Principles of Sound Transportation Finance
California State Senate Transportation Committee Hearing
January 24, 2006
I want to begin by applauding the administration for finally focusing the government’s attention on our long-neglected public works.
I have often lamented the tragedy that befell our state in 1974 with the election of Gov. Jerry Brown and the introduction of a radical and retrograde ideology. He called it his “era of limits.” It was punctuated with such new age nonsense as the mantra “small is beautiful.” I think it can best be described as the naïve notion that if we stopped building things, people would stop coming.
So we stopped building highways; we stopped building water projects; we stopped building houses and electricity plants. And people came anyway. And now we’re dealing with the result.
That ideology permeated two Democratic and two Republican administrations, and I am very glad to see this administration breaking from this folly.
But as pertains to this specific proposal, I would like to offer a few general observations.
First, by definition, transportation projects provide a direct and exclusive benefit upon a distinct class of users, and they ought to be entirely supported by those users. Thus, highways should be financed entirely by the users of those highways in proportion to their use. Ports should be financed entirely by the users of ports; mass transit by the users of mass transit, and so forth.
With respect to highways, California has long recognized that the most efficient way to do so is through a tax on gasoline paid by highway users in proportion to their use.
Second, there should be a clear distinction between the state highway system, that links the principle population, commercial, industrial and resource centers of the state; and local streets and roads that exclusively serve local communities. We used to make that distinction and we divided our gasoline taxes between the state and the various local jurisdictions.
Third, it should be recognized that highway construction and maintenance is an ongoing responsibility of each generation and should be funded on a pay-as-you-go basis. Each generation has its own maintenance to do and its own roads to build without being encumbered by the decisions of previous generations. Only in the case of capital intensive projects like tunnels and bridges have genuine revenue bonds been used, redeemed not by general highway users, and not by general taxpayers, but by the specific users of those specific projects through tolls.
Measured against these principles, the bond before us is a textbook example of how NOT to finance highways.
First, the use of general obligation bonds for transportation projects literally forces those who don’t use them to pay for those who do. Transportation projects should be paid for by the users of those projects in proportion to their use.
Second, the proposal contemplates indebting ALL taxpayers across the state to pay for local streets and roads in other communities – again literally robbing Piedmont to pay Pasadena. State funds should only be used for projects that benefit the entire state – such as the state highway system. Projects that exclusively benefit local communities – such as local streets -- should be exclusively paid for by those local communities.
Third, the proposal contemplates using 30-year bonds to pay for maintenance and equipment that will be obsolete long before the bonds are paid off, stripping the next generation of their ability to meet their own maintenance and equipment needs.
Fourth, the proposal locks in transportation priorities that may be entirely irrelevant or outdated a few decades from now. Population centers and transportation preferences change over time. If projects are funded on a pay-as-you-go basis, they can respond to changes in transportation needs. These 30-year measures rob our children of that flexibility.
Fifth, by encumbering gasoline taxes to pay for so-called “revenue bonds” for mass transit, you are literally robbing highway users to subsidize mass transit users – destroying the financial connection between the users and the payers of transportation projects.
Here is the fine point of it. Californians pay the fourth highest tax per gallon of gasoline in the country. We rank 49th in our per capita spending on our highways. Our problem has never been a lack of funds – but rather an abundance of very bad public policy.
Our gasoline taxes have been siphoned off for purposes unrelated to our highways, and local governments were given what amounts to veto power over state highway projects.
One other point, just for perspective. At the end of the Pat Brown administration, to produce the historic expansion of the state highway system, the state water project, the state university system and so much more, the total amount of general obligation debt incurred over the eight years of that administration – in 2004 inflation-adjusted dollars – was $20 billion. This proposal contemplates general obligation debt of nearly $70 billion.
At the end of that administration, only 2.2 percent of the general fund was consumed by debt service. Today the figure is 5.9 percent.
At the end of that administration, per capita spending – in 2004 inflation-adjusted dollars – amounted to under $1,500 per person. Today it is over $3,000 per person.
Which has delivered us to this fiscal paradox: despite record levels of debt, we have nothing to show for it; and despite record expenditures, we can’t seem to scrape together enough money to build a decent road system.
The fact that the overall plan contemplates nearly $70 billion of debt – compared to only $20 billion amassed by Pat Brown -- leads me to conclude that its sponsors already anticipate that it will be just as foolishly squandered as the record levels of debt and taxes that we are already paying for our public works.
Now, at this point in the proceedings, it would be customary to offer amendments to bring the proposal into line with the sound principles of fiscal policy that Senator Dutton outlined earlier.
But, of course, we are now powerless to do so, because the leadership of the Senate has agreed to bypass the constitutional process of the legislature and instead draft this measure by six members in a conference committee. So the proceedings today are so much hot air. We cannot amend this measure in any way.
In a shameful moment in the history of the California Senate, the leadership has abandoned the legislature’s role – and especially the Senate’s role – as the central decision-making organ in the state government. The careful deliberation and amendment of public policy is now a thing of the past.
We’re told our role is now “advisory.” Excuse me, but that’s what the Public Policy Institute and the Comstock Club are for. This is a legislature. We are not supposed to be advising on legislation. We are supposed to be acting on legislation.
I cannot offer amendments, so all I can do is protest, and to vote “No” when this breathtakingly bad public policy is finally dumped in our laps for a take-it or leave-it vote.