A Four-Step Process to Assess the Fiscal Performance and Sufficiency of State Road Funds

Performance Measurement

Performance measurement or performance management has been a fundamental part of public administration. A department’s program performance was a key component to the planning, programming, and budgeting system more than 60 years ago (Lee, Johnson, & Joyce, 2008). A renewed interest in performance management occurred in the early 1990s as part of reinventing government and the new paradigm of public management (see Hood & Peters, 2004). Tightening fiscal pressures have helped maintain focus on the performance of federal agencies through legislation such as the Government Performance and Results Act of 1993 and the Government Performance and Results Modernization Act of 2010. Recent research has emphasized the links of performance measures to strategic management (Poister, 2010) and budgeting (Hou, Lunsford, Sides, & Jones, 2011). Scholars have examined tools of performance measures as broadly applied to a wide range of departments and management functions.

In spite of the emphasis on performance measures across government, there are very few academic studies that examine performance measures of state transportation systems. Poister (1982) argues that the development of transportation performance indicators benefits state administrators by generating data that potentially help them to operate programs more effectively. A major impetus for assessing transportation system performance at the state level was the Intermodal Surface Transportation Efficiency Act of 1991, although few states have made significant progress in the development of performance measures for transportation (Dilger, 1998). In a more recent article, Poister (2010) asserts that performance indicators potentially generate information useful for planning the future needs of and strategic opportunities for the state transportation system:

Thus, strategic planning processes need to facilitate understanding of the forces driving issues, explore options in terms of their feasibility and likely consequences, and stimulate candid discussions regarding the costs and risks associated with various alternatives. If managers can engage in these kinds of assessments and develop genuine consensus around strategies among the “power players” within the organization and outside it whose support or active involvement is essential for success, the strategies arrived at stand a much better chance of success in moving the organization in the desired direction. (p. S248)

The role of performance measures and strategic planning is particularly vital in light of the aging transportation infrastructure and declining fiscal resources available in road funds. Wilmot and Naghavi (2000) discuss the limited number of financial models to assess state road revenue capacity and short-term cash flows; then they apply a linear programming model to Louisiana to predict the future operation of road funds. Wholey (1999) illustrates in a federal setting that the National Highway Traffic Safety Administration was relatively successful in implementing performance measures for the Government Performance and Results Act and that monitoring performance measures produced moderate improvements in service quality and accountability to long-term goals.

Transportation Finance Challenges

There is a significant amount of research conducted by both scholars and practitioners that highlights the fiscal challenges facing state road funds and state transportation systems in general. Most states fund transportation using some or all of the following seven revenue sources: (a) fees, (b) fuel taxes, (c) miscellaneous income, (d) bonds, (e) federal government transfers, (f) local government revenues, and (g) general funds (Eger & Hackbart, 2001). The growth of road fund revenues has been hampered by increasing fuel efficiency. Increases in fuel prices have been shown to drive increases in fuel economy as well (Allcott & Wozny, 2010; Busse, Knittel, & Zettelmeyer, 2009; Klier & Linn, 2010). These increases in fuel economy could result from the use of more fuel-efficient vehicles and/or from a reduction in the number of miles driven. Additional pressures on funding stem from marked inflation in construction and asphalt costs (Slone, 2009).

In recent years, many states have faced falling revenues from funding sources dedicated to transportation (Vock, 2010). States have not increased gas taxes rates, instead relying on federal stimulus money to help fill transportation budget gaps. Reliance on the Federal Highway Trust Fund has often been fraught with uncertainty in recent years, as the fund has experienced deficits and had to be replenished with general funds. The growth in funding needs for transportation infrastructure has caused states to more closely examine alternative funding and financing options such as vehicle-miles traveled taxes, congestion pricing, tolls, advertising, and public–private partnerships (Slone, 2010, 2012; Vock, 2010). This increased interest in alternative funding has been studied by several authors, including Transportation Research Board (2006); Hackbart, Yusuf, Moody, and Wallace (2005); Giglio and Williams (2001); and Rufolo, Bertini, and Kimpel (2001).

