Delayed reauthorization costs keep adding up with no relief in sight

By John Latta

Traffic congestion and the delays it causes are costing the nation’s construction firms an estimated $23 billion each year, according to a new analysis by the Associated General Contractors of America.

“There is no relief from traffic in sight,” association officials warned.

“Traffic tie-ups nationwide are sapping productivity, delaying construction projects and raising costs for construction firms of all types,” said Stephen E. Sandherr, the association’s chief executive officer.

The new analysis was based on responses from nearly 1,200 construction firms the association surveyed in late April and May. Sandherr said that a “staggering” 93 percent of firms reported that traffic and congestion were affecting their operations. Meanwhile, nearly two-thirds of firms lose at least one day of productivity per worker per year due to traffic congestion, equaling 3.7 million days of lost productivity industry-wide each year.

“As larger projects get put on the backburner, traffic stagnates, construction firms have less work and equipment plants see orders drop,” Sandherr said. “It is hard to think of a better way to undermine the stimulus than failing to pass a surface transportation bill.”

The survey reveals some stunning numbers.

Two-thirds of transportation contractors report states are issuing an average of 17 fewer bid lettings this year worth 30 percent less than last year because of the lack of the transportation bill. As a result,

60 percent of those firms report they are buying an average of $2.95 million less in equipment this year.

70 percent of firms are making an average of 26 percent less in revenue.

63 percent of transportation construction firms report they are hiring an average of 77 fewer workers this year because of the lack of a six-year bill.

Construction firms reported that traffic tie-ups delay the average construction project at least one day, while one-in-three firms report traffic adds a minimum of three days to the length of the average project.

Virtually every construction firm – 93 percent – reports that traffic and congestion are affecting their operations. Meanwhile, nearly two-thirds of firms lose at least one day of productivity per worker per year due to traffic congestion. That is more than 3.7 million days of lost productivity in the construction industry each year.

72 percent of construction firms report that delays caused by traffic tie-ups delay the average construction project by at least one day. And one-in-three firms report that traffic delays add a minimum of three days to the length of the average construction project.

Nearly three-quarters of contractors say congestion adds more than one percent to their total costs each year. And one in 10 report that traffic tie-ups add 11-percent or more to their cost of doing business.

In an industry suffering from a 20-percent decline in construction activity nationwide over the past two years, the last thing contractors need is to burn time, fuel and money stuck in traffic, said Sandherr.

Without a long-term bill and the multi-year funding guarantees it sets, he said, it is virtually impossible for states to plan the complex, long-term highway and transit projects needed to add capacity and cut congestion. Instead, states have little choice but to invest much of their money in short-term repaving and repair projects.

Washington could cut traffic and boost economic activity without adding to the deficit because the program relies on self-funding user fees, said Sandherr. (Most notably fuel taxes – Ed.) “In today’s political environment where voters are worried about jobs and the deficit, passing legislation that creates construction jobs, boosts our economy and doesn’t add one cent to the deficit ought to be a no-brainer.”v

The Land of the Lost

By John Latta

We are stalled.

The bridge and highway industry and the state and local agencies continue to press for a six-year surface transportation bill because it is the only way to a healthy industry and adequate transportation infrastructure. Washington agrees, but says there is no adequate way to fund it (although there is and politicians simply won’t vote for it).

We are in a standoff situation.

This stalemate is the new reality. It is an interim situation between two six-year pieces of legislation, but it is not a passive situation. It is influencing the way road building is pursued right now and will continue to do so for some years. While frustration levels rise, there is also a possibility that we have a new status quo.

Pete Ruane, president and CEO of the American Road and Transportation Builders Association, foresees states facing a 50-percent cut in federal funding and the loss of hundreds or thousands of jobs if Congress and the Administration do not act later this year or early next year on reauthorization.

But the odds of that are slim. And even if there is action, the House Ways and Means Committee still has to find a way to pay for it at a time when the only choice to provide adequate funds – a hike in the gas tax – is simply not going to happen. This could result in a new bill with too little money, a situation which would essentially continue the short-term thinking and planning mire in which we are now stuck.

Ruane, never timid when it comes to candid assessments, speaking at the recent International Bridge Conference in Pittsburgh, said “Many politicians in Washington are saying that we need to get more innovative and creative in passage of a new bill. Unfortunately, innovative is usually a code word for ‘we can’t raise user fees’ and simply reflects their lack of political will.”

Capitol Hill, said Ruane, is the “land of the lost, inertia and downright ineptitude,” when it comes to a transportation bill. “Partisanship and dysfunction are the rule not the exception.” We are,” he said “in limbo and face threats from many directions.”

In Washington for the Transportation Construction Coalition Fly-In (May 19-20) I heard members of both the House and Senate agree that a six-year bill is vital, but that there is no way to fund it. At that point, we were at a dead end. There are other funding choices and a number of speakers referred to them (tolling, VMT, PPP projects, etc.) but all conceded that they will not produce enough money to fill the Highway Trust Fund to a adequate level that is, to have enough money to do all the work that needs to be done.

It is frustrating to see the people we elect to solve problems basically tell us that yes there is a problem but we can’t, or won’t, solve it. v

An Ironic Explanation

By John Latta

So why?

Why is that Congress simply won’t consider the obvious and raise the gas tax. Yes, it’s a tax, and it’s mid-term election year. Basic reasons.

But there is a wonderful irony that is behind those two up-front explanations.

In late May at the annual meeting of the Coalition for America’s Gateways and Trade Corridors, some indirect answers to blunt questions provided some insight. I’m relying here on the take of veteran transportation industry watcher Ken Orski and his reference to remarks made by a panel of key senate staffers from the key Environment and Public Works Committee and the Commerce, Science and Transportation Committee.

Orski writes: “‘Does the public perceive a crisis? What do your constituents tell you?’ asked one participant. Members of the Senate panel did not answer the question directly, but their comments left no doubts as to how they assess the political environment. The public, they suggested, is skeptical that any additional money would result in tangible improvements in mobility. The level of trust in the federal government’s ability to solve the nation’s problems is low. Local transportation tax initiatives get to be approved because local officials can point to specific improvements that new taxes will buy. People know what they are voting for and see tangible results for their tax dollars. They do not have the same sense of trust and confidence in the promises of the federal government.” The panel, writes Orski, also suggested the industry is at fault for not presenting a better case for infrastructure investment at a federal level.

So, the irony is that you elected folks in Washington have done such a bad job that people don’t trust you to get it right anymore and the fault is ours for not finding a way to bail you out.

Transportation lobby groups are running into an allied problem as they push for a new six-year bill.

Senior members of the various industry organizations that make up the Transportation Construction Coalition made visits to Capitol Hill one hectic day in May attempting to talk to as many members of Congress as possible and to urge them to support a new bill. Not long after those visits, lobby organizations began to hear that the members felt they were unpersuasive. The lobbyists’ take on this response was that both Representatives and Senators – not all but most – felt that they could afford to ignore the heat the visits were supposed to generate. That they could continue to stall on pushing bill that will need new funds – even if they are user fees that don’t raise the deficit – because the public is not concerned enough to make reauthorization a priority, a.k.a. an election issue. Remember this is a public that desperately wants good, safe roads and bridges but it largely unaware that fuel taxes go to those roads and bridges and cannot be spent on any member’s favorite non-transportation projects. Nor can the administration hijack them.

A number of industry organizations have heard that the key crisis in the America right now is the jobs crisis and so they are beginning to swing some of the assault into the argument that virtually no other sector of the economy can create and maintain jobs as infrastructure can.

So the equation for those of us urgently trying to pressure Congress into the new bill is to let them know this: the public doesn’t trust you now, but if you let infrastructure crumble they will trust you less, and then they won’t re-elect you. v

Let’s Treat Infrastructure Maintenance Like Debt Service

By Eugene W. Harper, Jr.

We decry the decrepit state of our “crumbling” infrastructure, but we have yet to adopt legal rules needed to provide for its ongoing maintenance and repair.

A glance at the law governing enforcement of municipal bond obligations suggests a possible strategy for solving the maintenance problem, one that could be developed by state and local officials, bond lawyers, and other financial professionals.

Despite the drift of political and editorial rhetoric, the solution here is probably not to increase federal spending. Rather, it probably lies in the more tedious exercise of changing state and local finance laws nationwide to give maintenance spending the same priority, the same legal protection from political plunder, as debt service. This, even though maintenance spending is usually considered part of the annual operating budget separate and distinct from payments to bondholders.

Typically, bondholders are a “permanent” minority. In James Madison’s terms, they are a “faction” of lenders, always outnumbered by the (debtor) faction of voters. If bondholders had to rely for payment on the annual budget log-roll, they would, like any other permanent minority, almost always lose. They would need constitutional safeguards or other effective protection. Indeed, it’s precisely the existence of constitutional protection — or in some cases, an equivalently sturdy economic incentive — that permits states and localities to attract long-term lenders to finance capital projects.

Throughout the late 19th and most of the 20th centuries, bondholders relied largely on the non-impairment provision of the contract clause of the Constitution (and similar interpretations of state constitutions) for protection of their interests. Courts would generally enforce debt-service payment obligations against states and localities, even in the face of periodic political decisions to the contrary.

In the late 19th century, for instance, the docket of the U.S. Supreme Court was crowded with municipal bond enforcement cases. And not too long ago, in 1977, the contract clause protected covenants barring mass transit spending by the Port Authority of New York and New Jersey in the U. S. Trust case.

