Raids on Highway Funds Abate … For Now

Mon October 17, 2005 - National Edition
Pete Sigmund

The fiscal crisis has abated for most states, increasing opportunities for contractors. This is a significant turnaround from as recently as early 2004 when fiscal uncertainty held back numerous highway and bridge projects.

Some states were even “raiding” their transportation trust funds, transferring millions of dollars to general revenue (when allowed by their state constitutions) in order to meet the mandate of their constitutions that they always balance their budgets.

The turnaround has occurred in the past 18 months, especially since last January, as revenues from personal income taxes, sales taxes and corporate taxes increased significantly.

(The Gulf States, impacted by Hurricanes Katrina and Rita, of course do not share this fiscal sunshine. The expense of rebuilding infrastructure in Louisiana, for instance — including roads, bridges, transit systems, levees and traffic control systems — is estimated at 10 times the Louisiana Department of Transportation and Development annual budget of $2.3 billion. Louisiana may have to dip into state funds set aside to match federal money unless it immediately receives $100 million in cash from the federal government.)

Budget Experts Say It’s So

Experts on state budgets told Construction Equipment Guide (CEG) that the fiscal situation for most states is much improved from the past three or four years. This is seen as a very positive portent for the construction industry.

“States were hit by the decline in economic conditions, including the drop in the stock market and the technology sector, from 2000 until a turnaround in 2004,” said Greg Von Behren, staff associate of The National Association of State Budget Officers (NASBO) in Washington, D.C. “It became a domino effect as they were also hit by a decline in personal income taxes. States pulled themselves out of it by making big budget reductions. Some drew from their transportation funds to carry general fund expenditures. Then the economy improved so states could cover some of their costs. State revenues and budgets are much better than in the past.”

Arturo Perez, fiscal analyst of The National Conference of State Legislators (NCSL) in Denver, CO, told CEG that states started coming out of their dire straits in July 2004, and that revenues “really started to gain traction, and outperform projections, in the current calendar year.”

“So far, 2005 has been a relatively good year for state finances, with improved performance across all fronts on the revenue side,” he said. “Much of the good news is increased revenue from personal income taxes and general sales taxes, which account for about one-third of state revenue. Corporate income tax collections have outperformed the amounts built into their budgets. As for gas taxes, if anything, they have brought some positive growth.”

Transferred Highway Funds to Cover Shortfalls

Industry observers said that some states dipped into their transportation funds to balance their budgets during the down years but that none seem to be doing that now.

According to Bill Buechner, vice president for economics and research of the American Road & Transportation Builders Association (ARTBA) in Washington, D.C., an ARTBA survey of state laws and constitutions indicated that approximately 30 states had some sort of constitutional protection against such fiscal transfers.

“They require that gas tax revenues, and maybe other revenues as well, be used only for highways and bridges,” he said. “Some states have interpreted that to also include state highway patrols. Even there, you can only put so much stuff under the rug.”

Federal highway funds can’t be touched, except for some flexibility in using approximately $1 billion each year for subsidizing mass transit construction or operations.

Buechner said California two or three years ago passed a law protecting its highway funds “but then worked out exceptions that allowed the governor to dip into it for two years; he transferred $1.3 billion to the general fund in the October 2005 budget but said he would not do that again in 2006.”

Other states, which have used transportation funds for other purposes include Maryland, Wisconsin and Michigan.

“The recession caused some states two or three years ago to shift money available from gasoline taxes into general funds to keep from running into red ink and violating their own constitutions,” said Jennifer Gavin, a spokesperson of The American Association of State Highway & Transportation Officials (AASHTO) in Washington, D.C.

“They had to find money, so periodically some would raid their own pots of money from the state gas tax, which at that time was pretty stable because people still had to drive. Then, after the raid, there is usually movement within the legislature the following year saying we really shouldn’t have done that. You’ll see legislation produced, sometimes successfully, to build a firewall around the fund.”

Commented NCSL’s Perez, “Most states have a lock box on their transportation funds, but a few did tap into these funds, which would otherwise have funded highway or bridge projects. It’s not surprising that some did this the same way they tapped into other state funds in what was regarded as fund sweeps.

“To my knowledge, no states are now doing this because the need to do so has been alleviated over the past year as the revenue picture has brightened. The more their revenue base improves, the less states are inclined to pursue these other one-time actions to try to balance their budgets.”

NASBO’s Von Behren concurred. “I don’t know why any states would raid their transportation funding now,” he said. “The new federal reauthorization bill has been passed and revenues are better.”

States Explain

CEG contacted several states that used transportation funds for other purposes. Each explained unique situations.

“Yes, most recently in 2003 we transferred $300 million from our Transportation Trust Fund to the General Fund to help address a $1.5-billion deficit, which Gov. Robert L. Ehrlich Jr., inherited from the prior administration,” said Jack Cahalan, a spokesperson of the Maryland Department of Transportation (MDOT) in Baltimore, MD.

