Perspectives on Urban Infrastructure (1984) / Chapter Skim
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3 Financing the Nation's Infrastructure Requirements
3 Financing the Nation's Infrastructure Requirements
Pages 110-142
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From page 110... ...
Peterson INTRODUCTION To many governmental bodies the infrastructure financing problem consists of finding enough money to pay for the repairs and new investments they believe are necessary. In this it resembles the unemployment insurance financing problem, the welfare financing problem, and the school financing problem.
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From page 111... ...
In this chapter ~ first scrutinize the evidence regarding decline in capital investments in infrastructure. ~ consider whether the record is what it appears to be and whether there has been significant underinvestment in the nation's public facilities.
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From page 112... ...
THE CURRENT INFRASTRUCTURE FINANCING SYSTEM: HAS IT FAILED? The most common indictment of the nation's infrastructure financing system is that, over the last two decacles, it has generated too little capital investment (CONSAD, 1980; Morgan Guaranty, 1982; Peterson, 1978; Schneiclerman, 19751.
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From page 113... ...
State and local capital spending in real terms has declined erratically but steeply since 1968. Table 3-1 provides one measure of this downward trend, for total capital spending on structures and equipment.2 More extreme and more persistent than the decline in real spending has been the decline in the share of state ant} local budgets devoted to capital investment.
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From page 114... ...
25.7 1970 33.2 21.8 1975 31.7 18.3 1976 28.9 16.2 1977 27.3 15.1 1978 28.5 15.9 1979 26.9 15.5 1980 26.8 15.3 1981 24.9 14.4 1982 22.2a 12.9a a = preliminary estimate SOURCE: Gross Capital Investment figures from Bureau of Economic Analysis (unpublished)
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From page 115... ...
The statistical argument for more infrastructure investment bears some resemblance to the statistical argument for greater defense spending or greater private investment. Just as the sustained decline in real outlays for defense and the share of the federal budget devoted to defense through 1980 established a presumption in favor of greater defense spending, so does the decline in real infrastructure spending and the decline in the share of state and local budgets expended for this purpose.
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From page 116... ...
It seems probable that earlier generations bequeathed us a capital plant that was more durable and more resistant to temporary neglect than our standard accounts assume.
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From page 117... ...
37.4 (30.9) aFigures in parentheses exclude Community Development Block Grants; only a small portion of these funds have been used to finance spending that is classified as state and local capital investment in this table.
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From page 118... ...
The obviously temporary nature of these 100 percent federally funded programs caused state and local governments to postpone or cancel their own capital spending in anticipation of the receipt of federal dollars. One study concludes that the net effect of federal public works grants was to depress state and local capital spending and to cause the postponement of as much as $22 billion in capital expenditures (Gramlich, 1978)
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From page 119... ...
At the height of the interest-rate cycle, in 1974-1975 and again in 1980-1981, the use of long-term borrowing by state and local governments for infrastructure financing withered away (see Table 3-31. Until recently it appeared that the most recent swing in interest rates and infrastructure borrowing might presage a permanently altered capital financing market for infrastructure.
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From page 120... ...
In addition, for the purposes of this table, public power is also included because privately owned public power facilities are not included in BEA's definition of state and local capital investment. SOURCES: Data: Total Capital Investment, from Bureau of Economic Analysis, unpublished, calendar year gross fixed state and local capital formation.
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From page 121... ...
The volume of supply has placed pressure on tax-exempt interest rates and has also raised a question of priority for state and local governments. If state and local governments supported rather than opposed restrictions on single-family mortgage bonds and industrial development bonds in order to help preserve borrowing rates for infrastructure investment, their pleas to the federal government to acknowledge the paramount demands of infrastructure financing would be easier to accept at face value.
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From page 122... ...
The diagnosis that in fiscally burdened governments at a time of budget pressure capital spending and maintenance cannot compete effectively with other budget claims has led to efforts to remove 4 For systematic evidence that capital and maintenance spending is, in fact, the most vulnerable budget item under fiscal pressure, see Wolman and Peterson (1981)
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From page 123... ...
One device for achieving this end is the dedication of special revenues, so that they are used only for designated capital purposes. The dedication of revenue sources is intended to insulate capital spending from the vicissitudes of political budget choice.
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From page 124... ...
When the City of Boston spun off its sewer and water operations to an independent authority, the legislation creating the authority formally dedicated revenues to use within the sewer and water system. The enabling legislation also requires that 5-year capital budgets for system improvements be prepared and that user fees be set at a rate sufficient to finance the capital investment plan.
