Analysis of the 2008-09 Budget Bill: General Government

Secretary for Business, Transportation and Housing (0520)

The Secretary for Business, Transportation and Housing oversees 13 departments detailed in Figure 1 that develop and maintain the state’s transportation infrastructure, promote traffic safety, promote housing availability in the state, and regulate state–licensed financial entities as well as managed health care.


Figure 1

Departments Under Business,
Transportation and Housing Agency

Business and Regulatory Departments

  Alcoholic Beverages Control Board

  Department of Financial Institutions

  Department of Corporations

  Department of Real Estate

  Office of Real Estate Appraisers

  Managed Health Care

  Office of Patient Advocate

Transportation Departments

  Department of Transportation

  California Highway Patrol

  Department of Motor Vehicles

  Office of Traffic Safety

Housing Departments

  Department of Housing and Community Development

  California Housing Finance Agency


In addition, the secretary’s office also manages a number of economic development programs, such as the Infrastructure and Economic Development Bank (I–Bank), the Film Commission, the Small Business Loan Guarantee Program, and the Travel and Tourism Commission.

The budget provides 65.5 positions and $23 million (including $7 million from the General Fund) for the secretary’s operations in 2008–09. This represents a net increase of 6.6 positions and about $1 million (from special funds) over the estimated current–year expenditures, mainly to increase staff support for the I–Bank.

Infrastructure State Revolving Fund Program

The Infrastructure State Revolving Fund (ISRF) program is one of two programs administered by I–Bank. The ISRF program provides loans for local infrastructure improvements. Currently, the program is supported by about eight staff.

Program Objectives. The purpose of the ISRF program is to provide financial assistance to local governmental entities for infrastructure projects such as roads, water systems, sewer systems, and other public facilities. More specifically, statute intends the program to fund projects that promote efficient land use and resource conservation while also providing economic development opportunities. Local governmental entities eligible for funding from the program include cities, counties, assessment districts, and redevelopment agencies.

The program provides loans to sponsors of eligible infrastructure projects at interest rate costs that are lower than financing that can otherwise be obtained from the private market. Specifically, loans are made at two–thirds of the market interest rate for an A–rated tax–exempt bond. This reduced interest rate lowers the cost of borrowing to local governments and can enable infrastructure investment to occur sooner or at greater levels than may otherwise happen.

Initial Funding Came From General Fund. In 1998–99 and 1999–00 the I–Bank received a total of about $200 million from the General Fund to start up the ISRF program. Of this amount, $180 million was for financial assistance and program administration, and $20 million was set aside for infrastructure projects for the Imperial Irrigation District.

Revenue Bonds Used to Leverage Initial Appropriation. The I–Bank loaned out the initial $180 million in the first few years of the program. These loans will typically be repaid over a 30–year period. In order to continue to make loans, the I–Bank issued revenue bonds in 2004 and 2005 to obtain additional funds up–front instead of waiting to collect enough funds from loan repayments before making more loans. In turn, the bonds will be paid from the repayments of outstanding loans. As a result, the amount of bonds the I–Bank can issue for the program is limited by, among other things, the stream of loan repayments available for debt service. The I–Bank indicated that it is currently undertaking a review of its leveraging model to determine the maximum loan level that can be supported by the ISRF program. According to I–Bank staff, a preliminary review suggests that the initial $180 million can be leveraged between one to three times. This means that the program can provide a maximum amount of loans between $360 million and $540 million.

Program Has Provided $337 Million in Loans So Far. With funding from the initial appropriations, revenue bond proceeds, and various interest earnings and fee revenues the I–Bank has issued a total of $337 million in loans to date, providing funding for 81 projects throughout the state. Funded projects cover a broad range of infrastructure including upgrading water systems, improving roads, and constructing complete packages of infrastructure (including water, sewer, roads and utilities) for new development and redevelopment projects, among others.

New Loan Activity Likely to Remain at Lower Levels. Figure 2 shows the loans made annually from 1999–00 through 2006–07. As shown in the figure, the amount of loans dropped after 2001–02 when the initial $180 million was loaned out. This slowdown reflects, at least in part, the limitation on the amount of revenue bonds the I–Bank can issue based on the repayment of outstanding loans. So far, the I–Bank has issued two series of bonds, at $50 million each, for a total of about $100 million.

