PAVING MARKET ASSESSMENT FOR THE COMMONWEALTH OF VIRGINIA

Transcription

1 PAVING MARKET ASSESSMENT FOR THE COMMONWEALTH OF VIRGINIA APRIL 2011 Market Intelligence Group Ed Sullivan David E. Czechowski Jared S. Sathaye Vice President & Chief Economist Sr. Economist Market Research Analyst

2 Paving Market Assessment for the Commonwealth of Virginia Overview PCA s Market Intelligence Group (MIG) was tasked to provide an assessment of paving potential volumes in the Commonwealth of Virginia through 2015, segmented by paving system (highways, streets and local roads, and parking lots). Further, MIG was tasked to assess whether the near term cement volume opportunities for streets and local roads paving outweigh expected cement/concrete volume opportunities associated with parking lot paving in Virginia. The results of these assessments may yield guidance regarding the near term allocation of regional PCA promotion assets, and those of its partners, regarding paving opportunities. In this report, PCA compares the expected cement volumes attached to highways, streets and local roads and parking lots through Once the size of the paving market is determined, PCA evaluates the volume impact of an assumed 1% annual gain in market share attributed to successful promotion efforts. By this approach, paving sectors with the largest volume gains throughout the horizon, yield the highest return on promotional investments (ROI) for Virginia s regional promotional paving assets. The report is divided into eight sections. The first three sections establish a baseline from which the analysis is based and compares the ability of Virginia to meet its paving needs. The sections 4-5 of the report convert spending into paving opportunities for roadways and make a case for expecting future market share gains. The final sections of the report compare cement volumes resulting from 1% annual gains in market share for both roadways and parking lots. 1

3 Key Findings Parking lot paving activity is expected to remain depressed for some time due to its link to nonresidential construction. Depressed occupancy and usage rates, soft leasing rates, declining commercial asset prices, and tight lending standard characterize the nonresidential market. Without a significant improvement in expected ROI s, commercial construction activity will remain depressed. It will take time for these conditions to heal and give way to a nonresidential construction and a parking lot paving recovery. Based on funding conditions, Virginia may be poised for an increase in transportation spending during the next several years. This conclusion is reached even in the context of reduced state transportation revenue collections due to the recession. Traditional revenue sources are expected to be amplified by the Governor s program and unspent ARRA funds. Road conditions among VDOT districts may provide guidance regarding the regional deployment of paving resources. Overall road conditions have deteriorated significantly in the past four years with twice as many interstates and more than three times as many primary roads now viewed as deficient. Districts in the eastern portion of the state reported some of the largest increases in deficiency conditions, particularly in primary road systems. Secondary road deficiency is even more pronounced across the districts with most districts indicating a third to half (Northern Virginia) of this road network in poor condition. Congestion metrics suggest that the districts of Richmond, Staunton, and Culpeper would be targets for road improvement investment. Based on changes in the relative prices of concrete and asphalt, paving share gains could materialize over the next several years. New paving realities are now in place reflecting changes in global oil demand and new refining practices which reduce liquid asphalt production. The new paving realities now show that comparative life cycle and initial bid cost and life cycle assessments will increasingly favor concrete over asphalt in the foreseeable future and may lead to paving share gains in Virginia. Econometric tests suggest the relationship between changes in relative prices and paving market share is insensitive. The relative price insensitivity of changes in concrete s market share to changes in relative prices is in part due to the lack of initial bid paving parity until 2008 and favored asphalt up until that time. Observed changes in relative prices, in essence do not have a potential impact on market share gains until parity is reached. The asphalt-concrete competitive arena has just entered this era, which PCA believes will be sustained. More significant sensitivities to changes in the relative price of asphalt-concrete are anticipated during the years ahead. Despite competitive pricing conditions favoring concrete, gains in concrete s share in paving may be initially constrained due to existing non-price factors surrounding the material selection processes in state highway administrations. Non-price policy barriers essentially prevent the free market price mechanism to fully operate at least initially. PCA believes that non-price policy initiatives (escalators, alternative bid, and equivalent design) must be removed if the full potential of market share gains for concrete paved roads can be fully realized. The cumulative incremental gain from a 1% annum increase in concrete paving market share targeting road systems would yield roughly 250,000 additional cement tons to the market. The cumulative gain incremental gain from a 1% annum increase in concrete paving market share targeting parking lots would yield roughly 75,000 additional cement tons to the market. In terms of paving asset deployment within Virginia, targeting road systems, yield the potential of a threefold return compared to parking lots. Risks associated with PCA s analysis surround the expectancy of synchronized world growth. Slower economic growth in China could have large impacts on world economic growth, and as a result oil and asphalt prices. 2

4 SECTION ONE Structure of Virginia s Road Systems

5 Section One Structure of Virginia s Road Systems Overview The current size, structure, and condition of Virginia s road systems establish a baseline from which to begin an analysis of potential paving opportunities. Current VDOT information indicates that Virginia s interstate system and primary roads are heavily skewed toward asphalt, with only slightly more concrete paving penetration in the eastern districts. Difficult economic conditions have lead to challenging fiscal conditions at the state, county and municipal levels of government. As a result, these governments have been forced to prioritize spending initiatives often at the expense of maintaining and expanding existing roadways. As a result, overall road conditions have deteriorated significantly in the past four years with nearly twice as many interstates and more than 50% more primary roads now viewed as deficient. Furthermore, congestion metrics suggest that the districts of Hampton Roads, Northern Virginia, and Richmond rank high in current and projected congestion and could be prime regional targets for mitigation investment. Virginia s transportation agencies are not insulated from the public and political pressures of deteriorating road conditions and unmitigated congestion. Funding and project decisions are often made on the basis of those pressures. More important to PCA s goals of positioning market resources is an understanding of the material distribution in Virginia s road systems and by VDOT district. Surface Analysis Interstate Roads Virginia s 1,119 miles of system interstate carries 30% of all vehicle travel in the state and is weighted toward asphalt, particularly in the districts of Staunton, Bristol, Salem, and Culpepper. Concrete captures an increased share in Northern Virginia as well as in the Richmond district. Hampton Roads, noted for its concentration of armed forces facilities, shipyards, and coal piers is the standout in terms of concrete interstate highway penetration. PCA assumes all interstate concrete roads will remain concrete and offer minimal opportunity to expand paving penetration. High asphalt share in a district may reflect a comfort with asphalt paving and hinder promotional opportunities. Interstate System by Surface Type (Miles) Interstate System by Surface Type (% Share) District Concrete Asphalt Total District Concrete Asphalt Richmond Richmond 31.34% 68.66% Staunton Staunton 0.34% 99.66% Hampton Roads Hampton Roads 51.19% 48.81% Bristol Bristol 0.44% 99.56% Salem Salem 0.44% 99.56% Northern Virginia Northern Virginia 14.44% 85.56% Culpeper Culpeper 0.00% % Fredericksburg Fredericksburg 0.53% 99.47% Total , Total 16.37% 83.63% Source: Virginia Department of Transportation 3

