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Seven trends that spell trouble for transportation funding
 Back in 2011, we brought you a story on trends that are significantly impacting transportation funding. Since then, the trends have continued and become more pronounced, so we offer this update.
Between 2001 and 2009, the Oregon Legislature and Congress provided record levels of resources for transportation programs, allowing significant investment in all transportation modes. Today, however, the Oregon Department of Transportation and Oregon’s transportation system face significant long-term funding challenges. As a result, by 2016 the total dollar volume of ODOT’s construction program will fall below where it was before lawmakers passed the first Oregon Transportation Investment Act in 2001. A number of factors lie behind this shift.
(Click on chart to enlarge)
Debt service: In 2001 the OTIA program authorized ODOT to use bonding for highway projects for the first time. Bonding is a lot like taking out a mortgage: it allows you to buy a house (or build a bunch of highway projects) a lot sooner than if you had to save up the cash, but it also requires paying off the debt over the course of several decades. And while ODOT is paying off that debt, the state will have a lot less money to spend on new projects.
The three OTIA packages were frontloaded using bonding, and bonding was also used to accelerate the projects funded under the Jobs and Transportation Act (JTA). When all these bonds are sold, ODOT will be paying about $210 million in annual debt service from the State Highway Fund, about 35 percent of ODOT’s State Highway Fund revenues (not including federal highway formula funds). This is a reasonable and prudent level— ODOT’s bond ratings, including a AAA rating from one agency, were recently reaffirmed at a recent bond sale—but it will constrain the resources available for new projects for the next three decades.
Fuel efficient vehicles: The gas tax provides just under half of the State Highway Fund’s ongoing revenues, and the federal gas tax provides a significant majority of the resources flowing into the federal Highway Trust Fund. However, fuel sales have been flat or declining for a decade, in part because vehicles are rapidly becoming more fuel efficient. According to the federal Environmental Protection Agency, the fuel efficiency of new vehicles increased more than 24 percent between 2004 and 2013, and new federal fuel efficiency standards will ensure that this trend continues for decades. The U.S. Department of Energy predicts that as a result of fuel efficiency gains by 2040 the energy consumption of the nation’s light-duty vehicle fleet will decline by nearly a quarter from current levels, which will reduce gas tax revenue as well.
People are driving less: For six decades after World War II an expanding economy increased the average miles driven per person virtually every year. But in recent years the regular increase in vehicle miles traveled (VMT) has stopped, and VMT growth has slowed or gone negative. While debate about the causes of this continues, research indicates that demographic trends—including Baby Boomers retiring and less driving by the younger generation—has reduced the link between VMT and economic growth. Many experts predict that VMT will grow more slowly going forward, largely due to population growth, reducing the amount of revenue generated by the gas tax.
The State Highway Fund is taking in less than expected: More fuel efficient vehicles and flattened VMT, along with slower than anticipated economic growth, appear to be the major contributors to the significant erosion of projected future State Highway Fund revenues. Over the last half decade the State Highway Fund has suffered a significant decline in projected revenues, with virtually every State Highway Fund revenue forecast since the passage of the JTA in 2009 showing projections of future revenue dropping from the previous forecast. ODOT’s June 2009 revenue forecast projected $6.9 billion in gross State Highway Fund revenue from 2010 through 2015 for ODOT and local governments. But the June 2013 forecast projected $510 million less in revenues over that same period—a drop of more than 7 percent. And revenue from the JTA for 2013 came in 11 percent lower than originally forecast.
As a result of declining revenue projections and growing debt service, ODOT’s State Highway Fund resources are essentially fully committed to debt service, highway maintenance work, and agency operations. This leaves virtually no state funding for new capital projects, making federal funding the almost exclusive funding source for construction projects that preserve or improve the transportation system in the Statewide Transportation Improvement Program (STIP).
Federal Trust Fund underfunded: The federal surface transportation program invests more than half a billion dollars in Oregon highway and transit projects each year. However, the federal fuels tax has not been raised since 1993, and fuel efficiency, flat VMT and slow economic growth have taken further bites out of federal revenues. As a result, Congress has transferred a total of $53 billion in general fund resources into the Highway Trust Fund to avoid deep cuts. Going forward, the Highway Trust Fund faces an annual deficit of about $15 billion per year.
When the Trust Fund’s balances are once again exhausted near the end of 2014, Congress will be forced to either find new revenue or significantly cut funding for highway and transit projects. If Congress does not find additional resources for the transportation program, federal surface transportation funding will have to be cut by about 30 percent for the long term, costing Oregon about $150 million each year. If significant cuts are made to federal transportation funding, ODOT will have to cut or delay many of the projects included in the Statewide Transportation Improvement Program (STIP).
Construction cost increases: Construction costs more than doubled between 2001 and 2008. While construction costs have decreased since the onset of the recession, costs remain significantly higher than in 2001. As a result, each dollar ODOT spends buys much less construction activity than it did a decade ago. When adjusted for cost increases, ODOT’s construction program will be much smaller in 2015 than it was in 2001.
Lack of adequate and dedicated funding for non-highway modes: Because of limits on the use of the State Highway Fund and federal transportation resources, Oregon’s investments in transit, bicycle/pedestrian projects, ports and rail have been episodic. There is no adequate, dedicated source of funding for non-highway modes, so Oregon has no way to sustain over the long term the significant investments currently being made. What’s more, most of the funding sources ODOT has used for multi-modal investments faced significant constraints. For example, ConnectOregon has been limited by competition for scarce Lottery funds, and non-highway modes are highly reliant on federal funds that face significant risk of being cut.
How ODOT is responding
Faced with these funding challenges, ODOT is focused on its most basic mission of maintaining and preserving the highway system, investing scarce resources to minimize the deterioration of the system. New strategies have been developed to ensure that scarce resources are being invested to get maximum return on investment in bridges and pavement, including prioritization of projects on key routes. And ODOT is also taking steps to cut its costs: Since 2011, ODOT has been reducing its workforce to help bring expenses in line with state revenues, with a goal to achieve a 5 percent reduction by 2015. With the Legislature’s approval of SB 810 in 2013, ODOT is also responding to the growth in fuel efficiency and non-gasoline vehicles by developing a per-mile road use charge to ensure that all vehicles—even those that don’t use traditional fuels —pay their fair share for use of the roads.