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As U.S. State Debt Levels Moderate, Transportation Funding Takes Center Stage


As U.S. State Debt Levels Moderate, Transportation Funding Takes Center Stage

State debt levels remain moderate despite many states experiencing increasing revenues following the last recession and the 2017 Tax Cuts and Jobs Act. However, S&P Global Ratings has observed a renewed focus on transportation projects as states consider taking on new debt, reform transportation-related revenues, and increasingly consider public-private partnerships (P3s) or other alternative delivery methods to fund their infrastructure needs. In particular, we expect state governments will evaluate all options-–including tolling–-as they look to expand infrastructure spending in 2019, particularly as federal funding remains uncertain.

Despite this renewed focus on transportation funding and need for critical infrastructure investment, in total, we do not expect a significant increase in overall state debt levels.

Table 1

Aggregate State Debt Levels (Medians)
Fiscal year
Debt metrics 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009
Net tax-supported debt service as a % of governmental expenditures 3.7 3.8 3.8 3.9 3.7 4 3.5 3.6 3.6 3.5
Net tax-supported debt per capita ($) 1,010 945 955 1,018 957 999 1,036 1,010 932 870
Net tax-supported debt as a % of personal income 2.1 2.1 2.2 2.5 2.4 2.5 2.5 2.5 2.5 2.4
Net tax-supported debt as a % of GSP 1.8 1.7 2.3 2.4 2 2.2 2.2 2.1 2.2 2
GSP--Gross state product.

Moderating Debt Levels Are A Missed Opportunity For Infrastructure Investment

As the nation's rate of economic growth is likely to moderate, greater investment in infrastructure by states could be among the responses to offset or help reverse this trend. Solid U.S. economic growth in 2018 provided a stable base for state and local governments and projections indicate this should continue, albeit at a slower pace this year (see our report "Summer Should Be Smooth Sailing For U.S. State And Local Governments, But There Could Be Waves Ahead" (published April 30, 2019, on RatingsDirect). Although the chance of a recession as projected by S&P Global Ratings economists remains low at 20%-25% over the next 12 months, it has been increasing over the past year.

State spending on debt service has remained relatively level, despite a noticeable decline in infrastructure and other capital expenditures. According to the National Association of State Budget Officers (NASBO), bonds financed only 28% of state capital expenditures in fiscal 2018, with the rest funded on a pay-as-you-go basis (see chart 2). Over the past 10 years, capital expenditures from federal funds and bonds have declined while spending from other state funds, such as revenues in highway trust funds, has actually increased. As the nation's transportation infrastructure ages, new revenues have largely been used to maintain, not grow, infrastructure programs.

Chart 1

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Transportation spending accounted for 8% of total state expenditures in fiscal 2018 (capital and noncapital), according to NASBO, increasing 6.5% over the prior year compared to only a 2.1% increase from 2016 to 2017. Other state funds, which typically earmark revenue sources such as motor fuels tax, accounted for 61.2% of total transportation funding, while federal funds were at 29.1% and bond funds at 6.4%.

While state revenues have recovered at levels below those of past economic cycles, fixed costs for pensions, other postemployment benefits, and state-funded Medicaid costs have been increasing. The revenue and expenditure pressures for states, along with uncertainty at the federal level, have made it increasingly difficult for states to allocate funding for transportation projects. (For more information, see our report, "Between A Budget And A Hard Place: The Risks Of Deferring Maintenance For U.S. Infrastructure," published May 15, 2018.)

Federal Infrastructure Policy Uncertainty Creates Pressure For States

An area of continued uncertainty at the federal level is infrastructure policy. While leaders in both major political parties say that a national infrastructure plan is needed for the country's deteriorating roads, bridges, and railways, there is a lack of agreement on how to fund such an initiative. Whether to use new taxes, P3s, and other mechanisms will be a contentious negotiating point. (See "Transportation Infrastructure 2019 Sector Outlook: Mostly Stable, Despite Expected Slower Growth And Unlikely Investment Package," published Jan. 17, 2019.)

