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Tag: Finance
Our Public Private Partnerships report up on Metrans
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.
Is it unpatriotic to borrow from the Europeans?
By far, the most negative feedback I’ve received on last week’s LA Times Op-Ed concerns the notion that LA could borrow money from the European Investment Bank. The emails aren’t plentiful, but the ones I’ve gotten are plenty angry. The upshod:
America is the greatest country in the world, and thus, it’s wrong to seek money from foreign banks.
Well, ok. I’m not quite sure what to do with that argument. So I’ll try to break up different ways of thinking about it. Assumed is the idea that greatness is complete financial autonomy–that is, Americans finance their own government. This itself isn’t a terrible position to take, and given the loss of sovereignty experienced in Greece, Spain, and Italy, makes intuitive sense.
But Measure R is a bit different than sovereign debt. Well,it’s a lot different. Banks can know approximately how much to expect over the next decades from Measure R, even if there are some ups and downs, and they can limit what loans they are willing to make based on that information. It’s not as though LA’s mayor would head off to the world just looking for a loan based on general obligation bonds on taxes he has no authority or political hope of raising. Assuming that all debt is terrible and going to lead to a Greek-style meltdown is tantamount to assuming no bank should ever issue a mortgage again, even to people with steady jobs and sound credit, because a subset of homeowners got caught in the recent bubble. It’s tempting intuitively, but the analogy is off due to extraordinary conditions.
As to whether a city’s actions really reflect much on American strength, I can’t tell. All the mechanism I suggested–the California Infrastructure and Economic Development Bank, the European Investment Bank, and private funds, like Meridiam–all are simply different doorways into the global bond market, anyway. So I’m not sure functionally that what door you walk through makes much difference.
Argue with me, somebody. Help me see the basis for the reaction.
National infrastructure bank discussion from Felix Rohatyn and Rodney Slater in the FT
Unfortunately, the opinion piece is behind a paywall. For those of you who are subscribers, here is a link to whole piece. But I’ll quote the part that I think this is really intriguing:
Second, Congress can expand the definitions of Real Estate Investment Trusts (Reits) and Master Limited Partnerships to include investments in assets such as roads, water, ports, airports, transmission lines, waste water and bridges.
Reits are publicly traded corporate entities that invest in commercial real estate and pay a reduced or zero rate of tax on their earnings. In turn, Reits must distribute 90 per cent of their income to investors. Similarly, MLPs are publicly traded partnership vehicles that do not pay federal and state income taxes and return income to partners.
Applying the Reit/MLP model to infrastructure assets would attract investment from the deep US retail and institutional investor market, dramatically increasing funding support for new projects. Projects that were once unable to attract support could become financially viable, and more infrastructure projects could be supported.
Ok, now this is a really interesting idea that I hadn’t thought of. Since I don’t know much about Reits, I’d need to think more about this. I already have the opinion that way too much commercial property gets sweetheart deals at tax time, through TIFs and things like Prop 13, so I am not sure why, exactly, we need to have a tax incentive for infrastructure investment. I think there is *plenty* of existing demand for infrastructure bonds without sweetening the pot in this way. Maybe I’m wrong, though–I’m basing my comments on impressions rather than considered reflection on the data.
What are your thoughts? What have Reits done for commercial real estate that needs to happen for infrastructure?
Is transport too expensive? The Transportationist gets us thinking
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.
Some weblinks on Australia’s carbon tax move
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.
Jennifer Bennet in the Los Angeles Times
Peter Smith in the Financial Times
Richard Flanagan from the Gaurdian
Timothy Hurst for Reuters a pro op-ed
A case of poor scaling in the choropleth property tax values
Note: if you are having trouble viewing the images, just click on the post title to make the whole post bigger.
I don’t know if the Tax Foundation means to be in the “fibbing with maps” category, but I have some problems with the data presentation that goes along with their new interactive tool where you can go figure out how your county stands up in terms of median property tax. I guess they aren’t really fibbing: more like just wasting our time with a map that doesn’t tell us anything new about property tax burdens.
I can’t figure out where this map originally came from, but I borrowed from the Tax Prof (who deserves a HT). But it has the Tax Foundation logo on it, so I assume they had a hand in making it. Pretty though it is, it’s not helpful.
