Michigan panel boosts funding to rebuild major highways

Michigan’s State Transportation Commission (STC) approved a fifth amending bonding resolution under Gov. Gretchen Whitmer’s Rebuilding Michigan Program, focused on rebuilding state highways and bridges that are critical to the state’s economy and carry the most traffic.

On this week’s Talking Michigan Transportation podcast, Patrick McCarthy, director of finance at the Michigan Department of Transportation (MDOT), explains the action.

The resolution, supported by all six members, amended resolution accurately reflects actual total costs of completed and upcoming construction projects from $3.5 billion to $4.3 billion. 

Initially approved by the STC in 2020, up to a maximum of $3.5 billion of bonding principal were authorized. Together with the initial principal, any associated premium received from investors and interest earned may be used to fund the program.  

Transcript

Welcome And Bonding Update

Jeff Cranson 0:06

Hello, welcome to the Talking Michigan Transportation Podcast. I'm Jeff Cranson. Today I'm talking with Patrick McCarthy, the Director of Finance at the Michigan Department of Transportation, about the State Transportation Commission's unanimous approval of the revision and amendment to the resolution that allowed for the rebuilding Michigan program. The resolution was necessary to accurately reflect the total cost of completed and upcoming construction projects from $3.5 billion to $4.3 billion. Initially approved by the commission in 2020, up to a maximum of $3.5 billion of bonding principal was authorized, together with the initial principal and the associated premium received from the investors, interest earned may be used to fund the program. Patrick explains why there's additional revenue and what selling the bonds at a premium means. So I hope you enjoy the conversation. So, Patrick, as I mentioned in the introduction, we're back talking about bonding and rebuilding Michigan. And the State Transportation Commission earlier today unanimously approved another amendment, probably the final for this round of the Rebuilding Michigan program. Could you explain, I guess, high-level what they did and why they had to do it?

Patrick McCarthy 1:39

Sure, Jeff. This resolution amendment that we brought to the commission was so that we could finalize or update the list of the projects and their budgets that were originally authorized with the 2020 resolution for the rebuilding Michigan. We didn't ask for any more authority to bond for anything more than $3.5 billion that was originally requested. We didn't ask for any time extensions. We think that we have adequate time to issue the final round of bonds, which we expect to do this summer. So all we were really doing was trueing up the project list to the amount of proceeds that we had available from the issuance of all the bonds.

Extra Proceeds Add Three Projects

Jeff Cranson 2:25

So the list that was included with the agenda for the State Transportation Commission was all of the bond projects, and they just they have some updated figures. Is that right? That's correct.

Selling Bonds At A Premium

Patrick McCarthy 2:38

And we also ended up having a little bit of additional proceeds available based on market conditions when we issued our bonds and the interest rates from the earnings on the cash that we had. We had the ability to add three more projects to the list so that we could use up um the rest of the funds that we brought in from the financing transaction.

Jeff Cranson 3:00

So you've talked before about the premium that's involved in this and the reason that uh originally $3.5 billion program uh turns into more than $4.3 billion. But can you explain more about that? I mean, uh obviously that's good work uh by your team and the bond council, but what else goes into that? Sure.

Patrick McCarthy 3:23

The reason that we were able to um bring in a larger amount than the $3.5 billion of principal that we issued is that we were able to sell the bonds at a premium. And the reason for that is that our um our bonds are attractive to people that are wanting to invest in the municipal bond market. Um they they view us as a solid credit and a low risk to um to getting their um investment back plus the interest that they were um pledged by the department. So that allows them the comfort to offer more than what um more than the face value of the bonds that we issued. So for example, um the bonds have a $5,000 face value. And in exchange for that $5,000 bond, an investor would be willing to give us uh, say, $5,100 or $5,200 um for the opportunity to hold that bond and earn the interest that we're offering throughout the life of that bond.

Jeff Cranson 4:28

I think when people hear that and they think, well, if you turned 3.5 into 4.3, why don't you just bond all the time?

Patrick McCarthy 4:37

I think it is still debt service that is required to pay those back. So even though um the premiums are strong, um, it's still a financing transaction. So anything that we do issue also requires us to pay that back with interest. So financing is a great tool that allows us to accelerate projects and to get work done now, but it also um has a long-term liability component to the department.

Jeff Cranson 5:06

Yeah, and that as I've said many times, and I know you don't disagree that as much as you'd like to do this with a sustainable funding plan and without debt, I think this debt, if there's a such a good thing as good debt and bad debt, this debt pales in comparison to leaving a crumbling system to our children and grandchildren.

Patrick McCarthy 5:25

I agree. We get the work done, we get people to be able to drive on good, um, safe roadways now. And instead of waiting 20 or 30 years when we could afford it, and then still having to do the work in 20 or 30 years, at least people can drive on nice roads in the meantime.

Ratings And Four Times Coverage

Jeff Cranson 5:43

So when you talk to the bond council, the people in the industry that uh that work in this area, um, on top of just saying, you know, it's a good bet, we know people are going to keep registering their cars and we know they're gonna keep buying fuel for their cars. What else do they say that really explains why these are attractive to investors?

