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An Infrastructure Intervention: How Strategic Capital Investment Today Results in a Brighter Economic Tomorrow

September 9, 2019 Andy Marzo

The link between infrastructure and a prosperous, vibrant economy often gets lost when policymakers and elected officials are contemplating decisions concerning where to program annual budgets, and how they can implement fiscal policies that promote economic growth and job creation at the federal, state, and local levels. With the economy performing so well over the last decade, the discussion on infrastructure investment at the federal level seems to come to an apex every few years, with the topic mostly getting swept under the rug when the actual price tag of the required investments is realized. While the federal gridlock can be frustrating and has been detrimental to our national infrastructure in recent decades, there are also ample obligations at the state and local level regarding addressing critical infrastructure needs.

The fact is that a majority of our infrastructure systems operate as the hidden, unsexy engines that drive our economies forward; but because of this covertness many of us have, for one reason or another, taken our public infrastructure for granted in recent decades. In many cases, policymakers at all levels have, by choice or by circumstance, chosen to support an investment strategy centered around making the minimum annual deferred maintenance investments needed to keep operations going, coupled with more substantial investments only when our infrastructure has reached emergency levels of structural integrity. Moreover, in the cases where funds are actually put aside to address infrastructure needs, they are often the first to be re-appropriated by lawmakers and directed elsewhere to try and solve more immediate social needs and crises. Metaphorically speaking, we’ve been patching the boiler with duct tap and rubber bands to keep it operational when it should have been replaced years ago.

America’s Infrastructure Report Card (D+)

So what is the state of our national infrastructure? In their most recent edition of the American Infrastructure Report Card (2017), The American Association of Civil Engineers (AACE) gave the United States a D+ citing a number of alarming metrics including:

  • Ten percent of the nation’s bridges were structurally deficient in 2016, and on average there are 188 million trips across structurally deficient bridges each day
  • There are an estimated 240,000 water main breaks per year in the U.S, wasting over two trillion gallons of treated drinking water
  • U.S Ports, which serve as a gateway to 99% of overseas trade and are responsible for $4.6 trillion in economic activity (roughly 26% of the U.S economy) are becoming increasingly congested hindering U.S worldwide competitiveness and productivity
  • An estimated $80 billion is needed over the next 10 years to improve and maintain the nation’s levee system (a system which protects an estimated $1.3 trillion in property value)

Infrastructure is the backbone of and plays an essential role in the U.S economy. Our roads, highways, ports, railroads, and airports help move our workforce and products from place to place encouraging trade and efficient supply chains; and our utility infrastructure helps power and supply water to our businesses and homes, all while connecting us to the worldwide economy via broadband networks. Infrastructure affects business productivity as well as every sector and region of the U.S. because when one part of the infrastructure system fails, the impact can spread throughout the system and economy[1].

Infrastructure and GDP: A Hidden Correlation or Just Common Sense?

While we may not always realize it, there are many unintended economic consequences to not investing in infrastructure that are not as apparent as a pothole in the middle of the road or a major interstate closure which can cripple commerce. For example, a report from the AACE notes that failing to close the current infrastructure gap brings serious consequences including $3.9 trillion in losses to the U.S GDP by 2025, $7 trillion in lost business sales by 2025, and 2.5 million lost American jobs by 2025[2]. On the opposite end of the spectrum, in the depths of the great recession, a dollar in infrastructure investment would result in $1.50 in GDP growth, according to the Council of Economic Advisers[3]. Overall, poor roads and airports mean travel times increase, an aging electric grid and inadequate water distribution make utilities unreliable, and these problems translate into higher costs for business to manufacture and produce goods and provide services. These higher costs, in turn, get passed along to workers and families as well with the AACE estimating the cost to households being about $3,400 per year[4].

Infrastructure Jobs: Salaries, Training, and a Workforce of the Future

Focusing more on jobs, infrastructure construction and regular maintenance projects employ millions of people across the country while also creating thousands of new jobs every year[5]. Examples of employment in occupations related to infrastructure include general construction jobs, civil engineers, electrical power line installers, surveyors, architects, wind turbine technicians, railroad engineers, and freight drivers to name a few.

Many of these jobs are well paying compared to others in the economy, and especially those jobs that are filled by individuals on the lower end of the educational attainment spectrum. Moreover, many jobs related to infrastructure require short training periods with some estimates indicating that two-thirds of future infrastructure related jobs would require only six months of training or less[6]. These jobs could be prime opportunities for displaced individuals employed in other industries that are slowly diminishing from a jobs standpoint due to factors such as innovation in the alternative energy sector, operations moving oversees, and general operational process automation at plants and facilities across the U.S.[7]

Federal, State, and Local Infrastructure: Who’s to Blame?

While in many cases we blame federal gridlock for our troubled infrastructure, state and local governments are the primary stewards of the country’s infrastructure. They own 90 percent of non-defense public infrastructure assets in the U.S, and although the federal government assists in the building and maintenance of these assets, state and local governments pay for 75 percent of the cost of maintaining and improving them.[8] Knowing this obligation, as well as the fact that local municipal operating and capital budgets often have little wiggle room to fund massive improvements with general fund dollars, it will take fiscal discipline coupled with strategic investments and dedicated, long term public funding at all levels of government if we truly want to improve our crumbling infrastructure.

