What’s fiscally conservative about borrowing $4 billion for roads?
By Brian Schoeneman | Tuesday, February 15th, 2011 | PolicyQuite a bit, actually.
I have seen this question posed by people on both sides of the aisle since the Governor’s transportation plan was released and began its way through the General Assembly. The question is usually a rhetorical one – the kind Democrats ask with a wry tone of voice that is, in effect, a thinly veiled charge of hypocrisy. And when Republicans ask, it tends to be in an exasperated tone of voice slightly tinged with the flavor of betrayal. I can understand why the Democrats ask the question; these Democrats are the same folks who try and dumb down the Republican message of fiscal discipline into “no taxes ever” and who think our concern with deficits and public debt means we are psychological incapable of embracing any policy that involves borrowing. It’s harder for me to explain why Republicans ask it, but I try to give them the benefit of the doubt that it’s a sincere concern and not simply politics.
But regardless of the motivation for asking the question, the answer is simple: the Governor’s plan is fiscally conservative for a number of reasons, including the fact that this the good kind of public debt, we can service the debt with existing revenues, and we’re doing it without a tax increase. Taken as a whole, those reasons make it fiscally conservative. And what makes the plan the right thing to do is simple – we are finally moving the ball forward on rebuilding our transportation infrastructure.
I was critical of the Northern Virginia delegates who voted against the Governor’s plan in the House last week. I have listened closely to their rationales and their reasonings, and I am still critical of them. Some gave rational, reasoned responses. I can respect those responses even if I disagree. Others gave what sounded to me like thinly veiled excuses and inverse-John-Kerry-style ”I voted against it before I’m going to vote for it” answers. Those I can’t respect, because they smack of politics. And transportation is too important an issue for Northern Virginians for our elected officials to use it to play the same old political games.
I expect that kind of behavior from our opponents on the left. But what frustrates me the most is when I see Republicans – including some who call themselves fiscal conservatives – criticizing the Governor’s plan simply because it requires us to borrow money. A fellow blogger wrote today on Facebook “So taking out a loan to pay down future debts is “conservarive”?? What family takes out a loan to pay off their credit cards? That’s personal budgeting 101. Taking out loans to pay off credit debt is a really bad idea and kills your bond ratings.”
That’s just a bad argument and it dumbs down the policy here to an absurd level.
There is a huge difference between taking out a loan to pay off credit card debt – a situation much akin to robbing Peter to pay Paul – and financing major investment in improving our transportation infrastructure. The two scenarios are completely different and should be treated that way. It’s one thing to borrow money to pay off an existing debt – there you are simply moving numbers around on a page. Borrowing money to build things represents an investment for the future. These bonds will be used to create permanent structures that have value and the potential to pay for themselves in the long run. Building a new road or widening an existing road has an economic impact that is exponentially larger than the cost to build the road in the first place. And the economic impact of a road project cascades out from the actual project itself – for every construction worker on the road, you’ve got someone who made the concrete he’s pouring, someone who drove it to the site, someone who made the truck that drove it to the site, and so on. It’s hard to pin a number on the impact these projects have, but the end result is clear – we will get far more than $4 billion worth of economic activity and economic benefit for spending this money. That’s a far different situation than when a family spends $30 on the credit card for Ledo Pizza. That pizza isn’t going to pay for itself in the long run, unless the family is in the sewage treatment business.
Even using these bonds for maintenance – what my friend characterized as borrowing money to change the light bulb – is still a good investment. Roads need to be repaired, just like buildings, cars, and anything else out there. A car that is in good condition runs better and is worth more – the same is true of roads. The better maintained, the more efficient and the more reliable the road is – and greater efficiency and reliability equals a more solid investment and a greater return on that investment. Nobody buys a house and then fails to maintain it – at least nobody I would call responsible. We can’t build roads and bridges and fail to maintain them, even if it means we borrow the money to do it. The enhanced value of the asset in good working condition makes up for that cost. It just doesn’t make a lot of sense to separate out maintenance from new construction.
Fundamentally, we all have to recognize that there is good debt and there is bad debt. Being fiscally conservative doesn’t mean never borrowing. It means you want good debt over bad debt. A good fiscal conservative recognizes that it’s better to buy a house than to rent one. Yes, you’ll take on a lot of debt to pay for the house, but that’s good debt – it’s a physical investment and it’s likely to increase in value as time goes on. And the amount of money you actually pay will be reduced by inflation over time, meaning the real cost of the debt is far less than it could have been had you waited and saved to pay cash. We have the benefit of some of the lowest interest rates on bonds in a long, long time meaning that the amount we have to borrow and repay right now is significantly less than the cost in real dollars if we were to wait just a few years and pay in cash up front. Borrowing $4 billion now could be get you the same benefit as spending $6 or 8 billion out of pocket in a few years. And you don’t get the added benefits of the improvements for far longer.
Think about it this way – is it better to buy a house and incur the debt it takes to finance it now, or save your money and in twenty years buy the house free and clear? I don’t think anybody is going to suggest that the latter option is better than the former. And I don’t think it’s the fiscally conservative thing to do either.
Throw in the fact that the Governor’s plan allows us to spend more on transportation than we have in years without raising taxes right now, in the middle of a slowly recovering economy, and you’ve got a solid, fiscally conservative proposal to fix some of our transportation problems.
Does the Governor’s plan fix them all? No. Does it solve the problem of a long term dedicated funding source for transportation that the Democrats love to complain about? No. Does it have to? No. First things first – address the critical problem while we work to solve the longer-term one.
The Governor’s plan – whether it’s the House version or the Senate version – is a necessary first step in getting us to where we need to be when it comes to transportation and that’s why many of us were upset to see so many Northern Virginia elected officials vote against it. I respect those who have defended their votes in a rational way, but it is clear to me that voters in Northern Virginia can tell the difference between political maneuvering and a legitimate, principled stand. And even those who took a principled stand need to recognize that there are a lot of voters out there who will have a hard time accepting that their elected officials voted against transportation, regardless of the reason. That’s why the robocalls RPV sent into a variety of districts, including my own, have been so effective.
Governor McDonnell’s plan is a good one. It isn’t the best, but when it comes to legislation, we should never let perfect become the enemy of good enough. This bill is good enough for me, it’s fiscally conservative, and it finally moves the ball forward. I hope the General Assembly recognizes that and we can get the bill through by the end of session.
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About the author
A veteran political professional, long-time Republican party activist and attorney Brian W. Schoeneman has been offering his opinions at Bearing Drift since 2010. He serves on the Board of Virginia Line Media, LLC, which operates Bearing Drift and spends his days representing the U.S. Merchant Marine in Washington, D.C. He hails from Fairfax County, Virginia, where he lives with his wife and son.
Comments
24 Responses to "What’s fiscally conservative about borrowing $4 billion for roads?"
Brian S,
You left out the strongest rational for borrowing the money right now. Interest rates are historically low, Virginia has a great credit rating which will not be changed by this borrowing, so it is best to strike while the iron is hot.
However, Virginia does not get enough revenue from the existing fuel tax to even maintain that which has already been constructed. McDonnell’s plan includes heavy reliance on tolls, some of which almost certainly will not receive federal approval because they would be unconstitutional.
If you are so in favor of tolls, how about us putting up toll booths on I-66 since that seems to be the route you travel every day? I rarely travel I-66 so it will not bother me much and I would like for as many citizens as possible to share in the misery. How will you like it if you get to pay both the fuel tax to maintain somebody else’s roads as well as the toll to maintain the road upon which you travel?
I got the interest rates in there. It’s a bit buried, but it is in there.
If tolls on 66 mean I don’t have to sit in traffic for an hour and a half to go fifteen miles, I will gladly pay them.
