Infrastructure requires funding; Where will it come from?
Twitter was abuzz over a chart that was posted on FT’s Alphaville. Quack, quack, quack went Twitter, we need infrastructure spending to boost the economy! Of course nobody mentioned that Republicans, who recently shut down Congress to prove a point, are loath to increase spending. So where could additional money for infrastructure spending come from?
Here is a quick summary of possibilities.
The U.S. government: The likelihood of increased federal spending on infrastructure is almost zero, unless Congress wants to raise the federal gasoline tax. Congress has not increased the gas tax since 1993, not even to keep up with inflation.
State and local municipal bond issuance: This is where the bulk of current infrastructure spending comes from today. Municipal budgets have been constrained. New municipal bonds issued through the end of October fell 14.9 percent to $262.85 billion, according to Thomson Reuters. It’s not likely that state and local governments have significant balance sheet capacity to issue more debt. Here is the current outstanding municipal debt and how it is distributed (source: Sifma):
Public Private Partnership (P3s): Although a lot of positive press has been generated for P3s as a way to fund infrastructure, they have little track record to show efficiencies or savings. Ryan Holeywell of Governing.com separates the value from the hype of P3s:
[A] recent report from the U.S. Department of Transportation’s inspector general said unambiguously that P3s are unlikely to reduce the infrastructure funding gap, since they don’t increase funding levels. The only way P3s could be seen as generating revenue for state and local governments, the report concluded, is through whatever savings they might achieve through lower construction costs. But even those aren’t certain.
“There are people who say P3s create money. That is largely not true, but it’s not entirely untrue,” says Geoffrey Yarema, a partner at the law firm Nossaman, who has served as an adviser on some of the country’s largest public-private partnerships. “They don’t produce funding, but they can reduce costs significantly.”
But reduced costs aren’t a certainty, according to the Congressional Budget Office (CBO). In a 2012 report, the CBO found that P3s have built highways ‘slightly less expensively and slightly more quickly’ than the traditional approach, but the relative scarcity of data and uncertainty of existing studies on the topic ‘make it difficult to apply [those studies’] conclusions definitively to other such projects.’
Federal Reserve buying infrastructure bonds: The Fed has an enormous balance sheet ($3.8 trillion; now larger than the municipal bond market) and it has been buying $85 billion of U.S. Treasury and mortgage backed securities every month. It could also buy infrastructure bonds issued by states. As I wrote last year:
By some measures though, the housing market may be showing bubble-like properties again from the broad efforts of the Fed. Rather than potentially fueling a new bubble, the Fed should turn to buying infrastructure bonds to rebuild America’s energy grid, bridges, roads, rail systems and ports. This would be a direct investment in the public sector of the nation, rather than the personal assets of households. If the Fed invested in America’s hard assets, it would create jobs and put in place the necessary framework to truly spur economic expansion.
State pension funds investing in infrastructure: Although the typical model is that pension funds invest with the private sector in infrastructure funds, they can be made with or without a middleman. For example, the new Tappan Zee bridge in New York could get long-term loans from the New York State and City pension funds. The NY Thruway, which owns and operates the bridge, is rated A. Thirty year A bonds now yield 4.76 percent, versus a 30 year U.S. Treasury at 3.69 percent. In 2010, California’s Calpers fund invested in a British airport:
The largest public pension fund in the United States, the California Public Employee Retirement System recently took a 12.7 percent equity stake in the London Gatwick Airport with a $155 million investment.
To create funding mechanisms for infrastructure, the U.S. needs new ideas. We have sufficient wealth in the nation to do this, but we need to unleash new pools of capital. Then we may see more sources for infrastructure spending.
Correction: A previous version of this post said that the Tappan Zee bridge is owned by the Port Authority of New York. It is owned by the NY Thruway.