The Billion-Dollar Bonanza
A set of bond bills for public and private projects in this year’s state budget total well over $1.1 billion in cost. Not that anyone is talking about it. By Clint Brewer Though it has been sparingly addressed in the chambers of the Tennessee General Assembly this session, the proposed state budget includes two bond issues that combined top $1 billion in cost over the life of the bonds. Senate Bill 2358, sponsored by Sen. Jim Kyle (D-Memphis), and House Bill 2390 by Rep. Craig Fitzhugh (D-Ripley) call for direct general obligation interest-bearing bonds of $701,100,000. The massive bond issue accomplishes a variety of goals according to the attached fiscal note.
- Allocates $350,000,000 to the Tennessee Department of Transportation for construction and maintenance of state highways including extensive bridge repair.
- Sends $210,900,000 to the Department of Finance and Administration for capital outlay and grants to local governments.
- Provides $56,900,000 in grants tied to the Wacker Chemie AG Project in Bradley County.
- Bonds $80,000,000 that the Tennessee Department of Finance & Administration says is to secure credit for road projects that will ultimately be paid for in cash. The $80,000,000 bond approval would then be repealed.
- Repeals six previous bond authorizations with a principal amount totaling $41,285,000.
- Supplies $3,300,000 capital outlay and maintenance for state buildings and grants for local governments.
- Realizes a debt service savings of $600,000 per years.
The increased debt for Tennessee government is substantial, especially considering plans to bond the expense of some projects in lieu of cash already approved in previous state budgets. The bonds increase state expenditures by $76,600,000 annually in first year debt service alone. Over the life of the bonds, the expense for this spending package will be $1,133,991,000 – $695,700,000 in principal payments and another $438,291,000 in interest. On top of this bond issue is a separate bond bill that has already been passed and sent to Gov. Phil Bredesen’s desk for $262,000,000 related to Volkswagen and Hemlock economic development projects. Elements of the bond measure have raised some concern in the General Assembly. Most notably, a $350,000,000 piece for the maintenance of bridges and roads has been openly questioned by Lt. Gov. Ron Ramsey (R-Blountville) and held up in committee. Concerns have been raised about borrowing the money for the projects through issuing bonds versus paying for the projects in cash. There is also a component of the bond issue that would see state government swapping out cash already approved for projects in previous state budgets for bond revenue. The cash would then go back into the state’s sagging reserve fund. A spokesperson for the Tennessee Department of Finance & Administration as well as State Treasurer David Lillard both said that in the proposed budget there is a measure to move $168,300,000 previously approved for new buildings and renovations in the state’s two higher education systems as well as in corrections and mental retardation programs back to the reserve fund. The same projects would move forward with money generated from bond revenues. Paying Cash Though the larger Kyle/Fitzhugh bond bill or the in lieu of cash component has not drawn much public attention from legislators to date, pieces of it are being debated vigorously. Specifically, Lt. Gov. Ramsey has openly questioned using bonds to pay for $350,000,000 in bridges and road projects rather than to pay for them in cash – once the norm for state government in Tennessee when it came to Department of Transportation projects. In an April 16 meeting of the Senate Finance Committee, Senate Majority Leader Mark Norris (R-Collierville) led a move to hold up approval of the road and bridge projects, asking for more “details on what money will fund which bridges and road projects,” according to a report in the Chattanooga Times-Free Press. Alternate Numbers A set of memos created by Lillard for members of the legislature peel back some layers on the complex bond picture for the 2009 legislative season. The memos, obtained by the Tennessee Center for Policy Research, were created at the request of some legislators, Lillard said. One memo shines a light on the in lieu of cash deal in the budget and enabled by SB 2358/HB 2390 that is overlooked in the fiscal note. Lillard’s memo also notes that any energy and conservation program bonds are separate. A second memo is devoted solely to the $350,000,000 for the TDOT bridges and road projects, comparing the cost of paying for the projects in cash spread out over 5.1 years, 7.35 year or 10.5 years to the cost of generating the bond revenue. Using a rate of inflation of 4 percent at 10.5 years and of 8 percent at 5.1 years, Lillard finds savings for the state by using cash for the projects. The cost of the rate of inflation would be $68,631,443 and $57,390,505 respectively versus the cost of issuing the bonds at $93,677,500. In other words, bonding, rather than paying cash for these TDOT projects, will cost the state as much as $25,036,057, according to Lillard’s estimates. An F&A spokesperson noted that in general using cash always avoids bond issuance cost.
“You always avoid cost of issuance when you don’t issue,” F&A spokesperson Lola Potter said in an email to TCPR. “But, we have a shortfall in cash, with none to substitute, so it’s a moot point.”