States and cities defer infrastructure investment despite low borrowing costs; pensions, sluggish economy among factors

The Wall Street Journal recently covered what the headline writers called an “American Paradox.”

Plunging global interest rates have made borrowing cheaper than ever. But instead of spending on aging roads, bridges and buildings, many state and local governments are scaling back.

Washington state has wisely bucked the trend, adopting a much-needed comprehensive transportation package in 2015. The reasons for the national slowdown, nonetheless, are worth reflecting on here.

The WSJ writes,

A McKinsey Global Institute study released in June found the U.S. should boost infrastructure spending by 0.7% of its gross domestic product between now and 2030 to meet transportation, water, power and telecommunications infrastructure needs. Doing so this year would mean roughly $129 billion in new spending.

Many struggling legislatures and city halls are instead focusing on underfunded employee pensions and rising Medicaid costs.

An article in The American Interest expanded on the theme.

One way of thinking about the dilemma facing state and local governments: On paper, they should be borrowing more. Total debt levels are manageable, interest rates are low, and roads and bridges need repairs. But here’s the rub: Off the books, they face massive hidden debts in the form of unfunded pension liabilities, accumulated over decades.

Washington has fewer pension worries than most states. The lesson to be drawn from the “paradox” is that the long-term costs of expanded benefits/programs/services can eventually squeeze out necessary investments. That’s another reason to support the four-year budget outlook. It provides an immediate check on spending plans.

Debt and infrastructure investment will soon play into political discussions here.

The Lens reports on the two Republican treasurer candidates heading into the November general election differ on approaches to the state’s $20.6 billion debt.  

According to a report this year by outgoing State Treasurer James McIntire, Washington had $20.6 billion in debt at the end of December, 2015, up from $18.2 billion at the end of 2011. Last year, the Tax Foundation ranked Washington ninth highest of 50 states in per-capita state and local debt.

The finalists for state treasurer place a different level of emphasis on the state debt, and on limiting future tax hikes. 

In our foundation report, we addressed the importance of managing for the long term.

Even with the ongoing economic recovery, the state budget will face stress for the foreseeable future as a result of court-mandated increases in basic education funding, increased health care expenses, negotiated public employee compensation increases, and increases in other required state spending.

Given these pressures, special emphasis must be placed on controlling key budget drivers, including health care, labor costs, and debt. Some of the actions lawmakers might explore to increase budget sustainability include fully funding state pensions, creating a defined contribution plan option for state employees, and controlling state debt.

It’s a timely conversation.