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

Inherency

Model Infrastructure Bad

Status quo targeted infrastructure investments exacerbate structural ills

http://www.brookings.edu/up-front/posts/2010/01/15-prosperity-katz-puentes

What followed—the American Recovery and Reinvestment Act (ARRA)—was the most important and visible infrastructure policy effort of the past year and reflected a belief that infrastructure investment could provide both short-term jobs and long-term growth. Our early and ongoing assessments of ARRA found that the law usefully directed billions of dollars toward infrastructure. In fact, we estimate that, excluding the tax cuts, about a quarter of the total recovery package is directed toward infrastructure.

Unfortunately, the need for fast action meant the nation had to rely on existing “business-as-usual” delivery systems. As a result it thwarted any conversation about real reform and reinforced the approach of spreading money around instead of targeting investments. The administration’s one spatial directive of investing in so-called economically distressed areas only made a bad situation worse.

No Federal Control over investment

The federal government has limited control over their investments, states free-ride on grants displacing spending

http://www.brookings.edu/up-front/posts/2010/01/15-prosperity-katz-puentes

To understand the federal investment process for infrastructure today we need to examine both how the federal government plans and manages for the assets it owns and also for those in which it invests, but are owned by states, municipalities, and others. For the former, OMB provides detailed guidance to federal agencies on the capital process.25 While it is true that there is no unified federal capital plan, OMB helps federal agencies budget, plan, and prioritize their capital projects.26 The goal is to make sure that the capital assets in each agency contribute to the fulfillment of agency objectives. OMB’s capital process guide, first released in 1997 and expanded in 2006, integrates the executive and legislative initiatives that affect the federal capital process.27

OMB recommends frequent use of cost-effectiveness or benefit-cost analysis (BCA) in deciding whether investment in a new capital asset is the best way to fulfill an agency’s needs. In addition, a BCA is considered the fundamental method of selecting a capital asset, by ranking the net present benefit of several options available.28 Both benefits and costs should be estimated in a lifecycle manner and benefits should be estimated in relationship with the goals and needs of the agency. While OMB recommends monetary quantification of both benefits and costs, it does acknowledge that qualitative considerations—explicit regulatory requirements, considerations of business strategy, or unquantifiable social benefits or costs—may be important in the final evaluation.29

Over the years, GAO examined how selected federal agencies plan and budget for capital assets and to what degree they follow OMB’s guidelines.30 The agencies implement the main principles of capital planning and budgeting, but the results vary. While linking the proposed investments with the strategic goals of the agency is common, several agencies had problems with conducting asset inventories and assessments of the condition of their assets (i.e. the Department of Veterans Affairs and the U.S. Customs and Border Protection).31

One of the major criticisms of the current federal capital process is of the full funding requirement. The current rule requires that budget authority for the full costs of the asset be enacted in advance of any commitment by the federal agency.32 This rule results in spikes in spending, especially for small agencies. In an era of tight budgets and soaring deficits, there is a concern that federal agencies might forego capital spending due to this requirement.

However, full funding is also one of the few existing mechanisms to ensure long-term accountability of the federal government for its investment decisions.33 It is a fiscal control mechanism, because a lack of upfront fully committed funding can lead to higher delivery costs if a project is halted and re-started several times, or worse, half-finished projects—or so-called white elephants—that run out of money entirely.34 This type of budgeting eliminates the crowd out effect of multiple contingent appropriations associated with an earlier project on the funding of future projects. Also, Congress will not have to be in the situation to continue funding a project that is no longer wanted. Upfront full funding is a federal budget scorekeeping rule, enforced by OMB, and not a rule by statute. In fact, the laws are more lenient. The statutes require federal agencies, such as the Army Corps of Engineers, to have adequate budget authority for individual contracts.35 In contrast, full funding regulation asks the federal agency to get upfront funding for an entire project, even if it includes several contracts.

Federal agencies are supposed to use these principles to justify major infrastructure investment and grant programs, those in excess of $50 million annually. With all the legal requirements in place, BCA is not done consistently by federal agencies.53 The states themselves often do not use formal BCA in deciding among alternative projects and regular evaluations of outcomes are typically not conducted.54

The federal transportation grants have contract authority that allows states to do multiyear planning and contracting. The federal surface transportation program provides an 80 percent matching grant to states to conduct statewide planning and to develop long-range statewide plans. These plans “should include capital, operations and management strategies, investments, procedures, and other measures to ensure the preservation and most efficient use of the existing transportation system.”58 While both the federal agencies and the grantees have to develop long-term capital plans, there is no comprehensive long-term strategic view for the capital assets financed by the federal government. There is no incentive for decisionmakers to push for better long-range planning, because there is no accountability mechanism to assess the long-term results of federal investment.

The federal investment process does not appropriately allocate resources either through federal agencies or state and local recipients. Bias against maintenance, a flawed selection method and insufficient long-term planning plague the federal investment process. Overall, these problems result from both the incentives provided by the legal or regulatory framework and their implementation. For example, while operating leases score lower in the federal budget, they also lead to underinvestment in federal capital.59

Besides the shortages of the OMB capital guide and the existing statutes, the administrative discretion of the federal agencies and the grantees contribute to the deficiencies in the federal investment process. The federal agencies do it because of inability to follow a multitude of regulations and executive orders, in the context of ever changing policy objectives. This issue is complicated in the case of the U.S. Department of Transportation that mostly assists state-run transportation programs.60 The local and state grantees drive the capital planning and management of the transportation assets funded by the federal government. A clear and direct link between investment decisions and outcomes would help both federal agencies and grantees in managing the federal investment process.

