A CONFERENCE REPORT

HIGH PERFORMANCE PUBLIC WORKS A New Federal Investment Strategy for America

U.S. Advisory Commission on Intergovernmental Relations SR-16 November 1993 Advisory Commission on Intergovernmental Relations 800 K Street, NW Suite 450, South Washington, DC 20575 Phone: (202) 653-5640 FAX: (202) 653-5429 ii U.S. Advisory Commission on Intergovernmental Relations EXECUTIVE SUMMARY

The National Council on Public Works Improvement The highest quality investments that can yield (NCPWI) reported to the President and the Congress in maximum benefits compared to their costs; 1988 that "America's infrastructure is barely adequate to Cost-effectivemaintenance of existing facilities and fulfill current requirements, and insufficient to meet the equipment that will help avoid premature and cost- demands of future economic growth and development." ly repaits, rehabilitation, and replacement; Still today, the federal has no coordinated Soundly and equitably regulated projects that public works strategy to implement the improvements can meet environmental and other performance that NCPWI recommended. requirements efficiently in the setting where they The 1990 charge to the U.S. Army Corps of Engineers are located; and to develop a Federal Infrastructure Strategy provided an Affordable facilities that can be supported fian- opportunity to follow up on the NCPWI work in consulta- cially now and in the future by those who are re- tion with many other federal agencies, as well as with rep- sponsible for them. resentatives of state and local and the private sector. These broad consultations are the key to To implement this strategy, an action agenda is pre- strategy development because most public works infra- sented for the federal government. It has three primary structure is state, local, or private. Nevertheless, the fed- elements: (1) leadership by the President and the Con- eral government exercises pervasive influence over gress, (2) the issuance of detailed guidance to help im- America's public works through its financial assistance prove the practices of all the federal infrastructure and and regulatory programs. Thus, an infrastructure strategy infrastructure-related agencies and the clients that they for the federal government is a very important element in influence through their financial aid and regulatory activi- the success of a larger infrastructure strategy for the ties, and (3) governmentwide mechanisms to support the whole nation. recommended improvements. All of the recommended This report examines six key public works improve- actions are addressed to specific parties. ment topics: The President is asked to: I. Improving the quality of infrastructure invest- Issue an executive order requiring (1) improved ments; investment analysis techniques, (2) greater use of 11. Applying benefit-cost analysis to investment op- pricing and demand management techniques, (3) tions; improved maintenance management strategies, 111. Improving the maintenance of infrastructure; (4) better regulatory analysis, (5) the integration of an environmental quality ethic into all public works IV. Making federal regulation of infrastructure more agencies, (6) integrated environmental review pro- effective, efficient, and equitable; cesses, and (7) realistic financial plans that can sup- v Improving environmental decisionmaking for program goals. public works; and 0 Establish a public works investment section in the VI . Improving the financing of infrastructure. executive budget funded wholly or largely by stable trust funds that can be tapped only for For each topic, an interagency, intergovernmental soundly justified projects. consensus statement is presented. From these statements, Propose an infrastructure legislative program a four-point strategy is developed to assure the President, that includes (1) "The Infrastructure Investment the Congress, and the people of the that Act," designed to improve the quality of invest- continued federal investment in infrastructure will go for: ment analysis that is applied to all projects pro-

U.S. Advisory Commission on Intergovernmental Relations iii posed for funding; (2) 'The Environmental largely through the Office of Management and Budget Integration Act," designed to encourage analysis (OMB) circulars affecting the budget, legislative clear- and management of environmental problems in ance, and regulatory review processes. Follow-up work by an interrelated way that can make best use of lim- all federal infrastructure agencies would be required. En- ited resources to get the greatest health and eco- vironmental integration would be the responsibility of the system improvements; and (3) "The Mandate Council on Environmental Quality or its successor in the Relief Act," designed to keep tabs on the cumula- Executive Office of the President. A new infrastructure tive effects of mandate costs on responsible par- policy coordinating mechanism is also recommended to ties and to keep these costs within the bounds of keep all of the parties involved and to avoid the issuance of reasonable affordability. arbitrary and unworkable guidance. Convene a White House Conference on Infra- Governmentwide support for these activities should structure Investment to motivate action on this be provided by a number of agencies, including but not agenda. limited to OMB, the Federal Accounting Standards Advi- The Congress is asked to: sory Board, the Bureau of Economic Analysis, the Federal Geographic Data Committee, the Office of and %ke action on the President's infrastructure leg- Technology Policy, the Office of Personnel Management, islative program; the Administrative Conference of the United States, the Reorganize its committees to make it easier to in- Advisory Commission on Intergovernmental Relations, tegrate infrastructure and environmental pro- and the General Accounting Office. grams; In addition, there is an urgent need for something Integrate sound investment criteria into infra- more. A new institution, tentatively called the Infrastruc- structure and environmental programs when ture Research Board, should be created cooperatively by they are reauthorized; and federal agencies, state and local governments acting Revise the congressional budget and appropri- through their national associations, and the private sector. ations processes to correspond with the Presi- Its purpose would be to sponsor interagency, intergovern- dent's public works investment budget. mental, and public-private exchanges of information and views. This new organization should be modeled on the The detailed guidance called for would be supplied successful Transportation Research Board.

iv U.S.Advisory Commission on Intergovernmental Relations PREFACE AND ACKNOWLEDGMENTS

This report is the result of a series of consultations IV Federal Regulation that took place between April and July 1993. Six broadly Timothy Conlan, George Mason University representative task forces each met three times-in April, Dick Cocozza May, and June-to consider and develop consensus state- V Environmental Decisionmaking ments on six major public works topics. The main points Thomas Magness, Midwest Research Institute from those statements were synthesized into a four-point Pam Salsbery strategy and a more detailed action agenda. The draft VI. Financing strategy and agenda, along with the six task force state- John Petersen, Government Finance Group, Inc. ments, were considered further at The National Confer- Frank Blechman ence on High Performance Infrastructure, attended by about 160 experts, on July 29-30, 1993, in Washington, Other topics-such as research and development, D.C. Numerous revisions were made in the draft report as technology transfer, geographic information systems, a result of the conference. education, and training-were not selected for formal This report and the consultation process leading to it consideration by ACIR because they were being ad- were made possible by financial assistance and technical dressed by other activities in the Corps' larger effort on support from the U. S. Army Corps of Engineers. The the Federal Infrastructure Strategy Program. Neverthe- project is part of a larger effort by the Corps responding to less, they have not gone completely unmentioned in this a specific appropriation made for the purpose of develop- report. ing a Federal Infrastructure Strategy. The project manag- Participants in the task forces and the conference-to er for the Corps was Robert Pietrowsky of the Institute for which all task force members were invited, along with Water Resources. He was assisted by Cameron Gordon. many others-are too numerous to list individually. Fig- We also benefited from the participation of many other ure 1 (page 4), lists the organizations represented on the persons in IWR, other parts of the Corps, and severalper- task forces andlor at the conference. sons in the office of the Assistant Secretary of the Army for Civil Works. Formal presentations at the conference were made by The ACIR effort was directed by Bruce D. McDowell, (in order of presentation): director of Government Policy Research. He was assisted by Hon. Edward G. Rendell, Mayor, Philadelphia Charles Griffiths, Jeffery Fitzpatrick, and Suzanne Spence. Hon. Alice M. Rivlin, Deputy Director Each task force was assisted by a technical expert and U.S. Office of Management and Budget a professional meeting facilitator. The task force topics, U.S. Senator Bob Graham experts, and facilitators were: US. Representative Bob Carr Investment Analysis Hon. Thomas M. Downs, Commissioner Richard Mudge, Apogee Research, Inc. New Jersey Department of 'Ii.ansportation Angela Callahan Hon. Mortimer Downey, Deputy Secretary Benefit- Cost Analysis U.S. Department of Tkansportation John Boland, Johns Hopkins University Hon. G. Edward Dickey, Acting Assistant Secretary John Link of the Army for Civil Works 111. Maintenance Hon. David Gardiner, Assistant Administrator Harry Hatry, The Urban Institute U.S. Environmental Protection Agency Lester Schoene Robert Goodin, Director of Public Works

U.S. Advisory Commission on Intergovernmental Relations v Rockville, Maryland Economic Analysis and Research Branch (American Public Works Association) U.S. Environmental Protection Agency Michael J. Pompili, Assistant Health Commissioner Susan Binder, Chief Columbus, Ohio Industry and Economic Analysis Branch Thomas J. Harrelson Federal Highway Administration former Secretary of Transportation Don Emerson, Chief North Carolina Planning Analysis and Support Division (National Academy of ) Federal Transit Administration Hon. John Horsely, Founding Chairman Charles Terrell, Natural Environmental Specialist The Rebuild America Coalition U.S. Soil Conservation Service Barbara Dyer, Director Task Force 111- Maintenance The Alliance for Redesigning Government Jay Fountain, Assistant Director of Research Presentations to the task force meetings were made by: Government Accounting Standards Board Ron Young, Executive Director Task Force I-Investment Analysis Federal Accounting Standards Advisory Board Harry Hatry, Director Sheldon Edner StateILocal Government Research Program Office of Environment and Planning The Urban Institute Federal Highway Administration Joesph Wholey, Director Martin Borsykowsb, Chief Engineer Washington Public Affairs Center Office of Management and Budget University of Southern California City of New York Bruce Cannon, Chief Joseph Bittner Legislation & Strategic Planning Division Central Programs Branch Policy Development Office U.S. Army Corps of Engineers Federal Highway Administration William St eele, Economist Paul Posner, Director U.S. Bureau of Reclamation Budget Issues Harold Steinberg, Deputy Controller U.S. General Accounting Office U.S. Office of Management and Budget Richard Mudge, President Dick Earl, Chief Apogee Research, Inc. Facilities and Real Property Division Chris Wye U.S. Department of Energy National Academy of Public Administration Mike Rugless Ron Kirby, Director Parsons Brinkerhoff, Inc. Transportation Planning Task Force N-Federal Regulation Metropolitan Washington Council of Governments Michael J. Pompili, Assistant Health Commissioner Cameron Gordon, Study Manager Columbus, Ohio Institute of Water Resources Paul Lapsley, Chief U.S. Army Corps of Engineers Regulatory Management Division Art Koines, Deputy Director U.S. Environmental Protection Agency Office of Strategic Planning Philip Harter and Environmental Data Private Mediator U.S. Environmental Protection Agency Timothy Conlan, George Mason University David Berg Policy Analysis Branch Penny Medford, Chief Pollution Prevention Division Planning Analysis Division U.S. Environmental Protection Agency Federal Aviation Administration Paul Guthrie, Chief Task Force 11-Benefit-Cost Analysis StateILocal Operations David Moser, Senior Economist U.S. Environmental Protection Agency Institute for Water Resources Joseph E Canny, Deputy Assistant Secretary for Policy U.S. Army Corps of Engineers and International Affairs Brett Snyder, Chief U.S.Department of Transportation vi U.S. Advisory Commission on Intergovernmental Relations Barry Korb, Chief George Ames, Chief Regulatory Innovation Branch Resources and Analysis Branch U.S. Environmental Protection Agency U.S. Environmental Protection Agency Tbm Kozlowski, Chief Pete Butkus, Manager Operations and Standards Division Public Works Trust Fund Motor Carriers, Federal Highway Administration Department of Community Development State of Washington Task Force V-Environmental Decisionmaking Richard Geltman Eugene Cleckley, Chief Linton, Mields, Reisler & Cottone, Ltd. Environmental Operations Division Federal Highway Administration Barbara Weiss Federal Liaison Center Dinah Bear, General Counsel Government Finance Officers Association U.S. Council on Environmental Quality Jim Link, Chief Anne Cole, Small Communities Coordinator Highway Revenue Analysis Branch U.S. Environmental Protection Agency Federal =ghway Administration Norm Miller, Director of Legislation Mark Pointon and Intergovernmental Affairs Navigation Division New Jersey Department of Environmental Institute for Water Resources Protection and Energy U.S. Army Corps of Engineers David Berg Philip M. Dearborn, Director Policy Analysis Branch Government Finance Research Pollution Prevention Division U.S. Advisory Commission U.S. Environmental Protection Agency on Intergovernmental Relations Lynne Pickard, Chief Robert W. Rafuse, Jr., Senior Economist Community and Environmental Needs Divison Policy Analysis Division Federal Avaition Administration U.S. Department of Treasury Bill Westbrook, Mayor Jackson, Wyoming The Commission expresses its thanks to the Army Robert Mulready, City Administrator Corps of Engineers for making this project possible, and to Lewiston, Maine all who participated in the process. The ACIR staff has made every effort to capture the richness and diversity of Carl Bausch, Deputy Director views expressed by the participants accurately, and to ex- Environmental Analysis and Documentation press the points of consensus reached as clearly as possi- Animal and Plant Health Inspection Service U.S. Department of Agriculture ble. The staff takes full responsibility for any errors that may have been made and any acknowledgementsthat may Task Force VI-Financing have been missed. Comments on and corrections to this J. Douglas Koelemey, Executive Director report are invited. Commission to Promote Investment in America's Infrastructure Scott Reznick, President John Kincaid Commonwealth Development Associates Executive Director

U.S. Advisory Commission on Intergovernmental Relations vii viii U.S. Advisory Commission on Intergovernmental Relations CONTENTS

THE INFRASTRUCTURE CHALLENGE ...... DEVELOPING A FEDERAL INFRASTRUCTURE STRATEGY ...... The Process ...... Purposes of the nsk Forces ...... The Role of the Conference ...... Implementation ......

THE FOUR-POINT STRATEGY ...... High-Quality Investments ...... Cost-Effective Maintenance ...... Effective. Efficient. and Equitable Regulations ...... Affordable Facilities ......

AN ACTION AGENDA ...... Presidential and Congressional Leadership ...... Governmentwide Guidance on Infrastructure Investment and Regulation ...... Governmentwide Support for Infrastructure Agencies ......

THE SIX TASK FORCE REPORTS ...... I . Improving the Quality of Infrastructure Investments ...... I1 . Applying Benefit-Cost Analysis to Investment Options ...... I11 . Improving the Maintenance of Infrastructure ...... N. Making Federal Regulation of Infrastructure More Effective. Efficient. and Equitable ...... V, Improving Environmental Decisionmaking for Public Works ...... VI . Improving the Financing of Infrastructure ......

APPENDIX ...... Program: The National Conference on High-Performance Infrastructure ......

U.S. Advisory Commission on Inte~mmentalRelations ix

- x U.S.Advisory Commission on Intergovernmental Relations - THE INFRASTRUCTURE CHALLENGE

The National Council on Public Works Improve- , water and sewer systems, waste manage- ment reported to the President and the Congress in 1988 ment facilities, and community facilities; and that "America's infrastructure is barely adequate to ful- 3. Regulating most publicworks as to their environ- fill current requirements, and insufficient to meet the mental impacts, the accessibility and services pro- demands of future economic growth and development. vided to Americans with disabilities, and the And unless we dramatically enhance the capacity and wages and working conditions of public works performance of the nation's public works, our own gen- employees and contractors. Federal regulations eration will forfeit its place in the American tradition of frequently add substantial uncompensated costs commitment to the future." and delays. Most of the nation's public works are built, owned, operated, and maintained by state and local governments There is too little consistency among federal infra- and utility companies, often in cooperation with the private structure policies and priorities. Federal inflexibility often sector, but the federal government exercises great influence interferes with good state and local decisionmaking, over the entire infrastructure system in three ways: wastes scarce money, and causes poor performance. Infrastructure and public works too often become sy- 1. Directly building, owning, operating and maintain- nonymous with "pork barrel" spending and waste. ing certain key facilities, such as dams, hydropower facilities, flood control projects, waterways, and A new federal infrastructure strategy is needed to federal ; turn this perception (and sometimes reality) around and to help the nation realize how essential public worksare 2. Financially assisting state and local governments to growth and development, economic vitality and jobs, to build, own, operate, and maintain facilities enhanced productivity and international competitiveness, such as and highways, transit systems, air- and a healthy environment.

U.S. Advisory Commission on Intergovernmental Relations 1 2 U.S.Advisory Commission on Intergovernmental Relations DEVELOPING A FEDERAL INFRASTRUCTURE STRATEGY

The Process Engineering Research Laboratories and the American Society of Civil Engineers' Research In 1990, an appropriation was made to the U.S. Army Foundation. Corps of Engineers to develop a federal infrastructure strategy. This strategy was to be developed in consultation Purposes of the Task Forces with other federal agencies, state and local governments, and the private sector. At the Corps' request, the Advisory For the purposes of these six task forces, ACIR de- Commission on Intergovernmental Relations (ACIR) as- fined infrastructure to include any type of physical capital sisted with the required consultation process. facilities for which the participating federal agencies are In its 1992 interim report on this process, Toward a responsible, whether that responsibility is direct (owner- Federal Infrastmcture Strategy: Issues and Options, ACIR ship, operation, or maintenance), through federal aid, or recommended "that the nation's state and local govern- through regulation. This places the focus of the task forces ments, and the several federal infrastructure agencies, on the common principles and guidelines that all agencies work more closely together, and in cooperation with the could follow regardless of their specific program goals. private sector, to take advantage of opportunities to make The purpose of each task force was to develop an the nation's infrastructure more efficient, better coordi- initial statement of principles and guidelines for govern- nated, and more highly productive." The Commission rec- mentwide use. It is expected that, over time, these initial ommended 11 opportunities that should be considered. statements will evolve into interagency memorandums of In the final phase of its infrastructure work for the understanding, OMB circulars, executive orders, or some Corps, ACIR established six task forces to develop the other instrument establishing common practices among most important of the cross-program opportunities: federal departments and agencies. The purposes of these agreements are to (1) spread the best practices across the I. Improving the quality of infrastructure invest- government as rapidly as possible and (2) make it easier ments; for the state and local governments, and others, to work 11. Improving the use of benefit-cost analysis; with the federal government as a consistent partner 111. Improving the maintenance of infrastructure; rather than with a conglomeration of diverse agencies with confusingly different approaches to infrastructure. IV Managing federal regulation of infrastructure; V Streamlining the environmental permitting pro- The Role of the Conference cess; and The National Conference on High Performance In- VI. Finding adequate funding for infrastructure. frastructure was held July 29-30, 1993, to review the six task force statements along with the four-point strategy The many federal, state, local, and private interests and the action agenda. The conference confirmed the participating in the task forces and the development of strategy and action agenda, refined many points, added this report are listed in Figure 1 (page 4). some new points, and shifted some emphases. For exam- The topics of research and development, geographic ple, this section, describing development of the strategy, data coordination, technology transfer, and the education was expanded to include contributions of the conference of public officials and the general public about public works and the need for follow-up work involving state and local issues were dealt with only obliquely in this process because governments. The list of participants in Figure 1also was they were being developed more fully by the Corps expanded. through other elements of the Federal Infrastructure Perhaps the most significant addition to the report Strategy Program, including efforts of the Corps' Civil from the conference came from the emphasis by several

U.S. Advisory Commission on Intergovernmental Relations 3 Figure 7 Participants in Preparing this Report Congress New Jersey Department of Tkansportation Congressional Budget Office Northwest Indiana Regional Planning Commission Congressional Research Service Washington State, Department of Community General Accounting Office Development, Public Works Trust Fund House Committee on the Budget Other Government Agencies Joint Committee on %ation Office of U.S. Senator Byron L. Dorgan Administrative Conference of the United States Federal Reserve Bank of Cleveland Executive Branch Competitiveness Policy Council Council on Environmental Quality The World Bank Department of Agriculture Animal and Plant Health Inspection Service Professional Associations and Research Groups Economic Research Service American Consulting Engineers Council Soil Conservation Service American Planning Association Department of Defense American Public Works Association Office of the Secretary American Society for Public Administration Department of the Army American Society of Civil Engineers Civil Works American University Corps of Engineers American Waterways Operators Department of Energy Building Futures Council Department of Health and Human Services Building Research Board, National Academy of Department of Interior Civil Engineering Research Foundation Office of the Secretary Council of Infrastructure Financing Authorities Bureau of Reclamation EN0 Transportation Foundation Fish and Wildlife Service George Mason University U.S. Geological Survey Governmental Accounting Standards Board Department of Transportation Government Finance Officers Association Office of the Secretary Johns Hopkins University Federal Aviation Administration Midwest Research Institute Federal Highway Administration National Academy of Public Administration Federal Railroad Administration National Association of Counties Federal Transit Administration National Association of Regional Councils Department of Treasury National League of Cities Environmental Protection Agency National Trust for Historic Preservation Executive Office of the President The Urban Institute National Economic Council Transportation Research Board Federal Accounting Standards Advisory Board University of Southern California General Services Administration Washington Public Affairs Center Office of Management and Budget Private Companies and Consultants State and Local Government Agenda Communications, Inc. City of Columbus, Ohio Apogee Research City of Jackson, Wyoming Bechtel Corporation City of Lewiston, Maine Commonwealth Development Associates, Pennsylvania City of New York, Office of Management and Budget Government Finance Group, Inc. Denver Regional Transportation District Hickling Corporation Maryland Department of Fiscal Services KPMG Peat Marwick Metropolitan Washington Council of Governments Linton, Mields, Reisler and Cottone, Ltd. Metropolitan Water Reclamation District Philip Harter, Mediator of Greater Chicago ParsonslB rinckerhoff New Jersey Department of Environmental Protection and Rapoza Associates Energy Steinberg & Associates

4 U.S.Advisory Commission on Intergovernmental Relations speakers on pricing infrastructure not just for cost recov- tors, and capital budgeting were strong themes that ran ery but also to help manage the demand for services. This throughout the conference. The top priority, however, by point was incorporated into the action agenda. a wide margin, was the need for leadership by the Presi- At the suggestion of one conference session, the task dent and the Congress in establishing firm principles and force recommendation to institutionalize the environ- procedures to guide sound investment strategies. In par- mental quality ethic throughout the federal agencies and ticular, the President was urged to issue executive orders state and local governments was added to the action agenda. quickly to start the process and to establish a strong infra- A new recommendation that the Congress revise its budget structure policy coordinating mechanism. The Congress and appropriations processes to respond more effectively to was urged to reform its budget, authorization, and appro- the President's "investment budget" also was added. priations processes to base them on sound investment Additions to the "governmentwide guidance'' section criteria. The federal agencies were urged to take advan- of the action agenda included a broadening of the invest- tage of the Government Perfonnume and Results Act of 1993 ment analysis process and incorporation of greater flexi- to reformulate their infrastructure programs around per- bility into procurement policies. formance goals and regular tracking of results. The section of the action agenda on "Government- wide Support for Infrastructure Agencies" was aug- Implementation mented with a data improvement role for the Bureau of A great deal of work will be required by all the part- Economic Analysis, additional cooperating agencies in the ners in the federal system and by the private sector to science and technology effort, and greater definition of achieve the objectives spelled out in this report. To ensure the proposed Infrastructure Research Board. There were success, all follow-upwork on the strategy, action agenda, numerous reminders about the importance of the R&D and task force statements in this report should be pur- component of infrastructure programs. sued in consultation with all the affected federal, state, The use of performance goals, performance indica- local, and private parties.