Debt issuance to fund transportation projects has become a popular tool of policy makers (Slone, 2010). GARVEE (Grant Anticipation Revenue Vehicles) bonds are a popular source of tax-exempt bond financing backed by federal transportation-aid appropriations. Section 122 of Title 23 codifies the provisions that make bond-related costs eligible for federal reimbursement for any federal-aid project eligible under Title 23. Nevertheless, there are concerns over the effect of debt limits and the available debt capacity of state transportation departments. Determining what levels of debt service can be sustained by revenues from highway funds is important to balancing appropriate levels of investment using debt financing without hampering the state’s ability to meet other needs that may arise. Hackbart, Perkins, and Hur (2004) define the balance as “levels of debt or Road Fund debt service expenditures that can be incurred without negatively impacting the ability of a state to meet other high priority highway investments” (p. iv). Denison, Hackbart, and Moody (2009) explore the debt levels of state road funds in competition with general fund debt. They find that in states with overarching debt limits on both revenue and general obligation debts, road fund debt competes with the general fund debt. In states without overarching debt limits, road fund debt and all other debts are positively correlated, meaning both rise and fall at the same time.

Utilizing a combination of performance and financial measures in an analysis of state road funds better enables states to track the impact of resources on infrastructure. With the budget constraints facing many states, it is prudent to ask how transportation has been affected in recent years. The fiscal performance model developed in this article provides more detailed answers, but like fiscal analysis in other settings, it also raises important questions that need further exploration. Future fiscal predictions always exhibit some level of uncertainty. The steps used to develop the fiscal performance model are discussed in the following methodology and case study of Kentucky.

Step 1: Revenue Sources and Volatility

Many states rely on fuel taxes for road funds, although other revenue components can constitute part of the revenue base. Identifying all revenue sources that flow into the road fund and their volatility provides a first step toward a full analysis of the road fund. Significant, individual revenue sources can be examined in greater detail to understand the underlying factors that may be driving revenue volatility. As the primary source of funding for the KYTC, the Road Fund plays a vital role in building, operating, and maintaining the state’s transportation system. Kentucky’s total real annual road fund revenue has remained relatively flat over the past 15 years. During this time, the composition of fund revenues has been evolving. Fuel tax receipts have increased, while vehicle tax receipts have experienced slight declines. The increase in fuel tax receipts can be attributed to Kentucky’s fuel tax rate being indexed to the average wholesale price of fuel. This indexing allows Kentucky’s fuel tax rate (in cents per gallon) to increase automatically when the price of fuel increases. This is a significant advantage for Kentucky when compared with other states where every increase in the fuel tax rate must be approved by the state legislature. Kentucky’s Road Fund is the primary source of funding for KYTC, accounting for over 50% of the Cabinet’s funding in FY 2011. Total transportation funding derived from the Road Fund in FY 2011 was nearly US$1.2 billion. Identifying all of the revenue sources that are dedicated to the Road Fund aids in forecasting future revenue scenarios and sheds some light on how various revenue sources have fluctuated over time. From 1996 to 2011, real revenues actually demonstrated a fairly level trend.

Kentucky’s Budget in Brief provides an overview of the sources of Road Fund revenues with breakdowns of categories including Sales and Gross Receipts Taxes, License and Privilege Taxes, and other sources. The two main sources of Road Fund revenues are the motor fuel tax and the motor vehicle usage tax, which fall under Sales and Gross Receipts Taxes and totaled over US$650 billion and US$278 billion, respectively, in FY 2010. These taxes account for the majority of Road Fund revenues. The gas tax is levied at a rate of 9% of the average wholesale price per gallon of gas with a variable supplemental highway user tax that has a ceiling of 5 cents. The minimum wholesale price per gallon is US$1.342, which means the minimum tax, including the supplemental tax, is 17.1 cents per gallon.

