a framework for infrastructure investment in the 21st century - mi infrastructure conference

A FRAMEWORK FOR

INFRASTRUCTURE INVESTMENT

IN THE 21ST CENTURY

Identified Need

Need to boost worldwide investment in infrastructure by 60%:

• $36 trillion spent in the previous 18 years• $57 trillion needed during next 18 years

ASCE: ~$200 billion/yr additional funding needed in the U.S.

Source: Infrastructure productivity: How to save $1 trillion a year

McKinsey Global Institute (MGI), January 2013

How did we get here?

Population / Infrastructure Trends

Tax Policies (long-term trends)

Spending on Infrastructure

Physical Condition and Environmental Factors

Now, what do we do about it?

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0

19.0

20.0

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Ta

x R

even

ues

(%

of

GD

P)

Federal Tax Revenues (as percentage of GDP)

1945-2015

3-year

rolling

average

Average

Population vs. InfrastructureLong-Term Trends

Infrastructure FootprintUS: Population vs. Land Development (1982-2007)

Sources:

Population: US Census Bureau

Development: USDA-NRCS

Infrastructure Footprint

Sources:

Population: US Census Bureau

Development: USDA-NRCS

0%

10%

20%

30%

40%

50%

60%

1982 1987 1992 1997 2002 2007 2010

Pe

rce

nt

Incr

eas

e v

s. 1

98

2Michigan: Population vs. Urban Footprint

1982-2010

Urban Footprint Population


Source:

SEMCOG

Developed before 1970

Developed after 1970

Population in 1970: 4.7 million

Population in 2015: 4.7 million

Infrastructure FootprintState of Michigan

28 years (1982-2010):

Population increased by 8%

Developed land area increased by 50%

Over a 5:1 ratio in infrastructure footprint

expansion relative to population


On average, each taxpayer is paying

for 20% more infrastructure

Purchasing power for roads is 30%

less than in mid 1980s (adjusted for

inflation, considering both state and

federal fuel taxes)


Unlike roads (which are visible),

underground utilities are much older

and poorly maintained

Little to no political motivation to

match funding levels to actual needs

Sewer/water rates not keeping up

No funding source for stormwater

Infrastructure FootprintState of Michigan

Impact on roads:

35% increase in infrastructure (per capita) in Michigan

1984: $0.24/gal (combined federal + state fuel tax)

2015: $0.54/gal what it should be today, based on inflation

2015: $0.38/gal what it is today

30% effective decrease in funding

Combining these two trends: 50% decrease in available investment per mile of road

Impact on sewers and water systems: varies by community, but similar in magnitude


• How did this happen?• Land is cheap

• Few or no incentives to redevelop older

areas

• Old design standards offer little to no room

for creative design

• Desire for lower taxes

• Desire for bigger lots, larger houses

• Developer / Engineer Pressures

• Cost

• Schedule

Demographic Changes

Source:

Economic Implications of a Shrinking Number of Young People.

Terry F. Ludeman

Wisconsin Dept. of Workforce Development

Demographic Changes• Larger percentage of

Americans on a fixed income

and therefore highly resistant

to higher fees and taxes

• Decreasing reliance on

passenger vehicles (vehicle

miles traveled in decline since

2005)

• As a result, continued

downward pressure on fuel

tax revenues

100%

110%

120%

130%

140%

150%

1982 1985 1989 1992 1995 1999 2002 2005 2008 2012 2015

Total Vehicle Miles TraveledRelative to 1982, 12-month rolling average

Source: FHWA

Population-Adjusted VMTTrend

Tax PolicyLong-Term Trends

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0

19.0

20.0

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Ta

x R

even

ues

(%

of

GD

P)


1945-2015

3-year

rolling

average

Average

Tax Revenues

20

25

30

35

40

45

50

Inco

me

Ta

x -

% o

f G

DP

Tax Revenue as Percentage of GDP

Source: Heritage Foundation, 2015

20

21

22

23

24

25

26

27

Inco

me

Ta

x -

% o

f G

DP

Tax Revenue as Percentage of GDP

Source: Heritage Foundation, 2015

Tax Revenues

France:

45%

United Kingdom:

35%

Germany:

38%Tax Revenue as % of GDP (incl. state/local taxes)

Jamaica:

24%

United States:

24%

Papua New Guinea

25%

Tax Revenues

Tax Revenue as % of GDP (incl. state/local taxes)

• Large percentage of aging infrastructure built with sources of

revenue that are no longer there:

• Federal-Driven• Interstate system (initial investment: 1950s – 1970s)

• Sewer systems and treatment plants (EPA grants)

• Water distribution systems (EPA grants)

• Developer-Driven• Local roads

• Sewers (storm and sanitary)

