American Jobs Act – What Is In It For Your Construction Business?

Please, ladies and gentlemen, don’t shoot the messenger. I don’t write the legislation, I just report what is in it so your business can take advantage of the appropriations if you so choose. Having said that, here is a breakdown of what is in the 155 page American Jobs Act of 2011, as introduced by the Obama administration, which affects the construction industry, segment by segment.

      If your construction industry group or business would like a more detailed presentation of the provisions of this proposed federal law, I am available to speak to your organization about it. Just send me an e-mail at the address below proposing a time and location.

All Segments of Construction

·        Buy American iron, steel and manufactured goods

·        Employee payroll tax cut from 4.2% to 3.1%

·        Employer payroll tax cut from 6.2% to 3.1%

·        Zero payroll tax on pay increases up to $50 million in increased wages

·        100% first year write off for new equipment in 2011

·        50% first year write off for new equipment in 2012

·        Tax credit for hiring veterans unemployed 6 months or more increased from $4,800 to $9,600

·        Tax credit for new hiring of veterans unemployed 6 months or more of $5,600 and $2,400 for new hiring of veterans unemployed 4 weeks to 6 months

·        Tax credit of $4,000 for new hiring of any person unemployed for 6 months or more

·        $1.5 billion for job training, including registered apprenticeship programs

·        Prohibits hiring discrimination against the unemployed

·        Requires payment of Davis Bacon prevailing wages on any project receiving funding

Residential Construction

·        Project Rebuild appropriates $15 billion for rehabilitation of vacant and foreclosed homes and neighborhood stabilization

·        Includes homeownership assistance and homebuyer rehabilitation funding

·        Prohibits use of funds for demolition of existing public housing

·        Prohibits flipping of rehabilitated properties

·        Includes requirements to hire a certain portion of labor force from the project vicinity

Commercial Construction

·        School Building Modernization: $25 billion for elementary and secondary school buildings, plus another $5 billion for community colleges

·        Up to 30% of $15 billion in Project Rebuild funds may be used for commercial building rehabilitation that will help stabilize neighborhoods

Industrial Construction

·        $6.5 billion for construction of a new nationwide public safety broadband network

Government Construction

·        Increases SBA surety bond guarantees from $2 million up to $5 million

·        $27 billion for highway and railway construction under current formulas

·        $4 billion for intercity and high speed passenger rail corridor construction with 100% federal share

·        $3 billion for public transit construction with 100% federal share

·        $2 billion for Amtrak construction upgrades

·        $6 billion for fixed bus guideway construction

·        $5 billion for competitive surface transportation construction grants

·        $10 billion initial funding for American Infrastructure Financing Authority to provide direct loans or loan guarantees financing infrastructure construction projects which can repay by means of tolls, user fees or other dedicated revenue sources in 35 years or less

Obama’s Jobs Speech

Thursday evening September 8 at 7 p.m. Washington D. C. time President Obama will speak to a joint session of Congress about initiatives he is proposing to put 25.4 million unemployed and underemployed Americans back to work in a growing economy. Outside Obama’s senior staff no one is exactly certain what his proposals will include, but we expect to hear him talk about the following, not necessarily in the order presented here:

Construction Industry

About half of the Obama Administration proposals will be aimed directly at the ultra-high unemployment among skilled construction tradespeople:

FAA Reauthorization

The current temporary reauthorization of funding for the FAA expires September 16. When Congressman John Mica forced a shutdown of FAA runway and tower construction projects, that Congressional action stopped work on $2.5 billion of infrastructure construction until Transportation Secretary LaHood pushed through emergency legislation to put tradespeople back to work on these projects. The money to pay these workers will stop flowing again on September 17 unless a clean FAA reauthorization bill is enacted and signed into law by then, or another temporary extension is passed.

Surface Transportation Reauthorization

There has not been the customary six year Highway Trust Fund reauthorization since Obama took office. Instead, highway, water and rail transportation infrastructure construction across the country has been financed by a series of three and six month temporary extensions. Some of the slack has been taken up by stimulus appropriations, but the stimulus was intended to add to, not substitute for, regular surface transportation initiatives, and as a result, the economy has not been stimulated.

House Republicans on the Transportation and Infrastructure Committee are proposing to slash the level of appropriations from past legislation by more than half. Look for Obama to seek $550 billion in appropriations over the next six years, rather than the $230 billion Republican six year proposal.

Infrastructure Bank

The idea of a federal infrastructure bank to draw private investment into toll highway, rail and port facility construction – projects in which private investors could earn a reasonable return on their investment – has succeeded in facilitating infrastructure construction in Europe and elsewhere. This is a pet project of the Obama administration, plus there are two versions of proposals already put forward by Senator John Kerry (D. Mass.) – who proposes a $10 billion federal start up appropriation – and Representative Rosa DeLauro (D. Conn.) - who proposes $25 billion in federal seed money. Both versions would include investments in highway, rail, waterway, drinking water and sewage treatment, and energy projects. DeLauro’s version would also include broadband communications construction.

Commercial Building Retrofits

Another proposal which has been the subject of Obama administration trial balloons lately is the idea of a tax incentive to promote private investment in retrofitting existing commercial buildings for greater energy efficiency. This would put thousands of skilled tradespeople back to work without any direct federal expenditure, and would bring millions of private dollars now on the sidelines back into our economy. Also, it has the additional factor of appealing to Republicans, who are more likely to support an initiative that looks like a tax cut for business. Apparently Obama’s Jobs and Competitiveness Council is behind this proposal.

School Building Renovations

This proposal will be buried in the middle of the speech somewhere. Obama is always an advocate for improving the education systems of America, but because this particular initiative would involve new direct federal expenditures, it will likely draw strong opposition from across the aisle.

Broadband Tower Construction

While the stimulus early in Obama’s term appropriated a great deal of cash for studying the broadband needs of unserved and underserved areas of the nation, there has not been a lot of actual communication tower construction with those funds. Only about 68% of U. S. land area is currently covered by broadband communication networks – Obama will seek expansion of that coverage to 98%. This is another program which could bring private investment into play with minimal direct federal expenditures, as revenue from broadband users could ultimately repay investors for most of the cost of connecting outlying populations to cable TV and the internet.

