[Senate Hearing 111-815]
[From the U.S. Government Publishing Office]
S. Hrg. 111-815
INVESTING IN INFRASTRUCTURE: CREATING JOBS AND GROWING THE ECONOMY
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
ON
EXAMINING JOB CREATION AND ECONOMIC GROWTH THROUGH INVESTMENT IN OUR
NATION'S INFRASTRUCTURE
__________
SEPTEMBER 21, 2010
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York JIM BUNNING, Kentucky
EVAN BAYH, Indiana MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii JIM DeMINT, South Carolina
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin KAY BAILEY HUTCHISON, Texas
MARK R. WARNER, Virginia JUDD GREGG, New Hampshire
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado
Edward Silverman, Staff Director
William D. Duhnke, Republican Staff Director
Mitchell S. Warren, Professional Staff Member
Lisa Frumin, Legislative Assistant
Shannon Hines, Republican Counsel
Jeffrey M. Wrase, Republican Chief Economist
Dawn Ratliff, Chief Clerk
Brett Hewitt, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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TUESDAY, SEPTEMBER 21, 2010
Page
Opening statement of Senator Merkley............................. 1
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 5
Chairman Dodd
Prepared statement....................................... 38
Senator Johnson
Prepared statement....................................... 38
Senator Crapo
Prepared statement....................................... 39
WITNESSES
John F. Kerry, Senator from the State of Massachusetts........... 2
Prepared statement........................................... 39
Roy Kienitz, Under Secretary for Policy, Department of
Transportation................................................. 7
Prepared statement........................................... 41
Responses to written questions of:
Chairman Dodd............................................ 63
Alan B. Krueger, Assistant Secretary for Economic Policy and
Chief Economist, Department of the Treasury.................... 9
Prepared statement........................................... 45
Responses to written questions of:
Chairman Dodd............................................ 64
Edward G. Rendell, Governor, Commonwealth of Pennsylvania, and
Cochair, Building America's Future............................. 23
Prepared statement........................................... 49
Responses to written questions of:
Chairman Dodd............................................ 96
Robert Wolf, Chairman and Chief Executive Officer, UBS Americas.. 27
Prepared statement........................................... 53
Responses to written questions of:
Chairman Dodd............................................ 97
Senator Vitter........................................... 100
Donald Shubert, President, Connecticut Construction Industries
Association, Inc............................................... 29
Prepared statement........................................... 54
Responses to written questions of:
Chairman Dodd............................................ 101
Additional Material Supplied for the Record
Prepared statement submitted by the California Infrastructure and
Economic Development Bank...................................... 104
Prepared statement submitted by the Construction Management
Association of America......................................... 109
Letter submitted by the National Association of Manufacturers.... 112
Letter submitted by the Association of Metropolitan Water
Agencies....................................................... 114
(iii)
INVESTING IN INFRASTRUCTURE: CREATING JOBS AND GROWING THE ECONOMY
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TUESDAY, SEPTEMBER 21, 2010
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:03 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Jeff Merkley, presiding.
OPENING STATEMENT OF SENATOR JEFF MERKLEY
Senator Merkley. I call to order this meeting of the
Banking, Housing, and Urban Affairs Committee. Colleagues,
thank you for being here for this conversation about how to
finance our critical infrastructure needs and, in particular,
the role of a potential National Infrastructure Bank in helping
to finance that infrastructure.
You have heard it before, and you will hear it again: Our
Nation's infrastructure is a state of shameful disrepair. Yet
by investing in our infrastructure and providing our
communities and constituents with the physical building blocks
of society, we can create hundreds of thousands of jobs. And
just as importantly, we put in place a critical foundation for
future economic growth.
The pipeline disaster in California 2 weeks ago now joins
the I-35 disaster in Minnesota as yet another wake-up call
alerting us to the state of our infrastructure. From our
railroads to our water systems to our schools and universities,
our backlog of needed maintenance and our failure to maintain
modern infrastructure act as a drag on our economy. We have
4,000 dams deemed deficient. One in four of the Nation's
bridges are either structurally deficient or functionally
obsolete. The EPA estimates that an investment of $255 billion
is needed over the next 20 years to update or replace water and
wastewater systems. We have a backlog of $78 billion in our
public transit systems, and one in three urban and rural roads
are in just fair, mediocre, or poor condition.
Just as critical is this point: Right when our economy
needs a boost in employment, maintaining that infrastructure
would be a major source of jobs. Infrastructure projects put
people to work immediately, particularly our construction
sector that has been so hard hit. Infrastructure lays the
groundwork for a strong and vibrant economy into the next
generation. Our businesses cannot grow without a safe,
reliable, and efficient transportation network, ready access to
safe and clean water, reliable and safe delivery of energy.
We also know that with significant deficits to deal with,
we need to look at innovative ways to finance this necessary
investment in our infrastructure. One of the ideas that has
been much discussed in recent months is the idea of a National
Infrastructure Bank. Such a bank could make merit-based
decisions to prioritize projects of regional and national
significance. And by using tools such as loans and credit
support and by bringing private capital into the market, the
bank could bring new financing tools and hopefully additional
financing to this area where our needs are so significant.
I thank our witnesses for being here. We look forward to
all three panels, but we begin today with my friend Senator
John Kerry, who has a strong interest in the challenges of
maintaining and expanding our infrastructure here in America,
and we look forward to his comments.
Welcome, Senator Kerry.
STATEMENT OF JOHN F. KERRY, SENATOR FROM THE STATE OF
MASSACHUSETTS
Senator Kerry. Thank you very, very much, Chairman Merkley,
and I apologize for being a moment late. I want to thank the
other Members of the Committee. I am pleased to come back here
as a former Member of this Committee. I think it served on it
for 10 years and sat beside Chairman Dodd and worked with
Senator Shelby in that period of time. And I have long
advocated for the need for us to try to address the question of
America's infrastructure.
``Infrastructure'' is a horrible word. It is a lost word to
many citizens. But when you see a bridge fall down over the
Mississippi or you see, you know, airports clogged and our lack
of adequate generation of radar and other things that we face,
people begin to understand it.
The truth is, Mr. Chairman, that we are living off our
grandparents' and parents' responsibility, sense of
responsibility. We are living off prior generations'
willingness to invest in America. There is a great book called
``The Power Broker'' about Robert Moses and New York, and it is
a tremendous tale of how the Triborough Authority and all of
the great bridges and roads that connected New York to Long
Island and upstate New York and elsewhere provided for the
economic development growth of that State.
The fact is that I believe a National Infrastructure Bank
is the essential way for our country to catch up to the
enormous infrastructure deficit that we face in this country.
Rising economic powers around the world, our competitors--
China, India, Brazil, Mexico, other countries--are all
investing in their future, and they are all investing in their
future much more significantly than the United States. The
truth is we are moving at our current rate toward a secondary
competitive status because of our inattention to the
infrastructure of our country.
Now, there are a lot of ideas about the best way forward. I
think we have to be candid in the beginning of this discussion
and make it clear: Building infrastructure does not come on the
cheap. But it is clear that the most efficient way that we
could galvanize the private sector to actually provide the
investment rather than a big Government approach is, in fact,
to create an infrastructure bank for the United States.
Already, a diverse bipartisan group supports the idea of a
National Infrastructure Bank, including the Chamber of
Commerce, the AFL-CIO, SEIU.
So I believe that if we create new and strong incentives
for investment here in the building blocks for economic
competitiveness, all of which are key to America remaining a
great economic power--the roads, the bridges, the rail,
aviation, other essential infrastructure. You know, countless
communities--I was visiting Fall River, Massachusetts, the
other day. They have a combined sewer overflow requirement by
the courts. The courts have ordered it. They do not have the
tax base, they have no ability to be able to build this on
their own. Already, families that cannot afford it are paying
an additional $800 for a system that the court has ordered that
lasted over a hundred years, and they are going to be building
it for the next hundred years. But none of that is reflected in
the financing structure, which is all immediate and all sort of
pay-as-you-go in the current budget.
President Eisenhower recognized, when he built the National
Highway System, that it was good to bet on American ingenuity
and American economic capacity, and it strengthened our hand in
the cold war. Frankly, all of our infrastructure issues,
whether it is our grid, which is barely existent as a national
grid, or our lack of adequate ability to move people by rail
after 9/11--remember, the only way you could really move people
was by rail for the first few days. The truth is that
infrastructure is directly related to America's economic
strength, and economic strength is directly related to our
projection of power on a global basis.
Now, we are going to disagree sometimes, as we all know. We
are seeing it well exploited in the current political context,
the question of the appropriate size of Government. I think we
all agree that a smaller Government is better and that you want
to try to reduce the size of bureaucracy and so forth. And we
should not get tangled up in the demagoguery that surrounds
that issue. Americans do not want big Government, but I will
tell you what they do want. They want a Government that works
for them effectively. They want as much Government as it takes
to be safe and secure on roads and bridges and rail and
highways and air travel. And businesses want as much Government
as is required to efficiently and cheaply move goods, products,
to market. That means upgrading our Nation's highway system,
our rail, our maritime, our aviation, and modernizing our
electric grid.
Now, just to get a picture of how much we need this, Mr.
Chairman, in 2008, the National Surface Transportation Policy
and Revenue Study Commission called for an annual investment in
our country in infrastructure of $250 billion a year from
Federal, State, and local governments for the next 50 years in
order to meet just the bottom standard of what we need to bring
our infrastructure up to par. We are talking about staggering
sums of money here, and it clearly reflects how much we have
neglected our infrastructure, and it clearly reflects the path
of deterioration that we are on.
Well-functioning infrastructure is not a luxury. It is the
key to connecting and protecting our people and to creating
millions of middle-class jobs for American workers over the
long term, though it is not a jobs bill. That is the ancillary,
sort of side benefit of doing this. It is a bill directly
related to economic strength, directly related to competitive
strength, and directly related to national security. It is
vital to our economic future in the face of global competition.
Quite simply, we are falling behind our main economic
competitors, and the further we fall behind in this race, the
harder it is to catch up and the easier it is for companies to
decide, Well, I am not going to locate my company there because
it costs me so much more to move my goods, it is so much more
difficult to effect business; I am going to go somewhere where
they have got a modern infrastructure capacity.
China. China's 2009 infrastructure spending is estimated to
be 9 percent of GDP, or $350 billion a year, and growing at an
annual rate of 20 percent. China's highway mileage is expected
to surpass the United States' in under 3 years.
Europe's infrastructure bank--they have one--the European
Investment Bank, financed $350 billion in projects from just
2005 to 2009 across Europe, across the continent, helping to
modernize seaports, expand airports, build railroad lines, and
reconfigure city centers.
Brazil. Brazil has invested over $240 billion in their
infrastructure in the past 3 years alone, with an additional
$340 billion planned in the next 3 years. They have unveiled
major initiatives to invest in infrastructure ahead of hosting
the World Cup and the Olympics. And, incidentally, the
infrastructure bank was a central part of their strategy in
attracting the World Cup and the Olympics. And they are using
their infrastructure bank as a key tool to finance this massive
expansion.
So to get back into the game, Mr. Chairman, Members of the
Committee, we need something more than the municipal bond
market system, which is already struggling to support over 80
percent of the infrastructure investment in the United States.
A National Infrastructure Bank would complement existing
infrastructure programs, not compete with it. This is not in
lieu of the highway bill, not in lieu of the FAA bill and other
things. It is a complement to it, and it is a complement that
takes a small amount of public seed money, puts it into a
revolving concept, and leverages anywhere from 6 to 10 times
that amount of money so that you go from $25, $35, $40 billion
of initial investment up to $600, $700, $900 billion of private
sector stake. If done right, Mr. Chairman, this bank can change
the playing field for our country. It would finance projects
from high-speed rail to seaports. In today's newspaper, there
is a big article--I cannot remember if it is the New York Times
or the Washington Post, but it talks about the difficulties we
are having right now getting high-speed rail out there. And one
of the reasons is the freight competition for dedicated track.
We need to build dedicated track for high-speed rail. That is
what they have in France; that is what they have in Japan and
Germany and places. And until we get there, we are not going to
have a first-rate, modern transportation system for our
country.
So I would just close by saying, you know, this can be run
in an open, transparent manner by experienced professionals. It
can have meaningful congressional oversight. We could even
sunset it, which is something that I have proposed, so that
nobody fears that we are building some long-term, eternal
Federal bureaucracy but, rather, it has a purpose, it brings us
back to par, and then we figure out whether we are going to be
a country with a capital budget or how we are going to proceed
in the future.
Americans have always been builders. We built the
Transcontinental Railroad. We built the Panama Canal. We built
the Interstate Highway System. We went to the Moon. But for the
last 25, 30 years now, we have lacked adequate investments in
that building ethic, and the result is we have been without a
strategic plan for all of that period of time, and I believe a
National Infrastructure Bank and the commitment of this
Congress can change that and put us back onto the path that
President Eisenhower noted when he signed the Interstate
Highway System and he said, ``Together, the united forces of
our communication and transportation systems are dynamic
elements in the very name we bear--United States. Without them,
we would be a mere alliance of many separate parts.''
That is the direction we have been moving in. I hope we
will put an infrastructure bank in place, reverse the course,
strengthen America's competitive posture in the world, and give
our citizens the economy and the quality of life that they
deserve.
Thank you, Mr. Chairman.
Senator Merkley. Thank you very much, Senator Kerry, both
for painting the vision of the investment we need to make in
our infrastructure to serve the next generation and create
jobs, but also how the National Infrastructure Bank would play
a critical role in making that happen. So you have kicked off
our hearing very well. Thank you.
Senator Kerry. I appreciate it. Thank you.
Senator Merkley. While our second panel is coming up, I am
going to ask Senator Shelby if he would like to make his
opening statement.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Mr. Chairman. Thank you for
putting together this hearing.
Today the Committee revisits the idea of a National
Infrastructure Bank and the potential of infrastructure
investment to create jobs and enhance economic growth. We have
been told by many experts over the years that infrastructure
spending is an ineffective means to stimulate the economy,
although we know it is important on its own.
As early as January 2008, then-CBO Director Peter Orszag
testified before Congress regarding public works projects. He
stated, ``Even those that are on the shelf generally cannot be
undertaken quickly enough to provide timely stimulus to the
economy.'' But the nonpartisan Congressional Budget Office has
told us repeatedly that infrastructure spending has one of the
lowest bangs for the buck in terms of job creation, if that is
what we are trying to do.
Regardless, in early 2009, the Administration enacted, as
we will recall, a massive stimulus program of over $800 billion
with the promise that unemployment would not rise above 8
percent. Mr. Chairman, unemployment is 9.7 percent right now in
my home State of Alabama and higher than that of a lot of
States. The unemployment rate nationally is 9.6 percent, well
above the 8.2-percent rate when the stimulus was enacted and
well above the Administration's promise of an 8-percent
ceiling. This equates to 2.5 million payroll jobs lost since
the stimulus was enacted.
The President has promised to create jobs. The only thing
his policies have produced, in my opinion, is more Government,
more debt, more regulation, and more unemployment. Americans
are tired of the ``borrow now and pay later'' mentality of this
Administration and its allies in Congress, and they want it to
end.
I agree that investing in our infrastructure is important
to our Nation. I think we all do that. It is a long-term
proposition and one that must be considered carefully and
constructed thoughtfully. Debt-funded infrastructure spending
is not and never will be the most effective way to deal with
shorter-term economic difficulties. Nor do I believe that we
should create under the guise of innovation in infrastructure
finance a new GSE-like structure where taxpayers are put on the
hook for the risk of others.
We already have many ways of funding infrastructure
projects. While they may not be perfect, most involve the
process of appropriating funds through this Congress. I
understand that it may not be as efficient to have Congress
involved, but it does give the American taxpayer a voice in
these multi-million-dollar spending decisions.
When advocates for a National Infrastructure Bank talk
about leveraging taxpayer resources in partnership with the
private sector, I hear private profit and public risk. When I
hear that an infrastructure bank will not cost the taxpayers a
dime, I wonder why Federal resources and guarantees are needed.
When taxpayers are on the hook, Congress must have a role, I
believe. We must agree that we must maintain and modernize our
national infrastructure. It is a must. Neither the creation of
a National Infrastructure Bank nor another $50 billion in
spending would constitute a comprehensive plan for the future.
Rather than expose the American taxpayer to more risk and
waste billions of dollars on ineffective, inefficient programs,
I believe we need to develop a comprehensive long-term approach
to infrastructure investment. I believe that we need an
approach that encourages private sector participation and
investment, one that demands efficiency, effectiveness, and
reasonable return on investment.
But I also believe that we need to protect taxpayers and
make sure that we do not again construct another Fannie and
Freddie under the guise of a National Infrastructure Bank. I
hope we have learned our lesson in that regard. We will see in
the future.
Thank you, Mr. Chairman.
Senator Merkley. Thank you, Senator Shelby.
We will now hear from our first panel. First we will hear
from the Honorable Roy Kienitz, the Under Secretary for Policy
at the United States Department of Transportation. Mr. Kienitz
assists the Secretary in formulating national policies
affecting surface transportation and aviation. Prior to his
appointment to the Department of Transportation, Mr. Kienitz
served as the deputy chief of staff for Pennsylvania Governor
Edward Rendell.
Next we will hear from the Honorable Alan Krueger, who
currently serves as the Assistant Secretary for Economic Policy
of the Treasury Department. He advises the Secretary on all
aspects of economic policy, including current and prospective
macroeconomic developments, development and analysis of the
Administration's economic policy initiatives.
Thank you both for coming, and I ask that you keep your
remarks to approximately 5 minutes. We look forward to hearing
your thoughts. Thank you.
STATEMENT OF ROY KIENITZ, UNDER SECRETARY FOR POLICY,
DEPARTMENT OF TRANSPORTATION
Mr. Kienitz. Thank you, sir. Good morning, Mr. Chairman,
good morning, Senators. Thanks for allowing us to appear today.
I would like to start by saying it is very appropriate that
this hearing is entitled ``Creating Jobs and Growing the
Economy,'' because those are two things where we see a very
powerful role for the type of infrastructure investment we are
talking about here today. Obviously, the things that we do do
create jobs in the short run. But as Senator Kerry said, that
is not our principal aim. That is a wonderful thing to do, but
the principal aim is to build projects that create long-term
economic benefit over decades and generations.
If we select projects correctly, they decrease costs for
business and they increase overall economic productivity, and
that is something that lasts for generations. And that is
really the lesson of the big infrastructure investments of the
past, be they the Transcontinental Railroad, the Interstate
Highway System, the airport system, these generations-long
streams of benefits that the whole economy gets.
As folks here have alluded to, 2 weeks ago the President
gave a speech in which he laid out the initial outlines of a
vision for making a long-term investment in transportation
infrastructure, and that combines both the goal of a long-term
plan but something pretty quick now to get going in the current
environment. And this is a signal that the Administration
agrees with the Members of this Committee and most of the
Members of the House and Senate that a 6-year reauthorization
of surface transportation programs is important and we should
get it done as quickly as possible. And it is a way to get rid
of the long-term infrastructure backlog, but to make these
kinds of investments that will give us long-term change in the
economy.
To accomplish this, the program that we are going to be
proposing will need a robust level of funding, significantly
higher than the current baseline that is in the budgets going
forward. And we are suggesting that a significant share of
these new resources, as much as $50 billion, be frontloaded in
the current environment in the first year. We see that money as
part of the long-term plan, but the traditional method by which
these bills--they are smallest in the first year and grow
largest in the last year, and, now is when the economy needs
help, and hopefully in 4 or 5 years from now the economy will
be humming along. So we are looking at a different investment
profile to start sooner.
Under the Recovery Act, we are finding that bid prices for
a whole range of projects are coming in on average about 20
percent below prior estimates, so just from a bang-for-the-buck
point of view, now is the perfect time to put in a large chunk
of money because we are going to get the same projects for less
money.
Some of the tangible accomplishments of the President's
plan over the next 6 years we hope will be able to rebuild up
to 150,000 miles of roadway; construct and maintain 4,000 miles
of rail; and as part of our up-front proposal, we are proposing
some aviation investments that potentially could help us
rehabilitate or reconstruct 150 miles of runway. This aviation
investment plan would not be part of the long-term plan. We are
not proposing to merge the surface reauthorization and aviation
bills, but we would like to do some of that as part of the up-
front plan.
More generally, we want this to be part of a long-term
plan. The programs at the Department of Transportation have
been counted up over various times. We think on the surface
side there are over 100 individual funding categories right
now. That is traditional where you start with a small,
streamlined program and it grows over time, and it has been 20
years since there has been a major pruning exercise, and we
think that it is time to do much less in the way of categories
and much more in the way of performance-driven budgeting, both
at the Federal and the State level.
The Department in our Strategic Plan that the Secretary has
put out, we have outlined the five strategic goals we want to
pursue, which are all pretty simple: economic competitiveness,
safety, state of good repair of existing assets, environmental
sustainability, and community livability. And we want to have
our investments both on the formula side and on the
discretionary side driven by those priorities.
So the infrastructure bank for our purposes is a way to
direct spending, A, at the strategic priorities we have in a
much more concrete and specific way; and, B, to do it according
to a set of principles of merit-based decisions on what project
to pick and what mode to pick that project in rather than a
set-aside slide of money for each individual category. You have
to make that decision on a project-by-project basis and be
driven by analysis to get the biggest bang for the buck for the
country for these long-term economic gains.
So those are the core principles behind the infrastructure
bank that we see. There are a lot of questions that need to be
resolved. We have yet to make a specific proposal on all the
points that Senator Shelby laid out, and I was glad to hear his
statement; and I think if those are the markers you are laying
down, I think we can meet those markers. But that will
obviously be a conversation we have with this Committee and the
other committees of Congress.
So those are, I think, the principal reasons why the
President has been supportive of this, and then we want to work
with the Members of this Committee and the rest of the Senate
and the House to try to work out details that everyone can
believe in.
Thank you.
Senator Merkley. Thank you very much.
Now we turn to our second testimony from Honorable Alan
Krueger.
STATEMENT OF ALAN B. KRUEGER, ASSISTANT SECRETARY FOR ECONOMIC
POLICY AND CHIEF ECONOMIST, DEPARTMENT OF THE TREASURY
Mr. Krueger. Thank you, Senator Merkley and Ranking Member
Shelby and other Members of the Committee. I appreciate the
opportunity to discuss proposals to improve our Nation's
infrastructure investment.
The President has announced a bold plan to renew and expand
America's transportation infrastructure through an up-front
investment connected to a 6-year reauthorization of the surface
transportation program.
In my testimony, I will discuss several aspects of the
President's proposal. First, I will evaluate why focusing on
infrastructure investment makes sense in the current economic
environment. Second, I will discuss some of the long-term
benefits from increasing our investments in infrastructure. I
will then turn to the core ideas behind the Administration's
proposed National Infrastructure Bank, which were heavily
influenced by the bipartisan work of Chairman Dodd and former
Senator Hagel. Finally, I will highlight a successful,
innovative financing program, Build America Bonds, which could
be a useful tool for the National Infrastructure Bank.
The recession that started with the financial crisis of
2008 has had an exceptionally large impact on the job market.
From December 2007 to December 2009, our country lost over 8
million jobs. While there are positive signs of recovery in
many sectors of the economy, additional steps are needed to
ensure that the recovery stays on track. In this environment,
accelerating infrastructure investment makes good economic
sense for several reasons.
First, infrastructure investment will provide opportunities
for workers who were disproportionately affected by the
recession. Due to the collapse of the real estate market, the
contraction of employment in the construction industry has been
especially acute. One in five of the 8 million jobs lost was in
the construction sector. The unemployment rate among
construction workers is now 17 percent.
Second, a wide range of analysts, including the CBO, have
concluded that additional spending on infrastructure is among
the most effective policy options for raising output and
employment.
Finally, during recessions it is common for State and local
governments to cut back on capital projects, such as road
construction, in order to meet balanced budget requirements.
Past research has found that expenditures on capital projects
are more than four times as sensitive to year-to-year
fluctuations in income than is State spending in general. The
Recovery Act provided crucial support for infrastructure during
the recession.
Investing in infrastructure is not only important to our
economy now; it is also crucial to the economy's long-term
health. While economists have debated the magnitude of the
various infrastructure investments, evidence from recent
research points to a positive and significant effect of
transportation infrastructure investment on productivity.
John Fernald's research, for example, has found that
building the Eisenhower Interstate System corresponded with a
significant increase in the productivity of vehicle-intensive
industries compared to industries that did not heavily rely on
vehicles.
One of the most promising ways to leverage scarce Federal
resources while targeting our most productive investments is to
establish a National Infrastructure Bank. Our current method of
funding infrastructure lacks effective mechanisms to attract
and repay direct private investment in specific projects. A
National Infrastructure Bank would create the opportunity for
greater private sector investment in infrastructure.
Second, with a few notable exceptions, Federal funding for
infrastructure investments is not distributed on the basis of
competition among projects using a rigorous economic analysis
or cost/benefit comparison. The National Infrastructure Bank
would develop a framework to analytically examine potential
infrastructure projects based on benefit/cost analysis. It
would prioritize the most effective and efficient investments.
I should acknowledge that creating a framework for project
selection based on cost/benefit analysis is a challenge.
Consider, for example, the problem of congestion. Americans
waste an estimated 1 week of time sitting in traffic. Valuing
the time lost due to traffic may appear simple at first, if the
opportunity cost is lost income due to foregone work. However,
it is not clear that time spent in congestion should be valued
at the wage rate as not everyone sitting in traffic wants to
work more hours or can find a job. Additionally, there are
emotional and physical costs of commuting beyond lost working
time. All of these potential costs of congestion should be
factored into any cost/benefit analysis of infrastructure
alternatives.
Identifying all of the benefits of potential infrastructure
projects is also challenging as all the benefits do not
necessarily accrue directly in the area where the
infrastructure is built. For example, a project that improves
the connectivity between a freight rail and a port to allow for
quicker, cheaper, and more reliable service will be a benefit
for the producers of those goods, even if they live very far
away.
Another benefit of the National Infrastructure Bank arises
because coordinating multimodal, multijurisdictional projects
in the current system is extremely difficult. This is because
each mode of transportation has a distinct Federal funding
source, and there could be significant difficulty accessing the
capital markets for local funding for jurisdictional projects.
A National Infrastructure Bank would be able to bridge this
gap.
Finally, in addition to improving the targeting of our
infrastructure investment, we need to consider new ways to
finance it. A National Infrastructure Bank should be at the
forefront of innovative and sound ways for financing worthy
projects. One such financing tool is Build American Bonds,
which the President has proposed extending.
I am happy to answer any questions.
Senator Merkley. Thank you both very much for your
testimony, and we will have about 5 minutes of questioning from
each of our Members of the Committee.
I will begin just by noting, Mr. Kienitz, you referred to
five goals: economic competitiveness, safety, state of repair,
livability, and environmental sustainability. And, Mr. Krueger,
you refer to financing worthy projects. Walk us through the
vision of how an infrastructure bank makes its choices about
what type of projects to fund. And I think, Mr. Kienitz, you
referred also to getting away from the traditional stovepiping,
which means everything is in competition with each other. So
how does that get sorted out?
Mr. Kienitz. It is a complex task and that is exactly the
right question. We have started to try to figure that out, as
some of you may know. We have a discretionary program that was
created in the Recovery Act and has been continued since called
the Secretary's Discretionary Grants, or the TIGER program. We
have used this as a bit of a pilot to start doing exactly that,
and we asked applicants who are asking for larger amounts of
money to provide cost-benefit analysis along with their
applications. Some of those analyses we got were thin and not
very well done, and some of them were thick and expert.
And what we did is we weighed two sets of things, the first
of which is what do we think the overall bang for the buck for
this project is, all costs included and all benefits included.
Second, do we think this project is meaningfully advancing our
key national goals that we have set out, or, for example, so if
you had two projects that had a very similar sort of bang for
the buck and one of them advanced four of our strategic goals
and another one only advanced one of our strategic goals, we
might lean more heavily in its favor.
So it is a balancing act, but I would say the principal
thing that we want to say about the strategic goals is in the
past, the financing markets have often concentrated on can this
project be financed? Do the numbers work? That is a very
important consideration. We start actually with a different
question, which is does this project achieve something of
national importance? If it does, then we will look into, do the
numbers add up, and in some cases, it can be financed entirely
through debt. In some cases, part of it can be financed through
debt, but it might need grants for part of it. And in some
cases, if it is in a smaller community that has very little
ability to pay but there is still a high return on investment,
then a grant funded project is appropriate. So it depends on
the specific circumstances of each project.
Senator Merkley. Mr. Krueger, do you want to add to that?
Mr. Krueger. Sure.
Senator Merkley. And specifically, nitty-gritty. Is there
going to be a board that makes these decisions, or how are the
proposals actually evaluated?
Mr. Krueger. Well, of course, all of those details remain
to be worked out with the Congress. And as Under Secretary
Kienitz said, I think it is a balancing act. One needs to weigh
in any benefit-cost analysis the benefits of increased safety,
for example. I know that is done in other realms and I think
that can be done here, as well.
But the details of how the Infrastructure Bank would work
would depend on the legislation that authorizes it, and, of
course, we would be very happy to discuss those details further
with you and your staff.
