WASHINGTON -- Public works programs are back in style, but 1991 is turning out to be a year of greater promise than gain for the public works finance community.
"Infratructure" -- the once obscure technical term used to describe the vast network of transportation and water systems built by public works programs -- this year has become a fashionable cause in Washington and a new buzzword.
Members of Congress have cited the decaying infrastructure as their reason for proposing everything from raising the federal gas tax to finance a new multibillion-dollar surface transportation program to rolling back 1986 tax-exempt bond curbs and investing Social Security's $300 billion surplus in municipal bonds.
"Rescruing America's crumbling infrastructure' has become part of the imagery of American political discourse," said Sen. Daniel Patrick Moyniha, D-N.Y., chairman of the Senate's infrastructure sub-committee and author of the Senate highway bill.
"When we say infrastructure, the Latin prefix of 'infra' meaning 'under,' this is what everything else rests on. Doing it right is not a mundane thing. If you do it right, it is brilliant," he said.
The year promised, at first, to be more than one of just flourishes and rhetoric. House Speaker Thomas Foley, D-Wash., announced in January that infrastructure would be one of the House's top legislative priorities. He called on all House committee chairmen to come forward with initiatives.
"I believe we're tragically behind in catching up to the deterioration of the physical infrastructure of the United States -- highways, airports, various kinds of public facilities. It's important for the future health of the economy and the competitiveness of the economy that the infrastructure not be allowed to deteriorate further," he said.
With the economy reeling in recession, Democrats were quick to respond to his call and pick up on the theme, sounded for years by private economists, that the buckling infrastructure is hurting U.S. competitiveness and productivity and impeding long-term economic growth.
President Bush, not to be outdone by congressional Democrats, also made infrastructure investment the centerpiece of his domestic spending program. In February, he proposed a massive expansion and reauthorization of the highway and mass transit program. The largest federal infrastructure program, it is due to expire on Sept. 30.
An unusual bidding war developed between Congress and the President over who would spend the most money on the program. The President weighed in with a $105 billion, five-year spending blueprint -- a figure the Senate in little time inflated to $123 billion. But House leaders took the cake with their proposed $153 billion program, which would be financed in part with a 5-cents-a-gallon gas tax increase that they billed as "a nickel for America."
With so much new money available, and everyone intent on speedily passing the mammoth highway bill, hopes soared early in the year that the bill would be used as a vehicle for major infrastructure finance initiatives, such as the creation of state revolving loan funds or an easing of tax law restrictions on infrastructure bonds.
All sides acknowledged that bonds play a vital but costly role in financing infrastructure. According to the National Council on Public Works Improvement, bonds are used to finance about half of all infrastructure projects, while they account for up to 40% of the estimated $110 billion state and municipal governments spend each year on such physical investment.
Providing further impetus for bond reforms was the belief that state and local government would have to be recruited in the infrastructure effort, if Congress was to put a dent in the estimated $2 trillion of road and transit projects needed to correct a decade of neglect and disinvestment.
Interest in the bond area was so intense that, at one point in the spring, the House leadership explored the possibility of using the bill's proposed gas tax increase -- which would raise about $33 billion over five years -- to leverage between $40 billion and $50 billion of state and local bonds through a huge new infrastructure revolving fund program.
The idea came up at an unusual brainstorming session in the Capitol building, called together by House Majority Whip William Gray, D-Pa., and attended by Lazard Freres & Co. partner Felix Rohatyn, House Majority Leader Richard Gephardt, D-Mo., and several House Public Works and Transportation Committee members.
Mr. Rohatyn said in a brief interview last month that he suggested at the meeting that House leaders put the revenues raised from the new gas tax into a trust fund that could be used to back the issuance of bonds.
"It was a fairly simple suggestion. What state and local governments need are ways to deal with debt service. They have very little new borrowing capacity because of their budgetary problems. You could use the gas tax to pay the principal and interest on the bonds," he said.
Mr. Rohatyn acknowledged that the proposal would be controversial on the congressional tax committees because, among other things, it would use federal funds to pay off tax-exempt bonds -- which is currently prohibited under tax law.
"We left it open whether the interest would be taxable or tax-free," he said.
But Mr. Rohatyn's suggestion was never refined or developed, and its fate would foreshadow other disappointments during the year for the public finance community.
According to Rep. Norman Mineta, D-Calif., the surface transportation subcommittee chairman who drafted the highway bill, one concern the House leadership had with Mr. Rohatyn's idea is that it would seem unjustified to use the federal gas tax revenues largely to pay interest on the bonds over a 20-year period. "We just couldn't do it," he said.
Craig Hanna, legislative assistant to Rep. Gephardt, said the leadership in exploring the revolving fund idea ran into resistance from House members who liked the "status quo" and would not support transforming the traditional highway grant program into a major new leveraging program.
"We realized we were swimming against the tide to sell this thing," he said. "A lot of members aren't keen on messing with the highway trust fund," which holds the gas tax collections and traditionally has been devoted entirely to making federal grants, he said.
While exploring the revolving fund idea turned out to be mostly an "academic exercise" this year, Mr. Hanna said Rep. Gephardt is still interested in pursuing the proposal in future legislative sessions. Its success largely depends on whether a revenue source can be found to finance it, he said.
