Wednesday, June 12, 2024

Map Act, natural disasters, and uncertain revenues: Why NCDOT is scraping the bottom of its cash reserves barrel

During Hurricane Florence, flooded waters from Fishing Creek, a tributary of the Cape Fear River, washed out a four-lane portion of road on Highway 421 north of Wilmington. (Port City Daily photo/Courtesy North Carolina Department of Transportation)
During Hurricane Florence, flooded waters from Fishing Creek, a tributary of the Cape Fear River, washed out a four-lane portion of road on Highway 421 north of Wilmington. (Port City Daily photo/Courtesy North Carolina Department of Transportation)

Editor’s note: This is part one in a two-part story, part two will look at the local Wilmington-area impacts of the budgeting constraints.

NORTH CAROLINA — The North Carolina Department of Transportation (NCDOT) is in financial trouble thanks to unprecedented natural disasters like Hurricane Florence, lawsuit settlements due to the Map Act, and construction costs greatly exceeding initial estimates.

Related: NCDOT funding impacts for Wilmington region: Kerr interchange delayed, Gordon Road widening expedited

In fact, the NCDOT has been ordered by the Office of State Budget and Management to conduct an outside audit of how money is managed, and how things can be improved. McKinsey & Company was selected to oversee the audit of the department.

“While NCDOT has continued to complete projects and serve communities across North Carolina, we have been forced to respond to unprecedented natural disasters and financial pressures,” NCDOT Secretary Jim Trogdon said. “While we have many points of pride as an agency, our state faces new challenges every day that we must ensure we are using our resources to address. I appreciate the careful work by McKinsey & Company on this review to ensure that NCDOT can best serve North Carolinians.”

The state legislature mandates the NCDOT to maintain a cash balance of between $282 million and $1 billion, but expenses have led to that account balance reaching the so-called ‘cash-floor’ or 7.5 percent of revenues.

“OSBM asked for this review following NCDOT’s concern about the strain placed upon the department’s cash reserves due to weather-related events (Hurricanes Florence, Michael and Matthew, snowstorms, rockslides, and isolated flash floods), Map Act settlements, and project scoping issues (actual costs greatly exceeding initial projections),” according to a statement from the NCDOT.

The NCDOT noted that Map Act has cost the agency over $300 million to date, but the total extent remains unknown because many of those civil cases are still ongoing.

The Map Act – passed by the general assembly in 1987 – essentially allowed the NCDOT to ‘freeze’ development in ‘corridors’ where the agency thought it might construct future roadways. This had the same practical effect as a ‘taking’ through eminent domain, in that property owners could no longer use their land. But unlike eminent domain, property owners weren’t compensated by the NCDOT.

In 2016 a North Carolina Supreme Court ruling struck down the map act, but there are still numerous civil cases against the NCDOT, filed by property owners suing for what amounted to the unconstitutional taking of their land — in some cases for a decade or more. (You can find a case study of one such case in the Hampstead area here.)

Findings and solutions

The results are in and that it turns out, there are several factors directly impacting the budgeting constraints.

For one, “NCDOT is facing great changes and uncertainty in revenue streams and costs facing the department:

  • Revenue streams for infrastructure construction are at risk as gas prices remain low and drivers are less dependent on gas-powered vehicles;
  • The increased frequency of natural disasters dramatically and unpredictably increases costs and impacts the department’s cash reserves; and
  • Greater complexity of construction projects and threats of litigation makes projecting costs more difficult.”

The Cape Fear Region is no stranger to natural disasters like hurricanes (and even snowstorms occasionally), which, as seen with Highway 421, can have a massive impact on roads.

According to the analysis, a third of the budgeting impacts were due to natural disaster responses.

“Recommendations include:

  • Continuing to refine forecasting methodology to reduce budget overruns on increasingly complex construction projects;
  • Improving contracting practices to provide more project and budget flexibility;
  • Enhancing organizational performance metrics and governance to ensure budget accountability across departmental divisions; and
  • Increased use of data to improve organizational agility and strengthen controls for budget accountability.”

In order to remain above the legislated ‘cash floor,’ recommendations including suspension of projects and reducing contracted employees were suggested.

  • Where possible, reducing the number of embedded consultants/contract employees;
  • Implementing new policies and procedures to require any project in the Transportation Improvement Program that has a large cost variance from the original estimate to be reprioritized;
  • Suspending work on preliminary engineering for projects that are several years away from construction;
  • Implementing strict hiring reviews; and
  • Limit travel and the purchase of supplies and equipment.

“Despite increasing budget uncertainty, NCDOT is committed to maintaining a high-quality workforce able to efficiently complete construction projects statewide and respond to emergency situations impacting state infrastructure,” the release concluded.

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