State departments of transportation are increasingly cutting costs and seeking new ways to finance and deliver transportation projects as revenues from traditional funding sources—primarily federal and state fuel taxes—continue to erode. Facing an estimated $1.6 billion highway funding gap in coming years, Ohio policymakers began taking concrete steps to develop new cost-saving and project financing tools in 2011, passing legislation authorizing a potential long-term lease of the Ohio Turnpike to private investors and granting the Ohio Department of Transportation (ODOT) authority to enter into public-private partnerships (PPPs) to finance and develop new transportation projects.
ODOT took another major step earlier this year in establishing a new internal Division of Innovative Delivery to identify alternative transportation funding solutions. Among its early initiatives, the Division is exploring PPPs to modernize the Ohio Turnpike, develop non-Interstate rest areas, and establish a corporate sponsorship program for state-owned rest areas, bridges, interchanges and sections of highway. Further, the Division is also exploring innovative financing approaches for several different state transportation projects, including the Brent Spence Bridge over the Ohio River in the Cincinnati area, the Portsmouth Bypass in Scioto County.
Reason Foundation Director of Government Reform Leonard Gilroy interviewed ODOT Director Jerry Wray in October 2012 on how the agency is trying to address its long-term challenges by innovating today through streamlining measures, PPPs and other strategies.
Leonard Gilroy, Reason Foundation: Ohio, like many other states, is facing major challenges in terms of generating the revenue needed to maintain, much less expand, its transportation system into the future. Can you describe the financial challenges that ODOT is facing?
Jerry Wray, Director, Ohio Department of Transportation: ODOT is facing a number of challenges. ODOT's job is simple: we are entrusted with resources, and our job is to turn those resources into results. In our case, ODOT sees results in everything we do from mowing the grass, plowing the snow, and cleaning the ditches, all the way up to our most visible job, which is building roads and delivering transportation projects to communities around the state.
But the fact is that we're facing a funding crisis in Ohio. Last January, we determined that there is a $1.6 billion funding shortfall for construction projects. Those are projects that have been vetted through the approval process and are ready to go to construction, and yet we don't have enough money to build them. In addition to that, another $10 billion worth of future projects are in the development process, but for which there is no money.
Further, for every dollar Ohio sends to Washington D.C. from the federal motor fuels tax we receive about 86 cents in return, and the money we do get back comes with all sorts of strings, red tape and bureaucratic mandates attached. On the state side, ODOT receives approximately 60 percent of the money collected and shares the rest with other government agencies.
The cause of the problem is fairly simple. Our recent economic decline, combined with more fuel-efficient vehicles, inflation and the recent federal stalemate over a long-term national transportation funding plan has left Ohio and every other state in a precarious position. As gas prices rise, consumption goes down, meaning Ohio has less money to build and maintain our transportation system. Federal and state fuel tax dollars—our primary source of funding—don't buy us as much as they once did. We've been unable to keep up with the rising costs of construction. It costs us $158 today for what we could buy for $100 in the year 2000.
If the situation is left unchanged, we'll have to push projects back many years, or even decades. Our citizens find this disappointing and unacceptable, and we find this unacceptable, so we're focused on doing something about it. And if we want to continue our economic recovery we need to think differently, and we cannot wait for Washington to send us money. This is a monumental problem to tackle—and we will not solve it overnight. We will continue to find solutions but we also have to be realistic and focus on what we can control and what we can change now here in Ohio. We have to take care of business at home.
Gilroy: Can you describe some of the solutions you’re advancing at ODOT today?
Wray: We have to produce projects at the retail level: quick delivery of projects is what people want from us. Everything we do—from plowing snow to building new interchanges and highways—our citizens want faster and better.
To help us meet citizens' expectations, we've been exploring many different ways of saving money since January 2011. For example, we've reduced staff by over 400 through attrition and saved over $34 million annually, a savings that will repeat year after year. We expect further staff reductions through attrition in the coming years as well, which we expect will generate further savings.
