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Don't Blame Voters for California's Budget Woes

Fri, 09 Oct 2009 15:50:00 EDT

The Wall Street Journal

With the Golden State still struggling to balance its books, politicians from both sides of the aisle have come up with a nifty way to avoid responsibility for the mess: Blame the voters.

Gov. Arnold Schwarzenegger, a Republican, summed it up for his fellow pols recently by telling a reporter: "All of those propositions tell us how we must spend our money. . . . This is no way, of course, to run a state." State Senate President Pro Tem Darrell Steinberg, a Democrat, has made similar comments in denouncing "ballot-box budgeting."

Their indictment is false. Voters aren't tying lawmakers' hands too much, but too little. Here's the background:

For decades, state officials have habitually proposed deep cuts to the most popular programs unless voters agree to higher taxes. Tired of being manipulated, voters have used the ballot initiative to put some programs off-limits.

Nevertheless, a 2003 analysis by John G. Matsusaka, president of the Initiatives and Referendum Institute at the University of Southern California, found that no more than a third of California's appropriations that year were locked in by voter initiatives so stringent that legislators couldn't override them. Most of the appropriations—about $30 billion in 2003—were for Proposition 98, which passed in 1988 and mandates funding for K-12 education.

Even this overstates the case against ballot-box budgeting. K-12 spending has remained remarkably stable at around 40% of the budget pre- and post-Prop. 98. Today, California is 24th among the 50 states in terms of the percentage of its general funds it devotes to K-12. This suggests that education spending is not grossly out of line. Prop. 98 aside, Mr. Matsusaka found that only about 2% or 3% of California's budget is frozen as a result of ballot initiatives.

Mr. Matsusaka's analysis was affirmed last month by the Legislative Analyst's Office, a nonpartisan outfit that advises the legislature. It looked at all the restrictions on the state's budget—not just those imposed by ballot initiatives—and concluded that: "Despite these restrictions, the legislature maintains considerable control over the state budget—particularly over the longer term."

So what happened this year that got the politicians and others so upset with ballot-box budgeting? California faced a $42 billion budget deficit. After a round of spending cuts and $12 billion in new taxes, the governor and the legislature called for a special election and placed a number of propositions on the ballot that would have increased taxes an additional $16 billion and allowed for billions more in borrowing and fund shifts. Voters shot those measures down in May.

After much bickering, lawmakers nearly closed the deficit with severe cuts, but left the governor with a $1 billion deficit to close on his own. He did so by using his line-item veto to strike, among other things, $500 million for in-home care, transportation assistance and other social services.

Now the governor is being sued by a whole host of special-interest groups, including a coalition of organizations representing the disabled. Those organizations (along with Mr. Steinberg, who has filed a separate suit), claim that the governor cannot constitutionally cut spending beyond what the legislature has already cut. The suits ignore that the governor is bound by a constitutional requirement that the state's budget be balanced—but in any case have nothing to do with spending that is mandated by ballot initiatives.

In looking for the causes of the state's budget mess, a good place to start is with the unionized public employees, who have filed their own lawsuit against the budget. Public union ranks have grown a whopping 37% since 1990 and consume about one-third of the $85 billion budget in wages and benefits. California also faces a total unfunded future liability of about $110 billion for pensions and health-care benefits. Still, the state's chapter of the Service Employees International Union and other unions are suing the state because their members are being asked to take a few days of furlough to save the state about $1.5 billion. The unions say this is an illegal pay cut. Regardless of whether it is, ballot initiatives are not the issue.

True enough, some lawsuits are driven by ballot initiatives. The California Redevelopment Association is attempting to stop the state from raiding $2 billion in local redevelopment funds. Sixty years ago voters passed a constitutional amendment to prevent such raids, but the state government has found ways around that prohibition. But restoring the will of the voters in this case is essential for sound budgeting, because local development funds are used to pay for bonded contracts for roads and other infrastructure projects. If the state is allowed to grab these funds, the credit ratings of cities and counties will plunge and their borrowing costs will rise.

Whatever the wisdom of ballot initiatives that protect some programs from cuts, they are not the root cause of California's fiscal disaster. That cause is the government's spending addiction. From 1990 to 2008, California's revenues increased 167%, but total spending soared 181%.

This problem won't be tamed by letting lawmakers get their hands on more tax dollars by scrapping Proposition 13, which limits property taxes, as Mr. Steinberg and other lawmakers have suggested. Rather the solution is to restore the Gann Spending Limit that restricted state spending increases to population growth and inflation and required that anything left over be returned to taxpayers.

Such restrictions kept the state from slipping into a cycle of fiscal chaos in the 1980s by checking government expenditures and forced lawmakers to rebate $1.1 billion in excess revenue in 1987. But voters diluted Gann in 1990, when they passed Proposition 111, exempting infrastructure projects, disaster spending and a number of other state expenditures from the spending limit.

Prop. 111 freed politicians in Sacramento to use the revenues that gushed in during the dot-com boom and housing bubble to grow the state budget to unsustainable levels. If Gann hadn't been neutered, a Reason Foundation study found in February, California would have been rolling in a $15 billion surplus this year.

The Golden State's problem is not overly controlling voters—but out-of-control politicians.

Ms. Dalmia is a senior analyst, Mr. Summers a policy analyst, and Mr. Moore a vice president at the Reason Foundation.

Get Real About Bakersfield City Pensions

adrian.moore@reason.org (Adrian Moore) — Thu, 18 Jun 2009 00:29:00 EDT

Bakersfield Californian

City worker pensions in Bakersfield present a major budgeting challenge, but not an insurmountable one.

In 2000 and 2002, changes in state law allowed state, county and city workers to get more retirement benefits, and get them earlier. The changes dramatically increased pension benefits. Someone who worked for the government for 30 years would now get an amazing 90 percent of his salary for the rest of his life (instead of the previous 60 percent) and public safety workers were eligible to retire at a younger age.

At the time, the economy was going well and state and local governments rushed to implement these new benefits. Over the next six years, retirement costs for state employees increased by over 2,000 percent, and taxpayers went from footing $157 million in state pension benefits to over $2.7 billion per year.

A similar pattern has unfolded in cities, with pension costs consuming much larger shares of city budgets. Bakersfield has nearly $100 million in unfunded pension liabilities -- nearly a third of the annual operating budget. And the city's pension costs for police officers skyrocketed from nearly $3 million in 2002-03 to $10 million in 2007-08.

When the city increased the pension benefits, it hoped older workers would retire and be replaced by "cheaper" newer workers. But that hasn't worked out because pension costs are so exorbitant. For every 10 public safety workers that retire, the city pays pension costs equivalent to nine full-time staff. That means taxpayers are paying for nine police officers -- only none of them are working. The city can only afford to hire one officer to replace the 10 who retired.

The city can, and must, fix this problem.

First, for new employees, shift from the current defined benefit plan, which guarantees a percent of salary for life, to a defined contribution plan, where the city and the employee put a specified amount of money into an account each year that money goes to the employee upon retirement.

Second, for current workers, reinstate the requirement that they pay some modest share of pension costs. The city currently requires employees to pay 9 percent of pension costs only for their first five years on the job. After five years, workers don't contribute anything towards their own retirement.

Third, for all current employees, base the retirement salary calculation on their highest three years of pay, not one year. The city already does this for new hires. This avoids "pension spiking," where employees work a ton of overtime to increase their salary in a single year because that year's salary can set their pension level.

Fourth, since pension obligations are a promise to pay money in the future, they are a form of debt. As such, taxpayers should have the same public vote requirement on pension deals that we have on other forms of city debt. Ideally, the city would use pay-as-you-go, with no pension debt.

Pension costs are only going to get higher, and consume more of the city budget, unless both city workers and city leaders take responsible steps to meet current obligations and ensure future obligations are sustainable.

Adrian Moore is vice president of research at Reason Foundation. This column first appeared in the Bakersfield Californian.

Making Sure Infrastructure Stimulus Isn't Pork Parade

sam.staley@reason.org (Samuel Staley) adrian.moore@reason.org (Adrian Moore) — Wed, 07 Jan 2009 00:00:00 EST

President-elect Barack Obama's transition team is days away from releasing the details of an economic stimulus plan. If, as expected, more than $200 billion is directed toward transportation infrastructure, federal funding for roads, bridges, and transit will exceed spending in more typical years by more than a third. In 2008, for example, the federal government spent $70 billion. This raises the question: where will all this money go? Under the current system, pork. And more pork.

States receive most transportation funding from the federal government based on a complex formula. The money isn't given to projects based on their potential economic impact, efficiency or effectiveness. Congress allocates a large chunk through a process driven by special interests and earmarks. The number of "earmarks"-specific projects inserted into transportation legislation by individual members of Congress-increased from just 10 in 1982, to 1,850 in 1998, to 6,371 in the 2005 federal highway bill. Throwing a couple hundred billion dollars into this system with a mandate to "spend it fast" is a recipe for waste that won't meet the stimulus goals of the incoming Obama administration.

Mr. Obama, seems to recognized this danger. On Jan. 6, the Associated Press reported, "President-elect Barack Obama says he will bar pork-barrel projects from the massive economic stimulus bill he wants Congress to pass." Mr. Obama said, "We are going to ban all earmarks, the process by which individual members insert projects without review." So we'll see how that plays out in the real world with Congress.

More than a little irony characterizes this policy conundrum. Transportation was one of the most strategic, focused, and economically effective functions of the federal government for decades after President Eisenhower signed the Federal Aid Highway Act in 1956, creating the modern-day Interstate Highway System.

The federal government, in fact, was likely the only institution capable of embarking on such an ambitious program at the time. Private roads and bridges were too small in scale and scope to be able to undertake such a mega-project. Private financial markets didn't have the capacity to coordinate the capital necessary to make it work. The technology simply didn't exist to make road pricing and national toll roads cost-effective. Moreover, crossing state borders created political hurdles significant enough that a pre-emptive role of the federal government made sense.

Those times are gone. The private sector is now far more strategic and effective in delivering infrastructure projects that count than the federal government. A report by Infrastructure Partnerships Australia found in a survey of 54 major infrastructure projects the private sector delivered the facility a head of schedule and on budget while public projects were delayed 15 percent on average and over budget by 23 percent. The Dulles Greenway and Pocahontas Freeway in Virginia are domestic examples of public-private partnership projects. Europe and Austrialia have frequently used private capital to bring projects on-line ahead of schedule and under budget.

The federal government had clear goals in building the Interstate system. Today, it does not have a clear vision of its role in transportation funding and construction. Without an updated vision for the federal government's role, transportation (and other government spending) is likely to fall flat or, worse, undermine our nation's economic viability by allowing the gridlock and traffic jams that plague our urban areas to worsen as the economy recovers from the recession.

Federal transportation dollars need to be narrowly focused on transportation projects that are clearly national in scope or have demonstrably significant economic impact. Specifically, federal policy should focus on four key areas of national interest:

Interstate highway upgrades that link state highways in fast growing corridors, tapping into private companies to finance, build and operate these roads through user fees and the most up-to-date technology to ensure free-flow speeds at the maximum speed limit allowed. Places like Phoenix, Las Vegas and Austin, Texas, have grown immensely since Interstate system was first developed.
Leading multi-state coordination in expanding urban areas, resolving disputes such as the current spat between Missouri and Illinois over how to pay for a bridge over the Mississippi River in St. Louis, or facilitating an agreement between Kentucky and Ohio to build bridges spanning the Ohio River.
Protecting and supporting key freight corridors to ensure our manufacturers and producers have networks they need to get materials in and products out, whether it's the ports of Los Angeles and Long Beach, upgrading rail connections through Chicago, or ensuring goods move north from Houston of New Orleans to the interior of the US. Over 80 percent of all goods (by value) in America are now shipped by truck.
Investing in transportation research, safety and related issues, with special focus on new technologies and methods of managing transportation systems (such as stop light synchronization, electronic tolling, new road design, and toll roads) coordinating common standards for things such transmission frequencies for new technologies, and incentivizing experimentation and innovation, particularly with private sector participation.