Power Grid Modernization

This has been another favorite of Obama’s, as part of his alternative energy initiatives and climate change reduction legislation. Of course, power grid modernization should also attract considerable private investment from utility companies if the right incentives are enacted. And, significant segments of the skilled construction trades would be put back to work should power grid construction expand significantly. The massive outages on the east coast from recent storm damage will highlight the need for this sort of infrastructure investment.

Local Construction Initiatives

You may not hear anything about this one in Obama’s speech, but Representative Judy Biggert (R. Ill. 13^th District) announced a couple weeks ago that Veterans Administration Secretary Eric Shinseki has approved construction to transform the old Silver Cross Hospital building in Joliet, Illinois into a 60,000 s.f. VA outpatient clinic to serve the growing south suburban population of returning veterans. Silver Cross is moving into a new hospital facility in New Lenox.

Other Obama Proposals

Of course the construction industry won’t be the president’s only target for economic improvement. His speech will likely also include initiatives like tax incentives, direct federal expenditures, and cutting red tape to improve the economic competitiveness of American private enterprise. In the tax incentive category, look for proposals to extend the temporary 2% reduction in payroll tax rates; a tax credit for putting new employees on company payrolls; and an additional tax credit for hiring returning armed forces veterans. Proposed direct federal expenditures could include further extension of unemployment benefits for out of work Americans; assistance to local school districts for hiring more teachers; and specialized job training programs aimed at the long term unemployed. Finally, in the competitiveness category, we expect Obama to push ratification of three pending free trade treaties; and improvements in patent law to speed up commercialization of new American inventions.

Get Ready For The Construction Industry Unemployment Devastation Act

House Transportation and Infrastructure Chairman John Mica will call it the six year highway trust fund reauthorization legislation, but that will be a completely inappropriate title for the bill. Today Mica is expected to introduce a six year reauthorization package that will slash funding for roads, bridges and other infrastructure from past levels down to $230 billion over six years. If Mica’s version of the bill passes the House, it will collide with Senator Barbara Boxer’s expected version, which is predicted to call for funding at the level of $550 billion over six years.

Why am I calling this the “Construction Industry Unemployment Devastation Act?” Here is the arithmetic: Last fall, a panel of 80 experts on American infrastructure, headed by former Secretaries of Transportation Norman Mineta and Sam Skinner, concluded that maintaining U. S. infrastructure and meeting the needs of population growth should require investment of $262 billion each year, or a total of $1.57 trillion over six years. Senator Boxer’s bill is expected to propose about $550 billion over six years, or about 35% of the need. Mica’s bill which should come out today, will call for a mere $230 billion over six years, or just over 14.6% of the need. OUCH!!

Even the modest Boxer proposal would need an infusion of $12 billion, or $2 billion each year, from general federal revenues to make up for declining motor fuel consumption and a resulting shortfall in motor fuel tax revenue.

What this means for employment in the construction industry is that tradesmen who once worked for industry behemoths like Walsh, Bechtel or AMEC Morse Diesel will have to move overseas, or find work on crews remodeling houses, and the tradesmen now working in the home remodeling segment will end up at the unemployment office. It’s not a pretty picture, and the artists are those Republicans in the House who will do everything in their power to destroy any chance the Obama administration has of reviving the American economy before the 2012 elections.

Politics Is Strangling Infrastructure Bank Legislation

Early last September, the Obama White House proposed a Federal Infrastructure Bank, which the construction industry hoped would bring a much needed infusion of private capital into more “shovel ready” projects, and help in starting a resurgence of the severely depressed construction sector of the American economy. Well, the shovels are still ready, but the infrastructure bank concept, like so many legislative initiatives for creating jobs, is mired in the politics of spending cuts and debt reduction.

The Obama Administration’s original proposal was creation of a permanent federal infrastructure bank, which would use grants, loans and loan guarantees to attract state and local funding, and private investment, to revenue generating transportation infrastructure construction projects. According to the September 9, 2010 White House press release, the proposed infrastructure bank would be:

“…an important departure from the federal government’s traditional way of spending on infrastructure through earmarks and formula based grants that are allocated more by geography and politics than demonstrated value. Instead, the Bank will base its investment decisions on clear analytical measures of performance, competing projects against each other to determine which will produce the greatest return for American taxpayers.”

Of course, that overt threat to end Congressional earmarks against the Highway Trust Fund probably assured the death of the infrastructure bank proposal from the Obama Administration. As a result, Obama’s February 14, 2011 budget message phrased the concept a little more elegantly:

“A cornerstone of the I-Bank’s approach will be a rigorous project comparison method that transparently measures which projects offer the biggest value to taxpayers and our economy. This marks a substantial departure from the practice of funding projects based on more narrow considerations.”

So, unlike the Obama Better Buildings Initiative, which has never even been introduced in the form of legislation, the infrastructure bank concept has at least left the starting blocks, in the form of SB 652, the BUILD Act, and SB 936, the AIIF Act. Neither piece of proposed legislation has even made it over the first hurdle, though.

Unfortunately, Senator Kerry's 57 page Building and Upgrading Infrastructure for Long-Term Development Act, Senate Bill 652, is bottled up since March 17 in the Senate Finance Committee, while Senator Rockefeller's 67 page American Infrastructure Investment Fund Act, Senate Bill 936, is bottled up since May 10 in the Senate Commerce, Science and Transportation Committee. Neither proposal is going anywhere, in my estimation, until two conditions are met: 1) our political leaders finish their cat fight over increasing the debt limit and reducing federal spending; and 2) someone proposes to support the federal highway trust fund with a source of infrastructure funding revenue as an addition to, or an alternative to, the current motor fuel tax.

The breakdown last week of the debt limit negotiations, and the Republican refusal to consider any new taxes, likely sound the death knell to both SB 652 and SB 936. In the absence of a massive letter writing campaign from construction businesses in favor of one or both of these proposals, there isn't going to be an Infrastructure Bank set up any time soon. If you would like to see an Infrastructure Bank get moving, write to your own Senators, and to members of the Senate Commerce Committee and members of the Senate Finance Committee in support of it.

