New CWC Report Supports the Value of Infrastructure Investment

A new report by the Clean Water Council (CWC) illuminates facts that our leaders need to know, not only as Congress implements the massive economic stimulus package passed in February, but also for decades to come as the National Utility Contractors Association (NUCA) seeks to increase funding for water and wastewater infrastructure (e.g., SRF appropriations and reauthorization), support efforts to create a water infrastructure trust fund, create opportunities to create more opportunities for private investment in water/wastewater infrastructure markets, etc. To that end, NUCA has provided copies to all legislative offices on Capitol Hill, each CWC member and all the members and chapters of the NUCA.

In commenting on the value of the Sudden Impact: Assessment of Short-Term Economic Impacts of Water and Wastewater Projects in the United States report, NUCA CEO Bill Hillman had this to say: “By revising and expanding the much-heralded CWC findings from the early 1990s, the new findings will be instrumental in our struggle to draw public and political attention to the growing infrastructure crisis and procure new funding to meet documented national needs.”

The report shows that targeted water and wastewater investment contained in a wide range of legislation could, in short order, generate hundreds of thousands of skilled positions paying living wages. As noted in the report, “a $1 billion investment in water and sewer projects [also] generates measurable national employment in 325 other standard industry classifications, everything from tires to tortillas.”

The report also shows that a $1 billion investment in water and wastewater infrastructure results in total national output (i.e., demand for products and services in all industries) of between $2.87 billion and $3.46 billion, creates up to 26,669 new jobs (with average annual earnings for the construction portion of the jobs at an impressive $50,396) and generates personal (household) income of between $1.01 billion and $1.06 billion. In addition, each $1 billion invested generates approximately $82.4 million in state and local tax revenue.

The results are based on actual data collected from 116 water and wastewater construction projects in five demographically diverse states, including 73 different counties. The projects were completed in 2006 and 2007 and encompass a comprehensive array of geographic regions, project types, size, materials, construction methods and labor markets. The output, jobs and income (direct, indirect and induced) tied to these projects were determined at the county, state and national levels using two respected input-output models and multipliers (IMPLAN and RIMS II).

More funding means more jobs. It’s estimated that proper infrastructure funding could generate hundreds of thousands of skilled positions paying living wages.

“The CWC took inventory of actual projects in order to fuel the models with real-world data that accurately reflect current activity. The report is short and sharp, and the economic findings are rock solid,” added Hillman. “Not only are the impacts sudden, but they are also significant, targeted to an area of real need and do not increase the size of government.”

Each of the 116 projects analyzed in the assessment weaves a powerful local story, quantifying the interactions between firms, industries and social institutions within a local economy and rippling outward across regional and state boundaries to benefit the entire nation.

“For example, a New Mexico township authority contracted with a local utility contractor for $3.27 million to expand the wastewater treatment plant, including new headworks and a storage handling facility,” said Peg Krecker, one of the report’s authors. “This initial investment in construction added an additional $1.66 million of demand to the local economy. Slightly less than $1 million involved indirect effects such as engineering services, wholesale businesses and industrial machinery and equipment. Just over $750,000 of demand stemmed from household spending including housing itself, health care and retail stores for everything from food to automotive parts to gardening supplies.

“On top of this, an additional $1,730,000 in personal income to employees in the region resulted from growth in local economic demand. Finally, the number of jobs in the area grew by 50, 32 of which were construction jobs that paid approximately $41,000. This necessary upgrade made a striking impact in Santa Fe County.”

The report was made possible by contributions from the American Council of Engineering Companies, American Road and Transportation Builders Association, American Society of Civil Engineers, Associated Equipment Distributors, Association of Equipment Manufacturers, Caterpillar, Ductile Iron Pipe Research Association, John Deere Construction Equipment Co., Laborers-Employers Cooperation and Education Trust, National Stone, Sand and Gravel Association, National Utility Contractors Association, Plastics Pipe Institute, Portland Cement Association, The Vinyl Institute and Water and Sewer Distributors of America.

For a copy of the report, contact NUCA at (703) 358-9300.

Example — Annual Gift Giving

• Husband and wife donate $156,000 combined in annual gifts.
  
• Assume husband and wife both own company stock.
  
• Assume each gives stock to two children and four grandchildren, or 12 gifts total.
  
• Under these assumptions, a maximum of $156k could be gifted without tax. (Husband and wife make 12 gifts at $13,000 each.)
• Company generates $5M of sustainable pretax earnings.
  Pretax earnings multiple has dropped from five- to three-times.
  
• In a “normal” investment and value environment, the company would be valued at five times pretax earnings. In today’s market, however, the company could be valued at three times pretax earnings due to depressed economic conditions and more uncertainty about the future, meaning higher risk and greater return demanded or lower prices (lower multiples) paid by investors.
• Minority discount of 30 percent
  
• A minority ownership position in a privately-owned company is generally worth 25 to 35 percent less than a controlling position, as a minority shareholder has little, if any, ability to dictate the key operational and financial decisions of the company.
• Husband and wife are majority (controlling) shareholders and their share of the company (estate) is worth more than $3.5 million.
• Estate tax bracket in 2009 of 45 percent.

Under the aforementioned assumptions, the total stockholders’ equity in the hypothetical company would be worth $25 million in a “normal” market (i.e., the company has the ability to generate $5 million of sustainable pretax earnings, and under “normal” conditions, the market would value the company at five times this amount, or $25 million).

To determine the ownership that could be transferred via a $156,000 gift, which represents a minority ownership stake in the company, the value of the company ($25 million) was discounted by 30 percent ($17.5 million). Thus, the $156,000 gift transferred 0.9 percent of ownership (0.9 percent = $156k/$17.5M). If these shares had not been gifted, their pro rata controlling interest value, as still held by the husband and wife’s estate in 2009, would be worth $222,857 (0.9 percent x $25M) with the incremental estate tax of 45 percent on that value, or $100,286, assuming the total estate was worth more than the 2009 $3.5 million exemption value. Moving stock from value based on “controlling interest” to value based on a minority ownership stake will save tax dollars regardless of the economic vagaries of the marketplace.

With depressed economic value, concurrent transference of stock from control to minority will amplify the potential tax savings.