Gen Giuliano, Kevin Holliday, Teddy Minch, Zach Elgart, Victoria Farr, Matthew Kridler, Mary Kuhn, and I spent about a year or so working on questions about public-private partnerships in California. The resulting report is huge, but you can access its various parts here.
Category Archives: finance and pricing
So just when Santorum leaves and I’m faced with the possibility that reading about politics won’t be interesting enough to keep me away from doing real work (gasp! work!), LA’s mayor decides he’s going back to the ballot box to ask voters to make Measure R, a half-cent sales tax measure passed for 30 years back in 2008, permanent.
In Tony’s favor, it never hurts to ask, particularly when one is not running for re-election. For most US mayors who want to build more transit, the writing is on Belshazzar’s wall: we’re not likely to get a new transportation deal in DC at all before the November election. Unless something changes there–as in, we have a big, Goldwater-style doomsday for the GOP—if we get a deal after November it’s likely to be the Republicans’ deal. And they don’t want a federal infrastructure bank, and they don’t like sending money to California.
A couple journos called my Suburban Lair yesterday to talk about whether the Measure R extension has a chance of passing. I don’t think I gave them anything useful. Los Angeles County has had six or seven–I can’t remember–ballot box measures for sales taxes between 1975 and today, and three of them have passed: Prop A in 1980, Prop C in 1993, and Measure R in 2008. So based on the county’s history, it could go either way.
When Measure R was on the ballot, I spent time talking to both Democrats and Republicans about the measure, and among the Republicans, the fact that the measure would sunset seemed like a big deal to them. I can’t imagine they would be happy with the extension.
But if there is one thing that Mayor Tony’s crew knows how to do, it’s campaign. They are very good at it, and they got some key experience with Measure R, and they also have a pretty powerful network of businesses and nonprofits that threw their support behind the “Yes on Measure R” campaign–like most of the LA County museums. It seems likely that that coalition is still in place and readily activated for another initiative.
However, the continuation of the tax is a big deal, and the rationale–that they want to make sure they can borrow against the tax–has an assumption that will probably worry conservatives in the County: the fact that they aren’t comfortable borrowing against the tax that will sunset suggests that they know full well the tax as it is can’t support the existing project list without very, very low cost federal financing of the 30/10 plan. There are always cost over-runs, and it’s really really important that people not underestimate how expensive the subway to the sea is going to be. By releasing that sunset, the pressure to avoid cost over-runs goes away a bit. And that’s a problem for many conservative voters who see removing that constraint as a license to do what governments do: take on too much financial risk and manage projects poorly.
The annual conference of the American Planning Association is coming to Los Angeles, and in tandem, they have decided to do books on planning in the cities they are visiting. Planning Los Angeles is the first effort, and it’s quite nice. I’m impressed by a bunch of things, but one thing in particular: for a book that cost members $25, it has full color photos. The chapters came from writers around the region. I have a selection looking at the development of Measure R and what ballot box financing and politics means for transit.
Here is a nice interview with David Sloane via Planetizen, discussing the book.
APA has just put up a podcast here (also available through iTunes), along with a slideshow of some of the images.
The book is available right now, and it will be shipping through Amazon and other vendors later this month. It will also be on sale at the APA conference, April 13-17, and on display at the Organization of American Historians conference in Milwaukee, April 19-22. There will be an event at the Huntington Library in San Marino on April 28.
Here is a list of contributors–impressive!:
Ken Bernstein, AICP
Marlon G. Boarnet
Meredith Drake Reitan
William Fulton, AICP
Robert A. Leiter, FAICP
Steven A. Preston, FAICP
Christian L. Redfearn
Kenneth C. Topping, FAICP
Andrew H. Whittemore
David Levinson, the Transportationist, as usual, is thinking critically about the discussion about budget cuts in transport, and he’s got a provocative argument: transport projects cost too much to build. I’m fond of pointing out how failures to raise the gas tax erodes the purchasing power of the funds, but it’s also the case that costs have risen.
