- If state and local government infrastructure investment had continued at the rate prior to the Great Recession, $1.5 trillion more in infrastructure spending would have occurred in 2009-2019.
- In the decade following the Great Recession, state governments devoted significantly less of their budgets to capital spending and reduced their overall debt burden.
- As COVID-19 restricts consumer travel, billions of transportation activity-derived revenues that fund capital projects are at risk.
- Federal stimulus was vital following the Great Recession to prevent steeper declines in capital spending, but there is no agreement on a new comprehensive infrastructure spending plan.
S&P Global Ratings' analysis of the decade following the Great Recession shows a decline in state capital spending and infrastructure investment. This new paradigm was due to a number of factors, but mostly reflects a challenging operating environment and growing fixed-cost obligations, like pensions and other benefit costs through the lower-for-longer recovery period. Over the past decade, S&P Global Ratings estimates the U.S. would have spent approximately $1.5 trillion more in state and local government infrastructure investments had it continued on its pre-Great Recession path. During this period, both state debt and the portion of budgets devoted to capital expenditures declined. As the country emerges from the COVID-19-induced recession, U.S. state infrastructure spending is likely to be disrupted further. One consequence of continuing travel restrictions instituted to control the spread of the virus is that billions of dollars in transportation-related revenues, which typically fund long-term capital plans, are at risk of falling short of pre-pandemic levels, possibly for several years. As the country begins to recover from the COVID-19-induced recession, which was even more severe than the Great Recession, we see a growing risk of continued underinvestment in infrastructure.
Federal fiscal support that included programs to spur infrastructure investment was vital following the Great Recession to prevent a steeper drop-off in capital investment, but there has been no agreement in Washington on a new comprehensive infrastructure plan. The temporary one-year extension of the federal FAST Act was a start, but only maintains the status quo and does little to promote additional spending. Absent additional federal support, or a quick recovery in state revenues, the U.S. faces another potential decade of missed infrastructure investment.
What Was Lost: $1.5 Trillion In State And Local Infrastructure Investment
Based on a simple linear regression of BEA data, S&P Global Ratings estimates that if state and local government investment continued at a rate prior to the Great Recession, $1.5 trillion more in infrastructure spending would have occurred from 2009 to 2019. This missed opportunity contributed to a decade of slower economic growth, missed productivity gains, and deferred maintenance that increases the costs of deferred capital projects.
While the sudden and severe onset of the COVID-19-induced recession created new budgetary challenges, it also provided an opportunity for renewed infrastructure spending. S&P Global Economics estimates that a $2.1 trillion boost in public infrastructure spending over 10 years, to the levels (relative to GDP) of the mid-20th century, could add as much as $5.7 trillion to the U.S. over the next decade, creating 2.3 million jobs by 2024 as the work is being completed (see, "Infrastructure: What Once Was Lost Can Now Be Found--The Productivity Boost," published May 6, 2020, on RatingsDirect).
What Changed: States Deleveraged And Spent Less On Capital Investments
By most accounts, the immediate past economic recovery was shallow with economic growth only starting to accelerate in 2018 (see "When The Credit Cycle Turns, U.S. States May Be Tested In Unprecedented Ways," published Sept. 17, 2018). Fueled by aging demographic profiles and updated actuarial assumptions, growth in spending on Medicaid, pension contributions, and retiree health care benefits increased faster than overall expenditures, eroding states' discretionary expenditure capacity. As a consequence, capital investment waned as an abrupt change in spending policy created stress for state budgets. During this time, S&P Global Ratings generally observed:
- A slower rate of increase in long-term state and local government debt as pension pressures worsened;
- Smaller portions of state budgets devoted to capital expenditures; and
- New efforts to bolster transportation-related revenues to fund infrastructure projects.
Long-Term State And Local Debt Declined As The Economy Grew
As pension valuations recognized the stock market losses of 2008-2009, liabilities on state and local government balance sheets ballooned and future annual contribution increases were expected to exceed revenue growth. Across the country, pressure increased to curb these increasing costs as they threatened to consume more discretionary budgetary flexibility (see "Recent U.S. State Pension Reform: Balancing Long-Term Strategy and Budget Reality," published Feb. 9, 2018).
