New Jersey Transportation Funding- key elements of Senate bill.

The New Jersey state Senate adjourned on Monday before considering any proposals related to renewing transportation funding or cutting taxes. But the Senate is back in session tomorrow, setting the stage for what is expected to be another long day of negotiations.

At the heart of a new bill that was  passed by the state Assembly early Tuesday morning  is a proposed 1 percent reduction of New Jersey’s 7 percent sales tax.The cut would be phased in, starting at 0.5 percent next year and reaching the full 1 percent in 2018. It would come as part of a broader deal to renew the state Transportation Trust Fund (TTF) for another 8 years with a 23-cent gas tax hike.

The proposal featuring the sales-tax cut that has emerged this week actually is an alternative to another bipartisan plan that came out of the state Senate earlier this month.

That plan, sponsored by Sens. Paul Sarlo (D-Bergen) and Steve Oroho (R-Sussex), also features a 23-cent gas-tax hike, but instead of a sales-tax cut it calls for phasing out New Jersey’s estate tax and making a series of other tax cuts. They include lifting state income-tax exemptions on pensions, 401(k) plans, and other sources of retirement income over the course of several years. The Sarlo-Oroho plan would cost an estimated $870 million once all the cuts were fully implemented.

The new proposal, backed by Governor Christie and Assembly Speaker Vince Prieto (D-Hudson), scraps most of the tax cuts that are included in the Sarlo-Oroho plan in exchange for the sales-tax reduction. It does, however, keep changes to retirement-income exemptions that the two senators proposed, adding another $200 million to the potential cost of the Christie-Prieto plan.

The Senate has yet to consider the proposal, but if it were to be enacted, the sales-tax cut would represent New Jersey’s first reduction of a broad-based tax since 1994. It would also come at a time when the state has been experiencing revenue problems, including a $600 million budget hole that had to be closed with a series of cuts and other adjustments just last month.

The budget impact of the proposed sales-tax cut would start out modestly at $376 million during the 2017 fiscal year. And because it is part of a broader plan that involves the gas-tax increase to shore up the TTF, the cut would initially free up roughly $350 million in sales-tax revenue that’s currently being used to prop up the deeply indebted trust fund.

Going forward, the impact of the sales-tax cut on the budget would rise to an estimated $1.6 billion once fully phased in during the 2019 fiscal year, according to the nonpartisan Office of Legislative Services. Because all of the more than $1 billion in annual revenue that would come in from the 23-cent gas-tax hike would be constitutionally dedicated to funding transportation projects,  the sales tax cut  would not be offset, leaving a gap on the state budget.

Supporters predict that gap would be closed by economic growth, but if that growth doesn’t materialize, the hole would have to be filled with spending cuts or other tax hikes since the state constitution requires a balanced budget.

Complicating the issue even further is a planned constitutional amendment, backed by Democratic legislative leaders and public-worker unions, that call’s for revenue growth to help fund a series of ramped-up state contributions to the presently underfunded public-employee pension system. If voters approve the amendment this fall, it would mandate spending on the pension payments to increase from $1.3 billion this fiscal year to over $3 billion just as the full impact of the sales tax-cut would take effect.

New Jersey’s sales tax is rooted in a 1966 law that established a 3 percent rate. That was increased to 5 percent in 1970, and to 6 percent in 1983. The rate was lifted to 7 percent in 1990 under then-Democratic Gov. Jim Florio, only to be reversed in a backlash in 1992.

Another increase restored the rate to 7 percent in 2006 under then-Democratic Gov. Jon Corzine, but only after a six-day shutdown of state government. At the same time, the range of services that are subject to the sales tax was expanded, though New Jersey still offers exemptions for clothing, groceries and necessities.

Unlike many other states, New Jersey does not allow sales taxes to be levied at the local level. In fact, specially designated Urban Enterprise Zones allow many struggling urban areas to charge a lesser rate of 3.5 percent.