• Water mains

• States and municipalities have inherited these assets

• Much of this infrastructure is reaching the end of its useful life

• There are no programs of the size/magnitude of those we

enjoyed in the 1950s – 1970s

Tax Revenues

• Example (water/wastewater)

• Grant program authorized by Clean Water Act

(1972)

• 1972-1987: funding took the form of grants• 75% federal / 25% state/local match (pre-1981)

• 55% federal / 45% state/local match (1981-1987)

• 1987: funding switched to low-interest loans (SRF)

• 1972-1987: $72 billion in appropriations (15 years)

• 1987-2012: $36 billion in appropriations (25 years)

70% funding reduction (post-1987)

80%+ reduction when factoring inflation

Tax Revenues

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0

19.0

20.0

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Ta

x R

even

ues

(%

of

GD

P)


1945-2015

3-year

rolling

average

Average

Source:

White House Office of

Management and Budget

Tax Revenues

Tax Revenues

First 35 years

(1945-1980)

Tax revenues below

70-year average

only 23% of the time

Tax Revenues

Latest 35 years

(1980-2015)

Tax revenues below

70-year average

77% of the time

Fuel Taxes

$0.10

$0.15

$0.20

$0.25

$0.30

$0.35

$0.40

$0.45

1990 1995 2000 2005 2010 2015 2020

Fu

el t

ax

($

/ga

l)

Fuel Tax History

1990-2015

Wisconsin

with CPI

Michiagn -

ENR Index

Federal

Michigan

Wisconsin

Michigan

with CPI

Index

Spending on Infrastructure

Infrastructure Spending

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

1960 1970 1980 1990 2000 2010 2020

% o

f G

DP

Federal Spending on Physical Resources* (1962-2017)* Energy, Natural Resources, Environment, Commerce, Transportation, Community Development

5-yearrollingaverage

55-yearaverage

Source:



Social Security / Medicare

Source:



1.0

3.0

5.0

7.0

9.0

11.0

13.0

15.0

17.0

19.0

1960 1970 1980 1990 2000 2010 2020

% o

f G

DP

Federal Spending on Human Resources* (1962-2017)* Health, Medicare, Unemployment, Social Security, VA Benefits

5-yearrollingaverage

55-yearaverage

Spending Priorities

Source:



0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

1960 1970 1980 1990 2000 2010 2020

% o

f G

DP

Federal Spending: Human Resources vs. Physical Resources

HumanResources

PhysicalResources

Federal Transportation Funding

Federal fuel tax

revenue will

decrease by

27% in the next

ten years

20

25

30

35

40

45

50

55

2015 2017 2019 2021 2023 2025

An

nu

al F

ue

l Tax

Re

ven

ue

s ($

Bill

ion

s)

Projected Fuel Tax Revenues and Outlays (inflation-adjusted)

2015-2025Source: Congressional Budget Office

TaxRevenues

Outlays

Transportation Funding By State

Michigan: $309

Transportation Funding By State

$200

$400

$600

$800

$1,000

$1,200

$1,400

New

Yo

rk

Wyo

min

g

No

rth

Dak

ota

Sou

th D

ako

ta

Was

hin

gto

n

Mo

nta

na

Ve

rmo

nt

Illin

ois

Pe

nn

sylv

ania

Uta

h

De

law

are

New

Je

rse

y

Min

nes

ota

Nev

ada

Iow

a

Ore

gon

Lou

isia

na

Haw

aii

New

Mex

ico

Mar

ylan

d

Wis

con

sin

We

st V

irgi

nia

Cal

ifo

rnia

Neb

rask

a

Kan

sas

Mas

sach

use

tts

Co

lora

do

Mai

ne

Okl

aho

ma

Idah

o

Flo

rid

a

Ke

ntu

cky

Mis

sou

ri

Mis

siss

ipp

i

Texa

s

Co

nn

ecti

cut

Ari

zon

a

New

Ham

psh

ire

Vir

gin

ia

Oh

io

Geo

rgia

Rh

od

e Is

lan

d

Ala

bam

a

Ind

ian

a

Ark

ansa

s

Mic

hig

an

No

rth

Car

olin

a

Ten

nes

see

Sou

th C

aro

lina

Per Capita Transportation SpendingFederal + State + Local ($ per year)

Excludes Washington DC and Alaska

U.S. Median: $663

Michigan: $433 (35% lower than national median)

StimulusPublic Works Stimulus (ARRA)

$48 billion for transportation

$10 billion for water/sewer

Overall infrastructure funding gap:

$1.3 trillion (2001 dollars)

Bottom LineShift in tax burden from federal to state to local

Magnitude of investment: hard to make it up at the local level

Physical Condition

&

Environmental Factors

Visible

Problems

Hidden

Problems

Economic

Burden from

Failing

Infrastructure

Changing impact

of wet weather

on collection

systems

City

Peak 6-hour

rainfall (in.) TP 40 Bulletin 71 NOAA Atlas 14

Garden City 3.49 79 >100 37Exceedance

Interval

Detroit (west fringe) 3.59 91 >100 43 25-yr to 50-yr

Romulus 3.65 98 >100 48 50-yr to 75-yr

Westland 3.49 79 >100 36 75-yr to 100-yr

Royal Oak 4.79 >500* >500*200 >100 yr

* Extrapolated

Exceedance Interval (years)

Key

August 11-12, 2014 Rainfall Event

Now, what do we do about it?

