Background

The economic well-being of the United States is dependent on the  reliability, safety, and security of its physical infrastructure. The nation’s  infrastructure is vast and affects the daily lives of virtually all Americans.  In total, there are about 4 million miles of roads, 117,000 miles of rail,  600,000 bridges, 79,000 dams, 26,000 miles of commercially navigable  waterways, 11,000 miles of transit lines, 500 train stations, 300 ports,  19,000 airports, 55,000 community drinking water systems, and 30,000  wastewater treatment and collection facilities. Collectively, this  infrastructure connects communities, facilitates trade, provides clean  drinking water, and protects public health, among other things.
The nation’s infrastructure is primarily owned and operated by state and  local governments and the private sector. For example, state and local  governments own about 98 percent of the nation’s bridges and the private  sector owns almost all freight railroad infrastructure. The federal  government owns a limited amount of infrastructure—for instance, the  federal government owns and operates the nation’s air traffic control  infrastructure. In addition, through its oversight role, the federal  government plays an important role in ensuring the safety, security, and  reliability of the nation’s infrastructure. Table 1 provides information on  infrastructure ownership.
Funding for the nation’s infrastructure comes from a variety of federal,  state, local, and private sources. For example, the private and local public  owners of water infrastructure as well as multiple federal agencies fund  drinking water and wastewater capital improvements. As owners of the  infrastructure, state and local governments and the private sector  generally account for a larger share of funding for infrastructure than the  federal government. However, the federal government has played and  continues to play an important role in funding infrastructure. For example:    From 1954 through 2001, the federal government invested over $370 billion  (in 2001 dollars) in the Interstate Highway System.
Federal Airport Improvement Program grants provided an average of $3.6  billion annually (in 2006 dollars) for airport capital improvements between  2001 and 2005.
From fiscal year 1991 through fiscal year 2000, nine federal agencies  provided about $44 billion (in 2000 dollars) for drinking water and  wastewater capital improvements.
Through the New Starts program, the federal government provided over  $10 billion in capital funds for new fixed-guideway transit (e.g., commuter  rail and subway) projects between fiscal year 1998 and fiscal year 2007.
To increase the nation’s long-term productivity and growth, the federal  government invests in various activities and sectors, including  infrastructure.While providing long-term benefits to the nation as a  whole, much of this spending does not result in federal ownership of the  infrastructure assets. For the most part, the federal government supports  infrastructure investments through federal subsidies to other levels of  government or the private sector. To address concerns about the state of  the nation’s infrastructure, Members of Congress have introduced several  bills that are intended to increase investment in the nation’s infrastructure  by, for example, issuing bonds and providing tax credits for infrastructure  investments. (See table 2.)
Congress previously established two commissions to study the condition  and future needs of the surface transportation system, including financing  options. It created the National Surface Transportation Policy and  Revenue Study Commission (Policy Commission) to examine the  condition and future needs of the nation’s surface transportation system  and short- and long-term alternatives to replace or supplement the fuel tax  as the principal revenue source supporting the Highway Trust Fund. In  January 2008, the Policy Commission released its final report. Congress  also created the National Surface Transportation Infrastructure Financing  Commission and charged it with analyzing future highway and transit  needs and the finances of the Highway Trust Fund and with  recommending alternative approaches to financing transportation  infrastructure. This commission issued its interim report in February 2008,  and its final report is expected in November 2008.

	The Nation Faces Significant Challenges Associated with Its Infrastructure

We have previously reported that the nation’s surface transportation,  aviation, water, and dam systems face numerous challenges related to  their infrastructure. Increasing congestion has strained the capacity of our  nation’s surface transportation and aviation systems, decreasing their  overall performance in meeting the nation’s mobility needs. Furthermore,  significant investments are needed in our nation’s drinking and  wastewater systems to address deteriorating infrastructure and deferred  maintenance. In light of these and other challenges, we have called for a  fundamental reexamination of government programs and developed a set  of principles that could help guide such a reexamination.

		Growing Congestion Challenges the Nation’s Surface Transportation System, While Federal Programs Face Funding Uncertainties

