Tuesday, October 25, 2011

Secure Arkansas Bond Issue Round-Up

Many people have asked for resources to help them sort through the fog of conflicting information (more fog here) that state officials and spokesmen for "Move Arkansas Forward" have put out about the proposal to take on more debt.  The vote for this debt proposal is November the 8th!  Early voting starts Nov 1st.  Secure Arkansas announced it's opposition to the measure in early September.    Since then, Tea Party and Patriot groups from every corner of the state have joined us in opposition (that list from last week is already incomplete).

We do oppose using continual debt to do routine road maintenance.   This is not a question of who wants good roads vs. who does not, it's a question of whether we should rely on debt as far as the eye can see to get them.    The revenues dedicated to paying on similar bond program from 1999 have been around $74 million a year.    Those are the same revenues they propose to use for the new bonds.   Those revenues are available for highways whether we use them for road maintenance on a pay-as-you-go basis, or pledge them as collateral for a bond issue.    

Here is the key paragraph where we run the basic numbers: If we just spent this money as it came in, we would have over half of the amount they are proposing to borrow in just four years ($74 million * 4 = $296 million).  It took them three years to get all the bonds issued last time and it will take them that long again to get all the bonds issued this time.   To get the rest of that money, $279 million, ($575 million - $296 million = $279 million) nine years early it cost us $228 million in interest, and it would have cost us more if we had not refinanced.  We don't know how much we have paid in refinance fees, bond brokers commissions and fees, through mark-downs and the like.   We know that legal fees alone for the initial bond issue were close to another $1 million.   We feel like the highway money ought to go into highways, not bankers, bond brokers, lawyers, interest payments and administrative costs.

There has been an argument made that the Highway Commission sort of " won the bet" in 1999 by borrowing and spending.  Their argument goes that they got more road because from the key construction period of 2000-2004 construction costs had an inflation rate higher than the interest rate we paid for the bonds.   While there a several ways to look at those numbers, that argument is basically the Highway Commission telling the taxpayers "we won the bet last time so give us some more chips on credit."   I don't think that's a good argument.   It's really irrelevant whether or not you won the bet last time.  We don't want you gambling with our debt.  Especially now that we know that the taxpayers of Arkansas are facing an astounding $25 BILLION dollars in debt once one includes unfunded state pension obligations.  Enough already.

I am amazed that some self-styled "conservatives" want the taxpayers to go further into debt as the economy is collapsing. Especially based on the idea they can "win" by basically timing shifting costs in the interest market and the construction market. That they think they can repeatedly out-nimble the market using the clumsy mechanism of government debt is a testimony to their lofty self-image. Gambling on borrowed money is not a conservative value.  Hey, if we won doing that from 2000-2004 then great, now walk away from the roulette wheel. Furthermore, debt supporter's claims about how well they leveraged the money last time do not add up.

The economy is very different than it was from 2000-2004 we were in a boom time then with rising costs every year and low interest rates.   In that kind of boom borrowing might make sense.  Now we are in a deflationary period.  Too much debt is getting people into trouble.    We still have low interest rates right now, but these bonds won't be issued right now.   It will be three years at the minimum before all these bonds are issued, and no one knows what interest rates will be then, or even this time next year.  Look at Europe and how fast their fiscal crisis has changed bond interest rates in some of those nations. 

We also don't know that oil won't go back down to $50 a barrel in a few years, making asphalt costs lower each passing year for the next decade.   The heavy oil from the shale that is coming on now may mean that materials costs will level out or even go down over the next ten years.  We just don't know.   When you don't know, the conservative position is to avoid risk.

The other argument proponents of the debt put out is that roads fixed early require far less money spent to repair them than if you let that road deteriorate.    The first thing I would say about that is, "If there is such a crisis, why have you mismanaged things so that if you don't get all this money right away then our roads will deteriorate?"  My second question would be "if we have been put into an emergency situation then wasn't that under your management?  Why should we trust the same people who put us in this position going forward?  Shouldn't somebody be resigning over this?" 

