Making the Case for Greater Public Infrastructure

Investment: Opportunities to Close the Funding Gap

May 8, 2013

Investing in Our Public Infrastructure to Create Jobs

Table of ContentsPreface.............................................................................................................5Introduction.....................................................................................................7Infrastructure’s Importance to Economic Growth and Job Creation.................8

Chart 1: Construction Employment......................................................10Infrastructure Systems................................................................................11

Surface Transportation.........................................................................11Water and Wastewater.........................................................................12Electricity.............................................................................................13Maritime...............................................................................................13Aviation................................................................................................14Education and Health Care...................................................................14

The Role of Government................................................................................15Federal........................................................................................................15State...........................................................................................................17

Financing and Funding Challenges and Opportunities...................................18Chart 2: Cumulative Infrastructure Needs by System Based on Current Trends Extended to 2020 and 2040.....................................................18

Surface Transportation...............................................................................18Gas Tax................................................................................................19Sales Tax on Gas..................................................................................20Vehicle Miles Traveled Fee...................................................................20Fares and Tolls.....................................................................................21Other Revenue Sources and Considerations........................................21

Challenges and Opportunities for Other Infrastructure Systems................22Water and Wastewater.........................................................................22Electricity.............................................................................................22Maritime...............................................................................................23Aviation................................................................................................23Public Schools.......................................................................................24Safety Net Hospitals.............................................................................25

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Financing Strategies to Increase and Supplement Investment and Create Jobs.......................................................................................................................28

Traditional Debt Financing and Assistance.................................................28Tax-Exempt Municipal Bonds...............................................................28Chart 3: Top Six State and Local Infrastructure Categories Using........28Tax Exempt Financing, 2003-2012.......................................................28Private Activity Bonds..........................................................................29Transportation Infrastructure Finance and Innovation Act...................29Grant Anticipation Revenue Vehicles...................................................30Transportation Investment Generating Economic Recovery................30Build America Bonds............................................................................31

Innovative Debt Financing and Assistance.................................................31National Infrastructure Bank................................................................31State Infrastructure Banks...................................................................32Partnerships.........................................................................................32Chart 4: Infrastructure Acceleration Layer Cake..................................33 Performance-Based Infrastructure....................................................34 Public Pension Funds, Fixed Income Financing Instruments.............34 Energy Efficiency Retrofits Program Models......................................35 Clinton Global Initiative: Financing Energy Efficient Retrofits.........37 Clinton Global Initiative: Investing in Post-Sandy Reconstruction and Other Critical Infrastructure............................................................37 Private Equity and Other Partnerships with Private Investors...........37 Lessons Learned..............................................................................39 Project Management and Efficiency..................................................40

Looking Forward............................................................................................40Surface Transportation Reauthorization, MAP-21.......................................41Passenger Rail Investment and Improvement Act......................................41Water Resources Development Act............................................................41Water Quality Protection and Job Creation Act...........................................42Building Infrastructure Finance and Innovation Act....................................43

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Marketplace Fairness Act............................................................................43Supporting Actions to Protect First Responders..........................................43

Assistance to Firefighters Grant...........................................................43Staffing for Adequate Fire and Emergency Response..........................43Urban Area Security Initiative and the State Homeland Security Grant Program................................................................................................44Promoting Fair Wages and Benefits for First Responders....................44

Conclusion.....................................................................................................45

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PrefaceThe Democratic Governors Association, Center for Innovative Policy presents, Investing in Our Public Infrastructure to Create Jobs– a Policy Series white paper developed with guidance from Labor Union Partners representing multiple trades and workers and prepared by My Campaign Group.

Various infrastructure assets – roads, bridges, dams, sewer systems, water pipelines and public schools – throughout the U.S. are either at the end of their lifecycle or nearing it and require maintenance and repair. An increasing population has placed added strain on our infrastructure over time to the extent that the functionality of certain elements has been compromised.

Democratic governors recognize the economic benefits associated with having a well-designed, efficient infrastructure. Yet lack of available funding has impacted governors’ abilities to comprehensively address their states’ infrastructure needs. Faced with these challenges, Democratic governors have sought to make infrastructure investment a priority, putting people back to work repairing and improving our critical infrastructure.

Vermont Governor Shumlin has embarked on a multi-million dollar technology access project that's expanding broadband, cellular phone service and smart grid telecommunications capacity to underserved areas of the state, bringing high-speed connectivity to businesses, schools, health care providers and first responders as part of the state's commitment to providing universal broadband access by the end of 2013. A mix of federal, state and private funding has helped to make this project possible. (2013)

Maryland Governor O’Malley together with Senate President Miller and House Speaker Busch have succeeded in passing a $4.4 billion transportation investment plan that will support more than 57,000 jobs over the next six years, ease traffic congestion and build a 21st century transportation network. The governor also signed the Maryland Offshore Wind Energy Act of 2013 that creates a mechanism to incentivize the development of a 200 MW offshore wind facility, which will support almost 850 manufacturing and construction jobs for five years and an additional 160 ongoing supply and Operations & Maintenance (O&M) jobs thereafter. (2013)

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Massachusetts Governor Patrick proposed to increase the level of transportation capital investment by $13 billion over the next 10 years to create a state-of-the-art transportation network that’s able to provide fast and reliable service, while attracting and supporting sustainable economic growth in the future. Governor Patrick would raise revenue for these critical investments by cutting the sales tax from 6.25 percent to 4.5 percent and dedicating all proceeds to a fund for public works to support transportation, the school building fund and other infrastructure. In addition, the governor’s proposal would increase the income tax rate by 1 percentage point to 6.25 percent in order to raise sufficient revenue to support education initiatives, double the personal exemptions so that the increase is fair to all taxpayers and eliminate outdated, complicated special favors in the tax code. (2013)

Oregon Governor Kitzhaber committed to funding the I-5 Bridge Replacement by signing legislation authorizing the state to borrow $450 million to pay for its share of the $3.4 billion bridge and transit project that will connect Oregon and Washington. The construction-ready project increases safety, reduces congestion and improves the transport of goods to markets across the country and around the world. (2013)

California Governor Brown advanced his $23 billion proposed Bay Delta Conservation Plan, one of the largest Habitat Conservation Plans ever carried out in the U.S. This massive undertaking will secure the water supply for 25 million people from earthquakes and other potential calamities, and will restore tens of thousands of acres of natural habitat needed for threatened and endangered species. (2013)

Delaware Governor Markell created The Delaware New Jobs Infrastructure Fund to allow the state to quickly make significant investments in public infrastructure to accommodate the relocation or expansion of large scale employers. Revenue allocated to this fund must be spent for infrastructure improvements, including roads and utilities, intended to attract new businesses to Delaware or assist those looking to expand in the state. (2012)

Hawaii Governor Abercrombie released more than $1.14 billion over the last year for various capital improvement projects selected for their potential to immediately address priority maintenance and improvement work on state infrastructure and facilities, while stimulating the local economy and generating job opportunities. (2013)

Minnesota Governor Dayton proposed a $750 million bonding bill

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for shovel-ready construction projects, including a major State Capitol building renovation, facility upgrades and repairs at public colleges and universities, modernizing state-run veterans homes and funding for flood preservation efforts that would create an estimated 21,000 jobs. (2013)

Illinois Governor Quinn launched a $1 billion Illinois Clean Water Initiative through an expansion of the state revolving fund (SRF) program that will provide long-term, low-interest loans to help local governments overhaul their water and wastewater infrastructure, including pipelines and treatment plants that would create or support 28,500 jobs across Illinois. (2012)

Connecticut Governor Malloy unveiled the Next Generation Connecticut initiative proposing to invest nearly $2 billion in the University of Connecticut that would significantly increase the number of students and faculty in Science, Technology, Engineering and Math (STEM) related fields. The proposal calls for $1.54 billion in bonding to build new STEM facilities, expand teaching and research labs, upgrade information technology and renovate and build additional housing and parking. (2013)

New York Governor Cuomo has used innovative approaches to boost infrastructure investment since 2011. The cadre of initiatives in New York is geared toward stretching infrastructure dollars with smart investments. These initiatives include passage of design-build legislation, which shifts the risk of large projects from taxpayers to construction firms, and the NY Works Task Force, which works to align the $16 billion capital projects among the state’s 45 agencies. Adding to these proven successes, the governor has now proposed a $1 billion Green Bank that would combine public and private capital in order to create a funding mechanism to finance renewable energy technologies and clean energy projects that hold potential to create jobs and further diversify the state’s energy portfolio. (2013)

Introduction Our nation’s infrastructure includes a variety of assets – all with strategic importance to our economy. It connects people, places and ideas; allows for the exchange of goods and services; and promotes productivity and efficiency. Investing in infrastructure should be a priority – an opportunity to put people back to work in good-paying jobs with benefits building and renovating America.

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Yet infrastructure spending has not kept pace with needs over the years, and as a consequence our infrastructure has deteriorated and its financial burden has grown. It’s estimated that the U.S. needs to spend $2.2 trillion over the next decade just to keep infrastructure in “fair condition” and safe for public use.1 Besides maintenance needs, much of our infrastructure isn’t able to effectively support population growth, causing traffic congestion on our roads, electricity to be lost from our antiquated power grid, and water to be wasted in our pipes, None of this is good for our environment, and all of it infringes on productivity. Unwillingness to increase infrastructure spending by elected officials in Washington and, at times, those in state government has made it increasingly challenging for Democratic governors to responsibly fund infrastructure projects. Without adequate investment, our economy will not grow to its potential, with the direct effect of fewer jobs and lower wages.

Critics contend that among the reasons they don’t support increasing infrastructure spending is because of diminishing revenues, budget shortfalls and aversion to debt, but chronic underfunding is really a matter of choice. For example, the federal excise tax – the financing mechanism used to fund the Highway Trust Fund (HTF) – isn’t generating enough revenue to cover highway construction and maintenance needs, because for the last 20 years it hasn’t been adjusted to take inflation into account.

Not surprisingly, shutting down investment in infrastructure doesn’t reflect the views of a majority of Americans. According to a recent Gallup poll from March 2013, 72 percent of Americans would support a program that spends government money to put people back to work on urgent infrastructure repair projects.2 In fact, the poll found that this type of job-creating proposal is backed by all party groups – Democrats, Independents and Republicans – even at a time when deficit reduction is a high priority.3

1 Peter Bacque, “Rendell: Infrastructure will crumble without investment,” Richmond-Times Dispatch, Sept. 21, 2012, http://www.timesdispatch.com/business/rendell-infrastructure-will-crumble-without-investment/article_f1a2b490-50e8-5d46-aae9-4cb8bf3992aa.html 2 “Americans Widely Back Government Job Creation Proposals,” Gallup Politics, Mar. 20, 2013, http://www.gallup.com/poll/161438/americans-widely-back-government-job-creation-proposals.aspx?utm_source=add_this&utm_medium=addthis.com&utm_campaign=sharing#.UUmZWUTWEi0.twitter 3 Ibid.

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Seventy-two percent of Americans would

support a program that spends government money to put people

back to work on urgent infrastructure repair

projects.

This white paper discusses why infrastructure investment is so critical to our economy, and the potential it holds to create jobs in industries, like construction, where people still struggle to find work. It takes a closer look at the financing and funding challenges that Democratic governors face, and offers potential solutions based on best practices that could help stretch public financing and possibly close the funding gap that has developed. Its purpose; however, isn’t meant to advocate one solution over another, but rather to acknowledge the range of ideas that exist.

Information covered in this paper came from various labor unions collaborating with the Democratic Governors Association for the benefit of Democratic governors wanting to strengthen their commitment to protect the interests of workers and the unions that represent them. Working with labor to grow the economy is a great opportunity for states to partner.

