At a Labor Day celebration September 6 in Milwaukee, President Obama announced plans to create a national infrastructure bank. Although the push for an infrastructure bank got a bit lost in the buzz generated by the president’s proposal to channel at least $50 billion in federal funding to rail, road, and runway infrastructure projects over the next few years, it was a significant development, marking one of the first times Obama has publicly supported a new infrastructure bank as president.
With a growing national deficit and a Highway Trust Fund that seems to constantly teeter on the brink of insolvency, the new push for an infrastructure bank reveals a growing recognition that the nation’s existing tools for funding infrastructure are insufficient, and that the way the country is currently allocating the bulk of infrastructure funds—through formula-based grants and earmarks—yields uneven results.
The White House is counting on a national infrastructure bank to "leverage private and state and local capital to invest in projects that are most critical to our economic progress." The administration also wants the bank to base investment decisions "on clear analytical measures of performance," with projects competing against each other for funding. The link with Labor Day was no coincidence: the White House is hoping that expanded infrastructure spending and investments will help boost job figures in the face of stubborn unemployment.
However, any new infrastructure bank will require approval from a skeptical Congress. Draft bills have been introduced in the House and Senate, but more work will need to be done to flesh out how a bank will be governed, operate, and lend money. When lawmakers take up the issue, they will no doubt seek models from the United States and abroad. The California Infrastructure and Economic Development Bank, or I-Bank, warrants a closer look.
The I-Bank was created by the California Legislature in 1994 and has broad powers to issue bonds, make loans, and provide credit enhancements for a wide variety of infrastructure and economic development projects. It is located within the California Business, Transportation, and Housing Agency, but acts like an independent entity, with a five-member board of directors that approves I-Bank financing. The bank is managed on a day-to-day basis by executive director Stanton Hazelroth, who is appointed by the governor and confirmed by the Senate, and has a professional staff of 24. The I-Bank’s operations are funded solely by fees, interest earnings, and loan repayments.
In the early 2000s, the I-Bank received a $161 million appropriation from the state as seed money for the bank’s infrastructure investment program, the Infrastructure State Revolving Fund (ISRF). This fund provides long-term, low-cost loans—with the interest rate subsidized by the I-Bank—to California’s local governments for infrastructure projects in 16 eligible categories, including transportation, water, and wastewater. As borrowers began to repay the first group of loans made under this program, the I-Bank issued bonds against the repayment revenues. The bank has leveraged the initial general fund infusion for about $400 million in infrastructure loans over the life of the program. Recent projects funded under the bank’s infrastructure program have included a wastewater plant upgrade, a police station, and road and utility improvements.
The I-Bank’s other main category of lending is conducted through its Conduit Revenue Bond Financing programs, which issue tax-exempt bonds for eligible economic development facility projects and governmental purposes. Through fiscal 2009, the I-Bank and its related entities have issued more than $30 billion in tax-exempt bonds. The bank’s strong reputation in the market and AA+ rating on its own bonds mean that it can offer competitive rates to borrowers. Taxable bonds make up a very small component of the bank’s portfolio.
For these projects, borrowers typically pledge a portion of the project’s tolls or fees to investors for repayment of principle, interest, and fees. Bonds also can be secured by general tax revenues, although this is less common. Projects under this program have included financing for upgrades to the eastern span of the San Francisco–Oakland Bay Bridge. The I-Bank also can lend to qualified private companies for expansion of industrial facilities.
Each of the bank’s lending programs has its own set of eligibility requirements, processing timelines, fees, and financing terms. But all I-Bank projects must meet a set of fundamental criteria, including requirements that they promote equity, strengthen the economy, protect the environment, and promote health and safety. In addition, the legislative body of the sponsor must certify the project, and all loan applications are subject to public comment.
I-Bank staff members score infrastructure loan applications according to a variety of measures, with extra points awarded if the project is receiving additional private financing. The I-Bank’s board meets monthly to consider financing requests, taking into account project point scores, which grow in importance when funds are running low. The bank’s track record is strong, with few restructurings and only one default in its portfolio. The bank is about to undertake a study to examine the impact its lending has had on job creation and economic development.
In the United States, the breadth and depth of the California I-Bank sets it apart. A pilot program launched by the U.S. Department of Transportation in 1996 led to the creation of a number of state infrastructure banks, but these focus exclusively on transportation. In addition, many states operate revolving loan funds to finance water and wastewater infrastructure, and many cities and municipalities issue bonds.
But for Hazelroth, the California I-Bank’s broad sectoral focus and deep stable of in-house financial knowledge make it unique. "Our main advantage is that we have a group of people with expertise in the government who can assist with financing problems and deal with capital markets on an equal footing," he says. "In some cases, when small districts work with banks to borrow, they don’t get a good deal." In addition to the private investor dollars the I-Bank channels to projects through the use of bonds, the bank’s involvement can make projects more attractive to additional private sector lenders as well.
The I-Bank is sometimes criticized for having overly complicated loan application procedures and lengthy review processes. But Hazelroth says state and federal rules for verifying eligibility for tax-exempt bond treatment make these reviews necessary.
But as the Obama administration and Congress begin to flesh out how a new national infrastructure bank will function, the California I-Bank’s strong track record and focus on infrastructure make it worthy of a close look.