INFRASTRUCTURE COSTS ARE THE NEXT CRISIS

Our Nations Next Burden 

Would spending $12,000* affect you?  This is the estimate of total cost, per person, to repair our failing infrastructure in the United States.  This problem is prevalent at all levels of our economy: federal, state and local.  Infrastructure is deteriorating at levels that exceed the revenue allocation to repair and or maintain it.  $12,000 per citizen reflects the cost to repair and or replace failing bridges, roads, electrical grids, sewage lines and all components of a modern society.  The American Society of Civil Engineers estimates it will cost $3.6 trillion to bring our infrastructure up to a condition of simply good repair by 2020.  Of that $3.6 trillion, only about $2 trillion is estimated to be funded, through tax allocation, as is, leaving a funding gap of $1.6 trillion, or about $201 billion per year (ASCE, 2016). 

The rate of deterioration is the most alarming part of this issue.  An international pooling by World Economic Forum, Competitive Report, 2015, reported the United States fell, in just fifteen years, from 10th on a world scale to 25th (with one being the best).  More concerning is the United States fell from 16th to 25th since 2012.  Some of the defining parameters, of how we got to this rank, are the ability to travel via airplane, the electricity grid condition and state of highways, bridges, and access to public transit.  The international ranking places Switzerland first with America falling behind countries such as Bahrain, Spain, Oman and Saudi Arabia.  How did America go from 10th to 25th so quickly?  What are some of the factors? 

“Tens of millions of Americans cross over bridges every day without giving it much thought, unless they hit a pothole. But the infrastructure problem goes much deeper than pavement. It goes to crumbling concrete and corroded steel and the fact that nearly 70,000 bridges in America -- one out of every nine -- is now considered to be structurally deficient.”(Ray LaHood, Former Secretary of the Department of Transportation, CBS series 60 Minutes with Steve Croft, Nov 23, 2014)                                                                                                                                   

“Everyday millions of people travel over the 445 bridges in the city of Pittsburgh, which is why it was first on the tour during the broadcast.  One of Pittsburgh’s major bridges, The Liberty Bridge, one of Pittsburgh’s major arteries from all points south, was built in 1928 and designed to last 50 years… that was 86 years ago.” 

 “It all comes down to funding. Right now they can't keep up with it. Three hundred bridges become structurally deficient each year in the state of Pennsylvania. That's one percent added to the already 23 percent they already have. They just can't fix them fast enough.”

“Pennsylvania is one of the worst states in the country when it comes to the condition of its infrastructure, and Philadelphia isn't any better off than Pittsburgh. Nine million people a day travel over 900 bridges classified as structurally deficient, some of them on a heavily traveled section of I-95.” (Andy Hermann, past president of the American Society for Civil Engineers, 2014)

Why is the cost of infrastructure out of reach?  One of the reasons as cited below is the main theme… lack of funding and the inability of Congress to increase the gas tax to appropriate levels of subsidy. 

“LaHood says public spending on infrastructure has fallen to its lowest level since 1947. And the U.S., which used to have the finest infrastructure in the world, is now ranked 16th, in 2012, according to the World Economic Forum, behind Iceland, Spain, Portugal and the United Arab Emirates. It's a fact that's not been lost the most powerful economic and political lobbies in the country that believe the inaction threatens the country's economic future. Big corporations like Caterpillar and GE say it's hurting their ability to compete abroad. And at a Senate hearing earlier this year Tom Donohue, president of the generally conservative U.S. Chamber of Commerce voiced strong business support for raising the gas tax for the first time in 20 years.”