6 Surface Analysis Primary Roads Virginia s primary road system, consisting of 8,000 miles of two- to six-lane roads that connect cities and towns with each other and with interstates, is heavily skewed toward asphalt. Overall, these primary roads are close to 98% asphalt with only 2% concrete. Similar to the interstate materials mix, the districts of Northern Virginia, Richmond, and Hampton Roads are slightly more favorable to concrete, with the notable inclusion of Lynchburg. Primary System by Surface Type (Miles) Primary System by Surface Type (% Share) District Concrete Asphalt Other Total District Concrete Asphalt Other Bristol , , Hampton Roads 8.42% 91.52% 0.06% Richmond , , Richmond 6.52% 93.24% 0.24% Lynchburg , , Lynchburg 1.53% 98.47% 0.00% Staunton , , Northern Virginia 1.15% 98.85% 0.00% Salem Fredericksburg 0.79% 99.21% 0.00% Fredericksburg Salem 0.17% 99.79% 0.04% Culpeper Culpeper 0.08% 99.92% 0.00% Hampton Roads Staunton 0.07% 99.89% 0.04% Northern Virginia Bristol 0.05% 99.49% 0.46% Total , , Total 2.01% 97.87% 0.12% Source: Virginia Department of Transportation Surface Analysis Secondary Roads Virginia s secondary road system encompasses 48,280 miles of local connector or county roads. Hard surface secondary roads information provided by VDOT encompasses both concrete and asphalt so an exact share distribution cannot be derived. The state s asphalt profile in both interstate and primary roads, however, suggests the majority of these roads are asphalt. The Other segment of the secondary road system data encompasses untreated surfaces (i.e. gravel, ground aggregate, and chip seal). If PCA were to target this Other segment for an FDR or RCC application, the information suggests that the Bristol district offers a potential market opportunity with 31% of its secondary roads comprised of untreated or un-surfaced materials. Hampton Roads district, with only 8% of its secondary roads system untreated or un-surfaced, offers the least opportunity. Secondary System by Surface Type (Miles) Secondary System by Surface Type (% Share) District Hard Surfaced* Other Total Mileage District Hard Surfaced* Other Salem 5, , , Salem 76.56% 23.44% Richmond 5, , Richmond 87.37% 12.63% Lynchburg 4, , , Lynchburg 78.22% 21.78% Bristol 4, , , Bristol 68.81% 31.19% Staunton 3, , , Staunton 71.76% 28.24% Northern Virginia 4, , Northern Virginia 91.47% 8.53% Fredericksburg 4, , Fredericksburg 90.28% 9.72% Culpeper 2, , , Culpeper 72.82% 27.18% Hampton Roads 3, , Hampton Roads 91.72% 8.28% Total 38, , , Total 80.27% 19.73% *Hard surfaced pavement type consists of portland cement and asphalt. Source: Virginia Department of Transportation 4

7 Road Conditions Interstate Road deficiency often determines replacement or rehabilitation and has accelerated significantly in the state over the past several years, reinforcing the need for investment. VDOT s most recent interstate assessment suggests a sharp deterioration has occurred over the past four years with deficient pavement conditions now identified in 20% of interstate highways and 24% of primary roadways. A deficient pavement is the sum of the poor and very poor ratings. Pavement Condition- State of Virginia Interstate Primary Excellent 25% 31% Excellent 23% 33% Good 41% 38% Good 42% 34% Fair 23% 11% Fair 20% 9% Poor 6% 9% Poor 11% 11% Very Poor 5% 11% Very Poor 4% 14% Deficient 11% 20% Deficient 15% 24% Source: 2006, 2009 State of the Pavement Report Primary Individual district interstate and primary road deficiency data is not available for 2006, however, a comparison against all roads by district in 2006 suggests most districts saw an increase in their deficient road inventory in Sharp increases in deficiency conditions are suggested in Richmond, Hampton Roads, Fredericksburg, and Northern Virginia. Richmond s deficiency metric for all roads in 2006 was 12% versus the 24% rating for primary roads in Hampton Road s stands out with a 9% rating (2006) versus the current 31% rating for primary roads. The district standout is Northern Virginia with close to half of all primary roads classified as deficient in Pavement Conditions: Primary Roads (2009) Northern Virginia Fredericksburg Hampton Roads Salem Richmond Staunton Bristol Culpeper Lynchburg Excellent 13% 22% 22% 30% 29% 43% 41% 54% 38% Good 25% 33% 39% 34% 33% 27% 38% 23% 44% Fair 17% 12% 8% 11% 13% 8% 2% 6% 5% Poor 15% 11% 16% 11% 9% 9% 14% 7% 6% Very Poor 30% 22% 15% 14% 15% 13% 5% 10% 7% Deficient 45% 33% 31% 25% 24% 22% 19% 17% 13% Source: 2009 State of the Pavement Report Secondary Deficiency ratings for the secondary pavement network were derived by VDOT using a 20% sample of the secondary network. Based on this sample, Northern Virginia ranks highest with 46% of its secondary roads deficient. Hampton Roads and Fredericksburg follow with just over a third of their secondary network deficient. Pavement Conditions: Secondary Roads (2009) Northern Virginia Fredericksburg Hampton Roads Bristol Richmond Culpeper Staunton Salem Lynchburg Excellent 10% 18% 19% 33% 21% 24% 21% 16% 18% Good 21% 33% 32% 25% 34% 34% 36% 35% 42% Fair 22% 12% 14% 11% 16% 11% 16% 24% 15% Poor 6% 8% 12% 8% 12% 11% 4% 4% 8% Very Poor 40% 29% 23% 24% 18% 20% 23% 21% 17% Deficient 46% 37% 35% 32% 30% 30% 27% 26% 25% Source: 2009 State of the Pavement Report 5

8 Congestion Analysis Daily vehicle miles traveled (DVMT) is a useful indicator for understanding road usage. The Northern Virginia district, the most populous of the nine districts, ranks first in the highest overall DVMT. The Lynchburg district has the least usage in terms of overall DVMT. PCA s analysis suggests that the districts of Hampton Roads, Northern Virginia, and Richmond are most congested Daily Vehicle Miles Traveled (DVMT) by Physical Jurisdiction District DVMT- Total DVMT- Primary DVMT-Secondary DVMT- Interstate Bristol 10,720,784 4,590,157 2,591,125 3,539,502 Culpeper 12,084,466 6,562,519 3,000,854 2,521,093 Fredericksburg 15,491,190 6,448,228 3,705,997 5,336,966 Hampton Roads 40,809,894 16,607,827 11,937,716 12,264,351 Lynchburg 10,222,370 7,075,932 3,106,575 39,864 Northern Virginia 48,539,176 16,521,111 17,985,246 14,032,819 Richmond 39,157,668 13,749,962 11,085,452 14,322,254 Salem 17,645,698 8,011,019 4,835,868 4,798,811 Staunton 17,723,683 6,211,348 3,676,474 7,835,861 Total 212,394,928 85,778,101 61,925,307 64,691,520 Source: Virginia Department of Transportation A more meaningful measure of road congestion is daily vehicle miles traveled DVMT per lane mile. Based on existing road characteristics and usage, PCA measured congestion on this basis in each of the nine districts. Accounting for the reduction in 2009 due to the recession and high fuel prices, the analysis suggests little change in congestion rankings during the past several years. The Northern Virginia district ranks second in terms of congestion and the Bristol district ranks last. Congestion (DVMT/ Lane Mile) District Rank Bristol Culpeper 1, , , , , Fredericksburg 1, , , , , Hampton Roads 3, , , , , Lynchburg Northern Virginia 3, , , , , Richmond 2, , , , , Salem , , Staunton 1, , , , , Total 15, , , , ,258.7 Source: Virginia Department of Transportation 6

