Diminishing and Misdirected Public Resources

Last: Introduction to Transportation System Funding

The phenomenon of diminishing public resources affecting nearly all government finance, at virtually every level and aspect of public endeavor, will require fundamental reorganization of the service systems and public benefit paradigms under which federal, state and local governments and public entities exist and operate. This reassessment of public and government services will necessarily focus on the cost effectiveness of any and all public services, and the costs of governance at every level, from national and state, to the municipal and community environments where the vast majority of Americans live, work and travel.

All forms of transportation, whether automobile, truck, bus, ship, train or air, are linked to, and extensively supported by public infrastructure systems ranging from streets, highways and freeways to mass transportation system corridors, tracks, bridges, tunnels and rolling stock, as well as, airports, harbors, electrical grids, utility systems and foundational infrastructure. The long-established funding, development and maintenance regimes which support public transportation infrastructure and services are experiencing 21st century challenges and limitations of historic proportion. While fuel taxes have supported development and maintenance of ever expanding street, highway and freeway infrastructure for auto and truck transportation for many decades, a growing practice of diverting fuel and vehicle tax revenues into non-transportation expenditures has begun to curtail maintenance and diminish development of road, bridge and highway infrastructure throughout the United States. A shifting of transportation resources derived from fuel tax, vehicle registration, port, shipping, airport and other travel-related, private economy sources to increasingly publicly subsidized transportation systems and services, which themselves consume ever-increasing levels and percentages of transportation funds and tax revenues, has created an unsustainable economic relationship between the sources of transportation funding and the public transportation infrastructure and services mandated and provided by government.

Subsumed under umbrella transportation authorities that exclusively manage all public transportation systems and services in their respective jurisdictions, mass transportation systems and developments are often subjected to general fund budgeting regimes that place them in competition with dissimilar transit systems such as local and municipal buses, as well as, traditional street and highway programs of local government. The organizing concepts and missions of typical bus services, street maintenance and highway programs share little in common with those of mass transportation systems, yet are most often managed and funded under a single organizational, budget and political structure. Reconciling and prioritizing commitment of resources between traditionally well-funded street and highway programs, heavily subsidized bus services and the development and operation of capital-intensive mass transportation systems tends to further blur the distinctions between the public benefit model of bus service, gas and vehicle tax-supported highway programs, and federally supported mass transportation system development. Drawing funds to subsidize 75% or more of bus system operational expenses over fare income from a common pool of revenue consistently diminishes resources available to street, highway and mass transit operations of regional transportation authorities and local government. Each of these distinctly different forms of transportation service, mode of travel and infrastructure should be planned, administered and funded as independent systems; with clearly identified mission, clientele, funding sources and performance standards. Whether regional transportation authorities are appropriate for, or capable of effectively managing the development and operation of such diverse transportation systems in the best interests of the local governments and communities they serve should determine the extent to which regional authorities are permitted to continue their administration and business as usual.

Although 80% of Los Angeles County Metropolitan Transit Authority’s projected revenue will be derived from local taxes, supplemented by federal and state grants, the local governments and communities impacted by MTA transportation development and services play little or no role in the decision making processes of the MTA. Forced into competition for local tax revenues, city and county governments face erosion of their usable tax revenue base, as transportation authorities unilaterally commit ever-increasing amounts and percentages of local tax revenue to short- and long-term regional transportation spending. Funding of major transportation systems development and operation has progressively shifted to long-term public debt instruments and schemes such as bonds and targeted local and state taxes. This funding approach compromises transportation authorities’ obligations to secure adequate funding or “pay-as-you-go” in the development of increasingly expensive and inefficient systems and services. Debt obligations and tax burdens amassed by such practices of regional transportation authorities are increasingly passed on to individual tax payers and local businesses that seldom benefit from, or use the transportation services. Furthermore, newly developed transportation facilities and services tend to contribute far less to municipal or regional economies than the costs of building and financing that the construction and operation of the systems have imposed on those same economies.

