Peter Keating and guests discuss the state of American infrastructure and how much the Biden administration’s Infrastructure Investment and Jobs Act will move the needle when it comes to launching new projects. (26 minutes)
Transcription:
Mike Scarchilli: (
Hi, this is Mike Scarchilli, editor in chief of the Bond Buyer. Welcome to the future of infrastructure, our new podcast. It's a series of deep dives into us, infrastructure opportunities, investments, and impact for our first installment. I'm pleased to welcome investigative journalist, Peter Keating, and this four-part series build what better. Peter we'll break down the most important topics of the new landmark infrastructure deal subscribe today. So you don't miss any crucial insights. Here's our first episode
Peter Keating: (
Infrastructure week is finally here and it's going to last five years. After months of torturous negotiations, the House of Representatives recently passed the Infrastructure, Investment and Jobs Act. President Biden has signed it into law. Legislation promises $550 billion in new spending. And we're going to dive deep into what this once in a generation boost means for landscapes and markets around the country. I'm your host, Peter Keating, and welcome to Build What Better? a Bond Buyer podcast that will explore the future of infrastructure in America. To kick things off, I talked with Caroline Sevier. She's the director of government relations at the American Society of Civil Engineers. And they're the group whose quadrennial report card is the gold standard for measuring how well American infrastructure is doing. For starters. Let's just talk about the ASCE report card, the new edition from 2021, and what goes into compiling it. How many sectors of infrastructure do you guys look at and how many sources of data do you compile it from?
Caroline Sevier: (
The report card for 2021 was a compilation of 17 different categories. We did add one category for the 2021 report card, adding in stormwater. We also, for the first time ever, had a spotlight on the nation's broadband systems. We did not actually give that a letter grade, but started to look at some of the conditions that are out there for VOC. And unfortunately it was just not enough data to give it a grade itself. And the report card is actually compiled by a group of the nation's civil engineers from around the country who are issue experts in each one of those 17 categories. We had about 32 civil engineers make up our committee in America's infrastructure for the 2021 report card. And they spent about 18 months prior to the release, really digging through mostly government data, both at the federal and state level, looking into what the current conditions are. And the report card overall is really a snapshot at any given moment of our nation's infrastructure. So the 2021 report card, of course, does not take into account the Infrastructure Investment and Jobs Act, which just passed.
Peter Keating: (
So America's overall grade crept up to a C-minus in this new edition of the report card. That's a glass half empty half full situation if I've ever seen one. What are the most significant reasons for the improvements that were contained in that increase from the D range that the overall grade had been stuck in for so long?
Caroline Sevier: (
You are correct. For the very first time ever. And ASU has been releasing this report card every four years since 1998, our report card earlier this March we did come in did have America's cumulative GPA come in at a C-minus. The GPA was improved slightly from a D-plus in 2017. That's really indicating that we've made some progress around the margins in some infrastructure areas. However, as you said, we still have 11 categories they're stuck in the D range. And those categories that are still in the D range, unfortunately really include a lot of the infrastructure that Americans are interacting with most closely, everyday, like our roads and our transit systems. And often it's these categories that are still stuck in gear range, where we've really failed to make investments that are needed to maintain the assets that in many cases were built over 50 years ago.
Caroline Sevier: (
Overall though, in 2021, we did see five categories — those are aviation drinking, water, energy, inland waterways, and ports — all benefit from increased federal funding and improved asset management. And it's those grade bonds that really contributed to the improved overall GPA. And that means the message overall here has been, it's pretty simple when we're investing, we're seeing results. And then lastly, the only category that we actually saw the grade go down in the 2021 report card were our nation's bridges, that grade went down from a C-plus to a C. And that's really because we've seen the overall rate of bridge improvements slow, and the investment trends that we have been seeing over the past several years, that meant it's going to take us until about 20, 70 months, make all of the repairs that are necessary. And of course it doesn't take into account the fact that these bridges would be continuing to age over that time. But once again, the Infrastructure Investment and Jobs Act will go a long way to making up some of that backlog.
Peter Keating: (
Let me ask you about one other category before we move on to talk about funding and the reasons for all this. One category of infrastructure that gets bad grades because the data is so scarce where we're not even sure what might be needed. Your report says that there are 10,000 miles of levees in the U.S. whose location and condition are unknown. Is that as scary as it sounds?
