Restructuring Local Road Assistance: Why The Fuel Tax Increase Is Needed

(from Maine Townsman, February 1999)
By Kate Dufour, MMA Legislative Advocate

In November 1997 the Maine Department of Transportation approached the Maine Municipal Association to discuss MDOT’s interest in restructuring the Local Road Assistance Program (LRAP). MDOT’s interest in changing the structure of LRAP was motivated by the need to address three pressing issues: (1) the cost of transportation programs and the funding alternatives available; (2) an interest in changing transportation policies that appear to contribute to "sprawl" and drain financial support from the state’s "service center communities"; and (3) the historical flat-funding of LRAP.

Cost and Funding of Transportation Programs. As the Legislature begins to debate the Highway Fund budget, MDOT is faced with a $66 million capital improvement funding gap. MDOT through its budget request defines the funding gap as $45 million to keep the LRAP afloat, and $21 million to match $84 million in federal funds. Between 1991 and 1997, MDOT has struggled to regain the integrity of Highway Fund that was depleted in order to assist in filling the gap in the General Fund that was created by an economic downturn in the late 1980’s early 1990’s.

In order to balance the state’s accounts during this period, several non-transportation related departments, such Agriculture, Environmental Protection and the Attorney General’s Office, were partially funded with money generated by Maine’s fuel tax. The Department of Public Safety was also predominately funded through the Highway Fund. Although in the 1998-99 biennium MDOT was successful in restoring the integrity of the Highway Fund, the seven-year period of General Fund program reliance on Highway Fund revenues has left the state’s infrastructure in disrepair and a Highway Fund that has survived by means of borrowing and bonding. Currently, the percentage of MDOT revenue allocated to debt service is 15%, while the General Fund bonding rate and average national rate are at 3% and 7%, respectively.

Service Center Communities. Based on a study completed by the State Planning Office (SPO), a task force was organized to address the issue of sprawl and focus financial attention on Maine’s service center communities. Service centers are those municipalities where people go for shopping, entertainment, services and employment, but they do not reside there. According to the Task Force report on the state’s 69 identified service center communities, these municipalities must provide an expanded level of services to meet the needs of the regional community, but do not benefit from expanded property tax revenue. Therefore, the residents who live in the service center communities pay an inequitable amount of the tax burden to fund services that are shared by residents of outlying municipalities.

In an examination of the formulas used to distribute state transportation funds to municipalities, MDOT realized that they, too, used formulas that benefited outlying municipalities to the detriment of the service center municipalities. Currently, the LRAP formula, in its simplest form, is based on $600 per lane mile, regardless of the municipality’s responsibilities. Under existing statutes, the state shifts its compact area winter maintenance responsibilities when a municipality reaches a population of 3,500, and its compact area summer maintenance responsibilities when a municipality reaches a population of 6,000. These new responsibilities, which are based wholly on population, are reimbursed at the same rate of $600 per lane mile for their summer and winter maintenance responsibilities. In short, the LRAP formula requires Maine’s larger communities to provide additional services without appropriately being compensated for the added responsibilities.

Flat-Funding. To add to this background, since 1989 LRAP has been funded at $19.5 million a year. Although the cost for road infrastructure improvements and maintenance has continued to increase in the past decade, state funding to address municipal road infrastructure remains the same.

Faced with these three issues, the MMA Transportation Advisory Committee, consisting of 24 municipal officials from urban and rural municipalities, was formed for the purpose of assisting MDOT to restructure the LRAP. As currently proposed the LRAP would be divided into two sections: the Rural Road Initiative to be funded at approximately $17 million a year; and the Urban Compact Initiative to be funded at approximately $6 million a year. The proposal guarantees municipalities a minimum funding level equivalent to their FY 99 allocation and that all proposed increases in municipal responsibility are voluntary. Also, the proposal indexes the LRAP to a percentage of MDOT’s share of the Highway Fund thereby linking state assistance for local roads to increases (and potential decreases) in MDOT’s budget.

