Several weeks ago, the Trump Administration revealed its long-awaited plan for renewing US infrastructure with the release of its Legislative Outline for Rebuilding Infrastructure in America (“Outline”). Like many of you, we at Morrison & Foerster have been asking ourselves: What exactly does this Outline represent? And how should those in the infrastructure business respond now?
Other priorities have occupied Congress, most significantly the adoption of legislation to keep the US Government open and operating. With the passing of HR 1625: Consolidated Appropriations Act, 2018 in the House and Senate, we are seeing a renewed focus on infrastructure funding, including the approximately $21 billion allocated in the March funding deal. So it seems timely to look again at what the Outline may mean in this context.
Inverting Government Funding and Anticipating Private Sector Financing. The Outline proposes to invert the historical financial responsibility for major infrastructure funding, from an 80%/20% federal/state and local to a 20%/80% federal/state and local share. This dramatic shift, the Outline contends, would be accomplished by applying $200 billion in federal funds over 10 years to “incentivize” state and local governments through a system of matching grants and financing incentives, comprising approximately $130 billion in federal funds. The remaining $70 billion would be allocated as direct spending towards rural infrastructure ($50 billion) and “transformative” projects, such as high-speed rail ($20 billion). In contrast, the Democrats propose $1 trillion in federal direct spending in their infrastructure plan, “A Better Deal to Rebuild America”. Given the limited amount of federal funds proposed in the Outline, those seeking to develop infrastructure projects should begin picking their objectives and acting on proposed policy elements as they develop.
Leveraging $200 Billion. The Outline seeks to use this $200 billion expenditure in federal funds to spur at least $1.5 trillion in infrastructure spending (the President suggests it will be closer to $1.8 trillion of spurred investment). Such expenditures would result in a cost-share of 11%-14% on the part of the federal government, which has previously generally assisted in funding infrastructure at 50% (transit) and 80% (highways) levels. With a radically inverted funding ratio and no immediate source of funding in sight, the burden is clearly laid on state and local governments to act.
Easing Environmental Permitting. The Outline’s major regulatory component is in environmental permitting, where the Administration aims to shorten the process of approving major projects to two years or less. Changes in environmental permitting have been a consistent theme of the Administration, which has previously proposed changes to the National Environmental Policy Act (NEPA), as well as energy infrastructure. The Administration aims to further amend land revitalization regulations related to Brownfields usage and Superfund site remediation in order to reduce the expense and time required to permit development on such sites. Major structural changes, including statutory and regulatory amendments, will be required to ease such permitting requirements across a litany of departments and agencies.
Privatization of Federal Assets. Likely to be one of the Outline’s most contentious elements is its proposal to allow agencies to more easily dispose of federal real property if the agency can “demonstrate an increase in value from the sale would optimize the taxpayer value for federal assets”. Two of the most visible examples identified include Washington Reagan National and Washington Dulles airports. Major private equity players have expressed reluctance to take on aging existing infrastructure burdened with existing obligations and deferred maintenance, preferring to invest in new facilities without such negative characteristics. As such, industry response has been tepid, and few takers have enthusiastically stepped forth in the week since the Outline’s release.
No Specifics, Just a Starting Point for Negotiations. The Outline does not contain specific proposals for amendments to particular statutes. It is only a conceptual starting point for the Administration’s negotiations with Congress on the massive legislative changes that would be required to implement the Outline’s concepts for managing and funding infrastructure. These possible legislative changes will be fought out in the coming months in both the House and Senate, as well as in state and local government.
Don’t Expect Any Real Federal Infrastructure Funding Soon—Substantial Changes in Federal and State Law and Regulation Are Necessary. The Outline proposals cannot be implemented without substantial changes to existing legal authority. The necessary statutory changes are scattered throughout a host of laws, so complex legislative changes will be required. Even the elements of the Outline that might be accomplished by changes in regulation alone are likely to require formal agency rulemaking. Agency rulemaking/regulatory practices will likely need to be changed if an infrastructure bill passed at the federal level. States interested in working with the federal government on their infrastructure goals will likely need to enact legislative and regulatory changes on their books as well. HR 1625 has not substantially addressed many of the regulatory changes necessary to implement the Outline.
