Investing in tomorrow: U.S. infrastructure’s challenges and solutions

Transcription:

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Mike Scarchilli (00:04):

Hi everyone and welcome to the Bond Buyer Podcast, your essential resource for insights into everything municipal finance. I’m Mike Scarchilli, Editor-in-Chief of the Bond Buyer, and this week we dive into the critical topic of infrastructure, resilience and funding. Joining us to explore this vital issue is Darren Olson, a water resources engineer and head of the Water Resources Department at the Christopher B. Burke Engineering Limited in Chicago. Darren is also the chair of the American Society of Civil Engineers Committee on America’s infrastructure, which produces the ace’s well-known infrastructure report card. In this episode, Darren sits down with our senior infrastructure reporter, Caitlin Devitt, to discuss the current state of America’s infrastructure, the impact of recent federal investments and the importance of planning for climate resiliency. The conversation also delves into the crucial role that continuous infrastructure investment plays in saving American households money and the varying regional approaches needed to address climate risks. With that, let’s get started and dive into this insightful conversation.

Caitlin Devitt (01:13):

As we know, cities and counties and states and towns finance the bulk of our infrastructure mostly through municipal bonds, and many in our market think that the amount of muni bond borrowing is going to rise sharply in coming years as issuers start to incorporate climate risk into their capital plans. So let me ask you, in your experience as an engineer who pays attention to resiliency in the condition of our infrastructure, do you think cities and other project owners are doing enough now to address climate change in their infrastructure?

Darren Olson (01:46):

I think it’s refreshing that this is now starting to come to the forefront of infrastructure investment and it is starting to get prioritized. We’ve really seen it at the state and the federal level right now with the infrastructure investment Jobs Act IJA, the Inflation Reduction Act, IRA. They both really, especially IRA really prioritized resilient infrastructure and have been a huge influx of capital into the infrastructure sector. And I think we’re also seeing things like states. We’ve got 22 states right now that have adopted the net zero carbon emission goal. We have another 29 states that have renewable portfolio standards as far as energy. So we are seeing a move towards both from a financial perspective with some of this federal investment and also from more policy standpoint. The states are starting to move towards becoming more resilient. There is certainly still a long way to go. We still are seeing homes being built in areas that flood, and so I think that that’s something that’s right now at the beginning of it, and it’s refreshing to see moving that direction, but there’s still a long way to go.

Caitlin Devitt (03:21):

Yeah, it’s interesting. We see the insurance market, when you talk about homes being built in certain areas, we’re starting to see the property insurance market is really kind of reacting a little bit more strongly than the municipal bond market in some ways to climate risk and they’re starting to pull back. And in our market a lot of people are paying attention to that as sort of a red flag for where climate risks might exist.

Darren Olson (03:47):

Certainly I think we’re seeing a lot of that in the coastal areas where some homes along the coast and we have tough time getting insurance because the insurance companies won’t sell them insurance, but mean think of all the areas of unknown flood risk. So that’s known flood risk. We know that the coasts are susceptible to sea level rise. We know that certain ones are susceptible to hurricanes, but think of all of the areas we in Chicago, throughout Chicago or in older municipalities that are subject to urban flooding risks that isn’t even mapped or not even known. That opens up a whole nother spectrum of the unknown unknowns and what are we doing as far as ensuring those structures.

Caitlin Devitt (04:33):

Yeah, I mean, well, we talked before you talked about what kind of precipitation is something that you guys think about a lot and that the Midwest is going to be, because I’m in Chicago, you’re in Chicago, and a lot of times when you hear about the Midwest, you hear people saying, people will be moving here. We have the Great Lakes and we’re not subject to some of the other climate risk in the coast. But you were saying that in fact, the Midwest is subject to some of those high rainfall that is going to be projected in the future. Is that true about the Midwest and should different regions of the country be designing for different threats?