Assume shift in revenue burden to

local government

Appeal to the right audience and

SELL IT

Charge for ALL utilities

(even stormwater!)

Develop a business plan for

your infrastructure

Establish inflation-adjusted

revenue framework

Appeal to the Right Interests at the Right Time

Elected

Officials

Voters


Elected

Officials

• May require 2-3 separate

messages to reach each type of

elected official

Business owner/leader

Budget Hawk

Environmental advocate

• Keep your messages simple and

direct – address their key interests


Elected

Officials

• Examples

Business owner/leader Impact of failing infrastructure on local businesses

Budget HawkIncreased cost of emergency repairs (long-term budget impacts)

Environmental advocatePollution impacts of failing infrastructure

Better V I S U A L S help


Voters

• Hire a Public Relations Firm

Targeted, Coherent Message

Professionally-crafted materials

for mailing, website, TV, etc.

Bedside Manner

Engineers are not naturally gifted

at communicating with the public

Referenda

Maximize the chances of a

successful millage

• Branding Public Works

• Start with understanding how police and

fire legitimize services:

• Maintaining law and order

• Protecting your family

• Around-the-clock availability

• Immediate response

• Heroes


Public Works Police/Fire

Streets (snow removal and deicing) –

timely response, generally within one

day (available 24 hours 7 days a week)

Fire: immediate response to call.

Available 24 hours, 7 days a week.

Sewer backups, flooding – timely

response to complaint, but solution

may take months or years (available

during week, business hours on call?)

Police: immediate response to

emergencies. Available 24 hours, 7

days a week.

Most problems require planning,

design, construction (lead time of

one to several years)

Problems generally resolved on

site.


Charge for ALL Utilities

• Stormwater Utilities – the final frontier

• Stormwater spending bleeds money from

the General Fund

• Almost all communities in Michigan don’t

have a stormwater utility

• Many communities simply don’t have the

ability to tackle stormwater CIP

• Stormwater utilities can be used to

partially fund road projects (10%+ of road

projects are related to drainage)

Metro Detroit

Potential for about $200 million per

year in stormwater user fee revenues*

if all communities adopt stormwater

enterprise funds.

* Average Midwest stormwater utility

revenue is $43 per capita per year

Infrastructure: A Business Model

• Variable Costs (labor, materials, CIP)

• Fixed Costs (O&M)

• Debt serviceExpenses

• Effective sales/marketing

• Pricing strategy: need vs. politics

• Inflation-adjusted revenuesRevenues

Asset

Management

Plan

Infrastructure: A Business Model

Total Cost of

Ownership

Approach

The Subsidies are Over

• Who build it?

• Land developers

• Federal grant money (post-CWA)

• Who owns it now?

• Municipalities

• HOAs

• Water/sewer authorities

• Our rate structures are based on

subsidized infrastructure

Lastly….look INWARD

• Urban expansion (without population

growth) is paralyzing us

• Land use policies must discourage

greenfield development until we can

backfill underpopulated urban areas

• Build where we already have the

infrastructure

…and finally…

If Infrastructure played well

on TV:

Critical Structure Investigation

CSI - Michigan

Dedicated group of licensed structural engineers who

risk life and limb to inspect bridges and dams on the

Grand River, preventing catastrophic failures just in the

nick of time while using the latest in forensic technology,

really cool gadgetry and great character development.

Jon Oliver (HBO)

Infrastructure Segment

What Now?

• Redefine it:

• More education on tax and spending history

• Understand who built it and who owns it

• More emphasis on health, public safety, and

consequences

• Increased emphasis on what is BELOW the

ground

• More aggressive education for kids and public

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0

19.0

20.0

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Ta

x R

even

ues

(%

of

GD

P)


1945-2015

3-year

rolling

average

Average

What Now?

• Charge for it:

• Accept the local “bootstrap” reality (no more

federal handouts)

• Create Stormwater Utilities

• Couple fees to CPI or CCI (inflation)

What Now?

• Sell It!

• We’re still not loud enough

• Use PR firms

• Make the case for each audience

(four separate messages):

• Business model / finance

• Economics

• Environmental

• Public safety

a framework for infrastructure investment in the 21st century - mi infrastructure conference

Engineering