Rebuilding the Foundations: A Special Report on State and ... · Morgan Stanley & Co., Inc....

Rebuilding the Foundations: A SpecialReport on State and Local Public Works

Financing and Management

March 1990

OTA-SET-447NTIS order #PB90-254152

REBUILDli,(G THE FOUNDATIONS

rB~'~~

A Special Report on State and Local Publ ic Works Financing and Management

.

,Recommended Citation:

I

U.S. Congress, Office of Technology Assessment, Rebau”iding the Foun&tions: State andheal Public Works Financing & Management, OTA-SET-447 (Washington, DC: U.S.Government Printing Office, March 1990).,

I For sale by the Superintendent of DocumentsU.S. Government Riming Office, Washington, DC 20402-9325

(order form can be found in the back of this report)

n

Foreword

Potholes and sewer problems are perpetual items on local government agendas-theynever go away and there is never enough money to fix all of them, or to reconstruct bridgesand roads that may be in danger of collapse. In 1988, prompted by the many national studiescalling for more investment in public works infrastructure, the Senate Committee onEnvironment and Public Works and the House Committee on Public Works and Transporta-tion asked the Office of Technology Assessment to evaluate how technologies, management,and financing could improve public works and make them more efficient and productive.

From the outset, OTA planned to review State and local public works management andfinance to spotlight issues that needed attention. The review produced so much practical anduseful information that a decision was made to publish the results early in 1990 for use by the101st Congress in this special report, Rebuilding the Foundations: State and Local PublicWorks Financing and Management. OTA’s final report for this assessment, Rebuilding theFoundations: Public Works Technologies, Management, and Financing, will be completed inthe summer of 1990.

Several intertwined issues quickly came to dominate OTA’s discussions with State andlocal public works officials. As this report documents, the concerns centered on how to raisemore money for upgrading and maintaining public works, how to enhance public works, andhow to preserve the community environment and quality of life. Local officials focused on thecomplex tasks of resolving conflicts among these issues in a controversy-ridden andpolitically charged arena. State representatives highlighted the steps they have already takento increase support for localities. This special report also outlines the roles of Federal, State,and local governments and points to avenues for strengthening the intergovernmental structurefor managing and financing public works.

Throughout the study, the advisory panel, workshop participants, and a host ofgovernment, industry, and private citizen reviewers contributed a broad and invaluable rangeof perspectives. OTA thanks them for their substantial commitment of time and energy. Theirparticipation does not necessarily represent endorsement of the contents of the report, forwhich OTA bears sole responsibility.

. . .Ill

u Director

.—

Jon CraigChief, Water Quality ServiceOklahoma State Department of Health

Dave DavisExecutive DirectorMassport

Siro DeGasperisVice President, Public AffairsUnited Parcel Service

Daniel DudekSenior EconomistEnvironmental Defense Fund

Hazel GluckPresidentPublic Policy Advisors

Anthony Hall, Jr.l

Law Office of Peter Williamson

Austin V. Koenen2

Managing Director, Public FinanceMorgan Stanley & Co., Inc.

Rebuilding the FoundationsAdvisory Panel

Card Bellamy, Panel ChairPrincipaI, Morgan Stanley& Co., Inc.

Jerome KrugerDepartment of Materials Science

and EngineeringThe Johns Hopkins University

IFcmucrly Member, Houston City Couxxil.%flnuiy M=@u3 ~, S- lxhmaw Huucm, Inc.

Fred MoavenzadehDirector, Center for Construction

Research and EducationMassachusetts Institute of Technology

James PoirotChairmanCH2M Hill

Harry ReedPlanning DirectorArizona Department of Transportation

Burton StallwoodTown AdministratorLincoln, Rhode Island

Michael UremovichVice President of MarketingAmerican President Companies

Theodore G. Weigle, Jr.Executive DirectorChicago Regional Transportation Authority

NOTE: (YI’A apprcciatesand is grateful forrhc valuable assistance and thoughtful critiques provided by the advisory panel members.‘h panel does nok however, necessarily approve, disapprove, or endorse this rcpmt OTA assumes full responsibility for thexepmt and the accuracy of its contents.

iv

OTA Project Staff-Rebuilding the Foundations

John Andelin, Assistant Director, OTAScience, Information, and Natural Resources Division

Nancy Carson, Program ManagerScience, Education, and Transportation

Edith B. Page, Project Director

Julia Connally, Principal Analyst

Karen Mathiasen, Research Assistant

Sharon Burke, Research Assistant

Miriam Roskin, Summer Research Assistant

Marsha Fenn, Assistant to the Program Manager

Madeline Gross, Administrative Secretary

Kimberley Gilchrist, Secretary

Gay Jackson, Administrative Secretary

Contractors

Analytic ServicesSophie M. Korczyk

Apogee Research, Inc.

Sarah Campbell

Government Finance Research Center

Thomas D. HopkinsRochester Institute of Technology

Porter Wheeler

.—.

State and Local Infrastructure Management and Financing Workshop, July 7,1989

John AmbergerExecutive Directorsoutheast Michigan Council of

Governments

Mary BoergersDelegateMaryland House of DelegatesWayne CollinsCounty EngineerMaricopa County Highway

Department, ArizonaSettle DockeryDevelopment DirectorYork Properties

John GunyouCity Finance Officercity of Minneapolis, MN

Jonathan AtkinOffice of Technology Assessment

Michael BellThe Johns Hopkins University

Robert K. BestCalifornia Department of

Transportation

Ray BeurketAmerican public Works Association

Peter BlairOffice of Technology AssessmentRebecca BradyNational Conference of State

Legislatures

George BranyanOffice of Technology AssessmentHarry CookeNational Waterways Conference, Inc.

Claudia CopelandCongressional Research Service

Charilyn CowanNational Governors’ Association

Burton Stallwood, Workshop ChairTown Administrator, Lincoln, RI

John Horsley Donald MorseCommissioner Secretary/TreasurerKitsap County, WA Kentucky Infrastructure Authority

Anthony Kane Heywood T. SandersAssociate Administrator Associate ProfessorFederal Highway Administration Trinity University

Morgan Kinghorn H. Gerard SchwartzDeputy Assistant Administrator Vice PresidentU.S. Environmental Protection Agency Sverdrup Corp.

Byron KostePresidentWestinghouse Communities

Ian MacGillivrayDirector, Planning ResearchIowa Department of Transportation

Reviewers and Contributors

Michael DeichCongressional Budget Office

Walter DiewaldOffice of Technology AssessmentKevin DopartOffice of Technology AssessmentJoy DunkerleyOffice of Technology AssessmentJohn FischerCongressional Research Service

Robert FriedmanOffice of Technology AssessmentBrian FrenneaInland Rivers Ports & Terminals, Inc.Daniel GatchetRail Delivery Services

Charles V. GibbsCH2M HillNeil GriggColorado State University

Paul GuthrieU.S. Environmental Protection Agency

Mary SimoneMayorRocksprings, TX

Ron WagenmannTown ManagerUpper Merion Township, PA

Barbara HarshaNational Association of Governors

Highway Safety Representatives

Gill HicksPort of Long Beach

John HornbeckCongressional Research ServiceWilliam HooverAir Transport AssociationJames HuntGeneral Accounting officePeter JohnsonOffice of Technology AssessmentKen KirkeAssociation of Metropolitan Sewerage

Agencies

Carol KocheisenNational League of Cities

Bill KramerU.S. Environmental Protection Agency

Lester P. LammHighway Users Federation

V/

Jerry F. LavelleTri-City Regional Port District

Howard LevensonOffice of Technology AssessmentSteven LockwoodFederal Highway Administration

Richard MarchiMassport

Kay MartinAssociation of American RailroadsKenneth MeadGeneral Accounting OfficeMark MeoUniversity of Oklahoma

Wade MillerConsultant

Elizabeth MinerU.S. Environmental Protection AgencyJeffrey MomUrban Mass Transportation

Administration

Don NiehusU.S. Environmental Protection Agency

Obie O’BannionAssociation of American RailroadsWalter ParhamOffice of Technology AssessmentHenry PeskinEdgedale Associates

Craig PhilipSouthern Pacific Transportation Co.

Michael PhillipsOffice of Technology AssessmentBeth PinkstonCongressional Budget OfficeDouglas PorterUrban Land Institute

Richard PowellAmerican president LinesYvonne PufahlGeneral Accounting officeKaren RasmussenCalifornia Trucking Association

John ReithAmerican Trucking Association

Victor RezendesGeneral Accounting OfficeJenifer RobisonOffice of Technology AssessmentDavid Sanford, Jr.Us. Army corps of EngineersNeil D. SchusterInternational Bridge, Tunnel, and

Turnpike AssociationSarah J. SiwekSouthcoast Air Quality Management

District

Ed smithUs. Army corps of Engineers

Richard SullivanAmerican Public Works Association

Ted ThompsonNew York State Department of

Transportation

Vern WagarNational Association of County

Engineers

Thomas WehriU.S. Department of AgricultureHendrik WillemsU.S. Department of the InteriorCarl WilliamsCalifornia Department of

Transportation

Jacqueline WilliamsGeneral Accounting Office

Larry WilsonArkansas Department of Pollution

Control and Ecology

Jenifer WishartHickling Management Consultants

Leslie WollackNational League of Cities

Andrew WyckoffOffice of Technology Assessment

Contents

Chapter 1: Issues and Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Chapter 2: The Intergovernmental Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Chapter 3: States: Caught in the Middle. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55.

Chapter 4: Local Governments: Where the Buck Stops . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

Appendix A: Federal Spending and Tax Collection by State . . . . . . . . . . . . . . . . . . . . . . . . 121

Appendix B: Fiscal Capacity and Effort Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122

Appendix C: Case Studies of Regional Planning Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . 124

Appendix D: Contractor Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

~ 1 i •

. . ______ , • I

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ForStala and local gcMIInnl8ll!S, complying wi h regulallonscan be a d lemma the solution 10 one ~ such as wasta diaposal can creel8 another ~ air pol U1Ion n this caae

.’

.-

. .

.’. ,.

1-A. Rocksprings, Texas

1-1. Federal Expenditures, 1960 and 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1-2. State Fiscal Effort ● ..** *.*** * e * * . . * * . . * . * . . . . * .*.*.*...1-3. Projected Impact on States of Reduced Federal Aid for Public Works

. . . . . . . . . . . . . ‘6

. . . . . . . . . . . . . 9● . **,.....* 13

P a g e

1-1. Distribution of Federal Aid to State and Local Governments by Major Categories . 71-2. Federal Infrastructure Expenditures, 1980-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14. Increase in Household User Charges in Municipalities Attributable to

mental RegulationsEnviro *.*. o***. ... o.. .*. o . . . * * . * . . . . * . . . * * . . * . . * .*.....*.1-5. Local Options for Addressing the CostS of Federal Environmental Standards . . . .1-6. Public Works Spending by Level of Government ● *O** O**** *e*o*e e**...**...**.1-7. Federal Public Winks Trust Fund Summary, 1 9 8 8 . * . . * . . . . * * * * . . * . * * . . . . . . . . . .1-8. Major Infrastructure Financing Mechanisms: Advantages and Disadvantages . . . .1-9. Current Sources of Capital for Local Public Works ● . . . . . . . . . . . . . . . . . . . . . . . . . . .

,. .

10

181920202930

.—.

Chapter 1

Issues and Conclusions

“We’ve got all these people moving in from aneighboring State because our taxes are lower. Weneed roads and sewers for this new development, butwe can’t pay for them. And no politician wants toraise taxes-that’s just too hard!” groaned an officialfrom a fast-growing suburban jurisdiction in anindustrial Midwestern State.l

“We don’t need another special purpose tax; weneed statewide tax reform,” proclaimed the Gover-nor of a Western State that does not have an incometax and relies heavily on sales and property taxes.The legislature did not agree and adjourned withoutacting on a carefully prepared special tax packagefor transportation improvements, leaving local offi-cials, who badly needed the revenue, fuming.2

Roads, bridges, mass transportation, airports,ports and waterways, water supply, wastewatertreatment, and solid waste disposal make up theessential infrastructure for public works services.These services underpin the public health andeconomic vigor of the Nation and are utilized byevery citizen and every industry. But as the quota-tions above make clear, how to pay the bills for ourNation’s public works (and other government serv-ices) remains a thorny and contentious issue. As oneinformed observer put it: “The impasse is deep:Americans’ appetite for government services ex-ceeds their willingness to be taxed.”3

The Nation’s 83,000 local governments are in anunenviable position; they take the direct politicalheat generated by public works issues. They areresponsible for managing and maintaining over 70percent of the Nation’s public works facilities andservices. They must also comply with Federal andState standards and regulations over which theyhave little control. In addition, they are caught in abind consisting of the need to provide services on theone hand, and laws limiting how much money theycan raise and how they can raise it and constituentswho resent paying higher taxes on the other.

Federal and State governments, recognizing theimportance of keeping the economy running

smoothly, have long provided financial assistancefor local public works. However, policy changeshave reduced Federal contributions over the pastdecade, and infrastructure needs continue to outrunavailable dollars. Coping with the fiscal shortfall,meeting higher costs for maintaining transportationservices, and ensuring that environmental facilitiescomply with new national standards create dilem-mas for every State and local decisionmaker. None-theless, agreement is widespread that public worksinfrastructure needs upgrading and that additionalinvestment would benefit individuals and the na-tional economy alike. Indeed, one economist pro-jected recently that: “If we increased spending oncore infrastructure by $50 billion (1 percent ofGNP), productivity would rise by an estimated $62.5billion in the first year."4 However, disagreementsover how much additional support is needed and themost politically feasible method of providing it dogofficials at every level of government.

But money problems are not the entire story.Solutions to urban problems such as air pollutionand traffic congestion will require new technologiesand ‘approaches to transportation and difficultchanges in longstanding management practices. Forexample, the view that”. . . unconstrained personalmobility and control of congestion are incompatiblein the America of today and tomorrow,”5 is nowwidely shared by officials in major cities, but isanathema to many of their constituents. For anumber of small, remote communities, compliancewith new Federal environmental standards willrequire financial resources. beyond their fiscal capa-bilities. The management and technology changesnecessary to resolve these problems involve stagger-ing sums of money and require developing consen-sus among disparate, vocal, and tenacious industryand private citizen interest groups.

Considering all these conflicting pressures, it issmall wonder that despairing descriptions of hugeneeds have not successfully mobilized agreement ora national approach to funding infrastructure. Effortsto date have been piecemeal. Most State govern-

lu~~fj~ ofil~ at Dit@l/Ford Municipal Officials Chfcrence, Wwh.ittgtaI, DC, unpublished remarks, June 23, 1989,zJohn Hondey, commissiawr, Kitsap Cowy, WA, pcmonal communication, July 7, 1989.3~ J, s~~l~ “A FriVOk)US Decade?” ~(L$hingZon post, Jan. 3, 1990, p. A15.4David Alan Aschaur, cux’IOmis& Ft!dend Rcscsve Bank of ~~0, pmond CO13M311111iCd31t, Oct. 30, 1989.5AIan Boyd, ‘Transpw—“cm Systems of the 21st Breaking Gridlock,”

Academy Press, 1988), p. 19.

-3-

4 ● Rebuilding the Foundations : State and Local Public Works Financing and Management

State and local governments must replace and dispose ofobsolete transportation equipment and meet competing

revenue demands as well.

ments have increased their support for public works,and local governments have made often heroicefforts. Yet even jurisdictions that have successfullyraised taxes or fees for public works have been ableto meet only their most pressing needs. Making adifficult situation worse, even when new technolo-gies or management tools are available to makeservices more productive and efficient, officials arehard pressed to find funds to implement them. Thecurrent impasse over public works incorporatesthree critical and controversial national issues:

the shortage of money available for competinggovernment services, such as health and socialneeds, defense, education, and public works;the inadequate state of much of the Nation’stransportation and environmental infrastructureat a time of rapid technical, industrial, andeconomic change; andthe importance of preserving the environ-ment—large, urban areas must address air andnoise pollution and land use problems thatdiminish the quality of life and may limitgrowth and development, and every jurisdic-tion must upgrade its public works to complywith new environmental standards.

These three issues are interrelated in numerous,complex ways, but in their simplest forms, they havebeen on a collision course in recent years. As the1990s begin, political and financial considerations

intrude on every debate about preserving environ-mental quality and renewing our infrastructure.

To assess the progress of State and local govern-ments in coping with infrastructure problems and tooutline the framework for congressional decision-making, the Office of Technology Assessment(OTA) has prepared this special report documentingrecent trends in public works financing and manage-ment. The report presents snapshots of currentapproaches and identifies successful programs andissues that have yet to be resolved. It providesbackground information and the State and localcontext for OTA’s forthcoming report, Rebuildingthe Foundation: Public Works Technologies, Man-agement, and Financing, scheduled to be completedin the summer of 1990.

PAYING THE BILLSWhy have public works reached what many call

a crisis point?--primarily because the costs ofservices that local governments must or wish toprovide have outstripped the political acceptabilityof raising property taxes-their most importantsource of revenue. In 1987, property taxes generatedover 70 percent of the tax revenue collected by alllocal governments6--50 percent for cities, whichusually have a more diversified tax base thancounties and towns. User fees, sales, income, anddedicated taxes, Federal and State monies, andprivate sector investment, when it is available,provide the remainder. Required by State laws tobalance their budgets and limited by law (in overone-half the States) and by voter resistance in the taxincreases they can impose, local governments counton every dollar from each of these sources. Declin-ing Federal monies and State governments that havecontributed substantial funding support only forhighways and bridges are other contributing factors.

constitutional basis for a Federal role inpublic works lies in the responsibility of the FederalGovernment for interstate commerce, the generalwelfare, and national defense. Over the years ournational government has addressed these goals byfunding construction of a broad range of publicworks infrastructure, particularly for transportationand water resources. Historically, transportationfacilities that promote interstate commerce-ports

of Commerce, Bureauof the in (Washington, DC: November 1988), p.

Chapter 1-Issues and Conclusions ● 5

ports and waterways.

and waterways, rights-of-way for railroads, airportsand airways, and highways-have been supportedwith Federal monies. Local governments, with somehelp from their States, have maintained and operatedmost of these facilities, except for waterways (whichare the responsibility of the Army Corps of Engi-neers) and freight railroads (which are privatelyowned and managed).

Federal involvement in environmental publicworks began early in the 20th century with massiveinvestments in reclamation projects to provide waterfor agricultural and urban development. Over thepast several decades, the emphasis has shifted toprotecting the public health and natural resources,and the Federal Government has dramatically en-larged its regulatory role by setting standards for air,water supply, and water quality. Greater understand-ing of health dangers from contaminated drinkingwater, hazardous waste, improper wastewater treat-ment, and the health costs of air pollution promptedformation of the Environmental Protection Agency(EPA) in 1970 and tighter Federal regulation. SomeFederal finding has been made available throughEPA and the Farmers Home Administration of theDepartment of Agriculture to assist State and localgovernments in constructing facilities to controlhealth threats.

As the impacts of rising national debt service andpayments to individuals for health, welfare, andretirement made themselves felt (see figure l-l),Federal support for infrastructure, which had stead-ily expanded after World War II, began to shrink inthe late 1970s. Indeed, between 1979 and 1989,Federal grants to States and local governments forall purposes, excluding payments to individuals, fellfrom 11 percent of the Federal budget to 5 percent.7

Equally striking is the expansion in the share of theirFederal grant monies that States and localitiesprovided to individuals for health. These burgeonedfrom 3 percent of their Federal aid in 1960 to 30percent in 1989, while the portion of aid used forpublic works dropped from roughly 46 percent toabout 18 percent (see table 1-1, categories of naturalresources and environment and transportation).

and local officials accept the need forFederal standards and regulations to protect thepublic health and welfare. They contend, however,that many grant requirements raise their costs byrequiring expenditures for procedures that seemextraneous and by adding substantially to the timeneeded to complete the project. For example,Federal aid for bridge repair requires that a percent-age of Federal monies be used for repairs to“off-system” bridges (bridges on highways that arenot eligible for Federal aid); often these bridges areon underutilized or unimportant roads, and the Statewould prefer to use the money for bridges on majorhighways.8 Concerns about Federal programs centeron unfunded mandates, grant requirements, such asa focus on new construction rather than maintenanceor management improvements, and on the regula-tory

●

●

●

process,9 including:

inflexible administration of standards (stand-ards aim at uniform performance and do notaccommodate local variations in need andconditions);lack of coordination among Federal agenciesengaged in related activities;frequent changes in Federal regulations, whichmay require major local program adjustments;

of Management and Historical of the U.S. Government, 1990 (Washington, DC: 1989), pp. 128130. , Planning Research Division, Iowa Department of ation, in U.S. of Technology

—State and Local Infrastructure Financing and Management Workshop,” unpublished July 7,1989, pp. 118-119, of Assessment Advisory Panel meeting, unpublished remarks, and participants in of Technology op. cit., 8.

13%

to

2

● length of time required for Federal review andapprovals; and

● requirements for meetings and paperwork.

The complicated application process for approval ofa major harbor improvement (shown in chapter 2,figure 2-5) gives ample evidence that these concernsare justified.

The need to conserve and stretch Federal revenuehas also created conflicts between Federal taxpolicies and State and local financing for publicworks. Tax reforms enacted in 1984, 1986, and 1988raised the costs of some forms of infrastructurefinancing by limiting the types of projects eligiblefor tax-exempt bonds. Arbitrage arrangements, sale/leaseback, and other forms of public-private fundingthat local governments had used to leverage invest-ment for infrastructure improvements, were sharplycurtailed. Congress relaxed some of the most severerestrictions on arbitrage in legislation passed in late1989, and while it is too early to be certain, OTAanalysis indicates that the impact of tax reform ontraditional public-use projects (sewers and roads, forexample) may not be significant in the long term.

The decrease in tax-exempt private activity bondsfor facilities, such as convention centers and sportscomplexes, contributed to the significant drop inmunicipal borrowing between 1986 and 1987. How-ever, the municipal bond market returned to itspre-1985 level in 1988, signaling that jurisdictionswere taking on new debt for their traditional publicworks needs.10 (For further details see chapter 2.)

State and local governments contribute about 75percent of total public spending for public works,with most of their share supporting operations andmaintenance. Federal grants financed between 40and 50 percent of capital spending for public worksconstruction during the 1980s,11 and Federal supportplays an important role in finding new projects andmajor reconstruction. Over the past decade, onlyhighway and air transportation received increasingportions of total Federal funds spent on infrastruc-ture, thanks to trust funds supported by dedicateduser fees (see table 1-2). (Although mass transit andwaterways also have trust funds, the annual revenuesare much smaller.) The fact that no similar dedicatedFederal revenue sources have been enacted forenvironmental programs has had a significant im-

Center, “Federal Tax and Financing,” OTA contractor report, Sept. 13, 19S9, p. II-4. U.S. of Commerce, Bureau of the and of Management and Budget.

Chapter 1--Issues and Conclusions ● 7

6.2 16.7 3.5

Federal support for constructionof wastewater treatmentplants is diminishing; at the same time, Federal

requirements are becoming stricter.

pact. In 1980,20 percent of Federal grants for publicworks infrastructure was budgeted for water qualityprograms, while 80 percent supported transporta-tion. By 1988, funding for water quality had droppedto 10 percent. Concurrent with the drop in Federalappropriations, local costs for complying with Fed-eral environmental standards began to increase asnew standards began to take effect.

each State has assumed some greaterfinancial responsibility for public services, increas-ing expenditures an average of 6 percent over the last3 years, the fiscal strain has begun to tell. Theaverage rate of State revenue growth (estimated to be5.4 percent in 1989) has fallen behind the growth inexpenditures; in fact, 18 States had to cut backbudgeted spending in 1988 because of revenueshortfalls.12 Moreover, no State has entirely filledthe chasm created by cost increases for its infrastruc-ture needs and reductions in Federal support forpublic works—and funding infrastructure is a lowerpriority in every State than Medicaid, education, andlaw enforcement.

Each State has a unique fiscal and economicframework, and several factors bound its capabilityto plan and pay for public services. For example, thestrength and balance of a State’s economic basedetermine its ability to raise both public and privatefunds. Some tax their residents almost as heavily asthe economic base will allow, while others arewealthier than the tax burden suggests. (See figure1-2 and table 1-3 for information on State fiscalstanding.) Most New England and Mideastern Stateshave had strong economies in recent years, enablingthem to raise State and local revenues and to offerattractive opportunities for private investment.States without a strong economic base, like WestVirginia, or dependent on one resource, like

“ “cm of DC: 1988), p. 3.

Table 1-2--Federal Infrastructure expenditure., 1980-88 (1884 dollar. In million.)

1980 1981 1982 1983 1984 1Q85 1Q88

Total ............... $37,164 $35,520 $29,312 $29,009 $29,594 $30,805 $32.240

Tranaportatlon: Highways .... __ .. 11,112 10,008 8.204 8,790 9,991 11,796 12,639 Mass transit 3,858 4,164 3,930 3,618 3,539 3,090 2,984 Rail 2,852 3,993 2,188 1,322 1,473 989 817-Aviation ... 4,344 4,057 3,526 4,199 4,347 4,455 4,671 Shippingb • 2,601 2,533 2,687 2,857 2,795 2,886 3,480 Water resourcesC .. 4,927 4,396 3,948 3,755 3,7n 3,717 3,548

Environ",.",.: Water supply ........ 1,380 1,291 599 918 700 705 783 Wastewater ......... 6,089 5.079 4.231 3.551 2.971 3.187 3.317 8Orop In expend lure fleets IHII8 OJ \"onraa. buaritime

reflect repayments of Farmer's Home Administration' water supply loans.

on Offioe of Management and Budget historical data.

1M7

$28,171

10,999

2,849

722

4,690

2,940

3,214

134d

2824

1QAA

$28,656

11,746

2,740

512

4,874

2,571

3,333

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= Low average

-= Average

mmmmrn High average - High

• Ftscal effort measures how much each Siale chooses to tax its revenue base compared 10 olher States.

SOURCE: Off~ ot Technology Assessment, 1990. baSed on AdvIsory Commission on Intergovernmental Relations data

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Louisiana have difficulty raising both public andprivate investment funds, because their low per-capita income limits their taxing ability.

While a rapid rate of population growth heightensdemand for services, it can also provide a broader taxbase. Fast-growing States and communities canmake significant demands on private developers forinfrastructure investment, a practical impossibilityin nongrowth areas; private investors see littleopportunity to recoup an investment in infrastruc-ture where real estate markets are weak. Low-population, low-density States also have great diffi-culty financing infrastructure programs. Their taxbase is limited compared to the scale of neededinvestments, and costs are relatively higher thanthose of more populous districts, which can benefitfrom economies of scale.

Finally, political factors can override physical andeconomic variables and have a major influence on ajurisdiction’s ability to raise revenues. Taxpayerrevolts against local property tax increases havemade State legislatures reluctant to raise sales orincome taxes. Political pressure has pushed manyStates to limit the amount of bonds local jurisdic-tions can issue, creating barriers to traditionalavenues for public works funding. To financeservices needed in specific regions, many Stateshave begun to permit local jurisdictions to imposespecial levies or taxes for infrastructure projects.California’s efforts to overcome the effects of itswell-known Proposition 13 illustrate this point (seechapter 3 for details), and a number of localfinancing districts have been created to financeconstruction, operations, and maintenance for publicworks. California’s experience has been replicatedin a number of States.

Yet while special districts ease States’ fiscalburdens, they make State comprehensive planningand budgeting for capital improvements extremelydifficult. At the local level, too, having a number ofindependent, separate districts complicates regional

planning and management, makes political coordi-nation a formidable task, and places a heavy burdenof debt payments on district residents. Easingrestrictions on local find-raising capabilities andconsolidating small districts are actions Statescould take to coordinate and rationalize thefinancing of public works.

States coping most effectively with infrastructurefinancing issues and Federal requirements are thosewith the capacity and political will to raise capitalfrom a variety of public and private sources, andwith an available pool of technical and financialknow-how. For example, two States, Washingtonand New Jersey, have funded special State assis-tance programs to make low-cost loans to localjurisdictions for infrastructure improvements. TheWashington State program was carefully structuredto ensure that local jurisdictions tap their ownresources fully and plan carefully. (For furtherinformation, see boxes 3-B and 3-F in chapter 3.)

States that would be most affected by additionalreductions in Federal grants are large, rural Stateswith small populations; those with poor economicbases; and those heavily dependent on extractiveindustry (see figure 1-3). Although these States arehome to less than 11 percent of the Nation’spopulation, their problems are pressing, and OTAfinds that some categorical Federal programs de-signed to help them are based on criteria that workat cross purposes (see box 1-A). In another example,a Federal-aid program that targets bridge repairfunds to States with large numbers of substandardbridges penalizes States that have developed bridgemaintenance management programs and keep theirbridges in good repair.13

Benefit Charges or User Fees

When there were fewer demands on State andlocal financial resources, broad-based sales andincome taxes could carry most of the public worksfunding burden. However, funding programs, suchas health care, education, and criminal justice, havedepleted general revenues and reached debt ceilingsin many States. Accordingly, most States andlocalities have turned to benefit charges (such asuser fees and special assessments) and to State loanprograms that promote self-supporting projects forfinancing public works capital. Benefit charges areattractive and effective strategies because of theirrevenue potential, voter acceptability, and serv-ice management opportunities. A few localjurisdictions, such as Phoenix, for example (seechapter 4, box 4-C for details), target servicebeneficiaries to pay full cost for many publicservices because of their relative ability to paycompared to social service users. States with low

I-tivaof tile Dqxtmcnts of Tranaportathm of Gcorgi4 Florid& and Minncaota at a National T mqxmation Safety Board Bridge SafayWixulop, Unpubii$lcd~ Sept. 2s, 19s9.


(’/--”

14 ● Rebuilding the Foundation: State and Local Public Works Financing and Management

economic bases and/or small populations cannot broad-based taxes for supporting transportationassemble sufficient capital from these sources.

Recognizing the advantages of user charges,especially for transportation, a few States are ex-panding paid highways by authorizing privatelyfunded toll roads, while 47 States have raisedgasoline taxes and other motor vehicle user chargesover the last 10 years. Sixteen States permit localgovernments to levy local gasoline taxes (see table1-3, again). The gas tax is a substantial revenueproducer and often more acceptable to voters than

improvements. Gas taxes and other vehicle usercharges are also used in many jurisdictions tofinance public transit; a few use such revenues tosupport a variety of other services. A number ofStates use aviation-related taxes and fees to supportairport development Currently, about 60 percent ofroad and highway improvements are funded by usercharges. 14

Environmental capital improvement programs areincreasingly paid for by debt, in the form of revenue

I** Highway Muhkraa“oa, U.S. DcpartmcntofTransportation, 1987),p. 20.


1989, the city refused water access rights to any builder who did not install a legal septic system. Though denyingwater rights allows the city to comply with State regulations, it also thwarts chances of attracting much-neededeconomic development.

bonds backed by user fees. No State has a broad taxcharges are proven revenue sources, OTA con-or revenue base- for environmental services, and nodedicated Federal trust fund exists. A significantshare of environmental capital currently comes fromFederal grants, which face the perils of annualappropriations and have already fallen significantlyfrom previous levels. Grants for wastewater treat-ment are scheduled to be eliminated entirely in 1994.The capacity of low-income users to pay signifi-cantly higher fees for environmental services is anunresolved issue, and Federal tax code changes havemade private capital for environmental programsharder to attract. Because of Federal trust fundsupport and because transportation benefit

eludes that States and local governments arecurrently better able to finance transportationimprovements than environmental programs.

Revolving Loan Funds ●

Most States have established revolving loanprograms for wastewater facilities in anticipation ofthe phasing out of Federal construction grants.Several have created similar programs for transpor-tation infrastructure as well. Many States remodeledexisting loan and grant programs to create these;others started entirely new programs. It is too earlyto tell how the new revolving loan funds will work,

1 6 ● R e b u i l d i n g t h e Foundations: State and Local Public Works Financing and Management

although some States have already found that localdistricts accept multiple, complicated Federal regu-lations much more reluctantly for a loan than for theaccustomed grants. Many States are in the processof working out the technical, administrative, andinstitutional difficulties inherent in such a com-plex financial activity. Cuts in Federal appro-priations to support State administration ofenvironmental programs hamper their efforts.

States face two additional challenges: accommo-dating the needs of those districts too poor to afforda loan and expanding the supply of capital neededboth now and when Federal grants end in 1994. Atthat time, funds for environmental programs mustcome from higher user charges, State or local generalrevenues, from new, earmarked State taxes, or a newFederal program.

Earmarked or Dedicated Taxes

From a public policy perspective, earmarking ordedicating revenues for special purposes has thedisadvantage of restricting policymakers’ fiscaloptions in responding to changes in priorities.Nonetheless, States have found that earmarking isthe best way to ensure a reliable revenue stream.Pressure is heavy in some States without stronggeneral tax bases to use gas tax revenues to pay forsocial or education programs. Transportation advo-cates are adamant that States reserve these funds fortransportation capital or replacement accounts,which can otherwise be vulnerable to budget cuts.

Despite budget difficulties and objections tonew taxes, voters in a number of States andlocalities have supported new spending initiativesfor transportation or environmental improve-ment programs that meet well-defined priorities.(See chapter 3 for examples in New York, Iowa andWashington State.) One measure of the willingnessof a State’s voters to pay for public services is the taxburden its voters have accepted relative to the State’seconomic base and per-capita income (or ability topay—see table 1-3). Federal grant programs do nottake into account the needs of States that have lowfiscal capacities, but are already taxing their resi-dents relatively heavily, nor the possibility thatStates in good financial condition, but which taxrelatively lightly, could make a greater fiscal effort.

State and local officials consulted by OTA indi-cated that they would support a larger matchingrequirement for State and local contributions inreturn for Federal funds, if the formula recog-nized State and local level of effort.15

States also provide local governments with nonfi-nancial support for both transportation and environ-mental public works funding. Such aid may take theform of enabling legislation to permit local optionsales, fuel, or income taxes, public-private ventures,and other types of innovative strategies. Some Stateshave established bond banks to help local districtscut the costs of acquiring capital; many are offeringtechnical assistance and help with capital budgeting,and several have established infrastructure researchprograms. See chapter 3 for more complete descrip-tions of state programs.

Local

jurisdictions, too, have taken on additionalfiscal responsibilities, although many find theirfinancing problems overwhelming. These govern-ments have historically relied on the broad-basedproperty tax to finance public services from educa-tion to water supply and streets, largely because nomajor alternatives were needed. Moreover, theproperty tax was an approximation--albeit crude—of both ability to pay and benefits received. How-ever, the property tax is no longer adequate. Costshave climbed significantly, and elimination of .Federal block grants and revenue sharing, the needto support Medicare and social programs, reductionsin Federal categorical grants, and higher Federalstandards for environmental services have exacer-bated local fiscal woes. Repeated property tax hikesto support public services needed to serve popula-tion growth or economic development have met withlocal resistance, often leading to initiatives thatresult in State limits on local taxes. Finally, just asfor State governments, competition for local generaltax revenue is intensifying from education, lawenforcement, housing, and social welfare programs,which have no other revenue source. Forty-fourpercent of localities surveyed by the NationalLeague of Cities cut capital spending in 198816 anddeferred maintenance spending because of budgetconstraints. Local governments have been particu-larly hard hit by Federal policy changes and plead for

lam= of Tcchnobgy Asstssmeat, op. cit., footnote 8.l@ouglas D. RcsearchRcportson Amcmca“ ‘sCitics(Washington, KX2 Nsuicmal LcagueofCitics, July 1988),. . .p. Ill.


a consistent Federal tax policy that does not changeannually. Recently implemented Federal environ-mental requirements for solid waste facilities and. .drinking water will require new or upgraded infra-structure facilities but provide no seed grant money.Costs for complying with the new standards will besubstantial and will fall most heavily on smallcommunities and large cities where major improve-ments are needed (see table 1-4).

Most local governments have diversified andexpanded local revenue sources, raising nonpropertytaxes, including user fees. Local income and salestaxes have proven to be successful revenue raisersfor communities constrained by State-imposed prop-erty taxing caps. Earmarking portions of revenuesfrom these taxes for specific improvements, such aspublic transit or streets and bridges, helps win publicapproval for the increases. Although these taxeshave become an important source of revenue, fewcommunities raised them during 1988, indicatingthat these sources, too, may have temporarilyexhausted their voter acceptability. (See table 1-5 fora summary of local options for meeting environ-mental standards. Further information may be foundin chapter 4.)

