A year after the Michigan Department of Transportation (MDOT) sold the first group, or tranche, of bonds in Gov. Gretchen Whitmer's $3.5 billion Rebuilding Michigan plan, the finance team is preparing to sell another $800 million worth in August.
First, Patrick McCarthy, director of MDOT's Bureau of Finance, explains why the market has reacted so favorably to the sale of bonds to repair the state's crumbling roads and bridges. In a second segment, Brad Wieferich, director of MDOT's Bureau of Development, talks about the favorable bids for many of the projects and how the construction industry has reacted.
After the Michigan State Transportation Commission authorized the bond sale in January 2020, Gov. Whitmer joined the podcast to talk about the Rebuilding Michigan plan and the decision to sell the bonds.
In this week's first segment, McCarthy said a second round of $800 million in bonds will go on the market in August and independent analysts are projecting they will sell at a premium, just as the first round did a year earlier. The Bond Buyer reported on that first bond sale in August 2020, observing that while the pandemic diminished recent collections of pledged revenues, the state's sturdy coverage ratios provided a cushion to endure the fiscal storm.
"Michigan's state trunkline bonds are not susceptible to immediate material credit risks related to coronavirus because of strong coverage of debt service and limits on additional leverage," Moody's said at the time. "The longer-term impact will depend on both the severity and duration of the crisis."
Moody's also underscored that the lack of investment has taken a severe toll on the state's transportation assets.
A March 2021 Government Finance Officers Association primer outlined the role tax-exempt bonds play in infrastructure financings and as an investment product.
For those reasons and because of MDOT's solid track record managing finances, both bond offerings are generating a premium, meaning they are very attractive to investors, McCarthy says.
He also talks about the department's successful refunding of $68 million in 2011 State Trunkline Fund bonds, which saved the state nearly $20 million.
In the second segment, Wieferich talks about the opportunities the Rebuilding Michigan plan offered to accelerate a number of projects that could not be supported financially for several more years.
He also explains the design process, what's involved in preparing projects for contractor bids, and why, so far, most projects have come in under engineers' estimates.
As Wieferich notes, having more investment up front allows for rebuilding roads and bridges that would otherwise be resurfaced or repaired as stop-gap measures. In the long run, rebuilding rather than repairing, saves taxpayers money in ongoing maintenance. It also saves drivers time and money in commuting and commercial carriers who rely on the freeways to get goods to market on tight schedules.
A year after the Michigan Department of Transportation (MDOT) sold the first group, or tranche, of bonds in Gov. Gretchen Whitmer's $3.5 billion Rebuilding Michigan plan, the finance team is preparing to sell another $800 million worth in August.
First, Patrick McCarthy, director of MDOT's Bureau of Finance, explains why the market has reacted so favorably to the sale of bonds to repair the state's crumbling roads and bridges. In a second segment, Brad Wieferich, director of MDOT's Bureau of Development, talks about the favorable bids for many of the projects and how the construction industry has reacted.
After the Michigan State Transportation Commission authorized the bond sale in January 2020, Gov. Whitmer joined the podcast to talk about the Rebuilding Michigan plan and the decision to sell the bonds.
In this week's first segment, McCarthy said a second round of $800 million in bonds will go on the market in August and independent analysts are projecting they will sell at a premium, just as the first round did a year earlier. The Bond Buyer reported on that first bond sale in August 2020, observing that while the pandemic diminished recent collections of pledged revenues, the state's sturdy coverage ratios provided a cushion to endure the fiscal storm.
"Michigan's state trunkline bonds are not susceptible to immediate material credit risks related to coronavirus because of strong coverage of debt service and limits on additional leverage," Moody's said at the time. "The longer-term impact will depend on both the severity and duration of the crisis."
Moody's also underscored that the lack of investment has taken a severe toll on the state's transportation assets.
A March 2021 Government Finance Officers Association primer outlined the role tax-exempt bonds play in infrastructure financings and as an investment product.
For those reasons and because of MDOT's solid track record managing finances, both bond offerings are generating a premium, meaning they are very attractive to investors, McCarthy says.
He also talks about the department's successful refunding of $68 million in 2011 State Trunkline Fund bonds, which saved the state nearly $20 million.
