Tuesday, May 20, 2008

The Budget Deficit and High Speed Rail Are Totally Separate

NOTE: We've moved! Visit us at the California High Speed Rail Blog.

I've always believed that the main obstacle we will face in convincing Californians to build high speed rail this year isn't the pointless arguing over ridership projections or financial details. It's the fact that California faces a multibillion dollar budget deficit, and that will cause some voters to think "well gee maybe we shouldn't spend money when the state is in a deficit."

This thinking is very deeply flawed, but it's out there, as evidenced by a letter to the editor in today's Ventura County Star. The author, Ron Ruiz of Westlake Village, relies on several incorrect assumptions to argue that there is some kind of tradeoff between HSR and education funding:

Despite the cuts to education, the California High Speed Rail Authority, as part of our transportation system, is seriously considering designing and constructing a high-speed rail line (200-plus mph) at an estimated cost of more than $33 billion....

Wouldn't our leaders be more responsive and supportive to the people of California if they used their energy and wherewithal to provide the money that is critically needed for our strapped, declining educational system, instead of earmarking dollars and bond measures for a low-priority, nonsensical high-speed rail line that will serve but a fraction of our citizens?

California's education system needs help and a lot more serious support from our legislators.

Different departments? Different budgets? Different rules? If that's the case, then if our state lawmakers have made it impossible by regulation to effect this very urgent and reasonable budget trade-off, then those same lawmakers ought to be able to figure out how to bring about the necessary regulatory changes to make this budget trade-off work, in spite of the pressure from other special-interest groups.

The buttressing of our decaying education system right now seems far more pressing and urgent than having a fast train.

Ron Ruiz' problem is he doesn't understand why we have a budget crisis in the first place. The reason is California has a structural revenue shortfall - in other words, for the last 30 years we have not raised enough tax revenue to pay for our basic needs. The answer to this is NOT to turn to bonds - a structural problem needs a structural solution, and bond debt isn't such a solution.

Such an understanding of the real origins of our budget crisis shows us that this isn't a zero-sum game. HSR funding - which California's portion is $9 billion, not the $33 billion Ruiz claims - doesn't come from the same pot of money as education funding. They are not just separate, but completely unrelated. And it's not "regulation" that is the issue here, but the basic method of government. California needs more tax revenue to pay for its schools. That is a completely separate issue from how we finance high speed rail.

We have discussed this issue here before - noting that California can afford to build this project and in fact cannot afford to not build it. In April I wrote Building High Speed Rail in a Financial Crisis which made the same point - that HSR bond money comes from a different source, and is repaid through a different means, than education funding or the state budget more broadly.

To make it very easy for Ron Ruiz to understand: education funding must be paid for by new taxes. High speed rail is paid for with new bonds - which are repaid by the fares of HSR riders. Bonds can't be used to fund education, and taxes won't be used to fund HSR. They are entirely separate accounts.

Still, it's easy for folks like Ruiz to muddy the waters on this issue. Californians don't have a good understanding of how their government works (and their politicians and journalists don't offer much help), and that makes it possible to argue that if we build HSR, it somehow comes at the cost of some other need. It doesn't. That's now how budgeting works.

But maybe I'm giving Ruiz too much credit. If he calls HSR "low priority and nonsensical" then perhaps he is just using budgets as a fig leaf for his own failure to understand the pressing need for high speed rail.


Anonymous said...

Having just looked at a few of your posts here Mr. Chruickshank, it is not Mr, Ruiz who doesn't understand, but rather you.

Having heard Mr. Diridon in person state that the original bond funds are not expected to be repaid from fares. You are just plain wrong in that assertion.

Rafael said...

There's a fairly basic rule in public finances:

- major one-off infrastructure projects should be financed as long-term debt, serviced using a small portion of tax receipts over many years

- recurring operational expenses, e.g. the salaries of public officials, should not be financed by taking on debt

The construction of the proposed HSR network is obviously a long-term capital investment, so it's appropriate to fund it using a bond measure. After all, the tracks will only be laid once. Based on experience in other countries, the trunk line is expect to operate at a profit within a few years. In this context, profit means there will be a net annual contribution to the state's general fund after obligations to creditors and private investors are met. Initially, that surplus will be used to partially fund the construction of the spurs to Sacramento and San Diego, respectively.

Education up to and including high school is also a public investment. After all, someone has to shoulder the burden of public services in the future. However, in terms of budgeting, education must be treated as a recurring expense. New children enter the system each year just as graduating seniors leave it, i.e. the education system is an ongoing effort rather than a one-off project.

That said, it is singularly idiotic to cut spending on the eduction of minors. Any given child will be in in any given grade exactly once in its life. It either learns what is age-appropriate in that grade or chances are, it will never learn it. What is more, it is extremely difficult to attract and retain high-quality teachers for moderate pay if you cannot offer them above-average job security.

The real reason politicians are relatively cavalier about education spending is that parents cannot cast proxy votes on behalf of their children. We quite rightly allow retirees to participate in elections, but minors might as well be pets when it comes to the ballot box.

In addition, you are witnessing the financial consequences of prop. 13/1978 and state taxes on gasoline of just $0.504/gallon. That is higher than any other state except Hawaii, but still too low given the state's recurring expenses. Fuel taxes are also too low to achieve the goals of AB32 (cp. defeat of prop. 87/2006).