I don’t really disagree with his list of potential reasons. I only have a few additions, which may be riffs and variants on what he already has.
Some (additional) reasons why I hypothesize transport (and infrastructure) costs just keep going up and up:
1) The highest demand areas for maintenance and new stock occur in places that are expensive. I wonder how much of the costs of, say, intersections have to do with land costs. When Levinson asked why is it is so expensive–$175K–I began trying to think of private sector comparables, and I don’t have any except the house renovations: right now, looking at $15K to $20K for a new climate system, which makes no sense without new windows (another $10K). But that doesn’t include the land costs which are already sunk. So yes, the Northeast Corridor and California links of the proposed high speed make the most sense in terms of service and users, but they are also the most expensive to build. Ditto with LA’s subway down Wilshire. It’s a great corridor. It’s also west LA, where land just doesn’t get more expensive.
As urban land gets more intensively used, these costs get higher and higher.
2) Project creep. Standards have risen, as Levinson notes, but it’s not as though there aren’t a lot of what we might call side-payments in project development: noise walls hither and thither, etc. It’s hard for me to say that these costs aren’t necessary because the politics of getting something built pretty much requires the outlay.
And these are directly related to the first question, where the more densely settled the surrounding area, the higher the side payments.
3) Envy is a much bigger problem in public works than in personal life, I think. Jurisdiction X got a light rail link. I pay taxes for those things, why does Jurisdiction X get it when my neighborhood/district doesn’t? It’s a recipe for political hostages at budget time, as few political leaders have any reason to say “You know, the benefit cost on a project in my district just shows the project makes no sense.” It’s leads to two problems: projects that make no sense to serve some notion of geo-political equity, and project creep because if Jurisdiction X’s light rail stations had public art and golden knobs and a fountain, then my district’s light rail should have those and more. Combined with the Other People’s Money problem, this type of envy is a recipe for project creep.
There’s part of me that thinks that this problem might be addressed by forcing localities to pony up the cost of amenities out of property tax coffers.
4) One quibble with Levinson’s list: people do do benefit cost analysis all the time, but benefit cost is only as good as the integrity of the data and the analysts, and the whole process is too easy to roll. For development in California, I think CEQA forces agencies to get pretty financially committed to projects before they hit the “go” button in analysis. So by the time you’re there, you’re doing analysis to rationalize what you’ve committed to. With nonuser benefits and nonmarket benefits thrown in, the b/c ratio is politically constructed number. Perhaps it’s not CEQA–perhaps the commitment problem occurs everywhere, in that any line on the map causes a political firestorm, so that you have your rationales lined up before you draw anything.
Again, I’m not sure how to avoid this other than to have multiple groups paid to analyze potential projects–the proposing district and districts competing for the same funds. I’m sure we would find a way to make unsavory deals there, too.
I have no actual numbers or proof on these ideas. Maybe they are all small potatoes. Anybody got research they can have me read?
David King, Sarah West, Alan Atschuler and me on the Equity of Evolving Transportation Finance Mechanisms
We are here: TRB Special Report 303: Equity of Evolving Transportation Finance Mechanisms – has now been made available in prepublication format on the TRB website. Our individual commissioned papers have also been posted and can be accessed via the links provided in the blurb and in Appendix C of the report.
Very cool. Many thanks to the wonderful Jill Wilson of TRB for helping us put this report together.
Our Federal budget donnybrook embodies so many conflicts in American values that it’s hard to recount them all: disagreement over the Federal government’s reach versus states’ rights, a disillusionment, for whatever reasons, with social programs, the staggering costs of being at war for a decade—the list goes on and on. Buried within the politics of the budgetary battle, however, are longstanding snafus in US policy. One such mistake, and a potentially crippling one if it continues, has been a chronic inability among US leaders to help voters connect the dots between transportation investment and user fees.
