July 12, 2004 - From the November, 2001 issue

Despite Current Fiscal Constraints, State's Infrastructure Needs Attention

Before the current economic downturn wreaked havoc on the state budget, many predicted that the next few years would see unprecedented investment in our State's infrastructure. In fact, many were expecting Gov. Davis' Commission on Building for the 21st Century to release a report that told us the exact what, where and how of infrastructure construction and rehabilitation. However, while the events of 9/11 and the economic slowdown have delayed the report (which is now expected to be released by year's end), they have not dissuaded the participants from continuing to profess the importance of infrastructure investment. MIR was pleased to talk with Bill Hauck, a Commission member and President of the California Business Roundtable about a few Commission priorities as well as the short- and long-term obstacles to implementing a comprehensive system of statewide infrastructure investment.

Bill Hauck

Bill, as an active member of the Governor's Commission on Building for the 21st Century, could you give us some sense of what is likely to come from that Commission's Final Report, which is said to be about ready for release?

My hope is that the Commission's Final Report will refocus the attention of policy and decision makers in California. They need to recognize the importance of our infrastructure. And they need to provide an ongoing financing mechanism not only to rehabilitate our existing infrastructure, but to construct new facilities for our growing population. That's my hope. But, in light of the current fiscal environment, it's difficult to predict what the eventual outcomes will be.

In a 1999 interview you did with MIR, you stated that one of the impediments to investing in California's infrastructure was Prop. 13. In light of the Orange County Superior Court's decision restrictively ruling on the ability to change evaluations for property tax what, in your opinion, are the prospects of finally removing Prop. 13 as an impediment to public investment in the future of California infrastructure?

Regardless of the impediments, whether it's Prop. 13 or something else, we can't afford not to invest the state's infrastructure. Every facet of our infrastructure-schools, water systems, sewer systems, road systems-is 30-50 years old. If we allow those systems to get to the point where they fail and we are forced to build anew, the cost to Californians will be enormous. We cannot afford to ignore the need to invest in those facilities. If we do, we will not only lose them, but we cripple the State's economy.

At the Governor's recent Economic Recovery Summit Assembly Speaker Hertzberg and State Treasurer Angelides discussed the potential for a $25 billion multipurpose infrastructure bond measure for the coming year's ballot. In light of the fiscal restraints and the recession in California, is that still a viable option? Will we see that in pronouncements in weeks to come?

What was being discussed was a package of bonds-school, transportation and housing-proposed for next year's March ballot as an economic stimulus package for the state.

If one looks simply at one facet of that proposal-school construction-one realizes that there are in excess of 1,000 projects fully designed and approved statewide. All they need is to be funded. The construction of these projects would stimulate the economy, promote jobs and accomplish significant gains toward rehabilitating the state's school facilities.

However, to accomplish that mission the Legislature would have to convene a Special Session in the next several weeks and agree to put those bonds on the March ballot. At the moment, I don't see any momentum developing in that direction.

We will most likely see a November school bond on the ballot and there have been suggestions of a housing bond, but as far as a comprehensive package of stimulus bonds, while we remain hopeful, it just doesn't seem likely.

There has been much discussion from the California Business Roundtable about a set-aside in the state budget for infrastructure. Can you address what the Roundtable has in mind? What are the practical and political opportunities for such a proposal? And did this suggestion make it to the Governor's 21st Century Commission Report?

The Infrastructure Commission ultimately decided to propose a 1-percent, yearly General Fund set-aside for pay as you go infrastructure projects. That set-aside would automatically occur as long as the state's general fund grew by at least 5-percent and we maintained a $500 million reserve. If either of those did not happen, the appropriation would not automatically occur. If you look at that kind of consistent investment over a 10-year period, we estimate that the state could set-aside as much as $10 billion for infrastructure projects.

I'm hopeful that legislators will be able to look past the current fiscal crisis and translate that recommendation into state law so that when we attain 5-percent growth of the General Fund and we maintain a $500 million reserve we can immediately begin investing in our State's infrastructure.

Bill, reports are that the Commission also addressed how to best fund infrastructure, specifically, to reduce, through a Constitutional amendment, the voter threshold for local infrastructure bond financing, especially for transportation, to the 55-precent level. What are the prospects for such a reform appearing on the ballot next year?

The prospects are not good for that happening in the next session.


Now we did reduce the threshold for school bonds last year to 55-percent and that was a major accomplishment. Since Prop. 39 took effect 44 of 52 school bond measures have passed.

However, while we can see the tangible results of the shift to a 55-percent vote threshold on school bonds, it will be a much tougher task to persuade voters to lower the vote on all local bonds.

Let's get back to the state-local fiscal reform issues that you have invested much of your civic time to over the last deacde, from the Constitutional Revision Commission to the Speaker's Commission on State-Local Government Finance, and now the Speaker's Commission on Regionalism. Given Dan Walters' recent column about the Watson decision in Orange County, what price are we likely to pay in the state given our current fiscal rules, and given the quality of life challenges that the State has going forward?

We're paying a substantial price for failing to restructure the state/local fiscal relationship. That relationship was reasonably stable and steady until 1978 when it was totally disrupted by the enactment of Prop. 13. The property tax prior to that time had been a local tax, nothing more.

Subsequent to the 1978, property tax became a state tax, which dramatically inserted the state into local finance. Since that time we have failed to reconcile the subsequent Legislative and voter approved measures which have resulted in local governments competing for sales tax and other revenues. Because of those changes, we lost any semblance of a rational planning structure between communities.

Restructuring those relationships will be a very complex task in a state as large as California. And while we may be making some progress, I don't think we're making enough.

Again, as Dan Walters pointed out in discussing California politics being divided roughly between two ethics before Prop. 13 and afterward and noting the unintended shift of control from local authorities to the state level over revenues, what are the prospects for giving more power to the regions, as the Speaker's Commission on Regions has discussed, so that they can translate these bond measures for infrastructure into projects that make sense within their localities? Is there any prospect for the delegation of authority to regions in the agenda of the Legislature in the next session?

While that prospect might be discussed and debated in the next session, I am doubtful that anything will be accomplished. The next session will, first and foremost, be preoccupied with elections. The state's staggering deficit will come in a close second.

The regional approach to governance has promise and in certain regions leaders of local jurisdictions are already coming together to explore how they might approach regional planning and revenue sharing on a voluntary basis.

If one or more regions in the state could pursue that path and come up with a template for other regions, that might prompt the Legislature to take that experience and apply it statewide. That's my best case scenario for the next Legislative session.

Let's try to tie this all together. With your tenure at the California Business Roundtable and your involvement with the Commission on Building for the 21st Century, are you any more hopeful now than you were in 1999? Do we have the capacity to fix the state's financial and government systems so we can be progressive in thinking about our infrastructure needs?

I'm always optimistic. We've certainly made some progress on the infrastructure front since the Roundtable published its report in Aug. 1998. In California we never solve problems in one step. They're always too big or cost too much. However, we do have an opportunity to make a substantial difference with Prop. 42. If Prop. 42 passes next March, sales tax revenue on gasoline would permanently be transferred to all transportation purposes, not just highways. That's a critical measure.

On the question of reconciling and restructuring state and local finance, we've made less progress because, understandably, local governments are very guarded in their willingness to surrender revenue that they generate. That will change as well, but it's going to take more time.


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