REBUILDING AMERICA’S INFRASTRUCTURE MARKET-BASED IDEAS FROM THE MANHATTAN INSTITUTE TABLE OF CONTENTS INFRASTRUCTURE EDWARD L. GLAESER Private Infrastructure Provision—The Easy, The Hard, The Impossible | 6

EDWARD L. GLAESER If You Build It... Myths and Realities About America’s Infrastructure Spending | 9

NICOLE GELINAS 8 Ways President Trump Can Rebuild America—at Half the Cost | 15

NICOLE GELINAS Trump Needs to Think Big and Build Right to Reform Our Infrastructure | 19

NICOLE GELINAS For Infrastructure, Spend Sensibly to Make a Difference, and Avoid Mistakes | 21

AARON M. RENN Rebuilding American Infrastructure | 23 TRANSPORTATION AARON M. RENN Driverless Cars and the Future of American Infrastructure | 34 JOHN TIERNEY Making New York Airports Great Again | 39 ROBERT W. POOLE Reinventing the Port Authority of New York & New Jersey | 44 AARON M. RENN The Lessons of Long-Term Privatizations: Why Chicago Got It Wrong and Indiana Got It Right | 57 WATER + ENERGY AARON M. RENN Wasted: How to Fix America’s Sewers | 65 MARK P. MILLS Exposed: How America’s Electric Grids are Becoming Greener, Smarter—and More Vulnerable | 73

Table of Contents 2 INTRODUCTION

American infrastructure is in dire need of repair and replacement. Yet decades of experience have shown us that simply showering federal money on infrastructure is not the right solution. Indeed, this approach has been shown to encourage wasteful spending on projects that are politically expedient but economically dubious. Large injections of federal funds may encourage spending money on large, new projects while ignoring critical maintenance backlogs on existing infrastructure. Or it may incentivize state policymakers to devote attention to particular communities whose political importance far outweighs their need for new infrastructure. But despite these pitfalls, the federal government does have a role to play in revitalizing our country’s highways, airports, rail networks, pipelines, electrical grids, and water infrastructure. Over the following pages, Manhattan Institute scholars from a variety of different areas of expertise will sketch what, precisely, that role is. Among their recommendations: KNOW THE LIMITS OF PRIVATIZATION Given all the hurdles associated with the public sector, many have argued that private enterprise should play a larger part in infrastructure provision. While there is space for an increased private role—especially when it comes to America’s airports—handing control of infrastructure provision to the private sector isn’t always the answer. Harvard economist Ed Glaeser’s essay, “Private Infrastructure Provision: The Easy, The Hard, The Impossible” powerfully demonstrates why: privatization makes sense for new, “green field” projects that are likely to generate revenue; it is much harder to locate a role for the private sector in the maintenance of existing infrastructure, which tends not to generate profit yet is the country’s most pressing infrastructure need. DECENTRALIZE INFRASTRUCTURE FINANCING AND MANAGEMENT Glaeser’s second contribution to this series, “If You Build It,” addresses the all-too-common problem of political leaders setting bad infrastructure priorities. New infrastructure investment, Glaeser argues, is best suited to economically expanding places. But too often, politicians prioritize new projects in declining areas where the expenditures can’t be justified on economic grounds. His solution: send more of the authority to make these decisions back to local communities.

Introduction 3 PRIORITIZE HIGH-VALUE INVESTMENTS A series of three articles by City Journal contributing editor Nicole Gelinas, all originally published in the New York Post, present some of the most high-value infrastructure projects that the Administration should prioritize. Some of the most important projects include the Gateway tunnel between New York and New Jersey and an interstate highway between Las Vegas and Phoenix. Gelinas argues that policymakers should not worry about borrowing money to fund projects that will pay for themselves, and that the federal government should reward states and cities that have reasonable work rules and a demonstrated history of managing large projects well. FIX THE HIGHWAYS WE HAVE BEFORE BUILDING NEW ONES With 20% of the nation’s roads in poor condition, and the total number of miles driven annually by Americans stagnant, now is not the time to build new highways, writes MI Senior Fellow Aaron Renn in his report “Driverless Cars and the Future of American Infrastructure.” And because of technological innovations such as the self-driving car, the number of cars on the road—and the demands we will have on our highways—are unpredictable. With so much uncertainly ahead, policymakers should maximize the value of their infrastructure investment by fixing the highways we already have. PRIVATIZE AIRPORTS Many of the world’s best airports are run privately, or through public-private partnerships; meanwhile, in the United States, our airports are lagging behind. Flight delays are rampant and the quality of the airports themselves are often “third world,” as former Vice President Biden famously quipped. City Journal contributing editor John Tierney, in his profile of the mismanagement, bloat, and corruption at New York City’s airports, “Making New York’s Airports Great Again,” makes a compelling case for privatization nationwide. BREAK UP THE PORT AUTHORITY OF NEW YORK AND NEW JERSEY The Port Authority of New York and New Jersey, which controls much of the critical infrastructure in the country’s largest urban center, is corrupt, unwieldy, fiscally unsound, and incompetent. Robert Poole, founder of the Reason Foundation and contributor to a series of Manhattan Institute research on the Port Authority, puts forth a plan for breaking the entire entity up, entitled “Reinventing the Port Authority of New York & New Jersey.” A federal infrastructure plan should have incentives for the Port Authority to break apart each of its functions, which include management of a rail transit line, a bus terminal, several airports, and all of the bridges and tunnels across the Hudson River, into separate entities CLEAN UP THE EPA’S WATER MANDATES The federal government currently requires cities to undertake massive projects to retrofit their “combined sewers” (sewers in which storm-water runoff and sanitary waste from buildings are channeled into the same pipes to reduce or eliminate overflows of untreated wastewater into local waterways). The cost of these projects often run into the billions, yet the federal government provides almost no funding support. Aaron Renn’s second contribution to this series argues that the EPA should revisit this mandate, and that the federal government should step in to provide more support to cities struggling to complete these projects. MAKE THE ELECTRICAL GRID MORE SECURE, NOT GREENER One of the major trends in energy policy has been the move toward “green” grids—electrical grids whose deployment involves a vast expansion of the Internet of Things to achieve energy efficiency goals. But connecting the grid to the internet makes it far more vulnerable to cyber attacks. And while the federal government spends massively on grid efficiency technology, it spends next to nothing on grid security. MI Senior Fellow Mark Mills, in “Exposed: How America’s Electric Grids Are Becoming Greener, Smarter — and More Vulnerable,” argues that the government should prioritize grid reliability and resiliency above all other goals.

Introduction 4 INFRASTRUCTURE

5 INFRASTRUCTURE ORIGINALLY PUBLISHED AS A TRANSITION MEMO

PRIVATE INFRASTRUCTURE PROVISION— THE EASY, THE HARD, THE IMPOSSIBLE

There are many things to like about President-elect Trump’s plan to encourage the private provision of infrastructure. Private firms have incentives to keep costs down. If the costs need to be covered by tolls and ticket fees, no one would build bridges to nowhere or empty monorails. If investors reap returns only over time, they have the right incentives to invest in maintenance. EDWARD L. GLAESER But private provision is no panacea. In some cases, such as airports, privatization can be swift and relatively painless. Yet generous tax credits for privately built infrastructure— as proposed by Wilbur Ross, Mr. Trump’s nominee for secretary of commerce—leave real poten- tial for abuse: when the users don’t need to cover costs, it is far easier to waste billions on unwise projects. Better to make tax credits dependent on project performance, as measured by property-value increases. Unfortunately, privatization is unlikely to be the right recipe for America’s most important infrastructure investments: maintaining its existing stock. A better approach would have the federal government monitor infrastructure quality and tie federal support to maintenance.

1 | THE EASY: AIRPORTS AND NEW TECHNOLOGIES 2 | THE HARD: GETTING SUBSIDIES RIGHT 3 | THE IMPOSSIBLE: PRIVATE MAINTENANCE OF EXISTING INFRASTRUCTURE

1 For further discussion, see Edward L. Glaeser, “If You Build It… Myths and Realities About America’s Infrastructure Spending,” City Journal, Summer 2016.

INFRASTRUCTURE Private Infrastructure Provision—The Easy, The Hard, The Impossible 6 1 THE EASY: AIRPORTS AND NEW TECHNOLOGIES The world has plenty of well-run pri- Indeed, metropolitan New York is a Taking advantage of new transporta- vately owned and operated airports, natural place to start with airport pri- tion technologies often requires new such as London’s Heathrow. Yet New vatization: the current service level is infrastructure. The full advantage of York City groans with the service pro- low, and the region’s three major air- steam engines wasn’t reached until vided by La Guardia Airport and JFK, ports make the market naturally com- we had built thousands of miles of which are part of the publicly owned petitive. This competition should act rail lines. Cars needed the highway and operated Port Authority. Presi- to keep service level high and prices system. dent-elect Trump should follow Prime low. (Where only one airport serves a Mr. Trump should convene a high-level Minister Thatcher’s lead and push to region, there is a better case for some Transportation Technology Council privatize airports that function poorly. regulation of landing fees.) Airports to discuss how the federal govern- Airports are easy targets: they don’t still need regulation. We want the TSA ment can—ideally, without subsi- need subsidies, and there are many to continue screening—although it dies—enable the proliferation of new global models for airport privat- would be best if passengers fully pay transport options. Do we need help ization. Air passengers generally for its costs. Ordinary taxpayers in coordinating electronic charging sta- have above-average incomes and Nebraska should not pay for the secu- tions? Do we need new rules about can readily pay landing fees suf- rity costs of highfliers in New York. vertical takeoff and landing planes in ficient to cover the costs of the In addition to privatizing airports, cities? Do we need separate lanes on airport. JFK could certainly sur- there may be other easy wins for highways for autonomous vehicles? vive as a stand-alone business. the new administration that leverage The president-elect should embrace America’s edge in new technology. the possibilities and start a planning process for the future. 2 THE HARD: GETTING SUBSIDIES RIGHT Mr. Trump has expressed admiration able for private businesses, those mortgage-backed securities market for Peter Navarro and Wilbur Ross’s businesses have strong incentives to before the Great Recession. plan to subsidize privately delivered invest in gaming the political process. The downsides of the Navarro and infrastructure. The Navarro and Ross While the Navarro and Ross plan Ross scheme could be reduced by plan imagines that private infrastruc- avoids technical jargon, their basic making tax credits contingent upon ture investment would be supported economic argument is not specious. performance. If the justification for by public tax credits, like the Low New infrastructure can create “exter- these subsidies is that infrastructure Income Housing Tax Credit, which nalities”—benefits that are not reaped projects will generate property-tax subsidizes affordable housing. by the investors themselves. Conse- increases, the credits should be con- Private Activity Bonds provide an quently, the socially desirable amount tingent upon increases in property alternative model, one that subsi- of infrastructure is greater than the values. dizes transportation construction by amount of infrastructure that private For every new project, define a catch- allowing private companies to issue investors will produce on their own. ment area that will potentially bene- tax-exempt securities. These bonds Navarro and Ross focus on the bene- fit from the new infrastructure; then are allocated by the Department of fits that infrastructure creates through define a comparable control region Transportation to projects like I-495 added property- and income-tax rev- that is not likely to benefit from the Capital Beltway High Occupancy Toll enues. project. The increase in property-tax lanes. Still, countless wasteful public invest- revenues for the catchment relative to Yet public subsidies for private invest- ments were based on the alleged the control area provides the natural ment create new perils for waste and externalities from new building. measure of the size of the external abuse. The Navarro and Ross plan Detroit’s infamous People Mover benefit from the project. assumes that the “government will Monorail, for instance, was supposed If the tax credit is proportionate to provide a tax credit equal to 82 per- to work magic in the city. It didn’t. the increase in property-tax revenues cent of the equity amount” of invest- Equity investors are sure to love a and is doled out over time, the poten- ment in new infrastructure. They system where the government pays tial for abuse is significantly reduced. correctlysay that this still “leaves 82% of their costs while investors get Savvy investors will invest only in proj- the investor with skin in the game”— the upside. This is the kind of heads- ects that though not a lot. Moreover, whenever I-win, tails-the-government-loses sce- there are generous subsidies avail- are likely to lead to large increases in nario that made such mischief in the local property values, and those are

INFRASTRUCTURE Private Infrastructure Provision—The Easy, The Hard, The Impossible 7 the new projects that make the most support local projects by helping The federal government could help sense. A further check on tax-credit states and localities to evaluate reg- by providing cost-benefit analysis for abuse is to share the cost among ulations, including land-use laws that state and local regulators—and tie tax states, localities, and the federal gov- can prevent new infrastructure from credits to the use of federal cost-ben- ernment. Most of the benefits of new being built. efit analyses. If the states want the infrastructure projects lie within a The Federal Office of Information and money, they need to submit to an single state. Federal support should Regulatory Affairs provides cost-ben- analysis that will ensure that local be a fraction of the total tax credit efit analysis for executive-branch reg- regulations aren’t increasing costs and should flow only when states are ulations; but states and localities are excessively. also willing to pony up cash. too small to have their own cost-ben- The federal government can further efit analysis shops. 3 THE IMPOSSIBLE: PRIVATE MAINTENANCE OF EXISTING INFRASTRUCTURE For decades, transportation econ- government, private providers may Or it can withhold tax credits and omists have emphasized that the skimp on safety, especially when the require federal highway funds to be highest returns come from investing benefits from spending on mainte- used only for maintenance. Or if cur- in existing infrastructure. In some nance are not always immediately rent tolls are too low to pay for main- cases, this means repairing potholes obvious to drivers. Still, the federal tenance, it can insist on higher user and ensuring the structural integrity government can help with the repair fees. of a bridge. In other cases, this means of existing infrastructure. It can regu- When existing infrastructure quality imposing smarter tolls that vary by larly monitor road quality and bridge rises above a threshold, some new time of day to ensure more efficient safety. Improvements in technology infrastructure support is feasible; but usage. have made this easier than ever. It is still, the lion’s share of state spending In theory, privatizing some roads, possible to use drones to photograph needs to go for maintenance to be bridges, and tunnels will solve these roads, and computer vision can now eligible for federal support. The key problems. A private provider will have spot potholes from pictures. Bridge is that the federal government trans- incentives to ensure that the road and tunnel safety are a little harder to forms itself from an uncritical funder doesn’t become unusable. A private assess, but doable. of new projects to a watchdog that toll company will be happy to impose In addition to carrots, there are sticks. insists that states maintain their exist- time-varying tolls to make a road For example, if a state’s infrastructure ing infrastructure stock. more attractive and profitable. is in poor shape, the federal govern- Yet throughout much of America, ment can refuse to support building privatization is politically unlikely new infrastructure until the existing and tolling is deeply unpopular. Like infrastructure is brought up to snuff.

INFRASTRUCTURE Private Infrastructure Provision—The Easy, The Hard, The Impossible 8 INFRASTRUCTURE ORIGINALLY PUBLISHED IN CITY JOURNAL

IF YOU BUILD IT... MYTHS AND REALITIES ABOUT AMERICA’S INFRASTRUCTURE SPENDING

Among Bernie Sanders’s many proposals during his presidential run was a plan for Washington to spend $1 trillion on public infrastructure. Progressives love such proposals. Just tax the rich enough, they say, and we can build superfast trains, new roads, revamped airports, and other things that (purportedly) will bring widespread prosperity and greater equality from California to Montana to Maine. President Barack Obama has done his EDWARD L. GLAESER best to further this vision. He began his first term pumping $48.1 billion into infrastructure spending, via the 2009 American Recovery and Reinvestment Act (otherwise known as the stimulus package), and is ending his second term with a proposal to spend $73 billion more on infrastructure.

The progressive romance with infrastructure spending is based on three beliefs. First is that it supercharges economic growth. As President Obama put it in his 2015 State of the Union address: “Twenty-first century businesses need twenty-first century infrastructure.” Further, by putting people to work building needed things, infrastructure spending is an ideal government tool for fighting unemployment during recessions. Infrastructure should also be a national responsibility, progressives believe, led by Washington and financed by federal tax revenues. None of this is right. While infrastructure investment is often needed when cities or regions are already expanding, too often it goes to declining areas that don’t require it and winds up having little long-term economic benefit. As for fighting recessions, which require rapid response, it’s dauntingly hard in today’s regulatory environment to get infrastructure projects under way quickly and wisely. Centralized federal tax funding of these projects makes ineffi- ciencies and waste even likelier, as Washington, driven by political calculations, gives the green light to bridges to nowhere, ill-considered high-speed rail projects, and other boondoggles. America needs an infrastructure renaissance, but we won’t get it by the federal government simply writing big checks. A far better model would be for infrastructure to be managed by independent but focused local public and private entities and funded primarily by user fees, not federal tax dollars.

INFRASTRUCTURE If You Build It... Myths and Realities About America’s Infrastructure Spending 9 uilding infrastructure is no surefire factory can boost productivity, laying lation for a (fictional) high-speed rail way to stimulate economic growth, down a new highway or opening a link between Houston and Dallas and Bas Japan’s example shows. After new airport runway can, at least in found that costs outweighed ben- decades of strong economic expan- principle, generate future economic efits by an order of magnitude. The sion, Japan experienced a massive returns. But the relevant question is: returns to high-speed rail tend to be asset bubble in the late 1980s, with How do those future returns compare limited because air travel will still be the Nikkei 225 reaching 38,500 in with the costs? Just because infra- faster and driving a lot cheaper. Out- December 1989. The next year, the structure is a form of capital doesn’t side the East Coast, meantime, train bubble burst and the index began mean that spending a lot on it is travelers would typically still have to falling precipitously, dipping below always smart. When a firm estimates rent a car once they arrived at their 15,000 by August 1992 and never the rate of return for a new factory, it destination. President Obama’s grand recovering—indeed, by 2001, it had can calculate the expected net profits vision of “walking only a few steps to dropped below 10,000. Even today, and compare those with the expense. public transportation, and ending up the index is only slightly above 17,000. The analog for, say, new or improved just blocks from your destination” is Japan’s dismal stock-market perfor- roads is to estimate the benefits to at odds with reality in car-centered mance has been matched by little or users from reduced travel times, America. Has the president never no economic growth. Per-capita GDP, add the likely modest spillover ben- been to Houston? in constant U.S. dollars, was no higher efits to nonusers, and then subtract The existence of plausible transporta- in 2009 than in 1991, according to the spending needed to construct tion alternatives and the law of dimin- OECD data. The Japanese economy and maintain the infrastructure. The ishing returns have also tended to picked up slightly this year, but it’s results can differ significantly across reduce the benefits of infrastructure fair to say that Japan has lost a quar- projects. A well-known 1988 Congres- investment over the past two centu- ter-century of growth. sional Budget Office survey found ries. The opening of the Erie Canal in To help fight this economic sluggish- that spending to maintain current 1821 brought enormous value because ness, Japan has invested enormously highways in good shape produces the inland transportation options at in infrastructure, building scores of returns of 30 percent to 40 percent— the time were dismal. In the early bridges, tunnels, highways, and trains, but that new highway construction nineteenth century, it cost as much as well as new airports—some barely in rural areas showed a much lower to ship goods 30 miles over land as used. The New York Times reported return. A clever study that used firm to send them across the entire Atlan- that, between 1991 and late 2008, inventories estimated that the rate of tic Ocean. Yet the very existence of the country spent $6.3 trillion on return to new highways was sizable canals, as much of a breakthrough as “construction-related public invest- during the 1970s but sank below 5 they represented, reduced the bene- ment”—a staggering sum. This vast percent during the 1980s and 1990s. fits of the later rail system, as Nobel outlay has undoubtedly produced economist Robert Fogel has shown. Returns can vary substantially for engineering marvels: in 1998, for The returns for new transportation other forms of infrastructure, too. instance, Japan completed the Akashi infrastructure in places with terrible One study found that adding a new roads, such as much of Africa and Kaiky¯o Bridge, the longest suspen- runway to New York’s hectic LaGuar- sion bridge in the world; just this year, India, will be much higher than in the dia Airport would generate consid- United States, which already enjoys the country began providing bul- erable value, but adding one to San let-train service between Tokyo and an impressive, if under-maintained, Antonio’s less frantic international array of mobility options. the northern island of Hokkaido. The airport would bring little benefit. World Competitiveness Report ranks Busy airports are likely to be worth What about the economic value Japan’s infrastructure as seventh-best improving; others, less busy, may of the shorter commuting times in the world and its train infrastructure not be. California’s huge investment that new infrastructure can bring? as the best. But while these trillions in in high-speed rail was justified by a Between 2009 and 2014, the Texas spending may have kept some people 2014 cost-benefit analysis that Par- Transportation Institute estimates working, no one can look at the Japa- sons Brinckerhoff, the firm building that the annual cost to Americans nese numbers and conclude that the the rail system, had prepared. The from traffic rose from $147 billion to money has ramped up the growth report predicted that total benefits $160 billion and that hours wasted in rate. Moreover, the largesse is part of from the project would range from traffic increased from 6.3 billion hours the reason that the nation now labors $66 billion to $80 billion over several to 6.9 billion hours, despite the surge under a crushing public debt, worth decades. That number looked reason- in federal transportation funding. The 230 percent of GDP. Japan is less, not able when the projected price tag for time wasted has been particularly more, dynamic after its infrastructure the project was $35 billion, but the egregious in America’s more success- bonanza. budget has already swollen to $68 bil- ful metropolitan areas, like San Jose, lion—and is still expanding. In 2009, I where delays per auto commuter Infrastructure spending is a form of calculated a rough cost-benefit calcu- jumped from 56 hours in 2009 to investment: just as building a new

INFRASTRUCTURE If You Build It... Myths and Realities About America’s Infrastructure Spending 10 67 hours in 2014. Yet it’s hard to see the onset of the recession. The proj- program of waterway, harbor, flood how substantially reducing time lost ects may have raised employment in control, public building, highway, and to traffic congestion will turbocharge the counties of the contractors—the airway improvement in all our history.” the economy. Imagine that America statistical results are ambiguous—but Hoover favored “still further tempo- gets its act together and cuts traffic he found no impact on the counties rary expansion of these activities time sufficiently to save $80 billion—a where the projects were built. The in aid to unemployment during this pretty miraculous improvement. That extra infrastructure, in other words, winter.” The distinguished Columbia would still represent less than one-half does not seem to have improved eco- economist John Maurice Clark praised of 1 percent of America’s $18 trillion nomic vitality anywhere that it might Hoover’s public-works promotion as a GDP. have been expected to. “great experiment in industrial states- This isn’t to say that new transporta- manship of a promising and novel sort.” iven such numbers, infrastruc- tion infrastructure isn’t valuable—I’d ture advocates have downplayed be thrilled to save an hour a week in Franklin Delano Roosevelt followed Gstandard cost-benefit analysis in commuting time. But that extra hour Hoover’s lead on a much grander favor of broad macroeconomic sur- is unlikely to turn me into a vastly scale. The Civil Works Administration, veys, which look at the statistical link more creative and innovative person. the Public Works Administration, and between public-infrastructure invest- Transportation infrastructure isn’t the Works Progress Administration ment and overall economic activity. a solution for America’s lackluster hired huge numbers of the unem- This method allegedly enables one growth rates. ployed and built infrastructure proj- to capture all the spillover economic ects across the country. Roosevelt’s friendship with New York City mayor effects of infrastructure. Standard or is transportation infrastruc- Fiorello LaGuardia helped ensure cost-benefit analysis, these advo- ture a useful tool to fight job- that Gotham’s infrastructure got a cates say, misses the new businesses lessness during temporary eco- N particularly impressive upgrade. The and jobs and ideas that will blossom nomic downturns. The idea of using Lincoln Tunnel, LaGuardia Airport, because of the cheaper costs of trans- infrastructure building as a weapon and the Triborough Bridge—all were portation, as people move about and against unemployment first entered Public Works Administration proj- interact more freely. American politics after the economic ects. The nation’s generally positive panic of 1893. Before that recession Yet this macroeconomic approach view of these ambitious undertakings hit, in 1891, businessman and Ohio pol- can produce imprecise—and even helps sustain the view that Coxey was itician Jacob Coxey drafted his “Good wildly misleading—results. For exam- right: building infrastructure can put Roads Bill.” Coxey wanted the govern- ple, if infrastructure gets built in antic- people to work and reduce the pain ment to spend at least $20 million per ipation of an expanding economy, the of a downturn. statistics will suggest that the new month building roads across America, construction caused the expansion. paying workers “at least 80 percent Yet one should be wary of drawing A classic 1989 study by economist above the going hourly rate.” This infrastructure-related lessons from David Aschauer showed that post- building campaign, he argued, would the 1930s for the twenty-first cen- war national growth rates improved be financed by the printing press— tury. First, most of the U.S. had real after increases in public-sector cap- Coxey was a pro-inflation Greenback infrastructure needs in the 1930s, so ital-stock spending, but that hardly Party member—and would hike gov- the risk that all those formerly unem- proves that infrastructure caused the ernment spending by 75 percent. ployed people would be put to work growth. In 1990, Alicia Munell con- Coxey is best remembered for the on highly wasteful projects was rel- ducted a similar study for the Federal unorthodox manner in which he made atively low. These days, the condi- Reserve Bank of Boston focusing on his case in 1894: marching to state-level data. While these early Washington with hundreds of studies showed high returns to infra- supporters. “Coxey’s Army” structure, later work has found the failed to persuade Congress results quite fragile. High estimated to support the Good Roads returns often vanish when research- Bill, but its central idea ers control for common state trends remained in the air. or other economic variables. That idea received a major I recently advised a Ph.D. student, boost during the Great Andrew Garin, studying the impact Depression. President of the American Recovery and Rein- Hoover’s 1930 State of the vestment Act’s highway spending Union address announced on county-level employment. Garin’s that, to fight the economic estimates show that highway proj- collapse and provide jobs, ects had essentially zero effect on the federal government was local employment, four years after “engaged upon the greatest

INFRASTRUCTURE If You Build It... Myths and Realities About America’s Infrastructure Spending 11 tions are sharply different. While a more likely to fight temporary jobless- workers buy new clothes and cars— sensible anti-unemployment policy ness. Robert Moses built the Tribor- but they may also be too low, since targets resources at areas that have ough Bridge complex, the construc- many of these workers, as we’ve seen, high unemployment rates, many of tion of which got under way on Black would have been employed anyway. those areas are today in long-term Friday in October 1929, in just four The Council of Economic Advisers decline, and the last thing they need is years. Such speed is hard to imagine uses a number, based on prerecession new roads and bridges. For example, today. Boston’s Big Dig, to take one studies, of $92,000 per job-year for all Detroit’s infrastructure was built for famous example, took 25 years from government spending. 1.85 million people; now, after decades initial planning to its final completion To my eyes, even $92,000 per job- of difficulty, the city has less than half in 2007. (See “Lessons of Boston’s year seems too expensive. (The that population. New construction Big Dig,” Autumn 2007.) Why have average worker in the U.S., it’s worth there makes no sense and would just transportation projects become so noting, earns only about $40,000 squander money. much slower? Yes, they’re usually annually.) Putting to work 10 mil- As it turns out, Recovery Act highway more technologically complicated, lion unemployed Americans in 2009 spending seems to have gone to low but much of the time, politics is also would have required $1 trillion in gov- unemployment areas, as the chart on to blame. As Alan Altshuler and David ernment spending per year. Cutting page 29 shows, which means that the Luberoff chronicle in their masterful the payroll tax for poorer workers funding was less likely to reduce job- book Mega-Projects, earlier urban-in- seems like a more efficient way to get lessness and more likely just to shift frastructure initiatives proceeded firms to hire more people. workers away from other jobs. That’s without worrying much about com- doubtless what has happened with munity opposition. To erect the Tri- he third prominent infrastruc- the last of Massachusetts’s reces- borough, Moses could just demolish ture illusion is that transporta- sion-birthed mega-bridge projects, the buildings that he needed to get tion should be a centralized, tax- the ongoing Braga Bridge construc- out of the way—neighborhood com- T funded federal responsibility, rather tion in Fall River. That town is unques- plaints be damned. Such tactics are than decentralized, user-fee-funded tionably depressed, with a fearsome no longer politically acceptable, so local responsibility. The most pressing double-digit unemployment rate, the Big Dig and other large-scale problem with federal infrastructure but the project’s contractor is based undertakings needed painstakingly spending is that it is hard to keep it in Canton, Massachusetts—where to avoid inconveniencing anybody, from going to the wrong places. We unemployment is a healthily low 4.6 dramatically raising costs and delays. seem to have spent more in the places percent. New Deal projects also didn’t face environmental-impact reviews, which that already had short commutes and The relatively simple technology of can add years to a project timeline. less in the places with the most need. infrastructure construction of the Detroit’s Gordie Howe International Federal transportation spending fol- 1930s meant that the unskilled unem- Bridge’s review process took “four lows highway-apportionment formu- ployed could easily be put to work years of consultations, public hear- las that have long favored places with building roads. Among the iconic ings, traffic analyses, and environmen- lots of land but not so many people. images of the Great Depression tal studies,” to take a recent example. For example, Alaska received $484 are scores of men wielding shovels The project should be finished around million in the 2015 highway-aid appor- and picks. That isn’t how roads and 2020—15 years after that review pro- tionment, which included support for bridges are built anymore, though. cess began. metropolitan planning and air-quality Big infrastructure requires fancy improvement. This works out to about This is not to dispute that transpor- equipment and skilled engineers, $657 for each Alaskan. Massachusetts tation spending eventually creates who aren’t likely to be unemployed. received $586 billion, which amounts jobs. But are they a good bargain? The most at-risk Americans, if they’re to roughly $87 per person. New York The ratio of Recovery Act trans- working at all, usually toil in fast-food State received $1.62 billion, or $82 portation spending “outlayed or restaurants, where the average worker per person. Do these spending pat- expended” ($33 billion) by 2012 to makes $22,000 a year. They’re typi- terns reflect far greater transportation direct job-years created (113,347), as cally not trained to labor on complex needs in Alaska than in New York City reported by contractor, is $295,000. civil-construction projects. Subsidiz- or Boston? No: the average commute Transportation spending also creates ing Big Mac consumption would be time in Anchorage is 23 minutes, less jobs indirectly, through the materials a more effective way to provide jobs than the national average, while the and machines used by the construc- for the temporarily unemployed than averages in Boston and New York are tion contractors; if we take those subsidizing airport renovation. 30 minutes and 36 minutes, respec- positions into account, the ratio falls tively. The building process was also much to $114,000 per job-year created. quicker in the past, meaning that proj- These estimates may still be too high Alaska’s federal highway-aid haul is ects proposed during the Depression because each direct dollar of govern- all too typical, unfortunately. Recov- could be started and even finished ment spending leads to more con- ery Act transportation aid was twice during the Depression, making them sumer spending, as transportation as generous, on a per-capita basis,

INFRASTRUCTURE If You Build It... Myths and Realities About America’s Infrastructure Spending 12 to the ten least dense states than it of which greatly exceed its poten- port network, as it did when building was to the ten densest states, even tial benefits, seems unlikely to have the Eisenhower Interstate Highway though higher-density areas need moved ahead without the $900 System. The federal government more expensive infrastructure (ret- million in federal assistance that it should maintain safety and mainte- rofitting New York with tunnels and received in 2009. nance standards, on the road and in bridges, for example, is far costlier the air, and can nudge localities to than building in the greenfields of the maintain their infrastructure. Finally, it unding infrastructure with general West). Low-density areas are remark- can encourage transportation, espe- tax revenues removes the discipline ably well-endowed with senators per cially buses, that helps the poor find that comes when projects need to capita, of course, and they unsurpris- F jobs. But none of this requires a mas- pay for themselves. If every new road ingly get a disproportionate share of sive national spending spree. or rail project had to fund itself, the spending from any nationwide pro- projects that deliver the greatest ben- gram. Redirecting tax dollars across efits would be the ones that move any tasks of government have jurisdictions is rarely fair—and it isn’t ahead. If people are willing to pay nothing in common with pri- right, either, that poorer, lower-den- to use infrastructure, we can assume vate enterprise. Neither our sity regions should subsidize New M that that infrastructure provides social military nor our courts should be in York’s subway and airports. value. the business of extracting revenues Washington’s involvement also dis- A user-fee approach is also fairer. from, respectively, foreign powers or torts infrastructure planning by favor- With general tax financing, every litigants. Aid to the poor and to the ing pet projects. The Recovery Act American must pay for new highways elderly is meant to be money-losing. set aside $8 billion for high-speed in Montana, regardless of whether But infrastructure is different and has rail, for instance, despite the fact that they drive or have ever been to Mon- much more in common with ordinary such projects would never be appro- tana. It’s much fairer for the people businesses. After all, infrastructure priate for most of moderate-density who use roads to pay for roads. provides valuable services, the use America. California was lured down of which by one individual typically the high-speed hole with Washington User-fee financing is even more crowds out the use by someone else. support, but many voters now seem attractive because it helps reduce E-ZPass technology has made it to regret that they took the bait. In a congestion. Building more highways simple to charge for transportation. 2015 poll, 53 percent of respondents will never decongest America, for Why not, then, establish a business said that they would vote for “a ballot counterintuitive behavioral reasons. model for transportation infrastruc- measure ending the High Speed Rail Economists Gilles Duranton and Mat- ture? project and spending that money on thew Turner have empirically identi- The upsides would be substantial. water storage projects.” Only 31 per- fied the Fundamental Law of Road When businesses running, say, a cent said that they would vote against Congestion, which is that highway public road need to recoup their costs that measure. miles traveled increase roughly one- for-one with highway miles built. If over years and decades, they have Idiosyncratic, foolish projects existed we build it, people will drive it. The a strong incentive to maintain the long before the Obama administra- correct fix for crowded roads is to infrastructure properly. A transporta- tion. Detroit’s infamous People Mover charge people for the social costs of tion business model also avoids the Monorail would never have been built their choices. Singapore instituted messy redistribution of the current without federal aid. Alaska’s $400 mil- congestion pricing in 1975, and now system, where some states subsidize lion Gravina Island bridge to nowhere operates state-of-the-art electronic others and non-travelers subsidize was a particularly notorious example road pricing, with tolls that vary by the mobile. In some cases, the busi- of how Congress abuses transporta- usage and time of day. London has ness model for transportation might tion investment. As the Office of Man- now had congestion pricing for a be completely private. The Route 91 agement and Budget noted, during decade. Both cities have eased traf- Express Lanes are private roads built the Bush years, highway funding was fic as a result. Yet America still acts within the median of California’s Riv- “not based on need or performance as if charging drivers is a crime. For erside Freeway. For 20 years, they and has been heavily earmarked.” decades, federal rules prevented the have charged varying tolls based on The Recovery Act largely left deci- levying of tolls on interstate highways. time of day, and drivers have proved sions about individual projects to The Obama administration deserves willing to pay. The Orchard Pond Park- the states, but it required them to credit for supporting the possibility of way in Florida is another private road. move quickly. In some cases, this led tolling the system. Private airports operate in America to simple maintenance projects, like and across the globe, and, in many The federal role in transportation repaving, which usually make sense. cases, such private infrastructure has should be limited to certain key tasks. But when it came to larger-scale performed extremely well. Clifford Washington can certainly help coor- investments, the push for speed ran Winston, a distinguished transporta- dinate local investments to improve the risk of poor planning. The Dulles tion economist, has argued for the the functioning of a national trans- Corridor Metrorail Project, the costs privatization of all of America’s high-

INFRASTRUCTURE If You Build It... Myths and Realities About America’s Infrastructure Spending 13 ways. That would be a difficult task, first-class credit rating for decades, produces good results. Large-scale however. While drivers usually accept despite the turbulence of New York federal involvement in transportation tolls for new roads, they hate tolls politics. Many of America’s airports means that the people who benefit slapped on to previously free roads. are well run, despite public ownership. aren’t the people who pay the costs. Consequently, it’s easier politically to But taking this path requires intensely The result is too many white-elephant fund new projects with user fees than focused management. Few mayors or projects and too little innovation and to impose them on older infrastruc- governors can run an airport on top of maintenance. ture. Any new project thus should their day jobs. New York’s notoriously No one denies that the United States come with a user charge, right from corrupt and inefficient Port Author- suffers gaping infrastructure deficien- the start. ity provides a telling example of what cies, including potholed roads, unsafe Private ownership isn’t the only sensi- can go wrong with this model. (See bridges, and awful airports. But we ble model for transportation. Private “Let’s Break Up the Port Authority.”) also have a dreary history of federally control raises the specter of monop- A shift to an expanded role for the pri- supported infrastructure boondog- olistic pricing that harms consumers, vate sector in infrastructure construc- gles. America spends too much time though this can be addressed with tion and maintenance thus seems like arguing about whether to spend more reasonable regulation. Or, if transpor- a good bet. And America is not short money or less on infrastructure— tation still needs government fund- on private-sector transportation inno- including as a jobs program—and far ing—perhaps because we want a vators. Our cars are more technolog- too little time on how to construct subway system to reduce congestion ically impressive than ever. American and maintain infrastructure wisely. on unpriced streets or because we freight rail is a wonder of the world. Treating transportation infrastructure want buses to provide cheap mobility Cheap bus services ride up and down as yet another public-works program for the poor—private operators might I-95. Uber and Zipcar have upgraded ensures the mediocrity that we see all pressure the government to increase urban mobility for the Internet age. around us. A wise approach means, their subsidies excessively. Americans The parts of the transportation contrary to Bernie Sanders, a much may feel more comfortable if many system competitively produced by diminished federal role and a lot more projects remain in public hands. the private sector are in great shape; transportation initiatives that look like When we can’t go private, another the parts folded within the public private industry, with users paying for plausible option is an independent, sector are often, though not always, the services they receive. but public, entity. In some cases, an embarrassment. independent public entities have worked well, putting the focus on conomics teaches two basic truths: service rather than on politics. Robert people make wise choices when Moses’s Triborough Bridge Authority Ethey are forced to weigh bene- maintained both its bridges and its fits against costs; and competition

