Transportation Infrastructure Funding Assessment and Economic Impact Analysis for the Commonwealth of Kentucky

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1 Transportation Infrastructure Funding Assessment and Economic Impact Analysis for the Commonwealth of Kentucky Submitted To: Kentucky Infrastructure Coalition Submitted By: Commonwealth Economics December 2017

2 TABLE OF CONTENTS I. EXECUTIVE SUMMARY II. III. IV. INTRODUCTION KENTUCKY S TRANSPORTATION SYSTEM SUMMARY OF FUNDING NEEDS V. THE ROAD FUND VI. FUNDING THE GAP VII. QUANTIFYING TRANSPORTATION BENEFITS VIII. QUANTIFIED RESULTS IX. CONCLUSION P a g e 2

3 I. EXECUTIVE SUMMARY This report analyzes the Commonwealth of Kentucky s transportation infrastructure needs, historical and projected funding allocations and shortfalls, and the potential economic benefits that could be realized should these future needs be funded. The analysis concludes that Kentucky needs an additional $554 million, or more, in annual transportation funding in order to continue providing a safe and efficient transportation system. These needs are real and necessary to accommodate the system s commuters, manufacturers, distributors, retailers and other users. Funding the additional $554 million may require a combination of tax code changes to the Motor Fuels Tax and the Motor Vehicle Usage Tax, and the identification of other potential revenue sources. The historical analysis performed in this study suggests that the tax revenue base of Kentucky s Road Fund has been and will continue to be insufficient to fund the transportation needs throughout the state. Funding these infrastructure needs will allow Kentucky s economy to support increased employment, labor income, and overall output, in addition to creating travel time savings, reduced operating cost, and safer conditions. Funding the necessary transportation system needs would generate a return of 5.01 to 1 for each dollar invested. Additional Transportation Funding Needs (see Charts ES-1 & ES-2) Funding made available for state highway projects in the current fiscal year, FY 2018, is down 67% from FY 2012, and is $227 million less than its average over the past decade. At this current rate of decline, only a minimal, if any, amount of funding will be available from the Road Fund for state highway project construction after the next biennium, unless additional Road Fund resources are made available. The recent trend of declining Available Funding for state highway projects, as well as the current, FY 2018, shortfall is the result of a combination of factors, including (but not limited to): o Recent declines in the AWP affecting the level of the Motor Fuels Tax. o Recent legislation affecting the level of the Motor Vehicle Usage Tax. o Reduced capacity for additional debt as previous bond authorizations issued o Competing demands for Road Fund resources (including, but not limited to): Increased highway maintenance costs Increased highway resurfacing costs Increased employer pension and post-retirement benefit cost P a g e 3

4 Cabinet officials have estimated that an additional $205 million in annual funding is required in order to repair or replace aging bridges and roads across the Commonwealth and to maintain them at acceptable condition levels. Over the past decade the cabinet has used an average of $122 million in toll credits each year to match FHWA grants. However, these accumulated toll credits will be exhausted in FY 2020, leaving the Commonwealth with major additional funding needs in order to maintain the current level of federal participation on FHWA transportation related projects each year. Several hundred million of additional project needs have also been identified for aviation, riverport, and rail systems in Kentucky over the next several years. Quantified Economic Impacts and Benefits of Infrastructure Spending Using IMPLAN software, our analysis estimates the construction impacts to Kentucky s economy resulting from a $554 million increase in transportation infrastructure spending would support employment for 6,239 people and generate $296 million in total wages throughout the Commonwealth, with a total economic output of $927 million (or a benefit-cost ratio of 1.68 to 1), for each year this injection is made into the economy. In order to estimate the ongoing benefits of the improved transportation system, a meta-analysis is utilized to examine 17 different studies tasked with quantifying the benefits of transportation infrastructure investment. When taking the averages from the results found by the most comparable highway specific studies, the meta-analysis estimates that Kentucky s economy could realize an operational benefit to cost ratio of 3.33 to 1 for every dollar invested each year. This equates to $1.847 billion in operational benefits realized from an additional $554 million invested in transportation improvements. When combining the construction impacts with the ongoing operational benefits, we estimate a realized benefit-cost ratio of 5.01 to 1. This equates to a realized benefit to the Commonwealth of $2.774 billion from each additional $554 million investment in transportation infrastructure. P a g e 4

5 Chart ES-1 P a g e 5

6 Chart ES-2 P a g e 6

7 II. INTRODUCTION Transportation infrastructure is one of the pillars of Kentucky s economy. The state s economic health and its ability to remain competitive in the globalized economy depend on the efficient transport of people and goods. Kentucky s multimodal network of roads and highways, commercial and general aviation airports, waterways, freight rail corridors and public transit services need continuous investment. The improvement and expansion of this system depends on public and private expenditures on new and improved infrastructure, technology and services. These investments have direct benefits, including travel time savings for commuters and reduced shipping costs for manufacturers, distributors and retailers as well as reduced vehicle operating and accident costs and broader economic effects. These transportation benefits lead to long-term macroeconomic effects such as higher employment, greater gross state product (GSP), more personal income, more new enterprises and possible beneficial effects for the national and world economies. The first part of this study will focus primarily on state level transportation system infrastructure projects and improvements in Kentucky. The study will examine the amount of state highway system projects legally authorized by the Commonwealth s General Assembly over the past decade, the types of projects and improvements authorized, the funding made available for these projects, as well as for other transportation modes, and the funding gaps that exist. Additionally, the study will examine recent State Road Fund revenue performance, with a focus on the tax rates and performance of its two largest contributing taxes, the Motor Fuel Tax and the Vehicle Usage Tax. By comparing these recent trends, the study will then quantify the hypothetical rate increases necessary in the Motor Fuel Tax and/or the Vehicle Usage Tax to fill the funding gaps at various levels. The last part of this study will examine the ongoing operational benefits from previous studies which monetize the direct benefits, mentioned above, and estimate Kentucky s ongoing operational return per $1 invested in transportation. In addition, this study will estimate the macroeconomic or economic impacts created in Kentucky solely from one-time construction expenditures and its ripple effects throughout the economy. P a g e 7

8 III. KENTUCKY S TRANSPORTATION SYSTEM The Transportation Cabinet In 1982, the Kentucky General Assembly created the Transportation Cabinet (or the Cabinet ), as successor to the former Department of Transportation and Department of Highways. The Cabinet is responsible for the development, construction and maintenance of the Commonwealth s primary road systems, operating 12 regional district offices across the state, and highway maintenance facilities in each of Kentucky s 120 counties. Additionally, the Cabinet also provides regulatory, oversight, technical and financial assistance for the Commonwealth s public airports and public transportation providers across the state, and also performs a variety of other regulatory activities such as vehicle registration, driver licensing, highway and vehicle safety, etc. As displayed in Table 1, below, the Cabinet s operating budget, as authorized by the Kentucky General Assembly, over the last ten fiscal years has averaged over $2.3 billion annually, and is comprised of multiple fund sources, including state Road Fund revenues and various federal funding sources, which comprise approximately 59% and 31%, respectively, of the Cabinet s budget over the last ten years. Table 1 FY General Fund Restricted Funds Federal Funds Road Fund Total 2009 $ 5,178,200 $ 93,079,300 $ 725,400,800 $ 1,229,057,900 $ 2,052,716, $ 5,620,200 $ 92,953,300 $ 757,575,700 $ 1,323,196,900 $ 2,179,346, $ 4,856,600 $ 227,438,900 $ 718,294,000 $ 1,181,485,300 $ 2,132,074, $ 5,092,800 $ 531,464,000 $ 718,311,400 $ 1,259,954,500 $ 2,514,822, $ 5,678,200 $ 326,300,500 $ 605,332,200 $ 1,441,323,700 $ 2,378,634, $ 5,678,200 $ 326,539,200 $ 606,670,700 $ 1,461,496,100 $ 2,400,384, $ 6,228,200 $ 371,179,900 $ 726,762,100 $ 1,478,312,300 $ 2,582,482, $ 6,228,200 $ 226,521,400 $ 729,132,800 $ 1,443,678,300 $ 2,405,560, $ 6,228,200 $ 132,732,200 $ 740,779,100 $ 1,361,366,500 $ 2,241,106, $ 6,228,200 $ 131,730,500 $ 755,708,900 $ 1,380,512,200 $ 2,274,179,800 Total $ 57,017,000 $ 2,459,939,200 $ 7,083,967,700 $ 13,560,383,700 $ 23,161,307, Yr Avg $ 5,701,700 $ 245,993,920 $ 708,396,770 $ 1,356,038,370 $ 2,316,130,760 % of Total 0.2% 10.6% 30.6% 58.5% P a g e 8

9 State Highway System - Planning Every two years, in a biennial budget (60-day) session, the Cabinet is required to present the General Assembly with a proposed highway construction program for the next three biennial periods. This proposed program for the three biennial periods is referred to as the Six-Year Plan. The planning process for the Six-Year Plan begins with the development of a long-term, 20-year program, and includes input from local citizens and officials, Area Development District Public Involvement Committees, Metropolitan Planning Organization Committees, and the Cabinet. Each proposed project is evaluated relative to its contribution towards various goals, including: 1) Preservation and management of the existing transportation system 2) Providing system connectivity of the individual modes to promote economic development 3) Coordination and cooperation among a wide variety of interests in the planning process 4) Enhancement of transportation system safety and convenience for its users Additionally, to assist in the identification of highway needs across the Commonwealth, the Cabinet maintains an ongoing roadway inventory program, compiling and analyzing data on things such as traffic volumes, physical roadway features, accident statistics, and average travel speeds. Through this collaborative effort, proposed projects are evaluated, and the highway projects ultimately identified and approved for the first six years of the long-term program represent the highest priority projects and constitute the Six-Year Plan. The current Six-Year Plan consists of nearly 1,400 total projects eligible for state and federal funding. Utilizing the Six-Year Plan as it s basis of input, in each biennial budget session, the General Assembly then adopts a Biennial (two-year) Highway Construction Plan, which authorizes work to proceed on specific projects and project phases. In addition, the General Assembly also adopts a Transportation Cabinet budget which includes appropriations of state and federal fund sources to pay for portions of the Biennial Highway Construction Plan as well as all other Cabinet spending, including areas such as re-surfacing, maintenance, aviation, public transportation, administration, etc. Several recent Biennial Highway Construction Plans and Transportation Cabinet Budgets will be used as the basis of our analysis in the following section. P a g e 9