In 2009, the Federal Highway Trust Fund, which pays for a sizable chunk of US transport investment, fell short of its financial commitments. Why? Because the federal gas tax which supports the HTF is out-of-date. We haven’t increased the gas tax—which is 18 cents per gallon—since 1993. That’s like you or me not getting a pay raise in 17 years! Throughout the intervening decades, the Highway Trust Fund remained in the black because Americans kept consuming more and more gasoline. We didn’t take advantage of those growth times to bump up the tax by a nickel or a dime, when gas prices were low and we could have afforded it, easily.
Now the US is now in a tricky position. Having underinvested for decades with an eroding revenue stream vis-à-vis booming demand for transit and highways, much of our transportation infrastructure is aged, obsolete, or congested. Americans understand the problem, and they want transportation investment. A recent poll done by the Rockefeller Foundation found that two thirds of their respondents from both political parties believe that transportation investment is important. But less than a third thought raising the Federal gas tax is acceptable.
Those views make for potent political one-two punch in bankrupting transport funds. Leaders want to deliver on things that Americans value, like transit. But politicians don’t want to pay the political penalty that comes with charging tolls or transport taxes to cover project costs. Thus politicians work in a constant state of temptation, a bit like college students with their Dads’ credit cards—spend now, pay later.
No recent president has fallen harder onto this political whipsaw than Obama. After the 2009 shortfall in the Highway Trust Fund, a report from National Academy of Sciences recommended a modest increase in the gas tax and a gradual movement to mileage fees. The Obama administration’s response was no way, no how.
Instead, Obama not only decided to ignore the shortfall, but to build on it. His State of the Union and budget emphasized an infrastructure extravaganza: a new $8 billion yearly investment to create a high-speed rail system via a 54,000 percent increase in the budget for the Federal Railroad Administration. Even though high speed rail companies will charge passengers once the system in place (quite a bit, if fares around the world are any indicator), Obama’s proposal had no clawback for the Federal taxpayer and no plan to create a sustainable, long-term fund for seeding the projects.
Instead, the administration simply looted from general fund programs.
We can expect the major windfalls from high speed rail to go to land owners who develop around stations—just like the real estate developers who are now cashing in on all the new land in downtown Boston provided by the Big Dig. Financing things like high speed rail out of the general fund, rather than using a pay-as-you-go system of user fees, can burden low-income Americans both by taking their tax money for transport projects unlikely to benefit them much and gobble up money from programs that serve them, like Aid to Families or veterans’ benefits (both of which felt the ax).
Obama may have avoided the ire associated with raising the dreaded gas tax, but his high speed rail proposal completely backfired on him, at least for now. Around the country, from Wisconsin to Ohio to Florida, Republican governors have made a media festival out of turning down Federal high-speed rail funds. In doing so, the Republicans have successfully portrayed the whole high speed rail plan as yet another instance of Obama’s fiscal irresponsibility and, worse, a wildly expensive vanity project.
So Obama ran a fruitless and embarrassing budgetary gambit that, had it worked, would have undermined the user-based funding principles that have served transportation investment remarkably well for about 60 years. He got chewed up like a man in a bacon suit at a dog show, and the whole debacle distracted everybody from the really innovative ideas in the budget, like a national infrastructure bank to help governments leverage private funds for transportation investment.
All that, just so that Obama could dance around the dreaded gas tax and get a few trains going? Really?
While the US is busy dealing with its self-made debt
hairpulling crisis and Carmageddon, Australia actually decided do something useful with its time: pass a carbon tax.
Now, forgive me, Australians, because even though I think of myself as an intelligent person, I can’t get myself to remember that Australia has one “i” in it. I’m an American, and so I consider myself well-educated and cosmopolitan because I a) know you exist at all and b) can find you on a map and c) know who your federal leaders are. I know the metric system too! Praise me.
Anyhoodily, here is a collection of things I’ve been reading about the carbon tax.