Infrastructure’s Importance to Economic Growth and Job CreationThe quality of our infrastructure has a direct impact on our economy. Its vast inter-connected systems allow U.S. businesses to compete world-wide and sustain and create hundreds of thousands of jobs for American workers. Despite its importance, our infrastructure is decaying and needs upgrading.

A quarter of our bridges are deficient or obsolete.4 We lose seven billion gallons of clean drinking water each year from leaking pipes.5 Nearly half of the 257 locks on the more than 12,000 miles of inland waterways that the U.S. Army Corps of Engineers (Corps) operates are functionally obsolete, with the number expected to increase to 80 percent of all locks by 2020.6

The American Society of Civil Engineers (ASCE) in its latest Report Card for America’s Infrastructure graded the U.S. infrastructure a “D+” – only modestly better than the “D” it received four years prior in 2009.7 The slight improvement is attributed to state and local

4 American Society of Civil Engineers, 2009 Report Card for America’s Infrastructure, http://www.asce.org/Infrastructure/Report-Card/2009-Report-Card-for-America-s-Infrastructure/ 5 Ibid.6 Ibid.7 2013 Report Card for America’s Infrastructure, The American Society of Civil Engineers, http://www.infrastructurereportcard.org/

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We should be investing $1.6 trillion more than

what we now we spend…

governments acting on their own to secure financing to initiate projects rather than wait for the federal government to provide funding.8 Although the progress is encouraging, the problems remaining are significant. ASCE estimates that

we should be investing $1.6 trillion more than what we now spend to protect against a future shortfall; they predict that it will cost $3.6 trillion to repair and modernize roads, bridges, dams and schools by 2020.9

The worsening condition of our infrastructure today threatens economic growth and job creation in the future. We stand to lose one million jobs each year by 2020 from a projected $1 trillion loss in sales, $324 billion in exports and $1.2 trillion in disposable income that could occur without adequate investment.10 And delaying investment costs businesses and households, too. Higher running costs and travel delays from road, bridge and transport deficiencies alone cost taxpayers approximately $130 billion in 2010.11 Continued underinvestment in

infrastructure is projected to cost each U.S. family about $10,600 from 2010 to 2020.12 Additionally, the price tag to modernize and maintain our infrastructure increases by $150 billion for every year it’s postponed.13

8 “Small Infrastructure Gains Are Observed in Engineering Report,” John Schwartz, New York Times, Mar. 19, 2013, http://www.nytimes.com/2013/03/19/us/engineers-report-small-gains-in-nations-infrastructure.html?_r=0 9 2013 Report Card for America’s Infrastructure, The American Society of Civil Engineers, http://www.infrastructurereportcard.org/10 LiUNA! Testimony of Terence M. O’Sullivan General President Laborers’ International Union of North America Transportation and Infrastructure Committee, U.S. House of Representatives, February 13, 2013 (figures attributed to the American Society of Civil Engineers). 11 “Investing in Infrastructure: A question of trust,” The Economist, May 12, 2012, http://www.economist.com/node/2155457912 “Failure to Act: The Economic Impact of Current Investment Trends In Surface Transportation,” American Society of Civil Engineers, Jul. 2011, http://www.asce.org/infrastructure/report-card/economic-study/13 Ibid.

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Continued underinvestment in

infrastructure is projected to cost each

U.S. family about $10,600 from 2010 to

2020.

To make matters worse, much of our infrastructure is crumbling at a time when so many men and women are out of work. As depicted in Chart 1, construction has experienced a significant drop in employment since December 2007 – about the start of the recession, with only modest job gains reported in recent months. Although our nation’s unemployment rate is decreasing overall, 15.7 percent of construction workers currently lack jobs.14 Depressed demand for construction materials also means that supply costs are relatively cheap.

Now is the time we should be investing in America, both to maintain our current infrastructure and build for our 21st century economic needs.

Chart 1: Construction Employment

5,2505,5005,7506,0006,2506,5006,7507,0007,2507,5007,750

(Employment in Thousands)

Source: Bureau of Labor Statistics

It’s time to sound the alarm about our nation’s chronic underfunding problem, with hope that greater awareness will lead to action.

Infrastructure Systems

14 U.S. Department of Labor, Bureau of Labor Statistics, Economic News Release, Mar. 8, 2013, http://www.bls.gov/news.release/empsit.nr0.htm

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5,802 March 2013

-1,688

7,490 December 2007

“Infrastructure” is a broad term that describes multiple organizational structures (or systems), including but not limited to highways, bridges and tunnels, transit and rail, water treatment facilities and sewers, maritime ports and airport runways, public buildings that serve to educate and deliver health care as well as recreational parks, in addition to our electrical grid and telecommunications network. Each system plays a critical role in facilitating economic growth and job creation. This paper focuses on the following systems of infrastructure in order to closely examine the individual needs of certain ones in greater detail.

Surface TransportationSurface transportation infrastructure consists of highways, railroads, bridges and transit systems that connect people and places. A growing population and an increase in economic growth from global trade has put strain on an aging network, with many highways and rail systems built over 50 years ago.15 The 2013 Report Card for America’s Infrastructure graded our bridges and rails a “C+” and roads and transit a “D” based on capacity, conditioning, funding, future need, operation and maintenance, public safety and resilience.16 A separate ASCE report on surface transportation published in 2011 predicts that the poor condition of our infrastructure could cost the U.S. economy about 876,000 jobs and constrain GDP growth by almost $900 billion by 2020.17

Because surface transportation is so vast and encompasses so many different modes of transportation, its condition can vary significantly depending upon location and number of users. For example, infrastructure is generally poorer in urban areas compared to rural areas. It’s sometimes this difference in perception that can mask infrastructure’s economic impact and societal urgency relative to other public services. Additionally, the overall condition of state-controlled roads has actually improved over time, according to a recent study.18 Yet many problems remain to address, and

15 National Surface Transportation Policy and Revenue Study Commission, http://transportationfortomorrow.com/global/did_you_know.htm 16 2013 Report Card for America’s Infrastructure, The American Society of Civil Engineers, http://www.infrastructurereportcard.org/ 17 “Failure to Act: The Economic Impact of Current Investment Trends In Surface Transportation,” American Society of Civil Engineers, Jul. 2011, http://www.asce.org/infrastructure/report-card/economic-study/ 18 “Examining 20 Years of U.S. Highway and Bridge Performance Trends,” Reason Foundation, Feb. 21, 2013, http://reason.org/news/show/20-years-of-highway-bridge-performa

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rather than throw money at the problem; targeted spending is likely the answer.

Water and WastewaterOur pipeline infrastructure that supports our water and wastewater (sewer) systems urgently needs assessment and modernization. Its current status earned our water infrastructure a “D” on the 2013 Report Card for America’s Infrastructure.19 More than half of the U.S. pipeline system (also includes natural gas lines) was built before any federal regulatory oversight was enacted.20 The Environmental Protection Agency (EPA) determined that 30 percent of pipes are between 40 and 80 years old in areas that serve population of more than 100,000.21 Older pipes compromise public safety and cost money in inefficiencies and emergency repairs. More than 240,000 water main breaks were reported in the U.S. in 2008 alone.22 The risk of pipeline leakage should be addressed with a comprehensive approach so that our pipeline infrastructure is resilient, efficient and secure.

Although pipes are our greatest capital need, expanding and improving wastewater treatment plants as well as providing equipment to prevent sewer overflows are also needed. A 2009 report by the General Accounting Office (GAO) found that the EPA estimates that 850 billion gallons of untreated sewage is discharged from wastewater systems into surface waters each year, which can contaminate the drinking water supply.23

And there’s good reason to fund water infrastructure from an economic perspective. Water infrastructure is an effective and underused job creation opportunity. Needed investment in this area could create millions of jobs – across various sectors, not just construction.24 The Alliance for American Manufacturing (AAM) commissioned a study, published in 2009, that found water infrastructure projects to be leaders in job creation, with nearly 20,000

19 2013 Report Card for America’s Infrastructure, The American Society of Civil Engineers, http://www.infrastructurereportcard.org/20 The United Association supports water infrastructure: http://www.uagetinvolved.org/updates/WaterInfrastructure_IssuePaper.pdf21 Ibid.22 Ibid.23 Ibid and GAO report number GAO-09-657, Jun. 2009, http://www.gao.gov/assets/300/291776.html 24 LiUNA! Testimony of Terence M. O’Sullivan General President Laborers’ International Union of North America Transportation and Infrastructure Committee, U.S. House of Representatives, Feb. 13, 2013 (figures attributed to the American Association of State Highway and Transportation).

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total jobs (i.e., direct, indirect and induced) for every $1 billion spent.25 The Clean Water Council also released a study that same year that found investing $1 billion in water infrastructure could produce even higher job benefits – generating between 20,000 and 26,000 full-time jobs.26 Additionally, the U.S. Conference of Mayors (USCM) estimates that every job created in water infrastructure adds 3.7 jobs elsewhere, and for each dollar invested in water infrastructure $6.35 is added to the national economy.27 There’s a significant need for skilled labor to perform this work in order to ensure proper repairs and modernizations are effective in protecting public and environmental health; union investment in worker training could be leveraged.

Electricity Our energy infrastructure earned a “D+” on the 2013 Report Card for America’s Infrastructure due to its poor condition.28 Despite greater investment in power transmissions, limited maintenance, permitting issues and weather events have led to more power interruptions and failures.29 Much of our energy infrastructure was built a half century ago – well before the digital age and innovations in clean energy technologies occurred. Growing demand for electricity coupled with the desire to integrate new energy sources into our existing grid has put pressure on our energy infrastructure, stretching its limits to accommodate more than it was planned to do. Aside from needing to make critical improvements to an aging and outdated electrical grid, it’s also necessary that we invest in its supporting infrastructure, like electric distribution centers, new transformers and technology. This will ensure we have an advanced energy infrastructure that can continue to effectively deliver power to users.

MaritimeMaritime transportation is an important economic driver and a critical element of our nation’s transportation and security systems. Our waterways 25 How Infrastructure Investments Support the U.S. Economy: Employment, Productivity and Growth, Commissioned by the Alliance for American Manufacturing, Jan. 2009 http://americanmanufacturing.org/files/peri_aam_finaljan16_new.pdf 26 “Sudden Impact,” Clean Water Council, Feb. 2, 2009 draft, http://www.acec.org/advocacy/committees/pdf/water_projects_020209_draft.pdf 27 “Mayors Water Infrastructure Report Shows Investment Yields High Returns ,”The United States Conference of Mayors, , Aug. 14, 2008 (press release), http://usmayors.org/urbanwater/documents/NYWATERREPORTRELEASE_081408.pdf 28 2013 Report Card for America’s Infrastructure, The American Society of Civil Engineers, http://www.infrastructurereportcard.org/a/#p/grade-sheet/gpa 29 Ibid.

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infrastructure spans more than 12,000 miles of commercial inland and intra-coastal waterways and includes more than 240 lock chambers together with 300 commercial harbors.30 Our maritime industry is responsible for transporting 10 percent of all tonnage throughout the U.S. and nearly 20 percent of the entire value of all freight moved across our whole domestic transportation system.31

The Corps oversees all of our commercial waterways, including the 11,000 mile-stretch that comprises the Inland Waterway System (IWS), which levies a federal fuel tax to navigate. The Corps are primarily responsible for developing, operating and maintaining our commercial waterways infrastructure as well as maintaining and regulating channel depths through dredging and water management.

