[00:00:00] Lauren Gibbons: Hello and welcome to Facts Matter, a podcast by Citizens Research Council of Michigan. I’m Lauren Gibbons. I’m a reporter for Bridge Michigan, a nonpartisan, non profit newsroom here in the state. And I am guest hosting the Facts Matter podcast today with Eric Paul Dennis, Research Analyst for Michigan.

focusing on infrastructure with the Citizens Research Council of Michigan. And I actually have been looking into some of these issues that came up in your most recent report on highway funding and how it’s being impacted by, cost inflation. We’re all dealing with it in some way or another, but it’s actually pretty interesting how it impacts our construction costs and building the roads.

So just to start off could you tell us a little bit about what you found?

[00:00:51] Eric Paul Dennis: Sure. And thank you, Lauren, for guest hosting. This is great. So there’s a lot of different ways that you can look at cost inflation. We’ve heard a lot about the, you know, the, the base rate of inflation, the consumer price index going kind of crazy in recent years, what’s even been a little bit more crazy is the inflation of construction costs.

And one way that people have been tracking this, the federal highway administration tracks construction costs. So at a. At the national level, just since 2020, the fourth quarter of 2020. So beginning then they’ve estimated that construction costs are depending on how you look at it about 60 to 70 percent between 2020 and the third quarter of 2023.

We’re a little bit fortunate. One thing that I’ve found is that. Construction cost inflation can vary by kind of a surprising amount depending on which state you’re in and even which region of a state you’re in. For our analysis, I was fortunate that Michigan is one of only a handful of states that calculates highway, a highway construction cost index in a way that’s similar to the way that the FHWA does.

And we’re also fortunate that based on Michigan’s data, our inflation hasn’t been nearly as abrupt as the national rate, but it has still run quite a bit above what would normally be expected. So in Michigan, since 2020, we’ve seen a 26 percent increase in construction costs compare that to the national rate, which is a 62 percent increase in construction costs.

But if you were to adopt an assumption that’s common among road agencies. They usually predict that inflation will run about 4 percent year over year. And had that happened since 2020, we’d only be looking at about a 12 percent increase in construction costs. So we’re, even though we’re doing we’re lower, quite a bit lower than the national rate.

It’s still twice as much as would have been expected only a few years ago.

[00:03:26] Lauren Gibbons: And it’s an interesting time for all of this to be coming down because we have seen a big influx of money, both from the federal level and from the state. In the last few years, a road bonding project. So there’s been more money, albeit one time money coming in for Michigan roads.

And some of your research looked into how this has impacted you know, impacted how far that money goes. Could you talk a little bit more about that?

[00:03:55] Eric Paul Dennis: Yeah. And I, I don’t think that’s just a coincidence. I think that a lot of the construction cost inflation that we’ve been seeing in the last few years.

Is related to the increased funding that has been going out. Essentially it’s difficult for construction firms to ramp up to meet the demand that has been imposed by this additional funding. And so what has happened rather than. Inflation being predictable and doing that much more work is that costs have increased so that the basically the, even though there’s more money being spent, it has to be that work that.

The money is being expended on has to be performed by more or less the same amount of construction crews. And so they’re just being more selective in the projects that they’re taking on and increasing the, the bid costs. So it’s rather than the federal expenditures, the increased federal expenditures, creating more construction work, it’s just a lot of that is increasing the cost of construction work.

So when I was looking at this, I was. Mostly interested in. The cost inflations and the purchasing power of Michigan road agencies since 2015. I used that as a base here because that’s when our legislature passed a series of road funding laws that increased our own. Revenue and expenditures. But so since then even the money that Michigan has gotten from the federal government for road construction has not even kept up with cost inflation.

So even with the additional federal spending from the I. J. A. We actually, if you just look at our federal expenditures, we have less purchasing power from that money in 2023, as we did in 2015.

[00:06:10] Lauren Gibbons: Wow. Yeah, that’s a pretty significant difference. And also really points to I think the fact That it’s not as simple as throwing more money at the problem here in Michigan, right?

Sure. And you also in your research showed some of the regional variations and in terms of both inflation and also just the cost of building roads region by region. And what are some of the factors that construction crews are looking at in terms of if you have to, for example, builds a road in.

Grand Rapids versus Detroit or even up north.

[00:06:48] Eric Paul Dennis: Well, so there’s two different things going on there. One Is just the basic cost of construction, which I actually didn’t not look at for this research. So, for example, I don’t know in any year what the cost of rebuilding or maintaining a road would be in Grand Rapids versus Detroit.

