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Who’s Going to Pay for Trump’s Huge Infrastructure Plans?
The Fiscal Times ^ | November 14, 2016 | Mark Joffe

Posted on 11/20/2016 10:02:22 PM PST by Tolerance Sucks Rocks

A rare point of agreement between President-Elect Trump and Congressional Democrats is that America has an infrastructure deficit: The nation’s transportation, power, water and sewerage facilities are too often outdated and unable to reliably serve a growing population. But while the diagnosis crosses party lines, solutions are more controversial. Democrats may not be too worried about the recent increase in federal deficits, but Republicans who have made an issue of the national debt will be reluctant to produce more red ink. Likewise, tax increases to pay for new federal construction spending are off the table under Trump and a Republican-controlled Congress.

So it may be politically difficult to find federal funds for an ambitious infrastructure initiative. But, outside the federal government, a large pot of money is available to finance new projects. Although most public employee pension plans are underfunded, they have, in aggregate, $3.8 trillion of assets. Most of this money is invested in bonds and stocks, but these asset classes have drawbacks in the current environment. Bond yields are near historical lows, well below the levels needed to provide the 7-plus percent returns projected in pension plan actuarial forecasts. Stocks have been doing well, but after a seven-year bull market that has witnessed a tripling of the Dow Jones Industrial Average, U.S. equities have major downside risk.

If infrastructure investments could generate reasonable and relatively safe returns for public pension funds, they would provide an intriguing investment alternative. In a new California Policy Center study, my co-authors and I outline infrastructure investment alternatives for pension funds and private investors. We also discuss policy changes needed to encourage these investors to help rebuild America.

Let’s be clear on how this option differs from federal funding. Politicians often call federal spending an investment, but that’s just rhetoric. Real investors expect financial returns, in the form of interest, dividends and/or capital appreciation. If the federal government spends money to subsidize state freeways, it won’t see a financial return on its “investment.” There is no stream of toll revenues to provide dividends, nor does a freeway have any resale value.

While drivers dislike tolls, the ability to collect such revenue transforms highway spending into an investment — one that may be attractive to pension funds. Toll revenues also provide road operators with both the incentive and the resources needed to maintain and improve their highways. If a toll road becomes congested or potholed, drivers may look around for alternatives, shrinking toll income available to investors. To avoid this situation, toll road operators may be expected to resurface their highways more frequently and to add new lanes more quickly.

In Canada, Europe and Australia, it is common for pension funds to invest in highways and other infrastructure. In 2011, for example, an Australian pension fund took over the Queensland Motorway. Since then, it has improved the highway and made a large profit. Earlier this year, an Australian-led consortium bought the Indiana Toll Road (a segment of I-90) out of bankruptcy, with the California Public Employees Retirement System (CalPERS) taking a 10 percent share.

One might wonder why a California pension fund would invest in an Indiana toll road rather than a California project, but there are good reasons. First, California — famous for its freeways — doesn’t have many toll road investment options. More importantly, investing in-state could result in political considerations supplanting proper financial analysis. For example, Gov. Jerry Brown has sought private investments in California’s high-speed rail project. But that initiative has questionable revenue projections and seems likely to suffer delays and cost overruns. If CalPERS were to invest in the high-speed rail project to placate elected officials, it could make a bad deal for the state’s pensioners and taxpayers by taking on a low-quality investment.

One way to keep politics out of pension infrastructure investment decisions, reduce risk and still keep some money local, is to create a nationwide pool of pension assets available for infrastructure projects. Such a pool would professionally manage funds provided by pension systems in multiple states. Pool managers would be insulated from in-state political considerations because their assets would come from geographically diverse sources. Also, because the pool would invest in a diversified portfolio of infrastructure projects, it would be less vulnerable to large losses.

Other policies may need to change before U.S. pension infrastructure investment pools can become viable. Too many of our bond-funded roads and utilities are free to use or are heavily discounted through tax subsidies. In the case of highways, we should be looking to toll revenues rather than the gas tax, which will become less effective as electric vehicles become more common. In California, which faces an ongoing drought, a reluctance to charge higher water rates limits opportunities to reuse waste water and build desalination plants. Recycling sewer water and removing salt from ocean water are much more expensive than capturing rainwater, but watersheds serving the state’s heavily populated coastal areas no longer receive sufficient supplies of rainwater on a reliable basis.

In some cases, government can encourage pension fund and private investments by offering financial guarantees and other credit enhancements, but these arrangements need to be carefully structured to avoid allegations and appearances of crony capitalism. Another key reform would involve expediting project approvals. In Orange County, south of Los Angeles, we found one desalination project that has been under review for 18 years. It’s hard to imagine investors parking their money for such a long period of time.

America needs to renew its infrastructure. Pension systems have the capital needed to fund these essential investments. With some attitudinal and policy changes, we can channel their resources to the task of rebuilding our country.


