Rebuilding the Foundations: A Special

Report on State and Local Public Works

Financing and Management

March 1990

OTA-SET-447

NTIS order #PB90-254152
, Recommended Citation:

I

U.S. Congress, Office of Technology Assessment, Rebau”iding the Foun&tions: State and

heal Public Works Financing & Management, OTA-SET-447 (Washington, DC: U.S.

Government Printing Office, March 1990).

,

I For sale by the Superintendent of Documents

U.S. Government Riming Office, Washington, DC 20402-9325

(order form can be found in the back of this report)

n
Foreword

Potholes and sewer problems are perpetual items on local government agendas-they

never go away and there is never enough money to fix all of them, or to reconstruct bridges

and roads that may be in danger of collapse. In 1988, prompted by the many national studies

calling for more investment in public works infrastructure, the Senate Committee on

Environment and Public Works and the House Committee on Public Works and Transportation asked the Office of Technology Assessment to evaluate how technologies, management,

and financing could improve public works and make them more efficient and productive.

From the outset, OTA planned to review State and local public works management and

finance to spotlight issues that needed attention. The review produced so much practical and

useful information that a decision was made to publish the results early in 1990 for use by the

101st Congress in this special report, Rebuilding the Foundations: State and Local Public

Works Financing and Management. OTA’s final report for this assessment, Rebuilding the

Foundations: Public Works Technologies, Management, and Financing, will be completed in

the summer of 1990.

Several intertwined issues quickly came to dominate OTA’s discussions with State and

local public works officials. As this report documents, the concerns centered on how to raise

more money for upgrading and maintaining public works, how to enhance public works, and

how to preserve the community environment and quality of life. Local officials focused on the

complex tasks of resolving conflicts among these issues in a controversy-ridden and

politically charged arena. State representatives highlighted the steps they have already taken

to increase support for localities. This special report also outlines the roles of Federal, State,

and local governments and points to avenues for strengthening the intergovernmental structure

for managing and financing public works.

Throughout the study, the advisory panel, workshop participants, and a host of

government, industry, and private citizen reviewers contributed a broad and invaluable range

of perspectives. OTA thanks them for their substantial commitment of time and energy. Their

participation does not necessarily represent endorsement of the contents of the report, for

which OTA bears sole responsibility.

. . .

Ill

u Director

.—
Jon Craig

Chief, Water Quality Service

Oklahoma State Department of Health

Dave Davis

Executive Director

Massport

Siro DeGasperis

Vice President, Public Affairs

United Parcel Service

Daniel Dudek

Senior Economist

Environmental Defense Fund

Hazel Gluck

President

Public Policy Advisors

Anthony Hall, Jr.l

Law Office of Peter Williamson

Austin V. Koenen2

Managing Director, Public Finance

Morgan Stanley & Co., Inc.

Rebuilding the Foundations

Advisory Panel

Card Bellamy, Panel Chair

PrincipaI, Morgan Stanley& Co., Inc.

Jerome Kruger

Department of Materials Science

and Engineering

The Johns Hopkins University

IFcmucrly Member, Houston City Couxxil.

%flnuiy M=@u3~, S-lxhmaw Huucm, Inc.

Fred Moavenzadeh

Director, Center for Construction

Research and Education

Massachusetts Institute of Technology

James Poirot

Chairman

CH2M Hill

Harry Reed

Planning Director

Arizona Department of Transportation

Burton Stallwood

Town Administrator

Lincoln, Rhode Island

Michael Uremovich

Vice President of Marketing

American President Companies

Theodore G. Weigle, Jr.

Executive Director

Chicago Regional Transportation Authority

NOTE: (YI’A apprcciatesand is grateful forrhc valuable assistance and thoughtful critiques provided by the advisory panel members.

‘h panel does nok however, necessarily approve, disapprove, or endorse this rcpmt OTA assumes full responsibility for the

xepmt and the accuracy of its contents.

iv
OTA Project Staff-Rebuilding the Foundations

John Andelin, Assistant Director, OTA

Science, Information, and Natural Resources Division

Nancy Carson, Program Manager

Science, Education, and Transportation

Edith B. Page, Project Director

Julia Connally, Principal Analyst

Karen Mathiasen, Research Assistant

Sharon Burke, Research Assistant

Miriam Roskin, Summer Research Assistant

Marsha Fenn, Assistant to the Program Manager

Madeline Gross, Administrative Secretary

Kimberley Gilchrist, Secretary

Gay Jackson, Administrative Secretary

Contractors

Analytic Services

Sophie M. Korczyk

Apogee Research, Inc.

Sarah Campbell

Government Finance Research Center

Thomas D. Hopkins

Rochester Institute of Technology

Porter Wheeler

.—.
State and Local Infrastructure Management and Financing Workshop, July 7,1989

John Amberger

Executive Director

southeast Michigan Council of

Governments

Mary Boergers

Delegate

Maryland House of Delegates

Wayne Collins

County Engineer

Maricopa County Highway

Department, Arizona

Settle Dockery

Development Director

York Properties

John Gunyou

City Finance Officer

city of Minneapolis, MN

Jonathan Atkin

Office of Technology Assessment

Michael Bell

The Johns Hopkins University

Robert K. Best

California Department of

Transportation

Ray Beurket

American public Works Association

Peter Blair

Office of Technology Assessment

Rebecca Brady

National Conference of State

Legislatures

George Branyan

Office of Technology Assessment

Harry Cooke

National Waterways Conference, Inc.

Claudia Copeland

Congressional Research Service

Charilyn Cowan

National Governors’ Association

Burton Stallwood, Workshop Chair

Town Administrator, Lincoln, RI

John Horsley Donald Morse

Commissioner Secretary/Treasurer

Kitsap County, WA Kentucky Infrastructure Authority

Anthony Kane Heywood T. Sanders

Associate Administrator Associate Professor

Federal Highway Administration Trinity University

Morgan Kinghorn H. Gerard Schwartz

Deputy Assistant Administrator Vice President

U.S. Environmental Protection Agency Sverdrup Corp.

Byron Koste

President

Westinghouse Communities

Ian MacGillivray

Director, Planning Research

Iowa Department of Transportation

Reviewers and Contributors

Michael Deich

Congressional Budget Office

Walter Diewald

Office of Technology Assessment

Kevin Dopart

Office of Technology Assessment

Joy Dunkerley

Office of Technology Assessment

John Fischer

Congressional Research Service

Robert Friedman

Office of Technology Assessment

Brian Frennea

Inland Rivers Ports & Terminals, Inc.

Daniel Gatchet

Rail Delivery Services

Charles V. Gibbs

CH2M Hill

Neil Grigg

Colorado State University

Paul Guthrie

U.S. Environmental Protection Agency

Mary Simone

Mayor

Rocksprings, TX

Ron Wagenmann

Town Manager

Upper Merion Township, PA

Barbara Harsha

National Association of Governors

Highway Safety Representatives

Gill Hicks

Port of Long Beach

John Hornbeck

Congressional Research Service

William Hoover

Air Transport Association

James Hunt

General Accounting office

Peter Johnson

Office of Technology Assessment

Ken Kirke

Association of Metropolitan Sewerage

Agencies

Carol Kocheisen

National League of Cities

Bill Kramer

U.S. Environmental Protection Agency

Lester P. Lamm

Highway Users Federation

V/
Jerry F. Lavelle

Tri-City Regional Port District

Howard Levenson

Office of Technology Assessment

Steven Lockwood

Federal Highway Administration

Richard Marchi

Massport

Kay Martin

Association of American Railroads

Kenneth Mead

General Accounting Office

Mark Meo

University of Oklahoma

Wade Miller

Consultant

Elizabeth Miner

U.S. Environmental Protection Agency

Jeffrey Mom

Urban Mass Transportation

Administration

Don Niehus

U.S. Environmental Protection Agency

Obie O’Bannion

Association of American Railroads

Walter Parham

Office of Technology Assessment

Henry Peskin

Edgedale Associates

Craig Philip

Southern Pacific Transportation Co.

Michael Phillips

Office of Technology Assessment

Beth Pinkston

Congressional Budget Office

Douglas Porter

Urban Land Institute

Richard Powell

American president Lines

Yvonne Pufahl

General Accounting office

Karen Rasmussen

California Trucking Association

John Reith

American Trucking Association

Victor Rezendes

General Accounting Office

Jenifer Robison

Office of Technology Assessment

David Sanford, Jr.

Us. Army corps of Engineers

Neil D. Schuster

International Bridge, Tunnel, and

Turnpike Association

Sarah J. Siwek

Southcoast Air Quality Management

District

Ed smith

Us. Army corps of Engineers

Richard Sullivan

American Public Works Association

Ted Thompson

New York State Department of

Transportation

Vern Wagar

National Association of County

Engineers

Thomas Wehri

U.S. Department of Agriculture

Hendrik Willems

U.S. Department of the Interior

Carl Williams

California Department of

Transportation

Jacqueline Williams

General Accounting Office

Larry Wilson

Arkansas Department of Pollution

Control and Ecology

Jenifer Wishart

Hickling Management Consultants

Leslie Wollack

National League of Cities

Andrew Wyckoff

Office of Technology Assessment
Contents

Chapter 1: Issues and Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Chapter 2: The Intergovernmental Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Chapter 3: States: Caught in the Middle. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

.

Chapter 4: Local Governments: Where the Buck Stops . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

Appendix A: Federal Spending and Tax Collection by State . . . . . . . . . . . . . . . . . . . . . . . . 121

Appendix B: Fiscal Capacity and Effort Measures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122

Appendix C: Case Studies of Regional Planning Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . 124

Appendix D: Contractor Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

.’

.-

. .

.’. ,.

1-A. Rocksprings, Texas

1-1. Federal Expenditures, 1960 and 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1-2. State Fiscal Effort ● ..** *.*** * e * * . . * * . . * . * . . . . * .*.*.*...

1-3. Projected Impact on States of Reduced Federal Aid for Public Works

. . . . . . . . . . . . . ‘6

. . . . . . . . . . . . . 9

● . **,.....* 13

Pag e

1-1. Distribution of Federal Aid to State and Local Governments by Major Categories . 7

1-2. Federal Infrastructure Expenditures, 1980-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14. Increase in Household User Charges in Municipalities Attributable to

Enviromental Regulations *.*. o***. ... o.. .*. o . . . * * . * . . . . * . . . * * . . * . . * .*.....*.

1-5. Local Options for Addressing the CostS of Federal Environmental Standards . . . .

1-6. Public Works Spending by Level of Government ● *O** O**** *e*o*e e**...**...**.

1-7. Federal Public Winks Trust Fund Summary,198 8 . * . . * . . . . * * * * . . * . * * . . . . . . . . . .

1-8. Major Infrastructure Financing Mechanisms: Advantages and Disadvantages . . . .

1-9. Current Sources of Capital for Local Public Works ● . . . . . . . . . . . . . . . . . . . . . . . . . . .

,.

.

10

18

19

20

20

29

30
.—.

Chapter 1

Issues and Conclusions

“We’ve got all these people moving in from a

neighboring State because our taxes are lower. We

need roads and sewers for this new development, but

we can’t pay for them. And no politician wants to

raise taxes-that’s just too hard!” groaned an official

from a fast-growing suburban jurisdiction in an

industrial Midwestern State.l

“We don’t need another special purpose tax; we

need statewide tax reform,” proclaimed the Governor of a Western State that does not have an income

tax and relies heavily on sales and property taxes.

The legislature did not agree and adjourned without

acting on a carefully prepared special tax package

for transportation improvements, leaving local officials, who badly needed the revenue, fuming.2

Roads, bridges, mass transportation, airports,

ports and waterways, water supply, wastewater

treatment, and solid waste disposal make up the

essential infrastructure for public works services.

These services underpin the public health and

economic vigor of the Nation and are utilized by

every citizen and every industry. But as the quotations above make clear, how to pay the bills for our

Nation’s public works (and other government services) remains a thorny and contentious issue. As one

informed observer put it: “The impasse is deep:

Americans’ appetite for government services exceeds their willingness to be taxed.”3

The Nation’s 83,000 local governments are in an

unenviable position; they take the direct political

heat generated by public works issues. They are

responsible for managing and maintaining over 70

percent of the Nation’s public works facilities and

services. They must also comply with Federal and

State standards and regulations over which they

have little control. In addition, they are caught in a

bind consisting of the need to provide services on the

one hand, and laws limiting how much money they

can raise and how they can raise it and constituents

who resent paying higher taxes on the other.

Federal and State governments, recognizing the

importance of keeping the economy running

smoothly, have long provided financial assistance

for local public works. However, policy changes

have reduced Federal contributions over the past

decade, and infrastructure needs continue to outrun

available dollars. Coping with the fiscal shortfall,

meeting higher costs for maintaining transportation

services, and ensuring that environmental facilities

comply with new national standards create dilemmas for every State and local decisionmaker. Nonetheless, agreement is widespread that public works

infrastructure needs upgrading and that additional

investment would benefit individuals and the national economy alike. Indeed, one economist projected recently that: “If we increased spending on

core infrastructure by $50 billion (1 percent of

GNP), productivity would rise by an estimated $62.5

billion in the first year."4 However, disagreements

over how much additional support is needed and the

most politically feasible method of providing it dog

officials at every level of government.

But money problems are not the entire story.

Solutions to urban problems such as air pollution

and traffic congestion will require new technologies

and ‘approaches to transportation and difficult

changes in longstanding management practices. For

example, the view that”. . . unconstrained personal

mobility and control of congestion are incompatible

in the America of today and tomorrow,”5 is now

widely shared by officials in major cities, but is

anathema to many of their constituents. For a

number of small, remote communities, compliance

with new Federal environmental standards will

require financial resources. beyond their fiscal capabilities. The management and technology changes

necessary to resolve these problems involve staggering sums of money and require developing consensus among disparate, vocal, and tenacious industry

and private citizen interest groups.

Considering all these conflicting pressures, it is

small wonder that despairing descriptions of huge

needs have not successfully mobilized agreement or

a national approach to funding infrastructure. Efforts

to date have been piecemeal. Most State governlu~~fj~ ofil~ at Dit@l/Ford Municipal Officials Chfcrence, Wwh.ittgtaI, DC, unpublished remarks, June 23, 1989,

zJohn Hondey, commissiawr, Kitsap Cowy, WA, pcmonal communication, July 7, 1989.

3~ J, s~~l~“A FriVOk)US Decade?” ~(L$hingZon post, Jan. 3, 1990, p. A15.

4David Alan Aschaur, cux’IOmis& Ft!dend Rcscsve Bank of ~~0, pmond CO13M311111iCd31t, Oct. 30, 1989.

5AIan Boyd, ‘Transpw—“cm Systems of the 21st Breaking Gridlock,”

Academy Press, 1988), p. 19.

-3-
4 ● Rebuilding the Foundations : State and Local Public Works Financing and Management

State and local governments must replace and dispose of

obsolete transportation equipment and meet competing

revenue demands as well.

ments have increased their support for public works,

and local governments have made often heroic

efforts. Yet even jurisdictions that have successfully

raised taxes or fees for public works have been able

to meet only their most pressing needs. Making a

difficult situation worse, even when new technologies or management tools are available to make

services more productive and efficient, officials are

hard pressed to find funds to implement them. The

current impasse over public works incorporates

three critical and controversial national issues:

the shortage of money available for competing

gov ernment services, such as health and social

needs, defense, education, and public works;

the inadequate state of much of the Nation’s

transportation and environmental infrastructure

at a time of rapid technical, industrial, and

economic change; and

the importance of preserving the environment—large, urban areas must address air and

noise pollution and land use problems that

diminish the quality of life and may limit

growth and development, and every jurisdiction must upgrade its public works to comply

with new environmental standards.

These three issues are interrelated in numerous,

complex ways, but in their simplest forms, they have

been on a collision course in recent years. As the

1990s begin, political and financial considerations

intrude on every debate about preserving environmental quality and renewing our infrastructure.

To assess the progress of State and local governments in coping with infrastructure problems and to

outline the framework for congressional decisionmaking, the Office of Technology Assessment

(OTA) has prepared this special report documenting

recent trends in public works financing and management. The report presents snapshots of current

approaches and identifies successful programs and

issues that have yet to be resolved. It provides

background information and the State and local

context for OTA’s forthcoming report, Rebuilding

the Foundation: Public Works Technologies, Management, and Financing, scheduled to be completed

in the summer of 1990.

PAYING THE BILLS

Why have public works reached what many call

a crisis point?--primarily because the costs of

services that local governments must or wish to

provide have outstripped the political acceptability

of raising property taxes-their most important

source of revenue. In 1987, property taxes generated

over 70 percent of the tax revenue collected by all

local governments6--50 percent for cities, which

usually have a more diversified tax base than

counties and towns. User fees, sales, income, and

dedicated taxes, Federal and State monies, and

private sector investment, when it is available,

provide the remainder. Required by State laws to

balance their budgets and limited by law (in over

one-half the States) and by voter resistance in the tax

increases they can impose, local governments count

on every dollar from each of these sources. Declining Federal monies and State governments that have

contributed substantial funding support only for

highways and bridges are other contributing factors.

constitutional basis for a Federal role in

public works lies in the responsibility of the Federal

Government for interstate commerce, the general

welfare, and national defense. Over the years our

national government has addressed these goals by

funding construction of a broad range of public

works infrastructure, particularly for transportation

and water resources. Historically, transportation

facilities that promote interstate commerce-ports

 of Commerce, Bureau of the in (Washington, DC: November 1988), p. 
Chapter 1-Issues and Conclusions ● 5

ports and waterways.

and waterways, rights-of-way for railroads, airports

and airways, and highways-have been supported

with Federal monies. Local governments, with some

help from their States, have maintained and operated

most of these facilities, except for waterways (which

are the responsibility of the Army Corps of Engineers) and freight railroads (which are privately

owned and managed).

Federal involvement in environmental public

works began early in the 20th century with massive

investments in reclamation projects to provide water

for agricultural and urban development. Over the

past several decades, the emphasis has shifted to

protecting the public health and natural resources,

and the Federal Government has dramatically enlarged its regulatory role by setting standards for air,

water supply, and water quality. Greater understanding of health dangers from contaminated drinking

water, hazardous waste, improper wastewater treatment, and the health costs of air pollution prompted

formation of the Environmental Protection Agency

(EPA) in 1970 and tighter Federal regulation. Some

Federal finding has been made available through

EPA and the Farmers Home Administration of the

Department of Agriculture to assist State and local

governments in constructing facilities to control

health threats.

As the impacts of rising national debt service and

payments to individuals for health, welfare, and

retirement made themselves felt (see figure l-l),

Federal support for infrastructure, which had steadily expanded after World War II, began to shrink in

the late 1970s. Indeed, between 1979 and 1989,

Federal grants to States and local governments for

all purposes, excluding payments to individuals, fell

from 11 percent of the Federal budget to 5 percent.7

Equally striking is the expansion in the share of their

Federal grant monies that States and localities

provided to individuals for health. These burgeoned

from 3 percent of their Federal aid in 1960 to 30

percent in 1989, while the portion of aid used for

public works dropped from roughly 46 percent to

about 18 percent (see table 1-1, categories of natural

resources and environment and transportation).

and local officials accept the need for

Federal standards and regulations to protect the

public health and welfare. They contend, however,

that many grant requirements raise their costs by

requiring expenditures for procedures that seem

extraneous and by adding substantially to the time

needed to complete the project. For example,

Federal aid for bridge repair requires that a percentage of Federal monies be used for repairs to

“off-system” bridges (bridges on highways that are

not eligible for Federal aid); often these bridges are

on underutilized or unimportant roads, and the State

would prefer to use the money for bridges on major

highways. 8 Concerns about Federal programs center

on unfunded mandates, grant requirements, such as

a focus on new construction rather than maintenance

or management improvements, and on the regulatory

●

●

●

process, 9 including:

inflexible administration of standards (standards aim at uniform performance and do not

accommodate local variations in need and

conditions);

lack of coordination among Federal agencies

engaged in related activities;

frequent changes in Federal regulations, which

may require major local program adjustments;

 of Management and Historical of the U.S. Government, 1990 (Washington, DC: 1989), pp. 128130.

, Planning Research Division, Iowa Department of ation, in U.S. of Technology 

 —State and Local Infrastructure Financing and Management Workshop,” unpublished July 7,1989, pp. 118-119,

 of Assessment Advisory Panel meeting, unpublished remarks, and participants in of Technology op. cit., 8.
13%

to

2

● length of time required for Federal review and

approvals; and

● requirements for meetings and paperwork.

The complicated application process for approval of

a major harbor improvement (shown in chapter 2,

figure 2-5) gives ample evidence that these concerns

are justified.

The need to conserve and stretch Federal revenue

has also created conflicts between Federal tax

policies and State and local financing for public

works. Tax reforms enacted in 1984, 1986, and 1988

raised the costs of some forms of infrastructure

financing by limiting the types of projects eligible

for tax-exempt bonds. Arbitrage arrangements, sale/

leaseback, and other forms of public-private funding

that local governments had used to leverage investment for infrastructure improvements, were sharply

curtailed. Congress relaxed some of the most severe

restrictions on arbitrage in legislation passed in late

1989, and while it is too early to be certain, OTA

analysis indicates that the impact of tax reform on

traditional public-use projects (sewers and roads, for

example) may not be significant in the long term.

The decrease in tax-exempt private activity bonds

for facilities, such as convention centers and sports

complexes, contributed to the significant drop in

municipal borrowing between 1986 and 1987. However, the municipal bond market returned to its

pre-1985 level in 1988, signaling that jurisdictions

were taking on new debt for their traditional public

works needs.10 (For further details see chapter 2.)

State and local governments contribute about 75

percent of total public spending for public works,

with most of their share supporting operations and

maintenance. Federal grants financed between 40

and 50 percent of capital spending for public works

construction during the 1980s,11 and Federal support

plays an important role in finding new projects and

major reconstruction. Over the past decade, only

highway and air transportation received increasing

portions of total Federal funds spent on infrastructure, thanks to trust funds supported by dedicated

user fees (see table 1-2). (Although mass transit and

waterways also have trust funds, the annual revenues

are much smaller.) The fact that no similar dedicated

Federal revenue sources have been enacted for

environmental programs has had a significant im-

 Center, “Federal Tax and Financing,” OTA contractor report, Sept. 13, 19S9, p. II-4.

 U.S. of Commerce, Bureau of the and of Management and Budget.
Chapter 1--Issues and Conclusions ● 7

6.2 16.7 3.5

Federal support for construction of wastewater treatment

plants is diminishing; at the same time, Federal

requirements are becoming stricter.

pact. In 1980,20 percent of Federal grants for public

works infrastructure was budgeted for water quality

programs, while 80 percent supported transportation. By 1988, funding for water quality had dropped

to 10 percent. Concurrent with the drop in Federal

appropriations, local costs for complying with Federal environmental standards began to increase as

new standards began to take effect.

each State has assumed some greater

financial responsibility for public services, increasing expenditures an average of 6 percent over the last

3 years, the fiscal strain has begun to tell. The

average rate of State revenue growth (estimated to be

5.4 percent in 1989) has fallen behind the growth in

expenditures; in fact, 18 States had to cut back

budgeted spending in 1988 because of revenue

shortfalls. 12 Moreover, no State has entirely filled

the chasm created by cost increases for its infrastructure needs and reductions in Federal support for

public works—and funding infrastructure is a lower

priority in every State than Medicaid, education, and

law enforcement.

Each State has a unique fiscal and economic

framework, and several factors bound its capability

to plan and pay for public services. For example, the

strength and balance of a State’s economic base

determine its ability to raise both public and private

funds. Some tax their residents almost as heavily as

the economic base will allow, while others are

wealthier than the tax burden suggests. (See figure

1-2 and table 1-3 for information on State fiscal

standing.) Most New England and Mideastern States

have had strong economies in recent years, enabling

them to raise State and local revenues and to offer

attractive opportunities for private investment.

States without a strong economic base, like West

Virginia, or dependent on one resource, like

“ “cm of DC: 1988), p. 3.
...0.... ... ........ .... ...... .. .
Chapter 1--Issues and Conclusions . 9
................. ............. ................. . ............... . . . . . . . . . . . . . . . . . . . . . . . . . .

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,,. . . . . . ............ . . ........ .................. .................. ............ .................. ................. . . . . . . . . . . . . . . . . . . . . . .

.,. . . . . . . . ...... ...... ...... ...... . . . . . , --- . . .-
Chapter 1--Issues and Conclusions ● 11

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Louisiana have difficulty raising both public and

private investment funds, because their low percapita income limits their taxing ability.

While a rapid rate of population growth heightens

demand for services, it can also provide a broader tax

base. Fast-growing States and communities can

make significant demands on private developers for

infrastructure investment, a practical impossibility

in nongrowth areas; private investors see little

opportunity to recoup an investment in infrastructure where real estate markets are weak. Lowpopulation, low-density States also have great difficulty financing infrastructure programs. Their tax

base is limited compared to the scale of needed

investments, and costs are relatively higher than

those of more populous districts, which can benefit

from economies of scale.

Finally, political factors can override physical and

economic variables and have a major influence on a

jurisdiction’s ability to raise revenues. Taxpayer

revolts against local property tax increases have

made State legislatures reluctant to raise sales or

income taxes. Political pressure has pushed many

States to limit the amount of bonds local jurisdictions can issue, creating barriers to traditional

avenues for public works funding. To finance

services needed in specific regions, many States

have begun to permit local jurisdictions to impose

special levies or taxes for infrastructure projects.

California’s efforts to overcome the effects of its

well-known Proposition 13 illustrate this point (see

chapter 3 for details), and a number of local

financing districts have been created to finance

construction, operations, and maintenance for public

works. California’s experience has been replicated

in a number of States.

Yet while special districts ease States’ fiscal

burdens, they make State comprehensive planning

and budgeting for capital improvements extremely

difficult. At the local level, too, having a number of

independent, separate districts complicates regional

planning and management, makes political coordination a formidable task, and places a heavy burden

of debt payments on district residents. Easing

restrictions on local find-raising capabilities and

consolidating small districts are actions States

could take to coordinate and rationalize the

financing of public works.

States coping most effectively with infrastructure

financing issues and Federal requirements are those

with the capacity and political will to raise capital

from a variety of public and private sources, and

with an available pool of technical and financial

know-how. For example, two States, Washington

and New Jersey, have funded special State assistance programs to make low-cost loans to local

jurisdictions for infrastructure improvements. The

Washington State program was carefully structured

to ensure that local jurisdictions tap their own

resources fully and plan carefully. (For further

information, see boxes 3-B and 3-F in chapter 3.)

States that would be most affected by additional

reductions in Federal grants are large, rural States

with small populations; those with poor economic

bases; and those heavily dependent on extractive

industry (see figure 1-3). Although these States are

home to less than 11 percent of the Nation’s

population, their problems are pressing, and OTA

finds that some categorical Federal programs designed to help them are based on criteria that work

at cross purposes (see box 1-A). In another example,

a Federal-aid program that targets bridge repair

funds to States with large numbers of substandard

bridges penalizes States that have developed bridge

maintenance management programs and keep their

bridges in good repair.13

Benefit Charges or User Fees

When there were fewer demands on State and

local financial resources, broad-based sales and

income taxes could carry most of the public works

funding burden. However, funding programs, such

as health care, education, and criminal justice, have

depleted general revenues and reached debt ceilings

in many States. Accordingly, most States and

localities have turned to benefit charges (such as

user fees and special assessments) and to State loan

programs that promote self-supporting projects for

financing public works capital. Benefit charges are

attractive and effective strategies because of their

revenue potential, voter acceptability, and service management opportunities. A few local

jurisdictions, such as Phoenix, for example (see

chapter 4, box 4-C for details), target service

beneficiaries to pay full cost for many public

services because of their relative ability to pay

compared to social service users. States with low

I-tivaoftile Dqxtmcnts of Tranaportathm of Gcorgi4 Florid& and Minncaota at a National Tmqxmation Safety Board Bridge Safay

Wixulop, Unpubii$lcd~ Sept. 2s, 19s9.
Chapter 1--Issues and Conclusions ● 13

(’

/--”
14 ● Rebuilding the Foundation: State and Local Public Works Financing and Management

economic bases and/or small populations cannot broad-based taxes for supporting transportation

assemble sufficient capital from these sources.

Recognizing the advantages of user charges,

especially for transportation, a few States are expanding paid highways by authorizing privately

funded toll roads, while 47 States have raised

gasoline taxes and other motor vehicle user charges

over the last 10 years. Sixteen States permit local

governments to levy local gasoline taxes (see table

1-3, again). The gas tax is a substantial revenue

producer and often more acceptable to voters than

improvements. Gas taxes and other vehicle user

charges are also used in many jurisdictions to

finance public transit; a few use such revenues to

support a variety of other services. A number of

States use aviation-related taxes and fees to support

airport development Currently, about 60 percent of

road and highway improvements are funded by user

charges. 14

Environmental capital improvement programs are

increasingly paid for by debt, in the form of revenue

I** Highway Muhkraa“oa, U.S. DcpartmcntofTransportation, 1987),

p. 20.
Chapter 1-Issues and Conclusions ● 15

1989, the city refused water access rights to any builder who did not install a legal septic system. Though denying

water rights allows the city to comply with State regulations, it also thwarts chances of attracting much-needed

economic development.

bonds backed by user fees. No State has a broad tax charges are proven revenue sources, OTA conor revenue base- for environmental services, and no

dedicated Federal trust fund exists. A significant

share of environmental capital currently comes from

Federal grants, which face the perils of annual

appropriations and have already fallen significantly

from previous levels. Grants for wastewater treatment are scheduled to be eliminated entirely in 1994.

The capacity of low-income users to pay significantly higher fees for environmental services is an

unresolved issue, and Federal tax code changes have

made private capital for environmental programs

harder to attract. Because of Federal trust fund

support and because transportation benefit

eludes that States and local governments are

currently better able to finance transportation

improvements than environmental programs.

Revolving Loan Funds ●

Most States have established revolving loan

programs for wastewater facilities in anticipation of

the phasing out of Federal construction grants.

Several have created similar programs for transportation infrastructure as well. Many States remodeled

existing loan and grant programs to create these;

others started entirely new programs. It is too early

to tell how the new revolving loan funds will work,
16 ● Rebuilding the Foundations: State and Local Public Works Financing and Management

although some States have already found that local

districts accept multiple, complicated Federal regulations much more reluctantly for a loan than for the

accustomed grants. Many States are in the process

of working out the technical, administrative, and

institutional difficulties inherent in such a complex financial activity. Cuts in Federal appropriations to support State administration of

environmental programs hamper their efforts.

States face two additional challenges: accommodating the needs of those districts too poor to afford

a loan and expanding the supply of capital needed

both now and when Federal grants end in 1994. At

that time, funds for environmental programs must

come from higher user charges, State or local general

revenues, from new, earmarked State taxes, or a new

Federal program.

Earmarked or Dedicated Taxes

From a public policy perspective, earmarking or

dedicating revenues for special purposes has the

disadvantage of restricting policymakers’ fiscal

options in responding to changes in priorities.

Nonetheless, States have found that earmarking is

the best way to ensure a reliable revenue stream.

Pressure is heavy in some States without strong

general tax bases to use gas tax revenues to pay for

social or education programs. Transportation advocates are adamant that States reserve these funds for

transportation capital or replacement accounts,

which can otherwise be vulnerable to budget cuts.

Despite budget difficulties and objections to

new taxes, voters in a number of States and

localities have supported new spending initiatives

for transportation or environmental improvement programs that meet well-defined priorities.

(See chapter 3 for examples in New York, Iowa and

Washington State.) One measure of the willingness

of a State’s voters to pay for public services is the tax

burden its voters have accepted relative to the State’s

economic base and per-capita income (or ability to

pay—see table 1-3). Federal grant programs do not

take into account the needs of States that have low

fiscal capacities, but are already taxing their residents relatively heavily, nor the possibility that

States in good financial condition, but which tax

relatively lightly, could make a greater fiscal effort.

State and local officials consulted by OTA indicated that they would support a larger matching

requirement for State and local contributions in

return for Federal funds, if the formula recognized State and local level of effort.15

States also provide local governments with nonfinancial support for both transportation and environmental public works funding. Such aid may take the

form of enabling legislation to permit local option

sales, fuel, or income taxes, public-private ventures,

and other types of innovative strategies. Some States

have established bond banks to help local districts

cut the costs of acquiring capital; many are offering

technical assistance and help with capital budgeting,

and several have established infrastructure research

programs. See chapter 3 for more complete descriptions of state programs.

Local 

jurisdictions, too, have taken on additional

fiscal responsibilities, although many find their

financing problems overwhelming. These governments have historically relied on the broad-based

property tax to finance public services from education to water supply and streets, largely because no

major alternatives were needed. Moreover, the

property tax was an approximation--albeit crude—

of both ability to pay and benefits received. However, the property tax is no longer adequate. Costs

have climbed significantly, and elimination of .

Federal block grants and revenue sharing, the need

to support Medicare and social programs, reductions

in Federal categorical grants, and higher Federal

standards for environmental services have exacerbated local fiscal woes. Repeated property tax hikes

to support public services needed to serve population growth or economic development have met with

local resistance, often leading to initiatives that

result in State limits on local taxes. Finally, just as

for State governments, competition for local general

tax revenue is intensifying from education, law

enforcement, housing, and social welfare programs,

which have no other revenue source. Forty-four

percent of localities surveyed by the National

League of Cities cut capital spending in 198816 and

deferred maintenance spending because of budget

constraints. Local governments have been particularly hard hit by Federal policy changes and plead for

lam= of Tcchnobgy Asstssmeat, op. cit., footnote 8.

l@ouglas D. RcsearchRcportson Amcmca “ ‘sCitics(Washington, KX2 Nsuicmal LcagueofCitics, July 1988),

. . . p. Ill.
Chapter 1-Issues and Conclusions ● 17

a consistent Federal tax policy that does not change

annually. Recently implemented Federal environmental requirements for solid waste facilities and . . drinking water will require new or upgraded infrastructure facilities but provide no seed grant money.