For more than a century, legal enforceability induced lenders to bear political risks that could result not only in payment default but also in a covenant breach. The muni bond market flourished and grew.

More recently, as shown by the explosive growth of “subject-to-appropriation” or “back-door” credits — where a legal obligation to pay arises only after an appropriation has been made in the fiscal period when payment is due — bondholders have come to rely on the expected draconian consequences of “repudiation” by a (sovereign) state.

If a state should fail to appropriate debt service for an authorized subject-to-appropriation credit, then, for all practical purposes, the market would consider that to be a repudiation of the state’s own debt. As a result, the state would lose access to credit markets, at least until the repudiation itself was repudiated by full payment. Loss of access is an altogether unacceptable risk, one imposing essentially the same payment discipline as legal enforceability.

For locals, markets generally don’t accept repudiation risk as an effective safeguard for long-term lending, in part because locals are in no relevant sense sovereign in our federal system, and in part because no one can confidently predict what they may do. After all, Los Angeles is now boycotting Arizona, and the West 67th Street Block Association in New York City once had its own foreign policy.

Those factors raise two questions about infrastructure maintenance:

Are supporters of current maintenance those who oppose “deferred maintenance,” a permanent minority in need of constitutional protection in our political system, just like bondholders themselves?

Are special projects like limited-access highways and toll bridges — which produce cash revenue to pay bondholders and where that cash is not normally required to be spent only in the budget appropriation process — in a different analytical position from ordinary infrastructure projects like local roads, bridges, schools, and parks, which produce no cash revenue and where general obligation or other tax-supported bondholders get paid even if the project falls apart?

As to the first question, deferred maintenance is hardly a laudable public-policy goal, despite the pledge of one desperate candidate to be the veritable champion of deferred maintenance. Rather, deferred maintenance is to be avoided if all that crumbling infrastructure is to be avoided.

No one can tell when maintenance is deferred, without granular expertise in capital and operating budgets. As a result, the repudiation risk has no bite. Everyone wants infrastructure to be maintained, but everyone also has multiple higher priorities. No special interest groups or political action committees organize around pro-maintenance slogans. Indeed, interest groups frequently target funds otherwise earmarked for maintenance as a funding source for their own wages, benefits, or transfer payments. Also, few ribbon-cutting photo-ops are held to herald maintenance programs.

So, yes, proponents of current maintenance and opponents of deferred maintenance constitute a permanent minority in need of constitutional protection in the normal budget process.

For the second question, comparing how we finance revenue-generating projects with how we finance ordinary infrastructure suggests a fix. Revenue bond indentures effectively protect maintenance requirements as if they were debt-service requirements by building the former into coverage ratios for the latter. Investors fear projects that are not maintained will fail to generate the requisite revenue to pay debt service.

Generally, no money is released from the lien of a revenue bond indenture unless debt service is paid and operations and maintenance requirements are met. Enforceable covenants require issuers to raise tolls, fares or other charges sufficiently to meet both those requirements.

By contrast, GO and other tax-supported debt instruments are not generally issued with enforceable claims for current maintenance. Ordinary infrastructure projects produce returns in the form of public goods, not cash — public goods that benefit taxpayers, not bondholders. Those projects’ bonds are paid for by taxpayers, not direct users, and taxing and spending for payment are part of the annual budget process, where any pro-maintenance lobby is a perpetual minority.

So, yes, we should consider reconfiguring state and local finance laws, jurisdiction by jurisdiction, to provide the equivalent of debt service protection for maintenance requirements, by authorizing financing mechanisms for ordinary infrastructure that recognize enforceable claims for current maintenance and repair. This would entail authorizing a parallel structure to a revenue-bond financing structure.

The aim here would be for budget-makers to provide for maintenance spending, along with debt service spending, before recognizing other claims on annual revenue. A one-size-fits-all model or uniform law would probably not work for 50 states.

This is not to suggest that maintenance claims are more important than the compelling and competing claims of teachers, police, or sick children. It is, however, to suggest that maintenance claims — like the claims of bondholders — are unlikely ever to be met in the normal political process without structural fiscal safeguards. So, unless we change the rules of the game, we’ll probably have to live with our “crumbling” infrastructure.

Editor’s Note: Eugene W. Harper Jr., a retired New York bond lawyer, teaches infrastructure finance at the Baruch College, City University of New York, School of Public Affairs. This article ran originally in The Bond Buyer newspaper. Bond Buyer is a SourceMedia publication. SourceMedia is owned by Investcorp, which also owns Randall-Reilly, the parent company of Better Roads.

By John Latta

Instead of “build baby build”, a public interest group argues that America needs a “fix baby fix” attitude towards our transportation infrastructure. Maintenance and repair of existing roads must be given priority over building new roads says the group in a new report.

The report, Road Work Ahead, is from the Education Fund of U.S. PIRG* and actually calls for a “fix it first” policy to be the dominant guiding philosophy in Washington and every state capital.

“Across the nation, drivers face more than 90,000 miles of crumbling highways and more than 70,000 structurally deficient bridges,” says the report. “Neglected maintenance of roads and bridges acts as a constant drain on our economy and a scourge on the quality of life.”

The report asks “Why are America’s roads and bridges in such terrible shape, and who or what is to blame?”

Members of congress who love nothing more than ribbon cutting and special interest groups absorb most of the blame for policies that prefer building new roads over maintaining existing ones in the report.

“One thing is for sure, the deterioration of our roads and bridges is not an accident. Rather it is the direct result of countless policy decisions that put other consideration ahead of the pressing need to preserve our investment in the highway system. Political forces often undermine a strong commitment to maintenance.

“Members of Congress, state legislators and local politicians thrive on ribbon cuttings. Powerful special interests push for new and bigger highways. Meanwhile, federal and state policies – which should provide strong guidance in the wise use of taxpayer dollars – often fail to achieve the proper balance between building new infrastructure and taking care of what we have already built.

“To fix our roads and bridges, America first must fix our transportation policies. To counteract the tendencies to neglect repair and maintenance, we must adopt strong “fix it first” rules that give priority to maintenance of our existing roads and bridges, set national goals for the condition of our transportation system, and hold state governments accountable for achieving results.”

A basic charge in the report is that “special interest pressure tilts the playing field toward the construction of new and ever-wider highways at the expense of repair and maintenance.” But special interests do not get all of PIRG’s blame. “Congressional earmarks – in which members of Congress designate funding for special projects – further tilt spending away from maintenance.” PIRG does not stop there: “State transportation funding policies are often similarly short-sighted, focusing on the creation of politically popular new highways rather than maintaining existing roads and bridges.”

The report also faults Washington, claiming the federal government is derelict in its oversight of funds sent to states. “Responsibility for the road and bridge crisis begins at the top, with federal transportation policies that allocate vast amounts of money to the states with little direction and no accountability.”

The PIRG report delivers a series of specific recommendations to help create what it calls “a top-to-bottom shift in funding priorities and policies,” including:

Prioritize highway and bridge maintenance and repair.

States should be held accountable for properly maintaining roads and bridges, and should be required to demonstrate progress to the public according to specific, measurable benchmarks.

Reorganize federal highway programs to focus exclusively on either maintenance or new construction.

One program should cover all new infrastructure construction, ensuring that new highway or bridge projects undergo rigorous evaluation and prioritization at the federal level —much like the New Starts program for public transportation projects. Another program should consolidate infrastructure preservation efforts to better dedicate resources to repair and maintenance.

Require states receiving federal aid to plan for future maintenance before building new roads.

States receiving federal transportation funds should calculate and publicly report the 10-, 20- and 50-year maintenance costs of all new or improved infrastructure projects and demonstrate that such funds will be available over the lifespan of the infrastructure. Such requirements are commonplace in state applications for federal transit investments.

Measure performance the right way.

The federal government should establish performance measures connected to national goals that drive investment decisions, such as increasing the fraction of roads in good condition or reducing the number of vehicles traveling over structurally deficient bridges. States should report progress to the public annually.

Reward states for good performance on national objectives.

States already receive bond ratings for how well they act to meet future obligations to investors who buy their assets. By that same principle, the U.S. Department of Transportation could develop a system to rate states based on their progress, or lack thereof, on preventive maintenance, deferred maintenance, and resources dedicated to repair. States with unsatisfactory ratings would be prohibited from transferring funds out of federal repair programs for other purposes, and would risk losing their full federal funding over time.

States, too, should create “fix it first” policies.

Every state should adopt “fix it first” policies analogous to those in Maryland, New Jersey and Illinois, requiring state DOTs to focus on the rehabilitation of existing facilities before building new highways. v

* Editor’s note:

How PIRG describes itself

U.S. PIRG, the federation of state Public Interest Research Groups (PIRGs), stands up to powerful special interests on behalf of the American public, working to win concrete results for our health and our well-being. With a strong network of researchers, advocates, organizers and students in state capitols across the country, we take on the special interests on issues, such as product safety, political corruption, prescription drugs and voting rights, where these interests stand in the way of reform and progress.

How PIRG describes its Education Fund

With public debate around important issues often dominated by special interests pursuing their own narrow agendas, U.S. PIRG Education Fund offers an independent voice that works on behalf of the public interest. U.S. PIRG Education Fund, a 501(c)(3) organization, works to protect consumers and promote good government. We investigate problems, craft solutions, educate the public, and offer Americans meaningful opportunities for civic participation.

