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Innovative Financing Methods for Local Roads in Midwest and Mountain-Plains States JILL HOUGH AND AYMAN SMADI Budget constraints for transportation projects is a growing problem at the federal, state, and local levels. At the same time, several changes have been affecting demands placed on the transportation systems, for example, population shifts, changes in travel patterns, and changes in economic activity. County and local governments are faced with increased demands on some portions of their road systems, and other portions have seen a drop in the level of use. As a result, these transportation agencies are facing tremendous challenges to maintain their extensive road networks and provide improvements when and where needed. Traditional funding sources are no longer adequate. There is a great need for counties to explore innovative methods to increase revenues or decrease costs or both. However, because of the nature of rural states (i.e., low population density and a limited tax base), methods used to supplement public funding of transportation projects in urban areas may not be applicable. Described are 4 innovative financing methods (e.g., rural improvement districts) and 14 cost reducing strategies (e.g., sharing equipment) used by local governments in eight rural states. County road officials identified these methods through a mail questionnaire and rated key criteria, such as ease of collection, to evaluate each method before implementing it. Rural improvement districts, special assessment districts, and the wheel tax were identified as innovative methods that are not widely used to raise revenues for a county road system. Advantages and disadvantages of each innovative financing method identified are discussed.

The lack of road funding is a national problem. According to studies by the Bureau of Transportation Statistics, state and local government expenditures on roads are greater than the amount collected in transportation revenues (1). There is a need for additional funds at the federal, state, and local government levels just to maintain current roadway conditions. Historically, states developed extensive road networks to support the agrarian lifestyle. Typically roads were built every mile to provide farm access. However, changes in the agricultural sector are changing the demands placed on the rural road systems. First, the trend toward larger farms reduces the need for access roads. Second, with the increased farm size and the move to more productivity, there has been an increase in equipment size. The larger and heavier equipment requires wider and stronger rural roads. Third, many rural families earn off-farm income either seasonally or year round, thus increasing commuter traffic on rural roads. As the purpose of rural trips changes, the demands for improved maintenance increase. Fourth, changes in railroad regulation have allowed easier abandonment of rail lines. Since 1980, more than 53 108 km (33,000 mi) of rail have been abandoned nationwide (2). Commodities and goods otherwise moved by rail may be diverted to truck or barge where Upper Great Plains Transportation Institute, North Dakota State University, P.O. Box 5074, Fargo, ND 58105.

applicable. Increased truck use causes additional wear and tear on the roadway. Rural roads were not designed for the density and truck configuration of this traffic. Changes in available funding may make it even more difficult in the future to maintain the extensive road network that has been built to serve the public. The trend of highway revenue shortfalls and increased intensity of use of many rural roads suggest that an adequate future rural road system will depend on increased funding and decreased road costs. Future road costs may be reduced by consolidating local and county road services, reducing the number of roads maintained through closure or minimum maintenance, or changing road services. Because of the pressure of fiscal restraint at the national level, it appears that increasing or maintaining future funding at the local level will depend largely on developing innovative financing methods. This paper examines innovative financing methods and cost reducing strategies used by local governments in eight rural states: Colorado, Iowa, Minnesota, Montana, North Dakota, South Dakota, Utah, and Wyoming.

DATA COLLECTION A survey instrument was designed to ask road officials to identify and evaluate the effectiveness of the innovative financing methods on the basis of several criteria: revenue certainty, inflation sensitivity, revenue potential, ease of collection, public acceptance, and user equity. In total, 470 questionnaires were mailed to county engineers or county road supervisors. Table 1 illustrates the number of surveys mailed and the response rate for each state. In all, 177 questionnaires were returned for a response rate of 38 percent. North Dakota and Iowa had the highest response rates, 49 and 42 percent, respectively. Budgetary data from the state departments of transportation (DOTs) were collected so that a weighted average of each funding source could be calculated. This weighted average gave an overall view of how much the revenue source actually contributed to the overall county budgets throughout the state. However, Montana DOT does not keep an account of revenue generated by counties so its numbers are excluded from the weighted average calculations.

