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Prospectus Blog Obama’s DOT Pick To Face Surface Transportation Crisis

The Washington Post paints an accurate picture of the surface transportation funding and financing crisis that will confront President-elect Barack Obama (below at right), Congress, and Obama’s pick to head the U.S. Department of Transportation.
As roads and bridges are crumbling and cracking and transit systems struggling with rising costs and ridership, the U.S. Highway Trust Fund is in bad repair itself. Headed for bankruptcy and saved last fall only by an $8 billion raid of the U.S. Treasury’s General Fund, this highway and transit account dates to 1956 and relies on a federal gas tax that hasn’t been raised from the current level of 18.4 cents per gallon for 15 years. A high-profile federal commission has urged the tax be hiked to 40 cents per gallon, but that’s unlikely, given the economy’s woes, and the politics of raising taxes.
Yet, to ensure highways and transit can support economic growth as U.S. population booms in coming decades, surface transportation spending will need to rise from the current $140 billion a year ($50 billion from the feds, $90 billion from the states), to $225 billion per annum. What else besides a gas tax hike should be considered? The Post:

Other ideas to raise revenue include expanding toll roads, increasing public-private partnerships and using congestion pricing, a system in which motorists or transit passengers pay more during peak travel periods. Another idea, which is being tried in Oregon, is to charge motorists a tax based not on the gas they buy but on the number of miles they drive.
The Clinton administration experimented with some of these initiatives, but the Bush Transportation Department has embraced them, particularly toll roads and public-private partnerships. Under Bush, the department has been shrinking the federal role in road building and public transportation and opening the sector to private investors who assume the risks of building the projects in exchange for profits from tolls and fees. Congressional Democrats and some Republicans, along with transit advocates, have accused the department of rationing good road transportation to those who can afford fees, tolls and taxes. In some cases, the public-private partnerships have lacked adequate protection of the public interest, according to reports by the GAO.
“We need to look at all kinds of alternatives,” said William Millar, president of the American Public Transportation Association, an industry group that represents transit systems. “Tax credit bonds, public-private partnerships, tolling, user fees – we should be looking at it not from an ideological standpoint but from a very practical standpoint. . . . There may be places even in public transit where you could charge more for certain services.”

In a sidebar, the Post profiles four leading contenders for the DOT hot seat, including Mort Downey of PB Consult, and ex-FAA head Jane Garvey. Obama and the Congress will really hold the cards, but the DOT pick will have to do some heavy lifting, including broad coalition-building.
Cost-saving, exacting “design-build-operate-maintain” (or DBOM) contracting arrangements need to become more prevalent. More state legislatures should take whatever steps are necessary to make it easier for public employee pension funds to invest in road, bridge, tunnel and transit projects while meeting their market-rate fiduciary obligations to pensioners. This means eschewing lower-rate state highway bonds in favor of P3 partnerships where the pension funds help provide investment capital through alternative means such as a private infrastructure investment fund or direct investment, in return for a share of toll or fare proceeds over the long term.
That long-term orientation is a plus. Although nearly all U.S. public employee and building trade pension funds have taken a hit during the financial meltdown, they’re still flush, typically with with tens upon tens of billions in assets, and a growing interest in diversifying further – into more stable investment classes such as infrastructure.
Another key element of the strategy going forward must be time-variable pricing of roadways and transit. We all pay for the water and electricity we use according to our own consumption patterns, often with higher charges for peak-period use, and no one cries out about economic injustice – either because of the pay-as-you go approach or the peak differentials. The same model should be more broadly applied to surface transportation infrastructure, especially as demand grows, supply becomes constrained, and maintenance and operations costs threaten to continue spiraling upward.