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S&P Global Ratings currently rates $62.0 billion of highway user tax bonds, secured by transportation-related taxes and fees, such as fuel taxes and motor vehicle registration fees. Most of these are highly rated, with only three ratings below the ‘AA’ category, reflecting typically high debt service coverage and stable pledged revenues (see table 1 in the Appendix).
Overall, the outlook for highway user tax debt appears stable. While EVs, PHEVs, and HEVs could pose a challenge to fuel taxes over the long term, the losses to date have not been significant due to the small number of electric vehicles on the road, and the flexibility states have to pledge replacement revenues. The situation is analogous to the impact on state revenues from internet sales. States didn’t press vigorously for changes in tax law to collect lost sales taxes from internet sales until the tax losses became significant. When losses of fuel tax become significant, states may become incentivized to look more vigorously for transportation related alternatives.
We changed several highway user tax bond outlooks during the recent pandemic, but these changes were the result of changes in the obligated states’ GO outlook, such as happened in Michigan, Nevada, and New York State. Our priority lien criteria, under which we rate highway user tax bonds, generally links highway user tax bonds to no higher than one notch above the associated state GO rating, absent unusual circumstances. As a result, highway user tax bond outlooks for these states changed when the associated state outlooks changed. The outlooks for Michigan and New York State highway user tax bonds subsequently were changed back to stable, as their states’ GO outlooks likewise returned to stable.
Moderate Drop In Motor Fuel Tax Revenue During the Pandemic
State fuel tax revenues fell during the COVID-19 pandemic as a result of reduced driving; however, state debt service coverage levels turned out to be more than sufficient to handle the decline. Combined state fuel tax revenue fell 11.2% in the second quarter of 2020 from the first quarter of 2020, according to the U.S. Census Bureau, following a 6.9% decline from 2019’s fourth quarter to the first quarter of 2020, for a cumulative fall in quarterly fuel tax revenue of 17.3% for the two quarters (see table 2). However, on a year-over-year basis, the decline for the 12 months ending December 2020 was only 6.1% compared to the same 12 month period in 2019.
Debt Service Coverage Remains Strong
These levels of decline were relatively benign from a rating perspective, since pledged debt service coverage for all but three of our ratings, based on fiscal 2020 pledged revenue, was still over 2x. The three exceptions with less than 2x coverage are rated in the ‘A’ category, but still enjoyed at least a minimum of 1.33x or higher debt service coverage.
In addition, most states also pledge additional revenue beyond just fuel taxes. We believe the addition of other pledged revenue beyond fuel taxes can lend revenue stability. In some cases, such as Connecticut, the state transfers what would normally be general fund revenue, such as state sales tax, into its pledged highway fund, while Michigan recently redirected a portion of income tax to pledged transportation funds.
Often, motor vehicle registration and license renewal fees comprise a significant share of pledged revenue, which we see as a stabilizing factor. Between 1960 and 2019 has there has never been a decline in the number of registered vehicles in the U.S.
As an example, motor vehicle registry fees comprised 44% of Massachusetts’ pledged state transportation fund revenues in fiscal 2020, and fuel taxes 56%. While both new registration fees and fuel taxes declined in 2020 in Massachusetts, we believe the need to renew vehicle registrations and licenses adds a more predictable element to these revenue streams, while their presence could help offset potential declines in fuel taxes to the extent vehicles become more fuel efficient or move to alternative energy.
In Michigan, as another example, motor fuel tax revenue declined 10.5% in fiscal 2020, but vehicle registration fees declined only 0.7%. Michigan is projecting 6.3% growth in fuel taxes in fiscal 2021, and 2.1% growth in registrations fees. The net result is total transportation fund revenue, including miscellaneous fees, declined only 5.5% in fiscal 2020 (a 6.0% decline for what was allocated to pledged trunk line funds per state formula), and is projected to grow 4.1% in 2021 (4.9% projected growth in trunk fund allocation). This level of fluctuation was comfortably handled by fiscal 2020 Michigan trunk line fund maximum annual debt service coverage of 6.58x.
Massachusetts has also gradually increased its fuel tax rates (last increase in 2013), as well as vehicle registration fees (last increase in 2015 to $60 from $50). These gradual increases are typical of many states, and are usually imposed when a state enacts a new multi-year capital road program, which helps maintain debt service coverage even when new bonding does occur. New Jersey law automatically annually adjusts fuel tax rates to generate a specified amount of total revenue.
