Congratulations to Austin Beutner on his appointment as the mayor’s jobs and economy chief. “I recognize we need a top to bottom revitalization and refocus of our economic development team,” noted the mayor. Indeed, an estimated 150,000 jobs have been lost in Los Angeles since January 2008, and by some estimates, city government will face a deficit of more than $1 billion in two years.
According to media accounts, Beutner would like to make Los Angeles the most business-friendly city in the country. Fortunately, he has a powerful tool at hand that is almost guaranteed to create jobs, improve L.A.’s failing infrastructure, marshal the financial resources of the private sector and enhance his boss’s sagging political profile. That tool is a little-known, and badly underutilized, California law called the Infrastructure Financing Act.
Enacted in 1996, the IFA authorizes cities to enter into agreements with the private sector to design, construct, finance, maintain, and/or operate fee-producing infrastructure facilities such as parking garages, airports, transit centers and toll roads. That sweeping grant of authority gets a city out from under the burden of compliance with archaic, costly and time-consuming public bid laws and into the promised land of flexible, speedy, merit-based competitive selection. Even more important in the worst economic downturn since the Great Depression, the IFA authorizes private equity to step in to fill the gaps left by nonexistent state and local funding.
Poor grades
Everyone agrees that Los Angeles stands in dire need of infrastructure improvements. In 2005, the American Society of Civil Engineers gave Los Angeles a D for its urban runoff facilities, a D+ for streets and highways, and a C for bridges. Parks and drinking water each got a C+, and like the other categories noted, have headed only downward, not upward, in quality since 2005. Just about everyone would also agree that with large infrastructure projects come jobs. So why doesn’t the city have a dozen or so IFA-based projects on the front burner at this moment?
Three reasons for this disregard of the IFA can be identified, none of them persuasive:
• First, timid politicians may worry about union opposition to public-private partnerships. It is true that when the IFA was introduced almost 15 years ago, the authority it gives to local agencies was also given to the state. PECG, the Caltrans engineers union, worried about losing architecture and engineering work, and promptly flexed its considerable muscle to wipe out any authority for state projects in the law. Even today, state funding for a project will kill its eligibility for IFA. These early squabbles with PECG may have left the law with an anti-union taint in some minds.
The reality, of course, is that any large infrastructure project creates a multitude of jobs, including union jobs. Under IFA, all construction jobs are entitled to prevailing wage, comparable with union pay. Savvy developers have long since figured out that the only way to succeed with projects that will eventually revert to public ownership is to work with unions from the early phases of project planning, with job preservation a top priority. The more enlightened unions, such as the Service Employees International Union, understand this and are even looking for privately financed infrastructure projects as an appropriate investment vehicle for their members’ assets.
• Second, politicians often regard private-sector financing with suspicion: “All these guys with the expensive suits and the limitless expense accounts are out to take us for all we’ve got.” This is not an unreasonable concern. How many of us these days are feeling warm and fuzzy toward Goldman Sachs, Chase or Citibank? But the solution, especially for cities facing staggering revenue shortfalls, is not to slam the door on the private sector and its piles of cash. The solution for cities is to arm themselves with knowledge by retaining advisers whose expertise will create a level playing field when deals are negotiated. Knowledge is power, and cities can acquire it.
After all, Mayor Villaraigosa has acquired the services of Beutner, former investment banker and partner at private equity leader Blackstone Group, for $1 per year. Well done!
• Third, and finally, too many politicians hate to be among the first to do something new. The IFA has been collecting dust for years: a Ferrari sitting in an obscure Sacramento garage. Yes, there are undoubtedly risks to firing it up for a few L.A. infrastructure projects. On the other hand, there are risks involved for any politician in presiding over a city where unemployment is running more than 13 percent and the budget may shortly be more than $1 billion in the red. Wouldn’t you agree, Mr. Mayor?
Penny Cobey, of counsel at McKenna Long & Aldridge LLP, specializes in complex development projects. Before returning to private practice, she was construction counsel to LAUSD’s multibillion-dollar school construction project.
