Facing Up To California's Transportation Infrastructure Crisis

Thursday, June 28, 2012

With the federal transportation program set to expire this week, California and other states are anxiously waiting to see if Congress will pass another short-term extension or enact a new multi-year spending program befitting the world’s largest economy.

It’s well known that California, one of the world’s largest economies, has vast and growing needs for transportation, energy generation and distribution, water and waste-water treatment, schools, courthouses and many other types of facilities that are vital to our economic and social vitality.

Yet, with all of the promise of jobs growth and economic stimulus, many wonder why policymakers at all levels have not moved more quickly to increase investment in infrastructure which almost everyone agrees we sorely need.

Muddled Views of Infrastructure, Needs and Priorities

To some degree, calls for more infrastructure investment have been muted by a lack of clarity regarding the very concept of “infrastructure.” Some define the term narrowly to include only transportation, water systems, utilities, and other “core” assets deemed are essential to society. Others include more localized assets of the kind traditionally financed with assessments on private developers or through redevelopment agencies before their recent demise.

In addition, the ownership and governance of California’s infrastructure is fragmented and decentralized, making it difficult to find reliable data on existing inventories. As a result, many policy documents take different approaches to assessing needs, with some focused on levels of spending while others look at social impacts and benefits.

Transportation Still Top the List

By almost any measure, transportation continues to be the area of greatest need and therefore the focus of most infrastructure investment in California. Followed by education (K-12 and higher education) facilities, transportation receives the largest amount of state infrastructure spending.

But since the 1950’s, tremendous growth in population and vehicle miles travelled (VMT) have far out-paced transportation revenues. As shown in the chart below, between 1970 and 2004, population growth and annual VMT far outpaced revenues derived from the gas tax.

To its credit, California has been recognized as a national leader in measuring the condition and performance of its transportation system. But even with an impressive network of highways, bridges, transit, air and seaports, freight and passenger rail, California residents basically rely on infrastructure designed 50 years ago to support half our current population.

Although more dollars are being spent on transportation, real investment in the state is significantly lower than in the 1960s and 1970s.  Each year, California spends $2 billion less than is needed for highway maintenance and rehabilitation.  As a result, over half of the State’s major roads are in poor or mediocre condition, over half of its urban interstates are considered congested, and a third of bridges in the state are structurally deficient or functionally obsolete.

A Funding Gap Approaching $300 Billion

The projected infrastructure deficit spells big trouble for California. Even with voters’ 2006 approval of an historic $20 billion transportation bond, the gap between costs and revenues is expanding. Looking at the next 10 years, the California Transportation Commission projects total costs of nearly $538 billion, excluding the costs associated with recent environmental mandates or ongoing costs of maintaining new infrastructure. Available revenues are projected to be about $242.4 billion, leaving a shortfall of almost $296 billion over the ten-year period.

California’s nonpartisan Legislative Analyst’s Office projects annual state General Fund shortfalls of $20 billion through Fiscal Year 2015‑16, which calls into question the Golden State’s ability to fully manage debt service on general obligation bonds, which accounted for almost three-fifths of the State’s total infrastructure spending over the past decade.

Some of the needed funding will likely be generated by local sales tax measures and bonds issued by regional transportation agencies, but local and regional agencies face the same types of constraints that limit the State’s ability to invest.

Potential Solutions

Even with demand management strategies and land-use reforms, California has a big problem that calls for big solutions.  But solutions will be hard to come by at a time when policymakers are consumed with balancing the general fund budget and voters have little appetite for increasing the gas tax or other traditional means of funding. While federal funding and policy remain a top priority, the State will need to explore new revenues like fees tied to vehicle miles travelled and a larger role for private investors.

As the world’s eighth largest economy, California has the potential to become one of the most dynamic markets for private infrastructure investment, but broad scale solutions remain elusive. An early pioneer in public-private partnerships (P3s), California is among the growing number of states developing new models for partnering with the private sector to leverage public funds and fast track transportation projects that might otherwise be deferred indefinitely.

Earlier this month, state and local officials reached final agreement with private investors to rebuild a portion of San Francisco’s Doyle Drive (now called the Presidio Parkway) in a deal that is expected to result in significant savings over the asset’s useful life. Other potential P3 projects are being evaluated around the state.  But it remains to be seen how much private capital will be invested with continuing concerns about differences in the cost of public and private capital, private sector profit motives, control of public assets, and perceived threats to public sector jobs, among others.

There is increasing talk about the prospect of California pension funds participating in California P3 projects. But pension funds are institutional investors with fiduciary duties to make prudent investments.

As of today, P3 procurement processes are still too long and expensive with highly uncertain outcomes. So like other institutional investors, California pensions may not be in a position to invest until P3 processes are more transparent and efficient.

Money is Not the Only Problem

Coincident with funding and financing solutions, other policy and stakeholder issues must be addressed.

Although the federal government now provides a minority share of revenues, it continues to drive transportation policy at all levels of government, which raises the need to re-balance federal, state and local decision-making and reduce federal restrictions that inhibit leveraging investments across programs and sectors.

At the state and local level, we need to continue efforts to better align land use and transportation decision-making, increase the availability and access to data and technical tools that support decision-making across jurisdictions, and address the interests of public employee unions, environmental advocates and other stakeholders so that projects can advance without undue litigation or regulatory delays.

It Will Be a Long Road to Recovery

It’s painfully clear that, under any scenario, California’s transportation infrastructure has a rough road ahead. The Golden State’s chronic budget deficits and inability to manage more debt will threaten funding for the next several years, if not longer.  So while we definitely need more federal support, the public and private sectors will need to work more closely to find opportunities to co-invest.

A crisis that has evolved over many years will take many years to correct with strong leadership, bold solutions, and a sense of urgency. Fixing the problem is a must if California is to sustain its competiveness in the 21st century. 

Dale E. Bonner served as California’s Secretary of Business, Transportation and Housing from 2007-2011.  He is currently the Founding Principal of Cal-Infra Advisors, an independent infrastructure advisory firm.

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