Given that motor fuel taxes accounted for over half of Road Fund revenues in FY 2010, identifying possible trends in the usage of fuel is an important step in assessing future sufficiency of the Road Fund. When comparing Kentucky’s average gasoline tax rate per gallon and the national average, from 1997 to 2010, the national average has risen slightly, from about 19 cents per gallon in 1997 to approximately 22 cents per gallon in 2010. In the same time period, Kentucky’s rate has increased from around 15 cents per gallon to over 25 cents per gallon. Much of this increase can be attributed to the increase in the average wholesale price of gasoline. Kentucky’s indexing of the variable portion of the gasoline tax allows the rate to rise without legislative action, while the rates remain fairly constant in states without this indexing. However, it is not only tax rates that can affect revenues but fuel consumption as well. When examining fuel usage, Kentucky drivers have consistently consumed more fuel per person than the national average. Certainly, economic trends influence fuel consumption as well, as the economic downturn in 2008 was associated with lower fuel consumption. Research has shown varying measures of the price elasticity of demand for gas, but these measures are universally inelastic, that is, changes in the price of gasoline do not cause major changes in levels of fuel consumption (Hughes, Knittel, & Sperling, 2006).

As motor fuel taxes comprise one of the largest revenue categories for Kentucky, further comparisons are warranted. Kentucky’s motor fuel tax receipts are compared with the national average for the years 1996 to 2010. Trends indicate an upward trajectory both in Kentucky and nationally. Traditionally, Kentucky has been fairly consistent with the national average, although Kentucky has moved ahead in recent years, again, likely due to the indexed portion of the motor fuels tax. There is more volatility in Kentucky’s receipts than in the national average, which should be expected, as the use of a 50-state average would filter out much of the individual state volatility.

Another significant source of Road Fund revenues for Kentucky is the motor vehicle usage tax. This tax is levied when a vehicle is registered for the first time in Kentucky, or when ownership is transferred. In FY 2010, this tax accounted for 23% of Road Fund revenues. Investigating trends in vehicle registrations and the revenues derived from vehicle taxes is another important step in evaluating the Road Fund. In recent years, Kentucky has mirrored the national average, after being below the average from 1995 to 2000. Interestingly, the national average for vehicles per capita has declined slightly from a peak of 0.51 in 1995 to 0.45 in 2009, indicating that growth in vehicle ownership has been outpaced by population growth.

The number of vehicles in a state can be an important driver of tax receipts derived from motor vehicles. These revenues can be an important funding component for transportation. Kentucky is an interesting case, as its motor vehicle usage tax is considered a Special Title Tax by the Federal Highway Administration (FHWA). This classification is included in the FHWA revenue category of Motor Vehicle and Motor Carrier Tax Receipts. Many other states obtain funds via registration fees, and although Kentucky does use this fee, it does not constitute the majority of its revenues from motor vehicle taxes and fees. Registration fees are different from Kentucky’s motor vehicle usage tax in that registration fees are paid each time a vehicle’s registration is renewed, while the usage tax is levied when a vehicle is registered in Kentucky for the first time or it changes ownership.

Kentucky has traditionally had higher tax receipts than the national average, which could be attributed to the motor vehicle usage tax. Kentucky has historically averaged over US$600 million annually in total receipts. Kentucky experienced a downturn in tax receipts in 2009 that could be attributed to the recession affecting Kentucky more adversely than the nation as a whole.

Step 2: Expenditures and Volatility

After analyzing the revenue side of the Road Fund, specifically the motor fuel tax and motor vehicle usage tax, expenditure levels are now examined in closer detail. Generally, revenues will drive expenditures, so trends and volatility will likely follow those found for revenues, although debt issuance may be indicative of some divergence between revenues and expenditures in the data. However, the expenditure choices will be pertinent in examining how a state’s road fund affects its transportation system and meets its transportation needs. Although states may also make transportation expenditures from general funds, the focus in this article is on road funds.

Total annual Kentucky Road Fund expenditures have historically been upward of US$1 billion. Annual Road Fund expenditures from 1996 to 2011 were analyzed. When examining real dollars, it is apparent that expenditures from the Road Fund have also experienced a slight decline, albeit with some minor changes during the time period. As might be expected, the recession appears to have negatively affected expenditures for a short time period, likely due to the commensurate decrease in Road Fund revenues.

