How do we pay for upgrades to our water system?

150 150 Stan Hazelroth

(photo credit: Hannah Ball)

This was originally posted on the California Economic Summit reporting section and is part of their ongoing coverage of the state’s infrastructure needs and challenges.

There is a healthy debate going on Sacramento over how the state can pay for our huge backlog of public works projects, from repaving crumbling roads and expanding public transit to ensuring the state’s growing population has access to clean water. Water, in particular, was the subject of a joint Senate hearing this week, where lawmakers wrestled with how to raise between $6-8 billion in a bond measure they’d like to put before voters next year to pay for upgrades to the state’s aging water system.

Selling large general obligation bonds to pay for public works may be a time-honored practice in California—and it may even be necessary one—but my role as the former executive director of the California Infrastructure and Development Bank (known as the “I-bank”) has taught me this: Lawmakers should keep in mind it’s not the only way to invest in infrastructure.

During my tenure as director from 2001 to 2012, the I-bank loaned over $400 million dollars to dozens of different local entities for infrastructure projects. But we started with only $160 million in cash.  Where did the other $240 million come from? Leveraging.

Leveraging is the way business is done in at least 23 other states and all over the world, every day—and it’s a basic investing tool state lawmakers should be using more often. When you loan $100 to an electric utility, say, to build new infrastructure, they take money from ratepayers and pay that loan back over time. These payments, based on the history of utility ratepayers over decades, are very reliable—so reliable, in fact, that bond buyers will loan money secured by the promise of those ratepayers to pay the utilities back over time.

The utility with the right to be paid back $100 can pledge those aggregate payments and secure an additional loan of, say, $80. When that loan begins to be paid back, bond buyers will loan you another, say, $60, which can also be loaned out. With just $100 in cash, in other words, you can loan out $240.

Bringing leverage to the water debate

We have a serious backlog in funding needed infrastructure projects in California—many of which, the state’s water infrastructure, in particular, are paid for with user fees. This presents lawmakers with the exact same opportunity available to an electric utility as described above, and it’s high time the state took advantage of it. (The Economic Summit’s Infrastructure Action Team is preparing an action plan in October that will propose a range of similar approaches.)

Among the state’s greatest infrastructure needs is “clean water”, a term of art for wastewater treatment projects. Current conservative estimates indicate that California’s communities and residents need almost $30 billion in new and upgraded wastewater treatment facilities.

The problem is, the state doesn’t have that kind of money. By using leverage, though, we can begin closing that gap—without adding any additional liabilities to the state budget.

One place to start: The federal Environmental Protection Agency has granted over $3 billion to the state of California over the past few decades for wastewater treatment. The recipient of those grants, the State Water Resources Control Board (SWRCB), has made very low interest rate loans to local wastewater treatment districts, resulting in a number of “state of the art” projects being built. The Board developed a leveraging program in 2002 and added an additional $300 million to the fund.

Right now, that’s where the story ends, with the vast majority of the state’s wastewater treatment needs going unmet. If only it were possible to loan more than $3 billion dollars when you only have $3 billion, right?  But wait, it is.

No additional cost to the state

The answer is leverage.  By issuing revenue bonds on behalf of the SWRCB , lawmakers could provide both significant economic and environmental benefits throughout the state—at no additional budgetary or General Fund cost, or even liability to the General Fund. Every loan document, in fact, would state exactly that. (This approach, by the way, would work not just for the Clean Water Program, but for an array of other state programs built on the same model. By my calculations, another $1 billion in potential leveraging opportunities exists within the state’s program for safe drinking water alone.)

The basic elements of how the state can adopt this approach—providing more money to more projects and creating jobs in the process—are outlined below:

  • The SWRCB currently utilizes the federal capitalization grants provided by EPA, and revolving loan repayments, to make “direct loans” to localities for wastewater treatment facilities on a dollar-for-dollar basis.
  • The Board could at least double the funds available to localities—at half the state’s general obligation bond interest rate—by issuing leveraging bonds, under a restructured, simplified, and enhanced revenue bond program instituted by the Board through the I-Bank in 2002 and modified in 2012.
  • Acceleration of project funding will provide enormous economic stimulus, with a substantial number of newly created jobs, since wages typically comprise 20 percent of infrastructure construction budgets.
  • Acceleration of project funding will provide environmental benefits today rather than in the future, while also keeping construction costs (which typically increase by 4-5 percent per year) in today’s dollars.
  • Some additional staffing might be required to originate and monitor additional projects—and optimize leveraging—but other than a small increase in administrative requirements, paid for solely from the money generated by the loans themselves, expanding program capacity will not result in any increased budgetary or General Fund cost. 

So there you have it. The state has a unique opportunity to provide several billion dollars in additional positive environmental and economic impacts, without any additional cost to taxpayers.

The additional administrative costs associated with this approach are miniscule and they’re more than outweighed by the opportunities: a market that will be extremely receptive to a stream of triple-A bonds; more jobs in the short term; lower construction costs; and, most importantly, a huge increase in the number of wastewater treatment projects across California.

It all starts with leverage.

Stan Hazelroth is former executive director of the California Infrastructure and Development Bank and Member, 2013 California Economic Summit Infrastructure Action Team


Stan Hazelroth

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