Notably, sales tax collections have been on the rise; while income tax is subject to significant volatility, the sales tax has been a steady performer for the state budget over the last several years. It generated $7.5 billion in revenue during the 2010 fiscal year, and $7.8 billion during the 2011 fiscal year. Sales tax collections then steadily improved from $8 billion during the 2012 fiscal year to $8.8 billion through the 2015 fiscal year. The latest projection for the current fiscal year, which ends at midnight tomorrow, is for $9.3 billion, and Christie’s administration is forecasting a $9.6 billion haul during the 2017 fiscal year.

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Why the FAST Act Will Benefit Public-Private Partnership

Congress has passed, and the president has signed, a long-term surface transportation reauthorization bill, (America’s Surface Transportation Act (FAST Act), H.R. 22) providing approximately $305 billion of funding for highway and transit projects over the next five years and revising federal transportation policy on a number of important topics-including public-private partnership market.

The Highway Trust Fund

The Highway Trust Fund, supported largely through user fees by way of federal gas tax revenues, serves as the primary mechanism for states to fund road and transit construction and maintenance projects. The Highway Trust Fund has a growing gap between revenue and expenditures because the federal gas tax rate has not been raised since 1993 and is not indexed to inflation, while the cost of maintaining and improving U.S. surface transportation infrastructure continues to rise and increasingly fuel-efficient cars use fewer gallons of gas per mile traveled.

The FAST Act generally maintains the existing federal transportation funding model — distributing more than 90 percent of federal funding to state departments of transportation through formulas — while boosting highway spending by about 15 percent over existing levels, and increasing transit spending by about 18 percent. After dozens of recent short-term patches of the Highway Trust Fund through transfers from the general revenue fund, the FAST Act closes a five-year, roughly $70 billion gap through creative one-time budget mechanisms such as transfers from Federal Reserve accounts and the sale of oil from the Strategic Petroleum Reserve.

While state departments of transportation have praised the predictability of the FAST Act, the modest increase in overall spending levels will not fully address the looming U.S. infrastructure backlog. For example, the American Society of Civil Engineers estimates that the U.S. needs to invest approximately $1.8 trillion in surface transportation projects by 2020 to maintain a state of good repair. Additionally, the FAST Act does not provide a long-term sustainable solution (such as a gas tax rise or a vehicle miles traveled fee) for fully funding the Highway Trust Fund beyond the act’s five-year term.

Public-Private Partnerships and Innovative Financing

Previously, states relied almost exclusively on Highway Trust Fund transfers, state gas tax revenue and municipal bonds to fund new projects, delivering such projects through a design-bid-build model whereby the state department of transportation developed design specifications then solicited the lowest bid for the construction of a project. In an effort to improve mobility and build new highway and transit capacity in a funding-constrained environment, U.S. states have increasingly turned to public-private partnership (P3) delivery models that include project risk transfer from states to private entities, efficient and integrated delivery of design, construction and maintenance project components, and an infusion of upfront private equity. U.S. states are also using more project-based revenue sources, such as user fees and tolls, and innovative federal finance tools such as the Transportation Infrastructure Finance and Innovation Act (TIFIA) federal credit program and private activity bonds.

On balance, by providing a relatively stable but still under-funded federal revenue stream, the FAST Act is largely positive for the continued use of the P3 delivery model by U.S. states. The FAST Act will end much of the short-term funding uncertainty that caused states to postpone or cancel projects during prior weeks- or months-long Highway Trust Fund patches, but the lack of fully realized surface transportation funding will encourage states to continue to seek project delivery efficiencies and private funding sources through P3s.

Toll Policy

The FAST Act takes a mixed approach toward federal tolling policy. User fees, usually in the form of tolls for highway projects, are often essential elements of the funding and financing package for P3 projects. While federal law only allows tolling on interstate highways where additional lanes are constructed, the Interstate System Reconstruction & Rehabilitation Pilot Program allows three states to experiment with tolling existing interstate highways. Created in 1998, the pilot program has long been fully subscribed, but the three participating states (Virginia, Missouri and North Carolina) have not yet implemented any tolling of existing facilities under the program. While P3 and tolling proponents had urged Congress to expand the number of slots in the pilot program, the FAST Act instead encourages the existing participants to expedite their projects, requiring the three existing states to move forward with a tolling project within one year (with a potential one-year extension). If the participants fail to comply, their slot will expire and other states will be eligible. The FAST Act also requires new states to have legislative authority to implement the tolling of an existing facility, and any new participants must complete their projects within three years.

TIFIA Funding Levels and Policy Tweaks

The FAST Act reduces funding levels for the TIFIA program (utilized by many P3 projects) from $1 billion over the last two years to $275 million in FY 2016, rising to $300 million for FY 2019 and FY 2020. However, TIFIA had not made full use of its authorized funds in the last two years, causing $639 million in TIFIA funds to be transferred back to the Highway Trust Fund in 2015. The FAST Act eliminates the requirement that the TIFIA program transfer such uncommitted balances.

While the TIFIA funding cut is not ideal, it should not have an acutely adverse effect on P3 projects due to the lack of market support over the last two years for the $1 billion annual level and the steady increases in funding over the five-year life of the FAST Act. The FAST Act also allows states to use an increasing array of funding sources to pay the subsidy and administrative costs associated with TIFIA credit assistance, expands eligibility to include smaller projects and transit-oriented development projects, creates a streamlined process for TIFIA loans under $100 million, and increases funding levels for the U.S. Department of Transportation’s administration of the program. Additionally, the FAST Act codifies existing DOT practice by allowing costs related to P3 projects using an availability payment concession model to be eligible for federal reimbursement.

WIFIA Fix

The FAST Act fixes a widely criticized element of the Water Infrastructure Finance and Innovation Act (WIFIA) program introduced in 2014 by eliminating a prohibition on financing water infrastructure improvements with financing packages that include both WIFIA loans and tax-exempt debt such as municipal bonds.

Innovative Finance Bureau and Investment Center

The FAST Act also establishes a National Surface Transportation and Innovative Finance Bureau within the DOT, which is intended to serve as a “one-stop-shop” for states and local governments to receive federal financing or funding assistance, as well as technical assistance. The nascent Build America Transportation Investment Center introduced this year by the Obama administration appears to have an overlapping mandate, and it remains to be seen how these two entities will interact. While the bureau and center may not provide enormous benefits for state departments of transportation with extensive P3 experience, their existence reflects a general positive attitude of Congress and the administration toward P3s and innovative finance.

Nationally Significant Freight and Highway Projects Program

The FAST Act creates a new grant program, the Nationally Significant Freight and Highway Projects Program, funded at $4.5 billion over five years, for “nationally significant” projects costing more than $100 million that improve the movement of both freight and people, increase competitiveness, reduce bottlenecks, and improve intermodal tansportation. The DOT will award projects competitively based on statutory criteria, similar to the popular existing “TIGER” competitive grant program administered by the DOT. The FAST Act limits the federal share of project costs to 60 percent, and only $500 million of the $4.5 billion can be awarded to freight rail and freight intermodal projects.

Long-Distance Intercity Passenger Rail Routes

In addition to the highway and transit provisions, the FAST Act contains a passenger rail title that reauthorizes and funds Amtrak intercity passenger rail operations for a five-year period. Included among the passenger rail policy prescriptions is a new pilot program that would allow a public entity (such as a state or a joint powers authority) or a private rail carrier to bid to operate up to three long-distance (more than 750 miles) passenger rail routes that are currently run by Amtrak. While Amtrak turns a profit on its heavily used Northeast Corridor service, many of Amtrak’s long-distance routes are unprofitable.

