A fiscal year 2012 transportation spending breakdown

By John Latta

Sometimes this page is used to help readers read between the lines.

The House Appropriations Committee has released its fiscal year 2012 Transportation, Housing and Urban Development funding bill. The legislation includes funding for the Department of Transportation. FY 2012 begins Oct, 1, 2011.

And should Reauthorization actually occur, the committee would change its numbers to reflect the funding called for in that legislation. But the proposal itself does indicate the committee’s basic approach to where what money should go.

As we face extension after extension on the way to (maybe) a new six-year surface transportation bill, we continually run into the problem that no one really has a workable idea about how to fund an adequate bill in the short term (i.e. now) since no one will raise fuel taxes, by far the main contributor to the Highway Trust Fund (HTF).

Whenever the question of funding a new bill arises, it is tossed, hot-potato-style, to the House Appropriations Committee, which would have to find the machinery to bring in extra money.

In total, the bill includes $55.15 billion in discretionary spending – a reduction of $19.8 billion below the President’s request and $217 million below last year’s level. The funding level in this bill reflects the overall FY 2012 discretionary spending total of $1.043 billion, to which the House, Senate and White House agreed in the recent debt ceiling legislation.

“Step by step, we are trimming government spending and streamlining programs to make them more cost-effective, efficient and responsive to the American people,” says committee chairman Hal Rogers. “This bill saves taxpayers billions of dollars and eliminates waste wherever possible. This bill is yet another example of this Committee’s commitment to return our government to some semblance of fiscal sanity by restoring responsibility, restraint and thoughtfulness to the budgeting process.”

The Senate’s version keeps current funding levels in place.

John Horsley, executive director of the American Association of State Highway and Transportation Officials (AASHTO) said that his group applauds “the entire [Senate] subcommittee for taking this action, which avoids a major reduction in transportation investment for FY 2012. The cuts proposed in the House bill would eliminate 500,000 jobs, not to mention putting the nation further behind on many critical transportation improvements.”

Transportation Highlights from the Bill

Transportation – The bill includes $16.7 billion for the Department of Transportation for fiscal year 2012, which is $3 billion above last year’s level and $15.8 billion below the President’s request.

Highways – The bill provides $27.7 billion for the Federal Highway program – the highest amount supportable by the Highway Trust Fund for fiscal year 2012. The Committee is prepared to support a higher Highway Trust Fund spending level, should a new, multi-year authorization bill be enacted. The bill does not contain a rescission of highway contract authority from the states.

Federal Aviation Administration (FAA) – Included in the legislation is $12.6 billion for the FAA, an increase of $233 million over last year and $485 million below the President’s request. The bill fully funds the FAA’s Next Generation Air Transportation System (NextGen), allowing the FAA to move forward with the next step in modernizing the nation’s air control and airport system, which will help ease congestion and reduce delays for travelers in U.S. airspace.

Rail – The Federal Railroad Administration (FRA) is funded at $1.3 billion, which is $7 billion below the President’s request and $36 million above last year’s level. Of this amount, $1.1 billion is targeted to Amtrak, primarily for capital improvements to the nation’s rail lines. The bill also includes policy reforms for Amtrak, such as requiring overtime limits on Amtrak employees to reduce unnecessary costs, and reinstates a provision that prohibits federal funding for routes where Amtrak offers a discount of 50 percent or more off normal, peak fares. In addition, the bill does not include funding for High-Speed Rail or Intercity Passenger Rail Service.

Transit – The bill contains a total of $1.8 billion for the Federal Transit Administration (FTA), which is $1.9 billion below the President’s request and an increase of $169 million over last year. The legislation also provides $5.2 billion in state and local bus grants – the amount estimated to be available from the Mass Transit Account (trust fund) for fiscal year 2012. The Committee is prepared to support a higher formula bus spending level should a new, multi-year authorization bill be enacted. The legislation also limits transit capital investments – only funding “Small Starts” projects and those projects that have signed Full-Funding Grant Agreements with the FTA prior to Nov. 1, 2011. The legislation also includes language that prohibits new Full-Funding Grant Agreements if the project is more than 50-percent federally funded.

Safety – The legislation contains funding for the various transportation safety programs and agencies within the Department of Transportation. This includes: $731.1 million in both mandatory and discretionary funding for the National Highway Traffic Safety Administration (NHTSA) – a decrease of $65.4 million from last year; $529.7 million for the Federal Motor Carrier Safety Administration – a decrease of $25.4 million from last year; and $182.9 million for the Pipeline and Hazardous Materials Safety Administration – a decrease of $13.2 million from last year.

The Bloomberg-Rendell-Schwarzenegger funding and fixing plan

By John Latta

This month, there may be a real reauthorization debate. Finally. Maybe. Whether it results in anything solid is something of a long shot.

Somewhere in almost all of the various plans presented as saviors of America’s infrastructure (and there is a sizeable number), there are ideas that must eventually be adopted. Too many good, experienced minds have analyzed all possible avenues for us not to have solutions available to us.

Now, Building America’s Future (BAF) has tabled new plans to help us fix our transportation infrastructure and move it out of its archaic straitjacket.

Building America’s Future was founded and is headlined by Pennsylvania Gov. and transportation policy maverick Ed Rendell, former California Gov. Arnold Schwarzenegger and New York Mayor Michael Bloomberg. It claims a diverse bipartisan membership of state and local elected officials from across the country. Its quirky independence might have caused it to lose some impact, but its new report entitled Falling Apart and Falling Behind is gaining support.

One simple statement from the BAF report is, prima facie, startling: “We have let more than half a century go by without devising a strategic plan on a national scale to update our freight and passenger transport system.” As the size of federal investment in transportation infrastructure (as a share of GDP) has steadily fallen, and as federal funds are “dispersed to projects without imposing accountability and performance measures,” our transportation infrastructure is stuck back in the past century. Our passenger transportation system is saddled with congestion woes and by being largely run on gasoline is “environmentally, politically and economically unstable. We have the world’s worst air traffic congestion, in part because we are still using the radar-based air traffic system developed in the 1950s,” so says the BAF report. And in this, they really echo virtually every other major report on the topic in the past five years.

BAF’s key recommendations are not new, but they are centrally important to our future:

One: Develop a national infrastructure strategy for the next decade that makes choices based on economics, not politics.

