Moving Ahead for Progress in the 21st Century (MAP-21), the new U.S. surface transportation assistance law signed by President Barack Obama this past summer, modestly increases federal highway and public transportation funding, but high hopes that this modest response to the growing need is more than made up for by how the new law streamlines, restructures and simplifies how the money will be distributed. Much of the money will have to come from general funds, and in this era, that means deficit spending. It remains to be seen, however, whether deficit reduction negotiations, which were unresolved at press time, will affect the two-year, $105 billion MAP-21 authorized — or, absent a long-term strategy, how funding will be affected beyond MAP 21.

What must Congress address as it grapples with the federal role in public transportation in a constrained fiscal era? Part of the answer lies in how MAP-21 addresses those issues, which is where we begin.

MAP-21 a mixed bag
As with most bills, the new law is a mixed bag of blessings and disappointments. MAP-21 eliminated earmarks, which plagued the law that preceded it and made “bridge to nowhere” a household phrase. However, it largely funded both highway spending and public transportation assistance at the same total levels as Fiscal Year 2012, which represents both aversion of what could have been a program disaster as well as a lost opportunity to better address what has been a consensus about the huge need for U.S. transportation infrastructure investments. It also kicked the revenue can down the road, despite the consensus on the need for new taxes to pay for and stabilize a larger investment program.

Federal transit assistance is authorized at nearly $10.6 billion in FY 2013 and $10.7 billion in FY 2014. Almost $8.5 billion of these amounts will come from the Mass Transit Account of the Highway Trust Fund in FY 2013 and $8.6 billion in FY 2014; $2.1 billion will come from the General Fund in each of these years again, meaning partially deficit spending. Of those totals, $1.9 billion is authorized each year for the Major Capital Investment Program (New Starts and Small Starts).

The new law consolidates many of the previously authorized programs and creates a few new ones. While both the New Starts/Small Starts programs as well as Formula Assistance continue, Very Small Starts, which was only part of Federal Transit Administration (FTA) regulation anyway, and never part of any statute, is wrapped into Small Starts. Importantly, though, both small and “big” starts are not yet separated in the Major Capital Investment Program as they were in the previous legislation. However, Congress has indicated it will set aside $150 million from the program for Small Starts when it gets around to passing a technical corrections bill later this year.

TIFIA gets a boost
A major increase in federally-backed loans, through the Transportation Investments Finance and Innovation Act (TIFIA), could help stretch the federal dollars further, particularly “self-help” regions that dedicate transportation funds through voter-passed measures by bonding against future revenues to build out transit projects faster, as it has already done for several rail projects. MAP-21 includes $750 million for the TIFIA program in 2013 and $1 billion in 2014. It is estimated that the $1 billion TIFIA authorization will support about $10 billion in actual lending capacity.

There is concern, however, that most of that additional lending authority could be already spoken for by highway needs. Of the 27 projects that have filed letters of interest with the U.S. Department of Transportation (U.S. DOT) at press time, all but five were road and bridge projects, some of which are quite large, such as for the Tappan Zee Bridge in New York.

Furthermore, the framework for the expanded loan program has been changed to one that is more of a first-in/first-out process and puts previously rejected loans, if deemed creditworthy, first in line. Although U.S. DOT officials have suggested that there will be some “national interest” test applied to the loans as well, it is too early to tell how all of it will play out post-MAP-21. In addition, MAP-21 also mandates a 10% “set-aside” for rural projects, but again, that expanded eligibility for smaller projects may be offset by the increase in the share of project costs that TIFIA is allowed to support.

Another important MAP-21 provision is a new framework for measuring and improving transportation performance. To develop implementation rules for these new provisions, the U.S. DOT and FTA have already begun a series of webinars and listening sessions. Asset management and performance studies have been funded in several research projects, and it is expected the U.S. DOT and FTA will use this guidance for new rulemaking.

It is worth noting here that flexible funding from highways to transit in recent years has declined, partly as local and state highway funding has been reduced in the wake of the financial crisis that left so many city, county and state budgets devastated. As local government budgets recover, it remains to be seen whether flexible funding will return to the nearly $1 billion average that public transportation once enjoyed each year, or whether the additional performance and other requirements of MAP-21 will keep these dollars in the highway program.

MAP-21 also eliminated the consistently over-subscribed Transportation Investment Generating Economic Recovery (TIGER) program that was begun in the 2009 stimulus and continued in subsequent appropriations. However, the new law authorizes $500 million in a Projects of National Significance Program from the general revenues — but subject to an appropriation in FY 2013 only, which has yet to be enacted — to fund critical high-cost surface transportation capital projects that will accomplish national goals, such as generating national/regional economic benefits and improving safety. Many streetcar, rail and bus rapid transit projects benefited from TIGER, but it is unclear whether this new program will even get started before MAP-21 expires.[PAGEBREAK]

Official White House photo by Lawrence Jackson

Official White House photo by Lawrence Jackson

Resolution of big issues
How all this will play out after MAP-21 and beyond will depend on consensus on three major issues. Each is briefly discussed below:

Deficit reduction: The recent “fiscal cliff” discussions mainly involved preservation of the tax rates for all but the wealthy, and in the process, did not do a lot for deficit reduction. President Obama claims that the combination of spending cuts already enacted, plus the new tax agreement, gets the U.S. more than halfway toward the minimum of $4 trillion needed in deficit reduction over the next decade. Republicans and some outside experts, however, think more is needed. Either way, reaction of the bond markets to any deal reached, or not, will determine the ultimate level of tax increases and spending cuts needed. Remember, it took the 1987 stock and bond market crashes to inject enough fear into Congress, combined with the 1992 presidential run of third-party candidate Ross Perot, to force Congress to act on a grand bargain of spending controls and revenue increases. Recall also that the two gas tax increases, as a result of that period, reverted to the Trust Fund, and thus, led to the massive increases in guaranteed public transportation spending of the 1990s and 2000s.