Chart 2

image

One of the largest infrastructure projects in the country in need of federal funding is replacement of the Gateway Tunnel. The federally owned tunnel connects the rail network between New York City and Newark, N.J. under the Hudson River. It has been deteriorating for years, but was significantly damaged after Hurricane Sandy in 2012. The project costs are estimated at over $30 billion and increasing annually. A 2015 framework agreement among the U.S. Department of Transportation, the State of New York, and the State of New Jersey, indicated that the federal government would contribute 50% of the costs. However, the project has been put on hold by the current presidential administration due to lack of committed federal funding. In our opinion, if the tunnel's condition were to deteriorate to a point where it was too dangerous to use, it would have significant negative effects on the economic activity of neighboring states and the broader New York City metro region.

For over a decade, California has been constructing a high-speed rail line between Los Angeles and San Francisco. While the governor has proposed $23.5 billion of transportation spending in 2020, an increase of $1.4 billion (or 6%) over estimated expenditures for the current year, the spending plan reduced the state's anticipated appropriation for the project. California has appropriated $666 million for the High-Speed Rail Authority (HSRA) in 2020, a decrease of $944 million (or 59%) below the 2019 estimate.

Approved by voters in 2008, the project included a $9 billion bond to launch construction. Costs are estimated at $77.3 billion, a $13.1 billion increase over the 2016 cost estimate, with the HSRA only securing approximately one-third of the total funding needed. In his first State of the State address, the governor announced that portions of the project would be postponed. Under an American Recovery and Reinvestment Act (ARRA) funding agreement, if the HSRA does not complete the extensions to Merced and Bakersfield (estimated at $20 billion to $23 billion) by 2022, the state could be forced to pay back $3.5 billion in federal grants. Additional federal funding is unlikely as the Federal Railroad Administration announced that it terminated a 2010 agreement with the HSRA and will pull a nearly $929 million federal grant, though the state may appeal that decision.

While sometimes the victim of political stalemates and delays, federal transportation grant-secured obligations remain a highly rated source of funding for state and transit agencies (see our report "Despite The Risk Of Shutdowns, GARVEE Bonds Continue Benefiting From Government Support," published Feb. 28, 2019). The ratings on grant anticipation revenue vehicle (GARVEE) bonds assume that the supportive legislative framework and Congressional appropriations funding transportation grant programs will continue through multiyear authorizations or ongoing temporary extensions. While reauthorization risk cannot be eliminated, it has been minimized through conservative financial structures inherent in rated GARVEE transactions.

Federal debate has also brought increasing focus to long-term transportation asset resiliency, an ongoing credit risk that will likely add to capital requirements. These rising costs are partly due to increasing exposure to extreme weather and initiatives to reduce carbon emissions. Over the past year, the relationship between infrastructure and sustainable transportation investments gained prominence as a policy component of Congressional Democrats' "Green New Deal" to reduce carbon emissions and create jobs. While support at the federal level for any infrastructure investment package has been challenging--and the Green New Deal has yet to gather significant political momentum and is essentially a non-starter with the current administration--we anticipate state and local governments will increasingly focus on enhancing transportation-related projects to meet sustainable carbon-reduction initiatives.

Over the long term, the continued lack of federal funding for critical infrastructure projects and suspended agreements indicate states may need to bear more of the cost for transportation projects. Persistent federal funding uncertainty further highlights Washington's changing fiscal relationship with states and the need for states to identify new revenues for transportation projects.

States May Fund Transportation Projects By Increasing Gas Taxes, Tolls, And Other Revenue Sources

The need for new transportation-related revenues is partly a symptom of the general crowding out of government budgets by fixed obligations and the reality that, following the Great Recession, GDP growth has been sluggish. Since the last recession ended, we have seen states propose or enact changes to their motor fuels taxes, especially after 2014, when a global decline in the energy sector left states with such taxes tied to energy markets undergoing automatic gas tax rate declines.

According to NASBO, seven governors this year (many in the Midwest) are proposing increases in state gas tax rates, while 26 other states have already raised their motor fuel tax rates since 2013. (For more information, see our report, "U.S. States Take Advantage Of A Prolonged Economic Expansion," published May 16, 2019.)

image

Legislation enacted this year includes Alabama increasing its gas tax rate six cents in September as part of a 10-cent phase-in over three years, before implementing a variable-rate formula in 2023 where the tax rate will be adjusted based on changes in the National Highway Construction Cost Index. Additionally, Ohio will raise its gas tax 10.5 cents and its diesel tax 19 cents this July 1, while Illinois approved a doubling of its gas tax rate to 38 cents per gallon from 19 cents, with further increases tied to inflation beginning July 1.

