Heads up, Arizona, part one: The high cost of getting ready for growth

Arizona's population has ballooned from 2.7 million in 1980 to 6.5 million in 2007. By 2032, the state will have welcomed even more new residents — 4.2 million — for a total of nearly 11 million. How the state will accommodate that growth was the focus of a recent report, "Infrastructure Needs and Funding Alternatives for Arizona: 2008 to 2032," commissioned by the Arizona Investment Council (AIC) and prepared by the L. William Seidman Research Institute at the W. P. Carey School of Business. Part one of our five-part series provides an overview of the challenges and opportunities the state faces in meeting its infrastructure needs over the next 25 years.

Arizona's population has ballooned from 2.7 million in 1980 to 6.5 million in 2007. By 2032, the state will have welcomed even more new residents — 4.2 million — for a total of nearly 11 million. How the state will accommodate that growth was the focus of a recent report commissioned by the Arizona Investment Council (AIC) and prepared by the L. William Seidman Research Institute at the W. P. Carey School of Business.

According to the report, "Infrastructure Needs and Funding Alternatives for Arizona: 2008 to 2032," meeting Arizona's infrastructure needs over the next 25 years will cost the state between $460 and $532 billion. Tim James, Seidman's director of research and consulting, led the team. "We know that we can solve these infrastructure problems," he said.

"It's possible for us to build sufficient infrastructure here over that period, but we need to start now, because if we wait 10 or 15 years, we'll have horrible creaking infrastructure and the state will be totally unattractive to potential new residents and to existing and potential new businesses as well." AIC President Gary Yaquinto echoed James' sense of urgency. "If we don't start moving now, we're going to end up in a situation where growth in our economy will stagnate and our quality of life will deteriorate," he said.

Initiating debate

The purpose of the report was not to solve all of the state's infrastructure problems at once. Instead, James said, the team's most important goal was to start a debate about the infrastructure issues confronting the state. "The road ahead is difficult but it is not impassable. One of the principal aims of this study is to initiate and add to the level of debate about pressing infrastructure concerns.

If it succeeds in doing so it will have been a worthwhile enterprise," writes James in the report's introduction. The report explores infrastructure needs and financing mechanisms in four sectors: water and wastewater; energy; telecommunications; and transportation. In this Knowledge@W. P. Carey series, we examine each sector in turn, beginning with a general overview as well as coverage of the water and wastewater section in this issue.

Growth's opportunities and challenges

Arizona has been among the nation's leaders in population growth for decades. Between 2000 and 2030 the population of the United States will increase by 30 percent, according to U.S. Census Bureau estimates. Arizona stands to see a population increase of nearly 109 percent — second only to Nevada's 114 percent. "People continue to be attracted to the state for its climate, job opportunities, life style, and western spirit of independence," the report's authors write.

Yet the kind of explosive population growth that is forecast for Arizona brings challenges as well as opportunities. "A growing population will allow the state to build its significance as an economic center in the Southwest. If Arizona takes the opportunity now to build cutting-edge telecommunication, energy, transportation, and water and wastewater infrastructure networks, the state will rival others in promoting economic growth and prosperity," the authors write.

The authors suggest a number of opportunities that growth affords the state, including:

• The opportunity to build "cutting-edge telecommunications infrastructure" that will put Arizona on par with world telecommunications leaders like Japan, Korea, and France;
• The opportunity to "realize forward-thinking energy infrastructure that accounts for the new realities of the 21st century — like soaring oil and natural gas prices and an increasing desire to reduce our negative environmental impact;"
• The opportunity to "host growing populations well into the future" even as other Southwestern states grow increasingly thirsty and competition over the region's water supply intensifies; and
• The opportunity to build an efficient and safe transportation infrastructure to carry the state's people and goods within, into, and out of the state.

At the same time, such huge population growth also poses unique challenges. According to the report, "A growing population is forcing Arizonans to make tough decisions about planning for, and financing, needed infrastructure projects. The state's growth has already placed a heavy strain on existing public and private infrastructure."

The bottom line, the authors suggest, is that the state must acknowledge the challenges and opportunities posed by continuing population growth, and then decide how it wants to confront those challenges and embrace those opportunities.

"At this critical juncture," the authors write, "the state must decide if it is indeed willing to embrace the kind of growth forecast in this study. An unwillingness to confront the challenges posed by Arizona's forecast growth will not only limit the opportunity to become one of the region's leading economic centers, but may end up stifling growth itself."

Yet Arizona isn't alone in facing the challenges and opportunities associated with population growth. Most of the nation will face huge infrastructure bills in the next 25 years. "The American Society of Civil Engineers' 2005 Report Card for America's Infrastructure assessed the condition and capacity of the nation's infrastructure and gave it an overall grade of 'D'. In 2008 ASCE estimates that $1.6 trillion is needed over a five-year period to bring the nation's infrastructure to good condition," writes James in the report's introduction.

What $460 billion will buy

Investing in the state's infrastructure is money well spent, the authors suggest. While the bill is "huge," James admits, consider what Arizona will get:

• In the water/wastewater sector, $109 billion will rehabilitate existing infrastructure for current populations, build new infrastructure to support future populations, and secure water supplies for current and future populations.
• A $74-86.5 billion capital investment in the energy sector will buy the state a new natural gas storage facility to secure Arizona's natural gas supplies, as well as additional refinery, transmission, and generation capacity for natural gas, petroleum, and other fuels. The investment would also cover sufficient electricity generation, transmission, and storage infrastructure to serve the state's growing population.
• In the telecommunications sector, an investment of $24-25.2 billion would give Arizona a state-of-the-art fiber to the home network that would put the state on par with world telecommunications leaders.
• In the transportation sector $253-311 billion is what's required simply to keep the transportation system at a level of service equal to today's — in other words, to support a growing population without worsening congestion. To improve the system (decrease congestion from today's level, for example) additional investment would be necessary.

Financing the high cost of growth

Paying that huge bill will require a mix of funding mechanisms that are already in place and have proven effective, as well as new, innovative funding mechanisms. Exploring those mechanisms was one of the most important tasks the Seidman research team faced.

"Arizona must wrestle with the thorny issue of how its public and private sectors can fund the enormous cost of infrastructure. It may need to do more of what it already does, it may need to adapt and consider new methods of provision and funding," James writes. Yaquinto agreed. "The biggest problem," he said, "is not in determining what our infrastructure needs are going to be, but in finding the right mechanisms to raise the kind of capital that is going to be needed to put this infrastructure in place."

After presenting the total 25-year, half-trillion dollar infrastructure bill to a group of industry leaders and policymakers, James said, "It's not a nice message, but one of the things we're trying to do here is say: heads up Arizona, we need to look at our infrastructure needs and deal with them today before it's too late."

Bottom Line:

• Between 2008 and 2032, Arizona will add 4.2 million new residents, for a total of nearly 11 million (an increase of 65 percent).
• Meeting Arizona's infrastructure needs over the next 25 years will cost the state between $460 and $532 billion.
• The hardest part of solving the infrastructure problem is not identifying the needs, but finding the right mechanisms to fund those needs.
• If the state wants to remain attractive to new residents and businesses, the time to act — to begin debate on how best to pay for Arizona's infrastructure needs — is now.