Independent Thinking®

Investing in America’s Infrastructure

By Howard Cure
April 24, 2016

The United States has an infrastructure problem. Globally, the United States ranks 19th in the quality of its infrastructure. Quantifying infrastructure investment – and the related opportunities and risks – is a challenge, but is critically important in this election year, for our economy and our long-term competitiveness.
 
A good starting point for investors is to look at the amount of money the government spends on buildings and large-scale projects. Nationwide, public construction spending is just over 1.5% of our annual gross domestic product – the lowest since 1993. While the federal government’s monetary contribution to our infrastructure needs has steadily declined over time, it still holds significant sway over the critical approval process, which can add time and costs to any project.
 
Most of the money that is spent on public infrastructure comes from state and local governments, not from the federal government. As of 2015, more than 90% of the $291 billion spent by the public sector was at the state and local level, according to the latest Census Bureau report on construction spending.
 
With interest rates at record lows and improving fiscal conditions for most states, why aren’t states borrowing to spend on big capital projects? Part of the problem is that state and local governments remain heavily indebted. They are on the hook to pay pensions and benefits to retired government workers, and they borrowed a lot of money in the capital markets in the run-up to the 2008 financial crisis. As a result, they’ve been more focused on paying down debt than on investing in big capital projects. Disagreements among U.S. government leaders – at the local, state and federal levels – over how to pay for new investments have also contributed to a policy of inaction.
 
There have been spurts of finance dedicated by the federal government; most recently through the American Recovery and Reinvestment Act, or ARRA, of 2009, which was designed to provide temporary relief programs for those most affected by the recession and to invest in infrastructure, education, health and renewable energy. Of the ARRA’s total estimated cost of $831 billion, infrastructure investment totaled over $105 billion, a relative drop in the bucket. While this has provided some stimulus, it is no substitute for federal long-range planning and financing.
 
The U.S. infrastructure system is so outdated that it will take some $2.2 trillion to fix, according to the American Society of Civil Engineers. That means increasing infrastructure spending by 1% of gross domestic product to meet future needs.
 
The American Road & Transportation Builders Association published a special report in March discussing the remaining presidential candidates’ position on funding transportation.
 
Candidates Bernie Sanders and Hillary Clinton stress the job-creating potential of major infrastructure programs in the highway and transit funding proposals. They both propose financing sources derived from various tax reform measures. Republican candidate Senator Ted Cruz has consistently supported devolution proposals of the federal gas tax and voted against passage of the FAST Act. Governor John Kasich earlier sponsored several proposals to reduce the federal gasoline tax to a few pennies per gallon. New York businessman Donald Trump said infrastructure modernization would be one of his top priorities as president, although he has provided few specifics about how to finance the realization of this vision.
 
The problem is clear. The challenge has been finding a politically viable solution to pay for this investment, as well as better coordination in approving projects to reduce costs. New or varied financing sources also provide investment opportunities and risks. The legal structures associated with these potential bond offerings are also important to prevent overleveraging of volatile revenue sources.
 
Our analysis in pursuing the bonds secured by these various financing options is based on the volatility of the revenue stream, the construction and operating risk of specific projects, and the underlying economics, while providing safeguards against overleverage. Continued conversations with our clients help us assess their risk appetite in this rapidly evolving sector.

Howard Cure is the Director of Municipal Bond Research at Evercore Wealth Management. He can be contacted at [email protected].

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