Trust Fund solvency: Although gas prices are trending upward, they are not captured by the current federal gas tax because it is set per gallon, producing a growing gap between what the Trust Fund takes in and what Congress wants to spend. Complicating the picture is the expected effect of significant increases in fuel economy standards on vehicles, which means that road and public transportation demand is further decoupled from the project payment funding source. In addition, fewer miles are being driven, thanks to demographic shifts.

Currently, the Mass Transit Account is projected to be insolvent at the end of next fiscal year, according to an analysis by former House Transportation & Infrastructure Committee Chief of Staff Jack Schenendorf, while the rest of the Trust Fund for Highway programs will go bust the following year. Until recent general revenue bailouts of the Trust Fund, the Highway Account was supposed to enter insolvency first; Congress bailed it out with more deficit spending than the Mass Transit Account, though. With the Administration’s August 2012 announcement, increasing the fuel economy standards for cars and light trucks from 34.1 miles per gallon in 2016 to an average just under 50 mpg by 2025, the erosion in Highway Trust Fund revenues will accelerate faster, beginning in the latter half of this decade.

For nearly a decade now, a variety of independent experts and commissions have warned of this growing Trust Fund insolvency, to no avail. Perhaps a grand bargain deficit deal can lead to a fix, or perhaps one part of curbing financial speculation with a new futures transaction tax that Europe has employed can provide a solution. Otherwise, as long-time policy expert Ken Orski put it, we may be in for a period of short-term transportation bills, much like the U.S. experienced in the 1960s and 1970s before President Ronald Reagan signed the law creating the Mass Transit Account.

New development patterns: Demographic shifts show a more diverse America, with fewer young people driving and huge increases in demand for more walkable towns and suburbs. More and more people are clamoring for safer streets and healthier communities, and a variety of real estate studies show that more walkable neighborhoods supported by public transportation are in greater demand and fared better during, and recovered faster after, the collapse of housing prices during the Great Recession.

This seems to be a result of the preferences of younger people as well as a growing number of seniors who want to live in neighborhoods where they can be less dependent on driving. Economic development expert Richard Florida argues that beginning with the Great Recession, we are in the midst of a third period of “creative destruction,” like the Great Depression of the 1930s, or the Long Depression of the 1870s, which will remake the U.S. economy and society and generate new eras of economic growth and prosperity that are dependent on interconnectedness of megaregions. Florida argues that denser development, more socially tolerant communities and areas based on “creative industries,” such as research and development; biotechnology; nanotechnology and new entertainment media, have already shown to be factors in attracting and retaining new talent in this “reset.” Accordingly, transportation policies that are less dependent on the single auto commuter, who is wasting time paying attention to the road, are needed more. This paradigm would call for more public transportation and high-speed rail. How Congress addresses or even acknowledges these trends is a very open question, but its answer will shape public transportation policies for decades to come, Florida says.[PAGEBREAK]
The future is now?
For the next two years, the debate over transportation spending has moved to the states, where many decisions will be made about how to spend the billions of dollars distributed under MAP-21. Because of the growing gap between demand and federal resources, the fight may also shift more and more to state and local ballot initiatives, where public transportation-related initiatives, despite the recession, continue to pass at a 70-plus-percent  rate.

If the March sequester in the discretionary programs fails to be averted — the automatic spending cuts that are part of the “fiscal cliff” coined by Federal Reserve Board Chairman Ben Bernanke — public transportation will stand to lose about 8% each year from the current total, or about $800 million, most of which will be from the New Starts/Small Starts program. Highways could stand to lose about the same or perhaps more, depending on how general fund bailouts are counted.

The only good news in this situation is that the canard that “highways pay for themselves while transit doesn’t” has now been exposed, which presents a set of interesting possibilities for any future surface transportation legislation.

As if there were not enough big issues to affect the federal public transportation program, two others loom. The smaller is how the FY 2013 Continuing Resolution, which funds half of highway and transit programs, will be extended for the rest of the year. It expires March 27. The second is the debt ceiling, which must be raised by early March at the latest. Failure to resolve either of these could tip the already fragile U.S. economy into recession — and make the deficit picture and its related challenges even greater.

Any of these larger issues can thus affect federal public transportation funding in any number of ways. The most dire near-term scenario is to reduce spending to the levels in the Highway Trust Fund, end the Mass Transit Account and transfer all of the money to pay for highways, the one that the most severely conservative House Republicans favored last summer. However, that option was summarily defeated, when an attempted amendment to MAP-21 was rejected by a significant margin. Many who voted for the amendment were defeated in November’s election, so such an option is even less likely.

The most optimistic prospects for future public transportation funding include new revenues enacted as part of a “grand bargain” deficit-reduction deal. Such a scenario has been favored by several major reports on deficit reduction, most notably by the oft-touted Simpson-Bowles Commission. It provided for a 15-cent increase in the federal gas tax, part of which will go toward reducing the federal debt, and the rest, to increasing transportation infrastructure investment to help boost economic growth.

Resolution, or another postponement, is also dependent on how much larger fights in Congress are resolved, and how much larger trends are affecting the economy and U.S. politics, some of which are upon us all now.    

Cliff Henke is a sr. analyst at Parsons Brinckerhoff. He is based in Los Angeles.