State caps on local taxing (in 32 States) orbonding (in 46 States) fall especially heavily onsmall jurisdictions, because their limited tax basesmake them reliant on the property tax. Yet only someStates-New Jersey, New Mexico, and Washington,for example-have special programs to aid theirsmall communities. The unit cost of public worksfacilities for small systems is high, since thefacilities are small in scale and must be customizedto meet local conditions.

Tapping Private Investment

At present, jurisdictions seeking new revenue arelikely to target specific areas or beneficiaries asfunding sources. Approximately one-quarter of localdistricts have successful programs using privatecapital. In some growth regions, costs for infrastruc-ture expansion to serve new development are passeddirectly to the private sector through developercharges, such as facility construction requirementsand impact fees. Chapter 4 gives numerous exam-ples of such programs. The private sector is initiatingfor-profit ventures in some districts, primarily solidwaste projects, with major efforts under way todevelop privately financed toll roads in Virginia andCalifornia, and high-speed rail lines near Orlando,Florida, and between Las Vegas,. Nevada, andAnaheim, California. Other transportation servicesthat have potential for operating revenues and landdevelopment profits may successfully attract directprivate investment. See chapter 4 for further details..Paying Local Bills

Current trends indicate that new infrastructure,particularly in growth areas, will be financed in-creasingly with funds from benefit charges. This isthe result of several factors, including State andvoter limits on broad-based taxes, the steady andgrowing demands of social programs on genera!fund revenues, and the relative ability and willing-ness of beneficiaries to pay.

Utilizing benefit charges, such as targeted userfees, developer charges, and special district reve-nues, has some compelling advantages over raisingbroad-based taxes. First, citizens seem willing toaccept the principle that “you pay for what youget," under which they pay directly for servicesor developers pay for the facilities needed bytheir projects. Second, higher user fees raiserevenues closer to full service costs, and may cutdemand, hold steady or even reduce capital

SOURCE: Offiw of Technology ~t, 1990; baaut on data in U.S. Environmental Protection Agenoy, Oflb of Poiicy Ptanning and Evaluation,Mdc@Mba, Smd Budmsa md&tkxdhIr8 (Washington, DC: 198S), p. 2-14.

requirements, and permit local governments todesign projects that are relatively self-support-ing. Third, the community often can collect capitalfunds up front, avoiding the necessity for bondissues, thereby eliminating interest costs and reserv-ing debt for other public facilities. Last, benefit-based financing gives local governments moreautonomy, making them less dependent on State andFederal programs and the strings attached. In manycommunities, developers support these strategies,finding them systematic and predictable time andmoney savers.

INADEQUATE PUBLIC WORKSINFRASTRUCTURE

The need to replace and improve public works hasbeen well-documented in more than a dozen nationalstudies since 1980. The National Council on PublicWorks Improvement estimated in 1988 that annualfuture infrastructure investment needs could requiredouble the $45 billion invested in 1985.17 Nation-ally, county governments project their infrastructureneeds to be at least $18 billion a year through 1990,18

and a single State, Washington, calculates itslong-range capital needs to be almost $1 billionannually. 19

governments aided by States have alwaysbeen the principal providers of funding for infra-structure (see table 1-6). When Federal funds weremore plentiful, State and local governments usedsuch funds for capital to support construction ofpublic works facilities--completion of the Interstatehighway system, major improvements to ports suchas Long Beach and airports, and transit improve-ments in Washington, IX, and Boston are examples.State and local governments focused their ownrevenues on meeting needs in education and otherspecial program areas. Thus, critical as State andlocal capital is in providing infrastructure, theircombined total investment peaked at $34 billion(1984 dollars) in 1972,20 and recently has languishedbetween $20 billion and $28 billion annually.

Shortfalls in infrastructure funding coincide withmajor maintenance and capital needs for publicworks structures that have reached the end of theirdesign lives or have been used much more heavily ordeteriorated much more rapidly than anticipated.While the exact magnitude of essential public worksimprovements may be open to discussion, recentpolicy statements by major transportation and envi-ronmental interest groups21 demonstrate that astrong consensus has solidified about the inade-

qqw Worka ImpIuvcmuw America’s (Washington, DC: February 1988).lqq~ ~ of Juiy 1987), p. 6.19-* ~ “We Fbancc for k-al Public Works: Four Case Studi~” OTA contractor paper, Dcccnlk 19ss, p. 30.Watkmal COud at W* hnpmvemen~ op. ciL, footnote 17, p. 7.Z%dccted -plea irKhldc: Tmqmatl “m Aitanaci vca Group, (Waahingcm, DC:

~ 1989); Amdcan Aaaouaa“ “aI of State Highway and Thqwnaa“on Gfficiaia, “NCW ‘hqmation Cumxpta fm a New Cmtury,” unpub Wcbmmmt+ kbmaty 198% tk Natimal Gwanora’ Aasocialkxu (Waahingtm, DC:1989); and Victaia Price Kmnody,Ncw of ~ F~ Authorities 1988).

Table 1-5--Local Options for Addressing the Costsof Federal Environmental Standards

(

,

●

●’

●

●

●

SOURCE: of 19S0.

quacy of our infrastructure and the need for moreinvestment. We have fallen behind in repairingpotholes, easing traffic congestion to help curb airpollution, providing wastewater treatment, and dis-posal of municipal solid waste.

townships, and sparsely populated rural counties, aswell as a multitude of single-purpose districts, suchas the Nation’s 600 highway districts, 356 airportauthorities, 163 port authorities, and numerouswater supply districts.22 They are the level ofgovernment that has day-to-day responsibility formost public works services. For many years separatebranches of Federal and State governments havefunded and managed the individual public works forwhich they have responsibility as separate programs.For example, Federal highway programs have not

Facing mounting airport access problems, theMassachusetts Port Authority established a water taxi

between Logan Airport and downtown Boston.

considered rail or mass transit alternatives, or theaccess needs of airports, ports, and waterways.Water supply, wastewater treatment, and solid wastedisposal requirements have been set by separatedivisions of EPA with inadequate consideration ofthe interactions of pollutants in different environ-mental media. (See chapter 2 for a more completediscussion.) State agencies often mirror the Federalstructure. The diverse, long-established manage-ment patterns virtually ensure that Federal and Statesubsidies for transportation modes will conflict witheach other and that coordination of environmentalprograms will be minimal.

Rapid shifts by industry, such as the move tojust-in-time delivery, to adjust to global economicchanges have radically altered infrastructure use.Local governments have tried to respond, butcategorical Federal programs give them little flexi-bility to do so. For example, Federal aid for highwayfunds may not be used for modernizing trafficmanagement systems to speed traffic flow.23 Underthese circumstances, State and local officials find thelarge unspent balances in Federal transportationtrust funds especially galling (see table 1-7).

Federal program management has created somemajor obstacles for local governments trying tomaximize the productivity and efficiency of their

DC: Land pp.

Us. Office of “Advanced Urban

●

Table 1-6--Public Works Spending by Level of Government (In percent)

Federal State and local

Table 1-7--Federal Public Works Trust FundSummary, 1988 (current dollars in millions)

Trust Fund Revenues Outlays (end of year)Highway Trust Fund:

Highway Account.. . $13,645 $14,036 $9,020Transit Account . . . . 1,661 696 5,167

Airport and Airway TrustFund . . . . . . . . . . . . . 4,081 2,896 5,841

Inland Waterway TrustFund . . . . . . . . . . . . . 102 59 315

Harbor MaintenanceTrust Fund . . . . . . . . 161 169 8

public works and make them into mutually support-ive systems. The following summary provides a.snapshot of each transportation and environmentalpublic work infrastructure segment and identifiespossible short-term relief options. For a morecomplete picture, see the analogous sections ofchapters 2, 3, and 4. Long-term improvements topublic works management and financing willrequire major changes in Federal transportationand environmental program management andcongressional oversight and will be discussed inOTA’s forthcoming report on public works technol-ogies, management, and financing.

Highways

The Federal Government provides about one-quarter of the financing for highways and bridges,

1

sharing the responsibilities with States, which fundabout one-half, and local jurisdictions, which pro-vide the remainder. Federal finding is administeredthrough State highway departments, usually long-established and experienced organizations. TheFederal-Aid Highway Program supports about 22

.

percent of the Nation’s road mileage; these streetsand highways carry 79 percent of the total vehicle-miles traveled.24 Federal funds to State highwayagencies primarily target the Interstate Program. Inaddition, the Federal-Aid Primary Program aidsmajor arterial highways; the Federal-Aid UrbanSystem targets aid to urban areas; the Federal-AidSecondary Program supports farm-to-market roads;and the Highway Bridge Replacement and Rehabili-tation Program funds bridge improvements.

The Federal Interstate highway program encour-aged suburban development, although this was notits major purpose. The development occurred underweak State requirements and inadequate local land-use planning and zoning laws and has badlyoverloaded many local roads. State and local offi-cials claim that Federal grant requirements andconstruction standards have contributed signifi-cantly to raising capital and maintenance costs.Recent changes in Federal policies on permissibletruck lengths and weights brought productivity gainsto industry, but increased government costs forhighway and bridge maintenance and repair.

● Problem ureas: Central cities where roadwaysare decaying faster than they can be rebuilt, thetax base is burdened with special programs, andthe capacity to pay higher taxes is limited.(Taxes on the commercial sector may beincreased at the risk of business moving out.)Sprawling suburbs; inadequate investment intechnologies and management tools to increaseroad capacity without building more roads;weak land-use planning and development con-trols. The need for small towns and ruralcounties to maintain many miles of lightlytraveled roads and numerous bridges at servicestandards necessary for heavy trucks carrying

Wedc$ai Highw8y AhMsmh& op. cit., foOaIote 14, p. 5.

●


seasonal agricultural products only a few weeksa year. Low-income States with heavy taxburdens.

. Possibilities: Increasing Federal and State fueltaxes; enacting State legislation to permit locallevies. Private investment-not a realistic op-tion for the neediest areas. Toll roads andbridges; dedicated State and local revenuesfrom taxes and benefit charges. Revising Fed-eral grant requirements to allow funds to beused for relieving traffic congestion andalternative mass transportation projects, and topermit tolls on highways constructed withFederal aid. Eliminating tax subsidies foralternate fuels.

Mass Transit

Local governments or public transit authoritiesoperate most systems, although State and Federalsources provide substantial assistance. After reach-ing a peak in the mid-1980s, Federal support fortransit declined to $2.7 billion in 1988 (see table 1-2,again). State and local governments finance mostoperating and maintenance costs, and State contribu-tions outstripped Federal funds for the first time in1988. Across the country, transit user charges (fares)account for just under 40 percent of operatingexpenditures, although this varies according toregion.25 The transit users’ willingness and ability topay are both sensitive to individual incomes and

( local economic conditions. In addition to fares, masstransit revenues come from agency-issued revenuebonds, subsidies from local and State general funds,Federal grants from a dedicated 1 cent share of the9-cent per-gallon Federal gas tax, State gasolinetaxes and vehicle registration fees, tolls, and in somemetropolitan areas, a dedicated sales tax.

Federal tax and regulatory policy has had a smallbut important impact on mass transit financing,usually raising costs. The Tax Reform Acts of the1980s eliminated many private investment opportu-nities, particularly for purchase of equipment, whileFederal equipment requirements, air quality regula-tions, and fuel taxes all affect costs. Federal grantcategories do not always fit well with a jurisdiction’s

\ critical needs; small cities may receive more capital1 funds than they can use, while large cities remain in1 desperate need of new equipment and facilities.

Problem areas: Suburb-to-suburb commuteswhere conventional mass transit is not appro-priate, but alternatives have not been devel-oped. Growth areas where planning and devel-opment controls are weak. Old central citiesand older suburbs where capital facilities arewearing out and the percentage of users belowthe poverty line is increasing. Jurisdictions inwhich the population is aging and the tax baseis eroding. Diffuse mass transit benefits, whichaffect many only indirectly through easieraccess to downtown and reduced traffic con-gestion and air pollution. These make it diffi-cult to establish an adequate, reliable, andequitable local revenue base.Possibilities: Political leadership and focus ontransit needs and benefits. Requiring nonuserswho are indirect beneficiaries to share the coststhrough dedicated taxes. (See the French pro-gram discussed in chapter 4, as an example.)Increased support from State and local govern-ment general revenues. Additional Federalsupport from fuel taxes for the largest urbanareas. Public-private partnerships.

Aviation

Most major, commercial airports support them-selves (with the exception of air traffic controlactivities) with user charges. Federal investment inaviation increased from $4.3 billion in 1980 to $4.9billion in 1988 (see table 1-2), with most of theincrease used to modernize air traffic control and toexpand and renovate airports, especially reliever andgeneral aviation airports. User fees (ticket, cargo,and fuel taxes) provide the majority of these funds.State and local capital funding grew from $960million in 1980 to $1.3 billion in 1987.26

Large commercial airports, usually structured asindependent public authorities, rely primarily ondebt financing for capital investment. Bonds arebacked by revenues from airlines, parking, andconcessions. Smaller airports (especially those forgeneral aviation) depend much more heavily onFederal and State assistance, and special Federalsubsidies go to a few small airports (at very high unitcosts) in remote areas. Some States support airportswith general fired appropriations and through dedi-cated revenues from user fees; some States includeairport improvement in State-funded economic de-

%omas D. Ho- %cmefit Charges for Fmcing Inbstructurc,” OTA camractor report, August 1989, p. 15.~Apogcc Reseamh Inc., op. ciL, footnote 11.

velopment programs. Many local communities re-gard airports as key to economic development

Federal tax and regulatory policy does not signifi-cantly increase airport costs, but does limit revenueraising capacity. Federal air traffic control improve-ments will increase airport capacity and thus in-crease airport revenues in the long term.

●

●

Problem areas: Noise and vehicular traffic andunplanned, uncontrolled development nearmetropolitan airports; these all restrict airportexpansion potential. Large urban hub airports,which need improved ground access and airtraffic control equipment to increase capacity.Small- and medium-size airports important tolocal travelers and economic activity and asrelief airports, but which do not generateenough revenue to support bonds. Equipping,maintaining, and operating airports in remoteareas where demand is low. Growing metropol-itan areas where land used by small airports isattractive to developers for commercial orresidential use.Possibilities: Continued Federal trust fundsupport for medium and smaller airports; in-creased State support where fiscal capabilityexists; and stronger land-use regulations toprotect essential airports from developmentpressures. Authority to levy an airport head taxto support airport expansion and improvement.Air traffic control and runway improvements,larger aircraft, industry scheduling changes,and minihub development to relieve crowdedhubs. Public-private partnerships to provide forground-side needs. Development of high-speedrail as alternative transport for crowded aircorridors.

Railroads

Although rates and service are regulated by theFederal Interstate Commerce Commission, the vastmajority of railroads in the United States areprivately owned and operated. The major exceptionis Amtrak, a Federal corporation, which since 1971has provided subsidized passenger service. In 1987,Federal outlays included $595 million for Amtrakand $23 million for Local Rail Service Assistance,a program aimed at helping local districts rehabili-tate worn-out track.27 At least 20 States provide

assistance to local rail service, mostly as grants orloans to small short-line freight carriers. A fewStates with major urbanized areas, such as Califor-nia, Illinois, and Pennsylvania, subsidize intercitypassenger train service to relieve traffic congestionand air pollution.

Sagging railroad profits and investment re-bounded in the 1980s after Federal deregulation,although profit margins for railroads still average 5percent, making it difficult for most to attract newinvestment capital.28 Nonetheless, during the 1980sover 200 new, small, short-line railroads haveformed, generally using track abandoned by thelong-haul companies. Many are undercapitalized,and much of their track was purchased from mainlines that had neglected maintenance in preparationfor abandonment Thus government support will beimportant if service is to continue. For railroads toplay a much larger role in local transportation,however, rail service must be better integrated withother transportation modes, public officials andprivate executives must work in concert, and legaland institutional issues (liability is one example)must, be resolved.

●

●

Problem areas: States, regions, and especiallyagricultural areas and small communitieswhere rail service is inadequate, under-capitalized, or has been abandoned. Locationswhere potential profit margins are too low towarrant” private investment, and public re-sources are not available for expanded service.Areas that have excess capacity and tracks thatremain underutilized. Adequate funding forpassenger service.Possibilities: Increased flexibility in Federaltransportation grant programs to permit Statesto opt for rail alternatives to highway. State aidto underserved regions; flexibility in Federalregulations unrelated to safety, for low-profitlines. State, Federal, and industry policies thatencourage public-private partnerships.

Ports and Waterways

Ports and waterways can be as important asairports to local economic development. Generallyport facilities are owned and managed by a publicauthority, while inland waterway terminals areprivately owned. The Federal Government funds the

nc~ (Wmhingtau X: 1988), p. 6.w- ~1 @Clpctitiv&” Congressimd Qtmnerty, Aug. 11, 1989, p. 455.

(


1

1

majority of navigation infrastructure costs and hasthus played a large role in economic developmentand competition between ports. Federal policy haschanged, and costs for channel dredging must nowbe shared by local sources. Federal capital outlaysfor ports and waterways declined from $4.9 billionin 1980 to $3.3 billion in 1988 (see table 1-2).Although more than one-half of the States havefunded port and terminal facilities and their outlaysfor maintenance and operations increased, State andlocal capital investment dropped from $1.1 billion toabout $750 million between 1980 and 1987.29

Federal grants and government bonds provide thebulk of capital investment. Most large port authori-ties can support operating and capital costs with usercharges. Small, privately owned terminals may havea difficult time generating adequate revenue if theircustomer base is limited.

Problem areas: Older ports that need to mod-ernize and expand facilities to remain competi-tive, but cannot support the investment withoutraising fees so high as to threaten their competi-tive position. Port and terminal owners’ andwaterway users’ heavy dependence on Federalfinancing. Overcapacity-more competingports and terminals than large modem freightvessels need. Identifying priorities for Federalfunds among main system waterway and com-peting ports-political support may keepsmall, marginal projects alive, slowing comple-tion of major projects. Ports where disposal ofdredged material is a major environmental andcost issue. Absence of well-integrated landtransportation systems to support port activity.Possibilities: State and local public-privatepartnerships to finance improvements. Higheruser charges and stable State funding. Indus-trial partnerships; industry modernization anddevelopment of diverse markets. Reducing thenumber of ports and shrinking the size of thewaterway system to ensure maintenance ofessential commercial service.

Drinking Water Supply

The benefits of a pure water supply extend beyondindividual users to commerce and industry. Localgovernments are responsible for most of the Na-

Although clean water is considered a right, supplying urbanareas with potable water often involves extensive,

costly systems.

tion’s 60,000 water supply systems, although aboutone-quarter are privately owned. Federal outlays tosupport water supply in 1988 were small--$449million-targeted at central cities and poor, ruralareas. In comparison, State and local capital expen-ditures were $5.6 billion in 1987, with operationsand maintenance outlays an additional $11.1 bil-lion.30 State assistance also includes establishingbond banks, revolving loan funds, and interestsubsidy programs, and providing technical advice.Local governments finance capital expendituresprimarily through bonds backed by user fees andgovernment funds, generally recovering 75 to 80percent of costs through user fees.31

The impact of Federal tax and regulatory policy issignificant. New water quality standards will requireregular monitoring of drinking water sources andfiltration to remove specific contaminants. Taxreforms have increased capital costs, particularly forpublic-private ventures. Many communities willneed to increase rates substantially, both to fund

Inc., op. cit.,

31 op. ciL, 2s, p.

rehabilitation of obsolete facilities and to conserveand regulate water use, possibly reducing the needfor new facilities.

Problem areas: Small systems with watersupplies that do not meet current standards.Older cities where pipes and facilities areobsolete and decaying, causing significantleakage. Regions with serious contamination ofground and surface water sources. The customof low pricing for water, which impedes costrecovery and encourages consumption.Possibilities: Dedicated State or local revenuefunds to allow renovation and regular preven-tive maintenance. Raising rates to recover fullservice costs. Policies and pricing to managesupply and demand. Separating residentialdrinking water and outside water supplies.Treatment technology development.

Wastewater Treatment

Federal grants for wastewater facilities havedeclined from $6 billion in 1980 to $2.4 billion in1988 (see table 1-2) and will continue to drop ascapital grant programs are eliminated. To help fillthe revenue gap, State and local capital spending forwastewater treatment rose from $2.3 billion in 1980to $4.1 billion in 1987. However, a major shortfallin capital investment continues; at least two largecities, Boston and New York, deferred constructionof major sewage treatment facilities for most of the1980s.

More impressive have been increasesin expendi-tures at State and local level for operation andmaintenance, which climbed from $4.6 billion in1980 to $6.8 billion in 1987.32 For many years, someStates have provided general fund appropriations orbond funds for local wastewater improvements, butlocal governments have paid the major share of costsfor sewage treatment facilities with Federal grants,user fees, and general taxes. In 1987, user feesaccounted for between 40 and 70 percent of publicexpenditures for wastewater treatment, dependingon the region.33

The potential to raise user fees to cover neededcapital investment (in addition to operating ex-penses) is problematic depending on economicconditions of the community and State. Growing,

affluent districts will be able to increase fees, butsmall towns and older cities with stable or decliningpopulations will find it hard to raise rates thenecessary 100 percent or more (see table 1-4). Thesejurisdictions may not be able to support full capitalcosts, even though wastewater charges are lowcompared to those for other utilities.

Federal tax and regulatory policy has a majorimpact on wastewater treatment. The tax reforms inthe 1980s discouraged private investment capital,and new Federal regulations will require manycommunities to upgrade their facilities. The benefitsof wastewater treatment improvements include thehealth of the general public, the convenience andwell-being of individual users, and commercial andindustrial establishments, and protection of theNation’s water resources.

Problem areas: Small communities that cannotbenefit from economies of size and have lowper-capita incomes. Communities where Fed-eral standards disallow natural water (watersources in some regions contain more radonthan allowed by EPA, for example). Oldercities with obsolete pipes and facilities andinsufficient revenues to rebuild or begin pre-ventive maintenance. Low level of technicalexpertise of many operating personnel. Inade-quate research into new technologies and lim-ited access to existing advanced technologies.Possibilities: Higher user fees. Regional plan-ning and consolidation or sharing of facilities.Federal or State funds targeted at specificproblem areas in the form of grants or low-interest loans and technical support. DedicatedFederal or State revenue support for capitalneeds.

Municipal Solid Waste

Traditionally, the management of solid waste hasbeen the responsibility of local government, but theprivate sector plays a major role in collection,disposal, and operation of the Nation’s 6,000 munic-ipal landfills, in operating incinerators, and inprocessing recyclable materials. About two-thirds ofall solid waste management expenditures are madeby private firms, which recover costs throughcharges. 34 However, during the 1980s State and

32- ~Inc., op. d.. founotc 11.33- op. Ck, footxnC 2s, p. 14.3%tioMI COtmcil 00 FubIic W* Impfovancmt, op. cit., footnote 17, p. 78.


ti

local capital expenditures for solid waste more thandoubled, reaching almost $1 billion in 1987.35 Localservice is financed by local taxes and by disposalfees, which have increased dramatically during thelast decade.36 Capital expenditures are usuallyfinanced by bonds or through commercial loans.

The Federal Government does not finance solidwaste facilities with the exception of limited outlaysto rural areas. States have enforcement authorityover landfill compliance with Federal criteria, whichhave become increasingly stringent since passage ofthe Resource Conservation and Recovery Act in1976 and its 1984 amendments. The requirementshave caused bitter struggles over siting and openingnew landfills and have forced existing ones toclose.37

●

●

Problem areas: Urban areas without accessiblelandfill sites and small, rural communities thatcannot physically or financially meet Federalcriteria. Metropolitan areas where citizen oppo-sition prevents siting of incinerators orlandfills. Lack of manufacturing capacity forcertain recycled materials, such as newsprintand plastics, and small market demand forsome recycled products.Possibilities: Federal, State, and local policiesto encourage waste reduction and recycling;State support of regional cooperation to pro-mote joint use of existing and new facilities;adoption of known improvements in incinera-tion and landfill technology; public education.

PRESERVING THEENVIRONMENT

Environmental problems represent an excruciat-ing modern dilemma the need for better stewardshipof our air, water, and land resources has becomecritical due to many of the very practices that havehelped our Nation grow and flourish. Land use andtransportation patterns that fostered economic de-velopment and personal mobility in the past nowembody environmental issues that will requirechanges beyond our current ability to conceive inindustry operations and personal living and travelhabits. State and local officials in major urban andhigh-growth areas understand that congested high-

ways and airports, substandard air quality, andinadequate solid waste and wastewater facilitiesmake them less attractive to business. However, thechanges needed to resolve the issues are so difficultand far reaching that they cannot be understood,developed, or implemented quickly, easily, or inex-pensively.

Moreover, Federal policies and programs providefew tools for State and local governments to use inmanaging the interactions between transportationmodes and environmental media Both Congress andthe executive branch oversee individual environ-mental and transportation modes (e.g., air and waterquality, mass transit, highways, railroads) throughdozens of committees, separate Cabinet depart-ments, and a score of separate agencies. (See chapter2 for further discussion.) Competition for policysupport and revenue among these Federal agenciesand State and local governments is characteristic ofour governmental system; each industry interestunderstands this competition well and pursues itsgoals accordingly. Often the result is Federal pro-grams that are ad hoc and haphazard.

Fragmented responsibility, strong opposing fac-tions, and a focus on individual programs have ledto failure by the Federal Government to modernizeobsolete management of transportation and environ-mental programs. For example, an airport official ina city with air pollution problems, who is seekingFederal assistance with multimodal ground access,would need to contact five separate Federal agen-cies. Local officials needing funding aid for waste-water treatment plants (like the mayor described inbox l-A) are frustrated by Federal agencies thatwork at cross purposes. Air quality standards arecurrently such potent forces in public policy andtransportation discussions in large cities from south-ern California to New England that regional curbs onindividual transportation choices long taken forgranted are under serious consideration. Protectionof ground water and transportation needs dominatethe public agenda for land-use planning and realestate development in Florida. The scale of theenvironmental agenda is daunting-just to maintaincurrent levels of compliance with environmentalstandards will require additional local spending

I

21-667 - 90 - 2 : L?L 3

estimated at $15.8 billion annually by the year2000.38 These local and regional issues are inter-related and so difficult that more comprehensive,systems-oriented, Federal program managementand support will be needed if the problems are tobe resolved.

funding has been directed through categorical grantsto spur economic development as a way of meetingspecial needs, but not much consideration was givento the environmental consequences of the develop-ment. Specific groups, such as the unemployed orfarmers; or resource-poor regions, such as Appa-lachia, decayed urban cores, or the arid Southwest,were targeted for Federal assistance. Beginning inthe 1960s, the Federal Government varied thepackaging for Federal funding, moving from tightlystructured categorical grants, through loosely boundblock grants, to lump-sum revenue sharing. Eachgrant structure has its political and public-policytrade-offs. State and local governments particularlyappreciated revenue sharing, as it gave them theindependence to use funds to meet their ownpriorities.

Congress, however, appears to believe that politi-cal and policy goals are better served by categoricalgrants. These grants permit the Federal Governmentto target special goals such as highway construction,or to require fair labor and safety practices andenvironmental assessments, to cite only a fewexamples, as a condition for receiving Federaldollars. Categorical grant requirements can be im-portant national policy tools, although they do addcosts to projects. Preserving them also enablessenior congressional members to continue to pro-vide funds directly for specific, home district pro-jects. These projects may or may not match thepriorities for funding set by groups established toanalyze system needs.39 For further discussion, seechapter 2.

The wide variation in economic capabilities andtax effort among States and local governments

virtually ensures that some districts, especiallysmall, rural communities, island territories,40 andlarge, urban areas, will not have the necessaryresources to upgrade environmental services. More-over, they have much more difficulty undertakingeconomic development programs, because manycannot afford to offer tax breaks or infrastructureupgrades to attract a new business or industry.Inflexible Federal grant conditions and standards area major frustration to State and local managers. Arequirement to remove from a water supply sub-stances added to purify it in the first place is bafflingto local officials, and finding an acceptable alterna-tive can be difficult.41 The Federal challenge is todevelop standards that consider local conditionsand health risks, that implement national publichealth and safety goals, and that maintain ac-countability.

Government officials at every level find the lureof economic development compelling, and localgrowth has been the major driving force for mostpublic works infrastructure construction. Rural com-munities and economically distressed cities oftenfocus on attracting industry, overlooking the costs ofproviding transportation infrastructure and environ-mental services to support new growth. Once thesecosts are calculated, areas experiencing rapid growthcan levy impact fees on development to fundinfrastructure; officials in small communities andlarge, older cities that are losing population do nothave that option.

However, even when funding is available, majorurban jurisdictions find that transportation decisionshave environmental impacts or constraints that limittheir options. Examples include the lack of availableland for constructing new highways or disposing ofsolid waste in congested urban areas, noise problemsthat hinder airport expansion and construction, andtraffic-related air quality problems.

Southern California’s preliminary air quality con-trol plan, which proposes banning outdoor barbecu-ing and curtailing truck operations during rush hour

3~.so * ~MI Protectih July 1989), p. 2.Wed H. Dicid, prcsidmt andchicf executive officer, Ingram Barge Lines, and member, Watcmay Users Board, pcmonal communication Oct. 18,

1989.qarolyn Imamtnz “Building Foundau “ens: A Pacific Island Rrspcctive,” draft background paper prepared for the Pacific Basin Development

c-u? ~ 1989* P. 141- _ ~f~ of CDVirOnmatal engineering, Hand University, personal communication, Sept. 13, 1989. Tbc SUJXWDCC in question is

chhx’k.


,

I

,

or requiring them to operate at night, indicates thesteps local governments are contemplating to com-bat air pollution. Traffic congestion in the area isacute almost around the clock; a one-way commuteon the freeways can take 2 hours on a bad day. Yetmany businesses in southern California, a rapidlydeveloping transportation hub, depend on trucktransport. A number of such companies find unac-ceptable the noise problems and costs of keepingtheir loading facilities open at night to accommodatedeliveries.42

In every jurisdiction facing air quality or equallydifficult and interrelated environmental and infra-structure issues, alternatives must be examinedclosely and decisions reached through consultationwhere possible and negotiation where necessary.The process will inevitably be lengthy and excruci-atingly difficult; one participant in the Californiadiscussions compared the experience to being” . . .strung up in wet clothes on a cold, windy day."43

Transportation and environmental issues are in-terrelated in complex ways, and managing themrequires good information, careful planning andbudgeting, evaluating and monitoring impacts, andthe flexibility to devise alternative solutions asunforeseen events unfold. Transportation, environ-mental, and land-use problems are all multifaceted,and changes in one have major and complicatedimpacts on the others. Yet few government pro-grams, Federal, State, or local, support or lead tosystematic solutions that utilize the multimodaltransportation resources available and that are suffi-ciently sensitive to environmental impacts.

Traffic congestion, air quality, and water supplyproblems do not respect local boundaries; they areregional issues. Regional planning organizationsare the most logical institutions to address theseissues, but OTA found that such groups arealmost universally underfunded and lacking inauthority to prepare and implement plans tied tocapital budgets. Because of their institutionalweaknesses, regional planning agencies are highlydependent on the talents of individual personnel andhave little political clout. (See chapters 3 and 4 forfurther details.)

Photo credit: Thomas Burke

Downtown Los Angeles continues to grow, attracting newbusinesses and revenue, compounding traffic congestion

and air quality problems, and highlighting the urbandifficulties that accompany weak regional planning.

Although planning agencies are able to generateincome by charging for some services, the revenueis insufficient to allow them to maintain core staffand support their technical and service capabilities.However, many of the Federal programs that to-gether funded the necessary overhead for regionalplanning agencies have been eliminated, and only afew States provide any substantial support. Cuts inplanning funds from Federal housing and environ-mental programs have left transportation monies asthe primary Federal underpinning for regional plan-ning. Lack of Federal finding support for envi-ronmental planning is a major concern, and newFederal regulations have escalated the need forgood planning. Regional agencies have demon-strated some aptitude and success in this area. Forexample, in 1988, Maricopa County, Arizona,adopted a new air pollution control plan, and sincethen the State legislature has adopted four of the fivepriority recommendations of the Maricopa Associa-tion of Governments’ plan.44 Because of localgovernment revenue shortages and their reluc-tance to share planning, decisionmaking, andbudgetary powers with neighboring jurisdic-tions, Federal and State government leadership

and perhaps funding will be necessary if regionalplanning activities are to be effective.

In most areas of environmental infrastructure andmany in transportation, the Federal role is primarilythat of regulator. Federal enforcement powers andshrinking Federal program funds place strong con-flicting pressures on State and local public worksproviders. While these officials understand the needto meet Federal health and safety standards, manylack the technical expertise and management toolsfor collecting data to assess needs, develop plans,and choose appropriate technologies to meet Federalrequirements. These problems exacerbate the diffi-culties of making cost-effective decisions.

Advanced technologies can provide some relieffor a variety of environmental problems, includingair pollution caused by traffic congestion in urbanareas.45 Technological and management alternativesto new construction can increase the capacity ofexisting highways. However, all the new technolo-gies now under development will not eliminatethe need for more effective land-use planning andpersonnel trained to use, operate, and maintainavailable equipment and facilities. Investment inbetter management tools could enable local govern-ments to link comprehensive land-use plans tocapital improvement programs and to affect demandby pricing services according to costs. More flexibil-ity in Federal grants will be necessary for jurisdic-tions to use such monies to support investment inupgraded management tools and personnel trainedto use them.

CONCLUSIONSIf owners of highways, transit, and water treat-

ment systems could charge tolls and fees highenough to cover full capital and operating costs andmake a profit besides, transit systems would be assought after as are airlines, and investors would findtoll highways and water treatment facilities as goodan investment as the gas company. But this is not thecase; to make a profit and meet Federal standards,owners would have to set charges and fees so highas to be politically unpalatable and a hardship formany. Although their economic, social, and healthbenefits are indisputable, most public works servicesthat are the responsibilities of local governments are

not sufficiently lucrative to be attractive to privateinvestors. Accordingly, Federal, State, and localgovernments are likely to continue to subsidize mostroads, ports, airports, public transit, and environ-mental services, such as wastewater treatmentplants, with public tax dollars. All levels of govern-ment will inevitably have to raise taxes or fees tocover their costs, however--or they will have toeliminate or reduce programs and services.

OTA found widespread agreement on the needto maintain and upgrade public works and toincrease support for infrastructure. Yet for theforeseeable future, Federal spending will probablyfocus on social programs, such as Medicare; ondefense (although this is likely to decline slowly);and on servicing the national debt. Consequently,State and local governments must continue tofinance a larger share of their public works needswith their own revenues-general and dedicatedtaxes, fees, and benefit charges-and where feasible,with private sector partners. Each of the revenuesources has political, fiscal, and policy trade-offs(summarized in table 1-8).

Because property taxes have reached levels thatburden low- or fixed-income homeowners in manyareas, State and local governments need to giveserious consideration to other broad-based incomepossibilities. OTA finds that benefit charges andearmarked taxes have proven to be relativelyreliable and politically acceptable revenuesources. Many State and local governments havesuccessfully increased the levels of these chargesand taxes for specified, top-priority public worksprojects. However, approval at the ballot box doesnot come easily, and funding programs often must besubmitted to the voters more than once. Strong andcommitted political and community leadership,persistence, and a good public information pro-gram are key ingredients for success in efforts toincrease State and local revenues (see chapters 3and 4 for examples).

When the State or locality has made a clearconnection between the benefits and the tax or usercharge, as is easy to do with fuel taxes and surfacetransportation improvements, voters are much morelikely to approve a finding package. Because theFederal Government provides approximately 24

4W.S. Congrc.s Office of Tcchnoiog.y Asscssmcn& op. cit., footnote 23.

.-.


Table 1-8--Major Infrastructure Financing Mechanisms: Advantages and Disadvantages

Advantages DisadvantagesGeneral fund appropriation . .

General obligation bonds . . . .

Revenue bonds . . . . . . . . . . . .

State gas tax . . . . . . . . . . . . . .

Other dedicated taxes . . . . . .

State revolving funds . . . . . . .pendence in project selectionFiscal: debt service requirements provide incen-tives for charging full cost for services; loans canleverage other sources of funds; loan repay-ments provide capital for new loans

SOURCE: Offioa of Toohnobgy kseasment, 1990.

percent of total national highway expenditures,46

raising the Federal fuel taxes could provide funds fora major boost to transportation infrastructure. In-creases in the taxes are less likely to encounteropposition from large and powerful transport andconstruction industry interests if the revenues aretargeted for transportation improvements.

