Sunday, March 6, 2011

When a flawed plan meets a perverse incentive structure: the result is serious government waste

The L.A. Times has a fascinating piece of investigative journalism in today's paper. It's a long and detailed account of how a "visionary," who had hoped to save millions of dollars for the Los Angeles Community College District by installing a spectacular array of solar, wind, geothermal and hydrogen fuel cell power generating systems over and around and all about the nine junior colleges which make up the LACCD has thus far wasted $10 million in taxpayer money on his poorly thought out program.

Larry Eisenberg had a vision. "Amazing," he called it. "Spectacular."

The Los Angeles Community College District would become a paragon of clean energy. By generating solar, wind and geothermal power, the district would supply all its electricity needs. Not only would the nine colleges sever ties to the grid, saving millions of dollars a year, they would make money by selling surplus power. Thanks to state and federal subsidies, construction of the green energy projects would cost nothing upfront.

As head of a $5.7-billion, taxpayer-funded program to rebuild the college campuses, Eisenberg commanded attention. But his plan for energy independence was seriously flawed.

He overestimated how much power the colleges could generate. He underestimated the cost. And he poured millions of dollars into designs for projects that proved so impractical or unpopular they were never built.

These and other blunders cost nearly $10 million that could have paid for new classrooms, laboratories and other college facilities, a Times investigation found.

There seem to be two major lessons within the Times's story.

First, there is a lot of wishful thinking and overhype about "green" energy. Many who are pitching solar energy projects, for example, massively exaggerate how much energy will be produced from the installed solar panels. The same is true of wind power. It usually takes a few years to really know how much power you will be getting. And by the time you know, the salesman is long gone from the scene.

I don't know if the companies which are overhyping their products are liable down the road, if the panels fail to produce the promised amount of power, but they should be. There should be a government agency cracking down on anyone selling new "green" products who is making claims which are false or exaggerated. It's ultimately a form of consumer fraud.

The second lesson from the story of the Los Angeles Community College District wasting million of dollars on projects which never came to fruition is an old one: public entities never spend money like it's their own. They always waste taxpayer money when they can.

It's just so much more fun to spend money that is not yours than it is to be frugal that people will almost always spend like the spigot is never going to stop. It's a perverse incentive for government agents built into all contracting arrangements.


In order to revive our dormant economy, President Obama thought the best answer was his hugely wasteful stimulus plan. In Davis, we have firsthand evidence of what kind of crap the stimulus plan was funding: sidewalk bulb-outs. Those are the silly extensions of the sidewalks at intersections, which are supposed to make a city more pedestrian friendly by shortening the distance one has to walk from sidewalk to sidewalk. In reality, they are a big load of nonsense. If we really needed them, the City of Davis would have spent our own local taxpayer money on them. But we didn't really need them. So we grabbed the "free money" Obama was giving away in his farcical stimulus plan.

The irony is that we really are short of funds for street and sidewalk repairs, but the stimulus money would not cover those expenses. So instead of repaving cracked streets and replacing damaged sidewalks, we spent hundreds of thousands of dollars on a very low priority item.

That is essentially what happened in the LACCD. They were sold a bill of goods that this was other peoples' money. If the people authorizing these expenses were spending their own funds, or if they treated the taxpayers' money as if it were their own, this unfortunate wastefulness never would have occurred.

In the end, it is likely that the LACCD will cover this loss by raising taxes on property owners in Los Angeles County. Either that or the students will get a much poorer education because the District screwed the pooch.

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