INFRASTRUCTURE If You Build It... Myths and Realities About America’s Infrastructure Spending 14 INFRASTRUCTURE ORIGINALLY PUBLISHED IN THE NEW YORK POST

8 WAYS PRESIDENT TRUMP CAN REBUILD AMERICA— AT HALF THE COST

In his inaugural speech Friday, President Trump promised “a great national effort to rebuild our country.” To that end, he has already floated a plan to spend $550 billion over four years on infrastructure. And when it comes to spending on roads, transit and airports, nobody in Congress is in favor of small government. That was obvious during the confirmation hearing this month for Trump’s nominee for transportation secretary, Elaine Chao. NICOLE GELINAS A parade of senators asked for everything from new highways through “treacherous terrain” in the Southwest to commuter rail in New Hampshire. “How are we going to pay for all these great ideas?” Chao asked rhetorically, as senator after senator asked her to support each state’s pet project. (And no one was curious about cutting costs.) But we can get a lot of good infrastructure for less than $550 billion. Even spending half that would give us a great start. And how to pay is easy: Washington borrows money for solid long-term investments, just like everyone does. The harder part is to make sure they are good investments. Here are eight good ideas for America’s infrastructure:

1 | BUILD A RAIL TUNNEL UNDE THE HUDSON RIVER BETWEEN NEW YORK AND NEW JERSEY 2 | HAVE A COMPETITION, TOO, FOR BETTER COMMUTER RAIL 3 | FINISH THE SECOND AVENUE SUBWAY 4 | LAUNCH A COMPETITION FOR TRAIN-TO-THE-PLANE PROJECTS 5 | BUILD AN INTERSTATE HIGHWAY BETWEEN LAS VEGAS AND PHOENIX 6 | FIX THE NATION’S SUBWAY SYSTEMS AND COMMUTER RAILS 7 | THE WALL 8 | HELP STATES, CITIES AND TOWNS DO BASIC MAINTENANCE AND MANAGEMENT

INFRASTRUCTURE 8 Ways President Trump Can Rebuild America—at Half the Cost 15 1 BUILD A RAIL TUNNEL UNDER THE HUDSON RIVER BETWEEN NEW YORK AND NEW JERSEY lation of South Dakota every day... If Crucially, too, the tunnel is a proj- these tunnels would go down, they ect that nobody objects to. For that would cost about $100 million in lost reason, it’s a better prospect than productivity every single day.” New York and New Jersey’s other Already, commuters are suffering mega-project: a new bus terminal more unpredictability — and lost pro- for the commuters who take buses ductivity at work and at home — as instead of trains. Yes, the Port Author- Amtrak scrambles to keep up with the ity Bus Terminal is falling apart, too, deterioration to tracks, signals and with its upper floors unable to bear electrical wires. the weight of today’s bigger buses. The existing tunnel is 107 years old. But the reality is New York and New It’s falling apart faster now because of A new tunnel would make life better for Jersey residents and their New Jersey politicians have no clue how damage from Hurricane Sandy nearly and where to build a new bus terminal five years ago. But Amtrak can’t shut York employers and colleagues. But it’s an even bigger interstate project without hurting the people who live it down without disrupting rides for and work in Hell’s Kitchen and without 200,000 people daily, most of them than that. More capacity would mean that Amtrak could offer more service disrupting existing commutes. The New Jersey Transit commuters from two states still need years to show New Jersey to New York. from Washington through New York to Boston, part of a plan eventually they can take these problems seri- As New Jersey Sen. Cory Booker said to cut travel times among the three ously, not money now. at Chao’s hearing, “more people use cities. Cost: $20 billion for the tunnel those tunnels than the entire popu- 2 HAVE A COMPETITION, TOO, FOR BETTER COMMUTER RAIL From Silicon Valley to Massachusetts, the train to work. As rookie New More commuter rail would take some Hampshire Sen. Maggie Hassan said pressure off high-cost cities, too, as at Chao’s hearing, even her once-rural people would have more housing state could use commuter-rail invest- options outside of the metropolises. ments into Boston as the immediate Cost: $50 billion suburbs become more crowded and expensive. Let’s have a national contest for new commuter-rail line cash for regions willing to build denser housing — condos, apartments and single houses highways are getting more crowded closer together — around those lines. at rush hour, yet almost nobody takes 3 FINISH THE SECOND AVENUE SUBWAY New York is finally enjoying the first three stops of the subway, with en’t started work, or found most of the first of what will eventually be the money, for the next three stops. 200,000 new riders experiencing a Cost: $8 billion faster commute and more time with colleagues or with family (depend- ing on whom you like better). But the subway is supposed to go up through Harlem and, in the other direction, downtown. The state and city hav-

INFRASTRUCTURE 8 Ways President Trump Can Rebuild America—at Half the Cost 16 4 LAUNCH A COMPETITION FOR TRAIN-TO-THE-PLANE PROJECTS Only in America can you not take a Guardia but hasn’t said how he’ll pay nesspeople and tourists on high-qual- train from urban centers to the plane for them. Boston, too, has a primitive ity trains from city centers to airports — or, at least, do it in under two hours. bus system to get you to your plane, means less traffic on local roads and Gov. Andrew Cuomo wants to build and Chicago has only a subway that highways. train connections to both JFK and La makes local stops. Getting more busi- Cost: $15 billion 5 BUILD AN INTERSTATE HIGHWAY BETWEEN LAS VEGAS AND PHOENIX As new Nevada Sen. Catherine Cortez business and good for public safety, people going from outlying areas Masto, who ran partly on the issue, too, as highway travel is much safer of each city could drive, but people said at the hearing, these cities “are than travel on smaller roads. going from Phoenix’s increasingly two of the largest in the country”— It would be a good idea, too, to study popular downtown to visit Las Vegas just 300 miles apart—“that are not the idea of building rail along the new wouldn’t need a car for the trip, just connected by an interstate.” Fixing interstate, to give people a free-mar- like from New York to Boston. this would be good for tourism and ket choice of how to travel. That way, Cost: $10 billion, more with rail 6 FIX THE NATION’S SUBWAY SYSTEMS AND COMMUTER RAILS It’s a good thing it doesn’t snow any- York’s packed trains, is a disaster of including in New York, could still ben- delays and breakdowns. San Fran- efit from converting rails to electric — cisco passengers, too, are suffering a rather proven technology by now — the effects of years’ worth of delayed from diesel. maintenance. Money, though, should come only To ride the DC Metro is to take your with much better accountability for life in your hands; nine commuters and exactly how it is spent and on the nine workers have died in little more results. The feds should compare who than a decade. New York is in better does this work most efficiently and shape but could use more money for reward them over a period of time normal repair and replacement and with more. more, because Boston’s subways for modern signal technology to run Cost: $50 billion barely work in a blizzard. Even on a more trains closer together, as well. good day, the Red Line, which was Commuter rails around the country, once a dream compared to New 7 THE WALL Relax, please, if you hate the Wall. border security is core national infra- efforts and more than $100 billion structure. worth of spending to make it harder. There is a reason why the US govern- In fact, we already have big chunks of ment makes you put your passport in a wall on the Mexican border (really the little slot at JFK when you come — I saw it!). home from skiing, before they let But with nearly 200,000 people still you pass through what is, well, the making the trek each year, we still immigration hall’s physical wall: It is face both a security risk and a human- generally thought to be a good idea itarian risk. to have some dim notion of who is For all of Trump’s bluster, his proposal coming and going. And (if you don’t like Trump) stop fall- is to keep doing what we’ve been ing into the trap that helped Trump Border crossings from Mexico and doing and do it better: using physi- win. Many Trump voters were sophis- points south are down from a decade cal barriers as well as technology to ticated enough to understand that ago, in part because of bipartisan make it even harder (Trump’s voters

INFRASTRUCTURE 8 Ways President Trump Can Rebuild America—at Half the Cost 17 were also smart enough to realize that to exploit and endanger, and employ- US government can tax the money a wall can be partly metaphysical). A ers use their presence to push wages that workers here send back home to securer border is good for workers, down for other low-wage workers. Mexico. This idea may be good or bad, too: People who have no right to but it is not, and never was, absurd, Cost: At least $20 billion. (And yes, work in this country are the easiest Mexico can pay for at least part. The as Trump’s opponents often claimed.) 8 HELP STATES, CITIES AND TOWNS DO BASIC MAINTENANCE AND MANAGEMENT As we know from Flint, Mich., some you’ll lose even more residents. The in the cracks in the roads. Some of states and cities don’t even have the feds should offer grants and zero-in- these boring but vital projects are financial resources or competence terest loans for particularly distressed expensive, too: New York will need to guarantee the basic right of safe areas, coupled with outside manage- close to $2 billion to keep the Brook- water. Closer to home, Syracuse, too, ment expertise to help them relearn lyn-Queens Expressway from falling has long requested money for water the basics. down. investment. For middle-class and wealthier areas, Cost: $50 billion Poorer areas are in a vicious circle: the feds could offer smaller grants If you can’t deliver water, keep the and slightly higher interest-rate streetlights on and fill in potholes, loans to do the basic work of filling

INFRASTRUCTURE 8 Ways President Trump Can Rebuild America—at Half the Cost 18 INFRASTUCTURE ORIGINALLY PUBLISHED IN THE NEW YORK POST

TRUMP NEEDS TO THINK BIG AND BUILD RIGHT TO REFORM OUR INFRASTRUCTURE

Donald J. Trump became president-elect in part because people are fed up with government incompetence. One place where that’s obvious is infrastructure. Comparing us to China during the campaign, Trump said: “they have railroads and trains that go 250 miles an hour. We have the Long Island Rail Road that chugs out to Long Island and chug, chug chug.”

Now Trump wants to spend a trillion dollars to fix the problem. That’s 40 percent higher NICOLE GELINAS than our existing spending. It’s easier to spend a trillion dollars poorly on trains, bridges, and water than it is to spend it well. Four tips for Trump on how to succeed in infrastructure beyond ice rinks:

1 | THINK BIG 2 | DON’T WORRY ABOUT BORROWING MONEY 3 | MAKE DEALS 4 | QUALITY IS MORE IMPORTANT THAN SPEED

INFRASTRUCTURE Trump Needs to Think Big and Build Right to Reform Our Infrastructure 19 1 THINK BIG Think Big. Yes, we have to fix our rated. But we should build new things, of each trip? existing infrastructure. We need a too. Why shouldn’t we have real high- replacement tunnel under the Hudson speed rail service between Washing- River because the old one is deterio- ton and Boston, cutting an hour off 2 DON’T WORRY ABOUT BORROWING MONEY Trump says his infrastructure plan will But it’s more important to differenti- themselves through customers’ fees be “deficit-neutral”: he’ll either raise ate between infrastructure projects and tolls. new taxes to cover the spending, or that can pay for themselves, and infra- Subway and commuter-rail projects force projects to pay for themselves. structure projects that can’t. Airports, can’t — but they are still worthy. big bridges, and pipelines can pay for 3 MAKE DEALS Make deals. Most infrastructure Federal, state and local governments don’t waste taxpayer money. spending is at the state and city level. should consider environmental and Trump mentioned the Long Island Rail The feds provide about a quarter of other impacts of projects, but they Road. But one reason the railroad has the money, but don’t have much con- shouldn’t delay for years. been so slow to build a new station trol. Trump should help states and Trump should prioritize projects on Manhattan’s East Side is because cities spend smarter by rewarding where construction workers and man- workers could never agree who would those who plan projects well, finishing agers have agreed to reasonable work do what work, causing delays. on time or on budget. rules and staffing levels, so that they 4 QUALITY IS MORE IMPORTANT THAN SPEED Quality is more important than speed. ing too much too fast is a risk. Push- Trump should focus on what to build, The point of infrastructure projects is ing too hard too fast drives costs up, and how, rather than stick to an artifi- to build better infrastructure — not to as managers scramble to find skilled cial timeline and dollar amount. create jobs or cut ribbons fast. Spend- workers and materials.

INFRASTRUCTURE Trump Needs to Think Big and Build Right to Reform Our Infrastructure 20 INFRASTRUCTURE ORIGINALLY PUBLISHED IN THE THE NEW YORK TIMES

FOR INFRASTRUCTURE, SPEND SENSIBLY TO MAKE A DIFFERENCE, AND AVOID MISTAKES

Pick a few marquee projects to make models for others, and small projects for quick results. Don’t overpay workers but don’t look for profits. President-elect Donald J. Trump said in his victory speech that “we are going to … rebuild our highways, bridges, tunnels, airports, schools, hospitals. We’re going to rebuild our infrastruc-

NICOLE GELINAS ture.” He had already announced a plan to spend $1 trillion over 10 years. But if he’s not careful, he’ll be using it to pay for critical mistakes.

Back in 2009, newly elected President Obama deliberately kept his own stimulus plan to $832 billion, including $50 billion for infrastructure, partly to avoid the backlash from fiscal conser- vatives on breaking the 13-figure mark. Trump is saying he wants to create “thousands of new jobs.” Obama was more cautious at a time when the country was in the midst of hemorrhaging nearly 9 million jobs, unemployment would top 10 percent that fall. Though recovery has been slow, we’ve regained all our lost jobs and then some. Unemployment is now at 4.6 percent. It is a mark of deep change that a Republican presidential candidate could have bragged about such a trillion-dollar spending plan at such a time. But consider: Last December, Obama signed a transportation-infrastructure bill to spend $305 billion over five years, or $61 billion a year. Spread out over 10 years, Trump’s trillion dollars would increase spending by just $39 billion a year. That $39 billion would be spread over 50 states, many of which already have tens of billions of dollars in infrastructure backlogs after a near-decade of infrastructure austerity.

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1 | HOW CAN TRUMP MAKE SURE TAXPAYER MONEY GOES FAR?

INFRASTRUCTURE For Infrastructure, Spend Sensibly to Make a Difference, and Avoid Mistakes 21 Trump’s surrogates have also men- the effect the trillion dollars would same position Obama faced after his tioned spending on commercial have on public infrastructure. own stimulus: voters perceived little projects like shipyards and pipelines. And while helping states catch up change after a supposedly historic Making those kinds of investments with regular road maintenance is a investment. with taxpayer money would reduce good thing, it would put Trump in the 1 HOW CAN TRUMP MAKE SURE TAXPAYER MONEY GOES FAR? Focus on the projects, not jobs. The York’s bridges and tunnels collectively that can sign labor agreements that fact that infrastructure investment throw off hundreds of millions in dol- improve productivity and that can creates jobs is a good thing, but that lars in profit a year, money that goes design management structures to is not the purpose of the investment. to subsidize mass transit. Likewise, deliver projects efficiently should Workers should be paid well, but pipeline, electricity and water proj- be rewarded with bonus funding for paying them too well -- a New York ects can usually pay for themselves. future projects. City construction worker can make Washington should pay for projects Don’t be afraid to think small. Small $79.63 an hour, including benefits -- that can’t pay for themselves, includ- federal grants—in the millions or means building less. ing transit projects in some of the tens of millions of dollars each—can densest areas of the country, and in Pick out a few projects of national help states, cities and towns start or parts of the country whose residents importance and create a commission improve bus service, build sidewalks that, in say, three months, could figure would like to become denser. and bike lanes, and otherwise give out how to cut red tape and speed Help state and local governments— people more choices on how to get their completion. One marquee proj- which get most federal infrastructure around in addition to the automobile. ect could be a new tunnel under the money—spend their money more Such investments are good for poorer Hudson River, as part of higher-speed wisely. Over and over, they have people, who must spend more of their rail service on the northeast corridor. proven that they cannot keep proj- money, as a percentage of income, on States and regions could compete ects on time or on budget: consider transportation. for consideration of these multibil- the Big Dig in Boston, or the seismic Smaller projects have another benefit, lion-dollar projects. retrofitting of the Bay Bridge in San as well: Trump is up for re-election in Francisco. The Trump administra- Don’t focus on profits. Trump men- four years, and people will want to see tioned bridges, tunnels and airports in tion should create a national clear- quick results. his speech – all of which can generally inghouse, with transparent reports pay for themselves. In New York, Gov. from federal auditors, so that states Andrew Cuomo’s LaGuardia airport and cities can learn from each other rebuilding project will be funded, indi- what goes right on projects, and what rectly, by airline passenger fees. New doesn’t. State and local governments

INFRASTRUCTURE For Infrastructure, Spend Sensibly to Make a Difference, and Avoid Mistakes 22 INFRASTRUCTURE ORIGINALLY PUBLISHED IN THE AMERICAN AFFAIRS JOURNAL

REBUILDING AMERICAN INFRASTRUCTURE

When Donald Trump chose “Make America Great Again” as his campaign slogan, he put words to something Americans had increasingly come to see and feel. For many people, their personal lives and communities were no longer as great as they used to be, and they were looking for someone to set things right. Restoring rather than building greatness is an unusual challenge in America. But it is one that has become increasingly real over the last AARON M. RENN two decades, as much of the country has sunk into a malaise that is physically visible in distressed but once-thriving towns.

This need to Make America Great Again applies especially to our infrastructure. We have already built fantastic national networks of highways and bridges, airports, rail lines, inland waterways, electricity, water and sewer, and telecom infrastructure. The challenge today is not to build some vast footprint of new infrastructure in the style of the Transcontinental Railroad. Rather, it is to make the infrastructure we already have, much of which has been unconscionably left to decay, great again. Like the project of restoring prosperity to many of our communities, this is an unusual challenge in our national history—and a politically difficult one, too. Politicians love to cut ribbons on new projects; it is much less exciting to maintain and renovate something built long ago under previous administrations. That political incentive to favor new construction over maintenance is part of how we got into this situation. But this is a task President Trump knows something about. He has already proven that he knows how to obtain glory from rebuilding, not just building, infrastructure. In the 1980s, he pulled off a public relations coup by rescuing the reconstruction of Wollman Rink in Central Park.1 This meant rebuilding an ice rink that already existed, not creating an ice rink in the first place. But Trump still became a hero from it. This ability to make rebuilding buzzworthy means President Trump is the right man to make America’s infrastructure great again, if he focuses the government’s efforts on the right challenges and approaches.

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INFRASTRUCTURE Rebuilding American Infrastructure 23 1 NEW INFRASTRUCTURE IS NOT A PRIORITY Too often the term “infrastructure” is ing them to twenty-first-century The one transportation technology conflated with “transportation,” espe- needs. Much is made of the so-called the United States has not employed cially highways. This is because the smart grid or smart meters, but it is is high-speed rail. But even in Europe federal government is a major finan- difficult to see these as economic this is a niche service. It also is not cier of highway and transit infrastruc- game-changers for America. Their faster than flying in most cases. Proj- ture, and debates over the federal value is also questionable to the ects like Elon Musk’s “hyperloop,” highway bill, the gas tax, etc., gener- average person, as they come with which uses tubes to transport people ate significant debate and publicity. serious privacy concerns and secu- or freight between cities at extremely But America’s infrastructure encap- rity risks. high speeds, are speculative at best. sulates much more than just roads, It is similar with water and sewer lines. One area where new infrastructure even if the federal government is America is already well served either needs have emerged recently is in less directly involved in funding it. by utilities or by high-quality well and telecommunications. The nation’s For example, there is the electricity septic systems. How many people wireline network was deployed infrastructure, which provides nearly today don’t have running water and decades ago, and the internet cre- ubiquitous power to the nation. Most flush toilets in their homes? Again, ated a need for a vast new broad- of this infrastructure is privately these were revolutionary at the time, band network. However, the market- owned by utility companies, and so but those gains can’t be repeated. place has largely taken care of this receives less debate in Washington. The main challenge is to rebuild problem. Most of America, outside A look at our electric infrastructure aging systems and bring them up of some rural areas, already has helps illustrate the nature of today’s to modern standards, though some high-speed access, and there’s an infrastructure needs. The initial elec- areas do need to develop additional enormous high-capacity backbone trification of the country provided water sources. network in place. Private compa- enormous benefits to which it is The same applies to transportation. nies likewise continue to invest in difficult for us to relate. How many When the Erie Canal was completed ever-better wireless data networks. of us can imagine what life without in 1825, it offered revolutionary There appears to be little need for electricity was like? This process of increases in travel speeds. Compared government intervention here, out- electrifying America was largely car- to the horse and wagon, the canal side of subsidizing service to the ried out by private utilities. The fed- cut travel costs between Buffalo and poor or difficult-to-serve regions. eral government helped by extending New York City by 95 percent.2 Other In short, our infrastructure systems electricity to underdeveloped and transport innovations like the railroad, are, by and large, built out. There is hard-to-serve rural areas through the automobile, and the airplane also little need for a major deployment of programs like the Rural Electrifica- radically increased travel speeds and new infrastructure, or new types of tion Administration and the Tennes- reduced transport costs. infrastructure. There do not appear see Valley Authority. Previous generations already built to be any huge economic gains to be There is no way for us to replicate out networks for our major trans- had from new infrastructure on par the gains that came from electrify- port modes, and there are no with those coming from electrifica- ing the nation, since basically every- game-changers in speed improve- tion or building the interstate high- body who wants electricity already ments on the horizon. David Metz, way system. That is not to say that has it. Today’s expansions are limited, former chief scientist of the UK we do not need to build any new mostly to serve new development. Department of Transport, argues, infrastructure, but additions such as The need today is to repair or replace “We have largely run out of possibil- new pipelines will be incremental, not aging transmission lines, substations, ities for travelling faster by means of revolutionary. and power generation plants, updat- new technologies.”3

2 INFRASTRUCTURE INVESTMENT IS NOT AN ECONOMIC DEVELOPMENT TOOL Those who advocate increased infra- ture development because America tively labeled “sprawl” by opponents. structure spending often tout it as an is already largely well served. But in rapidly growing areas like Dal- economic development tool. How- One area where new infrastructure las-Fort Worth or Houston, expanding ever, as just shown, there is little in investment can potentially enable the urban footprint to accommodate the way of cost reduction or other economic growth is by opening new demand is clearly needed. Regions game-changing economic benefit land to development, converting rural like the San Francisco Bay Area that left to be had from new infrastruc- land into urban land. This is pejora- have failed to expand their urban

INFRASTRUCTURE Rebuilding American Infrastructure 24 footprint in response to demand homes—while the region lost popu- tition to become the first market for have seen housing prices soar into lation.4 Subsidizing infrastructure to its new Google Fiber service. Google the stratosphere. The same need for serve this kind of development makes laid a super-high-capacity network expansion to serve rising demand no sense. America does too much of with direct fiber service to homes, a might also apply in the case of new this. service that debuted to much fanfare transport lines, such as the Second Also, as Harvard economist and locally and nationally. But a recent Avenue Subway in New York, whose Manhattan Institute senior fellow Ed Bloomberg review of the project completion is badly needed to relieve Glaeser has pointed out, a signature found that, despite local backers’ overcrowding on other lines. attribute of a shrinking city or region initial claims that this was a “once- But adding new water lines and is excess infrastructure—too many in-a-lifetime opportunity” to “spark expanding roads to keep pace with houses, streets, sewer lines, etc.— economic development,” results were growth is not what most people mean relative to its reduced population poor. Kansas City has not become a by economic development. Instead, and commercial base. Building new major tech hub, and its GDP growth they view infrastructure expansion infrastructure only adds to this pile has trailed the nation since the fiber 5 as a way to stimulate development in of woes. The paradigmatic example system went live. slow-growing or struggling areas. This is the forlorn Detroit People Mover Unsurprisingly, Google has halted the is where the trouble begins. monorail that circles its downtown. rollout of Google Fiber into additional First, it is here that the sprawl critique I75 near Flint, Michigan, is already markets beyond the cities where it holds more water. New construction eight lanes wide. Many impoverished, already operates.6 Here, Google fol- on the fringes of a region that is not aging, or shrinking rural areas are now lows on the heels of Verizon, which growing will only devalue devel- crisscrossed by four-lane highways, to largely halted the rollout of its own 7 opment elsewhere. The location of little economic effect. There may be FiOS project in 2010. development may be influenced, but an equity case to be made for serving Those who believe that a new piece not the overall sum of regional devel- these areas, but not an economic one. of infrastructure will have similar eco- opment. This is just robbing Peter to Even in relatively successful regions, nomic effects to the Erie Canal seem pay Paul. For example, between 1980 new infrastructure often does not pan doomed to be disappointed. Any eco- and 2011, governments in the Buffalo, out the way boosters had hoped. For nomic gains from new infrastructure New York, area issued almost 60,000 example, Google chose the Kansas will be incremental at best. building permits for single-family City region in a nationwide compe- 3 AMERICA’S INFRASTRUCTURE IS IN NEED OF REPAIR The American Society of Civil Engi- are also not always caused by a lack Anyone who has flown through a neers (ASCE) publishes an annual of maintenance. The I-35W bridge dazzling foreign airport like Madrid “Infrastructure Report Card” for the collapse in Minneapolis, for example, Barajas can tell you that American air- United States. Its 2017 edition gives appears to have stemmed in large ports do not measure up. Even so, it’s the country an overall D+ score for part from a design flaw.10 According to important to acknowledge that many infrastructure.8 Roads, aviation, and an analysis by the Reason Foundation, American regions have spent heavily drinking water all get a D, among only 5.4 percent of urban interstates to improve their air travel facilities. many bad grades across all dimen- are in poor shape.11 The transportation Chicago spent about $10 billion on sions of infrastructure. But ASCE research organization TRIP gives a its O’Hare Modernization Program to members stand to gain a lot of work higher estimate, saying that 20 per- add and reconfigure runways at this from any major infrastructure pro- cent of the nation’s major roads are in critical hub.14 Indianapolis and Detroit gram, so they’ve got an incentive poor condition—32 percent in urban replaced their decrepit terminals with to play up the problem. Their take areas.12 For highways and bridges sparkling new facilities. Even LaGuar- should be crosschecked against other alone, only a minority, perhaps a fairly dia Airport’s notorious Central Ter- sources. small minority, of major facilities is minal, the one that regularly causes In truth, the condition of some of actually in poor shape. (Local streets American politicians such as former America’s infrastructure is often not often are in poor shape, but as we’ll vice president Joe Biden to compare as bad as generally perceived or see, these are not eligible for federal our airports to Third World countries, portrayed. According to the Federal grants.) is now being replaced at a cost of $4 15 Highway Administration, there are America’s freight rail system is also billion. America’s air infrastructure 59,000 structurally deficient bridges in solid shape. Even the ASCE gave may have a way to go, but progress in the United States. That’s a big it a grade of B, noting the major has been made. And as anyone who number, but it amounts to only 9.6 investments by the system’s private has flown to London can tell you, percent of total bridges in the coun- owners—$27.1 billion in 2015 alone.13 America has no monopoly on bad try.9 High-profile infrastructure failures airports.

INFRASTRUCTURE Rebuilding American Infrastructure 25 Also, it is not necessarily a bad thing was originally supposed to cost only drink the water in Mexico. Now, the to have a certain percentage of our $775 million—still a lot of money.17 cars are made in Mexico and you can’t infrastructure at or near end of life. Tens of billions of dollars are also drink the water in Flint.” To be clear, After all, few of us maintain all of our needed simply to renovate America’s Flint’s water crisis was caused by personal infrastructure and posses- legacy transit infrastructure. The Dis- human error, but that was only possi- sions at pristine levels of quality. How trict of Columbia’s own Metro subway ble because of the city’s old lead-pipe many people replace their furnace system has suffered several accidents infrastructure. America’s water lines, at the first sign of rust, rather than that require emergency repairs to in many cases, haven’t been touched waiting until it is truly at end of life improve safety. It lost 14 percent of since they were originally installed and can no longer be cost-effectively its riders last year, as they lost faith many decades ago. Some cities still maintained? American citizens and in the system.18 San Francisco’s BART have wooden water pipes in service. businesses very frequently “sweat rail system needs at least $10 billion Syracuse mayor Stephanie Miner once the assets” when it comes to their in repairs.19 Boston’s transit system said that if her city received the same own property, so it should not be sur- needs over $7 billion in repairs.20 New $1 billion commitment from the state prising that they are often less than York’s subway signals still mostly rely that Buffalo did, she would spend impressed with calls to spend more on 1930s-era technology. three quarters of it just to fix the city’s tax dollars on infrastructure. water lines.23 Similar maintenance backlogs affect Yet there clearly are major infrastruc- other infrastructure types. America’s While things are not uniformly dire, it ture repair needs in America. We older urban regions need to spend is clear that there is a need to repair have not been properly maintaining vast sums of money on sewer system and upgrade America’s existing infra- the assets we have built. Levee fail- environmental retrofit—$2.7 billion structure. It is this rebuilding, not ures notoriously caused much of the in Cleveland and $4.7 billion in Saint building—making America’s infra- flooding in New Orleans after Hur- Louis.21 The state of Rhode Island structure great again—that the Trump ricane Katrina, but America has yet had to pay $163 million to replace its administration should focus on. to address the neglect of its dam Sakonnet River Bridge because it had In doing this, however, President and levee systems. For example, the failed to perform routine maintenance Trump faces several major barriers recent possibility of an overflow or on the old one.22 This is just a sam- that must be addressed before prog- collapse at the Oroville Dam in Cal- pling of America’s infrastructure gaps. ress can be made. Politics and regula- ifornia forced 180,000 people to be tions will remain a barrier even if more 16 But the poster child for American evacuated. Many dams, levees, and funding is put in place. The existing locks on our inland waterway system infrastructure problems is Flint, Mich- igan, where a water treatment error federal infrastructure finance pro- are in need of repair, often at signifi- grams are poorly aligned with Amer- cant cost. Examples include Locks 52 caused lead to leach into the water supply, rendering it unfit for human ica’s needs in any case, and private and 53 on the Ohio River. Built in 1929, funding is at best a partial solution in their replacement cost is $2.9 billion. consumption. This caused then-candi- date Trump to say, “It used to be cars many troubled infrastructure catego- As the New York Times reported, this ries. replacement has been botched, and it were made in Flint, and you couldn’t

4 BARRIERS TO IMPROVEMENT: POLITICS AND REGULATION Many of the biggest barriers to fixing to subsidize the money-losing PATH Many pieces of infrastructure paid America’s infrastructure are not subway and real estate developments for through utility fees—electricity, financial, but political and regulatory. like the World Trade Center. This tan- water, sewer, etc.—also face politi- Take, for example, the sorry state of gled web of cross-subsidies, and the cal challenges to upgrades. Many of the New York region’s airports. How politics of New York and New Jersey these services are de facto monop- is it possible that one of America’s that make them difficult to unwind, olies and thus subject to rate reg- wealthiest regions has such poor are why the airport facilities are in ulation. Politicians have a powerful airport terminals? The problem is such bad shape. When New York political incentive to keep rates low, politics. The three main New York governor Andrew Cuomo made a at the price of deferring maintenance airports—Kennedy, Newark, and political priority of replacing LaGuar- and other needed investments. This is LaGuardia—are run by the bi-state dia’s Central Terminal, a deal was especially true for municipally oper- Port Authority of New York and New quickly struck for its replacement. ated water and sewer systems. For Jersey. These airports are highly Airport improvements are also often privately run utilities like electricity, profitable, generating $581 million in opposed by the airlines themselves, capital investment has historically operating profits in 2016 alone.24 But who do not want to pay the increased been strongly opposed by organized the Port Authority uses those profits fees needed to finance them. citizen groups that exist to maintain

INFRASTRUCTURE Rebuilding American Infrastructure 26 low rates. In some states, the oppo- such thing as shovel-ready projects.”26 ied the environmental impact of the 30 site has occurred. Utility interests Despite few changes in federal law, bridge. This is hardly the only case. have captured the regulatory appa- the process of completing EISs has Environmental litigation to stop proj- ratus, resulting in poor oversight and continued to increase in length. A ects is now routine. These are almost sometimes dubious investment that study by the Regional Plan Associ- invariably attempts to accomplish does not serve the public interest, ation (RPA) found that the average through environmental law what such as the Deepwater Wind offshore length of time to complete an EIS could not be accomplished politically. wind project in Rhode Island that will increased from slightly over two years Trying to stave off or win lawsuits is cost consumers hundreds of millions in the 1970s to eight years by 2011.27 one of the drivers of today’s longer 25 of dollars. A 2008 study by Piet and Carol A. and more complex EISs. As the RPA Activist pressure of other sorts DeWitt found that the time required notes, “The threat of environmental can also derail projects subject to to complete an EIS was increasing at lawsuits motivates lead federal agen- approval by weak-kneed politicians. a rate of 37 days per year.28 A report cies to take time-consuming steps or In recent years, perhaps the most by Philip K. Howard cites the example redesign projects to avoid them, con- famous examples are President of a project to merely raise the bridge tributing to project delivery delays.” Obama’s rejection of the KeystoneXL deck on the already existing Bayonne The fact that these delays are the and Dakota Access pipelines. Envi- Bridge in New York: The environ- major source of project delays is ronmental activists regularly attempt mental reviews for this basic project amply illustrated by the case of the to kill infrastructure associated with totaled around 20,000 pages and I-35W bridge collapse in Minneapo- fossil fuels. This often works in places took five years to complete. Accord- lis. Quickly replacing this major inter- with amenable governments. ing to Howard’s analysis, in several state bridge that carried more than Environmental studies are another categories of infrastructure, the cost 400,000 cars per day was obviously major killer, driven by both federal and of a six-year delay in building projects critical. The state managed to do it in state laws. No one wants to go back resulting from environmental review only fourteen months. The RPA notes to the days in which projects could adds up to more than the ASCE’s esti- that this project received no environ- be built with no review, when work- mates of what it would take to pay for mental waivers. Yet clearly there was 29 ers regularly died on work sites, and needed repairs. The cost of delays is political commitment at all levels to so on. But today’s process of creat- higher than the cost to build. make sure this project was not held up ing environmental impact statements And after the Port Authority com- by red tape or lawsuits, and that per- (EISs) frequently drags on for years, pleted those 20,000 pages of envi- mits were issued promptly. The I-35W leading to delays of a decade or more ronmental reviews for the Bayonne bridge replacement shows what it is in actually building projects. This is Bridge project? Remonstrators sued still possible to do in America if we one reason President Obama discov- to stop it anyway, arguing that the don’t tie our own hands with needless ered to his chagrin that, “There’s no government had not sufficiently stud- and endless study. This should be the rule more than the exception. 5 FEDERAL FUNDING STRUCTURES ARE POORLY ALIGNED WITH INFRASTRUCTURE NEEDS Another challenge the Trump admin- of America’s roadway system that cant. Atlanta’s 2013 figure is $922 mil- istration faces is that existing federal does have a maintenance problem, lion for infrastructure needs;32 Seattle’s infrastructure programs are largely however: its local streets.31 Yet local 2010 estimate was $1.8 billion,33 with $1 not aligned with America’s infrastruc- streets are largely ineligible for federal billion for Portland34 and $3.6 billion for ture needs. Consider two simple areas: funding. This non-federal aid mileage Los Angeles.35 Many of these backlogs roads and sewers. accounts for 86 percent of the total are, naturally, in economically strug- The modern highway finance system roadway mileage in the United States. gling cities; many more cities don’t dates to the passage of the Federal Major roadways like interstate high- have a handle on their problems and Aid Highway Act in 1956, passed to ways account for most travel volume don’t even have an estimate. One that provide funding to build the Interstate and are clearly worthy of special con- does have an estimate is Toledo, with 36 Highway System. It is financed by the cern. Nevertheless, many of Ameri- $1.3 billion in needed street repairs. federal gas tax, providing grants to ca’s roads that are in poor condition Where is a city like Toledo supposed states for highways (with some allo- are precisely these local streets. No to come up with that kind of money? cated to metropolitan areas) and matter how much money the federal In short, the streets where many Amer- financing the federal government’s government pumps into its highway icans live, especially those who are transit programs. funding structure, it will not do any- being economically left behind, cannot thing to help cash-strapped munici- be fixed by the existing federal funding As noted above, the major roadway palities with this problem. system of the United States is not in system, even with infinite spending. terrible condition. There is a segment The backlog of local repairs is signifi-

