Better Roads Staff | July 1, 2010
Stuck in traffic
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
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.
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