Congress Stymies Better Buildings Initiative

Politicians in both Republican and Democratic parties say they believe issue number one in the upcoming Congressional and Presidential elections is job creation. You would think this would make it easy to move legislative initiatives that would create jobs, conserve energy, and lower taxes. Yet one such initiative proposed by the Obama administration is so stalled in Congress that no one is moving any bill to implement the program.

On February 3, 2011, the White House proposed its Better Buildings Initiative, to improve energy efficiency of existing buildings, reduce the energy bills of businesses and consumers, and conserve energy. According to a report released Monday, June 13, 2011 by The U S Green Building Council, The Real Estate Roundtable and The Natural Resources Defense Council, the administration’s proposed program would create 114,000 new jobs, 77,000 of them in the severely depressed construction industry. The Better Buildings Initiative was also the subject of a portion of testimony by U. S. Department of Energy Assistant Secretary David Sandalow before the Subcommittee on Energy and Power of the House Committee on Energy and Commerce on June 3. As described, the Better Buildings Initiative will provide new tax incentives for building energy efficiency, new financing for retrofits of existing buildings, and streamlined building code provisions and performance requirements.

According to Roger Platt, a senior vice president of The Green Buildings Council, the Better Buildings Initiative will “lower energy consumption, reduce our nation’s dependence on foreign oil and allow America to retain its competitive edge in the international economy.” What’s not to like?

Congressional Committees with jurisdiction include: House Ways and Means, Chairman Dave Camp (R-MI) and its Select Revenue Measures Subcommittee, Chairman Pat Tiberi (R-OH); House Energy and Commerce, Chairman Fred Upton (R-MI) and its Subcommittee on Energy and Power, Chairman Ed Whitfield (R-KY); and House Science, Space and Technology, Chairman Ralph M. Hall (R-TX) and its Subcommittee on Energy and Environment, Chairman Andy Harris (R-MD). The websites of these committees and subcommittees are filled with diatribe attacking the Obama administration for inaction on the jobs and tax reduction fronts, yet there is no mention whatsoever of the Obama administration’s Better Buildings Initiative.

Republican politicians at all levels say they want lower taxes, less dependence on foreign oil, and more jobs. Private sector evaluation of the proposals in the Better Buildings Initiative says it will achieve all three goals. A polite letter to the committee chairmen listed above, pointing out that there should be strong bipartisan support for this proposal, and inquiring why it is going nowhere in the House, might kick some Republican butt, and get this job creator moving.

OSHA “Phasing In” New Residential Construction Fall Protection Standard

Tomorrow’s deadline for compliance with the new OSHA guidance on residential construction fall protection, which can be found at http://www.osha.gov/doc/guidance.html, will be phased in for roofers and other residential contractors who may be in violation of the new directives, but still in compliance with the old alternative standards, according to OSHA Administrator Dr. David Michaels. Between June 16 and September 15 of this year, any residential construction contractor found to be in violation of the new directives, but who does comply with the old alternative standards, will receive only a “hazard alert letter,” while contractors not in compliance with either the old or new standards will be issued OSHA citations.

This three month “phase in” effectively amounts to a one year extension of the deadline in those states north of the Mason Dixon line, where the roofing season ends around September 15. Contractors in the South and Southwest regions will have to obtain equipment complying with the new directive by September 15 to avoid issuance of fall protection citations.

Now would be a good time for roofers and other residential contractors to take a good look at the new OSHA guidance, and plan their fall protection procedures under the new guidelines, while cash flow is available to support acquisition of the required bracket scaffolds or retractable lifelines for the use of their tradespeople.

Are You REALLY An Additional Insured On All Subs’ Coverage?

General contractor G hires steel fabricator SF to fabricate and erect structural steel on the owner’s project. Fabricator SF hires steel erector SE to erect the beams and columns SF will fabricate in its shop. G’s subcontract with SF requires SF to name G as an additional insured on SF’s commercial general liability insurance. SF’s sub-subcontract with SE requires SE to name G and SF as additional insureds on SE’s commercial general liability policy. SE complies, and sends G a certificate of insurance showing G and SF as additional insureds on SE’s policy. Sound familiar?

Later, a couple weeks into erection of the steel on site, one of SE’s ironworkers falls and is injured. The ironworker files a workers’ compensation claim against SE, and a negligence lawsuit against SF and G. G, shown as an additional insured on the certificate provided by SE, tenders G’s defense in the negligence lawsuit to SE’s insurance company. If you would expect SE’s insurance company to defend and indemnify G, you would be mistaken, at least in Illinois, under the recent decision of the Illinois Appellate Court. Surprised?

In Westfield Insurance v. FCL Builders, 2011 WL 855197 (1st Dist. 2011), the court ruled that Westfield’s insurance policy language regarding the definition of who was insured required Westfield to provide coverage only when “you and such a person or organization have agreed in writing in a contract or agreement that such a person or organization be added as an additional insured on your policy.” The court found that SE’s promise to SF to name G as an additional insured was not enough to meet this requirement. Finding no direct written agreement between SE and G requiring SE to name G as an additional insured, the court ruled there could be no coverage for G under SE’s policy, in spite of the issuance of a certificate of insurance identifying G as an additional insured.

Perplexed? How can you fix this?

Easily enough! Besides requiring subs to require sub-subcontractors to name G as an additional insured, and submission of certificates of insurance reflecting that they have done so, G should require subcontractors and suppliers at all levels to submit, along with the typical certificate of insurance, a letter like this:

“Pursuant to a direct agreement among Owner, G and SE, and in consideration of Owner and G’s acceptance of SE as a trade contractor [or material supplier] on the project, SE hereby agrees directly with Owner and G to name Owner and G as additional insureds on SE’s commercial general liability insurance policy for the duration of the project, and is supplying the enclosed certificate of insurance from SE’s insurer identifying Owner and G as an additional insureds under SE’s commercial general liability insurance policy, together with a copy of SE’s policy and of the endorsement naming Owner and G as additional insureds.”

