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The Big Story Everone Ignores

July 30, 2001

By Russ Nichols

The state of California is in big trouble, and no one is noticing, according to Stuart Gabriel, Ph.D., director of USC's Lusk Center for Real Estate. The problem is infrastructure, a word that may cause John Q. Public's eyes to glaze over as he dozes off, but it's a crucial element in the business climate of the state.

Infrastructure includes roads, freeways, bridges, anything to do with transportation, including port facilities and public transportation, primary and secondary schools, universities, water, power, and whatever support state government can offer, directly or indirectly to assist business and enhance the quality of life for California citizens. That's quite a broad brush list, and Gabriel says the state budget on infrastructure has generally declined from 60 percent 30 years ago to around 2 percent today.

And according to Gabriel, failure to invest in infrastructure is bad planning or no planning at all, a situation that will adversely affect business and the quality of life in California in the not-too-distant future.

"If you look at developing nations and Japan during their peak growth years, these are countries that are allocating a third of their GDP (gross domestic product) to infrastructure. In California, this has declined as population growth has exploded," says Gabriel.

He points out that California has the third or fourth largest economy in the world, yet he says we have "serious disinvestment" in infrastructure.

"We have the best public universities in the world, but they are threatened, as are primary and secondary schools by budget constraints. Investment in human resources is economically enhancing. This is demonstrated time after time, by constraints on entrance into universities, lack of high quality primary and secondary school systems. But our political system doesn't lend itself to long-range planning," says Gabriel.

For the first time last year, the state prison construction and maintenance budget outpaced spending on the state's higher education system.

At a recent Lusk Center retreat, senior Irvine Company advisor Gary Hunt, sounded the same theme. "California's population growth is forecast to average about 600,000 people annually in this decade, compared with 478,000 per year in the 1990s," he says. "The fastest growth will be in the Los Angeles basin, whose population is expected to increase 310,000 annually in this decade, or a total of 3.1 million. The San Francisco Bay Area's population is forecast to increase about 1.1 million. In the next 10 years California's population will increase 6.7 million to a total of 40 million.

"Growth is destroying our quality of life because of the failure of our infrastructure systems to stay ahead of - or at least current with - the growth needs of our state.

"Infrastructure planning must now include not only roads, sewers, water, water storage and schools but electricity. The ability to provide electricity to a new subdivision, which two years ago everyone took for granted, may become just like our need to show that a new school district has a capacity for new students or that a water district has adequate water to meet the needs of a community," Hunt notes.

"In investing in infrastructure, California is playing catch-up. The greatest investment in California's infrastructure occurred 40 years ago. We have lived on that investment, but we are not making similar investments for our children's' future. California currently ranks dead last among the states in per-capita infrastructure spending."

Gabriel says, "California has serious competition on firm location choice. Out-of-state development agencies are advertising in California to pull businesses out of the state - Pennsylvania, Tennessee, Nevada, etc. And population migration out of California, for the first time in history turned negative in the early 1990s, due to the economic environment in the state relative to that elsewhere. The job picture is affected by where firms choose to expand or contract. Households are mobile. California has significant competition in Northern Mexico in manufacturing. The film industry has been attracted out-of-state to places like British Columbia, Asia and Latin America."

Gabriel blames much of this on failure to plan and failure to spend the necessary public dollars needed to attract and keep business in California. He adds that the news media has largely ignored the story, which he says is one of the most important ongoing business stories in the state.

Gabriel blames part of the problem on the California recession of the early '90s, and part of it on Proposition 13. "There's been a change of priorities. The legacy of Prop. 13 was a cap on local property taxes, and there was an evolution in political sensibility, a shift in thinking about big government vs. small government and what government can do efficiently," Gabriel says.

Is there a happy ending to this story? Afraid not. "I am not optimistic in the least," says Gabriel. "My sense is that the time horizon with respect to political concern is limited and that these are fundamental issues that require far-sighted and long-range planning, not only to create economic competitiveness and economic viability, but to prevent a worse outcome of gridlock and poor schools, and an infrastructure that is crumbling.

"And we need to maintain another dimension, and that is a quality of life. If we plan properly, we can enhance economic efficiency and quality of life."

© 2001 Daily Journal Corporation. All rights reserved.