Viewpoints – Mark Pisano: California demographic changes demand new way to pay for infrastructure

150 150 Justin Ewers

(Photo Credit: Simon Forsynth)

“Unraveled.” That's the word Mark Pisano uses to describe his response to the coming collision of California's aging population with its already-strained fiscal situation—a demographic perfect storm that he believes will make funding public projects all but impossible. After a long career battling budgetary headwinds to build the state's public infrastructure system, it is a fate Pisano is determined to help California avoid.

For more than three decades between 1976 and 2007, Pisano served as executive director of the Southern California Association of Governments (SCAG), a group of local governments from six southern California counties that together make up the nation's largest regional planning agency. Again and again over the years, as Pisano wrestled with plans for building out the transportation, water, and energy systems that serve as Southern California's economic backbone, he found his organization coming up short on how to fund them.

This perennial shortfall nagged at him. “I was always disconcerted by the fact that all of these plans had huge financial gaps associated with them,” Pisano says. In good times or bad, even the most vital infrastructure projects seemed to find themselves looking for funds. Tax revenues didn't cover the project's costs, bond sales only raised so much, and funding gaps were the norm.

A 2011 SCAG study, for example, highlighted more than $176 billion in “high-level” investments necessary to keep the Los Angeles area's transit system up and running—but included a $46 billion funding shortfall, or about 25 percent of the total amount. (As a state, California's infrastructure deficit is pegged at closer to $765 billion, with a funding gap in the hundreds of billions.)

During his tenure, Pisano tried a range of solutions, from experimenting with toll roads to funding rail line expansions with shipping container fees. None of them, he says, was enough: “After beating my head against the wall for 32 years, I'm still asking the same question: How are we going to fund the unfunded mandate and raise more revenues? I just don't see a way to resurrect the system we've used to pay for infrastructure over the last 50-60 years.”

Not enough money today, even less tomorrow

For Pisano, though, that's only the beginning of the state's problem. Since leaving SCAG, he became a senior fellow at USC's Price School of Public Policy, where he is researching how the state's changing demographics (its aging population, in particular) will impact California's economic growth—and, by extension, its ability to invest in public facilities, from the state's water systems to its roads and highways.

It is this coming wave of demographic change that has left him, as he puts it, “unraveled.” In a new paper, “3-D Infrastructure: Building the Next California,” Pisano outlines the fiscal challenge he believes the state is up against—and what he believes must be done to overcome it.

Much of the state's economic growth over the last 30 years, Pisano points out, is the result of a growing labor force—over half of it, in fact. But with California's baby boomers beginning to retire, a process that started in 2011, the state's future workforce is expected to shrink accordingly. Most experts estimate state labor force growth will be 70 percent lower over the next 30 years than it has been in the last three decades.

That has grave implications for the economy, which Pisano believes may end up growing at a rate closer to 2 percent, as a result (instead of its average of 3-3.5 percent). This will mean not just fewer jobs, but a much smaller state budget.

“In California over the next three decades,” Pisano writes, “this 'age penalty' will reduce income growth by 20 percent, our expenditures by 13 percent, and the taxes we pay to all levels of government by 34 percent.”

The state's challenge: Acting “fundamentally differently”

For vital state projects like public transit and school buildings, in other words, what proved difficult for most of Pisano's career is about to become much more so. With many regions already struggling to pay for public projects—and with the state's general fund likely to fall under increasing stress in the years ahead—California's infrastructure system is about to find itself pinned between a fiscal rock and a demographic hard place.

“It all adds up to one thing: The revenue picture in the future just isn't going to look anything like what we've experienced in the past,” says Pisano. “We're just going to have to do things fundamentally differently—both in terms of what we spend and how we finance it.”

Initially, Pisano says, he hoped his research was missing something—that his conclusion was wrong for some reason. “This is has so unraveled me that I've spent the last five months reviewing it with experts who do this kind of economic work,” says Pisano, who has shared his research with the General Accounting Office in Washington D.C. “They've said 'What you're saying is methodologically correct, your message is plausible, and you'd better get it out.'”

That is exactly what Pisano is now doing—while also introducing a range of potential policy solutions he believes could address the coming fiscal squeeze.

