Roads to Nowhere?
Population Growth May Outspace U.S. Highway Funds
By Brian Strawberry and Brian Moore

America’s setup of roads and bridges serves as the backbone of each state’s transportation system, carrying the bulk of the country’s commercial goods as well as accommodating the nation’s personal travel. But according to the U.S. Census Bureau, the U.S. population will reach 420 million residents by 2050 (as seen in Exhibit 1), which is nearly a 40 percent increase over the next 42 years. Now, take a moment to consider what that projection may mean for your morning commute to work.

Even if more of the population takes the bus or a train to work, it is clear that demographic changes will continue to be the primary factor driving increased roadway congestion. If the country’s transportation networks do not become a top issue for our citizenry and politicians to address, the nation’s infrastructure will soon be overwhelmed. Population increases of this magnitude will not only wear down the current roads, highways and bridges at a rapid pace, but also increase the need for new, larger and wider roads and bridges for our road and highway infrastructure.

Congestion

Congestion is one of the greatest threats to America’s transportation infrastructure. The three primary causes of congestion include demographic growth/shifts, slowed growth in supply of road capacity and, lastly, crashes, breakdowns, improper signals, events, weather or anything else that slows traffic and increases user risk. In 1982, Los Angeles was the only city that experienced over 40 hours of delay per traveler annually. By 2005, there were 28 cities across the U.S. that shared Los Angeles’s congestion situation, and this number is growing.

Roadway congestion translates into less time spent at home or work, wasted fuel resources and added stress on people and infrastructure. Congestion statistics reported on the national scale are jaw dropping. In 2005, drivers across national metropolitan areas experienced 4.2 billion hours of delay, wasted 2.9 billion gal of gas and cost an estimated $78 billion dollars. By 2006, congestion combined with rising fuel prices and logistic expenses caused the cost of managing, storing and moving goods in American businesses to reach 10 percent of U.S. GDP (as concluded by the National Surface Transportation Policy and Revenue Study Commission).

Funding Issues

Funding issues that limit the nation’s ability to repair and build new roads affect both federal and state funding decisions. Traditionally, federal transportation funding has come from the Highway Trust Fund (HTF), which receives revenues from the federal gasoline tax. Since the inception of the interstate highway system, federal gasoline tax revenues were sufficient to fund much of the necessary highway and street construction in the United States.

These federal funds averaged 46 percent of capital spending between 1995 and 2004; the rest is mostly reliant on state funds. However, tax revenue funds will not be able to support the HTF through 2009 at current spending levels. If corrective actions are not taken (as projected by the U.S. Department of the Treasury), the HTF is expected to hit a deficit for the first time of $4.3 billion by the end of 2009, and $26 billion by 2012. Using today’s figures, that increasing deficit would decrease Federal Highway Spending by $17 billion in 2009 and $104 billion by 2012.
State budget revenues are driven by fuel taxes, motor vehicle fees and other traditional highway user taxes, which account for over 70 percent of total state highway revenues. The remainder is made up of tolls, general funds and other specialized taxes. Over the past decade, the majority of the states have maintained a stable share of each revenue source, which is telling of the difficulty that they are having in raising fuel and motor vehicle taxes to increase revenues needed to fund highway construction.

State excise taxes range from eight cents per gallon in Alaska to 36 cents per gallon in Washington, and many states have not seen gas tax increases in five to 10 years. However, over the last five years, costs of heavy highway construction have risen 27 percent (due to wage increases, fuel costs, transportation costs, labor restrictions and foreign demand for raw materials), and the cost for highway materials has increased nearly 45 percent (as a result of foreign demand, fuel, insurance and permitting).

Under our nation’s current federal surface transportation act, Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU), roadways will realize a total deficit of $60 billion in funding between 2004 and 2009 (or $12 billion per year). SAFETEA-LU is scheduled to disburse $286.5 billion over its six-year term, but available funds are also included for other non-highway and street transit projects. Total funding obligations for federal highway construction under SAFETEA-LU for 2007 and 2008 are $39 billion and $40.3 billion, respectively.

Growth in guaranteed yearly fund allocations have also proven to be a downfall for SAFETEA-LU with rates at 4.4 percent per year, which equates to around 0 percent per year when considering inflation. Compared to growth rates experienced by TEA-21, the previous transportation act, rates were higher at 8.5 percent per year and 6 percent per year when adjusted for inflation. However, considering industry cost increases, growth rates would have had to be much higher to compensate for rising costs of construction.

