Fix It First, Expand It Second, Reward It Third. David Levinson, University of Minnesota and Matthew Kahn, UCLA

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1 DISCUSSION PAPER FEBRUARY 2011 Fix It First, Fix It First, Expand It Second, Reward It Third: A New Strategy for America s Highways Matthew E. Kahn and David M. Levinson Expand It Second, Reward It Third webinar for Council of State Governments, May 29, 2014! David Levinson, University of Minnesota and Matthew Kahn, UCLA

2 Introduction The most important links have already been built and now require significant investments in maintenance and repair

3 Deployment of the US Interstate Highway System Cumulative Length (%) of 42,795 miles

4 Structurally Deficient Bridges on US National Highway System Source: DOT 2007b

5 Typical Pavement Good Lifecycle Curve Satisfactory Fair $1.00 for Rehabilitation Here Poor Very Poor Serious Failed Small % of Pavement Life Will Cost $4.00 to $5.00 Here

6 From Building to Operating Building (yesterday) Operating and Maintaining (today and tomorrow)

7 Fix it First We propose that revenue from the federal gasoline tax no longer fund new highway construction. Instead, this revenue would be dedicated to preserving and reconstructing existing highways (on the NHS), which are reaching the end of their design life.

8 Flowchart: Fix It First Applies Formula Funds NHS Maintenance Projects Assesses Needs Highway Trust Fund State Funds Highway Trust Fund Transportation is Used User Fees

9 From Funding to Financing Funding (today) Financing (tomorrow) Federal State Federal States, Others User Fees User Fees User Fees (Gas Taxes) (Gas Taxes) Bonds, etc. (Tolls, MBUF), Value Capture

10 Expand it Second! New highways will continue to be built. We propose to change the financing rules Rather than receiving a 80% Federal subsidy, road owners could borrow (and have to repay from User Fees, Value Capture, and other sources tied to the benefits the project produces) the capital from the newly capitalized Federal Highway Bank A major change in incentives

11 Reward it Third! We introduce formal performance standards for ranking investments Formal criteria related to safety performance, pollution, and speed and accessibility will be evaluated by an impartial evaluator Projects that perform well on these criteria will receive an interest rate reduction

12 Flowchart: Expand It Performance Fund Asks Does Project Exceed Performance Standard? If yes, Subsidizes Interest Rates Second Federal Transportation Bank Asks Can Project Repay Loan? If yes, Lends Project Repays Purchases Financial Instruments Repays Loans for Community Investors Reward It User Fees Value Capture Third General Revenue

13 Federal Highway Bank and PPP Who receives the loans, who implements the project? Private firms and public agencies that have the ability to repay loans from user fees or value capture are eligible. They are on the hook for the loans. Private individuals and organizations invest in the bank, and expect returns. The entire system is in some senses a Public Private Partnership

14 Thank you David M. Levinson,