State Strategies for Paying for Infrastructure Vary

State and local governments spend about half a trillion dollars annually on transportation, water, and wastewater infrastructure, with roughly 25% of the spending funded by federal grants. And recent federal commitments have driven the largest growth in state and local capital investment since 1979.

However, these investments have fallen short of addressing needs in deferred maintenance, modernization, and climate-change adaptation, leading to a projected long-term infrastructure investment gap across the country of nearly $2.59 trillion—particularly in transportation, water, and wastewater systems, for which states and localities bear primary responsibility for maintaining and improving. But accurately measuring the backlog of needed investments is complicated by inconsistent state reporting practices and the lack of a comprehensive measure for quantifying the exact spending needs throughout the 50 states.

With financial support from The Pew Charitable Trusts, researchers Lourdes Germán and Andrew Simmons of the nonprofit Public Finance Initiative (PFI) conducted an in-depth examination of fiscal governance practices across a sample of states in fiscal year 2024 to identify how they fund infrastructure, particularly in the transportation, water, and wastewater sectors. Germán is PFI’s founder and executive director and is on the faculty of Harvard University; Simmons is a consultant to PFI and director of urban innovation and strategic partnerships with the U.K.-based nonprofit Resilience Brokers.

Using both quantitative and qualitative approaches, PFI’s report analyzes public finance strategies and tools used in 15 states—California, Georgia, Idaho, Illinois, Kentucky, Maryland, Massachusetts, Missouri, Montana, Nebraska, New Mexico, New York, Pennsylvania, Texas, and Washington. The report summarizes each state’s legal mandates and statutory fiscal authority in the transportation, water, and sewer infrastructure sectors, including detailing the composition of each state’s audited financials and governmental funds; identifying which state entities have authority over the collection and distribution of revenue sources; and assessing each state’s ability to use public finance mechanisms, such as bonds and loans. The authors focus on state-level activities, generally excluding municipal investments, but provide valuable insights on the importance of coordination between state and local authorities—for example, by examining whether states permit localities to collect certain revenues to fund or finance local infrastructure improvements.

The summary analysis and key findings in the paper highlight state-level practices and trends in infrastructure financing, including emerging efforts to address climate risks and suggestions for optimizing the use of traditional tools and investment approaches used to maintain and improve public infrastructure.

The authors found significant variations in fiscal governance of the infrastructure sectors and funding strategies across the 15 states, as well as several common trends in state approaches and challenges:

• Variety of jurisdiction authority and fiscal management: The 15 states show significant differences in the authority and fiscal management of the three infrastructure sectors, meaning that effective policies to optimize infrastructure spending and planning will reflect each state government’s financial practices, constitutional restrictions, and relationships with agencies and municipal (and other levels of) government.
• Limits on the authority local governments have to raise funds: Seven of the states in the study authorize local fuel taxes, nine of the states allow local sales taxes, and only six of the states permit local motor vehicle registration fees. These limits on local governments' ability to raise funds can lead to investment gaps that delay maintenance and improvements for critical infrastructure managed by these governments, such as local roads and water systems.
• Reliance on Own-Source Revenues: The study found a heavy reliance on what are known as own-source tax revenues—revenues that a state government generates independent of federal funds, through taxes, fines, fees, earnings on state investments, or collecting a portion of these sources from local governments—as well as on federal funds, to fund infrastructure improvements. Eleven of the 15 states relied heavily (50% or more) on own-source tax revenues, while the 4 other states relied heavily (50% or more) on intergovernmental revenues, such as taxes and federal sources. Most of the states studied raise less than 15% of their revenues from non-tax sources, such as charges, fees, and fines.
• Dedicated resources for transportation, water, and sewers: Dedicated transportation funds within state budgets or general funds were common across the states, with eight of the 15 states having such funds. However, only two states have major funds set aside for capital improvements, and none of the states appear to have major dedicated funds for water and sewer projects within its governmental or general fund. Instead, states appear to rely heavily on federal funding administered through the Environmental Protection Agency’s Clean Water and Drinking Water State Revolving Fund programs, with a few—such as California, Georgia, and Texas—having created programs through special authorities with one-time or other dedicated funds to support water infrastructure.
• Uses and types of infrastructure financing mechanisms and tools vary: The states in the study use a wide range of financing mechanisms, including leveraging special state authorities, revolving funds, and public-private partnerships (P3s), with varying degrees of oversight.

The authors conclude by recommending future research areas to explore, including the effectiveness of restricting certain state funds to support infrastructure; the role that tools such as budget assessments could play in enhancing strategic infrastructure investment decisions; the efficacy of P3s; the impact of legislative changes on P3 activity and performance; and the efficiency of coordinating decision-making and funding through institutions such as state infrastructure banks. The report’s findings highlight the importance of identifying successful funding and financing strategies to address infrastructure investment shortfalls as well as the need for better information and tools so that policymakers and the public can understand and address these challenges.

The Pew Charitable Trusts provided funding for this project, but Pew is not responsible for errors in this paper and does not necessarily endorse its findings or conclusions.