Highway Costs and the Efficient Mix of State and Local Funds

Transportation networks and governments are both hierarchically organized. In some states state government finances most of the highways, while in other states similar roads are financed locally. Larger governments attain scale economies. However they also tend to be more bureaucratic and have higher operating costs, all else equal, due to problems such as span of control. This study relates highway expenditures with share of expenditure by state government to determine how governments should share expenditure on all roads in a state. Highways are divided into two hierarchical classes: Higher and Lower, and a third case that consists both higher and lower hierarchical classes is also considered. For each state, in each highway class three different costs are considered: capital outlay, operations and maintenance, and total costs. Two government layers are considered: state (including federal contributions) and local government. A series of regression models to predict different highway expenditures, in each highway hierarchical class, as a function of utilization, capacity and funding shares are estimated. We find that there is a share of expenditures by each level of government in each highway hierarchical class, which results in a minimum expenditure for each funding category (capital, operating). That minimum is not very far from typical state/local mixes found in many states. The results of this study can be applied in formulation of efficient network financing arrangements. Policies can be formulated that can help adjust the financial responsibilities of transportation networks between government layers. 3 1. INTRODUCTION Highways and government are both hierarchically organized. Providing highway infrastructure requires finance of construction and maintenance. Determining what level of government should be responsible for provision, operation and regulation of each highway class is an important issue. States are continually considering turning back some roads to localities while assuming responsibility for other local roads. Management of a highway class by a geographically too small or too large jurisdiction brings about extra costs that can be avoided by appropriately assigning government layers to a roadway class. After assigning political layers to each highway class, there arises another issue of what percentage of costs each government layer should bear. The main objective of this study is to find an optimal share of costs funded by each government layer in each highway class to attain an efficient highway financing structure, i.e., minimum highway costs. Highway costs in the form of capital outlay, to improve the existing highway network, and …