Inflation may send Minnesota's transportation spending off a "funding cliff"

Sign of the times
The crosstown commons includes several aging bridges.
MPR Photo/Dan Olson

The crosstown interchange in south Minneapolis mixes traffic from Interstate 35W and state highway 62. It's like four rivers coming together from the east, west, north and south all trying to flow through a culvert that isn't big enough. Rebuilding the interchange is one of the state's top transportation priorities, but there's not enough money.

The state put the crosstown rebuild price tag at $250 million last year. But contractors balked and refused to bid. Now the state says the price tag is $285 million, but costs are still rising and the real price tag is anyone's guess.

At the same time, revenue streams are below projection.

Crosstown interchange
The Crosstown interchange mixes traffic from four directions, traveling on Interstate 35W and state highway 62.
MPR Photo/Dan Olson

"The gas tax, the tab fees, the MVST (motor vehicle sales tax) they were all down from forecasts," says Minnesota Department of Transportation's Abigail McKenzie, director of the agency's Office of Investment Management.

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The result is a big drop off in state road and bridge spending.

"We're facing what is referred to as a funding cliff," says Dave Semerad, executive director of the Associated General Contractors of Minnesota,

This year the Minnesota Department of Transportation let bids for about $800 million worth of road and bridge projects. When the state's new fiscal year begins July 1 that number drops to about $450 million.

The news gets worse.

The money's buying power this year is 80 percent of what it was last year. The reason is inflation. The price of steel, cement and asphalt used to build the roads and bridges is skyrocketing.

Abigail McKenzie
Minnesota Department of Transportation's Abigail McKenzie, director of the office of investment management
MPR Photo/Dan Olson

While the general inflation rate is about 2 percent, the cost of building roads and bridges is rising at about 20 percent a year.

"For every dollar we're spending it's buying 20 percent less. But here's what's got people shocked, a 50 percent increase on our asphalt prices," says Abigail Mckenzie.

Asphalt's main ingredients, aggregate and crude oil commodities, are in great global demand. The AGC's Dave Semerad says demand for raw materials is also hot in this country.

"The whole Katrina corridor is the largest construction project in history. That is using a lot of materials," he says.

Another factor contributing to the state's boom-bust transportation spending cycle is the state itself.

The boom in road and bridge building early this decade was financed heavily by borrowing and by drawing on anticipated federal revenues. State officials call spending the anticipated revenue advanced construction. It allows them to "encumber" money from the future for projects being planned now. Minnesota Department of Transportation officials say the amount of advanced construction money planned for fiscal year 2008 is about $330 million.

The borrowed money must be paid back. Previous years spending of anticipated revenue through advanced construction means the money is not available now.

The result of that kind of transportation spending strategy is higher peaks and lower valleys.

"It creates a naturally more volatile construction program. So there will be bigger years and smaller years just as a result of using advance construction financing," says McKenzie.

There is a ray of sunshine. All the spending early this decade was not for nothing. It created wider, safer roads all across the state. In the Twin Cities, McKenzie says, the result will be seen in new congestion numbers due out soon.

"We're going to show congestion down for the third year in a row so, the impact has been large enough we think we can see it on a system wide basis, so it's had real benefit for the citizens," she says.

But the question remains, what now? Where will the state find the money needed to pay for maintaining and replacing roads and bridges or in this case the crosstown interchange in south Minneapolis that are well past their prime?

Support appears to be growing among lawmakers for raising the state's portion of the gasoline tax. But the governor opposes it and says he'll veto any transportation bill with a tax increase. The standoff sets the stage for another round of political gridlock unless minds change or a comprise is crafted.