A FRAMEWORK FOR INFRASTRUCTURE

INVESTMENT IN THE 21ST CENTURY

Gregory P. Kacvinsky, OHM Advisors

Michigan Association of Planning

2016 Annual Conference – Kalamazoo, Michigan

October 26, 2016

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: Over $200 billion/year additional funding needed

Source: Infrastructure productivity: How to save $1 trillion a year

McKinsey Global Institute (MGI), January 2013

Source: American Society of Civil Engineers, 2013 Infrastructure Report Card

Identified Need

US must raise infrastructure

spending by 1% of GDP*

• $170-$180 billion per year

(similar to ASCE $200B/yr)

• Works out to $5B per year in

Michigan

*Source: Game changers: Five opportunities for US growth and renewal

McKinsey Global Institute (MGI), July 2013

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

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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

Ta

x R

even

ues

(%

of

GD

P)

Federal Tax Revenues (as percentage of GDP)

1945-2015

3-year

rolling

average

Average

Population vs. InfrastructureLong-Term Trends

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

Sources:

Population: US Census Bureau

Development: USDA-NRCS

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

Sources:

Population: US Census Bureau

Development: USDA-NRCS

Infrastructure Footprint

Sources:

Population: US Census Bureau

Development: USDA-NRCS

Sources:

Population: US Census Bureau

Development: USDA-NRCS

0%

10%

20%

30%

40%

50%

60%

1982 1987 1992 1997 2002 2007 2012

Per

cen

t In

crea

se v

s. 1

982

Michigan: Population vs. Urban Footprint1982-2012

Urban Footprint Population

Infrastructure Footprint

Source:

SEMCOG

Developed before 1970

Developed after 1970

Population in 1970: 4.7 million

Population in 2015: 4.7 million

Infrastructure FootprintState of Michigan

30 years (1982-2012):

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 (1982-2012)

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 (1982-2012)

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 Footprint

On average, we are responsible

for nearly 40% more

infrastructure than our parents

Infrastructure FootprintState of Michigan

Combined impact of increased

footprint and revenue shortfalls:

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

Tax PolicyLong-Term Trends

10.0

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17.0

18.0

19.0

20.0

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

Ta

x R

even

ues

(%

of

GD

P)

Federal Tax Revenues (as percentage of GDP)

1945-2015

3-year

rolling

average

Average

Tax Revenues

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Incom

e T

ax

-%

of

GD

P

Tax Revenue as Percentage of GDP

Source: Heritage Foundation, 2016

20

21

22

23

24

25

26

27

28

Inco

me T

ax

-%

of

GD

PTax Revenue as Percentage of GDP

Source: Heritage Foundation, 2016

Tax Revenues

France:

45%

United Kingdom:

33%

Germany:

37%Tax Revenue as % of GDP (incl. state/local taxes)

Jamaica:

24%

United States:

25%

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,

ended in 1980s)

• Water distribution systems (EPA grants, ended in

1980s)

• Developer-Driven• Local roads

• Sewers (storm and sanitary)

• Water mains

Tax Revenues

• 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

• 1987 - present: low-interest loans (SRF program)

• 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

Source: White House Office of Management and Budget

Tax Revenues

10

11

12

13

14

15

16

17

18

19

20

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

Fed

eral

Tax R

even

ues

(% o

f G

DP

)

Federal Tax Revenues (as percentage of GDP)

1945-2016

3-yr rollingaverage

Post-WWIIAverage

Tax Revenues

First 35 years

(1945-1980)

Tax revenues helped to

support infrastructure

investment

Tax Revenues

Latest 35 years

(1980-2015)

Tax revenues in long

term decline

Headlee: 30% loss in Taxable value is mostly permanent (inflation adjusted)Southeast Michigan

$100

$120

$140

$160

$180

$200

$220

$240

19

99

20

00

20

01

20

02

20

03

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20

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11

20

12

20

13

20

14

20

15

20

16

Bill

ion

s

SEV:

-$81 Billion (-36%) from peak in

2006 to 2016

Taxable Value:

-$54 Billion (-30%) from peak in

2007 to 2016

Inflation Adjusted to 2010 dollars

Fuel Taxes

$0.10

$0.15

$0.20

$0.25

$0.30

$0.35

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

Fu

el

tax (

$/g

al)

Fuel Tax History

1990-2017

Construction

Cost Index

(ENR)

