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Local Match: Finding the Cash to Secure Federal Funds

New Starts, Small Starts, Transportation Investment Generating Economic Recovery (TIGER), and other federal grant programs can help to make a transit capital project a reality. But to be competitive for funding, project sponsors must also commit local funds. In reality, the “local” match can be any mixture of local or state funding, as well as alternative funding sources such as developer contributions, toll revenues, and benefit assessment districts. This article examines some of the sources that project sponsors have successfully employed to secure funding for their projects.

The Increasing Local Share

While the statutory cap on federal funding for New Starts and Small Starts projects through the Federal Transit Administration (FTA) Section 5309 Capital Investment Grant program is 80 percent of capital costs, the reality is that most of these projects have received significantly less than that in recent years. The average grant amount for existing and recommended New Starts grants in FTA’s Fiscal Year 2015 Annual Report on Funding Recommendations is $875 million,1 which represents an average of 43 percent of project costs. Small Starts projects fare slightly better, but the federal share still averages only 55 percent. This leaves an average of $1.3 billion or 57 percent of New Starts projects and $58 million or 45 percent of Small Starts projects to be funded through local sources.

TIGER grants supported 52 projects in 2013, including six transit projects that received an average federal grant of $12 million covering an average of 41 percent of project costs. Thus, the average transit project funded by TIGER in 2013 had an average local share of $29 million (59 percent).2

How to fill the gap? Let’s explore three types of sources being tapped to advance projects around the country: state, local, and corridor-based funding.

State Funding

Several states recently have enacted comprehensive transportation funding reform packages, providing the first new funding in a generation to support bridges, highways, transit, and other transportation needs. These packages will generate millions of dollars in new revenue for transportation and seek to make funding sustainable. Bills in Maryland and Virginia provide targeted funding for transit capital needs.

Maryland’s 2013 bill increases state transportation funding by $800 million annually through fiscal year 2018. The bill transitions the state transportation funding source from a motor fuel tax charged per gallon of fuel to a motor fuel sales and use tax charged per dollar of fuel purchased. The package secures state Transportation Trust Fund revenues to provide $1.4 billion (58 percent) in funding for the Purple Line, a $2.4 billion, 16-mile circumferential light rail project connecting the Maryland suburbs of Washington, DC, and $1.7 billion (65 percent) for the $2.6 billion, 14-mile Red Line light rail project in Baltimore. The commitment of funding through passage of this package was an essential requirement for these projects to receive a New Starts funding recommendation from FTA.

Virginia also passed a bill in 2013 that will increase transportation funding by approximately $900 million annually. The bill eliminates the state’s 17.5 cents-per-gallon gasoline tax and replaces it with a 3.5 percent wholesale fuel tax and a 0.3 percent statewide sales tax increase. In addition, the measure imposes a 0.7 percent regional sales tax benefiting highway and transit projects in Northern Virginia. The package increases state funding for local transit agencies’ capital projects, pledging 68 percent state funding for rolling stock, 34 percent for infrastructure projects (including most transit expansion projects), and 17 percent for other capital expenditures.

Local Funding

Sales tax measures fund 66 transit agencies across the country, according to 2012 data from the National Transit Database. On average, sales taxes fund approximately 41 percent of the combined capital and operating expenses of these agencies, and provide as much as 60 to 80 percent of funding for transit agencies serving Austin, Cleveland, Denver, Fort Worth, San Antonio, and Seattle.3 Many regions have returned to the polls seeking voter support for additional sales tax measures over time. Increasingly, local transit investment needs require dedicated sales tax rate of greater than 1.0 percent. Two examples are San Jose and Los Angeles.

Santa Clara County voters adopted a permanent 0.5 percent sales tax to support transit in 1976. An additional 0.5 percent measure that initially supported only highway projects was extended over the decades to support highway and transit projects, and then only transit projects when it last came up for renewal in 2000. That measure is funding 51 percent of the 10-mile, $2.3 billion extension of Bay Area Rapid Transit heavy rail to the San Jose city limit, a project now under construction. In addition, county voters approved a 0.125 percent (1/8-cent) sales tax in 2008 that will fund the ongoing operation and maintenance of the BART extension, a prerequisite for $900 million in federal New Starts funds for the project. The measure brings the total local-option sales tax rate dedicated to transit in the county to 1.125 percent.