Capitol Hill Monday-Highway Funding

Members return to Capitol Hill Monday with fiscal year 2016 appropriations on the agenda and a looming highway authorization deadline on the calendar. Congress faces a Friday deadline to complete work on the highway and infrastructure legislation because the current extension expires on Nov. 20 at midnight. Even though members were largely back in their districts last week, staff for House and Senate conferees appointed to a bicameral conference committee were working to resolve differences between the versions of the long-term highway and infrastructure authorization bills passed by both chambers. While both versions of the bill reauthorize the highway program for six years, they both provide funding only for the first three years, requiring Congress to come up with the remaining three years of financing. In addition, differences remain in the ways each chamber pays for the programs. Press reports indicate there is optimism that the bicameral committee will produce the conference report on a long-term bill that can be passed by both chambers and sent to the president for signature before the end of the week. Nevertheless, it is likely House and Senate leadership would move quickly to pass another short-term extension of current authorization until the conference committee can complete its work should unforeseen delays take place.

Appropriations for 2016 will also be on the agenda this week, even though the fiscal year is already well underway. Passage of the Bipartisan Budget Act in October established topline allocations for discretionary programs, a breakthrough that is allowing the stalled appropriations process to move forward. Now that a satisfactory budget framework has been established, House and Senate leadership are strategizing on how to complete appropriations work before a Dec. 11 expiration of current funding, but there does not yet appear to be any clear process for moving forward. Last week the Senate took up and unanimously passed its first appropriations bill this year, the Military Construction and Veterans Affairs bill. The House has already passed six of the 12 annual spending bills and was considering a seventh when it was abruptly pulled from the floor.

Chairmen of the House Appropriations Subcommittees whose bills have not yet been considered by the full House have scheduled “listening sessions” with representatives who do not serve on the Appropriations Committee to get input on the remaining spending measures, according to press reports. New Speaker of the House Paul Ryan has reportedly polled the members of his conference on whether to resume consideration of individual spending bills or proceed with an omnibus bill, and apparently there was widespread support for developing a single omnibus spending bill.

Even without an established year-end plan, the Senate is likely to move forward with its second appropriations bill this week. Senators resume legislative business on Monday with a vote on a judicial nominee. Following this vote, it is expected that Senate Majority Leader Mitch McConnell will schedule the Transportation, Housing and Urban Development, and Related Agencies (T-HUD) Appropriations Act for consideration during the remainder of the week. The bill approved by the Senate Appropriations Committee provides roughly $56 billion in discretionary spending for programs and functions within the Departments of Transportation and Housing and Urban Development.

The House returns on Monday with votes expected on 14 bills under suspension of the rules. Votes are also expected on motions to concur with Senate amendments to two bills, one related to disaster and recovery assistance programs and the other to commercial exploration of space resources.

On Tuesday, the House is expected to take up H.R. 511, the Tribal Sovereignty Act, subject to a rule. This legislation amends the National Labor Relations Act to provide that any enterprise or institution owned and operated by an Indian tribe and located on its lands is not considered an employer. This bill would prevent the National Labor Relations Board from exercising jurisdiction over tribal businesses operated on tribal lands. The House may also vote on a motion to go to conference with the Senate on legislation to reauthorize the Elementary and Secondary Education Act (ESEA). Press reports indicate that House and Senate committee chairmen and ranking members have resolved differences between the Senate- and House-passed versions of the bill and reached a preliminary agreement on a conference report. We can expect consideration of the education bill before Congress adjourns for the year in December.

During the remainder of the week, the House is expected to consider three pieces of legislation reported out of the Financial Services Committee, each subject to a rule: H.R. 1737, which would nullify guidance provided by the Consumer Financial Protection Bureau in 2013 regarding indirect auto lending; H.R. 1210, legislation to modify Qualified Mortgage rules established by the Dodd-Frank Act (P.L. 111-203); and H.R. 3189, which would require reforms at the Federal Reserve in an effort to increase transparency and accountability.