Actually, the Democrats’ stance is like this:
They would buy the house by taking money by force from everyone in the neighborhood to pay for it, rather than prioritize the expense within their own salaries.
Little David, as a trucker you know cost per mile equivalents. What happens to vehicle cpm in traffic? Not a trick question at all.
Here, I will make it easier. http://www.commutesolutions.org/calc.htm
After the fixed and variable costs, factor in Tolls. Tolls are a marginal expense that the road user pays, not everyone else.
You people can’t stand it when Bob gets it right. If Kaine had delivered a similar package with similarly responsible borrowing practices I would have applauded him too but he failed miserably to drain the VDOT swamp and he failed us in technicolor.
How is it right that Governor McDonnell will charge a toll at the North Carolina border for travelers on I-95? Interstate traffic will be charged, but intrastate travelers will escape.
I will note with glee that our Governor abandoned his proposal to put the toll on I-85 at the North Carolina line. Opposition has not ended and we have the Constitution on our side.
Brian, anytime it takes so many paragraphs to rationalize a point, you should start over. Point is, no one I know objects to borrowing, but most fiscal conservatives object to borrowing without identifying an agreed upon stable revenue source. This borrowing is simply risky and puts the state’s excellent credit rating at risk, especially if the republicans in the House of Representatvies succeed in slashing the federal budget. It only works if the Governor is successful in taking money now spent in the general fund for education, public safety, et al and transfers it to transportation. Bad public policy.
We don’t need light rail. How is 4 billion dollars in federal money conservative.
Mike, forgive me for being verbose. Law school has engrained a few bad habits.
We do have a funding source – the gas tax. If thats notngood enough, we have the general fund. That’s what it’s there for.
Brian, lots of assumptions in your post.
“it’s better to buy a house than to rent one”.
Actually, that depends on many factors for the individual considering those two options.
“you’ll take on a lot of debt to pay for the house, but that’s good debt”
House debt can be good or bad. If you make $50K a year, and buy a $500K house with 100% financing that’s bad debt.
“Borrowing $4 billion now could be get you the same benefit as spending $6 or 8 billion out of pocket in a few years.” Or, $2 Billion. There’s no way to know this. It might be possible to analyse this with historical data, and if you have it I would be very interested to se the scatter plot and trendline complete with regression equation. MS excel has a great feature that makes it easy even for people who don’t like math.
“The enhanced value of the asset in good working condition makes up for that cost.” Now, I can sell my house, and realize an increase in the asset value. Whose going to buy Virginia’s roads? If the additional roads are going to increase tax revenue, does the Net Present Value of the cash flow of x years (let’s say 10 years) actually equal $4 Billion in today’s dollars? This is the type of analysis that needs to be done to back up your statements. Maybe it’s been done, I’m not sure and haven’t reasearched it. All I am saying is that I think the fiscally responsible thing to do would be to analyze the estimated cash flow vs. the investment. We can’t just assume the investment will bring back 200% of it’s value.
“Throw in the fact that the Governor’s plan allows us to spend more on transportation than we have in years without raising taxes right now” – Are you admitting that we’ll need to raise taxes in the future to pay for this? How much will they go up?
What’s the probability that this will negatively impact the state’s credit rating.
Now, I’m not advocation for or against the Governor’s plan. All I’m saying is that many Republican’s who balk at the state borrowing this much have good questions and concerns that do deserve to be answered.
Brian, I think you’ve really missed the mark on this one- I see nothing ‘fiscally conservative’ about McDonnell’s plan; and in your response, nothing substantiated to justify your support. You seem to be running circles around the fact that the transportation plan is essentially the issuance of a tremendous amount of debt. You seem dismissive of the GARVEE bond issue, i.e. the reliance on future Federal dollars to service state debt. However, I’m sure you, as would I, support cutting Federal spending in a variety of categories, including subsidies to roads. McDonnell’s plan is just bad policy. Bad from the beginning, still bad nearing the end. A true fiscal conservative wouldn’t even think of advocating this crap.
