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US Market Construction Update
Highway Construction

James Jeffords's (I-VT) recent split from the Republican Party certainly endeared him with the Democrats, who rewarded him with the chair of the Senate Environment and Public Works Committee-which has jurisdiction over the federal highway program. Jeffords voted for TEA-21 and against proposals to reduce motor fuel taxes last year. Wholesale fuel prices are dropping, and pump prices are folflowing suit. Some estimates suggest that as much as a 10-cent-per-gallon to 20-cent-per-gallon reduction in price is likely by the end of the year. As fuel prices stabilize and return to previous levels, the argument to reduce the gas tax weakens.

But what about beyond TEA-21, when 2004 rolls around and a new highway bill is debated? Most likely there won't be much change in funding levels, other than those resulting from inflation and general tax revenue increases stemming from greater vehicle and motor fuel usage. The reason we don't expect another 50% increase in federal highway funding is the unlikelihood of any tax increases that would benefit the Highway Trust Fund. As previously discussed, TEA-21's ability to provide such a significant increase in available funds came almost exclusively from the protection of motor fuel tax receipts solely for transportation-related purposes.

Halfway through the current federal highway act, it seems appropriate to review the results of the past three years and what the future holds for the remaining program years and beyond. Following several years of double-digit growth, 2000 became the first year in more than eight to witness a decline (-4%). The picture looks to be the same for 2001, as well, with another 4% decline projected. But keep in mind that construction of highways and streets will remain at the high level of almost $50 billion, $10 billion more than just five years earlier. What this correction in the market signifies is a leveling out of transportation spending now that TEA-21 has come inot full effect.

But what is the reason for the decline, in this the largest federal highway program to date? Last year, as motor fuel prices rose, debates ranged from Washington, D.C., to the state legislatures regarding proposed gas tax reductions and collection suspensions. The buk of these arguments in the U.S. Congress revolved around the 4.3-cents per-gallon gas tax introduced in 1992 for deficit reduction purposes. Considering the fact that estimates fell anywhere from $5 billion to $7 billion in lost funds during both fiscal years 2002 and 2003, many state departments of transportation were left wondering if it was time to tighten their belts and start holding some monies back for future years. These debates continued into early 2001 as well. The Bush Administration's approach to gas tax repeal proposals has resembled a game of "he loves me, he loves me not," and although the president has stated that he supports the current has tax level, Vice President Dick Cheney has indicated that a reduction in the tax is not out of the realm of possibility.

Before exploring further what the future may hold, it is helpful to review the recent history of the U.S. transportation spending. When TEA-21 was passed in 1998, the nation entered a new boom era of transportation construction unrivaled in U.S. history. From a federal funding standpoint, Federal Highway Administration authorizations increased nearly 50%, bringing the six-year program total to an unprecedented $175 billion, compared to the $121 billion made available under the previous highway program, the Intermodal Surface Transportation Efficiency Act (ISTEA), which spanned from 1992 to 1997. Add to that the 20% mandated state matching requirements, individual state programs, and local county and municipal road programs, and total U.S. highway construction is expected to reach nearly $350 billion during the life of TEA-21. This level of spending led Pete Ruane, president of the American Road and Transportation Builders Association (ARTBA), to claim that the transportation sector will remain the most stable part of the U.S. construction industry over the coming years.

This increase was precipitated by the fact that of the more than 3.9 million miles of highways and 582,000 bridges in the United States, nearly 60% of major roadways are in need of significant repair work and 31% of bridges are either structurally deficient or functionally obsolete. The apparent grave situation of our highway system is primarily due to an aging infrastructure and increasing traffic. Beginning in tghe 1950's and 1960's with the creation of the Eisenhower Interstate Highway System, road and bridge volume has grown dramatically. At the same time, the licensed driver population has outpaced total population by 30% and there were twice as many registered vehicles in 1998 than there were 30 years ago. Considering the fact that primary surfacing materials have an average life span of 15-20 years, it becomes apparent why Congress passed TEA-21.

Our nation's highway system is vital to the strength and sustainability of our economy. Transportation construction is a $160-billion-per-year U.S. industry employing 2.2 million Americans. More than 11% of the U.S. GDP is spent on transportation. Every $1 billion invested in transportation infrastructure generates more than $2 billion in economic activity throughout the economy. U.S. businesses shipped more than $6 trillion of goods and products in 1996. Most of this transportation took placee on our nation's highways, both for individuals and freight. Moreover, few people realize the importance our highways play in our nation's defense. The Eisenhower Interstate Highway System was created primarily for that reason- to quickly deploy ground forces throughout the country in case of a domestic attack. Interestingly, our highway system is also designed to aid the Air Force as well, with design requirements specifying one out of every five miles of interstate must be on a straight alignment to serve as an emergency air landing strip. So it is clear why the federal government found it worthwhile to make a significant investment in our transportation infrastructure.