9 SECTION TWO Demographic Impact on Virginia s Road Systems

10 Section Two - Demographics Impact on Virginia s Road Systems Overview PCA attempts to reconcile current and future paving needs in the context of prevailing budgetary pressures. Future needs are largely dictated by demographics. Demographic changes during the next twenty years could result in significant changes in road usage in Virginia. As a result, the safety, condition and congestion levels could change depending on the level and focus of VDOT spending initiatives. PCA derives road usage projections arising from changes in demographics by integrating Bureau of Census population growth estimates for Virginia and PCA estimates for population growth among each VDOT district. These estimates are then expanded to account for licensed drivers, vehicles on road, and vehicle miles travelled. PCA combines road usage projections with the existing structure of road miles and assumes no growth during a twenty-year horizon. Combining these factors yields estimates regarding future road congestion and road quality levels during the longer term horizon. These estimates provide a basis for identifying VDOT districts in most need of expansion (congestion estimates) and maintenance (deficient road paving conditions). It is assumed that similar analysis is performed by the state DOT and county decision makers to determine where to spend paving funds. Population Growth in Virginia Population growth in Virginia will translate into substantial demand to maintain and expand Virginia s road systems. According to the United States Bureau of Census, Virginia s population is expected to grow from 7.9 million persons in 2010 to 8.9 million persons in 2020 to 9.8 million persons in This translates into an increase in population of more than one million persons in the next ten years and two million persons in the next twenty years. Growth in the driving age segment (16-65 year olds) implies a 1.1% increase in licensed drivers by 2020 and a 2.0% increase by 2030 over existing levels. This roughly translates into an addition of nearly 725,000 more drivers on Virginia roads by 2020 and an addition of nearly 1.4 million drivers by Such increases roughly translate into an increase in registered vehicles on the road of roughly 1 million by 2020 and 1.8 million by As a result of these increases, PCA estimates daily vehicle miles travelled (DVMT) on Virginia s roads will increase from million miles currently to million miles in 2015, million in 2020, and million miles in This translates into a 25% increase in total DVMT by Virginia Population by VDOT District District Number of cities % of Top Cities Northern Virginia 32 46% 1,829,175 2,170,609 2,624,711 3,023,003 Richmond 10 14% 1,139,119 1,274,291 1,454,068 1,611,750 Salem 8 11% 649, , , ,556 Hampton Roads 7 10% 1,576,429 1,647,430 1,741,860 1,824,685 Staunton 6 9% 462, , , ,784 Lynchburg 3 4% 380, , , ,272 Culpeper 2 3% 321, , , ,552 Fredericksburg 1 1% 376, , , ,328 Bristol 1 1% 369, , , ,090 Total 7,104,533 7,882,590 8,917,395 9,825,019 Source: U.S. Census Bureau PCA s district population analysis focuses on the largest 70 cities within the state and their assignments to a district level. Once allocated to their appropriate districts, the demographic growth rate of the Fredericksburg district is revealed. Population rates are essential in revealing leading or lagging markets. Since 2000, this district grew 2.1% in population size. PCA projects that the Fredericksburg district will continue this growth into 2020 (1.9% increase) and into 2030 (1.5% increase). Analysis of the Bristol 7

11 district, on the other hand, showed a discouraging short and long-term outlook with declines in population density until Decision makers may focus more of their resources in areas with a growing population density; these areas being Fredericksburg, Culpeper, and the Northern Virginia districts for both the short-term ( ) and the long term ( ) and ignore declining areas such as the Bristol district. Congestion Growth in Virginia The 780,000 person growth increase in driving age population during the next ten years translates into nearly a 722,000 increase in licensed drivers, as well as a 1 million increase in registered vehicles and a 13% increase in daily vehicle miles travelled. For this analysis, lane miles by VDOT district are held constant at current levels. By holding current lane miles constant throughout the forecast horizon, pressures on the need to expand lane miles can be clearly identified. Congestion Projections (DVMT/ Lane Mile) District % Change % Change Bristol % -0.77% Culpeper 1, , , , % 15.41% Fredericksburg 1, , , , % 17.54% Hampton Roads 4, , , , % 4.75% Lynchburg % 2.95% Northern Virginia 3, , , , % 15.17% Richmond 2, , , , % 10.84% Salem , , , % 3.77% Staunton 1, , , , % 10.29% Total 1, , , , % 10.29% Source: Virginia Department of Transportation With no expansion in lane miles, congestion levels will increase 13% by 2020 and by an additional 10% by The largest increases in congestion are projected to occur in Fredericksburg, Culpeper, and Northern Virginia. Richmond and Staunton districts also show substantial increases. More modest increases are expected to materialize in Hampton Roads, Lynchburg, and Salem districts. Bristol is expected to show an improvement in congestion due to anticipated population declines. Implied Expansion of Lane Miles To Maintain Current Congestion Levels District Bristol Salem ,506 Lynchburg Richmond --- 1,472 2,606 4,898 Hampton ,059 Fredericksburg --- 1,639 2,904 5,447 Culpeper --- 1,245 2,208 4,138 Staunton --- 1,049 1,858 3,493 Northern Virginia --- 1,479 2,617 4,920 Statewide 7,876 13,948 26,195 Source: PCA Estimates 8

12 To maintain existing levels of congestion, Virginia must expand existing lane miles in each VDOT district by the expected increase in congestion. Combining projected congestion increases with existing lane miles results in an estimate of lane mile increases by VDOT district. The VDOT districts with the largest need to expand due to congestion changes suggest the likelihood of increased state highway spending. According to our analysis, Fredericksburg represents the VDOT district in most need of expansion requiring nearly a 5,500 lane mile expansion by In contrast, Bristol requires no expansion. Ride Quality Threat in Virginia VDOT s most recent interstate system assessment (2009) suggests a sharp deterioration has occurred over the past four years with deficient pavement conditions now identified on 20% of interstate highways and 24% of primary roadways. Population growth will lead to greater road usage, raising DVMT on Virginia s roadways. PCA has calculated a historical relationship between DVMT per lane mile (congestion proxy) and the percentage of roads rated as deficient according to VDOT s ride quality rating system. A deficient pavement is the sum of the poor and very poor ratings and may reflect a lack of budget funding. Projected Road Quality Percentage of Roads "Rated Poor or Very Poor" District Bristol 17% 24% 24% 24% 23% Culpeper 11% 21% 24% 26% 30% Fredericksburg 17% 34% 39% 42% 50% Hampton 9% 30% 31% 32% 33% Lynchburg 9% 18% 19% 19% 20% Northern Virginia 17% 42% 47% 51% 58% Richmond 12% 25% 27% 29% 32% Salem 20% 24% 25% 25% 26% Staunton 16% 21% 23% 24% 27% Source: Virginia Department of Transportation, PCA Estimates Based on the projected increases in future DVMT, PCA estimates the percentage of deficient roads in each district for the short and long term. Assuming lane mileage stays constant, and no changes are made to the roadway systems, PCA suggests that Northern Virginia s roads will continue to increase in deficiency. If no changes are made to the roads in Northern Virginia, it s possible that the roads could go from a 42% deficiency in 2009 to more than half being deemed deficient within a 10 year period. Projected Lane Miles Required for Rehabilitation 100% "Rated Fair or Better" (Lane Miles) District Bristol 15,894 3,777 3,759 3,744 3,715 Salem 17,929 4,299 4,408 4,492 4,462 Lynchburg 15,195 2,810 2,866 2,908 2,994 Richmond 18,483 4,705 5,079 5,368 5,950 Hampton 9,807 2,930 3,025 3,098 3,245 Fredericksburg 11,615 3,926 4,480 4,907 5,768 Culpeper 10,345 2,213 2,479 2,685 3,908 Staunton 13,971 2,981 3,204 3,377 3,724 Northern Virginia 12,520 5,248 5,868 6,346 7,309 Statewide 125,759 32,889 35,168 36,925 41,075 Source: Virginia Department of Transportation, PCA Estimates 9

