USC Keston Institute Panelists Assess the Performance and Progress of the $42 Billion State of California Infrastructure Bonds Approved in 2006

LOS ANGELES--(BUSINESS WIRE)--Top officials in the State of California’s public works agencies and state treasury joined infrastructure and policy experts yesterday for a forum titled, “Assessing Performance and Progress of California’s 2006 Infrastructure Bonds,” hosted by The Keston Institute for Public Finance and Infrastructure Policy at the University of Southern California (USC).

Panelists discussed the progress of the $42 billion in General Obligation Bonds that California voters overwhelmingly approved two years ago to fund public infrastructure projects in transportation, flood protection, school construction, housing, and water supply protection.

The panel, which took place at USC’s Davidson Conference Center, began with opening remarks by Richard Little, director of the Keston Institute for Public Finance and Infrastructure Policy.

“At last year’s panel, the assessment of the $42 billion in municipal bonds issued in 2006 was that very little progress had been made,” said Little. “Now nearly two years later, we come together at an interesting time, particularly with the volatility in the financial markets.”

Paul Rosenstiel, deputy treasurer of the State of California, noted that the financial crisis has created significant turmoil within the municipal bond market in that there is a reduced demand for an increased supply of municipal bonds. Rosenstiel attributed this partially to the collapse of the bond insurance industry. The bond rating agencies have traditionally rated uninsured municipal bonds as a higher risk than corporate bonds, which has made investors more reluctant to purchase uninsured municipals.

“In 2007, we had seven bond insurers rated AAA,” said Rosenstiel. “Today, we only have two, and both of them have a negative outlook.”

Rosenstiel also noted the increased supply of municipal bonds on the market, marked by the need for financial institutions, such as AIG, to sell bonds to raise cash, as well as the flight of municipal hedge funds from long-term bonds.

However, Rosenstiel did offer hope for an increased demand in municipal bond purchases. According to Rosenstiel, “There is one bright spot – direct retail sales. The baby boomer generation is moving out of equities and into fixed income. They should be going into municipal bonds.” Rosenstiel added, “The results of California’s most recent direct retail sale have been impressive, with 78 percent of the offerings bought at retail this year, compared to 23 percent last year.”

Rosenstiel also pointed to another impediment to selling California bonds, the State Budget. “With the State Treasury only able to issue bonds during certain time frames and not in others, such as following passage of the State’s Budget, timely and decisive action by the state legislature is critical,” said Rosenstiel. “Now, it will most likely not be until February 2009 before we can issue any more General Obligation Infrastructure Bonds.”

John Barna, executive director of California Transportation Commission (CTC), followed Rosenstiel’s presentation. Barna outlined the progress of the majority of Proposition 1B transportation projects, such as the Corridor Mobility Improvement Act (CMIA), which provides congestion relief and enhanced mobility for the California State highway system. According to Barna, “Proposition 1B fulfills the promise of the 1989 blueprint, to be the key transportation construction program through 2015-2017.”

“We are now funding those projects we dreamed up in the 1990s,” said Barna. “We are playing catch-up from an infrastructure standpoint. We have to plan for what’s next, and these bonds are not ‘for what’s next’. We are funding last year’s ideas.”

Lynn Jacobs, director of California Department of Housing and Community Development, said her agency is on schedule for spending the $2.5 billion bond, Proposition 1C, the largest housing bond in U.S. history. The $1 billion her agency was awarded has already led to 18,000 new housing units, transit oriented development and numerous infrastructure projects.

“We feel there is a need and capacity to build underground,” said Jacobs. “There is not enough underground development, such as water, sewer and electrical grids, to grow communities in California. Doing this establishes the base for many developments – not just for residential housing – but also mixed use and transit-based development.”

Sue Sims, chief deputy director of California Department of Water Resources, discussed the progress of Proposition 1E, which approved $2 billion to fund projects dealing with flood issues and water resources protection, such as repairing San Joaquin-Sacramento River Delta levees. Sims, as well as the other agency officials, noted that many of the projects have to be specifically authorized by the State legislature and that some of the Proposition 1E funds will not be received until March 2009.

Sims also addressed the State’s public finance and infrastructure strategy as a whole. “As we invest these funds, it’s important that we not just find projects to put the money in, but that we make sure that money is invested strategically in the right places, at the right amount. Moreover, we have to ensure that the entire system, 5, 10 – even 20 years from now, is developed with sustainability and strategic direction in mind.”

Carole D’Elia, the deputy director of the Little Hoover Commission that recently conducted public hearings for its bond oversight project study, echoed Sims’ viewpoint. “The bipartisan commission is studying the prioritization of the projects funded by the bonds, whether the State is spending the way the voters intended the funds to be spent, and whether the projects are carried out in the most efficient and effective way as possible.”

“According to our findings,” assessed D’Elia, “there is a lack of an overarching plan. There is no strategic plan working together and sometimes agencies are in conflict. There needs to be improved interdepartmental and cross agency communication.”

The Keston Institute’s Richard Little agreed, saying “Possibly the most critical thing I heard surrounds the clash of legitimate public policy issues. The fact is most voters don’t know if infrastructure is more important than education or the environment, but we need to have conversations about that – at all levels of government.”

Little also noted that transportation oftentimes sees the greatest disparity in revenue and perceived costs, noting that the public frequently believes gas taxes cover all transportation infrastructure and operating costs.

According to Barna, “Proposition 1B is a transition period to the next level of transportation projects and funding thinking. Organizations like The Keston Institute help continue that thinking and planning. For all intents and purposes, Proposition 1B is the end of the party. We have to go back to the drawing boards and come up with vision of where we need to go next.”

Evan Halper, Los Angeles Times government staff writer, moderated the event, and directed questions regarding transparency, performance and issues of project timelines to the panelists. The question of state agency cooperation with the Governor’s office, was also posed.

In his closing remarks, Little emphasized the need for open communication about California’s critical infrastructure needs and plans, adding, “The Keston Institute aims to collect the thoughts of the panel and then put those ideas into solutions that do, in fact, change the way we do things in the State. We are fundamentally running out of the ability to mortgage our future to the present. Because of the chaos in the markets, the future has caught up with State finances. Things have changed, and from an infrastructure standpoint, we are talking about very expensive stuff for very important things – and we need to discuss how we are going to do it.”

About The Keston Institute

The Keston Institute for Public Finance and Infrastructure Policy at the University of Southern California is a non-partisan research center that actively addresses California and the nation’s public finance and infrastructure challenges. It is specifically focused on regional and national transportation and water issues and promoting economic viability, livability and environmental sustainability.

The University of Southern California (USC), which houses The Institute within its School of Public Policy, Planning and Development (SPPD), whose faculty collectively ranks third at USC in terms of per capita research grants, is one of the nation’s leading research facilities for issues relating to public finance and infrastructure finance in the nation.

Together with the Keston Institute, the USC School of Policy, Planning and Development, has created the only educational and policy degree track in the field of civil infrastructure, with the goal of making USC a world leader in infrastructure and policy development.

The Institute’s ongoing research is exclusively focused on analyzing core infrastructure challenges facing California and the nation, while presenting realistic, objective recommendations to voters and policymakers. For more information about The Keston Institute, please visit http://www.usc.edu/keston