State must use infrastructure bonds wisely November 15, 2007 By Richard G. Little, in pasadenastarnews.com ONE year after California voters approved the largest bond package in state history to fund highways, schools, levees, parks and housing, most will be under the impression that the infrastructure problem is well under control. However, one year later, it's more of a "not exactly" situation.
A panel of experts convened by the Keston Institute for Public Finance and Infrastructure Policy last week, illuminated some sobering realities regarding the funding of California's infrastructure. Despite the billions approved by the voters in 2006, only 5 percent of those funds actually have been released to agencies to spend. Some of this can be attributed to agencies needing time to gear up to spend new money, some to the three-month delay in approving a state budget while some to the lack of any statewide vision for infrastructure.
Two years ago, as the various bond proposals began to surface, the Keston Institute proposed some simple guidelines for selecting projects: leverage other funding sources, provide environmental remediation and be part of a regional or statewide solution. Unfortunately another "not exactly" occurred. Instead of the bonds serving as seed capital to attract much needed private investment and pooled public funds, they have become the "main event." Additionally, rather than being a key part of project selection, environmental effects, are dealt with during the review process, where California Environmental Quality Agency (CEQA) related issues are sure to cause delays. Finally, any sense of system-wide or regional solutions went out the window as various communities of interest tried to elbow their way to the front of the line.
Although the process will no doubt improve as the procurement pipeline opens up, the long-term view is not rosy.
The financial impact of California's on-going structural budget's inability to provide essential infrastructure, cannot be ignored. Because the debt service (principal and interest payments) for General Obligation bonds is paid from the state's general fund, funding infrastructure in this fashion is unsustainable. Each dollar paid for debt service is a dollar unavailable for other programs. Faced with funding popular, and often obligatory, programs in education and public safety, or building and maintaining infrastructure, guess what the Legislature will do.
As long as bonds are one of the multiple pots of money from which to fund infrastructure, they quickly can become the de facto sole source. Current revenues allocated to transportation or flood control can be shifted to other programs to balance shortfalls and the loss backfilled with bond monies. This occurred during the current budget cycle with transit funding and who knows what it will look like with housing and construction in a downturn. As we face a future of annual budget deficits, it's reasonable to question what this means for our long-heralded infrastructure revival.
Faced with recurring deficits, one logically might consider some combination of spending cuts and revenue increases. But with the Legislature refusing to touch this imponderable problem, we need to look at what else we can do.
We can start from the premise that infrastructure conveys benefits. Some of these benefits accrue to society in general and some to one group more than others. If we can agree that those who benefit should pay in rough proportion to the benefits received, we have the start of a workable model. As an example, highway improvements were traditionally paid for from state and local taxes on gasoline on the theory that drivers received most of the benefits from the highway system. When state and federal politicians lost the stomach to increase these taxes to keep up with inflation, we needed other sources of funding. Enter the "self-help" counties and the directed sales taxes of Proposition 42 with less of a connection between who benefits and who pays. These funds were never enough to close the enormous backlog of needs, so the infrastructure bonds were proposed where everyone gets to pay, regardless of how much (or how little) they benefit.
As an alternative to the "everybody pays" model of general debt, the state should look to revenue-backed debt supported by user fees. In the case of highways, this would mean widespread use of direct tolls or "shadow tolls" possibly paid from revenues generated by an increase in the gas tax. These toll roads could be operated by a private entity through a public-private partnership that the Governor favors or a public or quasi-public infrastructure corporation. The form doesn't matter. Doing it does.
At the same time, we need to pay more attention to demand-side management. In the case of water, this won't automatically rule out new dams but an acre-foot saved or reused, is one less we have to impound and transfer from somewhere else. We need to work this problem from both sides - reduce consumption but consider new supply when it's needed and where the environmental consequences can be fully mitigated. Finally, the state needs to become more efficient in how it selects, constructs and manages projects. There are many proven techniques potentially available from around the country and the world, but they remain off limits because enabling legislation is bottled up in the Legislature.
Failing to take full advantage of the trust the voters showed last year will be a tragedy. If the 2006 bond funds are frittered away on pet projects that don't add up to a workable whole or used covertly to balance the budget, will anyone be surprised when next time they're asked to support infrastructure, the voters just say "no"?
www.usc.edu/keston
Richard G. Little is the Director of The Keston Institute for Public Finance and Infrastructure Policy at the University of Southern California. Link: http://www.pasadenastarnews.com/opinions/ci_7475589
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