Listen to the podcast:
The Trump administration’s budget for fiscal year 2019 includes $200 billion in federal funding for infrastructure projects, which is intended to stimulate state and private sector investments to make up a total of $1.5 trillion over a decade. The plan for infrastructure radically changes how infrastructure investments have been funded in the past, including more skin in the game for states, tax-exempt bonds for private investors and the elephant in the room – a higher federal gasoline tax.
It’s a big plan spread out over a long period, with many top-line elements that will determine the ultimate outcome yet to be defined, much less agreed to by Congress. What’s more, while the initial spending numbers being kicked around suggest some paths forward, how the projects would end up being financed could dramatically shift overall economic outcomes. For example, if the projects are mostly debt financed, then the economic drag created by higher government deficits could potentially more than offset any economic benefit, according to Kimberly Burham, managing director of legislation and special projects at the Penn Wharton Budget Model (PWBM). If instead the projects were funded by a gasoline tax — some proposals for a 25-cent per gallon increase have been floated — then the economic impact could be quite positive.
Additionally, for it all to work well, several stars have to align, such as better-written contracts for public-private partnerships to ensure feasibility and easier regulation while ensuring enforcement of whatever rules apply, say experts. It’s all far from assured, with many open questions about crucial details.
“[The Trump plan] flips the script from what we’ve seen in this country from the New Deal forwards,” said Kevin Heaslip, associate professor of civil and environmental engineering at Virginia Tech University, whose specialties include transportation engineering and urban transportation planning. He referred to the federal Highway Trust Fund that raises funding for transportation projects through gasoline and diesel taxes, and typically disburses 80% of road transportation and mass transit project costs to states. “Federal intervention [as a]driver of infrastructure is just not going to be the way that it used to be, if this plan gets enacted.”
Henry Petroski, professor of civil engineering at Duke University, agreed with Heaslip. But he noted that the federal government has been promoting alternatives to the traditional ways of financing infrastructure projects for some time. He recalled that the ratio of federal-state funding was 90:10 for the interstate highway system, which the Highway Trust Fund was originally created to finance. That funding ratio was also a way “to entice the states to get on board,” he said.
And before even getting to fundamental questions such as how much appetite states and private investors might have for arrangements being floated, the Trump infrastructure plan could increase the federal debt anywhere from point 0.4% to 0.9% or almost a full percent by 2027, according to a study by the PWBM. That could cause businesses to anticipate higher taxes over time, and thus constrain their investments, said Burham. However, by 2037, that debt could be between 0.4% lower and 0.6% larger, depending on how the plan is financed, the study noted.
Heaslip, Petroski and Burham, discussed the Trump infrastructure investment plan in separate interviews on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to Heaslip and Petroski using the player at the top of this page. You can listen to Burham using the player directly below.)
Alternative Funding Mechanisms
The Highway Trust Fund has targeted total outlays of $54 billion for road transportation and mass transit projects in 2017 and 2018. Its principal source of funds is the gasoline tax of 18.4 cents a gallon. But that tax rate has not been raised since 1993, even as all 50 states and the District of Columbia levy their own gasoline taxes (averaging 33.56 cents, according to the latest tally by the American Petroleum Institute.) The Fund’s revenues have been hurt also by the increasing use of hybrid, electric and other fuel-efficient vehicles, said Petroski.
“I think the handwriting has been on the wall that the federal government would like to get out of funding infrastructure.” –Henry Petroski
Burham noted that the Trump administration has said that it is willing to consider a gas tax to fund its infrastructure spending plan. She said the PWBM plans to publish an analysis soon of the likely outcomes if the plan is indeed funded by a gas tax increase. “We think that will show more positive economic effects because you won’t have the drag of the debt influencing investors and workers,” she added. Burham said she did not expect a tax increase to result in reduced gasoline consumption, “but [it] could cause some belt tightening by some people.”
