Future of Infrastructure Finance

Bruce D. McDowell

Government Policy Research

Advisory Commission on Intergovernmental Relations

I used to give speeches called "How to Improve Public Works with No New Money." They were very creative speeches. But the kind of speech you have to give now is, "Public Works Improvements with even Less Money Than You Thought You Had."

Fellow panel chair Nancy Rutledge Connery and I worked together on the National Council on Public Works Improvement. The problem with the council's report was that it came out right at the end of the Reagan administration and was passed along to a new administration, which, for one reason or another, did not pick it up. President Clinton gave it a whirl with his investment program, and it went down in flames. It was not quite the right time, but the right time is coming.

I had the task at the Advisory Commission on Intergovernmental Relations of bringing together people intergovernmentally and across the agencies of government to discuss what a federal infrastructure strategy should look like. One task force looked at how you do finance in constrained situations. The basic conclusion was that in any kind of infrastructure planning you need a financial planning element from the very beginning. We published the results in November 1993 as, "High Performance Public Works: A New Federal Infrastructure Investment Strategy for America."

We see an example of this financial planning now in the Intermodal Surface Transportation Efficiency Act (ISTEA), which requires that all transportation plans at the state and metropolitan level be done in a financially constrained fashion. State and metropolitan planning organizations are beginning to hire financial analysts to get the job done along with the rest of the planning process. Our four panelists will offer observations on how financing is affecting the provision of infrastructure today and how it will continue to do so in the future.



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Financing Tomorrow's Infrastructure: Challenges and Issues Future of Infrastructure Finance Bruce D. McDowell Government Policy ResearchAdvisory Commission on Intergovernmental Relations I used to give speeches called "How to Improve Public Works with No New Money." They were very creative speeches. But the kind of speech you have to give now is, "Public Works Improvements with even Less Money Than You Thought You Had." Fellow panel chair Nancy Rutledge Connery and I worked together on the National Council on Public Works Improvement. The problem with the council's report was that it came out right at the end of the Reagan administration and was passed along to a new administration, which, for one reason or another, did not pick it up. President Clinton gave it a whirl with his investment program, and it went down in flames. It was not quite the right time, but the right time is coming. I had the task at the Advisory Commission on Intergovernmental Relations of bringing together people intergovernmentally and across the agencies of government to discuss what a federal infrastructure strategy should look like. One task force looked at how you do finance in constrained situations. The basic conclusion was that in any kind of infrastructure planning you need a financial planning element from the very beginning. We published the results in November 1993 as, "High Performance Public Works: A New Federal Infrastructure Investment Strategy for America." We see an example of this financial planning now in the Intermodal Surface Transportation Efficiency Act (ISTEA), which requires that all transportation plans at the state and metropolitan level be done in a financially constrained fashion. State and metropolitan planning organizations are beginning to hire financial analysts to get the job done along with the rest of the planning process. Our four panelists will offer observations on how financing is affecting the provision of infrastructure today and how it will continue to do so in the future.

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Financing Tomorrow's Infrastructure: Challenges and Issues Dulles Greenway: Private Provision of Transportation Infrastructure Charles E. Williams, Major General (retired) Rebuild Incorporated I feel very fortunate to be standing here, not only for those who sponsored the Dulles Greenway but also for our nation, the state of Virginia, and everyone included in this colloquium because the Dulles Greenway is the first of its kind in more than 100 years in Virginia. I do not know how that shakes out around the country, but it has been a long time since we have had a completely delivered, privately owned toll road. The story of the Dulles Greenway is a very long one, and I will spare you the story prior to my arrival. September 29, 1993, is the day we broke ground. The Dulles Toll Road runs about 13 miles from the Beltway, 1495 west to Dulles airport. The road we just opened, called the Dulles Greenway, is 14.1 miles long, going from the Dulles airport west to the historical town of Leesburg, Virginia. One of the things we learned early on about a successful toll road is that the road has to leave one rather significant point and connect to another one. In our case, it leaves from Dulles airport, which is the airport with the greatest capacity to expand on the East Coast and has a $2 billion capital program ongoing. So it made a lot of strategic sense to connect a road to that significant facility. Beyond that, the Dulles area is a dynamic area for a lot of reasons. The Air and Space Museum is moving to that vicinity, so this also factored into some of the corporate thinking. We connect to Leesburg, which has historical significance and is growing. That was, overall, the fundamental strategy that went into the corporate planning on selecting the location for the road. There was already a public need for an infrastructure facility of this type. Let us look at a couple of reasons. Number one, we needed to unload traffic off the lateral north roadway, which is Route 7, and the southern lateral of Route 50 and Interstate 66. At the same time, that particular portion of