Road Fund appropriations are generally divided between the Transportation Cabinet, the Justice and Public Safety Cabinet (State Police), the Finance and Administration Cabinet, and smaller amounts to areas such as Homeland Security, Environmental Protection, and the State Treasurer. The Transportation Cabinet’s portion of the funding is by far the largest. In FY 2010, the Transportation Cabinet received over 93% of Road Fund appropriations. The dollars received by the Cabinet are generally divided between revenue sharing, aviation, highways, vehicle regulation, debt service, capital projects, and general administration and support. Highways and revenue sharing categories received the most funding with over 60% and 25%, respectively. By looking at expenditure categories to see where Road Fund revenues are being spent, states will better understand how their road funds affect sufficiency. Trends over time may also emerge, indicating changes in transportation policy and priorities related to expenditures.

Step 3: Analyze State Road Fund Sufficiency

Assessing the sufficiency of road funds in future years requires an analysis of the historical costs associated with the provision of transportation services and the current condition of infrastructure. Gathering information and opinions from officials responsible for maintaining the transportation system adds additional context when addressing sufficiency concerns. The impetus behind examining previous transportation system costs as well as expenditures is to provide historical comparisons between measures of sufficiency, such as system conditions, with prior expenditures. This allows future forecasts to be viewed through the lens of past expenditures and system performance. Accounting for expected changes in the costs of construction and maintenance activities allows future revenue estimates to be evaluated based on expected costs. If construction costs increase, then corresponding increases in Road Fund revenues will be necessary to maintain current service levels.

Roadway sufficiency can be analyzed by comparing historical expenditures with performance measures such as roadway ratings and by interviewing key officials to ascertain their assessment. Including previous expenditure levels as part of the comparison helps demonstrate whether past revenues and expenditures have been adequate to maintain Kentucky’s roadways and if a continuation is likely to be sufficient in the future. As construction and maintenance costs increase while revenues are nominally stable, fewer projects can be undertaken and maintenance may be deferred. This can create a situation where the condition of roads and bridges may deteriorate. The FHWA maintains a national highway construction cost index that can be utilized, but many states like Kentucky maintain state-specific cost indices. The KYTC maintains a construction cost index, which uses average unit bid prices from each year. The base year for this index is 1987 (base value of 100%). The index is shown in Figure 1. Recent years have seen wild swings in prices as they increased an average of nearly 25% each year from 2005 to 2008, followed by 3 straight years of greater than 40% change. This is particularly noteworthy, as the previous 25 years (1979-2004) never had an annual change exceeding 15%. When compared with the national index, Kentucky appeared to have more year-over-year volatility and the fluctuations in recent years can make it difficult for policy makers to plan for projects due to cost uncertainty.

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Figure 1.

Kentucky construction cost index.

Additional measures can be used to benchmark costs such as the cost to resurface a mile of roadway, which has been steadily increasing over the past decade. Ultimately, increasing costs lead to fewer miles of roadway being resurfaced ² and inevitably to poorer road conditions.

Ratings such as the ASCE Report Card for America’s infrastructure provide some initial perspective regarding the current condition of roads and bridges, but more detailed ratings from the KYTC are used for expenditure comparisons. The 2011 Report Card for Kentucky indicated a grade of D for both bridges and roads. These ratings are rather broad and do not offer much insight; thus, further data collection is needed. Still, ratings such as report cards can be used to assess the condition of transportation infrastructure and whether spending has been sufficient to maintain or improve infrastructure. Target levels of infrastructure performance will vary by state; thus, one particular method is not prescribed, and rather a number of statistics are gathered and examined. Historical data and trends from these ratings are introduced, followed by several comparisons with expenditures, and then any conclusions that can be drawn.

Road Fund expenditures are compared with Maintenance Rating Program (MRP) scores in Figure 2. The MRP Report is an annual survey of roads conducted by the Division of Maintenance in the KYTC, complete with roadway ratings. ³

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Figure 2.

Road Fund expenditures and MRP scores.

Overall, scores improved from 1999 to 2007 but have been up and down since. The target grade of 80 has been surpassed in 5 of the last 6 years. This indicates a marked improvement from the earlier data when the state did not meet its target goal from 1999 through 2006. The improvement in this measure could be attributed to more dollars being allocated to maintaining current roadways, versus using dollars to replace deteriorating roads and expanding system capacity. From 2006 to 2011, the Transportation Cabinet increased its maintenance expenditures by over US$100 million, while construction expenditures actually decreased by several million dollars. The trade-off inherent in such a strategy is that the average age of roads continues to grow, leading to future scenarios where more dollars are needed for replacement than are available. Utilizing more dollars for maintenance is a function of the age of the roadways, which in many cases are past their estimated service life, and thus increased maintenance is necessary.