Senator Merkley. OK. Well, I will follow up with one other
question here, and that is in the testimony, Mr. Krueger, you
referred to the potential for an Infrastructure Bank to
recognize and fund projects will have significant network
effects. Can you talk about this in a little more detail, why
such effects are important, but also why it is our current
systems of funding don't adequately target projects with those
types of network effects?
Mr. Krueger. Sure. I think much of the benefit from
transportation infrastructure comes about because of the
network effects, because one highway is connected to another or
because a highway reaches an airport or a rail line or a port.
And valuing those external benefits is very difficult. If a
project is funded locally, the local government may be aware of
some of those benefits, but it doesn't have the same incentive
as the national Government does to take into account of those
external benefits.
So taking into account of those external benefits, I think
is extremely important, especially for projects of national
significance where you are talking about projects that cut
across, in many cases, cut across jurisdictional lines and cut
across different modes.
Senator Merkley. Thank you very much.
With that, Senator Shelby.
Senator Shelby. Thank you. One of my concerns, and I don't
think I am the only one here, about an Infrastructure Bank is
that it would involve private profit-seeking goals with
Government backing, in other words, private profits socializing
the risk. I fear that the bank will simply be a new GSE or
something like it and we will face another Fannie and Freddie-
type entity that will cost the taxpayers money down the road,
maybe not immediately, but down the road.
Have you thought that out? In other words, if you are
putting the Government guarantee there, you are exposing the
taxpayers, but the people who invest privately will make the
profit, not the taxpayer. Will we benefit from the
infrastructure? Sure. We all do. We know that. But have you
thought that out, the mechanics of how this would work? Your
statement earlier seemed a little vague and like this is a work
in progress. But I fear the GSE model.
Mr. Kienitz. Yes, sir. The statement is vague and
deliberately so because it is a work in progress. We are
actively in discussions right now----
Senator Shelby. Is it deliberately so because you don't
know yet, or is it deliberately vague because you would rather
not have the Congress know what is going on?
Mr. Kienitz. We hope to make a very specific proposal----
Senator Shelby. OK.
Mr. Kienitz. ----but probably not for a while, and so we
are currently discussing what that should be. I would say that
the GSE model, I don't think is terribly high in favor with a
lot of folks right now, just because Fannie and Freddie are
obvious examples of something that looked like a good idea at
the time and has since shown its weaknesses.
Up until now, we have been using the principles of what is
called the Federal Credit and Scoring Act, where if we give a
loan, for example, under the TIFIA program at DOT, we set aside
a certain amount of money as coverage, and when you do a
portfolio of loans, you are setting aside enough money. In the
15 years of that program, I think there has been one
bankruptcy, which just occurred. In fact, we insist on, in the
case of a bankruptcy, the Federal Government jumps to the head
of the line in terms of the ability to get repaid, and our
analysts are telling us that we may make a little bit of money
in the bankruptcy of that loan, and it is the only one out of
the entire history of the program that has ever gone bad.
So that system that exists right now works pretty well. It
has been pretty safe. It is just way too small, and so part of
the potential here is to--one model is to simply take that
system and put a whole lot more money behind it and expand the
scope.
Senator Shelby. What you are talking about basically, and
correct me if I am wrong, is leveraging this money. In other
words, if you created a $50 billion, if you had an
appropriation, I assume an appropriation of $50 billion----
Mr. Kienitz. Right.
Senator Shelby. ----I guess we would have to borrow it from
the Chinese, and then they wouldn't be able to build their
infrastructure, would they?
[Laughter.]
Senator Shelby. But anyway, if we did that, what would you
envision, seriously, to leverage with 50? Could you leverage it
10 times or 5 times?
Mr. Kienitz. Our experience has been it is generally
somewhere between 8-to-1 and 12-to-1, depending on what pledge
we get.
Senator Shelby. So let us say if it is 8-to-1, you are
talking about $400 billion in infrastructure.
Mr. Kienitz. Now, I would expect that some portion of that
money would be grant money. I mean, the example Senator Kerry
used of Fall River, Massachusetts, if they are going to do a
water upgrade, some portion of that is going to be paid by the
local ratepayers. There will be money there to pay back,
because part of that will be loans. The issue is the level that
the rates would have to be in that community is so astronomical
that you can't realistically pay for the whole thing.
Senator Shelby. Would that be like transit today, where we
put up so much money and the cities put up so much money?
Mr. Kienitz. Right, and so there might be a portion of its
loan that is backed by local ratepayers and a portion of it
that is grant----
Senator Shelby. How would you limit, sir, or I will direct
this to both of you, how would you limit the exposure of the
taxpayer to this? Let us say they put up $50 billion. Is that
an implicit guarantee for the $400 billion that you would
leverage, say if it was eight times?
Mr. Kienitz. Right now, the TIFIA program has one-third is
the maximum that the Federal Government can put into any
project, so someone else's money has got to be in there for
two-thirds.
Senator Shelby. I understand that.
Mr. Kienitz. Also in this case----
Senator Shelby. No, but I am talking about the liability.
Let us go back to the ultimate liability of the taxpayers.
Would they be liable for, either implicitly or explicitly, $400
billion or just for the $50 billion?
Mr. Kienitz. Uh----
Senator Shelby. And how would you sell that? I mean, you
would be selling bonds, probably.
Mr. Kienitz. Right. The model that exists now is the
Treasury simply puts the actual cash into the deal and we hold
back a reserve, and the reserves are pooled over multiple
projects. So if one out of 20 projects goes bankrupt, but you
are collecting one-20th of the project value from each one, it
covers itself, and so far, it has worked well.
Senator Shelby. Have you run numbers, and who has run those
numbers, we would like to know, to see if all this could be
actuarially sound?
Mr. Kienitz. We have yet to do that because we haven't
quite made a specific proposal----
Senator Shelby. I know that, but isn't that important?
Mr. Kienitz. Oh, absolutely. Absolutely.
Senator Shelby. Secretary Krueger, do you want to comment?
Mr. Krueger. Just a couple of quick responses. I think this
would be very different from the GSEs.
Senator Shelby. How? Explain.
Mr. Krueger. And I would say that Under Secretary Kienitz
used understatement in saying that the model was different----
Senator Shelby. Would it be different because you would
call it something different, or----
Mr. Krueger. Oh, no, no. Let me explain----
Senator Shelby. ----in reality----
Mr. Krueger. Because it would be on-budget, first of all.
Second, because it would use the Federal Credit Reform Act for
scoring. Third, and probably most importantly----
Senator Shelby. Explain what you meant there.
Mr. Krueger. This is related to what Under Secretary
Kienitz said, that the scoring would be based on expected
losses, and there would also be limits in terms of the
leverage. I mean, I can give you an example. In my testimony, I
described the Build America Bonds model, which as you know are
direct subsidy bonds where the Federal Government pays right
now 35 percent of the borrowers'--of the issuers' costs. That
certainly limits the liability to 35 percent. The issuer is
responsible for the rest of the borrowing costs, and this is
one way of leveraging Federal resources which we are doing
right now.
But the other point I want to make is with the GSEs, the
GSEs were profit-seeking institutions. The Infrastructure Bank
would not be. The Infrastructure Bank would be an institution
that is seeking to make the best investments, but not trying to
make itself a profit, which is part of the problem--a big part
of the reason why the GSEs ran into trouble.
Senator Shelby. One quick question. Who would decide who
would get what under this bank? Would that be the Secretary of
Commerce, the Secretary of Transportation, or somebody there,
and would Congress have a role, or who would have a role, and
how objective would that be?
Mr. Krueger. Well, Congress----
Senator Shelby. How do you remove politics from it?
Mr. Krueger. Well, Congress would certainly have a role in
designing the institution.
Senator Shelby. What about giving out the money?
Mr. Krueger. Under Secretary Kienitz can talk more about
that, but----
Senator Shelby. Would that be up to the Secretary of
Transportation?
Mr. Krueger. ----the proposal that we had was that the bank
would be housed in the Department of Transportation but have
input from other relevant agencies and departments. But as I
said, that is a detail--that is an important detail that needs
to be worked out with the Congress.
Mr. Kienitz. As would the question of does this person--is
it run by a Government appointee? Is that person confirmed by
the Senate? There are many ways that you gentlemen are more
familiar with than I do in which proper oversight and attention
is given. And we are sorting through what we want to propose.
We suspect whatever we propose will be adjusted here----
Senator Shelby. Are you telling us basically it is an idea
now that has got to be fleshed out and crystallized before you
really make a concrete proposal?
Mr. Kienitz. Correct----
Senator Shelby. OK.
Mr. Kienitz. ----and the second point, is we are trying to
balance two things. We are trying to balance enough separation
from politics so that they can make some tough calls, but
enough connection that people feel like it is legit. And so I
don't think that is an easy balance, but that is the balance it
has to be.
Senator Shelby. Thank you, Mr. Chairman.
Senator Merkley. Thank you.
Now we will turn to Senator Tester.
Senator Tester. Yes. Thank you, Mr. Chairman, and I want to
thank the panelists for being here. If I don't get a chance to
say hi to Governor Rendell, I want to thank him for being here
today, too. I very much appreciate it. I know how passionate
you are about this issue.
A personal comment first, and then we will get to the
questions. First of all, I think if we don't start investing in
infrastructure, we are not going to be a leader in this world
for much longer. I think it is critically important that we
invest and it is going to cost money. Whether we pay for it at
this level or we pay for it at the local level, it is going to
cost some money. But we will all get benefits from that if it
is done right, and that is critically important. I think as we
look at our electrical transmission to water systems to our
transportation system, whether that is road, highways, or air,
there has to be an investment there or we will not be able to
compete. That is just my comment.
Now I am going to talk about rural America, because I do
have some concerns with an investment bank. We are going to try
to make it as nonpolitical as possible and we are not going to
have the Banking Committee oversee it, doggone it. I was hoping
that would be the case, but it is not.
And you talked about, Mr. Krueger, you talked about cost-
benefit analysis, and I think that on the surface, that sounds
really, really good, especially if you are talking about people
who are sitting in front of stoplights or whatever it may be.
Now, we have got 950,000 people in the State of Montana, and
Montana is a pretty good-sized State. Traffic, for the most
part, isn't an issue, although if you look for it, you can find
some traffic problems, but you have to really look for it.
So in the area of highways, how does Montana get a fair
shot at any sort of investment when, quite honestly, we don't
have a population base that is the size of a place like
Pittsburgh, much less a bigger city or a bigger State?
Mr. Krueger. Well, I think the principle of cost-benefit
analysis applies in different regions and different types of
economic conditions. The rural areas, I think, would also
benefit certainly from connection, you know, the delivery of
goods and services, transport of minerals or of cattle and so
on to ports. Rural areas would certainly benefit from
improvement in the ports, improvement of the freight rail
lines----
Senator Tester. No argument here.
Mr. Krueger. ----and I think that is exactly what you meant
when you said that the State would benefit from the investment
in infrastructure. Presumably, in many cases, that would pass
benefit-cost analysis, which would help the State.
Senator Tester. OK. Let me burrow down a little bit, and
this may be unfair because we are just fleshing this thing out
and it is just starting, and you can jump in if you want to,
Ron. The issue is, I have been to Southern California. I mean,
it is a nightmare to drive in that place. If you are looking at
developing a mass transit system, you could take a whole pile
of money and send it down to Southern California and Montana
wouldn't even be a blip on the radar. How does Montana get to
be more than a blip? And I know you are talking about shipping
cattle, but when you are talking about votes and you are
talking about the Electoral College and all those kind of
things, fact be known, I mean, I don't care if you are talking
about the Missouri River or you are talking about highways,
that makes a difference.
How does that cost-benefit analysis--you are not going to
be able to do everything all at once, don't have enough money.
We are talking, if the figures are right I put in my head, I
don't know how many, $60 trillion or something like that over
an extended period of time, but how do we get to be a part of
the equation? And then if there are minimums on the amount of
dollars, like no project can be under $75 million, that puts us
at another disadvantage. How is this going to work? Maybe you
can touch on that.
Mr. Kienitz. Yes, sir. We have thought about this a lot. An
interesting thing that is going on, for example, in Southern
California right now, they have gotten to the point where they
have agreed to tax themselves to try to fund their transit
infrastructure because, as you said, their needs are so large,
even the Federal Government is not big enough to do it. They
have to raise money locally, and so they have proposed a plan
to raise $30 billion locally. Now, what they want help from us
is loans to help front-load some of that money to get the
projects done quicker, but not grants so much.
We held one of our outreach sessions on the surface
reauthorization in Bismarck, North Dakota--far away, but close,
if you get what I am saying----
Senator Tester. Yes.
Mr. Kienitz. ----and what we heard up there was extractive
industries. That is the big growth area up there, and it is oil
and gas and it is timber and it is grain and things like that.
And interestingly, in the cost-benefit analysis we did on our
TIGER grants, frankly, much to my surprise, the largest
category of grants that we gave was the freight rail system. It
wasn't urban transit. We did some of that. But it was the
freight rail system because those are folks who have really
good information about if we make this improvement and this
improvement and this improvement, and we the private guys will
pay half or two-thirds, there is enormous benefits that come to
shippers over a wide area.
And so that is the type of thing that we can actually see a
fair amount of helping in rural America, be it rural Kentucky
on the short line railroads or the Great Plains on the major
railroads. So that has, I feel like, been a bright spot for us.
The question of how to make sure those benefits flow out
everywhere rather than just to the sort of concentrated pockets
is an issue. But as Mr. Krueger--you know, untangling the mess
in Chicago is hugely beneficial to everything that is 1,000
miles west of there.
Senator Tester. Right, and I have run out of time, but I
would just like to say, I mean, I think this is a critically
important conversation we are having. I think it is a
conversation--I mean, since I took over the farm, which has
basically been a little over 30 years ago, I haven't seen much
infrastructure take place. It seems like the attitude has been
about me instead of about all of us together. And I can tell
you that if we don't address this, because I see it falling
apart, I see the need there for water and sewer and highways
and rail and--I mean, our rail system in the State of Montana
is significantly less than it was 30 years ago. We have got
rails that are shut down. We have got less access to markets
than we had. And if this continues along this line, I mean, it
is not healthy for the country overall and it is not good for
our economy.
I appreciate you guys working on this. I hope we can come
together, put the politics aside, and come up with something
that is going to work for the country. I think this cuts across
everybody, rich, poor, Democrats, Republicans, Libertarians,
Independents. We have got to have something that works for this
country.
Senator Reed [presiding]. Senator Menendez.
Senator Menendez. Mr. Chairman, I know that Senator--I was
here before, but Senator Warner has been here, so I am happy to
wait----
Senator Reed. Thank you very much.
Senator Warner, you are recognized, please. Thank you,
Senator Menendez.
Senator Warner. I would like to thank the Senator for that
distinguished moment of leadership.
Let me--a couple of quick comments, and I will try to be
brief, recognizing that Senator Menendez is next.
One, I want to just reiterate what my friend, Senator
Tester, said, kind of net-net. I think Senator Kerry mentioned
this earlier. We have seen a 50 percent decline in
infrastructure investment in America as a percentage of our GDP
since the 1970s, and what used to be, as I know my good friend
Governor Rendell pointed out, or will later, one of America's
competitive advantages, infrastructure, now becomes a
competitive disadvantage vis-a-vis nations around the world.
And while a lot of details need to be worked out, the
concept we are talking about here of how we can use, with
limited exposure of the public, part of the larger balance
sheet to help finance infrastructure investments is not a
radical concept. We do it right now with OPIC. We do it right
now with the Export-Import Bank. We do it right now with the
World Bank. We do it right now with a variety of municipal
financing tools that are used.
We do it right now with the TIFIA grants, one of the
things--let me get out a couple of questions here and then you
can both address them. How what we are proposing here, what you
are proposing here would differ from TIFIA, number one. Number
two, before I got this job, I spent about a year working with
the Bipartisan Policy Center with former Senator Gorton from
Washington State on the question of how we do the evaluation so
that, again, as Senator Tester mentioned, we don't go back just
to VMT as your assessment and how we have these policy goals
and real metrics on project selection, and I would commend the
Administration to look at the Bipartisan Policy Center's work
and AASHTO and a whole series of organizations have been
involved in that, on that question. So I would like to hear a
little bit more about what kind of metric evaluation we are
going to use.
And then I would also like to make sure, if we thought
through this and put this investment bank into reality, how
would we ensure that there would be mode neutrality in the
assessments? We still have, as a former Governor, and I know
probably Governor Rendell will mention this, we all like to
talk about at our State levels a goal toward pushing rail,
pushing multimodal. In 90 percent of the States, the Highway
Department still outweighs virtually everybody else. If we were
going to create this Infrastructure Bank, how would we make
assessments based on some level of mode neutrality?
Mr. Kienitz. Thank you, Senator. From a structural point of
view, mode neutrality is not that hard to imagine. The issue we
have right now is there are dollars which are highway dollars
and dollars which are transit dollars and so you don't ever
have a conversation about how much highways and transit do I
want, because it is all locked in stone, mostly at the State
level and here at the Federal level, too.
So part of what we are proposing is a large amount of
dollars which has no label on it, if we can agree to that. That
has been a political difficulty, honestly, more than anything
else, because all of the recipients of these dollars, the first
thing they want is certainty. I want to know how much is before
me, before we look at the projects. I want that decided first.
Well, we have to let that be decided last. Once you create that
structure, then the challenge is on us to say, how do you
evaluate a freight rail project versus a transit project versus
a highway project? That is a little bit hard. We are starting
to do that in active year-by-year grant rounds with these
modest dollars we have in our discretionary program, but it is
the first test of how would you actually go and do that.
And what we find is that in the highway world, they are
really good at evaluating one highway project against the
other, and in the transit world, they are pretty good at
evaluating one transit project against the other. And then when
you ask the two folks to sit down and have one meeting, there
is a little bit of talking past each other. The systems haven't
ever been created to work together, and let alone high-speed
rail and aviation and freight rail.
So what we are trying to do is start with the generic cost-
benefit analysis as the leveling tool----
Senator Warner. Would the bank----
Mr. Kienitz. ----recognizing that it misses a lot and that
you need to be able to say, what about CO2? That has to count,
too. And what about safety? That has to count, too.
Senator Warner. But the bank would not--the bank, as you
envision, would not be broken into silos. You would have your
traditional grant programs, which we all hope will get out of
their silos. The bank would be one additional financing tool
out there, hopefully leveraging private sector dollars----
Mr. Kienitz. Yes.
Senator Warner. ----in a much greater way with these policy
goals that don't have the definition as strict as some of our
silo approach now back to VMT----
Mr. Kienitz. That is the hope.
Senator Warner. ----with these policy goals, and again, I
commend you to look at the Bipartisan Policy Group, which has
spent 2 years looking at trying to come up on a way, because is
a tough thing----
Mr. Kienitz. Right.
Senator Warner. These are great goals that are tough to
kind of break down into how you then evaluate projects.
Again, my time has been expired and I thank my colleague
and friend, Senator Menendez, for letting me jump here.
Senator Reed. Senator Menendez, please.
Senator Menendez. Thank you, Mr. Chairman.
Mr. Secretary, I want to get a sense, as someone who is a
full supporter, I heard some of the comments earlier that
suggest that this is somehow wasteful, that this is an effort
at stimulus. It seems to me it is an effort at the future
economy of this country. Just look at China. It understands how
it is making its investments in such a way that it is going to
yield enormous economic opportunities for that country, and it
is readying itself for fulfillment of its capacity in this
century. And so I think it is in that context that we would
look at this, understanding that these are about investments
that yield huge dividends in the long run and that leverage our
opportunity to attract the private sector.
I remember in my days in the House of Representatives when
I sat on the Transportation Committee, and if you came to visit
my, what was then my district and now, of course, in my State,
you would have seen abandoned railroad yards up and down the
Hudson waterfront overlooking Midtown Manhattan. And it was the
effort of myself and others who created an infrastructure and
the high-speed nonpolluting light rail line along that same
waterfront, and working to create sewage infrastructure and
what not that now has a multi-million-dollar ratable base all
up and down that waterfront, created tens of thousands of new
jobs, and created an economic synergy in the region that is
probably even in this current challenging economy, that is
second to none.
And that was based in the first instance upon an investment
in infrastructure. So it seems to me that the dividends that
are yielded is rather significant and more than pays back on
the investment.
So if we look at it in that way and eliminate the
criticisms just on a partisan basis, my question goes, how does
a National Infrastructure Bank help us particularly when we
have large, important national--projects of national
significance, and I will just cite one right now. I have
labored very long and hard, along with Senator Lautenberg, to
have a new trans-Hudson tunnel created from New Jersey to New
York. It is the largest single Federal investment in our
history. It creates 6,000 construction jobs and it ultimately
generates by every analysis anywhere between 40,000 and 50,000
new permanent jobs.
Now, unfortunately, our Governor is in the midst of trying
to cannibalize the State's contribution to that in order to
fund his State Transportation Trust Fund, but in the process,
we will lose the leverage of billions of dollars and the
creation of an infrastructure project that has been noted as
nationally needed and significant and has a ripple effect in
our economy of huge proportions.
So part of the challenge has been moving that project from
conception to where we are today, which is already started. How
do you envision a National Infrastructure Bank being able to
help us with projects of national significance move more
efficiently?
Mr. Kienitz. I will respond to that. I mean, as you
mentioned, Senator, the ARC project is the largest commitment
the Federal Transit Administration has ever made to any single
project, and that is something that we hope has a future. I
think we are all going to find out in the next month.
That was hard to fit into the budget of the Federal Transit
Administration and it is going to create a big lump of cash-
flow going out multiple years. Having a National Infrastructure
Bank hopefully gives another window for folks who have those
very large but very transformative projects to go to in a way
that allows the more bread and butter run of the mill stuff to
be funded out of the regular budget in the normal way. And then
the question would really be, that project has high costs but
huge benefits given the number of people who will use it, but
there is a project in Florida and there is a project in Texas
and a project elsewhere and those will all go in and their
evaluations will get put together.
But to our point of view, it means that the Infrastructure
Bank has got to be big enough that it can handle these big
projects. And right now, the TIFIA program we have, which gives
out loans for these programs, we tend to do $200 million, $400
million, $500 or $600 million is a really big loan out of
there. And you can do some good stuff with that, but you don't
do these big transformational things at that price tag. So that
is, I think, part of what we are seeing. We just need--the
magnitude has got to be sufficient to the costs of these big
transformative projects. They are in the many billions now.
That is just the reality of today.
Senator Menendez. I just hope that as we look at this,
after the vetting goes through and the determination is made of
what is a project that is worthy of being funded, that we would
look also at the mechanism of streamlining a process that
ensures that we can, in essence, make the project a reality in
a most cost efficient manner. In my mind, the bank can be a
component of helping that become a reality, as well.
And finally, if I may, Mr. Chairman, Secretary Krueger, I
mean, do we look at these investments from an economic paradigm
that says they yield huge dividends and can be, in fact, part
of creating a more robust economy for the future, or are we
just looking at it as some road or highway or sewer system that
we are dealing----
Mr. Krueger. Well, I think we look at investment in
infrastructure now as helping us now and in the future. Our
competitiveness will be improved in the future if we improve
our infrastructure now. And given the underemployed resources
we have currently in the construction sector, a 17-percent
unemployment rate for construction workers, Roy mentioned that
their projects are coming in 20 percent below cost from what
they expected. That is an indication of the unemployed
resources we have in the sector. This is the right time to
invest. But we are investing because of the benefits that are
yielded for the future and how they will help our country in
the future as well.
Senator Menendez. Thank you.
Thank you, Mr. Chairman.
Senator Reed. Thank you very much, Senator Menendez.
Gentlemen, thank you for your testimony and also for your
work. Just two areas I would like to focus on quickly. One, all
of us, I think, are encouraged by the proposals for the
creation of some type of infrastructure bank. Based on not just
alone, but based on the TIGER process, there seems to be a
focus on new projects, yet we all recognize there is a huge
deficit in maintenance of existing road systems, sewer
systems--you name the system, it has to be maintained.
In my home State of Rhode Island--and we are not unique--27
percent of our bridges are structurally deficient; 21 percent
are functionally obsolete. We are closing parts of Route 95--
are we doing or better or worse, Governor? Probably right in
the middle. We are closing part of 95 now to truck traffic, the
major north-south route, and we face another serious closure in
the future of a major section in the middle of Providence,
which could be devastating not just to the economy of Rhode
Island but just the whole Northeast economy.
And so the question really is: How are we going to meet
these obvious demands with an infrastructure bank? There is a
suggestion, I think, in some of your comments that, well, when
we do this, we can sort of focus on new projects and let the
rest of the budget sort of deal with the maintenance, et
cetera. But if you could just comment. I know this is not an
easy yes-no, one-line answer. Some initial thoughts, at least,
Mr. Secretary, then Mr. Secretary.
Mr. Kienitz. I am happy to do so. I think that our hope--
and I think this is a widely shared view--is that there has to
a bread-and-butter program, these underlying formula programs,
because the needs are so huge. I think one policy initiative
that is outside the infrastructure bank is making sure that
that money as necessary is going into these repair situations
rather than repair needs but still going out and using that to
build a big new thing. To the degree that that is happening, we
have actually had some progress recently. In the last dozen
years or so, road and bridge conditions have actually gotten
better. It is a huge ship so turning it is slow, but it is kind
of going in the right direction. And what that has meant,
really, though, is the starvation of the funds that have
normally gone into those new things.
So you are seeing somewhat of a division, but I will say,
for example, in the TIGER program, the project we funded in
Rhode Island was a redevelopment building for the future
project, but in Oklahoma, their highest priority is deficient
bridges. And so the project we funded in Oklahoma, they came to
us and said, ``This is our number one priority. Help us with
deficient bridges.'' And so we funded a program in Oklahoma for
deficient bridges.
So to some degree, Phoenix and Las Vegas, they have big new
visions to accommodate all their new people, and, other States
are going to have different priorities, and that is OK. And the
bank needs to respect that. There are huge benefit costs--
benefits that come from rebuilding existing and from building
new if the projects are designed well.
So I would not want to go in with a doctrinaire approach to
that question, but the thing that has been starved in recent
years has been the ability to do new things. So I think there
might be more of a focus in the infrastructure bank on that,
but that would need to be worked out over time.
Senator Reed. Let me just ask, before I turn to Secretary
Krueger, you have to think, as you are--how you coordinate
these two demands consciously. I mean, if we set up an
infrastructure bank and give them separate directors that are
approved by the Senate, then they go off doing their great
things, but there is no device to integrate that with the
Department of Transportation budget and the meat and potatoes
of repair. So I do not think you have got an answer yet, but
certainly that is a topic that you are going to give us an
answer.
Mr. Kienitz. I think our hope is that it be as integrated
as possible so you get that kind of a coordination. But there
will be many views on that topic.
Senator Reed. Secretary Krueger, your comments?
Mr. Krueger. Well, I would just highlight that a lot of the
economics research confirms what you said, that the return to
investment in maintaining our existing transportation system
tends to be very high. Ned Gramlich, a former Governor of the
Federal Reserve Board--I am sure you knew him--published a
study where he concluded that maintaining our system of
infrastructure has a very high rate of return, not just adding
to it but focusing on maintenance. So I think that confirms the
point that you were making.
Senator Reed. Thank you. Just on another topic, a quick
topic. We tend to talk about roads, bridges, you know, port
facilities. But the electrical grid is something that is
vitally important up our way, could open up huge opportunities
in terms of the alternate energy technologies that we all think
are the next big thing. That I presume would be a topic of this
infrastructure bank, too, that you would be looking at that.
Mr. Kienitz. That is a policy question that I think will be
a tough one. To the degree that there is some news on this
front in the President's speech, he is proposing that the
initial creation of this thing be done through the surface
reauthorization bill that would move through this Committee and
Environment and Public Works and the others here in the Senate
and the Transportation Committee in the House. I think that
will tend to give it a transportation focus just because of the
jurisdictional issues there. It could certainly go more broadly
than that. I am not an expert on the electrical grid. I think
there will be a fear that the wider you make the need, the more
money you need to put in, and then how are you raising that
money. And so that will be the tension.
But we have not made a specific proposal on that. I think
our goal is to have it be as broad as it can reasonably be
given the amount of money we are putting in.
Senator Reed. Thank you very much, gentlemen, and there are
no further questioners so there are no further questions. Thank
you very much.
Mr. Krueger. Thank you.
Mr. Kienitz. Thank you, sir.
Senator Reed. Let me ask the third panel to come forward,
please.
Let me introduce our third panel in order of their
presentations. First, we will hear from the Honorable Edward G.
Rendell. Governor Rendell is the 45th Governor of Pennsylvania.
He has been a strong advocate for increased infrastructure
spending and the need for a National Infrastructure Bank.
Thank you very much, Governor, for being here today.
Then we will hear from Mr. Robert Wolf, the Chairman and
CEO for UBS Americas. He is president of the UBS Investment
Bank and a member of the UBS Group Executive Board. He is also
a member of the President's Economic Recovery Advisory Board.
Thank you very much, Mr. Wolf.
And then, finally, we will hear from Mr. Donald Shubert,
president of the Connecticut Construction Industries
Association, and he was also appointed by Governor Rell to her
task force on reforming State contracting.
Thank you and welcome, a neighbor of Rhode Island. Thank
you very much, sir.
