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Kentucky Road Fund Restart

By Susan Gosselin

Highway construction funded by Kentucky’s Transportation Cabinet was paused in 2016  to rebuild balances in the state Road Fund.  State gas tax rates, set by a formula based on wholesale prices, was adjusted to a minimum  of 26 cents per gallon. The cabinet plans to issue  $50 million in new construction contracts in the  fiscal year beginning in July.
Highway construction funded by Kentucky’s Transportation Cabinet was paused in 2016 to rebuild balances in the state Road Fund. State gas tax rates, set by a formula based on wholesale prices, was adjusted to a minimum of 26 cents per gallon. The cabinet plans to issue $50 million in new construction contracts in the fiscal year beginning in July.

Drops in gas prices are a cause for rejoicing in most business quarters, unless you’re in the business of building roads. Kentucky has been all but out of the highway construction business for a year, having hit the brakes to keep its Road Fund from falling completely to empty.

In July, Transportation Cabinet officials, legislators and Gov. Matt Bevin are ready to cautiously restart activity after having had to re-engineer the route to fiscally sustainable roadbuilding for a commonwealth whose large and growing logistics sector is reliant on strong transportation infrastructure.

Kentucky’s road budget is funded in large part from gas tax revenues, and those revenues are pegged to the price of gas. So, when gas prices floated down from their 2009 highs in the $4 a gallon range back toward a price sometimes nearing $2 a gallon, incoming road fund revenues fell precipitously.

In fiscal year 2016, the Kentucky Transportation Cabinet said revenues declined overall by 6.5 cents per gallon of gas sold in the state – it added up to a $195 million subtraction from receipt totals for 2015.

And it accelerated already growing concern in Frankfort. The legislature voted to create a floor for the state’s gas tax rates, which vary under a formula that starts with wholesale costs. Additionally, the Kentucky Transportation Cabinet halted all state highway projects during fiscal year 2017 as part of its “Pause 50” program. The program ran from June of last year through this month.

When cabinet officials presented the recommended highway plan early in the 2016 legislative session, they anticipated the capacity to do some $80 million in “new project starts” in fiscal year 2016 and $160 million in FY2017. Cabinet cash balance forecasts, however, quickly drove home a view that they would not fund the recommended highway plan. The eventually enacted highway plan anticipated no capacity for “new project starts” until FY2018 and even then only $50 million, hence Pause 50.

And commonwealth officials say the plan worked – revenues are properly banked, and state highway work is scheduled to kick up again to the tune of $50 million in projects starting in July. But the road ahead is hardly certain, as the backlog of highway projects continues to grow every year, officials say.

“Each year, when you combine federal funds for federal roads, and state funds for state roads, Kentucky has a $1 billion budget for road maintenance,” said Greg Thomas, secretary for the Kentucky Transportation Cabinet. “We took a big hit when that ended up getting reduced to $750 million a year.

“Pause 50 has helped us to get ourselves on more solid footing. But it doesn’t change the fact that we have a pavement backlog that grows by 500 miles a year,” Thomas said. “Everyone is in agreement that something has to be done. There are a lot of people in Frankfort who are working to address it, from several different angles.”

State Projects vs. Federal Projects

The key to understanding Kentucky’s transportation budget is to understand who owns what pots of money. Under President Obama, the states were given an additional $50 million of funding for maintenance and repair of federal roads in Kentucky, bringing the annual budget to $700 million a year, each year until 2020. This money goes exclusively to the maintenance of federal roads, such as interstates.

The remaining $400 million in the state’s yearly road fund comes from state taxes. State road funds are a bit more complex. According to the Transportation Cabinet, approximately 48 percent of state road funds are, in actuality, given out to cities, counties and municipalities, who conduct work on roads in their jurisdiction. The remaining amount goes to state road projects and state routes.

Approximately 51 percent of money for state roads comes from taxes on gas. The rest of the state road fees come from a combination of usage fees for licenses, registrations, taxes on new vehicles, and the like. While the state did have a momentary dip in miles driven and cars purchased, they report that these numbers have recovered, and are expected to be largely flat, only up 1 percent in the 2018 fiscal year.

Gas tax will continue to drive state road revenues. The amount of tax collections is determined by two things: how much gas is sold, and the price of that gas.

“The tax is calculated by adding an additional 9 percent to the average wholesale price of gas, and then adding on an additional 6.4 cents of fees per gallon,” said Robin Brewer, executive director of the Office of Budget and Fiscal Management for the Kentucky Transportation Cabinet. “To give you an idea of the difference, in 2014, when gas prices were high, Kentucky was netting 32.5 cents a gallon. When prices dropped by half, that was a real problem for our budget. We had spent down our road fund reserves and were quickly going to go into negative numbers if something wasn’t done, and fast.”

Setting a floor on revenue risk

The Kentucky State Legislature recognized the risk, and took aggressive measures to stem the revenue fallout. The 2015 legislative session passed a “Freeze the Floor” law that keeps the amount of tax collected per gallon from falling below a set amount.

