Public Infrastructure Spending After the Pandemic — An Update

Despite the shock to government finances caused by the pandemic, states have not reduced capital spending.

On election day, voters weighed weather to authorize more than $65 billion of bond measures. Among the largest approved was a $4.2 billion environmental bond authorization for climate resiliency and other projects by the state of New York and $3.2 billion by the San Diego Unified School District. According to Bloomberg, bonds on the ballot were more than double the $27 billion last year and among the highest volume of bonds up for a vote since at least 2009.

It was also a few weeks ago this time last year that the House of Representatives passed the Infrastructure Investment and Jobs Act (IIJA). Still, despite the influx of federal funding coming to state and local governments, voters did not spurn approving projects or new and continued capital funding.

But while Massachusetts voters approved a constitutional amendment to create an additional “millionaires” tax that would add an estimated $1.3 billion annually toward public education, roads and bridges, and public transit. Californians rejected a new tax that would have raised up to $4.5 billion annually for EV rebates, charging stations, and wildfire suppression and prevention programs.

It’s been quite the year for infrastructure! But how is public sector spending on capital investments even without the IIJA? In 2020, contrary to initial expectations, government infrastructure investment increased. And data from the Bureau of Economic Analysis and the National Association of State Budget Officers (NASBO) offers some updated insights for 2021.

Capital Spending is Increasing, but Funding Mix Stays the Same

After the Global Financial Crisis (GFC) state governments started using less bonding for capital spending — this also coincided with less federal aid. To make-up the difference states began to increase their own funding to spend on capital, mostly through reforming transportation-related revenues. Some examples include:

• Between 2013 to 2021 33 states and the District of Columbia enacted legislation that increased their gas tax in different ways according to the Urban Institute.
• In Connecticut, the state is relying more on sales taxes to fund its transportation program than oil and gasoline taxes.
• Oregon is currently testing a voluntary road-usage fee program that allows drivers to pay 1.8 cents per mile traveled in an effort to collect highway funding from electric vehicle drivers.

As the NASBO data shows, states are increasing their capital expenditures on a nominal basis. But the mix of funding sources is staying about the same — with a slight uptick in general funds and slight decrease in other state funds.

As states receive IIJA funding over the next several years, it will be interesting to see if this changes the funding mix of their capital programs.

Infrastructure Spending is Still Low, Will 2022 be Different?

Infrastructure investment comes in two forms: investment in expansion or maintaining current assets. Voters like to see big expansive projects, but the basic stuff often gets neglected. By failing to keep-up with deferred maintenance, projects typically end up costing more to fix with each year of delay.

With time, physical deterioration, obsolescence, or accidental damage all cause fixed assets to decline in value, or depreciate. At the same time governments spend money on new fixed assets, or what the BEA calls fixed investment. If investment fails to keep up with depreciation, that creates an infrastructure funding shortfall that undermines the quality of assets and may result in catastrophic infrastructure failure.

The good news is that compared to 2019, state and local government investment in fixed assets increased year-over-year in 2020 and 2021 despite the pandemic. This contrasts four years of decline following the GFC. However, the U.S. is still far below where it would be had it stayed on its pre-GFC investment growth rate.

Infrastructure Spending is a Marathon, not a Sprint

The Infrastructure Investment and Jobs Act (IIJA) authorized $1.2 trillion of spending, including $550 billion or new authorizations. A need for additional infrastructure investments has remained high since 2008, given the state of current infrastructure, its effects on competitiveness, and potential to create economic growth. Although there have been some new investments in transportation and water infrastructure since the GFC, they rely primarily on user fees rather than general tax revenues, and more funding has been needed.

One issue is that existing infrastructure is deteriorating due to poor maintenance and a lack of repairs. The American Society of Civil Engineers (ASCE) estimated in it’s 2021 report card there was a $2.6 trillion funding need from 2020 to 2029 (most of which was in surface transportation). While this issue is the most visible one affecting infrastructure across different sectors, other issues such as deficient public transit systems may have greater long-term impacts on competitiveness. For decades, the government has primarily allocated 80% of transportation infrastructure funds towards highways, while only 20% was given to public transit options.

The IIJA seeks to remedy this underinvestment with a “a once-in-a-generation investment in our nation’s infrastructure and competitiveness.”

Although IIJA is a much-needed investment, it doesn’t end there. The federal government needs to provide greater long-term support for public transit systems beyond single legislative action, which would foster investment in infrastructure overall.

Across the country funding challenges persist. Various transportation and water systems differ significantly in terms of their funding sources, ownership structures, and maintenance requirements. As a result, there is no single approach that would lead to optimal investments in all areas at once. For example, while toll roads have been an increasingly popular way of financing new construction projects or repairs to existing roads, it is often difficult to develop new toll roads due to community resistance.

The IIJA is a needed starting point. Beyond this Administration the United States needs to further develop a funding strategy that takes into account the different needs of different sectors while also highlighting opportunities for increased collaboration among the public and private sector.

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