Infrastructure Sticker Shock: Financing Costs More than Construction

By Ellen Brown.

Funding infrastructure through bonds doubles the price or worse. Costs can be cut in half by funding through the state’s own bank.

“The numbers are big. There is sticker shock,” said Jason Peltier, deputy manager of the Westlands Water District, describing Governor Jerry Brown’s plan to build two massive water tunnels through the California Delta. “But consider your other scenarios. How much more groundwater can we pump?”

Whether the tunnels are the best way to get water to the Delta is controversial, but the issue here is the cost. The tunnels were billed to voters as a $25 billion project. That estimate, however, omitted interest and fees. Construction itself is estimated at a relatively modest $18 billion. But financing through bonds issued at 5% for 30 years adds $24-40 billion to the tab. Another $9 billion will go to wetlands restoration, monitoring and other costs, bringing the grand total to $51-67 billion – three or four times the cost of construction.

A general rule for government bonds is that they double the cost of projects, once interest has been paid.

The San Francisco Bay Bridge earthquake retrofit was originally slated to cost $6.3 billion, but that was just for salaries and physical materials. With interest and fees, the cost to taxpayers and toll-payers will be over $12 billion.

The bullet train from San Francisco to Los Angeles, another pet project of Jerry Brown and his administration, involves a bond issue approved in 2008 for $10 billion. But when interest and fees are added, $19.5 billion will have to be paid back on this bond, doubling the cost.

And those heavy charges pale in comparison to the financing of “capital appreciation bonds.” As with the “no interest” loans that became notorious in the subprime mortgage crisis, the borrower pays only the principal for the first few years. But interest continues to compound; and after several decades, it can amount to ten times principal or more.

San Diego County taxpayers will pay $1 billion after 40 years for $105 million raised for the Poway Unified School District.

Folsom Cordova used capital appreciation bonds to finance $514,000. The sticker price after interest and fees will be $9.1 million.

In 2013, state lawmakers restricted debt service on capital appreciation bonds to four times principal and limited their term to 25 years. But that still means that financiers receive four times the cost of the project itself – the sort of return considered usurious when we had anti-usury laws with teeth.

Escaping the Interest Trap: The Models of China and North Dakota

California needs $700 billion in infrastructure over the next decade, and the state doesn’t have that sort of money in its general fund. Where will the money come from? Proposals include more private investment, but that means the privatization of what should have been public assets. Infrastructure is touted to investors as the next “fixed income.” But fixed income to investors means perpetual payments by taxpayers and rate-payers for something that should have been public property.

There is another alternative. In the last five years, China has managed to build an impressive 4000 miles of high-speed rail. Where did it get the money? The Chinese government has a hidden funding source: it owns its own banks. That means it gets its financing effectively interest-free.

All banks actually have a hidden funding source. The Bank of England just admitted in its quarterly bulletin that banks don’t lend their deposits. They simply advance credit created on their books. If someone is going to be creating our national money supply and collecting interest on it, it should be we the people, through our own publicly-owned banks.

Models for this approach are not limited to China and other Asian “economic miracles.” The US has its own stellar model, in the state-owned Bank of North Dakota (BND). By law, all of North Dakota’s revenues are deposited in the BND, which is set up as a DBA of the state (“North Dakota doing business as the Bank of North Dakota”). That means all of the state’s capital is technically the bank’s capital. The bank uses its copious capital and deposit pool to generate credit for local purposes.

The BND is a major money-maker for the state, returning a sizable dividend annually to the state treasury. Every year since the 2008 banking crisis, it has reported a return on investment of between 17 percent and 26 percent. While California and other states have been slashing services and raising taxes in order to balance their budgets, North Dakota has actually been lowering taxes, something it has done twice in the last five years.

The BND partners with local banks rather than competing with them, strengthening their capital and deposit bases and allowing them to keep loans on their books rather than having to sell them off to investors or farm the loans out to Wall Street. This practice allowed North Dakota to avoid the subprime crisis that destroyed the housing market in other states.

North Dakota has the lowest unemployment rate in the country, the lowest default rate on credit card debt, one of the lowest foreclosure rates, and the most local banks per capita of any state. It is also the only state to escape the credit crisis altogether, boasting a budget surplus every year since 2008.

