The operation of municipal water and sewer systems is funded by charging fees to users based upon how much they use the system. In some communities, this approach has been taken to fund the repair and maintenance of streets, as well. Although not a widespread practice, the approach is popular in the states of Oregon and Montana, appears to be catching on in Washington State, has also been implemented in various communities in Colorado, Florida, and Texas, and can be found in scattered cities in between.
In soliciting topics for the 2011 rate survey, we were asked about the prevalence of street or transportation utility fees in our region. To explore the topic, we asked survey respondents to report whether their community funds a street utility with user fees, or if they are considering doing so. Based on the information reported by survey respondents, most communities in our region do not charge a street or transportation maintenance fee.
Interestingly, for both the large/metro survey and the small system survey data sets, the reported percentage of respondents that do fund a street utility with user fees was 15 percent. Another 3.1 percent indicated they are considering implementation of such a fee.
For those respondents that indicated operation of a street or transportation utility, the graphic below shows the reported funding sources. The monthly street utility fees reported for residential users ranged from $1.00 to $12.00, with an average of $4.00.
So why the fee approach? Most local street departments have historically been funded using the local share of gasoline tax, state highway tax funds, system development charges, general fund allocations (e.g. property taxes, state revenue sharing, licenses and miscellaneous fees), sales tax revenues, and sometimes federal funds. The use of property tax funds has been generally viewed as appropriate, given that streets are important to the economy of a jurisdiction, thereby benefitting all land owners. However, as gasoline tax shares to local entities decrease, property taxes become more contentious, and operations and deferred maintenance costs climb at an aggressive pace, City leaders are left to search for alternative means to fund maintenance of city street and transportation infrastructure.
The concept of a fee that is linked to actual use of the infrastructure, as opposed to a tax, can be an attractive alternative. Though the laws vary by location, in some areas, a fee, unlike a tax, can be implemented without a public referendum, although it may be advantageous to gain public support prior to implementation. However, in some instances, the implementation of a street/transportation fee has been challenged in court and subsequently abandoned.
In implementing a fee, it is important to be able to demonstrate the required differentiation from a tax. An example of standards for defendable fee-setting has been established by the Supreme Judicial Court of Massachusetts: 1) a fee is assessed for a particular benefit, 2) a fee is avoidable by opting not to use the service, and 3) the fee does not exist to raise revenue but to compensate the government for the costs of providing the service (Emerson College v. City of Boston, 1984).
The literature illustrates a number of ways to set the fee, such as proportionally to road usage based on trips estimated according to traffic standards developed by the Institute of Transportation Engineers, or sometimes, a flat rate per account.
It appears that the street/transportation fee has most successfully been implemented for the purpose of ongoing repair and maintenance, while continuing to use property tax or some other funding source for capital expenses. One criticism of the fee approach is that, by shifting from the property tax to a fee, users who previously did not directly pay for street services through taxes will see an increase to their utility bills, thereby creating a regressive effect. To address this, some cities have taken measures such as exemptions or discounts for users that do not own a vehicle.
If you are considering utilizing a fee structure for funding repairs and maintenance to the roadways within your jurisdiction, remember that it is extremely important to be able to demonstrate the connection of the costs and benefits associated with each affected property. Give some thought to the potential regressive nature of the fee, the effect on tax-exempt properties, and whether you will want to provide discounted rates to certain users. Adopt sound technical methodology that will result in a defendable rate structure if challenged in court, and initiate a public education effort to bring attention to the condition of local streets, the benefits of diligent maintenance efforts, the benefits of providing a dedicated and stable funding source, and the philosophy behind the rate-setting practice.
References:
Levinson, David, et al, 2009. “Economic and Equity Effects of Transportation Utility Fees.”
Montana Department of Transportation, 2011. www.mdt.mt.gov/research/toolkit/m1/ftools/fd/tuf.shtml
Puentes and Prince, 2003. “Fueling Transportation Finance: A Primer on the Gas Tax,” The Brookings Institute.