10 State Highway System Historical Construction Funding In this section, we will review the Commonwealth s most recent five (5) Biennial Highway Construction Plans (state fiscal years 2009 through 2018). We will quantify the amount of state funded highway projects authorized by the Kentucky General Assembly as well as the amount of state funding made available for these projects in the corresponding Transportation Cabinet budgets. Included in our analysis, are the following types of projects: State Construction (SP) State Construction High Priority Projects (SPP) State Bonds (SPB & SB2) Base Realignment and Closure (BRAC) Bond Projects (BR2) Table 2 State Funded Projects FY FY BR2 SB2 SPB SP SPP Total State Projects Total All Projects in H/W Plan State % of Total 2009 $ - $ - $ 527,445,578 $ 60,316,930 $ - $ 587,762,508 $ 1,703,079,708 35% 2010 $ - $ - $ 5,200,000 $ 1,213,342,030 $ - $ 1,218,542,030 $ 2,060,449,430 59% 2011 $ 79,100,000 $ 187,281,800 $ 93,310,000 $ 270,071,300 $ 54,540,000 $ 684,303,100 $ 1,786,027,805 38% 2012 $ 41,220,000 $ 126,975,000 $ 4,560,000 $ 1,163,942,900 $ 260,190,000 $ 1,596,887,900 $ 2,664,632,810 60% 2013 $ - $ 102,674,225 $ 2,125,000 $ 216,710,000 $ 507,666,900 $ 829,176,125 $ 1,650,076,859 50% 2014 $ - $ 85,410,000 $ 12,550,000 $ 366,936,430 $ 445,362,200 $ 910,258,630 $ 2,037,939,630 45% 2015 $ 2,740,000 $ 107,510,000 $ - $ 395,721,000 $ 494,714,800 $ 1,000,685,800 $ 1,813,973,061 55% 2016 $ 8,755,000 $ 19,631,800 $ 700,000 $ 384,840,000 $ 404,429,400 $ 818,356,200 $ 1,761,955,527 46% 2017 $ - $ 70,425,000 $ 663,300 $ 258,658,000 $ 583,383,400 $ 913,129,700 $ 1,766,644,534 52% 2018 $ 13,700,000 $ 49,300,000 $ - $ 361,145,000 $ 572,083,600 $ 996,228,600 $ 1,813,942,280 55% $ 145,515,000 $ 749,207,825 $ 646,553,878 $ 4,691,683,590 $ 3,322,370,300 $ 9,555,330,593 $ 19,058,721,644 50% As seen in Table 2, above, over the last ten fiscal years, on average, 50% of the projects included in the Biennial Highway Construction Plan are state funded projects and the other 50% is comprised primarily of federally funded highway and bridge projects. However, our focus in this section (and in this study) will be primarily on projects funded with state tax dollars. As also seen in Table 2, above, over the last ten fiscal years, the General Assembly has programmed between $587.8 million and $1,596.9 million of state funded projects each year, with an average of $955 million authorized per year over this period. It is important to understand that the amounts shown in Table 2 represent the estimated P a g e 10

11 cost of projects or phases of projects that are authorized to proceed, but does not represent the amount of funding made available to pay for these costs. Separate from the Biennial Highway Construction Plan, the General Assembly also authorizes funding each year for state projects that are included in the plan. This funding typically comes from two sources: 1) Appropriations from current year Road Fund revenues 2) Debt, in the form of bonds issued by the Turnpike Authority of Kentucky or Kentucky Asset/Liability Commission, with the principal and interest paid from Road Fund revenues over a period of up to 20 years. The remainder of this section calculates the amount of Available Funding for state projects each year in the Biennial Highway Construction Plan. For purposes of this study, our analysis considers both appropriations of Road Fund moneys as well as bonding authority authorized by the General Assembly as available to fund state highway projects in each year. As will be illustrated, the amount of Available Funding for state highway projects each year is typically much less than the amount of projects authorized. Table 3 State Road Fund Appropriations Appropriations for FY Highway Construction % of Road Fund 2009 $ 161,434,000 13% 2010 $ 196,358,400 15% 2011 $ 176,672,600 15% 2012 $ 195,799,800 16% 2013 $ 278,454,700 19% 2014 $ 249,562,000 17% 2015 $ 265,019,900 18% 2016 $ 217,323,800 15% 2017 $ 189,149,400 14% 2018 $ 197,539,400 14% Total $ 2,127,314,000 16% P a g e 11

12 Fiscal Year Table 3, above, displays the amount of direct appropriations made by the General Assembly from current Road Fund revenues in each Transportation Cabinet budget over the past ten fiscal years and made available to fund projects in the associated Biennial Highway Construction Plan. When compared to Table 1, displayed earlier, you ll see that over the last ten fiscal years, Road Fund appropriations for the Biennial Highway Construction Plan represent approximately 16% of all budgeted Road Fund spending by the Cabinet. Table 4 Economic Development & BRAC Bond Authorizations 2008 $ 350,000, Authorizing Session/Year of the General Assembly $ 50,000,000 $ 400,000, $ 56,000, $ 456,000,000 Table 4, above, displays the amount of Road Fund bonds authorized by the General Assembly in each Transportation Cabinet budget since 2006 for the purpose of funding state projects in a Biennial Highway Construction Plan. These bond authorizations represent funding in addition to the direct Road Fund appropriations made by the General Assembly, displayed in Table 3, above. The column headings (years) in Table 4 represent the calendar year in which the General Assembly met and authorized bonds, and the Fiscal Year row headings on the left of Table 4 represent the fiscal year in which the bonding authority could first be used (bonds issued) to fund projects. As Table 4 details, a total of $1.312 billion of Road Fund bonds were authorized during this timeframe for state projects in the Biennial Highway Construction Plans. No additional Road Fund bonds have been authorized by the General Assembly since Typically, any authorized but unissued (ABUI) bonds at the end of a fiscal year are carried forward and issued in subsequent fiscal years to fund projects. Since part of the analysis here is determining amounts available to pay for project costs each year, it is important to understand both the new bonds authorized in each fiscal year as well as P a g e 12

13 the amount of ABUI at the beginning of each fiscal year are available to be used to fund project costs during that year. Table 5, below, displays the bond issuances (i.e. bonding authority used) since FY Table 5 Road Fund Bonds Issued FY Dated Issuer Bond Series Project Funding /25/2007 Kentucky Asset/Liability Commission Project Notes, 2007 Road Fund First Series A $ 150,000, /5/2008 Kentucky Asset/Liability Commission Project Notes, 2007 Road Fund First Series A (First Supplement) $ 50,000, /14/2008 The Turnpike Authority of Kentucky Economic Development Road Revenue Bonds Series A $ 100,000, /28/2009 The Turnpike Authority of Kentucky Economic Development Road Revenue Bonds Series A $ 50,000, /25/2010 The Turnpike Authority of Kentucky Economic Development Road Revenue Bonds Series A&B $ 250,000, /19/2011 The Turnpike Authority of Kentucky Economic Development Road Revenue Bonds Series A $ 56,000, /13/2012 The Turnpike Authority of Kentucky Economic Development Road Revenue Bonds Series A $ 256,000, /2/2013 The Turnpike Authority of Kentucky Economic Development Road Revenue Bonds Series A $ 200,000, /22/2015 The Turnpike Authority of Kentucky Economic Development Road Revenue Bonds Series A $ 75,000, /7/2016 The Turnpike Authority of Kentucky Economic Development Road Revenue Bonds Series B $ 45,000, /23/2017 The Turnpike Authority of Kentucky Economic Development Road Revenue Bonds Series A $ 30,000,000 $ 1,262,000,000 As can be seen in Table 5, a total of $1.262 billion of Road Fund bonds have been issued to fund projects in the Biennial Highway Construction Plans since FY At the time of this study, only $50 million of ABUI bonds remain. Table 6, on the following page, accounts for the new bonds authorized (from Table 4) and the bonds issued (from Table 5) to calculate and display the total amount of bonding authority available at the beginning of each fiscal year to fund projects in the associated Biennial Highway Construction Plan. P a g e 13

14 Table 6 Available Bonding Authority at Beginning of each FY (New Bonds Authorized + ABUI) FY Bonding Authority at Beginning of FY 2009 $ 150,000, $ 450,000, $ 256,000, $ 656,000, $ 400,000, $ 400,000, $ 200,000, $ 200,000, $ 125,000, $ 80,000,000 Table 7, below, combines the information from Tables 2, 3 and 6 and illustrates the annual funding shortfall related to state highway construction projects over the past 10 years. Table 7 State Highway Projects Funding Shortfall Projects Authorized Appropriations Bonding Authority Total Available Funding Annual Shortfall FY Table 2 Table 3 Table 6 Table 3 + Table 6 % Funded Table 2 - (Table 3 + Table 6) 2009 $ 587,762,508 $ 161,434,000 $ 150,000,000 $ 311,434, % $ 276,328, $ 1,218,542,030 $ 196,358,400 $ 450,000,000 $ 646,358, % $ 572,183, $ 684,303,100 $ 176,672,600 $ 256,000,000 $ 432,672, % $ 251,630, $ 1,596,887,900 $ 195,799,800 $ 656,000,000 $ 851,799, % $ 745,088, $ 829,176,125 $ 278,454,700 $ 400,000,000 $ 678,454, % $ 150,721, $ 910,258,630 $ 249,562,000 $ 400,000,000 $ 649,562, % $ 260,696, $ 1,000,685,800 $ 265,019,900 $ 200,000,000 $ 465,019, % $ 535,665, $ 818,356,200 $ 217,323,800 $ 200,000,000 $ 417,323, % $ 401,032, $ 913,129,700 $ 189,149,400 $ 125,000,000 $ 314,149, % $ 598,980, $ 996,228,600 $ 197,539,400 $ 80,000,000 $ 277,539, % $ 718,689, Yr Averages $ 504,431, % $ 451,101,659 P a g e 14