Tolling is also part of the conversation in statehouses, where entirely new methods of taxation to fund infrastructure needs are under consideration. The governor of Connecticut has proposed reinstating highway tolls to finance road infrastructure (major Connecticut highway tolls were removed in the 1980s), while a few years ago, Rhode Island imposed new tolls on commercial traffic, but not on passenger vehicles. This May, Florida approved three new toll roads to boost transportation funding, despite earlier actions by lawmakers to reduce toll rates. Some states, such as Oregon, have looked into demonstration projects for alternative road fund financing, such as testing geolocation devices that could track car mileage for taxing miles traveled.

New York State's fiscal 2020 budget enacted what could be a significant capital funding solution for the Metropolitan Transportation Authority (MTA), the nation's largest transit system. For several years running, MTA, state, and city officials identified congestion pricing as the key solution for the MTA's significant capital needs and growing surface street congestion. Now approved as part of the state's enacted budget, albeit with specific details still pending, the large-scale city congestion pricing plan will be the country's first. Some estimates are that the plan could generate $1 billion annually, net of costs, although there are many variables and details still to be determined before officials can produce more refined projections.

Two other measures included in the enacted New York budget will also help fund MTA capital needs. The budget includes an expansion of statewide sales taxes on internet sales that could generate an additional $480 million annually, with $320 million earmarked for MTA capital. It also includes a new "mansion tax," effective July 1, with a sliding scale levied on luxury real estate properties of $2 million or more, with a maximum rate of 4.15% on properties of more than $25 million, that could generate $365 million annually for MTA capital. While congestion pricing and the other new taxes will generate much-needed funding for the authority's capital needs, how the MTA will improve funding to resolve outyear operating deficits (noncapital) remains uncertain. (For more information, see our report "Metropolitan Transportation Authority, NY Credit Could Benefit From State Budget Adoption Of Congestion Pricing," published April 4, 2019.)

Chart 4

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Major State Transportation Systems Embark On New Bonding And Revenue Programs

Some states are using improving revenue profiles and economic conditions to start bond-financed capital programs or significantly increase transportation funding. The states with such programs have some of the largest state highway agency-owned road miles in the country.

Table 2

Top 10 States By Public Road Miles Ownership, 2017
State Highway Agency County Local
State Miles % of all state's public miles State Miles % of all state's public miles State Miles % of all state's public miles
Texas 80,444 25.6% Texas 147,568 46.9% Illinois 112,492 77.1%
North Carolina 79,924 74.7% Kansas 114,139 80.3% Texas 83,275 26.5%
Virginia 58,940 78.3% Iowa 89,771 78.3% Wisconsin 82,091 71.0%
South Carolina 41,311 53.4% Michigan 89,468 73.3% California 80,627 45.8%
Pennsylvania 39,733 33.0% Georgia 84,852 66.1% Pennsylvania 77,641 64.4%
West Virginia 34,402 88.5% Oklahoma 77,540 68.7% Minnesota 77,549 55.6%
Missouri 33,859 25.7% Missouri 73,551 55.8% New York 76,209 67.1%
Kentucky 27,671 34.6% California 71,605 40.6% Ohio 73,216 59.5%
Ohio 19,233 15.6% Florida 70,261 57.2% North Dakota 63,498 72.4%
Georgia 17,959 14.0% Arkansas 65,945 64.3% Florida 38,205 31.1%
Source: U.S. Dept of Transportation, Highway Statistics 2017, Table HM-10.
California

The most significant development last year was affirmation of the gas tax increase approved by voters in 2017 and rejection of a proposed constitutional amendment to require voter approval for any future fuel and vehicle-related tax and fee increase. The enacted SB 1 Road Repair and Accountability Act of 2017 increased the gas tax by 12 cents, raised the excise tax on diesel fuel, and imposed a new transportation improvement fee on all vehicles based on value (including a fee on all-zero emission vehicles). All together, the combination of new taxes and fees is anticipated to raise $5.1 billion annually, and we consider the election outcome consistent with broader public support in California for transportation infrastructure.