Diversion and misdirection of transportation funds toward vaguely defined environmental and “Green” transportation initiatives, coupled with federal “Shovel-Ready Infrastructure Stimulus” funding spent on everything but infrastructure, have further eroded the cost-effectiveness and sustainability of transportation system development and services; while state-level projects like the California High-Speed Rail Initiative have proven to be poorly organized and financially unsustainable. Such ill conceived and wasteful spending of limited transportation funds are placing increasing burdens on state and local governments, as well as, taxpayers; while the State of California continues to engage in a practice of depositing infrastructure development bond revenues in the reserves of its bureaucratic agencies. A 2011 report on the status of recently issued California infrastructure bonds revealed that $9.1 billion of revenues derived from their sale remained parked in a variety of state government agencies and departments, with no clear plans to fund infrastructure projects for which the bonds were issued, and are costing California taxpayers $630,000,000 per year in bond debt service payments. State government officials have given no explanation for the depositing of $4.2 billion of the bond revenue in the California Resources Agency, $2 billion in Caltrans, and several other billions reserved for a variety of vaguely defined purposes including housing, health facilities, stem cell research, conservation, habitat improvement, K-12 education, community colleges, the State Air Resources Board and the University of California. Of the $30 billion in California infrastructure bonds sold since 2009, the state has distributed only $21 billion, and issued no 2011 infrastructure bonds until October, 2011. This example of systematic diversion of funds derived from the sale of “Infrastructure Bonds” to non-infrastructure administrators, programs and projects through bureaucratic back channels begins to reveal the extent to which taxpayer-supported infrastructure spending programs are manipulated and diverted into significantly less productive spending, that produces far fewer jobs and public safety improvements than the heavy construction activities associated with infrastructure development and repair.

July 2012 revelations that the California Department of Parks and Recreation has systematically underreported, and hidden $54,000,000 in special accounts, while threatening to close nearly seventy state parks and recreation areas due to a purported $22,000,000 deficit in the state parks maintenance budget, shed a ray of light into the murky and convoluted general fund and agency budgeting practices that have brought California state and local governments to the brink of bankruptcy. By August 2012, auditors had discovered over $200,000,000 in unreported funds spread among some fifty state departments and special funds, as the investigations of unreported and misappropriated state funds continued to expand.

In January of 2013, under pressure from The Los Angeles Times, the California Department of Forestry and Fire Protection revealed that it had hidden $3.6 million in damages awarded Cal Fire from legal settlements over California wildfires in the nonprofit California District Attorneys Association. Cal Fire paid the District Attorneys Association to hold the funds, legally required to be deposited in the State’s General Fund, and used the money to pay for needed equipment and training. This practice continued for seven years, until terminated in 2012. Might any investigation be initiated, or charges against Cal Fire officials over these matters be brought by the Sacramento County District Attorney?

These are but a few examples of the prevailing tendencies for funds intended for specific purposes to be diverted from seemingly rigorous and straight forward funding regimes through systematic bureaucratic practices or fraud. Tracking and accounting for public funds are essential foundations of any efforts to evaluate the cost-effectiveness of any public project, service or program.

A December 2012 vote of residents, primarily renters, living within 3 blocks of a proposed 4-mile, $125,000,000, Downtown Los Angeles Streetcar, successfully imposed a $62,500,000 special tax district assessment on the commercial property owners purportedly served by the new streetcar. Adding insult to the annual assessment fees of over $100,000 per year on some properties, the owners of the commercial properties who did not live on the premises were not permitted to vote on the issue. Such special assessment districts have been enacted throughout California to provide infrastructure and facilities such as street lighting, public sewers and other amenities to suburban single-family neighborhoods and developments. While restricting voting to presumed homeowners in suburban neighborhoods, traditional special assessment districts provided a mechanism for municipal and neighborhood improvements to be implemented at reasonable costs.

The misapplication of the improvement district initiative voting process to serve the L.A. Streetcar project, organized by the streetcar’s promoters and aided by local labor union voter outreach, has permitted local residents, who may have moved out of the neighborhood by the time the streetcar is in service, to impose a 40-year assessment on the commercial properties located along the streetcar’s route.

The extent to which transportation funding regimes and practices begin to exhibit a similar lack of transparency and discipline threatens the long-term sustainability of public transportation at every level. Unfortunately, the effects of the current simultaneous acceleration and expansion of transportation development spending by means of committing ever-increasing amounts of future revenue to servicing the debt incurred through borrowing and accelerated spending may not be detected or appreciated until the wave of debt has begun to overwhelm bond and loan repayment mechanisms and systems.

