What the Penn-Wharton Study Missed About the Trump Infrastructure Plan

What the Penn-Wharton Study Missed About the Trump Infrastructure Plan

March 01, 2018  | Jeff Davis

March 1, 2018

On February 22, economists at the Wharton School of Business released a brief analysis (the Penn-Wharton Budget Model analysis) of President Trump’s infrastructure plan. While the study does average a diverse array of economic models of the added economic value of federal infrastructure grants, the analysis also reveals a fundamental misunderstanding of how federal credit programs work that calls into question the overall conclusions of the work.

The analysis (which prompted a devastating Washington Post headline on February 23, “The math in Trump’s infrastructure plan is off by 98 percent, UPenn economists say”, which was quoted by Senator Tom Carper (D-DE) to Transportation Secretary Chao in a hearing earlier today), had the following conclusions:

…based on previous experience reviewed herein, most of the grant programs contained in the infrastructure plan fail to provide strong incentives for states to invest additional money in public infrastructure. Indeed, an additional dollar of federal aid could lead state and local governments to increase infrastructure total spending by less than that dollar since state and local governments can often qualify for the new grant money within their existing infrastructure programs. We estimate that infrastructure investment across all levels of government, including partnerships with the private sector, would increase between $20 billion to $230 billion, including the $200 billion federal investment.

We estimate that the plan will have little to no impact on GDP.

However, buried in the text of the analysis was this note:

The literature, which focuses on how state and local governments respond to federal grants, probably understates the additional infrastructure generated by these types of credit programs.

That turns out to be an understatement. To understand why, you have to understand how the budgetary treatment of federal credit programs differs from that of grant programs.

For a grant program, the amount of money appropriated by Congress for the program (or the amount of non-appropriated contract authority provided) bears a relationship of about 1 to 1 to the size of the check that the Treasury writes to the grant recipient. There may be deductions of a percent or less for program overhead and oversight, but the important thing is that the size of the check written by the Treasury to the grant recipient can never exceed the amount of the appropriation or other budget authority provide by Congress.

Federal credit programs don’t work that way at all. Since the Federal Credit Reform Act of 1990 (FCRA), the face value of federal loans is no longer recorded in the federal budget. Instead, Congress only has to provide money to cover the “subsidy cost” of the loan. These costs frequently total less than 10 percent of the face value of the federal loan. So the check written by the Treasury to the state or local government can be 10 or more times greater than the amount of appropriation or other budget authority provided by Congress.

The Trump plan proposes $14 billion in budget authority for loan credit subsidies. The actual subsidy rates won’t be determined until later (they are done on a case-by-case basis by OMB and the lead agency), but the amount of checks that would be written to state and local governments would vastly exceed that $14 billion even under the most conservative assumptions.

The Penn-Wharton analysis assumes that the $14 billion for credit programs (combined with $6 billion to cover the cost of lost tax revenue for increased risk of private activity bonds) would lead to between $10 billion and $30 billion in net total infrastructure spending (inclusive of the $20 billion in federal appropriations or lost tax revenue). But this is based on the misconception that the size of the appropriation is equal to the size of the check written to state or local government partners, which is true for grant programs but manifestly not true for credit programs.

(Most of the studies cited by the Penn-Wharton model were published before FCRA so they wouldn’t be able to take into account the face value vs subsidy cost differential that now exists.)

For a real-world example, there is no need to look at hypothetical economic models. We can look at actual facts – the amount of subsidy funding used by the TIFIA surface transportation credit program to date versus the size of the loan checks the program has written.

From the inception of the TIFIA program in fiscal 1999 through the end of fiscal year 2017 last October, the TIFIA program has used $1.9 billion in budget authority provided by Congress through Highway Trust Fund contract authority or ARRA stimulus appropriations. But it has made direct loans of $28.75 billion over the same period. That means that every dollar of budget authority used by the program led to over $15 of direct loans for infrastructure projects. And this is in the real world, not in an economic model.

Actual TIFIA Subsidy Funding Used vs.Direct   Loans Made
(Millions of dollars.)
FY Subsidy BA Loan Levels
2017 202 3,851
2016 109 2,180
2015 223 2,982
2014 447 7,391
2013 182 2,138
2012 53 1,398
2011 12 472
2010 167 2,158
2009 86 990
2008 154 1,019
2007 30 766
2006 4 42
2005 18 138
2004 0 0
2003 10 140
2002 16 573
2001 96 874
2000 52 765
1999 35 873
TOTAL 1,896 28,750
Source: the Analytical Perspectives volume of the Budget of the United States for each year 2001-2019.