Despite increases in transportation spending at all levels of government  and improvements to the physical condition of highways and transit  facilities over the past 10 years, congestion has worsened and safety gains  have leveled off. For example, according to DOT, highway spending by all  levels of government has increased 100 percent in real dollar terms since  1980, but the hours of delay during peak travel periods have increased  almost 200 percent during the same period. In addition, demand has  outpaced the capacity of the system, and projected population growth,  technological changes, and increased globalization are expected to further  strain the system. We have previously reported that federal surface  transportation programs are not effectively addressing these key  challenges because federal goals and roles are unclear, many programs  lack links to needs or performance, and the programs may not employ the  best tools and approaches.In addition, federal transportation funding is  generally not linked to specific performance-related goals or outcomes,  resulting in limited assurance that federal funding is being channeled to  the nation’s most critical mobility needs. Federal funding is also often tied  to a single transportation mode, which may limit the use of federal funds  to finance the greatest improvements in mobility.
To address these surface transportation challenges, various stakeholders  have called for increasing significantly the level of investment by all levels  of government in surface transportation. For example, in its January 2008  report, the Policy Commission recommended that all levels of government  and the private sector collectively invest at least $225 billion each year to  maintain and improve the surface transportation system, which would be  about $140 billion more than is currently invested. However, without  significant changes in funding, planned spending, or both, the balance of  the Highway Account of the Highway Trust Fund—the major source of  federal highway funds—is projected to be exhausted at some point during  fiscal year 2009. To address this gap between revenues and spending, in its  fiscal year 2009 budget request, the administration proposed granting the  Secretary of the Treasury, in consultation with the Secretary of  Transportation, the flexibility to transfer funds between the Highway and  Transit Accounts of the Highway Trust Fund. However, this solution, if  enacted, would provide only a short-term reprieve—both the  administration and the Congressional Budget Office project that the  balances of the Highway and Transit Accounts would be exhausted by the  end of fiscal year 2010.

		Increasing Demand Strains the Aviation System and Traditional Funding Approaches

The Federal Aviation Administration (FAA) faces significant challenges in  keeping the nation’s current airspace system running as efficiently as  possible as the demand for air travel increases and the air traffic control  system ages. System congestion, and the resulting flight delays and  cancellations, are serious problems that have worsened in recent years.  For example, according to DOT, 2007 was the second-worst year for  delays since 1995. To accommodate current and expected demand for air  travel, FAA and aviation stakeholders are developing the Next Generation  Air Transportation System (NextGen) to modernize the nation’s air traffic  control infrastructure and increase capacity. This effort is complex and  costly. Although there is considerable uncertainty about how much  NextGen will cost, FAA estimates that NextGen infrastructure will cost the  federal government between $15 billion and $22 billion through 2025.  Other key challenges for FAA include managing a timely acquisition and  implementation of NextGen and dealing effectively with the environmental  concerns of communities that are adjacent to airports or under the flight  paths of arriving and departing aircraft. For example, as we have  previously testified, if not adequately addressed, these concerns,  particularly about the noise that affects local communities and the  emissions that contribute to global warming, may constrain efforts to build  or expand the runways and airports needed to handle the added capacity  envisioned for NextGen. In addition, airports face similar funding  challenges in attempting to expand their capacity. For example, planned  airport development costs total at least $14 billion annually (in 2006  dollars) through 2011—exceeding historical funding levels by about $1  billion per year.
We have previously testified that FAA’s current funding mechanisms—the  Airport and Airway Trust Fund (Trust Fund) and the U.S. Treasury’s  general fund—can potentially provide sufficient resources to support FAA  activities, including NextGen.However, there are a number of  uncertainties—including the future cost of NextGen investment, the  volume of air traffic, the future costs of operating the National Airspace  System, and the levels of future appropriations for the Airport  Improvement Program—that may influence the funding necessary to  support FAA’s activities. In addition, uncertainties surrounding the status  of FAA’s reauthorization could have adverse effects on FAA’s ability to  carry out its mission unless other revenue sources and spending authority  are provided. Without legislative action, both the excise taxes that fund  the Trust Fund and FAA’s authority to spend from the Trust Fund will  expire on June 30, 2008. Failing to meet these infrastructure challenges in  aviation may have significant economic consequences, since aviation is an  integral part of the economy.

