Fix the Pensions, Fix the Tunnels
If states reduced their unfunded liabilities, they could afford to invest more in infrastructure.
The hallmark of President Trump’s second year in office is supposed to be infrastructure. On February 12, the White House released its blueprint for, as Trump put it last June, “new roads, bridges, tunnels, airports, and railways gleaming across our very, very beautiful land.” Though it offers some changes to business as usual, the plan isn’t ambitious enough. The key to long-term success in fixing America’s physical assets is to stop treating three problems — decaying bridges, soaring public-sector pension costs, and fraying private-sector retirement security — as separate. They are inextricable.
The purported White House outline starts off promisingly. It acknowledges what many transit and other infrastructure advocates have acknowledged since the Obama-era stimulus program: Money isn’t sufficient to solve our infrastructure woes. To ensure that states use new federal money wisely, the program would rank projects for funding, in part, according to whether their sponsors, usually state governments, could reduce the risk of cost and schedule overruns. They could do so by updating procurement policies, for example, so that one bidder couldn’t undercut others and then make up the difference in “change orders,” which require more money, once a contract was well under way. State governments could also change procurement policies to avoid having dozens of contractors and subcontractors working on the same project at the same time, often at cross-purposes.
The plan would also encourage more private-sector management of government projects. New York State, plagued by high costs, has already moved toward such measures. A private group is building a new, $4 billion central terminal at LaGuardia Airport, and will also manage the new terminal. On the Tappan Zee Bridge–replacement project north of New York City, too, private builders have taken the risk that the project, now nearly complete, would run over cost and schedule. Traditionally, taxpayers shoulder such risk.
The outline acknowledges another reality. States often take federal money without knowing where the rest of the funding for a project will come from, saddling their own taxpayers with debt, and higher taxes and fares, years later. New York State is a good example here, too. Four years ago, it secured a $1.6 billion federal loan to replace the Tappan Zee. But the state has never said where it will get the remaining $2.4 billion for the project or, for that matter, how it will repay the federal loan. After short-term gimmicks run out, tolls on the bridge will have to go up. There’s nothing wrong with that, but taxpayers deserve to know. To that end, the White House, in awarding funding, would heavily weigh a state’s ability to “secure and commit new, non-federal revenue to create sustainable, long-term funding” as well as how a state would “secure and commit new, non-federal revenue for operations, maintenance and rehabilitation” of a project once built.
For all these nascent good signs, however, the proposal doesn’t overcome what has always been the biggest flaw of the Trump infrastructure initiative: Although money isn’t everything, it does matter. And for all the campaign talk about a trillion dollars in investment, the administration has still not proposed to spend enough money for Americans to see a noticeable difference in infrastructure quality.
The White House proposes to increase federal spending by $200 billion over a decade, or $20 billion a year, and attracting another $1.3 trillion over the same decade, or $130 billion a year, in private-sector or state and local dollars.
These numbers need some context. Washington is already spending about $100 billion on infrastructure each year, according to the Congressional Budget Office. State and local governments spend an additional $300 billion. Increasing Washington’s contribution by 20 percent wouldn’t be transformative — especially considering that private-sector initiatives, though worthy, won’t make up the gap. Airport projects in major cities can attract private-sector investment because investors see future airline fees as a stable source of revenue. Some toll roads fit this definition as well. But private investors are largely uninterested in dams, mass transit, and local roads, because such projects do not pay for themselves.
The Trump plan also contains a worrisome provision for the East Coast’s marquee project. Amtrak, New York, and New Jersey need to build a new rail tunnel under the Hudson River to shut down the existing tunnel for repairs. The tunnel is a critical part of national infrastructure; interstate trains traversing Washington to Boston use it, as do commuters coming to New York City. An Obama-era agreement would have had the feds pay half the cost, which could be $13 billion. Yet the new document limits the federal contribution to any one core infrastructure project to 20 percent, lower than the historical average of 30 to 40 percent for projects such as the Second Avenue Subway. That means the states must pay more.