Revenue Sources Innovative financing methods can be categorized into two broad groups: user and nonuser revenues. User revenues comprise fees and taxes placed on items closely associated with the ownership and operation of a motor vehicle. Motor fuel taxes, registration fees,

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TABLE 1 Response Rate, Survey of Midwest and Mountain-Plains County Road Officials

driver license fees, weight-distance taxes, and titling taxes are typical user taxes. Sales and use taxes, mineral royalties, severance taxes, and property taxes are typical nonuser revenue sources, which are collected through mechanisms not related to highways or motor vehicles. It is more equitable to collect user-based revenues so that those receiving the benefit also pay for it. User-based fees are more likely to be accepted by the public. However, the public usually is not in favor of increasing taxes or implementing new taxes. It is important for county officials to increase the public’s awareness of the need for increased financing to maintain the road system.

Survey Results Four innovative financing methods or potential methods were identified through the mail questionnaire as making significant contributions to the road budgets of the counties implementing them. The level of significance was derived from a method’s ability to account for more than 5 percent of a particular county’s budget. The four innovative methods are sales tax, special ownership tax, wheel tax, and rural improvement districts. In addition, four other innovative methods were identified; however, these did not contribute significantly to the road budget. A detailed description of these methods can be found elsewhere (3).

TABLE 2

Sales Tax Nearly 11 percent of the county road officials responding to the questionnaire acknowledged the use of a county sales tax to generate revenues for the road system. Counties within Colorado, Iowa, North Dakota, South Dakota, and Utah reported current reliance on the county sales tax as a revenue source. Nearly all states have a statewide sales tax that is used to generate revenue primarily to fund education, public welfare, and highway maintenance and construction. As approved by the legislatures, counties can administer a county sales tax if residents in that county approve an election measure to allow the tax. Nineteen counties reported they have implemented a countywide sales tax, which on average contributes 14 percent of their county road budgets (Table 2). However, state DOT records indicated that sales tax makes up 3.5 percent of county road budgets (Table 2). The reason for the difference in the percentage of sales tax contributions to the budgets is that the counties responding to the questionnaire use a greater portion of sales tax revenues to finance their road budgets than do those other counties not responding to the questionnaire. Major advantages of the sales tax are as follows: (a) It can provide a fairly consistent source of revenue, which is important because road maintenance and improvement needs are continuous. (b) It is inflation sensitive. Sales taxes are administered on a percentage basis; therefore, as inflation causes the price of goods to increase, the sales

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tax collected also increases—as long as the quantity of goods purchased remains constant. (c) A county sales tax can be relatively easy to administer. The county sales tax can be piggybacked onto the state sales tax. Generally, the state will charge a small administrative fee for collecting and redistributing the county tax back to the county in which it was received. A disadvantage to implementing a county sales tax is that a sales tax may not be equitable. In general user charges, such as fuel taxes, are considered equitable because the beneficiary often is the person paying the fee. A county sales tax may not be equitable because rural road users are not necessarily those who purchase the taxed items. A sales tax may appear to be an unpopular method to finance roads; however, a road user needs assessment study conducted by the Upper Great Plains Transportation Institute found that road users in North Dakota were willing to pay increased sales taxes to finance necessary road improvements (4).

Special Ownership Tax A special ownership tax is a fee imposed on the owners or operators of specific items. Counties in Colorado, South Dakota, and Utah reported the use of a special ownership tax to generate revenue for financing their road systems. Of the nine responses, special ownership taxes comprise approximately 7 percent of their road budgets (Table 2). However, such taxes comprise only 1.8 percent of county road budgets in all eight states on average, according to state DOT data (Table 2). Different items could receive the special ownership tax; for example, counties within South Dakota have placed a special tax on mobile home registration. Fifteen percent of the revenue collected is sent to the state for administration fees and the other 85 percent remains in the county where the mobile home is registered (3). There are three advantages to a special ownership tax: (a) Revenue certainty exists as long as there is a demand for the product or item being taxed. However, the revenue potential will vary from county to county depending on the population base purchasing the item with the special tax. (b) A special ownership tax based on a certain percentage of the purchase price would be inflation sensitive, whereas a flat fee would not be inflation sensitive. (c) Furthermore, a percentage-based tax placed on the special items at the time of purchase would enable the revenue to be collected with any sales tax that may be placed on the item, therefore easing the collection and minimizing administrative expenses of the special ownership tax.

TABLE 3

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The main disadvantage of a special ownership tax is that it is likely to be unpopular with the individuals purchasing the special items; for example, those owning or purchasing a mobile home may oppose a mobile home registration tax. The equity of a special ownership tax should be considered. Items that are not “user related” must be scrutinized closely to ensure that the tax is not regressive in nature (imposing greater tax on the poor than on those with wealth).