States also often maintain high debt service coverage as a matter of policy in order to provide excess revenue to pay their department of transportation salaries and for annual road maintenance. Some states, such as Kansas, have at times also used excess gas taxes to support the state’s general fund. As a result, states have an incentive to maintain excess coverage, and additional bonds tests are typically high, with a few exceptions. Most states have additional bonds tests requiring 2x-4x historical coverage of future maximum annual debt service from statewide revenues.
Fuel Consumption Trends Are Relatively Stable
Fuel taxes in most states are charged on a per-gallon basis, not as a percentage of sales price, which tends to reduce revenue fluctuation, since the volume of fuel sold has been more stable than fuel prices. Fuel volume taxed by states has grown over the years, mostly because of an increase in vehicle miles traveled, despite improvements in miles per gallon efficiency (see table 4). The average miles per gallon for combined trucks and cars increased to 18.1 in 2019 from 12.4 in 1960. Americans have increasingly switched to SUVs, minivans, and pickup trucks, sidestepping federal regulations designed to improve average miles per gallon for motor vehicles, in that the federal target for trucks is lower than that for cars, with the result that overall fuel consumption trends have tended to be stable, and gains in fuel efficiency have not been as great as targets set for cars alone. The largest annual historical dip in motor fuel gallons taxed between 1960-2019 was during 1979-1982, when fuel consumption dipped a cumulative 9.1%, a level which we view as able to be comfortably covered by existing debt service coverage margins on rated bonds.
Federal Corporate Average Fleet Economy Standards
The federal government first enacted corporate average fleet economy (CAFE) standards in 1975, although the formula used to calculate them has been overhauled from time to time. These regulations set a manufacturer-wide standard for average miles per gallon per vehicle, which is set to go up on an annual basis. CAFE standards apply to car and truck manufacturers, not to consumers, and is not a rigid standard in that manufacturers can go over them if they pay financial penalties, and can trade credits among themselves (a source of income for electric vehicle manufacturers). Current CAFE regulations set separate targets for cars and light trucks. Minivans and SUVs are in the truck category, which is one reason why manufacturers are incentivized to make them, as CAFE standards raise the cost of manufacturing cars, a cost which is passed on to consumers. The federal CAFE target in 2021 for a car the size of a Toyota Camry is 43.09 miles per gallon, rising to 51.72 by 2025, and for a truck the size of a Ford F-150 it is 25.25 rising to 30.19 by 2025. The Trump administration reduced the speed of increase in future CAFE targets; the current administration will likely increase them to previous or more stringent levels. The net result is that eventually CAFE standards likely will increase actual internal combustion vehicles’ fuel efficiency, or raise the cost of internal combustion vehicles, or both.
Electric Vehicles And Plug-in Hybrid Electric Vehicles
Some states, such as California and Massachusetts, have stated a goal of phasing out the sale of internal combustion engines altogether. California’s governor has his state transportation department studying how to eliminate the sale of new cars running on fossil fuels by 2035 and new trucks by 2045 (see “California’s Order Requiring Zero-Emission Vehicles Poses Challenge To Gasoline Taxes,” published Oct. 21, 2020, on RatingsDirect). Currently, electric vehicles accounted for only about 1.5% of national vehicle registrations in the first half of 2020, but are rising quickly and may accelerate if President Biden’s plan announced in April 2021 is enacted. It sets a 50%-52% reduction in economywide net greenhouse gas pollution from 2005 levels by 2030. States have reported limited loss of gas tax revenues to date due to the presence of electric vehicles, as electric vehicles remain a small portion of overall vehicles on the road, but have begun to consider alternatives to fuel taxes if electric vehicle sales become a larger share of total vehicles. Alternatives include a potential vehicle mileage tax, although this may raise questions of privacy and enforceability. Connecticut recently enacted a vehicle mileage tax on truckers only, while other states have had pilot demonstration vehicle mileage tax projects for cars. Utah has raised car registration fees for electric vehicles to make up for lost fuel taxes. Other possibilities include taxes at electric vehicle recharging stations. We believe that to the extent electric vehicles cause a significant loss of highway user tax revenue, states will find alternative sources of tax revenue to fund vital road infrastructure. As of now, most states have not felt the need to act, beyond the normal cycle of gas tax rate increases.
Pledged Revenues Have Been Generally Stable
Pledged revenues have also benefitted from periodic increases in tax rates. Table 4 shows how average state gasoline taxes grew to 27.9 cents in 2019 from 19.3 cents in 2000, according to the Federal Highway Administration. The table also shows the wide disparity in per gallonage taxes between the states. We believe a state with tax rates lower than its neighbors has greater flexibility in raising gas tax rates, if needed. A separate data source, the American Petroleum Institute, reports average state gasoline excise tax rates of 25.7 cents as of July 2020, and total state tax rates per gallon of 36.8 cents, when additionally including oil inspection fees, county and local taxes, environmental fees, and other fees, as determined from a July 2021 study.
