Fix It First, Expand It Second, Reward It Third: a New Strategy for America’S Highways

DISCUSSION PAPER 2011-03 | FEBRUARY 2011

Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways

Matthew E. Kahn and David M. Levinson MISSION STATEMENT

The Hamilton Project seeks to advance America’s promise of opportunity, prosperity, and growth. The Project’s economic strategy reflects a judgment that long-term prosperity is best achieved by fostering economic growth and broad participation in that growth, by enhancing individual economic security, and by embracing a role for effective government in making needed public investments. We believe that today’s increasingly competitive global economy requires public policy ideas commensurate with the challenges of the 21st century. Our strategy calls for combining increased public investments in key growth-enhancing areas, a secure social safety net, and fiscal discipline. In that framework, the Project puts forward innovative proposals from leading economic thinkers — based on credible evidence and experience, not ideology or doctrine — to introduce new and effective policy options into the national debate.

The Project is named after Alexander Hamilton, the nation’s first treasury secretary, who laid the foundation for the modern American economy. Consistent with the guiding principles of the Project, Hamilton stood for sound fiscal policy, believed that broad-based opportunity for advancement would drive American economic growth, and recognized that “prudent aids and encouragements on the part of government” are necessary to enhance and guide market forces. Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways

Matthew E. Kahn University of California at Los Angeles

David M. Levinson University of Minnesota

FEBRUARY 2011

NOTE: This discussion paper is a proposal from the authors. As emphasized in The Hamilton Project’s original strategy paper, the Project was designed in part to provide a forum for leading thinkers across the nation to put forward innovative and potentially important economic policy ideas that share the Project’s broad goals of promoting economic growth, broad-based participation in growth, and economic security. The authors are invited to express their own ideas in discussion papers, whether or not the Project’s staff or advisory council agrees with the specific proposals. This discussion paper is offered in that spirit.

The Hamilton Project • Brookings 1 Abstract

The roads and bridges that make up our nation’s highway infrastructure are in disrepair as a result of insufficient maintenance—a maintenance deficit that increases travel times, damages vehicles, and can lead to accidents that cause injuries or even fatalities. This deficit is in part due to a prioritization of new projects over care for existing infrastructure and contributes to a higher-cost, lower-return system of investment. This paper proposes a reorganization of our national highway infrastructure priorities to “Fix It First, Expand It Second, and Reward It Third.” First, all revenues from the existing federal gasoline tax would be devoted to repair, maintain, rehabilitate, reconstruct, and enhance existing roads and bridges on the National Highway System. Second, funding for states to build new and expand existing roads would come from a newly created Federal Highway Bank, which would require benefit-cost analysis to demonstrate the efficacy of a new build. Third, new and expanded transportation infrastructure that meets or exceeds projected benefits would receive an interest rate subsidy from a Highway Performance Fund to be financed by net revenues from the Federal Highway Bank.

2 Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways Table of Contents

ABSTRACT 2

INTRODUCTION 5

CHAPTER 1: FIX IT FIRST: NEW PRIORITIES FOR THE HIGHWAY TRUST FUND 8

CHAPTER 2: EXPAND IT SECOND: INTRODUCING THE FEDERAL HIGHWAY BANK 16

CHAPTER 3: REWARD IT THIRD: PERFORMANCE STANDARDS AND INTEREST RATE SUBSIDIES 19

CHAPTER 4: PROJECTING BENEFITS AND COSTS 21

QUESTIONS AND CONCERNS 23

CONCLUSION 26

APPENDIX 1: METRICS FOR JUDGING EXISTING ROAD INFRASTRUCTURE QUALITY 27

AUTHORS AND ACKNOWLEDGMENTS 29

ENDNOTES 30

REFERENCES 31

The Hamilton Project • Brookings 3 4 Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways Introduction

ore than five decades ago, the federal government To continue to enjoy the level of network performance that built an excellent interstate highway network that we often take for granted, maintenance, repair, rehabilitation, connects all large metropolitan areas, ports, and reconstruction and enhancement of this existing system is Mairports within the contiguous United States. This network that urgently needed. Based on previous studies, we estimate that connects places is foremost a network that connects people: it an annual expenditure of $145 billion is needed to maintain allows people (and firms) to interact, creating opportunities highways and bridges at current performance levels.1 Other for trade and economic activity. Places that have the greatest studies have much higher estimates, up to $194 billion.2 accessibility, that enable more people to interact in less time, produce the greatest wealth (Glaeser 1998). Workers face less In addition to the threat of losing the benefits we have from risk of unemployment in cities where they can easily commute previous investments because of lack of maintenance, we are to many possible employment centers. These economies of getting less value from our system because we are using it agglomeration drive the formation of cities and regions, and inefficiently. Time is our scarcest asset. In cities, though, the require transportation of all kinds: passenger and freight; high population density that facilitates the economic benefits local and intercity; highway and transit; and rail, air, and of living and working in close proximity also imposes costly water. Transportation infrastructure is crucial for facilitating delays from congestion. trade within, between, and across states. In addition, this According to the 2010 Texas Transportation Institute (TTI) infrastructure is a crucial determinant of quality-of-life issues, Urban Mobility Report, in 1982 each commuter lost 14.4 including the length of our commutes, the quality of our air, hours in congestion, while in 2009 each commuter lost 34 and the livability of our neighborhoods. hours (or 4.8 billion hours lost in traffic nationwide) (TTI 2010, Exhibit 2, National Congestion Measures, 1982 to Unfortunately, we fail to realize the full benefit of our system 2009). For the five most congested metropolitan areas for auto of infrastructure and risk losing what we have because we are commuters (Chicago, Houston, Los Angeles, San Francisco not investing enough to maintain aging bridges and highways and Washington, DC) the annual monetary cost of time and because we do not use the system as efficiently as we lost per commuter varied between $1,110 and $1,738. Recent could. The existing transportation network represents long- total congestion costs for urban areas are approximately $120 lived capital: highways, bridges, and tunnels last for decades. billion a year (TTI 2010). At least as important as recurring Moreover, much of our existing highway network was built (and predictable) delay, is the unreliability of travel times, many years ago. For example, the average age of a bridge on the which leads travelers to leave early to guarantee being on time. U.S. Interstate Highway system is more than forty-five years old; most bridges were designed for a lifespan of forty to fifty The fundamental causes of these problems—underinvestment years. Over time, infrastructure deteriorates. Most of the time in existing infrastructure and the inefficient use of this deterioration is unheeded, but salient disasters remind us infrastructure that contributes to congestion—are misaligned of the importance of updating aging infrastructure. The fatal incentives in our process for investing in infrastructure and a collapse of the I-35W Mississippi River Bridge in Minneapolis mispricing of use. brought needed attention to the question of the state of repair of America’s bridges. Roads have similar, though not nearly Our system of federal grants matched to state funds puts as dramatic, issues: poor roads impose wear and tear costs on no value on benefit-cost analysis. As a result, new, often vehicles, can lead to accidents, and require further costs in inefficient, infrastructure investments are preferred by packaging to avoid damaged freight. policymakers at the expense of more mundane repair and maintenance of existing infrastructure that may have higher

The Hamilton Project • Brookings 5 returns. There is an odd juxtaposition with respect to our • Fix It First. All revenues from the existing federal gasoline investments in improving existing transport infrastructure tax would be redirected away from new construction and versus building new highways. Many of the transportation instead used primarily to repair, maintain, rehabilitate, infrastructure projects in the news have nothing to do with reconstruct, and enhance existing roads and bridges. maintenance and repair. Earmarks such as the proposed (and ultimately canceled) Gravina Island Bridge in Alaska (the • Expand It Second. Funding for states to build new and infamous “Bridge to Nowhere”), while a small share of the expand existing roads would come from a newly created federal transportation budget, garner outsized attention. At Federal Highway Bank (FHB). The funding would be the same time, research shows that, in general, rates of return contingent on meeting strict performance criteria and to new transportation infrastructure investments have been demonstration of an ability to repay the loan through falling in recent decades.3 direct user charges and capture of some of the increase in land values near the transportation improvement. Similarly, as a nation we have collectively chosen not to use market incentives to signal scarcity at times of peak use • Reward It Third. New and expanded transportation (rush “hour”). This lack of clear price signals leads roads to infrastructure that meets or exceeds preset performance be overused: there is too much congestion (and pollution) at targets—including targets for an on-time completion the peak, since people do not fully account for the delay and date, and social goals such as environmentally responsible pollution they cause. Consequently, the scarce resource of investment—will receive an interest rate subsidy from a road space during peak times is misallocated. newly created Highway Performance Fund that would be financed by net revenues from the FHB. To summarize the policy challenge, transportation is critical. The United States has benefited greatly from the investments A key innovation inherent in each of these proposals is ensuring made, especially starting with the Interstate Highway Act in that funding for investment and maintenance be firmly tied to 1956, and saw large economic gains for decades. However, as those who benefit from the use of that infrastructure through that infrastructure has aged, the United States is currently user fees, and by providing state and local officials with the underinvesting in maintaining existing transportation correct incentives to invest only in high-value projects. infrastructure and overinvesting in other, less-productive New capacity will be funded via the FHB and the Highway areas. Performance Fund. Introducing performance standards for infrastructure investments will lead to prioritizing higher- Such skewed investment patterns would be less likely to take quality infrastructure projects. place if states were given appropriate incentives to use benefit- cost analysis and were rewarded for meeting performance It is politically infeasible to coerce states into taking actions standards tied to social goals such as safety, lowered pollution that they may view as detrimental, or uncertain and risky. The levels, and avoiding cost overruns. States also need to be narrow version of our proposal will not change the general incentivized and enabled to implement innovative road formula that dictates how federally collected highway user fees pricing strategies in order for them to curb the problem of are redistributed to states, which is largely a political matter. traffic congestion and system unreliability. As different states In the more comprehensive form of our proposal, the formula undertake alternative strategies, the best strategies will be to allocate funds to states would be revised to correspond emulated, and all states will learn from the experience. with the priorities of the new program so that all states would receive funds proportionate to the size and condition of their We propose an infrastructure transportation policy that we infrastructure. call “Fix It First, Expand It Second, and Reward It Third.” This policy reforms federal transportation financing to alter the incentives facing states and cities as they plan their transportation infrastructure.

6 Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways Importantly, our proposal encourages pricing of major business and workers derive from locating near each other— roads. Examples include the ability to build new toll lanes are choked off by congestion. More efficient investment means that guarantee reliable travel times, such as today’s high that more people will have greater access to employment and occupancy toll (HOT) lanes, or conversion of existing roads spend less time stuck in traffic. Properly done, these standards or lanes from being unpriced to being priced. Under our would mean safer roads and bridges, fewer accidents, and proposal, no new federally financed road expansion will be more environmentally friendly investment. unpriced. Expansions will be financed through the FHB. Projects that meet performance standards will be rewarded This proposal focuses on highway infrastructure. Highway by the Highway Performance Fund. The knowledge generated and transit infrastructure are different animals. Although from the implementation of road pricing in different forms highway funds to states have comparatively fewer strings, and different locations will provide crucial insights, through federal funds allocated for transit are more highly regulated the introduction of information technology and off-peak by the U.S. Department of Transportation (DOT) and each price discounts, about how to reduce the costs of congestion project competes in a federal selection process. Whereas in metropolitan areas. transit funding also needs reform, the way highway funds are allocated are the “low-hanging fruit” with large opportunity Imposing performance standards on infrastructure for short-term, implementable reform. Ultimately, it is our investments gives incentives to states to prioritize the most hope that this proposal will prove successful for highway efficient infrastructure projects. More-efficient infrastructure infrastructure, and encourage more-stringent performance investment means better industrial organization that promotes standards across a broader range of infrastructure investments. trade and competition. For instance, evidence shows that the benefits of agglomeration economies—the benefits that

… the United States is currently underinvesting in maintaining existing transportation infrastructure and overinvesting in other, less-productive areas.

