Road Warriors

Texas Leads Nation in Highway Work Under Way

By Rob Patterson

In the wake of burgeoning growth, Texas needs to build new highways and to improve and maintain existing ones. But traditional state and federal funding sources have been unable to keep pace with the present and future mobility demands of the nation's largest state highway system.

In order to finance vital work on the system, Texas has instituted new financing tools to supplement funding options beyond the "pay-as-you-go" method of highway funding the state has employed in the past. "For many years, we had the cash-flow model from the State Highway Fund," said James Bass, director of the finance division for TxDOT. "It used to be the full TxDOT picture. That's no longer the case."

Texas currently has more highway work under way than any other state in the nation. Pay outs for highway work from all sources in 2005 are anticipated to be almost $5 billion. Another approximate $4 billion in highway contracts are also expected to be awarded this year.

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For fiscal year 2005, Bass estimates some $7 billion of expenses for the State Highway Fund, up about $1 billion from 2004. Revenue sources include state gasoline taxes, vehicle registration fees and federal reimbursements, which can run from 80 to 100 percent of the costs of certain projects under the Transportation Equity Act for the 21st Century. But state revenue and federal funds can't cover current and future highway expansion needs.

Recent legislative action and state constitutional amendments have established the Texas Mobility Fund as an additional resource and expanded the state's ability to issue bonds for highway construction, levy tolls and enter into public-private partnerships for highway construction. The net result allows the state to initiate much-needed system improvements at earlier dates than previous financing methods would have allowed.

"We're able to accelerate projects sooner and faster through bonds backed by the State Highway Fund, which we think is a benefit," said Bass. "If you look over a large period of time, it doesn't necessarily allow you to deliver more projects. You can deliver those same projects faster, which obviously has huge benefits to the economy and quality of life."

TxDOT can now issue $3 billion in bonds backed by future revenues to the State Highway Fund to accelerate that funding stream-but has yet to do so. An annual cap of $1 billion in debt can be issued backed by the fund, and at least $600 million of the $3 billion total must be for safety projects. The Texas Mobility Fund provides additional funding and debt financing to address multimodal transportation solutions to highway congestion.

The mobility fund receives revenue through 2005 from a statewide traffic fine and from an additional fee charged to drivers license holders who accumulate a certain number of moving violations. In 2006 and beyond, drivers license and vehicle registration fees will provide income to the fund. These dedicated revenues are projected to leverage $3 billion in bond proceeds.

Many of the new financing mechanisms were enabled by HB 3588, which was the state's most comprehensive transportation act to date, enacted in June 2003. It granted the authority to issue revenue bonds to Regional Mobility Authorities for new highway projects they initiate and construct and will maintain and operate. It also allows the Texas Transportation Commission to transfer responsibility for state highway segments to an RMA.

As well, the bill expands the use of tolls to finance transportation. It gives the commission the ability to build and convert highways into toll roads (with county approval) and reimburse local entities for highway projects they finance and build with pass-through tolls.

HB 3588 also established plans and financing mechanisms for the Trans-Texas Corridor. The vehicle, rail and utility corridor crossing the state will be built over several decades.

All told, it's a potential boon for contractors and suppliers serving highway construction needs in the state for years to come.

TxDOT continues to contract the majority of its projects on a fixed-bid basis. "The tried and true method we've been using for years is the low-bid process," Bass said. Bids, including line-item estimates, are reviewed by TxDOT's construction division and approved by the commission at its monthly meetings.

"We also do some A + B bidding -cost plus time-but that's been somewhat limited," Bass said. "The continuing bread and butter is the low-bid process."

In all its contracts, TxDOT specifies liquidated damages for projects that go past the specified number of work or calendar days for completion. The dollar amounts of damages vary depending on the job and disruption to traffic. "A project going through the heart of Houston will have higher liquidated damages than a highway going through Junction," Bass said.

"In the last couple of years we've emphasized more incentives for early completion. They've been done for years, but not on as many projects as we are now doing."

Statutory changes now allow TxDOT to enter into Comprehensive Development Agreements with private entities to plan, develop, finance, construct and maintain highways. "The commission is interested in seeing if the private sector would participate in the initial financing of projects, and continue to partner with the department over time in operating it and share in the revenues of the project," said Bass. "They're interested in seeing what the appetite for something like that is in the private sector. It's something that's been used quite a bit in other countries but not so much in the United States.

"Some CDAs may include state highway fund money, some may be bond money from the mobility fund, some may be turnpike bonds," he added. Although only a limited number of TxDOT contracts fall under such arrangements, they lend themselves to larger projects. The most obvious example is State Highway 130 bypassing Austin, which is the most expensive transportation project in state history.

Public and private entities can also present pass-through toll proposals to TxDOT for "projects that are on our list but may be lower in our priorities or not even on the list," Bass said. "If they feel like a project is that important to them, they can finance and construct it using their own bonds or equity. TxDOT then pays them a pass-through toll for every vehicle that travels after it is open."

TxDOT also has a state infrastructure bank program to loan money to cities and counties to do vital road projects.

Another piece of HB 3588 allows the commission to submit recommendations to the Legislature on changes in law that would improve the operations and efficiency of the department.

TxDOT will be making a shift this year in the structure of its own financial reporting. "A big portion of the dollars classified under highway construction are truly for rehabilitation and reconstruction as they do not add any capacity to the system," Bass said. "In fiscal year 2006, we're going to stop reporting those dollars as highway construction in our budget and move them over to maintenance to give a more accurate reflection of the work that's being done."