DALLAS -- States will have to find ways to enhance their existing revenue streams or create new ones to build critical transportation projects as consensus on long-term federal transportation funding legislation remains elusive this year, Wells Fargo Securities analysts said in a report.
Expect a cycle of short-term patches to federal transportation spending when the current extension expires May 31, said Wells Fargo senior analyst Randy Gerardes.
"I'm afraid we can look forward to another series of short, maybe even month-to-month, extensions," he said. "That's what happened the last time Congress had to develop a transportation bill and that seems to be what's happening now.
Finding the revenue to fund transportation infrastructure is the main roadblock to a multiyear federal transportation measure, he said.
"There are a lot of issues that have to be resolved before a long-term funding bill can get done," Gerardes said. "That's where we are with the Republicans in charge of the Congress and a Democratic president."
The Wells Fargo report issued Jan. 5 said state and local governments can finance transportation infrastructure projects through a robust tax-exempt bond market and private partners looking for secure investments.
Finding enduring, reliable sources of repayment is the challenge, Gerardes said.
"We have the capacity to do a lot of projects" he said. "The question is how do we pay for them, whether it is tolls or taxes."
"We have a lot of talented people in the market that can develop innovative ways of leveraging investments using a variety of tools," he said.
"In our view, we have a funding problem and not a financing problem," the analysis said.
The drop in gasoline prices doesn't make an increase in the federal gasoline tax more likely, he said.
"I've seen some suggestions that the decrease in gasoline prices will serve as political cover for a tax increase, but I don't buy it," Gerardes said. "That seems politically risky, especially if the low prices do not stick."
Lower gas prices are expected to lead to modest growth in vehicle miles traveled in 2015, although cheaper fuel costs will be a big benefit to airport and airline revenues, he said.
It takes a 40% drop in oil prices to generate a 1% increase in motor vehicle miles, he said, but a 10% drop in aviation fuel leads to a more than 10% increase in air travel.
The federal Energy Information Administration said the average American household this year will spend $550 less on gasoline than in 2014, which peaked at $3.70 per gallon before the slide began, Gerardes said.
"However, the increased discretionary income associated with lower fuel prices should offer an accommodative environment for toll operators to increase toll rates, which should support stronger toll revenue growth," he said. "We continue to be bullish on airports, specifically large international gateway airports with significant cargo operations."
A limited number of new-money debt issues for transportation in 2015 will drive cash towards toll roads and other higher-yielding infrastructure segments, Wells Fargo said.
"Uncertainty associated with federal transportation funding will likely continue to be a headwind to issuance, but we expect the market to come up with creative financing solutions to efficiently increase capacity from existing surface transportation infrastructure," according to the analysis.
The market for public-private transportation partnerships will grow incrementally in 2015 as states look for new ways to finance projects, Wells Fargo analysts said in the outlook.
Most projects for new highway capacity will be supported by toll revenues, they said. Express toll lanes on existing highways can add capacity at lower costs than a conventional toll road because of the shared right-of-way.
More use of availability payments in P3s is expected because they reduce the exposure of the private partner if projected traffic loads don't meet expectations, Gerardes said.
"While risk-averse bond investors may welcome the removal of this risk, we wonder whether ratings at project outset will be materially higher, given the construction risk that remains," he said.
