93362 THE POWER OF PUBLIC INVESTMENT MANAGEMENT' Transforming Resources into Assets for Growth C O U N T RY C A S E S T U D Y United States: Infrastructure Investments by State Governments – Grading the Decision Process John E. Petersen and Ha T.T. Vu 2012 0 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! THE AUTHORS John E. Petersen Professor, George Mason University Ha T. T. Vu Public Financial Management Advisor, International Monetary Fund This case study is one of a number of country cases in the Public Investment Management Series. The country case studies accompany the volume, “The Power of Public Investment Management: Transforming Resources into Assets for Growth”, World Bank (2014), and apply a common methodology to assess PIM systems globally. T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 2 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! Abstract:+ .' UNITED STATES The fifty state governments, and their thousands of local government progeny in the U.S., are the primary providers of the roads, ports, airports, waterworks, waste treatment and disposal facilities and the myriad of other public facilities that support the economy, as well as protect human health and safety. The paper briefly describes the broad contours of infrastructure investment in the United States on a national basis and then examines the processes and outcomes of capital spending by state government level. State level infrastructure management has been subject to a “PIM” type review in a couple of recent surveys done by the Pew Foundation. The Pew survey results are presented and analyzed T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 3 ! COUNTRY CASE STUDY: UNITED STATES 2012 ! Infrastructure Investments by State Governments – Grading the Decision process ' ' This' chapter' examines' the' processes' and' outcomes' of' capital' spending' by' state' governments' in' the' United' States.' The' 50' state' governments,' and' their' thousands' of' local' government' progeny,' are' the' primary' providers' of' the' roads,' ports,' airports,' waterworks,' waste' treatment'and'disposal'facilities,'and'the'myriad'of'other'public'facilities'that'support'the'economy,' as'well'as'protect'human'health'and'safety.'As'with'any'largeTscale'governmental'activity,'there'are' always'questions'about'how'well'a'function'is'performed'in'accomplishing'its'manifold'objectives:' are' decisions' wellTinformed,' coordinated,' and' costTeffective?' In' the' case' of' public' investments,' these' issues' are' all' the' more' important' because' of' the' large' sums' and' long' horizons' involved,' which'make'them'particularly'significant'in'terms'of'their'consequences'for'an'economy.'Unless'the' vital' services' provided' by' infrastructure' are' effectively' performed' when' and' where' needed,' economies'will'flag'and'private'needs'will'go'unmet.'' The' following' sections' examine' the' general' contours' of' infrastructure' spending' and' financing'in'the'United'States.'With'a'couple'of'notable'exceptions,'most'of'that'spending'is'done'at' the'state'and'local'government'level.'Financing,'on'the'other'hand,'is'a'more'complicated'issue,'and' assistance' from' the' Federal' Government' plays' a' major' role.' ' An' assessment' of' infrastructure' decisionTmaking' examines' the' results' of' two' recent' surveys' of' state' governmental' management' practices'performed'by'the'Pew'Center'for'the'States'(2005;'2008).'These'surveys'contain'a'subset' of' factors' that' provide' indices' of' the' quality' of' infrastructure' planning' and' management' in' the' individual'states.'These'results'allow'comparisons'among'the'states'and'between'the'two'periods,' allowing'us'to'take'a'cursory'look'at'the'correlation'between'the'grades'and'other'characteristics'of' the'states.'Last,'several'case'studies'of'individual'states'are'reported'and'an'assessment'is'made'of' the' overall' results' of' the' Pew' studies' and' how' they' might' be' improved' upon' in' future' research' efforts.'' Overview+of+National+Spending+on+Infrastructure+ Examining'the'role'of'state'governments'in'infrastructure'spending'in'the'United'States'is'a' complicated' matter.' Complications' arise' from' the' nature' of' the' country’s' political' and' economic' structure,' which' assigns' responsibilities' for' such' spending' to' a' myriad' of' governmental' units,' which' are' compounded' into' three' tiers' of' government,' as' well' as' to' the' private' sector' in' certain' functional' areas.' The' subject' matter' is' further' complicated' by' the' various' definitions' of' “infrastructure,”'which'can'embrace'different'notions'of'which'capital'investments'should'count'as' rendering' longTterm,' essential' benefits' to' the' economy' or,' more' broadly,' to' society.' For' example,' there' is' wide' agreement' that' the' “core”' capital' facilities' that' provide' for' transportation,' water' supply,' sewage' treatment,' and' solid' waste' disposal' are' basic' ingredients' for' developing' and' maintaining'modernTday'economic'activity,'especially'in'urban'areas.'' However,' governments' also' require' capital' facilities' for' supporting' other' essential' activities,'such'as'education,'medical'care,'and'public'safety.'Moreover,'the'particular'nature'of'the' economic' system' prevailing' in' a' nation' may' result' in' various' essential' infrastructureTrelated' services' being' left' to' the' ownership' and' operation' of' the' private' sector.' In' the' United' States,' for' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 1 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! example,'electric'power'and'gas'supply'are'a'mixed'publicTprivate'function,'but'largely'left'to'the' private' sector' in' the' form' of' regulated' utilities,' and' telecommunications' has' only' minimal' government' involvement' in' providing' infrastructure.' In' similar' fashion,' hospitals' and' education' facilities' are' owned' and' operated' by' both' the' public' and' private' sectors.' The' definition' of' “infrastructure”' can' be' further' stretched' when' we' consider' such' assorted' items' as' prisons,' fire' stations,' general' office' buildings,' sports' and' entertainment' facilities,' and' postal' delivery' services,' which' are' items' of' public' use' capital' expenditure,' but' may' be' viewed' as' on' the' edge' of' “vital”' infrastructure.'' To'provide'context'to'the'role'of'state'governments'in'overall'infrastructure'spending,'see' Table' X.1,' which' provides' an' overview' of' total' infrastructure' spending' in' the' U.S.' economy' in' 2004.1'The'tabulation'is'based'on'the'sources'of'funds'for'infrastructure'spending'as'opposed'to'the' point'of'final'expenditure.'' Table+X.1++++Capital+Spending+on+U.S.+Infrastructure:+All+Sectors+by+Source+of+Funds,+2004+(US$% billions)% State+ and+ Infrastructure+spending+ Federal+ Local+ Private+ Total+ Highways+ 30.2' 36.5' 0.0' 66.7' Other+transportation+ 14.5' 16.5' 8.5' 39.5' Water+ supply,+ wastewater,+ natural+ resources+ 10.5' 31.5' 3.6' 45.6' Energy+ 1.7' 7.7' 69.0' 78.4' Telecommunications+ 3.9' 0.0' 68.6' 72.5' Schools+ 0.4' 75.5' 23.8' 99.7' Prisons+ 0.3' 2.6' 0.0' 2.9' TOTAL+ 61.5' 170.3' 173.5' 405.3' PERCENTAGE+COMPOSITION+ 15.20%' 42%' 42.8%' 100%' Source:'Based'on'CBO'(2008)'at'pp.'4T5.'For'definitions,'see'table'1'in'CBO'(2008)' ' Comprehensive' data' collected' for' 2004' indicates' that' total' capital' spending' from' all' sources' on' transportation,' utilities,' and' selected' other' public' facilities—specifically,' prisons,' schools,' and' facilities'related'to'water'and'other'natural'resources,'such'as'dams—was'around'$405'billion'in' 2004'(Table'X.1).'The'Federal'Government'financed'about'$60'billion'(including'federal'grants'to' state'and'local'governments),'or'roughly'15'percent'of'the'total.'State'and'local'governments'(net'of' the' federal' grants)' funded' 42' percent' of' the' investment,' and' the' private' sector' provided' the' balance.'(These'shares'vary'over'time'and'among'various'types'of'infrastructure'outlays.)' Spending' on' infrastructure' supported' by' federal' funds' is' dominated' by' transportation,' which' accounted' for' $45' billion' of' the' roughly' $62' billion' total' federally' funded' investment' in' infrastructure' in' 2004.' Highways' alone' accounted' for' nearly' half' that' total,' and' most' of' the' spending'is'in'the'form'of'transfers'(grants)'to'state'governments.2'Capital'spending'by'state'and' local' governments' that' year' was' primarily' for' schools,' highways,' and' water' systems.' Together' in' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 2 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! 2004' these' categories' accounted' for' about' $135' billion,' which' is' about' 80' percent' of' the' $170' billion' spent' on' infrastructure' by' state' and' local' governments.' In' contrast,' private' sector' investment' in' infrastructure' was' dominated' by' spending' on' energy' and' telecommunications' facilities,' which' in' 2004' represented' nearly' 80' percent' of' the' private' sector’s' total' infrastructure' spending' of' about' $175' billion.' Private' entities' provide' most' of' the' nation’s' electricity' and' telecommunications' services' (typically,' as' investorTowned' utilities' that' operate' under' federal' or' state'regulation)'and'account'for'nearly'all'capital'spending'by'those'types'of'utilities.' How!important!is!the!government!sector!to!overall!investment!in!the!U.S.!economy?!In!recent!years!the! combined!gross!investment!by!the!private!and!public!sectors!of!the!economy!has!been!equal!to!17–18! percent!of!GDP,!of!which!the!combined!state,!local,!and!federal!share!has!been!around!2.5!percent!of! GDP.!Of!private!gross!investment,!about!oneIthird!has!been!for!residential!housing,!a!fraction!that!has! declined!greatly!since!the!Great!Recession!of!2007–09.3!' ' State+and+Local+Government+Capital+Spending++ ' Table' X.1' indicates' that' as' a' source' of' funds,' states' and' localities' in' the' aggregate' are' responsible' for' a' little' over' 40' percent' of' infrastructure' spending.' However,' states' in' particular' have'a'much'larger'role'to'play'in'infrastructure'spending'than'is'indicated'by'these'numbers.'For' the'most'part,'the'Federal'Government'funds'are'passed'on'to'the'states,'which'are'used'as'agents' in' making' the' actual' infrastructure' spending' decisions' and' implementing' programs.4' Moreover,' local' governments' and' their' various' affiliated' authorities' and' districts' largely' operate' under' the' auspices' of' the' states,' and' they' themselves' are' frequently' the' agents' in' spending' grant' funds' provided' by' the' states.' Just' as' the' states' receive' large' grant' payments' from' the' Federal' Government,' local' governments' are' the' recipients' of' payments' from' the' states' to' carry' out' activities.'State'payments'to'localities'in'support'of'education'and'transportation,'in'particular,'are' important'sources'of'funds'for'the'building'of'schools'and'roads.'Table'X.2'provides'a'summary'of' state' and' local' government' capital' expenditures' as' of' fiscal' year' 2008.' As' the' table' shows,' total' capital'spending'by'these'governments'amounted'to'$307'billion'in'FY'2008.'It'should'be'noted'that' approximately'$60'billion'in'spending'represented'funds'transferred'from'the'Federal'Government' to' the' states' and' localities.' For' the' state' and' local' sector' as' a' whole,' funds' spent' on' all' forms' of' transportation' infrastructure' amounted' to' about' $120' billion' in' 2008,' or' about' 39' percent' of' the' total'capital'spending'by'the'sector.5'' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 3 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! + Table+X.2++++State+and+Local+Government+Capital+Outlays,+FY+2008,+US$+millions+ Capital+outlays++ State+and+Local++ State+ Local+ Highways+ 88,218'' 61,705'' 26,513'' Mass+transit+ 15,500'' 3,100'' 12,400'' Railroads+ 700'' 700'' Aviation+ 12,400'' ' 1,025'' 11,375'' Ports,+harbors+ 2,400'' 720'' 1,680'' + Local+water+supply+ ' 10,000'' ' ' 10,000'' Wastewater/sewers+ 18,777'' ' 601'' 18,176'' Solid+waste+ 2,372'' 255'' 2,118'' Natural+resources+ 6,755'' 3,024'' 3,731'' Parks+and+Recreation+ 11,672'' 1,192'' 10,479'' + Primary+and+secondary+schools+ ' 70,283'' ' 1,592'' ' 68,691'' Higher+education+ 26,953'' 22,494'' 4,459'' Prisons+ 3,550'' 1,954'' 1,596'' Hospitals+ 9,050'' 3,308'' 5,741'' + Subtotal+ ' 278,629'' ' 100,970'' ' 182,118'' Other+Unallocated+ 28,818'' 6,088'' 18,272'' TOTAL+CAPITAL+SPENDING+ 307,448'' 107,058'' 200,390'' Source:'U.S.'Census'Bureau'2008;'estimates'of'allocations'based'on'CBO'2008,'4–5;'other'sources.'''' + Table'X.3'provides'a'percentage'composition'of'the'capital'spending'by'state'governments' and'their'local'units'in'2008.'For'states,'higher'education'facilities'and'highways'make'up'most'of' their'direct'capital'spending'(80'percent).'For'localities,'primary'and'secondary'schools,'roads,'and' local'utilities'make'up'the'bulk'of'such'spending.'' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 4 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! + Table+X.3++++State+and+Local+Government+Capital+Outlays,+FY+2008,+%+by+government+level+ Capital+outlays+ State+ Local+ Highways+ 57.6' 13.2' Mass+Transit+ 2.9' 6.2' Rail+roads+ 0.0' 0.3' Aviation+ 1.0' 5.7' Ports,+Harbors+ 0.7' 0.8' + Local+Water+Supply+ ' 0.0' ' 5.0' Wastewater/Sewers+ 0.6' 9.1' Solid+Waste+ 0.2' 1.1' Natural+Resources+ 2.8' 1.9' Parks+and+Recreation+ 1.1' 5.2' + Primary+and+Secondary+Schools+ ' 1.5' ' 34.3' Higher+Education+ 21.0' 2.2' Prisons+ 1.8' 0.8' Hospitals+ 3.1' 2.9' + Subtotal+ ' 94.3' ' 90.9' Other+Unallocated+ 5.7' 9.1' TOTAL+CAPITAL+SPENDING+ 100.0' 100.0' ' Source:' U.S.' Census' Bureau' 2008;' estimates' of' allocations' based' on' CBO' 2008,' pp.' 4–5;' other' sources.'' For' this' analysis,' it' is' often' useful' to' distinguish' transportationTrelated' spending,' which' receives' the' bulk' of' federal' support,' from' other' types' of' infrastructure,' such' as' local' utilities,' which' are' almost'exclusively'financed'by'locally'raised'revenues.'Both'types'of'asset'promote'other'economic' activities;'adequate'roads,'for'example,'facilitate'the'transport'of'goods'from'one'place'to'another' and' thus' promote' economic' activity.' Local' utilities' that' provide' electricity,' telecommunications,' and' waste' disposal' are' also' essential' to' modern' economies.' Beyond' these' basic' services,' the' definitions'of'“investment”'and'“infrastructure”'become'more'difficult'to'delimit.6'' LongYterm+Trends+ As' mentioned,' there' are' no' “official”' comprehensive' set' of' annual' figures' compiled' for' infrastructure' investment' in' the' United' States.' However,' a' large' share' of' public' capital' spending' can' be' traced' by' using' the' gross' investment' numbers' for' the' state' and' local' sector,' which' are' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 5 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! recorded' in' the' national' income' accounts.7' For' the' most' part,' this' spending' is' examined' in' relationship' to' national' GDP,' since' the' dollar' sums' have' increased' dramatically' over' the' past' 60' years'(this'study’s'data'starts'in'1947'and'ends'in'2010).'Note'at'the'outset'that'these'numbers'do' not'capture'federal'direct'expenditures'on'domestic'(nonTdefense)'capital'spending,'and'that'state' and'local'government'spending'is'aggregated'across'both'those'levels'of'subnational'government.'' Figure' X.1' provides' a' landscape' of' state' and' local' capital' outlays' as' a' percentage' of' GDP' from' 1947' to' 2010.' Over' the' sixTdecade' span,' that' percentage' increased' rapidly' following' World' War' II' and' reached' a' peak' of' 3' percent' in' the' early' 1970s.' Subsequently' the' average' fell' to' just' below' 2' percent' in' the' early' 1980s' and' then' generally' trended' upward' through' the' 1990s' and' 2000s' to' a' peak' of' 2.5' percent' in' 2009.' Of' course,' many' background' conditions' and' trends' influenced' this' behavior.' In' the' early' postTwar' years,' state' and' local' capital' spending' was' dominated'by'the'meeting'of'deferred'demand'for'public'facilities'that'was'the'result'of'the'Great' Depression' and' World' War' II.' That' was' followed' soon' by' the' implementation' of' the' federally' funded' Interstate' Highway' program' in' the' late' 1950s' and' 1960s' and' the' federal' environmental' programs'of'the'1970s.'