Roads and bridges in Oregon are funded through a variety of federal, state, county, and city sources. Federal and state funding programs for roads and highways are generally not supported by income, property, or sales taxes, but rely on various transportation system user fees. Table 1 shows road fund revenues in Oregon for fiscal year 1991 by jurisdictional level. At the local level, about 55 percent of road revenues come from local sources with the balance from state and federal sources (Legislative Committee Office, 1990). For local revenues, municipalities rely heavily on property taxes and local assessments and fees.

Streets and highways in Oregon cities and counties are financed in part by transportation user fees in the form of state and federal fuel taxes, weight-mile taxes on trucks, and vehicle registration fees. These user fees are collectively referred to as the Oregon Highway Fund. Approximately 40 percent of state road taxes are shared between cities and counties, with about 16 percent of the Oregon Highway Fund going to cities (Legislative Committee Office, 1990). The Oregon Constitution (Article IX, Section 3) dedicates these fees to the construction, maintenance, and operation of public roads.

Another significant source of revenues to cities and counties is from programs funded through the Intermodal Surface Transportation Efficiency Act (ISTEA), especially the Surface Transportation Program, and the Transportation Enhancement Program. The Surface Transportation Program (STP) was authorized by Title I of ISTEA. The STP replaces the Federal Aid Urban (FAU) and Federal Aid Secondary-County (FAS-C) funding programs and provides block grants for use on rural and urban highway system roads. Because about 25 percent of STP funds are flexible, STP funds are allocated to the State and suballocated to cities and counties on a formula basis by the Transportation Commission. According to Cam Gilmore of ODOT program services, STP fund allocations amounted to about $7 million for counties and $5 million for cities in 1993.

Funding for transportation and improvements in Lakeside are determined through the annual budget process. The budget process is initiated in February of each year with requests and projections from City staff. The requests are then reviewed by the Budget Committee. The Budget Committee then forwards the full budget to City Council for review and approval.

Table 2 summarizes the transportation revenues and costs for the City of Lakeside since fiscal year 1989-90. Revenues and costs have varied widely during the past six years. A high percentage (generally over 70 percent annually) of Lakeside’s transportation revenues come from the state motor vehicle tax.

Most of the other revenues have come from state or county grants. For fiscal year 1994-95, the City expects over $95,000 if transportation revenues and about $100,000 in costs. The City has historically carried a small reserve balance in its transportation accounts, with a projected surplus at the end of fiscal year 1994-95 of about $1,000.

ORS 366.785-366.820 authorizes the distribution of a portion of Oregon Highway Fund revenues to cities. These revenues come from fuel taxes, vehicle registration fees, and weight-mile taxes. Oregon Highway Fund revenues were approximately $60,000 annually in fiscal years 1993 and 1994. This is expected to increase to more than $70,000 annually for fiscal years 1995 (see Table 3). Lakeside has historically used these funds for street maintenance.

According to forecasts by the Oregon Department of Transportation there will be some growth in the State Highway Trust Fund through the 1998-1999 fiscal year. The Association of Oregon Counties expects growth of revenues at a rate ranging from 0.7 percent to 3.7 percent per year for Coos County. As a base-case assumption, it is reasonable to expect Lakeside to experience similar trends. This will mean no real growth in revenues if there is inflation at higher rates. Still, this will be a reasonably stable revenue stream for road maintenance.

Lakeside has historically required right-of-way dedications and developers to fund and construct transportation improvements concurrently with new development. The City of Lakeside Development Code as amended contains several articles which address the need for the improvement of the transportation system as the city grows.

• Article 10, Ordinance 168, Planned Unit Developments, are the code sections requiring the installation of new streets to city standards concurrent with new development.

• Article 5, Ordinance 179, Approval of Streets and Ways, specifies provisions for the creation of streets and ways in conjunction with subdivisions.

• Article 6, Ordinance 179, Design Standards, describes design standards for streets established during the subdivision process.

In summary, the City of Lakeside development standards address new development and significant redevelopment projects so that local streets and frontages on arterials and collectors will be improved as the city grows. Therefore, the on-site (including frontage improvement) portion of the transportation system that provides access to property will not require citywide funding if the city's standards are applied. The City does not track the dollar value of these improvements; they are not reflected in the City budget.

Lakeside has historically relied on a few major revenue sources to fund transportation improvements. The Oregon Highway Fund and grants the primary sources of transportation funds. Current funding sources are probably covering required repairs and high-priority maintenance. If Lakeside is similar to many other Oregon cities, however, it is possible that a detailed evaluation and scheduling of pavement maintenance needs would show that the average annual cost of needs is greater that the revenues forecasted. Lakeside may be deferring some maintenance. Even if this is not the case, additional population and development will require capacity improvements. Some of these improvements can be covered by grant programs from the state or federal government, but, grants will not cover all of the unfunded need in Lakeside. Lakeside will probably need to explore new transportation funding sources to implement projects identified in the Capital Improvements portion of the Transportation Systems Plan.

Most local governments are finding current resources through taxes or user charges inadequate to fund all the needed infrastructure projects in a timely manner. Three approaches to funding infrastructure are described in the literature: pay-as-you-go funding, debt financing, and public/private ventures. Our discussion focuses primarily on pay-as-you-go and debt financing methods.

