Special Briefing on the Deployment of the $1 Trillion Infrastructure Investment and Jobs Act by States and Localities

The $1.2 trillion Infrastructure Investment and Jobs Act (IIJA) presents states and cities with an opportunity -- and some political and financial challenges -- as they deploy funds for everything from transportation and water to housing and broadband, panelists said at a Special Briefing produced by Penn IUR and the Volcker Alliance.

 “While a small portion of infrastructure spending, federal grants may catalyze localities and states to come together to take on important  needs,” said Susan Wachter, co-director of the University of Pennsylvania institute, who co-moderated the May 19 webinar with, William Glasgall, Volcker Alliance senior director, public finance and Penn IUR Fellow.

 “When you consider that 80 percent of the nation’s infrastructure spending comes from state and local governments, this new federal funding is truly a gift that will keep on giving,” Glasgall said. 

Panelists said that the challenges, from inflation and rising interest rates to regional political conflicts, may complicate officials’ efforts to make the most of the money. “We have a lot of divided governments at the state level,” said Larry Parks, co-founder of Forethought Advisors,which provides strategic counsel and political intelligence to clients in financial services and other regulated industries. “Let’s say you have a Republican legislature in Michigan and a Democratic governor. Does Detroit benefit or not?”

The online briefing was the thirty-first 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 federal, state, and local leaders. In addition to Parks, panelists included Patrick Brett, managing director and head, Citi Municipal Debt Capital Markets; Providence, Rhode Island, Mayor Jorge Elorza; and Lauren Larson, director of the Colorado Governor’s Office of State Planning and Budgeting.

The IIJA money comes on top of the $1.9 trillion American Rescue Plan Act (ARPA), the COVID relief program that has helped state and localities strengthen finances while starting to address infrastructure needs. Larson, citing the National Council of State Legislatures, said more than half of the states are making infrastructure investments with ARPA money, spending an average of a quarter of allocations on such projects. Colorado has saved half and invested half of its one-time ARPA money and more than doubled its reserves to 15 percent of general fund spending, she said. The additional federal money will give the state full funding for its ten-year transportation plan, she said, compared with four years of funding without IIJA.

“We’re expecting 120 programs to receive some type of money here, and that’s in ten of our state agencies, so it’s quite a coordination effort,” she said. She said she was hopeful Colorado can “punch above our weight in the money we can pull down from IIJA,” after it set aside funds for state match. Colorado’s programs include electric school buses, climate risk initiatives, water infrastructure investment, and wildfire mitigation. It plans to extend broadband service to 99 percent of households in 2027, something that would not be possible without the additional federal funds, Larson said.

Housing is the priority in Providence, where Elorza said ARPA money helped balance the city’s books without spending cuts or tax increases and kept services flowing. “These dollars couldn’t come at a better time,” the mayor said. The city is taking a comprehensive approach in its housing plan, he said, forecasting demand in the private and subsidized market, and adjusting zoning and other policies.

As large as it is, the IIJA falls short of the more than $2.5 trillion investment that the American Society of Civil Engineers estimates is needed to improve the nation’s infrastructure, Brett said. That’s why governments will have to leverage the federal money in the municipal bond market and through federal loan programs that have a multiplier effect. 

“We are undergoing another period of pretty severe stress” in the municipal bond market, Brett said, noting $50 billion of outflows from municipal bond mutual funds as bond prices have fallen this year. While higher interest rates made refinancing less attractive, overall issuance is down only 7 percent, he said, and retail investors are buying munis, a sign that the market is starting to rebound.

“New money, capital financing is very much still happening,” Brett said. Even after the recent slump, the cost of financing is about the same as in 2018 and lower than it’s been over the past 40 years. “The bigger challenge is actually construction-cost inflation,” he said. “That $1.2 trillion isn’t worth that much.” 

Panelists expressed concern that jurisdictional and political tensions may prompt officials to think small and focus on improving existing infrastructure and “shovel-ready” projects, rather than initiate transformational programs that may be controversial.

“We live in an age of outrage, today,” Mayor Elorza said. “It feels as though it’s a lot harder to get things done, particularly big things.”

For example, “I think it’s universally understood, at least here in Rhode Island, that creating a better link to Boston would be strategically smart to do,” he said. “We found it’s not so obvious to folks in Massachusetts,” especially to some residents whose towns may be bypassed to keep the time between Providence and Boston to about 40 minutes. But he suggested that having federal money available for the project might lessen local opposition.

“This is one of those areas where additional resources paper over a lot of the challenges and help you overcome it,” Elorza said.