Transportation Funding Goes Back to the Future

In keeping with the October 21, 2015 “Back to the Future Day” celebrations, Toyota presented its hydrogen-powered Mirai with Michael J. Fox and Christopher Lloyd, stars of the 1980s Back to the Future Trilogy. The launch of the Mirai followed Toyota’s announcement last week that it expects to eliminate most of its gasoline-fueled cars by 2050. 

While gasoline-fueled autos will not be disappearing anytime in the near future, the increased utilization of vehicles using alternative fuels will have implications for the construction of transportation improvements, as federal and state gas taxes are the primary sources of transportation funding. Most states issue bonds backed by highway revenues, including gas taxes, to pay for highways and other transportation facilities. While most of those highway revenue bonds have strong credit characteristics because their leverage is limited, the transition from gas to alternative fuels will impede the efforts of state transportation departments to find dollars to meet future infrastructure needs.

Compounding the problem is Congress’s inability to adopt a transportation funding bill. Lawmakers face an October 29 deadline to extend the authorization of federal spending for transportation, but as has been its recent practice, Congress is expected to pass a short-term extension without a long-term funding solution. As a result, the shortfall in the federal Highway Trust Fund, established to provide highway and transit funding, will continue to grow.

The primary revenue source for the Highway Trust Fund is the federal gas tax, but unchanged at 18.4 cents per gallon since 1993, the tax has not kept up with inflation nor changing technology. As federal funding trails behind transportation demand, muni investors will need to analyze alternative funding modes that have already begun to be adopted. We expect to see increased use of programs that draw on alternative revenue sources for transportation, such as sales taxes, leveraging of toll road revenues, the use of tolled managed lanes alongside non-tolled highways and availability payments paid to bondholders to mitigate the risk of fluctuating toll revenues.