In the second segment, Wieferich talks about the opportunities the Rebuilding Michigan plan offered to accelerate a number of projects that could not be supported financially for several more years.
He also explains the design process, what's involved in preparing projects for contractor bids, and why, so far, most projects have come in under engineers' estimates.
As Wieferich notes, having more investment up front allows for rebuilding roads and bridges that would otherwise be resurfaced or repaired as stop-gap measures. In the long run, rebuilding rather than repairing, saves taxpayers money in ongoing maintenance. It also saves drivers time and money in commuting and commercial carriers who rely on the freeways to get goods to market on tight schedules.
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Jeff Cranson: This is Talking Michigan Transportation. I'm Jeff Cranson.
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Cranson: In January 2020, before we were all seized by a pandemic, the Michigan Transportation Commission, at the request of Governor Gretchen Whitmer, authorized the sale of $3.5 billion dollars in bonds to stave off the rapid deterioration of our state's most vital roads and bridges and launch a Rebuilding Michigan plan. Decades of underinvestment has left us with crumbling pavement, bridges held up by temporary supports, and other failing assets. A year and a half after the authorization of those bonds, two people are here to tell us about the progress. First, Patrick McCarthy, director of MDOT's Bureau of Finance, will talk about the coming sale of another $800 million dollars in bonds. Then, Brad Wieferich, director of MDOT's Bureau of Development, will talk about how industry has responded to the governor's plan and what else we can expect. Patrick McCarthy is the director of the Bureau of Finance at MDOT and has been deeply involved in these various bond sales over the years and also in refunding, or refinancing, these bonds so that we can save the taxpayers money on interest rates. So, Patrick, thanks for taking time to do this.
Patrick McCarthy: Thanks for having me, Jeff.
Cranson: So, first, let's talk about the next round of bonds in the governor's Rebuilding Michigan plan. The market had a very good reception to that first sale. Some of that money is still being, you know, put out there as our projects are spread out over a number of years. What are you feeling now about going back to the market a second time?
McCarthy: Sure, as we know, the governor and the State Transportation Commission authorized us to issue $3.5 billion dollars of bonds over the next four years. In August of 2020, we went to the market with the first round, or tranche they call them, of bonds for $800 million dollars of principal out of that $3.5 billion. That issuance was well received by the market. It was oversubscribed, which means we had more orders than we had bonds available for people to purchase. That allowed us to begin the projects. We started and completed the first project on I-496 last year, last fall. And now we are ready and planning this August to go to the market for the second tranche of bonds for another $800 million dollars of bond proceeds, or principal issuance, to support the ongoing list of projects that were originally announced. There were 46 projects, again, for that $3.5 billion dollars. The market conditions—
Cranson: So, talk a little bit about why $800 million.
McCarthy: That's just—as we're delivering these 46 projects, we are keeping an eye on the cash flow needs of the projects, both the ongoing projects that we have and the projects that are being let and awarded this summer. Many of these projects are multi-year projects, so even though we're issuing, or letting projects, for more than the $800 million dollars, we expect those projects to take multiple years to complete. So, between the timing of the projects that we let in fiscal year 20 and this year in 21, these cash proceeds from the bond issuance will be used to satisfy the payments to the contractors and the consultants on those projects.
Cranson: To get to $3.5 billion, there's going to have to be some more issuances. Do you expect them to be in similar amounts, understanding that 800 million doesn't go into 3.5 billion in an even number?
McCarthy: Right, it'll be similar amounts probably. It'll, again, depend on how the cash flow—how the projects are progressing and the spending patterns of those projects. You know, most likely it's going to be, you know, probably $800, $900 million dollars in fiscal year 22. And then the final issuance in fiscal year 23 will be dependent on how the project lettings come in, how the schedule of the expenditures is progressing. If the lettings come in under budget, then we won't need to issue the entire $3.5 billion dollars that we've been authorized. We're only going to issue enough to cover the expenditures on these projects, and, you know, hopefully these lightings come in in a positive environment and we're able to deliver these 46 projects for a reduced cost.
Cranson: Well, so far, we've done pretty well in terms of the bids, and I’m going to talk later to Brad about that. But when you talked about being oversubscribed, so, basically, $800 million sale, you know, getting us more than a billion, how does that work exactly?
