New Road Money for Local Governments

rockport5This past week, House Enrolled Act 1001 and Senate Enrolled Act 67 both passed the Indiana General Assembly, and are on their way to the Governor’s desk. Both have implications for local units of government around the state and here in Monroe County.

SEA 67: Returning Local Income Taxes to the Locals

First, let’s consider SEA 67. This act reduces the amount that the state is required to hold in each county’s income tax trust fund from 50% of the amount that is actually certified to be distributed to the local governmental units in the county to 15%. The trust fund is essentially an escrow account that holds the money collected from local option income taxpayers and that is used to pay out the annual distribution to local governments each year (referred to as “certified shares”). The theory is that local option income tax trust fund balances have been increasing over the years, and too much is being withheld from local governments.

Further, SEA 67 requires the state to make a one-time distribution of ALL of the excess trust fund balance as of December 31, 2014, to local units of government that receive local option income taxes (using the standard procedures for allocating local option income taxes to these units). This includes the county, cities and towns, public libraries, townships, and fire protection districts.

However: for the county and cities and towns, there is a restriction. 75% of the money must be spent on roads and aviation (or deposited in the rainy day fund, and later spent on roads and aviation). The remaining 25% can be spent on any lawful expense of local government. So basically, money that has been collected from local taxpayers, as authorized for particular purposes by local governments — is being given back to local governments by the state, but being restricted in use. And these restrictions only apply to the county, cities, and towns — townships and the public library have unrestricted use of these funds!!

The following table provides my very rough estimate of the amounts that each taxing unit in Monroe County will receive. Note that the total amount distributed to Monroe County ($6,892,000) is based on the latest fiscal note on SEA 67 (authored by Legislative Services Agency). However, it isn’t clear from the fiscal note whether the total is based on 88% of the December 31, 2014 trust fund balances (where the bill started out) or 100% (where the bill ended up). So please don’t take these numbers as definitive — they are simply estimates of roughly what the taxing units might be expecting.

Screenshot 2016-03-14 09.43.34
My Estimates of What Local Governments Will Receive Under SEA 67 (One-Time Distribution)

As the chart shows — Monroe County Government could be receiving approximately $2.7M from its income tax trust fund — however, only $675K would be unrestricted. And remember — this is money that has already been collected from taxpayers.

HEA 1001: Additional Local Option Highway User Tax and New Local Road and Bridge Matching Fund

839DE454-D67C-4C8A-B2C4-1D9CDB7D9303House Enrolled Act 1001, on the other hand, provides additional road funding to local governments through several very different mechanisms: (1) the provision for local units to increase their wheel tax/excise surtax; and (2) the creation of a new matching fund called the Local Road and Bridge Matching Grant Fund.

Wheel Tax/Excise Surtax

Sometimes referred to as a Local Option Highway User Tax (LOHUT), this refers to two separate taxes that must be adopted concurrently: a wheel tax and an excise surtax. Currently, this is the only local option tax available for road funding. The excise surtax portion is a surtax paid at the time of vehicle registration, and applies to cars, motorcycles, and trucks under 11,000 pounds. It is currently $25/vehicle in Monroe County. The wheel tax applies to all vehicles that aren’t subject to the excise surtax, including RVs, tractors, trailers, trucks, and buses. The wheel tax is currently $40/vehicle, except for vehicles under 3000 pounds (i.e., mopeds). Both the wheel tax and the excise surtax in Monroe County are at the statutory maximum (well, until HEA 1001).

The following table from the Bureau of Motor Vehicles shows the current LOHUT rates for Monroe  County:

Screenshot 2016-03-14 21.10.54
Wheel Tax / Excise Surtax Information for Monroe County as of 2016-03-14

Once collected, these taxes are then distributed to the county and to municipalities, and are earmarked for construction, reconstruction, repair, and maintenance of roads in each unit’s jurisdiction. The LOHUT (wheel tax/excise surtax) brought in $1,574,021 (2014) and $1,288,792 (2015) to Monroe County Government respectively.

HEA 1001 provides a couple of additional options for local governments with respect to the LOHUT:

  • It doubles the maximum rate for the wheel tax/excise surtax for counties (i.e., counties would be permitted to adopt up to $50 excise surtax and $80 wheel tax), IF the county is using a transportation asset management plan (see the section on the Local Road and Bridge Matching Grant Fund, below).
  • It allows municipalities (cities and towns) with a population of at least 10,000 to adopt the wheel tax/excise surtax (maximum of $25 for the excise/surtax and $40 for the wheel tax). Formerly only counties could adopt the wheel/excise surtax. To adopt these taxes, municipalities must also be using a transportation asset management plan.

Local Road and Bridge Matching Grant Fund

Bill Williams Bridge in Stinesville
Bill Williams Bridge in Stinesville

HB 1001 also creates a new program called the Local Road and Bridge Matching Grant Fund. The new fund provides a competitive 50-50 match to local units of government for local road and bridge projects that “repair or increase the capacity of local roads and bridges” and that are “part of the local unit’s transportation asset management plan” (a new requirement that local governmental units have a plan for transportation assets and drainage systems and rights-of-way that affect transportation assets).  INDOT (the administrator of the program) is instructed to “give preference to projects that are anticipated by the department to have the greatest regional economic significance for the region in which the local unit is located.” In addition, at least 50% of the grants in each fiscal year are required to be made to local units in counties with populations of less than 50,000.

The grant program is funded from state reserves and one percentage point of the 7% gross retail sales tax (for fiscal year 2018) and 1.5 percentage points of the sales tax for fiscal years 2019 and after.

The local unit must provide their 50% match out of the following sources:

  1. revenues from an increase in the wheel tax/excise surtax rate (see above)
  2. any special distribution of local income taxes (again, see above); or
  3. any  money in the unit’s rainy day fund.

Since most local counties and municipalities, including Monroe County and the City of Bloomington, will receive substantial cash infusions into their rainy day funds from the excess trust fund balances, the goal will be to use this revenue to lever the same amount of money in the new Local Road and Bridge Matching Grant Fund, and effectively double its spending power on local roads.

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.