Special Report: Funding Uncertainty Undercuts Outlook

With 2010 in the rear view mirror, construction and highway industry insiders ponder what lies ahead in 2011.

With memories of 2010 fading quickly, contractors have to wonder what's on the horizon. The stimulus package was a step in the right direction, but did its impact meet expectations and will the projects it "stimulated" set the tone for 2011? Or will a stalled highway bill and questions about the future of the Highway Trust Fund dictate near-term industry prospects? These are among the questions we posed to industry experts. Here's what they had to say about 2010 and where the industry is heading in 2011.

Analyzing the ARRA's Impact

Q: What impact did the American Recovery & Reinvestment Act (ARRA) have on highway construction in 2010? Did it meet, exceed or fall short of expectations?

Jeffrey Solsby, Director of Public Affairs, American Road & Transportation Builders Association (ARTBA): Put simply, the ARRA was a lifeline for firms throughout the industry. For some, especially those on the asphalt side, the blow from the recession was softened by the prevalence of asphalt work funded by the ARRA. But that doesn't compensate for the complete obliteration of the private market, which is a large portion of many contractors' work. Typically, they do a combination of public and privately supported jobs.

Ken Simonson, Chief Economist, Associated General Contractors of America (AGC): The ARRA kept highway construction from falling into a steep decline. Many contractors were able to avoid layoffs or to hire workers. The Act provided funds quickly to every state and the money was largely spent on high-priority projects. States got a great bargain and were in many cases able to fund more projects than expected because of lower materials costs and fierce bidding by contractors.

However, total highway construction spending in the first eight months of 2010 was 1.5% less than in the same period of 2009, so clearly not all highway contractors came out ahead. There is enough spare capacity in the highway construction industry to support an even higher level of funding.

Jack Basso, Director of Program Finance & Management, American Association of State Highway and Transportation Officials (AASHTO): The ARRA helped stabilize construction employment. Before the stimulus package, construction unemployment was heading toward 28% and now it is closer to 20%. We're pretty happy, as well, with the amount of resurfacing and repair work and material used as a result of the program.

When this money disappears, so will about 300,000 jobs. The industry will need alternative funding.

Ed Sullivan, Chief Economist, Portland Cement Association (PCA): Ultimately, we are very disappointed in where the funds went. Introduced as an infrastructure bill, in actuality, very little went into infrastructure. Major infrastructure construction takes time to get into the marketplace; hence, most of the money was used to repair existing roads.

Over the next 25 years, there will be a projected 50 million more drivers on the highways. If we don't invest more in new highway construction, drivers will experience horrendous traffic jams in cities, which ultimately will hinder our country's economic growth.

Leif Wathne, P.E., Vice President of Highways and Federal Affairs, American Concrete Pavement Association (ACPA): As a starting point, the concrete pavement industry welcomed the ARRA. In terms of the actual program, however, it had mixed results... There were some highway, roadway and airport pavement construction projects started and completed quickly and efficiently. But we simply need to do more to improve the capacity and condition of our nation's surface transportation infrastructure.

There are three critical issues that are hanging in the balance:

1. Condition and capacity: Both the condition and capacity of highways and roadways in the U.S. are sorely lacking... and well documented. Road builders and agencies have been lagging behind for generations as federal funding has fallen short of the critical needs of our system.

2. Jobs: The overall construction industry is still facing unemployment in the range of 20% or more. Transportation construction plays a vital role in our nation's economy, not only by providing well-paying, permanent employment, but also by supporting business and commerce in the timely shipment of goods to market.

3. Competition: In nations such as Russia, Brazil, India and China, there are large-scale investments being made in highways and other surface transportation infrastructure. It is no coincidence that these nations are emerging not only as economic superpowers, but also formidable political powers, as well.

The short-term gains realized from the ARRA will be lost without a robust highway bill now. It is for this reason the ACPA is urging quick passage of a multi-year highway bill, as well as the required funding mechanism, such as an increase in the federal motor fuels tax.

Prospects for future funding

Q: The much anticipated highway bill remains stalled. How quickly do you see the bill passing? What impact will passage have on the highway industry?

Solsby: Along with other groups/coalition partners, we are working to pass the next bill ASAP.

The greatest impact [of passage] will be to provide certainty. That certainty governs decisions by contractors, suppliers, materials and equipment firms to hire, invest, and expand. You don't make a major investment or expansion decision -- or plan to buy a $10 million piece of equipment -- based on one year's worth of work. You make it based on five to six years of work in the pipeline. That federal certainty will also help the states plan their own work. Right now, we're seeing nearly half of all states -- even with the ARRA -- cut their transportation budgets.

