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1 Memora andum To: NAPA s Legislative Committee members and State Asphalt Pavement Association Executives From: Jay Hansen, Executive Vice President Date: November 29, 2012 Re: Impact of Fiscal Cliffs and Continuing Resolution on Federal Highway Programs As negotiations in Washington D.C. continue over how to address the looming financial crisis known as the fiscal cliff, NAPA s Government Affairs professional staff has been asked how this issue willl impact the Federal Highway Program. This memorandum explains the revenue and spending measures that are set to expire or take effect early next year which potentially impact the Federal Highway Program and the highway construction markett in 2013 and beyond. There are threee fiscal cliff issues and one continuing resolution to consider when analyzing the 2013 Federal highway construction market. Fiscal Cliff I Unless the lame duck 112th Congress acts by January 2, 2013, taxess will automatically go up dramatically on every American, including income taxes, payroll taxes, estate taxes, and alternative minimumm taxes (AMT). At the same time devastating across the board government spending cuts (a.k.a. sequestration) for both defense and non defense programs will automatically go into effect. According to many economists, the sequestration and tax increasess are likely to return the national economy to a recession att a time when it has barely recovered. The mandatory January 2 sequestration will not impact U.S. Department of Transportation programs funded through contract authority from the Highway or Airport Trust Funds. However, programs funded from the General Fund, suchh as Amtrak and FAA Operations, will be hit with an automatic 8.2% cut, unless Congress acts to postpone orr eliminate the sequester. In addition, it appears that the FY 2013 transfer of Generall Funds to the Highway Trust Fund authorized by the new MAP 21 law are covered by the sequestration process and will be cut by $471 million or 7.6%. This could leave the Trust Fund with very low balances at the end of the two year MAP 21 authorization.

2 Impact of Fiscal Cliffs and Continuing Resolution on Federal Highway Programs Memorandum Page 2 Fiscal Cliff II In addition, another fiscal deadline looms on a date uncertain in early 2013 most likely in February or March. Unless Congress raises the legal national debt ceiling by trillions of dollars, the nation will again face a possible default on its previously incurred debt obligations, likely causing another round of frantic, behind the scenes budget negotiations in Washington that could lead to across the board spending cuts and/or a downgrade of the U.S. s credit rating. Fiscal Cliff III Lastly, for the nation s transportation programs, a third fiscal cliff looms on Oct. 1, Unless the newly elected 113th Congress acts by that date, the Highway Trust Fund will run out of money, creating a deficit that if current spending levels are maintained would approach $80 billion over fiscal years (FY) At that rate, the sort of funding patches applied by MAP 21 will be far from adequate to solve the problem. Indeed, the transportation fiscal cliff, while seemingly far off, must be addressed by Congress soon. In a paper released by AEM, entitled MAP 21 and Transportation s Fiscal Cliff, longtime transportation policy expert Jack Schenendorf, provided an overview of the challenge. Schenendorf, of Counsel with Covington & Burling LLP, in Washington, D.C., previously spent more than 20 years as staff of the House Transportation & Infrastructure Committee and was a key member of the SAFETEA LU sponsored Surface Transportation Policy and Revenue Study Commission. Here are some excerpts from his paper: Since MAP 21 does not address the long term financial viability of the Highway Trust Fund, transportation will face its own fiscal cliff in the next Congress the Highway Trust Fund is projected to run a significant deficit starting in The Highway Trust Fund would need an additional $76 billion, over and above existing user fee revenues, just to fund a six year bill (FY 2015 to FY 2020) at MAP 21 levels. And, of course, significantly more than $76 billion in additional revenues would be needed to increase funding for the surface transportation programs over the current MAP 21 levels. To make matters even worse, [this] analysis may be overly optimistic given the Administration s August 28, 2012, announcement increasing the Corporate Average Fuel Economy (CAFE) standards for cars and light trucks from 34.1 miles per gallon in 2016 to a fleetwide average of just under 50 mpg by This erosion in Highway Trust Fund revenues begins in the latter half of this decade. Transportation s fiscal cliff could also have a chilling effect on transportation investment in 2013 and 2014.

