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Last year, the pace of economic recovery depended on real estate and construction activity. That’s still true, but this year there’s a twist: Whether or not we drive off the fiscal cliff, appropriations to the 11 federal agencies that support public works will be cut to reduce the national deficit by at least $1.2 trillion.

The Highway Trust Fund is off the chopping block thanks to Moving Ahead for Progress in the 21st Century (MAP-21), the two-year surface transportation bill enacted in July 2012. Contractors also still have plenty of excess capacity. But greater demand for asphalt (already 10 times more expensive than it was 15 years ago) and concrete as the global economy gradually improves prompts the American Road & Transportation Builders Association (ARTBA) to predict a 3% increase in project costs.

Also thanks to MAP-21, Safe Routes to School applicants must compete with Recreational Trails and Transportation Enhancement programs — now all lumped together as Federal Highway Administration Transportation Alternatives — after coming up with a 20% match. But, says ARTBA Senior Vice President of Government Relations Dave Bauer, former discretionary programs “would’ve been entirely eliminated if some members of Congress had had their way.” (We’ll keep you posted on the fate of the National Center for Safe Routes to School, which although officially funded only through this month is still planning its fourth annual conference in August.)

Federal funding drives less than half — 44% — of road and bridge construction. The rest comes from states (32%) and cities and counties (24%), which — funny thing — also provide water and sewer service. Brace yourself for a slew of regulatory actions as the Obama administration tries to do as much as possible before the 2016 presidential election.

Within a few months U.S. EPA’s Office of Groundwater and Drinking Water could propose rules for perchlorate and carcinogenic VOCs as well as total coliform revisions that’ll greatly impact how you should respond to various triggers. Having ensured that meters, pipe fittings, and the like are (virtually) lead-free come 2014, the agency’s now looking at the Long-Term Lead and Copper rule’s lead service line and sampling procedures. The Third Unregulated Contaminant Monitoring Rule (UCMR3) requires four consecutive quarters of monitoring between now and 2015.

And last — though far from least — this year and the next are crucial for preparing for EPA’s long-promised new stormwater rule in late 2014 (see “Your future with EPA’s new stormwater regulation” on page 41 and “Effluent vs. runoff: separate and definitely not equal” on page 45 for the first in a yearlong series on what the agency’s planning and how to prepare).

Even though our esteemed politicians probably will find a way to keep from plunging us back into recession, we anticipate a debt-reduction plan that will cut deeply into state and local aid.

State tax revenues: a mixed bag

The National Governors Association and the National Association of State Budget Officers’ Fall 2012 Fiscal Survey of States reports that, in contrast to 2009 and 2010, states are increasing aid to local governments this year. But there are more strings attached: program reform and performance requirements.

The Nelson A. Rockefeller Institute for Government reports that state tax revenues have grown for 11 consecutive quarters, but the growth is tenuous. Yes, the 2012 national average was about 1% higher than 2008, but after adjusting for inflation revenues actually declined 5% since then.

Regardless of how much better their balance sheets may look, they’re still not able to provide a level of support cities and counties need. According to the Pew Charitable Trusts’ Local Squeeze report, state aid, which on average accounts for nearly one-third of local budgets, dropped by $12.6 billion, or 2.6%, in 2010.

Local revenues remain dismal

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Cities and counties’ bread and butter, property tax revenues, declined by 0.9% in nominal terms in the first quarter of 2012 after two consecutive quarters of growth. Once again, however, if you adjust for inflation revenues actually declined by 2.8% — the sixth consecutive quarterly decline, according to the Rockefeller Institute.

Revenues remained relatively strong during and immediately after the Great Recession, but collections have finally softened due to the delayed impact of falling housing prices on property assessments. Not surprisingly, the hardest-hit communities are in states with the largest declines in housing prices: Arizona, California, Florida, and Nevada. State caps on property tax increases prevent many localities from raising rates to bridge the gap.

The National League of Cities says revenues fell for the sixth consecutive year in 2012 and expects more of the same this year: stagnant housing markets, high unemployment, and more federal budget cuts. In return, cities are continuing to cut personnel and services and delay or cancel infrastructure projects.

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Local policymakers are also, according to Pew Charitable Trusts:

  • Selling public assets
  • Offering public service contracts to private contractors through competitive bidding/privatization
  • Investing in equipment and technology that can reduce the number of workers needed to deliver services
  • Spending emergency/rainy-day funds as one-time fixes to avoid making drastic staffing cuts
  • Forging regional partnerships. Some states have also taken steps to encourage localities to enter shared-service agreements or to consolidate or merge departments, functions and services, or even entire governments. (See our February 2012 cover story, “The urge to merge,” page 28.)

“Combined with soaring employee benefit costs, continued budget stress at the state level, and the prospect of deep spending cuts in Washington, the prolonged weakness in the property tax raises the prospect of serious budget problems and service cutbacks in local governments,” says Rockefeller Institute Senior Policy Analyst Lucy Dadayan.

Your perspective: another mixed bag

We asked you in November how all of the above are likely to affect investment in public works this year.

There is one glimmer of hope: Budgets are beginning to stabilize (see sidebar). However, many of the 500 respondents to our email questionnaire caution that the numbers in and of themselves don’t tell the full story. Funding increases are often offset by higher material costs that, along with unfunded mandates and inflation, remain unaccounted for in both O&M and capital budgets.

Perhaps most telling: the number of respondents who expect to postpone maintenance activities to meet budgetary goals jumped 10 percentage points this year to 37%. “Our community has ceased new construction, other than tax increment financing and economic development, to focus on maintaining the current infrastructure,” explains one survey-taker.

We also asked what you think 2013 will be like compared to the last few years. To find out, see “One step forward, two steps back."