Debt Supporter Claims Do Not Add Up
Supporters of taking on more debt for highway maintenance in a November 8th special election are making increasingly unbelievable claims about the numbers. I am not saying they are necessarily lying or being deceptive, but it's hard for a person that thinks through their claims to take them at face value. One of the latest examples: Rep. Nate Bell of Mena is an outspoken supporter of the debt plan. He claims $1 billion in road work was done as a result of the $575 million bond program. He attempts an explanation for the paradox....
How do you get $1 billion in work from only $575 million in bond sales?
A person needs to remember that the $575 million in bond proceeds only pays for a portion of the work. The bond proceeds are leveraged because of the timing of the federal and state revenues coming in and the construction expenditures going out. Proceeds from the issuance of a series of bonds come in all at once, and federal and state revenues come to the Department over regular, frequent intervals. However, construction expenses are paid out over the life of the contract, usually 1-3 years. That timing builds up cash balances which earn interest that further adds to the amount of work that can be accomplished.
Financial advisors will be used to formulate a plan to maximize the amount of work that the Commission could achieve through the issuance of $575 million in bonds. By taking into consideration all revenues available (bond proceeds, federal funds, and state funds), and structuring principal and interest payment schedules, the advisors were able to make about $1 billion available to the Commission for Interstate projects in the 1999 IRP, and similar results are expected for the 2011 proposal.
Even if you consider government borrowing at interest to gamble that they can invest the proceeds and get back more than the interest is a sound practice to rely on, which I don't, these numbers don't make sense. I can't buy the explanation that the revenue on top of the $575 million came from investment net profits.
The funds were raised over a period of 2000-2002. Elsewhere Bell uses the years from 2000-2004 to describe when the work was done. So they were raised from 2000-2002 and spent from 2000 to 2004. They never even had the $575 million in their hands at once as near as I can tell, yet we are expected to believe that they turned that stream of money into an extra $425 million? It's preposterous. I challenge them to open their books on these investment accounts. I doubt they netted even one tenth that amount during the period in question. There is something they are not telling us.
I guess they could also have made a little money from 2005 to present off of the gap between the federal highway and diesel tax money coming in to pay on the bonds and the date on which bond payments had to be made. So in the best case six million dollars a month comes in and in December the money is used to make the bond payment. That would give them a rolling average of $32 million to invest from 2005 to 20011.
Go throw those numbers in a compound interest calculator. $32 million given seven years to grow with even an amazing 10% annual return would give you about $62 million dollars- in other words $30 million in profit. That's if you did not spend the earnings but let the interest compound. I don't think there was anyway they got that kind of return from 2005 to present. Look at your 401K numbers and tell me the same people got the state 10% annual returns during this period.
Now when I said "$30 million in profit" that would only apply if you were not using borrowed money that you were paying interest on to make the investments. That is not true in this case. They were paying as much as 5.25% interest on those bonds. If their returns earned less than that on that particular tranche of bonds then their gross "profits" were actually net losses. One thing that might explain some of the gap is if they counted all profits as additional money to the program but ignored all costs.
So without accusing anyone of deliberate deception, it is my position that these claims of an investment bonanza are not credible. There is no way they earned a net of $435 million additional dollars from investing these proceeds. If public officials are going to make these claims to get votes for the program, then let's open the books and find out what the real numbers are.