Of course, the ruling in the Westfield Insurance case was based on the particularly narrow wording of Westfield’s policy, but you can be sure this court decision will prompt many other carriers to modify their policy language accordingly. The simple expedient of requiring the above form of letter covering each and every insurance certificate, policy and endorsement on the project will protect general contractors against the fate that befell FCL Builders in this coverage case.

Ways And Means Considering Modest Tax Relief For Smaller Contractors

Republican Congressman Walter Herger (R-CA), with cosponsors Shelley Berkley (D-NV) and David McKinley (R-WV), has introduced H.R. 1993, entitled American Job Builders Tax Reform Act, to provide some modest tax deferral for smaller construction contractors in the years beginning with calendar 2011. Yes, if the bill passes, it will apply for this calendar year’s taxes.

The legislation would permit construction businesses with annual gross revenues of up to $40 million to use the completed contract method of tax accounting for profits. Presently, only those contractors with annual gross revenues of $10 million or less are permitted to use completed contract tax accounting, while those with gross revenues over $10 million must use the percentage of completion method of tax accounting. H.R. 1993 would also increase the $40 million threshold each year to keep pace with inflation, according to the federal COLA.

The completed contract method of tax accounting permits deferral of income taxation on contractor profits until all work on a project is completed, and the business can accurately determine the amount of profit on the project, if any. Under the percentage of completion method, a construction business must pay taxes on the percentage of fee earned on all contracts in its tax year, even though the duration of some projects may make it impossible to determine whether or not a particular project will ultimately produce any profit at all.

H.R. 1993 has been referred to Congressman Dave Camp’s House Ways and Means Committee, where it will be considered by the Revenue Measures Subcommittee chaired by Representative Pat Tiberi (R-OH). Other members of the Revenue Measures Subcommittee include Representatives Rich Berg (R-ND), Shelley Berkley (D-NV), Charles Boustony (R-LA) John B. Larson (D-CT), Kenny Marchant (R-TX), Richard E. Neal (D-MA), Erik Paulsen (R-MD), Peter Roskam (R-IL), and Mike Thompson (D-CA).

If this bill will be helpful to your business, now would be the time to write to members of the subcommittee and let them know you support the legislation.

Would A Chicago Casino Bring Construction Jobs?

Short answer: Maybe.

To begin with, the Chicago Casino Development Authority created by the bill now on Governor Quinn’s desk awaiting signature would have to decide whether it wants a land based casino or a riverboat. Chicago has no shipyard, so if the Authority opts for a floating mecca of gaming, the only construction jobs for Chicagoans would be those involved in the land side ancillary facilities like restaurants, taverns and a parking garage. This would cut the local casino construction workforce by about half.

If the Authority chooses a land based facility, the question is how construction of such a casino would be financed, given the cash strapped situation of city government and local taxpayers at the present moment. It would be possible for the Authority to attract private capital to the project by requesting proposals for private construction of the physical facilities, which would then be leased to the Authority for operation of the gaming establishment. Private investors would recover their capital investment with agreed upon earnings through lease payments from the Authority, while the Authority would not have to borrow in order to finance the construction. The land based casino would become operational faster, since private developers would be more free to employ an accelerated design/build program than the Authority, constrained by “lowest responsible bidder” requirements of public construction laws, could ever do.

Given that most of the sites proposed for development of the Chicago casino are on property already owned by others, it would be easy enough for the Authority to specify the details of casino construction through a leasehold work letter like the ones office building or store tenants use to set out the requirements for building out the space they will occupy in a leased building or space. The Authority would retain control of the appearance and layout of the finished product, while the private owner would finance and contract for construction of the facility. The work letter could even require the Authority’s landlord to adhere to City mandated requirements for minority and women participation, and use of local tradespeople on the project.

If Governor Quinn signs the bill, Mayor Emmanuel will appoint the members of the Authority board, and I look for the Board to do everything possible to attract private capital to construction of the new casino – on land if there is any political interest in keeping the construction dollars in the city rather than in a shipyard in another state. The same sort of legal arrangements used when our generous local philanthropists donated a quarter billion dollars to enhancement of Millennium Park can both attract private investment to a Chicago casino project, and avoid the delays inherent in public bidding and contracting for actual construction of the facility. Rahm is a very smart Mayor, and the precedents are all in place. I’m looking for a land based casino built with private funds, and leased by the Authority. Hammers could be swinging within a year if our political leaders act quickly.

Republican Union Busting Goes Federal

The Republican sponsored push for labor union busting legislation, which has been steadily creeping eastward through state capitals from Madison through Indianapolis to Columbus, has finally arrived at the U. S. Capitol Building in Washington, D.C. Introduced by North Carolina Representative Virginia Foxx, and cosponsored by Representatives James Lankford of Oklahoma, Jason Chaffetz of Utah, Ron Paul of Texas and Lynn Westmoreland of Georgia, H.R. 1846 would repeal the Davis Bacon Act’s prevailing wage requirements on any construction contract paid for in whole or in part with Federal Highway Trust Fund money, if the invitation for bids on the project is issued after the effective date of the legislation.

The one page repealer bill is now in the House Committee on Transportation and Infrastructure and the House Committee on Education and the Workforce. If your Representative is on the sponsorship list for H.R. 1846, or is serving on either Committee to which the bill has been referred, now is the time to write and let them know your position on this anti-labor legislation.

Will Federal Highway Construction Dollars Ever Come Back?

One of the many political issues in Congress which presently suffers from a dearth of press coverage amid the toxic debates over Medicare cuts, tax increases, budget slashing and the deficit ceiling, is the question of long term reauthorization of the Federal Highway Trust Fund. However, work on the Highway Trust Fund issue does continue in Washington. Joseph Kile, CBO’s Assistant Director for Microeconomic Studies, testified recently before Max Baucus’ Senate Committee on Finance about the status of the Highway Trust Fund. The picture Kile painted was not a particularly pretty one.