13 Projected Lane Miles Required for Rehabilitation No Improvement from Current Levels (Lane Miles) District Bristol 15,894 3, Salem 17,929 4, Lynchburg 15,195 2, Richmond 18,483 4, ,246 Hampton 9,807 2, Fredericksburg 11,615 3, ,842 Culpeper 10,345 2, Staunton 13,971 2, Northern Virginia 12,520 5, ,098 2,061 Statewide 125,759 32,889 2,279 4,037 7,579 Source: Virginia Department of Transportation, PCA Estimates Given projected deficiency levels based on current lane miles and projected road usage, PCA can estimate both the level of lane miles that must be rehabilitated for full road adequacy (all roads fair or better), and the level of lane miles potentially requiring rehabilitation by VDOT district if current levels of road deficiency are maintained. The combination of these assessments, for current and projected levels of deficiency, can shed light on potential VDOT rehabilitation spending priorities. Implications of Future Demographic Changes on Virginia s Road Systems Paving activity results from one of two activities, the need to expand roadways, or the need to rehabilitate existing roadways. Demographic change during the next twenty years is a key factor in determining the level of future paving activity. Assessment of future congestion and rehabilitation levels can shed light on the level of paving activity that VDOT must initiate, as well as where those priorities lay among VDOT districts. PCA assumes that similar demographic analysis is also performed by the state DOT and county decision makers to determine where to spend paving funds. If past levels of road funding are maintained, demographic analysis reveals congestion and rehabilitation priorities faced by VDOT. Presumably, these spending priorities are either currently, or will be, reflected in VDOTs Six-Year Improvement Program (SYIP). To maintain existing road conditions, demographic analysis suggests that more than 2,000 lane miles of Virginia roadways will be in need of rehabilitation by 2015, nearly 4,000 lane miles by 2020 and more than 7,000 lane miles by Fredericksburg, Northern Virginia and Richmond account for roughly 70% of this road rehabilitation need. These needs must be compared against funding levels anticipated given PCA s financing analysis. To maintain existing road congestion levels, demographic analysis suggests that nearly 7,500 lane miles of Virginia roadways will be in need of rehabilitation by 2015, nearly 14,000 lane miles by 2020 and more than 25,000 lane miles by Fredericksburg, Northern Virginia and Richmond account for roughly 60% of this road expansion demand. 10

14 Paving Requirements By VDOT District To Maintain Current Congestion/Ride Quality Levels (Lane Miles) Rank Rank 2015 Statewide --- 9,803 17,350 32, Statewide --- 9,803 17,350 32, Rehabilitation --- 2,224 3,939 7, Rehabilitation --- 2,224 3,939 7, Expansion --- 7,579 13,411 25, Expansion --- 7,579 13,411 25, High Priority VDOT Districts Low Priority VDOT Districts Rank Rank 2015 Fredericksburg --- 2,193 3,885 7,289 1 Salem ,000 1, Rehabilitation , Rehabilitation Expansion --- 1,639 2,904 5, Expansion ,506 6 Northern Virginia --- 2,099 3,715 6,981 2 Hampton Roads , Rehabilitation ,098 2, Rehabilitation Expansion --- 1,479 2,617 4, Expansion ,059 7 Richmond --- 1,847 3,270 6,144 3 Lynchburg , Rehabilitation , Rehabilitation Expansion --- 1,472 2,606 4, Expansion Culpeper --- 1,512 2,675 5,024 4 Bristol Rehabilitation Rehabilitation Expansion --- 1,245 2,203 4, Expansion Staunton --- 1,273 2,254 4, Rehabilitation Expansion --- 1,049 1,858 3,493 5 Source: PCA Estimates These estimates are based only on increased road usage arising from demographic changes and assume historical road spending levels are maintained. It is important to recognize that current fiscal duress, and reduced VDOT budgets, may influence funding timing and magnify these rehabilitation and expansion needs. Demographic analysis, for example, suggests VDOT priorities will increasingly be pushed toward expansion and congestion concerns. During times of tight budget conditions, VDOT spending actions could differ from these long term priorities and force them to stretch available dollars toward cheaper rehabilitation projects. These financial issues are addressed later in the report. 11

15 SECTION THREE Virginia s Ability to Meet Paving Needs

16 Section Three - Virginia s Ability to Meet Paving Needs Overview Based on the current road system structure, condition, and congestion levels facing Virginia, there is a need to rehabilitate and expand Virginia s roadways. This dependency is based on current and expected future congestion levels and road quality. The need to spend on roadways must be combined with the ability to respond to current and expected future paving needs. To assess this, PCA analyzes the funding conditions facing VDOT and compares these levels against VDOT s planned spending levels in the current Six-Year Improvement Program (SYIP). Comparing expected revenues against planned expenditures reveals upside and/or downside risk to VDOT spending in the years ahead. To properly assess the potential risk or opportunity to VDOT spending, this section is divided into three parts including; (1) an assessment of future funding sources, (2) an overview of VDOT expenditures, and (3) a conclusion regarding funding ability. The sum of this analysis concludes that revenue sources for Virginia s transportation systems will continue to be adversely influenced by the current business cycle. Despite this, Virginia may be poised for an increase in transportation spending during the next several years. This conclusion is reached even in the context of reduced state transportation revenue collections supporting the transportation budget. PCA expects total transportation funds to exceed $5.0 billion annually through This is largely funded by increases in ARRA support and Governor Bob McDonnell's three-year ( ), $4.3 billion transportation funding plan. Once the transitory effects of ARRA and Governor s spending plan have dissipated, stronger employment growth will likely add to state transportation revenues. This is likely to be supplemented by a new, and larger, highway bill. Despite the elements of stronger state revenues and a new highway bill, VDOT revenues are likely to decline during due to the dissipation of transitory federal and state funding support. In the meantime, acceleration in transportation spending during the next several years may materialize adding to near term potential paving opportunities. PCA details its financial analysis by assessing the funding that supports state transportation spending. The five sources of funding include, (1) state transportation fund revenues, (2) federal SAFETEA-LU and its successor, (3) ARRA stimulus spending, (4) the Governor s transportation program, and (5) bonds. I. Virginia s Transportation Funding: State Revenues State transportation revenue sources are primarily the motor fuel tax, motor vehicles sales and use tax, motor license fees, and the state sales and use tax. PCA expects receipts from these sources will remain depressed throughout the forecast horizon. PCA calculates the relationship between employment and vehicle miles travelled (VMT). Projected employment levels result in projections for VMT. A modest annual improvement in fuel consumption efficiency is assumed to project total gallons consumed annually. The state fuel tax of 17.5 cents per gallon is applied to projected fuel consumption to arrive at fuel tax receipt projections. Typically, fuel tax receipts account for 29% of total transportation revenues. PCA assumes this ratio will hold throughout the forecast horizon thereby leading to a total state transportation revenue estimate. Transportation revenues are tied directly or indirectly to total VMT. VMT is highly correlated to employment levels. A high proportion of VMT is due to drivers traveling for work commute. Alternatively, the unemployed are likely to reduce all expenses, including those associated with travel. A decline in employment results in a decline in VMT and hence motor fuel tax revenues. With the onset of the recession, VA s employment declined from 3.8 million in 2008 to 3.6 million in 2010 or a decline of 3.5%. During the same time period, VMT declined 1.6 billion miles. Fuel tax revenues declined from $760 million in 2008 to an estimated $716 million in 2010 roughly a 5.8% decline. 12