According to the project lists on the TIFIA website, the TIFIA loans were used as part of transportation projects with a total cost of $108.3 billion, so the TIFIA loans would up being about 26.6 percent, on average, of the total cost of the project. The loan proceeds were usually combined with federal highway or transit formula funding and state or local revenues or other borrowing, or a public-private partnership component as well.

TIFIA and other loan programs are not a panacea. For years, the program has had trouble finding enough projects that qualify for the loans in order to utilize all its available subsidy funding. (The Trump plan would make more kinds of projects, like airports, ports, commuter rail, and new kinds of water projects eligible for federal infrastructure credit programs.) And one can’t argue with a straight face that none of these projects would have been build in the absence of a federal loan – often, state or local governments would probably have found some other way to finance the project at a greater cost.

But the Penn-Wharton analysis errs in assuming that $14 billion in subsidy appropriations for a federal credit program behaves anything like an appropriation of similar size for a grant program. The economic effects of the same amount of money appropriated for a credit program could be an order of magnitude higher than the economic effects of an identically sized appropriation for a grant program, because of the accounting rules put in place by the FCRA law in 1990. At a minimum, Penn-Wharton should be using the estimated loan levels made available by the $14 billion, not the $14 billion itself.

Share

Related Articles

Manchin Says He Won't Support Reconciliation Bill, Leaving Democrats in Limbo

Manchin Says He Won't Support Reconciliation Bill, Leaving Democrats in Limbo

Senator Joe Manchin (D-WV) made headlines yesterday when he very publicly withdrew his support from the pending budget reconciliation bill,...

House Returning August 23 to Vote on Budget, But Infrastructure Bill Is Entwined

House Returning August 23 to Vote on Budget, But Infrastructure Bill Is Entwined

This week, House leaders announced that the House of Representatives will break from its scheduled August recess and return to Washington...

Rapid Response Webinar: What’s in the Bipartisan Infrastructure Bill for Transportation?

Rapid Response Webinar: What’s in the Bipartisan Infrastructure Bill for Transportation?

The 2,702-page bipartisan infrastructure bill, which includes a full surface transportation reauthorization bill and a $180+ billion...

Debt Limit Complicates This Year's Fiscal Endgame

Debt Limit Complicates This Year's Fiscal Endgame

As if a 50-50 Senate, a five-seat majority in the House, a bipartisan infrastructure bill written outside the committee process, and a $3.5...

House Will Let Senate Go First on FY22 Budget Blueprint

House Will Let Senate Go First on FY22 Budget Blueprint

House Budget Committee chairman John Yarmuth (D-KY) made it official this week: he is calling off his plans to have his panel mark up a...

The Sanders

The Sanders "$6 Trillion Budget" - What Would It Look Like?

Last week, news reports circulated of a "$6 trillion" budget outline being produced by Senate Budget Committee chairman Bernie Sanders...

President Biden's First Budget: An Overview

President Biden's First Budget: An Overview

When the fiscal 2022 federal budget was (finally) released last Friday, I of course spent the first few days (Memorial Day weekend) looking...

Budget (Finally) Shows Full Scope of Biden's American Jobs Plan

Budget (Finally) Shows Full Scope of Biden's American Jobs Plan

The full range of budget documents released on Friday, May 28 finally make clear the full scope of the Biden Administration's "American...

Biden Proposes $88 Billion USDOT Budget for FY22

Biden Proposes $88 Billion USDOT Budget for FY22

President Biden's first budget request has asked Congress to provide $88.2 billion in gross discretionary budgetary resources for the U.S....

Key Themes in Senate Banking Hearing Include Equitably Rebuilding Communities, Surface Transportation Reauthorization

Key Themes in Senate Banking Hearing Include Equitably Rebuilding Communities, Surface Transportation Reauthorization

The Senate Banking, Housing, and Urban Affairs Committee held a hearing to discuss infrastructure investments on May 20. Witnesses included...

Opinion: Republicans make Biden an infrastructure offer he has to refuse

Opinion: Republicans make Biden an infrastructure offer he has to refuse

Republicans are actually proposing to cut public transit funding to levels below the existing baseline, according to calculations from...

Apples to apples, the Senate GOP infrastructure proposal is smaller than it appears

Apples to apples, the Senate GOP infrastructure proposal is smaller than it appears

Jeff Davis breaks down current federal infrastructure proposals from the Biden administration and the GOP.

Be Part of the Conversation
Sign up to receive news, events, publications, and course notifications.
No thanks