Where’s the Stimulus?

Tue July 21, 2009 - National Edition
Giles Lambertson




The $787 billion American Recovery and Reinvestment Act of 2009 has not stimulated construction activity in a huge way, but it has had positive impact on the industry. President Barack Obama counseled patience in a weekly radio address in July.

“The Recovery Act was not designed to work over four months — it was designed to work over two years,” the president said. He noted that the legislation proposed by his administration and rushed through Congress in February was intended to “stop the freefall,” “spur demand” and “save jobs and create jobs … We must let it work the way it’s supposed to.”

That, however, is the problem. Five months after enactment, the stimulus package is working pretty much the way most people believed it would work — supporters and critics alike. Which is to say, the stimulus bill is sort-of working … and sort-of not.

In the second half of 2009, the economic initiative’s numbers are expected to improve as more funded projects come on line. Yet concern about mounting federal deficits may slow longer-term economic growth.

As for creating jobs, even the president acknowledges unemployment will continue to rise into double-digit territory before it begins to recede. June’s construction unemployment rate was 17.4 percent, not seasonally adjusted, according to the Bureau of Labor Statistics, with total job losses over the past year standing just shy of 1 million.

The value of the Recovery Act to construction activity is conceded by most observers. A Government Accountability Office report this month suggests some reasons why the initiative has not been more valuable.

Shovel-Ready

When the package was proposed, the key term coined to promote infrastructure funding was “shovel-ready.” The idea was that a large number of project owners were ready to move dirt and only awaited an infusion of cash before shouting to contractors, “Gentlemen, start your engines!”

The start-up targets thrown around in January were 90 days and 120 days hence, suggesting there would be a burst of diesel emissions across the country in May and June as contractors started work. However, the final version of the Recovery Act didn’t require dirt to be moved in 90 days or 120 days. Rather, the legislation stipulated that the funds were to be obligated in 120 days. That is a much slower standard.

The GAO determined this month that each state met the 120-day deadline for obligating at least 50 percent of its share of the stimulus money. The rest of the money must be obligated within one year. However, obligated money is not contracted money. Months can pile up between obligation of funding and its contracted disbursal.

Case in point: North Carolina was awarded $735.5 million in stimulus funding for highways and bridges. As of June 30, $309 million had been earmarked for 55 projects; of those, 33 projects ($200 million) were under way. However, the GAO reported that the state has asked for just $4 million in stimulus fund reimbursement, which indicates how much money actually has gone out the door to contractors.

Dr. William Buechner is nonetheless impressed.

“I don’t know how many projects are under way. The Federal Highway Administration says 2,000 projects are and that is a pretty good achievement,” said Buechner, who is vice president of economics and research at the American Road and Transportation Builders Association.

“We track how the money is flowing. It’s hard to get a lot of construction work moving in just four months, but every time we look at the figures, the amount of money paid to contractors has gone way up. We seem to have a pretty steep curve on getting out the money. Things seem to be going at a pace you can’t complain about too much.”

The pace actually has proved too fast for some administrators; they failed along the way to meet all the Recovery Act requirements for spending the money. In some cases, the failure seemed willful.

The Act requires that spending priority be given projects that can be finished in three years and are located in “economically distressed areas,” as determined by income and unemployment data. Many states concentrated on the “shovel-ready” criterion and only later adjusted their priorities to meet the economic distress requirement. Other states, such as Pennsylvania, simply went their own way and argued that their choices made more sense in terms of job creation. Still others spread the money around a state equitably before giving priority to economically distressed areas in each locality.

GAO administrators are not impressed with the shows of independence. They told federal transportation officials in their July report that the states are playing loose with the rules. In response, transportation officials equivocated, agreeing that while rules had been bent, local DOT officials had leeway to “balance all the Recovery Act project selection criteria.”

Some other states fashioned their own criteria for economic distress. Arizona transportation officials, for example, alarmed that the state’s three largest metropolitan counties did not qualify as economically distressed, formulated their own criteria that incorporated the three counties. Similarly, Illinois officials tweaked the criteria until 21 counties were included that would not have been.

“In each of these cases,” GAO investigators concluded, “it is not clear on what authority the Federal Highway Administration approved these criteria.” Department of Transportation officials responded by saying that “it is appropriate to interpret the requirement … flexibly.” Evidently not persuaded, GAO officials said they will continue to monitor and report on these local interpretations.

Quite clearly, the speed at which the stimulus bill was enacted, coupled with its size and the urgency with which the administration has pushed it, created numerous opportunities for state transportation officials to flex requirements to their advantage — and they didn’t hesitate to do so.

The ultimate impact on contractors of this freelancing is unclear. Buechner did suggest that how state DOTs manage the stimulus money will have some bearing on future funding decisions in Congress. He called it a “kind of dress rehearsal for a substantial reauthorization of the highway program. The DOTs are showing they can handle a significant increase in federal highway funds — and we do need a significant increase in funding.”

Easiest Projects First

In framing the stimulus package as an initiative to “stop the freefall” and “spur demand,” the president encouraged the notion of a quick fix for a suddenly collapsing economy. Yet he also touted it as a jobs saver. This twin focus opened the door for Congress to incorporate into the bill lots of bailout money for struggling state governments and additional subsidies for education and unemployment programs.

