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The post Frequently asked questions about the Personal Retirement Optimization Plan appeared first on Reason Foundation.

State policymakers could drastically expand the K-12 public education options that are available to families through open enrollment policies, which diminish the role of residentially assigned school districts and attendance zone boundaries by allowing students to transfer to any public school that has available seating.

• Allow within-district and cross-district open enrollment, only rejecting incoming students for limited reasons, such as insufficient capacity.
• Clearly post their open enrollment policies and procedures on their public websites, including all application deadlines.
• Publicly report the number of open seats that every school has so families know which schools have availability.
• Do not charge transfer students tuition or fees.

These policies make it easier for families to use open enrollment and ensure that public schools are open to all students. 

In addition to the above requirements, policymakers should also ensure that state education agencies (SEAs) annually report key open enrollment data, including the number of transfer students, the number of transfer students accepted and rejected, and the reasons why any transfer applications were rejected in each school district. This transparency helps hold schools and districts accountable, ensuring that they don’t reject transfer applications for superficial reasons. It also allows state lawmakers to continually measure the success of the open enrollment program.

States, such as Florida, Arizona, and Oklahoma, require each school district to post the number of seats that are open and available to transfer students in each school by grade level. Some states, like Delaware, provide an open enrollment portal that shows which school districts have available seats, are nearing capacity, or are operating at full capacity.

Unfortunately, most states do not currently require school districts to post their available capacity online, making it hard for families to know which school districts have open seats. Transparent open enrollment reporting is crucial to helping families find and understand their education options. 

For instance, Florida school districts, adhering to all federal desegregation requirements, can only refuse to enroll transfer applicants for limited reasons, such as an insufficient number of open seats at a school. This policy ensures that the number of students does not exceed available facilities and staff. 

However, other states allow school districts to discriminate against transfer applicants for a variety of reasons, regardless of the number of seats that are available at public schools. For example, New Hampshire lets school districts reject transfer applicants due to their previous academic performance.

At the same time, Arkansas does not allow the number of transfer applicants leaving a school district to exceed more than 3% of the assigned school district’s total enrollment of the previous year. These policies unnecessarily limit the number of transfer students. These discriminatory policies are overly deferential to school districts, letting them cherry-pick students or artificially protect their residentially assigned monopolies.

Wisconsin has one of the most successful open enrollment policies in the nation, in part because of the state’s transfer funding policy. A statewide per-pupil funding amount, which is updated each year by the legislature, follows each transfer student to his or her new school. At the same time, transfer students are still counted in their residentially assigned school districts, allowing them to still collect some education funds for each transfer student. This scenario creates a win-win situation for both the home and receiving school districts.

Research from California’s public schools also shows it’s critical to get the financial incentives right in order for school districts to accept transfer students. Reason Foundation’s Aaron Smith reported: 

“Because California’s Basic Aid school districts have virtually no financial incentive to enroll new students from outside of their district boundaries, the state previously provided those that participated in the District of Choice program with 70% of each transfer student’s base amount. However, this inducement was slashed to 25% in the 2017-18 school year with predictable results. By the 2019-20 school year Basic Aid districts reduced transfer enrollments by 24% and several stopped participating in the program altogether.”

At the very least, states should not prohibit transporting transfer students across school district boundaries. If it so chooses, the receiving school district should be able to create new bus routes to transport transfer students. For instance, Florida school districts can provide transportation options to transfer students.

However, more states should consider innovative proposals, such as those in Colorado and Ohio, which encourage school sectors to work together to provide transportation. Policymakers should also consider Wisconsin’s policy, which reimburses low-income families using the state’s cross-district open enrollment option up to $1,218 annually for mileage expenses for school transportation.

For instance, Texas’ Lovejoy Independent School District can charge families of transfer students up to $14,000 in tuition. Instead of letting school districts charge tuition, states should allow education funds to follow students when they transfer, as Wisconsin does. Aligning financial incentives for both the assigned and receiving school districts is a key to developing a robust open enrollment program.

As such, policymakers do not need to change eligibility requirements when adopting open enrollment reforms. 

However, if state policymakers desire, they can look to Florida’s policy on athletic eligibility for transfer students. In 2016, Florida passed a controlled open enrollment law that allows students to transfer to any school in the state with few exceptions and also mandates immediate eligibility for student-athletes. This means, unlike in Arizona or Oklahoma, families in Florida don’t have to make difficult tradeoffs between academics and athletics and can instead make student transfer decisions based solely on what’s best for their circumstances, which is impossible for distant bureaucrats to assess.

On Florida’s approach, my colleague Aaron Smith wrote:

“​​A common pushback against Florida’s approach is the claim that participating in athletics is a privilege for students and shouldn’t be prioritized over academics. It’s easy for some to sympathize with this critique, but then why aren’t similar restrictions applied to other privileges such as debate club, school bands, or performing arts? 

Extracurricular activities—sports or otherwise—help develop positive skills and traits that aren’t readily taught in classrooms, and forcing families to make arbitrary choices seems to be more about adult agendas than what’s best for kids. Granting student-athletes immediate eligibility can even help with socialization and adjusting to their new environment.”

Florida: An Open Enrollment Policy Standard Bearer

Florida’s open enrollment law could serve as an ideal open enrollment model for other states. All school districts in the Sunshine State are required to participate in both cross-district and within-district open enrollment. The state’s public schools must regularly report the number of available seats by grade level and cannot charge transfer students’ families tuition or fees. While not required to do so, school districts can provide transfer students with transportation options.

During the 2018-19 school year, nearly 273,500 Florida students used open enrollment. More than two-thirds of the students using cross-district open enrollment transferred to schools “with graduation rates above the state mean and more than 90% of inter-district transfer students attend A- or B-rated school districts,” Reason Foundation’s Vittorio Nastasi reported.

Wisconsin’s Model Funding Solution to Open Enrollment

Wisconsin’s open enrollment law requires all school districts to participate in mandatory cross-district open enrollment so long as they have open seats. Beginning with a mere 2,464 students in the 1998-99 school year, Wisconsin’s cross-district open enrollment program grew to 70,428 students in the 2020-21 academic year.

Like Florida, Wisconsin school districts must post about their cross-district open enrollment option on their websites. In the case of oversubscription, students are selected through a randomized lottery with a waiting list for students who aren’t selected. The Badger State also has a voluntary within-district open enrollment option. 

The Wisconsin Department of Public Instruction provides detailed reports about available capacity in each school district including the number of transfer students and the reason transfer applications were rejected. School districts cannot charge tuition to transfer students. 

The crown jewel of Wisconsin’s open enrollment program is its cutting-edge student funding mechanism allowing education dollars to follow each transfer student regardless of where they go to school. 

For example, students using Texas’ cross-district open enrollment during the 2018-19 school year were more likely to transfer to school districts ranked as “A” under the state’s district report card accountability system and less likely to transfer to school districts with lower rankings, such as “C,” “D” or “F.” 

California’s Legislative Analyst’s Office’s 2016 and 2021 reports showed that most students participating in the state’s District of Choice program transferred to school districts with higher test scores. According to Reason’s Vittorio Nastasi, more than 90% of students using Florida’s robust cross-district open enrollment option transferred to schools rated as “A” or “B” and “over two-thirds of transfer students crossing school district boundaries enrolled in districts with graduation rates above the state mean.”

These findings show that students typically use open enrollment to access better schools outside their residentially assigned option. 

A 2017 report on Ohio’s open enrollment program found achievement benefits and increased on-time graduation rates for transfer students who consistently used open enrollment, especially for black students and those in high-poverty urban areas. 

Better academic opportunities are not the only advantage of open enrollment policies. The 2016 report from California’s LAO indicated that school districts participating in the District of Choice program attracted students who were bullied at or did not fit in at their assigned school or who wanted a shorter school commute. 

At the same time, transfer students are not the only ones who benefit from open enrollment policies. A robust education marketplace can make school districts responsive to students and families. For example, both the 2016 and 2021 California LAO reports found that many students transferred schools because their assigned school lacked educational opportunities, such as advanced placement or international baccalaureate courses, school instructional models, or courses that emphasized career preparation for students interested in particular fields.

In response, some school districts “took steps to mitigate enrollment losses including gathering feedback from families and communities, evaluating programmatic offerings, and implementing reforms that led to fewer students transferring out,” Reason’s Aaron Smith pointed out. Similarly, a 2014 report found that Colorado’s transfer students tended to come from school districts with fewer AP offerings and higher dropout rates.

The post Frequently asked questions on public school open enrollment appeared first on Reason Foundation.

Student-centered funding can take many forms but typically sets a base funding amount for regular-program students, with additional weights added for classifications such as English language learners, special education, and poverty. Under this system, a student would generate the same level of funding regardless of geographic location or what type of school they attend. Student-centered funding is based on four principles: 

Fairness: Education dollars should be allocated based on the needs of individual students. 

Transparency: School finance formulas should be streamlined and easy for parents, teachers, and school administrators to understand. 

Portability: Education funding should not be tethered to a student’s zip code and should follow the child to the school of their choice.

Flexibility: Education leaders who are closest to kids are in the best position to decide how education dollars are spent.

The ideal student-centered funding system would follow a path like this:

In many states, relying on local property tax revenue to determine student funding causes serious disparities across school districts. Not only does this put kids on uneven playing fields, but it can also make it difficult to implement open enrollment programs that give families options across school district boundaries.

The below chart highlights key differences between outdated education funding models and student-centered funding.

Student-based budgeting also refers to district-level funding reforms that district administrators can adopt to increase funding fairness, transparency, and flexibility. Student-based budgeting systems can empower school principals and other school leaders to make localized decisions for their students. 

In 2013, California’s Local Control Funding Formula (LCFF) streamlined more than 30 categorical grants into a single weighted-student formula. A study by Education Trust-West found that this change helped drive substantial improvements in equity. LCFF remains a popular reform—in a survey of superintendents, 82 percent agreed that it is leading to greater alignment among goals, strategies, and resource allocation decisions, and 74 percent indicated that the financial flexibility enabled their district to match spending with local needs. A separate survey found that, of those familiar with the law, 72 percent of likely voters and 84 percent of parents viewed it positively.

Hawaii implemented a student-centered funding plan in the 2006-07 school year. The state continues to fine-tune its weighted-student formula in response to school leaders, community stakeholder concerns and other issues as they arise. However, since its introduction, the weighted-student formula has provided a much more equitable, needs-responsive, and transparent way to fund Hawaiian schools while boosting community engagement in key decisions about their local schools.

Most recently, Tennessee passed a law to use a new student-centered funding formula to fund school districts in the state. Before the reform was signed into law in the spring of 2022, Tennessee was one of only nine states that still employed a resource-based formula for allocating education dollars to school districts. This approach put the focus squarely on inputs such as staffing ratios rather than students’ needs and was mired in layers of complexity that reduced transparency.

Policymakers should keep in mind that there isn’t a one-size-fits-all solution to school finance, and weighted-student formulas should be based on the unique needs of a state’s students.                               

In fact, for open enrollment policies to work effectively schools must be fairly compensated for accepting transfer students. Research from California’s public schools shows it’s critical to get the financial incentives right in order for school districts to accept transfer students. Student-centered funding models that attach education dollars to students are one way to ensure this happens. 

Across the United States, public education systems are increasingly becoming untethered to zip codes via policies like charter schools, public school open enrollment, private school choice, and innovative learning methods like micro-schools. As student populations become more mobile and choose to attend a school outside of their residentially-assigned public school district, it will be crucial for states to make student-centered funding reforms.

Reason Foundation’s Christian Barnard outlined how this problem is impacting Arizona:

“This school-finance system is causing a number of issues for students and schools because it hasn’t been updated to reflect today’s choices, including charter schools, or modernized to the funding system needed when kids choose a school other than their assigned neighborhood school. First, there’s the funding gap between charter schools and district schools. Because district schools have access to various local property tax sources for facilities and daily school operations that charter schools do not, the average charter-school student receives $1,308 less in funding than the average district-school student. In a state where the Arizona Charter Schools Association finds more than one in five students now attend a charter school, this inequity is a major problem.”

Oftentimes, resource-based funding formulas can restrict district flexibility over spending decisions, which can lead to greater inefficiency. This can lead to insufficient services and poor student outcomes for not just higher-need students, but all students in a school district. 

1. Streamline: Allocate education dollars based on students’ needs using a weighted student formula.

2. Equalize: Determine funding levels based on students, not by property wealth or zip code.

3. Empower: Deliver flexible education dollars and give families options outside of their residentially-assigned public schools.

4. Inform: Show parents and taxpayers how education dollars are allocated and spent.

Want more information on how your state can implement a student-centered funding formula?

Check out our Student-Centered Funding Roadmap for Policymakers here. 

The post Frequently asked questions on student-centered funding appeared first on Reason Foundation.

Here are some of the common questions about banning menthol cigarettes, the supposed evidence in support of a menthol cigarette ban, and a ban’s possible consequences on public health and minority communities.

Who smokes menthol cigarettes?

According to the FDA, there are nearly 18.6 million American menthol smokers. The FDA says nearly 85 percent of all black smokers use menthol-flavored products, compared to around 30 percent of white smokers who use menthol cigarettes. 

Are menthol cigarettes more dangerous than non-menthols?

Menthol and non-menthol cigarettes are both addictive and can cause smoking-related diseases, but non-menthol cigarettes are not safer than their menthol counterparts. Research published in the Journal of the National Cancer Institute found menthol smokers were somewhat less likely to develop lung cancer than non-menthol smokers. The report found:

“Black men are known to have a higher incidence of lung cancer and are more likely to smoke mentholated cigarettes compared with white men,” said Vanderbilt-Ingram Cancer Center’s William Blot, Ph.D. “It has been hypothesized that menthol in cigarettes influences smoking behavior, perhaps increasing dependency or adversely affecting the biology of the lung. However, our large study found no evidence to support those theories.”

…Among people smoking 20 or more cigarettes a day, menthol smokers were approximately 12 times more likely to develop lung cancer than never-smokers, while non-menthol smokers were about 21 times more likely to have the disease. The differences were mirrored for lung cancer death rates and were found to be statistically significant.

The researchers also found that both white and black menthol smokers reported smoking fewer cigarettes per day than non-menthol smokers. When it comes to the likelihood of quitting smoking, there was no significant difference between menthol and non-menthol smokers.

The authors said the findings suggest mentholated cigarettes are no more, and perhaps less, harmful than non-mentholated cigarettes.

The difference in lung cancer development may be because menthol smokers tend to smoke fewer cigarettes per day and start smoking later in life. If menthols are prohibited, those cigarettes left on the market may be considered safer by consumers, with a possible increase in the number of cigarettes smoked by those menthol smokers who switch to non-menthols. 

Are menthol cigarettes more addictive than non-menthols?

On standard dependency measures, such as the number of cigarettes smoked per day and the time to the first cigarette, menthol smokers are not more dependent than non-menthol smokers. There is also no significant difference in the quit rates between menthol and non-menthol smokers. The most recent evidence published in the Journal of the National Cancer Institute shows that quit rates among menthol and non-menthol smokers are indistinguishable. The study found no significant difference in quit rates between black and white smokers.

Are menthol cigarettes more popular among kids than non-menthols?

Fortunately, youth smoking rates in the United States are at a record low of 1.5 percent, according to the Centers for Disease Control and Prevention. Of that small percentage, more than 60 percent of middle school and high school students who are defined as current smokers use non-menthol cigarettes. Just 0.6 percent of middle and high school students used a menthol cigarette in the past 30 days.

States with the highest menthol consumption rates also have the lowest youth smoking rates. It is true that of the small group of African American middle and high school students who do smoke, most smoke menthol products. However, it should also be noted that black youth have lower smoking rates than other groups of young people, including non-Hispanic whites and Hispanics. 

Have menthol bans been implemented elsewhere? Were they successful?

Supporters of menthol prohibition have been disappointed by lackluster results in other jurisdictions that have banned the products, including Canada, the European Union, and Massachusetts. The most common result of menthol prohibition has been for the majority of menthol smokers to switch to equally dangerous non-menthol cigarettes, continue to buy illicit menthol, or use devices to flavor non-menthol cigarettes. As I noted in a recent piece:

The most optimistic case study for the prohibition of menthols comes from Canada. According to a study of Canada’s menthol ban, while the vast majority continued to smoke after the ban was implemented, a significant portion reported quitting. The study found “59.1 percent of pre-ban menthol smokers switched to non-menthol cigarettes; 21.5 percent quit smoking and 19.5 percent still smoked menthols, primarily purchased from First Nations reserves.” These results might seem somewhat underwhelming but are still impactful. But when we compare the menthol smokers to non-menthol smokers, we see a lackluster result. 

According to the authors of the study, menthol smokers increased their attempts to quit smoking, relative to non-menthol smokers by 9.7 percent. However, overall, just 7.5 percent more menthol smokers quit compared to non-menthol…

The European Union, with its 27 member states and a population of about 450 million, is the largest region to have banned menthol cigarettes. Menthols were already unpopular in Europe. Poland had the largest menthol market in the European Union at 28 percent, closest to America’s market at 36 percent. A preprint study funded by the Norwegian Cancer Society in partnership with the Polish Health Ministry found no statistically significant change in cigarette sales after the ban.

How would the prohibition of menthols likely be enforced?

The FDA says menthol prohibition would be enforced only against “manufacturers, distributors, wholesalers, importers, and retailers.” However, any implication that a ban would only affect big tobacco companies and established retail stores is misconceived. There are already laws on the books that would impose severe penalties on individuals who sell menthols post-prohibition. Anyone selling, importing, or distributing menthol cigarettes would be committing a crime and could land themselves in prison. Thanks to the Federal Cigarette Contraband Trafficking Act (CCTA), smuggling menthol cigarettes across state lines could result in five years in prison. Every state also has laws on the books that criminalize the unlicensed sale and distribution of tobacco products.

Additionally, the possession of untaxed cigarettes is already illegal in 36 states and the District of Columbia. States and localities could enact other laws to clamp down on any increase in the illicit tobacco trade. 

Why are some civil liberties and criminal justice reform groups concerned the ban would negatively impact minority communities?

Aamra Ahmad, senior legislative counsel with the American Civil Liberties Union, said a ban on menthol cigarettes would disproportionately impact minority communities:

“Time and time again, we see encounters with police over minor offenses — for Daunte Wright it was expired tags, for George Floyd it was using a counterfeit bill, for Eric Garner it was selling loose cigarettes — result in a killing. There are serious concerns that the ban implemented by the Biden administration will eventually foster an underground market that is sure to trigger criminal penalties which will disproportionately impact people of color and prioritize criminalization over public health and harm reduction.”

A ban on menthol cigarettes should be expected to hurt communities of color, spur the growth of black markets for methol products, lead to more policing and incarceration, and undermine a variety of criminal justice reforms that cities and states have made in recent years.