The long history of substantial intergovernmentalcost-sharing for transportation contrasted to thepresent uncertainties over funding for environmentalinfrastructure highlights the importance of consis-tent Federal support (see table 1-9). While officialsare disenchanted with the snail’s pace of expendi-tures from the airport and highway trust funds, nonedeny that without these funds, our transportationnetwork would be in even worse condition.

In contrast, chances are good that finding diffi-culties will force a number of local jurisdictions to

seek waivers or be unable to meet the costs ofcompliance with Federal environmental standardsunless additional assistance is forthcoming. Theneeds for environmental services in communitiesacross the country are huge; a stable Federal revenuesource would provide assistance to State and localgovernments struggling with environmental issuesthat often extend beyond jurisdictional boundaries.OTA concludes that a strong case can be made fora dedicated source of revenue to bolster localenvironmental program funding. This is espe-cially important for the Federal Government toconsider if it wishes localities to meet its timetablefor compliance with newly enacted standards. Aportion of the monies could be used for enhancingEPA’s technical capabilities, but the bulk is neededfor States to use to provide financial and technicalassistance to local jurisdictions.

*FH ~g&q Administration, op. cit., footnote 14, p. 4.

J

Table 1-9--Current Sources of Capital for Local Public Works

Sources of revenue-relative share is indicated by one, two, or three stars (*), with three stars (***) signifying the largest.

e* * f

* * *** * *

** * *

* * **

**

* **

***

i

* * * ** * ** * * *

* * **

SOURCE: Offb of Ttinobgy

1

I

Attractive though they may be, benefit chargesand private sector strategies frequently are notworkable for low-growth districts or small, ruralcommunities where investment of private capital isunlikely to pay off, credit costs are high, andresidents have limited ability to pay higher user fees.In many of these communities, the major issue ishow to maintain existing levels of services, muchless improve them to Federal standards.

Moreover, user fees and benefit charges havesocioeconomic trade-offs that pose complex practi-cal and public policy issues. These include equityand administrative issues, and revenue reliability inthe case of an economic slowdown, a politicalbacklash, or real hardship. The fairness of requiringa new resident to pay up front for infrastructurethrough higher land prices compared to long-timeresidents who paid gradually through property taxesis one issue. Setting and administering fees so theyare not an excessive burden on the poor, determiningaccurately the full costs of public services andallocating costs among direct and indirect benefici-aries pose other complex problems. Services likepublic transportation and wastewater treatment also

benefit people who do not use them directly, makingit unfair to depend solely on user fees and requiringhardy political leadership to raise taxes for them.Removing fiscal and land-use decisions from thepolitical process by establishing independent specialfinancing districts is a further concern. OTA con-cludes that while issues related to benefit chargesare difficult, they are not without solutions.Before embracing user fees as a major means ofpublic works financing, decisionmakers willwant to weigh and address each choice carefully.

Finally, OTA’s research for this document indi-cates that State and local public works problemscould be eased significantly if the Federal Govern-ment developed and implemented a national trans-portation policy and restructured transportation andenvironmental program management includingcongressional oversight.

Despite the interrelated nature of public worksinfrastructure, Federal-State-local relationships arestrongly tied to existing programs that limit thepotential for integration across infrastructure func-tions. For example, Federal subsidies for each of thetransportation modes are so different, and industry


and congressional turf battles so vigorous, thatmaking rational plans and decisions about the bestuse of our Nation’s multimodal transportation sys-tem is virtually impossible. State and local govern-ments must put together infrastructure improvementprograms in a manner currently distorted by out-dated Federal program management and conflictingtax policies. Local governments in small towns needtechnical assistance so that they can determine themost suitable type of wastewater treatment or solidwaste disposal facility for meeting both EPA stan-dards and their budget requirements. Current Fed-eral regulations and management of environmentalprograms do not allow for this flexibility.

Given the current Federal and intergovernmentalframework, it is unrealistic to expect that States willfired and administer transportation and environ-mental programs in a comprehensive and systematicmanner. Local governments are burdened withdifficult public works-related problems, most ofwhich extend beyond their borders and affect thesurrounding region as well. Moreover, regionaldifficulties often do not end at a State boundary. Itis time for the Federal and State Governments toacknowledge these broader aspects of publicworks and to create a coherent, supportivemanagement framework that includes adequatefinancing.

Photo credit: U.S. D epartment of Housing and Urban Development

Lower income families’ ability to pay must be considered insetting higher user fees.

Chapter 2

The Intergovernmental Framework

●

. .. .

CONTENTS

PUBLIC SERVICES-WHO PAID FOR WHAT AND HOW . . . . . . . . . . . . . . . . . . . . . . .The Depression **** .. b*. *.. ***. ***** *.*. *.** ***** ***. ***. .*. **a* *.** ***. ****0***Public Sector Expansion After World War II ... ** *. .*. .*** *b*. . b*..******..***Federal Grant Structure--Shifting Sands ..e. .*. ... .*** **. ... ... ***, ..*. o.**.**,.*

PUBLIC WORKS FUNDING AS THE 1990s BEGIN . . . . 0 . 4 ,0 . . . . . . . . . . . . . . . . . . . . . .FEDERAL REGULATORY POLICIES .O. ***. ... * * D . * . . . * . . + . * . * . . . . . . + . . . . . . . . . . .

Protecting the Environment . . . . . . . . ● .* . . . . *. . . ● , ● . ● . . . . . ● . . . . *. . . ● . ● ● . ● . ● . ● . ** ● . .Solid Waste ... ... .**. . ..*. ..*. ..o. ..o*. ..** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Transportation and Mobility ... . . . * . . * * . . . . * . . * * * . * * * * * * . * . * . . * * * * . . * * * .**.**...

INDUSTRY Perspective ..** **. *.. ..** ... **. .*. **.0**.*.*****....*.*.....****.*INTERGOVERNMENTAL ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Federal Fiscal Policies ... .*. *.o. ..*. .*. *.. ..*. .*o*. ..*o*. ... *.*. ..** ... o.e. *.. o. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CONCLUSIONS .e. *.. .*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3536373840414345464849495252

2-1. Deficient Bridges and Interstate Miles on the Federal Aid System, 1988 . . . . . . . . . 37

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362-3. Federal Grants to State and Local Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 412-4. Federal Infrastructure Expenditures, 1980-88 . .**...-*****.*..*.*,**.,*...,***. 42

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Chapter 2

The Intergovernmental Framework

The changing fiscal fortunes of the national government now stand out as the single mostimportant factor reshaping relations between Washington and the 50 State-1ocal systems. Ithas transformed the expansive Great Society Federalism of the 1960s into the fairly austereand competitive fend-for-yourselffederalism of the 1980s.1

Financing for public works, a major factor in howStates and localities manage these services, isprofoundly affected by Federal policies. For manyyears, Federal funds have been an indispensable partof the capital financing packages for ports, water-ways, highways, and bridges, and more recently fortransit systems, airports, and wastewater treatmentand water supply plants in every State and mostjurisdictions in the United States. Federal tax policyaffects the cost of capital for State and local projects,Federal regulations determine performance anddesign standards for public works facilities, andFederal grant conditions influence how the planningand construction are carried out.

Although the Constitution provides the basis fora Federal role in public works services, which arefundamentally State or local in nature (see table 2-l),it does not draw clear lines between Federal respon-sibilities and those of States and localities. Becauseof these interdependent relationships, States andlocalities have had to readjust their own publicworks management continuously, as national eco-nomic conditions and Federal policies have changedover the years. During the past decade, shifts innational priorities and severe budget constraintshave curtailed Federal spending for public works,left large unspent balances (see table 2-2) inuser-funded transportation trust funds, and placedmore responsibility on State governments to in-crease local spending on public works improve-ments. As if this fiscal upheaval were not enough,environmental concerns have also prompted morestringent Federal mandates and standards for publichealth-related facilities, and much of the transporta-tion infrastructure has been found to need extensiverepair or renewal. (See figures 2-1 and 2-2.)

The realignment in governmental roles that hasresulted has been both wrenching and painful. State

and local governments confront huge, unexpectedfunding requirements for public works services and,although they have increased spending, have notbeen able to put funding packages together fastenough to meet infrastructure needs. AlthoughCongress has acted to cut back Federal funding,members are unwilling to relinquish totally theirright to allocate funds for local programs. StrongFederal-local partnerships forged during the 1960sand 1970s have been weakened somewhat, to thedistress of local officials who often feel ignored byState administrations and prefer to maintain a directlink to Washington.2

Thus, tensions are high among State officials overthe reduced levels of Federal program funding andtheir increased responsibilities, while local govern-ments--large cities and counties and small ruralcommunities, alike--fight to keep their Federalconnections in addition to developing new ties totheir State governments. How to ensure adequateinvestment in public works for long-term mainte-nance, repair, rehabilitation, as well as new con-struction, in such a contentious climate involvescrucial and difficult intergovernmental issues.

PUBLIC SERVICES—WHO PAIDFOR WHAT AND HOW

Until about 1900, local governments were thedominant providers of all governmental services,including public works-except for waterways,which have always been constructed, operated, andmaintained by the Federal Government. Local gov-ernments accounted for 71 percent of total generalgovernment expenditures, with Federal spendingrepresenting 18 percent of the total, and Statesproviding the remaining 11 percent.3 Almost allFederal revenue came from consumption taxes; incontrast, over 50 percent of State revenue came from

IJotm sh~~, former ex~utivc director, Adviso~ Commission on Intcrgovermnental Relations, as quoted iII NOrTXNM Bcckm~. “wvclopmmt:in Federal-State Rclati~” KY: ‘ltIc Council of State Governm ems, 1989), p. 438.

2JOhII Gunyou, city f~ offlccr, Minneapolis, MN, in U.S. Congres, Offlee of Technology Assessment, ‘%anscnpt of Proceedings — StatSnd bcal Infrestructure Management and Financing Workshop,” Jdy 7, 1989, p. 189.

3J0 ~~~ ~ and John L. Hilley, (Washington, DC: The Brookings Institution, 1986), pp.

-3s-

—.

Table 2-1--Public Works Spending by Level of Government (in percent)

Table 2-2--Federal Public Works Trust FundSummary, 1988 (dollars in millions)

and by 1927 income taxes accounted for 64 percentof Federal tax revenue.

Trust Fund Revenues Outlays (end of year)

property taxes, as did 90 percent of local revenues.Early in this century, beginning an emphasis stillimportant today, Federal funds were provided toassist developing rural and agricultural areas, whererevenue sources were scarce. For example, theBureau of Reclamation was established in 1902 toencourage agricultural expansion, and the Rural PostRoads Act of 1916 funded roads across sparselysettled Western States. Although needs have longsince changed, the influence of these policies stilllingers.

Spending by all levels of government grewrapidly through the 1920s. Although the relativeshares provided by each governmental level re-mained about the same, the structure and composi-tion of taxes changed markedly. For example, in1902, revenue from income taxation was so smallthat government records did not tabulate it sepa-rately. However, by 1920 the Federal Governmentlevied taxes on both personal and corporate income,

Recovering from diminished prestige and author-ity after the Civil War and Reconstruction, Stategovernments slowly began to expand their supportfor public works in the first three decades of the 20thcentury. Although still not major players, Statesincreased their revenues during the 1920s by intro-ducing personal income taxes.4 By 1930, 16 Statestaxed individual incomes; 17 taxed corporate in-comes.5 Relinquishing property taxes as a revenuesource to local governments, States gradually intro-duced excise taxes on motor fuels and cigarettes.Local governments continued to rely solely on theproperty tax, their primary source of income to thisday.

The Depression dramatically altered the Federal-State-local relationship, ultimately expanding theFederal role. Property values and tax revenueplummeted, depriving local governments, the steadyproviders of public services, of their major source ofincome. They could not borrow, because banks hadgone out of business, and eventually simply ran outof money.6 Because State governments did not havethe resources or the programs to help, the FederalGovernment stepped in, beginning with emergencyprograms. Eventually, an extensive system of Fed-eral public assistance grants and other supportprograms developed. Although some of these wereentirely federally funded, many required a Statematch.

41bid, p. 17.sA&* commission on hkrgmmmmtal Relations, 19S9 cd., vol. 1 (Washingtm, DC: January

19s9), p. 114.6Arcmstm and Hilky, op. CIL, footnote 3, p. 18.

Chapter 2—The Intergovernmental Framework ● 37

Figure 2-1--Deficient Bridges and Interstate Miles on the Federal Aid System, 1988

l_-

To muster additional revenue during the Depres-sion years, States expanded their use of general salesand other selected taxes. Between 1931 and 1938,24States introduced general sales taxes, and 29 Statesput excise taxes on liquor.7 During this period, somepolitical scientists criticized State governments asobsolete and called for scrapping them, except asadministrative centers for the Federal Government.8

They cited the inability of the States to deal with thebroad economic problems of the Depression and theinefficiency of providing programs and services ona State by State basis.

State and local spending declined during WorldWar II but rebounded during the immediate postwarera, as governments turned to addressing deferredpublic works needs. For a while, the fiscal climatewas good; revenues were adequate because propertyvalues increased, and interest rates hit new lows.9

From 1950 to the mid-1970s, State and local

spending grew rapidly; expenditures increased from$30.7 billion in 1954 to $108.8 billion by 1975.10

During 2 years (1965-67) of the Johnson administra-tion, Congress increased the number of Federal grantprograms from 221 to 379, expanding social andhealth programs to address major societal prob-lems.ll

The enlarged Federal presence reignited debateover the role and structure of State governments. In1955, a Federal study by the Kestnbaum Commis-sion recommended major reforms in State govern-ment, including revising State constitutions andreorganizing legislatures and procedures. The Com-mission found that State Governors’ authority wasundermined by numerous independent agencies andboards, the election of many administrative officers,and weak executive influence over budgets. Inaddition, State legislatures had restricted their ownpowers by enacting limits on their ability to tax andborrow and by earmarking revenue.

cm op. cit., footnote 5, pp. 114-115. op. cit., footnote 3, p. 18. 19.

p. 21. p. 72.

Figure 2-2--Wastewater Treatment Facility Needs, 1988

1

During the next two decades, most States revised

and legislative procedures to strengthen the execu- Traditionally, most Federal grants and aid havetive authority. In 1981, the Advisory Commission on been for specific categories of projects as defined byIntergovernmental Relations, a permanent agencyFederal legislation, such as the construction ofestablished as a successor to the Kestnbaum Com-airports, transit systems, dams, locks, or highways.mission, reported that as a result of the reforms, mostStates and localities serve as conduits for FederalStates had improved their government systems.12 funds targeted at these categories, and projects must


By funding projects such as construction of local roads, the Federal Government provided both employment and transportationimprovements during the Depression.

comply with many conditions and regulations,including matching funds, to be eligible for grants.

Congress finds categorical grants attractive be-cause they permit channeling Federal funds to homedistrict projects, allow close control over the use ofFederal funds, and minimizeState governmentinterference.13 In contrast, State and local govern-ments view categorical grant requirements as nar-row, restrictive, and hard to adapt to specific needs.While some grant requirements are specific to aparticular program, most are general and apply to allFederal construction grants. Among those that havethe greatest impact on State and local governmentpublic works projects are requirements to:

● conduct an environmental impact study prior toproject construction,

●

●

●

●

pay construction workers the “prevailingwages” in the area,provide opportunities for citizen participation,provide relocation assistance for people andbusinesses displaced by projects, andinitiate intergovernmental consultation con-cerning project planning.

In the 1960s and 1970s, however, the structure ofsome Federal grants to State and local governmentschanged.

Block Grants

In response to criticisms of categorical grantsduring the 1960s, Congress consolidated some ofthem into block grants, dedicating these to broad,public purposes, such as the revitalization of cities,which included public works projects. Some block

programs--Urban Development Action Grants, forexample-were established specifically to enhancethe autonomy of local governments, bypassing theStates and providing funds directly to local projects.Block grants generally did not require matchingfunds and, instead, were allocated by formulas basedon measures of need. They gave project selectionand administrative responsibility to the local districtor the State, although they retained many of therestrictions of categorical grants.14

Block grants continued during the 1970s, butFederal review and oversight increased, as Congresssought to ensure that all State and local projects meeta variety of policy objectives, such as transportationand environmental planning, environmental impactassessment, equal employment opportunity, or re-

quirements to “Buy America.”.

Revenue Sharing

In another attempt to support local needs with lessFederal interference, the Nixon administration intro-duced revenue sharing in 1972. The program allo-cated unrestricted Federal funds to States andlocalities without a match requirement. The fundscould be used for any type of government programor project and were distributed by formulas designedto reflect population, local tax effort, and Statewealth, and were intended to funnel more Federalfunds to poor, heavily taxed States than to richerStates. (For a comparison of the Federal dollars percapita received by each State and the amountreturned through taxes, see appendix A.)

Although block grants and revenue sharingplayed an important role in Federal policy from 1960to the 1980s and funded many local infrastructureprojects, they did not have strong congressionalsupport and did not grow as rapidly as categoricalgrants. Moreover, broad-based grant programs lackthe influential industry support groups, such as therailroad, highway, and aviation lobbies, that categor-ical grants and trust fund programs enjoy. Thesefactors took their toll; block grants and revenuesharing, which amounted to 27 percent of all Federalgrants in 1979, declined to 21 percent in 1983.15

Revenue sharing with the States was cut off in 1980

and ended for cities in 1986, as part of the Reaganadministration’s policies of shifting local programcosts to the States and establishing the concept ofuser-supported trust funds as the basic Federalrevenue supply for infrastructure.

The Reagan administration briefly revitalized theblock grant concept during the early 1980s byconsolidating additional categorical grants, andseveral of the block grants persist. However, mostFederal grants are once again categorical, continuingt o f o c u s p -ly on new construction, despitemajor rehabilitation and maintenance deficits, andretaining elements of their initial underlying Federalgoals, regardless of the relevance to current needsand conditions.

Pursuing its goal of reduced Federal domesticspending, the Reagan administration successfullyreversed the growth trend in Federal grants to Stateand local governments (see table 2-3). Between1980 and 1989, Federal grants to State and localgovernments for all programs, excluding paymentsto individuals, dropped from $68 billion to $42billion, when adjusted for inflation.l6

PUBLIC WORKS FUNDINGAS THE 1990s BEGIN

The share of Federal, State, and local governmentbudgets devoted to public works dropped from 12percent to below 7 percent between 1960 and 1987,17

and capital investment decreased markedly, relativeto the gross national product (GNP) (see figure 2-3).During the 1980s, annual capital expenditures inadjusted dollars stayed relatively flat, fluctuatingbetween $40 billion and $50 billion annually-wellbelow the pace of national economic growth.18 Stateand local governments substantially increased reve-nue-raising efforts, permitting outlays for main-tenance and operations to keep pace with GNP.However, when adjusted for inflation, total Federalspending for public works, capital, maintenance, andoperations dropped from $37 billion to $29 billionbetween 1980 and 1988. (See table 2-4, part B.)

The decreased share of public spending allocatedto infrastructure reflects a shift in national priorities

14~id

l%id, p. W.Wff@ of Maml&=nt and Budget, B@et qfthc hiStiCd tablq pp. 128 and 130.17- Rc9ea@ Inc., database derived from Us. Dcpalunult of canma’w, Bureau of the Censu& and Office of Mana&mcnt and Budget.l%id

Table 2-3--Federal Grants to State and LocalGovernments (adjusted 1982 dollars, in billions)

Y e a r Amount

that has brought significantly higher governmentalexpenditures for social programs. Currently, Stateand local governments spend 29 percent of theirFederal grant monies on health care, a dramatic risefrom 3 percent in 1960. In comparison, 15 percent ofcurrent Federal grant funds are directed to transpor-tation compared to 43 percent in 1960.19

Even though Federal public works expenditures,when adjusted for inflation, have decreased duringthe 1980s, Federal grants are crucial to State andlocal governments, financing 40 to 50 percent oftheir annual capital spending (see figure 2-4). Theshare of Federal funds spent on transportation hasgrown significantly compared to water supply andwastewater treatment programs, thanks primarily toconstant replenishment of the highway, aviation,and inland waterway user-supported trust funds. In1980, 80 percent of Federal infrastructure outlayswere directed to transportation programs, and 20percent to water and water treatment projects. In1988, transportation’s share was 90 percent with 10percent going to water projects (see table 2-4). The60 percent reduction in adjusted Federal spendingfor wastewater treatment from $6 billion in 1980 to$2.4 billion in 1988, reflects Federal policy, estab-lished with the Clean Water Act of 1972, to provideconstruction grants for wastewater treatment plantstemporarily as abridge to local self-sufficiency. Thephasing out of Federal investment in water supply,while never large, conforms with the traditionalconvention of local responsibility for water supply.

FEDERAL REGULATORYPOLICIES

Through its regulatory standard-setting powers,the Federal Government has a major impact on State

Figure 2-3-Public Works Spending as Percent ofGross National Product

, Percent —I

60

50

40

30

20

10

060 63 65 67 69 71 73 75 77 79 81 83 85 87

F i s c a l y e a r s

SOURCE: Office of Technology Assessment, 1990, based on informationprovided by Apogee Research, Inc.

and local public works projects. Congress, with itslegislative and oversight responsibilities, and theexecutive branch, primarily the Department ofTransportation (DOT) and the Environmental Pro-tection Agency (EPA), Meet virtually every aspectof State and local transportation and environmentalpublic works activities. State and local officialsconsulted by OTA for this study did not question thenecessity for Federal regulations governing environ-mental quality and protecting public health and

of Budget, op. ciL, footnote pp. 248.

. . . . . .w. . . . . . .. . . . . .. . . . .. . . . .%

. . . . . .

. . . . .. . . . . %3

Chapter 2—The Intergovernmental Framework ● 4 3

safety. However, they criticized the unfunded regu-latory mandates written into recent legislation andthe requirements attached to categorical grants,which, they maintain, create planning, administra-tive, and financing problems. (For further discus-sion, see chapters 3 and 4.) Moreover, while theywelcome Federal financial aid and reject sugges-tions to eliminate the transportation trust funds,many chafe at grant requirements, which they viewas encroachments on their governmental sover-eignty, and at large, unexpended trust fund balances.These intergovernmental issues have their roots inthe compromises hammered out between Congressand the executive branch as they established, andcontinue to change, the responsibilities of theFederal agencies over the years.

of the National Environmental ProtectionAct of 1%9 marked the start of a tempering of theFederal commitment to developing natural re-sources for economic purposes-a process that hasbeen evolving over the past three decades. In a recentexample, the Clean Water Act Amendments of 1987strengthened the commitment to environmentalprotection, expanding Federal jurisdiction to includeany body of water in or affecting the commercechain, with the intent of extending regulation ofnavigable waters to include wetlands. Such legisla-tion reinforces the tensions between the goals ofeconomic development and environmental qual-ity. These laws form a major intersecting pointfor Federal, State, and local transportation andenvironmental public works programs.

EPA is the Federal agency that has the largestimpact on public works services related to theenvironment and public health. The Agency wascreated in 1970 by an executive reorganizationorder20 that brought together functional branches ofthe Departments of Agriculture; Interior; andHealth, Education and Welfare; the Atomic EnergyCommission; and the Council on EnvironmentalQuality. However, the order did not include anofficial mandate. Caught between industry advo-cates and environmental activists, the Agency has

struggled, with little success, since its inception withthe need to make its programs reflect the interrelatednature of environmental problems. Federal environ-mental policies continue to target individual envi-ronmental media—air, water, and land-eventhough pollution control in one medium may have anadverse effect on another. This”. . .single mediumapproach is set up like concrete in the practicalday-today administrative operations of EPA. . ."21

and is further reflected in congressional committeestructure.

State environmental departments tend to mirrorthis media-related approach, leaving local govern-ments, which must resolve and pay for pollutionproblems-including those resulting from cross-media pollution-without adequate planning andtechnical support. As just one example, require-ments to control air pollutants at wastewater treat-ment facilities could create acidic conditions thatwould turn the concrete facilities to gypsum.22 Thehistory of Federal legislation highlights the frag-mented framework in which local public worksdirectors operate.

No, 3 of Thomas, “A Systems Approach: Challenge for EPA,” p. 21.

P. of technical “ Valley, CA, June 7, 1989,

i

Water Supply23

In the late 1960s and early 1970s, growingconcern over the purity of the Nation’s drinkingwater prompted Congress to pass the Safe DrinkingWater Act of 197424 as an amendment to the PublicHealth Service Act. The Act and its amendmentsrequire EPA to set standards for drinking waterquality; the States are to enforce them. All publicwater supply systems--whether publicly or pri-vately owned—are subject to the mandate.

Dissatisfied with EPA’s implementation of the1974 Act and faced with the threat of suits byenvironmental advocates, Congress enacted the SafeDrinking Water Act Amendments of 198625 tosimplify the EPA regulatory process, stiffen therequirements, and accelerate the pace for EPA toestablish and implement new National PrimaryDrinking Water Regulations. Congress specified 83contaminants for which EPA was required to prom-ulgate regulations by June 1989, and required that 25contaminants be added to the list every 3 years. The1986 Amendments also authorized continued, butrelatively small, grants to States and localities, aswell as new Federal assistance intended to helpsmall systems monitor for unregulated contaminantsand install disinfection equipment.

Wastewater Treatment26

With the Federal Water Pollution Control Act(Clean Water Act) of 1972,27 the Federal Govern-ment shouldered some of the responsibility forcontrolling water pollution for the first time. The Actrequired EPA to promulgate nationwide minimumstandards for municipal and industrial wastewatertreatment and authorized a marked increase in

Federal funding. The Federal matching rate for local.wastewater treatment construction costs grew from50 to 75 percent, and annual construction grantappropriations rose five-fold between 1972 and1977. From 1973 to 1988 Congress granted over $50billion to municipalities.28

The grants were not intended to be permanent, butrather as a bridge to help the localities towardself-sufficiency. Amendments in 1977, 1978, and1981 created more stringent rules for governingtoxic pollutants in wastewater, and Congress simul-taneously began returning to States and localities theresponsibility for water quality costs. The mostdramatic shift was signaled by the 1987 Clean WaterAct Amendments,29 which required that the munici-pal construction grants program be phased out by1991 and replaced by capitalization grants for StateRevolving Funds. In 1994, all Federal aid to Statesand localities for wastewater treatment facilityconstruction will end.

Clean Air30

By the 1950s, Congress had recognized that theitinerant nature of air pollution rendered efforts atState control insufficient, and in 1963 Congresspassed the first Clean Air Act.31 Amendmentspassed in 196732 enabled the Federal Government toset emission control standards in areas especiallytroubled by pollution and exercise limited enforce-ment powers. Amendments in 197033 authorized thenewly founded EPA to establish minimum airquality standards, specified deadlines for action, andempowered the Agency to take over if a State failedto meet the deadline.

~MM~ Safe ~“ g WatcrActandthc 1986 Amcndmuttsisbascd on Apogee Research, Inc. and Wate Miller Associat~ Inc., “Problemsin F~ing ad Managing Smalkr Public Works,” Report to the NAonal Council on Public Works Improvement, Sept. 10, 1987, pp. 5941; SidneyM. Books, 1988); and J. Gordon Arbuckket al., (Rockvilk, MD: Government histi~ Inc., 1987).

%lblic Law 93-523,88 stat. 1660.~~fic Law 99339, 100 stat. 642.~-d on Wastewater ueatment legislation is based on Claudia Copchmd, Congmssiod R- &mice, “Federal Ass&an cc for Wam and

%vvu Systcxm%” backgmmd bricfingpapcrm for Senate Agriculture Committee, Feb. ~ 198% Arbuckle et al., op. cit., footnote 23; and Wolf,op. cit., footnote 23.

%lbIic Law 92-s00, 86 stat. 816.~op. ci~* f~ 26, p. 2.Wllblic Law 1004,101 stat. 7.%fataial on ckut air kgidation is bad a Afbuckk et al., op. ciL, fooatotc 23, and wolf, q. cit., footnote 23.31~~ ~~ gg.~, 77 s-

%lbtiC hW 90148,81 Stat. 485.-tiC hW 91-604,84 Stat. 1676.


Photo credit: Department of

Special lanes for high occupancy vehicles (HOV), such as the center lanes pictured above, are one way States can demonstrate acommitment to enforcing the Clean Air Act.

Despite these legislative efforts, the control ofsome major pollutants, most notably ozone, hasfailed. With the Clean Air Act Amendments of1977,34 Congress strengthened EPA’s enforcementpowers, limited its discretion to authorize waivers tononattainment regions, and imposed new and tighterState planning requirements. Should a State fail tosubmit an acceptable clean air implementation plan,EPA may cut off Federal funds for highway andsewage treatment facility construction and air qual-ity control programs. EPA can waive sanctions andpenalties if it determines that a State is making agood faith compliance effort, lessening the burdenon States and localities. Congress is expected toreauthorize the Clean Air Act in 1990 and is likelyto include provisions calling for additional controlson mobile pollution sources, such as automobiles,trucks, and buses. Most States and localities may be

responsible for major changes in their urban trans-portation patterns as a result.

Solid

Congress enacted the Solid Waste Disposal Act in1965,35 the first Federal legislation to deal directlywith solid waste disposal. The goal was to create anational research and development program todetermine better solid waste disposal methods.36

Today, the main piece of Federal legislation govern-ing State management of solid waste is Subtitle D ofthe Resource Conservation and Recovery Act(RCRA) of 1976.37 RCRA was intended to improvemunicipal and industrial waste management bydiscouraging landfill disposal and encouraging re-source recovery technologies.38 The Act confersmost of the planning and regulatory responsibilityfor the disposal of solid waste on the States andprovides some financial assistance to rural commu-

79

of Facing OTA-()-424 DC:

U.S. Government Printing Office, October 1989), 348,

,

(

J

I

i

II

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11

I

nities. The Hazardous and Solid Waste Amendmentsof 198439 target hazardous waste management,encourage compliance of State solid waste planswith Federal guidelines, and give EPA the authorityto takeover the management of a State’s solid wastemanagement plan if implementation efforts areunacceptable. 40

Transportation laws developed historically toaddress specific defense and economic developmentneeds as each succeeding mode of transportation—water, rail, highway, and air--emerged. F e d e r a lprograms and congressional committee structureretain much of this special purpose and modalorientation, despite creation of the Department ofTransportation. DOT was formed to". . . coordinatethe executive functions of our transportation agen-cies in a single, coherent instrument of government. . . [to] strengthen the national economy as awhole.’** DOT ultimately came to house organiza-tions that had been independent (e.g., the FederalAviation Agency) as well as those previously a partof other departments (e.g., the Urban MassTransportation Administration).

From DOT's inception, Congress has favored themodal emphasis inherent in the Agency’s originalstructure, an approach supported by strong industryinterest groups. These powerful forces have so farstymied development of policies that would permitimplementation of a national transportation systemin which the modes work in a complementarymanner. This problem has not gone unrecognized bythe Federal Government. A congressional report in1977 pointed out that”. . . the fragmentation of thelaws which define national transportation goals . . .have dramatic impacts in conflicts between themajor promotional agencies within DOT. . . eachprogram proceeds more or less independently-with

predictable inefficient and counter-productive re-suits."42 The Secretary of Transportation, SamuelSkinner, is expected to unveil a strategic plan fortransportation early in 1990 that will attempt onceagain to address these issues.

State DOTs by and large reflect the Federal modalorganization and place a particular emphasis onhighways. The lack of Federal and State support fora systems approach to transportation creates specialdifficulties for local officials, who need technicaland funding assistance to facilitate the intermodaltransfers for people and goods that are an integralpart of any healthy economy. An airport executive,for example, asserted that he could find no where togo in DOT to seek help for the ground accessproblems his facility has.43 Legislative historyshows the grip of the different modes on evenpresent-day programs.

Highways 44

The Rural Post Roads Act of 191645 marked theFederal Government’s first foray into Federal high-way aid. The Federal commitment to the Nation’shighways deepened and broadened with the creationin 1941 of the Interstate and Defense HighwaySystem, and in 1956 of the Highway Trust Fund,46

which provided a dedicated source of funding.Through the 1960s, the Federal Government contin-ued to bear a large portion of highway capital costs,but left operations and maintenance costs to theStates and localities.

In 1976, Congress enacted legislation makingsome maintenance costs, as well as constructioncosts for highways, roads, and bridges, eligible forFederal funding. The new funds carried conditions,and new conditions have been added during severalannual appropriations processes. These include Fed-eral constraints on States’ rights to define road rules,

%lbtiC Law 98-616,98 Stat. 3221.-ffkz of Tcc&ology ku8snwm, op. cit., fcxxmuc 38, p. 350.41L~ B. j- ● - ~ & %bt of tbc United S-” in U.S. tiI@=& HOW= ~~= ~ @ unmtnt Opaatims

a

38-39.“ e U.S.

~.s. ~Sauuc committee m GOV cxnmcnml Affairs, Study on 156.

dungtoa x: Us.

Juiy 2S, 1989,%4ateriAI at highway legidathn ia bmd on Natianal Cmtudl on Public Works Improvement, FM@

Fcbruuy 1988); and American Tmqmtation Mvisory Cmmc.& New in

355.~o sm. 374.

. . . . . . , ..%W.

Despite badly deteriorating bridges, such as the onepictured here, Highway Trust Fund monies could

not be used for rehabilitation until 1982.

speed limits, drinking age, truck access to bothfederally and nonfederally funded roads, and otherpolicy issues. The Surface Transportation Assis-tance Act of 1982 (STAA) boosted the Federal gastax, authorized increased appropriations for resur-facing, and authorized appropriations out of theHighway Trust Fund for highway bridge replace-ment and rehabilitation. The STAA was reauthor-ized in 1987, and most previous conditions werecontinued.47

Mass Transit

Until the late 1960s, the private sector owned andoperated most of America’s mass transit systems. By1970, newly constructed highways, increased auto-mobile use, and sprawling suburbs had put manypublic transportation companies out of business.Local governments, knowing the importance of theservice, assumed an active role in supporting masstransit. Initially Federal aid was limited to discre-tionary project financing for States and localities.After 1970, the Federal Government expanded itssupport for transit, as mass transit systems weredeclared eligible for aid from the Highway Trust

Fund.48 New and non-urban systems, in addition toexisting systems, became eligible for Federal aid,and States were allowed to substitute transit projectsfor interstate highway projects they judged non-essential. Perhaps most important, the Federal Gov-ernment began to contribute to operating costs aswell; indeed, during the late 1970s, over 80 percentof Federal formula grants were used for operatingassistance.49 Though amendments to the STAA(Public Law 97-424) in 1983 gave mass transit itsfirst dedicated revenue source (a l-cent per gallonportion of the newly increased Federal gas tax), theFederal Government has generally retreated from itssupport for mass transit during the 1980s.

Airports

Since passing the Air Commerce Act of 1926,50

the Federal Government has steadily invested in theNation’s airports and airways. Between 1947 and1969 the Federal Government covered nearly one-half of airport construction costs.51 The 1970 Airportand Airway Development Act52 marked a majorexpansion of Federal support for aviation infrastruc-ture; Congress approved new fuel and passengerticket taxes, and other charges, and established theAirport and Airway Trust Fund. The Act lapsed in1980, in the wake of conflicts over suitable uses forTrust Fund money, but in 1982 Congress reauthor-ized the Trust Fund with the Airport and AirwayImprovement Act. Legislation in 1987 reauthorizedfunding for airport development and directed theSecretary of Transportation to develop a long-termcomprehensive airport system plan.

Ports and Waterways

Federal dominance of water resources develop-ment was established in 1787, when Congress, in theNorthwest Ordinance, interpreted the CommerceClause of the Constitution as a mandate for Federalregulation and maintenance of navigable water-ways.

53 The U.S. Army Corps of Engineers wasmade responsible for waterways and harbors. The1824 General Survey Act authorized surveys for a

100-17, 101 Stat. 132. Budget New Nation’s (Washington, DC:

cit., footnote 48,

91-258,84 219.

Walker, (Washington, DC: U.S. Army of Engineers, 1981), p. 365. Northwest pertained tomapping and of and

I

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1

national network of internal improvements, expli-citly including waterways. In 1824, the Rivers andHarbors Act established Federal river and harborconstruction and maintenance programs. The Corpshad and continues to have the tasks of planning,developing, operating, and maintaining waterways.

Water programs became increasingly multipur-pose in the 20th century. Flood control was incorpo-rated into many projects in the 19th and early centuries, culminating in the 1936 Flood ControlAct, which formally designated the Corps as respon-sible for flood control. The Bureau of Reclamationwas established in 1902 to encourage westwardexpansion by providing inexpensive irrigation waterfor agriculture; hydropower was added to projectpurposes in legislation enacted in 1912 and 1917.

