Saturday, August 30, 2014

Kentucky Kickback: How the Olmsted Dam Project Exposed Mitch McConnell's Hypocrisy on Government Spending

by Nomad

Though McConnell now says he is dead set against any more government shutdowns, Kentucky voters have every reason to be a little dubious.

After all, in the last shutdown, Senator McConnell was able to parlay the last one into what one conservative group called a "boondoggle" sticking with an eye-watering $3 billion bill for taxpayers.

Back in October 2013 U.S. Senate Majority Leader Harry Reid and and Senate Minority Leader Mitch McConnell were pitted against each other at the negotiation table, in an attempt to work out some kind of compromise to end the 16-day-long government shutdown. The Republicans had refused to increase the debt ceiling in an attempt to roll back Obamacare- or Affordable Care.

Despite the usual talk about limiting Big Government spending, McConnell managed to slip a provision into the debt ceiling bill on the sly that included nearly $3 billion for a dam project.
A provision in the funding bill includes $2.918 billion in funding to the Army Corps of Engineers to install locks as part of the Olmsted Dam and Lock Authority Project on the Ohio River.
That was in fact an increase in the $1.5 billion funding that Congress had authorized several years earlier.

The Dam that Ran Away

According to an investigation by the St. Louis Post Dospatch, the Olmsted dam project has run way over budget since it was first proposed back in 1988. 
A Post-Dispatch review of thousands of pages of documents and more than two dozen interviews reveal a project plagued by cost overruns, delays and engineering challenges stemming largely from the corps’ stubborn insistence on an innovative construction method that met its match in the unruly Ohio River.
It was originally given a budget of $775 million (that's not accounting for inflation). According to the builders, the price tag has soared to an estimated $ 3.1 billion dollars. (So the McConnell deal in effect doubled the funding.)

This project- if it is ever finished- will be the largest and most expensive inland water navigation installation ever built in the United States. Sen. Rand Paul (R-Ky.) has called the whole project a "boondoggle’ and in an unusually clever turn of phrase said that it was a case of "one of these things where we're damned if we do, damned if we don't." According to Paul, as expensive as it has become, we have no choice but to plow ahead. 

With cost soaring for Olmsted project, Rep. Ed Whitfeld, a Republican from Kentucky, who had ushered through the House of Representatives critical funding for project in 2009, was even more blunt back. By 2011, he was calling the project "a complete failure."

Once upon a time, Congress expected this Ohio River lock and dam infrastructure project to be completed within seven years but U.S. Army Corps of Engineers now estimates that the project will not be fully complete until 2024

And some, like Michael Toohey, president and CEO of the Waterways Council, Inc., which represents the marine transportation industry in Washington, have expressed little confidence that the project will be able to meet even this deadline. 

In an interview, Toohey said:
The use of experimental engineering techniques has apparently driven the project financials to an unsustainable level for the Inland Waterways Trust Fund and those users required to pay these costs.
What experimental techniques is Toohey referring to, you might ask. 
According to critics,  one of the many problems is that the Army Corp of Engineers opted on a "in-the-wet" approach. where immense, fabricated dam segments are floated into the flowing river. The traditional method would have diverted the flow of water, allowing construction on the dry river bed.
In hindsight, it was a major misjudgment. The innovative method significantly increased the costs.  

It also increased the costs in another way. 
As Army engineers later revealed later to the navigation industry, because of the perceived risks with the untested techniques, it was more difficult to find contractors who could do the construction.

The solution was a different contractual agreement in order to "lure" contractors. These so-called "cost-plus" which have sizeable advantages to contractors. 
Under the terms of this type of contract, there was no penalty to the contracting construction companies for delays As the article says:
Olmsted has meant steady profit for the contractors with basically no investment or risk.
Hardly an incentive to expediency. As one of the chief operating officers said:
“It’s been a good project. We haven’t lost any money.”
In addition to that, the writer for the Post dispatch cites other reasons why the dam project has become such an expensive headache. The Inland Waterways User Board (IWUB) — the advisory panel is made up of shipping industry executives who are tasked with overseeing the river construction fund- failed to make the necessary recommendations to the Army Corps. 
Also, Congress refused to robustly fund the project in its initial stages and this, the writer claims, dragged out the construction.

A classic example of the adage "Penny-wise, pound foolish."

When Sharing the Burden is "Unfair"

To fully grasp the scale of this problematic project, we have to look back at the complicated bureaucratic process for generating the revenue for river infrastructure projects like Olmsted.