Infrastructure projects for commercial waterways developed by the IWS don’t have a local cost-sharing partner, and instead are funded partly by general revenues from the U.S. Treasury and partly from the Inland Waterways Trust Fund (IWTF). The IWTF is financed by a $0.20 per gallon diesel fuel assessment that’s collected for river-miles traveled across the IWS. Operation and maintenance for the IWS is funded from general revenues.

Maritime policy isn’t currently included in the surface transportation reauthorization bill.32 The failure of Congress to overlook this system’s importance could cause the U.S. to lose its position in the global economy to countries, like China, that continue to make critical investments. By not adequately investing in ports and harbors, the jobs of more than 500,000 workers employed in this industry are put at risk.

Additionally, many of our levees were built over 50 years ago. The ASCE found that repairing and restoring our national levees could cost more than $100 billion – spending that’s critical to protect homes, businesses and farmland from flooding.33

Aviation Eighty percent of U.S. passenger origin and destination movements that account for 343 million trips each year occur at 35 airports within the

30 American Society of Civil Engineers, “Failure to Act: The Impact of Current Infrastructure Investment on America’s Economic Future,” Jan. 15, 2003, http://www.asce.org/failuretoact/31 Ibid.32 The Vital Role of Maritime Transportation In Our Economy, Transportation Trades Department, AFL-CIO, Mar. 2012, http://www.ttd.org/policy-statements/statements-archives/2012-statements/the-vital-role-of-maritime-transportation-in-our-economy/ 33 “U.S. Gets Low Marks On Infrastructure From Engineers’ Group,” NPR, Mar. 19, 2013, http://www.npr.org/2013/03/19/174767342/upgrading-americas-failing-infrastructure-could-cost-1-6-trillion

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nation’s top 15 markets.34 The Federal Aviation Administration (FAA) predicts that enplanements in these 15 markets will grow by 30 percent by 2020 and 121 percent by 2040.35 Consequently, air and ground congestion related to aviation at major airports and surrounding regions is an increasing threat to economic productivity. It’s largely because we’ve fallen short on aviation, which has not kept pace with the needs of our national economy that the 2013 Report Card for America’s Infrastructure gave the system a “D.”36

Education and Health Care Education (e.g., schools and buildings used for education purposes, including facilities within our public four-year college and university and community college systems) represents a large component of our non-defense infrastructure assets. We know that there’s a direct relationship between the quality of the infrastructure, particularly regarding features, such as acoustics and air quality, and student learning.37 Health care (e.g., hospitals, community health centers and free clinics) also accounts for an important share of our infrastructure assets. Research tells us that factors, including use of anechoic tiles, access to daylight, accommodation arrangements designed to limit transmission of infection and even carpeting can help improve patient outcomes.38 In both instances, the federal government supports only a small portion of their total infrastructure investment. State and local governments fund the majority of our education and health care infrastructure, particularly as it relates to operation, maintenance and expansion. Although both asset types are necessary to support a thriving economy, education, in particular, plays an integral role in the productivity of our workforce.

The Role of GovernmentGovernment’s obligations have increased as the nation’s infrastructure has advanced and improved over time. Responsibility varies across government levels and systems, with diverse degrees of investment, management, planning and maintenance required. 34 American Society of Civil Engineers, “Failure to Act: The Impact of Current Infrastructure Investment on America’s Economic Future,” Jan. 15, 2003, http://www.asce.org/failuretoact/ 35 Ibid.36 2013 Report Card for America’s Infrastructure, The American Society of Civil Engineers, http://www.infrastructurereportcard.org/a/#p/grade-sheet/gpa 37 Building Minds, Minding Buildings, http://www.aft.org/pdfs/psrp/bmmbcrumbling1106.pdf 38 “Effects on Healthcare Environmental Design and Medical Outcomes,” Roger S. Ulrich, Ph.D., International Academy for Design and Health, http://treebenefits.terrasummit.com/Documents/Health/Effects%20of%20Healthcare%20environments.pdf

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Federal

Infrastructure is the foundation of our nation. It was built with a strong federal role and should be expanded and maintained with a strong federal role. There isn’t a single American who doesn’t benefit from and doesn’t want good roads and safe bridges, clean drinking water and efficient airports, waterways, abundant energy and good jobs.39

Federal government’s fundamental authority is to ensure that our infrastructure systems are safe, efficient and reliable. It sets the vision for how our network of infrastructure systems should look and function. Any effort to eliminate the federal government’s role and shift responsibility to the states ignores our nation’s history and the achievements made by Presidents Hamilton, Jefferson, Lincoln, Eisenhower and Reagan who understood that a basic transportation infrastructure allows for economic development and promotes expansion.

Furthermore, infrastructure’s needs are simply beyond the capacity of state and local governments to address. If the federal government were to shift a greater share of responsibility to states and municipalities, in all likelihood, our infrastructure would become fragmented and inefficient; productivity would decrease; and economic activity would slow. Although private investment may provide a supplemental resource, there’s not enough private capital available to replace federal investment.

Compounding the funding problem in the immediate future is the federal budget sequester, which affects are still largely unknown. The sequestration imposes damaging cuts to transportation that will reduce federal spending at a time when our economy is fragile and many workers are unemployed. While the full impact of these cuts won’t become apparent for several months, spending reductions cut across all modes of transportation and federal agencies. Although the Highway Trust Fund (HTF) that funds the majority of highway and transit programs is protected, discretionary funding that provides grants for new or expanding transit systems will be impacted, which could halt projects and result in job loss in multiple states. The Maritime Security Program that provides naval support also stands to lose funding. It faces cuts higher than those imposed on non-defense discretionary programs, and federal maritime workers serving defense functions most likely will be affected.

39 Terry O’Sullivan, General President of Laborers’ International Union of North America

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Since taking office four years ago, President Obama has made infrastructure investment a priority. Throughout his time in the White House, he has vocalized his strong commitment to rebuilding America’s infrastructure, and repeatedly says that making our infrastructure safer, makes businesses and workers more competitive in a global economy. Above all, the President understands the potential that greater infrastructure investment provides to unleashing thousands of good-paying jobs for projects that can’t be outsourced.

In his recent State of the Union40 address and subsequent Fiscal Year 2014 budget41, the President proposed creating a “fix-it-first” program that would put unemployed workers back to work as quickly as possible on our nation’s most urgent infrastructure repairs. His budget specifically calls for an initial, upfront investment of $50 billion for infrastructure, $40 billion of which would be spent on maintenance and updates for existing infrastructure as part of the “fix-it-first” program. The remaining $10 billion would be used to attract private capital for high-value projects through the “Rebuild America Partnership” that includes creating a National Infrastructure Bank (NIB) in order to upgrade and modernize maritime ports, pipelines, schools and other systems businesses rely on to remain competitive. His proposed Rebuild America Partnership would get $4 billion to implement expansions of the Transportation Infrastructure Finance and Innovation Act (TIFIA) and the Transportation Investment Generating Economic Recovery (TIGER) Discretionary Grant programs that provide debt financing for infrastructure projects, and his budget calls for $7 billion for the American Fast Forward (AFF) bond program that would be used to attract new sources of capital. The President’s budget also includes funding for NextGen and high-speed rail, in addition to an increase in federal transportation spending that would cut red tape associated with permitting, regulatory review, procedures and policies to cut delivery times in half for infrastructure projects.

The programs and policies expressed in the State of the Union and included in the President’s budget expand on 2009 Recovery Act financing, which put American workers to work improving more than 350,000 miles of U.S. roads

40 Note: Information for this paragraph and the following paragraph came from the text of President Obama’s 2013 State of the Union address, available here: http://www.nytimes.com/2013/02/13/us/politics/obamas-2013-state-of-the-union-address.html?pagewanted=all&_r=0 as well as the White House Fact Sheet: The President’s Plan to Make America a Magnet for Jobs by Investing in Infrastructure, available here: http://www.whitehouse.gov/the-press-office/2013/02/20/fact-sheet-president-s-plan-make-america-magnet-jobs-investing-infrastru 41 The President’s Budget for Fiscal Year 2014: http://www.whitehouse.gov/omb/budget

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and repairing or replacing over 20,000 bridges, since the President took office. Additionally, the U.S. Department of Transportation (DOT) has built or improved more than 6,000 miles of rail, 40 rail stations and purchased 260 passenger rail cars and 105 locomotives. The President’s motivation to address the nation’s infrastructure needs has resulted in the investment of more than 350 miles of new rail and bus rapid transit, in addition to supporting America’s manufacturing industry by investing in 45,621 buses and 5,454 rail cars.

It will be up to Congress as to whether the President’s proposals and budget gain support.

Also, on the table are proposals to cap or eliminate tax-exempt municipal bonds – conceivably the single most important financing tool used by state and local governments to support essential infrastructure investments. These bonds represent a partnership between the federal government and state and local governments and private investors in contributing to public infrastructure projects. Limiting or taking away that benefit would jeopardize financing for future projects and therefore should be opposed. Additionally, a number of important pieces of legislation that directly impact federal infrastructure spending are either up for reauthorization this year or will be in the years that immediately follow. If any of these bills should fail to pass, it could limit states’ abilities to leverage public and private financing and undoubtedly would reduce essential funding to states for infrastructure projects, potentially forcing governors to seek new funding alternatives to make up the loss. The Looking Forward section of the paper discusses various bills in more detail and makes the case for why it’s important that Congress pass critical infrastructure legislation.

State

A state’s role can widely vary by infrastructure system, with lines of distinction sometimes blurred. For example, the federal government provides only minimal funding for school facilities through a few programs. School facility maintenance and modernization is traditionally viewed as a local issue, yet it’s relatively easy to make the case that these facilities are economic assets that are of national interest, in addition to health and safety concerns. Furthermore, infrastructure maintenance and operation sometimes involves various owners and operators – public and private; such is the case with water, electricity, maritime and aviation systems, among others, with the state playing only a limited role.

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Financing and Funding Challenges and OpportunitiesChart 2: Cumulative Infrastructure Needs by System Based on

Current Trends Extended to 2020 and 2040

(Dollars in $2010 billions)

Total Needs

Expected Funding

Funding Gap

Total Needs

Expected Funding

Funding Gap

Surface Transportation $1,723 $877 $846 $6,751 $3,087 $3,664Water and Wastewater $126 $42 $84 $195 $52 $144Electricity $736 $629 $107 $2,619 $1,887 $732*Airports $134 $95 $39 $404 $309 $95Inland Waterways and Marine Ports $30 $14 $16 $92 $46 $46Totals $2,749 $1,657 $1,092 $10,061 $5,381 $4,681

20402020Infrastructure Systems

* Airport needs and gaps include anticipated cost of NextGen $20 billion by 2020 and $40 billion by 2040.

Source: Failure to Act, American Society of Civil Engineers

Surface Transportation

America’s system for financing surface transportation infrastructure is obsolete. Although the statement can be applied across most infrastructure systems, it’s especially true for surface transportation, which represents the biggest funding gap of all systems, illustrated in Chart 2.

How surface transportation is financed sheds light on our growing spending problem, and overshadows its devastating effects on our transportation system and overall economic competitiveness. If nothing is done to fix surface transportation’s funding mechanisms, millions of jobs will be in danger and our freight and passenger rail transportation systems could further decline.