U.S.Advisory Commission on Intergovernmental Relations 5 6 U.S. Advisory Commission on Intergovernmental Relations THE FOUR-POINT STRATEGY

The work of the six task forces, taken together, Task Force I1 recommended (1) that more federal yielded recommendations that can be summarized in the agencies use benefit-cost analysis, (2) improved meth- following four-point strategy. odology of benefit-cost analysis, and (3) promotion of IIb justify continued federal investment in infrastruc- consistency among agencies in using this technique so ture, the people, the President, and the Congress need that it might become a means of prioritizing investments assurance that future spending will be for: across diverse programs. Although this type of invest- The highest quality investments that can yield ment analysis is one of the longest used and best devel- maximum benefits compared to their costs; oped in the federal government, it is still controversial, and its consistent use is largely limited to water re- Cost-effective maintenance of existing facilities and sources agencies. The requirement for all agencies to equipment that will help avoid premature and cost- use benefit-cost analysis to justify their new regulations ly repairs, rehabilitation, and replacement; to OMB has spread familiaritywith the concept over the Soundly and equitably regulated projects that past decade, providing a basis for extending its use still can meet environmental and other performance further. Thsk Force I1 recommended principles and requirements effectively and efficiently in the guidelines to support this extension. setting where they are located; and Affordable facilities that are efficiently priced Cost-Effective Maintenance and can be supported financially now and in the Studies in recent years have shown that cost-effective future by those who are responsible. maintenance of infrastructure is being neglected in many cases. Two remedies for this problem are recommendedby These four points are elaborated on briefly below. Qsk Force 111. One is required planning for maintenance, which received a big boost in the Intermodal Suvace Tram- High-Quality Investments portation Eficiency Act of 1991. The other is an accounting approach being developed by the Governmental Account- The key to improving the quality of proposed infra- ing Standards Board. This approach would treat public structure investments is to require that they be sub- infrastructure as financial assets, and would count def- jected to investment analysis. msk Forces I and I1 erred maintenance of these assets as financial liabilities. worked on this topic. These liabilities would be required to be reported as part Thsk Force I recommended several ways to analyze of the annual financial reports of governments. This pro- the quality of proposed infrastructureinvestments, so that cedure would result in public disclosure of deferred main- decisionmakers will have reliable means of choosing the tenance, allowing citizens to hold ~ublic officials most beneficial ones. The recommendations include per- accountable for it. formance measures, benefit-cost analysis, cost-effective- ness analysis, impact analysis, analysis of alternative means of program delivery, and means of judging cross- Effective, Efficient, and Equitable Regulations program priorities. Federal departments and agencies should be expected to use a combination of these means to 7msk Forces IV and V worked on different elements justify the inclusion of their infrastructure projects in the of this topic. msk Force IV considered the cumulative federal government's "investment budget." Raising the effects of all the applicable federal regulations. Bsk quality of investments in terms of "return on investment" Force V considered the more limited issues involved should be emphasized. with environmental permits and approvals.

U.S.Advisory Commission on Intergovernmental Relations 7 Practical Federal Regulations. The federal govern- Affordable Facilities ment extensively regulates the provision of public works by state and local governments and the private sector. This Practical Financial Plans. Too often, grand visions of regulation is imposed through a variety of federal man- infrastructure are framed, programs are developed, gen- dates and conditions of federal financial aid. The amount eral principles are mandated, and it is assumed that the of such regulation is increasing. Although much of this necessary financing will come from somewhere-often federal regulation is justified, the effect often is to raise from someone else's budget. This widespread problem costs and slow the implementation of projects unnecessar- was recognized in the Intermodal Surface Transportation ily. Cumulative effects of the growing number of require- Efficiency Act of 1991, which constrains the size of state ments are very severe in many cases. These unintended and metropolitan transportation programs to what can consequences frequently result from lack of federal reasonably be expected to be funded. The federal govern- awareness of the problem, lack of federal recognition of ment, however, is under no such constraint; it plans larger and responsibility for the problems faced by the imple- programs than it can fund and mandates that others carry menting governments, and lack of flexibility in the federal out larger programs than they can fund. regulations that might allow state and local governments In recent years, this has generated a great deal of to find feasible ways to comply. Task Force IV recom- striving to find non-traditional sources of governmental mended several ways to strengthen the analysis of regula- revenues, including cost sharing with the private sector. tory impacts, provide greater flexibility in the compliance Many of the non-traditional revenue sources are not well process, and provide greater federal aid where necessary known, not easy to use, and not able to produce reliably to achieve national goals quickly and equitably. predictable revenues. Bsk Force VI recommended the preparation of fman- Less Costly Environmental Permits. The process of cia1 feasibility and affordability analyses of every infrastruc- getting environmental permits for infrastructure projects ture program being mandated, proposed, or reevaluated remains fragmented, expensive, and time consuming. risk by the federal government. This should include an "ability Force V recommended several ways of integrating and to pay" analysis of any public and private partners brought streamlining this process. The key is to uncover all the into the program with financial responsibilities. Both tra- permit requirements as early as possible, share environ- ditional and non-traditional funding sources and mecha- mental data freely among all affected parties, and design nisms should be identified and evaluated. Affordability of infrastructure projects from the beginning to meet all the the proposed program should be demonstrated. applicable requirements. This approach is designed to In addition, conference participants reinforced the avoid surprises at later stages, when redesign would be need for agency financial planning to incorporate demand required, and could save significant time and money and management techniques and pricing strategies aimed at achieve greater environmental protection. the efficient use of limited resources

8 U.S. Advisory Commission on Intergovernmental Relations AN ACTION AGENDA

A complex, multiagency infrastructure strategy will these principles and guidelines. The principles not be easy to implement. It will require presidential and should require federal agencies to: congressional leadership; governmentwide guidance, Prepare investment analyses and strategies, oversight, and support systems for federal infrastructure based on life-cycle costing, to justify their infra- agencies; and the commitment and cooperation of many structure budget requests, legislative proposals, federal agencies. and rulemaking activities. The purpose of these This action agenda outlines an initial set of consoli- analyses should be to ensure that the investments dated recommendations, based on the advice of the six made and mandated are those with the greatest task forces, for who should do what to get started on imple- rates of return as measured by a variety of tech- menting the strategy. Additional recommendations can be niques. found in the six task force reports following this agenda. Seekopportunities to set economic and eq- uitable prices for the use of infrastructure to Presidential and Congressional help measure and respond to the public's infra- Leadership structure preferences, to help bring the supply Occasionally, federal agencies cooperate with each oth- of and demand for infrastructure into balance, er, without being told to do so, when their vital interests to broaden the nonfederal audience for invest- demand it or when a serendipitous personal relationship ment analysis, and to achieve the maximum fea- encourages it. Usually, however, such cooperation is inhii- sible infrastructure cost recovery. ited by the extra time and expense involved and the uncer- Use maintenance management analyses and tainty that it is authorized and would be appreciated and strategies to ensure cost-effective maintenance rewarded. Conflicting missions frequently are mentioned as of federal, federally aided, and federally regu- barriers to joint activities. Undoubtedly, real difficulties are lated infrastructure. encountered when federal agencies attempt joint activities. Analyze existing and proposed regulations The strongest remedy to these difficulties is a clear affecting infrastructure to ensure that they are signal from the President, the Congress, or both, that necessary and that the least burdensome and cooperation and coordination are appropriate and re- most flexible forms of regulation that can get the quired. That signal is needed if a governmentwidefederal job done are being used. infrastructure strategy is to become reality. Institutionalize the environmental quality ethic throughout the leadership and professional The President's Role staffs of every federal agency so that environmen- Much can be done within existing legislation to establish tal quality factors will be routinely and actively govemmentwide infrastructure policies and practices. The pursued throughout every agency's analytical and President should take advantage of these opportunities to: decisionmaking processes and passed on to the state and local governments that they assist, regu- 0 Issue an Executive Order (1) establishing govern- mentwide principles to guide the infrastructure in- late, or work with as co-regulators. vestment, federal aid, and infrastructure-related Integrate their environmental review and regulatory activities of federal agencies, and (2) approval processes to introduce environmen- designating parties responsible for issuing addition- tal reviews into the infrastructure planningpro- al guidance and overseeing the implementation of cess as early as possible, provide for concurrent

U.S. Advisory Commission on Intergovernmental Relations 9 reviews and decisions to meet multiple require- other types of investment analysis; and (3) pro- ments, and minimize duplication and delay. vide for scientifically justified and risk-based multimedia analysis, regulation, and prioritiza- Prepare financial plans for each direct fed- tion in the implementation of environmental eral investment, federal-aid program, and infra- requirements. structure mandate showing how , operation, and maintenance funding will be or The Mandate Relief Act, which would require can be funded effectively, efficiently, equitably, (1) regular inventory and cost estimation of all and affordably by the responsible parties. existing and proposed federal mandates, (2) anal- ysis of the incidence of costs and the ability to pay Establish a public works investment section in the of those parties on whom the costs fall or would fall, President's Budget. The goal should be that this and (3) equitable federal sharing of the mandated section of the budget eventually be funded by a costs or an affordable prioritization and scheduling series of broad, flexible infrastructure trust funds of compliance by the non-federal parties. each funding a category of interrelated public works Convene a White House Conference on Infrastruc- activities and supported by appropriate dedicated ture Investment to highlight the importance of the sources of revenue designed to encourage multi- issue, motivate the diverse federal infrastructure year stability in planning long-term investments agencies to work together more closely, bring in the and maintaining facilities cost effectively. Only non-federal partners, and begin working out some of those investments justified by sound investment the details of the federal infrastructure strategy. This analysis should be eligible to be included in the conference should be reconvened periodically. public works investment budget. Develop an infrastructure legislative program incor- The Role of the Congress porating at least the following three proposals: Regardless of how innovative the executive branch is The Infrastructure Investment Act, which in its efforts to improve the management and administra- would (1) give statutory recognition to the basic tion of infrastructure programs, some needed improve- principles of investment analysis, maintenance ments will remain off-limits until present law is changed analysis, regulatory analysis, and financial analy- and new laws are enacted. Therefore, Congress also must sis; (2) revise the congressional budget, authori- act. The Congress should consider the following high- zation, and appropriations processes to recognize priority proposals: and effectively respond to the President's "invest- Hold hearings and act on the President's infrastruc- ment budget"; (3) consolidate interrelated infra- ture legislative program. structure programs into a series of flexible Reorganize its committees on infrastructure and the funding mechanisms (such as block grants and re- environment to allow easier consideration of issues volving loan funds) that allow alternative cross- like the creation of block grants, cross-program flexi- modal, construction, operation, demand manage- bility, and environmental integration. For example, ment, and maintenance options to be considered the number of transportation committees, the num- to best meet state and local conditions, (4) pro- ber of water committees, and the number of environ- vide incentives for greater infrastructure in- mental protection committees should be reduced. vestment and reduce tax disincentives, (5) Take the opportunity, when reauthorizing infra- encourage the development of innovative fund- structure and environmental programs, to intro- ing mechanisms in the bond markets, (6) provide duce the principles of sound investment justification, incentives for the introduction of new technolo- life-cycle costing, cost-effective maintenance, finan- gies that have the potential for improving the cost cial affordability analysis, mandate reform, and envi- effectiveness of infrastructure programs, (7) es- ronmental integration. tablish a national cooperative infrastructure re- search program, and (8) revise procurement Revise the congressional budget and appropriations practices to remove barriers to high performance processes to recognize and effectively respond to the investments. President's "investment budget." The Environmental Integration Act, which Governmentwide Guidance would (1) make it clear that all environmental on Infrastructure Investment and Regulation requirements are to be administered within the framework of theNational EnvironmentaIPolicy In accordance with the President's Executive Order Act, (2) correct prohibitions in environmental on Infrastructure, the following agencies should issue ad- laws that prevent the use of benefit-cost and ditional guidance, in consultation with affected federal

10 U.S. Advisory Commission on Intergovernmental Relations agencies, state and local governments, and other affected olds, short-cut methods, tiered approaches, rules of thumb, parties, and should exercise implementation oversight. automation, management-by-exception, and other tech- niques should be carefully provided to avoid imposing The Office of Management and Budget (OMB) overwhelming analytic burdens. should revise its circulars on budget submissions (A-11), The federal agencies also should develop pro- legislative clearance (A-19), and benefit-cost analysis gram-specific guidance to ensure that the more general (A-94), and its procurement policies, to support the Presi- governmentwide guidance is tailored to the individual dent's principles on investment analysis, maintenance needs of each program, whether it is administered di- analysis, and financial analysis. The legislative clearance rectly by the agency, through federal aid, or through a process should be strengthened to emphasize the need to regulatory program. This guidance should be sensitive examine alternative program designs and the potential to experience gained in the field operations of agencies. impacts of federal mandates more carefully from the view- The agencies should be alert constantly for opportu- point of the state and local partners. The principles of nities to cooperate with other agencies to further their Executive Order 12612 (Federalism) should be incorpo- joint interests. The negotiation of memorandums of un- rated into this clearance process. The benefit-cost circular derstanding (MOUs) among agencies should be encour- should be broadened to incorporate alternative and aged. Regional offices should implement these agreements supplementary types of investment analysis most appro- consistently. priate to various types of programs and program objec- tives, including those that might not be fully monetizable. An infrastructure policy coordinating mecha- Procurement policy needs to be flexible enough to allow nism is needed to provide continuing interagency input to decisions based on life-cycle cost analysis. the development, updating, and refinement of govern- mentwide guidance. The choice of mechanisms might in- OMB's Office of Information and Regulatory Af- clude a Cabinet sub-council, an OMB task force, or a fairs (OIRA) should revise its regulatoly review guidance formal Infrastructure Council modeled after the Water to emphasize (1) the need for mandate relief, performan- Resources Council. It will need continuing support from ce-based regulation, market-incentive regulation, the use the President if it is to be effective. of technologically advanced means of complying with reg- ulations, and regulatory flexibility; (2) greater use of nego- Governmentwide Support tiated rulemaking in suitable cases, and (3)limiting the use for Infrastructure Agencies of interim guidance in place of formal regulations (includ- ing provisions to sunset interim guidance after a reason- The changes called for by these infrastructure princi- able time). ples and guidelines are substantial. They will significantly OIRA should be charged with responsibility for main- revise the way many federal agencies do business. There- taining a cumulative inventory of federal mandates, en- fore, there will be a need for governmentwide assistance. suring that their costs are estimated, and requiring a cost Several existing federal institutions should contriiute to and affordability analysis of proposed rulemakings (in- this effort, but an additional institution also is needed. The cluding an analysis of the incidence of costs, the ability-to- following support activities should be provided in consul- pay of those responsible for paying, and an evaluation of tation and cooperation with relevant state, local, and In- alternative rules that might be less burdensome). dian tribal governments, and the private sector. Periodically, OIRA should require federal agencies to 0 OMB should allocate to infrastructure agencies conduct a zero-based review of their regulations affecting some of the pilot projects under the Government Perform- infrastructure to ensure that, as a group, they remain up to ance and Results Act of 1993. date, effective, practical, understandable, coordinated, and affordable. The Federal Accounting Standards Advisory Board (FASAB) should consider Service Efforts and Ac- The Council on Environmental Quality (CEQ), complishments(SEA) reporting standards and help devel- or some other appropriate unit in the Executive Office of op unfunded maintenance estimating and reporting the President, should be responsible for the environmen- standards in conjunction with the Governmental Ac- tal integration effort. This responsibility should not be counting Standards Board (which sets standards for state located in a line department or agency because of its and local governments) and also in conjunction with any interagency nature. federal agencies that pursue this goal under an OMB performance pilot project. Federal infrastructure agencies should consult freely and constructively with the guidance agencies listed The Bureau of Economic Analysis (BEA) should above to help ensure that the guidance developed is as revise the National Income Accounts to be more helpful well informed and practical as possible. Interagency work- in tracking the economic benefits and costs of infrastruc- groups should be convened as needed. Appropriate thresh- ture investments.

US.Advisory Commission on Intergovernmental Relations 11 0 The Federal Geographic Data Committee ing in administrative dispute resolution and negotiated (FGDC), which operates under OMB Circular A-16, rulemaking. should place priority on completing a full range of envi- ronmental databases to support the needs of the acceler- ACIR should develop and promote improved meth- ated environmental integration process. ods of regulatory analysis, federal mandate cost estimating, and intergovernmental impact analysis. 0 The Office of Science and Technology Policy (OSTP) should focus the governmentwide research ef- GAO, in cooperation with agencies' internal audit forts needed to provide a stronger scientificbasis for envi- programs, should audit and evaluate the quality of federal ronmental regulation, for the management of regional agency and federal-aid recipient investment analyses, ecosystems and watersheds, and for better understanding maintenance analyses, environmental integration pro- of relationships between land use and infrastructure de- cesses, mandate cost estimates, and regulatory analyses to velopment. The President's Council on Sustainable De- assure the Congress, the President, and the public that the velopment, the Federal Laboratory Consortium, the government's investments in infrastructure are of high Federal Coordinating Council for Science, Engineering quality and getting higher. and Technology, Congress' Office of Technology Assess- ment, and others also should have roles in this effort. An Infrastructure Research Board (IRB) should be established, using the Transportation Research Board 0 The Office of Personnel Management (OPM) should assist with the governmentwide effort to provide as a model. It could be located within the National Re- training and personnel exchanges to federal, state, and search Council or the National Academy of Public Admin- local infrastructure personnel. Existing training facilities istration, both of which are congressionally chartered such as the Federal Executive Institute and facilities in the advisors to the federal government. The purpose of IRB individual agencies should be used. The involvement of would be to sponsor interagency and intergovernmental state and local officials is provided for by the Intergovern- committee work, training, education conferences, nation- mental Personnel Act. Training might be especially needed al cooperative research, policy development, publications, on such topics as investment analysis, maintenance analysis, and clearinghouse functions. It would be supported by environmental integration, regulatory analysis, and strategic regular contributions from federal infrastructure agencies management of environmental review personnel. and other cooperating organizations. Its governing board should equitably represent cooperating federal, state, lo- 0 The Administrative Conference of the United cal, and private parties, including practicing infrastructure States should provide advice, referral services, and train- program managers.

12 U.S. Advisory Commission on Intergovernmental Relations THE TASK FORCE REPORTS

I. IMPROVING THE QUALITY OF INFRASTRUCTURE INVESTMENTS

11, APPLYING BENEFIT-COST ANALYSIS TO lNVESTMENT OPTIONS

Ill. IMPROVING THE MAINTENANCE OF INFRASTRUCTURE

IV. MAKING FEDERAL REGULATION OF INFRASTRUCTURE MORE EFFECTIVE, EFFICIENT, AND EQUITABLE

V, IMPROVING ENVIRONMENTAL DECISIONMAKING FOR PUBLIC WORKS

VI. IMPROVING THE FINANCING OF INFRASTRUCTURE

U.S. Advisory Commission on Intergovernmental Relations W 14 U.S. Advisory Commission on Intergovernmental Relations Statement of Principles and Guidelines, Federal Infrastructure Task Force 1 IMPROVING THE QUALITY OF INFRASTRUCTURE INVESTMENTS

I. OBJECTIVE performance measures, investment budgeting, and other devices designed to improve the quality of public invest- The objective of this statement of principles and ment. Examples include the following: guidelines is to improve the quality of infrastructure in- vestments in the United States by ensuring that all proj- The White House work group on infrastructure ects funded are likely to yield maximum benefits investment policy; compared to their costs. This can be accomplished by Vice President A1 Gore's National Performance requiring sound investment analysis of proposed invest- Review; ments as the basis for selecting and funding the construc- tion, maintenance, and operation options likely to yield Recent GAO reports on investment budgeting, the greatest net rates of return as measured by social, performance budgeting, and federal agency col- environmental, and economic benefits and costs. lection and use of performance data; Inclusion of a investment II. FINDINGS policy in A Competitive Strategy for America, the second report to the President and Congress by Importance of Infrastructure. A sound public infra- the Competitiveness Policy Council; structure forms a key part of the nation's capital stock and thus plays a vital role in encouraging a more productive Enactment of the Chief Amid Oficers Act of and competitive national economy. In addition, public 1990; works are vital to meeting immediate as well as long-term publicdemands for safety, health, and a clean and ecologi- Enactment of the Government Peqormance and cally healthy environment. Results Act of 1993; Publication of preliminary views on Service Ef- Definition of Infrastructure. This statement applies to public works infrastructure broadly defined, including forts and Accomplishments (SEA) reporting by transportation, water, waste management, and environ- the Governmental Accounting Standards Board mental protection facilities, as well as public buildings. (GASB); and Establishment of an FASAB work group to assist Need for Investment Analysis and Prioritization. Too in developing infrastructure accounting and re- many public works investments have been of questionable porting standards (July 1993). value. Charges of waste and favoritism often are leveled at public works spending proposals. Too often, projects with Ill. BASIC PRINCIPLE little or no demonstrable merit have been approved, while other projects with demonstrated merit have gone un- Given the profound economic and social importance funded. With the current scarcity of federal, state, and of infrastructure, it is essential that the federal govem- local funds for infrastructure, these wasteful practices ment identify, assess, and undertake infrastructure invest- cannot be tolerated. They are not only inefficient but also ments that will pay the greatest possible dividends for the are part of the reason for the loss of confidence in govern- nation now and in the future. Citizens and taxpayers need ment by many citizens. to be assured that these public investments are not wasted and that they will help the nation respond to current and Current Initiatives for Improving the Quality of In- future economic and social demands. frastructure Investments. The President, the Congress, Achieving this objective requires a govemmentwide and others appear to be moving rapidly toward the use of commitment to better data, improved measures of per-

