Federal Support for Financing State and Local Transportation and Water Infrastructure

State and local governments are the main owners of highways, mass transit systems, airports, and water systems nationwide. In recent years, 60 percent of the investment in such infrastructure that state and local governments have made from their own funds (excluding federal grants) has been financed using mechanisms that impose costs on the federal government: tax-exempt bonds, state revolving funds and infrastructure banks (“state banks”), tax credit bonds, and direct federal credit programs.

Use of Federally Supported Financing Mechanisms. On average between 2007 and 2016, states and localities invested $64 billion per year (in 2017 dollars) in transportation and water infrastructure using those financing mechanisms:

• $43 billion per year in tax-exempt bonds,
• $9 billion per year in loans by state banks,
• $8 billion per year in tax credit bonds (all from $82 billion of Build America Bonds sold in 2009 and 2010), and
• $4 billion per year from federal credit programs.

Federal Costs. The likely future costs of those mechanisms to the federal government are measured as discounted present values per dollar of financing provided. For tax-exempt bonds and state bank loans, CBO projected the federal cost of 20-year financing in 2023, a representative future year.

• Tax-exempt bonds cost an estimated 26 cents per dollar financed.
• The estimated cost of state bank loans depends on the source of funds: 23 cents for loans made directly from banks’ capital funds or from repayments of previous loans, and 43 cents for loans made from the proceeds of tax-exempt bonds issued by the banks (which accounted for about a quarter of state banks’ lending during the 2007–2016 period, CBO estimates).
• No tax credit bonds for transportation or water infrastructure have been issued since 2010. The cost of a future program would depend on its authorizing legislation. Tax credit bonds that provided the same amount of support as tax-exempt bonds would cost the federal government an estimated 19 cents per dollar for 20-year financing in 2023.
• The cost of direct federal credit programs depends on their loan portfolios. To date, loans made by the largest program have cost an average of 7 cents per dollar financed, as measured under the Federal Credit Reform Act of 1990. Under an alternative measure that accounts for the market value of financial risk, CBO estimates that cost to be 33 cents.

Other Characteristics. Financing mechanisms differ in the source of the federal support they provide—discretionary spending, mandatory spending, or provisions of tax law—and in their attractiveness to particular state or local borrowers. Tax-exempt bonds have the fewest restrictions on their use, but other mechanisms may offer different advantages, particularly for small borrowers.