Costs for complying with the new standards will be

substantial and will fall most heavily on small

communities and large cities where major improvements are needed (see table 1-4).

Most local governments have diversified and

expanded local revenue sources, raising nonproperty

taxes, including user fees. Local income and sales

taxes have proven to be successful revenue raisers

for communities constrained by State-imposed property taxing caps. Earmarking portions of revenues

from these taxes for specific improvements, such as

public transit or streets and bridges, helps win public

approval for the increases. Although these taxes

have become an important source of revenue, few

communities raised them during 1988, indicating

that these sources, too, may have temporarily

exhausted their voter acceptability. (See table 1-5 for

a summary of local options for meeting environmental standards. Further information may be found

in chapter 4.)

State caps on local taxing (in 32 States) or

bonding (in 46 States) fall especially heavily on

small jurisdictions, because their limited tax bases

make them reliant on the property tax. Yet only some

States-New Jersey, New Mexico, and Washington,

for example-have special programs to aid their

small communities. The unit cost of public works

facilities for small systems is high, since the

facilities are small in scale and must be customized

to meet local conditions.

Tapping Private Investment

At present, jurisdictions seeking new revenue are

likely to target specific areas or beneficiaries as

funding sources. Approximately one-quarter of local

districts have successful programs using private

capital. In some growth regions, costs for infrastructure expansion to serve new development are passed

directly to the private sector through developer

charges, such as facility construction requirements

and impact fees. Chapter 4 gives numerous examples of such programs. The private sector is initiating

for-profit ventures in some districts, primarily solid

waste projects, with major efforts under way to

develop privately financed toll roads in Virginia and

California, and high-speed rail lines near Orlando,

Florida, and between Las Vegas,. Nevada, and

Anaheim, California. Other transportation services

that have potential for operating revenues and land

development profits may successfully attract direct

private investment. See chapter 4 for further details. .

Paying Local Bills

Current trends indicate that new infrastructure,

particularly in growth areas, will be financed increasingly with funds from benefit charges. This is

the result of several factors, including State and

voter limits on broad-based taxes, the steady and

growing demands of social programs on genera!

fund revenues, and the relative ability and willingness of beneficiaries to pay.

Utilizing benefit charges, such as targeted user

fees, developer charges, and special district revenues, has some compelling advantages over raising

broad-based taxes. First, citizens seem willing to

accept the principle that “you pay for what you

get," under which they pay directly for services

or developers pay for the facilities needed by

their projects. Second, higher user fees raise

revenues closer to full service costs, and may cut

demand, hold steady or even reduce capital
SOURCE: Offiw of Technology ~t, 1990; baaut on data in U.S. Environmental Protection Agenoy, Oflb of Poiicy Ptanning and Evaluation,

Mdc@Mba, Smd Budmsa md&tkxdhIr8 (Washington, DC: 198S), p. 2-14.

requirements, and permit local governments to

design projects that are relatively self-supporting. Third, the community often can collect capital

funds up front, avoiding the necessity for bond

issues, thereby eliminating interest costs and reserving debt for other public facilities. Last, benefitbased financing gives local governments more

autonomy, making them less dependent on State and

Federal programs and the strings attached. In many

communities, developers support these strategies,

finding them systematic and predictable time and

money savers.

INADEQUATE PUBLIC WORKS

INFRASTRUCTURE

The need to replace and improve public works has

been well-documented in more than a dozen national

studies since 1980. The National Council on Public

Works Improvement estimated in 1988 that annual

future infrastructure investment needs could require

double the $45 billion invested in 1985.17 Nationally, county governments project their infrastructure

needs to be at least $18 billion a year through 1990,18

and a single State, Washington, calculates its

long-range capital needs to be almost $1 billion

annually. 19

governments aided by States have always

been the principal providers of funding for infrastructure (see table 1-6). When Federal funds were

more plentiful, State and local governments used

such funds for capital to support construction of

public works facilities--completion of the Interstate

highway system, major improvements to ports such

as Long Beach and airports, and transit improvements in Washington, IX, and Boston are examples.

State and local governments focused their own

revenues on meeting needs in education and other

special program areas. Thus, critical as State and

local capital is in providing infrastructure, their

combined total investment peaked at $34 billion

(1984 dollars) in 1972,20 and recently has languished

between $20 billion and $28 billion annually.

Shortfalls in infrastructure funding coincide with

major maintenance and capital needs for public

works structures that have reached the end of their

design lives or have been used much more heavily or

deteriorated much more rapidly than anticipated.

While the exact magnitude of essential public works

improvements may be open to discussion, recent

policy statements by major transportation and environmental interest groups21 demonstrate that a

strong consensus has solidified about the inadeqqw Worka ImpIuvcmuw America’s (Washington, DC: February 1988).

lqq~ ~of Juiy 1987), p. 6.

19-*~“We Fbancc for k-al Public Works: Four Case Studi~” OTA contractor paper, Dcccnlk 19ss, p. 30.

Watkmal COud at W* hnpmvemen~ op. ciL, footnote 17, p. 7.

Z%dccted -plea irKhldc: Tmqmatl “m Aitanaci vca Group, (Waahingcm, DC:

~ 1989); Amdcan Aaaouaa“ “aI of State Highway and Thqwnaa“on Gfficiaia, “NCW ‘hqmation Cumxpta fm a New Cmtury,” unpub W

cbmmmt+ kbmaty 198% tk Natimal Gwanora’ Aasocialkxu (Waahingtm, DC:

1989); and Victaia Price Kmnody,Ncw of ~F~ Authorities 1988).
Table 1-5--Local Options for Addressing the Costs

of Federal Environmental Standards

(

,

●

●’

●

●

●

SOURCE: of 19S0.

quacy of our infrastructure and the need for more

investment. We have fallen behind in repairing

potholes, easing traffic congestion to help curb air

pollution, providing wastewater treatment, and disposal of municipal solid waste.

townships, and sparsely populated rural counties, as

well as a multitude of single-purpose districts, such

as the Nation’s 600 highway districts, 356 airport

authorities, 163 port authorities, and numerous

water supply districts.22 They are the level of

government that has day-to-day responsibility for

most public works services. For many years separate

branches of Federal and State governments have

funded and managed the individual public works for

which they have responsibility as separate programs.

For example, Federal highway programs have not

Facing mounting airport access problems, the

Massachusetts Port Authority established a water taxi

between Logan Airport and downtown Boston.

considered rail or mass transit alternatives, or the

access needs of airports, ports, and waterways.

Water supply, wastewater treatment, and solid waste

disposal requirements have been set by separate

divisions of EPA with inadequate consideration of

the interactions of pollutants in different environmental media. (See chapter 2 for a more complete

discussion.) State agencies often mirror the Federal

structure. The diverse, long-established management patterns virtually ensure that Federal and State

subsidies for transportation modes will conflict with

each other and that coordination of environmental

programs will be minimal.

Rapid shifts by industry, such as the move to

just-in-time delivery, to adjust to global economic

changes have radically altered infrastructure use.

Local governments have tried to respond, but

categorical Federal programs give them little flexibility to do so. For example, Federal aid for highway

funds may not be used for modernizing traffic

management systems to speed traffic flow.23 Under

these circumstances, State and local officials find the

large unspent balances in Federal transportation

trust funds especially galling (see table 1-7).

Federal program management has created some

major obstacles for local governments trying to

maximize the productivity and efficiency of their

 DC: Land 

pp. 

 Us. Office of “Advanced Urban 

●
Table 1-6--Public Works Spending by Level of Government (In percent)

Federal State and local

Table 1-7--Federal Public Works Trust Fund

Summary, 1988 (current dollars in millions)

Trust Fund Revenues Outlays (end of year)

Highway Trust Fund:

Highway Account.. . $13,645 $14,036 $9,020

Transit Account . . . . 1,661 696 5,167

Airport and Airway Trust

Fund . . . . . . . . . . . . . 4,081 2,896 5,841

Inland Waterway Trust

Fund . . . . . . . . . . . . . 102 59 315

Harbor Maintenance

Trust Fund . . . . . . . . 161 169 8

public works and make them into mutually supportive systems. The following summary provides a .

snapshot of each transportation and environmental

public work infrastructure segment and identifies

possible short-term relief options. For a more

complete picture, see the analogous sections of

chapters 2, 3, and 4. Long-term improvements to

public works management and financing will

require major changes in Federal transportation

and environmental program management and

congressional oversight and will be discussed in

OTA’s forthcoming report on public works technologies, management, and financing.

Highways

The Federal Government provides about onequarter of the financing for highways and bridges,

1

sharing the responsibilities with States, which fund

about one-half, and local jurisdictions, which provide the remainder. Federal finding is administered

through State highway departments, usually longestablished and experienced organizations. The

Federal-Aid Highway Program supports about 22

.

percent of the Nation’s road mileage; these streets

and highways carry 79 percent of the total vehiclemiles traveled.24 Federal funds to State highway

agencies primarily target the Interstate Program. In

addition, the Federal-Aid Primary Program aids

major arterial highways; the Federal-Aid Urban

System targets aid to urban areas; the Federal-Aid

Secondary Program supports farm-to-market roads;

and the Highway Bridge Replacement and Rehabilitation Program funds bridge improvements.

The Federal Interstate highway program encouraged suburban development, although this was not

its major purpose. The development occurred under

weak State requirements and inadequate local landuse planning and zoning laws and has badly

overloaded many local roads. State and local officials claim that Federal grant requirements and

construction standards have contributed significantly to raising capital and maintenance costs.

Recent changes in Federal policies on permissible

truck lengths and weights brought productivity gains

to industry, but increased government costs for

highway and bridge maintenance and repair.

● Problem ureas: Central cities where roadways

are decaying faster than they can be rebuilt, the

tax base is burdened with special programs, and

the capacity to pay higher taxes is limited.

(Taxes on the commercial sector may be

increased at the risk of business moving out.)

Sprawling suburbs; inadequate investment in

technologies and management tools to increase

road capacity without building more roads;

weak land-use planning and development controls. The need for small towns and rural

counties to maintain many miles of lightly

traveled roads and numerous bridges at service

standards necessary for heavy trucks carrying

Wedc$ai Highw8y AhMsmh& op. cit., foOaIote 14, p. 5.

●
Chapter 1--Issues and Conclusions ● 21

seasonal agricultural products only a few weeks

a year. Low-income States with heavy tax

burdens.

. Possibilities: Increasing Federal and State fuel

taxes; enacting State legislation to permit local

levies. Private investment-not a realistic option for the neediest areas. Toll roads and

bridges; dedicated State and local revenues

from taxes and benefit charges. Revising Federal grant requirements to allow funds to be

used for relieving traffic congestion and

alternative mass transportation projects, and to

permit tolls on highways constructed with

Federal aid. Eliminating tax subsidies for

alternate fuels.

Mass Transit

Local governments or public transit authorities

operate most systems, although State and Federal

sources provide substantial assistance. After reaching a peak in the mid-1980s, Federal support for

transit declined to $2.7 billion in 1988 (see table 1-2,

again). State and local governments finance most

operating and maintenance costs, and State contributions outstripped Federal funds for the first time in

1988. Across the country, transit user charges (fares)

account for just under 40 percent of operating

expenditures, although this varies according to

region.25 The transit users’ willingness and ability to

pay are both sensitive to individual incomes and

( local economic conditions. In addition to fares, mass

transit revenues come from agency-issued revenue

bonds, subsidies from local and State general funds,

Federal grants from a dedicated 1 cent share of the

9-cent per-gallon Federal gas tax, State gasoline

taxes and vehicle registration fees, tolls, and in some

metropolitan areas, a dedicated sales tax.

Federal tax and regulatory policy has had a small

but important impact on mass transit financing,

usually raising costs. The Tax Reform Acts of the

1980s eliminated many private investment opportunities, particularly for purchase of equipment, while

Federal equipment requirements, air quality regulations, and fuel taxes all affect costs. Federal grant

categories do not always fit well with a jurisdiction’s

\ critical needs; small cities may receive more capital

1 funds than they can use, while large cities remain in

1 desperate need of new equipment and facilities.

Problem areas: Suburb-to-suburb commutes

where conventional mass transit is not appropriate, but alternatives have not been developed. Growth areas where planning and development controls are weak. Old central cities

and older suburbs where capital facilities are

wearing out and the percentage of users below

the poverty line is increasing. Jurisdictions in

which the population is aging and the tax base

is eroding. Diffuse mass transit benefits, which

affect many only indirectly through easier

access to downtown and reduced traffic congestion and air pollution. These make it difficult to establish an adequate, reliable, and

equitable local revenue base.

Possibilities: Political leadership and focus on

transit needs and benefits. Requiring nonusers

who are indirect beneficiaries to share the costs

through dedicated taxes. (See the French program discussed in chapter 4, as an example.)

Increased support from State and local government general revenues. Additional Federal

support from fuel taxes for the largest urban

areas. Public-private partnerships.

Aviation

Most major, commercial airports support themselves (with the exception of air traffic control

activities) with user charges. Federal investment in

aviation increased from $4.3 billion in 1980 to $4.9

billion in 1988 (see table 1-2), with most of the

increase used to modernize air traffic control and to

expand and renovate airports, especially reliever and

general aviation airports. User fees (ticket, cargo,

and fuel taxes) provide the majority of these funds.

State and local capital funding grew from $960

million in 1980 to $1.3 billion in 1987.26

Large commercial airports, usually structured as

independent public authorities, rely primarily on

debt financing for capital investment. Bonds are

backed by revenues from airlines, parking, and

concessions. Smaller airports (especially those for

general aviation) depend much more heavily on

Federal and State assistance, and special Federal

subsidies go to a few small airports (at very high unit

costs) in remote areas. Some States support airports

with general fired appropriations and through dedicated revenues from user fees; some States include

airport improvement in State-funded economic de-

%omas D. Ho- %cmefit Charges for Fmcing Inbstructurc,” OTA camractor report, August 1989, p. 15.

~Apogcc Reseamh Inc., op. ciL, footnote 11.
velopment programs. Many local communities regard airports as key to economic development

Federal tax and regulatory policy does not significantly increase airport costs, but does limit revenue

raising capacity. Federal air traffic control improvements will increase airport capacity and thus increase airport revenues in the long term.

●

●

Problem areas: Noise and vehicular traffic and

unplanned, uncontrolled development near

metropolitan airports; these all restrict airport

expansion potential. Large urban hub airports,

which need improved ground access and air

traffic control equipment to increase capacity.

Small- and medium-size airports important to

local travelers and economic activity and as

relief airports, but which do not generate

enough revenue to support bonds. Equipping,

maintaining, and operating airports in remote

areas where demand is low. Growing metropolitan areas where land used by small airports is

attractive to developers for commercial or

residential use.

Possibilities: Continued Federal trust fund

support for medium and smaller airports; increased State support where fiscal capability

exists; and stronger land-use regulations to

protect essential airports from development

pressures. Authority to levy an airport head tax

to support airport expansion and improvement.

Air traffic control and runway improvements,

larger aircraft, industry scheduling changes,

and minihub development to relieve crowded

hubs. Public-private partnerships to provide for

ground-side needs. Development of high-speed

rail as alternative transport for crowded air

corridors.

Railroads

Although rates and service are regulated by the

Federal Interstate Commerce Commission, the vast

majority of railroads in the United States are

privately owned and operated. The major exception

is Amtrak, a Federal corporation, which since 1971

has provided subsidized passenger service. In 1987,

Federal outlays included $595 million for Amtrak

and $23 million for Local Rail Service Assistance,

a program aimed at helping local districts rehabilitate worn-out track.27 At least 20 States provide

assistance to local rail service, mostly as grants or

loans to small short-line freight carriers. A few

States with major urbanized areas, such as California, Illinois, and Pennsylvania, subsidize intercity

passenger train service to relieve traffic congestion

and air pollution.

Sagging railroad profits and investment rebounded in the 1980s after Federal deregulation,

although profit margins for railroads still average 5

percent, making it difficult for most to attract new

investment capital.28 Nonetheless, during the 1980s

over 200 new, small, short-line railroads have

formed, generally using track abandoned by the

long-haul companies. Many are undercapitalized,

and much of their track was purchased from main

lines that had neglected maintenance in preparation

for abandonment Thus government support will be

important if service is to continue. For railroads to

play a much larger role in local transportation,

however, rail service must be better integrated with

other transportation modes, public officials and

private executives must work in concert, and legal

and institutional issues (liability is one example)

must, be resolved.

●

●

Problem areas: States, regions, and especially

agricultural areas and small communities

where rail service is inadequate, undercapitalized, or has been abandoned. Locations

where potential profit margins are too low to

warrant” private investment, and public resources are not available for expanded service.

Areas that have excess capacity and tracks that

remain underutilized. Adequate funding for

passenger service.

Possibilities: Increased flexibility in Federal

transportation grant programs to permit States

to opt for rail alternatives to highway. State aid

to underserved regions; flexibility in Federal

regulations unrelated to safety, for low-profit

lines. State, Federal, and industry policies that

encourage public-private partnerships.

Ports and Waterways

Ports and waterways can be as important as

airports to local economic development. Generally

port facilities are owned and managed by a public

authority, while inland waterway terminals are

privately owned. The Federal Government funds the

nc~ (Wmhingtau X: 1988), p. 6.

w-~1 @Clpctitiv&”Congressimd Qtmnerty, Aug. 11, 1989, p. 455.

(
Chapter 1--Issues and Conclusions ● 23

1

1

majority of navigation infrastructure costs and has

thus played a large role in economic development

and competition between ports. Federal policy has

changed, and costs for channel dredging must now

be shared by local sources. Federal capital outlays

for ports and waterways declined from $4.9 billion

in 1980 to $3.3 billion in 1988 (see table 1-2).

Although more than one-half of the States have

funded port and terminal facilities and their outlays

for maintenance and operations increased, State and

local capital investment dropped from $1.1 billion to

about $750 million between 1980 and 1987.29

Federal grants and government bonds provide the

bulk of capital investment. Most large port authorities can support operating and capital costs with user

charges. Small, privately owned terminals may have

a difficult time generating adequate revenue if their

customer base is limited.

Problem areas: Older ports that need to modernize and expand facilities to remain competitive, but cannot support the investment without

raising fees so high as to threaten their competitive position. Port and terminal owners’ and

waterway users’ heavy dependence on Federal

financing. Overcapacity-more competing

ports and terminals than large modem freight

vessels need. Identifying priorities for Federal

funds among main system waterway and competing ports-political support may keep

small, marginal projects alive, slowing completion of major projects. Ports where disposal of

dredged material is a major environmental and

cost issue. Absence of well-integrated land

transportation systems to support port activity.

Possibilities: State and local public-private

partnerships to finance improvements. Higher

user charges and stable State funding. Industrial partnerships; industry modernization and

development of diverse markets. Reducing the

number of ports and shrinking the size of the

waterway system to ensure maintenance of

essential commercial service.

Drinking Water Supply

The benefits of a pure water supply extend beyond

individual users to commerce and industry. Local

governments are responsible for most of the NaAlthough clean water is considered a right, supplying urban

areas with potable water often involves extensive,

costly systems.

tion’s 60,000 water supply systems, although about

one-quarter are privately owned. Federal outlays to

support water supply in 1988 were small--$449

million-targeted at central cities and poor, rural

areas. In comparison, State and local capital expenditures were $5.6 billion in 1987, with operations

and maintenance outlays an additional $11.1 billion.30 State assistance also includes establishing

bond banks, revolving loan funds, and interest

subsidy programs, and providing technical advice.

Local governments finance capital expenditures

primarily through bonds backed by user fees and

government funds, generally recovering 75 to 80

percent of costs through user fees.31

The impact of Federal tax and regulatory policy is

significant. New water quality standards will require

regular monitoring of drinking water sources and

filtration to remove specific contaminants. Tax

reforms have increased capital costs, particularly for

public-private ventures. Many communities will

need to increase rates substantially, both to fund

 Inc., op. cit., 

31 op. ciL, 2s, p. 
rehabilitation of obsolete facilities and to conserve

and regulate water use, possibly reducing the need

for new facilities.

Problem areas: Small systems with water

supplies that do not meet current standards.

Older cities where pipes and facilities are

obsolete and decaying, causing significant

leakage. Regions with serious contamination of

ground and surface water sources. The custom

of low pricing for water, which impedes cost

recovery and encourages consumption.

Possibilities: Dedicated State or local revenue

funds to allow renovation and regular preventive maintenance. Raising rates to recover full

service costs. Policies and pricing to manage

supply and demand. Separating residential

drinking water and outside water supplies.

Treatment technology development.

Wastewater Treatment

Federal grants for wastewater facilities have

declined from $6 billion in 1980 to $2.4 billion in

1988 (see table 1-2) and will continue to drop as

capital grant programs are eliminated. To help fill

the revenue gap, State and local capital spending for

wastewater treatment rose from $2.3 billion in 1980

to $4.1 billion in 1987. However, a major shortfall

in capital investment continues; at least two large

cities, Boston and New York, deferred construction

of major sewage treatment facilities for most of the

1980s.

More impressive have been increasesin expenditures at State and local level for operation and

maintenance, which climbed from $4.6 billion in

1980 to $6.8 billion in 1987.32 For many years, some

States have provided general fund appropriations or

bond funds for local wastewater improvements, but

local governments have paid the major share of costs

for sewage treatment facilities with Federal grants,

user fees, and general taxes. In 1987, user fees

accounted for between 40 and 70 percent of public

expenditures for wastewater treatment, depending

on the region.33

The potential to raise user fees to cover needed

capital investment (in addition to operating expenses) is problematic depending on economic

conditions of the community and State. Growing,

affluent districts will be able to increase fees, but

small towns and older cities with stable or declining

populations will find it hard to raise rates the

necessary 100 percent or more (see table 1-4). These

jurisdictions may not be able to support full capital

costs, even though wastewater charges are low

compared to those for other utilities.

Federal tax and regulatory policy has a major

impact on wastewater treatment. The tax reforms in

the 1980s discouraged private investment capital,

and new Federal regulations will require many

communities to upgrade their facilities. The benefits

of wastewater treatment improvements include the

health of the general public, the convenience and

well-being of individual users, and commercial and

industrial establishments, and protection of the

Nation’s water resources.

Problem areas: Small communities that cannot

benefit from economies of size and have low

per-capita incomes. Communities where Federal standards disallow natural water (water

sources in some regions contain more radon

than allowed by EPA, for example). Older

cities with obsolete pipes and facilities and

insufficient revenues to rebuild or begin preventive maintenance. Low level of technical

expertise of many operating personnel. Inadequate research into new technologies and limited access to existing advanced technologies.

Possibilities: Higher user fees. Regional planning and consolidation or sharing of facilities.

Federal or State funds targeted at specific

problem areas in the form of grants or lowinterest loans and technical support. Dedicated

Federal or State revenue support for capital

needs.

Municipal Solid Waste

Traditionally, the management of solid waste has

been the responsibility of local government, but the

private sector plays a major role in collection,

disposal, and operation of the Nation’s 6,000 municipal landfills, in operating incinerators, and in

processing recyclable materials. About two-thirds of

all solid waste management expenditures are made

by private firms, which recover costs through

charges. 34 However, during the 1980s State and

32-~Inc., op. d.. founotc 11.

33- op. Ck, footxnC 2s, p. 14.

3%tioMI COtmcil 00 FubIic W* Impfovancmt, op. cit., footnote 17, p. 78.
Chapter 1--Issues and Conclusions ● 25

t

i

local capital expenditures for solid waste more than

doubled, reaching almost $1 billion in 1987.35 Local

service is financed by local taxes and by disposal

fees, which have increased dramatically during the

last decade.36 Capital expenditures are usually

financed by bonds or through commercial loans.

The Federal Government does not finance solid

waste facilities with the exception of limited outlays

to rural areas. States have enforcement authority

over landfill compliance with Federal criteria, which

have become increasingly stringent since passage of

the Resource Conservation and Recovery Act in

1976 and its 1984 amendments. The requirements

have caused bitter struggles over siting and opening

new landfills and have forced existing ones to

close.37

●

●

Problem areas: Urban areas without accessible

landfill sites and small, rural communities that

cannot physically or financially meet Federal

criteria. Metropolitan areas where citizen opposition prevents siting of incinerators or

landfills. Lack of manufacturing capacity for

certain recycled materials, such as newsprint

and plastics, and small market demand for

some recycled products.

Possibilities: Federal, State, and local policies

to encourage waste reduction and recycling;

State support of regional cooperation to promote joint use of existing and new facilities;

adoption of known improvements in incineration and landfill technology; public education.

PRESERVING THE

ENVIRONMENT

Environmental problems represent an excruciating modern dilemma the need for better stewardship

of our air, water, and land resources has become

critical due to many of the very practices that have

helped our Nation grow and flourish. Land use and

transportation patterns that fostered economic development and personal mobility in the past now

embody environmental issues that will require

changes beyond our current ability to conceive in

industry operations and personal living and travel

habits. State and local officials in major urban and

high-growth areas understand that congested highways and airports, substandard air quality, and

inadequate solid waste and wastewater facilities

make them less attractive to business. However, the

changes needed to resolve the issues are so difficult

and far reaching that they cannot be understood,

developed, or implemented quickly, easily, or inexpensively.

Moreover, Federal policies and programs provide

few tools for State and local governments to use in

managing the interactions between transportation

modes and environmental media Both Congress and

the executive branch oversee individual environmental and transportation modes (e.g., air and water

quality, mass transit, highways, railroads) through

dozens of committees, separate Cabinet departments, and a score of separate agencies. (See chapter

2 for further discussion.) Competition for policy

support and revenue among these Federal agencies

and State and local governments is characteristic of

our governmental system; each industry interest

understands this competition well and pursues its

goals accordingly. Often the result is Federal programs that are ad hoc and haphazard.

Fragmented responsibility, strong opposing factions, and a focus on individual programs have led

to failure by the Federal Government to modernize

obsolete management of transportation and environmental programs. For example, an airport official in

a city with air pollution problems, who is seeking

Federal assistance with multimodal ground access,

would need to contact five separate Federal agencies. Local officials needing funding aid for wastewater treatment plants (like the mayor described in

box l-A) are frustrated by Federal agencies that

work at cross purposes. Air quality standards are

currently such potent forces in public policy and

transportation discussions in large cities from southern California to New England that regional curbs on

individual transportation choices long taken for

granted are under serious consideration. Protection

of ground water and transportation needs dominate

the public agenda for land-use planning and real

estate development in Florida. The scale of the

environmental agenda is daunting-just to maintain

current levels of compliance with environmental

standards will require additional local spending

I

21-667 - 90 - 2 : L?L 3
estimated at $15.8 billion annually by the year

2000.38 These local and regional issues are interrelated and so difficult that more comprehensive,

systems-oriented, Federal program management

and support will be needed if the problems are to

be resolved.

funding has been directed through categorical grants

to spur economic development as a way of meeting

special needs, but not much consideration was given

to the environmental consequences of the development. Specific groups, such as the unemployed or

farmers; or resource-poor regions, such as Appalachia, decayed urban cores, or the arid Southwest,

were targeted for Federal assistance. Beginning in

the 1960s, the Federal Government varied the

packaging for Federal funding, moving from tightly

structured categorical grants, through loosely bound

block grants, to lump-sum revenue sharing. Each

grant structure has its political and public-policy

trade-offs. State and local governments particularly

appreciated revenue sharing, as it gave them the

independence to use funds to meet their own

priorities.

Congress, however, appears to believe that political and policy goals are better served by categorical

grants. These grants permit the Federal Government

to target special goals such as highway construction,

or to require fair labor and safety practices and

environmental assessments, to cite only a few

examples, as a condition for receiving Federal

dollars. Categorical grant requirements can be important national policy tools, although they do add

costs to projects. Preserving them also enables

senior congressional members to continue to provide funds directly for specific, home district projects. These projects may or may not match the

priorities for funding set by groups established to

analyze system needs.39 For further discussion, see

chapter 2.

The wide variation in economic capabilities and

tax effort among States and local governments

virtually ensures that some districts, especially

small, rural communities, island territories,40 and

large, urban areas, will not have the necessary

resources to upgrade environmental services. Moreover, they have much more difficulty undertaking

economic development programs, because many

cannot afford to offer tax breaks or infrastructure

upgrades to attract a new business or industry.

Inflexible Federal grant conditions and standards are

a major frustration to State and local managers. A

requirement to remove from a water supply substances added to purify it in the first place is baffling

to local officials, and finding an acceptable alternative can be difficult.41 The Federal challenge is to

develop standards that consider local conditions

and health risks, that implement national public

health and safety goals, and that maintain accountability.

Government officials at every level find the lure

of economic development compelling, and local

growth has been the major driving force for most

public works infrastructure construction. Rural communities and economically distressed cities often

focus on attracting industry, overlooking the costs of

providing transportation infrastructure and environmental services to support new growth. Once these

costs are calculated, areas experiencing rapid growth

can levy impact fees on development to fund

infrastructure; officials in small communities and

large, older cities that are losing population do not

have that option.

However, even when funding is available, major

urban jurisdictions find that transportation decisions

have environmental impacts or constraints that limit

their options. Examples include the lack of available

land for constructing new highways or disposing of

solid waste in congested urban areas, noise problems

that hinder airport expansion and construction, and

traffic-related air quality problems.

Southern California’s preliminary air quality control plan, which proposes banning outdoor barbecuing and curtailing truck operations during rush hour

3~.so * ~MI Protectih July 1989), p. 2.

Wed H. Dicid, prcsidmt andchicf executive officer, Ingram Barge Lines, and member, Watcmay Users Board, pcmonal communication Oct. 18,

1989.

qarolyn Imamtnz “Building Foundau “ens: A Pacific Island Rrspcctive,” draft background paper prepared for the Pacific Basin Development

c-u?~1989* P. 1

41-_~f~ of CDVirOnmatal engineering, Hand University, personal communication, Sept. 13, 1989. Tbc SUJXWDCC in question is

chhx’k.
Chapter 1--Issues and Conclusions ● 27

,

I

,

or requiring them to operate at night, indicates the

steps local governments are contemplating to combat air pollution. Traffic congestion in the area is

acute almost around the clock; a one-way commute

on the freeways can take 2 hours on a bad day. Yet

many businesses in southern California, a rapidly

developing transportation hub, depend on truck

transport. A number of such companies find unacceptable the noise problems and costs of keeping

their loading facilities open at night to accommodate

deliveries. 42

In every jurisdiction facing air quality or equally

difficult and interrelated environmental and infrastructure issues, alternatives must be examined

closely and decisions reached through consultation

where possible and negotiation where necessary.

The process will inevitably be lengthy and excruciatingly difficult; one participant in the California

discussions compared the experience to being” . . .

strung up in wet clothes on a cold, windy day." 43

Transportation and environmental issues are interrelated in complex ways, and managing them

requires good information, careful planning and

budgeting, evaluating and monitoring impacts, and

the flexibility to devise alternative solutions as

unforeseen events unfold. Transportation, environmental, and land-use problems are all multifaceted,

and changes in one have major and complicated

impacts on the others. Yet few government programs, Federal, State, or local, support or lead to

systematic solutions that utilize the multimodal

transportation resources available and that are sufficiently sensitive to environmental impacts.

Traffic congestion, air quality, and water supply

problems do not respect local boundaries; they are

regional issues. Regional planning organizations

are the most logical institutions to address these

issues, but OTA found that such groups are

almost universally underfunded and lacking in

authority to prepare and implement plans tied to

capital budgets. Because of their institutional

weaknesses, regional planning agencies are highly

dependent on the talents of individual personnel and

have little political clout. (See chapters 3 and 4 for

further details.)

Photo credit: Thomas Burke

Downtown Los Angeles continues to grow, attracting new

businesses and revenue, compounding traffic congestion

and air quality problems, and highlighting the urban

difficulties that accompany weak regional planning.

Although planning agencies are able to generate

income by charging for some services, the revenue

is insufficient to allow them to maintain core staff

and support their technical and service capabilities.

However, many of the Federal programs that together funded the necessary overhead for regional

planning agencies have been eliminated, and only a

few States provide any substantial support. Cuts in

planning funds from Federal housing and environmental programs have left transportation monies as

the primary Federal underpinning for regional planning. Lack of Federal finding support for environmental planning is a major concern, and new

Federal regulations have escalated the need for

good planning. Regional agencies have demonstrated some aptitude and success in this area. For

example, in 1988, Maricopa County, Arizona,

adopted a new air pollution control plan, and since

then the State legislature has adopted four of the five

priority recommendations of the Maricopa Association of Governments’ plan.44 Because of local

government revenue shortages and their reluctance to share planning, decisionmaking, and

budgetary powers with neighboring jurisdictions, Federal and State government leadership
and perhaps funding will be necessary if regional

planning activities are to be effective.

In most areas of environmental infrastructure and

many in transportation, the Federal role is primarily

that of regulator. Federal enforcement powers and

shrinking Federal program funds place strong conflicting pressures on State and local public works

providers. While these officials understand the need

to meet Federal health and safety standards, many

lack the technical expertise and management tools

for collecting data to assess needs, develop plans,

and choose appropriate technologies to meet Federal

requirements. These problems exacerbate the difficulties of making cost-effective decisions.

Advanced technologies can provide some relief

for a variety of environmental problems, including

air pollution caused by traffic congestion in urban

areas.

