Thursday, May 26, 2016

Governor Brown's 2016 Five-Year Infrastructure Plan

TransportiCA Note: Below is an excerpt from the introduction of the Governor's 2016 Five-Year Infrastructure Plan, with specific reference to transportation.  For further information and greater detail, please see the plan webpage.

The California Infrastructure Planning Act requires the Governor to submit a five‑year
infrastructure plan to the Legislature for consideration with the annual budget bill.
The 2016 Five‑Year Infrastructure Plan (Plan) reflects the Governor’s proposal for
investing $55 billion in state infrastructure over the next five years.

Relative to years past, the Budget reflects the state’s improving finances. This year’s
Plan, therefore, reflects the expenditure of several billion dollars from the General Fund
on long overdue infrastructure investments. The Budget allocates more than $800 million
($500 million General Fund) for deferred maintenance projects at levees, state facilities,
courts, universities, and community colleges. In addition, the Budget allocates $1.5 billion
General Fund as a down payment on renovating the state’s Sacramento downtown
office space, including the State Capitol Annex. The Plan also reflects the Governor’s
transportation package first outlined last summer that will provide $36 billion over the
next decade to improve the maintenance of highways and roads, expand public transit,
and improve critical trade routes. Making these investments now will reduce the need
for even more expensive projects later, and a pay‑as‑you‑go approach will reduce
General Fund borrowing costs by more than $1.3 billion in the coming years.

Overview of the Plan
The investment in physical infrastructure is a core function of state government.
Infrastructure and capital assets allow for the delivery of key public services and the
movement of goods across the state — both essential components in fostering the state’s
long‑term economic growth. There continues to be critical deficiencies in the state’s
infrastructure, including a significant backlog of maintenance on existing facilities that
has built up over years of underfunding. The state must also do more to protect critical
infrastructure and plan for the impacts of climate change.

The vast majority of the funding proposed in this Plan is dedicated to the state’s
transportation system — more than 91 percent. This reflects the sheer size of the
state’s system, the state’s commitment to building the first high‑speed rail system in
the United States, and a proposed funding plan to enhance the maintenance of the
state’s roads and highways. The Plan proposes a significant investment of $1.5 billion
General Fund to improve or replace deteriorated state office space in central Sacramento,
including the State Capitol Annex. The Plan includes significant expenditures from the
Water Quality, Supply, and Infrastructure Improvement Act of 2014 (Proposition 1) to help
address many goals of the Water Action Plan. Additionally, there is continued investment
in trial court facilities, the state parks, facilities that support the California Highway Patrol,
the Department of Motor Vehicles, and other departments.

Budget challenges over the past decade resulted in a greater reliance on debt
financing, rather than pay‑as‑you‑go spending. From 1974 to 1999, California voters
authorized $38.4 billion of general obligation bonds. Since 2000, voters expanded
the types of programs funded by bonds and authorized more than $103.2 billion of
general obligation bonds. Of all previously approved infrastructure bonds, $86.8 billion
($76 billion of general obligation bonds and $10.8 billion of lease revenue bonds) in debt
remains outstanding. Additionally, there are $32.3 billion of general obligation and
lease revenue bonds ($28.6 billion and $3.7 billion, respectively) that are authorized
but not yet issued. The bonds will be issued when projects are approved and ready
for construction.

The increasing reliance on borrowing to pay for infrastructure has meant that roughly one
out of every two dollars spent on infrastructure investments goes to pay interest costs,
rather than construction costs. The amount of funds required to service the debt has
steadily increased over the past years. Annual expenditures on debt service have steadily
grown from $2.9 billion in 2000‑01 to $7.7 billion in 2015‑16. With an improving economy
and a significant increase in General Fund revenues, this year provides an opportunity to
put aside a significant amount of one‑time funds to invest in infrastructure.

The Budget proposes a $1.5 billion transfer from the General Fund to a new State Office
Infrastructure Fund to be used for the renovation or replacement of state office buildings
in the Sacramento region. The $1.5 billion will make a significant investment towards the
overall plan to improve or replace inadequate state office space in central Sacramento.

This Plan proposes $55 billion in spending. Of this amount, $705 million is from the
General Fund, $9 billion is from various special funds, $1.9 billion is from lease revenue
bond funds, $350 million is from general obligation bond funds, $13.9 billion is from
federal funds, $4.1 billion is from reimbursements and other non‑governmental cost
funds, and $25.2 billion is from High‑Speed Rail funds.

See Figure INO‑01 for a summary of the proposed funding. A detailed listing of the
specific projects proposed to be funded can be found in Appendix 1. Appendix 1 also
identifies the cost of the projects, the phase of the project to be funded, and whether the
project is new or continuing.

Maintenance of Existing Infrastructure
Historically, the state has not consistently addressed either the cost of maintaining
its new capital investments or the deferred maintenance on previous capital projects.
For example, while billions of dollars have been spent over the past decade to build
correctional facilities, less attention has been paid to the availability of permanent funds to
maintain these facilities.

Deferred maintenance is defined as maintenance activities that have not been completed
to keep state‑owned facilities in an acceptable and operable condition, and that are
intended to maintain or extend their useful life. Actions like repainting, reroofing, repairing
wiring and plumbing, dredging river or stream beds to restore original flow capacity,
replacing old equipment, and repairing roads are all examples of maintenance. In contrast,
capital outlay is defined as the cost of planning and constructing new buildings, additions
to and modifications of existing buildings, and includes projects that generally expand the
capacity or change the function of state‑owned properties.