With 1.3 million construction workers out of work and the construction industry’s unemployment rate at 15.7 percent – the highest rate of any sector – it’s extremely important that Congress address this problem.42 Adequate investment in surface transportation could create eight million jobs

42 U.S. Department of Labor, Bureau of Labor Statistics, Economic News Release, Mar. 8, 2013, http://www.bls.gov/news.release/empsit.nr0.htm

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over four years and drastically reduce the number of unemployed construction workers nationwide.43

Chart 2 figures show that if nothing is done to increase spending; the U.S. will be short $846 billion for critical surface transportation projects by 2020 and more than $3 trillion by 2040. With the insolvency of the HTF – surface transportation’s prime financing mechanism for roads and bridges – forecasted in 2015, politicians shouldn’t prolong reform any longer, as inaction will only worsen the problem.

The federal government currently imposes an excise tax of 18.4 cents per gallon of gasoline and 24.4 cents per gallon of diesel fuel whose proceeds are used to fund the HTF. Because it’s levied as a flat tax, it’s not indexed for inflation, and consequently its value has fallen by about 33 percent since 1993 – the last time the tax was raised.44 For comparison, the 20-year difference between the rate charged today and the rate charged in 1993 is about 12 percent of the cost of gasoline.45 As a result, the HTF now collects significantly less revenue than what it pays out. Additionally, outlays to states haven’t reflected the decline in collections. Between 2005 and 2009, each state actually got a higher allocation than it contributed, with monies from the General Fund used to cover the deficit.46 Absent any changes, the HTF can expect to have a $365.50 billion shortfall over the next 23 years.47

Intensifying calls for reform is that the trust fund’s insolvency is projected to coincide with the expiration of the surface transportation reauthorization legislation, known as MAP-21. MAP-21 stabilized the trust expenditures in order to provide Congress more time to reform the HTF’s financing mechanism. However, if MAP-21 expires, yearly investments in transit would decline from $11 billion to $3.5 billion and highways could lose a staggering $35.5 billion.48 A scenario like this one would almost certainly halt planned projects and put millions of jobs at risk.

43 LiUNA! Testimony of Terence M. O’Sullivan General President Laborers’ International Union of North America Transportation and Infrastructure Committee, U.S. House of Representatives, Feb.13, 2013 (figures attributed to the American Association of State Highway and Transportation). 44 Transportation Trades Department, AFL-CIO, Policy Brief, Options for Avoiding the Highway Trust Fund Cliff, Adopted. Feb. 24, 201345 Ibid.46 Ibid.47 Ibid.48 Ibid.

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Gas Tax One approach to address the HTF insolvency problem and increase collections would be to simply increase the gas tax assessment and index it for inflation. A proposed rate increase has been a part of various debt relief packages in the past.49 For example, in late 2010, through contemporary discussion, the Simpson-Bowles Commission recommended increasing the gas tax by 15 cents per gallon over three years, with revenues committed to fund transportation.50 Although the recommendation hasn’t been implemented, discussion of this nature should continue to be a part of budget negotiations and ultimately included in a deficit agreement.

The National Conference of State Legislatures (NCSL) reports that at least 17 states have taken a leadership role on the gas tax proposing to reform or supplement it with fee increases in order to fund repairs for roads and bridges.51 The majority of states don’t index their gas tax for inflation, and consequently revenue generated continues to fall short for what’s needed.

Sales Tax on GasAbsent agreement on the gas tax, other approaches to eliminate the HTF shortfall should be considered. The former Executive Director of the American Association of State Highway and Transportation Officials (AASHTO) called for changing the current cents per gallon assessment to a sales tax levied on gasoline. Under the proposal, an assessment would be imposed that would generate at least $350 billion for surface transportation funding over six years.52 Based on the proposal’s analysis, drivers would pay about $1 more per week per vehicle for gasoline than what they now spend under the cents per gallon rate. Structuring the assessment this way would ensure that a user fee – the preferred financing method – continues to finance the HTF, and that the assessment automatically adjusts with the price of fuel.

Vehicle Miles Traveled FeeAnother financing method that has been proposed is a mileage-based road charge, such as a Vehicle Miles Traveled (VMT) fee. A VMT fee charges drivers a relatively small assessment for each mile driven. Similar to the 49 Ibid.50 Ibid.51 “State Gas Taxes Head Higher,” The Wall Street Journal, Apr. 3, 2013, http://online.wsj.com/article/SB10001424127887323916304578401022066112256.html 52 Ibid.

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conventional gas tax, a VMT fee preserves the long-favored user fee financing mechanism for the HTF. Although multiple transportation commissions have recognized the potential that VMT fees hold, the concept will require more study in order to alleviate public fears about privacy and reasonable fee assessments.

No state has a VMT fee to-date, although both Oregon and Iowa have introduced the concept on a pilot-basis.

Oregon’s Road User Fee Task Force researched 28 different funding options before deciding to pilot a VMT fee in Portland, as a way to ensure that motorists, driving fuel-efficient vehicles, support the roads they travel on. At the pilot’s 12-month conclusion in 2007, a report was prepared for the Legislature that showed that VMT fees could provide a viable revenue option if expanded statewide and many of the issues related to collection, payment, technology and privacy could be overcome.53 Oregon launched its second 12-month pilot in 2012 to test the concept further. A final report will be prepared for the 2013 Oregon Legislature on its findings.54

A four-year study is being conducted by the University of Iowa’s Public Policy Center (PPC) as part of its Transportation Policy Research Program on the feasibility of assessing and collecting mileage-based road user charges.55 The study involves installing on-board computers with GPS in participants’ vehicles that monitor the number of miles traveled and transmit the data to the PPC for processing and evaluation. Its purpose is two-fold: 1) to assess how a mileage-based road user charge would be received as a taxing system nationally and 2) to determine if the technology for collecting mileage information is acceptable to users. The study is scheduled to be completed in 2013 and a final report on its results will follow.

With rapidly falling fuel consumption per mile driven, and thus lower fuel taxes to maintain the highway system, something other than the traditional motor vehicle cents-per-gallon tax is inevitable but politically challenging.

53 Oregon’s Mileage Fee Concept and Road User Fee Pilot Program, Oregon Department of Transportation, 2007 http://www.oregon.gov/ODOT/HWY/RUFPP/docs/RUFPP_finalreport.pdf 54 Oregon, Road Usage Charge Pilot Program, http://www.oregon.gov/ODOT/HWY/RUFPP/Pages/rucpp.aspx 55 “National Evaluation of the Mileage-Based Road User Charges,” University of Iowa, Public Policy Center, Transportation Policy, http://ppc.uiowa.edu/transportation/study/national-evaluation-mileage-based-road-user-charge

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Fares and TollsUser fees in the form of fares and tolls are sometimes used to supplement maintenance and operating costs typically associated with specific transportation projects, such as roads, bridges and transit, but aren’t a replacement for conventional financing mechanisms that fund the HTF. Appropriate levels of road and bridge tolls can cover operating expenses for certain projects, but this isn’t the case across-the-board. For example, transit fares rarely cover the entire system’s costs and therefore only provide incremental funding.56

Other Revenue Sources and ConsiderationsWith increased fuel efficiency standards scheduled to take effect by 2025, cars and light trucks will be required to average 54.5 miles per gallon, which could exacerbate the surface transportation shortfall already anticipated.57 Moreover, electric and natural gas powered vehicles are increasingly entering the marketplace, as more consumers and producers move to alternative fuel vehicles. Consequently, the existing funding structure for the HTF will become less sustainable if it’s based solely on the consumption of gas and diesel fuel. While a number of longer term options exist, the need to study alternatives shouldn’t be used as an excuse to prolong addressing the trust fund’s imminent insolvency.

Challenges and Opportunities for Other Infrastructure Systems

Water and WastewaterThe public sector is largely responsible for repairing and upgrading our nation’s water and wastewater systems. About 85 percent of all systems are municipal-owned.58 However, federal and state policies and programs are critical to leveraging public funding and attracting private investment for water projects, especially since the infrastructure that supports the delivery

56 “Transit Farebox Recovery and US and International Transit Subsidization: Synthesis,” Washington State Department of Transportation, Oct. 8, 2009, http://www.wsdot.wa.gov/NR/rdonlyres/55CF12C9-9D4E-4762-A27A-407A44546BE2/0/TrasitFareboxRecoveryandSubsidiesSynthesisKTaylorFINAL2.pdf 57 Transportation Trades Department, AFL-CIO, Policy Brief, Options for Avoiding the Highway Trust Fund Cliff, Adopted. Feb. 24, 201358 “Financing Solutions for Water Infrastructure Investment,” American Water, http://files.shareholder.com/downloads/AMERPR/1789227155x0x590366/A40AD811-D0CF-4463-AF11-103BB583E32C/Financing_Solutions_White_Paper_Combined-FINAL-8.8.12.pdf

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of water and wastewater is aging, and replacement and upgrade needs are increasing faster than the funds available. Only approximately 33 percent of water infrastructure projects are scheduled for funding through 2020 based on data in Chart 2. By 2040, the funding gap increases, with just 27 percent of projects scheduled for funding.

Although the Clean Water Act (CWA)59 of 1972 has reduced water pollution and the Safe Drinking Water Act (SDWA)60 of 1974 has made drinking water safer, without more funding beyond what’s available now, their achievements in public health could diminish. To help states upgrade and expand drinking water systems, the federal government should strengthen the SDWA’s SRF by reauthorizing federal funding up to $7.5 billion over five years so that more stringent federal and state environmental standards could be met.61 Additionally, if the federal government were to do away with the state cap on private activity bonds (PABs) for water infrastructure projects, it could give states access to as much as $7 billion per year in private financing to carry out more water projects.62

ElectricityAs the data in Chart 2 shows, we should be spending about $15 billion more each year from now until 2020 to prevent the projected $107 billion funding gap in our electricity infrastructure from happening. According to the ASCE, most of the shortfall will affect grid investments. They project that the U.S. needs to spend $95 billion more just to modernize the grid, which could limit the occurrence of brownouts and blackouts, saving businesses approximately $126 billion, and thereby protect against the loss of 529,000 jobs and $656 billion in personal income losses for American families.63

Upgrading our entire energy infrastructure would likely require as much as $2 trillion over the next two decades, but holds the potential to create as many as 200,000 jobs every year for the next 20 years for workers ready to put their skills to task.64 59 Clean Water Act summary: http://www.epa.gov/lawsregs/laws/cwa.html 60 Safe Water Drinking Act summary: http://water.epa.gov/lawsregs/guidance/sdwa/upload/2009_08_28_sdwa_fs_30ann_sdwa_web.pdf 61 Drinking Water Conclusion, 2013 Report Card for America’s Infrastructure, http://www.infrastructurereportcard.org/a/#p/drinking-water/conclusion 62 Ibid.63 American Society of Civil Engineers, “Failure to Act: The Impact of Current Infrastructure Investment on America’s Economic Future,” Jan. 15, 2003, http://www.asce.org/failuretoact/64 “Modernize Our Outdated Energy Infrastructure,” Politico, Mar. 18, 2013, http://www.politico.com/story/2013/03/modernize-our-outdated-energy-infrastructure-

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Maritime Chart 2 illustrates the funding gap forecasted for our inland waterways and maritime ports. If these predictions hold true, import and export costs would likely increase, which could slow business activity and result in job loss. Since nearly 30 percent of vessels traveling through domestic ports are already inhibited because of deficiencies with our navigation channels, the economic and job loss that could occur if we continue to ignore maintenance problems would be devastating.65

Part of the reason the funding gap came to bear is that Congress has diverted funding from the Harbor Maintenance Trust Fund (HMTF) to other needs when the user fees assessed on cargo arriving in U.S. ports were meant to fund operation and maintenance of navigation channels.66 Consequently, there’s now an excess of critical maintenance projects.

Additionally, the trust fund (IWTF) that pays for half of the maintenance and development costs of our commercial waterways infrastructure doesn’t generate enough revenue to support its needs. Consequently, its funding shortfall has reduced the overall amount that can be invested in construction projects, which has resulted in project delivery delays and increased total construction costs.