(It'should'be'noted'that'state'and'local'capital'spending'is'often'financed'by' federal' aid' programs;' see' figure' 2.).' At' the' very' end' of' the' period,' starting' in' 2008,' the' Federal' Government'initiated'an'economic'stimulus'program'that,'among'other'spending,'entailed'a'surge' in'temporary'capital'spending'assistance'to'states'and'localities.' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 6 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! Figure+ X.1.+ State+ and+ Local+ Government+ Gross+ Investment+ as+ Percent+ of+ GDP,+ 1947–2010+ 3.5 ! 3.0 ! 2.5 ! 2.0 ! 1.5 ! 1.0 ! 0.5 ! 0! 1947! 1955! 1965! 1975! 1985! 1995! 2005! 7! 5! 5! !! 5 5! 5! 5! +Source:+USBEA+2010+' Figure'X.2'provides'additional'insight'into'the'intergovernmental'aspects'of'state'and'local' sector'capital'spending.'State'and'local'gross'investment'are'shown'as'a'percentage'of'the'sector’s' total'spending'and'the'federal'capital'aid'received'for'capital'purposes'as'a'percentage'of'the'state' and' local' capital' spending.' Noted' in' the' figure' are' some' general' indicators' of' the' periods' when' large'federal'aid'programs'were'important'in'influencing'the'subnational'capital'spending.'Perhaps' the' most' notable' thing' is' that' over' the' previous' 20–30' years,' capital' spending' remained' fairly' constant' at' 15' percent' of' state' and' local' budgets,' with' about' 20' percent' of' the' capital' funds' supplied' by' federal' assistance.' By' far' the' most' important' functional' component' of' federal' assistance'has'been'that'for'highways'and'other'forms'of'transportation,'followed'later'by'waterT quality' environmental' programs.' Meanwhile,' spending' on' educational' facilities' (and' most' local' utilities)'has'been'largely'sustained'by'local'government'funding'sources.'' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 7 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! Figure+X.2++++State+and+Local+Government+Gross+Investment+as+%+of+Total+Spending;+Federal+ Figure 2: State and Local Government Gross Investment as a Precent of Total Spending and Capital+Aid+as+%+of+Gross+State+and+Local+Investment+Spending,+1947–2010+ Federal Capital Aid as a Percent of Gross State and Local Investment Spending: 1947-2010 35% Environmental Interstate Highway Programs Program Federal 30% Stimulus 25% 20% 15% 10% 5% 0% 47 55 65 75 85 95 05 19 19 19 19 19 19 20 Source: US BEA gross investment as % of total spending federal capital aid as % of gross investment National Income Accounts + Source:'USBEA'2010''+ ' ' Although' the' recent' federal' stimulus' program' led' to' a' sharp' uptake' in' 2009' and' 2010' in' federal'assistance'for'capital'purposes'(it'increased'by'about'$5'billion'and'$15'billion'in'these'two' years,'respectively),'the'increased'intergovernmental'aid'did'not'lead'to'capital'spending'increasing' as'a'share'of'state'and'local'overall'spending.'Because'of'the'widespread'and'continuing'impacts'of' the'recession,'the'states'and'localities'in'fact'reduced'their'overall'capital'spending'in'reaction'to' fiscal'austerity.8'In'other'words,'the'bulge'in'federal'assistance'was'offset'by'reduced'ownTsource' spending'by'the'aid'recipients.'' Overall,'given'the'inability'of'state'and'local'governments'to'deficit'finance'their'operating' budgets'and'the'sensitivity'of'their'revenue'systems'to'changing'economic'conditions,'they'tend'to' be'proTcyclical'in'their'spending'behavior.'' State+and+Local+Government+Infrastructure+Financing+Modes+ After'having'provided'insights'into'how'infrastructure'is'financed'in'the'United'States'at'the' subnational'level,'the'chapter'will'now'examine'the'financing'modes'for'infrastructure'investment.' The' United' States' is' unusual' in' that' its' subnational' governments' traditionally' have' had' access' to' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 8 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! the' private' bond' markets' and' have' relied' heavily' on' longTterm' borrowing' to' meet' infrastructure' needs.9' They' have' also' employed' user' charge' systems' (and' special' district' taxes)' to' pay' both' operating' and' capital' costs.' Because' of' the' complexity' of' the' funding' system' and' the' time' lags' involved,' it' can' be' difficult' to' aggregate' the' respective' sources' of' funds,' but' the' general' contours' can'be'sketched'out'by'combining'various'sources'of'data.'' In'FY'2008,'states'and'localities'spent'$307'billion'on'capital'outlays'(see'table'x.2).'During' the'previous'two'years,'they'had'borrowed'longTterm'an'average'of'$250'billion'in'new'capital.'Of' that'amount,'approximately'80'percent'represented'borrowed'funds'available'for'construction'and' acquisition,'or'$200'billion.10'From'this'must'be'subtracted'funds'that'were'borrowed'on'behalf'of' “nonTgovernmental”' entities,' which' amounted' to' perhaps' $15' billion' a' year' just' before' 2008.' Accordingly,' borrowed' funds' for' public' capital' spending' (infrastructure)' purposes' amounted' to' perhaps' $185' billion.' In' addition,' the' state' and' local' sector' received' approximately' $60' billion' in' federal' infrastructureTrelated' grants.' Thus,' a' rough' estimated' as' to' how' state' and' local' capital' outlays'were'ultimately'financed'in'2008'is'as'follows:' 'LongTterm'borrowing'' ' $185'billion' 'Federal'capital'grants''' ' '60'billion'' 'Current'revenues'' ' '' 62'billion'' ' 'Total'' ' ' ' ' $307'billion'' ' Thus,'in'recent'years'borrowing'in'the'(private)'bond'markets'has'supported'about'60'per'cent'of' all'state'and'local'government'capital'spending.'' Another'insight'into'the'financing'methods'used'for'infrastructure'is'related'to'the'issuance' of' “revenue”' bonds.' These' bonds' are' largely' selfTsupporting' in' that' they' finance' projects' that' are' paid'for'with'charge'user'fees'(or'special'taxes'that'apply'to'users)'and'are'usually'intended'to'be' selfTliquidating.'Approximately'60'percent'of'state'and'local'bonds'by'dollar'volume'are'secured'in' this'fashion.'One'result'of'this'approach'is'that'local'utilities'are'typically'more'insulated'from'the' annual'budgetary'battles'that'surround'a'government’s'taxTsupported'projects.'The'contracts'(the' bond'indenture)'under'which'revenue'bonds'are'sold'usually'dictate'an'increasing'of'charges'and' revenues' when' it' is' required' to' pay' debt' service' and' to' maintain' facilities.11' Another' outcome' is' that'many'of'the'projects'financed'by'revenue'bonds'are'themselves'products'of'financial'feasibility' studies.'In'other'words,'since'investors'look'only'to'project'revenues'for'the'future'payment'of'debt' service,'they'must'be'assured'that'the'funded'project'has'good'economic'prospects'and'strong'legal' credentials.12'' PublicTprivate' partnerships' (PPP)' at' the' local' government' level' are' most' prevalent' in' the' area' of' economic' and' real' estate' development,' and' they' can' play' some' role' in' certain' other' infrastructure' projects.13' The' use' of' these' partnerships' for' publicTuse' infrastructure' facilities' and' services'has'gained'a'good'deal'of'attention,'with'some'governments'making'very'large'asset'sales,' entering' into' leases,' or' granting' concessions' to' private' firms' for' major' transportation' projects.14' However,'application'of'the'PPP'technique'is'complicated'and'often'controversial.'So'far'it'has'been' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 9 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! limited' to' largeTscale' transportation' facilities,' such' as' converting' existing' toll' roads' to' private' operation,'where'various'federal'programs'been'used'to'assist'their'financing.'By'and'large,'aside' from' the' power' and' telecommunications' sectors,' there' is' very' little' private' interest' in' financing' mainTstream'public'utilities'such'as'water,'sewer'facilities'and'mass'transit.'' The+Pew+State+Management+Studies+ The' Pew' Center' on' the' States,' a' division' of' The' Pew' Charitable' Trusts,' is' an' independent' research'organization'that'has'conducted'extensive'research'and'analysis'to'identify'and'advance' effective' solutions' to' critical' issues' facing' states' including' state' management.' The' Pew' Center' launched'the'Government'Performance'Project'in'1999'which'graded'government'performance'in' all'fifty'states'of'the'U.S.'In'the'project,'Pew'graded'the'states'against'a'set'of'criteria.'The'grading' has' been' done' for' four' times' (in' 1999,' 2002,' 2005,' and' 2008)' and' in' four' management' areas— Information,' Infrastructure,' Money,' and' People.' Each' of' the' four' management' areas' received' a' score'ranging'from'A'to'D'(including'ten'possible'grades'of'A,'A–,'B+,'B,'B–,'C+,'C,'C–,'D+,'and'D).' For'each'management'area,'the'Pew'researchers'provided'both'a'letter'grade'for'the'major' area'and'also'scores'for'its'subTindicators.'The'scores'for'the'subTindicators'ranged'from'“weak,”'to' “midTlevel,”' to' “strength.”' For' the' Infrastructure' area,' there' were' five' subTindicators:' capital' planning,' project' monitoring,' maintenance,' internal' coordination,' and' intergovernmental' coordination.'The'table'of'criteria'used'for'the'Infrastructure'grading'is'provided'in'table'X.4.15'The' 2008'Infrastructure'subcomponent'scores'and'total'grades'for'2008'are'presented'in'table'X.5' Pew’s' stateTbyTstate' surveys' were' done' by' journalists' and' academics' and' involved' interviews' of' elected' and' appointed' officials,' questionnaires,' and' document' reviews.' The' Grading. the.States.2008.Report'digested'a'large'supply'of'information'about'state'government'(Pew'2008).'' The' evaluations' were' based' on' data' collected' from'more' than'12,000' different' sources' including' surveys,'written'documents,'and'interviews'with'over'1,000'persons'in'all'50'states.'' The'2008'Pew'survey'graded'the'states'with'the'same'methodology'used'in'2005,'and'thus' the' 2008' grades' are' comparable' with' the' 2005' grades' (Pew' 2005).16' The' Infrastructure' state' performance' grades' given' out' by' Pew' in' 2008' ranged' from' A' (Utah)' down' to' D+' (Massachusetts' and'New'Hampshire).'The'national'average'among'the'fifty'states'was'B–,'the'same'as'in'2005.'Ten' states' received' that' grade;' 17' states' earned' grades' above' the' national' average' (grade' of' B' and' above),' and' 23' states' received' grades' below' the' national' average' (grade' of' C+' and' below)' (see' table'X.5'for'a'display'of'the'2008'infrastructure'grades'by'descending'state'ranking).'Although'the' average'grade'(B–)'remained'the'same'between'2005'and'2008,'there'was'considerable'movement' among'the'individual'state'scores,'which'will'be'discussed'in'the'next'section.'' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 10 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! Table+X.4+++Pew+Infrastructure+Criteria+ Infrastructure+ Grading+Criteria+ area+ The+state+regularly+conducts+a+thorough+analysis+of+its+infrastructure+needs+and+has+a+ 1.Capital+ transparent+process+for+selecting+infrastructure+projects.++ Planning+ a. A' systematic' assessment' of' future' infrastructure' needs' informs' the' capital' planning' process.'' b. The'state'regularly'conducts'an'infrastructure'condition'assessment'in'accordance'with' accepted'engineering'standards.'' c. The'state'has'a'formal,'multiTyear'capital'plan'that'both'prioritizes'capital'activities'and' links'directly'to'the'capital'budget.'' d. The' state's' selection' of' projects' for' inclusion' in' the' capital' budget' relies' on' capital' planning'priorities,'condition'assessments'of'infrastructure'and'public'input.'' e. The'state'includes'estimates'of'the'operating'and'maintenance'costs'of'capital'projects'in' the'state'capital'plan'and'the'capital'budget,'and'it'formally'links'those'estimates'to'the' state'operating'budget'prior'to'legislative'adoption.' . The+ state+ has+ an+ effective+ process+ for+ monitoring+ infrastructure+ projects+ throughout+ 2.Project+ their+design+and+construction.+' Monitoring+ a. The'state'adequately'monitors,'evaluates,'and'detects'projectTcost'overruns,'delays,'and' safety'compliance.' b. The'state'effectively'intervenes'to'take'corrective'action,'as'necessary,'in'managing'the' construction'of'capital'projects.'+ The+ state+ maintains+ its+ infrastructure+ according+ to+ generally+ recognized+ engineering+ 3.Project+ practices.++ Maintenance+ a. The'state'adopts'a'lifeTcycle'approach'to'asset'management.'' b. The' state' uses' upTtoTdate' condition' assessments' in' setting' priorities' for' infrastructure' maintenance'and'renewals.' c. The' state' funds' maintenance' at' a' level' that' minimizes' a' facility’s' lifeTcycle' costs' and' ensures'that'defined'levels'of'service'and'safety'standards'are'met.'+ The+state+comprehensively+manages+its+infrastructure.+ 4.Internal+ a. When' responsibility' overlaps,' interT' and' intraTagency' councils' and' offices' effectively' Coordination+ coordinate'infrastructure'issues.'+ +The+ state+ creates+ effective+ intergovernmental+ and+ interstate+ infrastructure+ 5.+ coordination+networks.++ Intergovernmen a. Through' formal' and' informal' intergovernmental' structures,' the' state' effectively' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 11 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! tal+Coordination+ communicates' regulations' and' information' applicable' to' local' governments' on' capital' planning,' financing' and' administration,' and' ensures' coordination' among' the' various' governments'in'the'area'of'infrastructure'management.'' b. The' state' cooperatively' engages' formally' and' informally' with' interstate' (regional)' structures'to'coordinate'and'manage'infrastructure'issues.