Timothy Hurst for Reuters a pro op-ed
I had a flood of emails after the privatization piece appeared in the Times, and I don’t have time to respond to everybody, I’m sorry to say. However, to the guy who spent roughly a page and a half telling me that of course I would support higher taxes because I am a blood-sucking professor growing fat off the taxpayer, I just want to say one thing: USC is a private university, m’kay?
Now that I have that out of my system, we can talk about some of the other, more interesting questions that came in.
Are you saying we should or shouldn’t privatize?
I’m not saying either one. I am saying that privatization is inevitable if Americans don’t want to pay taxes for infrastructure.
We can cut back on supposedly “wasteful” projects (and we should), but those are about a millionth of a fraction as important to the total, overall maintenance needs budget than Tea Partiers make them out to be. We’ve had years and years of shrinkage in value from the gas tax because we don’t index it for inflation; in the interim, demand has risen. The fund shrinks, on and on. With the recession, demand has scaled back a little, but when you are using facilities and your funds are shrinking, the money for maintenance and repairs has to come from somewhere. And in a no-tax situation, that means privatization, or letting your maintenance go.
In general, there is very little evidence that suggests private infrastructure costs anybody less than projects simply owned and operated by governments. There are many reasons for this finding: privatization deals are often hamstrung politically–e.g., concessionaires limited in what they can charge no matter what the demand or unforeseen operating issues they can’t recover, etc etc etc, forced operation in faraway, unprofitable areas, etc. Many argue we haven’t seen terribly fair experiments with privatization, and they may be right. But they also may be wrong.
Is the US really in as much trouble as Greece?
No. The US economy, even with our recession, is massive; our debt is a portion of our total productive capacity. Greece, on the other hand, is underwater for lack of a better term. There’s a big difference there.
Forced privatization, however, can come from multiple sources. In Greece’s case, they have to sell, period. In our case, we could decide tomorrow to tax ourselves to get the revenues we need to maintain our existing system.
But if you simply defund infrastructure maintenance, the assets go to pot or you force governments to go looking for private investors. And that’s where the US is. We’re making bad decisions to defer maintenance and to seek public-private partnerships on new projects (which everybody still loves, all the chattering about “cutting the fat” notwithstanding).
The basic point of the op-ed is that yes, we can try to force gummint to privatize its services. But cutting off the funding and not maintaining the assets is a terrible way to do that, and forcing down government bond ratings is a Stupid McStupid way to do that.
But I think government is just too big and out of control. I want more privatization.
The better way to go forward with privatization, if you really, really, really ideologically hate government and would rather live in a world of tolls and fees for quasi-public goods, is to let government negotiate privatization deals when the assets are in good condition (desirable), and they can bring to the table something other than the concession rights—the ability to absorb some of the capital risks associated with large-scale infrastructure. That ability to deal with the risks associated with building and maintaining large-scale facilities, with bond financing, is really what governments can bring into public-private partnerships. If you constrain that ability with tax aversion and letting bond ratings go to pot, you hamstring the ability for institutions, both public and private, to draw on the sort of deeper, longer-term revenue-smoothing commitments that you need to build something like a train line between San Diego and Sacramento rather than a hotel.
Not keeping our infrastructure maintained is a bad strategy, even if we DO want to get parts of it out of gummint hands: private companies do not necessarily want to run concessions on poorly maintained facilities, and they do not want to inherit a maintenance risk. Used cars that have a certified maintenance record with them usually have a price premium over those that don’t–just so.
My taxes are already too high. I can’t stand anymore.
That may be true, but one final word of caution. There’s a reason why every single commentary on infrastructure privatization always includes the words “there’s no such thing as a free lunch.” Because there is no such thing as a free lunch in infrastructure. If you privatize infrastructure, you may (or may not) have lower taxes over time as those facilities move into private hands.
But Santa Claus doesn’t run private infrastructure projects: profit-making companies do. They need to charge tolls and fees for you to use their stuff so they can stay in business. So on the one hand, I’m told that Americans HATE tolls and fees, too. Well, best get over that if you want privatization because that’s how road/parking/park/school/etc concessionaires make their money.