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Financing Tomorrow's Infrastructure: Challenges and Issues the county offered the best opportunity for growth because in and around the Washington area the other corridors are approaching maximum development. Therefore, the Dulles corridor seemed to offer the best opportunity, as economists were telling us at the time. The strategy for locating the road on this footprint was two-pronged. One, it made good strategic sense from a planning standpoint. And two, it connected well to the economic growth pattern in that corridor. The point is, you do not locate a toll road, or any other facility to which you expect to have user fees attached, just any place. You must really think it through, not only in order to make good transportation and public sense, but also to match the economics. There are two questions I think are very important, one for the public side and one for the private. We have really got to think about where we are going to be in the year 2020, and that is why this forum today is so important. The NRC is out front on the thought process. We have to think about the whole infrastructure question as it relates to transportation in the year 2020, because we simply cannot put facilities in place overnight. Delivery of private facilities is very difficult because they are linked to private financing. However, whether the financing comes from the public or private sector, it is still a very difficult business. Virginia is very fortunate because a lot of money flows into its transportation coffers. The problem is that some of the $2 billion, in my opinion, is going into the wrong pots. For example, 45 percent of the transportation dollars are going toward new construction; that should be 75 percent, to my way of thinking. Therefore, the 40 percent going to maintenance, which drains the new dollars, quite frankly is too high. On the other hand, Virginia has a lot of transportation network that is obsolete and needs a tremendous amount of maintenance. The way for the private sector to become a partner is to carve into the maintenance area with new construction and help reduce it to 20 percent, where, I believe, it should be. Then the private sector could take a whack at the inefficiencies in the 15 percent in operations by putting in smart highway operating techniques and reduce that to about 5 percent. Really, the transportation dollar should be broken out as 5 percent operations, 20 percent maintenance, and 75 percent new construction, if you were proportioned somewhat nearer the ideal. Virginia has a lot of highways and as a result a big maintenance problem. The state will be spending $40 billion over the next 20 years. Virginia would still be unable to fulfill its total maintenance requirements. This is what drives the whole notion of enticing the private sector to come in and help with the problem because, regardless of which side of the aisle may be driving the political process, you cannot handle this $40 billion problem in the next 20

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Financing Tomorrow's Infrastructure: Challenges and Issues years without help. This is also why there are very good opportunities in the state of Virginia for private sector infrastructure projects. These were some of the high hurdles that we had to get over. Securing equity sponsors was a big issue because, obviously, that was the first dollar spent, that was the high risk dollar. Equity sponsors are not easy to find because you are talking about soliciting an individual, a pension fund, a bank, or some financial institution to put money at risk and receive a no-book earning for quite some years. So, quite frankly, the sponsors are very selective. There are some out there, but you have to be very mindful that they are not easy to capture. Local and state agreements are also very important. Environmental work, in my estimation, is at the top of the list of hurdles. You simply cannot finesse the environmental process. You operate with a deregulated mentality, but at the same time there are certain compliances that you must do because the whole concept of privatization is that you are borrowing a project from the public portfolio and moving it over into the private world for a period of time. You will privatize it, operate it like a private entity for a certain concession period, and then it goes back to the public. The responsible public entity, be it a state or a city or whatever, is the ultimate owner of that facility, so you cannot ever step completely away from the public arena. Securing permits and engineering are self-explanatory, but it was very important to get the right contractor and that the contractor listen to the new drumbeat. Securing the financing was very difficult. Our project costs were about $326 million using three different types of money: a heavy equity slice; some construction-dollar funding, which we call short-term money; and some 30-year money, which obviously was of the long-term debt type. In addition to getting the sponsors, we had to cross two additional hurdles, to find a consortium of banks that would provide the short-term financing and long-term lenders who could stay the course for 30 years. The endgame was simple. No one wants traffic tie ups, and no one wants more taxes. The only other option was tolls. We do not make any excuse for the toll rate because we are creating an option for the traveling public, not a demand. We have given people an alternative that is a "quality of life" enhancement. If time is important to the motorist, that must be factored into the decision to pay the toll. In our case, there are parallel arteries running east and west of our roadway that will carry the traveling public from western Virginia and West Virginia into the Washington area, but they have more than 20 traffic lights. The model travel time on either of those arteries is about 1 hour and 15 minutes from Leesburg to Constitution Avenue in downtown D.C., varying about five minutes depending on whether you are coming from north or south. The model time for the Greenway now is about 40 minutes to Washington, D.C. The real

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Financing Tomorrow's Infrastructure: Challenges and Issues issue is whether you want to pay to save time or you would like to stay on the other arteries and fight the traffic. This project, as I mentioned, was the first of its kind. It was fast paced and very expensive because we probably have a heavier slice of equity than we would like to see going forward. Because this was a pioneering effort, there were a lot of skeptics who questioned whether the concept was going to work; therefore, the equity requirements were a little bit higher. There has been a lot of social/economic fallout over this project. We created more than 500 jobs in the region very quickly and quietly. You do not normally think of a privatization effort doing this sort of thing. We were able to attract blue chip lenders, the top of the line in terms of long-term lenders. This obviously made control and management critical. The schedule had to be made, and, of course, the public used this first project as an outdoor theater because it was something that they had not seen for some time. We had everything that you could possibly have here in the way of challenges. We had to acquire the right of way for 14 miles. We had no condemnation authority per se. Not one acre, not one inch was condemned by the state. We actually purchased outright a third of the road from 47 different landowners, with individual negotiations to get a 250-foot swath across their property. The other third of the property right of way was obtained through a mutual type conveyance arrangement. The landowner was interested in developing, say, a large residential area, and it was convenient to have a road and an interchange at that location. In exchange for that, the landowner conveyed a portion of the property. The eastern portion was on federal property. You cannot purchase federal property; you have to work out some other arrangement. We have a very long leasehold arrangement with the Metropolitan Washington Airport Authority, whereby we leased the 226-acre swath that we touched. In this part of the roadway, we impacted 64 acres of wetlands, so another critical job was to mitigate for the environmental impact. With the wetlands site, we had all of the problems of "not in my backyard." The regulatory process required us to do a two-for-one mitigation. We had to put in place about 126 acres with an assortment of plants and trees. The handling of the planting was very delicate. We increased that to 150 acres because, once we started looking at it, there were some enhancements required to make the site a truly class act. So we made it into an environmental show piece. It is being considered for use now by one of the major universities for science work and other conservation training. So these were the by-products. I just want to mention one thing here about the general contractor and the way we worked this. All of you who have dealt with construction know about "retainage." Retainage is normally a portion or percent of the monthly draw that the owner holds for contingencies down the way. One of the

