LOS ANGELES -- Gov. Arnold Schwarzenegger’s political rebirth this winter --as champion of a massive $68 billion in new bonds to rebuild and expand California’s infrastructure -- has done more than trigger an earnest tug-of-war over priorities with the Democratically controlled Legislature.
The fact that the Republican governor of the nation's largest state would embrace mega-spending on projects ranging from schools and universities to water levees and roads, is a sure signal that infrastructure, seriously neglected nationwide since the 1970s, is headed
for a big rebirth.
“Years of chronic underinvestment” have brought California to a point where its transportation, flood control, water supply and other systems are seriously deficient, imperiling the state's competitiveness and risking “catastrophic consequences” through such threats as levees breaking, the nonpartisan Keston Institute for Infrastructure recently reported to the Legislature.
And California is hardly alone. Massive infrastructure deficits are mirrored in states nationwide. It’s a reality that even spending-averse, conservative governors and legislatures will have to deal with, both for safety and to prevent their states from slipping backward in a globalized economy.
But as our attitudes on infrastructure shift from whether to how, a mega-question arises: where will the multibillions of dollars for the repairs and new facilities come from?
Schwarzenegger’s bid has been for pure borrowing -- general obligation bonds that have to be paid off by tomorrow's taxpayers. But a state that adds too much new debt may find itself on thin ice. The California Legislature’s chief fiscal analyst warns that energy price spikes or receding real estate prices could send the state’s budget into free fall, making repaying huge new bond obligations very difficult.
But what law says that all the money for important new infrastructure needs to come from public treasuries anyway? Mark Pisano, veteran executive director of the Southern California Association of Governments (SCAG), points to the massive Alameda Corridor project, a freight rail expressway from the ports of Long Beach and San Pedro to transcontinental rail yards in Los Angeles. The $2.4 billion financing package, which SCAG negotiated, depended heavily on $1.8 billion in revenue bonds to be paid back in user fees by shippers sending freight containers through the corridor.
Many of the country’s growing array of toll roads, like those in Orange County that SCAG planned, or a major recent deal on the Chicago Skyway, are also financed on anticipated revenues. “I tell Gov. Schwarzenegger,” says Pisano, “that the bonds he wants should be seen as seed money that gets matched by private money -- jump starting the
investment strategy.”
A glance back through U.S. history, notes Pisano, shows that the nation grew across the continent -- from building canals and railroads to constructing subways and metro-area urban rail lines -- with relatively modest upfront government spending. Instead, private firms paid most of the cost, then collected revenue based on their investment.
The direct government spending that began in the New Deal, and reached its apogee in the interstate highway system with Washington paying 90 percent of the cost, can be seen as an aberration. Now, neither public opinion nor the weight of massive obligations that federal and state governments bear these days are likely to permit an all-government funding approach.
The Keston Institute estimates that if California uses public-private partnerships -- agreements with private investors and other businesses that benefit from the projects -- the state can magnify the impact of its bond investments dramatically. On projects ranging from high-speed rail to highways, levee repair to infill housing, the actual investment produced may be two to nine times the public bonding cost.
With rising population and development pressures, Pisano suggests government can also work with private-sector firms to identify prime tracts along existing commercial corridors or Main Streets, creating multiuse, transit-accessible development nodes that trigger less highway use. The acid test: does a positive “return on investment” pencil out both for the government, using its scarce infrastructure dollars, and for the private
investors?
The same principle can also be applied to extending passenger rail service in metro regions, the government recouping a major share of its investment through careful zoning and inducement for developments at the stations. Or in an area like Los Angeles, connecting the regional airports by rapid rail. “The best disciplining stick isn’t ‘smart growth,’” says Pisano -- “It’s having the market be part of the review of investment activities -- another lens on what we build.”
It sounds like a good deal, as long as the new partnerships with business are negotiated professionally, with an eye to long-term sustainability -- a reminder that we do need quality people in government! Add in transparent terms, clear performance standards and protection of the public against unfair charges, and the tapping of pools of private
investment capital could prove one of the best deals of the century.
Neal Peirce’s e-mail address is nrp@citistates.com.
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