Funding Shortfalls

Transportation Stopgap measures will fail funding shortfalls are inevitable

Energy Security Leadership Council 2011 “Transportation Policies for America’s Future Strengthening Energy Security and Promoting Economic Growth” February 2011, General P.X. Kelley, USMC (Ret.) 28th commandant, u.s. marine corps, Frederick W. Smith, chairman, president & ceo, fedex corporation.

In 2009, the Highway Account ran a deficit of $7.3 billion after outlays of almost $38 billion.42 The Transit Account is smaller, but is also running deficits, with revenues of about $4.8 billion and outlays of $7.3 billion in FY 2009.43 Due to the injection of stimulus funds, the Transit Account ended FY 2009 with a closing balance of $5.2 billion, but within a few years this balance is expected to once again go negative without further injections (Figure 2.7).44

Recent actions taken by Congress have only provided a temporary solution. Over the last three years, Congress has enacted emergency legislation to support the HTF using general fund transfers. In 2008, $8 billion was transferred, followed by another $7 billion in 2009, and then another $19.5 billion in March 2010, which extended funding for formula programs through to December 31, 2010. The Congressional Budget Office (CBO) expects this transfer to support the existing contractual obligations of the highway and transit programs through 2013.45

Many potential solutions have been proposed to address the funding deficiencies of the system. In September 2010, for example, a permanent infrastructure bank that would leverage public and private capital to invest in projects with national and regional significance was proposed. A similar idea was first advanced in the Senate, and legislation based upon the concept has also been introduced in the House of Representatives. Other policymakers have also recently pushed for greater investment in transportation infrastructure.46

Investment Low

Infrastructure investment is unsustainable – new sources of capital are key

Energy Security Leadership Council 2011 “Transportation Policies for America’s Future Strengthening Energy Security and Promoting Economic Growth,” February 2011, Admiral Dennis C. Blair, U.S. Navy (Ret.) former director of national intelligence and commander in chief, u.s. pacific command, General Bryan “Doug” Brown, U.S. Army (Ret.) former commander, u.s. special operations command, … and several others…, http://tinyurl.com/6nlvbbn

As the government mandates more stringent fuel economy standards, and consumers continue to shift to more efficient and alternatively-fueled vehicles, the outlook for U.S. transportation system funding—90 percent of which comes from fuel taxes—is becoming increasingly unsustainable. Outlays Exceed Revenues The present federal funding mechanism for highway and transit programs—the HTF—is different from most federal spending in that the bulk of the revenues come from people who pay fuel taxes. Because federal fuel taxes are levied on a per-gallon basis and have not been increased since 1993, their real value has declined by around one-third. This, combined with the fact that spending has climbed steadily, has necessitated infusions from the general fund of $34.5 billion over the past three years (with more bailouts expected to be necessary until the system is restructured). The primary revenue sources for the Highway and Mass Transit Accounts are an 18.4-cent per gallon tax on gasoline and 24.4-cent per gallon tax on diesel fuel. The Mass Transit Account now receives 2.9 cents per gallon of those fuel taxes.39 Although there are other sources of HTF revenue, such as truck registrations and surcharges on truck tires, fuel taxes provide about 90 percent of the revenue to the funds. Therefore, the current federal transportation funding regime must rely on continually rising gasoline consumption to support increased spending. As shown in Figure 2.6, with the exception of the late 1970s and early 1980s, consumption has in fact risen steadily. In recent years, however, it has flattened out (and actually declined temporarily as oil prices spiked and the global financial crisis took hold), and the EIA—which does not assume significant fleet penetration of alternative fuel vehicles—expects that it will decline only slightly through 2020. More stringent fuel economy standards announced in 2009 and 2010, as well as the push for revolutionary technologies such as electric vehicles, mean that fuel consumption—and fuel tax revenue— may continue to decline more rapidly in the future. As recently as 1998, the HTF was running such a large surplus that Congress transferred $8 billion from it to the general fund. In 2001, the HTF reached a cash balance historical high of around $20 billion. Since then, however, the balance has steadily declined simply because annual outlays are exceeding receipts collected from federal gas taxes and other HTF revenue sources. 40 In 2005, estimated outlays exceeded estimated revenues, and it was forecast that if realized over the FY 2005 to 2009 authorization period, the balance would fall to approximately $400 million by the end of FY 2009. Actual revenues for FY 2008 were about $4 billion lower than expected due to fewer purchases of trucks and motor fuel, and USDOT received indicators that the Highway Account balance was declining faster than expected.41 In 2009, the Highway Account ran a deficit of $7.3 billion after outlays of almost $38 billion.42 The Transit Account is smaller, but is also running deficits, with revenues of about $4.8 billion and outlays of $7.3 billion in FY 2009.43 Due to the injection of stimulus funds, the Transit Account ended FY 2009 with a closing balance of $5.2 billion, but within a few years this balance is expected to once again go negative without further injections (Figure 2.7).44 Recent actions taken by Congress have only provided a temporary solution. Over the last three years, Congress has enacted emergency legislation to support the HTF using general fund transfers. In 2008, $8 billion was transferred, followed by another $7 billion in 2009, and then another $19.5 billion in March 2010, which extended funding for formula programs through to December 31, 2010. The Congressional Budget Office (CBO) expects this transfer to support the existing contractual obligations of the highway and transit programs through 2013.45 Many potential solutions have been proposed to address the funding deficiencies of the system. In September 2010, for example, a permanent infrastructure bank that would leverage public and private capital to invest in projects with national and regional significance was proposed. A similar idea was first advanced in the Senate, and legislation based upon the concept has also been introduced in the House of Representatives. Other policymakers have also recently pushed for greater investment in transportation infrastructure.46

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