Bill Clinton stood today in his Harlem office with city comptroller John Liu, local and national teachers' union reps, and a man from the White House to unveil a new way of "putting us on the path to a sustainable future in New York City" after Superstorm Sandy. The former president's non-profit, the Clinton Global Initiative, has secured a pledge for the New York City teachers' pension fund to invest $1 billion in infrastructure projects within New York State.
But the new venture doesn't solve the central problem behind inadequate infrastructure investment. Unless a project can offer a financial return to investors, including public-pension funds, that project still needs government funding or a government guarantee.
The pension fund would make its investments either by lending money to infrastructure projects or taking "partial ownership" of such projects, Liu said.
The infrastructure investments, like all pension-fund investments, are supposed to earn a financial profit. The projects, however, are unlikely to earn the 8 percent return that city officials expect their taxpayer-guaranteed pension funds to earn each year.
Rather, Liu said, most of the investments will be in the pension fund's fixed-income portfolio, which provides a lower-than-average return within the fund for (theoretically) a lower-than-average risk.
Liu and Clinton estimated that the infrastructure projects the teachers support will earn about 4 percent. Liu added that some riskier infrastructure investments would earn more, depending on where they fall "in the risk-reward category."
Yet nobody on the stage explained how, exactly, the pension fund, as a big investor, would act any differently from any other big investor.
It's hard to see, then, what the teachers' fund will solve with its pool of money.
Global capital is not scarce. To the contrary, trillions of dollars around the world are sitting idle, waiting for good investments. Good investments repay their investors - whether those investors are private or public.
The example that Shaun Donovan, the Obama administration's point man for Sandy recovery, inadvertently offered to skeptical reporters illustrated the problem.
When asked how the pension-fund investment might replace federal recovery money, Donovan explained that pension-fund money could go to "things like transit" in New York City, "where there is a revenue produced" from fares. He also mentioned "tolls [from] roadways" as "additional sources of revenue."
But it's precisely because of these sturdy revenues that the state-run Metropolitan Transportation Authority (MTA) and the Thruway Authority can already borrow quite cheaply. Three weeks ago, the MTA borrowed money for 10 years at an annual interest rate of 2.33 percent, far less than the pension fund expects to earn.
Yes, there are projects that can't find financing. Take one example, housing, which the Clinton initiative (incorrectly) considers to be infrastructure.
It would be hard, say, for the New York City Housing Authority (NYCHA) to borrow hundreds of millions of dollars to put its power and heating equipment above floodable basements and low floors. But that is because it is too risky for investors to lend to the housing authority absent a new source of revenue, and the city is unwilling or unable to wring much new revenue from tenants.
As Liu implied with his "risk-reward" caution, even if the pension fund were to invest in such a project, it would do so only for a higher interest rate.
This math holds throughout the west. Indeed, it's for this reason - available capital wants to be repaid - that the British government has had to scale back massively its own ambitious year-old proposal to attract $30 billion of pension money for public infrastructure in that country.
As the Financial Times reported in July, the UK government's "growth strategy is 'feared to be "in tatters" after the government's chief construction adviser said pension funds were unlikely to invest in ... new infrastructure projects including roads, railways and power plants."
Why? British pension-fund managers consider most such investments too risky absent a government guarantee - and if the government must guarantee infrastructure, it's right back where it started.
Fancy schemes aside, there's no way around the basics. If the government considers infrastructure to be important, it must direct taxpayer funds or user-fee money into it (and often both).
To do so, government must cut back on something else, borrow more money, or raise taxes (and risk cutting the economic growth that it is supposed to be stimulating).