Time for a state-level century bond to protect American research capacity

As has now been extensively reported (see also here and here), the Trump administration has taken to cutting support for core research. This is not the place to dwell on the magnitude of the shortsightedness, only to note that this is spectacularly foolish, and in a simple way, because much of this research tends to pay for itself. Note that a future federal government cannot easily fix this problem, because half-completed projects need to be completed and our research capacity needs to be maintained. For instance, new cohorts of researchers must be trained.

The very limited bright side of this folly is that it clearly makes sense to keep these research facilities functioning and right now, for us, including as citizens of states. Indeed, future generations would gladly pay us to do the right thing today because they would also benefit – if only they could.

In fact they can. One structural reason for using debt financing is that it allows future cohorts to pay for long-lived assets that they will benefit from. For example, borrowing to build a bridge to be paid back with tolls means that we can share the cost of the bridge with the future generations who will enjoy it.

A similar logic applies to the American research enterprise. Future generations will be delighted that we did not give up on making breakthroughs in medicine or energy. Because it is unknown how long the emergency will last and benefits will extend far into the future, I propose that a state or states and/or university systems issue taxable 100-year century bonds. That is, these institutions should issue bonds with a very long maturity, along with low initial payments.

These bonds could then capitalize a special research institute with a mandate to provide bridge funding for research. These funds can be disbursed in return for a small portion of future funds from the research centers once sanity is restored.

There could be other revenue sources, depending on the institution, state law and perhaps the demands of the marketplace. These might include some share of value from any patents or a dedicated source of tax revenue. An additional surcharge on highly profitable businesses that have benefited from previous investments in our research infrastructure would be appropriate; this could be done, for example, by slightly reducing research and development credits as a backup if the main source of repayment does not materialize.

With luck, if the world returns back to normal relatively quickly, then perhaps the bonds can be paid back early, with little to no prepayment penalty. Another option is that the bonds could possibly be refinanced if we enter another period of very low interest rates.

Issuing century bonds is not novel, though state law issues would need to be negotiated. To be clear, I am using a hundred-year term because future cohorts will still benefit from this spending in a hundred years and so spreading the costs that far is appropriate. That said, if, under current conditions, the market would only accept a shorter, but still long, term like 40 years then that is fine with me. Further, having states pick up research that the federal government has failed to pursue has precedent; California established a bond-financed institute to study stem cells in 2005 that has disbursed billions.

Note that if interest on the bonds is taxable under the federal income tax (as makes most sense here for other reasons), then this will avoid entanglement with complicated federal tax law and the IRS. One specific consequence of this is that issuers need not worry about earning arbitrage on their funds as they are waiting to be invested. Note that the interest on the bonds could still be deductible from state taxes.

If we sell it, will they come? The University of California sold $500 million of century bonds in 2015 to take advantage of low interest rates and there seemed to be a market. And a bond of that size would apparently go a long way. To be sure, times have changed but one would think that there are a fair number of investors looking to express their values, advance their enlightened self-interest and make a reasonable return. If not, then something else should be tried because there is a clear (and popular!) value proposition here. Petitioning the federal government to do the right thing is appropriate – and it would be wise for it to change course – but the danger is strong that any concessions for some research will come at the unjustified expense of others.