A FRAMEWORK FOR INFRASTRUCTURE INVESTMENT IN THE 21ST CENTURY

Identified Need

Need to boost worldwide investment in infrastructure by 60%:

• $36 trillion spent in the previous 18 years• $57 trillion needed during next 18 years

ASCE: ~$200 billion/yr additional funding needed in the U.S.

Source: Infrastructure productivity: How to save $1 tril-lion a year McKinsey Global Institute (MGI), January 2013

How did we get here?

Population / Infrastructure Trends

Tax Policies (long-term trends)

Spending on Infrastructure

Physical Condition and Environmental Factors

Now, what do we do about it?

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0

19.0

20.0

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Tax

Rev

enue

s (%

of

GD

P)

Federal Tax Revenues (as percentage of GDP)1945-2015

3-yearrollingaverage

Average

Population vs. Infrastructure

Long-Term Trends

Infrastructure FootprintUS: Population vs. Land Development (1982-2007)

Sources:Population: US Census BureauDevelopment: USDA-NRCS

Infrastructure FootprintUS: Population vs. Land Development (1982-2007)

Sources:Population: US Census BureauDevelopment: USDA-NRCS

Infrastructure Footprint

Sources:Population: US Census BureauDevelopment: USDA-NRCS

0%

10%

20%

30%

40%

50%

60%

1982 1987 1992 1997 2002 2007 2010

Perc

ent I

ncre

ase

vs. 1

982

Michigan: Population vs. Urban Footprint1982-2010

Urban Footprint Population

Infrastructure Footprint

Source:SEMCOG

Developed before 1970

Developed after 1970

Population in 1970: 4.7 mil-lion

Population in 2015: 4.7 mil-lion

Infrastructure FootprintState of Michigan

28 years (1982-2010):

Population increased by 8%

Developed land area increased by 50%

Over a 5:1 ratio in infrastructure footprint expansion relative to population

Infrastructure FootprintUS: Population vs. Land Development (1982-2007)

On average, each taxpayer is paying for 20% more infrastructure

Purchasing power for roads is 30% less than in mid 1980s (adjusted for inflation, considering both state and federal fuel taxes)

Infrastructure FootprintUS: Population vs. Land Development (1982-2007)

Unlike roads (which are visible), underground utilities are much older and poorly maintained

Little to no political motivation to match funding levels to actual needs

Sewer/water rates not keeping up

No funding source for stormwater

Infrastructure FootprintState of Michigan

Impact on roads:

35% increase in infrastructure (per capita) in Michigan

1984: $0.24/gal (combined federal + state fuel tax)

2015: $0.54/gal what it should be today, based on inflation

2015: $0.38/gal what it is today

30% effective decrease in funding

Combining these two trends: 50% decrease in available investment per mile of road

Impact on sewers and water systems: varies by community, but similar in magnitude

Infrastructure Footprint• How did this happen?

• Land is cheap• Few or no incentives to redevelop older

areas• Old design standards offer little to no room

for creative design• Desire for lower taxes• Desire for bigger lots, larger houses• Developer / Engineer Pressures

• Cost• Schedule

Demographic Changes

Source:Economic Implications of a Shrinking Number of Young People.

Terry F. LudemanWisconsin Dept. of Workforce Development

Demographic Changes• Larger percentage of

Americans on a fixed income and therefore highly resistant to higher fees and taxes

• Decreasing reliance on passenger vehicles (vehicle miles traveled in decline since 2005)

• As a result, continued downward pressure on fuel tax revenues

100%

110%

120%

130%

140%

150%

1982 1985 1989 1992 1995 1999 2002 2005 2008 2012 2015

Total Vehicle Miles TraveledRelative to 1982, 12-month rolling average

Source: FHWA

Population-Adjusted VMTTrend

Tax PolicyLong-Term Trends

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12.0

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15.0

16.0

17.0

18.0

19.0

20.0

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Tax

Rev

enue

s (%

of

GD

P)

Federal Tax Revenues (as percentage of GDP)1945-2015

3-yearrollingaverage

Average

Tax Revenues

20

25

30

35

40

45

50

Inco

me

Tax

-%

of

GD

P

Tax Revenue as Percentage of GDPSource: Heritage Foundation, 2015

20

21

22

23

24

25

26

27

Inco

me

Tax

-%

of

GD

P

Tax Revenue as Percentage of GDPSource: Heritage Foundation, 2015

Tax Revenues

France:

45%

United Kingdom:

35%

Germany:

38%Tax Revenue as % of GDP (incl. state/local taxes)

Jamaica:

24%

United States:

24%Papua New Guinea

25%

Tax Revenues

Tax Revenue as % of GDP (incl. state/local taxes)

• Large percentage of aging infrastructure built with sources of revenue that are no longer there:

• Federal-Driven• Interstate system (initial investment: 1950s – 1970s)• Sewer systems and treatment plants (EPA grants)• Water distribution systems (EPA grants)

• Developer-Driven• Local roads• Sewers (storm and sanitary)• Water mains

• States and municipalities have inherited these assets

• Much of this infrastructure is reaching the end of its useful life

• There are no programs of the size/magnitude of those we enjoyed in the 1950s – 1970s

Tax Revenues

• Example (water/wastewater)

• Grant program authorized by Clean Water Act (1972)

• 1972-1987: funding took the form of grants• 75% federal / 25% state/local match (pre-1981)• 55% federal / 45% state/local match (1981-1987)

• 1987: funding switched to low-interest loans (SRF)

• 1972-1987: $72 billion in appropriations (15 years)

• 1987-2012: $36 billion in appropriations (25 years)

70% funding reduction (post-1987)80%+ reduction when factoring inflation

Tax Revenues

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11.0

12.0

13.0

14.0

15.0

16.0

17.0

18.0

19.0

20.0

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Tax

Rev

enu

es (

% o

f G

DP

)

Federal Tax Revenues (as percentage of GDP)1945-2015

3-yearrollingaverage

Average

Source:

White House Office of Management and Budget

Tax Revenues

Tax Revenues

First 35 years(1945-1980)

Tax revenues below 70-year average only 23% of the

time

Tax Revenues

Latest 35 years(1980-2015)

Tax revenues below 70-year average 77% of the time

Fuel Taxes

$0.10

$0.15

$0.20

$0.25

$0.30

$0.35

$0.40

$0.45

1990 1995 2000 2005 2010 2015 2020

Fue

l tax

($/

gal)

Fuel Tax History1990-2015

Wisconsinwith CPI

Michiagn -ENR Index

Federal

Michigan

Wisconsin

Michiganwith CPIIndex

Spending on Infrastructure

Infrastructure Spending

0.50.70.91.11.31.51.71.92.12.32.5

1960 1970 1980 1990 2000 2010 2020

% o

f GD

P

Federal Spending on Physical Resources* (1962-2017)* Energy, Natural Resources, Environment, Commerce, Transportation, Community Development

5-yearrollingaverage

55-yearaverage

Source:

White House Office of Management and Budget

Social Security / Medicare

Source:

White House Office of Management and Budget

1.0

3.0

5.0

7.0

9.0

11.0

13.0

15.0

17.0

19.0

1960 1970 1980 1990 2000 2010 2020

% o

f GD

P

Federal Spending on Human Resources* (1962-2017)* Health, Medicare, Unemployment, Social Security, VA Benefits

5-yearrollingaverage

55-yearaverage

Spending Priorities

Source:

White House Office of Management and Budget

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

1960 1970 1980 1990 2000 2010 2020

% o

f GD

P

Federal Spending: Human Resources vs. Physical Resources

HumanResources

PhysicalResources

Federal Transportation Funding

Federal fuel tax revenue will decrease by 27% in the next ten years

20

25

30

35

40

45

50

55

2015 2017 2019 2021 2023 2025

Annu

al F

uel T

ax R

even

ues

($ B

illio

ns)

Projected Fuel Tax Revenues and Outlays (inflation-adjusted)

2015-2025Source: Congressional Budget Office

TaxRevenues

Outlays

Transportation Funding By State

Michigan: $309

Transportation Funding By State

$200

$400

$600

$800

$1,000

$1,200

$1,400

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Per Capita Transportation SpendingFederal + State + Local ($ per year)

Excludes Washington DC and Alaska

U.S. Median: $663

Michigan: $433 (35% lower than national me-

dian)

StimulusPublic Works Stimulus (ARRA)

$48 billion for transportation

$10 billion for water/sewer

Overall infrastructure funding gap:$1.3 trillion (2001 dollars)

Bottom LineShift in tax burden from federal to state to local

Magnitude of investment: hard to make it up at the local level

Physical Condition&

Environmental Factors

Visible Problems

Hidden Problems

Hidden Problems

Economic Burden from Failing Infrastructure

Changing impact of wet weather on collection systems

CityPeak 6-hour rainfall (in.) TP 40 Bulletin 71 NOAA Atlas 14

Garden City 3.49 79 >100 37Exceedance Interval

Detroit (west fringe) 3.59 91 >100 43 25-yr to 50-yr

Romulus 3.65 98 >100 48 50-yr to 75-yr

Westland 3.49 79 >100 36 75-yr to 100-yr

Royal Oak 4.79 >500* >500* 200 >100 yr* Extrapolated

Exceedance Interval (years)

Key

August 11-12, 2014 Rainfall Event

Now, what do we do about it?