3 Impact of Fiscal Cliffs and Continuing Resolution on Federal Highway Programs Memorandum Page 3 With MAP 21 expiring on September 30, 2014, the next Congress will not only face the need to reauthorize the Federal surface transportation programs, but it will also face the looming Highway Trust Fund deficit. The challenge will be to develop a long term fix for the Trust Fund that provides a stable, adequate revenue stream sufficient to facilitate the modern, efficient, and safe national surface transportation system that America needs. Impact of the Continuing Resolution (CR) on Federal Highway Programs Congress was not able to pass any of the FY 2013 annual federal agency appropriations bills before adjourning for the elections. In order to keep the government running, they passed a sixmonth CR. The CR funds most U.S. DOT programs at approximately their current FY 2012 funding levels. Unfortunately, funding under the CR does not incorporate an obligation ceiling allowing for the modest increases in highway funding authorized in the new MAP 21 bill. For instance, MAP 21 increased highway funding by $550 million in FY It is possible that when Congress passes a bill to fund the remainder of FY 2013, the MAP 21 increases could be restored. The current CR expires on March 27, Take Action The time to start thinking about meetings with your members of Congress especially newly elected members of Congress is now. They need to understand the vital role transportation spending plays in supporting and growing the economy, both in their districts and in the country as a whole. For assistance or more information, do not hesitate to contact me, or visit

4 MAP-21 AND TRANSPORTATION S FISCAL CLIFF By Jack Schenendorf, Of Counsel Covington & Burling LLP The Moving Ahead for Progress in the 21st Century Act (MAP-21) (Public Law ) was signed into law by President Obama on July 6, 2012, after passing both the House and Senate with overwhelming bipartisan support. Funding surface transportation programs at over $105 billion for FYs 2013 and 2014, MAP-21 is the first long-term highway authorization enacted since Importantly, the new law makes significant policy changes in the framework for transportation investment. MAP-21 does not, however, address the long-term financial viability of the Highway Trust Fund. As a result, transportation is facing its own fiscal cliff, a looming crisis that the next Congress will have to address, possibly in the context of tax reform or the so-called grand bargain. What s At Stake? A modern, efficient, and safe national surface transportation system is essential for a strong economy, long-term private sector job growth, and economic success in a global economy. It is also a key factor in the quality of life enjoyed by the American people. Yet commission after commission, study after study, and report after report have identified serious deficiencies in the Nation s surface transportation network aging and deteriorating infrastructure and reduced operational efficiency of key assets. And this problem will only get worse. Over the next 50 years, the population of the United States is expected to grow by some 120 million people, greatly intensifying the demand for transportation services by individuals and businesses. The stakes are high. Without significant improvements to the national network, freight transportation will become increasingly inefficient and unreliable, undermining the ability of American businesses to grow, create jobs, and compete in the global marketplace. And Americans will waste more time stuck in congestion and have greater difficulty reaching job opportunities.

5 Map-21 A Meaningful Step Forward MAP-21 Funding and Financing MAP-21 is a meaningful step forward. First, MAP-21 extends the highway, highway safety, and transit programs through the end of FY There had been ten short-term extensions since SAFETEA-LU expired in These short-term extensions created great uncertainty and made it difficult for states and contractors to commit to significant improvements. By extending the transportation programs for more than two years, MAP-21 has provided a degree of stability that will allow states and contractors to move forward. Second, MAP-21 makes significant, much-needed policy reforms. For example, It streamlines Federal transportation programs, establishing four core highway programs and consolidating or eliminating over 2/3 s of the programs from SAFETEA-LU. It eliminates all earmarks and most discretionary grant programs. While policy reform is essential, it is not sufficient. To keep America competitive, significantly greater investment by the private sector and all levels of government, including the Federal government, is also needed. Virtually every commission, every study, and every report that has looked at transportation infrastructure needs has come to this conclusion. However, in developing MAP-21, Congress ability to increase or even maintain investment in the surface transportation programs was constrained. The existing revenue stream of the Highway Trust Fund could not support increased funding, or even maintain current funding, and Congress was not prepared politically to raise existing user fees or develop new sources of user revenues. As a result, Congress was left with two basic choices. Live within the existing revenues of the Trust Fund by reducing investment by about 30 percent. Or maintain current investment levels by finding a short-term fix for the Trust Fund. It guarantees states a 95 percent minimum rate-of-return. It improves transportation investment decision-making through performance-based planning and programming. It accelerates project delivery and promotes innovation. It contains a number of provisions designed to enhance freight movement in support of national goals. It expands innovative financing opportunities, including a significant expansion of the TIFIA program. Congress maintained existing investment levels. MAP-21 funds the transportation programs in in each of FYs 2013 and 2014 at a level slightly above the FY 2012 level, but slightly below the SAFETEA-LU funding level that was in place in FYs 2009 through To cover the short-term shortfall in the Trust Fund, Congress transferred about $21.2 billion into it. Of this amount, $2.4 billion was from the Leaking Underground Storage Tank Trust Fund and $18.8 billion was from the General Fund. This temporary fix was necessary to keep the Highway Trust Fund solvent through the end of FY To insure no increase in the deficit, Congress offset the transfers, mostly through pension funding stabilization. The cumulative impact of these reforms should give states greater flexibility to address priority needs on the national surface transportation network and allow them to deliver projects more efficiently and more quickly.