In addition to the issue of taxation, the United States, as well as the world, went through the catastrophic market crash of 2008.  This devastating event not only stunted infrastructure spending but also all governmental allocations.  The focus of repairing roads and or bridges had to acquiesce to pension maintenance and funding.  In fact, the pension crisis is a serious threat to funding infrastructure.  As wages, pension allocations increased, state and federal funding has decreased.  Internal issues of employment and its total cost have taken center stage.  Further complicating allocations is the time value of money.  This simply means that today's dollar is worth less than tomorrow's.  As an example, I cite the consumer price index, CPI:

• The CPI represents changes in prices of all goods and services purchased for consumption by urban households. User fees (such as water and sewer service) and sales and excise taxes paid by the consumer are also included. Income taxes and investment items (like stocks, bonds, and life insurance) are not included; and,
• The CPI-U includes expenditures by urban wage earners and clerical workers, professional, managerial, and technical workers, the self-employed, short-term workers, the unemployed, retirees and others not in the labor force. The CPI-W,

includes only expenditures by those in hourly wage earning or clerical jobs. (Bureau of Labor Statistics, 2016)

Another way to see how costs are creating an increasing burden on the population and government is by considering the shopping basket. The basket contains everyday products such as food, clothing, furniture and a range of services. As the products in the basket increase or decrease in price, the overall value of the basket changes.

The base figure for this analysis is the 1967 price of $100.00 to fill the basket.  That same market basket in 2016 now cost $712.00 (Bureau of Labor Statistics, 2016).  This 612% increase is why the cost of repair is becoming out of reach of government and taxpayers.  Leaving wage appreciation out, the input costs of all materials associated with infrastructure repair have almost doubled since 2007.  Concrete, gravel, heavy machinery, sewage and storm water piping and replacement instead of repair have become a constant weight to society.  The term burden, in Economics, has many derivations.  In this example, it will relate to opportunity cost.  What is the intrinsic cost of not acting?

It is estimated by The Business Insider that failure to invest an additional $157 billion above current levels per year for infrastructure would lead to $3.1 trillion in lost GDP and 3.5 million job cuts through 2020.  If it takes 2,737 years to spend one trillion dollars, at a rate of one million dollars a day spent, this issue brings another very important finance principle to bear. 

Debt is Killing Us

Debt is a killer of government.  It robs operational monies and saddles citizens with intergenerational debt.  Specifically, floating of bonds or debt to make the necessary repairs.  This has the greatest detriment by definition.  The tax revenue use of today will benefit those that are currently using the improved infrastructure.  Taking money from citizens in today’s dollars and at current levels of taxation will invariably affect the future generations that must carry the long-term debt forward.  This next generation will also not enjoy the pleasure of use that the current generation experiences.  If taxation and its defining principles were challenged by a group in Boston in 1773, what will today's youth say in 30, 40 or 100 years?  How can some of this externality be avoided?

Would you rather pay a little at a time without debt or borrow money and pay the principal plus interest?  Most would opt for paying as the revenue became available.  This simple concept is a pay as you go strategy.  Finance dictates that when a bond is floated that you have a cost of issuance, an amortization schedule, and annual payments.  In today's market environment, very low-interest rates, and debt issuance costs less than during the early eighties, one would conclude that debt issuance is not a poor choice.  Do not be fooled! 

Using real numbers.  A debt issuance of $30,000,000 dollars in today's rates will have a cost of $3.1 million per year for almost 30 years.  In this example, all things constant, the total cost of borrowing is an approximate $73,000,000, of which $43,000,000 will be interest charges.  This is one of the ways that our government on all levels has funding deficiencies and real and present economic dangers.  What also holds value is the enormity of the issue.  A 1.6 trillion-dollar deficit by 2020 in today’s dollars is alarming.  How do you deal with the complexity and volume of the issue with a limited budget?

In addition, what if the dollar of today is only worth 97 cents tomorrow?  Inflation, at three percent, would make a dollar depreciate in this manner.  That being said, paying as you go is an excellent model for small projects that can be captured in one or two budget seasons.  When the time increases, inflation decreases the real value of that dollar used today.  What if the expenditure is for sewer line replacement or installation, in rural communities, at a cost of $168 per linear foot?  And your total lines amass to seven miles.  This is a fictional example with a cost approaching $8,000,000.  What if the general fund budget is $15,000,00 or only $3,000,000?  Pay as you go would be impossible.  The work that is started in 2016 would need to be replaced by the time you have paid the entire amount off.  If we have established that debt is choking the preverbal neck of government, what do elected leaders do?  How big is this issue?