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Financing Tomorrow's Infrastructure: Challenges and Issues innovative spins we put on our deal was that we took the retainage up front from the contractor, and we took it from a source that was not cash. We took a letter of credit. So, during the execution we held a letter of credit from our contractor rather than retaining his cash. This was perceived as an incentive for the contractor because, if the contractor intended to do the job right in the first place, and the cash that was expected was not tampered with, this was obviously better for the company as a hold. This also put us in a better posture with the financing institution because we had our retainage up front. So when the project was presented to the financing institutions, we were able to show the letter of credit to answer the question of how to deal with some of the contingencies. I think it was also important to manage peripheral talk normally facing the highway contractor. The traditional picture a contractor would normally be faced with is—build 14 miles of road, so many bridges, etc., and, oh, by the way, would be asked to do all of these other things as well, relocate the utilities, work the insurance out, do the wetlands, and handle the regulatory agencies. We had 176 permits associated with this project, which the contractor would have had to deal with. We worked with 17 regulatory bodies of different sorts—federal, state, county, and town—as well as other interested groups. What we did as the owner was to take all of the risk associated with this collateral work and manage those tasks ourselves. Now the contractor had a clear shot at the project. He had just the roadway to deal with. All of the tasks that would have created problems were pretty dismissed away for the contractor because the owner took those. And then, of course, the last challenge is the organization of the team. Across the board, I might be the only person who has fully developed a project of this type from inception all the way through delivery. The Dulles Greenway was opened on its 24-month anniversary to the hour. We broke ground September 29, 1993, at 11 a.m., and we cut the ribbon September 29, 1995, at 11 a.m. It was six months ahead of schedule, and obviously that early completion potential was an incentive for the contractor. DISCUSSION A question was raised regarding operations and maintenance and whether that will also be privately funded. In the operation and maintenance section of the financing plan, we have reserves for overlay pavement. So the money is already in the financials. As to whether the private sector will be more efficient at maintaining highways, we are providing data on that very quickly now in an empirical way. I think even the state of Virginia will say, after a

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Financing Tomorrow's Infrastructure: Challenges and Issues period of time, that the techniques we used to put the facility in place will most likely reduce the maintenance requirements. I will give you an example of some of the things we did. As most people who build these facilities know, there is a range of what you can do in compliance with specifications. We operated at the very top end of the specifications. For example, our roadbed required 12 inches of stone before the asphalt. We treated the second 6 inches with cement to make it stronger. We were within specification without cement, but we chose to treat it with cement. We know this will have a lasting effect and reduce the maintenance. We have funding in our financial pro forma to overlay the road every seven years. We are hoping to get close to 10 years between repavings. We have a pavement-monitoring system whereby we do a lot of diagnostic work. So we will be getting a lot of intelligence about what is happening as we go along. That is how the maintenance will be reduced. The Greenway has no public money at all. It is unique. It was not a public/private venture as you know it, where we had a portion of federal money and some matching amount from the state. This was all private money. I would maintain that this is not the way to do it, but we had to do it this way in order to break the first one through. The Intermodal Surface Transportation Efficiency Act (ISTEA) came along about midway through our development. We were not able to utilize it, but we are clearly looking to it in the future. In a model sense, the way it should work would be through the flexibility ISTEA legislation creates for the states. The state of Virginia, hypothetically, would have to petition the federal government to allow certain allocated funding to Virginia to be used for a private venture. That is the way the ISTEA works, as I understand it. ISTEA comes with no money. This was a misnomer when it was suggested. When the bill passed, everybody went with their hands out saying, "Where's the money?" There was no new money. The same amount of money flows into the states. It is just that they have more flexibility on what to do with it. If the secretary of transportation (through the governing bodies) elects not to put the money on maintenance but on something new, the ISTEA legislation would allow him to switch it in those different trenches and then work with the private sector to get the project done. Our road did not have any ISTEA money. A reasonable question to ask is, when you turn this roadway back to the public, what do you get from the public? The public contribution was to pass legislation to allow the private sector to do this. The Virginia constitution prohibited the state's good faith and credit from being involved in a private arrangement. They entered with us into something called a comprehensive agreement for handling this project. There were no guarantees for anything. But if, for some reason, we would have faltered along the way and could not