TOPICS: Business/Economy; Constitution/Conservatism; Editorial; Government; News/Current Events; Philosophy; Politics/Elections
KEYWORDS: bonds; donaldtrump; election2016; federalspending; funding; infrastructure; investment; investors; p3s; pensionfunds; ppps; privatization; revenues; spending; taxcredits; taxes; transportation; trumpagenda; trumptransition
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1 posted on 11/20/2016 10:02:22 PM PST by Tolerance Sucks Rocks
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To: Tolerance Sucks Rocks

Toll roads? Are you kidding me? /rhetorical questions


2 posted on 11/20/2016 10:10:29 PM PST by philman_36 (Pride breakfasted with plenty, dined with poverty and supped with infamy. Benjamiin Franklin)
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To: Tolerance Sucks Rocks

mexicans


3 posted on 11/20/2016 10:12:54 PM PST by I got the rope
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To: Tolerance Sucks Rocks

There should be plenty of budget money for the law-abiding metro areas once the sanctuary lawbreaking metros are cutoff of federal funds.


4 posted on 11/20/2016 10:13:02 PM PST by Degaston
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To: Tolerance Sucks Rocks

That would be Mexico.


5 posted on 11/20/2016 10:13:24 PM PST by Lisbon1940 (No full-term Governors!)
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To: Tolerance Sucks Rocks

Trump will stop climate change payments to UN and use that for infrastructure. Just one source. There are many.


6 posted on 11/20/2016 10:16:54 PM PST by TexasCruzin (Trump is the man. #TrumpPence16)
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To: Tolerance Sucks Rocks

The protesters


7 posted on 11/20/2016 10:17:29 PM PST by correctthought (Woot!)
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To: Tolerance Sucks Rocks

I don’t mind paying taxes for this, so long as it’s for something tangible we can all benefit from.

The 1st stimulus only had 6% spent on actual shovels in the ground and as I drive around I no longer see signs extolling the virtues of the stimulus plan.

Which brings up another issue: “There is currently a baseline of $1 trillion built into the budget. Where does that money go?”

We should be able to route what looks like money going down a dark hole to these projects.


8 posted on 11/20/2016 10:17:49 PM PST by Vendome (Don't take life so seriously-you won't live through you're anyway - "Enjoy Yourself" ala Louis Prima)
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To: Tolerance Sucks Rocks

Cut off ALL payments to illegals, islamos and able bodied scumbags.

Spend the extra on honest Americans.


9 posted on 11/20/2016 10:18:30 PM PST by soycd
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To: Tolerance Sucks Rocks

magical money trees...maybe we should first replace obamacare and balance the budget before spending billions on bridges to nowhere?


10 posted on 11/20/2016 10:18:51 PM PST by ari-freedom (The Social Justice War is over and we won!)
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To: Tolerance Sucks Rocks

The same way *shovel ready* jobs were paid for.


11 posted on 11/20/2016 10:19:37 PM PST by Daffynition (*Donald Trump represents the WILL of the PEOPLE.*~ Don King 09.24.16)
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To: Tolerance Sucks Rocks

The Clinton’s offshore accounts?


12 posted on 11/20/2016 10:27:39 PM PST by GnuThere
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To: Tolerance Sucks Rocks

Ba$tards... steal retirement funds to pay for roads and infrastructure? We just dropped 6 trillion on 2 wars that got us nothing but tragedy and instability and ISIS.
Now, they are budget hawks suddenly.


13 posted on 11/20/2016 10:32:01 PM PST by DesertRhino (November 8, America's Brexit!!!)
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To: DesertRhino

The GOP congress did manage to lead the way on controlling spending during the 90’s only to blow up the budget after Bush. Time to go back to the Contract


14 posted on 11/20/2016 10:36:56 PM PST by ari-freedom (The Social Justice War is over and we won!)
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To: Tolerance Sucks Rocks

The money saved by stopping taxpayer theft via IRS refunds, welfare, etc by illegals to start with.


15 posted on 11/20/2016 10:38:34 PM PST by Tarasaramozart
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To: Tolerance Sucks Rocks

We are. One way or another.


16 posted on 11/20/2016 10:38:37 PM PST by TBP (0bama lies, Granny dies.)
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Perhaps they could use the funds that were supposedly allocated for it, maybe from gas taxes or whatever taxes or something...perhaps work towards a funding goal of less than 5% administration costs and 95% actual material and labor costs. Maybe even allow real competitive bids.


17 posted on 11/20/2016 10:39:10 PM PST by dsrtsage (One half of all people have below average IQ. In the US the number is 54%)
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To: Tolerance Sucks Rocks

Get rid of the Dept of Education and a few other useless departments, privatize the potal service, defund a few hundred useless programs and incentives and amazingly we’ll have money for infrastructure spending.

My gosh, we waste BILLIONS on nothing.

There’s land at the bottom of the swamp. It can’t be drained fast enough.


18 posted on 11/20/2016 10:40:32 PM PST by Jaysin
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To: Tolerance Sucks Rocks

Suddenly the LEFT is worried about spending ..????

Funny how that always happens when the Republicans get into office .. ??? I wonder if anybody else has begun to notice that too ..?????


19 posted on 11/20/2016 10:41:06 PM PST by CyberAnt (Peace through Strength)
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To: Vendome
Which brings up another issue: “There is currently a baseline of $1 trillion built into the budget. Where does that money go?”

Union coffers at all levels.

20 posted on 11/20/2016 10:44:14 PM PST by pgyanke (Republicans get in trouble when not living up to their principles. Democrats... when they do.)
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