Governor Rendell, your comments, please.
STATEMENT OF EDWARD G. RENDELL, GOVERNOR, COMMONWEALTH OF
PENNSYLVANIA, AND COCHAIR, BUILDING AMERICA'S FUTURE
Governor Rendell. Good morning, Mr. Chairman. I am going to
start actually answering some of the questions you asked of the
first panel. The problem with sitting there is, you know, you
are chomping at the bit to answer the questions, and the
questions were very important. Unfortunately, some of the
Members who asked them are not here, but let me answer what
Senator Shelby said.
First of all, I want you to understand I am here both as
the Governor of the Commonwealth of Pennsylvania and also
Cochair of Building America's Future, an organization that I
had with Governor Schwarzenegger of California and Mayor
Bloomberg of New York. It is a 501(c)(4) and (3), and we are
dedicated to revitalizing this country's infrastructure.
First, I think Senator Shelby is absolutely right. The
infrastructure bank is a small piece of the infrastructure
puzzle. It is an important piece of the infrastructure puzzle.
In many ways, it could be a linchpin to fixing and solving the
puzzle, but it is a small piece. And we all agree that $50
billion does not begin to scratch the surface that the
President has recommended. That has got to be an up-front
payment on a larger reauthorization of surface transportation
and other things, like water and wastewater and levees and dams
and you name it. So that is number one.
Number two, Senator Shelby can rest at ease that we are not
trying to create a GSE with the infrastructure bank, and the
guarantees that will be given by the Federal Government are
very similar, as Deputy Secretary Kienitz said, to the
guarantees we give in the TIFIA program or the BABs program or
anything else that is underway right now. We are not becoming
the--we are not putting the Federal credit behind all of these
investments.
In fact, the bank, because it will leverage private sector
investments in most cases, I think you will see a higher
scrutiny on projects because the private sector is interested
in the rate of return. And for the rate of return to be
successful, the project has to be successful. So you will not
only have some level of Government oversight, but you will have
the investor oversight as well. And I think that will even
tighten and reduce the risk and also spread the risk out. No
question about that. Private-public partnerships do, in fact,
spread the risk out and take a lot of the risk off the
shoulders of Government.
Second, Senator Tester was absolutely right--and Senator
Warner--about a competitive disadvantage. If we do not do
something about infrastructure in this country, we are cooked
as an economic power. The ten biggest ports in China take
three-and-a-half times the throughput of the ten biggest ports
in the United States. Only two American ports--Los Angeles Long
Beach and the Port of New York--would rank in the top ten in
China. Unless we can find a way to competitively move goods and
get goods in and out, we are not going to get investment,
domestic or foreign investment, in this country. Goods movement
is absolutely critical. Economic competitiveness depends on a
vital and vibrant infrastructure.
To your question, Senator Reed, the infrastructure bank is
only a component. There still has to be your basic
transportation bill. The smaller States, the rural States, are
going to still get their money through the reauthorization of
ISTEA. Nothing is going to change to that effect. In fact, by
taking some of the larger projects out of the normal highway
trust fund, you may have more money to spend for local and
regionals. But the real answer to how we are going to maintain,
the question of maintenance, versus new construction is you
must--with the next transportation bill, you must totally lift
the restriction on States tolling previously Federal accredited
highways. You must lift that restriction. If you want
maintenance, the only way we are going to maintain I-80 or I-95
through Pennsylvania or through Rhode Island is if we have the
right to toll it. That restriction makes no sense. The theory
is: Why make the taxpayers pay for it twice? Well, when you buy
a car, you pay for it. But you also pay to maintain it, right?
Same thing with infrastructure. And the only way, unless you
are going to come up with a whole lot more money than I think
you are going to come up with, is you have got to lift that
restriction. That is the single most important thing we can do
for maintaining what we have. It is as simple as that.
I think the infrastructure bank--and BAF does as well--has
to include more than just transportation. To ignore the needs
of the electric grid, to ignore the needs of broadband--I
assume--and I am sorry Senator Tester is not here. But
broadband reaching some of the rural areas of Montana--I guess
there is nothing but rural areas in Montana. But to reach those
rural areas, there has to be broadband buildout, and that has
to be financed, and it has to be financed through
accommodation, I think, of private and public investment. So if
you expand the infrastructure bank beyond transportation, it
opens up a lot of new avenues that are, I think, very
attractive to the smaller States and the rural States as well.
Now, we need this bank for so many different reasons but,
first of all, because the public wants it. Interestingly, BAF
has taken a series of polls to find that the public,
Republicans and Democrats alike, want to invest in
infrastructure. Two years ago, 81 percent said they would be
willing to pay 1 percent more in Federal income tax for
investments in infrastructure, but only if they knew that the
investments were not going to be distributed through the normal
political process but would be distributed based on some merit
cost-based analysis. Public support for infrastructure is
there. They can see it, they can feel it. They can ride on it.
It is different than almost any other type of Government
spending. But they want it to be distributed in a way that
makes sense.
Congress can control the performance measures. You put into
the act setting up an infrastructure bank what the criteria are
that the bank should make its decisions on. That is where your
control comes in. And, of course, your oversight. But you can
control the criteria. You can control the scoring by what you
do in the act itself. So it is not a question of losing
political control, but it is a question of gaining the public's
confidence in these projects.
Why do we need an infrastructure bank? Well, first and
foremost, until the stimulus, there have been no real vehicles
for multi-State, regional, and projects of national
significance. Let me give you a project that Senator Corker is
familiar with and Senator Shelby, were he still here, would be
familiar with, and that is Crescent Corridor. Six States and
Norfolk Southern combined on what is an incredible home run for
rail freight, taking from the southern ports going up the
country to Pennsylvania and winding up in Bethlehem,
Pennsylvania, a rail system that will add tens of thousands of
jobs.
Senator Corker, since you are here, I can tell you with
much satisfaction that your investment in the TIGER grant will
create for Tennessee 5,100 jobs, 573 trucks diverted off the
roads for Tennesseans; in Alabama, 8,600 jobs, 578,000 trucks
diverted from there.
I became the lead Governor. Norfolk Southern came to me. I
convinced my fellow Governors to invest. It is basically a one-
third, one-third, one-third: one-third Federal investment they
are hoping to get from TIGER, and they got part of that in the
first round; one-third from the States, all the States ponied
up and we put up our third; and one-third from NS. It is the
way we have got to do this. There has got to be private sector
investment in these things, and the bank is a perfect vehicle
to do it, because TIGER is going to go away. I assume you are
not going to reauthorize the stimulus bill. That is just a
hunch I have. So I think stimulus is going away, and there has
got to be something to replace it. TIGER has been enormously
successful.
There is another project with NS called National Gateway,
which goes the other way, from the Florida coast all the way
through Pennsylvania and Ohio. We happen to be involved in both
projects. It also receives some TIGER funding. There is no
vehicle for that. If we are going to build a true high-speed
rail system in this country, you cannot go on giving Florida
some money for its high-speed rail, California some money for
its high-speed rail. There has to be coordination, because
there are all different types of high-speed rail. There is
Maglev; there is more conventional high-speed rail. Well, if
part of the national chain does Maglev and the other part does
conventional, it will not work. If Pennsylvania does Maglev and
Ohio does conventional, you will have to get on another train.
It does not work. These projects have to go through some
vehicle. An infrastructure bank is the vehicle to do it. We can
leverage private assistance, and there is so much we ought to
do.
You heard Deputy Secretary Kienitz say TIFIA is a great
program. It is a loan program. It has been enormously
successful. It goes in as sort of the last piece of the money
when the equity cannot do the entire deal, and it has been very
successful. But it has got limits on it. We need to enhance the
TIFIA program dramatically right now. And we do not spend the
Federal money. We get that money back in loan repayments.
Private activity bonds, you have got a cap, I think it is
$15 billion nationally. That is a drop in the bucket. Raise the
cap significantly or uncap private activity bonds.
Building America's Bonds, I think the President is right.
We ought to make it permanent. It has been hugely successful.
Pennsylvania just did a $1.1 billion infrastructure bond
that was about 55 percent BAB. We got our lowest interest rate
in the history of the Commonwealth, 3.1 percent interest,
saving the citizens of the Commonwealth a tremendous amount of
money in interest. But all this private investment can be
funneled through the infrastructure bank.
Senator Menendez, to your question, if we were starting
that project over, if we were starting the project over, what a
good idea, since I assume it is going to be told, your tunnel.
Senator Menendez. It is a passenger rail tunnel.
Governor Rendell. Well, you could use the passenger rail
ticket price and some form of availability payments from the
State and Federal Government and get a private company to come
in, private investors to come in, up-front the money, and they
get repaid by the fare price and by the availability payments
from the Federal and State governments over the course of time.
But we do not up-front it. We do not take the risk. A private
company can do that. We have got to do it.
And, by the way, Congressman Oberstar is a hero to all of
us who believe in infrastructure. There is a part in his bill
to reauthorized ISTEA. The Office of Public Benefit, that would
be very damaging to involving private dollars in
infrastructure. We are going to take a hard look at that and
either get rid of it or frame it in a different way.
So there is so much that we need to do, and we need to do
it. I know there are always questions about deficit spending
and can we afford to do this. Gentlemen, we cannot afford not
to do it. Unless we want to consign ourselves, as Senator
Menendez says, and as Senator Tester said, and Senator Warner,
to being a second- or third-rate economic power, we have got to
invest. And there is a difference between investing and
spending.
Let me close, because we have some great businessmen on
this panel, by saying there is not a business in America that
has grown successful without investing in its own future. Most
of the time that has been prudent borrowing, sometimes from
capital reserves, but investing in its own future. We have to
find a way to do that.
There is so much that we would love to talk to you about in
BAF. I think we need a Federal capital budget as a means for
investing in infrastructure. But regardless of what route you
choose, we better start investing in our infrastructure, our
dams, our levees. You know, New Orleans, to repair the levees
in New Orleans would have cost $700 million. You are winding up
spending $14.8 billion of Federal money. Good idea not to
invest that $700 million? I do not think so. It is a 20:1 ratio
that you have lost Federal dollars by not investing at the
right time. And infrastructure spending is like that old Fram
oil filter commercial, remember? A greasy mechanic holds up a
Fram oil filter and says, ``You can pay me now, $17.28.'' He
points to a wrecked car, and the screen flashes $4,326. ``Or
you can pay me later.''
Let us pay it now. Let us do it right. Let us invest in
infrastructure. Let us create--Senator Kerry is a great man,
but he is wrong. If we did a 10-year infrastructure
revitalization program, that would revitalize this Nation's
economy and American manufacturing. There is no excuse not to
do it. The infrastructure bank is an important component. You
can control it by what you put into the bill. You are not going
to lose control. You are going to decide what the performance
measures are. You are going to decide what the make-up of the
board is. You are going to decide about congressional
oversight. Let us not let these small problems stand in the way
of a great opportunity.
Senator Reed. Thank you, Governor, very much. Thank you.
Mr. Wolf, please.
STATEMENT OF ROBERT WOLF, CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
UBS AMERICAS
Mr. Wolf. Good morning, Chairman Reed, and distinguished
Members----
Senator Reed. Could you put your microphone on, please?
Mr. Wolf. Oh, I am sorry. Good morning, Chairman Reed and
distinguished Members of the Committee. I am grateful for the
opportunity to offer testimony in support of a National
Infrastructure Bank. My name is Robert Wolf, and I am chairman
and CEO of UBS Americas and president of the global Investment
Bank.
I have worked in the financial services industry since
receiving my undergraduate degree in economics from Wharton in
1984. My career has focused predominantly on fixed income at
two firms--Salomon Brothers and UBS.
As a member of the President's Economic Recovery Advisory
Board, I have worked with fellow Board members to develop a
considered approach to creating a National Infrastructure Bank.
Today, I am here to share my own views, as a 26-year veteran of
the markets, on why I believe a National Infrastructure Bank is
in our Nation's best interest.
Let me say at the outset that creating a National
Infrastructure Bank at this time makes sense for two main
reasons:
One, it will attract private investments to help fund badly
needed infrastructure improvements critical to America's
competitiveness and economic growth.
The NIB would vet projects carefully, lend to fund the
highest priority projects and help attract private sector
capital to augment Government funding. Preqin, a private equity
industry consultant, estimates that there is over $180 billion
dollars of private equity and pension fund capital focused on
infrastructure equity investments. This capital can play an
important role in bridging State and local budget gaps.
And, two, it will create jobs.
The U.S. Department of Transportation and the Milken
Institute both estimate $1 billion of Federal and State
spending on transportation infrastructure creates 25,000-plus
jobs. Many of these jobs are in the construction industry and
related sectors that have sustained the largest losses in the
economic downturn. Our hope is that new jobs will be created in
the building industry as well as for engineers, architects,
urban planners, scientists, and industrial production
businesses.
To achieve these goals, it is crucial that an NIB be
chartered with a clear and achievable mission and strict
operational guidelines.
The NIB should be:
One, policy driven. It should be a vehicle for attracting
public and private funding to projects of considerable merit
that will modernize our Nation's infrastructure.
Two, loan focused. It should focus on making loans that
will generate returns, which means funding primarily projects
with user fees or dedicated revenue sources.
And, three, it must be merit based. It is crucial that the
NIB allocate its funds on the basis of a rigorous cost/benefit
analysis conducted by experienced industry experts and be
focused on those projects that will deliver the most value for
its dollars. This process must be totally transparent.
The NIB should not be:
One, a project equity investor. Consistent with the focus
on lending, the NIB should primarily offer loans and loan
guarantees at the project level, not project equity capital.
Nor should it be a substitute for existing infrastructure
funding programs. Rather, the NIB should complement successful
programs like the TIFIA loans, private activity bonds, Build
America Bonds, and municipal bonds.
Nor should it be solely focused on transportation. Instead,
it should make funds available for projects of regional or
national significance in other qualified sectors such as
energy, broadband, water, and sewerage.
Finally, in order to achieve this mission, the NIB must be
properly structured.
In my view, the NIB should be established as wholly owned
Government corporation, allowing it to serve a broad range of
infrastructure sectors, such as transportation, energy, and
water. The NIB decision makers must have the independence to
make loan decisions based on project merit. And it should be
capitalized with equity capital that comes solely from the U.S.
Government via the Treasury.
In closing, creating a National Infrastructure Bank is an
idea whose time has come. I do not think anyone disputes that
our country's infrastructure needs are extraordinary. The NIB
would mobilize the capital markets to fund new projects,
leading to sustainable economic growth and create jobs.
Again, Chairman, thank you for providing me with this
opportunity to appear before the Committee today. Thank you.
Senator Reed. Thank you, Mr. Wolf.
Mr. Shubert, please.
STATEMENT OF DONALD SHUBERT, PRESIDENT, CONNECTICUT
CONSTRUCTION INDUSTRIES ASSOCIATION, INC.
Mr. Shubert. Good morning, Mr. Chairman Dodd, Members of
the Committee. Thank you for this opportunity to testify today.
Mr. Chairman, I commend you and the Members of the
Committee for convening today's hearing on how infrastructure
investments can help generate American jobs and strengthen the
economy.
Congress identified infrastructure investments as an agent
for economic change during the debate over the American
Recovery and Reinvestment Act. During those discussions it was
widely endorsed that infrastructure investments create well-
paying jobs for skilled workers. Through my organization, CCIA,
we work closely with the basic building trades. We know that
there is a skilled workforce in our industry that could be a
powerful economic engine that is sitting idle.
Nationally, the unemployment rate in our industry is 17
percent. Since 2006, 2.1 million construction jobs have been
lost. Just to put this into perspective, almost one-third of
all jobs lost in the U.S. during the 2007 to 2009 recession
were construction jobs. The Recovery Act put many people to
work; however, there are many more workers ready to go who are
standing idle.
It was also widely endorsed that infrastructure investments
drive long-term economic growth. We know that the business
community relies on an efficient and safe infrastructure
system. Chambers of Commerce constantly tell us that mobility
increases competitiveness; however, congestion disrupts the
supply chain, increases the cost of doing business, and
threatens the ability to attract and retain employees.
Our Nation has tremendous infrastructure needs in all modes
of transportation, and significant funding is needed to meet
those needs. We must rebuild and maintain our current
infrastructure in a state of good repair and add capacity
across all modes of transportation to improve mobility and
address growing congestion. My statement provides details on
those needs and the costs to address them.
The Recovery Act is playing a major role in meeting the
Nation's infrastructure challenges. From an industry
perspective, the Recovery Act stabilized what may have been a
devastating construction season. With little work available in
other sectors of the construction industry, it provided a
lifeline to many large and small construction companies and
their employees. The most important discussion to have about
the Recovery Act investments at this point is that those
investments are coming to an end. If it is allowed to end
without new funding in place, the construction industry will be
decimated, our infrastructure will continue to fall into a
state of good repair, and congestion will mount while State
transportation departments cut back programs and wait for long-
term stable funding.
The authorization of a long-range surface transportation
bill is critical not only to our industry, but to the safety of
the traveling public and the competitiveness of America's
business community. To fully fund a reauthorization bill,
Congress and the Administration need to make tough decisions on
infrastructure funding. In the near future, Congress will have
to decide whether to scale back transit and highway
investments, add to the deficit, or raise new revenues. We are
willing to work with you and stand by you as these decisions
are being discussed.
A National Infrastructure Bank should be part of those
discussions. An infrastructure bank can provide for
megaprojects that are not easily supported under existing
programs, draw outside dollars into the transportation funding
scheme to fund large projects and preserve more core funding
for basic needs, and create a competitive process that would
ensure the best projects are funded.
Mr. Chairman, we commend the Committee for advancing the
discussion on a National Infrastructure Bank. I can assure you
that the construction industry, labor unions, and Chambers of
Commerce in Connecticut stand ready to help you as these
discussions go forward.
Again, thank you for this opportunity, and I would be happy
to respond to any questions.
Senator Reed. Thank you very much, gentlemen.
Let me first recognize Senator Warner, then Senator Corker;
then if no one arrives, I will conclude. Senator Warner.
Senator Warner. Thank you, Mr. Chairman. I would like to
thank the panel for their very good comments. I also feel if we
could only get Governor Rendell a little bit excited about this
issue, it would be helpful.
Let me also acknowledge something that I think everybody
said. This concept of bringing public capital and private
capital together is critical, and I would add, Governor, that
the Commonwealth of Pennsylvania has done some extraordinary
things, but the real leader in public-private partnerships has
been the Commonwealth of Virginia. We go back a decade-plus on
some of these initiatives in terms of trying to draw together--
trying to get private sector capital into our infrastructure.
And Lord knows anybody that has driven in Northern Virginia
knows we have not solved that problem yet. But it is a tool.
I have got two questions. The first question is: My sense--
and I think this panel has reflected that the idea of the
National Infrastructure Bank really means it is one tool
particularly for some of these larger, more expansive projects.
And the key here is to get, again, the private sector at the
table, and I particularly want to thank my friend Mr. Wolf for
his leadership on this issue for some time, particularly in
terms of rallying some of his colleagues on Wall Street.
One of the things I have thought about for some time--and
this would have some controversy perhaps more on my side of the
aisle. But as we think about these national infrastructure
projects of significant importance, if the National
Infrastructure Bank was to target in on some of these, have you
all given any thought to the notion that, you know, part of the
price of, in effect, qualifying for the infrastructure bank to
participate might be an expedited regulatory process?
One of the biggest challenges we have for any kind of
transportation project--as someone who has still got the scars
of working for 20 years trying to get rail to Dulles--is that
the regulatory overhaul--the appropriate environmental reviews,
other process reviews--becomes such an added transaction cost,
that something that might make sense in terms of the actual
dollar construction cost gets put into financial uncertainty
because of the enormous regulatory burden and uncertainty.
And, Governor Rendell, in your efforts, have you talked
about any kind of notion that those projects that would qualify
for an infrastructure bank funding or potential funding, that
part of the quid pro quo from the localities and States
involved might be an expedited regulatory review?
Governor Rendell. In fact, Senator, BAF--that is one of our
principles on our basic goals for the system--is we can and we
should do this, and I think the post-bridge collapse in
Minnesota, it was our hope that that would shock the Nation
enough to get us really involved in a real comprehensive
infrastructure program. It didn't do that. But the only benefit
that came from that tragedy was do you know how long it took
Minnesota to rebuild its bridge? Nine months. Nine months. Most
EISes alone for transportation projects take a year, year-and-
a-half. They did it in 9 months.
We can do things like that. The regulatory process doesn't
need to take the time that is built in. If we are willing to
invest the effort, we can slice through that regulatory
process, save money by doing it, at the same time preserve the
basic things that the regulatory process was intended to
protect and do it quickly. And I think that would, and maybe
Mr. Wolf wants to comment on this, but I think that would
excite the private sector because it would be a quicker return
on their investment.
Senator Warner. Let me just add one thing before I get to
Mr. Wolf's comment, and let me just echo and agree with you. I
also agree with your notion about the ability for us to lift
the restrictions in a reasonable way on Federal interstates. We
looked at that opportunity, I-81, which goes through your State
and mine.
There was recently a conversation a number of Senators had
with a very senior member of the Administration. We were
talking about China's move on putting in a major high-speed
rail link within 3 years and kind of the comment was, well,
that couldn't happen in America. Whenever we get to the point
where we say, that couldn't happen in America because of the
processes we have set up, well, that is a very different
America than I think either of us grew up in----
Governor Rendell. No question.
Senator Warner. ----or want and----
Governor Rendell. We used to be the ``can do'' country for
the world.
Senator Warner. Amen. And listen, we need appropriate
regulatory oversight, but sometimes this becomes a transaction
cost that makes otherwise fundable projects not fundable.
Very quickly for Mr. Wolf, and again, I want to thank
Robert for your leadership on this issue, you are out there on
this, but how do we get--clearly, your colleagues have done
pretty well. I often think that one of the quid pro quos maybe
of the TARP ought to have been really challenging Wall Street
to come up with a $2 trillion private sector Infrastructure
Investment Bank as the payback for the taxpayers rescuing the
financial system.
But how do we make sure that we get not only your
institution, but the best minds on Wall Street really engaged
in this issue in a way they can make reasonable returns, not
make perhaps outrageous returns, but reasonable returns to get
those minds to the table?
Mr. Wolf. Thank you, Senator. I think, one, it would be
important to make sure that the model is right, so it would
have to be a project that is deemed to be having sustainable
user fees or revenues that theoretically are paid for, so not a
grant process but based much more on user and revenue driven.
I think, second, there would have to be a capital market
structure at the project level. I mean, this is not going to be
anything like a GSE. This is going to be at the project level.
It is almost like project finance. And so our view would be
that the NIB would normally come in, possibly at more like a
subordinated debt-type level, which they have done in the past.
You would have senior debt, you would have sub-debt, and then
you would probably have some mezzanine debt and equity.
And then, therefore, for the Government, OK, they would be
able to maximize their dollars by getting private institutions,
but more importantly, their risk is defined. Now, the best
thing about doing it at the project finance level is if it goes
well, great. Everyone is happy, because the returns are based
on the cash-flow of the user fees and the time to finish. So to
your point, regulatory would have to be governed because that
would--you know, if it postponed because of all these different
hurdles, then that would be a negative.
On the flip side, let us just say it didn't go well, which
is not what we would want, but you would restructure the
financing at the project level, OK. And where you restructure,
I mean, to be blunt, private equity loses first. And so I can
give you examples of how we would structure it that would limit
the Government risk, OK, and make sure that there was no type
of guarantee on the whole project.
So at the end of the day, it has to be based on what we
would say either the appropriate revenues or the right
availability process.
Senator Warner. Thank you. Thank you, Mr. Chairman.
Senator Reed. Senator Corker.
Senator Corker. Mr. Chairman, thank you, and thanks for
your courtesy and to each of you for your testimony.
Governor, we have been on a number of media programs
together and you always talked in a rational way, so I thank
you for that. I don't know what you do when I am not around----
[Laughter.]
Senator Corker. ----but I certainly have seen you talk in a
rational way and I thank you for that and have added to a
constructive debate. And, Mr. Wolf, it is good to see you
again.
I am actually here for one reason. I have read the
testimony and all of that, but I really want to follow up on
the last comment Mr. Wolf made. I just want to--I don't
understand exactly how it works, OK, so the mechanics of how
the whole transaction would work. So I would love it--I don't
know if it is appropriate for the Governor or Mr. Wolf just to
walk me through sort of a standard, typical transaction,
because I think that would be really educational for all
involved.
Mr. Wolf. So, great. Thank you. Good to see you, as well.
Senator Corker. Yes. Thank you.
Mr. Wolf. So I think I will bifurcate the answer into
understanding the capitalization and then understanding how a
funding of a project.
But from the capitalization perspective, my recommendation
would be that the NIB would borrow debt and that it would not
be guaranteed by the Government. It does not have to borrow
debt, but that would be my recommendation, and the leverage,
very different than a GSE, would be capped at two, two-and-a-
half times, which is where the European Investment Bank was. So
there would be a defined leverage.
Senator Corker. Instead of that, why don't you just walk
through a deal.
Mr. Wolf. A deal----
Senator Corker. Give me a specific deal and just sort of
walk through it so----
Mr. Wolf. So let us just say there was a $1 billion project
for something that had some sort of user fees. There would be
likely four different types of investors. You would have $200
million at the State or local level. Then you would have
billion at the National Infrastructure Bank level. And you
would probably have somewhere around $350 billion at private
debt. And then you would have $250 billion at private equity.
And it would be completely focused on the cash-flow of that
project, OK----
Senator Corker. So every deal, if we could have a little
bit of exchange, each deal that one would look at would need to
have some type of user-fee generation for it to work.
Mr. Wolf. Or availability, but predominately user-
feedriven. That would be the preference of this.
Governor Rendell. So Mr. Wolf is correct. It needs a rate
of return. But Deputy Secretary Kienitz before you talked here
talked about Measure R in Los Angeles. Mayor Villaraigosa
persuaded 64 percent of Los Angeles County residents to vote to
raise their sales tax by half a cent over a 30-year period.
They were to generate enough money to do a number of projects,
but the most important one was to radically expand their light
rail system.
I think, and these figures may not be dead on, but I think
the project itself, that project was like an $18, $20 billion
project. In the first 10 years, the sales tax will generate
about 8 of the 18. What they would seek to do is come to the
Infrastructure Bank and say, this is a little different from
what Mr. Wolf was saying. They would say, look, a half cent on
the sales tax for Los Angeles County, you can gauge what that
return is going to be.
But we want to get this done in 10 years, not 30. So can
you loan us, and we are willing to repay you, can you loan us
the money in the first 10 years of the existence of this
project so we can finish it in 10 years? You will get your
money back by the guaranteed rate of return, by the half-penny
increase in the sales tax. That will be pledged to repay the
Infrastructure Bank with the loan.
So it can be conventional things where the private sector
is involved or it can be where the Government is going to do a
rate of return. When Mr. Wolf talked about availability
payments, it is a very important concept. Assume that I wanted
to do, and I do, but I'm going to run out of time, I want to do
something called the Schuylkill Valley Metro. That is a high-
speed rail line from Reading, Pennsylvania, all the way through
the Western suburbs of Philadelphia into the city. It would be,
I think over time, be a money maker. But there is no way I can
get a private company to invest if I say you can have all the
fares and you can have some of the right of ways at the
stations. It is just too much of a risk.
But if I said to the private company--maybe Mr. Wolf and I
can do the deal right here today--if I said, Pennsylvania is
willing to give you, in addition to all the fares and the
retail, we are willing to give you X-amount of million dollars
a year, can you build it--it is a $1.1 billion project--can you
build it? Well, with that availability payment and the fares,
he might be able to take that risk.
So the thing about it, Senator, is it can respond to all
sorts of needs like this. And again, I know--look, I have been
in Government all my life and I know there is always a tendency
to not want to lose control because you think your ideas are
the good ones, and usually they are. But you can structure
this----
Senator Corker. Actually, I think if we lost control of a
lot of things around here, it would be good, so----
[Laughter.]
Governor Rendell. Well, we lost control of the airline
industry. That didn't work out so well.
Senator Corker. Yes.
Governor Rendell. But if we could--I mean, you can put in
the criteria. You can put in the framework. But the beauty of
the bank is, it can be responsive to creative solutions. And
again, what Mr. Wolf said is so important, and I wish Senator
Shelby was here--I don't know if you heard his opening
statement or read it. He was worried about this becoming
another GSE. It isn't. It isn't. And the Government----
Senator Corker. How does the entity--I know my time is
over, and probably you have a noon meeting. How does the entity
borrow money without Federal backing? I don't get that.
Governor Rendell. It borrows money up to the State and the
Federal investment, but you do that right now in TIFIA. You put
in $400 million in a TIFIA loan to a project. That is your
risk. But $400 million is a very small piece of the project.
Mr. Wolf. Well, it would be very clear. I mean, our
creation of a National Infrastructure Bank would be the
Treasury would put in, say, $25 billion, $5 billion a year for
5 years, and that would be their equity. And then I would
propose a slight leverage at maybe two times. That is $75
billion of funding toward the National Infrastructure Bank,
which we think can get you $400 billion of project.
Senator Corker. Yes. You know what would be good? First of
all, I thank you for the courtesy. I know I am a minute and 57
over. I think what would be good for me would be just if you
all could send like three examples on different types of
projects as to how your standard, typical deal would work.
