Michigan hits the market Wednesday with an $800 million trunk line revenue-backed issue that marks the first borrowing under a $3.5 billion authorization Gov. Gretchen Whitmer spearheaded after her gas tax hike proposal fell victim to a political stalemate.
While the COVID-19 pandemic has hurt recent collections of pledged revenues, sturdy coverage ratios provide a cushion that the state is banking on to see the credit through the current fiscal storm. The ratings are holding steady at Aa2 by Moody’s Investors Service and AA-plus by S&P Global Ratings.
Michigan's State Trunk Line 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; the longer-term impact will depend on both the severity and duration of the crisis.
The State Transportation Commission early this year signed off on the borrowing plan dubbed Rebuilding Michigan by the first-term Democratic governor, who billed it as a means to give a jolt to critical highway and bridge projects.
It came after the Republican-controlled legislature last year rejected Whitmer’s proposed 45 cent per gallon gas tax hike that would have provided an infusion of cash for projects.
“Since it doesn’t require the legislature to act, we can get started right away. We can get to work on these state trunk line roads and freeways and take advantage of today’s low interest rates,” Whitmer said at the time.
The bonds are slated for a Wednesday sale with JPMorgan running the books and Loop Capital Markets and RBC Capital Markets rounding out the lead managers’ team.
The deal comes two days after the state’s consensus revenue estimating conference met to lay out the latest fiscal projections and impact from the COVID-19 pandemic economic shutdown and recession. The numbers will help the state finalize a budget for fiscal 2021 that begins Oct 1.
The state intends to sell $3.5 billion of 25-year bonds by the end of 2023 allowing the Department of Transportation to increase its five-year road and bridge plan to about $7.3 billion. The bonds are expected to take advantage of the declining debt service, but keep annual debt service within the limits of the statewide policy to maintain 4 times debt coverage.
The bonds are secured by a first lien on constitutionally restricted revenues that come from motor fuel taxes, vehicle registration fees, and other transportation-related miscellaneous fees that are deposited into the State Trunk Line Fund. About $862 million of restricted revenues are expected to be generated this year. That’s down by 7.5% due to a 12.5% drop in motor fuel collections and 2% decline in motor vehicle registration fees.
Pledged revenues has shown some volatility over the years with collections declining 14% between fiscal years 2004-2009, but then stabilized and have shown steady growth averaging 3.8% over the last decade — until the pandemic struck.
The COVID-19 economic standstill stung March, April, and May revenues. Motor fuel taxes took their steepest hit in May with a 43% decline. Registration fees also took the biggest hit in May with a 42% decline. Registration fees returned to positive territory in June while motor fuel fell by 39%.
“Revenue trends for subsequent months continue to improve as the state reopens,” the state reports in an investor presentation. Motor fuel collection reporting lag by two months and registration fees by one month.
S&P affirmed the AA-plus rating and negative outlook that is tied to the rating agency’s negative outlook on the state’s AA rating due to “the close linkage of the rating on the State Trunk Line Fund's obligation to the state's general creditworthiness."
S&P said its rating reflects very strong coverage that comes from stable revenue streams with a very strong underlying economic base. But it’s capped at no higher than one notch above Michigan’s general obligation revenue “based on our view that the pledged revenues are exposed to the state's operating risk, as evidenced by a history of the state making minor adjustments to statutory distribution of MTF revenue.”
No change can be made in the allocation, however, that causes funds deposited in any future year to be insufficient to pay debt service.
State legislation provides for motor fuel tax rates which make up a little more than half the transportation fund’s dedicated revenue to increase automatically with inflation capped at 5% without additional legislation, offsetting some volatility.
Fiscal 2019 revenues provided for 6.58 times coverage of maximum annual debt service of $161.8 million. Pledged revenues have improved significantly since 2017, because of a legislative package introduced in November 2015 which increased gas taxes to 26.3 cents per gallon and redirected some income tax revenue from the general fund for transportation uses.
GOP critics attacked the new borrowing when it was approved warning of the long-term impact on taxpayers and they were critical of Whitmer’s veto of a one-time measure in the budget to fund $375 million in transportation projects. They also say more funding would be available if all revenue generated at the pump went solely to fund road and bridge projects.
State officials including Whitmer have warned that bonding represents just a short-term fix for the state’s road needs. Other options under discussion to raise revenue for roads include tolls on roads or bridges while the GOP continues to press for an overhaul in the gas tax that would end any diversions.
