Leonard Letter Articles on Infrastructure – 2004-2007

 

“Don’t Be Afraid! Consider Toll Roads” – March 7, 2005

The Reason Public Policy Institute has put out an interesting discussion paper on the state's transportation infrastructure (Policy Summary of Study 324).  First the facts:  California is expected to grow to 50 million people by 2030 and in the state’s three largest urban areas, vehicle miles traveled by individuals will increase by 30 to 50 percent.  We all know that our freeways seem to be nearing capacity already.  The Reason paper shows why we cannot continue doing business as usual and still enjoy a good quality of life or compete with other states. 

 

Even though the metropolitan planning organizations in the three largest urban regions -- Los Angeles, San Francisco, and San Diego -- plan to spend nearly $400 billion between now and 2030 (according to Reason) -- most of this money will be used to operate and maintain the current infrastructure that is already near capacity.  In order to make California competitive with other fast growing states, Reason suggests we look at toll projects in other parts of the world to find solutions to our own long-term problems.  Some adamantly oppose the very thought of toll roads, seeing them as a conspiracy to give fat cats a license to print money.  However, how many people realize that toll roads are being used successfully to alleviate gridlock in (gasp!) France and Canada of all places? 

 

It takes a tremendous investment to make new highways, but the global capital market will invest in these roads if they charge tolls.  A steady stream of money from tolls allows governments to float the massive bonds needed to fund the construction of these roads.

 

Here are a few examples of recent toll projects:

 

Toronto's $2.6 billion Highway 407 Electronic Toll Road, a 67-mile new toll road with 43 interchanges and no toll booths, serving over 300,000 vehicles each weekday;

 

Paris' $2 billion twin toll tunnels completed by tunneling deep below, rather than going through, historic Versailles; and

 

Melbourne's $1.5 billion CityLink, connecting three freeways with the central business district largely underground to avoid disruptive land-use impacts -- like Toronto's above, it functions entirely without toll booths.

 

“Infrastructure” – September 6, 2005

Governor Pete Wilson often said that the best social program is a job. He is certainly correct, but government does not provide jobs. The private sector generates employment.  To amend his saying I would offer that the best government social program is infrastructure.  I do not know if this makes me a big government Republican or a public works Democrat, but the point is that before jobs, before even schools, there must be the basics of life that government can actually provide.  Clean water, sewer handling, flood protection, streets, highways, airports and ship ports are essential to modern life but are often left behind in budget priorities.  Let California take this lesson from our suffering brothers and sisters in the south: we need to invest now in strengthening our networks of basic services commonly called infrastructure.  The truth is that we are not prepared for floods, earthquakes or fires, and we are losing ground on providing water and electricity.

 

“Public Works” – November 21, 2005

It is like the special election all over again. Everybody agrees with the Governor that California's infrastructure needs rebuilding, but since it is the Governor's idea, no one supports it.  It is time for common sense solutions.  A $50 billion bond would cost $90 billion over 30 years.  So let’s dump the bond but agree to spend the same $3 billion per year that would have been spent on debt service directly on needed public works.  California's once great highway system was built entirely from tax dollars with no bonds.  There is no reason we cannot agree to set aside a small but growing part of the state's $100 billion annual spending plan on building and start the building program now.

 

 In truth nobody knows the full cost of building out California's necessary public works of schools, hospitals, highways, parks, dams, levees and waterworks.  Let’s not quibble how much; let’s just agree to start now.

 

“Money for Roads” – January 3, 2006

Californians are drivers and California is the portal to the nation for global trade.  Those two facts make our roads one of the biggest factors in our quality of life and economic success.  Yet, there is a $13 billion backlog in street and bridge rehabilitation projects.  That number does not even begin to touch on the new roads and freeways our state desperately needs.  Voters are passionate about having their tax dollars go to transportation infrastructure projects, and in 2002 nearly 70% of them approved Prop. 42 to designate gas tax revenues to pay for road projects. Unfortunately, fiscal irresponsibility by the state meant some shuffling of funds in 2003 and 2004.  Since the state needed money for other purposes, local governments were loaned money from the state transportation fund and required to repay it with their Prop. 42 designated revenue from 2006 to 2008.  The state is now in better fiscal shape than it was a few years ago; now is the time for the state to restore that local funding and not delay any transportation projects. However, the solution being floated is that those funds come from the proposed infrastructure bond (currently in the form of SB1024, Perata).  You have already read here that I believe this bond to be a bad idea. Rather than paying debt service each year, we should take that amount of money (I estimate it to be about $3 billion on the $50 billion bond being discussed.) and spend that each year on the capital projects we need.  I would start with filling the Prop. 42 gap created in 2003-04 and then begin to work down that $13 billion list of needs.