15 As illustrated in Table 7, the annual shortfall in Available Funding for state highway construction has ranged from $150.7 million to $745.1 million over the past ten fiscal years, and has trended higher in recent fiscal years. It must be noted here that, to some extent, the Biennial Highway Construction Plan has been purposely overprogrammed each year by the General Assembly, understanding that many factors, in addition to funding, can impact how quickly a highway construction project can be completed, and it is therefore sensible to authorize more projects than the Commonwealth has in available funds in a given year. Additionally, some authorized projects in one or more Biennial Highway Construction Plans, for various reasons, may never receive funding. However, when considering that over the past decade the Biennial Highway Construction Plan has only been funded at 53.6%, on average, and with an average historical shortfall of $451.1 million, it is reasonable to assume that a material portion of the annual shortfall is due to a lack of Available Funding, and that a significant amount of additional authorized projects could be undertaken/completed each year were more funding available on an annual basis. Additionally, Chart 1, shown on the following page, is a more visual representation of the data in Table 7 which clearly displays that, while state funded highway project authorizations have continued around their historical average in recent years, Available Funding has not, and in fact, there has been a steep drop in Available Funding each of the past six fiscal years. Note: The top of each annual stacked bar displayed in Chart 1 represents the amount of state funded projects authorized in the Biennial Highway Construction Plan that fiscal year. P a g e 15

16 Chart 1 P a g e 16

17 As illustrated in Chart 1, not only has there been a significant historical funding shortfall in the Biennial Highway Construction Plan over the past decade, but over the past three biennial budget cycles Available Funding from the Road Fund for state highway projects has taken a steep downturn on a near linear trend line. Available Funding in the current fiscal year, FY 2018, is down over 67% since just FY At this current rate of decline, only a minimal, if any, amount of funding will be available from the Road Fund for state highway project construction each year after the next biennium, unless additional Road Fund resources are made available. Table 3, displayed previously, provides additional evidence of this steady decline, displaying a continuing decline in the percentage of Road Fund appropriations made for highway construction each year (compared to all Road Fund appropriations made to the Cabinet) since 2013, and Table 6, displayed previously, also supports this by illustrating the steady decline in available bonding authority each year since To further quantify this in dollars, as displayed in Table 7, over the past decade, Available Funding for state highway projects has averaged over $504.4 million each fiscal year, but is now down to $277.5 million in FY This represents a current additional funding shortfall of $227 million from the historical average funding level, and also represents an immediate need each year in order for the state to just maintain its pace of highway construction from the past decade into the future. Based on recent trends in fuel prices and with a variety of other needs (in addition to highway construction) consuming increasing amounts of the Road Fund each year (some of these discussed later), it is difficult to see how either the current additional funding shortfall or any of the historical funding shortfall can be filled without changes to Kentucky s tax code to generate additional Road Fund revenues. It should also be pointed out here that, while a Road Fund future debt capacity analysis is beyond the scope of this study, it is likely that only a limited amount of additional Road Fund bonding capacity exists in the near future, and that future debt, under any scenario, could only support a relatively small portion of these anticipated annual funding shortfalls. For reference here, and certain later sections, we have included Chart 2 on the following page, which displays the FY 2018 distribution of state Road Fund appropriations and the heavy demands that are placed on this fund by areas other than new highway construction. P a g e 17

18 Chart 2 State Highway System - SHIFT In 2017 the Cabinet announced a new initiative, Strategic Highway Investment Formula for Tomorrow (SHIFT), to help guide the development of the next six-year highway plan. SHIFT uses a formulaic approach to evaluate and rank transportation projects across the state using data on safety, congestion, asset management, economic growth, and cost-benefit ratios. As part of the SHIFT process, the Cabinet has already evaluated and scored more than 1,100 projects, and hopes the results will be used to guide project prioritization and spending of transportation dollars over the next six-year cycle. Through the implementation of SHIFT, the Cabinet and its planning partners worked together to identify approximately $17.7 billion of project needs, and through the collaborative process, has identified $8.7 billion of these projects as priority projects that need to be undertaken over the next 10 years. This priority list includes 67 projects having statewide significance (such as interstates, parkways, interstate spurs, etc.) and P a g e 18

19 totaling $3.431 billion, as well as $5.301 billion of priority projects addressing regional priority needs. The list excludes three mega projects (Brent Spence Bridge, I-69 Ohio River Crossing, and I-471 improvements), as these will each likely require dedicated future funding sources. As discussed previously, historically, 50% of the Biennial Highway Construction Plan is comprised of state funded projects. However, because specific funding sources for the SHIFT priority list have not been determined on a project by project basis, we cannot ultimately assess how much of the $8.7 billion in priority project funding will be required from state level funding sources, versus federal or other sources. The Cabinet has indicated that with other needs consuming an ever-increasing portion of current Road Fund resources, and with its remaining toll credits (discussed in a later section) running out in FY 2020, more highway projects will require federal funding than ever before if additional Road Fund revenues are not made available. Simply put, this means that many future highway construction projects which would have traditionally been 100% state funded, will now be required to meet Federal Highway Administration (FHWA) funding standards, including additional environmental and other regulatory processes, thus further constraining the overall capacity and speed of the state s highway construction program. This potential outcome is supported by our analysis of recent Available Funding trends, as detailed in the previous section. If this turns out to be the case, without a substantial influx of additional revenue to the Road Fund, the development of Kentucky s highway transportation infrastructure in the future could be more constrained than ever before, due to the finite amount of federal apportionments available from the Federal Highway Trust Fund and the burden of additional regulations and requirements for federal funding from FHWA. State Highway System - Maintenance and Resurfacing The Cabinet is also responsible for the ongoing maintenance of the Commonwealth s highways and bridges, and provides a broad array of services and tasks to this end. Among other things, the Cabinet is responsible for direct highway maintenance, including inspection, repair, and/or resurfacing of the Commonwealth s highway system, including over 20,000 miles of secondary roads, 3,600 miles of primary roads, and another 1,400+ miles of interstates and parkways. Additionally, the Cabinet is P a g e 19

20 responsible for roadside maintenance, bridge preservation, and ongoing condition testing and scoring through its Maintenance Rating Program (MRP), along with numerous other related activities. While the need for funding maintenance related activities can be somewhat subjective (i.e. depends upon what condition one wants the road in), the Cabinet uses standardized methodologies and processes to identify and quantify the Commonwealth s highway maintenance needs. The MRP is a critical measurement process in this effort, and collects/uses annual performance measurements of highway infrastructure data to support planning and management decisions regarding maintenance activities and the use of resources. As part of the MRP, numerous highway features are inspected annually and scored individually across the state. As mentioned earlier, the Cabinet operates 12 district highway offices around the state, and data collected from the MRP is used in conjunction with other information to assist the Cabinet s management in the development of a maintenance budget for each of the 12 highway districts. It is generally recognized that the level of service provided varies between the four primary road types (interstate highways, national highways, state primary and secondary roads, rural secondary roads). For example, interstate highways with much higher traffic volumes and higher speed limits require a higher level of maintenance than rural secondary roads. Currently, the Cabinet s overall target scoring level for each highway district, as well as statewide overall, is set at 80 (i.e. 80 = B grade = Good). However, it is the responsibility of each district highway office to set targets for every feature for each of the four road types in order to achieve an overall/composite score of 80 within the district. Table 8, on the following page, displays the most recent MRP statewide scores for each road type. P a g e 20

21 Table 8 MRP Statewide Maintenance Scores Additionally, Figure 1, below, displays the overall grades for each of the 12 highway districts across the state. Figure 1 MRP Highway District Grades P a g e 21

22 With so many highway miles to maintain statewide, the costs related to maintenance and resurfacing are huge and require significant funding each year from the state s Road Fund. Table 9 Road Fund Appropriations for Maintenance and Resurfacing FY Maintenance Resurfacing 2009 $ 97,000,000 * 2010 $ 107,000,000 * 2011 $ 323,212,500 $ 97,000, $ 323,212,500 $ 97,000, $ 323,212,500 $ 97,000, $ 323,212,500 $ 97,000, $ 334,723,000 $ 97,000, $ 338,751,200 $ 97,000, $ 347,457,900 $ 125,000,000 ** 2018 $ 349,072,600 $ 125,000,000 ** Avg $ 332,856,838 $ 103,600,000 *Specific appropriations for maintenance not broken out in biennial budget **$125 million annual resurfacing budget adopted by General Assembly for biennium, was line item vetoed by the Governor to provide the Cabinet more discretionary flexibility over use of funds Table 9, above, displays the level of funding authorized by the General Assembly over the past ten fiscal years from Road Fund revenues and specifically for the Cabinet s maintenance and resurfacing related activities. As displayed in Table 9, over the past ten fiscal years, the Commonwealth has budgeted an average of $332.9 million annually for maintenance activities and an additional $103.6 million annually for resurfacing statewide across the 12 highway districts. Together, this represents over 32% of the Cabinet s Road Fund appropriations over this timeframe. It should be noted here that these appropriations for resurfacing are only related to the state s primary highway system, and do not include the resurfacing requirements for interstates, parkways, or rural secondary roads each year. P a g e 22