INFRASTRUCTURE Rebuilding American Infrastructure 27 It is a similar situation with sewers. struggling with a mountain of prob- In short, simply pumping more money America’s cities face billions of dollars lems and high poverty levels. into the existing funding structures in repairs for aging sewers, much of it The federal government used to pro- will completely fail to address many imposed by the federal government. vide grants for water and sewer proj- of America’s most pressing infrastruc- Just take one example: fixing so-called ects but eliminated these long ago, ture problems. combined sewer overflows (CSOs). leaving very little federal help avail- Some economists might argue that it When sewers were first installed in able for these cities. As Springfield, makes no sense to spend $1.3 billion America cities, they frequently com- Ohio, mayor Warren Copeland com- in Toledo, or to spend to fix sewers in bined sanitary waste from homes with plained to his local newspaper, “This Ferguson or Springfield. If they want stormwater runoff from streets into is the biggest, hugest unfunded man- to triage American communities and the same pipe system. In heavy rains, date that I’ve ever seen in the time I’ve effectively write off vast tracts of these can overflow, causing untreated been in public life. Basically, the EPA America, they should have the integ- sewage to spill into area waterways. at the federal level is prepared to tell rity to say it explicitly. Clearly prior- Under the Clean Water Act, the EPA us that we have to keep spending ities have to be set, and not every is forcing cities to largely eliminate money and there’s no help from the need can be met in the short term. these overflows, no matter what the feds to deal with it. It’s just a disaster But to the extent that we as a nation cost. The agency has sued numerous from my point of view. There doesn’t decide that we actually do care about cities over the issue. Of the 31 consent seem to be any way out of it.”37 struggling communities, we need to decrees the EPA has obtained from What is true for sewers is also true for align spending programs with their noncompliant cities, the estimated needs. At a minimum, repair of the cost of fixing just this one sewer prob- water systems like Flint’s. While that city received special federal and state existing infrastructure in these com- lem is $29 billion. Combined sewers munities is one thing we know we can are often in older, postindustrial cities help, dozens of other cities have been left high and dry. accomplish. 6 PRIVATE CAPITAL ALONE CAN’T SOLVE THE PROBLEM President Trump has pledged to ultimately that cost would have to be In addition, even in cases theoret- undertake a $1 trillion plan to rebuild born by the residents of Flint through ically conducive to private invest- America’s infrastructure. While noth- higher water bills. One reason why ment, actual experience in the United ing specific has been proposed, early so many of these communities have States suggests it will be harder to reports suggested that it would lean accumulated such a huge backlog of pull off successfully than many might heavily on private capital. infrastructure needs is because their think. Consider the case of Chicago’s Many have argued that pension and citizens cannot afford to pay for them, Midway Airport. That city received similar funds could potentially be or can’t afford to competitively disad- special federal permission and tried large-scale investors in infrastruc- vantage their communities by raising twice to privatize Midway Airport ture projects. These funds are chas- taxes or utility rates. That is not to by leasing it to investors, failing ing stable, quality returns in an era of excuse their frequently poor political both times. In 2008, former mayor low interest rates, and infrastructure leadership, but the problem of fiscal Richard M. Daley announced a deal seems to fit the bill. Infrastructure capacity is real. For example, the Saint for $2.52 billion to lease the airport projects where there are high-quality Louis area’s plan to retrofit its sewer for 99 years to a consortium led by 39 revenue streams attached are good system to comply with federal man- Citibank. But that deal fell apart potential candidates for private equity dates will double or triple the bills of after the consortium failed to obtain 38 40 investment. Toll roads, bridges, and people in troubled Ferguson. financing. Mayor Rahm Emanuel airports around the world are owned Moreover, much of the infrastruc- tried a second time but likewise failed: or operated by private entities. ture deficit we face as a country the deal attracted only two bidders, arises from costs such as environ- but one backed out, forcing the city But private capital is not free money. to scrap the tender.41 The fact that a Investors expect to both make their mental remediation, for which there is a public purpose but not enough highly motivated Chicago failed twice capital back and earn a profit. This to close a deal for this high-profile will ultimately come from users of of a revenue stream to satisfy a pri- vate investor. Another large chunk is and well-patronized airport suggests the facility. From an economic point that airport privatization in the United of view, this makes a lot of sense. The not amenable to private investment because it is in localities where the cit- States is not as simple a matter as problem comes in when the facilities supporters might suggest. are in economically struggling com- izens and business community have munities. limited ability to pay. America’s infra- It’s the same story with private invest- structure problems cannot be solved ment in highway and bridge projects. A private firm might buy Flint’s water with private investment only. More tax Many of these transactions have not utility and replace all the lines, but dollars will be required. gone well. A number of the opera-

INFRASTRUCTURE Rebuilding American Infrastructure 28 tors of privately run toll roads and tled to their payments regardless of ments in his city. He devised his bridges have gone bankrupt. Even the revenue stream, they have shifted so-called Chicago Infrastructure Trust in rapidly growing Texas, the con- the revenue risk—the biggest risk, and (CIT), announced to great fanfare at a cessionaire operating the SH 130 toll the one that bankrupted all those toll ceremony that included former presi- road near Austin went bankrupt.42 The roads—back onto the government. In dent Bill Clinton. He hoped to raise as company operating the Foley Beach effect, this is just a fancied-up form of much as $1 billion in private capital Express toll bridge in Alabama went traditional debt financing. to finance projects such as $200 mil- 43 bankrupt. The operator of the South Chicago looms large as a cautionary lion in energy efficiency retrofits of Bay Expressway in San Diego went tale about the limits of private invest- public buildings. The CIT struggled to 44 bankrupt. Some of these bankrupt- ment and what can go wrong with execute and has completed only one cies have spawned litigation, with privatization. Beyond the Midway project to date, a vastly downscaled accusations that the deals were done privatization failures, in 2006, the energy retrofit program that ended 45 using fraudulent traffic projections. city leased its downtown parking up being less than a tenth of the A private consortium that leased the garages for $563 million for 99 years. size originally envisioned. A report pre-existing Indiana Toll Road from This appeared to be a great deal until by the nonprofit watchdog group that state for $3.9 billion also went it later came out that the city had Project Six found significant prob- bankrupt. included an onerous no-compete lems with that transaction, too: the In one sense, these bankruptcies clause in the contract. Not only did deal included what was in effect $2.2 might be good news for taxpayers. the city itself agree not to build any million in loans to replace light bulbs They revealed that the companies competing garages, it also promised and install weather stripping, repairs had overpaid. In places like Indiana, not to allow any private companies that should never have been debt-fi- 50 this created a windfall gain for the to build competing facilities. This was nanced. It also gave Bank of Amer- public. But these bankruptcies led a highly dubious use of government ica, the financier on the project, a lien private firms to shift strategies, away power. Even worse, the city actually on all the equipment installed in city from skin-in-the-game equity deals did allow a competitor to open, which buildings as collateral. Furthermore, toward the so-called availability pay- exposed them to damage claims. The there appears to be no compelling ments model.46 city ended up paying $62 million in reason why the city needed to use complex, non-traditional financing for In an availability payments contract, compensation to the vendor they had 49 the project. a private consortium builds, main- privatized city garages to. tains, and operates a toll facility over No-compete clauses are common in Chicago’s use of privatization and pri- a period of time. In return, the govern- privatization contracts and examples vate capital for its infrastructure has ment entity promises a fixed stream of “submarine” clauses that can unex- arguably been a net negative for the of payments to the consortium for pectedly surface and torpedo a gov- city. If a sophisticated financial center making the roadway or bridge “avail- ernment at some future date. Having like Chicago cannot get it right, this able.” The new East End Bridge near used no-compete clauses to his own bodes ill for other, less experienced Louisville47 and the Goethals Bridge advantage, such as in the deal to open states and cities. replacement by the Port Authority of the Grand Hyatt in New York, Presi- As President Trump might say, too New York and New Jersey48 are using dent Trump must surely understand many of America’s leaders have been the availability payments approach. how easy it would be for sharks to stupid when it comes to deal-mak- There is nothing wrong with avail- take advantage of cities and states ing on private sector investment into ability payments per se, but these the same way. transportation infrastructure. If states contracts hardly constitute what has More recently, Mayor Emanuel tried and cities cannot make smarter deals, usually been meant by private invest- another way to use private capital they need to stick to traditional tax- ment. Because the vendors are enti- for financing infrastructure improve- or bond-financed public sector infra- structure development. 7 POLICY RECOMMENDATIONS Any plan to make America’s infra- with low environmental impact that ble and aggressively use all authority structure great again has to address can be delivered on an accelerated he has to issue environmental process both the policy needs and the basis in less than two years. Bridge waivers. political realities facing the Trump replacement projects would be ideal A longer-term program should administration. to improve safety on some of these include reforms to the environmental In the short term, Trump should look aging facilities. He should also build review process to dramatically speed to build momentum for infrastruc- on the Obama administration’s pro- up project timelines as well as to limit ture renewal by finding five to ten gram to accelerate environmental the scope of litigation. The president more I-35W bridge–type projects reviews for as many projects as possi- should look for bipartisan solutions

INFRASTRUCTURE Rebuilding American Infrastructure 29 here: Environmental review dramat- Another is replacement of structurally the Gateway Project to build new ically delays and increases the cost deficient bridges. The federal govern- rail tunnels under the Hudson River of projects that are of critical impor- ment could potentially help municipal in New York and the FAA NextGen tance to Democratic constituencies, governments temporarily with local air traffic control system. The recent too, including urban transit projects. street repairs, which are often shov- derailments at New York’s Penn Sta- Researchers of multiple political per- el-ready projects, as it did during the tion that caused travel chaos show suasions, like Philip K. Howard and the Obama stimulus. But ultimately state why rail upgrades are critical; there RPA, have already conducted signif- and local governments need to take is no slack in the system if any- icant analysis of the problems and the lead in establishing an adequate thing goes wrong. Air traffic control potential solutions, some of which funding structure for local streets. upgrades are needed to help unclog could include better basic up-front Trump should also reinstate federal the congested airspace around our coordination between the agencies grants for sewer and water rehabili- cities. Any such projects should be involved in reviews (or potentially tation and environmental compliance. heavily vetted to avoid funding boon- even creating a one-stop federal The expense of these items for many doggles. Too much of the money we shop) and limiting the scope of liti- communities is enormous and often spent today ends up wasted on “road gation over projects. It is possible to imposed by the federal government to nowhere” projects. both protect our environment and get itself, such as in the case of combined Where will the money come from? projects built in a timely fashion. sewer overflow remediation. Paying Let’s be honest here: more debt or Trump must also realign federal infra- for these unfunded mandates is only higher taxes and fees. There is defi- structure spending with needs. This fair. Beyond that, many poor, post-in- nitely a role for the private sector means limiting the use of funds for dustrial communities simply lack the in financing improvements to major expansion projects in favor of main- funds. The federal government should airports and other high-quality, rev- tenance. No more boondoggles. State also accelerate brownfield remedia- enue-producing assets. But this will and local politicians will always favor tion in these communities. These are simply not address most of the needs new projects over repairs, so federal the very places Trump promised to the country faces. States and localities funding should be heavily focused help in his campaign: they have signif- need to be willing to bite the bullet on maintenance in both highway icant needs, heavy poverty, and large and do the same. Doing things like and transit funding. One priority area minority populations that have been underpricing utility fees by forgo- should be rehabilitating aging rail sys- left behind. ing maintenance needs to end. The tems in America’s legacy rail transit There are select, high-profile infra- illusion that we can get something cities, including New York, Boston, structure expansion projects where for nothing has been part of what Philadelphia, Chicago, Washington, the federal government should be brought us to this point. If we want to and San Francisco—high-ridership involved in financing and driving them make America’s infrastructure great systems that are critical to the econ- to completion. These might include again, we must be willing to pay to omies of these major metro areas. make it happen.

8 ENDNOTES

1 David Freedlander, “A 1980s New York City Battle Explains Donald Trump’s Candidacy,” Bloomberg, September 29, 2015, https://www. bloomberg.com/politics/features/2015-09-29/a-1980s-new-york-city-battle-explains-donald-trump-s-candidacy. 2 “Erie Canal, United States,” Building the World, University of Massachusetts Boston, http://blogs.umb.edu/buildingtheworld/waterworks/ the-erie-canal-united-states/. 3 David Metz, Peak Car: The Future of Travel (Amazon.com), 2014. 4 Bruce Fisher, “Kill Those Zombies!,” Daily Public, March 6, 2015, http://www.dailypublic.com/articles/03062015/kill-those-zombies. 5 Sarah McBride, “Why It’s So Hard to Build the Next Silicon Valley,” Bloomberg, February 28, 2017, https://www.bloomberg.com/news/ features/2017-02-28/why-it-s-so-hard-to-build-the-next-silicon-valley. 6 Jake Smith, “Google Fiber pauses expansion, CEO steps down,” ZDNet, October 26, 2016, http://www.zdnet.com/article/google-fiber- pauses-expansion-ceo-steps-down/. 7 Roger Cheng, “Verizon to End Rollout of FiOS,” Wall Street Journal, March 30, 2010, https://www.wsj.com/articles/SB1000142405270230 3410404575151773432729614. 8 “Infrastructure Report Card,” American Society of Civil Engingeers, http://www.infrastructurereportcard.org/. 9 “Deficient Bridges by Highway System 2015,” U.S. Department of Transportation Federal Highway Administration, December 31, 2015, https://www.fhwa.dot.gov/bridge/nbi/no10/defbr15.cfm. 10 “NTSB: Design flaw led to Minnesota bridge collapse,” CNN, November 15, 2008, http://www.cnn.com/2008/US/11/14/bridge.collapse/ index.html. 11 David T. Hartgen and M. Gregory Fields, “22nd Annual Highway Report: The Performance of State Highway Systems,” Reason Foundation, Policy Study Number 448, September 2016, http://reason.org/files/22nd_annual_highway_report.pdf. 12 “Bumpy Roads Ahead: America’s Roughest Rides and Strategies to Make our Roads Smoother,” TRIP, November 2016, http://www.tripnet. org/docs/Urban_Roads_TRIP_Report_November_2016.pdf.

INFRASTRUCTURE Rebuilding American Infrastructure 30 13 “2017 Infrastructure Report Card: Rail,” American Society of Civil Engineers, http://www.infrastructurereportcard.org/cat-item/rail/. 14 Jay Koziarz, “Planned O’Hare Terminal Revamp Would Decrease Delays, Meet Surging Demand,” Curbed Chicago, July 18, 2016, http:// chicago.curbed.com/2016/7/18/12213272/chicago-transportation-expanded-terminal-ohare-airport. 15 Daniel Geiger, “LaGuardia terminal’s $4 billion revamp will finally begin,” Crain’s New York Business, June 1, 2016, http://www. crainsnewyork.com/article/20160601/REAL_ESTATE/160609992/laguardias-4-billion-central-terminal-overhaul-is-finalized. 16 Eric Kurhi, “Oroville Dam: Crisis eases but more than 180,000 evacuated,” Mercury News, February 12, 2017, http://www.mercurynews. com/2017/02/12/oroville-residents-told-to-evacuate-spillway-failure-imminent/. 17 Tyler J. Kelley, “Choke Point of a Nation: The High Cost of an Aging River Lock,” New York Times, November 23, 2016, https://www. nytimes.com/2016/11/23/business/economy/desperately-plugging-holes-in-an-87-year-old-dam.html?_r=0. 18 Benjamin Freed, “Metro Has Lost So Many Customers It’s Dragging Down National Ridership Figures,” Washingtonian, March 10, 2017, https://www.washingtonian.com/2017/03/10/metros-ridership-fell-so-much-in-2016-it-dragged-down-all-us-subway-ridership/. 19 Jaxon Van Derbeken, “Service Disruptions, Weekend Shutdowns ‘New Reality’ for Bart,” NBC Bay Area, April 5, 2016, http://www. nbcbayarea.com/news/local/Service-Disruptions-Weekend-Shutdowns-New-Reality-for-BART-374698181.html. 20 Gabrielle Gurley, “A Tale of Two Subway Systems,” American Prospect, April 1, 2016, http://prospect.org/article/tale-two-subway-systems. 21 Aaron M. Renn, “Wasted: How to Fix America’s Sewers,” Manhattan Institute, February 25, 2016, https://www.manhattan-institute.org/ html/wasted-how-fix-americas-sewers-8552.html. 22 Aaron M. Renn, “The Bluest State,” City Journal, Spring 2014, https://www.city-journal.org/html/bluest-state-13647.html. 23 Editorial Board, “Mayor Stephanie Miner’s ideas for the Syracuse Billion are big; are they big enough?,” Syracuse Post-Standard, November 30, 2014, http://www.syracuse.com/opinion/index.ssf/2014/11/mayor_stephanie_miner_syracuse_billion_vision_is_it_big_enough_ editorial.html. 24 “Financial Statements & Appended Notes for the Year Ended December 31, 2016,” Port Authority of New York and New Jersey, March 1, 2017, http://corpinfo.panynj.gov/documents/2016/. 25 Ian Donnis, “Is Deepwater Wind’s Block Island Project Worth the Cost to Ratepayers?,” Rhode Island Public Radio, February 23, 2016, http://ripr.org/post/deepwater-winds-block-island-project-worth-cost-ratepayers. 26 Stephanie Condon, “Obama: ‘No Such Thing as Shovel-Ready Projects’,” CBS News, October 13, 2010, http://www.cbsnews.com/news/ obama-no-such-thing-as-shovel-ready-projects/. 27 Petra Todorovich and Daniel Schned, “Getting Infrastructure Going: Expediting the Environmental Review Process,” Regional Plan Association, June 2012, http://www.rpa.org/library/pdf/RPA-Getting-Infrastructure-Going.pdf. 28 Piet deWitt and Carole A. deWitt, “How Long Does It Take to Prepare an Environmental Statement?,” Taylor and Francis Online, January 3, 2017, http://www.tandfonline.com/doi/abs/10.1017/S146604660808037X. 29 Philip K. Howard, “Two Years Not Ten Years: Redesigning Infrastructure Approvals,” Common Good, September 2015, https:// commongood.3cdn.net/c613b4cfda258a5fcb_e8m6b5t3x.pdf. 30 Mike D’Onofrio, “Environmental groups file suit to halt Bayonne Bridge project,” Jersey Journal, August 19, 2014, http://www.nj.com/ hudson/index.ssf/2014/08/environmental_groups_bayonne_bridge_raise_the_roadway_project_port_authoirty_ny_nj_court_coalition_f. html. 31 Aaron M. Renn, “Beyond Repair: America’s Infrastructure Crisis is Local,” Manhattan Institute, October 22, 2015, https://www.manhattan- institute.org/html/beyond-repair-america%E2%80%99s-infrastructure-crisis-local-7943.html. 32 Jeremiah McWilliams, “Atlanta increases cash reserves to $127 million,” Atlanta Journal-Constitution, January 7, 2013, http://www.ajc.com/ news/news/local/atlanta-increases-cash-reserves-to-127-million/nTpsZ/. 33 Bruch Nourish, “Seattle’s Terrifying Maintenance Backlog,” Seattle Transit Blog, January 21, 2013, http://seattletransitblog.com/2013/01/21/ seattles-terrifying-maintenance-backlog/. 34 Brad Schmidt, “Why Portland’s roads are so bad: City Council ignores spending targets, funds other priorities,” Oregonian, January 10, 2015, http://www.oregonlive.com/portland/index.ssf/2015/01/why_portlands_roads_are_so_bad.html. 35 Adam Nagourney, “Infrastructure Cracks as Los Angeles Defers Repairs,” New York Times, September 1, 2014, http://www.nytimes. com/2014/09/02/us/pipes-roads-and-walks-crack-as-los-angeles-defers-repairs.html. 36 Christina Payne, “Residents fume as streets crumble around Toledo,” Toledo Blade, June 21, 2015, http://www.toledoblade.com/ local/2015/06/21/Residents-fume-as-streetscrumble-around-Toledo.html. 37 Michael Cooper, “Sewer project costs could climb to $243M,” Springfield News-Sun, March 22, 2014, http://www.springfieldnewssun.com/ news/local-govt–politics/sewer-project-costs-could-climb-243m/D28NVnXzj09FHaRmLDVcNN/. 38 Véronique Lacapra, “MSD holds public meetings to explain why sewer rates are rising,” St. Louis Public Radio, March 18, 2015, http://news. stlpublicradio.org/post/msd-holds-public-meetings-explain-why-sewer-rates-are-rising#stream/0. 39 Paul Merrion, “City strikes $2.52B Midway privatization deal,” Crain’s Chicago Business, September 30, 2008, http://www.chicagobusiness. com/article/20080930/NEWS02/200031219/city-strikes-2-52b-midway-privatization-deal. 40 “City Cancels Midway Privatization Deal,” Airport Revenue News, April 22, 2009, https://www.airportrevenuenews.com/city-cancels- midway-privatization-deal/. 41 Karen Pierog and Greg Roumeliotis, “Chicago mayor halts Midway Airport lease talks after bidder backs out,” Reuters, September 5, 2013, http://www.reuters.com/article/usa-chicago-midway-idUSL2N0H204820130906. 42 Tom Corrigan, “Texas Toll-Road Operator Files for Bankruptcy,” Wall Street Journal, March 2, 2016, https://www.wsj.com/articles/texas- toll-road-operator-files-for-bankruptcy-1456958991. 43 Ryan Dezember and Emily Glazer, “Drop in Traffic Takes Toll on Investors in Private Roads,” Wall Street Journal, November 20, 2013, https://www.wsj.com/articles/SB10001424052702303482504579177890461812588. 44 Dezember and Glazer, “Drop in Traffic.” 45 Andrew Scurria, “Macquarie Can’t Skirt Bond Insurer’s $496 Million Toll Road Suit,” Wall Street Journal, February 2, 2017, https://www. morningstar.com/news/dow-jones/fund-news/TDJNDN_201702157708/macquarie-cant-skirt-bond-insurers-496-million-toll-road-suit. print.html. 46 Silviu Dochia and Michael Parker, “Introduction to Public-Private Partnerships with Availability Payments,” Jeffrey A. Parker and Associates, 2009, http://www.pwfinance.net/document/research_reports/9%20intro%20availability.pdf. 47 “Ohio River Bridges-East End Crossing, Louisville, KY/IN,” United States Department of Transportation, September 9, 2014, https://www. transportation.gov/policy-initiatives/build-america/ohio-river-bridges-east-end-crossing-louisville-kyin.

INFRASTRUCTURE Rebuilding American Infrastructure 31 48 “Goethals Bridge Replacement,” U.S. Department of Transportation Federal Highway Administration, 2014, https://www.fhwa.dot.gov/ipd/ project_profiles/ny_goethals.aspx. 49 Dan Mihalopoulos, “City Hall’s $62 million blunder,” Chicago Sun-Times, May 23, 2015, http://chicago.suntimes.com/news/the-watchdogs- city-halls-62-million-blunder/. 50 Faisal Khan and Michael Graham, “Dark trust: How Chicago’s mayor put city buildings in financial limbo and wasted millions of tax dollars,” Project Six, March 13, 2017, https://thesecretsix.com/investigation/dark-trust-how-chicagos-mayor-put-city-buildings-in-financial- limbo-and-wasted-millions-of-tax-dollars/.

INFRASTRUCTURE Rebuilding American Infrastructure 32 TRANSPORTATION

33 TRANSPORTATION ORIGINALLY PUBLISHED AS A MI REPORT

DRIVERLESS CARS AND THE FUTURE OF AMERICAN INFRASTRUCTURE

Infrastructure spending in the U.S. is heavily influenced by political, not economic, criteria— and cutting a ribbon to open a new or widened highway makes for great optics. Whether the project can be justified by a cost-benefit calculation is not always the main consideration. As the Congressional Budget Office (CBO) noted last year, “Spending on highways does not correspond very well with how the roads are used and valued. ”2 AARON M. RENN Quite apart from decisions to build new roads that are skewed by political considerations, it’s also the case that return on investment from new roads has simply been declining over time. In part, this is because the U.S. already has an extensive transportation network of railroads, highways, and air routes. Building the initial networks provided large amounts of value by significantly reducing trans- portation costs. Subsequent additions to the highway network post-1980 have generated significantly less value. The CBO has noted as much: “Research suggests that the increases in economic activity from spending for new highways in the United States have generally declined over time.”3 Harvard economist and Manhattan Institute senior fellow Edward Glaeser confirmed these findings: “There have been diminishing returns to building new roads, particularly since we completed the National Highway System.”4

CONTINUED ON NEXT PAGE

1 | INFRASTRUCTURE AND DRIVERLESS CARS 2 | “PEAK CAR” AND THE FUTURE DEMAND FOR TRAVEL 3 | CONCLUSIONS 4 | ENDNOTES

TRANSPORTATION Driverless Cars and the Future of American Infrastructure 34 Glaeser’s conclusion is no outlier. A ects, consider the failure or underper- the wellknown Infrastructure Report 2013 meta-analysis by Pedro Bom formance of various privately financed Card,12 published by the American and Jenny Ligthart of 68 studies toll-road projects. Even in rapidly Society of Civil Engineers, are pro- conducted between 1983 and 2008 growing Texas, the concessionaire duced by organizations with a stake in showed declining returns on highway operating the SH 130 toll road near increased infrastructure spending. But investment.5 One of the studies that Austin, which opened in 2012, went even if the exact needs are difficult to they looked at suggested that the bankrupt in 2016.9 The company oper- quantify, the legitimate repair needs return on new highways in the 1980s ating the Foley Beach Express toll appear to be considerable. and 1990s had already dropped below bridge in Alabama opened in 2000 According to a recent report from 10 5%. Conversely, maintenance yields and went bankrupt in 2013. The the transportation research organiza- 6 returns of 30%–40%. operator of the South Bay Express- tion TRIP, 20% of the nation’s major Nevertheless, about 35% of federal way in San Diego went bankrupt in roads are in poor condition. In urban 11 highway funding continues to go to 2011, after opening in 2007. areas, that number rises to 32%.13 The new or expanded highways instead of In these cases, traffic and revenues fell Reason Foundation’s Annual High- the backlog of repairs on the existing far short of projections. As it turned way Report lists a fairly small number system.7 A few examples: the state out, drivers’ willingness to pay tolls— of interstate highway miles in poor of Ohio recently spent $160 million that is, to pay the cost of constructing condition, only 5.4% in urban areas, to build a bypass around the town of and operating the highways in ques- but this value is trending upward.14 Nelsonville, population 5,400.8 The tion—was less than anticipated. In The Federal Highway Administration state of Iowa is widening US 20. Mary- other words, the value of the road to reports that 9.6% of America’s bridges land is widening MD 404. motorists had a negative ROI. While are structurally deficient, but this still The point is not to critique this or any toll financing, which charges the users means that 59,000 bridges need to 15 other specific project but to show that of highways for their cost, is prefera- be fixed. (Reason’s report says that American states are extensively build- ble to paying for new roads with tax 20% of bridges are deficient.) ing new highways as well as widening dollars, these bankruptcies also sug- Estimates of the maintenance needs existing highways. The relative lack of gest that President Trump’s proposed of America’s highway systems vary expansion in key northeastern metro $1 trillion infrastructure plan, which widely; but in all cases, a significant areas such as New York or Boston relies heavily on private investment number of roads and bridges require can give a misleading impression to and tolls, may not generate the antic- repair—and the money currently policymakers, who often bemoan— ipated results. being spent on speculative system inaccurately—the lack of highway Alongside the poor returns for many expansion could be profitably redi- expansion. expansion projects, America has a rected. For a measure of the poor return on significant backlog of critical mainte- investment (ROI) on expansion proj- nance needs. Many estimates, such as 1 INFRASTRUCTURE AND DRIVERLESS CARS Google is currently testing autono- There has been tremendous specu- • Eliminating the traffic-enforcement mous vehicles on the streets of Austin lation about what autonomous vehi- function of policing, which would and elsewhere; Uber’s driverless cars cles will mean for American society. deprive local government of mov- are cruising in Pittsburgh and San Articles on their potential impact have ing-violations revenue. Francisco. A driverless tractor-trailer appeared in a large number of pub- • Pervasive change or the elimina- using Uber’s technology recently lications, including New York maga- tion of entire industries such as car 17 18 made a 120-mile beer delivery run zine, the New York Review of Books, dealers and insurance agents, with 16 19 for Coors. Apple is working on driv- and the Harvard Business Review. follow-on effects in state and local erless cars. And the traditional auto Most agree that their impact could politics, where these constituencies 20 companies are gearing up to compete be vast, including: are currently very powerful. against these technology companies • Significant economic displacement. • Expansion of the surveillance state by developing autonomous vehicles— About 4 million people work as cars as well as trucks. as autonomous vehicles connected truck drivers, for example; their jobs to the cloud upload sensory data in Numerous technical, legal, and other are at risk. real time. challenges must be addressed before • Radically changing the ownership • An increased shortage of organs autonomous vehicles are ready for model of vehicles. Some suggest deployment to ordinary customers. for transplantation, as fewer organ that people in the future will access donors die in accidents. But the fact that actual test vehicles a shared fleet of driverless cars are already on the road suggests that rather than own an individual one. While it’s impossible to predict this moment might not be that far off. whether any of these changes will

TRANSPORTATION Driverless Cars and the Future of American Infrastructure 35 actually come to pass, it seems likely could easily become more tolerant of spacing in between. This approach is that autonomous vehicles could rep- longer commutes if their travel time is being tested in the trucking industry, resent a major economic and even productive. And third, so-called dead- in which a number of driverless trucks social inflection point. That is, they heading, in which empty vehicles, are coupled and led by a human- will be more like an entirely new mode such as those exiting a city center to driven truck.”23 Another study sug- of transport than merely another fea- park at a remote site or to return to gests that “when regulations, liability ture extension of the automobile as the owner’s home for another family concerns and driver comfort allow we know it. member to use, could lead to a seri- much more aggressive car-following This innovation introduces significant ous increase of vehicles on the road. algorithms, vehicle delays may be 24 uncertainty into our requirements for On the other hand, autonomous reduced by 45% or more.” transportation infrastructure over the vehicles hold the promise of making Which of these effects will predom- medium and long term. Consider the highways much safer and more effi- inate? How much traffic will there effect of autonomous vehicles on con- cient. “The reduction of traffic crashes actually be in the future? How much gestion alone. One study projects that and consequent secondary incidents highway capacity will be required? “the adoption of AVs will likely result alone,” one study suggested, “will lead Will driverless cars require different in higher per-capita VMT due to latent to significant efficiencies in traffic types of roadways to be built? 21 demand.” Another predicts: “When operations by reducing non-recurrent These questions are very much up fleet penetration reaches 95% and congestion, because 25 percent of in the air. But what we can say with when non-drivers are permitted to traffic congestion can be attributed to certainty is that the advent of auton- travel in robotic cars, VMT increases traffic incidents such as crashes and omous vehicles materially increases may reach as high as 35% on portions vehicle breakdowns. At high market uncertainty about both the type 22 of the transportation network.” penetration, AV technology poten- of infrastructure that we will need How might driverless cars lead to tially can make it possible to move and the highway capacity required, more congestion? First, they could be toward an advanced form of vehicle making speculative investment today used widely by those currently too old platooning in which convoys of vehi- unwarranted. or too young to drive. Second, people cles move at high speeds and small 2 “PEAK CAR” AND THE FUTURE DEMAND FOR TRAVEL Starting in 1950, total VMT had been constructed, that new road (increased scientist of the U.K. Department for increasing at a rate faster than pop- supply) will tend to increase the quan- Transport, states: “Saturation of daily ulation and jobs (see Figure 1). This tity of driving consumed because it travel demand is to be expected and was true for per-capita VMT as well. lowers the price of driving (in the is a likely explanation for the observed There were a very small number of form of reduced congestion, more cessation of per capita growth of per- short-term interruptions, such as the direct routings, and so on). sonal travel.”26 He bases his claim on time period around the 1973 Arab oil This is true so far as it goes. But the the diminishing marginal utility of embargo; but overwhelmingly, the logic of induced demand also insists additional car travel. trend was up. that any attempt to address traffic Metz points out that 80% of Britons This changed starting in the 2000s. congestion by building more roads or already have three supermarkets Total VMT fell, starting in 2007, and widening more roads is futile because within a 15- minute drive. In many continued until 2011. Per-capita VMT those roads will simply fill up with new categories, ample choices are already (see Figure 2) started falling in 2005 cars until they are equally congested. available within easy driving distance and continued through at least 2013. But there may be a countervailing and within each person’s daily travel (Per-capita and total VMT can move force, “saturation”: at some point, budget, which he estimates as a his- in different directions because the there is simply little to no further torical constant of about one hour. total U.S. population is growing.) demand for driving to satisfy. Traffic There’s limited need to drive more One obvious factor behind this decline engineers as far back as the 1950s and farther to access more oppor- was the onset of the Great Recession; anticipated that per-capita VMT tunities, except in a limited number it’s unsurprising to see that total VMT would level off at a future date. In of places with unique amenities or began falling in 2007 as Americans fact, a 1974 British study predicted employment characteristics. lost their jobs and incomes. But there that that country would reach a satu- This saturation effect exists inde- may be other forces at work. ration point in 2010, close to the time pendently of any other effects that Many argue that driving demand is in which British VMT did, in fact, peak might limit or even reduce travel 25 unlimited. This is embodied in the idea and start to decline. demand, such as claims that the of so-called induced demand, which David Metz, a researcher at University current generation of young people holds that when a new highway is College London and formerly chief prefers walking, bicycling, and public transit to a greater extent than previ-

TRANSPORTATION Driverless Cars and the Future of American Infrastructure 36 ous generations did. duced and the previous trend will uration point, we should not behave Both total and per-capita VMT resume indefinitely. But given the fact with as much certainty about future resumed their upward climb, begin- that this decline wasn’t anticipated by traffic increases as we did previously. ning in 2012 and 2014, respectively. contemporary traffic engineers, that In short, even apart from autonomous Total VMT has reclaimed its peak, per-capita VMT declined for nine vehicles, there has been a material though per-capita VMT remains well straight years (as opposed to only two increase in our level of uncertainty below peak. It’s possible that the during the Arab oil embargo of the about future demand for highway declines were purely recession-in- 1970s), and that there are theoretical infrastructure. reasons to believe in a demand sat- 3 CONCLUSIONS While there may be select regions— this nature could serve as a template ing is directed to transit. Some of for example, Houston—where rapid for reform. this goes to buses, but a significant growth makes highway expansion amount has been badly misdirected 2. Permit existing highways to be necessary, the national story is one of to build new rail projects in cities with tolled to manage congestion and uncertainty, thanks to autonomous limited histories of rail transit and finance expansion. Rather than vehicles and travel-demand satura- expanding highways that are cur- infrastructure designed overwhelm- tion. On the national level, the danger rently congested, one alternative ingly around the automobile. These is to commit to building highways that solution is to use pricing to manage projects, like Dallas’s light rail system, can’t be economically justified while congestion instead. This so-called are even more speculative than high- existing roadways crumble. To avoid congestion pricing approach has long ways. this danger, federal policy should be been used in Singapore and has been Meanwhile, the existing rail system changed in the following ways: deployed in many other cities around in Washington, D.C., has experienced 1. Limit or eliminate federal grants the world. It is also already in use in severe problems due to a lack of main- for highway expansion. One way the U.S., such on the SR 91 express toll tenance. The same is true in Boston. would be to restrict federal grants lanes in the Los Angeles area. This can New York City’s subway signals are to maintenance only, or to cap the be implemented with modern elec- many decades old and obsolete, share of expansion projects at a low tronic toll-collection methods that among myriad other maintenance percentage, such as 5%. Economists don’t require congestion-creating toll needs. Given the extensive mainte- Matthew Kahn of UCLA and David booths. nance needs on existing high-volume Levinson of the University of Minne- The bankruptcy of various U.S. toll- rail systems, limited federal dollars sota made an interesting proposal road projects noted above shows should not be directed to such specu- for this in 2011 that might serve as that drivers are sensitive to pricing. lative enhancement projects. 27 a model. Their proposal would: a) Requiring states to use either 100% With the future of transport so uncer- restrict federal grants to maintenance state funds or toll revenues to build tain, the government would do well to only; b) create a highway-specific expansion projects would enforce stay away from the new and stick to federal infrastructure bank to finance greater market and political discipline investing limited federal resources on highway expansion projects that meet on expansion projects. what we know will deliver: the main- a clear economic return threshold; tenance of our existing roads, bridges, 3. Limit or eliminate federal funds for and c) provide lower interest rates on and transit lines. loans for projects that meet various rail-transit expansion. About 20% of performance standards. Something of federal surface transportation spend-

TRANSPORTATION Driverless Cars and the Future of American Infrastructure 37 4 ENDNOTES

1 Winnie Hu, “Dreaded by Drivers, Brooklyn-Queens Expressway Is Set for Repairs,” New York Times, Nov. 28, 2016. 2 “Approaches to Make Federal Highway Spending More Productive,” Congressional Budget Office, Feb. 2016. 3 Ibid. 4 Quoted in Brad Plumer, “The One Thing Trump and Clinton Agree On Is Infrastructure: This Economist Thinks They’re Both Wrong,” Vox, Oct. 4, 2016. 5 Pedro R. D. Bom and Jenny E. Ligthart, “What Have We Learned from Three Decades of Research on the Productivity of Public Capital?” Journal of Economic Surveys 28, no. 5 (Dec. 2014). 6 See, e.g., Edward Glaeser, “If You Build It…,” City Journal (Summer 2016). 7 Matthew E. Kahn and David M. Levinson, “Fix It First, Expand It Second, Reward It Third: A New Strategy for America’s Highways,” Brookings Institution, Hamilton Project Discussion Paper 2011-03, Feb. 2011. 8 “U.S. Route 33 Nelsonville Bypass Opens Ahead of Schedule,” Ohio Department of Transportation, Oct. 1, 2013. 9 Tom Corrigan, “Texas Toll-Road Operator Files for Bankruptcy,” Wall Street Journal, Mar. 2, 2016. 10 Ryan Dezember and Emily Glazer, “Drop in Traffic Takes Toll on Investors in Private Roads,” Wall Street Journal, Nov. 20, 2013. 11 Ibid. 12 “2013 Report Card for America’s Infrastructure,” American Society of Civil Engineers. 13 “Bumpy Roads Ahead: America’s Roughest Rides and Strategies to Make Our Roads Smoother,” TRIP, Nov. 2016. 14 “22nd Annual Highway Report: The Performance of State Highway Systems,” Reason Foundation, Policy Study no. 448, Sep. 2016. 15 “Deficient Bridges by Highway System 2015,” Federal Highway Administration, Dec. 31, 2015. 16 Alex Davies, “Uber’s Self-Driving Truck Makes Its First Delivery: 50,000 Beers,” Wired.com, Oct. 25, 2016. 17 Robert Moor, “What Happens to American Myth When You Take the Driver Out of It?” New York, Oct. 16, 2016. 18 Sue Halpern, “Our Driverless Future,” New York Review of Books, Nov. 24, 2016. 19 Larry Downs, “The Right and Wrong Ways to Regulate Self-Driving Cars,” Harvard Business Review, Dec. 6, 2016. 20 Aaron Renn, “Self-Driving Cars Will Change More than Just Traffic: Here’s Why,” Washington Post, Mar. 4, 2016; and Ian Adams and Anne Hobson, “Self-Driving Cars Will Make Organ Shortages Even Worse,” Slate, Dec. 30, 2016. 21 Giovanni Circella et al., “Factors Affecting Passenger Travel Demand in the United States,” National Center for Sustainable Transportation, Nov. 2015. 22 Jane Bierstedt et al., “Effect of Next-Generation Vehicles on Travel Demand and Highway Capacity,” FP Think, Jan. 2014. 23 Abdul Rawoof Pinjari, Bertho Augustin, and Nikhil Menon, “Highway Capacity Impacts of Autonomous Vehicles: An Assessment,” Center for Urban Transportation Research, Nov. 2013. 24 Bierstedt, “Effect of Next-Generation Vehicles.” 25 Aaron M. Renn, “Have We Really Reached ‘Peak Car’?” The Guardian, Apr. 30, 2015. 26 David Metz, “A Delicate Balance: Mobility and Access Needs, Expectations and Costs,” International Transport Forum Discussion Papers no. 2011/07, Organisation for Economic Co-operation and Development, Apr. 2011. 27 Kahn and Levinson, “Fix It First.”