Illinois

The state approved a substantial six-year, $45 billion capital plan that finances $33 billion in transportation improvements. The bill is funded through a number of revenue increases, including a 19-cent increase of the motor fuel tax that the state projects will generate $1.2 billion per year. It also includes $675 million from various registration and title fee increases and $78 million from a five-cent-per gallon diesel fuel tax increase. The capital plan also places Illinois more in line with other states who have not only increased gas taxes and vehicle registration fees in recent years, but also routinely develop and follow long-term capital plans. Although revenue increases support the capital plan, reducing pressure on Illinois' general operating fund, higher fixed costs would likely weigh on the state's credit profile. (For more information, see our report, "Enacted Illinois Fiscal 2020 Budget Holds The Line," published June 5, 2019.)

North Carolina

In 2018, North Carolina enacted the Build NC Bond Act, a $3 billion authorization of appropriation-backed obligations of up to $300 million issued annually over the next 10 years. The bonds will be payable, subject to appropriation, from the NC Highway Trust Fund. The debt is subject to the state's debt affordability limits; each issuance has a 15-year maturity limit, and the state treasurer is responsible for recommending issuances under the program.

Texas

As Texas' economy and population continues to expand, so do its transportation capital needs. In 2015, voters approved Proposition 7 to direct $2.5 billion of net revenue from state sales and use tax that exceeds the first $28 billion of revenue for the fiscal year. The first transfer occurred in fiscal 2018 and approximately $2.25 billion is estimated to be deposited near the end of fiscal 2019. The comptroller estimates that $5 billion of Proposition 7 funding from state sales and use tax will be available for new transportation projects in the fiscal 2020-2021 biennium.

Virginia

In April 2013, the Virginia General Assembly adopted HB 2313 to provide an annual revenue source for the Northern Virginia Transportation Authority (NVTA) and the Hampton Roads Transportation Accountability Commission (HRTAC), to implement transportation projects in their respective regions. Each authority has bonding ability with pledged revenues consisting primarily of sales and use taxes. While the debt is not considered part of the state's overall debt profile, the creation of the authority allows for substantial additional revenues and transportation projects in two of the most populous regions of the state.

  • NVTA: The authority's inaugural six-year (fiscal year 2018-2023) capital plan identified 44 regionally significant, multimodal transportation projects totaling $1.285 billion.
  • HRTAC: The commission's six-year capital plan (fiscal year 2019-2024) totals $4.4 billion, $2.1 billion of which is expected to be funded through debt proceeds. The remaining portion of the capital improvement plan will be funded with a combination of pay-as-you-go funding and grants.
West Virginia

On Oct. 7, 2017, voters overwhelmingly approved a referendum authorizing the issuance of GO bonds totaling $1.6 billion to support highway projects. Additionally, West Virginia has identified financing plans for fiscal years 2018 and 2023 for various transportation and road fund investments that include up to $280 million in GARVEE bonds, up to $500 million in turnpike bonds, and the $1.6 billion in GO bonds. The same year the bond program was approved, the state increased its gas tax by 3.5 cents after falling to the minimum amount "floor" amount in 2014.

Regardless of increasing bonding campaigns for some, we do not expect this will have a material effect on overall state debt ratios.

Debt Levels Should Remain Sustainable For Most States

Generally, debt ratios are low to moderate across U.S. states. While we regard state debt levels as sustainable, increasing debt burdens have resulted in downgrades for some states or augmented credit pressures they currently face. Northeast states and those with larger populations or more urban areas typically have higher debt burdens than the rest of the country.

Currently, Connecticut remains the only state with a high enough debt load to trigger a one-notch downward override rating adjustment under our state rating methodology. However, we revised the state's outlook to positive in March 2019, recognizing we may raise our rating over the next two years if the currently high debt level moderates, or if we believe the state will retain currently high budget reserves through the next fiscal 2020-2021 biennium.

Connecticut's high debt override threshold was first met in fiscal year-end 2017, before the state's assumption of the city of Hartford's $540 million debt and large issuances incorporated into our 2018 debt calculations. The governor has proposed issuing an annual average of $1.7 billion of combined GO and transportation tax-supported debt in the coming biennium, compared with an average of $2.4 billion in fiscal years 2012-2019, under his "debt diet" proposal, which could begin to materially reduce future debt levels.

