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KDOT bonding authority is bad public policy

From Kansas Policy Institute.

KDOT Bonding Authority is Bad Public Policy

By Steve Anderson

This is the first in a series of posts about the Kansas Department of Transportation.

Most people would probably be surprised to find that the Kansas Department of Transportation (KDOT) has its own bonding authority. This authority is separate and independent from the Kansas Development Finance Authority (KDFA) which does the bonding for all other state entities.

The KDFA was created after a legislative study revealed the need for a more comprehensive approach that was to be housed under one agency.1 KDOT was excluded from this consolidation of issuers of bonds for reasons that were not fully delineated by the study. However, when one looks at the past behavior of administrations, legislatures and KDOT, a pattern starts to emerge that may explain that exclusion.

My interest in KDOT’s bonding began during my service as Budget Director when I discovered that KDOT, under Secretary Deb Miller, issued bonds in fiscal year 20112 for highway projects that only required interest payment until 2032, at which point principal payments would begin. I contacted friends in the contracting industry who informed me that concrete highways would have a life span of approximately 15 years and asphalt would be 7 to 8 years. The useful life of those highways built with borrowed money would be over before the first penny of principal was paid!

These bonds were issued without my knowledge despite the fact I served the same Governor as did Ms. Miller. Ms. Miller was unresponsive to the Division of Budget for requests to explain the rationale for issuing interest-only bonds but KDOT did inform me that these bonds were authorized under the prior administration and KDOT could issue bonds as they saw fit within that authorization.

The process of allowing KDOT to issue their own bonds at their discretion within a “transportation plan” authorized by the Legislature and Governor has a long and interesting history.

In fiscal year 1989 KDOT was authorized to issue bonds to begin a ten year transportation plan financed by an increase in motor fuel taxes, sales tax and registration fees. This was repeated in fiscal year 1999 with another ten year transportation plan which did not remove the prior tax increases from KDOT’s budget but instead merely added an increase in fuel taxes and sales tax on top of those already existing increases. Next up was the T-Works project authorized in fiscal year 2010 which included another tax increase dedicated to KDOT of .4 percent of the sales tax that was scheduled to go into effect July 1, 2013. And once again, this new tax increase comes in addition to the other tax increases over the prior decades which remained in place.

There is another issue with KDOT bonding authority that is troubling. Since KDOT is permitted to bond without having the full taxing power of the state behind those bond issues, they must hold a significant amount of funds as “honest” money for bond holders.  This requirement would not exist if those bonds had been issued through KDFA. KDOT often brags about their bond rating being slightly superior to the state’s but when you look at the hidden cost to the taxpayer that brag is not only false bravado but this behavior actually puts the state at risk in bad economic times. The following chart shows the KDOT ending balance and the minimum required ending balance that KDOT’s self-bonding creates.

$ in Thousands

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
 Ending Balance

 $599,584 $596,943 $363,889 $723,677 $400,313 $564,212 $452,199 $356,615
 Minimum Ending Balance Requirement

 $158,837 $222,031 $214,837 $509,746 $350,270 $352,270 $182,459 $266,346

Now compare the KDOT ending balances with the Kansas State General Fund balances, which represent the state funding source for almost every other program the state operates from schools to social programs to public safety?4

$ in Thousands

 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
 SGF Ending Balance

 $526,600 $49,700,000 $(27,100) $188,300 $502,900 $709,300 $530,500 $247,600

When the state was in a negative ending balance situation in fiscal year 2010 and Governor Sam Brownback was struggling to restore fiscal stability to the state upon taking office in fiscal year 2011, KDOT had over $363 million and $723 million respectively that was flying under the radar. It is time to remove this self-bonding authority and move all bonding to the KDFA. That simple move alone will help the state of Kansas weather economic downturns to the economy and provide a more complete picture of the state’s finances to citizens and legislators.
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1  http://www.kdfa.org/History
 http://budget.ks.gov/publications/FY2015/FY2015_GBR_Vol1–UPDATED–01-28-2014.pdf page 151
3 http://budget.ks.gov/publications/FY2015/FY2015_GBR_Vol1–UPDATED–01-28-2014.pdf
http://budget.ks.gov/publications/FY2015/FY2015_GBR_Vol1–UPDATED–01-28-2014.pdf page 22