Proposed Tennessee budget has $930 million in bonds

Bloomberg News

Tennessee Gov. Bill Lee's proposed fiscal 2026 budget includes $930 million in bonds in what may be the first of several years of increased state bonding.

The bonds would be general obligation bonds to finance capital projects, said John Dunn, director of communications for the Tennessee comptroller of the Treasury.

"It is the state's practice to finance its projects with short-term financing until projects are near completion or are complete, so long-term debt would be issued in stages as projects reach completion, which means there could be multiple GO bond transactions issued over a period of time," Dunn told The Bond Buyer.

Tennessee has sold little state government debt in the last 10 years.

The governor's staff "testified that the benefits of beginning needed capital projects now outweighed the costs of taking on new debt," according to The Sycamore Institute's "Budget in Brief" study released this week. "The interest costs of borrowing would be a better deal for the state than the effects of rapidly rising construction costs — particularly considering the state's triple-A credit rating, which typically gives access to the best interest rates."

Sycamore Institute Deputy Director Mandy Spears said she expected the state's turn to bonding in the coming fiscal year would likely continue in following years. The state had substantial federal-aid-related reserves in the last few years. With less federal aid expected, the state is likely to turn to bonding to fund capital expenditures, she said.

Dunn said the state expected to issue bonds in the coming years "to meet the timing of the state's ongoing and future capital needs. For the past several years, the state has been prudent to fund its capital needs with its surplus cash without the need to authorize new debt to fund the capital."

Spears said the state must continue to fund its highway construction fund with general fund subsidies. Lee is proposing that the GF provide $1 billion to the HCF this coming fiscal year. He is also proposing diverting proceeds from sales taxes on car tires to the HCF from the GF, expecting this will be $80 million per year.

Cars have become more fuel efficient, leading to less fuel taxes feeding the HCF, and the cost of road construction has gone up faster than the overall rate of inflation, Spears said. Highway fund revenue fell by nearly 33% in fiscal 2024 from fiscal 2021 after adjusting for highway construction costs, she said.

The state continues to face a backlog of road projects.

The new school construction fund may face less than adequate funding in the next few years, Spears said.

Lee's proposed fiscal 2026 all-source budget is 2% lower than fiscal 2025 but his fiscal 2026 general fund budget is 9% higher than fiscal 2025. The state's rainy-day reserve would cover 31 days of general fund spending in fiscal 2026, six days more than what had prevailed before the Great Recession, Spears said.