And again, I thank each of you for your testimony and for
coming up here today. It is rare that we are actually, during
this period of time, focused on something that is substantive,
so we thank you for giving us a break in that regard.
Senator Reed. Thank you, Senator Corker.
Thank you, gentlemen, for your testimony. Governor, I will
start with you, but a question I want to pose to every member
of the panel, an important part of this concept is a local
contribution. You have done a remarkable job in Pennsylvania of
coming up with local contributions, but there are lots of parts
of the country where States and cities and municipalities have
no capacity or very little capacity to match. They have the
projects. You can show on paper their rate of return is huge.
But they don't have that kind of match. So it raises a--or they
are going to borrow from Peter to pay Paul. They will take from
an existing program and they will wash the money through
something and, voila, so you lose out on something else.
So the question really is, when we think about this, how do
we make sure, one, that there is a real local match, and two,
we don't sort of borrow from other things that have to be done,
and essentially it is new money, matching this new money going
forward. I will start with you, Governor, and then Mr. Wolf,
and then Mr. Shubert, please.
Governor Rendell. Well, I think part of the answer to that
is to get the private sector involved, that heretofore
basically hasn't been involved in transportation at all. But I
think the wastewater and water and sewer example, there often
is private sector involvement, and there, the Government
guarantees some of the loans at fairly low interest and it
works.
But remember, we all have borrowing capacity, and in most
cases, in most cases, even in this tough recession, our
borrowing capacity is in fairly good shape. Not everywhere,
obviously. There are some municipalities who are really up
against it.
Take Pennsylvania, for example. I have borrowed a lot of
money to invest in infrastructure and other projects critical
for the Commonwealth. To hear some of my citizens talk about
it, I have borrowed every dime ever borrowed in the history of
the Commonwealth. Not necessarily true, but we are barely over
25 percent of our constitutional borrowing authority in
Pennsylvania. We are at about $11 billion and it is a $40
billion authority. We are still doing very, very well in terms
of Wall Street's analysis of our debt capacity.
There is debt capacity. I mean, the Federal Government is
so hamstrung by not having your own capital budget. The only
part of the Federal--DOD, as you know, has a small capital
budget built in, but it is the only part of the Federal
Government that has a capital budget. Rhode Island could never
have done any of the things that it did without a capital
budget. And my guess is, you match the Federal transportation
money in Rhode Island by some form of borrowing to come up with
the State share. That is what we do in Pennsylvania and what
most States do.
So I think having a capital budget gives us the ability
even in difficult times to continue moving forward, and as my
colleague from the Connecticut building trades said, the
borrowing gets a great return on investment.
You know, one of the things that has always rankled me is
the CBO scores everything up here and they will score a $400
billion infrastructure program at $400 billion, and yet it is
easy to demonstrate how in increased individual taxes that
these workers who are now earning nothing would pay, in
additional corporate taxes, in the avoidance of unemployment
compensation, that most of these 70 percent unemployed guys
are, that $400 billion, my guess is the Federal Treasury would
get back $100 or $125 billion, and yet it is scored at $400
billion.
Senator Reed. Mr. Wolf? Thank you.
Mr. Wolf. Thank you, Senator. One, the creation of a
National Infrastructure Bank would be more for the large
regional and national projects, but to answer the question more
on local, first, the burden of local governments is just too
high. They are funding 75 percent of the infrastructure. It is
just disproportionately too big.
Governor Rendell. State and local.
Mr. Wolf. State and local. And then, second, I think that
you really have to look at the projects that are being put
forward. They have to be merit based. So it has to be either
user based, availability based, but it has to have some sort of
sustainable perspective for a National Infrastructure Bank. If
you are going to the grant process, my recommendation would be
to work more with the agencies.
Senator Reed. Mr. Shubert, from your perspective on the
ground.
Mr. Shubert. Thank you, Senator. From our perspective, and
being from Connecticut, we see large megaprojects. We are to
the point now in Connecticut where four megaprojects are
basically devouring our transportation program. And as our
State starts looking for new revenue sources to start funding
megaprojects in the future--like Rhode Island, we are in the
Northeast. We have an old system. It is running over capacity.
The winter weather, everything affects our system. It is
falling into disrepair faster than we are addressing it.
We are going to have a line of these megaprojects into the
future. If we can fund some of those megaprojects through an
Infrastructure Bank, that will free up more regular formula
funding for us to apply toward our basic needs. And also,
across the country, the same thing would apply. If there is
more and more use of an Infrastructure Bank, that is taking
projects out of the core system, which leaves more money in the
core system overall for all the States.
Governor Rendell. And, Senator, one other thing. Building
America Bonds have been a great help to municipal and State
governments. We couldn't have financed a number of the major
construction projects we have done in the teeth of the
recession within BABs and they should be, whether it is at 35
percent or 28 percent, they should be reauthorized.
Senator Reed. Well, thank you, Governor, not only for your
testimony, but for your great leadership in Pennsylvania. And
Mr. Wolf and Mr. Shubert, thank you for your excellent
testimony here today.
My colleagues might have additional questions. You could
get them. We will send them to you, and please respond in a
prompt manner for additional questions.
But thank you again for your insightful testimony and the
hearing is adjourned. Thank you.
[Whereupon, at 11:58 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
I call the Committee to order. Today, we are here to discuss how
investing in our public infrastructure can help to strengthen our
economic recovery and create well-paying jobs for American workers.
In 1955, President Dwight Eisenhower sent a message to Congress. In
it, he called on Congress to meet the challenge presented by a national
economy that was rapidly outgrowing its capacity to transport people
and goods. The result of that message was a monumental Federal
investment in our national infrastructure--our Interstate Highway
System.
Eisenhower's initiative was broad in scope, and bold in conception.
It built upon over a century of investments in our railroads, ports,
water and sewer systems, and other infrastructure. These investments
helped build the world's strongest economy.
Now other nations are catching up and focusing a greater share of
resources on infrastructure investment than the United States. China
puts 9 percent of its GDP towards infrastructure projects and India
contributes 5 percent.
These countries are focused on providing their citizens with fast,
reliable transit options. They are lowering their reliance on fossil
fuels.
They are making investments on the scale that our Nation made early
in the 20th century--but they are focusing on the needs of a 21st
century economy.
We can't settle for second place.
We need to do better. This includes passing a long-term surface
transportation bill which will remain the backbone of our
transportation policy. Only a long-term bill can give our State and
local governments the certainty they need to ramp up investments in our
road, transit, and rail infrastructure. While these investments are
vital to the health of our transportation systems, we also need a new
approach to infrastructure finance.
A National Infrastructure Bank will build on our Nation's legacy of
bold, innovative investments in public infrastructure. It would
complement our current infrastructure financing programs in a manner
that delivers taxpayers the best bang for their buck.
First, an infrastructure bank would create a competitive, merit-
based process to distribute money. Projects would be subject to cost-
benefit analysis to determine their national and regional economic
impact.
Second, a well-designed National Infrastructure Bank would leverage
State, local, and private funds to support these investments. With the
current system of formula grants, States often simply substitute
Federal funding for State funding. The Infrastructure Bank's
competitive selection process can reward those projects that best
leverage new public or private funding to expand the pie, not just
rearrange the slices.
Lastly, it would allow us to shift our focus from the near-term to
the long-term. This will provide opportunities to fund large projects
of national and regional significance, projects that require vision and
patience. Investments like these will fuel our economy and create jobs
over the long-term.
With my former colleague Senator Chuck Hagel, I originally proposed
legislation that would have established such a bank on August 1st,
2007. Our announcement received little notice or fanfare--until a few
hours later when the tragic I-35 bridge collapse happened in Minnesota.
I'd like to applaud President Obama--who cosponsored my 2007
legislation--for his continued support of this important idea.
This is our opportunity to embrace the legacy of big-picture
thinking that led to investments on the scale of the Interstate Highway
System. By establishing a National Infrastructure Bank, we're affirming
our commitment to building a prosperous 21st century economy.
I look forward to today's testimony, and I'd like to turn it over
to Senator Shelby for his remarks.
______
PREPARED STATEMENT OF SENATOR TIM JOHNSON
Mr. Chairman, thank you for holding this hearing today regarding
the need to invest in our Nation's infrastructure. I commend your focus
on infrastructure as an investment in jobs and our economy. I am also
pleased that President Obama has focused national attention on
strengthening our transportation systems and other infrastructure to
ensure long-term economic growth and competitiveness.
This hearing examines an important topic. Throughout my
congressional career, I have worked to improve South Dakota's highways
and transit systems, water systems and stock of affordable housing.
Infrastructure investments are needed across the State--in Indian
Country, in our rural areas, and in our cities--and those investments
are in the national interest.
Mr. Chairman, in the 110th Congress you introduced legislation to
address infrastructure concerns in housing, water, and transportation.
This Committee held a hearing on the legislation in March of 2008.
I'd like to reiterate an issue I raised in my statement at that
hearing. Specifically, I want to ensure that we take rural as well as
urban concerns into account in examining investment needs and
developing any response. For example, in my State we have important
needs but relatively few projects that would involve a minimum $75
million Federal commitment, a minimum threshold that has been suggested
in the past. Also of concern are project criteria that emphasize
leveraging. In low population density States, the ability to provide
meaningful financial leverage and to attract outside investors may be
quite limited. Small numbers of people not doing especially well
economically are not as well equipped to contribute to projects as
large numbers of workers in large metro areas. This is especially a
concern in Indian Country and in other poor rural areas. The citizens
in these less populated States still have important needs in housing,
in water systems, in transportation that should be of concern to this
Committee.
So, as we examine the issues of infrastructure needs and possible
responses, I hope that any solutions we develop would provide
meaningful opportunities for investment in States like South Dakota, as
well as in more populous areas of the country.
Mr. Chairman, thanks for your efforts on this issue. I look forward
to working with you.
______
PREPARED STATEMENT OF SENATOR MIKE CRAPO
Mr. Chairman, today the Committee hears testimony on infrastructure
investment needs and possible responses, including a possible
infrastructure bank.
In my time in public service I have worked consistently to support
needed highway, transit, and other improvements to infrastructure in
Idaho and I agree that infrastructure deserves the attention of the
Committee. From my work in this area, I can assure my colleagues that
the infrastructure investment needs our Nation faces include needs in a
relatively rural State like Idaho as well as in large metropolitan
areas.
So, as we hear testimony and consider possible approaches to this
issue, I will be interested in learning how we can ensure that any
proposed solutions that we develop would be responsive to needs in a
State like mine as well as to other needs.
For example, in infrastructure bank legislation that was introduced
in 2007 there was a Federal project amount minimum of $75 million. That
might not seem high in big States and cities but it is an amount that
looms as a possible barrier to participation for smaller States. Also
of concern are project criteria that emphasize leveraging and revenue
streams. With respect to transportation projects, a revenue stream may
well mean toll roads. Those are not feasible with the traffic levels
prevalent in lower population density States.
So, as we consider infrastructure issues, we need to keep in mind
the concerns and needs of rural States as well as those of large
metropolitan areas.
Mr. Chairman, thanks for your interest in this issue. I look
forward to hearing from the witnesses.
______
PREPARED STATEMENT OF SENATOR JOHN F. KERRY
Mr. Chairman and Senator Shelby, I wanted to thank you for the
opportunity to testify at this hearing to explore ways to develop a
National Infrastructure Bank. Rising economic powers around the world
are investing in their future--we need to do the same before we are
left behind.
Chairman Dodd, I also wanted to take this opportunity to thank you
for your efforts to enact historic financial reform and for your great
work as Chairman and as a Member of this Committee for the past 30
years. As a former Member of the Senate Banking Committee, I know your
efforts have helped to restore confidence in our capital markets and
our financial institutions and provided critical new protections to
consumers from financial fraud and abuse.
Mr. Chairman, I also want to thank you for your leadership in
bringing attention to the critical need to renew and expand America's
infrastructure. I believe we must work together in a bipartisan manner
to find new ways to finance infrastructure projects that create jobs
and increase our economic competitiveness.
There are many ideas about how to do this. However, the costs of
tackling this problem are high and it's clear to me that the best way--
and the most efficient way--is to create an infrastructure bank for the
United States. Already, a diverse bipartisan group supports the idea of
a National Infrastructure Bank including the Chamber of Commerce, the
AFL-CIO, and SEIU.
We need to create new and strong incentives for investment here in
the building blocks for economic competitiveness--roads, bridges, rail,
aviation, and other essential infrastructure.
This is an idea whose time has not just come but is long overdue.
And Americans know it. Every day, during their commute to work, they
drive on broken roads and crumbling bridges. They are paying more to
fly and spending more time in the air than they should because we have
failed to invest in modern radar and upgrades to our airports. They
travel a rail system that is, for the most part, the product of another
century. And they live in communities that too often are unable to
properly manage their natural resources.
How bad is it? Our infrastructure earned a ``D'' rating from The
American Society of Civil Engineers, who has estimated that it would
cost more than $2 trillion to bring our country's existing
infrastructure to an acceptable level. We are talking about staggering
sums here, and it clearly reflects just how much we have neglected our
infrastructure--and just how much we need to do in the years ahead. To
bring that level of investment to market will require a partnership
with the private sector and the proper delivery of private capital
catalyzed by public funds and loan guarantees.
Well-functioning infrastructure is not a luxury--it is the key to
connecting our people and creating millions of middle-class jobs for
American workers over the long term. And it is vital to our economic
future in the face of global competition. Our growth and exports are
directly tied to how our infrastructure operates. Quite simply, we are
falling behind many of our main economic competitors, and the further
we fall behind in this race, the harder it will be to catch up.
For example, China's 2009 infrastructure spending is estimated at 9
percent of GDP, or $350 billion, and is growing at an annual rate of 20
percent. China's highway mileage is expected to surpass the United
States' in under 3 years.
Europe's infrastructure bank, the European Investment Bank,
financed $350 billion in projects from just 2005 to 2009 across the
European continent, helping modernize seaports, expand airports, build
rail lines, and reconfigure city centers.
And Brazil has invested over $240 billion in their infrastructure
in the past 3 years alone, with an additional $340 billion planned for
the next 3 years. Brazil has unveiled major initiatives to invest in
infrastructure ahead of hosting the World Cup and Olympics, using their
own infrastructure bank as a key tool to finance this massive
expansion.
To get back in the game we need more than the existing municipal
bond market system, which is already struggling to support over 80
percent of infrastructure investment in the United States. We have to
do more than our existing Federal Government programs, which have been
squeezed by the recent economic downturn and budget deficits.
Fundamentally, what we need is an American infrastructure bank that
complements our public efforts and acts as a catalyst for significant
private investment.
If done right, I believe an infrastructure bank can change the
playing field. It would finance projects from high-speed rail to air
and sea ports, all with the expectation of being repaid. It would lend
directly to economically viable projects of both national and regional
significance, without political influence. It would be run in an open
and transparent manner by experienced professionals and have meaningful
Congressional oversight.
Americans have always been builders. We built a transcontinental
railroad. We built an interstate highway system. We went to the Moon.
But for too long now, we have lacked adequate investments in our
infrastructure and what building we have done has been without a long-
term strategic plan. A National Infrastructure Bank will change that. A
National Infrastructure Bank will make Americans builders again.
In deciding whether to create a National Infrastructure Bank, we
should also consider this: When President Eisenhower signed the law
creating the Interstate Highway System; he noted that, ``Together, the
united forces of our communication and transportation systems are
dynamic elements in the very name we bear--United States. Without them,
we would be a mere alliance of many separate parts.'' What was true
then is still true today.
______
PREPARED STATEMENT OF ROY KIENITZ
Under Secretary for Policy, Department of Transportation
September 21, 2010
Chairman Dodd, Ranking Member Shelby, and Members of the Committee,
thank you for inviting me to appear before you today to discuss how
investing in transportation infrastructure can create jobs and grow the
economy.
It's particularly appropriate that the Committee has titled the
hearing ``Creating Jobs and Growing the Economy,'' because
transportation infrastructure investment has both effects, and the two
effects are closely related but separate. Infrastructure investment
creates jobs by creating work opportunities in construction and related
industries. These jobs are temporary--lasting from less than a year for
simple projects to several years for complex projects. After the
project is complete, it creates--if it is well-designed and well-
chosen--decreases in cost and increases in productivity that will spark
economic growth. Our goal at the Department of Transportation is to
make sure that both objectives--the short-term goal of creating jobs
and the long-term goal of growing the economy--are achieved in our
infrastructure investments.
The President's Infrastructure Investment Proposal
Two weeks ago, the President laid out a bold vision for renewing
and expanding our transportation infrastructure--in a plan that
combines a long-term vision for the future with new investments today.
It is time to authorize a new 6-year program for transportation
infrastructure investment, and the President has called for a 6-year
authorization that would help restore job growth and economic
prosperity today while reducing our long-term infrastructure deficit.
To accomplish this, the program will need a robust level of funding,
higher than our current baseline, and, with the current state of the
economy in mind, the Administration proposes that $50 billion--a
significant share of the new investments--be frontloaded in the first
year.
Some of the tangible accomplishments of the President's plan over
the next 6 years will include rebuilding 150,000 miles of roads;
constructing and maintaining 4,000 miles of rail; and rehabilitating or
reconstructing 150 miles of runway.
More generally, our new surface transportation program needs to be
part of a long-term framework that reforms the infrastructure
investment process and expands our levels of investment so that we can
build a truly world-class transportation system. We need to streamline,
modernize, and prioritize our transportation investments, consolidate
our dozens of programs into a coherent program structure that reflects
national needs, and foster a culture of competition and performance
that will drive investments that will produce better transportation
outcomes and more livable communities for the American people.
This program must have a number of key elements. We need to
continue the commitment by the President and the Congress to expand our
high-speed rail program. As the Secretary has traveled around the
country meeting with people in outreach sessions on our surface
transportation program, a recurring theme is that people want high-
speed rail. They don't want to have to wait in crowded airports or
drive for hours on congested highways to get where they want to go.
They want another choice. They want high-speed passenger rail.
We need to make achieving a state of good repair in our
transportation infrastructure a national priority. Our highways, our
bridges, our transit systems, our waterways, our ports, and our
railroads have in some cases been allowed to deteriorate to the point
that they are not safe, are not reliable, and don't provide an adequate
level of performance for the American people. As we repair and
rehabilitate our infrastructure, we can build in new safety features
and new technology that will improve our transportation system's
performance, so that, in every mode, we have a truly 21st Century
transportation system.
We need to make livable communities a central part of our
transportation program. That means we need to invest in better
transit--in both urban and rural communities--to give people the
transportation choices they want. We need to give people the option of
walking or bicycling on short trips without putting their lives at risk
by walking or bicycling in the street. We need to give people more
fuel-efficient options to get where they want to go, and allow people
easier access to jobs and housing.
We also need to take advantage of the technological breakthroughs
of the past 20 years in Intelligent Transportation Systems. Advanced
technology can multiply the effectiveness of our investments, so that
we get more safety, more congestion relief, and more performance from
each dollar of our investments than we could with conventional
technology. We have spent billions of dollars on developing new
technology; now we need to deploy it to reap the returns on our
research and development investment.
The reauthorization proposal needs to address our key priorities,
and that means that it needs an appropriate division of responsibility
between the Federal Government, States, and local governments. Each
State and metropolitan area has transportation needs, and Federal
assistance should help them meet those needs and grow their economies
while also addressing national priorities. While formula programs can
provide basic financial support to States and localities to maintain
and expand their transportation infrastructure, there are some national
goals that the Federal Government is uniquely suited to address. The
Federal Government should address critical freight transportation
problems that affect our national economic competitiveness and the
prosperity of communities all across the country. The Federal
Government should focus on the nationwide environmental sustainability
challenges that affect the environmental quality of the world that we
pass on to our children and grandchildren. Competitive Federal programs
would allow the Federal Government to direct funds toward projects that
can have the best regional and national impacts on our economy, our
environment, and our other critical national goals. For too long, these
critical national needs have been falling through the cracks of our
stovepiped transportation programs. We need a truly national
transportation program to address national needs.
Moreover, competitive programs can promote an environment where
projects competing with one another for support are forced to
demonstrate how they can be more effective in advancing our performance
measures and strategic goals. As projects that are most cost-effective,
most innovative, and based on the best analysis show that they can win
additional financial support, the entire culture of transportation
infrastructure investment is pushed toward a more data-driven, outcome-
oriented framework.
The Secretary has proposed five national transportation goals as
part of the Department's Strategic Plan--Economic Competitiveness,
Safety, State of Good Repair, Livability, and Environmental
Sustainability. If we want to achieve these goals, we need to be able
to direct our transportation funds toward whichever mode of
transportation--or combination of modes of transportation--can most
effectively achieve those goals. So we need to step away from the
traditional stovepiped approach to transportation funding. An
Infrastructure Bank provides an important opportunity to compete
projects in a way that breaks away from these stovepipes.
Finally, we need to make sure that the process of deciding which
projects to invest in is based on the best analysis possible. If we
want to use transportation infrastructure to grow the economy, we need
to use economic analysis to find out which projects will have the
greatest impact on economic growth. In order to achieve and maintain a
state of good repair for the Nation's transportation infrastructure, we
need to use asset management systems to develop a complete inventory of
our transportation assets and analyze what stream of maintenance,
repairs, and rehabilitation will maintain a state of good repair over
the life-cycle of the infrastructure at the lowest possible cost. If we
have specific goals that we are trying to achieve, we need to use
economic analysis to determine which projects will achieve those goals
in the most cost-effective way possible.
The surface transportation program also needs to take advantage of
all the financing options available to us. Some parts of the
transportation system can generate a revenue stream that can pay for
the project without tax revenues. For these projects, the Government
may need to advance the money up-front, at least in part, but then the
taxpayer can be paid back from the revenue stream that the project
generates.
So we need a financing institution that can provide a range of
financing options--grants for projects that by their nature cannot
generate revenue, and loans and loan guarantees for projects that can
pay for their construction costs (or part of their construction costs)
out of a revenue stream. In short, we need the Infrastructure Bank that
the President has proposed.
The Infrastructure Bank can be designed to embody all of the key
elements I have described. It can avoid the excessive stovepiping of
funds into narrow categorical programs. It can be focused on directing
its investments toward achieving the strategic goals that the Congress
designates. It can be provided with a professional staff that can focus
its attention on meeting national and regional transportation needs. It
can have a broad modal scope, so that it can invest funds in whichever
mode of transportation--land, water, or air--is most suited to
achieving our strategic goals. It can apply the tools of economic
analysis to select projects that can be demonstrated to have the
greatest possible impact on those goals. It can foster an environment
of competition and innovation that will encourage the best projects to
be funded. And it can offer the combination of financing options--
grants, loans, and loan guarantees--that will allow it to leverage
public funds and get the best results from our limited budgetary
resources.
We recognize that these proposals represent a major change in how
we have envisioned our transportation program in the past. But we
pledge to work with the Congress to design this program and to figure
out the best way to pay for it.
Creating Jobs
The President's new plan will build on what we have already
accomplished in the American Recovery and Reinvestment Act. That Act
embodies these twin goals in its title--short-term job opportunities to
achieve recovery, and long-term economic growth based on reinvestment.
We are making good progress on using our Recovery Act investments
to create jobs. As you know, the measurement of the jobs created under
the Recovery Act is subject to two different sections of the Act, each
of which calls for a slightly different measure of the number of jobs
created. Section 1201 of the Act (which applies only to the Department
of Transportation) calls for DOT to measure the number of ``job-years''
created by the Act. A ``job-year'' is one person working for one year.
So if a project keeps 100 people working for 2 years, it creates 200
job-years. Section 1512 of the Act is less clear--it asks us simply to
measure the number of ``jobs.'' This has been interpreted as meaning
the number of full-time-equivalent jobs that have been created by the
Act. Returning to our example, if 100 people are employed for 2 years
on a project, then the full-time-equivalent number of jobs is 100. So
it is easy to see that the varying statutory language in the two
sections of the Act can result in two different measures of the number
of jobs created.
But the important point is that jobs have been created, by either
measure. Our measure of the number of job-years created has risen
steadily as more projects have been started and completed. In our first
report on job-years created, as of April 30, 2009, the program had just
started, and only a few projects had broken ground. We recorded only
130 job-years. In our second report, as of July 31, 2009, we had begun
to make a real impact, with 15,000 job-years created. In our third
report, as of January 31 of this year, we were up to 95,000 job-years.
As of September 10, we estimate that we had created over 208,000 job-
years.
The number of full-time-equivalent (FTE) jobs, by contrast, is
higher during the peak construction season in the summer, and then
falls during the off-peak period in the winter. Unlike job-years, FTE
jobs can't be added from one time period to another--they are a
snapshot of the number of people working the equivalent of full-time at
any one point in time. So our first report, for the period through
September 30, 2009, showed an average of 46,000 people employed full-
time between when the Act was signed on February 17th and the end of
September. In our second report, for the period through December 31,
2009, FTE employment had fallen to 40,000 employees, because projects
were shutting down for the winter. The numbers for the first quarter of
2010 showed an even lower estimate, 34,000 employees, because two of
these three months were winter months. The most recent estimate, for
the second quarter of 2010, showed FTE jobs bouncing back up to 62,000
as spring and early summer weather made it possible for construction
projects to get started again, especially in the northern States.
Moreover, in creating jobs we are also creating skills. These jobs
provide on-the-job training for our construction workforce that will
make it easier for them to find good-paying jobs in the future.
While we have created thousands of jobs already, additional
opportunities remain. Almost all of the funds appropriated to DOT under
the Recovery Act have been committed to specific projects, but much of
the project funding will continue to be spent over the coming year,
creating hundreds of thousands of new jobs. Some States emphasized the
``Recovery'' part of the Act, and spent their money quickly on projects
that could be started and completed in a few months. Other States
emphasized the ``Reinvestment'' part of the Act, and chose to spend
their funds on more complex projects that could create greater long-
term improvements to their economies, but which took longer to plan and
execute. These projects will not be completed until next year, and they
will continue to create jobs through 2011. We knew when the Recovery
Act was designed that this would be a long recession. The Recovery Act
will continue to create jobs in 2011 and 2012 and continue to help the
economy to recover. We estimate that the DOT portion of the Recovery
Act will create 523,000 job-years, so we have plenty of jobs left to
create in 2011 and 2012.
Growing the Economy
Infrastructure investment doesn't just create jobs--it grows the
economy over the long term. There is an extensive economic literature
that bears out this observation. Let me give you a few examples.
First, if you look back in history, the effect of our
transportation investments on growing the economy is undeniable. In the
19th Century, investments in canals and railroads opened up the
agricultural lands of the Midwest and allowed the productive bounty of
that land to be shipped to markets in the East and abroad. In the 20th
Century, the construction of the Interstate Highway System and our
network of hub airports made possible convenient, long-distance
automobile transportation and high-speed, long-distance air passenger
transportation. The taming of the Mississippi River system with locks
and dams made possible low-cost barge transportation of Midwest grain
to export ports. More than 200 years ago, Adam Smith grasped the
essential role of transportation in the economy when he observed that
The greatest improvements in the productive powers of labor . .
. seem to have been the effects of the division of labor, [and]
the division of labor is limited by the extent of the market.
He then went on to explain how transportation improvements in 18th
century Britain expanded the extent of the market and allowed the
British economy to grow.
Second, the Department has sponsored research that quantifies the
impact of transportation investments on the growth of the economy. In a
series of studies conducted by Ishaq Nadiri and Theofanis Mamuneas, our
research has estimated that our expenditures on transportation
infrastructure have had a huge payoff on economic productivity. \1\ On
the average, from 1949 to 2000, investments in transportation
infrastructure had a 31 percent rate of return. This rate was
particularly high when we were first building the interstate highway
network, when we had rates of return as high as 48 percent. But even
more recently, in the 1990s and 2000s, we have had rates of return of
6-16 percent.
---------------------------------------------------------------------------
\1\ The most recent of these is Theofanis P. Mamuneas,
``Contribution of Highway Investment to National Economic Growth''
(Federal Highway Administration, July 2008).
---------------------------------------------------------------------------
Third, in urban areas, improvements in transportation
infrastructure have impressive economic effects. Studies by Glen
Weisbrod and his colleagues in the Chicago and Philadelphia
metropolitan areas showed that investments in transportation
infrastructure that reduced travel times by as little as 10 percent
would reduce business operating costs in Chicago by $980 million and in
Philadelphia by $240 million each year. \2\
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\2\ Glen Weisbrod, Donald Vary, and George Treyz, ``Economic
Implications of Congestion'', National Cooperative Highway Research
Program Report #463 (Transportation Research Board, 2001).
---------------------------------------------------------------------------
Fourth, more recent research by Daniel Graham of Imperial College,
London, has shown that, in urban areas, ``agglomeration effects'' of
reducing the costs of travel and freight transportation increase
productivity. \3\ Businesses are more productive when it is easy for
them to ship goods to one another and to travel to one another's
offices and facilities. Even after taking into account the time savings
for freight and passenger transportation from transportation
investments, there is a further 25-percent increase in productivity
resulting from these agglomeration effects.
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\3\ Donald J. Graham, ``Agglomeration, Productivity, and
Transportation Investment'', Journal of Transport Economics and Policy,
v. 41, pt 3 (September 2007), pp. 317-343.