+ Source:+Pew'Center'on'the'States+(http://www.pewcenteronthestates.org)'' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 12 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! Table+X.5++++Pew+Infrastructure+Overall+and+Dimension+Performance+Grades,+2008+ Capital+ Project+ Internal+ Intergovermental+ Overall+ State+ Maintenance+ Planning+ Monitoring+ Coordination+ Coordination+ Performance+ Alabama+ M' H' L' M' M' C+' Alaska+ L' M' L' L' M' CT' Arizona+ M' M' M' M' H' BT' Arkansas+ L' M' L' M' M' C+' California+ H' H' L' L' H' BT' Colorado+ M' M' L' M' M' C+' Connecticut+ L' M' M' M' M' C+' Delaware+ M' H' M' H' H' B+' Florida+ M' H' H' M' H' AT' Georgia+ M' H' M' M' H' B' Hawaii+ L' M' L' M' M' C' Idaho+ L' M' M' M' M' BT' Illinois+ L' M' L' M' M' C' Indiana+ M' M' H' H' H' B+' Iowa+ M' M' L' M' M' C+' Kansas+ M' M' L' M' M' C+' Kentucky+ H' H' M' H' H' AT' Louisiana+ L' M' L' M' M' C+' Main+ M' M' L' H' M' C+' Maryland+ H' M' M' H' H' B+' Massachusetts+ L' M' L' M' M' D+' Michigan+ H' H' M' M' H' AT' Minnesota+ M' M' L' M' H' C+' Mississippi+ M' M' L' M' M' C+' Missouri+ H' M' M' M' H' B+' Montana+ M' M' L' M' M' C+' Nebraska+ M' M' H' H' H' B+' Nevada+ M' L' M' H' H' BT' New+ L' L' L' M' M' D+' New+Jersey+ Hampshire+ M' M' L' H' H' C+' New+Mexico+ M' M' L' M' M' C+' New+York+ H' M' L' M' H' BT' North+ M' M' L' M' M' BT' North+Dakota+ Carolina+ M' M' L' M' H' BT' Ohio+ M' M' M' M' H' BT' Oklahoma+ L' M' L' M' M' CT' Oregon+ M' M' L' M' H' C+' Pennsylvania+ M' H' M' M' H' BT' Rhode+Island+ M' M' L' M' H' C+' South+ L' M' L' M' H' CT' South+Dakota+ Carolina+ M' M' M' L' M' B' Tennessee+ M' M' M' H' H' B' Texas+ M' M' H' M' M' B' Utah+ H' H' H' H' H' A' Vermont+ M' M' H' M' H' B+' Virginia+ H' M' M' M' M' B+' Washington+ H' M' M' M' H' B+' West+Virginia+ L' M' L' L' M' CT' Wisconsin+ L' M' M' M' H' BT' Wyoming+ M+ H+ M+ M+ M+ B+ T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 13 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! Source:+Pew'2008' Note:'L:'Low,'M:'MidTlevel,'and'H:'High.' Table+X.6++++Infrastructure+Performance+Grades,+2008+ + T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 14 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! Source:+Pew'Center'on'the'States+(http://www.pewcenteronthestates.org)+ ' Developing+Numeric+Scores+for+Grades+and+Component+Descriptions+ To' accommodate' this' study’s' analysis,' the' State' Overall' Grades,' Major' Management' Area' Grades,' and' the' respective' subcomponents' indicators' were' converted' into' numerical' scores,' as' shown' in' table' X.7.' This' numeric' scoring' system' helps' indicate' the' dynamics' of' the' grades' and' enables' analysis' of' the' various' factors' that' may' help' explain' the' variation' of' grades' among' the' states'and'over'time.' Table+ X.7+ + + Scoring+ System+ for+ Pew+ Management+ Performance+ Areas+ and+ Subcomponents+ Indicators+ Grades for ! Area Sub-! Management Areas! Numeric ! components! Numeric! (letter grade)! Score ! (description)! Score! A! 10! Strength (H)! 3! A-! 9! Mid-level 2! B+! 8! Weakness (L)! 1! B! 7! 6! C+! 5! C! 4! C-! 3! D+! 2! D! 1! + Source:'Pew'Center'on'the'States+(http://www.pewcenteronthestates.org)' Changes+in+Infrastructure+Grades+ Between' 2005' and' 2008,' the' overall' infrastructure' performance' grades' in' the' 50' states' were' subject' to' considerable' change,' although' the' average' score' (B–)' remained' the' same' in' both' years.' Eleven' states' saw' no' change,' while' 18' states' saw' their' scores' improve' and' 21' states' saw' their' scores' fall.17' The' changes' in' infrastructure' performance' grades' are' illustrated' in' Figure' X.6,' with'the'letter'grades'reTcoded'in'numeric'order'from'10'to'1,'with'10'for'very'high'performance' (equivalent' to' A)' and' 1' for' very' poor' performance' (equivalent' to' D).' Note' in' figure' X.3' that' the' average'value'of'the'grade'score'was'“6”'(B–)'in'2005'and'was'the'same'in'2008.'Thus,'the'change' on'average'between'the'years'was'“0.”' ' ' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 15 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! Figure+X.3++Change+in+Infrastructure+Performance+Grades,+2005–08+ 4 Grade change, 2005-08 2 0 -2 -4 0 2 4 6 8 10 Grades, 2005 change_infras_perform Fitted values Source: PEW 2005 & 2008 ' ' ' Infrastructure+Scores+and+SubYindicators++ An' initial' task' is' to' figure' out' which' among' the' five' subTindicators' of' infrastructure' performance' has' the' highest' correlation' with' the' variation' of' the' overall' infrastructure' performance' scores.18' To' do' this,' the' correlations' between' the' infrastructure' performance' scores' and'each'subTindicator'are'examined.'Among'the'five'subTindicators'of'infrastructure'performance,' capital' planning' and' maintenance' both' have' high' correlations' with' overall' infrastructure' scores' (68'and'75'percent,'respectively).'This'comports'with'the'readings'of'the'various'individual'state' reports,'which'appear'to'stress'these'factors.19' Infrastructure+Scores+and+other+Pew+Performance+Scores++ According'to'the'Pew'studies,'a'state’s'capital'assets'are'the'crossroads'of'the'effects'of'the' other'three'performance'categories—People,'Information,'and'Money.20'This'statement'was'tested' by' regressing' the' infrastructure' performance' scores' of' the' states' on' the' other' three' main' management' scores' (money,' people,' and' information)' to' see' (1)' whether' or' not' the' latter' components' have' a' statistically' significant' impact' on' or' correlation' with' the' former' and' (2)' how' much' the' impact' would' be.' This' was' done' by' running' a' regression' with' robust' standard' error' to' control'for'heterogeneity.'In'order'to'compare'the'explanatory'power'among'independent'variables' for' the' variation' of' infrastructure' performance' scores,' the' regression' was' run' with' standardized' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 16 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! coefficients.'The'higher'the'standardized'coefficient,'the'more'explanatory'power'the'independent' variable' has.' The' results' are' shown' in' table' x.5.' In' columns' 1a' and' 1b,' only' the' Money' and' Information' Management' scores' proved' to' be' significantly' correlated' with' the' infrastructure' performance'score'(see'column'1a).'This'appears'to'confirm'that'infrastructure'performance'scores' are' greatly' influenced' by' the' state’s' budgeting' practices' and,' to' a' somewhat' lesser' extent,' its' information'management.21'The'regression'results'show'no'statistically'significant'impact'of'people' management'scores'on'the'infrastructure'scores.'' Table+ X.8+ + + Correlations+ between+ Infrastructure+ Performance+ Score+ and+ Its+ SubYindicators,+ Other+Management+Scores,+Population+Growth,+and+Highways+Capital+Outlay+ Indicators+ Infrastructure+Performance+Scores+ ' (1a)+ (1b)+ (2)+ (3)+ with' with' with' with' robust' standardize robust' robust' standard' d' standard' standard' error' coefficient' error' error' Money' .3101***' .3280' ' ' management' (.1029)' People' .0185' .0181' ' ' management' (.1058)' Information' .2839***' .2976' ' ' management' .1083' Population'growth' ' ' .0959**' ' ' (.0403)'' Highways' capital' ' ' ' .0295**' as' %' of' state' (.0145)'' capital' Number' of' 100' 100' 100' 100' observations' Prob'>'F' 0.0000' 0.0000' 0.0195' 0.0455' RTsquared' 0.3071' 0.3071' 0.0447' 0.0347' Notes:. Robust' standard' error' is' in' parentheses.' Dependent' variable' is' the' infrastructure' performance'score.'The'symbols'of'*,'**,'and'***'indicate'statistically'significant'at'90%,'95%,'and' 99%'confidence'level.' + Examining+the+Influence+of+Structural+and+Economic+Relationships++ Another' set' of' questions' has' to' do' with' the' structural' characteristics' of' governments' and' their'economic'and'demographic'environments'and'how'these'influence'infrastructure'scores.'Do' states'that'have'capital'spending'as'a'higher'percentage'of'their'total'outlays,'or'that'assign'more'of' the'overall'capital'spending'to'the'state'versus'the'local'level,'enjoy'better'infrastructure'scores?'Do' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 17 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! states'with'higher'incomes'or'faster'population'growth'rates'tend'to'score'better?'And,'last,'what'is' the'impact'of'federal'assistance'on'the'state'infrastructure'scores?22'' The' next' part' of' the' analysis' tested' to' see' whether' the' states' with' higher' levels' of' capital' spending' have' better' infrastructure' performance' scores.' The' first' step' was' to' regress' the' state' infrastructure' performance' scores' on' per' capita' capital' spending' by' the' state' government.' The' results' showed' a' slight' negative' relationship,' but' not' a' statistically' significant' impact.' Next,' state' capital' spending' was' examined' as' a' percentage' of' total' state' expenditure.' Again,' the' result' was' a' slightly'negative,'but'insignificant'relationship.'However,'state'capital'spending'as'percent'of'total' state' and' local' capital' spending' did' show' a' statistically' significant' negative' impact' on' the' state' infrastructure' performance' scores.' For' every' one' point' increase' in' state' capital' spending' as' a' percent' of' total' state' and' local' capital' spending,' the' state' infrastructure' performance' score' decreased'by'.035'units'(on'the'scale'of'10,'with'1'for'the'grade'D,'and'10'for'grade'A).'However,' note'that'in'this'simple'bivariable'analysis,'this'impact'has'not'been'controlled'for'impacts'of'any' other'factors'and'has'low'explanatory'power.'' The'next'test'was'to'see'whether'those'states'that'had'higher'per'capita'incomes'had'better' infrastructure' performance' scores.' Regressing' infrastructure' performance' scores' on' state' per' capital'personal'income'showed'no'statistically'significant'impact.'To'find'the'impact'of'population' growth' on' the' Infrastructure' performance' scores,' the' analysis' regressed' the' infrastructure' performance' score' on' population' growth' over' a' fiveTyear' interval,' that' is,' infrastructure' performance' scores' of' 2005' and' 2008' on' population' growth' over' 2000–05' and' 2003–08' respectively.' Population' growth' was' found' to' have' had' a' statistically' significant' impact' on' infrastructure'performance'score'at'a'95'percent'confidence'level'(see'column'2'in'table'X.5).'For' every' 1' percentage' point' increase' in' population' growth,' the' infrastructure' performance' score' increase' by' about' 1' point.' Without' controlling' for' the' impact' of' other' factors,' population' growth' would' explain' about' 4' percent' of' the' variation' in' infrastructure' performance' scores' in' 2005' and' 2008.' The' slightly' positive' impact' of' population' change' on' the' Pew' infrastructure' performance' scores'implies'that'faster'growth'areas,'with'their'greater'need'to'build'more'capacity,'might'put' more'emphasis'on'infrastructure'policy'and'management'concerns.'' The' next' test' was' to' see' whether' states' with' a' higher' proportion' of' highway' capital' spending' to' total' state' capital' spending' had' higher' infrastructure' scores.23' The' infrastructure' performance'score'was'regressed'on'state'highways'capital'spending'as'a'percent'of'state'capital' spending' in' 2005' and' 2008.' The' results' show' that' highway' capital' spending' had' a' statistically' significant'positive'impact'on'infrastructure'performance'score'at'95'percent'confidence'level'(see' column'3'in'table'X.8).'For'every'1'percentage'point'increase'in'state'highways'capital'spending'as' a' percentage' of' state' capital' spending,' the' infrastructure' performance' score' increases' by' about' 0.03.24' Without' controlling' for' the' impact' of' other' factors,' the' percentage' of' highways' capital' spending' in' state' capital' spending' would' explain' for' about' 3.5' percent' of' the' variation' of' infrastructure'performance'score'in'2005'and'2008.' These'simple'tests'of'correlation'are'clearly'limited,'but'they'are'the'seeds'of'understanding' the'factors'that'affect'the'Pew'infrastructure'scores.'The'scores'appear'to'be'statistically'unaffected' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 18 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! by' the' relative' wealth' (as' measured' by' personal' income)' of' the' states' or' by' the' percentage' of' budget'spent'on'capital'projects.'However,'the'scores'appear'to'be'negatively'affected'by'the'degree' to'which'the'state'government'(as'opposed'to'the'local'government)'does'the'capital'spending'in'a' state.'In'other'words,'decentralization'of'capital'spending'decisions'to'local'units'may'improve'the' state'level'infrastructure'management'scores.'On'the'other'hand,'more'rapidly'growing'states'and' those' with' a' higher' proportion' of' federally' funded' capital' projects' (as' measured' by' the' heavily' assisted'highway'sector'spending)'tend'to'score'better.' Selected+Case+Studies+ The'Pew'studies'of'state'government'performance'provide'a'convenient'source'for'studying' comparative' behavior' when' it' comes' to' infrastructure' planning,' management,' and' project' execution.' The' data' was' primarily' qualitative' in' nature,' with' the' management' processes' themselves'(as'opposed'to'the'meeting'of'any'quantitative'goals'for'the'various'functional'types'of' investments)'serving'as'the'basis'of'rankings.'It'should'be'noted'that'quantitative'assessments'of' the' various' types' of' infrastructure' investment' and' their' success' in' meeting' various' goals' or' standards' are' conceptually' possible' using' available' data' resources,' but' the' job' would' be' a' heroic' effort'on'a'stateTbyTstate'basis.25'' Bearing'in'mind'the'limitations,'the'Pew'scores'at'least'provide'an'initial,'consistent'method' for' examining' the' quality' of' the' processes' by' which' infrastructure' needs' are' recognized' and' addressed' by' the' state' governments' in' the' United' States.' The' following' case' studies' provide' examples' of' how' states' are' viewed' by' outside' authorities.' (Unless' otherwise' noted,' the' following' stateTbyTstate' commentaries' are' based' on' the' Pew' 2005' and' 2008' reports.)' Infrastructure' performance'in'the'five'states'with'the'greatest'variation'in'scores'between'2005'and'2008'will'be' reviewed'to'understand'how'these'states'improved'or'deteriorated'overtime.'In'addition,'Virginia' is'reviewed'as'an'example'of'a'highTperforming'state.' Alabama+ In' 2005' Alabama' scored' “weak”' on' every' one' of' the' five' factors' that' make' up' the' Pew' infrastructure'scoring.'Among'other'things,'the'state'was'in'the'process'of'reducing'the'size'of'state' government,' the' result' of' a' failed' effort' to' raise' taxes' in' 2003.26' Nonetheless,' a' policy' of' public' sector'austerity'did'drive'efforts'to'improve'the'efficiency'of'government'through'a'comprehensive' strategic' management' and' planning' program,' which' affected' infrastructure.' Alabama's' infrastructure'performance'grade'improved'sharply'from'D'to'C+'between'2005'and'2008.27'' The' improvement' in' the' state’s' infrastructure' performance' was' due' to' a' new' governing' initiative' called' SMART' (figure+ X.4).' In' 2005' the' Alabama' government' introduced' a' SMART' Governing'initiative.28'The'initiative'is'an'attempt'to'use'rigorous'performance'budgeting'processes' to' justify' the' way' the' state’s' dollars' are' being' spent.' This' was' the' first' significant' effort' ever' launched'in'Alabama'to'encourage'strategic'planning'and'performance'budgeting.' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 19 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! Figure+X.4++++Alabama’s+SMART+Cycle+Governing+Initiative+ ' %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%Source:'Knight'2007' The'state'made'significant'progress'in'improving'the'collection'of'performance'data.'As'a'result'of' the'SMART'program,'agencies'were'producing'strategic'plans,'quarterly'performance'reports,'and' budget'requests'bolstered'by'performance'information.'Alabama'also'took'steps'to'improve'capital' planning.' Agencies' must' now' provide' detailed' and' prioritized' project' requests,' including' justification,' operating' and' maintenance' costs,' and' possible' alternative' funding' sources.' Each' capital'request'must'be'linked'to'one'of'the'governor’s'policy'priorities.'Transportation'planning'is' done'through'a'threeTyear'State'Transportation'Improvement'Plan,'a'fiveTyear'improvement'plan,' and' a' longTrange' plan.' As' a' result' of' SMART,' the' transportation' department’s' budget' now' has' appropriations'for'capital'improvements,'system'improvement,'and'maintenance.'According'to'the' 2008' Pew' report,' the' state' still' needs' to' develop' a' deferred' maintenance' estimate' and' increase' investment' in' maintenance,' particularly' for' infrastructure' not' related' to' transportation.' It' also' needs'to'do'a'better'job'in'statewide'capital'planning'and'coordinating'infrastructure'issues'at'the' statewide'level.29' New+Mexico+ New'Mexico'is'one'of'the'poorest'states'in'the'nation'and'its'standard'services'are'at'only' modest' levels' (Pew' 2005,' 74).' New' Mexico' infrastructure' performance' as' graded' by' the' Pew' Center' improved' from' D+' grade' to' C+' grade' between' 2005' and' 2008.' This' is' due' to' the' improvement'in'capital'planning'and'project'monitoring'which'increased'from'a'weak'level'to''midT level.'' Consolidation' of' New' Mexico’s' capital' planning' and' technology' planning' processes' improved'the'state’s'efficiency'and'accountability.'The'trigger'of'the'reform'was'the'leadership'of' the'governor,'who'was'performanceTdriven'and'strategyTminded.'He'initiated'a'new'Capital'Project' Division'in' the'Department'of'Finance'to'improve'state'capital'planning'and'the'governor’s'office' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 20 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! focused'more'on'securing'part'of'the'legislature’s'share'of'capital'outlays'for'strategic'purposes.'As' a' result,' the' state' made' some' progress' in' merging' agency' goals' into' a' comprehensive' statewide' strategic'plan.'The'old'capital'planning'process'relied'almost'exclusively'on'political'considerations' to'divide'capital'outlays.'The'state'simply'divided'available'funds'into'three'equal'portions:'one'for' the'governor'and'one'each'for'the'legislative'chambers.'Legislators'then'divided'the'portions'even' further,'often'making'it'impossible'to'assemble'enough'funding'for'necessary'projects.'' The'new'approach'to'capital'planning'put'almost'threeTquarters'of'capital'outlays'through'a' needsTbased'assessment,'enabling'New'Mexico'to'focus'more'on'achieving'strategic'goals.'During' the' 2007' legislative' session,' the' governor' and' the' legislature' also' set' aside' funds' for' strategic' purposes.'Nonetheless,'the'state'still'depends'on'an'array'of'agency'and'local'government'capital' plans'instead'of'a'statewide'plan.'' Project' monitoring' also' improved' in' New' Mexico.' In' 2003,' the' governor' created' a' topTtoT bottom'performance'review'of'state'programs'and'a'new'database'for'tracking'developments'on'a' continual'basis.'Project'managers'produce'weekly'reports,'and'the'state'responds'within'a'week'for' cost'overruns,'delays,'inefficiencies,'and'quality'concerns,'and'within'one'day'for'safety'issues.' Wyoming+ Wyoming'is'a'small,'rural,'resourceTrich'state'that'provides'low'public'service'levels'(Pew' 2005,' 95).' It' is' highly' reliant' on' a' limited' base' of' revenues—its' mineral' resources.' Wyoming’s' infrastructure'performance'as'graded'by'the'Pew'Center'improved'from'grade'C'to'B'between'2005' and' 2008.' This' upgrade' was' due' to' the' improvement' in' capital' planning,' project' monitoring,' and' maintenance.'Capital'planning'and'maintenance'moved'up'from'a'weak'level'to'midTlevel'and'the' project'monitoring'from'midTlevel'to'a'strong'level.' Innovative' solutions' are' driving' reform' and' progress' in' Wyoming.' The' small' state' government'has'restructured'its'agencies'by'creating'a'construction'management'office'to'oversee' planning' on' a' statewide' level.' This' focal' point' allows' more' comprehensive' planning' and' coordination.' The' creation' of' this' office' was' based' on' the' need' for' expertTlevel' people' who' were' knowledgeable'in'construction'management'and'longTterm'planning.'In'2005'the'state'introduced'a' new' resultsTaccountability' model' aimed' at' linking' performance' to' budgeting,' and' a' firstTever' statewide'information'technology'plan.' The'Department'of'Transportation'has'both'a'Statewide'Transportation'Improvement'Plan' and'a'longTrange'transportation'plan.'It'uses'an'assetTmanagement'system'to'prioritize'projects'for' selection' and' to' manage' roads' and' bridges.' The' resource' planning' system' links' financial' and' infrastructure' condition' data' with' a' geographic' information' system,' allowing' the' department' to' calibrate'management'of'each'mile'of'road.'For'project'monitoring,'Wyoming'often'uses'incentives' within'contracts'to'improve'timeliness'or'save'money.'The'Department'of'Transportation'has'been' able' to' cut' the' average' time' to' correct' problems' from' months' to' weeks' because' workers' immediately' notify' project' managers' of' problems' or' concerns.' For' maintenance,' the' state' has' instituted' a' new' assetTmanagement' computer' program' that' enables' a' lifeTcycle' approach' to' maintenance'for'state'buildings.'' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 21 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! Ohio+ Ohio'is'a'middleTsized'state'with'a'mixture'of'rural'and'older'urban'areas'and'a'declining' industrial' sector.' Ohio’s' infrastructure' performance' graded' by' the' Pew' Center' decreased' from' a' grade'of'AT'to'BT'between'2005'and'2008.'The'downgrading'was'due'to'the'deterioration'in'capital' planning,'project'monitoring'and'maintenance,'all'of'which'moved'from'a'strong'level'down'to'midT level.'The'state'was'graded'well'in'2005'mainly'due'to'its'“efforts'to'completely'overhaul'schools'in' every'one'of'its'613'districts”'following'a'television'exposé'of'its'schools'as'part'of'a'survey'ofthe' nation’s' crumbling' school' buildings' (Pew' 2008).' Ohio' had' made' impressive' investments' in' renovating'school'facilities,'even'making'them'more'environmentally'friendly.'' Ohio'historically'has'been'a'state'whose'fiscal'officers'focused'on'shortTterm'expense'and' revenues,'rather'than'doing'serious'planning'for'the'future.'The'school'construction'commitment' encouraged' a' longer' term' approach.' The' state’s' Department' of' Transportation' (ODOT)' went' through' a' major' restructuring,' slimming' down' its' workforce.' It' adopted' a' set' of' performance' measures'that'allowed'ODOT'managers'to'track'the'state’s'12'district'offices'against'each'other'in' performance.'Pavement'deficiencies'were'reduced'by'threeTquarters'between'1995'and'2005,'and' bridge' deficiencies' were' cut' by' about' half.' After' a' surge' of' activity' that' resulted' mainly' from' a' largeTscale' project' in' school' construction,' the' improvement' in' infrastructure' investment' management'was'not'sustained.'' By' the' time' of' the' Pew' 2008' study,' Ohio' still' lacked' strategic' planning' and' good' financial' management'and'did'not'have'comprehensive'data'in'areas'ranging'from'its'workforce'to'deferred' infrastructure' maintenance.' Much' of' Ohio’s' infrastructure' management' was' left' to' individual' agencies,' which' sometimes' lacked' the' wherewithal' to' do' proper' planning' and' maintenance.' For' capital' planning,' agencies' are' required' to' submit' a' sixTyear' capital' plan' to' the' budget' office.' However,' they' are' not' required' to' conduct' a' formal' assessment' of' future' needs' or' a' condition' assessment'of'buildings.'' For' project' monitoring,' project' managers' hold' regular' meetings' with' contractors' on' the' progress' of' capital' projects' and' provide' monthly' reports' on' overruns,' delays,' and' safety' compliance.'The'state'architect'typically'responds'within'three'weeks'for'inefficiencies,'one'week' for' quality' issues,' and' two' months' for' cost' overruns.' The' state' transportation' agency' ODOT' may' take'months'to'respond'to'significant'problems'on'projects.' In'the'case'of'maintenance,'some'agencies'conduct'their'own'condition'assessments'of'state' buildings,'but'Ohio'had'no'comprehensive'mechanism'to'assess'the'deferred'maintenance'needs'of' its'infrastructure.'' Vermont+ Vermont'is'a'small,'rural'state'with'a'small'bureaucracy'with'a'lot'of'smallTtown'attributes.' It'has'good'interagency'coordination.30'The'state'is'good'at'soliciting'public'input,'partly'because'of' its'small'size.'Public'input'in'Vermont’s'transportation'planning'is'extensive'and'includes'statewide' videoconferencing,' public' presentations,' stakeholder' meetings,' telephone' surveys,' and' the' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 22 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! traditional'means'of'public'notice'and'comment.'Vermont'infrastructure'performance'as'graded'by' the' Pew' Center' increased' from' B–' to' B+' between' 2005' and' 2008.' This' increase' was' due' to' the' improvement'in'the'state’s'maintenance'score,'moving'from'a'weak'level'up'to'strong'level.'' The' improvement' in' maintenance' scores' between' 2005' and' 2008' was' mainly' due' to' the' state’s' concerted' effort' to' address' its' historical' underfunding' of' building' maintenance.' The' Department'of'Buildings'and'General'Services'proposed'annual'allocations'of'2'to'4'percent'of'the' assessed' value' of' the' state’s' property' for' maintenance.' The' Vermont' Agency' of' Transportation' conducts'annual'assessments'of'bridge'and'pavement'assets'and'the'state'keeps'detailed'track'of' those'assessments'and'funds'maintenance'to'keep'program'assets'at'their'targeted'condition'levels.' Vermont'has' valuable' data' to' aid' management' and' allocates' adequate' funds' for' its' infrastructure' maintenance'needs.' Vermont'has'good'management'solutions'for'discrete'problems'but'lacks'a'statewide'strategic'plan.' In' addition,' all' elected' officials' serve' only' twoTyear' terms,' making' the' adoption' of' strategic' direction'even'less'attractive.'The'state'needs'improved'workforce'planning31'and'a'commitment'to' complete' a' capital' plan.' State' agencies' have' developed' goals' but' never' compiled' them' in' a' state' plan'and'did'not'implement'them.'Vermont'also'lacks'performance'measures'to'drive'its'budgeting' decisions.32'' Virginia+ Virginia' is' a' midTsized' state' with' a' mix' of' urban' and' rural' population.' It' is' generally' regarded' as' one' of' the' best' managed' states' in' the' United' States.33' The' state' infrastructure' performance' graded' by' the' Pew' Center' was' A–' in' 2005' and' B+' in' 2008.' The' state' government' ranks' very' high' in' financial' management,' and' in' almost' every' aspect' of' the' Pew' study' it' is' often' considered' (along' with' Utah)' to' be' the' best' managed' state' government' in' the' country.' Virginia’s' management' strengths' are' in' institutional' arrangements,' performance' management,' auditing,' capital' planning,' workforce' planning,' transparency,' and' accountability.' The' slight' slippage' in' its' infrastructure'score'between'2005'and'2008'came'in'the'subarea'of'maintenance,'where'the'state' was' behind' schedule' in' the' process' of' installing' a' new' asset' inventory' to' assess' the' condition' of' structures.'' The' state' has' had' some' strong' institutional' elements' that' help' it' undertake' longTterm' planning,' namely' the' Council' on' Virginia’s' Future' (which' sets' longTterm' goals' and' has' representation' from' the' legislature,' executive' branch,' and' private' sector)' and' its' Joint' Legislative' Audit' and' Review' Commission' (which' is' the' state’s' highly' regarded' counterpart' to' the' U.S.' Congressional' Budget' Office)' (Pew' 2005,' 90).' Among' other' things,' the' state' produces' longTterm' budget' forecasts' and' undertakes' firstTrate' fiscal' impact' analyses' on' proposed' major' projects.' Although'not'cited'in'the'Pew'analysis,'the'state'has'also'been'innovative'in'pursuing'publicTprivate' partnerships,'especially'in'the'transportation'area.34'The'state'has'partnered'with'private'firms'in' adding' toll' lanes' to' its' portion' of' the' interstate' highway' (Interstate' 495)' that' circles' Washington' D.C.'' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 23 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! Virginia' leaves' much' of' the' public' spending' and' revenue' collecting' to' its' localities,' and,' compared'to'them,'the'state'government'is'relatively'small'in'fiscal'effort'(the'state'level'accounts' for'45'percent'of'all'public'spending).'The'state'government'and'its'localities'are'also'free'of'legal' tax' and' expenditure' constraints,' which' are' common' throughout' much' of' the' United' States.35' Moreover,' the' state’s' economy' has' benefited' greatly' over' the' years' by' being' adjacent' to' Washington' D.C.' which' has' provided' solid' growth' in' federal' contracts' and' stable' federal' employment'in'the'Northern'and'coastal'parts'of'the'state.'' Conclusions+on+the+Pew+Surveys+and+Case+Studies++ The' great' benefit' of' the' Pew' Government' Management' surveys' is' that' they' represent' extensive' “onTtheTground”' interviews,' which' employ' a' consistent' set' of' factors' used' in' making' comparisons' among' the' states.' Nonetheless,' the' grades' do' not' provide' rigorous' quantitative' measures' of' just' how' well' the' states' are' performing' with' regards' to' the' needs' for' investments' among' the' various' functional' categories' and' how' well' these' are' being' met.36' Given' the' maturity,' size,' and' complexity' of' the' United' States,' this' lack' of' rigor' in' assessing' the' level' of' success' in' meeting' aggregate' norms' of' infrastructure' targets' is' not' surprising.' On' the' other' hand,' given' the' array' of' infrastructure' studies' that' measure' needs' (see' Annex. X.2),' it' is' conceptually' possible' to' measure' needs' and' outcomes' against' aggregate' quantitative' norms.' But' that' would' be' an' exceedingly'difficult'job'and'one'heavily'laden'with'“value'judgments.”'37'' Thus,'the'state'grades'in'the'Pew'surveys'are'largely'impressionistic'and'are'often'driven'by' the' interviewer’s' perception' of' deficiencies' or' improvements' in' the' management. process.. Accordingly,. high' marks' are' achieved' when' capital' decisionTmaking' is' done' within' a' structured' plan'(a'capital'budget),'which'in'turn'is'linked'into'a'series'of'state'goals'and'objectives'(longTrange' plan),'and'when'departmental'roles'are'explicitly'coordinated.'It'is'not'surprising'that'states'tend' to' rank' better' when' they' undertake' and' express' a' desire' to' implement' such' longTdistance,' visionary' reforms.' Moreover,' as' the' foregoing' discussion' on' simple' correlations' of' the' infrastructure'grades'to'various'explanatory'factors'indicates,'the'scores'tend'to'be'higher'in'states' that' are' growing' more' rapidly' (perhaps' because' need' to' increase' capacity' is' perceived)' and' that' get'more'federal'assistance'(perhaps'because'federal'aid'typically'carries'planning'requirements).'' More'mundane'but'also'important'are'the'mechanics'of'project'oversight'and'getting'capital' projects' done' on' time' and' within' budget.' State' procurement' policies' are' already' comparatively' sophisticated' and' transparent,' so' outright' malfeasance' in' contracting' is' rare.38' Contracts' for' government' capital' projects' are' widely' sought' in' a' system' of' competitive' bidding' for' the' work.39' Finally,' governments' in' the' mature' and' prosperous' U.S.' economy' already' have' in' place' a' huge' investment' in' infrastructure' assets.' As' noted,' the' Pew' Government' Management' Surveys' put' considerable' weight' on' the' maintenance' and' replacement' of' facilities,' reflecting' the' widespread' concerns' among' infrastructure' professionals' that' upkeep' of' facilities' is' often' the' first' thing' to' go' when' budgets' are' tight.' As' noted' previously,' changes' in' governmental' accounting' and' financial' reporting'practices'have'reinforced'the'need'for'asset'management'programs'and'recognition'for' maintenance' and' replacement.' But' acknowledging' the' needs' for' infrastructure' is' not' the' same' as' meeting' them.' The' national' profile' of' net' investments' (annual' gross' investments' minus' the' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 24 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! consumption'of'capital)'shows'a'worrisome'trend'that'the'aggregate'needs'of'capital'replacement' are' continuing' to' grow' and' lack' of' proper' care' is' a' major' factor' in' shortening' the' useful' life' of' assets.40'' Annex+X.1.+Economic+Returns+on+Infrastructure+ What' amount' should' be' spent' on' infrastructure' in' an' economy' and' how' should' that' be' determined?'There'can'be'several'answers'to'that'question,'ranging'from'professional'estimates'of' the' amount' of' capital' stock' that' is' needed' to' obtain' (or' maintain)' certain' levels' of' performance' regarding'particular'services'(achieving'levels'of'public'safety'and'fair,'widespread'public'access),' to'macroTlevel'estimates'of'the'impact'infrastructure'investments'on'the'productivity'and'output'of' the' national' economy.' For' example,' a' variety' of' recent' studies' have' documented' what' are' perceived' to' be' shortcomings' in' the' national' level' of' infrastructure' investment,' sometimes' collecting' data' on' stateTbyTstate' deficiencies' in' various' forms' of' capital' stock' in' meeting' needs.' These'are'best'seen'as'“normative”'assessments'of'infrastructure'needs'and'are'heavily'geared'to' achieving'various'professional'performance'standards'(see'annex'X.2,'Infrastructure'Needs).'' The' second' approach' examines' the' impact' of' infrastructure' as' it' benefits' the' economy' by' reducing' the' cost' of' private' business' transactions' and' improving' the' efficiency' of' operations.' Economists' have' attempted' to' measure' the' benefits' provided' by' infrastructure' investment,' and' their'studies'have'generated'a'wide'range'of'estimates.41'In'summary,'the'literature'supports'three' conclusions:' (1)' Public' spending' on' infrastructure' often' produces' positive' economic' returns;' (2)' There'is'significant'variation—both'in'the'returns'and'in'the'range'of'returns'among'projects—that' depends'on'several'factors,'including'a'country’s'stage'of'economic'development;'(3)'How'well'the' physical'stock'of'capital'is'operated'and'maintained'and'if'it'is'financed'so'as'to'be'selfTsufficient' over'time,'determine'the'longTterm'returns.'' Research' suggests' that' the' returns' on' the' initial' phase' of' a' system' of' public' investments,' such'as'the'creation'of'the'Interstate'Highway'System'in'the'United'States,'can'be'large;'however,'it' also' suggests' that' the' economic' returns' decline' as' the' system' grows' and' ages.' Governmental' spending' on' infrastructure' increases' the' stock' of' publicly' owned' capital' and,' in' that' sense,' represents'an'investment'in'the'future'productivity'of'the'private'sector.'But,'the'economic'payoff' from' public' spending' on' infrastructure' depends' on' the' usefulness' of' the' investments' themselves' (do' they' in' fact' support' increased' activity?)' and' how' well' it' is' operated' and' maintained' (is' the' infrastructure' activity' efficient' managed?).' Moreover,' if' such' public' spending' “crowds' out”' (reduces' the' funding' available' for)'any' private' capital' that' might' otherwise' occur,' the' net' impact' may'be'diminished.'' Early'studies'of'the'postTWorld'War'II'era'in'the'United'States'suggested'that'annual'output' was' sparked' by' public' infrastructure' investments.' An' implication' of' this' research' was' that' a' substantial' part' of' the' productivity' slump' of' the' 1970s' and' 1980s' in' the' United' States' was' the' result' of' a' shortfall' of' investment' in' infrastructure.' However,' subsequent' studies' identified' weaknesses' in' methodology' and' resulted' in' different' conclusions' about' the' economic' returns' on' public' spending' for' infrastructure.' A' major' problem' is' causality.' For' example,' it' may' be' that' as' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 25 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! states'become'more'productive'and'prosperous,'they'then'choose'to'spend'more'on'infrastructure' rather' than' the' other' way' around—that' is,' spending' more' on' infrastructure' makes' states' more' productive'or'prosperous.42''' However,'recent'surveys'covering'the'United'Sates'and'other'nations'have'shown'positive' returns' from' investment' in' public' capital.' But,' the' implications' of' those' international' findings' for' public'spending'on'infrastructure'for'the'United'States'are'not'clear.'That'is'because'much'of'the' recent'research'arriving'at'favorable'assessments'has'analyzed'circumstances'that'do'not'apply'to' the' United' States.' For' example,' studies' that' examine' infrastructure' investment' often' deal' with' samples'of'countries'that'are'at'different,'earlier'stages'of'development.'' According'to'the'Congressional'Budget'Office'2008'national'infrastructure'study'(OMB'2008,'19):'' '“[R]ecent' research' indicates' that' the' returns' on' investment' in' public' capital' in' the' United' States' are' positive' but' below' earlier' estimates.' Economic' research' points' out' that' the' payoff' from' investments' in' public' infrastructure,' such' as' highways,' falls' off' significantly' after' the' initial' impact' on' economic' activity.' For' example,' according' to' data' spanning' 1953' to' 1989,' construction' of' the' Interstate' Highway' System' in' the' United' States' made' vehicleTintensive' industries' in' particular' more' productive.' However,'the'capital'spending'that'took'place'after'completion'of'that'system'in'1973' appears'not'to'have'had'an'effect'on'differences'in'those'industries’'productivity.”' Moreover,'the'results'of'international'research'rely'on'a'broad'concept'of'public'investment' by'sectors'such'as'telecommunications'that'in'the'United'States'are'privately'owned'and'funded.43' Overall,' the' evidence' suggests' that' achieving' positive' returns' on' investments' in' infrastructure'depends'on'the'type'of'infrastructure,'the'amount'of'infrastructure'already'in'place,' and' the' phase' of' national' development' that' a' country' is' experiencing.' For' example,' the' national' products' of' underdeveloped' countries' traditionally' have' benefited' by' the' development' of' transportation' systems.' This' permits' access' of' the' hinterlands' to' national' and' global' markets.' Similarly,' basic' energy,' water' utilities,' and' sanitation' support' urbanization' and' industrialization.' The' same' has' been' true' with' developing' telecommunications' as' an' “information' age”' service' economy'develops.'' Credence'to'the'varying'assessments'of'the'role'of'infrastructure'in'economic'development' is' also' provided' by' recent' studies' done' by' the' World' Economic' Forum' (WEF)' on' international' competitive'factors.'Based'on'a'combination'of'businessperson'assessments'and'various'statistical' series' that' are' available' on' an' international' basis,' the' WEF' estimates' the' relative' competitive' position' of' the' world’s' country' economies' (WEF' 2010).' The' index' consists' of' a' complex' set' of' factors' ordered' into' three' major' groupings' (“Basic' Requirements,”' “Efficiency' Enhancers,”' and' “Innovation—Sophistication”).' These' component' factor' groups,' in' sequential' order,' roughly' describe' the' transition' of' countries' into' higher' levels' of' economic' development.' Based' on' quantitative' research,' WEF' changes' the' weighting' of' the' factors' to' reflect' the' stages' of' development'(as'measured'by'GDP'per'capita).'' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 26 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! Infrastructure'is'included'in'the'Basic'Requirement'set'of'factors.'The'interesting'aspect'is' that'the'Basic'Requirement'component'reduces'weighting'as'an'economy'becomes'more'developed' (WEF' 2010,' 9–10).44' In' other' words,' lowTincome' countries' have' this' “basic' requirement”' component'weighted'at'60'percent'in'their'total'score,'while'for'medium'income'the'weight'is'40' percent,' and' for' high' income' countries' the' weight' is' 20' percent.' The' implicit' finding' is' that' infrastructure' investment' is' approximately' three' times' as' important' as' a' development' factor' (increasing' competitiveness)' to' lowTincome' emerging' economies' compared' to' highTincome' developed'ones.'' The' WEF' report' also' states' that' while' the' United' States' in' 2010' ranks' 4th' overall' in' the' world’s' competitive' economy' index,' the' nation' ranks' only' 15th' in' the' world' in' terms' of' its' infrastructure' quality.' However,' it' should' be' noted' that' only' three' quantitative' measures' of' infrastructure' were' used' in' comparing' among' all' the' nations,' along' with' the' impressions' of' surveyed'business'persons.'Nonetheless'for'those'that'travel'internationally,'the'low'rating'for'the' United'States’'transportation'infrastructure'facilities'appears'correct.'' '' Annex+X.2+++A+Note+about+Infrastructure+Needs+Studies++ While' the' political' fortunes' of' infrastructure' spending' may' wax' and' wane' in' the' United' States,' there' is' no' lack' of' assessments' of' its' importance' and' the' need' for' increased' spending' to' meet'national'needs.'Among'the'recent'national'studies'are'the'following:'' • National+ Surface+ Transportation+ Infrastructure+Financing+ Commission:' In' Paying. Our. Way:.A.New.Framework.for.Transportation.Finance.(2009),'the'Commission'estimated'that' the'annual'gap'between'all'modes'of'U.S.'transportation'needs'and'current'investment'by' all' levels' of' government' was' from' $172' billion' to' maintain. existing' transportation' infrastructure' to' $214' billion' to' improve. system' performance.' (http://financecommission.dot.gov/)' • American+ Society+ of+ Civil+ Engineers:' In' ASCE’s' “Infrastructure' Report' Card' 2009,”' the' professional'engineering'society'estimated'that'investment'of'$2.2'trillion'over'five'years'is' needed' to' maintain' and' upgrade' the' nation’s' infrastructure.' For' transportation,' the' projected' need' was' $930' billion' over' five' years,' or' $186' billion' per' year' (http://www.infrastructurereportcard.org/)' • Miller+ Center+ of+ Public+ Affairs,' University' of' Virginia:' In' 2010' ' a' report' (“Well' Within' Reach”)'prepared'by'a'panel'of'experts'estimated'that'an'additional'$134–262'billion'must' be' spent' per' year' through' 2035' to' rebuild' and' improve' the' nation’s' road,' rail,' and' air' transportation' systems.' (http://web1.millercenter.org/conferences/report/conf_2010_transportation.pdf)' • Urban+ Land+ Institute+ and+ Ernst+ &+ Young:' ' Annual' reports' on' infrastructure' needs' and' surveys' of' major' projects' (both' domestic' and' foreign)' under' way' are' produced' by' the' Urban'Land'Institute'and'Ernst'&'Young.'The'most'recent'is' Infrastructure.2011:.A.Strategic. Priority.'Washington,'D.C.:'Urban'Land'Institute.'' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 27 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! • U.S.+ Chamber+ of+ Commerce:' Since' 2007,' in' various' publications' under' the' initiative' Lets. Rebuild. America,' the' Chamber' of' Commerce' has' put' together' various' indices' of' infrastructure' need' and' performance,' with' emphasis' on' the' transportation' sector' (http://www.uschamber.com/lra).45'' '' Annex+X.3+++Federal+Programs+Influence+State+Infrastructure+Decision+Making.