Gov. John Kasich’s proposal to “leverage” the value of the 241-mile Ohio Turnpike to jump-start highway and bridge construction spending across the state boils down to a massive borrowing plan.
By having the bonds issued by what is essentially an independent entity, the state is able to borrow about $1.5 billion it otherwise could not.
The move allows the state to sidestep its own constitutional debt cap as well as a narrower limit on separate highway borrowing backed exclusively by gas tax revenue.
“There is an appropriate amount of debt that can be added to an asset to unlock its value,” Kasich said recently. “That’s something people that don’t know anything about economics, finance, or jobs have a hard time understanding. Have them come see me.
“The fact of the matter is we are going to have an ability to unleash value,” he said. “If we weren’t doing this, then these projects would occur in 20 or 25 years. But by bringing them forward you’re actually saving money because they cost less. It’s no different than if I say to you, ‘I’m going to give you $10. Would you like it today or would you like it in 10 years?’ ”
“The debt is easily retired through the revenue stream that is provided by the tolls on the turnpike, which by the way, are coming down under our plan,” Kasich said. “Are you kidding me? Why didn’t somebody not do this about 25 years ago? You lower the tolls. You fix the turnpike. You bring projects forward, and you create jobs.”
With a few exceptions, the Ohio Constitution generally forbids taking on debt that results in more than 5 percent of general revenues, including lottery profits, being obligated to debt payments.
Transportation projects, separately guaranteed by motor fuel taxes, are not subject to the broad constitutional limit, but that borrowing is still restricted by the amount the fuel taxes generate. Kasich has made it clear the state will not increase the gas tax, which has been at 28 cents a gallon since 2005.
Despite refinancing maneuvers that temporarily lowered the state’s debt payments, neither method has enough room right now to borrow the kind of money the state is seeking. After reaching a high of about 4.5 percent in 2008, the state expects its debt service to be about 4 percent of general revenues this year.
But that does not include an additional roughly $1.4 billion in capital budget borrowing already approved for brick-and-mortar projects for which bonds have yet to be issued.
Although the state technically could borrow against future general revenues to pay for highway projects, it does not do that. Instead it borrows strictly against gas tax revenues for that purpose. The constitutional limit on highway debt is guaranteed by the gas tax or other revenue sources, and there’s just $400 million of wiggle room there.
“The constitutional provision applicable to state highway debt limits annual debt issuance to $220 million, and the total outstanding debt to $1.2 billion, of which there is currently more than $800 million outstanding,” said Dave Pagnard, spokesman for the Office of Budget and Management.
“Thus, the state has neither the debt authority nor the excess gas tax revenues that would be needed to fund the $1.5 billion in highway projects,” he said.
The turnpike plan is likely to be introduced within weeks as part of a new two-year transportation budget that lawmakers must get to the governor’s desk by the start of April.
The governor settled on the borrowing option after a $3.4 million study was conducted by KPMG Corporate Finance LLC. That study also indicated that $3.3 billion in investments in the turnpike itself would be expected over the next half century.
Rep. Ron Gerberry of Austintown, D-59th, a critic of the plan, accused the Kasich administration of essentially taxing northern Ohioans while not being willing to raise the state gas tax that would be paid by all Ohioans as some prior governors, Republicans and Democrats, have done.
The last increase, which had broad bipartisan support in the General Assembly, occurred under Republican Gov. Bob Taft in 2005.
“It is in my opinion [that] the state is finding a way to sidestep the 5 percent constitutional requirement of the state by throwing the debt on the turnpike and using it for projects off the turnpike,” Gerberry said. “But is it legal? It probably is.”
He questioned whether essentially quadrupling existing turnpike debt without significantly increasing its revenues could adversely affect the toll road’s long-term credit rating.
As of October, the turnpike had outstanding debt of about $566 million.
By borrowing an additional $1.5 billion in two phases over five years, the state would draw down matching federal highway funds for a total construction budget of $3 billion, some of which would be reinvested in the turnpike itself.
“We feel, where the turnpike is now and with its financial performance for calendar year 2012, that we are in a good position to realize the dollars put forth in the plan,” said Kurt Kauffman, Office of Budget Management debt manager.
“If there is an economic decline in which traffic volume would take a sharp drop, there can be external risks. But they haven’t issued a lot of debt. A lot of the new issuance was a decade ago.”
The plan calls for commuters using EZ Pass electronic tolling and traveling fewer than 30 miles on the turnpike to avoid toll increases for the next 10 years, and it would limit future toll increases for trucks and other users to the rate of inflation.
This isn’t the first time that using turnpike funds for nonturnpike purposes has been proposed.
In 2008, Democratic Gov. Ted Strickland and Republican legislative leaders put together a $1.57 billion economic stimulus package that also included highway construction.
That plan proposed borrowing $200 million, to be repaid at the rate of $20 million a year out of turnpike profits, as one way to help pay for the broader plan. But lawmakers stripped the turnpike’s role from the final package.
“We discussed a lot of things in regard to the turnpike,” Strickland said recently. “My bottom line for the turnpike is it should remain a state asset, and we should not privatize it.”
Strickland, whom Mr. Kasich narrowly defeated in 2010 and who is expected to decide this month whether to run again in 2014, said he found irony in such a borrowing proposal now coming from the Kasich administration.
“It’s one-time monies, and I remember a governor who used to be severely criticized for one-time monies,” Strickland said, referring to himself.
He said Kasich would have faced an outcry from northern Ohio if he had pursued a long-term lease of the turnpike to a private entity for an upfront lump sum to fuel construction spending.
The Kasich plan does not propose such a lease, and it would largely keep the current turnpike commission management mechanism.