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January 17, 2005
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| The Pawlenty plan would put $7 billion into transportation, starting in 2007. $4.5 billion for highway projects would come from an unprecedented bonding package. (MPR Photo/Jeff Horwich) |
St. Paul, Minn. — It sounds so good, it's a wonder more states haven't tried it -- get roads now; pay later.
After all, we do need some major highway projects in a bad way, and the state is a borrower in good standing. Roads are a legitimate investment, with a real payoff -- businesses move goods faster; people spend less time their cars and more time enjoying their lives.
All true. But like most bright, shiny ideas, it has a less lustrous side. Each claim about bonding for roads deserves a closer look.
Here's Gov. Pawlenty, announcing the proposal:
"It's a 10-year investment package that will accelerate dozens of major road and transit construction projects without raising taxes," Pawlenty said.
Some, like Minnesota's counties and Chamber of Commerce, want to raise the gas tax to pay for more construction. Pawlenty's plan won't do that.
But of course, we can't get something for nothing -- we're borrowing $4.5 billion. In 2007, as soon as the plan begins, the state starts paying down that debt -- plus 5 percent interest. In fact, that interest adds $2.2 billion -- another 50 percent -- to the total cost of the bonding package.
Arturo Perez, an expert on transportation financing at the National Conference of State Legislatures, says states considering bonding need to remember that debt payments become an inescapable priority.
For a number of years in the late 2010s, Minnesota could be paying almost $400 million a year on the transportation debt. Without new taxes, Perez says that inevitably means $400 million less for other projects.
"The decision on whether to bond comes down basically to whether (lawmakers) are willing to make the types of adjustments to current spending, because of the fact that debt retirement shoots right to the top," Perez says.
Of course, if lawmakers don't want to cut spending, the other option is -- to raise taxes. It might not happen until Pawlenty is out of office. Or, lawmakers or even voters might make it happen despite his opposition. U of M economics professor Ed Lotterman says more taxes remain a distinct possibility.
"From an economic point of view, to keep taxes low right now and have them be higher five, 10, 15 years down the road -- it doesn't do anything for you economically," Lotterman says.
Under the Pawlenty proposal, the bonds would largely be paid off using the future growth in car registration and gas taxes. Finance experts do like this part -- it's reassuring to have a dedicated source of financing, rather than paying down the debt out of the general budget.
The problem is this: The plan presumes our gas consumption -- and with it, gas tax collections -- are going to go up. Economists say that's far from certain, especially over the 30 years it will take to pay off the bonds.
For one thing, if gas prices continue to rise, people will use less. Hybrid cars, which are more energy-efficient, are already popular, and alternative fuel vehicles may be around the corner. A number of the governor's own policies -- from support for commuter rail to ethanol subsidies -- actually cut down on gas consumption. Even the roads proposal itself, paradoxically, would speed up freeway traffic and allow people to use less gas.
So there's no guarantee gas taxes will cover what state officials are projecting. In that case, the bond payments will need to dig into some other source of state money.
These concerns about future payment don't lessen the dramatic impact of the roads program in the near term. Lt. Gov. and Transportation Commissioner Carol Molnau puts it this way.
"The bonding package would accelerate the construction of major highway projects throughout the state that have been delayed or underfunded for years, and maybe even decades," Molnau says.
The size of Pawlenty's plan -- $4.5 billion -- is five times the last boost lawmakers gave to transportation funding, for the years 2003 through 2007.
The funds would flow to a variety of projects over a 10-year period. There are no specific projects on the list right now. One top transportation official suggests long-standing needs, like expansion of 35W and Cedar Ave. in Minneapolis are likely candidates.
But can the bonding boost make a long-term difference? Yes.
Take the state of Missouri, which decided for the first time in 2000 to bond for roads and bridges.
The Missouri Transportation Department's chief financial officer Pat Goff says roads in the state were falling apart faster than they were being repaired.
"So $907 million of bonds were sold, and we changed that curve," Goff says. "Now the percentage of good and better roads is increasing, rather than decreasing."
But Goff cautions against a scenario he calls "the hump and the cliff."
A sudden infusion of money can bring a satisfying surge in maintenance work -- that's the hump. But then the money runs out. The road projects keep coming, because that's what road projects do. If you've gotten used to bonding for more routine road work, Goff says the end can feel very much like driving off a cliff -- not only is your bonding money gone, but you're paying off debt with your cash on hand.
Goff says for Missouri -- and Minnesota -- one golden rule of borrowing needs special attention: Only borrow only for the big stuff.
"You don't borrow for groceries -- you borrow for your home," Goff says. "In the road industry, the transportation industry, if you borrow for bridges, long-term projects, or those that have economic development benefits early, or safety benefits early, then yes -- bonding makes some sense."
So, don't spend the money filling potholes -- make lasting changes to the state infrastructure. State officials are aware of this, of course. But the temptation to meander into what are essentially maintenance projects can be strong.
Gov. Pawlenty gives another big reason why bonding makes good sense at the moment.
"The state can leverage money at about 5 percent right now -- and the cost of road construction has gone up about 10 to 12 percent a year," Pawlenty said, in introducing the plan. "So by accelerating these projects, we're not only getting the benefit from a transportation standpoint, it's good fiscal policy."
In other words, if we wait and pay later, projects would actually cost somewhat more. That's because the price of steel, asphalt and other construction commodities is marching even faster than the interest rate we pay to borrow the money.
It sounds like a clincher -- why wouldn't you borrow money under those circumstances? And if you look at last year, Pawlenty is right. The U.S. government's index of construction materials jumped 8 percent in 2004. The cost of iron and steel jumped by almost one-third.
But inflation can be a fickle ally. If you look at the five years before 2004, construction materials edged up about 1 percent a year, and the price of steel actually fell a bit.
Economist Ed Lotterman says the long term trends are equally moderate, and there's no reason to believe the jump in 2004 is a structural change.
"To say, 'Gee, inflation is such that we really ought to be able to eat our cake now and pay for our cake with cheaper dollars in the future' -- that depends on an assumption of ongoing inflation, which we really don't have," Lotterman says.
There's another wildcard here -- borrowing large amounts of money can affect a state's bond rating. Minnesota is currently regarded as a top-notch borrower -- a very low risk. Experts say it's hard to predict how credit agencies would look at $4.5 billion borrowed for roads. If they should lower Minnesota's AAA bond rating, it could make borrowing for anything -- not just transportation -- more expensive in the future.
It's worth noting that when Missouri began bonding for roads, their AAA rating was unaffected. But Missouri also only borrowed for $1 billion.
All these claims and caveats and projections leave lawmakers with a lot to ponder. That's true even if House Speaker Steve Sviggum, R-Kenyon, suggests it's something of a no-brainer.
"I can't see why members of the Legislature can't rally around this. It's fiscally responsible, it's a wise package," Sviggum says.
Minnesota is not the first state to consider bonding for roads. Other states have been doing it for years -- mostly for isolated, high-value projects. But finance experts say Pawlenty's proposal is something different. That's partly because lawmakers must make the decision to bond before knowing what the money will buy.
And it's partly because the amount of money may well be unprecedented. The top finance expert with the National Conference of State Legislatures, Arturo Perez, could not recall anything like it.
That's no reason to count it out -- Minnesota may be on the cutting edge of a smart idea. Perez says the governor's plan is definitely worth a look -- a good, hard, careful one.
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