In the last two weeks, I’ve had a number of conversations with people about paying for infrastructure. In each of these conversations, the people trying to solve the problem started with the question:

How do we get more money for infrastructure?

After framing things in this way, there is no end to the level of creativity that ensues, with revenue programs and assessment systems and special taxing districts and more all offered for consideration. These are very smart people trying to solve the problem in front of them, but it’s the wrong problem. It’s the wrong question.

“How do we get more….?” is the question of the addict. It allows destructive habits to conflate wants and needs. It allows earnest action to turn to self-harm. The question allows us to address the symptoms of our cumulative decisions with yet more of what is causing our distress. This question is a pretext to decline, not to strength and prosperity.

To build a Strong Town, we have to get upstream of the immediate pressure to find the next fix and embrace a different question, one that is both more challenging and revealing:

Why don’t we have the money and resources we need to maintain infrastructure?

For local governments that can’t print their own money or pretend that prolificacy will have no consequences, the math problem is really simple. Invest in infrastructure to grow the tax base and create jobs, then use the wealth created by that growth to pay for the ongoing operations and maintenance of the system. If your investments are not creating enough wealth to financially sustain themselves, a lack of money is not your problem. A lack of productivity is.

For state and federal officials not wanting to merely be a pusher of liquidity to strung out local communities, the math problem is a little more nuanced. Finding new sources of revenue is helpful and perhaps necessary—we do need more money for infrastructure—but the approach needs to build local community wealth, not undermine it. When we assist city governments, it needs to be in ways that grow their productivity, not diminish their capacity.

That is more difficult than it sounds because the incentives are very different. I wrote in Chapter 5 of Strong Towns: A Bottom-Up Revolution to Rebuild American Prosperity:

What is good for a national economy is not well aligned with what is good for a local economy. The national economy is focused on growth, a short-term metric that is not correlated with real wealth or broad prosperity. In contrast, a local economy depends on wealth accumulation, a long-term reality that correlates to stability.

It is possible to do both—growth and wealth accumulation—but not without intention.

Asset Recycling

In 2018, the Reason Foundation released a policy study on the concept of asset recycling. Here is how they described the concept:

The basic idea calls for long-term leasing of aging existing facilities to well-qualified private partners and “recycling” the lease proceeds into new (but currently unfunded) infrastructure.

Let’s split this into its two components: (1) the long-term leasing of existing facilities, and (2) the use of that revenue to build new infrastructure. I find both of these components deeply fraught in their default state, but not impossible.

For a private partner to be willing to front the money on a long-term lease, that investment needs to be cash flow positive. Let me use another word: profitable. Most municipal infrastructure is not profitable—that is why our cities are struggling to maintain it and being driven towards insolvency because of it—and so very little of what local governments own and operate would make for a good lease situation.

In the limited situations where existing infrastructure investments are profitable, there is a legitimate question to be had about what to do with that profit. An old-fashioned way of approaching the situation—one my Depression-era grandfather would have embraced—would be to use the profit to shore up other parts of the system, maybe by making investments to improve their productivity and help insolvent parts of the system become profitable. My grandfather would probably also default to building up a rainy day fund, but he lived through the Great Depression so savings and prudent investment were his default settings.

In a modern world that places a high value on the easy gains that come with financial alchemy, another option is to take those long-term profits and—like cashing out an annuity or lottery winnings—turn them into a lump sum payment today. This can be done through a long-term lease to a private party willing to part with cash up front for a relatively secure revenue stream over time, kind of like buying a municipal bond only with the potential—through efficient management—to increase the return over time.

There is a legitimate argument to be had here that local governments are not good at running their systems with a high level of financial acuity and that the private sector would do a better job. I would generally agree with that argument as a description of current affairs, but not as destiny. Local governments are presently bad at financial math because state and federal governments have created incentives for them to behave that way, not because they can’t do it well. Those incentives can be changed.

Either way, if you believe the private sector is more competent and sophisticated than a local government at managing these systems, you should be more than a little wary of the capacity of local governments to negotiate lease agreements that are incredibly complex. An advocate of asset recycling should want these transactions to function more like the transparent bond market, with many buyers and sellers holding equal information during the transaction, and less like the one-sided transaction of a pawn shop.

If a local government can successfully structure a lease, then there is the question of what to do with that money. The notion that there are lots of profitable infrastructure projects sitting on the shelf for lack of funding is ridiculous. Interest rates are at all time lows and, like insolvent businesses in this insane time, cities are having no problem borrowing money. The problem isn’t a lack of cash; the projects are unfunded largely because they are bad or overly risky.

Getting a new funding source so we can fund bad and unproductive projects is only going to make things worse. We are back to answering the wrong question. Strong Towns advocates can see how easily this ends badly: A city gives up a profitable revenue stream in exchange for a one-time payout that they use on a white elephant project they have convinced themselves they need, perhaps using matching funds from the federal government. Asset recycling, especially when matched with state and federal incentives, creates a lot of destructive incentives.

From a Strong Towns perspective, asset recycling makes sense where it doesn’t just leverage money but also leverages risk. Contrary to current economic dogma, local governments should not be in the business of taking large risks. That is what the private marketplace is for, and it does it well when it is allowed to work. A successful local government is a source of stability that the private marketplace can build upon. Cities should never gamble with the wealth they need to provide clean water, handle our sewage, keep our streets from falling apart, and dispose of our trash.

Here is an example of a gamble: An airport has an old terminal in need of an upgrade. It has a steady revenue stream and is generally profitable, but an expansion and upgrade would potentially make it more profitable, as well as provide a greater benefit to the community. However, the project could also fail, not only robbing the local government of the profitable revenue stream but becoming a financial sink the community can’t easily rid themselves of.

To take away that downside risk, the community can use an asset recycling program to turn that existing revenue stream into a lump sum payment (or a guaranteed ongoing payment) from a private entity that will take over the terminal for a period of time (two or three decades, perhaps), make the upgrades, and then—if successful—experience a period of financial reward that comes from increased profits before ultimately returning the improved terminal back to public management. The community gets the money up front, takes little to no risk, hopefully has the prosperity from a better terminal, and ultimately ends up with an improved asset.

Obviously, such a transaction takes a lot of financial sophistication. While not impossible, local governments that don’t understand their own balance sheet—that can’t even put an annual dollar amount to their overall building and infrastructure liability—lack the credibility to negotiate such a deal on behalf of their constituents. That’s almost all local governments.

I’m all for putting more tools into the local government toolbox, but asset recycling does not feel like low hanging fruit. It feels primarily to be an attempt to get more money to continue to do the things that are making us poorer, not a reform designed to make our cities stronger and more productive.

Cities do not struggle to get money for good projects. It’s the lack of good projects that is the problem, especially at the scale centralized capital systems work at. Many large, negative-returning infrastructure investments can get funding, especially if they have a significant government constituency, but small, tactical initiatives that are profitable and increase local productivity are crowded out. That’s what needs to change.

How to Start Asking the Right Questions about Infrastructure Funding

Asset Recycling

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