Rebuilding California’s Infrastructure – Financing Models & Recommendations (Part 6 of 6)

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This is Part Six of “Rebuilding California’s Infrastructure,” to access the other five sections, click on the links below. To access the entire six-part study in a single, printable PDF document, DOWNLOAD HERE.

Part One: Introduction
Part Two: Water Reuse
Part Three: Water Storage
Part Four: Desalination
Part Five: Energy and Transportation
Part Six: Financing Models and Policy Recommendations

FINANCING MODELS AND POLICY RECOMMENDATIONS

California is not alone among states that find their infrastructure in need of modernization and their sources of funding constrained. The United States is decades behind several other countries in building its infrastructure for the 21st century. Policy changes will be required at both the state and federal levels to enable California to make up its infrastructure investment deficit.

California and other US states have not relied on private capital to finance infrastructure, as the $3.7 trillion municipal bond market makes borrowing by state and local governments affordable by virtue of the exemption of interest from federal income taxation. But a reliance on this tax-exempt debt financing mechanism has produced a legacy of underinvestment and delayed maintenance in infrastructure assets all across America. As a result, infrastructure assets—bridges, drinking water distribution pipes, transit systems—have become liabilities to state and local governments.

This has led public finance officials to re-examine their approach to financing infrastructure, including California State Treasurer John Chiang who proposed in his 2016 State Treasurer’s Biennial Report, “to rethink our reliance on bond debt to fund infrastructure.” He stated:

“The issuance of debt can be seen as a Trojan horse carrying with it transaction and interest costs that require repayment of two to three times, or more, of what was actually borrowed. These costs are expected to grow as the debt markets emerge from the sustained period of historically low interest rates. As rates increase, more of every infrastructure dollar will be used to pay interest, leaving less for the concrete, steel, equipment, and labor.” [1]

State Treasurer Chiang suggests, “developing finance plans that draw on a variety of capital sources.” The idea to leverage public funding with private financing from long-term institutional investors like pension funds has been articulated by many governments around the world, including the U.S. Department of the Treasury.

The intrinsic problem in financing infrastructure, however—from Sacramento to Queensland—is not a lack of capital but a lack of revenue-generating infrastructure assets to repay investors. While private investors have not participated much in financing public infrastructure, they have spurred money-making innovation in private-sector infrastructure, such as electrical power and telecommunications. These investors are increasingly as sought after for their expertise as for their capital.

To speed private investment in public infrastructure, some governments have developed policy incentives and financing mechanisms expressly to attract long-term institutional investors. We will look at five of these programs with any eye towards how they might be adapted by California policymakers, specifically, project guarantees, inflation protection mechanisms, pension governance reform, project bundling and in-kind contributions.

Advocates of laissez faire may question some of the policies described here, regarding them as a form of crony capitalism. For the purposes of this study, we assume that some types of civil infrastructure have public goods characteristics:  they would be under-supplied in the absence of government intervention.[2] Assuming the government must be involved, we believe that incenting private actors to supply public goods is usually preferable to public provision. It is also worth noting that there is international competition for infrastructure capital; if California and the US don’t offer policies to attract this capital, it will be invested in Australia, Canada and Europe.

United Kingdom: Guarantees

As part of the 2012 UK Guarantees Scheme, the UK government offered financial guarantees on money loaned to fund infrastructure projects in an effort to make the projects more attractive to private investors. The program was intended to “avoid delays to investment in UK infrastructure because of adverse credit conditions making it difficult to secure private finance.” By providing guarantees to lenders, the investment risk was transferred from the lenders to the government in hopes of encouraging more lending for infrastructure projects. The program was funded by an annual fee paid to the government by sponsoring infrastructure companies, based on the level of risk associated with the project. As of December 2015, the program has generated 39 projects valued at approximately $669 billion; there have been no calls on government to pay out on any government guarantees.[3]

For California policymakers, this financing mechanism may have the potential to be adapted by state infrastructure banks and economic development commissions to reduce project-financing risk for private investors in California infrastructure.

