State's Infrastructure Bank: Under the Financial Radar Screen, But Far From Marginal

Let's begin with you outlining for our readers the conceived purpose, role and function of the state Infrastructure Bank. Please also speak to how it's evolved to meet the original goals.

The Infrastructure Bank was created by legislation in 1994. It was a result of a couple of years of discussion among members of both parties and Governor Pete Wilson to create a bank that was a general purpose financing authority for the state of California. In the past, a lot of the financing authorities were single or dual purpose (either water credits or education, pollution control, etc.) But the infrastructure bank has a broad mandate that allows it now to get involved in both direct loans to local government for infrastructure finance, and also to serve as a conduit issuer. So, the idea was to establish a broad authority and the bank is starting to live up to that over the past several years.

Initially, there was no funding because the early ‘90s was a very tight budget time. But in the last year of the Wilson Administration, the Legislature appropriated $50 million to the infrastructure bank and another $425 million the following year, which got the bank staff started on the Infrastructure State Revolving Fund program (ISRF), a program in which we make loans to local government for 15 different categories of infrastructure, from roads to sewers to water, ports, public safety facilities. It's a pretty broad description of the types of infrastructure that can be financed and built by local governments. So, that program got off to a good start in about 2000, and has already financed over $230 million worth of projects. And, we've sold bonds leveraged by some of the first loans to continue the program. The money that I mentioned in the beginning was whittled back to about $200 million by the Legislature as the current economic crisis began to dawn on us. So, we ended up with about $200 million, and I think we can leverage that into close to $600 million worth of loans through the revolving fund concept.

Traditionally, the I-Bank has been the conduit issuer for a number of 501(c)(3) financings for cultural facilities, research facilities and the like, and also served as a conduit issuer for industrial development bonds, which can allow manufacturers or processors in California to borrow up to $10 million to provide jobs. In addition to that we have added a broader category of state funding during the past few years. A couple years ago the Clean Water State Revolving Fund (CWSRF) Program, a program that uses money from the Federal Environmental Protection Agency and for the last 15 years has been making loans to local government for wastewater treatment plants and similar facilities, ran out of funding. We leveraged their existing loans to provide more funds. We also just recently financed $1.16 billion of the seismic retrofit of the Bay Area bridge system. It's a seven-bridge system that, after the 1989 earthquake, was determined to be in need of repair or replacement.

Stan, one can't help but consider what you've listed here and ask: who governs this extraordinary bank, and how are its priorities set?

Up until December 31st, there was a three-member board established in the legislation that governs the organization. There's also an executive director, myself, who's appointed by the governor and has to be confirmed by the Senate, who runs the day-to-day operations. The board consisted of the secretary of Technology, Trade and Commerce, who was the chair, the director of finance and the state treasurer. The interesting issue that we face right now is that at the end of last year when Technology, Trade and Commerce was closed, the legislation did move us to the Business, Transportation and Housing Agency (BTH), but didn't appoint a new chair. Currently, there is legislation, AB 2481 (Nunez), to make the secretary of BTH the new chair of the board. So, we will be back to a three-member board.

The board makes the decisions regarding our ISRF program, for which the board has already adopted criteria. They look at each application as it comes up to see that it meets the requirements of the Act, and also of our criteria. The Board also approves IDBs and 501(c)(3)s. And they also approve actions with respect to the statewide issuances, although legislation guides those assignments.

Please put in context, once again, what the I-bank is all about. Who performed this function before the I-bank existed?

Historically, there were a variety of different financing entities and programs that existed in various state agencies and offices that could issue bonds or make loans for different types of infrastructure and or nonprofit and business financings. In some cases a special legal entity was established to do the financing. But, the good thing about this infrastructure bank concept is it puts together an ongoing team not only of people who work for the infrastructure bank, but also of consultants who are in the industry and who are familiar with the infrastructure bank law. We see ourselves not so much as a policy-making entity, but rather a facilitator. Bring us the project and we'll figure out some options with respect to how to finance it. And in the last few years, the demand for our expertise has increased greatly.

Let's focus in on transportation funding. You were recently part of discussions that were convened by the Keston Institute at USC to prepare a white paper for Secretary of Business, Transportation & Housing Sunne McPeak on possible initiatives for transportation funding and finance. Share what you contributed, as well as that report's key recommendations.

The exciting thing about the efforts of the Keston Institute and others that Secretary McPeak has brought together is that we're starting from the realization that we don't just have a shortfall, but we need to assume we have almost nothing to work with in terms of the traditional funding sources. Our charge was to look at every option with which any of us has some familiarity and recommend some of these that we might use to begin or continue the projects that are in the pipeline. Without some creative financing, many of these projects will be put on hold or canceled.