In his Finance Committee testimony, Kile outlined four potential scenarios for long term Highway Trust Fund reauthorization legislation: 1) funding highway projects for which benefits exceed costs; 2) spending enough to maintain highway performance; 3) maintaining current spending levels adjusted for inflation; or 4) limiting spending to revenues raised by existing motor fuel taxes.

Option 1) Funding projects where benefits exceed costs.

This option would involve significant increases from current spending levels, estimated at $209 billion per year from federal, state and local governments. If the current proportion of federal funding is maintained, this would mean Federal Highway Trust Fund annual expenditures would increase from the current level of $45 billion per year up to $94 billion per year. A somewhat less generous approach would involve setting a minimum threshold for the cost/benefit ratio. If federal funding were restricted to those projects for which benefits exceed costs by at least 20%, total government funding from federal state and local governments would drop to $188 billion per year, with the Federal Highway Trust Fund share decreasing to $84.5 billion per year. If the funding threshold were increased to 150% of costs, project funding would drop to $165 billion per year, and the federal share would drop to $74.2 billion per year.

Option 2) Spending at levels to maintain current highway performance.

Spending levels designed to merely preserve current average travel delays and pavement quality on federal highways would require all levels of government to spend a combined $127 billion per year, with the Federal Highway Trust Fund share approximating $57 billion, an increase of $12 billion above current Trust Fund spending levels.

Option 3) Maintaining current spending levels adjusted for inflation.

Current Highway Trust Fund spending levels of $45 billion per year, adjusted for inflation in construction costs, will exceed the revenues produced by current federal motor fuel taxes by $2.5 billion in fiscal 2011, and by $3.2 billion in 2012. Since the Highway Trust Fund is not permitted to go into a deficit position, even the modest option of maintaining current spending levels will require either annual make up appropriations from general revenues, an increase in federal motor fuel taxes, or additional user fees in the form of tolls or vehicle miles traveled taxes.

Option 4) Limiting spending to revenue from existing motor fuel taxes.

Limiting Highway Trust Fund spending to an amount equal to revenues produced by existing federal motor fuel taxes would result in an immediate reduction in federal highway expenditures from the current $45 billion per year down to about $30 billion per year. Funding at this level would increase deferred road maintenance and reduce new road and transit construction, resulting in accelerated crumbling of an already overstressed national transportation infrastructure.

Which Way Is Congress Headed?

Even if the Republican dominated House of Representatives would pass significant motor fuel tax increases together with new tolls or vehicle miles traveled taxes, the nearly universal inability of state and local governments to raise revenues to produce the required additional matching funds makes it very unlikely that we will see the federal transportation dollars represented by either option 1) or option 2) enacted in a long term Highway Trust Fund reauthorization measure in the foreseeable future. For the same reason, option 3) is less than likely since it would also require more state and local matching appropriations, though not quite at the astronomical levels represented by options 1) and 2). Even should a vehicle miles traveled tax be enacted to supplement revenue from motor fuel levies, the long lead time for adoption of the in vehicle metering technology required to assess and collect the new tax, together with the anticipated privacy objections to letting the federal government have a detailed GPS record of everyone’s minute by minute vehicle travel movements, will likely delay options 1), 2), and 3) for many years to come.

This makes option 4), an immediate one third reduction in Federal Highway Trust Fund expenditures, seem to be the most likely result in any long term Highway Trust Fund reauthorization measure coming out of the 112th Congress. Of course, the fifth alternative, unmentioned in Kile’s Committee testimony, is that Congress continues to limp along with quarterly or semi-annual highway trust fund reauthorizations, as it has for the last few years, awaiting a game changing House election for the enactment of any long term reauthorization legislation. So, will federal highway construction dollars ever come back? As I see it, not any time soon.

Congress Takes A Machete To The Construction Industry

Voters, politicians and pundits from both ends of the political spectrum are busy praising the fiscal year 2011 continuing resolution agreed to in Congress last week to avoid a shutdown of the federal government. If you ever wore a hard hat, you should be weeping and gnashing your teeth!

The hastily slapped together last second agreement slashed $28 billion from funding levels for fiscal year 2010. Over $17.1 billion of those cuts come directly at the expense of the construction segment of the American economy. This bill is a construction job killer as deadly as though the Congressional intent was to permanently demobilize that entire sector of American productivity. Now that the detailed list of $28 billion in cuts has been released, it is clear that $17,187,000,000.00, or 61.38%, are at the expense of the construction industry.


It seems there was not a single staffer in the legislative or the executive branches of our national government in Washington who was assigned to look at the issue of the impact this politically expedient compromise would have on various facets of either the American economy or the recovery which is still in its infancy. While the focus of the conversation was on politically divisive “issue riders” which nearly brought Washington D. C. to a grinding halt, and whether the burden of federal debt reduction should be fastened onto the shoulders of the poor, who fear program reductions, or the rich, who fear tax increases, nobody was looking at the impact this bill will have on the unemployed middle class construction worker, whose hopes of returning to work any time soon are dashed month after month by the folks wearing neckties in the halls of Congress, who were assured of a paycheck even had the government shutdown materialized.

Whatever your political leanings, it would be difficult to fashion a cogent argument for placing well over half the burden of federal budget cuts on a single segment of American industry which represents only about 5% of our domestic economy.

Biggert Continues Her Assault On The Construction Industry

Continuing her direct attack against any potential for recovery of new housing construction in America any time soon, 13th District Republican Representative Judy Biggert succeeded this morning in securing House passage of the fourth in a series of separate bills she cosponsored, terminating programs which provide relief to homeowners plagued by the economic crisis. Biggert is a cosponsor of HR 830, the FHA Refinance Program Termination Act, and HR 836, the Emergency Mortgage Relief Termination Act, passed by the House and sent to the Senate Banking Committee March 14, as well as HR 861, the Neighborhood Stabilization Program Termination Act, passed in the House March 17 and sent to the Senate Banking Committee. This morning the House also passed HR 839, the Home Affordable Modification Program Termination Act, cosponsored by Biggert, which will go to the same Senate Banking Committee.

