California Infrastructure Bank Provides Innovative Financing and More

A year and a half ago, when you were last interviewed by MIR, you shared some thoughts about the bank's future and its expansive plans for underwriting infrastructure bonds for an array of state and local government projects. Please give us a status report on the bank's activity; how prescient were you in that interview?

Starting from one of those predictions that I mentioned in that interview, the Clean Water Program, we leveraged their funds in 2003 providing an additional $300 million for the program. They're back to us and we're now working on a second sale so that one does continue. Since then we've branched into some general government financings that do not involve an infrastructure project or program. We issued $750 million in bonds for the California Insurance Guaranty Association to give them additional money to pay workers comp claims for people who were insured by companies that became insolvent. We also have been involved in the tribal compact assets securitization bonds and probably will be taking those documents to our board next month with the goal of raising about $1 billion for transportation.

We're also tasked with the emergency apportionment lease-financing program since we last talked. Some schools are suffering from serious financial difficulties, so we're currently about to seek approval and sell bonds to repay loans from the General Fund to three school districts in California – West Contra Costa, Oakland and Vallejo. This will free up that money to the General Fund for other purposes.

Even more exciting, we are involved in phase two of the governor's Goods Movement Action Plan. The ports, from San Diego to San Pedro to the Bay Area, are pretty up-to-date in terms of their own internal operation. But, as you know, the roadways and railways in and out of those ports in most cases are not keeping up with the increasing flow of goods. The I-Bank has been tasked with leading a group to put together a summary of all of the historic, current or and cutting-edge financing programs. We will be working with other committees in the Business, Transportation, and Housing Agency and holding public meetings to try to connect the most efficient financing mechanisms. The initial analysis of the phase one committee was that there's probably $47 billion of projects that could be constructed to improve goods movement. However, they've started to focus in on between $10 billion and $15 billion worth of highest priority projects and we'll be working with them to come up with a financing plan for those projects. Our goal is to be considered to issue some of the bonds.

When last MIR interviewed you, you mentioned the significance of a USC Keston Institute report that involved examining short term and interim financing options for the state of California to meet its transportation challenges. What was the value of that report in assisting the state and the Infrastructure Bank in financing the state's immediate needs for more infrastructure? Has the state found a better way to finance the $90 billion – or whatever the number is – shortfall facing our transportation infrastructure. And, lastly, what are the most likely financing tools that will be employed to meet our challenges?

Building on previous efforts, we've done a draft, and I think it'll be available soon. It's a 45-page outline of a whole range of financing tools. We've looked at everything starting with PAYGO, through general obligation bonds and revenue bonds, toll roads, all the way through the kinds of things you've been hearing about recently, such as equity or concession type contracts that have been becoming popular starting with the Chicago Skyway. Also, Washington, D.C., and several other communities around the nation are, in addition to revenue bond financing, looking at an equity infusion that makes quite a bit of additional money available to the local government or the state government from private investors. There is also SAFE-TEA that was just passed by Congress and signed by the President that makes money available.

We're looking at what will be coming to California through that, mixing that together with financing sources, to start to put the pieces together.

You're also aware that the Los Angeles Economic Development Corporation has helped to pull together a multi-county Southern California Leadership Council. It is focused on goods movement and they are sharing their thoughts with BTH Secretary McPeak, your chair. On their agenda for examination is tax exempt, tax credit bonds. Can you talk about that option as a potential means for the financing of needed new infrastructure in the state?

Yes, that is one that we will discuss in our report. It's been used in Qualified Zone Academy Bonds for education. They've used the concept which had a federal tax credit. I believe the next one that has been approved by congress is an energy efficiency program that uses tax credit bonds and then the LAEDC has also recommended consideration of tax credit bonds for transportation. The hope is that it provides an additional marketplace for bonds related to transportation projects. So we're looking at that and talking to the financial community about what would be the impact of a state tax credit.

One of the efforts that I think will come out of this will be to coordinate with the federal government to see if there's an interest at the federal level, because obviously a federal tax exemption is a really powerful tool. It would replace the interest payments with the tax credit and thus have the state play a role by providing a tax credit. Their proposal talks about the local participants playing a role in repaying the principal. So, that's one of the recommendations that will be presented and talked about by this group that is going to be meeting a couple of times in November.

Could you provide some context for our readers? The California Infrastructure and Economic Development Bank was created by legislation a decade ago to promote economic revitalization, enable future development, and encourage a healthy climate for jobs in California. Give our readers some insight into how month-to-month, the I-Bank realizes this expansive mission statement.

In addition to these lofty regional or statewide projects that we're working on, the revolving fund loan program that I think we discussed in our past interview continues to grow. The good thing about that is that even though we started out with about a $180 million appropriation from the general fund to fund the first loans, we've been able to sell bonds based on the revenue streams from those first loans to create additional cash to continue that program. We've sold over $50 million of bonds last year to continue the program, and we're just about to sell another $50 million.