Rather than prohibition, what is an alternative harm reduction strategy?

While smoking rates have gradually declined over the last few decades, 12.5 percent of American adults continue to smoke despite the widely known dangers and many smoking cessation resources available. One reason why so many Americans keep smoking traditional cigarettes is that public health officials have mostly failed to let them know that nicotine alternatives like e-cigarettes are substantially safer than combustible cigarettes. 

According to the Health Information National Trends Survey, just 2.6 percent of adults correctly believe e-cigarettes are much less harmful than traditional cigarettes. Since there is no burning tobacco in e-cigarette products, they are substantially safer than traditional cigarettes. Research also shows e-cigarettes are far more effective than nicotine replacement therapies at helping smokers quit.

Rather than resorting to the failed prohibitionist policies of the past, the FDA and Biden administration should apply the harm reduction model to tobacco policy. The federal government could focus on educating the public about safer nicotine delivery products, and the latest smoking cessation products available as part of a pragmatic approach to improving public health as people choose better options than conventional cigarettes. The harm reduction model has been successfully used by governments to reduce sexually transmitted diseases, reduce overdose deaths and treat drug addiction. In the case of smoking and menthols, a harm reduction strategy would be far more effective in reducing smoking than banning menthols.

The post Frequently asked questions about the FDA’s ban on menthol cigarettes appeared first on Reason Foundation.

The States Reform Act has garnered attention as the first prominent bill sponsored by a House Republican to end the federal prohibition of marijuana, which could help give the proposal some political advantage in its efforts to secure bipartisan support. Congressional Democrats have previously introduced various marijuana legalization proposals, including the Marijuana Opportunity Reinvestment and Expungement (MORE) Act, and currently have draft language for the Cannabis Administration and Opportunity (CAO) Act. At this time, however, many observers believe neither of the proposals being led by congressional Democrats will be able to secure the necessary Republican votes for passage in the Senate. Any marijuana legalization proposal would need to secure the support of at least 10 Senate Republicans in order to overcome a potential filibuster. 

The States Reform Act proposed by Rep. Mace already carries at least six Republican co-sponsors, with more support expected. Thus, it’s possible Mace’s Republican-backed States Reform Act may be able to break some of the political gridlock and attract a broad, bipartisan coalition to implement this needed policy.

Below are a number of the frequently asked questions about marijuana legalization and Rep. Mace’s proposed bill:

• Would the States Reform Act make marijuana legal nationwide?

The States Reform Act would remove marijuana and all cannabinoids from the federal Controlled Substances Act entirely, but marijuana would remain prohibited under many state versions of the Controlled Substances Act. To date, 20 states have removed marijuana from these laws for adult use and an additional 18 allow marijuana to be dispensed to qualified medical patients with a doctor’s recommendation. In states that do not allow commercial marijuana activity or possession for certain individuals, those restrictions would remain in place unless and until those states make their own statutory changes. That means marijuana would remain widely prohibited in states without adult-use marijuana programs. Even if a resident purchases a marijuana product in a state where it is legal to do so, that resident would be prohibited from bringing that marijuana product into a state that retains a legal prohibition against marijuana.

• What major complications affecting the legal marijuana industry would be changed by the States Reform Act?

Marijuana’s current classification as a Schedule 1 substance under federal law automatically triggers a wide range of limitations even for the state-legal marijuana industry. Federal anti-money laundering statutes and regulations require financial institutions to perform additional scrutiny over entities or transactions they have reason to believe could involve the trafficking or distribution of any Schedule 1 substance. This reporting is time-consuming and costly to perform and any financial institution that offers financial services to a marijuana business could also face aiding and abetting charges. As a result, many financial institutions have chosen not to offer accounts to businesses they believe are involved in the marijuana industry, even if they are fully licensed and compliant under state law. Federal regulation of financial institutions has also prevented new financial institutions from receiving deposit insurance and Federal Reserve accounts when those institutions aim to service the marijuana industry.

Similarly, all businesses that traffic in a Schedule 1 or Schedule 2 substance are precluded from claiming a deduction of their business expenses under the “Ordinary and Necessary” standard generally applicable to entities filing income taxes. Instead, Internal Revenue Code Section 280E allows these entities to deduct only the Cost of Goods Sold from their Gross Income when calculating federal income tax liabilities. The result is that state-legal marijuana businesses are penalized on their federal income tax and must pay that tax on a modified gross receipts basis. Even marijuana businesses that operate at a loss may face substantial income tax liabilities.

Removing marijuana from the Controlled Substances Act entirely, as the States Reform Act would do, automatically solves these issues and allows state-legal marijuana companies to access financial services and calculate federal income taxes just as similarly situated businesses in other legal industries

• How would marijuana be regulated under the States Reform Act?

The Alcohol and Tobacco Tax and Trade Bureau (TTB), a division of the Treasury Department, is designated as the primary regulatory body for marijuana by the States Reform Act. The TTB would be responsible for tracking all marijuana inventory through a seed-to-sale tracking platform similar to what is currently used by state regulatory systems administering adult-use marijuana programs. Typically, these platforms use radio frequency identification tags affixed to every plant or package containing a marijuana product and record all transfers of inventory at either the wholesale or retail level, and match declarations between buyers and sellers. These platforms are currently monitored by state regulators and allow them to run forensic data analytic programs to inspect for deviations in declared yields or conversions such that regulators can spot potentially illegal diversions of regulated inventory by any licensee. The TTB would track inventory in a fashion similar to existing state regulators and coordinate the transfer of any inventory between state regulatory systems in the event products are wholesaled between licensed marijuana businesses located in different states with marijuana programs in place.

As a partner to the TTB, the Bureau of Alcohol, Tobacco, Firearms and Explosives would be renamed to the Bureau of Alcohol, Tobacco, Cannabis, Firearms and Explosives and would investigate and potentially prosecute illicit trafficking in marijuana.

In sharp contrast to other proposals for federal legalization, the States Reform Act would specifically preclude extensive regulation of most marijuana products by the Food and Drug Administration. Section 201 stipulates that the FDA will have no more authority to regulate marijuana products than it does for alcohol unless a product is marketed as a medical product. These provisions will allow state regulatory systems to continue to address safety concerns, production methods, facility inspections and final product testing for potential impurities.

Sections 202 and 203 designate the federal Department of Agriculture as the appropriate regulator for the raw cannabis plant as it is growing. State licensing and regulations will continue in place for cannabis cultivation facilities, although state programs would additionally need to submit the details of their regulatory plan to the federal Department of Agriculture for approval, as is currently done with state hemp programs.

Finally, Section 206 of the States Reform Act creates a regulatory safe harbor for existing marijuana products so state-licensed businesses can continue selling these products before federal rulemaking is completed without fear of federal prosecution. This important protection even applies to state-licensed entities that engage in interstate commerce of regulated marijuana products, implying that states would be able to begin establishing interstate markets upon passage of the States Reform Act.

• Could a consumer in one state order marijuana products from another state?

The States Reform Act creates a pathway for consumers in states with adult-use marijuana programs to purchase or order products they like from other states with adult-use marijuana programs. Upon receipt of a federal license from TTB, marijuana companies will gain the ability to engage in interstate commerce. Many specifics of how this interstate commerce will operate are left to the rulemaking process, but it should generally be anticipated that consumers will gain access to marijuana products created in other states.

• What would the tax rate be under the States Reform Act?

Section 5901 establishes a new federal excise tax on marijuana products at a rate of 3 percent of the products’ value.  This would be assessed at the point of wholesale transfer between a producer and another producer, distributor or direct customer. The excise tax must be based on the fair value of the underlying products in an arms’ length transaction, which the Treasury Secretary will gain the ability to determine through rule. Effectively, this may mean the Treasury Department will determine a prevailing market price per unit of weight for various products based on periodic surveys. Several states, including Colorado and Nevada, follow a similar approach for the administration of marijuana excise taxes.

• How difficult would it be to get a federal license to produce marijuana under the States Reform Act?

Section 302 clarifies that the TTB “shall issue” a federal license to operate a marijuana business to any applicant that is not specifically excluded by a narrow range of criteria. These criteria include: (1) the likelihood that that applicant will never commence operations based on lack of business experience, financial standing or trade connections; (2) any proposal to operate in a state where marijuana is not legal; (3) a fraudulent misrepresentation of information within the application; or (4) the applicant has been convicted of a felony offense relating to marijuana within three years prior to application or a misdemeanor offense within one year of application unless the underlying action was lawful under state law. This “shall issue” standard makes approval the agency’s default decision for licensing applications unless the agency can prove one of the disqualifying criteria is relevant to a particular case.

Section 302 further clarifies that all existing state-licensed marijuana businesses in good standing shall be issued a federal license through the TTB upon application. This grandfathering provision will ensure continuity of operations and growth opportunities for existing state-licensed marijuana businesses.

The Secretary of the Treasury will be able to charge licensing fees sufficient to cover the cost of the Department’s regulation through the TTB. These amounts will be determined by rule but are restricted within the first three years of the agency’s regulation to no more than $10,000. In addition, the Department must waive these licensing fees for any applicant that meets the Small Business Administration’s definitions for a small business or a socially or economically disadvantaged business.

• Does the States Reform Act do anything specific to protect veterans’ access to marijuana?

The States Reform Act contains several provisions of particular concern to veterans of the armed forces.  Section 601 precludes any federal agency from denying employment to a veteran based solely on the reason that the veteran consumes or has consumed marijuana. Section 602 expressly allows doctors within the Department of Veterans Affairs to recommend marijuana products to patients who may benefit from the use of these products. 

• If marijuana is legalized federally, what would happen to people who have been convicted of federal marijuana crimes in the past?

Section 101 requires all Federal districts to expunge the records of practically all nonviolent federal marijuana arrests or convictions within one year of passage. This would be accomplished without the need for individuals to retain legal counsel or submit an application to remove the record of their specific offenses.  Instead, all qualifying records would be automatically expunged. The bill provides for only a limited range of exceptions, such as for individuals who are or have been associated with foreign drug cartels or who were convicted of driving under the influence of marijuana on federal property.

• How would the States Reform Act empower previous victims of the war on drugs?

Various provisions of the States Reform Act would combine to create pathways of restorative justice for victims of the war on drugs. First, all nonviolent criminal records would be expunged for these individuals, removing significant barriers for these individuals to engage in healthy and productive behaviors like attending college, applying for a home or business loan, or securing lucrative employment. Further, these individuals would even gain the ability to pursue a license to operate federally licensed, legal marijuana businesses to make productive use of their knowledge of the marijuana market. Finally, many of these individuals may even be able to qualify for assistance in launching a new marijuana business through a Small Business Administration loan and through a waiver of licensing fees.

The post Frequently asked questions about the States Reform Act, a proposed marijuana bill appeared first on Reason Foundation.

What is the simple explanation for a long-term airport public-private partnership?

A long-term airport public-private partnership (P3) is a contractual arrangement between the governmental airport owner and an airport company and its financial partners. The private-sector team is selected competitively, and pays lease payments to the city, county, or state government—either annually or (more commonly) in a lump sum up-front. The lease agreement spells out the ongoing relationship under which the private entity is responsible to operate, manage, and improve the airport at its own expense. The government serves as the regulator of the private partner’s performance for the duration of the agreement.

How common are long-term airport public-private partnerships?

Since 1987, more than 100 large and medium commercial airports have been leased or sold to investors worldwide. Among the major airports in this category are Athens, Copenhagen, Frankfurt, London Heathrow, London Gatwick, Madrid, Paris, Rome, Vienna, Sydney, Melbourne, Auckland, Cancun, Montego Bay, Lima, and Santiago.

In Europe, some of these airports are owned, either in whole or in part, by investors. But more common is a long-term lease, set up as a public-private partnership (P3) between the governmental airport owner and a consortium of investors.

Are any U.S. airports currently leased in this manner?

The only U.S. airport currently operated under a long-term lease partnership is the San Juan Airport. It was leased via a 40-year agreement in 2013. Investors have substantially upgraded the airport, pleasing airlines and passengers alike. The government received half of the $1.2 billion lease payment up-front, and it used those funds to upgrade smaller airports and to pay down government debt. Chicago has twice attempted to lease Midway Airport. Westchester County (NY) also began a procurement and St. Louis, in 2019, sought to lease its major airport, Lambert Field. Local politics and economic uncertainties prevented those transactions from being completed, despite investor and airline interest.

Why would taxpayers and passengers support the long-term lease of an airport?

While most large and medium U.S. airports are self-supporting from their own revenues, some are micromanaged by elected officials, which leads to lower productivity and, in some cases, to favoritism in awarding contracts to favored companies. Ongoing surveys worldwide find that passengers rate private and P3 airports as better than government-run airports at being responsive to passenger needs.

What can passengers expect from an investor-managed airport?

There are several empirical studies of how passengers fare in investor-managed airports. A PhD dissertation at Oxford University found that out of 201 airports worldwide, the 29 with private management and operations scored significantly higher on a measure of passenger-friendliness. More recently, the annual Skytrax survey of international airline passengers generally ranks numerous investor-run airports in the top half of its list of the world’s 100 best airports. And a much-cited study in the Journal of Urban Economics also found that airports with majority investor participation scored highest in productivity. The London airports that were among the first to become investor-owned invented what is now the common airport retail model of competing name-brand restaurants and retailers, and the long-term partnership lease of the San Juan Airport brought that model to an airport whose retail model was still embedded in the 1960s.

What are U.S. airports worth to infrastructure investors?

The 2021 Reason Foundation study analyzed 31 large and medium U.S. airports. Based on the amounts paid for long-term leases globally in recent years, the estimated total value of those 31 airports was $131 billion. The net proceeds, after paying off outstanding airport bonds, ranged from negative (in three cases of airports with very large bonded indebtedness) to as much as $10.6 billion (for Los Angeles International).

How did the study choose which U.S. airports to include?

This study reviewed all large and medium-hub airports and selected for study the subset of airports that are operated directly as departments of city, county, or state governments. Those airports show up in studies as being less productive and more likely to be micromanaged, rather than being run as businesses. Hence, they would likely have more room for improvement under private management than airports run by airport authorities. That is why some of the country’s busiest airports—such as John F. Kennedy International, Seattle-Tacoma International, and Orlando International were not included. 

How do investors estimate the value of an airport?

The most common method is to use a multiple of a measure of cash flow called EBITDA (Earnings Before Interest, Taxation, Depreciation & Amortization). Different kinds of infrastructure tend to have different average multiples. The Reason Foundation study drew on a database of global airport transactions assembled by a leading investment bank. Those multiples ranged from a low of 10 times EBITDA (written as 10X) to a high of 35X. To be conservative, the Reason study used 14X for its “low” estimate of gross value and 20X for its “high” estimate. In July 2021, an unsolicited bid for the company that holds the long-term lease on Australia’s Sydney Airport equaled 26X the airport’s 2019 EBITDA. This suggests that the Reason estimates of airport value may actually be too conservative.

Due to the COVID-19 pandemic, wouldn’t the airport be worth a lot less today than in 2019? Shouldn’t airports wait for a better time?

The July 2021 bid for Sydney Airport at 26X its 2019 EBITDA suggests that airport investors are taking into account the long-term value of airports as a growing, revenue-generating industry. In the infrastructure investment world, the United States is seen as a vast, promising, and still largely untapped market for sound long-term investments. To some extent, of course, that is a matter of opinion. The only real way to find out is for several large and medium U.S. airports to test the market and see what kind of interest develops. Nearly all observers were surprised that 18 teams assembled and submitted qualifications in 2019 in hopes of leasing St. Louis Lambert Field. A comparable request for qualifications for a large or medium hub airport in 2021-22 would be a good test of continued investor interest.

If airports are worth this much to investors, why would taxpayers agree to lease them?

City, county, and state governments have many unmet financial needs, such as needed but unfunded infrastructure projects, high levels of debt threatening their bond ratings, and under-funded public employee retirement systems. A long-term lease with a billion-dollar-scale up-front payment may be attractive to governments for addressing one or more of those needs.

How would governments spend the money from a long-term lease of this sort?

In most cases worldwide, the entire long-term lease payment is made up-front, providing the owner with a large one-time windfall. A windfall of this kind should be used in ways that have long-term benefits to the governmental airport owner. One such use is to build (or rebuild and modernize) other infrastructure that serves the public. When Indiana leased the Indiana Toll Road for $3.8 billion, it invested $2.6 billion of the proceeds in a 10-year statewide highway investment program. Another wise use could be to pay off some of the jurisdiction’s existing bonds, aiming to increase its bond rating. Chicago did this with most of its $1.8 billion proceeds from leasing the Chicago Skyway. Another sound use for many governments would be to reduce or eliminate the large unfunded liability of its public employee pension system. In some cases, like San Juan, only part of the lease payment is made up-front, with the balance paid annually during the term of the lease.

Would the government airport owner lose control of the airport?

The kind of long-term lease allowed by Airport Investment Partnership Program (AIPP) is a public-private partnership between the airport owner (e.g., a city, county, or state) and a consortium that has been selected competitively to be the private partner. The long-term lease agreement (e.g., 40 to 50 years) is a very detailed contract, spelling out roles and responsibilities, defining performance measures that the private operator must meet, addressing future airport improvements to be made by the private partner, and much more. In effect, the airport owner becomes the regulator of the company’s performance under the terms of the long-term agreement. Obviously, a workable agreement must be consistent with public-sector goals while allowing the company to operate the airport as a business (i.e., without micro-management). Fortunately, with over 100 airports being operated this way worldwide, there are numerous long-term agreements that can serve as examples.

What kind of companies would bid for an airport, if it were put up for lease?

Generally, a consortium is assembled that often include one of about a dozen global airport companies plus one or more investment partners. These can include public pension funds, insurance companies, and specialized infrastructure investment funds. The latter are pools of institutional capital, which accept equity from limited partners (including pension funds and insurance companies) to invest in long-lived, revenue-producing infrastructure. Of the 18 teams that submitted qualifications to bid on the St. Louis airport, the 12 that were invited to make presentations each included an airport company and either or both an infrastructure fund and a pension fund.

How long would the typical long-term lease be?

Long-term airport leases are typically in the 40-50-year range. In similar leases of toll roads, the Indiana Toll Road lease has a 75-year term. Most of the major airport leases in Australia are for 50 years, with an option for renewal for an additional 49 years. The length of the lease term would generally be proposed by the airport owner and subject to being negotiated as part of the long-term agreement.

What if taxpayers or the government owner is unhappy with the airport’s management or lease after, say, the first 10 years or so?

