The national debt is going to affect the future of transportation funding, and the public-private partnership community needs to understand why and what the implications for P3s may be.
The most recent parts of the story began on Aug. 1, when Fitch Ratings downgraded the federal government’s bond rating from AAA to AA+. For a company, that might not be a big deal, but for the government of the world’s largest economy, the downgrade was a shot across the bow. This was the second time a rating agency took such an action with the federal government’s bond rating, with S&P doing so in 2011.
Headlines in the financial press, such as The Wall Street Journal’s “America’s Fiscal Time Bomb Ticks Louder” and “U.S. Downgrade Flashes Warning Sign.” indicate how seriously the downgrade should be taken. As the Journal’s Greg Ip wrote:
One reason for Fitch’s downgrade was the absence of any political will to deal with the main drivers of the deficit: spending programs for older Americans, including Social Security and Medicare, and repeated cuts to tax rates for most households.
Fitch noted how much worse U.S. fiscal metrics are than its peer countries. To give one example: The U.S. is on track to spend 10% of federal revenue on interest by 2025, compared with just 1% for the average triple-A rated country and 4.8% for double-A-rated. Why, then, isn’t the U.S. rating even lower? Because the reserve status of the dollar and the size and safety of Treasury debt gives the U.S. unprecedented borrowing ability.
Indeed, it was hard to get presidents or Congress to worry about the deficit when interest rates were low. Today, a bond market signaling that the world is no longer safe for deficits may be the first step to tackling them.
The long-term consequences of the growing debt were estimated in the latest Congressional Budget Office’s (CBO) 2023 Long-Term Budget Outlook. Its baseline 30-year projection, which assumes no changes in existing laws and programs, is that by 2053, the national debt will constitute 181% of the U.S. Gross Domestic Product—compared with 98% today. And paying interest on that debt will increase from taking 15% of federal revenue today to 35% of federal revenue in 2053 (more than any federal budget item except Social Security and Medicare). And that’s just CBO’s baseline estimate.
The Committee for a Responsible Federal Budget estimates that, given likely extensions of tax cuts and expansions of federal programs, the 2053 national debt will likely rise to 222% of GDP.
Where does transportation fit in the discussion about the national debt?
Well, in July, the House Appropriations Committee, in response to conservative members saying they’re concerned about out-of-control federal borrowing while a Democrat is in the White House—as opposed to largely supporting massive deficit spending during the Trump administration—proposed trimming Fiscal Year 2024 Department of Transportation (DOT) discretionary grant spending by $5 billion.
This relatively minor cut would affect only a few programs in six modal agency discretionary grant programs totaling $22.5 billion last year. Yet a headline in Eno Transportation Weekly read, “FY24 House Funding Bill Has Massive Cuts to DOT Grant Programs.”
This proposal raised similar cries of alarm from highway, transit, and rail organizations, such as the headline “Transportation Funding Under Threat in House of Representatives” by United for Infrastructure, which advocates for more infrastructure investment.
Let’s think ahead a few years to when massive federal funding in the Infrastructure Investment and Jobs Act, often referred to as the bipartisan infrastructure law, and the Inflation Reduction Act’s funding has been expended. At that point, state transportation budgets would be expected to revert to their pre-stimulus spending levels.
But what can we expect transportation organizations and state DOTs to call for?
Based on history, it’s almost certain states will propose the most recent year of those expanded funding levels as their new budget baselines and ask Congress for federal funding. And if Congress goes along with the calls for that level of infrastructure spending, there will be another massive amount of federal borrowing. Since CBO’s dire debt forecasts don’t include this level of increased federal transportation spending, this type of increase would make all CBO’s 30-year projections serious underestimates.
Many years ago, a chairman of the Council of Economic Advisers, Herb Stein, propounded what became known as Stein’s Law. “If something cannot go on forever, it will stop.” But the longer that rude awakening takes to happen, the worse the consequences will be.
America’s transportation leaders should think hard about lobbying for this unsustainable spending to continue. The largest contribution to the out-of-control national debt is the impending bankruptcy of Medicare and Social Security. If, or when, Congress finally gets around to grappling with the costs of those programs, it’s likely that most or all federal discretionary programs, including infrastructure programs, will be in for serious, long-term spending cuts. Transportation leaders should start planning for that major change now.
One ray of hope for the highway and bridge sector is the opportunity that comes with the urgent need to phase out per-gallon fuel taxes and replace them with per-mile road user charges, also called mileage-based user fees. If done right, that transition could fully restore the users-pay/users-benefit principles on which the gas tax was based a hundred years ago. It could even mean converting state highway systems into revenue-financed highway utilities analogous to electric, gas, and water utilities. Public utilities, which can be government-owned or investor-owned, charge customers based on how much of the service they use. They also issue long-term revenue bonds backed by the projected income from their user charges to fund the costs of maintaining and improving the infrastructure.
Some advocates of road user charges envision them as externality taxes, including charges for carbon dioxide (CO2) emissions and noise, plus transit subsidies. This version of a road user charge conflates a user fee with an externality tax. A user fee is intended to keep pace with the capital and operating cost of the infrastructure in question, increasing over time as needed. Externality taxes are designed to reduce and eliminate the externalities, so their eventual revenue would be zero.
What about mass transit subsidies? Long-time traffic and revenue consultant Ed Regan has suggested that metro areas could add a transit tax to charges in the road user charge (RUC) future. This would mean only residents of an urban area would pay for its transit subsidies—not rural taxpayers or federal taxpayers in general. This isn’t ideal, but it would be more equitable than today’s system of diverting nationwide highway user tax revenue to transit in a few hundred metro areas.
In the near term, as advocates of more spending point out, thousands of bridges still need refurbishment or replacement across the country. But there is no way that federal taxpayers, via expanded federal spending, can address that total problem without massive tax increases. Innovative states are using long-term public-private partnerships to address hundreds of smaller bridges, as Pennsylvania’s Rapid Bridges program is doing. A growing number of major bridge replacements, including the Gordie Howe Bridge in Michigan, the I-5 bridge between Oregon and Washington, and the completed Ohio River Bridges project, are also moving ahead as toll-funded public-private partnerships.
P3 developers have a growing U.S. track record, and infrastructure investment funds and U.S. public pension funds are eagerly seeking American public-private partnership highway and bridge projects to invest in.
While both major political parties have irresponsibly run up the national debt and rarely taken it seriously, it is increasingly clear that the bills will eventually come due, and endlessly expanded federal borrowing and spending is not a realistic long-term future for the transportation sector.
State and local transportation officials should start planning for a self-help transportation future that requires users to pay for the infrastructure they use and utilizes public-private partnerships to fund and operate significant projects.
A version of this column first appeared in Public Works Financing.