How Does Road Money Get Spent?

WHERE DOES THE MONEY COME FROM?
WHO SPENDS IT?
WHO ARE THEY ACCOUNTABLE TO?

The debate over road funding has seen a number of outrageous and contradictory claims. On the one hand, for example, we’re told that the Department of Transportation (DOT) faces a $43 billion shortfall; on the other that it’s a flawlessly run agency with well-placed priorities and next to no waste.

Citizens can and should question these claims, as SCPC has on the shortfall and DOT management arguments. Toward that end, everyone wishing to engage in the roads debate should be aware of the basic mechanisms by which our state road system is currently maintained. This means a knowledge of current funding sources, the authorities who decide how road funds are spent, and who the authorities are accountable to.

Unfortunately, a citizen who understands these basic features of the controversy will know more than many policymakers do.

Road funding sources   

South Carolina road construction and maintenance is funded primarily through three different pools:

  1. State gas tax revenues
  2. Federal funds
  3. Debt financing from the State Transportation Infrastructure Bank (STIB)

State gas tax revenues totaled $574 million in fiscal year 2015 (FY15). Out of this amount, $422.5 was available for use by the DOT. The remaining revenue was divided as follows.

  • Revenue from 2.66 cents per gallon of the gas tax is dedicated to the County Transportation Fund (C-Funds). In FY15 this came to $69.5 million.
  • Another $9.5 million was transferred to the County Transportation Fund as a donor bonus.
  • One percent of the revenues from 13 cents of the gas tax is dedicated to the Department of Natural Resources Watercraft Fund. In FY15 this came to $3.4 million.
  • Revenue from 0.5 cents per gallon of the gas tax is dedicated to DHEC’s SUPERB fund, a fund that finances “the rehabilitation of a release at a site contaminated with petroleum or petroleum products released from an underground storage tank system.” In FY15 this came to $17.6 million.
    South Carolinians currently pay 16.75¢ in fuel tax per gallon.

    South Carolinians currently pay 16.75¢ in fuel tax per gallon.

  • Revenue from 10 percent of 0.25 cents per gallon of the gas tax was dedicated to the Department of Agriculture. In FY15 this came to $900,000.
  • The STIB received gas tax funding equivalent to the revenue raised by 1 cent of the gas tax. In FY 2015 this equaled $26.6 million.
  • $15 million was dedicated for purposes of financing transfers related to the International Fuel Tax Agreement (a system by which the 48 contiguous states transfer fuel tax revenue from commercial motor vehicles over a certain weight, i.e. semi-trucks).
  • Finally, $9 million was deducted by the Department of Revenue (DOR) for refunds, corrections, tare allowances, school buses, and U.S. government use).

State gas tax revenues are the only one of South Carolina’s three road funding sources that are free to be devoted to routine maintenance.

Federal funds are provided to the state DOT on a matching basis. The state DOT must begin federally funded construction projects (typically expansionary projects) using state gas tax revenues, and only then begin to use matching federal funds.

The DOT estimates it will receive around $900 million in federal matching funds in the current fiscal year. The DOT also states that the average state funding match requirement to receive federal funds is 20 percent of a project’s cost. This means we can roughly estimate the DOT will spend around $180 million in the current fiscal year in order to obtain federal funds.

Half of South Carolina roads, including secondary and rural routes, are not eligible to receive federal funds, and federal funds cannot be used for routine road maintenance. The state roads that are ineligible for federal funding also happen to be the class of South Carolina roads that are in the worst state of repair. Fifty percent of non-federal aid eligible secondary roads are rated as being in poor condition. In contrast, only 10 percent of interstate miles, which are federal aid eligible, are rated as being in poor condition.

In addition to these limitations, projects that receive federal funding must abide by federal laws governing project oversight and prevailing wage rates. Former head of the Federal Highway Administration Robert Farris suggests that these kinds of federal regulations increase project costs by 30 percent.

The DOT is giving up somewhere in the realm of $180 million, over which it would otherwise have full spending discretion, in order to receive federal funds. Even if we allow that some of the federal funds received by DOT are used for road repair, the state is undoubtedly parting with some funds that could be used for road maintenance and repair in order to co-finance expansionary road projects with the federal government.

