Tuesday, November 16, 2010

The Great Squeeze on Transportation

Lost in all the coverage of Maryland’s projected $1.6 billion general fund deficit is another conclusion drawn by state budget analysts: the Maryland Department of Transportation (MDOT) “may not be able to deliver its planned capital program.”

A capital budget is an exercise in balancing. On one side, available revenues – usually from taxes, transfers and bonds – must be calculated on an annual basis for a number of years. Maryland uses a six-year budget. On the other side, a list of projects must be entered that cost no more than the revenues to be realized. But since most of these projects are likely to be multi-year, they have to be inserted in such a way that each year is roughly balanced between spending and revenue. If the budget gets out of balance – usually through a shortfall of revenue – then projects have to be delayed and/or cancelled. That’s exactly what happened in 2008, when deteriorating revenues caused by the recession caused MDOT to “defer” $1.1 billion in capital projects.

In the same Spending Affordability Briefing that projected a $1.6 billion general fund deficit, the General Assembly’s Department of Legislative Services (DLS) predicted that would happen again. The Transportation Trust Fund (TTF) receives revenues from taxes and fees (like the gas tax, the titling tax and license fees), operating income (like rail and bus fares and airport revenue) and bond sales. Out of those revenues, it must pay for debt service on bonds, operating expenses (like MARC, the airports and snow removal) and capital spending. Since items like debt service, airport operations and snow removal are pretty much mandatory, that means revenue shortfalls will fall disproportionately onto the capital budget. DLS believes MDOT has been optimistic about projecting the amount of money that will be left over for capital spending for three primary reasons:

Less Tax Revenues
DLS states that MDOT has overestimated the amounts the TTF can collect from titling taxes, gas taxes, sales taxes and corporate income taxes, all of which are revenue sources for transportation. MDOT projects that titling tax revenues will increase by 7.6% per year over the next six years. DLS projects an annual 6.8% increase. That disagreement alone produces a $405 million shortfall. DLS believes the combined shortfall in tax revenues for the TTF will be $619 million over six years.

Higher Operating Budget Growth
MDOT projects that its operating budget – which, like its capital budget, depends on TTF revenues – will grow by 4.0% annually over the next six years. DLS notes that the ten-year historic rate of MDOT’s operating budget has been 5.4%. DLS estimates a 5.3% operating budget growth rate over the next six years and that siphons off $395 million that would otherwise go to capital projects.

The State is at its Debt Limit
Maryland has almost run out of bonding capacity. That has been caused by gigantic increases in allowable debt. General obligation bonds outstanding have risen from $3.3 billion in FY 2000 to a projected $8.6 billion in FY 2016 – an increase of 157%. Transportation bonds outstanding have risen from $725 million in FY 2000 to a projected $2.4 billion in FY 2016 – an increase of 238%.

State policy defines its debt limit in two ways. First, the outstanding tax-supported debt should not exceed 4% of state personal income. That ratio is projected to be 3.50% in FY 2013. Second, debt service should not exceed 8% of state revenues. That ratio is 6.87% in FY 2011 and is projected to hit 7.89% in FY 2016. If the state exceeds these levels, it may endanger its AAA bond rating.

This is going to have a direct impact on the TTF. DLS says, “Due to less revenue and higher levels of operating budget spending, bond sales are constrained throughout the six-year period.” The projected loss for the TTF: $1.39 billion.

Here is a graphic comparison of the difference between the MDOT forecast and two DLS forecasts of transportation spending over the next six years. The line at the top represents MDOT’s forecast. The two bars are forecasts from DLS, with the more optimistic forecast showing what would happen if MDOT loosened its bond coverage standards. In the out years, the shortfalls run into the hundreds of millions of dollars annually.

What happens to capital spending if DLS is right? DLS estimates that slow increases in revenues, rising debt service payments and rising MDOT operating costs will squeeze out the money available for transportation projects. In FY 2010, the state spent $1.4 billion on transportation projects, of which $794 million came from the federal government. In FY 2016, DLS projects that the state will spend just $748 million on transportation projects, of which $388 million will come from the feds. The state’s own spending on transportation will shrink from $575 million in FY 2010 to $360 million in FY 2016.

So what does this all mean?

No New Projects
As of 2008, MDOT could barely keep up with system preservation. If it has to make another round of project cuts, it may not be able to afford any new projects at all. As it is, MDOT’s Consolidated Transportation Program is packed with projects that are funded for planning but not construction. How large can that backlog grow?

Trouble Funding New Transit
DLS said in its evaluation of MDOT’s budget, “MDOT’s current forecast does not account for the operating or capital impact of large capital projects such as the three different transit lines under consideration.” Translation: the state cannot afford its share of the Red Line, the Purple Line or the CCT. The state government would owe about $800 million each for the Red Line and the Purple Line and between $225 million and $400 million for the CCT. In FY 2016, DLS projects that the state will be spending $360 million of its own money for its entire transportation budget with little or no extra bonding capacity.

So how does the state propose to deal with this problem? No one is saying, but Governor O’Malley and the General Assembly’s presiding officers are united in opposing any revenue increases. If they are serious, that fact combined with the evaporation of federal stimulus funding will pressure the state to divert transportation money to the general fund.

And then all of the above will get worse.