Inching Up From a Two-Year Plateau

Road construction in the U.S. has been flat, at best, for two years. But new federal money and the first breath of an economic recovery should start a gradual comeback in 2004.

by Kirk Landers, Editorial Director

While no one is sure about anything in this economy, cautious optimism is seeping into forecasting circles as industry prognosticators contemplate the year ahead.

Most bullish, by far, are big-picture economists, led by Dr. William R. Buechner, vice president of economics and research for the American Road and Transportation Builders Association. Buechner forecasts a 4.2% growth in highway-construction spending for 2004 and other national forecasters have issued similar expectations.

At the other end of the spectrum, a Better Roads survey of U.S. highway department managers and engineers found a mixed bag of budget forecasts for the next fiscal year, ranging from a mildly negative consensus among state agencies to a mildly optimistic outlook among city and county highway departments.

Do the economists see something budget managers are missing? Probably not. Because of inflation, the purchasing power of the federal fuel tax has lost ground. Explains Sunny Mays Schust, director of communications and publications for the American Association of State Highway and Transportation Officials, “There has been an erosion in purchasing power for highway departments through normal inflation. In 1996, the federal gasoline tax was 18.3 cents per gallon, but today, that same tax is worth just 15.2 cents per gallon in 1996 dollars.”

AASHTO has predicted that, by the time the next highway and transit reauthorization expires in 2009, inflation will have reduced the value of the fuel tax to 13.5 cents per gallon in constant (1996) dollars.

Thus even many of those agency professionals who told Better Roads they expect a budget essentially the same as their last one for their next fiscal year also spoke of having to do more with less money, and of struggling to maintain current conditions for safety and pavement quality.

The big picture

What economists see for 2004 is an increase in federal funds moving into the highway system, a strengthening economy, and a reasonable probability that the U.S. will have at least a moderately aggressive transportation reauthorization bill voted into law by the end of the first quarter.

The increase in federal funding stems from FY 2004 appropriations legislation that sets federal highway funding at $33.8 billion for the year, a 6.5% increase ($2.2 billion) over FY 2003. That increase alone accounts for most of the growth ARTBA’s Buechner forecasts.

Hope for more growth in highway spending stems from growth in Gross Domestic Product in the second half of 2003. Third quarter GDP increased at an impressive 8.2% annual rate, and economists are estimating fourth quarter growth of about 4%. Optimism is growing that the economic growth will continue through 2004 at an annual rate of about 4%, helping government revenues recover, and enhancing the ability of state and local government bodies to fund transportation projects.

Transportation reauthorization legislation still has to ooze its way through the politics of Capitol Hill, but positive progress was made last November when the Senate Environment and Public Works Committee reportedly passed the highway section of its six-year, $255-billion reauthorization plan on the strength of a 17-2, bipartisan vote. Shortly thereafter, the House Transportation and Infrastructure Committee rolled out a $375-billion reauthorization bill, also with bipartisan support.

While both proposals have a long and treacherous course to travel before the U.S. actually has a reauthorization law on the books, they suggest that Congress has an appetite for passing at least a moderately aggressive program. ARTBA’s Buechner has projected that the Senate bill would increase average annual highway and bridge construction spending by 4.8% per year through its six-year life, compared to TEA-21. The even more aggressive House T&I bill would increase spending by an average of 7% per year over its six-year life.

The most tangible affect reauthorization will have on highway spending in calendar-year 2004 is freeing $19.4 billion of the FY 2004 appropriation for state obligation. If a reauthorization act is not passed by the end of February, another extension of the old act will be needed to release this appropriation.

New federal appropriations aren’t the only influence on highway work, points out Buechner. “State Departments of Transportation carried over $3.75 billion of highway funds from TEA-21 which can be obligated in 2004 on top of the $33.8-billion limitation enacted for 2004,” he reports. In addition, several states have either passed or are considering fuel tax increases, and the new year could benefit from weather-delayed 2003 projects being carried over, Buechner adds.