Long-term lease partnership agreements nearly always include two kinds of early termination provisions. If the company is in serious non-compliance with the terms of the agreement, it can be terminated for cause. That is a very severe sanction, because there is typically no compensation, which means whatever equity the company has invested in the airport is lost. On the other hand, if the government’s objectives have changed over time, despite the company’s good performance, the agreement can be terminated for convenience. In this case, the agreement provides for compensation, since the company made its original investment in the expectation of earning a return over the entire planned term of the agreement. These two kinds of termination provision must be carefully negotiated before the lease can go into operation, to protect both parties.

Isn’t it illegal to use revenues from an airport for non-airport purposes?

Federal aviation regulations used to prohibit any revenue from an airport that receives federal airport grants from being used for any non-airport purpose. Congress changed that, first in 1996 with a small pilot program, and permanently in 2018 by enacting the Airport Investment Partnership Program (AIPP). Airports entering into an FAA-approved long-term lease partnership under AIPP can use the lease revenues for any governmental purpose. Enactment of AIPP has led to significant investor interest in U.S. airports.

Why does the study refer to the net proceeds of a long-term lease?

In nearly all other countries, the proceeds of a long-term partnership lease would be the gross value. However, federal tax law in the United States requires that in the event of a material change in control (such as a long-term lease), a facility financed with tax-exempt bonds must retire those bonds as a condition of the transaction. Therefore, the Reason study in each case subtracted the airport’s bonded indebtedness from the gross value estimate to arrive at its estimated net value to its government owner if long-term leased.

Would the airlines serving the airport object to it being leased?

In the days before airline deregulation (1978), U.S. airlines were strongly opposed to private management and operation of airports, fearing they would lose control over gates and generally fearing change. As airport management worldwide embraced private investment and management, U.S. airlines operating internationally became used to dealing with these new models of management. Over the past decade in the United States, as various airports have become candidates for long-term leases, most major airlines have accepted pro-forma agreements on how they would be charged for operating at the airport. These include American (in 3 cases), Delta (3), FedEx (2), JetBlue (2), Southwest (3), United (3), and UPS (2). This is important because Congress included in the AIPP legislation a requirement that any such long-term lease must receive the approval of 65% of the airlines serving that airport. This requirement was met for San Juan Airport and when Chicago Midway, St. Louis, and Westchester County considered leases.  

What happens to current airport employees in the event of a long-term lease?

At most U.S. commercial airports, the large majority of those working at the airport are employed by the airlines, airline contractors, or companies providing services at the airport (retailers, rental car companies, etc.). In long-term leases of infrastructure, the private-sector partner generally offers jobs to all those actually employed by the airport (as was required in the proposed lease in St. Louis). Because not all civil servants want to transfer to a private company, the government involved may offer transfers to other government jobs for those wishing to remain civil servants.

Full Policy Study: Should Governments Lease Their Airports?

The post Frequently asked questions about long-term airport leases appeared first on Reason Foundation.

Full Study — Should Governments Lease Their Toll Roads? 

News Release — Study: States Can Lease Toll Roads to Fund Other Infrastructure, Pay Off 

Why would a state lease or sell its toll roads?

It’s important to clarify that in the deals the study outlines, states would not sell these roads; they would continue to own the toll roads but would lease them via a long-term public-private partnership. The lease agreement would be a detailed long-term contract that regulates the company’s toll rates, operating standards, performance, and many other details. That agreement would be a public document, which should be available on the internet. The winning bidder would typically be a world-class toll road operator with a long track record of building, operating, and managing toll roads.

What would the state gain by leasing its toll roads?

The state would negotiate a contract to receive lease payments, either annually for the life of the contract (like an annuity) or as a large, one-time up-front payment. Either way, this could provide substantial new funds to help address the severe fiscal distress many states were in and is currently being exacerbated by the recession and coronavirus pandemic. Also, a long-term toll road lease transfers significant project risks to the private sector, including routine operations and maintenance, general project improvements, toll revenue risks, and other financial risks.

Wouldn’t a state government lose an asset and squander the proceeds of a long-term lease?

A one-time, potentially multi-billion-dollar windfall might lead to a short-term spending frenzy, rather than long-term improvements in the state’s finances. Thus, legislation authorizing long-term toll road leases should specify that a large up-front windfall must be devoted only to key balance-sheet improvements, such as investing in long-term infrastructure improvements, paying down state debt (to improve its bond rating), or reducing the unfunded liability of the public employee pension system. Some states may prefer 50 years of annual lease payments, which would be equivalent to an annuity that should also be dedicated to a specific set of important long-term state needs, like infrastructure projects.

With people driving less due to the coronavirus pandemic and recession, isn’t this a terrible time to put a toll road on the market?

Car and truck travel is increasing and could return to pre-COVID-19 levels in 2021. No U.S. toll road leases are likely before late 2021, by which time traffic in other countries will likely have recovered, and other toll road transactions will give an indication of how investors value them. A state government will need expert financial advice to make the trade-off between gaining near-term financial relief via a toll road lease versus waiting a year or two in hopes that toll road asset values have increased further. But states should start assessing this possibility now, to be able to make informed decisions in 2021.

Won’t toll road companies charge drivers much higher tolls than the government?

Long-term lease agreements include restrictions on toll rates, typically based on an inflation index such as the Consumer Price Index. Moreover, the toll rates and their increase over time are governed by the provisions negotiated at the time the long-term agreement is drafted and signed. The rate of allowed increases can be set in the contract. Some of the competitions for toll road leases stress affordable toll rates as one of the selection factors. Also, toll road operators know that excessive toll rates lead many users to divert to alternative routes, which cuts into toll revenue.

Won’t trucking companies be hurt by having to pay higher rates?

Trucks always pay higher rates than cars (both on toll roads and on other highways, via fuel taxes), because trucks cause far more damage to pavements than cars. Toll rates for heavy trucks on state-owned toll roads are typically four times as much per mile as toll rates for cars. Since heavy trucks often provide 40 to 50 percent of toll revenue on long-distance toll roads, it is in the toll road company’s interest to keep truck toll rates affordable for these valuable customers. Truck toll rates are regulated in the long-term agreement, just as car rates are. And to attract more truck usage, toll road companies might be motivated to add dedicated truck lanes in major trucking corridors, which would benefit both cars and trucks.

Why are most of the toll road companies foreign?

In the United States, nearly all toll roads are operated by government agencies called toll authorities. Over the past 20 years in Europe, Latin America, Australia, and Asia, many governments have gotten out of the toll roads business and they rely on investor-owned companies operating under long-term lease agreements to finance, develop, operate, and maintain major toll roads. As a result, there is now a global toll road industry that operates in those countries. There are no listed, independent toll road companies based in the United States at this point, though some of the global companies operate U.S. subsidiaries. In addition, many U.S. infrastructure investment funds are investing in toll roads and many U.S. companies are taking part in long-term public-private partnership projects.

Why should anyone be allowed to make a profit from vital infrastructure like highways?

A great deal of vital infrastructure is already run by investor-owned companies, such as electric utilities, railroads, telecommunications, pipelines, and in many other countries, airports, seaports, and toll roads. When companies operate as monopoly providers, their rates and/or profits are regulated by the state, as would be the case with long-term toll road leases. Investor-owned toll road companies have a growing history of good stewardship of these vital transportation arteries.

Won’t an array of different toll road companies lead to balkanizing America’s highway system?

America’s major highways are already owned by 50 different state governments, with some operated by toll authorities and the majority operated by state departments of transportation (DOTs). Under this proposal, states would continue to own and regulate the toll roads, which will be operated over a long period by experienced companies that specialize in this business. Those companies will have a strong interest in streamlining all-electronic toll collection, moving America much closer to nationwide interoperability of electronic tolling, which improves the customer experience compared with old-fashioned toll booths and plazas.

What if the deal is negotiated behind closed doors?

The competitive process to select the best team to finance, develop, and operate the state’s toll roads must be conducted in a transparent way. Some material in proposals may be company-sensitive information during the competition, but what counts in the end is the details of the winning proposal. The complex long-term lease agreement must become public information when completed, with performance requirements clearly spelled out, and the agreement must comply with provisions in the enabling legislation that permits long-term toll road leases.

What assurances do taxpayers have that the private company won’t cut corners to increase its profits?

The long-term lease agreement typically includes numerous key performance indicators that the company is contractually obligated to achieve, within the limits of the agreed-upon toll rates. These include measures of pavement and bridge condition and quality, as well as requirements for things like landscape maintenance, response time for road service patrols, and many other details. Most such agreements include financial penalties for non-compliance, and always include provisions enabling the state to terminate the lease for cause, or even for the state’s convenience. In the latter case, financial terms are also spelled out in the agreement.

What happens to the long-time loyal employees of the state toll roads? 

The enabling legislation and the lease agreement generally require the toll road company to offer employment to all then-current employees of the toll road. Some governments also offer lateral transfers to other state positions, for those who would rather remain civil servants. Toll road operating companies typically have no problem with such employee-protection provisions.

Isn’t 50 years too long to lease valuable highways?

The length of a toll road lease agreement is negotiable; in general, the longer the lease term, the higher the value of the lease, so the state government must make the trade-off as part of its decision process. A long-term lease, such as 50 years, means that major reconstruction may become the company’s responsibility during its tenure, in addition to whatever widening or other expansion may be needed. And if at any time during a long-term lease the state decides that it wants to terminate for convenience, it will have the right do so, in accordance with the termination provisions spelled out in the lease.

Why can’t a state toll agency make the same kinds of improvements as the private sector?

Depending on how the state toll agency is governed, the private toll road operating company may have several advantages. First, it can recruit and retain experienced toll road senior management—taking politics out of the process. Second, it can pay market compensation to its staff rather than civil service pay rates. Third, it can finance major improvements using a mix of equity and debt, rather than 100 percent debt financing that government toll agencies use. Fourth, the long-term lease agreement should safeguard the toll revenue from being diverted to other purposes by legislators, which has happened in states like New York, New Jersey, and Pennsylvania.

If these toll roads are paid for, why not make them free and support them with gas taxes?

No roads are ever “paid for.” They require ongoing maintenance, additions from time to time (widening, new interchanges), and eventual reconstruction as the pavement and bridges wear out. Gas taxes are beginning a long-term decline, due to ever-stricter federal miles per gallon (mpg) requirements. Today’s cars travel about twice as far on a gallon of gas as cars did 25 years ago, but per-gallon gas taxes haven’t kept pace. In 20 years, gas-powered cars will likely go twice as far again on a gallon of gas compared with today’s cars. And the increase in electric cars, which pay no gas tax, will further decimate gas-tax revenue. To cope with this, America needs more per-mile payments (such as electronic tolls), not greater reliance on shrinking gas tax revenues.

How do taxpayers know they are getting a good deal, rather than companies paying too low a price for the toll road?

Extensive data is available on what amounts were paid for toll road leases in other countries, so it is possible to estimate the potential market value of long-term leases of major U.S. toll roads. (Figures from this global experience were used in the toll roads lease study to estimate potential market values of nine state toll road systems.) After the competition yields a winning bidder, it is then up to senior state transportation department management to negotiate a deal that is a win for state taxpayers. For this purpose, they will need expert legal and financial advice from advisors knowledgeable about long-term infrastructure leases.

Wouldn’t the company make as much money as possible, and then return the road to the state at the end of the lease in poor condition?

Any company that did this would severely damage its reputation and prospects for winning future business. But just in case, long-term lease agreements should guard against that possibility. Wise provisions include requiring a reserve account to ensure ongoing maintenance in the last five years of the lease, and stringent oversight (and penalties) to ensure continued compliance with the performance measures in the agreement.

If a private company can profit from the toll road, why can’t the state do the same?

The key to a state profiting from its toll roads is to unlock the asset value. The state could try to borrow large sums against an assumed asset value, but that might jeopardize a toll road’s bond rating or be contrary to a state’s statutory or constitutional debt limit. The long-term lease method unlocks the asset value for the state while ensuring that the toll roads are managed by world-class companies that are held accountable for reasonable toll rates and achieving high performance.

How could toll road leasing help states’ under-funded public pension systems?

One possible use of some, or all, of the billions of dollars unlocked by a toll road lease is to use the money to reduce the unfunded liabilities of state pension systems. Most state pension systems have far fewer assets than they need in order to pay for the pensions promised to workers and retirees. Using the long-term lease proceeds in this way would help address their pension system’s current under-funding.

But how would using lease proceeds to shore up ailing pension funds help solve our highway infrastructure problems?

Shoring up ailing pension funds is only one potential use of the lease proceeds. States could choose to invest the lease proceeds in other highway infrastructure projects (as Indiana did with most of the proceeds from leasing the Indiana Toll Road) it currently doesn’t have the funding for or to pay down state debt to improve its bond rating and lower future borrowing costs. All these options would improve the fiscal position of state governments, helping cope with recovery from the recession and COVID-19 pandemic. Each state will have to debate and determine the wisest responsible uses of this new money.

The post Frequently Asked Questions: Why Should States Consider Leasing Their Toll Roads? appeared first on Reason Foundation.

Have a Specific Question About Your State Pension Plan?

The Pension Integrity Project is available to answer any additional questions by email at pensionhelpdesk@reason.org.

How will state-sponsored public pension plans be impacted by the COVID-19 pandemic?

The COVID-19 pandemic and related restrictions on economic activity have caused major investment losses and suppressed government revenue, both of which will have a negative impact on the solvency of state-sponsored retirement plans. The full extent of the impact is unknown at this time but the Pension Integrity Project recently released a new interactive web tool estimating that unfunded state pension liabilities could jump from $1.2 trillion before COVID-19 to between $1.5 trillion and $2 trillion at the end of the current fiscal year, depending on investment returns. You can use this tool to preview how your state’s individual plans would be affected by a variety of market scenarios.

How are public pension plan investments prepared to handle market volatility like that resulting from the coronavirus pandemic?

Most traditional state-sponsored defined benefit pension plans have historically assumed an investment return rate as high as 8 percent, even though the average annual return was just 5.87 percent between 2000 and 2018. Since the 2008 financial crisis, many public pension plans have adjusted slowly to the growing gap between actual and assumed investment returns and significant market changes. Additionally, a number of plans have chosen to expand high-risk investment holdings in private equity and other alternative assets in a search for greater yields over the past decade. Unfortunately, this trend has led most defined benefit pension plans to be more exposed to market volatility like that being experienced during the COVID-19 crisis.

Will the COVID-19 market crash force plans to raise employee contribution rates?

State-sponsored defined benefit plans depend on contributions from three sources to maintain funding levels and pay benefits: employee contributions, employer contributions, and investment gains. When any one of those sources of funds is reduced, the other funding sources must be increased or the system will continue to accumulate unfunded pension benefits. Thus, it is likely that employer and employee pension contribution rates are going to need to increase in the near term to offset investment losses and keep pace with growing unfunded liabilities. However, each state tends to take a different perspective on the relative share of contributions between employers and employees, so conditions will vary across states.

Will the COVID-19 market crash prevent retirees from receiving pension checks?

Generally speaking, it is a well-established principle that retirement benefits are guaranteed by federal and state constitutional protections and governing contracts. However, a scenario can occur where employers become delinquent in their contributions due to the lack of funds to contribute to plans, ultimately leading pension systems to adjust benefits themselves as an internal administrative matter, or local government employers can go into bankruptcy in response to the inability to honor their contractual obligations. This worst-case scenario can be avoided by maintaining fully-funded pension systems in good fiscal times. Fully-funded plans are more resilient and better able to weather volatility without imposing an unmanageable burden on employer budgets.

Does the fallout from COVID-19 make a future COLA less likely?

Because cost-of-living adjustments (COLA) are based on policies governed by individual pension systems, you should check with your specific system’s administrators to learn more about how COLAs may be impacted by the COVID-19 pandemic. For plans that have COLAs tied to statutorily fixed rates or actual increases in inflation, you should assume that those adjustments will occur as normal barring any legislative changes. For plans that have COLA’s tied to their funded status or given as a thirteenth check during years of extraordinary investment gains, you should check directly with your plan administration.

Does the state’s budget uncertainty impact the solvency of the pension system?

Yes, as state budgets are strained by decreased revenue and unexpected costs, state governments will likely have fewer funds available to supplement struggling pension systems. When pension plan investments underperform, as they will due to the market effects of the economic downturn and coronavirus pandemic, contributions from either the state or members need to increase in order for the system to stay on track and save enough to pay for future benefits owed In times of crisis, policymakers may be forced to allocate limited funds to more immediate needs at the expense of sufficiently contributing to the state public pension system. Any payments to the pension system below what is actuarially required will impact the long-term solvency of the plan by unnecessarily burdening future taxpayers and employees with more unfunded liabilities and even higher contributions.

What happens when the state doesn’t contribute its yearly pension payment because it is focusing on immediate emergency needs?

When state and local employers reallocate their pension fund contributions to emergency needs, like the COVID-19 public health and economic crisis, more contributions are required from members and/or investment returns. Due to the fact that investment returns will cause further loss and policymakers are unlikely to raise employee contributions at this time, plans will likely fall deeper into debt. The task of paying off the debt will fall on the shoulders of future generations who will need to contribute at higher levels – not only to stop the growth of future debt but to allow the pension system catch up with were plan actuaries said they should be in order to achieve their goal of fully funding accrued retirement benefits in the future.

Can states save money by limiting contributions to their pension plans to help with more immediate budget concerns?

In the long-run, no. Any short-term savings from limiting or canceling contributions to a public employee’s pension plan will be dwarfed by the long-term costs associated with paying off that pension debt over time. Cutting expenses by cutting pension contributions today means not only that they will need to be paid in full in the future, but even more will be needed to make up for the loss of investment returns on a smaller pile of assets. If contributions into a public pension plan are cut in the near-term, costs will increase at a more accelerated rate long-term.

Can strong investments save state-sponsored pension plans from insolvency long-term?

This is not likely. After the losses experienced during the 2008 recession, state-sponsored pensions plans were beneficiaries of a historic 10-year runup in the stock market. Yet, these pension systems barely returned to a national average of 74 percent funded.  Now that the historic bull market has come to a grinding halt, pension plan sponsors who had still hoped to invest their way out of the last two recessions will have to make some tough decisions to keep their plans solvent. Pension plan administrators and policymakers should take the lessons learned from three market recessions over the past 20 years and no longer rely on faith in strong investment returns to save their public pension systems from past and future debt.

If legislatures maintain the status-quo regarding the management of their states’ public pension systems, what will happen?

If policymakers default to maintaining the status quo despite drops in investment returns, the cost of providing a defined benefit pension option to public employees will increase at a greater rate in the intermediate- and long-term. Although immediate savings may be gained from not proactively responding to the effects of the economic downturn and COVID-19 fiscal fallout, these short-term savings will be dwarfed by future costs.

What happens to public pension systems if there is a prolonged recession?