The problem – for both rail and road builders – is the expected meager transportation allotment in the federal budget.

…the size of the overallbudget, much less the transportation portion, is still uncertain…

Writing in The Bond Buyer newspaper, Washington correspondent Audrey Dutton reports that one congressional staffer, addressing a rail meeting in D.C., said that “Congressional appropriators will be hard-pressed to provide more funding for high-speed rail for fiscal 2011 unless there is clear evidence that the $10.5 billion lawmakers approved for the sector has been used by state and local governments.” House Appropriations’ transportation, housing, and urban development subcommittee staff member Sylvia Garcia told the rail folks. “This year is going to be pretty tough.” One factor with the full committee, according to Garcia, is that it’s tough to get more funding when the original funding has not show demonstrable results, a problem with big, new programs like high-speed rail that take time to develop.

Garcia warned that the size of the overall budget, much less the transportation portion, is still uncertain, and Congress has not yet voted on a budget resolution.

“If or when that happens,” writes Dutton, “it may decide to either freeze or decrease spending in fiscal 2011. The Senate budget committee approved a budget resolution late last month that included about $10 billion less in new budget authority for transportation in the coming fiscal year, which begins October 1 than in the current one, but about the same level of outlays.”

Last year, Congress approved $8 billion for high-speed rail grants and another $2.5 billion in this year’s appropriations. v

Editor’s Note: Bond Buyer is a SourceMedia publication. SourceMedia is owned by Investcorp, which also owns Randall-Reilly, the parent company of Better Roads.

By John Latta

Another new report argues the only way to create and carry out long-term infrastructure policies and practices is to address America’s infrastructure as an investment, something that we do not do now.

The report, Infrastructure 2010: Investment Imperative, from the Urban land Institute and Ernst & Young, offers a simple thesis: “We must start treating infrastructure like investment.

“Too often we treat it as anything but, funneling spending through siloed formulas and sidestepping critical questions about the country’s longer-term infrastructure strategy and vision,” says the report, the fourth in an annual series. “The nation’s vast infrastructure needs offer opportunity to create much-needed jobs while making the lasting, integrated infrastructure investments that will lay the foundation for future prosperity.”

When it comes to roads, the report says: “Either local, state, or federal taxes must increase to meet the burden or older streets will fill with potholes, raising safety concerns and threatening property values.”

The report recognizes “signs of renewed commitment to infrastructure” at state and local government levels with initiatives to build and fund new projects and in creative partnerships between agencies at a federal level. “These are promising moves, but more needs to be done.”

When it comes to infrastructure, the United States finds itself between a rock and a hard place, says the report.

“Economic fallout, competing priorities and sticker shock prevent the country from aggressively addressing a slow-motion meltdown – the consequence of underinvesting in transport, water, and other networks for the past 30 years.”

U.S. leaders and policy makers must help Americans recognize the nation’s relatively affluent standard of living cannot be sustained on infrastructure systems planned and built during the mid–20th century, when the country had only half its current population, says the report.

“Most highway and road building was heavily funded by federal and state dollars decades ago, when the country’s economy operated on a high-octane growth curve, and now the bills come due with mounting repairs and resurfacing requirements on countless miles of serpentine asphalt.”

Recession-busted government budgets, entitlement and defense expenditures, and ballooning health care costs push infrastructure down most political priority lists. “Leaders continue to procrastinate when it comes to new investment as stressed taxpayers balk at more spending,” says the report.

Infrastructure 2010 recommends that government officials and policy experts take effective action, including the following:

Level with the American people about how the country is falling behind other economies as a result of underinvesting in infrastructure, and explain the true costs of making required upgrades and building new systems.

Determine a national vision for infrastructure improvements that supports the viability of the nation’s key metropolitan areas and national gateways – the places that increasingly concentrate economic activity and propel growth.

Move toward merit rather than formulas in allocating federal funding to state and local governments for infrastructure, and encourage integrated infrastructure, environment and land use planning.

Establish a national infrastructure bank modeled on Europe’s success, which can help promote more investment-grade decision-making and attract more private capital into infrastructure investments.

Raise revenues through user fees not only to pay for improvements and upgrades, but also to help gain economic efficiencies and environmental benefits through encouraging changed behaviors – less driving, greater water conservation, and reduced per-capita energy consumption.

The report, noting that “decades of underfunding now force a massive catch-up effort by deficit-constrained federal, state and local governments,” sees problems in a short supply of political will to tackle problems as households and businesses are in no position to face higher taxes and in the fact temporary job-based stimulus injections are inadequate.

“The likely future funding course involves raising revenues from more and higher user fees tied directly to providing necessary investment capital for infrastructure systems, rather than reliance on general taxes, which distort and hide costs from the public,” says the report. “More public/private partnerships can help finance infrastructure development and operate systems. A national infrastructure bank could also help align government and private investor interests, and attract greater private capital. Innovative tolling technologies and smart meters can help users gauge and manage expenses directly related to transportation, water, and energy, encouraging more efficient and less costly lifestyle and business decisions. In turn, enhanced revenue sources should help ensure that Americans have safe, vanguard systems to promote commercial growth and meet quality-of-life expectations.” v

Controversial climate and energy tax may threaten reauthorization

By John Latta

What I think has been feared for some time came to pass in Washington in April. There was a move, a bipartisan one at that, to raise money from new fuel taxes without a guarantee, in fact just the opposite, that the money would be used exclusively for transport projects

In a new climate and energy bill they are working on Senators John Kerry (D-MA), Lindsey Graham (R-SC) and Joe Lieberman (I-CN) suggest a new fuel fee would be levied and repaid to consumers via rebates that reward efficient fuel use.

A group of Democratic senators* and the transportation and labor lobbies** quickly opened fire, arguing essentially that the trio of Senators were possibly sabotaging the chances of a long-term federal surface transportation bill, a SAFETEA-LU replacement, by proposing a new gas tax that did not flow entirely into infrastructure.

“While we support your work to develop comprehensive legislation, we are concerned that your approach may not result in sufficient emission or oil consumption reductions from the transportation sector and may inadvertently hinder our efforts to pass a surface transportation authorization bill this year,” wrote the Senators. 

“If your legislation raises revenue from the transportation sector but does not reinvest funds into infrastructure, our efforts to enact a surface transportation authorization bill in the near future will be constrained. For that reason, transportation revenue should be reinvested into infrastructure strategies that will reduce transportation emissions and oil consumption,” they wrote. 

A letter from a coalition of 27 transportation, labor and other organizations told the Senators that the move was “not sound policy.” The letter, also sent to chairmen and ranking members of Senate committees involved in drafting a reauthorization bill, said in part,

“The solution to the transportation crisis is the quick passage of a new multi-year authorization bill that accelerates job creation with significant new investment and institutes a more performance-oriented federal transportation program.

Enacting a new transportation bill quickly will be very difficult, if not impossible, should Congress approve legislation that diverts revenue from carbon-based fees from motor fuels away from the transportation investment.

Failure to enact a transportation bill will not only harm our economic competitiveness, it will impair the ability of states, counties, cities and transit systems to reduce our dependence on foreign oil and reduce transportation-related emissions. Without a new authorization bill, expanding access to transportation choices like public transportation that reduce emissions and modernizing our highways and infrastructure simply cannot occur. The transportation sector accounts for 70 percent of domestic oil consumption and one-third of carbon pollution.”

The tax that could be triggered by the new climate and energy legislation is technically a carbon tax, but gasoline accounts for about 21 percent of carbon dioxide emissions and users would have to pay through the hose. Opponents of the Kerry-Graham-Lieberman approach are not categorically claiming that no new fuel tax should be part of its funding mechanism, but that if it is, that tax should not be created in such a way as to fatally flaw any new highway reauthorization of a highway bill.

Fuel taxes have been exclusively dedicated to highways and transportation systems. Since 1997 all fuel taxes revenue has gone into the Highway Trust Fund. This was also the case prior to that date except for two occasions when some of the income was used to help temporary, short-term deficit reductions.

As it is now, the gas tax isn’t doing the job. Even with a raise of 10 or 15 cents a gallon from its current 18.4 cents – the very most politics would allow and a very, very long shot at that – totally dedicated to highways and transportation it is unlikely to do so. The U.S. DOT estimated in a 2008 study, the Conditions and Performance Report, that we need $30 billion a year in new investments just to maintain our highways, bridges and transport system as they are now, and $75 billion of new investment a year to improve the transportation system.

The so-called “jobs bill” (HIRE – Hiring Incentives to Restore Employment Act), passed in March, topped up the Highway Trust Fund and extended the current authorization, SAFETEA-LU, through the end of the year, ending a series of short-term scrambling extensions and a sometimes chaotic and fiery push for a six year bill. But with HIRE may have come a problem.

A new Standard and Poor ‘s report , “U.S. Surface Transportation Funding Gets a Temporary Lifeline,” says that “with the breathing room HIRE provides, we think comes a reduced sense of urgency and postpones difficult decisions regarding how to finance infrastructure investment.” All of the forces pressing so hard for reauthorization now appears to have taken a break, and into this void comes the climate bill.

As multi-year bill proponents, inevitably headed by House Transportation and Infrastructure chairman Jim Oberstar, try to drive the reauthorization debate back up to speed, they may find the climate and energy bill tax proposals blocking their way because any reauthorization will need every cent of whatever the fuel tax is to do basic road and bridge work.