U.S. Advisory Commission on Intergovernmental Relations 15 formance, and investment analysis that goes well beyond quality of life, environmental protection, and na- current practice. This improved analysis then needs to be tional security. communicated effectively to government officials and the 'I).pically, this goal-setting should be under- general public. taken as part of an agencywide strategic planning To merit public expenditure, an investment proposal process that reexamines agency missions, legisla- should show a good likelihood of (a) returning future tive requirements, and underlying trends. The benefits (public and private) that substantially exceed its recently completed strategic planning exercises estimated costs, (b) supporting related public and private at the Department of Transportation and the De- investments, and (c) reinforcing other national strategic partment of Energy are examples worth examin- goals. These standards should apply to direct federal invest- ing for lessons learned in crossing program ments as well as to investments by state, local, or private boundaries, reconceptualizing issues, and refor- bodies that federal agencies encourage, assist, or regulate. mulating goals in light of changing realities. This principle, and the guidelines that follow, should 2. Measure and Analyze Performance. Achieving be applied by federal infrastructure agencies and their these goals requires, in turn, better measurement assisted and regulated partners to develop, plan, and im- and analysis. In addition to the analytic tech- plement improved infrastructure investment strategies. niques highlighted below, these efforts should They also should be followed by all federal entities in the include descriptions of current physical condi- executive and legislative branches when they evaluate tions, level of demand, and service quality. Care public works programs, projects, and systems. The ex- should be taken to formulate performance indi- pected result is that infrastructure investments will become cators that go beyond simple averages and to increasingly effective, economical, and equitable in meeting work toward program-specific indicators. De- program goals, and more readily supported and understood mand forecasts, along with high-capital and low- by the public and their political representatives. capital options for meeting and managing this demand, should be developed. The appropriate government to undertake this work will vary IV. GUIDELINES FOR EVALUATING across programs. INFRGSTRUCTURE INVESTMENTS 3. Establish an Investment Strategy. This improved measurement and analysis should be conducted Strengthening the analysis of infrastructure invest- within an overall framework that incorporates a ments requires: setting program goals, improving the strategic perspective. Infrastructure programs measurement and analysis of program performance, sup- are only one of the ways available to each agency in porting a strategic framework for overall economic and carrying out its overall mission. As such, the capital environmental improvement, and improving the commu- investment program should be coordinated with nication of results. other agency activities and with the activities of 1. Define Performance Goals. Defining perform- agencies that have complementary roles and goals. ance goals is an essential fist step in evaluating Frequent and full communication within the agency any program and set of related investment op- and with other agencies to develop a shared under- tions (public or private). An important part of standing of these roles is important. this effort is to identify the customers of the Furthermore, public infrastructure invest- program, consult with them, and assess their ments differ from most private investments in the needs. Customers (or stakeholders) should be longevity of their impacts (for example, such faci- defined broadly, including direct users (trucking lities as roads, airports, and dams are rarely tom firms for highways, for example) as well as indi- down), and in their potential to have profound rect clients (manufacturers and service firms that effects on the nature and quality of our lifestyles need on-time shipments). The goals of customers and the productivity of the private economy. This should not be assumed, but rather should be as- means that their evaluation should consider the sessed as directly as possible, perhaps using mar- qualitative aspects of the benefits and costs of ket research and public involvement. infrastructure, assess and compare the risks of different programs, and consider their long-term In most cases, negotiating and setting goals implications. will help define a meaningful set of performance measures. While the specific goals for each pro- 4. Consider Alternative Program Designs. Program gram will vary according to the category of infra- objectives can be achieved though several differ- structure and the government responsible for ent means, including direct administration, finan- making decisions, they are likely to include direct cial aid to others, regulation, or a combination. economic benefits, general economic productiv- Each method has different pros and cons, differ- ity, and safety, social well-being, ent levels and patterns of benefits and costs, and

16 U.S. Advisory Commission on Intergovernmental Relations different implications for the roles of govern- All budgets have limits, forcing hard choices. ments. These differences should be explored be- The role of consistent investment analysis pro- fore new programs are proposed or old ones cesses is to encourage the funding of the most revised. Choices to consider might include block worthy programs and projects. While the political grants versus categorical grants, grants versus process will (and should) allow for overriding pure mandates, loans versus grants, regulation versus analysis, the identification of direct and indirect financial assistance, market-based incentives, subsidies and inefficiencies should be made explicit. pricing policies, and tax changes (tax expendi- Congress and the executive have taken some tures) versus regulations or grants. Criteria for positive steps to provide the flexibility needed to helping to make these choices are summarized in seek out and make the best investments. For ex- Efi- the 1988Fragile Foundations report by the Nation- ample, the Intennodal Surface Transportation al Council on Public Works Improvement. ciency Act of 1991 (ISTEA) encourages greater flexibility and realism in setting project priorities In assessing these choices, it is useful to con- sider the near-term and long-term incentives that by requiring state departments of transportation and metropolitan planning organizations-the each may place on the builder and operator of the agencies now responsible for making many of the infrastructure facility. Any assessment of pro- investment decisions-to prepare financially gram alternatives will be more useful if it can be linked to changes in efficiency, effectiveness, ex- constrained transportation improvement plans. In contrast to past "wish lists," these new project pected performance measures, and future bud- gets of affected parties. lists are limited in magnitude to the funds that can be demonstrated to be available over the 5. Examine Needs for Cross-Program Flexibility. six-year program period. This constraint requires The relative priorities among different programs much more fiscal discipline than has usually been typically are left to political judgment. Sole re- exercised in the past, but it has also attracted great- liance on these judgments, however, does not er public and private interest since the projects in necessarily serve well to optimize national eco- the plan are now more likely to be implemented. Also, a broader array of projects can be considered, nomic productivity and efficiency in meeting including highways, , transit, bicycle and pe- agreed-on societal objectives. destrian facilities, intermodal facilities, and other For example, arbitrary national funding lev- forms of surface transportation that might be more els divided between highways and transit or be- effective in achieving program goals under particu- tween new construction and rehabilitation can lar circumstances. skew local investment decisions by requiring sub- optimal investments or programs that may not con- 6. Analyze Long-Term Financial Implications. Just sider how to minimize life-cycle costs. Redefining as infrastructure investments provide services program goals in terms of "zones of competition" over long periods of time, so too they generate (such as mobility rather than the specific means of long-term financial impacts that can also affect achieving that mobility), can help overcome the inherent bias of some programs-if the program's the quality of services provided many years in the performance measures reflect the broader concept. future. For example, limited explicit attention to Achieving this outcome requires (a) enough the rehabilitation and maintenance costs of the flexibility among related programs to allow consid- Interstate Highway System in 1956 meant that it eration of alternative solutions using resources deteriorated faster and further than expected from multiple programs, (b) time and ability to ap- during the 1970s. Life-cycle costing of alternative ply economic and program performance analysis, designs and practices for operating and maintain- and (c) a role in the decision process for the people ing facilitieswould help to reduce long-term costs and governments affected most directly. and eliminate biases toward construction. Establishing investment priorities as legisla- Some federal programs now require grant tive mandates may set inappropriate spending recipients to show the expected source of funds to priorities that do not take into account current operate and maintain the system as well as re- data, more comprehensive performance goals, or maining costs to complete. Such analysis should analytic results. For example, agencies may be di- be required for directly administered federal pro- rected to implement statutory mandates against the grams, federal-aid programs, and federal regula- advice of sound investment analysis or performance tory programs, showing who will be responsible assessments. In some cases, Congress even prohib- for meeting future costs and how they could do its the economic analysis of some mandates, thus so. Financial analysis of this type should be per- ensuring some wasteful investments. formed for alternative program designs before

U.S. Advisory Commission on Intergovernmental Relations 17 choices are made, and as a reality check on pro- Different programs have different goals or provide a grams being implemented. Simplified and inex- different emphasis to similar groups of goals. (For exam- pensive means of performing this type of analysis ple, urban mobility is important for both transit and high- should be developed and made widely available. ways, but each may emphasize different aspects of 7. Develop Confidence in Investment Analysis. mobility.) Some programs provide services; others empha- Confidence in the system of investment analysis size risk reduction (better health or safety), while others requires implementing the decision-support aim to stimulate productive private investments. Most will tools in an even-handed and technically correct serve a combination of goals. Program performance manner, with widespread understanding of the should be defined not by inputs, but in terms of program methods that are being applied. Such under- outputs and by the social, economic, and environmental standing should spread beyond the staff who per- outcomes that will result (such as a specific threshold or form the calculations. This means that the improved performance compared to the past). analytic results should be communicated effec- Efforts to evaluate investments need improved mea- tively and fully to decisionmakers and the general sures of performance. The SEA reporting concepts being public. Openness and full disclosure in this pro- considered by GASB and FASAB should be pursued to cess are important, since the quality and extent of help meet the need for better measures of conditions and available data vary widely across infrastructure performance. Such measures should be reported regular- programs, as does the ease of implementing the ly, both to track specific programs (thus helping to hold techniques. Papering over these difficulties their sponsors accountable) and to establish longitudinal creates a false sense of the quality of analysis, data bases to aid in projecting future outcomes under new exposes the process to attack, and hides the need or changed programs. for better data and better techniques. One of the few existing performance efforts in the federal government is DOT'S biennial report to Congress, 8. Communicate Effectively. The need for improved The Status and Condition of the Nation's Highways, Bridges, public awareness of the value of infrastructure and Transit. The 1993 volume is the latest to report on the means that investment analyses should be devel- characteristics, condition, and performance of these sys- oped with inputs from and communicated effec- tems. Future federal and non-federal investment require- tively and fully to the public and to their elected ments for all highways and bridges are estimated based on representatives. Clarity and simplicity are impor- the costs to meet different performance levels in pave- tant, as well as an active effort to explain what the ment condition and traffic service. analysis shows and does not show. The report has not been static; regular efforts have been made to expand the scope and type of analyses, and V. MENU OF DECISION-SUPPORT TOOLS to improve underlying data and analysis. Transit and high- ways are now combined, and changes are under way that No single analytic method provides comprehensive should provide a more comprehensive assessment of al- answers. As many of the following types of analysis as ternative investments. A new Highway Economic Report- practical should be used to help policymakers evaluate ing System (HERS) using a benefit-cost framework is potential public works investments and develop sound being developed to complement the long-standing High- investment strategies, plans, and budgets. Over time, the way Performance Monitoring System (HPMS), which uses quality, extent, and consistency in applying these tools an engineering-based analytic process. Improvements should be improved. The federal, state, and local govern- also are needed to incorporate operational options for ments all should use equivalent methods-tailored to improving "level-of-service" performance, focusing on their own needs-to establish consistency in the analytical outcomes, and tracking program performance and out- evaluations of directly administered federal infrastructure come trends over time. programs and related federal-aid and regulatory programs. Although each infrastructure program has its own These tools will need to be used differently in evaluating unique needs, other departments and agencies should programs and projects, and in making cross-program com- consider adopting analytic and reporting systems similar parisons. Some further development of these methods may to those developing in DOT be necessary to meet all of these needs. Benefit-Cost Analysis. This form of analysis incorpo- Performance Measures. Relevant and internally consis- rates a range of traditional evaluation techniques devel- tent measures of performance provide the key raw material oped by economists, including rate of return analysis, net for internal evaluations of the expected effectiveness of present value of benefits, and various timing measures. As infrastructure investments while also helping to make the practiced by water resource agencies, benefit-cost analy- results more understandable to decisionmakers and the ses typically estimate how much better off the nation's public. economy would be if the project were to be built. Other

18 U.S. Advisory Commission on Intergovernmental Relations applications frequently have less expansive horizons, fo- Highways and other improvements in encouraging cusing on more narrowly defined geographic regions and suburbanization. The net effect is often difficult to calcu- on more direct project benefits and costs. late, but the potential scenarios should be searched out as A minimum threshold for this type of analysis is usual- much as possible. ly whether or not benefits exceed costs (after discounting Adverse effects may have to be mitigated by law or future streams), but the methods can be used to rank political necessity (the FAA, for example, makes federal projects according to the highest returns, thereby helping funds available for a series of mitigation measures for to select a program of projects that provides the greatest neighborhoods in noise impact zones near airports). The overall return within a limited budget. If applied consis- costs of these impacts should be identified and quanti6ed in tently across programs, the techniques of benefit-cost monetary terms where possible (many environmental im- analysis can provide information (however imperfect) that pacts do not have a formal market place and thus may can help set cross-program priorities. This advantage require using proxies to determine their monetary values). should be cultivated. As mentioned below, the costs of Alternative program or project designs that would maximize should be included in the benefit-cost analy- net benefits or reduce adverse effects should be considered. sis whenever possible. Timing measures such as pay-back period (how long Analysis of Risks. Inadequate, insensitively designed, before the benefits exceed costs) and first-year benefits and poorly maintained infrastructure puts environments (does the rate of return exceed a hurdle rate in the first year at risk, raises health and safety risks, and creates potential of operation) are important outputs from this analysis. financial liabilities. Prioritization of infrastructure invest- Benefit-cost techniques, however, also present some ments should take these factors into account. Formal risk shortcomings for infrastructureinvestments. First, results analysis procedures should be used for major investments depend on the rate of discount used to convert future that have high-risk features. streams of benefits and costs to current dollars. As a Long-Term Analysis. Traditional analytic methods practical matter, early-year impacts receive a much great- grew out of the need to assess individual projects or specif- er weight-a possible problem in projects that may have ic investments. As such, they may be misleading when useful lives of several decades. Second, these techniques considering the long-term or strategic impacts of infra- are best suited to well-defined projects and may be awk- structure investments. The importance of these long-term ward if used for regional or national systems. Third, as impacts can outweigh the net economic value shown by with many analytic tools, they are best suited for invest- benefit-cost analysis. In considering these projects, it is ments not likely to stimulate a significant shift from busi- important not to ignore qualitative factors such as: ness as usual. Thus, strategic implications and non-linear impacts are often missed (witness, for example, the effect System effects (How much does the value of the air of the Interstate Highway System on stimulating new na- traffic control system or the Interstate Highway tional-scale markets and the consequent changes in distri- System exceed the sum of their individual parts?); bution networks and economic concentration) and their Non-linearities (Will the investment encourage ability to remold market shares (witness the rapid growth shifts in how infrastructure systems are used by in large trucks). the private sector?) For example, investment in Cost-EffectivenessAnalysis. Once performance mea- high-speed rail may change long-distance travel sures have been developed, they can be used to assess patterns; double-stack trains may generate signif- individual investments and programs in terms of their icant shifts in what and how much freight is ability to improve performance and their cost-effective- moved over long distances. The importance of a ness in doing so. They can be particularly valuable when global economy, with its emphasis on new pat- used as part of a strategic planning effort that assesses the terns of producing goods and services, has impli- relative merits of alternative program structures, includ- cations that are difficult to specify; and ing qualitative factors that can complement a comprehen- Quality of life, including long-term environmen- sive benefit-cost analysis. tal implications and possible effects on where people live and work. These issues are particularly Analysis of Externalities and Unintended Conse- difficult to assess, since they require speculation quences. In addition to their planned economic and envi- about changes in individual values and behaviors. ronmental benefits, infrastructureinvestments often have Nevertheless, they can have profound effects. unexpected positive and negative impacts on the environ- ment, health and safety, the financial condition of govern- Long-term impacts are difficult to assess with preci- ments and private parties, and established patterns of sion. It may be useful to consider the consequences (eco- daily behavior. Some of these impacts become apparent nomic, health, and safety risks) of alternative scenarios, only over long time periods, such as the role of Interstate including not building the facility, or designing facilities

U.S. Advisory Commission on Intergovernmental Relations 19 with flexibility to adapt to changes in technology, life The analytic staffs of federal agencies should consider styles, and business practices. Flexibility and the treat- the data and methodologies appropriate to each analytic ment of risk are important factors in making strategic problem, rather than limiting themselves to the data avail- planning a realistic part of decisionmaking. able. These data should be produced and verified objec- tively. A process for automated data collection, analysis, Uncertainty. The analysis of any long-lived project and reporting should be in place before agencywide imple- needs to consider the issue of uncertainty. All forecasts mentation begins. will be wrong in their details. In some cases, this uncer- The National Income Accounts should be revised to tainty can be assessed quantitatively using various types of be more helpful in tracking the economic benefits and sensitivity analyses. For example, OMB's Circular A-94 on costs of infrastructure. benefit-cost analysis highlights the value of probability- based techniques to help assess the multiple forces that Encourage Continued Interagency Cooperation. In- influence investments. teragency cooperation should continue and expand to in- clude efforts to build an active dialogue on how best to implement the principles and guidelines described here, VI. IMPLEMENTATION STEPS efforts to identify successful applications and areas for The principles and guidelines presented above offer an improvement, communication of successes and problems, opportunity to generate a profound change in how federal and efforts to tie in with other performance-related (and state and local) agencies nominate, evaluate, imple- studies or mandates (such as the White House National ment, and assess infrastructure investments. This should, in Performance Review and activities designed to respond to turn, result in more effective spending of scarce resources, a the Government Performance and Results Act of 1993). better understanding by decisionmakers and the public of A National Infrastructure Council should be estab- infrastructure, improved infrastructure programs, and en- lished to pursue these tasks. It could take the form of the hanced social, economic, and environmental outcomes. old interagency Water Resources Council or a Cabinet While full implementation of these changes will require sub-council. some time, the following near-term actions can generate Develop Examples. Application of these principles significant benefits and initiate more fundamental changes. and guidelineswill not be clear or easy. The methods need further development and demonstration within the com- Issue Principles and Guidelines to Require Invest- plexities of public programs. This effort should begin as ment Analysis. The President should require all federal soon as practical, and it should be undertaken carefully, infrastructure agencies to justify their budget requests and with the lessons learned shared widely among the relevant their legislative and regulatory initiatives with investment individuals in federal agencies. analysis, including life-cycle costing. Leadership in encouraging and developing analytical Establish an Interagency Working Group. The work guidelines and supporting data systems should be assigned of askForce I benefited greatly from active participation to OMB, GAO, CBO, FASAB, and the chief financial by senior program analysts and policymakers from many officers in each executive branch department and agency. key federal agencies involved in infrastructure. The pro- The goal should be to establish widely accepted analytic cess of sharing examples and techniques and discussing procedures that: ways to apply performance analysis is stimulating and self- reinforcing. This working group mechanism should con- Are applicable and accepted across the executive tinue under the auspices of the White House or OMB. and legislative branches; Pursue Pilot Projects. The Government Performance Account for all costs of alternatives, including de- and Results Act of 1993 calls for agencies to volunteer to velopment, construction, operation, and mainte- develop and implement appropriate performance mea- nance; surements. Infrastructure agencies have an advantage Can be validated by independent reviewers; in that it is relatively easy to quantify many benefits and costs of their programs. Also, most infrastructure agen- Will permit regular audit of results; cies already have some form of performance assessment under way. Coordinated pilot study reports by several infra- Can be readily understood by the public and the structure agencies would provide an early test of the new decisionmakers who must make use of them; and opportunities provided by this legislation. Federal infra- structure agencies should participate actively with OMB Are designed to foster interaction and construc- in the administration of the act. tive communication among analysts and decision- makers and across different agencies, levels, and Provide Infrastructure 'Ikaining. While a stand-alone branches of government. infrastructure institute has much to recommend it, the

20 U.S.Advisory Commission on Intergovernmental Relations need to begin disseminatingthese ideas is too important to McDowell, Bruce D. "Grant Reform Reconsidered," Intergovem- wait for agreement on organization, funding, and direc- mental Perspective 17 (Summer 1991): 8. tion for such an enterprise. Until these important details . "Reinventing Surface Transportation: New Intergovern- can be worked out, needed infrastructure investment train- mental Challenges," Intergovernmental Peqective 18 (Winter 1992): 6. ing should be provided by existing training programs, such as National Council on Public Works Improvement. FmgiIe Founda- the National Highway Institute, the Federal Executive Insti- tions: A Report on America's Public Wolks: Final Report to the tute, and other agency and program-specific efforts. President and the Congress. Washington, DC, February 1988. Reed, Marshall E, Richard A. Luettich, and Lester F! Lamm. Convene a National Conference on Infrastructure Measuring State Tvortntion Progmm Performance: Final Re- Performance. An annual conference offers one way to port. Washington DC: Highway Users Federation, 1992. (Pre- speed up communication across agencies and govern- pared for the National Cooperative Highway Research ments, among different levels of managers, and between Program, Transportation Research Board, National Research managers and decisionmakers. Tb add prestige and to en- Council.) courage attendance by senior managers, this should be Transportation Research Board. National Cooperative Highway Research Program. Primer on Trmzrportation, Productivity and sponsored by the White House, perhaps as a follow-up to Economic Development (Report 342). Washington, DC: Nation- the National Performance Review efforts. The conference al Research Council, September 1991. should be scheduled for more than one day, and should US. Department of Transportation. Federal Highway Adminis- include sessions devoted to techniques and case studies, tration. The Status of the Nation's Highways, Bridges, and Tmit: interaction with private-sector consumers of infrastruc- Conditions and Performance-Report of the Secrettuy of Tmns- ture services, and feedback from public decisionmakers. portation to the United States Congress and Summtuy. Washing- ton, DC, January 1993. References U.S. General Accounting Office. Fedeml Budget: Choosing Public Investment Programs. Washington, DC, July 1993. Apogee Research, Inc. Productivity Measures for the Federal Avi- ation Administration-Final Report, Prepared for the Federal . Inlproving Government: Need to Remine Organization Aviation Administration, Office of Aviation Policy and Plans. and Performance. Statement of Charles A. Bowsher, Comptrol- Bethesda, Maryland, January 22, 1993. ler General of the United States, before the Committee on Governmental Affairs, U.S. Senate. Washington, DC, March Competitiveness Policy Council. Public Infrastructure Subcoun- 11, 1992. cil. Interim Report: Restoring Public Confidence in Infrastructure Investment. Washington, DC, July 29, 1993. . Performance Measurement: An Important Tool in Manag- ing for Results. Statement of Charles A. Bowsher, Comptroller Esser, Jeffery L "Service Efforts and Accomplishments Report- General of the United States, before the Committee on Gov- ing," Government Finance Review 9 (October 1992): 3. ernmental Affairs, U.S. Senate. Washington, DC, May 5,1992. Federal Accounting Standards Advisory Board. Memorandum . Progmm Performance Memum: Federal Agency Collection Regarding the Preliminary Views on Service Efforts and Ac- and Use of Performance Data. Washington, DC, May 1992. complishments Reporting (December 1992) issued by the Gov- . Transition Series: Investment. Washington, DC, December ernmental Accounting Standards Board. Washington, DC, 1992. February 9, 1993. US. Representative Bob Carr, Chairman, Subcommittee on Governmental Accounting Standards Board. Exposure Draft: Pm- Transportation and Related Agencies, Committee on Appro- posed Statement of the Governmental Accounting StandardF priations, Investment Criteria, NEWS, May 4, 1993. Board on Concepts Related to Service Efforts and Accomplish- US. Senate. Committee on Governmental Affairs. Report to Ac- ments Reporting. Norwalk, Connecticut, September 1993. company 5.20, Government Performance and ResuItsAct of 1993 Lewis, David. Objectiva and Decision Criteriaforlnfratructure In- (Report 103-58). June 15, 1993. vestment, A Summary of Research Findings of Project 2-1 7 of the Wholey, Joseph S., and Harry F! Hatry. "The Case for Perform- National Cooperative Highway Research Program. Washington, ance Monitoring," Public Administration Review 52 (Novem- DC, National Research Council, 1992. bedDecember 1992): 604-610

U.S. Advisory Commission on Intergovernmental Relations 21 22 U.S. Advisory Commission on Intergovernmental Relations Statement of Principles and Guidelines, Federal Infrastructure Task Force II APPLYING BENEFIT-COST ANALYSIS TO INVESTMENT OPTIONS