McCarthy: Sure, so, our $800 million dollars of principal that we issued brought in a little under $1.1 billion dollars, and the difference there is the premium that was recognized on the bonds. The bonds, to the investor, are attractive at the interest rates that we're offering them. So, they are willing to pay a premium, an additional amount of money on top of the coupon rate of the bonds, in order to receive that bond and hold that bond for, you know, anywhere from a few years to 25 years depending on which series of the bonds that they bid on, that they put in their offer for. So, it's the attractiveness which results from MDOT's stability as an investment as well as our ongoing management of our existing debt service where we're a low risk for them, and they're willing to pay that premium to invest in the bonds that we're offering.
Cranson: Well, so, that kind of further solidifies, you know, the argument on the side of bonding and, I guess, the difference between, you know, good debt and bad debt. I know that, you know, debt conjures negative thoughts for most people; nobody thinks debt is a good thing. But there are times, obviously, that our economy and economies around the world depend on certain levels of debt and debt being managed properly. That really speaks to the whole decision about this plan, and, you know, the investment of putting the money up now to keep the system from falling into further disrepair and basically disintegrating before our eyes and what that cost would leave to our children and grandchildren versus the cost of the debt, right?
McCarthy: Exactly. We are at almost historic lows of interest rates that the market is paying right now for debt. It was historically low before COVID. COVID bumped it up just a little bit, but it's still at almost historic lows compared to 5 and 10 and 20 years ago. It's, you know, the ideal time to be going to the market as far as the debt service that the department is going to incur. And then, to your point, the savings that we can recognize from the fact that we no longer continue to have to put maintenance dollars into these roadways once they've been fully reconstructed. Also, the delays for the motoring public that they will see during the construction of these 46 projects, but they won't see it every two to three to five years over the next 20 years as we're out there doing patching and repair work on those roadways. So, all of those are considerations that we take into account when deciding that issuing debt is an important tool for us to deliver the road program and try to keep the motoring public moving along with as minimal impact as possible and as fiscally responsible as we can.
Cranson: Yeah, that's a really good point. This is a good opportunity to remind people that MDOT and, I think, a lot of DOTs have a formula of user delay costs, and it isn't just the money that goes into the project and what that costs us as taxpayers. But when the road is closed or there's work being done, and you're slowed down, that's costing you in terms of your time. Somebody who's living in a just-in-time delivery world in commercial markets, it's costing them money too. So, everything we can do to speed these things up saves us all. Talk a little bit about the non-Rebuilding Michigan bonds that were refunded and, you know, that that brought in a pretty hefty savings too.
McCarthy: Sure, and at the same time that we're going to go to the market in August for the$ 800 million dollars of Rebuilding Michigan bonds, we're also going to refinance the 2011 State Trunkline Fund bonds, which, after 10 years of being out in the market, are callable. We can ask for them back and replace them with bonds that we will issue at a cheaper rate. So, we're going to issue a reduced number of bonds that would be outstanding. We're going to replace, I think, $68 million dollars of trunk line bonds at a lower interest rate and save a little under $19.6 million dollars on the debt service on that $60 million dollars of debt. So, you know, we're being good stewards and managing the outstanding debt that we have and looking for opportunities throughout the life of these bonds that we've issued to save money for the, you know, taxpayers. Then we can reinvest those dollars into our existing road program.
Cranson: So, it sounds like you're constantly monitoring these things, right? And your staff is paying attention and looking for the right place to maybe jump in and do a refunding like that.
McCarthy: Yes, that's something that we continually keep an eye on. When we issue bonds, there's usually restrictions on how long you need to wait before you could do a refunding. But, as everybody probably knows, when you're looking at your savings account, what you're earning on, you know, your savings account over the last five to ten years continues to decline. That's bad for your savings account, but it's great if you're in the market to be refunding your existing debt and saving that money when you're paying that interest rate out to somebody else.
Cranson: Yeah, that's a good analogy. Well, thank you, Patrick, for taking time to explain this again, and, you know, good luck with the next round of bond sales. I’m sure we'll talk about it more.
McCarthy: Thanks, Jeff. We're actively working on it, and we can't wait for this August deal to be finalized and priced.