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Financing Tomorrow's Infrastructure: Challenges and Issues have completed the roadway, the public would not have been left with a white elephant. The state had the option to come in and take over. Virginia did not put in any funding, guarantees, or loans. The right model of this would have had the state make a contribution, but we were facing so many hurdles at the time—breaking paradigms in terms of legislation, moving a very sluggish assembly of politicians from a center in which they had operated for years—it was probably, in defense of Virginia, just too much to ask at the time. The state has since followed through with some super legislation and has been superb to work with. Today, probably, Virginia has the best enabling legislation for public/private ventures in the country. They can now make guarantee-an in kind-type contributions. Another question for Virginia was how the state ensures that it is not going to take title to a roadway with huge maintenance requirements after our concession period of 40 years? They are protected through this comprehensive agreement. We must maintain and operate this facility at no less than the state standards. So, at a minimum we will be giving them back what they would have had if they had maintained it. And to make sure that happens, they had inspectors out with us during the construction and also during the operation to make certain the standards are met. In trying to extend the maintenance period from every 7 to every 11 years, we are not deferring required maintenance. To meet the requirement for a roadway of this nature, built to our design, the state expects an overlay to the pavement every seven years. We provided for that. We will have a pavement monitoring system in place during operation to tell us what is going on. We will not overlay unless there is a reason to overlay, so we will be prepared about the sixth year to petition the state and say, ''Based on all of the data we have collected, it does not make sense for us to do this. Don't you agree?'' Regarding the toll rate, there are two relevant government bodies in the state of Virginia, the State Corporation Commission, which regulates rates, and the Commonwealth Transportation Board, which regulates policy. These bodies are the arms for the governor, and they made decisions for us. The Commonwealth Transportation Board decided how the roadway would be managed, designed, and operated, which are policy issues. Setting the toll rate was a joint decision between the private entity, us, and the State Corporation Commission, and it was negotiated. We had a certain project cost. Obviously the investors, the sponsors, needed an acceptable rate of return because of the front-end risk. A combination of this rate of return, servicing the debt, and operating the road is what set the tolls. We did not break out our funding by task. We had short-term money, which we needed to get the road built, which we have just completed. That amount of funding was provided mostly by a consortium of banks. They have limits, as you know, on the number of years they can loan money. The long-term debt financing was

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Financing Tomorrow's Infrastructure: Challenges and Issues done by another group of financial institutions, like insurance companies, pension funds, etc. The initial dollars came from the sponsors. These were the people and the entities who own the toll road. The very first dollars committed to the project are the equity dollars, then the bank dollars, and later the long-term lending dollars. There is an agreed upon cap on the rate of return with the state of Virginia. If the cap is ever reached, the surplus goes into a special account, and we will negotiate about how we deal with that surplus. In summary, all players, lenders, regulators, owners, contractors, and consultants did a fantastic job on this pioneering effort and should be given proper credit. I was very fortunate to have the opportunity to manage the execution of the project.

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Financing Tomorrow's Infrastructure: Challenges and Issues Flexibility in Infrastructure Finance Richard Mudge Apogee Research We are all in the business of trying to make sense out of words that are so vague they probably have little meaning to most people, the word "infrastructure," for example. Sometimes we think we are going to define it better and call it "public works infrastructure," which probably means very little to most people. Another great word is "privatization," or its refined definition, "public/private partnerships,'' but it is still the same nebulous thing. My current favorite is ''innovative finance" because it makes things sound free. Recently, however, some reality has begun to appear as some actual projects have been created out of innovative financing and privatization—the Dulles Greenway, for example. To show my bias as an economist, I believe that an understanding of finance begins with economics. Economics should tell us why we care about public works. In very simple terms, infrastructure provides two types of benefits. The first is direct benefits. These are things like travel time savings, clean water, and reduced vehicle operating costs. These are very important because they represent goods or services for which people should be willing to pay. In other words, the financial success of any business, whether public or private, depends on having a potential source of direct revenue attached to it. The second type of benefit is more indirect, to users and non-users alike. These involve market access, productivity, and health and safety benefits. I believe that this second category is an order of magnitude larger than the first. Apogee Research has just finished a series of studies that started with the Corps of Engineers and passed on to the Federal Highway Administration (FHWA). In this case, since FHWA supported the work, we examined the role of highways in supporting economic growth. Our studies showed that highway investment allows private firms to make more efficient use of their capital, labor, and raw materials. If you translate these efficiency gains into an annual

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Financing Tomorrow's Infrastructure: Challenges and Issues rate of return, for the last 40 years the nation's investment in highway capital has provided benefits equivalent to a return to private industry of about 25 to 30 percent a year. The results also showed that the larger the network, the larger the returns. In other words, thinking small is not good for the economy. This finding reminds us why public works are public. The large indirect benefits can be called "public goods," but they are benefits a private firm cannot capture. So when we think about privatizing public works, a key success factor is ensuring that the public sector retains a leading role. Success in financing projects requires two things: cash, or more correctly, a cash flow, and a financial mechanism. The former can be user fees, dedicated taxes, whatever. In many ways, this is the easier of the two to find. The financial mechanism represents a tool for translating the flow of funds into a real project. Again, I apologize for using examples from transportation, but that happens to be the field I know best. Within transportation, the key financial mechanism for the last 40 years has been the Highway Trust Fund. The primary financial cash flow for that has been the federal motor fuel tax. The Highway Trust Fund has been very successful. Although it was designed to build the Interstate Highway System, it has also become something on which to hang all the planning and policy work at the national level and, especially, at the state level. It has been a focal point that helps organize planners and engineers. In other words, its success is measured well beyond the financial tool it was designed to be. The Highway Trust Fund has been broken, however, for at least the last 20 years. In the early 1970s, the Interstate Highway System was basically complete. For the last 20 years, transportation has been searching for an alternative financial mechanism. Three financial options occur to me. The first option is to keep the Highway Trust Fund. It is not necessarily a bad mechanism as long as you put more money into it. The only time that happened on any significant scale was in 1982 when Congress passed a nickel tax increase that went into the Highway Trust Fund. The problem is the lack of motivation. The need to increase funding has been backed up by "needs" studies that show shortfalls in spending of $1 trillion, $2 trillion, $3 trillion, or more. The scale is hard for most people to relate to. Also, it is hard to draw an economic link showing that if we spent all that money, the world would be a better place. Basically, I think this "needs" oriented, more of the same, approach has failed. You can call that strike one. Another approach is privatization. This is not a new idea. The state of Virginia in the nineteenth century had a policy of matching 50/50 any private firm that wanted to build a railroad, canal, or toll road. The state of Virginia still owns part of the railroad between Richmond and Washington, D.C., because of that.

