April 30, 2004 - From the April, 2004 issue

California Should Follow Texas' Lead For Financing Transportation Infrastructure

With federal and state dollars drying up for transportation investment, the time has come for more creative financing mechanisms to suport the construction or modernization of our precious infrastructure. In this piece written for MIR, Robert Poole, Director of Transportation Studies at the Reason Public Policy Institute, looks to recent efforts to increase the profile of tolling options in Texas and urges California's policymakers to do the same.


Robert Poole

The Keston Institute for Infrastructure at USC has delivered its report on transportation funding to BTH Secretary Sunne Wright McPeak. Titled "Initiatives in Transportation Funding & Finance," it makes a powerful case that California should follow the lead of fast-growing Texas in completely revamping our system of transportation finance. McPeak and Gov. Schwarzenegger should take these recommendations seriously, as they struggle to come up with ways of providing desperately needed investments in our infrastructure.

Texas is creating a whole new paradigm of how to finance, build, and operate major highways. While few states probably would or could do anything as audacious as Gov. Rick Perry's 4,000 miles of Trans-Texas Corridor, the state's other innovations should all be transferable to California.

Texas's new paradigm is based on several underlying principles. First, it is now declared policy to look first at tolling for all new limited-access highway projects. This is simply a recognition of reality. As explained on the TxDOT web-site, from 1990 to 2000 vehicle miles traveled in Texas grew by 41%, while lane miles increased a mere 3%. (California figures are similar.) The result was congestion whose statewide cost is estimated at $45.6 billion over the decade. Since Texans, like Californians, don't want massive gas-tax increases, the only other way to pay for major highway improvements is with tolls. And Texas voters approved constitutional amendments to enable these new toll-friendly policies last fall by a 61% majority.

The second principle is that merely reducing the rate of increase in congestion (the best that can be said of the long-range plans of SCAG and other agencies here in California) is not sufficient. Article 19 of Texas's Omnibus Transportation Bill (HB 3588) enacted last year requires the statewide transportation plan to include transportation measures designed to reduce congestion, with performance measures such as delay reductions and travel-time improvements. "This component must not be financially constrained," says the statute. So the public must be informed what it will cost to reduce congestion, so that there can be real debate about projects that would serve that goal.

Third, Texas has embraced public-private partnerships and streamlined project delivery methods such as design-build. Called "comprehensive development agreements" in local lingo, they can now be used at both state and regional levels to speed up project delivery, provide guarantees on cost and completion dates, shift some key risks to the private sector (and hence off the backs of taxpayers), and promote better life-cycle costing (so that projects are built better up front, even at higher initial cost, so as to reduce ongoing operating and maintenance costs over subsequent decades).

The Texas approach has been evolving over the past decade or so, spurred on by the success of the Harris County Toll Road Authority in Houston and the North Texas Turnpike Authority in Dallas (analogous to the Transportation Corridor Agencies in Orange County). Texas legislation in 2001 generalized this approach, allowing for the creation of similar Regional Mobility Authorities in other metro areas, since all face similar problems of rapid growth but limited gas-tax revenues. The 2003 law, HB 3588, gave both the Texas Turnpike Authority Division of TxDOT and the RMAs new powers in toll revenue bonding, land acquisition, and enforcement of toll payment by motorists. One controversial provision, not yet used, permits TxDOT and RMAs to take over certain sections of currently non-tolled state highways and incorporate them into toll projects. It remains to be seen whether local political support can be generated for

such conversions.

Land acquisition is often a big obstacle to new highway projects, so HB 3588 introduces two creative new approaches. First, the Texas Transportation Commission may purchase options for possible right of way for a project, before the final alignment has been determined. Second, TxDOT "may offer the owner of the property [needed for right of way] a percentage of the [toll] revenue associated with a particular segment of a turnpike, rather than a single fixed payment for the property."

