Arizona Policy Choices

Balancing Acts: Tax Cuts and Public Policy in Arizona

Finding the Money

Penelope Lemov
© Governing, October 1997

The stakes are higher than ever: To survive in a global economy, states and localities need to move goods, services and people around with ever-increasing efficiency, economy and speed. Whether it's a high-tech highway or a low-odor sewer plant, facilities need to be built, maintained and modernized even while the once-generous public purse snaps shut.

It comes as no earthshaking news that federal grants and responsibilities are shrinking, that existing trust funds are under pressure to do more than was originally expected of them, and that local taxpayers are exceedingly reluctant to rubber-stamp billion-dollar borrowings for public works even as they demand less congested highways, cleaner water and more speed bumps on neighborhood streets.

There aren't any major breakthroughs on the fiscal front: No one's come up with a brand new source of cash for infrastructure or a whole new field of donors willing to put up the money to build bridges, even if their names were to go on them. National commissions meet and U.S. congressional committees debate about such newfangled financing variations as public purpose bonds and infrastructure banks. So far, little has come of their reports and hearings.

Despite these fiscal obstacles and drawbacks, however, infrastructure is moving ahead on the state and local level. Several states are making bigger commitments to infrastructure spending. Oklahoma, for instance, recently announced it would spend an extra $1.3 billion on new roads in the next five years. And Ohio started tying infrastructure expenditures to economic development four years ago. In order to attract specific companies, the state has been coordinating state and local spending to widen roads, to put in water-line connections and even to make sure there was a new stop sign at a local railroad crossing. The 1991 federal transportation law known familiarly as ISTEA also has encouraged and made possible new flexibilities in financing, which quite a few states are taking advantage of.

As to bonds, much of the debt that is being issued is in the form of revenue bonds that are repaid through user fees rather than general funds. The Massachusetts Turnpike Authority, for instance, is calling on Wall Street to borrow $1.3 billion to help pay some of the outstanding debts for Boston's Big Dig. The bonds for this major project, which burrows beneath the city to bury its highways, will be repaid by tolls collected at both the new Ted Williams tunnel, which is part of the Big Dig, and at other toll roads and bridges around the state. That's business as usual. But some localities, such as DeKalb County, Georgia, have figured out a palatable way to assess taxpayers to pay for public works by linking an infrastructure fund to property tax relief.

What most public works projects that get financed in the "devolutionary" era have in common is a cobbling together of old and new financing techniques, along with an ever-widening range of partners.

On the Fast Track

It takes four hours to drive from Miami to Orlando and that's at 1 a.m., when congestion on I-95 has eased and commuter cars are nestled safely in their carports.

If Florida's Department of Transportation has its way, the overland trip from one major tourist and business center to another will be pared down to just over an hour and a half on a high-speed train, that, like the French TGV, barrels along the track at 200 miles per hour.

"We're not dealing with the romantic aspects of rail travel," says Charles Smith, who's managing the high-speed transportation program for the Florida DOT. "We're looking at future travel and have to have alternatives to highways and airlines.

Financing a dramatic project such as high-speed rail the present price tag is $5.3 billion is well beyond what any single state could hope to manage on its own. That's why Florida officials, from the governor down to DOT administrators, are crafting a delicate balance of private, state and federal contributions.

The latest attempt to build a high-speed rail system that will eventually link Miami to Orlando to Tampa is far from a done deal, but progress is being made. Here's where things stand.

A private partner is in place. The state held a competition for the contract last year and chose a consortium of four private companies the group is known as Florida Overland Express. The private partners are ponying up $349 million a significant amount of cash for private companies to put at risk.

At the state level, Florida has pledged $70 million a year from its transportation trust fund to back the issuance of tax-exempt revenue bonds. Once the rail system is operational, train fares will be used to repay bondholders.

The borrowings, which are a key to financing the venture, are dependent on whether Congress passes legislation providing federal credit enhancement for the bonds. Without such a federal commitment, the bonds are not likely to be marketable. If Congress turns down the enhancement idea, the state will have to go back to the drawing board and rethink how it can finance a high-speed rail system.

Sibling Rivalry

The price tag is $22 million. That's what it will take to rehabilitate Cleveland's deteriorating but irreplaceable Viaduct Bridge. The bridge carries trains over the Flats the city's entertainment district that's the home to the Rock and Roll Hall of Fame and new restaurants.