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Financing Tomorrow's Infrastructure: Challenges and Issues Solutions for Local Government Paul S. Tischler Tischler and Associates I want to talk about three areas: finance and accounting, planning, and revenue. In the area of finance and accounting there are some realities, some of which may be obvious but are worth noting. In many jurisdictions, the infrastructure replacement costs are significantly greater than the need for new infrastructure. Increasingly in a community that is growing, the emphasis is on new because the community is already getting behind. The second point about finance and accounting is that infrastructure costs are usually only about 10 to 20 percent of a jurisdiction's budget. In fact, the associated operating costs are usually more significant than capital costs. Our firm has been involved in several cases where the jurisdiction decided to postpone opening a new facility that was almost finished in order to avoid paying operating costs. For example, although the cost of building a fire station and providing the apparatus can be significant, the annual operating costs of full-time firefighters dwarf the annual capital costs. It is always interesting when I go to local communities that the discussion of retrofitting a facility or adding a modular addition takes up more time in public hearings than the operating expenses, fringe benefits, and other things that really eat up budgets. The last point about finance and accounting is that it is surprising, when you think about it, that most jurisdictions do not have a depreciation account. Most private sector enterprises have a depreciation account for capital assets. That is, as a facility ages, the company sets aside money for replacement. In the public sector, water and sewer utilities routinely budget for replacement. Unfortunately, except for utilities, most jurisdictions do not maintain depreciation accounts. No money is set aside, and most older communities, consequently, are facing a "time bomb" when it comes to rehabilitating or replacing existing capital facilities. That means a community

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Financing Tomorrow's Infrastructure: Challenges and Issues meeting capital facility needs arising from demands from growth, and there are very few of those, is not addressing at all the needs for the remaining useful life of existing infrastructure. The cities are the worst examples of that. Two exceptions are cities we worked with that did establish capital facility replacement funds—Plymouth, Minnesota, and Germantown, Tennessee. Both jurisdictions had common characteristics of progressive leadership and citizens interested in their physical future. But they are almost unique among cities. In growing jurisdictions, operating costs must also be evaluated. In older communities, funding the replacement of existing facilities must be addressed. In the area of planning, most jurisdictions are operating under such severe fiscal constraints now that they are just concerned about meeting the current operating needs of their jurisdiction, not about aggressive long-term capital improvement program (CIP) budgets. The availability of basic infrastructure, such as water, sewers, and roads, opens up areas to new development. On the other hand, new development in an area generates the need for more capital facilities and equipment, such as schools, parks, libraries, police cars, and fire and rescue equipment. Unfortunately, when projected revenues are not sufficient to meet expenditures, the CIP suffers. Invariably, if a jurisdiction needs to save money, it may freeze vacancies but will not lay off staff. Instead, the six-year CIP will be postponed, again. This results in continuing backlogs for needed infrastructure. Postponing capital facilities is likely to decrease the level of service, a key problem of infrastructure. For example, many communities have adopted comprehensive land-use plans. However, providing needed roads recommended in the plan can not keep pace with growth. The result is a deterioration in the level of service for existing and new residents. In addition to the decrease in the existing level of service, there is another phenomenon. This is the level of "service creep." Service creep has generated greater (little understood) impacts on communities than the effects of new growth. For example, statistical studies show that there are more cars per capita, more trips per car, and more vehicle miles driven per car than there were five years ago. As a result, the same population generates an increased demand for roads to maintain the same level of service. Another example is schools in Baltimore County, Maryland. We were hired by the chamber of commerce in Baltimore County to find out how Baltimore County schools got in the position they were in and what to do about it. Schools and transportation are the two major local infrastructure issues, and schools are more influential in land-use decisions and movement, etc., than transportation. Home builders did not want to be shut down and were being threatened with a moratorium on schools.

