Case Study - Multiple Strategies
Combining Innovative Finance Techniques:  Ohio's Approach

The Financing Challenge

Like other large midwestern states, Ohio boasts an extensive transportation system which relies heavily on motor fuel taxes to fund ongoing operations and maintenance as well as improvement and expansion.  Ohio has the tenth largest highway network in the country and the fifth highest volume of traffic.  Given increasing traffic volumes, Ohio's congestion is growing and the state is near the top of the "second tier" states that are now facing the type of congestion that cities such as Atlanta and Los Angeles have faced for decades.  At the same time, system maintenance requirements are escalating.  These trends are having a major effect on funding needs.  The Ohio Department of Transportation (ODOT) must decide each year how to allocate its approximately $2 billion budget.  The preservation of the large existing network consumes 85 percent of ODOT's revenue, limiting the state's ability to fund new capacity.

In order to meet essential capital needs, ODOT is restraining operational growth.  Over the last several years, ODOT has implemented cost reduction and operational efficiency measures that have resulted in a savings of more than $400 million in actual and deferred operating costs since 1994.  At the same time, however, Ohio drivers have increased their use of more environmentally-friendly ethanol-based fuels, which are taxed at a lower rate than traditional fuels; consumption of these fuels has increased from 16 percent to 40 percent of total gasoline consumption over the last five years, and is expected to continue.  The high consumption levels of more environmentally friendly fuels is negatively impacting both state gas tax revenues and Federal funds.

While ODOT's operating cost reductions have enabled the issuance of more than $200 million in bonds between FY 1996 and FY 2000, revenue bonding capacity in the future is constrained.  In this environment of minimal state growth in revenues and limited bonding backed by traditional revenues sources, ODOT has looked to Federal financing innovations to bolster its ability to fund needed infrastructure improvements.

The Financing Solution

Recognizing that traditional financing approaches are no longer sufficient to meet the state's growing transportation needs, ODOT has implemented an array of new leveraging techniques to stretch both state and Federal dollars.  ODOT's toolbox includes a very active SIB program, GARVEEs, and the application of Federal matching techniques.  ODOT was the first state approved for participation in the Federal SIB program and the first state to leverage Federal dollars through GARVEEs.  In order to further optimize these techniques, ODOT is combining new techniques and realizing a multiplier effect.

This case study focuses on Ohio's use of toll credits to match the Federal share of GARVEE bonds.  As of December 2001, Ohio had earned $653 million in toll credits from investments in the 241-mile Ohio Turnpike System.  The state has used $286 million toward the non-Federal matching share of eligible projects.  Ohio is using these toll credits at the state level to match GARVEE bonds and also is sharing its credits with local government agencies for both highway and transit projects.

Toll credits have provided the state matching share of Federal bond reimbursements for the Spring-Sandusky Corridor, a group of nine major improvement projects to be financed with the proceeds of an estimated $130 million in GARVEE bonds.  These bonds have been sold in three tranches:  $70 million in May 1998, $20 million in August 1999, and $100 million in September 2001, of which $30 million was allocated to the Spring-Sandusky project.  Both Interstate and National Highway System (NHS) funds are being used to pay principal and interest on the Spring-Sandusky GARVEE bonds.  It is estimated that ODOT will use toll credits of approximately $15.6 million for the entire corridor project.

Toll credits are also being used to help finance the new Maumee River Bridge in Toledo, Ohio.  GARVEE proceeds from the September 2001 issue will fund $15 million of the estimated $390 million cost of the bridge, the largest single project ODOT has undertaken.  The new river crossing, the number one transportation priority in northwest Ohio, will provide a vital link from the Port of Toledo to other points in the region.  Future GARVEE bond issues will contribute another $200 million to the financing package for this project.  ODOT plans to apply about $32 million in toll credits for this project.

Also on the drawing board is ODOT's plan to apply toll credits to future GARVEE financings for the Southeast Ohio Plan, a combination of eight projects in the southeast part of the state.  Construction of this major improvement plan will be accomplished through a series of GARVEE bond issues, estimated to total $145 million.  An estimated total of $29 million in toll credits will be used to advance the Southeast Ohio Plan.

The following table summarizes ODOT's GARVEE financings, both actual and planned, and shows the estimated application of toll credits.

Ohio's GARVEE Bond Issues (dollars in millions)

The Results

The issuance of GARVEE bonds in Ohio, combined with toll credits, has facilitated the advancement of three major infrastructure improvement initiatives, totaling an estimated $807 million:  the Spring-Sandusky Corridor, the new Maumee River Crossing, and the Southeast Ohio Plan.  By combining two innovative finance tools, GARVEEs and toll credits, ODOT has optimized limited transportation dollars and increased its investment in projects of critical importance to the state's mobility.  These projects are being completed years in advance of when they would have been constructed using traditional financing techniques.  Toll credits, as demonstrated here, can be of significant value to a state, by freeing up cash resources to be allocated to other priorities, such as system maintenance requirements.