The backbone of the Corps’ support for watertransport lies in the 11 division and 38 districtoffices. These form a cadre of technical expertiseand arc responsible for operations, maintenance,construction, preparation of preliminary and designstudies, and acquisition of real estate for projectsthroughout the country. The waterways industry andregional and local port officials rely heavily on theCorps for advice and maintenance, and even operat-ing assistance. As one put it: “Without them, wewouldn’t be in business.’-

over the past decade, the Federal Government hascontinued to retrench its role as water resourcesdeveloper. The 1986 Water Resources DevelopmentAct instituted waterway user fees and cost-sharing.requirements for most water projects, with non-Federal sponsors responsible for a minimum of 25percent of the costs of most construction projects.The focus of water resources development at theFederal level has now shifted to operations, mainte-nance, environmental accountability, and decreasedfinancial and administrative responsibility.

Funding for waterway improvements comes fromFederal appropriations and the Inland WaterwaysTrust Fund, supported by marine fuel tax revenue.The Inland Waterways Users Board makes recom-mendations on project priorities based on considera-tion of national system needs.55

INDUSTRY PERSPECTIVE

Every industry uses or provides services depend-ent on public works, and most take for grantedgovernmental decisions that create the infrastructurenecessary for their business, except when a taxincrease or regulation that directly affects them isproposed. Then, industry associations swing intoaction and lobby Federal, State, and local officials toensure that their interests are thoroughly considered.Their lobbying activities often reinforce the statusquo, because they do not want the way they dobusiness disturbed.

However, when an infrastructure issue has beenwidely recognized as a problem, and legislation orregulation seems a certainty, industry is likely toacknowledge a need to change and to engage in thepolicymaking process. As the 1990s begin, airquality problems, the need for greater investment intransportation infrastructure, and urban traffic con-gestion are three such potent issues. Each industrysegment is trying to shape government actionaccording to its concerns. For example, southernCalifornia government agencies and industries aretrying to craft a solution to the area’s severe airpollution and traffic congestion problems. Withcurrent technologies, the poor air quality precludesconstruction of more roads to relieve traffic conges-tion, so new approaches must be tried. The Califor-nia Trucking Association’s members are willing tooperate at night as much as possible to relievedaytime congestion.56 However, many industriesthat depend on truck transport find the noiseproblems and costs of keeping their loading facilitiesopen to accommodate deliveries at night unaccepta-ble. Finding a reasonable balance among the diverseinterests will be a lengthy and difficult process.57

In one area--intermodal transportation--industryhas moved rapidly to capitalize on burgeoninginternational trade and changes in manufacturers’shipping patterns. Federal oversight, programs, andorganization have not kept pace, and a host ofdifficult transportation system issues are emerging,ranging from how to provide sufficient groundaccess for busy airports to congestion that preventsefficient local truck transfer of freight containers

%hndd C!. M&my, dirccw, Memphis and Shelby COWY Rnt Commission, kphk, TN, personal COmlmldC@OfL t%, 5, 1989.W.ls. Army oxpc of m== The System:A April 1989), p. 42.-E. hsm~, “&rector, Governmental and Industry Affairs, California Trucking Association pcrsomd wmmuniciu.iom Nov. 10, 1989.fls~ Si** ~ of ~“on, Soutb Coast Air Quality Management District, pcrwmal communication, Nov. 10, 1989.

-— . . . . .


I

from ship to rail. Local governments must deal withsuch problems on a piecemeal basis when Federalmonies are involved, because of categorical grantrequirements and the absence of a coherent Federaltransportation policy that incorporates environ-mental concerns. (For further information, see chap-ter 4.)

INTERGOVERNMENTAL ISSUESGenerally, State and local officials accept the

need for Federal standards to protect public healthand welfare, especially if they are tied to a grant.However, officials contend that federally mandatedstandards and grant requirements raise their costs,through expenditures for projects or procedures thatmay be extraneous to State priorities and that addtime to the project. As one example, Federal aid forhighways requires that a percentage of Federalmonies be used for repairs to “off-system” bridges(bridges on highways that are not eligible for Federalaid), and these bridges are on underutilized orunimportant routes in many States.58 Concernsabout Federal programs center on unfunded man-dates, such as those described in chapter 1, box l-A;grant requirements, such as a focus on new construc-tion rather than maintenance or management im-provements; and on the regulatory process,59 includ-ing:

●

s

●

●

●

inflexibility in the administration of standards(standards aim at uniform performance and donot accommodate local variation in need andconditions);lack of coordination among Federal agenciesengaged in related activities;frequent changes in Federal regulations, whichrequire major local program adjustments;excessive time required for Federal review andapprovals; andrequirements for meetings and paperwork.

The complicated application process for approvalof a major harbor improvement shown in figure 2-5gives ample evidence that these concerns are justi-fied.

In 1987,60 percent of State and local infrastruc-ture capital came from bonds.60 Traditionally, tax-exempt municipal or governmental bonds have beenthe fiscal workhorses for State and local govern-ments, which use them to acquire the large amountsof capital needed for roads, schools, and environ-mental projects. In addition, tax-exempt “privateactivity” bonds are issued to finance many types ofpublic-private ventures, which create facilities forpublic use.

To the concern of State and local governments,Federal tax reform legislation aimed at closingloopholes and minimizing revenue loss—primarilythe Tax Acts of 1986 and 1988—made tax-exemptbonds much more difficult to issue. At least partiallyas a result of the changes, the value of new issues ofmunicipal debt has decreased by one-half since1985, with even more dramatic reductions in theissuance of private activity bonds.6l

However, while it is too early to be certain, OTAanalysis indicates that the impact of tax reform ontraditional public-use infrastructure projects maynot be significant in the long term. Debt financing oftraditional public works, such as publicly owned andoperated wastewater and water supply plants androads, appears to be at a higher real level now thanbefore the passage of the 1986 Act.62 The decreasein tax-exempt private activity bonds for” publicfacilities, such as convention centers and sportscomplexes, may have boosted the use of tax-exemptgovernment bonds to finance traditional infrastruc-ture projects. A significant drop in borrowing didoccur between 1986 and 1987, but the marketreturned to its pre-1985 level in 1988 and increasedmore than three-fold between 1980 and 198863 (seefigure 2-6).

However, the reforms have had a significant effecton a wide range of activities financed by State andlocal governments, especially those undertaken incooperation with the private sector. Four provisionshave raised the greatest concern:

sq~~illi~, di.fcctor, pl arming Research Diviskm, Iowa Dcpartmcm of Tmnapmuiom in Office of Technology Asscssm ent, op. cit., footnote2, pp. 118-119,

W@marks &xn OTA Adviaory Panel meting, March 1989; and participants in Office of Tcc!tdogy Aascaam cm, op. cit., footnote 2.%vernmczn F~ hcafch titer, “Fe&ral ‘k %liC)’ and kfktmctm Financing,” OTA contractor report, Sept. 13, 1989, p. IX-4.blrbid, p. 14.%d., p. I-2.W)id, p. ~~.

MARINE PROJECT PERMIT PROCESS DETAILED FLOW

LB BOARD OF HARBORCOMMISSIONERS

I

1

I FEDERAL

I Central of

STATE OFFICE OF PLANNING & RESEARCH

PLANNING DIVEION

REGIONAL WATER QUALITYCONTROL BOARDI “

II

I l l FEDERAL2

PLANNING DIVISIONPLANNINGDIVISION

Beach Harbor.

Chapter 2—The Intergovernmental Framework ● 5 1

Figure 2-5--Ma rine Project Permit Process

CORPS

ICORPS OF ENGINEERS

CALIFORNIACOASTAL

COMMISSION

STATERESOURCES

AGENCY

ENVIRONMENTALPROTECTION

AGENCY

Us. COMMERCE

CORPS OF ENGINEERS

ccc ENVIRONMENTAL Protection AGENCY I

SOURCE: Traffic Department, Harbor.

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●

●

Stricter criteria for tax-exempt bonds. TaxCode revisions have restricted the use oftax-exempt private activity bonds to projects inwhich generally no more than 10 percent of thefacility is used for private purposes and no morethan 10 percent of the debt service is paid fromprivate sources. The previous private activitymaximum was 25 percent. This reduction inpermissible level of private sector involvementhas limited tax-exempt borrowing and raisedcosts for some forms of public works infra-structure, such as water treatment plants thatare owned or operated by private firms. Thenew lower limits on private activity will requiredevelopers to rely more on private capital forproject improvements, like new subdivisionstreets. In Vacaville, California the wideningof a major arterial failed the test for tax-exemptfinancing because the cost of required reloca-tion of private utility lines exceeded the 10percent limit on debt service allowable fromprivate sources.64

Additional procedures and reporting require-ments. All tax-exempt transactions must nowbe reported regularly to the Internal RevenueService. In addition, records must be kept oninvestment earnings in order to make rebates onprofits, if necessary, and the costs of insurancefor private activity bonds are restricted. Thesenew regulations mean increased effort andcosts for every jurisdiction, but hit small, andunsophisticated issuers hardest, as they mustseek outside financial help.Reduced arbitrage opportunities. Strict limitswere placed on the opportunities for State andlocal governments to earn arbitrage income byborrowing with tax-exempt bonds and invest-ing the proceeds, usually in higher yieldingbonds, until needed.65 Arbitrage is a lucrativeincome source, used in many cases to reduceproject costs. After strong protests spearheadedby local governments, Congress eased theserestrictions in the budget reconciliation legisla-tion passed in November 1989.Limitations on refinancing. The 1986 Actpermits governments to refinance tax-exemptloans only once. In the past, governments could

figure 2&Tax-Exempt GovernmentalPurpose Bonds

Billions of dollars80

m60

40

20

1980 1981 1982 1983 1984 1985 1988 1987 1988

Years

SOURCE: 1990, on data from the R tinter.

refinance bonds frequently to take advantage offalling interest rates.

Although the extent varies, State governmentsprovide essential financial support to local jurisdic-tions for public works, currently providing 54 cents(down from a high of 61 cents in 1975) in grants forevery dollar raised by local government. Generally,State funds go for education and public welfare, andto support specific transportation infrastructureneeds, such as highways, airports, and in some cases,wastewater treatment and mass transit. The relativedecrease in the State contribution since 1975 doesnot mean that total State dollar aid to cities hasdecreased; indeed it increased by 10 percent in realterms from 1979 through 1986. Rather, local govern-ments have increased the revenues they collect,which have grown 37 percent for cities and 52percent for counties.66 Further details are given inchapters 3 and 4.

CONCLUSIONSThrough funding support, legislation, and regula-

tion, the Federal Government has driven publicworks infrastructure policy since the early part of the20th century, and its fiscal policies and fundingcapabilities have shaped and local public

Government Association, testimony before Senate Committee on Affairs, service’s, and the District of May 4, 1989. op. cit., footnote 60, pp.

of 1988 cd., VOL 2 (Washington, DC: 1988), p.14.


works construction and service. Over the pastdecade, changes in Federal policies have forcedStates to play a larger role in financing andadministering public works programs, and localcommunities to do more for themselves. Federalspending is likely to continue for the short termto focus on health and social programs, defense(although this may decline gradually), and na-tional debt service. State and local governmentsmust expect to finance a larger share of publicworks with their own revenues-general taxesand fee-rid where feasible, with private sectorpartners.

Competition for revenue sources-excise andincome taxes, user fees, and other benefit charges—is characteristic of our Federal system and can beexpected to continue at all governmental levels.When Federal funds were more plentiful, State andlocal governments used them as substitutes for theirown resources for public works facilities, focusingtheir own spending on education, health, or otherspecial program areas that do not generate revenue.They will not withdraw from funding education orcaring for the destitute as Federal funding levelsdecline. The resulting financial squeeze on State andlocal governments is a major factor in the poorcondition of public works infrastructure and height-ened intergovernmental tension. The impacts ofcontinued low levels of Federal spending onpublic works will affect States with varyingdegrees of severity (see figure 2-7). This raisesequity questions that Federal policymakers willwant to consider.

Recent Federal tax reforms enacted to conserveFederal revenues have increased the cost of localcapital and discouraged public-private partnerships.While they understand the fiscal forces behind theseactions, State and local governments do not wel-come the effects and maintain that the FederalGovernment is pursuing conflicting fiscal policies.

Strong environmental lobbies have encouragedCongress to raise standards for environmental publicworks projects, and other concerns have promptedthe addition of grant requirements, such as BuyAmerica, which promote goals unrelated to theprimary purpose of the grant. These entail substan-

Photo State University

Resources are limited and State and local governmentsoften direct capital to education and health care programs

rather than public works.

tial costs, both in money and time required forproject completion. Local and State officials ques-tion the appropriateness of Federal policies re-quiring them to conform to national prioritiesand guidelines that often are not sensitive to localconditions or needs, but increase the project priceand timeline.

Federal oversight, programs, and funding aretargeted through categorical grants at specific issuesand problems--from wastewater treatment to air-port, highway, and harbor improvements. Strongindustry interest groups have grown up to supporteach of these categories, and environmental activistsfocus on enforcement of specific laws that target asingle issue.Such potent but diverse vestedinterests make coordinated environmental andtransportation programs difficult, and congres-sional and executive branch policies and pro-grams often appear to State and local govern-ments to work at cross purposes. More systematicFederal policy coordination and consideration ofreorganization or restructuring are warranted.

54 Rebuilding the Foundations: S

tate and Local Public W

orks Financing and Managem

ent

c00

c0C0.

c0 Co

FIgIn J.7--Proj1cted Impect on .... of ReduOId FecII .... AId for Public ¥IorkI-

'.~ . .,

Aelative fiacal Impact

D Low to average 72 percent of the U.S. p pu a' 11'11.1 in the.e Statee

D Av.rage and above 17 percent o. the U.S. popu atl livel In theae Statea

High 8 percent of the U.S. popu 8 livel In thea. State.

_ Very high 3 percent 01 the U.s. popu aU 'ives in theae State

.. mpact j.a defined _ lhe relallve level of effort each State would have to make to replace • hypothetical 50 percent cut in Federal aid for pYbtiC worka. SOURCE: ~ 0' Technology AlMument, 1990. derived from information provided by Apogee AeM8ld1. Inc.

•

.

‘

I

- - - - -

1 - —

. , . .

Photo General Contractors

General Contractors to produce

of

anI

CONTENTS

POLITICAL AND ECONOMIC MIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Spending and Revenue Patterns *.o. .o*Q. .o*. .*. **. .**. .*e**. ... o * . . * . * . ..*.**..* 57Constitutional and Legal Constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59Revenue Sources ***. .*. *.. ... *.. ... ... ..*. ... *.. **. .. o . * * . * * . * . * * . * . . . *......** 61

STATE TRANSPORTATION PROGRAMS_ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61Highways and Bridges *o. *.**. **. *.. o.e*. o*. ..**o. ..*, *.. ooo. ... .. o**.*......*** 61Airports *.. .o. ... ..*. .*. ... .o. ..*. .*. .*. *.. .**. e.. ... ..*o. o.. *.*. b . . . . . . . . . . . . . 62Railroads ... ..*. *.*. .*. ..o. .. * * . . * . * . . . . * . . . . * . . . * . . . * . . . . * . * . . . . * . . . *.***..*.Mass Transit ... ... oo. .**o*** *0**. ooo. ... .o*. ... o.*e*. . . . . . . . . . . . . . . . . . . . . . . . . . . 63Ports and Waterways .*. ... ... .*o. .*. *.. ..o*. ..oo. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64State Transportation Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Political Strategies for Transportation Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

STATE ENVIRONMENTAL PUBLIC WORKS PROGRAMS . . . . . . . . . . . . . . . . . . . . . . 73. .Drmking Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73Wastewater Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73Solid Waste . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75State Funding Programs ... ... . . . . . . . . . . * * * . . * . * . . . * . . * . * * * * . . * . * . * . * . . ...***... 75General Fund Appropriations .o. ... *.*. .*. ..*. ... .o. **o*, . . . . . . . . . . . . . . . . . . . . . . 79Earmarked Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

..*. ... ... ... .*o*. .o. .**. ..*. ..o*. ... o.. ..*** ... .*. eo*. ... ..*. ... *.. .e *.* 80Public-Private Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

MULTIPURPOSE STATE LOAN PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80STATE MANAGEMENT AND PLANNING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

Planning Land Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82TECHNICAL ASSISTANCE PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84FINDINGS AND CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

d

3-A. Iowa’s RISE Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 693-B. New Jersey Infrastructure Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 723-C. Citizen Outreach Pays ... ... .o****. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 743-D. Texas: State Water bans and the State Revolving Fund . . . . . . . . . . . . . . . . . . . . . . . . 763-E. The Wyoming Joint Powers Act Loan Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 813-F. Washington State Public Works Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 823-G. Florida Emphasizes Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 863-H. The New Mexico Infrastructure Development Assistance Program . . . . . . . . . . . . . . 88

3-1. State Fiscal Capacity and Effort . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 593-2. State Fiscal Capacity, 1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 603-3. State Fiscal Effort, 1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 603-4. State Income Tax Revenue, 1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 613-5. State Sales Tax Rates, 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . 623-6. How a State Revolving Loan Fund (SRF) Works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 773-7. Growth in Florida, 1970-87 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

3-1. Sample State Revenue Increases, 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 583-2. State Highway Funding Sources, 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 663-3. State Gas Tax Rates and Yields, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 683-4. New Revenue From State Lotteries Used for Infrastructure . . . . . . . . . . . . . . . . . . . . . 733-5. Major Infrastructure Financing Mechanisms: Advantages and Disadvantages . . . . 89

.-

. Chapter 3

States: Caught in the Middle

It is not the voters who failed [to approve a tax increase for transportation]; it is we, thepolitical leaders, who failed the voters. l

Notwithstanding wide differences in size, eco-nomic conditions, and governmental structure, eachState confronts the same problem: how to financetransportation and environmental infrastructure im-provements as well as schools, hospitals, andprisons. A State’s ability to finance public works isa product of its economic base and political compo-sition; these determine the mix of taxes, charges,fees, and private investment a State may use to payfor infrastructure.

Marked increases in targeted taxes, benefitcharges, and user fees have been necessary in mostStates over the past 5 to 6 years to support publicworks priorities, after more than a decade of flatinvestment. States have combined these specialcharges and broad-based taxes to boost funding forinfrastructure improvements, principally for trans-portation-highways, airports, and mass transit—with some States supporting railroads and ports aswell. Funding environmental public works hashistorically been a local responsibility, althoughsome States have long assisted with wastewatertreatment plant construction. Every State will beplaying a larger role in the future, since new Federalrequirements include environmental mandates thatare straining local fiscal capabilities and sendinglocal officials to their States for help. This chapteroutlines the economic and political frameworks forState public works programs as well as fiscal andmanagement strategies that States have developedover the past decade or more.

THE POLITICAL ANDECONOMIC MIX

Politics and economics interact in shaping aState’s public spending portfolio. Political delibera-tions and decisions determine State debt limits, taxrate ceilings, spending caps, and whether to levy asales or an income tax; all of these reflect a State’swillingness-to-pay. However, its ability-to-pay—the actual capability to raise revenue—is grounded

in economic factors, such as per capita income,industrial production, and retail sales.

State governmental expenditure and revenue pat-terns are good indicators of a State’s economicvitality and fiscal condition. In the aggregate, Statesappear to be in relatively good fiscal health-for1989, State government expenditures are expected

estimated expenditures in 1988. of 1982-83, State expenditures have grown steadily,if moderately (the average rate has been 6 percent forthe last 3 fiscal years), although this general picturemasks wide regional variations.

State constitutional or statutory requirements fora balanced budget require that expenditures stayvery close to or slightly lower than revenues. Almostevery State adopted some sort of tax initiative tomeet spending demands in 1988, producing $6billion in new revenue (see table 3-1 for examples);nonetheless, 18 States also had to reduce expendi-tures or deal with shortfalls by other means.3

Moreover, data indicate the rate of growth inrevenues may be falling behind expenditures; thetrend for 1989 shows a 5.4 percent growth in Staterevenue, compared to an anticipated 6.8 percent risein expenditures.

Economically strong, diversified States are betterable to pay for public works than States with low percapita incomes and weak economies. A State’seconomic base and ability to raise revenue measure

itself reflects its fiscal effort. These measures are auseful guide to which States are in the greatest need(have a low fiscal capacity) and which States aredoing the most to help themselves (have a high fiscaleffort). A more complete description of fiscalcapacity and fiscal effort indices can be found inappendix B. The variety in State fiscal capacity andfiscal effort is illustrated in figure 3-1. Regardless of

I IJob SqfIIKRK, c~f~ia State Senator, at ‘“l%chnology for lbmonw’s ~: A Policy C(mfcrcmx,” Costa M- CA, unpublishedremarks, Nov. 9, 1989. .

2N@~ G~~’ Associiuion and National Association of Smtc Budgu Gffkcrs, f%cuffhrvey o~rhc Skates (Washington, DC: 1988), p. 3.31bid., p. 6.

!-57-

1 21-667 - 90 - 3 : QL 3

. . ~. - -.

Table 3-1--Sample State Revenue lncreases, 1988

state Revenue increase Tax change

SOURCE: Advi80ry Commission on Intorgovemmamtal Rola!ions, S@nill-cmt Foatwo, at Fbod Fockmbm, 19S0 d., vol. 1 (Washing-ton, Oc: 1969), pp. 2S-29.

the strength of its economic base, a State must havethe political will to raise revenue (exercise fiscaleffort) to attack infrastructure deficits.

Regional Difference

Fiscal capacity and revenue effort vary widelyamong States even within regions (see figures 3-2and 3-3). New England and the Mideastern Stateshave stronger economies than much of the South andthe Northern Plains. However, a look at fiscal effortshows that some States with strong economic baseshave a below-average tax burden, while others withweak economies ask taxpayers to pay at a relativelyhigh level. Combining information about fiscalcapacity and effort with other economic data pro-vides an overview of State and regional economiccharacteristics.

New England boasts the Nation’s highest personalincome growth and the lowest unemployment rates.The tax bases of Connecticut and Massachusetts arewell above the national average, whereas Maine,Rhode Island, and Vermont have below-averagecapacity.

The Mideastern States are in good shape econom-ically, with personal income growth above thenational average and low unemployment. NewJersey has a particularly strong economic base andhigh fiscal capacity; only Pennsylvania has below-average revenue capacity, and the State budgetoffice projects expenditure growth well below thenational average.

The Great Lakes region has not fully recoveredfrom the recession of 1982-83, and States in theregion are slightly below the national average infiscal capacity, with unemployment above the na-tional average. State expenditures in 1989 areexpected to increase by only 3.9 percent, the lowestannual regional rate in the Nation.

The Plains region has made an impressive recov-ery from the early 1980s. The unemployment ratehas dropped from 5.5 percent to 4.2 percent, and allStates except Minnesota and North Dakota antici-pate spending increases of at least 5 percent.However, the region remains slightly under thenational average in fiscal capacity, primarily be-cause South Dakota, Iowa, and Nebraska have weakeconomies heavily dependent on agriculture.

While a few of the Southeastern States areprospering, many are struggling. Florida has beenthe dominant growth area, maintaining a spendinggrowth rate over 10 percent for the last 3 years;Virginia and Georgia also enjoy strong economies.Nonetheless, the fiscal capacity of the Southeastregion ranks the lowest in the country-Mississippiranks last, and Alabama, Arkansas, Kentucky, SouthCarolina, and West Virginia are among the Nation’sweakest 10 States.

In the Southwest, the Texas economy dominatesthe regional statistics. Because of the State’s reces-sion, caused by the drop in oil prices, the region hashad the Nation’s highest unemployment rate, and thesecond lowest rate of increase in personal income.Among the other Southwest States, expenditureincreases are expected to range from 2 percent inNew Mexico to 10.6 percent in Oklahoma.

The Roe@ Mountain region continues to haveeconomic and fiscal problems because of its eco-nomic dependence on the energy industry. Statefiscal capacity is uneven; Idaho, Utah, and Montanaare well below the national average, while Wyomingand Colorado have high capacity ratings because oftheir rich natural resources. State governments inthis region have increased spending only moder-ately.

The Far West States’ economic record is strong;personal income has increased by 6.7 percent (led by

Nevada at 8.9 percent and Oregon at 7.2 percent),and the unemployment rate is at the national. .

t~d, pp. 21-23; and Advisory Council m Imcrgov crnmcntal R&i- 1986 State (lWhingmm DC: 1989), pp. 5-7.

Chapter 3--States: Caught in the Middle ● 59

Figure 3-1--State Fiscal Capacity and Effort

Connecticut

80 II

601 ,

1975 1977 1979 1981 1983 1985 1987

Mississippi

120 -

100 -

8 0 -

6 0 ,1975 1977 1979 1981 1983 1985 1987

120 -

100 -

I

Texas140

120

100 “

8 0 I

average. Alaska has the only soft economy in theregion, due to the drop in energy production.

The variability of economic strength among the50 States is a product of factors that are difficult tocontrol and that change over time. The impact offalling energy prices during the mid-1980s high-lights the vulnerability of States like Alaska, Texas,Oklahoma, and Louisiana, which depend for incomeon one primary source. However, recent employ-ment figures compiled by the U.S. Department ofLabor show that the economies of several States(e.g., Texas and Louisiana) hard hit during the earlyand mid-1980s may be rebounding, while growthhas slowed in States like Massachusetts and New

already taxing residents more heavily than thenational average. States like California and Connect-icut, with strong resource and industrial bases, havethe option of choosing whether to enact new taxes orfees to raise additional funds.

In most States constitutional provisions or stat-utes limit revenue, spending, and debt and bondfinancing for public works. Some States have strictstatutes that make increasing levies for publicservices a lengthy and difficult process.

Revenue and Spending Limits

Hampshire, which had, until recently, enjoyed Many States restrict the financing authority ofvigorous economic healths Resource-poor States,their local governments and require them to balancelike Alabama, Mississippi, West Virginia, and budgets. However, over the past decade, 20 StatesMontana, remain economically weak and have have limited their own fiscal authority as well, bydifficulty generating additional revenue; many are statute or constitutional amendment, in response to

27, 1989, p.

Figure 3-2--State Fiscal Capacity, 1986 Figure 3-3--State Fiscal Effort, 1986

-1

taxpayerexample,

revolts against government spending. ForMassachusetts’s Ballot Question 3, passed

in 1986, restricts growth in State revenues ‘to theaverage growth in Massachusetts wages and salariesover the preceding 3 years.6

California’s Gann Initiative, approved by voters

appropriations to a percentage increase no greaterthan the State’s population growth plus the increasein the U.S. Consumer Price Index or per capitaincome in California, whichever is lower. Localofficials soon found they could not fund legallyrequired improvements and sought legislative relief,leading to passage of the Mello-Roos CommunityFacilities Act in 1984. The new law enabled localgovernments to create special assessment districts tofinance construction and operation of public facili-ties if two-thirds of the local voters approve.7 In July1989, the California General Assembly approved aninitiative for the 1990 ballot, which would againexpand spending flexibility.

Debt Limits

For the majority of States, constitutional andstatutory limits on borrowing also bound spending.State borrowing limits take widely varying forms,with nine States prohibiting the use of general debtaltogether, and four States (Maryland, New Hamp-shire, Tennessee, and Vermont) setting no borrow-ing limits and requiring merely a simple majorityvote of the legislature. For instance, in Alabama, theGovernor authorizes borrowing up to $300,000, butspecific bond issues must be authorized by constitu-tional amendment.8 In Pennsylvania, bonds forcapital projects that are itemized in a capital budgetdo not require a referendum if such debt will notcause the net outstanding debt to exceed 1.75 timesthe average annual tax revenues deposited in theprevious 5 years. Minnesota requires approval of abond issue by two-thirds of each house and amajority of the voters at any general election, exceptfor short-term borrowing, qualified school bondloans, and transportation bonds pledging fuel taxes.

Council on Public Works DC: October 19S7), p. 26.

c. al, Changing Stare for National Council on Works (Washington, DC: 19s7), p. 38.

VOL 1 (Washington, DC: 19S9), p. 120.


Most States currently employ a broad range oftaxes, although they rely most heavily on incomeand sales taxes. Sales taxes bring in the most revenue(48.5 percent of total State tax revenues in 1987), butincome tax revenues (39.2 percent of the total) aregrowing faster.9 Strapped by spending requirements,States have recently turned more frequently tobenefit or user charges and fees for specific purposesand are gradually allowing local governments moreflexibility to tax.

Income Taxes

Personal income taxes are levied in 43 States withwide variations in tax rates and the value ofexemptions (see figure 3-4). In 1987, income taxrevenue ranged from a high of 43 percent of total taxrevenue in Delaware to below 15 percent in severalSouthern States.10 In addition, 46 States collectcorporate income taxes, although their average percapita yield of $83 is far less than the average yieldof $309 from personal income taxes. Income taxesare more sensitive to economic swings than salestaxes, making them a less reliable revenue source.

Sales Taxes

Currently 45 States impose general sales andgross receipts taxes; these yielded almost one-half ofState tax revenue in 1987. Tax rates range from a lowof 3 percent in Colorado, Georgia, North Carolina,and Wyoming to a high of 6.5 percent in Washingtonand 7.5 percent in Connecticutll (see figure 3-5).

STATE TRANSPORTATIONPROGRAMS

Most State Departments of Transportation (DOT)were formed to administer highway programs andbecame increasingly important as the Federal Inter-state highway program got under way in the 1950s.Over the past two decades, most have broadenedtheir responsibilities to include other modes oftransport as well. However, many aspects of Statetransportation programs are shaped by Federalpolicies and their modal orientation.

Figure 3-4--State Income Tax Revenue, 1$87

SOURCE: of Technology nt, 1990, on U.S. Bureauof

State highway and transportation departmentsadminister a wide variety of State-funded programsand, with the Federal Highway Administration, theFederal-Aid Highway Program. States allocate 60percent of all highway outlays and are responsiblefor about 22 percent of the Nation’s highwaymileage and 43 percent of the bridges.12 Statelegislatures establish allocation formulas and priori-ties for State aid as well as for specific highway andbridge projects.

Revenue sources include user fees, sales taxes,tolls, and lotteries, and State policies range fromsharing revenue with local governments and allow-ing them considerable autonomy on projects tomaintaining tight fiscal control and requiring adher-ence to strict State guidelines. A few States, notablyAlaska, Delaware, North Carolina, Virginia, andWest Virginia, bypass local governments and as-sume responsibility for practically all highway andbridge construction and maintenance.

Issues—State highway departments operateunder Federal- and State-aid program guidelines.Many State DOT officials are frustrated by delays in

Bureauof the Census, p. xv. p. 21.

on Intergovernmental Relations, op. cit., footnote p. of DC: PP.

Rates (excluding local taxes) tax

6% and above

to number.SOURCE: 1990, on

on

Federal project approval and by grant requirements,which they feel prevent them from directing aid totheir most critical needs. States also decry theslowness of spending from the Highway Trust Fund,contending that it is outrageous for the FederalGovernment to collect gasoline taxes and not usethem for their intended purpose.

The challenges facing each State are shaped by itsgeographic and economic characteristics. Largerural Western States must divide limited fundsbetween maintaining their many Interstate miles andimproving other important highways and bridges.States with large urban centers must provide fundsto rehabilitate urban highways and bridges and torelieve congestion in suburbs, as well as for highwayand bridge improvements in rural districts.

States confront numerous legislative and planningissues. A few States are trying to strengthen Stateand regional land use and capital improvementprograms by linking highway financing programs toland development and by requiring private sectorcontributions for road improvements. Some haveencouraged private construction of toll roads orbridges. A handful of States with major urban areasare looking at ways to link highways with othertransportation modes to improve metropolitan mo-

bility and reduce air pollution caused by congestion.Methods of addressing these issues are discussedlater in this chapter.

Although airports are largely a local enterprise, 13States own or operate commercial airports, includ-ing Maryland, Alaska, and Hawaii. Almost all Stateshave aid programs, usually small, for purposes ofairport development and/or improvement. Fundscome from State aviation fuel taxes or generalappropriations.13 Many States target aid to smaller,nonmetropolitan airports, which are less likely thanurban airports to be economically self-sufficient.Since 1946, Minnesota’s State Airport Fund, sup-ported by taxes on fuel and airline property andaircraft registration fees, has offered capital match-ing grants to local airports.

responsible for annual inspec-tions of all (4,300) general aviation airports tocollect safety information required by the FederalAviation Administration (FAA), and many maintainstatewide airport development plans. AlthoughStates play a key role in airport regulation, financ-ing, and planning, Federal aid goes directly toairports, bypassing State agencies. State aviation

and Judith KY: Council of 19S7), p. 10.


This terminal in Cook, MN, was constructed using acombination of local money and aid from a State AirportFund. The facility has aground-level public area and aresidence for the airport manager on the second floor.

officials maintain statewide capital improvementplanning and coordination would be more effectiveif Federal grants were allocated at the State level. Totest this proposition, a 2-year demonstration projecthas recently begun in three States (Illinois, Missouri,and North Carolina) in which State agencies willadminister Federal block grants for reliever andgeneral aviation airports.14

Compared to the private sector and the FederalGovernment, States play a relatively minor role infinancing, operating, or regulating railroads. None-theless, at least 20 States provide assistance to localrail service from earmarked excise taxes and generalappropriations, and 45 States have a recent State RailPlan that includes an inventory of facilities andranking of proposed projects .15 The bulk of State aidtakes the form of grants or loans to small short-lineheight carriers that provide essential service tolocalities. Mississippi has a Railroad RevitalizationProgram that makes interest-free loans to localgovernments or railroad companies to rehabilitate

track and upgrade other equipment. States that owntracks (usually because they have been abandoned)either operate the railroad, as in West Virginia, or,more commonly, contract with an operating railroad.

A few large, urbanized States, such as California,Illinois, New York, Maryland, and Pennsylvania,subsidize or provide intercity passenger train serviceto relieve highway congestion and air pollution.Such arrangements are likely to increase. Since1985, California’s DOT has operated a successfulservice between downtown San Francisco and SanJose. Connecticut DOT, in cooperation with Am-trak, will begin commuter service soon over a33-mile route from New Haven to Old Saybrook.

Issues—Enabling legislation to permit public-private partnerships or other forms of private sectorparticipation may be needed in many States, espe-cially if efforts to develop high-speed rail transporta-tion between major population centers to easehighway and airport congestion are to succeed.

Although 7 urban States contribute 80 percent oftotal State aid, at least 40 States provide local masstransit with some funds from general revenues, adedicated portion of the general sales tax, or motorfuels and vehicle taxes. In 1988, State grants totaled$3.9 billion16 and, for the first time, surpassedFederal aid, which was $3.3 billion.

Intercity bus service is subsidized in 9 States, 13support ridesharing, and several target aid to specificusers such as elderly or handicapped persons or torural and small urban areas. While all States havetechnical assistance programs funded by UrbanMass Transit Administration grants, at least sevensupplement Federal funds to expand this service. 17

issues—Keen competition for Federal revenueand the extreme difficulty of resolving urban airquality problems are indicators that States are likelyto be pressed to increase their roles in financingtransit, in supporting transportation planning, and intechnical assistance.

Because of the importance of portsfor economicdevelopment, 28 of the 40 States located on naviga-ble waterways have provided grants for constructionof landside port facilities and water cargo terminalsduring the last 12 years.18 Three States, GeorgiaMaryland, and Louisiana, accounted for over 40percent of the $1.7 billion total in State aid.Although the East and Gulf Coast States providedthe most funds, the Mississippi Valley and WestCoast States have also invested in port developmentIn addition to general obligation bonds, Statesupport has come from appropriations, transporta-tion trust funds, and user fees. Louisiana dedicatespartial proceeds from State motor fuel taxes, andAlaska dedicates watercraft fuel taxes and bondproceeds for port improvements.19 Maryland andHawaii tap their State Transportation Trust Funds.State program responsibility is in the departments oftransportation, economic development, or State portauthorities. In addition to financial support, the Stateagency frequently coordinates the public workscomponents of major port improvement projects.

The Water Resources Development Act of 1986established local cost-sharing provisions for channel

At the Port of Long Beach, CA, containers are removedfrom the ship to a dockside transfer area. From there,

trucks pick up the containers and take them to the federallyfunded railroad transfer facility pictured here.

widening or deepening projects, which had previ-ously been financed solely from Federal funds.Currently, the deeper the channel, the larger therequired local match. The Act stipulated that thelocal share of the costs should be recovered fromincreased user fees, but so far States have paid thelocal share from other sources, on the premise thatincreased fees would hurt their ports’ competitivepositions.20

States have no specific responsibility for theNation’s 12,000 miles of commercially significantinland waterways. The Army Corps of Engineersbuilds and maintains the locks and dams, and mostinland waterway terminals are privately owned.

