March 31, 2011 - From the March, 2011 issue

California I-Bank: Infrastructure Investment Equals Economic Growth

Empowered with a broad statute, a democratic direct loan process, and financing power for the governor's office, the California Infrastructure and Economic Development Bank sits in a unique position to stimulate the economy of California. With the state's budget crisis still in negotiation, the I-Bank is also one of the only games in town, with designs on expanding the model to the federal level and expanding its reach in California. To detail the efforts of the I-Bank, its accomplishments, tools, and agenda, TPR/MIR is pleased to present the following exclusive interview with the executive director of the I-Bank, Stanton Hazelroth.

Stanton Hazelroth

The purpose of the California Infrastructure and Economic Development Bank is to promote economic growth, revitalize communities, and enhance the quality of life for Californians. How has the bank been achieving those goals since its inception?

My firm belief is that infrastructure in and of itself supports economic growth. We have made direct loans in 16 categories all over the state of infrastructure to local governments. We have issued bonds for manufacturers and processors under the Industrial Development Revenue Bond (IDB) Program and for non-profits under the 501(c)(3) program. We also have a state program, where we have issued on behalf of the state, for example, to the eastern span of the Bay Bridge or schools that are having financial troubles, to assist administration. All in all, we have about a $32 billion portfolio for issuing bonds and making loans, all of which are for some the infrastructure necessary for building or rebuilding a community.

Why is there a need for the California Infrastructure Bank? What role does the I-Bank play that can't be played by others?

We are the only general-purpose financing entity for the governor's office. We do a lot of different things. We have a very broad statute. We are able to make loans to local governments that might be able to get financing elsewhere, but we do it at a subsidized interest rate, so we help entities get financing at lower cost, both through our subsidized loan program and through issuing tax-exempt bonds.

With all the discussion about doing away with redevelopment agencies and with the state's lack of an adopted economic strategy, what holes does the I-Bank fill, and what are the politics of your mission?

One thing on the political front that is really positive is that our direct loan program is democratic (with a small "d"). We set up, through our statute, threshold criteria and procedures that have to be met. If local government meets those, it can get the lower-cost financing.

We have been working in conjunction with other entities in the state that relate to economic development. Unfortunately, in 2003, the Technology, Trade, and Commerce Agency disbanded. Economic development didn't go away in the state, it just got spread all over the place. This governor wants, once he has got past the budget issue (which is all-consuming right now), to look at the administrative branch and re-organize. I have heard that they want to pull a unit together that does economic development. We would be the main financing arm of that effort.

We have been conducting a series of conferences co-sponsored by Michael Likosky, a professor at NYU and the Rockefeller Foundation. We had conferences in October and November, and then again in January. We invite people from all over the country who have some expertise in infrastructure finance or economic development. Michael and I have presented a plan to the governor that has a number of steps that we recommend to make the bank more accessible by the governor, more in the direct line-of-sight of the governor, and to make changes in the statute so that the I-Bank can be involved in public-private partnerships (money from state or federal government is going to be very rare in the future).

What else did you share with Gov. Brown?

We recommended a task force be set up that Michael and I would co-chair; the governor would have members on it, and we would get other people from the community throughout California with an interest in infrastructure and economic development to develop a broader and cleaned-up statute. We are doing this concurrently with the effort at the federal level to create a national infrastructure bank. Both Michael and I have been helping Senator John Kerry and Congresswoman DeLauro, who both have (or will soon have) bills to create a national infrastructure bank. We are working with those members of Congress to create a full-service, broad-based, national infrastructure bank but to also be first in line to partner with that national bank because it will have more money available than the state does at this point.

It's interesting that Will Marshall, one of the founders of the New Democratic movement, wrote a couple months ago about the need for an infrastructure bank and its inclusion in President Obama's $50 billion transportation plans. Is it modeled after California's I-Bank?

We are looking at each other. Michael has written a book that is a great history of the use of these kinds of facilities, both nationally and internationally. The book is called Obama's Bank: Financing a Durable New Deal, and it traces the history of infrastructure banks and similar entities. Interestingly enough, we have used infrastructure banks a lot in our foreign policy and in third-world countries. In some cases, we will do a Marshall Plan kind of assistance, with loans and grants for infrastructure. That not only helps countries grow but also hopefully makes friends.

With about $2 trillion in potential private stimulus money available, what is the possible pay-off for California in finding a way to leverage public and private resources together through the bank?