TRANSPORTATION Driverless Cars and the Future of American Infrastructure 38 TRANSPORTATION ORIGINALLY PUBLISHED IN CITY JOURNAL

MAKING NEW YORK’S AIRPORTS GREAT AGAIN

For once, Donald Trump was guilty of understatement. “Our airports are like from a Third World country,” he complained during the first presidential debate, describing the experience of landing in New York. He was echoing a common complaint—Vice President Joseph Biden had previously used “Third World” to describe La Guardia—but Trump wasn’t adequately diagnosing the problem. Comparing New York’s airports with the Third World’s is unfair to JOHN TIERNEY the Third World.

Even in the poorest countries, a traveler can expect to reach an airport terminal by automobile, but the traffic congestion at La Guardia has gotten so nightmarish that passengers are jumping from cabs along the highway and schlepping their bags on foot to the terminal. Passengers often rank La Guardia as America’s worst airport, infamous for its leaky ceilings, claustro- phobic corridors, and seedy bathrooms. Yet, by some measures, it isn’t even the worst local airport. As dingy as it is, La Guardia can’t match Newark Airport when it comes to gouging passengers, who’ve seen their fares rise and rise to cover the most expensive landing fees in the country. In the Third World, people typically can fly out of their home city, but prices are so high at Newark that northern New Jersey residents often drive two hours to Philadelphia to find affordable flights. Why are passengers paying so much to get so little? Because American airports are terribly managed, by global standards, and New York’s airports are the worst-managed in America. Among the world’s top 100 airports, as determined by the annual Passengers Choice Awards, the highest-ranked American airport is Denver—in 28th place, far behind the major airports of Europe, Asia, and the Middle East. New York has the second-busiest airport system in the world—only London handles more travelers—but its best airport, JFK, ranks just 59th. Newark and La Guardia don’t make the list. Outside the United States, in cities such as London, Paris, Madrid, Zurich, Frankfurt, Rome, Istanbul, Mumbai, Sydney, and Buenos Aires, public-private partnerships are transforming the industry, with airports getting sold or leased to private-management companies that focus on pleasing passengers. To make a profit, these managers must hold down costs, while enticing customers with lots of flights, competitive fares, and terminals with appealing stores and restau- rants. London’s three airports have improved dramatically since they were privatized—first as a

TRANSPORTATION Making New York Airports Great Again 39 single company, and then divided into by the Progressive era’s naive faith London’s airports are preparing to three separate firms so as to encour- in rule by independent experts, it add runways, the Port Authority is age competition. Heathrow, currently became a bureaucracy unto itself, making no similar efforts to expand eighth in the international ranking, has expanding its turf by taking on proj- capacity in New York, despite the been so intent on attracting passen- ects that didn’t cross state lines. On obvious need. It has consigned pas- gers that it built and runs a nonstop their own, New York and New Jersey sengers to long waits in aging termi- express train linking the terminal to could easily have built and managed nals, staffed by often unresponsive central London. To deal with surging their own airports, and the competi- workers. demand, its management company is tion between them would have ben- The Port Authority’s three big airports seeking to add another runway, as is efited the public. If La Guardia were rank at the bottom of an analysis of the rival company in London running an independent airport, it would pay flight delays at major American air- Gatwick Airport. a price for the traffic mess generated ports conducted by Nate Silver at the In the United States, by contrast, air- by its current renovation project, FiveThirtyEight blog. After controlling ports are still typically run by politi- which is leading many passengers to for weather delays and other factors, cians in conjunction with the locally shun the airport. But because most of Silver calculated how many extra min- dominant airlines, which help finance these travelers wind up using JFK or utes a passenger would be delayed the terminals in return for long-term Newark, their money still goes to the on a typical flight leaving or arriving leases on the gates and other facil- Port Authority, anyway. The agency’s at each airport. New York’s three air- ities. Keeping costs down and cus- managers bring to mind the phone ports were the only ones in America tomers happy are not the highest operator on early episodes of Satur- with an average delay of at least 19 priorities. The airlines use their con- day Night Live, played by Lily Tomlin minutes for both arrivals and depar- trol of the gates and landing slots to during the Bell-monopoly era: “We tures. The worst was La Guardia, with keep out competitors so that they can don’t care. We don’t have to.” an average delay of 27 minutes for an charge higher fares; the politicians use arrival and 30 minutes for a departure. their share of the revenue to reward reed of competition, the Port The local delays are due partly to the supporters, especially the unionized Authority has run up its expenses Northeast’s congested skies and to an airport workers who contribute to Fat the airports, chiefly through the inefficient air-traffic-control system— their campaigns. above-market salaries and pensions also woefully backward, by world In New York, these problems are even extracted by its politically power- standards. But the delays wouldn’t be worse because of decisions made in ful unions. It spends $156,000 in so bad if New York’s airports hadn’t the 1940s to give an airport monopoly wages and benefits per worker. (See been stripped of revenue needed to to the Port Authority of New York and “Bloated, Broke, and Bullied,” Spring build runways and other facilities to New Jersey—perhaps the most inef- 2016.) Even with these stratospheric meet rising demand. ficient and least accountable public costs, the Port Authority charges such New York’s airports also dominated agency in America. If O’Hare Airport high fees that it makes a hefty profit the bottom of the rankings of Amer- were as dilapidated as La Guardia, on its three major airports. In most ican airports in surveys of passenger Chicago voters could punish the other cities, these revenues would satisfaction by J. D. Power, by the mayor responsible for it. If the San help maintain and upgrade the ter- Points Guy, and by Travel & Leisure Francisco airport set landing fees as minals and runways and other facil- magazine. La Guardia secured last high as Newark’s, it would lose busi- ities because federal law generally place, the magazine explained, by ness to Oakland’s airport, which is run forbids local politicians from divert- having “the dubious honor of ranking separately and competes to attract ing airport revenues to non-aviation the worst for the check-in and secu- airlines and passengers. But New purposes. But the federal law, passed rity process, the worst for baggage York’s three major airports—and three in 1982, contains a grandfather pro- handling, the worst when it comes smaller ones—are under the control vision that has let the Port Authority to providing Wi-Fi, the worst at staff of an agency that’s unresponsive to continue diverting billions of dollars of communication, and the worst design voters. No single politician ever gets airport money to cover the ongoing and cleanliness.” And that survey was blamed, because the Port Authority’s losses of its other operations—such as done before the chaos unleashed by executives and board members are the PATH commuter train from New the current renovation project. appointed by the governors of New Jersey to New York, the midtown bus York and New Jersey. terminal, and the World Trade Center reconstruction project. he Port Authority has diverted so When the agency was created in 1921, much money from the airports and the rationale for its unwieldy structure That’s the biggest reason New York’s Trun up such massive debts on its was to enable the two states to coop- passengers pay so much to get so other projects that it can’t afford the erate on projects to improve the port, little: their money isn’t reinvested in bill for La Guardia’s renovation. That starting with a railroad tunnel under the airports. While London’s airports work is being financed partly by Delta the Hudson River. But the agency were being modernized, New York’s Airlines, which is renovating its own never built the tunnel. Instead, aided were allowed to deteriorate. While terminal, and partly by a private con-

TRANSPORTATION Making New York Airports Great Again 40 sortium that will build and manage it wasn’t done long ago, particularly unprofitable projects in the island’s a new central hall and terminal. This at La Guardia.” Ever since Margaret ports. The terminal was a confusing public-private partnership with the Thatcher privatized British airports in jumble of dim corridors, with pas- Port Authority is a welcome devel- the 1980s, that approach has become sengers enduring long waits to get opment, but it still leaves New York routine in the rest of the world. Today, through security or pick up luggage. far behind the rest of the world. The three-quarters of passenger traffic in The stores were tacky and the restau- private consortium is leasing just one Europe is handled by airports that rants greasy spoons, often rented at terminal, not the whole airport. And have been fully or partially privatized. bargain rates to politicians’ friends or La Guardia is still ultimately part of But privatization has been blocked in relatives. the same Port Authority monopoly as the United States by federal policies On rainy days, the ceilings leaked; on JFK and Newark. Passengers would as well as local resistance. hot days, the air conditioning faltered. be better served by putting each air- The result has been much poorer The floors of the boarding bridges port under the control of an indepen- management in the U.S., particularly from the gates to the planes were rid- dent manager, as was done with the in airports structured like the ones in dled with holes. The bathrooms were London airports. New York, as a team of economists grimy, and it often took days or weeks The successful results in London concluded after analyzing more than to repair a broken toilet. Because of impressed New York mayor Rudy 100 major airports around the world. union work rules, changing a light- Giuliani, who moved to break up the The economists, led by Tae H. Oum bulb required four workers, some- airport monopoly in 2000. He criti- of the University of British Columbia, times five—if there was a new bulb cized the Port Authority for letting the found that airports run by cities or available. Some crucial tasks didn’t airports deteriorate by diverting $150 other local governments were typ- get done at all, such as maintaining million of airport revenue annually ically less efficient than those run the instrument landing system used to into other projects. He proposed reas- either by private companies or by guide a plane descending during bad serting New York City’s control over public authorities dedicated solely to weather. For years, pilots had to land La Guardia and JFK, which are city the airports. The lousiest airports of their planes visually, without posi- property, by ending the Port Author- all were those in the United States run tional guidance from radio signals, ity’s leases and bringing in private by port authorities that oversaw both because the system’s antennae were managers. The city considered bids seaports and airports. The economists blocked by trees—and no one in the from four companies—including the concluded that Americans should bureaucracy wanted to take responsi- managers of airports in Amsterdam, “reconsider ownership and manage- bility for cutting them down. Airlines, Düsseldorf, and Zurich—and ended up ment of airports by port authorities.” unsurprisingly, switched operations choosing the British firm in charge of to other Caribbean hubs, leaving the Heathrow. “We drafted an agreement airport without the revenue to pay hat advice has little appeal to to privatize the airports and began bills, much less make capital improve- the politicians, unions, and air- negotiating with the Port Authority,” ments. There was no hope of rescue lines comfortable with the status recalls Anthony Coles, then a deputy T from the Puerto Rican government, quo at the Port Authority. But now, mayor. “They were resistant, but we which was in terrible financial shape there’s an opportunity in Washing- were making some progress on it during the island’s long-running eco- ton to help air travelers in New York in 2001.” Then came the attacks on nomic crisis. and the rest of the country. Donald September 11. After that, says Coles, Trump campaigned on a promise to The situation got so grim that politi- “it wasn’t anyone’s priority anymore, improve America’s infrastructure, and cians considered surrendering some so it never went any further with us.” with Republicans in control of Con- of their control over the airport, The next mayor, Michael Bloomberg, gress, they can expand their efforts though that meant sacrificing the didn’t pursue it, and neither has to reform aviation. In the past, they’ve patronage that came with it. To dig Mayor Bill de Blasio. But as the air- often been stymied in this aim by out of their financial hole, they needed ports continue to fall behind the rest Democratic opposition, but they do someone from the private sector to of the world, the notion of wresting have one success story to build on. pay off their debts and manage the them from the Port Authority makes If you want to see how much better airport efficiently. This solution was more sense than ever. John Schmidt, airports could be in New York, or in difficult to implement in the United an attorney at Mayer Brown who has any other American city, take a plane States because of obstacles to privat- negotiated public-private partner- to Puerto Rico. ization erected by the major airlines ships at airports around the world, and unions aligned with Democrats. Until four years ago, the Luis Muñoz says that plenty of experienced man- But Republicans in Congress had Marín International Airport in San agers are eager for the New York chal- prodded the Federal Aviation Admin- Juan had lots in common with La lenge. “When it comes to privatizing istration into starting a program that Guardia. It was run by an unwieldy New York’s airports,” he observes, “the would permit at least a few airports bureaucracy, the Puerto Rico Ports universal view of the world’s major to give it a try. Authority, which neglected the air- airport operators is incredulity that port while running up bills on its other San Juan became the first—and so

TRANSPORTATION Making New York Airports Great Again 41 far the only—major American airport airlines and airports. “A knowledge- to make the conversion. The Ports able professional like Agustín makes Authority leased the airport in 2013 so much difference,” Luciano says. for 40 years to Aerostar, a partnership “With political appointees, you have of investors and a company operating to teach each new one how the air- airports in Cancún and other Mexican port works, and it can take so long to cities. The new managers agreed to get anything done. Now when there’s make capital improvements and to a problem with a taxiway or a gate or pay the Ports Authority $1.2 billion— a checkpoint, Agustín understands it half up-front and half over the course and takes care of it right away.” of the lease. They also promised to That’s precisely what Arellano did reduce landing fees and keep them with the trees blocking the antennae low in the future. needed to guide planes landing in bad The result, just three years later, is an weather. Airport officials had been airport that nobody would call Third waiting eight years for bureaucrats World. The redesigned concourses in Puerto Rico and Washington to are sleek and airy and easy to nav- decide which agency had the author- igate. Passengers get through secu- ity to remove them. Arellano promptly rity faster, thanks to a state-of-the- resolved the impasse. “We went out art system for screening bags. New there and cut down the trees our- boarding bridges stand at the gates. selves,” he says. “I knew we’d have to The duty-free shop now looks like an pay a fine, and we did—they made us upscale department store, and reve- plant two trees nearby for each one nue from the new stores and restau- we cut down. But we couldn’t wait rants has more than doubled. The any longer. We had to make sure renovated facilities and the reduced planes could land safely. Isn’t human landing fees have attracted more air- life more important than trees?” lines to San Juan, and they have no By eliminating old union work rules, trouble getting access to gates—now the airport has improved services, controlled by the airport’s manager, while shrinking the staff by a third. not other airlines. This new arrange- Managers use new computerized ment took some getting used to for tools for tracking repairs and spotting the dominant airlines, but they’re problems. The airport is one of the reaping other benefits. first in the United States to install a “We’re paying lower fees for a much system that tracks the flow of people better airport,” says Michael Luciano, throughout the terminal, enabling who has run Delta’s operations in San managers to see exactly how long it Juan for almost two decades. “Almost takes passengers to get through lines every area has been renovated. You at airline counters and security check- go into any restroom, and it’s bright points. When bottlenecks occur, extra and clean—things like that are really workers are dispatched to help out. infrastructure in the United States is so old that there’s no way the gov- important to our customers. The lines “We’re trying to change the whole at the checkpoints are handled more ernment can afford to modernize it culture of the airport to focus on all,” Arellano notes. “I realize that the smoothly. The whole airport experi- customer service,” Arellano says. ence is different. Things work.” word Ωprivatization≈ is problematic That’s brought more customers. The for many people. But it’s not as if the volume of passengers in San Juan public is giving up all control. It still nder the Ports Authority regime, has been growing at 4 percent annu- owns the airport in a public-private inexperienced political appointees ally, well above the industry average. partnership. The government gets Udirected the airport; their jobs and That increase is good for Aerostar’s out of debt and acquires a new source plans lasted only as long as their party bottom line, of course, but it’s also a of revenue, and passengers get an stayed in power. Now, the airport is boon to Puerto Rico. While the rest of improved facility managed by profes- run by industry veterans, who take the the island’s economy has floundered sionals. The public comes out ahead.” long view because of their company’s and the government has cut back 40-year lease. The Aerostar executive services, its airport has transformed in charge of the airport, Agustín Arel- from liability into asset. Arellano sees uppose that the politicians con- lano, a former pilot with the Mexican it as a model for New York and other trolling New York’s airports put air force, is an aviation engineer with cities, though he recognizes the polit- Saside their own interests—this is decades of experience overseeing ical obstacles elsewhere. “The airport completely hypothetical, needless to

TRANSPORTATION Making New York Airports Great Again 42 say—and decided to get the best deal their suitcases along a highway. trol the White House and Congress, for the public. What could be done It’s a lovely vision, but how—to be they have a golden opportunity to with the airports? non-hypothetical—could politicians bring American aviation up to inter- Robert Poole has looked at the num- be induced to surrender control of national standards. They’re hoping to bers in a report for the Manhattan the airports? reduce congestion and flight delays by turning the federal government’s Institute. A longtime expert on avia- The first step: prevent them from tion for the Reason Foundation, Poole antiquated air-traffic-control system raiding the airports’ coffers to sub- over to an independent corporation, estimates that the Port Authority sidize pet projects. United Airlines is could make at least $10 billion, and as Canada and Britain have done. trying to do this, asking the FAA to They’re also looking to make it easier more likely closer to $35 billion, by stop the Port Authority from divert- leasing the three major airports to for airports to emulate San Juan. The ing its Newark revenue. The airline’s FAA’s current program allows just a private companies. So the long-term formal complaint details Newark’s leases would probably be more than few airports to experiment with pri- “bloated” costs—like the $242,000 in vatization, and then only with the annual compensation per aircraft-res- San Juan leased its Luis Muñoz Marín International Airport in 2013 permission of the dominant airlines. to a private partnership, resulting in dramatic improvements to its cue worker. It also notes that the air- If Republicans succeed in eliminating facilities and services. port raises a “staggering” amount these restrictions and taking away the of money through landing fees that airlines’ veto power, American airports are “by far the highest” in the coun- enough to wipe out the Port Authori- could start catching up with the rest try—almost 60 percent more than the of the world. ty’s $21 billion debt—and, even better, next-highest, O’Hare. Much of this rev- wipe out the Port Authority itself. enue goes to outside projects, which It’s hard to imagine this ever occurring The agency’s other operations—the the Port Authority claims is permis- in New York because the Port Author- bridges and tunnels, the PATH train, sible because of the grandfathered ity would be loath to surrender its air- the World Trade Center transit hub— exemption in federal law. United port-monopoly profits. (How would could be assigned to other man- argues that the agency’s diversions it pay for the rest of its empire?) agers concentrating on customer have become so extreme that they’re But perhaps President Trump could service instead of patronage and illegal and should be stopped. help. If he really wants to improve his empire-building. hometown’s airports, he could reprise Another strategy would be even more If the airports were separately man- Mayor Giuliani’s strategy: stop the effective: get rid of the grandfather Port Authority from diverting airport aged, New Yorkers would enjoy the exemption altogether. The Giuliani same kind of benefits enjoyed by trav- revenue. It can do so now because administration formally asked Con- of the grandfather exemption, but elers in San Juan and foreign airports: gress in 1999 to repeal the clause, so renovated terminals, better services, Trump could easily insist that Con- that the Port Authority couldn’t divert gress revoke the exemption in this lower costs, more flights, cheaper money from JFK and La Guardia. But fares, more innovation. To reduce year’s FAA legislation. This would be a the Port Authority successfully lob- painful shock to local politicians, but it congestion and delays, the managers bied to keep the exemption. could add another runway at JFK or could inspire them to think creatively. Newark, or both, and they could use This year, though, Congress has It might even occur to them to turn their control of the gates to encour- another chance to do a favor for New over La Guardia, JFK, and Newark to age competition. Like the managers Yorkers—and the millions of travelers someone who knows how to manage of Heathrow, they might provide a who pass through. It will be debat- a First World airport. rail link to the center of the city. In ing aviation policy in order to meet a no case would they force passengers September deadline for reauthorizing to arrive at the terminal by wheeling the FAA, which must be done every few years. Now that Republicans con-

Research for this article was supported by the Brunie Fund for New York Journalism. This is the fifth in a series of articles about the Port Authority.

TRANSPORTATION Making New York Airports Great Again 43 TRANSPORTATION ORIGINALLY PUBLISHED AS A MI REPORT

REINVENTING THE PORT AUTHORITY OF NEW YORK & NEW JERSEY

The Port Authority of New York & New Jersey is America’s largest single provider of metro-area transportation infrastructure. The New York–New Jersey Port Authority Compact established the agency in 1921, and the original purpose was to improve the region’s seaports. But the broad language of the compact enabled the agency to build toll bridges and tunnels between the two states and, in the 1940s, to operate the region’s three major ROBERT W. POOLE commercial airports. The PA expanded again in 1962, taking over a money-losing heavy-rail transit line that was renamed PATH, and launching the World Trade Center real-estate development in lower Manhattan.

The Progressive-era architects of public authorities like the PA set out to replace the often sordid politics of public procurement with independent public agencies. These agencies would be led by apolitical technocrats—professional engineers, managers, and adminis- trators. That has proved to be a vain hope, as politicized decisions in recent decades have thrust the PA into an array of “economic-development” projects in New York and New Jersey, and the agency has diverted funds to rebuild the Pulaski Skyway, entirely within New Jersey. CONTINUED ON NEXT PAGE 1 | THE PORT AUTHORITY’S RATIONALE AND HISTORY 2 | CHANGE IS IN THE AIR 3 | PLANES, TRAINS, AUTOMOBILES, AND SHIPS 4 | FEASIBILITY 5 | REINVENTING THE PORT AUTHORITY 6 | CONCLUSION 7 | ENDNOTES

TRANSPORTATION Reinventing the Port Authority of New York & New Jersey 44 The agency’s financial condition is it for bistate transportation projects. assets and taking a more businesslike deteriorating. It is also a defendant in In light of these developments, out- approach to its transportation assets. a long-running lawsuit by the regional side organizations and, indeed, the The question is whether these reforms affiliate of the American Automobile PA leadership have called for reforms. go far enough. I think not. The PA Association, which challenges the PA’s The goal is generally to return the needs to undertake more fundamen- diversion of revenue from bridge and agency to its core transportation tal change, and a review of its history toll increases to help reconstruct the mission by divesting real-estate helps explain why. World Trade Center, instead of using 1 THE PORT AUTHORITY’S RATIONALE AND HISTORY By the early 1920s, New York Harbor facilities, including the development revenues to non-airport purposes had grown increasingly congested, as of the world’s first all-container facility before the enactment of the federal the port’s docks and wharves proved at Port Elizabeth, New Jersey. airport grants law in 1970. inadequate to the growing seaborne Still, the PA’s infrastructure invest- The PA’s Board of Commissioners commerce. Nearly all the region’s ments over the first 40 years all dealt comprises 12 members: six appointed docks were in New York City, but the with bistate transportation facilities. by the governor of New York; and six railroads that were needed to trans- That changed in 1962. Laws enacted by the governor of New Jersey. Under port goods to and from the Port of by the legislatures in both states a long-standing informal arrange- New York were in New Jersey. The enabled the Port Authority to develop ment, the governor of New Jersey result was the creation of a bistate a World Trade Center office com- appoints the board chairman, and public authority, established by the plex in lower Manhattan (a New York the governor of New York appoints New York–New Jersey Port Compact project) and to take over the bank- the executive director. The agency’s of 1921, to develop and operate port rupt Hudson & Manhattan Railroad, large surplus cash flows have proved and transportation facilities for the which became PATH (Port Authority alluring: the commissioners searched benefit of the entire region. Trans-Hudson), serving New Jersey for new projects, including non-trans- The Port Authority’s initial plan was commuters. In 1979, legislation portation real estate, which would win to improve the ports and expand rail- allowed the PA to build industrial political plaudits in their respective road infrastructure. But the agency, parks and redevelop waterfront land. states. It is also likely that the sur- short of funds, instead devoted much Similarly, in 1984, legislation enabled pluses weakened agency incentives of its efforts toward building reve- the PA to build mixed-use waterfront to efficiently manage the airports, nue-producing assets: three bridges projects in New Jersey and Queens, toll facilities, and seaports. The idea between New Jersey and Staten New York. of an apolitical agency was still well Island (Bayonne, Goethals, and Out- The PA could finance these major out of reach. erbridge) and the George Washing- moves into real estate because, by the One fact stands out: aside from ton Bridge, between New Jersey and 1960s, bridge and tunnel tolls, along expanding the Lincoln Tunnel in the upper Manhattan. The PA acquired with thriving airport traffic, were gen- 1950s and opening the second deck the existing Holland Tunnel under the erating large surplus cash flows. The on the G. W. Bridge in 1962, there Hudson River in 1931 and built the Lin- agency could tap the money because has been no expansion of highway coln Tunnel, which opened in 1937. there were no new projects lined up, capacity between New York and New In the 1940s, the PA entered into and terminal lease agreements with Jersey in more than 50 years, despite long-term leases to operate Newark, airline tenants were largely funding massive traffic congestion. And until LaGuardia, and Idlewild (later JFK) airport expansions. very recently, adding runway capac- Airports. In 1950, the agency opened Nearly all U.S. commercial airports ity at any of the three major airports a large Port Authority Bus Terminal must use their revenues for airport has been out of the question. Since in mid-Manhattan, primarily to serve purposes as a condition of accepting the early 1960s, the PA has milked the commuter buses from New Jersey. In federal airport grants. But PA airports cash cows—the airports and toll facil- the 1950s and 1960s, the agency sig- are exempt. That’s because they were ities—to subsidize an increasing array nificantly expanded marine terminal already transferring surplus airport of other projects. 2 CHANGE IS IN THE AIR The PA’s declining financial perfor- Center reconstruction, and a variety a special committee of the PA’s board mance—combined with growing of scandals—has led to proposals for of commissioners asked Navigant (a concerns over ever-higher toll rates, reform in recent years. The first pro- consultancy) and investment banking cost overruns on the World Trade posal began in September 2011, when firm Rothschild to perform a finan-

TRANSPORTATION Reinventing the Port Authority of New York & New Jersey 45 cial review of the agency. Navigant’s or its existing businesses.” Future of the Port Authority, consist- Phase II (final) report in 2012 made It documented the PA’s eroding finan- ing of its chairman, vice chairman, a some organizational and governance cial base, thanks to zero-revenue proj- board member, and the counsels of recommendations but did not ques- ects in the two states and soaring each of the two governors. The Spe- tion the agency’s overall business operating deficits at the ports, PATH, cial Panel released its rather sweeping model.1 Rothschild assessed the PA’s and the bus terminals. And it pointed report in December 2014;5 in Feb- ability to finance additional projects with alarm to the continued irrespon- ruary 2015, the board voted unani- despite its high debt level, which it sibility of doing so once the financial mously for the panel’s core structural 2 found to be adequate. erosion became obvious: and strategic recommendations. In 2013, New York’s Citizens Budget Even as the Port Authority’s finan- In addition to several changes in gov- Commission (CBC; a nonprofit cit- cial foundations were eroding, the ernance (e.g., a single CEO and two izens’ group) made a series of rec- Authority continued to finance cochairs, increased transparency), ommendations to improve the Port projects chosen by the governors. the Special Panel report, Keeping Authority’s management and bud- Between 2001 and 2012, the Port the Region Moving, made profoundly geting. A year later, the CBC reported Authority spent more than $800 important mission recommenda- that the agency had made progress million on such “regional projects.” tions. First, the PA must “return to in some areas but was falling short During the next few years, PA spend- its core mission of facilitating the in disclosing how it made and justi- ing on zero-return projects will efficient movement of people and fied decisions on capital projects, in increase even further, as a result of goods through the region.” Second, disclosing the sources of funding for the Authority’s agreement to provide it must revitalize its core transpor- each project and in providing inde- $1.8 billion to fund the rehabilitation tation assets: the three airports, the pendent monitoring of major capital of state highways in New Jersey. bus terminal, the seaports, and PATH. projects.3 Third, it must “phase out real estate “A Port Authority That Works” stated New York University’s Rudin Center ownership and development” as part that the relentless increase in bridge of its mission, including divestiture of for Transportation Policy & Manage- and tunnel tolls was the “direct result” ment released a more comprehensive its commercial real estate holdings of the PA’s “continuing reliance on its at the World Trade Center. Finally, report in 2014.4 “The fundamental bridges, tunnels, and airports to fund challenge,” according to the executive the PA must update its 1952 Consol- its money-losing operations and to idated Bond Resolution to include summary, “is that the business model finance both its own and the states’ under which the Authority has oper- “facilitating the divestment of non- capital projects.” The report called for core assets” and taking advantage of ated for the past 30 years is no longer redirecting PA funding to be “solely sustainable.” public-private partnerships and other for facilities, services, projects, and innovative financing tools. “A Port Authority That Works” faulted programs that are clearly aligned with agency decisions to move into real-es- its core [transportation] mission.” It The reform proposals are many, but tate development and PATH and the recommended that the PA divest all none of them asks the fundamen- subsequent move into economicde- non-transportation real estate except tal question: Is the Port Authority velopment projects. The Rudin Center for the World Trade Center (which it model the best way to plan, finance, report also criticized “allocat[ing] a expects to be profitable), invest more and manage the critically import- portion of its surplus revenues and its in improving the three major airports, ant bistate infrastructure? I suggest limited capital capacity to projects and stop the financial hemorrhage of that the answer is no. The PA itself selected by the governors of the two the PATH system. needs reinvention. A review of the states, many of which bore little or no Authority’s individual lines of business Also in 2014, the PA’s board of gover- explains why—and how. relationship to the Authority’s mission nors created the Special Panel on the 3 PLANES, TRAINS, AUTOMOBILES, AND SHIPS Airports rationed their landing and takeoff world-class standards. Kennedy, LaGuardia, and Newark slots, thanks to inadequate runway The PA’s Special Panel report touts the Airports score very poorly in national capacity. Meanwhile, the PA appeared three major airports as “the second and international airport rankings. to be more interested in adding to its largest airport system in the world in Many of their terminals are antiquated airport portfolio (by acquiring mon- passenger traffic (behind London) and undersize. Their retail concession ey-losing Stewart Airport and getting and the largest in flight operations.”6 offerings are far below those avail- involved in the management of mon- Considering these airports as a cen- able elsewhere. And for decades, the ey-losing Atlantic City Airport) than trally directed “system” reflects the Federal Aviation Administration has upgrading its three major airports to Progressive-era mind-set. It ignores

TRANSPORTATION Reinventing the Port Authority of New York & New Jersey 46 the potential benefits to passengers but unfortunately gave short shrift to implement runway pricing along and shippers of healthy competition to the benefits of serious runway these lines for nearly a decade but among these airports. pricing at the PA’s three major air- failed to use it. London’s Heathrow, Gatwick, and ports. Charging what amounts to After privatization, BAA plc—on its Stansted Airports were operated market-clearing prices to land and initiative—designed, financed, built, as a system when they were part of to take off—instead of traditional and now operates a nonstop heavy- the British Airports Authority. The landing-only fees based on aircraft rail transit line between its Heathrow Thatcher government privatized BAA weight—would generate significant Airport terminals and the Paddington in 1987, but most economists regarded new revenue to pay for additional Station in central London. Trains run privatizing a shared monopoly as a runways and encourage airlines to every 15 minutes and make the trip mistake. Over the past decade, the increase their average aircraft size to in the same amount of time. BAA plc government rectified the mistake by allow for more passengers. spent “over £500 million” ($646 mil- requiring BAA plc to divest Gatwick London’s Heathrow and Gatwick, now lion) to develop Heathrow Express and Stansted; the three airports now privately owned, have abandoned and has stated that the operation is compete for airlines and passengers. traditional weight-based landing profitable. The round-trip fare is £36 Currently, Gatwick and Heathrow are charges. Heathrow charges the same ($46.50).13 Gatwick also has non- each making a strong public case for landing fee for any size aircraft, giving stop rail service via Gatwick Express, a runway addition. The CAPA Centre airlines an incentive to use larger serving Victoria Station in central for Aviation released a thoughtful planes, on average, to spread the cost London. Trips depart every 15 minutes report on the New York airports in over more passengers. The fees vary and take 30 minutes. The round-trip 2015, recommending the competitive by time of day, with rates about twice fare is £35.14 The Port Authority has divestiture model as a key to revital- as high during noise-sensitive night- failed to plan or build any kind of fast ization.7 time hours, as compared with days rail link to the airports for which it is An airport’s organizational form mat- and evenings. Heathrow also charges responsible. different landing fees based on their ters. A largescale empirical study in Bridges and Tunnels 2008 used a database of 109 interna- noise category, with rates six times In its generally forward-looking tional airports, with six different own- higher for the noisiest planes than for report, the PA’s Special Panel unfor- 10 ership forms: city/state government, the quietest. Gatwick charges the tunately took for granted that the airport authority, private sharehold- same rate regardless of aircraft size agency’s bridges and tunnels are cash ers, public-sector corporations, port or weight and likewise charges based cows, always available for milking. Yet authorities, or mixed ownership. The on noise category. Unlike Heathrow, bridges and tunnels do not last for- most productive airports were those it charges for both landings and take- ever. With proper maintenance, major that had been privatized, corpora- offs, and with far lower rates off-peak bridges and tunnels can last up to a 11 tized, or were under airport authority than for peak-time operations. century. But in a growing metro area, ownership. The least productive were The Reason Foundation laid out a they may become functionally obso- those of U.S. port authorities.8 detailed approach to runway pric- lete decades before that. This fact could well be due to the ing for JFK, LaGuardia, and Newark Here are the in-service dates of the 12 practice of multipurpose port Airports in 2007. Incumbent airlines PA’s revenue-generating bridges and authorities using airport revenues to serving the three airports strongly tunnels: Holland Tunnel, 1927; Outer- cross-subsidize other activities, rather opposed the report’s recommenda- bridge Crossing and Goethals Bridge, than focusing on investing produc- tions to charge time-of-day rates for 1928; George Washington Bridge tively in their major airports. both landings and takeoffs, arguing, and Bayonne Bridge, 1931; and Lin- on the one hand, that pricing would coln Tunnel, 1937. The Lincoln Tunnel In 2011, a major study from the not work. On the other hand, the Regional Plan Association (RPA) added a third tube in 1957, and the incumbent carriers argued that if it G. W. Bridge’s second deck opened showed that, contrary to conven- did work, it would jeopardize their tional wisdom, it would be physically in 1962. Since then, the PA has added existing investments in terminal facil- no trans-Hudson capacity for buses, feasible to add runway capacity at ities (if new entrants were willing to 9 cars, or trucks. Kennedy and Newark Airports. The pay more to use the runways than the study also showed that the benefits incumbents). The PA is building a replacement, of adding new runways would be with additional lane capacity, for worth the cost, since air travel is so The U.S. Department of Transporta- the aging and inadequate Goethals crucial to the continued economic tion (DOT) had long prohibited mar- Bridge (which connects Elizabeth, growth of the region. Planning along ket-based runway pricing, allowing New Jersey, to Staten Island, New these lines should have been initiated only traditional weight-based fees for York), under a long-term public- pri- and brought to fruition by the Port landing. In 2008, the DOT lifted the vate partnership. And the Bayonne Authority itself. ban, and the policy change survived Bridge (connecting Bayonne, New legal challenges by the airlines. Thus, The RPA report was pathbreaking Jersey, to Staten Island) is being the PA has had the legal authority raised to provide increased clearance