23 As also displayed in Table 9, funding for maintenance and resurfacing has increased over the last two biennial budget cycles. Collectively, almost $54 million more was appropriated by the General Assembly for these areas in FY 2018 than just four years earlier in FY 2014, a 12.8% increase. Increased maintenance need is just one of the areas which has constrained available funding for new highway/bridge construction in recent years. As Figure 1 would suggest, with five of the twelve highway districts currently scored below the Cabinet s target level, even with the amount of historic funding made available, and the added funding in recent years, additional funding is needed across many of the highway districts in order to bring them back to the Cabinet s targeted condition levels. Additionally, Figure 2, below, is an illustrative map provided by the Cabinet, which displays the current interstate and parkway pavement conditions, with red representing roadways past due for repaving/treatment, and yellow representing roadways in current need of treatment. Figure 2 Interstate & Parkway Pavement Conditions P a g e 23

24 In addition to these extensive highway maintenance and repaving needs, there is also a total of 14,272 bridges around the state (greater than 20 feet in length) that must be maintained. Based on recent discussions with the Cabinet, over 1,000 of these bridges are rated in poor condition, and almost 400 more are considered substandard (i.e. weight limit less than roadway limit). The Cabinet estimates that approximately 130 additional bridges each year fall into poor condition. Additionally, there are currently 2,786 bridges classified as functionally obsolete, or in other words, not built to current design standards. As part of the SHIFT initiative, discussed in the previous section, the Cabinet identified approximately 1,100 structurally deficient bridges and more than 3,700 miles of roads that are urgently in need of significant repair. Cabinet officials have stated there is a backlog of pavement improvements totaling over $1 billion, and growing at a rate of 500 miles per year. To address these issues, the Cabinet has assessed that there is a need for an additional $205 million in annual funding (and adjusted for price inflation each year) in order to repair or replace aging bridges and roads across the Commonwealth and to maintain them at acceptable condition levels. This additional annual funding would entail approximately $155 million for pavement needs, including rehabilitation, resurfacings, and preventative maintenance work (as well as putting all highways statewide on an 11-year repaving cycle), and $50 million for bridge needs, including replacement, rehabilitation, and preventative maintenance. The Cabinet has stated that their next recommended highway budget will prioritize these needs (over new construction) and will request this additional funding from the Governor/General Assembly. State Highway System - Toll Credits Toll credits are a federal transportation funding tool available for states as a means of matching state (or local) spending requirements for certain federal funding. Under current federal law, toll credits can be earned and accumulated based on the amount of capital investments a state makes in certain Federal Highway Administration (FHWA) approved tolled facilities, such as roads and bridges. Accumulated toll credits may then later be used by the state as the matching share on certain FHWA grants, as well as certain grants administered by the Federal Transit Authority (FTA) for public transportation. P a g e 24

25 For example, certain federal grants require an 80/20 matching ratio, meaning for each $80 contributed by the federal agency, the state agency is required to contribute $20. In most cases, this requires an actual expenditure of $20 (cash) by the state. However, under certain FHWA and FTA programs, toll credits may be used as the state match, reducing the amount of cash funding the state must contribute and allowing certain programs/projects to essentially be funded with 100% federal cash, as opposed to the 80/20 split. Additionally, in order to accrue toll credits, the state s non-federal transportation capital expenditures must be maintained, such that federal funds are not being used as a replacement for state funding (referred to as the maintenance of effort or MOE ). Historically, the Cabinet has been able to meet the MOE, and has accumulated and utilized toll credits to the extent possible. Table 10, below, displays the amount of toll credits used by the Cabinet to match federal FHWA and FTA grants since fiscal year Table 10 Toll Credits Used FY FHWA FTA 2009 $ 68,436,008 $ 2,076, $ 118,247,194 $ 5,061, $ 116,585,313 $ 7,673, $ 98,368,585 $ 2,784, $ 200,055,113 $ 5,163, $ 139,752,577 $ 1,759, $ 150,991,756 $ 4,012, $ 104,255,938 $ 4,861, $ 102,423,016 $ 2,666,012 Totals $ 1,099,115,500 $ 36,060,945 Avg $ 122,123,944 $ 4,006,772 As illustrated in Table 10, above, the Cabinet has utilized toll credits extensively in recent years, averaging over $126.1 million per year. Assuming a typical 80/20 match these toll credits have allowed the Cabinet to qualify for and spend over $500 million in federal moneys per year over this timeframe, primarily on federal projects in the P a g e 25

26 Biennial Highway Construction Plan and on public transportation projects around the state. However, based on feedback from Cabinet officials, the Cabinet s accumulated toll credits are set to run out by or in fiscal year The exhaustion of toll credits will directly impact the state s highway construction program, as Road Fund cash will be required to match federal monies beginning in FY 2020, thus, leaving the Commonwealth with additional major funding needs in order to simply maintain the current level of federal participation on transportation related projects each year. Aviation Kentucky is home to 59 public airports. Under Kentucky Revised Statutes Chapter 183, the Cabinet is responsible for the inspection of public and private airport facilities within the Commonwealth to determine the safety and adequacy of such facilities. All such facilities must be licensed by the Cabinet s Department of Aviation. Additionally, the Cabinet s Department of Aviation manages the Capital City Airport in Frankfort and also provides technical/engineering guidance in the planning, design, and construction of airport facilities across the state, as well as setting standards for design and construction of private facilities. The operational budget for the Department of Aviation is funded primarily through agency revenue funds received via the sales tax on jet fuel (approximately $10-11 million per year in recent years). While some of these funds may be used for capital improvement at airports across the state, the limited amount of funding has generally limited this to items such as small resurfacing, patching, and lighting system maintenance projects. In certain instances, the General Assembly has also appropriated funds directly in a budget bill for various aviation projects across the state. The 2008 General Assembly authorized $60 million of Road Fund supported bonds for aviation projects, though only $9 million was issued (for the expansion of Blue Grass Airport in Lexington). The balance of this authorization lapsed. The 2012 General Assembly appropriated $1 million for runway repair at Lake Barkley State Resort Park, while the 2014 General Assembly appropriated a total of $3 million for the Bowling Green-Warren County Regional Airport project, Pikeville Commercial Air Service project, and Eastern Kentucky University Aviation Program, and the 2016 General Assembly appropriated P a g e 26

27 $750,000 in FY 2017 directly for the Bowling Green-Warren County Regional Airport project. While this funding certainly helps, there is a significant amount of additional need. Based on the Department of Aviation s 2014 pavement study, approximately $70 million of essential/needed asphalt maintenance was identified, including runways, taxiways, and parking aprons, at the Commonwealth s general aviation airports. In 2016, the General Assembly appropriated $10 million in General Fund moneys in both FY 2017 and FY 2018 for aviation economic development to support the development, rehabilitation, and maintenance of publicly owned or operated aviation facilities. These funds are expected to reduce the current pavement needs to around $50 million, but additional funding will be required in future years to complete these projects. Additionally, the Department of Aviation has identified at least ten general aviation terminal buildings across the state in need of replacement or significant re-modeling, and estimate the cost of these projects at an additional $7-8 million. Public Transportation The Cabinet also plays a vital role in public transportation. While it does not own any public transit facilities, the Cabinet is responsible for the application, oversight, and implementation of various public transit grants, several funded through the Federal Transit Authority (FTA), for operating, capital, and technical assistance to both nonprofit and public operators around the Commonwealth. The Cabinet also provides oversight and coordination for various programs providing transportation to the elderly and disabled. Table 11, on the following page, displays amounts appropriated to the Cabinet by the General Assembly for public transportation over the past ten fiscal years. P a g e 27

28 Table 11 Appropriations for Public Transportation FY Road Fund General Fund Federal Funds Restricted State Funds Total Funding 2009 $ - $ 5,178,200 $ 30,907,800 $ 505,600 $ 36,591, $ - $ 5,178,200 $ 30,944,100 $ 522,500 $ 36,644, $ - $ 4,574,600 $ 44,546,000 $ 440,000 $ 49,560, $ - $ 4,528,800 $ 44,546,000 $ 440,000 $ 49,514, $ - $ 5,178,200 $ 32,682,900 $ 440,000 $ 38,301, $ - $ 5,178,200 $ 32,860,000 $ 440,000 $ 38,478, $ - $ 5,728,200 $ 25,341,400 $ 484,200 $ 31,553, $ - $ 5,728,200 $ 25,667,200 $ 495,600 $ 31,891, $ - $ 5,728,200 $ 25,730,500 $ 692,600 $ 32,151, $ - $ 5,728,200 $ 25,788,900 $ 698,700 $ 32,215,800 Avg $ - $ 5,272,900 $ 31,901,480 $ 515,920 $ 37,690,300 Public data is not readily available to determine exactly how many of the dollars from Table 11, above, were used directly for the development and/or improvement of public transportation facilities. However, what can be seen is that approximately 85% of the appropriated state funding for this area comes from the federal government, in the form of pass-through grants with the FTA. These federal grants typically require a percentage matching share from the state, the requirement for which may vary depending upon each particular grant or how the funds are to be used. In each budget for public transportation, displayed in Table 11, above, the General Assembly has instructed that the Cabinet utilize Toll Credits to provide the state match on these federal grants to the maximum extent possible. This is obviously an important distinction, as Table 10, displayed previously, shows us that the Cabinet has utilized over $4 million in Toll Credits per year for FTA grants over the past decade. This equates to the state match on approximately half of the budgeted federal funding for public transportation over this timeframe. Further, while the General Assembly has appropriated over $5 million per year from the General Fund towards public transportation, as displayed in Table 11, above, they have directed $3.5 million of this per year to non-public school transportation, leaving a limited amount of discretionary funds for other statewide public transportation needs. P a g e 28

29 Note: Usage of state Road Fund dollars is constitutionally restricted, and not permitted for the development of public transit facilities (see The Road Fund section). Riverports Kentucky is bordered by rivers on three sides (the Mississippi to the west, the Ohio to the north, and the Big Sandy and Tug Fork to the east), and contains approximately 1,100 navigable miles of waterways. As such, rivers have played an integral role in the history of the state, and continue to play a role in the transportation of goods to and from many areas of the state. Critical to this are Kentucky s eight operational riverports, each owned and operated by local governments. The current list of riverports/authorities include: Hickman-Fulton County Paducah-McCracken County Henderson County Owensboro Louisville-Jefferson County Greenup-Boyd County Eddyville Meade County While public information related to future infrastructure needs is limited, four of the eight riverports provided the Cabinet specific information related to future infrastructure needs, and collectively have identified over 60 projects totaling $498 million over the next twenty years. Funding for the majority of these needs will likely have to come from local taxes and/or other local funding sources, and the completion of many of these projects will be crucial to the ongoing success of Kentucky s waterway system. Note: Since FY 2013, the General Assembly has appropriated $500,000 per year from the state s General Fund for drudging at state riverports. P a g e 29