So we were able to gather ideas from all over the country and all over the world and funnel them through the Keston Institute, where they were assembled as a major proposal. We continued to talk to Sunne and to members of that panel to try to refine the priorities: bringing private funds into the picture, public-private partnerships, and user-fees. Many of these things are going to have to be at least examined over the next few years if we're going to be able to continue to have the kind of activity that's warranted by the backlog of projects that exists.

Elaborate on that backlog of projects. What included in the backlog? What's at risk in California if we don't meet our infrastructure needs?

We see numerous reports on the backlog of new projects that are needed and we hear numbers from the California Business Roundtable that are in the $90-billion range, and then the state treasurer in the $80 billion range. However, it depends on which sectors of infrastructure need you include. Education, water, transportation and a few others alone can get you up to those numbers. But there are also the hidden and quite serious costs of deferred maintenance, which I've heard characterized as $50 billion to $60 billion. We built all of these great projects in the ‘50s and ‘60s, but we haven't put the money into maintaining them to the level necessary. So, we're behind with maintenance as well. Realizing how huge these numbers areis what has brought this administration together with a variety of interested stakeholders from the community to consider seriously more creative methods of financing our infrastructure needs.

Stan, what's the I-bank going to look like two, three, four years from now? Give us a sense of what the game plan is.

We had the ISRF program and the 501(c)(3) and IDB programs as our foundation, and then we got into particular state programs over the last couple years, like the Bay Bridge and CWSRF Program. The broad state functions in transportation, water and others will continue to grow such that we?ll be doing large bond issuances on a regular basis for those sectors of infrastructure. We like to say that we hit our $10 billion mark this year. A big part of that involved the rate reduction bonds totaling over $6 billion. But, it's about $4 billion since then on an increasing basis, where four years ago we might have been at half a billion. This year, we plan on being over $2 billion. I can see in four or five years our impact could be in the range of $4 billion or $5 billion or more. It really just depends on whether the Legislature and the governor continue to look to the bank as the source of expertise for a variety of programs.

We're also working with Secretary Tamminen on his effort to flesh out the governor's January statement about creating a green bank that would do energy efficient financing. There are an incredible number of different programs around the state, the nation and even the world for energy efficient projects and we would like to be able to help promote and finance them. We are actively working with Secretary Tamminen on a vehicle to make that happen.

What's the state treasurer think about the I-Bank and such proposals?

I think the state treasurer is generally supportive of the infrastructure bank program. And, although we have disagreements on details once and a while I think that he really likes the program. And Secretary McPeak is very excited about being involved in this program, and told me that getting that bill passed for her to become chair was one of her highest priorities.

We have discussed with the treasurer's staff and others that as I-Bank becomes involved in more and broader state financings we might consider a broader board. One of the limitations with only two or three board members is that a conversation between two of our board members could become a meeting. A larger board would avoid this. The other advantage of expanding the board might be that as we get into more and different types of projects, the governor or the Legislature may decide to put people with particular expertise such as water or transportation on the board.

How do you react to the proposal to apply Prop. 42 funds to the general fund? What are the consequences for transportation funding that the report addressed either well or poorly?

I don't think anybody in the transportation community disagreed that in order to be able to finance more transportation, you would need to remove the option that allows Prop. 42 money to be used elsewhere in unusual circumstances like what exists today. Polling suggests that the population is generally cynical about the Legislature raising money for one purpose and using that money for another purpose. So, if you think you are voting for an initiative to support transportation funding and that money does not go to transportation uses, you are less likely to trust the government the next time out and vote for another critical spending bill.

Closing that gap on Prop. 42 funds will accomplish two things. One, it puts a few billion dollars back into transportation. But, it also gives people confidence that if you go out again with a transportation bond, the funds are really going to be used for that purpose. People are more likely to support it if they trust it will be used for the stated purpose and people will support transportation projects.

The Bank is providing significant infrastructure support for local government. What's the need and case for increasing that support for local government infrastructure?

I guess that there's sort of a bifurcated answer for that. Over 90% of our transactions involve money raised from the capital markets through revenue bond programs. The only limitation on us there usually is the quality of the project and the number of assignments that we have.

In the ISRF program, which is the one place where we make direct loans to local government, there are unmet demands in many of those categories that we could fulfill and demand continues to increase. With the staff and money that we have, we're continuing to serve that need in part. But, if more money were appropriated for that program, you could double or triple that through leveraging, and have more of an impact on the need.

Having said that, we wouldn't ask that question in the next couple years because there simply isn't excess money available. The fact that we're able to meet some of the demand puts us in a better position than a lot of organizations who simply have run out of funds. Of course, if we had more money in that program we'd serve more of the need, but we can continue to meet a lot of the requirements in our present situation through some of these creative financing and revenue bond programs until such time as the economy rights itself and the option to increase funding for these programs becomes realistic.