Land Writes: Finding the Cash to Fix America’s Infrastructure Crisis

It is no secret that the infrastructure of the United States is in deplorable condition. Bridges are collapsing, roads are crumbling, railroad tracks are eroding, and water and sewer lines are held together by patchwork.

The problem has been severe for a number of years. Since 1998, the American Society of Civil Engineers (ASCE) has given the quality of America’s infrastructure a cumulative grade of D. On its most recent report card, for 2009, ASCE estimated that $1.1 trillion is needed—in addition to what is already being spent—in order to restore the nation’s infrastructure to good condition.

The deteriorating physical facilities not only create personal inconveniences like longer commutes and flight delays, but also affect the nation’s productivity, economic growth, and competitiveness. High-quality infrastructure is a key factor in sustaining the country’s competitive position in the global economy. When U.S. manufacturers cannot rely on domestic supply chains because of poor highways, railroads, and airports, moving work overseas becomes more attractive. When foreign governments encourage the development of high-speed rail that expands labor markets and mobility and the United States does not; when ports, bridges, and highways are a higher priority for global competitors than they are for the United States; and when other countries coordinate transit, education, housing, and employment projects to produce greater efficiencies but the United States does not, the country’s prospects for long-term economic success are jeopardized.

Economists, labor leaders, and think-tank experts emphasize that rebuilding U.S. infrastructure would create jobs—jobs that cannot be exported or outsourced. Unemployment is still around 8 percent, and the jobless rate for construction workers tops 17 percent. Republicans and Democrats agree that the country could put a big dent in those figures by rebuilding failing infrastructure systems; they just cannot agree on a plan to do so.

Public officials from President Obama on down have offered proposals to address these intertwined problems. These include a one-time federal appropriation of $40 billion to $50 billion for “shovel-ready” projects such as school repair, an infrastructure bank funded at $10 billion to $25 billion, and a special fund established with overseas profits that would be repatriated by U.S. corporations incentivized by a negotiated reduction in tax rates affecting those profits now stranded offshore.

While well intentioned and perhaps better than nothing, everything proposed so far falls woefully short—in scale, duration, funding, planning, and implementation mechanisms—of what is required. The approach recommended here has a different order of magnitude—one that takes fuller account of pressing needs on the ground, the demand for new jobs, and some untapped financing possibilities.

Getting Started

The first step in restoring U.S. infrastructure is to set a realistic financial target. This analysis takes ASCE’s $1.1 trillion as a point of departure for the additional funds required to meet the nation’s infrastructure needs beyond those already appropriated. Factoring in ten years of inflation at 3 percent a year, as well as the further deterioration of existing facilities, we see $1.5 trillion as a more realistic ten-year target. This amount is consistent with a 2010 shortfall of about $129 billion projected in the recent monograph Meeting the Infrastructure Imperative from the Center for American Progress (CAP). The federal share of this amount is projected by CAP as $58 billion per year.

This is a far cry from any funding now being considered on Capitol Hill. Nonetheless, it is not beyond the country’s reach if the current dollar-for-dollar cash outlay of federal grants for infrastructure projects is replaced by a plan that effectively leverages government funds and incorporates repatriated corporate profits, as well as new revenues generated by many of the construction projects themselves.

The second step is adopting a realistic time frame for raising capital and developing long-term plans. Given the challenges of winning congressional approval and raising the needed capital, $150 billion would seem to be the probable maximum that could be mobilized for new infrastructure requirements per year. However, we believe the task will be made simpler if the program not only is budget neutral, but actually reduces the deficit in upcoming years.

The proper time frame is critical, considering that the long-term health of the country’s transportation, energy, communications and related sectors is at stake, not to mention billions of dollars. The needed planning, engineering, coordination, and reform of the permitting and approval process go well beyond that required for short-term, shovel-ready activities. As ASCE states in its 2009 Report Card for America’s Infrastructure, “Infrastructure funds at all levels must be prioritized and executed according to well-conceived plans that both complement the national vision and focus on system wide outputs.” Alice Rivlin, former director of the Office of Management and Budget, agrees, cautioning, “A long-term investment program should not be put together hastily or lumped in with . . . [an] antirecessionary package.”

Basic Principles

To repair the nation’s crumbling infrastructure over the next ten years, the federal government should be prepared to follow six basic business principles.

• Use debt to finance improvements. This is the way a business would invest in new plants or refurbish old plants and machinery. The debt should be spread over as long a period as possible, taking into account the useful life of the assets. There is little reason to use equity or, in the case of the government, grants when debt is a feasible alternative.
• Entice new private investment.
  This requires recognition that private capital will seek the highest yield possible, given the riskiness of the venture. To the extent that the federal government can reduce risk by guaranteeing debt or by paying debt service on borrowings, the cost of private capital will drop.
  