Federal

Michigan

State Transportation Funding

$200

$400

$600

$800

$1,000

$1,200

$1,400

New

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rk

Wyo

min

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Was

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Ve

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Illin

ois

Pen

nsyl

van

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h

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law

are

New

Jer

sey

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ada

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gon

Lou

isia

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Haw

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Mex

ico

Mar

ylan

d

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con

sin

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irgi

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Ind

iana

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ansa

s

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hig

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olin

a

Ten

nes

see

Sou

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aro

lina

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

Excludes Washington DC and Alaska

State Transportation Funding

$200

$400

$600

$800

$1,000

$1,200

$1,400

New

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rk

Wyo

min

g

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Dak

ota

Sou

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rmo

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ois

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nsyl

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law

are

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sey

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nes

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ada

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gon

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isia

na

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ico

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nia

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Per Capita Transportation Spending - Including 2017 Michigan Tax IncreaseFederal + State + Local ($ per year)

Excludes Washington DC and Alaska

Spending on Infrastructure

Infrastructure Spending

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

1960 1970 1980 1990 2000 2010 2020

% o

f G

DP

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 G

DP

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 G

DP

Federal Spending: Human Resources vs. Physical Resources

HumanResources

PhysicalResources

StimulusPublic Works Stimulus (ARRA)

Total stimulus: $832 billion

$48 billion for transportation (5.7%)

$10 billion for water/sewer (1.2%)

Overall infrastructure funding gap:

$200B/year

Bottom Line

Federal Government

getting out of the

business of

infrastructure

States and local

governments WILL

take on the additional

burden

August 7, 2016

Physical Condition

&

Environmental Factors

Visible

Problems

Hidden

Problems

Hidden

Problems

Changing impact

of wet weather

on collection

systems

August 11, 2014

(Metro Detroit)

Now, what do we do about it?

Assume shift in revenue burden to

local government is here to stay

Appeal to the right audience and

SELL IT

Charge for ALL utilities

(even stormwater!)

Develop a business plan for

your infrastructure (including Capital

Improvement Plans)

Update master plans to favor the

use of existing infrastructure

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 Hawk

Environmental 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 Message

Professionally-crafted materials

for mailing, website, TV, etc.

Bedside Manner

Engineers are not naturally gifted

at communicating with the public

Referenda

Maximize the chances of a

successful millage

Maximize Revenues from Utilities

• Stormwater Utilities

• Stormwater spending bleeds money

from the General Fund

• Almost all communities in Michigan

don’t have a stormwater utility

• Many communities don’t have the

ability to tackle stormwater capital

needs

Funding Imbalance – Typical Community

136 miles of sewer

3,200 manholes

6 pump stations

Budget: ~$7 million/yr

200 miles of watermain

2,500 hydrants

2,800 valves

Water Tower

Budget: ~$10 million/yr

165 miles of storm sewer

22 miles open channel

10,500 structures

30 major culverts/bridges

Budget: $270,000/yr

Old Reality: Enclosed system

(pipes and manholes) – inlet to outfall

Old Reality: Flood control rules

Get it to the river quickly and efficiently

Old Reality: Stormwater detention

(1970s on) – peak flow control

New Reality: Stormwater quality (post-2000)

source control and stream corridor management

Proposed

stormwater utility

legislation in

Michigan!

State of Michigan

Potential for about $400-$500 million

per year in stormwater user fee

revenues* if all communities adopt

stormwater enterprise funds.

* Average Midwest stormwater utility

revenue is $50 per capita per year

The Subsidies are Over

• Who built it?

• Land developers

• Federal grant money

• 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

• Master plans must discourage

greenfield development until we can

backfill underpopulated urban areas

• Build where we already have the

infrastructure

…and finally…

JOBS!

• Multiplier effect on investment

• $170B-$180B annual

investment can raise annual

GDP by $320B and create 1.8

million jobs*

*Source: Game changers: Five opportunities for US growth and renewal

McKinsey Global Institute (MGI), July 2013

John Oliver (HBO)

Infrastructure Segment

https://www.youtube.com/watch?v=Wpzvaqypav8Segment @ 17m 14s

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, general

public, and elected officials

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

Ta

x R

even

ues

(%

of

GD

P)

Federal Tax Revenues (as percentage of GDP)

1945-2015

3-year

rolling

average

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

Asking for your help…

• Current / Pending Legislation

• HB 5991

• Enabling legislation for stormwater

utilities

• Potential for action after the

election

Thank you!