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Financing Tomorrow's Infrastructure: Challenges and Issues What created this conflict was postponing necessary construction and service creep. Beginning in the 1980s, Baltimore County did not want to raise taxes or expand schools. Ten to fifteen years later the number of students in the school district was the same, but the requirement for classrooms had almost doubled. The reason was the increased level of service—fewer children per classroom, required special education and other programs, and electives local residents wanted to implement in the school system. The impact is not only on the size of classrooms, but also on operating expenses, additional teachers, etc. The solution was to reduce the level of service. They could not afford the level of service because they did not have the debt capacity to build that many schools and they did not want to raise taxes. We said they had to increase the number of pupils in the class because otherwise the situation was hopeless. When this hit the front page of the Baltimore Sun, the Parent Teacher Association president was quoted as saying, ''They were not asked to look at level of service. That is crazy.'' The next year they, in fact, had to reduce the level of service by adding two pupils to each class. Relatively few residents understand this phenomenon. They assume the shortage of infrastructure is due to new growth and not to increasing demands for service by existing residents. That is an example of how levels of service change, which, to me, is the major reason jurisdictions cannot afford to operate and meet the challenges of growth. A sidebar of that example is the development community in Baltimore County, who said, they were willing to pay their fair share, willing to pay impact fees. That is the first example I know of where a development group proposed paying impact fees so they could build. Another planning issue is that infrastructure can significantly influence new development patterns. That point is obvious. But the fourth point under planning issues is very important. Infrastructure costs generally increase as density decreases, what I call "cost of sprawl." The tendency of infrastructure costs to increase as density decreases is only part of the financial picture. This gets us into revenue issues, an entry into the next topic and the third area I want to talk about. To find out the impact of infrastructure on a community, you have to do a fiscal analysis, which can be defined as cash flow to the public sector. To analyze cash flow, you look at all the revenues, all the operating expenses, and the capital costs. Very few jurisdictions are doing this kind of fiscal impact evaluation. Howard County, Maryland, is an example of the cost of sprawl concept. In the state of Maryland, income tax reverts to the county government, there are transfer taxes, and there are substantial property taxes. Those three components are critical revenue ingredients in Howard County. Because of this structure, revenues accruing from higher valued housing with higher incomes more than offset the infrastructure costs of low-density development. From a

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Financing Tomorrow's Infrastructure: Challenges and Issues fiscal perspective, low-density development makes more sense than high-density development even though the infrastructure costs are greater. Any of you dealing with local communities should be aware of this "opposite" result, which is not evident from just looking at infrastructure. The methodology for a fiscal impact analysis should be a case study-marginal cost approach, versus a per capita average cost approach. The per capita average cost approach to a fire department budget, for example, would divide the budget by population to arrive at a per capita cost. This per capita cost would be the same regardless of the spatial distribution or timing of new developments. In contrast, a case study-marginal cost approach would consider the fire department's response time to serve a new development. It would also consider whether existing fire stations could serve the new development or whether a new fire station should be built. An example is the addition of 1,000 homes in somewhat of an in-fill situation, versus 1,000 homes in a leap-frog situation. The former would probably generate no additional costs in constant dollars. The latter would probably necessitate a new fire station, apparatus, and annual staffing costs. In many jurisdictions, the costs of new capital facilities and other services are greater than projected revenues from new development. One reason for this is a decrease in state and federal funding at the same time that both voluntary or required mandates have been imposed raising the required level of service. Because elected officials are reluctant to raise property taxes, new funding approaches are needed. By conducting a fiscal impact analysis, a jurisdiction can focus on how development and the provision of infrastructure and related operating costs will affect the need for additional revenues. Little Rock, Arkansas, is an example of what is happening throughout the country. Little Rock, unfortunately, is a case of both cost of sprawl and level of service creep. Little Rock annexed and doubled in size in the 1980s. In older areas of the city, the infrastructure is deteriorating because money was not being put into the older community. People in the older areas felt they were being neglected and that new growth was sapping the resources of the city. On the other hand, developers felt they were paying their way with revenues generated from new growth. We looked at the fiscal impact of development. Every community is unique, but in the case of Little Rock we found that new development did in fact pay for itself. The major reasons this was true were the market value of new housing, the relatively low level of service, and the fact that the developers had to build capital facilities. Then we looked at why the infrastructure quality of life was deteriorating in older parts of the city. We looked at the cost of disinvestment in older parts of the city, as far as I know the first time this has been studied. The cost of disinvestment is a very important issue that large cities need to address more than they do. Older portions of the city were losing residents. People

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Financing Tomorrow's Infrastructure: Challenges and Issues wanted to move out of the city or into larger housing. They did not have any more debt in their houses. The housing values were not very high (it is a low-cost city). They basically were giving their houses away. The costs of disinvestment to the city are loss of revenue, loss in assessed value, which translates directly to property taxes; and an increase in costs. The city incurs direct costs for community-oriented police, housing inspectors, street lighting, animal control, arson investigation, judicial activities, and demolition of housing units. The city loses revenues as units are demolished and existing units decrease in value. The point is that the cost of disinvestment far surpasses the net revenues from new development. Does that mean you should stop new development? No, because people will go elsewhere, across the city lines. By the way, the city of Little Rock is attracting 80 percent of the employment base in the whole metropolitan area, and you still see these results. So the city is now engaged in revitalizing the downtown and older neighborhoods. We provided them with examples of successful redevelopment from other cities throughout the country. Even Boise, Idaho, a city that is growing, has fiscal problems. We just looked at development scenarios in Boise. I suspect most people would think of Boise as a healthy city. In all of the growth alternatives, we showed that new growth generated a need for $4 million to $5 million a year extra out of other city revenues. Boise cannot even afford to meet capital improvement replacement programs. So even a city like Boise, which does not have many of the urban problems you find in the eastern half of the country, has fiscal problems. I believe that there are solutions to local financing, and they are quite simple. The mechanisms are there to increase sales taxes, gasoline taxes, and income taxes. I am talking about a quarter or half of one percent. The base is so large that those dollars coming back to the community can be substantial. Unfortunately, most states do not want to authorize localities to even put tax increases on the ballot. There are various possible approaches to either accommodating or curbing the need for infrastructure. Some of these are revenue mechanisms. These could include: special or assessment districts private financing impact fees developer contributions/agreements revenue bonds real estate taxes real estate transfer taxes

