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Inflation threatens Biden's infrastructure spending spree

November 27, 2023   PoliticoPro

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Think inflation has only driven up the price of groceries?


The cost of construction materials has grown even faster — about 45 percent since the beginning of 2020 — and the price spike is threatening to dampen the effect of the two-year-old bipartisan infrastructure law and last year’s Inflation Reduction Act.


The biggest impact may be one of President Joe Biden’s top priorities: infrastructure funding for cities and disadvantaged communities. Many local governments are still shaking off the one-two punch of the Great Recession and the Covid-19 pandemic, and experts expect they will have a hard time coming up with matching funds to unlock the federal dollars.


“You can’t get around it, just like our paychecks don’t go as far at the grocery store,” said Alison Black, chief economist for the American Road and Transportation Builders Association.


The infrastructure law set aside $550 billion in new funds over five years to build and repair roads, bridges, mass transit systems, water and sewer pipes, broadband internet connections and a network of electric-vehicle charging stations. The Inflation Reduction Act, which was largely aimed at addressing climate change, included hundreds of billions more in tax credits and other subsidies for clean energy projects.


Biden has touted the spending as a way to create middle-class jobs. Top administration officials including Transportation Secretary Pete Buttigieg, Energy Secretary Jennifer Granholm and EPA Administrator Michael Regan have helped spread the message with announcements of new rounds of spending and ribbon cuttings for projects from Florida to Alaska.


The rise in costs has been a counter-melody to the administration’s messaging, even though supporters say the infrastructure bill is still a once-in-a-generation investment. The topic has come up at think tanks and during a webcast hosted by the Transportation Department’s internal research organization, the Volpe Center. A handful of states have started matching-funds programs to help local cities apply for federal grants, and also as a hedge against inflation.


The Federal Highway Administration, which tracks construction costs, declined to comment on inflation. But the Biden administration has been trying to show that its policies are making a dent in the broader trend of rising consumer prices.


The White House announced early Monday that it's creating a Council on Supply Chain Resilience to address one of the underlying factors for higher prices. The Department of Energy also is working with the National Academies of Science, Engineering and Medicine to develop a plan for "smart manufacturing" and DOT launched an office dedicated to improving multimodal transportation, among other initiatives.


Most of the inflation in construction prices happened in 2021 and 2022, according to data from the Federal Highway Administration. Costs for some materials, including concrete, have continued rising this year, according to Black at the road builders association. The spike in prices has started to level off or even drop since the beginning of 2023, but experts said it still means infrastructure money won’t go as far as originally planned.


To be clear, construction materials are only part of the cost of a typical project. Highway projects, for instance, typically run up significant costs for land acquisition and design work before the first bulldozers arrive.


But labor costs also are going up, especially in fast growing states such as Florida, Georgia, South Carolina and Texas, said Erika Walter, a spokesperson at the Associated Builders and Contractors. And higher interest rates are pushing up the cost of construction too.


Most of the federal money is going to states through funding formulas that have been in place for decades. But a significant amount is being awarded through competitive grants and as discretionary grants at DOT, EPA and other agencies.


The infrastructure law also allows cities and other local governments to apply for certain types of federal funding, such as electric vehicle charging, if their respective states decline to participate. Buttigieg called that aspect of the law “an elegant policy design.”


The catch is, most federal programs require a state or local government to come up with matching funds. States typically have no problem coming up with the money because most of them have dedicated gasoline taxes to pay for highways, said Adie Tomer, a senior fellow at the Brookings Institution.


Cities on the other hand, have smaller tax bases and many of them slashed their workforces during the recession of the ‘00s, which puts them at a disadvantage in applying for funds.


“Local governments may not apply for grants — whether they don’t know about them or they’re just scared that they won’t have the capacity,” to follow through on them, Tomer said. “And when they do apply and win, they may be delayed in getting those projects moving.”


In Minnesota, lawmakers set up two pools of money to help local and tribal governments apply for both transportation and clean energy grants. The Minnesota Department of Transportation will have $216 million dedicated to providing matching funds for federal infrastructure grants, and the state Commerce Department will have $100 million for technical support and matching funds for federal clean energy projects.


The state programs weren’t specifically aimed at addressing inflation in project costs, but they’re an acknowledgement that most of Minnesota’s municipalities have populations of fewer than 5,000 people and relatively small budgets and staffs, said Daniel Lightfoot, a lobbyist with the League of Minnesota Cities.


“We’re a small-town state,” he said.


Other states have set up similar programs. Colorado, for instance, set aside $65 million to help school districts apply for EPA’s electric school bus grants, which are funded through the infrastructure law. Michigan lawmakers set aside $125 million for electric buses.


The state programs will give communities a leg up when they apply for federal grants, said Yaron Miller, senior manager for energy modernization at the Pew Charitable Trusts.


“Really, fundamentally, this is about not leaving available federal resources on the table,” he said.