Why Infrastructure is a Revenue Challenge for Cities
Guest columnist Jen Mayer shares insights on revenue generation for infrastructure projects gleaned from city-led best practices and cutting-edge investment strategies.
Now that tax reform is over, Capitol Hill is likely to turn to the challenge of financing our nation’s crumbling infrastructure. The trouble is, it’s not really a financing challenge.
There are plenty of capital sources, domestic and foreign, eager to lend to infrastructure projects, including the U.S. municipal bond market, which emerged largely unscathed from tax reform. While the bill prohibited advance refunding of municipal bonds, the tax-exempt status of private activity bonds important for higher education, hospital and industrial developments was preserved.
Yet whatever happens next in Washington, DC.., it’s not likely to resolve the decades-long need to raise the Federal gas tax or find another new source of revenue for infrastructure. Congress may well change how existing funding is allocated, expand Federal credit programs and facilitate public-private partnerships. But local governments will have to find the revenue to pay back any financing. That task may be exacerbated by the limits placed on State and Local Tax Deduction (SALT) deductions that could make raising local taxes even more difficult.
What can local governments do to raise revenue for infrastructure?
The third City Accelerator, an initiative led by Living Cities and supported by the Citi Foundation, recently focused on infrastructure finance challenges in four U.S. cities, and identified three key strategies:
- Tap future value created by infrastructure
- Monetize assets
- Capture operational cost savings
#1 Tap Future Value Created by Infrastructure
Public infrastructure investment creates enormous value for landowners. Usually that value doesn’t come back to the infrastructure agencies that create it. Studies conducted on behalf of San Francisco’s Bay Area Regional Transportation Agency (BART) by Strategenomics, Inc., found that a condominium within a half-mile of a BART station is worth 15 percent more than a condominium located more than 5 miles from BART, all other things being equal.
As with transportation projects, transformative infrastructure reuse efforts like the High Line in New York City, the Belt Line in Atlanta or the 606 in Chicago are also likely to result in property value increases. Cities may be able to dedicate the increased property tax generated from this increased value to pay for the projects that create it.
#2 Monetize Assets -- Existing and Newly-Created
Many communities are “sitting on their assets,” whether surplus land, facilities or equipment. In some cases, these assets are under the control of individual city departments, and there is no centralized registry or process to ensure that they are being used to the greatest benefit possible.
By providing incentives to individual departments (such as awarding them a share of the proceeds), cities may be able to create revenue from development of underutilized sites. Surplus land around facilities can be used to fund reconstruction or rehabilitation. In the case of the Long Beach Civic Center, construction was primarily funded by private development of the site of the old civic center. Under the transaction, the city’s cost for a new civic center was limited to its existing outlays for operations and maintenance.
A city may also be able to realize value from swapping parcels with the private sector. For example, valuable, well-located land may be used for a purpose -- such as parking cars or storing maintenance vehicles -- that could be relocated to a lower cost location. The original sites could then be sold or leased for a higher use, such as a retail mall or hotel, and generate enough funding to construct a facility at a new site, or for other projects.
In 2015, the city of Portland, Maine, swapped a city-owned parking lot for a parcel that would enable them to relocate their public works department that was located in a prime downtown area. The swap freed up the former public works site for higher-value waterfront redevelopment, increasing economic activity and property values.
#3 Capture Operational Cost Savings
Operational cost savings can be used to pay back the cost of infrastructure that creates the savings. Energy Savings Agreements (ESAs) are already using energy cost savings to pay for modernized lighting, heating and other efficiency improvements. This trend may expand further to include infrastructure improvements where the cost savings are less direct, but no less real.
For example, reduced first responder and medical costs could pay for safety improvements at intersections. Urban parks could be paid for with a combination of reduced health and stormwater costs and increased property value from better aesthetics.
These are just a few examples of the tools and concepts presented in Resilience, Equity and Innovation: the City Accelerator Guide to Urban Infrastructure Finance.
Review and download the full report: