Changing The Funding Guard

Jan. 1, 2006

Regime change finally took hold in the transportation construction industry in 2005, and 2006 is the first full year under the new order. President George W. Bush on Aug. 10, 2005, signed the Safe, Accountable, Flexible and Efficient Transportation Equity Act—A Legacy for Users (SAFETEA-LU).

SAFETEA-LU was the big transportation story of 2005. The big transportation story of 2006, according to industry experts, is likely to be the cost and availability of materials.

Regime change finally took hold in the transportation construction industry in 2005, and 2006 is the first full year under the new order. President George W. Bush on Aug. 10, 2005, signed the Safe, Accountable, Flexible and Efficient Transportation Equity Act—A Legacy for Users (SAFETEA-LU).

SAFETEA-LU was the big transportation story of 2005. The big transportation story of 2006, according to industry experts, is likely to be the cost and availability of materials.

“This year we saw cement shortages crop up in 32 states,” said Ken Simonson, chief economist at the Associated General Contractors of America (AGC). “In 2006, those are likely to be even more widespread simply because demand for concrete keeps growing as the construction industry expends, but cement production is remaining almost flat.”

Economic activity in the first quarter—and even the first half—of 2006 will be a little weaker than most people expect, according to Ed Sullivan, chief economist for the Portland Cement Association. Sullivan predicts that high energy prices will suck money out of the economy for home heating, so the construction market will ease back. He also expects to see gradually increasing mortgage rates, which will slow residential building and thus ease cement demand.

On the other hand, Sullivan expects stronger economic activity in the second half of the year and an overall increase in cement use by 3.5% in 2006 after a 5% increase in 2005.

The three major construction categories were all ahead of last year for the first 10 months of 2005, according to AGC.

“Total construction spending is almost 9% higher, led by an 11% gain in private residential spending,” said Simonson. “Public construction spending is up 8% and private nonresidential spending is 5% higher.”

“We fully expect tight market conditions to continue,” Sullivan told Roads & Bridges, the question is where and how intense. He said the cement shortages over the past two years have roughly followed regional housing growth.

Funding deconstructed

Offsetting the good news of SAFETEA-LU, there was a feeling in the transportation industry that the federal program is headed for a funding crisis. Investment in the nation’s transportation system is not enough even to maintain the system in its current condition much less provide any improvement. The primary funding mechanism, the national gasoline tax, is facing eroding receipts and inflation-eroded buying power—it has not been raised in more than a decade—and economists say the Highway Trust Fund will be depleted before the next reauthorization of the program.

But first, after several extensions of the previous authorizing legislation, Congress finally passed the bill with the extremely long name. As a result, the industry can count on $286.5 billion in guaranteed funding for the federal highway, transit and safety programs through fiscal year 2009.

In one key provision of the new SAFETEA-LU regime, each state’s minimum rate of return on its contribution to the Highway Trust Fund will climb from the current 90.5% to 92% by 2008. All states also are guaranteed a total six-year average highway funding increase of at least 19%, compared with the state’s six-year funding total under TEA-21.

One of the most important measures in the bill is a change that ensures the Highway Trust Fund will be compensated for the sale of ethanol motor fuels to the tune of $18.9 billion in new trust fund revenue. The ethanol clause made possible part of the increase in funding of SAFETEA-LU over TEA-21.

Doling it out

Of course the authorization means nothing unless the money gets appropriated in the annual federal budget, which Congress did in November. The 2006 transportation appropriations bill originally funded the highway program at the full $36 billion authorized by SAFETEA-LU. However, recent approval of a 1% spending redution has this year’s investment at $35.67 billion.

Congress made several modifications to the SAFETEA-LU authorization. It transferred $122 million to the National Highway Traffic Safety Administration, money that will not be available for road and bridge improvement, according to the Data DIGest weekly newsletter from the AGC’s Ken Simonson. Congress also eliminated $454 million earmarked in SAFETEA-LU for two bridges in Alaska. That money will still go to Alaska, but it may be used for other eligible projects. The appropriations bill also transfers $625 million from FHWA discretionary programs to a newly created fund for other earmarked high-priority projects.

