“Bond, Arnold Bond…”
Considering alternatives...
[Chuck DeVore] 1/6/06

Tonight [Thursday] during Governor Schwarzenegger’s state-of-the-state address, it is widely expected the governor will call for up to $27 billion of bonds to be issued over five years as part of a 10-year, $100 billion public works program.

The bonds would pay to build roads, schools, jails, courthouses, levees and retrofit hospitals. If approved by two-thirds of the legislature, they would go on the June ballot for approval by the voters.

If issued, the bonds would add about $2 billion per year in principle and interest payments to California’s budget burden, adding pressure to increase taxes.

It’s this last issue that should most concern fiscally responsible people because unless we can reach agreement to restrain the rapid growth in other areas of the budget, issuing more debt will compound the budget mistakes of the Davis administration.

Instead of issuing more debt, we ought to consider market alternatives to having the state finance, design, and build new infrastructure.

In Texas, as an example, the state auctioned off the right to build and operate the 600-mile “Trans-Texas Corridor” from Oklahoma to Mexico. The contract calls for an initial private investment of $6 billion for a 316 mile four-lane toll road with an additional $1.2 billion being paid to the state for the right to operate the segment. Think about it: 316 miles of road with the state getting $1.2 billion and not a penny of government bonds issued.

Using the same model, California could obtain the environmental approvals for a truck tollway corridor from the ports of Long Beach and San Pedro to a point 50 miles distant in the Inland Empire and then auction off the right to build and operate the road to a private consortium. Other states exploring truck-only toll roads include Georgia, Virginia and Texas.

What about levees, must they be funded by government? In the Sacramento delta region relatively inexpensive farm land is converted to relatively affordable housing. One of the reasons why this land in inexpensive is that it often floods. This raises the question, why should residents of California who have paid a premium for land with no flood risk pay for people to settle in low-cost, but flood-prone land? The answer is they shouldn’t. Instead, private flood control districts linked to flood insurance premiums can be organized to reduce the flood risk though assessments to fund levees. As the flood risk is reduced, the insurance rates drop and the assessments can be reduced as well.

With transportation and levee improvements privately funded and built, it would allow the state to focus its infrastructure efforts on those areas that would be more difficult to fund through private means. This would reduce the debt burden on taxpayers and reduce the pressure to raise taxes.

Any interest in innovation out there? Or, must we be wed to the old ways of doing business? CRO

copyright 2005 Chuck DeVore