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The price of highway excellence is $12 billion — give or take several billion

How you account for maintenance-cost inflation makes a big difference.

Assumptions about inflation might seem like a minor, technical issue, but estimating how billions in spending might be inflated over a 20-year period has huge implications for projected price tags.
Courtesy of MnDOT

The focal point of this year’s contentious transportation debate has been the findings of the Transportation Finance Advisory Committee (TFAC) Governor Dayton established in 2012. The TFAC developed recommendations and estimates for funding Minnesota’s transportation system over the next 20 years under three different scenarios of system performance. Now, with a month to go in the legislative session, a new reportexamines the reasonableness of the assumptions used to develop these estimates. Like a last minute Perry Mason witness, the court of public opinion now considers new information regarding the actual size of the transportation funding gap that needs to be filled.

The investigation was commissioned by the Minnesota Chamber of Commerce, which hired the consulting group Accenture to prepare the study. Although Accenture “kicked the tires,” so to speak, on a variety of assumptions in the TFAC report , the headline finding focused on the reasonableness of the inflation measure used to estimate the funding gap for a world class highway transportation system. Assumptions about inflation might seem like a minor, technical issue, but estimating how billions in spending might be inflated over a 20-year period has huge implications for projected price tags.

The TFAC report used a 5% per year inflation factor to derive the estimated $12 billion highway funding gap associated with the “Economically Competitive/World Class” performance scenario. According to the Accenture report, the average annual increase over the past 12 years in three inflation measures – the Consumer Price Index, the Federal Highway Administration (FHWA) Highway Construction Cost Index, and the American Road and Transportation Builders Association Construction Cost Index – were much more modest: 2.3%, 1.1% and 3.1% respectively. Accenture noted that assuming a 2.5% inflation factor would reduce the estimated funding gap by $4.5 billion. Given this historical discrepancy, the Accenture report considered this TFAC assumption questionable.

What’s the “right” measure? It’s a question we asked ourselves earlier this year when comparing Minnesota’s measure of highway cost inflation over the last twelve years with the FHWA national highway construction cost index. As we reported back in February, over the last 11 years the state reported highway cost inflation figures that were over 6 times the national highway cost inflation measure (and over 8 times higher when those differences are compounded).

That is simply a huge differential and deserves much closer examination.  Supply and demand realities unique to Minnesota likely influence the differential in part, along with other state-specific factors (climate, material and engineering mandates and specifications, etc).  But part of the differential is likely influenced by how the cost index is derived.  As we discussed in our article, in 2003 the FHWA stopped using the cost index methodology used by the state in favor of an alternative methodology they argue is more robust and more responsive to changes in construction purchases and their weighting over time.

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How much of this large differential can be assigned to Minnesota-specific supply, demand, and mandate issues and how much to technical differences in measuring inflation?  We have no idea, and to our knowledge this issue has not merited a hearing this year.  That’s rather remarkable and disappointing in its own right given the magnitude of tax increases and spending commitments being proposed.

One thing we can say with certainty: this matters regardless of where the primary source of the differential lies.  If most of the difference is based in Minnesota having a far more challenging cost construction environment, than a breakdown of the reasons “why” is wholly appropriate and necessary to determine which factors can and can’t be controlled through state action in pursuit of greater efficiency in transportation spending. If most of the difference is based on how inflation is measured, that calls into some question the reliability of the cost estimates contained in the TFAC report and the amount of revenue that needs to be raised.

Unfortunately, the Senate Transportation Committee Chair has dismissed the report as “cooked up,” “not a credible report,” and “a political document to achieve a political goal.”  That’s predictable in the high stakes game of end of session messaging and politics.  But the issue raised in the Chamber report and flagged in our investigation is real and should not be dismissed.  With so much at stake and the financial implications so large, every Minnesota taxpayer deserves an explanation.

This post was written by Mark Haveman and originally published on Fiscal Fitness, the blog of the Minnesota Center for Fiscal Excellence.

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