Federal Funds might delay state infrastructure problems, but they’ll never solve them

By:  Dr. John Brown Miller

[Originally published by THE HILL on November 21, 2017, without charts.]  This is the second part in a three part series on infrastructure.

President Trump’s $1 trillion infrastructure proposal has highlighted the role of the federal government in state and local infrastructure projects.  State and local governments hold approximately $4 trillion in infrastructure. [1]   So, what is the federal role in infrastructure owned and managed by state and local governments?

Beginning with the invention of the automobile and the airplane, Congress has indirectly inserted itself into the infrastructure space of state and local governments.  The federal government isn’t acting as an infrastructure owner, with its own skin in the game, but as a “carrot and stick” grant maker to state and local governments.

This indirect role began as a cooperative effort to manage roads used in interstate commerce.  In 1916, President Wilson signed the Act for Federal Aid to State Highway Departments for Rural Post Roads, fulfilling a party platform promise.

Post roads were defined as any public road used to deliver U.S. mail in rural areas for towns with a population less than 2,500. Fifty percent of the state’s initial costs of design and construction were eligible for federal reimbursement. Advance agreement was required on the roads to be constructed and the character (design) and method of construction. Roads were to be toll free. The nickname “freeways” followed.

The United States highway network still exists, and includes US Route 1 along the Atlantic Coast, US Route 66 from Chicago to Los Angeles, and U.S. Route 101 along the Pacific Coast.

The 1916 act was practical.  New auto roads across multiple states needed to connect at state borders.  Standard federal design criteria leveled out the performance of the entire network.  States were obliged “to maintain the roads constructed” under Section 7 of the law.  If any such road were not properly maintained, after a four-month grace period to fix it, further grants were to be refused.

Congress included a political formula for allocating grant money among states: one-third based on the ratio of the land area of each state to the nation; one-third based on the ratio of the population of each state to the nation; and one-third based on the ratio of the mileage of existing delivery routes to the total mileage of the nation.

Forty years later, the Eisenhower Interstate highway network followed the same model. States were not “relieved” of their maintenance obligations. A more complex formula for allocating grant money among the states was developed: half on the basis of state population and half on the basis used in 1916.

Sixteen years later, the EPA construction grants program was authorized by Amendments to the Clean Water Act.  Grants required 3,000 local grantees to adopt user fees to cover long term operation, maintenance, and repair of wastewater treatment plants.  The federal government was involved because municipalities were releasing effluent into “waters of the United States.”

These grant programs made sense at the time. But, they relied exclusively upon a design-bid-build delivery method. States and local grantees were required to maintain and repair the facilities. Although design-bid-build is one of several, proven methods for infrastructure delivery, a century of experience shows that exclusive reliance on one delivery method was misplaced.

The shape of a typical cash flow curve on a design-bid-build project is stable, as shown in Figure 1.  For every $10 government spends on design, it spends more than $100 on initial construction. The initial delivery time frame for a typical design-bid-build project is eight years.

Figure 1

But, the cost of a typical infrastructure facility extends far beyond eight years, as shown in Figure 2.  In-service costs over a facility’s life, including a typical mid-way refit/repair, are more than 10 times the cost of design and construction. For every $110 government spends on design construction, it spends more than $1,100 on operation, maintenance and repair.  Figure 2 includes a (typical) refit/repair during facility life.

Figure 2

These numbers relate to single assets, not the system-wide challenges governments actually face. Governments manage multiple infrastructure assets at the same time. Assume a city authorizes multiple infrastructure projects per year, every year, starting 30 years ago, all with similarly shaped cash flows. At the portfolio level, the city’s cost of infrastructure includes portions of the maintenance and repair costs from each and every one of the assets built over the last 30 years.

Figure 3 shows the shape of this portfolio challenge for a (hypothetical) town with 61 infrastructure assets – 30 of them in the past, one in the present, and 30 in the future.  For simplicity, each project’s cash flow is the same.  Initial delivery costs are shown in yellow, the costs typically subsidized by federal grant programs.  The long tail of OM&R costs for each project is shown in red.  These are the costs for which state and local governments are responsible under these same programs.

Figure 3

Figure 4 shows the same information, on a cumulative basis.  Suddenly, the infrastructure financing problem facing state and local governments smooths out. The infrastructure financing challenge is not cyclical. All governments face a steady, predictable obligation of ongoing maintenance and repair costs that are 10 times the cost of initial construction.

Figure 4

Reliable assessments of asset condition and future operation, maintenance, and repair expense are readily obtained – for any infrastructure owner (public or private) that chooses to obtain them.  How to deal with this information is best understood and managed locally.

Where, when, and how to effectively apply maintenance and repair dollars is not “knowable” in Washington, and requires an agility for which Congress is not known.

The federal policy of managing state and local infrastructure by forcing governments through complex allocation and priority lists to earmark a parade of design-bid-build projects has failed. The effects surround us. Every dilapidated bridge and bad road confirms it.

Today’s officials face decades of decisions by predecessors to defer maintenance and repair costs into their future. Earmarking more design-bid-build projects in Washington doesn’t address this problem. And, the perception will be worse — winners and losers of new federal grants chosen in a process poisoned by special interests, log-rolling, rosy forecasts and earmarks — more of those “highways to nowhere.”

The problem is at the portfolio level, it is constant, and Congress is in the way. The American economy — not government — needs to spend more of its GDP on public infrastructure. China spent 8.6 percent of GDP on public infrastructure from 1992 to 2013. The U.S. spent 2.5 percent over the same period.[2] American spending on infrastructure is insufficient. It’s that simple.

Rather than enticing state and local governments into competing to misapply inadequate federal grants, Congress should stop suppressing investment in infrastructure — all investment in infrastructure — whether public or private. Adding other proven competitive delivery methods, along with changes in tax policy, would be good places to start.

Congress is working the wrong infrastructure problem.

Miller was professor of civil engineering at MIT, chair of the ABA Section of Public Contract Law, and is an expert on infrastructure procurement.

[1] Prof. Alicia Munnel’s1990 estimate, escalated by R.S. Means’ Historical Cost Indexes. https://www.rsmeansonline.com/references/unit/refpdf/hci.pdf  Prof. Munnel was then with the Federal Reserve Bank of Boston, and is now faculty at Boston College.

[2] Bridging-Global-Infrastructure-Gaps-Full-report-June-2016, McKinsey.