17 Virginia State Transportation Revenue Projections (Million $) Total State Revenues 2,720 2,673 2,606 2,683 2,699 2,722 2,785 2,814 - Percent Change 3.4% -1.7% -2.5% 3.0% 0.6% 0.8% 2.3% 1.0% Fundamentals Employment (000) 3,763 3,637 3,631 3,664 3,678 3,701 3,780 3,810 Unemployment Rate (%) 4.0% 6.6% 7.0% 6.5% 6.0% 5.5% 5.3% 5.1% Vehicle Miles Traveled (Mil) 78,623 77,524 76,981 78,044 78,712 79,572 81,648 82,487 Average MPG Gallons Consumed (Mil) 4,344 4,124 4,095 4,140 4,165 4,199 4,297 4,341 State Tax ($/Gallon) Fuel Taxes (Mil $) $ $ $ $ $ $ $ $ Fuel Tax Share of Total (%) 28.0% 27.0% 27.5% 27.0% 27.0% 27.0% 27.0% 27.0% Other Revenues (Mil $) $1,959 $1,951 $1,889 $1,959 $1,970 $1,987 $2,033 $2,054 Source: Virginia Department of Transportation, PCA Estimates While fuel tax revenues account for less than 30% of total transportation revenues, other factors that contribute to total transportation revenues are tied directly, or indirectly, to employment levels. As employment declines, VMT declines and toll receipts are reduced. Similarly, reduced employment levels result in fewer vehicle sales and the associated tax revenue. The estimation process is admittedly rough, but for the purposes of this report, the methodology is deemed appropriate. PCA expects a modest recovery in Virginia s employment levels during , followed by acceleration in employment growth in 2013 and beyond. Transportation revenues are expected to remain near current depressed levels through 2013 according to PCA estimates. Once Virginia s economic growth gains traction (post-2013), employment, VMT, and transportation revenues will increase at an accelerating rate. In the meantime, Virginia s transportation revenues will remain depressed. According to PCA estimates, state transportation revenues will remain near $2.6 billion annually through This represents roughly a $100 million decline compared to levels. With an employment recovery, past peak revenue levels are expected to be reached by 2014 and beyond. A stronger revenue recovery does not materialize due to PCA s MPG improvement assumptions. SAFETEA-LU and its Successor Under the SAFETEA-LU highway program, Virginia received slightly more than $1.2 billion annually. PCA assumes that a new highway bill will be passed in fiscal year The size of the new highway bill is not expected to be as large as the $500 billion program initially discussed by Congressman Oberstar (Chairman of the Transportation and Industry Committee). For this assessment, PCA assumes a more modest bill reflecting a 20% increase over its predecessor. This level is calculated as the minimum nominal increase in the highway bill that equates real spending in the end year of the program with the same level as The level could be larger in light of potential inflation concerns in the out years. To some, however, this increase may seem too optimistic, since funding of the new highway bill remains the key obstacle for any increase in spending. In this analysis, PCA projects Virginia s allocation of the new highway bill at $1.5 billion annually. Impact of Highway Bill Delays on Expected SYIP Highway Revenues SAFETEA-LU expired and funding was renewed at existing levels on a year-to-year basis. The funding renewal has not been an automatic process. Congress often debates the level of funding for an extension of SAFETEA-LU and the duration of the extension. This causes uncertainty in VDOT with regard to highway project commitment. 13

18 This uncertainty takes two forms. First, major construction projects require years of funding commitment. These projects are not guaranteed in the context of SAFETEA-LU extensions particularly in light of new concerns regarding the level of the federal deficit. As a result, major projects which now carry longer term funding risks are postponed and VDOT allocates more of its spending toward smaller projects. This typically works to the detriment of cement consumption and favors smaller local road projects. Second, the uncertainty regarding the level of funding has prompted VDOT to put a greater portion of funds into its reserve account rather than obligating the funds to projects. In doing so, VDOT can partially guard against disruptions in priority projects caused by delays in the congressional reauthorization process. Due to SAFETEA-LU uncertainty, for example, VDOT put $103 million into the federal funds reserve account during In addition, due to uncertainty regarding the highway bill, VDOT reduced its SYIP federal funding revenues $85 million to $90 million annually totaling $542 million over the six year plan. This suggests that the funding available for reflected in the SYIP is underestimated, and implies the possibility of even greater paving spending activity than suggested by VDOT. ARRA Funding Virginia was awarded $695 million for road projects by the American Recovery and Reinvestment Act (ARRA). Only 24% of Virginia s $695 million of ARRA funds has been spent through This implies more than $500 million will be released during Most of these dollars are expected to be spent this year and completely dissipated in Governor s Three-Year Investment Plan Governor Bob McDonnell issued a three-year ( ), $4.3 billion transportation funding plan. The proposal cleared Virginia s house and senate. The plan represents the largest infusion of funds into the states cash-strapped transportation coffers in more than twenty years and is funded by $1.8 billion in acceleration in the sale of Capital Project Revenue bonds, $1.1 billion in Grant Anticipation Revenue Vehicles (GARVEE) bonds, and another $1 billion in a state revolving fund. To address the growing needs by localities to maintain roadways, the Governor s plan includes the establishment of the Virginia Infrastructure Bank (the Bank). The Bank serves as a vehicle to loan money to local governments and private partners for road building. The Bank will be initially funded by at least $282 million from last year s transportation budget surplus. Twenty percent of the fund will go to localities as grants and 80% will go to private and public entities for low interest loans. The plan also includes a proposed constitutional amendment to place all transportation funds in a "lock box" to prevent alternative uses. The Governor s plan provides some certainty regarding funding through 2013, but not beyond. Risk assessment regarding VDOT funding beyond 2013 will be largely determined by the transportation revenues generated by the state. Virginia s Bond Funding Transportation funding can also be supported by bond actions. The state of Virginia is one of only 15 states with AAA bond ratings from all three bond rating agencies. According to VDOT, roughly $215 million in annual funding has been generated by capital improvement bonds. Keep in mind; bonds are often a mechanism used for large county and municipal projects. The strength of bond ratings among counties and municipalities within each VDOT district is presumed to be influenced by past and expected future employment conditions within each district. These potential local bond actions are separate from VDOT funding assessments, but represent additional funding/spending actions. Local bond initiatives are not considered in PCA s final assessment of Virginia s ability to finance its transportation plans. PCA assumes all VDOT districts had favorable bond ratings going into the recession. Job loss analysis from Virginia s recessionary peak suggests that Fredericksburg and Northern Virginia reflected the least job losses. This suggests that these areas probably suffered the least impairment to their bond ratings and hence have maintained their ability to generate transportation funding through debt. In contrast, Richmond, Salem and Staunton were hit harder with job losses during the recession. This suggests the possibility of greater impairment of their bond ratings and hence the potential of diminished ability to generate transportation revenues via debt. 14

