Cost-Cutting-Edge Innovations For Infrastructure Finance
The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By Girard Miller
October 8, 2019
The American Society of Civil Engineers estimates that the United States needs to spend $4.5 trillion in 2021-25 to replace obsolete and dangerous infrastructure. To fund that much construction at federal expense, the debt service would require new taxes of $200 billion annually for the next 30 years with no tax cuts for three decades. A ten percent increase in federal income tax rates every five years would be required in order to continue the ongoing process of upgrading our dilapidated infrastructure. Fiscally, the only sustainable federal role is to incentivize rather than fully subsidize most of these projects.
Despite bipartisan agreement that our nation needs to upgrade its public infrastructure, there are sharply divergent policy views on priorities and funding policies. America’s, “Marble cake,” federalism is the framework for major infrastructure reconstruction initiatives that now need a smarter bipartisan federal-state-local government partnership. (“Marble cake,” cuts across the three layers of United States government, with funding shared, as contrasted with, “Layer cake,” responsibilities.)
This article describes cost-cutting-edge federal fiscal strategies to (a) get more construction bang for the buck, (b) finance cleaner local water systems and dangerous-bridge replacements with non-recurring federal assistance and (c) cut the policy implementation lag that too often characterizes well-intended but sluggish counter-cyclical infrastructure initiatives.
Start with smarter, pump-priming incentives. Game theory informs us that local governments will optimize their local treasury when federal grants become available, seeking to substitute federal taxpayer dollars for local resources. Projects that would never be built with local taxes become political darlings when the money comes instead from Washington D.C. Gamesmanship can be minimized if Congress establishes a long-term planning and pump-priming policy structure that consistently incentivizes states and localities to (1) implement authentic long-term capital planning programs, (2) identify projects that can be accelerated during a recession by (3) sharing in the advance costs of land/rights acquisition, engineering and architectural design work to make selected future projects “RFP-ready,” and thereby eligible for accelerated construction in recessions. Countercyclical federal funds can then be targeted to pay just the first few years’ debt payments to amortize the project until its originally scheduled construction timetable under the grant recipient’s original standalone capital improvement plan. Thereafter, the debt service becomes the applicant’s responsibility, thus avoiding substitution effects and pork-barrel bridges to nowhere. Complementary lower-cost financing strategies are discussed below.
Require full-cost user fees for federally assisted clean water, highway and bridge construction projects. Obsolete and unhealthy local water and sewerage lines need to be replaced. Typically they were never properly funded with full-cost accounting that charged the resident-users for the depreciation on their now-obsolete systems. Federal remediation assistance will be needed in communities such as Flint and Newark, but it should come with a string attached: The assisted municipal utilities must contractually include full-cost depreciation accounting, so that user fees then provide all the funding required to assure that future replacements will be locally financed and thereby get United States taxpayers out of that business. Likewise, 5G telecom networks and electronic vehicles will become more prevalent, with pinpoint location detection. As gasoline taxes dwindle, it will be both necessary and feasible technologically to require and collect micro-payments from vehicles for the miles they drive on metropolitan roads and for every bridge crossing. Full-cost user-fee pricing in the coming 5G/EV era will facilitate proper and timely replacement of those facilities in future years.
Provide states and localities a reliable Taxable Bond Option (TBO). Historically, the municipal bond market for state and local infrastructure debt finance has been exempt from federal income taxes on the interest paid to their bondholders. Economists have long argued that the exemption of muni bond interest is an inefficient subsidy at the federal level. Only highly taxed investors are major buyers; foreign investors and goliath pension funds have no use for the tax exemption. It would be billions-cheaper for Uncle Sam to just pay the states and local issuers a direct subsidy. Local officials have always been suspicious of this concept, however, for fear that such subsidies would someday be cut from the budget in a swelling sea of federal red ink. However, many have been supportive of an option to issue certain bonds on a taxable basis with a cost-effective federal reimbursement of a percentage of their interest costs—or simpler and better yet, an equivalent single up-front cost-share (e.g. 25%) that would permanently reduce the project’s taxable debt service. This so-called TBO option could be authorized on a permanent basis for certain qualifying purposes, such as the full-cost user-fee replacement projects mentioned previously, and as a lower-cost funding vehicle for qualifying lower-income communities. In periods of recession, the TBO authority can be opened up to all muni bond issuers, like the Build America Bonds program under the Obama administration in 2008-10. A standing unemployment-rate trigger to activate nationwide or regional TBO authorizations would eliminate policy lags. Each deal’s federal cost-sharing must be contractually obligatory to preclude future Congressional backpedaling.