We have some examples over the past year or so of transportation-related projects in El Segundo and San Bernardino and other cities and counties in California that had particular highway and transportation issues that they wanted to resolve. They were able to borrow money through this program to not only assist with some of their interior roads but also with goods movement related highways and bridges and grade separations and things like that that address site-specific local connections in the goods movement program throughout California. So, while we are working on the big picture, we also continue to chip away throughout the state on particular projects.

According to the I-Bank's September minutes, the Board approved the sale, issuance, and delivery of bonds for such diverse entities as Para Los Niños, the Sacramento redevelopment agency, and projects for the cities of L.A., Sacramento and San Bernardino. Is this a fair picture of the array of projects that come before your board for approval?

Through the Revolving Fund Loan Program there are 16 categories of projects that we can consider ranging from transportation, ports, government facilities like police stations and fire stations, the conversion of closed military bases, water and sewage, etc. So, it's almost a question of the few things that can't be addressed through that program rather than those that can when you talk about explaining the breadth and depth of that program. We also issue 501(c)(3) tax-exempt revenue bonds for a wide variety of non-profits like the SPCA, the Salvation Army, research facilities and cultural facilities throughout California that assist in economic development throughout the state. Through the industrial development bond, we can issue to manufacturers and processors that assist private parties in getting tax-exempt financing for economic development, and one of the tests there is public benefit, which is usually the number of jobs.

How does an eligible entity determine whether the I-Bank can help them? How do they apply for I-Bank assistance?

Well, one way to get the picture initially is by going to our website, which is www.ibank.ca.gov, and browse the range of programs and see what looks like it might fit, and for programs that look interesting, there is a three-page pre-application that a local government can fill out. It's just some very fundamental things about the project, the nature of the project, the source of repayment, amount of money that's needed, etc. They can email that to us and get pretty quick feedback about whether it fits into one of the categories. Then when we've made that conclusion it results in some emails back and forth, some phone calls and then we can send them a full application to fill out that has some detailed financial information that is required for underwriting. The other way is either through funding fairs or through contact directly with me or one of our loan officers. We do a lot of technical assistance that way to give somebody feedback over the phone on a particular project regarding how it might fit in to one of our programs and then guide them through the pre-application.

Elaborate on how the governance of the I-Bank has changed since our May '04 interview.

Initially the I-Bank had a three-member board chaired by the Secretary of Technology, Trade and Commerce, which included the Department of Finance director and the State Treasurer. When the Trade and Commerce Agency was disbanded, the I-Bank was moved to the Business, Transportation and Housing Agency and the Secretary became the chair.

Soon after we were moved to Business, Transportation and Housing, the Secretary of State and Consumer Services and a governor's appointee were added to the board. The governor's appointment hasn't been filled yet, but the four members have all been very active in various projects. We work with the State Treasurer on a regular basis because he is our agent of sale on all of our bonds. Fred Aguiar, who would be the newest member, and his staff have been very helpful in particular projects.

Why do we need the I-Bank?

The biggest overall benefit that the I-Bank can provide is the general expertise in one place in a number of types of financings for state and local government. We've put together quite a talented team of loan officers and people with a lot of experience in issuing bonds for a variety of economic development facilities. We can assist a lot of the smaller entities – where the city manager might also be the fire chief and cook and bottle-washer and has a lot of different responsibilities – with expertise in a particular project to help them to provide financing that they might otherwise not have the expertise to do. We also get out into communities and, through members of the Senate and Assembly and through funding fairs that we sponsor, bring to the attention of various county and city governments the types of programs that are available.

The value of the I-Bank is not only the actual money that we can place – it's the collective expertise that we can bring to a community to help them get something done very quickly. We had an example in El Segundo that we're very proud of where they had a transportation project that they were ready to fund but opened bids that were substantially more than their estimates. They had federal participation but had a time limit that was about to run out. They came to us and within a month we had processed the application and taken it to our board and gotten approval, and they were able to beat the deadline they had with the federal government and keep their federal participation intact and help make the project a success. That's the kind of thing that we really love to be able to do, to really bring our talent to focus on something that has a time constraint and make it happen.

Let's end by focussing on the big picture. There are very serious political conversations taking place about the need for more infrastructure investment in the state. The I-Bank's is you noted above, will soon be releasing a report on the depth of the state's infrastructure needs for transportation, water, the levees, which will only reaffirm the important need for action. The question is: what role do you anticipate the I-Bank playing in financing the needs being quantified?

I think the goods movement financial need overall is estimated to be in the $40-$50 billion dollar range if we are to deal with all of the rail and roadway improvements that would be on everyone's wish list for the next few decades. This would allow the ports to not only double but perhaps triple their capacity without having ships circling out in the ocean for several days waiting to unload because of traffic problems.

So, we're involved in not only producing a menu of options to the decision-makers in the Business, Transportation, and Housing Agency about financial options that might be available but also assume that we will play a role in actually issuing some of the bonds if bonds are chosen. Or if they decide at some point to seek legislation to develop loan programs or something like that, then the I-Bank would be involved in that. Other issues such as seismic retrofit of hospitals, the levee system, those are the subject of ongoing discussions including the administration and we just stand ready to assist when called upon.