Prepared Statement of Mr. James Duit, President

Duit Construction Company, Edmond, Oklahoma

Testifying on Behalf of the American Road and Transportation Builders Association

Before the Subcommittee on Transportation, Infrastructure and Nuclear Safety

United States Senate

February 11, 2002

Mr. Chairman and Members of the Subcommittee, on behalf of the American Road and Transportation Builders Association I would like to thank you for inviting us to be here this afternoon to discuss highway funding issues, particularly the impact of the unprecedented $8.6 billion cut in federal highway investment that is on the table for fiscal year 2003 and what can be done to prevent a recurrence in the future.

I am James Duit, President of Duit Construction Company, a highway construction firm based in Edmond, Oklahoma. I am here representing ARTBA, which on Wednesday will mark its 100^th anniversary representing the transportation construction industry here in Washington. ARTBA’s more than 5,000 members come from all sectors of our industry both public and private. Our industry generated $200 billion annually in U.S. economic activity and sustains the employment of more than 2.2 million Americans.

My company was founded in 1969 and now provides good jobs for 300 permanent employees. Duit Construction specializes in paving, aggregates and quarries. I am a member of the Transportation Research Board’s Pavement Research Committee.

It was also my privilege to serve last year as chairman of the American Concrete Pavement Association.

I am accompanied by Dr. William Buechner, ARTBA’s Vice President for Economics and Research, who will be available to respond to any technical questions you may have. Dr. Buechner is a Harvard-trained economist who spent more than two decades as an economist for the Joint Economic Committee of the U.S. Congress.

Reason for negative RABA for FY 2003

The reason for the proposed $8.6 billion cut in the federal highway program in FY 2003 is well known. Since FY 2000, the “revenue-aligned budget authority” or RABA provision of TEA-21 (Transportation Equity Act for the 21^st Century) adjusts the annual firewall guarantee for highways if revenues into the Highway Account of the Highway Trust Fund are above or below the initial TEA-21 baseline revenue estimate. For FY 2003, the RABA adjustment was determined to be negative $4.369 billion—the first negative RABA adjustment ever.

Subtracting the negative $4.4 billion from the original TEA-21 highway guarantee of $27.7 billion gives the $23.2 billion federal highway investment proposed in the President’s budget for FY 2003.

This is $8.6 billion less than the $31.8 billion enacted for federal highway investment during the current fiscal year.

Senator, we greatly appreciate your leadership in addressing this issue by introducing legislation to provide FY 2003 funding of at least $27.7 billion, the original TEA-21 guarantee. We believe this is an excellent start and look forward to working with you to restore the highway funding this year.

Before I discuss the consequences of an $8.6 billion cut in federal highway investment, I want to point out that the negative RABA was not the result of a reduction in gas tax revenues into the Highway Trust Fund. It is easy to misunderstand what happened, and the assertion that the proposed cut in highway funding was due to declining gas tax revenues has appeared in a number of newspaper articles. But it is not an accurate statement.

According to data provided to ARTBA by the U.S. Department of the Treasury, motor fuel excise taxes collected by the Treasury during FY 2001—the “look-back” year for the FY 2003 RABA computation—were just about even with the amount collected during FY 2000. There was a small decline in total revenues but virtually all of it was due to a reduction in excise taxes paid by heavy trucks.

The overriding reason for negative RABA is that Treasury made a forecasting error in computing the FY 2001 RABA adjustment and another forecasting error in crediting revenues to the Highway Account in FY 2000. Treasury corrected both of those errors when computing the FY 2003 RABA adjustment. These were technical corrections to past forecasting errors, caused to some extent by the recession, but they account for almost $3 billion of the negative RABA adjustment that concerns us today.

In addition, we believe Treasury has underestimated projected incoming Highway Account revenues for FY 2003. This underestimate, we believe, added another $900 million to the negative RABA. The FY 2003 revenue projection does not appear consistent with the administration’s overall economic assumptions and does not appear to take into account historical data showing that highway travel and truck excise tax receipts recover sharply after a recession ends.

The Treasury gas tax data and an explanation of how the FY 2003 RABA adjustment was computed are attached to my prepared statement and I ask that they be included in the record.

Consequences of Proposed $8.6 Billion Cut in Highway Funding

Now I want to discuss the consequences of a $8.6 billion cut in federal highway investment.