But of course, while we do agree the interstates need repair, we are not convinced that the need for this debt is as dire as they make out.   It may be a dire loss for the bond brokers who will sell them, and the law firm that will do the legal work on them, but not for the interstates.   We are quite used to public officials on all levels claiming that it will be an absolute disaster if they don't get more money right now.   Again, they can't get the whole amount of money prior to three years even if the bonds pass, and if they simply spend the revenue streams that they want to pledge as bond collateral  then they will have over half the amount they propose to borrow in only four years.

The balance of the funds could come from within their existing budget- if there is a true emergency.   Their annual budget is enormous.  Add to that,  in 2009 they got a surprise $230 million windfall in discretionary funds from Obama's stimulus plan.   If the interstates are really in such poor shape in 2011 that we must vote to go into debt now, then why didn't they spend that $230 million windfall repairing those interstates two years ago and spare us this "crisis?"

The question has been raised whether or not this truly represents a liability for the taxpayers of the state.  Just look at the language on the ballot.  It says that if the pledged revenue sources are not enough to meet the bond payments then the bonds become a general liability for the state.    Since most of that money comes from the Federal Highway Trust Fund and is supported by a federal highway gasoline tax then we will be counting on the federal government coming through for the next fifteen years to avoid having this liability fall on us. 

The federal government is in an ongoing fiscal crisis.   There is a history of taking money from the federal gasoline tax and diverting it to deficit reduction.   The tax has to be renewed from time to time and may become a national campaign issue.   It's just not as safe a bet as it was in 1999 that those federal funds are going to keep coming in like we hope they will.

The other tax pledged as collateral on these bonds is a tax on diesel fuel.  If ever we paid off these bonds, which we still owe $200,000,000 on, then those tax revenues would be pledged to an expense that no longer exists.  We should finish paying on them by the end of 2014.   As we get closer to that time, we should have a discussion about whether we should transfer the revenues from that tax into the Highway Department, end the tax, or keep the tax on diesel fuel and us the proceeds to reduce the state fuel tax on gasoline in order to bring us in line with surrounding states.

When they say there would be "no tax increase" if the bonds are approved they might be narrowly technically correct, if the feds come through for the next fifteen years.  But depending on how you look at it, they could be wrong too.  If we pay off the existing bond program in 2014 as planned then we will have to do something with the diesel tax dedicated to paying off that bond.  It will be one of the three options I outlined above, and two of them involve a tax reduction. 

So is voting to continue a tax that would otherwise be scheduled to end an increase in future taxes?   I could make the argument that it is, but that's not the main argument I would make.   They propose that we borrow $575 million dollars.   That does not happen for free.   We are going to pay for it somehow, whether it be in fewer dollars going to roads and more to interest and bond dealers, or whether it be the continuation of a tax that we could end if we did not borrow the money.  

Many people have asked about our opposite number on this issue, the advocacy group "Move Arkansas Forward."  We are a grassroots organization with many small contributors, most of whose contributions consist of "sweat equity" such as forwarding this email to their friends. "Move Arkansas Forward" has been thrown together to push this highway debt plan.   It is funded mostly by entities connected to the Chairman of the State Highway Commission (IOW the group who would get to oversee the expenditure of these public funds) and a bunch of contractor interests who are hoping to make money off of this debt.  While we salute the positive contributions Mr. Murphy has made to his hometown, we do question the propriety of an appointed official so directly connected to funding a campaign that would in essence give the commission he chairs access to a large pool of public funds to spend.

One last point.  Some of the proponents of this program say that it will "create jobs."   Government debt for the most part does not create jobs, it only borrows jobs from the future, minus interest.   We think the main reason we are in so much trouble in this economy now is too much borrowing in the past.   Now all that past debt is taking jobs from us in the present as there is too much debt overhanging our economy.

The people who claim this debt will "create jobs" sound just like Barack Obama when he talks about borrowing for his "shovel ready" stimulus spending.   In the long run it doesn't work.   If government borrowing and spending on public works programs really created jobs, then we'd have jobs.   Borrowing takes jobs from the future.

I think most of the taxpayers in this state are working and sacrificing to pay down their personal debt.   At the same time, these public officials are pushing for those same people to take on more public debt.   That's tone deaf.  It's not where responsible people are right now.

With great respect,

Mark M. Moore


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