A cautionary example of this type of postponed impact of reckless spending and financing, that is all too similar to the veiled leveraged borrowing schemes of the California High-Speed Rail Authority and the Los Angeles County Metropolitan Transportation Authority, has played out in four Southern California school districts, whose boards of directors promised their respective taxpayers that the districts could borrow hundreds of millions of dollars for school facilities improvements without necessitating property tax increases in the foreseeable future. By structuring their borrowing plans so that payments on taxpayer-approved facilities improvement loans would not begin for twenty years, the Poway Unified, Oceanside Unified, Escondido Union and San Diego Unified school districts saddled their respective taxpayers with payments amounting to ten times the principal amounts of the original loans. Delayed, and scheduled over payment periods twenty to forty years from the initial funding of the loans, with no options for early or accelerated payment of the loans, Poway Unified School District’s $105,000,000, 40-year loan will cost local property tax payers nearly $1 billion, while a similarly structured $164,000,000 loan will cost San Diego Unified School District taxpayers $1.3 billion to pay off in the loan’s twenty to forty year debt servicing period.

As of 2013, the state of New Jersey owed $110,000,000 for a football stadium (Giants Stadium) that was demolished in 2010; the debt for which will not be retired until 2025. Similar debts and taxpayer obligations continue to exist on defunct or demolished stadiums in Pittsburgh, Seattle, Houston, Memphis and Kansas City. Transportation authorities and local governments must exercise diligence and caution to avoid the creation of indebtedness that outlives the functional life of the transportation infrastructure and systems they are developing and putting into service. Through the systematic diversion of revenues intended for servicing of debt to capital expenditures, cost overruns and operating subsidies, many transportation authorities are increasing and extending the long-term obligations and servicing of transportation systems indebtedness without the approval or knowledge of taxpayers burdened with the debts.

The recent convergence of municipal and state government funding shortfalls and near insolvency with the steady downgrading of government credit and bond security ratings threatens to severely restrict the ability of governments, at all levels, to finance major transportation development through issuance of bonds and other credit instruments. Looming defaults on debt service by municipal and improvement district bond issuers threatens to destabilize the insurance agencies that underwrite the municipal bond market. This growing instability further diminishes governments’ and public entities’ ability to finance massive transportation initiatives and projects such as the California High-Speed Rail Initiative, or the numerous mass transportation system developments being promoted and funded by federal, state and local transportation authorities under the assumption that they will be financed entirely through government grants, bonds and taxes; whether they are cost effective, or not. Adding to a growing trend of government deficit spending and default, an alarming number of cities, counties and public entities are predicting an inability to make scheduled payments on municipal and other bonds, while the State of California has amassed $87.3 billion in bonded indebtedness, and operates for months each fiscal year in deficit, and without an adopted state budget. Although eventually approved and adopted each fiscal year, the California budget has not been balanced in the past decade.

In January 2011, Moody’s Investors Services began treating unfunded pensions equally with bond debt, raising California’s total public debt to $136.9 billion, and likely to be revised upward; thereby significantly shifting the weight and potential liability of state and local government debt further into an unpredictable future. Subsequent projections of unfunded public employee pension liabilities have reached several hundred billion dollars state wide, while the California cities and counties facing or declaring bankruptcy have steadily increased in size to populations of nearly 300,000, and are increasingly unable to pay the pension contributions of their own retired employees. Although state law requires the California Public Employees Retirement System to supplement, and make whole any shortfalls in local government pension payments, CALPERS 2012 investment income has fallen dramatically short of its 7% growth projections to less than 2%.

Moody’s Investors Services’ August 2012 report on the growing fiscal distress in California cities, counties, school districts and other public entities concluded: “To summarize, we expect … more bankruptcy filings and bond defaults among California cities reflecting increased risk to bondholders as investors are asked to contribute to plans for closing budget gaps”, and that Moody’s will be required to reassess the financial positions of all California government and public entities ”to reflect the new fiscal realities and the governmental practices”. The report noted the potential for ratings downgrades to fiscally distressed cities, counties, school districts and special districts throughout the state, which would significantly increase the costs of borrowing for every public entity in California.

Fiscal deficits measure annual budget shortfalls, and bond payment schedules are projected over twenty to thirty year periods, while pension obligations are projected indefinitely. Moody’s Investment Services sets credit ratings that can, in turn, affect interest rates on government bonds. California’s current A1 bond rating is one of the lowest in the US, and their decade-long state budget deficit reached a projected $25 billion over an 18-month period of 2011-2012. Facing an average projected budget deficit of $20 billion for each of the next five years, California’s Governor signed a 2011-2012 State Budget that purports to balance spending with very optimistic increases in projected revenue, aided by a hoped for voter-approved increase in state taxes. Public debt and fiscal deficits of these magnitudes severely diminish governments’ ability to finance any public development or endeavor by issuance of once-secure government bonds; and have led California taxpayers to repaying $2 for every $1 borrowed through the sale of state bonds. California commits $7.65 billion, or 7%, of its annual general fund revenues to servicing bonds issued over the past decade; an increase of $2 billion in the last two years, and has moved from the nation’s 22nd ranking in the ratio of Public Debt to Personal Income, to 7th, in the same ten years. California public debt has risen to $2,362 per resident over the past ten years, or $9,500 per California family, while the credit ratings of state and municipal bonds have steadily declined. Downgraded bond credit ratings are an indication of diminished ability to service the debt, which could lead to increased taxpayer costs in issuing and paying off public debt.