6 Transportation s Fiscal Cliff According to this chart, the Highway Trust Fund would need an additional $76 billion, over and above existing user fee revenues, just to fund a six-year bill (FY 2015 to FY 2020) at MAP-21 levels. And, of course, significantly more than $76 billion in additional revenues would be needed to increase funding for the surface transportation programs over the current MAP-21 levels. Since MAP-21 does not address the long-term financial viability of the Highway Trust Fund, transportation will face its own fiscal cliff in the next Congress. As can be seen from the chart below, which was prepared by the American Association of State Highway and Transportation Officials (AASHTO) based on the Congressional Budget Office s official cost estimate for MAP-21, the Highway Trust Fund is projected to run a significant deficit starting in (In fact, it is estimated that the Transit Account may actually be in the red in 2014.) To make matters even worse, the AASHTO analysis may be overly optimistic given the Administration s August 28, 2012, announcement increasing the Corporate Average Fuel Economy (CAFÉ) standards for cars and light trucks from 34.1 miles per gallon in 2016 to a fleet-wide average just under 50 mpg by This more stringent CAFÉ standard will likely cause further erosion in Highway Trust Fund revenues beginning in the latter half of this decade. Transportation s fiscal cliff could also have a chilling effect on transportation investment in 2013 and States and contractors may be reluctant to move forward with certain investments in the face of the looming Highway Trust Fund deficits, especially if Congress is not actively engaged in fixing the problem.

7 The Challenge With MAP-21 expiring on September 30, 2014, the next Congress will not only face the need to reauthorize the Federal surface transportation programs, but it will also face the looming Highway Trust Fund deficit. The challenge will be to develop a long-term fix for the Trust Fund that provides a stable, adequate revenue stream sufficient to facilitate the modern, efficient, and safe national surface transportation system that America needs. Additional Resources For commission study funding recommendations and other resources and analysis, go to: The time to start thinking about the long-term Highway Trust Fund fix is now. Although 2014 seems a long way off, in political terms it s just around the corner. Moreover, there may be opportunities, such as tax reform or the grand bargain, to address the financing issues before or separate from the reauthorization effort in Highway Trust Fund revenue issues have been addressed in a variety of circumstances in the past. For example, President Reagan supported a highway user fee increase in the 1982 lame duck session. See "Modernizing U.S. Surface Transportation System: Inaction Must Not Be an Option" at Covington & Burling LLP Biographies Jack L. Schenendorf This is the first in a series of papers on surface transportation policy prepared at the request of the Association of Equipment Manufacturers. Highway user revenues were addressed in the Omnibus Budget Reconciliation Act of 1990, the Omnibus Budget Reconciliation Act of 1993, the Taxpayer Relief Act of 1997, and the American Jobs Creation Act of In recognition of the strong link between economic growth and transportation investment, the grand bargain proposals of both Bowles-Simpson and the Gang of Six addressed the Highway Trust Fund deficit. Given the importance of transportation to economic growth, private sector job creation, and international competitiveness, it is imperative that all options be explored. America needs a modern, efficient, and safe national surface transportation system.