dan carol is a director in the Milken Institute’s Center for Financial Markets. Prior to joining the Institute, Carol worked for California Governors Jerry Brown and Gavin Newsom as the senior advisor for infrastructure and energy.
Published April 3, 2020
Thousands are dead, millions are sick and billions have been dislocated by an unprecedented global crisis brought on by the Covid-19 pandemic. After passing the $2 trillion stimulus package focused on temporarily sustaining people and businesses during this crisis, policymakers in Washington, DC, are now actively discussing how major investments in American infrastructure could simultaneously attack a problem undermining long-term growth even as it anchors a recovery from an unprecedentedly steep economic decline.
I agree that investing in infrastructure at this critical moment is a smart idea — but only if Congress provides the right kind of transformational funding that communities desperately need to get shovels moving in the ground. Otherwise, a massive cash infusion won’t be able to overcome the multi-trillion-dollar funding gap that existed long before the pandemic in a fashion that restores growth and employment. That’s because a fix for what ails us is not just a question of how much we spend but how well we buy.
To get the job done right, a post-Covid infrastructure package needs to do two things at once. Obviously, we need to invest in the core infrastructure needed for resilience (for example, for fewer water crises like Flint) and build for the future with new infrastructure basics like Broadband-for-All. But equally important, we need to invest in the technical capacity to help communities reform broken public procurement systems that fail to create the incentives for making projects shovel-ready in timely fashion as well as for optimal life-cycle asset management.
How? Apply lessons learned from the last stimulus in 2009, and adopt international best practices that make it easier for private and social impact capital to co-invest in our communities, at scale. Here, I review local fiscal conditions in a Covid world, explain how communities can move from stuck to shovel-ready and outline how a federal predevelopment fund can buttress a better makeover.
The New Normal for State and Local Economies
Even before the pandemic stretched state and local government budgets to the breaking point, the sector was in deep fiscal trouble. Indeed, this sector hadn’t fully recovered from the 2008 crash when Covid-19 hit.
According to research from the Pew Research Center, states missed out on $283 billion in otherwise expected revenue from 2008 to 2018 thanks to the slow recovery, and half of the states are spending less than they were a decade ago. In fiscal year 2018, 23 states still spent less in inflation-adjusted terms than in fiscal year 2008 when they were on the cusp of the Great Recession.
As a consequence, less innovation- and risk-capital has been available for the past decade — arguably the worst possible time for a shortfall. By the same token, the capacity of the public sector to solve problems and respond to crises is limited just when flexible, effective leadership is most needed.
Leveraging Scarce Public Investment in Tough Times
States and localities will need ongoing support to maintain essential public services in the next six months. After that, communities are going to need to leverage the public dollars they have available to tackle local recovery efforts and create or restore lost jobs. Infrastructure is one key area for Covid-recovery investment that, in theory at least, is ripe for success.
Before discussing effective approaches, it is worth considering what went wrong in 2009. As ProPublica’s Michael Grabell has documented, the stimulus failed to jumpstart a strong, sustainable recovery because “money was spread far and wide rather than dedicated to programs with the most bang for the buck. Shovel-ready projects, those that would put people to work right away, took too long to break ground.”
This is an argument for investing in timely predevelopment funding for local projects that struggle to find support within existing federally funded programs.
This is not an argument against investing in infrastructure as a recovery measure this time around, however. It is an argument for investing in timely predevelopment funding for local projects that struggle to find support within existing federally funded programs.
What’s predevelopment? It is the funding that pays for tasks that need to be completed before construction can occur, such as architectural and engineering work, market assessments and economic feasibility studies, site/lease acquisition costs, business plan writing and permitting.
A Federal Build America Investment Initiative report probably says it best:
Although only accounting for a small percentage of total costs, predevelopment activities have considerable influence on which projects will move forward, where and how they will be built, who will fund them and who will benefit from them. Greater attention to the predevelopment phase could yield a range of benefits — for example, providing the opportunity to develop longer-term, more innovative and more complex infrastructure projects and facilitating assessment of a range of financing approaches, including public-private partnerships. Additional investment in predevelopment costs also may enable state, local, and tribal governments to utilize … emerging technologies, reduce long-term costs … and provide other benefits, such as improved environmental performance and enhanced resilience to climate change.