What I did look at and what I do know is that in the grand region, which Grand Rapids is part of. From 2015 to 2023. MDOT has calculated that construction costs have inflated 41 percent in that region, which is less than the overall statewide average, which has been 49 percent over that time. In contrast, in the metro region, the Detroit metro region, MDOT estimates that inflation has run 63%.

Which is the highest region and also where most of our population is, where most of our construction spending goes. So this is probably putting a lot of pressure on MDOT to reallocate money between regions to account for the differences in inflation between different parts of the state.

Fortunately, MDOT has that ability. MDOT has a budget and they can reallocate. funding expenditures between regions. However keep in mind that local agencies, which get most of their funding from the state through the Michigan transportation fund they also have federal funding and. A lot of local agencies are funded by local road millages, but I don’t know about the cost, but at least the inflation rates across the state can vary by quite a bit.

So, since 2015, there’s been only about 34 percent inflation in the upper peninsula, compared to again, 63 percent inflation in the Detroit metro area. And these local agencies are getting funding from our Act 51 formula, which doesn’t account for differences in construction costs. It accounts for things like road miles and population, but so if you’re in a high inflation area, you are, it’s likely that you’re having to spend a lot more for the same amount of construction work than in a low inflation area.

And so that’s putting a lot more pressure on these areas, particularly around Detroit.

[00:09:30] Lauren Gibbons: And what are some things that policy makers and road agencies, both state and local can do in terms of, adapting and moving forward. So obviously this particular amount of, this increase in inflation rather wasn’t expected, but now that it’s here and now that it’s something that everyone has to deal with when they’re considering how to fund Michigan roads, what are some next steps that both policymakers and road agencies can consider?

[00:10:01] Eric Paul Dennis: Oh, it’s that’s a great question. I mean, we there’s not much that probably not much that they can do about the cost of construction. 1 thing that I think that policy makers and road agencies should consider is that, as you said, maybe throwing more money at. The problem isn’t the best solution and we should consider harder how we got into this situation.

So one thing that I learned through this research, I was surprised to find. Construction costs have been increasing significantly above the rates of base inflation for quite a while. For several years before this recent period of increased inflation, the base rate was running from 2 to 3%.

Even then construction costs were running at about 4%. So if you had the same budget and. In Michigan, a lot of our revenue is tied to inflation increases, but it’s that consumer rate. It’s not the construction inflation increase. And so all else being equal, you would still be year over year losing more purchasing power and yet a lot of road agencies, including the Michigan Department of Transportation.

Are currently expanding or planning to expand the road system, adding new lanes to highways increasing the capacity of interchanges, things like that. And so, looking forward, we have to remember that when you do something like that, it increases the life cycle costs. Of those roads in an environment where we should probably expect to be paying more and more to maintain those roads going into the future.

So perhaps we should take a step back and think if expanding capacity, building more pavement is really the best option. And think about the costs and benefits of doing that rather than really focusing on maintaining what we have and trying to. Think of ways to bring the bid cost down for construction

[00:12:33] Lauren Gibbons: and to follow up on that a little bit.

I guess, to, to put a finer point on it, rather, how big of a deal is the inflation trends that we’re looking at when we look at overall Michigan’s road funding picture is it something we should be really concerned about, or is this just kind of fluctuating based on some of the big changes that we’ve seen in recent years?

[00:13:00] Eric Paul Dennis: It’s substantial. So we, since 2015 our, it’s kind of hard to figure this out. So what I was looking at was not our budget data, but actually our expenditures data, which It differs by more than I would have thought, but from nominal dollars, like just a dollar. From 2015 to 2023, what we’ve spent on roads and bridges in the state of Michigan between MDOT and all the local agencies is 99 percent higher.

It’s essentially doubled. When you adjust that for construction cost inflation we only have about 50 percent more purchasing power. Which even if we would have had the normal amount of construction cost, inflation would have been 62 percent more purchasing power, but so we’re spending more and more on this, but even the expected construction cost inflation is eating more and more away.

Because it’s increasing at a higher rate than the base rate of inflation. If you work that out, in 2023, indexed to 2015, we had 12 percent more cost inflation than would have been expected. If you multiply that 12 percent by our road and bridge expenditures in 2023, that came out to about 700, 000, 700 million.

And that amount was similar in 2022. It’s likely to be similar in 2024. So just over those three years, that’s over 2 billion that we’re lost to not just inflation, but that unexpected rate of inflation, 2 billion over those three years.