In 2000, many defined-benefit public pension plans were at or near full funding. However, after the dot-com bubble collapse and post-9/11 recession, missed investment return assumptions and insufficient contributions eroded plans’ strong financial standing and created billions in unfunded liabilities going into the 2008 financial crisis and Great Recession. Over the proceeding 10-year historic bull market, most public pension plans reported continued growth in unfunded liabilities. For some plans this was due to de-risking policies being adopted, but most just could not meet investment assumptions and/or contribution rates. Regardless of the length and depth of the recession that may be sparked by the COVID-19 pandemic, unfunded liabilities will continue to grow at an accelerated rate if systemic public pension issues are left unaddressed.

What steps can state policymakers take to ensure the long-term stability of public pension retirement systems?

Step 1: Adopt better funding policies, risk assessment, and actuarial assumptions.

• Lower the assumed rate of return to align with independent actuarial recommendations.
• These changes should be aimed at minimizing risk and contribution rate volatility for employers and employees.

Step 2: Establish a plan to pay off the pension system’s unfunded liability as quickly as possible.

• The Society of Actuaries’ Blue Ribbon Panel recommends amortization schedules be no longer than 15 to 20 years.
• Reducing the amortization schedule would save the state billions of dollars in interest payments.

Step 3: Review current plan options to improve retirement security for a wider range of public employees.

• Generally, somewhere between 40 percent to 70 percent of public employees hired in the typical state do not choose public service as their long-term career and leave their public employer before they vest in their public pension system. Fewer than 20 percent usually make it to a full, unreduced retirement benefit after 25 or 30 years.
• As traditional pensions are likely to be more attractive to long-term career public employees, portable plans can provide more attractive benefits for those shorter-term employees.

Interested in more information about the impact of COVID-19 on public pension systems?

The Pension Integrity Project offers policymakers and pension plan stakeholders:

• Customized analysis of pension system design, trends, and fiscal trajectory
• Independent actuarial modeling to weigh the impact of policy scenarios
• Assistance with stakeholder outreach, engagement and relationship management
• Design and execution of public education programs and media campaigns
• In-depth case studies on jurisdictions that have adopted reforms—highlighting key lessons learned
• Peer-to-peer mentoring from state and local officials who have successfully enacted reforms

Together we can ensure public employees of all kinds receive their earned benefits and taxpayers are protected from unnecessary cost. Please email any questions to pensionhelpdesk@reason.org.

The post Answering Frequently Asked Questions About COVID-19 and Public Pensions appeared first on Reason Foundation.

Many, including President Donald Trump, have touted the efficacy of two drugs currently in use in China and other countries: chloroquine (CQ) and hydroxychloroquine (HCQ). As a result, many argue that, due to the severe and volatile effects of Covid-19 and the lack of effective therapies, the FDA should streamline, compress or even skip the years-long clinical trials process for these drugs, especially for patients who have a high chance of succumbing to the virus.

To evaluate this position, it’s necessary to understand why and how clinical trials work and methods for working around them.

1. How do clinical trials work?
2. Is there any way for COVID-19 investigational drugs to bypass the clinical trials process, making them available for doctors to administer?
3. What are chloroquine (cq) and hydroxychloroquine (hcq) and how do they work?
4. What are the side effects of chloroquine and hydroxychloroquine?
5. If hydroxychloroquine is 40 percent less toxic than chloroquine, why are we even bothering with chloroquine?
6. Do the drugs work against COVID-19?
7.  What other approaches are being sought?

Frequently Asked Questions About Chloroquine And Hydroxychloroquine In Treating Covid-19

The post Frequently Asked Questions About Chloroquine and Hydroxychloroquine In Treating Covid-19 appeared first on Reason Foundation.

Using the gas tax as the main highway funding source is becoming increasingly unsustainable.

First, the purchasing power of the fuel tax is declining due to the growing number of electric and hybrid vehicles as well as the increasing fuel efficiency of conventional vehicles.

Second, highways have suffered, as many U.S. states and localities have diverted specific fees and taxes designed to fund them. The lost revenue from diversions and the decline in purchasing power result in increased congestion, additional traffic accidents and shorter vehicle lifespans due to poor pavement conditions.

While the per-gallon fuel tax served the country well for decades as the nation’s primary highway funding source, its shortcomings have become more apparent over time. Often fuel tax increases are not politically palatable, and even when implemented fall short of providing the needed funding. The diversion of highway funds to non-highway sources intensifies the problem.

To more effectively and equitably fund our nation’s roadways, transportation agencies need to adopt a stronger users-pay/users-benefit approach that does not depend on fuel use and that strengthens the link between where revenues are obtained and where they are spent.

Policymakers are examining mileage-based user fees (MBUF) as a more sustainable revenue source than the gas tax. Using MBUFs as the main funding source is fairer, more reliable and more transparent, and better equips transportation agencies to face continued changes in vehicle propulsion.

Funding roadways through fuel taxes served the nation well for most of the 20th century, but increased fuel economy, coupled with the increase in electric and hybrid vehicles, has made fuel taxes an unreliable revenue source. Even while many states have managed to raise fuel tax rates to compensate for some of the funding problems, the decline in overall fuel tax revenues is projected to worsen considerably in the coming decades. Without a change in funding method, the fuel tax will become increasingly unsustainable.

While per-mile charging was not a viable alternative in previous decades, technological advances and a decreasing ability to fund roads and highways adequately have made user fee models such as MBUFs and tolling more attractive. Oregon’s experience has already proven that an MBUF system can work effectively and gain public acceptance.

Charging users based on the miles they drive will continue to face public skepticism, and the transition from per-gallon to per-mile funding will be substantial. But the various state pilot projects show that concerns over privacy and fairness have been (so far) unfounded. And while the concept does require some adjustments for drivers, participants appear to have easily adapted to them.

From an agency standpoint, operating under a mileage-based funding arrangement appears to deliver the least headaches: Everyone pays for what they use, no one avoids paying for what they use, and formulas can be designed and tweaked to ensure that sufficient funds are available to properly maintain roads.

By avoiding fuel taxes’ inherent and increasing problems, MBUFs offer the best path forward to ensure roads and highways receive the most effective funding through an approach that is fairer, more reliable and more sustainable.

Here are 13 frequently asked questions about mileage-based user fees.

Frequently Asked Questions: Mileage-Based User Fees

The post 13 Frequently Asked Questions About Mileage-Based User Fees appeared first on Reason Foundation.

The only heated tobacco product currently authorized for sale in the U.S. is Philip Morris International’s (PMI) Tobacco Heating System (THS), sold under the brand IQOS. The battery-powered device uses a heating blade to warm a stick of leaf tobacco to a maximum temperature of 570 degrees Fahrenheit to ensure the tobacco doesn’t burn. The tip of a burning cigarette, by contrast, exceeds 1,300 degrees Fahrenheit.

This regulated heating process creates a tobacco-flavored vapor containing nicotine but produces no smoke or ash because no combustion is taking place. Each tobacco stick generates 12–14 puffs and lasts around five minutes, about the same as the typical time and puff amount of an ordinary cigarette. Because IQOS uses leaf tobacco and lasts the length of an average cigarette, it mimics much of the ritual, taste and sensory experience of smoking. Unlike e-cigarettes, IQOS flavors are limited to tobacco and menthol. The tobacco sticks meet the Food and Drug Administration’s (FDA) definition of a cigarette and are categorized as non-combusted cigarettes.

Critics of harm reduction products in general often argue that, because the long-term effect of these products is unknown, they should be treated the same as cigarettes until proven otherwise. The problem with this line of argument is that the dire effects of cigarette smoking are visible and known.

In the decades it will take to discover the exact effect IQOS will have on its users, millions of Americans will die from a smoking-related disease. Harvard law professor and former regulatory czar Cass Sunstein encapsulated the problem with this precautionary approach:

The precautionary principle, for all its rhetorical appeal, is deeply incoherent. It is, of course, true that we should take precautions against some speculative dangers. But there are always risks on both sides of a decision; inaction can bring danger, but so can action. Precautions, in other words, themselves create risks—and hence the principle bans what it simultaneously requires.

On the balance of the available evidence, the dangers of impeding IQOS as a tool to help smokers quit far outstrips any possible threat it could pose to public health.

Heated Tobacco Products: Frequently Asked Questions

The post Frequently Asked Questions About Heated Tobacco Products appeared first on Reason Foundation.

Managed lanes are a set of lanes in which access is controlled to meet a transportation policy goal. Vehicle restrictions, capacity requirements and pricing are three ways to manage access. Managed lanes encompass bus-only lanes, truck lanes, HOV (high-occupancy vehicle) lanes, HOT (high-occupancy toll) lanes, and express toll lanes. By preventing some lanes from getting overloaded with vehicles, managed lanes offer motorists a more reliable commute option that can also improve public safety in terms of making less-congested routes available for emergency personnel, while also reducing gasoline consumption and emissions. Additionally, toll revenue can cover many of the costs associated with operating and maintaining the lanes.

For decades, the U.S. highway system has eased the transport of people, as well as goods. Over time, highway usage has increased dramatically, to the point where many metro areas find themselves with immense traffic congestion and limited means to improve traffic flow. By providing a largely uncongested alternative using managed lanes, governments can provide motorists with a consistent, reliable means of completing their commutes. When priced variably to reflect lane usage, governments also can help relieve some of the highway funding uncertainties that many states increasingly face. As former Virginia Secretary of Transportation Aubrey Layne stated about the Commonwealth’s decision to embrace tolled managed lanes, “This is not about revenue generation. This is for traffic management…The move is long overdue, and the Express Lanes are a much better use of our assets.”

Frequently Asked Questions About Managed Lanes

The post Frequently Asked Questions About Managed Lanes appeared first on Reason Foundation.

As state and local governments increasingly face fiscal challenges in making improvements to existing highways, adding highway capacity, and ensuring projects are sufficiently maintained to avoid deferred maintenance problems, public-private partnerships (or P3s) are emerging as a policy tool to help ensure efficient project delivery as well as maintenance and upkeep of highways over their design life.

While common in much of Europe and elsewhere, highway P3s remain a newer phenomenon in the U.S., and one not always well understood by both advocates and critics alike. This document answers some of the common questions individuals often pose about highway P3s, while clearing up some of the common misconceptions made about P3 agreements.

Frequently Asked Questions: Highway P3s (pdf)

The post Frequently Asked Questions: Highway P3s appeared first on Reason Foundation.

1. Why do advocates call this “corporatization” rather than “privatization”?
2. Wouldn’t the ATC corporation board be dominated by the major airlines?
3. Small cities and airports fear that the corporation might withdraw ATC services from their airports, cutting them off from the national airspace system. Is that a realistic worry?
4. Some have called ATC corporatization a “give-away to unions.” Is that accurate?
5. The U.S. ATC system is far larger in size than that of any other country. How can you extrapolate from the experiences of other countries whose ATC systems are much smaller?
6. What impact would corporatization have on air safety?
7. Doesn’t this proposal amount to privatizing the airspace?
8. Private pilots fear that a fee-supported ATC corporation could make general aviation unaffordable. How will they be protected from ruinous ATC charges?
9. Why not let GA continue to “pay at the pump”?
10. Wouldn’t moving the ATO out of FAA and changing its funding and governance disrupt FAA’s NextGen modernization program?
11. What evidence is there that corporatization has led to cost savings?
12. Won’t the military oppose corporatizing the Air Traffic Organization?
13. An ATC corporation would be “Too big to fail,” so wouldn’t this risk government bailouts?
14. Isn’t corporatization a partisan plan by small-government conservatives? Why should others support it?
15. What is a federally chartered nonprofit corporation? Are there some existing examples?
16. Wouldn’t allowing an ATC corporation to charge user fees be giving it taxing authority?
17. What would happen to current aviation taxes after corporatization?
18. Wouldn’t it take a large, costly bureaucracy to collect ATC user fees?
19. Who would be responsible for noise complaints from changed flight paths near airports?
20. Doesn’t the proposed corporatization amount to giving away many billions of dollars in assets to a private corporation?
21. Why do business jet groups oppose corporatization?