The Hamilton Project • Brookings 7 Chapter 1: Fix It First: New Priorities For The Highway Trust Fund

“To meet expected needs in the coming years, MnDOT [the state’s Department of Transportation would be used to ensure Minnesota Department of Transportation] will need to direct that funds are allocated efficiently. virtually all available funds to preservation projects.” Presently, maintenance, repair, and rehabilitation of Minnesota Office of the Legislative Auditor (Office of the Legislative Auditor, State of Minnesota 2008) existing infrastructure, as well as safety and environmental enhancements, compete with new infrastructure for priority, and often come up short as the priorities of politicians and the electoral cycle differ from the life cycle of infrastructure. Most ur first substantive proposal, Fix It First, directs states do not use any type of stringent benefit-cost analysis to revenue from the federal gasoline tax away from new determine the allocation of these federal dollars within the highway construction. Under the narrow form of state. Oour proposal, the remaining funds would be allocated across states via existing formulas. A more-comprehensive form of Currently, of the $38.5 billion Federal Highway Program, our proposal would see this money allocated based on national approximately 30 percent is used for capacity adding maintenance needs. Benefit-cost analysis conducted by each investments.4 The FY2010 allocation of total federal highway spending is shown in Table 1.

TABLE 1 FY2010 Federal-aid highway fund apportionments

Spending Category Dollars (thousands) Percentage of total

Interstate maintenance 7,040,519 18

National Highway System 8,704,980 23

Surface Transportation Program 9,010,263 23

Bridges 5,726,448 15

Congestion mitigation and air quality improvement 2,372,787 6

Highway Safety Improvement Program 1,502,675 4

Appalachian Development Highway System 470,000 1

Recreational trails 84,160 0

Metropolitan planning 303,967 1

Railroad highway crossings 220,000 1

Coordinated border infrastructure 210,000 1

Safe routes to schools 180,000 0

Equity bonus 2,692,857 7

Source: FHWA 2010a Note: The Equity Bonus provides funding to States based on equity considerations. These factors include low population densities, median household income of less than $35,000, high mortality, and high fuel tax rates (FHWA [1])

8 Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways FIGURE 1A Federal Spending on the National BOX 1 Highway System The Major Programs Financed by Federal Highway Funding

Many of the programs listed in Table 1 have over- Other (33%) Maintenance Only (32%) lapping funding:

Interstate Maintenance (IM). This program provides funding for resurfacing, restoring, rehabilitating, Added Capacity (35%) and reconstructing most routes on the interstate system.

National Highway System (NHS). The NHS

includes approximately 160,000 miles of roadway— FIGURE 1B principally the interstate highway system—as well Federal Spending on the Surface as other roads that are important to the nation’s economy, defense, and mobility. Transportation Program

Surface Transportation Program (STP). This program provides flexible funding that may be used by states and localities for projects on any federal- aid highway, including the NHS, bridge projects on any public road, transit capital projects, and Other (38%) Maintenance intracity and intercity bus terminals and facilities. Only (39%)

Highway Bridge Program (HBP). This program provides funding to enable states to improve Added the condition of their highway bridges through Capacity replacement, rehabilitation, and systematic (23%) preventive maintenance. Source: FHWA 2009b

Examining the NHS program, we observe 35 percent of funds In addition, the balance in the Federal Highway Trust Fund go to added capacity (either new facilities or reconstruction has shrunk from $23 billion in 2000 to an estimated deficit of that adds capacity). Similarly, 23 percent with the Surface $8.1 billion in 2010, requiring a taxpayer bailout. At the same Transportation Program (STP) goes to added capacity.5 time that the federal government is budgeting less money for Note that there is also a significant share of these funds maintenance and repair, state and local governments also are (about one third) in the “other” category, which includes cutting back. Opposition to new auto registration fees and transit improvements. We recognize that this broad category higher state gasoline taxes has reduced these revenue sources funds some valuable projects, but we recommend that these (Schoen 2007). funds be directed to enhance the “Fix it First” core goals. To illustrate, Figures 1a and 1b show pie charts of the current RATIONALE allocation of the NHS and STP. This allocation is in addition to the Congestion Mitigation and Air Quality Improvement The Interstate Highway System has been the backbone of our Program, which is largely capacity adding. transportation system since its inception. Both residential communities and economic employment centers have arisen

The Hamilton Project • Brookings 9 around its interchanges. Local productivity is higher in areas According to the American Association of State Highway and where the highway was completed earlier (Fernald 1999). Transportation Officials (AASHTO), the NHS comprises only Such highways have led to new suburban population centers 4.1 percent of the nation’s total road mileage but carries 44.8 (Baum-Snow 2007). On the cost side, several factors arise. percent of vehicle traffic. Despite its importance, much of the system is not in good repair; approximately 37 percent of NHS Although there is no transparent top-line number that shows miles are in fair, poor, or very poor condition (FHWA 2008b). the scope of our maintenance deficit, the weight of the evidence indicates we are not allocating enough to maintenance. The Figure 3 shows the average age of infrastructure on the U.S. extreme case of the collapse of the I-35W Mississippi River Interstate Highway system is more than forty-five years old. Bridge in Minneapolis illustrates the point (Box 2). The cost of While there has been some progress in reducing the number retrofitting the bridge with new gusset plates, while not free, of structurally deficient bridges and in replacing fracture- and improving bridge redundancy (the bridge was designed as critical bridges, there is much to be done, and the problem fracture critical, and so failure at a single point would result in worsens each year as unreplaced and unrepaired bridges age. failure of the whole), would have been far less than the cost of rush building a new bridge (estimated at $250 million), much To illustrate, the Southeast Michigan Council of Governments less the toll in thirteen lives and 145 injuries, in addition to (a planning organization including the Detroit region) reports the anxiety caused for millions who learned about the August that the percent of lane miles in poor condition has increased 1, 2007, tragedy. The bridge had been rated “structurally from less than 10 percent in 2004 to more than 30 percent in deficient” in 2005 (and this observation was corroborated 2009, showing just how quickly roads can deteriorate with subsequently when inspections found further cracking even a short deferral of maintenance due to the economic and fatigue), indicating it was in need of a major overhaul downturn (Southeast Michigan Council of Governments or replacement (DOT 2008). Despite its poor condition, 2011). according to Minnesota Governor Tim Pawlenty, the bridge There are 115,104 bridges on the NHS, which includes interstate was not scheduled to be replaced until thirteen years later, in bridges. Of these, 5.6 percent are considered structurally 2020 (Elsen and Sander 2007). deficient, down from 7.9 percent in 1995.6 AASHTO estimates The same logic applies, in a less spectacular fashion, to that a $5.1 billion average annual investment would clear the pavements. Figure 2 shows the extent to which pavements NHS bridge investment backlog by 2024. This is in addition deteriorate over time, and suggests there is a cost-minimizing to the cost to maintain, repair, and rehabilitate bridges that point of intervention before the pavement deteriorates too are not on the backlog. Figure 4 shows just how many bridges much. Research from scholars at Michigan State University DOT considers “structurally deficient.” suggests that for every $1 spent on preventive pavement Judging from sources such as the American Society of Civil maintenance, between $4 and $10 is saved on rehabilitation Engineers (ASCE) Report Card and state performance (CTC & Associates 2003, Baladi et al. 2002). management systems, evidence abounds that preservation is underfunded; without new revenue sources, or, as in our

FIGURE 2 proposal, a greater share of existing revenues, this problem Typical Pavement Lifecycle Curve will magnify.

Good

Satisfactory

$1.00 for Rehabilitation Fair Here

Poor

Very Poor Will Cost $4.00 to $5.00 Here Serious Small % of Pavement Life

Failed Source: Federal Aviation Administration (FAA) 2010.

TIME

10 Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways FIGURE 3 Deployment of the U.S. Interstate Highway System

100

20 Cumulative miles Length of 42,795 (%)

0 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995

Source: FHWA Note: Half of the interstate highway system is from 1965 or before. Unless something is done, failure will be more frequent, the Interstate system is aging and nearing the end of useful life for many components.

FIGURE 4 Structurally Deficient Bridges on the U.S. National Highway System

Source: DOT 2007b

The Hamilton Project • Brookings 11 Highway repair has lagged in part because of rising Implicitly, items such as the Highway Bridge Program (HBP) construction costs. The prices of basic building materials such and Interstate Maintenance (IM) would be expanded, while as concrete and steel have increased globally. Higher oil prices the NHS, STP, and Congestion Mitigation and Air Quality have translated into a higher cost of asphalt. At the same time Programs would be reshaped so that funds would no longer be that the costs of construction have risen, federal funding for spent to add capacity. maintenance and improvements has declined.7 We also propose that the remaining funds be allocated within There are other system enhancements that can be made to a state by using benefit-cost analysis whenever possible. We improve the efficiency of the existing highway system. These envision allocating 1 percent of a state’s Highway Trust Fund system enhancements include targeted safety enhancements, disbursements, ranging from $1.5 million to $33 million per traffic control improvements, and environmental state, depending on their current allocation (FHWA 2009a), improvements. Evidence suggests that safety improvements to be used to expand and build this analysis capability into such as guardrails or shoulder rumble strips can have high each state’s Department of Transportation. Realistically, this benefit-to-cost ratios. Shoulder rumble strips have estimated may apply only to projects that are above some minimum benefit to cost ratios ranging from 30:1 to more than 60:1 in price tag. The federal government should develop criteria to the appropriate context (DOT). estimate benefit-cost tests for different types of projects and provide resources for states to conduct these analyses above With national annual congestion costs in the ballpark of $120 a threshold cost (such as $1 million), and require states to billion, states also need to be given the ability to experiment work down the list of projects starting with those with highest with new forms of pricing and means to lower congestion. return. Pricing unpriced roads, for instance, by converting existing lanes to HOT lanes, as discussed in the Introduction above, We envision two different versions of how our proposal could can help lower congestion and reduce the need for added be implemented. The narrower version of the proposal would capacity. be to use the existing federal-state formula for allocating funds, simply restricting these funds for preservation and enhancement investments that do not add capacity. This PROPOSAL 1: RESTRICTING THE HIGHWAY TRUST FUND TO restriction alone would serve to increase the amount of SUPPORT THE EXISTING SYSTEM funding used to support existing infrastructure in each To shift the investment focus to “Fix It First,” we would state. Given the political nature of much of existing highway restrict the use of the federal Highway Trust Fund (collected spending, this would be the easiest way to implement this from highway user fees, including the federal gas tax) from proposal. adding capacity to the existing system. Instead, the funds primarily would be dedicated to maintain, repair, rehabilitate, A broader version of our proposal would reallocate funding reconstruct, replace, and enhance existing transportation across states based on the condition of existing infrastructure. infrastructure that is part of the NHS. Reserving the federal Roads and bridges in the worst state of repair would be given Highway Trust Fund for system preservation and enhancement priority for funding. Such a formula would allocate funds via would mean a boost in federal highway investment for these a weighted average of the state’s bridge deck by condition and purposes of close to $12 billion per year. Combined with any road surface area by condition. To illustrate, a road in very additional revenues that states raised from increasing their poor condition might garner five times as much funding as an gas taxes, these funds would put us on the right path toward otherwise equivalent road in very good condition. Similarly, repairing our nation’s aging infrastructure. a bridge in very poor condition might be weighted five times as high as an identically sized bridge in very good condition. To develop a funding formula that combines roads and bridges, we need to understand the costs of each. While more research is required to ascertain appropriate weights, to a first approximation, a bridge is on the order of one hundred times as expensive as a road, per unit area.