This definition of benefit-cost analysis is broad and I. OBlECTlVES< encompasses less comprehensive forms of analysis, such This statement proposes a strategy for using econom- as cost-effectiveness analysis and performance analysis. ic analysis to improve the quality of decisionmaking asso- The following text refers specifically to standard bene- ciated with federal infrastructure investment. This can be fit-cost analysis, although individual topics maybeapplica- done by (1) expanding the use of benefit-cost analysis by ble to cost-effectiveness analysis or to other variant forms. agencies that deal with federal, federally assisted, or fed- erally regulated infrastructure; (2) improving the accuracy Historical Development. The development of bene- and credibility of benefit-cost analyses prepared by these fit-cost analysis within the federal government began with agencies; and (3) promoting greater consistency in the use of the Flood Control Act of 1936. By the 1950s, the necessary this analytical method, thus enhancing its role in com~ari- techniques had progressed to the point where several sons of diverse programs, projects, and regulations. water resources agencies were using benefit-cost analysis, interagency guidelines for its use were developed, the II. FINDINGS President endorsed general principles for applying the technique, and Congress endorsed the procedure. An in- The federal government faces the urgent tasks of teragency Water Resources Council was established in maintaining and improving the nation's infrastructure, 1966, chaired by the Secretary of the Interior, and oper- during periods of fiscal stringency as well as other periods. ated until 1983 as the primary instrument for improving More attention needs to be focused on improving the benefit-cost methods and promoting their use among all productivity of infrastructure investments, the methods federal water resources agencies. Benefit-cost analysis for investment analysis, and the quality of data available to continues to be used for water resource projects through- support this analysis. out the government. A Powerful and Timely Tool. Of the various tests of Since 1981, Executive Order 12291has required bene- merit that may be applied to infrastructure investments, fit-cost analysis of all major federal regulations as part of benefit-cost analysis is useful and broadly applicable. It the mandated regulatory impact analysis. OMB Circular can be used to (1) develop and support initial decision A-94 establishes guidelines and discount rates to be used strategies; (2) compare and prioritize investment options; in benefit-cost analysis of federal programs. (3) upgrade investment portfolios and reduce investment Although benefit-cost concepts are well developed risks; and (4) evaluate post-investment decisions to help and widely understood and applied, practical difficulties determine whether to continue, change the amount of, or have arisen in many cases for which the expertise, time, redirect investment. and funds required to perform adequate analyses have not been available. Thus, many applications of benefit-cost Definition of Benefit-Cost Analysis. Benefit-cost analysis have used short-cut methods. analysis compares the expected beneficial consequences of a proposed action to its expected adverse effects. In Spreading the Use of Benefit-Cost Analysis. Since the comparing alternative proposals, benefit-cost analysis em- 1960s, some federal agencies outside the water resources ploys a decision rule derived from concepts of economic programs have chosen to apply benefit-cost analysis. In efficiency, for example, to maximize net benefits or bene- addition to the Office of Management and Budget's fit-cost ratios. In practice, most benefit-cost analysis at- (OMB) regulatory impact analysis program, other current tempts to consider non-monetized as well as monetized examples include the U.S. Forest Service, the Soil Con- consequences, although decision rules may deal with mo- servation Service, the Federal Aviation Administration, netized values only. the Federal Railroad Administration (in its railroad assis-

U.S. Advisory Commission on Intergovernmental Relations 23 tance program), and the Federal Transit Administration. present knowledge to improve practice. In other cases, fur- In addition, Congressman Bob Carr, chairman of the ther research and development efforts, and better data, may Transportation Appropriations Committee, recently re- be needed. Nevertheless, the current state of the art of leased a set of investment criteria for highway, transit, and benefit-cost analysis provides an effective technique for in- airport investments emphasizing the need to consider bene- vestment analysis, provided it is applied in accordance with fits and costs as part of the justification for appropriations principles and guidelines discussed below. requests coming before that committee. Thus, many federal agencies now are using some form of benefit-cost analysis for Ill. PRINCIPLES one or more of these purposes. However, methods are not consistent from one Universal Application. All significant federal and fed- agency to another. Application of benefit-cost analysis is erally assisted and regulated infrastructure proposals governmentwide only in the case of regulatory impact should be subjected to benefit-cost analysis. analysis (following general guidance issued by OMB). The Accounting Stance. Federal programs should be eval- only functional program to make routine and consistent uated from the point of view of national impacts, including use of benefit-cost analysis across multiple agencies is both direct and external benefits and costs, in both the water resource development. private and public sectors. Diverse Applications of Benefit-Cost Analysis. In ac- Multiple-Objectives. The '%best" project or program is cordance with the three federal roles in infrastructure- the one that delivers the most desirable combination of direct federal projects, federal-aid projects and programs, net improvements with respect to economic efficiency, and federal regulation-benefit-cost analysis can be redistribution of income, environmental quality, intergen- applied in at least three ways. Traditionally, this type of erational equity, and other objectives. analysis was applied only to federal projects to be federally Decision Criteria. From an economic efficiency constructed, operated, and maintained. As cost-shari% standpoint, which is one of several important consider- came to these Programs, benefit-cost anal~sesbeganto be ations, the purpose of investment analysis is to m-ize prepared for projects with diverse sources of funding and the net benefit obtained from a portfolio of investments responsibilities for ownership, operation, and/or mainte- (e.g., from a program budget). nance. In 1981. Executive Order 12291extended theuse of this analytical technique to a wide variety of regulato- Baseline Assumption. Benefit-cost analysis requires ry programs. the establishment of a plausible baseline assumption; Now, as the federal government considers dividing its beneficial and adverse effects are then measured against budget into "investment" and "current expense" sections, that baseline on a with-without basis. many federal aid programs for infrastructure are likely to be Optimality vs. Feasibility. Various analytical methods moved into the investment budget, where they will need to may be used to search for optimal projects; benefit-cost be justified on the basis of their likely future returns. For this analysis is then used to determine economic feasibility and reason and others, traditional project-by-project analysis may funding priorities. no longer be adequate. Programmatic analysis will be need- ed to help pick the most economically meritorious programs Risk and Uncertainty. Benefit-cost analyses should and the most efficient forms of those programs. Benefit-cost present the expected values of beneficial and adverse ef- analysis is developing as one technique that may be used for fects as well as statements regarding the nature and mag- this evaluation. nitude of risk or other uncertainty associated with those Also, in order to reduce some of the uncertainty about estimates. the quality of investments made by state and local govern- Non-Monetized Effects. Benefit-cost analysis should ments receiving federal aid under these infrastructure consider all of the beneficial and adverse effects of a programs, federal aid recipients should perform a bene- proposed action, regardless of whether or not those ef- fit-cost type of analysis for the investment options that fects can be expressed in monetary units. they consider. Consistency of benefit-cost analyses pre- Discount Rate. To facilitate comparisons,benefit-cost pared by state and local governments with federal proce- analysis requires that future streams of benefits and costs dures would give further assurance that these funds would be converted to equivalent present values by discounting. be well spent by state and local governments.

Need to Improve Benefit-Cost Analysis. Benefit-cost IV. GUIDELINES FOR APPLYING analysis is an imperfect tool. When the practice-as BENEFIT-COST ANALYSIS embodied in the procedures of the various federal agen- The principles listed above may not always be easy to cies-is contrasted to underlying principles, many deficien- apply. The following guidance is provided to assist in the cies can be noted. In some cases, it may be possible to use application of this method.

24 U.S.Advisory Commission on Intergovernmental Relations Universal Application. When properly applied, bene- federal-aid programs that are decided on by a state or local fit-cost analysis helps in the identification of the most government, benefit-cost analysis should be performed by worthy projects, and in setting priorities for irnplementa- the federal-aid recipient for the geographic area affected. tion. This is possible within a particular program only Care should be taken in the use of state and regional when all projects or elements of that program are sub- multipliers to avoid double-counting benefits and costs jected to consistent analysis. But, in practice, benefit-cost that may simply be shifted across borders. analysis is applied selectively-routinely in some pro- grams and agencies (e.g., water resource development), Multiple Objectives. Federal infrastructure projects never in others, and occasionally elsewhere. OMB's re- affect the of the nation in a number of ways. When quired benefit-wst analysis guidelines for major proposed economic benefits exceed costs, they increase the aggre- federal regulations (those likely to have an effect on the gate value of goods and services produced (promote eco- economy of $100 million or more per year) are more nomic efficiency). In the course of doing this, benefits and broadly applicablebut not specific to any particular project costs may be redistributed from some groups in society to or program. Even though project selection may ultimately others, or from one generation to another. Environmental reflect noneconomic as well as economic criteria, insights quality may be affected, as might several other measures gained through benefit-cost analysis should be given an of social well-being. In principle, these are all joint objec- important role in the decision process. tives. The most desirable investment is the one that deliv- All significant federal infrastructure projects, pro- ers the best combination of improvements with respect to grams, and regulations should, therefore, be subjected to all objectives. But it is difficult to determine what is "best" benefit-cost analysis, using a consistent set of standards when some effects are difficult to monetize and the trade- and approaches. These standards should provide for anal- offs among the different objectives are not well under- yses of varying complexity and level of detail, as appropri- stood. Better methods are needed for presenting and ate to each situation. In some cases, the standards may comparing combinations of impacts. provide for cost-minimization studies, cost-effectiveness In practice, benefit-cost analysis is most useful for analysis, or performance analysis as alternatives to a com- determining the economic efficiency of alternatives when plete benefit-cost study. all effects are monetized. In the case of water resource Lacking universal application, benefit-cost analysis projects, environmental quality changes, regional im- can be applied to specific programs, as it is to water re- pacts, and effects on social well-being are assessed, but source development projects. In this case, benefit-cost they are not given official status as objectives. Benefit-cost analysis, at the appropriate level of complexity, should be procedures used for other programs speak only of eco- applied to all significant infrastructure investments within nomic (monetized) benefits and costs. It should be noted each selected program. This guideline assumes that steps are that the ability to monetize project effects has improved in taken to provide the necessary analytical capability within recent years. Some environmental effects can be charac- each affected agency if it does not exist. terized as non-market economic goods and can be valued by methods that utilize market data for related goods Accounting Stance. In identifying and measuring (hedonic price analysis, travel cost analysis, and alternative benefits and costs, the analyst must choose an accounting cost analysis) or survey data (contingent valuation studies). stance: Are benefits and costs to be measured from a local, Pending the development of an improved capability for regional, or national perspective? Are only direct, pro- ranking investments according to multiple objectives, bene- gram-related benefits and costs to be measured, or should fit-costanalysis should retain economic efficiency (e.g., maxi- external effects be considered as well? If external effects mize the benefit-cost ratio) as the primary decision rule. At are to be considered, should they be limited to the United the same time, standards should require the tabulation of States, or should transboundary effects be computed? In other categories of consequences, such as income redistribu- fact, none of these effects can be omitted completely from tion, intergenerational equity, environmental quality, re- the analysis, although some may be treated less rigorously gional impacts, and other social well-being effects. than others. For example, there may be a national interest in the Economic Decision Criteria. Where the size of the distributional and other consequences of a program for a investment budget can be assumed to be fixed, total net particular locality or region (or state or neighboring coun- economic benefit would be maximized by choosing a port- try), and it may be helpful to separate program-related folio of projects with the highest benefit-cost ratios. In effects from external effects. In some cases, such as reve- practice, however, the benefit-cost procedures of some nue sharing and block grant programs, distributional ef- agencies advocate formulating projects initially (by smling fects may be of primary interest, with economic efficiency and selecting among mutually exclusive alternatives) in the considerations as a secondary issue. In this case, effects absence of budget constraints, based on a net-benefit deci- should be calculated at state and regional levels, as appro- sion rule (the present value of benefits minus costs, also priate, as well as at the national level. For projects within known as net present worth). Next, abudget-constrained

U.S. Advisory Commission on Intergovernmental Relations 25 investment program is developed by ranking projects ac- search for optimal projects, but it is a crude tool for this cording to their benefit-cost ratios (a measure of economic purpose. Better methods are available, including linear efficiency). Projects also may be ranked by internal rate of programming and other mathematical optimization ap- return. proaches. Further development of these methods and ex- These approaches may require modification where panded application is needed to improve analysts' ability projects are large relative to the available budget. In this to identify alternatives and test for optimality. case, a strict application of any single criterion might re- sult in unspent funds. Further complications arise in the Risk and Uncertainty. All estimates of benefits and case of federally assisted or federally regulated infrastruc- costs of proposed investments are forecasts, and therefore ture investment, where most project costs are borne by inherently uncertain. Sometimes, it is possible to estimate other levels of government or by the private sector. the probability of occurrence for various outcomes to help It should be noted that the use of a benefit-cost ratio put boundaries around the uncertainty. The methods for decision criterion, instead of net benefit, requires atten- doing this include estimates of probabilities of various tion to the way in whichbenefits and costs are categorized. outcomes, confidence intervals, and certainty equivalents. Current practice often groups together all positive effects In other cases, where nothing is known of the probability under the heading of "benefits" or "beneficial effects"; all of alternative outcomes, the results are simply said to be negative effects are similarly grouped and termed "costs" uncertain. There has been relatively little development of or "adverse effects." In fact, there is a distinction between methods for coping with this type of uncertainty. "benefit" and "beneficial effect," as there is between Where infrastructure proposals are related to health "cost" and "adverse effect." Economic benefits consist of all and safety risks, risks to the environment, and risks of output-related effects, including those which are adverse external financial liabilities, it may be particularly impor- (e.g., congestion costs due to recreation use of a reser- tant to apply formal risk analysis methods to develop a voir). Economic costs include all input-related effects, in- fuller understanding of these potential cost factors. Risk cluding those which are beneficial (e.g., increased profits analysis is not always used in conjunction with benefit-cost to local businesses as a result of highway construction analysis, however. This may reflect, in part, the difficulty activity). Failure to observe these distinctions biases bene- of performing risk analysis and communicating the results fit-cost ratios, but will not affect the net benefit measure to decisionmakers and to the public. or the calculated internal rate of return. The method used Better methods are needed for estimating, express- in each specific application, and the reasons for choosing ing, and communicating the estimated uncertainties it, should be explained, so that those using the analysis will and risk factors incorporated into benefit-cost inputs, not be misled. assumptions, and results so that decisionmakers may understand the range and likelihood of possible out- Baseline Assumption. The baseline assumption for comes. One result of better characterization of riskand direct federal projects and federal regulations should in- uncertainty should be greater attention to risk reduc- corporate all future actions and conditions considered tion through data improvement. most likely to occur in the absence of federal investment. This includes the possibility of investment by state or local Non-Monetized Effects. Quantitative comparisons, governments or by the private sector. The baseline as- determinations of economic feasibility, and rankings are sumption is rarely a status quo assumption. facilitated by effects that can be measured in a common Similarly, the baseline assumption for benefit-cost unit, such as money. Yet, in practice, many effects cannot analysis of federal-aid expenditures decided on by state or be, or have not been, expressed in monetary units. As a local governments should include all future actions most result, conclusions are often based on monetized effects likely to occur in the absence of the federal-aid recipient's alone. Such conclusions are limited at best, seriously proposed action, including the possibility of investments biased at worst. Much progress has been made in develop- by other governments and by the private sector. ing monetary measures for certain non-market goods, and more progress is needed. More importantly, methods Optimality vs. Feasibility. Economic feasibility is usu- must be found for evaluating investments having signifi- ally defined as requiring benefits to exceed costs; it is cant non-monetized consequences. demonstrated through benefit-cost analysis. The same Benefit-cost analysis should consider all conse- analysis also permits the ranking of a specified set of quences of an investment, whether monetized or not. investments according to economic returns, or other ob- Every reasonable attempt should be made to monetize jectives. Selection of the "best" investment from among any effects which can be characterized as economic bene- those considered, however, does not reveal whether some fits or costs. Various market-based and non-market-based still better investment might exist. The best possible in- methods are available, such as hedonic price analysis, trav- vestment, according to the decision criterion used, is the el cost methods, and contingent valuation surveys. These optimal investment. Benefit-cost analysis can be used to methods may be useful for some, but not all, project ef-

26 U.S.Advisory Commission on Intergovernmental Relations fects. Where monetization is not feasible, the effect Chief Financial Officer should be responsible for provid- should be fully described, and quantified to the degree ing detailed procedures appropriate to the agency's mis- possible. sion, to ensure consistent implementation. Discount Rate. Investments should be analyzed using Institutionalize Support for Benefit-Cost Analysis. "real" (inflation-free) estimates of benefits and costs and a Among the responsibilities of the central support agency "real" discount rate. Depending on its conceptual basis, or agencies are the following: the discount rate may range from several percent to as Develop and issue detailed standards, guidance, much as 10 percent. It is relatively stable over time, how- and procedures for the conduct of benefit-cost ever, and does not vary with price inflation. Discount rates analysis within the various federal agencies, con- are mandated for some federal benefit-cost analysis, by sistent with the various federal roles and types of legislation for water resource projects and by OMB Circu- programs and projects. lar A-94 (1992) for regulatory and certain other programs. Continuously maintain and improve standards, guidance, and procedures. V. IMPLEMENTATION STEPS Assist agencies in developing organizational ca- Issue Principles and Guidelines. In order to achieve pability for performing benefit-cost analyses. the full benefits of benefit-cost analysis, the President Conduct or facilitate training programs designed should issue governmentwide principles requiring the use to maintain and improve skills of analysts. of benefit-cost analysis by all federal infrastructure de- Provide a documentary repository for past bene- partments and agencies in justifying their budget requests fit-cost studies. and their legislative and regulatory initiatives. The Presi- dent also should assign responsibility within the Executive Conduct evaluations of selected past studies, in Office of the President for oversight of this requirement order to identify needed areas of improvement in and for issuing and maintaining additional guidance to procedures. assist federal agencies in meeting this requirement. Disseminate and monitor the effectiveness of se- OMB's Circular A-94 already provides guidelines that lected methods for approximating the value of could form the basis for governmentwide implementation benefits and costs, including standard values for of benefit-cost analysis. some frequently used project outputs. The principles and guidelines should be adapted for Sponsor the development of improved methods use in directly administered federal infrastructure pro- and procedures. grams, federal-aid infrastructure programs, and federal programs that regulate infrastructure. The oversight re- Monitor, through selective audits, the quality of sponsibilities in the Executive Office of the President current benefit-cost analyses. should be exercised in consultation and cooperation with Reduce Legislative Barriers to Benefit-Cost Analysis. the federal infrastructure agencies. In some environmental protection programs, the Con- Despite its shortcomings and uncertainties, benefit- gress has expressed its opposition to the use of bene- cost analysis is a powerful-and frequently the best availa- fit-cost analysis. While policy decisions in these areas may ble-tool for evaluating and ranking proposed infrastruc- reflect a broader set of considerations, it is important to ture investments. When benefit-cost analysis is conducted demonstrate the potential contributions of benefit-cost in accordance with the guidelines listed above, it can make analysis to the development of more effective environ- a substantial contribution to the productivity and effec- mental policies. Congress should be persuaded to aban- tiveness of government investment. don prohibitions and opposition, and to accept the However, benefit-cost analysis cannot achieve its po- contribution that benefit-cost analysis can make to im- tential under current institutional arrangements. Benefit- proving public decisions. cost analysis is, in most respects, a bureaucratic orphan. It is applied comprehensively only to water resource projects References under optional guidance not currently being updated or Bentkover, J.D., VT. Covello, and J. Mumpower, eds. Benefis maintained. The governmentwide application of bene- Assessn~ent:i71e State of the Art. Dordrecht: D. Reidel Publish- fit-cost analysis imposed by Executive Order for regula- ing Co., 1986. tions with potential impacts in excess of $100 million per Dower, Roger C. "Survey of Federal Agency Research and Appli- cation of Economic Benefits Analysis." Washington, DC: U.S. year is supported only by general OMB standards and Environmental Protection Agency, August 19, 1983. guidelines, which are not backed up by program-specific U.S. Department of the Army. Corps of Engineers. NationalEco- procedures in many cases. (An exception is EPA's Guide- nomic Development Procedures Manual-Oveiview Manual for lines for Peflonning Regulatory Impact Analysis.) Within Conducting National Economic Development Analysis. IWR each agency, the agency head, policy analysis office, or Report 91-R-11. Washington, DC, October 1991.

U.S. Advisory Commission on Intergovernmental Relations 27 U.S. Department of Transportation, Federal Transit Administra- Guidelines and Discount Rates for Benefit-Cost Analysis of Feder- tion. Procedures and Technical Methodr for TmitProject Plan- a1 Progrants. Revised October 29, 1992. ning. Washington, DC, February 1993. , Regulatory Progmrn of the United States Govem- ment-1990; Appendix V Regulatory Impact Analysis Guidance, U.S. Environmental Protection Agency. Guidelines for Peflorm- 1990. ing Regulatory Impact Analysis. Washington, DC, December 1983 (reprinted March 1991). U.S. Water Resources Council. Economic and Environmental Principles and Guidelines for Water and Related Land Resources US. Office of Management and Budget. Circular No. A-94, Implementation Studies. Washington, DC, March 1983.

28 U.S. Advisory Commission on Intergovernmental Relations Statement of Principles and Guidelines, Federal Infrastructure Tmk Force III IMPROVING THE MAINTENANCE OF INFRASTRUCTURE

improper design or operation or inadequate maintenance. Adequate attention to maintenance needs is important in The purpose of this statement of principles and guide- the design and construction of facilities as well as after lines is to provide guidance to federal agencies and their they are operational. state and local partners that will enable them to ensure effective and efficient maintenance of capital assets and reduce or avoid deferring needed maintenance. Deferral of Maintenance. Maintenance of existing The term "maintenance" applied here is used broad- infrastructure-roads, bridges, water and sewer systems, ly. It includes preventive and routine maintenance, minor dams and reservoirs, buildings, and other public facili- and major repairs, rehabilitation, and even replacement ties-often does not receive adequate attention-wheth- costs if a component has deteriorated to a point where er the infrastructure is owned by federal, state, or local partial or full replacement is cost effective. Some mainte- governments. This is especially so in times of tight bud- nance expenditures, thus, may be funded from operating gets. Seldom, for example, are the likely cost and service funds and some from capital funds. consequences of not doing maintenance reported. If mainte- The term maintenance used here excludes work nance is deferred, this can result later in poor quality public aimed primarily at expanding the capacity of a facility or facilities, reduced public safety, higher later repair costs, and otherwise upgrading it in order to serve needs different than, poor service for the public-both citizens and businesses- or si@~cantly greater than, those originally intended. including added vehicle wear and tear, sewer back-ups into Federal concerns include not only capital assets that it homes, and flooded streets. In its final report to the Presi- owns and maintains but also assets obtained by other dent and the Congress in 1988 (Fragile Foundations), the governments with federal support and assets regulated by National Council on Public Works Improvement made a the federal government. strong case for reducing deferred maintenance. The findings and recommendations contained here have two primary purposes: (1) to reduce long-term costs Recent Initiatives Focusing on Maintenance. Recent- by identifying infrastructure maintenance early enough to ly, two major approaches have developed to deal with the avoid higher costs later, and (2) to help public officials too prevalent practice of deferring infrastructure mainte- better prioritize maintenance needs and make more in- nance. One requires the preparation of maintenance formed decisions on maintenance budgets by providing management systems as part of the planning and federal them with fuller information on the implications of main- funding of state and local surface transportation projects tenance options. under the Intermodal Surface Transportation Eficiency Act of 1991 (ISTEA). The other is an initiative by the Govern- mental Accounting Standards Board (GASB) to develop II. FINDINGS guidelines for reporting information on capital assets. Importance of Maintenance. Maintaining public in- GASB's work is expected to include guidelines on frastructure assets is a major responsibility and cost of reporting the condition of these assets, their ability to federal, state, and local governments. Dollars for mainte- meet service needs, and the estimated cost (if any) to nance compete with many other claimants for public return assets to acceptable condition. GASB sets account- funds. Proper maintenance is vital if government agencies ing standards to guide state and local governments, and it are to deliver quality services to citizens effectively and works with the Federal Accounting Standards Advisory efficiently. Every capital asset suffers wear and tear of its Board (FASAB), a recently established body that recom- components through usage and due to the attrition caused mends federal accounting standards and has also begun to by environmental conditions, damage by accident, and consider capital expenditure accounting issues.

U.S. Advisory Commission on Intergovernmental Relations 29 Under ISTEA, new construction of highways and transit two complementary approaches to improving the effec- facilities is no longer the central focus; good management tiveness and efficiency of maintenance: (1) planning and and maintenance of existing facilities now receives empha- (2) accounting and reporting. sis. Three maintenance management systems are required before federal grants can be made. They cover pavements, Planning for Maintenance bridges, and public transportation facilities and equip- Maintenance Should Be Planned. Maintenance is too ment. The purpose of these management systems is to important to be just allowed to occur when the need for develop proposals for optimal allocation of limited funds repairs arises. Federal, state, and local agencies should to help minimize life-cycle governmental and user costs. develop annual maintenance plans, with the objective of Analysis of maintenance needs is required, making use of enabling the public assets to continue to deliver quality inventory and condition assessment data. The analysis and service in the most cost-effective manner. resulting plans are required to be aired in public. Multiyear maintenance plans should be provided in Other examples of maintenance planning are in- support of the first-year plan and budget. These plans are creasingly common among agencies directly responsi- needed to enable public officials to consider the future ble for facilities: costs and service quality implications of various levels of The U.S. Army Corps of Engineers has a mature maintenance, changing demands for service, and the im- maintenance planning process for its navigation plications of any maintenance that the plan defers. Rou- facilities that is directly linked to its annual bud- tine maintenance as well as large-cost items, such as major get process. It includes regular condition assess- repairs and rehabilitations, should be included. The plan ments and performance-based evaluations of should specify why major maintenance elements have facility operations in relation to the missions be- been included, including external factors such as expected ing performed. The process is a dynamic one that increases in the usage of facilities. In addition, intentional responds to changing needs. In recent years, as lack of maintenance or minimal maintenance strategies user fees have begun to fund a significant share of recommended because of declining demands for service the Corps' maintenance costs, the Corps has or obsolescence of facilities, should be explained. found &elf in partnership with the Inland Water- ways Users Board (IWUB) whose members pay Assess Condition of Infrastructure. Agencies should the fees and are very sensitive to cash flow projec- regularly assess the condition of their infrastructure as- tions that reflect the relationship between reve- sets. This information is vital as an early step toward esti- nues and expenditures. Conversely, IWUB is mating maintenance needs. skeptical about traditional Corps rules based on Systematic, reliable, and efficient procedures should net benefits to the national economy. be used. Condition assessment is well developed for roads, bridges, and transit. It is less well developed for many New York City has established a regular condition other assets, such as water and sewer systems. Where survey of all its city-owned buildings and public adequate methodologies for condition assessment do not facilities as a result of a city charter requirement exist, research programs, new technologies, and user re- enacted after the West Side Highway collapse sev- view processes should be used to establish them. eral years ago. The survey is automated and pro- Before the condition assessment, agencies will need vides well justified cost estimates of maintenance to develop an inventory of facilities to include in the main- needs for the city's annual budget process. tenance plan. The inventory should include relevant, sig- The U.S. Department of Energy is in the second nificant characteristics of each facility (such as materials year of a five-year effort to establish a Capital used, capacity, past loads, and past maintenance andprob- Asset Management Program (CAMP) based on lem history). condition assessments, life-cycle planning that Infrastructure System Needs Should Be Reviewed evaluates alternative "what if" scenarios, and Periodically. The planning process should also provide for prioritization of maintenance needs in the con- periodic review of each infrastructure system for which an text of changing departmental missions. organization has responsibility (for example, the transpor- tation system, the water system, and the school system). Ill. PRINCIPLES AND GUIDELINES This can provide a much improved perspective on mainte- ON MAINTENANCE nance needs. For example, a (or building or road or facility) in poor condition might be found, based on The task force recommends that federal, state, and information about future land use and demographic local agencies apply the following principles and guide- changes, not to be needed currently or in a few years- lines when they make decisions about the maintenance of thus changing the cost-effectiveness of repair options. capital assets. These principles and guidelines focus on Obsolescence is an important consideration.

30 U.S. Advisory Commission on Intergovernmental Relations Explicitly Consider Future Maintenance Costs When actions should be undertaken and when, given funding Selecting New or Replacement Capital Assets, Including constraints. Low-Maintenance Design Alternatives. When procuring These priorities should consider the interrelation- new facilities, or purchasing new capital equipment, or ships of projects, for example, by combining lower priority replacing or rehabilitating major components of existing with higher priority projects when doing so would substan- capital assets, the planners and designers should consider tially lower the overall costs while maintaining a standard future maintenance requirements and options to reduce of quality. This might occur, for example, if a lower prior- future maintenance costs. ity road repair project wuld be combined with a higher In some instances, this may lead to selection of assets priority underground pipe project so that the road work with higher initial costs, but whose added cost is shown by would need to be done only once. analysis and experience to be more than compensated for by future savings on maintenance, as well as yielding more Give Explicit Attention to Preventive Maintenance. trouble-free service. For example, designing for more ex- As has been found often, "an ounce of prevention is worth pensive materials in some instances can lead to less fre- apound of cure." Too often, agencies havebeen faced with quent repairs and reduced repair costs-and would major needs to catch up on repairs, and preventive main- minimize future service interruptions. tenance is neglected. This can lead to a never-ending cycle This analysis effort will require the agency to estimate of playing catch-up, usually costing more and providing such elements as future asset deterioration, the asset's lower quality services to customers. Each agency should service life for different maintenance options, the costs of develop annual preventive maintenance work plans and various repair strategies, and the likely impacts of deterio- budgets as a high priority. Adequate preventive mainte- ration on such features as service interruptions, safety, nance planning requires a multiyear perspective, includ- and business impacts. The timing of the benefits and costs ing consideration of designs based on life-cycle costs, associated with each maintenance option should also be performance, and usage of the asset as well as costs. examined explicitly. These analyses should consider not Communicate the Maintenance Plan Effectively. It is only "immediate" performance, such as pavement rideabil- not enough for an agency merely to develop plans on its ity, water main breaks, and number of service interruptions, own without communicating with those who will be af- but also should consider other, longer-term impacts, such as fected. Federal, state, and local infrastructure agencies safety, pollution, and costs to users of the facilities (including should communicate effectively about the plan with those citizens and businesses) and costs to the local economy. If who will be served and those who will have to act on it. quantitative data cannot be obtained, the best available qual- This includes persons both within and outside the agency. itative information should be provided. Different communication approaches will likely be need- Such information, combined with information from ed for the various types of users of the plan, such as regular condition assessments, will enable the govern- department executives, cost-sharing partners, OMB, ment to make more informed decisions about the level Congress, federal-aid recipients, federally regulated in- and mix of funding needed and which maintenance- frastructure agencies, the media, and the public. In most related activities to undertake and when. cases, communication should start early in the planning process and should be actively pursued as a two-way learn- Use "Value Analysis-Value Engineering." Agencies ing experience. not doing so should incorporate some form of "value anal- ysis-value engineering" and life-cycle costing into their Use the Plan as a Means to an End. The goal of all development of maintenance strategies, at least for major infrastructure is to deliver services, and the goal of main- repairs. This approach involves examining each element tenance is to ensure regular, cost-effective delivery of of a proposed asset, the asset as a whole, and the asset's those services. To be useful, plans must be carried out, and relation to the overall service to which it contributes-to to be carried out, they must be manageable in scope, ascertain that the asset is really needed and is provided in careful in their use of resources, and executed with com- the most cost-effective way possible. mitment and persistence. Thus, the planning process should collect only the information needed and collect it Prioritize Maintenance Needs. Agencies should use only as often as needed. Planning and reporting should regular condition assessments and other relevant infor- not become as big a job as the maintenance itself. mation to prioritize maintenance needs. This information should include the importance of the asset (e.g., usage Accounting and Reporting for Maintenance information), the likely impacts on service levels and per- formance, risks to health and safety, and costs to the Report Condition of Infrastructure. Agencies should government and users (assuming, as usually will be the regularly report to upper management, elected officials, case, that not all such needs can be funded right away). and the public the condition of their infrastructure assets. This will help the agency determine which maintenance This reporting, using the latest available information,

US.Advisory Commission on Intergovernmental Relations 31 should occur at relevant times during the decisionmaking expenditures should be justified in the same perform- cycle (such as during preparation of the annual budget). The ance terms as new construction so that these priorities findings of the condition assessments process (discussed ear- can be considered in relation to one another (as well as lier) should be reported in a clear, understandable way. to other funding claimants).

Report Costs of Unfunded Maintenance. The costs of Report Degree of Uncertainty. Agencies should iden- needed maintenance should be estimated by establishing tify and include in their maintenance-needs reports the condition standards for each capital asset and calculating extent of uncertainty in the estimates used by them in the cost to return assets to an "acceptable" condition making their major maintenance decisions. Predicting the based on established standards. This amount should be future (such as future usage and service life of a facility) is reported annually to public officials and the public as part difficult at best. However, it is better to obtain the best of the budget and financial reporting processes. available professional estimates on these elements than In many cases, no universally accepted standard may not to consider information on future costs, service lives, exist. Developing more than one condition level might be and performance. useful. For example, condition level might be categorized The organization providing the estimates also should by different serviceability levels (e.g., a "minimally accept- provide information on the key analytical assumptions able" and a "fully acceptable service" condition). A combi- made and the magnitude of the uncertainty in the esti- nation of expert and political judgment, along with citizen mates. This might be done, for example, by providing inputs, is likely to be needed to establish these standards. ranges of estimates on the key numbers, rather than a The standards, however, should be reasonably consistent single value. More sophisticated methods are available for over time to avoid being haphazard or manipulated. estimating the magnitude of uncertainties, but these will By subtracting the amount of maintenance dollars not always be practical to use. budgeted from the cost to bring assets to acceptable condi- tion, the agency can establish the amount that is un- IV. RECOMMENDED IMPLEMENTATION STEPS funded. This cost estimate is sometimes called "unfunded Issue Principles and Guidelines. The President maintenance" or "deferred maintenance." should issue general principles for infrastructure mainte- As with the establishment of "acceptable" condition nance to be followed by all federal infrastructure agencies, standards, unfunded maintenance costs might be pre- and should charge OMB with responsibility for establish- sented for different serviceability levels, such as by report- ing a process to more fully develop and oversee guidelines ing both the amount needed to return the assets to a that require each federal infrastructure agency to plan for "minimally acceptable" and to a "fully acceptable" level. maintenance and to account for and regularly report pub- The cost of unfunded maintenance might also be licly on amounts of needed maintenance that are not categorized by prioritylimportance (e.g., high priority ver- funded. The principles and guidelines should be adapted sus lower priority, based on each asset's usage and risk1 for use in directly administered federal infrastructure pro- safetylimpact potential). grams, federal-aid infrastructure programs,- - and federal programs that regulate infrastructure. OMB's oversight Report the Consequences of Unfunded Maintenance. responsibilities should be exercised in consultation and Estimates of unfunded maintenance are important to en- cooperation with the federal infrastructure agencies. able management, elected officials, and citizens to obtain Agency budget offices and OMB, in their guidelines a more accurate picture of the financial condition of the on budget submission, should request information on the government. The information on unfunded maintenance amounts needed for maintenance, both the amount re- reported by the infrastructure agency should include not quested and the amount not requested but needed to only the dollar gap but also the performance implications return assets to "acceptable condition." of the unfunded maintenance, including the risks to The President should request FASAB to accelerate its health and safety and likely economic losses. These esti- consideration of capital expenditure accounting and re- mates also indicate the magnitude of what might be a porting principles and standards, parallel to GASB, and major deferred liability. The information, especially when work as rapidly as possible toward issuing consistent stan- tracked over time, also can encourage public officials to dards applicable to federal, state, and local governments consciously and explicitly consider and take appropriate to facilitate understanding of maintenance needs by public actions to correct the deficiencies and to gain support officials and citizens. from the public for the corrections. ~~enciesshould include with maintenance budget Reduce Legislative Barriers to Good Maintenance. requests estimates of likely consequences if the mainte- Legislative bodies should avoid enacting legislation that nance is not funded. This information should indicate limits agencies' ability to make rational decisions about the consequences of significant unfunded maintenance whether to maintain assets or replace them with new in terms of both cost and performance. Maintenance assets. Many public officials and others believe that past

32 U.S. Advisory Commission on Intergovernmental Relations legislative limits have led to wasteful investments that and reporting. Under authority of the Intergovernmenfat were not based on adequate analysis. For example, some Personnel Act, these opportunities also should be made federal programs may have led to investing in new roads available to state and local officials. without adequate consideration of the associated mainte- This assistance should be designed to help state and nance costs, and may have imposed rigid quarterly or local governments make cost-effective decisions re- annual expenditure controls that reduced a program's garding infrastructure maintenance, and should pro- ability to provide maintenance when it is needed. Such vide: (a) model systems, procedures, and information provisions distort public choices and can lead to decisions for condition assessments, prioritization of mainte- that are not cost effective. nance options, and cost analysis of various types of infra- structure maintenance practices; @) training curricula Report Exemplary Federal Maintenance Planning, and training programs on maintenance for various types Asset Accounting, and Reporting Efforts. Federal infra- of infrastructure; and (c) access to federal laboratories, structure agencies should identify exemplary efforts in maintenance planning, accounting, and reporting, and Expand Research. Federal research, development, share these findings widely with other federal agencies and testing of materials, processes, and procedures re- and their state and local partners. lating to infrastructure maintenance should be coordi- nated and expanded. A number of federal and federally Sponsor Pilot Efforts Aimed at Testing a Complete assisted initiatives are ongoing, including: researchpro- Process of Maintenance Planning, Asset Accounting grams within federal agencies, the Federal Construction and Reporting in One or More Federal Agencies. Many Council, federal laboratories, the Building Research federal agencies are developing, or have developed, a Board, the Transportation Research Board, ten univer- process for capital asset analysis including a number of sity-based Transportation Research Centers, and the Civil the elements described earlier. However, most current Engineering Research Foundation. Coordination among effortsfall short in some important features, such as the these activities is sporadic; it should be improved. annual calculation and reporting of the magnitude of Research activities are an important federal effort. unfunded maintenance and its implications. Therefore, the The federal government often is in the best position to President should direct that pilot projects aimed at testing a undertake and sponsor research, particularly when that complete process of maintenance planning, accounting, and research will be helpful to most or all parts of the nation. reporting be undertaken in one or more agencies. Substantial savings at all levels of government are possi- ble, for example,from breakthroughs in achieving-long- Include Condition Ratings for Major Facilities in the er lasting materials for roads, bridges, water and sewer Reports to be Required under the Government Perform- pipes, and building construction, and from the develop- ance and Results Act of 1993. The condition of major feder- ment of more affordable methods and instruments for ally owned and supported facilities, particularly those that conducting condition surveys. The federal government is serve the public (such as national highways, veterans' hos- in the best position to support and/or encourage such pitals, social security offices, dams, national , and developmental work. This effort might be in the form of post offices) should be considered as being part of the results directly funding such efforts, such as in current projects to of federal program activity and should be included as per- examine road maintenance materials, and in the form of formance indicators in the annual performance reports to be various incentives for states and private industry to under- submitted to the President and Congress under this act. take such work. Establish an Infrastructure Clearinghouse. The The President should direct that the diverse federal President should establish an ongoing clearinghouse that efforts to determine which developed materials, pro- collects and disseminates information on infrastructure, cesses, and procedures are most cost-effective (and under including a major component on maintenance. INTER- what conditions) be coordinated and assessed. The find- NET and other means of timely information exchanges ings of such studies should be rapidly disseminated to among federal infrastructure agencies and others should interested federal, state, and local agencies-perhaps in be used to facilitate this activity. innovative ways (such as teleconferencing, video confer- encing, and computer networks), as well as reports, con- Provide Education, Training, and Technical Assis- ferences, and direct technical assistance. tance. To encourage explicit and thorough consideration References of maintenance needs, the President should enhance and City of New York. Office of Management and Budget. Asset Con- coordinate the many existing efforts in various federal dition and Maintenance SchedulesforMajor Portions of the City's agencies that support a variety of education, infrastruc- Capital Plant: Agency Reconciliation of Maintenance Schedules ture, training, and technical assistance activities. These and Executive Summary. New York, 1993. activities should include comprehensive coverage of main- Federal Accounting Standards Advisory Board. ObjectivesofFed- tenance, including maintenance planning, accounting, em1 Financial Reporting, Statement of RecommendedAccounting

US. Advisory Commission on Intergovernmental Relations 33 Concepts: Exposure Dmfr, Vol. 2: Complete Tat. Washington, Hyman, William, Roemer M. Alfelor, and Joan A. Allen. Sewice DC, January 8, 1993. Efforts and Accomplishments Reporting: Its Time Hm Come- Road Maintenance. Norwalk, Connecticut: Governmental Ac- Godwin, Stephen, and George E. Peterson. Guide to Assessing counting Standards Board, 1993. Capital Stock Condition. Washington, DC: The Urban Institute Press, 1984. National Council on Public Works Improvement. hgikFounda- tions: A Report on America's Public Works. Washington, DC, Governmental Accounting Standards Board. Eq~osureDm$: Pm- February 1988. pp. 21, 105-106, 120-122. posed Statement of the Governmental Accounting Standards Peterson, George E., Rita Bamberger, Nancy Humphrey, and Board on Concepts Related to Service Eforts and Accomplish- Kenneth M. Stell. Guide to Financing the Capital Budget and ments Reporting. Norwalk, Connecticut, September 1993. MaintenancePlan. Washington, DC: The Urban Institute Press, 1984. Hatry, Harry I?, James R. Fountain, Jr., Jonathan M. Sullivan, and Lorraine Kremer, eds. Service Efforts andAccomplishments ,Mary J. Miller, Stephen R. Godwin, and Carol Shapiro, Reporting: Its Time Hm Come. Norwalk, Connecticut: Govern- Guide to Benchmarks of Urban Capital Condition. Washington, mental Accounting Standards Board, 1990. DC: The Urban Institute Press, 1984. US. Department of Transportation. Federal Transit Administra- , Annie P. Millar, and James H. Evans. Guide to Setting tion. "Management and Monitoring Systems: Proposed Rule," Priorities for Capital Investment. Washington, DC: The Urban Federal Register, Part lV,March 2, 1993. Institute Press, 1984. Van Daniker, Relmond I?, and Vernon Kwiatkowski. Infrastruc- , and Bruce G. Steinthal. Guide to Selecting Maintenance ture Assets: An Assessment of User Nee& and Recommendations Strategiesfor Capital Facilities. Washington, DC: The Urban In- for Financial Reporting. Norwalk, Connecticut: Governmental stitute Press, 1984. Accounting Standards Board, 1986.

34 U.S. Advisory Commission on Intergovernmental Relations - - -- Statement of Principles and Guidelines, Federal I~ructureTark Force N MAKING FEDERAL REGULATION OF INFRASTRUCTURE MORE EFFECTIVE, EFFICIENT, AND EQUITABLE

I. OBJECTIVE mental systems are expected to double or quadruple during this time period. The purpose of this statement of principles and guide- Costs of this magnitude threaten to distort local lines is to help establish a more accountable, equitable, budgets and priorities, squeezing resources for effective, and efficient approach to federal regulation of other vital public services like education, law en- infrastructure. These improvements should be based on a forcement, and public health. stronger and more equal intergovernmental partnership. This new approach is necessary because, in many Federal regulations and mandates can have cases, state and local governments are co-regulators in non-fiscal effects that are as important as their partnership with the federal government, as well as regu- financial impacts. These include lengthy delays in lated parties themselves. Much of the success in meeting the construction, maintenance, or expansion of the federal regulatory objectives depends on a strong state public facilities, the prescription of inefficient and local partnership. and inflexible procedures that are poorly adapted to local circumstances, the blurring of public ac- countability, and unnecessary conflict with the institutional and representationalresponsibilities II. FINDINGS of state and local governments. Such consequencesreflect weaknesses in the fed- Federal regulations affecting state and local govern- eral regulatory and policymaking processes, ments have increased dramatically in recent years, with which too often fail to recognize the cumulative important implications for the nation's infrastructure pro- effects of mandates, support overly ambitious grams. Although the goals and accomplishments of many goals without providing adequate administrative regulations are salutary, these federal regulations and and financial resources, fail to establish clear mandates-both singly and in combination-are generat- priorities or define appropriate performance ing serious problems for state and local governments. standards, and lack responsiveness to differing Such problems can negatively affect the construction and local needs and preferences. maintenance of the nation's infrastructure in both direct and indirect ways. In particular: These problems ultimately undermine the feder- al government's ability to achieve its regulatory Certain federal mandates impose heavy fiscal goals, and they perpetuate a system that, by rou- burdens on state and local governments, and the tinely promising more than it can deliver, invites combined costs of all federal mandates have been public cynicism and disaffection. growing faster than federal aid. Such mandated a Policies and measures undertaken to ameliorate costs are projected to continue growing at a rate such problems have shown some signs of effec- that will threaten other important policy objec- tiveness in certain instances, but have been inef- tives unless remedial actions are taken. For ex- fective overall. ample, the Environmental Protection Agency estimates that local government spending on en- vironmental projects will need to increase by over Ill. PRINCIPLES 50 percent between now and the year 2000 just to FOR INTERGOVERNMENTAL REGULATION meet the costs of existing and pending regula- In order to minimize regulatory problems while still tions. In some localities, user fees for environ- accomplishing regulatory objectives, Congress and the

U.S.Advisory Commission on Intergovernmental Relations 35 federal agencies should adhere to the following principles existence of a significant market failure or a prob- when enacting or promulgating new regulations or revis- lem of national scope that state or local govern- ing existing statutes and rules: ments are unable or unwilling to address through independent action or voluntary cooperation. 1. Effective regulation in an intergovernmental They also should explore nonregulatory options framework requires mutual cooperation and genuine part- before concluding that regulation is required. nership among the federal, state, and local governments. If a need for regulatory intervention has been 2. Limited resources at all levels of government re- documented, Congress and federal agencies quire that Congress and the federal agencies clearly define should give serious consideration to a full range of their regulatory objectives, establish appropriate standards regulatory options and select the least burdensome of performance, and seek the most eacient and scientifically mechanism capable of achieving the objective. In sound methods of achieving their regulatory goals. addition, Congress should refrain from enacting rigid and inflexible provisions that direct the 3. Congress should design, and agencies should ad- rulemaking process. Federal agencies should not minister, regulatory programs in ways that promote effec- regulate more prescriptively than required by law. tive, flexible implementation and continuous improvement in achieving required outcomes. Among other things, this As an integral part of considering such regulatory requires recognizing differences in state and local institu- options, Congress and federal agencies should tional structures, resources, conditions, and servicing re- actively consult with prospective state and local sponsibilities, and opportunities to offer incentives and implementors to elicit their perspectives on feasi- use market mechanisms to help achieve required outcomes. ble procedures and requirements and to build a foundation for effective cooperation. Consulta- 4. Citizens have a right be treated fairly and equit- tion periods should be long enough to generate ably in the regulatory process. Protecting this right re- well-considered and documented remonses. quires careful balancing between uniform protection of I~-~-- fundamental rights, deference to local democratic pro- @ In order to promote effective implementation cesses, public participation and accountability in the further, Congress and federal agencies should regulatory process, and freedom from unreasonable regu- conduct and regularly update a detailed, system- latory burdens. atic inventory of all regulatory demands and costs placed on state and local governments. Such cu- mulative requirements, as well as the existing IV. GUIDELINES responsibilities and services of state and local FOR IMPLEMENTING INTERGOVERNMENTAL governments, should be taken into account when REGUMTORY PRINCIPLES considering additional regulatory requirements. 1. Intergovernmental Partnership: Accomplishing An effective intergovernmental partnership also federal regulatory objectives frequently requires active requires that Congress and federal agencies sup- cooperation from state and local governments. To achieve port the development and adequate funding of such cooperation, federal regulators should recognize applied demonstration and compliance assis- that states and localities have independent constitutional tance programs, to promote education, training, responsibilities, possess widely varying fiscal and institu- technical assistance, and information sharing tional resources, confront different problems and condi- among all partners in the regulatory implementa- tions, and are accountable to their own citizens and tion process. democratic processes. Within this institutional framework, inflexible and 2. Efficiency: Because society's resources are lim- burdensome mandates are counterproductive. They invite ited, the benefits of public regulation must be optimized unnecessary conflict rather than cooperative problem by employing resources as efficiently as possible. TO help solving, and they impose uniform, ill-fitting solutions on accomplish this objective, we recommend that Congress and communities where adaptations to varying local condi- regulatory agencies consider the following procedures: tions are needed. Both the need for and the specific standards in- 73 avoid such problems, we recommend that the fol- cluded in environmental, health, and safetylegis- lowing guidelines be applied whenever regulations are lation and regulations should be based on-and, enacted or promulgated: when appropriate, revised in response to-the Proposed regulations should be limited to cases generally accepted findings of well-established, of demonstrated need and widely recognized na- peer-reviewed science. If existing scientificknow- tional purposes. Congress and regulatory agen- ledge is inadequate, regulatory agencies should cies should be expected to clearly document the promote research that will remedy such deficien-