---------------------------------------------------------------------------
We have seen these effects in the transportation projects we have
reviewed as part of our TIGER Grants program. When the Congress
authorized the TIGER Grant program last year, and we issued guidance to
applicants, we wanted to make sure that we could choose the best
projects possible. To achieve this, we required applicants, at least
for the larger projects, to do a careful analysis of the benefits and
costs of their proposed projects. We then organized a team of
economists from within the Department to review those analyses and make
sure that their estimates were valid. The results gave us confidence
that the projects we were selecting were truly the best projects
available.
We repeatedly found projects that had measurable benefits well in
excess of their costs. For example, the Priority Bus Transit project
for Washington, DC, had benefits as much as six times its costs. The
Kansas City Transit Corridors project had benefits equal to at least
twice its costs. Several other projects were in the same range. We can
invest in these projects confident that we are getting our money's
worth.
We want to emphasize that growing the economy is not the only
factor that influences our choices of transportation projects. Not all
of the benefits of transportation projects can be translated into
dollars and cents. Many of the elements that make our urban areas more
livable--sidewalks and trees and multiple transportation options--are
difficult to assign dollar values to. And we take these kinds of
benefits seriously, too. But we also pay attention to the effects of
transportation on increasing the number of dollars in our pockets--
dollars that enhance our economic security and our sense of well-being.
It's plainly apparent that the Nation's economy is not producing
the prosperity that we all expect. There are, of course, many reasons
for that, including defects in our financial markets and excessive
financial leverage that many consumers were encouraged to engage in
during recent years. But clearly one contributing factor is that we
have not allocated the Nation's public investment well. We have not
invested enough in the public infrastructure that generates
demonstrable returns in increased productivity, while we have invested
too much in projects whose value was supported more by speculative
expectations than by demonstrable contributions to productivity. It's
time to refocus our investment priorities toward projects of enduring
value--projects that make a solid contribution to our Nation's economic
well-being. The Department of Transportation stands ready to play its
part in that effort.
Thank you, Mr. Chairman, for this opportunity to appear before you.
I would be happy to respond to any questions that you have.
______
PREPARED STATEMENT OF ALAN B. KRUEGER
Assistant Secretary for Economic Policy and Chief Economist, Department
of the Treasury
September 21, 2010
Introduction
Thank you Chairman Dodd, Ranking Member Shelby, and distinguished
Members of the Committee for inviting me to testify before your
Committee today. I appreciate the opportunity to discuss proposals to
improve our Nation's infrastructure investment and finance system.
Infrastructure is an essential part of the U.S. economy. Publicly
owned transportation infrastructure--including the roads, rail lines
and airports that businesses use to transport and deliver goods, and
that people use to commute to work, visit their families and travel the
country--makes up nearly 13 percent of our total nonresidential capital
stock according to the Bureau of Economic Analysis. In addition,
spending on public infrastructure is a significant part of Government
activity. According to the Congressional Budget Office, public
investment in transportation infrastructure in 2006 was approximately
$140 billion (6.4 percent of total Government spending), which was
split roughly equally between the Federal Government and State and
local governments.
The President has announced a bold plan to renew and expand
America's transportation infrastructure through an up-front investment
connected to a 6-year reauthorization of the surface transportation
program. Under Secretary Kienitz is providing an overview of that plan.
In my testimony, I will discuss several aspects of the President's
infrastructure proposals. First, I will evaluate why, from an
economist's perspective, focusing on infrastructure investment makes
sense, especially in the current economic environment. Second, I will
discuss some of the long-term benefits from increasing our investment
in infrastructure. I will then turn to the core ideas behind the
Administration's proposed National Infrastructure Bank, which were
heavily influenced by the bipartisan work of Chairman Dodd and a
distinguished former Member of this Committee, Senator Hagel. Finally,
I will highlight an innovative financing program, Build America Bonds,
which has provided an efficient new way to provide Federal support for
financing State and local government infrastructure investments and
could be a useful tool for the National Infrastructure Bank.
Infrastructure Investment in the Short-Term
The recent recession that started in late 2007 had an exceptionally
large impact on the labor market. The U.S. lost over 8 million jobs
between December 2007 and December 2009, and the unemployment rate
currently stands at 9.6 percent. One in five jobs that were lost in the
2-year period beginning in December 2007 was in the construction
sector. While there are positive signs of recovery in many sectors of
the economy, additional steps are needed to ensure that the recovery
stays on track. In this economic environment, accelerating
infrastructure investment--building on what we have already
accomplished in the American Recovery and Reinvestment Act--makes good
economic sense for several reasons.
First, infrastructure investment will provide opportunities for
workers who have been disproportionately affected by this recession.
Due to the collapse of the real estate market, the contraction of
employment in the construction industry has been especially acute.
Since December 2007, the construction industry has lost 25 percent of
its total payroll jobs. In August 2010, the unemployment rate for
construction workers stood at 17 percent. This is over three times
higher than it was 3 years ago. We should move quickly to provide an
opportunity for construction workers to productively apply their skills
and experience. Investment in infrastructure is well targeted to that
goal, and will take advantage of underutilized resources in the
construction sector.
Second, a wide range of analysts, including economists at the
Congressional Budget Office, have found that additional spending on
infrastructure is among the most effective policy options for raising
output and employment. \1\ Investment in infrastructure directly
increases employment because workers are hired to undertake
construction projects. Additionally, it adds to demand for goods and
services through purchases of material and equipment and through
additional spending by the workers who are hired. This in turn further
increases employment and output throughout the economy.
---------------------------------------------------------------------------
\1\ Congressional Budget Office, ``Policies for Increasing
Economic Growth and Employment in the Short Term'', January 2010.
---------------------------------------------------------------------------
In addition, during recessions it is common for State and local
governments to cut back on capital projects, such as building schools,
roads and parks, in order to meet balanced budget requirements. Past
research has found that expenditures on capital projects are more than
four times as sensitive to year-to-year fluctuations in State income
than is State spending in general. \2\ Tax receipts at the State and
local level contracted for four straight quarters at the beginning of
this recession and are still below prerecession levels. The American
Recovery and Reinvestment Act provided crucial support for
infrastructure during the recession. However, we must do more to ensure
that investment in infrastructure is not reduced for the wrong reasons,
as the need for improved and expanded infrastructure is just as great
during a downturn as it is during a boom.
---------------------------------------------------------------------------
\2\ See, James R. Hines, Hilary Hoynes, and Alan Krueger,
``Another Look at Whether a Rising Tide Lifts All Boats'', in The
Roaring '90s: Can Full Employment Be Sustained?, edited by Alan B.
Krueger and Robert Solow, Russell Sage and Century Fund, 2001.
---------------------------------------------------------------------------
Finally, we have long been underinvesting in the Nation's
infrastructure--and, as I will explain in the next section of my
testimony, addressing this shortfall with investments we make today
could help spark growth not only now but also in the long-term. The
American Society of Civil Engineers (ASCE) estimates that we face a
$2.2 trillion need for infrastructure investment over the next 5 years.
We would need to roughly double our current level of investment in
order to reach the levels they recommend. While that analysis might not
be an authoritative guide for the most efficient investment of public
resources, it strongly suggests that additional funding can be put to
good use. Given the stark difference between their assessment of the
need for investment and what we are doing, it is not surprising that
these engineers have given us a ``D'' for our current efforts. It
doesn't take a professor to know that this grade is unacceptable.
Infrastructure Investment in the Long-Term
As I just mentioned, investing in infrastructure is not only
important to our economy now; it also is crucial to the economy's long-
term health. Investment in infrastructure can have a sustained impact
on aggregate output by improving economic efficiency and productivity.
There have been several major infrastructure investments throughout
American history that have allowed goods to be transported more quickly
and at lower costs, resulting in both lower prices for consumers and
increased profitability for firms. Examples include the building of the
national railroad system in the 19th century and the creation of the
Eisenhower Interstate System in the 1950s and 1960s.
While economists have debated the magnitude of the productivity
gains from various infrastructure investments,\3\ \4\ evidence from
recent research clearly points to a positive and significant effect of
transportation infrastructure investment on productivity. In a 1999
paper published in the American Economic Review, John Fernald finds
that the large infrastructure investments made during the construction
of the interstate highway system in the 1960s corresponded with a
significant increase in the productivity of vehicle-intensive
industries (such as transportation and gas utilities), relative to
industries that do not depend heavily on vehicles (such as apparel and
textiles and plastics). \5\ Fernald's findings suggest that, in the
past, investment in infrastructure led to substantial productivity
gains, and they point to the potential for further increases in
productivity through additional, well-targeted investment.
---------------------------------------------------------------------------
\3\ Munnell, Alicia, ``Policy Watch: Infrastructure Investment and
Economic Growth'', Journal of Economic Perspectives, Vol. 6, No. 4,
(Fall 1992), pp. 189-198.
\4\ Gramlich, Edward, ``Infrastructure Investment: A Review
Essay'', Journal of Economic Literature, Vol. 32, No. 3 (Sept., 1994),
pp. 1176-1196.
\5\ Fernald, John G., ``Roads to Prosperity? Assessing the Link
Between Public Capital and Productivity'', The American Economic
Review, Vol. 89, No. 3 (Jun. 1999), pp. 619-638.
---------------------------------------------------------------------------
In addition to improving productivity, infrastructure is a public
good that provides lasting benefits to consumers and households.
Evidence from economics research, including preliminary evidence from a
randomized experiment involving road paving in Mexico, suggests that
infrastructure investment can raise housing values, which reflects an
improvement in living standards.\6\ \7\
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\6\ Haughwout, Andrew F., ``Public Infrastructure Investments,
Productivity, and Welfare in Fixed Geographic Areas'', Journal of
Public Economics, Vol. 83, No. 3, (Mar. 2002), pp. 405-428.
\7\ Quintana-Domeque, Climent, and Marco Gonzalez-Navarro,
``Street Pavement: Results from an Infrastructure Experiment in
Mexico'', Industrial Relations Section, Princeton University, Working
Paper No. 556, (Jul. 2010).
---------------------------------------------------------------------------
Of course, policy should adjust to take advantage of new investment
opportunities made available by technological progress and we must be
mindful of the fact that at some point, the economy reaches the point
of diminishing returns from further investments in a particular area.
As Fernald observed, ``Building an interstate network might be very
productive; building a second network may not.''
The Case for a National Infrastructure Bank
A well designed National Infrastructure Bank could help achieve
three major policy objectives. It could:
increase overall investment in infrastructure, and,
specifically, attract private capital to coinvest in specific
infrastructure projects;
improve the efficacy of our infrastructure investment by
having a merit-based selection process for projects; and
fill in the gaps in our infrastructure funding system,
which currently disadvantages investments in multimodal and
multijurisdictional infrastructure projects.
As I indicated earlier, there is a large gap between our current
level of investment in infrastructure and the level that outside
experts assess is needed to maintain our transportation infrastructure.
We are also investing less than other countries as a percentage of GDP.
Last week, President Obama noted that our total infrastructure
investment as a share of GDP is much less than infrastructure
investment in Europe and China. While we are investing 2 percent of our
GDP, Europe is investing roughly 5 percent and China is investing 9
percent.
One way to address the need for more infrastructure investment is
to attract more private capital for direct investment in transportation
infrastructure. There is currently very little direct private
investment in our Nation's highway and transit systems. The lack of
private investment in infrastructure is in large part due to the
current method of funding infrastructure, which lacks effective
mechanisms to attract and repay direct private investment in specific
infrastructure projects. It also results because the private benefit
for investors is less than the benefit for society as a whole, because
of externalities from infrastructure. The National Infrastructure Bank
could address these problems by directly funding selected projects
through a variety of means. The establishment of a National
Infrastructure Bank would create the conditions for greater private
sector coinvestment in infrastructure projects.
Secondly, with a few notable exceptions, Federal funding for
infrastructure investments is not distributed on the basis of a
competition between projects on the basis of rigorous economic analysis
or any cost-benefit comparisons. The current system virtually ensures
that the distribution of investment in infrastructure is suboptimal
from the standpoint of raising the productive capacity of the economy.
To address the lack of merit-based funding, the National
Infrastructure Bank would develop a framework to analytically examine
potential infrastructure projects based on cost-benefit analysis, and
evaluate the distributional impact of both the costs and benefits of
each project. Of course, not all of the costs and benefits can be
quantified, but an effort should be made to quantify what can be
quantified and to take account of any additional benefits and costs to
society. A rigorous analytic process would result in support for
projects that yield the greatest returns to society, and would avoid
investing taxpayer dollars in projects where total costs exceed total
societal benefits. The National Infrastructure Bank would select
projects along a sliding scale of support that most effectively
utilizes the bank's limited resources, targeting the most effective and
efficient investments.
I should clearly acknowledge that creating a framework for project
selection based on cost-benefit analyses of competing infrastructure
projects is challenging. For example, consider the well publicized cost
of congestion. The Texas Transportation Institute recently estimated
that in 2007 some 4.2 billion hours were spent sitting in traffic in
439 urban areas, which they calculate is equivalent to nearly one full
work week for the typical American. Valuing the time lost due to being
stuck in traffic may appear simple at first, if you only think about
the cost of that time as equal to the lost income (i.e., valued at the
marginal wage rate). However, not everyone can find a job or wants one,
so it is not clear that time spent in congestion should be valued at
the wage rate. The Department of Transportation, in its guidance on
this matter, recommends a variety of values of time, depending on
whether the travel takes place as part of paid business travel, local
commuting travel, or long-distance leisure travel. The value of time in
freight transportation is even more complex, varying with the value and
``perishability'' of the cargo that is being transported. Additionally,
there are costs of commuting beyond lost time. A recent survey by
Gallup, for example, found that those with long commutes are more
likely to experience back and neck pain. All of these potential costs
of congestion--and corresponding benefits of alleviating congestion--
should be factored into any cost-benefit analysis of infrastructure
alternatives.
Finally, in addition to the lack of merit-based funding within one
mode of transportation, coordinating multimodal projects in the current
system is extremely difficult because each mode of transportation has
distinct funding sources. Each of these funding sources has different
requirements, Federal and State matching limits, and other
restrictions. Complicating matters further, if a multimodal project
crosses State lines, there could be significant difficulty accessing
the capital markets for local funding given the difficulty inherent in
multi-State debt issuances. Because of the current criteria underlying
infrastructure investments, we have lost sight of the larger rationale
for national infrastructure investment.
As a result, there has been an underinvestment in multimodal and
multijurisdictional infrastructure projects, compared with single modes
and single jurisdictional projects. A National Infrastructure Bank
would be tasked with assisting projects that are multimodal and/or
cross jurisdictional boundaries.
A corollary to this point is the potential value that can be
generated from so-called ``network effects.'' Network effects suggest
that investments in certain areas, such as infrastructure, can lead to
increasing returns based on the size and interconnectivity of the
broader network. A classic example is telephones: if only one person
has a telephone, the value is much less than half as great than if two
people have telephones. This is particularly important when one
considers the new types of investments that can be financed by the
National Infrastructure Bank. Multimodal, multijurisdictional
investments will improve the connections between our existing
infrastructure networks, such as better links between our ports and our
freight rail lines, or connecting our airports and intercity passenger
rail lines to individual cities' public transit systems.
As infrastructure investments often have broad benefits for society
as a whole, it is incorrect to simply assign the benefits of a project
directly to the area where the infrastructure is built. For example, a
project that improves the connectivity between a freight rail line and
a port to allow for quicker, cheaper and more reliable service will be
a benefit for the producers of goods, who will use the rail line to
send their goods to the port for export. Those producers may be
thousands of miles from the actual infrastructure investment, but they
will enjoy a portion of its benefits.
Innovative Financing
In addition to improving the targeting of our infrastructure
investment, we need to consider new ways to finance it. A National
Infrastructure Bank should be at the forefront of innovative and sound
ways for financing worthy infrastructure projects. According to the
Congressional Budget Office, there is little direct private investment
in our Nation's surface transportation infrastructure system, and this
is a challenge that the National Infrastructure Bank would be able to
address. \8\ However, State and local governments often turn to the
private capital markets to finance infrastructure investment through
the municipal bond market, a long standing practice which the Federal
Government subsidizes by allowing tax-exempt bond status.
---------------------------------------------------------------------------
\8\ Kile, Joseph, ``Issues in Infrastructure Investment'',
National Tax Association Conference. Congressional Budget Office,
Philadelphia, 26 Sep. 2008. Address.
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I'd like to highlight an innovative financing tool that was
introduced in the Recovery Act and has helped hundreds of States and
local governments fund infrastructure projects thus far--Build America
Bonds, or BABs. BABs are an alternative for issuers who traditionally
have issued tax exempt bonds, such as State and local governments. A
Build America Bond is a taxable bond for which Treasury pays a 35
percent direct subsidy to the issuer in lieu of the traditional
extension of tax exempt status. (Other Recovery Act bonds, which
utilize the BABs model, have an even deeper subsidy, such as Recovery
Zone Facility Bonds.) BABs have enjoyed a very positive reception from
both issuers and investors. Between the program's launch on April 3,
2009, and August 31, 2010, over $126 billion of BABs have been issued
by State and local governments in 49 States and the District of
Columbia. Last spring, the Department of the Treasury estimated that
for the $90 billion of Build America Bonds issued through March 31,
2010, State and local governments will save over $12 billion in present
value borrowing costs compared with issuing traditional tax-exempt
bonds. This figure has grown since then.
Given the success of the program, the Administration has proposed
to extend the BABs program at a subsidy rate of 28 percent, which we
estimate would be revenue-neutral for the Federal Government. In
addition, the Administration has proposed to expand the eligible uses
of BABs, allowing them to support financing for nonprofits and a wider
range of municipal borrowing. This is an example of both building off
the successes of the Recovery Act as well as creating innovative
financing tools for infrastructure investment. We look forward to
working with Congress to extend this innovative program. Indeed, the
value of extending BABs would be even greater if a National
Infrastructure Bank were in existence to spur public-private
investments in infrastructure projects.
Conclusion
To summarize, a strong economic case can be made to increase our
infrastructure investments and to accelerate those investments to put
people back to work, to partner more with the private sector in funding
infrastructure projects, and to take benefits and costs into account in
allocating infrastructure investments. The creation of a National
Infrastructure Bank would be a major step toward achieving these goals.
Mr. Chairman, this concludes my prepared testimony. I thank you for
your leadership on these issues. I will be pleased to answer any
questions you or other Members of the Committee may have.
______
PREPARED STATEMENT OF EDWARD G. RENDELL
Governor, Commonwealth of Pennsylvania, and Cochair, Building America's
Future
September 21, 2010
Introduction
Good morning and thank you Chairman Dodd and Senator Shelby for
welcoming me to the Senate Banking, Housing, and Urban Affairs
Committee. Given the President's recent infrastructure investment
announcements, and the interest from people across America, I am very
grateful to be here to testify about the need to create a National
Infrastructure Bank to help finance critical investments in our
Nation's crumbling infrastructure.
Building America's Future
I am here both in my capacity as the Governor of Pennsylvania and
as Cochair of Building America's Future, which I am honored to lead
along with Governor Arnold Schwarzenegger of California and Mayor Mike
Bloomberg of New York City. Building America's Future is a growing,
bipartisan, nonprofit organization of State and local elected officials
from across the United States who believe that we must reform how we
pay for infrastructure and that additional resources must be invested
more wisely.
Our members include 18 sitting governors, 44 mayors of major
cities, and 47 other State and local elected officials. They are
republicans, democrats, and independents each working in their own
communities to figure out how to repair and rebuild our crumbling
infrastructure. Given the economic downturn, the decreased budgets in
States and cities, and the rising unemployment rate, many of us are
searching for responsible ways to invest more while spurring additional
job growth.
The Need for Additional Investments in Our Infrastructure
I am struck by what happens every time there is another
infrastructure catastrophe in this country. For 24, 48, or 72 hours
there is a barrage of news videos and articles about those catastrophes
but when the cameras leave our collective attention is turned to other
issues while the victims and local leaders are left to contend with the
aftermath of the disaster.
Take the recent gas pipeline explosion in San Bruno, California
that killed at least four people, injured about 50, and destroyed or
damaged more than 80 homes. Media reports indicate that the pipeline
was first installed in 1956. As of now, we do not know the cause of
that horrible explosion since the National Transportation Safety Board
and the Pipeline and Hazardous Materials Safety Administration continue
investigating. But we do know that many of our pipelines and
underground systems, such as our drinking water and waste water
systems, are old and could fail at any moment.
The question for all of us here today is whether or not we will act
in the aftermath of this recent crisis in California or must we wait
for another catastrophic event to occur before we realize the need to
move now and make investments to repair and rebuild infrastructure that
was installed during the Eisenhower Administration?
I do not want to sound alarmist but I know firsthand that an
accident of this magnitude--or worse--could happen in many other
communities whether it is another gas pipeline, a structurally
deficient bridge, aging dams, or leaking water pipes. Part of the
reason many people do not think a problem exists is because these
assets are hidden or underground. It is only after a disaster occurs do
we pay attention to that infrastructure but by then it is too late.
Many of you may recall back in March of 2008 when I had to shut
down I-95 in both directions just north of the Philadelphia central
business district. An inspector from the Pennsylvania Department of
Transportation just happened to be in the area during lunch and
discovered a major crack in one of the main concrete support pillars of
I-95. We had to shut down the highway for fear that if that concrete
pillar collapsed several hundred people could have been hurt or killed
because 190,000 vehicles per day travel over that section of I-95.
Thank goodness that inspector happened to discover that crack or the
consequences could have been devastating.
In the past few years we have seen the I-35W bridge collapse in
Minneapolis, dams fail in Cedar Rapids, widespread power outages in the
Northeast and parts of the Midwest, and the levees fail in New Orleans.
The cost of the search and rescue and clean-up efforts is in the
billions where had we made the necessary investments we may have been
able to avoid the costs in dollars and human lives lost. The aftermath
of Hurricanes Katrina and Rita have already totaled over $15 billion in
Federal Emergency Management Agency assistance alone according to the
Department of Homeland Security. Had we invested more in those levees
perhaps we could have avoided the painful aftermath.
We should not wait for another disaster to take action and that is
part of the reason why I am here today to discuss how a National
Infrastructure Bank can help our Nation.
Building America's Future has been fighting for additional
investments in our Nation's roads, bridges, transit systems, dams,
levees, ports, drinking water and waste water facilities, broadband and
electricity systems and other infrastructure. We believe that we must
not only invest more but we must do so more wisely and with a longer-
term vision. We must do more if the United States is to remain
competitive in a global economy. A first class infrastructure system is
one way to ensure our success in that effort.
I would also like to include a letter for the record that is signed
by many of our fellow Building America's Future governors, mayors, and
other local elected officials. Whether it is Los Angeles' ``30/10''
transit initiative, the construction of high speed rail in Florida or
California, the public-private Crescent Corridor rail project
connecting the South and the Northeast, or the need to address our
crumbling bridges, dams and levees in other parts of the country we
know that the needs for more investment already exists.
It is my opinion that you can help address that need by passing
legislation before this Congress adjourns to establish a National
Infrastructure Bank.
President Obama's Announcement
That is why I was extremely encouraged with President Obama's
recent announcement that he is asking Congress to create a National
Infrastructure Bank, provide an additional $50 billion on top of
existing funding levels for transportation infrastructure, and that he
seeks a reformed, robust transportation bill as quickly as possible. By
doing these three things we can ensure that America's infrastructure--
our transit systems, highways, bridges, runways, pipelines, water and
energy systems, and high speed rail network--is of the highest caliber
for its owners, the American people. We will create millions of jobs
and boost our economy.
As I understood the President's announcement he seeks an additional
$50 billion on top of existing surface transportation funding levels
and some of that money would go toward capitalizing a National
Infrastructure Bank for projects of regional and national significance.
What I think is important about this proposal is that the cost of such
projects will not be shouldered by the Federal Government alone but
rather the Bank would seek to establish partnerships with Federal,
State, and local governments as well as more robust private sector
involvement. If we do this quickly and properly we can make great
progress toward repairing and rebuilding our Nation's crumbling
infrastructure.
The idea of a National Infrastructure Bank is not new. It is a
concept that has been around for many years and versions of it have
been implemented successfully in several States like California and
South Carolina. And across the pond the European Investment Bank has
been financing infrastructure projects since 1958.
The Need for a National Infrastructure Bank in the United States
What is missing at the Federal level is a long-term vision about
budgeting and planning for large-scale infrastructure projects. We do
not have a Federal capital budget and because of that investments are
typically made on an annual basis. We must change that investment
strategy so that we invest the taxpayers' dollars in the most
meritorious projects that have the most economic impact.
Building America's Future believes that the United States must
create a National Infrastructure Bank so that we can have a single
entity, staffed by experts, who can work to attract and leverage
dollars from State and local governments as well as the private sector.
The Bank will focus on projects of regional and national significance,
will remove politics from the process, subject all requests to a
benefit-cost analysis, and set the standard for accountability and
transparency.
I recently hosted a forum in Pennsylvania to discuss the future of
the transportation bill and other infrastructure needs. I was pleased
that former Governor Jon Corzine, with whom many of you served here in
the Senate, came to talk about the billions of dollars in private
investment funds that are waiting to be invested in the United States.
These investment funds represent a significant opportunity to be
creative in how we go about repairing and rebuilding our infrastructure
because they will allow us to leverage the Federal dollars that are
used to capitalize the bank. If we can marshal this private capital
then I believe we can make a significant dent in the $2.2 trillion
funding shortfall that the American Society of Civil Engineers says
exists in the United States just to bring our systems into a State of
good repair.
Many are rightly concerned about our growing Federal deficit but I
believe more people are concerned about the growth of our economy. We
must invest where it makes sense and that means more resources for our
transit systems, the creation of high speed rail, and removing
bottlenecks in and around our ports and cities so that people and goods
move more quickly, use less gas, and keep costs down.
If we do this through the National Infrastructure Bank we will
create millions of more jobs not only on the construction sites but
back in the factories that produce the concrete, asphalt, aggregate,
steel, wood, and other materials that go into these projects. We are
used to building things in this country and we can do so again by
standing up the National Infrastructure Bank now.
One other point I would like to make. Many detractors of a National
Infrastructure Bank say that we cannot afford to do this. I say we
cannot afford not to do it. I would like to know what successful
company in the United States has grown itself without investing money
back into its business. Some say that there should be no more spending,
no more borrowing, and no more investing. If that argument wins the day
then I think we will look back upon these times of 9.7 percent
unemployment with envy because it will mean not only significantly more
unemployment but a complete degradation of our infrastructure.
Companies will leave our shores and we will import more than we export.
That cannot be the way of our future. That is not the America we know
and love.
National Infrastructure Bank Structure
We believe that a National Infrastructure Bank should be created
with the following basic concepts:
Establish the Bank as an independent entity with the
greatest flexibility to finance and fund only projects of
regional and national significance.
Allow the Bank to fund projects beyond just transportation
such as ports, drinking and waste water, electrical grid,
broadband and others that make sense.
Enable merit-based selection of projects by experts so that
the most critical and feasible projects proceed by employing
benefit-cost analysis methods.
Ensure Federal assistance at a significant enough scale to
make these major projects financially viable.
Ensure that the Bank has the authority to employ a range of
finance and funding tools including, but not limited to:
grants, credit assistance, low interest loans, tax incentives,
Build America Bonds, Private Activity Bonds, enhanced TIFIA
authority, and others to be determined.
Create a method for leveraging public investments with
private capital.
Establish clear performance measurement standards such as
completing projects on time and within budget, reducing traffic
delays for passengers and goods movement, reducing carbon
emissions, and improving safety.
Provide project expediting capability by eliminating
redundancies to speed completion of projects while still
ensuring the environment remains protected.
President Obama's fiscal year 2010 budget proposed $5 billion per
year for 5 years for a total initial capitalization of $25 billion for
the National Infrastructure Bank. In fiscal year 2011 that proposal was
modified to be an infrastructure fund administered by the Department of
Transportation. However, Congress has not appropriated these dollars
primarily because the Bank has not been authorized. I give the
President credit for supporting this concept with real dollars as it is
a sign of his commitment to the long-term vision of rebuilding this
country through smart, targeted investments.
It is incumbent upon this Congress to pass a National
Infrastructure Bank authorization bill this year so that it can be
stood up properly next year. And I believe that the Obama
Administration must engage with the House and Senate in the details of
this legislation in the coming days.
We have heard some concerns about whether or not a National
Infrastructure Bank means rural States will be ignored to the benefit
of urban areas. I do not think that is true at all. The Bank will look
at projects on a regional and national basis. That may mean investments
in areas that expand beyond any major city because of the long-term
vision. For example, we need to expand our exports and by investing in
our ports now we can ensure that agriculture products that come from
our rural areas can get to those foreign markets more efficiently and
quickly. This would mean a benefit not only to the port in the city in
which it is located but to the farmers and ranchers who depend upon
proper delivery to earn their wages.
One other way that rural areas will benefit is if existing grant
programs that fund large-scale projects would concentrate on smaller
projects. For example, the Highway Trust Fund has recently been under
threat of depletion and insolvency. Transfers of funds from the general
fund into the Highway Trust Fund have kept the program alive. I believe
that if the National Infrastructure Bank stands up it could ease the
current strain on the Highway Trust Fund by funding the larger-scale
projects through the Bank. Therefore, allowing more Highway Trust Fund
dollars to remain available for smaller projects in rural areas. I
think that is a benefit that must be studied and explored.