On the negative side, he acknowledges that some state DOTs may delay lettings until a full six-year bill is passed. Indeed, ARTBA noted in November that the value of new contract awards for highways and bridges was trailing the year-previous pace.

Making do

Some 51 managers representing 35 states and Puerto Rico participated in the Better Roads 2004 budget survey. The respondents represented all geographic regions of the country, and the largest highway markets in each region.

More than any other group in our survey, state DOTs have felt the weight of declining funds and diminished spending power. One out of three reported a decreased budget in 2003, while just 18% reported increases.

Expectations for 2004 are only slightly less negative. A solid majority — 56% — expect carry over budgets, and the number projecting cuts dips to 28%, but only 16% anticipate increases.

Even more sobering were the state responses to 2004 spending trends in 10 specific categories of road management. In only two categories did more state DOTs project increases than decreases — traffic safety and bridge repair. All other values were at least slightly negative, and they were extremely negative for more expensive interventions such as new construction and reconstruction of roads and bridges, and even for pavement recycling and milling and overlays.

This is especially significant considering major interventions are needed to address the DOTs’ most pressing problems: traffic congestion and failing pavements. Half of the state DOT respondents rated traffic congestion as a major problem for their agencies, and another 38% said it is a minor problem. Nearly everyone said failing pavement is at least a minor problem for their agencies, and 31% said it was a major problem.

Not all state agencies have been working under austerity conditions, however. J.C. Wood, Jr., director of maintenance for the North Texas Toll Authority, reports a much different situation. His department’s budget has increased sharply for the past two years, and will increase again this month when the NTTA’s 2004 fiscal year kicks off. As a result of the Authority’s aggressive posture, spending has increased or stayed the same in all of the road management categories covered in our survey, and the only major problem the agency confronts in 2004 is traffic congestion.

Neutral to positive

Among local government agencies, the prognosis for 2004 budgets ranges from neutral among city and county agencies to positive for townships.

More than 500 managers representing city,

county, and township highway departments participated in our survey, for a response rate of more than 25%.

Among city respondents, three years of flat budget trends have left road managers with diminished buying power. Like their colleagues in the state DOTs, the most common major problems for city managers are congestion (36%) and failing pavements (26%). Like their state counterparts, city managers are somewhat more likely to cut spending on high-ticket items while protecting investments in maintenance and traffic safety, but the trends are much subtler at the city level, with little difference between the number of cities planning spending increases and decreases in each category.

County road managers are less likely to have major congestion problems than their city counterparts, but about 30% of them cite failing pavements as a major problem. Still, anticipating relatively flat budgets for 2004, these managers are nearly as likely to cut spending on major pavement interventions as they are to increase it, and they are much more likely to budget increases in preventive maintenance and traffic safety.

Townships, a popular form of government in the eastern U.S., have the country’s most bullish road managers going into 2004. Supported primarily by local revenues, many of these agencies have reported budget increases in 2003 and anticipate increases in 2004. Their favored targets for increased investment are preventive maintenance, winter maintenance, milling and overlays, and bridge construction/reconstruction.

Trying to maintain pavement conditions and relieve congestion weren’t the only imposing challenges local government road officials worry about for 2004. Many said their biggest challenge for the new year was complying with new regulations, in particular, storm water runoff. In addition several city and county managers talked about budget pressures stemming from increased operating costs, ranging from early retirement charges to skyrocketing health insurance premiums and other benefit costs.

What to expect

While the pace at which state revenues recover and federal funds actually find their way to jobsites is subject to endless speculation, the signs are very positive for a good economy in 2004.

A late-November survey of 28 professional forecasters by the National Association for Business Economists put expectations for 2004 GDP growth at a solid 4.5%. In addition, the group expected business spending increases of 10%, and a 2% growth in new jobs.

If they are correct — and there is a growing consensus among other economists that they are — tax revenues should increase at all levels of government as the year progresses, helping highway agency budget managers to begin putting out held-back projects for bid. That would make ARTBA’s forecast for 4.2% growth in road spending a lock.

