Saturday, December 03, 2005

Ark. Times- Last Bond Paid Interest Equal to 46% of Principal

By Debbie Pelley (click "comments" below for article).


Blogger Debbie Pelley said...

Arkansas Times - Arkansas Paid Interest Equal to 46% of the Principal on Last Highway Bonds in 1999

Clue to the Present Highway Bond Proposal Waste

Informative quotes from article below by Ernest Dumas

“How much would the state have saved if it had not issued bonds and financed the work year by year? [$575 million approved in 1999] The Highway Department says that over the life of the bonds the interest will amount to $264 million. . . . So the state would be saving $265 million to put into more highway improvements under pay-as-you-go.” By Ernest Dumas

[Wouldn’t that be paying almost half the amount spent in interest – 46% - not including the bonding fees. Conservative opponents, like Senator Jim Holt, of the present highway bond issue have been ridiculed for asserting that 37% of principal( $217 million for $575 million in bonds) is the minimum cost of interest and bond fees for the present highway proposal . Other researchers (both liberal and conservatives) have put the figure as high as a dollar of interest and bond fees for every dollar that goes into the highways. Forty-six percent is not far from that figure]

Ernest Dumas has written a very thorough 10- page article in the Arkansas Times about the two bond proposals to be voted on Dec 13 with the subtitle, “The law and arithmetic raise questions about election issues.” He has answered some key questions that I, myself, had just decided to research.. Proponents have accused opponents of the highway bond proposal of exaggerating the wasted money involved in this issue. History of the past highway bond transaction is the best way to prove opponents are right on this present highway bond matter. Dumas has done the citizens of Arkansas a real favor in bringing this research to the attention of the public.

Dumas makes the point about what could happen if we approve the highway bond proposal Dec. 13. At one time before Amendment 20 was passed years ago guaranteeing citizens to vote on any state indebtedness, “Arkansas had a staggering $160 million of public debt – more per capita than any state in the country.”

Dumas also points out another aspect of which I was not aware: “Technically, the commission could issue bonds anytime after the Dec. 13 election even though there would be no federal maintenance and diesel tax revenues available to pay the bonds. The bond law says the payments will be made directly from the state general fund if the other revenues are not available or not sufficient. There is no limit on the amount of general revenues that could be taken. Dumas added that this is not likely because of public outcry, but often in our day public outcry is extremely weak, especially in this era of political correctness.

Below are a few excerpts from his 10 page article by Dumas that covers many details not found in other articles.. His entire article is very informative and can be accessed at this link on the Arkansas Times website:

Old-style arithmetic suggests that a pay-as-you go program might produce at least as much improved highway mileage and almost as fast as the ramped-up program that would be undertaken with 12-year bonds.

The Highway Commission in 1999 came up with the smaller bond plan that earmarked all the money for interstate improvement. Huckabee embraced it and it sailed easily through the legislature. Voters approved the bonds by a wide margin later in the year and the bonds were issued in three stages, $175 million in 2000 and separate issues of $185 million and $215 million in 2001. Each series of bonds has a 12-year maturity and cannot be called for 10 years. At that point, there are few savings to be realized by retiring the remaining debt in a lump sum because nearly all the interest by then will have already been paid. [Totals 575 million – same number being discusssed now.]

The bonds are repaid from a four-cent-a-gallon increase in the diesel fuel tax (some $16 million a year) dedicated solely to pay the bonds and about $58 million a year of federal interstate maintenance funds — a total of about $75 million a year that would retire the principal and interest on $575 million of bonds. Along with other federal and state money that was added to the program, the proceeds were to improve 379 of the worst interstate miles in the state.

Nearly all the bond proceeds and the interest from investing them while they were not needed have been spent in the nearly six years since the first bonds were issued. The state has finished or has under construction 356 miles, the last stretch being Interstate 40 through North Little Rock. The work will continue into 2006.

Only $46 million of the $575 million of debt has been repaid. Like your home mortgage, the principal is repaid more rapidly in the latter stages of the debt. But from now until late 2013 little of the taxes pledged to the bonds will be available for highway work, so the interstate improvement program will grind next year to a very slow pace.

How much would the state have saved if it had not issued bonds and financed the work year by year? The Highway Department says that over the life of the bonds the interest will amount to $264 million. The front-end costs for the Friday Law Firm, other counsel and the underwriters totaled another $938,000, a fraction of what the department forecast in 1999. So the state would be saving $265 million to put into more highway improvements under pay-as-you-go, but the highway building to this point would indeed be slower.

Huckabee’s ardent championing of bonds puts him again in the awkward position of arguing against himself. The truckers have tapes of Huckabee commercials from the winter of 1995-96 opposing highway bonds proposed by Gov. Jim Guy Tucker. Huckabee, the lieutenant governor then, said the state would be prudent not to borrow money for highways but to pay as you go.

There also is a good argument that the massive interstate development needlessly takes money from primary and secondary road improvements across the state although the Highway and Transportation Department is arguing just the reverse

This writer maintains that the poorer the person or the state, the more necessary it is to refrain from debt and interest. Indebtedness will only increase the need for more debt and eventually decrease the condition of our highways. It is a shame to take money from poor taxpayers of Arkansas and waste half, or almost half of it, on interest and bankers and lawyers. No matter how many times they say "No New Taxes", we all know the money comes from the taxpayers one way or the other.

Debbie Pelley

9:47 AM, December 03, 2005  
Anonymous Harvey Edwards said...

Good letter to the editor in the Ark Dem Gazette today. Its good for folks to put their views out there and it sure looked like you know what you are talking about. I would paste it here but it reiterates the above discussion.

8:38 PM, December 08, 2005  
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