Pay-as-you-go funding requires governments to pay for infrastructure costs directly from current revenues. Revenue sources commonly used for this approach include taxes, fees and user charges, interest earnings, and grants. These specific approaches are obviously quite different. Local governments, for example, clearly have a preference for grants or transfers such as state and federal funding programs. Only when grants are exhausted must local governments look to the resources of their own citizens, who then typically pay either through taxes or user charges. The advantages of this approach include reduced interest, increased flexibility, enhanced debt capacity, improved borrowing terms, and increased fiscal responsibility. The major disadvantages of this approach are insufficient funding, intergenerational inequity (if, for example, long-term facilities are paid for disproportionately by current users), inconsistency of funding requirements, and use of accumulated reserves.

Debt financing requires local governments raise money though the issuance of debt obligations (usually bonds). A more simple term for this approach is borrowing. These obligations are then paid back over time, with interest. The primary advantages of debt financing are that improvements can be financed as needed, intergenerational equity, repayment in cheaper dollars (if inflation is significant), and enhanced stability. Disadvantages include interest costs, encumbered future revenues, and limits on the amount of debt that can be issued.

In this memorandum we distinguish between the terms funding and financing. We use funding to describe any mechanism that generates revenue for transportation-related projects. Construction, operation, maintenance, and repair of transportation facilities require money--money that ultimately comes in one way or another from businesses and households that are selling goods, services, or labor. They give up some of the money--some of their resources--to fund public goods and services like transportation. The many different ways that government can collect that money from them are funding mechanisms.

We use financing more narrowly to refer to ways to spread out the impact of collecting funds through the issuance of debt obligations that are repaid over time, with interest. In other words, all transportation projects are funded by some means; some funding is financed by borrowing money to pay for the projects. Funding can occur on a pay-as-you-go basis or through various financing mechanisms.

Funding mechanisms that are ultimately applied for transportation projects should be evaluated to determine their suitability. We use a standard set of criteria to assist in evaluating existing and potential funding programs:

• Legal Authority refers to the ability of counties and municipalities to engage in various types of financial and contractual commitments. Many financing programs are governed by state and federal statutes. Others are permitted under municipal home rule, these programs require enabling ordinances be adopted by the city. All of the funding mechanisms described in Appendix A have been applied by other Oregon communities. While it is not within our scope of expertise to offer a legal opinion on funding mechanisms, we believe that, except as noted, all of the mechanisms we described could be implemented without special action, provided they were carefully prepared to conform to the requirements of existing enabling legislation.

• Financial Capacity provides a measure of the revenue-generating potential of a particular financing mechanism. Where possible we provide estimates of the financial capacity of programs.

• Stability is a measure of the predictability and reliability of a funding mechanism. This criteria addresses the amount of variability in revenues and the long-term viability of mechanisms to fund transportation maintenance and improvements.

• Administrative Feasibility is an evaluation of the administrative requirements that each funding mechanism would impose on the City. Administrative requirements vary significantly from program to program. Some programs will require considerable staff time to establish and administer.

• Equity is a polite name for "Who pays?" Cities and their citizens will usually prefer to spread the costs to the federal government, the state, or nonresidents (e.g., through gas taxes). Funding options that make users pay costs proportionate to the level of use are generally perceived to be fairer. Options based on factors having little or no relationship to use are generally less equitable.

• Political Acceptability refers to public acceptance of individual funding programs. In theory, if an evaluation shows a funding source to be legal, sufficient, stable, fair, and efficient relative to other sources, then it should be politically acceptable. In practice, local history and special interests often make it more complicated. Many local funding programs will require local review; some require voter approval. Recent trends in Oregon and nationwide provide an unfavorable precedent for many funding options. Voters are unlikely to approve mechanisms that are perceived as "taxes". The public is much more likely to support programs such as impact fees or systems development charges that place the financial burden on new residents.

Ideally, funding programs would meet all of the criteria. In practice, some criteria are given more emphasis than others. Political acceptability is often given more emphasis than the other criteria because of local political realities. If a revenue measure must go through voter approval and conventional wisdom suggests that the voters will defeat it, policy makers look to other sources.

The fact that criteria have different units of measurement and different importance to different people has led policy analysts to attempt to develop systems for scoring and weighting criteria so they can be added to a single score for each funding mechanism--a score which can then be compared to scores for other mechanisms. We have not attempted scoring or weighting in this memo. Rather, Appendix A gives our best estimates of the impacts for each criterion leaving judgments about preferred mechanisms to decision makers.

The Transportation Planning Rule (TPR) explicitly requires municipal TSPs to identify planned transportation facilities and improvements and provide an estimate of the timing and costs of proposed projects. Lakeside technically falls outside the TPR requirements, and is not required to complete a transportation improvement plan. However, the City has committed to completing a transportation improvement plan as a part of this project.

This memorandum provides an initial overview of the status of transportation financing in Lakeside. The City's ability to ultimately implement its transportation plan will hinge largely on funding. Without funds, the City will be unable to implement many needed projects.

Tables 3-1 to 3-3 summarize federal, state, and local transportation funding mechanisms. Appendix A provides a more detailed evaluation of each program. The reader should keep in mind the objective of this report while reviewing the programs: to generate a list of transportation funding mechanisms. The next report will match specific funding sources to capital improvements identified in the Transportation Systems Plan.