36 US. Advisory Commission on Intergovernmental Relations cies before issuing permanent standards or re- ment and acceptance, a wider range of technical quirements. options, and less subsequent litigation and delay. Agencies should make greater use of risk analysis The federal agencies and Congress should pro- to help them evaluate competing threats to public vide maximum regulatory flexibility to state and health and safety, and exposures to financial lia- local partners, and other regulated entities, using bilities, and should select the most serious prob- performance-based goals to allow for variations lems for priority attention. in the severity of regulatory problems, wide dif- ferences in jurisdictional capabilities, the use of Once problems are prioritized, federal regulators innovation, and experimentation with alternative and policymakers should be required to consider compliance strategies. Legislatively, Congress a full range of regulatory alternatives. In particu- can often provide additional flexibility in federal- lar, Congress and federal agencies should give ly funded infrastructure programs by replacing special consideration to innovative and potential- narrow categorical programs with broad, per- ly more cost-effective regulatory approaches, formance-based assistance such as the surface such as greater use of market incentives, tiered transportation blockgrant. Administratively, fed- standards for jurisdictions of different sizes, and eral agencies should comply fully with the Regula- expanded use of properly designed performance tory Flexibility Act, which requires that federal standards (with quantifiable measures of outcomes) agencies give special attention to the needs and in place of rigid technical requirements. The resources of small communities and other small search for alternatives should be made in consul- entities when formulating regulatory standards tation with affected parties. and procedures. Once regulatory options have been identified, Finally, effective implementation does not occur agencies should subject these alternatives to in a vacuum. Procedures and requirements that careful economic analysis in order to assure that appear to be feasible in isolation may be unwork- direct and indirect costs, as well as benefits, are able within the framework of competing regula- fully considered when selecting the most efficient tions and total responsibilities. For example, alternative. environmental and infrastructure problems typi- cally have multimedia, multimodal, multiagency, Effectiveness: Ambitious regulatory goals and and multigovernmental dimensions. According- standards are of little consequence if they cannot be effec- ly, Congress and federal agencies should recog- tively implemented and sustained. Experience shows that nize and be accountable for the full range of when regulations are too complex, they generate confu- regulatory responsibilities that are imposed on sion, delays, and noncompliance. When regulations are state and local governments, so that federal goals too expensive, they generate opposition and circumven- can be prioritized and feasible standards and pro- tion. When they are unnecessary or inappropriate, they cedures can be devised. generate conflict, cynicism, and avoidance. Consequently, effective regulatory programs must be designed from the start with a recognition of which units and levels of gov- 4. Fairness, Equity, and Accountability: Variation ernment will be implementing the standards, what re- and flexibility are not appropriate policies in all instances. sources they have available, and what legitimate alternative All citizens, regardless of where they reside, are guaran- demands are competing for those resources. ?b help accom- teed equal protection under the law. Fundamental stan- plish such recognition, it is recommended that: dards of human health and safety do not vary from one locale to another. Nor can local actions be permitted that Congress and federal agencies engage in early, impose negative consequences on citizens in neighboring active and full consultation with state and local jurisdictions. governments, independent technical and profes- At the same time, equality and fairness must be sional organizations, and other appropriate enti- balanced with other constitutionally protected values, ties that will be involved in or responsible for such as freedom, privacy, and local democratic pro- implementing federal rules. One particularly cesses. Moreover, common standards often can be promising method of doing this is to make greater achieved through cooperative and parallel actions, use of negotiated rulemaking, which brings to- without the need for a uniform rule. Finally, federal gether implementing agencies and affected par- policymakers should recognize that excessive uniformi- ties to negotiate the text of a proposed rule. ty and unreasonable regulatoryburdens can give rise to Experience has shown that this process tends to perverse, unfair or inequitable results. For example, the generate more practical rules, greater commit- costs and benefits of uniform requirements may vary

U.S. Advisory Commission on Intergovernmental Relations 37 enormously from one jurisdiction to another, and the tal regulatory performance and consultation with state threats to health or safety may vary just as widely. and local governments, through such techniques as: To balance these competing values and objectives, 0 Creation of a State and Local Capacity Thsk Congress and the federal agencies should: Force, a Small Communities Coordinator, a Restrict the issuance of uniform requirements Small Community and Local Government in- and standards to the minimum level necessary to tra-agency management cluster, and support for assure the protection of basic rights. the State Pollution Prevention Roundtable; Assure that regulatory burdens and responsi- Development of "user friendly" program guides, bilities are fairly distributed in terms of region, enhanced technical assistance programs, the use jurisdiction, and the ability to pay. of testing laboratories and demonstrations to re- duce risks associated with innovative technolo- Write regulations in plain, non-legalistic lan- gies and solutions to compliance problems, and guage that can be readily understood by affected streamlined permit processes. parties, and make these regulations easily avail- able to the affected parties. We also commend the National Conference of State Carefully monitor and oversee the performance Legislatures for improving awareness of federal regulato- of existing rules and regulations on a predictable ry developments through creation of The Mandate Moni- and routine basis, in order to promote public ac- tor, and we recommend comparable actions be taken by countability, evaluate accomplishments, assure ef- other associations of state and local government officials fective implementation, assess evolving needs and to enhance their input into the regulatory process. priorities, and promote continuous improvement. Finally, with respect to improving the efficiency and effectiveness of federal regulatory programs, we recom- Consider the ability of local governments, tax- mend consideration of performance-based strategic plan- payers, and the various classes of infrastructure ning processes such as those at DOT and the Department users to pay for federal mandates. of Energy. B. Strengthening Existing Mechanisms: Although V. RECOMMENDED IMPLEMENTATION STEPS we believe it is helpful to promote wider adoption of the To help implement these principles and guidelines, best available practices for implementing existing regula- we recommend that the following practices and proce- tory relief, consultation, and analysis procedures, many of dures be considered or adopted by Congress or execu- these tools have inherent weaknesses that limit their effec- tive agencies, as appropriate: tiveness. As outlined in research studies conducted by the General Accounting Office and the Advisory Commission A. Best Current Practices: Several policies and on Intergovernmental Relations (ACIR), these weaknesses procedures exist that are intended to promote the prin- include limited agency compliance, inconsistent implemen- ciples and guidelines outlined above. These include the tation, and limited impacts on final rules and regulations. Executive Order on Federalism, the Regulatory Flexibil- To help overcome these limitations, we recommend ity Act, and the Negotiated RulemakingAct. While some adoption of the following changes and amendments in federal agencies have made a dedicated effort to imple- regulatory relief and analysis mechanisms: ment these procedures, others have demonstrated less E.O. 12612 and the Regulatory Flexibility Act. The commitment. Consequently, we recommend that all President and Congress, respectively, should federal agencies examine the following procedures as strengthen these mechanisms by revising their examples of best available practices for implementing language to clarify when assessments must be these regulatory relief and analysis procedures. prepared and by placing the ultimate decision Department of Housing and Urban Develop- about using them in the hands of OMB, rather ment: Guidance for implementation of Executive than with the specific regulating agency. In addi- Order 12612 on Federalism. tion, these mechanisms should be incorporated Environmental Protection Agency: Guidelines into agency guidance documents in plain English for implementing the Regulatory Flm'bility Act. and with enough elaboration to provide practical assistance in applying them. 0 Administrative Conference of the United States: Recommended procedures for negotiated rule- Negotiated Rulemaking: The NegotiatedRulemak- making. ing Act of 1990 and the Administrative Dispute Resolution Act are promising techniques that In addition, we recommend that other federal agen- merit reauthorization by Congress. In addition, cies consider, for possible adaptation, the Environmental the use of negotiated rulemaking should be ex- Protection Agency's efforts to enhance intergovernmen- panded by amending the act to (1) create a pre-

38 U.S. Advisory Commission on Intergovernmental Relations sumption in favor of using negotiated rulemaking Environmental and Other Statutes: Concepts of in those cases that meet selective criteria for suit- federal program flexibility and holistic decision- ability;' and (2) allow regulated entities or other making have been expanded by EPA, in its use of affected parties to formally request that an economic incentives in regulatory programs, and agency consider utilizing negotiated rulemaking. by DOT, in its various transportation programs. The State and Local Cost Estimate Act: This act We recommend that such innovative solutions requires the Congressional Budget Office to pre- and flexible approaches to regulatory compliance pare cost estimates of certain federal legislation be continued and enhanced. Full advantage likely to have significant fiscal impacts on state should be taken of existing opportunities for en- and local governments. However, such estimates couraging "holistic" decisionmaking, as in the are often prepared too late in the legislative pro- consideration of pollution prevention programs cess, and are not required for certain categories and in decisionmaking with long time horizons. of legislation. We recommend that Congress We further recommend that federal agencies strengthen this act by requiring preparation of carefully examine their enabling statutes to find cost estimates for alternative provisions of bills opportunities for more efficient and fully effec- with major fiscal impacts prior to subcommittee tive approaches to writing and implementing reg- markup, including estimates for currently ex- ulations. Finally, we recommend that Congress cluded forms of legislation such as tax and appro- authorize such flexibility when devising or priations bills. We further recommend that reauthorizing infrastructure-related statutes. Congress authorize the preparation of an annual- ly revised, comprehensive inventory and cost esti- Fundamental Reforms: Finally, we recommend mate of major intergovernmental regulatory that Congress and federal agencies &vote further re- search and give serious consideration to more fundamen- programs and statutes. tal changes in the regulatory process. These changes are The Federal Advisory CommitteesAct (FACA): This designed to alter the basic rulemaking process in ways act establishes stringent procedures for agencies that would enhance priority setting in regulatory to follow when gathering advice about regulatory decisionmaking, encourage long-term decisionmaking and other matters from external parties. Histori- and innovation, foster economically beneficial technol- cally, FACA has been interpreted by many fed- ogy change, and restrict current incentives to use regu- eral agencies in ways that impede full and early lations as devices for shifting costs from the federal consultation with state and local officials when budget to third parties. developing or revising regulations. We recom- In the near term, potential changes that should be mend that federal agencies provide better train- explored include: ing and information to agency personnel to avoid misunderstandings of FACA's requirements, and Performance and Market-Based Regulatory to emphasize non-FACA forms of fact-finding, Approaches: These regulatory approaches in- listening to affected parties, and conferencing crease the range of choices available to regulated such as those used extensively by DOT Exemp- parties for compliance. This, in turn, can speed tions, such as the one for EPAs state co-regula- compliance, reduce compliance costs, and en- tors, should be clearly set forth. We recommend courage the development and use of innovative that Congress consider amending FACA to technologies. We recommend that Congress and broaden this exemption to include organizations federal agencies actively search for opportunities of state and local officials when engaged in con- to promote such fl exible approaches when enact- sultations with agencies over rules in which their ing and implementing regulatory programs. EPA, members will be partners in implementation. for example, has more than 15 years of experi- ence with this approach and a Regulatory Innova- tions Branch dedicated to it. 'For example, the criteriadeveloped by the Environmental Pro- Zero-Based Regulatory Review We recommend tection Agency would restrict negotiated rulemaking to cases in which a limited number of issues and parties are involved, the that federal agencies consider implementing a parties share a degree of common ground, their fundamental zero-based regulatory review process. This would values are not challenged by the rulemaking, and they are will- entail a comprehensive review of all rules re- ing to negotiate in good faith. In addition, relevant statutes quired to implement specific regulatory pro- must be able to accommodate avariety of options, and it is help- grams and could be undertaken as part of an ful to confront a rulemaking deadline or other action-forcing mechanism. See EPA, Program Evaluation Division, "An ongoing exercise in total quality management. In Assessment of EPA's Negotiated Rulemaking Activities," De- consultation with state and local governments cember 1987, p. 2. and other interested parties, agencies would re-

U.S. Advisory commission on Intergovernmental Relations 39 view basic regulatory principles, requirements, ernmental aid system. Each state and local jurisdic- and options from the ground up, in order to tion would be allocated a regulatory expenditure streamline, update, improve, and make proce- limit based on its ability-to-pay (which might be dures and requirements user friendly. One po- established by estimates of relative tax capacities, tential model to explore is the current review of tax efforts, and expenditure demands of the type highway safety programs. prepared by ACIR). Each jurisdiction would be required to implement all federal mandates up to 0 Regulatory Demonstration and Assessment Partnerships: This proposal would establish in- but not beyond its expenditure limit. If mandated tergovernmental regulatory laboratories and expenditures exceeded a jurisdiction's regulatory demonstration projects in order to promote the limit, new flexibility would be introduced into the development and testing of appropriate regulato- regulatory requirements. For example, such a ju- ry standards, innovative technology, techniques risdiction might be entitled to establish its own set of holistic outcomes assessment, and alternative of regulatory priorities within the limits of its financial allocation. This could include the use of implementation approaches prior to the promul- gation of universal rules and regulations. approaches which, while making progress toward full compliance, would schedule that progress in Sunsetting Interim Guidance Documents: Fed- affordable annual increments. Alternatively, excess eral agencies often issue guidance documents costs might be charged to the federal government. to provide interim or supplemental guidance to We recommend that Congress and the Presi- parties implementing or subject to regulatory dent direct the Advisory Commission on Intergov- programs. Because such guidance often carries ernmental Relations or some other appropriate the practical force of law without the formal intergovernmental entity to conduct a detailed safeguards of the rulemaking process, we rec- study of the design and feasibility of such a pro- ommend that federal agencies apply fixed sun- gram. set provisions to such guidance documents, and Federal Mandate Relief: Several bills have been accelerate the issuance of formal regulations introduced in both houses of Congress to provide through appropriate consultation or negoti- relief to state and local governments from the ation processes. steadily mounting burdens of federally imposed costs. Some would make the federal government In the longer term, we recommend serious exploration responsible for reimbursing all incremental costs of the following additional opportunities for innovation: attributable to new federal regulations and man- A Federal Regulatory Budget: The purpose of a dates. Others call for estimating all the federally federal regulatory budget would be to apply the induced costs and developing plans to share costs, priority-setting discipline of a financial budgeting reduce costs, or abolish mandates. Hearings have process to the imposition of additional regula- begun on these pending bills. We call on Congress tions by the federal government. Such a process to work as rapidly as possible toward enactment would establish an annual limit on total com- of such legislation. pliance costs that could be imposed on regulated entities. Federal agencies would not be autho- References rized to require compliance activities that ex- Administrative Conference of the United States. Procedures for Negotiating Proposed Regulations (Recommendations No. ceeded budgeted amounts without triggering 82-4 and 82-5), Negotiated Rulemaking Sourcebook. Washing- some form of reconciliation provision, special im- ton, DC, 1990. pp. 11-17. plementation procedures, or supplemental fund- . Chapter 1-What IsNegotiated Rulemaking? Negotiated ing provision. Such constraints would establish Rulemaking Sourcebook. Washington, DC, 1990. new incentives for Congress and the federal Conlan, Timothy J., and David R. Beam. "Federal Mandates: agencies to promote more efficient regulatory The Record of Reform and Future Prospects," Intergovernmen- approaches and clearer regulatory priorities. We tal Perspective 18 (Fall 1992): 7. recommend that the President establish or desig- Executive Order 12612 on Federalism. Fedeml Register 52 (Octo- nate a high-level committee, task force, or com- ber 27, 1987): 41685. mission to study the merits and feasibility of "The Federal Courts: Intergovernmental Umpires or Regula- establishing a regulatory budget procedure. tors?" Intergovernmental Penpective 18 (Fall 1992): 12. 0 An Intergovernmental Regulatory Expenditure "Federal Regulation of State and Local Government: A Status System: An intergovernmental regulatory ex- Report," Intergovernmental Penpective 18 (Fall 1992): 5. penditure system would combine elements of Habicht, E Henry, 11. "Environmental Regulations: Lightening regulatory budgeting with features of the intergov- the Load," Intergovernmental Penpective 18 (Fall 1992): 27.

40 U.S. Advisory Commission on Intergovernmental Relations Knaster, Alana S., and Philip J. Harter. "The Clean Fuels Regula- US. Department of Transportation. Federal Aviation Adminis- tory Negotiation," Intergovernmental Perspective 18 (Summer tration. Report to Congress: State Block Gmnt Pmgmm. Wash- 1992): 20. ington, DC, May 1992. Martin, James L "The States and Regulatory Flexibility: Win, U.S. Environmental Protection Agency. The Regulatory Flaibility Lose, or Draw?" IntergovemmentalPerspective 18 (Fall 1992): 18. Act, Fact Sheet 11, Washington, DC, August 1992. . l7ze United States Experience with Economic Incentives to Osborne, David. "A New Federal Compact: Sorting Out Control Environmental Pollution. Washington, DC, July 1992. Washington's Proper Role." In Marshall, Will, and Martin , Advisory Council for Environmental Policy and Technol- Schram, eds. Mandate for Change. New York, Berkley Books for ogy. Improving Technology Diffusion for Environmental Protec- the Progressive Policy Institute, 1992. tion, Report and Recommendations of the Technology Innovation "Perspectives on Regulatory Federalism," Intergovemmental Per- and Economics Committee. Washington, DC, 1992. spective 18 (Fall 1992): 30. . Office of Regulatory Management and Evaluation. EPA Guidelinesfor Implementing the Regulatory Flexibility Act. Wash- Spain, Catherine L "Regulating State and Local Governments ington, DC, April 1992. through the Internal Revenue Code," Intergovernmental Per- US. Office of Management and Budget. Regulatory Progmm of spective 18 (Fall 1992): 23. the United States Government-1990, Appendix It Regulatory Im- pact Analysis Guidance, Unified Agenda of Federal Regulations. US. Advisory Commission on Intergovernmental Relations. Washington, DC, April 1991. Reprinted from the Federal&&- Federal Regulation of State and Local Governments. Washing- ter 56 (April 22, 1991). ton, DC, 1993. US. Regulatory Council. A Survey of Ten Agencies' Experience . Federal Statutoly Preemption of State and Local Authority: with Regulatory Analysis, A Working Paper. Washington, DC, History, Inventory, and Issues. Washington, DC, 1992. May 1981.

U.S. Advisory Commission on Intergovernmental Relations 41 42 U.S. Advisory Commission on Intergovernmental Relations ,Statement of Principles and Guidelines, Federal Infrasructure Task Force V IMPROVING ENVIRONMENTAL DECISIONMAKING FOR PUBLIC WORKS

I. OBJECTIVE Created unaffordable, unachievable, ineffkient, and sometimes ineffective environmental pro- More effective, efficient, consistent, and predictable cesses and compliance requirements for non- environmental decisionmaking processes need to be applied federal parties (especially small local governments); throughout the nation's infrastructure programs. Practi- and cal and consistent steps need to be taken by both environ- Created tensions within and among federal, mental protection agencies and infrastructure agencies, state, and local environmental and develop- working together, so that the goals of each can be achieved ment agencies. to the greatest extent possible with less cost and less delay. More specifically, opportunities should be sought and This chain of events is counterproductive to the action taken to (1) fully integrate and simplify the process achievement of both environmental protection goals and of applying for and deciding on environmental protection infrastructure goals. permits and other environmental approvals needed to Steps are needed to overcome these unintended results authorize public works projects, (2) reduce the time and of the efforts to foster greater environmental sensitivity, cost involved in this decisionmaking, and (3) more fully improved protection from environmental pollution and integrate the consideration of environmental quality val- health hazards, and the transformation of development pro- ues and requirements into infrastructure programs. grams into programs that are compatible with nature.