Patrick McCarthy 6:04

I think it I think it goes to the solid rating that we have. Um, when we issue bonds, we get a rating. You've probably heard of Moody's or SP. Um, those agencies provide a rating for our bonds based on our ability to um to pay the debt service and the strength of our revenues, um, our fiscal management, making sure that we're not overextending ourselves. Uh, they're very impressed with the commission's policy that we have to have a four times coverage ratio, which makes sure that we're not bonding for more than we um can manage and still deliver our existing operations and maintenance for the department.

Jeff Cranson 6:46

Can you break that break that down, that that term, the four times coverage ratio?

Patrick McCarthy 6:51

What is it? Sure. Um, so when we do a bonding transaction, we look at the maximum future debt service in any one fiscal year. And then we make sure that the revenue that we're constitutionally um bringing into the department from registration fees and fuel tax uh is is ends up being four times larger than that largest annual debt service that we would have to pay. So only 25% of our annual revenue would be going to debt service. And that gives us the ability to still meet all of our other responsibilities and obligations for making sure the roads are safe and maintained, um, providing our planning services and all of the other um things that the trunk line is responsible for.

Jeff Cranson 7:39

Have you had any inquiries from other states? I mean, since we the commission first approved this at the governor's request in 2020. So this has been going on for six years now with with great success. We've celebrated some major uh reopenings of some of the busiest freeways around the state that were rebuilt. Um, have you had a chance to talk to some others about the successes of this program?

Drive Site Roadwork Reminder

Patrick McCarthy 8:05

We haven't really engaged with any of the other states on this subject, um, but we have we have gone to um several conferences with other issuers, and we just basically talked about general terms and ways that you can make sure that you're marketing yourself effectively to bring in the best deal, um the best pricing on your deals, um, but not anything specifically with any other states um as far as um how successful our transactions have been. No. We'll be right back. Stay tuned.

MDOT Message 8:43

No, before you go, head on over to my drive to check out the latest on road construction and possible delays along your route. For a detailed math, head over to Michigan.gov slash drive.

Refunding Bonds Like A Refinance

Jeff Cranson 8:58

Well, long before you were finance director and you were uh in other roles within the Bureau of Finance at the department, you had some involvement in in some of these, you call them refundings, which was basically going back just like we might uh, you know, remortgage our homes, right? Uh get a lower interest rate. And uh the department's been pretty aggressive about that. Can you talk about that a little bit?

Patrick McCarthy 9:23

Sure. We're very um aware of the conditions in the market and looking for all of the opportunities that would allow us to save money with uh right or refinancing of a of an existing outstanding debt. Uh, we have a commission policy that we pursue any um refundings when we can have a or recognize uh greater than 3% net present value savings on the bonds. Um so there's a lot of math that goes into that, but basically we're looking for the opportunity um to replace our existing debt with newer debt, but at much lower interest rates that allows us to reduce that um overall um total debt service that we would have to pay on those bonds. And typically, anytime that we issue a bond, we typically put a 10-year call on the project, which basically means that we we have to keep the bonds out there in the market for 10 years before we could try to call it back. And that's also a strong feature for the people that invest in our bonds, knowing that they'd be able to hold it for that long and collect interest from us for 10 years before we could um go back out and try to lower the interest rate that we're paying the holders of those bonds.

Jeff Cranson 10:40

We saw a bit of a a spike or an uptick in these kinds of interest rates um during the pandemic, but have things kind of leveled off now? They have.

Patrick McCarthy 10:49

They did level off. Um, unfortunately, these last couple of weeks have um have caused the market to go into a little bit of uh um uncertain time frame. So the rates are kind of moving around quite a bit right now. Oh, has there been volatility in the market the last couple of weeks? I never noticed. You might not have been paying attention to the news, but yes, that's been happening with a lot of um, you know, it's our municipal bond rates are tied um not directly, but kind of indirectly to the federal treasury rates. And um, you know, we haven't seen any anything changing, and there were talks of some reductions or some rate cuts, but I think that those are going to be delayed now with the you know what's happening with the oil prices and what's going on in the Middle East. Um so we'll keep an eye on those as we as we go out to issue our final round of bonds. Um, but traditionally, the rates that we um that we would receive right now for um for the interest cost on our bonds is still very historically low. Um they were near record lows back um back in the early 2020s. So we had great rates our first couple of tranches on these bonds, but our third tranche and probably this fourth one are still at uh at very low rates um compared to the last 30 years of of what interest rates have been charging.

Jeff Cranson 12:16

So some of these that were sold later in the Rebuilding Michigan program lifespan um could possibly be candidates for refinancing at some point.

Patrick McCarthy 12:27

Yes, yep, absolutely. Um again, we have to wait that 10-year timeframe, but the first round of bonds that we issued are now almost six years old. So it won't be too long um before we start to look at the e value of refinancing those. Well, it's hard to believe, isn't it?

FY27 Budget And New Revenues

Jeff Cranson 12:44

Yes, it is more than six years ago that the commission first voted on this. The only other thing I think I wanted to talk to you a little bit about is uh we we mentioned this briefly before, but uh the governor's budget proposal didn't have a lot of changes or new things for fiscal year 27 in terms of transportation in the department. I guess maybe I just set it for you, but what's your overall take on the on the uh executive recommendation for the FY27 transportation budget provider?

