Funding and Financing to Sustain Public Infrastructure: Why Choices Matter

Abstract

Investment in public infrastructure, including the provision of essential services through capital-intensive networks, is critical to supporting economic development and, more so, the quality of places and lives. The sustainability of public utilities and other infrastructure systems depends on spending to an optimal compliant service level and raising revenues that fully cover the cost of service. Sustaining infrastructure relies on both funding and financing mechanisms, which should not be confused. This primer provides a framework for understanding the difference between funding and financing and why policy choices for these functions matter. Funding choices affect the distribution of burdens on service consumers; financing choices affect the cost of capital for service providers. These implications tend to receive less attention than behavioral incentives for economic efficiency. The portfolio of alternative funding and financing methods and instruments is described along with how they relate to structural and governance models for service delivery. The report provides key statistics and trends across U.S. infrastructure sectors, with highlights for Michigan. To varying degrees by infrastructure sector, the analysis detects discernable shifts in fiscal federalism and policy emphasis from governmental funding to financing, from federal to state and local funding, from tax-based to fee-based funding, and from public to private capital financing, with implications for impacts and outcomes. Investment gaps and methods for closing them are considered. By improving understanding, this primer aims to promote inclusive and constructive stakeholder engagement around equity in the realization of sustainable public infrastructure.