Floreat Florida
RAHM EMANUEL, THE mayor of Chicago, Illinois, lifts up a decayed wooden tube and waves it for emphasis. Many of the city’s water pipes are over 100 years old, he says. Some, it turned out when the Water Department got round to replacing them, are made of wood. No wonder the network sprang 3,800 leaks in 2011 alone. Yet at the pace of investment that prevailed until last year it would have taken the local water company until 2059 to refurbish all the mains, the mayor points out.
Everywhere Mr Emanuel looks, he sees the need for new or improved infrastructure: pockmarked roads; century-old stations on the “L”, Chicago’s elevated-train network; grand but draughty municipal buildings; a congested airport; clapped-out schools and community colleges. Over the next three years alone he plans to spend over $7 billion to start fixing all this. But finding the money has required some creativity.
Cities like Chicago, with meagre investment budgets, generally rely on grants from the state and federal governments, along with municipal bonds, to pay for such improvements. However, the federal government’s fiscal woes and the political impasse in Washington have been putting the squeeze on infrastructure funding. Take the highway fund, which Congress created to pay for its share (usually about a third) of improvements to roads and public transport around the country. It is supposed to be fed by receipts from the gas (petrol) tax of 18.4 cents per gallon, but this is not linked to inflation and has not been raised since 1993. Moreover, Americans are driving less, in more efficient cars, or in ones that run on something other than petrol, all of which leaves the transportation kitty increasingly bare. At the same time the cost of building roads has risen faster than prices in general, further sapping the fund’s value.
Fingers in the dyke
Politics has compounded the problem. The act under which Congress doles out money from the highway fund expired in 2009. Unable to agree on how much to spend, or how to top up the shrinking fund, lawmakers passed nine short extensions of the old act before finally approving a new, two-year bill last year. But this does nothing to strengthen the fraying funding mechanism. Instead, Congress has frozen spending at the current level and cobbled together a few one-off revenue-raisers to pay for it. The Congressional Budget Office now expects the highway fund to run dry in 2014, and the gap between receipts and the present level of spending to reach $109 billion over the next eight years.
Worse, the current level of investment, even if Congress finds a way to maintain it, is utterly inadequate. More than five years after the collapse of a bridge in Minnesota that claimed 13 lives and prompted pledges to speed up repairs, almost 70,000 other bridges, or roughly 11% of the total, are still rated as “structurally deficient” by the Federal Highway Administration. The American Society of Civil Engineers (ASCE) estimated in 2009 that Americans lost $78 billion a year to traffic delays, in the form of wasted time and petrol. A further $67 billion goes on repairing the damage to cars caused by the shoddy condition of many roads. Crashes, a good number of which are also attributable to this neglect, cost a further $230 billion. The ASCE reckoned that for the period from 2005 to 2020 the country was spending only 54% of what was needed to prevent further deterioration, and just 29% of what it would take to set America’s roads to rights.
Falling to bits
Nor are the problems confined to roads. The ASCE thought that America’s water and sewage systems, inland waterways and levees were equally dilapidated, and that its schools, dams, airports, public transport and hazardous-waste disposal were in only slightly better shape. It blamed “delayed maintenance and chronic underfunding” and argued that the country needed to double its spending on infrastructure over five years, from a projected $1.1 trillion to $2.2 trillion. And that was at a time when infrastructure spending was being boosted by a one-off contribution from Mr Obama’s stimulus.
Civil engineers, naturally, are keen on civil-engineering projects. But the Centre for American Progress, a think-tank, reached much the same conclusion in a report that looked only at the federal share of spending on essential projects. Congress, it concluded, was coughing up barely half of the $262 billion a year that was needed.
Such big sums are daunting in austere times, but the potential benefits outweigh the spending. In the short run, infrastructure investments provide a boost to a feeble recovery. The CBO estimated in 2011 that for every dollar the federal government spent on infrastructure through Mr Obama’s stimulus, the value of economic activity increased by between $1 and $2.50—one of the biggest multipliers of the main components of the programme. And a study by the University of Massachusetts-Amherst in 2009 found that every $1 billion spent on infrastructure creates 18,000 jobs, almost 30% more than if the same amount were used to cut personal income taxes.
Every $1 billion spent on infrastructure creates 18,000 jobs, almost 30% more than if the same amount were used to cut personal income taxes
In the long run, investment in infrastructure boosts productivity by enabling people and goods to get to places faster, communicate more easily, spend less time and money on repairs and so on. One recent study found that the construction of a road typically led to an increase in economic activity between three and eight times bigger than the initial outlay within eight years after its completion. (The impact subsequently fades, presumably because congestion returns.) And since the government’s borrowing costs are currently low and the construction industry is still in the doldrums, investment in infrastructure is cheaper now than it will be when the economy is humming again.
Mr Emanuel is convinced of all this. Unfortunately for Chicagoans, the politicians in Springfield, the state capital, are even less help than those in Washington. The state and local authorities have accumulated debts of about $10,000 per resident, which puts them among the top quintile in the country. The pension plan for state workers has assets to cover only 39% of its projected liabilities. In 2009 the legislature approved a series of tax increases on things like sweets and alcohol, as well as an expansion of gambling, with the proceeds earmarked for infrastructure improvements. But so far these measures have fallen well short of producing the hoped-for $1 billion a year. All this has left Illinois with the worst credit rating of all 50 American states—and little money to spare for an overhaul of Chicago’s infrastructure.
