Michigan eyes tolls to drum up road revenue

Michigan is considering a large, first-time road tolling program that would establish a public tolling agency and new borrowing credit to shore up a long-struggling road funding system.

The toll program, which would begin with nearly 600 of mostly interstate miles, would also be somewhat unusual in that it would build on existing roads. Most new toll programs are established on new roads, with less than 1% of toll mileage built on so-called brownfield roads.

Michigan is among a small handful of states, including Connecticut, Indiana, Minnesota and Wisconsin, that are eying tolls for existing highways, an option that has grown more possible with the advance of all-electric tolling.

 ”As we’re looking for new revenue streams, this would be a novel concept,” Eric Morris, Michigan officer leader at transportation advisor HNTB, told lawmakers on the Senate Transportation and Infrastructure Committee in a hearing Tuesday. HNTB was hired by the Michigan Department of Transportation to undertake a feasibility analysis and implementation plan for tolling across the state. The committee hearing marked the first time that lawmakers formally heard the results of the reports, released in January.

“Tolling could diversify revenue sources for transportation in the state of Michigan and free up existing resources of federal and state transportation revenue,” Morris said. “But it will require a careful and considerate approach to implementation.”

The Michigan Statewide Tolling Study was borne out of the state’s long debate over how to address its transportation funding shortfalls. Like all states, Michigan faces declining gas taxes, which one study estimates could fall by $200 million a year by 2030, as electric vehicles gain popularity and fuel efficiency continue to rise.

Gov. Gretchen Whitmer, who won her first term by campaigning to “fix the damn roads,” turned to a $3.5 billion road bond program in 2020 after the then-Republican Legislature shot down her 45-cent gas tax increase. Even at the time, Whitmer warned that the state will need a bigger fix than bonding.

In January, after the toll study was released, Whitmer said she was open to tolling as a potential long-term solution for the state’s funding problem. It’s “worth starting to understand everything that the study concluded, and then working to see how that would fit into a larger plan that is sustainable, that recognizes how the industry is changing and how our outdated system of funding roads needs to be addressed,” Whitmer said.

Tolling is already authorized in Michigan, which imposes fees to cross eight bridges and one tunnel but no roads.

Transportation advisory firm HNTB’s feasibility analysis and implementation plan outline an initial toll corridor of 545 miles that would start in 2028, with a 14-year expansion that could eventually cover 1,156 miles.

Toll revenue on the first corridor would gross around $1.3 billion in 2032 and rise to $4.5 billion in 2067, with a total gross revenue estimate of $43.7 billion in 2022 dollars, the plan said.

That compares to the costs, over the same period, which total $32.6 billion in 2022 dollars. The $32.6 billion price tag includes $15.4 billion for roadway, $6.7 billion for bridge rehab, and $5.8 billion for toll collection.

Toll revenue would be sufficient to support the capital and operating and maintenance and debt service through 2060, the study said.

The plan calls for an initial $8.5 billion investment from 2026 through 2031, which would be financed with the issue of three bond tranches floated in 2026, 2028 and 2029. The bonds would be backed by future toll revenue.

Making capital investments ahead of installing tolls is “important to show the value to the motorist,” Ron Davis, HNTB’s deputy project manager, told lawmakers.

The plan recommends the state create a hybrid agency that would operate under MDOT but have independent toll rate-setting authority and the authority to issue bonds, modeled after the Florida Turnpike Enterprise and others.

On the bond side, the study assumes that the new credit could achieve BBB ratings. The bonds would feature 35-year maturity and ascending annual debt service and feature a debt service reserve fund and capitalized interest through construction completion plus six months. All-in true interest costs are estimated around 5.12% for all three tranches, with an average coverage of 2.47 times for the first tranche.

States that want to install tolls on roads built with federal funds are required to apply to one of six federal programs that allow tolling on federal-aid highways. HNTB recommends that Michigan go through two federal programs, the Section 129 General Tolling Program for bridges and the Value Pricing program.

As the fourth statewide study on using toll finance to upgrade and modernize transportation infrastructure, the HNTB study is the “best one to date,” said Robert Poole, director of transportation policy at the Reason Foundation in his Feb. 7 newsletter on surface transportation.

“Some previous studies have focused mostly on the potential revenue that could be generated, rather than on the benefits of toll-financed modernization,” Poole said.

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