Relying on the history of federal backing for highway funding, Standard and Poor’s analysis expects Congress to continue to extend legislation and support, but highlights a key unknown: “What remains uncertain in our view is the form the support will take and whether it will be adequate to meet U.S. surface transportation needs.”

Any support is almost certain to be less than adequate if it has to ‘share’ gas tax revenue.

The S&P report concedes that HIRE improved the near-term funding outlook for federal highway grant programs. But the elusive, and now delayed, search for a six-year replacement for SAFETEA-LU is, says Standard and Poor’s, “confounding” state DOTS and local transportation agencies.

“In our view,” says the report, “potential delays in authorizations, changes in law, declining HTF balances, or Congressional or administrative modifications to grant programs will not end the longstanding practice of federal aid for transportation on which we base our grant anticipation ratings. However, we anticipate that program rule changes, constrained funding sources, and federal budget pressures may lead to lower authorization and appropriation levels.”

The Standard and Poor’s report also shines a light on a possible problem buried in the administration’s budget. It points out that the fiscal 201l budget “does not advance any major changes in federal transportation programs and requests $78.7 billion for the Department of Transportation (a 2.3 percent increase over fiscal 2010)”, modest increases for highways, public transportation and a modest decrease for high speed rail funding.

“However,” says the Standard and Poor’s report, “ because the budget does not advance recommendations for funding those programs over the long term, and because of growing budget deficits and the President’s proposed fiscal 2012 freeze on discretionary spending, we believe the ability of the General Fund to significantly supplement HTF spending is likely to be constrained.” v

*Senators Tom Carper (D-Del.), Arlen Specter (D-Pa.), Frank R. Lautenberg (D-N.J.), Bill Nelson (D-Fla.), Benjamin L. Cardin (D-Md.), Jeff Merkley (D-Ore.), Kirsten E. Gillibrand (D-N.Y.) and Michael F. Bennet (D-Colo.). All co-sponsored Sen. Carper’s Clean, Low-Emission, Affordable, New Transportation Equity Act, known as “CLEAN-TEA”.

**American Association of State Highway and Transportation Officials (AASHTO)

American Road & Transportation Builders Association (ARTBA)

American Public Transportation Association (APTA)

Amalgamated Transit Union (ATU)

America Bikes

American Concrete Pavement Association (ACPA)

American Council of Engineering Companies (ACEC)

American Highway Users Alliance

American Society of Civil Engineers (ASCE)

American Traffic Safety Services Association (ATSSA)

American Trucking Associations (ATA)

Associated Equipment Distributors (AED)

Associated General Contractors of America (AGC)

Association for Commuter Transportation (ACT)

Association of Equipment Manufacturers (AEM)

Association of Metropolitan Planning Organizations (AMPO)

International Union of Operating Engineers

Laborers’ International Union of North America (LiUNA!)

League of American Bicyclists

National Asphalt Pavement Association (NAPA)

National Association of Counties (NACo)

National Association of Development Organizations (NADO)

National Ready Mixed Concrete Association (NRMCA)

New Starts Working Group

Safe Routes to School National Partnership

Transportation Trades Department, AFL-CIO

United Brotherhood of Carpenters and Joiners of America

The so-called “jobs bill” may disguise some reauthorization dilemmas

By John Latta

It was almost audible.

The sigh of relief that followed the passage of the so-called “jobs bill”, actually the Hiring Incentives to Restore Employment (HIRE) Act, was a release of months of pent-up tension. Prior to HIRE the venerable SAFETEA-LU had stumbled through four short extensions and both contractors and government agencies were holding their breath worrying that replacement six-year surface transportation funding legislation would never arrive.

HIRE basically gave us SAFETEA-LU TWO, an extension through the end of the year, essentially keeping the old act’s machinery, and money, in place. The construction season was saved. And so we exhaled.

But does HIRE’S nine-month extension provide an automatic and well-oiled segue into a recognizable highway bill?

A common reaction to HIRE’s passing was that transportation funding was on solid ground until the end of the year and states could begin the construction season by creating jobs and doing much needed highway and bridge work because the Highway Trust Fund had enough money, guaranteed, through the end of the year. An allied reaction was that this created a period of relative calm after the tumultuous fights for the four extensions, a period that would allow Congress to finally come together on a multi-year highway and transit reauthorization bill, a new SAFETEA-LU.

But if Congress could not do it before – after all when you pass a six-year bill you know when it will expire – what changes in nine months might make members able to do it this time?

With the air coming out of the balloon with the passage of HIRE, the urgency that has pushed action ever since SAFETEA-LU expired last fall has all but disappeared. Without it there is the possibility that not enough will be done in the time at hand. What’s more, some of the terms of HIRE, in relation to highway funding, run through into the first quarter of 2001, muddying the renewal process just enough to worry those still demanding decisive action.

One thing that will not change is the inability of the current fuel tax to provide adequate funding to the Highway Trust Fund (HTF). That won’t change by Christmas, so the question of where the money to make up the difference between fuel tax intake and the needed funding numbers will come from will be very much like it is today. The President has said no fuel tax increase, pre-election Congress members don’t want to touch it and it’s hard to see that tax-averse situation changing after the November mid-term elections.

The extent to with the elections will change things is guesswork, but veteran industry analyst Ken Orski says in his latest newsletter that the once remote possibility of a Republican takeover of one or even both Houses of Congress now appears a distinct possibility among serious political observers. “Would a Republican Congress make major reforms in the current transportation program more or less likely? Will the 111Th Congress be less or more tax averse?” asks Orski. And, he asks, “What would be the impact of a possible change in the leadership of the House Transportation and Infrastructure Committee?”

Many industry stakeholders pushing for SAFETEA-LU’S renewal last fall did not see the health care bill looming and did not predict that it would take center stage, in fact take almost all of the stage. After November, what other issues may force their way into line ahead of reauthorization?

During the short term SAFETEA-LU extensions, and again in HIRE, money from the General Fund has bailed out the HTF. With no increase in the fuel tax being considered, is this duality entrenched enough to become standard in future? Could a future six-year bill accept that the HTF has limits, define where its funds are to be spent and rely on the General Fund for other transport and construction programs once paid for by the HTF? According to Orski, as much as 25 percent of the HTF revenue is spent on non-highway programs such as walkways, trails and bike paths. One way to partially restore solvency to the HTF, he points out, would be to limit its use to highway expenditure and transfer all of its non-highway obligation to the General Fund. Here an Infrastructure Bank, something the President has supported, could assist the General Fund

Orski also raises the elephant-in-the-room question: “How important will deficit reduction figure in future budgetary cycles?”

In a New York Times piece David E. Sanger notes that the projected deficit for the coming year is nearly 11 percent of the country’s economic output. We’ve run huge deficits before, for example during WWI and WWII, and they have risen with the expectation that they would fall back into line once peace was declared. But, says Sanger, what is scary is that “by President Obama’s own optimistic projections, American deficits will not return to what are widely considered sustainable levels over the next ten years.” In fact, he writes, in 2019 and 2020 deficits start rising again to more than five percent of the GDP.

As Sanger put it: “For Mr. Obama and his successors, the effect of those projections is clear: Unless miraculous growth, or miraculous political compromises, creates some unforeseen change over the next decade, there is virtually no room for new domestic initiatives for Mr. Obama or his successors.”

If there is no sacrosanct highway fund in place, or if highway funds came in any degree from the general fund, who in Washington facing these deficit pressures would be willing to guarantee funds into the future for highways and bridges? Might we shortly face a situation where a limited – but guaranteed – HTF begins to look like a pretty good option?v

Jobs Bill 101

H.R. 2847, the Hiring Incentives to Restore Employment (HIRE) Act is the first significant piece of job-creation legislation to pass since President Obama and the Democratic Congress earlier this year declared that they would focus on reversing widespread unemployment. The National Asphalt Paving Association produced this summary of specific proposals in the legislation.

• Jobs Payroll Tax Exemption: Offers an exemption from the 6.2% Social Security payroll taxes for every worker hired in 2010 that has been unemployed for at least 60 days. There would also be an additional $1,000 income tax credit for every new employee retained for 52 weeks to be taken on the employer’s 2011 income tax return.

• Section 179 Expensing: Increases the amount of small business expensing allowed under section 179(b) of the Internal Revenue Code for 2010 in an attempt to encourage new purchases of equipment. Under the legislation, a small business can expense up to $250,000 against their tax liability through December 31, 2010, instead of depreciating the costs over time.

• Build America Bonds Expansion: Allows state and local government to borrow at lower costs to finance more infrastructure projects. Under H.R. 2847, issuers of government-supported tax credit bonds may elect to take the higher federal subsidies offered to issuers of Build America Bonds. The bill would allow four bonds to offer the higher federal subsidy: 1) new clean renewable energy bonds, 2) qualified energy conservation bonds, 3) qualified zone academy bonds, and 4) qualified school construction bonds.

• Highway Trust Fund Extension: Extends existing highway programs which provide states and localities with the certainty they need to make decisions on projects. The bill extends the authorization of surface transportation programs under SAFETEA-LU through December 31, 2010. In addition, the bill increases authorization levels and transfers $19.5 billion from the general fund to the Highway Trust Fund. Under the bill, $14.7 billion of the transfer would be dedicated to the Highway Account.