Although proposals have been made to increase and supplement the trust fund’s revenues, no proposal has yet to advance through the House or Senate. Instead, earlier water resources development acts have been used to reform the fund.

AviationIt’s not that we just need to expand and build more airports to address our aviation infrastructure needs; the key to having less congested airspace is an Air Traffic Control (ATC) system that can handle the volume of air traffic in our skies. NextGen67 is the broad name used to describe the transformation of our National Airspace System (NAS) from a ground-based system to a satellite-based system. It has the capacity to relieve airspace congestion, improve air safety and decrease aviation’s impact on the environment.

89026.html 65 The Vital Role of Maritime Transportation In Our Economy, Transportation Trades Department, AFL-CIO, Mar. 2012, http://www.ttd.org/policy-statements/statements-archives/2012-statements/the-vital-role-of-maritime-transportation-in-our-economy/ 66 Ibid.67 NextGen, Federal Aviation Administration, http://www.faa.gov/nextgen/why_nextgen_matters/what/

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These combined benefits will enable aircraft to fly more direct routes and minimize delays. NextGen is costly, but necessary, representing our aviation infrastructure’s most pressing need. Figures in Chart 2 show that the majority of the funding gap in aviation, at least for 2020, is due to NextGen.

Public Schools A 2013 State of Our Schools report finds that schools are currently facing a $271 billion deferred maintenance bill just to bring buildings up to working order. 68 This equates to a cost of approximately $5,450 per student.69 The report also estimates that it would cost $542 billion to bring primary and secondary schools both into good repair and address modernization needs over the next 10 years.70 Yet this data may not fully capture the true size and scope of the problem because little data is available. It has been nearly 20 years since the federal government has conducted a comprehensive assessment of the condition of its public schools.71 The last comprehensive report on America’s school facilities was conducted by the GAO in 1995 and indicated that 15,000 U.S. schools were circulating air that, at the time, was deemed unfit to breathe.72

Another challenge is that school districts with a higher proportion of low-income children generally have less funding for new construction, renovations and maintenance and repair than districts with wealthier student populations.73 It would cost at least $50 billion to bring schools in lower income districts up to parity.74

Although increased education infrastructure spending for capital construction is needed, states should carefully consider whether it’s advantageous to divert funding from the education general fund to fill this gap, as a reduction in funding levels could jeopardize maintenance of effort funding requirements and impact federal funding. Additionally, states might want to avoid cutting tax rates in exchange for closing corporate tax loopholes, as doing so, doesn’t necessarily compensate for short-term revenue gains.

The federal government, with state and local support, could conduct regular surveys on the condition of its public schools, so policymakers have a better understanding of what needs to be done and how to best allocate resources. 68 “2013 State of Our Schools Report,” The Center for Green Schools, http://centerforgreenschools.org/Libraries/State_of_our_Schools/2013_State_of_Our_Schools_Report_FINAL.sflb.ashx 69 Ibid. 70 Ibid.71 Ibid. 72 Ibid.73 Modernizing Schools: Making the Case for Federal Investment, National Education Association, 200874 Ibid.

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Among the recommendations in the State of Our Schools Report are calls for75:

Better data collection and issues, including building age and site size as well as separate accounting for utility and maintenance expenditures; and allowing for differentiation in capital accounting for new construction and renovation. These changes would allow the condition and upkeep of our public schools to be better monitored and allow for improved prioritization of investment.

Providing more financial and technical assistance to states that could enable them to more easily include facility data in their longitudinal education data systems.

Designating a federal agency to perform a facility condition survey every 10 years, with the first one scheduled immediately to assess the conditions of our public school infrastructure.

Funneling more federal dollars to school districts with the greatest maintenance and repair needs either through direct investment or alternative financing mechanisms. If the federal government made a one-time contribution of $20 billion to school districts to eliminate a portion of their deferred maintenance, it’s estimated that it could create nearly 250,000 skilled maintenance jobs with $6 billion for materials and supplies.76

Safety Net HospitalsThe Affordable Care Act (ACA) presents opportunities and challenges for public and non-profit safety-net hospitals. The dramatic expansion of insurance coverage through Medicaid and exchanges, along with new incentive payments aimed at reducing cost and improving quality has the potential to grow and strengthen these health care providers.77 At the same time, planned cuts in Medicaid disproportionate share hospital (DSH)

75 Center for Green Schools, 2013 State of Our Schools Report: Recommendations, http://centerforgreenschools.org/Libraries/State_of_our_Schools/2013_State_of_Our_Schools_Report_Recommendations.sflb.ashx 76 Modernizing Schools: Making the Case for Federal Investment, National Education Association, 2008 77 “How Five Leading Safety-Net Hospitals Are Preparing For The Challenges And Opportunities Of Health Care Reform,” Health Affairs, Aug. 2012 http://content.healthaffairs.org/content/31/8/1690.full?sid=98344466-2e40-4f3d-b62c-67b188af6200

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payments will reduce a traditional source of hospital funding.78 These cuts are expected to hit urban safety-net hospitals particularly hard.79

It will be important for safety-net hospitals to invest in their facilities in order to reposition and expand services, attract newly insured patients and strengthen their bottom lines. Capital financing is needed for new primary care capacity, rehabilitation of aging facilities, health information technology and other infrastructure to coordinate care and meet new performance standards.80

These investments have the potential to benefit individual hospitals, consumers and communities, but also to significantly reduce costs and improve quality of care in the health care system as a whole, because safety net hospitals disproportionately serve vulnerable populations with the most complex, expensive medical conditions.81

However, access to capital is a critical issue for safety net hospitals, including public hospitals. While ACA provides funding for the capital needs of community health centers, it doesn’t provide comparable amounts for safety-net hospitals. 82 Dislocations in the credit enhancement market83 as well as a negative outlook for state and local governments’ finances84 have 78 Ibid.79 “The Potential Impact of the Affordable Care Act on Urban Safety-Net Hospitals,” National Association of Urban Hospitals, Sept. 2012, http://www.nauh.org/component/option,com_rubberdoc/format,raw/id,115/view,doc/80 “Local Public Hospitals: Changing with the Times,” Center for Studying Health System Change, Research Brief, no. 25, Nov. 2012, http://www.hschange.com/CONTENT/1326/1326.pdf and “How Five Leading Safety-Net Hospitals Are Preparing For The Challenges And Opportunities Of Health Care Reform,” Health Affairs, Aug. 2012, http://content.healthaffairs.org/content/31/8/1690.full?sid=98344466-2e40-4f3d-b62c-67b188af6200 81 “The Promise And Peril Of Accountable Care For Vulnerable Populations: A Framework For Overcoming Obstacles,” Health Affairs, Aug. 2012, http://content.healthaffairs.org/content/31/8/1777.full?sid=229d9a80-3a0f-4584-aa6a-6661d3afc1f2

82 “Toward a High Performance Health Care System for Vulnerable Populations: Funding for Safety-Net Hospitals,” The Commonwealth Fund, Mar., 2012, http://www.commonwealthfund.org/~/media/Files/Publications/Fund%20Report/2012/Mar/1584_Bachrach_funding_safety_net_hosps_final.pdf 83 “Bond Insurers Continue to Struggle Through 2012,” The Bond Buyer, Feb. 9, 2013, http://www.bondbuyer.com/issues/122_28/municipal-bond-insurance-industry-continued-decline-2012-1048543-1.html 84 “Moody's: Outlook for US local governments remains negative in 2013,” Moody’s Investor Service, Feb. 21, 2013, http://www.moodys.com/research/Moodys-Outlook-for-US-local-governments-remains-negative-in-2013--PR_266803

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also made it more challenging to raise capital through tax-exempt bonds. New investment targeted to safety-net hospitals could have a tremendous impact on the implementation of health care reform.

States could:

Consider using Medicaid waivers under Section 1115 of the Social Security Act (SSA) to provide capital to reposition safety-net hospitals to serve vulnerable patient populations. Section 1115 provides the Health and Human Services (HHS) Secretary freedom to authorize experimental projects that promote the goals of the Medicaid statute and demonstrate a new innovative strategy.85 The Secretary may either waive a required element of a Medicaid state plan or may authorize matching funds for costs that couldn’t otherwise be matched under the Medicaid program. This last point would give states access to capital that could be distributed to safety-net hospitals for facility upgrades. However, states should attempt to avoid using Section 1115 waivers to restrict Medicaid eligibility or enrollment, or to transfer state decision-making authority to private insurers.

Provide a state credit enhancement of hospital bonds for local issuers. A number of states already have some type of credit enhancement program for public schools, which allow districts to incur lower interest costs when accessing capital markets, and thus reduce project costs. A program like this one could provide bondholders an added layer of security that would potentially unleash more capital for hospital construction projects.

Offer funding for intermediaries, such as community development financial institutions, so they can expand their lending capabilities to more credit worthy borrowers.

Establish a state capital grant program with requirements for matching financing to maintain and improve safety-net hospitals.

85 “Toward a High Performance Health Care System for Vulnerable Populations: Funding for Safety-Net Hospitals,” The Commonwealth Fund, Mar., 2012, http://www.commonwealthfund.org/~/media/Files/Publications/Fund%20Report/2012/Mar/1584_Bachrach_funding_safety_net_hosps_final.pdf See also: Social Security Act § 1115.42 U.S.C. § 1315.

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Allow participants in demonstration programs to receive an advanced Medicaid payment based on a portion of future reimbursement that could be used to cover project start-up costs.

Create a state New Markets Tax Credit (NMTC) program that would provide tax credits to investors for equity investments in safety-net hospital capital improvement projects in low-income areas that serve disadvantaged populations. Such a program could be modeled after a similar one that the federal government offers.

Financing Strategies to Increase and Supplement Investment and Create Jobs

Traditional Debt Financing and Assistance Traditional debt financing instruments and assistance provided by the federal government to states will continue to be important, as states attempt to address their infrastructure needs and close the funding gap.

Tax-Exempt Municipal BondsState and local governments financed infrastructure investments totaling about $1.65 trillion in the 10-year span between 2003 and 2012 using tax-exempt municipal bonds.86 It’s perhaps the most valuable traditional financing mechanism available to states to maintain and build roads, bridges, schools and hospitals, in addition to other essential infrastructure projects, like water and wastewater systems. Chart 3 shows more specifically how the majority of funds were spent.

86 “Protecting Bonds to Save Infrastructure and Jobs 2013,” National Association of Counties (NACO), Feb. 2013

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Chart 3: Top Six State and Local Infrastructure Categories UsingTax Exempt Financing, 2003-2012

($ Billions)

Source: National Association of Counties

Tax-exempt municipal bonds allow states to attract investors, since investors aren’t obligated to pay federal income tax on the interest earned on the bond. In turn, states can borrow money at lower interest rates to fund infrastructure projects.

Although the tax exemption has been in place for over a century, certain federal proposals are calling for either capping or ending it entirely. Both options could threaten the future of municipal bonds. Capping the exemption so that only a certain amount of interest below the cap is tax-free would mean that investors would pay more in federal taxes, but it would also increase bond interest rates, so states would pay more, too. If municipal bonds completely lost their tax-exempt status, interest rates for states would almost certainly rise and it would likely be much harder for them to find investors for future projects. It’s projected that taxing municipal bonds could increase borrowing costs by as much as 2 percent, which would cause infrastructure costs to jump by as much as 25 percent.87 The National Association of Counties (NACo) estimates that applying the federal income tax to municipal bond interest would have cost state and local governments

87 “Governor’s Fear Loss of Bond Tax Exemption,” Stateline, Feb. 26, 2013, http://www.pewstates.org/projects/stateline/headlines/governors-fear-loss-of-bond-tax-exemption-85899454447

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nearly $500 billion more in interest expense for tax-exempt municipal bonds issued between the years 2003 and 2012.88

Congress should protect this important tax exemption to ensure states have tools to finance infrastructure investment, especially at a time when infrastructure needs exceed available funds and workers are desperate for jobs.