Maybe the sum total of what you pay when you select out of some services and select in to only those you patronize, but there is little evidence to suggest that actually works out. There are always cross-subsidies, even in privately produced goods (the beer pays for a lot of the food in restaurants, etc).
Gummint workers are lazy and incompetent. We’d get better service if our roads were in private hands.
Ok, but if we weren’t all working in the same place, Dilbert wouldn’t be as funny as it is, now would it?
One thing that private companies do tend to be able to do better than governments: they differentiate levels of service to let people buy into the service level they want. It’s very hard for governments to charge a “first class” and “third class” fee on tax-supported goods. Service differentiation can really make a big difference in how well services are fit to market demand.
However, service quality on privately owned concessions tends to vary, too, for a whole bunch of reasons. Remember when United Airlines was putting the hammer down on its employees in the mid2000s? Worst. Service. Ever. Heaven Help You if your flight got cancelled.
Of course you want us to spend money on infrastructure! That’s how you make your living! You’re writing out of self-interest.
I hear this charge a lot. Truth be told, it doesn’t matter to me professionally whether we privatize or not. I have private companies asking me to consult, I have governments that ask me to consult. My skills are portable between sectors.
Ultimately, I think it’s an open question about whether we need to spend more money overall on infrastructure. Is it more important than education or health care? I can’t presume to answer that question. But it’s really hard to maintain markets and everything Americans say they believe in if nobody can get decent water service, our energy grid is outdated, and we have potholes big enough to swallow 1980s Buicks. Infrastructure is one of those things where you have to spend money to make money: casinos, for example, have routinely built their own little transit and road projects to make it easier for their customers to come gamble.
So whether we strategically disinvest or not, whether we decide never to build HSR or anything new ever again, we do have to maintain our system if we want to function as an economy. It’s like this: you either pay for repaving, or you pay for new shocks and struts on your car more often than if the roads were in good repair.
Keep the questions coming if you like, and thanks for reading.
I wrote an Op-Ed for the Los Angeles Times on the Greek privatization issue. It appears here.
Here are some of the assets the Greeks are selling off.
The HOT lane, like most, is operating under two political mandates. First, those who pay to enter the HOT lane are guaranteed to be allowed to travel 70 kph for the stretch of the HOT lane, and there is also a limit that tolls can go no higher than 30 shekels, which is about $10. Given those constraints, it’s not likely that the franchisee can get to a profit-maximizing strategy–whether there’s a profit at all is the question.
The original automatic control algorithm for setting tolls didn’t function properly: it overestimated the costs and contained a measurable lag: so cars and congestion would be clearing on the tollway and on the free lanes and the automatic control algorithm, responding to previous conditions, would raise the price as congestion was going down. Not what you want with a dynamic pricing model where you want to give people the right price signal when they are confronted with the decision to take the HOT lane or the free lanes.
Professor’s Gutman’s improvement suggested a two-loop control: an interior loop that monitors entry and an exterior loop that monitors changes in flow that cascades back to the interior loop as speeds increase or decline. That enables the company to maintain the floor speed of 70 kph.
The kicker on this–the rickety part of policy–is going to be the 30 shekels, not Professor Gutman’s controls. Because there will be a time, if demand grows, when it’s going to become impossible for the company to attain that speed floor with a $10 toll–if it isn’t there now. One of those performance constraints–the speed floor or the price–have to allowed to vary more once the HOT lane faces higher demand.
I can’t find Professor Gutman’s manuscript online, so he’s probably working on it now. I’ll post a link when we see it. One of my wonderful colleagues, Barak Fishbain, said that there are Youtube videos of some of Professor Gutman’s system control work on robotic motorcycles, but I can’t find those. I’ll post them if I find them.
Aha! edited, thanks to Barak, links to the YouTube of the Unmanned Motorcycle project!