30 Railroads Kentucky plays an important role in the United States rail network. As such, rail is an important component of Kentucky s economy. As largely displayed in Figure 3 on the following page, the Kentucky rail system is comprised of 23 railroads (owning, operating, or having trackage rights in Kentucky), including one port railroad and five tourist railroads, three of which operate on private tracks. These railroads range in size from short line railroads to the nation s largest railroads serving the United States, Canada and Mexico. P a g e 30

31 Figure 3 P a g e 31

32 Rail transportation in Kentucky is largely the responsibility of private rail companies, intermodal shippers, and others involved in the industry. The Cabinet has no responsibility or authority over the management of those companies, and state level funding is not a typical direct source of funding for rail infrastructure improvements in Kentucky. Due to the private ownership of the rail system, publicly available information related to future improvements and expansion is limited. However, there are a variety of state and federal options for funding of certain railroad needs. The Kentucky General Assembly has established and funded certain state level programs for railroad assistance, including: Kentucky Short Line Railroad Assistance (KSRA) Fund Kentucky Railroad Crossing Improvement (KRCI) Program Kentucky Tax Credits administered by the Kentucky Railroad Assistance Program (KRAP) In 2010, the General Assembly authorized $2 million in dollar-for-dollar grant matching funds in both FY 2011 and FY 2012 from the Road Fund Highway Construction Contingency Account for the KSRA Fund. No additional state funding has been made available to this program subsequent. Additionally, and as can be seen in Figure 3, above, Kentucky s rail system is quite extensive, and in-fact, includes over 2,100 highway-rail at-grade crossings around the state. As such, there are numerous safety issues impacting various crossings around the state each year. Beginning in fiscal year 2013, and each year since, the General Assembly has authorized $1.6 million in grant moneys from the Highway Construction Contingency Account to be made available to the KRCI program for short line railroads to help fund safety improvements at highway-rail at-grade crossings within the state. Eligible projects include rehabilitation for at-grade crossings and installation/improvement of crossing safety equipment. These grants have required private matching funds (from 20% to 50%, depending upon the specific budget language). In FY 2015, the budget language also began including grade separated crossings (i.e. rail bridges over/under roads), and in FY 2017, the budget language expanded the eligibility beyond short line rails to Class I railroads. P a g e 32

33 In 2016, the Federal Railroad Administration published a list of crossings in need of traffic signal preemption coordinated with rail crossing warning systems. In FY , the Cabinet deferred the KRCI funds to its Division of Traffic in order to advance these signal projects. Most federal funding options require at least a portion of the project costs to be matched by the project owner. However, certain discretionary federal funds and grants may cover up to 100% of costs for certain types of projects such as safety or emergency action needs. Federal funding sources for various railroad projects and improvements include: Federal Funding of Intercity Passenger Rail o Passenger Rail Investment and Improvement Act (PRIIA) o High Speed Passenger Rail Program (HISPR) Transportation Investment Generating Economic Recovery (TIGER) FHWA Section 130 Railway-Highways Crossing Program FRA Railroad Rehabilitation & Repair (Disaster Assistance) Program Federal Funding for Surface Transportation Programs o Congestion Mitigation and Air Quality (CMAQ) Improvements Program o Transportation Alternatives Program (TAP) o Surface Transportation Program (STP) o Transportation Infrastructure Finance and Innovation Act (TIFIA) Federal Funding for Non-Surface Transportation Programs o FRA Railroad Rehabilitation and Improvement Financing (RRIF) Program o U.S. Department of Commerce, Economic Development Administration (EDA) o U.S. Environmental Protection Agency, Diesel Emission Reduction Act (DERA) o Private Activity Bonds Federal Tax Incentives P a g e 33

34 IV. SUMMARY OF FUNDING NEEDS As detailed in previous sections, the Commonwealth invests heavily in its transportation infrastructure each year. However, even with the investment of hundreds of millions of tax dollars annually, there are significant needs for additional revenues in order to support both the cost of new construction and to properly maintain the systems in future years. Highways/Bridges Kentucky s historical annual funding shortfall (i.e. Project Authorizations less Available Funding) for state projects in the Biennial Highway Construction Plan has averaged $451 million per year over the past decade. Kentucky s current additional shortfall (i.e. historical average funding less current year Available Funding) for state projects in the Biennial Highway Construction Plan is $227 million. Based on the trend line in recent years, this additional annual funding shortfall is likely to widen, and at the current rate of decline, only a minimal, if any, amount of funding will be available from the Road Fund for state highway project construction after the next biennium, unless additional Road Fund resources are made available. The Cabinet estimates the need for an additional $205 million annually from the state Road Fund for repaving and maintenance costs associated with the state s highways and bridges. Toll Credits are expected to run out in FY On average, over the past decade, the Cabinet has used over $122 million of Toll Credits per year, in place of Road Fund dollars, to match FHWA grants for highway/bridge projects. Other Transportation Modes The Department of Aviation has identified an additional $50 million in runway repaving needs at airports around the state, and an additional $7-8 million in terminal re-modeling/replacement needs. Toll Credits are expected to run out in On average, over the past decade, the Cabinet has used over $4 million of Toll Credits per year, in place of Road Fund dollars, to match FTA grants for public transportation projects at locally owned facilities around the state. Four of the eight operational riverports in the state provided information to the Cabinet, and have identified over 60 needed projects, totaling approximately $498 million over the next 20 years. P a g e 34

35 Chart 3 P a g e 35

36 Chart 3, on the previous page, illustrates the tremendous immediate and growing future transportation infrastructure funding needs in Kentucky. Going into the next biennial budget period, we estimate the additional annual needs for highways alone to be $554 million (by FY 2020), just to maintain the average level of construction spending from the past decade, and to provide the necessary level of maintenance on our existing highways and bridges. However, when considering the historical need for additional highway funding, the recent widening of the highway funding gap, and the extensive other transportation funding needs, it can be observed that Kentucky may actually need $1 billion in additional annual transportation system funding. To really understand these transportation funding needs, particularly for highways, it s important to understand the current sources of funding for the state highway system and the resource levels available. Therefore, the following sections will examine the state Road Fund and provide historical performance analysis on the overall fund as well as its two largest contributing taxes, the Motor Fuels Tax and the Vehicle Usage Tax. It should also be noted that while this study has focused largely on state level projects/funding, many local transportation related funding needs exist around the state, and the next sections will also provide historical information on how much of the Road Fund ultimately is shared with local governments to assist with their road system infrastructure funding needs. P a g e 36

37 V. THE ROAD FUND Road Fund - Revenues Kentucky law strictly defines the sources of funding and use of funds related to its road system. Section 230 of the Kentucky Constitution states, in part: No money derived from the excise or license taxation relating to gasoline and other motor fuels, and no monies derived from fees, excise or license taxation relating to registration, operation, or use of vehicles on public highways shall be expended for other than the cost of administration, statutory refunds and adjustments, payment of highway obligations, costs or construction, reconstruction, rights-of-way, maintenance and repair of public highways and bridges, and expense of enforcing state traffic and motor vehicle laws. Furthermore, Chapter 48 of the Kentucky Revised Statutes defines the Road Fund and states, in part: This fund shall consist of money derived from the excise or license taxation relating to gasoline and other motor fuels, and moneys derived from fees, excise or license taxation relating to registration, operation or use of vehicles for use on public highways. Annual Road fund revenues are comprised of a variety of taxes and fees, including: Motor Fuels Tax Motor Vehicle Usage Tax Weight Distance Tax Motor Vehicle License Fees Motor Vehicle Operator License Fees Interest Income Other permits and fees Table 12, on the following page, displays a history of Road Fund revenues over the past ten fiscal years, and details its two largest contributing sources: the Motor Fuels Tax and the Motor Vehicle Usage Tax. P a g e 37

38 Table 12 Road Fund Revenues FY FY Motor Fuels Tax Motor Vehicle Usage Tax Other Revenues Total Revenues 2009 $ 622,176,306 $ 336,365,985 $ 233,440,603 $ 1,191,982, $ 655,394,856 $ 332,737,956 $ 217,437,454 $ 1,205,570, $ 732,414,232 $ 381,539,665 $ 224,858,029 $ 1,338,811, $ 789,709,589 $ 417,188,162 $ 237,591,826 $ 1,444,489, $ 837,802,563 $ 427,085,571 $ 226,735,535 $ 1,491,623, $ 885,360,542 $ 443,109,665 $ 231,971,039 $ 1,560,441, $ 849,356,663 $ 432,919,930 $ 244,462,066 $ 1,526,738, $ 749,100,369 $ 484,870,220 $ 248,571,388 $ 1,482,541, * $ 760,500,000 $ 499,800,000 $ 247,700,000 $ 1,508,000, ** $ 749,800,000 $ 485,700,000 $ 242,700,000 $ 1,478,200,000 Avg $ 763,161,512 $ 424,131,715 $ 235,546,794 $ 1,422,840,021 Avg % of Total 53.6% 29.8% 16.6% *Actuals - rounded **Official Revenue Estimate When reviewing the historical performance of Road Fund revenues and the various tax types that contribute, you see that the Motor Fuels Tax has accounted for approximately 53.6% of all Road Fund revenues over the past ten fiscal years, while the Motor Vehicle Usage Tax has accounted for an additional 29.8% of all Road Fund Revenues over this period. The next section will examine the Motor Fuels Tax in more detail. Road Fund - Motor Fuels Tax As discussed in the previous section, the largest revenue contributor to the Road Fund is the Motor Fuels Tax, so it is important to understand how this tax works. Motor fuel taxes are levied on gasoline, liquefied petroleum gas and special fuels (predominately diesel fuel) sold for use in motor vehicles operated on public highways. Chapter 138 of the Kentucky Revised Statutes sets a variable tax rate equal to 9% of the average P a g e 38