Paradoxically, elevating these areas to national priorities would mean the federal government would largely back out of the regular project grant making process. Instead, specific funding priorities would be set by those closest to the problem, empowering states and regional authorities that already generate more than half of funds spent on transportation. Thus, federal funds for purely local projects would go away over a transition period, refocused on projects with clear national impacts. State and local governments will have strong incentives to adopt direct user fees to establish willingness to pay criteria for deciding what projects should be funded and when.

Travelers, drivers, taxpayers and businesses will benefit from this transition because funding levels will be set and projects selected by those closest to the problem, not formulas or legislative gamesmanship.

Rahm Emanuel, President-elect Obama's chief of staff, told The New York Times last fall that, "You don't ever want a good crisis to go to waste; it's an opportunity to do important things you would otherwise avoid."

This is clearly true for U.S. transportation policy. This recession and the ongoing transportation funding crisis should prompt Mr. Obama and Congress to reinvent the U.S. Department of Transportation in ways that allow it to become a player in laying a foundation for the long-term growth of the national economy. Not only is the federal government working on stimulus packages, it is poised to commit $500 billion in transportation spending as part of the six-year reauthorization bill of the Transportation Equity Act for the 21st Century. The nation can continue to waste precious resources on bridges to nowhere or we can finally reform the transportation funding system to reflect the needs of our modern, global economy.

Funding System for Roads and Bridges Is Broken

adrian.moore@reason.org (Adrian Moore) — Mon, 05 Jan 2009 00:00:00 EST

In the midst of a recession and with well over $700 billion in bailouts already splashed around, there is talk of increasing the federal gas tax. Why? Federal transportation spending is exceeding revenue from the tax. Congress is so far unwilling to consider cuts in federal transportation spending, and reasonable estimates say total road spending is already about $30 billion a year short of the amount needed just to properly maintain our current road system, let alone expand it to accommodate future economic and population growth.

But a gas tax increase is wildly unpopular, politically unlikely, and a bad idea on its face. People object to the idea of paying money into a system they don't trust and know is broken.

Ask a man on the street what his first thought is about transportation spending, and there is a good chance he will say "Bridge to Nowhere," the poster child for the earmark-riddled, highly-politicized, and often downright silly way Congress decides how to spend transportation dollars. In the last transportation bill, individual members of the House and Senate carved out special funding for 6,373 pet projects amounting to over $24 billion, which illustrates that the nation's spending decisions are not driven by a desire to provide the best transportation system in the most efficient way possible.

The ebb and flow of politics determines who and what gets funding and when. One consequence of politicized spending decisions is that it is all too easy to put off needed maintenance until next year so that you can spend the money elsewhere this year. Now the deferred maintenance bill is a $300 million annual deficit for roads, bridges, tunnels, and other infrastructure.

Another consequence is that spending is not focused on federal transportation priorities. About 20 percent of federal fuel tax money goes to local transit projects. Billions more each year go to local bicycle trails, walking paths, development incentives and a vast array of transportation and things loosely related to transportation that are strictly local in nature. The only justification for federal transportation spending is providing a national transportation network, and local projects are simply not national in nature or importance and the federal government has no business funding them both in principle and because it diverts funds from things like maintaining the crumbling Interstates.

And if this plague of problems on the spending side is not enough, federal gas tax revenues are failing too. Vehicles are becoming more fuel efficient, so we are paying less gas taxes while driving more miles, which means more wear and tear on the system. The cost of providing those miles of roads is going up, not down, so a transportation system dependent on fuel taxes is fundamentally unsustainable. It is absurd to base the system for funding infrastructure on a gas tax while simultaneously pursuing policies designed to reduce fuel use.

Right now, the average household in the United States pays about $214 in federal gas taxes and between $99 and $374 in state gas taxes (depending on their state) each year. Adding to that burden to throw more money into a bad funding system won't help.

A sensible approach to America's transportation funding crisis, just like when dealing with the family budget, is to first look at managing your spending, then see what you can do about income.

First, transportation money must be spent on the right things, the top priorities.

Until Congress and state legislators base funding on results and refuse to throw good money after bad, no one will trust the system or be willing to put more money into it. Transportation funding decisions need to be driven by results, by what is necessary to provide a functioning and integrated transportation network. This means focusing long-term transportation policy on a "mobility first" strategy that emphasizes connectivity with shorter travel times, lower overall travel costs for individuals and businesses, and expeditiously connecting people and businesses across the network. At the federal level this means narrowly focusing on the national network for personal travel and goods movement, not a politicized process of funding state transportation budgets and pet projects of members of Congress. Simply put, no transportation earmarks. Most importantly this means stopping federal spending on transit and other projects that are not key parts of the national network and are strictly local in nature.

Second, get more bang for transportation bucks.

Some states do a better job than others at providing infrastructure. For example, a comparison of state road conditions shows that some states do a much better job with road maintenance money than do others. States as varied as Massachusetts and Florida have used public-private partnerships to get more maintenance out of the same budget. Too often we say the problem is a lack of funding and the way we do things is fine, when we should be seeking to change and improve how we maintain our transportation systems.

That goes for how we design and build roads as well. In many ways, a new freeway today is built the same way as one in the 1950's. Too often, we are not using the latest materials and innovative designs, and we are way behind on integrating new technologies into our roads to allow them to be better managed.

Third, and only third, look for new transportation revenue.

If people want something, and they know what they have to pay and what they will get for their money, they are willing to pay. Our current transportation system only has the first part-people want to travel, but they don't know what they are paying or what the money is going to.

To reform the system, the fuel tax should go. Fuel taxes are only an indirect user fee, and some could legitimately question whether they are a user fee at all. Fuel taxes generate revenue based on the energy source for the vehicle, not the wear and tear on the road, bridge, or other facility. We need to shift to a direct mileage charge, where we pay for how much we drive and which roads we drive on. This kind of pricing will give transportation system users participation in the funding process in a meaningful way. It creates powerful incentives for transportation providers to pay attention to users. And it a much more precise mechanism for providing accountability for a service as tangible as road than is the ballot box.

American drivers stuck in long traffic jams might be surprised to learn that communist China and many European nations are embracing private-sector investment in roads. At a time when more investment in transportation infrastructure is needed, the hundreds of billions in private capital looking for investment opportunities needs to be invited to our transportation system. Secretary of Transportation Mary Peters has said over $400 billion in untapped capital is ready to be spent on roads and bridges.

Transportation spending should be performance-based and prioritized to provide more mobility; transportation earmarks should be eliminated; private sources of investment should be utilized; and the gas tax should replaced by a sustainable funding system that features direct user fees. Until those reforms are made, talk of raising the gas tax is ludicrous because higher taxes would just mean more pork projects, not better roads and bridges.

All Infrastructure Spending Is Not Created Equally

sam.staley@reason.org (Samuel Staley) adrian.moore@reason.org (Adrian Moore) — Fri, 05 Dec 2008 00:00:00 EST

The economy is officially a year into a recession, marking one of the longest periods of economic stagnation since World War II, and bolstering calls for yet another, even bigger federal stimulus package. On Tuesday, the nation’s governors met with President-elect Barack Obama and funding for infrastructure projects topped their wish-list.

“There is not a governor in this country that would turn down money for roads and bridges and infrastructure projects,” Gov. Michael F. Easley of North Carolina declared.

"Infrastructure investment is not only necessary for long-term economic growth and global competitiveness - but it will also create jobs when Americans, and Californians, need them the most," said California Gov. Arnold Schwarzenegger. "With an immediate commitment to national infrastructure investment, it's possible to put shovels in the dirt and start immediately on projects across the nation."

But, this begs an important question: Would all transportation infrastructure spending have an equal impact?

No.

Federal policymakers need to consider much more than dumping money into the transportation sector if they want to have a meaningful, positive impact on the economy. It takes more than digging ditches and laying asphalt to ensure that investments create improvements in mobility that spur job creation and increase productivity. To maximize the impact of any infrastructure spending, the transportation investments must be the right kind, in the right place, and at the right time. Those are no small obstacles.

On the surface, transportation seems like a “no brainer” if there is going to be a massive federal stimulus package. Our bridges, roads, and transit systems are crumbling. Depending on which interest group is compiling the numbers, the nation is under investing in transportation infrastructure by $70 to $100 billion per year.

According to Reason Foundation’s Annual Highway Report, 50.7 percent of America’s urban interstate highways were congested in 2006. And of the nearly 600,000 highway bridges in the country, 24.1 percent were deficient or functionally obsolete.

The National Governors Association suggests $57 billion in infrastructure projects could be started within 120 days of being funded. The American Association of State Highway and Transportation Officials claims that 3,109 transit and highway projects, accounting for $18 billion in new spending, are “ready to go” once state and local transportation agencies get a funding green light from the federal government. This spending would create 630,000 jobs according to their studies.

But not all of those projects will offer a return on taxpayers’ investment. A bridge to nowhere or a lightly-traveled light rail route that will long require heavy annul subsidies isn’t a good use of money just because it is infrastructure.

This isn’t the 1950s. It’s not just a matter of building the obvious routes needed for an Interstate highway system that will connect major metropolitan areas and create freight corridors. The country has reaped the economic rewards of the Interstate system. But, our rate of return has been falling on these investments since the 1970s. Now it is time to rethink transportation investments in the context of the modern economy.

The highway and road system must meet the needs of a globally competitive, dynamic, services-based economy. Today approximately 80 percent of all goods, by value, are shipped by truck in this country. Only 15 percent of travel on our nation’s roads is traditional commuting, and 97 percent of our total travel is by automobile. Americans don’t just get up and go to work. We combine and “chain” our trips to include errands, non-office business, personal appointments, and to meet friends for coffee or happy hour. Our demand for flexible and adaptable modes of transportation, primarily the car, has skyrocketed, placing unprecedented demands on the transportation system. At the same time our investment in the network has languished. Travel demand on our roads has outstripped additions to capacity by 3-to-1 over the last three decades.

The 21st century economy needs a transportation network that is fast, efficient, and flexible. Achieving this will require directing transportation investments to meet the following fundamental concepts:

Think 3-D. We can eliminate chronic traffic congestion and increase travel speeds by adopting cutting edge engineering solutions and embracing innovative road design to provide multi-layered access to key destinations through tunnels, flyovers, queue jumpers (or duckers), and elevated expressways.
Recognize the hidden costs of congestion. Congestion is a job killer because it limits our access to our most valuable resource: people. For the most part, people will live within a 30 minute commute of their workplace. Congestion shrinks this “opportunity circle” for workers and employers alike, preventing businesses from tapping into the most talented and productive workers available. Transportation projects should place a premium on reducing congestion.
Adopt a “mobility first” transportation strategy. Transportation networks in a services-based economy need to emphasize connectivity with shorter travel times, lower overall travel costs for individuals and businesses, and expeditiously connecting people and businesses within metropolitan areas.
Embrace market forces and the private sector. There’s a reason almost one-third of our new road infrastructure has been built as toll roads. Modern tolling marries the powerful economic force of “willingness to pay” with new public and private capital capable of delivering the infrastructure users want. In short, toll roads put the right roads in the right place at the right time.
Embrace innovative highway design and materials. The private sector has repeatedly shown its ability to provide new designs, using new materials, to speed up the delivery of transportation infrastructure when they’ve been allowed. It’s time to give state and local governments more freedom to test the waters with private capital and incentivize innovations that meet real needs identified on the local and regional levels.