The value of flexible pre-development funding is not lost on local leaders: predevelopment grant vehicles such as the bipartisan Brownfields site redevelopment program, the Trump administration’s Better Utilizing Investments to Leverage Development (Build) and the Obama administration’s Transportation Investment Generating Economic Recovery (Tiger) programs are consistently oversubscribed by as much as ten-fold. For example, in 2014, the U.S. Department of Transportation received 200 applications requesting more than $300 million in funding for Tiger planning, when only $35 million was available.
Grabell, the widely respected reporter for ProPublica, had this to say about Tiger:
Typically, the government spreads money like peanut butter, so that no one can do anything significant and every program is starved. … The 2009 stimulus introduced a better model: a competitive, $1.5 billion grant program for transportation called Tiger that forced local leaders to think regionally about strategies that combined multiple modes of transportation. The money untangled freight rail lines in Chicago, financed streetcars in Dallas and rapid buses in the Washington area, and helped Philadelphia build a 128-mile network of bike and walking trails. It should be a model for future transportation grant programs.
Predevelopment funding is often the overlooked “secret sauce” for making community-led projects practical. With rare exceptions, investors don’t come to town with predevelopment capital — they expect the public sector or philanthropy to foot that bill. Most investors are not interested in deals that are promising but not quite ready for prime time. They also expect the public sector to pave the way, sometimes with streets, parks, public amenities, sewer lines and the like.
Filling the Predevelopment Gap
One of the best early examples of public predevelopment funding was by the City of Portland Development Commission (PDC) and Enterprise Community in 1997. Portland’s initial predevelopment loans were for up to $200,000. Eligible uses included land acquisition, preliminary design (the “fat line” stage of drawings that allow preliminary cost estimates) and site studies such as geo-tech and environmental. If an affordable housing project didn’t advance, the agency would generally buy the studies from the developer, effectively forgiving the loan in exchange for the site and project data.
Portland’s Predevelopment Fund paired its early support with a $25 million affordable housing bond, catalyzing 3,000-plus units of affordable housing over eight years at a time when costs were rising faster than incomes. Predevelopment risk capital helped move these deals to reality because it substituted for the most expensive money in the capital stack and reduced the long-term debt service.
Pittsburgh’s redevelopment success story — from a dying Rust Belt City to a newly vibrant Robotics City — was also initially anchored by a $60 million predevelopment fund in 1996. For its part, Cincinnati’s success in redeveloping the city’s Central Business District and the adjacent neighborhood of Over-the-Rhine (OTR) had similar origins.
Government need not be the only actor in the predevelopment game. For example, in New Orleans after Hurricane Katrina, the Entergy Corporation provided $200,000 in gap financing to allow the nonprofit Volunteers for America to shape what became a 200-unit, $84 million affordable housing deal for low-income seniors called the Terraces on Tulane Avenue. This team has since created its own spin-off, the Renaissance Neighborhood Development Corporation, which has rehabbed or built out another 1,000 affordable units.
Going to Scale
U.S. infrastructure is in the midst of profound transformation. New needs and new opportunities — from big data, extreme weather events and driverless cars — were already disrupting how traditional infrastructure systems are funded, financed and designed before the pandemic. Little wonder that the long-term effects of decades of deferred maintenance and local fiscal challenges were revealing themselves in dramatic new ways, from Flint’s aforementioned water crisis, to dam and levee failures in the Carolinas and Mississippi regions, to a wildfire-induced utility bankruptcy in the West.
Happily, we don’t have to reinvent the wheel. According to studies from McKinsey and Co. and Georgetown University, there are successful international models for building high-performance infrastructure systems that can be adapted to the U.S. context. Indeed, the time is now to use performance-based federal funding to teach local communities how to “fish” for capital for new projects, incentivize better maintenance of existing infrastructure assets and promote lifecycle thinking for public assets meant to last 30 to 40 years.