		Aging and Deteriorating Water Infrastructure Presents Challenges

Water utilities nationwide are under increasing pressure to make  significant investments to upgrade aging and deteriorating infrastructures,  improve security, serve a growing population, and meet new regulatory  requirements.Water infrastructure needs across the country are  estimated to range from $485 billion to nearly $1.2 trillion over the next 20  years. According to the Environmental Protection Agency’s (EPA) June  2005 Drinking Water Infrastructure Needs Survey, the largest category of  need is the installation and maintenance of transmission and distribution  systems—accounting for $183.6 billion, or about 66 percent of the needs  projected through 2022. For wastewater systems, EPA’s 2004 Clean  Watersheds Needs Survey projected infrastructure-related needs for  publicly owned wastewater systems of $202.5 billion through 2024.Many  drinking water and wastewater utilities have had difficulty raising funds to  repair, replace, or upgrade aging capital assets; comply with regulatory  requirements; and expand capacity to meet increased demand. For  example, based on a nationwide survey of several thousand drinking water  and wastewater utilities, we reported in 2002 that about one-third of the  utilities (1) deferred maintenance because of insufficient funds, (2) had 20  percent or more of their pipelines nearing the end of their useful life, and  (3) lacked basic plans for managing their capital assets.Other GAO work  suggests that the nation’s water utilities could more effectively manage  their infrastructure at a time when significant investments are needed.
Several factors have contributed to the nation’s deteriorating water  infrastructure over the years. The adequacy of available funds, in  particular, has been a key determinant of how well utility infrastructure  has been maintained. However, according to our nationwide survey, a  significant percentage of the utilities serving populations of 10,000 or  more—29 percent of the drinking water utilities and 41 percent of the  wastewater utilities—were not generating enough revenue from user  charges and other local sources to cover their full costs of service. In  addition, when asked about the frequency of rate increases during the  period from 1992 to 2001, more than half the utilities reported raising their  rates infrequently: once, twice, or not at all over the 10-year period. Citing  communities’ funding difficulties, many have looked to the federal  government for financial assistance. However, if budgetary trends over the  past few years serve as any indication, federal funding will not close the  gap. For example, the trends and overall funding levels associated with the  Clean Water and Drinking Water State Revolving Funds, the key federal  programs supporting water infrastructure financing, suggest that they will  have only a marginal impact in closing the long-term water infrastructure  funding gap. We have previously reported that comprehensive asset  management, a technique whereby water systems systematically identify  their needs, set priorities, and better target their investments, can help  utilities make better us of available funds. Additional funds, however, will  ultimately be needed to narrow the funding gap.

		Aging Dam Infrastructure Raises Safety and Funding Challenges

Our nation’s dam infrastructure is an important component of the nation’s  water control infrastructure, supplying such benefits as water for drinking,  irrigation, and industrial uses; flood control; hydroelectric power;  recreation; and navigation. However, as evidenced by the events of  Hurricanes Katrina and Rita, the failure of dam infrastructure, which  includes levees, also represents a risk to public safety, local and regional  economies, and the environment. In particular, the aging of dam  infrastructure in the United States continues to be a critical issue for dam  safety because the age of dams is a leading indicator of potential dam  failure.According to the American Society of Civil Engineers, the number  of unsafe dams has risen by more than 33 percent since 1998, to more than  3,500 in 2005.In addition, the number of dams identified as unsafe is  increasing faster than the number of dams that are being repaired.
To address the challenges facing our nation’s dams, the Federal  Emergency Management Agency and the National Dam Safety Review  Board identified both short- and long-term goals and priorities for the  National Dam Safety Program over the next 5 to 10 years. They include  identifying and remedying deficient dams, increasing dam inspections,  increasing the number of and updating of Emergency Action Plans,  achieving the participation of all states in the National Dam Safety  Program, increasing research products disseminated to the dam safety  community, and achieving cost efficiencies. However, according to the  Congressional Research Service, most federal agencies do not have  funding available to immediately undertake all nonurgent repairs, and at  some agencies, dam rehabilitation projects must compete for funding with  other construction projects. The Association of State Dam Safety  Officials reported similar funding constraints on dam investment at the  state level.

		GAO Principles Could Guide Efforts to Reexamine Federal Programs in Light of Challenges

Given the nation’s infrastructure challenges and the federal government’s  fiscal outlook, we have called for a fundamental reexamination of  government programs. Addressing these challenges requires strategic  approaches, effective tools and programs, and coordinated solutions  involving all levels of government and the private sector. Yet in many  cases, the government is still trying to do business in ways that are based  on conditions, priorities, and approaches that were established decades  ago and are not well suited to addressing 21st century challenges. A  reexamination offers an opportunity to address emerging concerns by  eliminating outdated or ineffective programs, more sharply defining the  federal role in relation to state and local roles, and modernizing those  programs and policies that remain relevant. Through our prior analyses of  existing programs, we identified a number of principles that could help  drive an assessment for restructuring and financing the federal surface  transportation program. While these principles are designed specifically to  reexamine the surface transportation programs, most, if not all of these  principles could be informative as policymakers consider how to address  challenges facing other federal infrastructure programs. These principles  include    creating well-defined goals based on identified areas of national interest,  which involves examining the relevance and relative priority of existing  programs in light of 21st century challenges and identifying emerging areas  of national importance;   establishing and clearly defining the federal role in achieving each goal in  relation to the roles of state and local governments, regional entities, and  the private sector; incorporating performance and accountability into funding decisions to  ensure resources are targeted to programs that best achieve intended  outcomes and national priorities;   employing the best tools, such as benefit-cost analysis, and approaches to  emphasize return on investment at a time of constrained federal resources;  and   ensuring fiscal sustainability through targeted investments of federal,  state, local, and private resources.

