North Carolina treasurer wants transportation secretary fired

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North Carolina’s state treasurer says Gov. Roy Cooper should fire the Department of Transportation secretary because the agency has overspent its budget by billions.

NCDOT officials say the agency has experienced millions in unanticipated weather-related expenses, higher costs for its accelerated construction schedule, and potentially up to $1 billion in losses due to a court ruling.

State Treasurer Dale R. Folwell said NCDOT spent nearly $7 billion in fiscal 2019, although only $5 billion of revenue was appropriated for the year, and that every division within the agency has overspent.

Folwell, a Republican, also criticized the transportation agency for making $1.1 billion in short-term loans from the capital budget, known as the Highway Trust Fund, for operational expenses in the separate Highway Fund between April 2018 and April 2019. He believes many projects were impermissibly funded, he said.

“The word ‘trust’ in the Highway Trust Fund implies that taxpayers, rating agencies, and bondholders trust that the money is being used properly,” Folwell said. “The lack of oversight at NCDOT is outrageous.”

Folwell, who made his concerns public in a press release Oct. 31, also said he believes there is a “clear and urgent need for the Office of State Budget and Management to take over the financial management of NCDOT.”

Cooper, a Democrat who appointed James Trogdon as NCDOT secretary shortly after taking office in January 2017, said Trogdon “is focused on continuing to deliver critical projects in every region of the state and implementing improvements to our internal processes to continue to improve what we do for the people of this state while operating within our cash window.”

Trogdon, who reports regularly to the General Assembly on budget matters, told lawmakers in a letter Monday that recent criticism of him “fails to consider the dynamic nature of a multi-billion capital program where construction projects are paid over several years."

The criticism “simply does not take into account the carry-forward nature of the state’s transportation budget nor does it consider the unprecedented costs” that storms, floods and hurricanes, and a recent court ruling striking down a 32-year-old state law governing the purchase of right of way has cost the state, Trogdon said.

“When those elements are considered, the math is simple,” said Trogdon, who has requested additional funding from the General Assembly.

If rating analysts were concerned about NCDOT’s spending and oversight, they didn’t mention any issues in rating reports for North Carolina’s $300 million of appropriation-backed Build NC bonds issued June 13 to accelerate the construction of 38 road projects identified in the Statewide Transportation Improvement Plan.

Fitch and S&P Global Ratings rated the limited obligation revenue bonds AA-plus, while Moody's Investors Service assigned an Aa1 rating. All had stable outlooks.

The 15-year bonds priced June 13, as the first tranche of the $3 billion program. The debt will be paid back from revenues in the Highway Trust Fund.

S&P was the only agency that discussed the decline in the Highway Trust Fund’s monthly cash balance over the past year due to the increase in loans to the Highway Fund to accelerate construction projects.

“As of March 30, 2019, the total amount of the loans from the HTF to the Highway Fund came to approximately $1.1 billion,” said S&P analyst Timothy W. Little, who added that the state treasurer had recognized the drain on the HTF as result of the loans.

Little said the state treasurer, NCDOT, and the Office of State Budget and Management agreed to implement cash management procedures before Build NC bonds are issued. The procedures require NCDOT to report certain information and to document Highway Trust Fund loans and interfund transfers.

“Despite the increased loan activity from [the] HTF, we do not view it as a material credit weakness to the Build NC bonds” or to the North Carolina Turnpike Authority’s revenue bonds, Little said. “The state has consistently shown proactive management of its cash balances by implementing and following procedures when necessary.

“Additionally, the fund itself continues to show robust revenue growth as a result of increasing economic activity and population gains across the state,” he added.

HTF revenues totaled $1.5 billion in fiscal 2018, an increase of 2.4% over the prior year and a 36.7% increase since 2013, S&P said.

The trust fund’s primary revenue sources are 29% of the state's motor fuels tax, 100% of the highway use tax levied on motor vehicle purchases, revenue from certificate of title fees and other fees paid to the Division of Motor Vehicles, and interest and income earned by the HTF.

The NCDOT is also experiencing budget pressure due to a series of complex issues, some unanticipated and others related to requirements imposed by the General Assembly. Among them are requirements that NCDOT maintain a cash balance between a minimum of $282 million, or 7.5% of revenue, and $1 billion.