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Financing Tomorrow's Infrastructure: Challenges and Issues Other, nonrevenue approaches could curb or monitor the need for new infrastructure. These include adequate public facilities ordinances and transfer of development rights ordinances that make it possible to reassign development intensities from low density areas to areas where growth is desired. Transfer of development rights provide some flexibility on certain things. I talked with previous speaker Ms. Sowder about "takings," or legislative actions that are confiscatory. Taking issues are a concern now in Congress. The issues around compensation for property owners for regulatory actions will put a damper on planning department efforts to become or remain aggressive. But there is no corresponding discussion about what is given. If you have to pay somebody the value of the land you are taking, then what about infrastructure improvements on behalf of landowners? They are being given something. Well, it might make sense to talk about that half of the equation, too, and trace a transfer of development rights. Impact fees raise several issues that are symptomatic of what is happening today. First, there is the intergenerational equity issue. We paid or our parents paid for infrastructure for us, but we are no longer willing to pay for infrastructure for our children, or at least not the full bill. This is a dramatic change. I think it is due largely to not understanding the level of service creep. In some communities developers have been told, "You want to fight us in the state legislature to implement impact fees? That is all right. We are going to implement an adequate public facilities ordinance, which means unless we have capacity for new development, we are not going to allow it to be authorized." There have been several states where that threat has been made, and they have allowed the new revenue exaction of impact fees. By the way, the National Association of Homebuilders has not come out against impact fees. The reason is that responsible builders realize that—because of cutbacks in federal and state funds and the timidity of local officials about raising taxes—there have to be other revenue sources. Impact fees require a rigorous process on the part of jurisdictions to come up with a justifiable fee structure. Developers have a certain amount of time to pay and develop, and they know the money is going to be spent for new development. An example of a special agreement, like a special assessment district, is Douglas County, Colorado, just south of Denver, which had school impact fees. The case was thrown out of court, but developers "volunteered" to pay impact fees, even though they did not have to because they were worried they might not otherwise get approval from the local jurisdiction. In conclusion, I think there is a lack of education of the public about what has happened in providing services. People do not understand the cost to a police department of having officers handle child abuse cases, for example. It is the same with education. One child more or one less per class has a ripple

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Financing Tomorrow's Infrastructure: Challenges and Issues effect on the level of service and on infrastructure costs. By fully understanding the capital costs, operating expenses, and revenue sources available to a jurisdiction, a community can better understand how it can meet the demands of new growth and maintain the level of service to current residents. By going through this process, the community will also be "educated" on the need to budget for replacing existing infrastructure. Until people are better educated, there will continue to be a ripple effect of a lack of confidence in government. Until the basic lack of confidence in government is overcome, there is going to be great reluctance to allow more revenues to jurisdictions to pay for their needs. If localities do not have the revenue mechanisms they need to solve these problems, we will fall further behind in providing necessary infrastructure, which will ultimately lead to decreases in the levels of service.

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Financing Tomorrow's Infrastructure: Challenges and Issues Biographical Sketches of Colloquium Participants George Bugliarello is chancellor of Polytechnic University, chairman of the Board on Infrastructure and the Constructed Environment of the National Research Council and a member of the National Academy of Engineering. He has chaired the Board on Science and Technology for International Development of the National Academy of Sciences, the Advisory Committee for Science and Engineering Education of the National Science Foundation, and has consulted on numerous international assignments. Dr. Bugliarello chairs the Metrotech Corporation, established by Polytechnic University to create Metrotech (a university-industry park in New York City). He holds a doctor of science degree in engineering from Massachusetts Institute of Technology and has been awarded several honorary degrees. Timothy J. Brennan is a professor of policy sciences and economics at the University of Maryland Baltimore County Campus and senior fellow at Resources for the Future in Washington, D.C. His research has been focused on regulatory economics, antitrust, and numerous information issues, including regulating broadcasting, the First Amendment, and copyright. In addition, he has published papers on the ethics and philosophy of economics. His articles have appeared in journals specializing in economics, philosophy, communications, and law. Among his current research topics are regulatory "takings," structure of the telecommunications market, deregulating electricity, privacy, measuring environmental damage, and the role of moral rights in making public policy. Dr. Brennan has a Ph.D. in economics and a M.A. in mathematics from the University of Wisconsin. Natalie R. Cohen is president of New York-based National Municipal Research and publisher of Fiscal Stress Monitor, a monthly publication that analyzes regional and local trends affecting the fiscal condition of state and local governments. The publication was launched in the fall of 1994 and

