West Virginia weighs road bond costs versus opportunities

CHARLESTON, W.Va. — Can West Virginia afford to borrow $1.6 billion for road construction?

Those who support the road bond proposal that’s currently before voters usually ask that question a different way: Can West Virginia afford not to?

The supporters point to current interest rates of about 3.5 percent.

They compare that to an anticipated inflation rate on construction costs of 4 percent or more.

“It’s such an incredible time to sell the bonds because we can get an interest rate of probably 3.5 percent,” Gov. Jim Justice told a crowd in Morgantown during one of his recent stops around the state to promote the road bond.

“Interest rates can’t get any lower than where they are now. As time goes on, just tell it like it is: When things get better and they’re going to get better, interest rates are going to move up some.”

Transportation Secretary Tom Smith also advocated for locking in lower interest rates now.

“There’s always a time for wise investment,” Smith said in Morgantown. “Currently we think we can get a bond rate of about 3 and a half percent. Look at any construction cost index right now and you’ll see 4.5, 5.5, 6.5 percent. So that tells you it’s time for wise investment, that that’s good debt. You’re getting a good rate.

“If you wait, the cost of inflation will be more and you’ll have deterioration, so it’s a double-whammy. You end up getting hit twice.”

Caution on borrowing is probably a good instinct for West Virginians. Each of the big three bond rating agencies downgraded West Virginia last year, citing soft revenue and the habit in recent years of using one-time funding to fill ongoing budget holes.

Moody’s wrote last February that West Virginia’s state funding shows a structural imbalance and that the governor’s proposals to take on more debt were part of its thinking.

Moody’s also concluded that a significant reduction in debt and pension liabilities could lead to an upgrade, whereas a significant increase in the West Virginia’s net tax supported debt burden could result in another downgrade.

In issuing its most recent assessment of West Virginia, Moody’s took specific aim at the road bond idea, “Pension liabilities remain above average and the state’s debt burden could increase under the Governor’s new infrastructure proposal.”

Moody’s had provided that warning before the Legislature passed the funding mechanisms intended to pay down the bond debt.

Legislators approved increased gasoline taxes, Division of Motor Vehicles fees and sales taxes on new vehicle purchases to bring in about $130 million more a year to be used to pay down the bond debt.

“It’s funded through DMV fees, it’s funded through the gas tax, through the privilege tax and Turnpike tolls,” Justice said. “That’s in place now.”

Sean O’Leary

Areas of concern remain, though, suggested Sean O’Leary, senior policy analyst with the West Virginia Center on Budget and Policy, a progressive think tank.

O’Leary buys the logic of locking in a low interest rate, but questions the amount being borrowed.

“That makes sense, if you’re going to borrow, that you’re going to borrow when interest rates are low. But the question is, you’re borrowing such a large amount, we’d be essentially doubling up on our bond indebtedness,” O’Leary said in a telephone interview.

“That would be the counter: This isn’t a typical amount that we’re borrowing.”

O’Leary also expressed concern about the 25-year paydown period.

“We have the taxes now, but it doesn’t foresee a future downturn in the economy, anything that would impact our ability to bring in that revenue,” he said.

West Virginia’s current tax-supported state debt is $1.5 billion, down about 3 percent from the prior year.

A 2017 “Debt Capacity Report” issued by the state Treasurer’s Office concluded that West Virginia needs to be careful about taking on increased debt.

“Although West Virginia is below all of the recommended caps on the ratios examined in this report, that does not provide a license to issue debt,” the report concluded.

“Until West Virginia leaders come up with a comprehensive plan to fix the budget deficits and address declining revenues, debt should only be issued within the recommended ratios to move West Virginia forward and help address its financial issues.”

Again, that conclusion was reached before lawmakers approved tax and fee increases to pay down the road bond. And the report notes that West Virginia has not had a general obligation bond issued in more than 15 years since issuing the final $110 million authorized by the Safe Roads Amendment of 1996.

“West Virginia has the capacity for the issuance of bonds if we can find the way to pay for them,” according to the debt report.

Ron Walters

Delegate Ron Walters, a professional financial planner who is also chairman of the House Pensions & Retirement Committee, says he’s thought long and hard about the economics of the road bond decision and is comfortable with West Virginia taking on the debt.

“Overall, I think it’s a good deal for the public,” Walters said. “I know the maintenance money is in place to maintain these roads. I have early voted, and I felt comfortable enough to vote for it. You really have to dig into it to get comfortable with it, and a lot of people want their roads fixed. I think we’re better off doing it this way than on a pay-as-you-go system.”

Walters agrees that current interest rates, if they’re locked in, will beat long-term inflation.

“If you lock in the money at 3.5 and get the money now, you limit your inflation rate at a certain extent,” said Walters, R-Kanawha. “That 4.5 percent growth would eat into it and it would reduce the value of it every year. So if that is the margin, or the spread, then I’m comfortable with that from an inflationary standpoint.”

Walters was aware of the warnings from Moody’s but noted that West Virginia has significantly paid down long-term indebtedness such as workers compensation costs.

“That will make this a viable option that I’m not concerned will affect our bond rating,” Walters said in a telephone interview. “Since the revenue is in place to fund the bond, your payback’s going to be somewhere between $2.8 and $3 billion.

“If you remember, not too long ago we had a $4 billion debt in our workers compensation and today we’re under $100 million. So we’ve pretty much taken care of that obligation, and it’s resulted in rate decreases. We’re moving in a direction where we can see the light at the end of the tunnel.”

Eric Nelson

House Finance Chairman Eric Nelson, who is also a professional financial planner, also believes locking in the road bond funding is shrewd.

“Absolutely, a hundred percent,” said Nelson, R-Kanawha. “Any time you can lock in 25-year financing and protect yourself against rising inflation in other costs, it’s the most prudent financial move one can do, especially when you have full debt service coverage already in place.

“You can budget all of your other expenses and not have to worry about the variable components of inflation and whatever else may happen. We’re still at historically low interest rates. We must take full advantage of it.”

Nelson said he also feels comfortable with West Virginia’s bond ratings, which affect the rate at which the state can borrow.

“In the past when we were downgraded, we balanced our budget with significant use of one-time monies from our prior governors. Any lending institution or rating agency is always focused on matching your revenues to your expenses,” Nelson said.

“When we match some ongoing revenues to certain expenses, i.e., repaying the bond, that’s looked on favorably, not unfavorably It’s when you’re trying to pay ongoing expenses with one-time monies that rating agencies throw up a big question mark.”

The ballot measure, known as Amendment 1, authorizes the state to issue bonds not exceeding $1.6 billion over a four-year period: $800 million in 2017, $400 million in 2018, $200 million in 2019, and $200 million in 2020.

“This is not $1.6 billion going out on day 1,” Nelson said. “All we do when we issue bonds is you’re locking in a rate and a repayment, but that doesn’t mean those monies all go out the door on the first day.”

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