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Federal Recisions Send State DOTs Scrambling

Mon November 05, 2007 - National Edition
Giles Lambertson

Hundreds of millions of dollars are at stake when the Federal Highway Administration tells state departments of transportation not to spend money previously authorized by Washington. Such orders — called rescissions — are arriving in state capitals with increasing frequency.

The impact on highway programs — and on contractors who build and maintain highways — is real. Planning is interrupted, budgets are adjusted, contracts are not let or are reduced in scope.

However, the situation is more complex than is suggested by the simple adage, what the federal government giveth, the federal government taketh away.

Sometimes federal giving itself, even when generous, is a problem because of handcuffing stipulations attached to it. Furthermore, when Washington rescinds authority to spend money, usually it is just reneging on promises about future funding.

But those distinctions matter little at ground level. Federal funding often is the difference between highway work getting done or not getting done and any interruption is difficult for states to manage.

“From an industry perspective,” said John J. McMahon Jr., executive vice president of the Delaware Contractors Association, which represents both large contractors and start-up companies in the state, “nobody can really project where they are going to be in the next three or four years. But depending upon their capacity to go after projects, contractors are either gearing up or gearing down.

“When all of a sudden future projects get pulled offline, that has a tremendous effect, right down to the individual worker who may or may not be employed.”

The latest rescission order for federal-aid highway funding was issued June 20 by the Federal Highway Administration. It repealed state authority to spend $871 million in “unobligated balances,” meaning money not yet tied to project contracts. The take-back from individual states ranged from almost $80 million from California to less than $4 million from each of several smaller states. The rescission order was “applied proportionally to states based upon the fiscal year 2007 apportionments,” the Highway Administration explained in its order. Each state was given 30 days to comply.

Who’s to Blame?

The Federal Highway Administration is not the villain, if there is one, in this funding dilemma. The order to pull back on funding authority comes straight from Congress.

The federal budgeting process begins with a president submitting a proposed budget and Congress doing just about anything it wishes with the president’s proposal. Eventually a congressional budget resolution is passed, which authorizes spending levels, followed by appropriation bills, which actually pony up the money.

Once a budget year begins, several tools are available to both the president and Congress to adjust final budget figures up or down to fit changing economic circumstances. Supplemental appropriation bills produce extra funding when needed, usually in emergencies; rescission orders cancel previous budgetary authority for whatever reason.

Cancellation orders — rescissions — must be legislated, and that’s what Congress did in May when it passed the U.S. Troops Readiness, Veteran’s Care, Katrina Recovery and Iraq Accountability Appropriations Act of 2007. To help pay for the Act’s additional appropriations, Section IV, Chapter 8 canceled $871 million in Federal Highway Administration spending authority.

“Rescission is fairly routine,” Doug Hecox, a spokesman for the U.S. Department of Transportation, Federal Highway Administration, said about the June rescission order. “It happened twice in fiscal year ’07, three times in ’06, twice in ’05 and so on. It certainly is not without precedent. And the June rescission was not unusual in size, though that is a generic response.”

Budgetary rescission orders indeed are not unusual, but they have been unusually large in recent years. Annual highway funding rescissions have grown from about $370 million in 2002 to more than $4 billion in 2007. Why this happened is not a great mystery. The cause is, in a word, politics.

The congressional appropriations act of last May pretty well delineated where Congress’ spending priorities lay at the time — in war and defense spending, veterans’ care and Hurricane Katrina recovery. Not coincidentally, each spending category was a political high priority in the spring.

At the time the Act was passed, contentious debates in these areas had swelled public concern to a righteous din. As is typically done during such politically tumultuous times, Congress tried to abate concern by funneling extra money into each area as a demonstration of political will.

Sometimes these same political dynamics work in favor of highway and heavy construction. For example, the immediate response to the collapse of the interstate highway bridge in Minnesota was congressional clamor for additional appropriations for bridge replacement and repair across the country.

But without a doubt, the May appropriations bill did not help the industry. To help pay appropriations for Iraq and New Orleans, Congress pulled back some spending authority under the 2005 Safe, Accountable, Flexible, Efficient Transportation Equity Act – A Legacy for Users.

The federal highway-funding picture is further muddied by the habit of Congress to earmark projects. In a recent forum conducted by South Central Construction Magazine, the Arkansas Highway and Transportation secretary, Dan Flowers, noted the connection. He observed that federal allocations already squeezed by rescissions are effectively diminished further by earmarks that require states to spend money in low priority areas.

Economic Impact

The economic impact of rescissions is difficult to see on a national level, even when the cutbacks are of sizeable magnitude. Ken Simonson, chief economist for Associated General Contractors, said he has not yet detected ripples in the economy resulting from the 2007 rescissions.

“It is pretty hard to pin down,” he said. “I think it would take a while to filter through, though it is possible that people are starting to trim their sails and to lay off employees.”

Impact is a lot easier to discern at the state level. Because nearly half of state highway funding comes from Washington, any retracted funding authority can send shock waves through state DOT planning and contracting processes.

A caveat is appropriate: Not all dollars in a federal transportation-funding bill are real. This can be seen in a simple calculation using X, Y and Z. The X amount is a cap, the upper limit set on annual spending in a transportation bill. The Y amount represents dollars actually authorized by Congress for spending, an amount that always is less than the spending cap.