Today, the Highway Performance Monitoring System considers one out of every seven miles of the nation’s roads (or 15 percent) to be “not acceptable.” The American Road & Transportation Builders Association (ARTBA) estimates that, just to maintain the current conditions of our roadways, federal highway funding would have to reach $54.5 billion by 2010 and $61.5 billion by 2015. ARTBA also estimates that to maintain our current roadways, repair current obsolete roads and bridges and build additional new roads and bridges for future congestion issues, funding will need to reach $131 billion annually.

Planners who designed the majority of today’s modern roads never imagined the extent of the demands that the 21st century would have on our transportation infrastructure. At the present time, both federal and state governments are increasingly working to convince the public that if they want less congested and safer roads, sources of additional funds will be needed from either increased taxes or private investors. It is perhaps overly optimistic to hope that this issue will get the attention it needs before the increasing population outstretches the capabilities of the nation’s infrastructure to carry the load.

Possible Solutions

Future costs to maintain the condition of our aging roads, highways and bridges will exceed projected highway revenues. The National Surface Transportation Policy and Revenue Study Commission recently published a study looking at these shortfalls with suggestions to reach necessary funding levels in the future. Recommendations for the new transportation act following SAFETEA-LU’s 2009 expiration include:

1. Increased federal and state fuel taxes
The commission recommends that the federal tax rate be increased by five to eight cents per gallon over the next five years, and then indexed to inflation thereafter. Each one-cent raise in fuel taxes could generate nearly $2 billion, and indexing the tax or converting to a gasoline sales tax would help account for rising construction costs.

2. Increased flexibility on state and local toll pricing
The commission recommends the removal of certain barriers involved with state and local tolling. The added flexibility will allow states that wish to make greater use of toll-ways the ability to do so. Tolls are expected to begin to play a more integral part in the future of roadway maintenance funding. There are currently 31 states with toll roads. In the last 17 years, 27 states have initiated toll projects.

3. Congestion pricing in metropolitan areas
Congestion pricing, both on new and existing roadways in metropolitan areas (population greater than one million), will be used in upcoming years to better manage congestion. Congestion pricing can either be implemented through the use of high-occupancy toll (HOT) lanes, express toll lanes, facility pricing or area wide pricing. Revenues collected would vary depending on the severity of congestion.

4. Further public private partnerships (PPPs) in heavy highway construction
The commission is encouraging additional PPPs, including the possibilities of concessions for highway construction as PPPs prioritize projects that generate high returns, improve life cycle investing and provide incentives for more efficient operation and maintenance. There are currently 23 states that have authority to participate in PPPs. The two paths for PPPs are either greenfield (new construction or the addition of capacity) or brownfield (the long term lease of existing toll facilities). However, while PPP is a very popular topic, not all states are clamoring to continue using them. In Texas, constituents have created a backlash against others owning their roads and legislators are taking a step back to consider if they really want to sign away any additional future revenue. Texas now has a two-year moratorium on PPP projects.

Other factors that are influencing the future of this construction market include the recent decline in residential construction (that has added more competitive pressure in other markets), increased use and interest in environment-friendly materials and construction techniques and trends in efficient delivery methods. As the issues surrounding heavy highway construction change over time, namely from material price increases and demographic pressures that parallel evolution, adaptation and acceptance of policies that combat these issues will be essential. There are pros and cons for each of these concerns, and many of these solutions will vary depending on various specifics.

It is no secret that our nation’s roadways are showing their age. We want better and safer roads and bridges and reduced commute times, but we don’t all want to take the time to understand how that infrastructure is funded. The problem is that the cost to maintain our roads, highways and bridges is exceeding budgets that were authorized four or five years ago. If solutions are not forthcoming, we will all have more time to think about the problem as we sit in traffic waiting for someone to do something about it. Think again about that 40 percent growth in population by 2050. The morning commute is just the most obvious problem. Our groceries, gas, and most manufactured goods share those roads.

Brian Moore is a consultant working with contractors on a variety of strategic, management and operational issues and Brian Strawberry is a research consultant for FMI. For more information, contact Brian Moore at bmoore@fminet.com or (919) 785-9269 or Brian Strawberry at bstrawberry@fminet.com or (919) 785-9246.