Essentially, this is a 10-year strategic plan for creating investment in America’s infrastructure. The plan must “spur” an investment of $200 billion a year and, if it does, it will create nearly five million jobs for the next decade, says the BAF research. “This investment would create nearly half of the 12.5 million jobs that we need to revive the American economy and keep them in place for the next decade.”

Two: Pass a six-year transportation bill updated to compete in the 21st-century global economy.

This one’s really an unopposed no-brainer. And the BAF emphasis on a bill that is not simply a status-quo extension is also almost universally supported, although there is some refreshing astringency in the BAF language: “The new bill must move from an essentially recycled version that thinly distributes funds based on archaic formulas and political expediency to a plan that sets clear priorities and makes hard choices . . .”

Three: Be both innovative and realistic about how to pay.

Again, the recommendation is mainstream and widely held. But it relies more heavily than most other analyses on the creation of a National Infrastructure Bank to leverage private money, and wants new long-term revenue-gathering options, as do most observers in this field. It also calls for a gas tax increase “once the U.S. economy improves,” another popular position. The infrastructure bank idea has been getting some increased support. When the American Society of Civil Engineers recently estimated just how badly our infrastructure had deteriorated, the group described a crumbling system that would take a five-year investment of $2.2 trillion to adequately improve. There’s no way that sort of money comes by check from Washington. To attract private money that is out there looking for something to do (and there is a lot of it), something predictable, reliable and with a good rate of return is needed: The Infrastructure Bank is an intriguing possibility. It would loan funds or guarantee loans for major infrastructure projects that are “in the public interest,” with returns primarily from user fees such as tolls and fares. The idea not only brings private money to the table, it would create jobs.

Four: Promote accountability and innovation.

BAF is again not alone and doesn’t break new ground in this area of reform recommendation. But the plain speaking (perhaps not a surprise, given BAF’s founders) is very much to the point: “Under current transportation policy, Washington impedes local innovation while failing to impose accountability for money distributed across the country.” The BAF report calls for faster project delivery times, clearer criteria for all funding and the encouragement of state and local innovation through competitive grants. There are those, of course, who argue that more state involvement, more “flexibility,” is also a way for Washington to slide off cost (read tax) increases that will have to be made by the states, leaving clean hands in D.C.

Reauthorization funding is uncertain, but reform looks good

By John Latta

Detailed proposals for a new surface transportation bill have finally surfaced, and two keys factors have dominated their presentation. It’s about funds, and it’s about reform.

The House Transportation and Infrastructure Committee (actually the Republicans on that committee) have delivered a proposal, and the Senate (actually the Democrat at the helm of the Environment and Public Works Committee) has counter-proposed. The House version offers $230 billion over six years; the Senate $109 billion over two years. There is plenty of reform in both versions and they have generally been welcomed across the board. But the House’s funding total has also almost universally been criticized as woefully inadequate.

So, the battle for funding will go on, as will the debate about how much reform without adequate funding will benefit our industries. But if there is any good news, it is that the reforms put forward will probably be in any new legislation if and/or when it happens. So the key proposed reforms are worth looking at.

The House version’s key proposals include:

1. More efficient environmental reviews. It:

• condenses the final environmental impact statement and combines it with the record of decision;

• provides a single system to review decisions and reduce bureaucratic delay by requiring concurrent reviews and setting deadlines for approvals; and

• classifies projects in the right-of-way as categorical exclusions under NEPA.

2. Clarification of eligibility for pre-construction activities. It:

• allows for acquisition of land during NEPA where the transaction itself does not cause a change in the area’s land use or cause adverse environmental effects;

• encourages corridor preservation to reduce project costs, delays, and impacts on communities; and

• allows detailed design prior to NEPA completion at state expense, making such work eligible for federal reimbursement only if the project is subsequently approved.

3. Promotion of integrated planning and programmatic approaches. It:

• builds on the efforts in Section 6001 of SAFETEA-LU and allows environmental decisions made in the planning process to be carried forward into the NEPA process; and

• clarifies authority for programmatic approaches (rather than project-by-project reviews).

This House proposal aims to reform surface transportation programs by consolidating or eliminating approximately 70 programs that are duplicative or do not serve a federal purpose.

Rather than applying spending cuts evenly across all existing programs, this proposal identifies programs that serve similar purposes. The proposal also identifies programs that do not serve a federal interest – such as the National Historic Covered Bridge Preservation Program and the Nonmotorized Transportation Pilot Program – and eliminates them.

States will no longer be required to spend highway funding on nonhighway activities. States will be permitted to fund such activities if they choose, but they will be provided the flexibility to identify and address their most critical infrastructure needs. However, this additional flexibility will not be unchecked. States will be held accountable for their spending decisions through new performance measures and transparency requirements.

Many of the programs that will be consolidated or eliminated in this proposal were created during a period when it was common to spend more than was collected in transportation revenue.

The Senate version’s key reform proposal:

• consolidates 87 programs under SAFETEA-LU into less than 30. States will have flexibility to fund activities for which dedicated funding has been removed;

• consolidates the Interstate Maintenance Program, the National Highway System Program and part of the Highway Bridge Program into a single program that focuses on the most critical 222,000 miles of roads in the nation;

• consolidates several existing programs to provide funds to states for projects on all Federal-aid highways, and all bridges and tunnels;

• provides for the sub-allocation of some funds to metropolitan areas and to other areas of a state based on population; and

• increases funding for TIFIA (Transportation Infrastructure Finance and Innovation Act) from $122 million a year to $1 billion a year. The Senate plan also increases the maximum share of project costs from 33 to 49 percent and allows TIFIA loans to be used to support a program of projects. And it allows upfront commitment of future TIFIA program dollars through the use of master credit agreements.

There are also several provisions to reduce project delivery time and cost, including expanding the use of innovative contracting methods, reducing red tape for projects “with no significant environmental impact,” encouraging early coordination between relevant agencies to avoid delays and incentives for speeding up delivery decisions.

A new report on the repair/maintain/expand debate

By John Latta

A new report argues that spending decisions made at a state level are causing road conditions to get worse in parts of the country.

The report was produced by Smart Growth America and Taxpayers for Common Sense, with support from the Rockefeller Foundation (see Editor’s Note below).

The report makes these key points:

• Rehabilitating a road that has deteriorated is substantially more expensive than keeping that road in good condition.

