Transportation financing precarious despite new revenue

The Devon railroad bridge across the Housatonic could cost $750 million to replace.

NEC Commission

The Devon bridge carrying the New Haven rail line across the Housatonic could cost $750 million to replace.

Despite the recent infusion of sales tax receipts, Connecticut’s transportation program could be in deficit by mid-2018, according to nonpartisan analysts.

And while Gov. Dannel P. Malloy’s administration believes the Special Transportation Fund will remain in the black through 2020 — albeit by a razor-thin margin — nonpartisan analysts cite several problems, including surging debt and pension costs and downgraded expectations for fuel tax revenues.

And if the governor and legislators — who are also struggling with big deficits in the rest of the budget — raise more revenues for transportation next year, they could find themselves in an all-too-familiar place: Under pressure to avoid general fund tax hikes, yet in tempting proximity to a transportation program flush with new cash.

The Fiscal Accountability Report nonpartisan analysts issued recently — a lengthy document analyzing a wide array of short- and long-term budget trends — projected the Special Transportation Fund would slip 2 percent into deficit, or $34 million in the red, in the 2018-19 fiscal year. And that shortfall would grow to 5.2 percent or $97 million by 2019-20.

Just six months ago, when Malloy and legislators dedicated sales tax receipts to finance a “five-year ramp-up of transportation spending” from 2016 through 2020, analysts estimate the program would enjoy surpluses all five years, topping $170 million in 2019 and 2020.

At the same time, the governor launched a Transportation Finance Panel to recommend how to finance increased spending on transportation for an additional 25 years, through 2030.

Malloy and lawmakers thought back in June they had placed the transportation fund on solid footing at least for the next five years when they promised it a share of Connecticut’s $4.1 billion-per-year sales tax stream.

Transportation receives $159 million in sales tax receipts this fiscal year, $277 million in 2016-17 and $362 million in 2017-18. Because officials canceled the transfer of some other general fund revenues normally dedicated to transportation when they reassigned sales tax dollars, there still was a net gain for transportation.

The transportation fund actually receives about $30 million less this fiscal year than it would have under the old funding system.

But transportation comes out nearly $100 million ahead in 2016-17 and the numbers keep growing. Transportation funding is up by about $240 million in 2018-19 and by more than $270 million in the last year of the five-year ramp-up.

So given that bonus, what changed the outlook enough to create deficits just a few years from now? There were several factors but some of the most crucial include:

Connecticut’s bonding backlog

Over the last five years, the state has more than doubled the amount of financing approved for transportation capital projects that’s never actually been borrowed and spent.

In January 2011, about $1.7 billion in transportation financing had been approved by the State Bond Commission but not yet issued. According to the last monthly report from the treasurer’s office, which covered October 2015, the backlog had grown by that point to $3.6 billion.

If Connecticut expects to catch up on that work, it will need an extra $65 million in debt service in 2018-19, and an extra $68 million in the following year.

Pensions

Retirement benefit costs are spiking throughout the entire state budget, a problem caused largely by decades of inadequate saving by legislatures and governors before 2011.

Analysts now expect the transportation fund will need to find $11 million extra in 2018-19 to cover its share of the annual pension contribution, and $12 million in 2019-20.

Resetting revenue expectations

Nonpartisan analysts have lowered revenue expectations for the transportation fund — which relies chiefly on fuel taxes — in the years to come. Projections were reduced by $40 million for 2018-19 and by $34 million for the year after that.

The state has two taxes that affect fuel prices: a flat, 25-cents-per-gallon retail tax on gasoline sales, and an 8.1 percent levy on wholesale fuel transactions. The latter tax, since it’s based on a percentage, is more volatile, rising or dropping as prices change.

According to the Connecticut AAA, the state’s gasoline prices have dropped steadily since peaking in June. The wholesale price at New Haven harbor, the single-largest importing site in the state, stood at $1.37 per gallon late last week, the Connecticut Energy Marketers Association (CEMA) reported.

CEMA President Chris Herb said forecasts call for stable, lower fuel prices over the next 18 to 24 months based on worldwide supply and demand trends and crude oil production levels.

But Herb quickly added that “as strong as the fundamentals are today, this system is very fragile and remains very susceptible to war, weather and geopolitical systems.”

For example, he added, if OPEC successfully pushes member nations to cut oil production, “it could throw gasoline and petroleum prices on their ear.”

The Malloy administration does take a different approach to calculating transportation costs in the future years.

For example, legislatures and governors have used borrowing to provide road maintenance grants to cities and towns since 2010 — a cost that came for decades out of the Special Transportation Fund. The administration assumes that practice will continue, which nonpartisan analysts’ projections don’t assume that. The grant program costs $60 million per year.

The administration also does not build inflationary adjustments into its forecasts, arguing that agencies routinely are denied this extra funding in tough times. But some Republican legislators and other critics of the administration counter that if these adjustments are withheld for too many consecutive years, it only increases the likelihood a program or agency will struggle to remain in balance.

“There are fundamental differences in calculations between (the governor’s budget office) and OFA on this issue,” Malloy spokesman Chris Collibee said. “Even on such important matters as this, we have clear disagreements on the numbers.”

And while Congress this week approved a five-year transportation bill that would send Connecticut more than $3.5 billion in federal transportation money through 2020, most of that funding would be applied to specific projects, and not to the state’s Special Transportation Fund.

The STF, which totals $1.42 billion this fiscal year, largely covers debt service on the state’s share of capital projects, as well as Department of Transportation operational costs. Federal funds comprise a relatively tiny share of the STF, totaling just $12.1 million this fiscal year.

Former state Rep. Cameron Staples, D-New Haven, who chairs the Transportation Finance Panel, said this week his group still is developing recommendations and expects to report them early next year.

A panel of business, transportation and political leaders, the Transportation Finance Panel has focused considerable study on gasoline tax increases, tolls and some other options — including a vehicle mileage tax.

Malloy has said that all options, including tax increases, must be on the table when discussing how to transform Connecticut’s aging, crowded transportation network into a “best-in-class” system.

But the same is not true when it comes to balancing the rest of the state budget. The governor has said he wants to mitigate projected deficits — which nonpartisan analysts peg at $254 million this year, $552 million in 2016-17, and $1.72 billion two years down the road — with spending cuts.

Many of the governor’s fellow Democrats in the House and Senate majorities say that can’t be accomplished, at least in the out years, without additional revenue.

But could officials, for example, increase gasoline taxes for transportation, and then cancel the previously approved transfer of sales tax receipts? This would effectively use a tax hike earmarked for transportation to free up millions of dollars for non-transportation programs.

For example, while the wholesale fuel tax has risen four times since 2005 — from 5 to 8.1 percent — and has increased state government’s take at the pumps by 40 percent since 2005, nearly $1.4 billion in receipts has been spent on non-transportation programs since then.

House Speaker J. Brendan Sharkey, D-Hamden, and Senate President Pro Tem Martin M. Looney, D-New Haven, both agreed last week that tax hikes were off the table at this month’s budget talks.

But while neither discussed gasoline taxes in particular, both also said the prohibition against tax increases doesn’t extend to the 2016 regular legislative session, which begins on Feb. 3.

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