Among the alternatives the federal government has pushed is a shift to a “user tax” where drivers pay gasoline taxes by the miles they drive, and not by the gallons of gasoline they buy, said Petroski. He noted that Oregon has been testing that under a trial program called OReGO that it launched in July 2015. California also ran a pilot program to test such user taxes. “The federal government has been incentivizing other states and even municipalities to try out something like this,” said Petroski. “I think the handwriting has been on the wall that the federal government would like to get out of funding infrastructure.”
Heaslip noted that per-mile taxes like the one in Oregon will not suffice to meet the huge capital investment needs for infrastructure projects. Funding would get harder for projects that have relatively lower demand, he noted. If you have the Capital Beltway around [Washington,] D.C., or a major interstate highway, you have a lot of demands on those roads. But who’s going to pay for upgrades on Broad Street in Philadelphia or other places where you just don’t have the demands or the pricing mechanisms?”
Role for the Private Sector
According to Heaslip, states have mostly saved their monies for operations and maintenance of their transportation infrastructure systems, and they would have to create new revenue streams for additional projects.
The private sector would also have to be tapped, therefore, to bridge the funding gap, but the returns on such investments have to be sufficiently attractive. The Trump plan includes a $6 billion proposal “to create flexibility and broaden eligibility” to expand the use of tax-exempt private activity bonds, or PABs, in order to leverage private financing for infrastructure projects.
According to Heaslip, “The question is: Is getting one dollar for every four dollars you put up if you’re a private company worth the investment in building or putting up capital to build infrastructure?” He noted that U.S. infrastructure projects have attracted investments from Spain, Australia and China.
“The question is: Is getting one dollar for every four dollars you put up if you’re a private company worth the investment in building or putting up capital to build infrastructure?” –Kevin Heaslip
Asset recycling by the federal government is another way to raise funds, but they tend to be one-off options, said Heaslip. He pointed to proposals to sell the Baltimore-Washington Parkway, Dulles Airport and Reagan National Airport to private entities.
The private parties that would eventually maintain those assets have to be “good stewards,” and rules and regulations have to be strictly enforced in managing such infrastructure, said Petroski. “One of the reasons our infrastructure has deteriorated to the point it has is there hasn’t been strict enforcement,” he added. “If it’s not done to the quality that it was contracted for, there often is not sufficient penalty for that. That attitude has to change, and that would be a big way of improving our infrastructure, essentially without it costing us anything.”
The plan has also stirred debate on private cars versus mass transit. Advocates of a new, $13-billion rail tunnel between New Jersey and New York are upset that the project did not find mention in Trump’s budget speech. The focus is on which is a higher priority for investments – transit or cars, said Heaslip. He noted that funding for transportation projects has been cut, especially since $50 billion of the $200 billion in Trump’s infrastructure plan has been allocated for rural block grants. Here again, the upshot is that private sector investors have to step in, he said. “What this plan is saying is: We want to invest in highway transit, and we really want somebody to come in and privatize public transit and Amtrak.”
Another upshot of the Trump plan is that municipalities have to take a closer look at raising funds for their infrastructure projects. “Municipalities have a lot of access to revenue through sales taxes, visitor taxes and through hotels and so forth,” said Petroski. “It’s a question of how you choose to spend it. And this [budget] bill will force decisions like that if [the Trump plan] becomes a reality.”
Selling naming rights to private companies could be another source of funding, such as in the case of the AT&T Station (formerly Pattison Station) on SEPTA’s Broad Street Line in Philadelphia, said Heaslip. “Maybe we’ll auction off rights to transit stations like we do on stadiums, and that’s one source of revenue,” he said. “We have to be really creative in how we move forward because the big federal government checks are not going to be coming like they used to. It opens up some challenges, but it also opens up some opportunities as well.”
Three Impact Scenarios
The Trump infrastructure plan could have positive or negative effects, depending on how its various parts are implemented. Burham emphasized “the net change to infrastructure spending,” because along with the $200 billion allocation, there are major cuts in the budget to other federal infrastructure spending programs.
