Could a Federal Revolving Fund Help Transportation Infrastructure?

August 17, 2018

Very little of the Trump Administration’s infrastructure initiative made it relatively intact into House Transportation and Infrastructure chairman Bill Shuster’s (R-PA) draft infrastructure legislation released at the end of last month.

But one big item outlined in the Trump principles made it into the Shuster bill, and while that proposed new program, as written, isn’t about transportation infrastructure per se, its principles could also be applied to transportation in future legislation to enable the federal government to make major investments more quickly.

The Trump outline included $10 billion for a proposal developed by the Office of Management and Budget for what was, in February 2018, called a “Federal Capital Financing Fund” for acquisition of federal non-defense real estate. OMB developed the principles into draft legislation transmitted to Congress in June 2018 and renamed it the “Federal Capital Revolving Fund Act of 2018,” (FCRF) and OMB’s draft language was included in the Shuster legislation (as section 303) almost without change (except that the $10 billion was not provided by the Shuster bill, only authorized for someone else to provide).

The revolving fund proposal addresses an age-old problem: whenever budget resources are limited (as they almost always are), the programs and accounts that fund ongoing operations (especially those programs that write checks directly to registered voters) are always taken care of first. Once the needs of the operating programs are disposed of, capital-oriented programs are then addressed – but always with eye towards whatever the program got last year (the budgetary “base”). This makes it especially difficult for major capital acquisitions to be funded all at once – the annual appropriations process under the current system of budget ceilings and baselines really isn’t set up to deal with a program that might need a billion dollars in a single year for a really big acquisition but which might only need $200-300 million per year in most other years.

(To cite a particularly absurd example of this problem, Congress once treated funding for the 2010 Census an off-budget emergency – even though the budgetary definition of “emergency” includes a requirement about unforeseen circumstances, and everyone could see the 2010 Census coming since George Washington’s administration. The Census is the very definition of a program with spending peaks and valleys.)

How it would work. The idea behind the revolving fund legislation is this: Congress provides a one-time slug of $10 billion in mandatory budget authority (outside the annual appropriations process) to capitalize the fund. The fund can then be used to make large one-time investments in real estate for federal agencies – but the fund would be repaid for the amount of the purchase by annual discretionary appropriations from that agency’s budget over 15 years. The eventual repayments could then be used to fund another building acquisition for someone else down the road (hence “revolving” in the name).

And the projects have to be large (minimum size of $250 million). The scope of the potential projects supported by the fund is limited to “any interest in land, together with the improvements, structures, and fixtures located thereon having a useful life of at least 25 years and in which Federal personnel perform the agency mission.”

(Aug. 22 addendum: To be clear, under the draft bill, the Appropriations Committees would have to approve the real estate purchases from the FCRF before that money could be committed – authorizing committees would not be able to unilaterally direct agencies to make deals and then force the appropriators to pay them back over time.)

The revolving fund will be distinct from the existing Federal Buildings Fund, which is a “quasi-revolving fund” used by the General Services Administration to collect rents from federally-owned real estate and pay rents on offices leased by the federal government, and also for some federal construction activities (such as courthouses). The FBF actually turned a $1.35 billion profit in 2017 ($10.18 billion in rents collected versus $8.85 billion in spending), which served to offset the rest of the Financial Services and General Government appropriations bill and made it easier for that subcommittee to stay under its budget ceiling.

Allowing the Appropriations Committees to break up the cost of a major real estate purchase for an agency into 15 equal installments would certainly make it easier for them to fund large purchases without having to cut other programs as much under their budget ceilings in the year of purchase.

(When the outline of this proposal came out in February, someone asked “what happens if the Appropriations Committees fail to appropriate the repayments to the fund?” The draft legislation makes it clear – OMB will score the annual repayments against the applicable appropriations bill whether or not the money is actually appropriated, so the appropriators have no reason not to repay the fund.)

For an example of how operational accounts and programs get priority over major new capital programs, just look at the pending fiscal 2019 budget for the FBF.

The GSA Federal Buildings Fund’s FY 2019 Budget
Millions of dollars.
Request House Senate
New Constr./Acquis. $1,338.39 $275.90 $1,080.07
Repairs & Alterations $909.74 $679.93 $890.42
Rent Payments $5,430.35 $5,430.35 $5,418.85
Building Operations $2,253.20 $2,248.40 $2,244.12
FCRF $200.00 $0.00 $0.00
Total FBF Spending $10,131.67 $8,634.57 $9,633.45
Rental income -$10,131.67 -$10,131.67 -$10,131.67
Net FBF Appropriation $0.00 -$1,497.10 -$498.22

Both the House and Senate provide 100 percent of the budget request for operational accounts – rent payments and building operations. But the House only provides 21 percent of the request for new construction and acquisition and the Senate bill provides 81 percent of the request. (The big difference there is that the request and the Senate bill include $768 million to exercise the option to purchase the Department of Transportation headquarters building and the House bill does not – more on that below.)

And, since the Federal Capital Revolving Fund has not yet been established by law, neither the House nor Senate bill contains the first $200 million repayment of a proposed $3 billion FCRF acquisition of a new headquarters for the Federal Bureau of Investigation.

Anyone with even a passing familiarity with the ongoing drama to relocate the FBI or to build a consolidated Department of Homeland Security headquarters complex can understand that many of the cost overruns that bedevil such projects happen because the process is stretched out over such a long time period. Trying to find $3 billion in a single year in either the GSA’s appropriation bill or the bill that funds the FBI would be a tall order indeed.