Netherlands: Inflation Protection

In the 2012 N33 road-widening transportation project, the Dutch government created an inflation-linked financing mechanism expressly to secure senior debt financing from the local pension fund, APG. In this $167 million transaction, APG provided $107 million in debt, at a lower fixed rate than offered by the commercial banks to the government, in return for inflation-proof payments on its capital, which was guaranteed by the Dutch government. This enabled APG to reduce inflation risk in its $461 billion portfolio and provided the government with cheaper debt by taking inflation risk.[4]

Typically, infrastructure project financing is fixed and not indexed to inflation. By indexing project loan payments to the country’s consumer product index, the Dutch government saved APG the significant costs associated with buying similar inflation protection.

Like APG, US pension funds need inflation protection. Policymakers might be able to use the Dutch government’s inflation-linked financing mechanism as a model to structure similar instruments. This is especially relevant since California has the two largest public pension funds in the United States. Such a financing mechanism might mitigate the geographic and concentration risks that would otherwise impede the California pension funds from investing in California infrastructure.

Canada: Controlling Interest Legislation and Pension Governance Reform

The Quebec government entered into an operating partnership with La Caisse de dépôt et placement du Québec, a local, $215 billion pension fund, to take over responsibility for planning, financing, developing and operating certain public infrastructure assets. To do this, the provincial government needed to amend procurement regulations and pension governance laws to allow the pension fund to have a controlling interest in public assets. The government continues to protect the public interest by retaining approval authority for projects developed by the pension fund.[5]

This financing model might offer California policymakers an additional option for building and operating infrastructure projects with limited impact on public balance sheets.

Europe and Canada: Project Bundling

Because it does not make sense for long-term institutional investors to finance small infrastructure projects—the average municipal financing in the US is $25 million—or to invest in projects in economically-challenged locations—project sponsors in Europe and Canada developed methods to group or consolidate projects into single procurements.[6]

By bundling similar small projects into one deal, a scale can be achieved that justifies the costs of due diligence for private investors, reduces transaction costs for both investors and sponsors, and diversifies the risk of the underlying individual projects.

Project-bundling financings have funneled over $800 billion in international infrastructure investment over the past five years.[7] We propose them because of the broad application they may offer California policymakers as they confront a $358 billion gap in needed infrastructure financing over the coming decade.[8]

Australia: In-Kind Contribution

The state government of Queensland conveyed the Queensland Motorway—a highway, bridge, and tunnel network—to QIC, a local pension fund, to satisfy pension liabilities in 2011. This in-kind contribution benefitted from both political support and public acceptance because of the shared responsibility for pension liabilities between the government, the pension fund, and the taxpayers. QIC’s management of, and subsequent investments in, the motorway resulted in an increase in its value so great that the asset had to be sold because of its overweight position in QIC’s portfolio. This resulted in a multi-million-dollar profit for the pension fund in less than five years[9] and a much-improved roadway for the state.

US corporations have made in-kind contributions to their pension funds, but state and local governments have not made them to public pensions. California policymakers might explore the potential of in-kind contributions as a tool to address distressed assets on balance sheets and to reduce unfunded pension liabilities.

In addition to these five approaches to increase private-sector investment in public infrastructure, some governments have encouraged pension funds to pool assets to more efficiently deploy capital into infrastructure projects. Pooling can be thought of as the aggregation of assets into a collective investment vehicle to enhance investment performance.

Pooled-Asset Structures

Australia introduced pooled-asset structures in the early 1990s. More recently, in 2011, the United Kingdom launched an initiative to establish a pooled-asset vehicle, stating: “The current investment model and structure of UK pension funds does not allow the vast majority of UK pension funds to efficiently invest in infrastructure.”[10]

The 2012 Moreau Report, commissioned by the Canadian government, echoes the UK’s rationale, specifically finding that pooling would facilitate pensions’ access to infrastructure investments.[11]

After the collapse of a Minnesota bridge in 2007, Kathleen Sebelius, then governor of Kansas, proposed that “pension funds pool their assets and invest directly in projects to build new roads and bridges in multiple states, bypassing the Wall Street firms that want to siphon off profits.”  She suggested that public pensions funds, with assets in excess of $3 trillion, could “create a multiplier effect, generating jobs, economic activity, and new tax revenue for states.[12]

US pension plans—to date—have not pooled assets to invest in infrastructure.