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Financing Tomorrow's Infrastructure: Challenges and Issues includes a subscriber base of rating agencies, bond insurers, commercial banks, broker/dealers, money managers, academics, government officials and the press. Ms. Cohen's more than 15 years of experience in the municipal industry includes rating credits at Moody's Investors Service in the Public Finance Department and supervising the planning of New York City's $8 billion education budget at the New York City Office of Management and Budget. She is a member of the National Federation of Municipal Analysts, the Municipal Analysts Guild of New York, and the Municipal Forum and has been a member of the Public Securities Association Credit Research Committee. Ms. Cohen has a B.A. degree from Hampshire College in Massachusetts and an M.P.A degree from the Robert F. Wagner School of Public Service at New York University. Nancy Connery is a private consultant, author, and lecturer on public investment, management, and infrastructure issues and a member of the Board on Infrastructure and the Constructed Environment of the National Research Council. She is the former executive director of the National Council on Public Works Improvement and serves as advisory editor and contributor to The Public's Capital, an infrastructure newsletter published jointly by Harvard University and the University of Colorado, Denver. Ms. Connery has received the Silver Hard Hat Award from the Construction Writers' Association, Distinguished Service Award from American Public Works Association, and the Rebuilding America Award from CIT Group/Equipment Finance. She received a masters degree of public administration, as a Lucius Littauer Fellow from the John F. Kennedy School of Government, Harvard University, and a bachelor of arts cum laude in political science from Pacific Lutheran University. Carol Everett is the director of special programs for the American Public Works Association (APWA). She is responsible for managing and developing special projects of longer duration than projects normally undertaken by the organization. In 1992, Ms. Everett was named the executive director for the Rebuild America Coalition, which is a broad coalition of 60 public and private organizations committed to reversing the decline in America's investment in infrastructure. Ms. Everett has a master's degree in economics from the University of Wisconsin. Frannie Humplick is an infrastructure economist in the Policy Research Department at the World Bank. Her current responsibilities include managing research on infrastructure, keeping abreast of policy changes in infrastructure around the world, and advising governments on infrastructure expenditures and sector reform. She is an associate editor of the Journal of Infrastructure Systems and a member of various committees on infrastructure related issues. Dr.

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Financing Tomorrow's Infrastructure: Challenges and Issues Humplick holds a M.S. in transportation systems and a Ph.D. in infrastructure systems from Massachusetts Institute of Technology. Bruce McDowell is director of government policy research at the Advisory Commission on Intergovernmental Relations in Washington, D.C. He has been with the commission 1963–1964, 1972–1986, and 1988-present, where his interests have included federal urban development programs, substate regionalism, regional transportation, citizen participation, the federal aid system, and intergovernmental consultation processes. On 1986-88, Dr. McDowell was on the staff of the National Council on Public Works Improvement. Dr. McDowell has lectured at numerous colleges and universities and was on the faculty of the Salzburg Seminar in American Studies in 1977 and the International Conference on Urban Planning and Economics in Beijing, China, in March 1988. Dr. McDowell is active in numerous planning and public management associations. He holds bachelor and doctoral degrees from American University and the master of city planning degree from the Georgia Institute of Technology. Richard R. Mudge is president of Apogee Research, a firm that specializes in economics, finance, and policy aspects of public works. He is a nationally known expert in the economics and finance of environmental and transportation infrastructure. Dr. Mudge has made numerous appearances as an expert witness before the U.S. Congress and has extensive experience with infrastructure finance and the economic value of public works. He holds a Ph.D. in regional economics from the University of Pennsylvania and received his undergraduate degree from Columbia College. Ann L. Sowder is vice president at Government Finance Group, Inc. She has more than 15 years of experience in municipal finance, including financial advisory work, underwriting, and rating agency experience. Since joining Government Finance Group in 1994, Ms. Sowder has directed and coordinated transportation-related financial advisory and consulting assignments. Ms. Sowder is a chartered financial analyst. Ms. Sowder is a graduate of the Woodrow Wilson School of Princeton University, with a masters in public affairs, and the University of Virginia, where she earned a bachelor of arts in economics. Paul S. Tischler is principal of Tischler & Associates, Inc, a fiscal, economic, and planning consulting firm with a national practice. Mr. Tischler has been retained by dozens of public and private sector clients in roles ranging from project manager to expert witness. The firm concentrates in the following areas: fiscal impact analyses; evaluation of impact fees; capital facility

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Financing Tomorrow's Infrastructure: Challenges and Issues forecasting; and economic and market studies. Mr. Tischler is the chair, Economic Development Division of American Planning Association, is listed in Who's Who in Real Estate, Who's Who in Finance and Business, and Who's Who in the East. He received his MBA in real estate and urban development from American University and a bachelor of arts in economics from Johns Hopkins University. Charles E. Williams is executive vice president and chief operating officer of Rebuild Incorporated. He is the former chief operating officer of the Toll Road Investors Partnership II where he was responsible for managing the construction of the Dulles Greenway. A retired major general of the U.S. Army Corps of Engineers, he has more than 30 years of financial and construction management experience. He is an adjunct professor of the Byrd School of Business, Shenandoah University, a member of the Board of Trustees at Shenandoah University and the Board of Directors of the Loudoun Hospital. In addition to being a graduate of both the Army basic and advanced engineering schools and the Army War College, he holds an MBA, which is supplemented by the Kennedy School of Government Senior Managers Program at Harvard University. Deborah L. Wince-Smith is currently a senior fellow at the Council on Competitiveness, a nonprofit coalition of chief executives from leading businesses, academia, and organized labor dedicated to improving the competitiveness of U.S. industry and raising the standard of living in America. She was the first assistant secretary for technology policy in the Department of Commerce and a senior fellow at the Congressional Economic Leadership Institute, a nonprofit foundation providing a neutral forum to discuss with members of Congress and the private sector key issues affecting America's economic vitality. Ms. Wince-Smith is a member of advisory boards, councils, and boards of directors of leading national organizations and U.S. firms, such as the National Security Advisory Board of Los Alamos National Laboratory and the Association of Technology Business Councils. Trained in classical archeology, Ms. Wince-Smith did anthropological field work in Pakistan, India, and Afghanistan. She graduated Phi Beta Kappa and magna cum laude from Vassar College and received her masters degree from Cambridge University.