MuniLand

The Senate’s latest twist: The American Infrastructure Fund

A bipartisan group of eleven U.S. Senators, led by Colorado Democrat Michael Bennet, has filed legislation to create the American Infrastructure Fund. Senate bill 1957 would:

Provide bond guarantees and make loans to states, local governments, and   infrastructure providers for investments in certain infrastructure projects, and provide equity investments in such projects, and for other purposes.

The trade industry association Sifma describes the legislation:

On January 17, a group of 11 U.S. Senators joined 50 House members to support a proposed national infrastructure bank funded with $50 billion of taxable bonds with a one percent interest rate. The Partnership to Build America Act (S. 1957), in line with the H.R. 2084, filed in the House in May by Rep. John Delaney, D-Md., aims to help state and local governments finance initiatives to build or repair roads, bridges, highways, ports, schools, and other infrastructure projects.

This legislation feels like an evolved version of Democrat Virginia Senator Mark Warner’s BRIDGE Act legislation from November, 2013. Warner’s bill began with a $10 billion investment that would be structured as an independent government entity (think Fannie and Freddie) and relies on a government appropriation for initial funding. Loans and guarantees made under the BRIDGE Act would carry an interest rate comparable to U.S. Treasuries and capped maturities of 35 years.

Bennet’s legislation ups the initial money for the infrastructure fund to $50 billion and gets seed money by selling bonds at a 1 percent interest rate to U.S. corporations that are repatriating overseas profits. From Sifma again:

A focus on infrastructure in the U.K.

The United Kingdom created an independent group, U.K. Infrastructure, to track, coordinate and promote infrastructure investment in the country. It announced its latest plan last week:

A new national infrastructure plan containing information on over £375 billion [$616 billion] of planned public and private sector infrastructure investment has been announced by the government.

The plan sets out investment for energy, transport, flood defense, waste, water and communications infrastructure up to 2030 and beyond.

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):

Infrastructure land

The New York State Comptroller, Tom DeNapoli, issued a new report this month that discusses public private partnerships (P3s) and makes recommendations for municipal entities that are considering P3s for infrastructure projects. The report seems to be directed at the New York State Assembly, which had legislation that would have authorized P3s in the state without any limit on size or requirement for oversight. From the report:

Since that time, [New York] has authorized a number of agencies and public authorities to use a simple form of public-private partnership known as design-build contracting. The Thruway Authority’s procurement of the new Tappan Zee Bridge is being undertaken using design-build methods, with the expectation that this approach will streamline the project, shift some financial risk to private contractors rather than the Thruway and its users, and result in savings for the Authority.

Policy makers in New York are now considering whether to authorize more sophisticated types of P3s that depend on private financial investments. The State Fiscal Year (SFY) 2013-14 Executive Budget included a proposal for “design-build finance” P3s that would for the first time have given private firms the authority to finance public infrastructure projects.

More bridges, less war spending for America

This week a semi truck plowed into the I-5 bridge crossing the Skagit River in the State of Washington, causing part of the bridge to collapse. The incident echoes the failure of the Minneapolis bridge in 2007. These are serious but rare occurrences in the U.S. Even so, the nation’s infrastructure needs more attention.

Here is the estimate of necessary infrastructure spending for the next seven years by the American Society of Civil Engineers:

Moderating the infrastructure debate

New York’s mayor Michael Bloomberg has a reputation as a data junkie who uses statistics to manage the city more efficiently. I think I found his doppelganger in Michigan’s governor Rick Snyder. Fitch recently bumped Michigan’s rating to AA from AA-, where it had been since 2007. Bloomberg and Snyder may be national models for the effective use of data at the local, state and federal levels.

I learned about Snyder’s efforts while watching a Council of State Government’s webinar about the American Society of Civil Engineer’s 2013 report on the condition of America’s infrastructure. The report has been panned by many, including Reuters’ Jack Shafer, who says that the proposed spending is just an enormous meal ticket for the nation’s civil engineers and construction firms. The Director of Michigan’s Department of Transportation, Kirk Steudle, used two arguments to rebut Shafer:

1) Most civil engineers are public employees who don’t benefit from an increase in infrastructure spending. In fact, they would be paid the same if they managed three or six projects.

Infrastructure must be part of the agenda

The need for more infrastructure must be brought back to center stage. Creating middle-class jobs “must be the North Star that guides our efforts,” President Obama said in his State of the Union address on Tuesday. More improved bridges, tunnels, ports and other shared infrastructure would be a great way to boost the economy, create jobs and improve the hard assets that support business and public activities.

Many infrastructure projects are taking place under the radar, guided and funded by state governments. These projects are usually designed and driven by states with some funding from the federal government as well as municipal bonds and toll or user fees. The bridge that carries I-75 and I-71 traffic over the Ohio River between Ohio and Kentucky is a perfect example of a joint project. This is a bridge in Senate Minority Leader Mitch McConnell and House Leader John Boehner’s districts that President Obama stood in front of last year to sell his $467 billion jobs bill. The bill was never approved by Congress. The bridge highlights the difference between the two parties on funding infrastructure. Bluegrass Politics blog covered the story:

Obama joked that it was “just coincidental” that he came to the bridge in the backyards of McConnell and Boehner.

Raise the federal gas tax

Members of Congress approved spending $198 billion during fiscal years 2012 and 2013 on the war in Afghanistan, according to the Center for Strategic and International Studies. In contrast, in fiscal year 2012, Congress allocated only $37 billion to the Federal Highway Administration for transportation infrastructure. About $23 billion of this spending on highways, bridges and mass transit comes from the 18.4 cents of federal tax Americans pay on a gallon of gasoline. This tax – instituted in 1993 – has not been adjusted (even for inflation) since it was put in place. From McClatchy:

It’s been 20 years since Congress raised the gasoline tax. The 18.4-cents-a-gallon tax has lost a third of its buying power to inflation and rising construction costs.

The tax feeds the federal Highway Trust Fund, which long has paid for a portion of highway construction and repairs in all 50 states.

Get ready for more public toll bridges and roads

Governor John Kasich of Ohio and Governor Steve Beshear of Kentucky are forming a bi-state team to research funding options to replace the 50 year-old bridge that crosses the Ohio River and connects their states. The Brent Spence Bridge carries about double the volume it was designed for on Interstate 71. It is an example of valuable U.S. infrastructure in need of replacement. The big question is where the funds will come from. AP has the story:

The two governors were joined by U.S. Transportation Secretary Ray LaHood, and all three said that charging tolls would need to be a part of any financing plan.

“Uncle Sam is not coming in on a white horse to pay for all of this. Those days don’t exist anymore,” [Kentucky governor] Beshear said. “We need to find all kinds of sources.”

Sandy as an external shock

Estimates for the economic damage resulting from Superstorm Sandy are circulating from $15 to $50 billion in damage. No formal assessments have been completed yet, and it’s likely that these are “repair” estimates that reflect the cost of cleaning up and repairing infrastructure back to its former state. A repair bill is likely to be much lower than the cost of hardening and improving vital transport, energy and communication systems to withstand more storms like Sandy or worse. After Hurricane Katrina, architect Frederic Schwartz wrote:

The planning of cities in the face of disaster (natural and political) must reach beyond the band-aid of short-term recovery. Disaster offers a unique opportunity to rethink the planning and politics of our metro-regional areas…

I’m not advocating centralized economic planning, but instead the concept of having a clean slate to rethink a region’s needs and weaknesses. Much of New York’s infrastructure is over 50 years old and some parts of the subway system are over 100 years old. On top of these old and heavily worn systems have been laid new systems that support the regions modern economy.

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