1. Why do advocates call this “corporatization” rather than “privatization”?
   The term privatization implies shifting a government function to a for-profit company—either via a service contract (outsourcing) or via sale by the government. By contrast, what is proposed for U.S. air traffic control is converting the existing FAA Air Traffic Organization (ATO) into a federally chartered nonprofit corporation, governed by a board selected to represent a balanced set of aviation stakeholders. Over the past 30 years, more than 60 countries have divested their ATC provider from the government transportation agency and made it self-supporting from fees paid by users of ATC services.
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2. Wouldn’t the ATC corporation board be dominated by the major airlines?
   No; there would be no airlines on the board at all. Instead, various aviation stakeholders (including airlines, airports, ATC employees, private-plane groups, etc.) would nominate knowledgeable individuals to serve on the board, in the numbers spelled out in its federal charter. Those board members would be prohibited from having any financial compensation from any aviation organization while serving on the board, and would owe a legally enforceable fiduciary duty to the best interests of the ATC corporation. Proposed stakeholder boards have ranged from 11 to 15 members, with a maximum of four seats to be nominated by various kinds of airlines. Since the corporation would be nonprofit, all board members would have equal votes, so the members nominated by airlines would be a small minority.
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3. Small cities and airports fear that the corporation might withdraw ATC services from their airports, cutting them off from the national airspace system. Is that a realistic worry?
   Nearly all small airports get control towers under a federal “contract tower” program, in which companies are paid by the FAA to provide non-radar tower services. FAA requires that the benefits of a control tower exceed its costs. But FAA’s limited budget has led to a moratorium on any new contract towers since 2014. Also, FAA has deleted from its NextGen modernization plan the best hope for more small-airport towers: a technology called Remote Towers that is already in use in Europe, provided by ATC corporations there. Compared with a conventional tower, a Remote Tower offers larger benefits at lower cost, so the benefit-cost ratio will be higher, allowing more airports to qualify. The best hope for small airports having affordable control towers is an ATC corporation with reliable revenues and the ability to issue bonds to pay for modernized facilities, including new technology such as Remote Towers.
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4. Some have called ATC corporatization a “give-away to unions.” Is that accurate?
   A smooth transition from a governmental, civil-service bureaucracy to a customer-friendly high-tech business will require fair treatment of existing employees. Current union contracts will continue in force until their expiration dates, at which point the new management will negotiate new contracts better suited to a business context. It would be grossly unfair not to protect existing employees’ pension benefits, but that will not preclude newly hired employees being covered under whatever new pension program the corporation develops. And of course, the prohibition on strikes by ATC corporation employees will continue. The good news, from the standpoint of enacting ATC corporatization, is that the largest employee group—controllers and others represented by NATCA—favors the shift to a nonprofit corporation with a reliable user-fee revenue stream and the opportunity to take part in developing new technology, as their counterparts at nonprofit corporation Nav Canada have been doing for 20 years.
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5. The U.S. ATC system is far larger in size than that of any other country. How can you extrapolate from the experiences of other countries whose ATC systems are much smaller?
   This might be a relevant criticism if the aim were to create a huge ATC system from scratch. But the U.S. ATC system is already at the required large scale, in terms of facilities, equipment, and personnel. What needs to be changed are the funding and governance arrangements. Annual appropriations by Congress are uncertain and always come with numerous strings attached. When customers pay the ATC corporation directly (as households pay their electric bills), the corporation will have a reliable revenue stream that will support issuing revenue bonds to finance large-scale modernization—something FAA is unable to do. Likewise, governance by a stakeholder board will be far better focused than “oversight” by 535 members of Congress, the Office of Management & Budget, the Government Accountability Office, the Secretary of Transportation, and the FAA Administrator. No management team can function with that many different bosses.
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6. What impact would corporatization have on air safety?
   Corporatization would increase air safety for three reasons. First, it would remove the current conflict of interest, in which FAA (the air-safety regulator) regulates itself when it comes to air traffic control. Since 2001, the International Civil Aviation Organization (ICAO) has recommended arm’s-length separation between the aviation safety regulator and the provider of ATC services; the United States is one of the few countries not in compliance. Second, ensuring truly state-of-the-art technology is a key to continually increasing air safety, and FAA is lagging corporatized providers in this regard. Third, ATC corporations purchase liability insurance in the global aviation insurance market (which also insures airlines). Insurers then have an incentive to monitor safety performance of the ATC corporation, to reduce their own financial exposure. In addition, empirical evidence from several international studies finds that air safety has improved following corporatization and arm’s-length separation of safety regulation from ATC service provision.
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7. Doesn’t this proposal amount to privatizing the airspace?
   That concern reflects a misunderstanding of this reform. The airspace will remain in the public sector, with decisions about ATC procedures and technology being made by the FAA, as safety regulator. It is only the provision of the ATC services that will become the task of the ATC corporation. The corporation will not be allowed to arbitrarily stop providing ATC services to certain airports or portions of the airspace, in violation of the provisions Congress provides in its federal charter. This is consistent with international aviation law and ICAO recommendations.
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8. Private pilots fear that a fee-supported ATC corporation could make general aviation unaffordable. How will they be protected from ruinous ATC charges?
   The very large General Aviation Caucus in Congress will not permit such an outcome to occur, and the 2016 House bill prohibited charging per-use fees to small private planes. Private pilots’ organization AOPA has spent decades arguing against fees for private planes for individual flights or other ATC transactions. Canada also has a large general aviation community, and instead of charging small planes per-transaction fees, it levies a single annual charge, akin to a vehicle registration fee—currently $68 for a plane up to 2 metric tonnes and $227 for a plane between 2 and 3 metric tonnes. That makes private pilots paying customers, justifying their ability to nominate a stakeholder board member. This system has worked fine for more than 20 years, and has not led to any attempt to impose per-transaction fees on general aviation.
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9. Why not let GA continue to “pay at the pump”?
   Both general and business aviation currently pay modest fuel taxes that help to support the FAA’s programs, but providing only 0.8% of all aviation user-tax revenue. The problem with using tax money to help pay for the ATC corporation is that tax money gets deposited in the U.S. Treasury and can only be spent on aviation if and when Congress appropriates the money. And Congress never appropriates tax money without imposing “oversight” on how the money is used. This creates the perverse system in which the FAA and its Air Traffic Organization have hundreds of overseers—which is one of the problems that needs to be solved. ATC corporatization, now in place in more than 60 countries, is de-politicization of air traffic control. It creates a direct relationship between customers (aircraft operators) and the ATC service provider, in which the ATC company can focus on delivering cost-effective service to those customers. Any involvement of tax money will undercut the purpose of the reform, which is to transform the ATO into a high-tech, 24/7 service business delivering value for its customers.
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10. Wouldn’t moving the ATO out of FAA and changing its funding and governance disrupt FAA’s NextGen modernization program?
    The FAA has made modest progress on replacing very old technology with somewhat newer technology. But it lags many years—even decades—behind ATC corporations in countries including Australia, Canada, Germany, the United Kingdom, and elsewhere. Digital communications between pilots and controllers, electronic flight strips, routine use of GPS (satellite) navigation, remote towers, and GPS-based landing systems are some examples of where FAA significantly lags countries with self-supporting ATC corporations. Moreover, in a 2015 report, the National Research Council concluded that the FAA is not implementing the original transformative vision of NextGen; rather, NextGen has become simply a set of equipment upgrades. While the conversion of the ATO into an ATC corporation would not disrupt existing NextGen contracts, one can expect its stakeholder board to revisit the original NextGen vision to map out a better path forward.
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11. What evidence is there that corporatization has led to cost savings?
    The most dramatic example of reduced costs is in our neighbor, Canada. In inflation-adjusted terms, Nav Canada’s ATC fees are 40% lower than they were at the outset, and its productivity has increased over its 20 years of existence. By contrast, according to the update of a Brookings Institution report, FAA’s unit cost of service has increased by 66% over this same period, while flight operations have actually declined. ATC corporations in Europe are much smaller, and have only achieved modest reductions in costs over this time frame. Nearly all of those corporations, however, are government corporations, without the customer focus created by Nav Canada’s stakeholder board.
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12. Won’t the military oppose corporatizing the Air Traffic Organization?
    Opponents have made this claim, but it is false. Secretary of Defense James Mattis recently sent a letter to Sen. John McCain stating that “DoD is supportive of possible privatization [sic] of ATC services,” and has created an ad-hoc committee to review the existing interactions between DoD and FAA air traffic operations, to ensure that all needed arrangements are maintained. Civil/military cooperation is standard practice in all 60 countries that have corporatized ATC. Airservices Australia and that country’s Air Force are jointly developing a new nationwide flight management system that they will operate jointly. In the UK, military controllers work side-by-side with NATS controllers at the latter’s Swanwick Center. Every year in Washington, DC, the Air Traffic Control Association hosts a civil/military ATC conference in parallel with ATCA’s own annual conference.
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13. An ATC corporation would be “Too big to fail,” so wouldn’t this risk government bailouts?
    Given current technology, ATC is akin to a natural monopoly, like some other utilities. It is therefore what bond-buyers consider an excellent credit risk. Indeed, the larger ATC corporations have investment-grade bond ratings. In the 30 years during which ATC corporations have been in operation, there has never been a bankruptcy. The worst aviation downturn occurred following the 9/11 terror attacks. Nav Canada’s traffic suffered serious declines, and it instituted a temporary rate increase to make up for reduced transaction volume. Since then it has developed a robust reserve fund to help it get through future downturns without having to increase its rates. In the UK, NATS was only a few months old when 9/11 occurred, and had no reserve fund. To get through the downturn, both major shareholders—the Airline Group and the UK government—made equity contributions to increase working capital. Neither company came anywhere near bankruptcy.
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14. Isn’t corporatization a partisan plan by small-government conservatives? Why should others support it?
    In fact, ATC corporatization was begun in 1987 when the Labor government of New Zealand converted its ATC agency into self-supporting Airways New Zealand. That company, in turn, was the inspiration for Vice President Gore’s National Performance Review, which proposed taking the ATC function out of FAA and converting it into a self-supporting U.S. Air Traffic Services (USATS) corporation in 1994-95. In 1997 the Mineta Commission proposed a follow-up version of that plan. Today, ATC corporatization is supported by a large number of former DOT Secretaries and former senior FAA officials appointed by Democratic and Republican Administrations. It is a bipartisan, good-government reform.
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15. What is a federally chartered nonprofit corporation? Are there some existing examples?
    The most common examples are numerous federal credit unions, which are nonprofit, stakeholder-governed financial institutions. The American Red Cross and the U.S Olympic Committee are the two best-known examples. In aviation, the Congressional Research Service has cited the example of MITRE Corporation’s Center for Advanced Aviation System Development (CAASD), which does research and development work under contract to the FAA. There are dozens of other federally funded R&D Centers organized as federally chartered nonprofit corporations, including The Aerospace Corporation, the Center for Naval Analyses, and Oak Ridge National Laboratory. FFRDCs receive federal funding, which the proposed ATC corporation would not.
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16. Wouldn’t allowing an ATC corporation to charge user fees be giving it taxing authority?
    This claim misunderstands the legal difference between a tax and a fee. A tax is paid to a government, and is allocated to various uses by a political body. A user fee is charged only to those who receive a service, and is paid directly to the provider of that service. There is a long legal history clearly defining the difference between taxes and fees. Government utilities, such as the electricity provider Tennessee Valley Authority, charge their customers fees for the electricity they use; those fees are not “taxes.” An ATC corporation is a utility, like those that provide electricity, natural gas, water supply, etc. Customers pay fees based on the amount of services they use; those charges are not “taxes,” even when the utility is owned by a government entity.
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17. What would happen to current aviation taxes after corporatization?
    Current aviation excise taxes each year generate more than the total (capital and operating) costs of the Air Traffic Organization, and they also generate funds for the federal airport grants program, AIP. The rest of FAA’s costs come from the federal general fund. Once the ATC corporation is in operation, deriving its revenue from ATC fees, the existing aviation taxes would be dramatically reduced—from about $14 billion to just the $3.5 billion needed to support the AIP grants program (which will continue to be FAA’s responsibility). Most likely, Congress would continue to support the safety regulatory functions of FAA via the general fund, like nearly all the other federal safety regulatory bodies (Consumer Product Safety Commission, Food & Drug Administration, etc.)
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18. Wouldn’t it take a large, costly bureaucracy to collect ATC user fees?
    The rest of the world pays for ATC via user fees, following the charging principles set forth by ICAO, which call for en-route and overflight charges based on aircraft weight and distance plus terminal charges based on weight. Because charging ATC fees is so ubiquitous, the new ATC corporation can obtain billing service at the outset from one of several global providers. One service has long been offered by the International Air Transport Association, aimed largely at developing countries. Another is provided by a commercial company, COMSOFT. A newer service is the FlightYield system developed by Airways New Zealand and now offered worldwide by SITA in cooperation with the Civil Air Navigation Services Organization (CANSO). Thanks to billing software that obtains its basic data from aircraft flight plans, the cost of ATC billing is quite low. As of 2012, the world’s second-largest ATC provider, Nav Canada, had a 12-person billing department, and their billing cost was estimated at 2/10^th of one percent of their total revenue.
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19. Who would be responsible for noise complaints from changed flight paths near airports?
    As the aviation safety regulator, the FAA would remain in charge of approving or disapproving new flight procedures that could change noise exposures on the ground. Such changes would also have to comply with the National Environmental Policy Act (NEPA), as they currently do. So there would be little or no change in how noise problems are handled by the federal government.
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20. Doesn’t the proposed corporatization amount to giving away many billions of dollars in assets to a private corporation?
    First of all, if this were actually a “privatization”—a sale to a for-profit company—then paying for the assets would be routine. But the proposed corporatization is a reform of the existing ATO, simply giving it a new funding and governance structure. The day before the change-over, the ATO will be a government agency. The day after, the same facilities and the same people (except for top management) will still be there, doing the same jobs, under a new organizational model. Secondly, the existing facilities and equipment have all been paid for not by general federal revenues but by aviation excise taxes deposited in the Airports & Airways Trust Fund. So the users have already paid for the assets. Third, most of the assets are obsolete and need to be replaced. This includes the 50-year-old en-route centers, aging VORs and radars, obsolete terminal equipment still using paper flight strips, etc. And finally, if aviation users were required to pay even the depreciated asset value of the assets, that would needlessly inflate the level of ATC fees users would have to pay. The ATC corporation will have to issue revenue bonds to pay for not only technology modernization but also large-scale facility replacement and consolidation. That should be the focus of its capital spending, not paying again for aging and obsolescent facilities and equipment.
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21. Why do business jet groups oppose corporatization?
    U.S. business jets in U.S. airspace are the only such jets in the world that don’t pay ICAO-type ATC fees. Even though they are a large user of the ATC system (12% of all control tower operations, 13% of all TRACON operations, and 11% of all en-route miles flown), the amount they pay in aviation fuel taxes is only 1.3% of all aviation excise tax revenue—a very sweet deal. Business jet groups allege that paying ATC fees would greatly damage their industry, yet business aviation in Canada is thriving, and the Canadian Business Aviation Association finds that Nav Canada’s services are a good value for the money. A 2006 Reason Foundation study found that if a Nav Canada fee system were in place in this country, shifting from the current turbine fuel tax to those fees would add between 3% and 5% to the variable cost per hour to operate a business jet. The argument that this would be crippling is not credible. If ATC reform reduced delays and provided more-direct routes, business jet operators would better off paying the ATC fees if they saved as little as 3 to 5% of their annual flight hours.» return to top

The post Air Traffic Control FAQs appeared first on Reason Foundation.

A public-private partnership is a contractual agreement between a government agency and one or more private firms to carry out a project that is traditionally done by government. For highway PPPs, the types include (1) DB (design-build), in which a single integrated team does both the design and construction of the project, (2) DBOM (design-build-operate-maintain), in which a consortium of companies handles design, construction, and ongoing operations and maintenance for a period of years in exchange for annual payments from the state, and (3) DBFOM (design-build-finance-operate-maintain), in which a consortium is responsible for financing the project as well as the other tasks. These are all departures from traditional DBB (design-bid-build), in which the state first contracts for the design and then goes out to bid for a construction contract.

What is a toll concession PPP?

A toll concession is a DBFOM highway contract in which the principal funding source is tolls charged to users. The projected toll revenue stream is used to support long-term revenue bonds, in addition to covering operating and maintenance costs. The group that wins the competition takes on the risks of (a) construction cost overruns, (b) late completion, and (c) inadequate traffic and revenue. Those risks would otherwise be borne by the government (and hence, the taxpayers).

Aren’t toll concessions a form of crony capitalism? After all, many firms are excluded from bidding on these projects.

Toll concessions are used mostly for major projects (sometimes called mega-projects). Government seeks to reduce risks of large cost overruns or insufficient traffic and revenue. Therefore, standard practice is a two-stage competition. First, any firm or group of firms may submit its qualifications and experience for projects of this size and complexity. Second, an expert review board then selects the best-qualified three to five teams and invites them to bid. Because preparing detailed proposals takes considerable time and money, it makes sense not to have a dozen firms invest that kind of time and money with only a small chance of winning. Both stages involve objective criteria.

Why aren’t toll concessions awarded solely on who submits the lowest-cost proposal?

In a toll concession, the winning team is responsible not only to finance and build the project but also to maintain it for 35 to 50 years. So the sensible thing to minimize is not the initial cost but the life-cycle cost. Proper maintenance over 50 years can cost several times as much as the initial construction cost. It is penny-wise and pound-foolish to build a major highway as cheaply as possible if this will mean significantly higher maintenance costs over its 50-year design life. But that often happens with construction-only highway (DBB) contracts, awarded based only on lowest initial construction cost.

Doesn’t most of the funding in these projects come from government?

No it doesn’t. Like railroads, pipelines, electric utilities, etc, toll road companies finance these projects with a mixture of debt and equity. Equity is cash put directly into the project (like the down payment on a home), typically around 20% of construction cost. The debt may be a mix of revenue bonds and bank loans (analogous to a home mortgage). In some cases subordinated loans from the Federal Highway Administration, are also used, under a program called TIFIA, enacted by Congress in 1998 to encourage PPP infrastructure. Toll revenue is intended to repay all the debt providers and to provide a return on the company’s equity investment. In some toll cases, the state DOT imposes many costly requirements, which make the total project cost more than the projected toll revenues can cover. In those cases, the state DOT may contribute 10 to 20% of the project budget, often with an agreement to share in the toll revenues if the project does better than forecast.

Don’t the companies doing toll concessions get guaranteed profits?

No they don’t. A key feature of toll concessions is the transfer of major risks from taxpayers to the investors (the providers of debt and equity). In traditional highway construction-only projects, contractors propose numerous “change orders” during construction, which may significantly increase the taxpayer cost well beyond the amount of their initial bid. That cannot happen in a toll concession, because the construction cost overrun risk has been taken on by the company. The same is true of the traffic and revenue risk. The only way a concession company can make a profit is if it keeps a lid on construction and operating costs and if its traffic and revenue end up equaling or exceeding what it projected in its financial model.

What happens if a toll concession project goes bankrupt? Do taxpayers bail it out?

In the two decades or so in which toll concessions have been used in the United States and Australia, five of the 22 U.S. projects have gone bankrupt, as have four of 16 Australian projects. In none of these cases did taxpayers bail out the investors. Typically, the equity providers lose their entire investment, and the debt providers negotiate reduced payments (referred to as a “haircut”). The lenders usually have the right to auction off the remaining term of the concession to another company, and the toll road in question remains in operation during and after the bankruptcy.

Don’t these projects amount to double taxation—paying tolls and gas taxes for the same project?

If the state DOT provides part of the “equity” in the project because the project would not be viable based solely on toll revenue, then the state DOT uses gas tax money–usually its only source of highway money. In those cases, it requires both gas taxes and toll revenues to make the project possible. There have been toll concession projects financed 100% by toll revenues—such as the 91 Express Lanes in Orange County, California and the Jordan Bridge in Chesapeake, Virginia. In those cases the toll payers should, in principle, receive rebates on the fuel taxes they pay for the miles driven on the tolled projects, but current law in most states does not provide for that. Rebates have long been available on the New York Thruway and the Massachusetts Turnpike, two state-run toll roads. In the future, if currently non-tolled highways are rebuilt and modernized via toll concessions, highway users should insist that those new tolls replace, rather than supplement, existing gas taxes. Fuel tax rebates will be easy to do with today’s all-electronic tolling technology.

Why should for-profit companies get tax-exempt loans?

Congress in 2005 decided that state toll agencies and toll concession companies are in the same business of providing tolled infrastructure, and that both should have access to the same kind of revenue bonds. Since state toll agencies have long relied on tax-exempt bonds, Congress authorized tax-exempt status for “private activity bonds” (PABs) used for highway and transit projects with a dedicated revenue stream. These are not “government loans,” however. By law, they must be issued by a state agency on behalf of the PPP concession company, but that company is solely responsible for paying off the loans. There is no recourse to the taxpayers, any more than there would be with any other revenue bond that is secured solely by the project’s revenues.

Do governments give toll concession projects a monopoly?

There are very few situations in which there is only one road or highway between point A and point B. Some people object when a project once planned as a “free” highway is developed as a toll road instead because the state DOT does not have the money to build it using gas tax revenues. But that road is not a monopoly; there are almost always alternatives to using the toll road. (In Texas standard practice is to include multi-lane non-tolled frontage roads on either side of a toll road.) Concerns have been raised about provisions in many (but not all) concession agreements that provide some limits on new “free” highways being added parallel to the toll road. When the first toll concession project (the 91 Express Lanes in California) was being financed, the debt providers insisted on protection for the toll revenue stream via the inclusion of a “non-compete” provision in the concession agreement, under which the state DOT agreed not to build any more non-tolled lanes in that corridor. That turned out to be overkill, and today’s practice is that the company agrees to accept all projects in the current long-range transportation plan of the state or metro area. For any other projects that would be proposed and implemented later, if the company can prove that X% of its traffic diverts to the new free road, it is entitled to some degree of compensation for lost toll revenue.

Doesn’t the long term of these agreements conflict with government sovereignty and sound transportation management?

Some have urged that toll concession agreements be limited to 25 or 30 years, since nobody can know the future. That lack of a crystal ball is as true of governments as it is of concession companies. In deciding to use a toll concession to provide a needed new (or replacement) highway or bridge, the state DOT or the local Metropolitan Planning Organization (MPO) must weigh the trade-offs involved. In many cases, if they don’t use a toll concession, the needed project might not be fundable for 20 years or more. If they do use a concession approach, the term of the agreement must be long enough to provide the possibility of the company earning a return on its investment—which can range between 35 and 70 years, depending on the project. The concession company takes many risks since it cannot know the long-term future of transportation—autonomous vehicles, major changes in where people choose to live and work, etc. The government also takes the risk that the project might turn out to be of low value many decades hence, but it cannot forecast the future any better than the concession company and its investors. Most concession agreements do include provisions for early termination, on a basis that is fair to both parties.

Don’t these projects convert free roads into toll roads?

There is not a single known case in the United States of a toll concession project converting a free highway or bridge into a tolled highway or bridge. This allegation appears to be based on either of two kinds of situations. In the first, an existing bridge or highway is worn out and must be replaced—but the only available funding source is toll revenues (e.g., the Jordan Bridge in Virginia). Another situation is when a highway that was originally intended to be upgraded into a freeway (with limited on-ramps and off-ramps, overpasses of local roads, and no traffic lights) cannot be done due to lack of gas-tax revenue and is done instead as a tollway. This is what happened in the suburbs of San Antonio with SH 281. Texas DOT announced that instead of upgrading this signalized arterial into a freeway, the needed upgrade could only be built via toll finance. That set off a major political battle in which opponents claimed that this was “converting a freeway into a toll road”—but it was nothing of the kind. It was building a new toll road instead of building a new freeway.

Aren’t these tolls just another kind of tax?

There is a fundamental difference between a toll and a tax. This question has been litigated extensively in California and Virginia. In 2013 the Virginia Supreme Court ruled unanimously that the tolls planned for a concession project to expand the tunnels under the Elizabeth River in Virginia were not taxes, for three reasons. First, those who pay the toll receive a specific benefit not available to those who don’t pay. Second, drivers have a choice of other ways to cross the river (though maybe not quite as convenient), so paying the tolls is a choice. Third, the tolls are collected solely to fund the tunnels project, not to provide general revenues to any unit of government. There are some cases in which government toll agencies divert toll revenues to pay for other things—other highways, mass transit, canals, ferries, economic development. In fairness, the diverted toll monies are essentially taxes. The projects they are used for should be paid for by all taxpayers, not just those who use toll roads and bridges. Fortunately, this kind of diversion is not found in toll concessions.

Why should we let foreign companies control our highways?

Concession companies do not control highways. They are regulated by several hundred pages of a detailed concession agreement. In these still-early days of U.S. toll concessions most of the companies have been joint ventures that include one or more non-U.S. company. There is a good reason for this. The United States, until recently, has had no private-sector toll road industry—so nearly all the experience and expertise is from countries that have such industries. Australia, France, Italy, Spain, and Portugal are among the leading countries with well-established toll road industries. Companies with long track records in those countries have therefore been key players in the start-up of toll concessions in America. Much of the financing also reflects overseas investors, especially from Australia, Canada, and France, but in recent years many U.S.-based infrastructure investment funds and pension funds have become important financiers of toll concessions. Major U.S. engineering and construction companies increasingly team up with overseas toll companies, so the industry will gradually take on a more home-grown character.

Don’t toll-concession highways cost a lot more to build than state-built highways?

