How Bipartisan Infrastructure Law Can Help State and Local Governments Meet Needs

After decades of declining federal infrastructure investments, state governments face estimated unfunded liabilities of at least $1 trillion in deferred maintenance on critical assets such as roads, bridges, and public water supplies. Recent federal legislation, however, will provide states and localities with a historic increase in funding that could serve as a down payment on these unfunded liabilities.

In 2021, lawmakers enacted the bipartisan Infrastructure Investment and Jobs Act (IIJA), which provides $850 billion for core infrastructure priorities over the next five years. Of that total, more than $500 billion is targeted for transportation and water systems, both typically managed and maintained by state and local governments.

State government balance sheets will benefit particularly from more than $200 billion in increased funding for transportation and water: $70 billion for roads, $40 billion for bridges, $39 billion for public transportation, $15 billion for electric vehicles, and $55 billion for water systems. After these increases, the total funding for transportation and water over the next five years represents a 62% boost over the previous five years of nominal federal spending in those sectors (not adjusted for inflation).

These new investments will provide a solid down payment to address the $1 trillion in accumulated deferred maintenance nationwide. For example, major investments under the IIJA include:

• Surface transportation. The law provides $326 billion, including $110 billion in increased funding, for surface transportation over the five-year period. Of this, $70 billion will fund state and local highway and roads projects with another $40 billion allocated to two new bridge programs.
• Water. The law includes $64.3 billion for water infrastructure, $55 billion of which is new funding mainly for drinking water, wastewater, and sewer systems, a significant increase over previous years' modest federal contributions to this sector. Two state-administered revolving fund programs for clean water and drinking water each will receive $11.7 billion. In addition, funds were provided for programs, most of which will flow through state revolving funds: $15 billion to replace lead pipes and $10.5 billion to address contaminants.
• Public transit. The law provides $92 billion, including $39 billion in increased funding, for public transit infrastructure. These investments include $33.5 billion in formula grants for urban areas and $4.6 billion in formula grants for rural areas, as well as $23.1 billion to upgrade rail and bus systems and $8 billion to expand high-capacity rail and bus service. Other transit funds will support low or zero-emission bus grants and improvements to services for older adults and individuals with disabilities.

• Electric vehicles. The law sets aside $19 billion for projects associated with electric vehicles, most—$15 billion—in new money. Of the total, $7.5 billion will go directly to states and local governments to deploy electric vehicle charging infrastructure nationwide.

The IIJA has the potential to reduce the gap in spending on deferred infrastructure maintenance, but it will not be a panacea for reducing states’ infrastructure liabilities. Most significantly, ongoing inflation and rising interest rates are likely to increase the costs of planned projects well beyond initial estimates, which would diminish the impact of new funding. Indeed, construction cost increases have outpaced the consumer price index (CPI-U) over the last two years (Figure 2).

The aggregate indexes illustrate a pronounced general upward trend in construction costs but mask variations across different construction material sectors and states. The American Association of State Highway and Transportation Officials reports that material cost increases for its members have ranged from 15% to a doubling or tripling in some markets over the last year.  Higher costs can also dramatically increase the lead times for procurement and delivery of many construction materials and lead to unpredictability in their availability and project delays that further increase costs.

Finally, although most of the funds provided by the IIJA will be allocated directly to states via formula, about a quarter will be awarded through competitive grant programs. Competitive awards such as these are often used to target policy priorities more effectively—for example, by scoring applicants based on factors such as equity or cost-benefit analyses. Still, they also can pose challenges.

For example, small and historically underserved communities may lack the resources to prepare successful applications for competitive grants or to manage federal grant requirements when they do succeed. And that can exacerbate existing equity challenges that discretionary programs may be designed to mitigate. Further, the uncertainty around discretionary awards can hamper state and local government capital planning and budgets. Such factors typically delay projects as well, given the amount of time required to award funding.

The IIJA represents the largest federal investment in public infrastructure in more than a generation. It provides states and localities with more than $200 billion in new federal funding for transportation and water systems over the next five years, which represents a meaningful down payment toward retiring the $1 trillion in deferred maintenance liabilities that states have accumulated over the last 50 years. Cost increases and supply chain challenges may limit the IIJA’s impact, but the bill provides an opportunity for renewed public interest and investment to deal with immediate issues and to build transportation and water systems that can meet the needs and challenges of today, as well as last into the next century.

Emma Wei is an associate manager, Ronald Mak is an associate, and Stephanie Connelly is a principal associate with Pew’s state fiscal policy project.