 

“The Price of Bonds” – January 9, 2006

The Governor’s proposal to issue bonds to pay for infrastructure improvements continues to concern me.  I was pleased to hear him say that he believes we should cap the state’s debt ratio at six percent.  According to the Legislative Analyst’s Office, the current debt service ratio is about 4.5% and is projected at 5.9% if the infrastructure bonds are included.  If we accept that we are willing to spend 6% of our annual budget on infrastructure, then the next question is: should we spend it servicing debt or actually buying stuff?  It is the same set of options faced by a homeowner needing kitchen renovation.  The homeowner must decide: should I set aside 6% of my income for a certain amount of time and do the improvements when I have saved enough, or should I borrow the money and spend 6% of my income paying off the loan?  I do not believe the legislature has explored these two options and that we are rushing headlong into borrowing for projects that, while needed, could be better handled by investing savings rather than paying interest.

 

“Highways Are Not Houses” – January 30, 2006

I commend Assembly Republican Leader Kevin McCarthy for introducing a bill this week that suggests the pay-as-you-go approach to infrastructure funding that I have been advocating for years.  The proposal calls for a percentage of the general fund to be set aside, provided that Prop. 98’s education commitments are met.  This could generate $35 billion over ten years.  That is a much wiser idea than issuing bonds.  (I estimate that $50 billion worth of bonds would cost $90 billion over 30 years.)  Not only would we save money by this pay-as-you-go approach, it also makes common sense.  We have a huge list of infrastructure needs. We do not have the capacity to build them all at once. We simply do not have the construction crews, engineers, and government oversight staff to do as much as we would like, all at the same time. This reality begs the question: if we are going to have stagger bond issuances anyway, why not simply stagger the projects to reflect money we actually have in the bank?  That way we avoid debt service.  We would also be able to live a principle that we espoused during the Davis recall: if there is unexpected revenue, spend it on one-time projects. 

 

A counter-argument I have heard from Senate Republican sources is that paying for highways is just like a family buying a house. The analogy goes like this: it is nearly impossible for the average family to save up enough money in cash to buy a home, so they take out a mortgage and spread the cost of that home over 30 years with the interest paid being the cost of making such an important investment.  But highways are not houses, and the Assembly Republicans are not suggesting we wait until we have all the cash in the bank before we break ground on a freeway.  They are saying, rightly so, that we can begin a few projects with the excess revenues from this year, and then continue working on them with any additional excess funds in future years as well as a regular commitment of a percentage of the general fund.

 

“LAO: $68 Billion Infrastructure Bonds to Cost $144 Billion” – February 6, 2006

I am grateful to Assemblyman Bill Maze for submitting a letter to Elizabeth Hill, the Legislative Analyst.  The letter requested the Analyst to provide General Fund revenue and expenditure growth over the next ten years, and the cost of financing the Governor’s proposed infrastructure bonds.  I have posted the Analyst’s response here:

http://www.boe.ca.gov/leonard/LAOReport.pdf

 

The Analyst puts the total cost of the Governor’s proposed infrastructure bonds ($68 billion worth) -- assuming an average 5.75 percent interest rate repaid over thirty years -- at about $144 billion.  The Analyst pegs the annual debt service under this plan at a whopping $4.8 billion dollars per year. 

 

As I have written elsewhere, it makes much more sense to devote the money we would pay in debt service and simply apply that money every year for infrastructure, thus gaining $78 billion over ten years ($144 minus $68) in investments in highways, hospitals, and high priority projects.  An even more conservative proposal would be Assemblyman McCarthy’s bill that would set aside 1 percent of the General Fund for infrastructure spending on an ongoing basis.  This would get over $1 billion the first year, and grow as expenditures grow.

 

I applaud the Governor for boldly addressing our state’s infrastructure needs.  He has also indicated he is willing to consider other approaches.  Governor, I say let’s start now, and let’s pay for it now as well.

 

“Infrastructure Bonds Would Delay Balanced Budget” – February 14, 2006

In the Legislative Analyst's response to a query from Assemblyman Bill Maze, the Analyst projects the Governor's infrastructure bonds would delay the State Budget from going into surplus at least two years, absent other steps to balance the budget. I have posted the letter here:

http://www.boe.ca.gov/leonard/LAOReport.pdf

 

The good news is the Analyst sees revenues growing at an average rate of 6.1 percent vs. 5.5 percent growth for baseline expenditures over the next ten years. This track puts us in surplus by the 2012-2013 Budget. But according the Analyst, under the Governor's bond proposal, expenditures would increase 5.7 percent per year - instead of 5.5 --- thus delaying our emergence into surplus until 2015-2016.

 

Of course, the other option would be to reduce those baseline expenditures to make room for needed capital improvements.  I know it’s wishful thinking, but it’s also common sense.

