Oct 23, 2015

Reform before revenue: how poor governance and management is holding Oregon back

Tilikum Crossing Portland Bridge by jonniarmani, licensed under CC BY-NC-ND 2.0
“Tilikum Crossing Portland Bridge” by jonniarmani is licensed under CC BY-NC-ND 2.0

Portland was once a leader in transportation innovation, but today other metro regions around the nation are setting the pace in improving their transportation infrastructure. Just three recent examples:

  • Last month Denver Mayor Michael Hancock of Denver proposed an 18% increase in the city transportation budget. The Denver region also has six high capacity transit lines under construction, having already invested $5.5 billion in transit expansion over the past decade.
  • This year Los Angeles Mayor Eric Garcetti and the City Council adopted zoning and street design changes to improve arterials, speed up bus service, and make walking and biking safer. Los Angeles Metro is well into a $45 billion transit expansion program, with five lines under construction.
  • The City of Seattle recently increased its operating contribution to King County Metro by $50 million annually, and is on the verge of likely approving a $930 million levy to improve streets. In addition, the Seattle-Tacoma region is predicted to approve a $15 billion expansion of Sound Transit in 2016.

States are also acting. In the past two years, legislatures as diverse as Pennsylvania, Virginia, Wyoming and Vermont increased transportation spending. This year Washington State raised its gas tax by 11.9 cents per gallon, about a 30% increase.

Portland and Oregon are being left behind. Debate in Portland rages not about whether streets will be improved like in Seattle or Denver, but about whether or not a fee will be adopted simply to maintain streets to basic good condition, after years of neglect and critical audits. In the same month that the legislature in Olympia invested significantly in transportation, 175 miles to the south in Salem the Oregon legislature chose not to. Legislators’ reluctance was partly attributable to the revelation that management of the state Transportation Department was making claims about emissions that were proven to be wildly exaggerated.

The common theme to these Oregon stories? Credibility – or lack of it.

A familiar claim is, “Oregon has a transportation finance problem.” But it’s actually impossible to tell, because the system is so opaque. Oregon may or may not have a transportation finance problem. What Oregon really has is a transportation governance and management problem. It must fix its governance and management problem before it can fix its finance problem – if it even has one.

The lesson from other places isn’t just that they are spending more money than Oregon. The lesson is that they reformed the structure and management of their transportation agencies to get better value and better decision-making. For example:

  • In 2013, Massachusetts Gov. Deval Patrick persuaded the legislature to raise taxes for transportation to the tune of $600 million per year. This increase in 2013 was politically possible only because of managerial reform of the state agencies the Governor undertook in 2009. Stung by cost overruns, he overhauled agency management. Among other reforms, Massachusetts created an investment board with fiduciary expertise independent of the state transportation department to oversee capital allocation, breaking the past regime of accepting the self-serving estimates of agencies that had often proven to be wrong.
  • Also in 2013, the Pennsylvania legislature raised transportation spending by what will ultimately be $2.3 billion per year. Significant funds went to transit in Philadelphia and Pittsburgh, justified by evidence that mobility in those cities is essential to the whole state’s economy. The amount allocated to local governments’ streets was also increased, including a competitive grant program requiring project sponsors to prove positive economic development impacts, not just repeat old promises of “congestion relief” which had actually led mostly to more traffic.
  • In Minneapolis-St. Paul, a panel of local officials determines where an additional $110 million per year in transit capital is invested, generated from taxes in the region. Asked what the state government’s role was, a local leader said, “All we asked the Minnesota legislature to do was to get out of the way – let us raise and spend our own money in the urban area!” They recognized the metro area is an economic engine with its own resources and opportunities, different from rural Minnesota.
  • In California, the state devolved decision-making and significant amounts of money formerly controlled by the state government to the metropolitan planning agencies instead: the Bay Area, the Los Angeles region, greater San Diego, etc. (Following an independent performance audit by experts from outside the state, Gov. Jerry Brown also made managerial changes at the state DOT.) The legislature mandated new performance measures based on economic, environmental and social outcomes, recognizing that the traffic forecasting methodology used previously was usually inaccurate and fiscally irresponsible. This new discipline, called “performance measures,” improved the overall cost-effectiveness of setting priorities in urban California.