One of the earliest Australian pooled-asset structures, Industry Funds Management (IFM), is recognized as an exemplar of the genre. Created in 1994 by 30 Australian pension (or superannuation) funds, IFM operates as an institutional fund manager with an independent board to oversee the business, and with a dedicated in-house investment team to make investment decisions and manage the assets.

According to CEO Brett Himbury, the $20 billion IFM has generated an average annual return of 11.5 percent over the past 20 years.[13] IFM’s recent investment in the Indiana Toll Road is its 30th infrastructure asset and the fourth toll road in IFM’s infrastructure portfolio.[14]

IFM uses its organizational structure to align investors’ interests by facilitating follow-on investments. This optimizes both cash yield and the long-term value of assets in which they have an equity ownership interest. The ability to reinvest in owned assets is a competitive advantage that generates, on average, a 15 percent return according to IFM Executive Director Brian Clarke.[15]

This investment approach differs from discrete, US debt financings in which the focus is on obtaining the lowest cost of capital, not on enhancing the long-term value of the asset.

Direct-Investment Capacity

The “secret sauce” of IFM, and many other pooled-asset structures, is the ability to make direct investments in infrastructure assets and projects. This capacity enables investors to draw on in-house expertise to make investment decisions internally and to have equity ownership interests in assets. This lowers costs and increases control over their investments. US institutional investors generally do not have the capacity to make direct investments and therefore must outsource the investment process to fund managers at much greater expense.[16]

Pioneered by the Ontario Teachers’ Pension Plan, most of the large Canadian pension funds also have the capacity to make direct investments in infrastructure assets and projects. Like the Australian pension funds, they acquired the capacity to make direct investments in infrastructure by investing cooperatively in pooled-asset structures developed expressly to invest in infrastructure. These structures range from formally organized legal entities to opportunistic syndicates.

Borealis Infrastructure is one of the Canadian direct-investment platforms formed expressly to invest in infrastructure on behalf of its sponsoring pension fund, Ontario Municipal Employees Retirement System (OMERS). OMERS operates Borealis Infrastructure as one of three investment captives, much like a subsidiary company that is structured to balance accountability and autonomy. Each captive has a dedicated chief investment officer to oversee an in-house investment team; all are employees of OMERS. Borealis Infrastructure manages over $12.7 billion in infrastructure investments for OMERS and other institutional investors. Its 10-year average annual rate of return, according to its 2014 annual report, is 12.33 percent, which almost doubles the MSCI World Infrastructure Index return for the same period.[17]

The sustained outperformance of these Australian and Canadian infrastructure investors can be attributed to organizational structures, which align long-term interests and financing mechanisms that realize cost efficiencies.

Few of the nearly 4,000 pension plans spread across the United States—227 managed by states, and 3,771 managed by local governments—have an efficient way to invest in infrastructure. Even the two largest American pension funds, both in California, have not yet been able to institutionalize direct investment capacity.

Barriers to Adaptability of International Models

It is important to note that there have been numerous examples in the United States of political attempts—mostly by state governors—to tap institutional investors, particularly pension funds, to secure private capital to finance infrastructure needs, yet no policy initiatives have been advanced to overcome the structural impediments of US fiscal policy that discourage private investment in infrastructure.