A study by McKinsey & Co. found that NCDOT’s cash limit requirements are narrower than peer states, and that policy will make meeting cash targets more difficult going forward.

NCDOT’s maximum allowable amount of cash as a percentage of annual appropriation was 26%, not including federal funds in fiscal 2019.

In several peer state transportation departments, based on 2018 comprehensive annual financial statements, McKinsey found that the cash balances were 53% in Texas, 46% in Florida, 43% in Virginia, 36% in Massachusetts, and 21% in Ohio. None of the states had a limit on the amount of cash they could keep on hand.

When Trogdon took over the agency in 2017, cash reserves were more than $2 billion and lawmakers requested that amount be reduced, agency spokesman Steve Abbott said. That’s when the construction schedule was accelerated.

In February 2018, Trogdon requested that the General Assembly approve Build NC, a $3 billion bond program to help finance the accelerated road construction over 10 years. Build NC was passed on June 20, 2018, according to a timeline on NCDOT’s cash balances.

By the time the Build NC Act was passed, NCDOT was already embroiled in litigation as a result of a 1987 law passed by the General Assembly that allowed the agency to restrict improvements on lands in designated transportation corridors without paying the landowners.

Nearly 600 property owners had filed lawsuits alleging that the corridor maps amounted to a taking of their property without just compensation, according to a disclosure in bond documents for the June 13 bond issue.

The North Carolina Supreme Court struck down the Map Act in June 2016, finding it a form of inverse condemnation.

In July 2018, a Forsyth Superior Court Judge ruled that NCDOT had failed to comply with a deadline to appraise certain properties affected by the Map Act. The ruling prevented the agency from using a “quick take” procedure to move projects forward while negotiating compensation for the property with landowners. The court also required the agency to settle the Map Act cases.

The NCDOT’s bond disclosure said about 3,500 parcels are vulnerable to claims for damages because of the Map Act ruling, and that 1,500 parcels had been acquired. The agency has spent about $10.2 million for legal fees. The disclosure said payments for the liability will come from the HTF.

After the Build NC bonds were issued, NCDOT's chief operating officer, Bobby Lewis, said in July that spending related to the Map Act was climbing and could reach $1 billion. As of Friday, the agency said about $340 million had been spent on settlements.

An unanticipated year-long surge in weather-related events also sped up NCDOT’s cash burn rate, starting with Hurricane Florence in September 2018, which is projected to cost $225 million. Other events such as snow and ice storms, rock slides and floods cost the agency $96 million, and damages from Hurricane Dorian this past September are estimated to be as much as $30 million.

“Over a 12-year span, we averaged $66 million in weather-related expenses,” Abbott said.

Project funding disbursements and cash outflow had reduced the cash balance to $432 million as of September, up from $343 million at the end of June, according to a financial review posted on NCDOT’s website.

The low balance led NCDOT to take several actions to slow expenses earlier this year, including laying off about 500 part-time temporary employees and suspending engineering work on about 900 projects that were not expected to be constructed in the next few years, Abbott said.

Since March, NCDOT has also suspended all contract advertisements for resurfacing and pavement preservation activities; reduced bridge replacement contract advertisements, although critical projects will proceed; and suspended all non-essential travel and training.

The spending pressures at NCDOT have arisen amid a months-long dispute between the governor and the Republican-led General Assembly over the state budget.

Cooper vetoed the budget in June, and remains in an impasse with lawmakers over teacher’s raises and expanding Medicaid.

Since the veto, the Legislature has passed a series of mini-budgets for certain state agencies. Some agency budgets remain unsettled but they can operate because of an automatic continuing resolution.

On Wednesday, Moody's Investors Service said the North Carolina General Assembly's Oct. 31 adjournment without passing a budget for fiscal 2019-2021 is a credit negative because it reflects weak governance.

“Although the state ended fiscal 2019 with a budgetary surplus of nearly $900 million, the lack of agreement on budget priorities amid a time of economic expansion and healthy revenue growth does not augur well for budgeting and strong governance during times of economic and revenue stagnation or declines,” said analyst Pisei Chea.

Although North Carolina is largely insulated during the current impasse, Chea said the delay could begin to hurt local governments and other downstream entities through an interruption in state aid.

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Transportation industry Revenue bonds Budgets Roy Cooper State of North Carolina North Carolina Turnpike Authority North Carolina