Revenues also tend not to fluctuate when fuel prices fluctuate. In most states, taxes are charged per gallon, not as percentage of fuel sales price, and the amount of driving except during the pandemic, has been historically stable. Pledged fuel taxes only affect debt service coverage to the extent the consumption of motor fuels changes. As seen in table 4, long term fuel consumption has not been much affected by changes in gas prices, although prices are still below their last peak in 2012. In recent weeks, retail gas prices have hit a seven year high, according to the Energy Information Administration. As of July 5, 2021, the average retail price of regular gasoline was $3.12. This compares to the annual average nominal price of $3.55 price in 2012, indicating prices still might have a way to rise before they affect consumption.
Future Financing Needs
Most states prepare multi-year financing programs. While fixing roads is politically popular, raising taxes to do so is generally not. Overall, we expect the amount of highway user tax supported debt to continue to grow gradually over the next few years, although rated highway user tax debt has grown 58% since we published our highway user tax debt commentary in 2012, when rated highway user tax debt outstanding totaled $39.2 billion. However, growth might be somewhat restrained in the next few years as states identify one-time capital projects, such as road improvements, that are eligible for funding under the federal American Rescue Plan Act, and flush state general funds might as be inclined to appropriate more to pay-as-you go maintenance. At the same time, some states report large infrastructure needs and we believe capital needs may have been underfunded during the recent recession, while projected shortfalls in federal transportation trust funds may limit future federal transportation aid (see “Infrastructure After COVID-19: Risk Of Another Lost Decade Of U.S. State Government Capital Investment,” Oct. 29, 2020). Michigan, for example, has authorized up to $3.5 billion of additional trunk line fund bonds over the next 5 years, while other states have no immediate plans for additional transportation debt.
Priority Lien Criteria
We rate highway user tax bonds under our priority lien criteria, which examines both the ability of pledged gross revenue to cover debt service, and the creditworthiness of the obligor issuing the bonds. In most cases, our criteria limits these bonds to no more than one notch above a state’s GO rating.
We Expect Credit To Remain Stable
We expect highway user tax supported credit will continue to remain stable as the result of stable state creditworthiness and active management by states of the tax rates and sources of revenue for money that is deposited into their state-sourced highway funds. These state-derived highway user tax revenues may take on even greater importance in future road infrastructure funding given the reluctance of the federal government to raise its federal gas tax rate–it hasn’t been raised in 28 years–that funds the federal transportation trust fund which provides transportation grants to the states. Although states have sometimes changed their allocation of highway user tax revenue from a pledged highway fund to a state’s general fund to provide state general fund budget relief, thereby weaking highway user tax bond credit quality, changes in overall state creditworthiness may have more frequent effect on highway user tax supported debt ratings than actual debt service coverage by gross pledged transportation revenues.
|Selected State Highway User Tax User Revenue Bonds|
|Issuer||Hwy user tax rev bond rtg||State GO rtg/ICR||Debt outstanding (mil. $)||Add’l bonds test (x)||MADS coverage||FY20 pledged rev change (%)||Pledged rev change 3 yrs (%)||Pledged revs*||Debt service reserve|
|Arizona Transp Brd|
|Connecticut spl tax obl bds|
