By Mark Pisano.

As the population grows slower and older, governments need to anticipate slower growing revenues.

That would be problem enough, even before considering that most governments anticipate significantly increasing expenses associated with pension obligations, health care, deferred maintenance for critical infrastructure and debt. And then there’s climate change.

Balancing public budgets has never been easy, and it will soon get much harder. As described in a previous commentary, the slowdown in overall population growth, linked with an increase in the number of people reaching retirement age, is slowing economic growth – lowering consumption, overall economic activity, personal income and tax revenue to governments.

I referred to those impacts as “penalties” because the demographic trends penalize our collective ability to sustain economic growth and public services, and our individual income and consumption patterns.

The challenges for government – in its role of providing public goods – will require foundational changes to how public activities are organized, funded and managed. Two foundational opportunities are worthy of focused attention from this day forward.

The first foundational opportunity is for cities and regions to consciously grow their economic base with higher value-added activities and higher incomes across its entire population.

California’s distinct regional economies are already well down the path of pursuing strategies tailored to their regional assets and advantages. The remarkable progress in the Bay Area is instructive, both to the potential of innovation-based economies and the requirement for continuous reinvention.

While California as a whole has thrived for decades, prosperity has always been uneven across regions and within communities. The demographic and other trends will likely accentuate those dynamics and increase economic vulnerabilities.

The California Economic Summit is premised on the need for regions to develop their own strategies and for state policies to be aligned to support both common and distinct regional needs. The fiscal pressures of the future will require that structure to be more explicit.

Michael Storpers’ book on why some regions succeed and others do not could provide additional insights for this process (The Rise and Fall of Urban Economies: Lessons from San Francisco and Los Angeles. Stanford University Press). He observes the importance of reciprocal regional networks among capital, technology and innovation.

Building the economic base calls for a relentless focus on systemic strategies to increase regional aggregate demand and new cutting edge products, which will increase the income and tax revenues of the region.

A second priority will be developing funding and governance mechanisms needed to support the built and natural environment, and capturing some of that value in the growing economic base to pay for public goods.

The Economic Summit and other partners in the state worked with Governor Brown and the Legislature to give local government agencies the authority they need to pursue a different funding paradigm: the Public Financing Authority Boards of Enhanced Infrastructure Financing Districts.

These financing districts represent a new paradigm. Historically infrastructure was capital intensive, centralized and controlled/hierarchical – a “3-C” funding structure. But Enhanced Infrastructure Financing Districts reflect “3-D” principles: decentralized, diversified and distributed.

This authority encourages and enables local governments to partner together to develop, finance and manage projects that have multiple benefits – and thus multiple potential sources of funding.

At least one of those potential funding streams, an increment of property tax, grows with the economic base, allowing for reinvestment over time. Other potential sources can be linked to a variety of benefits derived from the projects.

Cities and counties start these authorities once investment strategies are developed to achieve public purposes. The funding streams are based on values, uses and fees that are derived from these decentralized place-based investment strategies that will increase over time. Investment strategies that have multiple uses and benefits will have multiple revenue streams.

For example, storm runoff that provides flood control as well as pollution control reductions, stream improvements that enhance the property values and water recapture, and ground water protection are all possible benefits from a program to restore the Los Angeles River, and each benefit provides a funding stream to finance the investments. The more diversified the benefits, the stronger the business plans of these authorities, especially when compared to the separated, stove-pipe programmatic approach of today. Integrated, diversified and decentralized approaches create opportunities for lower cost and financeable solutions.

Last, the legislative authorities of the PFA’s require a nexus between the fund payments and benefits derived. This distributed funding structure requires the decision-making body to intensely focus on how users will benefit from investments, not only for legal reasons but for creating dependable future revenues streams that can be used to amortized debt structures issued in financial markets.

To capture diverse funding streams, organizations will need to be structured differently. Cities and counties have the authority to appoint any public agency that is a funding partner in the investment program. New authorities are created based on investment partnering and not on shared legal authorities, making it easier to organize based on a shared purpose.

This is a bold step in public institutional design. California has prepared for the demographic penalty challenge if we are willing to use it.

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Originally posted at CA Fwd.

Mark Pisano is a professor of public administration at the University of Southern California Sol Price School of Public Policy. For 31 years, he served as executive director of the Southern California Association of Governments (SCAG), the nation’s largest regional planning agency. He is the author of The Puzzle of the American Economy, which describes how demographic transformations will place a drag on economic growth and increase stress on public budgets. This is part three of four columns on what these changes mean for California’s future.