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Feature Articles |
Smart Investments: Ideas to ActionJuly 10, 2000In remarks at a dinner meeting of the Los Angeles District Council's Smart Growth Committee, State Treasurer Philip Angelides explained how California can make "smart investments" to meet the challenges of rapid growth. The following are highlights of his remarks.When we begin to look beyond the next couple of years, it is clear that California will face some of the most dramatic challenges ever in our State's history. During the next 20 years, California will add more than five million new jobs. We also will add:
The explosion in population and jobs will drive us head-on into two public policy challenges that must be met if we are to remain economically strong in the years ahead. First Challenge Our first challenge is to find a way to meet the tremendous demands of projected growth, while preserving those unique environmental qualities that have always made California an attractive state in which to live. We can preserve and improve the quality of our air and water, enhance the livability of our communities, maintain the beauty of our beaches and mountains, our deserts and our valleys - if we embrace environmentally responsible and thoughtful policies which support more sustainable development at the urban fringe and renewed growth and investment within our existing urban fabric. Second Challenge The second challenge is to grow in ways that promote equality of opportunity across our State. For all our successes, California has the greatest gap between rich and poor of all but four states in this country. Perhaps the hardest hit by this surge in poverty-level income are California children. More than one in five is, today, living below the poverty line. Preservation of the environment and equality of opportunity, with all the implications those goals entail - these are the challenges that I see if we are to sustain our economy and if the "Golden State" is to be worthy of that name in the year 2020. Smart Investments Our office previously released a report entitled Smart Investments which articulates a state investment policy to meet the challenges of surging growth. It urges a new approach which recognizes that how we spend precious public dollars, and the approaches we take to capital investment, can shape the vibrancy of California well into the 21st Century. Smart Investments was the outgrowth of an annual statutory requirement that the Treasurer advise the Governor and the Legislature on how much debt the state can afford for infrastructure investment. What we found, in examining the State's debt capacity, is that California can finance between $68 and $94 billion in infrastructure over the next ten years, depending on how much borrowing we choose to undertake. While our State's needs may well exceed the funds currently available for investment, what is most remarkable is the lack of a State investment policy to guide the expenditure of tens of billions of dollars for infrastructure and to direct the State's investment capital in the most productive manner. Given the nature of the challenges which California will face, the State investment policy outlined in the report focused on a set of growth principles that best ensure the State's long-term economic strength by preserving the environment, and giving new opportunity to those California communities lagging behind. Key Principle Consistent with that focus, the report articulated a key principle that must be central to any investment plan: Investments that support livable communities, sustainable development, and sound environmental practices strengthen the economy. This means that infrastructure and other State investments must support new forms of more sustainable development at the urban fringe, and that more of our investment capacity must be redirected into the somewhat tattered fabric of California's existing communities and neighborhoods. Sustainable Development Since this finding involves sustainable development, perhaps I should define it a little more thoroughly. Sustainable development means land uses that support transportation options beyond more freeways and roads. It means a better mix of housing in communities and neighborhoods. It means locating jobs near housing and balancing job growth with new housing, communities centered around civic spaces, and well-planned higher density use of land. Example Let me give you one example of how investment policy can support sustainable development. As Treasurer, I chair the California Tax Credit Allocation Committee which annually awards $450 million in federal and state tax credits to finance the construction and rehabilitation of affordable housing. Last year, we adopted a new program direction - scoring applications for tax credits in a way that supports sustainable growth. Housing developments are given points for being close to transit, parks and recreational facilities, and retail grocery shopping. Apartments for families are given points if they are located within walking distance of a public school. And points are awarded to projects in low-income communities in need of quality affordable housing where a comprehensive revitalization effort is underway. These new criteria have had a measurable impact on the very competitive process of awarding tax credits. Seventy-three percent of the projects funded under the new system were within community revitalization