Low Gas Prices Could Give Toll Roads a Financial Boost

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New research says the roadways are currently an attractive option for municipal investors, but in places such as Texas the climate for tolls has turned icy.

Although toll roads can be deeply unpopular in parts of the United States, new research published on Tuesday says the financial outlook for pay-to-use highways is looking strong.

A new report issued by Wells Fargo Securities, LLC, points to low gas prices, an uptick in the miles motorists are traveling and favorable economic conditions for toll increases as key reasons for optimism. “We remain bullish on toll roads,” Randy Gerardes, a senior municipal analyst at Wells Fargo, wrote in the report.

The latest U.S. Energy Information Administration figures show that average gas prices nationally were $2.32 on Sept. 28, down about $1.03 from the same time a year ago.

“There are sort of two advantages of having lower gasoline prices,” Gerardes said during a phone interview on Wednesday. “You may choose to drive more, or you may have more discretionary income.” He added: “For toll operators that’s an opportunity to be able to pass higher tolls onto drivers.”

That might sound good for people investing in the roadways, but the idea of any tolls—never mind toll increases—is enough to make some motorists, and some lawmakers, bristle.

Kevin Pula, a policy associate at the National Conference of State Legislatures, explained on Wednesday that among certain states and constituencies toll roads are “almost toxic.”

“Traditionally we've never really tied road infrastructure funding to use,” he said.

While some people see tolls as a viable way to help cover maintenance and construction costs tied to the nation’s aging highway infrastructure, others argue that the charges are unfair and believe there are alternative sources of revenue available to pay for roads.

Seeking Revenues, Adding Express Lanes

Tolling has grown in the U.S. during the last decade. There were 5,433 miles of tolled roads in the United States in 2013, according to the Federal Highway Administration. That number was up from 4,721 in 2003.

Pula said that he does not believe that there is a major shift taking place toward paying for roads with tolling, but did note that it is part of the conversation when it comes to highway funding and that “states are looking at a whole bucket of things to raise revenues.”

Efforts to find new revenue come amid ongoing uncertainty about when and how Congress will act to shore up the federal Highway Trust Fund, a key source of money for state road projects.

In the meantime, some states have turned to gas tax hikes to raise cash.

During 2015 alone, seven states, including Georgia, Idaho, Iowa, Nebraska, South Dakota, Utah and Washington, passed legislation to increase gas taxes, and two others, Kentucky and North Carolina, changed the structure of their taxes to counter decreasing revenues, according to information the National Conference of State Legislatures published in July.

Are more toll roads part of the long-term solution to solidify funding for the nation’s roadways?

Robert Poole thinks so. He is director of transportation policy at the Reason Foundation, a libertarian think-tank, and has also advised the presidential administrations of Ronald Reagan, George H.W. Bush, Bill Clinton and George W. Bush on transportation issues.

Looking toward the future, he believes that toll financing could provide a critical source of financing to reconstruct interstate highways. “It’s something I’ve been urging for several years,” he said. Referring to interstates he added: “It’s a very important part of the overall infrastructure.” Poole said that interstate highways make up only 2.5 percent of the lane miles in the U.S. but handle 25 percent of the vehicle miles traveled.

“Yet most of these routes are 40 to 50 years old,” he said. “At some point you need to break it up and start over.”

A current trend with tolling that Poole highlighted was express toll lanes being added to roads in and around urban areas. Drivers can pay tolls to use these lanes in order to avoid congestion. “The places where that’s going on most are Florida, Texas, Virginia and Colorado,” Poole said. “It’s almost hard to keep up with the number of them that are going on.” Some of these express lane projects are being carried out by states alone; others are public-private partnerships.

Discussions are currently underway about an express lane proposal in Colorado that would be designed to alleviate congestion from ski resort traffic headed to Denver on a 13-mile stretch of Interstate 70. Tolls for the lane could range between $3 and $30.

Pushback Against Tolling in Texas

Not everyone is onboard with congestion pricing or using tolls to pay for roads.

“If the government can price us off our public roadways we've lost our freedom,” said Terri Hall,  founder and director of a group called Texans Uniting for Reform and Freedom, otherwise known as TURF. Hall acknowledges that the road network in Texas needs work. "We're now in a stage where we have to make significant investments,” she said. “This needs to be a priority."

But she also opposes the idea of using tax dollars to build roads and then tolling them as well, saying that it amounts to double taxation. “In our view, if you’re going to build a road with tax money,” she said, “it should be a freeway, it should not be a toll road.”

So how does Hall think roads should be funded? Gas taxes are the fairest way, she said, but she’s also quick to acknowledge there’s a low appetite among politicians to raise them and that the federal gas tax does not rise with inflation. So what she has advocated for is using taxes and fees paid on vehicles in Texas—including vehicle sales taxes—to fund roads there.

TURF is one of the groups backing an amendment to the Texas constitution known as Proposition 7, which state voters will decide on this November. It would dedicate a portion of Texas’ general sales and use tax, as well as the motor vehicle sales tax, to pay for road maintenance and construction.

During his campaign for office in 2014, Republican Gov. Greg Abbott said he did not support adding toll roads in the state. In June, he signed a bill that instructs the Texas Department of Transportation to prepare a report that, among other things, presents a plan to “eliminate all toll roads,"  although there are some exceptions.

An Attractive Investment

Texas currently has over 500 miles of tolled roadways. The Wells Fargo report issued on Monday notes that of more than 50 U.S. toll road systems that have operated for at least five-years, Texas, along with Florida, has the most that are borrowing money, and the top three that are fastest growing since January 2014 in terms of traffic.

Topping the list of fast-growing entities was the North Texas Tollway Authority Special Projects System, which is set to operate about 221 lane miles in 2016. Last year, the system did 48.6 million transactions and brought in $40.6 million in revenues, according to budget documents. Estimated revenues for 2016 are $80.1 million.

Compared to other types of municipal market investments, the returns on toll roads remain attractive. The Standard & Poor’s toll road index has a 4.11 percent one-year return, the Wells Fargo report points out. In contrast, the one-year return on the index for state general obligation debt is just 2.04 percent. Gerardes said the index for hospitals was the only one in the municipal market that he’d seen slightly outperform toll roads during the last year.

Bill Lucia is a Reporter for Government Executive’s Route Fifty.

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