Wheel Tax South Dakota counties were the only ones reporting use of the wheel tax to generate revenue for the road fund. Counties responding to the survey indicated that on average the wheel tax makes up 14 percent of their road budget, with some counties financing up to 35 percent of their road budgets from this tax (Table 2). State DOT records indicated a weighted average of nearly 17 percent of the county road budget is funded by the wheel tax (Table 2). Counties within South Dakota do not receive a portion of the state fuel tax, nor can they implement a local gas tax, thereby increasing the importance of the wheel tax. State law provides that counties may charge up to $4 per tire per vehicle up to a maximum of four wheels, therefore setting a maximum of $16 for all vehicles. The wheel tax is collected annually at the local level, at the time residents purchase their vehicle license renewals. Legislation states that the first $2 of each wheel tax goes toward road and bridge funds. If counties elect to implement the other $2 per wheel, the revenue is used for a reduction of property taxes. The additional revenue is placed in the general fund to reduce the amount of property taxes used to fund road maintenance (3). The advantage of a wheel tax is the secure revenue source. There is revenue certainty since everyone who registers vehicles pays a wheel tax on the vehicle being licensed. One-hundred percent of the respondents indicated that the wheel tax was at least somewhat revenue certain (Table 2). Disadvantages of the wheel tax include the following: (a) The wheel tax is not inflation sensitive because it is a flat based fee. It could be made inflation sensitive if the fee were tied to one of the inflation indicators. (b) The wheel tax is somewhat controversial. Eighty percent of the respondents indicated that the public accepted the wheel tax within their county (Table 3). However, some counties in South Dakota developed a referendum and voted down the wheel tax, thereby defeating its implementation (3). (c) There are some problems with user equity of the wheel tax. None of the respondents

Combined Innovative Financing Methods: Ease of Collection, Public Acceptance, User Equity

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indicated the wheel tax was equitable (Table 3). Some respondents believe the wheel tax would be more equitable if the maximum of $16 were removed. Currently, all vehicles, including trucks, pay the same $16 maximum. If the maximum were removed, 18-wheel trucks would pay $144. Furthermore, some county officials would like to see the wheel tax imposed on all wheels including those of tractor-trailers and farm wagons. Removing the maximum, raising the fee, or applying the wheel tax to all wheels would be potential ways to expand the tax revenue dollars.

Rural Improvement Districts and Special Assessment Districts As rural developments and subdivisions are constructed, there is a greater demand for road services. To finance these services, the subdivisions may be assessed a fee. In Montana, rural improvement districts are being used to finance road improvements and maintenance that are not in the county road budgets. Similarly, Cass County in North Dakota reported the use of a special assessment district fee to raise money to provide service to rural subdivisions for public projects that will cost more than $12,000. A more detailed description of this method can be found in the full report (3). A Montana road official was the only respondent to report the use of this funding method (Table 2). Currently, this method finances more than 15 percent of that particular county’s road budget. This method has merit; however, because only one road official reported its use, it is difficult to judge this method’s overall effectiveness. The advantages of a rural improvement district or special assessment district fee are as follows: (a) They would be relatively revenue certain. Essentially, all of the costs involved in servicing the particular district would be totaled and charged to the residents living in the subdivision (district). This charge should be recalculated annually to adjust for any variances in the services anticipated. For example, years with heavy annual snowfall may require more frequent snow plowing, therefore increasing the snow removal costs. Likewise, years with low snowfall would require less snow removal and therefore would reduce the fees. (b) Administering the fee can vary by district. An easy way to collect the fees is to piggyback them onto property taxes. This method of collection would be preferable to assigning someone in the subdivision to be responsible for collecting the revenue and paying the maintenance bills as they occur. (c) These are equitable taxes because those who will benefit from the improvements will be charged for them.

TABLE 4

The main disadvantage of a rural improvement tax or special assessment fee may be the opposition received from some of the residents of these districts.

COST REDUCING STRATEGIES Reducing costs is another strategy county road officials may consider to increase road funds. Reducing costs is the result of managing services and resources more efficiently. Since each county has only an allotted amount of revenues to meet the demand placed on the system, any cost savings would leave more funds for expanded uses. County road officials were asked to list and explain any cost reducing strategies they are implementing along with any potential cost reducing strategies worth investigating. In all, counties listed 14 strategies to reduce costs. The responses may be categorized into service and management strategies.