Measures of pavement condition can also provide some insights into how Road Fund expenditure levels affect roadways. The KYTC rates pavement conditions in the state by classifying pavements as good, fair, or poor condition. The scale used to determine what constitutes good, fair, or poor condition is adjusted based on traffic volume. Thus, routes with higher volumes are expected to be maintained in better condition than routes with lower traffic volumes. Pavement condition ratings and Road Fund expenditure levels are contrasted in Figure 3.

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Figure 3.

Road fund expenditures and pavement conditions.

From 2003 to 2008, Kentucky experienced an increase in the percentage of pavements rated as “good,” but the percentage has been declining since it peaked in 2008. Correspondingly, the percentage of pavements rated as “poor” has been trending upward since 2008. Other measures such as the International Roughness Index (IRI), which measures the condition of pavements and provides rideability scores, indicate similar results when compared with expenditures. Data on bridge conditions are less readily available than pavement conditions and no targets are denoted. As the report card grade of D alludes to, Kentucky has over 20% of its bridges rated as functionally obsolete and nearly 10% structurally deficient. When measuring road fund sufficiency, individual states may choose different benchmarks based on available data.

The question of whether spending levels have been adequate (in terms of meeting the needs of our transportation system) was examined by looking at a number of performance measures as discussed previously and through stakeholder interviews with key state transportation officials in areas including budgeting, maintenance, planning, pavement, and bridges. Interviewees from varying backgrounds and responsibilities were chosen to ensure that the information gathered was from a broad cross-section of the various areas that make up transportation departments. To identify interviewees, we reviewed KYTC’s organizational chart as a first step, and then consulted with officials initially identified to ascertain if other interviews were warranted. A total of eight interviews were done. Four open-ended questions were asked regarding interviewees’ perceptions of (a) the ability of the road fund to meet transportation needs, (b) any trends in revenues, (c) ratings of infrastructure, and (d) long-term outlook for the state’s transportation system. Anonymity of the interviewees was assured to encourage honesty and frankness in their responses. Key points that emerged from the stakeholder interviews included concerns about expenditure levels being sufficient, aging infrastructure, and the impact of national politics on state transportation budgets. The performance metrics examined reinforced the concerns raised by the stakeholders that current revenue and expenditure trends may not be sufficient to meet future transportation needs or maintain current service levels. To further examine this issue, average-, high-, and low-revenue scenario forecasts are developed to assess the fiscal condition of the road fund in the near future.

Step 4: Revenue and Expenditure Forecasts

Forecasting future values provides a future outlook for road funds, including potential high- and low-revenue scenarios. This will enable future planning to incorporate all of the prior steps, particularly if current revenue and expenditure levels have been deemed insufficient. As some states have forecasting tools already in place, the choice, level of detail, and application of forecasts will be determined on an individual state-by-state basis. Examining long-range state highway plans will assist in revealing if future revenues and expenditures are sufficient to meet the needs detailed in such plans, or merely to seek to maintain current infrastructure. If revenues and expenditures are determined to be insufficient at meeting performance measures in Step 3, then the forecasts can provide some information regarding potential revenue increases, or the need to develop new revenue sources if no revenue increases are forecast.

The first challenge in forecasting Road Fund revenues for the next several years is to determine the level of detail appropriate for building robust forecasting models. Although it is possible to apply forecasting models to individual categories, this level of detail is not necessary and using so many forecasting models would introduce unnecessary forecasting error to our estimates of total Road Fund revenues. Therefore, the emphasis of the forecasts discussed in this report is on the aggregate annual Road Fund revenues. The decision to focus on aggregate Road Fund revenues was made after considering forecast models for major revenue categories.