Scope of the Problem

Economics is a science concerned with the process or system by which goods are bought and services are produced, sold and acquired.  The science also has a very relative axiom.  What is the opportunity cost of action, discussed earlier?  This simply put is, what is the next best item of value that could substitute for this item. 

As all things are connected, when a level of government commits, through policy decision and adoption, to resource allocation what is the impetus or onus of action.  Is it that citizens bombard them about the condition of the roads?  Is it the possibility of receiving grants to aid in this cost, or is it simply a desire to satisfy constituent needs? Experience tells us that it is all three.  Elected officials have a very hard job.  Costs are forever increasing but budgets and tax revenue are remaining constant.  It is this factor of taxation levels that offers concern.

Infrastructure development, creation, and repair do have a direct tangible cost to the entity allocating the resource.  It is the unseen costs that need to be focused on.  It is estimated, as discussed earlier, that we have a $1.6 trillion-dollar void to be filled by 2020.  That is spending almost $1,600,000 per day for 2,737 years. 

In real terms, what happens to the labor that is used to fix these problems?  They contribute an estimated 600 billion to our GDP annually.  This point supported by AFL-CIO president Richard Trumpka who said, “every billion dollars spent on transportation infrastructure would create 35,000 well-paying jobs.”

Projects in the process do use scarce tax dollars, which in turn are paid to companies.  These companies, in turn, pay employees.  The workers then purchase products from other businesses thus stimulating our economy in a way that is beneficial.  Allocative efficiency is met. 

On the converse, stunting infrastructure repair goes back to the time value of money.  Putting a project off for as little as seven years can see costs that double.  It also, holding inflation at three percent, can mean that your dollar of today is now worth 79 cents.  When this disequilibrium occurs, how will it be brought back to the goal of repairing the problem?  There is one answer.  New and creative ways to tax citizens would be the fix.  Instead of taxation without representation, what can leaders do?

Of the People for the People by the People

Government is of the people, for the people, and by the people.  This postulate holds the basic tenets of our organized society but is not followed often enough.  What must be valued highly by our elected body is that the input of the taxpayer, i.e. their bosses, is vital.  One way to establish this context, and develop private-public partnerships, is to form ad-hoc committees and or working groups.  See a need, fix a problem or prioritize goals should be the focus of the group.  As an example, a city or municipality needs all aspects of infrastructure from roads to sewer line replacement.  Elected leaders could advertise for concerned and involved citizens to advise on how revenue is directed.  A team leader, citizen or elected official, would be the oversight.  Organizational structure would be followed based on the skill sets of those involved.  A financial team leader, an engineering team leader, and a public relations/marketing team leader could all be created.  This hierarchy now has a purpose.  The decisions in a community will be guided through a defined time parameter, as to not create organizational paralysis.  Set conclusion of the group at a timetable that is appropriate for the need.  The following steps should be followed

• Define the need
• Discuss concerns and plans
• Define your plan
• Propose plan to citizens
• Seek public input, outside of the group (marketing)
• Evaluate marketing effort, base recommendation on data collected
• Adopt committee’s recommendation
• Act

This strategy alleviates the possible conflict that can occur if it is determined that roads are better than parks.  If citizens want bridges fixed versus streetlights, elected leaders will be informed and have the pulse of their community in mind and in action.  An informed citizen feels as if their opinion matters.  They become more active in their community and a sense of pride is established.  This strategy can help to alleviate the negative externalities and scope of the problem.

Citizen groups should be established to assist elected officials and guide them as to what policy decisions have the greatest impact to the community.  When citizens are empowered hard decisions become a little more palatable.  Expenditures of tax dollars need to be transparent and also needs to be monitored with a fine eye.

Technology May Reduce Cost

Technology and scientific advances may be your greatest ally.  Use them as a catalyst for fiscal efficiency.  Don’t be choked by the high cost of existing methods.  Seek out what is new and tested.  As an example, sewer and stormwater replacement costs in traditional methods involve excavation, extensive labor and safety concerns of the workers.  It is estimated that full replacement and or new installation of a 24” sewer line can cost $168.00 per foot.  This cost is strictly for replacement variables.  It does not include road closures or traffic control costs.  Would a product that is 1/3 the cost or $56.00 per foot be of interest? 