Major Highway and Bridges Projects Get Preliminary P3 Go-Ahead

Indiana looking to private funds to keep infrastructure investment expanding

By John Latta

As states continue to struggle with funding droughts threatening major infrastructure development, Indiana is set to look into the use of public-private partnerships in two billion-dollar cross-border projects, an expressway and two Ohio River bridges

Indiana Governor Mitch Daniels said that, “The Illiana Expressway in northwest Indiana and the Ohio River bridges in southeast Indiana are long-sought major infrastructure projects with the potential for significant economic impact. This bipartisan legislation enables the use of public-private partnership financing options, which are the only practical means of making them happen.

Shattering not Shuttering

“While other states are shuttering their highway programs, Indiana is shattering all records for infrastructure investment, and this could extend that record with enormous benefit to Hoosiers at opposite corners of our state,” said Daniels

The enabling legislation comes at a time our deep economic malaise is threatening to derail or cancel vitally needed infrastructure projects, forcing states to look for alternative funding strategies. The American Road and Transportation Builders Association has said that, ”The economic recession has challenged lawmakers from Sacramento to Austin and Tallahassee to Albany—and in city and county halls around the country—to find innovative ways to fund vital transportation infrastructure projects.”

Governor Daniels said of the legislation that, “No action of this General Assembly has greater potential for job creation [than SEA 382.]”

According to The Bond Buyer newspaper, the Indiana legislation allows the state to privatize two of the state’s largest proposed infrastructure projects under a bill passed by the Democratic-controlled House and Republican-controlled Senate. The bill allows the state to enter into public-private partnerships to finance construction and operation of a proposed $1 billion toll road between Indiana and Illinois and a $4.1 billion joint project with Kentucky to build a pair of bridges over the Ohio River.

Daniels can now negotiate with private investors without having to go back to the legislature for approval according to The Bond Buyer. But the measure requires the state to prepare an economic impact study and environmental analysis before it issue a request for proposals and to hold a public hearing, says the newspaper.

Calling on Creativity

The Governor is on record as saying that neither of the two projects could have been undertaken without private involvement. Using a P3 approach, he said, was a “creative” way to let work begin on them. But the legislation is no guarantee that the projects will be undertaken.

The toll road in question is the Illiana Expressway, an East-West stretch of 25-30 miles linking I-94 in Indiana to I-57 in Illinois, with about ten miles of the highway in Indiana, designed to alleviate traffic congestion in northwest Indiana. The state will retain ownership of the land, but with P3 proposal discussions will let private companies build and manage the road’s operations in return for toll revenue.

Daniels has been a long-time supporters of public-private partnerships, arguing that they have the twin values of producing money for projects that might otherwise not be forthcoming and that they do so without creating new debt for the state. In 2006 he leased the Indiana Toll Road for $3.8 billion. He has also said that he is talking with neighboring Kentucky and Illinois about their growing interest in expanding the role of P3 projects in state infrastructure.

The Bond Buyer also reports that New Jersey Governor Chris Christie has formed a privatization task force to evaluate just which government operations could benefit from being managed by private companies. The goal is to lower the state’s payroll and at the same time to slash state operating costs.

Christie said he was looking for places where the state could deliver programs and services where “in a more efficient cost effective way by having the private sector do it.” v

Editor’s Note: Bond Buyer is a SourceMedia publication. SourceMedia is owned by Investcorp, which also owns Randall-Reilly, the parent company of Better Roads.

Mike Anderson’s American Iron

A “New” Way To Look At Things

When you’re talking about construction equipment, “new” is a simple enough tag to designate. Or is it?

Sure enough, that piece of shiny equipment just shipped from the factory, now sitting pretty on the lush front lawn of a dealership, is new. And, better yet for those of us who try to follow what’s truly new in the market, there’s no doubt about the “new” tag if the manufacturer happened to have introduced that model in the past, what, six months. Or should that be 12 months? Or 24? Or 36?

And therein lies the dilemma for marketers of construction equipment.

One of the industry’s true stalwart brands, Bobcat – a brand so historic and renowned that it is often used to describe a universal equipment type and not simply a make – is understandably putting a lot of effort into drawing attention to its “new M-Series loaders.” Indeed, it was only last June that, dodging snowflakes (it was North Dakota after all), Better Roads editorial director Marcia Gruver was observed hopping into a S630 skid steer loader at the M-Series launch. That was the better part of year ago now, but Marcia’s cool ride then is still undoubtedly a new machine now, especially considering that the M-Series product family is still easing into the market. But will the S630 be “new” a year from now? How about the brother S650 that followed a few months later?

These questions really come to the fore during the show season. A “new” product may be exactly that, for that particular show, but it’s also quite possible the same piece was “new” at another industry event, be it last month or even last year. Since not all shows are annual, there is a prime opportunity to maneuver for crafty OEM marketers and their likewise shrewd hired guns at the PR agencies: “Get the art department, pronto! We need nice, big, bright, ‘New’ signage for this display. Yes, the same display we had in Phoenix eight months ago . . . and in Paris two years ago.”

Like most people who have attended equipment trade shows over the past couple of years, we here at Better Roads have been seduced by the John Deere 764 HSD, the quad-tracked high-speed dozer that, two years after the last CONEXPO-CON/AGG, still attracts a flock at any show it’s at. Methinks one of the most intriguing earthmovers ever unveiled will be “new” until it is actually in full production and showing up on jobsites. Only when we see it working here, and there, and over there, may the “new” tag start to slip off. That may yet be years away.

It reminds me of the excited radio deejay I heard recently, who breathlessly explained to his not-so-spry listenership that a new Jimi Hendrix track had just crossed his desk. “A new what?” I asked my car dashboard. Apparently, I had not mistaken what I had heard, because the sound that answered me back was, indeed, new . . . well sort of. v

To comment or join a dialogue on Mike’s column go to our website, www.betterroads.com, and have at it. You’ll find the column under the Current Issue button.

Housing sector – slow in 2010, “dynamic” in 2011, according to PCA

By John Latta

The ugly home building market is finally weakening its death grip on the struggling economy.

A reviving residential construction sector will of course help the other construction sectors begin to recover too. But when?

The Portland Cement Association (PCA) believes the residential sector’s adverse impact on cement consumption has run its course, but unlike other major pundits, sees only a tepid increase in residential construction activity during the latter half of this year. More substantive gains, says PCA, will not come until 2011 and beyond.

The prediction comes from PCA’s chief economist Ed Sullivan, one of the construction sector’s best seers. The confident Sullivan concedes he is out of kilter with other organizations that are well-versed in the history and data of residential construction. PCA projects a 14.4 percent jump in housing starts this year. That sounds like a reasonable number but it reflects an increase over miserable 2009 levels. The increase will come, he predicts, from a 20 percent increase in single family starts and a 5.7 decline in multifamily home starts.

“These projections lie well below the consensus of construction economists’ expectations,” concedes Sullivan.

The National Association of Homebuilders (NAHB)sees a 25.6 increase, 2010 over 2009, in total housing starts, the National Association of Realtors (NAR) predicts a 37.3 percent increase and the Mortgage Bankers Association (MBA) foresees a 33.4 percent lift, according to PCA.

“At issue is the timing of the recovery. PCA continues to believe that several significant hindrances specific to the housing sector will remain in play throughout 2010 leading to a delay and more muted improvement in the residential sector compared to the consensus national averages.

“In our view, it is likely that 2011 will be characterized by a dynamic recovery in residential,” says Sullivan. “Upon review of the structural factors that will bring about a strong recovery in housing there may be reason to lean against the wind of consensus.”

In fact PCA is way ahead of all but one prediction from the other groups already cited when it comes to 2011 starts. PCA sees total housing starts for 2011 at 48.4 percent higher than this year. The NAHB prediction is 49.4 percent, NAR 40.0 percent and MBA 38.0 percent, according to PCA.

A decent jump in housing starts won’t happen until two critical conditions are met, says Sullivan. We need an inventory of unsold new homes that is no more than a five month supply, and we need stable or rising prices. And, he says, we have neither. There’s an almost 8 month inventory and prices are in the tank. And change isn’t coming soon, he says, because of our present lingering malady of “weak economic growth, high unemployment, likely increases in foreclosure activity, fire sale pricing of bank possessed properties, which acts as a depressant on new home pricing, and the continuation of tight lending standards.”

The question to answer then, is just when future conditions will have changed to the point where we can expect a significant acceleration? There are, says Sullivan, six key factors to consider when trying to figure out the answer.

One: Weak labor markets will hinder a significant and sustained increase in 2010 new home building.

“Stabilization of labor markets is the critical ingredient that eventually leads to an improvement in the underlying fundamentals for residential activity,” says Sullivan. “Without a sustained improvement in labor market conditions, it is unlikely that any notable increase in sales activity will materialize.” PCA sees job losses stopping this quarter, followed by an even period then, early in the third quarter, the beginning of a series of steady quarterly improvements.

Two: Homebuyer tax credits may result in a payback in sales during the second half of 2010, moderating perceived momentum.

The dynamic of tax credits as economic stimuli is at work here according to Sullivan. An acceleration in home sales and the resulting drop in inventory that occurred late last year created some optimism. But, pouring cold water on it, Sullivan says that while economic conditions were not as bad as they were in the first part of the year, the sales mini-boom “may owe a substantial amount of credit to the homebuyer tax credit” and its originally-planned expiration in November. “Tax credits work,” he says. “Tax credits work best when there is an urgency to act before the deal expires.”

But the auto industry shows us, says Sullivan, that tax credits boost sales in two ways: they make sales that would otherwise not have been made and they bring forward sales that would have been expected in the months ahead. Then sales stall and fall back into what he calls a ‘payback’ period.