State and Local Governments—Which Are Financially Weakened Already—Will Be Hard‑Pressed to Carry the Financial Burden the Outline Contemplates. State and local governments will be asked to cover at least 80% of a project’s cost, with federal awards limited to a 20% cost‑share. Currently, federally funded highways are generally funded at approximately 80% by the federal government. The Administration’s approach, if successful, will literally flip the status quo.
Moreover, the process in the Outline will pit states against one another in a competition for scarce federal funding. The largest portion of the federal funds proposed in the Administration’s Outline will be used to create incentive programs to reward states and localities that invest the most in infrastructure projects, which may reward the wealthiest communities, not those most in need of renewed infrastructure.
These proposals mandate that states and localities do the heavy lifting despite still grappling with the potential revenue shortfall implications of December’s Tax Cuts and Jobs Act. With reduced reliance on federal appropriations for infrastructure spending, the Administration appears confident that a proposed streamlined permitting process will somehow spur the development the Administration would like to see.
To assist in lessening the burden of funding shortfalls, the Outline presumes an increase in private sector participation to funding infrastructure. Its proposed approach for aiding this increase in private sector participation is to loosen restrictions on tolling on interstate highways and allowing for the commercialization of interstate rest areas, among other measures. However, the financial value of such privatization measures is still relatively conceptual and unclear.
Funding the Federal Share by Cutting Existing Federal Programs Is Politically Fraught and May Run Counter to the Recent Two-Year Budget Deal and 2018 Consolidated Appropriations Act. Another likely contentious issue is that the $200 billion offered by the Administration would come principally from cuts to existing federal programs. The Administration’s 2019 budget blueprint envisions a 19% cut to the Department of Transportation’s discretionary spending and a 20% cut to the Army Corps of Engineers’ budget. This further signifies that the Administration envisions the states as spearheading spending, planning, and building the country’s infrastructure in the coming decade.
Since the release of the Outline, there has been some bipartisan support for raising the gas tax as a means of funding the federal portion of infrastructure expenditures. This gas tax has not been raised since 1993, and revenues from it have fallen proportionally as fuel efficiency on vehicles has increased. The gas tax is not popular generally, so the prospects of it being increased are uncertain.
Policies Are Tilted Towards Rural Projects; Urban Transit Projects May Suffer. One should pay particular attention to project opportunities in rural areas, as the Outline proposes that 25% of its funding go to infrastructure projects outside of metropolitan areas to “address unmet rural infrastructure needs”. The Outline’s focus is so intently on rural regions that the word “rural” is mentioned over 50 times in the document, whereas the word “urban” is mentioned once.
Urban transit projects are likely to suffer if legislation substantially similar to the Outline is passed in Congress. The Outline may allow for some funding for new urban transit projects through its “transformative” projects funding but appears not to focus many funds on the revitalization and repair of the country’s legacy transit systems, such as those of New York, Chicago, and Boston. Instead, the Outline proposes loosening restrictions around public‑private partnerships and requiring value capture in transit projects.
Appropriations in HR 1625 suggest that Congress and the Administration differ on their approach to urban transit projects. The March spending bill allocated $1.3 billion to Amtrak’s national network, and the Hudson River tunnel between New York and New Jersey (Gateway) may see as much as half a billion dollars in funding.
The Legislative Outline for Rebuilding Infrastructure in America still may be the starting point for serious, prolonged regulatory, and statutory debates. Many of its elements have an uncertain political future: the $1.5 trillion revenue loss created by December’s Tax Cuts and Jobs Act, compounded by nearly $2 billion in spending bills recently passed by Congress, leave little “headroom” for further government spending. Major political battles should be anticipated in areas of fund allocation, raising revenue, and environmental regulation, among others.
All signs point to this being just the beginning of a protracted political negotiation for scarce resources. Those interested in infrastructure should contemplate the following thoughts on the impact the upcoming political negotiations may have on their projects.
The Outline is thus a long way from implementation. That said, interested actors should follow this evolving discussion, as this will certainly become a robust debate throughout the coming months, and Congress may even surprise us all with a real infrastructure bill down the line.
In the meantime, action in infrastructure development will remain with traditional federal infrastructure programs—to the extent they have been funded under the two year spending bill passed in early February in Congress—and with state and local governments in the roles they have traditionally held and in increasing cooperation with private developers and investors.
Because our clients are so active in developing and funding infrastructure, Morrison & Foerster will closely monitor these developments.