Debate BUILDs over Infrastructure Investment
The recent introduction of the BUILD Act to create a national infrastructure bank to help finance infrastructure improvements has started a needed debate over how to pay for such investments. Our New America Foundation colleague Jason Delisle today sheds some light on the new proposal in a commentary at e21.
The BUILD Act would create a new entity, the American Infrastructure Financing Authority (AIFA), which would issue direct loans and loan guarantees to finance projects. The purpose is to create a process that is immune from the "pork-barreling" tendencies of lawmakers and also fiscally sustainable in an era of mounting federal budget deficits and national debt. The website of Sen. John Kerry (D-MA), lead sponsor of the bill, states:
"AIFA is independent of the political process. It would fund the most important and most economically viable projects across the country, our states, and our communities. AIFA is also fiscally responsible. While AIFA will receive initial funding from the government, after that it must become self-sustaining."
Whether such an institution could truly be apolitical should be debated in another forum. The "fiscally responsible" argument is important to us and Delisle examines it in his commentary. The rationale behind the bank would be to reduce the costs of borrowing for infrastructure projects, make the loans and guarantees "self-sustaining," and leverage private money--allowing infrastructure projects to take advantage of the federal government's incredibly low interest rates. However, the bank would require all projects to compensate the government for the full cost of this subsidy from lower interest rates. As Delisle argues, this begs the question why states and municipalities would go through all this? The interest on municipal bonds is already subsidized by taxpayers since it is not subject to federal income tax.
The bank's supporters argue that even after paying for this subsidy, infrastructure projects would still be better off. Delisle questions this claim and points to federal budgeting rules that make it look like taxpayers are better off too. He explains that we really can't have it both ways--taxpayers would still bear some credit risk that they are not reimbursed for due to a loophole in federal budgeting rules.
"The Federal Credit Reform Act, which details how the federal government must calculate the costs and risks that federal loan programs impose on taxpayers (including loans made under the BUILD Act), systematically excludes a full measure of the riskiness of these loans. That is, by discounting expected loan payments at risk-free U.S. Treasury interest rates, the rules ignore the fact that loan performance is unpredictable over time and that defaults will be more frequent and costly in bad economic climates. Private lenders charge borrowers a premium to take on that kind of risk and uncertainty, called “market risk,” but government budget rules do not."
Delisle concludes, “In short, the program isn’t self-sustaining because taxpayers are bearing a risk for which they have not been compensated.” We need to have a serious debate about how to modernize our aging infrastructure in a fiscally responsible way. In having that discussion we must recognize that there will be no free lunch, and budget accordingly.