Originally posted at Fox & Hounds.
By Loren Kaye

Modern and reliable public works are key to California’s economic growth. Indeed, few activities by state and local governments can be more helpful to economic development than ongoing maintenance and expansion of the public infrastructure: roads, water facilities and sewers, and public buildings for schools, colleges, courthouses and jails. (This doesn’t include the privately-financed and operated but publicly regulated telecom and energy networks.)

State and local agencies spend billions every year on infrastructure, but population growth plus the age of the existing system, minus tight budgets and tax fatigue, equals an increasing gap between the legitimate need for new facilities and the revenues available to provide them.

Infrastructure isn’t exciting: we expect clean water to flow from the tap and a smooth road to school or work. But, inexorably, the condition and value of our current stock of public facilities is eroding. Instead of providing a competitive advantage for economic development, our infrastructure will become a drag on growth.

The solution – easier said than done – is to carefully assess the public works needs of the state over a reasonable time horizon, establish the most likely and appropriate funding sources, determine where technological and regulatory efficiencies can provide more bang for the buck, and conclude by deciding where and how additional revenues, if any, should be raised to fill the gap.

Unfortunately, instead of meeting this issue head-on, the Legislature is showing signs of backing into a non-strategy.

Smitten with the prospect of passing constitutional amendments with their respective supermajorities, the Assembly and the Senate between them are moving seven measures to lower local vote requirements for numerous local taxes, including several that could finance infrastructure improvements.

Three of the proposals (ACA 3ACA 8 and SCA 7) would reduce the vote requirement to pass local general obligation bonds (backed by a property tax increase) from two-thirds to 55 percent, targeting a variety of functions. Two measures  (SCA 4 and SCA 8) would allow voters to increase “special taxes” for transportation purposes by a 55% threshold. These measures would permit, for example, increased sales or parcel taxes to finance debt for transportation projects.

Two other proposals, SCA 9 and SCA 11, as well as ACA 3, would reduce the vote threshold for special taxes for operating revenues for various programs.

To be sure, there may be a case for lowering a local vote threshold for one or another tax to pay for local infrastructure, if the need is established and the tax is fair. But there are at least three reasons these active measures should all be rejected.

  • First, members of the Legislature are proposing solutions before articulating the problem. Indeed, the Legislative approach seems to be oriented more to what mix of tax proposals could win at next November’s ballot, as opposed to what is the right approach financially and economically to finance critical infrastructure. First things first: the Legislature and Governor should undertake serious strategic planning to determine how best to finance state and local infrastructure needs overall. That is, analyze and decide which public works projects are most appropriately financed using which revenue mechanisms, what are the financing gaps, and who should be responsible for the financing.

The Governor hinted at this approach in his January budget when he committed to releasing the 2013 Five-Year Infrastructure Plan later this year. The Administration’s stated objective is to lay out state infrastructure priorities and wean some of these programs from general obligation bonds. The new Transportation Agency, under the leadership of Secretary Brian Kelley, is already engaged in this task. Given how closely tied is the state-local fiscal relationship on infrastructure finance and projects, it only makes sense to consider these issues together, rather than looking at taxes and vote requirements ad hoc in individual bills.

  • Second, it is far from clear if the financing shortfall for public works in the state is at the local level or the state level. It would be foolish to undertake a massive new authorization for local infrastructure finance if the real needs are at the state level. A strategic plan would clarify this issue.
  • Third, no matter the need, most of these bills are either too broad or potentially discriminatory. The measures reducing the vote threshold for special taxes could levy differential taxes on homeowners, renters and businesses.

ACA 8 is even more problematic. It provides easier access to property-tax funded debt finance for any local government, even fee-supported agencies like sewer and water districts. It would create a rush to occupy the new property tax base among overlapping city, county and special district agencies. ACA 8 is the ultimate example of cart-before-the-horse infrastructure finance.

There is no question that improving our public facilities, including updating state and local financing, is a key component of an economic recovery strategy.  Bill Hauck, former president of the California Business Roundtable and board member of California Forward, recently wrote, “According to recent estimates, the state will need to invest more than $700 billion over the next decade in public facilities to serve a growing population—upgrading school and university buildings, maintaining highways and public transit systems, and making the water system adequate, reliable and sustainable.”

But our economy and our workers will not see a net benefit if new taxes are enacted without ensuring they are the most efficiently targeted and will fill the legitimate needs of new public facilities.

Loren Kaye
President of the California Foundation for Commerce and Education