The appropriations bill funds transit in 2006 at $8.5 billion, which is $825 million more than in 2005 but $152 million less than authorized by SAFETEA-LU. The Airport Improvement Program received $3.51 billion in the bill, slightly less than the $3.6 billion it received in 2005.

The positive news is that strong economic growth has boosted general state tax revenues, according to the economic forecast of Bill Buechner, vice president of economics and research for the American Road & Transportation Builders Association (ARTBA). With more tax revenue, the states feel much less pressure to dip into highway funds to balance state government budgets. Continued economic growth should provide a solid base for more state and local government investment in highway construction in 2006 and beyond.

Wild about transportation

Defenders of Wildlife, a Washington, D.C.-based conservation organization, was somewhat optimistic about preserving wildlife under SAFETEA-LU.

Currently, highway projects are planned, funded and designed before considering the potential impacts to wildlife and habitat, Defenders said in a statement. Under new law, transportation planners will consider habitat locations to avoid building roads in these sensitive areas, concentrating more on improving existing roads and highways.

“This is historic,” said Trish White, director of Defenders’ Habitat & Highways Campaign. “For the first time ever, wildlife will be one of the first things considered when building roads, instead of the last.” On the other hand, Defenders lamented what they saw as SAFETEA-LU’s weakening of the National Environmental Policy Act, the increase in funding for highway building and earmarked projects, “many with serious implications for wildlife.”

My kingdom for a dozer

The Association of Equipment Manufacturers’ (AEM) annual outlook survey is conducted in the third quarter of the year and outlines manufacturers’ estimates of year-end business volume for the current and next year. The 2005-06 forecast covers 68 whole machine product types and 18 types of attachments and components.

These are grouped into seven broad product segments: earthmoving, lifting, bituminous, concrete/aggregate, light equipment, attachments/components and miscellaneous equipment. The complete AEM outlook survey will be available on the AEM website (

Earthmoving equipment sales for year-end 2005 are forecast to increase 12.9% in the U.S. For 2006, business volume in the earthmoving segment is expected to show increases of 6.6% for the U.S. The earthmoving segment includes excavators, loaders, graders, trenching machines, off-highway haulers, tractors, scrapers and log skidders.

In the lifting segment of the industry, year-end 2005 sales are predicted to gain 29%. In 2006, anticipated gains in this product segment are 17.7%. Equipment in this category includes machines such as lattice boom and hydraulic cranes, tower cranes, aerial lifts, boom trucks, rough-terrain forklifts and telescopic handlers.

Sales of bituminous machinery are expected to show business gains in 2005 of 12.6%. In 2006, U.S. sales are predicted to see a 10.2% increase. The bituminous equipment segment includes asphalt plants, rollers, asphalt pavers, cold planers, soil stabilizers and road wideners.

The business volume of concrete and aggregate equipment is predicted to show year-end 2005 growth of 14%. Sales in 2006 are anticipated to grow 10.2%. Machines in this category include crushers, screens, feeders, conveyors, washing equipment, rock drills, concrete batch plants and pavers.

Light equipment includes machines such as portable air compressors, tampers, breakers, saws, trowels, light towers, generators, pumps, vibrators, compactors, screeds, lasers and mixers. Year-end 2005 sales in this segment are expected to increase 10.5%. Light equipment business for 2006 is predicted to gain 9.3%.

The anticipated 2005 business volume for attachments and components is anticipated to grow 9.9%. The market for components and attachments in 2006 is expected to increase 6.3%. Examples of machinery in this category are buckets, rakes, demolition tools, tires/wheels and hydraulic and electrical components.

Sales of miscellaneous equipment for year-end 2005 are forecast to increase 13.5%. For 2006, the U.S. market is expected to gain 4.3%. Equipment in this category includes trailers, augurs, light trucks and grouting and pipe bursting equipment.

Clouds on the cost horizon

In September Ken Simonson predicted that prices for construction materials would jump at least 10% in 2006 because of Hurricane Katrina.