Assume shift in revenue bur-den to local government

Appeal to the right audience and SELL IT

Charge for ALL utilities (even stormwater!)

Develop a business plan for your infrastructure

Establish inflation-adjusted revenue framework

Appeal to the Right Interests at the Right Time

Elected Officials

Voters

Appeal to the Right Interests at the Right Time

Elected Officials

• May require 2-3 separate messages to reach each type of elected official

Business owner/leader Budget HawkEnvironmental advocate

• Keep your messages simple and direct – address their key interests

Appeal to the Right Interests at the Right Time

Elected Officials

• Examples

Business owner/leader Impact of failing infrastructure

on local businesses

Budget HawkIncreased cost of emergency repairs (long-term budget impacts)

Environmental advocatePollution impacts of failing infrastructure

Better V I S U A L S help

Appeal to the Right Interests at the Right Time

Voters

• Hire a Public Relations Firm

Targeted, Coherent MessageProfessionally-crafted

materials for mailing, website, TV, etc.

Bedside MannerEngineers are not naturally

gifted at communicating with the public

ReferendaMaximize the chances of a successful millage

• Branding Public Works

• Start with understanding how police and fire legitimize services:

• Maintaining law and order

• Protecting your family

• Around-the-clock availability

• Immediate response

• Heroes

Appeal to the Right Interests at the Right Time

Public Works Police/Fire

Streets (snow removal and deicing) – timely response, generally within one day (available 24 hours 7 days a week)

Fire: immediate response to call. Available 24 hours, 7 days a week.

Sewer backups, flooding – timely response to complaint, but solution may take months or years (available during week, business hours on call?)

Police: immediate response to emergencies. Available 24 hours, 7 days a week.

Most problems require planning, design, construction (lead time of one to several years)

Problems generally resolved on site.

Appeal to the Right Interests at the Right Time

Charge for ALL Utilities• Stormwater Utilities – the final

frontier• Stormwater spending bleeds money

from the General Fund• Almost all communities in Michigan

don’t have a stormwater utility• Many communities simply don’t

have the ability to tackle stormwater CIP

• Stormwater utilities can be used to partially fund road projects (10%+ of road projects are related to drainage)

Metro Detroit

Potential for about $200 million per year in stormwater user fee revenues* if all communities adopt stormwater enterprise funds.

* Average Midwest stormwater utility revenue is $43 per capita per year

Infrastructure: A Business Model

• Variable Costs (labor, materials, CIP)

• Fixed Costs (O&M)• Debt service

Expenses

• Effective sales/marketing

• Pricing strategy: need vs. politics

• Inflation-adjusted revenues

Revenues

Asset Manage-ment Plan

Infrastructure: A Business Model

Total Cost of Owner-ship Ap-

proach

The Subsidies are Over

• Who build it?• Land developers• Federal grant money (post-CWA)

• Who owns it now?• Municipalities• HOAs• Water/sewer authorities

• Our rate structures are based on subsidized infrastructure

Lastly….look INWARD

• Urban expansion (without population growth) is paralyzing us

• Land use policies must discourage greenfield development until we can backfill underpopulated urban areas

• Build where we already have the infrastructure

…and finally…

If Infrastructure played well on TV:

Critical Structure Investigation

CSI - Michigan Dedicated group of licensed structural engineers who risk life and limb to inspect bridges and dams on the

Grand River, preventing catastrophic failures just in the nick of time while using the latest in forensic technology, really cool gadgetry and great character development.

Jon Oliver (HBO)Infrastructure Segment

What Now?• Redefine it:

• More education on tax and spending history• Understand who built it and who owns it• More emphasis on health, public safety, and

consequences • Increased emphasis on what is BELOW the

ground• More aggressive education for kids and public

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1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Tax

Rev

enu

es (

% o

f G

DP

)

Federal Tax Revenues (as percentage of GDP)1945-2015

3-yearrollingaverage

Average

What Now?

• Charge for it:

• Accept the local “bootstrap” reality (no more federal handouts)

• Create Stormwater Utilities• Couple fees to CPI or CCI (inflation)

What Now?

• Sell It!

• We’re still not loud enough• Use PR firms• Make the case for each audience

(four separate messages):• Business model / finance • Economics • Environmental• Public safety

Q&A