Future Infrastructure budget cuts are inevitable – We must locate other means of investment to rebuild and innovate

U.S. economy is on the brink now—continuing down this path will end the economy

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Status quo and Future transportation infrastructure requirements will strain our budgets – the NIB is a key budget neutral solution

http://www.nybooks.com/articles/archives/2008/oct/09/a-new-bank-to-save-our-infrastructure/?page=1

These are rare times of ferment in one of the most neglected fields of public policy—the nation’s infrastructure, or what used to be known as public works, including roads, mass transit, bridges, ports and airports, flood control systems, and much else. We have been confronted with spectacular and tragic evidence of the inadequacy of these facilities in the failure of the levees in New Orleans and in the collapse of the I-35 bridge in Minneapolis. More generally, a recent report by the American Society of Civil Engineers concludes that America’s infrastructure overall is close to “failing” and deserves a grade of “D.” It estimates that an investment of $1.6 trillion will be needed to bring it up to working order.

According to the report, nearly 30 percent of the nation’s 590,750 bridges are “structurally deficient or functionally obsolete” and it will take “$9.4 billion a year for 20 years to eliminate all bridge deficiencies.” “The number of unsafe dams has risen by 33 percent to more than 3,500.” Public transit facilities—including buses, subways, and commuter trains—are dangerously under-funded, even as demand for them has “increased faster than any other mode of transportation.” Current funding for safe drinking water amounts to “less than 10 percent of the total national requirement,” while “aging wastewater management systems discharge billions of gallons of untreated sewage into US surface waters each year.” Yet government investment in these vital facilities is generally held to be below the level needed simply to maintain them in their current poor state.

The gap between our economy’s need for functioning infrastructure and what is being invested in it has aroused much concern. Tired of waiting for Washington to recover the vision and energy it once devoted to the problem, Governor Arnold Schwarzenegger convinced California voters in 2006 to approve $20 billion in bonds to finance the repair and construction of roads and bridges in the state as well as public transit systems and other facilities. Together with Governor Ed Rendell of Pennsylvania and New York Mayor Michael Bloomberg, Governor Schwarzenegger has also formed a bipartisan group called Building America’s Future, which aims to find better ways to address the crisis. A second group, the Transportation Transformation Group, led by, among others, former House majority leader Dick Gephardt and General Barry McCaffrey, former US Southern Forces commander and drug czar, has a similar mission and the backing of Goldman Sachs.

Along with the Australian company Macquarie, Goldman Sachs is also among a new group of investors who are taking part in private refinancings of toll roads such as the Chicago Skyway, the Indiana Toll Road, and now perhaps the Pennsylvania Turnpike and the New Jersey Turnpike. Under those arrangements, the state or city sells the road and the right to set and collect tolls on it to a private company—in essence, a new form of government borrowing.

The last element of this mounting interest in the problem of infrastructure is public frustration at the costs to consumers of poorly maintained roads, bridges, transit systems, and airports. The average American motorist incurred $710 in lost time and fuel costs in 2005, well before the price of oil went over $100 per barrel. Air travelers fare no better—there were 1.8 million hours of flight delays in the US in 2007, many of which were caused by demands for runways that exceeded supply. Shippers report increasing frustration with the nation’s ports. According to the American Society of Civil Engineers, it will take over a quarter of a trillion dollars to bring the nation’s public school buildings up to “good” condition. And the demand for all of these services will increase further with population growth and economic activity.

But while private investors and states and cities are devoting more attention to this, the federal government has failed to provide the leadership it alone can supply. Federal spending on infrastructure, corrected for inflation, is actually lower than it was in 2001, despite the growing economy, the well-known disrepair and obsolescence of our assets, and the rising costs of their inadequacy. And this level of spending, as a share of GDP, is much lower than it was two or three decades ago.

Throughout US history, competent public investment decisions have been an essential complement to private investment, from the Louisiana Purchase and the Land Grant Colleges to the Interstate Highway System and the Internet. And the functions of infrastructure are still as essential as they have ever been, if not more so. Indeed, The Economist reports that China will spend $200 billion on its railways between 2006 and 2010—the largest investment in railroad capacity made by any country since the nineteenth century—while the US rail system continues to become more and more degraded at a time of great potential renewal. The Chinese also plan over the next twelve years to construct 300,000 kilometers of roads in rural China, as well as ninety-seven new airports. The Chinese understand that economic power depends on these investments.

In an effort to confront this problem, Congressman John Mica, the ranking Republican member of the House Transportation Committee, recently called for a trillion-and-a-half-dollar infrastructure spending program, under both public and private sponsorship. But where would the money come from? The Iraq war drains our national resources, and the 2001 cuts in personal income, capital gains, and inheritance taxes have slashed federal revenues. Meanwhile, several presidential candidates, including the Republican nominee, Senator John McCain, were unable to resist the temptation to endorse a motor fuels tax “holiday,” which would produce negligible saving for motorists but cut even further needed federal revenues. Thus, when it comes time for investments in our future, the federal cupboard is bare.