Open the Federal Financing Bank (FFB) to the states. The FFB is an arm of the U.S. Treasury, now used to provide pass-through funding to federal agencies at low-cost U.S. Treasury bond interest rates. The FFB could be made available for states (and, “Conduit” state bond banks that service local governments and agencies) to likewise borrow directly from the FFB for specified qualifying purposes. In today’s market, U.S. Treasury bonds with maturities appropriate for infrastructure projects bear interest rates about 60 basis points (0.60%) below AAA-rated municipal debt, and the potential savings would be even greater for lower-rated issuers who meet stringent credit requirements. This could reduce interest costs by 25% and annual debt service costs by about 10-15%, while eliminating the federal cost of tax exemptions that benefit wealthy investors. Such FFB underwriting must require proper safeguards for credit, including a universal requirement for deep-pocket third-party guarantees (bond insurance) and disqualification of all federal assistance to the delinquent state in the event of an FFB default. If coupled with the TBO incentives, or recession-period pump-priming grants to cover initial debt service payments for accelerated construction, the fiscal benefits to states, localities and their residents will promote additional, timely and efficient construction and employment.
+++++++++
This article was adapted from, “Part IV: Infrastructure,” in the author’s new book Enlightened Public Finance, which addresses fiscal literacy for the 2020 elections. Other chapters address the perils of deficit accumulations, various tax reform options and national health care financing strategies. The author’s net proceeds will be donated to the Government Finance Officers Association’s public finance scholarship program. Paperback copies are now available through online retailers, and directly from the publisher without retail commissions whereby one-half of the purchase price will be donated: https://store.bookbaby.com/book/Enlightened-Public-Finance
Author: Girard Miller received an MPA degree in 1973 from the Maxwell School at Syracuse University, and an MA in Economics from Wayne State University in 1978. Now retired, his 30-year career spanned the governmental, nonprofit and investment communities. Twice the president of national mutual funds, he served on the Governmental Accounting Standards Board, and has authored several publications for the Government Finance Officers Association, where he is an honorary life member.
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Cost-Cutting-Edge Innovations For Infrastructure Finance
The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By Girard Miller
October 8, 2019
The American Society of Civil Engineers estimates that the United States needs to spend $4.5 trillion in 2021-25 to replace obsolete and dangerous infrastructure. To fund that much construction at federal expense, the debt service would require new taxes of $200 billion annually for the next 30 years with no tax cuts for three decades. A ten percent increase in federal income tax rates every five years would be required in order to continue the ongoing process of upgrading our dilapidated infrastructure. Fiscally, the only sustainable federal role is to incentivize rather than fully subsidize most of these projects.
Despite bipartisan agreement that our nation needs to upgrade its public infrastructure, there are sharply divergent policy views on priorities and funding policies. America’s, “Marble cake,” federalism is the framework for major infrastructure reconstruction initiatives that now need a smarter bipartisan federal-state-local government partnership. (“Marble cake,” cuts across the three layers of United States government, with funding shared, as contrasted with, “Layer cake,” responsibilities.)
This article describes cost-cutting-edge federal fiscal strategies to (a) get more construction bang for the buck, (b) finance cleaner local water systems and dangerous-bridge replacements with non-recurring federal assistance and (c) cut the policy implementation lag that too often characterizes well-intended but sluggish counter-cyclical infrastructure initiatives.
Start with smarter, pump-priming incentives. Game theory informs us that local governments will optimize their local treasury when federal grants become available, seeking to substitute federal taxpayer dollars for local resources. Projects that would never be built with local taxes become political darlings when the money comes instead from Washington D.C. Gamesmanship can be minimized if Congress establishes a long-term planning and pump-priming policy structure that consistently incentivizes states and localities to (1) implement authentic long-term capital planning programs, (2) identify projects that can be accelerated during a recession by (3) sharing in the advance costs of land/rights acquisition, engineering and architectural design work to make selected future projects “RFP-ready,” and thereby eligible for accelerated construction in recessions. Countercyclical federal funds can then be targeted to pay just the first few years’ debt payments to amortize the project until its originally scheduled construction timetable under the grant recipient’s original standalone capital improvement plan. Thereafter, the debt service becomes the applicant’s responsibility, thus avoiding substitution effects and pork-barrel bridges to nowhere. Complementary lower-cost financing strategies are discussed below.
