Feature Article: The coming hangover
| March 01, 2010 |
Does the road up Stimulus Mountain dead end at a cliff?
By John Latta
The Federal Highway Administration says in January that it had authorized $23 billion in projects under the year-old American Recovery and Reinvestment Act (ARRA). The agency says that almost $5.6 billion in stimulus funds has been sent to states to repay them for materials and labor on highways and bridges. FHWA also says it is working to get $15 billion in projects currently under construction underway.
The American Association of State Highway and Transportation Officials (AASHTO) says more than 12,250 transportation projects are underway as a result of stimulus funding. According to AASHTO, state DOTs have “set an amazing record of speed and efficiency” in putting stimulus dollars to work. In doing so states have stretched the funds far further than either Washington or state capitals expected them to go. “With bids running as low as 30 percent below estimate,” says an AASHTO study called Projects and Paychecks, “states stretched federal dollars even further, creating more jobs and more miles of improvements. California, Georgia and Texas awarded more than 90 percent of their highway contracts below original cost estimates.”
The Projects and Paychecks report says as of January 7 a total of 1,125 bridges had been improved or replaced, 21,400 miles of pavement had been resurfaced or widened and 1,700 safety traffic management projects had been put in place using stimulus funds.
Secretary of Transportation Ray LaHood has blasted criticism that the administration’s economic stimulus package was ineffective. “The stories that have been written that it hasn’t created jobs is baloney,” LaHood said. Recalling visits to ARRA-funded construction sites he bristled, “I see orange cones and orange barrels all over your communities.”
“Projects and Paychecks proves just how big a role stimulus is playing to keep Americans working,” said John Horsley, AASHTO executive director. “In January, state DOTs identified more than 9,800 additional ‘ready-to-go’ projects worth $79 billion. Congress needs to move quickly to pass another Jobs Bill. This study proves transportation projects can deliver hundreds of thousands of jobs for America,” Horsley said.
But money from ARRA will run out or largely be exhausted by the end of this year. States are facing a worrying few months because without help from Washington the end of those funds could trigger more disturbing budget cuts.
Construction industry management consultants and investment bankers FMI says “most ARRA funds were viewed by state governments as fiscal relief, and implemented as a stop gap measure resulting in artificial inflation of highway construction spending set to rapidly deflate in later 2010 and 2011. The coming hangover as funds dry up will be exacerbated by completion in 2010 of the bulk of ARRA-sponsored transportation projects, increased state budget deficits, the delayed passage of a new federal highway bill and the continued slow economic recovery.”
Without congressional intervention, FMI “foresees a dramatic drop-off in highway construction spending and other infrastructure-type projects once the stimulus wave passes.”
“ARRA, overall, had been, the great unsung hero of the past year.”
— Christina Romer, Chair of the Council of Economic Advisers
Affected projects would not just be jobs paid for with stimulus funds. ARRA funds did not apply to local roadways, but states were able to use those funds for big projects they might otherwise have paid for and then use the freed-up local funds for such road work. But any federal money destined for big or small roads, including ARRA funds, takes time to reach state coffers, and because of this built-in delay, according to FMI, “lengthier projects are overlooked in favor of short-term projects for which funds can be captured quickly. The real effect is that ARRA had been used as a crutch to perform vital upgrades and state financial woes merely postponed until tomorrow.”
Without ARRA then, state budget deficits could rise radically and quickly.
“Unfortunately, big state deficits are expected to continue through state fiscal year 2012 — that is, for another 18 months or so after 2010 ends, “according to the Center on Budget and Policy Priorities.“ If states do not receive additional federal assistance beyond the scheduled expiration of such aid, they will be forced to institute further deep budget cuts and/or substantial tax increases.” States must plan now for that uncertain future.
The Center worries that about this immediate scenario:
States are taking steps now to plan their budgets for state fiscal year 2011, which starts on July 1, 2010 in most states. Governors will send their budget proposals to their legislatures between next month and February 2010 in almost all states. The legislatures will have to pass budgets as early as March or April in some states and by the end of June in almost all states. If states do not know they will receive additional federal fiscal relief, they will begin implementing new budget cuts and tax increases by this summer, at the latest.
ARRA money has limited, to varying degrees, state budget cuts. But once the cutting picks up and is accompanied by layoffs, tax increases, higher fuel excises, the measures used to try and balance state budgets become themselves drags on economic recovery.
Christina Romer, chair of the Council of Economic Advisers said in the council’s “Economic Report of the President for 2010” that ARRA, overall, had been, “the great unsung hero of the past year. It has provided a tax cut to 95 percent of America’s working families and thousands of small businesses.” The Council of Economic Advisers, an agency within the Executive Office of the President, is charged with offering the President objective economic advice on the formulation of both domestic and international economic policy.
“It has meant the difference between hanging on and destitution for millions of unemployed workers who had exhausted their conventional unemployment insurance benefits,” said the council’s report. “It has kept hundreds of thousands of teachers, police, and firefighters employed by helping to fill the yawning hole in state and local budgets. And, it has made crucial long-run investments in our country’s infrastructure and jump-started the transition to the clean energy economy. All told, the Recovery Act has saved or created some 1½ to 2 million jobs so far, and is on track to have raised employment relative to what it otherwise would have been by 3.5 million by the end of this year. When the political rancor of the moment passes and dispassionate analysis is done by experts, I have no doubt that the American Recovery and Reinvestment Act of 2009 will be viewed as one of the great triumphs of timely, effective, countercyclical macroeconomic policy—just exactly the type of policy the Employment Act of 1946 was designed to facilitate.”
Whatever happens, says FMI, “highway contractors will likely face continued volume and profit slumps as well as sharp competition in the coming years.” Searching for a silver lining, the consultant company says “challenging economics provide the opportunity for companies to reconsider their firm’s organization and focus. Restructuring may include taking on activities such as consolidating operations, reducing overhead, replacing executives and applying traditional company strengths on emerging markets or acquiring firms that complement existing construction capabilities. A reduction in backlog drives companies to innovate and create new business opportunities and partnerships that provide work they never would have realized otherwise.” v
AASHTO’s one year review of ARRA: The basics.
On February 17, 2009, the American Reinvestment and Recovery Act was signed into law, releasing $48 billion to jumpstart the nation’s flagging economy and rebuild our aging transportation systems. One year later, state transportation departments have set an amazing record of speed and efficiency, providing tens of thousands of jobs and billions in paychecks to American workers.
Within 11 months of funding:
• More than 7,000 highway projects are under construction and nearly 2,000 are completed;
• Improvements are being made to more than 24,000 miles of highway and more than 1,100 bridges;
• 700 transit projects have been approved, from new buses to track repair and new transit centers; and
• Transportation construction was up more than five percent than in the previous year, with 70 percent of transportation construction firms receiving ARRA contracts.
States have proven their commitment. Examples from every state offer a look at what has been accomplished. Projects of every size and description have been created – providing long-lasting results that have already:
• Upgraded aging bridges and highways
• Improved safety
• Reduced potholes and road hazards
• Reduced congestion and improved traffic flows
• Expanded options for bicyclists, pedestrians and transit users
• Enhanced the environment.
From the AASHTO report “Projects and Paychecks: A One Year Report on State Transportation Success under the American Recovery and Reinvestment Act
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