These concepts will be central to achieving a policy goal of improving the long-term viability and efficiency of our transportation network. And before the federal government gives governors billions for new infrastructure spending, someone should talk to Secretary of Transportation Mary Peters, who has said there is over $400 billion in private capital ready to be spent on infrastructure projects.

Public-private partnerships, like those Peters proposes, offer the best hope of prioritizing the long wish-lists of infrastructure projects. The private sector will gravitate to projects that offer steady revenue streams and the best chance for profit: new toll roads that relieve congestion in urban areas or highly traveled bridges in need of repair, for example. On the other hand, projects centered around pretty ribbon-cutting ceremonies or meant to deliver pork to congressional districts will be found wanting by investors.

Increasing private sector involvement can close the funding gap, reduce the ‘need’ for stimulus spending and make certain the most-needed transportation projects – the ones that will deliver the most bang for our bucks - rise to the top.

The way we fund our roads is failing and out of date. Simply pouring billions more into building roads the old fashioned way won’t fix it. A modern transportation network designed to meet today’s diverse travel needs would help the economy grow. Unfortunately for taxpayers simply handing a big stimulus check to governors won’t deliver that network.

Time to Say No to Borrowing Another Billion

adrian.moore@reason.org (Adrian Moore) — Tue, 07 Oct 2008 00:00:00 EDT

San Francisco Chronicle

California Gov. Arnold Schwarzenegger says he may go begging to the federal government for a $7 billion bailout so the state can pay its bills in the coming weeks. And yet the state still wants to borrow $16.8 billion through the various bond initiatives on the ballot, including Proposition 3.

Prop. 3 asks for $980 million to expand children's hospitals - undoubtedly a great cause. It's such a wonderful cause that California taxpayers borrowed three-quarters of a billion dollars for it just four years ago.

In 2004, voters passed Proposition 61, authorizing $750 million in bonds to help children's hospitals. As of June 1, 2008, just over $400 million of Proposition 61's funds had actually been awarded to eligible hospitals. That leaves nearly $350 million unspent. Why?

Including interest payments, Prop. 3 will cost taxpayers $2 billion. The state budget deficit is $15 billion. Schwarzenegger may borrow another $7 billion from the feds.

And thanks to bond initiatives like this, California has been on a wild borrowing spree for years.

The state's authorized general obligation bond debt has nearly tripled over the last six years, from $42 billion in 2001-02 to a massive $120 billion in 2007-08.

Borrowing is way up because state lawmakers don't want to make difficult budget decisions.

When times are tough, families cut costs. We stop eating out, carpool, or cancel cable TV service to save money. Politicians just ask for higher credit limits.

Legislators could free up some funds for escalating hospital construction costs and the need for advanced medical technologies, or just make children's hospitals a higher priority in the annual budget.

Instead they want to put this on the credit card.

Eight private and five University of California children's hospitals stand to reap the rewards of Prop. 3. The Chronicle reports the private hospitals are spending about $900,000 each, $7.2 million total, to pass Prop. 3. Why not spend that $7.2 million caring for kids?

Because they think it's an investment. Each of the eight private hospitals would get about $98 million if Prop. 3 passes. In this economy, with $750 million in bonds recently approved for children's hospitals (and more than $300 million still unspent), taxpayers should say no.

It is time to cut up the credit cards and pay as we go.

California Needs Credit Cards to Pay Monthly Bills

adrian.moore@reason.org (Adrian Moore) — Tue, 07 Oct 2008 00:00:00 EDT

Gov. Arnold Schwarzenegger says California may need a $7 billion bailout (excuse me, loan) from the federal government so the state can pay its bills and employees over the next few weeks.

The state "may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the federal treasury for short-term financing," Mr. Schwarzenegger wrote to Treasury Secretary Henry Paulson.

The fragile financial position that California finds itself in is mind-boggling. The state needs a credit card just to pay its monthly bills. California has a $15 billion deficit and the state's debt has nearly tripled in the past six years, from $42 billion in 2001-02 to $120 billion in 2007-08, including $15 billion borrowed to last time we faced a huge budget deficit. Despite all this red ink, voters are being asked to borrow another $16.8 billion in bonds on the November ballot.

California, home to the world's eighth largest economy, should not be buried in debt.

Unfortunately, it seems Gov. Schwarzenegger attended the Patrick Ewing School of Business. Ewing, the basketball great and one-time president of his labor union explained why NBA players needed to make more money: "They make a lot of money, but they also spend a lot of money."

That's California in a nutshell. Make a lot, spend a lot.

Sure there are excuses. The housing crisis has hit the state hard. The economy slowed and tax revenues have been less than expected. But it all comes back to spending.

Gov. Schwarzenegger promised to end "crazy deficit spending" when the recall vote ushered him into office. Yet, the governor's budgets from 2004 to 2008 increased general fund spending by a whopping 32 percent. Certainly, state Democrats who try to block nearly every budget cut share some of the blame. But ultimately, it's the governor's job to explain to taxpayers why short-term cuts are needed and why the budget process needs to be fundamentally changed to eliminate these chronic deficits.

It's time for lawmakers to go through the state budget line-by-line. After all, that's what they are paid to do. It is time to ditch baseline budgeting, where programs get increased funding just because "we have always done it this way."

Performance-based budgeting would require every state program to demonstrate what it is accomplishing and show how and why it is spending taxpayers' dollars. The most-effective programs would get more funding. The least effective programs would disappear.

Competitive sourcing, which allows the private sector to compete for jobs and contracts that are currently performed by the government, would also save a lot of money. The federal government has saved over $7 billion the last five years thanks to competition. You'll hear unions, like the prison guards, cry that this is privatization. In reality, existing federal employees won 83 percent of the job competitions from 2003 through 2007, but taxpayers saved $25,000 for every job put up for competition because even when the government keeps the job it significantly lowers costs and improves efficiency.

One thing Gov. Schwarzenegger has been right about is the desperate need for a constitutional spending limit and a rainy-day fund. Sacramento's annual spending increases should be limited to the growth in population and inflation. When the economy is booming, instead of spending the 'extra' money, California should either give it back to taxpayers or make significant contributions to a rainy-day fund. And then, in years like this, with the economy down, the rainy-day fund can be used to balance the budget without tax increases or massive spending cuts.

California's leaders constantly ask taxpayers to borrow more bond money, while they postpone tough budget decisions. Now the state might need a $7 billion bailout from the feds. Voters should send a message about fiscal discipline when asked to approve $16.8 billion in borrowing this November. And if Gov. Schwarzenegger is planning to ever live up to his promises about 'blowing up the boxes' of state government, now seems like a pretty good time to start.

California General Election: Voter Guide

adrian.moore@reason.org (Adrian Moore) mike.flynn@reason.org (Michael Flynn) — Wed, 01 Oct 2008 00:00:00 EDT

Executive Summary

It is election season and that means Californians once again face a daunting package of ballot questions on difficult public policy issues. This year’s initiatives cover a wide range of topics including transportation, gay marriage, criminal justice, hospital construction, the treatment of farm animals and much more. As has been the case in years past, the ballot measures are not always as straightforward as they first appear. Some are premised on questionable assumptions and value judgments. Others, despite admirable motivations, would nevertheless lead to unintended or unforeseeable adverse consequences. Some of these initiatives would empower the government to restrict individual freedom and choice in the name of uncertain benefits. And several would further burden California taxpayers by dramatically expanding the size and scope of state government, most notably by borrowing heavily against the future through bonds.

California’s latest budget deferred a nearly $15 billion shortfall to next year, so voters are going to have to be hardnosed about facing the tough choices these initiatives represent. The amount of general obligation bonds authorized in California has nearly tripled, from $42.1 billion in 2002 to a staggering $120.1 billion this year. If the four bond measures on the ballot this November are approved by voters, an additional $16.8 billion of bond debt would be authorized. Given that the state is already spending well beyond its means with an annual deficit of $15 billion, increased commitments would be financially irresponsible and an unjust hardship for future generations of taxpayers.

The nonprofit and nonpartisan Reason Foundation has evaluated the 12 initiatives on this year’s ballot.

(Note: The budget figures cited in this voter’s guide are the official estimates of the California Legislative Analyst’s Office.)

High-Speed Rail Will Add to State's Budget Woes

adrian.moore@reason.org (Adrian Moore) — Fri, 19 Sep 2008 00:00:00 EDT

Flash Report

With the state sitting on a massive $15 billion budget deficit, you’d think California would be looking for ways to cut spending. Instead, voters will decide on November ballot initiatives that could charge billions more on the state’s credit cards.

California's general obligation bond debt has nearly tripled in just the last six years, rising from $42 billion in fiscal year 2001-02 to $120 billion in fiscal 2007-08. The biggest ticket item on the November ballot is Proposition 1A, which would allow the state to authorize $9.95 billion in bonds to start a high-speed rail system.

Planners and politicians undoubtedly have romantic visions of sitting on a speeding train traveling at 200 miles per hour from Los Angeles to San Francisco. I get it. They dream it would be just like those European vacations, riding on those high-speed trains in France.

But reality bites. And California isn't like France, or Japan, or any other place where a bullet train exists or is likely to succeed.

One of the more interesting things about Prop. 1A is the amount of the bonds, just shy of $10 billion. The California High-Speed Rail Authority says it will cost $45 billion (in 2006 dollars) to build just the first two phases of the system. So where does the other $35 billion come from?

The high-spending Bush administration is going to leave the federal government facing record deficits. Gov. Arnold Schwarzenegger and the state legislature cannot agree on a budget. Local governments are trying to squeeze every penny out of every dollar they have, and they have nothing to spare. And if the private sector thought the rail plan would bring it a profit, they’d be building the high-speed train system themselves.

Another reason the private sector is unlikely to get involved is the ludicrous projections the Rail Authority is trying to sell taxpayers. They claim they are going to build a train that is faster, has more riders, is more efficient, and has lower fares than any high-speed rail system in the world, even those who have operated for years.

The Rail Authority says 65.5 million people, 88 million including commuters, will use the rail system in 2030 – and that’s their low estimate. Their more optimistic scenario suggests the system will have 96 to 117 million riders in 2030.

No other study has ever predicted anything close to that. A University of California at Berkeley report, done in the mid-1990s, predicted the state could expect 12.5 million high-speed rail riders by 2010. A 1997 report by the Federal Railroad Administration said that no high-speed rail route in the state was “commercially feasible” enough to “cover both its capital and operating costs.” That report estimated that 15.6 million Californians would use high-speed rail by 2020. Then a 2000 study by Charles River Associates predicted the rail system could garner 42 million riders a year, including commuters, by 2020.

A new Reason Foundation study, produced with the Howard Jarvis Taxpayers Association and Citizens Against Government Waste, examines all of the previous ridership estimates and finds the California high-speed rail system should expect 23 to 31 million riders by 2030, meaning the Rail Authority is likely overestimating ridership by more than 60 percent.

With the Rail Authority’s estimate so far off the mark, they’ll either have to dramatically raise the planned ticket prices – further reducing ridership – or seek taxpayer subsidies to cover the red ink. And there is going to be a lot of red ink. Research published in the Journal of the American Planning Association studied 258 public transportation projects built between 1927 and 1998 and found that rail projects had the highest cost overruns, costing taxpayers 45 percent more than projected.