 

“How to Think about the Infrastructure Bonds” – March 20, 2006

Trying to follow the debate about various proposals for California’s infrastructure bonds is a bit like reading about the various health studies. One day a low-fat diet is good for your heart; the next day it is not as good as the day before.  I recommend your review of a short piece by Cal Tax that offers guidelines for the infrastructure bond debate:

http://www.caltax.org/InfrastructureBondCriteria.pdf

 

Cal Tax offers worthwhile reforms that should accompany any bonds, including the use of cost-effective local transportation agencies, embracing the design-build strategy, streamlining the permit process, and authorizing public-private partnerships. Cal Tax also provides criteria to evaluate the various proposals, including looking at alternatives to bonds, keeping the process free from special interest manipulation, and focusing on true capital costs rather than salaries, computers or other ongoing costs.

 

“A Worthy Idea” – April 3, 2006

Russell J. Hammer, the President & CEO of the Los Angeles Area Chamber of Commerce, wrote in the Chamber’s newsletter about an idea that should receive wide and serious discussion in Sacramento. Hammer began by saying that the collapse of the infrastructure bond deal destroyed “any shred of confidence that Sacramento can accomplish anything important within a reasonable time frame.”  He acknowledges that infrastructure is desperately needed and that perhaps we should establish a committee of experts to craft a bond, and he suggests modeling it on the Base Realignment and Closure Commission established by Congress in 1995 when no elected official had the political will to decide on which bases should be closed.  There would be no pork added to the plan and only an up or down vote, no logrolling any base off the list.  I share Mr. Hammer’s view that we should empower a public works board to create a list of infrastructure projects and brainstorm ways to finance them.  There should be no two-thirds vote required; instead, a majority of legislators would have to vote to kill the proposal in its entirety, otherwise it goes to the voters.  

 

“Capital Is Not the Problem” – April 10, 2006

Last week, gubernatorial candidate and current state Treasurer Phil Angelides, suggested that the California Public Employees Retirement System (PERS) invest $15 billion, or up to five percent of its assets, in transportation infrastructure projects that generate income for the state, such as toll bridges.  Despite the common wisdom that we are in need of more money to build new infrastructure, lack of capital is not the problem. The problem is that we lack the collective political will to make infrastructure a budget priority.  Our legislators lack the discipline to spend money on building roads, schools, levees and prisons because they get more political benefit from spending money directly on public employees and entitlement programs than they do from investing in construction projects that will not be completed until after they leave office.  If we really wanted to “build it,” as the Governor says, we would take a percentage of the annual budget and create a capital fund that could begin work on these projects immediately.  Yet our legislators cannot agree on which projects to fund, in what order, or make the regulatory changes needed to have projects designed and approved quickly.  If we could be united on that front, the money is there, whether it comes from the taxpayers directly in the General Fund or from the taxpayers indirectly through a PERS investment bond.

 

“Can We Afford to Repair All the Levees?” – May 1, 2006

Last week, I read with great interest that U.S. Senator Dianne Feinstein has publicly argued that fixing California’s levees may be too costly and some Delta islands might need to be sacrificed.  I agree.

 

Fixing our state’s levees has dominated much of the discussion over the Governor’s massive infrastructure bonds.  An early version of the proposal would have required a $3 per month water users’ fee to be paid by all water customers to finance a bond to repair only about 25 miles of levees -- in a state with about 2,600 miles of levees that need our attention.  I am pleased to see that this proposal has encouraged a healthy discussion about the costs and benefits of levee repairs.  After examining the costs, it seems mathematically certain that we cannot afford to rebuild every levee in the state.

 

From my perspective, there are two kinds of levees: (1) those that serve a statewide public purpose and (2) those that serve a local purpose.  For the first kind of levee, it seems reasonable that the people should pay for the cost of fixing the levees.  This includes the levees that deliver fresh water to our state’s massive water projects.  Once these projects are identified, we can then discuss whether state general funds or bonds are the best way to pay for the work. For the second kind of levee, such as those protecting local landowners, it probably makes no sense to demand that taxpayers cough up billions of dollars for levee repairs.  Both types of levees should be subjected to a rigorous cost/benefit analysis to gauge the true priority of the repair. 

 

“Debt vs. Cash for Infrastructure” – May 15, 2006

The Legislative Analyst’s breakdown of the $600 million library bond, Proposition 81, says that over 30 years, at 5 percent, it will cost about $1.2 billion to pay off both the principal ($600 million) and interest ($570 million). The average payment would be about $40 million per year.

 

There will be over $37 billion worth of bonds on the fall ballot.   Carrying over the ratio and conditions from above, over 30 years the state would pay back the $37 billion in principal, plus about $35 billion in interest.  If they were all sold together, the bonds would take about $2.4 billion dollars per year of debt service.   

