Higher Interest Rates Could Keep Highway Trust Fund Afloat Another Year After IIJA Expires
Just as The Great Inflation of 1967-1982 holds precedents and lessons that could greatly affect infrastructure spending in the real world, it also holds some precedents for the not-quite-real world of federal trust fund accounting. These lessons were telegraphed by the year-end financial reporting for the Highway Trust Fund released last week.
The lesson is: when the Federal Reserve increases interest rates to fight inflation, the Treasury Department has to pass those higher rates to the special securities in which the balances held by federal trust fund accounts are invested. And if any of those trust funds have artificially high balances, that interest can compound and add up quickly.
During The Great Inflation, Highway Trust Fund balances had been held artificially high by presidential impoundments – the refusal to allow states to obligate and spend contract authority that was already on the books, leading to ever-increasing annual rollovers and larger Trust Fund carryover balances. This was made worse by an interest rate environment that, in 1981 (the last year in which the law required Treasury to make a specific report on the subject), the securities held by the HTF paid a spread of annual rates between 11.6 and 12.1 percent per year. In 1981, the Trust Fund earned almost as much in interest than it did from the diesel fuel tax and the excise tax on new trucks and trailers, combined.
We aren’t there yet. But today, the Trust Fund balance is artificially inflated since the IIJA added a $118 billion bailout transfer to the Trust Fund that was processed in December 2021, taking the end-of-month balance for the Trust Fund from $18.1 billion on November 30 to $135.8 billion on December 31. That $118 billion was supposed to gradually spend down until just after the IIJA authorization period expires in September 2026.
But the Federal Reserve’s belated interest hikes to control inflation have officially started to affect balances. The Trust Fund was credited with $275 million in interest in September alone. Times 12 that is an annual rate of $3.3 billion per year. Simply multiply that times four years and you get an extra $13.2 billion cash on hand at the end of the Infrastructure Investment and Jobs Act, which would push the next insolvency date for the Highway Trust Fund (per the latest Congressional Budget Office baseline) from fiscal 2027 into fiscal 2028.
But we’re just getting started. Check out the estimated rate of growth of the interest rate being paid. We looked the Treasury Department monthly reporting of invested security balances (and we had to do it in the middle of the night because the data is on the same Treasury website that sells those inflation-protected I-bonds that are paying an astounding 9.62 percent, which causes the website to completely crash during the business day). We correlated with the interest paid on those start of monthly balances to get a monthly rate and then simply multiplied by 12.
(In real life, the Trust Fund probably holds a blend of different securities with different due dates and interest rates. For comparison, check out the blend of the securities held by the Social Security Trust Fund.)
Here are the last six months of apparent interest rates being paid on Highway Trust Fund balances, in millions of dollars:
|of Month||Paid||Interest As||Times 12|
|Invested||for That||Percent of||For Annual|
And there is no reason to think it is going to stop at 2.5 percent. The one-year Treasury bill went from near-zero at the time the IIJA was signed in November 2021 to 2 percent around Memorial Day 2022 to 3 percent in mid-June to 4 percent by the end of the fiscal year in late September. As of today, the rate is 4.54 percent, and rates in that ballpark will eventually trickle through to the blend of securities held by the Trust Fund.
That aforementioned CBO projection of Trust Fund cash flow, issued in May 2022 from an economic forecast that was slightly earlier, projected Highway Trust Fund interest payments on the bloated IIJA balance would be a bit less than $2.0 billion in fiscal 2023, or around $160 million per month. The next forecast will probably have to at least double that.