A second challenge to providing accurate forecasts is to identify appropriate forecasting models that capture revenue trends and provide robust predictions. When forecasting Kentucky Road Fund revenues, which have been relatively consistent, several basic models may be considered including a time trend model, time-trend-squared model, and lag model. The trend-squared variable captures any exponential growth or diminishing growth rates. The lag model, more formally known as the autoregressive (1) (AR(1)) model, exploits the relationship between this year’s revenue and last year’s revenue to forecast revenues. It relies heavily on prior-year revenues to forecast each succeeding year. The models used here utilize historical state budget data to forecast future Road Fund revenues. Implicit in the forecasts are effects from factors such as fuel efficiency, population growth, fuel prices, and broader economic factors. Thus, the forecasts used here implicitly account for the impact of these factors. Any revenue forecasts that attempted to integrate such effects individually would be significantly more complex and may not necessarily improve the validity of the forecasts.

The formal regression equations are presented for time trend, time-trend-squared, and lag models in Equations 1a, 2a, and 3a, respectively, where Y_t is the total Kentucky Road Fund revenues and T_t is the trend value for the FY at time t. The regression coefficients in Equations 1a, 2a, and 3a are estimated using total road fund revenues from the 15-year period. The predicted values of Y ^ t become the forecast estimates using Equations 1b, 2b, and 3b:

Y t = β 0 + β 1 T t + ε t ,

Y ^ t = β ^ 0 + β ^ 1 T t ,

Y t = σ 0 + σ 1 T t + σ 2 T t 2 + ε t ,

Y ^ t = σ ^ 0 + σ ^ 1 T t + σ ^ 2 T t 2 ,

Y t = α 0 + α 1 Y t − 1 + ε t ,

Y ^ t = α ^ 0 + α ^ 1 Y t − 1 .

The coefficients for the three models are presented in Table 1. The slope coefficient on the trend model is US$21.3 million. This suggests that every year, the Road Fund revenue is expected to increase by about US$21.3 million. The slope coefficient for year in the time-trend-squared model is slightly higher at US$24.9 million. However, the coefficient on the year-squared variable is negative, meaning that Road Fund revenues would be projected to grow at a slightly higher rate initially, and then eventually diminish over time. Both the trend and trend-squared models place uniform weight on the entire data set to forecast the annual change. The coefficient on the lag model is essentially the percentage of last year’s revenues that are added to the constant to get the predicted value. The lag model uses the entire data to calculate the coefficients, but the current year’s Road Fund revenues are of greater importance in the calculation of the next year’s revenues. ⁴

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Table 1.

Road Fund Revenue Forecasting Model Coefficients.

	Year	Year2	Constant	Observations	R 2
Trend model	21,290,000*** (1,886,000)		943,900,000*** (18,240,000)	16	.901
Trend2 model	24,890,000** (8,286,000)	−211,981 (473,832)	933,000,000*** (30,600,000)	16	.903
	Lag		Constant	Observations	R 2
Lag model	0.934*** (0.133)		99,420,000 (147,600,000)	15	.793

Note. Standard errors are given in parentheses.

**

Significance at the 5% level

***

Significance at the 1% level

Figure 4 plots the forecasted values to better illustrate the subtle differences between the models. The simple trend model projects the highest rate of growth over the 5-year period of time. The trend-squared model estimates less total Road Fund revenues in 2012 and has a rate of growth that is slightly less than the trend model. The lag model has the highest projection for 2012, but has a lower rate of growth over the 5-year period.

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Figure 4.

Forecasted road fund revenue values for various models.

Each of the three forecasting models produced reasonable estimates of the total Kentucky Road Fund revenue projections for 2013 to 2017. As we move forward to generate high-revenue and low-revenue scenarios for comparisons with expenditures, it is desirable to limit the focus of the various model projections for ease of comparison. Using an average of the three forecasts presented above is less dependent on the specific assumptions of each model, and therefore provides a more robust estimate for the time period under consideration (see Bopp, 1985; Grizzle & Klay, 1994). Thus, this approach is used to develop high- and low-revenue scenarios, as well as an average baseline.