areas and 100 percent of the projects funded got points for meeting our sustainable development goals. Second Example Let me give you another example of how investment policy can support good growth patterns. I sit on the boards of the California Public Employees' Retirement System - CalPERS - and the California State Teachers' Retirement System - CalSTRS - which together have $270 billion in capital invested globally. In the last year, those funds have committed $1 billion in new capital investment for urban, in-fill development - from mixed use to office to commercial to housing - targeted to California communities. These investments are designed to bring the funds market returns as we support smart growth with our State's investment capital. Reinvestment Our report discussed another element of a "smart investment" strategy - re-investing in declining communities. This is essential, we concluded, to reverse this dangerous trend toward "two Californias," one in poverty and the other enjoying an economic boom. State investment policy is one tool that can and should be used to revitalize our economically struggling communities. That's why, as a member of the California Infrastructure and Economic Development Bank, I advocated that we adopt "smart investment" criteria to govern the $1.4 billion in loans which the bank will make for local infrastructure projects. Those criteria, enacted in December, target this precious resource to economically distressed communities, in support of projects which are environmentally sensible. And that's why I pushed for adoption of the Extra Credit Teacher Home Purchase Program - a new $150 million program enacted by a commission I chair. Extra Credit will provide tax credits to assist teachers, willing to serve in low performing schools, purchase a home - recognizing that improving schools in poor, urban areas is elemental to the success of community revitalization efforts. All told, since the release of Smart Investments, we have implemented a set of investment initiatives - like those I have described above - which will target nearly $10 billion in public financial resources and investment capital in support of sustainable development and community reinvestment. Yet, I have no illusions that infrastructure and capital investment alone will be enough to take those places of high poverty and high unemployment and give them new hope and to change the patterns of growth that threaten our future. That will take concerted and meaningful action across a range of policy fronts from education to social services to other investments in human capital. New Partners In addition, for a new investment dynamic to have impact, it is not enough for the State alone to change direction. We will need partners in the effort to construct a new State investment policy that meets the challenges of growth in the years ahead. There are three key forces with whom the State must join hands to make a difference. Sum We need to engage regional leadership in changing the way we invest and develop in this State. Sum We need to empower and enlist local communities in this effort. Sum And, we need to compel the private sector to join with us in an investment partnership to secure our future. Strong Regional Planning Our Smart Investments report recognizes that how we structure our capital financing decisions is fundamentally important. The report puts it this way: An effective State investment plan must rely on strong regional planning to meet its objectives. Providing affordable housing, broadening economic opportunity, reaching a balance between jobs and housing, preserving open space and developing efficient transportation systems are all matters that reach beyond city and county boundaries. Increasingly, business and civic leaders are stepping forward to promote regional cooperation and sensible investment policies. From Joint Venture: Silicon Valley to the Bay Area Council's Community Capital Initiative to the Great Valley Center, communities are focusing on regional solutions and regional investment strategies. It's time that the public sector did the same. It is absolutely essential that the tens of billions of dollars which the State will expend for infrastructure be invested in support of strong and credible regional plans. And, it is absolutely essential that regions come together to plan collaboratively for their future and to guide investments in ways which support the most sensible growth patterns for our future. We must give regions the tools and the authority to do so. Local Taxation It's also time that we reform the local taxation system to reward communities for good land use decisions and for regional collaboration. We need to move forward now on local fiscal reform and regional tax equity. Capital Investment And, I know this is controversial, communities need majority vote approval for local capital investments in schools, parks, libraries, and other important community projects. The State can't do it all and local communities are best suited to make decisions about neighborhood projects. Yet, in the end, in our free enterprise system, public efforts cannot succeed without engaging the powerful potential of the private capital markets. We need to empower the private sector to bring economic growth, jobs, retail services and quality housing to the struggling communities of our State. At the same time that we create a path for private investment, we must also