• Job Loss. An $8.6 billion cut in federal highway investment in FY 2003 would reduce employment in America by more than 360,000 jobs over the next seven years, with roughly 70 percent of the job loss occurring in 2003 and the election year 2004. This works out to more than 825 jobs per Congressional district. A state-by-state breakdown of the job loss is included as an attachment to my testimony. If highway investment in FY 2003 is provided at the TEA-21 baseline level of $27.7 billion (a $5 billion increase from the proposed RABA-adjusted level), the job loss would still be almost 170,000. Neither figure is acceptable at a time when the economy is struggling to emerge from recession. Much of the job loss will affect minorities, especially Hispanic workers who make up almost a third of the transportation construction workforce. A legislative solution that would restore only $5 billion would concede that jobs will be lost.

• TEA-21 Reauthorization Baseline. The FY 2003 obligation limitation will be the major determinant of the baseline funding levels for the fiscal years covered by TEA-21 reauthorization legislation. As the attached chart shows, the $8.6 billion cut would lower future baseline highway funding by more than $10 billion each year from the levels included in the FY 2002 budget submitted just a year ago. Starting from this baseline will make it much more difficult for Congress to increase federal highway investment after TEA-21 expires. Providing $27.7 billion for FY 2003 would eliminate about half the shortfall, but restoring the full $8.6 billion is the only way to provide a realistic baseline for reauthorization.

• Cancellation of Highway Improvements. Based on reports from state DOTs, a number of states have already started to terminate or postpone projects on the basis of the expected cut in FY 2003 federal highway funding. The chaos caused by the proposed cut in federal highway funding will continue until federal funding for FY 2003 has been resolved. This needs to be addressed quickly to allow state construction programs to proceed unimpeded for the 2002 construction season.

• Cannibalization of State Highway Budgets. The states rely on federal highway funds to finance, on average, almost half of their highway capital improvement programs. A cut in federal highway funds in FY 2003 would exacerbate their budget problems and likely force many to cannibalize their own highway improvement programs to complete construction on federal-aid projects.

How the $8.6 Billion Could Be Financed

Highway funding for FY 2003 could be maintained at the FY 2002 level of $31.8 billion—and we believe should be—by utilizing the existing balance in the Highway Trust Fund’s Highway Account. According to the Treasury Department that balance stands today at about $20.5 billion.

This balance is not needed to reimburse states for already committed projects and programs. Approximately $7 billion of the balance is a cash surplus that occurred because TEA-21 did not require the RABA adjustment until FY 2000. More highway user fee revenues came into the trust fund in FY 1998 and FY 1999 than were spent.

An additional $14 billion or so in the balance is to cover the unobligated contract authority that TEA-21 has provided to the states to date above the guaranteed firewall (You’ll recall that TEA-21 authorized $177 billion for highway investment, but only guaranteed $162 billion under the budget firewall). That contract authority is worthless to the states unless this money is appropriated from the trust fund. Otherwise, they cannot commit it to projects.

It is time to free these surplus funds to save American jobs.

Purpose of the RABA Mechanism

I would now like to turn to the second issue being addressed today—how to improve the RABA mechanism.

Let me begin by pointing out that our overriding concern with federal highway funding is not only that it be adequate to meeting our nation’s transportation needs but also that it be predictable and reliable.

Highway and bridge investments often take a long time to plan and construct. To schedule projects efficiently, state Departments of Transportation need stable funding sources and predictable revenues. That is why the federal highway program has a six-year, rather than annual, authorization cycle.

The RABA adjustment process was not expected by the Congress, the states or the industry to inject the kind of instability in federal highway funding that we are currently facing.

The purpose of RABA was to help implement the TEA-21 goal of using all revenues into the Highway Trust Fund for their intended purpose—investment in transportation improvements—in a timely manner.

To accomplish this, TEA-21 set up a two-part process to determine the annual funding for the federal highway program.

First are the firewall amounts guaranteed in TEA-21, which from FY 2000 on were directly linked to Highway Account revenues collected during the previous fiscal year. These guaranteed amounts were based on revenue projections made at the time TEA-21 was enacted in June 1998.

The second is the RABA adjustment, which automatically increases or decreases the firewall guarantee whenever actual revenues into the Highway Account exceed or fall short of the TEA-21 baseline estimates.

Attached to my testimony is a detailed explanation of how the FY 2003 RABA adjustment was computed.

The major problem with the computation process appears to be in the “look forward” forecasting provision. Although annual highway funding under TEA-21 is supposed to be tied to previous-year revenues, part of the RABA calculation requires making a forecast of Highway Account revenues during the budget year itself and comparing that forecast to the initial TEA-21 baseline.