	Various Options Are Available or Have Been Proposed to Fund Investments in the Nation’s Infrastructure

Various options exist or have been proposed to fund investments in the  nation’s infrastructure. These options include altering existing or  introducing new funding approaches and employing various financing  mechanisms. In addition, some have suggested including an infrastructure  component in a future economic stimulus bill, which could provide a one- time infusion of funds for infrastructure. Each of these options has  different merits and challenges, and the selection of any of them will likely  involve trade-offs among different policy goals. Furthermore, the  suitability of any of these options depends on the level of federal  involvement or control that policymakers desire for a given area of policy.  However, as we have reported, when infrastructure investment decisions  are made based on sound evaluations, these options can lead to an  appropriate blend of public and private funds to match public and private  costs and benefits. To help policymakers make explicit decisions about  how much overall federal spending should be devoted to infrastructure  investment, we have previously proposed establishing an investment  component within the unified budget.

		Funding Approaches Can Be Altered or Developed to Help Fund Infrastructure Investments

Various existing funding approaches could be altered or new funding  approaches could be developed to help fund investments in the nation’s  infrastructure. These various approaches can be grouped into two  categories: taxes and user fees.
A variety of taxes have been and could be used to fund the nation’s  infrastructure, including excise, sales, property, and income taxes. For  example, federal excise taxes on motor fuels are the primary source of  funding for the federal surface transportation program. Fuel taxes are  attractive because they have provided a relatively stable stream of  revenues and their collection and enforcement costs are relatively low.  However, fuel taxes do not currently convey to drivers the full costs of  their use of the road—such as the costs of wear and tear, congestion, and  pollution. Moreover, federal motor fuel taxes have not been increased  since 1993—and thus the purchasing power of fuel taxes revenues has  eroded with inflation. As Congressional Budget Office (CBO) has  previously reported, the existing fuel taxes could be altered in a variety of  ways to address this erosion, including increasing the per-gallon tax rate  and indexing the rates to inflation. Some transportation stakeholders  have suggested exploring the potential of using a carbon tax, or other  carbon pricing strategies, to help fund infrastructure. In a system of  carbon taxes, fossil fuel emissions would be taxed, with the tax  proportional to the amount of carbon dioxide released in the fuel’s  combustion. Because a carbon tax could have a broad effect on consumer  decisions, we have previously reported that it could be used to  complement Corporate Average Fuel Economy standards, which require  manufacturers meet fuel economy standards for passenger cars and light  trucks to reduce oil consumption. A carbon tax would create incentives  that could affect a broader range of consumer choices as well as provide  revenue for infrastructure.
Another funding source for infrastructure is user fees. The concept  underlying user fees—that is, users pay directly for the infrastructure they  use—is a long-standing aspect of many infrastructure programs. Examples  of user fees that could be altered or introduced include airport passenger  facility charges; fees for use of air traffic control services; fees based on  vehicle miles traveled (VMT) on roadways; freight fees, such as a per- container charge; highway tolls; and congestion pricing of roads and  aviation infrastructure.
Aviation user fees. Many commercial airports currently impose a user  fee on passengers—referred to as a passenger facility charge—to fund  airport capital projects. Over $2 billion in passenger facility charge  revenues are collected by airports each year, representing an important  source of funding for airport capital projects. In contrast, FAA’s activities,  including the transition to NextGen, are largely funded by excise taxes  through the Airport and Airway Trust Fund. To better connect FAA’s  revenues with the cost of air traffic control services that FAA provides, the  administration has proposed, in its FAA reauthorization bill, to replace this  excise tax funding system with a cost-based user fee system. This new  system would aim to recover the costs of providing air traffic control  services through user fees for commercial operators and aviation fuel  taxes for general aviation. According to the administration, cost-based  user charges would link revenues more closely to costs and could create  incentives for more efficient use of the system by aircraft operators. We  have previously testified that a better alignment of FAA’s revenues and  costs can address concerns about long-term revenue adequacy, equity, and  efficiency as intended, but the ability of the proposed funding structure to  link revenues and costs depends critically on the soundness of FAA’s cost  allocation system in allocating costs to users. We found that the support  for some of FAA’s cost allocation methodology’s underlying assumptions  and methods is insufficient, leaving FAA unable to conclusively  demonstrate the reasonableness of the resulting cost assignments.