Table 3

Top 10 States By Debt Metric For Fiscal 2018
Top 10 states By debt metric for fiscal 2018
Ranking Total tax-supported debt Per capita As % personal income As % GSP Debt service as % general spending
1 California Connecticut Hawaii Connecticut Connecticut
2 New York Massachusetts Connecticut Hawaii New Jersey
3 Massachusetts Hawaii Massachusetts Massachusetts Hawaii
4 New Jersey New Jersey New Jersey New Jersey Illinois†
5 Illinois† New York Delaware Mississippi Massachusetts
6 Connecticut Washington Wisconsin Wisconsin Washington
7 Pennsylvania Delaware Mississippi West Virginia Mississippi
8 Washington Illinois† Illinois† Illinois† New York
9 Florida Wisconsin West Virginia Kentucky California
10 Wisconsin Maryland Washington Oregon Florida
Source: S&P Global Ratings. †Illinois fiscal 2018 audit unavaiable. GSP--Gross state product.

Chart 5

image

Table 4

State Tax-Supported Debt Statistics For Fiscal 2018
State FY 2018 (Mil. $) Rank Per capita Rank As % personal income Rank As % GSP Rank Debt service as % general spending Rank

Alabama

4,769,036 24 976 26 2.30% 23 2.16% 22 4.01% 23

Alaska

1,006,900 40 1,365 21 2.29% 24 1.86% 25 1.44% 43

Arizona

4,147,341 26 578 33 1.32% 32 1.20% 32 2.29% 37

Arkansas

1,522,156 38 505 37 1.19% 34 1.19% 33 1.97% 40

California

84,124,160 1 2,127 11 3.40% 16 2.83% 17 6.27% 9

Colorado

1,795,244 37 315 42 0.55% 43 0.49% 43 2.51% 33

Connecticut

24,331,299 6 6,810 1 9.13% 2 8.87% 1 15.86% 1

Delaware

2,417,607 32 2,500 7 4.86% 5 3.22% 13 5.71% 13

Florida

16,758,309 9 787 29 1.59% 29 1.62% 27 6.22% 10

Georgia

9,504,154 15 903 27 1.98% 27 1.62% 28 6.05% 12

Hawaii

7,746,080 17 5,453 3 9.99% 1 8.42% 2 10.60% 3

Idaho

366,769 46 209 45 0.48% 45 0.48% 44 1.20% 47
Illinois† 31,322,245 5 2,458 8 4.32% 8 3.62% 8 9.23% 4