We've also moved to zero-based budgeting this year. ODOT used to carry forward lots of money as a cushion for future years, but we can't afford to let that money sit on the books when we can use it to build projects around the state. We will free up millions of dollars this year alone.
We've also re-budgeted $150 million off of our previously adopted biennium budget, taking a hard look at areas like equipment usage, overtime control, and vehicle usage and purchasing. We believe we could reduce our vehicle fleet by up to 40 percent, for example.
That's what we can do internally, as an agency, to identify areas where we can deliver the same great service ODOT is known for and do it at a lower cost to our customers. But we’re not stopping there. I oftentimes tell groups of people when speaking at public events that, “this isn’t your grandpa's ODOT.” And it isn’t. We’re embarking on a new program—the Division of Innovative Delivery—that will allow us to essentially do two things: 1) reduce construction costs by partnering with the private sector, and 2) generate additional money by leveraging the value of state-owned assets.
For instance, we are conducting a top-to-bottom review of all of ODOT’s assets that could potentially generate money for the department. We have a website that provides real-time traffic information to the motoring public. Is there a market for ODOT to sell advertising space on that website? We’re about to find out. We have thousands of bridges, interchanges and other transportation features that private businesses could pay us millions of dollars to sponsor. So, we’re pursuing an aggressive sponsorship and advertising program.
We're also looking at new and innovative ways to finance transportation projects, and we see great value in engaging the private sector through public-private partnerships.
Gilroy: Let's talk more about public-private partnerships (PPPs). In the last two years, Ohio has become one of the leading states in the U.S. with regard to embracing innovations like PPPs, private infrastructure financing and cutting-edge tolling projects. Can you briefly describe some of your notable PPP projects in the works right now? Would you have been able to deliver these projects without the PPP model?
Wray: We're researching PPPs and the development of alternative financing solutions for several different projects right now, and options range from design-build, design-build-finance, design-build-finance-maintain, availability payments, tolling new capacity and more. We’re taking a new look at each and every construction project we are pursuing and asking different questions. Is there another way to deliver this project much faster and at a lower cost to Ohio’s taxpayers? Oftentimes, the answer is yes.
We have a huge $330 million bridge project in the Cleveland area. That project was delayed many years because we simply do not have $330 million sitting around at ODOT. So, we took a fresh look at the project and by pursuing innovation and a design-build-finance model, the private sector is going to finance that project over the next few years and let us get shovels in the ground much sooner than we had anticipated and we’re going to pay them back over time. That is also something we’ve never done in Ohio.
Another project we're looking at is the construction of a new bridge over the Ohio River between Cincinnati and Northern Kentucky. We're partnering with Kentucky on that $2.4 billion project. If we waited for traditional funding it would probably take 30 years or more and we might never see that bridge in our lifetime. So we're looking at the option of tolling that bridge to hopefully get it under construction in 2014.
For the Portsmouth Bypass, we've hired a consultant to help us structure this public-private partnership, and that would be an availability payment model. We receive approximately $22 million from the feds each year for Appalachian development and we would use that money to pay a concessionaire back over a period of time.
So, you can see that in Ohio we're serious about pursuing alternative project delivery methods and seeking innovative financing. We simply do not have another option. We cannot beg Washington for a bailout or hope that money magically falls from the sky and we certainly will not raise taxes on hardworking Ohioans. We have to lead and do things differently and that’s exactly what we're doing.
Gilroy: Something we haven’t talked about yet is the Ohio Turnpike. The state is undertaking a study of the Turnpike. How soon could we expect to see results of the study and how is Ohio likely to proceed?
Wray: The Ohio Turnpike is 241 miles of straight-line highway running through the northern part of Ohio and the Ohio Turnpike Commission takes in around $260 to $270 million each year in tolls.
