Highway Funding Revisited

 | Mar 27, 2012 | 9:30 AM EDT  | Comments
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In the good old days, when deficits were a nuisance not a noose and earmarks helped Washington dealmakers stitch together compromises that made budget hawks see red, it used to be a test for each new set of highway bill authors to exceed the percentage multi-year funding increase envisioned by the last.

 Events such as the Bush 41-era "ISTEA" (1991), Clinton-era "TEA-21" (1998) and even the George W. Bush-era "SAFETEA-LU" (2005) each represented major funding increases, although the gasoline tax had already begun to lose its luster as a funding mechanism before former House Transportation Committee Chairman Don Young (R-Ak.) got to name the final version of the latter after his wife.

But today the kitty is dry. Cars are more efficient, and prohibitive fuel costs have Americans driving less, generating less federal revenue via the 18.4 cents per gallon gas tax. And adding insult to injury, earmarks are no longer allowed.

Where's the fun or political payoff in finding a fix for that?

If you note that highway bills (or surface transportation acts) have been struck roughly every seven years when they are supposed to authorize funding for just five -- similar to other rent-extracting policy-lease extensions such as the Farm Act and Higher Education Act -- you've probably already surmised two things. First, it takes a whole lot of pork to grease the skids for plans to divvy up $50 billion or more in annual money for road and bridge construction, mass transit and other transportation priorities. And that deal-making takes time.

The difficulty is compounded by states in different regions having different priorities ( they don't need as much transit in Nebraska), by some states facing perennial difficulties in producing matching funds and by the almost permanent dissatisfaction of  donor states who send more to Washington in gas taxes than they receive in federal highway funding.

Highway bills tend to be temporarily extended -- often multiple times -- when they expire, rather than replaced via a permanent multi-year authorization, all in order to buy Congress more time to cut-print on a deal making a filibuster-proof Senate majority happy. 

Second, after no fewer than eight extensions since the shortened-span SAFETEA-LU (the "Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users") expired in September 2009, this would seem to be the year for another "permanent" authorization to be legislated.

This week is fish-or-cut-bait tie, with the last extension expiring on March 29.   The Senate has passed an 18-month, $109 billion extension that won't draw comparisons to the Obama stimulus bill, but papers over the fact that the gas tax won't support the $40 billion or so in annual funding deemed minimally sufficient to the nations' needs. The gap between what the gas tax will pay for and the minimum that lawmakers can accept will be covered mostly by appropriations from the general fund, hardly without controversy in the era of budget austerity and mandated funding offsets on the floors.

Meanwhile, House Republicans, predictably, have eschewed the mid-length/general-fund approach and have instead sought to produce a healthy four-and-a-half year authorization with plans to augment funding (at least initially) with revenues from new allowances for oil and gas drilling on federal lands. Senate Dems are predictably nonplussed, as has the White House, which has been thrown onto the defense over its energy policy amid rising gas prices.

At week's end the House GOP will first try to adopt House Transportation Chairman John Mica's (R-Fla.) long-term extension, then even if it passes, likely volleys back a three-month extension when the Senate rejects any such plan in favor of its own. It's not even clear that House Speaker John Boehner (R-Ohio) might be able to muster sufficient Republican support to advance a 3-month extension, but we expect something in this range or slightly longer to be ultimately adopted.

As my colleague Loren Smith concludes:

"It's not clear that companies relevant to highway construction will derive significant value from the Senate's 18-month bill (top analysts peg a positive catalyst at a minimum of three years). That, in turn, reduces pressure on the House GOP to take it up. Meanwhile, the Senate is talking tough against a three-month extension, but majority Democrats would regard a funding-related shutdown for failure to agree as an unacceptable policy disaster. Specifically, the labor, transit and other stakeholders who would most loathe a shutdown carry more influence with Democrats. So we see much the same dynamic in play that led the Senate to approve the House's FAA extension last August."

The plus in all this is that funding will stay roughly constant. But the odds of anything more than another short-term punt (or two) seem slim, which could produce less of a negative than the absence of a hoped-for positive (long-term funding certainty). This could be a mixed bag for companies heavily engaged in highway construction and engineering, heavy machinery, production of asphalt and aggregates, transit and even highway safety programs. Many of these companies bounced well off the 2009 bottom and had two solid years of recovery after passage of the Obama stimulus legislation, but then hit a wall of worry with other economically-sensitive stocks after last year's Japanese Tsunami and the sovereign debt crisis in Europe. Like other sectors, the group has largely recovered again since last fall, but now seems fairly directionless awaiting further evidence on the economy and clarity on the 2012 election outcome. 

The math of funding shortage affecting the highwaymen -- facing either party left with the upper hand after November -- is that for every additional year one might want to extend surface transportation funding, one must borrow another $6-9 billion or find a new tax source to pay for it.

I have heard that the House is making at least some progress toward coalescing around long-term legislation, which would have more far-reaching consequences. And should Republicans still control the House and gain in, if not retake the Senate, they can tweak and pass a new Mica's long-term bill in the next Congress and administration. As a rule of thumb, Republicans are unlikely to cut too heavily, regardless of their margins, although conservative policy mavens would like to devolve highway management to the states.

For their part, Democrats would like to raise taxes to bring in dedicated revenue for highway programs, although their failure to come to an agreement when they had large majorities in both chambers (at the beginning of the Obama administration) raises doubts about how brave they might become if restored to surely-narrower control. Should Democrats hold the White House and Senate, in any event, we would expect spending increases on infrastructure, financed by transfers from other parts of the federal budget, and likely including new borrowing. For this reason, we see companies closely involved with federal infrastructure spending as Blue Stocks for this election cycle.

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