Having directed a $2 billion international production program and mega-millions in other production contracts, I understand the complexity associated with manufacturing and construction programs. Major road improvements and bridges cannot be done efficiently on small scale piece meal basis. The funding must be assured up front.
The below op-ed by Nate Bell presents the reasoning for the proposed GARVEE bond renewal. Arkansas has serious problems and these do need to be addressed on may fronts. However, it is easy when traveling out of Arkansas to note on crossing into another state the road improvement in those states. It is also easy for those who have good roads to oppose this issue. Indeed, the public should be demanding transparency and accountability from the Arkansas Highway Commission and many other government programs.
And while people are considering the issues of government, it would be appropriate to address why the annual surpluses have been given to the Governors and legislators to spend instead of being set aside in either a rainy day fund or even returned to the taxpayers from whom the money was collected.
It is healthy for conservatives to promote positions especially on tax and spend issues. However, it is a sad day when one group of conservatives claims to be more conservative than others based on their position on a bond issue. I commend Nate Bell for his commitment to Arkansas and for not backing down in sharing his position and the facts on this issue despite others claiming that this makes him less conservative. It is interesting that before there were TEA Party groups, I noted and have not forgotten that there was a young Nathan Bell boldly proclaiming his conservative positions.
Like many of you I’m upset that Gov. Beebe recently called for a special election to decide on the Grant Anticipation Revenue Vehicles (GARVEE) bond renewal. There are so many places where the million dollar cost of the election could make a huge difference in our state. The Governor’s decision to spend the money on an unnecessary election is justifiable reason for angst but that money will be spent regardless of the outcome of the election. The bond renewal election could easily have been held in conjunction with any other regularly scheduled election at a very low cost.
We also see tremendously expensive pedestrian bridges, bicycle paths and other projects being constructed that seem completely unreasonable when the need for better highways continues to grow all around us. We are offended that such unnecessary projects are funded while important needs languish.
Anger, no matter how justified, tends to have a blinding effect on us. I’m concerned that many of my conservative friends are allowing their anger at these abuses of taxpayer funds to blind them to the facts about the proposed GARVEE bond renewal. I’m disappointed that people I respect are using innuendo and misleading information to advance their political goals. This is exactly what so many of us have spent our lives working to end. We must make honest and factual arguments. In the end each of us will draw our own conclusions but we must be certain that we are doing so based on fact.
I’m not asking any of you to agree with my conclusions. I am asking that you read with an open mind and carefully consider the facts presented before making up your mind.
President John Adams said, "Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passions, they cannot alter the state of facts and evidence."
I’m not going to devote a tremendous amount of time to explaining GARVEE bonds as most of you have hopefully taken time to understand the basics. For those who have not done so there is good general information on the bonds and their permissible uses at this link.
Arkansas first used the GARVEE option in 1999. The bonds were issued in three series, the first in 2000, the second in 2001, and the third and final issue was in 2002. The principal amount of the first series was $175 million and the interest rate was 5.273%. The principal on the second series was $185 million at an interest rate of 4.523%. The principal on the third and final issue was $215 million at an interest rate of 4.324%. All three series sold at a premium, meaning that we got more than face value for the bonds. The total premium for all three series amounted to $23.6 million. This additional money effectively reduces the amount of interest paid.
The outstanding balance on all three bond series was refinanced in 2010 at a rate of 1.404%. The amount refinanced was $253.2 million. The final maturity was not extended by doing this and it remains August 2014. The Highway Commission was able to save approximately $13 million in interest by doing this. The current outstanding balance is $206.5 million, and again, it will be retired in August 2014. All bonds were issued using the competitive issuance process.
The bottom line is that total interest for the ’99 program was scheduled to be $264.6 million, but this amount was reduced by $23.6 million from the premium paid, and reduced by another $13 million from the refinance, leaving a net interest expense of $228 million from the ’99 program. This was spread over a 14-year period, amounting to about $16 million per year in interest expense.
The first bond project in the ’99 program was awarded in 2000, and the last job was awarded in 2003. From 2000 to 2004, the Construction Cost Index was fairly flat, going from 140.9 in 2000, to 140.0 in 2004, a very slight decrease. In 2005, the CCI rose 29.9% to 181.9. It rose another 27.9% in 2006, to 232.7. It stayed fairly flat in 2007, but went up to 278.3 in 2008. In other words, in the four years following the awarding of the final contract, from 2004 to 2008, the CCI rose 98.8%.
