The familiar saying "as goes California, so goes the nation" seems to apply to the many states that have been unable to invest in infrastructure improvements because they are crushed by debt and shrinking revenues. Will California and energy project developers continue to invest in energy infrastructure in 2010 given the limited availability of private capital, shaky state finances, and shifting regulatory climate?
How’s this for an overused statement: The U.S. is in the middle of an infrastructure crisis. That is hardly news, but it is true. What is news, however, is that the pressure to repair and expand our nation’s inadequate infrastructure is now being addressed through a variety of new financing mechanisms and the passing of new legislation. The jury is out as to whether such efforts can be successful given today’s tight financial markets, but it’s a start.
"Dollars and Dirt: A Goodwin Procter Symposium on Infrastructure Development and Financing Opportunities," held on September 30, 2009, explored the prevailing thoughts on infrastructure financing and approaches. The seminar featured two panels of experts who examined the current state of infrastructure financing and construction. The first panel discussed working with local governments and maximizing infrastructure opportunities in California against the current legislative backdrop; the second explored approaches to financing infrastructure, including traditional land-secured financing, private sector investment, and Build America Bonds (BABs).
Laying the Groundwork
Overburdened infrastructure is failing across the country. In Los Angeles, home to the largest wastewater infrastructure system in the nation, more than 4,500 separate overflows of sewage spilled onto the streets between 1994 and 2004, racking up billions of dollars in clean-up expenses. The American Society of Civil Engineers 2009 Report Card gave California’s infrastructure an average grade of C – and estimated yearly investment needs at $37 billion. California’s financial crisis appears to be the worst among the 50 states. Consider these facts:
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California’s total debt: $63 billion
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California’s annual debt service: $3.6 billion
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Amortization (assuming no new debt): 84 years
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Mandatory part of California budget: 60%
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Unfunded liabilities: $99 billion
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California’s 2009 and 2010 expected budget shortfall: $21 billion per year
The consensus at the conference was that the U.S. is also in the middle of another Great Recession. Every economic indicator from retail spending to the stock market is pointing to a jobless, muted recovery. The unemployment rate rose from 9.8% to 10.2% in October. The current Great Recession has depleted taxes and other municipal resources. Road improvements and maintenance are not being undertaken because funds are just not available. Raising taxes in California remains an unpalatable option given the high unemployment rate and existing tax burden compared to other states (Figure 1). California’s average annual property tax payment leads the western states at $2,278 (compared to $1,133 for Arizona and $1,445 for Nevada) but remains less than the average $3,076 in New York and $2,974 in Massachusetts.
1. Winning isn’t everything. California leads the nation in tax rates, leaving few options for increasing revenue. Some states don’t collect all taxes. Source: Goodwin Procter LLP
California’s approach to enhancing infrastructure has been to take the matter to the voters. California citizens expressed a desire to move infrastructure projects forward in November 2006 when voters approved over $42 billion in general obligation bonds. Those bonds were for funding transportation improvements and repairs, expanding local transit, upgrading freight transportation corridors, repairing levees, and ensuring safe drinking water and current water supplies. In November 2008, City of Los Angeles voters approved Measure R, committing a projected $40 billion to traffic relief and transportation upgrades throughout Los Angeles County over the next 30 years. However, the expenditure of funds did not really start until after passage of the American Recovery and Reinvestment Act (ARRA). ARRA, passed in February 2009, took a long-awaited first step to rebuilding our public systems by allocating $51.2 billion to "core infrastructure investments."
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