Private Activity Bonds Private activity bonds (PABs) are issued by state and local governments on behalf of a private corporation to finance construction projects. They essentially allow corporations to borrow at lower rates, so projects can be built cheaper and provide investors with a tax-exempt investment. State and local governments have the sole discretion of determining whether a project provides a public purpose before issuing a bond. The bonds are intended to subsidize business projects that provide economic benefits often in the form of jobs. More than $65 billion of PABs have been issued since 2006, according to a review of Bloomberg bond data by the New York Times.89 Unfortunately, the tax-exempt status of PABs, along with traditional municipal bonds, is being reviewed by Congress, with proposals calling for its elimination and capping the tax break’s value. PABs provide an important tax-exempt financing option for state and local governments. Any changes to this tax benefit could impact state government’s ability to finance projects, which could be especially harmful to states if federal funding is also cut for infrastructure projects.

Transportation Infrastructure Finance and Innovation Act

The Transportation Infrastructure Finance and Innovation Act (TIFIA) program of 1998 offers federal credit assistance to qualified surface transportation projects deemed to provide national or region significance. It offers three types of assistance: loan guarantees, direct federal loans and standby lines of credit, with the goal to use federal matching funds to encourage other public and private sponsors to help finance important surface transportation projects. Based on requirements provided by the Federal Credit Reform Act of 1990, which governs the program, the U.S. DOT must have a capital

88 Ibid.89 “A Stealth Tax Subsidy for Business Faces New Scrutiny,” New York Times, Mar. 4, 2013, http://www.nytimes.com/2013/03/05/business/qualified-private-activity-bonds-come-under-new-scrutiny.html?pagewanted=all&_r=0

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reserve that can cover anticipated credit losses before assistance is offered through the program. TIFIA is an important financing tool for highway and transit projects, bridges and tunnels, passenger and freight rail facilities, among other qualified projects that meet defined cost threshold requirements.

Grant Anticipation Revenue Vehicles Grant Anticipation Revenue Vehicles (GARVEEs) are a type of tax-exempt debt instrument that allows a state government to secure upfront financing for transportation projects based on the promise of anticipated annual monies, like federal appropriations, to guarantee the loan. These bonds provide states the ability to borrow money from future appropriations to begin needed projects sooner, and spread costs over the life of the project rather than paying the full cost at the end of construction. Although GARVEEs are a relatively secure public financing option, their continued use depends upon the federal government making good on its promise to provide financial aid. If a state defaults on the loan because their federal allocation isn’t sufficient to service the debt, then the state is obligated, as the loan co-signer, to raise taxes in the event of a default. It’s therefore critical that the federal government address the problems with the gas tax that funds the HTF in order to provide states greater certainty related to future federal allocations.

Transportation Investment Generating Economic Recovery

The U.S. DOT competitively awarded Transportation Investment Generating Economic Recovery (TIGER) grants to various transportation projects, funding roads, bridges, rail and port initiatives in states throughout the U.S., which address national needs. The discretionary grant program provides the federal government the direct authority to scrutinize projects for selection, and to review options for delivering projects more efficiently, while also reducing construction costs. Four separate rounds of funding were awarded from 2009 through 2012, with a total of $3.1 billion in grants issued.90 Although program demand exceeds the supply of funding based on the number of applications DOT has received, opponents have criticized the program for political reasons claiming it lacks transparency, and vow to scrap the program for good. TIGER grants help fund critical infrastructure projects and put people back to work with public financing. Every effort

90 “Two tales about TIGER grants,” Politico, Aug. 1, 2012, http://www.politico.com/news/stories/0812/79299.html

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should be made to ensure that the DOT continues to receive annual appropriations for this program.

Build America BondsBuild America Bonds (BABs) were first authorized in 2009 as part of the American Recovery and Reinvestment Act. BABs offer investors a direct subsidy instead of a tax exemption on interest earned on the bond, and thus benefit from higher yields, making them more attractive instruments for tax-exempt investors, including pension funds and foreign investors. State and local governments sold these securities to fund infrastructure projects until the program expired in 2010. The program provided states with an opportunity to spur economic growth and create jobs addressing critical infrastructure needs with public investment. Congress should consider reauthorizing this legislation.

Innovative Debt Financing and AssistanceAlthough both traditional financing and funding mechanisms will almost always be part of the strategy used by states to finance public infrastructure, it’s becoming more and more apparent that the private sector may have an important role to play. New models that involve the use of institutionalized and private capital may be able to broaden the discussion beyond taxes and fees to allow states to deliver infrastructure projects despite critical funding challenges, especially under the right conditions to attract this investment. Certain newer, innovative financing initiatives could help states finance some infrastructure projects, but they shouldn’t be considered a substitute for real action to address infrastructure’s chronic underfunding problem. Of course, how these initiatives are implemented is extremely important given the public and employee interest issues that have surfaced over the years. At a minimum, any innovative financing proposal, including a national infrastructure bank (NIB) or separate public private partnership (PPP or P3) should apply all relevant labor protections, such as: Davis-Bacon prevailing wage rules91; public employee protections; Section 13(c) transit labor protections; Railway Labor Act; the Railroad Retirement Act; the Railway Unemployment Insurance Act; the Federal Employer’s Liability Act and other related statutes as well as Buy America92 provisions. Project Labor Agreements93 (PLAs) should also be used as an option when a project’s size and complexity warrants. 91 Primer on the Davis-Bacon Prevailing Wage Act, http://www.uagetinvolved.org/updates/DavisBacon_IssuePaper.pdf92 Primer on Buy America provisions: http://www.dot.gov/highlights/buyamerica

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National Infrastructure BankA National Infrastructure Bank (NIB), like the one that the President envisions and Congress recommends for economic growth and infrastructure investment, if properly capitalized would provide loans, loan guarantees and issue bonds to finance new intermodal projects and those that affect large regions of the country. While the President’s proposal is focused on transportation, similar congressional proposals are broader and, include public housing, drinking water and wastewater systems. At present, the bank is intended to supplement, not replace the need to fund the HTF or other federal support for infrastructure, and instead would focus on projects of national or regional importance, especially those that can attract new private investment.

Strong federal infrastructure investment that would strengthen our competitiveness, expand our economy, improve our communities and create good jobs should be supported. To this end, an infrastructure bank proposal should focus on improving and developing publicly owned and operated infrastructure, with an explicit prohibition on the direct and indirect financing of projects that will result in the privatization of publicly owned facilities. Projects that are associated with existing publicly owned infrastructure should continue to be publicly owned and operated. It should also include protections for existing workers who maintain and operate the types of infrastructure targeted for improvement, and ensure that workers aren’t displaced or otherwise harmed through a change in operations or management, as a result of a bank financed project. Additionally, bank enabling legislation should include protections similar to those offered to transit workers when federal funds support their agencies.

When public funds are involved, it’s inappropriate for private contractors to oversee the work of other private contractors. Thus, the legislation should provide for project oversight and inspection to be undertaken by public agency staff whose sole allegiance is to the public interest.

The selection of projects by the banks should be an open, transparent process that provides the public with adequate time and sufficient information to carefully review the proposed financing and to comment on the merits of the project prior to any commitment of funding.

State Infrastructure BanksAccording to research conducted by the Brookings Institution, 35 states have used infrastructure banks and funds to invest nearly $7 billion in over 900

93 Primer on Project Labor Agreements: http://www.uagetinvolved.org/updates/PLA_IssuePaper.pdf

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different projects since 1995.94 Projects run the gamut from local road maintenance and highway construction to emergency relief for damaged infrastructure, among addressing other infrastructure priorities.

A particular desirable feature of an infrastructure bank is that it’s both separate and apart from other budgetary spending. This helps address the potential conflict between educational budget priorities, such as might happen when one desirable budget item such as educational capital infrastructure is pitted against another item such as general education funding for example. Having an infrastructure bank could avoid having to face such trade-offs.

PartnershipsParamount to attracting private capital, whether through an infrastructure bank or type of public-private partnership, is recognizing how investors value money. Applying the conventional infrastructure delivery model used for public financing to private financing may not be feasible. While it’s key that the private sector demonstrate they’re a dependable partner, so must state government to ensure that both risk and return are shared. For state government, this means that projects should be well-defined, deemed construction worthy and have passed all or most regulatory hurdles. A component often missing from the conventional model is a formula that estimates return on investment, weighing all financial costs and benefits without adjusting for the transfer of risk. Additionally, the use of private capital has been met with political challenges, mostly because the term “public-private partnership” has come to mean different things from private equity finance to public pension funds to labor stakeholders so that its real potential for public infrastructure innovation may not be fully apparent, depending on the stakeholder group defining it.

Chart 4 is a useful illustration showing why infrastructure reform across multiple aspects of the delivery system is needed if we are to create a marketplace conducive for investors to engage with government partners. By aligning and integrating various elements of our current approach, we’ll be better positioned for reform that’s necessary to attract investment and accelerate project delivery.

94 Robert Puentes and Jennifer Thomas, “Banking on Infrastructure: Enhancing State Revolving Loan Funds for Transportation,” The Brookings Institution, Sept. 12, 2012, http://www.brookings.edu/research/papers/2012/09/12-state-infrastructure-investment-puentes

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Chart 4: Infrastructure Acceleration Layer Cake

Source: CH2MHILL

Source: CH2MHill

Performance-Based InfrastructureThe West Coast Infrastructure Exchange (WCX)95 is a regional investment facilitator uniting governments, non-profits as well as community and business groups and labor organizations from west coast states, California, Oregon and Washington as well as British Columbia to collaboratively address regional infrastructure challenges, with funding currently provided by the Rockefeller Foundation. Its goal is to close the gap between available funding and infrastructure needs across multi-jurisdictions by aligning various aspects of project delivery in a way that attracts investors through a new approach called, performance-based infrastructure.

It intends to:

Strengthen project management;

Standardize investment guidelines;95 More information is available here: http://www.westcoastx.com/about.php

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A growing National marketplace of projects attractive to investors

Regional infrastructure exchanges, I-Banks, Green-Banks, etc.

State-Based “one-stop” entities ease investor concerns, and serve as members of regional

infrastructure exchanges

State/Local project bundling and technical assistance accelerates outcomes and scale

A New Pipeline better infrastructure projects and priorities fostered by using standard “Common Apps” and the community

investment dashboard model

Create a clearinghouse for investment-ready projects, including federal funding streams, public bonding options and private investment;

Help investors identify and mitigate against risk by standardizing financing protocols; and

Serve as a regional center of expertise to foster best practice sharing.

The Exchange is still in its early stages of development having just been formed in 2012 – and so far, no projects have been chosen. Some partners have identified small-scale energy and water projects as priorities, but it will eventually serve projects of all sizes, large and small. Throughout 2013, it will function with an interim management team, representing each partner office coordinated by the Oregon State Treasury. After the framework is established to identify and review projects, a Director, experienced in public infrastructure management, will be chosen in April 2013. At scale, the Exchange hopes to serve as a translation point between public sector projects and private capital and as a regional center of expertise if a new national infrastructure system based on innovative partnerships emerges in Congress.

