Using Value Capture Strategies to Finance Transportation Infrastructure

There are many different types of infrastructure, but they tend to be lumped together. Certainly repairing potholes and building a new bridge is infrastructure, but are they on the same scale as a new airport or a national high-speed rail network? To differentiate between smaller local or regional projects and the larger, big-ticket national projects, some are calling the latter, “megastructure.”

There is a consensus that the U.S. has been underfunding its infrastructure. The American Society of Civil Engineers (ASCE) has stated that just putting existing infrastructure into a state of good repair will cost in the vicinity of $2 trillion. And that doesn’t include trillions more for new infrastructure required by the additional 100 million people that will be here by 2050.

Strained federal and state budgets will be hard pressed to lay out these trillions of investment dollars using conventional tax-and-invest models. But the advantage of a well-designed transportation project is that nearby properties generally experience an increase in value. Isn’t it then in the private developer’s interest to subsidize some of the public sector’s infrastructure construction costs? That is the theory behind value capture financing.

How Did We Get Here

A lament, spoken by both lawmakers and transportation advocates, is that funding transportation projects has never been so politicized. It should not be — there is no such thing as a Democratic road or a Republican tunnel. Unlike the unrelenting, three-month continuing resolutions to fund transportation — as has become the standard operating procedure over the past few years — legislators used to craft a deal for five or more years. Legislation of that duration gives certainty to developers, manufacturers, contractors and the states. The surface transportation bill that was signed last year, MAP-21, only secured $105 billion in funding for just 27 months, not the five years at higher levels that many wanted.

So what’s changed? The Highway Trust Fund (HTF) is broke. Unlike past years when the federal gas tax could fund the HTF on its own, it has been necessary to use general tax revenues to keep the fund solvent. There is resistance to raise the federal gas tax because since the 1980s, 20 percent of the revenue from tax has been allocated to transit. Some legislators have had issues with the transit allocations, which have been used to fund bike paths, sidewalks and building restoration. Fuel tax revenues are down because gas mileage has improved and green vehicles are now available. But the biggest change has been the ban on congressional “earmarks.” Prior surface transportation bills breezed through Congress with overwhelming support because the votes were incentivized by earmarked projects in key congressional districts. Every congressman could have a photo-op with a shovel at a ground-breaking ceremony for a new project. With earmarks gone, there is less motivation to compromise.

The earmark game has evolved. Its latest incarnation is disaster relief appropriation. Victims of Hurricane Sandy have suffered from the damage done by the monster storm. Congress, after some controversy, recently passed the second part of the $60 billion relief bill. But not all funding is targeted at direct losses from Sandy, and not all the funding will go to the affected areas. Some spending is for a new roof on the Smithsonian museum in Washington. Tens of billions will not be spent until 2015, much to repair federal assets and to mitigate “future disasters.” From a Northeast infrastructure standpoint, there are positives — more than $5 billion is appropriated for tunnel and infrastructure repair, including more than $300 million for Amtrak. Amtrak can now start work on the portals in New York City’s Hudson Yards for the two new tunnels under the Hudson River. But is this a prudent and productive way to fund critical infrastructure — lurching from disaster to disaster? It bears noting that the recent “fiscal cliff” showdown between the President and Congress resulted in increased federal taxes by $60 billion, ironically the same amount of the Hurricane Sandy relief bill. Meanwhile, the federal government continues to run annual trillion dollar deficits, federal debt is racing toward $17 trillion, sequestration — the across the board cuts totaling $1 trillion over 10 years — is still on track for this March, and the debt ceiling will have to be raised yet again in May. This fiscal path is unsustainable, so any thoughts that future infrastructure spending will be easily accommodated by general tax revenues, is optimistic at best.