4 ways states will fund infrastructure projects in 2018
While the construction industry awaits the big reveal of President Donald Trump's long-anticipated infrastructure plan – promised to be introduced this month – state and local governments are likely wondering how the details will affect the way they finance repairs and construction of highways, bridges and other public projects. One thing that Trump made clear in his budget proposal – and most recently in his contention that that the federal government is not obligated to pay for half of the near-$13 billion NY-NJ Hudson River tunnel project – is that states and municipalities will have to dig deeper to finance projects that serve mainly local residents.
Many states have already accepted that they are largely on their own when it comes to financing infrastructure programs, and will likely continue to use one or more of the following devices to make their projects happen.
Public-Private Partnerships (P3s)
As candidate for president, Trump said public-private partnerships were to be the backbone of his infrastructure program and investors would receive massive tax credits in return. In September, however, the president said his enthusiasm shifted to derision when he told a group of House Democrats that P3s were "more trouble than they're worth." But states and other public bodies are already keen on shifting the burden and risk of design, construction, financing, operation and maintenance elsewhere, and have taken advantage of private-sector innovation time and time again.
In October, the Michigan Department of Transportation said it would partner with private interests to finish a $1 billion state highway modernization project in Oakland County, MI. Now MDOT will not have to wait on public funding for the project, and the agency could see completion 10 years ahead of schedule.
But a P3 relationship can be thorny if the private partner becomes financially unstable, either because it miscalculated how much its investment would pay off or because it was on shaky ground to begin with. Earlier this year, a Texas toll road went through Chapter 11 bankruptcy reorganization after the original concessionaire said toll revenues had fallen short of expectations, unfortunate because that's the way they were to be paid back for the road investment. The toll road is now under new management.
Infrastructure banks as a funding vehicle haven't received much attention, even though, according to the U.S. Department of Transportation's Federal Highway Administration, 32 states and Puerto Rico have established frameworks for them. The idea for a federal infrastructure bank has been bandied about, but hasn't gained much traction with the Trump administration or lawmakers.
The way it works is that the bank is set up with initial seed money, and then acts as a revolving investment fund that makes loans for infrastructure projects. The loan repayments go into the bank and then are used to make additional loans.
Canada established a national infrastructure bank in 2016, kicked off with a $35 billion investment from the government. It could help fund a potential Pacific Northwest high-speed rail from Vancouver, British Columbia to Portland, OR.
But infrastructure banks are not just government entities. In October, six big Kentucky community banks announced the formation of a $150 million infrastructure fund to offer debt financing to private firms involved in P3s.
Bond issues are popular funding vehicles for state and local governments looking to finance capital projects, including infrastructure and public buildings. The agency that needs the money sells bonds to investors and then pays the principal plus interest back to those investors. What makes these types of bonds attractive is that the interest is typically not taxed by the federal government (although some states do levy taxes).
Municipalities also issue private activity bonds (PABs), which they then can use to finance projects like airports, schools or highways with the same tax-free benefit. P3s, like the one building the Purple Line light-rail project in Maryland, have benefited from PABs — in the Purple Line's case to the tune of $313 million. PAB tax-free status was preserved in the final tax reform bill passed by Congress before Christmas, but House efforts to scuttle that provision spurred Maryland Gov. Larry Hogan to announce that he would sell hundreds of millions of PABs in advance of the final vote in case the results didn't fall in PABs' favor.
Gas taxes and user fees
Federal lawmakers have not been able to gather the political steam necessary to launch a reasonable attempt at raising the gas tax, which has been stagnant at 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel since 1993. The gas tax funds the Highway Trust Fund (HTF), which in turns doles out money to states for their surface transportation projects. According to the Congressional Budget Office, the HTF will be broke in 10 years if new revenue streams – like additional taxes – aren't tapped.
But the public relations battle is over in states such as California, Oregon and Indiana, which have raised gas taxes and other user fees in the form of more expensive registration renewals and extra charges on sales of hybrid and electric vehicles. Those decisions are supported by polling that indicates the public doesn't mind paying extra for infrastructure if it means better quality roads.
Of course, there are federal grants that are financing massive infrastructure projects, like light-rail extensions in Minneapolis and Boston. But the fate of those programs is up in the air depending on how the Trump infrastructure proposal shakes out this month. What we do know is that the president is unpredictable, so it's anyone's guess what projects will win federal funds going forward.
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