By Kelly McCutchen
As the painful economic downturn forces businesses to become more efficient and refocus on their mission, state government should be no different. Across-the-board budget cuts are reaching diminishing returns. It’s time to look seriously at eliminating programs that no longer serve a core government function.
Eliminating unnecessary programs will improve efficiency and, in some cases, would free up large amounts of capital that could be redirected to address the very problems limiting the state’s job growth, such as water and transportation.
The shortage of infrastructure funds comes just as an economic vise grip tightens on the state budget. Declining gas tax revenues hinder traffic solutions for metro Atlanta. Municipal water systems are losing billions of gallons of expensive, treated water a year through leaks – and revenues were reduced by low water use during the drought. Budget cuts eliminated reservoir construction funds just as billions of gallons flowed through the state without being captured. And high-quality, high-paying jobs are leaving the state every year due to a lack of a more modern type of infrastructure: venture capital.
Georgia has a unique opportunity to address these challenges by redeploying hundreds of millions of taxpayer dollars locked in assets now yielding the state a limited return on investment. Contrary to other government experiments in “stimulus funds,” it is clear that these investments will create jobs just when our Georgia economy needs them.
One example is a program created more than 20 years ago “to provide low cost loans to small towns and communities who had little or no access to the financial markets for their infrastructure needs.” This program, the Georgia Environmental Facilities Authority (GEFA), is the epitome of mission creep. Rather than being a financier of last resort, GEFA makes loans to communities who could easily find loans in the private sector. State government, through GEFA, crowds out the private sector, taking revenue and jobs away from private Georgia financial institutions. With net assets of $1.6 billion, if GEFA were a private bank it would be the third largest in the state.
Previous studies have shown that if the state were to prevent this unfair competition with the private sector and refocus GEFA on its original mission, many of GEFA’s existing loans could be securitized, freeing as much as $500 million.
Half a billion dollars would go a long way toward addressing Georgia’s budget deficit, but it would be poor fiscal policy to use this one-time source of funds to address an operating shortfall. A more appropriate action would be to redirect these funds into other infrastructure investments that would provide a better return on investment.
For example, one-third of the $500 million could be used for water-related projects. Some water systems in Georgia are losing up to 20 percent of water due to leaks. One of the most effective water conservation projects Georgia could pursue would be to provide grants to local communities for these repairs. These funds could also be used to restore reservoir construction funds that were eliminated from last year’s state budget.
A second priority is jumpstarting statewide transportation projects. There is widespread support for additional transportation investment but many high-priority projects such as the statewide freight network are delayed while the state debates future funding mechanisms. The investment would not only have a short-term impact on traffic congestion, but it would signal to businesses looking to move here that Georgia is willing and able to address mobility.
The remaining funds could be invested in early-stage venture capital focusing on areas where Georgia has a competitive advantage such as neuroscience, cardiology, oncology, health-care information technology, wireless semiconductors, photovoltaic solar cells and Internet security software. This would go a long way toward addressing Georgia’s anemic venture capital market, which causes many promising Georgia companies with billions of dollars of revenues and high-paying jobs to leave the state each year in search of capital.
Georgia is the only state in the nation to ban public pension investments in venture capital. Just this month, Tennessee announced a $120 million state investment in venture capital to “develop Tennessee’s ‘entrepreneurial infrastructure,’ bring additional venture capital to the state, diversify the state’s economy and create clusters of business innovation which can generate additional new companies or attract new talent to the state.” This is on top of nearly a billion dollars of investment by Tennessee’s public pension funds. Meanwhile, Georgia’s existing Seed Capital Fund, with active investments of less than $11 million, saw its budget allocation cut to zero in October.
Georgia certainly needs to address its antiquated pension investment restrictions, but starting these funds would again have an immediate short-term impact and send a critical signal to investors across the nation that Georgia is ready to become a center for innovation.
Transportation, water and venture capital woes cost the state in jobs and millions of dollars of lost revenue. Redirecting capital toward these critical needs would have the immediate effect of creating desperately needed jobs and economic activity. In the long term, it will increase the tax base and send a meaningful signal that Georgia is prepared to exit this economic recession stronger than ever. It’s time for action and leadership.
Kelly McCutchen is executive vice president of the Georgia Public Policy Foundation, an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.
© Georgia Public Policy Foundation (November 13, 2009). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.