Ultimately this is about what we are going to do for the American
people. The average American loses 60 hours a year stuck in traffic.
That is time that people can never get back and it is time that they
cannot spend with their families and friends. And it's costing us $87.2
billion in lost productivity and 2.8 billion gallons in wasted fuel
each year.
We must stop this cycle.
We can do this. This is not rocket science. But we must do so on a
good-faith, bipartisan basis and with the goal of assuring the Bank's
success. If the Bank is successful then our cities, States, and regions
will be more successful.
Conclusion
Our hope is that if the National Infrastructure Bank is capitalized
at the right level the Bank will make significant progress towards
addressing some of the larger projects and outstanding needs in the
country while Congress moves forward with significant reforms of
existing funding silos, policy decisions, and the creation of a
national vision.
We believe that Congress must also pass a robust, reformed
transportation bill that will address our surface transportation needs
for the next several years. This program needs reforms and I was
extremely encouraged that the President recognized that fact and
intends to offer a proposal in the coming weeks.
I know that many of you are hearing from people in your States as I
have in the Commonwealth of Pennsylvania about the economy and
unemployment. People are hurting. The construction industry is at 20
percent unemployment and future job creation is uncertain at best. As
Governor of the sixth largest State in the Nation I have done what I
can to make smart investments and I can tell you investments in
infrastructure have created and saved thousands of jobs. What that
means is that a worker can make the car and mortgage payments, put food
on his or her family's table, and contribute to the tax base. It means
less people on unemployment and more people being productive as part of
our workforce.
That is the fabric of America.
Is a National Infrastructure Bank going to be the single solution
to our unemployment or crumbling infrastructure problems? No, it is
not. There are no silver bullets. But we must fight this battle with as
many bullets and weapons as possible to defeat it.
Thank you and I look forward to answer any of your questions.
______
PREPARED STATEMENT OF ROBERT WOLF
Chairman and Chief Executive Officer, UBS Americas
September 21, 2010
Good morning Chairman Dodd, Ranking Member Shelby, and
distinguished Members of the Committee. I am grateful for the
opportunity to offer testimony today in support of a National
Infrastructure Bank (NIB). My name is Robert Wolf, and I am Chairman
and CEO of UBS Americas and President of the global Investment Bank. I
am also a member of the Group Executive Board of UBS AG, our parent
company.
I have worked in the financial services industry since receiving my
undergraduate degree in economics from Wharton in 1984. My career has
focused predominantly on fixed income specializing in the credit
markets, principally at two firms--Salomon Brothers for approximately
10 years and UBS for 16 years.
As a member of the President's Economic Recovery Advisory Board, I
have worked with fellow board members to develop a considered approach
to creating a National Infrastructure Bank. Today, I am here to share
my own views, as a 26-year veteran of the markets, on why I believe a
National Infrastructure Bank is in our Nation's best interest. I will
also offer specific recommendations on how the proposed bank should be
structured to achieve its goals in an optimal manner.
Let me say at the outset that creating a National Infrastructure
Bank at this time makes sense for two main reasons:
(1) It will attract private investment to help fund badly needed
infrastructure improvements critical to America's
competitiveness and economic growth
State and local governments account for about 75 percent of public
infrastructure spending, and many of these governments are under severe
fiscal strain. A number of important projects have been delayed or
sidetracked, especially those with high capital cost or those which
cross State boundaries. A National Infrastructure Bank would vet
projects carefully, lend to fund the highest priority projects, and
help attract private sector capital to augment Government funding.
Preqin, a private equity industry consultant, estimates that there is
over $180 billion dollars of private equity and pension fund capital
focused on infrastructure equity investments. This capital can play an
important role in bridging State and local budget gaps.
(2) It will create jobs
The U.S. Department of Transportation estimates that $1 billion of
Federal and State spending on transportation infrastructure creates
27,400 jobs. Similarly, the Milken Institute estimates that $1 billion
of spending creates 25,000 jobs. Many of these jobs are in the
construction industry and related sectors that have sustained the
largest job losses in the economic downturn. Greater employment in
these areas is essential to any sustained and accelerated economic
recovery. A National Infrastructure Bank will provide funding for new
projects that put people to work now--not just transportation-related
jobs, but jobs that build durable infrastructure with lasting economic
benefit, including projects in energy and electricity, water and
wastewater, and telecommunications and broadband. Our hope is that new
jobs will be created not only for construction workers, but also for
engineers, architects, urban planners, scientists and many industrial
production businesses.
To achieve these goals, it is crucial that a National
Infrastructure Bank be chartered with a clear and achievable mission
and strict operational guidelines.
I have looked at other Government-sponsored infrastructure
institutions from around the world and have developed views on what the
National Infrastructure Bank's mission should and should not be.
The National Infrastructure Bank SHOULD be:
(1) Policy driven
It should be a vehicle for attracting public and private funding to
projects of considerable merit that accomplish broader policy goals
like relieving congestion, minimizing environmental impact, improving
mobility, enhancing transportation networks, and increasing our
national or regional economic competitiveness.
(2) Loan focused
It should focus on making loans that will generate returns, which
means funding primarily projects with user fees or dedicated revenue
sources.
(3) Merit based
It is crucial that the National Infrastructure Bank allocate its
funds on the basis of a rigorous cost-benefit analysis conducted by
experienced industry experts and be focused on those projects that will
deliver the most value for its dollars. Transparency is critical
throughout the decision-making process. If a project cannot generate
revenues sufficient to pay the principal and interest on the loan, and
there is no other dedicated revenue source or local availability
payments for that purpose, the loan should not be made.
The National Infrastructure Bank should NOT be:
(1) A project equity investor
Consistent with its lending focus, the NIB should primarily offer
loans and loan guarantees at the project level, not project equity
capital.
(2) A substitute for existing infrastructure funding programs
Rather, the National Infrastructure Bank should complement
successful programs like loans under the Transportation Infrastructure
Finance and Innovation Act (TIFIA), Private Activity Bonds, Build
America Bonds and municipal bonds. It should act to leverage other
public and private sector funding sources at the project level, and it
should complement the traditional appropriations process, not replace
it.
(3) Focused solely on transportation
Instead, it should make funds available for projects of regional or
national significance in other qualified sectors such as energy,
broadband, water and wastewater.
Finally, in order to achieve this mission, the National
Infrastructure Bank must be properly structured.
In my view, the National Infrastructure Bank should be established
as a wholly owned Government corporation, allowing it to serve a broad
range of infrastructure sectors, such as transportation, energy and
water. The NIB decision makers must have the independence to make loan
decisions based on project merit. Independence will permit faster, more
transparent and objective project selection supported by detailed cost-
benefit analysis.
It should be capitalized with equity capital that comes solely from
the U.S. Federal Government via the U.S. Treasury. Funding its equity
in this manner will avoid the problems seen with the Government
Sponsored Enterprises, such as Fannie Mae and Freddie Mac, which are
hybrid organizations chartered to be owned by private shareholders
while benefiting from Government sponsorship. By contrast, the National
Infrastructure Bank should be fully owned by the Federal Government
with no private shareholders.
In closing, creating a National Infrastructure Bank is an idea
whose time has come. I don't think anyone disputes that our country's
infrastructure needs are extraordinary. The NIB would mobilize the
capital markets to fund new projects, leading to sustainable economic
growth--and new jobs.
Again, Mr. Chairman, thank you for providing me with this
opportunity to appear before the Committee today to discuss my views,
and I am happy to answer any questions you and other Members may have.
______
PREPARED STATEMENT OF DONALD SHUBERT
President, Connecticut Construction Industries Association
September 21, 2010
Good morning Chairman Dodd, Ranking Member Shelby, and Members of
the Committee, my name is Don Shubert and I am president of the
Connecticut Construction Industries Association (often referred to as
``CCIA''), based in Wethersfield, Connecticut. CCIA is an organization
of associations representing the many facets and disciplines of the
construction industry in Connecticut. The associations include the:
Connecticut Road Builders Association, Associated General Contractors
of Connecticut, Connecticut Ready Mixed Concrete Association,
Connecticut Asphalt and Aggregate Producers Association and others. The
membership includes construction managers, general contractors,
subcontractors, equipment and material suppliers, professional
engineers, and other professionals allied with the construction
industry. Together, we build the infrastructure that services all modes
of transportation.
The CCIA divisions enjoy an active working relationship with
national organizations that include the: American Road and
Transportation Builders Association, Associated General Contractors of
America, National Asphalt Pavement Association, National Ready Mixed
Concrete Association, National Stone, Sand and Gravel Association, and
the U.S. Chamber of Commerce. Additionally, we are founding members of
a large transportation advocacy coalition, KEEP CT MOVING, that is a
broad-based group modeled after the Americans For Transportation
Mobility coalition that is led by the U.S. Chamber of Commerce. KEEP CT
MOVING members include industry associations, organized labor, and the
major Chambers of Commerce in Connecticut.
I am testifying today solely in my capacity as president of CCIA.
Infrastructure investments drive economic growth
Mr. Chairman, I commend you and the Members of this Committee for
convening today's hearing on how infrastructure investment can help
generate American jobs and strengthen the U.S. economy. There are few
things the public sector can do that rival the short-term and long-term
benefits of boosting infrastructure investment. The 2008 and 2009
debate on an economic stimulus package proves this point, as the
potential of infrastructure investment to facilitate economic recovery
was widely endorsed by both parties, with only the immediacy of these
impacts questioned by some. As later parts of my testimony will
demonstrate, the American Recovery and Reinvestment Act's (Recovery
Act) transportation investments have delivered profound results for our
community and the entire country over the last 18 months.
The benefits of investing in infrastructure are basically two-fold.
First, those investments create well-paying jobs for skilled workers
who are sitting idle in a sector of the economy that has been hit
hardest by the economic downturn. Second, those investments rebuild
infrastructure that is falling into disrepair and expand capacity to
improve mobility. Investments in transportation infrastructure drive
the long run growth, productivity, and competitiveness of the American
economy.
The U.S. economy is a vast network of businesses that produce goods
and services for America's 115 million households, for export to
foreign countries, or for use by other businesses. The tie that binds
these businesses to their customers, suppliers and workers is the U.S.
transportation network. Each year, almost 80 percent of the value of
freight shipments in the U.S. is carried by trucks along the Nation's
highways.
CCIA has an active working-relationship with the U.S. Chamber of
Commerce, and local Chambers of Commerce across Connecticut. We hear
constantly from the business community that manufactured goods and
cargo move through the United States on a system primarily consisting
of ports, roads, rail, and inland waterways. The supply chain is viewed
from initial point of origin to the final destination with frequent
junctures in between. To keep competitive domestically and
internationally, many U.S. businesses have developed complex logistics
systems to minimize inventory and ensure maximum efficiency of their
supply chains. However, as congestion increases throughout the U.S.
transportation system, these supply chains and cargo shipments are
frequently disrupted and the cost of business increases.
Another priority message from business is that traffic congestion
threatens its ability to attract and retain employees. Employers in all
industries rely on transportation systems to connect them with their
workforce and connect that workforce with suppliers and customers
around the country and the world. In Connecticut, the rising cost of
living in certain areas is pushing workers farther from their place of
employment, increasing commute times and costs. The business community
constantly reminds us that increasing congestion is disrupting the
important connection with their workforce and imposing additional costs
on the workforce and employers alike.
To the business community, infrastructure investments: improve
competitiveness because of reduced production and distribution costs as
a result of increased travel speeds and fewer mobility barriers; give
employees access to higher-paying jobs; and improve regional economic
competitiveness, which stimulates job growth to support an increasing
population.
For example: the Stamford Chamber of Commerce identifies Stamford
as the economic engine of Connecticut. According to the Chamber,
Stamford is the largest business center in the State, and with present
development plans under construction, it will be the largest city in
the State. Stamford is the largest international trade center between
New York and Boston. The Chamber tells us that the biggest challenge to
Stamford's economic growth is the out-dated transportation
infrastructure and mounting congestion in all modes of transportation
that is becoming a barrier the region.
The foundation of a modern economy is a transportation system that
moves people and freight efficiently, safely, and on time. This lesson
was learned during the 1960s and 1970s when construction of the
Interstate Highway System allowed American firms to access a nationwide
market and take advantage of scale economies that yielded significant
increases in productivity.
The construction industry can play a significant role in economic
growth. Employing local workers and using local materials to improve
our infrastructure is an excellent combination to drive economic
growth. Unfortunately, the pervasive uncertainty about future
investments by Federal and State governments and the private sector is
stalling many infrastructure projects.
A skilled workforce, that is a powerful economic engine, is idle
The construction industry workforce today is faced with its worst
economic crisis since the Great Depression. This past winter, 23
percent of construction workers were unemployed. In August, the peak of
the construction season, the unemployment rate was still 17 percent.
Before the recession, the unemployment rate for construction workers
was less than 6 percent. According to the Bureau of Labor Statistics,
there were 7.7 million workers employed in construction in August 2006.
This August, there were only 5.6 million employed, a loss of more than
2.1 million construction jobs. To put this in perspective, almost one-
third of all the jobs lost in the United States during the 2007-2009
recession were construction jobs. Contractors are reluctant to hire new
employees and purchase new equipment with few prospects of work in the
near future. The reality of the construction industry is that most jobs
exist only if the companies have sufficient work. The last thing our
members want to do is hire and train new employees when they may not be
able to keep them on the payroll. The following graph charts
construction unemployment over the past 32 months.
Labor unions in Connecticut have reported 20-30 percent
unemployment this year. One union has reported that unemployment
increased over 2009 figures, even with the additional funding provided
by the Recovery Act. Many union members struggle to work the number of
hours needed to maintain their benefits over the course of the year.
Contractors and suppliers are rotating employees and mandating
furloughs to maintain continuity in the workforce.
In addition to the economic downturn, construction employment is
suffering from the direct impact of the uncertainty, being caused by
lack of Federal long-term surface transportation funding legislation,
that is paralyzing State Department of Transportations. Since SAFETEA-
LU expired on September 30, 2009, State transportation agencies have
been restricting their programs to compensate for the lack of a stable,
predictable funding stream. During the delay of reauthorizing the last
surface transportation legislation, from 2003 to 2005, there was an
abundance of private projects, and other public projects to keep
contractors working while State DOT's constricted their programs.
Today, we are in a delay period for reauthorization, and there is
little other work available. We expect the economic impacts in terms of
job loss and industry contraction to be much more significant in 2010-
2011 than during the 2003-2005 period.
Contractors also have significant excess capacity. According to the
quarterly construction market survey conducted by the American Road and
Transportation Builders Association, only 3 percent of transportation
construction firms are currently operating at full capacity, compared
to a normal rate of 15 percent. At the other end of the scale, 45
percent of contractors are operating at less than three-quarters of
capacity, compared to a normal rate of 10 percent. Even with $20
billion of Recovery Act highway projects underway, the industry could
undertake far more construction work than is currently available.
This available labor force and industry capacity can be an economic
engine. Every $1 billion invested in nonresidential construction adds
$3.4 billion to Gross Domestic Product (GDP) and $1.1 billion to
personal earnings according to the Associated General Contractors of
America. The Federal Highway Administration calculates that every $1
billion invested in highway and bridge improvements creates or sustains
27,823 jobs. Approximately one-third (9,537) of these jobs are on-site
construction jobs in the State of investment. Another one-sixth (4,324)
are in industries that supply materials and services used in highway
and bridge construction. Most of these jobs would be in-State depending
on the project and mix of in-State suppliers. About half (13,962) of
the jobs would be induced jobs created when the construction and
supplier workers and owners spend their additional incomes. These jobs
would be a mix of in-State and out-of-State jobs. Conversely,
investments elsewhere would support some jobs in-State.
There is no shorter line between unemployment and a job than a
construction project. There are millions of skilled trades-people
across the country who are out of work and stand ready to return--many
of whom could report back to work on one-day's notice. Construction
jobs on public projects offer people the opportunity to earn a decent
living, obtain quality health benefits, and save for retirement.
However, contractors and construction workers are in a holding pattern
while State transportation departments adjust to a lack of funding
certainty and search for funding.
The Nation has tremendous transportation needs
A 2010 National State of Good Repair Assessment conducted by FTA
reports that:
Nine percent of America's rail assets are in poor condition
and 17 percent of are in marginal condition.
Nine percent of America's bus assets are in poor condition
and 32 percent are in marginal condition.
TRIP, a national research group, reports that:
Thirty-two percent of America's major roads are in poor or
mediocre condition.
Twenty-five percent of America's bridges are structurally
deficient or functionally obsolete.
Forty-four percent of America's major urban highways are
congested.
Connecticut has similar needs. TRIP reports:
In 2008, thirteen percent of Connecticut's major roads were
rated in poor condition and 32 percent were rated in mediocre
condition.
Nine percent of Connecticut's bridges were structurally
deficient in 2009.
Twenty-five percent of Connecticut's bridges were
functionally obsolete in 2009.
In 2008, fifty-eight percent of Connecticut's urban
Interstates and other highways or freeways were considered
congested.
And these are only surface transportation needs. We must also
modernize the air traffic control system, expand capacity at our
airports and on freight rail lines, improve connections to ports and
increase the reliability of the inland waterways system.
Significant funding is needed to meet those needs
Two congressionally appointed commissions have recommended a broad
overhaul of the Federal Surface Transportation Program to improve
mobility, safety and the physical condition of the Nation's surface
transportation system by significantly increasing funding. The National
Surface Transportation Policy and Revenue Study Commission (NSTPRSC)
and the National Surface Transportation Infrastructure Financing
Commission (NSTIFC) were created by Congress to examine the current
condition and future funding needs of the Nation's surface
transportation program, develop a plan to insure the Nation's surface
transportation system meets America's future mobility needs, and to
recommend future funding mechanisms to pay for the preservation and
improvement of the Nation's roads, highways, bridges and public transit
systems.
The NSTPRSC concluded that it is critical to the future
quality of life of Americans that the Nation create and sustain
the preeminent surface transportation system in the world, one
that is well-maintained, safe and reliable.
The NSTIFC found that the U.S. faces a $2.3 trillion
funding shortfall over the next 25 years in maintaining and
making needed improvements to the Nation's surface
transportation system.
The U.S. Department of Transportation issues reports on the
Conditions and Performance of the Nation's Highways, Bridges and
Transit, in which it calculates the annual investment that all levels
of government would have to make both to maintain current conditions
and improve conditions.
The 2008 Conditions and Performance Report issued by the U.S.
Department of Transportation included data on the cost to maintain and
improve the Nation's mass transit systems, including both bus and rail-
based transit. When combined with data on recent cost increases and
traditional Federal share, the report indicates that a Federal transit
program of $12 to $14 billion annually between FY2011 and 2016 would
maintain conditions while $17 to $19 billion would be needed to improve
conditions. In FY2010, total funding for the public transportation
program was just over $10 billion. For FY2011 through 2016, Transit
Account revenues are projected to be about $5.5 billion per year, less
than half the amount needed just to preserve existing conditions.
The latest report, which was issued in January 2009, provides data
on the average annual investment that would be needed between 2006 and
2026 both to maintain conditions and improve conditions on our Nation's
highways. When combined with information on recent increases in highway
construction costs and the traditional Federal share of highway
investment, the report shows that funding for the Federal highway
program in the next surface transportation authorization bill should be
in the range of $71 to $78 billion per year just to maintain current
highway and bridge conditions. The annual Federal investment needed to
improve conditions would be even higher. By contrast, Federal highway
investment in fiscal year 2010 is $41.1 billion, a shortfall of more
than $30 billion for just keeping the status quo.
The massive gap between Federal highway investment and needs is
shown on a State by State basis in the following Table that was
provided by the American Road and Transportation Builders Association.
For example, the table shows that Connecticut would need an annual
Federal investment of just over $627 million as the Federal share of
the cost to maintain conditions and performance on the State's highways
and bridges. \1\ In FY2010, the State received about two-thirds of that
amount. Alabama also received fewer Federal highway funds than needed
just to maintain current highway and bridge conditions, as did almost
every other State. The table also shows that the one-time highway
stimulus funds in the American Recovery and Reinvestment Act, while
helpful in the short-term, come nowhere near filling the long-term
Federal highway investment shortfall, leaving a shortage that threatens
to cripple the systems that provide the mobility that is essential to
support our economy and quality of life.
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\1\ State investment needs are based on Federal Highway
Administration data on the number of highway miles in poor or mediocre
condition in each State, the total deck area of deficient bridges in
each State, and a measure of highway congestion.
In January 2010, the Connecticut Department of Transportation
released an analysis that identifies approximately $4 billion of
unfunded initiatives in our public transit, highway, and bridge systems
that were programmed over the next 5 years. The Department based its
analysis on what it described as a tremendous uncertainty surrounding
the passage of long-term surface transportation measure which has
significant implications on the Department's ability to plan and
execute its transportation infrastructure program. In the analysis,
ConnDOT identifies 49 unfunded projects that were programmed for 2010,
102 unfunded projects programmed for 2011, 36 unfunded projects
programmed for 2012, 17 unfunded projects programmed for 2013, and 16
unfunded projects programmed for 2014. Additionally, the analysis
identified over $8 billion in additional major long-term unfundable
initiatives in the transit, highway, and bridge programs.
ARRA's major impact on the Nation's transportation needs is ending
The American Recovery and Reinvestment Act's transportation
investments have been one of the few bright spots for the
transportation construction industry. Virtually all of the projects
financed by the Act's $48 billion for transportation improvements are
now either underway or completed. As a result, transportation
construction is the only major construction market that did not decline
during the 2007-09 recession. As the next graph shows, the value of
construction work put in place on homebuilding is now more than 60
percent below its prerecession peak, while private nonresidential
construction is down 25 percent and public construction other than
transportation is down more than 10 percent. But the value of
construction work put in place on transportation improvements has not
fallen. It is clear the construction industry could very well have been
devastated over this construction season without the Recovery Act
projects stabilizing the workload.
The Recovery Act has mitigated a steep drop in construction
activity in the residential and commercial sectors of the industry. For
example: in the asphalt industry, over a third of the total market was
comprised of homebuilding and commercial construction projects. When
those market segments were devastated by the economic downturn, the
loss was somewhat offset by the gains provided by the Recovery Act. In
the cement and concrete industries, where those market segments
comprise a larger part of the total market, the resulting loss was
greater. In turn, the aggregates industry (stone, sand, and gravel)
suffered major market losses. The following chart shows that even with
the Recovery Act there was a downturn in the asphalt market.
While the Recovery Act funds have had a positive stabilizing impact
on the construction marketplace, those resources are coming to an end.
We believe the momentum generated by ARRA will be lost if Congress
fails to find revenue sources to support a well-funded, multiyear
surface transportation authorization bill. A robust multiyear bill is
the best step that can be taken to alleviate the uncertainty that
prevents State DOTs from planning and undertaking projects and driving
America's economic recovery and growth.
Unfortunately, the Federal public transportation and highway
programs are currently in a state of limbo and have been operating
under a series of short-term extensions since the last bill expired
almost a year ago. The delay periods during the reauthorization of the
last two Federal surface transportation measures show that States rely
heavily on continuing and guaranteed funding from the Federal
Government. As stated earlier, uncertainty in Federal transportation
funding stifles State transportation programs which stalls the delivery
of much needed infrastructure, disrupts hiring and equipment purchases,
interrupts steady employment, fosters inconsistent training, and causes
the loss of highly skilled employees. In short, this shuts-down a large
economic engine.
A comprehensive long-term reauthorization bill is needed
We were greatly pleased to see President Obama's recent call for
enactment of a 6-year reauthorization of the Federal public
transportation and highway programs. We believe that enactment of a
multiyear surface transportation bill would be a true economic
stimulus.
As welcome as the President's commitment to prompt enactment of a
reauthorization bill is, we recognize there is still a long path ahead
of us. The 2005 reauthorization bill included surface transportation
investment levels well beyond what existing revenues could support and
included no new resources. As a result, the Highway Trust Fund surplus
was liquidated over a 4-year period and this structural draw down was
exacerbated by the worsening economy.
The Mass Transit and Highway Accounts face cash crises in the years
ahead. This means Congress is now faced with three very difficult
funding alternatives for the next bill:
scale back transit and highway investments to currently
supportable levels and, in so doing, force the loss of hundreds
of thousands of construction industry jobs;
further add to the Federal deficit to support future
transportation investments; or
raise new revenues.
CCIA supports raising new revenues. While I fully appreciate the
challenges this situation presents for elected officials, I would be
remiss in not pointing out that only through dedicated revenues can
contract authority and other mechanisms that provide States the
certainty to move forward with long-term transportation plans be
retained. Clearly, the core of an effective national surface
transportation program must be a stable, guaranteed, long-term revenue
source.
Given the inherent financing challenge facing the reauthorization
of the Federal surface transportation program, we fully acknowledge the
importance of being open to new ways to meeting the Nation's
transportation infrastructure challenges.
An Infrastructure Bank could be part of the solution
A National Infrastructure Bank proposal is one of a number of
proposals that has been suggested by both of the federally chartered
commissions mentioned above and many transportation interests. An
Infrastructure Bank would provide funding for many megaprojects that
are not easily supported through the existing Federal public
transportation and highway programs. It would enhance a long-term
stable funding source, by providing new funding for projects, which
would leave more funding in the core stable and dependable
transportation formula programs.
In Connecticut, several megaprojects are currently devouring the
State's transportation program. If one or two of those projects had
been funded by an Infrastructure Bank, more resources would be
available through the core program and the State would be in a better
position to meet its maintenance and expansion needs. Additionally,
there are many other megaprojects that ConnDOT has identified with no
funding sources. An Infrastructure Bank may be the ideal funding
mechanism for one or more of those projects, which may not otherwise be
delivered in the future.
An Infrastructure Bank could provide several benefits. It could
fill a clear void that exists in Federal transportation policy to
support large-scale projects that provide service beyond the border of
an individual State. An Infrastructure Bank could bring more revenue
from State, local, and private sources into the infrastructure funding
scheme. For example, if the amount of financial participation from
State, local, and private sources is one of the criteria included in
project selection process, an Infrastructure Bank could create
competition that will draw new investments into transportation funding
programs. Likewise, the competitive process created under an
Infrastructure Bank would ensure the best projects move forward. As
such, we urge Congress and the Obama Administration to pursue an
Infrastructure Bank as a supplement to robust Federal public
transportation and highway programs. The additional funding generated
by the bank would leave more of the stable core program funding in
place to meet basic needs.
My discussion today has focused mainly on transportation
infrastructure. However, the concept of infrastructure bank funding for
large-scale projects may also lend itself to other applications, such
as Clean Water projects that are facing similar funding challenges. The
U.S. Environmental Protection Agency estimates we could need as much as
$390 billion each year over the next 20 years to repair obsolete
drinking water and waste water systems. In Connecticut, the
Metropolitan District Commission is currently administering a billion
dollar Clean Water project to separate sanitary sewer and storm water
lines. There are likely many similar projects in cities and towns in
Connecticut and across the country in need of funding.
Mr. Chairman, we commend you for the time you and your staff have
invested in advancing the creation of a National Infrastructure Bank.
We believe there is substantial potential in an Infrastructure Bank to
leverage new infrastructure dollars and create a new merit-based
process to select and deliver much-needed upgrades to our
transportation systems. We stand ready to work with you as these
proposals develop.
Again, thank you Mr. Chairman for this opportunity to testify
today. This discussion is important to putting the Federal-Aid Public
Transportation and Highway Programs on a solid foundation of fiscal
stability.
I will be happy to respond to any questions.
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD
FROM ROY KIENITZ
Q.1. Ideal Time to Invest in Infrastructure. I have heard that
given today's low interest rates and the excess capacity
available in the construction industry that now is an ideal
time to be investing in infrastructure. Please comment on the
efficiencies that we can realize by increasing our Nation's
investment in infrastructure right now, in the midst of the
current economic downturn.
A.1. This is indeed a good time to take advantage of abundant
underused resources to close part of the Nation's
infrastructure gap. As the Department of the Treasury and the
Council of Economic Advisers noted in their report on
infrastructure investment on October 11, 2010, the unemployment
rate in the construction industry is currently over 17 percent,
so abundant human resources are available. Many are also
unemployed in supporting industries, such as steel and cement
manufacture. As a result, construction costs for infrastructure
investment are unusually low. Our experience with Recovery Act
funding has shown that many projects were built for less than
the estimated construction cost. Among our $1.1 billion in
aviation investments, for example, winning bids for the
projects came in $200 million below their initial engineering
estimates. As a result, more than 2,000 additional airport,
highway, bridge, and transit projects were funded because other
projects were being completed under budget. Finally, interest
rates on high-grade municipal bonds are down 82 basis points
from 2008, further reducing the costs of investing in
infrastructure.
Q.2. Merit-Driven Selection Process. One of the benefits of
creating a National Infrastructure Bank is the fact that we
create a competitive, merit-driven process that leads to
selection of those projects with the best returns. How can we
design a bank to ensure that we make the best use of Federal
dollars and fund the projects with the highest rates of return
and the greatest public benefits?