• In spite of an enormous repair backlog, the vast majority of states continue to inadequately fund road repair projects.

• Neglecting repair and preservation cost taxpayers billions of dollars in preventable expenses.

The report examined road conditions in each state and D.C., and recommends changes at both state and federal levels in spending priorities.

“Decades of disproportionate spending by states on road expansion at the expense of regular repair have left many state roads in poor condition,” the report states. “By underfunding repair and allowing roads to fall out of good condition, state leaders are choosing the most expensive type of repair possible, as rehabilitating a road that has completely deteriorated is substantially more expensive than keeping that road in good condition in the first place.”

According to the report, South Carolina spent 18 percent of its highway capital budget on repair projects between 2004 and 2008, but spent 41 percent on expansion. “The percentage of South Carolina roads in ‘good’ [based on FHWA data] condition during this time dropped from 45 to 33 percent, the largest decline of any state.”

The report also argues, ironically, that dollars spent on new road construction are potentially adding to the problem. “With every dollar spent on new construction, states add to a road system they are already failing to adequately maintain. As a result, states face a large and growing financial burden.”

The answer is to invest wisely in repair and preservation – a process that actively reduces the scale of future costs. The report cites American Association of State Highway and Transportation Officials (AASHTO) data that says one dollar spent to keep a road in good condition avoids anywhere from $6 to $14 needed later to rebuild the road once it has fallen apart.

Examining state funding priorities and the relationship between spending on expansion versus repair, the report found that between 2004 and 2008, states spent $37.9 billion annually on repair and expansion of roads and highways. Of these funds, says the report, 57 percent went to road widening and new road construction; that is, to 1.3 percent of the roads worked on. At the same time, 43 percent of funds was spent on the preservation of existing roads that make up 98.7 percent of the system.

“Prioritizing repair and preservation makes good fiscal sense and brings a host of additional benefits,” says the report. And not only are state taxes being wasted, “Federal funds built a large proportion of these major state roads, and allowing states to under-invest in repair and preservation greatly reduces the value of these federal investments.”v

Editor’s Note: Smart Growth America says it is “the only national organization dedicated to researching, advocating for and leading coalitions to bring smart growth practices to more communities nationwide.” Check it out at www.smartgrowthamerica.org

Taxpayers for Common Sense says it is a nonpartisan budget watchdog serving as an independent voice for American taxpayers. Its mission is to achieve a government that spends taxpayer dollars responsibly and operates within its means. Check it out at www.taxpayer.net

Priority imbalance?

98.7% (used) vs. 1.3% (new)

First Quarter (Q1) 2011 compared to Q1 2010

Same Tunnel. Same Weak Light.

Recent survey suggests ‘hunkering down’ may be the best planning strategy for a while

By John Latta

Knowing exactly where you are is the key to getting to where you want to be. And a new survey of its contractor members for the quarter ending March 31 by the American Road and Transportation Builders Association (ARTBA) makes it hard to ignore the fact that the industry is not in a good place.

Nearly half of ARTBA’s respondents are working below 75 percent of capacity. The net rising indices for construction work performed, employment, backlogs and capital spending indicate many contractors are struggling in the current economy and the overall market is still contracting, according to ARTBA.

There are more contractors reporting they are doing less work on transportation construction projects than for the first quarter of last year.

“Some participants reported that the highway and bridge construction market is the worst they’ve experienced in their lifetimes. Likewise, expectations for the remainder of 2011 are poor,” says the report. But there were some indications of a “marginal improvement” in some areas.

Whether that is a trend or not, says ARTBA, will be determined by market activity over the next six months and progress on a federal surface transportation bill in that same time frame.

Some contractors tell ARTBA they face a lack of work to bid on. Some report that competition is not as stiff as last year, but this news is offset by respondent reports that projects are still priced extremely low and margins are non-existent. ARTBA highlights this response from one contractor: “If I don’t pick up some contracts soon, I will have to shut down operations.”

The art of riding the short-term/long-term transportation funding teeter-totter

By John Latta

A report from the National Transportation Policy Project says creating jobs in the transportation infrastructure is a good thing — but maybe not as good as we think, if it fails to bring long-term economic revival.

The report calls for investment that doesn’t create simply jobs, but “real job benefits.”

The report comes from the Bipartisan Policy Center and the authors are Douglas Holtz-Eakin, president of the American Action Forum and former director of the Congressional Budget Office, and Martin Wachs, senior principal researcher at the RAND Corporation and professor at the University of California-Berkeley.

“Short-term job creation, while vitally important, must be viewed within the context provided by a longer-term view,” say the authors. “Over the long term, higher productivity — the ability to generate more output and income from each dollar of capital or hour of work — is the key to higher labor earnings and improved standards of living.”

The authors argue that while transportation investment will always create jobs, its actual effect on our economy — and eventually the long-term future of those working in the industry and in those newly created jobs — is only positive if the productivity metric measures positively.

Last month’s Financial District in these pages reported that a new McKinsey Global Institute report noted that productivity was the key factor in reigniting growth and renewing the American economy.

Different investments in transportation can have different impacts, and short-term job increases may not become the basis for long-term economic recovery, the authors claim. “Poorly-targeted transportation dollars represent a wasted opportunity that the country can ill afford given its current fiscal predicament,” say the authors.

So short-term job creation is not, they argue, automatically a good thing if we judge investments by their long-term value.

“Simply assuming that any transportation investment will have positive stimulative effects and will produce long-term gains for the economy is not a sound basis for investment.” The two authors basically call for a form of lifecycle cost analysis of any transportation investment, ending with the selection of those projects that promise better “returns” on the investment.

One of the problems identified by the authors is the uncertainty of the “multiplier effect.” Estimates of how much a given project or investment means to long-term economic success, how many ripples it sends out over the economic pond, how many jobs it creates, tend to “carry substantial uncertainty,” to use their words. “Generally they are not purely data-driven; rather they rely on judgments and assumptions, and may not take into account aspects of the structure or timing of an investment that would have an impact on its actual multiplier effects.”

This uncertainty about how many jobs will actually be created by a specific transportation investment too often muddy the waters when it comes to assessing the long-term value of the investment and make it difficult to compare to other possible transportation uses of the funding involved.

Cited examples of long-term benefits from transportation infrastructure investment include improved efficiency and productivity brought about by reduced costs associated with congestion, environmental damage and accidents on our roads.