TRANSPORTATION Reinventing the Port Authority of New York & New Jersey 47 for large cargo ships. Yet there are no gestion. In a 1989 lawsuit, the Auto- The G. W. Bridge Bus Terminal is a other known PA plans for “revitaliz- mobile Club of New York and New much smaller facility, poorly con- ing its core [highway] transportation Jersey argued that it was not “just nected to Manhattan transit lines and assets.”15 Given the overwhelming and reasonable” for the PA to include with a small fraction of the daily usage congestion on the Authority’s other PATH losses in the rate base for deter- of PABT. It is difficult to find, in the PA bridges and tunnels, the drivers who mining tolls on the bridges and tun- reports, either cost figures or recent use them are clearly being short- nels. A federal district court rejected usage figures, since this bus terminal changed, paying ever-higher tolls for the argument. And in a 2016 lawsuit, is lumped in with the G. W. Bridge in declining levels of service. the Automobile Club of New York and financial statements. The PA report- Congestion extracts a high cost from New Jersey sued the PA (same as edly considered closing or selling the 17 the highway, bridge, and tunnel users before), but this suit also failed. Any G. W. Bridge Bus Terminal in 1990. in the New York metro area. The Texas serious reform of the Port Authority That might still make sense, given A&M Transportation Institute’s “2015 should reconsider its long-standing that the Special Panel report ranked Urban Mobility Scorecard” shows that policy of treating its bridge and tunnel it much lower in alignment with core the total annual cost of traffic conges- customers as cash cows. mission than PABT. tion (measured only as the value of Bus Terminals PATH lost time and extra fuel consumed) The PA includes the Port Author- Table 1 compares the key metrics of in the New York metropolitan area ity Bus Terminal, or PABT, and the America’s 10 largest heavy-rail tran- increased from $10.2 billion per year George Washington Bridge Bus Ter- sit systems, including PATH. Not only in 1982 to $14.7 billion in 2014 (both minal in its “Interstate Transportation does PATH have the second-highest in 2014 dollars). The New York metro Network.” Reporting the financials of train (vehicle) operating cost per area moved from being ranked sec- the bus terminals separately would trip (1.9 times the median) and the ond-worst to worst in the nation on foster greater transparency and third-highest total operating cost per this measure. On an individual basis, accountability. PABT, which opened in trip ($3.90), but its general adminis- the average annual cost, $1,209 per 1950, is the largest bus terminal in the tration costs are the highest of all 10— commuter in 1982, had climbed in U.S., thanks to expansions in the 1970s at $0.92 per trip, they are 2.2 times real terms to $1,739 in 2014. On a cost and 1980s. It serves both intercity and the median of $0.42 per trip. Accord- measure, New York has gone from the commuter bus operators, with the ing to New York’s CBC, the annual fifth-worst metro area in the nation to latter accounting for 85% of its oper- PATH deficit rose from $294 million the second-worst.16 ations. Despite strong growth in traf- in 2004 to $383 million in 2014. The Manhattan residents may well be con- fic during the past decade, its annual commission projects that PATH’s cerned that adding to trans-Hudson operating loss is growing—$97.6 mil- annual loss will increase to $487 mil- 18 highway capacity will make conges- lion in 2014 alone. The Special Panel lion by 2018. tion on the city’s streets even worse. report ranked PABT low on align- The CBC and the Special Panel noted Not necessarily. ment with performance objectives that PATH’s fares are relatively low, (presumably because of increasing First, given that 85% of the contain- especially given that its ridership is losses) but high on alignment with somewhat more affluent than typi- ers going to and from the ports are the PA’s core mission. The facility is in carried by trucks (since they are cal transit commuters. Despite sev- poor condition, and the report calls it eral fare increases, the average one- going to or from nearby distribution “physically and functionally obsolete.” centers and businesses), new truck- way fare paid is just $1.96, due to only capacity could relieve some of In October 2015, the PA’s commis- an array of discount pass options. the congestion on current bridges sioners voted unanimously to begin PATH grossly undercharges for what and tunnels. Second, some portion work toward replacing PABT with an amounts to a high level of service of trans-Hudson vehicle traffic is lon- all-new facility. Following an inter- between New York and New Jersey ger-distance through traffic, espe- national design competition, the PA (see the sidebar). cially on the G. W. Bridge, which is staff will develop the plans, which Why are PATH fares so low? While part of the East Coast’s main north– tentatively call for building the new political pressures to keep transit south interstate highway (I-95). Third, facility at an estimated cost of $7.5 fares far below cost affect all transit additional bridge or tunnel capacity billion–$10.5 billion. Without the huge agencies, one factor unique to PATH should be accompanied by conges- potential fund transfer from bridge is its heavy reliance on cross-subsi- tion pricing for all of the PA’s tolled and tunnel revenue, such a grandiose dies from toll payers. The CBC noted facilities. And this pricing could be plan would be highly unlikely. Instead that PATH is the only one of the 10 revenue- neutral, with higher rates of a competition to design the grand- major heavy-rail systems that does during peak periods offset by lower est edifice, it would make much better not receive annual taxpayer sub- rates during off-peak hours. sense to invite conceptual proposals sidies from federal (Federal Tran- from potential developers/ operators Unsurprisingly, the New York metro sit Administration), state, and local whose plans would be judged on how taxpayer sources. The Special Panel region’s toll payers object to paying self-financing they could be. ever-higher tolls for ever- worse con- recommended that the PA seek a

TRANSPORTATION Reinventing the Port Authority of New York & New Jersey 48 new operator for PATH, public or pri- ulation and open the door to annual ports. U.S. ports fare poorly compared vate—potentially one not regulated FTA grants. with Asian ports. The most produc- by the Federal Railroad Administra- tive U.S. container ports are Long Seaports tion (FRA), whose regulatory require- The Port of New York and New Jersey Beach and Los Angeles, with the ments are more costly to meet than is the country’s third-largest port, New York–New Jersey ports a distant those of the Federal Transit Admin- after Los Angeles and Long Beach. third, closely followed by Baltimore istration (FTA). It also recommended Like many U.S. port authorities, the and Savannah. Panama’s Balboa port that PATH pursue federal funding PA operates largely as a landlord, is significantly more productive than from the FTA, as all other heavy-rail leasing individual terminals to various any U.S. port and might develop a systems receive; reduce PATH’s 24/7 private-sector companies. transshipment capability under which service modestly; and increase adver- mega-ships from Asia would offload tising revenue. The PA has invested heavily to pre- their containers for further shipment pare its facilities for the much larger CBC, however, suggested a major to the U.S. East Coast by smaller ves- post-Panamax cargo ships that will sels. reduction in the cross-subsidy from be able to use the expanded Panama toll payers (down from the current Canal. The competition among East By and large, PA port facilities are 69% of PATH’s budget, to 25%–33%). Coast ports to capture market share poor financial performers. The PA’s “The large cross-subsidy PATH from new all-water service from Asia 2014 annual report reveals net oper- requires from more profitable lines of via the Panama Canal—as a faster ating losses for Port Newark ($43.6 business,” the CBC noted, “represents alternative than shipping via the Suez million, 54% of gross income); How- lost opportunities for investments in Canal—is intense. However, there is land Hook ($17.3 million, 159% of gross the agency’s more profitable activities considerable speculation within the income); Brooklyn Marine Terminal and an inequitable burden on users of shipping industry that more capac- ($7.6 million, 177% of gross income); the bridges and tunnels.” ity is being created than will be used, Red Hook ($6.0 million, 405% of That would require either local sales given that ultra-large ships will likely gross income); and Port Jersey Marine taxes in the counties in which PATH stop at fewer ports. To capture the Terminal ($5.4 million, 24% of gross operates or a special property tax new business, ports will need greater income). in those same counties. While either depth and larger cranes but also a These losses, once again, demonstrate change might be politically diffi- quicker and more efficient means of the perverse effects of subsidizing cult, the change would be a marked loading and unloading cargo. These potentially money-losing operations improvement in fairness, better improvements will be a challenge for out of surplus revenues extracted matching PATH costs to its beneficia- the PA’s facilities and workforces. from toll payers. The Elizabeth ries. The commission recommended The Journal of Commerce has devel- Marine Terminal generated enough fare increases and revisions in the fare oped a ranking system for container net income—$71.6 million in 2014—to structure that could include peak/ ports that measures berth productiv- reduce the overall port commerce line off-peak pricing and distance-based ity (an index based on the average of business net operating loss to $10.4 fares, both of which are used on some number of container moves per crane, million. But with the pressing need for of the other large heavyrail systems. per hour, while a ship is at berth).19 capital investments to modernize its It also suggested transferring PATH port facilities and keep them compet- Table 2 lists the productivity scores to New Jersey Transit, which would for the world’s 26 largest container itive, the PA cannot afford to operate presumably eliminate the FRA reg- America’s third-largest port system at

TRANSPORTATION Reinventing the Port Authority of New York & New Jersey 49 a loss. In hindsight, the 1962 There is a project under way to raise agreement that led the PA the clearance height of the Bayonne to build the original World Bridge to accommodate larger, higher Trade Center destabilized cargo ships. It will cost $1.3 billion, and the agency and led to its the funds are coming from increased current modus operandi: bridge and tunnel tolls. Toll Roads repeatedly increasing News has sharply criticized the equity bridge and tunnel toll rates of this arrangement: to finance money-losing and “zero-return” projects Since the drive to heighten the favored by the governors shipping clearance at the Bayonne of New York and New Bridge comes from shippers who will Jersey. The first of these, of benefit by the ability to use larger course, was the money-los- ships, why won’t they pay “tolls” to ing PATH system, which travel under the rebuilt bridge and the PA agreed to take on help pay for what benefits them? in exchange for permission Truckers and other motorists get a to develop the WTC. slightly widened deck, but other- wise the main change they’ll see is As the Rudin Center report a longer, higher climb and more fuel noted, “Between 2002 and consumed.21 2012, the Port Authority spent more than $800 The Port of Hong Kong provides a million on these ‘regional cautionary tale for New York. Once projects,’ including $1.8 one of the leading ports in Asia, Hong billion for rehabilitation of Kong is no longer among the world’s New Jersey state highways 26 most efficient container ports (it and bridges, including the is still fifth in container volume). A Pulaski Skyway.” recent article in the Wall Street Jour- nal attributed the decline to the port’s The availability of “crowded terminals” and the ability of cross-subsidies, the Rudin Center report concluded, other Chinese ports to unload cargo unlikely that the recent toll increases “has seriously distorted the Port containers faster and cheaper.22 would be rescinded (due to bond cov- Authority’s investment priorities.”23 World Trade Center and Other Real- enants), but such a decision would One consequence of the relentless Estate Ventures significantly change the PA’s con- The original World Trade Center increase in toll rates is the ongoing tinued reliance on toll facilities as its development, though controversial litigation brought in federal district cash cow for cross-subsidies—at least at the time, ended up providing a court by the Automobile Clubs of for non-transportation projects. New York and New Jersey, affiliates of return on the PA’s original investment. The PA’s Special Panel has recom- the national AAA. The suit argues that Indeed, the agency leased it (in July mended that the agency phase out the toll increases begun in 2011 vio- 2001) for 99 years to developer Larry its commercial real-estate holdings late the federal Bridge Act, since that Silverstein, at a price of $3.2 billion. and, as well, “Repurpose, redevelop, legislation does not allow bistate toll Following the destruction of the or sell underperforming assets, includ- revenues to be used for non-transpor- buildings on September 11, 2001, both ing obsolete facilities such as the Red tation purposes—or for transportation Silverstein and the PA understandably Hook Container Terminal.” Managing projects that don’t link the two states committed to building a replacement its various non-transportation assets, in question (the Pulaski Skyway). World Trade Center on the site, with the Special Panel noted, may “divert the PA focused in particular on creat- The U.S. Magistrate’s Court for the staff attention and financial resources ing a much better transportation hub Southern District of New York denied from core transportation facilities and to link PATH with subway lines and the auto clubs’ request for an injunc- needed new projects.”25 other transportation services. Unfor- tion to halt the toll increases but tunately, for many reasons, the over- allowed the case to proceed, since all redevelopment suffered large cost these questions had not been defini- overruns and schedule delays before tively adjudicated in previous cases.24 its completion in January 2016. Should the plaintiffs prevail, it seems

TRANSPORTATION Reinventing the Port Authority of New York & New Jersey 50 4 FEASIBILITY The reports from the CBC, the Rudin rely on the competitive procurement PATH from the FTA’s annual grant Center, and the PA’s own Special Panel of privately financed concession com- funding for other heavy-rail transit all suggest, to varying degrees, that panies to build or modernize major systems. There are also grounds for the PA’s business model of the last airport, bridge and tunnel, and sea- considering taxation of properties 50 years or so is no longer sustain- port facilities. directly served by PATH’s commuter able. But all three remain comfortable Once cross-subsidies end, the PA trains (these properties benefit from with the Progressive-era model of a would use toll revenues to reconstruct their proximity to commuter trans- public authority that master-plans the and modernize the existing bridges portation). Today, with apparently region’s key transportation infrastruc- and tunnels. The agency might also endless cross-subsidies from 17 toll ture as a system, owns and operates be able to finance new bridge and payers, there is little political incentive the major facilities, and dispenses tunnel facilities for freight as well as to think about this. If the subsidies extensive cross-subsidies (though motor vehicles. The PA could use end, the incentives would be dramat- perhaps no longer to non-transpor- airport revenues and new pricing ically different. tation projects). schemes to add new runways to Ken- The aging and obsolete PABT needs I would suggest, instead, a more nedy and Newark Airports, as well as replacement. The money to make sweeping reform based on three modernize airport terminals. There this happen could come from a core ideas: 1) competition rather than would also be a strong, even over- public- private partnership that would monopoly among individual facili- whelming, incentive to close down develop PA-owned real estate in the ties; 2) revenue self-sufficiency for uncompetitive ports and to reinvest vicinity. Navigant’s Phase II Report26 the major-mode facilities—airports, in competitive ones that could retain cited property around the terminus bridges and tunnels, and seaports; and expand the ports’ market share of the Lincoln Tunnel (Dyer Avenue) and 3) procurement and operation of among East Coast ports. that “offers the potential opportunity facilities via long-term public-private What about PATH and PABT? To for value-added real estate develop- partnerships (P3s), whose incentive is improve PATH’s finances, the alter- ment that could generate hundreds of to earn a rate of return by providing natives reviewed earlier in this paper millions of dollars over a 10- to 15-year high-quality service to paying cus- would all be worth implementing: sig- period.” Navigant also noted that air tomers. nificant fare increases to levels com- rights above PABT North Wing pres- The new business model draws on petitive with other means of cross- ent another development opportunity. global best practices. These include ing the Hudson; changes in the fare What Are Port Authority Assets a new appreciation for the benefits of structure, such as peak/off-peak and Worth? competition among facilities (e.g., the distance-based rates; and eliminating British prime minister Margaret now-competing London airports and 24/7 service. Thatcher privatized the state-owned the separately managed urban toll- PATH itself could be divested to New British Airports Authority (BAA), ways of Santiago, Chile); privatization Jersey Transit, as suggested by the British Ports, British Rail, British Gas, of major airports, seaports, and toll CBC. Another alternative would be British Telecom, and the formerly roads and development of new facili- to include PATH (or, at least, its new state-owned water and electric utility ties via longterm P3 concessions; and World Trade Center terminal) as part industries in the 1980s. In subsequent increasing roles for variable pricing of of the divestiture of the WTC. decades, there has been a world- airport runways and congested urban wide trend toward privatization and toll facilities. There is nothing revolutionary in this public-private partnerships for large- recommendation. For example, Hong The transition would have to take scale infrastructure in transportation, Kong’s Mass Transit Railway Corpora- energy, and environmental facilities. place over many years (more on this tion (MTR) was created in 1975 as a below), but the Port Authority would government- owned corporation, and In transportation infrastructure, spe- undergo a profound change. It would it is self-supporting from fares and cifically, the predominant model is no longer be the owner and opera- real-estate revenue. The Hong Kong not an outright sale (as with BAA) tor of major infrastructures. Instead, government partially privatized MTR but rather a long-term lease under it would become the policymaker in 2000, selling 23% of its shares on what is called a concession agree- and regulator of facilities that would the stock market. ment—a form of public-private part- be developed or redeveloped via pri- nership (P3). Those agreements are vate capital under long-term P3 con- Whichever ownership alternative is the means by which the public-sec- cession agreements. The PA would selected, the CBC recommendation tor agency exercises governance and retain its responsibility for bistate of changing PATH’s subsidy from toll oversight of the concession company transportation infrastructure, but as payers to federal and local taxpayers responsible for designing, financing, a growing number of state DOTs are has much to recommend it. Today, constructing (or reconstructing), now doing for megaprojects, it would there is no good reason to exclude operating, and maintaining the facil-

TRANSPORTATION Reinventing the Port Authority of New York & New Jersey 51 ity over a lease term long enough to toll facilities, and seaports, we can port valuation, with a high-end value generate a return on its investment. gain a general idea of what the PA’s of 26X and a low-end value of 12X. existing facilities might be worth. New York’s Port Authority has done Table 3 estimates the value of the a handful of such P3 deals, including Investors evaluate the value of a com- PA’s individual bridges and tunnels, the JFK Terminal 4 project in 1999, pany or an infrastructure enterprise in airports, and port commerce lines the current project to replace the terms of its earnings before interest of business. Figures for net income, Central Terminal at LaGuardia, and expense, taxes, depreciation, and interest, and depreciation and amorti- a concession for replacing the Goe- amortization (EBITDA). In the case zation are from Schedule E of the thals Bridge. Notable projects in other of assets owned by the PA, taxes are zero, and the other figures are in its PA’s 2014 annual report. (For the three locales include the long-term conces- major airports, the PA’s $233 million sions for modernizing the Indiana Toll financial statements. Investors typ- ically pay some multiple of EBITDA, in 2014 Passenger Facility Fee [PFC] Road and Chicago Skyway; conces- revenue was added to the reported sion projects to add express toll lanes either for outright ownership or a lease term long enough to have many net income figure, allocated among to congested freeways in Orange the three airports, based on relative County (California), Fort Lauderdale, of the attributes of ownership (e.g., 40–75 years). passenger numbers.) The first set of Dallas and Fort Worth, and the I-495 valuation estimates uses the high-end Beltway and I-95 in northern Virginia Airports: Macquarie Capital has multiples noted above; the second near Washington, D.C.; and Puerto assembled figures that cover 30 set uses the average multiple in each Rico’s longterm lease to upgrade commercial airport transactions case, and the third set uses the low- and modernize the San Juan Airport. for 2008–13. While the range of the end multiple. Since 2003, more than $31 billion in EBITDA multiples ranged from a low equity and long-term debt has been of 10 times EBITDA (10X) to a high The potential market values for the invested in P3 infrastructure projects of 35X, the average was 16.3X.29 The three sets of assets are summarized in the highway sector alone.27 EBITDA multiple for the recent sale of in Table 4, for the three alternative valuation multiples. There is, in fact, a global infrastruc- London City Airport for $3.05 billion 30 ture investment-fund industry that was 28X. Attorney John Schmidt The PA reports the book value of all includes major investment banks, of Mayer Brown, who has advised its assets as $30.77 billion (Schedule F sovereign wealth funds, and large on many P3 concession transactions, in the 2014 annual report). Of course, public pension funds. In 2014, such suggests that the high end of this book value includes investments in funds raised a record $55 billion. They range would apply to the PA’s major loss-producing facilities, which might 31 raised another $48 billion in 2015, via airports. have a market value of zero or less. 77 funds.28 Toll facilities: Another Macquarie data The estimated market value of just the revenue- producing bridges and Some of the largest U.S.-based infra- set tracks 10 major toll-facility conces- sions from 2008 through 2015. These tunnels, airports, and seaports ranges structure funds include ArcLight Cap- from $78 billion at the highest EBITDA ital Partners, Global Infrastructure range from 18.3X to 35.5X EBITDA, with an average of 26.2X.32 multiples to $32 billion at the lowest, Partners, the Blackstone Group, and more conservative, multiples. Goldman Sachs Infrastructure. Major Seaports: Although there have been U.S. pension funds that are invest- some long-term port leases (and Another interesting comparison is the ing directly in infrastructure include some sales), data on EBITDA multi- assets’ market value compared with CalPERS (California Public Employ- ples are harder to obtain. Port values the PA’s outstanding bonds. Sched- ees’ Retirement System), CalSTRS declined sharply during the Great ule D-2 of the 2014 annual report lists (California State Teachers’ Retirement Recession and an accompanying these: System), the New York City Employ- slowdown in global shipping, but Consolidated bonds $19.23 billion ees’ Retirement System, the State recent Australian port deals, accord- Special-project bonds 1.53 billion Board of Administration of Florida, ing to Infrastructure Investor, were in T4 Liberty bonds 1.22 billion and the Illinois State Board of Invest- the 25X–27X range.33 Because most Total bonds $21.98 billion ment. The nonprofit TIAA (Teachers U.S. landlord ports (like the PA’s) Insurance and Annuity Association) is already have long-term leases with The total indebtedness is consider- another direct investor. terminal operators, the high end of ably less than the market value of the revenue-producing assets. Because long-term P3 concessions the EBITDA range is probably not worldwide are modernizing airports, realistic. To be conservative, the esti- mates that follow use 19X for baseline 5 REINVENTING THE PORT AUTHORITY Since there would likely be strong change outlined above, two basic would the benefits to users of the political resistance to the sweeping questions need to be answered. First, PA’s facilities and the economy of the

TRANSPORTATION Reinventing the Port Authority of New York & New Jersey 52 determines how it uses the funds escrow funds sufficient to service raised. The financial statements, in that advance-refunded debt.” Many other words, do not reveal which bonds do not allow the issuer to pay bond issues financed which facil- them off early, for example, if interest ities. rates have decreased and the issuer The PA board may allocate debt could save money by refinancing at service among the lines of busi- a lower interest rate. But many bonds ness, but that does not reflect do permit the agency to refinance by any actual link between a facili- “defeasing” the existing bonds. That ty’s source of capital and what it means setting aside enough funds metro area be significant enough to is required to pay in annual debt ser- (often using very low-risk Treasury warrant sweeping change? Second, vice. Bond markets accept this prac- debt) to make the scheduled pay- is such change even possible, given tice because robust cash flows from ments to the original bondholders. the constraints imposed by the Port toll revenues (and historically, also The PA’s Special Panel report calls for Authority’s bonded debt? Since the from airports) have been enough to amendments to the agency’s Consoli- first question is irrelevant unless the rate the debt as investment- grade. dated Bond Resolution that would: (1) answer to the second question is But this practice also makes it hard permit the sale of assets and the use yes, the financing question must be for investors, customers, and citizens of the sale proceeds; and (2) provide addressed first. to see how the PA actually conducts for the defeasance of debt. It notes Financing its business. that amendments can take effect only The PA does not issue airport reve- The PA’s Special Panel recognized after the consent of 60% or more of nue bonds to finance airport capital that changes to the agency’s 1952 the current bondholders has been projects, toll revenue bonds for bridge Consolidated Bond Resolution would obtained. The Special Panel suggests and tunnel projects, and port revenue be necessary to divest the agency’s that this change could be phased in bonds for port projects. Instead, the noncore assets.34 The bond resolu- by including the new language in all agency’s long-standing practice has tions of most other public agencies, new and refunding bond issues over been to issue consolidated revenue it noted, “typically have a defeasance the next five to six years. And “once bonds. The PA’s revenue streams back provision allowing the borrower to the 60% threshold is reached, the the debts, and the agency’s board void the debt when they set aside amendments would apply to all out-

TRANSPORTATION Reinventing the Port Authority of New York & New Jersey 53 standing bonds.” billion–$11 billion, if the alternative First-rate transportation infrastructure 37 Assuming that such a process takes chosen is a rail/ truck tunnel. of this sort is essential for continued place over the next five-to-six-year Against this predictable howl of pro- economic growth. This agenda should period, the PA could develop a tests are the benefits to the region’s win the support of the entire region’s long-range asset-restructuring plan economy. These benefits are poten- business community, as well as that to effect a transition to the model tially quite large because the PA’s of airport, highway, and seaport cus- that I recommend in this report. The core transportation assets will all need tomers. first phase would be to sell noncore large-scale investment in coming Nevertheless, the users of the PA facil- real-estate and economic-develop- decades. ities will be concerned that the high ment projects. Since those projects Kennedy and Newark Airports prices that P3 concessionaires pay for do not provide any net revenue for urgently require more runway capac- their leases mean big price increases debt service, this might be doable ity. Paying for these improvements for them. That has not been the expe- before the 60% bondholder approval can best be met via a combination rience elsewhere. The San Juan Inter- is reached. After achieving that of existing airport revenue (no longer national Airport concession competi- threshold, the PA could bid out the diverted to money-losing, non-air- tion required the bidders to agree to various airport, bridge/tunnel, and port projects) and net new revenues a fiveyear freeze on airline charges, seaport facilities in phases, compara- from market-priced runway access (as followed by increases limited to the ble with the recent long-term P3 con- implemented by privatized London rate of inflation. Those limitations are cessions for the Indiana Toll Road and Heathrow and Gatwick Airports in built in to the long-term lease/con- the San Juan International Airport. In recent years). These changes will cession agreement enforced by the each case, the concessionaire pays up enable air transportation to increase Puerto Rico Ports Authority. front for the lease, providing funds to pari passu with the region’s economic Likewise, the Indiana Toll Road con- defease a comparable amount of PA growth. cession limits annual toll increases bonds. Trans-Hudson surface transportation to an inflation index; when the IFM This process would be fully consis- will need very significant investment Investors Global Infrastructure Fund tent with the PA’s Special Panel’s as the existing bridges and tunnels acquired the concession in 2015, it recommendation to “[e]mploy pub- reach the end of their design lives. had to accept all the provisions of lic-private partnerships, tax incre- Better trans-Hudson goods move- the original agreement. Companies ment financing, and other innovative ment will likely require a new tunnel engaging in these kinds of leases financing tools to provide funding for freight, possibly a truck/bus tunnel seek long-term returns via growing alternatives and enhanced operational linked with a Bay Ridge Truckway in the customer base, realizing increased 35 opportunities.” In short, P3 agree- Brooklyn.38 Serious congestion pric- operating efficiencies, and generating ments make it financially possible for ing, with lower than current rates increased discretionary revenue (such the PA to gradually retire its consoli- at nonpeak hours and higher rates as expanded retail sales at airport ter- dated bonds and divest its non-trans- during peak hours, could generate the minals and tollway rest areas)—not by portation and selected transportation same or increased toll revenue from charging sky-high rates. assets. Cross subsidies would end, the modernized tunnels while bring- The PA has made modest use of P3 and the agency’s finances would ing about a meaningful reduction in concessions, but the agency may become far more transparent to the peak-period congestion. encounter political pushback if it public. The PA’s ports are entering a changed expands their number and scope. Political Turbulence era of mega-ship ocean transport, in One way to overcome resistance is if Any proposal to end large-scale which they will be in serious compe- public pension funds become inves- 40 cross-subsidies from users of the tition with other East Coast deep- tors. Australian and Canadian pen- airports and bridge/tunnel facilities draft ports—such as Baltimore and sion funds have been the pioneers in would likely be opposed strongly Norfolk—for container traffic serving large-scale infrastructure investment. by current recipients of those subsi- the Northeast and the Midwest. In a For example, a consortium led by dies, including users of PABT, riders recent study, McKinsey proposed vari- Canadian pension funds Borealis and on PATH, and those employed at the able pricing by terminals to provide the Ontario Teachers’ Pension Plan money-losing ports. Other oppo- incentives for both vessel operators submitted the winning bid for London 41 nents include those who hope to use and terminal operators to load and City Airport in February 2016. future cross-subsidies for major new unload more efficiently.39 Many U.S. public pension funds, projects such as new Amtrak tunnels These changes will revitalize the PA’s grossly underfunded and faced with beneath the Hudson River and a pro- a critical need to increase their aver- posed Cross Harbor Freight Move- core infrastructure, with each airport, bridge, tunnel, and port facility sepa- age rate of return on investments, ment Project. The former project is have begun to allocate a portion of 36 rately managed and held accountable now estimated to cost $24 billion, their portfolios to infrastructure in while the latter, though still largely for performance under the terms of its long-term concession agreement. which they can make equity invest- undefined, has been estimated at $7 ments. Generally speaking, brand-new

TRANSPORTATION Reinventing the Port Authority of New York & New Jersey 54 toll roads or bridges (called “green- the Skyway (which they will have to bridge/tunnel, and port projects field” projects) are considered too reconstruct at some point during the include one or more public pension risky for pension funds. By contrast, term of that concession). The lease for funds. Another factor for winning the P3 projects to manage and rebuild/ the much larger Indiana Toll Road was bid might be a conservative debt-eq- modernize existing infrastructure are also put up for sale in 2015. The win- uity ratio, aimed at ensuring financially considered lower-risk and suitable for ning bidder, a consortium of Austra- conservative bids. The debt/equity of pension funds. lian and U.S. pension funds—including the winning Skyway bid was 46/54, Two recent U.S. examples illustrate the New York City Employees’ Retire- and that of the Indiana Toll Road was this trend. In 2015, the company that ment System—paid $5.73 billion for 43/57. had won the long-term concession the remaining 66 years of that con- Public pension fund investment in for the Chicago Skyway in 2004 put cession. That toll road will also have to infrastructure addresses two major the remaining 89 years of the con- be reconstructed and widened during problems: the need for increased cession up for bid. A consortium of the term of the concession. investment in renewing aging infra- three Canadian public pension funds The PA could require that quali- structure; and the pension funds’ won the bid, paying $2.84 billion for fied teams invited to bid on airport, need to earn higher returns.42 6 CONCLUSION The new model suggested in this metro area need ongoing investment: companies held accountable for per- paper draws on global best practices to add capacity as needed, to renew formance, not only via bond cove- that have mobilized large sums of and replace facilities, and to keep nants but also by performance criteria new capital investment: long-term pace with the latest technology. The embedded in their long-term conces- public-private partnerships with PA’s role would change from being sion agreements. dedicated revenue streams. This financier, owner, and operator of the It will hardly be easy to reinvent the model recognizes that large-scale infrastructure to that of planner and Port Authority, but the need to do so infrastructure facilities in a growing regulator of an array of concession is increasingly urgent. 7 ENDNOTES

1 Navigant, Phase II Report, presented to a Special Committee of the Board of Commissioners of the Port Authority of New York and New Jersey, Sep. 2012. 2 Ibid. 3 “How Is the Port Authority Doing? An Update on Port Authority Budget Reform,” Citizens Budget Commission, July 23, 2014. 4 Mitchell L. Moss and Hugh O’Neill, “A Port Authority That Works,” NYU Wagner Rudin Center for Transportation Policy & Management, Mar. 2014. 5 Special Panel on the Future of the Port Authority, Keeping the Region Moving, prepared for the governors of New York and New Jersey, Dec. 26, 2014. 6 Ibid., p. 53. 7 “New York LaGuardia Airport—Rehabilitate or Close Down? Is Privatisation a More Useful Option?” CAPA Centre for Aviation, May 22, 2015. 8 Tae Oum, Jia Yan, and Chunyan Yu, “Ownership Forms Matter for Airport Efficiency,” Journal of Urban Economics 64, no. 2 (Sep. 2008): 422–35. 9 Jeffrey M. Zupan, Richard E. Barone, and Matthew H. Lee, Upgrading to World Class: The Future of the New York Region’s Airports, Regional Plan Association, Jan. 2011. 10 “Schedule 5—Charges Effective from 1 July 2014,” Heathrow Airport Limited, Apr. 2014. 11 “Gatwick Airport: Conditions of Use 2016/17,” Gatwick Airport Limited, Jan. 28, 2016. 12 Robert W. Poole, Jr., and Benjamin Dachis, “Congestion Pricing for the New York Airports: Reducing Delays while Promoting Growth and Competition,” Policy Study No. 366, Reason Foundation, Dec. 2007. 13 HeathrowExpress.com. 14 GatwickExpress.com. 15 Keeping the Region Moving. 16 David Schrank et al., “2015 Urban Mobility Scorecard,” Texas A&M Transportation Institute and INRIX, Aug. 2015. 17 Steven S. Ross, “The Port Authority Shell Game,” Business and Society Review 84 (winter 1993): 50–57. 18 “Financing PATH: Options for Deficit Reduction,” Citizens Budget Commission, New York, Apr. 2014. 19 “Port Productivity,” Journal of Commerce, accessed Oct. 20, 2016. 20 “Ranking the Ports,” Journal of Commerce, June 23, 2015, p. 16. 21 Peter Samuel, “PANYNJ Moves Ahead with Goethals Replacement and Other Big Staten Island Toll Bridge Projects,” Toll Roads News, May 16, 2013. 22 Joanne Chiu, “Hong Kong’s Port Is Caught in a Storm,” Wall Street Journal, Feb. 16, 2016. 23 Moss and O’Neill, “A Port Authority That Works.”

TRANSPORTATION Reinventing the Port Authority of New York & New Jersey 55 24 Auto Club of New York, Inc. v. Port Authority of New York and New Jersey, 842 F. Supp. 2d 672 (S.D.N.Y., 2012). 25 Special Panel, Keeping the Region Moving, p. 93. 26 Navigant, Phase II Report, pp. 86–87. 27 Robert W. Poole, Jr., 2016 Annual Privatization Report, Surface Transportation, Reason Foundation, Aug. 2016. 28 Matthieu Favas, “Not So Calm Before the Storm,” Infrastructure Investor, Feb. 4, 2016. 29 Calculation based on Macquarie data table provided to author. 30 Peter Kneller, “Winning Bidder for London City Airport,” Inspiratia Infrastructure, Feb. 26, 2016. 31 John R. Schmidt, e-mail to Robert Poole, Feb. 23, 2016. 32 Calculation based on Macquarie data table provided to author. 33 Florence Chong, “Why Investors Prefer Ports in an Economic Storm,” Infrastructure Investor, Feb. 2015. 34 Special Panel, Keeping the Region Moving, pp. 95–96. 35 Ibid., pp. 96–97. 36 Emma G. Fitzsimmons, “Amtrak Says New York Region’s Rail Projects Could Cost Up to $23.9 Billion,” New York Times, Jan. 20, 2016. 37 Andrew Coen, “Port Authority Cross Harbor Freight Could Impact Future Revenues,” The Bond Buyer, Dec. 8, 2015. 38 Peter Samuel, “New York Harbor Rail Tunnel Pushed with Special Truck Toll Tax,” Toll Roads News, Sep. 29, 2004. 39 Timo Glave and Steve Saxon, “How to Rethink Pricing at Container Terminals,” McKinsey & Company, Dec. 2015. 40 John Ryan, “The Public Pension Fund Core Funding Gap and Infrastructure Public-Private Partnerships: Identifying Potential Synergies and U.S. Policy Responses to Improve American Infrastructure and Retirement Security,” McGraw Hill Financial Global Institute, May 14, 2014. 41 Peter Kneller, “Canadians Betting on London City Growth,” Inspiratia Infrastructure, Feb. 26, 2016. 42 Robert W. Poole, Jr., “Pension Funds and Highway Investment: A Win-Win Proposition,” Public Works Financing, Jan. 2016.

TRANSPORTATION Reinventing the Port Authority of New York & New Jersey 56 TRANSPORTATION ORIGINALLY PUBLISHED AS A MI REPORT

THE LESSONS OF LONG-TERM PRIVATIZATIONS: WHY CHICAGO GOT IT WRONG AND INDIANA GOT IT RIGHT

Chicago’s Parking-Meter Debacle: In 2004, Chicago leased its city-owned Chicago Skyway Toll Bridge for 99 years for $1.83 billion. The deal was considered a win. Hoping for another, the city leased several downtown parking garages in 2006 for 99 years, in return for a payment of $563 million. Chicago next turned to parking meters and Midway Airport. The city developed both these deals in 2007 and 2008. In September 2008, amid the U.S. financial AARON M. RENN crisis, the city announced its deal for privatizing Midway, which was promptly approved by the city council. The Midway deal ultimately fell apart, as the winning bidder failed to line up financing.