From 2010 onward, state and local unfunded pension liabilities continued to grow from 19% to 23% of gross state product (GSP) before declining in 2017. At the same time, long-term debt steadily fell from 19% to approximately 15.5% of GSP. The slower rate of growth of long-term indebtedness is, in our opinion, partly due to increasing pension liabilities and associated contributions.
We view efforts to address rising pension liabilities positively, but this had the unintended consequence of reducing capital spending. On a positive note, the progress states have made on reforming pension obligations reduces its significance as a near-term effect on most state budgets. In our recent survey of state pension plans, we continued to observe states adopt more conservative actuarial assumptions and methods or direct resources into pension plans above required contributions (see "Sudden-Stop Recession Pressures U.S. States' Funding For Pension And Other Retirement Liabilities," published Aug. 3, 2020).
The Portion Of State Budgets Devoted To Capital Spending Continued Its Decline
Capital expenditures as a percentage of state budgets declined from 13% to 8% from 1991 to 2019, underscoring a shift in state spending priorities even before the Great Recession. In turn, new revenues have largely been used to maintain, not grow, infrastructure programs as the nation's transportation infrastructure aged.
This trend is worrisome for the long-term readiness of U.S. infrastructure and demonstrates increased deferred maintenance. In our opinion, significant underspending on maintenance can reduce asset life and increase capital costs, pressuring future financial flexibility (see "Between A Budget And A Hard Place: The Risks Of Deferring Maintenance For U.S. Infrastructure," May 15, 2018). Continued failure to maintain and invest in infrastructure could also lead to slower economic growth or public safety lapses.
Pay-As-You-Go Financing Became More Popular As Federal And Bond Funds Waned
With most capital expenditures occurring outside of the general fund, there has been a noticeable decline in the amount of federal and bond funds spent on infrastructure. According to our analysis of data collected by the National Association of State Budget Officers (NASBO), bond funds financed only 27% of state capital expenditures in fiscal 2019, down from a high of 33.5% in 2009. Over the past 10 years, capital expenditures from federal and bond funds have declined while spending from other state funds, such as revenues in highway and transportation trust funds, increased.
Since the Great Recession ended, many states proposed or enacted changes to their motor fuels taxes. This mostly occurred after 2014, when a global decline in the energy sector left states with such taxes tied to energy markets undergoing automatic gas tax rate declines. Tolling has also part of the conversation in statehouses recently, where entirely new methods of taxation to fund infrastructure have been under consideration (see, "As U.S. State Debt Levels Moderate, Transportation Funding Takes Center Stage," published June 11, 2019). New transportation revenues offset declines in federal and bond funds, but COVID-19 and the sudden-stop recession threaten a pullback in spending.
What's At Risk: Future Infrastructure Investment And Transportation-Related Revenues
With dramatic declines in revenues expected, states will likely pull back on discretionary capital spending to alleviate budget stress. S&P Global Ratings has already observed states significantly reducing expenditures and deferring capital expenditures to address budgetary imbalances (see "COVID-19 Induced Recession Throws Curveball To U.S. State Budgets," published May 21, 2020, and "U.S. States Mid-Year Sector View: States Will Continue To Be Tested In Unprecedented Ways," published July 13, 2020). In our opinion, however, Federal infrastructure stimulus and additional state debt issuance may prevent steep declines in capital spending like we observed in the years following the Great Recession.
State transportation funds receive a number of related revenues, the bulk of which are motor fuels taxes and other vehicle fees, to fund infrastructure programs. Over time, we have observed many states reform their transportation-related revenue structures in response to changing economic trends and consumer behavior. For the past few years, states have generally seen revenue growth in their transportation funds. However, travel restrictions in an effort to mitigate the spread of COVID-19 are placing pressure on these revenue sources and capital programs.
The effect of health and safety mitigation efforts on transportation-related revenues is directly observed in monthly miles traveled and vehicle sales. Total vehicle sales declined 47% from February to April 2020, along with a similar drop of 56% in vehicle miles travelled from February to May 2020 before increasing as parts of the country began to ease travel restrictions. It is unclear when travel will resume at pre-recession levels as broader market changes occur.