Consider the Possibilities

The potential of this public banking model for other states is huge. California’s population is more than 50 times that of North Dakota. California has over $200 billion stashed in a variety of funds identified in its 2012 Comprehensive Annual Financial Report (CAFR), including $58 billion managed by the Treasurer in a Pooled Money Investment Account earning a meager 0.264% annually. California also has over $400 billion in its pension funds (CalPERS and CalSTRS).

This money is earmarked for specific purposes and cannot be spent on the state budget, but it can be invested. A portion could be invested as equity in a state-owned bank, and a larger portion could be deposited in the bank as interest-bearing certificates of deposit. This huge capital and deposit base could then be leveraged by the bank into credit, something all banks do. Since the state would own the bank, the interest would return to the state. Infrastructure could be had interest-free, knocking 50% or more off the sticker price.

By doing its own financing in-house, the state can massively expand its infrastructure without imposing massive debts on future generations. The Golden State can display the innovation and prosperity that makes it worthy of the name once again.


Ellen Brown is an attorney, founder of the Public Banking Institute, and a candidate for California State Treasurer running on a state bank platform. She is the author of twelve books, including the best-selling Web of Debt and her latest book, The Public Bank Solution, which explores successful public banking models historically and globally.

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  • Dee

    I don’t get it. How can a Bank lend money without charging interest? Who would, aside from tax payers paying tax if I understand this , ever voluntarily deposit money in a bank that didn’t pay interest because it didn’t charge interest and if it did pay interest , how would it be different?
    BND charges interest on student loans, I looked that up .. sounds like they charge interest jut like any other bank.. It would probably not be in the public interest for the state bank using state money to loan money and then not charge interest. And if the state bank loaned money to the state for state projects at a competitive interest rate, then the bank would receive the interest , only it would be the states money because it was the states bank and the state would benefit from the increased revenue, but the tax payer would still be paying interest on the loan to the state so the state could pay interest to itself as the state bank, it would just be the state getting the money like it does all tax paid. But the tax payer would still be paying the loan plus interest and not saving anything, or perhaps a little if the state bank charged the state some preferred interest rate..
    And at current rates of interest paid to account holders , checking or savings .. I don’t see folks selecting a state bank any more than a private bank as the place to go for ROI. And to sell bonds you have to be competitive in rates offered to attract investors.
    I’m sorry, but I just do not understand how this works( or why it would work), short of it being yet another bankster magic scam like Credit default swaps. If Interest is being charged, and to the degree it is charged, the tax payer sees no savings , just the state gets more revenue .. And as you point out, the interest the state would receive, and the cost to the tax payer of that interest, can run more than the cash price of the infrastructure project. The Tax payer sill pays full freight, the State gets more money.. part of the problem is how much money the state gets.. the more money the state gets, the more distortion and malspending the state does. Unless I am missing something, this is just a way for the state to get more power and more money and it will probably just end up as higher pay for state workers and richer pensions. Which means either the state will have to go on a perpetual infrastructure building spree , like China, to keep the plates spinning , or at some point the tax payer will have to maintain a bloated state when the state is finished building it own private Rome and Athens.

    • R. Ambrose Raven

      No, the key point has nothing to do with the interest rate. Firstly, any credit created is accepted by the community for goods and services because they have confidence in the currency. Only if the credit issued by such a bank was so large as to be inflationary would it start to cause problems – if its impact is not inflationary then it is not competing with other investors, meaning that it is increasing aggregate demand, which is what we’d like investment to do. Secondly, government projects generally focus on doing real things that involve planning, skills, training, good wages and above all a clear public benefit. So it is highly likely to be beneficial, meaning it will return a surplus, directly or indirectly, now and certainly later.

      In related party transactions, the fee or interest rate is irrelevant. You cannot make a profit or a loss by trading with yourself.

      • joebhed

        As far as interest ‘rates’ potential for causing “problems” in the economy……….
        this comment about the interest ‘rate’ being irrelevant to whether and how public improvement projects are funded sort of belies the much bigger, pervasive interest-cost construct……… which is that using debt-based money (created by banks out of nothing) causes an upwardly-mobile income stream from the payers of bonding interest to the money-creators. FOREVER. (Nice work if you can get it.)

        NEED I say, from the Ninety-Nine percent to the One Percent?
        NEED I say “in perpetuity” for every single dollar EVER so created?
        NEED I say with compounding interest that increases over generations?
        NEED I say this is what the so-called capitalist scam is all about?
        The privileged class creates the capital (Debt-contract-based financial assets) that serves as “money” in this country, and they rent it to the Restofus………forever.

