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Even
Philip Shucet admits that the business of road
maintenance is not very glamorous. Highway engineers
spend a lot of time worrying about potholes, drainage
ditches, pavement edges and the integrity of the roadbed
underneath the asphalt, notes the former Virginia
Department of Transportation commissioner. No one holds a
ribbon-cutting ceremony when a repaving job is
completed. Highway maintenance is a
thankless job. Most people, frustrated by construction
crews blocking traffic lanes, are as likely to shake
their fist at you as thank you.
Yet
highway maintenance is moving to the forefront of the
transportation debate in Virginia. The expense of
maintaining the Commonwealth's road network is outpacing
the growth in transportation revenues by ever wider
margins. Indeed, according to VDOT projections, the
maintenance costs are so voracious that they will
consume literally every state highway dollar by
2018 -- leaving no state funds for new construction and
eating into federal allocations.
With
traffic congestion getting steadily worse, many people
find that prospect alarming. Citing $74 billion in
unfunded highway projects needed by 2025, powerful
politicians and businesses interests are calling for a
major tax hike to keep the construction budget intact.
The most compelling argument they offer -- published in
official state documents, projected in PowerPoint
presentations, and disseminated by e-mail -- is a simple
chart cryptically entitled, "State Construction
Dollars to HMOF," that graphically depicts how
repairs are consuming the construction budget.
As
the tax-averse House of Delegates approaches a showdown
with the tax-happy state Senate in the 2006 session,
considerable attention will focus on that chart.
Any forecast emanating from the Warner administration is
likely to invite scrutiny, especially given the
massive budget surplus that the administration failed to
anticipate when jacking up General Fund taxes in 2004. Skeptics are
entitled to ask, just how hard are those VDOT numbers?
How subject are they do being revised at a later date?
To
jump start the questioning, I met Shucet one morning last week for
coffee, just a mile or so from his home in Virginia
Beach. He had spent his last day at VDOT only the week
before and was relishing the time off from the grueling
job. Shucet stood by VDOT's projection and he reiterated his
belief that Virginia desperately requires more money to
build more roads. But he candidly conceded that there
was more to the numbers than met the untutored eye.
I
walked away from that meeting with three major
conclusions. Yes, the maintenance budget is eroding the
funds available for new construction. However:
Before
the Warner administration, VDOT did not have a firm handle
on exactly how big its construction backlog was, Shucet
says. People "kind of knew" what needed to be
done, but there were no hard numbers. Now he can say
with confidence that $1 billion (in round numbers)
of new road and bridge maintenance projects enters the
pipeline every year, swelling a backlog of roughly $2
billion. Spending $1 billion annually on maintenance
keeps the backlog about the same size from year to year.
During
the budget crunch in the first two years of the Warner
administration, Shucet says, the state
was falling behind in its maintenance obligations. "In three years [as
commissioner], I drove about 120,000 miles on state
roads. Over 36 months, I saw our system deteriorate. I
saw the result of failing to address that backlog and
flatlining maintenance."
Now
VDOT policy is to work down that backlog a little bit
each year. The
current six-year spending plan calls for adding $97
million a year to maintenance and then increasing total maintenance spending by four percent per year.
Current spending policies should trim the backlog by 22
percent over six years, Shucet says.
At
that rate, VDOT will have cut down the project backlog
by about half by the time maintenance spending is
projected to consume the state highway budget -- a
significant accomplishment never mentioned by advocates
of tax increases. "Will we
have a better road system as a result?" asks Shucet.
"Yes, as far as
the integrity of the system, we will. We will have a
better maintained system."
And
a better maintained system will, in turn, ameliorate
traffic congestion by reducing one of the major causes
of congestion -- road maintenance
crews. "Road construction is a major
cause of bottlenecks," Shucet explains.
"Whether you're adding a lane or repaving a lane,
you're in the middle of the road. If you maintain your
system to appropriate standards, you'll need to be in
the road fewer times."
Shucet
doesn't have any hard numbers -- indeed, the benefits
may be impossible to quantify -- but he says it would be reasonable to expect a
25 percent reduction in maintenance-related road work.
The benefits to motorists of fewer construction-related
delays are something that the pro-tax advocates never mention.
A
second major assumption in the VDOT chart is the
expectation of continued four percent inflation in
construction costs. It's a historical fact, says Shucet:
Inflation in the construction sector has run roughly
double the rate of consumer price inflation over the
last 15 years. "Generally speaking, the demand for
construction services has been very high. That drives
prices up."
Higher
costs are reflected in the price of materials - steel,
cement, plywood, petroleum-based asphalt, as well as
labor. It is getting very difficult to find skilled
construction labor, Shucet says. Of
course, he admits, there's no way to know if
construction costs will continue to outstrip the general
inflation rate. That's why VDOT requires the CFO to
review and approve the inflation assumptions in its
cost-forecasting methodology annually.
