Editorial: Bonding for road work has some advantages
Gov. Gretchen Whitmer is apparently considering borrowing the money Michigan needs to fix its crumbling roads. The governor seems to have come to the realization that the Republican-controlled Legislature is not going to approve a massive increase in the fuel tax, particularly in an election year.
So Whitmer is expected in her State of the State address Jan. 29 to unveil a plan that uses revenue raised from bond sales to fund either all or a major part of the $2 billion a year she says Michigan needs to bring its roads to acceptable condition.
There are advantages and dangers to selling bonds for infrastructure work.
For one thing, as Robert Daddow, the retired Oakland County financial wizard notes, bond sales can be adjusted to meet the demands of the current construction season.
Raising $2 billion a year doesn't mean the state can effectively spend all that money. With $16 billion in new construction projects already underway in southeast Michigan, the competition is fierce.
"You're not going to be able to spend $2 billion in a single Michigan summer," Daddow says. "There's not enough labor, equipment or material available."
Unlike an increase in the fuel tax — Whitmer proposed 45 cents a gallon last year — the revenue flow from bonds can be adjusted once a seasonal construction plan is in place.
Michigan can also borrow the money on the cheap. Its AA bond rating and ability to raise revenue to meet its obligation should qualify it for the most favorable bond rate, currently in the 1.29% range.
Servicing $2 billion in bonds at that rate would cost roughly $200 million a year. That's a lot of bang for a relatively few bucks.
Daddow rightly cautions, though, that bonding is a short-term solution. That $200 million debt service cost is incremental — it recurs each time another $2 billion in bonds are sold.
Should Whitmer propose a 20-year bonding plan, by the end the total debt service could be larger than the current $5 billion annual Transportation budget.
A two- to three-year plan, though, could be managed. And it would give the governor and Legislature time to concoct a permanent solution.
As we've said before, any plan should include reworking Public Act 51, which spells out how road revenue is distributed. Currently it works to spread a disproportionate amount of available road funds to sparsely populated areas of the state. Fix Act 51, and the amount that would be needed for roads likely drops significantly.
The obvious disadvantage of selling bonds is that the state would be borrowing against the future to meet today's needs. Michigan is still paying off bonds that were issued during the Granholm administration to fix roads that are now crumbling again.
The length of bonds should not exceed the expected life of the asset. That means Michigan should stay away from 20-year issues, and opt instead for 10- or 15-year bonds. That would drive up the debt service costs, but is the most responsible approach.
Bonds would offer a way around the current stalemate between the governor and the Legislature, and give the state the flexibility to adjust revenue to annual needs.
But bonding should not be looked at as the permanent answer to Michigan's road funding shortfall.