VMT fees. To more directly reflect the amount a vehicle uses particular  roads, users could be charged a fee based on the number of vehicle miles  traveled. In 2006, the Oregon Department of Transportation conducted a  pilot program designed to test the technological and administrative  feasibility of a VMT fee. The pilot program evaluated whether a VMT fee  could be implemented to replace motor fuel taxes as the principal source  of transportation revenue by utilizing a Global Positioning System (GPS)  to track miles driven and collecting the VMT fee ($0.012 per mile traveled)  at fuel pumps that can read information from the GPS. As we have  previously reported, using a GPS could also be used to track mileage in  high-congestion zones, and the fee could be adjusted upward for miles  driven in these areas or during more congested times of day such as rush  hour—a strategy that might reduce congestion and save fuel.In addition,  the system could be designed to apply different fees to vehicles, depending  on their fuel economy. On the federal level, a VMT fee could be based on  odometer readings, which would likely be a simpler and less costly way to  implement such a program. A VMT fee—unless it is adjusted based on the  fuel economy of the vehicle—does not provide incentives for customers to  buy vehicles with higher fuel economy ratings because the fee depends  only on mileage. Also, because the fee would likely be collected from  individual drivers, a VMT fee could be expensive for the government to  implement, potentially making it a less cost-effective approach than a  motor fuel or carbon tax. The Oregon study also identified other  challenges including concerns about privacy and technical difficulties in  retrofitting vehicles with the necessary technology.
Freight fees. Given the importance of freight movement to the economy,  the Policy Commission recently recommended a new federal freight fee to  support the development of a national program aimed at strategically  expanding capacity for freight transportation. While the volume of  domestic and international freight moving through the country has  increased dramatically and is expected to continue growing, the capacity  of the nation’s freight transportation infrastructure has not increased at  the same rate as demand. To support the development of a national  program for freight transportation, the Policy Commission recently  recommended the introduction of a federal freight fee. The Policy  Commission notes that a freight fee, such as a per-container charge, could  help fund projects that remedy chokepoints and increase throughput. The  Policy Commission also recommended that a portion of the customs  duties, which are assessed on imported goods, be used to fund capacity  improvements for freight transportation. The majority of customs duties  currently collected, however, are deposited in the U.S. Treasury’s general  fund for the general support of federal activities.Therefore, designating a  portion of customs duties for surface transportation financing would not  create a new source of revenue, but rather transfer funds from the general  fund.
Tolling. We have previously reported that roadway tolling has the  potential to provide new revenues, promote more effective and rational  investment strategies, and better target spending for new and expanded  capacity for surface transportation infrastructure. For example, the  construction of toll projects is typically financed by bonds; therefore,  projects must pass the test of market viability and meet goals demanded  by investors, although even with this test, there is no guarantee that  projects will always be viable. Tolling potentially can also leverage  existing revenue sources by increasing private-sector participation and  investment through such arrangements as public-private partnerships.  However, securing public and political support for tolling can prove  difficult when the public and political leaders perceive tolling (1) as a form  of double taxation, (2) unreasonable because tolls do not usually cover the  full costs of projects, or (3) unfair to certain groups. Other challenges  include obtaining sufficient statutory authority to toll, adequately  addressing the traffic diversion that might result when motorists seek to  avoid toll facilities, limitations on the types of roads that can be tolled, and  coordinating with other states or jurisdictions on a tolling project.
Congestion pricing. As we have previously reported, congestion pricing,  or road pricing, attempts to influence driver behavior by charging fees  during peak hours to encourage users to shift to off-peak periods, use less  congested routes, or use alternative modes. Congestion pricing can also  help guide capital investment decisions for new transportation  infrastructure. In particular, as congestion increases, tolls also increase,  and such increases (sometimes referred to as “congestion surcharges”)  signal increased demand for physical capacity, indicating where capital  investments to increase capacity would be most valuable. Furthermore,  these congestion surcharges can potentially enhance mobility by reducing  congestion and the demand for roads when the surcharges vary according  to congestion to maintain a predetermined level of service. The most  common form of congestion pricing in the United States is high- occupancy-toll lanes, which are priced lanes that offer drivers of vehicles  that do not meet the occupancy requirements the option of paying a toll to  use lanes that are otherwise restricted for high-occupancy vehicles. In its  FAA reauthorization proposal, the administration proposed extending  congestion pricing to the aviation sector as a means of managing air traffic  congestion. Specifically, the administration proposed that FAA establish a  fee based on time of day or day of the week for aircraft using the nation’s  most congested airports to discourage peak-period traffic. Under such a  fee, cargo carriers could pay lower fees by operating at night than they  would pay by operating at peak periods of the day, creating an incentive  for some cargo carriers to switch daytime operations to nighttime. Like  tolling, congestion pricing proposals often arouse political and public  opposition, raise equity concerns, and face statutory restrictions.