+ State'capital'budgeting'practices'are'heavily'influenced'by'federal'aid'mandates,'especially' in' the' areas' of' highways' and' environmental' facilities,' both' of' which' have' been' largeTscale' recipients'of'federal'assistance.'Such'assistance'carries'requirements'for'planning'and'also'entails' various' technical' specifications' for' facility' design' that' must' be' met' in' order' to' qualify' for' aid.' In' transportation,' federal' requirements' specify' the' general' approach' that' states' and' regional' organizations' should' use' in' planning' transportation' infrastructure' projects.' However,' these' requirements'usually'do'not'specify'the'analytical'techniques'to'be'used'be'planners'in'evaluating' projects.46'See'figure'A.X.1'for'an'array'of'factors'influencing'decisionTmaking.'' ' Figure+A.X.1++++Factors+Influencing+Transportation+Infrastructure+Decisions+ ' Source:'USGAO'2004.' In' the' environmental' area—where' air' quality,' for' example,' is' linked' to' transportation' planning—the' federal' requirements' revolve' around' capital' projects' meeting' specific' technical' pollution' control' standards.' However,' the' priorities' used' by' states' in' passing' out' assistance' to' localities' (which' now' in' water' pollution' programs' is' primarily' in' the' form' of' subsidized' lending' programs)'are'left'largely'to'the'states'to'determine.'' Federal' agencies' such' the' Office' of' Management' and' Budget' (OMB),' Department' of' Transportation' (DOT),' and' Government' Accountability' Office' (GAO)' have' identified' benefitTcost' analysis'as'a'tool'to'identify'those'projects'with'the'greatest'net'benefits.'However,'state'and'local' planners'acknowledge'that'factors'other'than'the'systematic'analyses'of'the'planning'process'often' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 28 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! drive' final' investment' decisions.' State' and' regional' decision' makers' must' consider' the' structure' and'availability'of'federal'funding'sources.'Low'matching'requirements'on'federal'programs'greatly' lower'the'net'costs'of'a'project'to'the'aid'recipients.'Since'federal'funding'often'is'tied'to'a'single' purpose,'it'can'be'difficult'to'finance'projects'that'do'not'have'dedicated'funding'(such'as'making' railroad' improvement' projects' with' highway' funds).' In' addition,' political' decision' makers' must' ensure'that'there'is'public'participation'in'their'deliberations'and'that'their'choices'have'sufficient' political'support.'' Often,' at' both' the' state' and' local' levels,' voter' referendums' are' required' to' approve' a' taxT supported'project’s'financing.47'Also,'the'physical'limits'on'expanding'existing'infrastructure'(such' as' highways' in' historic' areas)' may' direct' investments' to' preserving' and' maintaining' existing' facilities' or' improving' operations.' Finally,' multiTstate' infrastructure' projects' (such' as' transportation' corridors' or' shared' water' resources)' can' be' barriers' in' coordinating' investment' decisions.48' The' same' is' true' with' multiTjurisdictional' projects' within' a' state,' unless' the' state' government' intervenes' and' requires' cooperation.' Designing' and' enforcing' environmental' and' energyTrelated'standards'are'matters'of'intense'political'controversy'at'the'legislative'level'in'the' United' States.' As' of' this' writing,' the' need' for' national' government' deficit' reduction,' plus' widespread' political' efforts' to' reduce' the' size' of' government' at' all' levels,' place' the' future' of' all' federal'assistance'programs'and'their'support'of'infrastructure'very'much'in'doubt'(Halsey'2011).'' + Annex+X.4++++Asset+Management+and+GASB+Rule+34++ Financial' accounting' and' reporting' practices' have' had' a' substantial' impact' on' the' area' of' state' and' local' government' capital' asset' management' in' the' United' States.' Reacting' to' concerns' about' the' decline' in' infrastructure' investment' in' the' 1980s,' states' and' large' cities' began' to' emphasize'the'need'for'systematic'longTterm'asset'planning,'including'measuring'the'condition'of' existing' facilities' and' responding' to' maintenance' and' replacement' requirements.' In' 1999,' the' Government'Accounting'Standards'Board'(GASB)'released'Rule'34,'which'requires'governments'to' annually' report,' as' part' of' their' comprehensive' financial' reports,' a' statement' showing' the' depreciated' value' of' their' physical' assets.49' Essentially' what' GASB' 34' did' was' to' require' that' general' units' of' governments' report' their' financial' results' and' condition' on' a' full' accrual' basis,' with' a' complete' balance' sheet' showing' their' physical' capital' assets' on' a' depreciated' basis.' (Government' enterprises' had' earlier' moved' to' a' full' accrual,' corporateTstyle' financial' reporting' system.)' The' new' accounting' requirements' gave' higher' visibility' to' capital' investment' decisions' and'the'meeting'of'capital'maintenance'and'replacement'needs.'' While' “GASB' Statement' 34”' and' the' financial' reports' are' arcane' matters' for' the' general' public,' they' have' fostered' the' adoption' of' comprehensive' systems' for' assessing' the' condition' of' assets' and' linking' capital' decision' making' to' the' budgeting' process.' The' credit' rating' agencies,' bank'lenders,'and'various'major'investors'use'the'more'comprehensive'financial'reports'to'judge' the'capital'asset'management'practices' of' the' states' and' cities.50'Thus,'it'is'primarily'through'the' private'credit'markets'(and'the'credit'ratings)'that'the'reporting'standards'are'enforced'and'good' management' practices' are' rewarded.' It' should' be' noted' that' government' enterprises' (financed' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 29 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! with' revenue' bonds)' act' as' commercial' enterprises' and' have' maintenance' and' replacement' spending'requirements'(as'a'matter'of'contract)'built'into'their'borrowing'arrangements.'' ' Notes+ 1. As'is'always'true'with'tabulations'regarding'infrastructure,'the'total'spending'is'subject'to' the' definition' of' infrastructure' used.' This' is' important' when' it' comes' to' the' categorical' fringes' of' the' definition.' For' example,' the' Congressional' Budget' Office' considered' postal' facilities'an'infrastructure'category,'but'not'health'care'facilities'(such'as'hospitals).'In'2008' the'private'sector'invested'about'$30'billion'in'hospitals'and'related'health'care'structures,' while' the' public' sector' invested' about' $9' billion' (see' U.S.' Bureau' of' Economic' Analysis'' 2008).'' 2. Federal' level,' direct' nonTdefense' spending' on' infrastructure' is' primarily' in' natural' resources'and'energy.'There'is'also'some'spending'on'office'facilities.'In'2004'this'federal' capital' spending' amounted' to' approximately' $27' billion.' (See' USOMB' 2011,' table' 9.5— “Nondefense'Outlays'for'Major'Public'Direct'Physical'Capital'Investment:'1940–2012”).'' 3. USBEA' (2011)' National' Income' Accounts.' In' 2004,' gross' investment' by' state' and' local' governments'equaled'2.3%'of'GDP'and'that'of'the'Federal'Government'equaled'only'0.2%' of' GDP.' PrivateTsector' gross' investment' was' equal' to' 16.1%' of' GDP,' with' 10.3%' of' GDP' being'nonTresidential'and'5.8%'of'GDP'being'residential.'Note'that'the'inferred'deprecation' on' government' investments' is' considered' a' current' consumption' item' in' the' national' income' accounts.' These' investment' figures' do' not' reflect' defenseTrelated' and' national' security'capital'spending.'' 4. The' programs' carry' various' requirements' and' usually' are' distributed' by' formulas.' There' are'often'matching'requirements'whereby'the'states’'uses'of'the'funds'are'leveraged'by'the' federal'payments.'' 5. The' several' states' and' the' Federal' Government' have' different' fiscal' years.' These' timing' differences'lead'to'somewhat'different'results'when'tallying'the'sources'and'uses'of'funds' for'a'particular'interval'and'purpose.' 6. Determining' the' definition' of' “infrastructure”' can' lead' to' a' great' deal' of' controversy.' The' U.S.' Federal' Government' does' not' have' a' formal' capital' budget.' Yet' many' of' its' expenditures' are' considered' “investments”' in' the' future' economy.' For' example,' OMB' (2008)'in'an'appendix'describes'spending'on'research'and'development'and'education'as' investments.' Those' spending' categories' form' the' basis' for' supporting' intellectual' and' human'capital,'respectively,'and'can'provide'longTterm'benefits'akin'to'those'generated'by' “hard”'infrastructure'spending.'However,'for'the'purposes'of'this'analysis,'consideration'is' restricted' to' the' physical' facilities,' “bricks' and' mortar,”' used' in' supplying' governmental' services.'' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 30 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! 7. Gross'investment'as'defined'in'the'national'income'accounts'is'generally'similar'to'capital' spending'except'that'the'costs'of'acquisition'of'land'and'exiting'built'assets'are'omitted,'as' are'sundry'“soft'costs”'that'may'be'capitalized'in'a'budget.'However,'major'new'equipment' acquired' is' included.' It' should' also' be' noted' that' in' the' national' income' accounts,' the' expenditures'and'revenues'of'certain'forms'of'public'enterprise'activities'are'excluded,'and' only' the' surplus' or' deficit' is' included' in' the' public' sector' accounts.' At' the' state' and' local' level,' these' exclusions' amount' to' about' $30' billion' annually' in' capital' outlays,' which' are' treated' as' “commercial”' or' marketTbased' activities' for' national' income' purposes.' See' USBEA' (2010),' table' 3.19,' “Relation' of' State' and' Local' Government' Current' Receipts' and' Expenditures'to'the'National'Income'Accounts.”''' 8. There'at'present'is'great'political'disagreement'in'the'United'States'surrounding'the'merit' of'counterTcyclical'spending'by'government'(at'all'levels)'as'opposed'to'keeping'taxes'low' and' reducing' the' size' of' government.' At' stake' in' the' debate' is' the' future' of' federallyT supported' grant' programs,' such' as' the' Highway' Transportation' fund' and' discretionary' spending'for'other'infrastructure'purposes.''' 9. State' and' local' debt' obligations' are' generically' referred' to' as' “municipal' bonds.”' The' Federal'Government'does'virtually'no'direct'lending'to'states'and'localities.'' 10. See' SIFMA' 2010.' Governments' typically' borrow' longTterm' and' create' bond' funds' from' which' they' withdraw' funds' to' pay' for' construction' and' acquisition' as' projects' are' completed.'Also,'many'bond'issues'borrow'to'create'debt'service'reserves'to'assure'timely' payment'and'to'fund'various'“soft'costs,”'such'as'engineering,'legal,'and'financing'charges,' which'are'often'capitalized'as'part'of'the'amount'borrowed.'Thus,'the'net'use'of'proceeds' from'a'bond'issue'to'pay'the'“hard”'costs'of'construction'and'acquisition'is'often'80'percent' of'the'amount'borrowed.''' 11. These'are'called'“tests”'that'a'borrower'must'meet'under'the'bond'contract.'For'example,'if' the' net' operating' revenues' (net' of' operating' expenses)' of' a' project' are' not' a' specified' multiple'of'the'annual'debt'service,'the'debtor'is'legally'required'to'raise'rates'to'achieve' that' multiple' (this' is' called' the' “coverage' requirement”).' These' contract' requirements' are' overseen'by'a'trustee'(financial'institution)'that'receives'regular'reports'and'represents'the' bondholders.' Also,' revenue' bond' funds' are' exempt' by' federal' law' from' municipal' bankruptcy'proceedings.'The'U.S.'legal'system'is'“creditor'friendly.”''' 12. Revenue' bonds' are' “limited”' debt' obligations,' meaning' that' they' do' not' look' to' general' taxes' for' support.' They' are' funded' by' special' contracts,' which' dictate' performance' requirements'and'are'based'on'market'feasibility'and'engineering'studies.'Failure'to'meet' operating'norms'can'trigger'legal'action'to'enforce'the'contracts.'' 13. In' the' area' of' real' estate' development,' publicTprivate' partnerships' usually' involve' the' creation'of'a'special'entity'(district),'which'make'improvements'(roads,'water,'and'sewer)' in' conjunction' with' the' development.' The' district' levies' taxes' or' charges' to' pay' for' the' improvements,' which' are' usually' financed' by' a' bond' issue.' Those' expenditures' are' recorded' as' government' outlays,' but' in' these' cases' are' directed' toward' developing' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 31 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! privately' owned' parcels' and' depend' on' the' increase' in' activity' and' values' caused' by' the' development.'' 14. Most'notable'have'been'the'leasing'of'toll'roads'to'private'consortia'in'Indiana,'Virginia,'and' the' City' of' Chicago.' The' Great' Recession' and' continuing' weak' economy' have,' for' the' time' being,'stunted'the'growth'in'such'privatizations.'' 15. The'subTindicators'for'the'People'factor'are'strategic'workforce'planning,'hiring,'retaining' employees,' training' and' development,' and' managing' employee' performance.' SubT indicators' for' the' Money' factor' are' longTterm' outlook,' budget' process,' structural' balance,' contracting/purchasing,' and' financial' controls/reporting' subTindicators.' Finally,' the' subT indicators' for' Information' include' strategic' directions,' budgeting' for' performance,' managing' for' performance,' performance' auditing' and' evaluation,' and' online' services' and' information'subTindicators.' 16. Surveys'done'by'Pew'before'2005'used'different'criteria'and'are'not'directly'comparable'to' the'2005'and'2008'surveys,'which'used'the'same'criteria'and'research'techniques.'Michael' Pagano,'University'of'Illinois'at'Chicago,'oversaw'the'implementation'and'tabulation'of'the' infrastructure' survey.' Scores' and' grades' for' the' states' were' developed' and' vetted,' with' final'scoring'done'by'a'committee'of'the'interviewers.'' 17. The' big' movers' were' two' states' whose' infrastructure' grades' moved' up' by' 3' units' (' New' Mexico'and'Wyoming)'and'one'state'moved'up'by'4'units'(Alabama).Two'states'had'their' infrastructure'grades'moved'down'by'3'units'(New'Hampshire'and'Ohio)'' 18. For'a'description'of'the'numeric'scoring'of'the'subcomponents,'See'table'X.7.'' 19. The' substantial' impact' of' maintenance' policies' on' the' state' infrastructure' score' and' its' relationship' to' financial' reporting' practices' is' discussed' in' annex' X.4,' Asset' Management' and'GASB'Rule'34.' 20. Pew'(2008);'the'statement'appears'in'the'report'for'each'state.' 21. The' Money' Management' score’s' high' degree' of' association' is' no' surprise.' Its' subcriteria' are:' (1)' The' state' uses' a' longTterm' perspective' on' budgeting;' (2),' The' budget' process' is' transparent' and' inclusive,' (3)' Financial' management' activities' support' structural' balance' between' ongoing' revenues' and' expenditures,' (4)' Procurement' activities' are' conducted' efficiently' with' effective' internal' controls,' and' (5)' There' is' systematic' assessment' of' the' effectiveness'of'financial'operations'and'management.'See'(Pew'2008,'34).' 22. In' its' “Grading' the' States' 2005' Report,”' the' Pew' team' said' the' following' regarding' infrastructure'management:'“State'[infrastructure'management]'processes'are'dramatically' better'when'it'comes'to'roads'and'bridges.'A'great'deal'of'money'for'state'transportation' projects' comes' from' the' Federal' Government,' which' requires' infrastructure' planning' in' order' to' qualify' for' funding.”' (Pew' 2005,' 28).' For' a' discussion' of' how' federal' aid' affects' state'capital'planning,'see'annex'X.3.' 23. State' highway' capital' spending,' which' is' heavily' influenced' by' the' programmatic' requirements'of'federal'grants,'was'used'as'a'proxy'for'the'degree'of'federal'influence'on' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 32 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! the' capital' spending' planning' and' decisionTmaking' processes' at' the' state' level;' see' annex' X.3'for'a'discussion.'' 24. This' finding' provides' limited' support' for' the' statement' that' higher' levels' of' federal' aid' support'better'infrastructure'grades.'See'Pew'(2008)'' 25. The'various'studies'cited'in'this'report,'such'as'the'ASCE'infrastructure'report'cards'(ASCE' 2009),'do'provide'stateTbyTstate'measures'of'infrastructure'needs.'Also'studies'by'the'U.S.' Environmental' Protection' Agency,' the' U.S.' Department' of' Education,' and' the' U.S.' Department'of'Transportation'provide'quantitative'and'comparative'measures'of'needs'for' major'types'of'infrastructure'at'the'state'level.' 