19 Employment (Thousands) District Job loss Job Loss % of Peak 2015 Projected Job Growth From Peak Recovered % From Peak Northern Virginia 1, , , % % Fredericksburg % % Culpeper % % Hampton Roads % % Lynchburg % % Bristol % % Staunton % % Richmond % % Salem % % Total 3, , , % % Source: M oodys.com, Virginia Employment Commission Bond ratings are also influenced by expected future employment conditions among VDOT districts. The Virginia Employment Commission ranks Northern Virginia as the employment engine for the state, followed by Fredericksburg. These districts also lost the least amount of jobs during the recession and are expected to be the regions of growth. This suggests that counties and municipalities within these districts will maintain a strong bond rating adding to the potential of bond funding opportunities. In contrast, districts that suffered the most during the recession are also expected to be among the slowest in job recovery. This suggests generally less ability of counties and municipalities within these districts to generate funds for transportation projects via debt. The state of Virginia s overall bond rating going into the recession was exceptional relative to other states. Furthermore, the employment declines were more muted compared to other states. Even in this context, it suggests that all counties and municipalities throughout the state should maintain relatively good bond ratings throughout the forecast horizon. This suggests a favorable outlook regarding the ability to supplement revenue sources with debt. Total VDOT Funding State transportation spending is supported by five sources of funding including, (1) state transportation fund revenues, (2) federal SAFETEA-LU support, (3) ARRA stimulus spending, (4) changes in transportation fund reserves, and (5) bonds. In the foregoing analysis, PCA has assessed the outlook for each of VDOT s funding sources. PCA does not include in its calculations, bond revenues although the potential for raising funds via this mechanism seems favorable. The sum of this analysis concludes that revenue sources for Virginia s transportation systems will continue to be adversely influenced by the current business cycle. Despite this, Virginia may be poised for an increase in transportation spending during the next several years. This conclusion is reached even in the context of reduced state transportation revenue collections supporting the transportation budget. PCA expects total transportation funds available will exceed $5.0 billion annually through This calculation is largely funded by increases in ARRA support and Governor Bob McDonnell's three year ( ) $4 billion transportation funding plan. By 2013, ARRA funding is expected to have run its course while the Governor s three year plan dissipates a year later. Once the transitory effects of ARRA and Governor s spending plan have eased, stronger employment growth will likely add to state transportation revenues. This is likely to be supplemented by a new highway bill. Finally, VDOT adds $500 million to its reserves through

20 Virginia Total Transportation Revenue Projections (Million $) State Revenues 2,720 2,673 2,606 2,683 2,699 2,722 2,785 2,814 SAFETEA-LU Apportionment 1,280 1,280 1,280 1,280 1,280 1,536 1,536 1,536 Unspent SAFETEA-LU SAFTEA-LU/New Highway Spend ,000 1,100 1,485 1,485 1,485 ARRA Governor's Program ,527 1, Capital Improvement Bonds Total Revenues 4,095 4,004 3,800 5,166 5,724 5,936 4,910 4,502 Source: Virginia Department of Transportation, PCA Estimates according to the SYIP budget. Presumably, VDOT s transportation reserve strategy may prove less cautious in the context of stronger economic conditions and highway bill certainty. Despite these factors, VDOT funding is likely to decline during due to the dissipation of transitory federal and state funding support. II. Virginia s Transportation Expenditure Outlook The Virginia Department of Transportation (VDOT) is responsible for the state s transportation network, including responsibility for building, maintaining and operating the state's roads, bridges and tunnels. The agency maintains a 58,000-mile network of highways and bridges, which is the third largest statemaintained highway system in the country, behind North Carolina and Texas. VDOT s road system priorities and spending plan is laid out in its Six-Year Improvement Program (SYIP). State law requires the coordinated development of a separate program for each county, known as the Secondary Six-Year Plan (SSYP). The SYIP reveals VDOT s six year paving priorities by district and road type (interstate, primary and secondary). The SSYP establishes road improvement priorities in the counties secondary road system, however, VDOT has sole authority over the funding, construction, maintenance, and control of this system. The SYIP concentrates spending on three broad areas including; (1) system acquisition, (2) system maintenance, and (3) financial assistance to localities. The SYIP is developed by local governments and VDOT anticipating land use and travel patterns more than two decades into the future. To determine paving requirements, the SYIP takes into consideration statewide and regional plans that identify future needs and an analysis of projected traffic volumes as well as population, business, and residential growth. In general, SYIP needs and priority objectives parallel PCA s demographic methodology and analysis. VDOT s Six-Year Improvement Plan: Priority Setting Adopted by the Commonwealth Transportation Board (CTB) in June 2010, VDOT s SYIP for fiscal years focused on four main principles: 1) funding deficits for projects under way, 2) maximizing the use of federal funds, 3) funding projects already under way and those with new phases starting in fiscal year 2011, and 4) funding deficient bridges and pavements. The SYIP also allocates $103 million in reserve federal funding from the previous program due to uncertainty in federal transportation funding. SYIP funding, for this analysis, is partitioned into three primary areas: 1) Highway System & Acquisition (line item 603), 2) Highway System Maintenance (604), and 3) Financial Assistance to Localities (607). Highway System and Acquisition (603) funding typically supports three phases of new construction: 16

21 preliminary engineering (plan preparation, engineering design, environmental reviews), right of way (land or right of way acquisition, utility location), and construction. Highway System Maintenance (604) typically includes a broad range of activities such as structure, drainage, and roadside maintenance. The surface maintenance component of this category is more relevant in that it encompasses road base and surface treatment (repaving) maintenance. Financial Assistance to Localities (607) provides funding to 81 cities and counties for maintenance on arterial, collector, and local roads as well as facilities maintenance. The level of assistance is based on the number of qualifying lane-miles and available funding. The planning component of this category includes funding for access roads to public parks, historic sites, airports, and industrial sites. Virginia SYIP (Million $) VDOT SYIP Budget Items 3,865 3,309 3,364 3,161 3,334 3,355 3,450 3,569 Highway System & Acquisition (603) 2,122 1,649 1,570 1,390 1,430 1,387 1,410 1,455 Interstate Primary Roads Secondary Roads Urban Roads Other Highway System Maintanence (604) 1,258 1,186 1,312 1,345 1,390 1,443 1,498 1,556 Interstate Maintanence Primary Maintanence Secondary Maintanence Transportation Operations (excluded) Highway Management (excluded) Financial Assistance to Localities (607) City Roads Maintanence County Roads Maintanence Planning Source: Virginia Department of Transportation, PCA Estimates VDOT s most recent five-year budget projections for the highway program reflect weak revenue stream expectations and expose a focus toward system maintenance versus acquisition, particularly with respect to secondary and urban road systems. Highway System & Acquisition (603) declines from an average of 51% of the budget ( ) to a 42% average in On that same period basis, both the secondary and urban roads share each declined from 5% to 2%. Counter to that trend, Highway System Maintenance (604) share increased from 36% ( ) to a 43% average in Share gains are observed in all three road system categories. Financial Assistance to Localities (607) share of budget reflects marginal percentage gains. Excluding statewide initiatives, a review of projects and their value in the current VDOT SYIP database reveals that Northern Virginia leads the FY2011 district group with over $384 million in total project value. In terms of funding changes from FY2011, three districts show declines in average total project value for FY (Culpeper, Lynchburg, and Northern Virginia). Districts with double-digit project value increases in FY (from 2011 levels) include Salem, Fredericksburg, and Hampton Roads. SYIP project value toward specific road systems favors interstate and primary systems. A comparison of FY average spending against FY2011 spending levels reveals double-digit declines in all key road systems. These estimated project value commitments reflect roughly $100 million annually in unspent federal funds and pessimistic state revenue projections. 17