12 Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways It is unlikely that this more-comprehensive proposal would Down the road, if remaining funds prove to be insufficient be palatable to all states. One way this could be made more to support current infrastructure, increasing the match acceptable would be to allow states to opt in. We envision rate, along with increasing the gas tax, could help close this that states with the most need will opt in. Under an opt-in gap. According to the CBO, evidence suggests that if federal style implementation, the states that do opt in to the program spending decreased, then spending by states would increase to would receive collectively as much money as they otherwise some extent (CBO 2011). To more fully address infrastructure would, but some opt-in states might get more in Year 1 and problems, a more comprehensive version of our proposal others would get more in Year 10, depending on the size and would increase the state match rate. Based on usage of condition of their NHS network. In Year 1, the state with the facilities, the match should be a much smaller share of federal worst roads would receive more funds, but those funds, which funding, since most traffic on the NHS is local. Funds could be would have to be spent to restore existing roads, means that “recaptured” by pricing the roadway accordingly. in Year 2 that state may no longer still have the worst roads, We recognize that this proposal on its own, by spending more on existing …the funds primarily would be dedicated to maintain, infrastructure, is likely to reduce the overall investment repair, rehabilitate, reconstruct, replace, and enhance in new highway capacity across the United States. Our second existing transportation infrastructure that is part of proposal presented below will present a new financing the NHS. option for states that seek to build new highways. From society’s perspective, we do not and another state would get more funds. Over time, all states believe that we sacrifice much by focusing investment efforts will get a fair share of the funds, because infrastructure will on preserving existing transportation infrastructure. As the cyclically deteriorate and be renewed on different cycles in declining returns to infrastructure investment indicate, the different states. best projects have already been built (Nadiri and Mamuneas 1996). Under the existing system, most states and localities need to supply only 20 percent of the funds for projects involving Investing in preserving existing infrastructure is a less-risky federal funds (Congressional Budget Office [CBO] 2011). investment than constructing new highways. Past investments However, there are other projects on the NHS with primarily in highways have influenced the locational decisions of local benefits for which states receive no federal funding. households and firms. In this sense, the existing urban form On average, we estimate state spending on NHS roads is is shaped by past investments in highways. Land use decisions approximately 55 percent federal and 45 percent state (see are based on the accessibility of existing facilities. In contrast, American Public Transportation Association [APTA] 2010, a new transit or highway project, especially one built to serve a 18, for a discussion of match rates). greenfield site or one that hopes to spur development, is based on speculative expectations of future demand, rather than on Here we also present alternatives, one that minimizes budget known existing demand. disruptions, another that addresses the problem more comprehensively. Although increasing the match rate will increase the total amount of funds allocated for maintenance, we do not want this to deter states from supporting the program. To minimize disruption to current budgets, the existing match rates will stay the same as they are now.

The Hamilton Project • Brookings 13 A useful definition for the links eligible to be funded from Fix It First guarantees an upgrade of the nation’s existing federal sources is the NHS, shown in Figure 5. The NHS is a transportation infrastructure. In a probabilistic sense, this network including the U.S. interstate highway system as well will sharply reduce the number of future bridge collapses other important routes generally comprising the most traveled and closures, lower the cost of future pavement repair 4 percent of total mileage in the United States carrying more and rehabilitation, and upgrade safety. The maintenance than 40 percent of highway traffic and 75 percent of truck improvements will lead to higher-quality roads and bridges traffic (Slater 1996). These are routes that have already been operating at modern standards, that will both improve safety agreed upon as being a national priority. We argue that if and allow freight traffic and people to move directly at high these roads were a priority to build, they remain a priority speeds, which will save time. The capacity of bridges and to maintain. The Highway Trust Fund would not be usable roads, when upgraded consistently along routes will allow for highway capacity expansions, but highway organizations heavier trucks to travel on them, thus lowering the labor cost could borrow money to finance such capacity, described below of freight shipments. in Proposal 2. To increase the efficiency of the system, we propose allowing The flow chart of this proposal is illustrated in Figure 6. and encouraging states to implement electronic road pricing Revenue from highway user fees funds the program. The on the Interstate Highway System (pricing that is generally program funds states to repair, rehabilitate, replace, and prohibited currently, with a few exceptions) provided the enhance existing highways. These highways enable travel. A funds are used in the corridor in which they are raised to user fee on that travel is collected and returned to the program. maintain, repair, replace, reconstruct, or enhance the existing system, without seeking federal permission. This includes both general tolls and HOT lanes. Road pricing is a necessary first

FIGURE 5 The National Highway System

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1 20 0 2 S I U S U S 3 S1 U2 U1 8 4 6 20 9 0 S 5 8 2 S S U 1 3 4 5 90 0 7 U1 1 S2 0 U1 S2 7 0 1 1 1 U 1 1 4 7 3 S3 S6 U 2 9 U1 U1 S2 U 8 2 S9 1 S U 6 4 8 G I 2 U U7 3 2 6 2 U14 S2 S17 U 691 3 2 I 5 I 2 6 9 S S 6 U2 S4 19 9 U 6 S 4 S 26 U1 3 30 6 S52 2 8 4 1 S

U I8 6 U8 U I 9 2 59 9 86 7 2 47 RI I S S 1 2 5 U 9W 8

S 7 S2 S 7 2 2 7 9 3 2 3 S 7

U 5 3 S S U S3 S 60 5 U 0 U 2 6 4 I 5 S 4 6 6 1 3 S S1 U 2 12 I 9 1 7 8 S 4 I 0 9 U I9 S 3 I90 9 6 5 8 2 U 3 U U U S 9 5 WI 1 4 U 18 9 6 1 U 7 79 U 1 S2 S 1 U 98 2 9 2 U I3 9 I8 U 6 4 2 4 S 5 9 S 3 6 2 8 9 U I 1 1 I96 3 62 I86 9 I2 4 I4 5 3 7 63 6 06 5 5 U1 9 3 6 U18 7 I6 S44 U U U S 1 8 49 9 U 9 S 1 I6 5 I 0 12 0 2 CT 8 5 1 6 5 S2 2 I 12 3 U 1 S 6 U 9 S7 U18 8 6 N U 7 89 U 9 9 U18 U U1 K I2 U6 I U422 7 78 8 C 3 7 PA 8 85 S I9 7 U S 18 2 1 U 2 1 8 U 5 4 4 U 8 9 5 7 I U U1 S I 3 9 8 I U 6 28 3 2 4 S S46 U 0 I 9 U 9 2 5 30 U U3 1 0 20 2 9 S 2 1 0 50 U 1 99 0 5 2 U U 0 S 1 U 1 U1 U 2 U1 S 8 S8 22 18 3 1 44 U 0 6 73 2 I 2 S5 1 1 1 91 28 8 U1 S 4 22 S220 1 4 7 6 U S 6 S 7 S 7 S1 30 U S 3 2 1 6 I6 U 9 S 7 5 4 5 S54 20 1 S 1 9 S 1 3 U3 U 5 1 S1 U2 8 32 61 U 8 S4 9 23 2 U 7 5 U U20 8 8 1 2 3 U 20 S U 2 3 WY 1 I U U S1 2 S 0 4 9 1 I U U6 5 4 S 7 7 3 NJ 8 F 6 9 4 8 U20 U20 I 2 S2 I 22 2 2 2 6 4 95 2 8 1 3 S I 20 S 5 1 2 I S1 2 5 8 8 U20 8 2 U 7 11 6 7 9 S U F U S 6 2 I2 7 I7 I 0 6 6 S 3 3 5 S U U I1 S 1 S 9 S4 9 I I276 U 6 S8 4 53 S2 U 1 8 5 3 0 0 2 4 I 0 44 U U 31 7 7 S U1 7 7 4 1 U 1 U U U2 7 1 9 6 I 5 5 6 0 3 U 6 7 S 1 4 U 0 S9 0 U 8 I U2 4 4 U U 1 6 6 U 2 I8 2 U 2 22 1 I7 2 S 1 9 8 3 U 7 U8 7 U 3 S 5 71 4 1 U6 I S 42 S 1 5 2 U1 S2 2 24 2 5 9 30 S 7 U U 2 5 S U275 9 S S 0 8 S2 1 3 2 4 S4 9 U U3 4 1 2 S S 3 S 0 3 U 6 I 1 U 2 2 2 5 2 4 3 S 2 9 2 0 SL6 14 S 9 9 4 2 6 U S 0 U 7 8 A IA 15 3 U 6 1 6 7 U 3 U S 37 S 9 I 40 S5 1 I80 I 1 5 2 9 1 U 5 6 8 I2 4 1 U30 F 2 2 2 0 U1 I I C4 3 3 S 8 2 S 3

6 8 S5 U 81 0 S 5 U4 69 9 U U 1 S 4 0 30 5 4 U 1 39 I80 2 U 1 I4 3

8 25 1 S U S 2 S U 5 7 17 3 1 0 U S 0

U S U1 5 80 S 1 4 3

5 0 I 2 U 9 1

7 8 2 I6 I1 S9 2 1 U2 16 6 4 0 0 S 2 2 U8 S U 3 S S 01 8 0 7 9 U 3 6 2 1 7 3 U 4 38 1 6 3 1 7 U 3 5 3 1

5 U6 0 U 2 7 U S9 I6 S

5 9 0 2

9 U 3 1 6 7 F S4 S

3 8 U3 S U 6 U25 95 I U1 U 25 70 U 1 0 9 I2 U 6 I74 52

U U S 0 I 8 U8 1 7 4 70 8 0 7 0 U2 5 6 I I6 4 5 I U3 S1 1 3 0 S 1 0 U 9 3 1 1 4 2 U S1 U 2 7 9 3 U34 7 S404 0 2 25 2 7 OH S U 2 I U S740 26 0

S 8 S2 4 S 7 2 7 U U5 1 U 3 4

U 3 U 5 S 6 U 6 U NE 9 7 S 9 3 I S7 9 U50 I7 8 6 S 7 I5 1 5 6 S 8 1 I 3 U 1 U 7 S U 3 I

I80 U 1 I 2 4 U 3 1 6 0 U 4 1 U 3 U S6 33 7 21 S5 4 S3 3 9 S 5 S S 5 2 S S5 9 4 5 6 50 U S2 U 5 U I 9 9 7 U 6 4 1 2 1 2 5 5 3 I U 3 3 F