Some federally funded SCDOT projects current underway include:

  • $23 million to extend SC 153 from US 123 To S-135 Prince Perry Road
  • $24.7 million to extend Platt Spring Road
  • $270 million for improvements to the I-85/I-385 interchange

STIB debt financing is the third source of fundsThe STIB is funded through Other Funds (fines and fee revenue) in the state budget. The specific funding sources for STIB include:

  • truck registration fees
  • a portion of gas tax revenue
  • motor vehicle registration fees
  • revenues from an electric power tax
  • investment earnings

Since the passage of Act 98 in 2013, the STIB has also received a $50 million annual transfer from the DOT.

In the current fiscal year the STIB has a budget of $150 million. Budgets produced by House and Senate bodies for the upcoming fiscal year would give the STIB a budget of $255 million. Prior to the passage of Act 98 the STIB received an average budget of $50 million.

The controversial I-526 extension. The extension may be paid for with money from the STIB.

The controversial I-526 extension. The extension may be paid for with bonded money from the State Transportation Infrastructure Bank.

The official state budget numbers for the STIB may be less than trustworthy, however. Audit documents for fiscal year 2014 (FY14) indicate the STIB has received $220 million in revenue despite the state budget listing the STIB’s total budget for that same year at only $50 million. It’s unclear whether recent increases in the STIB’s budget, as given in state budget documents, are due to true funding increases or are due to including revenues that were previously left out of state budget documents. We suspect they are true increases, in which case the STIB could receive somewhere in the realm of $470 million in the upcoming fiscal year.

Once the STIB receives its funding, it bonds out the dollars it receives to up to ten times their original value in order to finance road projects of the STIB board’s choosing. This bonding process has allowed the STIB to create billions of dollars in debt over time. In fact, STIB bonds are the largest category of South Carolina’s bond debt, with total liabilities at over $2 billion dollars in FY14 (see page 230 of the PDF).

All of this bonding, of course, requires the STIB to make debt payments. The FY14 audit of the STIB reveals the agency spent $90 million on interest and other debt costs. This expenditure is just shy of double the amount ($48.5 million) the STIB spent on transportation project assistance.

In other words, the STIB pays more in interest on its debt than it spends on road projects.

Finally, STIB funds are used only for expansionary projects (never maintenance), and have historically been expended in only a handful of counties.

Some STIB funded projects currently underway include:

  • Mark Clark extension in Charleston County (I-526) (still in contract phase)
  • Widening I-77 in Richland County
  • Sheep Island Parkway in Berkeley County
  • Widening I-20 in Lexington County

Other funding sources for roads include funds administered by the Coordinating Council for Economic Development. In 2014 alone the Council handed out $21.8 million in grants for roads. What distinguishes this funding source from the others (apart from its size) is its recipients. Every grant given out by the coordinating council, including grants for roads, is given out for the benefit of one selected business. So while the general public may have problems getting roads fixed, a large enough company can always try and get funding for new roads from our economic development authorities.

Even a cursory analysis of South Carolina’s road funding sources makes it clear where a major part of the problem with our road funding lies. South Carolina relies on a relatively small pool of funding from one dedicated revenue source to finance the majority of its road maintenance. And lest we forget, the roads that must be maintained by the state alone total some 41,459 miles, the fourth largest state road system in the country. To make matters worse, a portion (around $180 million) of the one small pool of funding that is free to be devoted to maintenance – gas tax revenue – is instead spent on expansionary projects in order to receive a federal funding match.

In short: South Carolina is giving up money that could be used for road maintenance and repair in order to finance road expansions. If in the upcoming fiscal year the DOT retained the money it will spend to receive federal matching funds, and received the funding that would otherwise go to STIB, the DOT would have over $700 million it could use entirely for maintenance and repair. As things stand now, the DOT has somewhere under $300 million free to be devoted to state maintenance. Even if the DOT continues to spend some of its funds to receive federal dollars, the state can clearly use the resources it has to do more for road maintenance and repair.

