North Carolina is hoping to capitalize on the recession’s silver lining by financing highway construction with an innovative contract between the state and private contractors — a deal that could accomplish one of Gov. Beverly Perdue’s transportation goals, even though the state treasurer’s office has expressed some reservations.

The recession, which officially began two years ago this month, according to the National Bureau of Economic Research, led to a 15% decline in North Carolina tax revenue in fiscal 2009, and revenues in the first four months of fiscal 2010 are 1.5% below estimates. 

Yet the recessionary environment has also led to declining construction costs for highway projects in the state. Mark L. Foster, the North Carolina Department of Transportation’s chief financial officer, said that contractors’ bids on projects are averaging 23% below engineers’ estimates.

Looking to take advantage of the drop in costs, the state has proposed finishing a 5.1-mile stretch of highway around Charlotte, called the Interstate 485 Outer Loop, which has been delayed since 2003. Perdue last month announced a plan that could save the state between $50 million and $100 million and result in completion of the project by 2015.

The plan divides the $540 million project into three stages: the remaining five miles of I-485 at a cost of $185 million, the widening of I-85 into Cabarrus County for $200 million, and an interchange merging I-485 with I-85 for $155 million. All three parts must be completed for the I-485 project to function.

The plan anticipates using a combination of grant anticipation revenue vehicle bonds, state highway funds, and private financing to complete construction. The state issued about $24 million of the bonds in July as part of a $250 million statewide Garvee deal, Foster said. The bonds were rated AA by Standard & Poor’s, Aa3 by Moody’s Investors Service, and AA-minus by Fitch Ratings.

North Carolina expects to issue a total of $250 million of Garvees for the project, with about $139 million for the first I-485 five-mile stage, Foster said. Additional funding will come from the state’s highway funds.

State funds and Garvees will finance 90% of the project. About 10% of the construction cost, or about $50 million, is expected to be financed with a design-build-finance contract — the state’s first attempt with this method.

The model takes the traditional design/build contract a step further. In a design-build contract, the state pays a contractor to both design and build the project and the contractor is usually paid back in three to four years, Foster said. With a design-build-finance contract, a private contractor or team of contractors pay a part of the construction costs up front. The state then will pay the contractor over a 10-year period with future transportation funds that will be appropriated by the General Assembly.

The state cannot use Garvee funds for the entire project without diverting funds from other transportation projects within its allocation, according to Foster.

The financing structure “is more about accelerating a critical project to take advantage of a low bid environment than it is about finance tools,” he said. “It is no different than any other design-build contract. The only small difference is there is a piece of the price that will be paid out over an extended time.”

The money owed to the contractor is expected to count against the state’s debt covenants, he said.

The state DOT today is holding an optional forum for potential contract bidders in Charlotte to answer questions about the projects and financing. A statement of qualifications for the first stage is due from design-build-finance teams on Dec. 22. The DOT hopes to select contractors by May.

Perdue touted the “innovative solution” as a way to complete Charlotte’s missing link without taking money from other projects. In February she said that work on the Outer Loop would begin by the end of the year. But with declining tax revenue, the state could not afford to borrow for the projects and Garvee funding would not cover all of the costs.

The state’s $737 million allocation for highway and bridge projects from the American Recovery and Reinvestment Act was ruled out for the Outer Loop because it was not considered “shovel-ready” and was too large to be a stimulus project, Foster said.

The governor had considered using funds from existing road projects for the Outer Loop, a “totally unacceptable” proposal, Charlotte Mayor Patrick McCrory said in an interview. McCrory was Perdue’s Republican challenger for governor last year. He said Charlotte is the largest city in the country without a completed outer beltway.

The design-build-finance method has been tried elsewhere with success. The Florida Department of Transportation entered into a similar project with contractors in March 2007 for Interstate 75. That project is expected to be finished next April, eight months ahead of schedule, according to the I-75 Web site.

But in North Carolina, the treasurer’s office has expressed reservations about the design-build-finance contract. On Tuesday, Treasurer Janet Cowell’s office released 89 pages of e-mails between officials in her office and the DOT regarding the financing of the Outer Loop. In the e-mails, Treasury officials expressed skepticism about the legality of design-build-finance in the week prior to the governor’s announcement of the deal.

On Nov 25, the treasurer’s office said:  “Since October, the Department of State Treasurer has been clear and consistent in expressing our reservations about the Department of Transportation’s design-build-finance proposal as the optimal method for completing the I-485 project. We have outlined alternative options for the completion of this important project within the timeframe proposed.” Stephen L. Cordell, a public finance attorney with McGuireWoods LLP, is referenced in the e-mails as saying the DOT does not have the authority under state law to enter into this type of financing contract. Cordell did not  return calls for comment.

Foster, who was responding to Treasury officials’ questions in some of the e-mails, countered the doubts expressed by those officials.

“We have been working very cordially with the treasurer’s office to address any concerns and we have even modified some of our approach based on their recommendations,” he said. “But at the end of the day, we have the legal authority, we have the borrowing capacity to do this very important project, and we continue to work with the state treasurer to make it happen,” he said.

The governor’s office reaffirmed its support for the deal yesterday.

“This plan was vetted thoroughly before it was announced,” said Chrissy Pearson, Perdue’s press secretary. “There is a statute on the books that gives the DOT authority” to proceed with the design-build-finance method, she said, adding: “Gov. Perdue would do nothing to threaten the fiscal stability of the state.”

The treasurer’s office did not return calls by press time and has not elaborated beyond the statement of Nov. 25.

Other possible impediments to the model have been raised by contractors. Stephen Whitley, an engineer with Dutch construction firm and potential bidder on the project ARCADIS NV in Raleigh, said there is a “huge” interest among contractors for the projects. However, he said the $50 million that a contractor may need to spend could limit competition among bidders.

“Some of the contractors that have been able to go after projects in the past, they will probably choose not to go after this,” Whitley said. “They can’t handle the $50 million financing portion.” Several contractors could team up to make a joint bid, he added.

The DOT’s Foster said the project was split into three stages to generate competition.

“We feel by splitting it up we will bring more competition to the table, i.e., better prices overall,” he said.

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