Require full-cost user fees for federally assisted clean water, highway and bridge construction projects. Obsolete and unhealthy local water and sewerage lines need to be replaced. Typically they were never properly funded with full-cost accounting that charged the resident-users for the depreciation on their now-obsolete systems. Federal remediation assistance will be needed in communities such as Flint and Newark, but it should come with a string attached: The assisted municipal utilities must contractually include full-cost depreciation accounting, so that user fees then provide all the funding required to assure that future replacements will be locally financed and thereby get United States taxpayers out of that business. Likewise, 5G telecom networks and electronic vehicles will become more prevalent, with pinpoint location detection. As gasoline taxes dwindle, it will be both necessary and feasible technologically to require and collect micro-payments from vehicles for the miles they drive on metropolitan roads and for every bridge crossing. Full-cost user-fee pricing in the coming 5G/EV era will facilitate proper and timely replacement of those facilities in future years.
Provide states and localities a reliable Taxable Bond Option (TBO). Historically, the municipal bond market for state and local infrastructure debt finance has been exempt from federal income taxes on the interest paid to their bondholders. Economists have long argued that the exemption of muni bond interest is an inefficient subsidy at the federal level. Only highly taxed investors are major buyers; foreign investors and goliath pension funds have no use for the tax exemption. It would be billions-cheaper for Uncle Sam to just pay the states and local issuers a direct subsidy. Local officials have always been suspicious of this concept, however, for fear that such subsidies would someday be cut from the budget in a swelling sea of federal red ink. However, many have been supportive of an option to issue certain bonds on a taxable basis with a cost-effective federal reimbursement of a percentage of their interest costs—or simpler and better yet, an equivalent single up-front cost-share (e.g. 25%) that would permanently reduce the project’s taxable debt service. This so-called TBO option could be authorized on a permanent basis for certain qualifying purposes, such as the full-cost user-fee replacement projects mentioned previously, and as a lower-cost funding vehicle for qualifying lower-income communities. In periods of recession, the TBO authority can be opened up to all muni bond issuers, like the Build America Bonds program under the Obama administration in 2008-10. A standing unemployment-rate trigger to activate nationwide or regional TBO authorizations would eliminate policy lags. Each deal’s federal cost-sharing must be contractually obligatory to preclude future Congressional backpedaling.
Open the Federal Financing Bank (FFB) to the states. The FFB is an arm of the U.S. Treasury, now used to provide pass-through funding to federal agencies at low-cost U.S. Treasury bond interest rates. The FFB could be made available for states (and, “Conduit” state bond banks that service local governments and agencies) to likewise borrow directly from the FFB for specified qualifying purposes. In today’s market, U.S. Treasury bonds with maturities appropriate for infrastructure projects bear interest rates about 60 basis points (0.60%) below AAA-rated municipal debt, and the potential savings would be even greater for lower-rated issuers who meet stringent credit requirements. This could reduce interest costs by 25% and annual debt service costs by about 10-15%, while eliminating the federal cost of tax exemptions that benefit wealthy investors. Such FFB underwriting must require proper safeguards for credit, including a universal requirement for deep-pocket third-party guarantees (bond insurance) and disqualification of all federal assistance to the delinquent state in the event of an FFB default. If coupled with the TBO incentives, or recession-period pump-priming grants to cover initial debt service payments for accelerated construction, the fiscal benefits to states, localities and their residents will promote additional, timely and efficient construction and employment.
+++++++++
This article was adapted from, “Part IV: Infrastructure,” in the author’s new book Enlightened Public Finance, which addresses fiscal literacy for the 2020 elections. Other chapters address the perils of deficit accumulations, various tax reform options and national health care financing strategies. The author’s net proceeds will be donated to the Government Finance Officers Association’s public finance scholarship program. Paperback copies are now available through online retailers, and directly from the publisher without retail commissions whereby one-half of the purchase price will be donated: https://store.bookbaby.com/book/Enlightened-Public-Finance
Author: Girard Miller received an MPA degree in 1973 from the Maxwell School at Syracuse University, and an MA in Economics from Wayne State University in 1978. Now retired, his 30-year career spanned the governmental, nonprofit and investment communities. Twice the president of national mutual funds, he served on the Governmental Accounting Standards Board, and has authored several publications for the Government Finance Officers Association, where he is an honorary life member.
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