Capital Financing After the Great Recession
By Todd Haggerty and Erica Michel | Vol . 22, No. 31 / August 2014
Did you know?
- The federal gas tax rate, currently 18.4 cents per gallon, has not been raised since 1993.
- The Port of Baltimore is the 11th largest in the United States. The largest is in Houston, Texas.
- Between November 2012 and November 2013, California’s cap-and-trade auctions generated $552 million in state revenue.
The Great Recession and its protracted aftermath not only strained state general funds or operating budgets, but also limited state infrastructure budgets. Lawmakers often were forced to make difficult choices between funding capital needs or programs in the operating budget. Adding to the challenges of financing infrastructure improvements has been the slow growth of gas tax revenues, traditionally dedicated for use in transportation projects. Congress also seems unable to agree on the future of the Highway Trust Fund, making federal funding for state infrastructure projects uncertain. So it is no surprise that, according to Standard & Poor’s, public infrastructure investment has been declining since 2009.
However, even in the face of a slow economic recovery and a host of other challenges, states are again beginning to take on new capital infrastructure projects. Many are doing so with creative financing models in addition to more traditional financing.
Although state infrastructure projects historically have been financed by issuing long-term debt and federal aid, lawmakers in the post-Great Recession world are considering setting up public-private partnerships, using rainy day funds and developing other non-traditional tools to finance capital improvements. Some examples follow of innovative ways states are funding capital improvements.
California. In 2006, the Legislature passed Assembly Bill 32, The Global Warming Solutions Act, which established the goal of reducing green-house gas emissions in the state to 1990 levels by 2020. To achieve this goal, the law allowed the California Air Resource Board to establish a cap-and-trade program, which is expected to bring billions in revenue to the state. California lawmakers plan to use a portion of these revenues to help fund the state’s new high-speed rail project, which is designed to connect San Francisco and Los Angeles by 2029. The Legislature approved $250 million in cap-and-trade revenue funds for the FY 2015 budget year, and 25 percent of cap-and-trade revenues in subsequent years. Federal, local, private and bond revenues also will be used in the project. It is worth noting that the state faces some legal challenges to the cap-and-trade spending plan.
Maryland. The Panama Canal is being expanded to allow for larger freight vessels, putting pressure on U.S. port cities to make the necessary adjustments to accommodate the larger ships. In Maryland, strained revenues and the Great Recession meant the state had few funds to make capital upgrades at the Port of Baltimore. The state turned to public-private partnerships to help upgrade the port to create a 50-foot deep berth that can accommodate larger ships. The state leased the Seagrit Marine Terminal to a private company and, in exchange, the company made the necessary upgrades for the port to work with the larger freight vessels. A larger berth, however, is not the only thing Baltimore needs to maintain a competitive advantage. Once goods arrive at the port, CSX Transportation Inc. transports these good by rail. The state also entered into a public-private partnership with CSX to raise the height of Baltimore’s Howard Street Tunnel. This allows CSX to double-stack containers on their freight carriers, transporting twice the amount of goods from the port.
Texas. In 2013, Texas voters approved a plan to fund $2 billion in water infrastructure projects from the state’s rainy day fund. The $2 billion will support the State Water Implementation Fund for Texas, which will be authorized to provide assistance for projects that either conserve or reuse water or that will expand the water supply. The plan will provide low interest rates and favorable payment periods to local governments. The Texas Water Redevelopment Board currently is developing a process to prioritize projects that apply for funding. An advisory committee consisting of the state comptroller and members of the Legislature will oversee program management.
Infrastructure and capital projects play a vital role in state economies, but short-term program budget needs often can make it difficult for states to invest in major capital projects. Historically, states have received a significant share of infrastructure and capital funding from the federal government, but those funds are now in jeopardy as Congress struggles to find alternatives to the lagging gas tax. With state budgets becoming stronger, many are looking to invest in longterm projects to spur economic growth. These economic development projects are using innovative financing mechanisms that rely less on federal funds and traditional long-term debt and that could be the future of capital financing in the states.