Yes, it is bad policy, but to republicans, it is great politics. The House of Delegates, by their intrasigence, has made us all desperate for some improvement in transportation infrastructure, and most citizens seeing their favorite project on the “sample list” of 900 projects think all those projects will be funded, which is absolutely absurd, but for now, it will do to ensure passage of this borrowing bonanza. Further, in Hampton Roads, watch out for PPVs that will strangle our region by tolls too high.
A toll is a tax. The gas tax is a tax. And both are going to have to go up to pay back the 4 billion in debt. I just want Gov McD to say he is raising both those taxes or fund streams before we borrow 4 billion.
IMO: unless he admits he is responcible for these tax increases, I do not support borrowing 4 billion dollars worth of bad debt with some future Gov taking the blame for McD’s debt payback. Playing politics with 4 billion in borrowed debt is bad policy.
It’s not bad policy at all. Why in heaven’s name would we pay as we go on projects that take 5-10 years to go from planning to completion? It makes no sense.
Right now, interest rates are at all time lows. Construction costs are at all time lows. The Lt. Governor told me today that the bids they’ve been getting on construction projects right now are 20%-30% less than they were just two or three years ago. The new debt we’re issuing, a little over $1.5 billion, is not “a tremendous amount of debt.” Fairfax County spends more than that on schools every year. Debt alone is not bad or fiscally irresponsible.
What I find frustrating with the arguments you guys continue to make is that they’re not grounded in reality. Of the $4 billion here, $1 billion of it is cash. Of the rest $1.3 billion was obligated for bonds four years ago – we’re simply front loading the bonds to use the money now instead of later. The GARVEE bonds will get paid back and even in the current environment in Washington, there will still be infrastructure spending, and we will still get our fair share.
This plan represents the first meaningful investment in transportation in a quarter century. The last two Democratic administrations got nothing done – in fact, they got worse than nothing done, as you had Tim Kaine closing rest stops while he apparently lost $1.45 billion in the cushions over at VDOT.
Ryan,
Buying is always going to be better than renting if you’re talking about long term investments. That’s the point of that statement. There is good debt – the kind that’s backed by something tangible that tends to increase in value over time – and there is bad debt, like charging pizzas on a credit card. This is not bad debt.
Your definition of bad debt isn’t bad debt at all – it’s a bad decision, and one you shouldn’t be able to make.
You’re right – there’s no way to know what the potential savings could be, which is why I said “could” and not “would.” But given the fact that over time, inflation tends to catch up and decrease the costs you’re paying in the long run, it’s not a bad assumption.
I don’t have that data, but I’m sure the folks at VDOT or in the GA have it. This is a blog, not a think-tank.
I’m not admitting that we’re going to have to raise taxes – no one knows if that will be the case. It is certainly possible, but anything is possible. I think we won’t have to raise taxes, but there are plenty of bad scenarios out there where it may happen. It should always be the absolute last resort.
I think most of these questions have been answered and that’s why you see so such broad, bipartisan support for the Governor’s plan – except, of course, from the Democrats in the House of Delegates from Northern Virginia.
FYI: I’m not opposed to borrowing the money but I want to know “before” how and who’s going to pay for it.
I do not want massive tolls, higher gas taxes or cuts in some programs to be the funding streams that we are “forced to use at some later date” to pay these funds back. You & McD are asking me to buy into this plan without the details. I don’t spend $100 without knowing where I’m making up that money from so I just can’t get into a 4 billion dollar debt program without facts up front.
Tell us (now) how, who and how much and you might find support but “I don’t know or we’ll get those details later” just isn’t working for me.