Patrick McCarthy 13:16

It's uh it's a pretty good um proposal by the governor. It's really just kind of a continuation budget. Um, there's not a lot of surprises in what was announced. Um, it does fully implement the 2025 revenue package. Um, so there are increases in our budget from 26 to 27, uh, but that's really reflecting those um additional full year revenues that we should expect to see from fuel taxes and um in the vehicle, um, I'm sorry, and the corporate income tax and marijuana money, because most of those didn't take effect until January 1st of 2026. So we only had three quarters of a year of revenue from that.

Jeff Cranson 14:01

Explain that a little more, that uh if those didn't take effect until then, then when do you actually start to see that that when does that revenue show up?

When Fuel Tax Cash Arrives

Patrick McCarthy 14:10

Sure. So the first year the revenue is starting to show up. Those um fuel tax rates didn't take effect until January 1st. So that means that that the fuel wholesalers start to um charge that new tax in January. They turn in their tax returns and their and their payments for the tax they've collected in February to Treasury. Treasury does their analysis and validates those figures, provides the funds to transportation, to our Michigan Transportation Fund, um, and the reports of the dollars they've collected in March. And so it's actually that first week of April where um where the trunk line and our um local partners at the counties and cities and villages will start to see those MTF distributions hitting their bank accounts.

Jeff Cranson 15:02

Um and explaining that a lot of people probably didn't understand that back when this was uh adopted in the fall. Um, do you still feel like this is shrouded in a little bit of murkiness or is it starting to become clear?

Patrick McCarthy 15:16

Uh it's starting to become clearer. Uh um, unfortunately, it's taken this long to develop that clarity. And I know that um, you know, there's a lot of um, you know, I guess people that were expecting to see this money starting to flow faster than it is, which is, you know, unfortunate. But there's kind of a difference between the accounting rules for the cash recognition of what they're going to see and um and an accrual basis of accounting, which basically will say, you know, you're going to show the money in your financial statements. It's just that the cash isn't going to going to be there to um right away. You're going to have accounts receivable at the end of the year. You can't spend accounts receivable. You can spend your cash when it shows up.

Jeff Cranson 16:03

Yeah, explain that a little bit more because uh I'm not sure that the layman would get that.

Federal Shutdowns And Reimbursements

Patrick McCarthy 16:08

Yeah, we um in the department with the trunk line fund, we we've been very um cautious or careful not to get too far ahead of ourselves in putting out new work that would be funded with the neighborhood roads fund um and the revenue package that's coming out because we want to make sure that that that cash actually shows up in the bank account before we start having to um write checks to our contractors and our consultants. So um we didn't want to we didn't want to overextend ourselves. Um eventually that revenue based on you know the timing of when it comes in, that money will get here. Um, but we needed to be cautious that we weren't, you know, starting to incur these costs and end up with any sort of cash flow issues for the department.

Jeff Cranson 16:57

Yeah, that makes sense. And that reminds me when you talk about cash flow of another uh issue, one more thing to talk about just a little bit, because we know that um the federal budget is gonna be uh a fight again uh before the end of this year. And we inevitably get questions about what happens if the federal government shuts down and what does that mean to the federal funds. Um and you've always been pretty clear that MDOT manages its cash flow in a in a way that um we can withstand a bit of a delay with those federal reimbursements. So talk about how you do that.

Patrick McCarthy 17:35

We do manage our cash flow. Um, we have a requirement or responsibility that when we enter into our contracts that um that we have the resources available to pay for that contract. So we do have a um a reasonable cash balance on hand that would allow us to um to make payments for our obligations while we would wait for um any sort of a federal reimbursement. The the fortunate part, I know we talk about shutdowns and things like that at the federal level, but the way that the highway trust fund um works is that we can continue to incur costs and get reimbursement from the feds for any of our existing active projects. We just can't start any new next year projects with federal funds. So, you know, our our most of our construction projects are multi-year projects. And so those are continuation and we've got funds, and the funds will continue to flow from the from the federal highway trust fund. We it just could, if it lasts long enough, delay our ability to start working on projects that are funded with next year's money.

Jeff Cranson 18:46

That's interesting. Um, it always is helpful to reassure people when we get those questions. So I appreciate you explaining that. Well, thanks, Patrick, uh, as always, for talking first about the reauthorization of the bonding resolution and then touching on some of those other budget-related things. Uh, I always appreciate it.

Closing Thanks And Credits

Patrick McCarthy 19:07

No problem, Jeff. Thanks for having me on the show.

Jeff Cranson 19:09

I'd like to thank you once more for tuning in to Talking Machine Transportation. You can find show notes and more on Apple Podcasts or Buzzsprout. I also want to acknowledge the talented people who help make this a reality each week, starting with Randy Debler, who skillfully edits the audio, Jesse Ball, who proofs the content, Courtney Bates, who posts the podcast to various platforms, and Jacke Salinas, who transcribes the audio to make it accessible to all.