A.2. We believe that our selection process for the TIGER Grants
program that was created under the Recovery Act provides a good
model for how a merit-driven selection process might work. In
that program, we received over 1,400 grant applications,
totaling over $59 billion in requested funding, for a $1.5
billion program. We organized teams of technical experts--with
each team including experts from several modal
administrations--to provide a preliminary review of the
applications and to select the best 10 percent as ``highly
recommended'' for further review. We had required that each
application provide a detailed discussion of the benefits that
it would achieve, including a detailed benefit-cost analysis
for projects over $100 million. A team of economists critically
reviewed the benefit-cost analyses for the highly recommended
projects, and provided its conclusions, along with the
conclusions of the technical experts, to a senior review team
comprising the Department's senior management from each of its
modal administrations. The senior review team made its
recommendations to the Secretary, who made the final selection
decisions. This process worked effectively because it drew
heavily on the technical expertise of the Department's career
staff, combined with the common sense judgment and wide
experience of the Department's senior management, as well as
the ultimate accountability of final selection by the
Secretary. The process also worked because we required
applicants to make use of economic analysis to provide a common
measuring stick for comparing disparate projects. While we
exempted smaller projects from the benefit-cost analysis
requirement in the first round of TIGER Grants, our experience
was that even applications for small projects often were able
to put together very capable benefit-cost analyses; as a
result, in the second round of TIGER Grants that were awarded
in October 2010, we required all applications to include a
benefit-cost analysis.
Q.3. Leveraging. One of the goals of an infrastructure bank is
to leverage new State, local, and private funding. Some studies
have found that previous increases in Federal transportation
funding have led to reduced State and local funding. How can we
best design an infrastructure bank to ensure that it leverages
new public and private funding rather than simply substituting
for existing funding?
A.3. It is true that previous studies have found that States
curtail their own spending on infrastructure when the Federal
Government increases its spending. A GAO report in 2004, for
example, found that since 1982 States had reduced their
spending on highways by about 50 percent of the Federal
increase in spending on highways, and that this rate of fiscal
substitution had increased during the 1990s. In the TIGER Grant
program, we looked closely at the extent to which States,
cities, transportation authorities, and private firms were
contributing to the costs of the projects for which TIGER Grant
funding was sought. We did this partly because we wanted to
increase the number of projects that could be funded, and
partly because we thought that projects that had attracted
funding from local authorities and private firms were more
likely to have high benefits than projects that had not. In
many cases we awarded less funding than the applicant had
originally requested, strengthening the incentive for local
authorities to increase their contributions. An infrastructure
bank that has flexible authority to issue both grants and loans
can structure its assistance so as to leverage funding from
several sources--State and local taxes, user fees, and private
sector contributions--and increase the number of projects that
can be funded with a given level of resources. Careful economic
analysis can also identify how the benefits of a project are
distributed and suggest what would be a fair distribution of
the costs of funding the project.
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RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD
FROM ALAN B. KRUEGER
Q.1. Ideal Time To Invest in Infrastructure. I have heard that
given today's low interest rates and the excess capacity
available in the construction industry that now is an ideal
time to be investing in infrastructure. Please comment on the
efficiencies that we can realize by increasing our Nation's
investment in infrastructure right now, in the midst of the
current economic downturn.
A.1. There is currently a large group of unemployed and
underemployed labor available to improve our infrastructure.
Building more roads, bridges, and rail tracks would help the
segment of workers that was most disproportionately affected by
the economic crisis--construction and manufacturing workers.
The Treasury Department, with the Council of Economic Advisers,
recently issued a report which addressed this topic in greater
detail. I am enclosing a full copy of the report for the
record.
Due to the collapse of the real estate market, the
contraction of employment in the construction industry was
especially acute. Since December 2007, the construction
industry has lost 25 percent of its total payroll jobs,
dropping from 7.5 million to 5.6 million employees. In
September 2010, the unemployment rate for construction workers
stood at 17.2 percent; over three times the rate from 3 years
ago, and almost double the overall unemployment rate.
Accelerated infrastructure investment would provide an
opportunity for construction workers to productively apply
their skills and experience. Moreover, hiring currently
unemployed construction workers would require lower training
costs for firms than would be incurred by hiring workers during
normal times, because these workers already have the requisite
skills and experience in construction.
The excess supply of construction workers is one of many
factors making current construction costs low, which in turn
leads to lower project costs. For example, the Federal Aviation
Administration received $1.1 billion in Recovery Act funds for
airport improvements. The money was designated for 300
projects. The winning bids for those projects came in over $200
million below the engineers' original estimates. A second round
of projects was selected, which also received less expensive
bids than had been anticipated. As a result of these cost
savings, 367 runway and airport improvement projects were
funded with the same amount of money that was originally
intended to support 300 projects.
Q.2. Merit-Driven Selection Process. One of the benefits of
creating a National Infrastructure Bank is the fact that we
create a competitive, merit-driven process that leads to
selection of those projects with the best returns. How can we
design a bank to ensure that we make the best use of Federal
dollars and fund the projects with the highest rates of return
and the greatest public benefits?
A.2. Transportation investment by the Federal Government has
rarely been made through a competitive process. To address the
lack of merit-based funding, the National Infrastructure Bank
would develop a framework to analytically examine potential
infrastructure projects based on cost-benefit analysis and to
understand the distributional impact of both the costs and the
benefits of each project. Of course, not all of the benefits
and costs can be quantified, but an effort should be made to
quantify what can be quantified and to take account of any
additional benefits and costs to society. A rigorous analytic
process would result in support for projects that yield the
greatest returns to society, and would avoid investing taxpayer
dollars in projects where costs exceed total benefits.
This is a difficult process given the inherent complexities
involved in calculating the benefits from investment in
transportation infrastructure. As I mentioned in my testimony,
even calculating the full costs of congestion is very
difficult. The Department of Transportation has begun a
competitive multimodal transportation grant program, the TIGER
program, which was started under the Recovery Act and
subsequently continued through additional Congressional
funding. DOT is planning to gather data on the actual benefits
of their TIGER Grant projects so that they can find out how
closely the actual benefits correspond to the benefits
anticipated in the benefit-cost analyses. I support this effort
to see what lessons can be learned from the experience of the
TIGER program to develop procedures for a National
Infrastructure Bank.
Finally, I recommend that when considering the costs and
benefits of project proposals, the Bank should take into
account the effects that infrastructure investments will have
throughout the network connected to these investments.
Specifically, the Bank ought not only to consider the costs and
benefits that accrue in the area where the infrastructure
project takes place, but also track the costs and benefits
attributable to investments away from the project site. For
example, a significant improvement in the connection between a
port and a freight rail line will also benefit those who use
that route to export goods. The National Infrastructure Bank
should consider all the costs and benefits when considering
project proposals--not just localized costs and benefits at the
project site.
Q.3. Effects of Prolonged Unemployment. Prolonged unemployment
can have significant negative impacts on construction workers
and the construction industry. Can you discuss what impacts
prolonged unemployment can have on the skills of construction
workers and the long-term impacts of substantial prolonged
unemployment on the construction industry?
A.3. The construction industry was hit particularly hard by the
economic downturn. We have conducted analysis which suggests
that 61 percent of the jobs created by investing in
infrastructure would be in the construction sector, 12 percent
would be in the manufacturing sector, and 7 percent would be in
retail trade, for a total of 80 percent in these three sectors.
Nearly 90 percent of the jobs in the three sectors most
affected by infrastructure spending would be middle class jobs,
defined as those between the 25th and 75th percentile in
national distribution of wages. Overall, the average
unemployment rate among those who would be put to work by
additional investment in infrastructure is currently over 15
percent, more than one and one-half times the national
unemployment rate.
Research by Laurence Ball of Johns Hopkins University, who
analyzed unemployment in OECD countries, finds that prolonged
recessions can produce persistently high unemployment, even
after the recession is over--a phenomenon known as hysteresis.
\1\ At a microeconomic level, unemployment has been found to be
associated with health problems, illness, and depression. \2\
Moreover, research by Andrew Clark and others finds that
unemployment has a ``scarring'' effect; unemployment spells
lower the reported life satisfaction of those who return to
work even after they become reemployed. \3\
---------------------------------------------------------------------------
\1\ See, Laurence Ball, ``Aggregate Demand and Long-Run
Unemployment'', Brookings Papers on Economic Activity, 1999(2), pp.
189-251; and Laurence Ball, ``Disinflation and the NAIRU'' (1997), in
Reducing Inflation: Motivation and Strategy, edited by Christina Romer
and David Romer, Univ. of Chicago Press.
\2\ Linn, Margaret W., Richard Sandifer, and Shayna Stein,
``Effects of Unemployment on Mental and Physical Health'', American
Journal of Public Health, 75(5):502 (1985).
\3\ Clark, Andrew E., Yannis Georgellis, and Peter Sanfey, ``The
Psychological Impact of Past Unemployment'', Economica, 68(270):221-241
(2001).
Q.4. Public-Private Partnerships. What is the potential for
public-private partnership in infrastructure? What is the
evidence that private capital is available for the kinds of
significant regional projects that the NIB would be designed to
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support?
A.4. Experience suggests that there is enormous potential for
public-private partnership in infrastructure, and private
capital is available and ready to invest in transportation
infrastructure. For example, the Recovery Act established a
number of new and expanded bond financing programs to enable
State and local governments to borrow at lower costs for
capital projects, including Build America Bonds (BABs), which
have been very successful. Prior to the introduction of BABs,
the traditional tax-exempt municipal bond market was frozen. In
March 2009, highly rated issuers faced borrowing costs that
were higher than taxable Treasury yields, even though their
bonds were tax-exempt, and many issuers were unable to access
financing at any price. Then in April 2009, the BABs program
was introduced. This program made municipal bonds attractive to
a wide variety of new investors--including pension funds,
sovereign wealth funds, and retail investors in lower tax
brackets. Since the program's inception in April 2009, State
and local governments have now issued more than $150 billion in
BABs and saved billions of dollars in financing costs. \4\ The
success of the BABs program demonstrates strong private
investor interest in infrastructure financing.
---------------------------------------------------------------------------
\4\ This figure is for BABs issuances from April 2009 to October
31, 2010.
---------------------------------------------------------------------------
As Governor Rendell stated in his testimony, there are
billions of dollars in private investment funds that are
waiting to be invested in the United States. Moreover, as
Robert Wolf stated at the hearing, ``Preqin, a private equity
industry consultant, estimates that there is over $180 billion
dollars of private equity and pension fund capital focused on
infrastructure equity investments. This capital can play an
important role in bridging State and local budget gaps.''
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD
FROM EDWARD G. RENDELL
Q.1. Ideal Time To Invest in Infrastructure. I have heard that
given today's low interest rates and the excess capacity
available in the construction industry that now is an ideal
time to be investing in infrastructure. Please comment on the
efficiencies that we can realize by increasing our Nation's
investment in infrastructure right now, in the midst of the
current economic downturn.
A.1. There is no question that now is the time to invest in our
infrastructure to take advantage of the very low interest rates
as well as the low bids cities and States are receiving on
their construction projects. That has the potential to make
current dollars go further. For example, Pennsylvania issued a
$900 million ``Build America Bond'' in January of this year and
the result was that the Commonwealth obtained the lowest
interest rate since 1968 at a rate of 3.13 percent. That is a
remarkable rate and the savings realized will mean more dollars
available for other worthy projects.
Additionally, we have been receiving some of the lowest
construction bids for projects throughout Pennsylvania. The bad
news is that many of these bids are so low because unemployment
rates are high. The September, 2010, U.S. Department of Labor
unemployment figures indicate that unemployment in Pennsylvania
is at about 9 percent which is slightly below the national
unemployment rate of 9.6 percent. And because of that,
construction firms are more interested in keeping workers
employed by reducing their bids in order to win more contracts.
For example, when Pennsylvania received its stimulus funding
for roads, highways, and bridges we bid out 242 projects.
Because the bids came in significantly lower than expected, we
were able to add 344 new projects.
I cannot speak for every other State but my guess is that
other governors, mayors, and elected officials are experiencing
similar experiences.
Q.2. Merit-Driven Selection Process. One of the benefits of
creating a National Infrastructure Bank is the fact that we
create a competitive, merit-driven process that leads to
selection of those projects with the best returns. How can we
design a bank to ensure that we make the best use of Federal
dollars and fund the projects with the highest rates of return
and the greatest public benefits?
A.2. If we are going to set up a National Infrastructure Bank
then we must do it right from the beginning. That means we must
have expert staff capable of conducting benefit-cost analysis,
we must have a board experienced in the infrastructure world
making informed and merit-based evaluations of the projects,
and we must establish criteria which all projects must meet.
One way to do that is to limit the types of projects to those
that have regional or national significance. I would also
recommend that an NIB be completely transparent by posting all
the data for the world to see. When people can see where and
why their tax dollars are being spent then they will tend to
trust their leaders in making these difficult decisions.
With respect to the rates of return and public benefit that
is not easy to define but that is why this Bank must be
established--to make the tough decisions. Will every project be
eligible? The answer to that is absolutely not. Those
submitting projects for consideration must prove to the Board
why these projects truly benefit a region or Nation. For
example, our ports are clogged and cargo is often expensive to
ship over land due to congestion, lack of capacity, and lack of
alternative transportation options such as on-dock-rail. Well,
a port could justify the impact by laying out for the Bank how
improvements in certain cities and States would eliminate choke
points, speed traffic, or get our goods exported more easily.
That scenario is a win not just for that particular port but
for the shippers, consumers, and those buying our products
overseas because the overhead costs of shipping will be reduced
and on-time delivery can improve. And I believe that our
Government--be it through the Bank or another entity that
currently tracks this data--should measure those benefits to
companies who ship their products and earn profits thereby
hiring more people back to work so that can increase their
productivity.
Q.3. Leveraging. One of the goals of an infrastructure bank is
to leverage new State, local, and private funding. Some studies
have found that previous increases in Federal transportation
funding have led to reduced State and local funding. How can we
best design an infrastructure bank to ensure that it leverages
new public and private funding rather than simply substituting
for existing funding?
A.3. First, I am not suggesting that a NIB replace current
Federal funding--most of which is allocated to the States on a
formula basis. Instead, the NIB should be viewed as a
supplementary tool that could provide appropriate assistance to
large scale projects of national or regional significance.
Establishing criteria about the level and amount of NIB
assistance would be the best way to safeguard the Federal
contribution. Some of these limits are already in place. For
example, in the transportation infrastructure area the TIFIA
program is prohibited from contributing more than 33 percent of
a project's total cost. Additionally, Federal law already
requires a specific State/local match for highway and transit
projects.
I think similar things could be done in the water and
wastewater, energy, broadband, and other infrastructure areas
that the Bank could help finance once criteria are established
for those needs.
------
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD
FROM ROBERT WOLF
Q.1. Ideal Time To Invest in Infrastructure. I have heard that
given today's low interest rates and the excess capacity
available in the construction industry that now is an ideal
time to be investing in infrastructure. Please comment on the
efficiencies that we can realize by increasing our Nation's
investment in infrastructure right now, in the midst of the
current economic downturn.
A.1. Interest rates are currently at their lowest levels in
decades allowing for low-cost funding of projects.
The 10-year U.S. Treasury is currently 2.39
percent, 172bps below the 10-year historical average of
4.11 percent and 454bps below the 30-year historical
average of 6.93 percent. \1\
---------------------------------------------------------------------------
\1\ Bloomberg data, 10/9/10.
The Moody's Aaa corporate bond index is currently
4.56 percent, 104bps below the 10-year historical
average of 5.60 percent and 267bps below the 25-year
historical average of 7.23 percent. \2\
---------------------------------------------------------------------------
\2\ Bloomberg data, 10/9/10.
The construction industry has been among the hardest hit in
the economic downturn and the costs of key inputs for
---------------------------------------------------------------------------
construction (concrete, steel, etc.) have also come down.
The Dodge Construction Index that tracks total U.S.
construction contract/pipeline value has decreased 25
percent from September 2008. \3\
---------------------------------------------------------------------------
\3\ Bloomberg data, 10/9/10.
The Dow Jones Global Building Materials and
Fixtures Index has declined nearly 30 percent from
September 2008. \4\
---------------------------------------------------------------------------
\4\ Factset data, 10/9/10.
According to the Bureau of Labor Statistics, the
construction industry has an unemployment rate of 17.2
percent as of September 2010. \5\
---------------------------------------------------------------------------
\5\ Bureau of Labor Statistics, ``Industries at a Glance:
Construction'', September 2010.
In addition to the costs of financing and constructing
infrastructure now at historically low levels, there is
currently over $180bn of equity capital looking to invest in
infrastructure. \6\
---------------------------------------------------------------------------
\6\ Preqin, September 2010.
This private capital will be invested wherever
private sector infrastructure investment opportunities
develop (primarily in the OECD), and will be invested
abroad if investment opportunities are not available in
---------------------------------------------------------------------------
the U.S.
Given the low interest rate environment and high
unemployment in the construction sector, now would be an
optimal time to create jobs through infrastructure investment.
Jack Wells, chief economist at USDOT, estimates
that $1bn of Federal funding for transportation
infrastructure would create 34,800 jobs. \7\
---------------------------------------------------------------------------
\7\ Jack Wells, USDOT, September 2008.
The Milken Institute estimates that $1bn of
transportation infrastructure spending would create
27,400 jobs. \8\
---------------------------------------------------------------------------
\8\ Milken Institute, ``Jobs for America'', January 2010.
Q.2. Merit-Driven Selection Process. One of the benefits of
creating a National Infrastructure Bank is the fact that we
create a competitive, merit-driven process that leads to
selection of those projects with the best returns. How can we
design a bank to ensure that we make the best use of Federal
dollars and fund the projects with the highest rates of return
---------------------------------------------------------------------------
and the greatest public benefits?
A.2. The NIB must allocate funds based on rigorous cost-benefit
analysis conducted by experienced industry experts and should
focus on those projects that will deliver the highest value for
money.
The decision-making process must be totally
transparent and open to public scrutiny.
The decision to fund selected projects will be
independent of the appropriations process or other
partisan constraints and free of the election and
budgetary cycles.
To help select the best projects, the NIB should
have a broad-based board of governors, representing
various infrastructure stakeholders and comprised of
members with demonstrated sector expertise and private
and public sector experience.
It should be noted that the NIB should be policy
driven, which means it will consider nonmonetary cots
and benefits alongside monetary ones as part of its
cost-benefit analysis.
USDOT's existing TIFIA program provides an example of how a
National Infrastructure Bank would use merit to determine
project funding.
The TIFIA process uses pre-agreed criteria to
determine which projects receive loans; these criteria
include innovation, safety, livability, sustainability,
economic competitiveness, and State of good repair.
Since its inception in 1998, TIFIA has made $7.9bn
of loans, $1.6bn of which have already been repaid with
interest. \9\
---------------------------------------------------------------------------
\9\ Federal Highway Administration, TIFIA Projects and Case
Studies, October 2010.
TIFIA-assisted projects have created over $29.4bn
of total infrastructure spending; an example of the
potential to leverage Federal dollars with local
government and private sector investment. \10\
---------------------------------------------------------------------------
\10\ Federal Highway Administration, TIFIA Projects and Case
Studies, October 2010.
Q.3. Public-Private Partnerships. What is the potential for
public-private partnership in infrastructure? What is the
evidence that private capital is available for the kinds of
significant regional projects that the NIB would be designed to
---------------------------------------------------------------------------
support?
A.3. Private-public partnerships can be a viable tool in
infrastructure investment because they:
Mobilize private sector capital to fund projects
alongside Government funding.
Shift elements of the project risk from the public
sector to the private sector.
Allow for greater participation of the private
sector in the development and financing of
infrastructure and provision of services.
There is currently over $180bn of equity capital looking to
invest in infrastructure and there is over $55bn of new equity
capital being raised by infrastructure investors today. \11\
---------------------------------------------------------------------------
\11\ Preqin, September 2010.
If this $180bn of equity capital comprised 30
percent of project costs, it could generate $600bn of
---------------------------------------------------------------------------
infrastructure investment.
Since 2005, over $38.1bn of public-private partnership
transactions have been undertaken in the U.S. transportation
sector (road, rail, and port). \12\
---------------------------------------------------------------------------
\12\ Dealogic Database, InfraAmericas, Infrastructure Journal.
Of this, over $13.6bn has been invested in
greenfield projects, the majority of which would not
have been completed without the use of private sector
---------------------------------------------------------------------------
equity.
An additional $24.5bn has been invested in
brownfield projects, which have helped reduce
Government debt burdens and allowed these governments
to redeploy capital into new infrastructure projects.
An example of one such project is the North Tarrant Express
in Texas that reached financial close in November 2009:
This project was financed using $1,048mm of private
sector debt, $600mm of TIFIA loans, $573mm of
contributions from TxDOT, and $426mm of private sector
equity. \13\
---------------------------------------------------------------------------
\13\ Dealogic Database, InfraAmericas, Infrastructure Journal.
Of these funds, the Federal Government contributed
only $600mm (22 percent of project cost) for the TIFIA
loan which is expected to be paid back with interest
---------------------------------------------------------------------------
over 40 years.
The track record for public-private partnerships globally
is very strong.
U.K. National Audit Office studies have found that
privately developed infrastructure projects are
delivered on-time and on-budget with much higher
frequency than similar publicly procured projects. \14\
---------------------------------------------------------------------------
\14\ U.K. National Audit Office, ``PFI: Construction
Performance'', February 2003.
73 percent of public procurements ran over-budget
---------------------------------------------------------------------------
vs. only 22 percent of privately financed projects.
70 percent of public procurements ran over time vs.
only 30 percent of privately financed projects.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
FROM ROBERT WOLF
Q.1. How would you suggest funding the proposed infrastructure
bank?
A.1. The NIB could leverage its initial funding with private
sector equity and debt to maximize value for money. To provide
an example, an initial NIB funding of $25 billion could be
leveraged two times by issuing debt to private sector
investors, creating $75 billion of NIB capital that could be
used to fund as much as $375 billion in infrastructure funding
(while maintaining only a 20 percent NIB stake). A primary
advantage of involving private equity is that private equity
takes the first loss on projects in the event of distress,
thereby shielding the Federal Government's investment in the
project. The NIB would be subject to strict leverage limits to
be set forth in its establishing legislation.
Q.2. Do you believe any new funding used to create the proposed
infrastructure bank should be offset with corresponding
decreases in Federal spending elsewhere?
A.2. We believe that infrastructure spending is critical to the
economic growth of this country and that a National
Infrastructure Bank would increase the overall pool of capital
available for infrastructure investment. The creation of an
infrastructure bank as we have outlined would be advantageous
for the country because it would leverage Federal dollars with
funds from private sector debt and equity investors, thereby
reducing the reliance on the Federal Government to fund
infrastructure improvements. However, I would not advocate
reducing the Federal Government's overall spending on
infrastructure.
------
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD
FROM DONALD SHUBERT
Q.1. Ideal Time To Invest in Infrastructure. I have heard that
given today's low interest rates and the excess capacity
available in the construction industry that now is an ideal
time to be investing in infrastructure. Please comment on the
efficiencies that we can realize by increasing our Nation's
investment in infrastructure right now, in the midst of the
current economic downturn.
A.1. As far as low interest rates are concerned, if the
question is regarding Government's ability to borrow, reports
show that current market interest rates are at low levels. This
means that the Government can obtain the same amount of
bonding, paying far less over the debt service period. If the
question goes to producers' and contractors' ability to finance
new equipment purchases, the same holds true. However, access
to capital is tight making it harder for companies to finance
new equipment and plant purchases.
There are two primary efficiencies that can be realized
now. First there is a skilled workforce sitting idle. That
workforce is fully trained and can return to work on short
notice. Hiring unemployed construction workers would impose
lower training costs on firms that would be incurred by hiring
and training new workers, because these workers already have
the requisite skills and experience in construction. This lower
training cost is one factor that is keeping construction costs
low, which leads to the second efficiency.
Second, the fierce competition between contractors seeking
work due to the excess capacity in the construction industry is
driving down prices, making current construction costs low. In
a report issued on October 11, 2010, the Department of the
Treasury with the Council of Economic Advisors provided that:
``Construction costs and other costs associated with building
projects are especially low in the current environment. The
Department of Transportation's (DOT) experience with Recovery
Act funding has shown that more than 2,000 additional airport,
highway, bridge, and transit projects were funded because of
low bids, or projects being completed under budget. DOT also
reported that among its $1.1 billion in aviation investments,
winning bids for the projects came in $200 million below their
initial engineering estimates.''
A recent bid opening in Connecticut provides an example. On
October 13, 2010, the Connecticut Department of Transportation
held a bid opening for the Reconstruction of the I-95/I-91/
Route 34 Interchange Project that was estimated to cost over
$500 million. The low bid was $356.8 million.
Q.2. Merit-Driven Selection Process. One of the benefits of
creating a National Infrastructure Bank is the fact that we
create a competitive, merit-driven process that leads to
selection of those projects with the best returns. How can we
design a bank to ensure that we make the best use of Federal
dollars and fund the projects with the highest rates of return
and the greatest public benefits?
A.2. CCIA does not have the type of data to sufficiently advise
you on the design of a bank to ensure that we can make the best
use of Federal dollars and fund projects with the highest rates
of return and the greatest public benefits, however, we believe
that effective measures to ensure those important results would
be to identify specific goals and set objective selection
criteria to meet the goals. Goals could include economic
competitiveness, safety, state of good repair, and other
critical national goals. Criteria to meet those goals could
include items such as job creation, reduced carbon emissions,
and public health and safety benefits.
It is important to set high standards of transparency and
accountability. One way to do this may be to require that those
goals and the selection criteria be set forth for all
applicants to understand prior to the acceptance of proposals
and conducting evaluations.
Q.3. Effects of Prolonged Unemployment. Prolonged unemployment
can have significant negative impacts on construction workers
and the construction industry. Can you discuss what impacts
prolonged unemployment can have on the skills of construction
workers and the long-term impacts of substantial prolonged
unemployment on the construction industry?
A.3. Prior to the economic downturn, the construction industry
was facing a workforce challenge. The workforce was aging, and
the industry was having problems attracting and retaining
younger employees. At that point, the industry was investing in
workforce development initiatives such as annual Construction
Career Day programs for high school juniors and seniors.
With the economic downturn, and resulting high unemployment
in the industry, the large number of unemployed skilled trades-
people is limiting contractors' and apprenticeship training
programs' ability to bring new people into the industry and
train them. Employers will only hire and invest in training new
employees when there are long-term prospects of work available.
Likewise, it is difficult to conduct apprenticeship training
programs when there are many skilled people looking for work.
It makes no sense to train people for unemployment.
The current situation is exacerbating the challenge of
replacing our aging workforce. If and when construction
employment rises again, we will be worse off, because we have
fallen behind in our efforts to replenish a skilled productive
workforce.
Retaining management employees and office staff presents
another challenge. Many contractors have had staff reductions
during the economic downturn. Many of the newly unemployed
high-level employees and staff have transferable skills and are
seeking work in other industries and sectors of the economy.
This will present a significant challenge for construction
companies when they begin taking on new work and rebuilding
their companies.
Q.4. Leveraging. One of the goals of an infrastructure bank is
to leverage new State, local, and private funding. Some studies
have found that previous increases in Federal transportation
funding have led to reduced State and local funding. How can we
best design an infrastructure bank to ensure that it leverages
new public and private funding rather than simply substituting
for existing funding?
A.4. From CCIA's viewpoint, a National Infrastructure Bank will
almost certainly supplement rather than replace core Federal
transportation funding streams. We believe that there are a
significant number of mega- and multi-modal projects that are
too expensive for a State or region to fund, and are too large
for the core funding program to support. We believe that
alternative funding sources such as an infrastructure bank will
be used to meet those needs, leaving the core funding programs
to fund the mounting number of regular program projects.
Again, Chairman Dodd and Ranking Member Shelby, the
Connecticut Construction Industries Association applauds your
leadership and looks forward to working with the Committee to
develop meaningful legislation to invest in infrastructure,
create jobs and grow the economy.
Additional Material Supplied for the Record
PREPARED STATEMENT SUBMITTED BY THE CALIFORNIA INFRASTRUCTURE AND
ECONOMIC DEVELOPMENT BANK
Chairman Dodd, Ranking Member Shelby, and distinguished Members of
the Committee my name is Stanton C. Hazelroth, and it is a privilege to
offer my testimony concerning the need for the creation of a National
Infrastructure Bank.
As you know, a discussion has been taking place ranging far and
wide about the need for and the make-up of a National Infrastructure
Bank. I believe you have heard testimony about successful examples in
other parts of the world. I am here to testify that such a bank has
existed in California for over 15 years, providing financing for over
$31 billion of infrastructure and related governmental needs. I suggest
that you only have to look as far as California to find a working model
that proves, albeit on a State-sized scale, the potential impact of
such a bank.
I serve as the Executive Director of the California Infrastructure
and Economic Development Bank (California I-Bank). The California I-
Bank was created by the California Legislature in 1994. The Legislation
was approved by a vote of 67 to 1 in the Assembly and 30 to 3 in the
State Senate illustrating the potential bipartisan appeal of this
concept. The mission of the California I-Bank is to finance public
infrastructure and private development that promote economic growth
that is the sine qua non for creating new jobs for Californians. I am
here to tell you that a national I-Bank is not only feasible, but a
must if our Nation is going to rebuild the infrastructure that our
economy relies upon to compete globally. While it cannot and should not
supplant our current systems of financing infrastructure, it can
supplement them in a most powerful way.
