Deteriorating Public Finances

Maryland Governor Wes Moore recently asked his state’s Board of Public Works to slash nearly $150 million from its annual budget mid-year to help balance the books. After years of Covid-fueled stimulus funding (e.g., American Rescue Plan Act of 2021), many states and local governments are finding it more challenging to balance budgets in the context of surging Medicaid and educational expenditures. According to a Pew Trust study, Maryland is expected to face a budget shortfall of $2.2 billion by 2028, strongly suggesting that Governor Moore’s cuts represent a mere tip of the proverbial iceberg.

Maryland is hardly alone. In Arizona, the State faces a budget shortfall of $400 million this year and $450 million the next. In California, the State experienced a swing from a $100 billion surplus in 2022 to a projected financial shortfall of as much as $68 billion currently. New York state faces a projected $4.3 billion deficit for the current fiscal year and so it goes.

None of this is particularly good news for highway contractors. True, federal monies continue to drive highway and road spending, but the growing fiscal malaise among states creates contractor vulnerability as federal funds emerging from the Infrastructure Investment of Jobs Act of 2021 are exhausted over the next few years.

Remarkably, the financial exhaustion is occurring during a period of solid economic growth. Should the nation’s economy find its way into recession, which some economists continue to predict, matters stand to worsen. Even absent recession, Massachusetts’ Governor Maura Healey announced earlier this year that she intends to cut $375 million from her state’s budget as a result of six consecutive months of falling revenue. Tax collections fell $769 million short of expectations.

The approaching end of ARPA fund availability, which supplied nearly 60% more federal funding to states in FY2023 compared to four years earlier, has revealed lingering structural deficits in many communities. Loss of revenue from commercial real estate and other sagging segments continues to generate fiscal uncertainty. With the national debt approaching $35 trillion, states may no longer be able to count on the federal government for massive levels of support going forward. 

Technological Progress to the Rescue?

Based on the present trajectory of affairs, highway and similarly situated contractors face sharp declines in public infrastructure investment at some point in the not-so-distant future. Many of these contractors have been ramping up their capacity during a period of outsized public investment, including on roads and bridges. Absent an altered dynamic, some of that capacity is likely to be dismissed as public funding fades.

But is there a way out of this evolving set of circumstances? What if there was an emerging force that allowed states, counties, parishes, and municipalities to continue to adequately finance road maintenance and improvements for their citizenry while also balancing their annual budgets? As it turns out, there is a path to such a blessed outcome, and that path is paved with technological progress.

For the foreseeable future, that progress is likely to be evolutionary rather than revolutionary, at least until Elon Musk builds an affordable flying car. Until then, cars will be glued to roads, and those roads need to be sufficiently well-maintained, safe, and durable. Contractors at the cutting edge of progress stand to supply procurement officers and the policymakers for whom they work the best combinations of price and capability. They will be poised to gain market share and ultimately be the most profitable road builders upon making required investments in equipment, training, etc.

At the vanguard of progress in this regard is material science. Let us take Warm Mix Asphalt (WMA) as an example of a promising pathway. WMA is an advanced type of asphalt that can be produced and laid at lower temperatures than traditional Hot Mix Asphalt (HMA). This reduces fuel consumption and greenhouse gas emissions, offering both economic and environmental benefits. WMA technologies not only extend the paving season and improve working conditions, but also reduce the amount of time it takes for asphalt to bind. According to the Federal Highway Administration, WMA production methods use temperatures 30 to 120 degrees Fahrenheit lower than traditional HMA, reducing fuel consumption by approximately 20%. Lower temperatures also permit more asphalt mix to be hauled for longer distances, diminishing transportation costs.

Reutilization of materials also represents cost-saving progress. Reusing recycled materials such as reclaimed asphalt pavement (RAP) and recycled concrete aggregate (RCA) not only provides environmental benefits, but also reduces costs. According to the National Asphalt Pavement Association, an average of $3.3 billion is saved every year through the usage of RAP. When roughly a fifth of mix incorporates RAP, it saves $7.80/ton compared to mixes that utilize new materials exclusively.  

A study of concrete aggregates in South Africa also indicates significant savings. The study notes that “the long-term cost of producing one ton (spelled ‘tonne’ in original) of coarse recycled concrete aggregate was about 40% less than that for coarse natural aggregate. Also, the environmental benefit of producing one ton of recycled concrete aggregate was approximately 97% higher than that for natural aggregate.”

Innovative Financing

Finding new ways to finance projects can also reduce costs and streamline efficiency. Not only is private capital often more plentiful than public capital, but the private sector is often more adept at

handling risk. According to the U.S. Department of Transportation, one of the reasons the State of Florida sought a public-private partnership (P3) for its Port of Miami Tunnel project was to mitigate its risk exposure. In exchange for taking on a larger share of financial risk, private investors were given a 30-year concession to operate the tunnel. After that period, the tunnel is turned back to the State. The long-term economic benefits for government and the citizenry it serves are simply massive. P3s have become less apparent in everyday thinking due to enormous federal government outlays, but circumstances indicate that they will return to the forefront of project finance in the future.

Deadline Approaches

Recipients of the roughly $350 billion provided to states, counties, cities, and U.S. territories under ARPA must obligate funding by the end of the current year. These governments only have until 2026 to spend these funds. At that point, a brave new world in which states and municipalities are largely on their own will emerge. The time to consider what that world will look like has come. One thing is guaranteed – there will not be as much money as is required to adequately invest in American infrastructure unless there is progress along all key dimensions, whether in the form of new technology or incredibly inventive financing.