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The Big Borrow: Critiquing the Republican transportation alternative

A bridge has fallen down. Highway projects have been delayed because construction firms won’t subsidize their own work until a financially strapped MnDOT can afford to pay them.

A bridge has fallen down. Highway projects have been delayed because construction firms won’t subsidize their own work until a financially strapped MnDOT can afford to pay them. The nonpartisan Office of the Legislative Auditor has called the funding picture for Minnesota’s roads and bridges “downright grim.” The primary funding mechanism for transportation — the gas tax — was 20 cents per gallon when the cost of gas was about $1.20 in 1988. Today, with an exponential increase in passenger miles and traffic congestion and gas hovering at $3 per gallon, the gas tax remains 20 cents per gallon.

For all these reasons and more, every Republican house member who rose to speak during the seven hours and 15 minutes of floor debate on the transportation funding bill last Thursday acknowledged that getting more money for the state’s roads and bridges should be a priority at the Capitol. Furthermore, the “minority report” House Republicans put up as their substitute proposal 24 hours before the DFL brought the omnibus transportation bill to the floor would spend approximately as much as the DFL on the state’s transportation needs.

The principal difference? While the DFL (and a smattering of Republicans) have passed a bill that, as House Republicans frequently point out, would be “the largest tax increase in modern Minnesota history,” the Republican leadership would instead create the largest credit-card debt in state history and cut $1.6 billion in current general fund spending besides.

These general fund budget cuts would be in addition to the steps required to balance the growing deficit for 2008-09, estimated at $373 million in last November’s forecast and expected to come in at around $1 billion when the new forecast is announced Thursday. On the House floor Thursday, minority leader Marty Seifert, R-Marshall, stated that his party’s proposed cuts would leave K-12 education and nursing homes unscathed — which immediately takes more than 40 percent of the pie off the table — and would instead be aimed at “welfare” spending.

The largest of these programs, such as Medicaid and the Minnesota Family Investment Program (MFIP), provide medical insurance and assist in getting impoverished citizens back to work, respectively. Both are matched by federal dollars, effectively doubling the impact of any cuts. Cutting these programs an average of $160 million per year for a decade would swell the ranks of the unemployed and uninsured. Other general fund budget-cutting options might include parks and other activities funded by the DNR, higher education, corrections and other public safety programs, and aid to local governments.

More than budget cuts

Budget cuts would not be the only way the Republican transportation plan would eat into the general fund. More than a third of the estimated $7.6 billion tab would come from levying $3.15 billion in general obligation bonds for roads and bridges over the next decade, and the debt service on that borrowing would likewise come out of the general fund. That’s assuming voters would approve a constitutional amendment allowing G.O. bonds for trunk highway projects — currently it is prohibited under state law. The Republicans acknowledge that until and unless such an amendment passes at the ballot box, this chunk of money in their proposal is not available. But if an amendment were passed, and G.O. bonds were available for state highways and bridges, transportation projects would be formidable competition for other capital improvement projects that are normally a part of the bonding process.

The sky is not the limit for bonding. As an unwritten rule, the state caps its biennial bonding bills at 3 percent of the general fund budget so as not to lose its high credit rating from the bonding agencies. With the state in recession, the general fund is shrinking, so the amount of the 3 percent cap is necessarily reduced along with it. With less bonding leeway and transportation projects swallowing a significant chunk of it, some of the other purposes of bonding — such as environmental mitigation for clean water and toxic cleanups, repair and construction of buildings at the U of M, MnSCU and other state-owned institutions — would necessarily be postponed or fall by the wayside.

Another $2.2 billion in transportation borrowing would be in the form of state trunk highway bonds, paid for out of the state trunk highway fund, which receives much of its revenue from the gas tax and motor vehicle license tab fees.

According to a background paper on transportation funding put together by the Minnesota Chamber of Commerce on its website (PDF), “Historically the state has not relied heavily on Trunk Highway Bonds to fund highway construction. The preference has been to follow a ‘pay as you go’ philosophy that relies on the current revenue in the Highway Trust Fund.” Yet as independent audit from the nonpartisan Office of the Legislative Auditor noted last week, “In recent years, policy makers have tried to address transportation’s financial problem by borrowing money for highway expansion projects. While some borrowing and some expansion projects may be appropriate, this approach does not resolve the long-term need for permanent and stable funding to maintain and preserve existing highways and bridges.”

Does borrowing save money?

Despite these words of warning, those in favor of levying more than $5 billion worth of bonds for transportation ($3.15 billion in G.O. bonds and $2.2 billion in state trunk highway bonds) argue that the interest costs of borrowing are not as large as the inflationary costs of transportation maintenance and construction. By putting down its marker on long term bonds now, the state will likely save money over the life of the payments.

This is ironic because Minnesota is one of the very few states in the nation (if not the only one) that does not factor in the additional cost of inflation when setting their official budget expenditures. In fact Gov. Tim Pawlenty vetoed the tax bill last session because it contained a provision for factoring inflation into the cost of government. Thus, by the official accounting methods used on the Minnesota general fund budget, it cannot be demonstrated that borrowing for roads saves money.

The independent audit also noted that MnDOT has deviated from its “preservation first” policy and begun spending more money on expanding the transportation rather than maintaining it. MnDOT Commissioner Carol Molnau has subsequently stated that the agency will go back to an emphasis on preservation. The net effect of this if the Republican proposal for transportation were to be implemented is that the state’s taxpayers would still be paying for road improvements many years after they’d already been improved and were again starting to deteriorate.

Republican leaders have worked hard to be able to credibly claim that they are funding well over $7 billion in road and bridge improvements without a tax increase. Yet if they are successful and the gas tax continues to remain at 20 cents per gallon, local city and county governments, who rely on the gas tax and license fees to fund their local transportation projects, will continue to be faced with the choice of watching their local roads and bridges deteriorate or finding other sources of revenue to repair them. In response to the stagnating gas tax revenue over the past 20 years, they have increasingly relied on local property taxes to pay for local transportation. Because the Republican plan does not increase the gas tax or the license tab fees, the transportation funding for local roads and bridges will not have a dedicated funding source that keeps pace with the need for maintenance, making further property tax increases more likely.

Last but not least, the Republican plan devotes almost all of its resources to roads and bridges and a relative pittance to transit. And yet a day after vetoing the DFL bill that allocated a quarter-cent sales tax increase in the metro area to be used largely for transit programs, Pawlenty went to Washington and gave a speech at a National Governor’s Association meeting in support of reduced greenhouse gases and clean energy usage.