Sliding Economy Hammers State Transportation Projects
On the road to transportation funding, state departments of transportation are gripping the wheel and holding on for a bumpy ride. Decreasing revenue, a hazy future for the federal highway trust fund and a shaky lending market have led many state authorities to delay projects, rework deals and make deep cuts.
The sluggish economy has hit many states, including Virginia, hard. Reduced revenue from fuel taxes and vehicle fees and Congress’ authorization of only a portion of 2009 federal highway funds have contributed to the state’s need to drastically reduce its program. In June, the Virginia Dept. of Transportation made $1.1 billion in cuts to its six-year construction program. Four months later, it announced that up to $2.6 billion in additional cuts would be made by January. In the latest round, VDOT estimates nearly $1 billion will come from the construction program. Officials expect maintenance also will be impacted and at least 900 full-time positions will be eliminated.
“In the future, VDOT will be a smaller agency,” says VDOT Commissioner David Ekern. “We cannot afford to administer and deliver our services, programs and projects the same way we have in the past. Safety, emergency response and maintenance of existing roadways will be our top priorities, but we will have to make some difficult decisions to live within our means.”
The June cuts targeted hundreds of projects including $170 million for reconstruction of the Interstate-66/I-495 interchange in Fairfax County and $45.2 million toward the replacement of South Quay Bridge in Southampton County.
Reta Busher, VDOT chief financial officer, says future cuts to the construction program will leave little more than projects that have federal aid commitments. The agency’s estimates for the future of its six-year program include an anticipated loss of nearly $600 million in federal funding. Like many departments of transportation, Virginia is bracing for the federal highway trust fund to nose dive in 2010. The fund’s solvency was tested earlier this year when the Bush administration predicted a $3.2-billion deficit in fiscal 2009, which began Oct. 1, 2008. Lawmakers passed an $8-billion “fix” in September to fully fund the program.
Although encouraged that the program was funded, industry observers predict an even worse scenario in 2010. The American Association of State Highway and Transportation Officials forecasts the fund could drop to $23.5 billion in fiscal 2010, nearly $20 billion short of previous estimates.
“[In September] we did something necessary, but if we think we’ve fixed the problem, we’re dreaming,” says Jack Basso, AASHTO director of management and business development. “We’re faced with an even larger problem in the coming year. This will cause Congress to have to decide, what do we want the future of transportation in this county to be?”
The threat of losing significant chunks of federal funding is causing many DOTs to rethink their plans, says Bill Buechner, vice president of economics and research at American Road & Transportation Builders Association. “This year, DOTs were hesitant to commit to projects early in the year until it was clear that Congress would do something about the shortfall,” he says. “Next year, they will turn a lot more conservative in terms of committing federal money. I would suspect they are not confident in committing to long-term projects.”
The severely constricted credit markets that contributed to the Wall Street collapse in September further fouled mechanisms for transportation funding. Suddenly state transportation departments, which have traditionally been seen by institutional investors as safe bets, had trouble floating bonds. The state of Maine was unable to find a market for a $50-million AA-rated transportation bond.
The failed bond attempt dealt an added blow to an already strapped agency. In August, Maine DOT announced it would suspend paving operations due to the rapidly escalating cost of liquid asphalt. In July, the state saw asphalt prices rise by 39%.
Louisiana’s program is feeling the credit crunch as well. State officials announced on Oct. 16 they would cancel the December sale of $485 million in bonds because there was no market for them. Several major state projects could be impacted if the bonds don’t find buyers, including the $403.5-million John James Audubon Bridge and the $1-billion widening of the Huey P. Long Bridge. Mark Lambert, spokesman for the state Dept. of Transportation and Development, says the department has sufficient funds for the project through May 1, 2009.
