How California Should Pursue Much-Needed Infrastructure Improvements
California has a $500 billion backlog of infrastructure maintenance and modernization projects over the next few decades. The backlog includes $120 billion for K-12 school facilities, $60 billion for road maintenance, and $45 billion for upgrading the state's water systems. On the whole, the American Society of Civil Engineers gives California's infrastructure a disappointing "C" grade.
The Hoover Institution's latest issue of Eureka explores vital topics for California's future. Included is an exploration of why the Golden State's infrastructure is crumbling beneath our feet. Culprits discussed include 1) Governor Brown's 1970-era "small is beautiful" mentality, which deprioritized infrastructure, 2) Proposition 13 and its legacy measures, which made local governments more reliant on state funding, and 3) term limits, which reduces incentives among legislators to think long term.
With these suggested causes unlikely to disappear anytime soon, California has one option to prevent further infrastructure crumbling: make the projects less expensive. Technology can be useful in this endeavor, but so too should California promote public-private partnerships (P3), enhance competitive bidding, and reduce the prevalence of project-labor agreements (PLAs).
Promote P3: P3 is not a panacea to cost-overruns, but by limiting financial risks to major projects, P3 can be a very useful tool in managing lifetime costs of infrastructure projects. While some P3 projects can have slightly more expensive base and financing costs - the latter mainly driven by corporate interest rates usually being higher than governments with taxing power - during the entire lifetime of the projects, i.e. design, construction, financing, operation, and maintenance, P3 tends to save the public significantly. And it isn't difficult to see why. While government entities are insulated from market pressures, private entities must pursue efficiencies in order to make major infrastructure projects profitable. This search for profitability works to ensure construction stays on schedule, the infrastructure is operated efficiently, and finally, that maintenance occurs regularly since it's always more expensive to rebuild than it is maintain. As the Legislative Analyst's Office concludes, "P3 procurement - if done correctly - has merit and may be the best procurement option."
Enhance Competitive Bidding: Competitive bidding is important for two reasons. For one, it sets a standard policy across government entities that the lowest responsible bid should win. This ensures that governments will contract in a fiscally responsible manner, and it also works to eliminate favoritism. Secondly, by publicly advertising the bids, competitive bidding creates a market with clear price signals. This serves to enhance efficiency and effectiveness as service and product providers work to streamline their costs to strengthen their bids. However, while current California law mandates competitive bidding, the California Public Contract Code is extraordinarily complex; thus making compliance with its numerous rules, standards, and certifications quite onerous for potential contractors. For instance, one such requirement mandates that potential bidders certify the environmental attributes of their service or product in order to do business with the Department of General Services. While seemingly easy to comply with, the contractor must now have in-depth knowledge of their product or services' entire supply-chain or risk severe liability. Such complexity limits the market of willing service or product providers, which then eliminates a whole host of potential bidders. The end result is that the competitive bidding process is undermined.
Reduce Prevalence of PLAs: PLAs are collective bargaining agreements whereby government entities, typically prior to awarding project contracts, pre-negotiate the terms of labor conditions, such as wages and overtime. Often advocated by private and public unions claiming they eliminate labor disputes, ensure labor cost predictability, and reduce employment terms uncertainty, PLAs reward unionized bids over non-unionized bids - hence further restricting the competitive bidding market - and lock in overly favorable labor terms. Because they are pre-negotiated, government entities are restricting their project's flexibility even before bids have been reviewed. In fact, there is strong evidence that the rationale for PLAs tend to be overblown, misleading, or inaccurate and there is more evidence than not that PLAs do lead to projects being more expensive than they otherwise could be. Rather than eagerly implement PLAs, as is current practice, California's state and local governments shouldn't ever lock themselves into unfavorable agreements.
It is unrealistic to think that Sacramento will begin prioritizing infrastructure in budget negotiations, that Proposition 13 or its legacy measures will be reversed, or that term limits will suddenly go away. As a result, to chip away at the growing $500 billion in infrastructure needs, California should strive to make projects less expensive and hence, more manageable.
