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America has an infrastructure deficit: The nations transportation, power, water and sewerage facilities are too often outdated and unable to reliably serve a growing population.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.
Lets be clear on how this option differs from federal funding. Politicians often call federal spending an investment, but thats 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 wont 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 doesnt 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 Californias 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 states 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 states 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. Its 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.
Toll roads? Are you kidding me? /rhetorical questions
mexicans
There should be plenty of budget money for the law-abiding metro areas once the sanctuary lawbreaking metros are cutoff of federal funds.
That would be Mexico.
Trump will stop climate change payments to UN and use that for infrastructure. Just one source. There are many.
The protesters
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 $1 trillion built into the budget. Where does that money go?”
We should be able to route what looks like money going down a dark hole to these projects.
Cut off ALL payments to illegals, islamos and able bodied scumbags.
Spend the extra on honest Americans.
magical money trees...maybe we should first replace obamacare and balance the budget before spending billions on bridges to nowhere?
The same way *shovel ready* jobs were paid for.
The Clinton’s offshore accounts?
Ba$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.
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
The money saved by stopping taxpayer theft via IRS refunds, welfare, etc by illegals to start with.
We are. One way or another.
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.
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.
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 ..?????
Union coffers at all levels.
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