The California I-Bank is the State of California's only general
purpose financing authority and has extremely broad statutory powers to
issue revenue bonds, make loans and provide credit enhancements for a
wide variety of infrastructure and economic development projects. It
received an initial one-time net appropriation of $181 million in 1999.
The California I-Bank does not receive annual appropriations from the
State; its operations are funded solely from fees, interest earnings
and loan repayments. The I-Bank began full operations in 1999. Over the
last decade we have steadily grown from $6.0 billion to approximately
$30 billion in debt financings with a staff of 25 positions. \1\ Most
of the projects financed by the California I-Bank also receive funding
from additional sources, multiplying the impact of the I-Bank
financing. Working with a National Infrastructure Bank as a member of
the team would allow project proponents to make effective use of
multiple sources of financing in creative, innovative ways that allow
more and even larger regional projects to happen and on extremely
favorable terms.
---------------------------------------------------------------------------
\1\ Information technology, human resources, and certain I-Bank
accounting services are provided by other departments. In a few cases,
a bond that was issued by the I-Bank and later defeased by the I-Bank
are both shown as financing work by the I-Bank and counted in the
overall total. Removing those few examples, the money that I-Bank has
placed is approximately $28 billion.
---------------------------------------------------------------------------
When considering a National I-Bank, it is helpful to understand how
the California I-Bank is organized. It is similar to the many of the
proposals currently before this Congress. Both Infrastructure Banks
would be governed by a five-member board of directors. In California,
the board consists of four Governor's appointees and the California
State Treasurer. Three of the Governor's appointees sit as a result of
their appointed positions with the Governor, like the Secretary of
Business, Transportation and Housing, and one is directly appointed by
the Governor.
The Board is statutorily required to approve all financing by the
California I-Bank. Staff is not free to make loans and investments on
their own unless by specific delegations from the Board. The daily
affairs are managed and conducted by an Executive Director, who is
appointed by the Governor and confirmed by the Senate. The California
I-Bank Executive Director and staff were responsible for developing the
structure, departments and employees needed to carry out their mandate.
The Congressional proposals commonly include a detailed and
sophisticated ``ready to go'' organizational structure, taking many
successful ideas from the European Infrastructure Bank. A strong,
independent board and staff is essential. The I-Bank recently received
ratings upgrades from Standard and Poor's (S&P) and Fitch Ratings, Inc.
(Fitch). S&P cited, ``[p]rogram oversight and loan screening provided
by State infrastructure bank'' staff as well as a key factor in the
upgrade. Moody's cited ``strong management with rigorous and detailed
credit reviews of new and existing borrowers'' as a key consideration
in their rating assessment.
Like the Congressional proposals, the California I-Bank can issue
debt, make loans and loan guarantees, among other powers. Both the
California I-Bank and the Federal proposals require the development of
objective selection criteria. After consultation with all interested
parties and technical experts, a series of public hearings was held
throughout the State to insure that criteria were developed leading to
the selection of only the best projects. Due to the diversity required
by the financing model, the projects over the last 10 years in the
direct loan program are 50 percent rural projects and 50 percent urban
projects. The I-Bank statute requires special efforts to provide
technical assistance to those in need and often those are rural
projects.
The following table lists the cumulative totals by fiscal year in
which the I-Bank has loaned, issued debt, or played a significant role
as a member of the financing team.
------------------------------------------------------------------------
Fiscal Year Cumulative Financing Totals
------------------------------------------------------------------------
1997-1998............................ $6,022,000,000
1998-1999............................ $6,086,580,000
1999-2000............................ $6,533,692,050
2000-2001............................ $6,852,267,350
2001-2002............................ $7,621,646,205
2002-2003\2\......................... $11,550,160,105
2003-2004\2\......................... $15,642,301,155
2004-2005............................ $18,134,898,155
2005-2006\3\......................... $23,146,452,663
2006-2007\2\......................... $28,431,501,828
2007-2008............................ $29,492,415,314
2008-2009............................ $30,764,252,814
2009-2010............................ $31,757,137,814
------------------------------------------------------------------------
The diversity of the I-Bank's programs has also expanded and now
includes the following primary programs:
---------------------------------------------------------------------------
\2\ Includes the sale of Tobacco Settlement Bonds for which the I-
Bank was responsible for creating a special purpose trust, selling the
tobacco assets to the special purpose trust, and working with the
Department of Finance to oversee the sale of the bonds.
\3\ On April 25, 2006, $1,160,435,000 of Toll Bridge Seismic
Retrofit Revenue Bonds issued by the I-Bank was defeased and $80
million in related commercial paper was repaid.
Infrastructure State Revolving Fund (ISRF) Program
(provides low-cost financing to local agencies for public
---------------------------------------------------------------------------
infrastructure projects);
Industrial Development Revenue Bond (IDB) Program (provides
tax-exempt revenue bond financing for eligible small- to mid-
size manufacturing companies);
501(c)(3) Revenue Bond Program (provides tax-exempt revenue
bond financing for certain nonprofit public benefit
corporations);
State School Fund Apportionment Lease Revenue Bond Program
(provides tax-exempt revenue bond financing for school
districts needing emergency apportionment loans);
Public Agency Revenue Bond Program (provides tax-exempt
revenue bond financing for governmental entities, including the
I-Bank's ISRF Program); and
Other Tax-Exempt Revenue Bonds (this category captures I-
Bank projects that don't meet the criteria of any of the four
bond programs listed above).
(The IDB Program, the 501(c)(3) Revenue Bond Program, the State School
Fund Apportionment Lease Revenue Bond Program, the Public Agencies
Revenue Bond Program and Other Tax-Exempt Revenue Bonds are
collectively the Bond Financing Programs.)
The I-Bank statute has allowed a broad and creative range of
economic development financings. Below is information on each of the
programs.
Infrastructure State Revolving Fund Program
The Infrastructure State Revolving Fund (ISRF) Program is a direct
revolving fund loan program created by the I-Bank that can directly
serve as a model for the national I-Bank. It is a statewide program
that provides low-cost loans \4\ up to $10 million per project for the
following 16 statutorily designated categories \5\ of public
infrastructure: (1) city streets; (2) county highways; (3) drainage,
water supply and flood control; (4) educational facilities; (5)
environmental mitigation measures; (6) parks and recreational
facilities; (7) port facilities; (8) power and communications; (9)
public transit; (10) sewage collection and treatment; (11) solid waste
collection and disposal; (12) water treatment and distribution; (13)
defense conversion; (14) public safety facilities; (15) State highways;
and (16) military infrastructure. ISRF Program eligible applicants
include local government entities such as cities, counties,
redevelopment agencies, special districts, assessment districts, and
joint powers authorities. Since June 2000, the Board has approved
ninety-five (95) ISRF Program loans totaling nearly $417.6 million. \6\
---------------------------------------------------------------------------
\4\ ``Loans'' is generically used to mean loans, leases/leaseback
agreements and installment sale agreements.
\5\ Each of the categories is further defined in Government Code
Section 63010.
\6\ This number includes seven approved loans that were withdrawn
by the borrower.
---------------------------------------------------------------------------
While the appropriated funds have been committed to ISRF Program
borrowers, additional ISRF Program financing is available because of an
innovative ``leveraged loan program'' structure which involves the
issuance of revenue bonds secured by the repayments from previously
approved loans. To date, the I-Bank has issued three series of revenue
bonds totaling roughly $153 million to provide additional funding for
the ISRF Program (Program Bonds). As noted above, the I-Bank recently
received ratings upgrades from S&P and Fitch. The Program Bonds are
rated ``AA+,'' ``Aa2,'' and ``AA+'' by Fitch, Moody's Investors Service
(Moody's) and S&P, respectively. Moody's cited ``strong management with
rigorous and detailed credit reviews of new and existing borrowers'' as
a key consideration in their rating assessment. S&P cited, ``[p]rogram
oversight and loan screening provided by State infrastructure bank''
staff as well as a key factor in the upgrade.
Industrial Development Revenue Bond Program
The I-Bank is authorized to issue Industrial Development Bonds
(IDBs), which are tax-exempt bonds issued by governmental entities to
small- to mid-size, privately owned manufacturing and processing
businesses to provide low-cost financing of up to $10 million for the
acquisition, construction, rehabilitation, and equipping of the
business. The purpose of IDBs is to promote economic development and
job creation or retention. The I-Bank is a conduit issuer of IDBs. IDB
bonds are payable solely from the revenues generated by the privately
owned business and are neither backed nor guaranteed by either the
State or the I-Bank, and do not involve the use of State funds. The
eligibility requirements for IDBs are governed by provisions in the
Internal Revenue Code and U.S. Treasury regulations. Since 1999, the I-
Bank has issued forty-eight (48) IDBs totaling approximately $235
million to businesses located throughout the State.
501(c)(3) Revenue Bond Program
The I-Bank is authorized to issue 501(c)(3) bonds, which are tax-
exempt bonds issued by governmental entities to federally approved tax-
exempt nonprofit corporations to provide low-cost financing for capital
improvement projects. Similar to IDBs, the eligibility requirements for
501(c)(3) bonds are governed by the Internal Revenue Code and U.S.
Treasury regulations. The I-Bank serves as the conduit issuer of
501(c)(3) bonds, which are payable solely from the revenues of the
nonprofit entity, are neither backed nor guaranteed by either the State
or the I-Bank, and do not involve the use of State funds. As a result,
the I-Bank typically issues bonds for the following types of nonprofits
located throughout the State: \7\ (1) research institutions (e.g.,
Scripps Research Institute, Gladstone Institute, RAND Corporation, and
Buck Institute for Age Research); (2) cultural organizations (e.g.,
Asian Art Museum, San Francisco Ballet, California Academy of Sciences,
and Getty Museum); (3) charitable organizations (e.g., Salvation Army
and Goodwill Industries of Orange County); (4) recreational facilities
(e.g., YMCA); and, (5) other unique nonprofits that provide a defined
public benefit (e.g., Society for the Prevention of Cruelty to Animals,
the Academy of Motion Picture Arts and Sciences and Learning With a
Difference, Inc. d/b/a The Westmark School). Since 1999, the I-Bank has
issued ninety-three (93) 501(c)(3) bonds totaling approximately $5.8
billion.
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\7\ While the I-Bank has broad authority as a conduit bond issuer
for nonprofit entities, it is statutorily prohibited from financing
housing projects. Additionally, the I-Bank's board of directors has
adopted a policy to not issue bonds for nonprofit health facilities or
nonprofit higher educational facilities and other projects that are
eligible for financing through other State financing authorities that
were created specifically to finance those types of projects.
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State School Fund Apportionment Lease Revenue Bond Program
Emergency Apportionment Lease Revenue Bonds. In December, 2005, the
I-Bank issued $97 million of State School Fund Apportionment Lease
Revenue Bonds in three series. In April, 2010, the I-Bank issued an
additional series totaling $13 million for a fourth district. The
bonds, which were initially authorized by Chapter 263, Statutes of 2004
(AB 1554), as amended, will reimburse the State's General Fund for
long-term emergency loans made to four school districts experiencing
severe financial distress. The bonds will be repaid through a direct
intercept of State School Fund monies designated for apportionment to
the four districts. To the extent any school district in the future
obtains approval by the Legislature for an emergency loan, it is
anticipated that the I-Bank will issue bonds to fund the loan using the
model developed for the bonds issued in December 2005. This occurred as
mentioned above, in April, 2010.
Public Agency Revenue Bond Program
Because the I-Bank is the Governor's only general purpose financing
authority and has extremely broad statutory powers to issue revenue
bonds and act on the State's behalf in certain statutorily authorized
circumstances, the I-Bank has been involved in the following financings
and activities to support various State entities and programs.
Infrastructure State Revolving Fund Program. As mentioned above, on
March 1, 2004, the I-Bank issued its initial series of ISRF Program
revenue bonds, the Series 2004 ISRF Bonds, in the amount of $51.37
million. On December 14, 2005, and September 24, 2008, I-Bank issued
the 2005 and 2008 ISRF Bonds, totaling $52.8 million and $48.375
million, respectively, to provide additional funding for loans under
the ISRF Program.
Energy Efficiency Bonds. In April 2003, the California Consumer
Power and Conservation Financing Authority (CPA) issued $28,005,000 of
2003A Energy Efficiency Bonds on behalf of the California Energy
Commission (CEC). On October 25, 2004, the CPA assigned its rights and
responsibilities for these bonds to the I-Bank when the CPA's
operations were closed down as a result of budget elimination. In May
2005, the I-Bank issued a second series of revenue bonds in the amount
of $37 million to provide additional funding for the CEC's Energy
Efficiency Financing (EEF) Program, which provides low-cost loans of up
to $3 million to schools, hospitals and local governments for the
installation of energy-saving measures. The bonds are repaid from
previously approved EEF Program loans. Eligible projects include
heating, ventilating, air conditioning, equipment control, small
cogeneration and photovoltaic systems.
California Insurance Guarantee Association Bonds. In August 2004,
the I-Bank issued $750 million of revenue bonds for the California
Insurance Guarantee Association (CIGA) pursuant to authorization
contained in Chapter 645, Statues of 2003 (AB 227). CIGA is an
organization created by the California Legislature in 1969 to pay
claims of insolvent insurance carriers that are licensed to do business
in the State of California. The proceeds of the bonds were used by CIGA
to pay claims and related expenses that arose as a result of the
insolvencies of insurance companies providing workers' compensation
insurance. The bonds are repaid solely by special and regular premium
assessments on worker's compensation premiums paid by insurance
companies to CIGA.
Toll Bridge Seismic Retrofit Bonds. In August 2003, the I-Bank
issued $1.1 billion of long-term fixed rate revenue bonds for the
California Department of Transportation (Caltrans) pursuant to
authorization in Chapter 907, Statutes of 2001 (AB 1171). The bonds
were rated in the ``AA'' category by all three rating agencies and were
repaid solely from revenues and related interest earnings generated by
the $1 per vehicle seismic retrofit surcharge collected on the seven
Bay Area State-owned toll bridges. Caltrans used the bond proceeds to
fund a portion of the construction of the new East Span of the San
Francisco-Oakland Bay Bridge (Bay Bridge), which is one of the largest
public works projects in Northern California history. In March 2005,
the I-Bank also authorized the issuance of up to $400 million of
commercial paper for the program, with Caltrans using the proceeds for
the continued construction of the Bay Bridge. In March 2006, the Toll
Bridge Seismic Retrofit Bonds were defeased by bonds issued by the Bay
Area Toll Bridge Authority (BATA). BATA also paid off the related I-
Bank commercial paper notes at that time. BATA was given the financial
responsibility of continuing the Bay Bridge seismic upgrades and for
the costs thereof pursuant to Chapter 71, Statutes of 2005 (AB 144),
which also authorized BATA to collect the seismic surcharge revenue
generated from tolls collected on the State-owned Bay Area toll
bridges.
Clean Water State Revolving Fund (CWSRF) Bonds. In August 2002, the
I-Bank issued $300 million of fixed-rate revenue bonds to provide
additional funding for the CWSRF Program. The CWSRF, which is
administered by the State Water Resources Control Board (SWRCB),
provides low-cost loans up to $25 million per year to local agencies
throughout the State for the construction of wastewater treatment and
water recycling facilities. The bonds, which are repaid by 98
previously approved CWSRF loans from 50 different borrowers, received
natural ``AAA'' ratings from all three rating agencies. The bond issue
also represented the first time that the State had leveraged one of its
Federal Environmental Protection Agency-funded State revolving fund
programs, and added California to the ranks of over 20 other States
that have utilized this innovative financing technique to expand
lending capacity.
In addition to the above programs, the I-Bank has also been
involved in other unique financings listed below.
Tobacco Securitization Bonds. As part of the State's solution to
provide funds to address the Fiscal Year 2002-2003 budget deficit, the
Legislature and the Governor authorized the issuance of bonds secured
solely by tobacco settlement revenues. Chapter 414, Statutes of 2002
(SB 1831) authorized a special purpose nonprofit corporation
(Corporation) to serve as the issuer of the tobacco settlement bonds
and authorized the I-Bank to sell for, and on behalf of, the State, all
or any portion of the tobacco settlement revenues to the Corporation
necessary to issue the bonds. In January 2003, September 2003, August
2005 and most recently in March 2007, the I-Bank sold the tobacco
settlement revenues to the Corporation, and the Corporation issued
bonds totaling over $13 billion to be repaid from tobacco settlement
revenues.
Recovery Zone Economic Development Bonds Pool Finance Program
(RZEDBs). On February 17, 2009, President Obama signed the American
Recovery and Reinvestment Act of 2009 (Recovery Act), which contains a
number of new financing tools valuable for counties and cities to
achieve short-term economic stimulus and support long-term economic
recovery. RZEDBs are taxable governmental bonds that must be issued
before January 1, 2011, and are principally used in designated recovery
zones after designation as such for qualified economic development
purposes. RZEDBs can be used to pay costs associated with public
infrastructure or facilities that promote development or other economic
activity in a recovery zone, or for expenditures for job training and
educational programs. RZEDBs provide either a 45 percent interest rate
cash subsidy from the Federal Government to the bond issuer, or
bondholders can receive a tax credit equal to 45 percent of each bond
interest payment (unused credits may be carried forward to successive
years).
As a conduit bond issuer, the I-Bank may sell RZEDBs, which are
payable solely from the revenues of the participating eligible cities
and counties, are neither backed nor guaranteed by either the State or
the I-Bank, and do not involve the use of State funds. The I-Bank
intends to offer a pooled bond program to aggregate RZEDB financings
from several cities and counties into one large bond issuance to
facilitate efficient and cost effective access to this new type of
taxable bond with lower interest costs, lower bond issuance costs and a
ready-assembled bond financing team.
Tribal Compact Asset Securitization Bonds. Chapter 91, Statutes of
2004 (AB 687) ratified amended State-tribal gaming compacts (Compacts)
with five recognized Native American tribes (Tribes). Each Compact
allows the Tribe to increase the authorized number of gaming devices it
operates and also enhances the Tribe's exclusivity over gaming
activities. In return, the State receives, among other things, two new
income sources from the Tribes derived from the increased gaming
devices (Compact Assets). AB 687 authorizes the I-Bank to sell for and
on behalf of the State some or all of the Compact Assets to a special
purpose trust created by the I-Bank as a not-for-profit corporation
(Trust). The Trust is authorized to issue bonds, the repayment of which
is limited to the Compact Assets sold to the Trust by the I-Bank. The
I-Bank works closely with the Department of Finance and the State
Treasurer's Office to issue the bonds, with the bond proceeds intended
to be used to fund transportation projects.
Imperial Irrigation District Preliminary Loan Guarantee. On April
29, 1998, the Imperial Irrigation District (IID) and the San Diego
County Water Authority (SDCWA) entered into a 45-year water
conservation and transfer agreement (Transfer Agreement) for the
transfer of up to 200,000 acre-feet per year of water supply to SDCWA
based upon IID water conservation. The Metropolitan Water District of
Southern California (MWD) and the Coachella Valley Water District
(CVWD) challenged the IID/SDCWA transfer, resulting in Key Terms of a
Quantification Settlement Agreement (QSA), which outlined a series of
agreements to settle disputes and allow the Transfer Agreement to
proceed (QSA together with the Transfer Agreement, collectively the
Agreements).
IID did not initially approve the QSA due to concerns about two
early termination provisions contained therein and expected potential
environmental mitigation costs associated with actions undertaken
pursuant to the Agreements. Early termination would eliminate the
contract revenues that IID and its landowners would rely upon to
finance the capital investments enhancing water supply based upon IID
water conservation. A preliminary loan guarantee, approved by the I-
Bank Board on June 27, 2003, addressed the financial risks involved
with early termination and enabled IID to issue sufficient revenue
bonds to finance the water supply project. The Board of Directors of
the IID approved the QSA on October 2, 2003.
On December 15, 2009, the I-Bank Board approved a 1-year extension
of the 2003 Preliminary Commitment, subject to certain clarified terms
and conditions and to further negotiations on a few remaining terms and
conditions consistent with the 2003 Preliminary Commitment.
Other Tax-Exempt Revenue Bonds
The I-Bank has issued bonds for projects that do not fall into any
of the above categories of bonds. These include Rate Reduction Bonds,
Exempt Facility Revenue Bonds, Enterprise Zone Facility Bonds and
Economic Development Facility Bonds.
The I-Bank's activity related to rate reduction bonds (RRBs)
involved the issuance and ongoing administration of $6.046 billion of
bonds by special purpose trusts in 1997 and 1998. The RRBs were related
to the restructuring of the electric utility industry.
Exempt Facility Revenue Bonds are a category of bonds created by
special provision of the Internal Revenue Code which allow private,
for-profit companies, typically located at ports and airports, to
utilize the proceeds of tax-exempt bonds to finance limited types of
projects. California I-Bank is currently processing a bond to finance
$530 million for Poseidon, a desalinization plant to be located in
Carlsbad, California. A National I-Bank could finance such projects,
serving the driest regions in the States, making a huge positive impact
on water supply.
Enterprise Zone Facility Bonds are issued for projects that meet
the definition of 26 United States Code, Section 1394. An ``Enterprise
Zone'' means any area within a city, county, or a city and county that
is designated as an enterprise zone by the California Department of
Housing and Community Development in accordance with the provisions of
Section 7073 of the California Government Code. Economic Development
Facility Bonds are issued for projects that meet the definition of
Economic Development Facilities as defined in the I-Bank's statutes.
National I-Bank Project Example
Earlier this year, the Mayor of Los Angeles came to Washington with
an unusual financing request. According to press reports, he was not
looking for a grant or other handout. He simply needs a loan or loan
guarantee. He has obtained local voters approval to collect funds for
transportation. A one-half cent sales tax was passed by the voters in a
recent election to be collected for 30 years. Some experts say the
total amount that will be collected over 30 years is approximately $40
billion.
The City also has a very detailed, shovel ready plan to use the
money for transportation projects-mostly rail. If the City builds and
finances the projects on a pay-as-you-go basis, it will take 30 years
to put these critical transportation improvements in place. If it can
borrow the money, secured by the ongoing payment of this tax, the City
estimates that all of the projects can be complete within 10 years.
Think of the reduction in traffic, increases in air quality, and all
the other massive environmental benefits that could take place in 10
years: one-third of the time it would otherwise take.
The initial reaction to the Mayor's request was that such a program
doesn't exist. That is exactly my point. A National Infrastructure Bank
is designed to respond to just this kind of need. Los Angeles has a
huge infrastructure and environmental need, as do many communities
throughout the Nation. We have the solution.
______
PREPARED STATEMENT SUBMITTED BY THE CONSTRUCTION MANAGEMENT ASSOCIATION
OF AMERICA
The Construction Management Association of America welcomes this
opportunity to comment on current proposals to create a National
Infrastructure Bank. We have long supported this concept and I would
like to commend Chairman Dodd on taking the initiative to explore this
important and innovative idea and move it toward enactment. CMAA joined
with the Chairman and other Senate leaders last January in a news
conference in support of the Infrastructure Bank and other proposals.
We were also encouraged by President Obama's recent announcements
of support for the National Infrastructure Bank and his intention to
seek additional short-term funding for infrastructure investment.
CMAA would like to commend Pennsylvania Governor Ed Rendell of
Building America's Future for his eloquent and consistent leadership in
this effort.
CMAA is a national organization of more than 6,200 members,
including both owners of construction projects and individuals and
organizations providing professional construction and program
management services for our Nation's infrastructure.
CMAA's owner members are predominantly in the public sector and
include such organizations as the U.S. Army Corps of Engineers, the
U.S. General Services Administration, the State Department's Overseas
Building Operations, the Department of Veterans Affairs, the Department
of Homeland Security's Customs and Border Protection agency, and
numerous State Departments of Transportation, city and regional transit
agencies, ports, school districts, airports, and other entities.
Our service provider members include virtually all of the leading
companies in this industry. Although CMAA members are active across all
types of construction, it is fair to say that public sector
infrastructure projects account for a very significant portion of their
total business.
CMAA develops and maintains the Construction Management Standards
of Practice and administer the Certified Construction Manager (CCM)
program, which has been accredited by the American National Standards
Institute under International Organization for Standardization norm ISO
17024.
Our entire focus as an organization is on bringing professional
discipline to the management of every phase of a construction project
or program. The goal is the most successful project possible, as
measured by the achievement of schedule, budget, quality, and safety
goals and the avoidance of delays, claims, and disputes.
Sound professional construction management protects the interests
of owners and their projects, saving tax dollars while providing
quality buildings and infrastructure.
We believe the concept of a National Infrastructure Bank is
fundamentally in harmony with this focus, and creating the Bank will be
a powerful step toward assuring America of the infrastructure we will
need to continue to grow and prosper. Moreover, the Bank concept may
also provide a new level of oversight and accountability in
infrastructure construction.
The National Infrastructure Bank will replace our current,
politically driven process for selecting projects with a process based
on clear cost-benefit analysis conducted by impartial experts. The best
projects--those that serve clear public needs and are planned and
implemented effectively--will promise sufficient returns to attract
investment dollars.
The discipline imposed by ROI metrics will drive steady improvement
in design, construction techniques, procurement policies, adoption of
new technology, and other areas. Projects will be selected for funding
based on merit-based criteria rather than geography or political
considerations. This strategy will also foster development of clear
performance measurement standards such as completing projects on time
and within budget, with high levels of quality and safety.
All of these values are the fundamental goals of professional
Construction and Program Management. As we continue to work in an
environment of constrained resources, these basic values will become
ever more critical. Getting the most from the available resources will
be the key challenge of the years ahead.
In our advocacy of a new multiyear Surface Transportation
Authorization, as proposed by Rep. James Oberstar, as well as
legislation to improve our Nation's drinking water and wastewater
systems, develop high speed rail initiatives, and promote other forms
of infrastructure investment, one question comes to the fore again and
again: How are we going to pay for these improvements?
Nobody doubts that our infrastructure needs are real and urgent.
But we all also recognize that the potential cost of meeting these
needs is immense. Both in our present budgetary and economic climate,
and in any likely near-future scenario, this price tag is simply beyond
our ability to pay . . . if we continue to rely on our traditional
funding mechanisms.
This is why the Bank is so critical, and why the new resource must
be conceived and structured as a bank and not simply a new Government
fund.
The Highway Trust Fund, based chiefly on the gasoline tax, will
never again be adequate to fund even ongoing maintenance of our roads
and bridges, let alone expansions. We see similar situations with a
wide range of revolving funds and other methods that, in one form or
another, channel tax revenues into infrastructure.
This is the linkage that we must leave behind. We must move away
from complete reliance on public funding for infrastructure and forge a
new, stronger connection between private capital and infrastructure
needs. Many innovative new financial methods are being employed in the
United States today, from Public Private Partnerships to Design-Build-
Operate-Maintain contracts. CMAA members are often in the forefront of
these efforts, both as owners and as providers of services that range
from predesign planning to ongoing operation of buildings and other
structures. These new tools are being improved through practical
experience, evolving steadily into systems that deliver good value to
taxpayers and users as well as to investors.
There will always be a role for direct Federal spending, of course,
because not every infrastructure project will attract private
investment, and because certain public assets and resources must be
supported whether they generate revenues or not. But using a National
Infrastructure Bank to finance a large part of our infrastructure needs
means we will be able to target Federal spending more efficiently and
realize more benefits from it. By introducing a major new source of
funds that have not previously been available, the Bank will make it
possible for Federal, State, and local funds to be directed to other
projects--projects that might have been squeezed out of budgets by
larger-scale undertakings.
In addition, the Bank will always be able to lend out far more
money than it has on hand. Initial Federal funding, together with funds
deposited by private investors, will serve as the reserves on which a
significantly larger lending volume can be based. A funding system
based on tax revenues and Federal borrowing will never be able to
generate the same amount of money as a true banking system.
The National Infrastructure Bank should be invested with authority
to use a wide range of proven financial tools, including grants, credit
assistance, low interest loans, tax incentives, Build America Bonds,
Private Activity Bonds and other resources. The Bank should also have
the broadest possible focus on infrastructure, financing not only roads
by water and wastewater systems, electric power, ports, airports,
broadband, and other forms of infrastructure.
CMAA is also organizationally dedicated to transparency and
accountability in construction management. We believe these values
thrive in an environment in which objectives and metrics are clear; in
which risk is realistically and reasonably shared, and in which
performance is measured with the goal of continuous improvement.
Funding infrastructure projects through Bank investments will
contribute to creating this kind of environment.
America must be able to repair, maintain, and expand all kinds of
infrastructure in order to support future economic growth. The National
Infrastructure Bank provides a means for the business community to fund
this infrastructure in the same way it would fund any other similarly
critical asset. Creating a National Infrastructure Bank is a key step
away from viewing infrastructure as an expense and toward seeing it as
an investment. Expenses are incurred and never recovered, while
investments can continue to pay off for years or decades to come.
LETTER SUBMITTED BY THE NATIONAL ASSOCIATION OF MANUFACTURERS
LETTER SUBMITTED BY THE ASSOCIATION OF METROPOLITAN WATER AGENCIES