45 Technological and management alternatives

to new construction can increase the capacity of

existing highways. However, all the new technologies now under development will not eliminate

the need for more effective land-use planning and

personnel trained to use, operate, and maintain

available equipment and facilities. Investment in

better management tools could enable local governments to link comprehensive land-use plans to

capital improvement programs and to affect demand

by pricing services according to costs. More flexibility in Federal grants will be necessary for jurisdictions to use such monies to support investment in

upgraded management tools and personnel trained

to use them.

CONCLUSIONS

If owners of highways, transit, and water treatment systems could charge tolls and fees high

enough to cover full capital and operating costs and

make a profit besides, transit systems would be as

sought after as are airlines, and investors would find

toll highways and water treatment facilities as good

an investment as the gas company. But this is not the

case; to make a profit and meet Federal standards,

owners would have to set charges and fees so high

as to be politically unpalatable and a hardship for

many. Although their economic, social, and health

benefits are indisputable, most public works services

that are the responsibilities of local governments are

not sufficiently lucrative to be attractive to private

investors. Accordingly, Federal, State, and local

governments are likely to continue to subsidize most

roads, ports, airports, public transit, and environmental services, such as wastewater treatment

plants, with public tax dollars. All levels of government will inevitably have to raise taxes or fees to

cover their costs, however--or they will have to

eliminate or reduce programs and services.

OTA found widespread agreement on the need

to maintain and upgrade public works and to

increase support for infrastructure. Yet for the

foreseeable future, Federal spending will probably

focus on social programs, such as Medicare; on

defense (although this is likely to decline slowly);

and on servicing the national debt. Consequently,

State and local governments must continue to

finance a larger share of their public works needs

with their own revenues-general and dedicated

taxes, fees, and benefit charges-and where feasible,

with private sector partners. Each of the revenue

sources has political, fiscal, and policy trade-offs

(summarized in table 1-8).

Because property taxes have reached levels that

burden low- or fixed-income homeowners in many

areas, State and local governments need to give

serious consideration to other broad-based income

possibilities. OTA finds that benefit charges and

earmarked taxes have proven to be relatively

reliable and politically acceptable revenue

sources. Many State and local governments have

successfully increased the levels of these charges

and taxes for specified, top-priority public works

projects. However, approval at the ballot box does

not come easily, and funding programs often must be

submitted to the voters more than once. Strong and

committed political and community leadership,

persistence, and a good public information program are key ingredients for success in efforts to

increase State and local revenues (see chapters 3

and 4 for examples).

When the State or locality has made a clear

connection between the benefits and the tax or user

charge, as is easy to do with fuel taxes and surface

transportation improvements, voters are much more

likely to approve a finding package. Because the

Federal Government provides approximately 24

4W.S. Congrc.s Office of Tcchnoiog.y Asscssmcn& op. cit., footnote 23.

.-.
Chapter 1--Issues and Conclusions ● 29

Table 1-8--Major Infrastructure Financing Mechanisms: Advantages and Disadvantages

Advantages Disadvantages

General fund appropriation . .

General obligation bonds . . . .

Revenue bonds . . . . . . . . . . . .

State gas tax . . . . . . . . . . . . . .

Other dedicated taxes . . . . . .

State revolving funds . . . . . . .

pendence in project selection

Fiscal: debt service requirements provide incentives for charging full cost for services; loans can

leverage other sources of funds; loan repayments provide capital for new loans

SOURCE: Offioa of Toohnobgy kseasment, 1990.

percent of total national highway expenditures,46

raising the Federal fuel taxes could provide funds for

a major boost to transportation infrastructure. Increases in the taxes are less likely to encounter

opposition from large and powerful transport and

construction industry interests if the revenues are

targeted for transportation improvements.

The long history of substantial intergovernmental

cost-sharing for transportation contrasted to the

present uncertainties over funding for environmental

infrastructure highlights the importance of consistent Federal support (see table 1-9). While officials

are disenchanted with the snail’s pace of expenditures from the airport and highway trust funds, none

deny that without these funds, our transportation

network would be in even worse condition.

In contrast, chances are good that finding difficulties will force a number of local jurisdictions to

seek waivers or be unable to meet the costs of

compliance with Federal environmental standards

unless additional assistance is forthcoming. The

needs for environmental services in communities

across the country are huge; a stable Federal revenue

source would provide assistance to State and local

governments struggling with environmental issues

that often extend beyond jurisdictional boundaries.

OTA concludes that a strong case can be made for

a dedicated source of revenue to bolster local

environmental program funding. This is especially important for the Federal Government to

consider if it wishes localities to meet its timetable

for compliance with newly enacted standards. A

portion of the monies could be used for enhancing

EPA’s technical capabilities, but the bulk is needed

for States to use to provide financial and technical

assistance to local jurisdictions.

*FH~g&q Administration, op. cit., footnote 14, p. 4.
J

Table 1-9--Current Sources of Capital for Local Public Works

Sources of revenue-relative share is indicated by one, two, or three stars (*), with three stars (***) signifying the largest.

e

* *f

* * *

*

* **

*

* **

* * *

*

*

*

* *

*

*

*

*

i

* ** *

* **

* * * *

* * *

*

SOURCE: Offb of Ttinobgy

1

I

Attractive though they may be, benefit charges

and private sector strategies frequently are not

workable for low-growth districts or small, rural

communities where investment of private capital is

unlikely to pay off, credit costs are high, and

residents have limited ability to pay higher user fees.

In many of these communities, the major issue is

how to maintain existing levels of services, much

less improve them to Federal standards.

Moreover, user fees and benefit charges have

socioeconomic trade-offs that pose complex practical and public policy issues. These include equity

and administrative issues, and revenue reliability in

the case of an economic slowdown, a political

backlash, or real hardship. The fairness of requiring

a new resident to pay up front for infrastructure

through higher land prices compared to long-time

residents who paid gradually through property taxes

is one issue. Setting and administering fees so they

are not an excessive burden on the poor, determining

accurately the full costs of public services and

allocating costs among direct and indirect beneficiaries pose other complex problems. Services like

public transportation and wastewater treatment also

benefit people who do not use them directly, making

it unfair to depend solely on user fees and requiring

hardy political leadership to raise taxes for them.

Removing fiscal and land-use decisions from the

political process by establishing independent special

financing districts is a further concern. OTA concludes that while issues related to benefit charges

are difficult, they are not without solutions.

Before embracing user fees as a major means of

public works financing, decisionmakers will

want to weigh and address each choice carefully.

Finally, OTA’s research for this document indicates that State and local public works problems

could be eased significantly if the Federal Government developed and implemented a national transportation policy and restructured transportation and

environmental program management including

congressional oversight.

Despite the interrelated nature of public works

infrastructure, Federal-State-local relationships are

strongly tied to existing programs that limit the

potential for integration across infrastructure functions. For example, Federal subsidies for each of the

transportation modes are so different, and industry
Chapter 1--Issues and Conclusions ● 31

and congressional turf battles so vigorous, that

making rational plans and decisions about the best

use of our Nation’s multimodal transportation system is virtually impossible. State and local governments must put together infrastructure improvement

programs in a manner currently distorted by outdated Federal program management and conflicting

tax policies. Local governments in small towns need

technical assistance so that they can determine the

most suitable type of wastewater treatment or solid

waste disposal facility for meeting both EPA standards and their budget requirements. Current Federal regulations and management of environmental

programs do not allow for this flexibility.

Given the current Federal and intergovernmental

framework, it is unrealistic to expect that States will

fired and administer transportation and environmental programs in a comprehensive and systematic

manner. Local governments are burdened with

difficult public works-related problems, most of

which extend beyond their borders and affect the

surrounding region as well. Moreover, regional

difficulties often do not end at a State boundary. It

is time for the Federal and State Governments to

acknowledge these broader aspects of public

works and to create a coherent, supportive

management framework that includes adequate

financing.

Photo credit: U.S. Department of Housing and Urban Development

Lower income families’ ability to pay must be considered in

setting higher user fees.
Chapter 2

The Intergovernmental Framework
●

. .

. .

CONTENTS

PUBLIC SERVICES-WHO PAID FOR WHAT AND HOW . . . . . . . . . . . . . . . . . . . . . . .

The Depression **** .. b*. *.. ***. ***** *.*. *.** ***** ***. ***. .*. **a* *.** ***.  0** *

Public Sector Expansion After World War II ... ** *. .*. .*** *b*. . b*..******..***

Federal Grant Structure--Shifting Sands ..e. .*. ... .*** **. ... ... ***, ..*. o.**.**,.*

PUBLIC WORKS FUNDING AS THE 1990s BEGIN . . . . 0 . 4 ,0 . . . . . . . . . . . . . . . . . . . . . .

FEDERAL REGULATORY POLICIES .O. ***. ... * * D . * . . . * . . + . * . * . . . . . . + . . . . . . . . . . .

Protecting the Environment . . . . . . . . ● .* . . . . *. . . ● , ● . ● . . . . . ● . . . . *. . . ● . ● ● . ● . ● . ● . ** ● . .

Solid Waste ... ... .**. . ..*. ..*. ..o. ..o*. ..** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Transportation and Mobility ... . . . * . . * * . . . . * . . * * * . * * * * * * . * . * . . * * * * . . * * * .**.**...

INDUSTRY Perspective ..** **. *.. ..** ... **. .*. **.0**.*.*****....*.*.....****.*

INTERGOVERNMENTAL ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Federal Fiscal Policies ... .*. *.o. ..*. .*. *.. ..*. .*o*. ..*o*. ... *.*. ..** ... o.e. *.. o

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CONCLUSIONS .e. *.. .*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35

36

37

38

40

41

43

45

46

48

49

49

52

52

2-1. Deficient Bridges and Interstate Miles on the Federal Aid System, 1988 . . . . . . . . . 37

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

2-3. Federal Grants to State and Local Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

2-4. Federal Infrastructure Expenditures, 1980-88 . .**...-*****.*..*.*,**.,*...,***. 42

.

I

.,
— —.

Chapter 2

The Intergovernmental Framework

The changing fiscal fortunes of the national government now stand out as the single most

important factor reshaping relations between Washington and the 50 State-1ocal systems. It

has transformed the expansive Great Society Federalism of the 1960s into the fairly austere

and competitive fend-for-yourselffederalism of the 1980s.1

Financing for public works, a major factor in how

States and localities manage these services, is

profoundly affected by Federal policies. For many

years, Federal funds have been an indispensable part

of the capital financing packages for ports, waterways, highways, and bridges, and more recently for

transit systems, airports, and wastewater treatment

and water supply plants in every State and most

jurisdictions in the United States. Federal tax policy

affects the cost of capital for State and local projects,

Federal regulations determine performance and

design standards for public works facilities, and

Federal grant conditions influence how the planning

and construction are carried out.

Although the Constitution provides the basis for

a Federal role in public works services, which are

fundamentally State or local in nature (see table 2-l),

it does not draw clear lines between Federal responsibilities and those of States and localities. Because

of these interdependent relationships, States and

localities have had to readjust their own public

works management continuously, as national economic conditions and Federal policies have changed

over the years. During the past decade, shifts in

national priorities and severe budget constraints

have curtailed Federal spending for public works,

left large unspent balances (see table 2-2) in

user-funded transportation trust funds, and placed

more responsibility on State governments to increase local spending on public works improvements. As if this fiscal upheaval were not enough,

environmental concerns have also prompted more

stringent Federal mandates and standards for public

health-related facilities, and much of the transportation infrastructure has been found to need extensive

repair or renewal. (See figures 2-1 and 2-2.)

The realignment in governmental roles that has

resulted has been both wrenching and painful. State

and local governments confront huge, unexpected

funding requirements for public works services and,

although they have increased spending, have not

been able to put funding packages together fast

enough to meet infrastructure needs. Although

Congress has acted to cut back Federal funding,

members are unwilling to relinquish totally their

right to allocate funds for local programs. Strong

Federal-local partnerships forged during the 1960s

and 1970s have been weakened somewhat, to the

distress of local officials who often feel ignored by

State administrations and prefer to maintain a direct

link to Washington.2

Thus, tensions are high among State officials over

the reduced levels of Federal program funding and

their increased responsibilities, while local governments--large cities and counties and small rural

communities, alike--fight to keep their Federal

connections in addition to developing new ties to

their State governments. How to ensure adequate

investment in public works for long-term maintenance, repair, rehabilitation, as well as new construction, in such a contentious climate involves

crucial and difficult intergovernmental issues.

PUBLIC SERVICES—WHO PAID

FOR WHAT AND HOW

Until about 1900, local governments were the

dominant providers of all governmental services,

including public works-except for waterways,

which have always been constructed, operated, and

maintained by the Federal Government. Local governments accounted for 71 percent of total general

government expenditures, with Federal spending

representing 18 percent of the total, and States

providing the remaining 11 percent.3 Almost all

Federal revenue came from consumption taxes; in

contrast, over 50 percent of State revenue came from

IJotm sh~~, former ex~utivc director, Adviso~ Commission on Intcrgovermnental Relations, as quoted iII NOrTXNM Bcckm~. “wvclopmmt:

in Federal-State Rclati~” KY: ‘ltIc Council of State Governm ems, 1989), p. 438.

2JOhII Gunyou, city f~ offlccr, Minneapolis, MN, in U.S. Congres, Offlee of Technology Assessment, ‘%anscnpt of Proceedings — Stat

Snd bcal Infrestructure Management and Financing Workshop,” Jdy 7, 1989, p. 189.

3J0 ~~~ ~

and John L. Hilley, (Washington, DC: The Brookings Institution, 1986), pp. 

-3s-

—.
Table 2-1--Public Works Spending by Level of Government (in percent)

Table 2-2--Federal Public Works Trust Fund

Summary, 1988 (dollars in millions)

and by 1927 income taxes accounted for 64 percent

of Federal tax revenue.

Trust Fund Revenues Outlays (end of year)

property taxes, as did 90 percent of local revenues.

Early in this century, beginning an emphasis still

important today, Federal funds were provided to

assist developing rural and agricultural areas, where

revenue sources were scarce. For example, the

Bureau of Reclamation was established in 1902 to

encourage agricultural expansion, and the Rural Post

Roads Act of 1916 funded roads across sparsely

settled Western States. Although needs have long

since changed, the influence of these policies still

lingers.

Spending by all levels of government grew

rapidly through the 1920s. Although the relative

shares provided by each governmental level remained about the same, the structure and composition of taxes changed markedly. For example, in

1902, revenue from income taxation was so small

that government records did not tabulate it separately. However, by 1920 the Federal Government

levied taxes on both personal and corporate income,

Recovering from diminished prestige and authority after the Civil War and Reconstruction, State

governments slowly began to expand their support

for public works in the first three decades of the 20th

century. Although still not major players, States

increased their revenues during the 1920s by introducing personal income taxes.4 By 1930, 16 States

taxed individual incomes; 17 taxed corporate incomes.

5 Relinquishing property taxes as a revenue

source to local governments, States gradually introduced excise taxes on motor fuels and cigarettes.

Local governments continued to rely solely on the

property tax, their primary source of income to this

day.

The Depression dramatically altered the FederalState-local relationship, ultimately expanding the

Federal role. Property values and tax revenue

plummeted, depriving local governments, the steady

providers of public services, of their major source of

income. They could not borrow, because banks had

gone out of business, and eventually simply ran out

of money.6 Because State governments did not have

the resources or the programs to help, the Federal

Government stepped in, beginning with emergency

programs. Eventually, an extensive system of Federal public assistance grants and other support

programs developed. Although some of these were

entirely federally funded, many required a State

match.

41bid, p. 17.

sA&* commission on hkrgmmmmtal Relations, 19S9 cd., vol. 1 (Washingtm, DC: January

19s9), p. 114.

6Arcmstm and Hilky, op. CIL, footnote 3, p. 18.
Chapter 2—The Intergovernmental Framework ● 37

Figure 2-1--Deficient Bridges and Interstate Miles on the Federal Aid System, 1988

l_-

To muster additional revenue during the Depression years, States expanded their use of general sales

and other selected taxes. Between 1931 and 1938,24

States introduced general sales taxes, and 29 States

put excise taxes on liquor.7 During this period, some

political scientists criticized State governments as

obsolete and called for scrapping them, except as

administrative centers for the Federal Government.8

They cited the inability of the States to deal with the

broad economic problems of the Depression and the

inefficiency of providing programs and services on

a State by State basis.

State and local spending declined during World

War II but rebounded during the immediate postwar

era, as governments turned to addressing deferred

public works needs. For a while, the fiscal climate

was good; revenues were adequate because property

values increased, and interest rates hit new lows.9

From 1950 to the mid-1970s, State and local

spending grew rapidly; expenditures increased from

$30.7 billion in 1954 to $108.8 billion by 1975.10

During 2 years (1965-67) of the Johnson administration, Congress increased the number of Federal grant

programs from 221 to 379, expanding social and

health programs to address major societal problems.ll

The enlarged Federal presence reignited debate

over the role and structure of State governments. In

1955, a Federal study by the Kestnbaum Commission recommended major reforms in State government, including revising State constitutions and

reorganizing legislatures and procedures. The Commission found that State Governors’ authority was

undermined by numerous independent agencies and

boards, the election of many administrative officers,

and weak executive influence over budgets. In

addition, State legislatures had restricted their own

powers by enacting limits on their ability to tax and

borrow and by earmarking revenue.

 cm op. cit., footnote 5, pp. 114-115.

 op. cit., footnote 3, p. 18.

 19.

 p. 21.

 p. 72.
Figure 2-2--Wastewater Treatment Facility Needs, 1988

1

During the next two decades, most States revised

and legislative procedures to strengthen the execu- Traditionally, most Federal grants and aid have tive authority. In 1981, the Advisory Commission on been for specific categories of projects as defined by Intergovernmental Relations, a permanent agency Federal legislation, such as the construction of

established as a successor to the Kestnbaum Com- airports, transit systems, dams, locks, or highways.

mission, reported that as a result of the reforms, most States and localities serve as conduits for Federal

States had improved their government systems. 12 funds targeted at these categories, and projects must
Chapter 2—The Intergovernmental Framework ● 39

By funding projects such as construction of local roads, the Federal Government provided both employment and transportation

improvements during the Depression.

comply with many conditions and regulations,

including matching funds, to be eligible for grants.

Congress finds categorical grants attractive because they permit channeling Federal funds to home

district projects, allow close control over the use of

Federal funds, and minimize State government

interference. 13 In contrast, State and local governments view categorical grant requirements as narrow, restrictive, and hard to adapt to specific needs.

While some grant requirements are specific to a

particular program, most are general and apply to all

Federal construction grants. Among those that have

the greatest impact on State and local government

public works projects are requirements to:

● conduct an environmental impact study prior to

project construction,

●

●

●

●

pay construction workers the “prevailing

wages” in the area,

provide opportunities for citizen participation,

provide relocation assistance for people and

businesses displaced by projects, and

initiate intergovernmental consultation concerning project planning.

In the 1960s and 1970s, however, the structure of

some Federal grants to State and local governments

changed.

Block Grants

In response to criticisms of categorical grants

during the 1960s, Congress consolidated some of

them into block grants, dedicating these to broad,

public purposes, such as the revitalization of cities,

which included public works projects. Some block
programs--Urban Development Action Grants, for

example-were established specifically to enhance

the autonomy of local governments, bypassing the

States and providing funds directly to local projects.

Block grants generally did not require matching

funds and, instead, were allocated by formulas based

on measures of need. They gave project selection

and administrative responsibility to the local district

or the State, although they retained many of the

restrictions of categorical grants.14

Block grants continued during the 1970s, but

Federal review and oversight increased, as Congress

sought to ensure that all State and local projects meet

a variety of policy objectives, such as transportation

and environmental planning, environmental impact

assessment, equal employment opportunity, or requirements to “Buy America.” .

Revenue Sharing

In another attempt to support local needs with less

Federal interference, the Nixon administration introduced revenue sharing in 1972. The program allocated unrestricted Federal funds to States and

localities without a match requirement. The funds

could be used for any type of government program

or project and were distributed by formulas designed

to reflect population, local tax effort, and State

wealth, and were intended to funnel more Federal

funds to poor, heavily taxed States than to richer

States. (For a comparison of the Federal dollars per

capita received by each State and the amount

returned through taxes, see appendix A.)

Although block grants and revenue sharing

played an important role in Federal policy from 1960

to the 1980s and funded many local infrastructure

projects, they did not have strong congressional

support and did not grow as rapidly as categorical

grants. Moreover, broad-based grant programs lack

the influential industry support groups, such as the

railroad, highway, and aviation lobbies, that categorical grants and trust fund programs enjoy. These

factors took their toll; block grants and revenue

sharing, which amounted to 27 percent of all Federal

grants in 1979, declined to 21 percent in 1983.15

Revenue sharing with the States was cut off in 1980

and ended for cities in 1986, as part of the Reagan

administration’s policies of shifting local program

costs to the States and establishing the concept of

user-supported trust funds as the basic Federal

revenue supply for infrastructure.

The Reagan administration briefly revitalized the

block grant concept during the early 1980s by

consolidating additional categorical grants, and

several of the block grants persist. However, most

Federal grants are once again categorical, continuing

to focus p -ly on new construction, despite

major rehabilitation and maintenance deficits, and

retaining elements of their initial underlying Federal

goals, regardless of the relevance to current needs

and conditions.

Pursuing its goal of reduced Federal domestic

spending, the Reagan administration successfully

reversed the growth trend in Federal grants to State

and local governments (see table 2-3). Between

1980 and 1989, Federal grants to State and local

governments for all programs, excluding payments

to individuals, dropped from $68 billion to $42

billion, when adjusted for inflation.l6

PUBLIC WORKS FUNDING

AS THE 1990s BEGIN

The share of Federal, State, and local government

budgets devoted to public works dropped from 12

percent to below 7 percent between 1960 and 1987,17

and capital investment decreased markedly, relative

to the gross national product (GNP) (see figure 2-3).

During the 1980s, annual capital expenditures in

adjusted dollars stayed relatively flat, fluctuating

between $40 billion and $50 billion annually-well

below the pace of national economic growth.18 State

and local governments substantially increased revenue-raising efforts, permitting outlays for maintenance and operations to keep pace with GNP.

However, when adjusted for inflation, total Federal

spending for public works, capital, maintenance, and

operations dropped from $37 billion to $29 billion

between 1980 and 1988. (See table 2-4, part B.)

The decreased share of public spending allocated

to infrastructure reflects a shift in national priorities

14~id

l%id, p. W.

Wff@ of Maml&=nt and Budget, B@et qfthc hiStiCd tablq pp. 128 and 130.

17- Rc9ea@ Inc., database derived from Us. Dcpalunult of canma’w, Bureau of the Censu& and Office of Mana&mcnt and Budget.

l%id
Table 2-3--Federal Grants to State and Local

Governments (adjusted 1982 dollars, in billions)

Year Amount

that has brought significantly higher governmental

expenditures for social programs. Currently, State

and local governments spend 29 percent of their

Federal grant monies on health care, a dramatic rise

from 3 percent in 1960. In comparison, 15 percent of

current Federal grant funds are directed to transportation compared to 43 percent in 1960.19

Even though Federal public works expenditures,

when adjusted for inflation, have decreased during

the 1980s, Federal grants are crucial to State and

local governments, financing 40 to 50 percent of

their annual capital spending (see figure 2-4). The

share of Federal funds spent on transportation has

grown significantly compared to water supply and

wastewater treatment programs, thanks primarily to

constant replenishment of the highway, aviation,

and inland waterway user-supported trust funds. In

1980, 80 percent of Federal infrastructure outlays

were directed to transportation programs, and 20

percent to water and water treatment projects. In

1988, transportation’s share was 90 percent with 10

percent going to water projects (see table 2-4). The

60 percent reduction in adjusted Federal spending

for wastewater treatment from $6 billion in 1980 to

$2.4 billion in 1988, reflects Federal policy, established with the Clean Water Act of 1972, to provide

construction grants for wastewater treatment plants

temporarily as abridge to local self-sufficiency. The

phasing out of Federal investment in water supply,

while never large, conforms with the traditional

convention of local responsibility for water supply.

FEDERAL REGULATORY

POLICIES

Through its regulatory standard-setting powers,

the Federal Government has a major impact on State

Figure 2-3-Public Works Spending as Percent of

Gross National Product

, Percent — I

60

50

40

30

20

10

0

60 63 65 67 69 71 73 75 77 79 81 83 85 87

Fiscal years

SOURCE: Office of Technology Assessment, 1990, based on information

provided by Apogee Research, Inc.

and local public works projects. Congress, with its

legislative and oversight responsibilities, and the

executive branch, primarily the Department of

Transportation (DOT) and the Environmental Protection Agency (EPA), Meet virtually every aspect

of State and local transportation and environmental

public works activities. State and local officials

consulted by OTA for this study did not question the

necessity for Federal regulations governing environmental quality and protecting public health and

 of Budget, op. ciL, footnote pp. 248.
. . . . . .

w. . . . . . . . . . . . . . . . . . . . . . .% . . . . . . . . . . . . . . . . %3
Chapter 2—The Intergovernmental Framework ● 4 3

safety. However, they criticized the unfunded regulatory mandates written into recent legislation and

the requirements attached to categorical grants,

which, they maintain, create planning, administrative, and financing problems. (For further discussion, see chapters 3 and 4.) Moreover, while they

welcome Federal financial aid and reject suggestions to eliminate the transportation trust funds,

many chafe at grant requirements, which they view

as encroachments on their governmental sovereignty, and at large, unexpended trust fund balances.

These intergovernmental issues have their roots in

the compromises hammered out between Congress

and the executive branch as they established, and

continue to change, the responsibilities of the

Federal agencies over the years.

of the National Environmental Protection

Act of 1%9 marked the start of a tempering of the

Federal commitment to developing natural resources for economic purposes-a process that has

been evolving over the past three decades. In a recent

example, the Clean Water Act Amendments of 1987

strengthened the commitment to environmental

protection, expanding Federal jurisdiction to include

any body of water in or affecting the commerce

chain, with the intent of extending regulation of

navigable waters to include wetlands. Such legislation reinforces the tensions between the goals of

economic development and environmental quality. These laws form a major intersecting point

for Federal, State, and local transportation and

environmental public works programs.

EPA is the Federal agency that has the largest

impact on public works services related to the

environment and public health. The Agency was

created in 1970 by an executive reorganization

order20 that brought together functional branches of

the Departments of Agriculture; Interior; and

Health, Education and Welfare; the Atomic Energy

Commission; and the Council on Environmental

Quality. However, the order did not include an

official mandate. Caught between industry advocates and environmental activists, the Agency has

struggled, with little success, since its inception with

the need to make its programs reflect the interrelated

nature of environmental problems. Federal environmental policies continue to target individual environmental media—air, water, and land-even

though pollution control in one medium may have an

adverse effect on another. This”. . . single medium

approach is set up like concrete in the practical

day-today administrative operations of EPA. . ."21

and is further reflected in congressional committee

structure.

State environmental departments tend to mirror

this media-related approach, leaving local governments, which must resolve and pay for pollution

problems-including those resulting from crossmedia pollution-without adequate planning and

technical support. As just one example, requirements to control air pollutants at wastewater treatment facilities could create acidic conditions that

would turn the concrete facilities to gypsum.22 The

history of Federal legislation highlights the fragmented framework in which local public works

directors operate.

 No, 3 of 

Thomas, “A Systems Approach: Challenge for EPA,” p. 21.

 P. of technical “ Valley, CA, June 7, 1989,

i
Water Supply23

In the late 1960s and early 1970s, growing

concern over the purity of the Nation’s drinking

water prompted Congress to pass the Safe Drinking

Water Act of 197424 as an amendment to the Public

Health Service Act. The Act and its amendments

require EPA to set standards for drinking water

quality; the States are to enforce them. All public

water supply systems--whether publicly or privately owned—are subject to the mandate.

Dissatisfied with EPA’s implementation of the

1974 Act and faced with the threat of suits by

environmental advocates, Congress enacted the Safe

Drinking Water Act Amendments of 198625 to

simplify the EPA regulatory process, stiffen the

requirements, and accelerate the pace for EPA to

establish and implement new National Primary

Drinking Water Regulations. Congress specified 83

contaminants for which EPA was required to promulgate regulations by June 1989, and required that 25

contaminants be added to the list every 3 years. The

1986 Amendments also authorized continued, but

relatively small, grants to States and localities, as

well as new Federal assistance intended to help

small systems monitor for unregulated contaminants

and install disinfection equipment.

Wastewater Treatment26

With the Federal Water Pollution Control Act

(Clean Water Act) of 1972,27 the Federal Government shouldered some of the responsibility for

controlling water pollution for the first time. The Act

required EPA to promulgate nationwide minimum

standards for municipal and industrial wastewater

treatment and authorized a marked increase in

Federal funding. The Federal matching rate for local.

wastewater treatment construction costs grew from

50 to 75 percent, and annual construction grant

appropriations rose five-fold between 1972 and

1977. From 1973 to 1988 Congress granted over $50

billion to municipalities.28

The grants were not intended to be permanent, but

rather as a bridge to help the localities toward

self-sufficiency. Amendments in 1977, 1978, and

1981 created more stringent rules for governing

toxic pollutants in wastewater, and Congress simultaneously began returning to States and localities the

responsibility for water quality costs. The most

dramatic shift was signaled by the 1987 Clean Water

Act Amendments,29 which required that the municipal construction grants program be phased out by

1991 and replaced by capitalization grants for State

Revolving Funds. In 1994, all Federal aid to States

and localities for wastewater treatment facility

construction will end.

Clean Air30

By the 1950s, Congress had recognized that the

itinerant nature of air pollution rendered efforts at

State control insufficient, and in 1963 Congress

passed the first Clean Air Act.31 Amendments

passed in 196732 enabled the Federal Government to

set emission control standards in areas especially

troubled by pollution and exercise limited enforcement powers. Amendments in 197033 authorized the

newly founded EPA to establish minimum air

quality standards, specified deadlines for action, and

empowered the Agency to take over if a State failed

to meet the deadline.

~MM~ Safe ~“ g WatcrActandthc 1986 Amcndmuttsisbascd on Apogee Research, Inc. and Wate Miller Associat~ Inc., “Problems

in F~ing ad Managing Smalkr Public Works,” Report to the NAonal Council on Public Works Improvement, Sept. 10, 1987, pp. 5941; Sidney

M. Books, 1988); and J. Gordon Arbuckk

et al., (Rockvilk, MD: Government histi~ Inc., 1987).

%lblic Law 93-523,88 stat. 1660.

~~fic Law 99339, 100 stat. 642.

~-don Wastewater ueatment legislation is based on Claudia Copchmd, Congmssiod R- &mice, “Federal Ass&an cc for Wam and

%vvu Systcxm%” backgmmd bricfingpapcrm for Senate Agriculture Committee, Feb. ~ 198% Arbuckle et al., op. cit., footnote 23; and Wolf,

op. cit., footnote 23.

%lbIic Law 92-s00, 86 stat. 816.

~op. ci~* f~26, p. 2.

Wllblic Law 1004,101 stat. 7.

%fataial on ckut air kgidation is bad a Afbuckk et al., op. ciL, fooatotc 23, and wolf, q. cit., footnote 23.

31~~ ~~ gg.~, 77 s-

%lbtiC hW 90148,81 Stat. 485.

-tiC hW 91-604,84 Stat. 1676.
Chapter 2—The Intergovernmental Framework ● 45

Photo credit: Department of 

Special lanes for high occupancy vehicles (HOV), such as the center lanes pictured above, are one way States can demonstrate a

commitment to enforcing the Clean Air Act.

Despite these legislative efforts, the control of

some major pollutants, most notably ozone, has

failed. With the Clean Air Act Amendments of

1977,34 Congress strengthened EPA’s enforcement

powers, limited its discretion to authorize waivers to

nonattainment regions, and imposed new and tighter

State planning requirements. Should a State fail to

submit an acceptable clean air implementation plan,

EPA may cut off Federal funds for highway and

sewage treatment facility construction and air quality control programs. EPA can waive sanctions and

penalties if it determines that a State is making a

good faith compliance effort, lessening the burden

on States and localities. Congress is expected to

reauthorize the Clean Air Act in 1990 and is likely

to include provisions calling for additional controls

on mobile pollution sources, such as automobiles,

trucks, and buses. Most States and localities may be

responsible for major changes in their urban transportation patterns as a result.

Solid 

Congress enacted the Solid Waste Disposal Act in

1965, 35 the first Federal legislation to deal directly

with solid waste disposal. The goal was to create a

national research and development program to

determine better solid waste disposal methods.36

Today, the main piece of Federal legislation governing State management of solid waste is Subtitle D of

the Resource Conservation and Recovery Act

(RCRA) of 1976.37 RCRA was intended to improve

municipal and industrial waste management by

discouraging landfill disposal and encouraging resource recovery technologies.38 The Act confers

most of the planning and regulatory responsibility

for the disposal of solid waste on the States and

provides some financial assistance to rural commu-

 79 

 of Facing OTA-()-424 DC:

U.S. Government Printing Office, October 1989), 348,
,

(

J

I

i

I

I

I

1

1

I

nities. The Hazardous and Solid Waste Amendments

of 198439 target hazardous waste management,

encourage compliance of State solid waste plans

with Federal guidelines, and give EPA the authority

to takeover the management of a State’s solid waste

management plan if implementation efforts are

unacceptable. 40

Transportation laws developed historically to

address specific defense and economic development

needs as each succeeding mode of transportation—

water, rail, highway, and air--emerged. Federa l

programs and congressional committee structure

retain much of this special purpose and modal

orientation, despite creation of the Department of

Transportation. DOT was formed to". . . coordinate

the executive functions of our transportation agencies in a single, coherent instrument of government

. . . [to] strengthen the national economy as a

whole.’** DOT ultimately came to house organizations that had been independent (e.g., the Federal

Aviation Agency) as well as those previously a part

of other departments (e.g., the Urban Mass

Transportation Administration).