Darren Olson (05:11):

Absolutely. Absolutely. So you hit the nail on the head. The Midwest is supposed to, they’re estimating that spring rains and spring precipitation is supposed to increase in the Midwest by up to 30%. So that is in the Chicagoland area. When we talk about building resilient infrastructure and climate change risk, that’s probably one of our biggest focuses here in making sure that when we’re designing new roads and new bridges and new subdivisions that we’re using the most up-to-date rainfall, that not only incorporates what we’ve seen in the last 10 or 15 years of increased precipitation, but also predicting out into the future what is anticipated to occur. Because if we build infrastructure, we don’t want to build it for the next five years or the next 10 years. I mean, when you’re building infrastructure, you want to be building it for the next 50 to a hundred years.

(06:05):

And so it makes sense when you’re looking at the precipitation data that you’re designing it on that that should be incorporating things like climate change. So that’s what we look at here. But other areas are looking at things that are completely different. You go out to California, they obviously have things like seismic events and wildfires, and I know that pg e, which is their electric company out there, is working to build their electrical systems more resilient in electrical infrastructure, more resilient to drier weather, hotter weather, so it’s not a source of wildfires. Other things that people are looking at throughout the southeast and older communities we’re looking at, we’ve got combined sewer infrastructure where our rainwater is collected in the same pipe as our wastewater. Chicago is the same way. A lot of communities are looking at decoupling those systems so that every time we have a large rain event, we’re not sending combined sewage into the local waterways.

(07:21):

So each part of the country is kind of dealing with its own climate risk challenge and then also looking at how to build their infrastructure more resilient so they can withstand that. Another great example is Texas. They’re having to, they’ve got these cold snaps that they’ve been getting, and a couple of years ago they had the one where the water systems went out and the gas and electric went out and it costs, I think the state a billion dollars, just that single one event. And so they’re needing to look at building their infrastructure more resilient to handle different temperature situations that may occur from climate change

Caitlin Devitt (08:05):

And that to mention the grid and their system. So does it cost a lot more to design and build resilient infrastructure? I know we talk about, or cities talk about funding being a big barrier despite we do have the IOJA and the IRA and there’s this historical level of federal support, but cities still talk about funding as being a barrier. So does it cost a lot more to design and build infrastructure that protects against climate risk?

Darren Olson (08:38):

I’ll answer that I think in two parts. So the first part would be physically the construction of more resilient infrastructure. And in general, it is going to cost a little bit more in the short term, and I stress the words the short term because you may need to put in a larger storm sewer to handle not just the events that we’re anticipating storm events we’re anticipating now, but the ones that we’re going to be anticipating in the future. So you may need to put in a larger storm sewer or if you’re building a levee, you may need to build that levee a little bit higher to handle anticipated river water levels in the future, not just what we’re seeing today. So in the short term, it could be a little bit more expensive, but when you start to look at the long term and what’s being protected by that infrastructure in the long term is going to be less expensive.

(09:31):

And all you have to do is go and look at places like New Orleans with Hurricane Katrina that had levees, that they were old built to old standards, and now they have put in a new levee system on that levee system has been tested and the amount of the dollar value of what’s been protected by that levee system has really made that levee system pay off and actually be less expensive than have they rebuilt with a less resilient system. So the short term, it may cost a little bit more, but if you look at the long, long-term, 10, 20, 30, 50 years, it’s going to actually cost you less money. But the building is just one component of resiliency. The other part is planning, and that’s something that a lot of municipalities are starting to do quite a bit with their water and their sewer infrastructure is really taking a hard look at it with asset management and seeing where the best investment is.

(10:37):

And that is something that does not cost much more right to plan. Resilience is not much more expensive than planning without resiliency in mind. And so that would be one thing that if I could stress to cities and local governments, it would be that you don’t need to, building resilient can be more expensive, and that is one part of the equation, but the other part is the planning that goes into it, and that doesn’t cost any more to plan resilient than it does to plan the old way. So that’s something that I think we’re seeing a lot more on the federal level with NOA looking at the precipitation standards throughout the country with, I think it was called the Precip Act, where Noah was not just letting people using old rainfall standards, Noah is now going and doing new rainfall standards for the entire country, which is going to be something that’s going to help everyone out when they design more resilient infrastructure. So the cities and states and

Caitlin Devitt (11:52):

Everybody have to build to those or plan to those new standards.