Ill. PRINCIPLES II. FINDINGS The processes for reviewing, coordinating, and ap- The findings of the 1992 ACIR study Intergovernmen- proving environmental permits for infrastructure should tal Decisionmaking for Environmental Protection and Public be guided by the following five principles: Works are sound. As necessary environmental protection 1. A highquality environment and continued eco- statutes and requirements have been enacted andpromul- nomic development both are legitimate, high- gated over the past two decades, they have: priority national goals. These goals are compatible Created a set of complex decisionmaking pro- if pursued within a "sustainable development" cesses with many separate, often sequential and framework. inconsistent, and sometimes duplicative steps 2. A single, integrated, multimedia, government- taken by many different agencies; wide environmental quality ethic based on Title I of the National Environmental Policy Act (NEPA) Stretched out the process of making infrastruc- should be an integral part of all development ture and environmental decisions, limited the programs-federal, state, and local. flexibility available to find problem-related and performance-based means of reaching environ- 3. Environmental analysis and compliance pro- mental and infrastructure goals, and sometimes cesses should be better integrated. lacked a sound scientific basis; 4. Environmental permits and approvals for public works should be based on sound, peer-reviewed Increased the unpredictability of the planning science, and should be evaluated using perform- and decisionmaking processes, sometimes caus- ance measures of environmental outcomes. They ing steps in the process to be repeated; also should be based on priorities for reducing Led to inefficient uses of limited resources; environmental risks most effectively and effi-

U.S. Advisory Commission on Intergovernmental Relations 43 ciently, considering their true costs to society, Performance-Based Evaluation of Environmental their affordability, and the need to set achievable Outcomes. Environmental compliance too often is judged priorities for compliance. largely, or even primarily, as a matter of legal compliance Achieving consistency between environmental with specified activities or "end of the pipe" specifica- goals and development goals, and ensuring the tions. This type of compliance may be unnecessarily affordability of these goals, should be based on a costly and adversarial, and does not always yield signifi- process that provides for wide-ranging public in- cant improvements in the environment. Provisions for volvement, interagency and intergovernmental flexibility in complying with environmental goals offer cooperation, and coordinated political action. opportunities for comparable, or even superior, im- provements in the environment for the same or less cost. These principles are elaborated on below. Such opportunities should be identified and pursued. Legitimate and Compatible Goals. Defusing the ten- Costs of Compliance. Promising to achieve more sion between environmental protection and development than can be reasonably accomplished in any given time programs depends on seeing both sets of goals as having period creates frustration and a loss of confidence in legitimacy and seeking compatibility between them. This government. Yet, the amount of infrastructure work compatibility should not be seen as a simple compromise, that needs to be done to clean up the environment, but as an opportunity to find new ways to achieve both sets prevent pollution, and avoid damage to the nation's of goals at once. The President's Council on Sustainable ecological resources is prodigious, and the full costs of Development should play an important role in identifying compliance often must be and should be included in the and promoting this opportunity. costs of infrastructure projects. Available technical, fi- nancial, and other resources to pursue these projects Environmental Ethic. Many of the difficulties in receiv- are limited. Therefore, compliance with environmental ing environmental approvals for public works projects have goals in infrastructure programs should be pursued occurred as a result of inadequate consideration of envi- through prioritization that makes best use of available ronmental factors in the earliest stages of planning and resources in reducing environmental risks as quickly as designing public works. Thus, environmental problems possible over a period of years. sometimes come as a surprise late in the process of seek- ing approval to proceed, when permits or other types of Public Involvement. All public works and environrnen- approval are applied for. This can create the need to replan tal decisions should be made with active involvement of and redesign projects-activities that take considerable addi- citizens and other affected parties. NEPA requires that all tional time and incur additional costs. Tb avoid this prob- federal agencies provide opportunities for such involvement. lem, each infrastructure agency should institutionalize a Public involvement should be institutionalized in all single, integrated environmental quality ethic throughout environmental and infrastructure programs as a process of its entire leadership and professional staff so that environ- two-way communication in which there is mutual educa- mental quality factors will be routinely and actively pursued tion of the public and the government at every stage of the throughout the agency's analytical and decisionmaking planning and decisionmaking process. This "close to the processes, and passed on to the state and local govements customer" approach should be designed to restore confi- that they assist, regulate, or work with as co-regulators. dence in government and provide support for well-justified and achievable goals. Integrated Environmental Processes. Many infra- The need for making reasoned choices and justifying structure projects must undergo general environmental supportable choices should be communicated to the pub- analysis within the framework of NEPA as well as other lic in terms that can be readily understood and responded federal, state, and local environmental requirements, in- to constructively. cluding more specific types of analysis and review related directly to individual environmental permits and approv- Governmental Partnerships. Multiple federal agen- als that must be obtained. Currently, these are quite dif- cies frequently regulate a single infrastructure project. In ferent, and frequently separate, processes. Time and addition, state and local governments may be co-regula- money could be saved in many cases if these separate tors with the federal government, as well as regulated processes were better integrated to avoid procedural and entities. It is essential, therefore, for all of these govern- substantive duplications, and conflicting approaches and mental units to be working within similar principles and decisions by multiple agencies. Joint and concurrent envi- guidelines. Otherwise, unnecessary confusion, inconsis- ronmental reviews should be the goal. This integration tencies, tensions, delays, and conflicts are likely. Common should be established within and among all federal agen- principles and guidelines, frequent consultations, and a cies in accordance with CEQ regulations (40 CFR spirit of cooperation and partnership among these entities 1502.25). should be developed.

44 U.S. Advisory Commission on Intergovernmental Relations IV. GUIDELINES detail in these two types of processes differ, as doprovi- sions for timing, public disclosure, and the factors to be To put these principles into action, at least the follow- considered. The preparation of flow charts for each of ing ten types of guidelines are needed: these processes should be undertaken to facilitate com- Integrate and improve the effectiveness, efficien- parisons among them. cy, consistency, and timeliness of the environ- The second step should be to identify and pursue mental planning and decisionmaking processes; opportunities for integrating appropriate processes with Institutionalize the integrated environmental one another. For example: decisionmaking process and environmental qual- CEQ, or its successor agency, should continue its ity ethic in each federal agency; seminars on NEPA integration and follow up by Provide better coordinated, more complete, issuing guidance to integrate environmental and higher quality information to support im- analysis and compliance processes. proved environmental analysis, planning, and The coordinated, multimedia permit process for decisionmaking; major projects being developed by the state of Strategicallymanage agency resources to support New Jersey should be evaluated as a potential integrated environmental decisionmaking; model for other states and the federal government. More fully develop and apply sound, peer-reviewed The recommendation of EPA's Science Advisory science in support of integrated environmental Board that ecological regions be managed as a decisionmaking; whole, perhaps using regional organizations, Enhance public involvement programs; should be pursued. Forge stronger federal interagency linkages among Risk-based models for comparing and managing environmental and infrastructure agencies; clusters of environmental regulations, so that the worst risks would be dealt with first, should be Develop, facilitate, and strengthen intergovern- given a high priority. mental partnerships for environmental decision- making and infrastructure; The Arkansas model of NEPA integration should be considered by other states. In Arkansas, the Improve training for environmental decision- in-house, multidisciplinary planning staff of the making in the federal, state, and local govern- state Highway and Transportation Department ments; and works closely with the engineering staff from the 10. Revise environmental legislation and regulations beginning of the design stage to include environ- to more fully support integrated environmental mental considerations, prepare environmental decisionmaking. impact statements, and avoid most conflicts with federal environmental regulations. These guidelines are elaborated on below. The FHWA and FAA NEPA integration model Integrate and Improve the Environmental Decision- should be considered for use by other federal making Process. In accordance with the principles set agencies. Both of these agencies use NEPA as the forth above, top priority should be given to (a) integrating umbrella for all environmental requirements to the many elements of the environmental decisionmaking be considered concurrently at the planning, de- processes with each other to promote efficient and effec- sign, and implementation stages. tive concurrent reviews by all the responsible agencies; (b) Alternative dispute resolution techniques for fa- balancing environmental requirements with development, cilitating environmental decisions and avoiding infrastructure, and jobs goals; (c) bringing environmental litigation should be used frequently. requirements into line with good, peer-reviewed science and performance monitoring oriented toward desired en- Special permit processes should be used for cases vironmental outcomes; and (d) providing the flexibility in which innovative technologies for improving needed to get maximum performance for the investment the environment are proposed. Such innovations of available resources. often cannot be tried under standard permit re- To achieve these goals, the first step is to inventory, quirements because of the uncertainties intro- document, and compare the existing environmental duced by the innovative technology. Closer decisionmaking processes. Some are broad analytical monitoring and other special conditions might processes that seek public involvement in preparing a allow these innovative projects to proceed. comprehensive assessment of societal and physical cir- Federal interagency memoranda of understand- cumstances, while others are more narrowly focused on ing such as the one signed on May 1,1992, by the specific, single- factor, legal requirements. Levels of secretary of Transportation, the administrator of

US. Advisory Commission on Intergovernmental Relations 45 EPA, and the assistant secretary of the Army for that are consistent can be issued automatically Civil Works, to facilitate the consideration of Sec- saves a great deal of processing time and energy. tion 404 Clean Water Act permits for transporta- In the New York case, a recent study found that tion projects, should be used as models for the bulk of the time of the environmental com- developing other memoranda of understanding plia.nce staff was being spent on the review and on issues for which infrastructure and environ- processing of relatively routine permit applica- mental protection agencies have common needs tions, while too little time was left for projects and interests. of major significance and for participating in preapplication environmental analyses where Institutionalize the Environmental Ethic. Lessons preventive advice could expedite later permit learned from demonstration projects and individual ex- processing. It was found that breaking out of rou- amples of process integration should be applied broadly to tine permit processing systems that required a institutionalize and infuse the environmental ethic into thorough review of every application on a first- infrastructure agencies and to make the integrated envi- come, first-served basis could make more effec- ronmental decisionmaking process more consistent, ef- tive use of scarce resources and make the jobs of fective, efficient, timely, and predictable. These lessons staff more interesting and productive. should be published in clear and understandable lan- guage, with practical guidelines for implementation. Some environmental review staffs also have been ex- panded with financing from permit processing fees. Legis- Provide Better Information to Support Integrated lation and training funds maybe needed to authorize some Environmental Decisionmaking. Access to baseline infor- management improvements. mation on natural and cultural resources, similar to that More Fully Develop and Apply Environmental Science. provided for geological resources by the U.S. Geological Not enough is known about such subjects as how to manage Survey, can save time and costs in completing required large ecological systems, how to measure and communicate NEPA analyses and documentation as well as in satisfying relative environmental risks, and how to estimate the envi- other environmental permit and approval processes. On- ronmental outcomes of specific regulatory practices. Re- going programs, such as the National Wetlands Inventory search should be done to provide needed answers. and the Soil Conservation Service's Soil Survey have prov- en extremely useful for these purposes. Proposed initia- Enhance Public Involvement Programs. Many feder- tives for a Bureau of Environmental Statistics within a al programs in addition to NEPA provide for public in- Department of Environment that could come about from volvement or citizen participation. One of the most recent the elevation of EPA, and a National Biological Survey to require enhanced public involvement is the Intermodal under the Department of the Interior, hold the potential Surface Transportation Eficiency Act of 1991. for contributing significantly to more effective and effi- Many state and local governments also have active cient environmental analyses and compliance decisions. programs of this nature. Often, they have been estab- The federal government, in cooperation with state lished, in part, to satisfy federal requirements. and local governments, should continue to initiate, com- In 1979, the Advisory Commission on Intergovern- plete, and maintain national inventories of all of the natu- mental Relations completed a comprehensive study of ral and cultural resources required to be considered in the citizen participation in which it identified 45 different types environmental decisionmaking process. User-oriented of involvement being used by governments. Many other procedures should be developed and made widely avail- surveys, handbooks, training courses, and other sources of able to transform these data into a sound and objective help are available on this topic. basis for required analyses and decisions at both the pro- gram and project-specific levels affecting ecosystems of Forge Interagency Links. Federal agencies can and do various sizes. learn from each other when they are in contact. Greater frequency of contact among federal infrastructure and environmental agencies should be arranged to facilitate Strategically Manage Resources for Environmental improved environmental decisionmaking processes, shar- Decisionmaking. Innovative management practices that ing of baseline data, and exchanges of information about prove successful should be identified and transferred into advances in developing and applying improved environ- widespread usage. For example, strategic use of permit mental science. Sharing the results of pilot studies and processing personnel to put their time where it will do the demonstrations also should be facilitated through these most good has shown promise in the Corps of Engineers contacts. In addition, exchanging personnel among feder- and the state of New York. al agencies and with state and local governments can have In the Corps, the practice of issuing "general attitudinal as well as technical benefits. Personnel ex- permits" for large areas in which specific permits changes are authorized by the Intergovernmental Personnel

46 U.S. Advisory Commission on Intergovernmental Relations Act of 1970, and Rural Development Councils in many formance of environmental programs on a pilot project states may offer convenient mechanisms for arranging basis. That act also would provide for broader application personnel exchanges in rural areas. of the pilot project findings at a later time. Opportunities to enact legislation that would more fully integrate envi- Develop and Facilitate Intergovernmental Partner- ronmental decisionmaking processes should be sought. ships. Some federal and federally required environmental analyses are prepared by state and local governments, and V. RECOMMENDED IMPLEMENTATION STEPS most federal regulation of the environment is applied by state and local governments. Additional opportunities for 1. Establish an Integrated Environmental Ethic developing these intergovernmental partnerships-most and Decisionmaking Process. The following actions notably the potential state responsibility for issuing Sec- should be taken to establish an integrated environmental tion 404 permits-should be sought out and developed ethic and decisionmaking process applicable to all federal where the capacity exists in state and local governments to agencies that administer infrastructure programs directly, undertake these responsibilities. provide financial assistance for infrastructure, or regulate Advantages include administration of requirements infrastructure: by officials who are closer to and more familiar with local The President should revise and expand Execu- conditions, and who are better able to supply and respond tive Order 12088 (Environmental Compliance), to other relevant information in the community. State and or issue a new executive order, to establish gov- local governments also may be more able to combine diverse ernmentwide policies to integrate environmental permit and approval decisions in an integrated review pro- decisionmaking based on (a) outcome-based per- cess, as is being demonstrated in New Jersey. formance standards, (b) improved science, and (c) Where state and local governments need help in com- risk-based priorities for compliance. The execu- plying with federal requirements, that help should be tive order should direct all federal infrastructure supplied through the intergovernmental partnership. The agencies to establish, and actively nurture, a strong federal government has a responsibility under the Regula- environmental ethic within their programs, and tory Flexibility Act to give special recognition to the prob- should give CEQ, or its successor agency, responsi- lems of small governments in responding to federal bility for overseeing implementation of the govern- requirements. The establishment of a small-community mentwide policies. The President also should coordinator in EPA, and a local government/small com- convene a White House Summit on Environmental munity dialogue group to advise EPA on these special Integration to help focus attention on the impor- needs, has been helpful to the federal and non-federal tance of this governmentwide initiative. partners. This EPA example should be considered for CEQ, or its successor agency, should develop adoption by other federal agencies. additional governmentwide guidance, in consul- tation with other federal environmental and in- Provide Environmental Training. The improved frastructure agencies and affected state and local decisionmaking processes, more fully developed data governments, to assist in implementing the Presi- bases, and new environmental science called for by this dent's environmental integration policies. CEQ task force are significant departures from much current also should develop legislative proposals needed practice. If they are to be successfully implemented, many to facilitate the implementation of the Presi- federal officials-from top management to operational dent's policies, and a clearinghouse of best prac- practitioners-will need to be trained in new concepts and tices that can be used to implement the additional new methods of operating. The new guidelines will not be guidance. This guidance should advise federal self-implementing. Adequate training for all those who agencies on the appropriate use of innovative need it should be supplied. management practices such as alternative dis- pute resolution techniques and the optimal allo- Revise Legislation and Regulations. Although some cation of environmental analysis and compliance of the integration of processes recommended here, and review staffs in operating the integrated process. the development of better baseline data, can be accom- plished under existing legislation, it should be recognized OMB should revise its legislative review, regula- that the full implementation of these principles and guide- tory review, and budget submission procedures to lines will not be possible without revising present legisla- support the President's environmental integra- tion and related regulations. Pilot projects and special tion policies. demonstrations should be used to set the stage for needed The Congress should revise all environmental legislative revisions. For example, the Government Per- statutes to bring them clearly within the purview formance and Results Act of 1993 may provide a convenient of NEPA integration policies and to establish ear- vehicle for testing outcome-based evaluations of the per- ly integration of reviews, performance-based

U.S. Advisory Commission on Intergovernmental Relations 47 compliance, efficiency, affordability, timeliness, References and predictability as goals of the environmental Applying the Section 404 Permit Process to Federal-Aid Highway decisionmaking process. Projects. Federal Highway Administration, National Marine Fisheries Service, U.S. Army Corps of Engineers, U.S. Envi- Each federal infrastructure and environmental ronmental Protection Agency, U.S. Fish and Wildlife Service. agency should review its environmental review Washington, DC, September 1988. and decisionmaking regulations and processes to "Balancing Environmental Protection and Public Works: ACIR incorporate and affirmatively support the princi- Roundtable," Intergovernmental Perspective 18 (Winter 1992): ples of integration. 15-18. Bear, Dinah. "The National Environmental Policy Act," Zntergov- 2. Pursue Pilot Projects. Under the Government Per- ernmental Perspective 18 (Summer 1992): 17-19. fomeand Results Act of 1993, EPA, CEQ, or a consor- Clean FVater Act Section 404(q)-Memorandum of Agreement be- tium of federal environmental agencies should apply to tween the Department of the Interior and the Department of the OMB for a pilot project to begin developing outcome- Army. Washington, DC, January 13, 1993. based performance evaluation measures of environmen- Habicht, E Henry, 11. "Environmental Regulations: Lightening tal programs. the Load," Intergovernmental Perspective 18 (Fall 1992): 27-29. 3. Improve the Knowledge Base for Environmental Hicks, Richard. "Environmental Legislation and the Costs of Decisionmaking. All of the federal environmental agen- Compliance," Government Finance Review 8 (April 1992): 7-10. cies should work through the Federal Geographic Data Implementation of the Intermodal Surface Transportation Eficien- Committee (FGDC) to accelerate development and coor- cy Act: Protecting the Environment and Reducing Regulatory Inef- ficiencies. Memorandum of Understanding between the U.S. dination of a comprehensive nationwide data base to sup- Department of Transportation, U.S. Department of the Army, port improved environmental decisionmaking by federal, and US. Environmental Protection Agency. Washington, DC, state, and local governments. January 14,1993. The recommendations of EPAs Science Advisory Board Kelly, Cynthia C. "Escalating Environmental Mandates," Public should be used as the basis for an expanded program of Management 75 (March 1993): 2-8. environmental research based on improved risk assessments McDowell, Bruce D. "The Environment and Public Works," Zn- and concepts of ecological and/or watershed management. tergovemrnental Perspective 18 (Summer 1992): 9-11. Other federal, state, and local environmental agencies U.S. Advisory Commission on Intergovernmental Relations. In- should be consulted in expanding this research program. The tergovenimerital Decisionmaking for Environmental Protection resources of the Office of Science and Technology Policy, the and Public Works. Washington, DC, 1992. National Science Foundation, federal laboratories, EPA's US. Department of the Army. Memorandum: Regulatory Znitia- interagency research committee, the Department of De- fives Associated with the Intennodal Surface Transportation Efi- fense Strategic Environmental Research Program, and the ciency Act (ISTEA). Washington, DC, May 4, 1992. National Academy of Sciences/National Research Council U.S. Department of the Interior. Environmental Quality, Chap- should be used to buttress this essential activity. ters 1-7, Departmental Manual. Washington, DC, 1980. -. Interagency Cooperation-Endangered Species Act of 4. Provide Environmental Training. CEQ, or its 1973, As Amended. 50 Code of Federal Regulations, Ch.IV, Part successor agency, should be directed to continue its NEPA 402. Washington, DC, October 1, 1988. integration seminars and workshops, and to work with the U.S. Department of Transportation. Federal Highway Adminis- Office of Personnel Management, the Federal Executive tration. The Flevibility Document. Washington, DC, May 1986. Institute, EPA, the other environmental and infrastruc- . Memorand~~m:Revised Guidance on Cooperating Agen- ture agencies, and universities to increase training oppor- cies. Washington, DC, March 19, 1992. tunities in support of environmental integration policies US. Environmental Protection Agency. "The Birth of aNational and guidelines. Provisions of the Intergovernmental Person- Resource," Enviro Tat Quarterly, Fall 1992. nel Act should be used to encourage personnel exchanges US. General Accounting Office. WaterPollution: Pollutant Trad- among federal agencies and between the federal govern- ing Could Reduce Con7pliance Costs if Uncertainties Are Re- ment and state and local governments. solved. Washington, DC, June 1992.

48 U.S. Advisory Commission on Intergovernmental Relations Statement of Principles and Guidelines,Federal Inffastructure Task Force Yl IMPROVING THE FINANCING OF INFRASTRUCTURE

I. OBJECTIVE increased even more. The traditional funding sources and mechanisms-including the general fund (containing rev- The purpose of this statement of principles and guide- enues from such sources as property, sales, and income lines is to improve the effectiveness, efficiency, and equity ), long-term borrowing (such as general obligation of the financing for federal infrastructure programs. The bonds and revenue bonds), dedicated taxes (such as the approach taken is to establish financial planning and the gasoline tax), and intergovernmental grants-often are selection of appropriate sources and amounts of funds and insufficient. financing mechanisms as an integral part of infrastructure planning and decisionmaking, spanning the entire process 3. The Search for Alternative Sources of Funds. from goal-setting to implementation. Financial planning During the 1980s, and even in the early 1990s, there has should not be brought in just at the end of the process, as been increasing interest in using nontraditional mechanisms an afterthought or simply as an element of the implemen- for raising funds to pay for infrastructure. For example: tation process, accepting all the goals, programs, and proj- The U.S. Department of Transportation joined ects that may have been developed without consideration that search in a major way in the 1980s through its of their financial consequences. Rice Center studies. The U.S. Environmental Protection Agency has II. FINDINGS prepared a major new inventory of alternative 1. Rising Requirements for Funds. Very often, financing techniques, Alternative Financing grand visions of infrastructure are framed, social policies Mechanisms for Environmental Program (1992). are adopted, programs are developed, general require- Cost sharing and dedicated infrastructure trust ments are mandated, and it is assumed that the necessary funds became a regular part of the U.S. Army financing will come from somewhere. That assumption Corps of Engineers' financial planning in 1986. frequently no longer rings true. The costs of infrastruc- ture programs (designed to accommodate growth, im- State and local governments are negotiating prove effectiveness and competitiveness, and provide more frequently with developers to fund all or adequate maintenance of existing facilities and equip- portions of essential infrastructure. ment) and unfunded federal mandates (to protect the Alternative pricing policies for western water are environment, accommodate the handicapped, and allevi- being examined. ate overcrowding in correctional facilities and other public The access of state and local governments to the institutions, for example) have accumulated faster than debt capital markets has been affected signifi- revenues have grown, sending infrastructure agencies, cantly as the federal tax-exempt status of their and the governments to which they belong, in search of bonds was relaxed in 1981, then tightened signifi- additional funds. cantly in 1986. Congress now is considering 2. Heavy State and Local Government Responsibil- whether to permit greater use of the tax-exempt ity for Funding. State and local governments traditionally bond market for infrastructure under the persist- have been responsible for planning, designing, building, ent prodding of the Rebuild America Coalition, owning, operating, maintaining, and financing most the Anthony Commission on Public Works Fi- public works. As federal aid has declined in recent years, nances, and others. and unfunded federal mandates have increased, thefinan- EPA has underwritten state revolving loan funds cia1 responsibilities of state and local governments have for wastewater treatment plants in every state.