To determine future budget levels, we examine whether projected revenues will be sufficient to meet trends based on historical expenditures. Expenditures were forecast using a time trend regression, and compared with the predicted values as well as high-/low-revenue scenarios developed from the average of revenue forecasts. The high- and low-revenue scenarios generated are based on the largest percentage deviation between actual and predicted values. When conducting the analysis, it is expected that the high-revenue scenario results in a surplus, the low-revenue scenario results in a deficit, and the average-revenue scenario balances out, given that the scenarios assume a continuation of historical expenditure trends. Outside of whether a continuation of historical expenditure trends into the future will yield sufficient revenue to maintain, or even expand the capacity of the transportation system, another pressing question is the level of deviation that may be possible, particularly with the low-revenue scenario, and what implications this scenario may have on transportation systems.

The largest deviation between actual Road Fund revenues and the model’s predicted value was determined for the time trend model, the trend-squared model, and lag model. Again, these deviations correspond with the most recent recession, indicating that future deviations over the next few years are likely to fall within this range. The percentage that this deviation represents is 4.49, 4.82, and 6.74, respectively. The average of these percentages is 5.35 that was used to construct the upper and lower bounds of the average-revenue forecast model. The average forecast predicted values in Table 2 suggest that there will be Road Fund surpluses for years 2012 through 2014, followed by deficits in 2015 and 2016. The low-revenue scenario indicates deficits in the Road Fund for all 5 years. The high-revenue scenario predicts a surplus for all 5 years.

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Table 2.

Average of Models.

		Revenues			Net available funds a
	Projected expenditures based on historical trends (in U.S. dollars)	Projected revenues based on average forecasts (in U.S. dollars)	Low (5.35% decrease from projected revenues) (in U.S. dollars)	High (5.35% increase of projected revenues) (in U.S. dollars)	Projected (in U.S. dollars)	Low-revenue scenario (in U.S. dollars)	High-revenue scenario (in U.S. dollars)
2013	1,331,039,564	1,333,447,509	1,262,087,784	1,404,807,235	2,407,945	−68,951,780	73,767,671
2014	1,348,390,620	1,349,445,547	1,277,229,683	1,421,661,411	1,054,927	−71,160,938	73,270,791
2015	1,365,741,676	1,365,089,963	1,292,036,884	1,438,143,041	−651,714	−73,704,792	72,401,365
2016	1,383,092,733	1,380,394,795	1,306,522,675	1,454,266,914	−2,697,938	−76,570,058	71,174,182
2017	1,400,443,789	1,395,372,971	1,320,699,291	1,470,046,651	−5,070,818	−79,744,498	69,602,862

a

Net available funds is the projected revenue less projected expenditures.

As expected, the low-revenue scenarios for the average forecast models results in a deficit for the Road Fund, while the high-revenue scenarios result in a surplus. The results suggest that about a 5% deviation below projected revenues will produce shortfalls in the Kentucky Road Fund. The average-of-models base scenario runs a surplus for 3 years followed by 2 years of deficits. An interpretation of the forecasts indicates that the Kentucky Road Fund should generate enough revenues to maintain historical spending patterns. The bigger policy question, discussed previously, is whether continuing historical spending patterns is sufficient to maintain Kentucky’s transportation system. If more resources need to be invested in Kentucky’s transportation system, then it is clear that current revenue sources are unlikely to be sufficient.

The revenue forecasts and the comparisons of projected revenue to projected expenditures indicate that Road Fund revenues should be adequate to support historical spending levels for the next 5 years. For the “normal” and “high-revenue” scenarios, the projected revenues generally equaled or exceeded the projected expenditure levels. Even for the worst-case, “low-revenue” scenarios considered, the projected revenues never fell short of projected expenditure levels by more than 6%. In other words, there is no indication that a precipitous drop in Road Fund revenues is likely within the time frame considered. Looking out beyond 5 years, the question becomes harder to answer. There are certainly factors at work (such as the exponential increase in the market penetration of alternative-fuel vehicles) that call into question the long-term viability of the current funding model. Although historical spending patterns are likely to be maintained over the forecast time period, are these levels sufficient for the transportation system? The performance measures in Step 3 indicate that a continuation of current trends may not be sufficient. However, statewide long-term transportation plans can also provide some insight, particularly plans with specified monetary needs. Kentucky’s current 6-year plan lists identified projects needed to improve the state’s highways. It does not list all projects, rather those for which funding is presumed to be available based on nominal dollars. The plan has over US$8 billion in identified projects, but due to anticipated inflation, there is almost US$2 billion left unfunded.