But the authors make it clear they believe you can have your cake and eat it too. Short-term job creation can be a part of long-term economic recovery if it’s done right, and that is the core of their case. But to achieve both goals, we must approach transportation spending in a fundamentally different way than we have in the past, they say. To do this, they recommend these policy changes:

1) Borrowed funds should not be put into existing channels for transportation spending in an effort to increase short-term employment. We should not put any money — much less borrowed money — into programs that provide questionable job-creation and long-term economic benefits.

2) Funding for transportation infrastructure that is intended to create jobs should focus on investments that are “shovel-ready” and provide long-term benefits. These are the investments that can immediately help ease unemployment while also building our economic future.

3) Federal transportation policy should be flexible on the “how” while being specific about outcomes. We need to focus more on accountability for the specific outcomes we want to achieve — economic growth, job creation — rather than on the strategies used to achieve them.

Let Them Use Spoons

Travelling in a far-off region of the world, iconic American economist Milton Friedman was shown work on a huge roadbuilding project by his proud hosts. A vast group of laborers were moving earth with shovels, no big earthmoving iron in sight. He asked the obvious question and was told that if massive machinery was used, it might be faster, but there would be fewer jobs created in the construction industry. Ah, says Friedman, if it’s job creation you want, why not use spoons instead of shovels?

Tweaking old-fashioned busy lanes could smooth flow

By John Latta

Congestion on busy roads is not going anywhere; we’ll have it for a long time to come. But one measure used to combat it (and also fight back against high gas prices that are also not going anywhere) is going away. Carpooling.

So do carpool lanes still make traffic management sense and, for that matter, economic sense today? Perhaps HOV (high-occupancy vehicle) lanes should become HOT (high-occupancy toll) lanes, essentially giving cars with, say, three or more people a free ride by tolling vehicles in those lanes with only one or two people in them.

A 2009 Census Bureau survey shows that carpooling peaked way back in 1980. That year, they calculate the carpooling rate at almost 20 percent (19.7 percent). By 1990 it was 13.4 percent and, in 2000, it was 12.2 percent. By 2009, it was just 10 percent. A rate for Hispanics boosted, according to the Census, by new immigrants sharing rides to jobs, was at 19 percent in 2009. But it had been 28 percent in 2000.

This fall “has confounded efforts by urban planners,” according to a recent New York Times look into the state of carpooling.

Robert Poole, director of transportation studies at the Reason Foundation, says the decline has its roots in two opposing trends. “On the one hand we had DOTs and metropolitan planning organizations (MPOs) doing everything they could think of to encourage carpools. While freeway expansion slowed dramatically during the past three decades, when new lanes did get added, they were mostly carpool lanes,” says Poole. “But during this same three decades, two-earner households became the dominant trend, and those jobs were typically in two different suburban directions. Car ownership grew twice as fast as population during this period – population up by about a third, car ownership up by nearly 60 percent. And the ongoing suburbanization of jobs has made arranging and sustaining carpools increasingly problematic.”

The Clean Air Act in 1990 would have required many companies to develop plans to increase carpooling and mass transit use, as the Times points out, but “Congress, after hearing from critics who said the proposal was unworkable, scrapped the idea in the mid-’90s.”

But today we have social media, and we should be able to use the likes of Twitter and FourSquare to help us find efficient and easy-to-use shared rides. And yet the carpooling rates continue to decline. However, a number of studies are trying to find formulae that would increase casual carpooling, using technology and social media to bring together potential ride-sharers who do not know of each other’s existence.

Carpool’s HOV lanes are also a source of frustration, as Poole points out. They can become crowded and offer very little travel-time saving. Or they may be relatively empty while the “everybody-else” lanes next to them are packed and slow, another frustrating inefficiency. They can be packed with cars carrying family members, cars that would be loaded with the same people without HOV lanes. In this case, the rationale of taking vehicles off the road is lost. A Transportation Research Board paper that analyzed 2001 National Household Travel Survey data found that a vast majority of HOV trips were trips undertaken with family for discretionary activity purposes. Given that virtually all these HOV trips would have been undertaken regardless of the presence of an HOV lane, say the researchers, one could question the potential efficacy of implementing a pure HOV lane.

Poole identifies another part of the modern carpooling problem. While federal rules require HOV lanes to maintain an average speed of 45 mph or better during peak periods, it just doesn’t happen. But the Feds don’t push it, he says, and so local transportation officials don’t push to require at least three people in the vehicle, an efficiency over the two-person rule but a potentially unpopular one. But if that speed average was maintained, he argues, getting three people in a pool car would be a lot easier. “I think Congress should include enforcement of this performance standard in its Reauthorization measure,” says Poole. “It would make it much easier for state and local officials to do what they should be doing – raising the occupancy rate – since they could tell those who complain that, ‘The Feds made us do it.’ This modest reform is long overdue.”

The Federal Highway Administration (FHWA) says HOT lanes combine HOV and pricing strategies by allowing single-occupancy vehicles to gain access to HOV lanes by paying a toll. The lanes are “managed” through pricing to maintain free flow conditions even during the height of rush hours. The appeal of this concept is tri-fold:

It expands mobility options in congested urban areas by providing an opportunity for reliable travel times to users prepared to pay a significant premium for this service;

It generates a new source of revenue that can be used to pay for transportation improvements, including enhanced transit service; and

It improves the efficiency of HOV facilities, which is especially important given the recent decline in HOV mode share in 36 of the 40 largest metro areas.

The combined ability of HOT operations to introduce additional traffic to existing HOV facilities, while using price and other management techniques to control the number of additional motorists and maintain high service levels, renders the HOT lane concept a promising means of reducing congestion and improving service on the existing highway system, says FHWA.

Slugging

There are, of course, still carpools. Washington, D.C., has more than its share, and that city has also given us “slugging” and “slug-lines.” Simply, a driver heading for the city stops at a predetermined spot, often a bus stop, where people are waiting in (slug) lines for rides. He calls out his destination and one, or two or three people hop in, and off they go. The passengers don’t pay the driver anything because he benefits by using HOV lanes. Everyone wins.

There seems to be some doubt on where the term comes from. The best explanation appears to be that when bus drivers saw lines of people at stops, they’d pull and open the doors. But sometimes none of the people got on, and other times only a few. The nonriders were, of course, waiting for an instant carpool. Since “slug” is slang for a take token used by cheating bus riders, drivers began calling the nonriders slugs.

Productivity Demands Infrastructure Upgrade

By John Latta

If America is more productive, she will be more competitive is the message beyond a new report.

The report, Growth and Renewal in the United States: Retooling America’s economic engine from the McKinsey Global Institute, identifies productivity as the key factor with reigniting growth and renewing the American economy. Productivity is “the engine that has powered U.S. growth in recent decades and has been a source of U.S. competitiveness,” say the researchers. “The United States needs to accelerate labor productivity growth to a rate not seen since the 1960s.”

While the report concedes this a daunting challenge, the researchers not only say it can be done – to a point of actually outperforming historic GDP growth rates – but also identify seven “major imperatives” that need to be addressed by business leaders and policy makers if it is to happen:

1. Drive productivity gains in the public and regulated sectors.

2. Reinvigorate the innovation economy.

3. Develop the U.S. talent pool to match the economy of the future and harness the full capabilities of the U.S. population.

4. Build 21st-century infrastructure.

5. Enhance the competitiveness of the U.S. business and regulatory environment.

6. Embrace the energy productivity challenge.

7. Harness regional and local capabilities to boost overall U.S. growth and productivity.

About #4.

The report states bluntly that America’s infrastructure is inadequate to meet the needs of a growing, dynamic economy. It will either astonish or frustrate most American to see this country ranked 23rd in the world for its overall infrastructure. That infrastructure, including transportation, has been declining and now reached this miserable rating that is “undermining competitiveness” in the global economy.

“Multinational companies consistently rank infrastructure among the top four criteria they use to make decisions about where to invest,” says the report. There is also considerable scope for the United States to “identify and implement leading-edge practices in infrastructure development from project selection to financing and delivery, sometimes using the vehicle of public-private partnerships.”

There is also scope to improve the use of demand-management techniques; for example, city center congestion pricing and bridge tolls that vary by time of day, says the McKinsey researchers.v

Lend Me Your Earmarks

A vast amount of transportation funding sitting around doing nothing may be put back into action if two U.S. senators can clear some very big hurdles.

By John Latta

Moves are being made in Washington to free up billions in transportation “earmark” funds, especially those commonly called “orphan earmarks.”

Pennsylvania Sen. Bob Casey, a Democrat, has introduced two bills aimed at using federal money allocated to highway projects that remains unspent . . . and idle. And Sen. Claire McCaskill [D-Mo] wants not only orphan earmark money back, but an end to all transportation earmarks.

“This legislation will ensure that funding already directed toward highway projects is put to good use, improving our roads and bridges, and creating more construction jobs,” says Casey.

Casey cites reports that indicate that almost one in three dollars earmarked for highway projects since 1991 remain unspent, totaling $13 billion nationwide and $392 million in his native Pennsylvania. McCaskill assesses Missouri’s loss over that time at $101 million. Casey’s two bills:

The Redistribution of Unspent Earmarks Act will require any earmarks that are more than three years old and not obligated to a specific project to be returned to the state transportation department with jurisdiction over the project, allowing the money to be spent on other federally-approved projects.

The Use It or Lose It Act will require congressionally- directed funding from the Highway Trust Fund to be obligated for a project no later than three years after the funds were first made available. If funds are not obligated in that time frame, they will be released to the state transportation department, which will then be able to direct it toward other federally-approved transportation projects in that state.

But changing the way earmarks operate will always be an uphill battle in Washington, and this attempt is no different. Former Secretary of Transportation Mary Peters went on record as saying she expects Casey’s proposal to fail, in part because congressmen suspect states would simply sit on their hands for three years until the money became theirs with no Washington politician’s strings attached.

But in the Casey camp is Senator McCaskill, a long-time earmark reform advocate, who has written to Secretary of Transportation Ray LaHood asking him to investigate how so much funding is sitting unused and essentially inaccessible in the no man’s land of orphaned earmarks. These idle funds prevent states from accessing their share of highway funding by skewing the funding formula used in Washington. And they remain on ice, unable to be used for anything other than their original designation.

McCaskill went a step further: She asked LaHood to work toward ending “the process of earmarking in transportation bills and instead allocate money for projects solely through, merit and need-based formula funding.”

According to McCaskill, members of Congress earmarking pet projects do not completely understand nor correctly assess the specific needs and specs of those projects, so that when earmarks arrive in a state or region, local authorities often have a difficult time actually using the money. In fact, simple paperwork mistakes are a considerable roadblock in many cases.

“Far more egregious,” McCaskill says in her letter to LaHood, “is that these orphan earmarks also count against a state’s share of federal highway funds, resulting in state departments of transportation losing that money.”

McCaskill, who says she has never requested an earmark while in office, writes that, “Since joining the Senate in 2007, I have worked to put an end to the practice of earmarking because I do not believe that members of Congress know better than those in their state how best to utilize federal funding, and that earmarks further eliminate funding that could be made available through competition or formula. The recent reports of these orphan earmarks confirm that this is most certainly the case when it comes to transportation funding.”

A whopping 11 percent of the funds in the most recent highway bill (that’s $22 billion) were earmarks, McCaskill points out to LaHood, and over the 20 years the total for earmarks has been pegged at around $7.5 billion.

Writing for the Heritage Foundation, Ronald Utt, Ph.D., says that many members of Congress facing changes to earmark practices “are unenthusiastic about the change or even hostile to it. They believe that earmarking is an integral and valuable part of their duties.”

A common definition of earmarks, says Utt, is “a legislatively mandated expenditure that specifies the location or company and the project to receive the funding.”

The Case for P-P-Privatization

Cornell professor calls for an attitude adjustment in transportation infrastructure thinking.

The antidote to traffic congestion and decaying infrastructure is not more government programs. The answer, says the author of a new book, is to turn motorists into consumers of American roads . . . not just users of them.

Only the increased use of public-private partnerships (PPPs or P3) can repair our roadways and boost our economy, he says.

And that, the writer concedes, means toll roads. But on the flip side, he says, it also takes politics out of the equation.

The Road to Renewal: Private investment in U.S. transportation infrastructure (The AEI Press, 2011) is written by R. Richard Geddes, an associate professor of policy analysis and management at Cornell University, who recently served as a commissioner on the National Surface Transportation Policy and Revenue Study Commission. Geddes is also an adjunct scholar at the American Enterprise Institute that published the book.