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Actually Brian, that is simply not true. Every member of the General Assembly knows that this initiative will require a tax increase in the near future. My theory is that the Governor will present this requirement to his successor, but make no mistake about it, the added debt service will require a tax increase. You and Brian Kirwin can deny that you know it will require a tax increase, but frankly, that is not a believable position to take. If left to BK, he would cut enough out of the General fund, without of course acknowledging the effect of those cuts on Public education, safety, health and human services, or courts and justice, but hey, what else is new.
While I’d prefer that the governor and the General Assembly were in favor of an increase in the gas tax (the value of which has eroded as the price of fuel has risen) IN ADDITION to using the bonds, that’s just not the political climate we’re in.
Issuing the bonds means we get $4 billion worth of highway improvements that we wouldn’t get without them and — although I’m pretty sure the original poster wouldn’t agree with me on this, we also get the economic stimulus those projects will create. As others have said, interest rates are as low as they have been in years and lower than they likely will be in future years. Also, because they need the work, construction company bids on these type of intrastructure projects are coming in lower than expected.
We can do this or we can continue to do nothing, as we have for the last ten years, while some continue to advocate for the perfect plan.
The political process seldom yields perfection.
“It’s not bad policy at all. Why in heaven’s name would we pay as we go on projects that take 5-10 years to go from planning to completion? It makes no sense.”
A strawman, Brian, nobody is suggesting we NOT fund the capital improvements with bond issues. The concern is how we pay back the bond.
Yes, a big Christmas financed on a credit card; celebrate until the bill arrives. In this case, I suspect paying the bill will be the responsibility of the next Governor, who must essentially force the House of Delegates to either increase transportation related taxes and fees, or bankrupt the state. Sound familiar? This is the Gilmore strategy, and of course, it worked. In essence, the intrasigence of the House of Delegates has required politicians to obligate first, pay later. This is of course the height of political irresponsibility, but if that is what is required to fund transportation infrastructure in Virginia, so be it. The real humor in this is to listen to the so called fiscal conservatives attempt to justify this failure of political leadership and responsible governance. But hey, if we the voters keep falling for fairytales, that is our problem.
Eric, go read the comments on Common Sense again. Localgop criticized the plan because it was financing and not pay as you go.
Mike, it’s good to know that you have the extrasensory perception needed to be able to tell us what every single member of the House of Delegates knows here.
If, in a worst case scenario, and all of the funding sources for this – the insurance premium tax, the existing revenue sources, the federal revenue sources – all dry up at the same time, I would agree with Kirwin that we make the cuts in the general fund necessary to ensure we pay for transportation.
Right now, it is as big – if not bigger – priority than the others you’ve listed, many of which already have dedicated funding sources at the local level.
Brian, in all due respect, I think of you as a plugged in member of the republican establishment who would know the verbal commitments the Governor has made to senators and delegates about the need to have tax, fee, and toll increases, and his commitment to seek those in the near future. Please, if this is the case, do not exacerbate this situation by denying the obvious; if I am wrong about your status, my apology.
Mike, we’re talking about the current transportation plan, not future solutions to the long-term problem.
No one is saying that there will never be a fees or tolls. And I am not saying that there will never be a need for tax increases in the future – what I am saying is that for this bill, the spending was achieved without requiring a tax increase. And unless the Lt. Governor is lying to my face when we talked about the plan yesterday, I’ll take his word for it.
As I noted in this article, this is not the permanent solution to our transportation problems. It’s a necessary first step, and one that is long overdue. The last two administrations did little to nothing to solve these problems. The McDonnell administration isn’t making that same mistake and they deserve credit for not simply trying but actually doing.
Yes, and what I am saying is that to get the votes, the Governor or his representatives made clear that he will seek such revenue increases in the near future. The Northern Virginia population, and those in Hampton Roads, while desperate, realize that using anticipation notes, and funding GO bonds with existing revenue, just means you have robbed the future to appear as if you are doing something today. I marvel at this political strategy at the same time that I condemn the failure of leadership. But on the other hand, how else does a Governor fulfill his campaign promises with a House of Delegates that simply will not act responsibly?
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