2.

Responsibility for the nation’s infrastructure is currently spread across federal, state, and local governments. For example, the federal government is responsible for maintaining wastewater systems, while states and municipalities handle drinking water. The federal government helps states, cities, and towns build and operate mass transit systems; and it builds bridges that are part of the Interstate system, while local governments build local roads and the picturesque covered bridges that appear on tourist postcards. Most of the federal government’s $73 billion budget for infrastructure in 2007 was spent on a handful of “modal” programs dedicated to promoting the construction and major rehabilitation of specific types of infrastructure, or “modes”—the Federal-Aid Highway Program, the Airport Improvement Program, the Transit Formula and Bus Grant Program, and the Army Corps of Engineers’ water resource programs, among others.

Some projects (often navigation or water resource development) benefit from selective congressional patronage—either so-called “earmarks” (special bequests for the pet projects of specific representatives or senators, such as the infamous Alaskan “bridge to nowhere”) or deals cut between Congress and the agencies. These deals are typically used for such water projects as the St. John’s Bayou–New Madrid Floodway Project in southeast Missouri, described by the corps’s own officials as an “economic dud with huge environmental consequences” and “a bad project. Period.”1

In the first part of the twentieth century, the nation was still developing highway and airport systems, and these methods of financing worked. States were eager to get federal funds to integrate their roads and airports into the new national networks. But that job was substantially done by the 1980s, and we now find ourselves, as General Heinz Guderian remarked, fighting the next war with the tools of the last one. Sending federal money to state capitals to fund 90 percent of whatever road construction state legislatures choose does little to further projects of national scope or genuine economic value. Moreover, the availability of funds to build new roads often blunts the incentive to repair and maintain existing roads until their deficiencies become pressing enough to warrant reconstruction. Thus, little has been done to maintain the Interstate Highway System, despite the fact that major sections are falling into disrepair, and repairing them is estimated to provide the taxpayers with the highest economic returns among highway projects today—much higher than the returns from building new roads.

Federal grants for water projects create other disincentives. If the Corps of Engineers doesn’t get around to funding a city’s project, then that city has every reason to wait for the next budget cycle instead of looking for other solutions. The result is lethargy and delay. The federal government will typically pay for levees, but not to preserve wetlands that provide natural flood protection by absorbing torrential rain. Moreover, by shielding local users from the true cost of living on flood plains, federal programs encourage development in areas that cannot sustain it.

Hurricane Katrina demonstrated the potentially devastating consequences of these failures. The state of Louisiana and its municipalities built flood control systems around levees while ignoring the deterioration of fragile wetlands in the Mississippi Delta. Louisiana’s congressional delegation steered federal funds toward navigation projects instead of flood control.

Particularly unfortunate is the failure of government to consider alternatives to new infrastructure construction. As the residents of any major American city understand, there are few places left to build new roads to relieve urban congestion or to expand or build new airports to reduce delay. Sooner or later, the officials in charge must consider managing road and airport use through pricing. They may auction off landing slots during peak rush hour periods2 or reserved lanes for drivers paying congestion tolls, much as we have “high-occupancy” lanes today. Or, as Mayor Bloomberg bravely proposed in New York, they may impose fees for bringing an automobile during business hours into the most congested part of Manhattan, a program that has been enormously successful in London.

In a world of $4-a-gallon gas and $40,000-a-year college, raising tolls will be unpopular with many families, whether poor or well-to-do. But we must either accept congestion and delay—together with ever more deteriorating and dangerous infrastructure—or use tolls to limit public use while providing a new source of revenue for transportation improvements. London now realizes about $400 million annually from the fees it charges to drive into the city; and it has used these revenues to expand dramatically its bus fleet. New York’s revenue would likely be higher, and would support any number of mass transit programs that would benefit lower-income users and commuters generally.

Another consequence of having different government programs dedicated to different types of infrastructure—whether highways, water projects, or wastewater treatment—is the creation of bureaucratic fiefdoms that are inevitably held captive to the “iron triangle” of congresspeople, lobbyists, and thebureaucrats themselves, as has happened in the case of the Highway Trust Fund and the Army Corps of Engineers. As a result, these programs never compete with one another. No responsible body has the mission of impartially deciding whether we’d be better off with more mass transit and better train service and fewer major roads, because these are never compared when a specific proposal is under review. Moreover, the different agencies that analyze projects—if they do so—generally use different (and self-interested) criteria for determining such critical variables as the value of time, the value of new jobs created, the discount rate, the cost of capital, and so on.3 As a result, the public is left without the apples-to-apples comparisons that any rational investor would use to allocate a portfolio of billions of dollars of investment.