Darren Olson (11:57):

Exactly. So no will have nationwide new rainfall data that it’ll ultimately be up to the municipalities to make sure that that’s what they’re designing to, but that data will be there and available for about

Caitlin Devitt (12:12):

Yeah, I mean, we’re talking about the long horizon. Muni bonds tend to be long debt, 30 years, sometimes longer. So it’s something our market likes to think about going out over the long term. From your perspective, is there something that investors or other infrastructure finance professionals should be looking for? I mean, it sounds like rainfall standards might be one of ’em, sort of like a shortcut or a way of looking to ensure that the assets that they’re thinking about buying the data or that they’re thinking about financing is with selling here?

Darren Olson (12:45):

Yes, and so it would be looking to see what sort of standards that asset has been designed to, and we talked about the rainfall standards, making sure that whether it’s a roadway or a water system or whatever that has been designed to be most current rainfall standards. So whether it’s the new NOAA rainfall data or local rainfall data that may be more climate specific to that area. And I think that the one thing that people talk about with water systems, lower water rates and all that, I would actually look to areas that are investing in their infrastructure and maybe charging a more reasonable rate for that at a higher rate for that infrastructure. And they’re continuing to maintain and inspect and maintain that infrastructure. And that’s where I would want to be investing my money because just because if somebody has the cheapest rates, that generally is the areas that we look that have the largest problems.

(14:07):

And so when we look at water systems that fail, you go back and look at ’em and it’s like, well, they have the cheapest REITs, and maybe that was a way for them to promote their infrastructure better, but in reality, it usually means that they’re not investing in that infrastructure. And so that would be the other thing that I would look for is you’re designing new infrastructure to the latest standards, but then you also have ways that you’re maintaining and continuing to invest and inspect and that infrastructure. And a lot of times that means you’re charging more race. The city of Chicago has been increasing the sewer and water fees, but it’s also been investing in its water infrastructure tremendously. Over the past 10 years, the city of Chicago has pretty much replaced every single water main within the city, and after decades and decades of investment, it badly needed it.

(15:12):

And that’s what we see a lot of times is that these infrastructure holders will under invest for so long that by the time it comes to updating their infrastructure, it’s really, really expensive. And so I like to see communities and cities that are continuing to invest in their infrastructure over long periods rather than ones that don’t charge much wait and wait and wait until things start to fail. And at that point then what they find is when they open up the streets and start to look at their pipes, it’s like, holy cow, we’ve got a lot of work to do.

Caitlin Devitt (15:54):

Makes sense. When you were saying before about incorporating climate risk into capital into planning, it reminded me that National League of Cities just came out with a report or a survey, I should say, a couple of weeks ago. I don’t know if you saw it, kind of asking s about that question and a rising number are doing it still very few. Not that many people responded to the survey, but it was interesting that almost all of ’em said they had been affected by either storm water or flood or heat, but very few were starting to incorporate it, we’re building it, and then we’re incorporating it into their capital plans, although more hard. So like he’s saying, it’s starting to be a shift, I think, where people are paying attention to it. So turning to the A SCE report that I mentioned earlier that just came out, it’s called Bridging the Gap. It’s about the nation’s infrastructure funding gap through I believe, 2043. And it starts by highlighting the significant investment in infrastructure in the last few years by the feds, which we’ve talked about IJA and IRA. Can you sketch for us some of the reports, conclusions about our future infrastructure and some of the high level points that report makes?

Darren Olson (17:14):

Yeah, so the report came out and it is interesting to note that we put this report out also once every four years, and the previous report was titled Failure to Act. And so I think the name change on this one is really striking and is something to highlight because we are now talking about not just failing to act, but bridging the gap. And that really has been done by those two federal investments IJA and IRA. And what we’ve seen is that the gap has been continuing to grow this infrastructure gap, which is the difference between what are our infrastructure needs versus how much are we spending on infrastructure. And that gap has grown considerably over the past decades really because the federal government hasn’t been investing in our infrastructure. And so we’ve been talking about the failure to act, what is that causing in economic damages and in damages to additional cost to the American household?

