A little over a year ago, the North Carolina Department of Transportation (NCDOT) received accolades for repaying a state loan two years ahead of schedule and becoming more financially stable than in years past. But there are growing fears that stability might be short-lived.

Frank Bowen, a financial analyst from the North Carolina State Treasurer’s office, issued a warning at Tuesday’s Local Government Commission meeting that NCDOT is heading into a “danger zone” with spending going up and available cash going down.

Session Law 2020-91 created Bowen’s position within the treasurer’s office to review and monitor NCDOT’s bond program and activities that utilize bond proceeds and the department’s Spend Plans in cooperation with the Office of State Budget Management (OSBM).

In Fiscal Year 2019, the DOT spent $6.8 billion against a budget of $5 billion for that year. Of the $1.8 billion in overspending, DOT depleted $1.1 billion in “short-term” loans from the Highway Trust Fund (HTF) to the Highway Fund (HF) between May 2018 and April 2019. Prior to that, the HTF had not been touched for over 14 years.

HTF money is designated for capital projects. The Highway Fund is for maintenance.

“Under state law, many of the projects funded could not have been paid using HTF funds. Additionally, as required by statute, NCDOT neither sought nor received approval of the State Treasurer to loan the funds from the HTF to the HF,” State Treasurer Dale Folwell said in October 2019.

Former NC Transportation Secretary James Trogdon said at the time that hurricanes and underestimated project costs were to blame for the overspending.

Overspending also caused NCDOT to suspend work on 900 projects in August 2019. They wouldn’t be restarted until the spring of 2020.

The Spend Plan for Fiscal Year 2025-26 was approved by OSBM in May.

Bowen said the fundamental metric that is being used is a comparison of DOT’s combined cash balance to their open commitments. It’s a metric that they use in their financial update and is referenced in the plan.

Source: NC Treasurer’s Office.

He said the cash balances of the 2025 HTF are projected to decline significantly from their present level. The HTF is a combination of HTF, the HF, and the emergency fund.

Source: NC Treasurer’s Office.

Bowen said open commitments (projects that have been awarded) have increased steadily since 2021.

“My fear is we’ve got two things moving in the opposite direction,” he said. “We’ve got the commitments trending up, that’s part of the formula and then you’ve got combined cash balances going down. So, by their metrics, and we can get into what’s in the Spend Plan, by their own projections, we’re getting into what historically could be a danger zone for lack of a better term.”

Bowen said that has been the history of open commitments, pointing to a slide of the year 2017, which precluded the crises of 2019 and 2020, which he said they don’t want to get anywhere near again.

Source: NC Treasurer’s Office.

On another slide, he showed that in 2018, the ratio of cash was 26% of commitments. Currently, it is 31%. In April, the cash ratio was in the 25% range, so it is going up and heading, as he says, back into the 2019 range.

He added that he is concerned that putting a billion dollars into commitments and a continued reduction in cash balances is a dangerous combination.

“I was perspiring because when we were getting that 25% ratio, you were seeing the trust fund balance go from about a billion dollars to below $700 million, and it’s in the $700 million range now,” Bowen stated. “So, all these things I’m pointing at are indicators that the ratio is going to get in a troubling situation.”

The Spend Plan that Bowen referenced doesn’t include a $1.145 billion project awarded in Asheville. The Spend Plan says that with the current projections before the award of the project, there would be a cash balance of $1.6 billion, or 19% of commitments, in December.

The cash balance for December 2025 is projected at $1.425 billion.

S.B. 356 was signed into law in November 2019. The bill gave the DOT $36 million from the General Fund for recovery efforts from Hurricane Dorian and forgave a $90 million General Fund loan. It also gave the DOT an extra $100 million Build NC bond and allowed the department to use a $100 million one-time cash loan from the Highway Trust Fund to the Highway Fund. The loan was given with the stipulation that it would be paid back.

In 2020, detailed repayment procedures were established under a Memorandum of Agreement (MOA) between the Department of State Treasurer, the Department of Transportation, and the Office of State Budget and Management. When the MOA was signed, the loans were expected to be repaid within four years. However, the loans were repaid two years early, on Dec. 28, 2022. 

“The reason why we’re discussing this right now is we have a memorandum of agreement between the Department of the State Treasurer and Department of the DOT concerning loans between the highway fund and the highway trust fund,” Bowen said Tuesday. “With the transit we’re discussing here, the highway trust fund continues to fall. The possibility of the necessity for a loan from the highway fund to the highway trust fund seems quite probable.”

Bowen said that a short-term loan is 24 months under that memorandum of agreement. To approve that, they need to find out how it is going to be paid back. Such a plan may require legislative action to ensure a sufficient balance in the HTF to support repayment.

He said while they have had discussions with DOT about a loan, they haven’t formally asked for one. He points out that they should be seeing new commitment reports, possibly as early as this week, that reflect the actual $1.1 billion project, and they can compare that to cash balances. It should, however, have a major impact on future Open Commitment levels.

Source: NC Treasurer’s Office.

“The early repayment of the loans to the Highway Trust Fund is a tribute to the leadership of Secretary (J. Eric) Boyette and the professionalism of his staff,” Treasurer Folwell said in January 2023. “The turnaround from the previous administration is quite welcome. They listened and collaborated with the staff here at DST and have made remarkable progress.”

The North Carolina General Assembly created the HTF in 1989 to provide revenue sources for specific highway projects.