Two hundred billion dollars in federal funding is especially inadequate when one considers these numbers against the state and local crisis that could define the next generation: pension and health-care costs. As of 2015, the last full year for which complete data are available, states had funded only 72 percent of their future obligations to government workers, according to the Pew Charitable Trusts. That leaves a $1.1 trillion deficit. On health care for public-sector retirees, states owe $646 billion.
In states from New Jersey to Kentucky, these numbers mean real, looming cash calls of billions of dollars a year. New Jersey, for example, has set aside just 30 percent of the money it needs to fund pension payments, according to a new Manhattan Institute study. New Jersey taxpayers face a grave risk. A mild recession could mean that in a few years it would have to triple, or more, its current $2 billion annual pension contribution just to pay current retirees, let alone set aside money to grow for the future tab. This is a state that, along with New York, is supposed to come up with new revenues, under Trump’s proposal, to fund the Hudson Tunnel. And it’s not just blue states that are distressed by retirement liabilities: Kentucky, for example, has funded just 38 percent of its pension obligations, and South Carolina, 58 percent. States that have funded their pensions in the range of two-thirds or so — Alabama, Alaska, Indiana, Louisiana, and New Hampshire among them — could benefit from some modest shoring up.
There is a way, though, for the White House and Congress to ease, if not solve, this crunch: Offer states credit, in the form of more federal infrastructure money, if they pare back their pension and health-care obligations to future retirees. States that gradually move newer workers to 401(k)-style accounts with low-fee investment options, for example, should get some percentage of that money now, to invest in projects that will pay off in the future. States that pare back future health-care liabilities would receive a similar reward.
Of course, paring back future health-care costs over time is easier than cutting pension costs. America already has a public-sector health-care program for people deemed too old to participate in the workplace: Medicare. Most private-sector retirees are happy with it. There’s no justification for those who pay state and local taxes to subsidize private health care for government workers who choose to retire before 65, a big driver of future liabilities. And there’s no justification for some states and cities to force their taxpayers to pay for private health care for older retirees when the federal government set up Medicare for just that purpose.
When it comes to retirement income, though, private-sector efforts to supplement Social Security are a mess. As AARP reports, half of American workers don’t have a workplace retirement plan, even a 401(k). Only 22 percent of Americans with such access have saved $100,000 or more, according to the Employee Benefit Research Institute.
To address this problem, Washington should return to an old idea: creating a way for workers and spouses to create voluntary private savings accounts alongside their Social Security contributions, via an extra payroll deduction. A good start would be to give people the option of diverting the extra money most will soon see in their paychecks thanks to the Christmas tax cut. Private-sector managers could invest such money broadly, on a low-fee basis, in a range of stocks and physical assets — including infrastructure — designed to track the larger economy. With such savings plans, state and local unions would have no reason to use their political power to insist on a separate and unequal system for their workers: Why isn’t what taxpayers get good enough for them, too?
The climate in Washington is hardly ripe for bipartisan, big-picture thinking. But a real possibility exists here. Blue states with some of the worst pension woes — Connecticut and Illinois, in addition to New Jersey — need a constructive way to reduce their obligations before they run out of money to provide even basic public services. Some supporters of the tax law’s elimination of the federal deduction for state and local taxes above $10,000 annually claim that cutting off the money is how to do it. But that radical change did nothing to address the long-term nature of these entrenched liabilities.
A deal here could mean real money for infrastructure. If states were to pare back their pension and health-care liabilities by, collectively, just 25 percent, and if the federal government were to match the savings by half, the United States would have another nearly $200 billion for such projects over a decade, matching Trump’s reported federal-spending proposal. By addressing this problem now, the country can build the physical assets it needs to support a growing tax base, which it needs to support the pension and health burdens that remain.
This piece originally appeared at National Review Online
This piece originally appeared in National Review Online