Other Funds Must Supplement Borrowing for Infrastructure

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By RICHARD G. LITTLE


Despite Shakespeare’s warning to “Neither a borrower, nor a lender be,” Bill Lockyer and his staff at the treasurer’s office should be applauded for the report on debt affordability they released on Oct. 1. In just 50 pages, “Looking Beyond the Horizon: Investment Planning for the 21st Century” manages to explain, in clear and comprehensible language, the state’s long-term credit picture and California’s investment options for the first quarter of the century.


The good news is that we have the fiscal capacity to take on considerably more debt in the form of general obligation bonds to pay for infrastructure and other long-term investment needs.


The treasurer’s report goes to great pains to point out this inherent conflict between debt service (annual principal and interest payments) and operating expenses for such things as health, environmental, and public safety programs, all of which are paid from the state’s General Fund. Absent a decrease in other spending or the creation of new revenue streams, a $14.6 billion shortfall is expected by 2027. Of course, there won’t be an actual shortfall. By law, debt service must be paid first so these other programs will have to live with the leftovers.


The Legislature could cut spending, but cutting popular programs is unpleasant. At the same time, it’s not likely that in the home of Proposition 13, the Legislature will rush to raise general tax revenues either. So, if we don’t cut spending or increase general taxes, what do we do?


One possible way to meet the state’s enormous needs for building, repairing, and maintaining its transportation infrastructure, for example, is to impose some form of statewide user fee. This typically translates into tolls, which in the land of the freeway is usually a conversation killer. Public-private highway concessions show promise but still make many people uncomfortable.



50 cents per day

There are alternatives, however. The state tax on gasoline is a surrogate user fee, which every driver pays, but it hasn’t been raised since 1994 and since that time construction costs in California have increased 250 percent. An increase in the fuel tax of 20 cents per gallon would raise $3.5 billion annually but cost an average driver only about 50 cents per day. This could support a $35 billion public revenue bond, which would shift the financial burden directly to the users, and also offset the need to impose direct tolls.


Without advocating an increase in the fuel tax, one does wonder if 50 cents per day is too onerous a charge to use the state’s massive highway system.


Overall, the treasurer has put forth some workable proposals that deserve serious attention, but the bottom line of the report is that California must develop a long-term funding strategy to guide capital investment decisions. Such a strategy must be based on consensus assumptions for growth and development, objective assessments of revenues and expenditures, and reflect a statewide and bipartisan approach to addressing the state’s infrastructure investment deficit.


However, leaving our grandchildren a sustainable infrastructure legacy is about more than just developing new revenue streams. We will need to invest those funds wisely and for the long-term, utilizing more efficient technologies and innovative financing mechanisms.


Relying totally on general obligation bonds for infrastructure investment is not the answer. Borrowing must be supplemented with selected tax increases, equitable user fees, and the use of private capital when appropriate. At the same time, we need to look at more efficient and accountable processes for raising and spending public funds.


The treasurer’s report has shown that the state’s financial foundation is basically sound and has offered some fresh ideas to build on it. However, many of the financial tools the state will need to achieve its investment goals will require legislative or voter approval, and this cannot be done in a vacuum. Government needs to regain the public’s trust and prove that it is capable of delivering, either on its own or through others, reliable service at a realistic price. This will require leadership. Unless the Legislature provides the authority for state agencies and regional bodies to experiment with new models for finance and governance, necessary infrastructure investment will be long-delayed if provided at all. The parts are all here, we just need the will to make them work.



Richard G. Little is the director of the Keston Institute for Public Finance and Infrastructure Policy at the University of Southern California.

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