If the Rail Authority is off by 45 percent, the state’s system will cost over $70 billion, not the $45-$50 billion being sold to taxpayers. The final price for the complete statewide high-speed rail system will actually be $65 to $81 billion, according to our new report. Throw in the operating costs, well over $1 billion a year, and you have a recipe for adding massive amounts to the state’s budget deficit.

With Gov. Schwarzenegger preparing to veto the state budget, maybe Californians should consider this a good time to make wise spending decisions. Let’s cut up those credit cards and pay-as-we-go. A high-speed train system might sound nice, but this isn’t the right plan and billions more of debt isn’t what the state needs right now.

California Focus: High-Speed Rail Measure on Wrong Track

adrian.moore@reason.org (Adrian Moore) — Thu, 18 Sep 2008 00:00:00 EDT

Orange County Register

In November, Californians will vote on Proposition 1A, which would mean almost $10 billion in new bonds to make a down payment on a statewide high-speed rail system. Many people are excited at the idea. High-speed rail could provide a new means to travel up and down the state and put California ahead of the rest of the nation. Unfortunately, the proposed system is deeply flawed.

The California High Speed Rail Authority (CHRSA) is essentially saying 'we are going to build a train that is faster, will carry more people, will be more efficient, and will have lower fares than any existing high-speed rail system in the world.'

None of those things are likely to be true.

Reason Foundation has just published a report providing a "due diligence" analysis of the rail project and the claims the Rail Authority makes. Let's just say "pig in a poke" doesn't begin to cover it. The rail plan is a financial boondoggle. Between 1999 and 2008 the official estimated cost of just part of the system (Los Angeles to San Francisco) rose from $30.3 billion to $45.4 billion (in 2006 dollars). Remember, the big price increases come when construction actually starts, so our estimate suggests the final price tag could top $75 or $80 billion.

The idea is for Proposition 1A funds to be joined by other state money, federal funds and private investment to bring together the total needed. Then, fares paid by riders will be enough to pay for operation of the system, maintenance, and pay back the private investors with interest.

This is remarkable because the CHSRA projects astonishingly low fares. They plan for San Francisco–Los Angeles unrestricted business class fares to be $70 in 2030 (in 2006 dollars). For comparison, business class fares from New York to Washington, D.C., on the high-speed Amtrak ACELA train are $172, while on the Tokyo-Osaka bullet train they are $135. France's TGV train running from Paris-Marseille costs $140.

The Rail Authority claims it will be able to keep fares so low for a couple of reasons. First, extraordinary efficiency. The Rail Authority predicts its operating costs will be 40 percent -to-70 percent less than high-speed rail lines in other countries (has California government ever kept costs down?). Then it predicts amazing ridership that far exceeds anything in France, Spain, Germany, and Japan – even though those countries have shorter distances, higher density, and more people who already travel by train.

CHSRA predicts between 65.5 million and 96.5 million intercity high-speed rail riders by 2030. But their ridership estimates depend on getting riders out of their cars. To do this, the trip has to be fast and short. So the Rail Authority claims it will hit average speeds that are not being achieved by any other high-speed rail system in the world. A trip from San Francisco to Los Angeles would allegedly take 2 hours and 40 minutes, averaging 197 mph. France's TGV-Est train averages 174 mph, the TGV Paris–Avignon averages 159 mph, Japan's bullet train averages 159 mph, and Taiwan's high-speed rail averages 152 mph. And those are the fastest ones out there. And they can use light, fast trains, because they run on their own tracks. California will have to use heavier, slower trains because the plan is run on the same tracks as freight trains, and federal safety rules require heavier passenger trains in the event of a collision.

Reality check: Reason Foundation's analysis indicates that the high-speed rail sytem's operating costs will be 30-to-50 percent higher than predicted; average speeds will be well below 170 mph, so a trip from San Francisco to Los Angeles will take about an hour longer than advertised, 3 hours and 40 minutes; and 2030 intercity ridership of between 23 million and 31 million – not 65 to 96 million. All of which means either fares have to go way up – which drives down ridership – or the taxpayers will have to subsidize the train system to cover its red ink. This as the state's budget deficit sits at $15 billion.

The train is an especially bad deal for Orange County taxpayers. The system is planned in chunks and Orange County isn't part of the first portion. The County will eventually be connected to LA by "stub" lines – only if there's still money around to pay for it.

A high-speed train system might be good for the state. But if taxpayers are going to foot the bill, let's wait until a sensible, realistic plan comes along.

The California High-Speed Rail Proposal: A Due Diligence Report

Mon, 01 Sep 2008 00:00:00 EDT

With the high costs of building in California and the history of cost overruns on rail projects, the final price tag for the complete high-speed rail system will actually be $65 to $81 billion, according to the Reason Foundation report.

And while the Rail Authority forecasts between 65 and 96 million intercity riders by 2030, the due diligence report finds these projections are dramatically inflated. After compiling numerous ridership studies previously conducted for...

L.A. Should Seize Opportunity and Federal Funds to Ease Congestion

adrian.moore@reason.org (Adrian Moore) — Mon, 26 May 2008 00:00:00 EDT

Los Angeles Business Journal

The federal government has offered Los Angeles $213.6 million to help ease the region's infamous traffic congestion. Take the money. The region's transportation system is clogged and it is only going to get significantly worse without major changes.

The Los Angeles County Metropolitan Transportation Authority's long-term plan does a lot of good things. But it also points out a very harsh reality: Between now and 2030, L.A. will spend $152 billion - with a "b" - on transportation, yet the travel speeds on our freeways will actually fall by an average of 14 miles per hour during that span. Translation: Our traffic jams will be worse than they are today - after spending $152 billion.

Rising congestion is quite simply the result of the growing gap between supply and demand for roadway capacity. There are more cars on our roads, many driving longer distances, but we are not adding the road capacity needed to keep pace.

Metro's long-range plan proposes spending about 33 percent of its funds on the roadway system, which carries more than 95 percent of the travel in L.A. County. This will ensure rapidly declining mobility for the overwhelming majority of travelers in the county. In no other walk of life would you find a business that would dedicate just 33 percent of its resources to service 95 percent of its customer demand.

There are a lot of incentives and pressures for Metro's plan to underinvest in roads, but the $213 million federal Urban Partnership Program grant is a chance to turn the plan around.

For the last seven years, most new highway capacity added in Los Angeles County came in the form of carpool lanes. But as professor Pravin Varaiya and his colleagues at UC Berkeley found, carpool lanes actually make things worse. Their study found high-occupancy vehicle (HOV) lanes cause "a net increase in overall congestion delay. HOV actuation does not significantly increase person throughput."

Yet, most of the money set to be spent on L.A.'s roads over the next two decades would curiously go to carpool lanes. That's why this federal grant is so important.

The bulk of the federal money would be used to convert carpool lanes on portions of the 10, 210, 710, 605, 110 and 60 freeways into toll lanes. Tolls on the lanes would be variably priced, adjusting during the day in order to ensure the lanes are always free flowing at 55 miles per hour. This means tolls would be highest during morning and evening rush hours, and much lower at off-peak times.

It also means you wouldn't have to guess how bad traffic would be on a day you really need to get somewhere on time because you'd have the option of getting into a toll lane guaranteed to be moving at the maximum speed limit. Emergency vehicles and buses would be able to use the lanes and avoid congestion. With buses freed from traffic, transit would offer riders a faster, more reliable commute - perhaps luring more people out of their cars.

Real carpools and vanpools could still use the lanes for free or pay a reduced toll, but would never have to worry about congestion. It's a win-win for all commuters and workers. And it could be even better if this was the start of a plan to build a network of toll lanes connecting all of the Los Angeles region's highways. This network would ensure that drivers, buses and emergency vehicles always have a congestion-free alternative to today's gridlock.

Similar lanes in Orange County and San Diego have been enormously successful. Orange County's 91 Express Lanes represent just one-third of that highway's lanes but carry half of all traffic during rush hour because they are moving so much faster.

The plan to convert carpool lanes into toll lanes has the bipartisan support of Mayor Antonio Villaraigosa and Gov. Arnold Schwarzenegger. Other leaders and transportation officials should follow suit.

Look at our roads today. The status quo is failing miserably. Transportation planners admit their long-range plans will only make congestion get worse. It's time for a fresh approach and this federal grant is the first step.

California Focus: End Recurring Budget Deficits

adrian.moore@reason.org (Adrian Moore) — Sun, 24 Feb 2008 00:00:00 EST

Orange County Register

Everyone loves a silver bullet; the simple and easy solution to a tough problem. Gov. Arnold Schwarzenegger's silver bullet is a 10 percent across-the-board budget cut he hopes will erase the $16 billion deficit. If only it were that simple.

Don't get us wrong, budget cuts, like the one Schwarzenegger's proposed, are often political minefields even though every government department could manage to trim 10 percent of costs and still do its job. Improved efficiency and accountability should always be the goal, and the governor's cost-cutting makes great sense as a strategic management initiative. But the big picture shows California is constantly buried under multibillion-dollar deficits, not because departments are spending too much each year, but because the budget is structurally flawed, and no one wants to make the hard decisions that will provide lasting improvements.

Gov. Schwarzenegger said, "While these reductions present numerous challenges to implement, this across-the-board reduction approach is designed to protect essential services by spreading reductions as evenly as possible so that no single program is singled out for severe reductions."

In other words, every single program the state spends money on is just as important as every other. That simply isn't true. The Board of Barbering and Cosmetology is not as important as the Highway Patrol. The cosmetology board should be eliminated, not cut by 10 percent. The Acupuncture Board, Credit Union Advisory Committee and Registered Veterinary Technicians Committee are just a few of dozens of other boards that taxpayers shouldn't be funding – at all.

The seemingly forgotten 2,500-page California Performance Review identified $32 billion in potential budget savings, calling for the elimination of 117 of the state's 339 board and commissions, restructuring agencies to eliminate overlap, selling unneeded state properties and other reforms that still make sense. Gov. Schwarzenegger's ill-chosen battles with special interest groups doomed the report from the start. And as a result, Gov. Schwarzenegger's budget deficits today are eerily reminiscent of the red ink that led to the recall Gov. Gray Davis. Under both men, the state has failed adhere to kitchen table economics, to prioritize the way families do.

When California's families face tough financial times, we don't cut our food or health care spending by the same amount that we cut our movie outings. We prioritize, making big reductions in areas like entertainment, while continuing to pay the mortgage and electricity.

As the mortgage crisis worsens, you see many families who bought a second home as an investment property selling those houses because they can't afford two mortgages right now. With a $16 billion deficit, the state should be doing the same. The government owns property, worth billions of dollars that it has no need for or intention of using, including golf courses, stadiums, prime commercial real estate and the notorious MTV beach house.

Monetizing assets the state owns, but does not need, is a fairly quick means to reduce the short-term budget gap. That would buy time for the state's leaders to prioritize state programs, reducing spending on programs that are lower priorities and helping prevent future budget shortfalls.

For the long-term health of the state, Schwarzenegger has rightly pointed to the need for a state spending limit and rainy-day fund. Tax revenue has been extremely volatile in recent years. California saw revenue spike during the dot-com boom. Then came a bust. California saw revenue spike again thanks to a historically hot real estate market. Then came another bust.

The core of the problem is that nothing forces the governor and Legislature to keep spending in line with revenue. California has passed various reforms, such as the Gann Spending Limit, but the Legislature always finds ways around them.