6 B U 1 1 S 4 6 6 S 0 13 6 3 5 U U U13 7 50 8 1 U 4 I S U3 1 I7 I 7 U 4 6 1 S1 1 4 0 88 U6 U 7 5 MD I S CB

7 7 6 U5 U 4 2 8 2 3 65 I 0 8 S8 5 U 5 5 S S 0 NV 4 36 U 0 3 0 U 2 1 6 5 U33

3 5 3 U3 S18 22 5 35 5 7 I9 S12 5 U6 S1 5 I6 U S

19 7 U 8 1 DE 1

0 U9 28 1 U7 6 B I8 I1 U3 U

8 2 S 19 0 S U1 U I7 5 S U I S4 U 5 3 3 0 S U 7 4 8 72 3 2 U 5 5 U 6 S 3 U2 8 6 I U S 2 0 9 0 5 O 0 S U3 WV 9 S 47 I 3 I72 I7 S 5 9 S 1 2 6 3 S 1 6 2 8 08 3 I S3 2 I2 1 4 U36 U S 2 2 S 07 S 5 7 0 7 9 25 U36 2 4 6 5 60 0 B 1 9 S4 7 U 80 2 9 6 2 U 9 5 S7

0 8 5 3 2 U6 U S1 S3 S8 8 I 3 9 7 S2 U 2 I 1 IL S 3 U 2 38 4 S I6 U 2 S U S 1 U IN 54 1

U U 6 U7 4 6 1 6 U 9 6 0 U5 I 5 S 64 2 U 7 7 S1 I 5 S 6 3 U50 6 2 9

70 S 9 U 5 7 3 S I U 9 0 UT S92 S1 0 1 4 U U24 4 2 U2 4 7 U 1 0 U 1 3 0 I

U 4 2 6 S1 U 1 1 U 2 1 4 S VA 6 2 7 36 S 9 S1 9 S 52 U U 3 6 5 3 1 8 10 1 S I 4 U

S3 0 1 U2 S 50 43 1 U 3 U 1 68 4 S1 U 24 S 4 3 52 7 5 U 4 I4 I70 U 83 S1 7 70 22 0 7 0 5 I2 5 U U 9 C U 4 I 0 1 3 S10 D KY U460 6 46 4 U 0 5 0 S U 50 U5 26 5 0 U 0 46 0 I26 U I6 I U 2 6 U S1 CO 7 4 5

85 3 4 4 1 U 7 5 4 I U 3 U8 5 9 U50 5 1 5 0 2 0 6 2 5 1 8 U50 7 C 2 5 2 2 1 S 8 U 6 4 6 I I S 8 5 0

1 1 I64 2 S1 1 1

U 0 1 6 I S 4 U 10 S 0 S 14 1 8 8 1 W 0 S U 6 5 5 S 5 I 9 9 6 I8

1 S S U U 1 4 1 4 8 U 1 8 2 S 27 U U U 0 1 U 6 U U 6 U

S 5 S 1 3 0 U5 6 S 8 5 5 2 U 1 1 5 33 7 17 U I 0 9 1 U

3 I 7 2 S 3 4 7 1 7 1 5 5 3 1 4 S1 2 W S 1 S96 1 1 6 S8 9 5 4 7 0 S 5 1 I U5 1 U1 0 U S U 1 8 0 0 8 4 19 U 5 5 U U 5 7 6 U 58 6 6 S 0 158 S 6 2 4 U U 1 U 6 S 2 98 S S7 9 19 S9 1 22 U U KS U 1 8 14 2 9 1 61 31 I8 S9 6 S8 3 9 29 U 13 U S 14 S 0 0 U 6 1 3 S U CA 5 S 5 64 S 0 U5 S 0 U S 04 0 5 U54 8 3 9

U 7 0 58 9

0 1 U 8 S9 A U 3 7 S 9 U1 9 1 S S

U U 96 6 5 11 S

9 U1 0 S1 5 6 008 1 3 5 28 S6 U 1 9 U 7 1 U S I7 S 4 1 S 7 U U 6 2

1 S 5 1 S254 U 2 1 U U U MO 3 0 7 6 0 5 2 4 4 S U7 6 U 0 2 U460 9 U 5

5 S 2 9 U 9 S 6 6 6 S I 2 17 8 3 S 5 NC S96 1 18 F 3 3 1 S6 9 9 2 E 9 U U S4 1 1 264 2 6 39 8 S154 7 2 5 S 1 I 40 U S 4 U4 I4 U26 0 4

83 2 U W U3 421 1 17 U U U6 1 S3 60 1 U U U 1 0 21 60 6 1 I U4 U U S1 5 7 U U 2 I U 60 I U 7 U1 4 1 5 6 U160 4 24 1 1 S744 2 6 3 U 7 U U S 6 5 S 58 S17 1 7 U60 8 6 U3 1 I U70 6 A 1E 8 5 7 6 42 U11E 4 17 1 U 6 S5 U 4 2 U7 5 3 S I 2 0 0 8 54 5 0 U 6 70 2 S U166 3 6 U 1 9 U S U U 66 U 40 I U U1 2 I5 U166 9 1 58 6 U7 8 2 S 00 6 U 7 S 4 S S 2 9 U 67 3 5 1 1 9 4 2 U5 3 S 8 U S 6

U 6 6 U 1 S 1 U3 U S S 1 4 F 6 3 U2 14 7 1 6 5 6 U6 1 5 I1 S24 2 S 93 4 11 I S 3 24 6 5 7 40 4 S 5 4 U 0 2 49 1 S 2

U 2 0 4 S U 6 0 0 8 S 5 U U60 4 21 S U 8 U U 6 1 I2 1 U 8 U1 S3 U S 7 2 45 I U U 56 2 U270 4 2 U 6 U 7 3 I 1 2 4 S1 2 1 S138 9 8 1 62 4 7 2 3 U74 1 U 40 5 U6 I 6 0 U 3 S 5 3 U 7 E 1 2 U1 10 S 5 8 4 4 S 9 5 1 U7 1 8 U412 I155 70 1 74 U64 2 U 7 4 U I4 U U 62 1 5 U9 5 1 U S41 U 1 1 U U412 4 2 U S5 S 7 E U 9 U S S 8 4 12 3 5 9 5 8 1 S 3 U U5 U S 1 8 7 9 412 18 5 5 U 7 1 6 2 S 3 4 6 84 U412 5 U U 4 2 U 9 9 8 8 I244 U41 S U1 U 8 S1 5 2 U S1 6 U U2 1 4 2 U 52 8 S S 6 3 7 18 U 7 U4 1 U 4 9 4 1 4 66 U U7 S U 4 9 I S 9 U 1 2 2 6 I5 S 7 5 6 S U 70 U 3

3 5 U6 3 A U64U64 7 U 99 U 0 U9 4 U1 3 2 8 5 75 U 5 85 7 I3 5 I2 0 I 2 7

4 1 I I40 8 U 1 I1 S S U 64 I 2 S 8 76 1 U9 2 I10 0 U 1 2 I24 5 U 9 3 U 76 S 3 30 1 6 1 U 1 6 S 5 5 1 S 54 8 S 5 7 S 2 U U 2 S 8 U8 3 U 7 U7 76 1 U 5 6 2 U 4 2 29 8 7 S S 2 U62 U82 U6 1 0 6 U U 2 7 S91 2 U1 0 0 U 7 378 62 I4 5 9 5 4 0 8 7 6 6 4 5 8 I S7 TN 7 S 5 7 S U 2 U76 U3 U U I240 5 40 I2 7 S S5 S7 S OK I U72 5 5 S 378 U76 7 S U 8 U U U U 4 S 64 U 1 S2 7 7 552 U U72 U 56 S 27 I8 1 78 3 6 4 S U 72 A I 3 1 7 72 1 7 2 28 7 5 S 29 9 9 5 S U52 8 7 1 1 2 3 U 7 U2 U L 8

S 5 5 5 U S S7 S 3 4 1 4 31 1 28 4 S 7 84 0 2 S S24 41 I9 5 U8 15 9 U 60 7 S 0 5

0 4 U I 5 9 8 6 1 7 2 316 0 5 I S S3 U 1 U7 6 7 9 U I

U4 9 U S 2 3 1 7 1 U S 1 60 U S I5 U S 8 5 S 7 1 U2 7 1 9 6 4 U 7 86 U 3 8 I 5 I2 U AR I 3 7 1 1 U 5 8 1 S 3 1 U78 U27 7 U I U S 8 6 3 8 U 9 6 2 7 U 28 U S I 2 8 S 69 U27 70 0 S 2 I 1 0 U 4 2 0 5 U2 U 9 6 1 7 7 9 5 U 8 0 4 8 U60 U60 U 7 4 1 U U 9 5 1 I 87 60 31 U9 1 60 3

7 I U 0 8 S U U S7 5 I U78 7 U 2 7 S 9 5 5 6 5 7 1 3 U 05 NM S 8 0 6 S U S 5 S U S S3 16 43 8 9 0 U U7 U 16 U 4 8 U 1 2 SC 7 U S 5 U U7 0 9 S2 4 2 S8 U 02 S 59 U 4 5 8 1 0 U 6 4 9 U U7 1 4 4 4 S8 U 1 3 I 2 U 87 7 9 U U 3 I S U 2 S7 AZ 7 8 8 47 U 1 2 1 1 2 21 1 70 8 U 2 I8 2 U U U 5 5 U 7 U 7 8 U82 2 S U 5 7 2 1 82 U 4 4 2 8 2 5 U U 2 2 4 1 6 I U U62 U62 5 82 80 1 U27 2 4 U U U 6 U 5 7 8 U82 9 5 U 2 4 5 9 2 U8 U2 9 2 5 U

1 2 8 U I1 4 6 I16 7 5 S7 W S 8 8 S9 7 5 U82 U 82 7 U 3 0 I S 3 U U 7 7 U82 8 S96 3 U U2 2 1 U80 5 I 5 9 81 U U82 8 U 9 U U 1 5 4 5 8 U3 U 5 7 2 41 1 8 S114 2 5 U380 U U380 5 S 80 S S

2 7 U 71 U 4 AL 8 2 U U8 8 2 2 4 1 U U 2 4 0 U 7 4 U 3 6 1 U U S U80 U 1 2 4 80 19 U U U U 9 82 3 4 U3 5 9 I6 7 9 U 0 3 4 35 0 8 3 1 1 0 MS 8 0 U8 4 2 0 U S U 1 8 I82 I3 1 55 U U U 0 U 0 U7 U 4 2 S S 5 4 5