39 wholesale price (AWP) of gasoline, subject to a statutory floor set by the General Assembly. In addition to the variable tax, the statutes also provide for a supplemental highwayuser motor fuels tax that is a fixed rate of $0.05 per gallon for gasoline and $0.02 per gallon for special fuels. Also, businesses operating commercial trucks in Kentucky are assessed a surtax of 2% of the AWP on gasoline and 4.7% of the AWP on special fuels for the amount of fuel used in operation on the public highways of Kentucky. The current surtax rates, for fiscal year 2018, are $ per gallon for gasoline and $ per gallon for special fuels. In addition to the Motor Fuels Tax components described above, under KRS 224, there is a $0.014 per gallon petroleum environmental assurance fee assessed to all fuel sales in the state. This fee is charged and collected in a similar manner to the Motor Fuels Tax, however, it is deposited in a separate dedicated fund (rather than the Road Fund) and is not available for transportation purposes under the current statute. Table 13, on the next page, displays a history of the Motor Fuels Tax rate on gasoline over the past ten fiscal years. The table shows that the tax rate has fluctuated up and down over the years following the AWP. However, in 2015, after a series of sharp declines in prices, the General Assembly adjusted the statutory floor for the AWP to its current floor of $2.177 per gallon. The Motor Fuels Tax rate has remained unchanged since that time. P a g e 39

40 Table 13 Motor Fuels Tax Rate History Begin Date End Date AWP Tax Rate KRS (1) Motor Fuels Tax/Gallon User Tax/Gallon KRS (2) Total Motor Fuels Tax Environmental Assurance Fee Total State "Gas Tax" 7/1/2008 9/30/2009 $ % $ $ 0.05 $ $ $ /1/ /31/2009 $ % $ $ 0.05 $ $ $ /1/2010 6/30/2010 $ % $ $ 0.05 $ $ $ /1/2010 9/30/2010 $ % $ $ 0.05 $ $ $ /1/ /31/2010 $ % $ $ 0.05 $ $ $ /1/2011 6/30/2011 $ % $ $ 0.05 $ $ $ /1/2011 6/30/2012 $ % $ $ 0.05 $ $ $ /1/2012 6/30/2013 $ % $ $ 0.05 $ $ $ /1/ /31/2013 $ % $ $ 0.05 $ $ $ /1/2014 3/31/2014 $ % $ $ 0.05 $ $ $ /1/2014 6/30/2014 $ % $ $ 0.05 $ $ $ /1/2014 9/30/2014 $ % $ $ 0.05 $ $ $ /1/ /31/2014 $ % $ $ 0.05 $ $ $ /1/2015 3/31/2015 $ % $ $ 0.05 $ $ $ /1/2015 6/30/2018 $ % $ $ 0.05 $ $ $ While detail data related to the timing of historical fuel sales throughout the Commonwealth is not publicly available, we can estimate a time-weighted Motor Fuels Tax rate for each of the ten fiscal years in this study. Table 14, on the next page, takes the Total Motor Fuels Tax rate from each year in Table 13, above and applies a time weighting to each in order to estimate a weighted average Motor Fuels Tax rate for each of the past ten fiscal years, including the current fiscal year (2018). P a g e 40

41 Table 14 Time Weighted Motor Fuels Tax Rate FY Weighted Avg Tax Rate 2009 $ $ $ $ $ $ $ $ $ $ Overall Avg $ Road Fund - Motor Fuels Tax Revenue Sharing While the Motor Fuels Tax comprises the largest share of overall Road Fund revenues each year, it is important to understand certain statutory restrictions and requirements that are placed on this revenue stream. Primarily, certain portions of Motor Fuels Tax revenues are required to be shared and/or used for specific purposes and are not available to the Cabinet to use for state level expenditures. Kentucky Revised Statutes Chapter 177 requires that a total of 48.2% of the Motor Fuels Tax collections be restricted and reserved for use on county, municipal, and state rural secondary roads. As part of this requirement, Chapter 177 requires that 22.2% of Motor Fuels Tax receipts be expended by the Cabinet on the rural secondary road system. Chapter 177 also directs that 18.3% and 7.7% of Motor Fuels Tax receipts be distributed, based on statutory formula, to county and municipal governments, respectively, for use on county roads and bridges, and urban roads and streets. The remaining 51.8% is then available for the General Assembly to appropriate to the Cabinet to use on state level expenditures. P a g e 41

42 In 2005 and 2006, the General Assembly adopted legislation modifying Chapter 138 and excluding $0.021 per gallon of the Motor Fuels Tax from the revenue sharing requirement in Chapter 177. So, effectively, the first $0.021 per gallon of the Total Motor Fuels Tax from Table 13, displayed previously, and 51.8% of the remaining portion of the Total Motor Fuels Tax are available to be appropriated to the Cabinet for state level expenditures. This exclusion does not apply to the 2%/4.7% surtax on commercial truckers, discussed earlier. Table 15, below, displays the historical performance of the Motor Fuels Tax over the most recent eight-year period for which detail data is available, and breaks out the components of the revenue sharing provisions in each year. Table 15 Motor Fuels Tax History FY State Dedicated 2.1 Cents State 51.8% Rural Secondary 22.2% County 18.3% Municipal 7.7% Total Motor Fuels Tax Total Available for State % of Total Available for State 2009 $ 60,968,095 $ 290,576,769 $ 124,647,677 $ 102,750,112 $ 43,233,654 $ 622,176,306 $ 351,544, % 2010 $ 61,370,120 $ 307,528,422 $ 131,954,734 $ 108,773,497 $ 45,768,083 $ 655,394,856 $ 368,898, % 2011 $ 61,479,157 $ 347,369,572 $ 149,028,095 $ 122,847,483 $ 51,689,925 $ 732,414,232 $ 408,848, % 2012 $ 60,434,127 $ 377,601,098 $ 161,974,500 $ 133,519,520 $ 56,180,344 $ 789,709,589 $ 438,035, % 2013 $ 58,576,398 $ 403,082,527 $ 173,244,580 $ 142,809,722 $ 60,089,336 $ 837,802,563 $ 461,658, % 2014 $ 57,917,020 $ 428,054,518 $ 183,950,952 $ 151,635,244 $ 63,802,808 $ 885,360,542 $ 485,971, % 2015 $ 58,867,831 $ 408,635,059 $ 175,874,559 $ 144,977,677 $ 61,001,536 $ 849,356,663 $ 467,502, % 2016 $ 60,136,095 $ 356,436,807 $ 153,155,804 $ 126,250,055 $ 53,121,608 $ 749,100,369 $ 416,572, % Average $ 59,968,605 $ 364,910,597 $ 156,728,863 $ 129,195,414 $ 54,360,912 $ 765,164,390 $ 424,879, % As displayed in Table 15, above, the Motor Fuels Tax has provided an average of almost $425 million per year in funding for state level expenditures. Further, if we divide the Total Motor Fuels Tax each year, from Table 15, above, by the corresponding weighted average gasoline tax rate for that year, from Table 14, above, we get an average over the past eight years of approximately $29.8 million annually in Total Motor Fuels Tax per penny ($0.01), at the gasoline tax rate. Keep in mind that this per penny calculation is only an approximation, and that the revenue impact of any future changes to the Motors Fuels Tax would be dependent upon several factors. Additionally, assuming that any incremental tax rate increases would impact both the normal tax and surtax, as well as be subject to the revenue sharing provisions of Chapter 177, each $0.01 tax rate increase would provide an estimated $16.6 million in additional available funding for state level expenditures by the Cabinet. P a g e 42

43 What is also important to see from Table 15 is that, on average, the Motor Fuels Tax provides approximately $129.2 million per year for counties around the state to maintain county roads, and another $54.4 million per year for municipalities to maintain their road systems. While certain larger local governments, such as Louisville- Metro, often supplement their share of Road Fund receipts with local revenues in order to maintain their system, many smaller counties/cities do not have the local tax base to fund additional road system improvements and rely heavily, or exclusively, on Road Fund support for maintenance of their local road systems. Road Fund - Motor Vehicle Usage Tax As displayed previously in Table 12, the second largest contributor to the state Road Fund is the Motor Vehicle Usage Tax. Under KRS 138, the Motor Vehicle Usage Tax is imposed on the sale or transfer of new or used motor vehicles at the rate of 6% of the vehicle s value, and essentially takes the place of the state Sales Tax on motor vehicle sales (motor vehicles are exempt from state Sales Tax under KRS ). The value on which the tax is assessed on new cars is a percentage of the manufacturer s suggested retail price and for used cars and trucks is based on a notarized affidavit, prepared by both the buyer and seller, attesting to the actual cash considerations paid for the vehicle. In 2013, the General Assembly enacted legislation to make permanent a trade-in allowance for buyers who trade-in a used vehicle towards the purchase of a new vehicle, whereby the buyer pays the Motor Vehicle Usage Tax only on the excess of the new vehicle value over the value of the trade-in (rather than on the value of the new vehicle). The Cabinet estimates this change has reduced Motor Vehicle Usage Tax receipts by approximately $46 million in each fiscal year since Even with the legislative change to the tax in 2013, the Motor Vehicle Usage Tax has continued to grow in recent years, and has averaged $424.1 million per year over the past ten fiscal years, which equates to an average of $70.1 million for each 1% of the tax. Unlike the Motor Fuels Tax, however, the Motor Vehicle Usage Tax is not subject to revenue sharing requirements with local governments, and may be used to fund any eligible program/project costs supported by the state Road Fund. So, in recent years, and on average over the last ten, the Motor Vehicle Usage Tax actually provides more funding available for the state Biennial Highway Construction Plan and other state level transportation system costs than any other state tax. P a g e 43