Cranson: Spoken like an accountant. Hi, for the second segment, I’m with Brad Wieferich who is the director of the Bureau of Development at MDOT, which is where most of these road projects originate in terms of design and a look at all the things that are going to go into them. Brad, thanks for taking time to be here again.
Brad Wieferich: No, appreciate talking with you, Jeff.
Cranson: So, talk a little bit about Rebuilding Michigan and how things have gone now that we're, you know, I guess a year into it. The Commission authorized the bonds in January of 2020. We didn't actually sell the first tranche of bonds, as Patrick likes to put it, until August of 2020, but some of that money was to backfill work that was already being done on 496 west of Lansing, which was the first project completed under Rebuilding Michigan. But what are you seeing in these projects and how bids are going and how industry is receiving the whole plan?
Wieferich: You know, from where I sit, Jeff, things are going very well. I’ll be honest, increasing our program to the size that this program did, I personally had some concerns about our resources, our availability to deliver, but we've been doing it. And we have about a billion dollars worth of work that includes Rebuilding Michigan money in them contracted out right now. So, the overall program is about $3.5 billion. Were maybe about a little less than a third, a quarter, of the way into it from a dollar perspective. But what we are seeing is that, both the delivery of these projects and in the bidding, the department and industry are responding. Right now, looking at the combined engineers estimates versus the low bids that we're seeing, overall, about two percent under our engineers estimates. So, things all in all are going quite well.
Cranson: So, that's a good sign. That means that there's competition in the industry for the most part and they're bidding competitively to try to get these jobs and that's why they're coming in where they are, right?
Wieferich: Yeah, that's exactly right. I mean, we develop our estimates based on the work in the contract, obviously. How much concrete? How much asphalt? How much earth work? You know, how much bridge work? We have to take all of these things into account. We look back at our historical prices on what we get for different projects in different regions and locations and try to come up with what we think is a really good estimate for that project. Those estimates help us plan out the dollars, obviously, try to kind of make sure that we're managing that resource appropriately. But at the end of the day, these go out to the private industry for competitive bidding, and it's actually really good to see that our engineers’ estimates are very close in line with those low bids. Therefore, it kind of validates, in my opinion, what our engineers are doing on the front end. At the end of the day, like I said, we're about two percent under where we thought we would be so pretty good shape.
Cranson: So, in your best non-engineer-ese, can you talk about that process and what really goes into it from, you know, the conception of a project until it's bid and how with the process of estimating—and I guess also the process of design because I suspect a lot of people hear design when you're rebuilding a freeway that already exists in the same footprint, the same corridor and think, “Well, how much could there be to design it? You know, it's a road that already has straight segments and curves and all those things built in.” So, talk about all of that.
Wieferich: Sure, and with my road design background, I told people when I used to be an engineer that was really my passion. So, I could talk for a long time about it, but I won't.
Cranson: [Laughing]
Wieferich: I’ll make it as succinct as possible. A program like this was interesting, actually, because the projects, the concepts were developed a couple different ways. One, we had, for lack of a better term, I’ll call it wish lists of work, big projects that we knew we wanted to do, but we simply didn't have the resources, simply didn't have the funding to do, so that put those on the table. In addition, we have our Five-Year Transportation Program that includes five years worth of projects that we're planning. We looked through that list as well for projects that we could accelerate. “Let's go ahead and move those up and deliver them to the public earlier.” And with those jobs, specifically the ones that we moved up, we also looked at the scope of work. What are we really doing? And one of the terms that I’ve heard in the past is that, you know, “With Rebuilding Michigan, we're going to build them right.” One thing that I would like to try to clarify is that I don't think that we were building them wrong before. What we were saying by “Building it right” is building it for the long haul, for a long term. The projects that we have been putting out for the last several years, we follow an asset management approach, which means we want to do the right fix at the right time to really maximize our resources, but with limited resources, you can't do a lot of these long-term fixes that really give you a big boost to your overall system condition. So, if a project was to be delivered, you know, four years from now but it was an overlay, an asphalt overlay, just a cap, maybe we want to take that move it up, but it really needs to be a reconstruct. We need to get this thing into a 20- and 30-year lifetime rather than just something that's five or ten years to kick it down the road. So, once we've kind of settled on this is the type of work that we want to do, we call it the scope of work, we've settled on our scope, now we have to take a look at the amount of work that this involves. How many tons of asphalt? How many yards of earth work? How many tons of aggregate? How many cubic yards of concrete pavement? How much bridge work is going to be involved, you know, the steel and the concrete and everything that goes along with that? So, we come up with our schedule of items, basically the schedule the materials. We know how much we're going to be putting into the project. We know historically, because we keep track in our databases of our past prices, we can take a look at where those trends are heading for different geographic areas of the state, the different materials. But that's really how we end up then with an engineer's estimate. There's a lot of nuances that go into that and will affect the overall bids. Constructability is one. How efficient is it? Obviously, building a roadway, very low volume, very rural is very different from a per mile standpoint than building a very urban, very complex, trying to shift traffic around. So, there are many, many factors that go into it, but essentially, we start with the materials and quantities based on average prices. Then we have to adjust for these project specific type issues. Like I said before, I’m very pleased that the estimates that we have come up with, there's been a couple of outliers in the list, but overall, we're two percent under our engineer's estimate. That's a pretty sharp pencil from an estimating standpoint.
