The ‘bang for the buck’ theory fueling Trump’s infrastructure plan

President Trump’s long-awaited infrastructure plan did indeed propose new federal funding — totaling $200 billion.

But the White House, which had billed the proposal as a $1 trillion plan all throughout 2017, was now calling it a $1.5 trillion plan. How does $200 billion become $1 trillion, or $1.5 trillion?

In a word, leverage.

The Trump plan would provide $14 billion to beef up the four existing federal infrastructure credit programs: TIFIA (highways and mass transit, and the Trump plan would also make airport and port projects eligible), RRIF (railroads), WIFIA (water), and RUS (rural infrastructure). These programs provide low-interest federal loans (today’s TIFIA rate is 3.16 percent) for terms of up to 35 years to enable new public infrastructure projects.

{mosads}Under the terms of the Federal Credit Reform Act of 1990, the face value of federal loans and loan guarantees no longer shows up as part of the federal budget. Instead, Congress only has to provide money to cover the “subsidy cost” of the loan. These costs frequently total less than 10 percent of the face value of the federal loan. For 2019, the Office of Management and Budget estimates that the subsidy cost of new TIFIA loans will be 6.3 percent and the subsidy cost of new WIFIA loans will be just 1 percent.

Divide $1 in credit subsidy funding by 6.3 percent and you get almost $16 in loan potential, and since these loans usually pay about one-third of the total cost of a project, you can multiply 16 times three and get a 48 to one leverage ratio. That’s a tremendous amount of “bang for the buck,” and it’s assumptions like that which allow the $14 billion in subsidy funding for these credit programs under the Trump plan to leverage at least $700 billion in other project funding. (In theory.)

This is what the recent Penn-Wharton analysis of the president’s plan missed. (To their credit, the authors of the Penn-Wharton study admitted “The literature, which focuses on how state and local governments respond to federal grants, probably understates the additional infrastructure generated by these types of credit programs.”)

Loans, of course, have to be repaid, and these federal credit programs require some kind of dedicated stream of future revenues for loan repayment. Where highway projects are concerned, many people automatically think tolls, and since the Trump plan also proposes to lift the general ban on the imposition of tolls on Interstate highways, this aspect of the plan took a lot of criticism.

But revenue streams don’t have to be toll-based. USDOT maintains a list of all TIFIA loans and their revenue pledges, and many are secured by sales taxes, regular appropriations, gas taxes, or transit farebox revenues, not tolls. (New York even pledged some of its future money from the tobacco settlement to get a TIFIA loan to rehab the Staten Island Ferry.)

It is important to note that the assumptions used about the leveraging value of these credit programs are bipartisan. The accounting methodology for credit subsidy costs is the same as that used under Presidents Clinton, George W. Bush, and Obama. And former Senate Public Works Chairwoman Barbara Boxer (D-Calif.) was fond of citing that “every dollar made available through TIFIA can mobilize up to a total of $30 in transportation investments.” (Boxer said that back when the subsidy rate was around 10 percent, and the rate has dropped by one-third since then, which increases the leverage ratio.)

However, just because these leveraging assumptions are legitimate on paper and have bipartisan support does not mean that they will be entirely valid in the real world.

Scalability

The same assumptions that say that $1 billion in federal credit subsidy funding can leverage $48 billion in total project investments also say that $100 billion in subsidy funding can leverage $4.8 trillion in total project investments. But that latter number is ludicrous, because the entire U.S. construction sector (including housing) is only $1.4 trillion per year and there’s just not that much extra capacity out there. The existing credit programs can’t be scaled up infinitely. How far they can be scaled up beyond existing levels with the same rate of return is a hypothetical argument for economists.

Lack of acceptable projects

One reason that these credit programs can’t be scaled up infinitely is a lack of projects that qualify for this kind of credit assistance. Projects must meet minimum size requirements, must receive an “investment-grade rating” from at least two different bond rating agencies, and must prove the reliability of their revenue stream for repayment in the future. Many worthwhile infrastructure projects just don’t qualify for federal credit. The TIFIA program has faced this problem in the past and had to give back much of its subsidy funding, unspent.

Uneven distribution

Not all state and local governments will be equally able to take advantage of a bottomless well of cheap federal infrastructure loans. Municipalities with AAA credit ratings shouldn’t have a problem managing additional debt. But many municipalities have already worked up crippling debt loads, and more debt, even for something as worthwhile as infrastructure, may not be the answer. And every dollar raised in new tax revenues as a pledge for a federal infrastructure loan is a tax dollar not available for other purposes.

Debt limit

Even though the face value of federal loans no longer shows up in the budget, the money has to come from somewhere. In effect, the U.S. Treasury would borrow hundreds of billions of dollars on the bond market and then immediately loan that money back out to state and local governments for infrastructure. This deserves to be considered in context with other fiscal decisions about the appropriate level of the public debt.

Federal credit programs can indeed leverage huge non-federal resources and provide tremendous “bang for the buck.” But it won’t work everywhere, and may not work on the scale envisioned by the White House.

Jeff Davis is a senior fellow and editor of Eno Transportation Weekly at the Eno Center for Transportation.