by James A. Bacon
“The U.S. highway trust fund is broke,” declares a new report, “Road to Recovery,” published by the Carnegie Endowment for International Peace. If you include deferred maintenance, the U.S. surface transportation system added between $103 billion and $175 billion annually to the national deficit in recent years.
The United States is one of only a few countries in the world where revenues raised to support the federal transportation system do not cover costs. Revenues represent only 62% of surface transportation expenditures — compared to 100% or more among all other members of the Organization for Economic Cooperation and Development. And that doesn’t even take into account the U.S.’s bad habit of deferring maintenance, which can increase upkeep to as much as $800,000 per lane-mile over the life of the road.
The report makes another important point: “The rate of economic return from investment in highway infrastructure in the United States has been approaching the long-term interest rate (cost of capital) since the 1990s. Once the rate of economic return meets the long-term interest rate, it becomes equally beneficial to keep invested capital in the private sector, a clear signal that those investments could be without merit. At that point, the system no longer delivers the benefits necessary to justify public funds.” (Click on graph below for more legible image.)
Net ROI in transportation compared to long-term interest rates
Put in the starkest of terms, the U.S. is spending too much on new road/highway construction and too little on maintenance. The Carnegie report doesn’t put the point quite this baldly, but it’s entirely possible that the federal government’s transportation policies could represent a net destroyer of national wealth!
Such madness should come as no surprise. As the report also says, “While the country suffers the effects of an increasingly degraded and under-performing transportation system, investment decisions on the nation’s transportation system have become increasingly unfocused, short-term and highly politicized.” In 1987, President Ronald Reagan vetoed a transportation funding bill because it contained 100 earmarks. In 2005, President George W. Bush signed a funding bill containing 6,229 earmarks.
How, then, do we fix this broken-down system? The authors advocate assessing a 5% ad valorem tax on oil production and imports when the world oil price is rising and a tax on retail gasoline sales when the world oil price is falling. The idea has some merits, although I’m not entirely persuaded. What fascinates me most is the report’s discussion of the true cost of federal transportation policy.
The authors tote up the following when calculating how much the U.S. is underfunding its transportation system (figures are from the “high” scenario): $85 million in deferred maintenance, $20 billion in federal General Fundsubsidies, $40 billion in hidden budgetary costs paid by agencies other than the U.S. Department of Transportation, a $29 billion productivity loss from sub-optimal investment, and interest payments on debt from General Fund expenditures.
What concerns me most — because it is a problem that Virginia shares — is deferred maintenance. States the report:
Studies have found that spending $5 million on preventive maintenance can save $100 million to $500 million in rehabilitation and reconstruction costs. Although postponing maintenance may appear inescapable given the current shortfall of transportation funds, this deferred maintenance will cost America dearly; projections place its cost at a staggering $5 trillion by 2035 (in 2010 dollars). It is estimated that it would cost three times the transportation system’s $1.4 trillion present asset value to replace it if it were not kept in a state of good repair.
In case you missed it, I refer you to my recent discussion of life cycle budgeting, which encompasses both the up-front capital costs of transportation projects and long-term maintenance costs. The Commonwealth Transportation Board is scheduled to discuss “local maintenance programs” in its upcoming meeting this Wednesday. I will be interested to see how presenters frame the issue.