Caroline Sevier: (
It is a bit scary and you are correct. Unfortunately to really target investments in any infrastructure and to allocate funding, we need routine reliable data to be collected, to be aggregated and reported on, right. Levees is one prime example of this data remains very scarce. We have found that in the United States, there are about actually 30,000 miles of an inventory. Levees was an additional 10,000 miles where again, that location or condition are unknown, but there's some other categories where we are seeing a similar lack of data. School facilities actually represent the second largest sector of public infrastructure spending after highways, yet there is no comprehensive national data source for K through 12 public school infrastructure. Meanwhile, the overall share of the economy, state capital funding for schools is actually down about 31% in fiscal year 2017 compared to 2008.
Caroline Sevier: (
And that's about a $20 billion cut. However, by Smith AST's estimates, the nation should be spending as a whole about $87 billion annually on capital needs just for school spending. On the other hand, been just shy of $50 billion annually, so that $38 billion annual gap that we're having and continues to really impact all of our school infrastructure. And unfortunately, that gap might actually be a lot higher if we had comprehensive national data. The other category I want to highlight here is stormwater. The stormwater sector is another one of those relatively data core sectors that are out there with no comprehensive national database for our assets. Really a clear picture of the existing assets and their condition is going to be needed if we're going to be able to provide things like flood projection models, where we need data about where areas of significant risks are as well as of course, data to target and best investments for improvements. And as part of ASCE's 2021 report card, we actually recommended that the EPA has clean water needs survey. As we go forward, try to elicit some more strong form water related data, including information about the maintenance needs. Third pair needs pollution prevention, as well as urban flooding. Those are just three categories where we really have a real lack of data that would really help us if we have that information, know where to target those investments.
Peter Keating: (
So you mentioned schools and stormwater and earlier transit, which scored a D-minus. These are all directly government responsibilities, maybe at different levels, federal, or state or local. Do you have an assessment of whether it's significant that a particular freight rail did so much better than that, that is mostly privately owned, mostly financed by, as you pointed out shipping fees, where do we put the blame for what looks like from all the things you're saying just a failure of public responsibility? Is this a problem of federal gridlock? Is it state and local officials who've never rebooted capital spending to the levels they were at before? The great recession is it broader or deeper than that? Do Americans just not like to pay for infrastructure? I mean, we seem to be in a period where these clear responsibilities just aren't being met.
Caroline Sevier: (
There's a few different things that are really compounding it overall, going to the question of do Americans not like to pay for infrastructure. We actually found a lot of polling recent state and local ballot initiatives, in fact, show that Americans do tend to support infrastructure investments. In the past several years alone, we really continue to see state and local ballot measures get adopted with broad support when they relate to infrastructure investment and where you can really tie the investments in local projects in the community to voters. In fact, in 2020, 98% state and local infrastructure measures did pass. And that was a really high watermark. And then just looking at the infrastructure investment in jobs act a full from, I think it was last week,from USA Today and Suffolk University found that 61% of Americans support the investments from the federal government through the Infrastructure Investment and Jobs act.
Caroline Sevier: (
So I think when there is an understanding from voters about where some of this funding is going, and when there is a clear line that is going to infrastructure investments, there has been a lot of support. One thing that I think we need to get better at as a nation is really time what the cost of maintaining our infrastructure is through things like what the proper rate should be, for example, for a water service and I think there really continues to be some education that is needed in terms of what the true cost of infrastructure is for the average American in order to know what those investments should be, and being able to once again, to really tie them back to specific projects in the communities, you can see that return on investment.
Peter Keating: (
To explore how the new law will affect infrastructure financing. I discussed his details with Christopher Hamel, policy analyst, and Tom Doe, president at Municipal Market Analytics, an independent research firm.
Chris Hamel: (
You know, we need to acknowledge the extreme times in which we live given COVID and the pandemic we've all now been living through. And that's had a truly generational, severe effect on state and local government. And so I hate to kick someone when they're down and out, but with that acknowledgement, let me say I just think the way we do infrastructure in the United States has been broken for a long time. And while I commend Washington for this important infusion of dollars into the system, the system remains broken. if I were able to wave a magic wand and say, and tie one string to the infrastructure that has now been approved by Washington, I would say that before state and local government accepts those dollars, they must have a plan for keeping it in a state of good repair over its 30 year life, so that we don't find ourselves in a similar ditch years from now. And so it just stays in a local government is, is something that operates year to year and finds it hard to take the long-term and infrastructure of anything is something that must be viewed in terms of decades, not just the next fiscal year,
Peter Keating: (
Tom, just how big a deal is this new law, what frames of reference should we use to evaluate its size and its likely impact?