From DOT's inception, Congress has favored the

modal emphasis inherent in the Agency’s original

structure, an approach supported by strong industry

interest groups. These powerful forces have so far

stymied development of policies that would permit

implementation of a national transportation system

in which the modes work in a complementary

manner. This problem has not gone unrecognized by

the Federal Government. A congressional report in

1977 pointed out that”. . . the fragmentation of the

laws which define national transportation goals . . .

have dramatic impacts in conflicts between the

major promotional agencies within DOT. . . each

program proceeds more or less independently-with

predictable inefficient and counter-productive resuits."42 The Secretary of Transportation, Samuel

Skinner, is expected to unveil a strategic plan for

transportation early in 1990 that will attempt once

again to address these issues.

State DOTs by and large reflect the Federal modal

organization and place a particular emphasis on

highways. The lack of Federal and State support for

a systems approach to transportation creates special

difficulties for local officials, who need technical

and funding assistance to facilitate the intermodal

transfers for people and goods that are an integral

part of any healthy economy. An airport executive,

for example, asserted that he could find no where to

go in DOT to seek help for the ground access

problems his facility has.43 Legislative history

shows the grip of the different modes on even

present-day programs.

Highways 44

The Rural Post Roads Act of 191645 marked the

Federal Government’s first foray into Federal highway aid. The Federal commitment to the Nation’s

highways deepened and broadened with the creation

in 1941 of the Interstate and Defense Highway

System, and in 1956 of the Highway Trust Fund,46

which provided a dedicated source of funding.

Through the 1960s, the Federal Government continued to bear a large portion of highway capital costs,

but left operations and maintenance costs to the

States and localities.

In 1976, Congress enacted legislation making

some maintenance costs, as well as construction

costs for highways, roads, and bridges, eligible for

Federal funding. The new funds carried conditions,

and new conditions have been added during several

annual appropriations processes. These include Federal constraints on States’ rights to define road rules,

%lbtiC Law 98-616,98 Stat. 3221.

-ffkz of Tcc&ology ku8snwm, op. cit., fcxxmuc 38, p. 350.

41L~ B. j- ● - ~&%bt of tbc United S-” in U.S. tiI@=&HOW= ~~=~@ unmtnt Opaatims

a 

 38-39.

“ e U.S.

~.s.~Sauuc committee m GOV cxnmcnml Affairs, Study on

 156.

dungtoa x: Us. 

Juiy 2S, 1989,

%4ateriAI at highway legidathn ia bmd on Natianal Cmtudl on Public Works Improvement, FM@ 

Fcbruuy 1988); and American Tmqmtation Mvisory Cmmc.& New in 

 355.

~o sm. 374.

. . . . . . , ..%W.
Despite badly deteriorating bridges, such as the one

pictured here, Highway Trust Fund monies could

not be used for rehabilitation until 1982.

speed limits, drinking age, truck access to both

federally and nonfederally funded roads, and other

policy issues. The Surface Transportation Assistance Act of 1982 (STAA) boosted the Federal gas

tax, authorized increased appropriations for resurfacing, and authorized appropriations out of the

Highway Trust Fund for highway bridge replacement and rehabilitation. The STAA was reauthorized in 1987, and most previous conditions were

continued. 47

Mass Transit

Until the late 1960s, the private sector owned and

operated most of America’s mass transit systems. By

1970, newly constructed highways, increased automobile use, and sprawling suburbs had put many

public transportation companies out of business.

Local governments, knowing the importance of the

service, assumed an active role in supporting mass

transit. Initially Federal aid was limited to discretionary project financing for States and localities.

After 1970, the Federal Government expanded its

support for transit, as mass transit systems were

declared eligible for aid from the Highway Trust

Fund.48 New and non-urban systems, in addition to

existing systems, became eligible for Federal aid,

and States were allowed to substitute transit projects

for interstate highway projects they judged nonessential. Perhaps most important, the Federal Government began to contribute to operating costs as

well; indeed, during the late 1970s, over 80 percent

of Federal formula grants were used for operating

assistance. 49 Though amendments to the STAA

(Public Law 97-424) in 1983 gave mass transit its

first dedicated revenue source (a l-cent per gallon

portion of the newly increased Federal gas tax), the

Federal Government has generally retreated from its

support for mass transit during the 1980s.

Airports

Since passing the Air Commerce Act of 1926,50

the Federal Government has steadily invested in the

Nation’s airports and airways. Between 1947 and

1969 the Federal Government covered nearly onehalf of airport construction costs.51 The 1970 Airport

and Airway Development Act52 marked a major

expansion of Federal support for aviation infrastructure; Congress approved new fuel and passenger

ticket taxes, and other charges, and established the

Airport and Airway Trust Fund. The Act lapsed in

1980, in the wake of conflicts over suitable uses for

Trust Fund money, but in 1982 Congress reauthorized the Trust Fund with the Airport and Airway

Improvement Act. Legislation in 1987 reauthorized

funding for airport development and directed the

Secretary of Transportation to develop a long-term

comprehensive airport system plan.

Ports and Waterways

Federal dominance of water resources development was established in 1787, when Congress, in the

Northwest Ordinance, interpreted the Commerce

Clause of the Constitution as a mandate for Federal

regulation and maintenance of navigable waterways. 53 The U.S. Army Corps of Engineers was

made responsible for waterways and harbors. The

1824 General Survey Act authorized surveys for a

 100-17, 101 Stat. 132.

 Budget New Nation’s (Washington, DC: 

cit., footnote 48, 

 91-258,84 219.

 Walker, (Washington, DC: U.S. Army of Engineers, 1981), p. 365. Northwest pertained to

mapping and of and 
I

I

I

I

1

1

national network of internal improvements, explicitly including waterways. In 1824, the Rivers and

Harbors Act established Federal river and harbor

construction and maintenance programs. The Corps

had and continues to have the tasks of planning,

developing, operating, and maintaining waterways.

Water programs became increasingly multipurpose in the 20th century. Flood control was incorporated into many projects in the 19th and early 

centuries, culminating in the 1936 Flood Control

Act, which formally designated the Corps as responsible for flood control. The Bureau of Reclamation

was established in 1902 to encourage westward

expansion by providing inexpensive irrigation water

for agriculture; hydropower was added to project

purposes in legislation enacted in 1912 and 1917.

The backbone of the Corps’ support for water

transport lies in the 11 division and 38 district

offices. These form a cadre of technical expertise

and arc responsible for operations, maintenance,

construction, preparation of preliminary and design

studies, and acquisition of real estate for projects

throughout the country. The waterways industry and

regional and local port officials rely heavily on the

Corps for advice and maintenance, and even operating assistance. As one put it: “Without them, we

wouldn’t be in business.’-

over the past decade, the Federal Government has

continued to retrench its role as water resources

developer. The 1986 Water Resources Development

Act instituted waterway user fees and cost-sharing

.

requirements for most water projects, with nonFederal sponsors responsible for a minimum of 25

percent of the costs of most construction projects.

The focus of water resources development at the

Federal level has now shifted to operations, maintenance, environmental accountability, and decreased

financial and administrative responsibility.

Funding for waterway improvements comes from

Federal appropriations and the Inland Waterways

Trust Fund, supported by marine fuel tax revenue.

The Inland Waterways Users Board makes recommendations on project priorities based on consideration of national system needs.55

INDUSTRY PERSPECTIVE

Every industry uses or provides services dependent on public works, and most take for granted

governmental decisions that create the infrastructure

necessary for their business, except when a tax

increase or regulation that directly affects them is

proposed. Then, industry associations swing into

action and lobby Federal, State, and local officials to

ensure that their interests are thoroughly considered.

Their lobbying activities often reinforce the status

quo, because they do not want the way they do

business disturbed.

However, when an infrastructure issue has been

widely recognized as a problem, and legislation or

regulation seems a certainty, industry is likely to

acknowledge a need to change and to engage in the

policymaking process. As the 1990s begin, air

quality problems, the need for greater investment in

transportation infrastructure, and urban traffic congestion are three such potent issues. Each industry

segment is trying to shape government action

according to its concerns. For example, southern

California government agencies and industries are

trying to craft a solution to the area’s severe air

pollution and traffic congestion problems. With

current technologies, the poor air quality precludes

construction of more roads to relieve traffic congestion, so new approaches must be tried. The California Trucking Association’s members are willing to

operate at night as much as possible to relieve

daytime congestion.56 However, many industries

that depend on truck transport find the noise

problems and costs of keeping their loading facilities

open to accommodate deliveries at night unacceptable. Finding a reasonable balance among the diverse

interests will be a lengthy and difficult process.57

In one area--intermodal transportation--industry

has moved rapidly to capitalize on burgeoning

international trade and changes in manufacturers’

shipping patterns. Federal oversight, programs, and

organization have not kept pace, and a host of

difficult transportation system issues are emerging,

ranging from how to provide sufficient ground

access for busy airports to congestion that prevents

efficient local truck transfer of freight containers

%hndd C!. M&my, dirccw, Memphis and Shelby COWY Rnt Commission, kphk, TN, personal COmlmldC@OfL t%, 5, 1989.

W.ls. Army oxpc of m== The System:A April 1989), p. 42.

-E.hsm~, “&rector, Governmental and Industry Affairs, California Trucking Association pcrsomd wmmuniciu.iom Nov. 10, 1989.

fls~ Si**~of~“on, Soutb Coast Air Quality Management District, pcrwmal communication, Nov. 10, 1989.

-— . . . . .
Chapter 2—The Intergovernmental Framework ● 49

I

from ship to rail. Local governments must deal with

such problems on a piecemeal basis when Federal

monies are involved, because of categorical grant

requirements and the absence of a coherent Federal

transportation policy that incorporates environmental concerns. (For further information, see chapter 4.)

INTERGOVERNMENTAL ISSUES

Generally, State and local officials accept the

need for Federal standards to protect public health

and welfare, especially if they are tied to a grant.

However, officials contend that federally mandated

standards and grant requirements raise their costs,

through expenditures for projects or procedures that

may be extraneous to State priorities and that add

time to the project. As one example, Federal aid for

highways requires that a percentage of Federal

monies be used for repairs to “off-system” bridges

(bridges on highways that are not eligible for Federal

aid), and these bridges are on underutilized or

unimportant routes in many States.58 Concerns

about Federal programs center on unfunded mandates, such as those described in chapter 1, box l-A;

grant requirements, such as a focus on new construction rather than maintenance or management improvements; and on the regulatory process,59 including:

●

s

●

●

●

inflexibility in the administration of standards

(standards aim at uniform performance and do

not accommodate local variation in need and

conditions);

lack of coordination among Federal agencies

engaged in related activities;

frequent changes in Federal regulations, which

require major local program adjustments;

excessive time required for Federal review and

approvals; and

requirements for meetings and paperwork.

The complicated application process for approval

of a major harbor improvement shown in figure 2-5

gives ample evidence that these concerns are justified.

In 1987,60 percent of State and local infrastructure capital came from bonds.60 Traditionally, taxexempt municipal or governmental bonds have been

the fiscal workhorses for State and local governments, which use them to acquire the large amounts

of capital needed for roads, schools, and environmental projects. In addition, tax-exempt “private

activity” bonds are issued to finance many types of

public-private ventures, which create facilities for

public use.

To the concern of State and local governments,

Federal tax reform legislation aimed at closing

loopholes and minimizing revenue loss—primarily

the Tax Acts of 1986 and 1988—made tax-exempt

bonds much more difficult to issue. At least partially

as a result of the changes, the value of new issues of

municipal debt has decreased by one-half since

1985, with even more dramatic reductions in the

issuance of private activity bonds.6l

However, while it is too early to be certain, OTA

analysis indicates that the impact of tax reform on

traditional public-use infrastructure projects may

not be significant in the long term. Debt financing of

traditional public works, such as publicly owned and

operated wastewater and water supply plants and

roads, appears to be at a higher real level now than

before the passage of the 1986 Act.62 The decrease

in tax-exempt private activity bonds for” public

facilities, such as convention centers and sports

complexes, may have boosted the use of tax-exempt

government bonds to finance traditional infrastructure projects. A significant drop in borrowing did

occur between 1986 and 1987, but the market

returned to its pre-1985 level in 1988 and increased

more than three-fold between 1980 and 198863 (see

figure 2-6).

However, the reforms have had a significant effect

on a wide range of activities financed by State and

local governments, especially those undertaken in

cooperation with the private sector. Four provisions

have raised the greatest concern:

sq~~illi~, di.fcctor, pl arming Research Diviskm, Iowa Dcpartmcm of Tmnapmuiom in Office of Technology Asscssment, op. cit., footnote

2, pp. 118-119,

W@marks &xn OTA Adviaory Panel meting, March 1989; and participants in Office of Tcc!tdogy Aascaam cm, op. cit., footnote 2.

%vernmczn F~hcafch titer, “Fe&ral ‘k %liC)’ and kfktmctm Financing,” OTA contractor report, Sept. 13, 1989, p. IX-4.

blrbid, p. 14.

%d., p. I-2.

W)id, p. ~~.
MARINE PROJECT PERMIT PROCESS DETAILED FLOW

LB BOARD OF HARBOR

COMMISSIONERS

I

1

I FEDERAL

I Central of 

 STATE OFFICE OF 

 PLANNING & RESEARCH 

PLANNING DIVEION

REGIONAL WATER QUALITY

CONTROL BOARD I “

I I

Ill 2 FEDERAL

PLANNING DIVISION

PLANNING

DIVISION

 Beach Harbor.
Chapter 2—The Intergovernmental Framework ● 5 1

Figure 2-5--Marine Project Permit Process

 CORPS 

I

CORPS OF ENGINEERS

CALIFORNIA

COASTAL

COMMISSION

STATE

RESOURCES

AGENCY

ENVIRONMENTAL

PROTECTION

AGENCY

Us. 

COMMERCE

 CORPS OF ENGINEERS 

 ENVIRONMENTAL Protection AGENCY I ccc

SOURCE: Traffic Department, Harbor.

I
●

●

●

●

Stricter criteria for tax-exempt bonds. Tax

Code revisions have restricted the use of

tax-exempt private activity bonds to projects in

which generally no more than 10 percent of the

facility is used for private purposes and no more

than 10 percent of the debt service is paid from

private sources. The previous private activity

maximum was 25 percent. This reduction in

permissible level of private sector involvement

has limited tax-exempt borrowing and raised

costs for some forms of public works infrastructure, such as water treatment plants that

are owned or operated by private firms. The

new lower limits on private activity will require

developers to rely more on private capital for

project improvements, like new subdivision

streets. In Vacaville, California the widening

of a major arterial failed the test for tax-exempt

financing because the cost of required relocation of private utility lines exceeded the 10

percent limit on debt service allowable from

private sources.64

Additional procedures and reporting requirements. All tax-exempt transactions must now

be reported regularly to the Internal Revenue

Service. In addition, records must be kept on

investment earnings in order to make rebates on

profits, if necessary, and the costs of insurance

for private activity bonds are restricted. These

new regulations mean increased effort and

costs for every jurisdiction, but hit small, and

unsophisticated issuers hardest, as they must

seek outside financial help.

Reduced arbitrage opportunities. Strict limits

were placed on the opportunities for State and

local governments to earn arbitrage income by

borrowing with tax-exempt bonds and investing the proceeds, usually in higher yielding

bonds, until needed.65 Arbitrage is a lucrative

income source, used in many cases to reduce

project costs. After strong protests spearheaded

by local governments, Congress eased these

restrictions in the budget reconciliation legislation passed in November 1989.

Limitations on refinancing. The 1986 Act

permits governments to refinance tax-exempt

loans only once. In the past, governments could

figure 2&Tax-Exempt Governmental

Purpose Bonds

Billions of dollars 80

m

60

40

20

1980 1981 1982 1983 1984 1985 1988 1987 1988

Years

SOURCE: 1990, on data from the

 R tinter.

refinance bonds frequently to take advantage of

falling interest rates.

Although the extent varies, State governments

provide essential financial support to local jurisdictions for public works, currently providing 54 cents

(down from a high of 61 cents in 1975) in grants for

every dollar raised by local government. Generally,

State funds go for education and public welfare, and

to support specific transportation infrastructure

needs, such as highways, airports, and in some cases,

wastewater treatment and mass transit. The relative

decrease in the State contribution since 1975 does

not mean that total State dollar aid to cities has

decreased; indeed it increased by 10 percent in real

terms from 1979 through 1986. Rather, local governments have increased the revenues they collect,

which have grown 37 percent for cities and 52

percent for counties.66 Further details are given in

chapters 3 and 4.

CONCLUSIONS

Through funding support, legislation, and regulation, the Federal Government has driven public

works infrastructure policy since the early part of the

20th century, and its fiscal policies and funding

capabilities have shaped and local public

 Government Association, testimony before Senate Committee on Affairs,

 service’s, and the District of May 4, 1989.

 op. cit., footnote 60, pp. 

 of 1988 cd., VOL 2 (Washington, DC: 1988), p.

14.
Chapter 2—The Intergovernmental Framework ● 53

works construction and service. Over the past

decade, changes in Federal policies have forced

States to play a larger role in financing and

administering public works programs, and local

communities to do more for themselves. Federal

spending is likely to continue for the short term

to focus on health and social programs, defense

(although this may decline gradually), and national debt service. State and local governments

must expect to finance a larger share of public

works with their own revenues-general taxes

and fee-rid where feasible, with private sector

partners.

Competition for revenue sources-excise and

income taxes, user fees, and other benefit charges—

is characteristic of our Federal system and can be

expected to continue at all governmental levels.

When Federal funds were more plentiful, State and

local governments used them as substitutes for their

own resources for public works facilities, focusing

their own spending on education, health, or other

special program areas that do not generate revenue.

They will not withdraw from funding education or

caring for the destitute as Federal funding levels

decline. The resulting financial squeeze on State and

local governments is a major factor in the poor

condition of public works infrastructure and heightened intergovernmental tension. The impacts of

continued low levels of Federal spending on

public works will affect States with varying

degrees of severity (see figure 2-7). This raises

equity questions that Federal policymakers will

want to consider.

Recent Federal tax reforms enacted to conserve

Federal revenues have increased the cost of local

capital and discouraged public-private partnerships.

While they understand the fiscal forces behind these

actions, State and local governments do not welcome the effects and maintain that the Federal

Government is pursuing conflicting fiscal policies.

Strong environmental lobbies have encouraged

Congress to raise standards for environmental public

works projects, and other concerns have prompted

the addition of grant requirements, such as Buy

America, which promote goals unrelated to the

primary purpose of the grant. These entail substanPhoto State University

Resources are limited and State and local governments

often direct capital to education and health care programs

rather than public works.

tial costs, both in money and time required for

project completion. Local and State officials question the appropriateness of Federal policies requiring them to conform to national priorities

and guidelines that often are not sensitive to local

conditions or needs, but increase the project price

and timeline.

Federal oversight, programs, and funding are

targeted through categorical grants at specific issues

and problems--from wastewater treatment to airport, highway, and harbor improvements. Strong

industry interest groups have grown up to support

each of these categories, and environmental activists

focus on enforcement of specific laws that target a

single issue. Such potent but diverse vested

interests make coordinated environmental and

transportation programs difficult, and congressional and executive branch policies and programs often appear to State and local governments to work at cross purposes. More systematic

Federal policy coordination and consideration of

reorganization or restructuring are warranted.
54 Rebuilding the Foundations: State and Local Public Works Financing and Management

c

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0

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Photo General Contractors

 General Contractors to produce

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an

I
CONTENTS

POLITICAL AND ECONOMIC MIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Spending and Revenue Patterns *.o. .o*Q. .o*. .*. **. .**. .*e**. ... o * . . * . * . ..*.**..* 57

Constitutional and Legal Constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Revenue Sources ***. .*. *.. ... *.. ... ... ..*. ... *.. **. .. o . * * . * * . * . * * . * . . . *......** 61

STATE TRANSPORTATION PROGRAMS_ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Highways and Bridges *o. *.**. **. *.. o.e*. o*. ..**o. ..*, *.. ooo. ... .. o**.*......*** 61

Airports *.. .o. ... ..*. .*. ... .o. ..*. .*. .*. *.. .**. e.. ... ..*o. o.. *.*. b . . . . . . . . . . . . . 62

Railroads ... ..*. *.*. .*. ..o. .. * * . . * . * . . . . * . . . . * . . . * . . . * . . . . * . * . . . . * . . . *.***..*.

Mass Transit ... ... oo. .**o*** *0**. ooo. ... .o*. ... o.*e*. . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Ports and Waterways .*. ... ... .*o. .*. *.. ..o*. ..oo. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

State Transportation Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Political Strategies for Transportation Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

STATE ENVIRONMENTAL PUBLIC WORKS PROGRAMS . . . . . . . . . . . . . . . . . . . . . . 73

. . Drmking Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73

Wastewater Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Solid Waste . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

State Funding Programs ... ... . . . . . . . . . . * * * . . * . * . . . * . . * . * * * * . . * . * . * . * . . ...***... 75

General Fund Appropriations .o. ... *.*. .*. ..*. ... .o. **o*, . . . . . . . . . . . . . . . . . . . . . . 79

Earmarked Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

..*. ... ... ... .*o*. .o. .**. ..*. ..o*. ... o.. ..*** ... .*. eo*. ... ..*. ... *.. .e *.* 80

Public-Private Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

MULTIPURPOSE STATE LOAN PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

STATE MANAGEMENT AND PLANNING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

Planning Land Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

TECHNICAL ASSISTANCE PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

FINDINGS AND CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 d

3-A. Iowa’s RISE Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

3-B. New Jersey Infrastructure Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

3-C. Citizen Outreach Pays ... ... .o****. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

3-D. Texas: State Water bans and the State Revolving Fund . . . . . . . . . . . . . . . . . . . . . . . . 76

3-E. The Wyoming Joint Powers Act Loan Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

3-F. Washington State Public Works Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

3-G. Florida Emphasizes Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

3-H. The New Mexico Infrastructure Development Assistance Program . . . . . . . . . . . . . . 88

3-1. State Fiscal Capacity and Effort . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

3-2. State Fiscal Capacity, 1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

3-3. State Fiscal Effort, 1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

3-4. State Income Tax Revenue, 1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

3-5. State Sales Tax Rates, 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . 62

3-6. How a State Revolving Loan Fund (SRF) Works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

3-7. Growth in Florida, 1970-87 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

3-1. Sample State Revenue Increases, 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

3-2. State Highway Funding Sources, 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

3-3. State Gas Tax Rates and Yields, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

3-4. New Revenue From State Lotteries Used for Infrastructure . . . . . . . . . . . . . . . . . . . . . 73

3-5. Major Infrastructure Financing Mechanisms: Advantages and Disadvantages . . . . 89
.-

. Chapter 3

States: Caught in the Middle

It is not the voters who failed [to approve a tax increase for transportation]; it is we, the

political leaders, who failed the voters.l

Notwithstanding wide differences in size, economic conditions, and governmental structure, each

State confronts the same problem: how to finance

transportation and environmental infrastructure improvements as well as schools, hospitals, and

prisons. A State’s ability to finance public works is

a product of its economic base and political composition; these determine the mix of taxes, charges,

fees, and private investment a State may use to pay

for infrastructure.

Marked increases in targeted taxes, benefit

charges, and user fees have been necessary in most

States over the past 5 to 6 years to support public

works priorities, after more than a decade of flat

investment. States have combined these special

charges and broad-based taxes to boost funding for

infrastructure improvements, principally for transportation-highways, airports, and mass transit—

with some States supporting railroads and ports as

well. Funding environmental public works has

historically been a local responsibility, although

some States have long assisted with wastewater

treatment plant construction. Every State will be

playing a larger role in the future, since new Federal

requirements include environmental mandates that

are straining local fiscal capabilities and sending

local officials to their States for help. This chapter

outlines the economic and political frameworks for

State public works programs as well as fiscal and

management strategies that States have developed

over the past decade or more.

THE POLITICAL AND

ECONOMIC MIX

Politics and economics interact in shaping a

State’s public spending portfolio. Political deliberations and decisions determine State debt limits, tax

rate ceilings, spending caps, and whether to levy a

sales or an income tax; all of these reflect a State’s

willingness-to-pay. However, its ability-to-pay—

the actual capability to raise revenue—is grounded

in economic factors, such as per capita income,

industrial production, and retail sales.

State governmental expenditure and revenue patterns are good indicators of a State’s economic

vitality and fiscal condition. In the aggregate, States

appear to be in relatively good fiscal health-for

1989, State government expenditures are expected

estimated expenditures in 1988. 

of 1982-83, State expenditures have grown steadily,

if moderately (the average rate has been 6 percent for

the last 3 fiscal years), although this general picture

masks wide regional variations.

State constitutional or statutory requirements for

a balanced budget require that expenditures stay

very close to or slightly lower than revenues. Almost

every State adopted some sort of tax initiative to

meet spending demands in 1988, producing $6

billion in new revenue (see table 3-1 for examples);

nonetheless, 18 States also had to reduce expenditures or deal with shortfalls by other means.3

Moreover, data indicate the rate of growth in

revenues may be falling behind expenditures; the

trend for 1989 shows a 5.4 percent growth in State

revenue, compared to an anticipated 6.8 percent rise

in expenditures.

Economically strong, diversified States are better

able to pay for public works than States with low per

capita incomes and weak economies. A State’s

economic base and ability to raise revenue measure

itself reflects its fiscal effort. These measures are a

useful guide to which States are in the greatest need

(have a low fiscal capacity) and which States are

doing the most to help themselves (have a high fiscal

effort). A more complete description of fiscal

capacity and fiscal effort indices can be found in

appendix B. The variety in State fiscal capacity and

fiscal effort is illustrated in figure 3-1. Regardless of

I IJob SqfIIKRK, c~f~ia State Senator, at ‘“l%chnology for lbmonw’s~: A Policy C(mfcrcmx,” Costa M- CA, unpublished

remarks, Nov. 9, 1989. .

2N@~ G~~’ Associiuion and National Association of Smtc Budgu Gffkcrs, f%cuffhrvey o~rhc Skates (Washington, DC: 1988), p. 3.

31bid., p. 6.

!

-57-

1 21-667 - 90 - 3 : QL 3

. . ~. - -.
Table 3-1--Sample State Revenue lncreases, 1988

state Revenue increase Tax change

SOURCE: Advi80ry Commission on Intorgovemmamtal Rola!ions, S@nillcmt Foatwo, at Fbod Fockmbm, 19S0 d., vol. 1 (Washington, Oc: 1969), pp. 2S-29.

the strength of its economic base, a State must have

the political will to raise revenue (exercise fiscal

effort) to attack infrastructure deficits.

Regional Difference

Fiscal capacity and revenue effort vary widely

among States even within regions (see figures 3-2

and 3-3). New England and the Mideastern States

have stronger economies than much of the South and

the Northern Plains. However, a look at fiscal effort

shows that some States with strong economic bases

have a below-average tax burden, while others with

weak economies ask taxpayers to pay at a relatively

high level. Combining information about fiscal

capacity and effort with other economic data provides an overview of State and regional economic

characteristics.

New England boasts the Nation’s highest personal

income growth and the lowest unemployment rates.

The tax bases of Connecticut and Massachusetts are

well above the national average, whereas Maine,

Rhode Island, and Vermont have below-average

capacity.

The Mideastern States are in good shape economically, with personal income growth above the

national average and low unemployment. New

Jersey has a particularly strong economic base and

high fiscal capacity; only Pennsylvania has belowaverage revenue capacity, and the State budget

office projects expenditure growth well below the

national average.

The Great Lakes region has not fully recovered

from the recession of 1982-83, and States in the

region are slightly below the national average in

fiscal capacity, with unemployment above the national average. State expenditures in 1989 are

expected to increase by only 3.9 percent, the lowest

annual regional rate in the Nation.

The Plains region has made an impressive recovery from the early 1980s. The unemployment rate

has dropped from 5.5 percent to 4.2 percent, and all

States except Minnesota and North Dakota anticipate spending increases of at least 5 percent.

However, the region remains slightly under the

national average in fiscal capacity, primarily because South Dakota, Iowa, and Nebraska have weak

economies heavily dependent on agriculture.

While a few of the Southeastern States are

prospering, many are struggling. Florida has been

the dominant growth area, maintaining a spending

growth rate over 10 percent for the last 3 years;

Virginia and Georgia also enjoy strong economies.

Nonetheless, the fiscal capacity of the Southeast

region ranks the lowest in the country-Mississippi

ranks last, and Alabama, Arkansas, Kentucky, South

Carolina, and West Virginia are among the Nation’s

weakest 10 States.

In the Southwest, the Texas economy dominates

the regional statistics. Because of the State’s recession, caused by the drop in oil prices, the region has

had the Nation’s highest unemployment rate, and the

second lowest rate of increase in personal income.

Among the other Southwest States, expenditure

increases are expected to range from 2 percent in

New Mexico to 10.6 percent in Oklahoma.

The Roe@ Mountain region continues to have

economic and fiscal problems because of its economic dependence on the energy industry. State

fiscal capacity is uneven; Idaho, Utah, and Montana

are well below the national average, while Wyoming

and Colorado have high capacity ratings because of

their rich natural resources. State governments in

this region have increased spending only moderately.

The Far West States’ economic record is strong;

personal income has increased by 6.7 percent (led by

Nevada at 8.9 percent and Oregon at 7.2 percent),

and the unemployment rate is at the national . .

t~d, pp. 21-23; and Advisory Council m Imcrgov crnmcntal R&i- 1986 State (lWhingmm DC: 1989), pp. 5-7.
Chapter 3--States: Caught in the Middle ● 59

Figure 3-1--State Fiscal Capacity and Effort

Connecticut

80 I

I

601 ,

1975 1977 1979 1981 1983 1985 1987

Mississippi

120 -

100 -

8 0 -

6 0 ,

1975 1977 1979 1981 1983 1985 1987

120 -

100 -

I

Texas

140 

120

100 “

8 0 I

average. Alaska has the only soft economy in the

region, due to the drop in energy production.

The variability of economic strength among the

50 States is a product of factors that are difficult to

control and that change over time. The impact of

falling energy prices during the mid-1980s highlights the vulnerability of States like Alaska, Texas,

Oklahoma, and Louisiana, which depend for income

on one primary source. However, recent employment figures compiled by the U.S. Department of

Labor show that the economies of several States

(e.g., Texas and Louisiana) hard hit during the early

and mid-1980s may be rebounding, while growth

has slowed in States like Massachusetts and New

already taxing residents more heavily than the

national average. States like California and Connecticut, with strong resource and industrial bases, have

the option of choosing whether to enact new taxes or

fees to raise additional funds.

In most States constitutional provisions or statutes limit revenue, spending, and debt and bond

financing for public works. Some States have strict

statutes that make increasing levies for public

services a lengthy and difficult process.

Revenue and Spending Limits

Hampshire, which had, until recently, enjoyed Many States restrict the financing authority of

vigorous economic healths Resource-poor States, their local governments and require them to balance

like Alabama, Mississippi, West Virginia, and budgets. However, over the past decade, 20 States

Montana, remain economically weak and have have limited their own fiscal authority as well, by

difficulty generating additional revenue; many are statute or constitutional amendment, in response to

 27, 1989, p. 
Figure 3-2--State Fiscal Capacity, 1986 Figure 3-3--State Fiscal Effort, 1986

-1

taxpayer

example,

revolts against government spending. For

Massachusetts’s Ballot Question 3, passed

in 1986, restricts growth in State revenues ‘to the

average growth in Massachusetts wages and salaries

over the preceding 3 years.6

California’s Gann Initiative, approved by voters

appropriations to a percentage increase no greater

than the State’s population growth plus the increase

in the U.S. Consumer Price Index or per capita

income in California, whichever is lower. Local

officials soon found they could not fund legally

required improvements and sought legislative relief,

leading to passage of the Mello-Roos Community

Facilities Act in 1984. The new law enabled local

governments to create special assessment districts to

finance construction and operation of public facilities if two-thirds of the local voters approve.7 In July

1989, the California General Assembly approved an

initiative for the 1990 ballot, which would again

expand spending flexibility.

Debt Limits

For the majority of States, constitutional and

statutory limits on borrowing also bound spending.

State borrowing limits take widely varying forms,

with nine States prohibiting the use of general debt

altogether, and four States (Maryland, New Hampshire, Tennessee, and Vermont) setting no borrowing limits and requiring merely a simple majority

vote of the legislature. For instance, in Alabama, the

Governor authorizes borrowing up to $300,000, but

specific bond issues must be authorized by constitutional amendment.8 In Pennsylvania, bonds for

capital projects that are itemized in a capital budget

do not require a referendum if such debt will not

cause the net outstanding debt to exceed 1.75 times

the average annual tax revenues deposited in the

previous 5 years. Minnesota requires approval of a

bond issue by two-thirds of each house and a

majority of the voters at any general election, except

for short-term borrowing, qualified school bond

loans, and transportation bonds pledging fuel taxes.

 Council on Public Works DC: October 19S7), p. 26.

 c. al, Changing Stare for National Council on Works (Washington, DC: 19s7), p. 38.

 VOL 1 (Washington, DC: 19S9), p. 120.
Chapter 3--States: Caught in the Middle ● 61

Most States currently employ a broad range of

taxes, although they rely most heavily on income

and sales taxes. Sales taxes bring in the most revenue

(48.5 percent of total State tax revenues in 1987), but

income tax revenues (39.2 percent of the total) are

growing faster.9 Strapped by spending requirements,

States have recently turned more frequently to

benefit or user charges and fees for specific purposes

and are gradually allowing local governments more

flexibility to tax.