A $10 to $15 billion Federal Infrastructure Predevelopment Fund to support predevelopment and project de-risking for resilient community-led infrastructure projects would address long-term financing gaps while acting as a catalyst for public-private partnerships and better overall infrastructure performance.
These reforms would address local capacity and barriers that impede deal flow. In theory, there are still trillions in sidelined capital that could move into U.S. public-private partnerships in a socially beneficial way in the next 5 to 10 years. But the federal government, states and metros face challenges in integrating private capital across current programs, planning rules and financing authorities.
A $10 to $15 billion Federal Infrastructure Predevelopment Fund to support predevelopment and project de-risking for resilient community-led infrastructure projects would address long-term financing gaps while acting as a catalyst for public-private partnerships and better overall infrastructure performance. Here are the key changes needed to accelerate a shift from top-down, “silo’ed” federal planning support to local project implementation support.
Fix procurement with an infrastructure risk and resilience assessment. Federal infrastructure funding should be conditioned on requiring local sponsors to do an infrastructure risk and resilience assessment to ensure that lifecycle project costs, maintenance needs and other risks are considered, along with alternative financing and project management systems. The pause created by the IRRA, like the old environmental impact assessment, would offer a clear moment in the procurement process for improvements. Taking this step is also likely to attract private and impact capital.
Use predevelopment assistance to get shovel-ready. As discussed above, predevelopment cash can make the difference. A key consideration in designing the fund: tie outlays to performance improvements in project maintenance, asset management and permitting.
Regional deployment accelerators. Congress has been considering a “national infrastructure bank” for 15 years, an idea predicated on Hoover Dam-scale projects, which studies show are now few and far between. Given the urgent challenges of increasing resilience and accounting for climate change and considering the on-the-ground realities of how projects really get done at a local level, it would make sense to deploy smarter and faster by creating a national network of multiple (say, 10) frontline regional acceleration centers. These centers could focus on innovations that America needs now, like broadband for remote work, energy-efficient hospitals and modern water management systems.
Public-sector project finance expertise. Most public agencies lack the staff with the skills to develop a robust pipeline of public-private partnerships and implement lifecycle finance. By their own admission, many local leaders are not comfortable sitting across the table from Wall Streeters. And they often fall into the trap of fully funding one public project with their limited funds rather than leveraging what public dollars can buy. We therefore need to train up a new generation of skilled public-sector “deal jockeys” and “finance fellows” who can facilitate resilient projects and partnerships.
Taking Action in Your Own Community
With fiscal challenges ahead due to the Covid-driven plummet, economic development leaders shouldn’t wait for federal dollars to flow. Now is the time to expand state and local predevelopment funding to bolster local community efforts. In some cases, local gap funding can be filled through state support, local initiatives and sometimes philanthropy. They can check out sources of predevelopment capital from the Citizens Housing and Planning Association and the Massachusetts Housing Partnership. Or they can take steps to create their own revolving loan fund guided by experts like the Council on Development Financing Agencies.
Size doesn’t matter here as much as leadership. A small community foundation can lead the way (for example, the Telluride Foundation), or a major anchor institution can step into the breach. Most recently, Erie, Pennsylvania, garnered well-deserved national attention for attracting early Opportunity Zone investments ahead of many other communities. At the heart of its success: Community-assembled predevelopment funding from the Erie Downtown Development Corporation, the Erie Insurance Company and Erie County’s Industrial Business Development Fund.
Next on the Agenda
Mindful of the hard lessons of 2009, it’s clear that building an effective long-term recovery reaching all Americans will demand fresh approaches. While much must come through learning-by-doing, I think the smart deployment of predevelopment dollars will be key to building a resilient recovery and a steady supply of shovel-ready projects in what many fear will be a difficult recovery.
We shouldn’t kid ourselves: The nation’s multi-trillion-dollar infrastructure funding gap will only grow in the wake of local and state fiscal strains from the coronavirus, no matter how big the size of the next federal stimulus package. But as I hope I’ve made clear, the path to a recovery that simultaneously speeds a return to normal and puts us on the road to a sounder infrastructure footprint is well within our capacities.