By: Paul Schmitz
Most states depend on tax revenues generated from gas sales and tourism to fund necessary infrastructure projects. Due to stay at home orders, many are experiencing a 30-50% drop in revenue, with states implementing stricter rules being hit the hardest. This week we ask our panelists representing national associations and agencies as well as top engineering and contracting firms, and manufacturers for their perspectives on the funding of future transportation projects.
How will the COVID-19 pandemic affect future public and private project funding? (short term 6-12 months and long term > 12 months)
In the past, when state and local governments faced significant fiscal challenges, they continued to match federal funds but cut back on their own transportation spending. A one-time injection of federal funds, like we saw in 2009, may have helped support the market but that was offset by a decline in state and local spending. It took over 8 years for real state highway and bridge spending to reach pre-recession levels after the 2008 Great Recession. Currently, states are grappling with revenue declines and at least ten states have already delayed or cut nearly $5 billion in projects. A sustained increase in federal highway and bridge investment would support real growth and help with a broader economic recovery. When President Reagan increased the federal gas tax by 5-cents-per-gallon in 1983, highway and bridge investment grew at a real rate of six percent per year over the next five years.
Owners of all types are likely to find their actual or projected revenue to pay for construction has been cut severely, and perhaps as well their ability to tap lenders, investors, donors or their own assets. Meanwhile, many will also have unbudgeted expenses they must cover. These factors will cause a drastic cutback in new construction in the short term. Longer-term, state and local projects will rebound if federal funding materializes for infrastructure or for backstopping state/local revenue losses. Most private owners will continue to experience funding difficulties.
We’ve seen local agencies retract within their own budgets, cancelling most capital improvement programs outright or reducing the scope within current programmed efforts. I expect COVID-19 will change this for the balance of the 2020 calendar year. We have not yet seen a reduction of IDOT or Tollway work efforts which comprises a large portion of civil consulting and contractor opportunities.
The pandemic is and will have a short and long-term impact. The transportation funding for the State of Utah comes from three main sources, federal gas tax, state gas tax and the portion of State general funds related to the auto related sales tax. The pandemic has caused a downward trend in the amount of miles driven in the state, which in turn impacts the amount of taxes collected at the pump (both State & Federal). Though this has trended down, the most recent data is showing it has started to rebound. With the amount of unemployment going up due to the pandemic, I'd also anticipate a downturn in the auto related sales tax that the state collects would also trend down.
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Dave Lipomi (Area Director North – Tensar)
In the short term, I think there will be pressure to maintain the safety levels that are set forth by the CDC: face masks where applicable, less face to face meetings, etc. I have heard of some places actually having temperature monitors in offices, or face masks be handed out at sites. This will be an incurred cost from the pandemic that was not originally budgeted. I would think that these costs would remain in the long term, but they may and probably will get relaxed the further we get from the shutdowns. As for how the projects will be funded, I don’t really think that will change. In the short-term, you may see a pullback just because of a reduced workforce. However, in many states this really hasn’t happened in the construction market. I would think, in the long-term, we will see an uptick in these types of projects getting funded because it’s a good way to keep people in the workforce where they are pretty well separated, (i.e. a construction site.) Infrastructure is usually the first place where government money is spent during a recession, so like I said, if this pandemic is prolonged, I would expect a stimulus bill directed at infrastructure.
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Kevin Burke (Executive Vice President – Illinois Asphalt Pavement Association)
In Illinois, public highway construction may see a reduction for 2021 construction. However, long-term outlook is strong due to recent Rebuild Illinois Capital Plan. Private projects are more at risk in the short-term.
In the near term, agencies are working through projects that have already been in development. As revenue shortfalls become reality and with uncertain federal intervention, via stimulus or reauthorization, it is likely states will use their limited revenues to perform agency operations/maintenance, state of good repair, traffic operations, etc. which will likely result in delay or cancelling of planned improvements. Additionally, the longer the revenue impacts continue, and new design and construction projects are not advertised, the greater the impacts to the design and construction industries will be.
In the short-term, we are already taking action to reduce our agency’s budget (derived from sales tax) from $94 million to $80.5 million. This does not include the reduction in State and Federal funding due to the massive reduction in VMT. This creates more pressure to seek out other funding sources to close the funding gaps in our projects. We haven’t figured out the long-term impacts yet because we don’t know the length of time our current SIP order will last, and also how fast the economy will rebound.
We thank our panelists for their thoughts on the future of funding for transportation projects. Next week we will continue the conversation by discussing how a possible infrastructure stimulus bill will impact the economy and where it’s needed the most.
For another perspective, check out the latest Infrastructure Insider podcast, where R&B Senior Managing Editor Brian W. Budzynski speaks with former Federal Highway Administration Chief Counsel Fred Wagner, who served under the Obama Administration, about the present state of federal infrastructure overtures and the likelihood of a bill satisfying the House, Senate, and White House before the FAST Act expired on Sept. 30 of this year.
About The Author: Schmitz is Market Manager for Public Roads at Tensar.
