Is Infrastructure Funding a Federal or State Issue?
October 22, 2015
Investment in our country’s infrastructure, especially roadways and railways, has been a hot topic in recent months. Devastating events such as the Amtrak train cash in Philadelphia have reinvigorated the national discussion around infrastructure investment. Debates around Federal Highway funding and a Federal Infrastructure Bank (FIB) have come to the forefront in both Congress and the impending Presidential election.
By Christina Saggiomo
Hillary Clinton expressed support of a Federal Infrastructure Bank in her speech on Roosevelt Island last month and Bernie Sanders has also proposed increases in infrastructure spending. In many ways the proposal of a FIB hinges on a debate that has long been at the center of American policy: which decisions should lie with the states and which with the federal government.
The States’ Way
In 1995 the National Highway System Designation Act established a pilot program for State Infrastructure Banks (SIB). This allowed states to utilize federal funding, combined with some of their own capital to provide loans in a variety of forms for infrastructure projects. States could support projects for water use, clean energy and transportation.
In many cases, setting up a SIB helped states better utilize their federal funding. By lending money (that in the past was given out as grants) states could realize income from interest payments that could then be reinvested in other projects. Furthermore, SIBs could lend at lower rates than these projects could access in the municipal bond market (a funding alternative that raises capital from private investors looking for tax-exempt income). Finally, by utilizing federal funding through a SIB, the states were still left to make their own decisions on which projects to fund. The intention was to have states fund projects that could not get funding elsewhere. In other words, the riskiest and most difficult (but still worthwhile) projects had a funding alternative when capital markets and private financing became unattainable. In this case, the SIB money would be left for those that needed it most.
Unfortunately, challenging projects are not the ones getting funding through SIBs. Rather than take financial risk to help many much needed infrastructure improvements, states have decided to fund projects that leave less to chance. This leaves many developments with no real funding options. Projects with dedicated and more predictable capital streams, such as water utilities, have become good candidates for SIB funding. Transportation projects on the other hand often do not have the same dedicated revenue coming in, leaving many to appear less attractive to SIBs and private banks. Furthermore, transportation project professionals are accustomed to receiving grant money from federal and state agencies. They often do not want to pay interest associated with other infrastructure loans.
Federal Interests Come Into Play
Rather than leave the states to their own devices, a Federal Infrastructure Bank would give a federal agency control over which projects get funded. Revenue from interest would be paid back to the Treasury, rather than left to the state to control going forward.
In order to assist riskier projects in getting funding, a FIB could force funding toward those that need it the most. Rather than leaving it to the states to decide, a federal agency would make decisions on projects. This could direct funding with favorable rates to projects that cannot get funding elsewhere. This capital would in many cases replace grant money and give more federal oversight over our country’s infrastructure investment.
Depending on your point of view, the cons associated with a FIB are the same as the pros. For example, increased federal oversight could in many cases slow down the process of projects getting funding. It also means that all interest income must come back to the US Treasury and cannot be reinvested directly in other infrastructure projects. This money then becomes part of a pool that could be tied up in Congress. The FIB could also create issues at the state level as they lose control over which projects get funded and in turn lose control over much of their federal grant money.
Is Compromise Possible?
In order to better utilize these two potential funding streams for our nation’s infrastructure a FIB could be proposed as a source of additional funding to infrastructure rather than a replacement of grant money. This would resolve some of the tension with the states in taking away control over capital. Also, if a mechanism could be put into place to fund projects at their riskiest phase, construction, it could open up funding options in the private market when construction is completed.
Funding for infrastructure is a critical issue that has no easy solution. Whether adding more regulation for states, adding a federal funding arm or creating other incentives for private investment there are many complexities. It is important that we are aware of the pros and cons of these alternatives as the infrastructure debate gains steam.
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The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.