Richard G. Little, AICP

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The Changing Landscape of Infrastructure Decision
Making USC Policy Luncheon July 19, 2007
Financial and Political Realities of
Infrastructure Investment in 21st Century
California
Richard G. Little, AICP USC Keston Institute for
Public Finance and Infrastructure Policy
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Is there a crisis in infrastructure funding?
That depends on whom you ask, but if you define
crisis as having needs that far outstrip any
readily sustainable way to pay for them, then
yes, we have an infrastructure funding crisis.
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Why is this?
There are only a limited number of sources for
transportation funds and they are already
overcommitted. Current revenues can barely
support maintenance and repair, there is little
left for major renovation or additional capacity.
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Some basic realities of public finance

• There are two ways to pay for infrastructure,
  taxes or fees
• There are 100 pennies in a dollar and you can
  only spend them once.
• If we want to buy more infrastructure, we need to
  take the pennies from another pile (education,
  public safety, healthcare) or get more dollars.

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How has transportation infrastructure
traditionally been funded?

• Pay as you go current revenues from fuel and
  sales taxes, general revenue, and user fees
• Debt selling bonds or notes backed by full
  faith and credit or revenue streams
• Intergovernmental transfers grants from one
  level of government to another (Highway Trust
  Fund)

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Is pay-as-you-go financing the answer?

• The initial cost of most major infrastructure and
  capital construction projects precludes this
  method of financing them?very little gets built
• Appropriating the amounts necessary to actually
  get something built would mean more revenues
  (taxes or fees) or reductions to other
  non-capital programs

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A quick take on debt
Depending on the interest rate, total debt
service (principal interest) over the life of a
30-year bond is about 2x the principal
amount. These payments must come from general
revenues (taxes) or user fees (tolls).
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More federal assistance isnt likely anytime soon
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State and local sources dont look so good either
General and special tax revenues continue to
provide only a portion of the necessary funds
required to maintain, rebuild, and expand
Californias transportation systemwe will need
to find more creative solutions to ensure the
continued viability of critical services.
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Motor fuel taxes as a revenue source

• Revenue does not rise automatically with
  inflation as does income tax or sales tax
• Improving fuel economy lowers revenue per mile of
  driving
• Revenue declining precipitously in relation to VMT

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What could California buy with the fuel tax?

• 1/gal of fuel tax 175,000,000
• 20/gal 3.5 Billion/year or the debt service
  for a 35 Billion bond
• If you drive 40,000 mpy in a vehicle that gets 20
  mpg this will cost you 1.10 per day.

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So, where will new money come from to make
needed investments?

• Demand management strategies, including
  congestion pricing, as an integral part of
  project planning
• More user fees (TOLLS!!!) where the beneficiary
  pays for services received
• Non-enterprise resource streams outside of
  general revenues
• Increased use of private equity capital to fund
  traditionally public services

New ways of thinking about what we do, how we do
it, and how its paid for.
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This will require considerable political will
The political process needs to be forthright and
help voters realize that unless there is a
fundamental sea change in how we approach funding
for transportation and other infrastructure,
necessary rehabilitation and new capacity will be
long-delayed if provided at all. This is a
classic budget tradeoff situation.
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Tradeoffs used to be rather simple
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Todays decisions must achieve multiple
objectives and satisfy many stakeholders
Success Zone
Fiscal Conservatism
Infrastructure Needs
Public Employee Issues
Environmental Concerns
Social Equity
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PPPs ?when public funding isnt enough
Public Private Partnerships (PPPs) are
contractual agreements between the public and
private sectors wherein the private sector agrees
to deliver services in exchange for a fee.
The private sector typically agrees to finance,
build, operate, and maintain the infrastructure
assets (mostly, but not exclusively,
transportation) necessary to deliver the services.
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Partnering of the public and private sectors
takes many forms
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Motivations for Public Private Partnerships

• Public Sector Motivations
• Constraints on public sectors ability/willingness
  to raise new revenues desire to leverage
  multiple sources of funding
• Opportunities to take advantage of project
  finance techniques not available to the public
  sector and/or to transfer new project risks to
  private sector
• Introduction of market pricing mechanisms to
  manage constrained resources and move toward
  user pays approach
• Private Sector Motivations
• Returns from stable long duration cash flow
  profile of essential infrastructure assets
• Opportunity to deploy integrated design,
  construction and operation capabilities and reap
  the benefits of innovation

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Can PPPs be a win-win for California?
If the private sector can deliver mobility in
selected corridors at less cost to the public at
large and make a profit at the same time, why
should we care?
This is what remains to be proven!
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Some final thoughts

• Most of the aging infrastructure we strive to
  maintain is based on models from the 18th and
  19th centuries (if not earlier)
• We will increasingly be challenged to generate
  the financial resources to offset the entropy
  produced as these systems age
• We need to devote some thinking to new models of
  service delivery that are not so dependent on
  energy-intensive engineered works (i.e., How do
  we deliver the services without the systems?

We need to begin a dialogue, NOW!
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Thank You!
Richard G. Little, AICP Director The Keston
Institute for Public Finance and Infrastructure
Policy University of Southern California RGL
236 Los Angeles, CA 90089 phone (213)
740-4120 fax [phone] email
rglittle_at_usc.edu Website www.usc.edu/keston