California desperately needs a tax and expenditure limit to protect taxpayers from tax increases and to serve as a method of imposing some restrictions upon Sacramento's spending. A revenue limit would cap the amount of money that the state could collect in taxes to, say, a percentage of population growth and inflation. If the state collected too much money in a year, taxpayers would get refund checks instead of allowing politicians to spend the 'excess' money, as happens today.

Consider that during fiscal 1997-2002, California's state revenue increased by 27 percent. Yet, the state still ended up with a $30 billion-plus deficit because spending increased 36 percent during that time. During Gov. Schwarzenegger's tenure spending has gone up another 36 percent.

Until there are some real, binding limits on state spending and revenue, California will keep finding itself in a budget mess every few years. Spending and revenue limits force state leaders to prioritize and to make hard choices the same way families do during a fiscal crisis. It is time for our current leaders to bite the bullet and face some of those tough choices they were elected to make.

Fixing San Diego's Finances

adrian.moore@reason.org (Adrian Moore) — Fri, 22 Feb 2008 00:00:00 EST

Once highly regarded for its efficient and conservative management, the city of San Diego has been rocked in recent years by a severe financial crisis and political turmoil.

In 2003, Reason Foundation partnered with the Performance Institute, a national think tank, on the "San Diego Citizens' Budget Project." The project was planned as a three month examination of what was considered a well-managed city to see if additional efficiencies could be gained from implementation of more innovative management practices. Performance Institute founder and president Carl DeMaio led the project, which helped uncover secrets the city had been keeping on the true state of its finances.

San Diego faces multi-billion dollar liabilities for pension and health care benefits for retirees, failed to balance its operating budget for a decade, and neglected to maintain its community infrastructure (roads, utilities, public safety, etc.). On top of that, the city issued false and misleading financial statements for years—and used those statements to issue bonds on Wall Street.

DeMaio and Reason took these findings public and challenged the city's most powerful interests to respond by adopting immediate reforms. DeMaio also took these issues directly to the ballot box through the initiative process, and last year earned victories for pension reform and managed competition against stiff opposition from the city's powerful municipal unions.

DeMaio goes way back with Reason Foundation. In 2000, he led our Transition to Governance project, crafting recommendations for performance-based reforms of the federal government that led to President Bush's President's Management Agenda. He also helped lead the California Citizen's Budget project a few years later, a joint project of Reason Foundation and the Performance Institute.

After years of pushing for reform in his hometown, DeMaio announced he was stepping down from the two companies he founded and announced his intention to run for San Diego's City Council. And he's enlisted other like-minded reformers to run for city office. Big things are happening in San Diego that just might end up offering a case study for how to reform a modern big city.

Reason Foundation's Adrian Moore: You are best known as a national government reformer, through your work on Capitol Hill and most recently at the Performance Institute. Now you're leaving the national stage to focus on running for San Diego City Council. Why the jump into local politics?

Carl DeMaio: I've always been interested in making positive change happen in government—whether on Capitol Hill by promoting better congressional oversight and budgeting practices or by founding the Performance Institute to study "best practices" in government programs. It's frustrating to see a government program fail, and then turn around and ask for more tax dollars. Nowhere else but government can you have an enterprise treat its customers poorly, screw up a service, not achieve a result, and then turn around and ask for more money!

To me the big challenge is to rethink how government works to make it accountable, transparent, competitive and performance-based. I've worked with cities, counties, states, and federal departments across the nation on implementing these reforms. And guess what? Government can be reformed to provide a better service and a better outcome at a lower cost. Yes, you can implement business practices in government. Yes, you can deliver better value for the taxpayer if you approach problems from a "multi-sector" approach—borrowing the best from public, private, and non-profit sectors. The frustration has been that we've been making change happen on a program-by-program basis. My hope is to implement these reforms on a bigger scale—take an entire city government and reform every department.

One of the reasons why I'm running for City Council is to bring those practices into play within a single city. Certainly I'm interested in improving our situation here in San Diego. At the same time I believe we can have a positive impact nationwide. If we make San Diego city government a "model" of an efficient city, my hope is cities and counties across the nation will imitate. They sure are watching San Diego today and using our financial crisis to learn what NOT to do. It'd be nice to change that so that people are watching San Diego city government and borrowing from our reforms and successes.

Moore: You played a big role in uncovering the financial problems facing the city of San Diego and you took a lot of heat for that. How did—or even did you—know the city's finances were so bad and how did you weather the heat?

DeMaio: We stumbled across the financial crisis in San Diego. I had just finished working on the roll-out of the President's Management Agenda at the federal level and had just finished working the California Citizens' Budget Project with Reason Foundation. Naturally looking at a local government and defining a government reform agenda would be the next step. We thought we'd work on a three-month project and produce recommendations for saving around $20 million—enough to weather the city's official budget shortfall.

I gathered a team of municipal finance experts to independently pour over the city's financials and budgets. What we found was that the city bureaucrats and politicians had intentionally misled the public about the true state of the city's fiscal health. The so-called $20 million deficit was actually $100 million—and that was not counting the $2 billion pension fund liability. We found evidence of securities fraud, millions in raids on fee-based enterprises in violation of the State Constitution, and programmatic failures. We took our findings to the then-Mayor and City Council, but they refused to act.

When we took the truth public they denied everything—and they got their powerful friends, lobbyists, and union friends to attack us. We stood our ground and began an intense public education campaign to clue the public in on what was happening at City Hall and just how bad the situation was. We even had to approach national news media—New York Times, The Wall Street Journal, USA Today—to get them to write the story before even the local paper would cover the story.

I didn't mind taking heat from the local powerbrokers as long as we were fighting for what was right. Too often political leaders worry about the consequence of what should be done and end up watering down or not doing what needs to be done. Then again, I wasn't in politics back then. (Laughs)

Moore: What would you say are the three top issues facing San Diego in the coming five years?

DeMaio: First and foremost, the city's financial crisis. The city must balance its budget for real and we must deal with the multi-billion dollar liabilities for pension and retiree health care. The city has barely addressed its budget imbalance and debt issues since we uncovered them four years ago. Add to that dire situation the fact that the tough economy will cut the city's revenue growth in the next few years—particularly in sales tax and property tax revenues.

Second, the city faces a massive infrastructure deficit. The city has for decades neglected its roads, public facilities, and public safety equipment needs. The city has failed to put aside the monies necessary for maintaining—let alone expanding—its infrastructure. That neglect is finally catching up to the city in the form of crumbling and traffic-clogged roads and community infrastructure inadequate to meet the needs of our growing population.

Third, the city will confront several environmental challenges—including water and sewer management, solid waste and landfill management, energy reliability, open space management, and storm water runoff. The environment in San Diego is the envy of the nation—it is our greatest asset. Yet we are seeing major risks emerge on our environmental quality that must be addressed.

Moore: Let's take each of those issues in turn. How will you address the financial issues?

DeMaio: You balance a budget for real by combining spending cuts and revenue growth. The first issue of cutting spending is easy from a technical standpoint. I've drafted balanced budgets for even the worst financial crunches, but none of those balanced budgets came with the most important ingredient: political spines! In cutting spending, politicians actually have to say "no" to powerful interest groups. And "no" can be a very lonely word in politics.

The biggest spending cut we can make in the city is to reduce labor costs. If you do that, every single service in government becomes more efficient. And it is what is happening in every sector of the economy—witness what is going on in the automobile industry with salary and benefits reform. The same thing must happen in government. We need to benchmark our salaries and benefits against the local labor market for similar skill sets. That will require in some cases salary cuts, and of course, reform of pension and health benefits. We need to reform the pension system to shift non-public safety workers to a 401(k)-style retirement system and provide choices for public safety members to choose a reformed defined benefit plan or opt into a 401(k) plan with higher take-home pay. Finally, salary adjustments in government should always be based on competitive labor market analysis—and performance. The old model was for the municipal labor union to come in and negotiate an across-the-board salary and benefits increase. We need to make increases merit-based.

Once labor costs are streamlined, we need to prioritize city services to focus the budget on the "core" services. How can this city government be spending money on a nine-story downtown library when we are cutting basic library hours city-wide? How can we be talking about funding a ballpark from the General Fund when we cannot give our police and firefighters adequate equipment? By focusing on the "core" and doing those services well, we can cover the primary functions of local government before getting over-extended.

Moore: You mentioned revenue increases—you mean raising taxes?

DeMaio: No. On revenue increases, you don't get those by raising taxes. I founded and ran two successful businesses. To borrow a market example, that would be like a company wanting to raise its revenues by raising prices. Your customer might walk—or be stolen by a competitor—and you'd end up with less revenue. We grow revenue by growing markets—offering a better service, helping your customers expand, seeking more customers, etc.

The same is true in government. You get revenue increases by supporting the economy and each hard-working family in your city. When your residents are successful in their endeavors and lives, the city government shares in that success. Our three primary revenue sources are property taxes, sales taxes, and tourism taxes. By fostering a competitive economic and jobs-friendly environment, we can grow revenues with every job created, every housing unit brought to market (did I mention our affordable housing crisis?), and every tourist brought in to enjoy the treasures our city offers.

Moore: On the second issue—the infrastructure deficit—how will you address that?

DeMaio: The city needs to do two things: increase funding for infrastructure and improve its management of infrastructure projects. On funding, the city should "lockbox" a percentage of revenues to invest in infrastructure—even if it is for a set period of time, say five or seven years. It is too easy for the politicians to push off infrastructure investments into the future to fund increased services today.

Second, the city needs to require that new development pay its fair share of the cost of community infrastructure—as well as commit to using these funds to actually provide the infrastructure. I've seen the city collect development impact fees only to drag its feet and not provide the infrastructure improvements.

Third, the city must explore public-private partnerships to leverage private investment in community infrastructure. Borrowing from successes in other cities, we have ample opportunities for public-private partnerships in San Diego—from the Convention Center to even the City Hall complex.

You can't just throw more money at the problem though. You have to reform how we manage infrastructure in the city. First, we need to do a better job of real estate and asset management. A few years ago we discovered the city could not even tell you what assets it owned. We must "book" the depreciation of our assets using an accrual method so we know where the infrastructure deficits are. We have to ask whether the assets we currently own are being put to the best use for the taxpayer. Second, we need to do a better job of infrastructure planning—from devising individual community plans to adopting capital plans for specific elements of our infrastructure (such as the Regional Transportation Plan.) The problem I'm seeing in our planning is it takes a transactional or incremental approach rather than adopting a transformational approach. We cannot sustain the path we are on in many of our infrastructure systems—be it water/sewer, transit, freeways, parks, etc. Yet we draft these plans with all sorts of "happy talk" rhetoric on how we will get the infrastructure done. Then we tend to spread money around like peanut butter—and in doing so we fail to complete significant improvements. So we must revise our infrastructure plans to be more strategic and realistic—and actually follow them.

Finally, when implementing infrastructure projects (building a road or installing a sewer trunk) the city has an abysmal record of project management. As we move to more contracted services and the dawn of the "multi-sector workforce," we have to upgrade and overhaul our internal contract management functions. It is the most important investment we can make in an internal function of government outside of our human resources function. We also need to convert our contract vehicles to more accountable ones—using design-build, fixed price, and performance-based contracts. Finally, we must end the practice of using government contracts in infrastructure to manipulate labor rates in the market—prevailing wage, living wage, project labor agreements, etc. The federal and state government should be involved in labor rates, not the city. The city should be focused on its role: providing community infrastructure.

Moore: I did not expect one of the top three to be an environmental issue. Most Republicans aren't exactly known as environmentalists. What are your solutions for the environmental challenges?