"It's a high priority for us," says Taras Szmagala of the Greater Cleveland Regional Transit Authority. The RTA got federal grant money to start the first part of the project, but when officials were ready to go ahead with phase two, the structural rehab of the viaduct, they doubted federal money would be there when they needed it.

"That's why they looked around for sources of low-cost cash to borrow, and Ohio's fledgling State Infrastructure Bank was just the ticket. SIBs, which were authorized as a demonstration program by 1995 federal legislation, are a variation on the revolving-loan-fund structures the federal government put in place in the states to help finance wastewater facilities.

In setting up transportation SIBs, the original program called for 10 states to volunteer. (It has since been expanded.) The first group of states was allowed to take up to 10 percent of its federal gas money, match it by at least one state dollar for every three federal ones, and use the proceeds to seed a "bank" to lend money to localities that need help financing transportation infrastructure.

Few states have their banks up and running. Ohio is one of the first to the mark. The original federal funds for the bank came to $35 million, and the legislature more than met the minimum match with $30 million from the general revenue fund. The first project was a $35 million loan to Butler County for up-front expenses on a regional highway. The second was for construction of an underground parking facility near a science center in Cleveland, and the third is to rehab the bridge.

What's helped Ohio put its money to use so quickly and for such a wide range of projects, says Gary Joseph, the deputy director for economic development at Ohio's Department of Transportation, is the way the enabling legislation was written. It gave the SIB permission to do a variety of projects not just highways and it gave the bank revenue-bonding authority so it could leverage its money.

"Ohio's sitting here with $8 billion in new construction needs. We don't get that kind of money from gas taxes," Joseph says. "So the leveraging gives us another tool to get projects constructed, especially projects other than highways that don't have an opportunity to get done through grants."

Hot Stuff

When the San Diego Association of Governments signed on to turn carpool lanes into toll lanes for solo drivers, its goal was simple: relieve congestion on one of its most important commuter roads, I 15. The idea was to tap the unused capacity of I 15's high-occupancy vehicle lane and, in so doing, lure cars out of the crowded freeway lanes.

What SANDAG is also getting for setting up what drivers have dubbed "Lexus Lanes" is the use of toll dollars to pay for transit and other transportation improvements. So far, SANDAG has approved the use of $1.8 million to fund new express bus service that will begin its runs on I 15 in December.

Does this mean that conversion of HOV lanes to HOT (as in high-occupancy toll) is a way for other localities to raise revenue for infrastructure projects?

That remains to be seen. San Diego, as a test case, is fortunate enough to have $8 million in federal money to pay for the operational costs and physical improvements needed to get the toll system started. And the HOV lane was already in place, so there were no costs to pay off there. For San Diego's HOT lane program to go beyond its three-year demonstration period, SANDAG will have to figure out whether revenues from the tolls are enough to cover toll-collection operations. After all, carpoolers still drive the lane free of charge, and SANDAG doesn't want to oversell capacity so that the HOV-HOT lane becomes as clogged up as the rest of I 15. One other point: Since the HOT program started, the number of carpools on I 15 has increased by 15 to 20 percent. Now that there's a price on the lane, do drivers see value in it? And will that leave SANDAG without enough capacity to sell?

A Sewer Story

First, there's the $30 million that a private company will invest to update and improve Cranston, Rhode Island's wastewater plant.

Then, there's the $48 million that same company will plop right into the city's purse for the privilege of bringing the latest technologies to a plant that's antiquated and inefficient.

And that's not all. By signing a 25-year lease, Cranston guaranteed its ratepayers that they would not have to pay more for service between now and 2022 than they would have if the city had continued to run the sewer system.

As of September, Cranston is the first city to turn over to a private company for a 25-year period the operation, maintenance and upgrading of its wastewater system. (Until recently, federal rules precluded any contract that went beyond five years.) Given the particulars of the deal and the amount of money the private sector will pump into Cranston's sewer system, it's not surprising that Peter Alviti, the city's public works director, fields two to three calls a week about the $78 million deal.

What he can tell them is that it got done the old-fashioned way. The contract was competitively bid, and the city worked simultaneously with three companies until a winner was picked.

The final deal provides the city with assurances that, over the course of 25 years, it will not lose control of a major asset that it will be able to guard against underperformance of service and overcharging of ratepayer fees and still leave the private sector enough leeway to make it worth its while to invest in capital improvements and maintain operations efficiently.


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Morrison Institute for Public Policy