State Road Burden Grows as Federal Funding Falters

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DALLAS – States will face budgetary challenges as they have to pick up more and more of the tab for repairing and replacing a growing backlog of aging roads and bridges, Moody's Investors Service said.

States are spending more on infrastructure because federal transportation funding has not kept pace with needs or inflation for the last 20 years, Moody's analysts said in a report issued Jan. 19.

"States will increasingly leverage motor fuel and other road taxes to issue more debt, which will lead to a faster increase in transportation-related debt than overall state net tax-supported debt," said Moody's analyst Julius Vizner, author of the report. "States generally have low debt levels and have the capacity to tap capital markets to finance a substantial amount of infrastructure."

Combined state and federal transportation spending rose to $153 billion in 2016, from $109 billion in 2006, with states responsible for 70% of the increased funding, according to the National Association of State Budget Officials.

States could have a pivotal role in the $1 trillion infrastructure program proposed by President Donald Trump in late October, Vizner said.

"We believe implementation of this plan will include public revenue sources that states control, either from availability payments made directly from the state, state-sanctioned tolls on highways and bridges, or other state taxes that provide attractive returns to private equity," Vizner said.

The Trump investment initiative with a stated goal of $100 billion per year of new investments could increase annual infrastructure expenditures by up to 40%, he said.

"Depending on its implementation, the incoming administration's plans may ease states' burden," the report said. "An increase in federal spending on infrastructure would be credit positive for states."

The stagnation of federal funding that had led to large accumulated state spending backlogs is due in large part to the failure of Congress since 1993 to raise the federal gasoline tax of 18.4 cents per gallon and the diesel tax of 24.4 cents per gallon, Moody's said.

Federal highway funding to states scarcely grew between fiscal 2009 and fiscal 2015, and the five-year Fixing America's Surface Transportation Act enacted in 2015 keeps federal funding relatively flat through fiscal 2020 when adjusted for inflation, the Moody's report said.

Federal fuel taxes and other revenues dedicated to the Highway Trust Fund have fallen short of spending levels since 2001 as cars became more fuel-efficient and collections flattened.

"The federal gas tax not increasing in 24 years has shifted the burden of keeping up with rising transportation expenses to states," the report said. "With little to no increase in federal funding and roads and bridges constantly aging, states are left to pick up an increasing dollar amount of transportation funding."

State gasoline taxes have risen by a cumulative 25% in 40 states since the last increase in the federal fuel tax increase, and several states are considering fuel tax increases in 2017, Vizner said.

"With growing recognition of the need to invest more in infrastructure, states will increasingly augment available federal highway aid with their own revenues, both on a pay-go basis as well as through increased use of debt financing over the next two to three years," he said.

Toll-based funding will also increase to support state bond issuance as well as P3 financings, Vizner said.

States have $267 billion of transportation-related general obligation debt and another $107 billion of lease-appropriation pledges, Moody's said. Total state transportation debt includes $34 billion of outstanding bonds supported by fuel taxes and other road user fees.

States also have $9 billion of rated grant anticipation revenue vehicle (Garvee) debt secured by their annual federal highway funding.

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