An infrastructure plan or two, and how to pay for it

Whoever wins the White House this fall, each party claims it will put more people to work updating this nation's embarrassingly worn roads, rails, bridges, ports, airports . . .

And shopping malls?

"Whoever is elected president will work in the first year toward a more stimulative fiscal policy," says James M. Meyer, boss at Tower Bridge Investments, West Conshohocken.

Hillary Clinton has posted a 12-page outline of a program "to encourage and advance U.S. infrastructure spending," including private and tax-exempt financing, since the government is strapped for cash these days, writes Matt Fabian, partner at Municipal Market Analytics.

Clinton plans a five-year, $275 billion building program, plus a few billion to start a "National Infrastructure Bank" that would arrange "public-private partnerships" and tax-exempt municipal bonds to fund more construction, "recalling Obama's 2009 stimulus package."

Rival Donald Trump hasn't detailed plans, unless you count his Aug. 2 pledge to spend twice as much as Clinton promises, says Ted Brooks, of BNY Mellon's Blue Bell-based CenterSquare Investment Management, which invests $10 billion in real estate and infrastructure projects worldwide.

The cheapest way to fund projects is with government borrowing. The U.S. Treasury can sell bonds at 2 percent or less. States with solvent budgets and pensions, such as Delaware and Maryland, can borrow nearly as cheaply; poorly managed states such as New Jersey and Pennsylvania pay more like 3 percent.

That's less than what even the most solvent construction companies pay. Plus, governments don't require a profit margin.

But outside the United States, not too many wealthy countries just tax-and-build anymore. Private firms make and run toll roads and bridges, ports and airports, in Western Europe, East Asia, and much of Latin America. Australia, which finances public projects with pension investments and pays them back with tolls and fees, is "a model for the world," Brooks says.

But locally elected reps have killed attempts to use private money and management to update aging infrastructure around here. Gov. Ed Rendell wanted to lease the Pennsylvania Turnpike to a Spanish construction company financed by Citigroup; the General Assembly laughed it off. Mayor Michael Nutter wanted to sell the Philadelphia Gas Works to a for-profit Connecticut utility; City Council shredded the proposal.

Privatization threatens politically protected jobs and contractors, Brooks acknowledges. It doesn't guarantee cheap services: to the contrary, rates typically rise after town water and sewer plants are taken over by for-profit Aqua America or American Water.

But Pennsylvania Turnpike tolls are rising rapidly, and the roads it's responsible for keep crumbling under the current state-appointed regime, as Brooks points out.

Financiers are less sanguine about public assistance for private-purpose projects.

Last week, the New Jersey Sports and Exposition Authority approved $800 million in tax-exempt Payment in Lieu of Taxes-backed (PILOT) financing for the proposed $2.5 billion American Dream mall, plus $350 million in bonds to be paid by diverting on-site sales taxes, to help the Canadian outfit that owns Minnesota's big Mall of America build the mall and rec center up in the Meadowlands.

Now, all the developers have to find is an additional $1.5 billion from banks or other private lenders, who have declined to fund a mall there under two previous developers since 2004, Fabian notes.

Bond-watchers worry this kind of thing gives "public-private partnerships" and tax subsidies a bad name.

"I hope we're not going to see them subsidizing more solar plants for friends of the administration," says Mayer.

"Does New Jersey really need another shopping mall?" Brooks asks.

Fabian is "skeptical that a new, massive retail mall in one of New Jersey's most congested corridors is desirable or a good economic development bet, and that an entertainment facility - amusements, water park, ski slope - on the New Jersey Turnpike will become a coveted destination location."

He writes that the mall looks more like a make-work project for contractors - at the expense of competing local malls and at the cost of diverting millions in current retail taxes to enrich wealthy foreign developers.

American Dream reminds me of Revel. That $2.4 billion, state-taxpayer-subsidized Atlantic City casino failed before it was two years old and hasn't reopened.

Mayer has a radical finance alternative: "The Federal Reserve could sell some of the bonds from its portfolio and use the profits to fund infrastructure spending," he told clients of Boenning & Scattergood in a report last week.

He's talking about the $4 trillion in mostly Treasury and mortgage-backed securities the Fed accumulated under its "quantitative easing" programs. Since interest rates have continued to drop, a lot of that higher-rate debt can now be sold for tens of billions in profits, Mayer tells me.

Why not sell some and use the profits to fix the national infrastructure? It would take special permission from Congress; without that, Treasury would be bound to use the money to balance the budget. But the bond premiums - limited time only! - would be free money, and it might as well be used for unmet national needs, he says.

This is genius. It's "stimulative," which Democrats like, Mayer notes. It "doesn't require taxes," which Republicans appreciate. And it's "finite," because even the Fed will, in time, run out of bonds to sell at a profit.

Especially when rates start rising again.

JoeD@phillynews.com

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