This document summarizes a presentation by the Congressional Budget Office (CBO) about federal grants to state and local governments for infrastructure investment. It provides data on federal nondefense investment in physical capital, education, and research from 1962 to 2017. It also shows that while the federal government accounts for the majority of transportation and water infrastructure spending, state and local governments select projects within federal rules. Research estimates that state and local governments substitute around 0.2 to 1.3 of their own spending for each additional dollar of federal highway grants. The CBO has published several reports on topics related to federal investment.

1. Congressional Budget Office
Presentation for the National Federation of Municipal Analysts
January 31, 2019
Sheila Campbell
Microeconomic Studies Division
Federal Grants to State and Local
Governments for Investment

2. 1
CBO
How much does the federal
government spend on infrastructure
investment, and how does that
investment take place?

3. 2
CBO
Federal Nondefense Investment, 1962 to 2017
Physical Capital Education and
Training
0
25
50
75
100
125
150
175
200
1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017
Research and Development
Billions of 2017 dollars

4. 3
CBO
Education and Training
($124 Billion)
Physical Capital
($114 Billion)
Grants to State and Local Governments
Other Federal Spending
Federal Nondefense Investment, 2017
Research and Development
($64 Billion)
Total: $302 Billion

5. 4
CBO
* Includes the following budget functions: Administration of Justice; Energy; General Government; General Science, Space, and Technology; Income Security; International Affairs;
Health; Education, Training, Employment, and Social Services; Agriculture; and Social Security.
0 10 20 30 40 50 60 70
Other *
Commerce and Housing Credit
Community and Regional
Development
Veterans Benefits and Services
Natural Resources and
Environment
Transportation
Total: $114 Billion
Grants to State and Local
Governments
Other Federal Spending
Billions of 2017 dollars
Federal Nondefense Investment in Physical Capital by
Budget Function, 2017

6. 5
CBO
Transportation Infrastructure: Sources of Nondefense Investment,
1962 to 2017
Federal
Government
State and Local
Governments
0
25
50
75
100
125
150
175
1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017
Billions of 2017 dollars

7. 6
CBO
Water Infrastructure: Sources of Nondefense Investment,
1962 to 2017
Federal
Government
State and Local
Governments
0
25
50
75
1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017
Billions of 2017 dollars

8. 7
CBO
How does the role of the federal
government in infrastructure
investment differ from the role of
state and local governments?

9. 8
CBO
n.a. = not applicable.
a. The state or local port authority chooses land projects and may receive federal funds through other federal transportation programs.
Features of Infrastructure Spending by Mode of Transportation
Mode
Federal Government’s Typical
Maximum Share of Total Spending Federal, State, and Local Decisionmaking Roles
Highways 80% of capital State and local governments choose projects, following
federal rules and conditions
Mass Transit 80% of capital, 50% of operations State and local governments choose projects, following
federal rules and conditions
Rail n.a. Regulatory
Aviation 75% to 90% of capital State and local governments choose projects, following
federal rules and conditions; federal government designs the
national aviation system
Water Transportation 40% to 100% of construction,
50% to 100% of operations
Federal government chooses water projects with
Congressional approvala

10. 9
CBO
Do state and local governments use
federal funds for infrastructure
investment to substitute for spending
from other sources?

11. 10
CBO
a. Substitution rates are calculated as the cumulative effect of a change in spending in response over three years.
b. This substitution rate is based on the cumulative change in state highway spending over the period.
Estimates of Substitution Rates From Literature on Highway Grants
Study Main Substitution Rate Estimate Period Studied Dependent Variable
Meyers (1987) –0.6 1976–1982 State spending for highways
Knight (2002) –0.9 1983–1997 State spending for highways
Gamkhar (2003) –0.2a 1976–1990 State and local spending for
highways
Government Accountability
Office (2004)
–0.5 1983–2000 State and local spending for
highways
Nesbit and Kreft (2009) –0.2 1974–2002 State spending for highways
Dupor (2017) –0.8b 2008–2010 State capital spending for
highways
Leduc and Wilson (2017) 1.3b 2008–2012 State spending for highways,
including transfers to local
governments

12. 11
CBO
What are some resources from CBO
about federal investment?

13. 12
CBO
Federal Support for Financing State and Local Transportation and Water
Infrastructure (October 2018), www.cbo.gov/publication/54549.
(Source of information for slides 5 and 6.)
Public Spending on Transportation and Water Infrastructure, 1956 to 2017
(October 2018), www.cbo.gov/publication/54539.
Fiscal Substitution of Investment for Highway Infrastructure,
Working Paper 2018-08 (August 2018), www.cbo.gov/publication/54371.
(Source of information for slides 8 and 10.)
How CBO Produces Fair-Value Estimates of the Cost of Federal Credit
Programs: A Primer (July 2018), www.cbo.gov/publication/53886.
Related Work on Federal Investment by CBO

14. 13
CBO
Fair-Value Estimates of the Cost of Federal Credit Programs in 2019
(June 2018), www.cbo.gov/publication/54095.
The Macroeconomic and Budgetary Effects of Federal Investment (June 2016),
www.cbo.gov/publication/51628.
Approaches to Making Federal Highway Spending More Productive
(February 2016), www.cbo.gov/publication/50150.
Federal Investment (December 2013), www.cbo.gov/publication/44974.
Federal Grants to State and Local Governments (March 2013),
www.cbo.gov/publication/43967.
Related Work on Federal Investment by CBO (Continued)