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From page 125... ...
, airport construction, wastewater treatment, and many other areas of capital infrastructure. Many cities employ user fees in the form of special assessments explicitly to frame demand for capital improvements.
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From page 126... ...
First, federal aid is provided to support capital spending on infrastructure facilities that are national in coverage or where capital investment is necessitated by the establishment of new federal standards. The interstate highway system and major hub airports are good examples of facilities in the first category; EPA construc
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From page 127... ...
Although the benefits of capital spending are primarily local, the magnitude of investment required may greatly exceed the expenditure that would normally be required to maintain and replace local capital systems if there had been a history of adequate care. There is no clear reason why today's users of these facilities should bear the costs created by the previous generation's violation of the implicit social contract that each group of users passes on to the succeeding one a capital plant in basically good repair.
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From page 128... ...
· Use its financial resources or leverage to establish long-term user-fee financing of capital assets wherever possible. · Link capital financing more effectively to capital planning by requiring recipients to generate their own assessments of capital condition, long-run capital investment and maintenance requirements, and immediate investment priorities.
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From page 129... ...
The argument for a new institution of this type would be more persuasive if state and local governments would volunteer to surrender some of their current borrowing capacity in exchange for this new financing vehicle. If infrastructure finance is a priority, these governments might consider or be required to consider offsetting reductions in the volume of tax-exempt debt issued to support middIe-income housing mortgages or industrial development.
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From page 130... ...
Two of the commonly proffered explanations that federal aid growth has been inadequate and that the long-term bond market has ceased to provide capital for infrastructure finance- receive very little support from the evidence. A third assertion that capital infrastructure spending has been unable to compete effectively with other budget claims for political reasons-has greater plausibility, at least for those cities in severe fiscal straits, but it cannot account for the strong secular decline in capital spending.
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From page 131... ...
Raines ~ will discuss the peculiar problems of financing large capital investments. We have not always clearly distinguished between ongoing capital expenditures, especially for maintenance, and large projects.
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From page 132... ...
That city ended with $6 billion worth of short-term debt coming due in one year and found itself, furthermore, with no market access. In terms of fiscal pressure causing budget cuts, particularly for ongoing maintenance aspects of capital financing, the role of market access cannot be excluded.
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From page 133... ...
There are also, however, some costs. User fees are not tax deductible.
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From page 134... ...
Sometimes needs for capital investments simply do not line up with the ability to pay. When that occurs, the only way projects can be financed is through capital grants from other levels of government.
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From page 135... ...
Not only do we have a problem of maintenance and ongoing capital improvements, but also the large project poses a need for a special type of planning. Financial planners should be involved at the earliest stages of the process to develop schedules and financing plans in the context of local problems and politics, to develop a strategic plan attuned to local circumstances.
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From page 136... ...
In many states the only source for capital financing is the property tax. As a result, the only way to get more money into the capital budget in such states is to cut the operating budget.
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From page 137... ...
SUMMARY Distinctions Between New Capital Programs and Maintenance In developing financial programs, it is important to distinguish between new capital projects and maintenance spending. It is also important to separate the different kinds of maintenance, ranging from routine operating maintenance, to major repairs, to upgrading of facilities.
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From page 138... ...
New York City, for instance, got into its fiscal problem in part by rationalizing human capital investments, such as the salaries for vocational education, as a capital expense. It is essential to distinguish among operating maintenance, deferred maintenance (repair and replacement)
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From page 139... ...
If, as a nation, we are going to tackle a capital rebuilding program, whoever is lending the money, especially if the loans are made at subsidized rates, has an immense opportunity to establish as a quid pro quo that local government make the institutional changes necessary to adequately maintain and replace facilities. The Opportunities for and Limitations of User Fees There is more to the user-fee concept than simply changing to whom the bill is sent.
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From page 140... ...
Rather than pay high electric power bills, they may buy wood stoves. If enough people take alternative measures to avoid these costs, the revenue stream produced by economic pricing may diminish rather than increase, upsetting the financial plan.
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From page 141... ...
The clearest response would be some forbearance by state and local governments in issuing all other types of bonds.
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From page 142... ...
142 PERSPECTIVES ON URBAN INFRASTRUCTURE The narrowing of the spread between municipal general obligation bonds and other types of issues is largely due to the flooding of the market with other types of local issues, such as industrial revenue bonds. So far officials of these governments have declined the opportunity to declare that infrastructure is indeed a priority for debt financing and to voluntarily restrict other types of issues.
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