Here goes:
You can see from the map that the scale on the property tax is exhausted at over $2000 year for median home values. Now, if you look at that, we can see that both Los Angeles County, where my beloved LA is, and Polk County, home of Des Moines, the capital of Iowa, are both dark blue, which means the median is above $2K a year. I’m guessing LA’s median property value is a wooncy bit higher than what we find in Des Moines, so let’s see how much got collapsed into that highest strata by looking at the interactive county tool, where the interesting stories come through.
In the tables, you get the tax paid as a percentage of median home value, a normalized figure–which is what should be mapped thematically if the Tax Foundation wants to tell us something interesting specifically about taxes, rather than home values. As it is, we’re probably getting roughly the same map here, particularly for the coasts, as we would if we just mapped median home values. Or population density. It’s better to separate the effects in a choropleth presentation if you have multiple things going on.
So Los Angeles ostensibly looks bad when you look at the tax ranking. It’s 10th in the country. And OMG it’s dark blue! But then when you look at the tax normalized by median home value, the state falls to 37th–the bottom half.
The normalization by median income doesn’t make that much sense, either, unless this is median income of homeowners. It’s likely in places like Los Angeles that some property tax is passed along to renters, but it’s probably not fully passed along, so using the median for the whole population, rather than just the median for the population of homeowners, is a bit misleading there. It’s hard to know what that story is, and it likely changes from period to period as rentals relative to demographics change.
Just to close the loop, let’s look at Des Moines.
Los Angelenos and Des Moines residents are paying at the median about the same raw amounts. Yes, there is some difference, but in 2009, it’s about $2,900 for the median Los Angeleno and about $2,400 for the median Polk County resident.
Well, then. What have we got?
We have the median resident of Des Moines paying a little over 1 percent of their home value in tax, while the Los Angeleno pays at the median about 0.61 percent. Los Angeles (and other places in California) are way towards the bottom: 655 out of 790 counties and 37th out of 50 in state ranking on taxes.
Proposition 13, at work. Untaxed wealth in your home value that will continue to grow over time for those who hang on to property due to the weird rules governing assessments under 13.
Gas taxes are bad bad bad, private investment is good good good
Polls, don’t you love them? There are so many ways that polls can be done badly.
Awesome with awesome sauce on top.
This popularity of private funding raised for transportation infrastructure can be seen the universal love that people have for paying tolls and parking charges, and the long history of extremely successful private franchising arrangements we’ve had.
Not.
Maybe we should try to start our very own philanthropic organization: Fill a Pothole for Humanity. We could have sincere-looking spokespeople come on, in between the miserable child and miserable animal charity commercials, and talk in urgent terms about how swell it would be if you were to voluntarily send in your money right now, if you feel like it, in your spare time between driving too much and using inefficient vehicles while worrying about US national security policy.
Just so long as nobody is actually expected to pay for stuff they use.
Edited to add: Columbia’s David King writes that the pothole charity idea has been tried in Germany.
The Expo Line and Who is Overpaid in Transit Construction Contracts
Richard Green notes on his blog that:
A light rail line going by USC–the Exposition Line–has been under construction for some time now. For a considerable time, the site featured a sign that said the line would open in 2010. Now the estimates are that it will open some time in 2011 or 2012. At the same time, when I walk by the project, I can’t say that the workers building it show a great deal of, shall we say, urgency about getting the thing done.
At the same time, I don’t hear a lot of people who are upset about how far behind schedule the project is. Maybe this is because no one is planning to take the Expo Line. Maybe it is because peoople have such low expectations of LA Metro that they are not surprised, and therefore not outraged. Either way, it suggests a problem.
First off, it’s a bad idea to conclude anything about work effort based on what you observe by walking by. That’s like the people who judge professors by saying we “only teach two hours a week.” It’s not a valid sample, and it’s very had to evaluate other people’s work effort when you have never done the job yourself— and that’s particularly true of white collar workers passing judgment on blue collar workers engaged in dangerous and often tiring work–during a recession, no less, where anything that extends their work hours has direct implications for their family’s ability to eat and pay rent (unlike salaried work).