“Since then, the governor has made very aggressive efforts to replenish the fund, including repaying $50 million in 2004, with the balance of $250 million to be repaid in 2005. He also introduced a transportation funding bill, which the legislature passed. This generates an additional $238 million each year.”

Cahalan pointed out that revenue sources are not inflation-sensitive and that previous administrations had not added new funding in 12 years.

“Maryland did dig into its trust fund but I think they have revived,” said Cal Coblenz, executive director of the Maryland Chapter of the Associated General Contractors (AGC). “This year they have come up with funding that is real good for highway construction. This year I think things are looking very favorable for us. This governor has come up with innovative ideas that are helping the highway industry.”

Michigan’s legislature took $10 million from its Comprehensive Transportation Fund (CTF) in each of the past two years, using it to balance its General Fund budget.

“We have a constitutional mandate that we must use our State Trunkline Fund [STF], which is basically for highways and bridges, only for transportation purposes,” said Ben Kohrman, director of communications of the Michigan Department of Transportation (MDOT) in Lansing, MI. “The mandate, however, does not apply to the CTF, which is for transit, and the legislature took advantage of that fact.”

Peg Schmitt, a spokesperson of the Wisconsin Department of Transportation (WIDOT) in Madison, WI, told CEG that the state’s last biennial budget, for 2005 to 2007, included provisions for transferring funds from the Transportation Fund for other purposes. This is allowed by the state’s constitution.

“The bulk of the money went for transportation purposes at other agencies, like funding school bus transportation,” she said. “A lot of that was backfilled [replaced] in the fund by bonding. There were no program reductions necessarily; in fact, I think we had increases in almost all our programs.”

Casey Newman, director of The Office of Policy, Budget and Finance for WIDOT, said Wisconsin’s legislature transferred $427 million from the state’s transportation fund for the 2005 to 2007 period, replacing $250 million of that with general obligation bonds primarily for funding highway rehabilitation.

“The debt service for that is paid with general revenue, so there’s no impact on the transportation fund,” he said, adding that “our revenues have increased, but they are slightly below projected amounts.”

Still Many Concerns

States still have a lot to worry about. Not the least is coming up with the matching funds for federal dollars. They also have to contend with proposals to abolish their gas taxes in order to relieve taxpayers, proposals to increase the tax in order to reduce the deficit, and the constant battle to meet the mountain of highway and bridge needs.

“We are not out of the woods yet, but not so deep in the forest as we might expect,” said Wisconsin’s Newman.

“We have a huge challenge — roughly 40,000 miles of state-maintained highways and 25,000 bridges,” said Rich Kirkpatrick, a spokesperson of the Pennsylvania Department of Transportation (PennDOT) in Harrisburg, PA. “In addition, some of our 30-cent state gas tax money underwrites what local governments pay to support their system, which is roughly 70,000 miles.”

Pennsylvania has a dedicated Motor License Fund, which can only be used for highway and bridge purposes, including the cost of the state highway patrol.

“We have never been in danger of not meeting our matching funds since the 1970s, and we never want to go back to that situation when we paid so much for debt service and overhead that we virtually had nothing for matching federal dollars,” Kirkpatrick said. “We’re still digging out from that 40 years later.”

In New Jersey, a Blue Ribbon Commission Report in November 2003, warned that “the ability of the TTF [Transportation Trust Fund] to provide its share of necessary funding will be lost in 18 months” and proposed a pay-as-you-go system instead of the huge burden from bonding.

“If no new revenues are made available to the TTF by Fiscal Year 2006, its capacity to generate revenue will evaporate completely,” the commission declared.

Asked about New Jersey’s trust fund, Erin Phalon, acting director of communications for the New Jersey DOT in Trenton, NJ, told CEG, “We have enough revenue to fund our transportation capital projects through Fiscal Year 2006. They are partially funded through the sale of new bonds. We also are meeting our full matching commitment. Beyond Fiscal 2006 we will need a new revenue source.”

Commented Michigan’s Kohrman, “There has been talk in Michigan about a proposed increase in our 19-cents-per-gallon gas tax, but this administration does not favor such steps. Our job is to do the best we can with the money we have, and get as much money as possible from D.C.”

Kohrman said Illinois and Indiana had taken action during the last decade to suspend the sales tax on gas.

“Ironically, the price was far below what it is now and the suspension reduced revenues,” he added.

As far as federal funds are concerned, there’s not much leeway. Funding from the new highway bill must be used for highways, bridges, transit or related projects.

“The new law provides $100 million per year for emergency repair work,” said ARTBA’s Buechner. “This money comes from the Highway Trust Fund, but any additional amounts will have to be appropriated from the General Fund.” CEG