Public Pension Funds, Fixed Income Financing InstrumentsGiven the amount of investment that’s required to make infrastructure improvements in the coming years, states could consider pension funds to finance at least a portion of investment that encourage the use of union construction labor as well as potentially protect the jobs, collective bargaining rights and working conditions of existing employees. Realizing that certain infrastructure structures are privately owned and operated, pension fund investment used to maintain, improve and/or build these private assets could also be considered.

When using public pension funds to invest in public infrastructure, states could evaluate options for how a project is designed, inspected, operated and maintained giving preference to public entities and public employees when strong preferences could be ensured for both labor and the public unless efficiencies could otherwise be obtained through a private entity.

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Because local practices often differ in terms of how private sector firms are used for different stages of infrastructure development, coordination with local representatives is critical to ensuring that investments don’t come at the expense of workers who have dedicated their careers to providing America with first-rate infrastructure.

Private equity – type infrastructure funds generally haven’t produced the returns that warrant their use of fees or that would justify their use of leverage. Rather than seek out private equity financing options, states could rely on fixed-income financing instruments that provide more stable returns over the long-term.

Private sector investment firms, which narrowly represent their firms’ interests, often request concessions that ensure a profitable venture for the firm, which can jeopardize the public interest – high rates of return, lengthy contracts, anti-compete clauses and guaranteed payments are some examples. Public pension funds, on the other hand, are semi-public, semi-private entities with labor representation. With these diverse interests represented, they’re typically better positioned to enter into a mutually beneficial long-term partnership with states, labor and the public.

Whenever possible, states should consider working together with public pension funds or group of public pension funds to ensure control of an asset remains with the public.

Energy Efficiency Retrofits Program ModelsA 2012 Rockefeller Foundation report found a need for $279 billion in investments for energy efficient retrofits across the entire range of infrastructure in the U.S.96 It was estimated that these investments could return $1 trillion in energy savings over 10 years, with a return of more than $3 for each dollar invested.97 If all of the retrofits were undertaken, it could produce more than 3.3 million cumulative job years of employment. Additionally, electricity use would drop by 30 percent and pollutant emissions would fall by 10 percent.98

96 United States Building Energy Efficient Retrofits, The Rockefeller Foundation, Mar. 2012, http://www.rockefellerfoundation.org/uploads/files/791d15ac-90e1-4998-8932-5379bcd654c9-building.pdf 97 Ibid.98 “United States Building Energy Efficient Retrofits Market Sizing and Financial Models,” State Innovation, 2013, http://www.stateinnovation.org/Uploaded-Documents/ee-retrofits.aspx

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States should be encouraged to create programs that would support these investments. One particular area where it would be most logical for states to look is the public sector where an additional $25 billion of retrofitting investments is projected.99

There are already some models for this. For example:

Western Michigan University has one of the first revolving loan funds designed to make up-front investments in retrofitting needed to finance projects. A study by the National Association of College and University Business Officials (NACUBO) found that programs, like Western Michigan’s have a median 32 percent annual rate of return on investment, putting people to work and paying for itself and more in four years.100

Oregon’s “Cool Schools Initiative”101 is an example of a state’s strong commitment to investing in public schools by creating a fund to finance low-cost energy retrofits. In 2011, the state Department of Energy (DOE) used $2 million in unused stimulus funding to conduct school energy audits, which generated private sector jobs in the process. Following the audits, the legislature passed the Cool Schools Initiative that extended financing in the form of grants and loans to schools to conduct energy efficiency retrofits. In just its pilot-phase, the program performed audits of nearly 400 schools, negotiated with 12 school districts to provide about $11 million in low-cost retrofit financing and committed to lending $4.7 million to eight school districts to retrofit 28 individual schools.102 The union-owned financial services company, Ullico, partnered with Oregon to invest up to $15 million to identify appropriate investments for energy efficient retrofits for public schools and infrastructure based on the pilot’s initial success.103 The innovation in Oregon is that the state provides the technical services to help local government identify and validate

99 United States Building Energy Efficient Retrofits, The Rockefeller Foundation, Mar. 2012, http://www.rockefellerfoundation.org/uploads/files/791d15ac-90e1-4998-8932-5379bcd654c9-building.pdf100 Implementation Guide, Billion Dollar Green Challenge, Jan. 15, 2013, http://greenbillion.org/resources/ 101 More information about the Cool Schools Initiative is available here: http://www.oregon.gov/energy/SCHOOLS/COOL_SCHOOLS/Pages/Overview.aspx 102 “American Federation of Teachers President Randi Weingarten and Ullico Join Gov. Kitzhaber to Announce Investment of up to $15 Million in Oregon Schools to Support Cool Schools Initiative,” AFT Press Release, Nov. 10 2011, http://www.aft.org/newspubs/press/2011/111011.cfm 103 Ibid.

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energy efficiency needs that make a project viable. Additionally, the state provides support to create financing models, which makes it feasible to complete low-cost energy efficiency upgrades. In effect, this reform centralizes the process ensuring scale efficiencies and a higher degree of expertise. States could consider a policy like this not just in colleges and schools, but across the public infrastructure.

Clinton Global Initiative: Financing Energy Efficient Retrofits

In June 2011, the American Federation of Teachers (AFT) joined the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), the Building and Construction Trades Department (BCTD), and other unions in a multi-year commitment to action as part of the Clinton Global Initiative (CGI) pledge. AFT committed to encourage the use of workers’ capital for the purpose of large-scale investments in the reconstruction of America’s built environment. Working with money managers, consultants, pension funds and other interest parties, the commitment will finance the construction and repair of quality public infrastructure, which will result in at least $10 billion in worker capital invested in this area within five years.

The commitment also includes a pledge to invest $10 to $20 million in energy efficient retrofits, and an effort to train 40,000 new apprentices and 100,000 mid-career constructions workers in the skills necessary to work on 21st century infrastructure projects.104 To date, the commitment has reached more than $2.7 billion of its total goal.105

Clinton Global Initiative: Investing in Post-Sandy Reconstruction and Other Critical Infrastructure

As part of the CGI pledge, the New York City Teachers Retirement System pledged $1 billion in new investments for infrastructure projects, such as improvements to transportation, power, water, communications and housing, in New York City and throughout the tri-state area.106 While all projects will be rated on the basis of their return and the fund’s fiduciary standards, potential investments could range from repairing bridges to rebuilding 104 “NYC Teacher Pension Fund Pledges $1 Billion to Investments in Post-Sandy Reconstruction and Other Critical Infrastructure,” Clinton Global Initiative, Press Release Dec. 13, 2012, http://press.clintonglobalinitiative.org/press_releases/nyc-teacher-pension-fund-pledges-1-billion-to-investments-in-post-sandy-reconstruction-and-other-critical-infrastructure/105 Ibid.106 Ibid.

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housing destroyed by the hurricane.107 Besides repairing and upgrading facilities used by hundreds of thousands of New Yorkers, the infrastructure fund could create thousands of jobs.108

Private Equity and Other Partnerships with Private Investors

PPPs that rely on private equity are often mentioned as a solution to address infrastructure financing challenges, especially as shrinking revenues has states considering alternative financing that could permit them to stretch limited resources and moving toward PPPs models of one kind or another.109 However, implementation can be complicated and raise concerns that should first be addressed, especially if a PPP is considered for something other than private investment through municipal bonds, such as a long-term lease agreement or sale and leaseback agreement. Since not all types of infrastructure provide adequate revenue to support this approach, the public’s interest should be cautiously deliberated, as private profits are extracted from public infrastructure. Private investors who promise job creation from a PPP should be held accountable, and the jobs and rights of the employees should be protected, thus ensuring that all relevant labor protections are guaranteed, including public ownership and control. PPPs can have their place in the delivery of certain infrastructure projects, but they should be carefully managed to ensure they’re not used to weaken labor standards, eliminate public sector jobs or ignore public interest.

States could:

Pass comprehensive PPP legislation that would enable a state to enter into a contractual agreement with a private sector entity to engage them as a financer of infrastructure projects or as a provider of infrastructure related services if relevant labor protections were guaranteed. PPP legislation is an important first step between a public sponsor and a private entity, as it provides a level of predictability and transparency for the private partner to more actively participate in these kinds of arrangements, as the legislation typically prescribes a list of standards and rules, which govern a contract. Thirty-one states have enabling PPP legislation for highways, roads and bridges and 21

107 Ibid.108 Ibid.109 “Infrastructure Investment and Policy,” The Bureau of National Affairs, Inc., Vol. 2, No.34, Aug. 22, 2011.

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states have legislation for transit projects.110 Although states should be encouraged to use public financing over private financing whenever possible, particularly when municipal bonds are at record lows, debt limits and other constitutional requirements can limit that option, forcing states to seek private capital to finance critical projects.

Create specialized government entities (often called PPP units) to ensure that technical capacity and expertise is in place so that PPP deals could be properly evaluated in order to protect public interests. Policymakers don’t always have the right skill sets to effectively scrutinize multifaceted PPP proposals that often involve assessing complicated pricing deals, and as a result could unintentionally negotiate a bad deal for taxpayers. A PPP unit could therefore fulfill this skill gap and provide functions, like quality control, policy development and technical assistance as well as promote PPPs, thus providing a necessary safeguard to uphold public interest. States should consider also including voices in the decision-making process that represent public interest and labor, among other stakeholder groups to ensure their interests are well-protected, including public input and access to information prior to and throughout the bidding process. Only three states have dedicated units – California, Virginia and Michigan.111

Bar or limit certain privatization services. Some states already prohibit the privatization of services, like corrections, that have a high level of responsibility, and when it’s determined that a public employee can perform the service. Additionally, states could call for a thorough evaluation of all in-house alternatives, with public employees and unions providing input in preparing alternatives.

Establish prequalification and responsible contracting policies that ensure public contracts are awarded to responsible bidders, with demonstrated track records of providing high quality work and meeting project deadlines. This could include a screening process that requires bidders commit to meeting certain responsible contracting standards, including good wage and benefit requirements for workers, worker preference to those who would be displaced by a new contract,

110 Emilia Istrate and Robert Puentes, “Moving Forward on Public Private Partnerships,” Brookings-Rockefeller, Dec. 2011.111 Ibid.

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correctly classifying workers as employees and providing a history of work performed for other government agencies.

Hold contractors accountable to the standards of the contract through evaluation, with results made available to the public. This is especially important for contracts that have an automatic renewal clause. One option for states could include setting up a clearinghouse where wage and hour, safety violations and environmental fines and penalties are advertised to public and private owners of construction projects.

Lessons LearnedPPP contracts that lack certain safeguards can end up costing government more in the long-run. For example, in 2008 Chicago signed a 75-year contract with a private company to operate its parking meters in return for a $1.1 billion payment.112 Since taking over the meters, the company has raised rates each year, which now stand at $6.50 per hour – the highest amount charged by downtown parking meters in the U.S. California signed a 35-year contract with a private company that agreed to finance, build and manage the South Bay Expressway – a toll-road, with revenues paid to investors.113 The company filed for bankruptcy in 2010 – just three years after the commitment was made. Virginia also has experience dealing with a failed PPP. Since entering into a contract with a private company to build and manage the Dulles Greenway in 1993, the highway is burdened with debt and tolls continue to rise.114

Project Management and EfficiencyAs new financing strategies are being developed, opportunities to eliminate wasteful spending and inefficiencies could also be explored to ensure that tax dollars are spent responsibly. Additionally, more monitoring and data collection could be done to evaluate return on investment for money spent on various projects.