Income Taxes

Personal income taxes are levied in 43 States with

wide variations in tax rates and the value of

exemptions (see figure 3-4). In 1987, income tax

revenue ranged from a high of 43 percent of total tax

revenue in Delaware to below 15 percent in several

Southern States.10 In addition, 46 States collect

corporate income taxes, although their average per

capita yield of $83 is far less than the average yield

of $309 from personal income taxes. Income taxes

are more sensitive to economic swings than sales

taxes, making them a less reliable revenue source.

Sales Taxes

Currently 45 States impose general sales and

gross receipts taxes; these yielded almost one-half of

State tax revenue in 1987. Tax rates range from a low

of 3 percent in Colorado, Georgia, North Carolina,

and Wyoming to a high of 6.5 percent in Washington

and 7.5 percent in Connecticutll (see figure 3-5).

STATE TRANSPORTATION

PROGRAMS

Most State Departments of Transportation (DOT)

were formed to administer highway programs and

became increasingly important as the Federal Interstate highway program got under way in the 1950s.

Over the past two decades, most have broadened

their responsibilities to include other modes of

transport as well. However, many aspects of State

transportation programs are shaped by Federal

policies and their modal orientation.

Figure 3-4--State Income Tax Revenue, 1$87

SOURCE: of Technology nt, 1990, on U.S. Bureau

of 

State highway and transportation departments

administer a wide variety of State-funded programs

and, with the Federal Highway Administration, the

Federal-Aid Highway Program. States allocate 60

percent of all highway outlays and are responsible

for about 22 percent of the Nation’s highway

mileage and 43 percent of the bridges.12 State

legislatures establish allocation formulas and priorities for State aid as well as for specific highway and

bridge projects.

Revenue sources include user fees, sales taxes,

tolls, and lotteries, and State policies range from

sharing revenue with local governments and allowing them considerable autonomy on projects to

maintaining tight fiscal control and requiring adherence to strict State guidelines. A few States, notably

Alaska, Delaware, North Carolina, Virginia, and

West Virginia, bypass local governments and assume responsibility for practically all highway and

bridge construction and maintenance.

Issues—State highway departments operate

under Federal- and State-aid program guidelines.

Many State DOT officials are frustrated by delays in

 Bureau of the Census, p. xv.

 p. 21.

 on Intergovernmental Relations, op. cit., footnote p. 

 of DC: PP. 
Rates (excluding local taxes)

 tax

 6% and above

 to number.

SOURCE: 1990, on 

 on 

Federal project approval and by grant requirements,

which they feel prevent them from directing aid to

their most critical needs. States also decry the

slowness of spending from the Highway Trust Fund,

contending that it is outrageous for the Federal

Government to collect gasoline taxes and not use

them for their intended purpose.

The challenges facing each State are shaped by its

geographic and economic characteristics. Large

rural Western States must divide limited funds

between maintaining their many Interstate miles and

improving other important highways and bridges.

States with large urban centers must provide funds

to rehabilitate urban highways and bridges and to

relieve congestion in suburbs, as well as for highway

and bridge improvements in rural districts.

States confront numerous legislative and planning

issues. A few States are trying to strengthen State

and regional land use and capital improvement

programs by linking highway financing programs to

land development and by requiring private sector

contributions for road improvements. Some have

encouraged private construction of toll roads or

bridges. A handful of States with major urban areas

are looking at ways to link highways with other

transportation modes to improve metropolitan mobility and reduce air pollution caused by congestion.

Methods of addressing these issues are discussed

later in this chapter.

Although airports are largely a local enterprise, 13

States own or operate commercial airports, including Maryland, Alaska, and Hawaii. Almost all States

have aid programs, usually small, for purposes of

airport development and/or improvement. Funds

come from State aviation fuel taxes or general

appropriations. 13 Many States target aid to smaller,

nonmetropolitan airports, which are less likely than

urban airports to be economically self-sufficient.

Since 1946, Minnesota’s State Airport Fund, supported by taxes on fuel and airline property and

aircraft registration fees, has offered capital matching grants to local airports.

responsible for annual inspections of all (4,300) general aviation airports to

collect safety information required by the Federal

Aviation Administration (FAA), and many maintain

statewide airport development plans. Although

States play a key role in airport regulation, financing, and planning, Federal aid goes directly to

airports, bypassing State agencies. State aviation

and Judith KY: Council of 19S7), p. 10.
Chapter 3--States: Caught in the Middle ● 63

This terminal in Cook, MN, was constructed using a

combination of local money and aid from a State Airport

Fund. The facility has aground-level public area and a

residence for the airport manager on the second floor.

officials maintain statewide capital improvement

planning and coordination would be more effective

if Federal grants were allocated at the State level. To

test this proposition, a 2-year demonstration project

has recently begun in three States (Illinois, Missouri,

and North Carolina) in which State agencies will

administer Federal block grants for reliever and

general aviation airports.14

Compared to the private sector and the Federal

Government, States play a relatively minor role in

financing, operating, or regulating railroads. Nonetheless, at least 20 States provide assistance to local

rail service from earmarked excise taxes and general

appropriations, and 45 States have a recent State Rail

Plan that includes an inventory of facilities and

ranking of proposed projects .15 The bulk of State aid

takes the form of grants or loans to small short-line

height carriers that provide essential service to

localities. Mississippi has a Railroad Revitalization

Program that makes interest-free loans to local

governments or railroad companies to rehabilitate

track and upgrade other equipment. States that own

tracks (usually because they have been abandoned)

either operate the railroad, as in West Virginia, or,

more commonly, contract with an operating railroad.

A few large, urbanized States, such as California,

Illinois, New York, Maryland, and Pennsylvania,

subsidize or provide intercity passenger train service

to relieve highway congestion and air pollution.

Such arrangements are likely to increase. Since

1985, California’s DOT has operated a successful

service between downtown San Francisco and San

Jose. Connecticut DOT, in cooperation with Amtrak, will begin commuter service soon over a

33-mile route from New Haven to Old Saybrook.

Issues—Enabling legislation to permit publicprivate partnerships or other forms of private sector

participation may be needed in many States, especially if efforts to develop high-speed rail transportation between major population centers to ease

highway and airport congestion are to succeed.

Although 7 urban States contribute 80 percent of

total State aid, at least 40 States provide local mass

transit with some funds from general revenues, a

dedicated portion of the general sales tax, or motor

fuels and vehicle taxes. In 1988, State grants totaled

$3.9 billion16 and, for the first time, surpassed Federal aid, which was $3.3 billion.

Intercity bus service is subsidized in 9 States, 13

support ridesharing, and several target aid to specific

users such as elderly or handicapped persons or to

rural and small urban areas. While all States have

technical assistance programs funded by Urban

Mass Transit Administration grants, at least seven

supplement Federal funds to expand this service. 17

issues—Keen competition for Federal revenue

and the extreme difficulty of resolving urban air

quality problems are indicators that States are likely

to be pressed to increase their roles in financing

transit, in supporting transportation planning, and in

technical assistance.
Because of the importance of ports for economic

development, 28 of the 40 States located on navigable waterways have provided grants for construction

of landside port facilities and water cargo terminals

during the last 12 years.18 Three States, Georgia

Maryland, and Louisiana, accounted for over 40

percent of the $1.7 billion total in State aid.

Although the East and Gulf Coast States provided

the most funds, the Mississippi Valley and West

Coast States have also invested in port development

In addition to general obligation bonds, State

support has come from appropriations, transportation trust funds, and user fees. Louisiana dedicates

partial proceeds from State motor fuel taxes, and

Alaska dedicates watercraft fuel taxes and bond

proceeds for port improvements.19 Maryland and

Hawaii tap their State Transportation Trust Funds.

State program responsibility is in the departments of

transportation, economic development, or State port

authorities. In addition to financial support, the State

agency frequently coordinates the public works

components of major port improvement projects.

The Water Resources Development Act of 1986

established local cost-sharing provisions for channel

At the Port of Long Beach, CA, containers are removed

from the ship to a dockside transfer area. From there,

trucks pick up the containers and take them to the federally

funded railroad transfer facility pictured here.

widening or deepening projects, which had previously been financed solely from Federal funds.

Currently, the deeper the channel, the larger the

required local match. The Act stipulated that the

local share of the costs should be recovered from

increased user fees, but so far States have paid the

local share from other sources, on the premise that

increased fees would hurt their ports’ competitive

positions. 20

States have no specific responsibility for the

Nation’s 12,000 miles of commercially significant

inland waterways. The Army Corps of Engineers

builds and maintains the locks and dams, and most

inland waterway terminals are privately owned.

Issues—Federal technical expertise and funding

has supported many State port and industry operations that now need to develop their own independent resources. Public-private partnerships and

innovative user-fee arrangements are likely to be

sought. Intermodal connections need improvement

in many states.

n on Water 

 1989).

and Hackett, op. cit., footnote

 of State Highway and op. cit., 18, p. 30.
— .-—

Chapter 3--States: Caught in the Middle ● 65

In addition to Federal grants, State revenues for

construction and improvements to transportation

infrastructure come from two principal sources: user

fees, including fuel taxes, registration fees, ticket

taxes, and tolls; and broad-based taxes. Financing is

by annual appropriations (pay-as-you-go) or debt

(general obligation or revenue bonds). Although ,

most States rely primarily on traditional revenue

‘sources and financing mechanisms, many have

developed new sources and financing strategies,

including collaboration with the private sector.

Benefit Charges-Motor Fuel Taxes

and Other Vehicle Charges

User fees or broader benefit charges, principally

motor fuel or gas taxes, form the financial base for

most State transportation programs, especially for

highways. In 1988, Federal, State, and local gas

taxes provided $29 billion of the $52 billion State

and local governments spent on highway capital,

maintenance, and traffic services.21 The remaining

revenues came from a variety of other sources22 (see

table 3-2). Nonetheless, current gas taxes expressed

in adjusted dollars are below their 1965 levels;

increases of 2 to 4 cents per gallon are needed to

bring their purchasing power up to that of 1965

levels. 23

During the 1980s, 47 States (all except Alaska,

Georgia, and New York) raised the per-gallon gas

tax-some substantially and more than once—to

keep pace with rising construction and maintenance

costs. The yield from a penny of gas tax varies

widely among States, depending on the amount of

gasoline consumed, which is the product of State

population, road mileage, and number of vehicles

per capita California’s 9-cent per-gallon tax, which

is low by national standards, yields $1.1 billion,

while Connecticut’s 20-cent per-gallon tax produces

only $320 million (see table 3-3 for State by State

information).

Most States levy a flat per gallon tax on gasoline

and diesel fuel. However, some States established

variable rates, based on fuel prices, in the early

1980s, hoping revenues would track gas prices and

provide a rising revenue stream; but as gasoline

prices fell in the mid-1980s, so did revenue from

variable rates. To compensate, some States tie the

tax rate to an index based on changes in motor fuel

use and construction costs. For example, Michigan,

Ohio, and Wisconsin have enacted taxes that adjust

automatically to fuel consumption levels and the

Federal Operations and Maintenance Cost Index.

The revenue raised reflects highway use and maintenance costs relatively well.

earmark all gas tax revenue for highway use, both to

guarantee a reliable revenue source and to ensure

that motorists can see the benefits of the taxes.

Frequently, State highway improvement programs

are tied to increases in the gas tax. (See box 3-A for

a description of Iowa’s program.) Eight States

dedicate gas tax revenue to a transportation trust

fund, which may include transit.24 At least nine

States, mainly in the south, west, and midwest,

return fuel tax and other benefit charges associated

with flying to localities for airport development.25

A few States fold all gas tax revenue into the

general fund from which all governmental programs

are financed. Florida, Massachusetts, New Jersey,

New York, South Carolina, Oklahoma, Arkansas,

Texas, and California use a share of the gas tax

revenue to fund other programs. In 1987, the Texas

State highway fund loaned $280 million to the State

general fund for education, and transferred $32.4

million to prisons and the State workers’ compensation fund.26 In recent years, fiscal pressures have

generated an increase in State legislation to use gas

tax and other vehicle-related charges for nonhighway purposes. OTA concludes that these efforts

are likely to continue, despite the opposition of

transportation advocates, because gas taxes are

broad-based and reliable revenue sources.

Fees—Although most States

exempt motor fuels from State sales taxes, eight

collect substantial revenue by applying the sales tax

21M= cOOpX, Fdd Highway ~“ “ oation, personal communication. Jan. 4, 1990.

2%c W@ In&nation Program, 1989 Stute Highway (Washington DC: 1989), p. 18.

=otnaa W. Cooper, Federal Highway Administmiom and Judith A. Dcpaqmlc, Florida Department of Transpomtim “Imcal Option Motor Fuel

ma;’ (iraR documuttl May 1989, p. 3.

u~~ca~~m of sw I-Ii@way and Transportation Of&ials, op. cit., footnote 16, p. 2.

2s&~ ~w, Fe&r~~~S~ R~/es in /@mrW~e (W~~~n, ~: Ntiio~ ~~il on Rblic WOfi IrnpKWCIXIUNS, 1987), p. 72.

*Rod Infofmation Rogram, op. cit., foomotc 22, p. 48.
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,—-—— . . —.. .-
Chapter 3-States: Caught in the Middle ● 67

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Table 3-3--State Gas Tax Rates and Yields, 1989

SOURCE:_ofTdnoloov Anaosmont, IWO, ba8adondatafrom theHiahwayU8arsFodoratlon; and Tho Roixllnformation Proaram 19S9,Stafe

-FW~~(W~MgtomDC: 1989).

to gasoline. In 1988, such taxes yielded $l.2 billion

in California.27

Fees for driven’ licenses, vehicle registration,

inspections, truck weights, record checks, and vanity

license plates are other revenue sources for State

transportation needs.Tbgetherthesefeescontribute

approximately 20 percent of all State highway

revenues.

28 Most fees are assessed on a flat rate, and

they do not reflect aspects of highway use, such as

the weight of the vehicle and mileage driven.

However, several court rulings have found that some

State flat-rate fees are unconstitutional. For example, in 1987, the U.S. Supreme Court ruled that

Pennsylvanians truck fees were illegal, and that the

State must refund the $500 million collected. The

court held that the flat-rate fee was not related to road

use and that the State discriminated against out-ofState trucks by reducing fees for trucks registered in

Pennsylvania. 29

Tolls--The Pennsylvania Turnpike between Harrisburg and Pittsburgh was the first modern highway

financed with tolls. Currently, tolls are charged on

numerous bridges and tunnels, and 28 States operate

36 toll roads. In most cases, tolls pay the debt service

on State or local revenue bonds used to finance

construction of a specific road, and some also fund

maintenance and operations.

Although legislation prohibits tolls on federally

financed highways, the 1987 Surface Transportation

and Uniform Relocation Assistance Act and amendments permitted test projects in nine States to use

Federal funds for up to 35 percent of costs and toll

financing for the balance. The projects, in California, Colorado, Delaware, Florida, Georgia, Pennsylvania, South Carolina, Texas, and West Virginia,

reflect the Federal interest in encouraging financing

based on benefit charges.30

States have many uses for toll revenues. New

Jersey has formed a fund from excess toll revenues

30.

%d, p. 

-d

q-m-y, chief, R)ky Evduatitm Branch, U.S. Department of T nuqxmmion, pcnxxlai cotxlnlunicatioxl, ScpL 25, 19s9,

— --- ..— - . --
Chapter 3--States: Caught in the Middle ● 69

Material IUSE is “ 1989-1993

1988).

 pp. 46-s1.
A rural airport in Washington,financed by the local government in cooperation with the State development program.

to finance other needed State highways.31 In 1986,

Florida instituted a Toll Facilities Revolving Loan

Fund that provides venture capital to localities to

plan and construct toll roads and is repaid from tolls.

The State appropriated $2.7 million in 1986 and $20

million in 1987. (See chapter 4 for further details of

private toil-financed highway projects.)

Arizona, Colorado, Florida, Georgia, Illinois, Missouri, Nevada, New York, Ohio, Texas, and Washington) permit local jurisdictions to levy a general

sales tax dedicated for transportation improvement.

In most cases, the localities can further target the

funds for mass transit improvement. For example, in

California up to 0.5 cents of sales tax revenue is

returned to eligible counties for transit use.32

consin are among the States that earmark revenue

collected from taxes on aviation fuel and airline

property, and fees from aircraft registration to

finance State airport development and capital improvement programs. Washington State finances an

airport development program, focused on rural

areas, with dedicated State aviation fuel tax revenue.33

Appropriations From the State General Fund

Most States use general fund appropriations for

transportation capital improvements only for supplemental or emergency financing, although a few

States support transit capital investments with general fired revenues. New York State appropriated

$170 million in 1987 to transit projects, and Georgia

appropriated $600,000 from general funds. States

providing aid to local airports tend to use general

fund appropriations in addition to benefit charges.

For instance, California set up a revolving loan fund

in 1979 with general appropriation seed money of $1

million a year for 5 years.34 In 1988, about 6 percent

of State transportation capital expenditures came

from general funds35 (see table 3-2 again). Because

general appropriations require legislative action and

are subject to changing State priorities, they are not

a reliable source of financing for long-term capital

projects.

Financing With State Bonds

Currently, States use general obligation bond

financing less for transportation than they once did.

In 1973,29 percent of State long-term debt was for

highway improvements compared to 8 percent in

1984.36 Bonds financed less than 10 percent of State

capital expenditures for transportation projects in

1988.37 Several factors have contributed to the

downward trend in general obligation bond financing. First, many States have strict debt limitations

restricting the use of general obligation bonds.

Furthermore, States tend to give first priority for

bond financing to school, prison, and hospital

construction because gas taxes and other user fees

provide a ready source of support for transportation.

Finally, relatively high interest rates in the 1980s

increased the costs of borrowing. Since bond issues

must have voter approval in most States, they

became more sensitive political issues.

 Inc., in Council on Public Works 1986). p. 49.

 8, vol. p. 

13, p, C-18.

 p. 

of State DC: 1988), p. 85,

 “ L. Institution 1986), p. 167.

 of Budget op. cit., footnote 35, pp. 85-87.
— -— —

Chapter 3--States: Caught in the Middle ● 71

Use of revenue bonds for transportation purposes

will probably increase, both because of constraints

on general obligation bonds and because tolls and

other types of benefit charges provide reliable

revenue streams for debt service. Michigan relies

solely on revenue bonds backed by proceeds from

gas taxes, driver’s license fees, and motor vehicle

registration to support long-term highway needs. In

the fall of 1988, Florida voters passed a constitutional amendment allowing the State DOT to use gas

tax revenues to repay revenue bonds to purchase

rights-of-way and to build and rehabilitate bridges.38

Trust Funds

Most States earmark specific revenue, usually gas

tax and registration fees, for a trust fund-a permanent account to be used solely for transportation or

highway expenditures. In 1984, New Jersey established a comprehensive transportation trust fund to

finance long-term improvements (see box 3-B). The

Maryland Consolidated Transportation Fund, fed by

the gas tax, a motor vehicle titling tax, license and

registration fees, and a portion of the State corporate

income tax, finances highways and public transportation. In 1986, Alabama established a Municipal

Government Capital Improvement Fund to make

grants to local governments for construction of

public buildings and streets. The improvement

program was to be funded from the State Oil and Gas

Trust Fund when it reached $60 million. Currently,

the fund stands at $45 million; the State anticipates

it will be several years before it reaches $60

million. 39

Public-Private Partnerships

Most existing public-private partnerships are

between local governments and developers, and

State governments are just beginning to develop

such arrangements for financing capital investments

in transportation. Before States or localities enter

into public-private partnerships, they must have the

legal power to take certain actions, and many have

enacted or are considering legislation to provide the

necessary authorizations. Some of the most important include:

● power of contract-the ability to enter into a

service contract,

● power to convey—the ability to sell or lease

existing facilities to a private company,

. power to purchase-the ability to purchase

facilities from the private vendor at some point

in the future, and

. bond authority to finance the facility.

In 1986, 19 States had statutes specifically

authorizing privatization of one or more types of

infrastructure. Arizona adopted a policy of joint

sponsorship of certain highway projects as part of its

1984 transportation program and will assume only

50 percent of the cost of construction of freeway

interchanges and grade separations not on the State

plan. 40 Texas has authorized the formation of

transportation corporations in which private property owners form nonprofit corporations to accept

property and money to support highway developments. A landowner interested in having a road built

must apply to the Right of Way Division of the

Department of Highways. If the Division approves

the need for the road, the applicant submits a plan

and articles of incorporation for approval by the

Highway Commission. Four corporations have been

approved, two in Austin and two in Houston.41

Caltrans, the California DOT, has recently been

authorized by the State legislature to develop

partnerships with private firms to design, build, and

operate four demonstration projects for State-owned

rights-of-way. Caltrans is soliciting proposals from

private developers who are guaranteed leases for up

to 35 years to operate the facility and the option to

recoup their investment through toll revenue or

through the value added by the transportation

facility to associated private development.42

Lotteries

The State of New Hampshire established the first

modem State lottery in 1964, and by 1989,28 States

and the District of Columbia used lotteries to raise

revenue. Gross receipts range widely; in 1986

Vermont lottery receipts were just $12 million,

while California’s lottery brought. in $1.6 billion.

J-~~ ~orm~on e, op. cit., fmmotc 22, p. 38.

39(-J- stabler, assistant truwrcr, of Alabam& personal communication, Sept. 28, 1989.

-bus Assocti Inc., on Advisory Rcpat to the !knaw Budget

tittcc @%hin@oIL ~: my 1987), p. [V-7.

qlIbid., p. W-21.

%ldifomia Dcpartmcat of Transpatation, Office of Privatization, (Sacramento, CA: October 1989), p. 1.
. -. -. . . . . .
Prize money and administrative costs can claim up

to three-quarters of the receipts. Though lottery

revenue has in the past proven a very unpredictable

source of funding, it can fill important gaps. Most

States direct lottery revenues into general funds, but

several States earmark at least a portion of lottery

revenue for public works infrastructure (see table

34).

To help assure continued support for transportation improvements, several States have taken the

lead and established long-range capital financing

programs, based on bonds, increased gas tax revenues, or a package combining revenue sources.

Successful financing programs are typically sold to

voters and decisionmakers by a structured effort that

includes establishing needs and priorities, evaluating alternatives, and developing political support.

(See box 3-C for an example.) Six basic steps

characterize successful efforts:

identifying specific needs, the purpose of the

program, and those benefited or otherwise .affected;

structuring the program and ranking projects;

evaluating and establishing the financing program;

setting up collection and accounting procedures

for revenues and managing the program;

coordinating with other public agencies and

private sector leaders; and

developing political support in advance.

STATE ENVIRONMENTAL

PUBLIC WORKS PROGRAMS

Because local jurisdictions have historically been

responsible for environmental infrastructure, the

State role has been small, consisting primarily of

setting public health standards and providing some

financing and technical assistance to local districts.

Supplying drinking water and managing solid waste

have been almost entirely local tasks, However, for

most of the past 20 years, States have acted to pass

through and administer Federal grants to localities or

special districts for wastewater programs. Since the

passage of the Water Pollution Control Act in 1972,

the Federal Government has provided construction

grants for wastewater facilities, to help localities

meet the standards mandated by the Act as rapidly as

Table 3-4—Net Revenue From State Lotteries

Used for Infrastructure

Net revenue

State (millions) Dedicated use

Arizona . . . . . . . $42.2 Transportation

Colorado .. ..0. $26.1 Parks, recreation, capital

construction

Iowa . . . . . . . . . . $26.3 Economic development

Oregon . . . . . . . $21.3 Economic development

SOURCE: Advisory Commmslon orI Intergovernmental Relations, Sgnticant Features of Fiscal Federahsm, 19SS ad., vol. 2 (Washington, DC: July 19SS), pp. SS-90.

possible. The legislative intent was always that

eventually State and local governments would

assume full funding responsibility. The Farmers

Home Administration of the Department of Agriculture has also played a significant role in water and

wastewater treatment plant financing for rural areas

and has supported State technical assistance programs as well,

charged with administering and enforcing Federal water purity regulations, and almost

three-quarters of the States also support local

improvement programs through grants, loans, and

bond banks. Such assistance includes aid to local

governments for purchasing land to protect underground water supply sites (Massachusetts), bond

funds to support water supply contamination abatement (Maryland), and low-cost loans for controlling

water supply and wastewater pollution (Kentucky).

State management and technical assistance is provided by circuit riders who advise communities

without engineering expertise and try to encourage

inefficient small-scale systems to consolidate.

issues—Drinking water problems are increasingly moving from local jurisdictions to the State.

Many problems demand regional solutions, because

water-quality issues extend beyond political boundaries (much of Florida is facing drinking water

problems, for example). Moreover, the costs and

technical requirements necessary to meet Federal

Clean Water regulations exceed the financial and

engineering capabilities of many local jurisdictions.

States establish design, operations, and treatment

standards and assist local governments with planning and engineering advice; some provide special

Large municipal wastewater treatment plants, such as this

one in Washington, DC, have played m important role in

cleansing water resources of pollutants.

technical assistance to small districts. Financially,

States play a key role. They allocate Federal

construction grants based on an annual State needs

study, with over one-half of the States providing a

share of the local match. States may use Environmental Protection Agency (EPA) funds for authorized wastewater treatment construction grants until

1990. However, between 1991 and 1994, all Federal

funds must be used as seed money for self-sufficient

State revolving funds (SRFs), from which local

districts can borrow to build wastewater treatment

facilities. After 1994, States will have full responsibility for administering and funding wastewater

treatment construction loan programs and for providing financial and technical assistance to local

districts. EPA estimates that a $68 billion additional

investment is required to meet current national

treatment needs .43

Issues—After Federal support for SRFs ends in

1994, States will be responsible for expanding the

loan fund base as well as for enforcing all Federal

wastewater regulations. EPA is expected to extend

current water-quality regulations to cover combined

sewer overflows and bypasses, significantly increasing State regulatory responsibilities and local investment needs. In this rapidly changing framework,

States play a vital role in providing local districts

with financial advice and technical support. However, State technical expertise is often limited,

because salaries for engineering and financing

experts are lower than in the private sector,44 and

funding resources are thin. Federal aid for State

environmental planning and program administration

has been severely curtailed, and most States have not

replaced it. Costs are likely to exceed the capabilities of many local jurisdictions. Furthermore, few

resources are available to encourage new technology or operating improvements.

Currently, the States’ primary role is in enforcing

EPA standards. A few States, including New Jersey,

Wisconsin and Michigan, have programs to aid local

districts in landfill siting and acquisition or resource

recovery. Because of the regional and statewide

implications of solid waste disposal issues, the

State role in providing technical assistance and

political support will probably expand.

Federal policies require States to assume a much

larger role in administering and financing wastewater programs, and between 1982 and 1986, Federal

funds as a portion of State budgets for water

programs fell from 49 to 33 percent.45 Some State

governments-Texas, Ohio, Oklahoma, and West

Virginia, for example-have a history of providing

grants and loans to localities to supplement Federal

programs. By 1981, 41 States had established

programs (usually modest) of grants and/or loans to

help meet the 25-percent local share of Federal

matching grants.46 More recently, many States have

expanded loan and grant programs or established

State-run bond banks. The programs have varied

forms of capitalization (bonds or appropriations),

eligibility requirements (need or fret-come, firstserve), loan terms, and interest rate subsidies.

Almost all offer grants or large subsidies for

hardship cases. Local self-sufficiency is the goal of

several States, but most provide periodic infusions

of capital from the general fund, bond issues, or

 of Municipal Pollution Control, 1988 Needs (Washington, DC:

February 1989), 1.

 Department of 

 Budget 1980’s (Washington, DC: 1983), p. 58.
I

I

I

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i

earmarked taxes .47 (Box 3-D describes the Texas grant and enforce current EPA project regulations.

Loan Program.) The SRF can make loans to communities at or below

State Revolving Loan Funds

market interest rates for 10 to 20 years. Loans can be

used to finance new projects, refinance ongoing

EPA modeled the SRF program after existing projects, or to “leverage” or guarantee other bonds.

State programs, and under EPA guidelines, States In effect, local districts borrow from a State agency

must add a matching 20 percent share to the Federal that is responsible for managing the SRF, and the

4~.s. &.ummaxal Protection Agency, State p. 

.—. .- . . . . .- . - - . . - -.,
Chapter 3--States: Caught in the Middle ● 77

EPA grants the money to a State, which LOAN 

must assure compliance with Federal

regulations. The State provides a 20% A

match, and the total amount makes up a

State Revolving Fund. Communities borrow

from the Fund and repay the amount with

interest.

SOURCE: of Technology 1990.

loan repayment stream feeds a self-sustaining loan

fund (see figure 3-6).

In early 1990, 42 States and Puerto Rico had

EPA-funded SRF projects under way.48 The Federal

grants total $1.4 billion, and individual State grants

range from $188 million in Texas to $4.6 million in

Vermont and South Dakota.49 Utah was the first

State to begin construction of an SRF-financed

project; administrators credit the fast start to experience gained managing the State-based program,

begun in 1984. In 1988, Tennessee awarded $8.3

million, including a $2 million State match, to six

community water pollution control projects on the

State’s project priority list. Interest rates vary

according to an ability-to-pay index developed by

the University of Tennessee. Several States plan to

leverage the capital grants to multiply the effectiveness of the Federal funds—New York, for example,

plans to use its capital grant to secure bonds up to

five times the amount of the capitalization.

The success of the SRF program from the State

and local perspective depends on several factors.

Chief among them are: Federal funding levels

through 1994, successful financial management of

the program by the State, and State support of local

projects. Currently, Federal funds are authorized to

provide $1.2 billion for capitalization grants in each

of 1989 and 1990, and $2.4 billion for 1991,50 with

amounts beginning to decrease in 1992, and falling

to zero after 1994. Actual 1989 appropriations were

 Agency, of Municipal Pollution Control, p. 

 pp. 

of Cities reports that billion would provide less than 25 percent of State and local costs of the Act
$941 million,51 however; and States worry that in

future years appropriated funds will also be lower

than authorized levels.

States face three important financial/institutional

issues related to SRFs. The first, is the required 20

percent match. In most cases, these funds are raised

from general obligation bonds and/or general appropriations, depending on the State fiscal philosophy.

Second, State SRF officials are managing complex programs that require a high level of legal and

financial expertise. Loan structuring, portfolio management, and compliance with Federal and State

statutes demand sophisticated knowledge of local

and national conditions and capital markets. The

transition to a loan program will be unwelcome and

difficult for many communities, and they will need

more State help, particularly in establishing higher

rate structures to cover full project costs and ensure

loan repayment. For some poor communities, raising

rates to permit conventional loan repayments will be

impossible, and State officials will be called on to

develop alternative financing plans. EPA funds

available to States for program planning and administration are being drastically cut, handicapping

those that need the funds for management staff and

technical assistance.52

I

4

I

I

Third, States face the challenge of how and where

to raise the additional capital to finance projects and

meet Federal regulations--only some of which

pertain directly to the objectives of the program. As

one State wastewater program manager commented:

local jurisdictions to stomach for a LOAN—and the

Feds just added a new regulation on maintaining a

drug-free work environment."53 Utah SRF officials

estimate that Federal contract conditions stipulating

environmental reviews, wage rates, and access for

the handicapped will increase local project costs by

approximately 20 percent54 and are compensating

local districts by reducing interest rates 3 points.

Costs are a problem now even with Federal support;

difficulties will intensify when Federal funding ends

in 1994. In most States, the SRF programs are not

expected to meet all the financing needs, and EPA

estimates that 20 States will face a combined

financing burden of nearly $57 billion.55 Moreover,

operating costs are expected to increase rapidly as

more complex treatment processes are introduced,

requiring higher user fees and ultimately making

capital financing more difficult. Finally, State officials can buffer the Federal/local tensions arising

from unanticipated changes in Federal regulations,

which often hamper local program management and

financing.

State Bond Banks

Vermont established the first State-sponsored

bond bank in 1970, and at least 10 States have since

followed suit: Alaska, Illinois, Kentucky, Maine,

Michigan, New Hampshire, New Jersey, Nevada,

North Dakota, and Oregon. Such banks reduce

interest costs to local communities by pooling a

number of small, local issues into one large, more

easily marketable bond. State bond banks offer the

greatest local savings when the State guarantees the

consolidated bond issue with a reserve fund supported by the State general fund.56 Furthermore,

having a group of communities participate in the

bond issue spreads the risk and lessens the chance of

default, thus lowering interest costs. Underwriting

costs are lower because of the larger issue and

superior credit rating of the State bond bank,57 and

small town officials, inexperienced in finance,

benefit from the expertise of State bond bank

specialists.

Other Bond Financing

Bonds are the primary source of State matching

funds for EPA SRFs, and now finance more construction of environmental facilities than Federal

grants. During the 1980s, municipal bonds raised an

sllkn C. Ni~ cm”Uuuncnld planna, Officc of Municipal Pbiht.ion Contro4 U.S. EsIvkonmmtd~-Y*m~unik. 11, 1989,

52NW ACidUIly of Public AdUWU“ “stracion, Financing Strong State Water of a National Workshop, Mar.

20-21, 1989 (wasMgtoQ DC: Us. Envkomnead ~&=Yt Ml= Of Wata, August 1.

%x& op. cit., fOomotc 44, Mar. 9, 1989,

W.s. En “wmnmend Protection Ageacy, Office of Municipal Pollution Gnaol, S/W 1988), p. 2

5s-I&earch, b., The U.S. l%vimmnaai Pmtcdon Agency, OfYicc oft& Comptrolla,

m press).

%bambas Aasociate& Inc., op. cit., foomotc 40, p. II-11.

%Naticmal Ccmf~ of State Iqislaturcs, Capitaf 1987), p. 101.

—
Chapter 3--States: Caught in the Middle ● 79

This debris deposited by storm water illustrates why new

environmental standards will require control of overflow

resulting from storms.

average $3.8 billion per year in capital for wastewater projects alone.58

However, projections of future needs are daunting. EPA estimates that if future capital requirements for wastewater and water supply facilities are

financed entirely with new bonds, municipalities

will have to double the environmental public works

debt they currently issue—from $4.5 to $9 billion a

year.