Massachusetts, California, Pennsylvania and Minnesota did not put more tax dollars into the existing governance structures and formulas. Reform came first, including devolution of authority and money to the regional level. The thinking behind those reforms:

  • Leaders recognized that urban and rural areas have fundamentally different transportation needs. They quit hoping that a single “statewide package” could somehow make sense for those different needs. Significant authority for urban areas was devolved to urban agencies, who are locally accountable and attuned to the multi-modal needs that are unique to urban areas.
  • Local officials realized than relying on regional resources and regional decision-making produced better value than sending tax money to the state capital and hoping that it would come back to their area for something useful.
  • Decision-makers at all levels are discarding the opaque “need” numbers and wish lists that drove transportation packages in the past, and are instead allocating funds using performance measures of economic return and social benefit. This approach breaks with the conventional approach of compiling a project list designed to win the votes of individual legislators who happen to have high-ranking committee assignments. It can also end the practice of transportation agencies estimating their own “needs” without clear goals or meaningful fiduciary oversight.

Before raising taxes, Oregon must recognize that its existing mechanisms of transportation planning, finance and oversight are not working – and that they won’t work better with more money. Institutional problems that need fixing include:

  • The muddled layers of government defy accountability. The state government, county governments, and city governments all own assorted highways, roads, streets and bridges in overlapping geographies rather than in adjoining geographies. The inefficiency of this mash-up is illustrated by a corollary opposite: Oregon’s criminal justice system also involves three levels of government, but in contrast to the transportation regime, every one knows who does what. The state runs penitentiaries for convicts serving sentences longer than one year, counties run jails for those serving sentences shorter than one year, and cities run police departments who make most arrests. Each level’s specialization is based on its comparative advantage, and each can be held accountable for its piece. Each link is essential, none superior to the other two. We don’t assume the director of the state Corrections Department has more expertise about crime than police chiefs in Beaverton and Medford do, or that jails are less important than the penitentiary just because one is local government and one is state government. This same logic should apply to transportation, but doesn’t. For unknown reasons the state agency is placed in a preferential financial position not warranted by its role in the actual system, its physical assets, or expertise.
  • The current formula of allocating highway fund revenue, consisting of gas tax and other sources, is totally arbitrary: roughly 50% state government, 30% county governments, 20% city governments. This allocation bears no relationship to mileage, need, outcomes or any rational metric. (Not incidentally, cities and counties put together own over four times the mileage of streets, roads and highways owned by the state.) The allocation is an archaic entitlement based on agency ownership rather than on need or return on investment.
  • Beyond the formula, capital allocation is driven by interested parties seeking to maximize dollars for their individual agencies, rather than by objective criteria measuring system performance. In the distribution of some federal funds and in theoretically competitive programs, ODOT is often both a contestant and a judge, an untenable conflict of interest. If we expect wise decisions, a contestant cannot be a legitimate judge. Yet there is no institutional check on ODOT management’s use of forecasts and estimates that are self-interested and, frankly, often turn out to be inaccurate.
  • Fragmented ownership in a common geography means no manager can be held accountable. A motorist drives from Ladds Addition to the Original Pancake House, taking city-owned Hawthorne Boulevard, the county-owned Hawthorne Bridge, and state-owned Barbur Boulevard. She arrives with a bent axle due to a pothole somewhere along the way. Who does she complain to about the pothole? The Mayor, who campaigned on the issue of fixing potholes although potholes then became the responsibility of a City Commissioner who does not work for him? The county chair, whose primary job is health clinics, libraries and jails but happens to own a random few bridges? Or the Governor, who has an entire state to worry about before getting concerned about a pothole on a city street? The motorist just wants to get to the Original Pancake House, not earn a degree in political science to figure out who is responsible for a pothole. Oregon’s ownership patchwork doesn’t allow that.

From the citizen’s point of view, government gets a group grade. Mismanagement in one portion of the system jeopardizes the whole system. For example, the state highway division’s use of debt over the past decade now demands that roughly 35% of state transportation revenues go to debt service to bondholders rather than to projects. (In 2001 the figure was approximately 2.1%.) Bonded indebtedness is a valid financing tool for assets that appreciate or have a steady revenue stream, but excessive use of debt instead of pay-as-you-go for routine expenses is another red flag revealing the lack of meaningful oversight. One segment of the system (state highways) can unilaterally become a voracious consumer of tax revenues just to pay its debts, politically crowding out other segments of the system (city and county roads) who depend on the same funding source for current needs.