• Impose user fees.
  User fees must be planned for as many projects as possible. If the country is to spend more than $2.8 trillion on infrastructure over the next ten years—what is being spent now plus $150 billion more per year—the public must be prepared to accept higher user fees so that a large percentage of the new or rebuilt infrastructure can pay for itself.
  
• Limit federal debt.
  The federal government, to the extent possible, should use financing mechanisms that neither put more debt on the federal balance sheet nor require grants to carry the costs of the infrastructure on a dollar-for-dollar basis.
  
• Require shared investment risk. The federal government, whenever possible, should seek some state and local government investment, either as equity or subordinated debt. If the state or local government has a stake in the investment, it will be more likely to treat seriously the selection of projects and their income potential.
• Limit the federal return on investment.
  The federal government should seek no more than to break even on its investment. All additional revenue should accrue to state and local governments or private investors.
  

Applying These Principles

According to the CAP monograph, the federal government is spending $92 billion per year on infrastructure, of which $82 billion is disbursed in the form of grants for capital construction, operations, and maintenance, and about $10 billion is in the form of guarantees/credit subsidies and tax expenditures. Figure 1, drawn primarily from the CAP monograph, summarizes the use of current public and private spending to care for infrastructure. (For the purposes of this analysis, it is assumed that half the grant funds are used for construction, and half for day-to-day operations and maintenance.)

The CAP monograph notes that about $129 billion more per year in 2010 dollars will be required to supplement current outlays for infrastructure. To reach this annual goal, the federal government will need to spend—or provide loans of—$50 billion per year, with the remainder being invested by local governments and private investors or paid from user fees (see figure 2).

A problem with the CAP analysis is that it assumes the federal government will continue to spend about $51 billion in grants and other subsidies while adding another $50.1 billion in grants, drawing largely on new taxes and fees relating to oil. But why would a tax-averse, oil company–friendly Congress spend $101 billion a year in grants, with the additional dollars coming largely from new oil fees or the elimination of oil subsidies? And even if such oil-unfriendly measures were adopted, should not such measures be part of a larger deficit reduction program rather than serving as the linchpin of an infrastructure program?

If the federal government is to reach the goal of investing about $101 billion per year to rebuild the country’s infrastructure, it must adopt the basic business principles set forth above. Acting on such principles, state and local governments (or regional governmental bodies) would issue long-term bonds with an average life of 20 years, and the federal government would pay the entire principal and interest on these bonds each year. Finally, we believe that user fees should be charged on at least half the infrastructure built under this program, and that the federal government should recover its annual investment for at least half the new infrastructure.

Relying on debt, rather than federal grants, would allow the federal budget to reflect only the 20-year discounted value of debt service rather than the larger annual $101 billion grant outlay. With expected annual revenue of $3.35 billion from user fees, the government’s budget commitment for infrastructure could remain slightly below its current level of about $51 billion, while allowing another $1.5 trillion of infrastructure improvements to be put into service over ten years.

Further Offsetting the Cost

To help its balance sheet, what if the federal government could offset the discounted value of its first-year commitment, $50 billion, or even its first- and second-year commitment, $100 billion? How could it accomplish this goal? A plan incentivizing corporations to repatriate profits, with a negotiated reduction in the tax rate, would benefit corporations and the economy—and generate a pool of revenue that could be dedicated to improving infrastructure.

Profits U.S. corporations earn abroad are taxed in the country where the income is earned. These corporations do not have to pay U.S. taxes, minus their foreign tax payments, unless and until they bring their profits back home. However, if the U.S. government were to accept a lower effective tax rate of, say, 5 percent or 10 percent for a one-time payment on the estimated $1.4 trillion of currently unrepatriated profits—a figure from the congressional Joint Committee on Taxation cited by the Washington Post—it would receive $65 billion at 5 percent or $130 billion at 10 percent, which it could then earmark for infrastructure.

Handling repatriated profits in this manner not only would lead to an increase in investable corporate funds in this country, it also would have a direct economic payback for U.S. corporations. As noted in the March 2011 report Winning the Prosperity by the nonprofit, nonpartisan New America Foundation, “Public infrastructure investment makes private investment more efficient and more competitive globally by eliminating many . . . bottlenecks . . . and by lowering the cost of transportation, electricity, and other core business expenses.” For instance, the U.S. Department of Transportation says freight bottlenecks cost the U.S. economy about $200 billion each year, and the Federal Aviation Administration blames air traffic delays for $33 billion in losses to the economy. These facts illustrate how critical good infrastructure is to corporate profitability and the bottom line.

Moreover, as Pollyannaish as this might seem, corporations might respond to appeals to their patriotism and should welcome participation as an opportunity to repair their tarnished reputations. It would be particularly hard for American corporations to ignore a plea for assistance when that plea is coupled with a substantial lowering of their taxes on repatriated profits.

