New Study: State-Level “Federal-Aid Swap” Programs Hurt Workers and Fail to Save Money on Infrastructure

Iowa law allows certain highway projects to bypass federal construction rules

Chicago: As congressional leaders in both parties consider trillions of dollars in new infrastructure investment, a new report from the Midwest Economic Policy Institute finds that state-level accounting schemes (called “federal-aid swap” programs) that bypass federal construction standards fail to save any money—even though they result in fewer projects being covered by prevailing wages, Disadvantaged Business Enterprise goals, and Buy America provisions.    

Read the Report, “The Effects of ‘Federal-Aid Swap’ Programs on Highway Construction Costs, Contractor Diversity, and Out-of-State Contractors: Evidence from Iowa.”

“Federal-aid swaps” are policies that states use to consolidate federal infrastructure dollars into a smaller pool of projects—enabling others that were apportioned and would have received federal subsidies to be paid for entirely with state or local funds.

Ultimately, the practice allows states to bypass federal contracting standards that ensure construction workers are paid local market wages (Davis-Bacon prevailing wage), support construction companies owned by women and People of Color, and require the use of American-made iron and steel. According to the nonpartisan Government Accountability Office (GAO), Iowa has the most-utilized program of the 15 states with “federal-aid swap” schemes, with as much as 18% of federal highway dollars swapped with state funds in 2019 alone. 

MEPI examined about 1,300 Iowa Department of Transportation projects awarded between 2016 and 2020. After accounting for project size and complexity, project type, and project location, the study found that while “federal-aid swaps” did not reduce overall project costs (and may have actually increased costs), they did result in 10% fewer projects covered by Davis-Bacon prevailing wages, 4% fewer covered by Disadvantaged Business Enterprise goals, an estimated $2 million wage cut for the state’s blue-collar construction workers, and an estimated $9 million siphoned out of the state’s economy by increasing the number of out-of-state contractors winning project bids.

“The problem with Iowa’s ‘federal-aid swap’ program isn’t just that it fails to save money—it’s that it means lower wages for local construction workers and fewer local contractors winning bids,” said study author and MEPI Policy Director Frank Manzo IV. “If the goals of infrastructure investment include creating good-paying jobs and spurring economic growth in communities, the data from Iowa strongly suggests that ‘federal-aid swap’ programs can actively undermine both of these objectives.”

While calling for additional research on the effects of exchange rates on “federal-aid swap” programs, the report notes that its findings on the cost-neutral impact of federal construction standards on state highway projects also align with the conclusions of most peer-reviewed economic research on the impact of prevailing wage laws.

“Labor comprises a historically low share of overall construction costs, and research has consistently found that states that repeal or otherwise bypass prevailing wage standards have failed to realize any cost savings,” Manzo added. “This is because prevailing wages tend to attach more highly skilled workers to the industry, deliver higher levels of productivity and stimulate contractor efficiencies that reduce spending on larger cost components such as fuels, equipment and materials.”

To counter the potentially damaging impacts that swap programs could have on forthcoming federal infrastructure investments, the report includes several state and federal policy considerations.  These could include repealing state-level swap programs and statutory prohibitions on the practice by Congress, or the enactment of state-level prevailing wage, Disadvantaged Business Enterprise, and Buy America policies in current “federal-aid swap” states that do not already have them.

The Midwest Economic Policy Institute (MEPI) is a nonpartisan nonprofit research organization which uses advanced statistics and the latest forecasting models to promote thoughtful economic growth for businesses and working families across the Midwest.