People are passionate about the Ohio Turnpike and when the word “lease” is mentioned, people have strong opinions on both sides of the issue. So we hired KPMG to provide a thorough, independent, third-party analysis of the Ohio Turnpike. This will provide us the information and recommendations we need to fully leverage the value of this state-owned asset. The options range from changing nothing, rolling the Turnpike into ODOT and bonding against the future revenue stream, or seeking a concessionaire to lease the Turnpike for a period of time and using that money for projects in northern Ohio and elsewhere around the state. Certainly opportunities exist that would maintain the Turnpike's integral role in our highway system but could also provide additional dollars to improve the state's status as a national leader in logistics.
We anticipate receiving a final report from KPMG before the end of 2012 and I think you’ll see the administration take that information and use it to make a very educated and thoughtful decision about how to proceed with potentially leveraging the revenue potential of the Ohio Turnpike.
Gilroy: You're also looking at potential PPPs to re-develop the rest areas ODOT operates along state highways. Can you describe that project?
Wray: We currently have 104 rest areas in Ohio: 45 on the interstates and 59 on state routes and US routes. Federal law prohibits us from seeking commercial development of the 45 interstate rest areas. So, we are pursuing something a little different with them. We just put Traveler's Marketing under contract to lead an advertising and sponsorship program of Ohio's 45 interstate rest areas which could generate $13 million over eight years. That’s something we’ve never done before.
But for the other 59 non-interstate rest areas we're exploring the option of converting some of them into service plazas. This will serve the public much better, turn a cost into revenue, and will generate additional money for projects around the state.
All 104 rest areas in Ohio cost taxpayers roughly $50 million each year to maintain. That's mowing the grass, paying the utility bills, resurfacing parking lots, making improvements to structures, and paying for our biggest expense, which is housekeeping and janitorial services. If we could offset that cost by changing our business model, we could put that $50 million into highway preservation and construction in Ohio. Again, this is something that's never been done in this state but it's an option we must consider.
Gilroy: What lessons would you offer to another state DOT that is considering following ODOT footsteps on PPPs, tolling and other innovations? What internal culture changes are required for success? How should they approach communication with the public, media, etc.?
Wray: Ohio just enacted PPP legislation in 2011. We’re still learning from other states about how they pursued certain PPP ventures. We are looking at Virginia’s model for selling advertising at rest areas. We’re looking at neighboring states like Indiana and Pennsylvania and the models they pursued for their toll roads. What worked, what didn’t, and why? So, I would say that we’re still learning from other states and are not really in a position to give them advice just yet.
Gilroy: Have the financial challenges ODOT is facing prompted a larger shift in the agency’s thinking with regard to how it delivers on its mission?
Wray: Our job at ODOT is to provide the best possible return on the public's transportation investment, to provide as much service as we can—as many results as we can—for the resources that we have. ODOT is a $2.8 billion enterprise. We need to produce and deliver $2.8 billion in results for the people of Ohio.
For many years we had consumption growing, and we always had another federal bill coming, and it was going to be larger than the last. We were slow and lethargic in terms of delivering projects. So for decades we basically had money waiting on projects. Today, DOTs need to see it as the reverse: projects waiting on money. We need to get aggressive at getting projects ready to go and work with our partners in the cities, metropolitan planning organizations, port authorities, transportation improvement districts and others to put together funding packages.
We've got a lot of tools at our disposal, like tolls and public-private partnerships, so we need to get the projects ready and then find the tools to finance them. And this is going to require a logical, cogent, fact-based process that is open and understandable so that the public will know how we're setting the priorities and making decisions about how projects move forward.
We will continue to find efficiencies, be innovative, and be up front with the public on our financial situation. And we're going to continue to work to change our circumstances so that we can deliver the best results for the citizens of Ohio.
Jerry Wray is the director of the Ohio Department of Transportation and is the first to be named to the post twice in ODOT’s 100-plus year history. He previously served as director from 1991to 1999. During this time, ODOT improved its project management, initiated employee suggestion campaigns and focused on better meeting customer needs. The department also increased its construction program to record levels while reducing operating expenses. In the 21st century, Director Wray and ODOT are committed to maintaining and improving transportation infrastructure through efficient and effective organization and the use of innovative financial tools.
Other articles in Reason Foundation's Innovators in Action 2012 series are available online here.