Road Work AheadJames E. Ellis
Throughout his Presidential campaign, candidate Bill Clinton wowed prospective voters with his bold $80 billion plan to boost spending on America's infrastructure. The Democrat promised to spend big on public works not only to jump-start the flagging economy but also to construct the data networks, superhighways, and high-speed rail lines needed to ensure American competitiveness into the next century.
Now, President-elect Clinton has a shot at turning that dream into reality. There's only one small problem: How can an Administration inheriting a $300 billion annual deficit pony up the cash to--literally--rebuild America?
There's no shortage of funding ideas (table). A massive federal public-works finance bank. Infrastructure bonds for regular-Joe investors. Gas tax increases. And even privatization of traditional government services such as building airports or refurbishing creaky bridges. There's only one firm rule: Everything must be done on the cheap.
ODD MIX. Congress will soon hear details of many of the plans. Last year it established the Infrastructure Investment Commission (IIC) to cook up ways to lure new capital into public-works projects. The seven-member commission--a mix of politicians, financiers, lobbyists, labor leaders, and a former Reagan Administration aide--is scheduled to report to Congress in January. But in mid-December, it will give a sneak preview of its findings to congressional leaders close to the Clinton camp.
"President Clinton's determination to address infrastructure needs has given new urgency to the commission's efforts," explains Chairman Daniel V. Flanagan Jr. "We hope to develop a comprehensive package that will help the new Administration and the new Congress move on a fast track."
Flanagan believes the key to any Clinton infrastructure blitz may be figuring out a way to tap pension coffers. U.S. pension funds hold about $3.1 trillion in assets. That's more than the current value of common shares trading in U.S. equity markets and almost equals total U.S. banking assets, says University of Notre Dame economist Teresa Ghilarducci. She estimates that the funds could swallow up to $30 billion in new infrastructure investments.
Wooing the pension funds is easier said than done, however. Any attempt to dip into their vast pools of capital will renew the debate over the propriety of risking the retirement savings of millions of Americans. In addition, pension funds have long scorned conventional methods for financing state and local public-works projects. Since pension funds are tax-exempt, they have little interest in the low-yield, tax-free bonds that states and localities issue. And financiers still haven't devised a higher-yielding security that most municipalities can afford.
Pension fund managers haven't ruled out infrastructure investments, but they're skeptical. "We're willing to look at whatever they come up with, but it can't be off-the-wall or esoteric," warns David G. Bronner, chief executive of the Retirement Systems of Alabama.
That's why the IIC is studying a proven winner, the College Construction Loan Insurance Assn., known in financial circles as Connie Lee. Established by Congress in 1986, AAA-rated Connie Lee sells bond insurance that lets lower-rated colleges and universities sell their own construction debt in the private markets at lower rates and for longer terms than bank debt. Connie Lee has $4.7 billion of insurance in force on a capital base of only $102 million. Although it's federally sponsored, only Connie Lee--not the Treasury Dept.--is liable for defaulted college debt.
The IIC will propose next month that Congress establish a quasi-governmental infrastructure agency built on the Connie Lee model. It would operate an insurance fund to guarantee the debt of infrastructure securities. The fund could probably be capitalized initially for about $3 billion, but still allow the new Administration to claim it is spurring projects worth up to $100 billion.
But mimicking Connie Lee's success is by no means certain. With only 48 employees, the college lender is far less bureaucratic than any national infrastructure agency could ever be. And while the college lender is pretty much immune to political pressure, an agency funding billions in infrastructure projects seems ripe for political meddling.
The IIC commissioners are trying to build in safeguards against becoming another Washington gravy train. They plan to require states to provide due diligence on projects before they're considered by the federal agency. In many cases, states would be required to provide matching funds--a potential problem, since state governments are plagued by budget shortfalls themselves. The commissioners are also counting on the markets to keep the agency honest. Says one top official: "We believe the ratings agencies will force the discipline that's needed."
RISKY BUSINESS. Other IIC proposals, though, may give the markets reason to worry. One recommendation would allow the infrastructure corporation to guarantee the debt of some projects that are still in development or construction--a risky undertaking. To support such lending, the commissioners believe that the new corporation would initially require a credit line from the Treasury. That's sure to alarm the bond market. Says Public Securities Assn. Vice-President Micah Green: "I question the wisdom of providing government financing for projects too risky for tax-exempt financing."
The new Administration also needs to remember that the private sector has a way of disappointing government planners. Just look at Virginia's toll road project, the nation's first privately funded toll road in generations. Promoters promised that the 15-mile, $1.75-a-trip tollway between Leesburg, Va., and Washington's Dulles International Airport would relieve traffic congestion while spinning off double-digit returns for private lenders.
Four years later, not an inch of pavement has been laid. Investor-owned Toll Road Corp. of Virginia has been unable to round up the $310 million in construction financing it needs. Now, project officials are scrambling for federal highway funds.
Toll Road Corp.'s woes have cast a pall over the prospects for pure privatization of public works. That leaves government to do the heavy lifting when it comes to infrastructure. And at both the state and federal level, the options are few. Last year's $150 billion transportation bill made it easier for states and municipalities to charge tolls on roads and tunnels built with federal funds. But, says New York State Thruway Authority Chairman Peter Tufo, "adding tolls to a non-tolled facility is going to be politically very difficult." And the new Administration had better think twice before it dips into the $30 billion surplus in the federal transportation and airport trust funds. Any money withdrawn from the account increases the budget deficit by a like amount.
The infrastructure plans of many smaller municipalities would probably benefit more from federal tax law changes than from a national public-works corporation. The total cost to municipalities of reduced tax incentives for banks investing in muni bonds has been $1.5 billion since 1986, according to the Rebuild America Coalition. But the best chance for municipal finance relief to breeze through Congress would probably ride on the coattails of a broader infrastructure agency package. And unless a sugar daddy turns up, that chance may be a long time coming.
TABLE: BANKROLLING THE INFRASTRUCTURE BINGE
FEDERAL INFRASTRUCTURE INSURANCE CORP. A federally chartered body that would insure infrastructure projects, making investment in them more attractive to pension funds. It could guarantee $80 billion worth of projects with only a few billion dollars in actual federal outlays
FEDERAL INFRASTRUCTURE BOND BANK Besides insuring some project loans made by states and cities, this entity would sell its own bonds to purchase the debt of less liquid, lower-rated municipalities. But its proposed capitalization of about $25 billion over five years may be too costly
INFRASTRUCTURE SAVINGS BONDS Small-denomination, tax-free municipal bonds could be sold to individual investors. This would require changes in federal securities rules. And the bonds probably would draw far less revenue than securities targeted to pension funds
LETTING BANKS BUY MORE MUNIS The Tax Reform Act of 1986 cooled banks' purchases of tax-exempt issues. Making it easier to issue bonds that offer banks preferential tax deductibility could steer relatively cheap capital to small localities