Los Angeles County now boasts three 0.5 percent local-option sales tax measures supporting transportation, which were passed in 1980, 1990, and 2008. The 30-year Measure R of 2008 dedicates 35 percent of its funding for 12 transit expansion projects, including two New Starts projects: the 3.9-mile, $2.8 billion Westside Purple Line Extension, and the 1.9-mile, $1.4 billion Regional Connector light rail project. Los Angeles is eager to identify additional funds to accelerate its transit expansion program and sought to extend Measure R an additional 30 years through Measure J of 2012. That measure fell just 0.6 percentage points shy of the two-thirds majority required for approval in California, so Los Angeles Metro is currently considering other approaches to provide additional financial capacity. This illustrates an important lesson for planners in other regions: be prepared to identify a Plan B to fund your project.

Source: Maryland Transit Administration
                                                                                                             

Seattle did just that when voters in the region adopted ST2 in 2008, a 15-year, 0.5 percent sales tax for Sound Transit’s regional bus and rail projects. It followed the 2007 failure of a 1.0 percent sales tax measure that would have funded both transit and highway projects. Planners learned that voters were supportive of new taxes for transit, but not for highways, so funding for highways was stripped from the 2008 measure. ST2 will fund several New Starts projects planned in the region, including the 8.5-mile Lynnwood Link light rail extension, currently in project development.

Corridor-Based Funding

Another approach is to use revenues generated adjacent to the transit corridor to fund transit improvements. This includes value capture, in which the increased value of properties adjacent to a project is tapped as a funding source. Often this is done through tax increment financing (TIF), which involves the creation of a special district to raise revenue for public improvements by capturing a portion of the additional assessed value generated by private-sector development.

Source: Stephen Barna, Dulles Corridor Metrorail Project

The tax base is frozen at predevelopment levels, and all or a portion of property tax revenue derived from increases in assessed values (the tax increment) is applied to a special fund created to retire bonds originally issued for development of the district. Another value capture approach is the special assessment district, in which an additional property tax is applied to parcels of land that receive a special benefit from one or more public improvements funded by special tax. A third approach is direct contributions from developers.

  1. Fairfax County, Virginia, has established a special assessment district to fund approximately 17 percent of the cost of the $3.1 billion, 11.7-mile extension of Washington Metrorail service to Tysons Corner and Reston.


The project is also using another corridor-based funding approach to fund 47 percent of the project, toll revenue from the Dulles Toll Road, along which the rail line will be built.

Two other Northern Virginia jurisdictions are also planning to apply corridor-based financing to deliver transit projects. Arlington County anticipates using tax-increment financing to fund the Crystal City Streetcar project. The city of Alexandria, meanwhile, plans to use a combination of benefit assessment district revenues and developer contributions to fund the infill Potomac Yard Metrorail Station. These projects may also apply a share of Virginia’s newly-enacted state and regional transportation funding.

Lessons Learned

There are several important lessons to be learned from these examples:

  • Communicate: Keeping your funding partners apprised of funding needs helps them to help you. The state funding packages passed in Maryland and Virginia might have overlooked transit needs if not for the persistent demonstration of funding needs by transit leaders there.
  • Start early: The funding packages for each of the projects described in this article required years of planning to reach fruition. It’s best to begin thinking about how to pay for capital and operating costs early in the planning process. That will provide time to begin nailing down some funding sources and develop a plan to get the remainder committed.
  • Be flexible: In some cases, funding didn’t materialize until the second or third ballot measure. Knowing of potential back-up sources will help should any planned funding sources fall through. In addition, back-up funds can fill funding gaps created by any unanticipated increase in project capital costs.
  • Be creative: As the Northern Virginia projects demonstrate, major transit capital projects don’t require a dedicated sales tax to be delivered. Using corridor-based funding sources and other alternative approaches can help to make a project a reality in a fiscally constrained environment.

Financial planning for major transportation projects can be complex, time-consuming, and frustrating. But as these examples illustrate, there are many options to identify and secure local matching funds.

Note:

    1. Parsons Brinckerhoff Analysis of Annual Report on Funding Recommendations: Fiscal Year 2015 Capital Investment Grant Program (2014). Federal Transit Administration.
    2. Parsons Brinckerhoff Analysis of United States Department of Transportation's TIGER 2013 Awards.
    3. Parsons Brinckerhoff Analysis of National Transit Database 2012 sales tax revenue data.

Image Header Source: Oran Viriyincy (Creative Commons)