        The real interest “rate” in a full-employment national economy, which by definition commands an adequate money supply, is always ZERO.

    • Ben Johannson

      You have to understand that banks do not make loans with deposits. When
      we had a fixed-rate system in the 19th Century that was the case, but
      in our current floating-rate system with a modern central bank there is
      no longer any connection between a bank’s deposits and its ability to
      extend financing. If a credit-worthy customer applies for a loan, the
      bank simply credits the appropriate account. At the end of the day it
      determines its reserve requirements and if necessary acquires more
      reserves either from another bank or the CB. The only limit on
      available investment capital in our economy is the capacity of the
      private sector, state and local governments to service their

      • joebhed

        “”The only limit on available investment capital in our economy is the capacity of the
        private sector, state and local governments to service their liabilities.””

        True enough.

        But isn’t the required capital flows to making the interest payments on customer deposits, as well as making the payments drawn on the loan deposits themselves, part of that all banks’ liability management?

        There is a very real ‘cost of money’ to the banks from extending student and other loans that is a quid-pro-quo determinant of what the bank will need to charge for the loans it makes, including for infrastructure projects.

        Moreover, there is no evidence that BND supports transportation infrastructure in the state. In 2013 North Dakota had 746 structurally-deficient and 247 functionally-obsolete bridges, 32 high-hazard dams and 44 percent of the state’s roads are in poor to mediocre condition.
        Most highway reconstruction and other transportation related improvements are funded by fuel taxes paid by ND consumers.
        The existence of BND is not causal to having public bank-funded public infrastructure improvements.

        • SufferinSuccotash, Mentat

          Why doesn’t BND support public transportation infrastructure? It would seem to make sense given all the Bakken Shale-related economic activity going on in the state.

          • joebhed

            I guess because they had a tax-funded source for transportation even before BND, who might control those tax fund balances. It seems there are many taxing opportunities in North Dakota right now, so that the failed transportation infrastructure of the day is not for any lack of funding. Maybe a labor shortage.
            The partnership banking thing seems to not work too well for public projects.

  • joebhed

    The solution for funding for public infrastructure that does not involve both debt and interest is reform to the money system.

    When the grandest of public investment projects was on the drawing boards as the Muscle Shoals proposal in Alabama, two American capitalists and developers who understood money advocated for a complete equity-funding of the project, using dollar bills to pay for the labor and materials, and NOTHING to pay the financiers as debt-money creators.

    “The element that makes the bond good makes the bill good.”
    So said Thomas Edison and Henry Ford to the government’s bonding authority.

    “”People who will not turn a shovelful of dirt nor contribute a pound
    of material will collect more money from the United States than will the
    people who supply the material and do the work. That is the terrible
    thing about interest. In all our great bond issues the interest is
    always greater than the principal. All of the great public works cost
    more than twice the actual cost, on that account. Under the present
    system of doing business we simply add 120 to 150 per cent, to the
    stated cost.””

    “”But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good. The difference between the bond and the bill
    is that the bond lets the money brokers collect twice the amount of the
    bond and an additional 20 per cent, whereas the currency pays nobody but
    those who directly contribute to Muscle Shoals in some useful way.””

    Today, the Kucinich proposal to reform the money system, and to pay for public infrastructure with real, rather than debt-based, money, is the best way forward. Under our national economic metrics and the formula proposed in the Kucinich HR 2990-112th Bill, California could receive about $12 Billion ANNUALLY for its own public purposed projects. That would be federal-state revenue sharing from the government’s repatriation of it’s Constitutional money-creation and issuance powers.

  • “The Chinese government has a hidden funding source: it owns its own banks. That means it gets its financing effectively interest-free.” Not quite: the government pays interest on the loans that it derives from the appreciated value of land and property that it owns around the new train stations, plus appreciated property taxes, plus increased income taxes from the newly urbanized workers drawn to the – you guessed it – high speed trains.
    Conservative urban planning helps, too. The early HSR lines have all become cash positive sooner than anticipated.

  • L_W

    It’s worse than that even. Bonds don’t typically cover the cost of ongoing maintenance on the infrastructure, so those costs keep piling up somewhere.

    Also, the bonds (debt) term lasts longer than the life span of the infrastructure, so you’re “underwater” long before the debt it paid, plus you need new infrastructure.

    Not sustainable.