U.S. Advisory Commission on Intergovernmental Relations 49 The mixing of federal gas tax dollars with private private cost and add to air pollution. On the other hand, toll road funds-illegal for many years-was au- new technologies can change the equation. New collec- thorized in 1991. tion devices are being introduced that can calibrate use, In 1993, a special federal study commission rec- permit congestion pricing, and make tolls a very efficient ommended a series of innovative federal actions way of exacting user charges. to attract pension fund investments into infra- 5. Inequities of Funding. Responsibilities for fund- structure. ing infrastructure frequently fall unequally and inequit- ably on individuals and governments. For example, when One of the strongest forces driving this search for general taxes pay for infrastructure services that are not additional infrastructure funds is rapid growth of un- used to the same extent by everyone, it is generally agreed funded federal mandates. These mandates are imposed by that some users pay too much, while others pay too little. federal laws, court decisions, and administrative regula- An example is unmetered public water. If payment for a tions, with little or no thought given to their costs. Many of service that is essential to the general public's health and these mandates are for environmental protection. Others safety isbeyond the means of certain parties, then the case are for the purpose of benefiting Americans with disabili- can be made for subsidized or even free service for some ties, reducing the crowding of prisoners, and ensuring fair selected people. Again, public health and safety may dic- wages and working conditions for infrastructure workers. tate that individuals who cannot pay for water may receive The cumulative costs of these mandates are high and basic service at reduced rates or even free until they (or growing, but they have not been systematically estimated others on their behalf) can pay. or provided for with planned funding. They have begun to At the governmental level, examples of inequity arise displace other important state and local priorities without frequently in the distribution of intergovernmental aid weighing the relative merits of competing priorities. Legally and in the imposition of intergovernmental mandates. speaking, all mandates are of the highest priority but, scien- Although it is generally agreed that aid should be distrib- tifically speaking, EPAs Science Advisory Board has ob- uted in relation to needs and ability to pay, many current served that not all mandates are of equal urgency or funding formulas do not follow these two principles very necessity. closely, and mandates seldom consider these principles at 4. Inefficient Uses of Funds. Some features of infra- all. Numerous examples of unequal impacts of environ- structure programs, built in by the political process, have mental costs have been presented to EPA. resulted in inefficient uses of scarce funds. For example, funding that is available only for capital improvements, in Ill. PRINCIPLES AND GUIDELINES times when adequate maintenance funding is not avail- FOR FUNDING INFRASTRUCTURE able, has resulted in too much construction and reconstruc- In order to improve the funding of infrastructure pro- tion, and too frequent replacement of capital equipment, grams, three principles should be followed: incurring greater costs than would have been incurred if routine maintenance had been performed. A financial planning process should be estab- Economies also can be introduced by making the ways lished and applied consistently to all federal pro- in which funds are raised in the capital markets more grams affecting infrastructure either directly, efficient. Pooling of securities, use of credit enhance- through federal aid, or by regulation. ments, and the restructuring of debt-payment cash flows A standard set of criteria for evaluating the effec- to meet the needs of existing investors and to attract new tiveness, equity, and efficiency of infrastructure ones can all contribute to more cost-effective ways of funding sources and mechanisms should be estab- raising capital. Applications of securitization, for example, lished and applied consistently throughout the can restructure pools of loans into securities that find federal government as part of the financial plan- global markets consisting of both institutional and individual ning process. investors. Federally sponsored securitization is being Mechanisms for funding infrastructure should be applied increasingly to several different types of debt instru- chosen after a thorough evaluation of alterna- ments, including municipal bonds, and could be applied to tives is performed using the standard criteria. leverage limited federal grant moneys to capitalize state revolving loan funds and bond banks more adequately. These three basic principles are elaborated on below The method of revenue collection also can lead to an and supported with preliminary guidelines. inefficient use of funds. For example, the current system The Financial Planning Process of fuel taxes and highway-. tolls favors vehicles with high weight-to-axle ratios, increasing road wear and mainte- The ability to put together a practical package of nance costs. In the case of toll roads, frequent stops to pay diverse funding mechanisms may be the key to finding small fees may result in traffic delays that represent a the resources needed to support established federal

50 U.S. Advisory Commission on Intergovernmental Relations infrastructure objectives. For each federal infrastruc- avoiding unintended distortions in the programs and fi- ture program being proposed, mandated, budgeted, or nancial markets. reevaluated, a financial feasibility/affordabilityanalysis Effectiveness: The attribute of raising funds in a should be prepared. The purposes of this analysis sufficient amount and timely fashion when needed to should be to gauge the financial feasibility and relative meet the costs. In other words, a source of funds may in effectiveness of alternative infrastructure proposals theory be equitable and efficient, but unless it yields from the viewpoint of all the parties responsible for sufficient funds in a dependable fashion when they are funding the improvement and its subsequent operation needed and has the elasticity needed to respond to and maintenance, and to identify the most affordable changing demands, it is not effective. Legal restrictions, options. Preparing this analysis at an early stage in the political acceptability, interjurisdictional economic review of legislative and rulemaking proposals can be an competition, and, in the case of borrowing, financial effective means of holding costs down. Moreover, the market acceptability, all may limit the effectiveness of amount of available funds can and should help shape various sources of funds. how much can be required and how the requirements can be met. Risk estimates based on worst-case scenar- Guidelines for Applying the Benefit Principle. In gen- ios may have to be tempered by assessments of costs and eral, those who benefit from infrastructure services resulting improvements in performance. should be asked to pay for them. User fees, dedicated The requirement for financial feasibility analysis taxes, trust funds, and special districts are commonly used should apply equally to judicial, legislative, and executive to apply this principle. This works well when most of the decisions affecting the demand for infrastructure. If funds benefits are identifiable, measurable, and direct, and cannot be raised without jeopardizing the fiscal health when the beneficiaries can be billed conveniently at the of the responsible parties, programs and mandates should point of use or where they live. be redesigned or stretched out to make them feasible. However, when many of these socially beneficial ser- The May 1992 report of EPA's Environmental Finan- vices are widely dispersed, indirect, or difficult to measure, cial Advisory Board (EFAB), entitled Narrowing the Gap: general taxes may be the only efficient means of funding. In Environmental Finance for the 1990s, provides a blueprint addition, when some people needing services do not for the kind of financial feasibility that all federal infra- have the ability to pay, or have only limited ability to pay, structure agencies should consider. Clear estimates of the general taxes also may be the most equitable means of financing needs are the first step, to be followed by an funding. evaluation of potential funding sources and mechanisms, A special case of responsibility to pay for infrastruc- and the differing capacities to pay possessed by the gov- ture occurs when identifiable parties cause pollution or ernments and agencies responsible for implementing in- impose other externalized infrastructure costs on society. frastructure proposals. It is likely that apackage of several In this case, the polluter or imposer of the cost should pay revenue sources will be needed to meet identified needs. the wsts they impose on society to the extent that those A multiyear time frame is particularly important for costs can be clearly identified and measured. infrastructure planning. In part, this is because bringing Selecting Funding Mechanisms capital projects into existence requires extensive engi- neering, long lags in acquiring various permits and com- Selection among alternative sources of funding should pleting public hearing and approval processes, and long be guided by the criteria of effectiveness, equity, and effi- construction periods. In addition, the large amount of ciency. The application of these criteria is seldom clear-cut, investment in a typical infrastructureproject requires pay- nor are the outcomes of analysis unambiguous; people and ments to be spread over many years and provides benefits governments can disagree over the level and distribution of over long periods of time. benefits of programs and projects and how their costs should be apportioned and revenues collected. Nonetheless, there Criteria for Evaluating Alternative Funding Mechanisms is an ovemding need to analyze financing implications and options at the very outset of the infrastructure investment Generally, sources of funds can be judged by three analysis process (see ?tisk Force I Statement), not as an crit erk afterthought. Only in this way can the benefits and costs be Equity: The attribute of raising revenues from those compared, and the concepts of equity, effectiveness, and who benefit from the expenditure in proportion to their efficiency of funding options be recognized. benefit or the costs they impose on society, with due re- Another tier of concern has to do with the selection of gard to shared benefits and consistent with prevailing no- the source of funds and traditional versus nontraditional tions of ability to pay. financing techniques. Governments have many alterna- tives in the selection of specific revenue sources and in the Efficiency:The attribute of raising the needed funds choices of facility operations and revenue collections. at a minimum administrative and transaction cost and Much of the innovation that has occurred in the financing

U.S. Advisory Commission on Intergovernmental Relations 51 of infrastructure has been to establish new entities in the and selective) and income taxes (usually state). In addi- or to enlist the private sector in the develop- tion, governments have commonly financed utilities (wa- ment, financing, construction, andlor operation of capital ter, sewer, waste disposal) through user charges based on facilities formerly provided by the public sector. consumption andlor availability of service. Increasing There also are several intergovernmental concerns pressure on raising sufficient funds through traditional involved in transfers, mandates, and tax policy relation- mechanisms, greater acceptance of the benefit principle, ships. In our federal system, governments that own and and technological advances have all combined to increase operate infrastructure may find themselves in receipt of the use of nontraditional sources of revenues. These in- financial assistance (the fiscal carrot) or under mandate clude developer exactions, special taxing districts, and in- (the stick) when it comes to providing services. Furthermore, novative user charges, such as congestion fees and federal tax policy and federal securities laws and regula- differential waste disposal fees. As technology for record- tions have pervasive effects on the cost and availability of ing usage and levying requisite charges (such as in highway financing techniques used by state and local governments. user charges) improves, other opportunities will present themselves to better attune charges to benefits. The Principal Choices. There are four major choices Both traditional and nontraditional mechanisms when selecting among potential mechanisms for funding should be considered to fill any funding gaps. The advan- infrastructure: (1) current revenues, (2) borrowing tage of traditional funding mechanisms is that they are in (pledging future revenues), (3) intergovernmental assis- place and known-administratively, politically, and in tance, and (4) private-sector options. terms of predictable productivity. However, they may be It is important to recognize that all expenditures, in- at their limits of effective use, economically, politically, or cluding those on capital items, will ultimately need to be legally. If that is the case, the nontraditional mechanisms paid from revenues in somebody's budget, either today or may offer the only alternatives available for generating in the future. Thus, the selection of sources of funds additional revenues. Experimentation with alternative breaks down into a decision to finance improvements ei- funding mechanisms should be encouraged. ther from revenues currently collected by governments or In any event, whether traditional or nontraditional others on their behalf or by promising to use future reve- mechanisms are used, there are limitations beyond which nues to pay debt service or lease payments. spending of any unit cannot go, no matter what sources Deciding from what sources infrastructure will be are enlisted in the effort. The nontraditional sources, at funded is vital not only in deciding on the relative merits of least up to now, have accounted for less than 20 percent of one resource over another but also in the practical affairs infrastructure budgets. of designing a financing plan. It is important at the outset to understand the distinctions between (1) own-source Pay-as-You-Govs. Borrowing. When making choices revenues that governments raise themselves and over between using current revenues or deferring their collec- which they have some degree of control and (2) intergov- tion until the future through borrowing or lease-purchase ernmental payments that are funded by others and over arrangements, there is the added dimension of timing of which the recipients may have little or no control. Inter- benefits and payments. The arguments between the advis- governmental assistance is decided on by the assisting ability of borrowing versus using current revenues (pay-as- government, and its use may carry numerous conditions you-go) are well understood, but are especially pertinent that limit its flexibility. in the case of infrastructure financing. Whereas reliance Alternatively, governments may elect to borrow or on current revenues saves on interest costs and conserves contract for the provision of infrastructure and related borrowing capacity, it frequently is not an effective option services with the private sector. In every case, again, because it provides insufficient funds to pay the large costs revenues to pay for the facility and services will need to of an infrastructure project. Perhaps more important is be raised sooner or later, by one government or another the desirability of aligning costs to the benefits received or by private parties. When raised either through taxes over time. Capital improvements produce their benefits or charges, these revenues will most likely represent a over many years, and it is logical that those who benefit cost in forgone opportunities to spend funds on other from services over time should pay for them as they are things. It is important, therefore, at the outset of infra- used, especially when the users may vary fromyear toyear. structure policy and planning processes to focus on State and local governments rely heavily on the capi- sound criteria for selecting the appropriate sources of tal markets to finance their infrastructure needs. While funding. the realities of the federal budget place limits on the encouragement that can be provided for such borrowings lkaditional vs. Nontraditional Funding Mechanisms through tax preferences and securities regulation, there to Consider. Governments typically have relied on a lim- is an overriding obligation to make such access as eco- ited number of traditional revenue sources, such as the nomical and efficient as possible and to focus on the local property tax and various forms of sales taxes (general public benefits of the expenditures to be financed, as op-

52 U.S.Advisory Commission on Intergovernmental Relations posed to the particular legal form of the borrower or its Issue governmentwide principles and guidelines obligation. Where, for example, there may be incidental for comprehensive financial planning in infra- or derivative benefits to private parties as a result of fi- structure agencies. nancing arrangements, these should not unduly inhibit the Consider establishing financial advisory boards in use of tax- exempt borrowing for facilities that principally each of the federal infrastructure agencies, using benefit the general public. To the extent possible, broad EPA's EFAB model. program objectives should be set and the states and locali- Remove legislative barriers to financing. ties should have freedom from detailed restrictions in accomplishing them as best they can. Fill knowledge gaps that impede sound financial planning and the use of innovative funding mech- Guidelines for Determining Who Should Pay. When anisms. governments, as distinct from identifiable private parties, Build agency capacities to perform financial plan- pay for infrastructure, the question is which governments ning. should raise the revenues from their own sources. Local benefits should be paid for locally; regional or metropoli- Use private financial services as appropriate. tan benefits should be paid for at that level (generally Each of these initial steps is elaborated on below. through a special district); statewide benefits should be paid for by the state; and national benefits should be paid Issue Principles and Guidelines. The President for by the federal government. Often, however, a single should issue a single set of governmentwide financial facility serves more than one clientele, as when a single planning and management principles, and establish a highway accommodates local, regional, and long-distance process for more fully developing, issuing, and oversee- trips. In such cases, costs should be shared. ing guidelines that would require each federal infra- When one government mandates another govern- structure agency to continuously and comprehensively ment to provide infrastructure, it may have responsibility evaluate and improve the funding of its infrastructure to pay part or all of the costs. When the mandating govern- objectives. These guidelines should show clearly how ment is simply regulating services that would be provided the President's principles should be applied to directly in any event, the need is not so compelling. But when the administered federal infrastructure programs, as well mandate is to meet a national need or involves substantial as federally assisted and federally regulated infrastruc- spillovers, then the need for assistance is compelling. ture programs. The key to determining who should pay, and how Oversight responsibilities located in the Executive much, is a careful analysis of who benefits (both directly Office of the President should be exercised in consultation and indirectly), over what period of time, in what propor- and cooperation with the federal infrastructure agencies. tions they benefit, and how able they are to pay in propor- OMB should be given responsibility for compiling esti- tion to their benefits (or to the costs they impose on mates of the cumulative federal, state, and local funding others). Governments, like private parties, have differing requirements resulting from federal infrastructure pro- abilities to pay that should be considered when costs are grams, policies, and mandates. There should be a mandated on them, when intergovernmental grants are reexamination of multiyear planning and budgeting by distributed, and when revolving loan funds are set up and the federal government and implementation of capital administered. Representative revenue capacity, tax effort, budgeting and advance funding concepts in the case of and expenditure needs (such as prepared by the U.S. physical infrastructure spending. Advisory Commission on Intergovernmental Relations) Establish Financial Advisory Boards. The Environ- should be consulted when considering the ability of gov- mental Financial Advisory Board (EFAB) in EPA has put ernments to pay a fair share of infrastructure costs. Gov- EPA much more closely in touch with the financial reali- ernmental analyses also can be strengthened significantly ties, capacities, and opportunities faced by its state, local, by reference to the publications and evaluations of the and private partners, and has developed many significant credit rating agencies and municipal credit analysts who insights into the means by which environmental funding provide helpful guidance on the feasibility and reliability might be improved. EFAB, with its balanced representa- of various financing mechanisms, as well as the credit tion and strong track record, provides a sound model for worthiness of governments that wish to employ them. other federal agencies to consider in helping to strengthen their own approaches to ensuring more effective, equita- IV. INITIAL IMPLEMENTATION STEPS ble, and efficient funding of their infrastructure responsi- bilities. The Waterways Users Board, attached to the The following five initial steps should be taken irnme- Army Corps of Engineers, provides another model. diately to start establishing comprehensive financial plan- ning and management processes in all of the federal Remove Legislative Barriers. Federal tax and securi- government's infrastructure agencies: ties laws, as well as state laws, limit access to revenue

U.S. Advisory Commission on Intergovernmental Relations 53 sources and innovative financing mechanisms. As these and techniques of the planning process itself more effec- barriers are encountered, consideration shouldbe given to tive and efficient, are useful services that are needed and appropriate remedial legislation. could be provided efficiently and effectively by experts who specialize in these concerns. Fill Knowledge Gaps. The background materials identified and distributed to support the deliberations of Innovate and Experiment with Financing Mecha- this task force should be published and made available nisms. The arena of finance is vigorous and much more widely. In addition, an ongoing clearinghouse dynamic. Experience has already been gained with financ- capable of continuing a similar service should be estab- ing mechanisms that pool and stretch resources by making lished. This service should include cataloging, evaluating, municipal debt more attractive to existing investors and and promoting the use of innovative funding mechanisms enabling it to attract new investors. Revolving loan funds, such as revolving loan funds, structured municipal bonds, bond banks and pools, credit enhancements, and various and new types of infrastructure securities. forms of swaps and derivatives are devices to reshape and INTERNET and other means of timely information make more attractive the future cash flows that debt obli- exchanges among federal infrastructure agencies and oth- gations represent. Proposals for securitizing streams of ers should be established. funds, including those based on grants, the establishment The creation of new knowledge also should be pur- of new financial institutions in which there is a federal inter- sued. For example, better cost-estimating methodologies est, and the development of infrastructure securities that are needed to enable consideration of future funding are attractive to individual investors or, at the other end of needs of federal mandates. Better tracking of program the scale, to public pension systems are examples of inno- performance, benefits, and costs (through improved data vation. Some of these represent greater collaboration with systems and better public reporting arrangements) also the private sector as well. As has been noted above, fi- would be valuable to financial planners. Pilot studies, un- nancing infrastructure represents a broad scale of policy der the Government Performance and Results Act of 1993, concerns and revenue-raising entities and techniques. In- should be used to begin creating such new knowledge. novation is to be encouraged, as is the testing of the effi- ciency, effectiveness, and equity of new and novel Provide Training and Technical Assistance. For the techniques in particular applications. most part, the type of financial planning being recom- References mended by this task force is not now being done in the Commjssion to Promote Investment in America's Infrastructure. federal government or elsewhere. Thus, as new principles, Financing the Future. Washington, DC, 1993. guidelines, and knowledge are developed, and begin to be Holcombe, Randall G. "Revolving Fund Finance: The Case of used, there will be a growing need to familiarizeincreasing Wastewater Treatment," Public Budgeting & Finance 12 (Fall numbers of people with them. To meet this need, both 1992): 50-65. formal training and a variety of technical assistance oppor- "Leveraging Public Dollars: Special Report," PWizancing (De- tunities should be offered. The various federal infrastruc- cember 1992): 12-24. ture agencies, in cooperation with each other and with Morandi, Larry, and Sam Azodmanesh. "Financing Water Quali- OPM, should develop and offer appropriate courses, man- ty Infrastructure: An Update on State Revolving Funds," State Legislative Report 17 (October 1992). uals, personnel exchanges, and other such opportunities. National Council on Public Works Improvement. Fragile Founda- Partnerships with established training institutions tions: A Report on America's public Works. washington, DC, should be explored. For example, the Federal Executive 1988. Institute frequently develops special courses for agencies, Neve, Trevor L., Robert L. Crosslin, and John E. Petersen. One and the Intergovernmental Personnel Act allows state and Solutiorz to Capital Budget Slzortfalls: A Primer for public-Private local officials to enroll in federal training courses. The act Entures. Bethesda, Maryland: Logistics Management Institute, also encourages intergovernmental personnel exchanges. June 1992. Another type of opportunity is illustrated by the Western US. Advisory Commission on Intergovernmental Relations. To- Infrastructure Leadership Institute led by the University of ward a Federal Infmtructure Strategy: Issues and Options. Wash- ington, DC, 1992. New Mexico and the University of Arizona. US. Congressional Office of Technology Assessment. Delivering the Goods: Public Woks, Eclu~ologies,Management, and Fi- Use Private Financial Services. Many private firms nancing. Washington, DC, 1991. are highly skilled in techniques of financial analysis and U.S. Department of Transportation. Federal Highway Adrninis- planning, financial deal-making, and the creation of new tration. Building a Better Partnership: PubliclPrivate Cost-Shar- financial instruments. Many public bodies may find it ad- ing and Toll Financing Provisions of the Intemtodal Sugace vantageous to use outside advisors to explore potential Transportation Eficiency Act of 1991. Washington, DC, 1992. financing mechanisms to achieve portions of their finan- .Exploring Key Issues in Public-Private Partnershipsfor High- cial planning. Proposals for innovative financing mecha- way Development. Washington, DC, 1992. nisms, as well as advice on ways to make the mechanics . Financing Federal-Aid Highways. Washington, DC, 1992.

54 US. Advisory Commission on Intergovernmental Relations Innovative Highway Financing. Washington, DC, Septem- . Funding State Environmental Program Administration: ber 1990. The Use of Fee-Based Progmts, Draft Report Prepared for the . Roundtable Discussion on Federal-Aid Toll FinancingofIS- State Capacity Task Force. Washington, DC, August 7, 1992. TEA. Washington, DC, 1993. . Environmental Finance Advisory Board. Incentives for US. Environmental Protection Agency. Alternative Financing Environmental Investment: Cltaiging Belzavior and Building Mechanism for Environmental Program, State Capacity Task Capital. Washington, DC, August 9, 1991. Force: The Alternative Financing Meclranisins Team Report. . Narrowing the Gap: Eilviiorrnzental Fi~rancefor the 1990s. Washington, DC, August 7, 1992. Washington, DC, 1992. . Tlre Clean Air Act of 1990: A Guide to Public Financing . Small-Community Financing Strategies for Environmental Options. Washington, DC, 1990. Facilities. Washington, DC, 1991.

U.S. Advisory Commission on Intergovernmental Relations 55

- 56 U.S. Advisory Commission on Intergovernmental Relations APPENDIX

The National Conference on High Performance Infrastructure

Thursday, July 29 4:OOp.m. Views from the Outside Welcome and Overview Jimmy Bates, Moderator Hon. Edward G. Rendell Acting Deputy Director, Civil Works Mayor, City of Philadelphia U.S. Army Corps of Engineers Robert Goodin Keynote Address American Public Works Association Budgeting for Performance Michael J Pompili Hon. Alice M. Rivlin Assistant Health Commissioner Deputy Director Columbus, Ohio US. Office of Management and Budget Thomas J Harrelson 11:OO a.m. Views from the Congress National Academy of Public Administration Bruce D. McDowell U.S. Advisory Commission 5:OOp.m. Adjourn on Intergovernmental Relations, 7:OO p.m. Dinner Moderator Introduction Sen. Bob Graham, Member, Hon. Barbara Sheen Todd Congressional Infrastructure Caucus Commissioner, Pinellas County, Florida Rep. Bob Car5 Chairman, Improving the Performance Transportation Appropriations Committee of State, Local, and Private Partners 12:OO Noon Luncheon John Horsley Founding Chairman, Rebuild America Coalition Bruce D. McDowell, Moderator, ACIR Restoring Public Confidence Friday, July 30 in Infrastructure Investment Hon. Thomas M. Downs 9:00 a.m. Priorities for Implementing Commissioner the Federal Infrastructure Strategy New Jersey Department of Transportation Four Breakout Groups 2:OO-3:30 p.m. Views from the Agencies 11:OO a.m. Priorities for Implementing Bruce D. Long, Moderator the Federal Infrastructure Strategy Chief, Water Resources Branch Reports of the Breakout Groups Office of Management and Budget 12:30 p.m. Closing Luncheon Hon. Mortimer Downey Deputy Secretary of Transportation Introduction Hon. Bruce M Todd Hon. G. Edward Dickey Mayor, City of Austin, Texas Acting Assistant Secretary of the Army for Civil Works Reinventing Government: The Infrastructure Case Hon. David Gardiner Barbara Dyer EPA Assistant Administrator Director Policy, Planning, and Evaluation The Alliance for Redesigning Government

U.S. Advisory Commission on Intergovernmental Relations 57 58 U.S. Advisory Commission on Intergovernmental Relations