22 The Governor s Spending Plan Governor Bob McDonnell recently issued a three-year ( ), $4.3 billion transportation funding plan. Of this, roughly $3.8 billion is targeted at Virginia s road systems (87.5%) and the remainder is targeted at transit, rail and public transportation. Among the road systems, $1.6 billion is targeted at primary roads (37.5%); $1.2 billion is targeted at interstates (28.2%), $422 million at urban roads (15.7%), and $257 million (5.9%) at secondary roads. PCA distributes spending of the three year plan as follows, 15% in 2011, 35% in 2012, 35% in 2013 and 10% in Governor's Plan Expenditures (Million $) Total ,527 1, Enhancement Interstate Primary Secondary Urban Public Transportation Rail Transit Miscellaneous Source: Virginia Department of Transportation, PCA Estimates III. Virginia s Ability to Fund Road Systems Needs Comparing expected transportation funds against expected VDOT expenditures reveals whether funding shortfalls or surpluses are expected to materialize during the forecast horizon. The sum of PCA s analysis concludes that funding sources for spending on Virginia s transportation systems will adequately support the current spending plans. According to PCA s assessment, VDOT s SYIP suggests that sustained surpluses will materialize through These surpluses average $270 million annually, or roughly 5.4% above planned expenditures. Transportation Revenues & Expenditure Balance (Million $) Total Revenues 4,095 4,004 3,800 5,166 5,724 5,936 4,910 4,502 Non-SYIP Expenditures SYIP Expenditures 3,865 3,309 3,364 3,161 3,334 3,355 3,450 3,569 Governor's Plan ,527 1, Total 4,623 4,037 4,026 4,661 5,560 5,621 4,674 4,365 Net Balance Source: Virginia Department of Transportation, PCA Estimates 18

23 SECTION FOUR Converting Spending Into Lane Mile Paving Opportunity

24 Section Four: Converting Spending Into Lane Mile Paving Opportunity Overview To reach an assessment regarding Virginia s paving opportunities; paving dollars spent must be translated into lane miles paved. This section of the report parses out non-paving items from total VDOT spending to yield an estimate of the potential paving expenditures. Once paving expenditures are estimated, these estimates are translated into potential lane mile paving among types of road structures and by VDOT district. Paving Funding PCA expects VDOT expenditures will average more than $5 billion through 2013 and $4.5 billion thereafter. This reflects our assessment of VDOT funding streams. It would be a mistake, however, to assume that Virginia s revenue flow equates to the amount available for the SYIP highway and road spending. A significant portion of Virginia s transportation funds do not go to potential paving spending. PCA attempts to parse out non-paving items from total VDOT spending to yield an estimate of the potential paving expenditures. Roughly $775 million annually, for example, is allocated to administrative support, environmental monitoring and evaluation, ground transportation planning, commonwealth toll facilities, non-toll transportation debt service, VDOT capital outlay, support to other agencies, and support to ports. PCA assumes the historical spending shares of total VDOT revenues associated with these activities remain constant throughout the forecast horizon - yielding future expected volumes of spending for these items. These items are subtracted from the total future SYIP expenditures potentially available for paving. The following table identifies these items and excludes these dollars from paving analysis. Virginia Exclusion of Non-SYIP Item Projections (Million $) Total VDOT State Revenues 2,720 2,673 2,606 2,683 2,699 2,722 2,785 2,814 Non-SYIP/Non-Paving Relevant Budget Items Share of State Revenues 27.9% 27.3% 25.4% 23.4% 25.9% 27.1% 28.3% 28.3% Enviromental Monitor/Evaluation (514) Ground Transportation Planning (602) Commonwealth Toll Facilities (606) Non-Toll Transportation Debt Service (612) Administrative Support (699) VDOT Capital Outlay (998) Support to Other Agencies Support to Ports Support to DRPT Programs Note: Items not contributing directly to paving funding and are excluded from PCA's paving analysis. Source: Virginia Department of Transportation, PCA Estimates Furthermore, a significant portion of SYIP funds, or roughly $600 million annually, are specifically targeted for bridge construction and other clearly non-paving activity. PCA assumes the historical spending shares of total VDOT revenues associated with these activities remain constant throughout the forecast horizon - yielding future expected volumes of spending for these items. These items are subtracted from the total future SYIP expenditures potentially available for paving. The following table identifies these items and excludes these dollars from paving analysis. 19

25 Virginia Exclusion of SYIP Non-Paving Item Projections (Million $) Total SYIP Non-Paving Items Highway System & Acquisition (603) Primary Roads Category - Bridges Secondary Roads Category - Bridges Urban Roads Category - Bridges Other Highway System Maintanence (604) Highway Management (excluded) Highway Management (excluded) Financial Assistance to Localities (607) Planning Source: Virginia Department of Transportation and PCA Estimates The combination of administrative and clearly non-paving items totals roughly $1.2 to $1.4 billion annually. This represents the total items are subtracted from the total future SYIP expenditures potentially available for paving. The following table identifies these items and excludes these dollars from paving analysis. Virginia Total Expenditure Exclusions (Million $) Total 1,667 1,313 1,322 1,201 1,310 1,320 1,383 1,410 - Annual Percent Change % 0.7% -9.1% 9.1% 0.8% 4.8% 1.9% Non-SYIP SYIP Source: Virginia Department of Transportation and PCA Estimates Additions to Potential Paving Funds According to PCA s assessment, VDOT s SYIP suggests that sustained surpluses will materialize through These surpluses average $270 million annually, or roughly 5.4% above planned expenditures. This suggests upside VDOT spending potential favoring all transportation expenditures including paving initiatives. Some of these surpluses will be used to support highway spending. PCA assumes 67% of annual surpluses go to fund the Virginia Infrastructure Bank (VIB) and the remaining balance goes into reserve transportation funds. The VIB serves as a vehicle to loan money to local governments and private partners for road building will be initially funded by at least $282 million from last year s transportation budget surplus. According to PCA s assumption regarding the disbursement of transportation surpluses, VIB balances rise from the initial funding of $282 million to $650 million by the end of the forecast horizon. Keep in mind, Virginia s goal is for the VIB to eventually reach $1 billion in assets. 20

