State road construction industry seeks funding certainty

The road construction industry is closely following deliberations in Lansing on a permanent funding solution in Michigan.

 

LANSING — Thirty years ago, Michigan’s road-building industry was flush with new gas tax money amid a construction boom that nearly tripled in size in as many years.

Today, lawmakers pay for road projects by scraping together general fund dollars on an annual basis, since gasoline taxes aren’t enough to meet current maintenance needs. The diversion of money from other state departments has been a bandage solution while the legislature negotiates a long-term revenue stream.

The cyclical nature of road funding could come back around to abundance, some in the industry say, depending on what the legislature decides on roads.

Top lawmakers are meeting with Gov. Rick Snyder to find a compromise on roads after the House and Senate put forth proposals relying on different amounts of current and new money, but they haven’t reached a deal.

The lack of a permanent funding fix has created uncertainty, to the point that contractors hesitate to hire or invest in equipment worth millions of dollars because they can’t count on projects beyond a single year, state transportation administrators and lobbyists for the road construction industry say.

A mid-80’s boom

On Sept. 23, 1985, Crain’s reported that increased federal and state gasoline taxes in 1982 directly contributed to new construction companies entering the road and bridge business, while other firms returned to Michigan after leaving to work on projects in other states during the recession of the early 1980s.

In the 1985 fiscal year, the Michigan Department of Transportation planned to award $410 million in contracts for road work eligible for federal funds — roughly $914 million in today’s dollars.

That was nearly three times more than the $146 million in road contracts MDOT awarded in 1982. The contracts followed a federal gas tax increase from 4 cents per gallon to 9 cents and a state tax hike of 4 cents per gallon that same year, according to Crain’s.

There are parallels, for sure. Then and now, Michigan was recovering from an economic recession that halted much construction activity, including on infrastructure. Some of that work resumed as the economy improved.

Even when adjusted for inflation, MDOT is spending more on roads today than it did 30 years ago, partly because the state has more roads today. The department says it awarded 871 contracts worth $1.3 billion on projects eligible for federal money in the 2014 fiscal year, with another 729 contracts worth $1.2 billion awarded this year to date.

But the state is struggling to keep up with the cost of upkeep. Michigan’s flat 19-cent gas tax hasn’t been raised since 1997, nor is it tied to inflation. As a result, the buying power of that revenue shrinks each year.

“If we are able to secure a long-term funding package, I think there will be lots of opportunities, and you’ll see what happened in 1985 all over again,” said Mike Nystrom, executive vice president of the Michigan Infrastructure and Transportation Association, a Lansing-based trade group representing the road building industry.

“Companies will expand, will invest and there will be new companies starting up.”
New interest

Road contractors, like other construction companies in Michigan, saw projects and funding dry up during the late-2000s recession. Many firms sought work in other states, while others downsized or went out of business.

In the last two years, Nystrom said, his roughly 600-member association gained at least 40 new members, in part because of a rebounding economy.

Settling the debate on road funding with a permanent revenue stream, though, will send that number higher as companies sense a more stable environment in which to invest, he said. He added that more companies bidding on public road projects also could drive prices lower.

“No one’s going into business when the industry’s flat on its back,” Nystrom said. “If you don’t know what the future is, you aren’t going to invest in training employees that you might not have the work for. And it limits them in buying capital.”

One-shot funding boosts — including annual state budget cycles and the 2009 federal stimulus — have created some work amid fiscal pressures, said Mark Van Port Fleet, MDOT’s current chief operations officer and chief engineer.

Yet the problem with one-time money, he said, is that it doesn’t give companies the type of security they need to make long-term investments in people or equipment that they’d have with a five-, 10- or 20-year funding strategy.

In 1985, Leet “Ed” Denton told Crain’s that his company, Denton Construction Co., took on its first Michigan road project after a seven-year absence in other states.

At the time, the Grosse Pointe Woods-based company was the low bidder on a repaving of the Lodge Freeway in Detroit in the 1980s, a project that initially was delayed due to bids that came in higher than expected.

Denton, now 82, is still in business, but on a smaller scale. He said he sold his family’s namesake construction business to Warren-based Angelo Iafrate Construction Co. about 15 years ago.

His St. Clair Shores-based Denton Enterprises Inc. now includes a concrete paving business in Lanexa, Va., and a small operation in North Carolina. Denton said he sold in part because of the uncertainty of work in Michigan.

His operations — totaling 350 employees and upward of $30 million in annual revenue in 1985 — have dropped to 75 to 100 workers and $12 million to $15 million in income.

“The amount of large concrete paving jobs was diminishing around the country, and it was increasingly difficult to make money,” Denton said. “What we’re doing in Virginia and North Carolina is principally repair and maintenance work because there’s not enough funding to really do a lot of new construction or complete reconstruction.

“The funding is totally inadequate, not only on a state level but also at the federal level.”

National logjam

Michigan’s funding stalemate is happening as Congress negotiates a long-term deal to keep the federal Highway Trust Fund from running out of money.

In July, Congress narrowly avoided a shutdown by passing a three-month extension of the fund, which allocates a portion of federal gas tax revenue to states for road projects. MDOT leaders say the short-term extensions help the state continue planning road projects, but the lack of stability means they can’t project very far.

Michigan receives about $1 billion yearly in federal transportation dollars, 75 percent of which goes to MDOT. The state must put up a 20 percent funding match to receive its full federal award, according to MDOT.

No permanent solution in Washington also could lead to project delays, which in turn could speed up construction schedules, affect timing of materials purchases and increase costs, Van Port Fleet said.

He added that the state is fast approaching the point at which road conditions will decline faster than revenue will increase to maintain them.

The state trunkline system alone would need $1 billion to get 90 percent of the roads to good condition, Van Port Fleet said. Yet MDOT will get just 39.1 percent of the estimated $1.2 billion in state dollars Snyder and state policymakers are looking for, with the rest split among cities and counties based on a funding formula.

Gas tax revenue has fallen from $846 million in 2009 to an estimated $820 million this year, according to MDOT figures. Lawmakers have had to shift some of the state’s general fund to roads because that amount has not been sufficient to match Michigan’s share of federal road money.

In the 2016 fiscal-year budget that starts Oct. 1, that means an additional $400 million for transportation.

“It is time that (new) revenue happens,” Van Port Fleet said. “How they do it is really not up to us.”

House and Senate leaders have said there appears to be consensus that some new revenue is necessary, but they haven’t been able to agree on a dollar figure. The House passed a proposal this spring relying mostly on existing spending, including diverting money from the Michigan Economic Development Corp. The Senate’s plan relied on some existing revenue and a gasoline tax increase tied to inflation.

Snyder favors a combination of higher fuel taxes and vehicle registration fees.

Voters in May rejected the Legislature’s proposal to raise the sales and fuel taxes in order to raise money for roads, along with schools and local governments.

“We can find a solution that takes care of itself year after year,” said Gideon D’Assandro, a spokesman for House Speaker Kevin Cotter. “The sticking point is finding a plan that can be a permanent solution where we don’t have to go back every year and take money and put it toward the problem.”

Meetings continue with Snyder and top legislative leaders, D’Assandro said. All parties have said the talks are productive, without offering details on potential compromises.