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Concerns Over California’s Infrastructure Shortfalls

June 15, 2001

Deficient and fragmented infrastructure development managed by disparate local governments throughout California could constrain the state’s economic growth into the future, according to Stuart Gabriel, Director of the Lusk Center for Real Estate at the University of Southern California.

Speaking to leading Los Angeles-area middle-market executives at the Manufacturers Bank Economic Symposium held on June 5, Gabriel stated that California faces significant public policy challenges that must be addressed in order to preserve and expand upon the economic success of the 1990s, and take full advantage of the opportunities presented by the state’s population growth. Aggressive infrastructure solutions, primarily in the form of affordable and convenient residential housing and transportation build-out, are critical to continued economic vitality, and should be evaluated and implemented from a uniform, regional perspective, according to Gabriel.

In addition to his directorship of the Lusk Center, Gabriel is a professor of finance and business economics at the Marshall School of Business and the School of Policy, Planning and Development at the University of Southern California. Additionally, he served on the economic staff of the Federal Reserve Board in Washington, D.C., and is a visiting scholar at the Federal Reserve Bank in San Francisco. He also is a Director of the Los Angeles Economic Roundtable and the Los Angeles Community Design Center and a Fellow of the Homer Hoyt Institute for Advanced Real Estate Studies. Also, he currently serves as a Director of the American Real Estate and Urban Economics Association.

Gabriel expressed concern over an exploding population and job market in California over the last decade that is out of proportion with residential permit issuance, thus putting significant pressure on housing availability and prices. He noted the dramatic population growth will continue, with the state expected to grow by 5 million persons per decade between 2000 and 2020. These 10 million new residents will form 3-1/2 million new households (at approximately 2.8 persons/household). According to estimates of the California State Dept. of Finance, homebuilders will need to add 220,000 new housing units a year to accommodate the projected population growth. Notably, approximately 45 percent of the state household growth is anticipated to occur in Los Angeles.

“ Unfortunately, the 1990s rebound in homebuilding was anemic at best,” stated Gabriel. “For example, 1999 was considered a ‘boom’ year for home building in California with the issuance of 140,000 residential permits. If that trend continues, California will face an increasing housing deficit in coming years.”

Further contributing to the housing shortage, Gabriel pointed to disjointed local governments throughout the state not planning development initiatives from a uniform, regional perspective. As an example, he cited the 170 incorporated cities in the Los Angeles Basin, 88 in Los Angeles County alone, each independently making development decisions that have broader negative effects on the housing supply, and in turn impacting the economic viability of the entire region.

“One of the ironies is that environmental concerns related to housing production have influenced local governments to impose low-density suburban solutions,” Gabriel stated. “With the resulting significant increases in median commute times and in energy consumption, and traffic delays costing Californians over $15 billion annually, it’s now perhaps fair to say that the supposed low-density solutions are today part of the problem. Looking into the future, we must consider densification of residential development nearer transit lines and employment centers.”

Moreover, Gabriel suggested that, although there has been improvement over the last 20 years, more transportation build-out is needed in California.

“California ranks dead last in the nation on per capita transportation spending, even though CalTrans projects that traffic congestion in California will increase 10 percent annually in the coming years”, he said. “Undoubtedly we need better public transit as well as better use of the infrastructure currently in place, including improvement in high speed rail links, increased capacity of regional airports, effective public transit to those airports, and congestion pricing of roads.”

However, Gabriel referred to the energy crisis as a significant drain on the resources needed to fund infrastructure development. State power purchases drew down the accrued $6 billion state budgetary surplus by 66 percent during the first quarter of 2001, the likely result of which will be significantly diminished investment in the housing, transportation and other vital infrastructure needs.

“We absolutely must push for the re-financing of the state energy-related expenditures in order to reimburse the general obligation fund,” he said.

Gabriel concluded his presentation at the Manufacturers Bank symposium by comparing California’s budget allocation towards infrastructure spending with rapidly developing nations in Latin American and Asia.

“One frightening data point when you look at rapidly developing countries is that they spend about 30 percent of their GDP on infrastructure. In the late 1960s, California spent about 20 percent. Today, in the midst of this tremendous growth, the state devotes only around 2 percent to infrastructure spending. California’s population boom, with all its great diversity, offers an excellent climate in which to do business. It is the responsibility of the state’s government leadership to formulate infrastructure initiatives that allows California’s businesses to reap the rewards this great state has to offer.”

The Manufacturers Bank Economic Symposium is designed to help educate and inform middle-market business leaders in the Los Angeles area about the economic challenges facing the region. It was held at the City Club on Bunker Hill in Los Angeles, and around 95 executives attended the event. The symposium was the first one held, and Manufacturers Bank plans on making it an annual event.

Los Angeles-based Manufacturers Bank is a subsidiary of Sumitomo Mitsui Banking Corporation (SMBC) and had $1.2 billion in assets as of December 31, 2000. Manufacturers Bank provides a full range of lending and cash management services to California’s middle-market business community through 12 regional banking centers located throughout the state. Manufacturers Bank’s parent, SMBC, is one of the largest banks in the world with total assets of $931.8 billion and operations in 27 countries as of September 30, 2000. For more information, visit Manufacturers Bank’s Web site at and SMBC’s Web site at