Public pensions have a fiduciary duty to provide a secure retirement for their beneficiaries—not to build bridges, create jobs, or finance businesses started by women or minorities. Nonetheless, political leaders pressure them to support pet projects. New York Governor Mario Cuomo proposed financing a new Tappan Zee Bridge with public pension capital in 2011; California Governor Jerry Brown called for pension capital to build a high-speed rail project in 2012.[18]

As convenient and logical as these calls for local, in-state investments would appear, they run counter to the tenets of prudent investing. Just as insurance companies spread out policies in hurricane and flood areas to mitigate geographic risk and employees do not invest all their money in the stock of their employers to avoid concentration risk, pension funds should limit investments in their local economies unless there are compelling offsets to mitigate the inherent geographic and concentration risks. If public pensions were to expose themselves to such risks, they would be putting taxpayers—who are ultimately responsible for pension funding shortfalls—at risk as well.

Life-Cycle Costs

Public finance officials—California State Treasurer John Chiang is an example—are increasingly recognizing that borrowing costs are only the starting point in financing infrastructure assets and projects. These policymakers acknowledge that other costs, such as operations and maintenance, need to be considered—and too frequently are not in the United States—when underwriting projects that might stretch out over several decades. They are also challenging the conventional wisdom that tax-exempt municipal financing is lower in cost once the cost of the tax subsidy is factored into the calculation.

A 2014 report on lifecycle cost analysis by the American Society of Civil Engineers and the Eno Center for Transportation provided the foundation for this thinking, which shows that including lifecycle costs in financing projects shifts the emphasis from up-front costs to the long-term value of the infrastructure asset.[19]

The objectives of many public finance officials seem to be in opposition to those of private investors—and for that matter, taxpayers. Governments seek to obtain the lowest cost of capital—to preserve borrowing capacity and minimize the cost of service to taxpayers—while private investors seek to realize the highest risk-adjusted return for their capital by increasing long-term asset value. Where these constituencies intersect is on the cash yield derived from high-performing infrastructure assets.

Long-term institutional investors like IFM and Borealis, invest—and reinvest—not for short-term gains but to receive steady, predictable cash flows for as long as possible. It follows that governments and taxpayers would get more value by financing total lifecycle costs than they do from a simple bond issuance based on the current cost of subsidized debt service that finances construction only.

By adopting a lifecycle approach to financing infrastructure, California policymakers could shift the focus from cost-of-service to asset preservation. This would enhance the sustainability of infrastructure assets, optimize the delivery of infrastructure services to taxpayers, and encourage private investment.

POLICY RECOMMENDATIONS – CALIFORNIA

We offer the following nine recommendations, noting that additional study needs to be done to determine both their adaptability and their feasibility for California.

  1. Identify projects which would be better financed by private capital to preserve state and local governments’ credit and funding resources for projects that can only be financed by the public sector.

California government agencies—such as the transportation and water state agencies, the California Energy Commission, and the California Public Utilities Commission—might begin by estimating the real lifecycle risks and costs of their infrastructure assets to identify those that could be better shared with, or transferred to, private partners. In addition to risk-sharing and possible cost-savings, this would allow governments to preserve credit capacity and funds for infrastructure needs unsuited to private sector financing.

  1. Aggregate projects to create financially viable project pools.

California infrastructure procurement agencies might mount a cooperative effort to investigate whether small, discrete projects with similar structural design and deficiencies could be bundled into single procurements. According to the 2016 State Treasurer’s Biennial Report, California has more than 2,700 bridges that are structurally deficient. Some of these bridges might need similar remediation, which could be done on a mass-production basis with greater efficiency. This would allow governments to reduce costs, increase competition, and accelerate delivery.

  1. Develop guarantees and credit-enhancement mechanisms to plug project-financing gaps.

For projects with insufficient user fees to produce a level of return necessary to attract private investors, state investment banks and economic development commissions could provide project-completion guarantees, contract assurances, and other credit enhancements. These financing mechanisms would provide project-viability gap funding. While funded by public-sector dollars, they would enable government to leverage its resources much further than by borrowing the full amount of financing.

  1. Facilitate the development of a multi-state, pooled-asset structure for public pensions to develop direct investment capacity in infrastructure.

This would introduce a competitive source of long-term capital to complement subsidized capital sources available to state and local governments. A pooled source of public pension capital would also preserve the ability of governments to utilize municipal bond financing by virtue of the public interest they share as state agencies.

  1. Adopt a lifecycle approach to financing California infrastructure.

This would quell the temptation to proceed with expensive, short-term-oriented financings at the expense of choosing the best option in the long run. It would also ensure that operation and maintenance costs are factored into financial decision-making. Most importantly, it would signal to private investors a commitment to long-term asset preservation.

  1. Encourage more efficient water markets.

More private capital would be available to finance water infrastructure, if water products were more consistently sold and exchanged at market prices. As discussed in the water storage chapter, California has the opportunity to greatly increase its use of water banking. More efficient pricing of different grades of water would both encourage the development of water banking and provide more consistent information about the returns available for reuse, storage and desalination projects.

  1. Streamline approval processes for key infrastructure projects.

As we mentioned in the desalination chapter, both the Carlsbad and Huntington Beach projects were proposed in 1998. The Carlsbad plant was completed 17 years later, while the Huntington Beach plant is still under review.  The state could accelerate infrastructure development and attract more private capital by reducing the number of public agencies reviewing proposals and capping the length of time a given agency can take to reach a final decision.

  1. Increase energy production using a greater variety of clean energy options.

The addition of solar and wind power production alone will be insufficient to keep up with the state’s growing population and energy needs. Regulators should be more open to nuclear energy and natural gas – which can be used together with solar in hybrid power stations.

  1. Reduce congestion by encouraging private capital to finance more High Occupancy Toll lanes.

HOT lanes have been successful is Orange County, elsewhere in Southern California and the Bay Area. Yet California still has the majority of the nation’s most crowded stretches of highway. State and local leaders should redouble their efforts to attract investors to finance more HOT projects rather than waiting for public sector agencies to accumulate enough funding to build these lanes.

POLICY RECOMMENDATIONS – FEDERAL

In the 2016 election cycle both major candidates called for increased federal infrastructure investment. But with its persistent deficits, high debt burden and rising entitlement costs, it is unclear that the federal government has the fiscal capacity to undertake the necessary investment. As an alternative, Congress should consider regulatory and tax code changes that would encourage banks, corporations and pension funds to invest in state and local infrastructure projects.

  1. Encourage banks to hold more municipal bonds by deeming them to be High Quality Liquid Assets.

In 2014, the Federal Reserve and the Federal Deposit Insurance Corporation implemented a new rule requiring large banks to hold a minimum amount of High Quality Liquid Assets (HQLA) to act as a buffer in case of a liquidity crisis like the one that disrupted financial markets in September 2008. The regulator included equities and corporate bonds in its definition of HQLA but excluded all municipal bonds.[20] More recently, bank regulators allowed some general obligation bonds to be treated as HQLA but continued to exclude revenue bonds.[21] Meanwhile the House of Representatives passed HR 2209 which directs the Fed and other financial regulators to include liquid, investment grade municipal bonds in their definitions of HQLA.[22] At this writing it was unclear whether this bill would become law. Highly publicized bankruptcies notwithstanding, municipal bonds have had very low default rates over the last 75 years[23] and should not face discriminatory regulatory treatment.

  1. Replace the federal tax exemption on municipal bond interest with an issuer subsidy.

Even if HQLA restrictions are eased, banks and other institutional investors will continue to limit their municipal bond holdings due to the tax treatment of these securities. Since the individual income tax was instituted in 1913, municipal bond interest has been exempt from federal taxation; it is also exempt from state income tax in California and elsewhere. As a result, municipal bonds are generally perceived as an investment for high income individuals who either hold them directly or through mutual funds.

Elimination of the tax exemption has been proposed by Simpson-Bowles Commission[24] and former Senator Tom Coburn (R-Oklahoma).[25]  While such a change would increase municipal market liquidity by bringing more categories of investors into the market, it would also reduce demand among today’s investors who are willing to take lower interest rates in exchange for the tax exemption.