Former U.S. Secretary of Transportation Mary Peters calls the book “a must-read for those of us who seek to provide funding for America’s transportation system now and into the future.” And Robert Poole, director of transportation policy at the Reason Foundation, says it is “the best and most insightful book yet on the role that private investment can and should play in transportation infrastructure.”

In a P3, it is private investors (not taxpayers) who bear the costs and risks, argues Geddes, giving them strong incentives to complete projects on time and on budget, and introducing sharp, focused incentives necessary to operate, upgrade and expand key facilities. “Because investors stand to profit from P3s, it’s in their interest to attract motorists through efficient operation, rigorous safety standards and fast, thorough repairs — a customer service ethic that government-operated systems lack.”

P3s also make way for innovative pricing that can reduce congestion and decrease emissions, says Geddes. He also argues that they would bring private capital and new jobs to communities direly in need of both. Private funds can be used to build new highways from scratch, or be employed to take over existing roads, using two similar but different payback scenarios. And once privatized and commoditized, roads could become investment opportunities for such entities as pension funds, bringing even more private capital to bear on infrastructure.

“Most importantly, P3s turn motorists into consumers instead of merely users of America’s roadways. As consumers, motorists have the power to demand the services they need.” Presumably the argument also holds good for the trucking companies that deliver most of America’s freight. Citizens, Geddes maintains, own the vast majority of America’s roads “and deserve a competitive return on their investment.”

While existing P3s have shown that they can increase competition in such areas as facility design and construction, more competitive benefits would come in areas such as facility finance, maintenance, expansion and operation with the expansion of P3s, according to Geddes. To the relatively common claim that P3s decrease public control over critical transportation assets, Geddes argues that properly structured, they can improve public control and oversight, compared to roads that are publicly owned and operated.

“Some observers also assume that P3s can only be used on facilities that generate enough toll revenue to make them profitable. This is false,” Geddes writes. “Even if a facility loses money, competitive bidding through P3s ensures that the public pays the least possible subsidy required to keep it in operation – an approach that has been used in other countries. Noting that “much of America’s federal transportation spending today is directed by political calculations rather than by benefits to motorists and taxpayers,” Geddes argues that private money will go to high-volume needs because that’s where the return is. This approach would surely worry rural politicians and others who have few roads to attract investors, although the author’s “least possible subsidy model” may work in these cases. It would also massively upset the ubiquitous earmarkers in Congress who would rather have the money arrive in a grateful community with their name emblazoned on the bag.

Earmarks have, of course, gone over the top in transportation spending. Only 10 earmarked projects appeared in the 1982 highway bill, but 6,371 of them were in the 2005 bill. For earmark opponents, there is a lot of evidence that they do more harm than good; for example, providing only part of a project’s costs and forcing state and local agencies to find the rest of the money somewhere, being used for nonpriority projects and counting against Federal funds. They also often go unspent for years, creating even more headaches for funding (see story page 62).

Private investing is one of three major changes Geddes suggests be made in approaching transportation infrastructure financing. The other two are charging road users based on how much they use roads and congestion or value-pricing, which hikes road use charges during periods of peak demand.

Funding Choices

Which option(s) may be used to find more funds?

We know the purchasing power of the Highway Trust Fund is dropping. We know the money flowing into it from fuel taxes is woefully inadequate. What we don’t know with any degree of certainty, or detail, is what other sources of revenue could effectively boost the HTF coffers back to a level where it can adequately fund bridge and highway building, maintenance and repair across the country.

A new report goes into detail on a wide range of options and puts numbers to them to try to stimulate pre-reauthorization discussion (see AASHTO chart at bottom). A new surface transportation bill with only existing income options will not provide enough funds to even keep our transportation system in the shape it’s in now.

The recent Forum on Funding and Financing Solutions for Surface Transportation in the Coming Decade Conference focused on:

near- and medium-terms funding options for the Federal surface transportation programs, current and potential future applications of federal financing tools, and funding and financing initiatives that are working at state or local levels.

The American Association of State Highway and Transportation Officials (AASHTO) Center for Excellence in Project Finance convened the forum for members of Congress, Congressional staff and transportation industry stakeholders. Speakers included members of Congress, state and local government representatives, education professionals and private-sector transportation organizations and businesses.

The rules of the transportation funding game have changed in Washington.

By John Latta

Rules about how things may be, can be, should be and are done on Capitol Hill are rarely written simply. And if they are, they rarely function simply.

Some of the key rules pertaining to Reauthorization and the Highway Trust Fund (HTF) have been changed by the new Republican majority in the House. Transportation and highway advocacy groups say the changes could create major problems for the recovery of the transportation infrastructure industry, i.e., highway and bridge contractors and state transportation agencies.

It is worth disentangling these changes because understanding what has happened allows us to follow the next moves. SAFETEA-LU expired in September 2009 and went into extended limbo. Those of us following attempts to replace it with a new six-year surface transportation bill (or for that matter to stall such a bill) were often frustrated by a barrage of arcane Capitol Hill mumbo jumbo that often made understanding what was going on a puzzle-solving exercise.

An awareness of the early January moves in the new Congress will be valuable in trying to keep up with reauthorization moves this spring.

He Said, She Said

The new Republican leadership has said these rule changes reflect their election pledge to rein in spending.

The new rules I refer to take the place of provisions that were passed back in 1998. Those old rules came about because of a practice that the new rules appear to have reinstituted. Prior to the 1998 rules, members of Congress did not have to use up all of the money in the Highway Trust Fund, an amount set in legislation, allowing surpluses to be built up within the fund.

Why not spend it all? Because a surplus of highway funds allowed the amount of that unspent surplus to be spent somewhere else in the national budget, somewhere that had nothing to do with highways. Congress could then claim a ‘balance’, that is, “hey, we didn’t overspend.” While the new rules do not change the requirement that Highway Trust Funds cannot be spent for nontransportation purposes, they do change the requirement that they must all be spent. So HTF funds still cannot be taken out and spent for other projects – but some of those funds can be left in the HTF, and when that happens, another part of government may be able to spend its money on a project with the yet-to-be-used HTF funds as a counterbalance.

From 1998 until now, that practice was out of play. Now it’s back. Probably.

Before the January change, any House member could essentially kill a bill, an amendment to a bill or a conference report that failed to appropriate funds for transportation programs at the level set by legislation by simply raising a point of order. In other words, if it didn’t spend the full amount, it could be stopped.

Now this situation is murky.

Republicans say the old 1998 rules are still in play and that the changes prohibit spending above the legislated limit, thus preventing what would essentially be deficit spending for transportation that would require general fund infusions into the HTF.

On the other hand, opponents on the other side of the aisle and highway advocacy, transportation and infrastructure development groups say it is not the broad language of the changes but loopholes that will allow the pre-1998 surplus practice back into the game.

Writing in the Bond Buyer (a newspaper owned by this magazine’s parent company), Lyn Hume says that “the new language, for example, does not appear to apply to amendments or to money transferred from the general fund to the Highway Trust Fund. Lobbyists said that doesn’t make sense because all gas tax and other revenues are transferred to the highway fund from the general fund.”

The new Republican chairman of the House Transportation and Infrastructure Committee, John Mica of Florida, has gone on record in the House as saying that the new rules don’t change the way highway programs are funded, a statement that does not appear to address or establish the degree to which they are funded. However the often blunt Mica did say that after meeting with Republican colleagues he felt confident the highway fund would not run up surpluses.

Senator Barbara Boxer (D-Calif), who heads the Senate Environment and Public Works Committee that will do the senior chamber’s lead work on Reauthorization, knows Mica and has had meetings with him since he took over. After those meetings, Boxer was optimistic about Reauthorization, but still warned that and a ‘raid’ on the HTF could throw a huge spanner in the works.

Critics of the rule changes stepped forward immediately. A group of more than 20 transportation and business groups say the changes would make funding “subject to the whim of the appropriation process.” The Associated Equipment Distributors say the changes would leave highway funding “to the whim of the appropriators.”

American Road and Transportation Builders Association President Pete Ruane says that, “13 years ago, Congressional Republicans and Democrats alike voted overwhelmingly to provide budgetary guarantees that ensured all federal gas and diesel tax user fee revenue collected for the Highway Trust Fund would be invested exclusively and in a timely manner in state highway, bridge and transit improvements. Today, House Republicans behind closed doors, in a secret ballot, unilaterally rescinded those guarantees as part of their new House rules package. This is a reversion back to the budget gimmicks of the past that allows the Highway Trust Fund balance to be used to hide the true size of the federal deficit.

“The real-life implication of this action is that it injects further uncertainty into the already reeling U.S. transportation construction market where unemployment is in excess of 18 percent — twice the national average. Long-term transportation plans and projects require stable, predictable funding,” said Ruane. “With multiyear Reauthorization of the federal highway and transit programs now more than 15 months overdue, this sends the wrong signal to the states and Wall Street.”

American Association of State Highway and Transportation Officials Executive Director John Horsley says, “there are two deficits facing the country today — the federal debt and the deficit in maintaining the infrastructure on which the economic recovery depends. In their zeal to address the first issue, the new House leadership has taken action that deepens the second.”

The American Highway Users Alliance says that House Republicans had “voted to do away with longstanding budgetary firewalls that guarantee multiyear highway funding levels in the annual appropriations bills. The loss erodes public trust in the Highway Trust Fund and will destabilize funding for future highway projects and programs.”

The Bond Buyer’s Hume also points out that “the new House rules also replace pay-as-you-go with a ‘cut-as-you-go’ regime, but will permit taxes to be cut without offsets to the resulting revenue losses, which market participants said could be good for munis (municipal bonds) because any easing of the federal tax law’s bond restrictions results in revenue loss. . . . Under the old pay-as-you-go rule, all new spending had to be offset with revenue-raising provisions. Instead, the rules would establish a cut-as-you-go regime under which legislation that would increase mandatory spending over one, five or 10 years would have to cut spending by an equal or greater amount elsewhere.”v

This is a backdoor gas tax!!!

Texas Senator Kay Bailey Hutchison has ripped off a letter to EPA Administrator Lisa Jackson blasting the agency for what she said is imposing a backdoor gas tax on Americans. The letter speaks for itself:

Dear Administrator Jackson:

The U.S. Environmental Protection Agency (EPA) announced on December 23, 2010 its plans to impose costly greenhouse gas regulations on refineries, which will hurt every American driver, trucker, farmer and flier with higher gasoline, diesel and jet fuel prices. Higher prices passed on to consumers will feel like a new gas tax. I urge you to consider the economic impacts of this announcement and not to impose this burden on all Americans.

America’s families and workers are still struggling to recover from one of the worst recessions in American history. Millions of Americans remain out of work with unemployment stuck near 10 percent. Family budgets already stretched thin face gasoline prices 39 cents higher and diesel fuel 52 cents more expensive per gallon than this time last year. This of course raises expenses for every family and business. All of this limits the ability to create new jobs or keep life affordable for Americans.

Your agency is circumventing the role of Congress. With heavy input from constituents, Congress has already rejected attempts to use cap-and-trade to force fuel prices higher with costly new greenhouse gas mandates on the American people. A report entitled Climate Change Legislation: A $3.6 Trillion Gas Tax authored by myself and [Missouri] Senator [Kit] Bond calculated the cost of the Waxman-Markey cap-and-trade bill on gasoline, diesel and jet fuel prices using publicly-available government figures.

This effort by the Administration would be imposing its own backdoor carbon regulations. The EPA previously announced regulations to require not only large industrial facilities, but eventually even hospitals, schools, farms and local small businesses to accept new costly carbon regulations. These will cripple growth and the ability to create new jobs. EPA’s recent announcement may target oil refineries with expensive new greenhouse gas performance standards; however, it is consumers who will face higher fuel prices passed on to them in the form of more pain at the pump. Threatened also are refinery workers across America, who will face the prospect of losing their good-paying, middle-class-supporting jobs if your regulations curtail operations.

I urge you to forgo these intended plans and allow Congress working with the President to make responsible policy decisions.

Sincerely,

Kay Bailey Hutchison

Planning in the Roadbuilding Business in 2011

By J. Brian Barksdale

The outlook for the construction industry in this New Year and the word “uncertainty” are synonymous. It seems that from an economic and business perspective (at least), none of us are really sure of anything anymore. Although officials claim the recession officially ended many months ago, economic challenges have not subsided for many people in the United States – not to mention globally. As far as the roadbuilding industry is concerned, there are many unresolved issues with the potential for positive change.