Under Biggert’s leadership, the House has now succeeded in pushing through bills to completely gut all the programs in the Obama Administration stimulus legislation which gave some hope of stabilizing the tottering housing market, and stemming the bleeding in the housing start statistics so critical to recovery of jobs and activity in the construction industry. The fate of these critical programs is now in the hands of the 10 Republican, 12 Democrat Senate Committee on Banking, Housing and Urban Affairs. The Democratic members are Chairman Tim Johnson of South Dakota, and Senators Jack Reed of Rhode Island, Charles Schumer of New York, Robert Mendez of New Jersey, Daniel Akaka of Hawaii, Sherrod Brown of Ohio, Jon Tester of Montana, Herb Kohl of Wisconsin, Mark Warner of Virginia, Jeff Merkley of Oregon, Michael Bennet of Colorado and Kay Hagan of North Carolina. Republicans serving on the committee include Ranking Member Richard Shelby of Alabama, and Senators Mark Crapo of Idaho, Bob Corker of Tennessee, Jim DeMint of South Carolina, David Vitter of Louisiana, Mike Johanns of Nebraska, Patrick Tooney of Pennsylvania, Mark Kirk of Illinois, Jerry Moran of Kansas, and Roger Wicker of Mississippi.

While pundits predict all four bills will die in the Senate, or be vetoed by President Obama in the unlikely event they do pass, it is incumbent on every voter whose economic progress depends in any way on recovery of the construction segment of our economy to get in touch with the members of the Senate Banking Committee and let them know how important it is to construction companies and construction workers to see that this destructive legislation never reaches the Senate floor.

U. S. House Deals Construction A One/Two Punch

Last week the U. S. House of Representatives passed, and sent across the capitol to the Senate Committee on Banking, Housing and Urban Affairs, two unheralded pieces of legislation which represent direct attacks on the potential for economic recovery in the construction industry and the U. S. housing market: HR 830, passed March 14, would terminate the FHA Refinance Program; and HR 861, passed March 17, would terminate the Neighborhood Stabilization Program. The two programs on the Republican Party death list were part of the stimulus package of legislation aimed at assisting homeowners, whose house values fell below the principal balances on their home mortgages, refinance their loans, and assisting neighborhoods with large numbers of foreclosed homes avoid the urban blight associated with a situation where many homes in the same area stand vacant and unmaintained.

The fate of these two programs is now in the hands of the 10 Republican, 12 Democrat Senate Committee. The Democratic members are Chairman Tim Johnson of South Dakota, and Senators Jack Reed of Rhode Island, Charles Schumer of New York, Robert Mendez of New Jersey, Daniel Akaka of Hawaii, Sherrod Brown of Ohio, Jon Tester of Montana, Herb Kohl of Wisconsin, Mark Warner of Virginia, Jeff Merkley of Oregon, Michael Bennet of Colorado and Kay Hagan of North Carolina. Republicans serving on the committee include Ranking Member Richard Shelby of Alabama, and Senators Mark Crapo of Idaho, Bob Corker of Tennessee, Jim DeMint of South Carolina, David Vitter of Louisiana, Mike Johanns of Nebraska, Patrick Tooney of Pennsylvania, Mark Kirk of Illinois, Jerry Moran of Kansas, and Roger Wicker of Mississippi.

Termination of these two federal programs will be like a knee to the groin of an already prostrate residential construction industry in the United States. Without the economic support from the federal dollars these two significant programs provide, housing starts, already on a steep slalom down the mountain, will just turn their tips into the fall line. Seems like the Republican Senators and Congressmen favoring these bills, who already own their homes, want to destroy the American Dream for anyone in the middle class who still rents housing. If your business depends on housing construction for any part of its revenue, you should write your elected representatives on the Senate Banking Committee and point out the folly passage of either one of these proposed laws would represent.

Goldilocks And The Obama Budget

Today the Obama administration sent the House a $3.73 trillion budget proposal which would give the United States a first ever four consecutive year run of trillion plus deficits. Like Goldilocks and the beds in the three bears’ house, Congressional Republicans characterize the administration’s proposed spending cuts as too soft, Congressional Democrats say they are too hard, and the Obama White House says they are just right. By the time appropriations legislation passes through the Capitol, however, it won’t likely look like a bed at all. The White House proposal falls far short of Obama’s blue ribbon deficit commission’s recommendations for a $4 trillion deficit reduction.

The Obama budget proposal goes nowhere near the entitlement “third rail” of electoral politics. And, it contains a mixed bag of the bitter and the sweet for the construction sector of our economy. On the positive side, Obama proposes doubling the nation’s share of clean energy electric power by 2035; building high speed internet connections to reach 98% of American homes and businesses; $328 billion in additional funding for transportation infrastructure construction, from sources other than motor fuel taxes; and dropping cap and trade taxes on greenhouse gas emissions. In the negative ledger column, the budget would eliminate home mortgage interest deductions for households with income more than $250,000; $1 billion reduction in grants for airport construction; and another billion dollars cut from water treatment and other infrastructure construction programs.

House Budget Committee Chairman Paul Ryan (R. Wis.) is expected to unveil an alternative budget in April that will take a meat axe to entitlement spending. House Budget Committee Ranking Member Chris Van Hollen (D. Md.) defended the administration’s proposal: “Compared to the slash and burn Republican approach, [the administration’s] budget positions the president as offering a responsible approach to deficit reduction.

Housing Boom’s Walls of Jericho

The housing boom during the first half of the last decade added over 10 million apartments, condominiums and homes to the U. S. housing stock. Now, however, just as the construction industry’s economic recovery is choking on the glut of foreclosed and unsold housing units, the prospect of any recovery for housing construction is further dampened by the tumbling of the walls of Jericho hastily erected and poorly fabricated during the overbuilt, easy money years of 2000 through 2005.