In December 2008, Chicago Parking Meters LLC, a Morgan Stanley–led investment group, won a 75-year concession to control and operate approximately 36,000 parking meters throughout Chicago in return for a $1.16 billion lump-sum payment. The lease required the company to install new multi-space kiosks for parking payments and to accept credit cards. The conces- sionaire also was empowered to write parking tickets, though Chicago retained the revenue. The city retained advertising and naming rights over the meters. Chicago also agreed to a non-compete clause that prohibited it from opening off-street parking lots that would compete with meters—unless the rates in the lot were at least three times those of the meter rate in the area. CONTINUED ON NEXT PAGE

1 | LESSONS LEARNED 2 | THE LIMITS OF PRIVATIZATION: PUBLIC ASSETS AND PUBLIC POLICY 3 | CONCLUSION 4 | ENDNOTES

TRANSPORTATION The Lessons of Long-Term Privatizations: Why Chicago Got It Wrong and Indiana Got It Right 57 In a lopsided vote, the city council everyone else in the city. The new by Spanish infrastructure developer approved the lease on December 4, mayor battled with Chicago Parking Cintra and Australia’s Macquarie 2008. The deal closed in early 2009 Meters over compensation claims for Bank—that led the consortium that but almost immediately ran into trou- out-of-service meters and free park- won the Skyway lease also won the ble. The company initially increased ing for the disabled. Ultimately, Mayor Indiana Toll Road lease. rates in the Loop, the core of Chi- Emanuel amended the deal in 2013, The Indiana Toll Road Concession Co. cago’s central business district, by a which he claimed as a victory8 but paid the state a lump sum of $3.85 modest 17 percent (though parking others dismissed as a further give- billion for a 75-year concession. The rates would rise from $3.50 per hour away. Either way, the amendment consortium was required to imple- in 2009 to $6.50 per hour in 2013). did not materially change the lease. ment electronic tolling and invest in However, parking rates in other parts To this day, Chicago’s parking-meter upgrading and widening portions of of the central business district dou- lease is viewed as a civic debacle and the toll road. And it had to maintain bled almost immediately and rose is a source of lingering public anger. certain levels of service in rural and even higher elsewhere in the city. Indiana’s Toll-Road Lease urban areas. The higher rates provoked outrage. Mitch Daniels was elected gover- In return, the company could increase Meters broke as they overflowed with nor of Indiana in 2004. During his tolls—which it did, significantly. Tolls quarters before the new credit card– campaign, he learned that the Indi- were raised 72 percent initially, with reading kiosks were installed. Several ana Department of Transportation’s passenger-car tolls for an end-to-end parking meters were vandalized. The (INDOT) list of programmed projects ride increasing from $4.65 to $8.00. deal rapidly became a public-relations vastly exceeded the state’s financial Rates also increased annually, for disaster for Mayor Richard M. Daley resources. trucks, through 2010. Thereafter, rate and his administration. The public’s After entering office, Daniels com- increases for all vehicles were capped ire was further stoked when aldermen missioned a study that revealed a to the greater of three: 2 percent or began complaining that they could no $1.8 billion funding gap over the next the rate of inflation or the rate of longer adjust parking policy in their decade. INDOT then developed a pro- increase in per-capita GDP. The deal wards because doing so would trigger gram, “Major Moves,” that included also included a non-compete that hundreds of thousands of dollars in only projects that could be paid prohibited the state from building a 3 penalty payments. for. The projects were selected via competing interstate highway.10 In June 2009, Chicago’s independent a scoring and public-input process. The lease deal was announced on inspector general issued a report The result: many major projects were January 23, 2006. Because of the claiming that the parking meters pushed off more than a decade and amount of money involved and the 9 had been leased for only about half were de facto canceled. projects it could finance, the Daniels 4 of what they were worth. Even as In the meantime, the Daniels admin- administration expected widespread city officials and others disputed the istration investigated more than 30 support for the deal. Instead, there claim, public opinion turned solidly potential ways to address the funding was immediate, vociferous opposi- and irrevocably against the lease. By gap in its highway plan. Likely inspired tion:11 from Democrats who wished to September, Mayor Daley’s approval by Chicago’s successful Skyway lease, oppose the agenda of a Republican rating had fallen to 35 percent, and Indiana undertook to lease the Indi- governor; from those who saw them- he ultimately decided not to run for ana East– West Toll Road, a 156-mile selves as losers in the deal, including 5 reelection. highway across the northern edge of the trucking industry and residents in The $1.16 billion payment that Chi- the state. the counties through which the toll cago got for the lease was originally The East–West Toll Road, like many road passed, who would be paying intended to be distributed to a variety others, was conceived and built in the the higher tolls (still, 66 percent of of funds, including: $400 million to a pre-interstate era and was opened in toll revenue came from out-of-state long-term reserve (to generate reve- 1956, the same year the Federal Aid drivers); and from people concerned nue to replace the city’s existing park- Highway Act was enacted. Today, it’s that foreign corporations were taking ing-meter revenue stream); $325 mil- part of the interstate system as I-90. control of a state asset. lion to a midterm reserve; $326 million By 2005, it was a break-even opera- After a heated public debate, the deal to a budget stabilization fund; and tion and still carried $200 million in was approved on a largely party-line $100 million to a “human infrastruc- debt. vote. The consortium took over oper- ture” fund.6 Instead, the city nearly ations and implemented the required immediately started using the money The East–West Toll Road flowed directly into the Chicago Skyway widening and electronic tolling. Indi- to cover its budget deficits during the ana allocated the lease proceeds in a Great Recession, including spending and was, in effect, the Skyway’s only source and destination of traffic. This variety of ways, including: $200 mil- most of the longterm reserve fund. By lion to retire existing toll-road debt; 2010, only $180 million was left.7 meant that it had leverage over the Skyway, which had recently increased $240 million for local aid to the seven Rahm Emanuel took office in 2011 as tolls; unsurprisingly, the firms—led counties through which the toll road a critic of the deal, joining virtually passed; $150 million in infrastructure

TRANSPORTATION The Lessons of Long-Term Privatizations: Why Chicago Got It Wrong and Indiana Got It Right 58 aid to all local governments in the or replaced 1,190 bridges and 4,000 Critics still snipe at the terms of the state; $120 million to the Northwest miles of pavement over a ten-year lease or complain that the state Regional Development Authority; period.12 faced a funding shortfall at the end $500 million to a long-term reserve, Traffic on the toll road fell short of of the expiration of the Major Moves the Next Generation Trust Fund; and Indiana Toll Road Concession Co.’s program. But many others, inside the balance to financing the expanded expectations, and, as a result, it filed and outside Indiana, have generally Major Moves highway program. Proj- for bankruptcy in 2014.13 Australia’s assessed it as a good deal for the ects included 413 miles of new high- IFM Investors, backed by a group of state.15 So what did Chicago get way—notably, the construction of pension funds, bought the concession, wrong with its parking-meter lease the initial stages of a long-proposed which exited bankruptcy in 2015.14 that Indiana got right with its toll-road I-69 extension from Indianapolis to There was no disruption in highway lease? Evansville. The state also rehabbed operations during bankruptcy. 1 LESSONS LEARNED Public Review Matters on the intensity of the debate: privatization deals benefit from an In Chicago, the Daley administration The legislative battle over Gov. Mitch adequate public review and comment largely developed the parking-meter Daniels’ “Major Moves” highway plan period. Time is needed to explain 16 lease behind closed doors, giving the [including the toll-road lease] has these complex deals to the public city council only three days to vote on almost surpassed the intensity of and to ensure that they are properly the deal after the mayor released its last year’s fight over daylight-sav- vetted and seen as legitimate. terms. After only one hour of debate, ing time, and has all the firepower Carefully Manage the Transition the council approved the lease by of a high-stakes election campaign. from Public to Private Operation 17 a 40 to 5 vote. Among those who Bitter, partisan shots not only fired Chicago’s parking-meter lease signifi- voted no was alderman Toni Preck- by legislators but also their state cantly increased parking-meter rates winkle, now president of the Cook political parties; television and radio and required the private company to County Board of Commissioners, ads; highly charged rhetoric; polls; install new multi-space kiosks that who said that she did not have time staged rallies, and strong opinions would accept credit cards. However, to review the deal. That’s not surpris- conveyed by lots of average Hoo- to maximize its revenue, Chicago ing: a scanned copy of the approval siers.21 Parking Meters reprogrammed the ordinance, which includes the text of existing meters to higher rates before the lease agreement, is 512 pages.18 The review period and debate gave opponents plenty of time to analyze installing the new kiosks. People had The Daniels administration developed the 112-page concession agreement22 to carry many more quarters—annoy- the Indiana Toll Road lease largely out to identify troublesome provisions. No ing enough. But there was more, as of public sight, too. But public vet- such provisions were identified, and the Chicago Tribune reported: ting of that lease was another matter. the contract has functioned well since City Hall is weathering a storm The Chicago city council, composed its approval. of controversy over failures in its almost entirely of Democrats, had a While a longer vetting process does $1.15 billion lease of all city park- history of approving Daley proposals ing meters.… But problems quickly rapidly, by lopsided margins. Though not necessarily mean that the final deal will be better, two important surfaced. They ranged from poor Daniels had a Republican majority preparation by LAZ to take over in the Indiana General Assembly, he facts emerge from Chicago’s ill-fated parking-meter lease: such a large meter system to the faced a large Democratic minority company’s failure to repair broken caucus who would fiercely contest • T he rushed approval process cre- meters and regularly empty the coin any policy that he proposed. ated a public perception that the banks in the meters, which often This meant that the toll-road release parking-meter deal was illegitimate, filled up with quarters and jammed had to go through a traditional legis- if not crooked. While many in Indi- after meter rates quadrupled this lative approval process, with hearings ana disapproved of the toll-road year. On May 27, about 250 pay-and- and significant media scrutiny. Daniels deal, no one questions its legiti- display-boxes—many of them new announced the deal on January 23, macy. devices recently installed—failed in 2006.19 It was later approved by the • Had there been a longer review the downtown area.23 assembly, in a largely party-line vote, and debate process over Chicago’s The lesson: don’t overlook the tran- 20 on March 14, 2006. parking-meter lease, the trouble- sition. The initial experience of a pri- The opposition was significant and some provisions of that deal may vatization deal will be difficult to over- well financed. The yes and no camps have been discovered before it was come if it’s a bad one. both ran ads in support of their posi- too late. Don’t Blow the Up-Front Payment tions. The Kokomo Tribune reported The lesson: governments undertaking

TRANSPORTATION The Lessons of Long-Term Privatizations: Why Chicago Got It Wrong and Indiana Got It Right 59 As a general principle, one-time rev- begun drawing from the balance of as an alternate route—and it paid enues should be used on one-time the Next Generation Trust Fund to the Indiana Toll Road Concession Co. expenses, not on recurring ones. finance current road construction.29 $500,000 to make up for lost reve- 33 Indiana heeded that principle. The The lesson: governments should not nue. majority of the $3.85 billion that the impair future revenue streams in The Chicago parking-meter lease state got from the lease financed privatization transactions, and they requires the city to reimburse the Major Moves, Indiana’s new road-con- should be skeptical of the long-term concessionaire for free parking pro- struction program. Additionally, $500 viability of revenue replacement vided to the disabled, as well as for million was put into a so-called Next reserve funds as a mitigation tool. At any meter closures—including road Generation Trust Fund that would a minimum, privatization deals that construction, street fairs, and special maintain additional road and bridge affect an existing revenue stream events—in excess of an annual closure capacity over the long term. Some should replenish that stream, with allowance. monies were distributed to locali- inflation adjustments in the form of ties for infrastructure projects, and Unlike floods, the events triggering future payments from the conces- compensation in Chicago are not some special funds were granted to sionaire. counties through which the toll road unusual; they occur regularly. And the passed.24 Beware of Compensation Payments compensation payments turned out Some privatization advocates30 have to be far higher than anticipated. Unfortunately, Chicago used much of defended Chicago’s parking-meter Compensation payments for free dis- its $1.16 billion lease payment to cover lease while agreeing that its imple- the city’s budget crisis.25 Less than abled parking alone reached as much mentation was botched. But subtle as $21 million per year. This prompted two years after the deal, only $180 mil- financial pitfalls can make it difficult lion of the meter money remained.26 Illinois to change its law on disabled for a government to cope with even a parking to restrict free parking to Meanwhile, the Daley administration well-managed privatization lease. put off financial reforms to address only those who are physically unable the city’s structural financial prob- Compensation payments are one to use a parking kiosk. But this was lems— problems that continue to such pitfall. Because the concession- still expected to result in $5 million 34 plague Chicago. aires in both Indiana and Chicago in annual compensation payments. paid large, onetime lump-sum pay- (Initially, the Emanuel administration Watch Out for All the Budget ments to lease an asset, they needed disputed the concessionaire’s claims Implications of Privatization reassurance that they could recover for compensation for meter closures. The Indiana Toll Road had been a the money as well as earn the rate of Yet after a negotiation, the adminis- break-even operation, so the lease return they anticipated. So the lease tration projected that the city would payment was a pure windfall for the contracts have compensation clauses pay compensation of $6.5 million per state. Chicago’s parking meters, how- that protect these vendors against year.)35 ever, had contributed $16 million–$17 any adverse changes by the govern- So Chicago not only lost $16 mil- million in net revenue annually to the ment. city’s corporate fund.27 That money lion–$17 million in annual meter reve- would be lost: under the terms of the Consider, for example, what would nues that it received pre-lease; it also lease, the company was entitled to happen if Chicago passed an ordi- became burdened with an annual 100 percent of the meter revenue. nance that lowered parking-meter $11.5 million in compensation costs. rates in defiance of the lease. For pro- The total annual revenue swing is Chicago did plan to replenish its cof- tection, provisions in the lease require now about $26 million per year over fers from a Revenue Replacement compensation if the city takes any the 75-year life of the lease (assuming Fund. This long-term reserve account such action that impairs the financial that the Revenue Replacement Fund initially received $400 million from the value of the meters. Similar provisions continues to generate $2.5 million per lease proceeds, and a city ordinance protect the lessee of the Indiana Toll year). required annual transfers of $20 mil- Road. (Compensation terms do not lion to the city’s corporate fund. But The lesson: governments should be protect against the loss of revenue if highly skeptical of any privatization after significant drawdowns, includ- fewer people park or drive on a toll ing $210 million in 2010 for the city’s deal that involves regular, recurring road; that is, part of the risk the lessee compensation payments. Put another budget deficit, the fund had only $122 properly bears.) million at the end of September 2015. way, any public asset that requires As a result, the fund is now budgeted In the case of the Indiana Toll Road, recurring closures that might require to contribute only $2.5 million annu- there has been only one event that compensation is a poor candidate for ally to the city’s corporate fund.28 required compensation.31 In 2008, a long-term privatization lease. the Borman Expressway, which runs This small but telling example of finan- parallel to the Indiana Toll Road for cial mismanagement also demon- part of its length, flooded and was strates how difficult it is for govern- closed for about a week.32 The state ments to avoid raiding the cookie jar. made the toll road free for that period Indiana is not immune: the state has

TRANSPORTATION The Lessons of Long-Term Privatizations: Why Chicago Got It Wrong and Indiana Got It Right 60 2 THE LIMITS OF PRIVATIZATION: PUBLIC ASSETS AND PUBLIC POLICY In the case of a highway, the state, a road itself, such as congestion. to storefront businesses. Without toll authority, or a private entity builds, These characteristics make highways some form of meter system or other constructs, and operates a tangible and toll roads—and, by extension, time limits on parking, employees of capital asset. That asset’s construc- similar public assets—good candi- nearby businesses (or others) might tion, maintenance, and operations dates for privatization lease: they are grab all the spots and make it diffi- costs—as well as potential profits—are predictable, stable, and largely stand- cult for would-be business patrons recovered through user charges. This alone. It’s not likely, for example, that to find parking. Parking meters help is a simple-to-understand model sim- a state will want its road back in order ensure that storefront businesses ilar to many private businesses. For to use it for a higher-value public have enough parking for customers. this reason, some new toll projects are good. Even if a state did want its road Traditionally, technology limited park- private concerns from the beginning. back, by its very nature, changing a ing meters to simple pricing schemes, Highways also have a characteristic toll road to something else would be such as 15 minutes for every quarter known as “overdetermined form”— very costly. inserted, up to a maximum of two that is, it would be very difficult to Of course, such public assets are not hours. Such pricing schemes were in repurpose them for anything else. immune from risk. For example, who effect at all times when meters were The same is true of hospital buildings, knows what driverless vehicles may being enforced. Today, modern tech- which are very difficult to retrofit for mean for the Indiana Toll Road? But nology allows more dynamic pricing other uses, except at great expense this risk is borne principally by the systems. or by demolishing them and starting concessionaire. Given the history of San Francisco recently implemented over. Overdetermined form holds for changes in transportation technol- a system, SF Park, that varies park- highways regardless of whether they ogy, unforeseen developments will ing-meter pricing by neighborhood are run publicly or privately. likely require contract modifications. and time of day to target 85 percent There are crucial differences between Such circumstances would potentially occupancy. The goal: to ensure that a highway, an airport, a bridge, and a enable the concessionaire to renego- parking spots are well utilized and typical three-story building on Main tiate the terms of the lease; yet such that a few spaces are always available Street. These differences help us circumstances would also put the for people who want a spot at the understand which public assets are concessionaire at risk, giving the state prevailing price. In other words, the suitable for privatization. Consider the leverage in a renegotiation. In any goal is optimal occupancy, not reve- three-story building. event, the risks associated with toll- nue maximization or rate maximiza- The ground level could have a retail road privatizations have so far proved tion. (One interesting result of the SF outlet, a restaurant, or an office. The manageable. Park implementation is that the pilot upper floors could be used for offices, Parking meters are qualitatively differ- zone’s parking-meter rates actually 37 a warehouse, or apartments. These ent: Are they primarily a capital asset? declined by 4 percent, on average.) buildings are more easily adapted for Are they a government service, as tra- There is an additional complication new uses. ditionally understood? The answer to with a parking-meter lease, or a lease Another characteristic of highways both questions is no. Parking meters with similar public assets. The city and toll roads sets them apart: they are primarily an urban-planning tool retains responsibility for maintain- tend to be separated from the areas that cities use to manage the utiliza- ing the streets and sidewalks; only through which they pass—by defini- tion of precious on-street curb space the meters and the right to collect tion, they are limited access. This is for the benefit of the surrounding money from them are privatized. The one reason many people do not like neighborhood. Only secondarily do equivalent situation in the case of a them, particularly in cities, because parking meters represent economic toll road would be to privatize just the they can divide neighborhoods in two rights to profit from public spaces. toll booths while the state retained all or otherwise create a difficult-to-cross In responding to the question, “Why responsibility for the road. barrier. Highways and toll roads are does the city have parking meters?” What’s more, unlike a toll road, the often criticized for visual and sonic Chicago says that “meters play a vital curbside asphalt on which people blight, too. role in facilitating traffic management, park is not an asset with overdeter- The upshot of having these charac- promoting business, and reducing mined form. This real estate is more 36 teristics is that, after the decision is congestion and pollution.” Note the like a building on Main Street, easily made to build them, highways and inclusion of promoting business as a and cheaply repurposed. For instance, toll roads are only weakly related to key rationale for meters. Cities install San Francisco implemented a pop-up other urban-planning considerations. parking meters because there is more café concept in which parking spots Instead, the main policy consider- demand for parking spots than there became space for sidewalk cafés. ations relate to the operations of the are spots to park in, particularly spots Parking spots also could easily be that are conveniently located adjacent turned into protected bike or bus

TRANSPORTATION The Lessons of Long-Term Privatizations: Why Chicago Got It Wrong and Indiana Got It Right 61 lanes, space for street vendors, or When a city like Chicago signs a long- and fiscal risks work as obstacles other uses. Even the street itself can be term concession for parking meters, for transportation planners altering repurposed—as in New York City, when it is: 1) selling economic rights to its current street-level transportation Broadway in Times Square and Herald streets, treating parking meters as pri- configurations.”38 This is not a the- Square was turned into a pedestrian marily a revenue source instead of an oretical risk. When Chicago alder- plaza. (This was initially done very urban-planning tool; and 2) severely man Scott Waguespack wanted to cheaply with paint and lawn chairs.) restricting its ability to change future reduce meter-enforcement hours in What’s in the best interest of a neigh- public policy regarding its streets and his ward, he discovered that it would borhood may be very different as neighborhoods. In other words, the cost $600,000 in compensation pay- conditions change over years and city takes a particular public policy ments in just the first three years. His decades—so the curbside could be and freezes it in place for decades. chief of staff said, “Now these deci- repurposed, returned to use for park- The lesson? Parking meters—as well sions aren’t being made based on ing, etc. as other general-purpose public what’s most efficient and what’s best for small businesses. It’s all about Unlike a toll road, parking spaces are assets integrated with neighborhood functioning and tightly bound to avoiding having to compensate the intimately integrated with the func- leaseholder.”39 tioning of a neighborhood. Parking public policy—should not be subject spaces are a core part of the city’s to longterm privatizations. This rule There are other public-policy effects, largest supply of public space—namely, should include long-term deals involv- many probably unanticipated, of the its streets—and profoundly affect the ing a significant amount of streets parking-meter lease. The Chicago adjacent properties. Parking spaces are and sidewalks. Otherwise, a city will Transit Authority selected Ashland intimately tied to neighborhood health. limit its ability to change public policy Avenue over Western Avenue for as circumstances change. a proposed Bus Rapid Transit line Returning to the goal of promoting Technically, Chicago retains the right in part because Ashland had fewer business, business conditions change leased meters than Western.40 Illinois over time in neighborhoods, so parking to do anything it wants with parking policy and the spots in question. How- changed its law on disabled parking policy needs to respond accordingly. In because of unanticipated compen- summary, parking meters: ever, as noted, changes can involve compensation to the concessionaire sation charges. It may well be good • Are primarily an urban-policy tool, for lost revenues. To be sure, had Chi- public policy that the disability law not a capital asset cago retained control of the meters was modified—but in response to an • Involve utilizing general-purpose, and then decided to remove them, unexpectedly onerous provision in a flexible real estate it would still lose the revenues. But lease? • Are strongly connected to the sur- under the terms of its current lease, It is certainly possible to successfully rounding areas removing the meters now would be involve the private sector in the instal- • Ar e strongly connected to other far more costly. lation, management, and operations public-policy concerns Roosevelt University’s Stephanie of parking meters. However, because • Need to respond dynamically to Farmer conducted interviews with of their effects on public policy, park- changing neighborhood conditions Chicago-area transportation planners ing meters and other similar items are and priorities about the effect of the parking-meter not suitable for long-term leases to lease, and concluded: “New planning private entities. 3 CONCLUSION The Indiana Toll Road and Chicago parking-meter leases provide i mport- ant lessons for governments consid- ering major privatization transactions. The first is that, done correctly, privat- ization can be a big win for the public. The Indiana Toll Road lease is a case study in success. The second lesson is that the cost of getting it wrong can be high. Chicago’s parking-meter lease is exhibit A in failure. Because of their long length, the stakes in these deals are higher than ically have shorter durations and are ated or terminated. for outsourced services, such as print- regularly rebid. A 75-year contract Getting long-term privatizations ing or landscaping. Those deals typ- can’t be easily, or cheaply, renegoti- right starts with picking the right

TRANSPORTATION The Lessons of Long-Term Privatizations: Why Chicago Got It Wrong and Indiana Got It Right 62 asset (see chart). Toll roads have a poor candidates. business of civic life—such as offering track record of success. Assets that One final note: assets whose pri- discounted parking to the disabled or have similar characteristics, such as vatization would result in having to closing streets for special events—are airports, are also more likely to be pay regular, recurring compensation probably best kept under the day-to- good candidates. Parking meters, or to the lessee as part of the ordinary day management of municipal gov- anything related to city streets, are ernment. 4 ENDNOTES

1 See https://www.dnainfo.com/chicago/20130429/chicago/rahm-rips-daley-on-lemon-of-parking-meter-deal-he-left-behind. 2 See http://www.wndu.com/home/headlines/80032922.html. 3 The preceding narrative was adapted from a Chicago Reader investigative series. See http://www.chicagoreader.com/chicago/fail- chicago-parking-meter-privatization-archive/Content?oid=1265254. 4 See http://www.chicagoreader.com/features/blogs/pdf/IGO-CMPS-20090602.pdf. 5 See http://articles.chicagotribune.com/2009-09-13/news/0909120434_1_mayor-richard-daley-paul-vallas-olympic-games. 6 See https://www.civicfed.org/civic-federation/blog/expiring-parking-meter-and-skyway-funds. 7 See http://theexpiredmeter.com/2010/07/1-billion-in-meter-money-nearly-depleted. 8 See http://www.chicagoreader.com/chicago/mayor-emanuel-locks-in-parking-meter-deal/Content?oid=9931786. 9 See http://www.in.gov/indot/files/10_majormoves.pdf. 10 See http://tollroadsnews.com/news/concession-contract-for-indiana-toll-road-detailed. 11 See http://www.landlinemag.com/Magazine/2006/May/News/Indiana-toll-roads.aspx andhttp://www.indianaeconomicdigest.com/main. asp?SectionID=31&subsectionID=229&articleID=25165. 12 See http://www.in.gov/gov/files/062911_Toll_Road_handout_(3).pdf. 13 See http://www.southbendtribune.com/news/local/it-s-official-toll-road-files-bankruptcy/article_da98962e-f0b5-5465-bfcd- 289e7c9103fa.html?mode=jqm. 14 See http://www.wsj.com/articles/indiana-toll-road-exits-bankruptcy-protection-1432907793. 15 See, e.g., http://www.governing.com/topics/mgmt/indiana-toll-road-model-privatization.html; and http://finance.yahoo.com/news/how- taxpayers-fleeced-well-heeled-investors--for-once-154833010.html. 16 See http://www.chicagoreader.com/chicago/features-cover-april-9-2009/Content?oid=1098561. 17 See http://newsblogs.chicagotribune.com/clout_st/2008/12/aldermen-deba-1.html. 18 See http://chicagoinspectorgeneral.org/wp-content/uploads/2011/03/Parking-Meter-Report.pdf. 19 See http://www.theindychannel.com/news/daniels-announces-3-8-billion-bid-to-operate-toll-road. 20 See http://www.nwitimes.com/news/local/general-assembly-oks-toll-road-lease/article_0aacac2a-f3a5-5c65-8b4a-f4004154a904.html. 21 See http://www.kokomotribune.com/opinion/major-maneuverings-behind-major-moves/article_98a8b5f0-9fcd-58f9-a764- eb80dfa80cb2.html. 22 See http://www.in.gov/ifa/2328.htm. 23 See http://www.chicagotribune.com/news/chi-parking-meter-bogus-ticketsjun04-story.html. 24 See Indiana Department of Transportation, “Major Moves,” June 29, 2011. http://www.urbanophile.com/documents/INDOT-toll-road- handout.pdf. 25 See http://newsblogs.chicagotribune.com/clout_st/2009/06/city-hall-to-dip-into-parking-meter-rainy-day-fund-to-balance-budget.html. 26 See http://theexpiredmeter.com/2010/07/1-billion-in-meter-money-nearly-depleted. 27 See http://www.chicagoreader.com/chicago/one-billion-dollars/Content?oid=1123046. 28 See http://www.cityofchicago.org/content/dam/city/depts/fin/supp_info/AssetLeaseAgreements/MeteredParking/CMPS_Revenue_ Replacement_Fund.pdf. 29 See http://taftlaw.com/news/publications/detail/1342-indiana-legislature-loosens-purse-strings-in-non-budget-year. 30 See, e.g., http://reason.org/news/show/setting-the-record-straight-on-1. 31 Information provided in an e-mail from the General Counsel of the Indiana Finance Authority. 32 See http://abc7chicago.com/archive/6391816. 33 There were additional compensation payments of about $45 million at the beginning of the contract related to the discounting of tolls until electronic toll collection was in place. This was effectively a buyback of some of the near-term toll increases in order to secure deal approval—not a compensation event as such. See n. 24. 34 See http://articles.chicagotribune.com/2014-07-03/news/ct-chicago-parking-meters-met-0703-20140703_1_chicago-parking-meters- city-rises-free-parking/. 35 Ibid. 36 See http://www.cityofchicago.org/dam/city/depts/rev/supp_info/ParkingMeter/MeterFAQs.pdf. 37 See http://sf.streetsblog.org/2015/04/17/all-meters-now-sfpark-ready-more-demand-based-parking-pricing-to-come. 38 See http://epn.sagepub.com/content/46/9/2160.abstract. 39 See http://www.chicagobusiness.com/article/20090926/ISSUE01/100032422/wholl-feed-meters-that-go-away. 40 See http://articles.chicagotribune.com/2013-09-30/news/ct-met-cta-ashland-bus-rapid-transit-20130930_1_bus-rapid-transit-transit- riders-one-lane/2.

TRANSPORTATION The Lessons of Long-Term Privatizations: Why Chicago Got It Wrong and Indiana Got It Right 63 WATER + ENERGY

64 WATER + ENERGY ORIGINALLY PUBLISHED AS A MI REPORT

WASTED: HOW TO FIX AMERICA’S SEWERS

In the nineteenth century, drainage problems and sanitation and health crises led many cities to develop sewer systems. In 1855, Chicago became the first U.S. city to have a com- prehensive sewer system.1 Boston began building one in 1876.2 Most of these early systems were built as so-called combined sewers—sanitary wastewater from buildings was combined with storm-water runoff into the same pipe system. AARON M. RENN The alternative approach, a “separated” sewer system, which uses different pipes for storm-wa- ter runoff and sanitary wastewater, was also implemented in the nineteenth century, especially in Europe. But different rainfall patterns made combined sewers more attractive in America. Today, 772 U.S. cities have combined sewers, mostly in the older industrial regions of the Northeast and Midwest (Figure 1).3 In the nineteenth century, sewage was not treated, so the choice of piping system did not affect treatment levels, as it would today. Recall, too, that this was the era of horse-drawn transportation: urban streets were full of horse manure and, often, dead animals;5 industrial and stockyard runoff left waterways heavily polluted. For cities with occasional heavy rainfalls that made storm sewers a necessity, it did not make sense to build two sewer systems. For these cities, “dilution was the solution.”

CONTINUED ON NEXT PAGE 1 | COMBINED-SEWER OVERFLOWS AND THEIR REMEDIATION 2 | REMEDIATION COSTS 3 | THE COMBINED-SEWER RUST-BELT CONNECTION 4 | CONCLUSION 4 | ENDNOTES

WATER + ENERGY Wasted: How to Fix America’s Sewers 65 1 COMBINED-SEWER OVERFLOWS AND THEIR REMEDIATION Environmen- Remediation actions vary from place tal Protec- to place, depending on the specifics tion Agency of the sewer system. Some cities are (EPA) issued increasing their treatment capacity; its CSO con- others must upgrade the capacity of trol policy, sewer lines to transport wastewater to which the treatment facility. Some cities are requires cities constructing “deep tunnel” projects— to substan- large-diameter tunnels bored far tially elimi- underground to store excess waste- nate CSOs water that temporarily exceeds the in order to system’s treatment capacity; others comply with are undertaking separation projects the Clean to separate sanitary and storm sewer Ultimately, sewage treatment was Water Act. Though today the human- pipes. added for both combined sewers health impact of CSOs is limited, the More recently, cities such as Phila- and the sanitary portion of separated federal mandate seeks to make local delphia have turned to “green infra- systems. But for cities with com- waterways clean enough for swim- structure” solutions, such as bioswales bined sewers, there is an additional ming and fishing. (gently sloping detention trenches challenge. Normally, wastewater is The EPA has since undertaken with plants that filter and slowly dis- treated—and thus is clean—before enforcement actions and sued cities charge storm water into the ground), being discharged into local streams, and independent sewer districts in an attempt to reduce storm-water rivers, and lakes. Heavy rainfall, how- across the U.S. for noncompliance: runoff. Green infrastructure can be ever, can overwhelm the capacity under the “polluter pays” principle less expensive to install, can deliver of combined sewers and treatment of environmental law, such entities benefits sooner, and can have more systems. In these cases, the sewer are responsible for what were, at the ancillary community benefits than systems will overflow, dumping time, legal and appropriate decisions. traditional solutions. These various untreated (if diluted) wastewater into EPA-enforcement actions have fre- approaches to CSO remediation are local waterways at overflow points— quently resulted in consent decrees typically implemented in combination, “combined-sewer overflow” (CSO). specifying mandated investments to though the specific mix is unique to The Clean Water Act of 1972 targeted achieve compliance. But even with- each city. the cleanup of America’s waterways out a consent decree, every city with from the legacy of the industrial combined sewers has had to take age, including CSOs. In 1994, the action to achieve compliance. 2 REMEDIATION COSTS In a 2012 report to Congress, the EPA Cleveland. Served by a regional decree was signed, the projected estimated a need for $48 billion in utility, the Northeast Ohio Regional completion date was 2035, for an CSO-remediation capital projects.6 Sewer District (NEORSD), whose average of $135 million in annual Given the difficulty of estimating service territory includes 1.1 million outlays. Cleveland’s 2015 general long-term costs, this may actually people, Cleveland is a prime exam- fund operating budget is $542 mil- understate the total. The EPA’s 31 ple. NEORSD’s EPA consent decree lion:11 the sewer project’s average current co sent decrees list $29 billion anticipated $3 billion in capital invest- annual cost thus is equivalent to 25 in projected costs for those 31 cities ment. Savings identified during proj- percent of the city’s entire general alone (Figure 2).7 ect development have reduced this fund operating budget. Or consider While CSO-remediation costs are amount by about $300 million, for Cleveland’s unfunded pension liabil- 12 highly variable from city to city, they a new cost of $2.7 billion. NEORSD’s ity of $719 million —making the sewer 9 can sometimes be astronomical. The compliance plan, Project Clean Lake, project nearly four times the size of following examples demonstrate the includes construction of seven major Cleveland’s unfunded pension liabil- situations—and solutions—that five new tunnels, as wide as 24 feet in ity. While the sewer district is inde- 10 cities or independent sewer districts diameter. pendent of and larger than Cleveland are pursuing. At the time the NEORSD consent itself, the cost of the city’s CSO-reme-

WATER + ENERGY Wasted: How to Fix America’s Sewers 66 Waters” project.18 Combined sewers overflow because heavy rains overload pipes and treat- ment facilities. Green infrastructure attempts to address this problem by reducing the flow of storm water into the sewer system. Much of the storm water flowing into sewers is runoff from impermeable surfaces, such as roofs, asphalt streets, and parking lots. Green infrastructure seeks ways to allow this rainwater to be absorbed into soils naturally or to be otherwise captured on the surface without flowing into sewers. Philadel- phia’s green-infrastructure solutions include developing green streets with features such as bioswale-type landscaping and tree pits (similar in appearance to traditional tree lawns but designed to capture and manage storm water) and permeable pave- ments. Various green-drainage fea- tures in parking lots, green roofs, and elsewhere are also being pursued, as well as traditional, nongreen (“gray”) infrastructure solutions. Philadelphia’s program is innovative but not cheap: $2.4 billion in capital over 25 years,19 nearly half as much as the city’s $5.5 billion unfunded pen- sion liability. However, using a green approach confers other advantages. First, unlike a deep tunnel, it can be deployed incrementally and deliver benefits sooner. Second, unlike under- ground storage tunnels, it can be used diation initiative dwarfs every other (“The $4.7 Billion Construction Project to provide landscaping and other major civic undertaking in the region. You Will Never See,” was a headline in urban greenery with ancillary value the St. Louis Business Journal).15 St. Louis. The Metropolitan St. to the community. Most cities today Louis Sewer District (MSD) is the Over the 23-year implementation are including at least some green ele- fourth-largest wastewater agency in period, average annual expenditure ments in their CSO-remediation plan, America, serving 1.3 million people will equal $203 million. In contrast, but Philadelphia was the first large- over 525 square miles and covering the 2015 general fund budget of St. scale plan to emphasize green infra- most of St. Louis County and the Louis is $484 million;16 the 2015 gen- structure. independent city of St. Louis. MSD’s eral fund budget of St. Louis County is Buffalo.The Buffalo Sewer Authority project to remediate CSOs and other $261 million.17 Average annual sewer (BSA) serves 450,000 people across system issues is—in addition to the project spending will thus equate to 110 square miles in Buffalo and sur- $2.7 billion in investments already 27 percent of the combined $745 mil- rounding communities. Buffalo is for- made during 1992–2012—the $4.7 bil- lion city-county annual general fund tunate: at an estimated $380 million lion “Project Clear.”13 MSD describes budgets. (As with Cleveland, MSD is over 19 years, its costs will be less than the work as “equivalent to construct- an independent agency.) those of some other cities.20 About ing 11 Busch Stadiums, rebuilding Philadelphia. Philadelphia has 30 percent of Buffalo’s program is I-64 nine times, or erecting seven received significant press for being dedicated to green infrastructure. new Mississippi River bridges.”14 the first major city to attempt to The BSA believes that the rate impact However, unlike those other regional meet CSO regulatory requirements on customers, in terms of future capital projects, the sewer project is using a primarily green infrastructure increases, will be minimal and that not easily visible to the public eye approach—the “Green City, Clean much of the program can be financed because so much of it is underground