A revolving fund proposal by public works committee member Robert Borski, D-Pa., also fell by the wayside this year when the committee drafted the highway bill. Rep. Borski, who had attended the meeting with Mr. Rohatyn, wanted to create either state or federal revolving loan funds to issue up to $60 billion of transportation infrastructure bonds.
But Rep. Borski never offered an amendment in the committee's markup of the bill late last month. "I wouldn't have gotten to first base with it," he said afterward. "The bill was moving so fast, it got beyond us. We just didn't have time to flesh the idea out," he said.
Like the Rohatyn proposal, Rep. Borski acknowledged that his amendment might have generated "a whole lot of problems," questions and controversy, which would have delayed enactment of the highway bill. The House leadership, by late July, was single-mindedly intent on getting the bill passed in the full House before the Labor Day recess that started Aug. 3.
Hopes of attaching amendments to the bill that would ease the tax curbs on infrastructure bonds also fell victim to time pressures and a long-standing jurisdictional rift in Congress, despite the good intentions of the House leadership, congressional aides said.
Public works committee members had studied the possibility of either including such reforms in the highway bill or recommending that they be included in the bill when they referred it to the House Ways and Means Committee for action on the gas tax. But such a procedure was resisted by the tax committee's powerful chairman, Rep. Dan Rostenkowski, D-Ill., aides said.
"It came down to a turf fight," said one aide, who asked not to be named. "The only real hope we had to take care of the jurisdictional problem was for Foley to intervene" and encourage cooperation between the committees, the aide said. But that never happened.
Also, time did not permit the tax committee to debate one suggested reform, which would have reclassified infrastructure bonds as governmental bonds, permitting more private involvement and benefit in infrastructure projects that are mandated by federal law, aides said. This radical reform would have involved rolling back the 1986 Tax Reform Act's private-activity limits and state volume cap restrictions for infrastructure bonds.
Because the public works committee delayed the bill for months as it bickered over its complex spending provisions and formulas, the tax committee received it only at the last minute before the Labor Day recess began and had only two days to deliberate over the tax provisions.
"There's no way you could debate something like privatization in two days," the aide said. "That is not something you want to do on a slipshod basis. The issue is so controversial because of the room for the kind of abuses" that prompted enactment of the 1986 law, he said.
So the bill slipped through the ways and means committee on July 31 with nary a word said about bonds. In fact, the committee was consumed the whole time in argument over the gas tax increase, which passed only narrowly and proved to be far more controversial than House leaders had expected.
Opposition to the proposed tax increase among both Republicans and Democrats in the House was so widespread that, along with some last-minute budgetary roadblocks, it forced the House leadership to postpone a full House vote on the bill until Congress returns next week.
But though the bill still awaits final approval in the House and faces a long conference with the Senate, the best hopes for including bond reforms or programs evaporated before the recess. Congressional aides say that with only weeks left in the legislative session, it looks like 1991 will be another year of all talk and no action on infrastructure finance.
"The highway bill was not the window of opportunity we hoped it would be" for enacting a far-reaching new revolving fund program, Mr. Hanna said. But Mr. Gephardt will continue to refine and push the proposal in future years, perhaps tapping some revenue source other than the gas tax to finance it, he said. "It's not something we would back away from now," he said.
Rep. Borski agreed that the House bill turned out to be a disappointment. While it and the Senate bill, which passed in June without any bond provisions, substantially rewrite the laws governing transportation, they both steer clear of establishing any innovative mechanisms for financing it in the future, he said.
Like Mr. Hanna, Rep. Borski held out hope that the revolving fund idea would take hold in the future. He said it might attract renewed attention if Congress fails this year to authorize the substantially higher highway spending that would be financed with the proposed gas tax increase.
"If we don't get the nickel, then you'll see more built-up frustration, more pent-up need for infrastructure investment" that will create a natural constituency for a program designed to stretch federal dollars, he said.
Failure to pass the gas tax his year might also give proponents of tax-exempt bond reform the time they need to drum up a consensus for change in the bond area, the tax aide added. Such reforms could be attached to the gas tax proposal the next time it goes through Congress, he reasoned.
The fate of the gas tax proposal is one of the major issues that hangs in the balance as Congress returns and gets back to work on the highway bill next week. The President has vowed to veto the tax increase, and Senate leaders have said they would not support it unless it passes the House with a high enough margin to overcome a veto.
With scant evidence that the proposal would draw such overwhelming support, Mr. Hanna said it is possible that the House leadership will sever it from the highway bill even before it goes to the floor for a vote.
Meanwhile, the highway bill as it is shaping up in both houses contains some good news for state and local government officials. It appears on track to greatly increase federal spending on transportation, which in itself will stimulate more state and local spending and bond issuance, according to the National Governors' Association.
In addition, both the House and Senate bills would provide a minimum of 80% federal funding for transportation projects, although the administration had been pushing to lower the federal share to as little as 60% in an effort to force more leveraging by state and local governments. The governors association and municipal groups have hotly opposed lower funding shares, saying it would bankrupt municipal governments.
And both bills would provide localities with far more flexibility to decide how to use the funds, enabling them to finance all kinds of innovative projects in the future, from toll roads to high-speed rail.
