Special Briefing on State and City Spending of Federal Infrastructure Funds

As federal funds flow following passage of the $1.2 trillion Infrastructure Investment and Jobs Act, the onus is on state and city officials to budget wisely and direct money to projects that promote a more equitable and environmentally sustainable society, according to panelists on the Dec. 16 edition of the Special Briefing webcast.

"One of the things that I'm most excited about is that this funding comes with discretion for the administration to be able to spend it right," Rep. Earl Blumenauer, D. Ore., said during the Special Briefing, co-sponsored by the Volcker Alliance and the Penn Institute for Urban Research (Penn IUR).

"This flexibility only works if it is utilized,” Blumenauer said. The money "can be transformational in terms of reducing greenhouse gasses, to be able to deal with the racial and economic inequities that we have seen with past infrastructure investments. But if we don't do it right, it could actually increase disparities and increase greenhouse gasses in the sector—transportation—that accounts for most of our carbon pollution." 

Moderated by William Glasgall, Senior Director, State and Local Initiatives, the Volcker Alliance, and Penn IUR Co-Director Susan Wachter, the Special Briefing was the 26th in a series of sixty-minute online conversations featuring experts from the Volcker Alliance’s national research network and Penn IUR, along with other leading academics, economists, and fiscal policy leaders from around the U.S.

Panelists included Blumenauer, a member of the House Ways and Means Committee; Patrick Brett, Managing Director and Head of Citi’s Municipal Debt Capital Markets and Capital Solutions Businesses, Chairman of the Municipal Securities Rulemaking Board, and Penn IUR Advisory Board Member; David Glick, Associate Professor of Political Science, Boston University, Faculty Director of MetroBridge, and Co-Principal Investigator, Menino Survey of Mayors, Boston University Initiative on Cities; and Rebecca Rhynhart, City Controller, City of Philadelphia.

The infrastructure bill includes $110 billion to repair bridges and roads; $65 billion for broadband; and the largest Federal investment in history in public transit—almost $90 billion, Blumenauer said. It includes $66 billion of rail funding for modernization in the northeast corridor and world-class passenger service outside of the corridor. Blumenauer said he was "reasonably confident" that there will be "opportunities for human infrastructure" in the Build Back Better legislation that has been passed by the House but has stalled in the Senate.

Responding to a question from Wachter, Blumenauer said it's critical to enlist nonprofit and charitable organizations in the effort to spend infrastructure funds properly.

"There are lots of institutional cross-pressures, there'll be political efforts, there'll be organized groups that will be pushing for more traditional investment," he said. We need to "make sure that we're building our political and policy infrastructure. I've been in discussion with some of the folks in the philanthropic community" that have invested in building civic infrastructure in the past.

Panelists said municipalities' experience in spending COVID-19 relief funds under the American Rescue Plan Act (ARPA) may provide a lesson for their approach to the infrastructure bill.

"We laid out a detailed framework on the way the City of Philadelphia should be treating the rescue plan money," Rhynhart said. "That kind of detail would also be applicable when the infrastructure money starts to flow."

Philadelphia, which faced a $450 million budget shortfall for fiscal 2022, received $1.4 billion of ARPA money, representing a "huge opportunity," Rhynhart said. Her office recommended setting aside $850 million for tax revenue shortfalls, including $450 million the first year and declining amounts after that. "It's very important that governments wean themselves off of the stimulus ... and then make very targeted investment into specific areas that are challenges," she said.

Though she pushed for that approach, including $180 million toward intervention to reduce violence in the city, "the mayor didn't go that route," Rhynhart said. The $700 million the city received last May was used for general operations, and the mayor's plan is to use ARPA money for revenue replacement, she said.

Glick said infrastructure and housing were very high on the list of priorities for 126 mayors that participated in the Menino Survey, which focused on ARPA. Transportation infrastructure was the most common priority of participants, with municipal facilities, including parks, water, and broadband not far behind. Respondents regarded the funds as "once in a lifetime money," Glick said, noting that a number of them raised equity concerns, and suggested using money to help neighborhoods that were traditionally left behind.

The municipal bond market will play a "huge supporting role," helping cities and states to stretch and target the money, Citi's Brett said.

Over 10 years, the bill provides $700 billion in baseline spending and $550 billion in incremental new spending, Brett said, far short of the $2.5 trillion the American Society of Civil Engineers has estimated is needed in new investment. Grant money "almost never pays for an entire cost of a project. Almost always there's a requirement that state and local governments put in a certain amount of money themselves," he said. "We do expect to see a pretty significant increase in supply in the muni market as a result of all these investments."

The final version of the bill left out some important municipal bond -related features, Brett said, including a provision to allow issuers to refinance debt. The bill does include improvements to existing programs, such as an increase in the maximum loan term under the Transportation Infrastructure Finance and Innovation Act to 75 years from 30 years, and an expansion of sectors eligible for the loans, which will help leverage money for airports, for example.

It also creates a new infrastructure bank for carbon capture and sequestration under the Department of Energy. And it authorizes an additional $15 billion of Private Activity Bonds, typically used for transportation public-private partnerships, Brett said. 

Since the money will flow through states' budgets, panelists said political conflicts are likely over the use of the money, especially in places like Pennsylvania, where the legislature is controlled by Republicans and big city governments are led by Democrats.

For example, Rhynhart expects some conflict over the approach to climate change, and whether the effort should focus on building protection against the changing environment or on measures to reduce the carbon footprint.

"To me the tension and the collaboration, the back and forth, is what government is," she said.