Tom Doe: (
Well, I think it's, it's been likened to the highway bill back in the 1950s. And I think that's reasonable comparison. Certainly in the largest of the dollars, but if I could just circle back a little bit too, to a point that, that Chris made and, and Peter that you also followed up on is that there really is a moment here where the federal government could have done, I think, a great deal to assist the dynamics around capital raising through the markets. And for example, so not just even maintaining the facilities or the new facilities that are constructed, but also having some requirements around, uh, the timely financial disclosure that could, could have been implemented. That's long been a challenge for the municipal bond industry. And then secondly is around some type of requirements around climate disclosure, around the risks of a particular area or the vulnerability of a particular infrastructure project. That's going to receive some of that federal funding. And so I think with all the headlines there are some misses that I think are key to acknowledge.
Peter Keating: (
We'll continue our discussion after this short break. And we're back talking with Tom Doe and Chris Hamill about America, finances, infrastructure. Tom, let's talk about a couple of other provisions that muni market advocates and participants were interested in. Until late October, it looked like restoring tax exempt advanced refunding, and also relaunching a direct pay bonds program were going to be part of the followup bill, the Build Back Better bill or budget reconciliation bill. Those have been stripped from the House budget framework. How important do you think they would have been either one of them toward firing up the market and maybe boosting state and local willingness to issue debt?
Tom Doe: (
It really seems that there has been a swap that's been made and that the federal government has said, well here, we're just going to give you a large amount of money directly rather than dealing with a security. So that's a real kind of change. And I know that there are a number of states and cities that are certainly concerned that this is just, greater federal intrusion. That's just kind of the point being made is that the advanced refunding is a nice tool that issuers can have, they can continue to have access to tax exempt financing and lower interest rates. And that creates savings. What we learned last year and to some degree this year is that without the tax exempt advanced refunding is that the issuers were able to do so through the taxable environment.
Tom Doe: (
And because of the low rates, they were able to succeed and still garner savings. That may not be true if we have higher rates going forward to that would be a miss by not having it. The other point you're saying about the essentially the old build America bond program, is that again, I think any tool that we can give issuers to get to market and to raise capital in ways that are dynamic with the marketplace. And that means that are appealing to the investors who are essentially loaning the money to a public government. I think those are important and helpful. I think that the disappointment was is that these direct pay bonds had problems initially when it was done back after the Great Recession because the subsidy was too high, which everybody recognizes now, in retrospect, and there were seek frustration, which again, created some concerns among issuers to whether the program would be viable.
Peter Keating: (
So coming out of this bill, do you see any big shifts coming in the muni markets, either in the mix of projects financed or the vehicles that we be used to finance them?
Chris Hamel: (
I try to tackle that by addressing or introducing something that's been referenced in this interview, which is climate change. It's clear that the challenge of a changing climate is a global one and a national one. And so therefore since it is a problem for the entire country, there needs to be a major role of the federal government in it, in advancing what it sees as the proper policies to address mitigation with respect to the use of carbon in the economy. So this whole notion of how you electrify the economy will be substantially kick-started by the federal government. And I think that's appropriate how long then that will last, what will be the individual state necessities to be a part of that effort. It is a story yet to be written, but I believe it's been essential for the federal government to do what it has now done, and we'll need to do more up to push the economy and retool it away from carbon to a safer form of fuel that doesn't produce the warming that clearly a couple of hundred years of a carbon-based economy has.
Chris Hamel: (
So I think that's inevitable as to where we're headed.
Peter Keating: (
Finally, I asked Tom Kozlik who heads research and analytics at HilltopSecurities about where infrastructure finance is heading in the future.