1 2 GA S7 U8 0 3 0 3 6 1 9 3

U8 W 7 6 0 I220 2 3 1 1 4

1 1 5

3 2 3 4

3 0 I 3 7 2 U I E U 13 4

S 9 U

I3 9 S 0 4 5 6 U82 U8 17 U S U 5 9 1 U 2 5 15 9 C 6 U 3 S 17 U I 9 2 U 7 2 S 38 6 1 5 I4 1 65 S U 3 S U U U84 S S U6 9 6 U 9 U1 2 U 0 2 37 5 U U 2 8 2 7 84 5 U84 3 0 4 5 U U S6 S8 5 67 9 I6 S 1 9 9 U 45 U84 1 U 5 49 U 2 U 4 0 U U U 6 84 84 2 8 A 23 1 8 U S 7 U 0 4 U84 U A S I2 S U84 S U 9 U 67 4 9 U 1 U67 6 1 2 I 3 U I 5 7 1 2 U 8 F 3 9 9 8 8 9 98 A 7 5 U U 3 3 4 6 9 6 U U 4 5 S 1 19 28 5 8 S 6 U U 103 U3 1 S S 8 1 63 U U

1 U3 U S2 0 9 9 S 6 S7 28 S 8 3 3 18 S 2 8 3

S8 23 1 5 1 U 90 U 1 U 7 U 3 TX S 6 S20 U C5 I 7 7 21 4 11 71 6 I1 2 9 0 0 U 7 S 9 8 U98 3 9 7 2 1 3 U U U 0 U 95 9 0 S

U1 7 7 9 9 1 0 U 1 9 22 20

U 6 2 S S S F U 2 59 8 I1 I U90

S1 1 S U S1 7 0 250 500 1,000

M 6 U 9 1 90 I12 2 9 U1 10 S 7 28 7 0 35 0 2 I 01 1 U1

1 3 U U 9 S 8 S7 2 90 7 U7 3 87 1 S 9 U S40 U6 21 6 59 S 1 I S 4 0 U S S Miles 2 36 2 U I210 S4 U U290 3 9 4 5 0 6 90 90 0 9 1 S U2 U290 U290 U2 S105 3 4 U 7 LA I S1 9 S3 4 1 S 0 8 2 7 7 S4 3 F S 35 S9 7 6 S8 F 1 77 S S S2 9 28 7 1 3 S5

U2 1 9 0 2 S S 1 I6 4 1 9 I4 I4 S1604 8 7 5 8 58 S U 9 8 S6 S S 5 1 2 3 83 U5 8 U U S 2 90 S 9 U I410 12 7 U87 3 98 7 S S1 6 S60 0 U S60 S6

2 I 2 U 27 U 7 3 37 8 0 7 I 7 7 1 5 S U98 7 U27 7 S7 U FL S70 U 10 U8 1 2 7 3 81 7 7 U U98 77 S80 80 S9 U S

1 35 I I 1 7 8 5 S44 1 C1 59 U I595 472 U

S 1 8

26 28

U 1 2

U S8 U

5 7 1

7 7

S6 7 1 U U U 83 U8 3 U83 B S100 S4 6

S 2

I A4 S AK I 8 A2 S 9 3 S 9 4 S 9 IA1 3 1 S 4 S6 7 S 2

S4 IA3 S 9 S S1 9 S 3 3 7 S 0 S

31 S7 Eisenhower Interstate System S7 STRAHNET S19

1 1 Other NHS Route HI STRAHNET Connector 0 200 400 800 0 50 100 200 Miles Miles

Source: FHWA 2010b

14 Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways FIGURE 6 Flowchart of Resources in the “Fix It First” Proposal

Applies Formula Ma Fu i n nte ds na N ds nce HS ee s N Pro sse ject Asse s

Highway Trust State Fund

ed Us Fu n n is d io Tr s at u Hi rt st ghway o Fu sp n an d Tr

User Fees

Note: This is a flowchart of resources in the “Fix it First” proposal, which show how the funds from the the Highway Trust Fund are distributed by formula to states who repair, rehabilitate, replace and enhance existing facilities infrastructure. Use of those facilities generates user fees (gas taxes now, perhaps vehicle mileage taxes in the future) that are added to the Highway Trust Fund. step in properly allocating the scarce resource of peak-period road pricing. Third, the value of shorter travel time depends road capacity. We anticipate prices will vary with demand, so on the traveler and the nature of his or her trip. A network of peak tolls would be higher than off-peak. HOT lanes that guarantee travel times offers a solution to the problem now faced with lack of choices in travel. There are a number of reasons to move toward pricing, which this proposal facilitates. First is simply revenue. The revenue There is increasing cumulative international experience with collected using the gas tax has been declining and will continue area congestion charges in cities ranging from London, to to decline with increased fuel efficiency and electrification of Stockholm, to Singapore, and HOT lanes are becoming more the fleet. Some alternative source of funds is required, and a common in the United States (e.g., SR-91 and I-15 in California, user fee is a reasonable selection here, as pricing is the most I-394 in Minnesota, and the Katy Freeway in Texas). Such direct user fee. Second is allocation of scarce road space. By programs are generally popular and reduce congestion. For charging a different amount at different times and locations, a example, the city of Stockholm introduced a toll system price signal is sent to travelers about when and where to travel for seven months in 2006, after which citizens voted on its to account for the congestion they impose on others. Prices in permanent adoption (Harsman and Quigley 2010). In this the off-peak would be lower than prices in the peak, thereby vote, 52 percent of the Stockholm voters approved continuing encouraging many travelers who have flexibility about when to the system. Evidence from HOT lanes suggests they are more travel to choose a different period. Surprisingly, most trips at popular after than before they are opened, and that they are the peak hour are not work trips (FHWA 2007a). This suggests just as popular among low-income groups as they are among significant discretion on the part of travelers about time of and high-income groups (though in general they are used travel, and a great deal of promise for general time-of-day somewhat more by those with higher incomes) (Zmud 2008).

The Hamilton Project • Brookings 15 Chapter 2: Expand It Second: Introducing The Federal Highway Bank

e recognize, moving forward, that states and requirement was there. In 1916, the first Federal-Aid Road Act localities will want to implement promising (PL-64-355) set a precedent by allocating $5 million in federal transportation investments but will need funds funds to be matched 1:1 by the states for construction of rural Wto do so. Economic research has documented that highway roads. The Bureau of Public Roads (BPR), then part of the U.S. construction contributes to local economic growth and to Department of Agriculture, administered federal aid to state suburban growth in population and employment (Baum- highway departments. Snow 2007, Duranton and Turner 2010). Those localities that anticipate that there could be large local economic benefits The interstate is now complete. Very little additional new from increasing their highway capacity need financing to allow intercity highway construction is anticipated. (Although these projects to proceed. existing facilities need to be maintained and rebuilt, that is the provenance of the gas tax or other user charges.) A rationale States currently rely on the Federal Highway Trust Fund to for grants is that there are spatial spillovers to transportation pay for part of many capacity-expanding projects; the Fix It investment, without which localities underinvest in transport First proposal restricts those funds to be used for existing infrastructure. However, most new highway and transit infrastructure, leaving a hole in state budgets to pay for investments today serve within-metropolitan travel, where new projects. Since those projects are long-lived capital the benefits are primarily local. Accordingly, the emphasis investments, long-duration financing is an appropriate source on spillovers as a rationale for federal intervention in the year of revenue. 2011 is misplaced.

We propose that new capacity-adding projects would be PROPOSAL 2: REPLACING GRANTS WITH LOANS FROM THE funded by the states themselves or by borrowing from the FEDERAL HIGHWAY BANK Federal Highway Bank (FHB), rather than by statutory grants allocated by formula. Loans would be contingent on meeting We propose that projects should have the option to borrow a stringent performance test and demonstrating the ability to money from a new organization, a Federal Highway Bank repay the loan. (FHB), and repaid principally with a dedicated revenue stream from user charges, and with land value capture on benefitting In contrast to grants, loans help to align incentives in several properties if user charges are insufficient. Guarantees of such ways. Borrowing jurisdictions would have much stronger funding would depend on the road-owning jurisdictions’ incentives to consider whether they truly value a specific general funds: this should be viewed as insurance, rather project. Local taxpayers, landowners, or system users would than as funds of first resort. User charges include tolls, gas recognize that they are on the hook for the loan and will taxes, and other sources in which the user directly pays for monitor how politicians spend the money. This should lead use of the network.8 Land value capture includes land value to additional caution about spending because it is no longer, tax, special assessments, impact fees, joint development, tax from the perspective of localities, “other people’s money.” increment financing, transportation utility fees that assess properties based on the benefit gained from new infrastructure RATIONALE investments or the cost incurred of providing transportation infrastructure. At the onset of the highway era, the federal government wanted to ensure there would be a well-connected intercity highway The flow chart of this proposal is illustrated in Figure 7. This system, but recognized that there also would be local benefits. bank will match the supply and demand for highway capital Early federal aid programs had a matching requirement; investments. although the percentage of the local match has varied over time (as low as 10 percent in the interstate era), that match

16 Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways FIGURE 7 Flowchart of Resources in the “Expand It Second” and “Reward It Third” Proposals

Does Project Exceed Performance Asks Performance Fund Standard? If yes, Subsidi Interest Ra zes tes

Federal Asks Can Project If yes, Lends Project Transportation Repay Loan? Bank s Repa nt nancial Re ty

Fi p ys ay s Lo a r Communi

Instrume n fo

rchases s Pu

Investors User Fees

Value Capture

General Revenue

Note: This is a flowchart of resources in the “Expand It Second” and “Reward It Third” proposals, which show how the funds from the FHB are distributed to projects based on ability to repay, and funds from the Highway Performance Fund are given in the form of interest rate subsidies to projects that exceed performance standards after they open. The project generates benefits, which are capitalized in user fees, value capture, or general tax revenue, to repay loans. The FHB repays investors, while profits go to the Highway Performance Fund.

There are three primary reasons to tie user charges to new • Third, by pricing selected facilities (or selected lanes) capacity. to ensure free-flow conditions (thereby creating the same vehicular throughput as congested conditions at a • First, we seek to ensure there is a source of revenue from faster speed, overall a win-win), we can provide facilities beneficiaries, and users are the foremost beneficiaries of (and ultimately a network) that allows travelers to pay any project. Tying costs to the people who benefit from extra and thereby avoid congestion, introducing choice, using new infrastructure is both a more fair and a more and addressing the reliability problems we raised in efficient way to finance new capacity. There are many ways the Introduction above. These routes, now in limited to ensure goals of equity. We discuss some examples in deployment as HOT lanes, can see much wider use, “Questions and Concerns” below. but require new capacity in places to be able to bypass bottlenecks. HOT lanes benefit more than just motorists: • Second, we seek to use pricing as an instrument to they can also be used to provide rapid bus transit networks manage capacity. With demand-varying road prices, some throughout metropolitan areas. These express buses will discretionary travelers will switch from the peak to the face freely flowing travel conditions throughout the peak off-peak travel periods. Since (as noted above) most travel period, and thus have a time advantage over buses running in the peak is non-work-related, there is good reason to on surface streets and cars not paying the toll. believe that even small differences in the price by time of day will have large effects on congestion.

