State governments are facing major transportation infrastructure financing challenges as highway or Road Fund revenue growth has slowed and resistance to tax increases has strengthened. As a result, state transportation officials have turned to other financing methods to maintain momentum in meeting highway construction and maintenance needs. Among the financing methods being considered is the expansion of bond or debt financing. Changes in federal legislation that permits states to “pre-obligate” future federal funds, among other considerations, has made debt financing an attractive alternative for the states. As states consider the expanded use of this financing strategy, several financial management questions arise including the appropriate role of debt financing, debt capacity and whether to establish limits on their use of debt financing. Unfortunately, limited research has been carried out to address these issues as the state debt financing literature has focused on state General Fund debt management issues. This study focused on the debt management issues associated with the use of state highway or Road Fund revenues as the source of debt service support for new bond issues. Among the issues assessed (through a national survey) were whether states have developed separate debt policies or limits for highway or Road Funds, the ratios of debt service payments to total state Road Fund revenues and other debt management issues. The study results suggest that the states have begun to focus on these issues and are actively setting and managing debt policies for their Road Funds and are including debt financing as part of their overall state highway financing strategies.

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The contents of this report reflect the views of the authors, who are responsible for the facts and accuracy of the data presented herein. The contents do not necessarily reflect the official views or policies of the University of Kentucky, the Kentucky Transportation Cabinet, nor the Federal Highway Administration. This report does not constitute a standard, specification, or regulation.