On October 7th, voters in West Virginia overwhelmingly approved a $1.6 billion general obligation bond to invest in the state’s road system. This is on top of the estimated $500 million in Turnpike Bonds and $500 million in federal GARVEE road bonds that were approved during the special legislative session earlier this year, along with about $130 million in increased State Road Fund revenues to pay for the $1.6 billion “Road to Prosperity” road bond.
The legislature is meeting in a Special Session this week to consider legislation that will address filling vacancies at the WV Department of Transportation and to make changes to the WV Jobs Act – which requires the state to hire at least 75 percent of its workers on state funded public improvements projects ($500,000 or above) from the local labor market.
According to Governor Jim Justice, this unprecedented investment will lead to the creation of an estimated 48,000 jobs in West Virginia. While this could be an enormous opportunity for the state’s short and long-term growth, it is important to put these numbers in context and for people to have a clear understanding of what the impact could be over the next several years. Below, I take a dive into answering some of the important questions surrounding the road bonds and there impact on West Virginia’s economy and fiscal health.
So, how big is $2.6 billion in road construction?
It’s pretty big. Altogether, the state spends about $700 million in state revenues on roads and about $400 million in federal revenues or $1.1 billion. The state revenues come from motor fuel taxes, DMV fees, and the sales tax on vehicles, while federal matching funds come mostly from the federal highway trust fund.So, $2.6 billion is more than double what the state spends each year on roads and four times more than what the state collects in taxes/fees each year in West Virginia. The voters approved $1.6 billion in general obligation bonds is approximately $500 million more than the state spends each year on roads or $900 million more than the state collects in West Virginia in taxes/fees for roads. In 2014, per capita spending on highways was $658 per person compared to the national average of $508 per person – ranking 14th highest among the 50 states.
While $2.6 billion in additional road spending may be a lot of money, West Virginia’s spending on roads has stagnated over the last decade. West Virginia spends less today compared to the 1980s and 1990s on roads after you adjust for inflation and spending per mile. According to the 2015 report by the WV Blue Ribbon Commission on Highways, West Virginia would need approximately $750 million per year in additional funds to maintain its existing highways system and $1.130 billion annually to provide for expansion of the current highway system. The commission recommended an additional $419 million per year in additional revenues into the State Road Fund.
The $2.6 billion in bonds that have been approved by the legislature (Turnpike/GARVEE) and by the people (General Obligation Bond) this month are planned to be issued over the next four years. The voters approved bond of $1.6 billion will be issued in four increments, $800 million in 2017, $400 million in 2018, and $200 million in 2019 and 2020. The Turnpike and GARVEE bonds will also be issued in increments over the next few years.
Is West Virginia taking on too much debt?
The last general obligation bond constitutional amendment for roads was passed in 1996 at $550 million (Safe Road Amendment). This is about $879 million in today’s dollars. This debt is scheduled to be retired by June 1, 2025. As of June 30, 2017, the state’s total net tax supported debt is $1.521 billion, while the non-tax supported debt from the state’s 20 other bonding authorities (mostly colleges, but includes Turnpike Authority) is $6.249 billion.
According to the West Virginia’s Treasurer’s Office’s 2017 Debt Capacity Report, West Virginia’s net tax supported debt and debt service are currently below the recommended caps or debt ratios for each category that the “municipal bond industry and others use” to analyze a state’s fiscal position.
The debt ratios include net tax supported debt service (principle + interest payments) as a share of the state’s General Revenue Fund and Total Revenues (General Revenue Fund + Lottery Funds + State Road Funds), and net tax supported debt as a share of the Assessed Value of Real/Personal Property, State Personal Income, and net tax supported debt per capita in West Virginia.
The chart below shows the recommended caps (debt ratios) for each of the five categories included in the 2017 Debt Capacity Report along with their projected 2018 debt ratios without the $1.6 billion in tax supported general obligation bonds that passed earlier this month. Included in the chart is also the estimated debt ratio if you include $1.2 billion of the $1.6 billion (75 percent) in new tax supported general obligation bonds that are scheduled to be issued by 2018 and 75 percent or $97.5 million of the projected $130 million in new dedicated debt service payments that are to be used to pay the new bond debt.
The WV Treasurer’s Office estimates that on June 30, 2018 the total estimated net tax supported debt will be $1.414 billion and the total debt service will be $182.9 million without any additional debt. As you can see from the chart, when you include the additional $1.2 billion in new tax supported debt and $97.5 million in additional debt service payments (based on the WV Treasurer’s Office own projections for each of the five categories) for 2018, the state goes above each of its own recommended debt caps. For example, the recommended per capita cap on net tax supported debt is $1,100. The Treasurer’s Office estimated earlier this year that this number will be $327 below this cap by 2018. However, if you include the more than the additional $1.2 billion in voter approved general obligation bonds that are scheduled to be sold by 2018 this figures grows to $1,428 or $328 above the state’s own per capita recommended debt cap.
While it is hard to know for sure what impact the additional bond debt will have on the state’s fiscal health, Moody’s Investor Service warned earlier this year that a “significant increase in state’s Net Tax Supported Debt burden…could lead to a downgrade.” As Brad McElhinny pointed out recently at Metro News, the 2017 Debt Capacity Report from the WV Treasurer’s office also warned against the state increasing its debt in the midst of chronic budget gaps:
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. 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.
We have a great newsletter, join below: