A new plan for taking on California’s “high-risk” infrastructure challenge

(photo credit: Howard Hecht)

When California’s state auditor offered a stern warning last month about the array of looming budget challenges still facing California—from unfunded pension liabilities to growing state obligations for everything from education to criminal justice—it may have sounded like the same familiar fiscal disaster story.

While the state has made great strides in getting its fiscal house in order, the report makes clear how much work is left to be done: The state’s deteriorating infrastructure system was highlighted as a particularly “high-risk” area—with a shortfall of $290 billion facing the agencies charged with maintaining the state’s highways, local roads, and transit systems over the next ten years. Investments of more than $40 billion will be needed just to deliver safe drinking water across our fast-growing state in the decades to come.

These fiscal challenges, with their eye-popping numbers, may be all too familiar to Californians weary from a decade of lurching from one fiscal calamity to the next. But in our view, with the right strategy in place—and with the will to change the way we do business as a state, by looking not just at raising taxes or cutting spending, but at new ways of financing public works, including tapping private investment—this doesn’t have to be where the story ends.

What California needs: A comprehensive infrastructure action plan

For the last several months, the Economic Summit’s 2013 Infrastructure Action Team—a group of experts from local governments, public agencies, and private industry—has been examining how California can make the infrastructure investments needed to meet the needs of a growing population.

Last week, the Action Team finalized an action plan outlining a comprehensive infrastructure investment strategy for the state—one that produces greater value for the dollars invested by focusing on results, builds public confidence in how projects are delivered, includes adequate revenue for the public agencies responsible for maintaining our state’s infrastructure system, and provides both state and local governments with the tools they need to support and utilize private investment. (A summary of the plan is below. The complete draft plan, which will continue to be updated, can be found here.)

This may seem like a lot to take on. It should. The Bureau of State Audits’ report underscores the urgent imperative for wide-ranging, immediate action to address the state’s infrastructure challenges. The longer California puts off billions of dollars in needed investments, the more expensive they will become. Redevelopment agencies have been dissolved, further limiting the ability of local agencies to finance much-needed local infrastructure projects. The federal government has shown little desire to support increased funding (something the government shutdown has made crystal clear).

And with so many pressures on California’s state budget, the state’s ability to borrow its way out of this problem—by financing long-term bonds repaid out of the state General Fund—is only going to become more limited.

Simply put, unless we take action—and take action now—California is going to have fewer resources in the future to pay for infrastructure, putting state and regional competitiveness at risk.

The Infrastructure Action Team’s action plan is driven by a singular goal: to push the state toward an infrastructure planning, development, and finance system that is focused on economic growth, environmental sustainability, and equal opportunities for all.

This cannot be achieved by simply raising taxes or cutting spending. Instead, the state needs to explore new approaches for financing public works, including attracting private sector capital to extend the reach of public dollars.

We believe this comprehensive approach is the way to get there. Participants will have an opportunity to discuss this plan at the Economic Summit on November 7-8 in Los Angeles, where we hope to start identifying how these goals can be achieved—and to build the statewide coalition we’ll need to get this done. (Register here.)

An Infrastructure Action Plan for California

1. Focus on results: With a focus on outcomes, public agencies should integrate infrastructure planning, development, and financing at the earliest possible stage to make projects more transparent, to ease the adoption of new technology, and to improve the return on investment. This could include strengthening the state’s existing “design-build” authority, a first step toward moving the state toward a new culture of infrastructure investing.
2. Build public confidence: The public needs to understand the community benefits of smart infrastructure investments, how they are paid for and how improvements are tracked. A statewide communications effort should make the case for infrastructure investment, highlighting the cost of doing nothing and promoting performance metrics and tracking results to build public confidence.
3. Include adequate revenue: California lacks the resources to maintain and modernize its infrastructure, particularly its transportation and water systems. The State should tap into—and leverage—appropriate revenue sources, give local governments more control over revenue spending decisions, and consider the best approach to replacing redevelopment financing:

• Tap into appropriate revenue sources:
• Expand the pool of state revenue: As state General Fund support declines, new dedicated revenue sources are needed to meet the need for increased investment. (Examples for transportation could include raising gas taxes or vehicle-related taxes like the Vehicle License Fee.)
• Increase use of user fees and assessments: A greater reliance on user fees and assessments can link beneficiaries to investments, encouraging accountability for results. (Examples for water could include developing a statewide method for financing water-related ecosystem improvements.)

• Grant local governments more authority: The State should reduce the vote requirement for increasing taxes and approving General Obligation bonds dedicated to infrastructure to 55 percent and clarify the conditions under which revenues can be raised in other ways with a simple majority vote.
• Find a new way to finance community economic development: As a replacement for redevelopment authority, the State should enact a new method—one that combines capturing tax increment growth with the authority to use benefit assessments—to allow communities to finance local economic development projects. State lawmakers are already considering several distinct approaches, which are on the legislative agenda for 2014.

4. Provide new tools to drive private investment: Public financing alone will not allow the State to invest in an infrastructure system that will meet the needs of California’s 21^st century economy. Instead, the State must consider a variety of methods to leverage private capital investments:

• Strengthen the role of the state infrastructure bank: The State should position its existing public financing authority, the State Infrastructure and Economic Development Bank (I-bank) to facilitate private sector investment through public-private partnerships. The I-bank is currently revising its criteria to broaden its support of infrastructure and local economic development.
• Encourage new local governance models: The State should review the current structures used for major projects—the existing joint powers authority, for example—and consider new local and regional institutional models such as Public Benefits Corporations, which can build partnerships across sectors to tap public and private resources and effectively manage interagency projects.
• Expand current authority for projects seeking private investment: The State should clarify existing Infrastructure Financing Act rules to expand public-private project financing. This could involve providing flexibility in the selection of private partners, encouraging alternative deal types, and extending the time frame of public-private deals.
• Integrate risk assessment: To ensure the financial risks taken on by state and local entities are understood, the State should create a risk assessment system to assess project proposals that combines the expertise of the financial, insurance, engineering, and governance fields.

California may be facing a daunting challenge when it comes to infrastructure, but this plan gives the state a comprehensive strategy for taking on this problem. Join us at the Economic Summit on November 7-8 in Los Angeles to identify how we can work together to make this vision a reality.

By the co-leads of the 2013 California Economic Summit Infrastructure Action Team:

Mark Pisano, Senior Fellow, Price School of Public Policy, University of Southern California
Sean Randolph, President, Bay Area Council Economic Institute
Kim Walesh, Director of Economic Development, City of San Jose