This op-ed by Chuck Marohn first appeared on StrongTowns.org on June 14, 2021.
The concept of a National Infrastructure Bank is being floated again as a way to address America’s infrastructure crisis. There is a bill in Congress and a well-connected lobbying organization pushing for its passage. There is the potential for half a trillion dollars to be put into the bank and then ten times that—$5 trillion total—to be spent through the bank, so this is not some modest or halfhearted approach. It’s a serious proposal with huge sums of money to be spread around.
A National Infrastructure Bank is a big idea. It appeals to those who want to see bold federal action on a wide range of items. It has the backing of many mayors, governors, economists, and infrastructure experts. And, as a bank, it has a veneer of financial prudence. It is a big idea.
It’s also a really stupid idea.
Let me make what I think is the strongest case for a national infrastructure bank. There are good and profitable projects that the existing municipal bond market will either not fund or will deem too risky to fund at reasonable rates. It might be that the project is too big or complicated to be fully evaluated by investors. It might be that a two or three percentage point spread in interest rates may make the difference in whether the project is viable or not.
In these cases, a national infrastructure bank can step in and provide loans to local governments, utility boards, transit authorities, and other infrastructure management organizations so that they can complete those projects. Those borrowers will see a real financial return on those investments and use that return on capital to repay the loan, plus interest. Not only does it work out financially, but the economy is better off — among other objectives of the bank — and that just makes it all even better.
To me, that is the best argument. In 2021, it’s also a fairy tale.
Let’s start with the notion that worthy projects are having a difficult time getting funding. Just last week, MarketWatch ran an article titled “‘Food Fight’ in the municipal-bond market as demand devours all supply.“ For those of you not familiar with bond markets, what this means is that there are not enough municipalities seeking to borrow money to satisfy all the investors with cash looking to invest. When too many investors are fighting over the chance to loan too few cities and other governments money, supply and demand means that interest rates for muni debt drops.
That is what has happened, to record levels.
…in one section of the market, for high-yield munis, “there’s just not enough deals.” That was the conundrum facing the Invesco High Yield Municipal Fund, which announced in May that it would close to new investors.
Large funds are now essentially forced to buy any deal that comes out, Steeves said, leaving portfolio managers with little opportunity to distinguish themselves from competitors, and resulting in zero price discovery in that portion of the market.
Again, for those not familiar with the language of bond investing, “high-yield” means the riskiest loans, the ones where the governments are most impaired in their ability to repay the debt. Any insolvent local government can borrow as much money as they want right now with “zero price discovery” (which means they are getting ridiculously low interest rates).
There is no credible argument that can be made that a national infrastructure bank is needed to fill some liquidity hole in the market. There is no entity in the infrastructure businesses unable to borrow all of the money they want. So, why do we need a new bank with trillions of dollars to lend out?
The other part of the fairy tale is the notion that there are worthy projects out there, investments that pay an actual financial return. There just isn’t, at least not at the scale that a national infrastructure bank would look to fund.
Let me make sure we are all on the same page with what an “actual financial return” is. Say your city borrows $1 million to install a new sewer pipe in the ground. A real financial return would mean that the city, once they deducted their expenses, had new revenue from the installation of that pipe sufficient to retire that $1 million debt, plus interest.
If those projects existed (and they really don’t anymore), they are easily funded. What cities are actually struggling with isn’t money for expansion but money for maintaining what they already have. It’s the backlog of past promises that is financially strangling them, and borrowing money from an infrastructure bank is not going to fix that insolvency problem.
For example, Flint, Michigan, can borrow all the money it wants right now and use that money to fix their lead pipes. They can borrow the money, they just have no means to pay it back. And since replacing lead pipes with non-lead pipes is not exactly expected to supercharge growth in Flint, it’s not like there is an expectation of additional tax revenue that can be dedicated to loan repayment.
Local government debt is not a federal revenue stream. An infrastructure bank would try to make it one, but it doesn’t work that way, at least not if the bank wants to remain solvent.
Most proponents of a national infrastructure bank know this, which suggests to me that the whole idea is a bit disingenuous. As an example of what I mean, let me point to a state version of an infrastructure bank I am familiar with, that being the South Carolina Transportation Infrastructure Bank.
I was invited by Vince Graham — who at that time was the chair of SCTIB, although he was subsequently asked to leave that position (he’s a hero) — to take a look at the bank’s books and try to help him and his team understand what was going on.
Let me just say that it would make ENRON blush.
SCTIB was ostensibly a bank that made loans like a traditional bank and also made grants, sort of like a foundation, supposedly from its profits. Interestingly, a lot of the loans it made were in the form of grants to the state DOT. It was all a way to get around Article X, Section 13, of the state’s constitution, which limits the amount of debt the state can incur.
…the maximum annual debt service on all highway bonds so additionally secured which shall thereafter be outstanding shall not exceed fifteen percent of the proceeds received from the sources of revenue for the fiscal year next preceding.
Here’s how it went: Every year, the DOT would “invest” money in the infrastructure bank. The bank would then use that capital as a fractional reserve to borrow more money, which it would then grant to fund large projects run by the DOT. So long as the DOT continued to “invest” in the bank—which was technically not a debt payment and thus not subject to the constitutional limits—the infrastructure bank could make payments to its creditors and the whole scheme could keep running.
South Carolina has billions in debt (money the taxpayers are on the hook for) that is off their books and essentially hidden in the balance sheet of what is a horribly insolvent bank. If it were a real bank, the FDIC would have shut it down a long time ago. It’s not, thus my reference to ENRON. I’m sorry, South Carolina residents, but how did you think you were paying for all those highways and bridges? It wasn’t from taxes!
I suspect that this shell game is the kind of thing that a national infrastructure bank would do as well, which is why politicians wanting to spend trillions of dollars on infrastructure without having to go through that pesky process of raising taxes or borrowing money are lining up to support it. We should never do this. It’s a stupid idea pretending to address a problem that doesn’t exist, and that’s the best-case scenario. Worse case: It’s a Wall Street tool for pushing more debt on insolvent states and localities, certificates they can securitize and gamble with. No thank you.
For cities and states struggling to fix infrastructure, the problem has never been a lack of money to be borrowed. The problem is decades of unproductive infrastructure investments: public expenditures that didn’t have a positive financial return the first time around, that now must be maintained without any plan or even vision for how to squeeze a greater return out of that expenditure.
America does not need a top-down infrastructure bank to loan insolvent governments more money.
What we desperately need is a Strong Towns approach to strengthen the balance sheets of local communities and help them build real wealth, stability, and prosperity.