|Delaware Trans. Auth. Senior lien||AA+/Stable||AAA/Stable||639||2.00||3.69||(4.4)||0.4||M,R,L,T||Yes|
|Delaware TIFIA loan U.S. DOT||AA-/Stabe||AAA/Stable||223||2.00||3.31||(4.4)||0.0||M,R,L,T||Yes|
|Port Fin. Comm. State Transp. Trust Fund (Senior Lien)||AA+/Stable||AAA/Stable||84||no addl capacity under current dist formula||3.94||(14.1)||(11.3)||R||No|
|Port Fin. Comm. State Transp. Trust Fund (Junior Lien)||AA+/Stable||AAA/Stable||92||1.00||3.73||(14.1)||(11.3)||R||No|
|State Transp. Trust Fund Intermodal Program||AA+/Stable||AAA/Stable||2,109||no addl capacity under current dist formula||7.61||(4.5)||0.6||R||No|
|Dept. of Trans. Seaport Investment Program||AA+/Stable||AAA/Stable||197||1.50||26.99||(5.6)||(5.4)||R||No|
|Inland Protection Financing Corp. wholesale excise tax||AA/Stable||AAA/Stable||22||2.50||28.37||(8.9)||(3.6)||M||Yes|
|Hawaii DOT State Highway Fund||AA+/Stable||AA+/Negative||372||2.00||5.44||(0.6)||(1.4)||M,R||1/2 MADS|
|Louisiana gas and fuel tax|
|first lien gas and fuel tax||AA-/Stable||AA-/Stable||1,740||closed||3.91||(8.5)||(3.4)||M||No|
|junior lien gas and fuel tax||AA-/Stable||AA-/Stable||834||2.00||2.63||(8.5)||(3.4)||M||No|
|highway improvement bonds||AA/Stable||AA-/Stable||249||2.00||2.83||2.1%||16.1%||R,L||No|
|Maine Bond Bank (Transcap Program)||AA/Stable||AA/Stable||99||2.00||2.01||(1.7)||(0.6)||State HURF||1/2 MADS|
|Massachusetts Commonwealth Transp. Fund|
|first lien||AA+/Stable||AA/Stable||55||closed lien||5.85||(9.4)||(8.7)||M,R||No|
|Comprehensive transportation fund||AA+/Stable||AA/Stable||61||2.00||15.39||1.7||10.6||M,R,S||No|
|Trunk line fund||AA+/Stable||AA/Stable||359||2.00||6.58||1.6||8.5||M,R,L||No|
|Missouri Hwy and Tran Comm|
|senior lien||AAA/Stable||AAA/Stable||51||closed lien||41.17||(0.4)||(3.6)||M,R,S||No|
|Nevada motor fuel tax||AAA/Negative||AA+/Negative||707||3.00||4.08||1.7||5.7||M,F||No|
|New Mexico St Hwy Comm|
|New York State|
|Thruwy Auth. Hwy 2nd general highway & bridge trust fund||AA+/Stable||AA+/Stable||2,300||2.00||4.84||2.2||5.1||M,R||No|
|Metro. Transp. Auth. dedicated tax transp. fund||AA/Stable||AA+/Stable||5,024||2.50||5.89||6.7||7.9||M.R,S||No|
|Ohio hwy cap imp bds||AAA/Stable||AA+/Stable||1,003||$1.2 bil limit||22.77||16.6||21.4||M,R,L||No|
|Pennsylvania Tpk Auth.|
|Senior lien oil franchise tax||AA-/Negative||A+/Negative||585||2.00||3.23||0.1||(0.8)||M||No|
|Subordinate lien oil franchise tax||A/Stable||A+/Negative||454||1.15||1.91||0.1||(0.8)||M||1/2 MADS|
|Rhode Island Commerce Corp. motor fuel tax bonds||A+/Stable||AA/Stable||28||1.25||1.54||(15.4)||(7.9)||M||1/2 MADS|
|Rhode Island Tpk and Bridge motor fuel tax||A+/Stable||AA/Stable||200||1.25||1.33||(15.4)||(7.9)||M||MADS|
|Texas Transp. Commission state highway fund||AAA/Stable||AAA/Stable||21,809||4.00||9.63||(12.9)||(9.5)||M,R,F||No|
|Vermont special infrastructure bonds||AA+/Stable||AA+/Negative||25||2.00||6.60||12.3||12.5||M,S||Yes|
|Wisconsin Dept. of Transportation transp. Rev. bonds||AA+/Stable||AA/Stable||1,671||2.25||3.84||21.1||20.2||R||No|
|Pandemic Related Declines in State Fuel Tax Revenue|
|National totals of state motor fuels tax (mil. $)||% change|
|2021 1st Quarter||12,257||(5.0)|
|2020 4th Quarter||12,902||(0.1)|
|2020 3rd Quarter||12,909||12.5|
|2020 2nd Quarter||11,479||(11.2)|
|2020 1st Quarter||12,924||(6.9)|
|2019 4th Quarter||13,880||4.4|
|2019 3rd Quarter||13,300||(5.7)|
|2019 2nd Quarter||14,101||N/A|
|12 months end Dec. 2020||50,214||(6.1)|
|12 months end Dec. 2019||53,484||N/A|
|Year||Vehicle miles of travel (mils.)||Vehicle registrations (mils.)||Net motor fuel volume taxed by states (000s gals)||% change||U.S. regular conventional retail gasoline prices ($/gal.)||All motor vehicles combined fuel economy (miles/gal.)|
|State Motor Fuel Tax Rates, 2000-2019|
|Gasoline/gasohol cents per gallon|
|Dist. of Col.||20.00||23.50||23.50|
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