Wild claims have been made that toll concession highways cost two or three times as much as ordinary highways. There is no factual basis for such claims. Installing state-of-the-art all-electronic tolling systems adds a few percentage points to the cost of a tolled highway. As noted earlier, a tolled highway is generally built more durably than a “free” highway, because doing so results in significantly lower maintenance costs over 50-odd years, minimizing life-cycle costs, not initial construction costs. So a toll concession project might cost 10% more to construct than a non-tolled highway—but nothing like two or three times as much. The value proposition here is that in exchange for a slightly higher initial cost, the highway will have significantly lower life-cycle costs, and taxpayers will be shielded from any cost overruns or revenue shortfalls.

Why not have legislators vote yes or no on each PPP agreement?

This has been proposed by opponents of toll concessions, and also by well-meaning legislators. In fact, such a provision has been included in several state PPP enabling statutes, with the result that no PPP projects were ever proposed in those states—until after the law was changed. The reason for this is the following. The pre-qualified groups that bid for such projects must invest large sums of money to analyze potential traffic and revenue, estimate the cost to design and build the project, estimate ongoing operating and maintenance costs, etc. The winning team must then spend many months negotiating the numerous provisions that constitute the concession agreement. The state DOT likewise invests its own senior staff time plus the expensive time of its legal and financial advisors. After all of that time and expense, to have elected officials either veto the project or change the terms of the deal (which may make it impossible to finance) creates a large risk that all of the companies’ and the DOT’s time and money will have been wasted. Companies faced with that kind of risk can take their expertise to other states and other countries that provide a PPP-friendly situation. The enabling legislation should spell out the general terms and conditions under which PPP concessions can be used by the state DOT, but leave the specifics of each competition and the negotiation of each agreement to the DOT and its legal and financial advisors.

Don’t unions oppose PPPs such as toll concessions?

At this early stage of U.S. toll concessions, there is no overall labor union position of this subject. As a broad generalization, building trades unions are generally favorable to toll concessions, which they view correctly as expanding the amount of highway construction work that will take place. Public employee unions that work for state DOTs (as in California) generally oppose toll concessions (and even design-build), because they view these procurement methods as outsourcing jobs (such as project design) that they believe should be done by government employees. Ironically, U.S. public-sector employee pension funds have begun seriously investing in PPP infrastructure, both here and overseas. Some of the largest ones (e.g., CalPERS) now have specialized staff that research PPP projects and recommend direct investment in specific projects (e.g., London Gatwick Airport and the Indiana Toll Road).

The post Toll Concession Public Private Partnerships: Frequently Asked Questions appeared first on Reason Foundation.

What is a PPP?

A public-private partnership is a contractual agreement between a government agency and one or more private firms to carry out a project that is traditionally accomplished by government. For PPPs in infrastructure, such as highways, the types of PPP include (1) DB (design-build), in which a single integrated team does both the design and construction of the project, (2) DBOM (design-build-operate-maintain), in which a consortium of companies handles design, construction, and ongoing operations and maintenance of the facility for a period of years in exchange for annual payments from the state, and (3) DBFOM (design-build-finance-operate-maintain), in which a consortium is responsible for financing the project as well as the other tasks. These are all departures from traditional DBB (design-bid-build), in which the state first does (or contracts for) the design and then goes out to bid for a construction contract. Under DBB, selection of the contractor is based solely on the lowest cost to construct, ignoring the cost of decades of maintenance, which can be reduced by a more robust (but slightly more expensive) design.

What is a toll concession PPP?

A toll concession is a DBFOM highway contract in which the principal funding source is tolls charged to users of the highway project. The projected toll revenue stream is used to support long-term revenue bonds, in addition to covering operation and maintenance costs of the project. In a toll concession, the consortium that wins the right to do the project takes on the risks of (a) construction cost overruns, (b) late completion, and (c) inadequate traffic and revenue. Those risks would otherwise be borne by the government (and hence, the taxpayers).

Aren’t toll concessions a form of crony capitalism? After all, smaller firms are excluded from bidding on these projects.

Toll concessions are used mostly for major projects (sometimes called mega-projects). Government seeks to reduce the odds that the project will turn out to be a boondoggle, due to large cost overruns or insufficient traffic and revenue. Therefore, standard practice worldwide is to do the competition in two stages. In the first stage, any firm or set of firms may submit its qualifications to do projects of this size and complexity. A key aspect of being qualified is having prior experience successfully carrying out DBFOM projects. An expert review board then selects the best-qualified three to five teams and invites them to bid, as stage two. Because preparing detailed proposals takes considerable time and money, it makes sense not to have a dozen firms invest that kind of time and money with only a small chance of winning. Both stages involve objective criteria.

Why aren’t toll concessions awarded solely on who submits the lowest-cost proposal?

In a toll concession, the winning team is responsible not only to finance and build the project but also to maintain it for 35 to 70 years. So the sensible thing to minimize is not the initial cost but the life-cycle cost. Proper maintenance over the life of the concession can cost several times as much as the initial construction cost. It is penny-wise and pound-foolish to build a major highway as cheaply as possible if this will mean significantly higher maintenance costs over its 50-year design life. But that is what often happens with typical construction-only highway (DBB) contracts, awarded based only on lowest initial construction cost.

Doesn’t most of the funding in these projects come from government?

No. Like most other large infrastructure (railroads, pipelines, electric utilities), toll concession companies finance these projects with a mixture of debt and equity. Equity is cash they put directly into the project (like the down payment on a home), typically around 20% in toll concessions. The debt may be a mix of revenue bonds and bank loans (analogous to the mortgage on a home). In some cases subordinated loans from the Federal Highway Administration are also used, under a program called TIFIA, enacted by Congress in 1998 to encourage PPP infrastructure. Toll revenue is intended to repay all the debt providers and to realize a return on the company’s equity investment. In some toll concession mega-projects, the state DOT has imposed many costly requirements that make the total project cost more than the projected toll revenues can cover. In those cases, the state DOT may contribute 15 to 30% of the project budget, often with an agreement to share in the toll revenues if the project does better than forecast.

Don’t the companies doing toll concessions get guaranteed profits?

No. A key feature of toll concessions is the transfer of major risks from taxpayers to the investors (the providers of debt and equity). In traditional highway construction-only projects (like the notorious Big Dig in Boston), contractors often bid low and later propose numerous “change orders” during construction, which can increase the cost well beyond the amount of their initial bid. That cannot happen in a toll concession, because the construction cost overrun risk has been taken on by the company. The same is true of the traffic and revenue risk. The only way a concession company can make a profit is if it keeps a lid on construction and operating costs and if its traffic and revenues end up equaling or exceeding what it projected in its financial model.

What happens if a toll concession project goes bankrupt? Do taxpayers bail it out?

In the two decades or so in which toll concessions have been used in the United States and Australia, four of the 22 U.S. projects have gone bankrupt, as have four of 16 Australian projects. In none of these cases did taxpayers bail out the investors. Typically, the equity providers lose their entire investment, and the debt providers negotiate reduced payments (referred to as a “haircut”). The lenders usually have the right to auction off the remaining term of the concession to another company, which must agree to the provisions of the original concession agreement. The highway in question remains in operation during and after the bankruptcy.

What about TIFIA loans? Don’t federal taxpayers end up taking a loss on those in a bankruptcy?

Thus far, only two TIFIA loans for toll concession projects have experienced problems. The South Bay Expressway in San Diego filed for bankruptcy in 2010, due to insufficient traffic and toll revenue. A 2011 report from the Congressional Budget Office put TIFIA’s potential loss at $72 million. Subsequently, however, the lenders sold the Expressway to the San Diego Association of Governments (which got a nearly brand-new toll road for 44% of its original cost). Under the revised financing deal, TIFIA is getting a higher interest rate on its investment-grade debt (paid for out of toll revenues), and the Federal Highway Administration now finds that “the TIFIA program is positioned to receive 100% of its original loan balance.” In the case of the Pocahontas Parkway in Virginia, the lenders assumed ownership of the toll road after revenues fell short of projections. The lenders, including TIFIA, could choose to remain in the project and seek to recover the full principal over the life of the concession or sell their interest in the project. After one lender sold its loan at a percentage of face value, TIFIA opted to do likewise, selling its loan at 41.5% of face value. That loss-TIFIA’s only one thus far-amounted to just 1.1% of the TIFIA program’s total loans (as of 2014). Of these, 39 loans are active and nine have been repaid thus far.

Don’t these projects amount to double taxation-paying tolls and gas taxes for the same project?

Using a toll road is a voluntary choice; people only use it if they value the improved travel as worth the cost of the toll. If the state DOT has provided part of the “equity” in the project (because it would not be viable based solely on toll revenue), then the state DOT does use gas tax money, because that is usually its only source of highway funding. In those cases, it requires both gas taxes and toll revenues to make the project possible. Some toll concession projects have been financed 100% by toll revenues-such as the 91 Express Lanes in Orange County, California and the Jordan Bridge in Chesapeake, Virginia. In those cases the toll payers should, in principle, receive rebates on the fuel taxes they pay for the miles driven on the tolled projects, but current law generally does not provide for that. Rebates have long been available on the New York Thruway and the Massachusetts Turnpike, two state-run toll roads. In the future, if worn-out and currently non-tolled highways are replaced (i.e., rebuilt and modernized) via toll concessions, highway users should insist that those new tolls replace, rather than supplement, existing gas taxes. That is not hard to do with today’s all-electronic tolling technology.

Why should for-profit companies get tax-exempt loans from the government?

Congress in 2005 decided that state toll agencies and toll concession companies are in the same business of providing tolled infrastructure, and that both should have access to the same kind of revenue bonds. Since state toll agencies have long relied on tax-exempt bonds, Congress authorized tax-exempt status for “private activity bonds” (PABs) used for highway and transit projects with a dedicated revenue stream. These are not “government loans,” however. By law, they must be issued by a state agency on behalf of the PPP concession company, but that company is solely responsible for paying off the loans. There is no recourse to the taxpayers, any more than there is with any other revenue bond that is secured solely by the revenues generated by a project.

Won’t the private concession company skimp on maintenance, so as to increase its profits?

Skimping on maintenance is a bad idea, since it will lead to poor pavement quality and unsightly appearance, both of which make the tolled highway less attractive to paying customers. In addition, the bond covenants, which the concession company must agree to in order to sell the revenue bonds, require proper ongoing maintenance precisely to keep the road in better shape than alternative “free” highways. And the concession agreement with the state DOT also provides for enforceable maintenance standards.

Do governments grant toll concession projects a monopoly?

There are very few situations in which there is only one road or highway between point A and point B. Some people object when a project once planned as a “free” highway is developed as a toll road instead because the state DOT does not have the money to build it using gas tax revenues. But that road is not a monopoly; there are almost always alternatives to using the toll road. (In Texas standard practice is to include multi-lane frontage roads on either side of a toll road.) Concerns have been raised about provisions in many (but not all) concession agreements that provide some limits on new “free” highways being added parallel to the toll road. When the first toll concession project (the 91 Express Lanes in California) was being financed, the debt providers insisted on protection for the toll revenue stream via the inclusion of a “non-compete” provision in the concession agreement, under which the state DOT agreed not to build any more non-tolled lanes in that corridor. That turned out to be overkill. Current practice is that the concession company agrees to accept all highway and transit projects in the current long-range transportation plan of the state or metro area. For any other projects that might be proposed and implemented later, if the company can prove that X% of its traffic diverts to the new free road, it is entitled to some degree of compensation for lost toll revenue.

Doesn’t the long term of these agreements conflict with government sovereignty and sound transportation management?

Some have urged limiting toll concession agreements to 25 or 30 years, since nobody can know the future. That lack of a crystal ball is as true of governments as it is of concession companies. In deciding to use a toll concession to provide a needed new (or replacement) highway or bridge, the state DOT or the local Metropolitan Planning Organization (MPO) must weigh the trade-offs involved. In many cases, if they don’t use a toll concession, the needed project might not be fundable for 20 years or more. If they do use a concession approach, the term of the agreement must be long enough to provide the possibility of the company earning a return on its investment-which can range between 35 and 70 years, depending on the project. The concession company takes many risks since it cannot know the long-term future of transportation-autonomous vehicles, major changes in where people choose to live and work, etc. The government also takes the risk that the project might turn out to be of low value many decades hence, but it cannot forecast the future any better than the concession company and its investors. Most concession agreements do include provisions for early termination, on a basis that is fair to both parties. That is probably the least-bad way to deal with the inherent uncertainties of the future.

Don’t these projects convert free roads into toll roads?

There is not a single known case in the United States of a toll concession project converting a free highway or bridge into a tolled highway or bridge. This allegation appears to be based on either of two kinds of situations. In the first, an existing bridge or highway is worn out and must be replaced-but the only available funding source is toll revenues (e.g., the Jordan Bridge in Virginia). Another situation is when a highway that was originally intended to be upgraded into a freeway (with limited on-ramps and off-ramps, overpasses of local roads and no traffic lights) cannot be done due to lack of gas-tax revenue and is done instead as a tollway. This is what happened in the suburbs of San Antonio with SH 281. Texas DOT announced that instead of upgrading this signalized arterial into a freeway, the needed upgrade could only be built via toll finance. That set off a major political battle in which opponents claimed that this was “converting a freeway into a toll road”-but it was nothing of the kind.

Aren’t these tolls just another kind of tax?

There is a fundamental difference between a toll and a tax. This question has been litigated extensively in California and Virginia. In 2013 the Virginia Supreme Court ruled that the tolls planned for a concession project to expand the tunnels under the Elizabeth River in Virginia were not taxes, for three reasons. First, those who pay the toll receive a specific benefit not available to those who don’t pay. Second, drivers have a choice of other ways to cross the river (though maybe not quite as convenient), so paying the tolls is a choice. Third, the tolls are collected solely to fund the tunnels project, not to provide general revenues to any unit of government. There are some cases in which government toll agencies divert toll revenues to pay for other things-other highways, mass transit, canals, ferries, economic development, etc. In fairness, the diverted toll monies are essentially taxes. The projects they are used for should be paid for by all highway users or all taxpayers, not just those who use toll roads and bridges. Fortunately, this kind of diversion is not found in toll concessions.

Why should we let foreign companies control our highways?

Concession companies do not control highways. The several hundred pages of a long-term toll concession agreement do not cede “control” to the company. Via the agreement, it must comply with a wide array of state and federal requirements, and most such agreements include limits on the toll rates that can be charged. The agreements also provide termination clauses, both for cause (repeated failure to abide by the terms and requirements) and for convenience (if government policy changes-but in this case, the government must compensate the company fairly). It is true that in these early days of U.S. toll concessions (nearly all have been financed only since the early years of the 21st century), most concession companies have been joint ventures that have included one or more non-U.S. companies. There is a good reason for this. The United States, until recently, has had no private-sector toll road industry-so nearly all the experience and expertise is from countries that have such industries. Australia, France, Italy, Spain and Portugal are among the leading countries with well-established toll road industries. Companies with long track records in those countries have therefore been key players in the start-up of toll concessions in America. Much of the financing also reflects overseas investors, especially from Australia, Canada and France, but in recent years many U.S.-based infrastructure investment funds have become important financiers of toll concessions. Major U.S. engineering and construction companies increasingly team up with overseas toll companies and investment funds, so the industry will gradually take on a more home-grown character as experience increases.

Don’t toll-concession highways cost a lot more to build than state-built highways?

Wild claims have been made that toll concession highways cost two or three times as much as ordinary highways. There is no factual basis for such claims. Installing state-of-the-art all-electronic tolling systems adds a few percentage points to the cost of a tolled highway. As noted earlier, a tolled highway is generally built more durably than a “free” highway, because doing so results in significantly lower maintenance costs over 50-odd years, minimizing life-cycle costs, not initial construction costs. So a toll concession project might cost 15% more to construct than a non-tolled highway-but nothing like two or three times as much. The value proposition here is that in exchange for a slightly higher initial cost, the highway will have significantly lower life-cycle costs, and taxpayers will be shielded from any cost overruns or revenue shortfalls. In addition, the needed bridge or highway may get built decades sooner via toll funding, compared with traditional DBB procurement based on gas tax money.

Why not have legislators vote yes or no on each PPP agreement?

This has been proposed by opponents of toll concessions, and also by well-meaning legislators. In fact, such a provision has been included in several state PPP-enabling statutes, with the result that no PPP projects were ever proposed in those states-until after the law was changed. The reason for this, especially for toll concessions (which are large, complex projects), is the following. The pre-qualified consortia that bid for such a project must invest large sums of money in analyzing potential traffic and revenue, estimating the cost to design and build the project, estimating maintenance costs, etc. The winning team must then spend many months negotiating the numerous provisions that constitute the concession agreement. The state DOT likewise invests its own senior staff time plus the expensive time of its legal and financial advisors. After all of that time and expense, to have elected officials either veto the project or change the terms of the deal (which may make it impossible to finance) creates a large risk that all of the companies’ and the DOT’s time and money will have been wasted. Companies faced with that kind of risk can take their expertise to other states and other countries that provide a PPP-friendly situation. The enabling legislation should spell out the general terms and conditions under which PPP concessions can be used by the state DOT, but leave the specifics of each competition and the negotiation of each agreement to the DOT and its legal and financial advisors.

Don’t unions oppose PPPs such as toll concessions?

At this early stage in the history of U.S. toll concessions, there is no overall labor union position of this subject. As a broad generalization, building-trades unions are generally favorable to toll concessions, which they view correctly as expanding the amount of highway construction work that will take place. Public employee unions that work for state DOTs (as in California) generally oppose toll concessions (and even design-build), because they view these procurement methods as outsourcing jobs (such as project design) that they believe should be done only by government employees. Ironically, U.S. public-sector employee pension funds have begun seriously investing in PPP infrastructure, both here and overseas. Some of the largest ones (e.g., CalPERS) now have specialized staff that research PPP projects and recommend direct investment in specific projects (e.g., privatized London Gatwick Airport). Smaller pension funds more commonly place a portion of their investment portfolio with one or more global infrastructure investment funds, taking advantage of those funds’ expertise and their diversified portfolios of projects.

Attachments

• Toll Concession PPPs: Frequently Asked Questions

The post Toll Concession PPPs: Frequently Asked Questions appeared first on Reason Foundation.

Q: Why should the Endangered Species Act be reformed when we constantly hear how successful it is?

A: There is strong and increasing evidence the Endangered Species Act is causing widespread harm to the species it is supposed to protect-to the extent the Act may be doing more harm than good. The Act makes otherwise normal and legal forms of land and resource use illegal, such as farming, home building and cutting timber. The Endangered Species Act’s severe penalties-$100,000 and/or 1 year in jail for harming a single species or even unoccupied habitat that is deemed suitable-turn species in to liabilities. As a result, landowners seek to reduce their liabilities in a number of ways.