That’s a general snapshot of the 1999 program. Now let’s examine the lessons learned. We paid an average interest rate of 4.67% on the 1999 program prior to the refinance. The construction period ran from 2000-2004. At the end of this period the CCI was 140.0. Had we used the revenue in a pay as you go program the earliest possible completion date for the same dollar value of work would have been 2008. During this period construction costs increased 98.8% meaning that we would have been able to complete only about half of the same amount of work that we actually did. Put another way the interest costs at 4.67% pale in comparison to the annual CCI increase that averaged 12.35% over the 8 year period. Taxpayers saved millions of dollars and had the use of twice as many miles of much improved interstate highways and were able to use them eight years sooner.
That is merely the financial side. Now let’s examine the practical side. It costs approximately $2.8 million per mile to rehabilitate an existing interstate. This would include rubblizing (crushing the existing concrete pavement in place) and overlaying an existing concrete interstate with asphalt, or milling and overlaying an existing asphalt interstate with asphalt. It costs approximately $3.6 million per mile to patch and rehabilitate an existing concrete interstate, and it costs approximately $5.7 million per mile for a full reconstruction of an existing interstate highway. Keep in mind that bridge work can substantially increase some of these costs, as it costs anywhere from $63 to $106 per square foot for bridge work.
A highway not rehabilitated when it needs the work will soon require full reconstruction. This is just like your house and a roof leak. If you don't fix the roof when it first needs it you'll soon be replacing not only the roof but also the decking, rafters and ceilings. Highway repairs are very similar and the cost more than doubles when not completed in a timely manner. When the impact of delaying the work for “pay as you go” is taken into account it becomes clear that it would have taken nearly 40 years to complete the same work that was completed in just 4 years using GARVEE bond financing. It also becomes crystal clear that using GARVEE bonds responsibly saves taxpayers money while maintaining necessary infrastructure.
Now let’s examine the new proposal. The AHTD is proposing to issue $575 million of new GARVEE bonds. Current 12 year bond rates are at 2.97%. This would be slightly less expensive for shorter term bonds. This is a much lower rate than the 1999 rate making the deal even more attractive than the 1999 proposal. Most conservatives believe that the exponential expansion of the money supply under the Obama administration will inevitably lead to runaway inflation. If this is true then any 2.97% fixed rate financing of capital projects becomes in effect a huge savings plan for the taxpayers of the state.
There are a variety of opposition groups who are misusing the facts and in some cases resorting to complete fabrication and innuendo to gin up opposition to the bond renewal. I’m going to attempt to deal with some of the “issues” below.
1. There are some who claim that state highway funds are being diverted to bike paths and pedestrian bridges etc. This is completely untrue. The following is an excerpt from the AHTD response to my official request for information: “I can assure you no ‘highway’ funds for used for the pedestrian bridges. There is a category of federal funds known as Transportation Enhancement Funds. This category cannot be used for regular vehicular road and bridge projects.
Enhancement funds are for “non-typical or non-traditional transportation related projects.” Examples of enhancement projects would include sidewalks, pedestrian bridges, beautification projects, or historic preservation projects. We don’t have enhancement funds available every year, but when we do, they are distributed through an application process. Sponsoring organizations, often local governments, apply for these funds and the AHTD selects the projects to be funded. I’m not sure if the pedestrian bridges in the LR area received enhancement funds, but I am confident they didn’t receive any money that could have been spent on a state highway project.“
2. There are suggestions that bond proceeds will be invested and subject to misappropriation etc. This shows a lack of understanding of our existing state laws. Bond series will be issued on an as needed basis using the competitive issuance protocol required by state law. The proceeds will be held in trust during the construction process until paid to the contractors. This does involve investing the funds for very short periods of time and the entire process is very tightly regulated to insure that no taxpayer funds are lost.
3. There are claims that no map is available pinpointing the proposed construction. This is also untrue. The map is published on the internet at: Click Here
4. There are claims that if the federal revenue stream disappeared for some reason then a raid on general revenue or a tax increase would be required. While the legislature could choose to do this, the pledged revenue stream is less than 5% of the AHTD budget and could be absorbed by slowing the pace of other work if the federal revenue was eliminated.
5. Some are suggesting that if the bonds aren’t issued then the diesel tax could be reduced. This is also incorrect since the work still would need to be done and under “pay as you go” the net cost will be far higher eliminating any chance of reducing the tax and most likely requiring tax increases.
6. Much has been made of bond issuance costs and legal fees. These costs amounted to about 0.16% on the 1999 program and are expected to be similar on the new series.
The bottom line is that the GARVEE bond renewal is the most fiscally responsible approach to interstate highway rehabilitation that is currently available to Arkansas taxpayers. I encourage you to join me in support of this excellent plan as we work together to Move Arkansas Forward.
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Nate Bell is Arkansas State Representative for District 22, Mena, AR. He is a farmer / small business owner.
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