Tom Kozlik: (
There's an important big picture to keep in mind. One of the things that I've been talking about since March of this year it's 2021 is I've kind of coined the phrase, the golden age of public finance, and that really contrasts compared to where state and local governments and state and local government credit quality was coming out of the Great Recession. And to begin the previous decade, there was the recovery at the 2009 recovery act. There were some very limited shovel-ready projects that came out of that fiscal policy, but overall there wasn't anywhere near the amount of aid for state and local governments and for public finance entities that came out of the Great Recession period. And as a result, credit quality really fell. And what I use to cite the situation that state local governments found them in is two things.
Tom Kozlik: (
First of all, state and local government employment, didn't bottom out until I think it was 2013. And that's because for several years, state and local governments were continuing to, in order to balance budgets, lower their employment levels. That's the first thing, the second thing is state local government ratings. I cite Moody's public finance ratings. When I talk about this theme, ratings didn't the number of downgrades continued to outpace upgrades on an annual basis until 2014, until several years after the Great Recession. After 2014, it gradually climbed back and upgrades started to outpace downgrades. But that I think symbolizes the credit hole that state local governments found themselves into in the beginning to the middle of last decade, where state local governments find themselves now is much different. While downgrades did outpace upgrades slightly in 2020, they're definitely going to outpace upgrades. You're definitely going to outpace it downgrades this year in 2021. And I'm expecting that upgrades are going to outpace downgrades in 2022. So there is a much different financial landscape that state local governments find themselves in.
Peter Keating: (
Given the huge backlog of projects that many municipalities would love to have already gotten to if they only had the cash ready and all the deferred maintenance, do you see signs that their state and local authorities are also up to the challenge of financing, the kind of innovation it will take to fight climate change?
Tom Kozlik: (
I am encouraged by the, the level of detail that many of the leaders in areas that I'm seeing are showing. First of all, recognizing the potential impact from things like soil erosion or beach erosion, and the types of steps that they as either individuals in their local areas, cities, states, or even regions, because that's really what a lot of this has to do with it has to do with the region. For some reason, I'm reminded of what it is that New York, New Jersey and Connecticut and areas in the Northeast United States in the beginning stages of COVID kind of banded together to really take steps to control the spread right in the beginning and middle of 2020. One of the things I'm encouraged at the level of detail that leaders are showing in, again, recognizing what's happening with regard to weather-related patterns or climate change, could there be more work done?
Tom Kozlik: (
Sure. There's there definitely could be more work done, but I think there will be. And I think that one of the other things that happens as well is because of what many of these leaders have had to take on over the last two years now, meaning dealing with things where they're like, really COVID, there's only so much timethat these leaders have been able to spend looking at other issues like cybersecurity or like climate change. And I think that when issues of COVID start to decrease in the level of, I don't want to say necessarily level of importance, but when they're not just these red alert issues every day, I think that I am encouraged based on what I've seen that I've been seeing that the leaders, when they, when they have the resources that they've received and when they have more time and focus, they're going to be able to tackle what is it needs to happen either at a local level or a regional level.
Peter Keating: (
So it sounds like, not just because of federal investment, but because of improving credit quality at the state and local level and the, hopefully the eventual fade of the pandemic that you were doubling down on calling this the beginning of a golden age of public finance, not just a one time splurge of federal spending in the first half of the Biden administration.
Tom Kozlik: (
That's correct. I don't necessarily think that this is something that's this golden age that I've been referring to. I don't think it's necessarily lasts a decade or two. I think that for the most part, they're going to be some entities, some state local governments that are going to be experiencing this golden age longer than others.Some are going to experience for several years, some others maybe just for a year or two. A lot of that has to do with the fact that as I was painting the picture of what happened in the last decade, there were still several state, local governments that even just before COVID, we're still pretty structurally imbalanced from a financial perspective. Those are the entities that this federal support is going to help in the next year, maybe two. But the hole that they dug themselves before COVID was so big that they are going to kind of return to the more, either volatile or their more uncertain situation quicker than most of the entities in the public finance world. I mean, from when you think about the whole finance world from a state government perspective and from a city government perspective the state, the general state credit quality in general city credit quality is still relatively high. And so I think that the majority of those entities are going to be enjoying this golden age of public finance for at least a couple of years.
Peter Keating: (
I hope you've enjoyed this first look at American infrastructure and how it's paid for thank you to all of our guests for participating and to you for listening. Please join us again. I'm Peter Keating.