WATER + ENERGY Wasted: How to Fix America’s Sewers 67 over time by borrowing more, as older unique case: it is in compliance with remediation program cost $3 billion; bonds are paid off. Nevertheless, the the Clean Water Act and so has zero today, the city is able to treat 98.3 majority of this money will come from CSO-remediation liability. In 1970, Chi- percent of all water during storms.22 ratepayers—Buffalo’s unfunded pen- cago sued its neighbor to the north Indeed, the Chicago lawsuit turned sion liability is $141 million, or half the over sewer overflows into Lake Mich- out to be a partial blessing in disguise, CSO-remediation bill. Though the BSA igan, the source of drinking water to spurring Milwaukee to get ahead of serves more than the city of Buffalo, both communities.21 In response, Mil- the CSO-compliance curve—and, as this example again illustrates the scale waukee built a deep tunnel and other discussed below, to obtain federal of the CSO-remediation challenge. improvements to hold excess sewage grants to pay for more than half the to prevent overflows. Milwaukee’s project. Milwaukee. Milwaukee is a relatively 3 THE COMBINED-SEWER RUST-BELT CONNECTION As Figure 1 shows, CSO-remediation and non-ratepayer sources would be no help from the feds to deal with it. costs—as with infrastructure repair used, in some cases). As a result, the It’s just a disaster from my point of challenges generally—are heavily citizens and property owners of many view. There doesn’t seem to be any associated with older industrial cities, of America’s cities hit hardest by dein- way out of it.”26 This means major rate which have seen large-scale job losses dustrialization would also pay for the increases. For its part, Springfield has in manufacturing. Many Rust Belt bulk of CSO-remediation costs. sufficiently satisfied the EPA that it cities have also lost population. Even Consider Cleveland, again. The city’s is not under a consent decree; but in regions where the overall metropol- residents and investors, as well as it is still spending big, proposing to itan population has grown, population those in the surrounding suburbs that raise sewer rates by 7 percent (well loss in the core city (the older, cen- are part of its regional-sewer utility, above the rate of inflation) each of tral part of the region is where com- are going to pay the majority of the the next three years to help fund the 27 bined sewers are generally located) costs of Cleveland’s CSO-remedia- program. has been substantial—in some cases, tion project. The city’s population, The cumulative impact of these rate half or more of the peak population. which peaked at 914,808 in 1950, had increases can be substantial. For A high percentage of residents who plunged to 389,521 by 2014—a decline example, in Providence, Rhode Island, remain are poor. of 57 percent. Cleveland’s poverty the average sewer bill has gone from The federal government previously rate is about 37 percent;25 it has suf- $130 annually in 1996 to $470 today, made construction grants available fered large-scale deindustrialization; in part to pay for that city’s remedi- for wastewater projects, peaking and it was one of the cities hit hardest ation program. If its Phase 3 plans at $7.3 billion in 1977.23 From 1970 by foreclosures during the subprime are approved, household bills will to 1995, these grants totaled $60.9 housing crisis. rise to $670 by 2020—a 43 percent 24 billion, helping some cities to get Yet Cleveland is seeing nascent revi- increase in just five years—with more 28 ahead of the curve on CSO remedi- talization, especially in its urban core, to come. ation. Milwaukee, as noted, was one of a type not seen in a long time. It The EPA does take affordability of such city: the federal government added 4,000 residents to its down- sewer bills for residential customers paid 55 percent of the cost of its town during the 2000s—a sea change into account when considering local deep tunnel. While Milwaukee still in a city that has seen massive pop- remediation plans. Though it views had to pay a lot locally, the burden ulation loss. World-class institutions, affordability as a continuum, aver- was significantly reduced, thanks to such as the Cleveland Clinic, are grow- age residential sewer bills must, as federal assistance. Starting in 1987, ing. These positives would be brighter a rule, exceed 2 percent of median however, federal grants were substan- still if the city and its inner suburbs household income to be classified tially eliminated. Instead, such grants were not on the hook for a $2.7 billion as a “high” financial burden. The EPA were used to capitalize State Revolv- sewer liability. should be given credit for includ- ing Fund loan programs (though ing affordability in its enforcement some funds continued to be granted These huge sewer costs are, as noted, legally mandated by the federal gov- actions. Yet its current measures of to local wastewater projects via ear- affordability, from both a resident and marks). Henceforth, local wastewater ernment; localities have no choice but to spend the money. As Springfield, civic perspective, have significant lim- utilities would primarily receive loans, itations.29 not grants. Ohio, mayor Warren Copeland com- plained: “This is the biggest, hugest One key limit of the EPA’s approach is The net effect was to shift the cost unfunded mandate that I’ve ever seen that the use of median income does burden of CSO remediation increas- in the time I’ve been in public life. not fully capture the impact of sewer ingly to local utilities, which would Basically, the EPA at the federal level bills on lower-income households. Jeff recover costs predominantly through is prepared to tell us that we have to Rexhausen of the University of Cincin- sewer bills (though property taxes keep spending money and there’s nati calculated the sewer-bill burden

WATER + ENERGY Wasted: How to Fix America’s Sewers 68 for many large U.S. counties for those at the 20th percentile of household income. Select cities are shown in Figure 3. In a number of cities, even current sewer rates represent a material por- tion of lower-income households’ budgets. And not all these cities are in the Rust Belt, evidence that low-in- come affordability problems can affect any city. As Figure 3 shows, many of these significant sewer rate increases will be most keenly felt in low-income households: directly, as sewer bills for those who pay their own utilities; or as rent, for those who do not. The EPA’s CSO-remediation mandates thus act as a highly regres- sive tax. These household remediation bills pipeline, Flint needed an interim water such cities. Because sewers are typi- may not seem much; but consider source and decided to utilize the cally paid for them in the context of surveys that Flint River. However, it failed to treat by utility ratepayers (not from the find that a majority of Americans the river water properly, leading to general fund) or are run by an inde- do not have enough money to pay contamination from water-pipe cor- pendent sewer district, CSO remedi- an unexpected $500 expense.31 In rosion. Flint’s lead water-pipe infra- ation will not result in “crowd out” per Detroit, plans by the water and sewer structure could cost up to $1.5 billion se. But there is a limit to how much 33 department to start disconnecting to replace. While Flint is a drink- citizens and businesses can cumula- customers for nonpayment provoked ing-water, not a wastewater, matter, tively pay for all these needs. a political uproar among the city’s it has brought significant attention to In addition to the direct burden on low-income residents. For Americans the fact that shrinking postindustrial localities and their citizens, higher living paycheck to paycheck, any cities are unable to afford the stag- rates contribute to the overall cost increase in true essentials, like water gering infrastructure costs that they climate that makes these cities less and sewer service, makes a big dif- face—the scale of which is of the competitive for residents and busi- ference. same magnitude that some commu- nities face for CSO remediation. nesses—not only compared with This infrastructure squeeze on postin- newer cities that have separated dustrial cities is highlighted by the This challenge also illustrates the sewage systems but also, sometimes, recent case of Flint, Michigan. Flint fact that these cities have far more with their own suburbs that have sep- previously received drinking water infrastructure needs than CSO reme- arated systems. Even where the com- from Detroit’s water utility. By build- diation alone, including items that bined-sewer service area is part of a ing its own pipeline to Lake Huron, the more directly affect human health larger regional sewer district, there Flint area hoped to pay less than it and well-being, such as replacing are often newer suburban commu- would to buy water from Detroit. It aging and leaky water pipes, repair- nities that are outside the “regional” would also decouple Flint from bank- ing streets and sidewalks, and topping district. While sewer bills are often not rupt Detroit, which hoped to use its off unfunded pension funds. Each of a major expense compared with some water utility as a revenue generator.32 these can run to over a billion dollars, other items, increases from CSO-re- depending on the city, and collec- After Flint decided to build its own mediation initiatives constitute part of tively pose an immense challenge to the overall stack of legacy costs. 4 CONCLUSION How should localities, as well as state rates and financing, revising fed- CSO-remediation challenge and the and federal governments, respond eral affordability criteria, restoring huge scale of the costs that it often to the CSO-remediation financing direct federal grants for CSO compli- imposes. challenge, particularly in struggling ance, and redirecting other funding Embrace green infrastructure. Cities postindustrial cities? Strategies could streams to CSO remediation. Beyond should aggressively evaluate and include embracing green-infrastruc- policy, one needed change is simply implement green-infrastructure solu- ture solutions, optimizing local sewer to bring more public attention to the tions to CSOs; state and federal envi-

WATER + ENERGY Wasted: How to Fix America’s Sewers 69 ronmental agencies should robustly tionally, Chicago’s Metropolitan Water would require $26.4 billion over its support doing so, even if it means Reclamation District, the agency that lifetime to complete. modifying previously agreed-upon treats the city’s wastewater, obtains Provide additional state funding for remediation plans. Green infrastruc- financing from property taxes.37 CSO-remediation initiatives. Like dis- ture is preferred for two reasons. A detailed recommendation for rate tressed localities, many states have First, green—in this case—is the color structures is beyond the scope of their own budget issues: state aid of money: it is often cheaper; and let this paper. But localities—and states to localities was actually reduced in Philadelphia provide the template, whose laws can determine local many cases during the Great Reces- with cost savings utilized as a guide sewer financing—should examine sion. Nevertheless, in many states, the to which green solutions make sense. their financing structures to optimize state government is a financial part- The second reason is that many forms the way sewer costs are recovered to ner with localities in infrastructure of green infrastructure provide addi- achieve the right balance: not burden- finance. tional public benefit beyond simply ing low-income households and not Some states are already evaluating eliminating CSOs. For example, harming the business climate with proposals to increase their water and bioswale-type storm-water detention excessive industrial-utility charges. wastewater infrastructure funding along streets can be integrated as a Revise federal affordability guide- assistance to localities. In New York, form of landscaping and greenery. lines. The EPA should consider further Governor Andrew Cuomo is propos- Indeed, many of these cities need to revisions to its affordability guide- ing that the state provide $250 million make investments in streets, anyway; lines for residents and communities in water and wastewater infrastructure doing so with a green street design to take a more nuanced account of assistance over the next two years— can kill two birds with one stone. Con- lower-income residents and commu- an increase of $100 million over the versely, the deep-tunnel concept of nities facing structural economic chal- existing state support program.39 (extremely expensive) underground lenges, such as postindustrial cities. storage tunnels used only for storing In Ohio, State Senator Joe Schiavoni excess wastewater—and then only a Changes could include more specif- has proposed a $1 billion program to limited number of times per year in ically examining low-income house- provide state aid to localities for water heavy rains—is an inherently dubious holds (not simply using the regional and sewer infrastructure.40 He rep- use of public funds. median income); adding criteria— resents the Youngstown area, a clas- such as the poverty rate, absolute sic postindustrial city working hard One risk of green infrastructure is that unemployment rate, and totality of to renew itself but burdened with long-term maintenance costs are not costs facing the community, including legacy liabilities, such as CSO-reme- yet known. Additional analysis should pensions and debt—to better identify diation costs, that it cannot afford to be put into properly estimating long- distressed communities; and factoring pay. Senator Schiavoni is the minority run costs so that communities can in housing costs in higher-cost loca- leader, so prospects for his legislation make financially appropriate deci- tions. Indeed, sound recommenda- are uncertain. But the CSO issue is on sions on infrastructure in light of the tions, based on detailed evaluations the legislative agenda in Ohio. total cost of ownership. of the EPA’s affordability criteria, have Provide the flexibility to redirect already been published.38 Revisit and optimize local sewer rate existing funding streams to sewers. Sewers are financed using structures. Renew federal construction grants How should states and the federal different mechanisms in different for wastewater projects designed to government fundamentally respond cities. A utility that bills for sewage comply with federal mandates. The to the challenge of postindustrial services, based on water consump- federal government created the man- cities? In many cases, these cities are tion, is the principal model. (Utility date for these localities to reduce their poor, shrinking, and with limited eco- charges can be flat rate, tiered, etc.) CSOs; it should put its money where nomic prospects. Some show nascent Some locations also obtain reve- its mandates are. This need not mean signs of revival but are far from a gen- nue from property taxes and other creating an open-ended program of eral turnaround. sources. renewed grants, but rather a limited A realistic assessment of their situ- For example, Cleveland’s system is program ation requires acknowledging that financed through sewer bills, with a designed to finance the transition to these types of locations are not pres- small residential base charge, plus a Clean Water Act compliance for these ently in demand in the current econ- flat usage fee per thousand cubic feet localities, of which CSO remediation omy. This does not mean giving up of water consumed. Lower rates are is a part. hope: cities like New York, once given available for those who can demon- up for dead, have revived. strate financial need.34 In Chicago, The $48 billion CSO remediation-cost sewers are charged as a fixed percent- estimate from the 2012 Clean Water- But it does require understanding that age of the water bill. Some residential sheds Needs Survey may be low. But government cannot conjure up eco- customers still have unmetered water if accurate—and assuming the pre- nomic growth in these places. Rather and pay a fixed charge for service.35 vious 55 percent federal/45 percent than attempt to restart growth, Others pay a volumetric rate.36 Addi- local cost-sharing ratio—the program a better approach is to focus on

WATER + ENERGY Wasted: How to Fix America’s Sewers 70 restructuring government and elim- Take highway spending. Federal could include wastewater infrastruc- inating the legacy-liability stack. As and state highway aid is import- ture as an eligible funding category long as there is a huge bill for things ant to roadway maintenance. Yet in under state economic-development like unfunded pensions and CSO many communities, part of this aid assistance programs. Doing so might remediation, this will create a cost and is directed to highway expansion, be far more beneficial to struggling risk disincentive to invest. Such cities’ a dubious use of funds in cities and postindustrial cities, which have few liability stacks pose a key challenge regions that are not growing. There major employers seeking to locate but one that can be addressed. is, for instance, a plan to build a there, than business-subsidy pro- The focus of state and federal aid to brand-new $300 million highway, the grams, from which they may never struggling postindustrial cities should “Opportunity Corridor,” inside Cleve- benefit in any material way. 41 be liability elimination, including CSO land, a shrinking city and region. Transportation funding and econom- remediation. One additional benefit But because federal highway money ic-development funding is available, Cleveland is chasing it. If of channeling aid to such an end is are two potential types of funding that it is virtually certain to succeed the federal government allowed that money to be flexibly applied instead sources where creative flexibility in accomplishing its objective. Many could allow local governments to types of government-aid programs to the sewer project, it would chip away at Cleveland’s massive liability. better address pressing problems, like are speculative as to their outcomes; CSO remediation, that they are legally yet as a civil-engineering matter, Crumbling streets are, of course, also obliged to resolve. Again, one key CSO-remediation construction proj- part of the liability stack of postin- benefit of directing intergovernmen- ects have a high likelihood of success. dustrial cities. Yet if localities were tal aid to CSO remediation—rather Redirecting funds presently used allowed the flexibility to redirect some than to economic-development or for questionable transportation, transportation funding to other capi- real-estate incentives—is that money economic development, or housing tal needs, such as sewers, local leaders spent on the former is almost cer- schemes to CSO remediation can could decide which of their needs was tain to achieve its objectives. Water reduce that liability with less recourse highest priority. In addition to federal quality will improve, localities will be to the ratepayer. This approach would changes, granting such flexibility in compliance with the Clean Water put cash in residents’ pockets, espe- to localities would also require that Act, and local citizens and businesses cially the poor, and create a better state departments of transportation will have more money in their pockets. cost profile for the city—if, and when, and regional metropolitan planning This makes CSO remediation a low- the market begins to favor it. organizations, which allocate federal risk investment. transportation aid, be on board. One way to do this is to provide addi- Regardless of the package of pol- tional flexibility in existing aid pro- In addition to new and expanded high- icies implemented, some change grams to allow localities to use the ways in shrinking regions, states have to the CSO-remediation status quo funding for CSO remediation. Today, various business-subsidy programs is needed, especially for America’s the primary source of flexible funds that operate under the umbrella of struggling postindustrial cities: it is that can be applied to sewers is the economic development that are often unjust to make the disproportionately Community Development Block Grant dubious. New York State is investing poor residents of these especially (CDBG) program. Some places have $750 million—nearly double Buffalo’s troubled places bear the burden of used these funds for sewer projects. entire CSO-remediation liability—in reversing rational decisions made in But most other funding streams are a Buffalo-based solar-panel factory their communities in the nineteenth much more restricted. for the benefit of Solar City, a firm century run by billionaire Elon Musk.42 States 5 ENDNOTES

1 See http://www.encyclopedia.chicagohistory.org/pages/300017.html. 2 See http://www.mwra.com/03sewer/html/sewhist.htm. 3 See http://www3.epa.gov/caddis/ssr_urb_ww2.html. 4 See http://www.epa.gov/enforcement/national-enforcement-initiative-keeping-raw-sewage-and-contaminated-stormwater-out-our. 5 See http://cityroom.blogs.nytimes.com/2008/06/09/when-horses-posed-a-public-health-hazard. 6 See http://www.epa.gov/sites/production/files/2015-12/documents/cwns_2012_report_to_congress-508-opt.pdf. 7 See http://www.epa.gov/enforcement/fy-2015-status-civil-judicial-consent-decrees-addressing-combined-sewer-systems-csos. 8 EPA National Enforcement Initiative, Status of Civil Judicial Consent Decrees Addressing Combined Sewer Systems, December 15, 2015. 9 See http://www.neorsd.org/projectcleanlake.php. 10 See http://www.neorsd.org/images/703/projectcleanlake-sewers_hires.jpg. 11 See http://www.city.cleveland.oh.us/sites/default/files/forms_publications/2015Budget.pdf. 12 All pension data taken from http://crr.bc.edu/briefs/gasb-68-how-will-state-unfunded-pension-liabilities-affect-big-cities-2. 13 See http://www.projectclearstl.org.

WATER + ENERGY Wasted: How to Fix America’s Sewers 71 14 See http://www.projectclearstl.org/about. 15 See http://www.bizjournals.com/stlouis/print-edition/2015/08/14/the-4-7-billion-construction-project-you-will.html. 16 See https://www.stlouis-mo.gov/government/departments/budget/documents/upload/FY15-AOP-Summary-Overview-and-charts-S-1- to-S-82.pdf. 17 See http://www.stlouisco.com/portals/8/docs/document%20library/budget/2015/adopted/2015AdoptedSummaryBook.pdf. 18 See http://www.phila.gov/water/sustainability/greencitycleanwaters/Pages/default.aspx. 19 The city claims that this program represents a savings of $5.6 billion. See http://www.phillywatersheds.org/what_were_doing/ documents_and_data/cso_long_term_control_plan. 20 Information provided by Buffalo Sewer Authority. 21 See http://chicago.suntimes.com/opinion/7/71/931147/editorial-milwaukee-can-teach-chicago-clean-water. 22 Information on Milwaukee via the Metropolitan Milwaukee Sewer District. Milwaukee is continuing investments to bring water capture to 100 percent. While not legally required, this is a reasonable investment, given the EPA’s history of ratcheting environmental requirements ever higher. 23 See http://www.epa.gov/sites/production/files/2015-10/documents/csossortc2004_appendixm.pdf. 24 Dollars are not inflation-adjusted. 25 See http://www.cleveland.com/datacentral/index.ssf/2014/09/decade_after_being_declared_na.html. 26 See http://www.springfieldnewssun.com/news/news/local-govt-politics/sewer-project-costs-could-climb-to-243m/nfJqw. 27 See http://www.springfieldnewssun.com/news/news/local-govt-politics/springfield-might-increase-sewer-stormwater-rates/npgDL. 28 See http://wpri.com/2015/12/29/sewer-rates-set-to-spike-if-massive-ri-tunnel-project-gets-ok. 29 See, e.g., http://www.epa.gov/sites/production/files/2014-10/documents/financial_capability_assessment_framework.pdf. 30 See http://public.tableau.com/profile/aeri4370#!/vizhome/AffordabilityIndicator/RegionSelection. 31 See http://www.chicagotribune.com/business/ct-americans-with-no-emergency-savings-0108-biz-20160107-story.html. 32 See http://www.crainsdetroit.com/article/20140402/NEWS/140409965/bonds-that-unbind-flint-takes-next-step-in-pipeline-project-that. 33 See http://www.reuters.com/article/us-michigan-water-idUSKBN0UL2HW20160107. 34 See https://www.neorsd.org/rates.php. 35 See http://www.cityofchicago.org/city/en/depts/fin/supp_info/revenue/water_division_services/understanding_yourwaterbill.html. 36 See http://www.cityofchicago.org/city/en/depts/water/provdrs/cust_serv/svcs/know_my_water_sewerrates.html. 37 See https://www.mwrd.org/irj/portal/anonymous/AFReports. 38 See http://www.epa.gov/sites/production/files/2014-10/documents/financial_capability_assessment_framework.pdf; and http://www. awwa.org/Portals/0/files/legreg/documents/affordability/Affordability-IssueBrief.pdf. 39 See https://www.governor.ny.gov/news/4th-proposal-governors-2016-agenda-grow-economy-and-strengthen-infrastructure- communities. 40 See http://www.vindy.com/news/2015/sep/02/schiavoni-proposes-bonds-to-help-cities. 41 See http://www.wkyc.com/story/news/local/cleveland/2015/04/03/opportunity-corridor/25263787. 42 See http://www.nytimes.com/2015/10/26/nyregion/cuomo-bets-on-solar-power-to-get-buffalo-on-its-feet.html.

WATER + ENERGY Wasted: How to Fix America’s Sewers 72 WATER + ENERGY ORIGINALLY PUBLISHED AS A MI REPORT

EXPOSED: HOW AMERICA’S ELECTRIC GRIDS ARE BECOMING GREENER, SMARTER— AND MORE VULNERABLE

Nearly everyone is aware of the deep interconnectedness of electricity in every facet of daily life. Less well understood is the enormous size and complexity of America’s roughly $6 trillion electric utility system.1 Unlike in many countries, the U.S. electric utility system is not a single grid. Rather, it is a complex web of eight regional “supergrids” coupled with thousands of local grids that deliver 55 percent of all the energy that America uses for MARK P. MILLS non-transportation purposes.2 Now, the U.S. electric utility system is on track to deliver an increasing share of the country’s transportation energy, too.3

The August 2003 blackout that enveloped New York City and the Northeast—which put 50 mil- lion people in the dark for two days—inflicted $6 billion in damages.4 That outage was caused by a confluence of human and machine factors, as are so many disasters in complex systems. Nature, thus far, is the most common source of grid outages. In 2005, Hurricane Katrina left nearly 3 million without power for several days.5 CONTINUED ON NEXT PAGE

1 | THE U.S. IS INCREASINGLY DEPENDENT ON ELECTRICITY 2 | THE ELECTRICITY BALANCING ACT 3 | BLACKOUTS: PAST, PRESENT, AND FUTURE 4 | GRID 2.0: A CYBERPHYSICAL TARGET FOR HACKERS 5 | GREEN ENERGY V. CYBERSECURITY 6 | THE STATE OF U.S. GRID CYBERSECURITY 7 | CONCLUSION 8 | ENDNOTES

WATER + ENERGY Exposed: How America’s Electric Grids are Becoming Greener, Smarter—and More Vulnerable 73 In 2011, it was the lingering power act directly in the physical world. This be slowly changing. The Decem- blackouts that amplified the impacts “cyberphysical” transformation holds ber 2015 hacker-caused blackout of from Hurricane Sandy—accounting the potential for greater efficiencies, Ukraine’s electric grid helped raise for some 40 percent of the $50 bil- convenience, reliability, safety, and red flags, as did the discovery that, lion in damages from that storm.6 predictability. For example, informa- in 2016, Iranian hackers used a pro- The second most dramatic takeaway tion systems are already very good at cess called “Google dorking” to hack from widespread outages—after their identifying and predicting road traf- into a small New York dam’s control 15 economic and social costs—are the fic and hazards, as well as informing system. The Ukraine hack, ostensi- heroic efforts and speed with which drivers via maps and alerts. When that bly by Russia, used malware called electric utility crews effect repairs information is converted into a direct “BlackEnergy” combined with other and restoration.7 Utilities have long action as a cyberphysical system, one cyber and espionage tactics. Argu- prepared for recovery: geographically gets an “autonomous” (i.e., driverless) ably the first wake-up call regard- widespread, car. ing the capabilities of cyberphysi- Cyberphysical systems, however, cal attacks came in 2010, when the complex systems have unavoidable world learned of a clandestine proj- exposure to natural events and statis- bring a new class of risk; let’s call it “cyber carjacking.” In the summer of ect (ostensibly U.S.-Israeli) using the tical failure modes. In the wake of the Stuxnet computer virus to severely 2003 blackout, a Carnegie Mellon Uni- 2015, hackers remotely took over the steering and braking of a Jeep Cher- damage the electrical infrastructure versity study estimated that a black- 16 10 of Iran’s nuclear facilities. out of that level is likely every 25 okee (Figure 1). That wake-up epi- years.8 In the meantime, smaller but sode led to a 1.4 million vehicle recall Last year, Lloyds Bank published a 11 still inconvenient outages—resulting by Chrysler. comprehensive study of worst-case from nature as well as other causes— In pursuit of environmental aims, U.S. scenarios “to bring awareness to the are becoming more common.9 policymakers and regulators are rush- potential physical damage caused ing to improve energy efficiency and by cyberattacks against Operational But America’s electric sector faces Technology” and, in particular, “the two revolutionary changes. One is the integrate episodic power sources—i.e., wind and solar—onto electric grids. U.S. power grid.” Lloyds noted that, emergence of so-called smart systems while the scenarios considered were that promise vastly improved control This has involved pushing utilities and federal and state governments still “improbable,” they were none- and distribution of power across grid theless “technologically possible.”17 systems. The other is the pressure to spend tens of billions of dollars on smart-grid technologies. For every- A worst-case multipronged, multi- to add far more episodic (wind and regional cyberattack causing wide- solar) power sources that inherently thing from cars to aircraft to health care, regulators have emphasized a spread outages could inflict $243 bil- require “smart systems” linked to the lion–$1 trillion in total damage on the Internet. safety-first approach to technology. That has not been the case thus far U.S. economy, Lloyds found. Information and communications with regard to ensuring the cyberse- Current electricity policies, as will be technologies (ICT) are now migrat- curity of America’s evolving electric discussed in greater detail below, run ing from working mainly with infor- grid. the risk of creating the conditions for mation (i.e., the cyberworld) to an This head-in-the-sand attitude may a perfect cyberstorm by prematurely Internet of Things (IoT) that can also pushing the Internet of Things onto

FIGURE 1. ANATOMY OF A CYBERPHYSICAL HACK In 2015, researchers Charlie Miller and Chris Valasek took control of a Jeep from ten miles away.12 The engineers looked for a vulnerability in Sprint’s cellular network that connected to the vehicle’s music and radio system, and then hacked the password. Next, exploiting the fact that a Jeep’s entertainment system is physically connected to the power system, they remotely uploaded new code onto the car’s microcomputers (all on the same power network) that controlled steering and antilock brakes. Chrysler and the cellular carrier have since corrected those particular vulnerabilities; but cyberphysical systems remain complex, diverse, and rapidly evolving. The challenge for electric grids across America comes from the push for greener, smarter grids, wherein all such technologies demand real-time controls and Internet connections. Smart appliances, solar arrays, battery-storage, and demand-management technologies require the kind of computer-based controls—the equivalent to automotive anti- lock brakes and power steering—to manage the episodic, varied nature of power demand and supply on grids required to meet society’s 24x7 needs. Engineers and cyber experts have understood for years the nature of such exposure.13 But now, the proliferation of real-time networked controls on grids will vastly increase the variety and scale of the cyberattack surface. For aircraft and cars, safety and security take priority over the efficiency and convenience gains from using automated and networked controls. Not so for U.S. power grids, where cyberphysical security has taken a backseat to policy- makers’ push for green-energy priorities. Even when cybersecurity is on the political front burner, the utility sector is frequently omitted. The president’s new Commission on Enhancing National Cybersecurity, for instance, includes no appointees from the infrastructure and electric sectors.14

WATER + ENERGY Exposed: How America’s Electric Grids are Becoming Greener, Smarter—and More Vulnerable 74 grids to accommodate environmen- growing cyber capabilities of bad becoming increasingly dependent on tal goals—and doing so at a time of actors, and exactly when society is electricity. 1 THE U.S. IS INCREASINGLY DEPENDENT ON ELECTRICITY Individual data centers—the central tems, a maker of computer-network- and electric vehicles (EVs). The U.S. power plants of the Internet—con- ing devices, forecasts U.S. data-cen- Energy Information Administra- ter traffic to nearly tion’s (EIA) forecast for EVs on U.S. triple in five years, roads by 2030 represents adding the with much of that electric-load equivalent of 5 million growth coming from homes.27 Other, more ambitious, EV the explosion of video forecasts add demand equivalent to content.23 Cisco also 40 million homes.28 projects a tenfold rise Rising urbanization—in the U.S. and in data traffic from globally—deepens electric depen- the Internet dency, too. Cities, inherently highly of Things, including electrified (Figure 3), will see accel- from machines in erated dependence with the “smart homes, cars, stores, city” movement, wherein everything factories, hospitals, from traffic to building operations to and, especially, util- public services and safety are Inter- ities.24 By one esti- net-connected. mate, global IoT data While energy efficiency is projected traffic could require to improve, the EIA forecasts that as many as 4,000 America will use about 10 percent new data centers, sume as much power as steel mills.18 more electricity two decades from creating an aggregate power demand now.30 Over the same period, the EIA Yet only several decades ago, data 25 fourfold that of California’s grid. forecasts essentially no growth in U.S. centers did not exist as a category for Many of those data centers will be tracking electricity use.19 Even more transportation oil demand. These two than factories, data centers must run 24/7. And while data centers—enormous information “factories”—today consume more U.S. electricity than America’s steel indus- try, they account for only a fraction of the information ecosystem’s total power needs.20 Overall, the U.S. economy is more dependent on the information-centric and electric-dependent sector than the transportation-centric, oil-depen- dent sector that dominated the twen- tieth century: activities associated with transporting goods trends mean that the U.S. economy in America. While information hard- will become yet more dependent on and people account for about $500 ware will continue to become more billion of U.S. GDP; the comparable fuel delivered by the kilowatt-hour in efficient, overall ICT power demands wires, not by the gallon in pipes. The figure for creating and transporting 26 will continue to grow. big challenge remains: to ensure that information is $1.2 trillion (Figure 2).21 Then there are other electricity-con- this electricity reaches our homes, This dependence on electricity-using suming tech trends, including 3-D hospitals, and businesses whenever data networks is growing. Cisco Sys- printing, data-centric health care, we need it. 2 THE ELECTRICITY BALANCING ACT Unlike many other countries, the U.S. Instead, it has a complex array of grids, classes of U.S. grids, as well as many does not have a national electric grid. a “system of systems.” There are two separate individual grids within them.

WATER + ENERGY Exposed: How America’s Electric Grids are Becoming Greener, Smarter—and More Vulnerable 75 One class consists of North America’s be loosely analogized to trying to and control possible; but such tech- eight longhaul grids, Regional Trans- run with a shallow pan full of water nologies will take time to deploy mission Operators,31 which move “bulk without spillage. power” from remote power plants If grids are not to cities, each of which has regional balanced con- subdivisions (Figure 4). The long- tinuously, critical haul grids are overseen by the North voltage or fre- American Electric Reliability Corpora- quency control tion (NERC) and are regulated by the can be lost, lead- Federal Energy Regulatory Commis- ing to outages, sion (FERC). damaged cus- The second class of U.S. grids includes tomer and utility thousands of independent local distri- equipment, and, bution grids, from small towns to the in some cases, biggest metropolises. These grids are the destruction owned, or used by, more than 3,000 of grid hardware. utilities. About 200 of the utilities are To counter such investor- owned, about 900 are rural risks, grids have cooperatives, and about 2,000 are long been fitted publicly owned municipal entities. with sensors, protective relays, With every other commodity’s supply backup systems, chain—including oil, natural gas, min- safeguards, and manual overrides, as and to ensure that they are cyberse- erals, and agricultural products—there well as with various supervisory con- cure. Still, when such power control are typically one to several months’ trol and data acquisition systems (a becomes widespread, the primary worth of demand in storage to ensure kind of precursor industrial “internet” benefits will extend beyond enabling reliable delivery to markets. Given the used in nearly all industries and infra- more EVs and solar on grids. Above physics of storing power, however, 99 structures). all, the benefits will involve enabling percent of electricity has to be gen- better security and reliability. erated the same instant that it is con- Ultimately, technology will permit sumed. America’s electric grids to operate in To date, however, spending to make a fashion more akin to the Internet: the grid smarter has been dominated Today’s central engineering challenge one day, the grid will be nodal, inter- by making it easier for utilities to bill is to deliver power continuously—and active, and highly controllable, with customers, or promote conservation nearly instantaneously—over vast smart power-flow routing, micro- and green energy.32 Adding commu- geographic areas in the face of inevi- grids, solar energy, and batteries all nications features to meters is com- table plant failures, weather, and fluc- playing a role. parable to installing a speedometer or tuating demand. Next-generation high-power semicon- gas gauge—it is not a game-changer. The invisible balancing act needed ductor technologies are emerging to The game-changer involves con- to keep huge power flows stable can make grid-level dynamic switching trolling grid-power flows and doing so securely. 3 BLACKOUTS: PAST, PRESENT, AND FUTURE Electric power outages are becoming ing use, the outage wiped out power outage lasted 25 hours and sparked more frequent (Figure 5 and Figure across 500 blocks of Manhattan for 13 mass looting and arson—1,600 stores 6). Since 1990, the average incidence hours.35 On November 9, 1965, 30 mil- were ransacked, and more than 1,000 of outages on U.S. grids has increased lion people in the Northeast, includ- fires were lit38—prompting more than by about 8 percent per year,33 while ing millions of New Yorkers, were 4,000 arrests and headlines such as the annual outage duration has risen plunged into darkness for 18 hours. “Night of Terror.”39 The total damage by about 14 percent per year.34 That blackout inspired books and was estimated at $300 million. New The social disruption—not to mention movies, mostly about heroic behavior York City has since suffered three the costs—wrought by blackouts is and rediscovered neighborliness, and more blackouts, all a product of led to the creation of NERC, which nature and machine/human failure. substantial. (Figure 7). Consider New York City, which, on August 31, 1959, established standards and oversight Today, all major cities use far more was struck by the world’s first major to improve long-haul grid reliability. electricity than New York City con- electric-power outage. Triggered by a New York City’s most infamous sumed on the eve of its disastrous heat wave and surging air-condition- blackout struck on July 13, 1977.37 The 1977 blackout. Meanwhile, a new phe-

WATER + ENERGY Exposed: How America’s Electric Grids are Becoming Greener, Smarter—and More Vulnerable 76 nomenon has emerged for utilities, independent of how much energy is ing disparity between peak and aver- with important implications for reli- consumed. Put another way: reliability age demand will be radically exac- ability: peak demand for power has is determined more by the amount of erbated with the addition of more become far more volatile. capital spent on hardware to ensure episodic, or peak, supply from solar For more than a decade, there has that energy is available when needed, and wind. This new challenge is par- been a widening gap between the rather than on the money spent pro- ticularly clear when viewed on an growth rate in energy used to make ducing the energy itself. hourly basis in California, where the electricity and the growth rate in peak This trend is visible across America, rapid growth in green energy will cause the daily peak-to-valley ratio demand (Figure 8).40 As a result, an including New York City.41 Official increasing share of standby gener- forecasts expect little growth in New to rise from 115 percent in 2012 (i.e., ating capacity is required to meet York City’s average utility energy meeting peak demand required 115 frequent, episodic peaks. This also consumption; but peak demand is percent of base generation) to about means that for many utilities, as expected to rise sharply, from 160 145 percent in 2020 (Figure 9). As the much as 70 percent of total costs are percent above average demand in California ISO, the state’s transmission associated with capital equipment 2003 to 220 percent above average authority, notes, this will “require flex- (power plants, wires, hardware) to demand in the next decade.42 ible resource capabilities to ensure green grid reliability.”43 ensure peak-delivery capacity. These The challenge of dealing with increas- costs and hardware are essentially America’s “information utilities” (i.e.,

FIGURE 7. AMERICA’S TEN WORST BLACKOUTS36 1. August 14, 2003: 50 6. December 22, 1982: million people lose 5 million lose power power across the across the West Northeast 7. June 29, 2012: 4 million 2. November 9, 1965: lose power across the 30 million lose power Midwest and the across the Northeast Northeast and in Ontario, Canada 8. October 29, 2011: 3 3. July 13, 1977: 9 million million lose power lose power in New York across the Northeast City 9. September 8, 2011: 3 4. October 22, 2012: 8 million lose power in million lose power California across the Northeast and Arizona 5. August 10, 1996: 7 10. July 2, 1996: 2 million million lose power lose power across the across the West western U.S., Canada, and Mexico

WATER + ENERGY Exposed: How America’s Electric Grids are Becoming Greener, Smarter—and More Vulnerable 77 data centers) are also seeing surging prodded by reg- air conditioners, heaters, lights, PV peak demand. According to Cisco, ulators—prefer the latter, harnessing systems, batteries, and EV chargers.47 the gap between peak data traffic technology and price incentives to Without a more widely networked, and average data traffic (visible in its moderate peak demand. IoT-centric electric grid, meeting peak tracking of global data use) will widen Peak electricity-management tech- demands, ensuring reliability, and, as hugely in the coming decade, from niques require substantially increas- discussed later, fuller deployment of 200 percent today to nearly 700 per- ing communications and controls. In solar and wind sources will be impos- 44 cent within a few years (Figure 10). other words, they require a far greater sible. The current rush to push the There are two main tools to manage expansion of the Internet of Things Internet of Things onto the electric peak demand of anything: build extra onto local grids.46 The majority of grid will dramatically raise the risks capacity, or incentivize customers products forecast for the growing res- of cyberattacks. Asked for his view to consume less during peak times. idential IoT sector are associated with of the Internet of Things, Jerry Irvine, Information utilities use the former, controlling electricity by integrating a cybersecurity expert, responded: furiously expanding infrastructure information controls—i.e., adding “Scary as hell.”48 to meet demand. Electric utilities— “smart”—into meters, thermostats, 4 GRID 2.0: A CYBERPHYSICAL TARGET FOR HACKERS There are two main types of cyber consultant inadvertently bypassed a damage.”53 In America, cyberterrorists targets: cyber information targets and firewall, Ohio’s Davis-Besse nuclear are broadening their reach beyond cyberphysical targets. The vast major- plant’s control room was infected by their traditional financial and per- ity of cyberattacks fall into the former, the Slammer cyberworm, which then sonal-information targets to include which includes theft of financial and blocked the plant’s automated sen- the power systems and the machines other personal information, theft of sors.51 inside hospitals. Their goal: “Bring 54 business secrets, and harassment, Still more recently, in 2012, hackers these hospitals to a standstill.” such as “distributed denial of service,” wiped out the hard drives on 35,000 Measuring the precise number of or DDoS, attacks to overwhelm and Saudi Aramco computers, tempo- attacks on cyberphysical systems shut down websites. rarily compromising all back-office is not easy, since there are many But cyberphysical targets are becom- operations of the state-backed oil standards and definitions. But the ing more vulnerable and more attrac- giant. Shortly before the 2014 Winter reported trends are clear: hackers are tive to bad actors.49 In 2000, in the Olympics, a hacker gained access increasingly targeting infrastructure first known example of a malicious to the heating, cooling, and emer- systems. breach into an industrial control gency-response systems of Russia’s According to computer firm CDW, 52 system, an angry ex-employee hacked Sochi arena. In 2015, German engi- in 2015, the number of cybersecu- an Australian water-services plant and neers discovered that hackers had rity attacks at U.S. utilities exceeded released tons of sewage into local breached the operating system of a 7,000. America’s oil and gas sector 50 parks and rivers. In 2003, after a steel mill, causing “massive physical experienced more than 5,000

WATER + ENERGY Exposed: How America’s Electric Grids are Becoming Greener, Smarter—and More Vulnerable 78 rus programs in 2015, that, when it comes to the Internet and 80 percent worry of Things, “it’s almost impossible to that a future attack tell how often” industrial controls are could cause physi- breached or “how it’s done.”63 Accord- cal damage.56 PwC, ing to Tripwire, only 43 percent of an auditor, reports energy executives believe that their that cyberattacks on firms have detected all cyberattacks the U.S. utility sector committed against them.64 AT&T says perpetrated by orga- that, in 2015, there was a 458 percent nized crime doubled increase in the frequency with which in 2015.57 According hackers probed IoT connections for to the federal National vulnerabilities.65 Cybersecurity and Where are the vulnerabilities? Utility Communications Inte- smart meters, one of the most prom- gration Center, Ameri- inent ways that the Internet can be ca’s manufacturing and connected to the electric grid, are energy sectors are the one. Since 2010, the number of smart top two targets for meters in the U.S. has soared, from 10 attacks on cyberphys- million to more than 50 million.66 But ical systems (Figure in the years to come, smart meters 58 11). will represent only the tip of the ice- In another study, Cisco berg of vulnerabilities in an expanding found that over 70 attack surface of IoT-enabled devices percent of utility IT connected to grids. security professionals The proliferation of Internet-con- discovered a security nected things with direct access (or breach in 2015, com- back doors) to electric grids is not pared with 55 per- the only threat to their security and cent in other indus- reliability; so, too, is the push to accel- tries.60 U.S. utilities erate a fully cyber-connected electric were among the top grid. Meanwhile, the SANS Institute five most exposed reports that only 29 percent of U.S. American industries to companies are beginning to imple- 61 malware, says Cisco. ment a cyberphysical strategy, 33 Some security experts percent are still developing a strat- even warn that the egy, and 18 percent have no plans to “next Cold War has develop a strategy.67 already begun—in cyberspace.”62 There are yet no documented cases of terrorist attacks triggering U.S. power To win this new cyber outages. Still, it is possible that cyber- war, America must attacks may be to blame for some keep electricity and outages that have been categorized other critical infra- as “faulty equipment” or “unknown” 55 structure off the front attacks. According to Tripwire, an causes (Figure 12). It is a near-cer- IT security firm, 75 percent of utilities lines. Alas, simply detecting attacks tainty, however, that “cyberattack” report that at least one cyberattack can be difficult. The SANS Institute, will soon become a new category for defeated their firewalls and antivi- a cybersecurity research outfit, says power-outage tracking. 5 GREEN ENERGY V. CYBERSECURITY State and federal mandates (including billion.68 By comparison, over the past involve the structural changes being the federal Clean Power Plan) seek to half-dozen years, the DOE invested a brought to U.S. grids that increase move U.S. electricity generation away total of only about $150 million on cyberphysical risks because of the from fossil fuels and toward renew- cybersecurity research projects.69 nature of wind and solar generation. able power sources. Total federal and The risks inherent in this asymmetry State policies requiring green man- state support for green-energy tech are not only associated with a lack of dates have resulted in wind and solar over the past decade exceeded $175 emphasis on cybersecurity; they also constituting about 75 percent of all

WATER + ENERGY Exposed: How America’s Electric Grids are Becoming Greener, Smarter—and More Vulnerable 79 new electricity capacity added to U.S. Internet of Things; grids in the past decade (Figure 13). the latter requires This trend creates new pressures on the pursuit of new, utilities to integrate the vagaries of radically better, wind and solar power into their grids, classes of physical which require power to be available chemistry. on demand. Storing large Yet integrating episodic renewable quantities of elec- energy with the continuous need for tricity (Figure power—especially with today’s surg- 14) has frus- ing peak needs—requires an entirely trated engineers new level of control, integration, since the dawn and networking. Adding that kind of the electric of real-time control with the Internet age. Bill Gates, of Things dramatically increases the now an inves- opportunities available for cyber- tor in a number attacks—i.e., it greatly expands the of new battery “attack surface.” companies, has The core issue is the requirement for summarized the high-availability energy sources to challenge: “The biggest problem operate a reliable grid. Today, about bined, as a last resort, with greatly for the two lead candidates [wind 90 percent of America’s power comes expanded backup from natural-gas and solar] is that storage looks to be from readily available sources: 33 generation. But all these solutions so difficult…. We’re more than a factor percent each from coal and natural greatly increase cyberphysical- and gas, 20 percent from nuclear, and 5 of 10 away from the economics to get 72 physical-attack surfaces. percent from hydro dams.70 Mean- [grid-scale storage].” More transmission lines (long-haul while, wind and solar power have low Utility-scale battery storage has and local) increase exposures to con- average availability. Worse, wind and grown nearly 20-fold in only a few ventional causes of outages. Increas- solar have zero availability for many years. But that storage still consti- ing the share of U.S. electricity supply hours each day. Neither wind nor solar tutes less than 0.01 percent of overall coming from natural gas means that output can increase to accommodate U.S. grid supply.75 Even if California, it is now important to consider the surges in peak demand, either. which has America’s most aggressive physical and cyber vulnerability of storage mandate, achieved its storage Solar and wind power can oper- the gas infrastructure as an additional goal by 2020, the storage would pro- ate successfully thus far because of vector for electric outages. As noted, vide barely 2 percent of California’s America’s surplus of other, high-avail- far greater use of IoT-type network peak-power needs.76 ability sources. Texas and Iowa, the controls also creates a “magnet” for largest and second-largest wind-gen- Regardless of the hopes for break- hackers. Finally, it’s not just smart erating states, get 70 percent of their through discoveries in battery tech- meters and other grid IoT devices that electricity from natural gas, coal, and nology, there is no realistic prospect are vulnerable. Cyber backdoor expo- uranium.71 for storing electricity as a viable solu- sure is inherent in the control systems Proposals to incorporate vastly more tion to the episodic supply of wind embedded in many solar panels and 77 wind and solar on U.S. grids offer and solar energy. For this reason, wind turbines themselves.78 essentially two technology solutions green-power advocates view the use to deal with the availability problem: a of networks (wires) and (smart) net- more networked grid and a grid with work controls as the means to align far more storage. The former would episodic supply across geographic represent a radical acceleration of the regions with market demand—com-

FIGURE 14. BATTERY-STORAGE REALITIES The sheer scale of batteries needed for grid-scale storage (ignoring costs) makes clear the engineering challenge to create U.S. utility systems dominated by episodic power. The total amount of electricity stored at any given moment in all the batteries in America for all purposes—laptops, cars, phones, flashlights, etc.—is countable in just minutes’ worth of daily U.S. electrical demand.73 The enormous $5 billion Tesla battery “gigafactory” under construction in Nevada will produce a quantity of batteries each year that can store 30 billion watt-hours of electricity.74 Yet that huge quantity of battery supply is a drop in the bucket compared with America’s daily consumption of 10,000 billion watt-hours. It would take 100 years for the Tesla factory to manufacture a quantity of batteries capable of storing a half-day’s worth of U.S. electric demand.

WATER + ENERGY Exposed: How America’s Electric Grids are Becoming Greener, Smarter—and More Vulnerable 80 6 THE STATE OF U.S. GRID CYBERSECURITY The prospect of a hacker turning tures. It expands off all of America’s lights in a single and concentrates attack is wildly implausible: to simul- U.S. cybersecu- taneously bring down all of the coun- rity authority at try’s distributed patchwork of grids the federal level, (see Figure 4) would be borderline a development impossible and would, in any case, unlikely to boost require nation-state-class capabilities. the speed or flex- Even the major 2015 cyberattack on ibility needed Ukraine’s grid affected only about to counter such 250,000 residents.79 threats. The bill After the Ukraine attack, Gerry does not cover Cauley, CEO of the North American local U.S. dis- Electric Reliability Corporation, tes- tribution grids, tified before Congress,80 noting, which are far correctly, that U.S. long-haul grids more cyber-vul- have important technical and opera- nerable than long- tional advantages81 over Ukraine’s (far haul grids. And it smaller) grid and that Ukraine was expands Ameri- brought back online in only several ca’s cyberphysical attack surface by ing grid programs that make cyber- hours. Though NERC requirements promoting the smart- and green-grid physical attacks easier to carry out. for long-haul grid cybersecurity will transformation already under way. The U.S. Government Accountability escalate in July 2016 with expanded Consider another example of mud- Office is not impressed with the state requirements for critical infrastructure dled federal priorities. In December of cybersecurity of America’s utility protection (CIP) standards,82 Cauley 2015, the Department of Homeland infrastructure, either. In a 2015 report, nonetheless cautioned that U.S. utili- Security issued cybersecurity guide- the GAO warned that: ties “will need unprecedented levels of lines87 for industrial control (Figure 15) 1. FERC has not taken steps to moni- financial resources in order to restore systems (Figure 16). According to the tor [the electricity industry’s] com- their facilities and eventually resume DHS, following the guidelines would pliance with voluntary [cybersecu- normal operations” after a successful have “prevented 98% of the [cyber] rity] standards. cyberattack.83 incidents reported in FY2015.”88 2. Entities in the electricity industry It is on local U.S. distribution grids— Among others, the DHS guidelines recommend reducing industrial (e.g., utilities) often focused on which will not be covered by NERC complying with regulations rather CIP standards—where the rush is control systems’ attack surface as well as allowing “real-time external than taking a holistic and effective greatest to add Internet-connected approach to cybersecurity. devices and green-energy sources. connectivity only when absolutely Ironically, while concern over cyber- necessary”—a policy at odds with 3. Smart grid devices (e.g., meters) did security is slowing the adoption of the the federal push for smart-greening not always have key security fea- Internet of Things in many industries, America’s grid. tures such as the ability to record this is not the case for U.S. utilities, U.S. policy schizophrenia on security activity on systems or networks, which are particularly susceptible to and green goals is persistent and per- which is important for detecting political pressure.84 vasive. A 2013 White House report93 and analyzing attacks. State and federal policies continue to that urged greater grid reliability 4. The electricity industry lacked suf- promote or require far greater use of (albeit with a focus on “weather-re- ficient metrics for determining the both green energy and Internet-con- lated outages”) also promoted the extent to which investments in nected smart-grid features. Even very technologies that will undermine cybersecurity improved the security 96 though the Energy Policy Modern- reliability by expanding grids’ cyber- of smart grid systems. attack surface.94 State policies are no ization Act,85 passed by the Senate in When combined with the rising more coherent. New York governor April 2016 with a bipartisan majority, tech-savviness of groups hostile to Andrew Cuomo’s new “Reforming includes an amendment to the Federal America, as well as rising urbaniza- the Energy Vision”95 initiative pays lip Power Act to authorize the U.S. sec- tion, federal and state policymakers’ service to grid security—“[The] avail- retary of energy to “take such actions prioritization of environmental goals ability of reliable, resilient, and afford- as the secretary determines will best over grid security is making America able electric service is critical to the avert or mitigate [cyber threats],”86 more exposed to cyberattacks.97 the bill has several alarming fea- welfare of citizenry and is essential to New York’s economy”—while promot-

WATER + ENERGY Exposed: How America’s Electric Grids are Becoming Greener, Smarter—and More Vulnerable 81 FIGURE 16. INDUSTRIAL CONTROL SYSTEMS AND THE INTERNET OF THINGS The digital age of Industrial Control Systems (ICSs) began in 1968 with the invention of the programmable logic controller (PLC). (The Stuxnet virus attack in 2010, against Iran’s uranium centrifuges, targeted PLCs, one of the few documented examples of a digital weapon destroying a physical asset.)90 In 1986, the first PLCs were tied to personal computers; in 1992, PLCs were linked to a local Ethernet using Internet-communications protocols, and in 2003, the first PLCs were embedded in Web servers.91 PLCs, sensors, relays, meters, and the like are all connected, monitored, and operated by a supervisory control and data acquisition (SCADA) system, a kind of “industrial Internet” used across industries, especially in the electric sector. While SCADA dates back over a half-century—largely because of the need to operate electrical systems over broad geo- graphic areas—integration with the Internet (whether in factories or on utility grids) is the newest phenomenon in the progression of ICSs. Today, millions of utility remote terminal units, sensors, meters, actuators, controls, and SCADA systems exist across America’s hundreds of local and connected grids, as well as across its long-haul grids. Millions more exist in factories and office buildings—and soon, in homes. And, until recently, ICSs largely existed in operational silos that were far less vulnerable to cyberattack.92 7 CONCLUSION Hackers typically fall into two groups: Maps,”101 the Pentagon should priori- evolving cyberphysical threats are private individuals or organizations tize helping the private sector secure unlike other physical-security issues with varying skill levels who hack and defend America’s critical electric that utilities have heretofore faced. for financial, nuisance, or harass- infrastructure. The Defense Advanced Sound grid-cybersecurity policy ment motives; and nation-state or Research Projects Agency announced would therefore: nation-sponsored entities with high plans in January 2016 for a $77 mil- skill levels th thack for geopolitical lion, four-year program to help utili- • Avoid top-down, one-size-fits-all motives. ties detect cyberattacks; but given legislation. According to CrowdStrike, a cyberse- the scale and complexity of the chal- • Slo w—and, in some cases, halt— 102 curity consultancy, geopolitical devel- lenges, it is only a small step. smart- and green-grid transforma- opments have become the “most Tech titans, including Facebook, tion that increases the attack sur- important drivers for cyberattacks,” Google, Apple, and Microsoft, have face until adequate cybersecurity with the latter now firmly part of the pledged to help advance the deploy- features are available and incorpo- “global threat landscape.”98 Adds ment of “green” and smart grids.103 rated. Kevin Mandia, CEO of FireEye, another They should also acknowledge, and • Reallocate grid budgets to increase cybersecurity firm: “It does not seem help resolve, the cybersecurity chal- funding for security, resilience, and reasonable to expect the majority lenges associated with such initia- reliability, and require cybersecurity of the private sector to defend itself tives. The foundational responsibility metrics as part of pre-deployment from military cyber attacks. We do for solutions originates with the tech- requirements for green and effi- not expect a homeowner to prevent nologies’ providers, not ciency programs. a military unit from breaking into their the users in the industrial and utility • Boost utility-sector collaborative bedrooms, so why should we expect sectors. Similarly, investors and pol- engagement with federal cyberse- companies to prevent or detect simi- icymakers should explore ways to curity programs, especially those of lar attacks in cyberspace?”99 encourage greater focus on innova- the U.S. Department of Defense. Dealing with this reality has implica- tive venture capital in cyberphysical • Encourage private-sector-led tions for how federal agencies should security—which accounts for less cybersecurity technology research, work with the private sector and for than 1 percent of total venture-capital development, and deployment, so the appropriate allocation of public investment.104 that companies on the front line can resources. The potential for nation- As this report argues, if U.S. state and move at the speed of innovators, state attacks also has implications federal cyberphysical security policies not bureaucrats. for liability protection for utilities in are to become coherent and effective, • Ensur e that policies, mandates, and the event of a cyberattack; for shar- they must be anchored in acknowl- regulations in cybersecurity are ing classified information with utilities; edging three realities: (1) the rush to based on overall objectives—rather and for interindustry and interagency make U.S. grids greener and smarter than being prescriptive and subject coordination. As the GAO reported, also increases their cyberphysical to becoming rapidly obsolete. the Department of Defense’s own attack surface; (2) there are two radi- infrastructure is vulnerable to cyber- cally different classes of cyber threat: 100 physical attack. Rather than focus private hackers and nation-state (or on “Climate Change Adaptation Road nation-sponsored) hackers; and (3)

WATER + ENERGY Exposed: How America’s Electric Grids are Becoming Greener, Smarter—and More Vulnerable 82 8 ENDNOTES

1 1,000 GW (gigawatts) of installed capacity @ avg. $2,000/kW replacement value = $2 trillion, plus equal value in transmission ($2 trillion) and distribution ($2 trillion). See also http://www.rmi.org/RFGraph-present_value_cost_US_electricity. 2 See http://www.eia.gov/totalenergy/data/annual. 3 EIA Annual Energy Outlook 2016, https://www.eia.gov/forecasts/aeo/data/browser/#/?id=47-AEO2016&cases=ref2016~ref_no_ cpp&sourcekey=0. 4 J. R. Minkel, “The 2003 Northeast Blackout—Five Years Later Tougher Regulatory Measures Are in Place, but We’re Still a Long Way from a ‘Smart’ Power Grid,” Scientific American (Aug. 13, 2008), http://www.scientificamerican.com/article/2003-blackout-five-years-later. 5 See https://www.oe.netl.doe.gov/docs/katrina/katrina_083005_1600.pdf. 6 Mary Williams Walsh and Nelson D. Schwartz, “Estimate of Economic Losses Now Up to $50 Billion,” New York Times (Nov. 1, 2012), http:// www.nytimes.com/2012/11/02/business/estimate-of-economic-losses-now-up-to-50-billion.html?_r=0. 7 Billy Ball, “Rebuilding Electrical Infrastructure along the Gulf Coast: A Case Study,” National Academy of Engineering (spring 2006), https://www.nae.edu/Publications/Bridge/TheAftermathofKatrina/RebuildingElectricalInfrastructurealongtheGulfCoastACaseStudy.aspx. 8 Cited in Minkel, “The 2003 Northeast Blackout.” 9 Eaton Blackout Tracker Annual Report, Mar. 10, 2016, https://powerquality.eaton.com/About-Us/News-Events/2016/PR100316. asp?id=&key=&Quest_user_id=&leadg_Q_QRequired=&site=&menu=&cx=3&x=12&y=11. 10 Andy Greenberg, “Hackers Remotely Kill a Jeep on the Highway—with Me in It,” Wired (July 21, 2015), https://www.wired.com/2015/07/ hackers-remotely-kill-jeep-highway. 11 Lucas Mearian, “Chrysler Recalls 1.4M Vehicles After Jeep Hack,” Computerworld (July 24, 2015), http://www.computerworld.com/ article/2952186/mobile-security/chryslerrecalls-14m-vehicles-after-jeep-hack.html. 12 David Schneider, “Jeep Hacking 101,” IEEE Spectrum (Aug. 6, 2015), http://spectrum.ieee.org/cars-that-think/transportation/systems/jeep- hacking-101. 13 Teodor Sommestad et al., “SCADA System Cyber Security—a Comparison of Standards,” Royal Institute of Technology (Sweden), http://ieeexplore.ieee.org/xpl/login.jsp?tp=&arnumber=5590215&url=http%3A%2F%2Fieeexplore.ieee.org%2Fxpls%2Fabs_all. jsp%3Farnumber%3D5590215. 14 Devin Coldewey, “Obama Appoints Tech Veterans from Microsoft and Uber to Cybersecurity Commission,” TechCrunch (Apr. 13, 2016), http://techcrunch.com/2016/04/13/obama-appoints-tech-veterans-from-microsoft-and-uber-to-cybersecurity-commission. 15 Christopher M. Matthews, “Google Search Technique Aided N.Y. Dam Hacker in Iran,” Wall Street Journal (Mar. 27, 2016), http://www.wsj. com/articles/google-search-technique-aided-n-y-dam-hacker-in-iran-1459122543. 16 Steven Cherry, “Stuxnet: Leaks or Lies?,” IEEE Spectrum (Sept. 4, 2012), http://spectrum.ieee.org/podcast/computing/embedded- systems/stuxnet-leaks-or-lies/?utm_source=techalert&utm_medium=email&utm_campaign=090612. 17 Lloyd’s Emerging Risk Report, 2015. See https://www.lloyds.com/~/media/files/news%20and%20insight/risk%20insight/2015/ business%20blackout/business%20blackout20150708.pdf. 18 Sam Shead, “Apple’s Data Centre in Ireland Could Increase the Country’s Electricity Consumption by 8.2%,” Business Insider (Apr. 18, 2016), http://www.businessinsider.com/author/sam-shead. 19 See http://www.tech-pundit.com/wp-content/uploads/2013/07/Cloud_Begins_With_Coal.pdf?c761ac&2b8101. 20 ~100 billion kWh U.S. data center use per Natural Resources Defense Council, “America’s Data Centers Consuming and Wasting Growing Amounts of Energy,” https://www.nrdc.org/resources/americas-data-centers-consuming-and-wasting-growing-amounts-energy. Re: steel industry ~60 billion kWh, https://www.eia.gov/consumption/manufacturing/briefs/steel. 21 See http://www.bea.gov/industry. 22 Ibid. 23 See http://www.cisco.com/c/en/us/solutions/collateral/service-provider/visual-networking-index-vni/VNI_Hyperconnectivity_ WP.html?referring_site=RE&pos=2&page=http://www.cisco.com/c/en/us/solutions/collateral/service-provider/visual-networking-index- vni/mobile-white-paper-c11-520862.html. 24 Ibid. 25 Rich Miller, “Internet of Things May Create a New Breed of Data Centers,” Data Center Frontier (May 2, 2016), http://datacenterfrontier. com/internet-things-may-create-new-breed-data-centers. 26 Peter Judge, “The Truth Is: Data Center Power Is Out of Control,” Datacenterdynamics (Jan. 12, 2016), http://www.datacenterdynamics. com/design-strategy/the-truth-is-data-center-power-is-out-of-control/95425.article. 27 EIA Annual Energy Outlook 2016, https://www.eia.gov/forecasts/aeo/data/browser/#/?id=47-AEO2016&cases=ref2016~ref_no_ cpp&sourcekey=0. 28 See https://mitei.mit.edu/system/files/Electric_Grid_Full_Report.pdf. 29 Mary Meeker, Internet Trends 2016, June 1, 2016, KPCB, kpcb.com/InternetTrends. 30 See http://www.eia.gov/beta/aeo/#/?id=8-AEO2015. 31 RTOs; otherwise known as Independent System Operators, or ISOs. 32 See http://about.bnef.com/press-releases/china-out-spends-the-us-for-first-time-in-15bn-smart-grid-market.21 33 See http://create.usc.edu/research/50772.pdf. 34 Jordan Wirfs-Brock, “Power Outages on the Rise Across the U.S.,” IE Inside Energy (Aug. 18, 2014), http://insideenergy.org/2014/08/18/ power-outages-on-the-rise-across-the-u-s. 35 Liz Ronk, “Lights Out New York: The 1959 Blackout,” Time (Nov. 3, 2012), http://time.com/3874803/new-york-city-blackout-photos-from- the-summer-of-1959. 36 See http://blog.ucsusa.org/mike-jacobs/2003-northeast-blackout-and-13-of-the-largest-power-outages-in-history-199. 37 Jennifer Latson, “Why the 1977 Blackout Was One of New York’s Darkest Hours,” Time (July 13, 2015), http://time.com/3949986/1977- blackout-new-york-history. 38 Sewell Chan, “Remembering the ’77 Blackout,” New York Times blog, http://cityroom.blogs.nytimes.com/2007/07/09/remembering-the-

WATER + ENERGY Exposed: How America’s Electric Grids are Becoming Greener, Smarter—and More Vulnerable 83 77-blackout/?_r=0. 39 “The Blackout: Night of Terror,” Time (July 25, 1977), http://content.time.com/time/subscriber/article/0,33009,919089,00.html. 40 See http://www.epri.com/abstracts/Pages/ProductAbstract.aspx?ProductId=000000003002006692&Mode=download. 41 See http://www.eia.gov/todayinenergy/detail.cfm?id=15051#tabs_SpotPriceSlider-8. 42 “Peak Demand in New York City: What’s the Problem?, Feb. 27, 2015, http://www.peakpowerllc.com/notes/2015/2/17/whats-the-problem- with-peak-demand. 43 See https://www.caiso.com/Documents/FlexibleResourcesHelpRenewables_FastFacts.pdf. 44 See http://www.cisco.com/c/en/us/solutions/collateral/service-provider/global-cloud-index-gci/Cloud_Index_White_Paper. html?referring_site=RE&pos=3&page=http://www.cisco.com/c/en/us/solutions/collateral/service-provider/visual-networking-index-vni/ VNI_Hyperconnectivity_WP.html, fig. 24. 45 See http://www.cisco.com/c/en/us/solutions/collateral/service-provider/global-cloud-index-gci/Cloud_Index_White_Paper. html?referring_site=RE&pos=3&page=http://www.cisco.com/c/en/us/solutions/collateral/service-provider/visual-networking-index-vni/ VNI_Hyperconnectivity_WP.html. 46 See http://dupress.com/articles/internet-of-things-iot-in-electric-power-industry. 47 See https://www.navigantresearch.com/research/market-data-iot-for-residential-energy-customers. 48 Al Sacco, “Cybersecurity Expert and CIO: Internet of Things Is ‘Scary as Hell,’ ” NetworkWorld (Mar. 25, 2014),http://www.networkworld. com/article/2175533/lan-wan/cybersecurity-expert-and-cio--internet-of-things-is---39-scary-as-hell--39-.html?page=1. 49 Jonathan Camhi, “The New Front in Cybersecurity: How to Prevent Hackers from Taking Down Critical Infrastructure,” Business Insider (May 2, 2016), http://www.businessinsider.com/the-new-front-in-cybersecurity-how-to-prevent-hackers-from-taking-down-critical- infrastructure-2016-4. 50 See http://csrc.nist.gov/groups/SMA/fisma/ics/documents/Maroochy-Water-Services-Case-Study_report.pdf. 51 See http://large.stanford.edu/courses/2015/ph241/holloway1/docs/SI-v10-I1_Kesler.pdf. 52 Kathy Pretz, “Protecting Critical Infrastructures from Cyberattacks,” The Institute (Mar. 26, 2015), http://theinstitute.ieee.org/ieee- roundup/opinions/ieee-roundup/protecting-critical-infrastructures-from-cyberattacks. 53 Kim Zetter, “A Cyberattack Has Caused Confirmed Physical Damage for the Second Time Ever,” Wired (Jan. 8, 2015), http://www.wired. com/2015/01/german-steel-mill-hack-destruction. 54 Fahmida Y. Rashid, “Code Red: Health IT Must Fix Its Security Crisis,” InfoWorld (June 2, 2016), http://www.infoworld.com/ article/3068179/security/code-red-healthit-must-fix-its-security-crisis.html?token=%23tk.IFWNLE_nlt_infoworld_daily_2016-06- 02&idg_eid=df1fe91f6f0013f6b6ae7043a82f47ab&utm_source=Sailthru&utm_medium=email&utm_campaign=InfoWorld%20Daily:%20 Morning%20Edition%202016-06-02&utm_term=infoworld_daily#tk.IFW_nlt_infoworld_daily_2016-06-02. 55 Fred Donovan, “Attackers Targeting Energy, Utilities Sectors to Disrupt U.S. Economy,” FierceITSecurity (Dec. 22, 2015), http:// www.fierceitsecurity.com/story/infographic-attackers-targeting-energy-utilities-sectors-disrupt-us-economy/2015-12-22?utm_ medium=nl&utm_source=internal&mkt_ 56 See http://www.tripwire.com/company/research/tripwire-2016-energy-survey-attacks-on-the-rise. 57 Thomas W. Overton, “Beyond the Firewall: Best Practices for Cybersecurity Risk Management,” Power (Mar. 1, 2016), http://www. powermag.com/beyond-firewall-best-practices-cybersecurity-risk-management/?hq_e=el&hq_m=3224696&hq_l=22&hq_v=025bb2fcfb. 58 See https://ics-cert.us-cert.gov/sites/default/files/Annual_Reports/Year_in_Review_FY2015_Final_S508C.pdf. America’s utility sector, like its banking sector, must report cyberattacks. Fear of bad publicity may cause other industries to underreport cyberattacks. 59 NCCIC/ICS-CERT Year in Review, Homeland Security, FY 2015, https://ics-cert.us-cert.gov/sites/default/files/Annual_Reports/Year_in_ Review_FY2015_Final_S508C.pdf. 60 See https://forms.greentechmedia.com/Extranet/95679/forms.aspx?msgid=fdc8fda2-03c4-44cf-9c07-5e3cb4e3b4e1&LinkID=CH0009 5679eR00000430AD&Source=website. 61 See http://www.cisco.com/web/offers/pdfs/cisco-asr-2015.pdf. 62 See http://www.homelandsecuritynewswire.com/dr20160408-the-next-cold-war-has-already-begun-in-cyberspace. 63 See http://www.prnewswire.com/news-releases/the-state-of-security-in-control-systems-today-a-sans-survey-300102024.html. 64 See http://www.tripwire.com/company/research/tripwire-2016-energy-survey-attacks-on-the-rise. 65 AT&T Cybersecurity Insights Report, http://about.att.com/story/cybersecurity_insights_report.html. 66 See http://ppec.asme.org/wp-content/uploads/2015/11/CleanerCheaperStronger_FINAL_Web.pdf. 67 See http://www.prnewswire.com/news-releases/the-state-of-security-in-control-systems-today-a-sans-survey-300102024.html. 68 See https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/50980-EnergySupport_OneCol.pdf. 69 See http://energy.gov/oe/articles/oe-announces-funding-improve-cybersecurity-nation-s-power-grid State spending: http://energy.gov/ sites/prod/files/2014/08/f18/SmartGrid-SystemReport2014.pdf. 70 See http://www.eia.gov/tools/faqs/faq.cfm?id=427&t=3. 71 See, for Iowa, http://www.eia.gov/state/?sid=IA#tabs-4; and for Texas, http://www.eia.gov/state/?sid=TX#tabs-4. 72 James Bennet, “We Need an Energy Miracle,” The Atlantic (Nov. 2015), http://www.theatlantic.com/magazine/archive/2015/11/we-need- an-energy-miracle/407881. 73 260 billion Wh in all batteries (250 billion in car batteries, 9 billion in laptops, 1 billion in smartphones) v. ~400 billion per hour U.S. demand; thus ~30 minutes. 74 See “Gigafactory Will Cost Tesla $5 Billion but Offers Significant Cost Reductions,” Forbes blog (Mar. 11, 2016), http://www.forbes. com/sites/greatspeculations/2014/03/11/gigafactory-will-cost-tesla-5-billion-but-offers-significant-cost-reductions; and http://www. teslamotors.com/gigafactory. 75 Peter Maloney, “Utility-Scale, Long-Duration Markets Take the Lead,” Utility Dive (Dec. 22, 2015), http://www.utilitydive.com/news/storage- in-2016-utility-scale-longduration-markets-take-the-lead/411232/?_hsenc=p2ANqtz--2pAH7DdwbEaxyE5L0TSRSu3J0o2lfS8CR1-QAg75P pnZITraJ3HxfwHME0EYKDN5wukazVSn_fJNjwiOd-jCbXinEXYUTEyzx2dFbGSeZ9q57XA&_hsmi=24836527. 76 See http://www.pv-magazine.com/news/details/beitrag/solar-plus-storage-to-become-8bn-market-by-2026--says-lux-research_1000229 86/#ixzz49Wi2m13c. 77 Mark P. Mills, “The Tesla and Solar City Merger Is Rooted in Battery Derangement Syndrome,” Forbes.com (June 25, 2016). 78 See Peter Fairley, “How Rooftop Solar Can Stabilize the Grid,” IEEE Spectrum (Jan. 2015), http://spectrum.ieee.org/green-tech/solar/

WATER + ENERGY Exposed: How America’s Electric Grids are Becoming Greener, Smarter—and More Vulnerable 84 how-rooftop-solar-can-stabilize-the-grid; and Thomas Fox-Brewster, “Hundreds of Wind Turbines and Solar Systems Wide Open to Easy Exploits,” Forbes blog (June 12, 2015), http://www.forbes.com/sites/thomasbrewster/2015/06/12/hacking-wind-solar-systems-is- easy/#2fe3df8427a6; http://www.fas.org/sgp/crs/misc/R43989.pdf; and http://thehackernews.com/2014/10/hacking-smart-electricity- meters-to-cut.html. 79 Kim Zetter, “Inside the Cunning, Unprecedented Hack of Ukraine’s Power Grid,” Wired (Mar. 3, 2016), https://www.wired.com/2016/03/ inside-cunning-unprecedented-hack-ukraines-power-grid. 80 See http://www.nerc.com/news/testimony/Testimony%20and%20Speeches/Gerry%20Cauley%20Testimony%20-%20April%2014%20 House%20Transportation%20subcommittee%20hearing.pdf. 81 See http://www.remotemagazine.com/main/articles/going-beyond-compliance-using-nerc-cip-v5-as-a-catalyst-for-a-greater-security- strategy. 82 Ibid. 83 Ibid. 84 See ibid. and https://www.hubs.biz/power/explore/2015/12/hackers-at-the-gate-part-ii-cybersecurity-experts-say-utilities-must-be-ready- now. 85 See http://www.energy.senate.gov/public/index.cfm/files/serve?File_id=eb454e3b-7f32-479e-b1a6-e84f9019941d. 86 See http://www.jdsupra.com/legalnews/passing-of-senate-s-energy-bill-signals-47390. 87 See https://ics-cert.us-cert.gov/Seven-Steps-Effectively-Defend-Industrial-Control-Systems. 88 See http://www.eetimes.com/author.asp?section_id=36&doc_id=1328762&_mc=NL_EET_EDT_EET_ industrialcontroldesignline_20160128&cid=NL_EET_EDT_EET_ 89 Seven Strategies to Defend ICSs, U.S. Dept. of Homeland Security, https://ics-cert.us-cert.gov/sites/default/files/documents/Seven%20 Steps%20to%20Effectively%20Defend%20Industrial%20Control%20Systems_S508C.pdf. 90 Kim Zetter, “An Unprecedented Look at Stuxnet, The World’s First Digital Weapon,” Wired (Nov. 3, 2014), https://www.wired.com/2014/11/ countdown-to-zero-day-stuxnet. 91 See https://ics.sans.org/media/An-Abbreviated-History-of-Automation-and-ICS-Cybersecurity.pdf. 92 See https://media.blackhat.com/bh-us-10/whitepapers/Pollet_Cummins/BlackHat-USA-2010-Pollet-Cummings-RTS-Electricity-for-Free- wp.pdf. 93 See http://energy.gov/sites/prod/files/2013/08/f2/Grid%20Resiliency%20Report_FINAL.pdf. 94 See http://breakingenergy.com/2013/08/16/white-house-report-calls-for-increased-electric-grid-resilience/?utm_ source=Breaking+Energy&utm_campaign=49e5e09cfa-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_f852427a4b- 49e5e09cfa-407307749. 95 See http://www3.dps.ny.gov/W/PSCWeb.nsf/All/CC4F2EFA3A23551585257DEA007DCFE2?OpenDocument. 96 See http://www.gao.gov/products/GAO-16-174T. 97 See, e.g., Katie Bo Williams and Cory Bennett, “Why a Power Grid Attack Is a Nightmare Scenario,” The Hill (May 30, 2016), http://thehill. com/policy/cybersecurity/281494-why-a-power-grid-attack-is-a-nightmare-scenario. 98 See http://finance.yahoo.com/news/crowdstrike-global-threat-report-analyses-130000072.html. 99 See https://www.fireeye.com/blog/executive-perspective/2015/12/looking_forward_the.html. 100 See http://www.gao.gov/products/GAO-15-749. 101 See, e.g., http://ppec.asme.org/wp-content/uploads/2014/10/CCARprint.pdf. 102 Christina Maza, “The Pentagon’s Plan to Defend the Power Grid Against Hackers,” Christian Science Monitor (Jan. 25, 2016), http://m. csmonitor.com/World/Passcode/2016/0125/The-Pentagon-s-plan-to-defend-the-power-grid-against-hackers?utm_source=hs_ email&utm_medium=email&utm_content=25599773&_hsenc=p2ANqtz-9AhAZmMMUzUk3skD4Jh0eiEYKXixmI9muXyqgeBrfXQLfk8Pe QA-Mtp3Iw3EYlv9Cjn6OK0NawMnIjMWngT7I-IK2hrlUauaCzz--D5vZ_QNBBb_M&_hsmi=25599773. 103 See http://www.smartgridnews.com/story/facebook-work-utilities-develop-green-tariffs-and-more-google-apple-microso/2016-06- 06?utm_medium=nl&utm_source=internal. 104 See http://www.luxresearchinc.com/news-and-events/press-releases/read/venture- funding-cybersecurity-rise-400-million-threats-iot-grow#sthash.GOZ93um6.dpuf.

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