59 Based on data from 1977 through 1985, this

level of increase is not unusual. However, capital

requirements for environmental programs compete

with other public investment needs, and the limited

ability of some small jurisdictions to issue new debt

poses other problems. EPA estimates nearly 7,000

cities and towns, or 26 percent of all communities

with populations under 2,500, could have difficulty

meeting the fiscal standards for new bond issues.60

Despite the complexities of debt financing, numerous States have established environmental programs financed by State bond issues to assist local

jurisdictions. California’s Clean Water Bond Fund is

authorized to issue up to $323 million in general

obligation bonds to finance water treatment, reclamation, and conservation projects. The Illinois

Anti-Pollution Bond Fund, established in 1970 with

a $750 million bond authorization, funds wastewater

facilities that would normally not be eligible for

Federal aid. Maine has a Small Projects Community

Assistance Program to finance wastewater projects

that can be constructed for under $100,000; it is

funded by a 1987$1 million bond issue. The State

also sold $198 million in industrial development

bonds in 1983 to capitalize the Finance Authority of

Maine, which supports local pollution control and

water supply system construction. Maryland supports a loan program to improve Chesapeake Bay

water quality with a $25.4 million general obligation

bond. West Virginia funds a solid waste disposal site

program with revenue bonds, while Wisconsin

provides financing for wastewater treatment facilities with $100 million in bonds and annual support

from the general fund.6l

A few States have financed major environmental

programs through general appropriations, and some

have used appropriations for the State share of initial

SRF capitalization. To cite some examples: Massachusetts appropriated $750 million to assume the

local share of EPA construction grants for wastewater facilities in 1985. In 1986, the Georgia Legislature appropriated $21 million for financing the State

revolving loan program. Wisconsin added $63

million from the general fund in 1987 to support

local wastewater treatment facilities, and Minnesota

supported its Solid Waste Processing Facilities

Capital Assistance Program with $20.2 million

appropriated by the legislature between 1980 and

1988.

Although many States dedicate fuel taxes to

transportation, it is unusual for a State to dedicate tax

revenues to environmental programs. In 1985, the

Washington State Legislature established the Centennial Clean Water Program and dedicated an

8-cent per-pack tax increase on cigarettes to finance

it, based on the relative popularity of “vice” taxes.

Since the first grants were made in 1987,$36 million

has been paid out of the fund to 120 recipients. The

program can accumulate funds and need not spend

all that is raised annually; an “insurance” provision

~8Am= ~~Inc., op. cit., fOOtnOW 55”

s~d

W.s. Env”uonmental protection Agency, Office of Policy, Planning, and Evaluation, (Washington,

DC: September 1988), p. 2-15.

61Bwon and Hackett, op. cit., foomote 13, pp. C-19.
I

I

!

b.-*

ensures that any shortfall in revenue is covered by

general fund appropriations. Minnesota’s 4-cent

per-pack tax on cigarettes brings in approximately

$16 million each year. Maryland levies a tax on boat

sales, yielding $14 million annually, which is

dedicated to the State’s Clean Water Program,62 and

Missouri dedicates 0.1 percent of its State sales tax

to water programs.

State-imposed fees raise only 8 percent of State

outlays for environmental programs, although their

use has increased as States look for politically

acceptable supplements to general revenue sources.

Because State responsibility for environmental services is primarily administrative and regulatory, State

fees are applied to permit reviews and facility

inspections, and charges are levied for emission of

pollutants. Revenues are used for operating and

administrative costs.

Privatization of solid waste recovery facilities has

been successful in some communities, and based on

this experience, States see public-private ventures as

an option for other types of environmental projects.

However, Federal Tax Code changes have made

some private-public projects more expensive because of restrictions on the use of tax-exempt bonds,

and the repeal of tax credits and provisions allowing

rapid asset depreciation (see chapter 2).

States encourage private investment by loosening

existing State statutes and by not enacting additional

barriers. Some States are currently adopting comprehensive statutes, which include granting local governments the right to enter into long-term service

contracts with a private entity and to sell or lease

facilities to private interests. Privatization is encouraged if the State acts to exempt public-private

ventures in the environmental area from being

classified and regulated as public utilities. At least

four States (Alabama, Arkansas, Kentucky, and

Minnesota) exempt public-private ventures from

some or all local taxes.63

The New Jersey Wastewater and Water Supply

Privatization Acts enacted in 1985 are among the

mdUtd GOvernm’ AssOciatim, op. cit., footnote 45, p. S4.

%3mmbm Associates, Inc., op. cit., footnote40, p. IV-15.

%edcbur U al, op. cit., fwtnatc 7, p. 61.

~rbid., p. 62.

most comprehensive privatization statutes. The Acts

establish procedures through which local governments may contract with private entities for up to 40

years for financing, design, construction, and operation or management of wastewater or water supply

systems.

MULTIPURPOSE STATE

LOAN PROGRAMS

Throughout the United States, capital financing

for transportation and environmental public works is

usually provided categorically, with each public

works function having its separate financing mechanisms. This approach gives each sector autonomy to

finance its own improvements, but it complicates the

coordinated capital infrastructure planning and budgeting important for economic development and

environmental protection. Several States have established multifunctional infrastructure financing programs to promote economic development; in general, these are small programs oriented toward

depressed areas. For example, Kentucky has instituted a $20 million Infrastructure Revolving Loan

Fund with subsidized interest rates for local communities. Colorado set up a Local Government Impact

Assistance Fund financed by mineral severance

taxes in 1977 to help local communities cope with

rapid expansion.64 Since 1986, California has made

loans or grants to rural counties for roads and water

supply systems from the Rural Economic Development Fund.65 Wyoming has one of the oldest

multipurpose loan funds and Washington State has

one of the newest (see boxes 3-E and 3-F).

STATE MANAGEMENT AND

PLANNING

During the last 20 years, State governments

generally have assumed more responsibilities related to public works, adopted modern management

techniques and technologies, diversified their revenue bases, and upgraded their professional staffs.

States are increasingly adroit at dealing in the

international credit markets and in utilizing new

financing techniques. Of particular interest are

improvements in fiscal management and capital

budgeting and planning. Thirty-six States now

— .-. .- - - . . . . . _
Chapter 3-States: Caught in the Middle ● 81

.
(

I

I

1

prepare long-range capital plans as a basis for annual lack of such planning and coordination. Although

or biennial budget decisions.66 land use and public works decisions are generally

I

i

made at the local level, States can be important

players.

The coordination of public works functions with State policies on land use and public works

land use development policies can promote effi- planning vary widely, influenced by the political

ciency and maximize the benefits of investment. The climate, the intensity of growth and environmental

low-density sprawl and traffic congestion that typify pressures, the State economy, and available reso many metropolitan regions mark the widespread sources. At one extreme, Idaho takes a minimalist

-atiod Cxlnfcrmcc of state b! “~ p. 24.

.,.

,

- . . - .
Chapter 3--States: Caught in the Middle ● 83

approach toward the State’s role in land use and development. Tennessee has had a State Office of

infrastructure planning. It has no State planning

office and provides no support for regional or local

comprehensive planning, reflecting a distaste for

intervention in local affairs and the State’s flagging

economy. Both State and local resources are so

limited that planning is not a major issue; what State

planning there is, is done on a departmental basis.67

On the other hand, a few States, especially those

with sustained growth, have taken steps to coordinate regional land use policies and infrastructure

Planning and legislation that permits regional planning agencies since 1935. Currently, the State is

divided into nine regional development districts,

which are responsible for data collection, land use

and facility planning, air and water quality, and for

fostering regional planning among counties and

cities. However, the impact of regional planning is

limited. Although coordination has improved in the

development of regional sewer and water facilities,

the development districts are not designated by the
I

Figure 3-7--Growth In Florida, 1970-87

State as the official metropolitan transportation

planning agencies, and they have only minor roles in

transportation planning. Moreover, regional planning in Tennessee, as in many other States, suffers

from competition among agencies because planning

functions and enforcement authority are scattered

among numerous State, metropolitan, and local

agencies.

For the last decade, Florida has been a national

leader in promoting regional growth management

policies to link land use and infrastructure development. Faced with rapid population growth (see

figure 3-7) and inadequate roads and sewer and

water systems, Florida requires planning and development reviews at the State, regional, and local

levels. While the State has established a strong

institutional framework for State and regional planning (see box 3-G), it does not play a large role in

financing local public works. In contrast, New

Jersey’s State transportation and environmental

financing programs (see box 3-B earlier in this

chapter) were designed to support its efforts to link

regional capital improvements for infrastructure

with land development.

TECHNICAL ASSISTANCE

PROGRAMS

State technical assistance programs, such as

circuit riders described earlier, can bolster local

managerial and technical knowledge at modest cost,

and are especially valuable in States with troubled

economies and in those with small, isolated jurisdictions. As the mayor of a small town put it:". . . one

of our bigger problems is that we don’t know where

to turn to for expertise, for help. [And if we do hire

a private consultant] we have no one that tells us

whether this person is doing the best job for us, or if

they are doing what will make them the best fee."68

Helping local officials spend public works funds

wisely can be as important as procuring the funds.

Technical assistance services range from statewide databanks to financing and technology workshops. Three State assistance programs examined by

OTA use their land grant universities to support

local managerial and technological capabilities.

However, each program is unique, reflecting its

State’s distinctive geographic, demographic, and

financial conditions. New Mexico’s program focuses primarily on mobilizing expertise within the

University of New Mexico’s Engineering Research

Institute to develop local officials’ managerial and

technical skills (see box 3-H). Designers of the

Nebraska and Oklahoma assistance programs, on the

other hand, placed special emphasis on cultivating

private sector participation in administering the

local programs as well as using the programs to spur

private sector investment.

Nebraska’s Center for Infrastructure Research

was established in 1988 at the University of Nebraska’s College of Engineering and Technology,

specifically to forge an alliance between technology

producers and technology users. Consequently, the

center places a high priority on transferring academic research results to industry and local government in the fields of solid waste management, bridge

and road maintenance, and construction materials.

Program officials describe their research efforts as

“market-driven”; 69 they focus their studies on community needs by consulting with local officials and

 Us. of ‘ of and I.AlCal

 Financing July 

, Center for 19$9.

 . . , - . - . .
Chapter 3--States: Caught in the Middle ● 85

private sector representatives before determining the

research agenda.70

The Oklahoma Infrastructure Institute, established in 1988, is administered jointly by the

University of Oklahoma and Oklahoma State University. Oklahoma was hard hit by the mid-1980s oil

price fall, and the Institute’s objectives have been

shaped largely by the State’s distressed economy.

Program officials hope that improving Oklahoma’s

infrastructure will rejuvenate depressed areas by

attracting new business. Preliminary program literature states that “. . . all aspects of infrastructure

planning, financing, construction, rehabilitation,

and management will be critical for achieving State

economic development goals.”71

FINDINGS AND CONCLUSIONS

States coping most effectively with infrastructure

financing issues and Federal requirements are those

that have both the fiscal capacity and political will

to raise capital from public and private sources and

an available pool of technical and financial knowhow. However, some States must struggle just to

provide current levels of environmental and transportation services; they do not have the financial

capability to satisfy local and Federal demands for

improvements. Five factors determine a State’s

ability to plan and pay for needed infrastructure

improvements.

The first is the strength and balance of the State

economic base, of paramount importance in determining its ability to raise both public and private

funds. New England and the Mideast States have had

strong economies in recent years, enabling them to

raise State and local revenues and to offer attractive

opportunities for private investment. States that lack

a strong economic base, like West Virginia, or are

dependent on one resource, like Louisiana, have a

very hard time raising both public and private

investment funds. In addition, poor jurisdictions

within such States cannot afford to pay for engineering, planning, and financial expertise.

The second is the rate of population growth, a

double-edged sword for many States-on the one

hand, it generates heightened demand for services,

while on the other, it provides a broader tax base.

Growing States and communities are able to make

significant demands on private developers for infrastructure investment-a practical impossibility in

nongrowth areas where the real estate market is

weak, and private investors see little opportunity to

recoup an investment in infrastructure.

The combination of population size and density is

a third and pivotal factor in determining how well

States can raise additional revenues. Lowpopulation, low-density States have greater difficulty financing public programs. The tax base is

limited compared to the scale of needed investments; their menu of revenue sources is usually

small; and they lack staff with specialized expertise,

forcing them to rely, if they can afford it, on outside

consultants. OTA finds that those States most

vulnerable to cuts in Federal transportation and

environmental grants and in need of access to

technical and financial expertise are large, rural

Western States, such as North Dakota, South

Dakota, and Montana; States with poor economic

bases such as Alabama, Mississippi, and

Louisiana; and States like New Mexico and

Alaska, with large areas of federally owned land

or dependent on the volatile extractive industry

(see chapter 2, figure 2-7). Although these States

contain less than 11 percent of the Nation’s population, their problems are pressing, and many Federal

programs provide little effective special assistance.

For example, current Federal programs do not

give special recognition to the needs of States with

low fiscal capacities who are willing to tax

themselves, nor take cognizance of States with

substantial fiscal capabilities but low tax effort

(see figure 3-3 earlier in this chapter).

The land area or special topographic characteristics of a State or county-which determine the need

for bridges, viaducts, or tunnels, for example—

comprise the fourth important variable, especially

when considering funding for roads and bridge

improvements. Although this factor is taken into

consideration in allocating Federal highway aid, the

formula does not compensate for it.

Finally, the State political environment includes

factors that can override physical and economic

variables; spending and debt limits imposed by

voters can hobble the ability of an economically

7WnivCrS@ of Nebraska-Lincdn, SWWUY (Lincoln, NE: January

1989).

71Mark Mm, Drc@ OK: Univcmity of OkIahom& May 1988),
III

ii
Chapter 3--States: Caught in the Middle ● 87

identified the absence of strong State and regional planning as a major reason the local plans were ineffective and

recommended overhauling the 1975 legislation.1

Convinced of the need for strong State and local controls, the legislature adopted the Local Government

Comprehensive Planning and Land Development Regulation Act of 1985. The provision is the

requirement that each of the State’s 67 counties, in conjunction with their respective cities, submit a comprehensive

5-year development plan to the State Department of Community Affairs (DCA) for approval. The plans must

conform to State comprehensive and regional plans and must spell out in detail what types of development are

allowed and where, and where public works systems will go and how they will be financed. Each district must adopt

a multi-year capital improvement program and an annual capital improvement budget. The teeth in the legislation

is the “concurrency” requirement stipulating that a specified service level for highways, sewers, and other public

facilities must be available at the time of the impact accompanying any new development. Within a year after plan

adoption, a local government may not issue a development permit that will result in a reduction in the level of service

for any facility identified in the plan.2 In effect, the State is requiring local governments to provide services

according to a comprehensive plan that is tied to a capital improvement budget. Twice a year, local districts may

consider comprehensive plan amendments. The penalty for noncompliance is a cut off of State funds, primarily

revenue sharing.

DCA began reviewing the mandated local plans in July 1988. Of the 201 plans received, 56 have been approved

and another 18 are close to approval.3 It is too soon to tell what will occur when local governments begin to carry

out the plans. Some builders, particularly upset with the concurrency regulations, claim all development will be

stymied unless local standards are lowered or the State substantially increases funding for public works.

Although local and State officials agree on the need for comprehensive planning, local governments want the

State to take a bigger and more responsible role in financing needed public works, estimated to cost as much as $1.6

billion annually through the year 2000. The State has resisted local pleas for an increase in the State gas tax rate.

Local governments frequently have not included transportation projects, funded by the State Department of

Transportation (DOT), in their local comprehensive plans because the funding schedule for the projects has been

unpredictable. 4 To remedy this, 1989 legislation enables local governments to count on State funding for the first

3 years of DOT’s 5-year plan. The legislature has also given local governments authority to levy a l-cent local sales

tax dedicated to 1 infrastructure and a l-cent local gas tax for roads, although both levies are subject to local referenda,

which makes them unpopular with elected officials. Nine counties have passed the sales tax and 13 have defeated

it; prospects for passage are improving in some large urban counties. The State is encouraging local governments

to make greater use of impact fees on developers.

.

1~~ W. OpCmII, %xd timmt COUI-VC Planning and Land Devdopmcmt Regulation A@” Fibri&z

Urhnlswes, vol. 13, No. 1, October 19S5, p. 4.

2s~ of Florid& “suJatc staff Analysis and~‘ Impact Statuncn&” aczom

3 “

tx@u8 _ Bill 2A, June 3, 1989, p. 1.

Mlckl Richardaom legislative dimctar, Florida state Depmmcm of Community /UTa& pcmonal cornmuticakm, Ox. 6, 1989.

%atEl of FkxiCl& op. cit., footMu 2, p. 4.

strong State to finance infrastructure improvements. general revenues and debt financing are forcing most

States with laws that permit districts to pursue a

variety of financial strategies tend to manage better.

OTA finds that despite strict spending limits in

some States, voters in many States have supported the use of general or dedicated revenues

for well-defined transportation or environmental

programs to address specific priorities. Successful efforts to raise fuel taxes or establish State

bond banks are products of strong political

leadership and commitment and the willingness

of a State's voters to pay for public services.

The expanding needs of social programs, such as

education, health care, and criminal justice, for

States to finance public works capital from benefit

charges (e.g., user fees and special assessments) and

to make local projects self-sufficient through loan

program rather than grants. Currently, transportation is funded substantially from user charges, and

environmental programs increasingly from debt

backed by user fees. Greater use of benefit charges

reflects a shift in attitude toward who should pay for

public services; when there were fewer demands on

government, broad-based taxes were able to carry

most of the burden. The current trend is for State

governments to rely more heavily on benefit charges

for pay-as-you-go spending and to back revenue
88 ● Rebuilding the Foundations: State and Local Public Works Financing and Management

(

bonds for long-term improvements. (See table 3-5 pay for transportation improvements. The gas tax is

for advantages and disadvantages of financing

strategies.) OTA concludes that benefit charges

are attractive and effective strategies, because of

their revenue potential, voter acceptability, and

service management opportunities. However,

these charges have major socioeconomic tradeoffs that need further consideration, including

administrative issues, equity, and revenue reliability in the case of a political backlash, an

economic downturn, or real hardship. For example, States with low economic bases and/or small

populations have major difficulties developing sufficient capital solely from user fees.

Reflecting the swing toward benefit charges, all

but three States have raised gas taxes and other

motor vehicle user charges over the last 10 years to

a relatively large revenue producer, and increases are

more acceptable to voters for supporting transportation improvements than raising general taxes. Although earmarking revenues for special purposes

restricts their fiscal options if priorities change,

States find earmarking a good way to ensure a stable

revenue stream. Gas taxes and other vehicle user

charges are frequently used to finance public transit;

and a number of States use aviation-related taxes and

fees to support airport development. Some States use

gas tax revenues for nontransportation programs,

although transportation advocates feel strongly that

these funds should be reserved for transportation.

OTA concludes that because gas taxes and

other transportation charges are politically acceptable and proven reliable revenue sources,

----- . - - -- -
— —

— Chapter 3--States: Caught in the Middle ● 89

Table 3-5-Major Infrastructure Financing Mechanisms: Advantages and Disadvantages

Advantages Disadvantages

fund appropriation . .

General obligation bonds . . . .

Revenue bonds . . . . . . . . . . . .

State gas tax. . . . . . . . . . . . . .

Other dedicated taxes

State revolving funds .

. . . . . .

. . . . . .

SOURCE: Office of Technology Asso8srnent, 1890.

States are currently better able to finance transportation improvements than environmental

programs. Highways, aviation, and (to some extent)

transit have dedicated revenue sources, while State

revenues earmarked for environmental programs are

unusual. Because a large share of environmental

capital currently comes from Federal grants, future

funds for environmental needs will have to come

from State general revenues, user fees, or new,

earmarked taxes, unless a new Federal program is

enacted.

States are providing local governments with

nonfinancial support, such as enabling legislation to

permit local option taxes or to facilitate publicprivate ventures and other types of innovative

strategies. Some States have established comprehensive planning requirements, and others have created

bond banks to assist local districts to reduce the costs

of acquiring capital. Several States are offering

technical assistance and help with capital budgeting,

and others have established infrastructure research

programs.

No State has a broad-based tax or revenue base for

environmental services. However, most States have

established EPA-capitalized revolving loan programs for construction of wastewater facilities and

are working out the technical, administrative, and

institutional difficulties inherent in such a complex

financial activity. States will be hampered by

coming cuts in Federal funds to support their

administrative costs and must also accommodate the

needs of those districts too poor to afford a loan and

expand the supply of capital, both now and when

Federal grants end in 1994.

Despite the success of several small, multipurpose, State infrastructure programs-Wyoming

(box 3-E) and Washington (box 3-F), for example—

it seems unlikely that States will fund and administer

transportation and environmental programs jointly

to any significant extent.. Traditional differences in

21-667 - 90 - Q : QL 3


. .

,:.,

-..
Chapter 4

Local Governments: Where the Buck Stops

If we can convince ourselves that light beer tastes better and is less filling, we ought to be able

to convince voters to support higher quality services.]

Local officials and managers are on the firing line.

They face day-to-day management problems and

expenses for system operations and maintenance,

complaints about inadequate roads and crowded

airports, Federal penalties for environmental deficiencies, and constituent hostility to the tax increases needed to pay for resolving these problems.

According to one method of calculation, over 83,000

local government units (see table 4-1) operate in the

United States. These range from densely populated

cities and rapidly growing urban counties to tiny

towns and sparsely populated rural counties. They

include a multitude of single-purpose special districts, among which are the Nation’s 600 highway

districts, 356 airport authorities, 163 port authorities, and numerous water supply districts.2 Local

governments encompass a staggering array of sizes,

economic characteristics, and functions; in the

Chicago metropolitan area alone, over 1,200 governmental units--6 counties, 113 townships, 261 municipalities, 313 school districts, and 501 special

districts-may be found.

Officials of these local governmental bodies are

deeply committed to improving aging public works

facilities to support both essential services and local

economies. To meet the relentless demands for

Table 4-1--Number and Types of Local

Governments, 1987

County . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,042

Municipal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,200

Township . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,691

School district . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,721

Special district ........0 . . . . . . . . . . . . . . . . . . 29,532

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,166

better services, local officials from Weehauken to

San Jose pursue the elusive dream of adequate,

reliable, and politically acceptable financing. Finding that traditional strategies for funding public

works are no longer enough, local officials are

seeking to make projects more self-supporting and

to involve the private sector. However, each community must match its plans to its political and

economic framework-and abide by Federal regulations and State laws as well. Many are making

extraordinary efforts, and some have been successful

in developing and funding programs to meet their

most pressing needs.

However, OTA did not find any jurisdictions that

claim to be doing more than staying even on meeting

public works needs. Local problems vary with the

jurisdiction’s size, age, and economic and geographic characteristics. Cities must maintain transportation networks built to serve commercial and

residential areas developed years ago. As public

works facilities age, maintenance costs rise, sapping

funds that might be used for modernizing or

rehabilitating their systems. Traffic congestion and

delay are increasing frustrations for commuters and

commercial activities, and affect the quality of life

in major urban and suburban jurisdictions. Communities must also take steps to comply with new water

quality and wastewater treatment requirements; a

number still do not meet current air quality standards.

Yet to balance their budgets as required by State

laws, local governments have had to cut expenditures, raise taxes, and tap a variety of alternative

sources of revenue. With most attributing their

actions to curtailments in Federal and State funds,3

52 percent of the Nation’s cities reduced capital

spending in 1987, 44 percent did so in 1988,4 and

lwhlt Van Cott, Commlssloncr of w~cr, Tolujo, Ohio, in U.S. Congress, Office of TechlloIogY A=ssment, ‘cTranscript of

Procee&gs-Environmcntat Infrastrucnue Workshop,” unpublished transcript, Sept. 14, 1989, p. 132.

z~u~ R. ha ~ ~., Spec~ D&Uic+ Use@ (wii&hlgtOxl+ x: me U*L~ ~ti~k 1987)!

pp. 4-6.

3Douglas D. Pctc=om Ciry ~h Reports on America’s Cities (WashingtorL DC: National League of Citi~ 1988)

. . .

p. Ill.

%id., p. 19.

-93-
94 ● Rebuilding the Foundations: State and Local Public Works Financing and Management

Traffic jams are so much a part of daily routine in urban

regions that congestion-related words, such as bumperto-bumper and rush hour, have become part of the

American vocabulary.

one-third in 1989.5 Counties also report a widening

gap between public works needs and revenues,

despite efforts to increase local receipts through

special assessments, impact fees, and public-private

partnerships. 6

Local officials’ public works responsibilities are

complicated by Federal and State policies beyond

their control. These include:

●

●

●

●

●

New environmental requirements that will increase both local capital and operating expenses (see figure 4-l).

Reductions in Federal support, on which local

gov ernments had come to rely, especially

wastewater treatment construction grants and

revenue sharing funds. The cuts have been

major blows to local governments; in most

cases, State support and increases in local taxes

and fees have not filled the revenue gaps.

Requirements to fund special social programs.

Federal tax code changes in the 1980s that

made public works partnerships less attractive

to the private sector and increased the cost of

borrowing.

State limitations on property tax increases and

borrowing. Such laws have thwarted local

efforts to raise additional revenue to support

I

Figure 4-1 --Local Government Expenditures To

Maintain Currant Levels of Environmental

Quality and Comply With New Regulations

 Billions of 1989 dollars

Actual Projected

3 0

01 , , , , , 1 1

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999

 Office of based on reformation

provided by 

Box 4-A details tax, spending, and debt limitation

issues confronting local jurisdictions.

Lacking both financial and management resources, small districts have been particularly hard

hit, and their fiscal resources will be further strained

by new environmental requirements. Although some

small jurisdictions are wealthy, most have low tax

bases, low per-capita incomes, and virtually no

public resources or access to private investment

funds. Their per-unit costs for public works are often

higher than those for larger districts that benefit from

economies of scale-it costs nearly four times as

much to provide 1 gallon of clean drinking water in

a community of 500 as it does in a city of 500,000,

for example.7 Because of their small size and

economic characteristics, some jurisdictions find it

difficult-almost impossible-to borrow money in

commercial credit markets. Compounding their

financing problems, small jurisdictions lack professional expertise and experience in managing public

works. Officials are dependent on consultants-for

evaluations of their systems and advice about

technological options and financing strategies, because salaries in the private sector are so attractive

that few engineers enter State and local governments

(see figure 4-2). States do provide some technical

and financial support (see chapter 3); however, not I

 D. in 1989, R on America’s Cities (Washington DC: National of 1989),

p. v. {

I Inc., Leaders DC: National Association of July 1987), p. 6. I

 (Washington, DC: I Works 1987), p. ii.

-- --- - - -- - - . _.. 
Chapter 4--Local Governments: Where the Buck Stops ● 95
i

,

I

i

Figure 4-2--Destinations of Engineering Students

Bachelor's degrees Master’s degrees

her 11%

State/local

government 3%

 6%

 of 1990, baaed on 19S2 Foundation 

all States have sufficient programs, and small

districts’ difficulties are compounded when the State

is also struggling economically and cannot help.

Rock Springs, Texas, typifies the multiple problems

facing such towns (see chapter 1, box l-A).

LOCAL TRANSPORTATION

RESPONSIBILITIES

Local officials have long known what their State

and Federal counterparts often appear to overlook—

that local public services must function smoothly as

a system for the national economy to remain healthy.

If local businesses falter, the economic health of the

State is affected, and eventually the economic vigor

of the Nation is sapped. The international market for

citrus provides one example of the interconnections

between local infrastructure and the national economy. Grapefruit is picked and placed in intermodal

containers in Florida groves. The containers are

loaded on tractor-trailers for the trip by local and

State roads to a railroad yard, where they are

transferred to a special container train. Once or twice

a week, these special trains speed across a tier of

southern States to a rail transfer facility near a major

local port on the west coast. Within hours, the

containers are transferred once again to tractortrailers, trucked over local roads to the port’s dock,

Federal

Government

 14%

State/local

government 4%

and loaded on a waiting vessel. If the transportation

system is functioning properly, 5 days after being

picked in Florida, the grapefruit may be crossing the

ocean on the way to Japan, providing a valuable

boost to the U.S. balance of trade.

percent of the Nation’s roadway mileage.8 They

receive funding support from the Federal Government, which provides 24 percent of total national

highway expenditures, and State governments,

which provide an additional 52 percent.9 State and

Federal programs are usually administered through

State Departments of Transportation (DOT) or

Highways. When additional capital funds are necessary, local governments depend on their own general

revenues, and increasingly on dedicated taxes. Most

communities have backlogs of road and bridge

maintenance and repair projects and seek greater

State support or permission to levy user fees, such as

the local gas taxes allowed in 16 States.10

To be eligible for Federal aid, local street and

bridge projects must conform to categorical grant

requirements; these requirements and concerns

about liability are strong incentives to utilize traditional designs and technologies, rather than innova-

 Highway 1987), p. 4.

 p. m.

 *-~, manuscript, 1988.
Chapter 4--Local Governments: Where the Buck Stops ● 97

To comply with Federal requirements, contractors in

Colorado replaced a wetland, filled in during highway

construction, with this man-made pond.

tive solutions. Moreover, with the exceptions of the

3- and 4-R programs,11 Federal funds are restricted

to new capital projects, precluding their use to

finance traffic management improvements that

could reduce congestion, such as upgraded signals,

ramp metering, and real-time traffic monitoring.

When adjusted for inflation, Federal expenditures in

1989 for highways and bridges were at the same

level as in 1980 (see chapter 1, table 1-2), although

construction and repair costs have escalated. Yet the

Federal Highway Trust Fund, fed by motor fuel

taxes, had a $9 billion balance in 1988;12 this balance

was estimated to rise almost another $1 billion

during 1989. In this context, local officials deem it

unfair that Federal fuel taxes collected from their

jurisdictions are being held in the Trust Fund and are

not returned to them for the intended purpose.

In addition, State and Federal planning and

construction requirements, such as detailed environmental impact studies and construction wage rate

standards, delay projects, increase costs, and discourage innovation. Although streets and highways

are essential to intermodal connections, local highway departments have little incentive to seek intermodal solutions to areawide transportation problems

since Federal and State funds are allocated by mode,

and interjurisdictional coordination is difficult to

achieve.

Weak land-use planning and development controls in many growth areas have resulted in traffic

that exceeds the capacity of even new roads.

Officials in rural areas face the dilemma of maintaining many miles of lightly traveled roads and

numerous bridges at service standards necessary for

heavy trucks carrying seasonal agricultural products

only a few weeks a year.

Convenient automobile transportation and the

lure of suburban living bring with them crowded

highways and air pollution in metropolitan areas.

Peak-hour congestion occurs daily, and gridlock

strikes in the case of an accident or when repair work

is necessary; indeed, when asked what he would

change to improve his business, an official of a large

international shipping line replied:”. . . reduce local

traffic congestion.”13 Routine maintenance must be

carefully scheduled and managed to avoid major

disruptions. The New York State DOT routinely

adds 40 to 50 percent to the budget for each major

highway improvement project to cover the costs of

measures to maintain traffic flow during construction.14

While new technology can bring some short-term

improvements to traffic congestion problems,15

changes in lifestyle and institutional arrangements

will be necessary for long-term solutions in regions

where problems are most severe. In southern California where a one-way commute to work can take

almost 2 hours on a bad day, several major employers have begun telecommuting programs under

which employees work at home or in a regional

office and communicate electronically.16

I Jersey ‘ g Council and New York Metropolitan Transportation Council, “Regional 

 and unpublished April 1989, p. 

 U.S. Congress, of Technology Systems and Urban Traffic Problems,”

science, Education and Program staff 1989.

 for “on, A e,” Costa CA, unpublished

remarks, Nov. 9, 1989.

 - 90 - 5 : 3
operating department or through a public transit

authority. During the 1980s, ridership increased for

rail systems, but decreased 11 percent for buses.17

Nationally, farebox revenues cover less than 40

percent of operating Costs; 18 and service is subsidized from general funds, from earmarked sales or

employment taxes, and from State sources (see

chapter 3). Federal capital grants have financed a

large proportion of bus and subway car purchases,

bus maintenance facilities, and the renovation or

construction of rail systems. Growing numbers of

express bus lanes and crowded “Park and Ride”

facilities show intermodal linkages will be used

when they are provided and convenient

Federal grant categories and a community’s most

critical transit needs do not always fit smoothly.

Some cities receive more capital funds than they

need, discouraging operating efficiency and proper

maintenance, while others, often those with older

rail systems, are in desperate need of capital

equipment and track rehabilitation, and are underfunded.19 Transit operators find it hard to understand

why Federal transit aid is declining when a $5.2

billion balance exists in the Mass Transit account of

the Highway Trust Fund.

Transit benefits are diffuse, affecting many only

indirectly through easier access to downtown and

reduced air pollution and auto congestion. These

indirect benefits make it difficult politically to

establish an adequate and reliable local revenue

base. The French Government addressed this issue

by levying a local payroll tax, with rates ranging

from 2 percent in Paris to 0.5 percent in small

jurisdictions, on all businesses with nine or more

employees. Receipts are dedicated to transit and

finance about one-third of all capital and operating

costs. Major improvements in French transit service

over the past 15 years are attributed to the revenues

from this broad-based tax.20

In contrast, many public policies in the United

States are disincentives to support for mass transit.

The frustrations and fatigue of commuting in heavy traffic

can take atoll on productivity in the workplace.