Reviewing the Basic Financing Mechanism

The financing mechanism proposed here would resemble that employed under the short-lived Obama administration program known as Build America Bonds, enacted as part of the 2009 stimulus. Under the Build American Bonds bill, in order to persuade local governments to stop using tax-exempt bonds to fund their projects, the federal government subsidized the interest rate on local taxable government bonds. In this proposal, the federal government would agree to subsidize the full, rather than a partial, amount of debt service on these new infrastructure bonds. The state and local jurisdictions in return would agree that once they had met the federal repayment trigger—that is, the debt-service charges on 50 percent of the borrowed funds—they would receive all the additional revenues for themselves and their private partners.

Other Implementation Issues

If the nation is to launch a truly far-reaching infrastructure program, the financing mechanisms are by no means the only challenging features that will have to be worked out. Among the challenges are the following:

• How to apportion the vastly expanded funds for infrastructure. In the view of many analysts, top priority for infrastructure funding should go to regional compacts of states because many needs, such as wastewater management and energy transmission, cross state and local boundaries. States, as well as cities with more than 250,000 people, would receive the remainder of the funds, with the states selecting which projects proposed by their smaller jurisdictions would receive the net federal subsidy.One oft-cited recommendation is to create a profit-oriented infrastructure bank. We believe that such an institution is necessary and desirable in order to support the basic financial principles on which this proposal rests. A majority of the board members of such an infrastructure bank should come from the private sector, with a minority being government officials from agencies whose funds are affected.

• How to make the program as efficient and unbureaucratic as possible. Work on many projects could be significantly accelerated if selected U.S. Environmental Protection Agency and other governmental restrictions were waived, such as the need for environmental assessments when existing infrastructure is simply being repaired or replaced. In addition, more construction work could be undertaken, and more workers hired, if labor agreed to a modified Davis-Bacon wage scale—for example, paying apprentice workers at a lower rate, as is common in many government projects.Significant reforms are needed to relax and synchronize permitting requirements and to address other hurdles in the project approval process, which can slow progress dramatically. For one cutting-edge transmission line cited in ASCE’s report card, for example, permitting began in 1990 and the final permit was obtained in 2002. The project’s construction required approval from two states and three federal agencies. This is not unusual.

  Accordingly, President Obama’s Council of Jobs and Competitiveness has recommended many ways for federal, state, and local agencies to harmonize their project approval standards and practices. To jump-start this effort, the administration has launched a Federal Infrastructure Projects Dashboard that will track 14 high-priority projects as they move through an expedited review process. However, it will take substantial additional prodding, creativity, and political savvy to break down entrenched bureaucratic fiefdoms.

Implications for Job Creation and Economic Growth

The New America Foundation report estimates that 23,000 jobs would be created for each additional $1 billion spent on infrastructure. Thus, when the full $129 billion is being spent each year, the program will be adding about 3 million jobs to the U.S. employment rolls. More important, these jobs would not be eliminated once a project was completed because additional construction programs would continue in a steady flow over at least ten years. And even with a modified Davis-Bacon wage scale in place in some cases, the pay would be equal to or better than that of most of the industrial and service jobs created with government support in recent years.

The multiplier effect of all these new jobs would extend to most areas of the economy—through increased consumer spending, resumed mortgage payments, growing demand for new homes, and a boost in federal, state, and local tax revenue.

Prospects for Success

Who would oppose an infrastructure program of the dimensions set forth here? Not local governments, which would receive billions of additional dollars to finance their neglected infrastructure. Not labor unions, which would see millions of jobs created while union wage scales were largely upheld. Not Wall Street, which would benefit from the issuance of hundreds of billions of dollars of bonds each year. Not many American corporations, which would be able to repatriate profits at a reduced tax rate while seeing these tax dollars go directly to infrastructure that will enhance their own bottom line. Not even fiscal hawks, who would see the economy being sparked with a smaller outlay of federal dollars than is currently being expended.

As for Capitol Hill, when the country is weighed down with over $15 trillion of debt, how likely is it that a divided and dysfunctional Congress would approve such an infrastructure proposal—even though it calls for fewer dollars than are currently committed? Rebuilding America’s infrastructure through a long-term plan that would cut federal expenditures is one of the few proposals that might win bipartisan support.

Whether or not both political parties support a large-scale infrastructure program, such a program is urgently needed. A national commitment to rebuilding the nation’s infrastructure along the lines advocated here would profoundly enhance the quality of life in the United States, beginning with putting millions of people back to work. It would improve public health and safety while securing the country’s competitive edge against burgeoning nations like China, and enable the United States to regain its footing as the world’s leading economic power.

The needs are pressing. Financing is feasible and affordable. Interest rates and construction costs are at historic lows. It is past time to get started.