Issues—Federal technical expertise and fundinghas supported many State port and industry opera-tions that now need to develop their own independ-ent resources. Public-private partnerships andinnovative user-fee arrangements are likely to besought. Intermodal connections need improvementin many states.

n on Water 1989).

and Hackett, op. cit., footnote of State Highway and op. cit., 18, p. 30.

— .-—


In addition to Federal grants, State revenues forconstruction and improvements to transportationinfrastructure come from two principal sources: userfees, including fuel taxes, registration fees, tickettaxes, and tolls; and broad-based taxes. Financing isby annual appropriations (pay-as-you-go) or debt(general obligation or revenue bonds). Although ,most States rely primarily on traditional revenue

‘sources and financing mechanisms, many havedeveloped new sources and financing strategies,including collaboration with the private sector.

Benefit Charges-Motor Fuel Taxesand Other Vehicle Charges

User fees or broader benefit charges, principallymotor fuel or gas taxes, form the financial base formost State transportation programs, especially forhighways. In 1988, Federal, State, and local gastaxes provided $29 billion of the $52 billion Stateand local governments spent on highway capital,maintenance, and traffic services.21 The remainingrevenues came from a variety of other sources22 (seetable 3-2). Nonetheless, current gas taxes expressedin adjusted dollars are below their 1965 levels;increases of 2 to 4 cents per gallon are needed tobring their purchasing power up to that of 1965levels. 23

During the 1980s, 47 States (all except Alaska,Georgia, and New York) raised the per-gallon gastax-some substantially and more than once—tokeep pace with rising construction and maintenancecosts. The yield from a penny of gas tax varieswidely among States, depending on the amount ofgasoline consumed, which is the product of Statepopulation, road mileage, and number of vehiclesper capita California’s 9-cent per-gallon tax, whichis low by national standards, yields $1.1 billion,while Connecticut’s 20-cent per-gallon tax producesonly $320 million (see table 3-3 for State by Stateinformation).

Most States levy a flat per gallon tax on gasolineand diesel fuel. However, some States established

variable rates, based on fuel prices, in the early1980s, hoping revenues would track gas prices andprovide a rising revenue stream; but as gasolineprices fell in the mid-1980s, so did revenue fromvariable rates. To compensate, some States tie thetax rate to an index based on changes in motor fueluse and construction costs. For example, Michigan,Ohio, and Wisconsin have enacted taxes that adjustautomatically to fuel consumption levels and theFederal Operations and Maintenance Cost Index.The revenue raised reflects highway use and mainte-nance costs relatively well.

earmark all gas tax revenue for highway use, both toguarantee a reliable revenue source and to ensurethat motorists can see the benefits of the taxes.Frequently, State highway improvement programsare tied to increases in the gas tax. (See box 3-A fora description of Iowa’s program.) Eight Statesdedicate gas tax revenue to a transportation trustfund, which may include transit.24 At least nineStates, mainly in the south, west, and midwest,return fuel tax and other benefit charges associatedwith flying to localities for airport development.25

A few States fold all gas tax revenue into thegeneral fund from which all governmental programsare financed. Florida, Massachusetts, New Jersey,New York, South Carolina, Oklahoma, Arkansas,Texas, and California use a share of the gas taxrevenue to fund other programs. In 1987, the TexasState highway fund loaned $280 million to the Stategeneral fund for education, and transferred $32.4million to prisons and the State workers’ compensa-tion fund.26 In recent years, fiscal pressures havegenerated an increase in State legislation to use gastax and other vehicle-related charges for nonhigh-way purposes. OTA concludes that these effortsare likely to continue, despite the opposition oftransportation advocates, because gas taxes arebroad-based and reliable revenue sources.

Fees—Although most Statesexempt motor fuels from State sales taxes, eightcollect substantial revenue by applying the sales tax

21M= cOOpX, Fdd Highway ~“ “ oation, personal communication. Jan. 4, 1990.2%c W@ In&nation Program, 1989 Stute Highway (Washington DC: 1989), p. 18.=otnaa W. Cooper, Federal Highway Administmiom and Judith A. Dcpaqmlc, Florida Department of Transpomtim “Imcal Option Motor Fuel

ma;’ (iraR documuttl May 1989, p. 3.u~~ca ~~m of sw I-Ii@way and Transportation Of&ials, op. cit., footnote 16, p. 2.2s&~ ~w, Fe&r~~~S~ R~/es in /@mrW~e (W~~~n, ~: Ntiio~ ~~il on Rblic WOfi IrnpKWCIXIUNS, 1987), p. 72.

* Rod Infofmation Rogram, op. cit., foomotc 22, p. 48.

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Chapter 3-States: Caught in the Middle ● 67

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Table 3-3--State Gas Tax Rates and Yields, 1989

SOURCE:_ofTdnoloov Anaosmont, IWO, ba8adondatafrom theHiahwayU8arsFodoratlon; and Tho Roixllnformation Proaram 19S9,Stafe-FW~~(W~MgtomDC: 1989).

to gasoline. In 1988, such taxes yielded $l.2 billionin California.27

Fees for driven’ licenses, vehicle registration,inspections, truck weights, record checks, and vanitylicense plates are other revenue sources for Statetransportation needs.Tbgetherthesefeescontributeapproximately 20 percent of all State highwayrevenues.28 Most fees are assessed on a flat rate, andthey do not reflect aspects of highway use, such asthe weight of the vehicle and mileage driven.However, several court rulings have found that someState flat-rate fees are unconstitutional. For exam-ple, in 1987, the U.S. Supreme Court ruled thatPennsylvanians truck fees were illegal, and that theState must refund the $500 million collected. Thecourt held that the flat-rate fee was not related to roaduse and that the State discriminated against out-of-State trucks by reducing fees for trucks registered inPennsylvania. 29

Tolls--The Pennsylvania Turnpike between Har-risburg and Pittsburgh was the first modern highwayfinanced with tolls. Currently, tolls are charged onnumerous bridges and tunnels, and 28 States operate36 toll roads. In most cases, tolls pay the debt serviceon State or local revenue bonds used to financeconstruction of a specific road, and some also fundmaintenance and operations.

Although legislation prohibits tolls on federallyfinanced highways, the 1987 Surface Transportationand Uniform Relocation Assistance Act and amend-ments permitted test projects in nine States to useFederal funds for up to 35 percent of costs and tollfinancing for the balance. The projects, in Califor-nia, Colorado, Delaware, Florida, Georgia, Pennsyl-vania, South Carolina, Texas, and West Virginia,reflect the Federal interest in encouraging financingbased on benefit charges.30

States have many uses for toll revenues. NewJersey has formed a fund from excess toll revenues

30.%d, p. -dq- m-y, chief, R)ky Evduatitm Branch, U.S. Department of T nuqxmmion, pcnxxlai cotxlnlunicatioxl, ScpL 25, 19s9,

— --- ..— - . --


Material IUSE

is “ 1989-19931988).

pp. 46-s1.

A rural airport in Washington, financed by the localgovernment in cooperation with the State

development program.

to finance other needed State highways.31 In 1986,Florida instituted a Toll Facilities Revolving LoanFund that provides venture capital to localities toplan and construct toll roads and is repaid from tolls.The State appropriated $2.7 million in 1986 and $20million in 1987. (See chapter 4 for further details ofprivate toil-financed highway projects.)

Arizona, Colorado, Florida, Georgia, Illinois, Mis-souri, Nevada, New York, Ohio, Texas, and Wash-ington) permit local jurisdictions to levy a generalsales tax dedicated for transportation improvement.In most cases, the localities can further target thefunds for mass transit improvement. For example, inCalifornia up to 0.5 cents of sales tax revenue isreturned to eligible counties for transit use.32

consin are among the States that earmark revenuecollected from taxes on aviation fuel and airlineproperty, and fees from aircraft registration tofinance State airport development and capital im-provement programs. Washington State finances anairport development program, focused on rural

areas, with dedicated State aviation fuel tax reve-nue.33

Appropriations From the State General Fund

Most States use general fund appropriations fortransportation capital improvements only for sup-plemental or emergency financing, although a fewStates support transit capital investments with gen-eral fired revenues. New York State appropriated$170 million in 1987 to transit projects, and Georgiaappropriated $600,000 from general funds. Statesproviding aid to local airports tend to use generalfund appropriations in addition to benefit charges.For instance, California set up a revolving loan fundin 1979 with general appropriation seed money of $1million a year for 5 years.34 In 1988, about 6 percentof State transportation capital expenditures camefrom general funds35 (see table 3-2 again). Becausegeneral appropriations require legislative action andare subject to changing State priorities, they are nota reliable source of financing for long-term capitalprojects.

Financing With State Bonds

Currently, States use general obligation bondfinancing less for transportation than they once did.In 1973,29 percent of State long-term debt was forhighway improvements compared to 8 percent in1984.36 Bonds financed less than 10 percent of Statecapital expenditures for transportation projects in1988.37 Several factors have contributed to thedownward trend in general obligation bond financ-ing. First, many States have strict debt limitationsrestricting the use of general obligation bonds.Furthermore, States tend to give first priority forbond financing to school, prison, and hospitalconstruction because gas taxes and other user feesprovide a ready source of support for transportation.Finally, relatively high interest rates in the 1980sincreased the costs of borrowing. Since bond issuesmust have voter approval in most States, theybecame more sensitive political issues.

Inc., in Council on Public Works 1986). p. 49. 8, vol. p.

13, p, C-18. p.

of State DC: 1988), p. 85, “ L. Institution 1986), p. 167.

of Budget op. cit., footnote 35, pp. 85-87.

— -— —


Use of revenue bonds for transportation purposeswill probably increase, both because of constraintson general obligation bonds and because tolls andother types of benefit charges provide reliablerevenue streams for debt service. Michigan reliessolely on revenue bonds backed by proceeds fromgas taxes, driver’s license fees, and motor vehicleregistration to support long-term highway needs. Inthe fall of 1988, Florida voters passed a constitu-tional amendment allowing the State DOT to use gastax revenues to repay revenue bonds to purchaserights-of-way and to build and rehabilitate bridges.38

Trust Funds

Most States earmark specific revenue, usually gastax and registration fees, for a trust fund-a perma-nent account to be used solely for transportation orhighway expenditures. In 1984, New Jersey estab-lished a comprehensive transportation trust fund tofinance long-term improvements (see box 3-B). TheMaryland Consolidated Transportation Fund, fed bythe gas tax, a motor vehicle titling tax, license andregistration fees, and a portion of the State corporateincome tax, finances highways and public transpor-tation. In 1986, Alabama established a MunicipalGovernment Capital Improvement Fund to makegrants to local governments for construction ofpublic buildings and streets. The improvementprogram was to be funded from the State Oil and GasTrust Fund when it reached $60 million. Currently,the fund stands at $45 million; the State anticipatesit will be several years before it reaches $60million. 39

Public-Private Partnerships

Most existing public-private partnerships arebetween local governments and developers, andState governments are just beginning to developsuch arrangements for financing capital investmentsin transportation. Before States or localities enterinto public-private partnerships, they must have thelegal power to take certain actions, and many haveenacted or are considering legislation to provide thenecessary authorizations. Some of the most impor-tant include:

● power of contract-the ability to enter into aservice contract,

● power to convey—the ability to sell or leaseexisting facilities to a private company,

. power to purchase-the ability to purchasefacilities from the private vendor at some pointin the future, and

. bond authority to finance the facility.

In 1986, 19 States had statutes specificallyauthorizing privatization of one or more types ofinfrastructure. Arizona adopted a policy of jointsponsorship of certain highway projects as part of its1984 transportation program and will assume only50 percent of the cost of construction of freewayinterchanges and grade separations not on the Stateplan. 40 Texas has authorized the formation oftransportation corporations in which private prop-erty owners form nonprofit corporations to acceptproperty and money to support highway develop-ments. A landowner interested in having a road builtmust apply to the Right of Way Division of theDepartment of Highways. If the Division approvesthe need for the road, the applicant submits a planand articles of incorporation for approval by theHighway Commission. Four corporations have beenapproved, two in Austin and two in Houston.41

Caltrans, the California DOT, has recently beenauthorized by the State legislature to developpartnerships with private firms to design, build, andoperate four demonstration projects for State-ownedrights-of-way. Caltrans is soliciting proposals fromprivate developers who are guaranteed leases for upto 35 years to operate the facility and the option torecoup their investment through toll revenue orthrough the value added by the transportationfacility to associated private development.42

Lotteries

The State of New Hampshire established the firstmodem State lottery in 1964, and by 1989,28 Statesand the District of Columbia used lotteries to raiserevenue. Gross receipts range widely; in 1986Vermont lottery receipts were just $12 million,while California’s lottery brought. in $1.6 billion.

J- ~~ ~orm~on e, op. cit., fmmotc 22, p. 38.39(-J- stabler, assistant truwrcr, of Alabam& personal communication, Sept. 28, 1989.-bus Assocti Inc., on Advisory Rcpat to the !knaw Budget

tittcc @%hin@oIL ~: my 1987), p. [V-7.

qlIbid., p. W-21.

%ldifomia Dcpartmcat of Transpatation, Office of Privatization, (Sacramento, CA: October 1989), p. 1.

. -. -. . . . . .

72 • Rebuilding the Foundations: State and Local Public Works Financing and Management

.. J-B-N .. .In1q'''''''''''''' ,,,.,..... 0:aftiDa maccepablemultipurpole inflas1radurefuDdiDa poaram ....... to be amona the'

IIlOIt cUfftcult of poIitiali tasks. In 1981 and early 1983. tbea-OoverJlOl" Thomas Kean ~s imlovadve .. ~sal for a ~-.v hney·Inu~.rt".a Bank (Nne) r.a W:.ddy bailed. O:.sputa over COIl1I'Ol of 1be but aDd its financial stability tiDed tbe idea., however, by die end of 1983. In 1984. := Ocve::= nsjected an al ... ..a:he ~ propccal d=t gave the lqislan..-e more power OVel'lhe bank. Ullimalllly die staDd-oJr led 10 Ibe ealablisbme:nt of. number of individual trust fuDdL 1bgetber these have po¥ided more aiel to local wlS1eWller IIeIJ1IIeDt and 1eSOun:e recovery syscema dian die IitfrasIruccure Bank wa projedecl to provide.

iN2-83: ru N .. J.,.,., i~ B • .a...-r. NJIB wouid have beiped. fi.nance four categories of public works: wastewallel' ueatmen~ water supply, solid wasce disposal, and transparttiiOll. IDe majority of the iuDdin, wouici come from equiiy ioans. wmen tbemseives woukl be funded by Federal Clean Water Ad pants.

However,loc:alities were loadl to see their Federal pants converted into loaDs and ctisHW the NqUiremeDIs to set US« fees or taxes hip enoup to meet costL Moreover, the legislature, which hid played no role in desipinc the propam and would play none in propam oversigbt, QUeStioned die reliability and continuity of me fuDdin& soun:es. The lack of oversiaht was a Specw sdcldn, point. ~ of tbe prOposed bank's size (almost $1 bi1Iion in capit8I) aDd its powerto make allocation decisicms. 'I'ba NJIB was desiped to be an independent audaity with cloe COUDeCtioos to the executive.brandl. pI'OIIIpIina the leaislature to demand die responsibility of determinina the bank's rules and repJaaions. 1bis. demand was incorporaced into the altel1lllive pvposal that was rejected..

19H-85: 'l7N I~' "".",.. B • ..,....Tbe New Jersey State Legislature ultimately enadeCl tine category-specific p:ograms. TbeNew Jeney Trampot1tlliml Trust Fund, estiibli&.'ied in l~o4, uses ie"'"enue buudJ. ban-eel by dedicated iiaOtoi vebide fuel taxes to fwal a $320.3 million program. The Trust Fund UDderIaka direet spending programs and finalQl Slate aid to coun:ies and municipali::~ for =r~CG sys=m ~

1be Ruolll'C. R.covuy a1lll Solid W ...... DiqoMIl Pro"..",. first established in 1980 and substantiaUy expanded in 1985, authorizes II'8DIS and low- or no-interest loans to local covernmems to cover 10 pm:entof COlIS fordevelopin& resoun:e recovery facilities and landfills. 1'be- Sa. Department of Environmenral Protection manages the pro~ which is backed by $168 million ($135 in general ob6gation bonds and $33 million 1raDSferred from the general fund). lDc:al payback of the loans starts 1 year after operations begin at new facilities.

The N.w 1.17" WiB~ ~1It r.,.,. FMII. MtAbli~ in 19M • 1& m ~ financing authority with the power to issue bonds backed by the Trust·s loan agreements with borrower localities. 1'bese ~ts.. in ~ ~ ~ by u.~-fee GOvenants, a StaMappropriated reserve fund. and municipal bond insurance. Funds to loc:aIities come from two sources: tbe Wastewater Treatment ~ an independent autbority~ and the Wastewater Treatment Fund, which is admiDistered by the Stale Department of Environmental Protection. These programs are consideted successful, although officials note that while nearly every eligible jurisdiction is eager to apply for a pant. many hesitate to apply for loans, because local financial solvency is • maj« concern.

l"-ill caNe.. Seney iDfruInJcIuIe fIMaciD&- '-dca -foIIowiaalepGl1l! eo.cu Gt Now Jcney Aftiir:s. NtlW l.,-,q 18IIG: ''''' '1'rJIIf * CDllltdl tHI Nftl.I.., A/ftIJn (PriDc:etaa. NJ: PriDceIDa um. aad RqicxIal ..... Caller. ~ Willaa Scbool of PbbUc .... 1arcnIaIicxuII AfI'ain. M.n:IlI988); and Sopbie M. KOIUJk, oos... fiIIIDce far Local PabUc WoIb: Four ea. Studies. " OTA ~ repon. Dec. 19; 1981.

Prize money and administrative costs can claim upto three-quarters of the receipts. Though lotteryrevenue has in the past proven a very unpredictablesource of funding, it can fill important gaps. MostStates direct lottery revenues into general funds, butseveral States earmark at least a portion of lotteryrevenue for public works infrastructure (see table34).

To help assure continued support for transporta-tion improvements, several States have taken thelead and established long-range capital financingprograms, based on bonds, increased gas tax reve-nues, or a package combining revenue sources.Successful financing programs are typically sold tovoters and decisionmakers by a structured effort thatincludes establishing needs and priorities, evaluat-ing alternatives, and developing political support.(See box 3-C for an example.) Six basic stepscharacterize successful efforts:

identifying specific needs, the purpose of theprogram, and those benefited or otherwise.affected;structuring the program and ranking projects;evaluating and establishing the financing pro-gram;setting up collection and accounting proceduresfor revenues and managing the program;coordinating with other public agencies andprivate sector leaders; anddeveloping political support in advance.

STATE ENVIRONMENTALPUBLIC WORKS PROGRAMS

Because local jurisdictions have historically beenresponsible for environmental infrastructure, theState role has been small, consisting primarily ofsetting public health standards and providing somefinancing and technical assistance to local districts.Supplying drinking water and managing solid wastehave been almost entirely local tasks, However, formost of the past 20 years, States have acted to passthrough and administer Federal grants to localities orspecial districts for wastewater programs. Since thepassage of the Water Pollution Control Act in 1972,the Federal Government has provided constructiongrants for wastewater facilities, to help localitiesmeet the standards mandated by the Act as rapidly as

Table 3-4—Net Revenue From State LotteriesUsed for Infrastructure

Net revenueState (millions) Dedicated useArizona . . . . . . . $42.2 TransportationColorado .. ..0. $26.1 Parks, recreation, capital

constructionIowa . . . . . . . . . . $26.3 Economic developmentOregon . . . . . . . $21.3 Economic developmentSOURCE: Advisory Commmslon orI Intergovernmental Relations, Sgnti-

cant Features of Fiscal Federahsm, 19SS ad., vol. 2 (Washin-gton, DC: July 19SS), pp. SS-90.

possible. The legislative intent was always thateventually State and local governments wouldassume full funding responsibility. The FarmersHome Administration of the Department of Agricul-ture has also played a significant role in water andwastewater treatment plant financing for rural areasand has supported State technical assistance pro-grams as well,

charged with administering and enforc-ing Federal water purity regulations, and almostthree-quarters of the States also support localimprovement programs through grants, loans, andbond banks. Such assistance includes aid to localgovernments for purchasing land to protect under-ground water supply sites (Massachusetts), bondfunds to support water supply contamination abate-ment (Maryland), and low-cost loans for controllingwater supply and wastewater pollution (Kentucky).State management and technical assistance is pro-vided by circuit riders who advise communitieswithout engineering expertise and try to encourageinefficient small-scale systems to consolidate.

issues—Drinking water problems are increas-ingly moving from local jurisdictions to the State.Many problems demand regional solutions, becausewater-quality issues extend beyond political bound-aries (much of Florida is facing drinking waterproblems, for example). Moreover, the costs andtechnical requirements necessary to meet FederalClean Water regulations exceed the financial andengineering capabilities of many local jurisdic-tions.

States establish design, operations, and treatmentstandards and assist local governments with plan-ning and engineering advice; some provide special

74 • Rebuilding the Foundations: State and local Public Works Financing and Management

The New York Depaltment ofTIaIISpJI1aIion (NYDOT) andrelated agencies conduc:ted an aggressive citizen ouueac:h campaip in 1988 10 encourage staaewide· suppoJt for lraDSpOrtatioa impovements. The agencies held public forums 10 ask residents bow to pay forexpansiOll aDd tebabiJjtalim, aad used capital improvement planning tecImfques to deaenniDe c:onsistent.aad CNdible priorities around: the Slate. Subsequently, NYDOT discussed its pIaas with public oftkiaIs tbroughout the Saa1e toensure tbeit support Cor tt. desipated improvements. In NOYeIIIba 1988, voters overwhelmingly approved aS3 billion bcmd issue to rebabilitare the State's highways and bridps. Tbe 0UII'e8Cb aud planning efforts developed for tile campaign have helped NYDOT maintain good reJadons willi COJISIituents. Moreover, die Department now ftqUiJa its regional directors to estimate project costs dtonJu&bIYt assess inflasttucture condition accurately, aad draft tbeirproarams iDaccordance with explicitNYDOT statewide coastruction aoaJs.

('

l ...... iatbia ... iab...a_n.t~NcwY_aep._olTrMipol ....... .--lc "'''Iri".., April 1919.

Large municipal wastewater treatment plants, such as thisone in Washington, DC, have played m important role in

cleansing water resources of pollutants.

technical assistance to small districts. Financially,States play a key role. They allocate Federalconstruction grants based on an annual State needsstudy, with over one-half of the States providing ashare of the local match. States may use Environ-mental Protection Agency (EPA) funds for author-ized wastewater treatment construction grants until1990. However, between 1991 and 1994, all Federalfunds must be used as seed money for self-sufficientState revolving funds (SRFs), from which localdistricts can borrow to build wastewater treatmentfacilities. After 1994, States will have full responsi-bility for administering and funding wastewatertreatment construction loan programs and for pro-viding financial and technical assistance to localdistricts. EPA estimates that a $68 billion additionalinvestment is required to meet current nationaltreatment needs .43

Issues—After Federal support for SRFs ends in1994, States will be responsible for expanding theloan fund base as well as for enforcing all Federalwastewater regulations. EPA is expected to extendcurrent water-quality regulations to cover combinedsewer overflows and bypasses, significantly increas-ing State regulatory responsibilities and local invest-ment needs. In this rapidly changing framework,States play a vital role in providing local districts

with financial advice and technical support. How-ever, State technical expertise is often limited,because salaries for engineering and financingexperts are lower than in the private sector,44 andfunding resources are thin. Federal aid for Stateenvironmental planning and program administrationhas been severely curtailed, and most States have notreplaced it. Costs are likely to exceed the capabili-ties of many local jurisdictions. Furthermore, fewresources are available to encourage new technol-ogy or operating improvements.

Currently, the States’ primary role is in enforcingEPA standards. A few States, including New Jersey,Wisconsin and Michigan, have programs to aid localdistricts in landfill siting and acquisition or resourcerecovery. Because of the regional and statewideimplications of solid waste disposal issues, theState role in providing technical assistance andpolitical support will probably expand.

Federal policies require States to assume a muchlarger role in administering and financing wastewa-ter programs, and between 1982 and 1986, Federalfunds as a portion of State budgets for waterprograms fell from 49 to 33 percent.45 Some Stategovernments-Texas, Ohio, Oklahoma, and WestVirginia, for example-have a history of providinggrants and loans to localities to supplement Federalprograms. By 1981, 41 States had establishedprograms (usually modest) of grants and/or loans tohelp meet the 25-percent local share of Federalmatching grants.46 More recently, many States haveexpanded loan and grant programs or establishedState-run bond banks. The programs have variedforms of capitalization (bonds or appropriations),eligibility requirements (need or fret-come, first-serve), loan terms,and interest rate subsidies.Almost all offer grants or large subsidies forhardship cases. Local self-sufficiency is the goal ofseveral States, but most provide periodic infusionsof capital from the general fund, bond issues, or

of Municipal Pollution Control, 1988 Needs (Washington, DC:February 1989), 1.

Department of

Budget 1980’s (Washington, DC: 1983),p. 58.

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earmarked taxes .47 (Box 3-D describes the Texas grant and enforce current EPA project regulations.Loan Program.) The SRF can make loans to communities at or below

State Revolving Loan Fundsmarket interest rates for 10 to 20 years. Loans can beused to finance new projects, refinance ongoing

EPA modeled the SRF program after existing projects, or to “leverage” or guarantee other bonds.State programs, and under EPA guidelines, States In effect, local districts borrow from a State agencymust add a matching 20 percent share to the Federal that is responsible for managing the SRF, and the

4~.s. &.ummaxal Protection Agency, State p.

.—. .- . . . . .- . - - . . - -.,


EPA grants the money to a State, w h i c h LOAN m u s t a s s u r e c o m p l i a n c e w i t h F e d e r a l

r e g u l a t i o n s . The State provides a 20% Amatch, and the total amount makes up a

State Revolving Fund. Communities borrowfrom the Fund and repay the amount with

interest.

SOURCE: of Technology 1990.

loan repayment stream feeds a self-sustaining loanfund (see figure 3-6).

In early 1990, 42 States and Puerto Rico hadEPA-funded SRF projects under way.48 The Federalgrants total $1.4 billion, and individual State grantsrange from $188 million in Texas to $4.6 million inVermont and South Dakota.49 Utah was the firstState to begin construction of an SRF-financedproject; administrators credit the fast start to experi-ence gained managing the State-based program,begun in 1984. In 1988, Tennessee awarded $8.3million, including a $2 million State match, to sixcommunity water pollution control projects on theState’s project priority list. Interest rates varyaccording to an ability-to-pay index developed by

the University of Tennessee. Several States plan toleverage the capital grants to multiply the effective-ness of the Federal funds—New York, for example,plans to use its capital grant to secure bonds up tofive times the amount of the capitalization.

The success of the SRF program from the Stateand local perspective depends on several factors.Chief among them are: Federal funding levelsthrough 1994, successful financial management ofthe program by the State, and State support of localprojects. Currently, Federal funds are authorized toprovide $1.2 billion for capitalization grants in eachof 1989 and 1990, and $2.4 billion for 1991,50 withamounts beginning to decrease in 1992, and fallingto zero after 1994. Actual 1989 appropriations were

Agency, of Municipal Pollution Control, p. pp.

of Cities reports that billion would provide less than 25 percent of State and local costs of the Act

$941 million,51 however; and States worry that infuture years appropriated funds will also be lowerthan authorized levels.

States face three important financial/institutionalissues related to SRFs. The first, is the required 20percent match. In most cases, these funds are raisedfrom general obligation bonds and/or general appro-priations, depending on the State fiscal philosophy.

Second, State SRF officials are managing com-plex programs that require a high level of legal andfinancial expertise. Loan structuring, portfolio man-agement, and compliance with Federal and Statestatutes demand sophisticated knowledge of localand national conditions and capital markets. Thetransition to a loan program will be unwelcome anddifficult for many communities, and they will needmore State help, particularly in establishing higherrate structures to cover full project costs and ensureloan repayment. For some poor communities, raisingrates to permit conventional loan repayments will beimpossible, and State officials will be called on todevelop alternative financing plans. EPA fundsavailable to States for program planning and admin-istration are being drastically cut, handicappingthose that need the funds for management staff andtechnical assistance.52

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Third, States face the challenge of how and whereto raise the additional capital to finance projects andmeet Federal regulations--only some of whichpertain directly to the objectives of the program. Asone State wastewater program manager commented:

local jurisdictions to stomach for a LOAN—and theFeds just added a new regulation on maintaining adrug-free work environment."53 Utah SRF officialsestimate that Federal contract conditions stipulatingenvironmental reviews, wage rates, and access forthe handicapped will increase local project costs byapproximately 20 percent54 and are compensatinglocal districts by reducing interest rates 3 points.

Costs are a problem now even with Federal support;difficulties will intensify when Federal funding endsin 1994. In most States, the SRF programs are notexpected to meet all the financing needs, and EPAestimates that 20 States will face a combinedfinancing burden of nearly $57 billion.55 Moreover,operating costs are expected to increase rapidly asmore complex treatment processes are introduced,requiring higher user fees and ultimately makingcapital financing more difficult. Finally, State offi-cials can buffer the Federal/local tensions arisingfrom unanticipated changes in Federal regulations,which often hamper local program management andfinancing.

State Bond Banks

Vermont established the first State-sponsoredbond bank in 1970, and at least 10 States have sincefollowed suit: Alaska, Illinois, Kentucky, Maine,Michigan, New Hampshire, New Jersey, Nevada,North Dakota, and Oregon. Such banks reduceinterest costs to local communities by pooling anumber of small, local issues into one large, moreeasily marketable bond. State bond banks offer thegreatest local savings when the State guarantees theconsolidated bond issue with a reserve fund sup-ported by the State general fund.56 Furthermore,having a group of communities participate in thebond issue spreads the risk and lessens the chance ofdefault, thus lowering interest costs. Underwritingcosts are lower because of the larger issue andsuperior credit rating of the State bond bank,57 andsmall town officials, inexperienced in finance,benefit from the expertise of State bond bankspecialists.

Other Bond Financing

Bonds are the primary source of State matchingfunds for EPA SRFs, and now finance more con-struction of environmental facilities than Federalgrants. During the 1980s, municipal bonds raised an

sllkn C. Ni~ cm”Uuuncnld planna, Officc of Municipal Pbiht.ion Contro4 U.S. EsIvkonmmtd~ -Y* m ~uni-k. 11, 1989,

52NW ACidUIly of Public AdUWU“ “stracion, Financing Strong State Water of a National Workshop, Mar.20-21, 1989 (wasMgtoQ DC: Us. Envkomnead ~ &=Yt Ml= Of Wata, August 1.

%x& op. cit., fOomotc 44, Mar. 9, 1989,W.s. En “wmnmend Protection Ageacy, Office of Municipal Pollution Gnaol, S/W 1988), p. 25s- I&earch, b., The U.S. l%vimmnaai Pmtcdon Agency, OfYicc oft& Comptrolla,

m press).%bambas Aasociate& Inc., op. cit., foomotc 40, p. II-11.% Naticmal Ccmf~ of State Iqislaturcs, Capitaf 1987), p. 101.

—


This debris deposited by storm water illustrates why newenvironmental standards will require control of overflow

resulting from storms.

average $3.8 billion per year in capital for wastewa-ter projects alone.58

However, projections of future needs are daunt-ing. EPA estimates that if future capital require-ments for wastewater and water supply facilities arefinanced entirely with new bonds, municipalitieswill have to double the environmental public worksdebt they currently issue—from $4.5 to $9 billion ayear. 59 Based on data from 1977 through 1985, thislevel of increase is not unusual. However, capitalrequirements for environmental programs competewith other public investment needs, and the limitedability of some small jurisdictions to issue new debtposes other problems. EPA estimates nearly 7,000cities and towns, or 26 percent of all communitieswith populations under 2,500, could have difficultymeeting the fiscal standards for new bond issues.60

Despite the complexities of debt financing, nu-merous States have established environmental pro-grams financed by State bond issues to assist localjurisdictions. California’s Clean Water Bond Fund isauthorized to issue up to $323 million in generalobligation bonds to finance water treatment, recla-mation, and conservation projects. The IllinoisAnti-Pollution Bond Fund, established in 1970 witha $750 million bond authorization, funds wastewater

facilities that would normally not be eligible forFederal aid. Maine has a Small Projects CommunityAssistance Program to finance wastewater projectsthat can be constructed for under $100,000; it isfunded by a 1987$1 million bond issue. The Statealso sold $198 million in industrial developmentbonds in 1983 to capitalize the Finance Authority ofMaine, which supports local pollution control andwater supply system construction. Maryland sup-ports a loan program to improve Chesapeake Baywater quality with a $25.4 million general obligationbond. West Virginia funds a solid waste disposal siteprogram with revenue bonds, while Wisconsinprovides financing for wastewater treatment facili-ties with $100 million in bonds and annual supportfrom the general fund.6l

A few States have financed major environmentalprograms through general appropriations, and somehave used appropriations for the State share of initialSRF capitalization. To cite some examples: Massa-chusetts appropriated $750 million to assume thelocal share of EPA construction grants for wastewa-ter facilities in 1985. In 1986, the Georgia Legisla-ture appropriated $21 million for financing the Staterevolving loan program. Wisconsin added $63million from the general fund in 1987 to supportlocal wastewater treatment facilities, and Minnesotasupported its Solid Waste Processing FacilitiesCapital Assistance Program with $20.2 millionappropriated by the legislature between 1980 and1988.

Although many States dedicate fuel taxes totransportation, it is unusual for a State to dedicate taxrevenues to environmental programs. In 1985, theWashington State Legislature established the Cen-tennial Clean Water Program and dedicated an8-cent per-pack tax increase on cigarettes to financeit, based on the relative popularity of “vice” taxes.Since the first grants were made in 1987,$36 millionhas been paid out of the fund to 120 recipients. Theprogram can accumulate funds and need not spendall that is raised annually; an “insurance” provision

~8Am= ~~ Inc., op. cit., fOOtnOW 55”s~d

W.s. Env”uonmental protection Agency, Office of Policy, Planning, and Evaluation, (Washington,DC: September 1988), p. 2-15.

61Bwon and Hackett, op. cit., foomote 13, pp. C-19.

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ensures that any shortfall in revenue is covered bygeneral fund appropriations. Minnesota’s 4-centper-pack tax on cigarettes brings in approximately$16 million each year. Maryland levies a tax on boatsales, yielding $14 million annually, which isdedicated to the State’s Clean Water Program,62 andMissouri dedicates 0.1 percent of its State sales taxto water programs.

State-imposed fees raise only 8 percent of Stateoutlays for environmental programs, although theiruse has increased as States look for politicallyacceptable supplements to general revenue sources.Because State responsibility for environmental serv-ices is primarily administrative and regulatory, Statefees are applied to permit reviews and facilityinspections, and charges are levied for emission ofpollutants. Revenues are used for operating andadministrative costs.

Privatization of solid waste recovery facilities hasbeen successful in some communities, and based onthis experience, States see public-private ventures asan option for other types of environmental projects.However, Federal Tax Code changes have madesome private-public projects more expensive be-cause of restrictions on the use of tax-exempt bonds,and the repeal of tax credits and provisions allowingrapid asset depreciation (see chapter 2).

States encourage private investment by looseningexisting State statutes and by not enacting additionalbarriers. Some States are currently adopting compre-hensive statutes, which include granting local gov-ernments the right to enter into long-term servicecontracts with a private entity and to sell or leasefacilities to private interests. Privatization is encour-aged if the State acts to exempt public-privateventures in the environmental area from beingclassified and regulated as public utilities. At leastfour States (Alabama, Arkansas, Kentucky, andMinnesota) exempt public-private ventures fromsome or all local taxes.63

The New Jersey Wastewater and Water SupplyPrivatization Acts enacted in 1985 are among the

mdUtd GOvernm’ AssOciatim, op. cit., footnote 45, p. S4.%3mmbm Associates, Inc., op. cit., footnote40, p. IV-15.%edcbur U al, op. cit., fwtnatc 7, p. 61.~rbid., p. 62.

most comprehensive privatization statutes. The Actsestablish procedures through which local govern-ments may contract with private entities for up to 40years for financing, design, construction, and opera-tion or management of wastewater or water supplysystems.