Transit officials are not typically an integral part of

local and regional transportation and land-use decisionmaking, and in many communities, land-use

policies allow metropolitan sprawl, creating transit

needs unsuited to conventional fixed-route bus and

rail service. Policies that require employer-provided

parking make it difficult to increase transit ridership

and improve productivity. Even Federal tax policy

favors auto drivers, because employer-paid transit

subsidies are considered taxable benefits, while

parking privileges are not. State and Federal motor

fuel taxes are relatively low, suppressing the cost of

gasoline to motorists and providing a further disincentive to transit use.

Over one-half of the Nation’s large and medium

commercial airports and a greater percentage of

small commercial facilities are owned and operated

by municipal and county governments. Most major

airports are largely self-supporting, except for the

essential air traffic control services provided by the

Federal Government They use landing fees, airline

rents, and revenue from parking and concessions to

fund facilities and services. Nonetheless, they must

comply with Federal, State, and local regulations

and be responsive to airline and passenger concerns

 D. “Benefit Charges for OTA 1989.

 for 1988), 37.

 of urban Public France: for Developing at the T

 meeting, DC, January 1987.
Chapter 4--Local Governments: Where the Buck Stops ● 99

 Massachusetts port Authority

Paking fees area key source of income for major airports.

as well. While over one-third of the Federal Airport

and Airway Trust Fund annual appropriation goes

for air tile control improvements, a little over

one-quarter is allocated directly to airports for

expansion and renovation.21 Nearly 90 percent of

capital improvements at reliever and general aviation airports are paid for from the Trust Fund.22

Other Federal- and State-aid programs are targeted

at small airports important to communities for

economic development.

Capacity and noise problems and ground access

difficulties (inadequate parking, highway access,

and mass transit connections) beset many large

airports. Reliever and general aviation airports are

targets for developers seeking large sites for commercial and residential developments. The aviation

trust fund balance was $5.8 billion in 1988, and is

expected to reach $6.8 billion in 1989,23 to the

frustration of airline operators and airport managers.

However, even when ample funding is available,

airport expansion plans often draw hostile reactions

from citizens who fear that increasing airport

capacity will bring more traffic and higher noise

levels. Friction between airports and citizens has put

many local airport improvement plans on prolonged

hold.

Local governments have minimal direct responsibility for railroads, because the private sector

operates freight service, and intercity passenger

trains are run by Amtrak. However, rail facilities are

strategically located and an integral part of most

cities. Many believe that they represent a neglected

option for moving people or goods within and

between metropolitan areas.

Trains could play a large and important role in

improving urban and national mobility, as the

success of Amtrak’s Metroliner between Washington, DC, and New York City, and the important

commuter rail services in States like California,

Illinois, and Pennsylvania illustrate. However, rail

companies claim that trains cannot compete, except

in a few situations, with cars, trucks, and planes,

which can use public rights-of-way-that is, highways and airports. Recently, a few private companies, seeking profitable opportunities to use abandoned track, have begun to plan new commuter

service in heavily traveled corridors. Before railroads can play a larger role in local transportation,

rail service must be integrated with other transportation modes, and public and railroad executives must

learn to work harmoniously. Numerous institutional

and legal issues affecting public and private sectors,

such as liability for accidents, must also be addressed.

Ports and waterways can be of major importance

to local economic development. Coastal port competition in the East is particularly vigorous, because of

the major shift in international trade to the Pacific

rim. Generally, port facilities are owned and managed by a municipality or a public authority; inland

waterway terminals are frequently privately owned.

Ports raise operating funds primarily from user fees

and use revenue bonds to acquire capital; some also

receive local and State general fund appropriations.

(Washington, 1988), P. 

 on Public Works Improvement, Fragile 1988), I p. 

congressional Budget Office, op. cit., 21, p. 36.
100 ● Rebuilding the Foundations: State and Local Public Works Financing and Management

introduction of double-stack container cars has revitalized many freight railroads and is a fast growing type of commercial transportation.

Federal funds cover the majority of navigation

infrastructure costs.

Many older ports are at a critical juncture; they

need to modernize and expand facilities to remain

competitive, but cannot support the necessary investment without raising fees substantially, which

would undermine their competitive position. Under

the Water Resources Act of 1986, costs for channel

dredging must be partially borne by the local port

operator; previously, the Army Corps of Engineers

had full responsibility for dredging. Furthermore,

the disposal of dredged material has become a major

environmental and cost issue for industrial ports.

The Nation has more ocean and inland ports than

required by modern shipping equipment and goods

transport patterns. Industry officials advocate the

targeting of limited public funds for facility improvements for high-priority, deep-water ports and . main-system projects on the waterways. However,

decisions on which ports have the highest priority

and what constitutes the main inland waterway

system are controversial and problematic.

The transportation linkages between ports and the

pipeline, rail, and truck services that move products

over land to terminals are critical to the efficiency

and attractiveness of the port to shippers. However,

despite the obvious importance of these connections,

few ports have integrated transportation systems,

and port officials often find negotiating with private

carriers difficult. Furthermore, frequently only one

rail carrier serves a port, curtailing the options for

shippers of bulk products if service is unsatisfactory.

LOCAL ENVIRONMENTAL

RESPONSIBILITIES

Funding and supply of environmental services is

provided almost solely at the local level; historically

service fees and general taxes have supported these

public works. New Federal standards and the phasing out of Environmental Protection Agency (EPA)

construction grants will increase costs (see table

4-2), most of which will be passed on to individual

users. Local governments financed 76 percent of

these services in 1981,82 percent in 1987, and their

share is expected to rise to 87 percent by the year

2000. 25 Lack of funds led many cities to postpone

both rehabilitation of old plants and new construction, and now costs have risen dramatically. This

situation does not bode well for large, older cities,

like New York and Boston, which face huge

infrastructure maintenance deficits and major costs

for upgrading outdated wastewater treatment facilities to meet EPA standards.

The Nation’s drinking water is provided by a few

large municipal systems, by special districts, Statechartered corporations, independent nonpolitical

boards, homeowners associations, and a variety of

public and private companies. More than 43 percent

of the population is served by 0.5 percent of all

systems, while 64 percent of the systems together

seine less than 3 percent of the U.S. population. Over

80 percent of large systems are publicly owned;

privately owned systems and private wells serve

almost one-third of the Nation’s population. Control

of the water supply system is a significant local

political issue because it is closely tied to local land

development. 26

, Rivers I.Ix., 28, 19s9.

Inc., The Us. Agency, in press),

 from Associates, Inc., T’ the 

 Works DC: May 19S7).

 - - . - -- 

--- . --
—

Chapter 4-Local Governments: Where the Buck Stops ● 101

Capital for water supply facilities comes from a

variety of sources, including general funds, user

charges, debt issues, stock issues, and intergovernmental aid. Tax levies can be based on property,

income, earnings, and special assessments, and

Federal funding has generally supported less than 10

percent of total expenditures. Service is financed

from hookup and user fees and general tax revenue

without any substantial subsidy from State government.

Many communities face drinking water supply

and quality problems. For some, water supply is

either threatened by pollution or is inadequate. Local

governments in the Western States compete for

limited regional water supplies. Older cities, particularly in the Northeast, must replace obsolete treatment facilities to meet current standards. Moreover,

most communities will have to revamp their treatment systems to meet EPA’s new water quality

standards. Although the standards are not yet final,

local officials estimate that the costs of filtration to

remove specific contaminants and to monitor water

quality will be massive. Some local officials contend

that their existing systems provide an acceptable

level of purity and that Federal requirements to test

for contaminants may not be necessary for public

health needs.

Policies of pricing water at low, subsidized rates,

particularly in the Northeast and Midwest, have

contributed to current revenue shortfalls, the absence of capital reserve funds, and overconsumption.27 To raise the capital needed for water treatment improvements, many communities will have to

increase water charges substantially. Full-cost

charges make good economic sense for many

communities, and fee structures can be used to

manage water use. However, managers in small or

older jurisdictions may find the necessary fee

increases higher than property values will support.

Districts that can raise fees enough to pay for

investment capital may run up against Stateimposed debt ceiling or Federal bond caps.

State-of-the-art engineering knowledge is needed

to comply with Federal and State water quality

regulations and to operate modern facilities, yet only

the largest and wealthiest cities can attract the

necessary engineering and technical talent. Small

districts suffer most from a lack of technical and

financial expertise, and while consolidation and

regional solutions hold promise for such systems,

communities resist giving up their independence. If

aid is not available and Federal deadlines are not

relaxed, noncompliance is a likely alternative for

many jurisdictions.

for wastewater treatment; they own and operate

nearly 16,000 wastewater treatment plants, which

treat more than 37,000 million gallons of sewage a

day. Private industry treats only a small additional

fraction of this amount and then discharges its

effluent into local treatment facilities or waterways.

Federal capital grants have helped finance about 25

percent of construction costs for local treatment

plants, and State aid contributes an additional 5

Wational Qnmcil m Public Wcxh hpmvcmcn~ op. cit., footnote 22, p. 54.

. . .
I

i

To protect water quality, the Environmental Protection

Agency requires State and local governments to develop

programs for controlling indirect “non-point source”

pollution, such as the agricultural runoff pictured here.

percent, with local monies supplying the balance. 28

Operating costs are covered by user fees, ad valorem

taxes, hookup fees, and some State aid, with user

fees covering between 40 and 70 percent of the

operating costs, depending on the region.

Federal and State financial assistance and stricter

treatment regulations have improved local wastewater treatment substantially over the past 20 years,

yet the backlog of local needs for system renovation,

expansion, and construction is massive. EPA estimated that a capital investment of $68 billion would

be necessary to satisfy the needs of the 1988

population, 29 excluding costs of addressing combined overflow problems, stormwater management,

nonpoint source control, and estuary protection. The

end of EPA construction grants in 1990 will bring

increased financial responsibilities for both State

and local governments, and the latter will have to

compete for limited State loan funds to finance

system improvements.

Many jurisdictions lack the engineering expertise

to resolve the technical problems related to assessing

needs, evaluating innovative or alternative systems,

siting facilities, and deciding on action plans to meet

Federal and State regulations. Furthermore, local

governments have few alternatives to raising user

fees substantially-in most cases doubling them—

to cover operating and maintenance costs and to pay

debt service. Many facilities are currently so poorly

operated and maintained that they are unlikely to last

their design lives. Small, low-income communities

and older cities may lack the economic base to raise

rates or local subsidies sufficiently, and will need

outside help or face noncompliance.

solid Wrote

Solid waste collection and disposal have been

managed by local governments and the private

sector. Local user fees have paid the operating costs,

and bonds and commercial loans have financed new

landfills and incinerators. All localities are contending with problems related to increasing per-capita

generation of solid waste, limited permitted landfill

capacity, and siting new solid waste facilities.30 As

the scope of such problems has increased, the

Federal Government has enlarged its role, focusing

on regulation of landfills, incinerators, and waste-toenergy facilities. States are also adopting stricter

regulations for landfills and incinerators, and both

State and local governments are developing programs to stimulate recycling and encourage waste

reduction.

Eighty percent of the Nation’s landfills currently

operating will be full in two decades,31 although

many will close before then because they cannot

meet regulations. Design features to ensure that

landfills are environmentally sound, such as liners,

leachate collection and treatment facilities, and

methane gas collection systems, increase capital

costs significantly. Local citizen and political oppo-

 Ire., for the National Council

19s7).

 Agency, Office of Municipal Needs VA: National

 February 1989), p. 

 Congress, Facing Americans (Washington, 

U.S. 00 1989), p. 303.

 p. 271.
Chapter 4--Local Governments: Where the Buck Stops ● 103

sition to siting landfills or incinerators is often

extreme, extending the facility replacement process

over many years. National efforts to increase demand for recycled materials have not been coordinated with policies encouraging waste separation

and collection.32

LOCAL GOVERNMENT

FISCAL PROGRAMS

Public works construction in cities and counties

has historically been financed with revenues from

broad-based local taxes and Federal and State grants.

More recently, local jurisdictions have turned to user

fees, developer impact charges, and revenues from

special districts to help fund capital investments and

operating and maintenance costs. Despite political

risk and State limitations, most local governments

have also had to raise property taxes, and some have

introduced or raised income or sales taxes and

service charges over the last several years to finance

public works. Dedicated Federal and State funds

have long supplemented local transportation programs. This has been much less true for environmental services, which are funded primarily through

local revenues and service charges.

The property tax has always been the mainstay of

local government revenue structure; in 1988, property taxes generated over 70 percent of the tax

revenue collected by all local governments.33 Cities,

which usually have a more diversified tax base than

counties and towns, rely on property taxes for

approximately 50 percent of their revenue. Although

the average effective tax rate on single-family homes

valued at $100,000 decreased from $1,260 in 1981

to $1,150 in 1987,34 41 percent of cities increased

property taxes in 1988 and in 1989—a significant

number, since many States place legal limits on

community property tax levies35 (see box 4-A).

property tax limits have forced local governments to press State legislatures for authority to levy

additional taxes. The retail sales tax is considered

the most productive local, nonproperty tax and has

proven most acceptable to voters. Since New York

City adopted a general sales tax in 1934, local

governments in 30 States have levied the tax; in

1986, these revenues made up approximately 16

percent of total local income.36 Since all but five

States set a cap on the local sales tax, attempts to

increase it require substantial political effort (see

box 4-B); and despite the need for additional

revenue, only 8 percent of cities increased sales

taxes in 1988 and 5 percent in 1989.37

Although most communities place sales tax revenue in the general fund, some dedicate a portion to

special functions, usually regional transportation,

including mass transit; currently, 11 States give

local sales tax authority to 117 transit or transportation districts.38 The Denver Regional Transportation

District levies a 0.6-percent sales tax, and the

Metropolitan Atlanta Rapid Transit Authority benefits from a l-percent sales tax dedication, of which

50 percent must be used for capital spending. In

Ohio, counties may impose a transit tax of up to 1.5

percent; 39 in 1980, the Central Ohio Transit Authority in Columbus switched from a dedicated local

property tax to a retail sales tax.40 Since 1972, a

portion of the sales tax paid in King County,

Washington, has gone directly to Seattle METRO

for operating and capital expenses. Currently, the 0.6

percent of the region’s 8.1-percent tax dedicated to

METRO produces $114 million annually and is a

key source of agency revenue.41

321bid., p. 317.

33u.s.-mcnt of commerce, B~ of the Census, (Washington, DC: November 1988), p. xv.

~Advisory Commission on Intergovcrnxncntal Relations, 1989cd., vol. 1 (Washington, DC: JanuaY 1989),

p. 72.

3%tCrSOQ, op. ci~, foomotc 5, p. 30.

WAdVigory Commission on hmrgov crnmcntd Rclatioxw (Washington, DC: July 1988),

p. 66.

3kerSOQ, op. cit., foomou 5, p. 23.

J8Advisory Coremission on Intergovernmental Relations, op. cit., footnote 34, pp. 58-59.

~%id, p, 63,

-tic Technology, Inc., t#kuion prepared for the Urban ConsorU“um for Technology Initiatives and tk U.S.

Dcpaltmult of Tmspomion (Washington, DC: 1982).

41Ja EhI&, bti~ &CCILX, communication, June 1989.
to levy the tax.

Local governments in11 States may levy personal

income taxes. and 3 States allow local payroll taxes.

In 1988, more than 3,500 districts (over two-thirds

of them in Pennsylvania) collected income taxes.42

Large cities, such as New York, Detroit, St. Louis,

Cleveland, and Philadelphia, are most likely to rely

on income taxes, which generally account for about

15 percent of total city tax revenues.43 Few cities

earmark income tax for special uses, although

Cincinnati, Ohio, and Newport, Kentucky, use

income tax revenue to support transportation. 44 only

3 percent of cities initiated or increased income taxes

in 1988, reflecting local resistance to any type of tax

increase. For example, the 1989 Virginia General

Assembly authorized several heavily urbanized

northern Virginia counties to levy a l-percent

income tax to finance needed transportation improvements, but the counties encountered heavy

Traditionally, local governments have levied fees

or charges on users of certain types of public services

to cover all or a portion of the costs and, to a lesser

extent, to ration service. Typically, water, sewer, and

solid waste disposal services, mass transit, bridges,

and public parking garages are at least partially

financed with user charges; fees often do not cover

ail costs, especially for services with large capital

expenses. Legal restrictions and public resistance to

tax increases have driven many local governments to

raise these fees and apply them to more services to

replenish general funds and to pay for specific

programs and improvements. Citizens seem to find

“paying for what you get” more acceptable than

paying higher general taxes.45

42&jv~ ~on IntqovemmaMal Rdatioms, op. cit., foomotc 34, p. 46.

%ztcrxm, op. cit., f~ 5, p. 30.

%Iic Technology, Inc., op. cit., f~e 40.

ootmtc 18, p. 1. 45Hx, op. cit., f

-7. ~ -r .- - - -- -- -

. . -.
Chapter 4-Local Governments: Where the Buck Stops ● 105

Photo American 

Taxpayers are often willing to pay full costs for direct

services, such as garbage collection.

User charges grew at an annual rate of 11 percent

between 1977 and 1984,46 and currently, about 15

percent of State and local revenues come from such

fees.47 In 1988, 62 percent of cities raised garbage

collection fees, 57 percent increased sewer service

fees, and 55 percent boosted water charges.48 Large

cities are more likely to have increased fees than

jurisdictions in the 10,000- to 50,000-population

range, probably because they offer more services

appropriate for fees. Moreover, implementing user

charges that recover full costs of service requires a

sophisticated capability that small jurisdictions usually lack. Regionally, user charges contribute most

to local revenues in the South and the Plains areas,

which have a tradition of low property taxes .49

User charges are best suited to finance those

services for which users can easily be identified and

charged, or for which it is easy to deny service to

those who do not pay. Environmental services fall

into this category. Less direct fees, such as the gas

tax or vehicle registration fees, are used to capture

some of the costs for facilities like local streets and

highways, where users cannot be excluded from

using the service. User fees provide local administrators with a useful management tool; service use

can be manipulated through rate policy-charging

higher rates for water used during dry months when

demand is high and higher transit fares during peak

Table 4-3--Local Options for Addressing the Costs

of Federal Environmental Standards

●

●

●

●

●

Prognosis: Potential for tax-payer acceptance unless debt

service costs push taxes or fees too high.

Option 3: Reallocate Funds Other Programs

Prognosis: between conflicting goals; likelihood of smaller allocations all around.

Option With Standards

Prognosis: Federal enforcement action, fines and litigation;

extensions or waivers; possibility of increased health 

SOURCE: of Technology Assessment, 1990.

hours when job-holding commuters must get to

work, for example.

While user charges are attractive revenue options,

local officials must build solid political support for

increases or risk a public backlash (see table 4-3),

and must resolve complex management and policy

issues. First, they must decide what types of services

they want to finance with user fees instead of general

fund revenues and how to calculate true, full costs

given available data and expertise. Charlotte, North

Carolina, and Phoenix, Arizona (see box 4-C), are

examples of communities that made substantial

efforts and instituted M-cost accounting programs.

Second, fee setting requires policy decisions on

which services are to be self-supporting and which

require subsidies for low-income groups. Finally,

the extent to which user fees can be used to control

service demand and still be equitable is a consideration.

and L. and Governments (Washington, DC: The Institution, 1986), p. 156.

op. cit., 5, p. 25.

 on Relations, (Washington, DC: 1989).
* *

important advantages of special districts is that they

The majority of special districts are formed to

provide a specific public works function-water

supply, sewage treatment, highways, airports, and

deep-water port facilities-and have at least partial

administrative and fiscal autonomy and are not

constrained by State debt limits. Special district

assessments account for approximately 10 percent of

can provide services in developing or rural areas or

small towns where local governments are not willing

or have limited financial or administrative capacity

to expand. However, proliferation of fiscally autonomous special districts creates issues of public

accountability and policy coordination with other

types of infrastructure and other jurisdictions.

total local revenue, a relatively small share, but in The Mount Laurel, New Jersey, Township Munisome States, such as California , Illinois, Pennsylva- cipal Utilities Authority serves fast-growing suburnia, Texas, Massachusetts, and Washington, special ban communities outside Philadelphia, and is typical

districts generate both capital and operating funds of many special districts. Created in 1969 when it

for local public works.50 Like user fees, special absorbed an existing private water and sewer sysdistricts, through their charges and assessments, tern, the authority operates five wells, two water

shift most of the financing for their services from all treatment plants, and three wastewater treatment

W.S. Ikpartmau of Cunmcru, op. cit., footnote 33, pp. 51,60, 6S, S5, %), 94.

. . . . . . . - --- —, -----
Chapter 4--Local Governments: Where the Buck Stops ● 107

plants, relieving the township of administrative and

financial responsibilities.51

Although special district financing is best suited

to growth areas, since 1965 Missoula County,

Montana, a slow-growing rural area, has been

raising capital through Rural Special Improvement

Districts (RSIDs) for a variety of public works needs

including roads, sewage treatment plants, and water

projects. 52 Missoula has two categories of RSIDs.

Neighborhood RSIDs are setup to improve facilities

in already developed areas, and developer RSIDs are

created when 51 percent of the land is owned by an

entity intending to improve the land for development. As of 1987, almost 900 RSIDs had been

established, many for small improvements and

others for projects costing as much as $1.6 million.

Missoula has also created perpetual maintenance

RSIDs to pay for upkeep of existing facilities.

Capital improvement plans provide local governments with a structure to survey needs and establish

priorities, coordinate intergovernmental projects,

develop financing strategies and schedules, and sell

the program to the public. Most cities and large

counties operate under a 5- to 6-year capital improvement plan that is updated annually. Usually,

the jurisdictions have a large backlog of capital

projects, and this type of planning process is

essential to maximize their limited funds.

In contrast, small communities are unlikely to use

any type of capital budgeting plans, although the

fiscal impact of necessary capital improvements

may be greater for them than for large jurisdictions.

Research on planning strategies in small towns

under 10,000 in Wisconsin, Massachusetts, Montana and Maine indicates that less than 5 percent

practice any form of capital improvement programming.53 While small communities recognize that

capital needs exist, responsibilities for public works

are often divided between towns and independent

districts, which are likely to deal with capital needs

on an individual and ad hoc basis, because of the

division of responsibility and because of their small

staffs, limited fiscal capacity, and voter resistance to

large expenditures.

Political Strategies

heal authorities are growing more conscious of

the necessity for citizen outreach and basic public

relations skills to raise awareness about infrastructure needs and gain funding approval. Commitment

and persistence are key. As one example, the

Chicago Regional Transportation Authority (RTA)

had conducted studies from 1985 to 1987 to assess

conditions of the RTA system, identify needs, and

estimate the cost of needed capital equipment and

reconstruction. The agency drafted a Strategic Plan,

which it took to the State legislature with a request

for a tax increase to support transportation improvements. Though supported by key legislators and the

Governor, the bill failed. RTA redoubled its efforts

the following year, drafting a concise but pointed

summary of the Strategic Plan, engaging media

consultants, and mounting an aggressive community

outreach effort. Over a 3-month period RTA presented its program to civic, business, and government groups around the State. These techniques

proved decisive in 1989; 1 day prior to adjournment

and by a narrow margin, the legislature authorized

$1 billion over 5 years for the RTA system.54

Officials in other jurisdictions that have succeeded in passing major capital improvement plans

have planned equally carefully, allocating resources

for public education so as to achieve the necessary

political consensus. Box 4-D describes Cincinnati’s

recent efforts, and other examples include Phoenix

and San Diego (box 4-B), and New York State

(chapter 3, box 3-B).

REGIONAL PLANNING

Although the economic and operating efficiencies

to be gained by regional planning for land use and

public works are widely recognized, the political

reality is that most of these decisions are made by

local elected officials and are based on the salient

local priorities. In many European countries, where

governmental authority flows from the top down,

local planning and infrastructure decisions are

sl~a d., op. cit., foomac 2. p. 24.

52AW ~~~., F@~ing i@mWUCZZW: ]nmv~~ at the Local bvef (Washington, m: Mt.hd ~WC of Cities! Dcumbcr 1987).

p. 56.

sss~y A. R~ @ ~ip -kg, ● 6CW1M BU@~g: srn~ l’bwn Practices in Four Sates,” ~IMKXI fOr the NtioA Cowil m ~hc w~~(

Impovemcat, unpublished manuscript, octokr 1986, p. 5.

f~~w G. Weigk, cxwutive~, Regional Tranqmrta tiOIl Authority, personal COUIHlliGitiOll, Aug. 16, 1989.
Chicago’s rapid transit system faces a variety of needs. The ceiling in this administrative office collapsed a year before the picture was

taken; and the deteriorating rail station is on Chicago’s Northwestern line, the system’s busiest route.

required to conform to district or regional plans. In

the United States, planning and public works decisions are made by local governments, and regional

planning organizations are usually advisory only. In

most States, general-purpose planning agencies,

such as Councils of Governments or Regional

Planning Councils, have no specific governing or

taxing authority, no veto power, and membership is

voluntary. Because their products reflect the consensus of their local members, regional agency plans are

often criticized as vague and overly general. “Regional planning only works when it’s a win-win for

all the districts; when everyone gets more or less

what they want. When there are hard choices and

winners and losers, regional planning--forget it."55

As a result, regional planning operates in political . limbo--acknowledged as an exemplary goal, but

lacking the teeth to be effective.

Despite the institutional weaknesses of regional

planning, policymakers have persisted in trying to

make it work to improve the efficiency of public

investment in infrastructure and other services.

During the 1960s and 1970s, Federal and State

governments encouraged comprehensive and functional regional planning. Provisions were added to

many Federal programs requiring regional bodies to

set priorities for, and review the use of, Federal

funds. In 1973, DOT promulgated a requirement that

Metropolitan Planning Organizations (MPOs) be

established to review urban area transportation

planning. DOT funded these regional activities;

other Federal agencies, particularly those supporting

housing and environmental programs, followed suit,

including planning grants with program funds.

During this period, most States passed legislation

allowing the formation of regional planning organizations, and some provided modest appropriations.

As a result of Federal and State support as well as

local interest, the number of regional councils and

planning associations jumped from 36 in 1%1 to

659 in 1978.56

 House of July 7, 19S9,

 OTA report, June 19S9, app. B, p. 1.
Chapter 4-Local Governments: Where the Buck Stops g

warned of infrastructure decay but failed to mobilize

widespread support for action. In 1986, the mayor and city council turned to the business community to help draw

attention to public works by establishing the Cincinnati Infrastructure Commission. Hoping to focus citizen concern

on the need for repairs to roads, bridges, and sewers, and stimulate willingness to pay, the mayor and city council

involved community leaders.

The effort paid off; within a year the commission had produced a comprehensive report on the city’s public

works, with recommendations for maintenance and repair and suggestions for financing, including a ballot

referendum to raise the city income tax by 0.1 percent with proceeds earmarked for infrastructure repair, upkeep,

and improvement. Six months later Cincinnati voters passed the tax increase, anticipated to yield $6.9 million per

year for infrastructure maintenance. The tax may be used only for projects that will take or less to complete

and will be rescinded if revenues are used for any other purpose. One commission member cited this emphasis on

manageable, relatively short-term projects as a key factor in making the referendum attractive to voters.2 Though

the tax increase passed by a narrow margin, the approval was significant because the decade had otherwise been

characterized by tax revolt.

The commission chairman, the chief executive officer of Procter& Gamble, selected as commissioners 10

business and community leaders from such corporations as Cincinnati Bell, General Electric, and Arthur Andersen,

as well as the president of the University of Cincinnati. Five committees were formed to review streets and roads,

parks and recreation, water and sewers, buildings, and financing. For each of these categories, volunteer project

engineers assembled teams to draft portions of the report. Project engineers could staff their teams however they

chose, though in most cases one member of the team was selected by the city Department of Public Works.

After completing their reports, the team leaders submitted them to the commissioners, who condensed the

findings and presented a final report to the mayor and city council.3 The commission’s independent status gave its

work an appeal that the municipal government could not muster. Passage of the tax increase highlights the

importance of clearly defining needs and articulating priorities. As one Cincinnati Infrastructure Commission team

leader noted:”. . . people are willing to pay higher taxes if they know exactly what they will get for their money.’4

Waklid m the commitiOll is b8sod on Cincimlali ~mCommls3

m==~ to cilxinnali Cily CoImcil, -M-

“ ior.1, “City of Cinciumii Infkzw!xucture Commission Rcpu”

dmuuwnl, Dec. 3, 1987; and Ronald w. Robcns, “Cincinnati’s Dream Team,” 

Engineering, My 1989.

wiuiam Victix, (31xkln ti~@mlkskm- commmicatiom ~. 6,1989.

-~commksion issued its complctc rcpmt in late 1987, the group has mmaincd intact to monitor progrtss snd ensure m=

program implementation.

4~mq. ci~, fOOttlOtC 1*P“4“

However, during the 1980s, many Federal pro- On the positive side, many agencies have highly

grams funded regional planning, such as the skilled and knowledgeable staffs, who contribute

Housing and Urban Development’s section 701

grants and EPA’s section 205 grants, were eliminated or cut back. Financial support for regional

planning has also waned in many States and

generally is under 30 percent of agency budgets and

as low as 10 percent.57 The impact on regional

planning organizations has been severe; professional staffs have been cut, services reduced, and

essential databases have become out-of-date. Although regional agencies have been inventive in

raising money by selling technical services, applying user fees, or charging special membership

essential technical expertise and provide valuable

services to their constituents. Indeed, one reason

many regions have coped as well as they have with

the transportation impacts of rapid growth is the

transportation planning process DOT has fostered

through the work of regional MPOs. In a few places,

regional agencies have achieved enough influence to

overcome political differences. For example, in

1988, the major urban county in Arizona adopted a

new air pollution control plan; since then the State

legislature had adopted four of the five priority

) assessments, local revenues are not adequate to recommendations of the Maricopa Association of

maintain even basic planning activities. .

~Ibid., p. 3.
I

I

,

i

,

I

)

I

Governments’ plan. 58 Box 4-E provides another mental approval of a project.. The charges compenexample. Regional planning is greatly strengthened

if the regional agency has the capability to finance its

recommendations and to tie infrastructure decisions

to land-use development policies. Unless State

governments provide them with more power, regional planning agencies will remain peripheral to

most infrastructure decisions, as one Governor

recently recognized publicly:

The critical challenges facing Virginia cannot be

addressed without formal, regional cooperation by

our localities. We must use State resources in a

manner that cuts waste and improves efficiency.

Such cooperation will not happen by accident.59

The diversity of regional planning can be seen in

case studies of six regional planning organizations

and two State planning programs in appendix C.

BENEFIT-BASED FINANCING

STRATEGIES

Local governments have traditionally paid for

infrastructure with funds raised largely from broadbased taxes plus some user fees levied on groups that

benefit directly from specific services. Pressed for

funds but constrained by voter opposition to tax

increases, local governments have turned to developer charges and special districts-ail ways to focus

the costs of constructing infrastructure on the

beneficiaries.

Developer charges are money, land, or construction services required of a developer seeking governsate local governments for the costs of providing

public facilities needed by the development and are

used to achieve some of the same goals as growth

limitation by regulation. Traditional forms of developer participation have included land dedications for

highway rights-of-way, schools, and parks. In recent

years, developers in fast-growing locations have

been required to build or provide funds for school

buildings, fire stations, and sewage treatment facilities. Generally, developers pass these charges on to

buyers by raising prices.

Despite the advantages to local governments of

developer charges, their use is not widespread

because to have an effective program, State enabling

legislation, local ordinances, and most important, a

strong real estate market are necessary. Communities in California, Florida, and Colorado are the

principal users, although examples exist in other

States. There is no standard program; every community has a different process, including the following:

In Broward County, Florida, the county undertakes an “adequacy review” to assess the impact of

any proposed development on the comprehensive

land-use plan and a wide range of public facilities,

including the regional transportation network, local

roads, water management and water supply, wastewater treatment and waste disposal, air quality,

5~d, ~p, A+ P. 4.

j~~(j B~J~, fCWlXlC3*VUT10f Of Virginia quoted in Ad@ton, Virginia Journal, Jdy 24, 1989, p. A9.

I

i

t

. . . . . -., . - ...— — ..- - - , - . . . . - - . . . _ , , -. . . . . --- - . —-
Chapter 4--Local Governments: Where the Buck Stops ● 111

schools, and parks.60 The developer must show that

existing facilities are adequate to support the proposed development or provide for them through fees

or exactions paid to the county.

Initially opposed by developers, the Broward

County system is now accepted because it applies a

systematic procedure to all developers and reduces

costly administrative delays. Impact fees are levied

prior to development for roads, parks, and schools.

Road impact fees are set, based on a computer model

that contains information about existing volume and

capacity for all major roads and calculates the

amount of traffic generated by the proposed development. The developer must pay a proportionate

share of the costs of increasing the capacity or

constructing any necessary road improvements; fees

are deposited in a dedicated fund earmarked for that

service area. Park and school construction fees are

set by a similar process of impact assessment. Water

supply and wastewater treatment facilities must be

constructed by the developer.

Orlando, Florida, has refined its system of

developer fees, using them as partial security for

revenue bonds for improvements to the wastewater

treatment system.61 Funds paid by developers and

deposited in an Impact Fee Account, plus user

charges, provide debt service payments on the

bonds. The city has established a reserve account to

cover shortfalls if revenues are insufficient or a

growth slowdown occurs.

In Fresno, California, developer fees pay for all

public works improvements needed in designated

growth zones of the city. 62 The initial developer Of

a growth zone must pay an accelerated fee (approximately established base fee) for

improvements. Once the total improvement cost is

collected, the fee is reduced to the base rate, and the

developers who paid at a higher rate are reimbursed.