Today’s modern technology has developed a system that can use a polymerized rubber/fiberglass liner that is pushed, through pressure, inside of existing sewer lines.    Equipment is set up at the point of entry and pushed through manhole covers to line the inside of deteriorating pipes.  The technology has been around for eighteen years and has several billion-dollar companies that produce and install the product.  Organizations like West Chester Bureau, Penn State University, and Lower Burrell, in Pennsylvania, have used and raved about the system.   Would installing 400 feet of 8” sewer pipe in conventional methods be complete in a four-hour shift?

This technology allows for a rate of production of 400 feet per four hours.  This is pushed through the lines, sealed and steam cured.  Streets are not closed and men are above ground and safe. Once installed, the product comes with an all-inclusive ten-year warranty and a fifty-year minimum life expectancy.

Knowing that the lines in place can be up to 50-75 or even 100 years old, this is a very efficient way to correct one of the failing marks that the United States holds on infrastructure.

Lastly, economies of scale are your friend.  Create shared agreements, leagues of municipalities and private-public partnerships.  The simple business principle of how much you purchase will dictate lower prices, based on the volume of business for the provider.  This strategy can be used not only for infrastructure but also for any of the variables that create tremendous cost, such as healthcare. 

Other Solutions

On the state and local levels put in place a program that meets some of the goals in a five-year plan.  Stormwater mitigation fees will help to deal with the issue of water run-off.    Implement a capital plan that sets aside dedicated revenue for no other purpose than infrastructure repair and maintenance. 

What is not a solution is floating new debt to fix these problems.  The debt load of our governmental entities is more than our citizenry can take.  If a citizen is asked, “do you see value in a $4,500,000 bond payment?”  What do you think the answer will be?  If that same citizen sees a use fee, couched tax, that is repairing the roads, fixing the bridges and keeping public space beautiful the onus of tax burden seems less compelling.

Follow the guidance of experts.  If it has been shown that the gas tax is the biggest driver of monies for repairs, then local officials need to lobby state officials, who in turn lobby congressmen.  The gasoline tax is a proportional use tax.  All consumers, regardless of income, pay the same cost.  This postulate dictates that those that use the fuel to travel our nations roads, use our sewage systems and light their homes, will do so with intergenerational equity.  The tax of today will benefit those that depend on our system of infrastructure currently.  

Conclusion

The enormity of the issues facing all levels of government is almost beyond comprehension.  When 70,000 bridges in this nation fail safety inspections.  When 300 additional bridges become structurally deficient in Pennsylvania alone every year, it elicits how we can have a $1.6 trillion funding gap.  As new technologies exist that can mitigate some of the enormous burden, they should be investigated.  Exploration of these ideas should also be in unison with other cities, boroughs and or municipalities to produce economies of scale.  Cost drivers should always be in focus. Saving 2/3 of a cost of replacement should be adopted expeditiously.  The gasoline tax, as proportional, places the onus of taxation on all citizens, regardless of income.  This may seem unpopular, but yet it is equal.  In reality, those that are more affluent use more, and thus pay more for the services they enjoy. 

Our nation needs to discover innovative and inventive ways of correcting these issues.  Plans for long-term sustainability with dedicated revenue streams are one of the possible answers.  Regressive taxation, property tax, where the lowest income makers pay the same amount, as the wealthy, is not a solution. Using science for repairs that will increase the usable life of a bridge, or extend a sewer line’s life by 50 years are solutions.  Technology should be supported that will allow an asphalt road to last 15 to 25 years.  As these advances in science are produced, they need to be adopted. Short and long term analysis decisions need to be in focus when governmental policy makers meet and discuss this and many other economic issues.  One thing is clear; infrastructure is our next fiscal crisis.  The failure to act is acting to fail! 

*Note: All quoted financial figures are as of August 20, 2016

I invite readers to submit their thoughts on how to finance infrastructure.

Sean P. Lally, MPPM

CFO Monroeville, PA

Former Controller, Fayette County, PA 

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To Tax or Not to Tax… That is the Question

https://www.dhirubhai.net/pulse/tax-taxthat-question-sean-lally?trk=prof-post