The Hamilton Project • Brookings 17 An independent bank appraiser would assess whether the fees, joint development, or transportation utility fees), and stream of revenue is adequate to repay the loan and whether the that stream is preferred to projects that rely in part on general project costs are properly estimated. The federal government revenue for repayment. Public acceptability for user charges would insure loan repayment, but borrowers would have to will increase when people understand the need to repay loans. purchase this insurance proportionate to their risk of failure as determined by the appraiser. The bank would be self-financing, and would be initially capitalized by the federal government; as the first set of loans Interest rates would vary based on the expected ability of the are repaid, subsequent capitalization would be raised from borrower to repay and would be subsidized by the federal markets. The bank could raise funds in a variety of ways, government based on meeting performance criteria outlined including selling bonds backed by loans, or combining and in the next section, “Reward It Third.” In addition, successful repackaging loans that would be sold off to pensions, life past borrowers would see their credit scores improve, and insurers, and others in the global marketplace seeking low- borrowers who had trouble with repayment would face higher risk investments. The bank’s cost of capital must be lower than future rates. Projects whose loan repayments were funded the interest rate it charges projects in order to be self-sufficient. directly and entirely by users (e.g., tolls and parking charges) Profits could be returned to taxpayers or deposited into the would be preferred to those funded through dedicated charges Highway Performance Fund to further reward successful on nonuser beneficiaries (e.g., some form of land value capture, projects with lower interest rates, as described in the next such as tax increment financing, special assessments, impact section, “Reward It Third.”

Tying costs to the people who benefit from using new infrastructure is both a more fair and a more efficient way to finance new capacity.

18 Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways Chapter 3: Reward It Third: Performance Standards And Interest Rate Subsidies

e propose that projects that meet or exceed The residents of the locality that implements the project performance targets receive an interest rate subsidy capture most of the benefits of the above objectives. Users, who from a Highway Performance Fund, and that are mostly local residents, gain directly from the speed and Wprojects that fail to meet targets not receive that subsidy. The throughput when they travel from place to place (Levinson subsidy would be funded from the profits of FHB operations, and Zhu 2011). That is thus mostly an internal benefit, and but be administered separately to ensure the bank is not rewarding it could double-count the gains. Similarly, local incentivized to seek out projects that fail to meet performance landowners generally gain from the accessibility that is created objectives. by new infrastructure. The value of useful infrastructure, which reduces the travel time between places, is capitalized in land—that is, it results in an appreciation of land values. RATIONALE Rewarding accessibility gains could again be double-counting. Agencies benefit in the long run from the durability provided By embracing performance standards, states and localities will by higher-quality construction, lowering future maintenance be judged on whether their projects deliver on clear criteria. costs. Projects that do meet these goals will be financially rewarded. Under these new “rules of the game,” politicians will have What is generally not considered in project appraisal is a stronger incentives to embrace cost-effective projects and to project’s implications on equity—how the project affects monitor the construction because their voters will be able to the transportation disadvantaged—and its effects on the track whether the projects are achieving clear goals. In this environment (aside from satisfying environmental impact sense, the introduction of transport financing reform (see the statement requirements). section “Expand It Second”) and performance standards are complementary policies. Reward It Third aims to reward project benefits that were not otherwise considered in local decisionmaking, including Transportation investments enable people and goods to environmental externalities, equity effects, positive economic move safely and efficiently between places; by doing so, these spillovers, and performance of the facility from both a investments make those places more connected and valuable. user and infrastructure perspective far beyond what was They have a variety of performance objectives: anticipated. Project sponsors are permitted to share these rewards with contractors to encourage better construction • Speed and management in Design-Build and Design-Build-Operate • Throughput frameworks. • Safety • Accessibility • Economic development PROPOSAL 3: EX POST EVALUATION AND THE HIGHWAY • Durability PERFORMANCE FUND • Equity The FHWA has invested resources into designing models for • Environment benefit-cost analysis.9 We are not aware of any formalized With scarce federal resources, we want to reward objectives performance standards rewarding projects on ex post criteria. that would otherwise not be satisfied—that is, where there is We propose that each project funded by the FHB should be some failure in markets or governmental decisionmaking that judged by ex post benefit and cost criteria. results in some objective not being fully considered. We also We recognize that it will take technical expertise and access want to reward excellent performance that exceeds standard to high quality data to provide rigorous ex post evaluations practice. of recent transport investments. This capacity must be built into the existing system and the federal government and states

The Hamilton Project • Brookings 19 must work together to develop standardized performance • First, pollution due to engine idling in congested conditions criteria. can be reduced: achieving the same trip at an optimal speed results in less emissions than one that is too fast (requiring In our first proposal, Fix It First, we proposed each state budget burning a lot of fuel to overcome resistance), or one that about 1 percent of their Highway Trust Fund revenues to build is in stop-and-go traffic, wasting energy due to braking this evaluative capability into their state’s Department of and accelerating. Peak-period pricing, along with selected Transportation. This performance evaluation group would be capacity expansions, both have roles to play here, as does responsible for analyzing national performance criteria at the improved traffic management. state and project levels. States already have some staff doing these types of evaluations, but they are not systematically or • Second, new projects that increase the use of modes such consistently conducted, which makes national comparisons as bus rapid transit, carpooling, and HOT lanes may more difficult than they otherwise should be. These state also reduce pollution. HOT lanes and HOT networks evaluations will allow national comparisons and give provide uncongested networks that express buses can take citizens the ability to judge the performance of their state advantage of. transportation agencies against national competitors. • Third, projects that reduce exposure to pollution by taking Speed, capacity utilization, and safety are already widely the pollution (and the concomitant health effects) away evaluated performance measures. For instance, many from populated areas also may have beneficial effects. cities have traffic sensors for the purposes of real-time traffic management and/or traveler information. The Texas We further want to incentivize the project to be finished Transportation Institute has already shown these data can on time. At the start of a proposed project, the borrower be used for performance monitoring (FHWA 2011). Highway would announce the project’s expected completion date, safety statistics are compiled from accident reports. New total cost, and expected use. Once the project is finished, the accessibility and equity measures should be determined at a first performance standard would be to check if the project national level. Accessibility measures include, for instance, was completed on time. Any cost overruns incurred by the the number of jobs reachable by workers in thirty minutes by borrower would need to be financed without additional federal car and by public transit, and the number of low-wage jobs loans. For projects that are significantly late in terms of time reachable by low-income workers. Equity measures could to completion, there would be a borrowing fee increase (e.g., include poverty levels in congested and polluted areas, among a twenty-five basis point increase). Starting within one year of other criteria. an opening of a new piece of transportation infrastructure, analysts could evaluate if the usage of the infrastructure For cities that invest in new highways, we propose that verifiable exceeds initial forecasts, in which case an interest rate subsidy data on ambient air pollution levels in the neighborhood of would be offered. the project be tracked relative to previous historical trends for the area (prior to construction) and relative to comparable Performance evaluation (and thus the continuance of the neighborhoods within that city that have not seen new federal infrastructure interest rate subsidy) would be annual, highway construction. If congestion duration and ambient air so projects that continue to meet or exceed performance pollution decline in areas supported by the new investments standards retain that subsidy. Projects that fall below more than they do in the control areas, and if transit use or performance targets (those claimed ex ante) would lose part or carpooling increase, then such projects should be rewarded all of the subsidy for that year. This active monitoring and thus with an interest rate subsidy. Each state’s Department of management of the project will keep everyone’s incentives Transportation will be responsible for providing these data aligned in ensuring performance. By spreading the local to the administrators of the Performance Fund, under rules payment out over time (e.g., twenty years), the locality would drawn by the Performance Fund, and subject to audit and have a continued incentive in retaining the subsidy. verification.

While it might not be obvious how a new road can reduce the economic and health costs of pollution, and in fact people may drive more because of the increase in road capacity, there are several ways these benefits are possible.

20 Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways Chapter 4: Projecting Benefits And Costs

ogether, our three proposals represent a sweeping Of course, most of the network is not congested most of the change in current transportation financing policy. time, and so travelers can reliably predict how long many We anticipate that our proposals would cause a trips will take, and plan schedules to maximize useful Tdiscernable increase in the quality of existing transportation time at destinations, wasting a minimal amount of time in infrastructure. Because states that implement these reforms travel. However, there are no guarantees, and some roads would no longer have access to highly subsidized grants for are congested for part of the day, with a high degree of building new highways, they would have strong incentives unpredictability about the ultimate point-to-point travel time, to carefully consider the costs and benefits of new highway increasing costs to consumers and businesses. Achieving on- construction. We anticipate that such states would only build time performance on demand produces many benefits: from highways if they expect them to be crucial infrastructure a willingness to travel farther on the part of the individual, investments. This “selection” effect will raise the economic increasing the size of the labor pool for employers, to just- returns to new highway investments in the sense that only the in-time production processes and larger distribution areas best projects would likely be implemented. Our introduction on the part of firms, lowering costs that are passed on to of performance standards will offer beneficial effects in terms consumers in the form of lower-priced and higher-quality of incentivizing politicians to tackle projects that offer social goods. There is, at present, no way to systematically guarantee gains. on-time performance. Unlike freight packages (which can be “absolutely, positively” guaranteed for next-day delivery), While we are confident about these qualitative statements, it is for road travel between or within cities, most travelers have very difficult to predict the likely benefits and costs of our set no choice but to try their luck with traffic. There is no option of policies. We can look back to recent cases that highlight the to pay more to avoid delay at peak times, or save money and net benefits of investment in maintenance (Box 2). suffer delay. This fact presents frustrations to travelers and

BOX 2 The I-35W Bridge.

An ex post analysis of the traffic effects of the collapse what had been a bus-only shoulder into part of a travel of the I-35W Mississippi River Bridge in Minneapolis lane. This change alone was estimated to save travelers by Zhu et al. (2010) suggests costs in time savings alone $28,000 per day, at a cost of about $1,162,000. While on the order of $49,000 per day. That savings alone is the bridge reconstruction would pay off in more than enough to justify the reconstruction of a replacement fourteen years (depending on the discount rate), the bridge ($250 million), though it is far less than the restriping paid off in just over a month. early ex ante estimates: the Minnesota Department of Transportation, for instance estimated $400,000 per While this case is not typical because of the tragic day costs, while Xie and Levinson (in press) estimated nature of the collapse and the political nature of the $71,000 to $220,000 per day. response, it illustrates that simple maintenance and enhancement of existing infrastructure can have large After the collapse, Mn/DOT implemented a number benefits relative to costs. of quick response projects, most notably restriping the detour route (I-94) from four to five lanes by converting

The Hamilton Project • Brookings 21 economic losses to shippers, who have to settle for arriving On the cost side, our core proposal will raise the share of late or who must leave early to ensure being on time. Freight the cost of constructing new highways borne by states and costs are directly related to travel time and reliability (see, e.g., localities. Under our proposals, states and localities will be Smalkoski and Levinson 2005, Carrion-Madera and Levinson expected to use more of their own resources and fewer federal 2010). As discussed by David Lewis (2008) in a previous dollars. As we have discussed above, this policy regime change Hamilton Project discussion paper, price signals can function will provide local decisionmakers with strong incentives to to improve the efficiency of new investments as well as existing carefully consider the merits of specific new projects. infrastructure. To implement our third proposal will require a significant Our proposal provides incentives for states and localities to investment to properly conduct ex post project evaluations. experiment with versions of road pricing. Such innovative These costs would be approximately 1 percent of each state’s policies offer a number of benefits along several dimensions. federal support. First, such policies will send correct scarcity signals to potential road users and will help to efficiently allocate this As we have discussed above in the section “Expand It Second,” scarce resource. Second, such road pricing will provide a new we seek for the FHB to be self-financing. The money to pay source of revenue to these local governments. Road pricing will for performance bonuses comes from the profits of the FHB. promote bus rapid transit deployment in these cities, which The FHB borrows money from the federal government and will enable public transit to better compete with the auto. As the private sector at interest, and lends it to worthy projects shown by the recent case of Stockholm, another benefit of at a higher interest rate. The difference between these adopting congestion pricing early is educational; as the public rates generates profits that are used to reward projects that becomes aware of the benefits and costs of congestion pricing, outperform expectations. To illustrate, if the cost of capital to this information will diffuse across cities. In a sense, the states the bank is 4 percent and it lends at 5 percent, it earns a profit and cities that are willing to be “guinea pigs” in committing to of 1 percent (minus expenses). Borrowers still get a better road pricing will teach the rest of the nation valuable lessons interest rate than the market provides, and those capitalizing for how to refine this policy to achieve a “win-win.” Although the bank receive a steady rate of return. So, in this example, we are confident that learning and improvements will occur, the magnitude of the interest rate subsidy is as much as 1 we cannot put a precise dollar value on how large these benefits percent per annum of total loans outstanding. These funds are will be. not distributed uniformly (some projects are rewarded while others are not), so if a rewarded project receives a 1 percent discount on the interest rate (from 5 to 4 percent), for example, its cost of capital declines 20 percent.