Wathne: The answer to the question of what impact it will have on the concrete pavement industry will depend largely on the scale of the program. Even so, we expect the bill, when signed into law, will help reduce the high unemployment in the construction industry; create good jobs; and allow companies and agencies to plan for both the short-term and long-term needs of the federal-aid highway system.

Sullivan: The administration became sidetracked with the health care bill, and now Congress has an anti-spending mentality. It is unlikely that we will see a highway bill in fiscal 2012 and maybe not until 2013. In the meantime, another extension will be necessary. It's not just economics, it's also politics.

Q: What does the future hold for the Highway Trust Fund (HTF)? Where will additional funds come from knowing that alternative-fueled vehicles are gaining in popularity and the gas tax remains unchanged?

Solsby: The HTF remains the most effective and viable transportation financing program in place. But its effectiveness is undercut because it is not indexed to inflation and its level has not been augmented to reflect current economic values.

The Fund has lost some 30% of its purchasing power in recent years. Imagine if you had no pay raise since 1992! We support raising the gas tax and indexing the tax to inflation going forward, as do many in Congress. To fund the next bill at a level commensurate with goals outlined by key Congressional leaders, we will have to look at putting all revenue options on the table — including raising the gas tax.

Basso: The 18.4 cent federal gas tax was enacted in 1993, and current estimates suggest that the HTF will get us to 2012. In the short run, raising the gas tax and collecting more DMV fees is the course to follow. Long term, a 7 to 8 cent-per-gallon federal gas tax will only allow the industry to tread water, whereas a 13 to 15 cent increase would be more appropriate.

Sullivan: The Highway Trust Fund hasn't benefitted from a gas tax increase in 17 years. When one factors in inflation, the fund continues to lose ground. The gas tax has to increase dramatically.

At this point, I don't believe alternative-fueled vehicles are having a significant impact on the fund. There are somewhere between 275 and 300 million vehicles on the road, and only a very small percentage of them are alternative-fueled vehicles, with an estimated 10 million more of them taking to the roads each year.

The key to current funding... is miles driven, and that is dictated by employment, or rather unemployment in this economy. If you don't have a job, you won't be driving to work. Once we create jobs, miles will go up. In the meantime, the long-range solution may come in some form of privatization.

Wathne: The HTF clearly needs stable revenue sources that reflect consumer trends for using alternate fuels, but also which are tied to the consumer price index or some other metric of the economy. Our posture is consistent with the recommendations presented in the 2007 Commission report, where increases in the federal motor fuels tax is identified as the only viable solution in the short-to-medium term, and a VMT (vehicle miles travelled) based system is most likely a long-term approach.

2011 Outlook

Q: Generally speaking, what will 2011 look like for highway contractors and producers?

Solsby: There will be challenges, there's no doubt about it. ARRA funding tapers off, states have cut spending on infrastructure and we still don't have a bill. We see this as reason No. 1 to push for the next highway bill.

Simonson: At best, new contract awards are likely to remain at pre-ARRA levels in early 2011. ARRA funds will quickly be depleted, and large cutbacks in activity and employment are likely by late 2011 unless there is a new surface transportation act by then.

Basso: We need long-term, well-funded legislation. Until we get it, numbers will continue to head south. AAA now supports a gas tax to help fund a bill. So does the U.S. Chamber of Commerce, as do we and a number of other organizations.

Sullivan: I think the best we can hope for is a flat situation. The ARRA stimulus package will have less of an impact in 2011 than it did this year, not to mention the passage of a highway bill is questionable for 2011.

At the state level, deficits will continue to impact street and local road construction. In 2006, for example, street and road construction accounted for 18 million tons of cement. This year, that figure is down to 5 million tons.

On a brighter note, a new highway bill and pent-up demand for new roads and streets bode well for concrete contractors and producers in 2013 and beyond.

Wathne: We are optimistic that both the highway and FAA bills will be passed in the year ahead. When the programs are enacted, we believe this will have a stabilizing effect on road builders and agencies alike.

It generally takes between 12 and 18 months after the highway bill is signed into law for agencies and road builders to hit stride. Even so, it is only with the enactment of adequately funded, robust programs that agencies and contractors can plan for the future; invest in capital equipment; and build, repair, and maintain the surface transportation systems that are so vital to our nation.