This “look forward” forecast has proven to be a major source of instability in the RABA computation because the projections have been off each year, as forecasts always are. For example, Treasury overestimated FY 2001 Highway Account revenues by $1.8 billion when computing the FY 2001 RABA adjustment and corrected its mistake in the FY 2003 RABA adjustment.

This problem must be corrected when TEA-21 is reauthorized.

Possible RABA Improvements

There are a number of ways this could be done. One is to eliminate the “look forward” forecast part of the RABA formula. Basing RABA solely on the “look back” part of the formula might yield smaller RABA adjustments, but provide more predictability and stability to federal highway investment.

Another option might be to establish a reserve that would automatically be drawn down whenever RABA is negative. In fact, such a reserve exists today in the Highway Trust Fund as I have previously explained.

I would like to suggest a third, more fundamental, reform that would change the nature of the RABA mechanism in the TEA-21 reauthorization legislation.

Under ISTEA and previous authorizations, the annual level of highway funding was budget-driven. Highway funding was determined by the overall budget cap and the level of the deficit, regardless of the amount of user fees paid into the Highway Trust Fund. As a result, the balance in the Highway Trust Fund kept growing, breaking trust with highway users who thought all their gas taxes were being invested in highway improvements.

TEA-21 addressed this problem by making highway funding revenue-driven, by linking each year’s funding to the previous year’s revenues. RABA helped accomplish this but, as we have seen, introduced the potential for unanticipated instability into federal highway investment.

For reauthorization, ARTBA urges that Congress go the next step and make annual highway funding performance-driven. While TEA-21 has succeeded in increasing highway investment, the level at present is barely sufficient to maintain the physical condition of the nation’s highways and bridges.

Under current funding, however, system performance—particularly congestion— is getting worse. In our TEA-21 reauthorization report, which has been supplied for the hearing record, ARTBA recommends that federal highway investment from FY 2004 through FY 2009 be set at a level that maintains not only the physical condition of highways and bridges, but mobility conditions as well.

Based on data from the latest Conditions and Performance report submitted to Congress just over a year ago by the U.S. Department of Transportation, this goal would require an average annual federal highway investment of $50 billion during the next six years, rising from $48 billion in FY 2004 to $54 billion in FY 2009.

Funding this investment could be achieved by modifying the RABA provision. The modification would require setting guaranteed annual funding levels, as recommended in the ARTBA reauthorization report, computing the resulting outlays from the Highway Trust Fund, which OMB and CBO already do, and automatically setting highway user fees at the beginning for each fiscal year to raise the required revenues.

This is exactly what the U.S. Postal Service does. It determines the cost of delivering the mail and sets postal rates at the level necessary to cover its costs. If the postal service followed the highway model, it would instead set postal rates at some arbitrary level and then deliver whatever mail its budget would permit.

Budget Related Reauthorization Issues

Before ending, I want to briefly mention some additional budget-related issues for TEA-21 reauthorization.

First, and most important, preserve the budget firewalls that apply to the highway and mass transit categories and the guaranteed obligation limitation for highways.

These two TEA-21 innovations have been instrumental in moving toward the goal of using all Highway Trust Fund revenues for surface transportation investment in a timely manner. The budget firewalls have removed the incentive to cut funding for the highway and transit programs, because the “savings” of doing so cannot be diverted to other uses. The guaranteed funding has, at least until FY 2003, provided predictability to federal funding for state DOT planning.

Second, we suggest enactment of a maintenance-of-effort requirement for the states. An increase in federal highway funding creates a temptation for state legislatures to divert state-derived highway funds to other uses. A maintenance-of-effort requirement to receive federal highway funds would eliminate that temptation.

Third, we recommend a significant increase in funding for the mass transit program and, in conjunction with that, elimination or a cap on the ability of state DOTs to transfer highway program funds to transit. Each year, more than $1 billion of federal highway funds are diverted by the states to transit operating and capital expenses, as permitted under the Surface Transportation Program (STP) and Congestion Mitigation and Air Quality (CMAQ) programs. This is in addition to the funding made available through the federal mass transit program. Adequate funding for the mass transit program should go hand in hand with dedicating highway program funds solely to highway improvements.

Mr. Chairman, again I want to thank you very much for inviting me to testify on behalf of the American Road and Transportation Builders Association.