by Sen. Doug Whitsett (R-Klamath Falls)
Much has already been said regarding the ongoing Oregon government spending addiction. Our Legislative Assembly has a long tradition of spending all available revenue. Moreover, it has not been content to spend only the existing revenue.
During the past ten years, it has authorized the extensive borrowing of money to “invest” in a variety of public projects. We can certainly debate the wisdom and the return on investment of each of those projects. What is not debatable is the reality of the ongoing costs required to pay the principle and interest on the accumulated debt. That debt service is the first budget priority and, for the most part, is due and payable for at least the next twenty years.
Oregon’s net revenue from its state-run lottery has been averaging a little more than one billion dollars for each two-year budget period. The State has been borrowing against that “earning capacity”. Lottery revenue bonds are secured by future lottery net earnings. The principle and interest on current lottery revenue bonds obligations is about $250 million per budget period. This means that about one fourth of all future lottery revenue is obligated to pay the debt service on lottery revenue bonds for about the next twenty years.
The State’s net General Fund revenue is estimated to be about sixteen billion dollars for this two-year budget period. The principle and interest on already issued general obligations bonds secured by future general fund revenue is about $800 million. This means that about five percent of general fund revenue is obligated to pay the debt service on general obligations bonds for about the next twenty years.
The combined cost of debt service on current and authorized lottery and general fund borrowing exceeds five hundred million dollars each year for the next twenty years. To put that amount of money into perspective, it would pay the fully loaded compensation of more than 6,500 state employees such as teachers, counselors, school administrators, police, firemen, and other employees that provide critically needed services. Those potential employees will not be hired, and will not provide needed services, for at least the next twenty years, because that money is dedicated to repay the principle and interest on borrowed money.
Unfortunately, the Legislative assembly has also authorized borrowing against other sources of revenue.
As late as 2005, the Oregon Department of Transportation was virtually debt free. The agency had a long history of paying for new construction projects and funding the costs of ongoing maintenance and operations from current revenue. However, that “pay as you go” policy ended when the Legislative Assembly made the policy choice to borrow money to build current projects and to secure the debt with future revenue.
Money was subsequently borrowed to fund the three Oregon Transportation Investment Acts (OTIA), the Jobs and Transportation Act (JTA), five Connect Oregon Acts designed to enhance intermodal freight, plus a variety of transit projects and other transportation ventures. Future state highway funds and future lottery revenue were mortgaged to pay the principle and interest on the debt accumulated by these projects. The principle and interest payment on that accumulated debt will be nearly $300 million per year for the next twenty years.
To put that amount of money into perspective, the estimated cost to overlay pavement on an “average” mile of two-lane highway is about $1 million. Over the next twenty years, about 6,000 miles of highway will not be repaved, because that money is obligated to pay the debt service on the borrowed money.
The Department has complained that their revenue from motor fuel taxes is not keeping up with expenses because automobiles are getting better fuel mileage. They are currently running test projects designed to evaluate the efficiency and equity of shifting to a tax on miles travelled as opposed to the current tax on fuel used. The fact of the matter is that the alleged decline in revenue resulting from better fuel mileage is hardly a drop in the bucket compared to the twenty-two percent of the Department’s total revenue that is obligated to pay the principle and interest payments on their accumulated debt.
It is against that dismal backdrop that the plans are being made to borrow at least another one and a half billion dollars to build a new interstate five bridge across the Columbia River (CRC). The proposal includes some creative financing and taps two streams of future revenue that have not before been encumbered by highway construction.
About $380 million of the proposed debt is to be financed by General Obligation bonds. The principle and interest on that debt would be paid by Oregon taxpayers over the next twenty years out of the General Fund. I estimate the annual debt service on that mortgage to be a little less than $30 million, with a total principle and interest cost of about $600 million over the term of the loan.
About one and a quarter billion dollars of the proposed debt would be financed by revenue bonds whose principle and interest would be paid by money collected from future tolls on the CRC Bridge. The plan is to access the Transportation Infrastructure Finance and Innovation Act (TIFIA) to secure a federally guaranteed loan for $892 million that provides fixed interest rate less than three percent for up to 35 years. I estimate the annual debt service cost of that loan at a little more than $40 million, with a total principle and interest cost of about one billion four hundred fifty million dollars over the 35 year term of the loan.
However, the provisions of the TIFIA credit instrument require the loan to be “supported in whole or in part from user charges or other dedicated non-federal funding sources that also secure the obligations”. I interpret that provision to mean that Oregon taxpayers must pay the difference in the event that tolling revenue is not sufficient to pay the annual debt service on the federal loan. The current formula being used to predict future toll revenue is flawed at best and appears to significantly overstate potential future tolling receipts.
Another $68 million of project costs would be provided on a pay-as-you-go basis by ODOT. The source of funding to pay yet another $86 million in mitigation costs has not been identified.
The question is not whether the State of Oregon and the Department of Transportation have the capacity to incur more debt. Both entities maintain good credit and bond ratings that allow them to be able to continue to borrow money under favorable loan conditions with very low interest rates.
The better questions ask whether it is prudent financial policy to continue to maintain maxed-out credit status. Is it good farsighted monetary strategy to buy now and pay later? Is it appropriate fiscal policy to expect the next generation to pay for infrastructure that we cannot afford to build today?