Infrastructure Financing: Annual Capital Improvement Planning and Programming

From an annual capital budgeting perspective, local and state governments need to enact fiscal policies that dedicate annual public funds to infrastructure projects (for example: revenues from various taxes, user fees, or other revenue sources with a nexus to infrastructure use). Since they are lawfully dedicated, these funds are not subject to fluctuations that can occur during the annual budget development and appropriations process due to changes in the political, economic, or fiscal landscape. In addition to these dedicated funds, cities and towns will need to get creative when it comes to potentially issuing new fees or taxes to help fund projects. For example, many municipalities are already or are contemplating additional fees or taxes on ride sharing services such as UBER or LYFT, due to their use and sometimes escalation of transportation related infrastructure problems.

Before coming to Camoin 310, I had the opportunity to work for the City and County of Denver in which one of my primary roles was working as a lead analyst in the development and implementation of the City and County of Denver’s annual operating and capital improvement (CIP) budgets, which totaled $1.5B in 2019. Like many cities and towns, Denver realized it had a large backlog of deferred maintenance projects that it needed to address, but also realized it had to keep pace with the changing priorities of the administration and its constituents from an infrastructure development standpoint (for example implementing new bike lanes, connecting the city’s sidewalk gap in some of its most disadvantaged neighborhoods, improving its broadband infrastructure network, and working with the regional transit authority to create a more interconnected transit system linking affordable housing units to public transportation).

To address maintenance projects (the often-unsexy projects that I mentioned such as HVAC repairs, building envelope upgrades, bridge improvement projects, boiler replacements, sanitary pipe liner replacements, and others that don’t get a lot of attention from newspapers or the public) sound fiscal policy was developed, approved, and enacted that dedicated a portion of the city’s annual capital improvement funds (funded primarily through property tax), to only be used on capital maintenance projects helping to restore and enhance roadways, parks, utility infrastructure, and other city owned facilities.

Infrastructure Financing: Creativity and Diversity is Key

Denver also has gotten creative in order to fund deferred maintenance and new infrastructure initiatives by using funds from the taxation of marijuana, funds collected through the city’s entertainment and cultural capital facilities fund that receives revenue from a 10% seat tax on all ticket sold at entertainment facilities (net of annual debt service payments) within the county, and funds collected through the city’s ownership stake at the Winter Park ski resort. Furthermore, residents of Denver chipped in by recently approving a new sales tax levy that dedicates funds to the city’s parks and recreation system to address its current infrastructure maintenance backlog while expanding on current park infrastructure. Finally, the city also tends to address portions of its infrastructure maintenance and development priorities through a general obligation bond that is issued roughly every ten years. While the system is not perfect, leaders in Denver have taken the time to be strategic, diversify the city’s capital funding strategy,  and have dedicated the resources needed to come up with a sound fiscal strategy that helps them catch-up in regard to their deferred maintenance backlog, while also helping them keep up with the changing wants and needs of its constituents.

Tax Increment Financing: We Can Help With That

Another financing tool that can complement or replace annual appropriations and/or the public issuance of GO or other forms of debt is tax increment financing (TIF). Generally, TIFs support infrastructure projects by borrowing against the future stream of additional tax revenue that the project is expected to generate. At Camoin 310, we have extensive experience advising clients on the strategic considerations and potential use of TIF to fund infrastructure which in turn can become a catalyst for economic development. For example, our Senior Vice President Jim Damicis recently advised and helped negotiate on behalf of clients in Scarborough, ME to use TIF to fund several hundred million dollars of infrastructure to support a roughly $800 million-dollar mixed use project (‘The Downs’). This project supports residential, commercial, industrial, retail, accommodations and food, and recreation elements within a village style high amenity district. The developer at the site will construct all of the initial infrastructure and will receive a portion of taxes generated at the site over the next 20-30 years as long as certain performance requirements are met. In structuring the TIF this way, the town mitigates risk and avoids having to try to finance the infrastructure up-front through a debt issuance or some other means.

If Not Now, When?

The United States is entering into an era where our infrastructure deficiencies will no longer be able to be ignored. If we want to continue to remain economically competitive on the international stage while also positioning our workers and industries to succeed, we must make the investments needed to reinforce our public infrastructure and solidify the backbone of our economy. These investments need to be considered now, in a time where local and state economies are generally performing well, since future investments may not be possible or even considered in times of economic recession. That being said, creative financing mechanisms in the form of the dedication of additional revenues through user fees, the formation of public-private partnerships, the implementation of new taxes, and the use of alternative methods of financing such as TIF should all be tools that policymakers consider when contemplating these investments.  While the costs of these investments are high, they will ripple across the economy translating into the creation of new jobs and higher industry productivity. In turn, these investments will also increase the overall quality of life for our country’s citizens and private sector businesses, ultimately benefiting our national economy for decades to come.