Michigan's new treasurer is a municipal bond finance veteran
Michigan’s new treasurer, public finance industry veteran Rachael Eubanks, is ready to put her bond-finance experience to work if the job of steering Michigan’s finances under Gov. Gretchen Whitmer calls for it.
Eubanks has worked in public finance for 13 years, most recently as a director at Robert W. Baird & Co. In that role she worked closely as a financial advisor with the Michigan state treasury. Eubanks structured more than $25 billion in bond financings for public entities, primarily Michigan's state government, its State Building Authority, the Michigan Finance Authority and the Michigan Strategic Fund. Eubanks also served as point of contact for credit rating agencies on state credit matters for 10 years.
She has also served as a utility regulatory commissioner on the Michigan Public Service Commission.
Public finance runs in her blood. She is the daughter of the now-retired Sarah Eubanks, who opened S&P Global Ratings' Chicago office and was a co-founder of the original Chicago-based Women in Public Finance, which has grown into a national organization with local chapters.
“Working as a financial advisor was far more than being transactional,” Eubanks said. “You are not just looking at how many bond issues that you are doing; you are really engaging what the priorities are with each administration, trying to problem-solve and look at a variety of solutions, of which bonding can be a part of, in order to implement whatever policy objectives are of the administration that is in place at that time.”
Eubanks said that the priority right now is figuring out the nuts and bolts of how to implement the priorities outlined in Whitmer’s campaign. Those priorities focused on large infrastructure, including fixing the roads, cleaning up the water, education and building a better Michigan for everyone.
“That is going to be the hardcore policy that is going to be the focus of the administration as a whole, making sure that all of our policies align with those priorities that Whitmer was elected on during the campaign,” Eubanks said.
On the campaign trail, Whitmer said she wanted $2 billion a year in new spending for infrastructure and another $1 billion in annual federal funding.
Eubanks said it is too far in advance to say whether bonding is going to be part of Whitmer’s plan or budget, but if called upon to explore the option she’s ready to look to do it in the most efficient and effective way possible. During her campaign, Whitmer cited increased user fees or a bond issue as possibilities, but offered no specifics.
Eubanks said that the administration is also working on policies for local governments, including how to handle state oversight.
Numerous local governments and districts were under various forms of state oversight during the recently ended administration of Republican Rick Snyder, most notably Detroit, where the state administrator led the city to file for Chapter 9 bankruptcy. After Benton Harbor Area Schools' November exit from a consent agreement, none remain.
"I think that is something that will be put front and center in short order, but it is not something that we have available as of now," Eubanks said. "Understanding the condition of our local units of governments is a priority and is under evaluation."
Michigan’s revenue numbers were revised upwards from May estimates. The state expects to see an extra $265 million in tax revenues for fiscal 2019, which ends Sept. 30, and $225 million in fiscal 2020. Eubanks said that will be folded into the budget that Whitmer will present in the next couple of months.
Even with strong economic growth, slow state revenue growth is expected to continue. Combined General Fund and School Aid Fund revenues are expected to decline from fiscal 2018 to fiscal 2019, and are projected to grow at less than 2% in fiscal 2020 and fiscal 2021.
“We don’t think that the slower revenue projections are unique to Michigan,” said Carol Spain, an analyst at S&P. “They are going through similar challenges that a number of states are facing while at the same time dealing with a pent up demand for increased spending on things like road improvement and education. I think there will be temptation to increase spending on some of these policy items. It’s going to be a challenge for states to really balance slow revenue growth as the demand for services grows while at the same time remaining prepared for a potential recession.”
Eric Lupher, president of the Citizens Research Council of Michigan, an independent policy research organization, said it will be very helpful to have a potential municipal finance champion as treasurer.
“Having a champion is good to continue to raise the need for policy within the administration and with the legislature,” Lupher said.
The issue for Michigan though, Lupher said, is the number of promises that have been made that lay claim to future revenues.
The state redirected revenue to highway spending and increasing the homestead property tax credit as part of the Snyder’s administration $1.2 billion 2015 road funding package. The package relies on a 7.3-cent increase in fuel taxes and 20% increase in vehicle registration fees. The $1.2 billion a year it will raise when fully phased in in 2021 still falls short of the amount of money analysts said the state needs to address its road problems.
Lupher said that those revenue diversions account for a large portion of would-be General Fund growth. Baseline revenues are projected to grow by about $600 million between fiscal 2018 and fiscal 2021.
“So while the expectation is for continued growth, that isn’t going to translate into meaningful growth of revenues flowing into the state,” Lupher said. “Promises have been made, so even with expectations of continued growth, it doesn’t provide much new resources for the new administration to come in and cement their priorities.”
“Some of these issues are so large in scale and affecting regions more than just single local government entities,” Lupher said. “That would suggest a role for the state to, in some way, take on the infrastructure needs of roads, water and sewer, many of those types of things. In some form, we as a state have to recognize that our infrastructure has been underfunded for decades now and the only remedy comes from increased taxes — there is nothing magical about that. “
Lupher believes that there is certainly a role for bonding in some form but said he was skeptical of value of using the funding option to deal with the state’s roads.
“Anytime you sell bonds people want to get repaid for their investment so that requires money somewhere down the line,” Lupher said. Michigan has already used the option, when it fixed roads in the 1990s.
“We sold a bunch of bonds and invested a lot in fixing the roads and here we are twenty years later dealing with the same issues,” Lupher said. “That is because there hasn’t been the resources to maintain the roads once they were built. Infrastructure, especially roads, require upkeep and because we haven’t made funding a priority because in part we had divert future resources to paying the principal and interest on those bonds we haven’t done a good job of maintaining the roads.
“Going through that exercise again, yes, we may have a short term period of improved road quality but if we don’t have the resources to maintain those roads while at the same time repaying the principal and interest on the bonds – it’s just a vicious cycle to get in and doesn’t solve the problem in the long run.”
In July S&P raised the state’s general obligation bonds to AA from AA-minus and assigned a stable outlook, with its appropriation-backed debt rising in tandem to AA-minus from A-plus. The state is rated AA by Fitch Ratings and Aa1 by Moody’s Investors Service.
Spain said that the state has done a good job building reserve balances to roughly $1 billion this year, up from $710 million in fiscal 2017. Reserves hit a peak of $1.3 billion in 2000 and then were drained by 2011. Total tax-supported debt dropped to $7.1 billion in fiscal 2017 — including $1.55 billion of GO paper and $3.55 billion of general fund-secured appropriation debt — from $8.3 billion in 2015.
A 2017 report from the Citizens Research Council says the rainy day fund won’t be enough to handle a severe recession.
“Michigan is still a big manufacturing state,” said Howard Cure, director of municipal bond research at Evercore Wealth Management. “There could be cuts at General Motors and other car companies so you really need a decent sized rainy day fund to combat that.”
Cure said that there is also concern over how import tariffs for aluminum and steel under President Donald Trump's administration could hit the state’s manufacturing base.
“I think there was an increase in exports before the tariff battles really started heating up and that is my consistent concern with Michigan: because it is such a big manufacturing state you need to be either more conservative on your revenue or provide a rainy day fund to maintain the operation of the state if there is drop because of the decline in manufacturing and a loss of employment base because of that,” Cure said.