Representatives for the road building industry hailed the measure, saying it shields the state’s roadway projects from unnecessary shocks. While the gas tax is still pegged to the price of gas, it can no longer go below 26 cents a gallon, no matter how low the price of gas falls.

Applying the current percentages the state uses in its formula, the gas tax calculation reaches 26 cents when gas gets to around $2.17 cents a gallon wholesale. As of late May, the wholesale price was about $1.80 a gallon, but the gas tax remained at 26 cents. If prices rise above $2.17 a gallon, the gas tax amount will begin again to rise with it.

“We really pushed for that law,” said Chad LaRue, executive director for the Kentucky Association Highway Contractors. “We wish the floor was set at a higher number, but it has still been an enormous help, and done much to keep the flow of work going to our members.”

Pause 50: Reset button for state budget

Fixing the floor was not nearly enough to fix the state’s road budget woes, however. To do that, The Kentucky Transportation Board took the radical step of “pausing” most of its state roadwork, as part of the “Pause 50” program.

“We started Pause 50 last summer so we could put our budget on a more sustainable track,” Thomas said. “And after a year, it’s turned out exactly as we hoped. All our projections came in pretty much as we thought they would. We’ve been able to replenish our required operating reserves, pay off projects that were already underway, and put enough money aside to get our projects rolling again.”

Pause 50 allowed the state to replenish its rainy day fund, which had been low for years. The real trouble began in 2014, when current and projected expenses exceeded revenues by more than $498 million. By stopping projects, revenues could be used to complete projects that were already underway, while putting money in reserve the state needed to keep the road fund above its $100 million recommended operating reserve.

Too much work at the end of the money

Though the Pause 50 program has done much to solve the state’s immediate monetary woes, the commonwealth has far more potential projects than it has money to do them. According to its own numbers, the Transportation Cabinet has more than 1,400 projects now in the highway plan pipeline. Only half are even partially funded – multiple money sources that may be used only for specific elements of projects, such as utilities infrastructure, must be allotted on a coordinated basis – and most of the dollars now committed are federal ones.

As a two-part Lane Report series in 2012 detailed, under normal conditions it often takes a decade for a project to reach fruition after officially being put into Kentucky’s highway plan.

“Years of overpromising has done a lot to undermine public confidence,” said Brewer. “The public can’t count on projects that have been put into the plan.”

In fact, more than 90 percent of the state-funded projects in the current highway plan don’t have state dollars to pay for them. The cabinet estimates that $7.16 billion in state road projects have been promised, while there’s only $690 million in anticipated revenue to pay for them.

While most people agree more road funding is needed, there is no agreement yet on the best way to collect those funds. A work group has been established in the state legislature to study the issue, and make recommendations.

SHIFTing focus

Part of making the numbers work on the state level is being strategic about the money that’s spent, Thomas said. At the request of Gov. Bevin, the Transportation Cabinet has adopted a data-driven program called Strategic Highway Investment Formula of Tomorrow, which will help it figure out how to prioritize work in progress. Officials hope it will help them untangle the commonwealth’s road priorities.

SHIFT is designed to score programs using data from the field, opinions of local road officials and information about the regional importance of the road to “weight” jobs appropriately by level of importance.

“If you give us $10 of road money, we’ll be able to tell you the best way to spend it,” Thomas said. “Specifically, we will look very closely at every project, and rank it based on rider safety, congestion, economic development and asset management, as a start. Then we will also look at the regional importance of the road, and how important an artery the road or bridge is in connecting communities to economic opportunities.

“We started it at the first of the year, and it has been great to give us some objective measurements. It’s worked in states like North Carolina, and we’re stealing it to make it work for us,” Thomas said.

Paul Looney, deputy state highway engineer for the Cabinet, said that extra attention is being paid to doing smaller, less invasive repairs, sooner. The department now has a van that travels the state to “grade” requested road projects by the SHIFT scale.

“For instance, we have hundreds of structurally deficient bridges in Kentucky. But they vary, from those that are crumbling in, to those that just need joints strengthened. We’re putting a priority on trying to get bridges the proactive help they need.

“That bridge that needs the bolts tightened on its joists and rust removed will be able to get it, and get its tonnage levels back to where they need to be because when a heavy truck can’t travel over a bridge, you are often cutting off economic resources to the people who live on the other side,” Looney said.

Economics are at the heart of roads to the people who build them as well.

“Road-building jobs are one of the great blue-collar opportunities still out there. They are hard jobs, but they pay well,” LaRue said. “Our contractors have made sacrifices to keep their businesses going through this period. We’re very happy to see the jobs starting to flow again, and we’re encouraged by the steps the cabinet and legislature are making to create a sustainable future for our roads. When you have good roads, you have a state that’s attractive to business.”

Susan Gosselin is a correspondent for The Lane Report. Shee can be reached at [email protected].