Renewed focus on federal infrastructure spending is a positive development for US infrastructure, which recently received a ‘C-’ grade from the American Society of Civil Engineers, Fitch Ratings says.
However, the American Jobs Plan (AJP) and Republican counterproposal do not specifically address the Highway Trust Fund (HTF), the primary federal funding source for surface transportation projects, or Private Activity Bonds (PABs), an important infrastructure financing tool. Current authorization for the HTF is provided under a one-year extension of the Fixing America’s Surface Transportation Act, which is set to expire on Sept. 30, 2021.
An infrastructure program that provides sustainable funding on a multiyear basis and effectively leverages investment tools would provide clarity for project planning and improve the viability of infrastructure investments. PABs play an important role in financing infrastructure projects, including public private partnerships (P3s).
The amount of highway and freight transfer infrastructure PABs issued so far this year has almost reached the $15 billion aggregate volume cap, which led to calls for increasing or removing the cap.
Continued reliable and sufficient HTF funding underpins the ratings on GARVEE bonds backed by future federal receipts from the HTF. HTF expenditures have outpaced revenues for decades, which has left it reliant on general fund transfers to remain solvent. Federal gas and diesel fuel taxes of 18.3 cents per gallon and 24.4 cents per gallon, respectively, which fund the HTF, have not changed since 1993.
In addition, gas tax revenues took a hit in 2020 as a result of reduced travel during the pandemic. The Congressional Budget Office projects HTF revenues will be insufficient to meet the fund’s obligations starting in 2022.
President Joseph Biden’s $2.2 trillion AJP outlines broad infrastructure goals, including $115 billion for roads and bridges. The Republicans’ smaller plan allocates $299 billion for roads and bridges out of total funding of $568 billion.
Biden’s carbon emissions reduction plans, discussed in the AJP and espoused at the recent Major Economies Forum on Energy and Climate, incentivize electric vehicle (EV) production and infrastructure. The proliferation of EVs would reduce gas and diesel consumption, exacerbating already insufficient revenues from fuel taxes, making these taxes less viable as the primary source of HTF funding.
The US Department of Transportation recently clarified that the $115 billion amount in the AJP would supplement funding as part of a bill reauthorizing federal surface transportation spending. The provisions of that bill should account for a more permanent funding solution for the HTF, with additional and new sources of revenue in order to pay for existing commitments and support investment in new projects.
User fees such as increased tolling and vehicle miles traveled (VMT) fees have been discussed as solutions, although Biden expressed opposition to user fees generally to pay for infrastructure. VMTs would be costly to implement, requiring new technology and tolling infrastructure, and also introduce privacy concerns.
Improving the funding formula of the HTF and increasing PAB volume caps appear to have bipartisan support. Fitch notes the Problem Solvers Caucus, a bipartisan group of House members, recommended HTF revenue fixes, including VMT fees; a registration fee for electric vehicles; and/or indexing gas and diesel taxes to inflation, highway construction costs, fuel economy standards or some combination of the three.
