State of the Union Speech Increases Expectations for Highly Leveraged Infrastructure Bill

February 2, 2018

President Trump’s first real State of the Union address on January 30 to a joint session of Congress did indeed contain a long mention of his (long-awaited) infrastructure plan:

As we rebuild our industries, it is also time to rebuild our crumbling infrastructure. (Applause.)

America is a nation of builders. We built the Empire State Building in just one year. Isn’t it a disgrace that it can now take 10 years just to get a minor permit approved for the building of a simple road? (Applause.) I am asking both parties to come together to give us safe, fast, reliable, and modern infrastructure that our economy needs and our people deserve. (Applause.)

Tonight, I’m calling on Congress to produce a bill that generates at least $1.5 trillion for the new infrastructure investment that our country so desperately needs. Every federal dollar should be leveraged by partnering with state and local governments and, where appropriate, tapping into private sector investment to permanently fix the infrastructure deficit. And we can do it. (Applause.)

Any bill must also streamline the permitting and approval process, getting it down to no more than two years, and perhaps even one. Together, we can reclaim our great building heritage. (Applause.)

We will build gleaming new roads, bridges, highways, railways, and waterways all across our land. And we will do it with American heart, and American hands, and American grit. (Applause.)

The White House released a fact sheet with a few talking points on the infrastructure plan during the address, but the details will wait until the fiscal 2019 Budget is released, which we expect during the week of February 12. The supporting documents for the Budget are expected to have sufficient details about the spending assumptions in the plan that keeping the rest of the plan secret afterwards would be pointless and confusing, so a coordinated release is expected.

We still expect the plan itself to rely on $200 billion in federal budget authority. But the big news from Trump’s address was that the amount of money leveraged by that $200 billion from non-federal sources had jumped from $800 billion (under discussion all last year) to $1.3 trillion, for a grand total of $1.5 trillion. (Trump had mentioned $1.7 trillion in an offhand remark a few days earlier but walked it back down to $1.5 trillion in the speech itself.

How, you may ask, are all these divergent totals possible?

The answer is that $14 billion of the $200 billion in “real” federal spending to be proposed under the Trump Administration plan would go to existing federal credit programs – TIFIA (for highways and transit), RRIF (railroads, including commuter rail and Amtrak), WIFIA (drinking water and sewer/wastewater) and RUS (rural electric grid, telephone and broadband). It is from this $14 billion that the confusion over the total leverage in the bill stems.

When considering the role of federal credit programs in infrastructure, there are two very important points to remember.

Point #1 is that the face value of federal loans are not part of the federal budget. Only the “credit subsidy cost” of a loan is part of the budget. The subsidy cost is calculated by the Office of Management and Budget and combines estimated default risk, the interest rate of the loan relative to what the federal government pays to borrow, and a few other things.

Every year the Federal Credit Supplement volume of the President’s Budget re-estimated the average subsidy costs of all federal credit programs. The FY 2018 FCS estimated that the average FY 2018 TIFIA loan would have a subsidy rate of 6.64 percent. To calculate the size of a loan, one has to divide the available credit subsidy money by the subsidy rate. 1 divided by 0.0664 gives a little more than 15, so every $1 million of budget authority provided to the TIFIA program in FY 2018 can enable $15 million in TIFIA direct loans.

And TIFIA typically funds about one-third of a project’s construction costs, so one can safely say that, in 2018 at least, every $1 million in TIFIA funding can leverage $45 million in total project costs. (A list of all projects ever financed by TIFIA is here.)

These assumptions may be somewhat arbitrary, but they are arbitrary in a bipartisan way. Back when the 2012 MAP-21 law was being drafted and implemented, the average TIFIA subsidy rate was closer to 10 percent, so Transportation Secretary Foxx told a Senate hearing in 2013 that:

We estimate that TIFIA’s leverage ratio is more than 30 to 1, meaning that $1 of budget authority will result in over $30 of infrastructure investment. At the MAP–21 funding level, the TIFIA Program will stimulate as much as $30 billion in infrastructure investment in fiscal year 2014 alone.

OMB has calculated an even lower subsidy rate for the FY 2018 WIFIA water infrastructure loans – 1.55 percent. 1 divided by 0.0155 is 64.5, so every dollar of WIFIA credit subsidy budget authority might support a loan of over $60, and then if the WIFIA loan only paid for, say, half or a little over half of a project cost, its leverage could be over 100 to 1.

The RRIF railroad loan program works a little differently – the borrowers are supposed to pay their own subsidy costs, which is why that program has proven less popular than TIFIA. (Except for Amtrak – OMB apparently calculates that Amtrak has zero default risk, since Congress will always appropriate money to pay Amtrak’s debts, so Amtrak can get an infinite amount of RRIF loans without anybody putting up any credit subsidy cost and sticking future Congresses with the debt service.) But the President’s proposal may change the law to allow federal funds to be used for more RRIF loan subsidy money and make the program more widely available.

We won’t know until the 2019 Budget comes out (if then) how the $14 billion in credit subsidy money will be split between TIFIA, WIFIA, RRIF, and RUS, nor do we know the specific leverage assumptions for each program. But with hypothetical leverage from that $14 billion ranging from a low end of, say, 20 to 1 to a high end of maybe 80 to 1, that $14 billion could leverage anywhere between $300 billion and $1.1. trillion, which explains how the White House can say the total amount leveraged by the entire bill is $1 trillion one day, $1.7 trillion the next, and $1.5 trillion a couple of days after that.

(The other problem with these assumptions is that there may not be that many creditworthy projects out there. See this December 2015 ETW article, Was the FAST Act’s 70 Percent Cut in TIFIA Funding Justified?, for more details.)

Point #2 regarding federal credit programs seems obvious, but is often ignored: loans have to be repaid eventually. Even at excellent loan terms (and the NYC-area commuter railroads recently got a $967 million RRIF loan on a 35-year note at a fixed rate of 2.85 percent, which strikes us as a really good deal for them), no state or municipality has limitless borrowing capacity. Some states and cities are a lot closer to their responsible credit limit than others (especially governments that have borrowed to pay operating costs or postpone hard choices on pension liabilities). So a trillion-plus dollars in leverage won’t be distributed evenly across the country, even in urban areas with high passenger and freight throughput that can produce revenue streams to support loan repayment.

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