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May 19th, 2009
America in Gridlock
[INTERVIEW] The Bank Not Built: The California Infrastructure Bank
Stan Hazelroth, California Infrastructure and Economic Development

The United States Department of Transportation, in 1996, was authorized to create a State Infrastructure Bank (SIB) initiative as a way to better allocate federal funds to state transportation infrastructure projects. Except in a few cases, the 34 participating states and territories have done little with the program, primarily due to a lack of sufficient federal funding.

In California – a participating SIB state – a similar Infrastructure Bank program was also established in the mid-1990s. But, unlike the SIB, the California Infrastructure and Economic Development Bank funds all types of infrastructure (not just transportation) and operates only on the state level with only state control.

Stan Hazelroth, Executive Director of the California Infrastructure and Economic Development Bank, recently spoke with Blueprint America on the effectiveness of the program so far and how the structure might be applied federally:

BLUEPRINT AMERICA: Explain how the Infrastructure Bank program came to be in California?

STAN HAZELROTH: The bank was created by statute in 1994, and I was appointed as the first executive director in 2001. There had been some activity prior to that, but I was the first one appointed to the position by Governor Davis and then I stayed on with Governor Schwarzenegger.

Our infrastructure bank was the dream of people back in the very early 90s. I believe a bill had been passed before 1994 and had been vetoed, but in 1994 the stars aligned and it was passed by the legislature – both branches – and signed by then Governor Wilson. It was put into the Executive Branch, which was what Governor Wilson desired, and it traveled from one agency to another in its early years.

In 1998, it was merged with CEDVA (California Economic Development Finance Authority), which was an existing authority in the Governor’s office and had been a conduit bond issuer. Now, the I-Bank had both the ability to create loan programs – or to make loans – and also to issue bonds.

In the late 90s, things were going pretty well in the economy – the state of the economy has a huge impact on [the I-Bank’s] ability to move forward. In the 1998-99 state budget, it was appropriated $50 million.

BLUEPRINT AMERICA: What do you do with that money?

STAN HAZELROTH: The staff at that time – civil servants who had been brought together to run the organization – created the Infrastructure State Revolving Fund program, which, in our statute, authorizes the I-Bank to make loans for 16 categories of infrastructure – when you set them all together, it’s probably 95 percent of the definitions of infrastructure that one could think of.

The program, initially, had a $10 million cap on the loans. In addition to thresholds already within the statute, the staff then put in place specific criteria – eligibility requirements for projects.

BLUEPRINT AMERICA: After the initial appropriation, what happened?

STAN HAZELROTH: Governor Davis, who had just taken office, put $425 million into his budget for the I-Bank. Suddenly, the I-Bank goes from nothing over a two year period to having $475 million. So, the board lifted the cap from $10 million to $20 million.

BLUEPRINT AMERICA: Why fund infrastructure this way?

STAN HAZELROTH: Well, the I-Bank then went through the process of public hearings on the established criteria, and that was quite a long process. I think one of the advantages that either a state infrastructure bank has, or a federal infrastructure bank would have, is that it really takes the pork out of the process by having a standardized list of threshold criteria to distinguish different projects.

There has been no history of the I-Bank making loans to projects due to political pressure. They’ve all been basically run through the thresholds of the statute, run through the criteria and then presented to the board on the basis of their merit. Following that, the board decides if they agree with the staff. And since 1999, when the program started, I believe we have made almost 88 loan commitments to the tune of about $350 million, close to $400 million at this point.

BLUEPRINT AMERICA: But, there was $475 million – right? What happened to that capital?

STAN HAZELROTH: I should go back and say that with the economy going up we had received the $475 million. When the dot com bubble burst, and the [economy] started to drop like a rock, we had $277 million recaptured by the Department of Finance and put back in the General Fund.

So, the way it worked out, the initial amount of money that was actually kept by the I-Bank for the Infrastructure State Revolving Fund program was about $162 million; $20 million had been later set aside for another program. The board’s reaction was to lower the cap again back to $10 million, but still proceeded with the program.

In the end, you have been able to leverage nearly $162 million in capital to nearly $400 million for infrastructure projects throughout the state…

It was decided right from the beginning that the I-Bank would be designed to be a revolving fund and a leverage program. With the initial capital – the cash – and then based upon pledging the payments of a number of loans that are being repaid to the I-Bank, we can issue bonds securitized by those payments coming back and raise more money for the program – so that’s why $162 million in cash can turn into $400 million in loans.