As always, businesses need to plan for what is known now while also preparing daily for potential changes. It has been obvious over the past few years that the companies that were “light on their feet” and able to quickly make revisions to their business structure have been the most successful at navigating the economic downturn.

With this backdrop of continuing uncertainty, roadbuilding contractors should remain focused on several significant areas in order to prosper in the current economy:

overall financial stability,

surety and banking relationships, and

awareness of new legislation.

Financial stability

Most companies have cut costs over the past couple of years. Reductions in labor force, slashed overhead expenses, stringent reviews of material costs and lean business practices are standard and should continue as construction companies try to match their work forces to the available contracts.

Other areas, however, need to be emphasized, — such as making every attempt to reduce the heavy loads of debt that many companies face. Companies have announced bankruptcy while showing profits on their financial statements – simply because they didn’t have positive cash flow to keep their debts current. Even with historically low interest rates on borrowings, highly-leveraged companies are struggling during this downturn. Any steps to improve a company’s cash flow situation are positive – and becoming imperative – in today’s lean economy. To improve financial stability, consider these options:

Some businesses still have idle assets that may be sold with proceeds used to pay off debts, or loans that may be extended or restructured.

In certain instances, business owners should consider injections of personal capital in order to strengthen company balance sheets, particularly when low profit levels are dramatically draining the company’s equity. If owners do not have the ability to personally infuse the company with cash, securing outside investors is an option. This decision may result in diluting their ownership in the company. While not preferable, it is sometimes the only practical solution to improve a contractor’s financial stability.

With the increased competition caused by lower levels of available work, essentially all contractors are deciding whether to take contracts at low or zero profits just to cover overhead and keep valuable workers on the payroll. I have one client who has refused to do so, citing the fact 30 years of experience and no needs for “practice.” As 2011 progresses, contractors should continue to re-evaluate their position on this issue, and consider the question of whether being stuck with very low margin work is worse than lower volumes of work. Those companies with relatively clean slates may be in a better position to take new more profitable contracts as they become available.

Surety and banking relationships

Roadbuilders need to routinely work with their bankers and surety companies to maintain strong relationships. As the economy improves, many companies may find their attempts to grow and improve operations hampered or derailed entirely by an inability to borrow funds for working capital or equipment purchases. For example, even as significant, potentially profitable contracts surface, companies without the equity or borrowing ability to do the job will not be able to complete the work. As we emerge from this downturn, borrowing money may have never been more difficult with the tremendous scrutiny our financial institutions are confronting each day from regulators and shareholders.

The same philosophy applies to surety bonds. Bonding capacity is often a critical component of a construction company’s ability to secure new work, especially in the governmental arena. Although many contractors began the economic downturn with significant backlogs of jobs that have carried them to this point, that work is now dwindling. Given the reduced tax revenues that most governments have been facing, the letting of new public contracts has slowed or stopped in many areas of the country. So while it may be tempting to ignore the current need for bonding, the need will resume as conditions improve or as more government stimulus projects are created.

Corporate management should pay careful attention to maintaining strong relationships with their bankers and surety agents. Providing timely, accurate financial data is a key element to this process. As is so often the case, communication is critical; banks and surety companies do not like surprises. Companies should schedule regular meetings with their lenders and provide them with all of the business’ current financial information in order to prevent problems, as well as to secure financing and bonds as conditions improve. Consideration should also be given to establishing “back-up” relationships with other banks and surety companies so that additional options are available if and when needed.

Be aware of new legislation

So much has occurred in the past couple of years on the legislative front with a tremendous number of laws created or revised during this downturn and political cycle. Many changes have been made to income tax laws, business incentives and health care requirements. While every change does not impact all companies, there are definitely effects on every business from some aspect of the legislation.

The mantra of many contractors right now is that they only wish they needed to worry about income taxes. While this sentiment is not completely off base, remember that a significant amount of tax legislation has passed in the past year that provides business incentives, as well as tax breaks. Also remember that some of the legislation contained more stringent rules for compliance with certain areas of the tax code. Some of the recent changes include:

an enhancement of the property expensing election under Section 179, allowing a business to take direct write-offs of larger amounts of fixed assets purchases, including some leasehold improvements;

a lengthening of the period for the carryback of general business credits from one year to five years for qualifying small businesses;

increased deductions for start-up expenditures for newly created businesses; and

new or enhanced requirements for information reporting to the IRS, including changes to Form 1099 requirements and enhanced penalties for failing to comply with accurate and complete reporting of applicable payments.

The Small Business Jobs Act that went into effect September 2010 also offers a variety of other programs in addition to tax law changes. For example, Small Business Administration (SBA) 504 program loans have higher maximum limits for small businesses that may prove helpful for many contractors. For qualifying businesses that can meet job creation and retention goals, as well as collateral requirements, the SBA can also provide funding for refinancing of existing loans. The act also contains provisions for smaller businesses to gain access to federal contracts, which may help to expand possibilities for such companies to compete for that work.

Construction companies should not ignore the impact of health care reform on their business moving forward. Many have delayed reviewing those provisions based on the idea that so many of the requirements occur years in the future. Although there is a phase-in of many health care items, some changes in minimum health care coverage take effect in 2011. Businesses should be leveraging assistance from health insurance providers and other professionals to be sure they are in full compliance with the current law, as well planning for upcoming mandated revisions.

It seems that uncertainty will continue to rule the days of 2011. However, construction companies should not allow that uncertainty to paralyze or prevent critical decisions designed to improve business results. Many companies seem to already be implementing this advice since a recent survey by the Construction Marketing Association reported that 65 percent of contractors and construction-related businesses expect to increase their marketing activities and budgets for 2011. Remember that the failure to make a decision is actually a decision, so act proactively and hope for the best while preparing for the worst.

I wish everyone a successful and prosperous New Year. Maybe if everyone eats turnip greens and black-eyed peas on New Year’s Day (a long-standing Southern tradition intended to improve one’s luck and financial fortune), 2011 will be much better than 2010. I sure hope so!

J. Brian Barksdale is a partner with Carr Riggs & Ingram LLC, a company ranked 34th nationally and 4th regionally for the South in Accounting Today’s top 100 national firm listing, with hundreds of construction company clients.v