So the “modal” infrastructure programs, rather than competing efficiently for resources, all lurch forward without coordination or attention to the merits of the specific projects they choose to fund. And that is in cases when the programs are not directly muscled through by politicians. The term “earmark” became popular during the writing of the 2005 transportation bill, which contained over six thousand of them (with a total cost of $24 billion), compared to five hundred of them in 1991 and ten in 1982.

3.

In view of the waste and inadequacies of existing federal and state policies, how can we begin to address the growing infrastructure crisis? In September 2004, former Senator Warren Rudman and one of the authors of this essay, Felix Rohatyn, agreed to chair a Commission on Public Infrastructure at the Center for Strategic and International Studies (CSIS) in Washington, D.C., to outline a new and different approach to selecting, financing, and managing infrastructure. Last year, the commission produced a consensus report; and a bill to enact its approach, the National Infrastructure Bank Act of 2007, has been submitted by Senators Chris Dodd (D., Connecticut) and Chuck Hagel (R., Nebraska), both of whom served as members of the CSIS commission. A companion bill has been offered in the House of Representatives by Banking Committee Chairman Barney Frank (D., Massachusetts) and Representative Keith Ellison (D., Minnesota); while a similar approach has been proposed in a bill introduced by Representative Rosa DeLauro (D., Connecticut). Barack Obama has spoken of the need for “a National Infrastructure Reinvestment Bank that will invest $60 billion over ten years…. The repairs will be determined not by politics, but by what will maximize our safety and homeland security; what will keep our environment clean and economy strong.”

The central idea of the CSIS commission proposal is to establish a National Infrastructure Bank, an institution that would be similar to the World Bank, a private investment bank, or any other entity that evaluates project proposals and assembles a portfolio of investments to pay for them. Traditionally, public financial institutions such as the one we propose are created to correct problems in capital markets, whether they be the failure of markets to fund projects that support development in the world’s poorest nations or their undue pessimism regarding the long-term solvency of a particular city or state government. This is not the case here. State and local governments generally can borrow for infrastructure purposes in line with their ability to service debt and the strength of their credit ratings. The issue here is not the efficiency of capital markets but rather the efficiency with which federal programs work and spend funds. The purpose of the National Infrastructure Bank would be to use federal resources more effectively and to raise additional funding. We propose this bank because we believe that markets for capital do work and can be harnessed to solve the critical shortfall in funding infrastructure.

The bank would replace the various “modal” programs for highways, airports, mass transit, water projects, and other infrastructure, streamlining them and folding them together into a new entity with a new culture and purpose. Any project seeking federal participation over a set dollar threshold would have to be submitted to this bank. (Smaller projects would be left to states, cities, and towns, perhaps with an accompanying federal grant to be used at the discretion of the state or local government.) Rather than receiving grants through pre-set federal formulas or privileged congressional payments, states, cities, or other levels of government would come to the bank with proposals they wished to pursue. These proposals—for, say, a new or improved highway, a subway, expanded airport, or harbor improvements—would outline the investment that state and local governments would be willing to make, what the users of the project would be expected to pay, and what support was wanted from the federal government.

The bank would have no preconceived, overarching plan for the nation’s infrastructure. Proposals for infrastructure investment would still predominantly come from state and local governments. Our plan would preserve almost entirely the existing balance of power between federal, state, and local government, but would change dramatically the way priorities are set and projects funded. That is because it would proceed project-by-project, and dollar-by-dollar, to find the best use of federal resources.

The bank would have a board of directors that included key Cabinet officers and members appointed by both the executive branch and congressional leadership; its chief executive would be appointed by the president and confirmed by the Senate. The Federal Reserve, the Public Company Accounting Oversight Board, and the Pension Benefit Guarantee Corporation are all good examples of comparable agencies with expert and important missions that have consistently functioned well. The bank would require states, cities, or other sponsoring entities to seek federal assistance only after they have thought through alternatives such as tolls and other user charges, such as the adjustment of prices to peak loads on the roads and airports or the availability of other solutions that do not require new, burdensome structures. These would include wetlands for flood control or changing speed limits and the use of “smart” traffic systems that allow more cars to use the same limited road space more efficiently. The bank would be in a good position to ask whether applicants were aware of alternatives and had considered the most efficient technology.

The bank’s securities, whatever they may be, should not benefit from a promise of the government’s full faith and credit (as has been enjoyed and abused by Fannie Mae and Freddie Mac). Only close scrutiny by investors can provide the kinds of discipline needed to ensure the bank’s long-term success. If the bank wishes to support a proposed project—whether by writing a check, insuring a local bond, providing other credit guarantees, or lending its own money—its securities should each be carefully exposed and specifically targeted, allowing participating investors to evaluate the assets they buy. But in our view the dramatic need for additional infrastructure investment clearly justifies tax-free returns for those securities.