Service Strategies Eight of the cost reduction suggestions were categorized as service strategies (i.e., they reduce maintenance). Two of the service strategies, the use of chip seal and the use of soil stabilizers, involve the use of additives or products on the roads (Table 4). A chip seal typically consists of a single application of an emulsified asphalt. After the emulsion is applied, it is immediately covered with a layer of uniform size aggregate. Finally, a pneumatic-tired (rubber) roller is used to embed the aggregate into the asphalt emulsion. A chip seal can provide a durable, low-cost, impermeable, all-weather surface if constructed properly (5). The use of soil stabilizers may be an effective surface treatment alternative for certain gravel and dirt roads. The additives are mixed with existing surface material to provide bonding and sealing properties. Some of the chemical additives actually harden unpaved roads to yield a surface similar to paving and can help reduce maintenance costs. Road surfaces treated with these additives would endure damage due to traffic and weathering. Other service strategies include reducing the level of maintenance, narrowing the width of roads, closing roads and bridges, and converting paved roads back to gravel (Table 4). All these strategies relate to actual reductions in road services. Reducing the level of maintenance (i.e., blading) may be possible on roads with very low traffic volumes. However, adequate maintenance must be performed so that passengers

Current Strategies Used To Reduce Costs

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are not subjected to hazardous road surfaces. Some counties are reducing road maintenance to the point of declaring as minimum maintenance roads those roads with occasional or intermittent travel (6 ). Furthermore, some counties may be able to reduce the width of their roads, which would reduce the amount of materials such as gravel needed on the surface. The safety of motorists and vehicles must be considered to ensure that adequate operating conditions are provided. Some counties are even taking reductions in maintenance one step further by closing roads or bridges. Originally, roads were built approximately 1 mi apart to provide access to farms. Shifts in the agricultural industry to fewer and larger farms and shifts in overall traffic patterns have reduced the need for the extensive road network that counties and townships are required to maintain. Road closures and bridge closures can significantly reduce road budget requirements. However, counties or townships implementing road or bridge closures must be certain to follow the appropriate procedures in order to avoid potential tort liability cases (6 ). Converting paved roads back to gravel roads is another possible service strategy counties may implement to reduce their costs. Before selecting such a strategy, counties must evaluate the costs of a paved road versus the costs of a gravel road. A life cycle cost analysis is recommended in which the maintenance costs and the user costs are calculated. Traffic volume on the road will greatly affect the costs of maintaining the road. Roads with higher traffic levels would be more likely to justify the continuation of a paved surface than would roads with low traffic. User costs may be considered in a life cycle cost analysis. These costs include vehicle operating costs, opportunity costs due to travel time and delays, and accident costs. User costs typically are higher on gravel roads than on paved roads because of lost travel time from moving at slower speeds and the increased vehicle maintenance costs due to wear and tear on the vehicle. In a North Dakota case study analysis, user costs were found to increase gravel road total costs significantly. However, only roads with high traffic volumes (more than 300 average daily trips) justified paving (7).

Management Strategies Careful management of resources is another way counties can reduce costs. Sharing equipment and reducing the number of employees were mentioned in the surveys. Counties working together and sharing equipment can reduce costs. The purchase of road equipment can be an expensive investment, particularly for equipment that is used only seasonally (e.g., snow plows). The drawback to consolidating use of equipment or jointly purchasing equipment is the loss of control. Contracts and agreements are needed in case both counties or entities want to use the same piece of equipment at the same time. These arrangements will enable a good working relationship between entities. Reducing the number of employees, sharing county engineers, or reducing management in the DOTs all require changes in resource allocation or specialization of employment positions. If a position can be reduced while the same amount of work is completed, then counties will benefit; however, employee morale needs to be monitored to ensure a positive work environment. Counties reducing the number of employees may begin to contract more jobs. Use of contract employees may lighten the managerial burden and would save money in employee benefits and salaries. Smaller counties with fewer responsibilities may be able to share a county engineer. Each county alone may not have enough resources to support an individual county engineer. However, two counties shar-

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ing an engineer can mutually benefit from the expertise of a trained county engineer while keeping their costs to a minimum. Joint projects between cities and counties is another potential method to reduce costs. Work done to roads that would benefit both the county and the city could justify joint construction contracts between the two entities, including sharing the administrative costs. County road officials also indicated that requiring a detailed benefit cost analysis for each project could reduce county costs. Counties must collect and maintain detailed data to perform any benefit cost analysis. A project-level benefit cost analysis will help counties select the most effective alternative strategy and, therefore, potentially save the county significant resources.