Three of Illinois’ most active home builders – Pulte, D. R. Horton and Lennar – are currently plagued by the financial fallout from a doubling of the rate of defects per new housing unit during 2000 through 2005, compared to the immediately previous six year period, according to estimates from the International Association of Certified Home Inspectors. Adding these woes to the ongoing multistate litigation over problems resulting from use of corrosive Chinese drywall products means the home building sector of the economy is facing a liability headache so tall even Superman couldn’t leap it in a single bound.

Pulte and D. R. Horton are the nation’s two largest home builders. In the third quarter, Pulte recorded a one time expense of $272.2 million – 25% of Pulte’s third quarter revenue – for increased reserves to cover losses for warranty repairs on homes built over the past 10 years. Similarly, Horton states its net liabilities for construction defect claims as of September 30, 2010, at $319.8 million, more than doubling the liability reserve Horton stated on September 30, 2003. Pulte CEO Richard J. Dugas told securities analysts that the huge increase in defects reserves “was completely unforeseen.” The housing sector issues, and corporate accounting for burgeoning liabilities, bother Towers Watson actuary Ron Kozlowski. “Their liabilities are underfunded,” Kozlowski contends. He remarks that home builders “have their heads in the sand.”

Meanwhile, 13 customers who bought new homes from Lennar in Hutto Parke, a subdivision of an old cotton plantation 30 minutes outside Austin, Texas, are suing for fractured foundations, drooping ceilings and sagging fences because, they contend, the homes were put up on unstable soil. Lennar has already settled claims by 221 of the 443 homebuyers in Hutto Parke.

In today’s liability insurance market of ever tightening claims made policy forms, little if any of these claims asserted against housing contractors will be covered by any sort of insurance, and the builders will have to dig deep into shareholder pockets to pay the resulting attorney fees and costs of litigation, as well as the customer recoveries against them. As if the housing sector didn’t have enough problems getting out of the starting blocks and running the high hurdles toward economic recovery.

Illinois Tax Hikes Driving Business Investment Out Of State

Knowledgeable observers predicted early in this legislative session that a major hike in state taxes would drive business investment out of state, and developments in neighboring states are already proving them correct. For example, 112 commercial and industrial construction projects worth $8.9 billion are already underway in 2011 just across the lake in Michigan.

The electric power industry in Michigan leads the way with 37 projects totaling $5.2 billion, representing 58% of new industrial construction investment in Michigan for 2011. The largest single power industry project in Michigan is the 765 KV Lower Peninsula Transmission Line, a 700 mile overhead extra high voltage transmission line extending into Ohio. American Electric Power Company will commence construction of this project this summer.

General industrial manufacturing construction, including auto industry plant expansions, accounts for 20 projects worth $1.4 billion, followed by 21 pharmaceutical and biotechnology investments totaling $467 million.

Illinois could have benefited greatly from the jobs created by this construction investment, as well as the new jobs in the completed or expanded facilities. Our state economy desperately needs new high tech jobs, but the income tax increase enacted by our legislature and signed by our governor is driving the money, construction jobs and manufacturing jobs across the lake.

Republican Subcommittee Chairman Lauds Obama Housing Smackdown

Illinois’ 13th District Republican Representative Judy Biggert, Chairman of the House Financial Services Subcommittee on Insurance, Housing and Community Opportunity, is looking forward to joining with other committee Republicans to quickly extract the federal government from its role as primary financial risk taker in the housing market in this country. Joining in the Obama Treasury Department attack on any continuing role for federal housing subsidies in the form of residential mortgage guarantees, Biggert said in her E-mail message to constituents yesterday: “Taxpayers cannot continue to shoulder the financial risks associated with [federally chartered mortgage guarantors] Fannie [Mae] and Freddie [Mac]. … Our goal should be to choose a path that will quickly and prudently wind down the government’s role and restore stability to the housing market.”

In other words, Republican leaders are climbing aboard the Obama Treasury train of proposed measures which will raise home mortgage interest rates, cut back availability of 30 year fixed rate mortgages to even the most creditworthy borrowers, and altogether eliminate availability of low down payment lending to first time homebuyers. If you don’t already own your home, the American Dream may be pulling out of your station and rapidly receding into the distance as the train whistle hoots its demise. In a long awaited white paper released yesterday by Treasury, the Obama administration proposes cutting the size of mortgages Fannie and Freddie can purchase from private lenders, from the present $729,750 down to $625,500 as soon as the third quarter of 2011. Minimum required down payments will go up to 10% for conventional loans, and rise from the current 3.5% up to 5% for FHA first time buyer mortgages.

Finally, Treasury proposes increasing the fees Fannie and Freddie charge conventional lenders for guaranteeing the mortgages these lenders underwrite.

In a related Obama administration attack aimed specifically at lower income home owners, the administration proposes a $2.5 billion reduction in the LIHEAP home heating fuel assistance program. What’s the point in owning your home if you can’t afford to heat it?

While, admittedly, excesses in home mortgage lending, and the securitization of home loans into derivative instruments, contributed heavily to the near collapse of worldwide financial markets and drove the U. S. economy into the worst recession in decades, it is beginning to look like the Obama administration’s use of a purgative on Fannie Mae and Freddie Mac could be the cure that proves worse than the disease. Available credit for both the construction and purchase of new homes has already dried up into a syrupy consistency clogging the arteries of any hope for quick recovery in the construction sector of the American economy, and the Obama Treasury Department recommendations for home mortgage market reform will keep construction workers, trade contractors and home builders on the sidelines of the economic recovery for years to come.

Ireland and China Back Obama’s Clean Energy Policy in Illinois

President Obama’s bold new goal that “by 2035, 80% of America’s electricity will come from clean energy sources” will be getting hard dollar backing from China’s Xinjiang Goldwind Science and Technology Company Ltd. and Ireland’s Dublin based Mainstream Renewable Power, Ltd. which plan to begin construction this coming July of the Shady Oaks wind farm in Lee County’s Brooklyn Township near Compton, Illinois. Last month the Illinois Power Agency awarded Goldwind the successful bid on the 106.5 megawatt Shady Oaks project, which will consist of 71 Goldwind 1.5 megawatt permanent magnet direct drive wind turbines, and is planned to produce enough power for 30,000 homes in the community.