“The expected payback from the first round will be muted due to the extension of tax credits during the first quarter. Sales will again accelerate in the second quarter as the credits are schedule to expire. Months supply of inventory will be reduced. Then what? Payback.”

Three: Foreclosure activity is likely to accelerate during the first half of 2010, adding to inventories.

PCA expects foreclosures will increase in the first half of this year primarily because of weak labor markets (high unemployment drives up foreclosures), the end of foreclosure moratoriums as lenders work through huge foreclosure backlogs and poor home prices. Of that last factor Sullivan points out that “according to some reports, roughly one quarter of home loans are underwater (the mortgage value exceeds the prevailing home value) and people with such loans have less incentive to keep making mortgage payments.”

Four: Increase in bank possessed properties will hinder an improvement in new home prices.

“As banks catch up and work through the backlogs generated by moratoriums, the possession rate will increase. PCA expects the rate will range between 36 and 42 percent. This implies roughly 1.3 million additional homes will be held by banks during 2010, compared to 871,086 in 2009.

“Banks offer substantial discounts below prevailing market prices to remove the financial liabilities of possessed homes from their books. These homes, some nearly new, compete directly with new homes for the homebuyer, putting downward pressure on new home prices.”

Five: Lending conditions are likely to remain a hindrance during much of 2010.

According to PCA the critical issue facing the economy is not the amount of capital that’s available but rather business and consumer access to it. “It is likely that bank’s aversion to risk will diminish only after charge-offs for loans show a sustained pattern of decline,” according to Sullivan. And that, he says, will probably start to happen six to nine months after labor markets stabilize.

Six: Trigger points may be delayed, suggesting less upside risk compared to consensus.

“Compared to consensus,” says Sullivan, “the potential for slower than expected sales, higher than expected inventories and a weaker than expected pricing environment suggest the potential for a delay in homebuilders reaching the trigger point signal to accelerate single family home building.” v

“A quicker than expected healing.” Maybe.

PCA chief economist Ed Sullivan says flatly that “the recovery in U.S. economic growth cannot be sustained without a stabilization in labor markets and job creation.”

There is evidence, he says, that the job creation process has already begun and the labor market’s performance has outperformed previous PCA projections. “If sustained, this may suggest a quicker than expected healing in the underlying fundamentals surround construction.”

These slightly stronger than previously projected PCA labor market activities could:

Reduce state deficits in 2010 leading to smaller drags on public construction activity.

Reduce the level of vacancy rates, soften the declines in leasing rates and reduce the declines in expected ROIs for commercial properties – leading to the potential of a quicker recovery in non residential construction.

Improve the outlook for single family construction activity in 2010 and 2011

Shorten the period for an easing in lending standards.

Mike Anderson’s American Iron

What’s Next Down The Road?

Editor-in-Chief John Latta and I, as two folks just returned from an equipment trade show are apt to do, were thinking out loud about what Company A or Company B might do next. Who is going to buy what? Who might sell off this? Who’s in bed with whom? And so it goes for those of us who enjoy nothing more than learning what’s the next move for the makers, sellers, buyers and users of the gear that makes, breaks and shakes our highways.

As the conversation so often leads, “What about Volvo?” John tossed my way, that coy gleam in his eye, knowing all too well I’d take a big, wild swing for the fences on that pitch.

And, sure enough, I was off … recounting the former Michigan wheel loaders, the former Samsung excavators, the former Champion Road Machinery motor graders, the former Ingersoll Rand pavers, etc., etc. Heck, at one point, my eyes glazed over, I even muttered something about the old SuperPac rollers and Scat Trak skid steers, I think.

What about a dozer? Yes, indeed, what about a dozer? Volvo Construction Equipment’s leaders vowed a number of years ago to evolve the company into a full-line player and have pretty much accomplished just that, but when and how will it add the cornerstone tractor line? We’ll see.

And, moving forward, we’ll certainly enjoy tossing around topics just like that.

Arriving at Better Roads to work alongside two equally passionate journalists, John Latta and Tina Grady Barbaccia, I welcome the opportunity to join in a true industry conversation. Agree or disagree with me, please don’t hesitate to let me know what’s on your mind. Please drop me a line at

mike.anderson@rrpub.com.

Over the past 15 years, I’ve enjoyed a couple of wonderful stops along the road while covering construction equipment and related industries throughout North America. This new home is in a vibrant, invigorating neighborhood, and I encourage all of my neighbors – you – to let me know what’s up.

And what’s up with Volvo? Well, returning to my desk from John’s office, there sat the news from said company that VT LeeBoy will begin supplying commercial pavers and road wideners to Volvo dealers under the historic Blaw-Knox brand, acquired by Volvo in the 2007 purchase of the Ingersoll Rand road machinery business.

Production of the upgraded and redesigned Blaw-Knox PF150 and PF161 wheeled asphalt pavers and the RW100 and RW195D road wideners will begin this year at LeeBoy’s Lincolnton, N.C. facilities. LeeBoy will take full responsibility for product support, including for units already in the field. New units will be marketed under the Blaw-Knox brand, as part of a five-year licensing agreement, and will be distributed through Volvo dealers.

And so it goes. v

By Audrey Dutton, Washington Bureau, The Bond Buyer newspaper

For cash-strapped state and local governments that have critical transportation infrastructure needs, but no money to pay for them, the coming year will be bittersweet.

Federal aid from the American Recovery and Reinvestment Act and possibly another job-creation bill will provide some transportation funding relief to municipal bond issuers, and some high-profile grants are expected to be announced this winter. But it probably will be another year before Congress takes up new multi-year authorization bills for the sector, sources said in recent interviews.

Governments and other muni bond issuers earlier this year began chasing ARRA funds after the new law was enacted in February, flooding the U.S. Department of Transportation and its various sub-agencies with applications for surface transportation and high-speed rail projects. The application pool was so large that states and cities face miniscule odds and are ­competing with their neighbors.

But market and industry participants are now speculating that the ARRA initiatives may be models for, or springboards into, longer-term ­programs.

Meanwhile, ­surface and air transportation groups have pushed for Congress to dedicate a large portion of funding in any new job-creation bill to transportation infrastructure.

But more permanent programs and revenue overhauls that would be instituted by much anticipated multi-year transportation bills have been hampered by a ­prolonged congressional battle over health care and climate-change legislation, the coming midterm elections, and reluctance by some lawmakers and the White House to broach the subject of user fees while unemployment remains high.

After the Senate returns from its winter recess this month, it is expected to take up a new job-creation bill.

The bill had not been proposed in the Senate as of late December, but the House-approved Jobs for Main Street Act of 2010 would provide federal transportation grants and attempt to solve some cash-flow problems that have plagued the highway trust fund.

The House bill would provide $27.5 billion for highways, $8.4 billion for transit, and $500 million for airports.

Rumblings in the Senate have suggested lawmakers there might support transportation funding in the area of $23 billion to $30 billion split between highways and transit,an industry source said late last month. The House bill also would lift a ban on the trust fund’s ability to earn interest on its cash balances — providing it with $500 million to $1 billion more per year, according to House estimates — and would restore $19.5 billion of foregone interest payments.

The jobs bill also could prolong the wait for a new multi-year transportation law. The bill passed by the House, for example, would extend the Safe, Accountable, Flexible, Efficient Transportation Equity Act: a Legacy for Users SAFETEA-LU) through the end of the fiscal year on Sept. 30, 2010, or one year after the law expired. The programs under SAFETEA-LU were extended through the end of February by a military appropriations bill to give Congress time to approve the longer extension.

Recovery Programs

In the meantime, new programs created by ARRA may be laying groundwork for lengthier federal investments in state-administered transportation projects. State transportation officials want the Build America Bonds program created by ARRA to be extended beyond its current expiration date of Dec. 31, said Joung Lee, senior analyst for finance and business development at the American Association of State Highway and Transportation Officials. Sen. Ron Wyden, D-Ore., who introduced BAB legislation in February 2005 and is considered a key supporter of the bonds, plans to work toward an extension.

“I think that we have seen that Build America Bonds have been an incredible success, providing prompt infrastructure investment in an efficient way. For that reason, I want to continue working to extend the program before it expires at the end of next year,” he said. “But I also think that Congress needs to refine the program, so that there isn’t just one type of Build America Bond that can be used for any type of project.

“I would like to see different flavors of BABs created. That would allow us to adjust the subsidy and give, for example, transportation infrastructure investment a larger subsidy than other types of projects because transportation projects typically create more jobs and other public benefits.”

“I would like to see different flavors of BABs* created.”

— Sen. Ron Wyden, D – Oregon

Currently, state and local governments can issue an unlimited amount of BABs to finance capital expenditures with the option of receiving direct federal payments equaling 35% of their interest expense. By mid-December, only eight months after ARRA’s enactment, issuers had sold more than $64 billion of direct-pay BABs, according to Thomson Reuters.

Airports want Congress to extend the temporary alternative-minimum tax exemption for private-activity bonds, saying the AMT exemption saved airport bond issuers millions of dollars and kept some projects from being halted. Issuers had sold $5.4 billion of AMT-exempt airport PABs as of Dec. 11, according to Jane Calderwood, vice president for government and political affairs at Airports Council International-North America. The debt supported projects at 35 different airports, she said. McCarran International Airport in Las Vegas was in the midst of a $2.5 billion project and “would have had to close the door” on it, but the AMT exemption enabled them to sell $550 million of debt to keep it alive, Calderwood said.