(1) The most significant is what is known as the “scorched earth” strategy, which consists of destroying and degrading habitat in order to make it unsuitable for endangered species. This is the most damaging because habitat destruction is the leading cause of imperilment for species in the U.S.[1]

(2) Habitat can also be rendered unsuitable for endangered species through benign neglect because the habitat for many species requires active management. As many as 84% of species listed under the Endangered Species Act are what is known as “conservation reliant,” which means they will depend indefinitely on a variety of conservation activities to ensure their continued survival because the threats to these species are impossible to eliminate.[2]

(3) It appears that many landowners who harbor endangered species, or whose land contains likely habitat for endangered species, refuse to allow regulatory authorities on their property for fear of triggering land and resource use restrictions. Yet monitoring is essential to wildlife conservation; it allows people to learn more about species, which provides insights into how to conserve them more effectively. Monitoring is especially important for endangered species because their small populations are more vulnerable to the effects of anthropogenic and natural habitat destruction and degradation.[3] Without monitoring, species, especially vulnerable species, have decreased chances of survival.

(4) Many landowners keep quiet out of fear, hoping regulatory authorities won’t look for rare species on their property and restrict the use of their land. This appears to be a common and widespread response by landowners.

(5) Some landowners engage in the “shoot, shovel, and shut-up” solution-seeking to rid their land of endangered species. While this is sensationalistic and receives a lot of publicity, it is likely relatively uncommon and the least significant of all these problems.

In all these ways, the Endangered Species Act’s penalty-based approach actively discourages conservation and monitoring and encourages the elimination of endangered species and their habitat. Not only are imperiled species harmed by Endangered Species Act-induced habitat destruction but so are many more common species that depend on the same habitat.

Q: What is the importance of private lands to endangered species?

A: Private lands are the linchpin for endangered species and successful endangered species conservation. Almost 80% of endangered species depended on private land for all or some of their habitat, compared to 50% for federal land. In addition, almost two-thirds of endangered species (62%), have 81-100% of their habitat on nonfederal land. And more than one-third of species (37%) have all of their habitat on nonfederal land.[4] Private lands are also very important in states with large amounts of federal land because private lands contain most of the well-watered land, which is usually the most valuable to all wildlife, endangered and common. For example, 40% of the sage grouse’s range is privately owned, but private lands contain almost all of the critically important moist habitat, such as wet meadows and streamsides, that chicks and adults rely on in spring and summer.

Q: What evidence is there that the Endangered Species Act is causing harm to species?

A: There is anecdotal and empirical evidence. Much of the anecdotal evidence is from a number of the Act’s most prominent advocates. There is also a growing body of scholarly, empirical evidence.

According to Michael Bean, then with the Environmental Defense Fund and currently the Interior Department, and widely recognized as one of the foremost authorities on the Endangered Species Act:

“There is, however, increasing evidence that at least some private landowners are actively managing their land so as to avoid potential endangered species problems…Now it’s important to recognize that all of these actions that landowners are either taking or threatening to take are not the result of malice toward the red-cockaded woodpecker, not the result of malice toward the environment. Rather, they’re fairly rational decisions motivated by a desire to avoid potentially significant economic constraints. In short, they’re really nothing more than a predictable response to the familiar perverse incentives that sometimes accompany regulatory programs.”[5]

Similarly, several academics who continue strongly to support the Endangered Species Act, including Reed Noss, who is well-known in biodiversity conservation circles for his unstinting support of the Act, made the following observation:

“[T]he regulatory approach to conserving endangered species and diminishing habitats has created anti-conservation sentiment among many private landowners who view endangered species as economic liabilities…Landowners fear a decline in value of their properties because the ESA restricts future land-use options where threatened or endangered species are found but makes no provisions for compensation. Consequently, endangered species are perceived by many landowners as a financial liability, resulting in anti-conservation incentives because maintaining high-quality habitats that harbor or attract endangered species would represent a gamble against loss of future economic opportunities.”[6]

In the 2000s, as the anecdotal evidence that the Endangered Species Act was causing significant harm to species mounted and became more widely known, the issue began to attract the attention of academic researchers. The red-cockaded woodpecker referenced by Michael Bean, which lives in the pine forests of the southern U.S., has been the focus of a number of research projects that found three responses from forest landowners to avoid the Endangered Species Act’s punitive land-use restrictions: harvesting timber prematurely because the woodpecker prefers mature pine trees for nest cavities;[7] an increased likelihood to harvest timber in proximity to occupied woodpecker habitat, as well as clear-cut, rather than selectively cut timber;[8] and, after land has been logged, a decreased likelihood landowners will reforest the land if it is in proximity to occupied red-cockaded woodpecker habitat.[9]

Researchers surveyed Colorado landowners in the habitat for the Preble’s meadow jumping mouse about their attitudes toward the mouse. The results are sobering: 26% of the land area surveyed was being managed to make it inhospitable to the mouse, and most landowners would not let their land be surveyed for the mouse.[10]

A study by several economists found that in Tucson, Arizona the land proposed to be designated as critical habitat for the cactus ferruginous pygmy-owl was developed one year earlier than habitat out of the critical habitat zone. There is “the distinct possibility the Endangered Species Act is actually endangering, rather than protecting, species” surmised the study’s authors.[11]

The Endangered Species Act’s penalties so effectively undermine the incentives for private landowners to conserve species that the ratio of declining to improving species on private land is an abysmal 9 to 1, whereas on federal lands the ratio is a much better 1.5 to 1.[12]

Q: The Endangered Species Act is very powerful so why not use this power to force landowners to obey the law? After all, “sticks” are often needed as well as “carrots” to change behavior.

A: While there is a wide range of views on forcing people to submit to the Endangered Species Act, landowners have an enormous advantage if they want to break or evade the law, or refuse to participate in conserving endangered species.

(1) Most endangered species and their habitat exist on private land, which private landowners can refuse to allow regulatory authorities to access.

(2) Most endangered species live in rural regions that are relatively sparsely populated and therefore have fewer “eyes” to detect if land contains endangered species or suitable habitat, and if landowners are engaging in practices detrimental to endangered species.

(3) It is simply impossible for enforcers and supporters of the Endangered Species Act to patrol this country’s hundreds of millions of acres of endangered species habitat. Short of turning the U.S. into a police state, private landowners will always be able lawfully to make habitat unsuitable for species that are already listed or proposed for listing, and most will be able to break the law without detection by destroying species and habitat.

Q: Efforts to reform the Endangered Species Act have been tried for the past 22 years. Why is this issue urgent now?

A: Following a 2011 lawsuit settlement between the U.S. Fish and Wildlife Service and a couple of environmental pressure groups, the Service is obligated to consider for listing over 750 species by 2018. Of these species, 251 must be final listing decisions, with the remaining 506 likely to have listing decisions made after 2018. All told, these lawsuit settlement species will increase the number of U.S. endangered species by about 50%, which will create increasing conflicts between the federal government, activist groups that used the Endangered Species Act to push for more land and resource use restrictions, landowners, states, municipalities and businesses. Furthermore, many of these lawsuit settlement species are in regions of the country that have been relatively untouched by the Endangered Species Act (e.g., Midwest, Great Plains, Inter-mountain West, and large portions of the South), and are aquatic species, which means water, both quantity and quality, is likely to be impacted.

Q: How can the stalemate over the Endangered Species Act be broken?

A: The Endangered Species Act’s funding authorization expired in October 1992. Since then the Act has been kept going by annual congressional appropriations. But proponents and opponents of the Act have fought themselves to a stalemate over reauthorization. In order to break the stalemate, each side must do something it has been reluctant or unwilling to do: take seriously the issues the other side cares about and then address these issues with concrete legislative action. Opponents must acknowledge and respect that endangered species conservation and species extinction are legitimate issues about which proponents are genuinely concerned. By the same token, proponents must recognize and respect opponents’ concerns about the costs the Act imposes on landowners, various levels of government and economic activity.

Q: What is the Endangered Species Reserve Program?

A: The Endangered Species Reserve Program is a new approach to conserving endangered species based on the successful and popular Conservation Reserve Program run by the U.S. Department of Agriculture. Like the Conservation Reserve Program, the Endangered Species Reserve Program is based on working cooperatively with landowners who harbor endangered species, including providing compensation, instead of the Endangered Species Act’s approach, which punishes landowners who have endangered species on their property.

Q: How would the Endangered Species Reserve Program work in practice?

A: The Endangered Species Reserve Program (ESRP) would essentially function as a contract program like the Conservation Reserve Program. The ESRP would compensate landowners for periods of around 10-15 years in exchange for agreeing to conserve endangered species habitat. Landowners in the Conservation Reserve Program receive annual payments in exchange for signing 10-15 year contracts to remove from production land deemed “environmentally sensitive.” There’s a reason why so many landowners willingly contact their local office of the Department of Agriculture but not the Fish and Wildlife Service. Landowners are happy to enroll their property in the Conservation Reserve Program because they are not punished and receive cash. By contrast, endangered species bring heartache and reduced land values. Currently there are approximately 26 million acres, in more than 375,000 farms, enrolled in the Conservation Reserve Program at the cost of $64 per acre.[13] In the USDA’s 2014 budget, $6.2 billion is allocated to conservation, out of a total budget of $146 billion, of which approximately $2.2 billion (36% of the amount spent on conservation) is for the CRP.

The Endangered Species Reserve Program would be much more flexible than the current approach. There is a wide range of innovative proposals for conserving endangered species, such as rewarding landowners for producing endangered species, or for providing cash bonuses to groups of landowners who manage contiguous land parcels for the benefit of endangered species. The ESRP would function best by being flexible enough to allow for a wide range of approaches to compensate landowners. Flexibility is also needed because ecological conditions can change over time and because landowners strongly dislike initiatives that lock them in to long-term or permanent arrangements, such as perpetual conservation easements.

The aspect of the Endangered Species Reserve Program that may be hardest for some to grasp, especially those steeped in the intricacies of the Endangered Species Act, is its simplicity. Instead of micro-managing issues as currently occurs under the Endangered Species Act, such as the definition of species’ distinct population segments or what constitutes “harm” to species, the Endangered Species Reserve Program would not specify these issues. Rather, it would employ a system to score habitat for endangered species, much like the Environmental Benefits Index used under the Conservation Reserve Program.[14] Such a scoring system would incorporate both the biological value and the financial cost of conserving endangered species habitat to determine the most efficient and cost-effective expenditures.

Q: What evidence is there that the Endangered Species Reserve Program would work?

A: There are four main lines of evidence:

(1) Statements from experts and proponents of the Endangered Species Act. Mollie Beattie, while director of the Fish and Wildlife Service, in an extraordinary moment of candor, compared the Endangered Species Act to the U.S. Department of Agriculture’s Conservation Reserve Program (CRP) in Beef Today, a trade publication of the cattle industry:

“I think this [the CRP] really, really opened people’s eyes to what could be achieved in a basically non-regulatory, voluntary program. If there were an incentive to make the best habitat [for endangered species], we’d be miles ahead.”[15]

Michael Bean, and his then-colleagues at the Environmental Defense Fund-Robert Bonnie, Tim Male and Tim Searchinger-understood very well this two-step process of first removing disincentives and then adding incentives. According to them:

“Removing perverse incentives is a necessary first step to effective conservation. Ensuring that private stewardship is rewarded and that it is made easy by both federal and state laws is also an important part of encouraging landowners to manage their lands in ways that conserve natural ecosystems.”[16]

(2) America has a long and proud tradition of private conservation and stewardship that is still going strong today. Americans are very willing to conserve wildlife so long as they are not punished for doing so. The plains bison was saved from extinction by a small number of ranchers rounding up the few remaining bison and fencing them in. An authoritative study published in the journal Biological Conservation in 2007 notes that “The independent actions of private citizens, taken long before national governments reacted, were responsible for saving the plains bison.”[17] This tradition of private conservation is still going strong today and can be seen in countless examples, such as landowners putting up nest boxes for bluebirds and wood ducks, which was initially motivated in the early-to-mid-1900s by concern for their declining populations. Sadly, there has not been a similar widespread effort to put up nest boxes for spotted owls, despite that they readily use them, because the Endangered Species Act’s penalties discourage landowners from doing so.

(3) There are a number of innovative approaches to endangered species conservation, one of which is called the Recovery Credit System. The the state of Texas developed the program in the mid-2000s and modeled it on the U.S. Department of Agriculture’s Conservation Reserve Program. Under this system, landowners mitigate potentially detrimental effects of their own land-use practices on endangered species habitat by purchasing Recovery Credits from the private owners of nearby land, who agree to improve and conserve similar habitat. In practice, Recovery Credits are purchased through a low-bid (or “reverse”) auction, which drives down costs. The Recovery Credit System is supported by a very robust and scientifically valid management process that ensures endangered species benefit, landowners’ concerns are met, and a wide range of stakeholders are involved.[18] A key aspect of the pilot program was landowner confidentiality because of the fear and very real possibility that the U.S. Fish and Wildlife Service could use information about landowners’ properties to invoke the Endangered Species Act’s feared land-use restrictions.[19]

The success of the Recovery Credit System on Fort Hood and surrounding private land led to its application and proposed application elsewhere, most notably for the dunes sagebrush lizard that lives in the Permian Basin of western Texas and eastern New Mexico, an oil-rich region that is responsible for 15% of U.S. oil production. In 2012, when the Fish and Wildlife Service decided not to list the lizard, the conservation plan developed by stakeholders, which was based in large part on the Recovery Credit System, was cited by Interior Department as the key reason not to list.[20]

The Recovery Credit System proved so successful that it has been adopted for a number of other species. It has also been implemented for the Utah Prairie dog and is part of proposed conservation initiatives for a number of other species, including the entire range of the golden-cheeked warbler and black-capped vireo in Texas,[21] the lesser prairie chicken, which was listed in March 2014, and the greater sage grouse, which may be proposed to be listed in the fall of 2015.[22]

(4) Over the past decade a growing number of surveys of landowners have shown what factors affect their willingness to conserve endangered species. These surveys show that:

• Landowners have significant concerns about risks to their property values and livelihoods associated with protecting endangered species.[23]
• Financial compensation is very important. For the most part, landowners think they should be compensated for conserving species that are endangered or close to being endangered. In many cases compensation increases landowners’ willingness to conserve endangered species.[24]
• Assurances against future regulation can increase landowners’ willingness to conserve endangered species.[25]
• Landowners prefer shorter (5-10 year) contracts and easements to conserve endangered species.[26]
• Landowners do not like long-term contracts or permanent conservation easements.[27] This strongly suggests that landowners don’t like many of the Habitat Conservation Plans under the ESA, which run for long time periods. Ben Cone’s and the Murray Pacific Corporation’s HCPs are for 100 years.
• Independence and autonomy are very important values to landowners, and these values exert a strong influence over their willingness to become involved in conservation initiatives in general.[28]
• Landowners strongly prefer to have some management and decision-making authority if they are involved in a program to conserve wildlife and very much object when they do not.[29]
• Many landowners have a strong sense of stewardship.[30]
• Landowners are more likely to join incentive programs if they are approached by trusted intermediaries, instead of public officials from regulatory agencies.[31]

Q: Why would the Endangered Species Reserve Program appeal to those interested in conserving endangered species?

A: There are five reasons:

(1) It would eliminate the penalties that are likely causing more harm than good, especially on private lands.

(2) It would eliminate the wasteful lawsuits that have increasingly driven the process by which the Endangered Species Act is administered.

(3) The Endangered Species Reserve Program would encourage the Fish and Wildlife Service and National Marine Fisheries Service to make more rational decisions about which species to protect, instead of being required to respond constantly to lawsuits from activist groups.

(4) The Endangered Species Reserve Program would most likely result in tens or even hundreds of landowners emerging from the shadows and volunteering that they have endangered species on their land. If landowners were free from the fear of being clobbered by the Endangered Species Act, then the most significant barrier standing in the way of a more successful approach to conserving endangered species would be removed.

(5) From a political standpoint, the Endangered Species Reserve Program is very feasible because there are landowners in every state but Arizona enrolled in the Conservation Reserve Program. As a result, many members of Congress, as well as state legislators, already have constituents enrolled in the program and therefore can easily understand applying a Conservation Reserve Program approach to endangered species.

Q: How would the Endangered Species Reserve Program be funded:

A: There are a number of ways this can be done that do not require additional spending and can even save money by being more cost-effective, such as:

(1) Cutting funding to some of the many existing programs that currently undermine species conservation, including numerous energy and agricultural subsidies. Politically, there is broad support for cutting agricultural subsidies.

(2) Dedicating the Land and Water Conservation Fund, a federal program established by Congress in 1965 that currently has a $900 million spending limit, to endangered species conservation. However, this funding would be contingent on it going toward rental contracts, such as in the Conservation Reserve Program, and not land acquisition, and the removal of the ESA’s penalties.

Q: Is this study saying the same thing others have been saying for years, which is that we need to add incentives though initiatives such as Safe Harbors, Candidate Conservation Agreements, No Surprises and Habitat Conservation Plans?

A: This study is saying that the disincentives, which cause the ESA to be counterproductive, first need be removed, then incentives need to be added. All of these other reform initiatives have limited effectiveness because they do not remove the penalties. Sprinkling a few incentives on top of the Endangered Species Act’s substantial penalties will not fundamentally reform the Act, which is what is needed if species conservation is to be substantially more successful. A number of legal scholars have made the point that these administrative reforms can only go so far to ameliorate the Endangered Species Act’s anti-conservation incentives, while others have pointed out that these reforms, because they are administrative, are relatively insecure.

Q: Isn’t this study just a rehash of what opponents of the Endangered Species Act have been selling for decades, which is that property rights and economic activity are more important than conserving endangered species?

A: This study shows how the Endangered Species Act, when it is threatening to landowners, will not successfully achieve its goal of conserving species. Therefore, the key is to remove the penalties that threaten landowners so the Endangered Species Act can more effectively conserve species.

Q: Why should landowners be compensated for following the law? After all, people have to follow all sorts of laws. Why should landowners be rewarded for what they should be doing?

A: When the government wants to convert private land for a public good, such as a highway or military base, it pays landowners the market value for the land taken. Yet in return for harboring rare wildlife, landowners are punished by having their property turned into de facto federal wildlife refuges, but are paid no compensation. William Ruckelshaus, administrator of the Environmental Protection Agency from 1970-1973 and 1983-1985 and widely respected expert on environmental policy, grasps that landowners are treated unequally under the Endangered Species Act and should be compensated:

“If I’m a landowner and someone is running a highway through my land, I may not like it, but at least I’m being compensated for it. If I’m forced to put buffers alongside streams that run through my land in order to protect salmon, sometimes those buffers take a significant amount of my land, and I think they should be compensated for that. If that’s a public good and it’s being asserted against a private property owner, then why shouldn’t the public pay for it the same way they do with a highway? But we don’t.”[32]

Q: What is the practical reason for compensating and not punishing landowners who harbor endangered species?

