President Trump and top congressional Democrats have reportedly agreed on a $2 trillion infrastructure package last week — which is already imperiled as the acting chief of staff, Mick Mulvaney, and GOP lawmakers object to the cost. The federal deficit for fiscal 2019 is likely to come in above $1 trillion, and is growing faster than anticipated. New-money municipal bond issuance year-to-date is unchanged against a depressed level in 2018.
So what do these disparate factors mean for federal infrastructure funding? In our minds, they mean a number of things:
Congress’ capacity and willingness to spend anything significant on infrastructure
State and local governments face limited capacity to fund additional infrastructure projects, as the lack of growth in state and local borrowing suggests. Issuance year-to-date is up a paltry 3.7% against 2018 levels that were deflated by the rush-to-market in late 2017. Plus, many are waiting to see how any spending at their level will be matched against any billions or trillions anticipated from the federal level.
Disbursements at both the federal and state/local levels need to match up with changes in infrastructure needs as a result of technological change, climate change, and the intersection of these two.
So, here’s the real question: What’s inside this infrastructure agreement?
Let's be honest about what it is that's been agreed upon in this new “deal.” A $2 trillion figure is merely gift-wrapping on a package and what’s inside it is not at all clear. Any kid opening it up will likely be disappointed by the few pairs of tube socks inside.
For instance: What are the types of projects? How many and where? Which ones will receive priority? How will these financial resources be distributed? Will it be through the existing federal grant and loan structure or will innovation be employed?
Other questions speak to funding.
Will the federal government increase the gas tax? Will it look instead at vehicle mileage taxes? How about tax policies designed to facilitate transportation development and innovation? Will the government apply different regulatory/tax treatments for different technologies? What will be the involvement of the private sector? All of these are elements of a serious infrastructure debate. And that's before the politics get involved.
And those politics are everything.
Messaging continues to be mixed. While Trump was meeting on infrastructure, his chief of staff and budget director, Mr. Mulvaney, was across the country explaining why there wouldn't be a deal. It will be a long process and we anticipate that results, if any, will be disappointing across the board.
So, what should the federal, state and local governments be doing now?
Let’s focus at the top. Congress should be considering how federal infrastructure spending might look after the 2020 presidential election, including:
- Finding ways to reduce the federal deficit to leave room for new infrastructure spending;
- Identifying ways to prioritize spending for state/local projects that will match up effectively with needs. For example, how should federal “subsidies” be prioritized to create incentives for state and local participants without generating a “free lunch” that would lead to projects that are not a high policy priority;
- Encouraging state and local governments to take on new spending in an environment in which there is strong resistance (as evidenced by the lack of growth in borrowing);
- Enabling greater private sector participation in infrastructure projects—e.g., by expanding capacity for the use of tax-exempt financing in conjunction with private sector partners on P3s;
- Identifying needs at the state/local level that will match with any federal support— whether for major maintenance of existing facilities (e.g., structurally deficient bridges and highways) or for new projects (e.g., projects related to climate change, the massive Gateway Project);
- Identifying the types of projects needed to deal with imminent effects of climate change and other environmental challenges, in an environment where the Trump administration has opposed such projects.
While all of this is going on, state and local governments should be planning for new projects and spending on major maintenance under the assumption that any new federal participation/support is unlikely to occur before the next presidential election. A key challenge, of course, is that even if some subsidy monies were to be made available now under a theoretical federal program, there is no assurance that wouldn’t be scrapped under a new administration.
In other words, state and local governments are currently in a tough position.
They are facing resistance to additional spending on projects from their own taxpayers and, as the lack of muni borrowing suggests, they are acquiescing to that resistance.
They need to know the federal policy priorities on issues such as climate change and green projects. Let’s see where that lands in the next 18 months, if at all.
Our bottom line is that the outlook for a significant actual increase in federal spending on infrastructure over the next 18 months remains grim, but that planning for future spending still needs to start now. That includes project prioritization and design as well as identification of potential incremental funding/revenue sources.
How do those tube socks feel on you, kiddos?
George Friedlander and Joseph Krist are partners at Court Street Group Research and contributors to the Municipal Impact Coalition.