In
other words,
the four-percent projection is no more than VDOT's best
guess, based on past experience. It's possible that
inflation could turn out to be
far more benign. A roaring housing boom, made possible in part by
low interest rates, has driven up the cost of materials
and labor. If interest rates rise, the housing market
could deflate -- many observers believe it could crash
-- easing pressure on the cost of
commercial and infrastructure construction.
Another
wild card is China. The Chinese construction market is
so hot that it has driven up the cost of steel, cement
and other construction materials across the globe.
Should the Chinese construction boom cool -- and
given the high commercial vacancy rates in many cities and the
fragility of the Chinese banking industry, that's not
a remote possibility -- price
pressures on heavy construction could moderate
worldwide.
Any
number of factors could throw off VDOT's projections. A
global economic slowdown. Rising interest rates that
choke off commercial construction. An increase in steel-
and cement-making capacity that eliminates scarcities.
The construction industry is highly cyclical, and we're
at the peak of a cycle. In
sum, there is nothing certain about VDOT's four percent
inflation projection. VDOT is using the four-percent number because
it has to use something. But Shucet acknowledges
that the number is subject to change.
If
inflation in construction costs moderated to the general
inflation rate, about two percent, projected maintenance
expenditures could be 25 percent less than VDOT projects
by 2018. Given the volatility
of the construction cost index, we could conceivably
experience a year or two of price deflation. Although
Shucet
doesn't draw this conclusion, I do: It makes no sense to
increase taxes now on the basis of a conjectural
forecast of what might happen to construction costs 10
to 15 years in the future.
Shucet's
greatest contribution to VDOT has been to impose order
and discipline to the management of its multi-million
dollar construction projects. VDOT now is bringing in
roughly 80 percent of its projects on time and on budget
-- a pretty good track record given the
uncertainties associated with construction work.
But
that's only Phase 1 of VDOT's managerial transformation.
Phase 2, should the next governor choose to pursue it,
would be to overhaul the way VDOT manages maintenance. Shucet envisions
redefining VDOT's job away from doing the maintenance itself to
ensuring that the maintenance gets done -- even if it
means outsourcing the work. VDOT's core mission, he
suggests, should be
setting standards, putting out the work for competitive
bids, and monitoring the
winning bidders to make sure they are meeting
performance standards.
Managing
the road system on a programmatic basis will require a
major change in the way VDOT operates, Shucet says. Instead of
managing the system in two-year budget cycles, VDOT
managers will be called upon to manage roads over
natural maintenance cycles. Instead of patching holes,
VDOT will pay more attention to the
sub-structures of roads to ensure that they last longer.
In sum, VDOT will think more like a business managing a
multi-billion dollar asset base for maximum efficiency.
Again,
Shucet has no hard numbers on how much can be saved, but
he says that it would not be unreasonable to aim for 20
percent gains through a programmatic approach to
management. The implication is that it should be
possible eventually to save hundreds of millions of
dollars a year in maintenance costs.
It
would be irresponsible, Shucet says, to base his
long-range forecast on the assumption that some future
administration might put into place the management
changes he envisions. At the same time, I would hasten to add, it would
be irresponsible for the next governor not to put those
changes into place. And it would be just as reckless for
the General Assembly to enact huge tax increases on the
pretense that there aren't still massive efficiencies
yet to be wrung out of VDOT's maintenance program.
Instead
of devoting their creative energies to finding ways to
raise taxes, I would contend, the General Assembly should do everything
in its power to ensure that Shucet's vision for the
transformation of VDOT is
carried to completion.
I'm
open to the possibility that it may be necessary some
day to increase taxes to properly maintain Virginia's
roads. But that day is not yet here. To
my mind, the impending "maintenance crisis" is
not inevitable, nor even a crisis.
The widely circulated "State Construction Dollars to HMOF"
chart reflects (a) a policy decision to
increase maintenance standards by pumping $100 million+
into base funding for maintenance, (b) an anticipated four
percent construction inflation that may never
materialize, and (c) the omission of hundreds of
millions of dollars in potential savings through the
implementation of new management methods.
It's way too early to tell how much money
will be needed. Change financial assumptions and
management policies, and
Virginia could well have more than half a billion a year
left over in 2018 to devote to new construction.
The state's current surplus
has exposed the folly of basing the 2004 tax hike on
short-term forecasts of revenue shortfalls. The
uncertainties of VDOT's long-range forecast are an
order-of-magnitude greater. Virginians should insist upon a greater level
of certainty before the General Assembly compounds the
error of its 2004 tax increase with another in 2006.
--
July 11, 2005
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