Ideas. Action. Results.

Ohio’s Turnpike Plan: A Creative Alternative to Raise Revenue

By Capri S. Cafaro

Tuesday, December 11, 2018

Background

Boosting infrastructure investment is a feel-good, bipartisan priority, at least until it’s time to figure out how to pay for it. Enhanced fuel efficiency and more widespread electric vehicle use have made traditional state and federal motor fuel taxes increasingly untenable as primary revenue streams for funding transportation infrastructure. And with budgets overextended at every level of government, jurisdictions are considering new options—including tolls, vehicle mile taxes, and asset sales—to cover the growing costs associated with building new, and maintaining existing, infrastructure. Yet such efforts can prove controversial and partisan. Even in the recent midterm elections, voters in Missouri and Colorado soundly rejected major transportation funding measures, blocking additional funds from flowing to tackle project backlogs.

Recognizing how difficult it can be to cobble together sufficient funding (and maintain public support), lawmakers in Ohio set out in 2012 to find a new way to expedite major construction projects. Many of these projects had been stalled for years due to inadequate funding. After KPMG conducted a study of possible revenue mechanisms, Governor John Kasich (R) turned to Ohio’s Turnpike for the solution. Built in 1955, the Ohio Turnpike—comprised of Interstates 76, 80, and 90—spans about 240 miles east to west across the northern part of the state. Because Interstate 80 is a major national highway, connecting New York City to San Francisco, there has always been a high volume of traffic on the turnpike. To avoid some of the pitfalls and controversies of other tolled highway projects around the country, while raising necessary construction funding, Ohio charted a different course.

The Ohio Model

There are two main characteristics that set Ohio’s infrastructure funding plan apart from other tolling initiatives:

  • Ohio maintained ownership, operation, and maintenance of the turnpike.
  • Ohio issued bonds against future toll revenues as a mechanism to fund projects outside of the turnpike itself.

The Ohio Legislature passed Amended Substitute House Bill 51 in 2013, with bipartisan sponsorship and support, to change the laws governing the Ohio Turnpike Commission (OTC) and the Ohio Department of Transportation (ODOT) and execute the strategy outlined above. Yet, to gain the statutory authority to issue bonds against future toll revenues, a number of concerns voiced by legislators, particularly those representing communities surrounding the Ohio Turnpike, needed to be addressed. Initially, some lawmakers worried:

  • Bond proceeds would be distributed to projects far from the commuters paying the tolls;
  • Toll rates could rise quickly and significantly; and
  • State employees would lose their jobs if maintenance and toll collection operations were privatized.

The 2013 Ohio transportation budget, as enacted, addressed these issues through the following measures after weeks of input and negotiations between legislators and the Kasich Administration.

  • The Ohio Turnpike Commission was replaced with a new entity now called the Ohio Turnpike and Infrastructure Commission (OTIC). OTIC’s jurisdiction was modified to enable toll revenue-backed bond proceeds to be used for non-turnpike related infrastructure projects, while also maintaining traditional turnpike jurisdictional matters within the newly created commission.
  • In order to be eligible for funding, a project must first be recommended by the existing Transportation Review and Advisory Council (TRAC). TRAC must recommend no less than 90 percent of the dollars allocated for infrastructure be, at least in part, within 75 miles of the Ohio Turnpike itself. These projects must also have a discernable benefit to Ohio’s highway system and a “nexus” with the Ohio Turnpike.
  • Toll increases for passenger vehicles (i.e., cars and not commercial semi-trucks) were prohibited between 2013 and 2023 if paid by electronic transmitter (EZ-PASS) and for distances less than 30 miles on the turnpike. The flexibility was given to increase tolls to support bonds issued before July 1, 2013 and outside of exempt categories (i.e., EZ PASS and commuters).
  • The director of the Ohio Department of Transportation and the director of the Ohio Office of Budget and Management were no longer permitted to enter into agreements with the private sector on behalf of the Ohio Turnpike.
  • The Highway Services Fund, meant to collect payments from private sector vendors, was repealed.

How It Works

The law governing the bonding authority of the Ohio Turnpike Commission was modified in 2013 to execute this new funding model. Notably, Am. Sub HB 51 eliminated existing provisions that prohibited turnpike toll revenues and bonds issued by the turnpike from being used for purposes other than direct turnpike expenses. This was necessary to use new bond proceeds for major new construction projects outside of the toll road itself.

Who Sells the Bonds?

OTIC has the authority to use toll revenues to support non-turnpike infrastructure project costs. In 2013, roughly $1 billion in bonds were issued by OTIC. These bonds were issued in two categories: $930 million in junior debt allocated toward infrastructure projects and $70 million in senior debt allocated toward turnpike projects. (Senior debt is typically repaid before more “junior” debt in the event of a default or bankruptcy, making it less risky and, therefore, commanding a lower return for investors.) The projects covered by the junior bonds are used for the major new construction projects selected by TRAC as meeting the “nexus” criteria.

How Are Bond Sale Proceeds Received and Allocated?

Am. Sub HB 51 established an “infrastructure fund” meant for the deposit of toll-backed bond proceeds that would be used for non-turnpike projects as well as any costs associated with debt service on the bonds. The proceeds of the junior bonds would be deposited into the “infrastructure fund.”

OTIC Bond Transactions & Structure

In 2018, five years after the first bond issuance, OTIC issued $80 million in senior bonds and $450 million in junior bonds. Moody’s upgraded OTIC’s junior bond rating to Aa3 and senior bond rating to Aa2. While toll increases are prohibited by law in the cases of EZ PASS users and commuters travelling 30 miles or less on the Ohio Turnpike, OTIC approved a toll increase of 2.7 percent every year for 10 years for all other turnpike users in order to support the issuance of the junior bonds. However, OTIC projections assume a toll increase on all vehicles in 2023 when the toll increase freeze expires.

Legal Concerns and Challenges

OTIC identified three main potential areas of legal concern:

“Nexus” issue: Using toll revenue to fund debt service for non-turnpike infrastructure projects could be viewed as an unconstitutional excise tax. However, following a review of case laws, the state concluded that tolls may be used to fund debt service for projects that meet the “nexus” criteria.

“Dormant commerce clause” issue: OTIC flagged a concern that EZ-Pass and commuter tolls would violate the U.S. Constitution’s Dormant Commerce Clause. A review concluded that such toll provisions would not be unconstitutional as long as they are applied equitably to interstate and intrastate travelers

“Impairment” concerns: The toll freezing provisions could hamstring OTIC’s ability to set toll rates, giving pause to bondholders. Since the toll provisions were subject to compliance with bond covenant terms, this concern has not materialized.

In 2015, a class-action lawsuit was filed in state court, and then federal court, challenging the use of toll revenue backed bonds for projects outside of the Ohio Turnpike itself. A U.S. district judge dismissed six of the seven claims brought in the case, Ullmo v. Ohio. Claims dismissed included the assertion that it was an unlawful to use funds for projects not related to the turnpike as well as the claim that the projects did not benefit turnpike users. It was concluded that projects that received funds met the “nexus” criteria as defined in the Ohio Revised Code and such projects provide a benefit to turnpike users.

The judge upheld one claim that asserted diverting toll revenues totaling to the unrelated projects is an “unlawful tax or user fee under Ohio law.“ The judge concluded that such an issue is not federal and should instead be sent back to state court.

Key Takeaways

Despite these legal concerns, Ohio’s lawmakers worked together, across the aisle, to devise an innovative solution to funding needed infrastructure projects. With deferred maintenance and delayed projects in each and every state, sharing these solutions and the lessons learned might provide others with an example for how to break down political and public opposition to paying for transportation network improvements.