Congressional committees resume a busy hearing and markup schedule this week, with a number of high-profile events occurring on Tuesday. U.S. Attorney General Loretta Lynch will be making her inaugural appearance before the House Judiciary Committee on Tuesday morning for a Justice Department oversight hearing. (General Lynch’s scheduled October appearance before the committee was rescheduled.) The House Energy & Commerce Subcommittee on Communications and Technology also meets Tuesday morning to conduct oversight of the Federal Communications Commission. The Senate Health, Education, Labor and Pensions Committee is scheduled to consider President Obama’s nomination of Dr. Robert M. Califf to become the next commissioner of the U.S. Food and Drug Administration. A joint hearing of House and Senate Homeland Security Subcommittees will take place in the afternoon to examine ongoing issues at the troubled Secret Service. Also occurring on Tuesday, the House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law is scheduled to consider the “State of Competition in the Pharmacy Benefits Manager and Pharmacy Marketplaces,” with representatives from local, corporate and online pharmacies scheduled to testify about increasing

The House Veterans Affairs Subcommittee on Health meets Tuesday morning for a legislative hearing on 10 veterans health bills, while the full Veterans Affairs Committee will meet Wednesday to discuss the VA’s Plan to Consolidate Community Care Programs, submitted to Congress on Oct. 30. The Subcommittee on Economic Opportunity meets Wednesday afternoon to review the VA’s On-the-Job Training and Apprenticeship Program. The Senate Veterans Affairs Committee also meets on Wednesday to review five pieces of legislation on veterans’ health and benefits.

There are again numerous House hearings this week focused on international activities in the Middle East and the campaign against the Islamic State. A joint hearing between the House Homeland Security and House Foreign Affairs Committees is scheduled for Wednesday morning to discuss terrorist sanctuaries. The hearing will likely also focus on the Russian passenger jet that crashed in the Sinai Peninsula last month and reports that a terrorist attack is the most likely cause of the disaster. The House Foreign Affairs Subcommittee on Terrorism, Nonproliferation and Trade will meet Tuesday afternoon on the topic of terrorist financing, while a House Judiciary Subcommittee on Immigration and National Security will meet Thursday to discuss the Syrian refugee crisis and its impact on the security of the U.S. Refugee Admissions Program. These hearings and other key congressional hearings are listed below.

Martin J. Milita, Jr. Esq., is senior director at Duane Morris Government Strategies, LLC.

Duane Morris Government Strategies (DMGS) supports the growth of organizations, companies, communities and economies through a suite of government and business consulting services. The firm offers a range of government relations and public affairs services from its Washington DC offices and multiple state capitols, including lobbying, grant writing; development finance consulting, media relations management, grassroots campaigning and community outreach. Mr. Milita works at the firm’s Trenton and Newark New Jersey offices.

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Extension of Federal Highway Funding

President Obama signed into law an extension of highway funding for two months on May 29, two days before a deadline that would have stopped infrastructure projects in their tracks, reported The Hill. The Highway and Transportation Funding Act of 2015 (H.R. 2353) will extend a variety of transportation building and maintenance projects through July. The law continues funding for programs financed by the Highway Trust Fund and ensures that expenditures from and revenue deposits into the fund will not be interrupted, a White House statement said.

White House Press Secretary Josh Earnest pointed out that the law is the 33rd short-term funding measure of its kind since 2008, which makes it difficult for states to plan substantial, long-term highway projects, The Hill noted.

The White House has proposed comprehensive transportation infrastructure legislation, the GROW AMERICA ACT, the White House said in a May 19 statement on H.R. 2353. The administration sent a six-year, $478 billion highway bill to Congress in March to address these transportation infrastructure needs, reported The Hill on March 30.

Legislators from both parties acknowledged the need for reliable, long-term funding to preserve and expand surface transportation but also expressed doubts over how to fund a multi-year highway bill. The Hill quoted Sen. Ron Wyden (D-Ore.), the ranking Democrat on the Finance Committee as saying, “Senate Democrats … understand that you cannot have big league economic growth with little league infrastructure.”  Sen. Pat Roberts (R-Kan.) warned that he wants to offer people some certainty on the funding issue, but added “… I’m just not sure that we can get that done.” (Credit The Hill).