 

If we spent $2.4 billion per year directly from the General Fund over 30 years, the state would spend $72 billion directly on needed projects without interest payments.  By my math, this is a better deal than spending $72 billion and getting $37 billion worth of infrastructure.

 

“Outstanding Obligations” – October 30, 2006

Voters are being asked to approve more than $40 billion in new state bonds this November.  The bonds are advertised as building necessary infrastructure, from repairing levees to expanding freeways to ensuring safe drinking water.  The campaigns for these measures lead Californians to believe that absent approving these vast borrowings, the state will have no money to undertake these types of projects.  We have also been told that if we approve all these bonds, the state still has the financial capacity to service this new debt.  If all the bonds are approved, the total taxpayer tab will ultimately be about$84 billion, at a rate of $2.83 billion per year.  That will be added to our existing projected debt service payments this year of more than $4 billion.

 

I know those number are staggering, but it gets worse.  The state has more than $26.6 billion in voter-approved, general fund bonds that have not yet been issued to the market.  (Note: this does not include the Economic Recovery Bonds, so-called Enterprise Bonds, and Commerical Paper notes.) To see the list, which includes education, water, parks, prisons, and more, go to this link and scroll to Appendix 1:

 

http://www.treasurer.ca.gov/publications/2006dar.pdf

 

The state Treasurer’s office estimates how much in new bonds will be issued in years ahead.  Before we even think about any of the proposed new bonds being issued, consider that in 2006-2007, the state is planning to issue $5 billion in previously approved bonds and in 2007-2008 another $5.5 billion.  That means at least another large increase in debt service in 2007 even if no new bonds are authorized.

 

So before you vote, I urge you to think about the staggering amount of money we taxpayers shell out every year to pay the state’s mega credit card and ask yourself if we wouldn’t do better by using that money each year to actually build things instead of creating more debt.

 

“What Would Milton Think?” – November 20, 2006

It was just a one sentence quote in the November 15 Los Angeles Times, but it struck me cold.  First, what I feared would happen with the election came to pass – the voters approved all the bonds despite our structural deficit, despite the fact we have billions of bonds in the pipeline already, and so on.  Now the Legislative Analysts tells us that state revenues are going down and the spike in revenues last year, as I said then, look like one-time events rather than a sign of an expansion of the state’s revenue base. 

 

The Governor’s answer to what appears to be a serious fiscal crisis in the making?  In the LA Times story he says this: “With our infrastructure bonds, we will again stimulate the economy.” 

 

Is it not ironic that on same week that we mourn the passing of Milton Friedman, a friend and mentor of our Governor, the Governor starts talking about economics as if he sides with the ideological enemies of Friedman about where and how wealth is generated?

 

Actually it is not too late.  Even though the voters have authorized the bonds it is still up to the Governor and the Legislature to order the bonds to be marketed.  If they would instead use the debt service money to build the same projects on a pay-as-you-go basis it would save billions in interest while building even more needed public works projects.

 

“Punishing Drivers Not Good Transportation Policy” – November 12, 2007

In a mind boggling display of ineptitude, the Sacramento Bee published an article last week about Interstate-5 in downtown Sacramento.   The story was geared toward blaming truckers for driving in lanes they are not supposed to be in.  By the logic of conventional wisdom that vehicles are bad, then truckers must be really, really bad and need admonishment – at least the Bee thinks so.  

 

However, the real thrust of the article is that I-5 in downtown does not work for anybody, truckers included.  It quotes Caltrans’ chief planner saying so.  There is tremendous demand to be downtown for work, and despite the huge housing downturn, builders are still struggling to build more downtown office space.  On the matter of getting downtown, public transit is too inefficient for those who have too much to do, and not enough time in a day to do it.  The overwhelming choice is thus to drive to work.  For the planners, this is not the correct choice.  The Bee plays right into their hands.  Without citing any authority, the Bee opines, “But, there is neither money nor space for a larger freeway.” 

 

The planners think people who drive need to be controlled until they make the “right” choice.  The Bee wrote, “Mike McKeever, head of the Sacramento Area Council of Governments, the region's chief transportation planning agency, argues the best bet is to get more commuters – not trucks – off the freeway.”

 

What happened to the bond money for transportation for all?  Failing that, how about congestion pricing?  People are so loyal to using cars, for obvious reasons, I think they would be willing to pay a toll to use the roads, provided they are decent roads, rather than waste and hour or more of their day taking public transit.

 

McKeever says part of the solution is for people to live closer to work.  Fine.  But people will only accept that if the transportation infrastructure is in place first.  People do not want to be trapped in whatever zone the planners want to stick them in.

 

When will the political culture stop punishing the people for exercising the best choice available to them?   As part of its mission to provide essential infrastructure, government needs to accommodate cars first.

 

http://www.sacbee.com/101/story/472022.html