Indiana

2,742,156 29 410 40 0.88% 39 0.75% 40 1.32% 45

Iowa

762,793 42 242 44 0.50% 44 0.40% 46 1.22% 46

Kansas

4,412,462 25 1,516 19 3.02% 18 2.64% 18 3.46% 27

Kentucky

7,318,384 20 1,638 16 3.92% 11 3.51% 9 3.77% 25

Louisiana

7,332,095 19 1,573 18 3.45% 15 2.91% 16 5.10% 16

Maine

861,171 41 643 30 1.33% 31 1.34% 31 3.86% 24

Maryland

13,858,740 11 2,293 10 3.65% 14 3.36% 12 6.10% 11

Massachusetts

38,803,284 3 5,622 2 8.02% 3 6.84% 3 7.51% 5

Michigan

6,383,310 21 639 31 1.50% 30 1.35% 30 2.06% 39

Minnesota

7,384,804 18 1,316 22 2.33% 22 2.01% 23 3.69% 26

Mississippi

5,097,263 22 1,707 15 4.67% 7 4.64% 5 6.67% 7

Missouri

2,991,895 28 488 39 1.05% 37 0.94% 36 3.39% 28

Montana

166,780 47 157 47 0.33% 47 0.34% 47 1.35% 44

Nebraska

33,455 49 17 50 0.03% 50 0.03% 50 0.17% 49

Nevada

1,910,299 36 630 32 1.31% 33 1.15% 34 2.37% 36

New Hampshire

722,312 43 532 35 0.87% 40 0.85% 39 3.15% 30

New Jersey

34,136,432 4 3,832 4 5.67% 4 5.50% 4 11.20% 2

New Mexico

2,722,686 30 1,299 23 3.01% 19 2.62% 19 5.41% 14

New York

50,506,000 2 2,584 5 3.76% 13 3.01% 15 6.43% 8

North Carolina

5,092,963 23 490 38 1.07% 36 0.90% 37 2.67% 32

North Dakota

64,083 48 84 48 0.16% 48 0.12% 48 0.30% 48

Ohio

12,200,222 12 1,044 25 2.16% 25 1.80% 26 4.37% 21

Oklahoma

2,106,526 33 534 34 1.16% 35 1.05% 35 1.85% 42

Oregon

8,190,139 16 1,954 12 3.92% 12 3.43% 10 4.82% 19

Pennsylvania

20,395,050 7 1,592 17 2.88% 20 2.59% 20 5.05% 17

Rhode Island

1,938,179 35 1,833 13 3.36% 17 3.18% 14 5.27% 15

South Carolina

1,044,462 39 205 46 0.48% 46 0.45% 45 2.70% 31

South Dakota

462,103 45 524 36 1.04% 38 0.90% 38 2.42% 34

Tennessee

2,080,871 34 307 43 0.65% 42 0.57% 42 2.25% 38

Texas

11,172,350 14 389 41 0.79% 41 0.63% 41 2.42% 35

Utah

2,712,005 31 858 28 1.89% 28 1.53% 29 4.26% 22

Vermont

672,311 44 1,073 24 2.00% 26 1.99% 24 1.90% 41

Virginia

11,858,819 13 1,392 20 2.44% 21 2.22% 21 4.86% 18

Washington

18,928,593 8 2,512 6 4.13% 10 3.36% 11 6.87% 6

West Virginia

3,094,348 27 1,714 14 4.22% 9 3.99% 7 3.32% 29

Wisconsin

14,100,100 10 2,425 9 4.78% 6 4.18% 6 4.74% 20

Wyoming

19,151 50 33 49 0.06% 49 0.05% 49 0.12% 50
Source: S&P Global Ratings. Standard & Poor's debt ratio calculations for states aggregate all tax-support obligations, including GO bonds, appopriation obligations, and special-tax bonds such as sales, personal income and gas tax. Population Source: US Census Bureau Estimates Available as of December 2018. We do not include grand and anticipation revenue (GARVEE) notes or GARVEE bonds in state debt calculations if they are payable solely from dedicated federal revenues. We also exclude bonds secured by tobacco settlement revenues from state debt calculations if they conform to our stress scenarios for rating such debt and are payable exclusively from settlemetn revenues. COntingent debt obligations that historically have not required state support are excluded as well. With regard to the use of public private partnerships, we evaluate the nature of a state's obligation under various long-term agreements in determining whether the obligation is considered part of a state's debt. Personal Income and GSP Source: U.S. Bureau of Economic Analysis. †Illinois fiscal 2018 audit unavaiable.

Related Research

  • Summer Should Be Smooth Sailing For U.S. State And Local Governments, But There Could Be Waves Ahead, April 30, 2019
  • U.S. Transportation Infrastructure 2019 Sector Outlook: Mostly Stable, Despite Expected Slower Growth And Unlikely Investment Package, Jan. 17, 2019
  • U.S. State Sector 2019 Outlook: Caution - Slower Speeds Ahead, Jan. 8, 2019
  • Despite The Risk Of Shutdowns, GARVEE Bonds Continue Benefiting From Government Support, Feb. 28, 2019
  • U.S. States Take Advantage Of A Prolonged Economic Expansion, May 16, 2019
  • Between A Budget And A Hard Place: The Risks Of Deferring Maintenance For U.S. Infrastructure, May 15, 2018

This report does not constitute a rating action.

Primary Credit Analyst:Timothy W Little, New York + 1 (312) 233-7052;
timothy.little@spglobal.com
Secondary Contact:Kurt E Forsgren, Boston (1) 617-530-8308;
kurt.forsgren@spglobal.com
Research Contributor:Vikram Sawant, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai
Research Assistant:Kayla Smith, Centennial

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