As a result of many years of budget reductions, departments’ annual operating budgets
provide limited funding for facility maintenance. This has made it difficult for departments
to address large maintenance projects such as replacing heating and cooling systems
or roofs. Consequently, departments undertake only the most critical activities to keep
facilities operational, and other maintenance items are deferred. Deferring routine
maintenance can lead to facility deterioration — and ultimately failure— and sometimes
the need to replace the facility sooner than otherwise would have been required if it
was properly maintained. Deferred maintenance can be costly and ignoring it can be a
potential threat to public safety. At present, the reported statewide deferred maintenance
need totals more than $77 billion, as shown in Figure INO‑02.

The Plan proposes allocating $807 million one‑time resources — $500 million
General Fund, $289 million Proposition 98 General Fund, and $18 million Motor Vehicle
Account — toward the backlog of deferred maintenance at other state facilities (see Figure INO‑03).

Maintaining Transportation Infrastructure
Transportation represents by far the highest level of deferred maintenance. Much of the
state highway system was built between the 1950s and early 1970s to serve a growing
economy and population. The state’s population has continued to grow significantly in
recent decades, resulting in a corresponding increase in vehicle miles traveled and placing
additional pressure on an aging state highway system. Similarly, increased international
trade, coupled with the country’s dependence on the state’s port system, has led to a substantial increase in trucking. As cars have become more fuel efficient, revenues from excise taxes have not kept pace with the state’s increasing need for highway maintenance and repairs.

The Budget provides $1.7 billion for transportation maintenance, including $120 million
from the Governor’s transportation package. Of this amount, approximately
$650 million supports fix‑it‑first priorities focused on pavement patching, thin overlays,
joint and bearing repairs on bridges, and minor repairs to culverts and drainage
systems — less than the estimated $1 billion in annual pavement and structure
maintenance needs. The balance of maintenance funding is used for equipment,
traffic management, landscaping, removal of litter, graffiti, and snow, and repair of
storm damage. Similarly, the average annual funding of $2.3 billion available for repair
and preservation work in the State Highway Operation and Protection Program (SHOPP)
is insufficient to address the estimated $8 billion in annual needs. The SHOPP funds a
broad range of transportation projects to address safety, repairs, and major maintenance
to the state’s transportation infrastructure. To address these funding gaps, the Budget
and this Plan reflect the Governor’s transportation package, which will provide $36 billion
over the next ten years to address the most urgent state and local transportation needs,
focusing on investments to repair and improve roads, highways, and bridges statewide.

Affordability — Debt Management
The state has long used debt financing as a tool for infrastructure investment, similar to
the private sector. Since 2000, the state has significantly increased its reliance on debt
financing — as opposed to pay‑as‑you‑go financing. In recent years, debt service was one
of the fastest growing segments of the budget. As shown in Figure INO‑04, debt service
on infrastructure bonds is expected to increase to $8.5 billion in 2019‑20, assuming
no new general obligation bonds are approved by the voters and only limited new
lease revenue bonds are authorized. (For more information on the state’s debt history, see Appendices 2 and 3.)

Both the bond market and the bond rating agencies consider a number of factors when
reaching a conclusion about evaluating a state’s debt position. Two measures commonly
used to determine a state’s debt position are debt as a percent of state personal income
and debt per capita.

The ratio of a state’s debt to personal income is a reflection of the state’s debt compared
to the state’s wealth (see Figure INO‑05). According to the 2015 State Debt Medians
Report by Moody’s, California’s total outstanding debt as a percentage of personal
income is 5.1 percent. This is well above the national average of 3.1 percent. Only two of
the ten most populous states — New York and Illinois — have more debt as a percentage of personal income.

Debt per capita measures each state resident’s share of the total debt outstanding.
This year, California’s per capita debt was estimated to be $2,407, and is well above the
national average of $1,419 as reported by Moody’s. California was ninth among the states
in 2015 in terms of overall debt per capita, and only two of the ten most populous states
— New York and Illinois — had higher debt per capita.

The debt service ratio is another measure of relative indebtedness. It expresses the state’s debt service level as a percentage of its General Fund revenues. The debt service ratio is projected to decline slightly through 2019‑20 — mainly due to higher projected revenues — to 4.31 percent, assuming no significant additional General Fund supported general obligation or lease revenue bond debt.

Integrating Climate Change into Planning
In April 2015, Governor Brown signed Executive Order B‑30‑15, which directed
state agencies to consider climate change in all planning and investment decisions.
The executive order addresses several pillars of the Governor’s climate change strategy.
Specifically, this executive order established a statewide greenhouse gas emission
reduction target of 40 percent below 1990 levels by 2030 and reiterated the state’s
commitment to long‑term greenhouse gas emissions reductions. The executive order
also identified a series of actions to increase the state’s resilience to climate change.
These include the requirement that state agencies consider current and future climate
conditions and employ full lifecycle cost accounting in all infrastructure investments.

Infrastructure investments need to be made in a manner that facilitates meeting the
state’s climate goals. Well maintained and managed natural systems can also provide
critical protection from flooding, wildfire, and other natural phenomena that are expected
to increase with climate change. Future investments in state buildings, water systems,
and transportation infrastructure, including roads and railways, will be made with a
changing climate in mind. Pursuant to the executive order, the Office of Planning and
Research is establishing a technical advisory group to help state agencies incorporate
sustainability and climate change impacts into their planning, as part of a larger effort that
will identify and review strategies for climate adaptation as reflected in the Safeguarding
California Plan.

The focus of this year’s Plan on investment in modifying and replacing existing facilities
and addressing deferred maintenance aligns with the state’s climate goals. New buildings
will be more efficient than the buildings they replace, and many of the investments in
deferred maintenance include projects that will not only prolong the useful life of facilities,
but will contain features that address sustainability and green practices.

This year’s Plan includes information from each agency on how climate change is being addressed within their departments.


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