Flawed governance structures lead to irrational priority-setting. Examples are everywhere. In the early 2000s, the Ross Island Bridge was rehabilitated because it is owned by state government, while the nearby Sellwood Bridge languished in worse condition for years because it is owned by a local government. The comparative urgency and trade-offs could not be evaluated in relation to each other. The Sellwood solution contains another inequity: motorists in distant Troutdale who rarely use the bridge will pay taxes for it for years, while residents of Milwaukie and Lake Oswego who use the bridge every day will pay nothing. This is just one example of the incoherence of our non-system. Another is that people hear that maintenance needs for existing streets are urgent, yet they simultaneously see arterials being widened. Telling the public “it’s different pots of money” falls flat, because they know the underlying truth: it’s all their money, the taxpayer’s money.

The unreckoned cost is in credibility. Informed members of the public cannot reconcile the dissonance of being told that we have a “crisis” of basic maintenance while simultaneously seeing millions being spent haphazardly. They are skeptical when told that tax increases are urgently needed now when past tax increases led to incurring large amounts of debt. (The legislature’s 2001-04 and 2009 fee and tax increases actually prompted this huge run-up in state debt, suggesting that more revenue perversely makes it less likely that the state government will live within its means.) This chronic mismanagement becomes a reason for voters to not trust government with more money. The plea, “We didn’t maintain our belongings, plus we ran up a big credit card bill, so now we need more money” is not compelling to most parents of teenagers. It’s not persuasive to most Oregonians, including elected officials.

With that backdrop, and the last minute revelations about more flawed forecasts from the state government management, it’s not surprising that the 2015 Oregon legislature chose not to increase transportation spending. It’s also a blessing: the package which failed, with its mix of projects designed to appeal to narrow interests rather than meet broad need, its expansion of large roads while short-changing maintenance of local streets, and its absence of performance measures, accountability and institutional reform, would have perpetuated the dysfunction, just at a higher price.

What’s a better path? Reform before revenue. Restore credibility to transportation governance and management before asking for more money. Any reform consists of two basic elements of good governance: assigning clear responsibility to the agencies best suited for different tasks, and allocating funding to achieve the best return on investment. These two simple steps would have huge fiscal benefits.

Reform #1: Rationalize Street, Road, Highway and Bridge Ownership

All streets, roads and highways are owned by the tax-paying public. The history of which agency first built a stretch of road should be declared just that: history. Current agency ownership should be erased, and responsibility for streets, roads, highways and bridges re-assigned to the units of government whose geographic scope and expertise best fits the function of that type of asset:

+In the urban region, highways, arterials, major streets and bridges should be managed by a metropolitan agency, and local streets by city governments. A metropolitan agency would be responsible for bridges, major streets, roads and highways whose function is predominantly intra-regional and cities would be responsible for those minor streets whose function is predominantly local.

+In the rural areas, roads and bridges that serve primarily local needs would be managed by county governments, while roads and bridges whose function is largely inter-regional would be managed by the state government.

This urban governance structure is “the London model.” An agency known as Transport for London objectively sets the distinction between regionally significant roads and locally significant streets, based on traffic counts and typical trip lengths. While no division of responsibilities between state and local government is perfect, any attempt at rational allocation of responsibility will be better than the current jumble.

Urban decision-making and resources should be re-assigned to urban agencies. They already possess authority over the land use decisions that are the primary influence on transportation demand. They are directly accountable to the local community, with a more favorable prospect for new voter-approved revenue. It makes no more sense for the state government to manage streets and highways in an urban area than it would make for the state government to manage a few water and sewer pipes in the urban area. Those assets (roads or pipes) have to interconnect at multiple points to an extensive network already managed by a local government. It would be inefficient for a state agency to own the sewers under Hawthorne Boulevard while a city agency owns the sewers under Powell Boulevard, yet that’s the inefficiency we tolerate in our transportation system.

As transportation planner Jarrett Walker says, you can’t make a transportation system “seamless,” but you can rationally decide where to put the seams so that they don’t become obstacles to good service delivery. The seam between short-distance trips and long-distance trips is easier to define than the random seams that run willy-nilly all over the map today.

Opponents of reform will claim those distinctions are impossible to make, by saying things like, “long distance trips begin on local streets,” or “Interstate 5 stretches from Mexico to Canada!” These accurate-but-irrelevant parries are like stating that a term of life imprisonment in the state penitentiary is set in motion by an arrest by a local police officer in Grants Pass, or that water molecules from a toilet flushed in Pendleton eventually end up in the Pacific Ocean. These statements are also true, but so what? They don’t mean the state should run the Grants Pass police department or the Pendleton sewers. The goal should be to make the system work.