MULTIPURPOSE STATELOAN PROGRAMS

Throughout the United States, capital financingfor transportation and environmental public works isusually provided categorically, with each publicworks function having its separate financing mecha-nisms. This approach gives each sector autonomy tofinance its own improvements, but it complicates thecoordinated capital infrastructure planning and bud-geting important for economic development andenvironmental protection. Several States have estab-lished multifunctional infrastructure financing pro-grams to promote economic development; in gen-eral, these are small programs oriented towarddepressed areas. For example, Kentucky has insti-tuted a $20 million Infrastructure Revolving LoanFund with subsidized interest rates for local commu-nities. Colorado set up a Local Government ImpactAssistance Fund financed by mineral severancetaxes in 1977 to help local communities cope withrapid expansion.64 Since 1986, California has madeloans or grants to rural counties for roads and watersupply systems from the Rural Economic Develop-ment Fund.65 Wyoming has one of the oldestmultipurpose loan funds and Washington State hasone of the newest (see boxes 3-E and 3-F).

STATE MANAGEMENT ANDPLANNING

During the last 20 years, State governmentsgenerally have assumed more responsibilities re-lated to public works, adopted modern managementtechniques and technologies, diversified their reve-nue bases, and upgraded their professional staffs.States are increasingly adroit at dealing in theinternational credit markets and in utilizing newfinancing techniques. Of particular interest areimprovements in fiscal management and capitalbudgeting and planning. Thirty-six States now

— .-. .- - - . . . . . _

Chapter 3-States: Caught in the Middle ● 81

.

Box J-E-The W,o",;"g Joint Powen Act LotI" Programl

The Wyoming Joint Powers Act (JPA) loan programl is a suiking example of how the geography. financial and natural resoun:e~ and political climate of an individual State can foster a Wlique program. Wyoming's loan program provides ftmding for a broad range of public works: water and sewer projects. transportation projects (including airports), solid waste facilitie~ and even housing, hospitals. energy facilities. and schools. No priorities are set among these categories, and both existing facilities and newly proposed facililies are eligible for loans. The application process is simple, and the barriers to acceptance are few.

The main impetus for creadna the JPA loan program was concem over the boom and bust energy cycles that characterize Wyoming's natural resource-based economy. Wyoming's dependence on r.attu-al resources also irlflueI'.ced the program's me!hod of capitaJi7ariO!1 ... With no State income rn and a sparse population. Wyoming relies heavily on emnarked funds established with current. resource-based revenues. JPA loans are backed primarily by die State Mineral Trust Fund, which is funded by mineral royalties and the State severance tax. The Wyoming Farm Loan Bo~ comprised oi five members including die Governor. ibe Siate Treasw-er, arad ta ... .e State Auditor, adminis~-rs the loans.

JPA interest rates, which can range from 6 to 12 percent and are CUI'1'eIltly at 8.S percent, are a big break for very small rmal jurisdictions. which could never have access to such low rates on the open market. Loans are secured by pledges from the local jurisdictions to charge facility users adequate fees to cover costs. If higher fees are not initially affordable for users. the State provides interim aid to ease the transition. Since 1974, the Wyoming Farm Loan Board has awarded 266 JPA loans totaling more dum $127 million; S4 percent of the funds have gone to water and sewer projects, 10 percent to transportation. and the remaining 36 percent to medi~ educational. energy. and solid waste facilities.

As of 1988, virtually every jurisdiction applying bad been awarded a loan. Program staff works closely with the applicants to counsel them on the most prudent application strategies, and local jurisdictions recognize the impor1:an.ce oi cooperation in iapping a finite ftmd.

The wide aVailability of the loans has helped avoid arguments over targeting and distribution. The relative harmony between the legislative and executive branches is notable. especially since project selection is lar2elv an executive branch WldenaIdng. Relations between the two branches are eased because the pn;gr3m is funded with earmarked revenues, freeing the legislature from annual budget discussions.' _Second, the local jurisdictions are generally bappy with the program, which pleases legislators. Last, the Fann Loan Board office makes an effort to be as accessible as possible in administering the program. One observer repons that: ~\ •• legislalive oversight over executive branch actions is less important--and less sttingent-in a State where an individual fanner seeking a loan can expect to discuss it directly with the governor, as is common with the Farm Board Loans."]

The legislature may take a more active oversight role in the loan allocation process if -or when--competition for the loans heats up. and the $100 million loan ceiling is approached. More competition seems likely. since the number of applications is steadily growing because of increasing public works needs, greater awareness of the program. and the fact that social service programs are requiring more of the State budget.

1 Material on abe wycming loan program is based OIl Sopbie M. KoJezyk. "State Pinance for Local Public Works: Four Calc Studica. .. orA CODtracUlr n:pon. Dec. 19, 1988.

lTbe loaD program is called a "'joint powers" program because it aIIowI JocIl jurisdictioas to coopcnue in applying for a loan for a joimly used fadlity. Most applic:ati~ however. an: made by siD&Ie jurisdiaions.

3RicUrd MiUa'. director. Wymning Legislative Service Offace. quowd in Korczyk. ope cit., fooIDolc 1. p. 47.

(

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prepare long-range capital plans as a basis for annual lack of such planning and coordination. Althoughor biennial budget decisions.66 land use and public works decisions are generally

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made at the local level, States can be importantplayers.

The coordination of public works functions with State policies on land use and public worksland use development policies can promote effi- planning vary widely, influenced by the politicalciency and maximize the benefits of investment. The climate, the intensity of growth and environmentallow-density sprawl and traffic congestion that typify pressures, the State economy, and available re-so many metropolitan regions mark the widespread sources. At one extreme, Idaho takes a minimalist

-atiod Cxlnfcrmcc of state b! “~ p. 24.

.,.

,

- . . - .


approach toward the State’s role in land use and development. Tennessee has had a State Office ofinfrastructure planning. It has no State planningoffice and provides no support for regional or localcomprehensive planning, reflecting a distaste forintervention in local affairs and the State’s flaggingeconomy. Both State and local resources are solimited that planning is not a major issue; what Stateplanning there is, is done on a departmental basis.67

On the other hand, a few States, especially thosewith sustained growth, have taken steps to coordi-nate regional land use policies and infrastructure

Planning and legislation that permits regional plan-ning agencies since 1935. Currently, the State isdivided into nine regional development districts,which are responsible for data collection, land useand facility planning, air and water quality, and forfostering regional planning among counties andcities. However, the impact of regional planning islimited. Although coordination has improved in thedevelopment of regional sewer and water facilities,the development districts are not designated by the

I

Figure 3-7--Growth In Florida, 1970-87

State as the official metropolitan transportationplanning agencies, and they have only minor roles intransportation planning. Moreover, regional plan-ning in Tennessee, as in many other States, suffersfrom competition among agencies because planningfunctions and enforcement authority are scatteredamong numerous State, metropolitan, and localagencies.

For the last decade, Florida has been a nationalleader in promoting regional growth managementpolicies to link land use and infrastructure develop-ment. Faced with rapid population growth (seefigure 3-7) and inadequate roads and sewer andwater systems, Florida requires planning and devel-opment reviews at the State, regional, and locallevels. While the State has established a stronginstitutional framework for State and regional plan-ning (see box 3-G), it does not play a large role infinancing local public works. In contrast, NewJersey’s State transportation and environmentalfinancing programs (see box 3-B earlier in thischapter) were designed to support its efforts to linkregional capital improvements for infrastructurewith land development.

TECHNICAL ASSISTANCEPROGRAMS

State technical assistance programs, such ascircuit riders described earlier, can bolster localmanagerial and technical knowledge at modest cost,and are especially valuable in States with troubledeconomies and in those with small, isolated jurisdic-tions. As the mayor of a small town put it:". . . oneof our bigger problems is that we don’t know whereto turn to for expertise, for help. [And if we do hirea private consultant] we have no one that tells uswhether this person is doing the best job for us, or ifthey are doing what will make them the best fee."68

Helping local officials spend public works fundswisely can be as important as procuring the funds.

Technical assistance services range from state-wide databanks to financing and technology work-shops. Three State assistance programs examined byOTA use their land grant universities to supportlocal managerial and technological capabilities.However, each program is unique, reflecting itsState’s distinctive geographic, demographic, andfinancial conditions. New Mexico’s program fo-cuses primarily on mobilizing expertise within theUniversity of New Mexico’s Engineering ResearchInstitute to develop local officials’ managerial andtechnical skills (see box 3-H). Designers of theNebraska and Oklahoma assistance programs, on theother hand, placed special emphasis on cultivatingprivate sector participation in administering thelocal programs as well as using the programs to spurprivate sector investment.

Nebraska’s Center for Infrastructure Researchwas established in 1988 at the University of Ne-braska’s College of Engineering and Technology,specifically to forge an alliance between technologyproducers and technology users. Consequently, thecenter places a high priority on transferring aca-demic research results to industry and local govern-ment in the fields of solid waste management, bridgeand road maintenance, and construction materials.Program officials describe their research efforts as“market-driven”;69 they focus their studies on com-munity needs by consulting with local officials and

Us. of ‘ of and I.AlCal Financing July

, Center for 19$9.

. . , - . - . .


private sector representatives before determining theresearch agenda.70

The Oklahoma Infrastructure Institute, estab-lished in 1988, is administered jointly by theUniversity of Oklahoma and Oklahoma State Uni-versity. Oklahoma was hard hit by the mid-1980s oilprice fall, and the Institute’s objectives have beenshaped largely by the State’s distressed economy.Program officials hope that improving Oklahoma’sinfrastructure will rejuvenate depressed areas byattracting new business. Preliminary program litera-ture states that “. . . all aspects of infrastructureplanning, financing, construction, rehabilitation,and management will be critical for achieving Stateeconomic development goals.”71

FINDINGS AND CONCLUSIONSStates coping most effectively with infrastructure

financing issues and Federal requirements are thosethat have both the fiscal capacity and political willto raise capital from public and private sources andan available pool of technical and financial know-how. However, some States must struggle just toprovide current levels of environmental and trans-portation services; they do not have the financialcapability to satisfy local and Federal demands forimprovements. Five factors determine a State’sability to plan and pay for needed infrastructureimprovements.

The first is the strength and balance of the Stateeconomic base, of paramount importance in deter-mining its ability to raise both public and privatefunds. New England and the Mideast States have hadstrong economies in recent years, enabling them toraise State and local revenues and to offer attractiveopportunities for private investment. States that lacka strong economic base, like West Virginia, or aredependent on one resource, like Louisiana, have avery hard time raising both public and privateinvestment funds. In addition, poor jurisdictionswithin such States cannot afford to pay for engineer-ing, planning, and financial expertise.

The second is the rate of population growth, adouble-edged sword for many States-on the onehand, it generates heightened demand for services,while on the other, it provides a broader tax base.

Growing States and communities are able to makesignificant demands on private developers for infra-structure investment-a practical impossibility innongrowth areas where the real estate market isweak, and private investors see little opportunity torecoup an investment in infrastructure.

The combination of population size and density isa third and pivotal factor in determining how wellStates can raise additional revenues. Low-population, low-density States have greater diffi-culty financing public programs. The tax base islimited compared to the scale of needed invest-ments; their menu of revenue sources is usuallysmall; and they lack staff with specialized expertise,forcing them to rely, if they can afford it, on outsideconsultants. OTA finds that those States mostvulnerable to cuts in Federal transportation andenvironmental grants and in need of access totechnical and financial expertise are large, ruralWestern States, such as North Dakota, SouthDakota, and Montana; States with poor economicbases such as Alabama, Mississippi, andLouisiana; and States like New Mexico andAlaska, with large areas of federally owned landor dependent on the volatile extractive industry(see chapter 2, figure 2-7). Although these Statescontain less than 11 percent of the Nation’s popula-tion, their problems are pressing, and many Federalprograms provide little effective special assistance.For example, current Federal programs do notgive special recognition to the needs of States withlow fiscal capacities who are willing to taxthemselves, nor take cognizance of States withsubstantial fiscal capabilities but low tax effort(see figure 3-3 earlier in this chapter).

The land area or special topographic characteris-tics of a State or county-which determine the needfor bridges, viaducts, or tunnels, for example—comprise the fourth important variable, especiallywhen considering funding for roads and bridgeimprovements. Although this factor is taken intoconsideration in allocating Federal highway aid, theformula does not compensate for it.

Finally, the State political environment includesfactors that can override physical and economicvariables; spending and debt limits imposed byvoters can hobble the ability of an economically

7WnivCrS@ of Nebraska-Lincdn, SWWUY (Lincoln, NE: January1989).

71Mark Mm, Drc@ OK: Univcmity of OkIahom& May 1988),

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86 • Rebuilding the Foundations: State and Local Public Works Financing and Management

Florida JI'OWI by -averqe of900 new residents each day. The State is in the midst of a political and financial strugIe over growth ~ after enacdng One oldie Nadon's saonpst land development regulatory ~ and rakiDa a scaad ia favor of comprehensive plannias. Although Sw.e and Ioat1 officials me having problems fiDdiu&. die fuDd& ro implemeal Che new plannins aad public. works requirements. FIorida·s propam can be iDsa'ucdw: to 0IMr Stales. are COIIIidedD& a stroll ... tole in powdI management..

1'1Je s .. '. role in planDina bepa in- 1975' with p8SS8F of the Local Government Compehensive Planning ~ wbich requiJedalllocal goyernmenas to ~ adopt:, and implement local comprehensive plans that included 1l'aDSpOI'taIi0ll and enWoDlnentai public works. The initial results of the act were disappointing; most local plans am18ined only v .... goals and poli~ which made iplplemenwion difficult. In 1982, a Stare Study Committee

1'ItoItI0"IIIIIt EtI~~~_

AaItdI ........ 1Itct ~ pIarn1g and budgeIaJ ~ .... ,. "JJopment oondnueI to fIauri8h.


identified the absence of strong State and regional planning as a major reason the local plans were ineffective andrecommended overhauling the 1975 legislation.1

Convinced of the need for strong State and local controls, the legislature adopted the Local GovernmentComprehensive Planning and Land Development Regulation Act of 1985. The provision is therequirement that each of the State’s 67 counties, in conjunction with their respective cities, submit a comprehensive5-year development plan to the State Department of Community Affairs (DCA) for approval. The plans mustconform to State comprehensive and regional plans and must spell out in detail what types of development areallowed and where, and where public works systems will go and how they will be financed. Each district must adopta multi-year capital improvement program and an annual capital improvement budget. The teeth in the legislationis the “concurrency” requirement stipulating that a specified service level for highways, sewers, and other publicfacilities must be available at the time of the impact accompanying any new development. Within a year after planadoption, a local government may not issue a development permit that will result in a reduction in the level of servicefor any facility identified in the plan.2 In effect, the State is requiring local governments to provide servicesaccording to a comprehensive plan that is tied to a capital improvement budget. Twice a year, local districts mayconsider comprehensive plan amendments. The penalty for noncompliance is a cut off of State funds, primarilyrevenue sharing.

DCA began reviewing the mandated local plans in July 1988. Of the 201 plans received, 56 have been approvedand another 18 are close to approval.3 It is too soon to tell what will occur when local governments begin to carryout the plans. Some builders, particularly upset with the concurrency regulations, claim all development will bestymied unless local standards are lowered or the State substantially increases funding for public works.

Although local and State officials agree on the need for comprehensive planning, local governments want theState to take a bigger and more responsible role in financing needed public works, estimated to cost as much as $1.6billion annually through the year 2000. The State has resisted local pleas for an increase in the State gas tax rate.Local governments frequently have not included transportation projects, funded by the State Department ofTransportation (DOT), in their local comprehensive plans because the funding schedule for the projects has beenunpredictable. 4 To remedy this, 1989 legislation enables local governments to count on State funding for the first3 years of DOT’s 5-year plan. The legislature has also given local governments authority to levy a l-cent local salestax dedicated to 1 infrastructure and a l-cent local gas tax for roads, although both levies are subject to local referenda,which makes them unpopular with elected officials. Nine counties have passed the sales tax and 13 have defeatedit; prospects for passage are improving in some large urban counties. The State is encouraging local governmentsto make greater use of impact fees on developers..

1~~ W. OpCmII, %xd timmt COUI-VC Planning and Land Devdopmcmt Regulation A@” Fibri&z Urhnlswes, vol. 13, No. 1, October 19S5, p. 4.

2s~ of Florid& “suJatc staff Analysis and ~‘ Impact Statuncn&” aczom3 “

tx@u8 _ Bill 2A, June 3, 1989, p. 1.Mlckl Richardaom legislative dimctar , Florida state Depmmcm of Community /UTa& pcmonal cornmuticakm, Ox. 6, 1989.

%atEl of FkxiCl& op. cit., footMu 2, p. 4.

strong State to finance infrastructure improvements. general revenues and debt financing are forcing mostStates with laws that permit districts to pursue avariety of financial strategies tend to manage better.OTA finds that despite strict spending limits insome States, voters in many States have sup-ported the use of general or dedicated revenuesfor well-defined transportation or environmentalprograms to address specific priorities. Success-ful efforts to raise fuel taxes or establish Statebond banks are products of strong politicalleadership and commitment and the willingnessof a State's voters to pay for public services.

The expanding needs of social programs, such aseducation, health care, and criminal justice, for

States to finance public works capital from benefitcharges (e.g., user fees and special assessments) andto make local projects self-sufficient through loanprogram rather than grants. Currently, transporta-tion is funded substantially from user charges, andenvironmental programs increasingly from debtbacked by user fees. Greater use of benefit chargesreflects a shift in attitude toward who should pay forpublic services; when there were fewer demands ongovernment, broad-based taxes were able to carrymost of the burden. The current trend is for Stategovernments to rely more heavily on benefit chargesfor pay-as-you-go spending and to back revenue

88 ● Rebuilding the Foundations: State and Local Public Works Financing and Management

(

bonds for long-term improvements. (See table 3-5 pay for transportation improvements. The gas tax isfor advantages and disadvantages of financingstrategies.) OTA concludes that benefit chargesare attractive and effective strategies, because oftheir revenue potential, voter acceptability, andservice management opportunities. However,these charges have major socioeconomic trade-offs that need further consideration, includingadministrative issues, equity, and revenue relia-bility in the case of a political backlash, aneconomic downturn, or real hardship. For exam-ple, States with low economic bases and/or smallpopulations have major difficulties developing suf-ficient capital solely from user fees.

Reflecting the swing toward benefit charges, allbut three States have raised gas taxes and othermotor vehicle user charges over the last 10 years to

a relatively large revenue producer, and increases aremore acceptable to voters for supporting transporta-tion improvements than raising general taxes. Al-though earmarking revenues for special purposesrestricts their fiscal options if priorities change,States find earmarking a good way to ensure a stablerevenue stream. Gas taxes and other vehicle usercharges are frequently used to finance public transit;and a number of States use aviation-related taxes andfees to support airport development. Some States usegas tax revenues for nontransportation programs,although transportation advocates feel strongly thatthese funds should be reserved for transportation.

OTA concludes that because gas taxes andother transportation charges are politically ac-ceptable and proven reliable revenue sources,

----- . - - -- -

— —

—Chapter 3--States: Caught in the Middle ● 89

Table 3-5-Major Infrastructure Financing Mechanisms: Advantages and Disadvantages

Advantages Disadvantagesfund appropriation . .

General obligation bonds . . . .

Revenue bonds . . . . . . . . . . . .

State gas tax. . . . . . . . . . . . . .

Other dedicated taxes

State revolving funds .

. . . . . .

. . . . . .

SOURCE: Office of Technology Asso8srnent, 1890.

States are currently better able to finance trans-portation improvements than environmentalprograms. Highways, aviation, and (to some extent)transit have dedicated revenue sources, while Staterevenues earmarked for environmental programs areunusual. Because a large share of environmentalcapital currently comes from Federal grants, futurefunds for environmental needs will have to comefrom State general revenues, user fees, or new,earmarked taxes, unless a new Federal program isenacted.

States are providing local governments withnonfinancial support, such as enabling legislation topermit local option taxes or to facilitate public-private ventures and other types of innovativestrategies. Some States have established comprehen-sive planning requirements, and others have createdbond banks to assist local districts to reduce the costsof acquiring capital. Several States are offeringtechnical assistance and help with capital budgeting,

and others have established infrastructure researchprograms.

No State has a broad-based tax or revenue base forenvironmental services. However, most States haveestablished EPA-capitalized revolving loan pro-grams for construction of wastewater facilities andare working out the technical, administrative, andinstitutional difficulties inherent in such a complexfinancial activity. States will be hampered bycoming cuts in Federal funds to support theiradministrative costs and must also accommodate theneeds of those districts too poor to afford a loan andexpand the supply of capital, both now and whenFederal grants end in 1994.

Despite the success of several small, multipur-pose, State infrastructure programs-Wyoming(box 3-E) and Washington (box 3-F), for example—it seems unlikely that States will fund and administertransportation and environmental programs jointlyto any significant extent.. Traditional differences in

21-667 - 90 - Q : QL 3

90 • Rebuilding the Poundl1lions: SttJIe and lDcal Public Worb F;1II2ncing and Management

PfH1Io a.dIt: Port uthority New YOtt lind ,.. Jetwy

acit ties are an effacti:ve way CO ensu a oonstSta eve .. to aU ng cap at deb and 0 operations and maJ • ance

sources of fundmg and FederallState/1ocal ust tudonal relationships are areal, creat ng road blocks to comprehensive nfrastructure program integration OTA s research indicates that pol

cymakers search III for new fund ng and man &lement strategIes may ftnd greater success n pursu ng separate programs to support enVIrOn mental and transportation publ c works

.... . ... ,.~ .. ~ .. ,

" , , \ .' ~:

\ ,

..

", If

. .

,:.,-..

CONTENTS

LOCAL TRANSPORTATION RESPONSIBILITIES .•.•••..••••.•...•..•••..••.•. R()8ds and. Bridges, ............................................... ..- ................... . 148ss·~t •••••.•••.•••••••••.••••.•....•••••••••.•..•••••.•••..••.•...••.•• AirpJrts. ................................................ -................. ' '" ..................... .-RaiJroads.- ............................................................. -• • • • .. .. • .. .. • • ........ . ~ and, Waterways . • ....................................................... .

LOCAL ENVIR.ONMENTAL RESP{)NSlBILITIES .•..•.••..•..•..••.•.•..••.••• 1'\.iftiriftft -- - -.,&~ Water Supply ...•.••......•••.•.•...•.•.....•..•.•.....•••........•.• Wastewater Treatment • . . . . . . . . . • • • .. • • • • • • . • . . • • . . . • . . • • . • • • • . . . . . . . . . • . • . • . . . . 80M Waste ................................................................... .

L-OC.A.L CW()VBP_~ FI5C.A.L PROOR"A_¥aS ................................ . .P.rOIJI'IlY Tax. ....................................................................................... . Retail. Sales ~ .............................. -.- ...................................................... . IIIc:onle" ~ ............ ' ........................ W< ................................ eo • • • • • • • • • .. ..

US«" Cbqes: .......... ' ....• ~ •..• '~ ........................................................ . ~ ~v~t[ijsnicts ................................................. . Capital ~vement PJanning and Budgeting ............................................... ..

REGIONAL PI.ANNING ........................ ., ........................................ . IJENEFI'f-BASED FINANCING S'I'RA1'EGIES ....................... 0, .................... ..

DeYeI~ CbuBa ..•..... I ..................... " ••• e· .................................... .

S}'JeciallrlJprove:IJJeDt Districts .................... 0....................................... . .... .. nx .IJlcreIneI1t FiDa.nc:ing ................................................................... . Private- InvestlIlCllt ..... ., ..................... , .' ........... ' •• ' ............................ ' •••••••

Is.-ues Relatad to-. .Benefit Financir..g. ••••• '.' ••• ' ••.• ' ...... ' ................................ . CONa.,USIONS ...... " ........... -.,.- .......... *' .......................................................... ..

l..ocaI. ReveIllJe. Soluces ................. ' ....... ' .... ., " ......................... ' •.......• CompliaJlce ......... ,-_ ................... ' ........... :~' ......................... .

Plaming. ............................ ' •• ~ ............. , ............. ' ••• ft ..................... ..

BODS

4-A 'JD.. Spenc:l:ing. and 1lebt Limitations ................ .-.' .............................. ., .' ............ .. 4-8. What It Takes To Pass a Sales Tax Increase .............................................. .. 4-C. JIIloellix.·s User Fee Prograxn ................................................................. . 4-D. 1l1e CiJlcinnali Infrasttucture Commission .............................................. .. 4-8. SANDAG: Fmancing Means Planning Power ......... _: .............................. ..

4-1. Ucal Government Ex~dinm=s To Maintain Current Levels of

PtIp

96 96 98 98 99 99

100 100 101 102 103 103 103 103 104 106 107 107 110 110 111 111 112 113 114 116 116 117 117

Page 95

104 106 109 110

Page

- Environmental Quality and Comply With New Regulations ••••• e.-. ......... .... 94 ~2. Jlestjnatioas o~' Engineering' Students .......................... ., ..................... .,'", .. • • .... .. .... 96

4-1. Number and Types, of Local GovetDlllelltS. 1987 ., .......................................... > .... '

4-4 IDcrease in. Household User Cbqes: in Municipalities Attributable to EnvironDJental Regulations .......................... -............................ -................... .

Page 93

101

Chapter 4

Local Governments: Where the Buck Stops

If we can convince ourselves that light beer tastes better and is less filling, we ought to be ableto convince voters to support higher quality services.]

Local officials and managers are on the firing line.They face day-to-day management problems andexpenses for system operations and maintenance,complaints about inadequate roads and crowdedairports, Federal penalties for environmental defi-ciencies, and constituent hostility to the tax in-creases needed to pay for resolving these problems.According to one method of calculation, over 83,000local government units (see table 4-1) operate in theUnited States. These range from densely populatedcities and rapidly growing urban counties to tinytowns and sparsely populated rural counties. Theyinclude a multitude of single-purpose special dis-tricts, among which are the Nation’s 600 highwaydistricts, 356 airport authorities, 163 port authori-ties, and numerous water supply districts.2 Localgovernments encompass a staggering array of sizes,economic characteristics, and functions; in theChicago metropolitan area alone, over 1,200 govern-mental units--6 counties, 113 townships, 261 mu-nicipalities, 313 school districts, and 501 specialdistricts-may be found.

Officials of these local governmental bodies aredeeply committed to improving aging public worksfacilities to support both essential services and localeconomies. To meet the relentless demands for

Table 4-1--Number and Types of LocalGovernments, 1987

County . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,042Municipal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,200Township . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,691School district . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,721Special district ........0 . . . . . . . . . . . . . . . . . . 29,532

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,166

better services, local officials from Weehauken toSan Jose pursue the elusive dream of adequate,reliable, and politically acceptable financing. Find-ing that traditional strategies for funding publicworks are no longer enough, local officials areseeking to make projects more self-supporting andto involve the private sector. However, each commu-nity must match its plans to its political andeconomic framework-and abide by Federal regula-tions and State laws as well. Many are makingextraordinary efforts, and some have been successfulin developing and funding programs to meet theirmost pressing needs.

However, OTA did not find any jurisdictions thatclaim to be doing more than staying even on meetingpublic works needs. Local problems vary with thejurisdiction’s size, age, and economic and geo-graphic characteristics. Cities must maintain trans-portation networks built to serve commercial andresidential areas developed years ago. As publicworks facilities age, maintenance costs rise, sappingfunds that might be used for modernizing orrehabilitating their systems. Traffic congestion anddelay are increasing frustrations for commuters andcommercial activities, and affect the quality of lifein major urban and suburban jurisdictions. Commu-nities must also take steps to comply with new waterquality and wastewater treatment requirements; anumber still do not meet current air quality stan-dards.

Yet to balance their budgets as required by Statelaws, local governments have had to cut expendi-tures, raise taxes, and tap a variety of alternativesources of revenue. With most attributing theiractions to curtailments in Federal and State funds,3

52 percent of the Nation’s cities reduced capitalspending in 1987, 44 percent did so in 1988,4 and

lwhlt Van Cott, Commlssloncr of w~cr, Tolujo, Ohio, in U.S. Congress, Office of TechlloIogY A=ssment, ‘cTranscr ipt ofProcee&gs-Environmcntat Infrastrucnue Workshop,” unpublished transcript, Sept. 14, 1989, p. 132.

z~u~ R. ha ~ ~., Spec~ D&Uic+ Use@ (wii&hlgtOxl+ x: me U* L~ ~ti~k 1987)!pp. 4-6.

3Douglas D. Pctc=om Ciry ~h Reports on America’s Cities (WashingtorL DC: National League of Citi~ 1988). . .p. Ill.

%id., p. 19.

-93-


Traffic jams are so much a part of daily routine in urbanregions that congestion-related words, such as bumper-

to-bumper and rush hour, have become part of theAmerican vocabulary.

one-third in 1989.5 Counties also report a wideninggap between public works needs and revenues,despite efforts to increase local receipts throughspecial assessments, impact fees, and public-privatepartnerships.6

Local officials’ public works responsibilities arecomplicated by Federal and State policies beyondtheir control. These include:

●

●

●

●

●

New environmental requirements that will in-crease both local capital and operating ex-penses (see figure 4-l).Reductions in Federal support, on which localgovernments had come to rely, especiallywastewater treatment construction grants andrevenue sharing funds. The cuts have beenmajor blows to local governments; in mostcases, State support and increases in local taxesand fees have not filled the revenue gaps.Requirements to fund special social programs.Federal tax code changes in the 1980s thatmade public works partnerships less attractiveto the private sector and increased the cost ofborrowing.State limitations on property tax increases andborrowing. Such laws have thwarted localefforts to raise additional revenue to support

I

Figure 4-1 --Local Government Expenditures ToMaintain Currant Levels of EnvironmentalQuality and Comply With New Regulations

Billions of 1989 dollars

Actual Projected

3 0

01 , , ,, , 1 1

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999

Office of based on reformationprovided by

Box 4-A details tax, spending, and debt limitationissues confronting local jurisdictions.

Lacking both financial and management re-sources, small districts have been particularly hardhit, and their fiscal resources will be further strainedby new environmental requirements. Although somesmall jurisdictions are wealthy, most have low taxbases, low per-capita incomes, and virtually nopublic resources or access to private investmentfunds. Their per-unit costs for public works are oftenhigher than those for larger districts that benefit fromeconomies of scale-it costs nearly four times asmuch to provide 1 gallon of clean drinking water ina community of 500 as it does in a city of 500,000,for example.7 Because of their small size andeconomic characteristics, some jurisdictions find itdifficult-almost impossible-to borrow money incommercial credit markets. Compounding theirfinancing problems, small jurisdictions lack profes-sional expertise and experience in managing publicworks. Officials are dependent on consultants-forevaluations of their systems and advice abouttechnological options and financing strategies, be-cause salaries in the private sector are so attractivethat few engineers enter State and local governments(see figure 4-2). States do provide some technicaland financial support (see chapter 3); however, not

I

D. in 1989, R on America’s Cities (Washington DC: National of 1989),p. v.{

I Inc., Leaders DC: National Association of July 1987), p. 6.I

(Washington, DC: I Works 1987), p. ii.

-- --- - - -- - - . _ . .

Chapter 4--Local Governments: Where the Buck Stops ● 95

Box 4-A-Tax, Spending, and Debt Limilations

During the 1960s and 1970s. local govermnents increased property taxes substantially to finance both services and their bonding debts for public works consttuction. Angered by rising taxes, taxpayers in a number of States pushed through legislation to limit local government use of the property tax. Local jurisdictions in 25 States faced limits before 1970 on the tax rates they could impose on local property owners; 8 more States had set limits by 1985.1

California's Proposition 13 and Massachusett's Proposition 21/2 are the best known. Proposition 13 precludes local jurisdictions from increasing property taxes for nondebt purposes an£L until modifiecL precluded any new debt obligations supported by property tax revenue. Proposition 21/2 limits local property tax rate increases in cities and towns to 21/2 percent per year until the rate reaches 21/2 percent of real estate market value. Communities with tax rates exceeding the ceiling have to reduce their tax rates 15 percent annually WItil they reach the 21/2 percent ceiling.2

(See chapter 3 for further infonnation.)

Arizo~ California, Iowa, MarylancL New Mexico. and Oregon also restrict increases in assessments. requiring local govermnents to increase tax rates rather than relying on automatic revenue increases resulting from rising property values. California, Iowa, and New Mexico exert even stronger control over localities by limiting both the tax rate a...."d assesSaT.ent ii'lcreaseS.

Local goverrunents have successfully persuaded some States to mitigate the impact of such property tax limitations. For example. Massachusetts increased aid to local goverrunents by 12 percent annually between 1981 and 1988 as a means of compensating local governments for much of the revenue lost as a consequence of Proposition 21/2 as well as the loss of revenue sharing.3

In addition to property tax caps. localities in a handful of States must abide by either general revenue or expenditure limits. Maryl~ Minnesota, Mississippi, and Missouri set limits on the amount of revenue that local goverrunents are allowed to collect from property tax and other nonproperty tax sources. Arizona and California restrict the amount of money that a jurisdiction can appropriate or spend annually.4

Many States impose constitutional and statutory constrai.,ts that limit the ability of local governments to issue general obligation bOnds. Although most municipauties maintain levels of indebtedness far below the imposed limits~ jurisdictions with low or declining credit ratings find that the limits figure in their discussions with credit analysts. TIle impact of State ceilings is less significant when jurisdictions have the option to choose between general obligation bonds and revenu~ bonds that do not fall under State regulations.

By 1986,42 States had imposed some type of constitutional or statutory limits on local government's ability to issue general obligation bonds. The typical fonns of regulation are a cap on debt levels or referenda requirements. While a few States tie debt limits to tax revenue, most tie them to a percentage of the value of a municipality's real property. In several States. the established debt limit can be exceeded for water and sewer consttuction. economic deveioptnem. or other specified purposes. A few States tie debt limits to tax revenue.

General obligation borrowing is also constrained by interest rate limits and/or referendwn requirements. Interest rate limits are not always crucial. since States frequently are willing to adjust limits as needed to respond to the credit market. 5 On the other hantL referendum requirements, imposed by the majority of States. can be strong constraints on local borrowing. For example, although Virginia counties have no limits on local borrowing. voters must approve every general obligation bond issue--a very effective restraint. California requires voters to approve all bond issues by a two-thirds majority.

A few States have neither debt nor interest rate limits and require only a simple majority vote of elected officials or the electorate. 'The per capita general obligation debt of these States does not show a consistent pattern compared to each other or to the national average. Willingness to borrow is thus more a reflection of State philosophy than of restrictions incorporated in constitUtions or statutes. - --

lAdvisory CommissiIJD on Intergcm:mmemal RelaD.oos. Significant FeaIIInS of Fiscal Federaltsm. 1988 ed. vol 2 (Washington. DC: 1988), p. 102.

2Sopbie M. Korczyk. "State FiDaDce for Local Public Works: Four Cue SIUdics,'· orA <XlIlUaCtor report. December 1989. p. 59. 3Jbjd. pp. 59-60. 4A..Aviscry ~ (I1ln:e1ji.1y~~ta1 Relations.. up. C:d.. fGOliiUl£ It p. 102.

SOovemment Fmance Researdl Calter, Constitlltiolllll, SltJIMIOry, and Other /nrpedimenu to Local GOllerlVltenl /f(rtutnlCtllTe FlnDnce, prepared for the Nlllional CouDQl on Public Works Improvement (WashinJlOD. DC: October 1987). p. 42

i,

I

i

Figure 4-2--Destinations of Engineering Students

Bachelor's degrees Master’s degrees

her 11%

State/localgovernment 3%

6%

of 1990, baaed on 19S2 Foundation

all States have sufficient programs, and smalldistricts’ difficulties are compounded when the Stateis also struggling economically and cannot help.Rock Springs, Texas, typifies the multiple problemsfacing such towns (see chapter 1, box l-A).