CONCLUSIONS Lack of road funding is a national problem. Counties have extensive road networks but lack the funds to maintain these roads to current roadway operations standards. A survey was mailed to county road officials in Colorado, Iowa, Minnesota, Montana, North Dakota, South Dakota, Utah, and Wyoming to identify innovative financing methods and cost reducing strategies. Four innovative methods were identified that contribute significantly to the county budgets. These methods are sales tax, special ownership tax, wheel tax, and rural improvement districts and special assessment districts. Each of these methods would be relatively easy to administer and the taxes would be relatively easy to collect. However, public opposition may prevent any of them from being enacted into legislation. Currently, the wheel tax and the rural improvement district tax are not widely used. Only South Dakota counties reported use of the wheel tax. South Dakota counties cannot implement a county fuel tax so they rely on the wheel tax to generate enough revenue for road improvements. The main criticism of the wheel tax is that it does not fairly tax the users of the road because each vehicle is taxed the same regardless of the weight or miles traveled. The wheel tax is a method that counties can consider implementing to generate additional road revenue. Only one county in Montana reported use of the rural improvement district tax. This method may become more popular as counties become more urbanized through the development of subdivisions. The development of these subdivisions places additional demands on any county’s limited road budget. Most counties do not have the financial resources to increase maintenance on rural subdivision roads as residents may demand. Therefore, a rural improvement district tax would enable a county to provide the services residents of the subdivision may require. Before a rural improvement district tax can be implemented, at least 50 percent of the residents must be in favor of it. Cost reducing strategies are important for counties to consider in order to increase available road funds. Reducing costs is the result of managing services and resources more efficiently. County road officials identified 14 cost reducing strategies in the questionnaire. Using chemical additives, reducing maintenance, and closing roads were some of the service strategies identified. As long as the chemical additives are used correctly, they may help to preserve the road longer, thereby requiring less maintenance during the year. If county road officials decide to reduce maintenance or close certain roads with low traffic volumes, it is imperative they follow proper procedures to avoid tort liability. Management strategies to reduce costs were also identified. Consolidating the use of equipment and sharing county engineers were strategies some counties are using. Reducing the number of employ-

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ees and conducting joint projects among counties and cities were among the strategies identified. In addition, the use of benefit cost analysis may help reduce costs by eliminating those projects that do not meet cost-effectiveness requirements. Road officials need to keep detailed data on road segments in order to conduct the analysis. As more counties find new ways to combat the funding shortage, it is important that county road officials be informed of financing strategies being used in other counties or other states. The Federal Highway Administration publishes an Innovative Financing Newsletter. More information can be obtained via the internet at http://www. wfc.fhwa.dot.gov.

REFERENCES 1. Wooster, J. T. Federal, State and Local Transportation Financial Statistics: Fiscal Years 1982–1992. Bureau of Transportation Statistics, U.S. Department of Transportation, 1995.

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2. Bitzan, J. D., J. S. Honeyman, K. L. Casavant, and D. D. Tolliver. The Impact of Rail Restructuring on Rural and Agricultural America— Case Studies of Rail Abandonment. U.S. Department of Agricultural (in press). 3. Hough, J., A. Smadi, and J. Bitzan. Innovative Financing Methods for Local Roads in the Midwest and Mountain-Plains States. Mountain Plains Consortium Report 97-74, North Dakota State University, Fargo, 1997. 4. Hough, J., A. Smadi, and G. Griffin. An Assessment of Road User Needs in a Rural Environment. Mountain Plains Consortium Report 96-58, North Dakota State University, Fargo, 1996. 5. Kercher, A. S. Chip Seals—An Economical Maintenance Alternative. In The DELDOT T2 Center Travel-LOG, Delaware Department of Transportation, 1993. 6. Welte, P., J. Hough, and A. Smadi. Legal Implications to Closing or Reducing Maintenance on Low Volume Roads in North Dakota. Mountain Plains Consortium Report 97-69, North Dakota State University, Fargo, 1997. 7. Hough, J., A. Smadi, and L. Schulz. Gravel Shortage Options. Mountain Plains Consortium Report 96-65, North Dakota State University, Fargo, 1996.