A deficit-neutral solution promoting municipal market liquidity would be to replace the federal tax exemption on municipal bond interest with an interest subsidy to municipal bond issuers. Such an approach has a precedent: as part of the 2009 American Recovery and Reinvestment Act, the Obama Administration and a Democratic Congress created a new type of taxable municipal security known as Build America Bonds (BABs).[26] Although BABs pay higher interest rates than tax exempt municipals, the federal government pays issuers an interest subsidy that offsets the extra costs. Once ARRA funding was exhausted, no new BABs could be issued because Treasury lacked budgetary authority to continue offering the subsidies.

The Administration has proposed replacements for BABs in recent budgets,[27] but these suggestions have not been acted upon by the Republican Congress. One way to restore BABs in a divided government context would be to couple new BAB subsidy authority with elimination of the municipal bond interest tax exemption. If implemented, this reform would have the effect of forcing all new municipal bond issuance into the taxable sector.

A potential risk of this proposal is that Congress would restrict the level of available subsidies, and thereby create a disincentive for local government bond issuance. In the absence of the tax exemption, interest cost on new municipal bond issuances will be higher once funding for subsidies is exhausted. If the subsidy was instead implemented as an entitlement, Treasury could provide them to any eligible bond issuer that applies. While the word “entitlement” may seem scary, it is essential to realize that this does not represent a material change from the status quo. Today, individual investors have an unlimited ability to reduce their tax liability by purchasing municipal bonds; the proposed entitlement simply shifts the benefit from taxpayers to state and local bond issuers.

CONCLUSION

Pension funds and other institutional investors have large amounts of capital that could be deployed to California infrastructure assets. Meanwhile, California public agencies have been unable or unwilling to raise enough money to build and maintain infrastructure commensurate with the needs of a growing population.

By implementing policies that facilitate private investment in civil infrastructure, California can eliminate water shortages, dramatically reduce highway congestion and avoid a repeat of the brown-outs that ushered in the current millennium. We hope this study will trigger a discussion among policymakers and institutional investors about how to deploy private capital to public benefit in our state.

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FOOTNOTES

[1] John Chiang (February 9, 2016). Building California’s Future Begins Today. http://www.treasurer.ca.gov/publications/biennial/2016.pdf. Page 6.

[2] Public goods are typically services from which individual users cannot be excluded and thus cannot be priced. In the case of roads and tap water, it is physically possible to exclude users, but doing so may be considered unacceptable from a normative standpoint.

[3] Chris Rhodes, (Infrastructure Policy Briefing Paper, London, House of Commons Library, December 23, 2015), p. 20-22.

[4] Michael Bennon, Ashby H.B. Monk, Caroline Nowacki (Summer 2015), Dutch Pensions Paving Way for Infrastructure Development. Journal of Structured Finance. Vol. 21 No, 2 Pages 45-54. http://www.iijournals.com/doi/abs/10.3905/jsf.2015.21.2.045?journalCode=jsf.

[5] La Caisse de dépôt et placement du Québec. (Press Release, Montreal, January 13, 2015), http://www.prnewswire.com/news-releases/la-caisse-unveils-agreement-with-quebec-government-to-carry-out-infrastructure-projects-288407561.html.

[6] As described in a 2014 Brookings Institution paper: “… in a given state, projects need to be large enough in dollar terms to merit private sector attention. As a rule of thumb, the private sector is interested in projects in the $100 million range to make the investment of their time and resources worth the effort. For some straightforward projects, notably parking garages, this number can be as low as $50 million.” See Patrick Sabol and Robert Puentes (December 2014), Private Capital, Public Good. Brookings Metropolitan Infrastructure Initiative, Washington, DC, p. 16.

[7] Ibid., p. 17

[8] John Chiang, Building California’s Future Begins Today, p. 6.

[9] Ross Israel, Leisel Moorhead, and Trent Carmichael (2015). The Commercialisation of Queensland Motorways in Australia. Infrastructure Risk Management PEI Report, London, pp. 274-279.

