How will bonds help fix the roads?

Michigan

GRAND RAPIDS, Mich. (WOOD) — One day after Gov. Gretchen Whitmer announced her Plan B for fixing Michigan roads during her State of the State Address, a state transportation panel OK’d the borrowing of $3.5 Billion.

The governor says the bond sale was necessary after her 45 cent a gallon gas tax hike was turned down by the Republican-led Legislature last year.

The State Transportation Commission issued $3.5 billion Thursday morning.

The proceeds will roughly double spending on state road and bridge construction over five years.

Spending will rise from nearly $3.9 billion to $7.3 billion over the five-year period.

Whitmer says the plan will allow for 73 new projects in high-traffic areas and enable the state to covert other planned projects to reconstruction, rather than resurfacing.

“I’m really appreciative of that the transportation commission took action this morning, 6 to 0. Just to point out that give five of those members were appointed by the last administration,” Whitmer said Thursday Morning. “And so, I think that shows that this really is a thoughtful way to go about managing this critical asset on which we all rely.”

But Thursday morning, Republic leadership from both the House and Senate said borrowing money is not the answer.

“The very fact that our governor has represented this short-term solution of bonding as a long term solution … one of the unintended results is it’s taken some of the air out of the balloon. And I think people now are probably thinking OK, we’ve got this solved and the fact of the matter is, we don’t,” Senate Majority Leader Mike Shirkey said. “But let’s call it for what it is. A lot of political theater.” Added Speaker of the House Lee Chatfield.

Bonds are a common method of borrowing for government — but what are bonds?

Think of a bond like the mortgage on your home, but without a down payment. When a city like Grand Rapids wants to invest in new roads and other infrastructure improvement, they issue bonds. Taxpayers still have to foot the bill for the bonds with interest, but the projects get done more sooner than later and the payments are strung out over years.

“You issue bonds to pay for an asset over time, rather than having to upfront cash all at once,” said Molly Clarin, the city of Grand Rapids’ acting CFO.

Right now, the City of Grand Rapids has about $538 million in outstanding debt from bonds for various long-term projects around the city, such as the water main work being done along Fourth Street on the west side.

Like most stocks, bonds are generally sold on the secondary market through a broker.

Wall Street likes bonds because unlike stocks, which are backed by the corporations that borrows the money, bonds are backed by the governmental unit that sold them.

“When you have a lot of uncertainty, we’ll typically see the bond market do better,” Clarin said. “If it’s a corporate bond, is a business as stable as a government? Probably not. Because business get bought out, other things happen.”

But bonds are not without risk, especially when times are tough and revenues from things like property taxes and other fees collected by cites and other governmental units are down.

“That’s a very important part of my job — ensuring that as a municipality, we don’t get too leveraged,” Clarin said.

Problems with payback could also limit a governmental unit’s bond rating, which determines the cost of borrowing for that entity.

“Your bond rating goes down, you go into default. Yeah, you definitely don’t want to be in that position,” Clarin said.

Right now, the city of Grand Rapid has a bond rating of AA. The state has a rating of Aa1 from Moody’s. Both are one step below the highest rating of AAA. An AAA rating means a bond has virtually no chance of a default.

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