Transportation at the Crossroads

Southeast’s Top Highway Contractors to Face Funding Issues Down the Road

By Scott Judy

When Minnesota’s Interstate 35W bridge collapsed last year, to the transportation industry it was more than just a symbol of the nation’s failing infrastructure system. It was a fatal and unfortunate example of the industry’s inability, despite its many warnings, to secure adequate transportation investments.

Since that fatal accident, however there have been more questions than answers. Numerous revenue challenges have emerged or escalated, including increased construction costs, declining revenues and a pending deficit in the federal highway trust fund starting in 2009.

Gas Tax

As the price of oil skyrocketed and gas prices headed for $4-per-gallon territory, the status of the nation’s infrastructure funding again became headline news. Presidential candidates John McCain and Hillary Clinton touted various forms of a federal gas-tax holiday for the summer, while Barack Obama shot back as being against it. Meanwhile, state politicians, such as Florida Gov. Charlie Crist, followed suit with their own proposals.

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The American Road & Transportation Builders Association, Washington, D.C., quickly voiced its opposition, citing a potential $7.1 billion hit to the federal highway trust fund – including impacts of approximately $942.7 million to transportation departments in the four-state Southeast Construction region.

The proposals were widely viewed as political rhetoric, say transportation industry officials in the Southeast.

“There aren’t many things I agree with Sen. (Barack) Obama on, but he certainly nailed that one right on the head,” says Robert Burleson, president of the Florida Transportation Builders Association in Tallahassee. “I respect the fact that he was willing to stand up and say that.”

At the same time, as the cost of driving goes up and people cut back, the gas tax is increasingly viewed as an out-of-date revenue stream.

“With the sharp increase in fuel prices, it will be next to impossible to raise the gas tax in the current political climate,” says Pete Kelley, vice president of Florida operations for Superior Construction Co. of Jacksonville, Fla. “That being said, the current system of funding infrastructure is obviously outdated.”

“We’ve got to figure out a way to increase federal collections,” adds FTBA’s Burleson. “Everyone recommends an increase in the federal gas tax. Short-term that’s the proper answer. Longer-term, the answer’s going to be to switch to a system that charges people based on miles driven.”

Berry Jenkins, who heads up the North Carolina heavy-highway division of Carolinas Associated General Contractors, also expects a change in funding streams.

“The gas tax as our (future) base funding mechanism probably is not going to be how it’s done – or at least it’s not going to be as heavily relied upon,” he says. “We’ll probably have to track how many miles people travel and have them pay a rate based on that. The problem is going to be the political will to do that.”

Future Funding Hurdles

The industry is currently facing other, more immediate problems, though. With the increased price of oil, the costs of transportation construction materials are straining DOT budgets and putting contractors at risk.

“The cost of materials and supplies has gone up tremendously,” says Steven Parks, executive director of the Georgia Highway Contractors Association in Duluth.

“It’s certainly putting a heavy burden on the contractor right now, and the time and the ability of government to put projects on the street and manage those projects.”

The situation is dire in South Carolina, says Sammy Hendrix, who oversees the Carolinas AGC’s heavy-highway division for that state.

“Construction prices are high and not coming down, which is having an effect on what few projects the SCDOT is letting,” he says. “Resurfacing projects are not as large because the cost of asphalt and aggregates are increasing monthly. SCDOT is coping with this problem and private owners are cutting back and hoping miracles will happen.”

In North Carolina, CAGC’s Jenkins estimates that inflation costs are impacting the state transportation budget by about 10-15% per year.

“A lot of suppliers can’t guarantee their prices to the general contractors for more than 30 days,” he says. “It’s increasing the risk that contractors are having to take to bid the work and getting paid for what they do. It’s more pronounced for a lot of the smaller subcontractors – they just don’t have the wherewithal to build in any kind of inflationary fuel price into their bids as much as they should.”

In Florida, despite the increased costs of materials, the Florida Department of Transportation is seeing its funding cut, as the state continues to experience a massive revenue shortfall due to the housing downturn.

Burleson says the state cut approximately $300 million from FDOT’s construction program in its most recent legislative session – and it could’ve been worse.

“We’re certainly not happy with it, but it’s a whole lot better than it could’ve been,” he says. Burleson explains the funding came from a source of revenue that had been tied to state growth and based on documentary stamp fees associated with housing sales. That funding source had been added several years ago, and provided approximately $540 million per year to FDOT’s budget.

The $300 million cut won’t necessarily be automatic again next year, but if housing continues to struggle, this source of funding could remain limited.

Overall, says Burleson, future state funding “is going to be a battle for years until we really figure out what it is we want state government to pay for.”

He adds that FTBA is putting forth proposals to raise tag and title fees, among other ideas.

In Georgia, where transportation construction has been booming in the last few years due to the state’s Fast Forward bonding program, Parks says the industry is nevertheless experiencing the same stresses.

“The dollars we have will not do the same amount of projects that we’re accustomed to doing,” he says. “That (means) things like resurfacing programs, where historically they have tried to do 10% of the system per year, are now down as low as 3% to 4%.”

Additionally, Parks says Fast Forward “has been the biggest victim of cost escalations and advanced construction practices that got us behind the curve. We’re roughly six years into the program and there’s still a lot of work left to do.”

In North Carolina, Jenkins sees the same hurdles but is more optimistic due to efforts currently under way to eventually enact a bonding program of $2 billion to $5 billion by as early as next year.

“I am much more optimistic that in ’09 we will have the ability to leverage a fairly significant bond program, subject to a vote of the people,” he says. “There’s enough momentum and enough recognized need for some investment in transportation that the public can be convinced.”

In South Carolina, Hendrix is considerably more pessimistic.

“I do not see funding in South Carolina doing anything in the next few years, which is absolutely going to be disastrous for roads and bridges that are in need of repair,” Hendrix. “We are in bad shape and getting worse. Many roads and bridges eventually will have to be posted or closed. The clock is ticking.”

Parks, with GHCA, says the longer-term picture is filled with big questions.

“Into 2011 and beyond, what will happen with the trust fund? What will happen with local funding? That’s the biggest problem in the industry right now – the uncertainty. We know ‘09’s going to be tough, but what are 2010 and 2011 going to do?”

Adds Jenkins, “We have some challenges, but I don’t think we need to throw in the towel.”

Top Highway Contractors

Following is Southeast Construction’s annual ranking of highway contractors in the four-state region. Like other company-based rankings, the list is based upon information that the firms provided through a survey form. Firms listed here submitted their revenue information. It is based upon transportation-related revenue that was generated from the four-state region.

To be listed in next year’s Top Highway Contractors ranking, contact Scott Judy, editor, at scott_judy@mcgraw-hill.com.