Back on October 21, 1978, Congress and the tug and barge industry created the Inland Waterways Trust Fund (IWTF) in order to pay for "major construction and rehabilitation for navigation on the U.S. inland and intracoastal waterways." That source of funding was modified on November 17, 1986 as a 50-50 partnership with the General Treasury.

The IWTF is funded by a fuel tax levied on commercial towing companies that use the inland and Intracoastal waterways. The rate has been over 20 cents a gallon since 1995. (Here is a list of all of the waterways that are covered by this revenue generating tax.)

The other funding came from Washington. That mean old Big Government. The actual management of the IWTF funds is left up to the U.S. Army Corps of Engineers as part of its civil works budget.
The Corps is responsible for determining the timing and amount of IWTF expenditures, and the preparation of the annual budget submission to the Office of Management and Budget and Congress.
It should have been an equitable scheme since the industry that most benefited from infrastructure upgrades and new projects would be paying 50% of the costs.  
Sounds like a good compromise, right? If it sounds fair to you, there were others who thought otherwise.

The Tax Foundation and the Inland Waterways Tax

It should come as no great surprise that conservative organizations have opposed the revenue generating fuel tax. 
A study by the Tax Foundation,  claims that the inland waterways tax is "economically and environmentally destructive." That study "The Unintended Consequences of the Inland Waterways Excise Tax," was authored by  John Dunham, an economist who worked with Philip Morris Management Corp. ( PMMC)

Coincidentally, PMMC- now known as the "Altria Group"- also happens to be Mitch McConnell’s top five career campaign PAC contributors. He has, according to the Center for Responsive Politics, received more money from tobacco interests than any member of Congress.

One more thing, there is the inevitable Koch brothers' connections. In this case, listed on the Tax Foundation's board of directors (as of 2009, at least) was Dr. Wayne Gable, who was also Managing Director of Federal Affairs at Koch Industries, and president of the Charles G. Koch Foundation and the Claude R. Lambe Foundation. The Tax Foundation receives contributions from Koch Charitable Foundations. For these reasons, some have dared to call it "an unreliable source" and a propaganda pusher for US corporations. 
works almost exclusively for lobbyists, industry trade associations and private companies looking for studies that bolster their case for legislation and policy changes they are trying to advance.
In the Tax Foundation study, Dunham noted that when tax was introduced in 1978, it was only 4 cent on each gallon but has since raised to 24.4 cents. (The Army Corp figures are somewhat less per gallon.) 

In any case, this added cost, he alleges, has been damaging to the inland shipping industry by either by making railroad and truck freight more competitive or by drastically reducing trade and commerce altogether. 
And that's a crying shame. 

Dunham cites the Army Corp of Engineers' assertion that barges are safer and more energy-efficient. They also create less pollution and reduce the chance of accidents and hazardous cargo spills. 

Making Excuses for Parsimony

All very well.
But why shouldn't an industry whose livelihood is completely dependent on river infrastructure be at least 50% responsible for a tax that provides for its maintenance, upgrade and improvement? Dunham dismisses all arguments of a "user fee," by general definition, a sum of money paid by the individual who chooses to access a service or facility.

In fact, the same system of using a federal fuel tax for highway construction and maintenance has been in place since 1956. According to the Wall Street Journal, since 2000, there have been at least half a dozen attempts by individual members of Congress to suspend the federal gas tax, which raises money to repair and expand the highway system. All have failed.
Paying for the upkeep of infrastructure is just not something that corporations think they must do. With the help of politicians like McConnell, they are likely to get their way.

A user fee on the waterway, Dunham replies, would only be justified "if the payers of the tax were the only beneficiaries of the waterway, or if the waterway caused some economic harm that was redressed by the tax revenue." That's not the case, says Dunham.

Besides, Dunham says, many related businesses and recreational boaters also benefit greatly from the waterway and use it without paying the tax. Simply put, The Tax Foundation believes the industry should not have to pay any user fee tax at all. 
That leaves the only one alternative: the government and the taxpayer.

There is a more than a little deceit going on. 
Firstly, there is a problem with his definitions of a user fee. Actually, the Congressional Budget Office (CBO) defines a user fee as “money that the federal government charges for services, or for the sale or use of federal goods or resources, that generally provide benefits to the recipients beyond those that may accrue to the general public."
Comparing a billion dollar industry with families who enjoy a little Sunday boating is insulting.  

Many of the very statements made in the study can be also used to undermine the position. For example, according to Dunham,  a user fee style tax would damage the inland shipping industry by making it less competitive to rail or highway freight. 