Interestingly, one approach he does not believe is the answer is a new wave of traditional public-private partnerships, where private entities take ownership of public facilities: “Too often, those just become a political nonstarter,” says Pisano. “Unions think you're attacking them. The public thinks these private guys are going to come in and rip them off. The reaction is always very negative.”

Pisano's approach: What it might look like

Instead, Pisano is proposing a range of alternative approaches—many of which have been outlined in California Forward's principles for a Smart Infrastructure System for California.

Simply put, Pisano believes the solution lies in empowering a range of new regional and local entities with the authority to shake up the state's traditional approach to public financing of infrastructure. Instead of what he calls the “3-C world of infrastructure”—today's centralized system, capital intensive and controlled by hierarchy—he proposes a “3-D model,” where public facilities are financed by a system that is “diversified, distributed, and decentralized.”

In Pisano's view, out would go today's system of financing public projects through the state general fund or general obligation bonds that are paid back over time with tax revenues—an approach that hasn't produced enough money to pay for projects for decades, and one that will only be more strained in the years ahead.  Out would also go a procurement process that involves agencies to drawing up the specs for their projects and then seeking competitive bids—a system he thinks inhibits creativity in both design and financing. 

In their place, Pisano believes the state should pursue a three-pronged approach:

  • Encourage more Public Benefit Corporations: To provide regional forums for all of the stakeholders interested in an infrastructure project, Pisano would like the state to encourage the creation of more Public Benefit Corporations (PBCs). These quasi-public entities can be established by state and local governments, use the financial tools of the private sector, and then be operated as nonprofits. There is no single model for PBCs, but they share an operating principle: Using partnerships and collaboration across sectors to tap into resources (both private and public) the infrastructure system needs.

One successful example is the Presidio Trust in San Francisco, a federally-operated PBC with multiple objectives—park management and conservation among them—that have allowed the organization to participate in the largest public-private project in the state, the $1 billion renovation of the Presidio Parkway.

“This is not a new notion,” says Pisano. “PBCs are just alliances of people to come together under the rubric of public policy to get something done. You can't do this right with existing organizations; they just get locked in stovepipes and silos. Instead, we need the Legislature to give [PBCs] more authority—to set the rules of the game—so there can be more of them.”

  • Create a new “risk assessment” board: To ensure the financial risks taken on by Public Benefit Corporations are understood and accounted for, Pisano also proposes creating a new Risk Assessment and Mitigations Board (RAMB) that would assess PBC project proposals. The RAMB's ground rules would be simple: It would only approve projects with clear returns on investments, those that are integrated into the rest of the infrastructure system, and those with a revenue-stream outside the state general fund. The board would be staffed by experts in the financial, insurance, engineering and governance fields capable of accurately identifying risk.

“I've spent a lot of time on this, and risk is where the most difficult issue is going to be,” says Pisano. “When you look at business plans and financing instruments, the toughest thing is the calculating the risk of assuming the product and services [a toll road, say] will be purchased. The state can help set up the tools to do make sure this is done right. Right now, that function's not being done anywhere.”

  • Empower the state Infrastructure Bank: The state already has one important, established financing instrument for infrastructure projects—a state “I-Bank” that has broad statutory powers to issue revenue bonds, make loans, and provide credit to a wide variety of projects. The I-Bank, housed in the governor's Office of Business & Economic Development, is currently financing some $32 billion worth of projects, but Pisano would like to see its authority—and its portfolio—expanded.

“If we could find a mechanism in the infrastructure bank that could help share the risk of buying revenue bonds, we could create whole new capacities for financing,” says Pisano. “But it's not just the infrastructure bank. If we take a whole range of statutes that haven't ever been used to the fullest, find out why they didn't, and start experimenting with them, we're going to find solutions.”

For Pisano, who has spent a career grappling with the state's infrastructure challenges, the question is not whether to begin this kind of experimentation, but when.

“We have a situation where we have problems galore—water problems, transportation problems, energy problems. The question becomes: What tools can we give to people who want to solve their problem, be innovative, and just go out and do it,” he says. “In my experience, if we create these tools and start turning them into real organizations, you'll create the capacity for people who really want to solve the problem to start trying new approaches. This will be the beginning of a movement.”

That movement, in Pisano's view, may just be the only way to put a stop to the state's coming “unraveling.”


Justin Ewers

All stories by: Justin Ewers