DeMaio: First of all, I see Teddy Roosevelt as a key role model and consider myself an environmentalist. Secondly, it should be no surprise that a San Diegan wants to protect the environment. It is the core of our quality of life and it is the underpinning of our economy. If we lose the environment, we lose San Diego. I'm not about to let either happen—hence I'm an environmentalist. However I believe the best way to create a "Green City" is to harness market-based solutions. Regulations usually impose costs, but offer little improvement for environmental outcomes.

Some of the environmental issues are related to the infrastructure challenges we just spoke about. We must upgrade our water and sewer system as we have 100-year-old pipes bursting virtually every week. That's an infrastructure management challenge and frankly it is my top environmental priority. We can have a huge impact on water quality and protecting our beaches and bays if we get that system back-on-track. Our landfill is almost full. Right now the city is turning to regulations to mandate recycling to address that problem. Instead of regulating, why not provide incentives? If people have a financial incentive to reduce their throw, they will recycle. That will require a change in how we manage the entire waste management system for the city and I'm currently examining different models used by cities across the country to put together a proposal.

On energy and water, I see those two issues as linked—19% of the state's energy consumption is due to moving water throughout the state. If we find a way to address water, we make big gains on energy conservation. Outside of local conservation measures and more aggressive use of recycled water for irrigation, the city will not be able to address that challenge without a partnership with the state and federal government. I want to get San Diego as a leader in organizing a comprehensive water-energy proposal that would benefit not just our city, but the state as a whole.

Moore: In each of these areas, you're clearly challenging the status quo and proposing big reforms. Based on your work nationally and what you're finding locally, what do you think is the key to success at making major changes in a government setting?

DeMaio: You make change happen by clearly defining the problem for the public and by articulating real solutions that have been proven elsewhere. You need BOTH of those ingredients. Too often we rush to a solution before the public is even aware of the problem. Sometimes a leader's job is to speak truth to power—let the public know what is really going on.

On solutions, it is not enough to adopt a piece of legislation or enact a policy. Execution is everything. Anyone who has run a complex business understands this. If you don't implement properly, change does not happen. Politicians don't like the execution phase of change. They like to pass bills and make proclamations, but the real challenge is in implementation. That requires getting political leaders that actually know what it takes to manage an enterprise of human beings. Humans are the most change-resistant animals on the planet.

What I find is people change when they see success. I advise political leaders to get early wins under their belt to build credibility with the workforce and with the public. Once a reform is succeeding, others start adopting it. People like to copy success. Same is true even in the most change-resistant government bureaucracy. Start with a reform in one department (say Libraries or Park and Recreation) and once it shows success approach the directors of the other departments and sell them. Once a reform is implemented, a political leader has more political capital to spend on a new reform. And the change process can continue to build. If you don't implement that first reform properly, then you get no more political capital to spend and change is stymied.

The other key ingredient is human capital. You have to have a stellar management team—you cannot have any weak links. You also have to engage the workforce and aggressively communicate and reward. A political leader tends to see career staff as underlings—so much so that there is a big cultural divide between the political staff and career staff. Career staff have to respect their political leader and they have to speak the same language. If your human capital is allocated to support change, you'll get change.

Moore: So you're saying the antidote to the city's problems and the way to amass political support is to be really good at management. How can you balance the political and managerial roles as an elected official?

DeMaio: Yes, actually. The public is desperately looking for "good government." I think being a good manager makes for good politics. But you have to go into it not worrying about the politics. In fact, as I'm going around our city campaigning, I'm describing what we are trying to do as a bit of an "experiment." The experiment is this: How much change can you achieve if you don't worry about the political consequence of the solutions you are trying to implement?

Moore: Your brand as a reformer and your populist approaches have led to an unusual mix of supporters—I've noticed a number of key Democrats supporting you in addition to your Republican base. But you also have attracted the ire of the municipal labor unions. They tend to have a lot of power. Will their opposition be a problem?

DeMaio: I think the unions are afraid of change. They benefited from the old system—it's all they know. I don't think what we are proposing is anti-union. For the reasons I outlined earlier when I talked about the importance of human capital, I do think the agenda we are proposing is very pro-employee. That would probably surprise some of the union leaders here in San Diego. In making proposals, I'm very much looking to maximize the success of every city worker. That's what a good leader should do—look out for the well-being of their team. I want the city of San Diego to be an "employer of choice" rather than an "employer of last resort."

As we move forward with reform, my hope is to engage the unions and ask that they help be part of the solution to moving our city forward. One way is to go directly to the city workers themselves. We need to treat people with respect, engage the city workers so they feel positive and passionate again about their work, and start demonstrating success. My proposition to the unions and the city workers will be simple: we can continue down this terrible path we are on, or we can try something new. That requires both management and labor put down their weapons and actually work together for the common good.

My ultimate job, however, is to serve the best interests of the people. City government exists to serve the people, not the other way around. If we have to take things directly to the public, we can and will. The unions are free to spend their money on those campaigns and after a spirited debate we can let the people decide. I hope we end up getting the unions as our partners for turning the city around. It works best when you have labor and management working together for the public benefit.

Moore: So if you win, you have four years on the city council. Then what?

DeMaio: A vacation? Seriously, we have a lot of work ahead of us and I'm already focused on how we get the ingredients in place that we'll need to turn things around. That means getting a Mayor, City Council, and City Attorney that are all working together to advance reform in city government and complete the challenging task of restructuring the seventh largest city in the country and making it a model once again of municipal excellence.

"Clean Water Restoration Act" Would Expand Federal Powers

adrian.moore@reason.org (Adrian Moore) — Sun, 07 Oct 2007 10:44:00 EDT

...

Raising Gas Taxes Won't Fix Our Bridges

adrian.moore@reason.org (Adrian Moore) — Mon, 01 Oct 2007 16:20:00 EDT

...

The Emerging Paradigm: Financing and Managing Pennsylvania's Transportation Infrastructure and Mass Transit

Thu, 01 Mar 2007 00:00:00 EST

In November 2006, Governor Ed Rendell’s Pennsylvania Transportation Funding and Reform Commission identified a $1.7 billion annual shortfall in funding for the Commonwealth’s transportation infrastructure and mass transit services. The Commission suggested an additional $900 million for state highways and bridges, $65 million for local highways and bridges, and $700 million for mass transit is needed on an annual basis to sufficiently meet Pennsylvania’s transportation funding needs.

In order to fill this funding gap, the Commission recommended multiple tax increases, including increases in the gas (Oil Company Franchise) tax, higher license and vehicle fees, and an increase of the Realty Transfer Tax. The Commission also proposed increases in local taxes for mass transit funding, including a higher local sales tax, a higher local Earned Income Tax, or a higher local realty transfer tax.

In addition, the Commission identified $180 million in savings by improving efficiencies ($120 million in highways, $60 million in transit) and recommended the utilization of Public- Private Partnerships (P3s) in both road and transit services. P3s are a means of leveraging private capital and expertise to provide a public service.

Governor Ed Rendell delivered his fiscal year 2007-08 budget proposal to the General Assembly in February 2007 in which he proposed a new 6.17% Oil Company Gross Profits Tax (to generate $760 million in new revenue) to fund mass transit in Pennsylvania, and a possible lease of the Pennsylvania Turnpike to a private contractor to generate $965 million per annum for roads and bridges.

The decision to explore the potential lease of the Pennsylvania Turnpike represents the emergence of a new funding paradigm in transportation. Instead of relying solely on traditional revenue sources—gas and vehicle taxes—state and local transportation agencies are increasingly looking to supplement those sources with private investment through Public-Private Partnerships (P3s). P3s can build new infrastructure, maintain existing infrastructure, and operate existing services, particularly mass transit.

The Emerging Paradigm explores these options for funding and managing Pennsylvania’s transportation infrastructure and mass transit services by considering the P3 experiences of other states and cities. For example, in 2005, leases of two toll roads—the 99-year lease of the 7.8-mile Chicago Skyway and the 75-year lease of the 157-mile Indiana Toll Road—garnered the City of

Chicago nearly $2 billion and the State of Indiana more than $3.8 billion. The upfront payment to Indiana is generating more than $500,000 in interest per day to fund its transportation needs without raising taxes or fees.

Pennsylvania could also utilize P3s in mass transit through “competitive contracting.” Pennsylvania’s two major public transit agencies—the Philadelphia-based Southeastern Pennsylvania Transportation Authority (SEPTA) and the Pittsburgh-based Port Authority Transit (PAT)—are facing a financial crisis. However, the crises at SEPTA and PAT are cost, not revenue-driven. Despite the fact that only 1% of all travel in Pennsylvania is done via mass transit, it receives 25% of all transportation subsidies.

American cities like San Diego, Denver, Los Angeles, San Francisco and Boston, as well as foreign cities such as London, Copenhagen, Stockholm, Melbourne and Tokyo, have successfully embraced “competitive contracting” of transit services whereby private contractors take over the operation of transit services through a contract with the government entity. The City of London has reduced bus costs by approximately 50% since 1985, and Stockholm has reduced bus, subway, and commuter rail costs approximately 20% since the early 1990s.

The experience of the City of San Diego—which has contracted out its bus system—compared to PAT is revealing. If SEPTA would have controlled costs as well as the San Diego Transit Bus System, the 2002 operating costs would have been 57.8% lower ($432.5 million less). And if PAT would have controlled costs as well as the San Diego Transit Bus System, the 2002 operating costs would have been 62% lower ($167.9 million less).

The Emerging Paradigm also explores additional opportunities for P3 utilization in transportation. The report concludes with a discussion about the benefits of P3s and addresses the common concerns about Public-Private Partnerships.

Governor's Rose-Colored Glasses Tint the Budget

Wed, 07 Feb 2007 16:12:00 EST

California Political News

As the details emerge on California Gov. Arnold Schwarzenegger's proposed budget, you might have the impression that the fiscal affairs of the golden state are once again in order that the river of red ink, deficits off into the foreseeable future has all but evaporated. Sadly, this couldn't be farther from the truth.

Certainly the governor does deserve some credit for his latest budget. For instance, Schwarzenegger's plan includes changes to state welfare payments similar to successful federal welfare reforms. His budget also honors the public's desire to see sales taxes on gasoline purchases directed toward improving our roads and puts on indefinite hold a massive general obligation bond to construct a questionable high-speed rail system.

But beyond that the budget begins to enter a sort of fantasy world characterized by rosy assumptions, undue optimism, and an utter disregard for the reform agenda that propelled him into office.

Fiscal conservatives are facing the sad truth that the governor they supported has actually increased state spending more than the governor they ousted. Since Schwarzenegger assumed office, general fund spending has increased by an astonishing 31 percent. As Sen. Tom McClintock reports, Schwarzenegger's annual rate of spending increase has been 7.9% compared with Davis' 7.1%. On top of that, the state's debt service, the percentage of the state budget dedicated to just paying off debt, will increase to 8 percent next year, up from 3 percent only three years ago, and will ratchet up more in coming years as more bonds are approved.

A good starting point for a budget is balancing expected revenue changes with expected expenditure changes. Rose-colored glasses are all the rage in Sacramento these days, and the proposed budget relies on optimistic revenue projections rather than confronting increasing spending. With payments on the state debt increasing dramatically, a smart budget would look to match that increase with billions in cuts to match. The last decade of state budgets have taught us that revenue growth simply won't keep up with a spendthrift legislature.

But the raw numbers do not tell the entire story of this budget proposal, which is laced with optimistic projections about future revenues. For instance, the Schwarzenegger's budget is built upon rosy revenue assumptions that have already begun to unravel.