[00:14:46] Lauren Gibbons: That’s, that is a pretty significant change. And. I know that you mentioned that some of this is also partly happening because of that additional influx of one time funding.

But from both the state and federal level, is this something that could even back out, potentially go down a little bit more in the future, or is this level of inflation something that we could see for many years to come? I know you said. Next year is probably pretty likely to be similar, but what is, I, guess obviously that’s a little speculative because a lot could happen policy wise budget wise, but based on the current trends you’re seeing is, this something that is here to stay

[00:15:30] Eric Paul Dennis: the inflation that we’ve seen since 2020?

I don’t think we’ll continue. Beyond this year, something similar did happen in 2008 when we had the federal stimulus package associated with the Great Recession. And in that case, inflation did come down quite a bit in 2009, 2010. In this case, it’s, it’s, the rate has risen much higher than that.

I expect it to plateau. But basic construction costs very rarely decrease. So even if that inflation rate plateaus, we’re probably, we should probably expect to be paying at least as much as we are paying right now for the next few years. Another thing that I want to bring up is that about, I think it was.

15 percent of our statewide budget. It’s about a quarter of the Michigan Department of Transportation budget in 2023 has come from our rebuilding Michigan bond funding. So, when I’m talking about our purchasing power being 50 percent greater than it was in 2015, a lot of that is debt spending from those bonds.

So, as soon as we’re done expending. The revenue for expending the money from the bonds that we’ve recently sold, we are the Michigan Department of Transportation is going to have a much less budget to expend on road and bridge construction, and they’re going to have to be servicing that debt. For the next few decades through about 2015.

So after the next few years, even if inflation rates come down our purchasing power is also probably going to come down because we’ll be over that bond funding hub and we will still have to spend money. We will then have to start paying those bonds back. So in a few years, it’s going to be very difficult for the Michigan Department of Transportation to maintain the roads, even at the state that they’re now at because they even in real, in nominal terms, they’ll probably have less money to expend than they do in 2023 24.

[00:18:00] Lauren Gibbons: And just quickly to clarify, I think you said extend until 2015 or did you mean 2050?

[00:18:07] Eric Paul Dennis: 2050, yeah.

[00:18:09] Lauren Gibbons: Okay. Yeah. Okay. I may have just misheard it. The bands

[00:18:14] Eric Paul Dennis: that we’ve sold will be repaid through 2050, I believe.

[00:18:20] Lauren Gibbons: Okay. Yeah. Yeah. And at this point is there anything we didn’t go over or any other aspects of this conversation that you think is really important for folks to know?

[00:18:31] Eric Paul Dennis: No, I just think it’s very relevant to know that But, you know, we talk a lot about how much more money is coming out now than, than was seven years ago. Or is that seven years, 2015, 20, 2017 is when the increased revenue from the 2015 state legislation started being spent. And it is a lot more we in nominal terms Michigan road agencies have twice as much as they did in 2015.

And that seems like a lot. Even the purchasing power now is 50 percent more, 49 percent more than it was in 2015. And that’s a lot. But when we’re Thinking about all of the money that’s coming from the rebuilding Michigan bonds as well as the federal money and the additional revenue that we’ve created through that 2015 road construction package.

We have to consider that construction cost inflation is higher than even in normal times. It’s higher than the normal rate of inflation. It’s been really crazy lately. And so the actual purchasing power. Of that money, is Significantly diminished. And so it’s, it’s really difficult for road agencies in Michigan to rebuild and maintain their system in a state of good repair, even though we have so much more, it would seem that we have so much more money than we did in past years.

[00:20:06] Lauren Gibbons: Yeah, I think that 700 million a year roughly was a pretty stark number. You know, especially as, as the legislature goes and is in the budget process now looking at potential ways to continue funding. infrastructure as well as other priorities. So that’s a big number, but yeah, well, again, I am Lauren Gibbons.

I’m a reporter with Bridge Michigan. I cover state government, politics, and policy as at one of those, obviously infrastructure based on, as you may have guessed, based on this conversation. And I’ve been speaking with Eric Paul Dennis with the CRC of Michigan. You can find the Citizens Research Council online at crcmich.

org and on Twitter at crcmich. This is Facts Matter, a podcast presentation of the Citizens Research Council. And you can find me at lgibbons at bridgemi. com or at, at Lauren M. Gibbons on Twitter. Thanks so much.