Surprisingly, no federal tax increases were required to fund TEA-21. As Brian Deery, senior director of the Associated General Contractor's highway division, put it, "We got a tax increase without raising taxes." This was made possible by a redirecting of revenues collected from motor fuel tax receipts to the Highway Trust Fund. Under previous highway acts, such as ISTEA, a portion of these receipts received by the federal government were redirected into non-transportation related programs-the largest of these being the 4.3 cents per gallon applied to deficit reduction purposes. To guard the Highway Trust fund from further siphoning, TEA-21 is designed with "firewalls" to protect funding and guarantee federal monies are used to support only transportation-related programs. Legislators decided that taxes collected for transportation would only be used for transportation purposes, and the 30% or so of federal gas taxes added back to the Highway Trust Fund could now provide for a nearly 50% increase in federal authorizations to the individual state DOTs.

The state DOTs, however, didn't immediately realize many huge increases in construction because transportation construction tends to ramp up rather than jump up when new funding is made available. The states had to somehow come up with some fairly significant increases in transportation dollars of their own. Remember that the states are required to match federal funding 80/20 for every dollar received. Also, with the new minimum guarantees provided by TEA-21, states such as South Carolina , which received much less in federal fundss than it paid in, were experiencing as much as 60% increasesin their Federal Highway Administration authorizations. During the first two years of TEA-21, therefore, a majority of the projects let included small to medium-sized resurfacing and highway rehabilitation work. These types of projects are more easily designed and can be let rather quickly. Now, as the states are settling into their programs, more big-ticket projects such as highway reconstructions and bridge replacements are occurring.

As previously mentioned, it appears the United States has reached the funding and spending plateau of the current federal highway program. Some minor hiccups were experienced due to the gas tax debates that will still be felt somewhat in 2001, but overall highway construction should hold steady to the end of TEA-21. This forecast also comes from the assumption that the federal gas tax will neither repealed nor suspended, and there are signs that this is accurate. Senator

Early industry expert predictions about the probable increase in federal funding provided by the next highway bill range from a low of 2% to a high of 12%. FMI predicts an increase of 3% to 5% because the Census Bureau projects another 25 million people will be added to our population over the next decade. That is almost a 10% increase, and these people will add further demand for vehicles and fuel to run them on-in turn raising the total amount of money paid into the Highway Trust Fund. Despite talk of more alternative-fuel and super-efficient vehicles, people will likely continue to demand large luxury cars and sport utility vehicles as long as fuel prices do not increase much. Moreover, the cost to establish a viable network of alternative fuel sources for users is currently beyond a reasonable investment.

Settling for a continuation of TEA-21 in three years, however, is not everyone's plan. ARTBA is calling for a $300 billion highway program in 2004. A program of this size is deemed necessary by the association to merely maintain the existing structure, an estimated cost of $50 billion per year. But since such an increase is unlikely, how can the program be funded? Possibilities include:

Higher gas taxes
Cutting a subsidy on ethanol-based motor fuel
Indexing the gas tax to inflation
Fostering the use of tax-exempt debt for capital projects
Greater flexibility in the use of tax-free debt within the public-private partnerships for highway and transit development

Beyond the funding-level differences, the consensus in the industry is that the next bill will maintain a similar structure to TEA-21. Current funding vehicles should continue. As Susan Binder, director of the Federal Highway Administration's Office of Legislation and Strategic Planning, noted, "If I was a betting person, I'd say the guaranteed firewall will hold." In addition , there does not appear to be any intentions to alter the current approach to transportation funding. President Bush has stated support of TEA-21 and continuation with the status quo. George Ray, state planning engineer for the Alabama DOT and a member of the American Association of State Highway Transportation Officials' Reauthorization Committee, said his committee is only fine-tuning a few issues in the current act and won't be submitting and significant changes for the next bill. Following this assumption, Congress would be under no pressure to alter the current course of transportation policy. The only likly shift of focus would be toward greater system preservation and maintenance.

Reprinted with permission from 2001-2002 U.S. Construction Markets Update, FMI Corporation, 919.787.8400. For more information, visit or call Angela Blackburn at 919.785.9220.


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