GOP's $1B road repair idea: Pension bonds
Lansing — A conservative business group this week pitched Michigan Republican legislative leaders on a debt swap idea it says could free up nearly $1 billion annually to fix the state's crumbling roads without raising taxes.
Under the concept presented to House Speaker Lee Chatfield and Senate Majority Leader Mike Shirkey, the state would issue a 30-year pension obligation bond to borrow $10 billion and pump that money into the Michigan Public Schools Employees Retirement System.
The bond would be used to pay down unfunded liabilities in the pension system and free up state School Aid Fund money currently used for that purpose, said Jase Bolger, the Republican former state House speaker who now works for the West Michigan Policy Forum.
The idea hinges on the assumption — a risky one, critics say — that the pension system would invest that $10 billion influx of cash and secure large enough returns to both pay down any remaining pension debt and cover the cost of bond interest payments.
If that happens, the state could save roughly $980 million a year in School Aid Fund dollars that currently go to pension debt, Bolger said. The plan would complement Chatfield’s plan to shift sales tax revenues already collected from fuel purchases — worth about $540 million annually — to roads instead of schools and local governments.
“So at the end of the day, you’ve funded teacher pensions, you’re paying off debt and you’re freeing up the cash to fix the roads,” Bolger said.
Chatfield and Shirkey have not committed to the idea but had asked the West Michigan Policy Forum to look into ways to finance additional road repairs without the 45-cent-a-gallon fuel tax hike proposed by Democratic Gov. Gretchen Whitmer.
Chatfield, R-Levering, had asked the group to explore ways to back fill the School Aid Fund and hold it harmless from his proposed gas sales tax shift, Bolger said. And Shirkey, R-Clarklake, said “we want you to be creative … because just raising the gas tax doesn’t have any creativity at all.”
John Kennedy, chair of the West Michigan Policy Forum, this week briefed Shirkey, Chatfield and the Whitmer administration on the idea, Bolger said. The group commissioned PricewaterhouseCoopers to run the numbers. No taxpayer funds were used.
The state currently expects to pay off $29.4 billion in unfunded liabilities in the teacher pension system in the next 21 years. The proposal would instead require the state to repay the new bond within 30 years, stretching the window out by nine years.
The concept quickly met conservative opposition from Patrick Anderson, founder and CEO of the Anderson Economic Group and a former state deputy budget director in the Engler administration. Anderson argued it could violate the Michigan Constitution, break trust with pensioners and is “also a really dumb idea” from a taxpayer perspective.
“There is no free lunch out there, and you do have to repay your debts,” Anderson said. “These are two eternal verities, and they have apparently been lost on the people that are promoting this idea that we can save money by not paying our bills.”
Extending debt payment schedules could cost the state additional money, the Anderson Economic Group projected in a study for the Macomb Intermediate School District. A 40-year repayment schedule would cost the state an extra $30 billion, and a 50-year schedule $45 billion, the firm found.
But Bolger said Anderson is wrong because the analysis does not take into account investment income the state could generate through the pension obligation bond plan.
“This not only frees up cash every year for the next 20 years, it also costs less over the long term,” he said.
The state is obligated to fund pensions, and the bonding idea is based on the risk assumption that pension investments will be profitable, Anderson countered.
“These are variations on the theme of not paying your bills," he said, "and telling yourself the happy tale that you are somehow going to make more money on the money that you should have paid back then you’re eventually going to have to repay to the people you’re now deeply indebted yourself to.”
Pension obligation bonds have become an increasingly popular tool for local governments seeking to free up cash.
But critics have warned against bonding to pay down pension debts, pointing to Detroit’s bankruptcy as an example of risks associated with additional borrowing ahead of unforeseen economic declines.
Detroit took out complicated interest rate swap contracts in 2005 and 2006 ahead of the mortgage meltdown and 2008-09 recession and later couldn't make debt payments — a factor leading to the city's bankruptcy in 2014.
The national Government Finance Officers Association in 2015 adopted an advisory warning against pension obligation bonds. Generating revenue from pension investments that tops bond interest rates is a “very speculative” goal, the association said.
Bolger said he anticipates annual interest payments of about 4 percent on the bond and said the market “over the long term” has performed much stronger than that. The state could reduce risk by investing the $10 billion over time instead of all at once to limit the impact of market corrections or recessions, he said.
Chatfield spokesman Gideon D’Assandro declined to weigh in on the pension bonding idea. Members of the House Republican caucus are looking at “a lot of different options right now for how to put together the best possible” long-term road funding plan, he said.
Chatfield “is glad to have a lot of different options” and “has made a priority of finding every dollar available for the roads before going to Michigan families and asking for more," D'Assandro said.
Shirkey’s office did not immediately respond to a request for comment, but The Detroit News had asked spokeswoman Amber McCann about road funding rumors floating around Lansing last week, including pension refinancing.
The Senate majority leader tasked his caucus with considering every option “until it’s been thoroughly evaluated and vetted to see if it’s something worthwhile,” McCann said.
“I think you’re going to hear a lot of different interesting concepts that don’t’ necessarily indicate the formation of a plan but rather a brainstorming of what is workable.”
Whitmer spokeswoman Tiffany Brown also declined comment on the pension obligation bond idea, saying the administration is not going to weigh in on “hypotheticals.”
But Brown noted the governor proposed a road funding plan 114 days ago” while Shirkey and Chatfield have still not formally proposed any alternatives.
The governor's budget plan calls for a 45-cent increase in the state's 26.3 cents per gallon fuel tax over two years, an idea Republican lawmakers have ridiculed.
Whitmer is “the only leader who has offered a budget proposal that raises the $2.5 billion in revenue Michigan needs to fix our roads, ensure clean drinking water for everyone in Michigan and support schools so students get the skills they need to compete for jobs,” Brown said.
The governor this week bashed the Republican-led Legislature for beginning its traditional summer recess without finalizing ongoing negotiations over road funding and the 2020 state budget.
The Michigan Chamber of Commerce, Business Leaders for Michigan and other top business groups have also urged lawmakers to work throughout the summer and use the “window of opportunity that exists in this non-election year” to craft a long-term road funding solution.
Officials must adopt a balanced budget by Oct. 1 to avoid the first government shutdown since 2009.