I-69 Section 5 and Fiscal Constraint

logoYesterday, an article in the Herald Times (INDOT seeks local OK to start I-69 work along Ind. 37 – behind a paywall) reported on the recent request from INDOT to the Bloomington/Monroe County Metropolitan Planning Organization (MPO) to include I-69 Section 5 in its Transportation Improvement Plan (TIP) at the April 12, 2013 meeting. The portion of I-69 Section 5 under MPO jurisdiction runs along the State Road 37 corridor from Victor Pike north to just north of Kinser Pike (Section 5 itself extends into Morgan County).

The discussion that I’m amplifying in this posting began in the comments to the Herald Times article above.

A poster named citizen-dmc wrote:

How can INDOT consider this when there is no money to pay for Section 5? 

All of the money was allocated for Section 4.

WHERE IS THE MONEY? Can someone explain.

The precious darlings from INDOT think money grows on trees, but they have not provided any revenue source for the completion of it up to Indianapolis and I-465

Of course this comment refers to the requirement that, for a local MPO to include a project in its TIP (a prerequisite for federal funding), the project must be “fiscally-constrained” — that is, there have to be identified funding sources for the project. Sections 1 – 4 of I-69 (running from Evansville to Victor Pike, south of Bloomington) were funded from the Major Moves program, from the one-time money received by the state through the lease of the Indiana Toll Road. The Major Moves account, however, has now been depleted.  Both opponents and supporters alike of the project have noted that traditional funding sources for road construction (i.e. gas taxes) were unlikely to be adequate to support Sections 5 and 6 — i.e., completion of the highway from Victor pike up to Indianapolis. Therefore, by that logic, the MPO would not and could not approve the addition of Section 5 to the TIP because it is not fiscally constrained.

This is unlikely to be a winning argument, however. There are several developments that I think will allow INDOT to clear the fiscal constraint requirement: additional road funding and a public-private partnership (P3) approach.

Additional Road Funding

This development will probably not have any impact on INDOT’s approach to funding I-69 Section 5 in the short-run. However, it will give INDOT substantial additional “breathing room” to pursue the Public-Private Partnership approach described below.

Pending legislation in the General Assembly would provide INDOT with more funding, by (a) eliminating the portion of the gas tax that is skimmed off the top for the State Police and BMV and (b) redirecting some of the sales tax on gasoline to road funding. Per the usual distribution formula, this additional revenue would be split between INDOT, counties, and cities and towns. Incidentally, although sales tax receipts are up from last year, these two approaches are both essentially zero-sum, and would require cutting of other services in order to redirect this revenue for road funding.

There are also several more long-term approaches under consideration to increase road funding by taxing alternatively-fueled vehicles in a way that equalizes their contribution to road construction and maintenance with equivalent conventionally-fueled vehicles and/or by taxing vehicles by miles traveled (much more difficult to implement!).

I wrote a bit more about these initiatives in Counties Agitate for Increased Road Funding. INDOT could see over $150M in increased funding annually from these legislative changes.

Public-Private Partnership (P3) Approach

Another approach that will allow INDOT to work around (or do an end-run around) the fiscal constraint requirement is through what is, somewhat Orwellianly, called a public-private partnership (P3). The Federal Highway Administration defines P3 as:

“contractual agreements formed between a public agency and a private sector entity that allow for greater private sector participation in the delivery and financing of transportation projects.” (Federal Highway Administration P3 Defined)

 Most often, P3 is seen with respect to operation of existing toll roads. The Indiana Toll Road lease was conducted under a P3 model called Long Term Lease Concession. Numerous toll roads are operated under Operations and Maintenance Concessions, in which contractors are hired to collect tolls and maintain the roads in return for contractually-specified payments.

There are also a number of P3 models that are used to construct new roads. From conversations with various personnel at INDOT, I believe INDOT will be pursuing a P3 model called the Design-Build-Finance (DBF) approach. With DBF, the contractor hired to design and build the road is also responsible for financing it (through commercial debt of some kind). In return, the project sponsor (INDOT, in this case) agrees to make payments to the contractor out of the usual appropriations (i.e., from gas taxes) over a period of time. The payments to the contractor would have to cover the costs of the design/build services themselves, the cost of financing to the contractor, and of course a level of profit to the contractor adequate to encourage them to accept this deferred compensation.

With this approach, the initial costs can be deferred and/or spread out over time. In a way, this is like purchasing a car with a vehicle loan rather than with cash. Rather than a $25,000 payment in one year, you might only have to pay $6000 over one year in car payments. Essentially the buyer is pushing out costs to the future — but the annual costs at the beginning are lower. And further, the law defines DBF arrangements as deferred payments, rather than debt — so the state isn’t even technically taking on any debt with this approach.

Like it or not, DBF this seems to be an end-run around the fiscal constraint requirement, and will very likely be the approach that INDOT takes when it approaches the MPO for inclusion of Section 5 in the TIP in April.

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