		Various Financing Mechanisms Can Also Help Fund Infrastructure Projects

Financing strategies can provide flexibility for all levels of government  when funding additional infrastructure projects, particularly when  traditional pay-as-you-go funding approaches, such as taxes or fees, are  not set at high enough levels to meet demands. The federal government  currently offers several programs to provide state and local governments  with incentives such as bonds, loans, and credit assistance to help finance  infrastructure. Financing mechanisms can create potential savings by  accelerating projects to offset rapidly increasing construction costs and  offer incentives for investment from state and local governments and from  the private sector. However, each financing strategy is, in the final  analysis, a form of debt that ultimately must be repaid with interest.  Furthermore, since the federal government’s cost of capital is lower than  that of the private sector, financing mechanisms, such as bonding, may be  more expensive than timely, full, and up-front appropriations. Finally, if  the federal government chooses to finance infrastructure projects, policy  makers must decide how borrowed dollars will be repaid, either by users  or by the general population either now or in the future through increases  in general fund taxes or reductions in other government services.
A number of available mechanisms can be used to help finance  infrastructure projects. Examples of these financing mechanisms follow:  Bonding. A number of bonding strategies—including tax-exempt bonds,  Grant Anticipation Revenue Vehicles (GARVEE) bonds, and Grant  Anticipation Notes (GAN)—offer flexibility to bridge funding gaps when  traditional revenue sources are scarce. For example, state-issued GARVEE  bonds or GANs provide capital in advance of expected federal funds,  allowing states to accelerate highway and transit project construction and  thus potentially reduce construction costs. Through April 2008, 20 states  and two territories issued approximately $8.2 billion of GARVEE-type debt  financing and 20 other states are actively considering bonding or seeking  legislative authority to issue GARVEEs. Further, SAFETEA-LU authorized  the Secretary of Transportation to allocate $15 billion in private activity  bonds for qualified highway and surface freight transfer facilities.  To date,  $5.3 billion has been allocated for six projects. In aviation, most  commercial airports issue a variety of bonds for airport capital  improvements, most notably general revenue bonds that are backed by  general revenues from the airport—including aircraft landing fees,  concessions, and parking fees—and passenger facility charges. Several  bills introduced in this Congress would increase investment in the nation’s  infrastructure through bonding. For example, the Build America Bonds  Act would provide $50 billion in new infrastructure funding through  bonding. Although bonds can provide up-front capital for infrastructure  projects, they can be more expensive for the federal government than  traditional federal grants. This higher expense results, in part, because the  government must compensate the investors for risks they assumed  through an adequate return on their investment.
Loans, loan guarantees, and credit assistance. The federal  government currently has two programs designed to offer credit  assistance to states for surface transportation projects. The  Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA)  authorized FHWA to provide credit assistance, in the form of direct loans,  loan guarantees, and standby lines of credit for projects of national  significance. A similar program, Railroad Rehabilitation and Improvement  Financing (RRIF) offers loans to acquire, improve, develop, or rehabilitate  intermodal or rail equipment or facilities. To date, 15 TIFIA projects have  been approved for a total of about $4.8 billion in credit assistance and the  RRIF program has approved 21 loan agreements worth more than $747  million. These programs are designed to leverage federal funds by  attracting substantial nonfederal investments in infrastructure projects.  However, the federal government assumes a level of risk when it makes or  guarantees loans for projects financed with private investment.
Revolving funds. Revolving funds can be used to dedicate capital to be  loaned for qualified infrastructure projects. In general, loaned dollars are  repaid, recycled back into the revolving fund, and subsequently reinvested  in the infrastructure through additional loans. Such funds exist at both the  federal and the state levels and are used to finance various infrastructure  projects ranging from highways to water mains. For example, two federal  funds support water infrastructure financing, the Clean Water State  Revolving Fund (CWSRF) for wastewater facilities, and the Drinking  Water State Revolving Fund (DWSRF) for drinking water facilities. Under  each of these programs, the federal government provides seed money to  states, which they supplement with their own funds. These funds are then  loaned to local governments and other entities for water infrastructure  construction and upgrades and various water quality projects. In addition,  State Infrastructure Banks (SIB)—capitalized with federal and state  matching funds—are state-run revolving funds, make loans and provide  credit enhancements and other forms of nongrant assistance to  infrastructure projects. Through June 2007, 33 SIBs have made  approximately 596 loan agreements worth about $6.2 billion to leverage  other available funds for transportation projects across the nation.  Furthermore, other funds—such as a dedicated national infrastructure  bank—have been proposed to increase investment in infrastructure with a  national or regional significance. A challenge for revolving funds in general  is maintaining their capitalized value. Defaults on loans and inflation can  reduce the capitalized value of the fund—necessitating an infusion of  capital to continue the fund’s operations.