…this policy regime change will provide local decisionmakers with strong incentives to carefully consider the merits of specific new projects.

22 Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways Questions And Concerns

1. WILL STATE AND LOCAL GOVERNMENTS CONTINUE TO 3. THIS PROPOSAL ELIMINATES FEDERAL GRANTS BUILD NEW ROADS? FOR PROJECTS THAT ADD CAPACITY. ISN’T THERE TOO MUCH NETWORK CAPACITY ON THE NHS IN SOME Our proposal seeks to direct scarce resources to those projects DEPOPULATING PLACES AND NOT ENOUGH IN OTHERS? that are likely to yield social benefits ranging from improved safety, to increased speed, to less pollution. If a new highway We agree that the NHS, which was designed at a particular proposal is likely to offer such benefits, then it certainly makes time more than five decades ago, needs to keep up with changes sense to make such an investment. Under our new “rules of in market conditions. If there is too much in some places the game,” a state will have access to financing that will allow and not enough in others, an NHS review may be required. it to construct the new road. Upon completion, the state will However, local and state governments have an incentive to pay a lower interest rate on its loan if the project yields the right-size networks as well, because they don’t want to pay for benefits that it promised. There will be cases in which a state’s improvements to unnecessary links. leaders are uncertain about whether building such a new road is “worth it” under these new financing rules. Given that 4. WON’T ROAD PRICING DISPROPORTIONATELY HURT THE highways are irreversible investments, we believe that such POOR? “in between” cases are exactly the ones in which it is prudent to delay investment until policymakers can be reasonably The surplus revenue from pricing can be used to ameliorate sure that the benefits will be high relative to the costs. Our economic inequities. Direct cash grants are the most obvious proposal actually incentivizes the local decisionmakers to solution, but if those aren’t desired, electronic vouchers can delay “pulling the trigger” until it is clear that the project be established. For example, households whose income is has significant merit. In this sense, we are confident that our below a given threshold can receive a preloaded electronic proposal will yield a higher return on public investment per device with the right to a given number of free trips at peak tax dollar. times. Many jurisdictions with pricing use surplus funds for transit; the problem is that most low-income individuals in the United States still drive, and many transit users are not low 2. IF THE RATIONALE FOR PRESERVATION IS SO STRONG, income. For a general review of issues, see Levinson (2010). WHY IS SO MUCH EFFORT STILL SPENT ON NEW Relative to other means of raising revenue, there is evidence of CONSTRUCTION AND SO LITTLE ON MAINTENANCE AND public support for road pricing. Dill and Weinstein (2007) cite REHABILITATION? Lawrence (2006) in finding that Washington state residents This is a classic problem in transportation funding. (and lower income groups in particular) felt that tolls were a Constituents often give more credit to policymakers for fairer means to raise revenues than increasing the gas tax. new projects than the less-noticeable upgrades of existing infrastructure. One of the reasons it is called “infrastructure” 5. WHY USE LOANS OVER GRANTS? is that it is hidden from us in a way that we generally cannot see. Roads and transit are perhaps the most visible aspect of Switching from a system of federal grants to a system of federal infrastructure, but even with these there is a bias to building loans will sharply change the calculus over which highway the fresh and new over maintaining the existing. Most projects are pursued by state and local government. We politicians and voters are simply unaware of the true state of anticipate that this regime shift will discourage weak projects deterioration of their local infrastructure. from being implemented. In this age of budget deficits, such a reform has real value.

The Hamilton Project • Brookings 23 A secondary potential benefit from this proposal will be that 7. DOESN’T THIS PROPOSAL PUT ADDITIONAL RISK ON metropolitan areas that accept loans for transportation projects THE TAXPAYER? will now engage in road pricing and parking pricing to collect We recognize the problems associated with previous loan revenue to repay the loans. This bundling of policies would repackaging organizations (Fannie Mae and Freddie Mac), allow metropolitan areas to use their existing infrastructure and want to emphasize that our FHB is different in a number more efficiently and could help to reduce congestion on key of ways. First, the FHB would originate the loans rather than highways. We expect that metropolitan areas and states will buy loans from banks. This is an important distinction: unlike experiment with different ways to cover their loan obligations bundled home mortgages, the FHB will have full knowledge and that metropolitan areas and states will learn from each of the underlying risks associated with each loan. Second, other’s experiences. the magnitude of the loans, and the inspections and audits, suggests that the problems of borrowers being unable to repay 6. WHY IS AN FHB NEEDED AT ALL? DON’T MUNICIPAL will be avoided. BOND MARKETS ALREADY PROVIDE THE TYPE OF

FINANCING DESCRIBED? 8. HOW DOES THIS COMPARE WITH OTHER The municipal bond market is seemingly the natural solution INFRASTRUCTURE BANK PROPOSALS? to the lack of current funds to financing infrastructure. We believe this should be a “highway” bank rather than a general However, the market is not working as well as it might. In part, “infrastructure” bank because the needs of transportation the problem is that tax exemption does not appeal to nonprofits, differ from those of water and sewerage systems, dams, federal government, pension funds, or international lenders. transit, and so on. In addition, the specialization required to The tax exemption is an implicit subsidy (relative to taxable assess highway projects precludes too broad a mandate. Other corporate bonds) that bond markets take into account when infrastructure investments face similar problems, and similar pricing bonds. Those not needing the exemption do not play but separate institutions should be established to address in this market, suggesting it has less capital than it would if those problems. the subsidy given by the tax exemption were more broadly based. On the flip side, there is a lack of infrastructure-backed Unlike the current administration’s proposal for a National debt that bond-purchasers can buy. There is a demand for low- Infrastructure Bank, or the Dodd-Hagel proposal from risk debt for insurers, annuities, and others. User-fee backed 2007, this FHB would be a sound, publicly owned, financial infrastructure bonds are a natural solution to this problem, institution aiming to achieve a return on investment, not a but we have not capitalized many U.S. facilities. government agency for distributing grant funds. The current Transportation Infrastructure Finance and Innovation Act Furthermore, there is the risk of default in municipal bond (TIFIA) program, and the proposed National Infrastructure markets. An advantage of an FHB is that it is a way to diversify Bank both conflate loans and grants, and are thus handouts the risk of infrastructure investment across metropolitan without any clear mechanism or necessary requirement for areas and states; the FHB will directly or indirectly securitize direct repayment of loans. We believe this missing feedback bundles of loans and sell them off. Road agencies will loop, the lack of a pre-specified payback mechanism, is a be required to purchase some insurance against default fatal flaw in the design of other National Infrastructure Bank proportional to the size of the loan and the risk, so that the proposals. By requiring user fees as the primary repayment insurance pool will be able to pay back if a borrower defaults. mechanism, we move toward more-efficient allocation of If every borrower defaults, clearly the insurance pool will be in scarce roads than currently exists; in addition, these user fees trouble. Reinsurance is a possibility; the federal government will help ensure reliable networks and give travelers the option will likely be the insurer of last resort. to avoid congestion.

More importantly, the municipal bond market has no incentive Deshpande and Elmendorf (2008) suggest that insulating to provide an interest discount for metropolitan areas that infrastructure decisions from the political process might meet performance standards. Each bondholder simply wants prove difficult. We agree, but we also think it is necessary for to maximize its return and doesn’t care about these social state and local governments to achieve efficient transportation goals. Nevertheless, the municipal bond market will remain investments. We believe the bank should not originate projects, open to local and state governments seeking funding there but should function as a capital allocator based on the best instead of with the FHB. evidence of prospects for repayment subject to projects having benefits in excess of costs.

24 Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways 9. HAVEN’T WE REACHED PEAK TRAVEL? IS ANY NEW 11. WHY DOESN’T YOUR PROPOSED PERFORMANCE CONSTRUCTION REQUIRED? BONUS REWARD ACCESSIBILITY BENEFITS FROM NEW HIGHWAYS? Some evidence suggests we have reached peak travel; congestion and travel per capita has not increased in the Economic theory predicts that improved roads will raise last decade (Millard-Ball and Schipper 2010). This plateau in nearby land prices. If a new fast highway is built, land nearby congestion increases, although a positive sign for travelers, will be more valuable because residents can have easy access does nothing to relieve today’s problems. Rather, it suggests to desired destinations. Local land prices will rise to reflect the those problems aren’t getting worse in the way many “scare” value of those residents’ time savings (and these price increases forecasts project. There is still much that has not yet been will be captured by government from local land or property done to address existing problems. This finding does provide taxes). Under the textbook assumptions that land markets are support for the notion that preservation is a higher priority perfectly competitive and bidders are fully informed, then than new investment. rewarding accessibility would “overcompensate” a state for investing in new highways. It is important to note, though, that our overall proposals shift significant costs to states in 10. SHOULD USER FEES PAY THE ENTIRE COST OF THE their implementation of new highway construction. There are LOAN? also real world institutions such as zoning that mean that the If user fees were sufficient to generate the revenue to pay off textbook predictions do not play out perfectly. However, it the loan, they should be the primary or even sole source of is for this reason that we do not want to reward accessibility funds. There may be good projects where that is not the case, benefits. What is generally not considered in project appraisal however. This is in part because in a transition period of some is a project’s implications on equity—how the project affects roads priced and others not priced, the former would have to the transportation disadvantaged. Equity is a performance compete against the latter. Furthermore, there are benefits the consideration under our proposal. toll roads give to nonusers, which have value (such as reducing congestion elsewhere). This is why we suggest value capture as the second source of revenue, and general funds as a last resort.

By requiring user fees as the primary repayment mechanism, we move toward more-efficient allocation of scarce roads than currently exists; in addition, these user fees will help ensure reliable networks and give travelers the option to avoid congestion.

The Hamilton Project • Brookings 25 Conclusion

uring an era of large budget deficits, the United States faces a serious infrastructure gap. Our proposals seek to redirect our scarce resources to help us to Dachieve some fundamental goals. The net effect of these three proposals will be to improve the state and efficiency of our nation’s infrastructure, the benefits of which will translate into improvements in the well-being of American families through reduced travel times, safer roads, and higher standards of living.