A: The reality is all across the country endangered species habitat is being destroyed because landowners are not compensated and are punished for harboring these species. As the past 40 years has shown, not compensating landowners, as well as punishing them, is extremely detrimental to endangered species and the conservation of endangered species habitat.

Endnotes

The post Frequently Asked Questions on Endangered Species Act Reform appeared first on Reason Foundation.

Many governors and state DOTs are asking Congress to remove the federal ban on charging tolls on Interstate highways. The President’s transportation budget proposal calls for doing this, for the purpose of reconstructing aging Interstates. Reason Foundation supports this idea in principle, as long as highway users are protected in specific ways. Here are answers to a number of frequently asked questions about this idea.

Since the Interstates have already been paid for via fuel taxes, why should anyone even consider tolls for these highways?

A highway is never “paid for.” As soon as it is built, it begins to break down. With proper maintenance, it can last for its full 50-year design life, after which it needs to be completely rebuilt. Many portions of the Interstate system are already at that stage, and nearly all the rest will need rebuilding within the next 20 years. Rebuilding these vital corridors will cost at least a trillion dollars.[1] But today’s fuel taxes can barely pay for highway maintenance.

Wouldn’t increasing the gas tax be a simpler solution?

Federal and state gas taxes are allocated to dozens of different highway and transit programs, many of them wasteful. In the real world, any gas tax increase large enough to make a dent on Interstate reconstruction would be spread across all existing programs, leaving Interstate modernization short-changed. That’s why we need a new dedicated revenue source to rebuild and modernize the Interstates instead of an increase in gas taxes.

Wouldn’t Interstate tolls be a new tax on driving?

Not if they are implemented as true user fees to replace current fuel taxes. When Congress removes the current federal ban on tolls on the Interstates, it must set conditions for doing so. One key condition would be to avoid making motorists and truckers pay both fuel taxes and tolls for the same Interstate. With electronic tolling, it is easy to provide fuel tax rebates to motorists for the miles driven on tolled highways. Highway user groups should insist on such rebates. (Note: Massachusetts already has a fuel tax rebate system for the Massachusetts Turnpike.)

Politicians have used some toll roads as cash cows to pay for many other things besides the tolled highway. Wouldn’t that also be the case here?

Congress must protect motorists and truckers by requiring that new Interstate toll revenues be used only for the capital and operating costs of the rebuilt Interstates (including debt service on the bonds issued to finance reconstruction). Each state that opts to introduce tolls will also need enabling legislation, so highway users must push hard for similar state restrictions on the uses of the new toll revenue.

How high would the new toll rates be?

If the toll rates are set to cover only the capital and operating costs of the modernized Interstates, our research shows that a 3.5¢/mile toll for cars (and 14¢/mile for heavy trucks) would be sufficient for long-distance Interstates.[2] Urban Interstate toll rates would be somewhat higher.

Wouldn’t a tolled Interstate lead to many cars and trucks diverting to parallel roads to avoid the toll?

Some people won’t pay a toll if there is a free alternative, even if the free road is lower quality (speed, pavement condition, etc.). But how much diversion occurs depends on how high the tolls are. If the tolls can only be used for the capital and operating costs of the tolled highway, the toll rates will be lower than on those current toll roads that divert a lot of revenue to other highways, transit, and even real estate (such as the World Trade Center). Eliminating revenue diversion will significantly reduce traffic diversion.

Toll booths and toll plazas cause long delays and even rear-end collisions. Wouldn’t Interstate tolling only add to congestion and accidents?

Nearly all existing toll roads are phasing out toll booths and toll plazas, replacing them with highway-speed all-electronic tolling. AET uses low-cost transponders on the windshield to electronically debit your prepaid customer account. The E-ZPass system operates in 15 states, and California, Florida, and Texas each have a single statewide electronic tolling system. For newly rebuilt toll-financed Interstates, there would be no toll booths or toll plazas-just high-speed all-electronic tolling.

The trucking industry says collecting tolls eats up 20 to 30% of the revenue just on collection costs. That seems like a wasteful way to go.

Those cost estimates are based on 20th century cash tolling. Today’s newest all-electronic toll systems need only about 5% of the revenue for collection purposes, thanks to the much lower cost of transponder-based tolling.[3] That is in the same ballpark as the cost to collect fuel taxes. Such low-cost transponder tolling is in operation today on newer toll roads in Colorado, Florida, and Texas.

Wouldn’t electronic tolling require a GPS box in every car so the government would track when and where you drive?

Absolutely not. All that’s needed for toll-financed Interstates is state-of-the-art transponder-based tolling, which has been widely accepted in more than 30 states with toll roads and bridges. And toll accounts are operated either by state toll agencies or private firms under long-term contract, not “the government.” Tough privacy laws are needed to protect toll accounts from government snooping.

If I travel between states, wouldn’t I need a whole set of transponders on my windshield?

No. In the 15 E-ZPass states of the Northeast and Midwest, there is complete “interoperability,” so you have one toll account and just one transponder, no matter which of those states you drive in. Florida, Georgia, and North Carolina are working to make their systems compatible with E-ZPass within the next year or so. Kansas, Oklahoma, and Texas are making their systems interoperable. The toll industry is committed to nationwide interoperability by 2016. There is also a start-up company developing a smartphone app that would let you use your phone for electronic tolling nationwide.

Wouldn’t tolls on Interstates benefit the rich and hurt the poor?

Everybody pays for the highways they use. Today, we pay via gas taxes on each gallon we consume. In the future, we will pay per mile driven, ensuring that everyone continues to pay for their use of the roads, regardless of how their car is powered. Wealthier people drive more miles per year than lower-income people, so they would continue to pay more under a toll system, just as they do today under the gas-tax system.

Endnotes

For further information, please consult the following:

Robert W. Poole, Jr. and Adrian Moore, “Ten Reasons Why Per-Mile Tolling Is a Better Highway User Fee than Fuel Taxes,” Policy Brief 114, Reason Foundation, January 2014.

Robert W. Poole, Jr., “Value-Added Tolling: A Better Deal for America’s Highway Users,” Policy Brief 116, Reason Foundation, March 2014.

Attachments

• Frequently Asked Questions on Toll-Financed Interstate Reconstruction (PDF)

The post Frequently Asked Questions on Toll-Financed Interstate Reconstruction appeared first on Reason Foundation.

Motorists and truckers have already paid for the Interstates with their gas taxes. How can you justify charging them tolls?

The Interstates were designed to last 50 years, with proper maintenance. After that, they need to be completely reconstructed. Over a hundred interchanges are huge bottlenecks and need to be replaced. And many corridors need additional lanes to handle current and projected traffic. Our estimate is that this will cost about $1 trillion, and there is no way this can be covered by existing fuel taxes. Tolling is the fairest way to pay for the mega-projects involved in Interstate reconstruction and modernization.

Why not just increase the federal gas tax?

First, there is very little political support for increasing the federal gas tax. And even if there were, it would take an increase of 40 to 50¢/gallon just to do the Interstate reconstruction and modernization. In fact, if there were the political will for an increase of that size, the money would have to be spread over all the dozens of federal highway and transit programs, with only a fraction of it available for the Interstates.

What about just increasing the federal diesel tax, as the trucking industry has proposed?

The trucking industry has proposed such an increase, with the proceeds dedicated to Interstate expansion. A big problem with this is that millions of individuals own diesel cars and pickup trucks, which mostly don’t use the Interstates. They would certainly object to a big increase to benefit trucking companies. Likewise, most local service trucks (dump trucks, tow trucks, cement mixers, etc.) and local buses are diesel-powered, and they, too, would pay the increase but get little or no benefit. It’s not surprising this proposal has gone nowhere in Congress.

Wouldn’t tolling require spending a large fraction of the revenue on collection and enforcement costs?

Old-fashioned cash toll collection in the 20th century was expensive, often using 20-25% of the revenue for collection and enforcement. But our proposal would use 21st century all-electronic tolling (AET), similar to the E-ZPass system now operating in 15 states. Recent research finds that the cost of collection with AET and a streamlined business model requires only about 5% of the toll revenue.

The trucking industry strongly opposes tolls. Won’t they kill this idea?

Our proposal calls for “value-added tolling.” Tolls would not apply until after an Interstate corridor was reconstructed (and widened, if needed). So highway users would be asked to pay for a modern replacement of a worn-out corridor. And in corridors with heavy truck traffic, new lanes could be truck-only lanes, with heavy-duty pavement capable of handling longer, heavier, and more-productive trucks that the trucking industry seeks to use nationwide.

What about “double taxation”-paying both tolls and fuel taxes on the same highway?

As proposed in this study, Interstate tolling is a replacement for fuel taxes, not an addition. With all-electronic tolling, it is feasible to give rebates to toll-payers for the amount of fuel tax attributable to them for the miles driven on the tolled Interstate.

Isn’t tolling too risky? Several toll projects have gone bankrupt recently.

The risky toll roads are brand new routes whose traffic projections are far from certain. By contrast, Interstates have long histories of growing traffic; they are the most vital arteries for travel and goods-movement in the country. Interstate modernization would be easy and low-risk to finance.

Why haven’t any states used the existing federal pilot program to rebuild an Interstate highway with toll financing?

The pilot program’s three slots are occupied by Missouri, North Carolina, and Virginia. None of the three has yet developed a politically salient case for Interstate tolling. The program permits only one Interstate to be reconstructed using toll finance in each state. That leads to local opposition from those nearby, who feel singled out compared to those living near other Interstates in the state. The best way to discover a politically viable way forward is to open the program to all states, and to permit them to use it for a complete program to reconstruct and modernize all their Interstates as each wears out.

What makes you think toll rates could be indexed to inflation, when hardly any gas taxes are inflation-indexed?

In states where tolling is fairly widely used (such as Florida), indexing of toll rates is already in use, and it is becoming common in the financing plans for tolled projects developed under public-private partnership agreements. A shift to a new way of financing Interstates offers the opportunity to implement a more sustainable model going forward. Indexing will retain the purchasing power of toll revenues to ensure ongoing maintenance and the ability to pay for future modernization, as needed.

Your study suggests truck-only lanes on a number of Interstates. Is anyone actually interested in implementing this idea?

Truck-only lanes are being planned for the Long Beach freeway in Los Angeles, which handles huge numbers of trucks hauling containers to and from the ports of Long Beach and Los Angeles. Truck-only lanes are the preferred solution for the reconstruction of I-70 in Missouri, Illinois, Indiana, and Ohio in a several-year Corridors of the Future Study, in which the trucking industry was an active participant.

Your study includes widening of various Interstates, based on continued growth in auto and truck travel. But hasn’t highway travel peaked? Is widening really necessary?

Vehicle miles of travel (VMT) per capita appears to have peaked nationally in recent years, but most transportation researchers expect total VMT to continue increasing at least at the rate of population growth. VMT continues to increase in a number of high-growth states. And all projections, including those of the Federal Highway Administration, expect truck VMT to increase at a faster rate than car VMT over the next several decades.

You say that tolled Interstates could be the first step toward replacing fuel taxes with mileage-based user fees. But how could that tolling method be applied to local streets and roads?

Reason Foundation supports the need to transition from per-gallon fuel taxes to mileage-based user fees (MBUFs). But there is no requirement that a single system be used for all mileage charging. Some recent research supports the idea of a simple, low-tech system for ordinary streets and roads (possibly based on annual odometer readings), charging 1 to 1.5¢/mile, and an E-ZPass-type system for limited-access highways such as Interstates and urban expressways. This kind of model also avoids the use of GPS or other devices that raise privacy concerns.

The post Frequently Asked Questions About Interstate 2.0 appeared first on Reason Foundation.

Direct savings to drivers-of time and fuel-account for $1.35 billion per year, based on a 13% reduction in congestion by 2035 (compared with the current long-range plan). The other $3.5 billion per year comes from the increase in regional economic productivity due to increased mobility (0.5% of regional GDP) that makes our urbanized area work better.

2. Congestion seems to have peaked in the last few years, yet your study claims it will be much worse by 2035. How can that be?

The cost of traffic congestion has increased 14-fold since 1982. The slight dip in 2007 was due to what many have called the Great Recession, which reduced driving somewhat. If the current official long-range transportation plan is implemented, the travel time index (currently at 1.23) will increase to 1.54 by 2035-and that is significantly worse than Los Angeles today (at 1.38). Note: the travel time index is the ratio of trip time during peak periods versus trip time at other times. That is not Reason’s projection: that number is derived from the official three-county long-range transportation plan.

3. Your report says that toll revenues will pay for about 80% of the cost of a $16.4 billion managed lanes system. Yet FDOT says the relatively inexpensive managed lanes on I-95 will lose money over the next decade. How can both statements be true?

FDOT’s 10-year projection of revenues and expenses includes items not normally counted when state DOTs estimate whether a managed lane is paying for itself. On a normal basis, including state capital costs and all operating and maintenance expenses from FY2012-3 through FY2021-22 the express lanes will generate $196 million in revenue versus costs of $129 million. FDOT includes an additional $40 million as a reserve fund, and also uses between $4 million and $5 million per year to support transit in the corridor-expenses not normally included. Also, those projections are for a single 24-mile corridor, not a 302-mile network. Our figure is based on toll revenues from the entire network in 2035, when congestion on the regular lanes will be much worse than it is today.

4. You call for building underpasses on major arterials like Kendall Drive and SR 7. How can you build underpasses in South Florida, given the water table?

Southeast Florida already has two functioning underpasses that work just fine. The first is the Kinney Tunnel, which conveys U.S. 1 under the New River in downtown Fort Lauderdale. The second, which opened in 2006, conveys Okeechobee Road (U.S. 27) beneath the FEC railroad tracks in Hialeah, next to the Miami River canal. Such underpasses are built with an impermeable barrier to prevent water from seeping into the concrete, and are equipped with pumps for use in the event of rain or flooding. Both existing underpasses operate without problems.

5. Wouldn’t it be illegal to charge tolls on overpasses or underpasses on arterials, because that would be tolling existing roadways?

Under our proposal, only vehicles choosing to bypass the signalized intersection by using the underpass would pay a Sunpass toll. Since the underpass (or overpass) would be new capacity, charging for its use does not violate FDOT policy against charging tolls to use existing capacity. All motorists would still have the choice of using the underpass or continuing to use the signalized intersection-for through traffic, left turns, right turns, or U-turns.

6. Your plan appears to be more of the same “build highways everywhere” approach. Shouldn’t we be giving people alternatives to driving?

The official three-county 2035 long-range transportation plan devotes 62% of all transportation investment monies between 2015 and 2035 to transit and other non-highway modes. Yet by 2035, the fraction of all trips made via transit would decline to 2.6% (from 2.9% in the 2005 base year). Peak commuting trips on transit would increase a little, from 3.7% now to 4.7%. But 92% of all commuting trips would still be made by car-and traffic congestion would be worse than what is experienced today in Los Angeles. Our proposal offers serious congestion relief and a more effective transit plan, based on bus rapid transit operating on managed lanes and managed arterials.

7. Your overall plan would cost about $20 billion. Even if you are correct that 80% of that could be paid for out of new toll revenue, where would the other $4 billion come from?

That $4 billion would come out of the $58 billion in available transportation funding (over 20 years) already in the long-range transportation plan (from federal and state fuel taxes and various local transportation tax revenues). By using 9% of that $58 billion to assist development of $20 billion worth of managed lanes and managed arterials, this shift in priorities would bring about both large-scale congestion relief and region-wide express bus service like that already setting new records on the I-95 Express Lanes.

8. Your plan opposes creating dedicated bus lanes on major arterials like SR 7. But if buses have to use regular lanes, they will get stuck in traffic just like cars. Isn’t this self-defeating?

The problem with dedicated bus lanes on congested arterials is that they would make congestion much worse. If one existing lane each way were converted to bus-only, all the existing traffic would be squeezed into the two remaining lanes (each way) and onto nearby parallel alternatives. Yet even with a bus every three minutes (20 per hour), the vast majority of the space in the bus-only lane would be unused. Alternatively, if the very expensive alternative of adding a 4th lane each way were chosen, that new lane would still be mostly unused. By contrast, our proposed “managed arterial” treatment (adding underpasses to congested arterials) would add a large amount of capacity and permit higher speeds for buses using the underpasses for express trips.

9. You call for adding premium toll lanes to the Turnpike and other toll roads in Southeast Florida. Isn’t this calling for two classes of toll-road customers?

Both the Turnpike and Miami-Dade Expressway Authority have studied premium express lanes for their most-congested toll roads (such as HEFT and the Dolphin). Why? Because many of their customers would gladly pay more at rush hour for an uncongested trip. But adding premium lanes to those corridors would be very costly. It’s only fair that those who wish to use such lanes be the ones to pay the higher tolls needed to build them.

10. Won’t adding more lanes to South Florida expressways make the greenhouse gas problem even worse?

Adding priced lanes that remain uncongested during peak periods would reduce CO2 emissions, which are much higher in stop-and-go traffic than they are with traffic moving steadily at 55 mph. In addition, by 2035 when the network is completed, the average passenger vehicle will be producing 31% less CO2, thanks to much more stringent fuel-economy requirements.

11. Many people don’t want to ride buses. Why doesn’t your plan expand rail transit instead?

Rail transit is extremely costly, which is why the official existing 2035 long-range transportation plan includes very little new rail transit and focuses most of its transit investment on bus rapid transit, which we support. Moreover, the overwhelming success of the new express bus routes using the I-95 Express Lanes demonstrates that many middle-class people will use bus rapid transit if it provides fast, reliable trips from near their homes to near their workplaces.

12. In two cases your plan would compete directly with existing rail transit: I-95 express lanes would compete with Tri-Rail and your proposed US 1 elevated express lanes would compete with Metrorail. Why isn’t that a bad idea?

The 95 Express bus routes already carry nearly 40% as many daily passengers between Broward County and downtown Miami as ride the entire three-county length of Tri-Rail. And that is with only the first 7 miles of I-95 Express Lanes in operation. This kind of premium bus rapid transit operating on uncongested lanes is a better alternative for a much larger number of people than Tri-Rail apparently offers. If and when Tri-Rail is shifted to the FEC rail corridor closer to high-density coastal land uses, its market share might well increase-and the expanded I-95 Express Lanes would be in less-direct competition with it. As for U.S. 1 and Metrorail, that transit line has probably attracted all the commuters for which it is a good option during its nearly three decades of service. Elevated express lanes linked to the revamped Busway would offer two new options: fast, uncongested trips for those drivers willing to pay for them and fast and reliable premium BRT service all the way to downtown Miami.

Robert Poole is director of transportation at Reason Foundation.

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