LOCAL TRANSPORTATIONRESPONSIBILITIES

Local officials have long known what their Stateand Federal counterparts often appear to overlook—that local public services must function smoothly asa system for the national economy to remain healthy.If local businesses falter, the economic health of theState is affected, and eventually the economic vigorof the Nation is sapped. The international market forcitrus provides one example of the interconnectionsbetween local infrastructure and the national econ-omy. Grapefruit is picked and placed in intermodalcontainers in Florida groves. The containers areloaded on tractor-trailers for the trip by local andState roads to a railroad yard, where they aretransferred to a special container train. Once or twicea week, these special trains speed across a tier ofsouthern States to a rail transfer facility near a majorlocal port on the west coast. Within hours, thecontainers are transferred once again to tractor-trailers, trucked over local roads to the port’s dock,

FederalGovernment

14%

State/localgovernment 4%

and loaded on a waiting vessel. If the transportationsystem is functioning properly, 5 days after beingpicked in Florida, the grapefruit may be crossing theocean on the way to Japan, providing a valuableboost to the U.S. balance of trade.

percent of the Nation’s roadway mileage.8 Theyreceive funding support from the Federal Govern-ment, which provides 24 percent of total nationalhighway expenditures, and State governments,which provide an additional 52 percent.9 State andFederal programs are usually administered throughState Departments of Transportation (DOT) orHighways. When additional capital funds are neces-sary, local governments depend on their own generalrevenues, and increasingly on dedicated taxes. Mostcommunities have backlogs of road and bridgemaintenance and repair projects and seek greaterState support or permission to levy user fees, such asthe local gas taxes allowed in 16 States.10

To be eligible for Federal aid, local street andbridge projects must conform to categorical grantrequirements; these requirements and concernsabout liability are strong incentives to utilize tradi-tional designs and technologies, rather than innova-

Highway 1987), p. 4. p. m.

*-~, manuscript, 1988.


To comply with Federal requirements, contractors inColorado replaced a wetland, filled in during highway

construction, with this man-made pond.

tive solutions. Moreover, with the exceptions of the3- and 4-R programs,11 Federal funds are restrictedto new capital projects, precluding their use tofinance traffic management improvements thatcould reduce congestion, such as upgraded signals,ramp metering, and real-time traffic monitoring.When adjusted for inflation, Federal expenditures in1989 for highways and bridges were at the samelevel as in 1980 (see chapter 1, table 1-2), althoughconstruction and repair costs have escalated. Yet theFederal Highway Trust Fund, fed by motor fueltaxes, had a $9 billion balance in 1988;12 this balancewas estimated to rise almost another $1 billionduring 1989. In this context, local officials deem itunfair that Federal fuel taxes collected from theirjurisdictions are being held in the Trust Fund and arenot returned to them for the intended purpose.

In addition, State and Federal planning andconstruction requirements, such as detailed environ-mental impact studies and construction wage ratestandards, delay projects, increase costs, and dis-courage innovation. Although streets and highways

are essential to intermodal connections, local high-way departments have little incentive to seek inter-modal solutions to areawide transportation problemssince Federal and State funds are allocated by mode,and interjurisdictional coordination is difficult toachieve.

Weak land-use planning and development con-trols in many growth areas have resulted in trafficthat exceeds the capacity of even new roads.Officials in rural areas face the dilemma of maintain-ing many miles of lightly traveled roads andnumerous bridges at service standards necessary forheavy trucks carrying seasonal agricultural productsonly a few weeks a year.

Convenient automobile transportation and thelure of suburban living bring with them crowdedhighways and air pollution in metropolitan areas.Peak-hour congestion occurs daily, and gridlockstrikes in the case of an accident or when repair workis necessary; indeed, when asked what he wouldchange to improve his business, an official of a largeinternational shipping line replied:”. . . reduce localtraffic congestion.”13 Routine maintenance must becarefully scheduled and managed to avoid majordisruptions. The New York State DOT routinelyadds 40 to 50 percent to the budget for each majorhighway improvement project to cover the costs ofmeasures to maintain traffic flow during construc-tion.14

While new technology can bring some short-termimprovements to traffic congestion problems,15

changes in lifestyle and institutionalarrangementswill be necessary for long-term solutions in regionswhere problems are most severe. In southern Cali-fornia where a one-way commute to work can takealmost 2 hours on a bad day, several major employ-ers have begun telecommuting programs underwhich employees work at home or in a regionaloffice and communicate electronically.16

I Jersey ‘ g Council and New York Metropolitan Transportation Council, “Regional and unpublished April 1989, p.

U.S. Congress, of Technology Systems and Urban Traffic Problems,”science, Education and Program staff 1989.

for “on, A e,” Costa CA, unpublishedremarks, Nov. 9, 1989.

- 90 - 5 : 3

operating department or through a public transitauthority. During the 1980s, ridership increased forrail systems, but decreased 11 percent for buses.17

Nationally, farebox revenues cover less than 40percent of operating Costs; 18 and service is subsi-dized from general funds, from earmarked sales oremployment taxes, and from State sources (seechapter 3). Federal capital grants have financed alarge proportion of bus and subway car purchases,bus maintenance facilities, and the renovation orconstruction of rail systems. Growing numbers ofexpress bus lanes and crowded “Park and Ride”facilities show intermodal linkages will be usedwhen they are provided and convenient

Federal grant categories and a community’s mostcritical transit needs do not always fit smoothly.Some cities receive more capital funds than theyneed, discouraging operating efficiency and propermaintenance, while others, often those with olderrail systems, are in desperate need of capitalequipment and track rehabilitation, and are under-funded.19 Transit operators find it hard to understandwhy Federal transit aid is declining when a $5.2billion balance exists in the Mass Transit account ofthe Highway Trust Fund.

Transit benefits are diffuse, affecting many onlyindirectly through easier access to downtown andreduced air pollution and auto congestion. Theseindirect benefits make it difficult politically toestablish an adequate and reliable local revenuebase. The French Government addressed this issueby levying a local payroll tax, with rates rangingfrom 2 percent in Paris to 0.5 percent in smalljurisdictions, on all businesses with nine or moreemployees. Receipts are dedicated to transit andfinance about one-third of all capital and operatingcosts. Major improvements in French transit serviceover the past 15 years are attributed to the revenuesfrom this broad-based tax.20

In contrast, many public policies in the UnitedStates are disincentives to support for mass transit.

The frustrations and fatigue of commuting in heavy trafficcan take atoll on productivity in the workplace.

Transit officials are not typically an integral part oflocal and regional transportation and land-use deci-sionmaking, and in many communities, land-usepolicies allow metropolitan sprawl, creating transitneeds unsuited to conventional fixed-route bus andrail service. Policies that require employer-providedparking make it difficult to increase transit ridershipand improve productivity. Even Federal tax policyfavors auto drivers, because employer-paid transitsubsidies are considered taxable benefits, whileparking privileges are not. State and Federal motorfuel taxes are relatively low, suppressing the cost ofgasoline to motorists and providing a further disin-centive to transit use.

Over one-half of the Nation’s large and mediumcommercial airports and a greater percentage ofsmall commercial facilities are owned and operatedby municipal and county governments. Most majorairports are largely self-supporting, except for theessential air traffic control services provided by theFederal Government They use landing fees, airlinerents, and revenue from parking and concessions tofund facilities and services. Nonetheless, they mustcomply with Federal, State, and local regulationsand be responsive to airline and passenger concerns

D. “Benefit Charges for OTA 1989. for 1988), 37.

of urban Public France: for Developing at the T meeting, DC, January 1987.


Massachusetts port Authority

Paking fees area key source of income for major airports.

as well. While over one-third of the Federal Airportand Airway Trust Fund annual appropriation goesfor air tile control improvements, a little overone-quarter is allocated directly to airports forexpansion and renovation.21 Nearly 90 percent ofcapital improvements at reliever and general avia-tion airports are paid for from the Trust Fund.22

Other Federal- and State-aid programs are targetedat small airports important to communities foreconomic development.

Capacity and noise problems and ground accessdifficulties (inadequate parking, highway access,and mass transit connections) beset many largeairports. Reliever and general aviation airports aretargets for developers seeking large sites for com-mercial and residential developments. The aviationtrust fund balance was $5.8 billion in 1988, and isexpected to reach $6.8 billion in 1989,23 to thefrustration of airline operators and airport managers.However, even when ample funding is available,airport expansion plans often draw hostile reactionsfrom citizens who fear that increasing airportcapacity will bring more traffic and higher noise

levels. Friction between airports and citizens has putmany local airport improvement plans on prolongedhold.

Local governments have minimal direct responsi-bility for railroads, because the private sectoroperates freight service, and intercity passengertrains are run by Amtrak. However, rail facilities arestrategically located and an integral part of mostcities. Many believe that they represent a neglectedoption for moving people or goods within andbetween metropolitan areas.

Trains could play a large and important role inimproving urban and national mobility, as thesuccess of Amtrak’s Metroliner between Washing-ton, DC, and New York City, and the importantcommuter rail services in States like California,Illinois, and Pennsylvania illustrate. However, railcompanies claim that trains cannot compete, exceptin a few situations, with cars, trucks, and planes,which can use public rights-of-way-that is, high-ways and airports. Recently, a few private compa-nies, seeking profitable opportunities to use aban-doned track, have begun to plan new commuterservice in heavily traveled corridors. Before rail-roads can play a larger role in local transportation,rail service must be integrated with other transporta-tion modes, and public and railroad executives mustlearn to work harmoniously. Numerous institutionaland legal issues affecting public and private sectors,such as liability for accidents, must also be ad-dressed.

Ports and waterways can be of major importanceto local economic development. Coastal port compe-tition in the East is particularly vigorous, because ofthe major shift in international trade to the Pacificrim. Generally, port facilities are owned and man-aged by a municipality or a public authority; inlandwaterway terminals are frequently privately owned.Ports raise operating funds primarily from user feesand use revenue bonds to acquire capital; some alsoreceive local and State general fund appropriations.

(Washington, 1988), P.

on Public Works Improvement, Fragile 1988),I p.

congressional Budget Office, op. cit., 21, p. 36.


introduction of double-stack container cars has revital-ized many freight railroads and is a fast growing type of

commercialtransportation.

Federal funds cover the majority of navigationinfrastructure costs.

Many older ports are at a critical juncture; theyneed to modernize and expand facilities to remaincompetitive, but cannot support the necessary in-vestment without raising fees substantially, whichwould undermine their competitive position. Underthe Water Resources Act of 1986, costs for channeldredging must be partially borne by the local portoperator; previously, the Army Corps of Engineershad full responsibility for dredging. Furthermore,the disposal of dredged material has become a majorenvironmental and cost issue for industrial ports.

The Nation has more ocean and inland ports thanrequired by modern shipping equipment and goodstransport patterns.Industry officials advocate thetargeting of limited public funds for facility im-provements for high-priority, deep-water ports and. main-system projects on the waterways. However,decisions on which ports have the highest priorityand what constitutes the main inland waterwaysystem are controversial and problematic.

The transportation linkages between ports and thepipeline, rail, and truck services that move products

over land to terminals are critical to the efficiencyand attractiveness of the port to shippers. However,despite the obvious importance of these connections,few ports have integrated transportation systems,and port officials often find negotiating with privatecarriers difficult. Furthermore, frequently only onerail carrier serves a port, curtailing the options forshippers of bulk products if service is unsatisfactory.

LOCAL ENVIRONMENTALRESPONSIBILITIES

Funding and supply of environmental services isprovided almost solely at the local level; historicallyservice fees and general taxes have supported thesepublic works. New Federal standards and the phas-ing out of Environmental Protection Agency (EPA)construction grants will increase costs (see table4-2), most of which will be passed on to individualusers. Local governments financed 76 percent ofthese services in 1981,82 percent in 1987, and theirshare is expected to rise to 87 percent by the year2000.25 Lack of funds led many cities to postponeboth rehabilitation of old plants and new construc-tion, and now costs have risen dramatically. Thissituation does not bode well for large, older cities,like New York and Boston, which face hugeinfrastructure maintenance deficits and major costsfor upgrading outdated wastewater treatment facili-ties to meet EPA standards.

The Nation’s drinking water is provided by a fewlarge municipal systems, by special districts, State-chartered corporations, independent nonpoliticalboards, homeowners associations, and a variety ofpublic and private companies. More than 43 percentof the population is served by 0.5 percent of allsystems, while 64 percent of the systems togetherseine less than 3 percent of the U.S. population. Over80 percent of large systems are publicly owned;privately owned systems and private wells servealmost one-third of the Nation’s population. Controlof the water supply system is a significant localpolitical issue because it is closely tied to local landdevelopment.26

, Rivers I.Ix., 28, 19s9. Inc., The Us. Agency, in press),

from Associates, Inc., T’ the Works DC: May 19S7).

- - . - -- - - - . --

—

Chapter 4-Local Governments: Where the Buck Stops ● 101

Capital for water supply facilities comes from avariety of sources, including general funds, usercharges, debt issues, stock issues, and intergovern-mental aid. Tax levies can be based on property,income, earnings, and special assessments, andFederal funding has generally supported less than 10percent of total expenditures. Service is financedfrom hookup and user fees and general tax revenuewithout any substantial subsidy from State govern-ment.

Many communities face drinking water supplyand quality problems. For some, water supply iseither threatened by pollution or is inadequate. Localgovernments in the Western States compete forlimited regional water supplies. Older cities, particu-larly in the Northeast, must replace obsolete treat-ment facilities to meet current standards. Moreover,most communities will have to revamp their treat-ment systems to meet EPA’s new water qualitystandards. Although the standards are not yet final,local officials estimate that the costs of filtration toremove specific contaminants and to monitor waterquality will be massive. Some local officials contendthat their existing systems provide an acceptablelevel of purity and that Federal requirements to testfor contaminants may not be necessary for publichealth needs.

Policies of pricing water at low, subsidized rates,particularly in the Northeast and Midwest, havecontributed to current revenue shortfalls, the ab-sence of capital reserve funds, and overconsump-tion.27 To raise the capital needed for water treat-ment improvements, many communities will have to

increase water charges substantially. Full-costcharges make good economic sense for manycommunities, and fee structures can be used tomanage water use. However, managers in small orolder jurisdictions may find the necessary feeincreases higher than property values will support.Districts that can raise fees enough to pay forinvestment capital may run up against State-imposed debt ceiling or Federal bond caps.

State-of-the-art engineering knowledge is neededto comply with Federal and State water qualityregulations and to operate modern facilities, yet onlythe largest and wealthiest cities can attract thenecessary engineering and technical talent. Smalldistricts suffer most from a lack of technical andfinancial expertise, and while consolidation andregional solutions hold promise for such systems,communities resist giving up their independence. Ifaid is not available and Federal deadlines are notrelaxed, noncompliance is a likely alternative formany jurisdictions.

for wastewater treatment; they own and operatenearly 16,000 wastewater treatment plants, whichtreat more than 37,000 million gallons of sewage aday. Private industry treats only a small additionalfraction of this amount and then discharges itseffluent into local treatment facilities or waterways.Federal capital grants have helped finance about 25percent of construction costs for local treatmentplants, and State aid contributes an additional 5

Wational Qnmcil m Public Wcxh hpmvcmcn~ op. cit., footnote 22, p. 54.

. . .

I

i

To protect water quality, the Environmental ProtectionAgency requires State and local governments to develop

programs for controlling indirect “non-point source”pollution, such as the agricultural runoff pictured here.

percent, with local monies supplying the balance.28

Operating costs are covered by user fees, ad valoremtaxes, hookup fees, and some State aid, with userfees covering between 40 and 70 percent of theoperating costs, depending on the region.

Federal and State financial assistance and strictertreatment regulations have improved local waste-water treatment substantially over the past 20 years,yet the backlog of local needs for system renovation,expansion, and construction is massive. EPA esti-mated that a capital investment of $68 billion wouldbe necessary to satisfy the needs of the 1988population,29 excluding costs of addressing com-bined overflow problems, stormwater management,nonpoint source control, and estuary protection. Theend of EPA construction grants in 1990 will bringincreased financial responsibilities for both Stateand local governments, and the latter will have to

compete for limited State loan funds to financesystem improvements.

Many jurisdictions lack the engineering expertiseto resolve the technical problems related to assessingneeds, evaluating innovative or alternative systems,siting facilities, and deciding on action plans to meetFederal and State regulations. Furthermore, localgovernments have few alternatives to raising userfees substantially-in most cases doubling them—to cover operating and maintenance costs and to paydebt service. Many facilities are currently so poorlyoperated and maintained that they are unlikely to lasttheir design lives. Small, low-income communitiesand older cities may lack the economic base to raiserates or local subsidies sufficiently, and will needoutside help or face noncompliance.

solid WroteSolid waste collection and disposal have been

managed by local governments and the privatesector. Local user fees have paid the operating costs,and bonds and commercial loans have financed newlandfills and incinerators. All localities are contend-ing with problems related to increasing per-capitageneration of solid waste, limited permitted landfillcapacity, and siting new solid waste facilities.30 Asthe scope of such problems has increased, theFederal Government has enlarged its role, focusingon regulation of landfills, incinerators, and waste-to-energy facilities. States are also adopting stricterregulations for landfills and incinerators, and bothState and local governments are developing pro-grams to stimulate recycling and encourage wastereduction.

Eighty percent of the Nation’s landfills currentlyoperating will be full in two decades,31 althoughmany will close before then because they cannotmeet regulations. Design features to ensure thatlandfills are environmentally sound, such as liners,leachate collection and treatment facilities, andmethane gas collection systems, increase capitalcosts significantly. Local citizen and political oppo-

Ire., for the National Council 19s7).

Agency, Office of Municipal Needs VA: National February 1989), p. Congress, Facing Americans (Washington,

U.S. 00 1989), p. 303. p. 271.


sition to siting landfills or incinerators is oftenextreme, extending the facility replacement processover many years. National efforts to increase de-mand for recycled materials have not been coordi-nated with policies encouraging waste separationand collection.32

LOCAL GOVERNMENTFISCAL PROGRAMS

Public works construction in cities and countieshas historically been financed with revenues frombroad-based local taxes and Federal and State grants.More recently, local jurisdictions have turned to userfees, developer impact charges, and revenues fromspecial districts to help fund capital investments andoperating and maintenance costs. Despite politicalrisk and State limitations, most local governmentshave also had to raise property taxes, and some haveintroduced or raised income or sales taxes andservice charges over the last several years to financepublic works. Dedicated Federal and State fundshave long supplemented local transportation pro-grams. This has been much less true for environ-mental services, which are funded primarily throughlocal revenues and service charges.

The property tax has always been the mainstay oflocal government revenue structure; in 1988, prop-erty taxes generated over 70 percent of the taxrevenue collected by all local governments.33 Cities,which usually have a more diversified tax base thancounties and towns, rely on property taxes forapproximately 50 percent of their revenue. Althoughthe average effective tax rate on single-family homesvalued at $100,000 decreased from $1,260 in 1981to $1,150 in 1987,34 41 percent of cities increasedproperty taxes in 1988 and in 1989—a significant

number, since many States place legal limits oncommunity property tax levies35 (see box 4-A).

property tax limits have forced local govern-ments to press State legislatures for authority to levyadditional taxes. The retail sales tax is consideredthe most productive local, nonproperty tax and hasproven most acceptable to voters. Since New YorkCity adopted a general sales tax in 1934, localgovernments in 30 States have levied the tax; in1986, these revenues made up approximately 16percent of total local income.36 Since all but fiveStates set a cap on the local sales tax, attempts toincrease it require substantial political effort (seebox 4-B); and despite the need for additionalrevenue, only 8 percent of cities increased salestaxes in 1988 and 5 percent in 1989.37

Although most communities place sales tax reve-nue in the general fund, some dedicate a portion tospecial functions, usually regional transportation,including mass transit; currently, 11 States givelocal sales tax authority to 117 transit or transporta-tion districts.38 The Denver Regional TransportationDistrict levies a 0.6-percent sales tax, and theMetropolitan Atlanta Rapid Transit Authority bene-fits from a l-percent sales tax dedication, of which50 percent must be used for capital spending. InOhio, counties may impose a transit tax of up to 1.5percent; 39 in 1980, the Central Ohio Transit Author-ity in Columbus switched from a dedicated localproperty tax to a retail sales tax.40 Since 1972, aportion of the sales tax paid in King County,Washington, has gone directly to Seattle METROfor operating and capital expenses. Currently, the 0.6percent of the region’s 8.1-percent tax dedicated toMETRO produces $114 million annually and is akey source of agency revenue.41

321bid., p. 317.33u.s. -mcnt of commerce, B~ of the Census, (Washington, DC: November 1988), p. xv.~Advisory Commission on Intergovcrnxncntal Relations, 1989cd., vol. 1 (Washington, DC: JanuaY 1989),

p. 72.

3%tCrSOQ, op. ci~, foomotc 5, p. 30.WAdVigory Commission on hmrgov crnmcntd Rclatioxw (Washington, DC: July 1988),

p. 66.3kerSOQ, op. cit., foomou 5, p. 23.J8Advisory Coremission on Intergovernmental Relations, op. cit., footnote 34, pp. 58-59.~%id, p, 63,-tic Technology, Inc., t#kuion prepared for the Urban ConsorU“um for Technology Initiatives and tk U.S.

Dcpaltmult of Tmspomion (Washington, DC: 1982).41Ja EhI&, bti~ &CCILX, communication, June 1989.

to levy the tax.Local governments in11 States may levy personal

income taxes. and 3 States allow local payroll taxes.In 1988, more than 3,500 districts (over two-thirdsof them in Pennsylvania) collected income taxes.42

Large cities, such as New York, Detroit, St. Louis,Cleveland, and Philadelphia, are most likely to relyon income taxes, which generally account for about15 percent of total city tax revenues.43 Few citiesearmark income tax for special uses, althoughCincinnati, Ohio, and Newport, Kentucky, useincome tax revenue to support transportation. 44 only3 percent of cities initiated or increased income taxesin 1988, reflecting local resistance to any type of taxincrease. For example, the 1989 Virginia GeneralAssembly authorized several heavily urbanizednorthern Virginia counties to levy a l-percentincome tax to finance needed transportation im-provements, but the counties encountered heavy

Traditionally, local governments have levied feesor charges on users of certain types of public servicesto cover all or a portion of the costs and, to a lesserextent, to ration service. Typically, water, sewer, andsolid waste disposal services, mass transit, bridges,and public parking garages are at least partiallyfinanced with user charges; fees often do not coverail costs, especially for services with large capitalexpenses. Legal restrictions and public resistance totax increases have driven many local governments toraise these fees and apply them to more services toreplenish general funds and to pay for specificprograms and improvements. Citizens seem to find“paying for what you get” more acceptable thanpaying higher general taxes.45

42&jv~ ~on IntqovemmaMal Rdatioms, op. cit., foomotc 34, p. 46.%ztcrxm, op. cit., f~ 5, p. 30.%Iic Technology, Inc., op. cit., f~e 40.

ootmtc 18, p. 1.45Hx, op. cit., f

-7. ~ -r .- - - -- -- -. . -.


Photo American

Taxpayers are often willing to pay full costs for directservices, such as garbage collection.

User charges grew at an annual rate of 11 percentbetween 1977 and 1984,46 and currently, about 15percent of State and local revenues come from suchfees.47 In 1988, 62 percent of cities raised garbagecollection fees, 57 percent increased sewer servicefees, and 55 percent boosted water charges.48 Largecities are more likely to have increased fees thanjurisdictions in the 10,000- to 50,000-populationrange, probably because they offer more servicesappropriate for fees. Moreover, implementing usercharges that recover full costs of service requires asophisticated capability that small jurisdictions usu-ally lack. Regionally, user charges contribute mostto local revenues in the South and the Plains areas,which have a tradition of low property taxes .49

User charges are best suited to finance thoseservices for which users can easily be identified andcharged, or for which it is easy to deny service tothose who do not pay. Environmental services fallinto this category. Less direct fees, such as the gastax or vehicle registration fees, are used to capturesome of the costs for facilities like local streets andhighways, where users cannot be excluded fromusing the service. User fees provide local adminis-trators with a useful management tool; service usecan be manipulated through rate policy-charginghigher rates for water used during dry months whendemand is high and higher transit fares during peak

Table 4-3--Local Options for Addressing the Costsof Federal Environmental Standards

●

●

●

●

●

Prognosis: Potential for tax-payer acceptance unless debtservice costs push taxes or fees too high.

Option 3: Reallocate Funds Other ProgramsPrognosis: between conflicting goals; like-

lihood of smaller allocations all around.Option With Standards

Prognosis: Federal enforcement action, fines and litigation;extensions or waivers; possibility of increased health

SOURCE: of Technology Assessment, 1990.

hours when job-holding commuters must get towork, for example.

While user charges are attractive revenue options,local officials must build solid political support forincreases or risk a public backlash (see table 4-3),and must resolve complex management and policyissues. First, they must decide what types of servicesthey want to finance with user fees instead of generalfund revenues and how to calculate true, full costsgiven available data and expertise. Charlotte, NorthCarolina, and Phoenix, Arizona (see box 4-C), areexamples of communities that made substantialefforts and instituted M-cost accounting programs.Second, fee setting requires policy decisions onwhich services are to be self-supporting and whichrequire subsidies for low-income groups. Finally,the extent to which user fees can be used to controlservice demand and still be equitable is a considera-tion.

and L. and Governments (Washington, DC: The Institution, 1986), p. 156.

op. cit., 5, p. 25. on Relations, (Washington, DC: 1989).

* *important advantages of special districts is that they

The majority of special districts are formed toprovide a specific public works function-watersupply, sewage treatment, highways, airports, anddeep-water port facilities-and have at least partialadministrative and fiscal autonomy and are notconstrained by State debt limits. Special districtassessments account for approximately 10 percent of

can provide services in developing or rural areas orsmall towns where local governments are not willingor have limited financial or administrative capacityto expand. However, proliferation of fiscally autono-mous special districts creates issues of publicaccountability and policy coordination with othertypes of infrastructure and other jurisdictions.

total local revenue, a relatively small share, but in The Mount Laurel, New Jersey, Township Muni-some States, such as California , Illinois, Pennsylva- cipal Utilities Authority serves fast-growing subur-nia, Texas, Massachusetts, and Washington, special ban communities outside Philadelphia, and is typicaldistricts generate both capital and operating funds of many special districts. Created in 1969 when itfor local public works.50 Like user fees, special absorbed an existing private water and sewer sys-districts, through their charges and assessments, tern, the authority operates five wells, two watershift most of the financing for their services from all treatment plants, and three wastewater treatment

W.S. Ikpartmau of Cunmcru, op. cit., footnote 33, pp. 51,60, 6S, S5, %), 94.

. . . . . . . - --- —, -----


plants, relieving the township of administrative andfinancial responsibilities.51

Although special district financing is best suitedto growth areas, since 1965 Missoula County,Montana, a slow-growing rural area, has beenraising capital through Rural Special ImprovementDistricts (RSIDs) for a variety of public works needsincluding roads, sewage treatment plants, and waterprojects. 52 Missoula has two categories of RSIDs.Neighborhood RSIDs are setup to improve facilitiesin already developed areas, and developer RSIDs arecreated when 51 percent of the land is owned by anentity intending to improve the land for develop-ment. As of 1987, almost 900 RSIDs had beenestablished, many for small improvements andothers for projects costing as much as $1.6 million.Missoula has also created perpetual maintenanceRSIDs to pay for upkeep of existing facilities.

Capital improvement plans provide local govern-ments with a structure to survey needs and establishpriorities, coordinate intergovernmental projects,develop financing strategies and schedules, and sellthe program to the public. Most cities and largecounties operate under a 5- to 6-year capital im-provement plan that is updated annually. Usually,the jurisdictions have a large backlog of capitalprojects, and this type of planning process isessential to maximize their limited funds.

In contrast, small communities are unlikely to useany type of capital budgeting plans, although thefiscal impact of necessary capital improvementsmay be greater for them than for large jurisdictions.Research on planning strategies in small townsunder 10,000 in Wisconsin, Massachusetts, Mon-tana and Maine indicates that less than 5 percentpractice any form of capital improvement program-ming.53 While small communities recognize thatcapital needs exist, responsibilities for public worksare often divided between towns and independentdistricts, which are likely to deal with capital needson an individual and ad hoc basis, because of thedivision of responsibility and because of their small

staffs, limited fiscal capacity, and voter resistance tolarge expenditures.

Political Strategies

heal authorities are growing more conscious ofthe necessity for citizen outreach and basic publicrelations skills to raise awareness about infrastruc-ture needs and gain funding approval. Commitmentand persistence are key. As one example, theChicago Regional Transportation Authority (RTA)had conducted studies from 1985 to 1987 to assessconditions of the RTA system, identify needs, andestimate the cost of needed capital equipment andreconstruction. The agency drafted a Strategic Plan,which it took to the State legislature with a requestfor a tax increase to support transportation improve-ments. Though supported by key legislators and theGovernor, the bill failed. RTA redoubled its effortsthe following year, drafting a concise but pointedsummary of the Strategic Plan, engaging mediaconsultants, and mounting an aggressive communityoutreach effort. Over a 3-month period RTA pre-sented its program to civic, business, and govern-ment groups around the State. These techniquesproved decisive in 1989; 1 day prior to adjournmentand by a narrow margin, the legislature authorized$1 billion over 5 years for the RTA system.54

Officials in other jurisdictions that have suc-ceeded in passing major capital improvement planshave planned equally carefully, allocating resourcesfor public education so as to achieve the necessarypolitical consensus. Box 4-D describes Cincinnati’srecent efforts, and other examples include Phoenixand San Diego (box 4-B), and New York State(chapter 3, box 3-B).

REGIONAL PLANNINGAlthough the economic and operating efficiencies

to be gained by regional planning for land use andpublic works are widely recognized, the politicalreality is that most of these decisions are made bylocal elected officials and are based on the salientlocal priorities. In many European countries, wheregovernmental authority flows from the top down,local planning and infrastructure decisions are

sl~ a d., op. cit., foomac 2. p. 24.52AW ~~ ~., F@~ing i@mWUCZZW: ]nmv~~ at the Local bvef (Washington, m: Mt.hd ~WC of Cities! Dcumbcr 1987).

p. 56.sss~y A. R~ @ ~ip -kg, ● 6CW1M BU@~g: srn~ l’bwn Practices in Four Sates,” ~IMKXI fOr the NtioA Cowil m ~hc w~~(

Impovemcat, unpublished manuscript, octokr 1986, p. 5.f~~w G. Weigk, cxwutive ~, Regional Tranqmrta tiOIl Authority, personal COUIHlliGitiOll, Aug. 16, 1989.

Chicago’s rapid transit system faces a variety of needs. The ceiling in this administrative office collapsed a year before the picture wastaken; and the deteriorating rail station is on Chicago’s Northwestern line, the system’s busiest route.

required to conform to district or regional plans. Inthe United States, planning and public works deci-sions are made by local governments, and regionalplanning organizations are usually advisory only. Inmost States, general-purpose planning agencies,such as Councils of Governments or RegionalPlanning Councils, have no specific governing ortaxing authority, no veto power, and membership isvoluntary. Because their products reflect the consen-sus of their local members, regional agency plans areoften criticized as vague and overly general. “Re-gional planning only works when it’s a win-win forall the districts; when everyone gets more or lesswhat they want. When there are hard choices andwinners and losers, regional planning--forget it."55

As a result, regional planning operates in political.limbo--acknowledged as an exemplary goal, butlacking the teeth to be effective.

Despite the institutional weaknesses of regionalplanning, policymakers have persisted in trying tomake it work to improve the efficiency of public

investment in infrastructure and other services.During the 1960s and 1970s, Federal and Stategovernments encouraged comprehensive and func-tional regional planning. Provisions were added tomany Federal programs requiring regional bodies toset priorities for, and review the use of, Federalfunds. In 1973, DOT promulgated a requirement thatMetropolitan Planning Organizations (MPOs) beestablished to review urban area transportationplanning. DOT funded these regional activities;other Federal agencies, particularly those supportinghousing and environmental programs, followed suit,including planning grants with program funds.During this period, most States passed legislationallowing the formation of regional planning organi-zations, and some provided modest appropriations.As a result of Federal and State support as well aslocal interest, the number of regional councils andplanning associations jumped from 36 in 1%1 to659 in 1978.56

House of July 7, 19S9, OTA report, June 19S9, app. B, p. 1.

Chapter 4-Local Governments: Where the Buck Stops g

warned of infrastructure decay but failed to mobilizewidespread support for action. In 1986, the mayor and city council turned to the business community to help drawattention to public works by establishing the Cincinnati Infrastructure Commission. Hoping to focus citizen concernon the need for repairs to roads, bridges, and sewers, and stimulate willingness to pay, the mayor and city councilinvolved community leaders.

The effort paid off; within a year the commission had produced a comprehensive report on the city’s publicworks, with recommendations for maintenance and repair and suggestions for financing, including a ballotreferendum to raise the city income tax by 0.1 percent with proceeds earmarked for infrastructure repair, upkeep,and improvement. Six months later Cincinnati voters passed the tax increase, anticipated to yield $6.9 million peryear for infrastructure maintenance. The tax may be used only for projects that will take or less to completeand will be rescinded if revenues are used for any other purpose. One commission member cited this emphasis onmanageable, relatively short-term projects as a key factor in making the referendum attractive to voters.2 Thoughthe tax increase passed by a narrow margin, the approval was significant because the decade had otherwise beencharacterized by tax revolt.

The commission chairman, the chief executive officer of Procter& Gamble, selected as commissioners 10business and community leaders from such corporations as Cincinnati Bell, General Electric, and Arthur Andersen,as well as the president of the University of Cincinnati. Five committees were formed to review streets and roads,parks and recreation, water and sewers, buildings, and financing. For each of these categories, volunteer projectengineers assembled teams to draft portions of the report. Project engineers could staff their teams however theychose, though in most cases one member of the team was selected by the city Department of Public Works.

After completing their reports, the team leaders submitted them to the commissioners, who condensed thefindings and presented a final report to the mayor and city council.3 The commission’s independent status gave itswork an appeal that the municipal government could not muster. Passage of the tax increase highlights theimportance of clearly defining needs and articulating priorities. As one Cincinnati Infrastructure Commission teamleader noted:”. . . people are willing to pay higher taxes if they know exactly what they will get for their money.’4

Waklid m the commitiOll is b8sod on Cincimlali ~m Commls3m==~ to cilxinnali Cily CoImcil, -M-

“ ior.1, “City of Cinciumii Infkzw!xucture Commission Rcpu”dmuuwnl, Dec. 3, 1987; and Ronald w. Robcns, “Cincinnati’s Dream Team,”

Engineering, My 1989.wiuiam Victix, (31xkln ti~@mlkskm- commmicatiom ~. 6,1989.

-~commksion issued its complctc rcpmt in late 1987, the group has mmaincd intact to monitor progrtss snd ensure m=program implementation.

4~m q. ci~, fOOttlOtC 1*P“4“

However, during the 1980s, many Federal pro- On the positive side, many agencies have highlygrams funded regional planning, such as the skilled and knowledgeable staffs, who contributeHousing and Urban Development’s section 701grants and EPA’s section 205 grants, were elimi-nated or cut back. Financial support for regionalplanning has also waned in many States andgenerally is under 30 percent of agency budgets andas low as 10 percent.57 The impact on regionalplanning organizations has been severe; profes-sional staffs have been cut, services reduced, andessential databases have become out-of-date. Al-though regional agencies have been inventive inraising money by selling technical services, apply-ing user fees, or charging special membership

essential technical expertise and provide valuableservices to their constituents. Indeed, one reasonmany regions have coped as well as they have withthe transportation impacts of rapid growth is thetransportation planning process DOT has fosteredthrough the work of regional MPOs. In a few places,regional agencies have achieved enough influence toovercome political differences. For example, in1988, the major urban county in Arizona adopted anew air pollution control plan; since then the Statelegislature had adopted four of the five priority

) assessments, local revenues are not adequate to recommendations of the Maricopa Association ofmaintain even basic planning activities.

.

~Ibid., p. 3.

I

I

,i

,

I

)I

Governments’ plan. 58 Box 4-E provides another mental approval of a project.. The charges compen-example. Regional planning is greatly strengthenedif the regional agency has the capability to finance itsrecommendations and to tie infrastructure decisionsto land-use development policies. Unless Stategovernments provide them with more power, re-gional planning agencies will remain peripheral tomost infrastructure decisions, as one Governorrecently recognized publicly:

The critical challenges facing Virginia cannot beaddressed without formal, regional cooperation byour localities. We must use State resources in amanner that cuts waste and improves efficiency.Such cooperation will not happen by accident.59

The diversity of regional planning can be seen incase studies of six regional planning organizationsand two State planning programs in appendix C.

BENEFIT-BASED FINANCINGSTRATEGIES

Local governments have traditionally paid forinfrastructure with funds raised largely from broad-based taxes plus some user fees levied on groups thatbenefit directly from specific services. Pressed forfunds but constrained by voter opposition to taxincreases, local governments have turned to devel-oper charges and special districts-ail ways to focusthe costs of constructing infrastructure on thebeneficiaries.