Rural Road Initiative

The proposed Rural Road Initiative:

1) Modifies the funding formula;

2) Requires that all funds be used on capital improvements; and

3) Creates the Rural Minor Collector Road Project program.

Rural Road Initiative Funding. The funding formula for the Rural Road initiative is 95% hammered out, although there is still an element that needs final resolution. Initiated by MDOT and supported by a majority of the MMA Transportation Advisory Committee the proposed formula does the following:

• Increases payments for minor collector miles from $300 per lane mile to $600 per lane mile. Currently, municipalities are required to provide winter maintenance on state aid major and minor collector roads. The reimbursement rate under the existing LRAP is $300 per lane mile.

• Ensures that in the first year no municipality will lose any LRAP revenue. After the first year all municipal LRAP allocations will fluctuate due to the provision which indexes the LRAP funds to a percentage of MDOT’s Highway Fund Allocation. For example, if the MDOT’s Highway Fund allocation in FY 01 were to increase by 2%, then each municipality’s LRAP payment would also increase by 2%.

• Requires that all funds distributed under the Rural Road Initiative be invested in capital improvements. The definition for capital improvements has been expanded to enable municipalities to use these funds to pay existing infrastructure debt or to save the funds for future investments.

One additional formula factor that MMA continues to explore relates to rural major collector state aid highways. The proposal excluding major collector road miles from reimbursement formula was developed to shift the focus of LRAP from a maintenance to a capital improvements program. Instead, to ensure that no municipality loses revenue caused by the removal of the major collector miles from the formula, a "hold harmless" provision was established. As MMA continues to receive feedback questioning the necessity of exchanging the current formula which reimburses municipalities for their winter maintenance responsibilities on major collector roads with the "hold harmless" provision, this element continues to be discussed with the MMA Transportation Advisory Committee and MDOT.

Rural Minor Collector Road Project Program. Another piece of the Rural Road Initiative is the development of the Minor Collector Road Project Program. Currently, MDOT estimates that there are 1,700 deficient minor collector road miles. Over the next 20 years MDOT will spend $1.3 billion to address deficient roads, however none of this investment will be allocated for repairs to minor collector roads. With that in mind, MDOT and the MMA Transportation Committee developed the Rural Minor Collector Road program, which is a voluntary program that enables municipalities to match additional state revenue in order to make improvements to Maine’s minor collector roads. Somewhat similar to the CRDA program, this proposal would require a municipality to first inform MDOT that it was interested in participating in a rural minor collector road project. MDOT would estimate the cost for the department to complete the project and give the municipality the state’s share of the cost, which would be 67% of the total estimated costs. The municipality would then be responsible, based on procedures adopted by MDOT to complete the project. If the final project cost is less than the department’s estimate, the savings belong to the municipality. If on the other hand, the project cost more than the MDOT estimate, then the state and municipality would share the burden of the unanticipated cost at the 33% municipal / 67% state rate.

For example, if the state assesses a project at an estimated $500,000, the state would give the municipality a $335,000 payment for its share. If the municipality completes the project at a cost of $400,000, the municipality saves $100,000. One the other hand, if the final project cost were $600,000, the state would reimburse the municipality $67,000, which is 67% of the project cost overrun.

Urban Compact Initiative

The Urban Compact Initiative proposal:

1) establishes qualification standards;

2) dramatically increases per lane mile funding formulas;

3) creates an opt-out provision; and

4) grandfathers municipalities currently providing winter maintenance in the compact area.

Methods for Qualifying. To participate in the Urban Compact Initiative, the municipality must meet three qualifications:

• have a population that is greater than 2,499;

• meet the existing density requirements, that is have an urban compact area which has a structure every 200 feet for a 1/4 mile; and

• be a net importer of workers.