The COVID-19 pandemic has dramatically affected the global transportation industry like no other disruptive force in modern history. In three months, the precipitous decline in public transit ridership, cruise ship sailings, air traffic, parking, toll road transactions, port container volumes, and overall mobility--up to 95% in some subsectors--has contributed to an expected slow recovery following the sudden-stop recession and the sharpest contraction in economic activity following World War II (see "Activity Estimates For U.S Transportation Infrastructure Show Public Transit And Airports Most Vulnerable To Near-Term Rating Pressure," published June 4, 2020).
Federal Fiscal Stimulus Could Prevent Further Capital Spending Declines
As we have observed in other recessions, countercyclical federal funding has had a stabilizing influence on state credit quality. In total, Congress approved approximately $1.5 trillion in fiscal stimulus legislation from 2008 through 2012. A landmark stimulus program of the Great Recession, the American Recovery and Reinvestment Act (ARRA) of 2009, provided $48.1 billion for programs administered by the U.S. Department of Transportation ($27.5 billion of which was authorized for highways) to aid the economy over the long term. However, as the stimulus from ARRA faded, the Congressional Budget Office (CBO) also noted that 2013 saw the lowest spending on major infrastructure systems since the late 1990s.
State and local expenditures make up around 75% of national transportation infrastructure expenditures, according to the CBO. Without federal fiscal support following the Great Recession, the drop-off in capital investment would likely have been more severe. Nonetheless, even during normal federal budget cycles, a recurring issue has emerged with federal funding of transportation projects falling short of receipts in the highway trust fund (HTF).
The CBO estimated in March that the HTF faces a shortfall of $87.8 billion in fiscal 2021-2025 and a $120.7 billion shortfall in fiscal 2026-2030. Without a reduction in the size of the surface transportation programs, an increase in revenues, or further general fund transfers, the HTF will become insolvent, threatening infrastructure programs across the country. Funding of the HTF shortfall has often been done in five-year increments, the most recent of which was set to expire Sept. 30, 2020. Identifying a replacement revenue source for existing federal gas tax remains a key uncertainty in achieving a long-term solution, and in the interim, general fund monies have been used. Whereas this is a positive in sustaining the federal role in national infrastructure investment, it is likely not a long-term solution. While Congress passed a continuing authorization extending the FAST Act one more year, a long-term solution remains unclear.
To possibly not repeat the lower-for-longer pace of recovery following the Great Recession, a new federal program for infrastructure spending--now--would alleviate some pressures on state budgets and ensure necessary capital programs are not delayed further. While some extraordinary aid has already been authorized to address direct expenditures related to the pandemic, along with additional Medicaid matching funds, it is unclear if future aid, particularly for infrastructure investment, will be authorized.
- Infrastructure: What Once Was Lost Can Now Be Found--The Productivity Boost, May 6, 2020
- Sudden-Stop Recession Pressures U.S. States' Funding For Pension And Other Retirement Liabilities, Aug. 3, 2020
- U.S. States Mid-Year Sector View: States Will Continue To Be Tested In Unprecedented Ways, July 13, 2020
- Moderating Debt Burdens Allow Some U.S. States Room To Borrow During A Recession, June 16, 2020
- Activity Estimates For U.S Transportation Infrastructure Show Public Transit And Airports Most Vulnerable To Near-Term Rating Pressure, June 4, 2020
- COVID-19 Induced Recession Throws Curveball To U.S. State Budgets, May 21, 2020
- Sudden-Stop Recession Pressures U.S. States' Funding For Pension And Other Retirement Liabilities, June 11, 2019
- When The Credit Cycle Turns, U.S. States May Be Tested In Unprecedented Ways, Sept. 17, 2018
- Between A Budget And A Hard Place: The Risks Of Deferring Maintenance For U.S. Infrastructure, May 15, 2018
- Recent U.S. State Pension Reform: Balancing Long-Term Strategy and Budget Reality, Feb. 9, 2018
This report does not constitute a rating action.
|Primary Credit Analyst:||Timothy W Little, New York + 1 (212) 438 7999;|
|Secondary Contact:||Geoffrey E Buswick, Boston (1) 617-530-8311;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: firstname.lastname@example.org.