DOT headquarters. And in many cases, the use of a revolving fund would make it easier for the federal government to purchase, rather than lease, real estate. This key distinction is currently on display with regard to the Department of Transportation headquarters building. This brief from the Bipartisan Policy Center explains how the current structure of budget incentives made it look cheaper for the federal government to lease the building back in 2006 instead of purchase the building, but that lease expires in October 2021, and GSA must notify the landlord by October 18, 2018 whether they want to exercise the 10-year lease extension option or the purchase option.

The 10-year lease extension would be at 95 percent of fair market value and the purchase option would have to be at full fair market value. But anyone familiar with the area knows how the construction of a major league baseball stadium cater-corner from DOT HQ has shot fair market value through the roof in that neighborhood. Getting in the Wayback Machine, going back in time to 2006, and convincing Congress and GSA to purchase rather than lease the building looks, in retrospect, like a much better deal.

To quote the BPC brief: “At the end of the 15-year lease, with an average lease payment of approximately $50 million, the government will have spent $750 million to rent a building that only cost $326 million to construct and will be left with no equity to show for it and no ability to purchase it at a bargain price.”

Capital budgeting. The design of the proposed FCRF reflects a recommendation of the Clinton Administration’s blue-ribbon panel on capital budgeting. Recommendation #3 of the panel’s final report recommended that “agencies with capital-intensive operations establish a separate ‘‘capital acquisition fund’’ (CAF) within their budgets that would receive appropriations for the construction and acquisition of large capital projects. The CAFs would use that authority to borrow from the Treasury’s general fund and then charge operating units within the agency rents equal to the debt service (interest and amortization) on those projects.”

But it is important to note that that same Clinton Administration panel recommended that the federal government not pursue a full capital budget. One of the reasons cited by the commission was that a lot of what people think of as capital spending by the federal government doesn’t actually go towards federal capital – the federal government does not wind up owning the capital asset. Instead, the federal government simply makes grants or loans to someone else, usually state or local governments, who wind up as the owner. In effect, the federal government simply lets other parties acquire capital at a discount by subsidizing the other party’s expenses.

This is the structure of all federal mass transit and airport spending and almost all federal highway spending. (Federal railroad spending is a bit different, depending on whether you view Amtrak as federal or non-federal.)

Of all government-owned (non-defense) fixed assets in the U.S., the federal government only owns 13 percent of the total – state and local governments own the rest. The federal government only owns 2 percent of the nation’s highways, streets and bridges and 2 percent of all other infrastructure classified as “transportation.”

So a federal capital revolving fund probably wouldn’t be appropriate for highway, mass transit, or airport infrastructure. Nor would it be appropriate for rail grant programs where a non-federal entity owns the project. But in terms of federally-owned infrastructure, there are three areas where the principles of a federal capital revolving fund could be brought to bear – but there, the potential benefits are significant.

Corps of Engineers. The federal government, through the Army Corps of Engineers, owns a significant number of dams and other waterway infrastructure. Conversion of the Inland Waterways Trust Fund to a revolving fund like the FCRF could allow quicker improvements of inland waterways mega projects like the Olmsted Locks and Dam on the Ohio River (the current IWTF priority).

This would not be as good of a fit, however, for the Harbor Maintenance Trust Fund – note the word “maintenance” in the title (the opposite of capital acquisition). Much of the HMTF budget goes, or is supposed to go, towards the Sisyphean task of harbor dredging. Digging up several acre-feet of silt from a harbor and dumping it somewhere else is a necessary task but a constant and recurring one, not a real capital project, which is why most of the HMTF funding goes to the Corps’ Operations and Maintenance account.

Air traffic control. Most of the federally-owned infrastructure classified as “transportation” in the BEA table above is the infrastructure of the Federal Aviation Administration’s air traffic control system. The ongoing and much-delayed “NextGen” program of converting the system from one based on radar beacons to one based on satellite navigation has been hampered by the fact that most NextGen funding comes out of the FAA’s capital account, which was flat-lined in nominal terms from fiscal 2011 through 2015 and which in 2019 will only have grown by about 5 percent over its funding level a decade ago. (The salary-heavy FAA operating account has grown by 15 percent over that same period.)

The capital revolving fund concept could conceivably be used to free up the NextGen program from the restrictions of the annual budget and allow major IT and other equipment purchases to be funded in a single year without causing major fluctuations in the FAA’s annual discretionary capital appropriation.

Amtrak and the Northeast Corridor. The federal government inherited the Northeast Corridor from the railroad bankruptcies of the early 1970s. Some of those assets were restructured into Conrail, which was eventually privatized (and later split up between Norfolk Southern and CSX). The rest of the NEC assets were sold by the federal government to Amtrak in 1976 (Amtrak was created in 1970 as an operating company only).

But Amtrak is still arguably part of the federal government (so says the Supreme Court). The federal government owns virtually all the stock in the technically-private corporation and provides well over a billion dollars each year in capital and operating subsidies.

Many of the key assets of the NEC are a century old or more, and the deferred capital backlog for the Corridor was estimated at $38 billion last year.

A capital revolving fund for Northeast Corridor improvements would potentially allow Congress to accelerate much-needed upgrades immediately with the eventual cost being spread out over a decade or more to make it easier for the Appropriations Committees.

(The revolving fund approach would certainly be a more logical way of funding the federal share of the proposed new Hudson River Tunnel than what New York and New Jersey have proposed, which was taking $6.7 billion from the new subway and light rail program that only gets $2.4 billion per year to cover the entire United States.)



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