26. The' state' education' fund' was' the' primary' target' (Pew' 2005).' Alabama' Department' of' Finance' website,'http://www.smart.alabama.gov/' 27. Out' of' five' subTindicators' of' infrastructure' performance' grade,' four' indicators' (capital' planning,' project' monitoring,' internal' coordination,' and' intergovernmental' coordination)' improved' from' the' weak' level' to' at' least' midTlevel.' Capital' planning' improved' the' most,' from'weak'to'strong.'Maintenance'stands'still'at'the'weak'level.' 28. The' SMART' acronym' stands' for:' Specific' results,' Measureable' key' goals,' Accountable' to' stakeholders,'Responsive'to'customers,'and'Transparent'to'everyone.' 29. Alabama'represents'a'case'where'improvement'in'stateTlevel'financial'management'results' should'not'be'seen'as'indicating'improving'conditions'at'the'local'level.'The'largest'county' in' the' state' (Jefferson' County–Birmingham)' is' the' scene' of' a' $3' billion' dollar' default' that' has'involved'criminal'activity'by'local'officials.'So'far,'the'state'government'(which'has'$8.5' billion'of'its'own'debt'outstanding)'has'refused'to'get'involved.'' 30. For' example,' to' reduce' moose' killings' by' automobiles,' Vermont’s' Transportation' Department'and'the'U.S.'Department'of'Fish'and'Wildlife'got'together'and'created'the'soT called'“critter'crossings,”'which'provide'safe'places'for'moose'and'other'wild'animals'to'get' across'the'roads.' 31. At' the' time' of' the' Pew' 2008' study,' the' state' capital' plan' was' not' complete' because' the' person'who'usually'compiled'agency'fiveTyear'capital'plans'into'a'single'state'capital'plan' was'temporarily'assigned'to'another'department.'Consequently,'the'state'capital'planning' was'downgraded'by'the'Pew'study'from'strong'level'to'midTlevel.' 32. Although' the' state' auditor' has' developed' a' riskTassessment' tool' to' gauge' the' need' for' audits' in' the' agencies,' the' state' does' not' complete' many' performance' audits' that' include' comparisons'of'agency'performance'over'time,'toward'targets,'or'against'other'agencies'or' state'governments.' 33. The'state'is'noted'for'its'prudent'financial'management'and'has'carried'an'AAA'bond'rating' since'1938,'the'longest'period'for'any'state'in'the'United'States.'' Virginia'has'recently'established' a'state'transportation'infrastructure'bank'that'will'make' loans' for' highway' improvements.' Loans' will' be' made' on' those' projects' that' bring' the' greatest' benefit' to' the' state’s' economy' in' terms' of' jobs,' added' income' and' added' state' revenues.' While' the' costTbenefit' requirements' are' not' laid' out' in' detail,' applicants' have' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 33 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! used'economic'and'fiscal'models'to'demonstrate'that'lowTcost'loans'will'generate'increased' economic'activity'(and'state'tax'revenues)'that'exceed'the'lending'costs'to'the'state.''' 34. See,' for' example,' see' Fuller' (2011),' which' provides' an' economic' analysis' of' the' impact' of' major'road'programs'on'the'state’s'economy,'using'a'stateTbased'economic'model.''' 35. Virginia'does'have'a'balanced'budget'requirement,'but'the'state'and'local'legislative'bodies' are' free' to' set' tax' rates' and' have' no' limitation' on' the' growth' or' composition' of' annual' expenditures.'Tax'and'expenditure'limitations'are'prevalent'in'many'states'and'affect'their' financial'flexibility.'See'Lee,'Johnson,'and'Joyce'(2007,'97).'' 36. The'reports'make'frequent'reference'to'such'things'as'infrastructure'backlogs,'unsafe'dams,' miles'of'roads'that'need'paving,'and'school'rooms'needed,'but'there'is'neither'uniform'use' of' these' need' data' points' in' deriving' the' grades' nor' comparisons' of' such' need' measures' versus'actual'spending.'' 37. The' analysis' of' “representative' expenditures”' among' governments' is' complex' and' largely' neglected.' The' difficulties' of' comparing' expenditure' “needs”' and' “outcomes”' among' the' states'was'examined'in'1990'by'the'Advisory'Commission'on'Intergovernmental'Relations' (see' Rafuse' 1990).' The' commission' no' longer' exists,' in' part' reflecting' the' political' controversy' surrounding' making' comparative' measures' of' needs' for' different' types' of' government' services,' including' infrastructure' spending.' The' difficult' politics' of' a' diverse' nation' have' made' popular' the' use' of' formulaTdriven' grants' that' distribute' national' funds' irrespective'of'regional'differences'in'tastes'for'services'and'their'costs.' 38. This'is'not'to'say'that'corruption,'or'hints'of'it,'is'nonexistent,'but'the'media'and'the'legal' system'make'it'difficult.'See'“Gov.'Perry’s'Cash'Machine,”'New.York.Times.(2011,'A22)..' 39. Very' little' construction' work' is' done' by' government' employees' (which' is' called' “force' account' work”).' Rather,' contracts' are' let' to' private' firms,' usually' involving' required' advertizing' and' competitive' bidding.' Since' there' are' so' many' local' governments' letting' contracts,' as' well' as' so' many' private' firms' bidding' for' them,' there' is' a' large,' competitive' market' for' government' procurement.' It' is' not' uncommon' for' losers' to' challenge' contract' awards.'' 40. According' to' the' national' income' accounts,' see' USBEA' (2010),' net' investment' in' government'physical'assets'by'state'and'local'governments'was'over'2%'of'GDP'in'the'late' 1960s,'but'has'declined'to'less'than'1%'by'2010.'This'is'a'macro'measure,'but'it'indicates' that'in'the'aggregate'the'net'expansion'in'assets'is'in'decline'as'old'assets'are'consumed'at'a' rate'that'offsets'much'of'the'new'capital'spending.'See'annex'X.4'for'a'brief'discussion'of'the' governmental'accounting'and'financial'reporting'practices'in'the'United'States'that'fostered' state'and'local'systems'of'asset'management.''' 41. For'a'summary'of'this'research,'see'OMB'(2008,'14'et.seq.).'' 42. See'footnotes'16'and'17'in'OMB'(2008,'17).' 43. See'footnotes'18'and'19'in'OMB'(2008,'19).' 44. The' basic' requirements' factor' consists' equally' of' infrastructure,' institutions,' macroT economic'policy,'and'health'and'primary'education.'' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 34 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! 45. The'Chamber'of'Commerce'is'still'developing'its'indices,'which'are'hampered'by'data'gaps' and'the'great'diversity'of'infrastructure'needs'and'conditions'throughout'the'nation.'It'has' used' perceptions' of' business' people' as' to' transportation' needs' and' quality' in' its' survey' work,' somewhat' along' the' lines' used' by' the' World' Economic' Forum' (WEF' 2010),' thus' there'is'a'heavy'element'of'subjective'judgment'involved.'For'a'discussion'of'the'Chamber’s' survey'and'sampling'techniques,'see'Oswald,'Qiwang'Li,'McNeil,'and'Trimbath'(2011).' 46. These' key' requirements' include' developing' strategic' goals,' considering' a' wide' range' of' environmental' and' economic' factors,' preparing' longT' and' shortTrange' plans,' and' ensuring' an'inclusive'process'that'involves'public'and'private'“stakeholders”'(see'USGAO'2004).'' 47. This'is'true'for'either'raising'taxes'to'support'a'project'or'selling'bonds'to'finance'it—the' two'measures'are'often'combined'in'a'single'referendum'vote.'' 48. An' example' of' interstate' difficulty' is' the' inability' of' Virginia' and' Maryland' to' agree' on' additional' “ring' roads”' in' the' Washington' DC' area.' Virginia' would' like' a' bypass' to' be' located' between' Loudoun' County' (VA)' and' northern' Montgomery' County' (MD),' but' Maryland'does'not'want'that'to'happen.'Maryland'prefers'to'have'traffic'funnel'toward'the' east'and'its'harbor'city'of'Baltimore.'Moreover,'Montgomery'County'wants'to'maintain'the' rural'nature'of'its'northwest'area.''' 49. Government' Accounting' Standards' Board' (2006)' promulgates' standards' for' financial' accounting'and'reporting'by'state'and'local'governments.'' 50. See' Lee,' Johnson' and' Joyce' (2007,' 510)' in' which' several' examples' of' domestic' and' international'asset'management'programs'are'described.'' ' References++++ ASCE' (American' Society' of' Civil' Engineers).' 2009.' Report. Card. on. America’s. Infrastructure. 2009..ASCE,.Reston,'VA.''http://www.infrastructurereportcard.org/)' CBO' (U.S.' Congressional' Budget' Office).' 2008.' “Issues' and' Options' in' Infrastructure' Investment.”.CBO,'U.S.'Congress,'Washington,'DC.'''' CBO' (U.S.' Congressional' Budget' Office).' 2010.' “Public' Spending' on' Transportation' and' Water'Infrastructure.”'CBO,'U.S.'Congress,'Washington,'DC.'''' Fuller,' Stephen.' 2011.' “The' Impact' of' Sixteen' Proposed' PPTA' Mega' Projects' on' the' Commonwealth'of'Virginia'Economy.”'Center'for'Regional'Analysis,'School'of'Public'Policy,'George' Mason'University,'Arlington,'VA.'' Government' Accounting' Standards' Board.' 2006.' “Basic' Financial' Statements—and' Management's' Discussion' and' Analysis—for' State' and' Local' Governments,”'Statement. of. Government. Accounting. Standard. No.. 34.' GASB,' Norwalk,' CT.' http://www.gasb.org/st/summary/gstsm34.html' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 35 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! Halsey,' Ashley.' 2011.' “States' Dread' new' Standoff' over' Transportation' Fund.”' Washington. Post,'August'24.' Lee,' Robert,' Ronald' Johnson,' and' Philip' Joyce.' 2007.' Public. Budgeting. Systems,. 8th. ed.' Boston:'Jones'and'Bartlett.' 'Knight,'Joshua.'2007.'“SMART'Governing:'Alabama’s'Performance'Management'Initiative.”' Government' Finance' Officers' Association' (GFOA)+ Annual' Meeting,' March' 2,' Anaheim,' California,' http://www.gfoaa.org/SMART.pdf' Miller' Center' of' Public' Affairs' 2010.' “Well. Within. Reach”' Conference' on' Transportation' Needs'and'Financing,'October'10,'2010,'University'of'Virginia,'Charlottesville,'VA.'' National' Association' of' State' Budget' Officers.' 2010.' ' “State' Expenditure' Report' 2009.”' NASBO,''Washington,'D.C.+' National' Surface' Transportation' Infrastructure' Financing' Commission.' 2009.. Paying. Our. Way:.A.New.Framework.for.Transportation.Finance..NSTIFC,.Washington,'D.C.' New'York'Times.'2011..“Gov.'Perry’s'Cash'Machine”'New.York.Times,.August'25.' Oswald,' Michelle,' Qiwang' Li,' Sue' McNeil,' and' Susanne' Trimbath.' 2011.' “Measuring' Infrastructure' Performance:' Developing' a' National' Infrastructure' Index.”' Public. Works. Management.&.Policy,'Vol.16,'No.4,'June'2011.+' Pew'(Pew'Center'for'the'States).'2005.'“Grading'the'States'2005'Report,”'Pew,'Washington,' D.C.'' ———.'2008.'“Grading'the'States'2008'Report,”'Pew,'Washington,'D.C.'' Rafuse,'Robert.'1990.'“Representative'Expenditures:'Addressing'a'Neglected'Dimension'of' Fiscal'Capacity.”'Advisory'Commission'on'Intergovernmental'Relations,'Report'MT174,'Washington,' D.C.. SIFMA' (Securities' Industry' and' Financial' Markets' Association).' 2010.' “Municipal' Bonds:' New'Issues'by'New'Capital'and'Refunding.”'SIFMA,'Washington,'D.C.'' USBEA' (U.S.' Bureau' of' Economic' Analysis).' 2010.' “National' Income' Accounts,”' (various' tables).' USBEA,'Washington,'DC.' ———.' 2011.' “Relation' of' Private' Fixed' Investment' in' Structures' (by' type)' in' the' Fixed' Assets' Accounts' to' the' Corresponding' Items' in' the' National' Income' and' Product' Accounts”' USBEA,' Washington,'DC,'http://www.bea.gov/national/FA2004/Structures_type.pdf'' 'U.S.'Census'Bureau.'2008.'“Government'Finances'2008.”'U.S.'Census'Bureau,'Department'of' Commerce,'Washington,'DC.' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 36 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! U.S.' Chamber' of' Commerce.' 2010.' “Let’s' Rebuild' America”' website.' http://www.uschamber.com/lra.''' U.S.' General' Accounting' Office.' 2004.' Surface' Transportation:' Many' Factors' Affect' Investment'Decisions'(June'2004).' U.S.'Office'of'Management'and'Budget.'2011.' Fiscal.Year.2012.X.Historical.Tables:.Budget'of' the' U.S.' Government,+ “Table' 9.5—Nondefense' Outlays' for' Major' Public' Direct' Physical' Capital' Investment:'1940–2012.”'USOMB,'Washington,'DC.' Urban'Land'Institute'and'Ernst'&'Young.'2011.'“Infrastructure'2011:'A'Strategic'Priority.”' Urban'Land'Institute,'Washington,'D.C.'' WEF.' (World' Economic' Forum).' 2010.' “Global' Competitiveness' Report' 2010–2011.”' WEF,' Geneva'Switzerland.' ' ' T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 37 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! ' !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! + 1. As is always true with tabulations regarding infrastructure, the total spending is subject to the definition of infrastructure used. This is important when it comes to the categorical fringes of the definition. For example, the Congressional Budget Office considered postal facilities an infrastructure category, but not health care facilities (such as hospitals). In 2008 the private sector invested about $30 billion in hospitals and related health care structures, while the public sector invested about $9 billion (see U.S. Bureau of Economic Analysis 2008). 2. Federal level, direct non-defense spending on infrastructure is primarily in natural resources and energy. There is also some spending on office facilities. In 2004 this federal capital spending amounted to approximately $27 billion. (See USOMB 2011, table 9.5—“Nondefense Outlays for Major Public Direct Physical Capital Investment: 1940–2012”). 3. USBEA (2011) National Income Accounts. In 2004, gross investment by state and local governments equaled 2.3% of GDP and that of the Federal Government equaled only 0.2% of GDP. Private-sector gross investment was equal to 16.1% of GDP, with 10.3% of GDP being non-residential and 5.8% of GDP being residential. Note that the inferred deprecation on government investments is considered a current consumption item in the national income accounts. These investment figures do not reflect defense-related and national security capital spending. 4. The programs carry various requirements and usually are distributed by formulas. There are often matching requirements whereby the states’ uses of the funds are leveraged by the federal payments. 5. The several states and the Federal Government have different fiscal years. These timing differences lead to somewhat different results when tallying the sources and uses of funds for a particular interval and purpose. 6. Determining the definition of “infrastructure” can lead to a great deal of controversy. The U.S. Federal Government does not have a formal capital budget. Yet many of its expenditures are considered “investments” in the future economy. For example, OMB (2008) in an appendix describes spending on research and development and education as investments. Those spending categories form the basis for supporting intellectual and human capital, respectively, and can provide long-term benefits akin to those generated by “hard” infrastructure spending. However, for the purposes of this analysis, consideration is restricted to the physical facilities, “bricks and mortar,” used in supplying governmental services. 