Funding and Responsibilities. Qualifying municipalities will be responsible for summer maintenance on State Highway Urban and State Aid Urban roads and will be reimbursed at a rate of $2,500 per lane mile up to two lanes and $1,250 per lane mile for each additional lane beyond two. Municipalities will be reimbursed $1,700 per lane mile, regardless of the number of lanes, for winter maintenance on State Urban Highway roads. These municipalities will also receive Rural Road Initiative funds for all minor collector road and local road miles located outside of the compact area. Funds allocated under the Urban Compact Initiative may be used on either capital improvements or maintenance, while funds allocated under the Rural Road Initiative must be used on capital improvements only.

Opt-Out Provision. Participation in the Urban Compact Initiative is mandatory for those municipalities with populations greater than 7,499. For those municipalities with populations between 2,500 and 7,499, participation is voluntary. For example, if a municipality qualifies for this program and is currently not responsible for the winter and summer maintenance of State Highway Urban and State Aid Urban roads, the municipality can choose whether or not to participate. If the increase in funding is adequate to meet increased responsibilities, then a municipality may choose to opt-into the program. However, if the municipality determines that the increased revenues will not adequately pay for increased responsibilities, then the municipality may opt-out. Once a municipality has chosen to participate, however, it may not at a later point opt-out.

Also, a municipality’s decision to opt in or out of the program will impact the turnback statute. Currently under 23 MRSA, section 754, any municipality with a population under 6,000 as of January, 1997 is protected from being turned back roads in their compact sections by MDOT that are in disrepair. If a municipality with a population between 2,500 and 6,000 opts into the program, the turnback provision under MRSA 23, section 754 will no longer apply. That is, MDOT will be able to turnback compact sections of road, regardless of condition, to municipalities that opt-into the program. If the municipality chooses to opt-out, the provision for turnbacks in good repair will continue to apply.

Grandfathered Winter Maintenance. Existing law require municipalities reaching a population of 3,500 to provide winter maintenance on State Urban Highways within the urban compact area. The pending proposal would require, those municipalities to continue to provide the winter maintenance on these roads; however, the reimbursement rate would be increased to $1,700 per lane mile.

Funding the Initiatives

As it currently stands, the funding of the restructured LRAP is reliant on a 5-cent fuel tax increase. One can only assume that if the additional revenues to the Highway Fund are not secured by the Legislature, the LRAP will remain frozen at the $19.5 million level, where it has been stuck for a decade. Because 50% of LRAP was put out to bond over the last biennium, however, LRAP is not found in the Highway Fund’s Part I "continuing services" budget. LRAP at traditional levels, augmented with $6 million additional dollars, is in the Highway Fund Part II budget but the Part II spending is contingent on the extra revenues provided by the 5 cent increase to the fuel taxes.

Summary

In summary the proposed changes to the LRAP would accomplish the following:

• Increase the total LRAP allocation from $19.5 million to $23 million and require in subsequent years that the LRAP fund be indexed to a percentage of total Highway Fund revenue dedicated to MDOT;

• Guarantee a minimum LRAP allocation to every municipality that is at least equal to the FY 1999 allocation;

• Increase the population threshold classifying municipalities as urban compact areas from 6,000 to 7,500;

• Create an opportunity for municipalities with populations greater than 2,499 and less than 7,500 to voluntarily choose to take responsibility for summer and winter maintenance on state roads in compact areas;

• Reimburse municipalities $2,500 for summer maintenance and $1,700 for winter maintenance on state roads in compact areas;

• Reimburse municipalities $600 per lane mile for rural road miles maintained;

• Require that funds allocated for rural road miles be expended for capital purposes only;

• Create a voluntary municipal/state funding partnership for capital improvements on minor collector roads; and

• Increase fuel tax rates by 5 cents per gallon.

For further information on how these changes may impact your municipality, please feel free to contact Kate Dufour of the MMA State & Federal Relations staff at 1-800-452-8786, or by e-mail at kdufour@memun.org.

MMA/MDOT OUTREACH MEETINGS SUCCESSFUL (sidebar)

During the month of January the Maine Municipal Association and the Maine Department of Transportation hosted seven regional outreach meetings across the state to discuss the proposal to restructure the Local Road Assistance Program (LRAP) with municipal officials. In total, 143 municipal officials met in the towns of Naples, Mechanic Falls, Madison, Ashland, Sangerville, Lincolnville and Machias, to learn, discuss and provide valuable feedback to the MMA Transportation Advisory Committee and MDOT on merits of the program.

Overall the most significant issue raised in most meetings was the creation of the Rural Minor Collector Road Project Program. This voluntary program would enable municipalities to match additional state funds to undertake minor collector road projects. As originally proposed, the state-municipal spilt was crafted on a 50/50 ratio. Although MMA’s Transportation Advisory Committee was championing a 60% state / 40% municipal split, many municipal officials made it clear that even the 60/40 split would continue to be too large of a financial burden on smaller municipalities interested in matching additional state revenue. Due to the feedback received, the proposal now stands at a 67% state / 33% municipal matching formula. Other concerns raised included the fuel tax increase and to a lesser degree the 100% capital improvement investment requirement of the Rural Road Initiative funds.

Naples. Discussion focused primarily on two issues: restoring and maintaining the integrity of the Highway Fund; and the matching requirement for the Rural Minor Collector Road Project Program. Municipal officials were concerned that if fuel tax rate was to increase it was important that the revenues be directly invested in roads not only on a short-term basis but also on a permanent basis. MDOT explained that by indexing the LRAP to a percentage of MDOT Highway Fund allocation, the built in safeguard would be that municipalities would partner with MDOT to ensure that no other program would decrease the Highway Fund revenues allocated to MDOT thereby preserving maximum funding for the LRAP. The municipal officials at this meeting were also concerned that the 50/50 and 60/40 matching Rural Minor Collector Road Project Program formula were too financially burdensome for smaller municipalities. The municipal officials represented at this meeting were not concerned with the requirement to invest 100% of their Rural Road Initiative funds on capital improvements.

Mechanic Falls. Discussion at this meeting primarily focused around the development of safeguards to insure that the revenue obtained by the fuel tax increase would be dedicated to improvements in the road infrastructure. One municipal official questioned why MDOT was interested in how Rural Initiative funds were to be expended. The MDOT representative at the meeting stressed the importance of capital investment on local roads.

Madison. Municipal officials at this meeting pointed out how quickly flat rate tax increases can be gobbled up by inflation. Participants were also very perturbed about the matching requirements on the Rural Minor Collector Road Project Program. Many felt that the state was walking away from its responsibilities. When asked about the 100% capital improvement requirement for Rural Road Initiative funds, many thought that it was good lobbying tool to use locally to insure ongoing investment in municipal roads.

Ashland. Most of the evening’s discussion revolved around the issue of shifting from the state to the municipality the responsibility for improvements to minor collector roads. Some of the municipal officials present at the meeting felt that this change was a trap to require municipal officials to take on more of the state’s road improvement responsibilities.

Sangerville. Faced with slowing economies and an increasing property taxpayer burden, the municipal officials in Piscataquis County raised legitimate concerns with nearly every aspect of the proposal, taking special objection with the minor collector program, fuel tax increase and the requirement to invest all Rural Road Initiative funds in capital improvements.

Lincolnville. Municipal officials at this meeting took interest in the minor collector road project and explored the program’s many possibilities. Overall the municipal officials seemed interested in the proposed changes.

Machias. The underlying tone of the meeting in Machias was the municipal belief that without good roads Eastern Maine would not survive economically. Municipal officials were interested in all aspects of the program that would enable them to invest more money in roads. The municipal officials understood the need to increase MDOT funding and were interested in learning about any other alternatives for increasing MDOT access to revenue.

As we continue our efforts to inform municipal officials about the proposed LRAP changes we are interested in speaking before any groups who may find this information useful. If you like us to present this proposal to your organization, please contact Kate Dufour at 1-800-452-8786.