If the North Carolina Department of Transportation’s financial practices were a highway, it would be a steep mountain road knotted by switchbacks and imperiled by landslides — and one with few guard rails.
DOT overspent its budget by nearly three-quarters of a billion dollars in 2019, according to a performance audit  of the department’s expenditures released by the State Auditor this month. As a result, DOT had to funnel $865 million from the State Highway Trust Fund to the Highway Fund, as well as request another $220 million from the General Assembly. DOT also delayed $144 million in payments to contractors, which cost the department $2.4 million in interest payments.
Today the Senate Transportation Committee lobbed questions at DOT board chairman Michael Fox and new DOT Secretary Eric Boyette about the damning audit. “When I look at the number” — $742 million — “I’m in shock,” said Sen. Warren Daniel, a Republican representing three mountain counties. “Seven million dollars is a scandal; this is a federal government type of number.”
Boyette inherited the headache from Jim Trogden, who retired in February to pursue a job in the private sector. Boyette told the committee he has hired a financial oversight director and has implemented other technology that he brought over from the Department of Information Technology, where he was previously secretary. However, only 14 of 21 DOT internal auditor positions are filled, and the department has no performance auditors, who require different skills, Boyette said.
DOT’s operations and maintenance budget had the greatest disparity — an $578 million overage, equivalent to 36.2%. This budget classification includes resurfacing, pavement preservation, bridge replacement and preservation, mowing and disaster funding. Public transportation, ferry, railroads and airports expenditures were $74 million over budget, equal to 20.3%.
Among the issues noted in the audit, DOT has projected only $50 million annually since 2009 for disaster-related expenses, but the costs have far exceeded that amount. The $50 million, though, doesn’t include expenses for federally declared disasters, such as Hurricane Florence; FEMA is supposed to offset some of those expenses, but is historically slow to do so.
Estimated disaster spending used neither statistical nor historical data, the audit read, but rather it used the same predetermined amount each year — even though hurricanes have become more frequent.
“Your forecasting has to be more accurate and reliable,” State Auditor Beth Wood said during the committee hearing, describing DOT’s spending forecasts as “unreliable and antiquated.”
DOT Chief Financial Officer Evan Rodewald, and Chief Engineer Tim Little were “hesitant to plan for more disaster spending because they didn’t know whether there would be any,” the audit read. “Yet when disasters occurred, DOT didn’t adjust its other operations and maintenance expenses and continued to overspend.”
By moving money around, DOT, in essence, borrowed from the future.
Little, a 25-year veteran of the department, didn’t monitor spending among the 14 highway divisions he oversees. Instead, he provided a year’s worth of money upfront for each division and allowed each division engineer to manage the money however they chose — with little, if any oversight.
Transportation funding is complex, and operates differently than in other agencies. Even the auditor’s office acknowledged it doesn’t have staff with the expertise to unravel the tangle of bonds, federal and state monies, multi-year projects and bureaucratic layers. However, DOT didn’t base its spending plan on specific projects for the coming year. Nor did it check in quarterly or even mid-year to ensure the budget was on track.
The chief engineer, the audit read, “should consider this on a quarterly basis.”
The audit also calls for more legislative oversight of DOT funds, similar to the scrutiny it devotes to the General Fund, a major revenue source for most other state agencies. Unlike those agencies, DOT’s certified budget reflects revenue and appropriations estimates, but doesn’t say how it will spend those monies. Transportation projects often span multiple years and budget cycles, complicating the reporting of expenditures.
The audit is yet another piece of bad news for the department: Yesterday, the General Assembly’s Fiscal Research Division projected a $300 million budget shortfall through the end of June because of less travel resulting from the COVID-19 pandemic. Boyette said today that next year DOT could be down another $500 million. And last year, the North Carolina Supreme Court ruled that the Map Act, codified by the state legislature 30 years ago, was unconstitutional. The Act allowed DOT to reserve private land for future roads, essentially tying it up for decades. Settlements provided to private landowners as a result of the ruling could exceed $1 billion.
Lawmakers should also consider “requiring the department to periodically report on advance construction for oversight purposes.” Advance construction is a commonly used, albeit risky, financing technique among states. Unlike traditionally financed projects, in which states get federal money up front, advance construction makes no such monetary promises. Instead, the state incurs the expenses, pays for the project and applies to the federal government for reimbursement. Even though the feds have determined the project is eligible for funding, there is no promise that they will pay.
The federal government has promised North Carolina $1.1 billion, but DOT has designated $4.8 billion to be built through advance construction — money that could evaporate given the recession and economic crisis caused by the pandemic. There are some advantages, however for states making use of advance construction: The accounting method makes certain bonds more feasible, for example, and allows states to accelerate projects.
DOT knew of the budgetary issues as early as November 2018, when DOT Chief Financial Officer Rodewald, who previously worked in Fiscal Research at the General Assembly, alerted his boss, chief operating officer Bobby Lewis, that the department “might be in danger of falling below the statutory cash floor,” the audit reads. The cash floor equals 7.5% of the total appropriations in any fiscal year. Lewis has authority over spending at all 14 highway divisions.
Michael S. Fox, chairman of the DOT board, told the committee the department “tried to slow down spending in 2018 and continued to do so in 2019.”
Fox said he agrees with the audit. “Even before it came out we had taken steps” toward improvement, he said. “We’re committed to taking additional steps to meet concerns.”
DOT has already furloughed several executive staffers in order to save money. The department is expected to work its way down the organizational chart in June, which will save another $6.5 million to $7 million, Boyette said.
Sen. Erica Smith, a Northampton County Democrat, told Fox and Boyette that the financial ramifications of DOT’s “spending mistakes” shouldn’t be placed on rank-and-file DOT staff. “I want to make sure the employees won’t feel the pain of this,” Smith said.