The North Carolina Department of Transportation (NCDOT) has long had the worst budget in state government.

The agency receives appropriations in a year, counts each dollar based on general purposes, and then counts it again based on the highway division expenditures. When I would ask transportation budget experts about it, they would acknowledge that was how the system worked. It would, therefore, be impossible to trace spending to projects or even categories by geographic division. I never liked the answer, but there were enough other parts of the budget to try to understand.  I didn’t scrutinize the agency’s internal finances, even as I shared the best policy ideas from outside experts on how to finance road construction.

If there’s a silver lining to the budget mess at NCDOT that has come to light over the past year, it has provided insight into the agency’s opaque budget and may now spur much-needed reforms.

In the past, NCDOT relied on politics to determine project priority, but that changed after the General Assembly passed a 2013 reform that created the data-driven Strategic Mobility Formula to guide transportation spending. By January 2017, however, the agency had amassed a cash balance in excess of $2 billion while legislators complained that storm-damage repairs and other projects seemed to languish.

The General Assembly gave NCDOT incentive to spend down its cash balance with the potential to borrow $300 million per year. The agency did that and more, blowing by the goal by $742 million. The extra spending was not in the budget. The legislature then passed a questionable bill that bumped borrowing to $400 million this year.  Another bill waiting on the governor’s desk would expand that to $700 million. Supporters of the original Build NC bond bill noted that the Treasurer would need to approve any borrowing, so there’s no need to ask the public to vote for a general obligation bond.

Games with GARVEE

The other form of debt NCDOT uses is called a grant anticipation revenue vehicle because it provides the great acronym GARVEE. As the name suggests, these bonds provide a way for the state to pay for roads today with anticipated money the federal government may provide in the future. The keyword here is “may.” If the federal government reduces its payments in the future, bondholders will receive lower returns on their investment. There are related risks for the state when it spends cash instead of taking out a GARVEE.

Advance construction is the federal program that makes GARVEEs possible and leaves the state at risk. States submit road projects for approval and begin construction. When they have completed a portion of the project, states seek approval to convert it to a funded project. If the federal government has enough money, states receive reimbursement up to their “obligation authority,” which is their share of the total amount of highway funds the federal government will promise to pay at a time. When a state does not have projects equal to its limit, the Federal Highway Administration distributes the unclaimed amount to other states. North Carolina’s annual limit is $1.1 billion, plus a portion of any unclaimed dollars from other states.

Timing and uncertainty have led North Carolina to go above the annual limit. NCDOT had $4.8 billion in projects in the pipeline to ensure the state doesn’t get less than $1.1 billion and to maximize the amount it can receive from what other states have left unclaimed.  A report published by state auditor Beth Wood did not include how much NCDOT received from the redistributed funds.  The auditor discovered that the anticipated receipts for advance construction projects are unaccounted in the state’s comprehensive annual financial reports precisely because they are not guaranteed. As a result, nobody can know how much the state is at risk for these projects and the associated debt.

Do Not Blame Map Act Settlements

The most contentious finding from the auditor’s report has not been that NCDOT has systematically understated $4.8 billion in debt. Instead, it has been a debate over the cost of Map Act settlements. NCDOT said in its prospectus that Map Act funds do not represent a significant claim on highway funds.  The State Auditor stated in a footnote on page 6, “Map Act Settlements are included in [Right Of Way] Expenditures which accounted for only $13 million (10.5%) of the $124 million overage in Construction.” [emphasis in original]

According to its June 24, 2019, report to the General Assembly, NCDOT had paid $277 million for 1,699 of the 3,500 parcels with a potential claim at the time.  Other parcels had been settled through 341 of 618 “causes of action” at the cost of $161 million. “The Department has paid contracted legal counsel $11,338,844 in relation to Map Act claims and causes of action.”

Two things made the small amount surprising. First, although NCDOT had plenty of time from the original NC Supreme Court decision in 2016 that it would need to pay the fair market price for parcels it acquired, the agency had failed to update its too-low cashflow forecasts for weather-related costs. Second, payments accelerated after June 2019. By May 27, 2020, NCDOT had paid $675 million in settlements on 3,637 parcels and another $296 million on 448 lawsuits.

Despite an apparent backlog of transportation needs, concern about excess cash at NCDOT created a rush of expenditures that led to a cashflow crisis, canceled contracts, layoffs, and cash injections. Reduction in driving compounds revenue problems but provides an opportunity to reconsider future transportation priorities, as NCDOT is in the midst of revising its long-term plan. Better budget practices and financial management will help.