HB 3588 and several other new laws also move away from the traditional focus on general-purpose lanes. Whether it's the huge multi-modal Trans-Texas Corridor, state highways, or county highways, all are now legally authorized to designate certain lanes as restricted or specialized, enabling various kinds of "Managed Lanes" to be used where it makes sense to do so. This could facilitate the development of a statewide network of heavy-duty truck-only toll lanes able to handle the highly productive double- and triple-trailer rigs that are not allowed anywhere on federally aided highways in Texas or California under a 1991 federal freeze on truck sizes and weights. And it will also clear the way for the kind of regionwide networks of HOT or express toll lanes that are currently under study in both Dallas and Houston.

The new law does a number of other things, such as creating a state infrastructure bank called the Texas Mobility Fund and permitting the state to issue a limited amount of GARVEE bonds backed by future federal highway revenues. Similar provisions already in use in California can certainly help stitch together creative funding packages for specific projects. But they are relatively minor pieces of the overall new paradigm.

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At a recent transportation finance conference in New York City, investment bankers lauded Texas as a model for other states, and I concur in that judgment. Texas Turnpike Authority Division director Phil Russell gave a very impressive presentation. The California Transportation Commission would benefit mightily by flying him in to give this presentation to its members. And TxDOT is doing a good job of educating public officials, opinion leaders, and the general public about its new approach. Check out the Resource Library at www.texastollways.com for their 2003 Transportation Short Course, which provides details on many of the points discussed above.

The Keston report includes two appendices explaining the Texas paradigm in some detail, and urges the Governor to include recommendations along these lines in his 2005 State of the State address and in his proposed 2005-06 budget. In particular, the report calls for greater use of tolls, more efficient project delivery, and increased use of public-private partnerships.

What this all boils down to is the need to enact a second-generation public-private partnership law for transportation in California. It would give both Caltrans and lower levels of government (country transportation authorities, joint powers agencies, etc.) the ability to initiate and implement projects funded by user fees (tolls), and to carry out such projects either themselves or by means of public-private partnerships. Unlike the now-repealed AB 680 (under which the 91 Express Lanes in Orange County and the SR 125 toll road in San Diego were franchised to the private sector), a second-generation law must create true partnerships between public and private sectors. This means that funding could come partly from traditional sources and partly from tolls, thereby making limited state funds go much farther. It would divide risks according to which party could best address them (e.g., public agencies would handle environmental clearance while private partners would assume the risks of cost overruns and traffic shortfalls). And it would provide a flexible alternative to the rigid non-compete clause that led to so much political trouble for the 91 Express Lanes.

But the key provisions that would jump-start investment via this new mechanism are two. The first is elimination of the need to get a bill through the legislature for every single project where tolls can play a role-converting an HOV lane to a HOT lane, developing a new toll bridge at the Los Angeles Harbor, completing the missing link on I-710 in South Pasadena as a toll tunnel, or developing SCAG's $16 billion toll truckways plan. By enacting an enabling statute, the legislature would be making a one-time judgment that this type of project is a good thing for California, leaving the details to be worked out project by project.

The second provision would recognize that most of the needed projects will be in the state's three major metro areas of greater Los Angeles, San Francisco Bay Area, and San Diego. It would therefore devolve the authority to do such projects to regional and local governments, consistent with former Sen. Quentin Kopp's historic SB 45 of a few years ago. Obviously, Caltrans also needs these new tools so it can consider applying them to inter-city projects such as toll truckways on I-5 and I-15.

Two obvious legislative approaches-other than starting with Texas's HB 3588-would be to modernize the old AB 680 to make it into a true public-private partnership law or to modify the little-noticed AB 2660 from 1996. The latter measure authorizes local and regional governments to enter into public-private partnerships to develop user-fee-funded infrastructure partnerships in every area except toll roads on state highways. Since it may be easier to start with an existing statute rather than to create one from scratch, I lean toward amending AB 2660.

Clearly, as the Keston report points out, given the enormity of the need for transportation investment in California and the paucity of funding, reform along these lines should be one of Gov. Schwarzenegger's top priorities in the coming year. While we need not slavishly follow the Texas model, its success in mobilizing needed investment cannot be ignored.

Robert Poole is Director of Transportation Studies at the Reason Public Policy Institute and a member of BTH Secretary Sunne McPeak's Caltrans Expert Review Panel.

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