” Randal O’Toole compares the costs and transportation performance of buses and streetcars and finds the latter to be sorely inferior. And he also provides food for thought on the extent to which streetcars, per se, have promoted economic development. (www.cato.org/pubs/pas/PA699.pdf)

Parking Pricing Primer. A useful guide to recent developments in using pricing to make urban parking systems perform better was released recently by the Federal Highway Administration. “Contemporary Approaches to Parking Pricing: A Primer” offers 39 pages of rationales, strategies, and case studies. (http://ops.fhwa.dot.gov/publications/fhwahop12066/Index.htm)

Corrected URL. The AtlanticCities article I mentioned in last month’s issue, by Eric Jaffe, carried an incorrect URL. The URL that works is as follows: www.theatlanticcities.com/commute/2012/05/what-really-matters-increasing-transit-ridership/2059.

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Quotable Quotes

 “So why is river navigation making slow progress while freight railroads pour money into their system? Highways also deteriorate even though we pay billions each year in gas taxes. Only railroads and pipelines expand and modernize their systems. The answer is that the money that truckers, motorists, and barge companies pay for upkeep is called a ‘tax,’ while railroads and pipelines ‘invest’ in their systems. Freight railroads and pipelines must comply with regulatory and legal demands when they expand, but politicians often praise them for ‘investing’ in America. The per-gallon fees paid by motorists and barge operators go into trust funds, and Congress decides how to spend that money, so those fees are a dreaded tax. Railroads and pipelines take large tax breaks for investing in their systems, so they get their own money back. But no one notices that. The end result? Healthy rail and pipeline systems, and crumbling highways and waterways.”
—Don Phillips, “‘Trust Fund’ Is a Dreaded Phrase,” Trains, July 2012.

“Why do appeals to increase infrastructure spending fail to resonate with the public? One widely held view is that people simply do not trust the federal government to spend their tax dollars wisely. As proof, evidence is cited that a great majority of state and local transportation ballot measures do get passed. They get approved because voters know precisely where their tax money is going. The Miller Center report agrees that focusing on specific local projects has the best potential for garnering support for greater transportation investment. However, whether an emphasis on local transportation issues would translate into expanded support for federal involvement, as the report suggests, is open to question.”
—Ken Orski, “Advocates of Higher Spending Are Facing a Skeptical Audience,” Innovation NewsBriefs, May 16, 2012.

“Rail transit proponents rely heavily on the myth that many people will ride railcars who won’t ride buses. They use the term ‘quality transit’ as a euphemism for rail transit, implying that buses are not quality transit. Apparently, ‘livability’ not only means you don’t have to have a car, but you don’t have to lower yourself by taking a bus, either. Taxpayers are supposed to cater to such snobs by providing them with rail alternatives that cost many times more than buses.”
—Randal O’Toole, “The Great Streetcar Conspiracy,” Cato Institute, Policy Analysis No. 699, June 14, 2012

“If we were to allow for, encourage, and assure the use of tolls and fees to repay investors, the large pool of available liquidity could provide ample commercial funding of infrastructure improvements, without debt-financed government spending. The process could be given a further lift by using a portion of existing highway-tax revenue along with prospective tolls as components of new derivative financial instruments to hedge investors’ risks.”
—Charles Wolf, Jr., RAND Corporation, “Pro-Growth Austerity,” The Weekly Standard, July 2, 2012

“[T]he state legislature is working on two bills to enhance fines and penalties for ‘talking/texting while driving.’ All good intentions, but guess what? It’s going to get worse. Imagine what having refillable kegs and dashboard taps would do to DUI statistics. New car gadgetry is a little like that. Get ready for more and more DWDs (Driving While Distracted).
—Mark DiIonno, “Mark in the Morning: Modern Car Connectivity Takes Distracted Driving to Dangerous Levels,” http://blog.nj.com/njv_mark_diionno/2012/06/mark_in_the_morning_modern_car.html

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Robert Poole is Searle Freedom Trust Transportation Fellow and Director of Transportation Policy





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