Cranson: So, that's good, and I think you hit on another point, something that Patrick and I have talked about, and that's the good debt that really is bonding and how going into debt in this case, by selling these bonds, actually saves you money in the long term because if you're back out there, you know, every three to five years resurfacing a road, spending money on it, throwing good money after bad, as they say, it's going to cost more in the long run to maintain it that way than to finally be able to rebuild it and get that longer life. I think maybe it's like the difference between renting your home and buying your home and how far your money goes. So, I think you made a good case for why we need to do that. There's also a user delay cost factor involved that, you know, isn't even something that's really measured in terms of, you know, what the taxpayers put into these projects, but what affects all of us and our commutes and our time getting various places and taking kids to games, not to mention commercial carriers and just-in-time delivery and how it affects those schedules.
Wieferich: Yeah, you're exactly right. Like I mentioned before, over the past 10 years we'll say, we're doing everything we can to stretch a dollar and to keep the surface conditions safe and passable for the motorists. But a program like this does allow us to do those long-term fixes and not only address the pavement for a long term, but also get to some of the infrastructure that's underneath the pavement. Typically, when we do these short-term fixes, when I say short-term, you know, 10, 12 years type of thing, we're not looking to go too deep. We're trying to get the surface in good shape. We're trying to get the water to drain where it needs to go to. We'll certainly address any safety issues that we can within the scope of work, but that long-term fix does allow us to really put that funding out even further into the future when we'll need it, on top of the impacts to motorists that you mentioned.
Cranson: Beyond that and what you're seeing, I think you hit on something else and that's about fixing them right. Governor Whitmer, when she ran in 2018, talked about fixing them right the first time, and I think there were people that reacted defensively to that, just as you mentioned, because it sounded like somebody wasn't fixing them right in the first place. But what that really means is if we have the resources, then we'll rebuild them instead of resurfacing them. That's what Rebuilding Michigan is allowing us to do. It's heading off the ultimate deterioration of the overall system. It's really just a dent. In the end, we're still going to need a long-term, sustainable funding solution, and we're going to need, you know, a lot more money than what was put in here. But in terms of shoring up probably our most vital freeways, the most important to commuting and commercial corridors, it's going to make a big difference. I think it's a good thing that you're seeing good numbers so far.
Wieferich: Yeah, you know, when I’m trying to explain some of the things that we do from an asset approach, I think about a roof, you know, the roof on my house. I can, you know, put a layer of shingles over the shingles once. I can tar it many times, but if I keep tarring it and I keep fixing it that's all I’m going to be doing. I’m going to continue to tar it and patch it and fix it. This is allowing us, in many cases, to get the new roof that's going to provide that longevity that we need.
Cranson: Well, thanks, Brad. I look forward to talking to you again over the next several months to see how we do when another $800 million dollars in bonds go out there on the market, and we've still got quite a ways to go with Rebuilding Michigan. So, thanks for taking time to explain this.
Wieferich: Anytime, Jeff. Appreciate it.
Cranson: Thank you again for listening to this week's edition of the Talking Michigan Transportation podcast. I would like to thank Randy Debler and Corey Petee for engineering this week's podcast. To subscribe to show notes and more, go to Apple podcasts and search for Talking Michigan Transportation.