Upper Merion Township, Pennsylvania, a suburb

of Philadelphia, has established itself as a Transportation Improvement District with authority to charge

developers impact fees based on the number of tips

generated by the new development.63 The fees are

deposited in a highway/traffic capital improvement

fund and dedicated to making the necessary improvements. Developed by a local traffic task force,

the system enables the community to raise revenue

for road improvements without affecting the township’s bond credit rating, thus reserving the township’s bonding capacity for other capital projects.

While special districts are not a new concept in

public finance, local governments, particularly in

growth areas, have recently modified and expanded

their use. Between 1982 and March 1987, Pleasanton, California, raised approximately $145 million

for infrastructure construction through general obligation bonds backed by special district assets.64

After a special improvement district has been

approved by the property owners or the city, the full

costs of all improvements, including interest costs

and engineering fees, are calculated, and the amount

is apportioned among the property owners. Benefit

zones are designated within some improvement

districts according to the proximity to the improvement. Assessments are made in proportion to acreage rather than assessed value to prevent confusion

with property taxes, and property owners may

choose either to pay the assessment in a lump sum

or in annual installments. In one district that had

three zones for allocating highway improvement

costs, assessments ranged from $13,700 to $50,000

per acre. If a parcel falls into a multiple-improvement district, the owners can be assessed charges of

$200,000 per acre.65

Based on the special district concept, tax increment financing is practiced in many States, most

frequently in California. The procedure involves

freezing, as of a base date, the real estate tax base in

a designated benefit area. Tax revenues at the

pre-investment level continue to flow to the general

fund, but any increased revenues resulting from

I @Douglas R. Poncr and Richard B. Peiscr, Development Component Series

Urban Land Institute, 1984), pp. 15-17.

61u.s. mVirOUMmMI Protection Agctxy, Administration sxtd Resources I Management, (Washington, DC:

I Sqcmbcr 1989), p. 68,

I ‘QPorter and Peiscr, op. cit., footnote 60, p. 18,

~ ~Apog(x Racarch Inc, op. cit., footnote p. 80.

WM., p. 35,

6Wid, p. 37.
The Matsunk Sewer Expansion Project in Upper Merion, Pennsylvania, was financed through the Township’s

sewer access rights program.

property values rising above the base are earmarked

for debt service on the improvements. Since the

mid-1970s, California jurisdictions have had authority to finance redevelopment with the additional tax

revenues generated by the projects. Los Angeles has

used tax increments to finance numerous redevelopment projects, both in the central business district

and in residential neighborhoods.

Orlando, Florida, has based its $19 million

financial plan for the redevelopment of its downtown area on tax increment financing.66 Revenue

bonds to finance the needed capital investments are

backed by an irrevocable lien on the increment in the

property tax revenue. In 1986, the tax increment

revenue, which is paid into a redevelopment trust

fund, was $2.3 million.

Davenport, Iowa, is financing a portion of $13.2

million in improvements in an economic development project with tax increment revenue.67 Improvements include four new Interstate highway ramps,

two bridges over the highway, and improvements to

local roads. One-half of the income from the tax

increment district is earmarked for repayment of a

$2.5 million loan from the RISE Fund (a State

transportation funding program described in chapter

3, box 3-A).

While local governments are eager to tap private

resources for public works capital, the private sector

is reluctant to participate because such projects are

not usually profitable; thus, involuntary developer

charges are more typical means of acquiring private

capital. However, occasionally, private investors are

willing to participate in financing public works that

they determine can lead to profits. For example, in

the tiny town of Belen, New Mexico, a developer

agreed to subsidize a new water supply plant until

the customer base grew and the system was operating at capacity and covering full costs.68

 p. 68.

 p. 

 op. cit., 61, p.%.
Chapter 4--Local Governments: Where the Buck Stops ● 113

Purchasing Access Rights

As a way to avoid bond issues and to accumulate

capital in advance for a water or wastewater facility,

some local governments sell access rights in prospective plants. For example, the township of Upper

Merion, Pennsylvania, initiated a Sewer Access

Rights Program to build up capital to finance

expansion of a sewage treatment plant. Developers

were allowed to purchase credits for an equivalent

dwelling unit (200 gallons per day) for $3,200.@ The

price of the credits increased as construction costs

rose, creating an incentive to invest early. Moreover,

nonparticipants had no guarantee of sewage treatment capacity for their developments. So far, the

township has collected $23 million from the program, $5 million in paid credits, $6.5 million in

signed contracts for additional rights, $5 million

contributed by the township to purchase reserve

capacity for its own uses, and $6.5 million from

neighboring communities that plan to use the

facility.

In 1983, officials in Houston, Texas, established

a similar pre-purchased wastewater treatment plant

program. In exchange for the payment of a capital

recovery charge, private developers are guaranteed

access to a contracted amount of future system

capacity. Between 1983 and 1987, the city collected

nearly $70 million, which it leveraged into $180

million in improvements to treatment plants. 70

Private developers have never liked the program,

and the downturn in the local economy has made the

pre-payment plan burdensome. However, the capacity credit system signals clearly where additional

capacity is needed and prevents overinvestment in

facilities where demand is limited. Moreover, new

capacity has been provided efficiently; the city

expanded several small treatment plants rather than

building a new, larger, regional plant.

In the early 1980s, Escondido, California, was not

in compliance with State wastewater regulations and

was the subject of a lawsuit filed by the neighboring

city of San Diego for nonperformance on a wastewater service contract. The city was also experiencing intense developer pressure. Although Escondido

was in technical default on its municipal debt, voters

had vetoed bond financing, higher user fees, and

conventional public-private partnerships.71 To finance the needed upgrading of the sewer plant, the

city opted to sell future capacity, raising $16 million

in 3 months by selling rights at $1,650 per unit, for

either cash payments or letters of credit payable in 2

years. The city assures a sell-back price based on a

guaranteed 33-percent increase for the first year and

an 18-percent return for rights held for 5 years. In

April 1989, access rights sold for $3,300 per unit.

The program has the support of both citizens and

developers, although there is some opposition from

anti-growth groups.

Enthusiasm for ownership of environmental facilities has waned since the passage of the 1984, 1986,

and 1988 Tax Reform Acts (see chapter 2 for

details), and solid waste management is one of the

few areas in which private ownership is still

considered profitable. In Hempstead, New York, a

private firm is scheduled to install a recycling

facility in a building provided by the town. The firm

will make a capital investment for equipment of

between $500,000 and $750,000. The town has

agreed to sell its recyclable to the company for a

guaranteed price for 3 years,72 at which time the

town will buy the equipment from the company,

unless the contract is renewed. Other nearby communities are permitted to use the recycling plant.

In transportation, suburban traffic congestion and

the lucrative prospect of the combination of toll

revenues and increased land values have made the

construction of private, for-profit toll roads more

attractive. However, prospective investors must

overcome a multitude of time-consuming financing

and institutional hurdles. In 1988, the Virginia

Legislature passed a bill enabling the construction of

private toll roads, and the Toil Road Corporation of

Virginia received approval in 1989 from the State

Transportation Commission to construct a 14-mile

toll road from Dunes Airport to Leesburg, Virginia.

In addition to completing the acquisition of capital

and purchasing the right-of-way, the corporation

must get approval of toll rates and financing plans

from the State Corporation Commission. Private

69Awg= R=~h, k., Op. Cit., fOOtnO~ 52! p.

 135’

TOApg= R~~~ ~c$, 4tWfic.Mvac p~ershi~ fm Environmental services: Anatomy, kcentives. and @X?dimcnts,” pfep~ed for tie us

EnVironmcntid Protection Agency, Office of the Comptroller, Resource Management Division, unpublished manuscript, OcL 17, 1988, p. 17.

, Tlu.s. fivfiuent~ Protection Agency, op. cit-. footnote 61, P. m.

~Apogee Researck Inc., op. cit.. foomote 70, p. 23.
114 . Rebuilding the Foundations: State and Local Public Works Financing and Management

entrepreneurs are also attempting to develop a

commuter rail service on abandoned railroad track in

northern Virginia.

Highway E-470, a 50-mile circumferential on the

eastern side of Denver, Colorado, exemplifies a

successful public-private venture, but it also illustrates the complexity of financing a major urban

highway. Private participation is limited to right-ofway contribution, the payment of impact fees, and

membership on advisory panels. Nonetheless, the

collaboration has been a major factor in public

acceptance of the financing package (see box 4-F).

Despite the advantages to local governments of

shifting public works costs onto individual developers, users, and property owners, such benefit-based

strategies pose a number of complex practical and

policy issues.

Equity: The issue of equity has several dimensions. First, developer charges and special

district assessments frequently require advance

payment for improvements. These can be a

heavy burden for small developers and even

exclude them from the market. Second, new

residents pay housing prices inflated to cover

required developer improvements. Benefits of

a highway or other community improvement

often come to both old and new residents,

making equitable cost allocation a challenge.

Finally, user fees are basically regressive.

Raising such charges to cover more fully the

costs of essential services, such as drinking

water or transit can create serious policy

dilemmas for local officials. Low-income citizens may be disproportionately hurt by new or

increased fees, unless the fees include provisions for low-income and other special groups

and encourage efficiency. However, if carefully

structured, benefit charges may be no more

regressive and can be less so, than subsidy by

broad-based taxes.73

Cost Allocation:Determining the full costs of

public works and developing-a rational system

for allocating costs among all direct and

indirect beneficiaries are complex and difficult

tasks. For example, the more extensive the use

of developer fees and benefit charges, the

●

●

●

●

●

cloudier the lines become between who are

direct or indirect beneficiaries, and who are not.

Administrative: Establishing a cost accounting

and budgeting system that measures and allocates user and developer impact costs requires

expertise usually found only in major metropolitan areas. Setting equitable fee schedules

and making choices between charging average

and marginal costs can be very complex.

Administrative systems that must accommodate both public and private funds in special

district accounts involve equally complicated

problems.

Uncertain Revenues: Uncertain revenues and

accumulation of debt without adequate budget

control and financial planning can be serious

problems for public works authorities and

special districts. Unforeseen rises in interest

rates and economic downturns can create shortfalls in user-charge revenues and devastate

financing plans that assume stable interest rates

and economic growth.

Political Decisionmaking: Public works programs financed by developer charges, access

rights, and special district assessments can

remove important budget and development

decisions from the political process. Since

these funds are earmarked, they do not necessarily reflect changes in community priorities

or development goals. Strong regional or State

planning programs can balance this independence.

Regional Planning and Budgeting: If developer

charges and special district assessments are

used to finance infrastructure, developing and

following comprehensive land-use and capital

improvement plans become very important.

High fees can encourage development to leapfrog over regulated areas into other less restrictive districts, exacerbating the problem of

providing infrastructure in the long term. Especially in jurisdictions near State boundaries,

this is a difficult and politically sensitive issue.

Strategy Selection: Local financing strategies

must conform to State laws, economic conditions, and the willingness of the community to

accept anew scheme. Most of the strategies that

shift costs from general purpose government to

individuals or special districts work best in

growth regions, where the real estate market is

Uxmnc 18, pp. 22-23. ~He, q. ci~, f

.I- - -- --- -- ~-- --- --- - - - .

. . . . . . .-

. . .- —.-----—
Chapter 4-Local Governments: Where the Buck Stops ● 115

In 1988, after years of planning and negotiations, the State of Colorado authorized the E-470 Public Highway

Authority to design, finance, and oversee the construction of E-470 as a limited-access tollway. The authority,

composed of an elected official from the three counties and the city (Denver) along the route, was empowered to

set tolls, levy development fees, and establish local improvement districts. From the outset of the planning stage,

no Federal or State support was available to cover the estimated $1 billion cost, and crafting a workable local

financing package required regional cooperation and private sector support.

scheduled to open its first segment in 1991, Highway E-470 is financed by a $722 million bond issue approved

in 1986,1 and toll revenues are expected to cover the bulk of the debt service once the highway is completed.

Developers who own property along the route are contributing approximately two-thirds of the-right-of-way as well

as paying impact fees to the authority. The authority has designated a 3-mile wide corridor along the E-470 route

as a value capture area because of its strong

economic potential, and planned to collect 25

percent of the increased property and sales taxes

resulting from the corridor development, However,

a slump in the regional real estate market has

delayed implementing the value capture program.

The authority considered imposing a $2 per employee head tax on local employers as another form

of beneficiary charge, but the idea was abandoned

after strong local opposition developed.

Funds for the first 5.5 miles, a $68 million

segment, will come from bond funds, the revenue

from a $10 increase in vehicle registration fees

charged within the three-county region, and developer impact fees. 2 The Union Bank of Switzerland

is providing a guarantee that bond holders will be

repaid from tolls, once the first segment is opened

in 1991. The provisions of the Public Highway

Authority stipulate that any fees or taxes imposed

are short term and must be removed when toll

revenues reach a sufficient level to pay the debt and

cover ongoing operations. Once a separate fired is

established to handle maintenance and improvements, the tolls will be eliminated.

Promoted as a public-private partnership, the

authority has formed an Executive Advisory Committee including four authority members and

four developers. Two other groups are also advising

the authority--a task force, which brings together

private citizens, developers, and the planning directors of the four jurisdictions, and a landowners

committee representing property owners along the Photo of Transportation

southern portion of the route, the first section to be Construction of Happy Canyon Bridge, part of Denver's

built. E-470 Highway project, is under way.

 “ Authority, personal Aug. 9, 1989.
t

i

\

(

[

strong. Without a healthy demand for growth,

the governing body has little leverage.

CONCLUSIONS

Local governments are in the unenviable position

of having primary responsibility for providing and

maintaining public works services and coping with

numerous Federal and State regulations on how

projects must be built and severe restrictions on their

ability to raise and manage funds. In most cases,

traditional broad-based taxes, principally on property, no longer produce sufficient revenue to finance

essential public services, which range from education to maintaining streets and sewer systems. As a

result, many communities have cut back expenditures to balance budgets, frequently deferring both

maintenance and capital improvements for public

works, and creating large backlogs of projects in the

process. In States where such actions are legal, local

jurisdictions have diversified and expanded their

revenue sources, raising nonproperty taxes and user

fees, and tapping private capital to finance new

growth.

Costs have risen across the board and a variety of

Federal and State actions have spumed the search for

additional local revenue. First, higher costs dictate

that a larger portion of local general tax revenue is

needed for education, law enforcement, housing, and

social welfare programs, all of which have no other

revenue source and are not suitable for benefit

charges. Second, cutbacks during the 1980s in

Federal construction grants, revenue sharing, and

support for social programs, coupled with higher

standards for environmental services, have added

significantly to local costs for public works. Finally,

property tax increases, particularly to support

growth or expanded facilities, have met with stiff

resistance from local voters, often leading to State

constitutional or legal limits on taxes.

upper limits of acceptability in many jurisdictions,

at least for the near term. However, dedicated local

income and sales taxes have proven to be successful revenue raisers for some communities, and

increments added to these taxes have become

important sources of revenue for local public

services. Earmarking portions of tax increases for

specific improvements, such as public transportation, is often key to winning public acceptance. On

the other hand, once a source of funds is earmarked,

it cannot be used for other needs even if surplus

funds accumulate. Nonetheless, these sources, too,

generate citizen resistance, and few communities

raised their rates during 1988.

In many growth regions, governments are shifting

costs for infrastructure expansion needed for new

development directly to the private sector, through

developer charges, sales of access rights, and special

district assessments. The private sector is initiating

for-profit ventures in a few districts, primarily solid

waste projects, although transportation services that

have potential for operating revenues and land

development profits may successfully attract direct

private investment Based on current political and

economic trends, OTA concludes that new infrastructure, particularly in growth areas, will be

financed increasingly from various benefit

charges, including direct user fees and taxes, such

as the fuel tax, that target beneficiaries.

Increasing benefit charges for public works services has some compelling advantages over raising

broad-based taxes. First, citizens seem willing to

accept the principle of paying for services, making it politically easier to charge higher fees for

public services and require developers to pay for

facilities needed by their projects. Many developers find” these strategies systematic, predictable

approaches that save time and money. Second,

charging fees for services and programs that are

closer to full costs may cut demand and hold

steady or even reduce capital requirements.

Third, the community often can collect capital funds

up front, avoiding the necessity for bond issues, and

eliminating interest costs and reserving debt for

other public facilities. Finally, benefit-based strategies allow local governments to design projects that

are relatively self-supporting, making them less

dependent on State and Federal programs, with their

attendant strings.

Despite their advantages, strategies that shift

infrastructure costs to beneficiaries pose some

complex and difficult public policy issues. If

recovery of the full cost of services is necessary to

a jurisdiction, how should fees be structured and

administered so they are not an excessive burden on

the poor? Determining service costs accurately and

allocating them equitably among direct and indirect

beneficiaries are also difficult and complex problems, especially when service benefits are diffused

I- ___ . - s. --r.— - . . - -- -- .- . . -- --- --- - ~----- .

.-

#

. . . — . -- -. -. .---—
(as in public transit for example) among users and

non-users. The equity of a new resident paying up

front for services, through higher land prices, when

long-time residents are also likely to benefit from

growth is a further issue. Finally, while establishing

independent special financing districts is a politically attractive option, doing so removes many fiscal

and land-use decisions from the political process and

may make it difficult to address new issues as they

arise. Each of these issues embodies important

political and policy concerns that must be weighed

and resolved before governments embrace these new

types of public works financing.

Small Districts and Low-Growth Areas

In many small, rural communities and low-growth

jurisdictions, such as older, central cities, private

capital and credit are unavailable, and residents have

limited ability to pay higher user fees. OTA

concludes that benefit-based and private sector

strategies are not appropriate or workable for

most small, rural communities and low-growth

areas. This is an especially severe problem for

funding environmental public works, since these

lack any substantial Federal or State support.

Policymakers need to consider alternatives for

such districts, which cannot depend for revenue

on a strong real estate market or the profitability

of private venture. Many such communities need

additional technical and management expertise as

well. Considerably more State involvement and

assistance is likely to be needed to address these

problems, since Federal programs and resources are

spread very thin already.

The task of complying with new Federal environmental standards hits hardest at small, poor communities lacking resources and expertise, and large,

older cities with public works facilities needing

major upgrades. Small jurisdictions are frustrated by

their lack of resources and Federal standards that

they fear may be more strict than their local public

health needs justify. A requirement to build a new

wastewater treatment system or replace a solid waste

facility that still has extra capacity may raise local

costs beyond the value of the homeowners’ land in

a small, rural town. For an older city with a backlog

of deferred maintenance and rehabilitation needs,

even full-cost accounting may not generate sufficient funds. Furthermore, higher service charges

could be a decisive factor for a local business

considering a move to a lower-cost jurisdiction.

The Federal challenge is to permit local choices

within a framework that implements national public

health and safety goals, maintains accountability,

and sustains economic vigor. Most local jurisdictions have no dedicated, reliable, outside funding

source for environmental projects, as they have

for transportation in the form of Federal and

State allocations of fuel taxes and other benefit

charges (see chapter 1, table 1-9). Developing

public support for new taxes or significantly

higher user charges to fill this gap requires

substantial time and effort and may fail, even

when the local economy can support them.

Furthermore, local options for funding environmental services have more limiting trade-offs associated with them than the options for funding

transportation. OTA concludes that without

stepped-up State or Federal assistance, noncompliance with EPA standards is a likely outcome

for districts that cannot generate adequate funds.

Debates in State legislatures from Maine to

California emphasize that infrastructure-related

problems, such as traffic congestion, water supply,

and air quality, long ago transcended local boundaries, to become regional issues.74 However, despite

requirements for comprehensive regional planning,

enacted as part of Federal grant programs over the

last couple of decades, OTA finds that regional

planning organizations currently have such basic

shortcomings that most are ineffective. Generally,

these organizations are underfunded, lack authority

to prepare and implement plans, and are highly

dependent on the expertise and personalities of

individual personnel.

If regional planning groups are to become constructive, effective forces, their basic weaknesses

need to be addressed. First, regional agencies need

reliable funding, in addition to the limited revenue

they can generate, to maintain core staff and

technical and service capabilities. Cutbacks in

Federal funds for housing and environmental programs have left DOT funding as the primary support

for regional planning. The lack of funding for

comprehensive environmental planning is of
particular concern as States assume responsibil- government ambivalence about cooperating with

d

I

 ity for revolving funds to support local environ- neighboring jurisdictions, State leadership and

mental infrastructure. Second, the regional im- funding will be necessary for regional planning 4

\ pacts of infrastructure issues create the need for activities to be effective. Federal program { coordinated capital improvement planning and requirements or incentives could spur the States i

i budgeting. OTA concludes that because of local to take action.

I

1

1

,

,

. . ------- . . . -. . . . .- -.. . . .—
Appendixes
Appendix A

Federal Spending and Tax Collection by State

This table compares Federal tax collections by State generally pay more in Federal taxes per person than the

with Federal spending for all purposes in each State, Federal Government spends per capita in the State. On the

including large agricultural subsidies and payments in other hand, the Federal Government pays out more than

lieu of taxes for Federal facilities, such as military bases

— — .

and Indian reservations. Those States that have high

it collects in taxes from States that receive

payments. per-capita incomes, such as New Jersey and Delaware,

Table A-1--Per-Capita Federal Spending and Tax Collection by State, 1987 (in dollars)

large Federal

Federal Federal tax Federal Federal tax

spending Collections spending collections

per capita per capita per capita per capita

Alabama . . . . . . . . . . . . . . .

Alaska . . . . . . . . . . . . . . ..

Arizona . . . . . . .,, . . . . . . .

Arkansas . . . . . . . . . . . . . .

California . . . . . . . . . . . . . .

Colorado . . . . . . . . . . . . . .

Connecticut . . . . . . . . . . . .

Delaware . . . . . . . . . . . . . .

District of Columbia . . . . . .

FIorida . . . . . . . . . . . . . . . .

Georgia . . . . . . . . . . . . . . .

Hawaii . . . . . . . . . . . . . . . .

Idaho . . . . . . . . . . . . . . . . . .

Illinois . . . . . . . . . . . . . . . . .

Indiana. . . . . . . . . . . . . . . .

Iowa . . . . . . . . . . . . . . . . . .

Kansas . . . . . . . . . . . . . . . .

Kentucky . . . . . . . . . . . . . .

Louisiana . . . . . . . . . . . . . .

Maine . . . . . . . . . . . . . . . . .

Maryland . . . . . . . . . . . . . .

Massachusetts . . . . . . . . .

Michigan . . . . . . . . . . . . . .

Minnesota . . . . . . . . . . . . .

Mississippi . . . . . . . . . . . . .

Missouri . . . . . . . . . . . . . . .

3,411

5,421

3,710

3,084

3,642

3,732

4,236

2,829

23,360

3,443

3,080

4,394

3,171

2,672

2,656

3,009

3,538

2,782

2,650

3,461

5,113

4,358

2,538

3,115

3,324

2,513

4,630

3,034

2,371

3,801

3,453

5,135

3,880

4,805

3,413

3,034

3,201

2,473

3,606

3,015

2,911

3,383

2,456

2,605

2,767

4,067

4,270

3,601

3,421

2.047

Montana . . . . . . . . . . . . . . .

Nebraska . . . . . . . . . . . . . .

Nevada . . . . . . . . . . . . . . . .

New Hampshire . . . . . . . . .

New Jersey . . . . . . . . . . . .

New Mexico . . . . . . . . . . . .

New York . . . . . . . . . . . . . .

North Carolina . . . . . . . . . .

North Dakota. . . . . . . . . . .

Ohio . . . . . . . . . . . . . . . . . .

Oklahoma . . . . . . . . . . . . .

Oregon . . . . . . . . . . . . . . . .

Pennsylvania . . . . . . . . . . .

Rhode Island . . . . . . . . . . .

South Carolina . . . . . . . . . .

South Dakota . . . . . . . . . . .

Tennessee . . . . . . . . . . . . .

Texas . . . . . . . . . . . . . . . . .

Utah . . . . . . . . . . . . . . . . . .

Vermont . . . . . . . . . . . . . . .

Virginia . . . . . . . . . . . . . . . .

Washington ., . . . . . . . . . .

West Virginia . . . . . . . . . . .

Wisconsin . . . . . . . . . . . . .

Wyoming . . . . . . . . . . . . . .

3,589

3,344

3,437

2,878

3,002

4,911

3,380

2,588

4,467

2,894

3,077

2,765

3,188

3,502

3,031

3,751

3,151

2,829

3,396

2,690

5,317

3,883

2,807

2,536

3,134

2,684

3,011

3,573

3,857

4,827

2,561

4,100

2,809

2,823

3,291

2,933

2,979

3,371

3,501

2,478

2,463

2,757

3,305

2,357

2,940

3,501

3,457

2,363

3,154

3,165

4,124 3,209 Average . . . . . . . . . . . . . . . 3,384 3,430

80URCE: LNian Rymarovncz, Fe&@ T- Payments by State Residents and Federal Expenditures h Indivkludstates, Fiscal Year 1987, Report for Congr~

(Washington, DC: Congressional Research Servkx, June 1, 19S8).

-121-
Appendix B

Fiscal Capacity and Effort Measures

Fiscal capacity is a concept developed by the U.S.

Advisory Commission on Intergovernmental Relations

(ACIR) to measure the relative revenue-raising abilities of

States and their local governments, including taxes and

nontax revenues, such as user charges. ACIR defines

fiscal capacity as the relative amount of revenue States

would raise if they used a "representative” tax and

revenue system, consisting of national average tax rates

and charges applied to 30 commonly used tax and revenue

bases. Therefore, State capacities vary because of differ-

 ing tax base characteristics, such as property values, sales

tax receipts, and mineral production. For example, the

effect of lower energy prices would adversely affect the

fiscal capacity of those States that rely on energy-related

taxes and user charges to raise a significant share of State

revenue. The method developed by ACIR is only one of

several methods to measure fiscal capacity, and some

believe an analysis based on per-capita income, though

much simpler, is equally useful.

ACIR also measures fiscal effort, or relative tax

burdens, across States. Revenue effort is defined by ACIR

as the burden that each State places on each revenue base

relative to the national average.

Table B-1 shows State capacity and effort indexes and

rankings as developed by ACIR. Because the ACIR

analysis is based on 1986 data, changes have undoubtedly

occurred in the index, but the general trends and

relationships remain valid.

-122-

. . . . . . -. -. . . — . .- ..-..— —-. - _ ----
Appendix B--Fiscal Capacity and Effort Measures ● 123

Table B-l-State Fiscal Capacity and Effort, 1986

Fiscal capacitya Fiscal efforta

Index Rank Index Rank

(1OO=U.S. average) (1OO=U.S. average)

Alabama . . . . . . 0 . . . . ....0.... . . . . . .

Alaska . . . . . . . . . . . . . . . . . . . . . . . . . . .

Arizona . . . . . . . . . . . . . . . . . . . . . . . . . . .

Arkansas . . . . . . . . . . . . . . . . . . . . . . . . .

California . . . . . . . . . . . . . . . . . . . . . . . . . .

Colorado . . . . . . . . . . . . . . . . . . . . . . . . .

Connecticut . . . . . . . . . . . . . . . . . . . . . . . .

Delaware . . . . . . . . . . . . . . . . . . . . . . . . .

District of Columbia . . . . . . . . . . . . . . . . .

Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Georgia . . . . . . . . . . . . . . . . . . . . . . . . . .

Hawaii . . . . . . . . . . . . . . . . . . . . . . . . . . .

Idaho . . . . . . . . . . . . . . . . . . . ... !.....

Illinois ,..,... . . . . . . . . . . . . . . . . . . . . .

Indiana. ....,.... . . . . . . . . . . . . . . . . .

Iowa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Kansas . . . . . . . . . . . . . . . . . . . . . . . . . . .

Kentucky . . . . . . . . . . . . . . . . . . . . . . . . .

Louisiana . . . . . . . . . . . . . . . . . . . . . . . . . .

Maine . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Maryland . . . . . . . . . . . . . . . . . . . . . . . . . .

Massachusetts . . . . . . . . . . . . . . . . . . . . .

Michigan . . . . . . . . . . . . . . . . . . . . . . . . . .

Minnesota . . . . . . . . . . . . . . . . . . . . . . . . .

Mississippi . . . . . . . . . . . . . . . . . . . . . . . . .

Missouri . . . . . . . . . . . . . . . . . . . . . . . . . . .

Montana . . . . . . . . . . . . . . . . . . . . . . . . . .

Nebraska . . . . . . . . . . . . . . . . . . . . . . . . . .

Nevada . . . . . . . . . . . . . . . . . . . . . . . . . . .

New Hampshire . . . . . . . . . . . . . . . . . . . .

New Jersey . . . . . . . . . . . . . . . . . . . . . . .

New Mexico . . . . . . . . . . . . . . . . . . . . . . .

New York . . . . . . . . . . . . . . . . . . . . . . . . .

North Carolina.. . . . . . . . . . . . . . . . . . . .

North Dakota . . . . . . . . . . . . . . . . . . . . . .

Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Oklahoma . . . . . . . . . . . . . . . . . . . . . . . . .

Oregon . . . . . . . . . . . . . . . . . . . . . . . . . . .

Pennsylvania . . . . . . . . . . . . . . . . . . . . . .

Rhode Island . . . . . . . . . . . . . . . . . . . . . .

South Carolina.. . . . . . . . . . . . . . . . . . . .

South Dakota... . . . . . . . . . . . . . . . . . . .

Tennessee . . . . . . . . . . . . . . . . . . . . . . . .

Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Vermont . . . . . . . . . . . . . . . . . . . . . . . . . . .

Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . .

Washington . . . . . . . . . . . . . . . . . . . . . . . .

West Virginia . . . . . . . . . . . . . . . . . . . . . .

Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . .

Wyoming . . . . . . . . . . . . . . . . . . . . . . . . .

75

287

96

73

117

115

139

119

123

102

92

109

76

97

86

84

95

77

94

92

107

122

96

101

65

95

88

91

137

121

125

102

109

86

93

92

95

92

90

97

77

77

82

101

79

97

100

97

74

86

. 157

%aeedon Stateand localtaxbaseeand othorrevenue sourcas,suchas usercharges.

80URCE: AdvisoryCommissmn on intergovernmental Relations, Stato FiscalCapacdyand Hfort(VVashington,DC: lW9~p. 13.
Appendix C

Case Studies of Regional Planning Agencies

OTA examined a cross-section of multipurpose regional planning organizational to evaluate their effectivenew and reviewed the status of regional planning in two

States-Tennessee and Idaho. Although the regional

agencies were highly individual, the study revealed much

about the current status of regional planning and highlighted areas that need to be strengthened.

Generally, the more formal authority a regional agency

has, the more status and clout it has within the region. The

regional agencies with the best records for implementing

plans were lead agencies for at least two or more regional

infrastructure programs. For example, designation by the

State as the Metropolitan Planning Organization (MPO)

as the lead agency for water and air quality programs or

for economic development defines an agency’s institutional role, guaranteeing its involvement in those programs and opening the door for wider participation.2 The

MPO designation is the most important, because it brings

with it U.S. Department of Transportation planning funds

and the authority to prepare the mandated regional

transportation improvement plan.

However, in many regions a different agency is

designated as lead for each separate responsibility,

reflecting the lack of agreement by the State and locality

on who should speak for the region. None of the regional

agencies studied had responsibility for planning all major

infrastructure categories. Moreover, although regional

agencies prepare comprehensive plans and coordinate

Federal and State projects, functional planning responsibilities arc frequently distributed to different agencies. As

a result, functional plans are not tied to comprehensive

regional plans. Even within one infrastructure category,

authority is frequently dispersed. In transportation, some

States have chosen to establish multiple, single-county

MPOs instead of one regional agency, where several

counties form the metropolitan area. In Tennessee, none

of the regional planning agencies has been designated as

an MPO.3

Authority is dispersed for several reasons. The Federal

Government may disperse authority by designating a

different agency to perform a task than the State uses.

Most State agencies favor organizations to which the y

customarily delegate program responsibilities. Local

elected officials prefer to involve their own districts in

decisionmaking and are not eager to have an agency

designated by the Federal or State government take the

lead. As an example, in Michigan, the State recently

established a State economic development agency, but the

Federal Government continues to fired the original

planning agencies.

Regional planning organizations can establish a leadership role by using their technical and analytic expertise to

provide needed local services to address local priorities.

The data collection and analytic work of many regional

agencies provide the technical foundations for numerous

regional decisions, and the organization is often the only

source for reliable regional data To maintain this role the

agency has to maintain its databases and retain qualified

staff, difficult tasks if funding levels are low. In addition,

most regional planning agencies operate one or more

regional service programs, such as ridesharing or programs for aged persons; these bring additional status,

some income, and enhance their credibility within the

region.

Regional agencies may provide another valuable service if they function as a regional ombudsman -available

to identify problems and provide a forum for discussing

controversial issues of regional significance. Some agencies go a step further and help to resolve regional

conflicts, although success in this role depends heavily on

the stature of the Executive Director. In 1988, the North

Central Texas Council of Governments successfully

resolved air quality issues within the region, achieving

agreement on a plan that avoided Environmental Protection Agency sanctions, for example.

l~q Associmicm of G#emmam Cearral “kxiM Council of Bahimorc Regialal Pluming council,

% Diego AaaXiah of GVanmam SCXUknt Micbig8n C!4nmd of Gowmmcau, and Ibqa Bay Rcgioaal Pluming Council.

-~~-”~A~mJ- 1989, p. 15.

3~., w. A-5, p. 7.

-124-
Appendix D

Contractor Reports

Copies of contractor reports done for this project are available through the U.S. Department

of Commerce, National Technical Information Service (NTIS), Springfield, VA 22161$ (703)

487-4650.

1. Apogee Research, Inc., “Impact of Federal Funding Changes on State/Local Infrastructure Financing Resources.”

2. Government Finance Research Center, “Federal Tax Policy and Infrastructure Financing.”

3. Thomas D. Hopkins, “Benefit Changes for Financing Inhastructure.”

–12s21-667 ( 136)