Tuesday, September 16, 2008

EDITORIAL >>Road bonds will cost more

Arkansas highway officials evinced some mild concern this week about the collapse of the federal highway trust fund, which accounts for a big part of the state’s shrinking highway building and maintenance program. A few other states in Arkansas’ shoes — the federal aid meets much of their annual bonded debt payments — are more panicky. Arizona has mothballed highway projects totaling $158 million and Oklahoma halted $83 million of projects.

The highway trust fund, which is the depository for the federal tax on gasoline and diesel, is drying up because roaring pump prices are forcing people to dramatically alter their motoring habits. Americans drove 50 billion fewer miles from November 2007 through June 2008 than they did the same period the previous year. So tax revenues are cratering while the cost of the highway materials they pay for are skyrocketing.

The same thing is happening to state highway taxes, which are mostly motor fuel imposts. Federal fuel taxes tend to be a little lower than state taxes — 18.4 cents while Arkansas taxes gasoline at 21.5 cents a gallon and diesel at 22.5 cents — but the crisis in the federal trust fund carries a special threat to 21 states, including Arkansas, that use part of their federal allotment to pay off highway bonds. Bonds are an obligation that a state has to meet.

You remember Gov. Mike Huckabee’s big interstate highway program that started in 2000. The state borrowed $575 million for interstate reconstruction and the debt is being repaid at the rate of $74 million a year through 2013 or beyond. The work has long since ended and we are just paying the debt now. The state bond payments come largely from the federal highway trust fund under the GARVEE authority (Grant Anticipation Revenue Vehicle), which allowed states to pledge their future federal aid to pay off bonds.

Congress is coming to the states’ immediate rescue by appropriating $8 billion from the nation’s general revenues — that is mainly your income taxes — to bail out the highway fund. President Bush first said he would veto it but now says he will sign it. But that is a very short-lived Band-Aid. The future looks bleaker than the present.

So why are Arkansas officials so blasé about it? They’re a little concerned because the state has no highway cushion fund — the Highway Department spends all the money as it gets it each month — but not panicky enough to cancel projects wholesale.

Here is a little secret. They don’t need to panic because they will never have to welsh on a bond payment even if the federal trust fund dries up permanently. In the middle of a long technical paragraph on page 9 of Act 1027 of 1999, the highway bond act approved by the voters that year, is a sneaky little sentence that never got mentioned in the bond-election campaign by Huckabee or others. The $575 million would be retired over a relatively short period — 12 years for each series of bonds — by using the state’s federal payments and the proceeds of a small increase in gasoline and diesel taxes that the legislature enacted simultaneously. Then the critical sentence: If those revenues were ever not available, the state would make the bond payments from state general revenues, which is the money paying for public education, colleges, prisons and health services.

When highway officials were asked about it, they said that little sentence was immaterial because everyone knew that federal aid would always be rising, not shrinking. The pointless general revenue pledge was merely there to satisfy finicky investors.
Now there is a good chance that the schools and colleges will get to help retire the debt for the interstate program.

That reminds us of another old grievance about the bond program. Bonds are useful to pay for huge projects that need to be undertaken immediately. You pay for the project a couple of times over the long haul because of the expense of bond lawyers, brokers and underwriters and interest to investors, but the usefulness of the project is worth it.

The Arkansas interstate program was not worth it. Because of the accelerated payments and the relatively small size of the project, the state could have rebuilt more interstate miles by next year than were built with the $575 million from the bonds.

And we would still be building them at a modest clip for the next five years or so because the federal aid and the state fuel taxes would not be tied up making bond payments. Highway folks and Huckabee pooh-poohed the argument but the record will now prove it.

Fortunately, Arkansas voters in 2005 rejected another bond issue founded on the same premise or else we would be much deeper in hock and the collapse of the trust fund would be a real reason for panic. Mike Huckabee might even acknowledge that now.

Arkansas’ new severance tax on all the natural gas coming out of the Fayetteville shale will lift some of the pressure on the highway fund because nearly all of it is pledged to roads. But natural gas wellhead prices are plummeting because all the shale development around the country makes gas plentiful once again, so the little severance tax passed by the legislature looks like anemic relief now.

Too bad the state did not get the chance to approve Sheffield Nelson’s initiated severance tax of 7 percent this fall. The highway fund next year might be rolling in cash from the big energy companies, like Sarah Palin’s Alaska. Given Palin’s sudden popularity, it might be a chance for Governor Beebe to latch on to the hem of her skirt and do the same for Arkansas.