Uncertain credit markets have also caused a hiccup in some public-private partnerships. The Missouri Dept. of Transportation ended talks in September with Missouri Bridge Partners, a consortium led by San Antonio-based Zachry American Infrastructure, to carry out its Safe & Sound Bridge project. The proposed PPP venture called for Zachry to design, build and finance 802 bridges over a 5-year period. Zachry was to operate and maintain them for 25 years.
The state instead opted to fund the project by issuing $700 million in state bonds. Don Hillis, MoDOT director of system management, says the bridge program is being retooled as a modified design-bid-build procurement for 248 structures and the department hopes to craft a design-build contract for 454 replacements.
Hillis says he still believes PPP will be viable in the future. “It’s doable, but not in today’s market,” he says. “We didn’t see that portion of the deal correcting itself anytime soon. We determined that we could do this ourselves, issue debt and move forward with the program.”
The future prospects of PPP also are in question in Pennsylvania. Following months of political wrangling, a consortium looking to lease the Pennsylvania Turnpike for $12.8 billion, withdrew its bid on Sept. 30. Pennsylvania Transportation Partners, which is led by New York City-based Citigroup and Spanish firm Abertis Infraestructuras, in May was selected as the preferred bidder to the 75-year lease.
Both Gov. Ed Rendell (D) and consortium representatives have said they hope to revisit the deal in the future, although the terms could change. “This bid and the price were immune to the turmoil in the credit markets,” claims Jim Courtovich, senior advisor with the Pennsylvania Turnpike Partners. “Next year will be a different picture and that’s the risk those policymakers took.”
Despite uncertainty in the market, Courtovich predicts PPP deals will gain favor among DOTs in the coming years. “[States] are seeing a decrease in revenue and an increase in borrowing costs,” he says. “There are fewer options. What will happen next year is the academic discussion of PPP as a futuristic and innovative idea will become one of PPP as a practical application. It will turn into a necessity.”
The failed Pennsylvania deal leaves the state with limited options in the near-term. The Federal Highway Administration in September denied the state’s request to toll Interstate 80. Rendell says the loss of the I-80 project left the state with a $500-million annual gap in its investment plan, which would result in hundreds of projects being postponed or canceled. Pennsylvania already has cut back significantly on new construction. Two years ago, the state's 12-year transportation plan dedicated 13% of the budget to increasing capacity. This year, capacity expansion was reduced to 5% as numerous plans were shelved, including the $390-million Central Susquehanna Valley Transportation Project.
While the current market calls future projects into question, many multiyear megaprojects continue to move forward. Maryland officials forecast that nearly $1.1 billion in projects will be deferred in their six-year plan. However, the $2.4-billion Intercounty Connector project in Montgomery and Prince George’s counties escaped relatively unscathed. The project’s three main contracts of approximately $500 million each remain on schedule and a $50-million to $65-million contract is expected to go to bid early next year. However, a $60-million to $75-million contract for collector and distributor roads was deferred.
California is reaping the rewards of funding decisions it made in the recent past. In 2004, Caltrans had roughly $900 million in capital projects in some stage of construction. With the addition of transportation funds through Proposition 42 and Proposition 1B, the state expects to have more than $10 billion in projects under construction next year. More than $6 billion of those projects will be new starts.
Doug Failing, director of Caltrans District 7, which includes Los Angeles and Ventura counties, says the downturn in the housing market has freed up contractors and equipment, leading to improved bids. “In the first quarter of the year, we saw six or seven bidders on projects that would have only gotten a couple of bidders in the past,” he says.
Topping the list of major work expected to be let in District 7 next year is a $750-million modified design-build project to widen I-405 between I-10 and Route 101. The first pieces of a $1-billion widening project on I-5 near the Burbank-Glendale-Pasadena Airport are already under way.
But Failing says state officials are keenly aware of the potential impact that the state’s general budget shortfalls could have on how legislators view funding transportation in the future. “This year, the legislature recognized the value of transportation, but if they have to revisit the budget again this year, there’s a real concern that transportation could be hit,” he says.
