Transportation Funding Study Committee

Today a joint transporation funding study committee is meeting to hear proposals on how to shore up infrastructure funding in Tennessee. Earlier in the week, during the Department of Transportation's preliminary budget hearing, there was discussion of issuing GARVEE (Grant Anticipation Revenue Vehicle) bonds. These bonds essentially use the anticipated stream of federal grant dollars to fund a bond outlay which would give the state a large influx of money now. That money could be used to start a new wave of infrastructure projects now. As federal dollars come in over future years, those dollars are pledged to pay the costs of the bonds. As used in other states, in some cases the potential federal dollars are the only security of the bonds. In other cases, the state pledges additional sources of revenues in the event the federal dollars do not materialize. If the revenue bonds are only secured by federal grants, the interest rates are higher as the bonds are riskier.

State Comptroller John Morgan addressed the committee and proposed issuing general obligation debt as a alternative with the plan to budget to use anticipated federal revenue to pay off the bonds. While this may seem like a technical distinction, this structure of the financing results in the lowest interest costs. According to the Comptroller, other states have used GARVEE bonds because general obligation debt must be approved in a referendum, which is not the case in Tennessee. He also pointed that Tennessee has borrowed relatively little in the past, which makes it more possible for the state to borrow funds now.

An important point to keep in mind is that borrowing money for infrastructure needs actually does not increase revenue, it only increases costs (through interest and issuance of debt costs). Cost savings can be realized if starting projects earlier helps the state avoid future inflationary costs. In other words, if anticipated inflationary costs in bridge and highway construction are expected to be higher than costs of borrowing, then in the long run it may be costs efficient to borrow and build sooner.

Another element of this issue is that this effort can of course be considered a part of a state funding economic stimulus package. Starting all these road and bridge construction projects now can help provide employment and economic activity in Tennessee while preserving and protecting important infrastructure.

The proposal would be for borrowing approximately $350 million. Over a 12 year period, estimates indicate that a general obligation bond would cost about $90 million in interest costs. This essentially means that the state would be paying $8 million a year in interest costs instead of spending that money on transporation projects. Whether or not the state would save that much in inflationary costs is yet to be seen. GARVEE bonds would be more expensive. These discussions are all preliminary, but we have yet to see whether these borrowing proposals would include any funds to assist local county highway departments with their infrastructure needs.