		Designing an Economic Stimulus Package to Increase Infrastructure Investment Would Be Difficult

Another option proposed for temporarily increasing investment in the  nation’s infrastructure is including an investment component in a future  economic stimulus bill. According to supporters, including funding for  “ready to build” infrastructure projects in a stimulus bill would serve to  both boost the economy and improve the nation’s infrastructure through a  one-time infusion of funds. For example, the American Association of  State Highway and Transportation Officials estimates 42,000 jobs are  created for every $1 billion dollars invested in transportation projects.
We have previously identified important design criteria for any economic  stimulus package. Specifically:    Economic stimulus package should be timely. An economic stimulus  should not be enacted prematurely, delayed too long, or consist of  programs that would take too long to be implemented to lessen any  economic downturn. For example, if fiscal stimulus is undertaken when it  is not needed, it could result in higher inflation or if fiscal stimulus is  enacted too slowly, it could take effect after the economy has already  started to recover.
Economic stimulus package should be temporary. An economic  stimulus should be designed to raise output in the short run, but should  not increase the budget deficit in the long-run. If a stimulus program is not  temporary and continues after the economy recovers, it could lead to  higher inflation.
Economic stimulus package should be targeted. An economic  stimulus should be targeted to areas that are most vulnerable in a  weakening economy and should generate the largest possible increase in  short-run gross domestic product.
Designing and implementing an economic stimulus package with an  infrastructure investment component that is timely, temporary, and  targeted would be difficult. First, while an effective stimulus package  should be timely, practically speaking, infrastructure projects require  lengthy planning and design periods. According to CBO, even those  projects that are “on the shelf” generally cannot be undertaken quickly  enough to provide a timely stimulus to the economy.Second, spending on  infrastructure is generally not temporary because of the extended time  frames needed to complete projects. For example, initial outlays for major  infrastructure projects supported by the federal government, such as  highway construction, often total less than 25 percent of the total funding  provided for the project. Furthermore, the initial rate of spending can be  significantly lower than 25 percent for large projects. Third, because of  differences among states, it is challenging to target stimulus funding to  areas with the greatest economic and infrastructure needs. For example,  two possible indicators for targeting infrastructure aid to states, gross  state product and lane miles per capita, are not correlated. Furthermore,  as we have previously reported, states tend to substitute federal funds for  funds they would have otherwise spent—making it difficult to target a  stimulus package so that it results in a dollar-for-dollar increase in  infrastructure investment.

		Investment Component within Unified Budget Could Guide Federal Investment in Infrastructure

We have previously reported that the budget process can favor  consumption over investment because the initial cost of an infrastructure  project looks high in comparison to consumption spending.Thus,  adopting a capital budget is suggested as a way to eliminate a perceived  bias against investments requiring large up-front spending when they  compete with other programs in a unified budget. However, proposals to  adopt a capital budget at the federal level often start with certain concepts  and models extended from state and local governments and the private  sector, which are not appropriate because of fundamental differences in  the role of the federal government. Specifically, when state and local  governments and the private sector make investments, they typically own  the resulting assets, while this is frequently not the case for the federal  government. For example, although the federal government invests in  surface transportation, aviation, water, and dam infrastructure, a  significant portion of this infrastructure is owned by state and local  governments. This makes it difficult to fully apply traditional capital  budgeting approaches, such as depreciation, which might be considered  when assets are fully owned. Moreover, there are fundamental differences  between the roles of the state and local governments and the federal  government. In an inclusive, unified budget, it is important to disclose up  front the full commitments of the government. Federal fiscal policy, as  broadly conceived, plays a key role in managing the short-term economy  as well as promoting the savings needed for long-term growth.
Rather than recommend adopting a capital budget, we have previously  proposed establishing an investment component within the unified budget  to address federal spending intended to promote the nation’s long-term  economic growth.By recognizing the different effects of various types of  federal spending, an investment focus within the budget would provide a  valuable supplement to the unified budget’s concentration on  macroeconomic issues. Moreover, it would direct attention to the  consequences of choices within the budget under existing budget  limitations—a level which is now not determined explicitly by  policymakers but is simply the result of numerous individual decisions. If  an investment component within the unified budget was adopted,  Congress could decide on an overall level of investment in a budget  resolution or other macro framework, which would be tracked and  enforced through the authorizing and appropriations process to ensure  that individual appropriations actions supported the overall level. This  approach has the advantage of focusing budget decision makers on the  overall level of investment supported in the budget without losing sight of  the unified budget’s effect on the economy. It also has the advantage of  building on the current congressional budget process. Finally, it does not  raise the problems posed by capital budgeting proposals that use  depreciation and deficit financing.
Although the investment component would be subject to budget controls,  the existence of a separate component could create an incentive to  categorize many proposals as investment. If an investment component  within the budget is to be implemented in a meaningful fashion, it will be  important to identify what to include. Any changes in the budgetary  treatment of investment need to consider broader federal responsibilities.  While well-chosen investments may contribute to long-term growth,  financing such programs through deficits would undermine their own goal  by reducing savings available to fund private investment.Accordingly,  reforms in the federal government’s budget for investment should be  considered within the overall constraints of fiscal policy based on unified  budget principles.