[10] Her Majesty’s Treasury (November 1, 2011). Memorandum of Understanding Between HM Treasury and the National Association of Pension Funds and its Member Pension Funds and the Pension Protection Fund. https://www.gov.uk/government/publications/memorandum-of-understanding-between-hm-treasury-and-the-national-association-of-pension-funds-napf

[11] William Morneau (November 16, 2012). Facilitating Asset Management for Ontario’s Public-Sector Institutions. Ontario Ministry of Finance. http://www.fin.gov.on.ca/en/consultations/pension/recommendations-report.pdf

[12] Kathleen Sebelius and Andy Stern (May 7, 2008). Main Street Not Wall Street Should Fix Crumbling U.S. Infrastructure. Christian Science Monitor. http://www.csmonitor.com/Commentary/Opinion/2008/0507/p09s02-coop.html

[13] Scott Deveau (November 13, 2015). Canadian Pension Funds Buy Indiana Toll Road for $2.8B.  Bloomberg News. http://www.bloomberg.com/news/articles/2015-11-13/canadian-pension-funds-buy-chicago-s-toll-road-for-2-8-billion.

[14] Industry Funds Management (May 27, 2015). IFM Investors Completes Acquisition of Indiana Toll Road Concession Company. Press Release. http://www.businesswire.com/news/home/20150527006535/en/IFM-Investors-completes-acquisition-Indiana-Toll-Road.

[15] McKinsey & Company (March 2013). Rethinking Infrastructure: An Investor’s View. McKinsey Insights & Publications., http://www.mckinsey.com/industries/infrastructure/our-insights/mark-wiseman

[16] Studies have shown that the cost differential between internal and external management is significant, and that outsourcing can cost ten to fourteen times more than internal management.  See Keith P. Ambachtsheer, The Future of Pension Management: Integrating Design, Governance and Investing, (Hoboken, NJ: John Wiley & Sons, 2016), 104. See also, Frederick Funston, “Management and Operations Study and Best Practice Review for the City of New York Office of the Comptroller’s Asset Management Function,” (Report, Funston Advisory Services, Bloomfield Hills, MI, December 2015), 367. See in addition, Canada Pension Plan Investment Board, frequently asked questions about operating costs,  http://www.cppib.com/en/public-media/faq.html.

[17] This figure is calculated from averaging the annual rates of return reported for infrastructure investments in the annual reports of the Ontario Municipal Employees Retirement System for the years 2006-2014, http://www.omers.com/corporate/corporate_annual_report.aspx and compared to an average of the annual rates of return of the MSCI World Infrastructure Index for the years 2006-2014, https://www.msci.com/resources/factsheets/index_fact_sheet/msci-world-infrastructure-index.pdf.

[18] Martin Braun, Freeman Klopott, and Henry Goldman (November 22, 2011, Cuomo Considers Pension Funds to Help Finance New Tappan Zee. Bloomberg News, http://www.bloomberg.com/news/articles/2011-11-22/cuomo-weighs-pension-funds-to-help-finance-tappan-zee-bridge-replacement. James Nash (December 3, 2012), Brown Seeks Sovereign Wealth to Back High-Speed Rail Line,” Bloomberg News. http://www.bloomberg.com/news/articles/2012-12-03/brown-seeks-sovereign-wealth-to-back-high-speed-rail-line

[19] American Society of Civil Engineers and the Eno Center for Transportation (2014). Life Cycle Cost Analysis. https://www.enotrans.org/etl-material/maximizing-the-value-of-investments-using-life-cycle-cost-analysis/.

[20] Kyle Glazer (September 3, 2014). Fed: Some Munis May Become HQLA in Liquidity Rule. The Bond Buyer. http://www.bondbuyer.com/news/washington-securities-law/fed-some-munis-may-become-hqla-in-liquidity-rule-1065794-1.html

[21] Jack Casey (April 1, 2016). Fed Rule Treating More Munis as HQLA Seen as Too Restrictive. The Bond Buyer. http://www.bondbuyer.com/news/washington-securities-law/fed-rule-treating-more-munis-as-hqla-seen-as-too-restrictive-1100310-1.html

[22] US House of Representatives (2016). H.R.2209 – To require the appropriate Federal banking agencies to treat certain municipal obligations as level 2A liquid assets, and for other purposes. https://www.congress.gov/bill/114th-congress/house-bill/2209/actions

[23] Matthew Holian and Marc Joffe (2013). Assessing Municipal Bond Default Probabilities. California Debt and Investment Advisory Commission. http://www.treasurer.ca.gov/cdiac/publications/probabilities.pdf.

