The New "Road to Prosperity" Explained
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.
The additional state debt could also hurt the state’s fiscal health if the state is unable to meet its debt service requirement in the future do to declining revenues or if the added cost of maintaining additional roads from new construction squeezes out other budget priorities. When it comes to GARVEEs, it is important to realize that they produce no new revenues and add to debt services costs since they borrow from future federal money – which could diminish the state’s ability to match federal funds in the future.
That said, the benefit of speeding up road projects could result in cost savings, as the rate of construction inflation is higher than the interest rate on most general obligation bonds. This is a way to short-cut inflation. In addition, if the new roadway spending goes toward rehabilitation projects instead of waiting until the roads are in functional disrepair it can lower future costs.
Where is the $2.6 billion going?
According to the West Virginia Department of Transportation’s “Road to Prosperity”project list, there are $337.1 million in GARVEE (1&2) bond projects, $370.5 million in Turnpike bond projects, and $2.03 billion in General Obligation Bond projects – a total of $2.736 billion. Of this amount, approximately $1.95 billion (71%) in listed bond projects go toward new construction (e.g. widening lanes, new roads, etc.) while $784 million go toward road repairs, resurfacing, and replacements.
Of the voter approved General Obligation Bonds listed projects (aka Road to Prosperity Amendment), approximately 84 percent or $1.7 billion is planned to go toward new construction while the remaining 16 percent ($328.5 million) is expected to go toward repairs, resurfacing, and replacements. While all of the new GARVEE bonds are expected to go toward existing roads, over two-thirds of Turnpike Bond projects are being used for new construction.
Will the road bonds create 48,000 jobs?
Governor Justice has repeatedly said that the $2.6 billion in new road spending will create “48,000 jobs” in West Virginia. Apparently this number was derived from a 2014 report from Duke University’s Center on Globalization, Governance & Competitiveness. In the report it states that “each $1 billion dollars invested in transportation infrastructure creates 21,671 jobs” or about one job per $41,145 in transportation spending. At $2.6 billion this would equate to over 56,000 jobs or 38,800 jobs at $1.6 billion. While the Governor has been clear that this is an imprecise figure, it is not typically a sound practice to simply apply multipliers that are based on national figures instead of at the state level or from studies that don’t take into consideration a state’s economy and demographics.
It is also important to keep in mind that the projected new jobs are temporary and that the money used to pay the debt service on the bonds will partly come from an increase from regressive fees/taxes that could lower consumer demand in other areas unlike federal spending that can come from deficit spending. The economic impact of the proposed road bonds also depends on several other factors, including the use of local labor and local inputs like raw materials, the portion of the economic benefits that may spill over into neighboring states, the rate of interest on the bond itself, the amount of slack in the local construction market, and whether the investment is targeted where the quality of the roads is bad. While all of these factors – and more – need to be considered before policymakers can make a sound judgment on the number of jobs that will be created, let’s roll with their figures for a minute.
According to the Duke study, over half (57 percent) of the projected jobs per $1 billion spent on transportation are in the construction sector. If we conservatively say half of the projected 48,000 new jobs will be in the construction industry, than construction employment should conservatively hit 50,000 absent any major declines in sectors within the construction industry. This appears to be a very unlikely scenario, while an additional 5,000 construction jobs – as predicted by Steve White with the Affiliated Construction Trades Foundation – seems like a more probable outcome. As the chart below shows, construction employment is at a 25 year low, with the state down about 9,000 construction jobs since their annual peak in 2006 – so while it appears there could be a lot of slack within the construction industry it is doubtful that it could jump by more than 10,000 jobs within the next few years.
Is this a good investment for the state?
There is little doubt well-targeted investments in transportation infrastructure such as roads create good-paying jobs – especially in the short-run. The long-run impacts, however, are largely determined on whether this investment leads to additional investments from businesses or people and whether the additional new roads will require new revenues in the future to be maintained. Another important consideration is whether the WV Jobs Act will be enforced, which could determine how much of the $2.6 billion stays in our local economy.
Since the state did not perform a life-cycle benefit-cost analysis (as far as I am aware of) for each of the larger proposed road projects, it is not clear whether the benefits will outweigh the costs over the long-run. A 2010 study by economist Michael Hicks that looked at the impact on small businesses of the Corridor G project that goes from Charleston to Pikeville (KY), found “startling” results that suggest an increase in firm productivity but Hicks warned that the results “should be interpreted with caution.”
The enormous investment provided by the road bonds offers a great opportunity to boost jobs and economic growth in the short-term, but it is unclear what the long-term impact will have on the state’s economic and fiscal health. It will be imperative for the Justice administration to hire as many local workers and utilize as much in-state businesses in the process as possible get the best bang for the buck. Additionally, it will be important for lawmakers to ensure that the additional debt does not lead to another credit downgrade or additional budget austerity that is already hurting our state’s economic position. Lawmakers should also take steps to increase transparency and accountability by ensuring the public knows how the$2.6 billion in road bonds are spent in West Virginia.