Another ARRA program will result in one of the most-anticipated announcements of the winter: the Federal Railroad Administration’s choice of a state or states to receive $8 billion in high-speed rail funding that was authorized under the law. The FRA received 259 applications for projects totaling $57 billion. Already, lawmakers are appropriating funds to build the high-speed rail network, which the U.S. High Speed Rail Association recently said will cost $600 billion to complete. Tacking onto the initial ARRA investment and following the designation of 11 high-speed rail corridors, Congress last month approved $2.5 billion for high-speed rail projects in its fiscal 2010 transportation appropriations bill.

The FRA’s administrator Joseph C. Szabo said recently the Obama administration is evaluating high-speed rail proposals in keeping with its “desire to lay the groundwork for a truly national high-speed and intercity passenger rail program.”

No Consensus

But the lingering, crucial problem for transportation officials — how to generate revenue for federal and state transportation trust funds — is not likely to be solved soon, according to sources.

Only one multi-year surface transportation authorization has been introduced so far, by House Transportation and Infrastructure Committee chairman James L. Oberstar, D-Minn. It does not yet include a tax title establishing a revenue source for the program. The bill would establish a bond-related metropolitan mobility program for metro areas with more than 500,000 residents, including the establishment of metropolitan infrastructure banks.

Oberstar said that $1 billion of federal funds would be provided for the metro mobility program.His bill also would merge more than 100 federal transportation funding categories into four major programs, and create a federal P3 office to oversee and approve state and local governments’ tolling of highways financed with federal aid.

Transportation advocates have all but placed bets on the nation moving toward a mileage tax to replace the current revenue source, gasoline and diesel fuel taxes and vehicle-related fees. But White House officials have stated emphatically that they will not consider a new transportation tax in a struggling economy.

The delay in finding a new revenue source could spark more participation from the private sector and more public-private partnerships. If Congress does not raise fuel taxes significantly, states and localities will look more and more to the private sector for capital to support their needs, said Jack G. Finn, senior vice president and national director of toll services of HNTB Corp. But commenting on prospects for a gas tax increase, Finn said, “I think that’s doubtful.”

One potential mechanism to pay for infrastructure is a national infrastructure bank, which has been proposed by congressional lawmakers and the White House, among others. However, the current multi-year transportation proposal does not yet include such a bank, and Congress voted not to appropriate any money for it this fiscal year, opting instead for the bank to be created under the authorization process. Additionally, transportation experts have warned that a bank would not be a cure-all for funding woes.

“An infrastructure bank is not a substitute for money,” said Joshua Schank, director of research for the Bipartisan Policy Center’s National Transportation Policy Project, which is pushing for a performance-based federal policy and wants tolling — particularly congestion pricing — to play a larger role in transportation finance.v

Editor’s Note: Bond Buyer is a SourceMedia publication. SourceMedia is owned by Investcorp, which also owns Randall-Reilly, the parent company of Better Roads.

www.bondbuyer.com

Good Expectations

— by Daryl Delano, Contributing Editor

As 2009 drew to a close things were finally looking up for the U.S. economy. The final economic indicator report released last year was from The Conference Board, and it showed the Consumer Confidence Index (CCI) rising for the second month in a row during December.

The overall CCI reached its highest level in three months – but thanks entirely to a sharp upturn in the “Expectations” component. And therein lies the source of some concern as we enter the New Year.

The “Present Situation” component of the CCI actually declined by more than 10 percent between November and December, and remained at its lowest level since February of 1983. Thus, although consumers were concerned at the end of 2009 about persistently high levels of unemployment and low/no growth in household income, they expected economic conditions to improve between then and the middle of 2010 (the “Expectations” component of the CCI measures consumer’s assessment of economic conditions 6 months in the future).

Consequently, economic developments in the real (vs. “expected”) economy during the first few months of this year will be critical in establishing momentum for economic growth – or for fueling concerns about a “double-dip” recession. At year’s end, of course, we didn’t yet have a reading on how economic growth (as measured by the change in Gross Domestic product [GDP]) had fared during the final quarter of 2009. Most indicators were positive, however, including consumer confidence, manufacturers’ new orders, and initial reports of retail sales during the Christmas-Hanukah-New Year’s Holiday period. We did, though, have final numbers for the third quarter of the year. Third-quarter 2009 GDP grew at an annual rate of 2.2 percent – the first positive move for GDP since the second quarter of 2008. Nevertheless, last year’s third-quarter gain in GDP was much lower than the 3.5 percent increase initially estimated by the U.S. Commerce Department — a worrisome development were this to become a pattern of economic reality falling short of expectations.

Expectations for the final quarter of last year were high – GDP growth should have been as good (or better) than that recorded during the third quarter of the year.

More important, however, will be the U.S. economy’s growth during the first three months of 2010. How strong – and how sustainable – will economic growth prove to be as we move through the New Year? Construction-wise there are plenty of positives – the bounce-back from depressed levels for the new residential and residential remodeling sectors of the market, and the ARRA-stimulus-funding-fueled momentum for highways, bridges, and most other sectors of infrastructure construction. But there are significant negatives, as well – cash-strapped state and local government funding authorities, on top of demand-challenged and funding-starved private developers of retail, office, hotel and warehouse space.

The Great Recession of 2007-2009 has fundamentally changed the economic landscape and has at least temporarily altered the behavior of U.S. consumers and businesses. The impact of these behavioral changes on spending and investment decisions – and thus on overall economic growth – will become clearer as we move through 2010. At present, most economists are cautiously optimistic that the “tailwinds” of monetary and fiscal policy stimulus, improved financial conditions and pent-up demand will be enough to offset the continued “headwinds” of unemployment, foreclosures and limited credit availability. If so, the nascent economic recovery – while slow to develop strength and momentum – should prove to be sustainable, and should become self-reinforcing as we move into 2011.v

TRB Watch

by Russell Houston, Senior Communications Officer, Transportation Research Board

Quality Management of Pavement Condition Data Collection

www.TRB.org/Main/Blurbs/162632.aspx

Although the concepts of quality management, control, and acceptance have been extensively used in manufacturing industrial processes, these same principles have not been systematically applied to pavement data collection. This is partially because in these services the “product” is not clearly known and the reference value often is difficult to determine. To help address this issue, TRB’s National Cooperative Highway Research Program (NCHRP) Synthesis 401: Quality Management of Pavement Condition Data Collection explores the quality management practices being employed by public road and highway agencies for automated, semi-automated, and manual pavement condition data collection and delivery using in-house staff and contracted services. The review focuses on the collection of distress data at the network level, as well as on smoothness, friction, and structural capacity data collection processes. A downloadable PDF of the report is available at both the Transportation Research Board Website and at www.BetterRoads.com.

Pavement Management 2009

www.TRB.org/Main/Blurbs/162607.aspx (No. 2093)

www.TRB.org/Main/Blurbs/162159.aspx (No. 2094)

www.TRB.org/Main/Blurbs/162614.aspx (No. 2095)

TRB’s Transportation Research Record: Journal of the Transportation Research Board (TRR), Nos. 2093, 2094, and 2095 include 45 papers that explore a wide variety of issues related to pavement management systems; pavement monitoring, evaluation, and data storage; full-scale and accelerated pavement testing; and strength and deformation characteristics of pavement sections. These issues also examine pavement friction, skid resistance, and pavement – vehicle interaction; rigid pavement design; flexible pavement design; and pavement rehabilitation. Individual TRRs, which are published on an irregular basis throughout the year, consist of collections of peer-reviewed papers on specific transportation subject areas and modes. TRB’s TRR Online service (http://trb.metapress.com/home/main.mpx) allows all visitors to identify papers of interest and review abstracts of those papers. Access to the full papers is available to service subscribers and employees of TRB sponsors.  Papers also may be purchased on an individual basis.

Russell Houston edits a weekly e-newsletter for the Transportation Research Board, a division of the National Academies, available at www.TRB.org. This column is not an endorsement of any of the contents of Better Roads. Contact: rhouston@nas.edu.

The National Association of Realtors estimates that 30 percent of all existing residential properties sold during July, August and September of 2009 consisted of foreclosed or otherwise distressed properties. This continues to limit new residential construction activity. In California, for example, although July-September sales were about 4 percent better in 2009 than 2008, the number of residential building permits issued through September of last year was still running almost 50 percent behind the 2008 pace.

At last, residential market activity is improving. It is possible this uptick may have the power to pull some of the contractors who ventured away from the residential market and into highway work as the economy sank, back to their old stomping grounds. That could at least ease the cut-throat competition we are seeing in bidding for highway projects, especially stimulus contracts. Unfortunately the improvement is occurring at an excruciatingly slow pace.

The residential sector of the economy contributed positively towards overall Gross Domestic Product (GDP) during the third quarter of 2009, marking the first time since late 2005 that housing market activity added rather than subtracted from economic growth in the U.S. Still, following years of steady decline, the residential sector has a much-diminished impact on GDP than earlier in the decade. In 2005, the residential investment component of GDP accounted for 6.1 percent of all economic activity in the nation. Even with a strong uptick in the sector during last year’s third quarter, though, housing market activity contributed only 0.4 percent of the 2.8 percent annualized growth in the quarter and represented only 2.5 percent of the total value of all economic activity measured during July-September of 2009.