We would access a whole new source of funds from the private sector that would allow us to do things now prevented by the small amount of money we have for our loan program.

The state has pulled back from selling some of the bonds that were passed in 2006 for infrastructure. Can you talk about the climate for issuing bonds and following up on the promises made when the voters issued approved those bonds?


The issue of general obligation bonds is solely the responsibility of the state treasurer. He saw the timing as bad because of the ongoing budget process and things like that. In our case, every bond that we issue is a revenue bond, which means that it is tied to a specific stream of revenue from a city, a water district, or something similar. Therefore, the state is not on the hook, and the I-Bank is not on the hook if these loans aren't paid back; it is solely the responsibility of the borrower.

In our interview five years ago, the I-Bank was working on the water program and the Goods Movement Action Plan. What has happened with those agendas with respect to the bank's involvement?

We just had a meeting with the clean water people-we did leverage their program once. We sold bonds backed by the revenue that they were receiving from the loans they had made in the past with cash. We raised another $300 million for their program. We had another meeting recently to start that process up again. The people who run the drinking water program also contacted us because they are similarly situated and they have made a lot of loans with cash and now feel the need to leverage to get more bang for the buck with the dollars that they have. They have approached us also about selling bonds on their behalf.

Goods movement was a very important term when Sunne McPeak was here. I don't know who picked up the ball on the goods movement package. I know that people in L.A. are working toward improvements in the ports and the roadways and rail that serve the ports. Toward the end of the last administration, the state did not have as much involvement as when Sunne McPeak was here. However, this governor, once the budget is behind him, will take a long look at those needs.

How bi-partisan is the support for what, in the past, has typically been bi-partisan, i.e., the Infrastructure and Economic Development Bank?

Our statute passed in 1994 with only three or four dissenting votes in each house. It had wide bipartisan support. The Republicans like it because it didn't require a lot of money from the General Fund; it leveraged the General Fund money to make it go further. The Democrats liked it because it provided money for economic development. We are seeing the same thing at the federal level. I am getting that information second-hand, but I understand that the there is bipartisan support in Congress on the national infrastructure bank statute.

The one problem that keeps popping up that we try to provide an answer for is that representatives from rural states are concerned that a national infrastructure bank will only respond to large metropolitan areas. On the contrary, our Infrastructure State Revolving Fund (ISRF) Program divides just about 50-50 between rural and urban borrowers. The amount of money is greater in the urban areas because the projects tend to be bigger, but the response to both urban and rural needs is being met to the extent that we can. I give that answer anytime it comes up, but it does continue to be a concern.

There is also concern in Congress about giving up earmarks. Many, many years ago, I worked for a Congressman. Bringing home the bacon was considered a good thing, at least at that time. It has gotten so out of hand-some of these projects don't have enough merit, than if you've based it on a system where you were just ranking projects based on need. The infrastructure bank at the national level can have an impact by making loans for regionally significant projects, and it doesn't preclude a member of Congress from bringing a project that isn't being noticed.

If you were asked to give expert testimony on the national infrastructure bank, what would you be pressing to include from the California example, and what would you modify and improve from the California model?

A broad definition of infrastructure is a positive thing. I would encourage the drafters not to simply make a transportation bank or a water bank or a clean energy bank or something like that-only operating in one sphere. One of the benefits of having an infrastructure bank is that you develop a team of experts in finance, working on the government side, so that when you do deal with professionals in the private sector, you deal on more of a level playing field.

Something that shouldn't be copied is that we are currently in an agency, like a program. We have this dual leadership, from the agency and the board. One of the recommendations for our bank and for the national infrastructure bank is to make it a corporate-type organization-still in the government but with a responsibility to the board, where the executive director and the board work together. There would be no secondary line of responsibility to an agency. There have been instances where staff people of the I-Bank have been asked to tasks that weren't related to I-Bank work. That really puts a lot of stress on a small staff.

If we are to talk in a year about the bank and your work, what are we likely to talk about?

We will be talking about a partnership between the new national infrastructure bank and the California Infrastructure bank to help the national infrastructure bank target regionally significant projects for consideration, for loans and grants. Then, hopefully, we will be talking about financing mechanisms made available by the national bank to state banks that would give states sources of money that they don't currently have-at least guarantees and types of bonds that might have a tax exemption or credit instead of an interest rate.



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