Who spends transportation funds?

The majority of state gas tax revenues as well as matching federal transportation funds are spent by the state DOT. DOT leadership is comprised of the Secretary of Transportation, appointed by the governor, and the eight-member DOT commission, all but one of whom are elected by the state legislative delegations of each of South Carolina’s seven federal Congressional districts.

STIB funds are bonded out and spent by the STIB board comprised of seven directors: two members appointed by the governor, the chairman of the DOT Commission, two members appointed by the Senate President Pro Tem, and two members appointed by the House Speaker.

C Funds are distributed to the state’s 46 counties using a three-part formula. County transportation committees (CTC’s) are the authorities who determine how these distributed C-funds are spent, but state law stipulates that counties spend at least 25 percent of their allocation of C-funds on state-owned roads. Contrary to what might be assumed, CTC members are not selected at the county government level, but are appointed by the legislative delegations of each county.

To whom are these spending authorities accountable?

In short, the legislature. To be more specific, most of South Carolina’s transportation authorities are accountable to only a few powerful legislative leaders.

The nominal head of the Department of Transportation is the Secretary of Transportation, appointed by the governor. In reality, though, the DOT secretary is a largely administrative position tasked with carrying out the policy of the true DOT authority, the DOT commission. Seven of the DOT commission’s eight members are elected by the state legislative delegations of South Carolina’s seven federal Congressional districts, and the one remaining member is appointed by the governor. However, in order for any candidate to be eligible for election to the DOT commission, he or she must first be screened and approved by the Joint Transportation Review Committee (JTRC).

The JTRC is a ten-member board composed entirely of legislators and legislative appointees, including: the chairman of the Senate Finance Committee, the chairman of the Senate Judiciary Committee, the chairman of the Senate Transportation Committee, two members appointed by the Senate President Pro Tempore, the chairman of the House Ways and Means Committee, the chairman of the House Education and Public Works Committee, and three members appointed by the Speaker of the House.

The House Speaker and Senate President Pro Tem, then, directly control half the appointments to the board that has the final say on whether any individual is even eligible to serve on the DOT Commission. In fact, today the two men who occupy these offices actually control six of the ten positions on the JTRC because the current Senate President Pro Tem Hugh Leatherman (R-Florence) is also the chairman of the Senate Finance Committee. The Speaker also indirectly controls two more of the appointments (the Education and Public Works chairman and Ways and Means chairmen) by virtue of his power to appoint committee memberships. In addition to nominating all DOT Commission candidates who are to be legislatively elected, the JTRC must approve the governor’s one appointment to the JTRC before he or she can be confirmed in his position.

To summarize, the DOT leadership is broadly accountable to legislative delegations, and more specifically accountable to the House Speaker and Senate President Pro Tem.

The State Transportation Infrastructure Bank, or STIB, is controlled by the seven-member STIB board. The members are appointed by a combination of the governor and legislative leadership. As with the DOT commission, the STIB board is primarily accountable to the House Speaker and Senate President Pro Tem. These two control more than half of the appointments to the board. Senate President Pro Tem Hugh Leatherman also serves on the STIB board.

The exact membership of different CTCs vary but in all cases the members are chosen by the legislative delegation of the county. CTC members owe their positions to, and are accountable to, a handful of state level legislators. CTCs are also accountable to the legislatively-controlled DOT as their countywide and regional transportation plans must be approved by the DOT.

Taken together, the most influential transportation authorities in South Carolina are all accountable to a small number of legislators, particularly the House Speaker and Senate President Pro Tem, who in turn are accountable only to the small number of citizens that make up their electoral district.

Bottom line

South Carolina government manages its roads by spending a fraction of the amount it spends on expansions on routine maintenance. It also makes the most powerful transportation authorities in the state accountable to a few legislative leaders, rather than an official who is accountable to the entire state electorate.

This is a formula for mismanagement and poor maintenance of roads – and that will not change simply by charging South Carolinians more at the pump. Indeed, dumping more money into this convoluted and unaccountable system will only perpetuate the mess.

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