“Contractors can expect increased diesel fuel costs to operate off-road equipment such as bulldozers, tower cranes and trucks,” Simonson said.

As of Dec. 19, the Energy Information Administration, Simonson said, quoted the on-highway national average diesel price at 2.46/gal, 48 cents higher than at that time a year ago. The price of oil, which rose significantly in 2005, affects the price of asphalt and the cost of operating all kinds of construction equipment.

One of the materials hit hardest last year was cement. Shipments through the port of New Orleans accounted for more than 3% of U.S. cement imports in the first six months of the 2005. “Therefore, cement shortages are expected to worsen in some of the 32 states that were already experiencing shortages and spread to new states,” said Simonson. “Cement prices are likely to rise even more steeply than the 12.7% increase that occurred between August 2004 and August 2005.”

AGC recommended in a letter to the U.S. Department of Commerce that the U.S. suspend the antidumping duty on Mexican cement. AGC said in a statement that U.S. Commerce Department officials had talked with their Mexican counterparts about an agreement that would end the current 55% duty in three years. In the interim, a much lower duty would apply, but there would also be a limit of 3 million metric tons per year on U.S. imports of cement from Mexico.

Buechner told Roads & Bridges that lifting the antidumping duty on Mexican cement would have a significant benefit for the U.S. cement market, especially in the South.

The serious concern expressed by the economists is that increases in materials costs will eat up the gains in federal construction funding. About half the cost of a highway construction project is materials, according to Buechner.

Even if prices for materials such as steel, cement and petroleum stabilize at their current levels, wrote Buechner in his economic forecast for 2006, the cost of highway construction in 2006 would be about 4.5% higher than in 2005. This could absorb much of Buechner’s predicted 5.4% increase in the highway construction market, leaving little to finance additional projects.

If prices continue to rise, higher costs would consume all of the projected increase in the value of highway construction next year and could force states to postpone some planned projects.

Edging toward the cliff

Transportation industry experts such as the people at ARTBA began preparing for the next authorization bill on Aug. 11, the day after President Bush signed SAFETEA-LU. They also know the legislation will need a course correction before SAFETEA-LU expires to avoid the precipice dead ahead. A transportation financing study, titled The Future of Highway and Public Transportation Financing and released by the National Chamber Foundation, predicted that the Highway Trust Fund will be drained in 2008, one year shy of the end SAFETEA-LU.

“Without a significant influx of new revenues, not only with the HTF by unable to support the federal commitment made under SAFETEA-LU, but our nation’s transportation network will also continue to deteriorate, impacting mobility and economic well-being,” said Stephen Sandherr, chief executive officer of AGC.

An ARTBA reauthorization task force and two federal commissions established by SAFETEA-LU are studying the problem. “SAFETEA-LU really stretched the Highway Trust Fund to finance the full $286.5 billion for highway and mass transit projects through 2009,” ARTBA’s Buechner told Roads & Bridges. “The revenue estimates were actually made before gasoline prices rose to the $2 and $3 level. So the projection is that the balance will fall to about $400 million by the end of 2009, but it’s likely that that will happen even sooner than that.”

Even the people negotiating SAFETEA-LU knew the financial situation:

“We knew for this reauthorization what needed to be done: We needed a gas tax increase. And we didn’t do it. So we have a highway program that’s inadequately funded. Everyone knows that the level of funding for highways through 2009 isn’t even what’s needed to maintain current conditions let alone make any improvements, and so when we come to reauthorization of SAFETEA-LU we have to have something. The only way they were able to get the funding up to $286 billion was to spend down the balance, and there won’t be any balance to spend down in 2009.”

“In a lot of ways, this bill that passed was really an opportunity lost to do something meaningful to address the nation’s transportation challenges,” Matt Jeanneret, vice president of communications at ARTBA, told Roads & Bridges.

“Next year, the interstate anniversary is a ripe opportunity for us to use that milestone to focus public attention on what the challenges are . . . and they’re enormous.

“Given the challenges today and going forward, it’s time for the Congress, the president and policy makers at all levels of government to come together and to develop a new vision for America’s transportation system.”

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