It could also catch some pessimistic contractors and industry suppliers off guard for this may be a construction year that starts slowly and picks up steam in the second half of the year. To protect against that, watch the general economic check points along the way. The first: last month’s holiday retail sales. Bullish economists expected at least a 3% increase over the 2003 holiday season, and many were forecasting 5% or more. Anything less than a 3% gain is cause for caution about the recovery; anything approaching 5% is a good sign.

After that: a timely enactment of the transportation reauthorization bill, continued GDP growth, and perhaps most of all, a steady increase in business spending. We cannot sustain an economic recovery based on consumer spending alone, say economists. Business spending needs to rise to generate more jobs, more infrastructure demand, and more tax revenues. 

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Tight Funds Exacerbate State Problems

Budget cutting among state highway departments may have bottomed out in 2003, with one-third of the agencies surveyed reporting cuts in road and bridge budgets. The outlook for 2004 is somewhat less negative, with 28% expecting cuts while more than half expect to maintain 2003 spending levels.

Spending priorities for 2004 clearly favor traffic safety and bridge repair and maintenance. The most common cutbacks are in the highest cost-per-mile categories: new construction, reconstruction, and pavement rehabilitation.

Focusing limited funds where they can serve the most taxpayers makes sense for the short term, but it takes money away from the areas that state agencies feel are their greatest challenges — congestion and failing pavements. Half of all state respondents said congestion was a major problem for their agency, and 88% said it was at least a minor problem. Nearly one-third said failing pavements are a major problem.

Maintaining 2003 Spending

Road professionals at the city level paint a budget picture for 2004 that is virtually a replay of 2003 — those expecting overall budget increases slightly outnumber managers expecting decreases, and half expect the same budget as last year.

While their overall budget outlook seems somewhat brighter than their colleagues at the state level, city managers are being very conservative in planning their spending priorities, which favor preventive maintenance and traffic safety. The lowest priorities are the most expensive per-mile interventions — anything having to do with bridges, new construction, or pavement rehabilitation. However, even in these areas, the sense of the survey is that the vast majority of city agencies have the same spending plans for 2004 that they had last year.

The most acute problems facing city road managers are congestion and failing pavements. More than one out of three respondents say congestion is a problem in their city, and more than one out of four cite failing pavements as a major problem.

Counties See More of the Same

Most county road agencies held their budgets in 2003 or expanded them, though 21% reported cuts compared to the previous year. The outlook for 2004 budgets is essentially flat, with those expecting increases slightly outnumbering those expecting decreases.

Spending plans for specific road and bridge management activities in 2004 is generally positive, with increases outnumbering decreases in most categories. The most notable exceptions are new road construction and reconstruction, pavement recycling, and milling and overlays. The most volatile spending category is bridge construction/reconstruction; more than half of the counties surveyed planchanges in spending for this activity, with increases outnumbering decreases by 8 percentage points.

Failing pavement is the most common problem among county road agencies; 30% list it as a major problem and 54% say it is a minor problem for their agencies. Because many county agencies have a rural flavor, problems with traffic congestion and safety are much less common than in state and city agencies, but 81% list potholes as at least a minor problem.

Local Support for Good Roads

While growth in road budgets is slowing slightly at the township level, township road operations remain the most robust among U.S. government agencies. A substantial 40% of the townships surveyed project increases in 2004 road spending, while just 20% expect decreases.

Township road managers generally favor winter maintenance, preventive maintenance, and milling and overlays for increased spending. The vast majority of agencies have carry-over budgets for bridge maintenance and repair, but among the handful charting changes, cuts slightly outnumber increases. Increases and decreases for new road construction and reconstruction are much more volatile, with 22% projecting higher spending and 22% lower; the net trend nationwide is flat.

The most pressing problem for township road managers is congestion. Nearly half consider this a major challenge for their agency and another 24% say it is a minor one. Failing pavements afflict about three-fourths of these agencies.

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Reprinted from Better Roads Magazine
January 2004

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