Sad to say, the area of economic activity that, once primed, held the most promise of having an immediate positive impact — that is, infrastructure funding — ended up with less than a $30 billion slice of a $787 billion pie. Pressed to spend the money quickly, most state transportation officials looked for — and found — a quick and easy place to dump it: potholes.

As of late June, more than half of the infrastructure money obligated by state DOTs has been for paving projects — resurfacing of existing roadways or construction of new roadways. In Florida, nearly half of its allotment of money was spent on widening highways.

While this is consequential work, it is not necessarily the most urgently needed work. The public clamor for several years has been about deteriorating bridges, as vividly illustrated in the collapse in 2007 of the interstate span in Minneapolis. The stimulus spending pattern does not reflect this national urgency.

According to GAO auditors, just 10 percent of infrastructure money has been obligated for bridge repair or replacement. It is easy to see why. The need to expend allotted dollars relatively fast works against bridge projects, which generally require complex environmental and design consultations. Some already designed and environmentally approved bridges did not qualify for stimulus funding because they could not be completed in the required three years.

So bridges got short shrift. In Cleveland, Ohio, the Innerbelt Bridge carries Interstate 90 traffic and local commuters across the Cuyahoga River. The 50-year-old structure is shifting on its foundation and otherwise threatening to fall. Officials hoped stimulus money would help pay for a five-lane replacement span, which has been on the drawing boards for years, and announced the Innerbelt Bridge replacement project would receive $200 million.

Then the officials had second thoughts. Worrying that committing to such a long-term project would jeopardize their stimulus funding, they ended up allotting just $85 million to the bridge and the rest to shorter-term projects.

“The state DOTs know what their needs are,” Buechner said in defense of such decisions. He reiterated that the need to spend the money quickly sometimes precludes other considerations. “It may not be an ideal mix of projects but they still have another $1 billion to obligate and you might see a change in the mix in the future. Just as long as they are getting out projects and putting people back to work, that’s what we are looking for.”

In a New Jersey bridge project, transportation officials are earmarking $70 million of the state’s $652 million infrastructure allotment for building two Ocean City spans and some adjacent infrastructure. This last phase of the Route 52 causeway project began three years ago and has a price tag of $251 million.

The project showcases another trend: The winning bid on the bridges came in a full $15 million less than the New Jersey DOT had anticipated. This squares with GAO bidding data. Auditors report that bids on projects funded by stimulus money are coming in from 5 to 30 percent below contract estimates, a sure sign of contractors desperate for work.

Supplement or Supplant

One of the provisions for infrastructure spending in the Recovery Act is that the stimulus money not be subbed for a state’s own funding, resulting in no net gain in funds for highways and bridges. The federal money is supposed to add to the overall construction effort.

This guideline to augment funding pools is applied unevenly in the stimulus package. For example, many states are using their stimulus allotments for health and human services and for education to maintain programs at an existing level rather than to add to them. While this causes consternation among constituents, it has proven difficult to stop. Numerous states have cut their education funding by an amount equal to their stimulus allotments.

Typically, states also supplant local infrastructure funding with federal money. “We have found the preponderance of evidence suggests that increasing federal highway funds influences states and localities to substitute federal funds for funds they otherwise would have spent on highways,” the July report declared in a finding going back two decades. Therefore, “substitution makes it difficult to target an economic stimulus package so that it results in a dollar-for-dollar increase in infrastructure investment.”

Difficult or not, GAO bookkeepers are trying to hold states to the stimulus package guidelines. States are required to show steady local funding effort during and after the infusion of federal funds. While nearly all states have dutifully certified that they will only augment their budgets with the federal money, some certifications included hedging phrases, such as “based on the best information available at this time.” GAO and federal transportation officials have pressed for more assurances.

Buechner said he believes his office sees evidence that the federal money indeed is being added to the pot without a loss of state money. In tracking the awarding of new contracts around the country, Buechner noted that awards in May totaled some $6 billion.

“That compares with $5.2 billion in May of 2008, the first month in a year or more when the current awards were above the same month the previous year,” he said. “That is not concrete evidence, but it certainly is suggestive. I can’t say for certain that is the result of the stimulus. But what you would expect — if the stimulus is adding to what states are doing — is just this kind of increase in total value of new contracts.”

Dave Wise, a director of GAO’s physical infrastructure team of auditors, is impressed by what the New Jersey Department of Transportation is doing to show its handling of the federal money. Its accountants are clearly separating stimulus money from state tax revenue, which apparently is an innovation.

“In terms of accountability, transparency is one of the most important things. When I spent time with people in the New Jersey DOT office to determine if they have existing procedures to account for stimulus money, I learned they are adding another column to track how stimulus money is spent. If they use the money for bridges, for instance, it will be noted separately.”

Asked about the potential for pockets of scandal in the midst of so much transferring of money nationally, Wise acknowledged the obvious. “It is always possible. We are in the early stages with this. There has been lots of money obligated but not a lot spent.”

The most pressing GAO task at this point is to work up bimonthly reports for Congress, keying on 16 states and the District of Columbia. Wise said state officials have been very accessible and cooperative with GAO examiners.

“We are looking at controls so far. That’s about as far as we have gotten because that’s as far as the money has gotten. At some point, we will begin to follow the money.” CEG