New California Policy Center Study Proposes Pension Funds Invest in Infrastructure

By Marc Joffe and Edward Ring
November 29, 2016

Although Sacramento and Washington DC will be ruled by very different governing philosophies over the next two years, we believe that a centrist approach to infrastructure policy can be a win/win for California Democrats and for Republicans who will control the federal government for the next two years. We analyze promising areas of infrastructure investment, as well as innovative financing mechanisms, in our just released in-depth, six-part study, “Rebuilding California’s Infrastructure for the 21st Century.” One of our core proposals is that California’s pension funds invest some of their hundreds of billions in infrastructure, improving our quality of life and creating hundreds of thousands of new jobs.

Earlier this week we learned that both houses of California’s legislature will have veto-proof Democratic majorities. This compliments Democratic control of all statewide elected office. Meanwhile, Michigan was just declared for Donald Trump, extending the President Elect’s margin of victory in the Electoral College. Darrell Issa’s win in California’s 49th Congressional District lifts Republicans to a comfortable 239-194 House majority (with one race outstanding) in addition to their narrower hold on the Senate.

Initial reaction to the Trump/Republican victory from liberal thought leaders has been dominated by denial and resistance.  Demands for state recounts have practically zero chance of changing the outcome, because Clinton would need to capture three states in which she is trailing by margins of at least 10,000 votes. Others are pushing for California’s secession from the union – an idea rendered virtually impossible by the outcome of the Civil War.

A much better way forward is to identify areas of agreement and then compromise on some of the policy details. One such area is infrastructure. On the campaign trail, Trump promised $1 trillion of new infrastructure spending over the next ten years.

But a detailed plan issued by Trump advisors Peter Navarro and Wilbur Ross offers an approach to financing the new infrastructure that is alien to most Democrats. Rather than simply spending an additional one trillion federal dollars – piled onto the nation’s tower of debt – they propose to offer about $137 billion of tax credits to private investors who would then build revenue-generating projects.

Liberal objections to this idea center around the fact that investors may profit from these projects, but the opportunity to profit provides an incentive to ensure that the infrastructure we build is the infrastructure we need. In the absence of consumer willingness to pay, infrastructure projects are too often selected on the basis of political factors, as shown by the infamous bridge to nowhere. That proposed bridge, which would have connected an Alaska island with 50 inhabitants to the mainland, nearly received $223 million in federal funding thanks to the power of Senator Ted Stevens and Representative Don Young – two Alaska Republicans.

Here in California, we, of course, have our train to nowhere, now being built between Fresno and Bakersfield. As we discuss in our study, the high-speed rail project only makes financial sense when planners use grossly inflated ridership assumptions. By letting investors rather than politicians choose transportation projects, Californians are more likely to get where they really want to go. For example, investors might be willing to fund high speed rail along the San Francisco/San Jose corridor, allowing the first part of the HSR system to be built while Peninsula commuters escape traffic jams on US-101.

Private investment can also create cost-effective water infrastructure. As we enter another season of uncertain rainfall, Californians are being asked to finance projects that simply move scarce supplies of potable water around. What is really needed and what investors are willing to fund, is new urban drinking water through desalination and wastewater reuse. Desalination has rescued the State of Israel from chronic water shortages and it can work the same magic in the State of California – if only regulators would stop taking their marching orders from environmental extremists who don’t want to see anything built next to the Pacific Ocean. Wastewater reuse, an even more cost-effective way to deliver drinking water to urban areas, is already a reality in several coastal areas in California and should be extended throughout the state.

The Trump approach is far from perfect, and, Senate Democrats will have the power to extract changes by threatening a filibuster. But rather than replace the private-led approach with new pork barrel spending, we suggest more incremental changes.  Our main proposal is to create incentives and mechanisms for public employee pension systems to pool some of their resources into professionally managed infrastructure investment funds. These funds would finance projects in California and around the country. By investing in a geographically diverse set of projects, these investment pools will be less subject to political pressure and more likely to realize stable, positive returns.

So for California Democrats the bad news is that they rule a state now facing a potentially hostile administration. But by finding compromise on infrastructure and other shared priorities, they have the chance to defuse the hostility, create high paying construction jobs and fixing the state’s underfunded transportation, energy and water systems.  We hope they take advantage of this opportunity.