Infrastructure State Revolving Fund Loan Levels

Program staff indicate that about $20 million is still available for new loans from the last bond issuance and that the I–Bank will likely issue a third series of revenue bonds sometime in 2008–09 to provide an additional $50 million for loans. Based on the average length of time it has taken the I–Bank to loan out bond funds, we estimate that it would take two years or longer to loan out the entire $70 million. Given the average loan amount of between $3 million and $5 million, this would allow the I–Bank to make about eight to ten loans a year for the next two years—on par with the level of new loan activities in recent years.

Project Scoring Criteria Do Not Effectively Target Key Program Objectives

We recommend the enactment of legislation to provide further direction to the Infrastructure and Economic Development Bank on achieving the objectives of the Infrastructure State Revolving Fund program. This should include a provision to require projects to demonstrate economic development and land use benefits to be eligible for the program.

As mentioned previously, the purpose of the ISRF program is to provide infrastructure financing for projects that (1) provide for economic development, and (2) promote improved land use. While the ISRF program has helped local governments to make infrastructure improvements, our review shows that the program is not meeting statutory objectives and could better target limited state funds.

Economic Development and Improved Land Use Merit Increased Focus. To evaluate and rank potential projects for their eligibility for funding, the I–Bank uses 13 criteria and a project scoring system with a maximum 200 possible points as shown in Figure 3. A project must score at least 80 points to be eligible for an ISRF loan.


Figure 3

Infrastructure State Revolving Fund Program
Project Scoring Criteria


Maximum Points

Economic Development Impact


  Job creation/retention


  Economic base employers


  Community economic development plan


Community Economic Need


  Unemployment rate


  Median family income


  Change in labor force


  Poverty rate


Land Use, Environmental Protection, and Housing


  Land use


  Environmental protection


  Housing element




  Quality of life/community amenities




  Project readiness


    Total Possible Points




Our review shows that the current scoring system does not effectively target funds to projects to provide economic development and promote better land use. Specifically, our review of approved ISRF loans indicates (1) the majority of projects that received loans have little or no economic development impact, and (2) projects do not need to have much impact on improving land use to receive loan funds.

The ISRF program provides a service to local governments by assisting them in making infrastructure improvements at a lower cost than if financing is obtained from the private market. We think that the program can be made to better promote the state’s economic development and land use objectives by targeting limited funds to those projects that demonstrate the desired benefits in their applications. Specifically, we recommend enactment of legislation to require that all ISRF–funded projects demonstrate at least a minimum level of economic development and land use benefits. For instance, projects could be required to achieve a portion, such as one–half, of their overall score from the economic development and land use criteria. Another approach would be to screen potential projects for economic development and land use benefits to ensure that only projects meeting the stated goals of the program are allowed to compete for funding.

Additional Staffing Not Justified on a Workload Basis

The budget requests four positions to augment staff for the Infrastructure State Revolving Fund program. Our review shows that two of these positions are not justified on a workload basis. Accordingly, we recommend rejecting two positions for a reduction of $219,000. (Reduce Item 0520–001–0649 by $219,000.)

The budget requests seven new positions for the I–Bank in 2008–09, including four positions to handle ISRF program workload. The four positions include two loan officers, an accounting position, and an office assistant. Our review of the program’s workload shows that two of the requested positions are not justified on a workload basis.

Accordingly, we recommend that the request for two loan officer positions be rejected, for a reduction of $219,000.

Reporting Inadequate to Facilitate Legislative Oversight

The Infrastructure and Economic Development Bank (I–Bank) is required to provide an annual report to the Legislature on its activities. The report, however, does not provide sufficient information to evaluate the performance of specific programs. We recommend that the I–Bank be directed to provide additional information necessary to facilitate legislative oversight.

Legislative Oversight Hampered by Limited Information. The I–Bank is required by statute to submit an annual report to the Legislature by November 1 of each year. The report currently provides a consolidated financial snapshot of the I–Bank as a whole, and provides some information on loan applications to the ISRF program. The report however does not provide financial information specific to the programs administered by the bank. Therefore, it is not possible to separately identify activities in the ISRF program; account for program and loan activities, workload levels, and program costs; or assess the program’s performance in terms of the types and amounts of financial assistance applied for and subsequently granted. For instance, the level of funding provided for the ISRF program for loans and support cannot be determined from the annual report. Discussions with I–Bank staff have yielded some estimates of how much funding this program has received since its inception, but the use of these funds cannot be accounted for completely.

Additional ISRF Information Needed. To provide better information to facilitate legislative oversight of the I–Bank’s activities, we recommend amending current law to expand the I–Bank’s reporting requirement to include the following additional information in its annual report.

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