In the absence of specific details on funding for the Trump infrastructure plan, the PWBM constructed three scenarios. Its study, which is based on the FY 2018 budget, found that on net, the 2018 budget either reduced infrastructure spending by $55 billion or increased it by $15 billion, depending on how the projections are factored in.
The first option constructed by the PWBM assumes that while the federal government spends $200 billion, it doesn’t stimulate any additional spending by the private sector or state and local governments. In this option, the fact that the plan is deficit-financed translates into higher federal debt. “There is no improvement to GDP or other economic indicators except for the fact that you are left with higher levels of debt,” said Burham.
In the second option, the PWBM assumes that as planned, the federal government’s $200 billion attracts $1.3 trillion from the states and private parties to make up for a total of $1.5 trillion in new infrastructure spending. It also assumes that user fees will finance those projects. Burham called Option 2 the PWBM’s “rosy scenario,” where the investment “makes the private sector and workers so much more productive that more than offsets the impact of increased debt, because you get more economic growth.”
In the third option, the PWBM study treats user fees as tolls, where those paid by businesses would be eligible for tax deductions. The PWBM’s third option is less rosy than the second option, but Burham called it “a realistic scenario.”
Much of the impact also depends on how fast the infrastructure money is spent, said Burham, pointing to the costs of project delays. She noted that Trump also plans to ease some regulations governing infrastructure projects, and that authorities could also scout around for shovel-ready projects.
“Generally when the [federal] government gives states additional dollars for infrastructure, they tend to spend a lot of that on other programs.” –Kimberly Burham
Burham expected the current trend of states financing the bulk of their infrastructure projects to continue. She said it is not clear if federal funding for those would actually result in increased total outlays. “Generally when the [federal] government gives states additional dollars for infrastructure, they tend to spend a lot of that on other programs,” she said. “So it’s an open question as to how much of this $1.5 trillion will be new spending on infrastructure and how much of it will go to programs that would have happened anyway.”
Burham said additional information is needed to capture a more complete picture of the actual impact of the infrastructure spending, and listed some:
- “Will it be deficit financed or funded by some sort of new tax? That will have a big impact on the economy as well and economic growth and wages and everything else.
- “We need to get a better sense of the type of infrastructure projects that are planned to be funded because that will give us a sense of how quickly spending will occur as well as how quickly infrastructure projects can be built.
- “We need to get an idea of how effective reducing regulations will be in speeding up these infrastructure projects to come online. The faster they come online, the more economic growth there is.
- “There’s a tradeoff if there are other, current infrastructure programs that are being cut. Are we trading something that is maybe more efficient? Are we getting something more efficient than old programs? Are we losing something in those programs [that will be eliminated]?”
Designing Contracts that Work
All said, the devil is in the paperwork, it appears. Private sector investments through public-private partnerships don’t necessarily work well, said a caller from San Antonio, TX, on the radio show. He pointed to the recent bankruptcies of private operators of a toll way in Indiana and State Highway 130 in Texas. (It has since emerged from bankruptcy.)
Petroski explained how things went wrong with the Indiana toll road project for example. “In most of these public-private partnerships, a lot of control is given to the private party,” he said. “In the case of the Indiana road, [the private operator] kept raising tolls and that drives down usage.” Cars and trucks that previously used the toll way switched to two parallel roads that do not have tolls, but they also did not have the requisite capacity for that surge in traffic. “So it not only affected the revenue of a private partnership, but it also affected the wear and tear on the public roads that were not getting any revenue from users.” Petroski advised law makers to write contracts “very carefully” to protect both the private partners and the public interest.
Heaslip noted that public-private partnership contracts in Virginia and in Maryland that were “put together very carefully” have worked out well. Ensuring the financial feasibility of the project is crucial, he emphasized. “It seems like the problems occur when the investment of the private company is not making a good return,” he said. “It takes a good analysis [by both the public and private partners] in order to determine: Is this piece of infrastructure something that can generate revenue that will pay a return, and keep the private entity involved, have them continue to maintain the roadways or whatever piece of infrastructure it is? If there is no return on it, you’re going to see these things happen, and Indiana and Texas happen over and over again.”