(18:29):

What we’ve seen is that with these two bills that the gap has started to, the growth of the gap has slowed and even in some cases stopped. And that’s an important thing to note, that when we invest in our infrastructure, we can start to see how that is helping both the economy and the American household. But what this report did, it took it really a step further. It said, okay, we’re starting to bridge the gap, but what is the difference if we continue to invest in the same way versus if we just do it once and we stop? And that’s where I think some of the most interesting conclusions come in. The gap will essentially continue to grow to $3.7 trillion if we just invest, do this one series of investments and we stop. And that’s the gap over the next 10 years would be $3.7 trillion.

(19:38):

If we continue to invest with the current levels of funding through IJA and IRA, that the gap will shrink to $2.9 trillion. That’s a savings of 800 billion by continuing to invest the way that we are now, the other thing that we’re seeing and what this report does so well is that it boils it down to how does this affect the American household. Previously, the American household core infrastructure was costing them about $3,300 a year, and that cost was car repairs because the roads that we’re driving on had potholes that were causing flat tires as this thing that you and I see in Chicago all the time, additional travel time from either congestion or from maybe a bridge needs to be repaired. And so somebody’s having to spend extra time routing around there. Maybe the otter goes out, you have to buy bottled water because you’re water may have a water main break.

(20:51):

And so that was previously costing the American family about $3,300 a year. That has since, with the investment that we’ve just seen, that has shrunk. And so that has shrunk down to about $2,700 a year. And that’s an important thing when we start to talk to our elected officials about what is this investment, what does this investment really meant? It has saved their constituents money. And that’s such a powerful message. By investing in our infrastructure, we are helping the economy, we’re saving GDP, but we’re also helping the American family. And if we continue to invest that number of $2,700 in cost to us due to poor infrastructure, that actually shrinks down to about $2,000 a year. So an additional $700 of savings that you’re giving people, if we continue to act and continue to invest in this way and that money, that’s money that gets put back into the economy, that it’s extra spending money that people have. And so really by investing in infrastructure, we’re helping our economy, our national and international competitiveness, but you’re also helping the American family. And that’s something that I think is really a message that we can give to our elected officials who are ultimately the ones that are providing the money to do this.

Caitlin Devitt (22:30):

Yeah, that’s super interesting. You can boil it down to those numbers. We don’t necessarily think that when we hit the pothole and have to get the tie replaced, but I think that’s a really good way of putting it. And I guess the IJA expires in 26, so your report curve comes out next year. So we have an election in November, so the next near term and long term, there’s going to be, I assume some action on this front. Very interesting and good stuff. Thank you Darren Olson for joining me today.

Darren Olson (23:04):

Thank you so much for having me. It was great.

Caitlin Devitt (23:07):

And I’m sure if you agree, we’d love to have you back next year when the new infrastructure card comes out.

Darren Olson (23:14):

I would absolutely enjoy that and would love to do it.

Caitlin Devitt (23:18):

Okay. Thanks again.

Darren Olson (23:20):

Thank you so much.

Mike Scarchilli (23:21):

We hope you enjoyed this episode. A big thank you to Darren for joining us and to our own Caitlin Det for conducting the interview. Let’s review some key takeaways from this conversation. One, continuous federal investment in infrastructure is essential. Programs like the Infrastructure Investment and Jobs Act and the Inflation Reduction Act have started to close the funding gap. But this isn’t a one-time fix. We need ongoing investment to prevent future gaps and keep up with necessary improvements. Two, infrastructure investment doesn’t just reduce the funding gap, but also significantly decreases the economic burden on American households. By continuing the current level of federal infrastructure investment, there can be substantial savings for families reducing the annual cost incurred from inadequate infrastructure from 3,300 to around 2000, which in turn stimulates the economy by increasing disposable income. Three, adapting infrastructure to climate change is crucial and varies by region.

(24:25):

In the Midwest, for example, they’re expecting significantly more rainfall, which means they need to plan for that when building roads and bridges. Other areas might focus on risks like earthquakes or wildfires. Ensuring our infrastructure can stand up to these challenges, not just now, but 50 to a hundred years into the future is essential for effective planning and resource allocation. Thanks again for listening to this Bond Buyer podcast. This episode was produced by the Bond Buyer. If you enjoyed this episode, please hit like and subscribe on your favorite podcast player, and please rate us, review us and subscribe to our content at www.bondbuyer.com/subscribe. Until next time, I’m Mike Scarchilli signing off.