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Independent, objective, nonpartisan research
Press Release · January 21, 2009

California Needs New Fiscal Tools To Rebuild Aging Infrastructure

SAN FRANCISCO, California, January 21, 2009 — California’s system for financing its transportation, water, education, and other critical infrastructure needs is seriously flawed—a problem compounded by the state budget crisis and the larger economic downturn—a new report by the Public Policy Institute of California concludes.

California has increasingly used borrowing through state general obligation bonds to finance infrastructure projects. But the need for infrastructure investment—an estimated $500 billion over the next 20 years—far exceeds the capacity of these bonds, according to the report, Paying for Infrastructure: California’s Choices. Years of declining investment have left the state with crumbling classrooms, congested roads, and an aging levee network that puts many homes and businesses in harm’s way. Problems in the government bond market are making it more difficult to sell the bonds already authorized, and in the long term, large projected budget shortfalls will limit the state’s ability to rely on these bonds to meet California’s future needs.

“The Obama administration may include funding for state infrastructure projects in an economic stimulus package,” says Ellen Hanak, PPIC research director and author of the report. “But California needs a long–term solution. There’s an opportunity here for the state to rise to the challenge and improve the way we finance the investments in our future.”

Once an innovator, California now trails other states and many nations in the ways it finances infrastructure. The state can regain its leadership role by resolving problems in three key areas: local funding, user fees, and partnerships with the private sector.

  • California is hamstrung by the supermajority threshold for local revenue measures. The state relies heavily on local and regional agencies to manage infrastructure, but it has some of the strictest rules in the nation for raising local revenue to build and maintain it. Two-thirds of voters must approve local general obligation bonds in California, one of only eight states with a supermajority requirement. As a result, state bonds—which require only simple majority approval—have been an increasingly attractive alternative for financing projects. But relying heavily on these bonds puts a burden on the general fund that the state can ill afford in lean budget times. The strict supermajority rules were loosened in 2000, when Proposition 39 lowered the approval threshold for local education bonds from two-thirds to 55 percent. The result has been a dramatic increase in local funding for K–12 and community college facilities. Lowering the supermajority threshold for other types of projects would improve Californians’ ability to pay for other essential infrastructure.
  • California lags in financing investments through user fees that encourage people to use resources efficiently. Charging motorists for using roads can help the state meet its environmental goals by reducing the number of miles people drive. But California’s reliance on these fees has declined. Fuel taxes, for example, have become a less important source of transportation infrastructure funding since the 1960s because of inflation and gains in fuel efficiency. California would benefit by joining the states and nations that are experimenting with electronic toll collection technology to charge drivers directly for their road use. California should also consider raising the gas tax, which has not increased since 1994. Similarly, it makes economic sense to expand the use of water user fees, requiring water users to pay more for higher consumption while using taxpayer dollars for public benefits such as aquatic ecosystems.
  • California trails in its use of public–private partnerships. In the 1990s, California was one of the first states to experiment with private partnerships to pay for toll roads in Southern California. But the state now lags other nations in seeking out these opportunities, and many states allow broader use of these partnerships to speed project completion and lower costs. Private sector involvement can include contracts to run public facilities, design–build contracts that cover both project design and construction, and private equity financing.

The report was supported with funding from The William and Flora Hewlett Foundation.

ABOUT PPIC

The Public Policy Institute of California is a private, nonprofit organization dedicated to informing and improving public policy in California through independent, objective, nonpartisan research on major economic, social, and political issues. The institute was established in 1994 with an endowment from William R. Hewlett. PPIC does not take or support positions on any ballot measure or on any local, state, or federal legislation, nor does it endorse, support, or oppose any political parties or candidates for public office.

Public Policy Institute of California