44 VI. FUNDING THE GAP As discussed previously, from FY 2009 to 2018, Kentucky s annual funding shortfall for state projects in the Biennial Highway Construction Plan has ranged from $150.7 million to $745.1 million, with a historical average funding shortfall (i.e. Project Authorizations less Available Funding) of over $451 million per year. This is a substantial shortfall, as it represents 46.4% of the state funded projects in the Biennial Highway Construction Plans during that timeframe and equates to 31.7% of the average annual revenue of the Road Fund (before revenue sharing) over the same timeframe. As also discussed previously, when comparing the FY 2018 Available Funding for state projects in the Biennial Highway Construction Plan to the ten-year average Available Funding, there is a current additional shortfall of $227 million. The recent trend of declining Available Funding for state highway projects, as well as the current, FY 2018, shortfall is the result of a combination of factors, including (but not limited to); Recent declines in the AWP, affecting the level of the Motor Fuels Tax Recent legislation, affecting the level of the Motor Vehicle Usage Tax Competing demands for Road Fund resources (including, but not limited to) o Increased highway maintenance costs o Increased highway resurfacing costs o Increased employer pension and post-retirement benefit costs o Reduced capacity for additional debt as previous bond authorizations issued Additionally, the Cabinet has assessed there is a need for an additional $205 million in annual funding (and adjusted for price inflation each year) in order to repair or replace aging bridges and roads across the Commonwealth and to maintain them at acceptable condition levels. This additional annual funding would entail approximately $155 million for pavement needs, including rehabilitation, resurfacings, and preventative maintenance work (as well as putting all highways statewide on an 11-year repaving cycle), and $50 million for bridge needs, including replacement, rehabilitation, and preventative maintenance. The Cabinet has stated that their next recommended highway budget will prioritize these needs (over new construction) and will request this additional funding from the Governor/General Assembly. Cabinet officials have also indicated that their accumulated toll credits will have been exhausted by or in fiscal year 2020, leaving the Commonwealth with additional major P a g e 44

45 funding needs in order to simply maintain the current level of federal participation on FHWA and FTA transportation related projects each year. The Cabinet has used, on average over the past decade, $122 million in toll credits each year to match FHWA grants and an additional $4 million each year to match FTA grants. When taking into account the current year additional highway funding shortfall of $227 million, along with the additional $205 million in annual needs related to maintenance and loss of $122 million in average toll credits used for FHWA grants, Kentucky s immediate additional needs for just the highway system are estimated at $554 million annually. And, when taking into account the need to also provide additional funding for the $451 million annual historical shortfall (or at least a material portion of it), as well as funding needs for the various other transportation modes, it can be observed that Kentucky needs an additional $1 billion, or more, in annual transportation funding. Obviously, without tax revenue increases, given the finite amount of Road Fund resources and heavy demands from many areas, neither the immediate highway funding shortfall, nor any of the other additional needs can be appropriated without crowding out a material amount of funding for other critical transportation system needs. However, the fiscal and economic impacts related to highway construction can be tremendous, and offset the state s up-front costs of construction over time. These impacts are going to be estimated and discussed in later sections. Tax Increases Necessary to Fund the Gap First, we will analyze the level of hypothetical tax increases necessary to provide the $554 million of immediately needed additional transportation funding each year. From our discussion of the Motor Fuels Tax revenue sharing requirements earlier, we calculated that each penny ($0.01 per gallon) of Motor Fuels Tax provided an average of $29.8 million annually to the Road Fund over the last ten years, and that of this amount, $16.6 million per year was available for state level programs/projects (after revenue sharing). Therefore, in order to fully fund the $554 million in immediate annual transportation needs using solely the Motor Fuels Tax, the effective Motor Fuels Tax rate would have to be increased to 58.1 cents ($0.581 per gallon), a 33.5 cents ($0.335 per gallon) increase P a g e 45

46 over its current rate of 24.6 cents, a 136% increase (assuming inelastic demand for fuel). It should also be noted that in order to produce this level of tax revenue increase, any tax change to the Motor Fuels Tax would need to be applied to both the normal tax and surtax on commercial truckers (most likely through an increase in the statutory floor for the AWP). Additionally, from our discussion of the Motor Vehicle Usage Tax earlier, we calculated that each 1% of that tax provided an average of $70.1 million annually to the Road Fund over the last ten years. Therefore, in order to fully fund the $554 million in immediate annual transportation needs using solely the Motor Vehicle Usage Tax, the Motor Vehicle Usage Tax rate would have to be set to an estimated 13.9%, rather than the 6% current/historical rate (assuming inelastic demand for vehicles). Pragmatically, it will likely require a combination of tax changes and/or other actions in order to fill these immediate needs, but the calculations above are illustrated in order to provide a sense of just how deep these funding needs are. Summary In short, historical analysis suggests the tax revenue base of Kentucky s Road Fund has been insufficient to fully fund the transportation system needs of the state. In recent years, fuel prices, tax code changes, and competing demands for Road Fund resources have further eroded the Available Funding for highway construction and development of other new transportation infrastructure. While the hypothetical individual tax increases calculated in this section may seem extreme, the state s transportation infrastructure needs are very real, and some combination of tax code changes including the Motor Fuels Tax and the Motor Vehicle Usage Tax, as well as potential other tax resources, very much needs to be implemented in order for Kentucky to continue providing a safe and efficient transportation system which can accommodate the needs of its commuters, manufacturers, distributors, retailers and other users. P a g e 46

47 VII. QUANTIFYING TRANSPORTATION BENEFITS Investing in transportation infrastructure creates ongoing operational benefits, including travel time savings for commuters and reduced shipping costs for manufacturers, distributors and retailers, as well as reduced vehicle operating and accident costs. The initial investment also generates one-time construction impacts which generates employment, greater gross state product (GSP), more personal income, and more new enterprises in the statewide economy. As with any investment of this magnitude, it is important to quantify the potential economic impacts and benefits discussed above, as well as the overall return on investment for each dollar invested in transportation infrastructure. It is also important to note the distinction between both the impacts and benefits by defining what goes in to each measurement. Construction Impact The economic impact from construction expenditures represents a significant added flow of dollars to the economy through spending on supplies and labor. This initial spending ripples throughout the economy, creating indirect and induced impacts or multiplying effects in both wages and jobs. This study estimates one-time construction impacts on Kentucky s economy using multiplier factors obtained from IMPLAN, a nationally recognized model commonly used to estimate economic impact. IMPLAN Economic impact reflects the ripple effect or multiplying effect from initial transaction, or direct spending, that occurs as a direct result of a project being developed. In the case of Kentucky s transportation investments, one example of initial transactions are expenditures by construction workers on food, gas, and other goods. The ripples from these initial transactions include the following: Indirect Impact consists of spending that occurs, typically by a business, to generate the initial or direct output. For example, the state s direct expenditure on a highway construction project requires the contractor to purchase goods, services, and other items from suppliers (concrete, machine rental, safety barriers, etc). The portion of these purchases that are within the economy is counted as an indirect economic impact. P a g e 47

48 Induced Impact represents changes to consumption due to the personal spending by employees whose incomes are affected by the project. For example, a newly-employed construction laborer will spend money on clothes, food, gas, etc. The amount of the increased income the laborer spends in the economy is considered an induced impact. Labor Income measures the change in total personal income in the economy that results from the initial spending activities occurring within the project. Total Employment measures the change in number of jobs supported throughout the economy that result from the initial spending activities that occur within the project. Indirect impact, induced impact, labor income, and total employment impacts are estimated using multiplier factors obtained from IMPLAN. An input-output model analyzes the commodities and income that normally flow through the various sectors of the economy. This study focuses specifically on Kentucky s economy and the impact that an additional $554 million invested annually in highway/bridge infrastructure and maintenance would generate in terms of the construction impacts outlined, above. Ongoing Operational Benefits When the construction period is completed, Kentuckians and their businesses will realize ongoing operational benefits that result from a more efficient and safe transportation system throughout the Commonwealth. Some of these benefits include reduced travel-time, lower operating expenditures, and improved safety conditions. A description for each of these benefits can be found below: Travel Time Changes Generally considers improved transportation conditions and reflects the dollar value of the reduction in vehicle-hours of travel ( VHT ). For example, state DOT models account for reduced congestion due to increased highway capacity, improved roadway geometry, and updated pavement conditions. In addition, state DOT models assign different values of time for auto and truck trips while capturing the benefit of reduced inventory holding costs. Vehicle Operating Cost Changes The level of general wear and tear on a vehicle can be improved by better pavement conditions and decreased travel times. In general, operating costs change because the number of vehicle miles P a g e 48

49 traveled ( VMT ) changes. Once the change in VMT is estimated, vehicle operating costs are generally calculated using cost-per-mile figures for different vehicles (auto or truck). Safety Effects One of the principal impacts realized from transportation improvements. The impact occurs when the number of crashes is reduced and/or the severity of the crashes is reduced on a facility or set of facilities. For example, crash rates can be reduced by limiting congestion and substandard roadway geometry. In general, most models categorize crash rates by type of crash (fatality, injury, and property damage) and then evaluate both the potential crash reductions and/or changes in severity using standard engineering methods. State DOT s identify these benefits using travel demand models and/or sketch planning tools in order to forecast trip generation, trip distribution, mode choice, and trip assignment based upon the current and future travel characteristics of their region. A selected software then uses these transportation system characteristics as inputs in order to estimate a Benefit-Cost Ratio 1 ( BCR ) which represents the ongoing operational benefits, mentioned above, per $1 invested in transportation. BCR s convert ongoing operational benefits of an investment into monetary terms and account for the fact that these benefits generally accrue over a long period of time while capital costs are incurred primarily in the initial years. Various tools have been used by different DOT s in an effort to monetize these benefits. However, two specific models have been used more often than others and are listed below: Transportation Economic Development Impact System Highway Economic Requirement System State Version In general, each software applies a specified discount rate 2 in order to calculate the true present value of the total benefits and compare them to the present value of the total costs. Total costs are generally broken down into two categories which are defined on the next page: 1 BCR s add the value of ongoing operational benefits that do not directly add to the flow of dollars in the economy. 2 The interest rate used in calculating the present value of expected yearly benefits and costs. State DOT s usually choose timeframes of years when considering the timeframe an ongoing operational benefit is realized. P a g e 49