Recent tax revenue numbers reveal that personal income tax payments are already a billion lower than what was anticipated in crafting the budget plan. These personal income tax figures are often seen as a harbinger of things to come at the April tax filing deadline and led Legislative Analyst Elizabeth Hill to call the news "an early warning sign that we want to be really cautious."

Not only does the budget not heed this caution, but the governor's budget also makes a number of other optimistic assumptions about state revenues. For one, Schwarzenegger is already banking on $500 million if the legislature approves a series of compacts that he has negotiated to expand gaming at Indian Casinos in Southern California. This proposal, which would allow Indian-operated casinos to add 22,500 new slot machines to their facilities for a share of the revenue, has been greeted by skepticism. The Legislative Analyst's Office has cautioned that little supporting evidence has been provided by the administration to justify this revenue estimate and the question remains if the legislature will even adopt the compacts.

Similarly, Schwarzenegger's budget assumes that the state will be able to pay some of its obligations to fund the state public employee pension system with a $500 million pension obligation bond that has been mired in court battles since the governor took office in 2003. There is no sign that the courts will reverse their opinion that such a bond is unconstitutional without a vote of the public.

In an unrelated court battle, the governor's budget also assumes a reversal of court decisions that mandated a cost of living increase in the Cal-Works Program. This decision, due in February, could cost the state another $530 million. Combined, Schwarzenegger's budget is banking on more than $1 billion in budget solutions that are wholly dependent on court action and where prospects for victory look dim at best.

But the governor's budget also suffers from the same misstep that Sacramento routinely commits in the annual budget process.

Put simply, California revenues are incredibly volatile particularly from personal income taxes, and lawmakers from both parties find it terribly uncomfortable to acknowledge this volatility.

In December, the so-called "Taxpayer X" surprised the state with a $200 million tax payment yes from one individual taxpayer and this single payment was credited with helping the state's revenue projections to stay on track. A month later, personal income tax revenues are down to the tune of a billion dollars below projections.

What these two unrelated stories should tell us is that we tend to underestimate the fluctuations in state revenues. Bad years tend to be worse than we thought and good years tend to be better, as we saw last year with an influx of $8 billion in unanticipated revenue. Instead of trying to learn from this volatility and tamping down on spending, Sacramento produces a budget, year after year, that can't cope with a decline in revenue.

Faced with such volatility, Schwarzenegger ought to produce a budget that doesn't hope against hope that elusive revenues will materialize or that court decisions will suddenly go his way. Instead, he should be prepared to budget, assuming that none of this revenue will arrive. How different that picture would look.

Ultimately, we elected Schwarzenegger to make tough choices and lead change something that a chief executive is expected to do. That means turning a critical eye to how the state spends its money and demanding results.

When the governor commissioned his comprehensive California Performance Review in 2004, we thought we were getting a results-driven governor. 2,000 pages later, you could literally count on one hand the number of major CPR initiatives that have actually been pursued and none have been the big money saving exercises including selling unneeded state assets, realigning the bureaucracy to cope with the expected wave of state worker retirements (doing more with less), or eliminating unneeded boards, commissions and sundry other state entities.

Over the past few years, Schwarzenegger has learned that reforming a state government as large as California's is very difficult. And it appears he has become content to commit the same crime of pushing problems off into the future with a flurry of new state borrowing, overly optimistic budgets, and a disregard for the painful reality that California will eventually face a downturn in the business cycle. When it does the pain will certainly be more pronounced than anyone in Sacramento is prepared to admit.

George Passantino is a partner in Passantino Andersen Communications and a Senior Fellow at Reason Foundation. An archive of his work is here. Dr. Adrian Moore is Vice President of Research at Reason Foundation. An archive of his work is here. Reason's California research and commentary is here. This column first appeared at CAPoliticalNews.com.

Shorter Commute Matters Most

adrian.moore@reason.org (Adrian Moore) — Sun, 26 Nov 2006 00:00:00 EST

Atlanta Journal-Constitution

Responses to "Anti-transit ideology a bad reason for plan," @issue, Nov. 19

Jay Bookman accuses the Reason Foundation of being ideologically opposed to transit. Reason is ideologically opposed to pork and wasting taxpayer money on ineffective projects. Show us a cost-effective light rail system carrying enough riders to pay for itself, and we'll support it.

The Reason Foundation's Atlanta transportation plan actually calls for extensive bus rapid transit, the most efficient transit system. More importantly, Bookman does not challenge the most crucial aspect of our plan — it would significantly reduce commute times.

Instead of trying to paint the State Road and Tollway Authority, the Department of Transportation board, the Georgia Regional Transportation Authority and Reason as some grassy-knoll conspiracy, compare the transportation strategies on their merits. Reason's plan will reduce congestion. It's been acknowledged that the existing plan will let gridlock grow exponentially. I guess that makes Reason ideologically opposed to wasting time in traffic jams. I'm betting most Atlantans share that ideology.

Adrian Moore is vice president of the Reason Foundation. Reason's analysis of Atlanta's transportation system is here and our transportation research and commentary is here.

Undermining the Future

Fri, 01 Sep 2006 00:00:00 EDT

Executive Summary

California needs to invest in infrastructure, but the five bond initiatives on the November ballot would authorize $42.65 billion in new debt, with annual debt service payments of $2.8 billion, and a total cost to taxpayers of approximately $84 billion, while delivering a lot of pork and little new infrastructure.

The state budget is once again in the red as spending growth outstrips even our healthy revenue growth. At the same time the state is already sitting on a record-breaking mountain of debt that is making borrowing money more expensive and raising debt payment amounts to levels far beyond what is fiscally responsible. The vast new debt we will vote on in November would create tremendous pressure for new taxes. There is no sign that the state’s leaders will reverse course and begin managing spending as debt payments rise.

Forty-five years ago nearly 60 percent of the budget for capital projects came from general and special funds. Currently, almost all state capital improvements are financed with debt. We do not have to put up with this trend. Californians need to take a hard look at the details of the bond proposals provided here before they vote, and consider the many and realistic alternative means of meeting our infrastructure needs.

Addressing California's Transportation Needs

Fri, 01 Sep 2006 00:00:00 EDT

Executive Summary

California’s population is projected to reach 48 million by 2030, an increase of 11 million people. The majority of this growth will occur in the state’s three major urban regions (Los Angeles, San Francisco, and San Diego). Vehicle miles traveled by individuals will increase by 30 to 50 percent in these regions, with truck traffic growing even faster, especially in greater Los Angeles. Yet California’s urban freeway systems are already nearing capacity, with pervasive congestion during ever-lengthening peak periods.

By 2030, if current long-range transportation plans are implemented, congestion in the three largest urban areas will be much worse than today’s already intolerable levels. The Los Angeles metro area already leads the nation in congestion, with the Bay Area ranking fourth. To eliminate the most severe congestion requires adding enough highway capacity to more than keep pace with projected growth in vehicle travel. A recent Reason Foundation study projects that between now and 2030, California would need to add 13,132 new lane-miles to do this. That amount of new capacity would cost $122 billion, or about $5 billion per year over 25 years.

While these are not small numbers in any sense, they are reasonable in the grand scheme of transportation spending. In response to this growing crisis, California’s leaders have offered a dismal response.

Proposition 1B, the Highway Safety, Traffic Reduction, Air Quality, and Port Security Bond Act of 2006, would authorize more than $19.9 billion in General Obligation debt, with an annual debt service of $1.3 billion and a total cost to taxpayers of approximately $38.9 billion. The funds would be spent as follows:

$4.5 billion to congested highway capacity projects
$2 billion to highways, local roads and public transit systems
$2 billion to local roads
$1 billion to State Route 99 through the Central Valley
$1.75 billion to local transportation projects and to state highways.
$4 billion to capital projects for local transit systems and intercity rail systems.
$2 billion to goods movement via ports, highways and rail
$1.2 billion to reduce air emissions and replace/retrofit old school buses.
$1.1 billion to security and disaster response on transit systems and in publicly owned ports and harbors
$325 million to railroad crossings and to retrofit local bridges and overpasses

While that is an impressive looking list and it would seem that $19.9 billion could make a substantial improvement to the state’s transportation system, only a limited portion of this money will be used to invest in new infrastructure, and an even smaller portion for new roads and highways. Most funds may go to ongoing maintenance and rehabilitation and to other noninfrastructure uses such as retrofitting buses or improving security on local transit systems. And since most of the money will be apportioned by the legislature if Proposition 1B is approved, we should expect plenty of it to go to local pork barrel projects.

This attention to California’s transportation infrastructure is overdue, but good intentions and recognition of the problem alone do not make good public policy. In reality, this bond proposal is an easy way for California’s leaders to look as if they’re addressing the congestion problem while passing the buck on to future generations and making very little in the way of real long-term improvement.

Californians recognize these doubts. In spite of the overwhelming support for the bond among state leaders and groups like AAA, the Chamber of Commerce, etc., the latest PPIC survey shows only 50 percent of likely voters say they would vote yes on Proposition 1B if the election were held today.

Even more damning is an innovative survey conducted by researchers from San Jose State University and Portland State University as a project for the Mineta Transportation Institute at San Jose State University. They surveyed Californians on different ways to fund transportation projects, and their question about using general obligation bonds like that of Proposition 1B explained that “paying off the bonds from the state’s general fund over 30 years would use money that otherwise might be spent for other state programs and services.” With that reality included, only 29.9 percent of those surveyed said they would support using general obligation bonds like Proposition 1B.

Fundamental problems with the approach of Proposition 1B include:

Roads should be funded by user fees. General obligation bonds paid out of general tax revenues require many Californians to pay for roads they will never use and don’t need. Gasoline taxes at least come close to relating how much you pay to how much you use the system. The use of direct fees—tolls—to pay for many new roads and lanes is increasingly popular with drivers and makes the most economic sense. Gas tax funds could then focus on roads that cannot be toll funded.
Proposition 1B is a drop in the bucket that would decrease momentum for long-term solutions. Many argue that something is better than nothing, but based on impact, 1B would be very close to doing nothing. The bond will not provide congestion relief on interstate freeways. A portion of the funds would be unavailable to the most of the state— $1 billion is devoted specifically to State Route 99. An unknown portion of a $2 billion component of the bond devoted to traffic safety and congestion relief may be spent on public transit. But conventional transit is unlikely to offer much in the way of congestion relief and Proposition 1B’s passage would not change that reality. If the bond passes many will be satisfied that “something” has been done about transportation when what we really need is a radical overhaul of California’s approach to transportation infrastructure.
Essential infrastructure ought to be a priority for general revenue funding. By allowing the legislature to bond for essential infrastructure, taxpayers remove the pressure on the legislature to prioritize the general budget. In 1960-1961 bonds accounted for only 16 percent of infrastructure funding, but by 2002-2003 the figure had grown to 76 percent. Voters have approved bond after bond, and yet here we are again. An expert panel assembled by USC’s Keston Institute “believes that the Department of Finance is singling out transportation to pay a disproportionate share of the General Fund deficit.” This bond would allow our leaders to lean on the crutch of borrowing yet again and continue their habit of shortchanging transportation in the general fund.
Proposition 1B allows poor prioritization to continue. State leaders and local MPOs have refused to make cutting congestion a priority. Officials hope to slow congestion’s rate of growth, but they fully expect conditions to grow much worse in the future. Policymakers claim they simply do not have the money to actually make conditions better, but that is not the case. The MPOs for our state’s three largest regions (Los Angeles, San Francisco, San Diego) plan to spend $265 billion over the next couple of decades, but the majority will go toward transit, not toward reducing congestion on our roads. Our MPOs do have the money necessary to actually reduce congestion by 2030.

