Michigan bond plan sparks debate over affordability
The interest rate cost of Michigan Gov. Gretchen Whitmer's $3.5 billion bond finance program for road fixes is fueling critics' arguments against the plan.
The proposal carries a $1.6 billion price tag for interest payments over the 25-year life of the bonds.
State officials, on the other hand, note that interest rates have recently hit record lows and investor demand is running high, so they argue there's never been a better time to borrow.
The total borrowing costs was outlined in a presentation to the House Transportation Committee on Tuesday by Michigan Department of Transportation officials and state Treasurer Rachel Eubanks. Whitmer unveiled the multiyear, $3.5 billion plan in her State of the State address last month.
Former Lt. Gov. Brian Calley, president of the Small Business Association of Michigan, used the committee hearing to continue his and SBAM's public opposition to the bonding plan. SBAM's legislative policy position calls for opposition for new state debt that doesn't have a dedicated revenue source to repay the debt, Calley said.
“Whitmer's bonds will deplete MDOT of cash flow in the future,” Calley said.
MDOT plans to issue state trunkline fund bonds, which are secured by MDOT's portion of fuel tax and vehicle registration fees that are distributed to the state, counties, cities and villages. The bonds would be sold over the next four years and do not require legislative approval.
While some dislike the borrowing plan, Eubanks said historically low interest rates make a compelling case for borrowing to pay for longer-term projects. She noted in her presentation that interest rates on tax-free bonds have been as high as 6.9% in 1994 but are now at record lows of under 2%.
"There's never been a time in history where interest rates been lower," Eubanks said.
MDOT finance director Patrick McCarthy said the interest payments are estimated at $1.6 billion over 25 years, meaning the $3.5 billion in roads will ultimately cost $5.1 billion.
“We have plenty of capacity to bond,” McCarthy told lawmakers. “Our calculation is that we can issue a total of about $6 billion in debt with current conditions in the market. Today we have $118 million already used of that $300 million of debt service capacity and that debt service is dropping, increasing capacity in the future. There is plenty of capacity above $3.5 billion.”
The state has about $463 million of outstanding state trunkline fund bonds. They are rated Aa2 by Moody’s Investors Service and AA-plus by S&P Global Ratings.
Paul Ajegba, Director of MDOT said that MDOT has been very strategic on projects chosen. The plan will allow MDOT to nearly double capital spending over the next five years to $7.3 billion from $3.9 million, adding 122 projects that the agency otherwise would not have the money to do in that period.
Forty-nine of those projects will be directly funded by the bond proceeds.
“All of the projects that were picked to be funded by the bonded money are projects that will have a useful service life of on average of 27 years,” Ajegba said. “These are all reconstruction projects not patch and overlay like we’d been doing in the past.”
Ajegba said that absent the bond strategy the infrastructure needs of the state would continue to go unaddressed. “With the bond money we have been able to re-scope a lot of projects — from band aid to reconstruct,” he said. “Bonding is not a funding source, it’s a financing tool to slow the rate of decline so we don’t fall off the cliff but eventually we must come up with a funding source.”
Calley and SBMA argued that entities get into trouble because of cash flow than because of profitability.
“With a bonding program particularly one as aggressive as this where you are maximizing what current policy allows borrowing to go to, you are taking future maintenance dollar and front end loading them," Calley said.
"Interest rates are low and you can net-present-value it all day long, but it's still cash flow that's needed for maintenance in the future, which is spent and used today."
Ajegba said that the hope is that over the long-term legislators can come with a generous source of revenue on an annual basis.
What that long term plan might look like remains unclear.
Whitmer floated the bond plan as an alternative to what she believed would have addressed the long term funding needs of Michigan roads. That plan which relied on a 45 cent-per-gallon gas tax increase was rejected by Republicans last year.