The city has not always been a model of fiscal rectitude. The previous administration papered over deficits with one-off measures, prompting a downgrade in its credit rating the year before Mr Emanuel took office. Although for the most part he has since cut costs enough to match the city’s means, the state’s failure to amend the pension system, in which Chicago participates, raises yet another threat to its finances.
With the city, state and federal governments all strapped for cash, Mr Emmanuel has had to turn to other sources of revenue. One obvious step is to increase the charges to users of the city’s infrastructure. At his urging, the city council raised water rates by 25% last year; by 2015 they will almost double. That has allowed the city to start replacing leaking water mains at two-and-a-half times the previous rate. Similarly, fares on the L are rising, which should help cover the costs of refurbishing decrepit stations. Mr Emanuel also wants to encourage more private investment in the city’s infrastructure, but its left-leaning voters are touchy about anything that smacks of privatisation. They noted that a consortium to which his predecessor sold a 75-year lease on the city’s parking meters immediately quadrupled the fees.
Mr Emanuel’s solution is called the Chicago Infrastructure Trust (CIT). This will help pair investors with projects that will generate a revenue stream to be hypothecated to cover the cost of the original investment, plus a return. First on its list are some $100m-worth of energy-saving measures in city buildings.
Lightbulb moment
At Newton Bateman Elementary School the principal asks a teacher how she likes the new lighting in her classroom. She seems not to have noticed any difference. That is the idea. Workmen have recently halved the number of lights above her head, installed more efficient bulbs and added automatic switches. Over the next ten months the city wants to overhaul the lighting in another 241 schools. It estimates that these retrofits will cost $14m and yield savings of $3m a year. In January it put out a request for “financial partners” to stump up the cash, to be repaid from the savings in the schools’ operating budgets.
From the mayor’s point of view this scheme has several advantages. It enables him to raise money from investors such as foreigners, charities and pension funds who are not interested in tax-exempt municipal bonds because they have little tax liability in the first place. It means that projects with clear benefits but low priority can go ahead sooner, helping to stimulate the local economy. All the assets involved remain not just the property of the city but under its management, so political attacks on “privatisation” can easily be rebutted. The mayor’s supporters in the unions are enthusiastic because the scheme will create new jobs. And although initially Mr Emanuel expects the CIT to get involved in only around $200m of the $7 billion-worth of infrastructure investments he is looking for, he clearly hopes to expand its role if the early projects prove successful.
Mr Emanuel is not the only local leader coming up with inventive ways to pay for infrastructure improvements despite the fiscal squeeze. The number of “public-private partnership” (PPP) projects under way around the country, although still low by European standards, has jumped in recent years. They include a tunnel under construction in Florida, a commuter rail scheme in Colorado and road improvements in Texas and Virginia. The Centre for American Progress, not normally a cheerleader for red-blooded capitalism, reckons it should be possible to mobilise at least $60 billion a year in private infrastructure investment. That would be a huge step up from the paltry total of $10 billion raised through such schemes between 1990 and 2006.
In Indiana a PPP is being used to boost public investment. In 2006 Mitch Daniels, a former governor, championed a 75-year lease of a busy toll road in the state in order to create an investment fund for future roadbuilding projects. The consortium that now runs the highway paid $3.8 billion for the privilege (just before the recession caused asset prices to plummet), as well as promising to invest $600m in upkeep over the first nine years of the lease. Indiana has used the proceeds to increase its roadbuilding budget by a third, to $1 billion a year.
Bob McDonnell, the governor of Virginia, is confronting the gradual decline in revenue raised by the state’s gas tax, which is levied on top of the federal one and suffers from the same problems. He recently persuaded the state legislature to abolish it altogether and instead raise the state’s sales tax from 5% to 5.3%. Along with some other increases, this should provide a steadier revenue stream.
Antonio Villaraigosa, the mayor of Los Angeles, helped secure a 30-year increase in the local sales tax in 2008 to fund transport projects. He then used the projected revenue as security for loans that will allow the city to build the original 30-year roster of projects in just ten years. The idea is to stimulate the local economy and take advantage of low construction costs, just as economists have been urging Congress to do.
Congress, however, is being unhelpful as usual, and not just by scrimping on its own capital budget. Last year, for the first time, it gave states free rein to charge tolls on new highways built with federal help, or on new lanes added to existing ones. But it still bars them from levying tolls on the unimproved portions of existing roads. It has also allowed a law to lapse that encouraged private investment in infrastructure by offering a tax break on bonds that finance it.
Meanwhile, the repeated brief extensions of the highway bill make it difficult to plan for the long term or to embark confidently on projects that might take many years to complete. Mr Obama has long called for a federal infrastructure bank which could invest more strategically and attract private capital relatively cheaply by subsidising or guaranteeing commercial loans. But Congress wants nothing to do with it.
There are plenty of ways for Congress to boost investment in infrastructure without massively inflating the public debt, but America’s governors and mayors are not holding their breath. As Mr Emanuel, a former congressman and White House chief of staff, says, “We can’t allow dysfunction, whether in Washington or Springfield, to delay our economic development.”