move American capital to support environmentally responsible growth and to create the new jobs and economic growth needed to close the chasm between the two Californias. It is time that private capital join the struggle for a sustainable future. Need For Capital There is clearly a need for equity and debt capital to pry open the doors of economic opportunity for those communities left out of the boom of the last decade. It is estimated that only 1 percent of US domestic private equity capital is currently targeted towards development and businesses in core urban areas. Less than 2 percent of the funds raised annually for venture capital in this country has flowed to companies owned by women or minorities. And a 1999 U.S. Department of Commerce study found that only a small portion of the $144 billion annual demand for capital in the minority business community is being met. One of the phenomena that has perplexed me throughout my first year in office is the unquestioning ease with which billions of dollars in American capital flows to highly risky and volatile developing countries across the globe, while at the same time our own underdeveloped communities are afflicted by the absence of private investment capital. The commitment of American investment overseas is playing a role in lifting up the poorest nations on this earth. It is time that we engage the powerful tool of capital to lift up the poorest who live amongst us. Today, our State pension funds have over $5 billion invested in overseas "emerging markets." I was looking recently at CalPERS returns over the three years ending in December 1999. The fund experienced annualized losses in Indonesia of minus 29 percent; in the Philippines of minus 25 percent; and Malaysia of minus 24 percent. I know that we can do better investing here at home in our own emerging markets and struggling communities! And for all its challenges, you don't need a CIA report to underwrite the San Joaquin Valley. There exists today a great confluence between the need for capital to spur economic growth and the opportunity for capital to be successfully invested in California's emerging markets. Yet, the story of opportunity has been barely told and is, clearly, little understood. As the Treasurer of the world's seventh largest economy, I have a unique opportunity to speak to private sector leaders across this country. And I have been telling them the good story of the opportunities for economic progress which exist in own midst. There is increasing evidence all around us as to the opportunities for capital to be successfully invested here at home. A 1999 HUD study showed that the retail purchasing power of America's inner-city markets exceeds by nearly $9 billion the retail sales in those markets. In Watts alone, the gap was nearly half a billion dollars - showing that retail investment is needed and can be successful. Ethnic and minority markets - often centered in our core urban areas -- are growing dramatically, with more than 54 percent of workforce growth expected to come from minority communities which are heavily concentrated in urban areas. The revenues of companies listed on the Black Enterprise 100 - the largest African American owned companies - have increased from $470 million in 1972 to over $13 billion in 1997. The Hispanic consumer market has gone from $80 billion in 1982 to $280 billion in 1998. Over its 23 years in existence, the Community Reinvestment Act - the CRA - has proven the case for investment in our own emerging markets. Communities redlined in the 1970s are proving to be fertile and profitable ground. A 1997 Federal Reserve study showed that the profitability of banks which had a high percentage of home loans in low income neighborhoods were no different than those with low percentages of such loans. In fact, Alan Greenspan has said that the CRA has helped financial institutions discover new markets and new business opportunities and that there is no evidence that banks' safety and soundness have been compromised by low and moderate income lending. Beyond educating the private sector, we can set an example for private capital to follow by making smart investments in California's emerging markets with our own portfolio. Let me give you a couple of examples. CalPERS has invested $100 million with Magic Johnson's company which saw the opportunity to develop inner-city retail centers. That investment is yielding a solid return of 9.6 percent and creating new wealth in California communities. The Treasurer's office is purchasing $1 billion in home loans made by California lenders under the CRA. By doing so, we provide those lenders new capital to lend again, at the same time that the purchase will yield a higher rate of return than the balance of our State's investment portfolio. And, we have increased by $800 million, over the last year, the amount of State deposits in California community banks, putting our money to work here at home. As an example, we placed $5 million with Broadway Federal which serves South Los Angeles. And all our deposits are collateralized and give us a better yield than Treasury rates. We have started down the long road to a new investment policy for our state. The road ahead - to educate and engage our public and private sector partners and to fully deploy the State's own financial resources - will be challenging. But it is journey well worth making. | |
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