[24] The National Commission on Fiscal Responsibility and Reform (December 2010). The Moment of Truth. https://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf

[25] Naomi Jagoda (December 9, 2014). Sen. Coburn: Eliminate the Muni Tax Exemption. The Bond Buyer. http://www.bondbuyer.com/news/washington-taxation/sen-coburn-eliminate-the-muni-tax-exemption-1068624-1.html

[26] SIFMA (2016). Build America Bonds Resource Center. http://www.sifma.org/issues/capital-markets/municipal-securities/build-america-bonds/overview/

[27] Robert Puentes and Patrick Sabol (April 22, 2015). Building better infrastructure with better bonds. Brookings. http://www.brookings.edu/research/papers/2015/04/22-building-better-infrastructure-with-better-bonds-sabol-puentes

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ABOUT THE AUTHORS

Marc Joffe is the Director of Policy Research at the California Policy Center. In 2011, Joffe founded Public Sector Credit Solutions to educate policymakers, investors and citizens about government credit risk. His research has been published by the California State Treasurer’s Office, the Mercatus Center at George Mason University, the Reason Foundation, the Haas Institute for a Fair and Inclusive Society at UC Berkeley and the Macdonald-Laurier Institute among others. He is also a regular contributor to The Fiscal Times. Prior to starting PSCS, Marc was a Senior Director at Moody’s Analytics. He has an MBA from New York University and an MPA from San Francisco State University.

Jill Eicher Jill Eicher is a researcher focusing on innovative financing models for public-sector agencies. Most recently, she was a Visiting Scholar at Stanford University’s Global Projects Center, working on the development of a cooperative investment model for public pension funds to deploy capital into U.S. infrastructure. She co-founded the Fiduciary Infrastructure Initiative, a research-driven venture focused on the applicability of international pension cooperatives making direct infrastructure investments as models for the U.S. A graduate of Wellesley College, Eicher did post-graduate work in mathematics and was issued a patent for her method for assessing investment risk.

Ed Ring is the Vice President of Policy Research at the California Policy Center. His work has been cited in the Los Angeles Times, Sacramento Bee, Wall Street Journal, Forbes, and other national and regional publications. Previously, as a CFO primarily for start-up companies in the Silicon Valley, he has done financial accounting for over 20 years, and brings this experience to his analysis and commentary on issues of public sector finance. From 1995 to 2009 he was the editor of EcoWorld, a website covering environmental issues from a free-market perspective. Between 2007 and 2010 he launched in partnership with AlwaysOn Media the highly successful “GoingGreen” clean technology investor conferences, held annually in San Francisco and Boston. He has an MBA in Finance from the University of Southern California, and a BA in Political Science from UC Davis.

Kevin Dayton is a policy analyst for the California Policy Center, a prolific writer, and the author of frequent postings about generally unreported California state and local policy issues on the California Policy Center’s Prosperity Forum and Union Watch. Major policy reports written by Kevin Dayton include For the Kids: California Voters Must Become Wary of Borrowing Billions More from Wealthy Investors for Educational Construction. Dayton spent more than 17 years in various federal, state, and local policy positions for Associated Builders and Contractors (ABC), including ABC of California State Government Affairs Director from 2005 to 2012. He was also a legislative assistant in the U.S. House of Representatives for Congressman Gary A. Franks (R-Connecticut) from 1992 through 1994. Dayton is a 1992 graduate of Yale University, where he majored in History.

ABOUT THE CALIFORNIA POLICY CENTER

The California Policy Center is a non-partisan public policy think tank providing information that elevates the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.

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