There's an obvious problem with that argument.
The annual traffic on America’s inland navigation system carries the equivalent of 58 million truck trips each year. Let's imagine all current waterway freight traffic were diverted - because of waterway fuel tax costs- to the nation's highways. Heavy truck traffic would nearly double. The impacts on urban Interstate highways through cities would be severe. Bridges and highways are already in desperate need of repair but try to imagine what that added burden would do. 
The resulting damage to the nation's highway system would require some kind of drastic revenue-generating tax upon industry. And the same would hold true for the rail freight system too. 

In fact, if waterway transport is so much more efficient then the argument can also be made that investments in improving the system are even more logical and warranted.

Looking at it from this point of view, to carp about paying a tax to improve an already economically efficient mode of transport seems parsimonious. The nation's Infrastructure must be maintained or improved. That's not the question. The question is who benefits the most and why they aren't paying more, not less. (Ironically these are the very same people demanding less government and lower taxes.)

Also, in claiming that boaters do not pay for the use of the waterway facilities, he neglects to mention that boaters along with everybody else do in fact pay for the use of the infrastructure.. with their taxes.
Remember that since 1986, the government has been paying 50% in the IWTF funds and that money ultimately comes from a lot of people who don't have boats.  
*   *   *
Ever since the authorization of the Olmsted project, critics claim that  IWTF funds have been drained dry. They charge that after a quarter-century of construction, the cost overruns for this one project have left no funding for other major river infrastructure projects. 
Starting in 2002, the costs of ongoing construction exceeded the revenues created by the IWTF sources. And to top it off, the revenue generated by the fuel tax has been flat or has been declining in recent years.  

The Army Corp of Engineers website is clear about the problem:
The result has been a steep decline in the IWTF balance and most inland waterway construction projects cost-shared from the IWTF are being curtailed while alternative funding options are sought. IWTF cost-share funding for ongoing construction is being constrained to estimated annual IWTF receipts based on the current fuel tax method. Most IWTF resources are being used for the Olmsted Locks and Dam project on the Ohio River. Without measures that would increase IWTF revenues, most other projects being cost-shared from the IWTF will need to be curtailed pending completion of Olmsted.
But those problems have, with the help of McConnell, now come to an end.. for the time being. By McConnell's design, the federal government meaning the taxpayers were left to foot the bill for the Olmsted dam project.
Who exactly benefits?

Well, the industries like coal, the largest commodity by volume moving on the inland waterways and, the second largest, petroleum including crude oil, gasoline, Diesel fuel, jet fuel, heavy fuel oils and asphalt. (Those are by the way Koch industries core products.)
In other words, two industries have already had enough free lunches from the government. Two industries which can afford to pay their share of user fee taxes.

The McConnell Dodge

When asked about the funding provision, the McConnell spokesman referred the question to other senators, namely, senior United States Senator Dianne Feinstein (D-Calif.) and Sen. Lamar Alexander (R-Tenn.), the chair and ranking members of the energy and water subcommittee.
It was a dodge that fooled nobody- he was in charge of the negotiations. McConnell surely must have known about the inclusion of the provision at the time. And yet, after running on a fiscal conservative platform, he remained as all-knowing and silent .as the Sphinx. 

The provision was so much at odds with the usual conservative policy of cutting spending- something that McConnell has long campaigned on- that even the conservative watchdog site Senate Conservatives Fund howled at the deal and pointed the finger at the Kentucky Senator. 
It was, they declared, little more than "Kentucky kickback" arranged by McConnell to the cost of the taxpayer.

The organization charged that by sneaking in a monstrous earmark in legislation which was supposed to be about cutting government spending, he also negotiated away an attempt to kill Obamacare. (As if there was ever a chance of that happening.)
Another source quotes Matt Hoskins, the group’s executive director.
Mitch McConnell is trying to blame others for this abuse, but everyone knows he negotiated this deal and everyone knows he wrote the bill..If he didn’t want the earmark included, he could have kept it out.”
At the end of the day, the Republican party was led off the end of the boardwalk by the likes of Tea Party star-child Ted Cruz and Michele Bachmann. The party took a major hit from all of the unnecessary brinksmanship. Even without the $3 billion dam funding provision, the ill-advised shutdown of the government cost taxpayers anywhere from $12 billion to $24 billion.

During the first week of the shutdown, a Gallup poll found that the percentage of people with a favorable opinion of the Republican Party had crashed to its lowest level since they began conducting polls. (The Democrats fared only a little better.) 

However, by throwing away all of the much-paraded conservative principles about Big Government spending, only the Senator from Kentucky emerged from the shutdown with a satisfied smirk.
Meanwhile the Olmsted project, despite being flush with taxpayer loot, with continue to be a headache for another decade or longer.