	Concluding Observations

The nation’s physical infrastructure is under strain, raising a host of safety,  security, and economic concerns. Given these concerns, various  investment options have been, and likely will continue to be, identified to  help repair, upgrade, and expand our nation’s infrastructure. Ultimately,  Congress and other federal policymakers will have to determine which  option—or, more likely, which combination of funding and financing  options—best meets the needs of the nation. There is no silver bullet.  Moreover, although financing mechanisms allow state and local  governments to advance projects when traditional pay-as-you-go funding  approaches, such as taxes and fees, are insufficient, ultimately these  borrowed dollars must be repaid by the users or the general population.  Consequently, prudent decisions are needed to determine the appropriate  level of infrastructure investment and to maximize each dollar invested.  We will continue to assist the Congress as it works to evaluate various  investment options and develop infrastructure policies for the 21st  century.
Messrs. Chairmen, this concludes my prepared statement. I would be  pleased to respond to any questions that you or other Members of the  Committee might have.

	GAO Contact and Staff Acknowledgments

For further information on this statement, please contact Patricia Dalton  at (202) 512-2834 or daltonp@gao.gov. Individuals making key  contributions to this testimony were Kyle Browning, Nikki Clowers, Steve  Elstein, JayEtta Hecker, Carol Henn, Bert Japikse, Barbara Lancaster,  Matthew LaTour, Nancy Lueke, and Katherine Siggerud.

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Summary:
Why GAO Did This Study

Physical infrastructure is critical to the nation's economy and affects the daily life of virtually all Americans--from facilitating the movement of goods and people within and beyond U.S. borders to providing clean drinking water. However, this infrastructure--including aviation, highway, transit, rail, water, and dam infrastructure--is under strain. Estimates to repair, replace, or upgrade aging infrastructure as well as expand capacity to meet increased demand top hundreds of billions of dollars. Calls for increased investment in infrastructure come at a time when traditional funding for infrastructure projects is increasingly strained, and the federal government's fiscal outlook is worse than many may understand. This testimony discusses (1) challenges associated with the nation's surface transportation, aviation, water, and dam infrastructure, and the principles GAO has identified to help guide efforts to address these challenges and (2) existing and proposed options to fund investments in the nation's infrastructure. This statement is primarily based on a body of work GAO has completed for the Congress over the last several years. To supplement this existing work, GAO also interviewed Department of Transportation officials to obtain up-to-date information on the status of the Highway Trust Fund and various funding and financing options and reviewed published literature to obtain information on dam infrastructure issues.

What GAO Found

The nation faces a host of serious infrastructure challenges. Demand has outpaced the capacity of our nation's surface transportation and aviation systems, resulting in decreased performance and reliability. In addition, water utilities are facing pressure to upgrade the nation's aging and deteriorating water infrastructure to improve security, serve growing demands, and meet new regulatory requirements. Given these types of challenges and the federal government's fiscal outlook, it is clear that the federal government cannot continue with business as usual. Rather, a fundamental reexamination of government programs, policies, and activities is needed. Through prior analyses of existing programs, GAO identified a number of principles that could guide a reexamination of federal infrastructure programs. These principles include: (1) creating well-defined goals based on identified areas of national interest, (2) establishing and clearly defining the federal role in achieving each goal, (3) incorporating performance and accountability into funding decisions, (4) employing the best tools and approaches to emphasize return on investment, and (5) ensuring fiscal sustainability. Various options are available to fund infrastructure investments. These options include altering existing or introducing new funding approaches and employing various financing mechanisms, such as bonds and loans. For example, a variety of taxes and user fees, such as tolling, can be used to help fund infrastructure projects. In addition, some have suggested including an infrastructure component in a future economic stimulus bill, which could provide a one-time infusion of funds for infrastructure projects. Each of these options has different merits and challenges, and choosing among them will likely involve trade-offs among different policy goals. Furthermore, the suitability of the various options depends on the level of federal involvement or control that policymakers desire. However, as GAO has reported, when infrastructure investment decisions are made based on sound evaluations, these options can lead to an appropriate blend of public and private funds to match public and private costs and benefits. To help policymakers make explicit decisions about how much overall federal spending should be devoted to investment, GAO has previously proposed establishing an investment component within the unified budget.