New Mexico Shells Out for Repair Costs Despite Warranty

April 9, 2013

The state of New Mexico has had to pay nearly $14 million in unexpected repair costs for a stretch of U.S. 550 due to a liability limit that was included in a 20-year warranty on the reconstruction and widening of the highway between San Ysidro and Bloomfield.

The Albuquerque Journal reports that the state so far has picked up about one-third of the $41 million spent to maintain the road under the warranty, which took effect in 2001. The loophole is expected to cost the state another $10 million before the warranty expires in eight years.

The state shelled out $62 million for the warranty on the $323 million project.

The liability limit was tied to the escalating cost of asphalt materials and was included in the warranty coverage guaranteed by the private contractor, a subsidiary of the Kansas-based billion-dollar private corporation, Koch Industries Inc.

Pete Rahn, who was leader of the state Department of Transportation under the administration of Republican Gov. Gary Johnson and spearheaded the road reconstruction deal, said the warranty provision didn’t seem like a big deal at the time. “But obviously, if we knew then what we know today, then we would have approached that differently, I’m sure,” Rahn said.

Rahn, now chairman of the New Mexico Transportation Commission, continues to defend the deal as a good one for New Mexico. “Frankly, this is still a heck of a deal,” Rahn said, noting that the Koch subsidiary has paid out nearly $28 million on warranty repairs. “That whole (road widening) package was a heck of a deal for us.”

But while sharing in the ongoing repairs, the state is still paying off the warranty. A decision to refinance the project bonds under Democrat Gov. Bill Richardson in 2004 means the state won’t pay off the U.S. 550 project until well after the warranty has expired.

Asked about a liability cap that is hitting New Mexico in the pocketbook, a Koch Industries spokeswoman told the Journal in an email that the company “continues to meet its long-term contractual obligations. Thank you.”

Sen. John Arthur Smith, D-Deming, was critical of the U.S. 550 road widening project from the start, in part, because it broke from traditional road financing practice and relied on future federal funding to pay for the reconstruction and warranty. Smith, who today chairs the powerful Legislative Finance Committee, said the escalation cap tied to asphalt-related prices wasn’t mentioned in the many legislative discussions about the warranty.

It doesn’t make sense for the state’s Department of Transportation to be footing maintenance costs while the warranty is still in place, Smith said recently, but added that there’s little recourse at this point.

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