MnDOT asks firms to work now, be paid later

04/20/2006

Contractors would have to take out loans in early stages

BY CHARLES LASZEWSKI
Pioneer Press

The Minnesota Department of Transportation has been scrounging for money everywhere it can for its Interstate 35W-Minnesota 62 Crosstown Commons reconstruction project, but highway contractors are howling over its latest idea.

Department officials want the winning bidder to float the state a loan.

“Should a contractor, who is doing a public service, have to do this?’’ said David Semerad, CEO of the Associated General Contractors of Minnesota. “We say no. Contractors aren’t banks.’’

Attorney General Mike Hatch, in a written opinion, said the loan idea would increase the project’s cost and cut the number of companies that could bid on the estimated $251 million project. According to Hatch, there are cheaper options, such as borrowing money from other highway funds, which have a reserve. The plan also could leave the state vulnerable to a successful lawsuit, he said.

“It’s nuts; we are supposed to be prudent,’’ said Hatch, a Democratic-Farmer-Laborite who is seeking to unseat Republican Gov. Tim Pawlenty. “There are other ways.’’

MnDOT officials acknowledged the financing idea hasn’t been tried before but said they saw it as a way to keep the project on schedule, with construction beginning in July and ending in December 2009. Delaying it until next year, when they have the money, would cost the state more through inflation than paying the higher interest rates the contractors would charge, said Bob McFarlin, assistant to the transportation commissioner.

Borrowing from other funds is complicated, he added.

“We don’t see any reason to change,’’ McFarlin said. “We have a good contract, and we are having good dealings with the contractors. Any time you are doing something a bit different, a little bit innovative, you get this.’’

Financing problems involving the Crosstown Commons first cropped up in January, when MnDOT officials approached the Metropolitan Council, seeking to borrow $50 million over three years for several metro-area highway projects, including the Crosstown Commons.

McFarlin said then, and reiterated Wednesday, that MnDOT is short money on the front end of the project because Congress was two years late passing its highway bill last fall and, since then, the money has arrived in Minnesota more slowly than expected.

Normally, the winning contractor submits bills to MnDOT as the road is built, and the department pays. Under the proposal, the contractors would receive lump sums every four to 11 months until December 2008, when the financial situation would stabilize and the state would pay as the bills arrive, McFarlin said.

That means contractors would have to obtain bank loans, probably at interest rates of 8 percent or higher, for up to $96 million, according to the attorney general’s opinion.

“I want our contractors in Minnesota to be on an equal footing,’’ said state Sen. Steve Murphy, a Red Wing DFLer and chairman of the Senate Transportation Committee. Under the proposal, he said, “they won’t be.”

“A Halliburton could do it, but the companies here couldn’t do it,” Murphy said.

Todd Goderstad, vice president of Ames Construction Inc. in Burnsville, said his company hopes to bid on the project, but he’s not sure if his company can pull it off.

“Nobody has tons of money lying dormant in a bank to lend to Minnesota,’’ Goderstad said.

Collateral for a bank loan to the construction company would be the expected payments from the state. But a large chunk of that money is from the federal government, and with uncertainties in Iraq and Iran, rising gas prices and continuing Hurricane Katrina aid, Congress could decide to cut those highway funds, Goderstad said. Banks know that and may be reluctant to lend the money, he added.