Concurrent with this growing unpredictability and instability of annual and long-term financing mechanisms, some regional transportation authorities have adopted implementation strategies that project financing and debt service decades into the future, while attempting to borrow against future tax revenues in order to start and complete their adopted plans at earlier dates. This is clearly the motivation behind the placing of an initiative on the 2012 Los Angeles County ballot that would extend the voter-approved ½ cent transportation sales tax increase for an additional 30 years, beyond its original 30-year term, to 2069; begging the question as to how many of the accelerated rail systems will be in operation fifty to sixty years after their construction. With government financing plans, instruments and debt service under pressure to maintain adequate and current levels of payment on a vast array of debt, much of government and public agency debt will require restructuring; inevitably extending the term of debt service well beyond original financing periods. The restructuring of financing and retirement of long-term debts could extend debt payments well beyond the functional life of the transportation systems they have funded.

Congress and federal transportation authorities should carefully assess the extent to which California and Los Angeles County taxpayers have been committed to long-term debt by virtually autonomous transportation authorities, including the Los Angeles County Metropolitan Transportation Authority and the California High-Speed Rail Authority, before extending them billions of dollars of additional credit. Administrators of the National Infrastructure Bank, American Infrastructure Finance Authority, Transportation Infrastructure Finance and Innovation Act lending program, Highway Transportation Fund, or any other federal agency extending credit and loans to local government, should rigorously evaluate and determine the credit worthiness of any local government or authority applying for infrastructure or transportation loans. This evaluation process should require full disclosure of all public debt, and projected long-term debt service obligations of public entities, municipalities and local governments applying for credit and infrastructure loans, as well as, local taxpayer approval of extended indebtedness.

Already being described as the “Municipal Debt Bubble”, total outstanding state and municipal bond debt in the US has nearly doubled, from $1.5 trillion in 2000 to $2.8 trillion beginning 2010. The primary reason for this vast increase is the relative safety municipal bonds offer investors over higher-risk, high-return investments that have suffered in the current recession. Municipal bonds have been considered to be safe investments because they are backed by the full faith and credit of issuing governments, who, in turn, have enjoyed nearly unlimited taxing powers to meet their debt obligations. However, greatly increased resistance to, and rejection of tax increases by voters and taxpayers are limiting the ability of state and municipal governments to fund new public projects, and, in a growing number of cases, to maintain payment schedules on existing bonds. Growing fiscal deficits among city, county and state governments have led to threatened bankruptcy of major cities including Los Angeles and Detroit, and Jefferson County, Alabama, raising the specter of a virtual state of insolvency and inability to pay debt among local and state governments throughout the nation. As with the mortgage debt bubble, it will take only a fraction of municipal bond issuers to default on bond payments for bond debt insurers to see their reserves and credit drained, precipitating a cascade of municipal bond devaluations, short selling and default that could only be brought under control, albeit temporarily, by a third trillion dollar federal bailout.

One type or classification of municipal bonds that may be refined and employed to finance monorail and other local infrastructure projects, termed “Conduit Municipal Bonds”, are distinguished from conventional municipal bonds by the fact that they are repaid by the private development entities whose projects are financed by the conduit bonds. Representing 20% of all US municipal bonds, conduit bonds allow private entities to utilize low cost municipal bond financing for projects that create and enhance local development. State or local governments are paid fees to issue the bonds on behalf of private companies, which are responsible for repaying purchasers of the bonds. This relieves local and state governments, and their taxpayers, of the burdens of debt service and repayment of bonds that are likely to have significant positive impacts on local transportation systems, infrastructure and economic conditions, while supporting the private entities making substantial investments in local communities. Rigorous and strategic reform of the conduit municipal bond industry and issuing processes could transform these financial instruments into one of local governments’ most versatile and powerful economic tools.

Next: Centralized Planning at Community Expense

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