HD74 - The Feasibility of the Commonwealth to Match Funds Generated by Local Transportation Referendum


Executive Summary:
The Virginia Department of Transportation (VDOT) has traditionally provided a majority of the funding for highway maintenance, construction and improvements in Virginia. Acknowledging that transportation needs are outpacing available state resources and that many localities have assumed a portion of the financial responsibility of their construction program, the 2006 General Assembly directed that VDOT review the feasibility of offering localities incentives to provide more local funding to meet transportation needs as follows:

The department shall report to the Chairmen of the Senate Finance and House Appropriations Committees by December 1, 2006, on the feasibility of the Commonwealth matching dollars generated by local transportation referendum provided that such funds not be used for debt service and that projects included in the transportation referendum meet state standards and are in the Six- Year Improvement Program. The department shall base the match on one state dollar for every two local dollars.

In recent years, local administration of projects has become more commonplace in the VDOT improvement program. More localities are interested in administering their own construction projects and the establishment of the Urban Construction Initiative has shifted management of the entire construction program to willing municipalities. More importantly, in addition to administering construction projects and programs, many localities have incurred debt through referendum and general obligation bonds for transportation purposes and this trend is increasing.

In order to evaluate the feasibility of the Commonwealth matching local bond funds, the magnitude of the impact needed to be identified. Local debt for transportation was identified and then compared to available state funds, both in past years and as anticipated in the future. Special financing programs, such as a bond matching program, would be funded prior to allocations for roadway construction; therefore, the impact to the construction allocations for the upcoming Six-Year Improvement Program was also assessed.

From 1988 to 1999, secondary construction funds fluctuated and averaged slightly below a conservative 3% inflation rate. Since 2000, secondary construction funds have declined in actual dollars and fallen sharply below the 3% inflation rate. The decline in actual dollars and the increase in the cost of construction have combined to create multi-year backlogs in county improvement needs.

In the past 18 years, six counties have passed referendums totaling in excess of $110 billion, with Prince William, Stafford and Loudoun counties proposing referendums in November 2006 totaling more than $500 million. There are other future proposed referendums totaling $360million by 2010. In the past five years (2000-2005), Arlington, Henrico, Fairfax, Chesterfield, Prince William and Spotsylvania have passed referendums totaling more than $500 million or approximately $100 million annually. Based on this most recent data, and noting that more counties are passing referendums for transportation purposes, this amount can be expected to increase in the coming years. For example, in 2005 Spotsylvania County citizens passed their first bond referendum for transportation totaling $144 million and Stafford County is proposing their first transportation bond referendum in November 2006 totaling $161 million. These numbers indicate that not only are additional counties entering the bond arena for transportation, they are doing so to address a large portion of their transportation needs. The value of locality bond programs will likely exceed the statewide secondary system allocation based on current trends.

According to the Report for Counties Assuming Responsibility for Their Secondary Construction Program submitted to the Governor and General Assembly in 2005 as House Document No. 80, while counties are incurring more debt by bond referendum for transportation, they have indicated they would prefer to have more consistent funding options available to address identified needs such as the ability to raise funds without referendums similar to the Virginia Public School Authority pooled bond program.

The 2006 Appropriation Act directed VDOT to study the feasibility of matching money generated by referendum, however, cities and towns can incur debt for transportation without a referendum. In order to fully assess the impact of a potential matching program, all transportation related debt should be considered. Cities and towns have used bond debt for transportation consistently over the past two decades. Bond debt for transportation purposes in cities and towns has averaged just over $575 million annually. Bond debt may include funds for debt service, transit, or maintenance activities; therefore, for the purpose of this analysis, one third of the bond debt is assumed for road construction. Cities and towns can be expected to incur nearly $189 million in transportation bond debt annually, and similar to the secondary system comparison, this more than exceeds the urban system allocation.

Without the identification of additional revenue, combining the anticipated bond debt for counties, cities and towns creates a devastating effect on the already strapped system allocations for construction which today is used to match federal highway funds to ensure a 4 to 1 return. The combined bond debt for counties, cities and towns could average nearly $300 million annually. The proposed one for two dollar matching program would require almost $150 million from the construction fund. The proposed bond matching program would exhaust all existing formula allocations and result in Virginia's inability to match -- and thus forfeiture of -- significant federal revenues.