Goldwind and Mainstream expect to spend about $200 million building the wind farm, which is projected to produce 120 construction jobs and 10 or 12 permanent jobs once the project goes into commercial operation. The Shady Oaks wind farm will sell electricity to Commonwealth Edison under a 20 year power purchase agreement. Commercial operation of the facility is planned for the second quarter of 2012.

Major U. S. manufacturing participation in the project comes through Goldwind’s purchase of $26 million in bearings for the wind turbines from Canton, Ohio based Timken Company.

Goldwind USA CEO Tim Rosenzweig remarked: “We are elated to have been selected to build this project and to bring critical jobs and opportunity to the local wind industry in Illinois.” Mainstream CEO Eddie O’Connor chimed in with the comment: “Our success today comes down to the strength of our relationship with Goldwind and our joint mission to provide low-cost, reliable renewable energy to the U. S.”

State of the Union – What’s In It for the Construction Industry?

President Obama is a Chicago bred politician, and as such he knows road building contractors are some of the most generous political donors among business people. Yet, in his State of the Union speech, he only glanced briefly in their direction. And, while clean energy construction also got a brief nod, there was nothing specific in the speech for either construction industry sector to hang its hat on. Furthermore, events in the House of Representatives since the speech ended make any hope of significantly increased infrastructure spending legislation look bleaker than ever.

True, Obama did vaguely refer to a budget that will invest “especially [in] clean energy technology,” and proposed taking subsidy dollars from oil companies and using them to set “a new goal: by 2035, 80% of America’s electricity will come from clean energy sources.” Does this mean his plan is to raise oil and natural gas prices to levels which will make “clean” electricity economically competitive?

Obama proposed that the executive branch should seize control of the allocation of federal infrastructure funding from Congress by throwing down the gauntlet with this bold and impractical challenge: “If a bill comes to my desk with earmarks inside, I will veto it.” That should serve to bring federal expenditures for infrastructure construction to a screeching halt. Unless, of course, he means the earmarks will already be inserted into his proposed budget legislation.

During the middle of the address, Obama said a few things which sounded promising for the construction industry. “The third step in winning the future is rebuilding America.” He mentioned high speed rail – for which billions were appropriated in the stimulus package – and which is already meeting resistance from newly elected Republican governors in some of the states which won high speed rail stimulus grants. He promised to “put more Americans to work repairing crumbling roads and bridges.” However, three pages down the teleprompter, he also proposed to “freeze annual domestic spending for the next five years.”

In the tempest of House leadership changes, and the absence of detailed proposals from either side of the aisle, it is difficult to say what these remarks will translate into in terms of appropriations legislation, other than to predict, “not much.” The federal Highway Trust Fund reauthorization legislation is now in the hands of the House Transportation and Infrastructure Committee, which just held its first organizational meeting this morning under the leadership of Chairman John L. Mica of Florida and Highways and Transit Subcommittee Chairman John J. Duncan, Jr. of Tennessee. No one yet knows what is on the Committee’s agenda, or for that matter on the Obama administration’s agenda, by way of fulfilling Obama’s State of the Union promise that long term Highway Trust Fund reauthorization legislation will be “fully paid for, attract private investment, and pick projects based on what’s best for the economy,” other than Congressman Duncan’s statement that “Increasing the gas tax is not the solution to addressing our infrastructure needs.”

Yes, we knew that two years ago when the Democrats ruled the House. So far, neither side of the aisle has put forth a viable alternative to higher motor fuel taxes, however. Congressman Duncan’s subcommittee website says “We must eliminate unnecessary bureaucratic red tape so that infrastructure projects can be built in half the time and taxpayer funds can be spent more efficiently.” Are they talking about eliminating environmental impact reviews?

In a statement issued just this morning, Duncan announced that “Today the House of Representatives passed a resolution to roll back non-security spending to 2008 levels.” At that pace, no motor fuel tax increase would be required to replenish the Highway Trust Fund.

So, despite the rhetoric, or perhaps because of it, I can be confident of only one thing: there won’t be any significant increase in infrastructure funding at the federal level any time soon.

Another Blow To Illinois Clean Energy

The waning hours of the lame duck Illinois Senate session struck another blow against clean power generation in Illinois as the Illinois Senate defeated by a vote of 33-18 a bill authorizing Tenaska, Inc. to proceed with construction of the proposed $3.5 billion coal gasification/carbon capture and sequestration power plant near Taylorville. Over the last five years the State of Illinois has invested $23 million of the $40 million spent by Tenaska in planning and development expenditures for the proposed project.

Taylorville Mayor Greg Brotherton, who hung around the statehouse during the final vote in the wee hours of Wednesday morning, remains optimistic Tenaska may find other sources of funding to complete construction of the facility, though he expressed exasperation at the workings of the Illinois legislature. “It was a learning experience for me the past five or six weeks, and seeing how the legislature works, it’s just unreal,” Brotherton exclaimed.

Mary L. Renner, Director of the Taylorville/Christian County Economic Development Corporation, said the Energy Center site remains viable for other energy related development even if Tenaska pulls out of the carbon capture/coal gasification project. “To be able to draw this kind of attention says a great deal for the natural resources there,” said Renner.

Opponents of the bill asserted that the legislation would have required Illinois electric utilities to purchase power from the newly built facility at above market prices for the next 30 years in order to recover the state subsidized cost of building and operating the environmentally conscious, greenhouse gas limiting facility. “It would have been damaging to the state’s job-creation climate,” said Philip O’Connor, chairman of the Coalition to Stop Tenaska’s Overpriced Power.

Tenaska vice president Bart Ford said his company is not yet prepared to say it will walk away from its own $40 million dollar investment in the project, despite the Illinois Senate’s resounding defeat of the authorizing legislation. “We are currently evaluating our next course of action,” said Ford. “We believe there is a great deal of support in Illinois for the idea of clean coal power.”

The apparent collapse of this local effort at greenhouse gas control puts Illinois in the company of several European carbon capture and sequestration projects which have faltered due to the unfavorable economic factors involved in bringing carbon capture technology up to commercial scale.