More to the point, Richard is mistaken when he concludes that people are not upset. The LA Weekly recently published a story called L.A.’s Light-Rail Fiasco which eviscerates the CEO of the Exposition Metro Line Construction Authority, Rick Thorpe, for salary and his conduct. Rick Thorpe is exactly the sort of transit guy who becomes a free agent and CEO: relentlessly self-promotional and confident, any previous successes get attributed to his leadership. So he picks up stakes, gets recruited away, commands an enormous salary, and builds a brand for himself that he delivers projects on time and on budget.
From the LA Weekly Story:
The reasons behind the fiasco are as numerous as they are complex. But at its core, it’s a simple story: Somebody had a clever new idea, and it backfired.
In this case, that somebody is Rick Thorpe, CEO of the Exposition Metro Line Construction Authority and one of the leading lights in light rail. He sold elected officials on a new type of contract, which he said would bring the project in cheaper and faster than it could be done by traditional means.
Colleagues from other transit agencies warned that the idea might not work. In the name of holding down costs, it could inadvertently create incentives that would drive costs up. But Thorpe pressed ahead anyway, and the elected officials charged with overseeing the line put their faith in his expertise.
Now, four years into the project, the results are plain.
“It just doesn’t work,” says Dan Peterson, an arbitrator with 50 years of experience in public works projects. “They’re trying to save 20 cents and it’s costing them $20 million.”
Thorpe and the MTA board argue that the contracting approach does, in fact, work. It is a process of negotiated design-build that, in Thorpe’s mind, prevented contractors from getting windfalls as they sometimes did under the design-bid-build process that has been industry go-to contracting process for a long time. However, the project where Thorpe’s innovation is supposedly working is not just behind schedule: it’s now 40 percent overbudget (to the tune of $260 million).
Now, you would think that Thorpe would know better than to be too fussy about contractors making money, based on this bit of info:
As CEO of the Expo Authority, Thorpe oversees a staff of 15 and earns a salary of $334,000. He makes more than the CEO of the Metropolitan Transportation Authority, who is responsible for 8,000 employees.
Thorpe’s self-branding that captured this salary is one of the major flaws of leadership both in the public and in the private sector. Once shareholders or board members believe you are some kind of magician, and they will if you are fortunate and if you blow your horn hard enough, competence is no longer enough. And as anybody who has built anything or completed any public project knows: 1) given all the barriers and problems, it’s amazing that anything gets built, ever, let alone on time and on budget, and 2) nobody, no matter how smart, confident, or charismatic gets anything built all by themselves. It takes a team, and while teams need managing, it is really easy to overstate and overcompensate the contributions of management when things go right and to make excuses when things go toes up.
There is another side. Why shouldn’t public managers good at their jobs make more than doctors or other professionals? Thorpe is a CEO, after all, and this is a major project, and major projects are tremendously hard to deliver, and private-sector CEOs make much much more.
However, the management and incentive contradictions emerge quickly. If you are paid $300+K a year to run something, your desire to finish it on time–particularly when you still have a board that rushes to your defense and you are no longer a hungry young guy building your brand–is low. Unless there are bonuses in Thorpe’s contract for on-time performance, he has little reason to protect the project from delays at this point, given all many reasons why projects get delayed in construction and the halo surrounding him personally.
Moreover, if you make your money because you are such an excellent manager, there is also the desire to innovate practices that reinforce the need for *management* on this project and future projects.
And from the what the LA Weekly reports, this “make management work” approach is right at the center of the problem. Instead of hammering out the details of the contacts up front–as with traditional design-bid-build contacts–Thorpe’s “negotiated design-build” requires the agency to keep their hands in project management more so than under traditional design-build where they would have been managing the contracts primarily–instead of negotiating as they go along.
In the end, I’ve always argued that there is very little wrong with the design-bid-build process.The US built most of the Interstate system with the approach and most existing transit, water, sewer, and other infrastructure this way. Where Thorpe sees the potential for “windfalls”, I see an incentive for construction companies to keep costs down so that they can increase profits. In the hands of a competent agency contract manager keeping track of the as-builts and project specifications, you shouldn’t end up with a poor-quality project. Instead, you provide an incentive on the part of the construction companies to keep employees hopping and to strike hard bargains with suppliers in the hopes of getting in under budget so that you can walk away with that the built-in cushion. The bidding process keeps companies from building in too much of a cushion. Innovations here have almost always struck me as cases of fixing something that wasn’t broken–to the overall detriment.