  • ejhr

    What a good article! I’m still trying to get my head around this financial fantasy world we live in today.
    The only way this giant house of cards will change is for the USA to default on it’s mountain of unfunded fiat liabilities, which of course they won’t willingly do because the private banks would all be wiped out,[as well as all debts, I heard[?]
    However it will happen. It’s a mathematical certainty that growth has to stop. We live in a finite world.

    • Ben Johannson

      A default would not accomplish anything other than immolation of the country’s net savings. It certainly would not improve the government balance sheet to destroy the private sector’s.

      • ejhr

        Not doing anything is a better option? We can’t survive in a fantasy world. One option is the gov’t credits an amount equal to all the mortgages etc to wipe them off the books. But If you’ve got any solutions let us know!

        • Ben Johannson

          Could you specify which liabilities you’re referring to? Your first comment implied public debt while your second indicates private; the dynamics of these are very different so if you could clear this up it would be a big help in furthering the conversation.

          • ejhr

            These are other peoples ideas which seemed to me to be worth checking out.
            That’s why I asked for other solutions. I thought all debts would be affected since we are all “kicking the can down the road”. Mortgages rely on a Growth economy, but a growth economy is no longer a viable economy long term.
            The planet is a finite system, so while growth has worked before we need to redraw the model to live within the resources we are rapidly depleting. We crossed over into overshoot in the 1970’s and the longer we ignore the limits to growth the more brutal will be the inevitable correction.
            We understand a country with its own money theoretically cannot go bankrupt [financially], but it won’t save it if it bankrupts its resource base, and that’s exactly what we are doing. All countries are impoverishing themselves.

  • joebhed

    “” The US has its own stellar model, in the state-owned Bank of North Dakota (BND). …..The bank uses its copious capital and deposit pool to generate credit for local purposes……Infrastructure could be had interest-free, knocking 50% or more off the sticker price……By doing its own financing in-house, the state can massively expand its infrastructure without imposing massive debts on future generations..””
    There you go again. Again.

    Sloganeering about public bank initiatives will not fund any state or local infrastructure projects, if modeled on BND. The only BND lending programs for anything resembling infrastructure are a medical facilities funding program, leaving Californians still $700 Billion short in funding needs.

    Under the BND model….as good as it is…..
    There is no in-house financing of transportation or other infrastructure.
    There is no generation of ‘credit’ for local purposes.
    There is no ‘interest-free’ financing…..of anything.
    There is no opportunity for the state to ” massively expand its infrastructure without imposing massive debts on future generations”.
    Those are things we “wish” we could do.

    Like I said, the Kucinich Bill’s revenue-sharing of seigniorage gains with the states is the only major potential source for debt-free infrastructure funding.

    His Bill has not been entered into this 113th Congress, since Dennis was gerry-mandered out of the House by Republican re-distrcting.
    But, it is exactly what we NEED.


    • Bev

      So glad to see you Joebhed post here at washingtonsblog with your great experience/insight into a Debt Free monetary system ( ) that could turn things around fast for the public good.

      I keep thinking that Kucinich’s bill ( ) urgently needs adopting here in the U.S. and in Japan

      ( see: Professor Yamaguchi (Berkeley, Doshisha Universities) shows that Kucinich’s HR 2990 NEED Act:
      (1) Provides the funding for infrastructure repair (which solves the
      unemployment crisis) (2) Pays off the national debt as it comes due (3)
      Does this without inflation! see PDF of model at ),

      eventually in all nations in order to have the massive money needed for the many generations it will take to try to pay for vast engineering efforts to reduce the huge current and future damage from Fukushima, the 400 additional aging nuclear power plants, and Climate Change Crisis. I don’t think any other option can pay for the repair of such extensive, long term damage. The best monetary system would not only save jobs and the economy, it is necessary for survival itself.

      • Ben Johannson

        Money is always a debt to someone. To you, me or the state.

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  • Thomas McGovern

    Re: “Proposals include more private investment, but that means the
    privatization of what should have been public assets” and “…fixed income to investors means perpetual payments by taxpayers and
    rate-payers for something that should have been public property.”

    Why “should have been?” Why is it assumed that the government (local, state, or federal) “should” finance or own infrastructure projects? “Should have been” is a big assumption and the author should explain the basis of “should have been.”

    • Ben Johannson

      Because the monies used by private investors to finance infrastructure spending typically originate from a bank, which leverages government money to extend the loan in the first place. There is no reason not to cut out the middle man.

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