All three of our proposals provide incentives to states to move toward systematic road pricing. The Fix It First proposal removes federal restrictions on tolling the interstate; the FHB, a key component of Expand It Second, requires direct user fees from tolls to repay loans; and the performance fund of the third pillar of our proposal, Reward It Third, subsidizes projects that improve performance and reduce pollution.

26 Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways Appendix 1: Metrics For Judging Existing Road Infrastructure Quality

oad infrastructure conditions can be described by Bridge conditions can be similarly described by many different many different measures; a widely applied index measures. These are tracked in the National Bridge Inventory is the International Roughness Index (IRI), which (NBI), which includes a structural evaluation of each bridge. Ris computed by a trailing fifth wheel on a test vehicle that The most important from a public policy perspective are measures how many inches vertically are displaced per mile structural deficiency and functional obsolescence. A structural of road. An IRI of 60 would imply 60 inches of displacement deficiency means the bridge includes a significant defect, per mile. This measure is reported for the NHS in Highway and often that weight or speed limits must be placed on the Statistics series compiled by the FHWA each year (e.g., FHWA bridge to ensure safety. This means the deck, superstructure, 2008b, Table HM-47). Typically, these are summarized into or substructure of the bridge is in poor condition or worse, five categories: Very Good, Good, Fair, Poor, and Very Poor. as defined by the NBI. Collectively, a bridge sufficiency rating Unfortunately, data are not publicly reported by lane miles by is used to determine whether a bridge is eligible for federal IRI category for the NHS, which would be more useful for our funds. The sufficiency rating formula result varies from 0 to purposes. We believe, however, that the underlying data could 100. The formula includes factors for structural condition, be analyzed by DOT staff to produce such a measure. Table bridge geometry, and traffic considerations. The sufficiency 2 suggests that the urban NHS is in far worse condition than rating formula is contained in the December 1995 Edition of the rural NHS. Figure 8 shows how IRI varies by road type the Recording and Coding Guide for the Structure Inventory and and how speed is affected by IRI. Other measures of pavement Appraisal of the Nation’s Bridges. A bridge with a sufficiency performance consider cracking and rutting. rating of 80 or less is eligible for Federal bridge rehabilitation

FIGURE 8 International Roughness Index

Normal Use

16 Erosion Gullies and Deep Depressions 14 50 km/h 12 Frequent Shallow 11.0 10.0 10 Depressions, Some Deep 60 km/h

8 Frequent Minor 8.0 80 km/h 6 Depressions 6.0

IRI (m/km = mm/m) Surface 4 Imperfections 3.5 4.0 3.5 100 km/h 2.0 2 2.5 1.5 0 Airport New Older Maintained Damaged Rough Runways & Pavements Pavements Unpaved Pavements Unpaved Superhighways Roads Roads

Source: Pavement Interactive 2006 Note: Compares the IRI with various qualities of roads, and the effect of the IRI on speed. Even an IRI of 2.5 may result in driver’s slowing because of discomfort and concern about vehicle or payload damage at higher speeds. Source: http://pavementinteractive.org/index.php?title=Image:Iri.jpg

The Hamilton Project • Brookings 27 funding. A bridge with a sufficiency rating of 50 or less is Functional obsolescence means the bridge does not meet eligible for Federal bridge replacement funding (Minnesota current design standards (e.g., for sight distance, lane widths, State Department of Transportation). heights, shoulders, etc.), or that it lacks capacity to handle current demands, but there is no implication the bridge Bridges that are in poor condition but that remain open may structure is unsafe to travel on given restrictions on speed and have weight limits, which restrict heavy trucks, increasing weight (FHWA 1996). Those restrictions are costly to travelers the distance trucks must travel. Ultimately, such bridges will and end users of freight. be declared unsafe and closed to traffic. As with pavements, keeping a bridge in good repair may save costly major repairs or defer the need for replacement.

TABLE 2 International Roughness Index, Rural and Urban Miles

Rating International Roughness Index Total U.S. Rural Total U.S. Urban (in/mi) (m/km) NHS Miles in NHS Miles in Category Category

Very Good <60 <0.95 25,317 6,075

Good 60–94 0.95–1.5 53,314 17,576

Fair 95–170 1.5–2.7 30,190 20,786

Poor 171–220 2.7–3.5 2,279 4,101

Very Poor >220 >3.5 475 2,515

Source: FHWA 2008b.

28 Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways Authors

Matthew E. Kahn David M. Levinson

Professor of Economics, UCLA Institute of the Environment Richard P. Braun/CTS Chair in Transportation, University and Sustainability, University of California at Los Angeles of Minnesota

Matthew E. Kahn is a Professor at the UCLA Institute of Dr. David Levinson is an Associate Professor in the Department the Environment and Sustainability, the Department of of Civil Engineering at the University of Minnesota and Economics, and the Department of Public Policy. He is Director of the Networks, Economics, and Urban Systems a research associate at the National Bureau of Economic (NEXUS) research group. He currently holds the Richard Research. He holds a Ph.D. in economics from the University P. Braun/CTS Chair in Transportation. In academic year of Chicago. Before joining the UCLA faculty in January 2006-2007 he was a visiting academic at Imperial College in 2007, he taught at Columbia and the Fletcher School at Tufts London. In January 2005 he was awarded the CUTC/ARTBA University. He has served as a visiting professor at Harvard New Faculty Award. He earned a Ph.D. in Transportation and Stanford. He is the author of Green Cities: Urban Growth Engineering at the University of California at Berkeley in and the Environment (Brookings Institution Press 2006) and 1998. His dissertation “On Whom the Toll Falls”, argues that the co-author of Heroes and Cowards: The Social Face of War local decision making about managing and financing roads (Princeton University Press 2008). He is also the author of will most likely lead to direct road pricing, which will allow Climatopolis: How Our Cities Will Thrive in the Hotter World the efficient allocation of scarce road resources (and thus (Basic Books 2010). He blogs for the Christian Science Monitor reduce congestion). Levinson has authored or edited several at http://www.csmonitor.com/Business/Green-Economics. books, including The Transportation Experience and Financing Transportation Networks.

Acknowledgments

We would like to acknowledge authors’ conference participants Allen Biehler, Tyler Duvall, Byron Lutz, and Clifford Winston, as well as Michael Greenstone, Adam Looney, Karen Anderson, and Dmitri Koustas on the Hamilton Project team for helpful comments and suggestions.

The Hamilton Project • Brookings 29 Endnotes

1. A National Cooperative Highway Research Program report finds an Minnesota Department of Transportation (MnDOT) has a ‘preserva- annual need of $188.4 billion in 2007 dollars to maintain existing in- tion first’ policy, over half of trunk highway construction spending since frastructure, of which $109.8 billion is capital and the remainder ($78.6 2002 has gone toward system expansion, leaving important preserva- billion ) is operations and maintenance costs (National Cooperative tion needs unmet.” The Minnesota Department of Transportation and Highway Research Program [NCHRP] 2006). Given that approximate- the Metropolitan Council’s most recent plans for the Minneapolis-St. ly 40 percent of capital expenditure adds capacity (see Federal Highway Paul region diminish the amount of new highway construction and ex- Administration [FHWA] 2008a, Chapter 6 Finance, Exhibit 6-12), we pansion, suggesting the state road construction program (2013–2030) calculate that the total need is $145 billion ($79 billion plus $66 billion should be allocated 50 percent to bridges, 29 percent to road preserva- [66=.6*109.8]) to maintain and operate existing roads at current perfor- tion, and 17 percent to capacity and major safety investments (Metro- mance levels (condition and level of service), without improving level of politan Council 2010). service 5. Author’s calculations based on FHWA 2009b, Table FA-6. 2. For instance, the National Surface Transportation Infrastructure Fi- nancing Commission estimated $172 billion annually, and the National 6. In addition, 12.6 percent of all U.S. bridges are structurally deficient Surface Transportation Policy and Revenue Study Commission esti- (FHWA 2008a, Chap. 7 Potential Capital Investment Impacts: High- mated $194 billion annually. ways and Bridges).

3. For instance, see Nadiri and Mamuneas (1996). Also, Duranton and 7. In 2005, the FHWA estimated that it needed $375 billion (over four Turner (2010) use data across 227 major U.S metropolitan areas and years) for its maintenance and repair projects, but Congress authorized find that metropolitan areas that experienced slower population growth just $286 billion for the four next years (DOT 2007a). between 1980 and 2000 have growing road-building sectors. New road investment is more likely to be cost effective if such roads are being built 8. As new user-fee technology comes online that is directly aligned with in growing areas. use by time of day and location (e.g., mileage-based user charges), the system can become more precise. 4. Some of the “added capacity” is “preservation” and some of the “preservation” is “added capacity,” so it is difficult to disentangle. Levinson, 9. The FHWA suggests a model called STEAM 2.0: Surface Transpor- Montes de Oca, and Xie (2006, 13) found that Minnesota would spend tation Efficiency Analysis Module for project assessment (FHWA [2]). 79 percent on preservation in 2001. Minnesota is growing slower than See FHWA 2007b for other tools. See also ECONorthwest (2002). the national average, and probably spends more on preservation than the average state. However, the Minnesota Office of Legislative Audi- tors Report on State Highways and Bridges (2008) says, “Although the

30 Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways References

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32 Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways ADVISORY COUNCIL

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Approximately one-third of federal highway involving federal funds or from increasing 1. spending goes to expand our existing user fees, these funds would put America on system, but the economic return to these the right path toward supporting its aging new investments has been falling. One infrastructure. reason is that funding for new projects is not based on a stringent assessment of the 5. States would expand existing roads and benefits or costs of a project. finance new construction through loans that would entirely replace today’s system of The United States currently has a matching federal grants. A newly 2. formidable infrastructure deficit. According created and independent Federal Highway to the American Society of Civil Engineers, Bank would provide loans to state and local we are currently spending $110 billion governments whose projects had projected per year less than the amount needed to benefits greater than costs and that had maintain the system at current performance demonstrated an ability to repay with levels. Without new revenue sources, this user fees. problem will only get worse. 6. New and expanded transportation Residents of states and cities across the infrastructure that meets or exceeds 3. United States are getting less from our performance targets would receive an existing transportation system because of interest rate subsidy from a Highway congestion, which costs drivers $120 billion Performance Fund financed by revenues a year in the monetized cost of delays. from the Federal Highway Bank. Perfor- Furthermore, the poor condition of many mance objectives would include on-time roads and bridges imposes wear and tear completion and improvements in safety, costs on vehicles and increases accident environmental conditions, access to rates, causing injuries and even fatalities. transportation for groups and locations that are transport disadvantaged, and Reserving the federal Highway Trust Fund outperformance of initial expectations. 4. to maintain, preserve, and enhance existing infrastructure would boost federal highway 7. The proposal provides opportunities for investment on existing infrastructure by states and localities to experiment with close to $12 billion per year. Combined with versions of road and congestion pricing. any additional revenues that would result Congestion pricing would reduce traffic from raising state match rates on projects delays and provide a new source of revenue to state and local governments.

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