Infrastructure, Yes! Mega-debt, No!

Massive bond isn't answer to California's troubles

There is no doubt that California’s infrastructure is crumbling and in dire need of repair. In the latest analysis by the Texas Transportation Institute, Southland motorists waste more than 407 million gallons of gas because of traffic congestion. The levee failures in New Orleans remind us of vulnerability to flooding in the Central Valley and Sacramento. And California’s existing water supplies and conveyance systems are insufficient for the state’s rapidly growing population, which is expected to grow by about 16 million people over th! e next 25 years.

With these conditions, it is no surprise that Gov. Arnold Schwarzenegger and legislative leaders are talking about a massive infrastructure revitalization effort in 2006. Unfortunately, embedded in this discussion is chatter about a gargantuan general obligation bond to fund infrastructure improvements—a bond so large it would dwarf all others.

While there is no firm dollar figure for the bond proposal yet, many have pegged it at $50 billion and some have suggested that it may be as high as $100 billion in new borrowing. For a state still suffering under a structural deficit in the billions of dollars, this bond proposal is a bad deal for taxpayers, a bad deal for the infrastructure goals the Governor has set, and a bad deal for the Governor’s hopes of reforming state government.

To taxpayers, the thought of shelling out $100 or more in principal and interest on new debt should be very troubling. California already spends more on debt service than it does on the state UC system or the courts. Adding more debt would be akin to the family that continues to fill out credit card applications that come in the mail, even as they are already upside down with other debt and expenses. Besides, having more credit cards means a lower credit rating and higher interest rates. The same holds true for California, which already has the lowest credit rating in the nation.

And while transportation stakeholders, water users, and other hopefuls line up to get their piece of the action, it is doubtful that a general obligation bond will deliver the most bang for the buck. The bond would violate a fundamental principle of infrastructure finance—the —user pays— principle. This principle isn’t just a catch phrase of free market economists—it is a great protector of the taxpayer and state alike.

The Bay Area, with its political clout, will no doubt secure a generous portion of the bond funding, likely leaving other areas of the state on the giving end of the transaction.

In places like the Central Valley, where levee improvements are needed and could be funded through the bond, people that wisely built outside of flood plains will be paying for the flood protection of those that chose differently. Even in an effort to divvy up the resources fairly across the state (in what can be called the —manure strategy— of spreading it around) there will ultimately be winners and losers.

Fortunately, there are many ways to fund critical infrastructure improvements without burdening the entire state. For instance, rather than asking mountain residents to pay for levee protection in the lowlands, those protected by the levees should shoulder the costs. In the realm of transportation, a growing chorus of voices has called for public-private partnerships where motorists (such as long-haul truckers that could save significant time and money by avoiding traffic) pay to use privately financed facilities. The Governor was among these voices.

Taking such steps, rather than floating a general obligation bond, would dramatically improve the state’s credit position and help ensure that infrastructure users actually get what they are paying for (and pay for what they are getting).

Finally, giving Sacramento politicians so much money to dole out without clear market signals or well-defined priorities would only invite the very reckless spending and pork-barrel politics the Governor pledged to “blow up.”

If he thought it was difficult to reform Sacramento this year, give the capital crowd another $100 billion to play with, where they become everybody’s best friend, and the task because virtually impossible.

Just as a grocery store owner wouldn’t ask the alley-way drug addict to take the store’s money bag to the bank, asking Sacramento to take this bag of money anywhere is a fiscal disaster waiting to happen. The Governor has become fond of speaking about Sacramento’s spending addiction. How does giving them another $100 billion help?

No doubt, California faces an infrastructure crisis that is only growing with time. And the Governor should be applauded for recognizing the need for action. Even still, taxpayers should look skeptically on this latest proposal to pile more debt on the shoulders of taxpayers.

Given his desire to restore fiscal discipline, Governor Schwarzenegger should lead the charge to replace this proposal with more market-friendly proposals like public-private partnerships, user-pays strategies, and localized approaches. Doing so would not deliver the governor a Pat Brown legacy—it would create a more modern legacy that tackles the growing infrastructure crisis without soaking the taxpayers.

George Passantino is a Senior Fellow at Reason Foundation. In 2004, Passantino served as a director of Governor Arnold Schwarzenegger’s California Performance Review.