The bonds are called economic development projects – from our stand point, everything that we do is economic development…

BLUEPRINT AMERICA: That’s the money; what about the I-Bank board?

STAN HAZELROTH: The Board initially consisted of three people: Our agency secretary as the chair, the Director of the Department of Finance, and the State Treasurer. I came aboard in 2001. Today, it’s a five-member board: A Governor’s appointee and the Secretary of State and Consumer Services.

BLUEPRINT AMERICA: The I-Bank seems like it was established completely on the state level; does it have anything to do with the State Infrastructure Bank (SIB) initiative that was put forth by the Federal Highway Administration?

STAN HAZELROTH: No. Every once in awhile we get a call, somebody thinking we are the State Infrastructure Bank, because, through SAFETEA-LU a few appropriations ago, a pilot program created somewhere around ten SIBs around the country.

California was included, but the California SIB has only made two loans since – and is basically now idle.

BLUEPRINT AMERICA: What’s the difference then – between the California I-Bank and the federal SIB program?

STAN HAZELROTH: We’re the California Infrastructure and Economic Development Bank. In other states there are some very active SIBs, but they deal strictly with transportation projects. The California I-Bank not only does transportation projects – under several definitions of streets and highways – but we also fund all kinds of infrastructure.

BLUEPRINT AMERICA: How has the California I-Bank been weathering the current economic downturn? California’s state budget is extremely stressed – could infrastructure projects funded by the I-Bank be affected in order to maintain the basic state operating budget?

STAN HAZELROTH: We are self-funding right now – a separate entity from the state. And, because of the strength of our projects and their record of repaying, the their rating remains not only high but has been upgraded recently.

BLUEPRINT AMERICA: Should the California system be applied federally? You recently went to Washington, arguing just that…

STAN HAZELROTH: My intention was just to get in front of a lot of people at the Federal level and say, ‘Here’s what you can do with it.’

It was something that I decided to do based on discussions with some friends in Washington that had been following the Dodd bill, and the call for a National Infrastructure Bank. President Obama has recently brought it up on a number of occasions, as well.

I just really wanted to offer the California I-Bank up as resident experts to help with the establishment of criteria for projects. When I read about the national effort to create an Infrastructure Bank, I saw their goal as similar to ours. And they have – in the Dodd bill – specific categories of infrastructure like we do… Basically, I was just trying to be helpful to the national effort because the more help and economic development that there is, the better off for everybody.

BLUEPRINT AMERICA: What do you think is the likelihood of an Infrastructure Bank being implemented nationally? Especially with the California I-Bank program as a model?

STAN HAZELROTH: There’s been a lot of criticism of past bills – even the budget bill for this year – of having too much money directed to specific projects and specific legislators’ districts.

Part of my effort is to say, ‘You know, it could be a good idea. Here’s what we’ve done with the structure that we have in California, and you could use a lot of the criteria that we have and the threshold eligibility sections of the statute to make the grants or loans that the National Bank makes sort of pork-proof.’

The response to some to some extent, concerning earmarks, is valid – that they have made it not hidden from everybody. As a result, people can react to it.

But, if you did it through a national I-Bank with an independent board of experts and an executive director who had expertise in finance and infrastructure, then you would take the whole issue of earmarks out of the discussion.

BLUEPRINT AMERICA: What has happened to earmarking in California, as a result of the state’s I-Bank?

STAN HAZELROTH: I think that legislators since the founding of the program have still probably found projects in their district that they wanted to specifically grant money to. The more money that an Infrastructure Bank has available to it, the greater impact that it can have and the more projects that it can finance. Then, there is less to entice each legislator.

BLUEPRINT AMERICA: Still, it seems the I-Bank is only a supplemental program in California to funding infrastructure…

STAN HAZELROTH: Yes. There are other methods for funding, like with transportation. The federal government and state government long ago created a partnership where the federal government works through the state’s Transportation Authority in funding projects. And, there are other state agencies that run programs that can finance water projects. The Treasurer has several authorities that finance specific projects, too…

BLUEPRINT AMERICA: How has your state program been received nationally, even by people in the Federal government?

STAN HAZELROTH: I think very positively. We have generally in California been known as the biggest secret in the state. Infrastructure has still not reached the day-to-day basis of interest level in the country. Further attention and, especially, additional money allocated to a program would certainly help make the program go further…

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