Subtracting Y from X produces Z, which is the unspendable “surplus” between caps and actual authorizations, a largely theoretical sum that accumulates on the books year by year. It is these “unobligated” funds that departments of transportation harmlessly tap first when rescission orders come down from Washington.

Only when rescission orders consume this “surplus” do givebacks begin to have real impact on projects. That said, even theoretical “surplus” funding can find its way into long-range planning and is missed when it is taken back.

“The rescissions are never really anticipated,” McMahon said, speaking from the viewpoint of contractors in Delaware. “State officials look to see how many dollars they can expect from the federal government. They establish their priorities, usually the most immediate needs in the state.

“When anything like rescission happens, it immediately affects the schedule of these projects and they have to go back to the drawing board and re-establish their priorities,” McMahon said.

McMahon also cites what he calls the “waterfall effect,” which is the budgetary reality that a federal funding stoppage at the top dries up project funds at state and local levels. “If federal dollars are taken away from you but the project has to be addressed anyway, you are going to try to find other ways to finance it. It might mean that four or five or six smaller projects won’t get done at all.”

Washington in June pulled back approximately $3.5 million in spending authority from Delaware. If that sounds like a lot, consider Texas: It lost some $72 million — and that was just in the June order.

“In the last two years, we’ve had rescissions totaling $666 million,” said Randall Dillard, manager of media relations for the Texas Department of Transportation. Dillard said the department’s “federal legislative people” are warning that another $800 million in rescinded spending authority is likely in the next two years.

“How that impacts us is that, together with other factors, it is creating a cash flow problem for our state,” Dillard said. “As traffic worsens in our state, we are fast running out of money for construction.”

Dillard said the crescendo of rescissions is creating uncertainty for Texas highway officials at the same time an alternative funding source is being threatened. State legislators seem ready to pull back from using private sector investment in highway projects such as toll roads. The legislature previously had encouraged the DOT to seek commercial funding of capital projects. But in the last session, lawmakers put a moratorium on private funding of such toll projects.

“We had counted on the ability to draw upon private sector investors to help close the gap between what we need to do and what we can afford,” Dillard said. “But there was a lengthy debate and dialogue last session and legislators decided they wanted to tap the brakes on private investment.”

A final factor in the funding crunch facing Texas — and other states — is the inflated cost of projects. In the last five years, highway construction costs in the Lone Star State have increased 62 percent, Dillard said. “The money just doesn’t go as far as it used to.”

Lessons in the Crisis

As rescission orders pile up, state transportation leaders are learning some valuable lessons about managing transportation budget uncertainty. For one thing, some DOT officials have become more responsive to the public when actual cutbacks are necessary.

In Texas, DOT officials responded to early rescission orders by reducing funding for nontraditional transportation programs, such as biking and hiking trails, historic preservation and beautification.

“The Texas Transportation Commission believes the Transportation Enhancement Program is a wonderful program,” Dillard explained, but commissioners also felt duty-bound to focus on the department’s basic goals of reducing congestion, enhancing safety, expanding economic opportunity and increasing the value of transportation assets.

However, in later rounds of cutbacks, the Texas commission held public hearings on how to respond to the rescissions. Commissioners discovered that de-emphasizing the enhancement category was not popular. So subsequent rescissions have been spread across the board.

Similarly, the Florida Department of Transportation secretary, Stephanie Kopelousos, felt it necessary to write a letter to members of the Rails-to-Trails Conservancy to explain that rescissions would for the most part be absorbed by “surplus” unobligated funds. But in the event real cuts were necessary, she reassured the organization that its pet enhancement project would not fall victim to the cutbacks.

“We are committed to protecting all of our trails projects…,” Kopelousos wrote.

Unlike Texas, Florida transportation officials have not resorted to public hearings. Dick Kane, communications director for the Florida DOT, said hearings have not been necessary “because we’ve been able to hold the work program harmless relative to the rescissions made since the enactment of SAFETEA-LU. If future rescissions result in adverse impacts to the work program, the executive board will have to decide whether to conduct public hearings, or have district secretaries work with their respective local governments to make decisions on which projects are impacted.”

Kane said turning to district secretaries is what the state has done previously on the “rare” occasions when rescissions required actual cutbacks in programming.

State transportation officials also are looking ahead to handle future rescissions. The Texas Transportation Commission each month is raising the issue in its public meetings to ensure that their Texas constituents are kept well informed of the situation in advance of any decisions. Said Dillard: “They don’t want people to be caught off guard.”

John McMahon recalls with evident nostalgia the days when Delaware and federal transportation agencies were “awash in cash.” But that was before the short recession at the turn of this century, which immediately preceded the economic shocks produced by the Sept. 11, 2001, terrorist attacks.

“The economy took an immediate dip,” McMahon recalled. He said the rescissions since then have not had a “traumatic impact” on Delaware’s transportation program. Still, the state’s wish list of highway projects stretches considerably further than foreseeable funding resources.

“But what in the name of goodness can you do?” the contractors association executive said. “No one wants to give federal funds back. But if the money isn’t there to be given to the state, despite the fact that you have anticipated and planned on it, it is not like there is a hell of a lot you can do about it.” CEG

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