• Governor Whitmer’s State of the State address included a plan to borrow $3.5 billion to fund current road projects. 
• The bond proceeds would accelerate funding for some projects, but are not a long-term solution to the state’s infrastructure problems and come with some tradeoffs.
• Discussions over long-term solutions, and how to help local road agencies, should continue unabated despite increased borrowing. 

Governor Whitmer’s State of the State address highlighted a turn in her strategy on how to fund highway repairs. While last year’s executive budget centered on a 45 cent fuel tax increase, the proposal was never seriously considered in the legislature and died. The Governor is back with Plan B: borrow $3.5 billion over the next four years to front- load existing state projects and add new ones. This time around, she plans to proceed without legislative input; transportation borrowing does not require legislative approval or a vote of the people.

The idea of long-term borrowing to fund highway repairs is not new; the Michigan Department of Transportation (MDOT) issued a number of bonds in the early 2000s as part of Governor John Engler’s Build Michigan program. Last year we examined past road funding efforts and potential effects from a number of potential solutions. What does our research say about the governor’s new plan?

Build Michigan: Short Term Improvements, Long Term Setbacks

Michigan has faced highway needs of similar scale before. In fact, as recently as the late 1990s nearly 40 percent of state roads were in poor condition. While conditions improved after a small fuel tax increase in 1997, they did not begin to improve in earnest until the state started utilizing bonding authority at the turn of the century. 

Bonds issued by MDOT for highway purposes are different from other state bonds. General obligation bonds have to be approved by a public vote and are financed with general tax revenues (General Fund dollars). But State Trunkline Fund (STF) bonds are revenue bonds financed from gas and vehicle registration taxes and can be issued without a vote of the people. Furthermore, the legislature does not need to approve their issuance. Public Act 51 of 1951 grants that statutory authority to MDOT, limited only by the amount of annual revenue available to service the borrowing.  PA 51 limits annual debt payments (principal and interest) to one half of fuel tax and registration fee revenues that MDOT receives from the Michigan Transportation Fund. State Transportation Commission policies are more restrictive, setting the annual payment limit at one quarter of fuel tax and registration fee revenues.

One of the key elements of the earlier Build Michigan II program was a larger use of bonding. As Build Michigan II ramped up, MDOT utilized bond proceeds to accelerate construction and try to bring road conditions to 90 percent “good”. And as a strategy to quickly improve the road conditions, it was successful. 

The inherent problem with borrowing arose after the bond proceeds had been fully expended, when the debt service took on larger share of MDOT road dollars. From Fiscal Year 2000 to FY2010, MDOT went from paying less than $50 million a year in annual debt service to $160 million a year. Yet MDOT did not receive an increase in state funding to offset the debt. In effect, the same revenue stream that had struggled to support state roads prior to Build Michigan II was now not only responsible for maintaining road conditions, but for paying off past repairs as well. As a result, from FY2000 to FY2014 non-federal support for Michigan roads declined once adjusted for inflation. In essence, using STF bonds helped dig the state out of the hole it was in, but made it difficult to maintain those conditions over the long term. It caused a new hole.

Rebuilding Michigan: Have we Been Down this Road Before?

Governor Whitmer’s new “Rebuilding Michigan” plan follows what Michigan did in the early 2000s. To kickstart road construction, the Governor asked the State Transportation Commission to approve $3.5 billion in STF bonds over the next five years. The STC did so the morning after the governor’s speech. 

All of this money will go to MDOT (as they would be the bond issuer). This represents a 40 percent increase in state and federal dollars in MDOT’s road budget over the same time period. The funding will be used to start or expand 122 projects during MDOT’s current five-year plan; drawing-board projects include rebuilding 7 miles of I-94 in Detroit, expansion of I-94 in Jackson County, and improvements of I-96 in several western counties. 

One of the points of emphasis the Governor made was that bonding will accelerate construction, bringing benefits sooner and reducing delays. And delays can make the price tag even higher;  according to the Senate Fiscal Agency, the delayed phase of the 2015 package expanded road system needs by billions of dollars. The intent of the Governor’s plan is to take advantage of that steep decline, as the costs of borrowing will be less than the extra costs from further road decay.

Without new funding to go along with it, however, new borrowing would put long-term pressure on MDOT resources. Under the terms approved by the State Transportation Commission, STF debt service payments would increase by around $200 million, depending on the final interest rate when the bonds are sold.

This would lead to a large increase in MDOT obligations. Existing debt service payments are projected to drop below $20 million by FY2024. Once the bonds from the new plan are factored in, as well as the I-75 rebuild project payments (as while they are legally distinct from state debt service, they function almost identically in terms of state obligation), annual MDOT payment on debt  will reach around $250 million; at least $100 million more than what will be paid in FY2021.

Borrowing would also limit MDOT options for larger scale reconstruction down the line. Highway bond issuances are best used for massive overhauls like the I-75 Modernization Project — which included lane expansions, revamps of interchanges, and a rebuild of 17.7 miles of highway in Oakland County — where a large up-front investment is required. Based on FY2019, MDOT received $1.03 billion in Act 51 revenue distributions, setting the debt service limit at $258 million per year. Natural growth will increase the debt service limit to a minimal extent; without new constitutionally protected revenues, MDOT would have almost no capacity to finance projects of this nature until the Rebuilding Michigan bonds were paid off.

What’s Next?

Throughout her State of the State address, Governor Whitmer identified a theme of working towards long-term solutions while taking executive action to start improvements now. The initial phases of her road solution, for better or worse, serve as just that – a start. 

While there are some economic advantages to accelerating road funding through borrowing, it limits the resources the state has to maintain improvements, and may prevent larger rebuilds for a number of years. At best, borrowing alone is a short-term plan. The new bonding leaves local road agencies (counties, cities, and villages) out of the equation. Michigan’s infrastructure woes are not limited to state assets; counties and cities face significant funding challenges as well. While “fix the damn roads” made for a punchy campaign slogan, nothing about the issue is simple or easy. One thing is for certain: the road funding discussion is not going away any time soon.