Developer charges are money, land, or construc-tion services required of a developer seeking govern-

sate local governments for the costs of providingpublic facilities needed by the development and areused to achieve some of the same goals as growthlimitation by regulation. Traditional forms of devel-oper participation have included land dedications forhighway rights-of-way, schools, and parks. In recentyears, developers in fast-growing locations havebeen required to build or provide funds for schoolbuildings, fire stations, and sewage treatment facili-ties. Generally, developers pass these charges on tobuyers by raising prices.

Despite the advantages to local governments ofdeveloper charges, their use is not widespreadbecause to have an effective program, State enablinglegislation, local ordinances, and most important, astrong real estate market are necessary. Communi-ties in California, Florida, and Colorado are theprincipal users, although examples exist in otherStates. There is no standard program; every commu-nity has a different process, including the following:

In Broward County, Florida, the county under-takes an “adequacy review” to assess the impact ofany proposed development on the comprehensiveland-use plan and a wide range of public facilities,including the regional transportation network, localroads, water management and water supply, waste-water treatment and waste disposal, air quality,

5~d, ~p, A+ P. 4.

j~~(j B~J~, fCWlXlC3*VUT10f Of Virginia quoted in Ad@ton, Virginia Journal, Jdy 24, 1989, p. A9.I

i

t

. . . . . -., . - ...— — ..- - - , - . . . . - - . . . _ , , -. . . . . --- - . —-


schools, and parks.60 The developer must show thatexisting facilities are adequate to support the pro-posed development or provide for them through feesor exactions paid to the county.

Initially opposed by developers, the BrowardCounty system is now accepted because it applies asystematic procedure to all developers and reducescostly administrative delays. Impact fees are leviedprior to development for roads, parks, and schools.Road impact fees are set, based on a computer modelthat contains information about existing volume andcapacity for all major roads and calculates theamount of traffic generated by the proposed devel-opment. The developer must pay a proportionateshare of the costs of increasing the capacity orconstructing any necessary road improvements; feesare deposited in a dedicated fund earmarked for thatservice area. Park and school construction fees areset by a similar process of impact assessment. Watersupply and wastewater treatment facilities must beconstructed by the developer.

Orlando, Florida, has refined its system ofdeveloper fees, using them as partial security forrevenue bonds for improvements to the wastewatertreatment system.61 Funds paid by developers anddeposited in an Impact Fee Account, plus usercharges, provide debt service payments on thebonds. The city has established a reserve account tocover shortfalls if revenues are insufficient or agrowth slowdown occurs.

In Fresno, California, developer fees pay for allpublic works improvements needed in designatedgrowth zones of the city.

62 The initial developer Ofa growth zone must pay an accelerated fee (approxi-mately established base fee) forimprovements. Once the total improvement cost iscollected, the fee is reduced to the base rate, and thedevelopers who paid at a higher rate are reimbursed.

Upper Merion Township, Pennsylvania, a suburbof Philadelphia, has established itself as a Transpor-tation Improvement District with authority to chargedevelopers impact fees based on the number of tips

generated by the new development.63 The fees aredeposited in a highway/traffic capital improvementfund and dedicated to making the necessary im-provements. Developed by a local traffic task force,the system enables the community to raise revenuefor road improvements without affecting the town-ship’s bond credit rating, thus reserving the town-ship’s bonding capacity for other capital projects.

While special districts are not a new concept inpublic finance, local governments, particularly ingrowth areas, have recently modified and expandedtheir use. Between 1982 and March 1987, Pleasan-ton, California, raised approximately $145 millionfor infrastructure construction through general obli-gation bonds backed by special district assets.64

After a special improvement district has beenapproved by the property owners or the city, the fullcosts of all improvements, including interest costsand engineering fees, are calculated, and the amountis apportioned among the property owners. Benefitzones are designated within some improvementdistricts according to the proximity to the improve-ment. Assessments are made in proportion to acre-age rather than assessed value to prevent confusionwith property taxes, and property owners maychoose either to pay the assessment in a lump sumor in annual installments. In one district that hadthree zones for allocating highway improvementcosts, assessments ranged from $13,700 to $50,000per acre. If a parcel falls into a multiple-improve-ment district, the owners can be assessed charges of$200,000 per acre.65

Based on the special district concept, tax incre-ment financing is practiced in many States, mostfrequently in California. The procedure involvesfreezing, as of a base date, the real estate tax base ina designated benefit area. Tax revenues at thepre-investment level continue to flow to the generalfund, but any increased revenues resulting from

I @Douglas R. Poncr and Richard B. Peiscr, Development Component Series Urban Land Institute, 1984), pp. 15-17.

61u.s. mVirOUMmMI Protection Agctxy, Administration sxtd ResourcesI Management, (Washington, DC:I Sqcmbcr 1989), p. 68,

I ‘QPorter and Peiscr, op. cit., footnote 60, p. 18,~ ~Apog(x Racarch Inc, op. cit., footnote p. 80.

WM., p. 35,6Wid, p. 37.

The Matsunk Sewer Expansion Project in Upper Merion, Pennsylvania, was financed through the Township’ssewer access rights program.

property values rising above the base are earmarkedfor debt service on the improvements. Since themid-1970s, California jurisdictions have had author-ity to finance redevelopment with the additional taxrevenues generated by the projects. Los Angeles hasused tax increments to finance numerous redevelop-ment projects, both in the central business districtand in residential neighborhoods.

Orlando, Florida, has based its $19 millionfinancial plan for the redevelopment of its down-town area on tax increment financing.66 Revenuebonds to finance the needed capital investments arebacked by an irrevocable lien on the increment in theproperty tax revenue. In 1986, the tax incrementrevenue, which is paid into a redevelopment trustfund, was $2.3 million.

Davenport, Iowa, is financing a portion of $13.2million in improvements in an economic develop-ment project with tax increment revenue.67 Improve-ments include four new Interstate highway ramps,

two bridges over the highway, and improvements tolocal roads. One-half of the income from the taxincrement district is earmarked for repayment of a$2.5 million loan from the RISE Fund (a Statetransportation funding program described in chapter3, box 3-A).

While local governments are eager to tap privateresources for public works capital, the private sectoris reluctant to participate because such projects arenot usually profitable; thus, involuntary developercharges are more typical means of acquiring privatecapital. However, occasionally, private investors arewilling to participate in financing public works thatthey determine can lead to profits. For example, inthe tiny town of Belen, New Mexico, a developeragreed to subsidize a new water supply plant untilthe customer base grew and the system was operat-ing at capacity and covering full costs.68

p. 68. p.

op. cit., 61, p.%.


Purchasing Access Rights

As a way to avoid bond issues and to accumulatecapital in advance for a water or wastewater facility,some local governments sell access rights in pro-spective plants. For example, the township of UpperMerion, Pennsylvania, initiated a Sewer AccessRights Program to build up capital to financeexpansion of a sewage treatment plant. Developerswere allowed to purchase credits for an equivalentdwelling unit (200 gallons per day) for $3,200.@ Theprice of the credits increased as construction costsrose, creating an incentive to invest early. Moreover,nonparticipants had no guarantee of sewage treat-ment capacity for their developments. So far, thetownship has collected $23 million from the pro-gram, $5 million in paid credits, $6.5 million insigned contracts for additional rights, $5 millioncontributed by the township to purchase reservecapacity for its own uses, and $6.5 million fromneighboring communities that plan to use thefacility.

In 1983, officials in Houston, Texas, establisheda similar pre-purchased wastewater treatment plantprogram. In exchange for the payment of a capitalrecovery charge, private developers are guaranteedaccess to a contracted amount of future systemcapacity. Between 1983 and 1987, the city collectednearly $70 million, which it leveraged into $180million in improvements to treatment plants.70

Private developers have never liked the program,and the downturn in the local economy has made thepre-payment plan burdensome. However, the capac-ity credit system signals clearly where additionalcapacity is needed and prevents overinvestment infacilities where demand is limited. Moreover, newcapacity has been provided efficiently; the cityexpanded several small treatment plants rather thanbuilding a new, larger, regional plant.

In the early 1980s, Escondido, California, was notin compliance with State wastewater regulations andwas the subject of a lawsuit filed by the neighboringcity of San Diego for nonperformance on a waste-water service contract. The city was also experienc-ing intense developer pressure. Although Escondidowas in technical default on its municipal debt, voters

had vetoed bond financing, higher user fees, andconventional public-private partnerships.71 To fi-nance the needed upgrading of the sewer plant, thecity opted to sell future capacity, raising $16 millionin 3 months by selling rights at $1,650 per unit, foreither cash payments or letters of credit payable in 2years. The city assures a sell-back price based on aguaranteed 33-percent increase for the first year andan 18-percent return for rights held for 5 years. InApril 1989, access rights sold for $3,300 per unit.The program has the support of both citizens anddevelopers, although there is some opposition fromanti-growth groups.

Enthusiasm for ownership of environmental facil-ities has waned since the passage of the 1984, 1986,and 1988 Tax Reform Acts (see chapter 2 fordetails), and solid waste management is one of thefew areas in which private ownership is stillconsidered profitable. In Hempstead, New York, aprivate firm is scheduled to install a recyclingfacility in a building provided by the town. The firmwill make a capital investment for equipment ofbetween $500,000 and $750,000. The town hasagreed to sell its recyclable to the company for aguaranteed price for 3 years,72 at which time thetown will buy the equipment from the company,unless the contract is renewed. Other nearby com-munities are permitted to use the recycling plant.

In transportation, suburban traffic congestion andthe lucrative prospect of the combination of tollrevenues and increased land values have made theconstruction of private, for-profit toll roads moreattractive. However, prospective investors mustovercome a multitude of time-consuming financingand institutional hurdles. In 1988, the VirginiaLegislature passed a bill enabling the construction ofprivate toll roads, and the Toil Road Corporation ofVirginia received approval in 1989 from the StateTransportation Commission to construct a 14-miletoll road from Dunes Airport to Leesburg, Virginia.In addition to completing the acquisition of capitaland purchasing the right-of-way, the corporationmust get approval of toll rates and financing plansfrom the State Corporation Commission. Private

69Awg= R=~h, k., Op. Cit., fOOtnO~ 52! p. 135’TOApg= R~~~ ~c$, 4tWfic.Mvac p~ershi~ fm Environmental services: Anatomy, kcentives. and @X?dimcnts,” pfep~ed for tie us

EnVironmcntid Protection Agency, Office of the Comptroller, Resource Management Division, unpublished manuscript, OcL 17, 1988, p. 17., Tlu.s. fivfiuent~ Protection Agency, op. cit-. footnote 61, P. m.

~Apogee Researck Inc., op. cit.. foomote 70, p. 23.

114 . Rebuilding the Foundations: State and Local Public Works Financing and Management

entrepreneurs are also attempting to develop acommuter rail service on abandoned railroad track innorthern Virginia.

Highway E-470, a 50-mile circumferential on theeastern side of Denver, Colorado, exemplifies asuccessful public-private venture, but it also illus-trates the complexity of financing a major urbanhighway. Private participation is limited to right-of-way contribution, the payment of impact fees, andmembership on advisory panels. Nonetheless, thecollaboration has been a major factor in publicacceptance of the financing package (see box 4-F).

Despite the advantages to local governments ofshifting public works costs onto individual develop-ers, users, and property owners, such benefit-basedstrategies pose a number of complex practical andpolicy issues.

Equity: The issue of equity has several dimen-sions. First, developer charges and specialdistrict assessments frequently require advancepayment for improvements. These can be aheavy burden for small developers and evenexclude them from the market. Second, newresidents pay housing prices inflated to coverrequired developer improvements. Benefits ofa highway or other community improvementoften come to both old and new residents,making equitable cost allocation a challenge.Finally, user fees are basically regressive.Raising such charges to cover more fully thecosts of essential services, such as drinkingwater or transit can create serious policydilemmas for local officials. Low-income citi-zens may be disproportionately hurt by new orincreased fees, unless the fees include provi-sions for low-income and other special groupsand encourage efficiency. However, if carefullystructured, benefit charges may be no moreregressive and can be less so, than subsidy bybroad-based taxes.73

Cost Allocation:Determining the full costs ofpublic works and developing-a rational systemfor allocating costs among all direct andindirect beneficiaries are complex and difficulttasks. For example, the more extensive the useof developer fees and benefit charges, the

●

●

●

●

●

cloudier the lines become between who aredirect or indirect beneficiaries, and who are not.Administrative: Establishing a cost accountingand budgeting system that measures and allo-cates user and developer impact costs requiresexpertise usually found only in major metro-politan areas. Setting equitable fee schedulesand making choices between charging averageand marginal costs can be very complex.Administrative systems that must accommo-date both public and private funds in specialdistrict accounts involve equally complicatedproblems.Uncertain Revenues: Uncertain revenues andaccumulation of debt without adequate budgetcontrol and financial planning can be seriousproblems for public works authorities andspecial districts. Unforeseen rises in interestrates and economic downturns can create short-falls in user-charge revenues and devastatefinancing plans that assume stable interest ratesand economic growth.Political Decisionmaking: Public works pro-grams financed by developer charges, accessrights, and special district assessments canremove important budget and developmentdecisions from the political process. Sincethese funds are earmarked, they do not neces-sarily reflect changes in community prioritiesor development goals. Strong regional or Stateplanning programs can balance this independ-ence.Regional Planning and Budgeting: If developercharges and special district assessments areused to finance infrastructure, developing andfollowing comprehensive land-use and capitalimprovement plans become very important.High fees can encourage development to leap-frog over regulated areas into other less restric-tive districts, exacerbating the problem ofproviding infrastructure in the long term. Espe-cially in jurisdictions near State boundaries,this is a difficult and politically sensitive issue.Strategy Selection: Local financing strategiesmust conform to State laws, economic condi-tions, and the willingness of the community toaccept anew scheme. Most of the strategies thatshift costs from general purpose government toindividuals or special districts work best ingrowth regions, where the real estate market is

Uxmnc 18, pp. 22-23.~He, q. ci~, f

.I- - -- --- -- ~-- --- --- - - - .. . . . . . .-

. . .- — .-----—


In 1988, after years of planning and negotiations, the State of Colorado authorized the E-470 Public HighwayAuthority to design, finance, and oversee the construction of E-470 as a limited-access tollway. The authority,composed of an elected official from the three counties and the city (Denver) along the route, was empowered toset tolls, levy development fees, and establish local improvement districts. From the outset of the planning stage,no Federal or State support was available to cover the estimated $1 billion cost, and crafting a workable localfinancing package required regional cooperation and private sector support.

scheduled to open its first segment in 1991, Highway E-470 is financed by a $722 million bond issue approvedin 1986,1 and toll revenues are expected to cover the bulk of the debt service once the highway is completed.Developers who own property along the route are contributing approximately two-thirds of the-right-of-way as wellas paying impact fees to the authority. The authority has designated a 3-mile wide corridor along the E-470 routeas a value capture area because of its strongeconomic potential, and planned to collect 25percent of the increased property and sales taxesresulting from the corridor development, However,a slump in the regional real estate market hasdelayed implementing the value capture program.The authority considered imposing a $2 per em-ployee head tax on local employers as another formof beneficiary charge, but the idea was abandonedafter strong local opposition developed.

Funds for the first 5.5 miles, a $68 millionsegment, will come from bond funds, the revenuefrom a $10 increase in vehicle registration feescharged within the three-county region, and devel-oper impact fees.2 The Union Bank of Switzerlandis providing a guarantee that bond holders will berepaid from tolls, once the first segment is openedin 1991. The provisions of the Public HighwayAuthority stipulate that any fees or taxes imposedare short term and must be removed when tollrevenues reach a sufficient level to pay the debt andcover ongoing operations. Once a separate fired isestablished to handle maintenance and improve-ments, the tolls will be eliminated.

Promoted as a public-private partnership, theauthority has formed an Executive Advisory

Committee including four authority members andfour developers. Two other groups are also advisingthe authority--a task force, which brings togetherprivate citizens, developers, and the planning direc-tors of the four jurisdictions, and a landownerscommittee representing property owners along the Photo of Transportation

southern portion of the route, the first section to be Construction of Happy Canyon Bridge, part of Denver'sbuilt. E-470 Highway project, is under way.

“ Authority, personal Aug. 9, 1989.

ti\

(

[

strong. Without a healthy demand for growth,the governing body has little leverage.

CONCLUSIONSLocal governments are in the unenviable position

of having primary responsibility for providing andmaintaining public works services and coping withnumerous Federal and State regulations on howprojects must be built and severe restrictions on theirability to raise and manage funds. In most cases,traditional broad-based taxes, principally on prop-erty, no longer produce sufficient revenue to financeessential public services, which range from educa-tion to maintaining streets and sewer systems. As aresult, many communities have cut back expendi-tures to balance budgets, frequently deferring bothmaintenance and capital improvements for publicworks, and creating large backlogs of projects in theprocess. In States where such actions are legal, localjurisdictions have diversified and expanded theirrevenue sources, raising nonproperty taxes and userfees, and tapping private capital to finance newgrowth.

Costs have risen across the board and a variety ofFederal and State actions have spumed the search foradditional local revenue. First, higher costs dictatethat a larger portion of local general tax revenue isneeded for education, law enforcement, housing, andsocial welfare programs, all of which have no otherrevenue source and are not suitable for benefitcharges. Second, cutbacks during the 1980s inFederal construction grants, revenue sharing, andsupport for social programs, coupled with higherstandards for environmental services, have addedsignificantly to local costs for public works. Finally,property tax increases, particularly to supportgrowth or expanded facilities, have met with stiffresistance from local voters, often leading to Stateconstitutional or legal limits on taxes.

upper limits of acceptability in many jurisdictions,at least for the near term. However, dedicated localincome and sales taxes have proven to be success-ful revenue raisers for some communities, andincrements added to these taxes have becomeimportant sources of revenue for local publicservices. Earmarking portions of tax increases forspecific improvements, such as public transporta-tion, is often key to winning public acceptance. On

the other hand, once a source of funds is earmarked,it cannot be used for other needs even if surplusfunds accumulate. Nonetheless, these sources, too,generate citizen resistance, and few communitiesraised their rates during 1988.

In many growth regions, governments are shiftingcosts for infrastructure expansion needed for newdevelopment directly to the private sector, throughdeveloper charges, sales of access rights, and specialdistrict assessments. The private sector is initiatingfor-profit ventures in a few districts, primarily solidwaste projects, although transportation services thathave potential for operating revenues and landdevelopment profits may successfully attract directprivate investment Based on current political andeconomic trends, OTA concludes that new infra-structure, particularly in growth areas, will befinanced increasingly from various benefitcharges, including direct user fees and taxes, suchas the fuel tax, that target beneficiaries.

Increasing benefit charges for public works serv-ices has some compelling advantages over raisingbroad-based taxes. First, citizens seem willing toaccept the principle of paying for services, mak-ing it politically easier to charge higher fees forpublic services and require developers to pay forfacilities needed by their projects. Many develop-ers find” these strategies systematic, predictableapproaches that save time and money. Second,charging fees for services and programs that arecloser to full costs may cut demand and holdsteady or even reduce capital requirements.Third, the community often can collect capital fundsup front, avoiding the necessity for bond issues, andeliminating interest costs and reserving debt forother public facilities. Finally, benefit-based strate-gies allow local governments to design projects thatare relatively self-supporting, making them lessdependent on State and Federal programs, with theirattendant strings.

Despite their advantages, strategies that shiftinfrastructure costs to beneficiaries pose somecomplex and difficult public policy issues. Ifrecovery of the full cost of services is necessary toa jurisdiction, how should fees be structured andadministered so they are not an excessive burden onthe poor? Determining service costs accurately andallocating them equitably among direct and indirectbeneficiaries are also difficult and complex prob-lems, especially when service benefits are diffused

I- ___ . - s. --r.— - . . - -- -- .- . . -- --- --- - ~----- ..-

#. . . — . -- -. -. .---—

(as in public transit for example) among users andnon-users. The equity of a new resident paying upfront for services, through higher land prices, whenlong-time residents are also likely to benefit fromgrowth is a further issue. Finally, while establishingindependent special financing districts is a politi-cally attractive option, doing so removes many fiscaland land-use decisions from the political process andmay make it difficult to address new issues as theyarise. Each of these issues embodies importantpolitical and policy concerns that must be weighedand resolved before governments embrace these newtypes of public works financing.

Small Districts and Low-Growth Areas

In many small, rural communities and low-growthjurisdictions, such as older, central cities, privatecapital and credit are unavailable, and residents havelimited ability to pay higher user fees. OTAconcludes that benefit-based and private sectorstrategies are not appropriate or workable formost small, rural communities and low-growthareas. This is an especially severe problem forfunding environmental public works, since theselack any substantial Federal or State support.Policymakers need to consider alternatives forsuch districts, which cannot depend for revenueon a strong real estate market or the profitabilityof private venture. Many such communities needadditional technical and management expertise aswell. Considerably more State involvement andassistance is likely to be needed to address theseproblems, since Federal programs and resources arespread very thin already.

The task of complying with new Federal environ-mental standards hits hardest at small, poor commu-nities lacking resources and expertise, and large,older cities with public works facilities needingmajor upgrades. Small jurisdictions are frustrated bytheir lack of resources and Federal standards thatthey fear may be more strict than their local publichealth needs justify. A requirement to build a newwastewater treatment system or replace a solid wastefacility that still has extra capacity may raise localcosts beyond the value of the homeowners’ land ina small, rural town. For an older city with a backlogof deferred maintenance and rehabilitation needs,even full-cost accounting may not generate suffi-

cient funds. Furthermore, higher service chargescould be a decisive factor for a local businessconsidering a move to a lower-cost jurisdiction.

The Federal challenge is to permit local choiceswithin a framework that implements national publichealth and safety goals, maintains accountability,and sustains economic vigor. Most local jurisdic-tions have no dedicated, reliable, outside fundingsource for environmental projects, as they havefor transportation in the form of Federal andState allocations of fuel taxes and other benefitcharges (see chapter 1, table 1-9). Developingpublic support for new taxes or significantlyhigher user charges to fill this gap requiressubstantial time and effort and may fail, evenwhen the local economy can support them.Furthermore, local options for funding environ-mental services have more limiting trade-offs asso-ciated with them than the options for fundingtransportation. OTA concludes that withoutstepped-up State or Federal assistance, noncom-pliance with EPA standards is a likely outcomefor districts that cannot generate adequate funds.

Debates in State legislatures from Maine toCalifornia emphasize that infrastructure-relatedproblems, such as traffic congestion, water supply,and air quality, long ago transcended local bounda-ries, to become regional issues.74 However, despiterequirements for comprehensive regional planning,enacted as part of Federal grant programs over thelast couple of decades, OTA finds that regionalplanning organizations currently have such basicshortcomings that most are ineffective. Generally,these organizations are underfunded, lack authorityto prepare and implement plans, and are highlydependent on the expertise and personalities ofindividual personnel.

If regional planning groups are to become con-structive, effective forces, their basic weaknessesneed to be addressed. First, regional agencies needreliable funding, in addition to the limited revenuethey can generate, to maintain core staff andtechnical and service capabilities. Cutbacks inFederal funds for housing and environmental pro-grams have left DOT funding as the primary supportfor regional planning. The lack of funding forcomprehensive environmental planning is of

particular concern as States assume responsibil- government ambivalence about cooperating withd ity for revolving funds to support local environ- neighboring jurisdictions, State leadership andI

mental infrastructure. Second, the regional im- funding will be necessary for regional planning4\ pacts of infrastructure issues create the need for activities to be effective. Federal program{ coordinated capital improvement planning and requirements or incentives could spur the Statesii budgeting. OTA concludes that because of local to take action.

I1

1

,, . . ------- . . . -. . . . .- -.. . . .—

Appendixes

Appendix A

Federal Spending and Tax Collection by State

This table compares Federal tax collections by State generally pay more in Federal taxes per person than thewith Federal spending for all purposes in each State, Federal Government spends per capita in the State. On theincluding large agricultural subsidies and payments in other hand, the Federal Government pays out more thanlieu of taxes for Federal facilities, such as military bases

— — .

and Indian reservations. Those States that have highit collects in taxes from States that receivepayments.

per-capita incomes, such as New Jersey and Delaware,

Table A-1--Per-Capita Federal Spending and Tax Collection by State, 1987 (in dollars)

large Federal

Federal Federal tax Federal Federal taxspending Collections spending collectionsper capita per capita per capita per capita

Alabama . . . . . . . . . . . . . . .Alaska . . . . . . . . . . . . . . ..Arizona . . . . . . .,, . . . . . . .Arkansas . . . . . . . . . . . . . .California . . . . . . . . . . . . . .Colorado . . . . . . . . . . . . . .Connecticut . . . . . . . . . . . .Delaware . . . . . . . . . . . . . .District of Columbia . . . . . .FIorida . . . . . . . . . . . . . . . .Georgia . . . . . . . . . . . . . . .Hawaii . . . . . . . . . . . . . . . .Idaho . . . . . . . . . . . . . . . . . .Illinois . . . . . . . . . . . . . . . . .Indiana. . . . . . . . . . . . . . . .Iowa . . . . . . . . . . . . . . . . . .Kansas . . . . . . . . . . . . . . . .Kentucky . . . . . . . . . . . . . .Louisiana . . . . . . . . . . . . . .Maine . . . . . . . . . . . . . . . . .Maryland . . . . . . . . . . . . . .Massachusetts . . . . . . . . .Michigan . . . . . . . . . . . . . .Minnesota . . . . . . . . . . . . .Mississippi . . . . . . . . . . . . .Missouri . . . . . . . . . . . . . . .

3,4115,4213,7103,0843,6423,7324,2362,829

23,3603,4433,0804,3943,1712,6722,6563,0093,5382,7822,6503,4615,1134,3582,5383,1153,324

2,5134,6303,0342,3713,8013,4535,1353,8804,8053,4133,0343,2012,4733,6063,0152,9113,3832,4562,6052,7674,0674,2703,6013,4212.047

Montana . . . . . . . . . . . . . . .Nebraska . . . . . . . . . . . . . .Nevada . . . . . . . . . . . . . . . .New Hampshire . . . . . . . . .New Jersey . . . . . . . . . . . .New Mexico . . . . . . . . . . . .New York . . . . . . . . . . . . . .North Carolina . . . . . . . . . .North Dakota. . . . . . . . . . .Ohio . . . . . . . . . . . . . . . . . .Oklahoma . . . . . . . . . . . . .Oregon . . . . . . . . . . . . . . . .Pennsylvania . . . . . . . . . . .Rhode Island . . . . . . . . . . .South Carolina . . . . . . . . . .South Dakota . . . . . . . . . . .Tennessee . . . . . . . . . . . . .Texas . . . . . . . . . . . . . . . . .Utah . . . . . . . . . . . . . . . . . .Vermont . . . . . . . . . . . . . . .Virginia . . . . . . . . . . . . . . . .Washington ., . . . . . . . . . .West Virginia . . . . . . . . . . .Wisconsin . . . . . . . . . . . . .Wyoming . . . . . . . . . . . . . .

3,5893,3443,4372,8783,0024,9113,3802,5884,4672,8943,0772,7653,1883,5023,0313,7513,1512,8293,3962,6905,3173,8832,8072,5363,134

2,6843,0113,5733,8574,8272,5614,1002,8092,8233,2912,9332,9793,3713,5012,4782,4632,7573,3052,3572,9403,5013,4572,3633,1543,165

4,124 3,209 Average . . . . . . . . . . . . . . . 3,384 3,43080URCE: LNian Rymarovncz, Fe&@ T- Payments by State Residents and Federal Expenditures h Indivkludstates, Fiscal Year 1987, Report for Congr~

(Washington, DC: Congressional Research Servkx, June 1, 19S8).

-121-

Appendix B

Fiscal Capacity and Effort Measures

Fiscal capacity is a concept developed by the U.S.Advisory Commission on Intergovernmental Relations(ACIR) to measure the relative revenue-raising abilities ofStates and their local governments, including taxes andnontax revenues, such as user charges. ACIR definesfiscal capacity as the relative amount of revenue Stateswould raise if they used a "representative” tax andrevenue system, consisting of national average tax ratesand charges applied to 30 commonly used tax and revenuebases. Therefore, State capacities vary because of differ-

ing tax base characteristics, such as property values, salestax receipts, and mineral production. For example, theeffect of lower energy prices would adversely affect thefiscal capacity of those States that rely on energy-relatedtaxes and user charges to raise a significant share of State

revenue. The method developed by ACIR is only one ofseveral methods to measure fiscal capacity, and somebelieve an analysis based on per-capita income, thoughmuch simpler, is equally useful.

ACIR also measures fiscal effort, or relative taxburdens, across States. Revenue effort is defined by ACIRas the burden that each State places on each revenue baserelative to the national average.

Table B-1 shows State capacity and effort indexes andrankings as developed by ACIR. Because the ACIRanalysis is based on 1986 data, changes have undoubtedlyoccurred in the index, but the general trends andrelationships remain valid.

-122-

. . . . . . -. -. . . — . .- ..-..— —-. - _ ----

Appendix B--Fiscal Capacity and Effort Measures ● 123

Table B-l-State Fiscal Capacity and Effort, 1986

Fiscal capacity a Fiscal efforta

Index Rank Index Rank(1OO=U.S. average) (1OO=U.S. average)

Alabama . . . . . . 0 . . . . ....0.... . . . . . .

Alaska . . . . . . . . . . . . . . . . . . . . . . . . . . .Arizona . . . . . . . . . . . . . . . . . . . . . . . . . . .Arkansas . . . . . . . . . . . . . . . . . . . . . . . . .California . . . . . . . . . . . . . . . . . . . . . . . . . .Colorado . . . . . . . . . . . . . . . . . . . . . . . . .Connecticut . . . . . . . . . . . . . . . . . . . . . . . .Delaware . . . . . . . . . . . . . . . . . . . . . . . . .District of Columbia . . . . . . . . . . . . . . . . .Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Georgia . . . . . . . . . . . . . . . . . . . . . . . . . .Hawaii . . . . . . . . . . . . . . . . . . . . . . . . . . .Idaho . . . . . . . . . . . . . . . . . . . ... !.....Illinois ,..,... . . . . . . . . . . . . . . . . . . . . .Indiana. ....,.... . . . . . . . . . . . . . . . . .Iowa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Kansas . . . . . . . . . . . . . . . . . . . . . . . . . . .Kentucky . . . . . . . . . . . . . . . . . . . . . . . . .Louisiana . . . . . . . . . . . . . . . . . . . . . . . . . .Maine . . . . . . . . . . . . . . . . . . . . . . . . . . . .Maryland . . . . . . . . . . . . . . . . . . . . . . . . . .Massachusetts . . . . . . . . . . . . . . . . . . . . .Michigan . . . . . . . . . . . . . . . . . . . . . . . . . .Minnesota . . . . . . . . . . . . . . . . . . . . . . . . .Mississippi . . . . . . . . . . . . . . . . . . . . . . . . .Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . .Montana . . . . . . . . . . . . . . . . . . . . . . . . . .Nebraska . . . . . . . . . . . . . . . . . . . . . . . . . .Nevada . . . . . . . . . . . . . . . . . . . . . . . . . . .New Hampshire . . . . . . . . . . . . . . . . . . . .New Jersey . . . . . . . . . . . . . . . . . . . . . . .New Mexico . . . . . . . . . . . . . . . . . . . . . . .New York . . . . . . . . . . . . . . . . . . . . . . . . .North Carolina.. . . . . . . . . . . . . . . . . . . .North Dakota . . . . . . . . . . . . . . . . . . . . . .Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Oklahoma . . . . . . . . . . . . . . . . . . . . . . . . .Oregon . . . . . . . . . . . . . . . . . . . . . . . . . . .Pennsylvania . . . . . . . . . . . . . . . . . . . . . .Rhode Island . . . . . . . . . . . . . . . . . . . . . .

South Carolina.. . . . . . . . . . . . . . . . . . . .South Dakota... . . . . . . . . . . . . . . . . . . .Tennessee . . . . . . . . . . . . . . . . . . . . . . . .Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . .Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Vermont . . . . . . . . . . . . . . . . . . . . . . . . . . .Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . .Washington . . . . . . . . . . . . . . . . . . . . . . . .West Virginia . . . . . . . . . . . . . . . . . . . . . .Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . .Wyoming . . . . . . . . . . . . . . . . . . . . . . . . .

75287

9673

117115139119123102

921097697868495779492

10712296

10165958891

13712112510210986939295929097777782

1017997

100977486

157.%aeedon Stateand localtaxbaseeand othorrevenue sourcas,suchas usercharges.80URCE: AdvisoryCommissmn on intergovernmental Relations, Stato FiscalCapacdyand Hfort(VVashington,DC: lW9~p. 13.

Appendix C

Case Studies of Regional Planning Agencies

OTA examined a cross-section of multipurpose re-gional planning organizational to evaluate their effective-new and reviewed the status of regional planning in twoStates-Tennessee and Idaho. Although the regionalagencies were highly individual, the study revealed muchabout the current status of regional planning and high-lighted areas that need to be strengthened.

Generally, the more formal authority a regional agencyhas, the more status and clout it has within the region. Theregional agencies with the best records for implementingplans were lead agencies for at least two or more regionalinfrastructure programs. For example, designation by theState as the Metropolitan Planning Organization (MPO)as the lead agency for water and air quality programs orfor economic development defines an agency’s institu-tional role, guaranteeing its involvement in those pro-grams and opening the door for wider participation.2 TheMPO designation is the most important, because it bringswith it U.S. Department of Transportation planning fundsand the authority to prepare the mandated regionaltransportation improvement plan.

However, in many regions a different agency isdesignated as lead for each separate responsibility,reflecting the lack of agreement by the State and localityon who should speak for the region. None of the regionalagencies studied had responsibility for planning all majorinfrastructure categories. Moreover, although regionalagencies prepare comprehensive plans and coordinateFederal and State projects, functional planning responsi-bilities arc frequently distributed to different agencies. Asa result, functional plans are not tied to comprehensiveregional plans. Even within one infrastructure category,authority is frequently dispersed. In transportation, someStates have chosen to establish multiple, single-countyMPOs instead of one regional agency, where severalcounties form the metropolitan area. In Tennessee, noneof the regional planning agencies has been designated asan MPO.3

Authority is dispersed for several reasons. The FederalGovernment may disperse authority by designating adifferent agency to perform a task than the State uses.Most State agencies favor organizations t o w h i c h t h e ycustomarily delegate program responsibilities. Localelected officials prefer to involve their own districts indecisionmaking and are not eager to have an agencydesignated by the Federal or State government take thelead. As an example, in Michigan, the State recentlyestablished a State economic development agency, but theFederal Government continues to fired the originalplanning agencies.

Regional planning organizations can establish a leader-ship role by using their technical and analytic expertise toprovide needed local services to address local priorities.The data collection and analytic work of many regionalagencies provide the technical foundations for numerousregional decisions, and the organization is often the onlysource for reliable regional data To maintain this role theagency has to maintain its databases and retain qualifiedstaff, difficult tasks if funding levels are low. In addition,most regional planning agencies operate one or moreregional service programs, such as ridesharing or pro-grams for aged persons; these bring additional status,some income, and enhance their credibility within theregion.

Regional agencies may provide another valuable serv-ice if they function as a regional ombudsman -availableto identify problems and provide a forum for discussingcontroversial issues of regional significance. Some agen-cies go a step further and help to resolve regionalconflicts, although success in this role depends heavily onthe stature of the Executive Director. In 1988, the NorthCentral Texas Council of Governments successfullyresolved air quality issues within the region, achievingagreement on a plan that avoided Environmental Protec-tion Agency sanctions, for example.

l~q Associmicm of G#emmam Cearral “kxiM Council of Bahimorc Regialal Pluming council,

% Diego AaaXiah of GVanmam SCXUknt Micbig8n C!4nmd of Gowmmcau, and Ibqa Bay Rcgioaal Pluming Council.- ~~-”~A~m J- 1989, p. 15.3~., w. A-5, p. 7.

-124-

Appendix D

Contractor Reports

Copies of contractor reports done for this project are available through the U.S. Departmentof Commerce, National Technical Information Service (NTIS), Springfield, VA 22161$ (703)487-4650.

1. Apogee Research, Inc., “Impact of Federal Funding Changes on State/Local Infra-structure Financing Resources.”

2. Government Finance Research Center, “Federal Tax Policy and Infrastructure Financ-ing.”

3. Thomas D. Hopkins, “Benefit Changes for Financing Inhastructure.”

–12s-21-667 ( 136)

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