Budget Squeeze for Transportation

Roads across the country are under strain due to growing congestion and years of insufficient investment in maintenance. The American Society of Civil Engineers has graded the overall condition of the nation's infrastructure a "D," and predicts that $200 billion per year must be spent to maintain and improve the quality of the nation's roads and bridges.15 This level of investment will put a tremendous strain on state budgets, already experiencing short-falls due to declining revenue.

Part of the problem is perverse rules that discourage investment in maintenance while encouraging construction of new roads.16 For example, in Massachusetts, the funds for highway maintenance come from the Department of Transportation's budget, while money for major repairs is taken from the Division of Capital Asset Management, a separate agency. This set-up clearly creates an incentive for the department of transportation to under-invest in road maintenance, because a separate agency will be responsible for repairs.17 Additionally, even when federal funds for maintenance are provided, public officials often divert them to the construction of new roadways, as a ribbon-cutting ceremony tends to carry more political weight than maintenance projects. The result is deferred maintenance which necessitates expensive repairs in the future.

State governments today face immediate budget crunches due to rising health, pension, and unemployment costs, coupled with declining revenue. State legislators, who have already closed $40 billion in budget gaps, face an additional $131 billion shortfall between now and the end of the 2010 fiscal year.18 According to William T. Pound, executive director of the National Council of State Legislatures, "These budget gaps are approaching those seen in the last recession, which were the worst since World War II, and show every sign of growing larger."19

Rising costs and declining revenues limit states' ability to use general revenue funds to address transportation needs. Meanwhile, gas taxes, the traditional mainstay of transportation funding, have not kept up with inflation. For example, states' gas taxes lost 43 percent of their value during the 1970s, 80s, and 90s.20 The federal gas tax, last increased in 1993, has done only slightly better. To complicate matters, Americans have begun to drive less in the past year, further reducing gas tax revenue.

Furthermore, over the past few years, construction costs have been rising due to rapid inflation in the price of construction materials and the increased consolidation of the construction industry. Though the recent financial crisis has led to a deflation in construction costs, the historical trends have contributed to the current shortfall in transportation budgets. Over the past five years, the cost of materials for highway and street construction, as measured by the Producer Price Index (PPI), has increased by 63 percent, a rate far higher than the general rate of inflation over the same period.21 In particular the cost of crude oil has led to very high costs for asphalt and diesel, two of the most basic construction materials used in highway and street construction.

While material costs have been increasing, the number of bids that states receive for contracts has been decreasing. While not as significant a factor as the cost of materials, there has been a noticeable trend among states indicating that fewer contractors are responding to requests for proposals. According to a survey of the nation's state transportation agencies, the reasons for this include 1) increased consolidation; 2) increased work with the same number of contractors; 3) downsizing of the construction workforce; and 4) increased technical requirements in contracts.22 As fewer contractors respond to competitive bid requests, states will be limited in their choices to find the best contractor for the lowest price, and prices will increase. Over time this could become a more serious factor behind highway construction cost inflation.

As a result of revenue shortfalls and historically rising costs, states are increasingly unable to build and maintain high-ways at traditional levels. According to the American Association of State Highway and Transportation Officials, the federal Transportation Trust Fund, used for state and local projects, is projected to run into shortfall during 2009 and will need to re-duce payments by 42 percent the following year unless new revenues are obtained.23 Many state-level transportation trust funds are also forecast to run into shortfall incoming years.24

In the context of great investment needs and stagnant revenues, the huge upfront payouts of toll road privatization have obvious short-term appeal.