50 Capital Costs In general, this is the total investment required in order to implement a transportation system improvement. For example, highway capital costs might include: right of way, engineering, major structures, and surfacing. A variation of these cost categories exists for all other transportation modes. Operational Costs It is important to incorporate future investments in order to maintain transportation systems. These investments tend to come after the initial construction year. For example, bridges and highways require preventative maintenance such as resurfacing certain sections and patching potholes. In general, state DOT s estimate the additional maintenance costs that would be required for the added capital costs. TREDIS The "Transportation Economic Development Impact System was designed to provide both economic impact analyses and benefit-cost analyses for individual and/or total transportation investments and policies. It is the only software applicable across all modes -- highway, bus rail, aviation, and port projects, as well as multi-modal projects. It also distinguishes between both freight and passenger transportation projects, and accounts for rural accessibility as well as urban congestion factors. The system also understands generative and distributive effects of transportation on regional economic growth. This is achieved using economic geography tools that integrate GIS with an economic development assessment process that accounts for threshold effects associated with changes in service areas, market access and travel times. While the TREDIS framework has been used in 36 states, each version is tailored to mimic each state s unique economy and freight shipping patterns. It is also designed to use specified results from state DOT sketch planning tools and travel demand models as inputs for certain projects and/or whole transportation systems. TREDIS is comprised of four modules which utilize travel characteristics from state DOT engineering models in order to determine the full economic impact of transportation projects. A description for each of these modules can be found below: Travel Cost Module translates changes in traffic volumes, vehicle occupancy, speed, distance, reliability, and safety into direct travel savings for households and businesses by applying practices for travel modeling and economic valuation, that are widely accepted by metropolitan, state, and federal agencies. P a g e 50

51 Market Access Module - translates changes in market access and intermodal connectivity into effects on agglomeration, dispersion, scale economies, productivity for various industry sectors and fully distinguishes effects on passenger access and freight access, for both local urban markets and same-day regional access markets, as well as connectivity to intermodal terminals. Economic Adjustment Module - builds upon inter-industry relationships and inter-regional trade flows from IMPLAN, demographic and economic model forecasts from Moody s, geospatial data from ESRI and employment data from US BEA. Accounts for changes in productivity, capital investment, labor supply and demand, employment and wage shifts, changes in relative costs, scale of market access, and population migration. Benefit-Cost Module - determines the net present value of project benefits and costs and compares them in order to produce a BCR. It also avoids doublecounting when taking into account the differing aspects of economic impacts and economic benefits. The TREDIS modeling framework is designed as a seamless tool to analyze the full economic impact of transportation projects and/or whole systems from scratch. However, it can also be broken apart so that each of the four modules may be used individually, in any combination with one another, or in conjunction with a state DOT s in-house substitute. For example, a majority of the studies analyzed in this study focus on reporting the BCR results from the benefit-cost module. HERS-ST The Highway Economic Requirements System State Version ( HERS-ST ) was developed by the Federal Highway Administration ( FHWA ) as a response to the growing need to examine the relationship between investment levels and the condition and performance of highways at the state level. The FHWA has utilized the federal version of HERS since 1995 to prepare its biennial report on the conditions and performance of U.S. highways. The U.S. Government Accountability Office ( GAO ) has deemed HERS as an appropriate tool for estimating highway investment levels. HERS-ST is a computer model that utilizes concepts and principles from both engineering and economics in order to evaluate the relationship between highway investment and performance. The model identifies deficiencies consistent with standard engineering practices and relies on economic criteria to implement improvements. P a g e 51

52 However, the HERS-ST model will only implement improvements if future benefits exceed the initial cost hereby making it an effective tool for BCR analysis. This systematic process leans on a database of records called the Highway Performance Monitoring System ( HPMS ) which supplies current highway information on roadway conditions and performance. Essentially, the model analyzes each individual highway section and produces a list of capacity improvements and resurfacing projects based upon the projected overall benefits. The overall BCR analysis results, generated in HERS-ST, encompass ongoing operational benefits for auto and truck at specified funding levels. Quantifying Kentucky s Transportation Benefits This study utilizes a meta-analysis in order to estimate the ongoing operational impact, realized by patrons and businesses over a period of time, per $1 invested in Kentucky s transportation system needs. A meta-analysis is a statistical procedure which combines data from multiple studies in order to identify a common effect. The analysis applied here looks at 17 transportation investment studies conducted by various state DOT s and third-party organizations. Each study generates a BCR which compares ongoing operational benefits to expenditures such as the costs to build, operate, and maintain infrastructure. Precautions were taken before estimating Kentucky s ongoing operational return on investment in order to avoid double-counting benefits/impacts, studies that focus on unrelated information, and/or outliers which may otherwise skew estimates. As a result, a handful of the 17 studies were not included in the final estimate. This study then calculates the average BCR of the remaining studies which involve new investment in a variety of transportation systems (Highway, Transit, Aviation, Rail, & Port). However, the $554 million annual need, identified in the previous sections, focuses primarily on funding highway/bridge construction and maintenance projects. As a result, this study utilizes an average BCR from highway specific studies in order to quantify the ongoing operational benefit to Kentucky when discussing an additional annual investment of $554 million. The end result is an average BCR which most accurately represents the potential ongoing operational return per $1 initially invested in Kentucky s annual transportation infrastructure needs. P a g e 52

53 VIII. QUANTIFIED RESULTS This section analyzes Kentucky s economy and estimates the construction impact an additional $554 million invested annually in transportation infrastructure and maintenance would generate in terms of added employment, labor income, and overall output. In addition, this section also estimates the ongoing operational benefits realized over time per $1 of initial Kentucky investments in transportation infrastructure, based on the comparable findings of other transportation studies. Construction Impact Summary Results Additional construction expenditures will generate significant economic impact within the State of Kentucky. Table 16, below, summarizes the estimated economic impacts created solely from funding Kentucky s annual additional transportation system investment need of $554 million and its ripple effects throughout the economy. Table 16 Annual Transportation Investment Needs Estimated Construction Impact Summary Impact Type Employment Labor Income ($) Value Added ($) Output ($) Direct Effect 3,671 $181,401,133 $242,426,066 $554,000,000 Indirect Effect 1,155 $57,524,972 $96,137,719 $191,025,238 Induced Effect 1,414 $56,687,372 $101,772,042 $182,288,819 Total Effect 6,239 $295,613,477 $440,335,827 $927,314,057 The construction impacts estimated in Table 16 assume a total annual construction expenditure of $554 million. Each year this injection is made into the economy it is estimated to create $927 million in total economic impact, including total employment for 6,239 people and $296 million in total wages. Ongoing Operational Impact Summary Results The overall efficiency of transportation investments can be assessed by comparing the present value of ongoing operational benefits against the present value of construction costs. This section highlights studies which involve new investment in a variety of P a g e 53

54 transportation systems (Highway/Bridge, Transit, Aviation, Rail, & Port) and takes certain precautions in order to calculate an average BCR that best represents the impacts that might be realized within the Commonwealth of Kentucky. This analysis examines 17 transportation investment studies conducted by various state DOT s and third-party organizations. Each study generates a BCR which compares ongoing operational benefits to expenditures such as the costs to build, operate, and maintain infrastructure. Table 17, on the next page, presents a summary of the initial 17 transportation investment studies and the resulting BCR s estimated by each report. P a g e 54

55 Table 17 P a g e 55

56 As shown in Table 17, state DOT s and third-party organizations have estimated BCR values between for various projects involving new investment in a variety of transportation systems (Highway/Bridge, Transit, Aviation, Rail, & Port). This means that for every $1 invested in these transportation systems residents and businesses may realize a return at the estimated rates as shown in Table 17. Certain precautions need to be taken before estimating Kentucky s ongoing operational return on investment to avoid double-counting benefits/impacts, studies that focus on unrelated information, and/or outliers which may otherwise skew estimates. As a result, some studies listed above may not be included in the final estimate. Studies Excluded from the Final Results This study took precautions in order to avoid pitfalls such as double-counting benefits/impacts, studies that focus on un-related information, and/or outliers that may inflate estimates. A careful reading of the 17 initial studies identified 6 studies that should not be included in this analysis. A list of these 6 studies with an accompanying explanation is below: Oregon DOT A substandard methodology was used and did not clearly identify what exactly went into their results. The study states in their conclusion, a detailed analysis should be conducted to develop a precise BCR. Maine DOT Excluded because it recovers benefits over a 50-year period which is 25 years longer than the average study listed. As a result, the benefit portion of the BCR may be hyper inflated when compared to studies that recover benefits over years. Missouri DOT All 3 of Missouri s studies were excluded from the final results. Economic impact studies conducted in 2012 and 2015 were excluded because the return on investment ratios incorporated one-time construction impacts. If the ratios had been used, they would have been flagged for double counting since this study has already estimated one-time construction impacts. In addition, the Champ Clark Bridge study was dismissed due to an unusually high BCR value of 8.7. Kansas DOT Excluded in order to avoid double counting construction impacts. In addition, this methodology is not in line with other studies listed. The study looks at the negative impacts a reduction in highway maintenance would cause and works in reverse to generate a sustained return on investment. P a g e 56

57 Final Overview Table 18, on the following page, presents a summary of the final 11 transportation investment studies and the BCR s estimated in each. In addition, the table calculates an average BCR estimate for all studies listed, as well as an average BCR that only includes studies which primarily focused on the impacts of highway investments. P a g e 57

58 Table 18 P a g e 58