Over-the-year trends in residential market indicators continued to slowly improve (that is, grow less negative when compared to the 2008 totals) as we moved into the final months of 2009. But recovery in new housing construction has yet to really take hold. Home sales (both new and existing) recorded strong gains between September and October, but housing starts declined a bit after a few months of modest increase.

The total number of residential units permitted throughout the United States during the first 10 months of 2009 was 40.5 percent less than over January-October of 2008. Overall residential building permit totals were lower than a year ago through the first 10 months of 2009 in all states of the nation except North Dakota (up about 5 percent, but totaling only 2,793 housing units – barely one-half-of-one-percent of the overall U.S. total.)

Construction sector employment declined in 49 of the nation’s 50 states between October 2008 and October 2009.

Four states recorded losses of more than 20 percent in construction jobs over this twelve-month period: Nevada, Arizona, Tennessee and Kentucky. Total payroll jobs in the U.S. declined by 4 percent over the past year; construction sector jobs plunged a much steeper 14.9 percent over the twelve months ending last October.

Against this overwhelmingly negative backdrop, four metropolitan areas of at least moderate size (i.e., those counting 1,000 or more housing permits through the first ten months of 2009) recorded double-digit over-the-year increases in total residential-unit permits: Jacksonville (NC), Augusta (GA), Fargo (ND) and Salt Lake City (UT).

However, only of 47 of the 362 metro areas of all sizes tracked in summary form by the Census Bureau managed to record a greater number of residential permits through October of 2009 than through the first ten months of 2008.

Among the major metropolitan areas recording declines of more than 60 percent from year-ago levels over the first ten months of 2009 were New York, Atlanta, Chicago and Raleigh. The nation’s two highest-volume housing markets – Houston and Dallas-Ft. Worth – saw permit counts decline by more than 40 percent over the year.

Nevertheless, while there’s virtually no chance that housing will exhibit gangbusters growth during the year ahead, there’s every likelihood that private residential sector gains will far exceed any gains that private commercial development (office, retail, hotels, etc.) might eke out over the course of 2010. Congress has extended the $8,000 home buyer tax credit until the end of April (it was originally scheduled to expire on 11/30/09) and expanded eligibility to a larger number of potential buyers. So it’s expected that this additional market stimulus will keep home sales moving forward — and ultimately lead to a solid pick up in new construction activity, as well.v

Sobering Report says 2010 will continue to challenge contractors

Treading water. It was a metaphor raised several times during a gloomy press conference to paint a picture of American transportation contracting companies trying to survive.

It arose during the presentation of the findings of the Transportation Construction Coalition’s survey of 527 transportation contractor respondents, member companies of the American Road and Transport Builders Association and/or the Associated General Contractors of America, by a TCC panel (See box).

The outlook, said AGC’s chief economist Ken Simonson, is “dire.” Texas contractor Dean Word called current conditions “brutal.” Terex boss Ron Defeo said “the industry is not getting any oxygen right now.”

The basic message, hammered home again and again, was that while a one-time investment such as the stimulus can help to mitigate the worst of the economy’s hardship, there is no alternative to a long term investment if the industry is to thrive and in turn build and maintain infrastructure and employ more people. That of course will only come with a new six-year surface transportation bill, legislation which is currently stalled in Congress.

“This is a capital investment,” said DeFeo, “and an 18-moth delay is just not acceptable to the industry.”

Perhaps the good news the in the survey’s presentation was an underlying confidence that if a six year bill is passed – with $450 billion for roads and bridges that House Transportation and Infrastructure chairman Jim Oberstar wants – the outlook gets much rosier much faster. The panel conveyed a sense that there was an “if you give us the tools we can do it” attitude just below the outer layer of serious concern.

The survey found that (spoiler alert: this list contains data that might upset you)

More than 80 percent of respondents will not buy new construction equipment in 2010

More than 40 percent anticipate layoffs of non-seasonal employees in 2010

Less than 20 percent plan to purchase new construction equipment (19 percent) or trucks (18 percent) next year

63 percent had to layoff permanent employees this year

More than three quarters of the responding firms anticipate either a “slight” (46 percent) or “severe” (32 percent) decline next year in state markets in which they work

More than 76 percent of the responding firms expect state transportation departments to put out less work to bid next year than they did this year

Only 17 percent of transportation contractors will begin 2010 with a work volume backlog at least as large, by value, as they had at the beginning of this year. A little less than 20 percent will begin the new year with at least 50 percent less backlog than last year and 33 percent report the value of their work backlog will be 25 to 50 percent less going into 2010

Almost 80 percent of road and transit builders expect construction market decline next year

Just five percent anticipate bringing on new, non-seasonal personnel.

Contracting companies are being “extremely cautious” in their bidding and hiring practices, said Simonson, aware that after stimulus money is gone there is no certainty or predictability in future federal funding. They are also worried about state funds, and Simonson’s own prediction is that state funds will decrease next year.

A six-year bill is needed to change this “mindset” among contractors said ARTBA economist and vice president of policy Alison Premo Black. “The situation is having a profound psychological impact on contractors. I think that is what this survey is about.” Congress, she said, can change this psychological outlook with a new six-year bill which will allow contractors to plan some years into the future, something many are now not doing. “The momentum generated by the stimulus would be in peril” without a new bill, she said

Terex chief DeFeo suggested another mindset might be at work, this time in Washington, as politicians resist broad calls to raise the gas and diesel tax to pay for future infrastructure building. The decision makers of the FDR and Eisenhower years built infrastructure so that America could grow, he said, but present generations have been more used to using infrastructure that building it. “Now we are just filling potholes in my view.” That has lead to a failing infrastructure, he said, “that puts people in harm’s way.”

One factor making life even harder for highway and bridge contractors is the movement of contractors from other fields searching – and bidding – for new sources of work. The result is that “competition is as fierce as we have ever seen it,” said Black, with bids coming in as much as 25 percent or more under engineers’ estimates. Dean Word said his transportation construction company has seen bids 50 percent below engineers’ estimates.

“It is impossible to overstate just how difficult current conditions are or how dire the outlook for next year is.”

— Ken Simonson, Associated General Contractors chief economist

The stimulus package was broadly credited by the press conference panel and TCC as saving thousands of construction-related jobs, but it was not enough to prevent widespread lay-offs among road and transit construction business. Stimulus dollars will be vital next year, said the surveyed firms, but they will not stop 44 percent of contractors anticipating having to lay off additional permanent employees due to overall economic conditions. Nearly 70 percent of the firms have received stimulus-funded contracts work so far this year but 63 percent also reported they still had to lay off permanent employees.

“It is impossible to overstate just how difficult current conditions are or how dire the outlook for next year is,” said Simonson. “One-time investments in transportation infrastructure like the stimulus help, but they’re simply no substitute for having a long-term investment strategy in our roads, bridges and transit systems.”

“The industry,” said DeFeo, “is not getting any oxygen right now.”

Mike Acott, president of the National Asphalt Pavement Association, a coalition member said, “The key to sustainable new job creation in the transportation construction industry is congressional passage soon of the overdue, long-term federal highway and transit program funding bill with new resources for the tapped out Highway Trust Fund.”

The TCC points out many state transportation programs have declined over the past several years, victims of program cuts precipitated by the recession’s impact on state revenues. As a result, most transportation contractors have been operating under capacity.

In the case of Dean Word Construction, 50 percent or more of its construction fleet is “parked in our yard with nothing to do,” said Word. “We’ve also got some long term employees who are highly skilled who’ve got nothing to do.” If equipment is needed, he said, “we’ll go lease short term and then turn it right back in.”

The requirement that stimulus-funded projects be “shovel ready,” presented as a major plus in the ARRA legislation, may in fact have contributed to the problems contractors are now facing. The requirement discouraged larger scale and longer-duration projects that sustain long-term personnel and equipment needs from getting funding, according to the TCC.

“Contractors in many states still do not see sustainable, state-funded, market growth on the horizon until the overall economy rebounds significantly,” said Black. “When they hear that the one source of stable funding for the market over the past four years is in doubt—the core federal highway and transit program—it’s not surprising many are tightening operations.”

Work backlogs numbers are also gloomy. These backlogs are a key factor in a contractor’s planning for the future, and contractors depend on maintaining a healthy backlog of future work contracts to ensure the cash flow necessary to maintain or add to their permanent work force.

“Our members have capacity; they’re ready to meet the nation’s needs but the state DOTs can’t offer projects for which there is no stable source or commitment of funding by the federal government,” said Joy Wilson, president and chief executive officer of the National Stone, Sand & Gravel Association.

Word called the current situation “very depressing” and said of his company, founded by his great grandfather in 1890: “We’re just trying to hold things together.” v

The Transportation Construction Coalition is a partnership of 28 national associations and construction unions representing hundreds of thousands of individuals with a direct market interest in federal transportation programs. The TCC was initiated in July 1996 to focus on the federal budget and surface transportation program reauthorization debates. The internet survey was conducted over the first three weeks of October. The complete survey results can be found at transportationconstructioncoalition.org.

The Panelists

Alison Premo Black, Economist & Vice President of Policy, American Road and Transportation Builders Association, Washington, DC

Ken Simonson, Chief Economist, Associated General Contractors of America, Arlington, VA

Ron DeFeo, Chairman & CEO, Terex Corporation, Westport, CT

Dean Word, President, Dean Word Construction, New Braunfels, TX

Joy Wilson, President and CEO of the National Stone, Sand & Gravel Association, Alexandria, VA