112 “Dubious Distinction for Downtown Parking Meters,” CBSNews.Com, Dec. 27, 2012, http://www.cbsnews.com/8301-201_162-57560922/dubious-distinction-for-chicago-parking-meters/ 113 “South Bay Expressway emerges from bankruptcy,” U~T San Diego, Apr. 4, 2011, http://www.utsandiego.com/news/2011/apr/14/south-bay-expressway-emerges-bankruptcy/ 114 “Dulles Greenway: Deal or No Deal?,” Washington Business Journal, Feb. 8,2013, http://www.bizjournals.com/washington/print-edition/2013/02/08/dulles-greenway-deal-or-no-deal.html

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States could:

Set clear limits on the use of Design-Build to ensure that competitive bidding laws aren’t bypassed and labor protections as well as other important protections are in place. For example, states could restrict its use to public works projects that exceed a certain cost threshold. States could also consider limiting the authority on a project-by-project basis, with appropriate legislative authority. States could consider reserving this type of bidding method for projects where design and construction activities are highly specialized. If a state decides to permit the use of design-build or an alternative bidding method, all relevant labor protections should apply. Lastly, states could propose a rule that design, inspection and ongoing maintenance and operational services of public works projects remain as public services and all collective bargaining agreements are honored when alternative bidding methods are used.

Mandate public–private cost savings analyses before contracting out work that can be done by public sector employees.115

Require private contractors to submit a performance history as part of a procedural requirement that accompanies responsible contractor provisions prior to awarding a contract. It could include a description of past work performed for government agencies and a general assessment showing whether the work was delivered safely, on schedule and within budget.

Foster greater capacity and collaboration among government agencies responsible for infrastructure spending to conduct oversight activities and share best practices.

Looking ForwardSeveral pieces of federal legislation that impact infrastructure spending are either waiting for Congress to approve them or set to expire in the near future unless reauthorization occurs. Democratic governors are encouraged to put pressure on their congressional delegations to urge them to pass these bills calling for more federal funding. Failure to address these issues in a timely matter could impact infrastructure projects in every state, thus putting the public’s safety at risk and increasing economic uncertainty, with job loss possible.

115 See also: Minnesota Taxpayers Transportation Accountability Act Minnesota Statutes 2008, section 161.3203, subdivision 4 (Laws 2008, Chapter 287, Article 1, Section 16); most recent version published: https://www.revisor.mn.gov/statutes/?id=161.3203

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Whenever public money is used in any form, protections should be in place to guarantee that such programs uplift the states and local communities and don’t contribute to the lowering of living standards of workers by reducing wages and benefits. When federal dollars or assistance are used to leverage funds, as in the items listed below, all relevant labor protections should be guaranteed.

Surface Transportation Reauthorization, MAP-21President Obama authorized more than $105 billion of funding for FY 2013 and 2014 in July 2012 for surface transportation programs. By signing the Moving Ahead for Progress in the 21st Century Act (MAP-21)116, he positively altered the policy and programmatic structure for transportation infrastructure investments, creating a more efficient, performance-driven multimodal program, while also modernizing highway, transit, bike and pedestrian programs established over a decade ago that have since become outdated. Although a good first step, it’s a patch and only a drop in the bucket compared to our actual needs. The legislation currently requires reauthorization every two years, so federal highway investment is only guaranteed through FY 2014. HTF revenues currently don’t cover transportation infrastructure needs after adjusted for inflation, the uncertainty of future reauthorizations and funding levels remain uncertain unless Congress takes action to revise or replace the funding source (e.g., motor fuel taxes) so that revenues are aligned with current needs.

Passenger Rail Investment and Improvement ActSigned into law in 2008, the bipartisan Passenger Rail Investment and Improvement Act (PRIIA) provides Amtrak, our national passenger rail service, with realistic multi-year funding levels and rejected risky privatization measures designed to starve the carrier, sell-off its most prized routes and assets and hollow out the remainder of the network. The bill also strengthened Buy America provisions, provided some protections for Amtrak employees in the event of a transition to another provider of passenger rail and continued the application of prevailing wage requirements of rail construction work. PRIIA expires this year unless Congress acts to reauthorize it, which would provide the opportunity to advance a long-term modernization plan for Amtrak and our national rail system.

116 Moving Ahead for Progress in the 21st Century Act (MAP-21), A Summary of Highway Provisions, Jul. 17, 2012, http://www.fhwa.dot.gov/map21/summaryinfo.cfm

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Water Resources Development Act The Water Resources Development Act (WRDA) is a package of legislation that authorizes water projects, such as levee repair, harbor protection, beach preservation, flood control, emergency management and water supply as well as most other water infrastructure having to do with navigation, recreation and the environment. It preserves our national health and boosts job creation, along with maintaining and increasing federal funding for water infrastructure programs. WRDA currently requires biennial authorization from Congress, and recently passed the Senate Environment and Public Works Committee in March on a bipartisan vote.117 A key provision included in the reauthorization bill is legislation that would create a Water Infrastructure Finance and Innovation Authority (WIFIA). WIFIA would provide low-interest federal loans to help communities with pipe replacement, build or upgrade treatment plants, undertake wastewater, reuse and desalination projects as well as new water supply projects in order to address water infrastructure challenges. Modeled after TIFIA – a successful program for the transportation sector – WIFIA would establish a financing mechanism within the EPA for water infrastructure investment, with an authorization of $50 million per year for five years, beginning in 2014 and ending 2018.118

Water Quality Protection and Job Creation ActThe Water Quality Protection and Job Creation Act of 2013119 would renew federal government’s commitment to addressing the significant need our nation has for wastewater infrastructure. It calls for investing $13.8 billion over five years in wastewater infrastructure through the SRF, in addition to other efforts to improve water quality. It would also give two more options for long-term, alternative financing mechanisms to provide several billion in supplemental funds for clean water infrastructure. The legislation also addresses the nation’s long-term water infrastructure needs by establishing the Clean Water Trust Fund and the Water Pollution Control Investment Act. These innovative financing mechanisms will deliver environmental and

117 Merkley Passes Infrastructure Jobs Bill Through Committee, Oregon Senator Jeff Merkley Press Release, Mar. 20, 2013, http://www.merkley.senate.gov/newsroom/press/release/?id=172f2d41-d9a3-44ec-9324-c99adebfc73a 118 Water Resources Development Act of 2013, http://www.epw.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_id=80046722-a3c0-2ffb-bc3e-d936ea2e2aef 119 A more thorough summary of the proposed Water Quality Protection and Job Creation Act is available here: http://www.cleanwaternetwork.org/sites/default/files/Summary%20of%20Water%20Quality%20Protection%20and%20Job%20Creation%20Act%20(3).pdf

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economic benefits for future generations and create thousands of jobs in the hard-hit construction sector, helping to tackle the country’s massive wastewater infrastructure deficit. It’s anticipated that this Act would create thousands of new, domestic jobs in the construction and wastewater sectors through increased investment in wastewater infrastructure, lessen the cost of building and maintaining that infrastructure and promote energy- and water-efficiency improvements to publicly-owned treatment facilities in order to decrease possible long-term operation and maintenance costs.

Building Infrastructure Finance and Innovation Act The Building Infrastructure Finance and Innovation Act (BIFIA) of 2013 would make federally secured loans available to U.S. building owners, including state and local governments; higher education; schools; and hospitals as well as agricultural, commercial and residential owners, to either construct energy-efficient buildings or make efficiency upgrades to existing buildings that would reduce emissions. Funds could be used to leverage private capital. The purpose of the legislation is to encourage building owners to take voluntary action to reduce emissions of air pollutants, per section 302 of the Clean Air Act, which would stimulate investment that generates new jobs and promote entrepreneurship and innovation in clean technology industries.

Marketplace Fairness ActThe Marketplace Fairness Act120 would enable states to require out-of-state retailers, even those without a physical presence in the state, to collect sales tax. The bill doesn’t require states to do it. Retailers with yearly remote sales of $1 million or less would be exempt under the current bill. States that have a sales tax now request that consumers voluntarily pay the tax on online purchases, although most rarely do. The bill would give states another revenue source that could be used to fund infrastructure projects or other services, especially given that some governors have indicated this preference.

Supporting Actions to Protect First Responders

120 “Lawmakers unveil an online sales tax bill, again” Politico, Feb. 15, 2013, http://www.politico.com/story/2013/02/lawmakers-unveil-an-online-sales-tax-bill-again-87695.html

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Firefighters are the frontline responders to all natural and man-made disasters. They should be properly resourced, and the federal government should not shirk its responsibility to assist in funding training, staffing and response programs and grants.

Assistance to Firefighters Grant

The Assistance to Firefighters Grant (AFG) program, administered by the Federal Emergency Management Agency (FEMA), has pumped billions of dollars directly into local fire departments, since its authorization in 2000. AFG has helped communities purchase apparatus, protective equipment, Hazmat suits and supplies; turn out clothing and EMS equipment and provides training to firefighters; and paramedics in all 50 states. The money helps augment local resources.

Staffing for Adequate Fire and Emergency Response

The Staffing for Adequate Fire and Emergency Response (SAFER) program, also part of the FEMA Grants Directorate, has helped communities hire, retain and bring laid off firefighters back to duty during the economic crisis. More than 10,000 firefighting jobs have been restored or protected under SAFER, since the economic collapse of 2007. SAFER also allows communities to grow their fire departments to meet national consensus standards and ensure adequate staffing. Federal dollars are used to supplement local resources to ensure that fire departments large and small have the staffing to meet any challenges. Even with impending cuts through sequestration, the program should be maintained.

Urban Area Security Initiative and the State Homeland Security Grant Program

Both the Urban Area Security Initiative (UASI) and the State Homeland Security Grant Program (SHSGP) provides needed resources for large metropolitan areas and state government resources for emergency managers to plan, train and prepare for any response.

Promoting Fair Wages and Benefits for First Responders

Like other workers, firefighters and first responders should be entitled to fair wages and benefits. Democratic governors recognize that these issues are primarily dealt with by local government. However, certain actions being considered by Congress may be harmful to both firefighters and local government if legislation were to pass.

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More than 70 percent of all firefighters aren’t part of the Social Security system. As a result, both the employees and public employers have developed retirement programs based on that contingency. There are several proposals being advanced by members of Congress that would force all non-covered employees into Social Security. This mandatory coverage would require both employees and employers to contribute 6.2 percent into Social Security. The result would be financial hardship to both the individual and governmental employer. In today’s economic climate these resources simply aren’t available. Democratic Governors should consider reaffirming our position in opposition to mandatory coverage.

For years, public pension plans have been immune from intrusions by the federal government. These programs have been governed by state or local statute and have complied with the standards developed by the Government Standards Accountability Board (GSAB). The current system has worked well and served both the interests of the employees and state and local governments. The ill-conceived Public Employee Transparency Act (HB 567) introduced in the 112th Congress would be an unnecessary and unwelcome intrusion into the financial and accounting purview of state government.

State and local governments and their respective employees have strived to provide fair wages and benefits over the years. Proposals that would force employees to pay federal taxes on the value of their employer-sponsored health and retirement benefits would greatly reduce the standard of living for dedicated public employees and should be opposed.

Conclusion

Lost opportunity and productivity describe the current state of our infrastructure. Congested highways, crumbling bridges, dilapidated airports and leaky pipes threaten our nation’s competitive edge at a time when efficiency is vital to economic growth and job creation. Underinvesting in infrastructure hurts businesses and workers. Democratic governors across the U.S. are using various financing mechanisms to undertake infrastructure projects in their own states, with some making bold funding changes in order to generate more revenue for infrastructure. Yet bi-partisan support for more spending at the national level is necessary to adequately address America’s infrastructure challenges, especially when our economy is so fragile and jobs are desperately needed.

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