26 PCA assumes 20% of the VIB balance will be spent for infrastructure programs in addition to the SYIP. This equates to roughly $100 million annually. According to VIB guidelines, 20% of the fund will go to localities as grants and 80% will go to private and public entities for low interest loans. The transportation plan also includes a proposed constitutional amendment to place all transportation funds in a "lock box" to prevent alternative uses. Subtracting out administrative and clearly non-paving items and adding back a portion of expected surpluses results in an estimate of potential funds available for paving.. The resulting estimates suggest that potential paving funds will be more than 35% above 2008 levels and eventually subsiding to 2008 levels by The following table identifies these funds and their expected dispersion among roadway categories. SYIP & Governors Plan: Net Paving Expenditure (Million $) Highway System & Acquisition (603) Interstate Primary Roads ,228 1, Secondary Roads Urban Roads Highway System Maintanence (604) (604) Interstate Maintanence (604) Primary Maintanence (604) Secondary Maintanence Financial Assistance to Localities (607) City Roads Maintanence County Roads Maintanence Total 2,809 2,604 2,570 3,238 3,850 3,911 3,085 2,822 - Percent Change -7.3% -1.3% 26.0% 18.9% 1.6% -21.1% -8.5% - Percent Compared to 2008 Levels 92.7% 91.5% 115.3% 137.1% 139.2% 109.8% 100.5% 21

27 Keep in mind, a significant portion of these funds may still be targeted at spending other than paving activities and could distort the subsequent analysis. According to the Federal Highway Administration, roughly 60% of highway spending during the past five years has targeted system preservation, or paving. Capacity expansion and new routes account for the remaining balance. PCA applies this share to arrive at funds available for paving. Translating Paving Funds into Lane Miles To arrive at an estimate of the promotional paving opportunities, potential paving funds must be translated into lane miles. For this translation, PCA uses Florida Department of Transportation benchmark estimates regarding the spending cost-per-road mile by type of road construction system. The cost-perroad mile is as follows: $1.866 million per interstate mile, $1.070 million per primary mile, $568,928 per secondary mile and $959,505 per urban mile. These costs are modeled assuming 90% of activity is resurfacing and 10% is new construction. In addition, the costs are estimated by urban/rural designations of 71% rural and 29% urban based on FHWA lane mile figures for Virginia. Finally, lane mile conversions per road type extrapolated from the Florida DOT figures were used to convert road miles to lane miles. Based on the cost assumptions, PCA estimates paving opportunity lane miles in the following table Comparing PCA estimates for Virginia s need to pave roads against its ability to pave roads during suggests roughly 75% of Virginia s need to pave will be satisfied Statewide Paving Opportunity (Lane Miles) State of Virginia 7,213 6,641 6,755 6,634 6,779 6,847 6,937 7,222 Interstate 3,620 3,333 3,390 3,329 3,402 3,436 3,481 3,624 Primary 1,719 1,582 1,609 1,581 1,615 1,631 1,653 1,721 Secondary Urban 1,342 1,235 1,257 1,234 1,261 1,274 1,290 1,344 Source: PCA 22

28 SECTION FIVE Making the Case for Future Paving Share Gains

29 Section Five Making the Case for Future Paving Share Gains Overview In the past, paving cost estimates favored asphalt resulting in the extremely high share of asphalt paved roads within the Virginia road system. Virginia is an asphalt state. Asphalt comprises 84% of the stock of interstate roads, 98% of primary roads, and an assumed 100% of local roads. If these shares are maintained during , very little improvement in concrete paving volumes will materialize. New paving realities, however, are now in place reflecting changes in global oil demand and new refining practices which reduce liquid asphalt production. The new paving realities now show that comparative life cycle and initial bid cost assessments will increasingly favor concrete over asphalt in the foreseeable future. In this context, PCA believes it is unlikely that a constant paving share will materialize over the next several years. This implies potential gains in every paving sector concrete competes directly with asphalt paving materials including urban and rural streets, interstates, parking lots, and residential driveways. Consider the following assessments regarding the potentially new competitive realities which are just beginning to unfold. Oil Prices and the Competitive Paving Environment Asphalt bitumen is a byproduct of oil refining processes, and represents around 2.5% of all refining output in the U.S. 1 Currently; there are 126 refineries in 28 states that produce asphalt. These refineries have an estimated annual capacity of 840,000 barrels of asphalt per stream day, or roughly a capacity of 308 million barrels per year. Oil prices have a direct impact on asphalt s cost structure. Future oil price changes are expected to be brought about by both cyclical and structural factors. Cyclical variations in oil prices are brought about by unsustainable short term movements in world demand or supply. Cyclical variations in oil prices are often short lived and explain the volatility in oil prices. Structural variations in oil prices are brought about by sustainable long term movements in world demand or supply. PCA believes the structural nature of world demand has changed so dramatically and rapidly that it has resulted in a sustained acceleration in oil prices, aside from cyclical volatility. World economic growth is expected to become synchronized with all regions recording strength. Global growth is expected to be characterized by high rates of growth among emerging and developing economies. This is expected to result in strong increases in consumption among the emerging middle class populations driving up commodity prices, including oil. 1 EIA petroleum and other liquids Refinery Yield Average

30 PCA expects oil prices will remain in the range of $104 to $110 dollars per barrel during Thereafter, oil prices are expected to reach nearly $120 per barrel by The combination of global business cycle recovery and accelerating structural growth among emerging economies plays a critical role in PCA s oil price outlook. The cost of asphalt is heavily dependent on the price of oil. PCA estimates for every historical 5% increase in the price of West Texas Intermediate, the price of asphalt increases roughly the same amount, or 6%. Coker Investments and the Competitive Paving Environment Cokers are equipment installed by oil refineries that increase the ability to refine higher margin light crude products, such as gasoline, per barrel of oil. Refineries with installed cokers produce less lower-margin residual products, such as liquid asphalt. Such equipment can dramatically improve the profitability of a refinery. Installing cokers have become attractive investments as the price of gasoline and diesel increases relative to asphalt. The expected future margins between light and heavy crude oils determine the decision to bring more cokers online and reinforce the upward movement in the cost of asphalt. As a result of a widening in the relative margins between light and heavy crudes, 21 new coker projects at refineries are expected to come on-line in the United States by As these cokers come on line, asphalt production/supply is reduced. PCA estimates that cokers could reduce asphalt supply by roughly 35% from 2006 levels. More cokers may materialize in the years ahead, further reducing asphalt supply. This assessment is based on the threshold margin differential between light and heavy crudes that is required to make a coker investment viable. Currently, the margin differential between light and heavy crudes is $31 per barrel. PCA estimates the threshold required to make a coker viable is roughly $14-$15 per barrel. As a result, some additional asphalt refiners could improve near term profitability by installing cokers. Concrete s Relative Price Improvement and the Competitive Paving Environment Liquid asphalt composes 5% of material in a typical asphalt pavement mix. The rest of the composition is sand and aggregate. However, liquid asphalt costs comprise roughly 55% to 65% depending on the mix costs. PCA expects asphalt prices to rise as global demand picks up and refineries shift production in favor of higher margin products. PCA expects 2011 asphalt prices will increase 12.2% and will eventually reach $123 per barrel in 2015, reflecting a 53% increase from 2010 levels. 24