7. Gross investment as defined in the national income accounts is generally similar to capital spending except that the costs of acquisition of land and exiting built assets are omitted, as are T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 38 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! sundry “soft costs” that may be capitalized in a budget. However, major new equipment acquired is included. It should also be noted that in the national income accounts, the expenditures and revenues of certain forms of public enterprise activities are excluded, and only the surplus or deficit is included in the public sector accounts. At the state and local level, these exclusions amount to about $30 billion annually in capital outlays, which are treated as “commercial” or market-based activities for national income purposes. See USBEA (2010), table 3.19, “Relation of State and Local Government Current Receipts and Expenditures to the National Income Accounts.” 8. There at present is great political disagreement in the United States surrounding the merit of counter-cyclical spending by government (at all levels) as opposed to keeping taxes low and reducing the size of government. At stake in the debate is the future of federally-supported grant programs, such as the Highway Transportation fund and discretionary spending for other infrastructure purposes. 9. State and local debt obligations are generically referred to as “municipal bonds.” The Federal Government does virtually no direct lending to states and localities. 10. See SIFMA 2010. Governments typically borrow long-term and create bond funds from which they withdraw funds to pay for construction and acquisition as projects are completed. Also, many bond issues borrow to create debt service reserves to assure timely payment and to fund various “soft costs,” such as engineering, legal, and financing charges, which are often capitalized as part of the amount borrowed. Thus, the net use of proceeds from a bond issue to pay the “hard” costs of construction and acquisition is often 80 percent of the amount borrowed. 11. These are called “tests” that a borrower must meet under the bond contract. For example, if the net operating revenues (net of operating expenses) of a project are not a specified multiple of the annual debt service, the debtor is legally required to raise rates to achieve that multiple (this is called the “coverage requirement”). These contract requirements are overseen by a trustee (financial institution) that receives regular reports and represents the bondholders. Also, revenue bond funds are exempt by federal law from municipal bankruptcy proceedings. The U.S. legal system is “creditor friendly.” 12. Revenue bonds are “limited” debt obligations, meaning that they do not look to general taxes for support. They are funded by special contracts, which dictate performance requirements and are based on market feasibility and engineering studies. Failure to meet operating norms can trigger legal action to enforce the contracts. 13. In the area of real estate development, public-private partnerships usually involve the creation of a special entity (district), which make improvements (roads, water, and sewer) in conjunction with the development. The district levies taxes or charges to pay for the improvements, which are usually financed by a bond issue. Those expenditures are recorded as government outlays, but in these cases are directed toward developing privately owned parcels and depend on the increase in activity and values caused by the development. T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 39 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 14. Most notable have been the leasing of toll roads to private consortia in Indiana, Virginia, and the City of Chicago. The Great Recession and continuing weak economy have, for the time being, stunted the growth in such privatizations. 15. The sub-indicators for the People factor are strategic workforce planning, hiring, retaining employees, training and development, and managing employee performance. Sub-indicators for the Money factor are long-term outlook, budget process, structural balance, contracting/purchasing, and financial controls/reporting sub-indicators. Finally, the sub-indicators for Information include strategic directions, budgeting for performance, managing for performance, performance auditing and evaluation, and online services and information sub- indicators. 16. Surveys done by Pew before 2005 used different criteria and are not directly comparable to the 2005 and 2008 surveys, which used the same criteria and research techniques. Michael Pagano, University of Illinois at Chicago, oversaw the implementation and tabulation of the infrastructure survey. Scores and grades for the states were developed and vetted, with final scoring done by a committee of the interviewers. 17. The big movers were two states whose infrastructure grades moved up by 3 units ( New Mexico and Wyoming) and one state moved up by 4 units (Alabama).Two states had their infrastructure grades moved down by 3 units (New Hampshire and Ohio) 18. For a description of the numeric scoring of the subcomponents, See table X.7. 19. The substantial impact of maintenance policies on the state infrastructure score and its relationship to financial reporting practices is discussed in annex X.4, Asset Management and GASB Rule 34. 20. Pew (2008); the statement appears in the report for each state. 21. The Money Management score’s high degree of association is no surprise. Its subcriteria are: (1) The state uses a long-term perspective on budgeting; (2), The budget process is transparent and inclusive, (3) Financial management activities support structural balance between ongoing revenues and expenditures, (4) Procurement activities are conducted efficiently with effective internal controls, and (5) There is systematic assessment of the effectiveness of financial operations and management. See (Pew 2008, 34). 22. In its “Grading the States 2005 Report,” the Pew team said the following regarding infrastructure management: “State [infrastructure management] processes are dramatically better when it comes to roads and bridges. A great deal of money for state transportation projects comes from the Federal Government, which requires infrastructure planning in order to qualify for funding.” (Pew 2005, 28). For a discussion of how federal aid affects state capital planning, see annex X.3. 23. State highway capital spending, which is heavily influenced by the programmatic requirements of federal grants, was used as a proxy for the degree of federal influence on the capital spending planning and decision-making processes at the state level; see annex X.3 for a discussion. 24. This finding provides limited support for the statement that higher levels of federal aid support better infrastructure grades. See Pew (2008) T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 40 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 25. The various studies cited in this report, such as the ASCE infrastructure report cards (ASCE 2009), do provide state-by-state measures of infrastructure needs. Also studies by the U.S. Environmental Protection Agency, the U.S. Department of Education, and the U.S. Department of Transportation provide quantitative and comparative measures of needs for major types of infrastructure at the state level. 26. The state education fund was the primary target (Pew 2005). Alabama Department of Finance website, http://www.smart.alabama.gov/ 27. Out of five sub-indicators of infrastructure performance grade, four indicators (capital planning, project monitoring, internal coordination, and intergovernmental coordination) improved from the weak level to at least mid-level. Capital planning improved the most, from weak to strong. Maintenance stands still at the weak level. 28. The SMART acronym stands for: Specific results, Measureable key goals, Accountable to stakeholders, Responsive to customers, and Transparent to everyone. 29. Alabama represents a case where improvement in state-level financial management results should not be seen as indicating improving conditions at the local level. The largest county in the state (Jefferson County–Birmingham) is the scene of a $3 billion dollar default that has involved criminal activity by local officials. So far, the state government (which has $8.5 billion of its own debt outstanding) has refused to get involved. 30. For example, to reduce moose killings by automobiles, Vermont’s Transportation Department and the U.S. Department of Fish and Wildlife got together and created the so-called “critter crossings,” which provide safe places for moose and other wild animals to get across the roads. 31. At the time of the Pew 2008 study, the state capital plan was not complete because the person who usually compiled agency five-year capital plans into a single state capital plan was temporarily assigned to another department. Consequently, the state capital planning was downgraded by the Pew study from strong level to mid-level. 32. Although the state auditor has developed a risk-assessment tool to gauge the need for audits in the agencies, the state does not complete many performance audits that include comparisons of agency performance over time, toward targets, or against other agencies or state governments. 33. The state is noted for its prudent financial management and has carried an AAA bond rating since 1938, the longest period for any state in the United States. Virginia has recently established a state transportation infrastructure bank that will make loans for highway improvements. Loans will be made on those projects that bring the greatest benefit to the state’s economy in terms of jobs, added income and added state revenues. While the cost-benefit requirements are not laid out in detail, applicants have used economic and fiscal models to demonstrate that low-cost loans will generate increased economic activity (and state tax revenues) that exceed the lending costs to the state. 34. See, for example, see Fuller (2011), which provides an economic analysis of the impact of major road programs on the state’s economy, using a state-based economic model. T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 41 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 35. Virginia does have a balanced budget requirement, but the state and local legislative bodies are free to set tax rates and have no limitation on the growth or composition of annual expenditures. Tax and expenditure limitations are prevalent in many states and affect their financial flexibility. See Lee, Johnson, and Joyce (2007, 97). 36. The reports make frequent reference to such things as infrastructure backlogs, unsafe dams, miles of roads that need paving, and school rooms needed, but there is neither uniform use of these need data points in deriving the grades nor comparisons of such need measures versus actual spending. 37. The analysis of “representative expenditures” among governments is complex and largely neglected. The difficulties of comparing expenditure “needs” and “outcomes” among the states was examined in 1990 by the Advisory Commission on Intergovernmental Relations (see Rafuse 1990). The commission no longer exists, in part reflecting the political controversy surrounding making comparative measures of needs for different types of government services, including infrastructure spending. The difficult politics of a diverse nation have made popular the use of formula-driven grants that distribute national funds irrespective of regional differences in tastes for services and their costs. 38. This is not to say that corruption, or hints of it, is nonexistent, but the media and the legal system make it difficult. See “Gov. Perry’s Cash Machine,” New York Times (2011, A22). 39. Very little construction work is done by government employees (which is called “force account work”). Rather, contracts are let to private firms, usually involving required advertizing and competitive bidding. Since there are so many local governments letting contracts, as well as so many private firms bidding for them, there is a large, competitive market for government procurement. It is not uncommon for losers to challenge contract awards. 40. According to the national income accounts, see USBEA (2010), net investment in government physical assets by state and local governments was over 2% of GDP in the late 1960s, but has declined to less than 1% by 2010. This is a macro measure, but it indicates that in the aggregate the net expansion in assets is in decline as old assets are consumed at a rate that offsets much of the new capital spending. See annex X.4 for a brief discussion of the governmental accounting and financial reporting practices in the United States that fostered state and local systems of asset management. 41. For a summary of this research, see OMB (2008, 14 et.seq.). 42. See footnotes 16 and 17 in OMB (2008, 17). 43. See footnotes 18 and 19 in OMB (2008, 19). 44. The basic requirements factor consists equally of infrastructure, institutions, macro-economic policy, and health and primary education. 45. The Chamber of Commerce is still developing its indices, which are hampered by data gaps and the great diversity of infrastructure needs and conditions throughout the nation. It has used perceptions of business people as to transportation needs and quality in its survey work, somewhat along the lines used by the World Economic Forum (WEF 2010), thus there is a heavy T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 42 ! 2012 COUNTRY CASE STUDY: UNITED STATES ! Infrastructure Investments by State Governments – Grading the Decision process ! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! element of subjective judgment involved. For a discussion of the Chamber’s survey and sampling techniques, see Oswald, Qiwang Li, McNeil, and Trimbath (2011). 46. These key requirements include developing strategic goals, considering a wide range of environmental and economic factors, preparing long- and short-range plans, and ensuring an inclusive process that involves public and private “stakeholders” (see USGAO 2004). 47. This is true for either raising taxes to support a project or selling bonds to finance it—the two measures are often combined in a single referendum vote. 48. An example of interstate difficulty is the inability of Virginia and Maryland to agree on additional “ring roads” in the Washington DC area. Virginia would like a bypass to be located between Loudoun County (VA) and northern Montgomery County (MD), but Maryland does not want that to happen. Maryland prefers to have traffic funnel toward the east and its harbor city of Baltimore. Moreover, Montgomery County wants to maintain the rural nature of its northwest area. 49. Government Accounting Standards Board (2006) promulgates standards for financial accounting and reporting by state and local governments. 50. See Lee, Johnson and Joyce (2007, 510) in which several examples of domestic and international asset management programs are described. T H E P O W E R O F P U B L I C I N V E S T M E N T M A N A G E M E N T' PAGE 43 !