Financing Infrastructure Over Time David Levinson University of Minnesota Levinson, David (2001) Financing Infrastructure Over Time. Journal of Urban Planning and Development American Society of Civil Engineers 127(4) (Dec).

Temporal Free Rider Problem n One Group Pays for Infrastructure, a Different Group Uses It When a fixed piece of infrastructure is funded and built by one group, and then a new group comes in and uses it without paying, there is a free rider problem. When one group comes in and borrows money to build infrastructure, and another group is held liable, there is also a free rider problem.

Alternative Financing Schemes n n Development Exactions (on-site) n n Impact Fees to finance off-site infrastructure (roads, sewers, schools, and parks). n n Value capture districts n n Growth management regulations n n Capital Recovery Fees n n Pay as you go

Capital Recovery Fees n n Cities with capital recovery fees for water and sewer: Austin TX, Chelmsford, MA Chesterfield County VA, Concord NC, Conway SC, Dunedin FL, Gurnee, IL, Houston TX, Loveland CO, Montecito CA, Pooler GA, Round Rock TX, San Jose CA, Santa Clara, CA and Calgary Canada. n n Capital recovery issue in electricity deregulation; "stranded" costs

What Are Expectations? n n Does the existing community have an expectation (a law) of being reimbursed when it decides to expand a capital facility? n n Does it lack that expectation until after the facility is constructed? n n Does the facility come before or after new residents?

Timeline of Recovery Policies

Three Financing Schemes n n Pay-As-You-Go (Traditional) n n Pay-As-You-Use (Bonds, Continuous Recovery) n n Pay-When-You-Enter (Impact Fees)

Cost Incidence

Illustration of Continuous Recovery

Continuous Recovery Equations n n (Q + q )* c = Q * C(1) n n C = T / Q (2) n n c =T / (Q + q )(3) where: T = Total Fixed Cost C, c = average fixed cost of infrastructure before (C), and after (c) development Q, q = existing population (Q), new population (q)

Loveland Example

Continuous Recovery Example

Bargaining

Conclusions n n Temporal Free Riding is a Problem Leading to Infrastructure Under-investment n n Bonds and Continuous Recovery Offer Solutions to the Problem n n Such schemes reduce risk to existing residents, by eliminating subsidies to new development.