Los Angeles plans to spend 58 percent of transportation funds on transit. Devoting the same percentage to expanding capacity would eliminate gridlock by 2030.

San Francisco plans to spend 64 percent of transportation funds on transit. Devoting just 25 percent of planned funds to expanding capacity would eliminate gridlock by 2030.

San Diego plans to spend 49 percent of transportation funds on transit. Devoting just 24 percent of planned funds to expanding capacity would eliminate gridlock by 2030.

California’s bonded indebtedness is already at record levels. The state issued 2.5 times as much debt in FY 2005-06 as it did in FY 1995-96, and over 10.5 times as much as in FY 1985-86. We have already authorized the state to go nearly $80 billion in debt. It is fiscally risky to increase the state’s level of debt by the amount proposed in this and the other bond measures on the November ballot.

There are three main parts to the way California ought to be approaching our transportation infrastructure needs.

First, make better use of current funds. Proposition 1B is a pork-laden mess and much less than half the money will go to projects that will relieve congestion. That is typical of our transportation spending. While transit is important and needs appropriate funding, current spending plans allocate very disproportionate funds to transit. The three largest metro areas plan to spend about $154 billion on transit over the next 25 years, vs. $109 billion on roads, and most of the road money will go to maintenance and upgrades, not new capacity. If even one-third of the money going to transit were shifted to roads we could get three to five times more congestion relief than Proposition 1B will accomplish.

Second, give transportation its share of the budget. We used to devote a reasonable share of the general fund to transportation infrastructure. Now, even though the state budget has grown considerably, we don't devote the same share of general fund revenue to infrastructure that we used to. If Proposition 1B passes, we will pay $38.9 billion to get less than $20 billion in current funds for projects, and we’ll be paying for that with about $1.33 billion each year out of the general fund. It makes more sense to take a responsible look at our bloated budget and cut less essential spending so that we could allocate about $4-5 billion per year out of the general fund for what is surely one of the most core functions of the state. Some bonding for large infrastructure investments might still be good policy, but prioritizing spending of the revenue we have should come first. We have plenty of good examples of such an approach. Nineteen counties in California have put in place local sales taxes for local transportation funding and used them to combine pay-as-you-go financing with bonding.

Third, California is falling far short of making full use of public-private partnerships for transportation projects. We are far behind states like Virginia, Massachusetts, and Florida in outsourcing highway maintenance, which would free up gas tax funds to help fund new road projects. More importantly, the private sector would happily invest capital in providing major new highway projects. If we aggressively pursued PPPs and tolled some of the new facilities and lanes added, private capital could fund at least 25 percent of what the bond could do if all the bond funds were spent on roads.

We recommend improving an existing public-private partnership law to incorporate state-of-the-art learning on this issue. The legislation would authorize both CalTrans and other levels of government (cities, counties, joint powers authorities, etc.) to initiate toll-funded transportation infrastructure projects, and permit them to partner with the private sector to carry out such projects, using both RFPs and procedures for dealing with unsolicited proposals. The appropriate approval process would occur within the responsible government entity (the MPO, or CalTrans, for example). This would enable California to enter the global capital markets, as well as tap worldclass expertise for modernizing its vitally important highway system. With the private sector to provide investment for these large-scale projects, scarce public money can be spent on things only the public sector can do.

The Bond Propositions on California's November Ballot

adrian.moore@reason.org (Adrian Moore) — Fri, 01 Sep 2006 00:00:00 EDT

Summary

California voters face a very important financial decision this November. Should we borrow up to $42.65 billion to fund a large number of transportation, housing, schools, water, and flood protection projects? If approved, the five bond measures on the November ballot (Propositions 1B, 1C, 1D, 1E, and 84) would add a total of about $84 billion in debt and interest that would have to be repaid from the state’s general fund over the next 30 years. Here we explain where the borrowed funds for each of these five propositions would be spent, and summarize the arguments of those in favor and against the proposals.

The Mobility Mission

adrian.moore@reason.org (Adrian Moore) — Thu, 29 Jun 2006 00:00:00 EDT

It's an old story, and often told, that President Eisenhower was inspired to create the Interstate Highway System after it took two months for his World War I military convoy to drive across country. Here on the 50th anniversary of the Interstate, it�s worth examining the real lesson of that story.

Though Eisenhower was focused on military travel, he was effectively saying "mobility in America stinks, and that is unacceptable." The solution was to build a system that connected the nation with enough highway capacity to allow people and goods to move smoothly — whatever the reason, be it military planning, fun, or profit.

We are at a similar crossroads today. Thanks to congestion, mobility in urban America stinks, and it is unacceptable. A key legacy of outgoing Transportation Secretary Norman Mineta will be the major initiative he announced in May to tackle urban congestion. He declared that congestion costs Americans a stunning $200 billion per year. That cost includes obvious and not so obvious factors such as:

The value of people's time spent stuck in traffic;
The wasted gasoline cars burn due to congestion;
Lost productivity due to delayed commutes and late freight shipments;
The cost of unreliability, like time wasted arriving early for meetings or appointments because traffic wasn't as bad as feared;
Lost value of cargo from delays in shipping;
Deaths, injuries and property damage due to accidents caused by congestion, and due to congestion slowing down emergency vehicles; and
Environmental costs due to higher emissions and other impacts of cars idling in traffic.

Think about who gets stuck in traffic besides commuters. The delivery people on their way to a dropoff; the cement truck drivers on their way to a job site; the plumbers, landscapers, sales reps, and many others who have to drive from job to job each day. The more time they spend in traffic rather than being where their customers are, the more they have to charge each customer. It adds up.

And the same even goes for people who don't have to travel around all day on the job. Research shows that people in cities are more productive than in suburban or rural areas. That productivity results from their more frequent interactions with each other, and congestion reduces interactions and productivity. American economic productivity — our big advantage in the global economy — is being undermined by congestion.

Think of yourself at a point on a map of a major city. You could draw a circle that would show how far you could drive in 30 minutes — which is about the lengthiest trip most people are willing to take for jobs and entertainment. Congestion makes this opportunity circle smaller. That means each employer has fewer workers from which to choose, and each worker chooses among fewer jobs. And we need more ambulances, delivery people, landscapers and plumbers to meet people's needs.

At the same time, the shrinking opportunity circle caused by congestion chokes cities' cultural and social lives. More congestion means fewer people are willing to make the trip to see a symphony, an art show, a street fair, or a new band playing at a cool club. As more people meet through online matching services, we can see how often distance is a criteria in determining who we date. Few people are willing to date someone who lives more than five or so miles away because getting together through traffic is just too hard.

Building the Interstates was not without expense, challenge or harm. But the benefits are incalculable: mobility has been a cornerstone of our culture and our economy. It is time we remember the real lesson of the story of the creation of the Interstate system. We need to build enough new road capacity in urban areas so that congestion does not choke our economy and our lives.

And yes, it has to be roads. Even as we invest more in public transit, cars and telecommuting are the only ways of getting to work that have actually increased in recent years. Cars are how Americans prefer to travel - and wishing otherwise will not change that. Outside of New York and Chicago, cars carry 90 percent or more of all travelers. But we spend far less than 90 percent of cities' transportation funds on highways. In fact, 11 of our largest cities spend less than 50 percent of their transportation funds on highways! Ranging from Boston spending 9 percent of transportation funds on highways to Seattle's 49 percent, the list includes San Jose, Salt Lake City, Charlotte, San Diego, Miami, San Francisco, Philadelphia, D.C., and Los Angeles.

In effect, these cities, and others that spend too little on highways, are choosing worse congestion for their residents and businesses. They are choosing failure and a slow death for their cities. Enough transportation funding currently exists to build some new highway capacity in all urban areas. Even more promising, a large and quickly growing amount of private capital is available to invest in new road networks in cities. Together with better management of existing roads, those investments can eliminate congestion as a factor that limits the economic and cultural vitality of our urban areas.

But first things first: As our Interstate system turns 50, it is time for citizens, business owners, political leaders, and transportation planners to stop tolerating poor mobility and to learn the lesson that traffic congestion is unacceptable.

Adrian Moore is vice president of research at Reason Foundation. An archive of his work is here and Reason's transportation research and commentary is here.

Post-Kelo Reforms Aren't Strong Enough

adrian.moore@reason.org (Adrian Moore) — Fri, 23 Jun 2006 00:00:00 EDT

A year ago, the U.S. Supreme Court's Kelo decision on eminent domain created two diametrically opposite reactions. On one hand, many local government officials rejoiced at the affirmation of what they feel is a necessary tool to reshape their communities. On the other hand, people everywhere grew so outraged by the decision that it could be "one of the best things that ever happened to the national property rights movement," as Reason's Len Gilroy wrote.

This divide has reinforced the fact that the Kelo decision threw the issue of eminent domain back to the states. The fight over where, when and how eminent domain can be used is now mostly a local fight, spilling from state houses down to inner city and suburban neighborhoods and even to rural areas.

Most state legislatures responded to Kelo by considering some form of eminent domain reform legislation. But what looked like a firestorm at first, soon fizzled out. As Harvard Professor David Barron described in the Boston Globe, most states did not actually pass legislation. And what did pass often had loopholes big enough to shove a Home Depot through.

It turns out that city and county governments and redevelopment authorities are pretty effective lobbyists. They managed to retain significant authority to use eminent domain and define limits in very subjective terms. As Barron wrote:

Americans have long been of two minds when it comes to property rights. On the one hand, there is the old notion that ownership is inviolable, a home is a castle, and the government has no business messing with private property. On the other hand, there is the equally old notion that no one is an island and that the value in any individual's property is deeply interconnected with the health of the community as a whole.

In a world where legislators and much of the public have gone squishy on what constitutes a right, passing a law that just plain says, "look, you can't take someone's land except on rare occasion for public infrastructure projects like roads and dams" appears just too extreme.

There is a conflict of visions. As one city manager told me, "What about the community's right to improve itself and create new jobs?" There is a reason the Constitution doesn't mention "community rights"—they don't exist. Only individuals have rights. Communities have desires.

Local officials' grand redevelopment schemes emanate from a vision in which community needs trump individual ones — on everything from public safety to how a privately-owned building should be used.

That is why the loopholes Barron described are so pernicious. It may seem reasonable to allow eminent domain to deal with "blight," because we all picture scenes of the worst of inner city Detroit—burnt out shells of buildings and empty lots piled high with trash—when we think of blight. But in fact, blight is in the eye of the beholder. Everything from an empty desert to a row of successful businesses to a neighborhood of modest but clean homes has been declared "blight" by people who have an alternative vision of how their community should look.

This is all the more reason to acknowledge those legislatures and local governments that did pass rules limiting eminent domain abuse in the aftermath of Kelo.

But with a resurgent property rights movement out there, the issue isn't going away. I expect there will be more high profile suits like Kelo and more local interest in cases of outrageous eminent domain abuse. Kelo brought the issue out into the light of day. Local officials can no longer exercise eminent domain on the q-t without anyone noticing.

And Kelo has brought us back to a fundamental question: Is a property right in fact a right that the system will protect—even when it's most inconvenient to do so?

Adrian Moore is vice president of research at Reason Foundation. An archive of his work is here and Reason's eminent domain research and commentary is here.

Timeline of Municipal Broadband and Technological Developments

steven.titch@reason.org (Steven Titch) adrian.moore@reason.org (Adrian Moore) — Tue, 18 Apr 2006 11:48:00 EDT

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