The underlying conservative principle is, “decisions should be made at the lowest level of government that is capable of solving the problem.” This rule of thumb is how the European Union decides which functions the EU should perform and which are left to member nations. Great Britain is currently embarked on a similar devolution to municipal regions after decades of over-centralization, and Transport for London successfully integrates management of arterials, transit, taxi regulation and other functions in their metro area.

This clear division of responsibilities would assign the state government the important job it is best equipped to do, which local governments cannot do: maintain long-distance corridors linking different regions of the state. By any objective measures of balance sheet, asset mix and headcount, the Oregon Department of Transportation already is primarily the state highway department. This reform would simply acknowledge that reality and allow the agency to focus on its core competency, long-distance rural highways including interstates outside the urban area, along with programs that are most efficiently accomplished at statewide scale, such as the licensing of drivers and registration of vehicles.

Achieving this reform will require progressive urban state legislators to reach what may initially feel like a counterintuitive conclusion for them. As state-level officials they are naturally oriented to think about what the state government itself can do, and want it to do more and better. But in transportation, the best thing urban state legislators can do for their constituents is to right-size the state government’s role, by divesting the state highway division of its urban assets and enabling the metro region to have more self-determination in the management of arterials and urban highways, with an appropriate share of financial resources to do so.

Reform #2: Allocate Operations and Maintenance Funding and Capital Investment by Criteria Based on Economic and Social Outcomes (“Performance Measures”)

Re-aligning facility management by function under Reform #1 will leave Oregon still with layers of transportation agencies. Each layer’s role will be more clearly defined than today, but they can still be expected to contend for resources. That’s exactly the next point, Reform #2: a new funding allocation system that encourages agencies to compete, but on the basis of return on investment rather than entitlement. A new method will need to be invented to allocate operations and maintenance funds as well as capital systematically through new merit-based criteria, whether statewide or within geographic regions of the state depending on where revenue is raised. If anything, the competition will become more intense than today, but competition is a good thing. The difference will be that the competition can be on the basis of merit and need, replacing the formulaic entitlements that agencies jealously guard today. Whatever the structure, it is essential to end the conflict of interest of the judge also being a contestant. Properly staffed, an Oregon Transportation Commission could be created to represent the public’s interest in the system, rather than represent one state agency and be at the mercy of receiving briefings only from the management of that one agency. A separate board could have the mission of overseeing the state highway division. One board cannot do both with any legitimacy.

Competition would also be the way to distribute federal funds that are now “automatically” kept by the state highway division. State highways would compete on an even playing field under rules requiring return on investment, rather than be the default recipient with no justification or evaluation required. An unbiased conduit would direct dollars to programs and projects that provide the highest economic and social return, regardless of whether the money is spent by a local government or the state. Flexible federal funds provide more opportunities for multi-modal projects including active transportation and transit for places that want them, so this flow of money could be quite valuable at the local level.

Under an outcomes-oriented evaluation, public officials will still make tough calls, but the calls will be the types of policy judgments that public officials should be making. Issues like deciding the right balance of road maintenance compared to road expansion, or the right level of investment for freight movement relative to the right level of investment for automobile movement, are meaningful issues for policy-makers to decide. Debating those issues will be more fruitful than privately thrashing out which three or four ranking legislators get promised big new interchanges in their districts, especially when the recent outcome of that approach has been that nobody, including the lucky ones, gets much of anything.

Several models exist for priority-setting and allocation of funds in a multi-jurisdictional system. Oregon can learn from other regions and states in devising the right fiscal allocation method for itself. The keys to an improved financing structure are to discard the current non-strategic allocation of funds, and replace it with one based on outcomes. If that concept sounds vaguely like the original Oregon Health Plan or certain watershed restoration approaches, that’s because it is similar.

Other regions are significantly reforming their transportation governance. As a result they are able to spend more money wisely. By contrast, Oregon has stuck with a governance model of the past that is unaccountable and has lost the confidence of the legislature and public. Glowing danger signals like chronically flawed data forecasts, under-maintenance of core assets, and increasing debt despite past tax increases should alarm anyone concerned with Oregon’s competitiveness. Reform will happen only when bold leaders outside the existing transportation hierarchy recognize that the current non-system is underachieving, and that reform is the only way to increase and maximize the public’s investment. Other regions are making those changes and investing now. Portland and Oregon should too.

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