Political Horizons: Capital outlay gets tighter

by mark ballard

Capitol news bureau

Under the “boring but important” heading for Louisiana’s taxpayers is news that interest rates began rising, meaning an end to the cheap money state government borrows to expand highways, repair buildings and make improvements.

“We have to pay a higher interest rate, which means we have to pay more to borrow the money, which means we can build fewer projects,” State Treasurer John N. Kennedy said.

To finance these projects, called “capital outlay,” state government sells bonds on the open market that it guarantees investors to repay from the tax dollars collected. As treasurer, Kennedy chairs the state Bond Commission.

Basically, the annual payments on a bond seeking $250 million in proceeds would cost state government about $805,500 more each year than the same bond last year — $16.9 million annually on June 27, 2012, versus $17.7 million if the same bond was written Thursday, according to the Bond Commission. And the rates are going up, any one of a dozen underwriters and analysts of the government bond market have been quoted in the financial trade publications.

“In the next 10 to 12 months, I’m going to have to borrow more money. I’m going to have to borrow at higher interest rates, which means you get less money, so you can build fewer projects,” Kennedy said. “You’re going to have to choose.”

While problematic in the short term, rising interest rates really aren’t bad news in the long term, Kennedy said. It means the recession is over and, at least for the rest of the country, the economic prospects look good enough for the Federal Reserve to back off its programs that artificially kept low the interest rates offered on long-term borrowing; programs for home mortgages, as well as bonds sold by state and local governments to pay for infrastructure improvements and repairs.

Kennedy said that while the pay for Louisiana workers has lagged behind the national average and tax collections in this state are relatively flat, massive investment from the petro-chemical industries is on the horizon.

Unions representing the building trades are reporting that companies have been approaching them with plans to invest $60 billion to $80 billion for plants in Louisiana. “Everyone is going to want to take credit, but it is driven by one thing only: Cheap natural gas,” Kennedy said.

But that’s in the future.

By fall, Gov. Bobby Jindal is going to be asking the Bond Commission to borrow money for the projects he has chosen. The capital outlay bill he signed into law last week provides $350 million to fund lines of credit for repairs, construction and planning.

Legislators submitted $677 million in projects, meaning Jindal gets to pick which ones go forward. And higher interest rates mean even fewer legislators’ projects will get Jindal’s blessing.

“Every governor uses capital outlay to advance their agenda. If a legislator wants a particular project, they got to vote the right way. What that means is you have political priorities, but you don’t have real building priorities in the capital outlay budget,” Kennedy said.

The power to choose which projects to fund has been a cornerstone of this state’s unique gubernatorial power for centuries. The power also gives governors leverage to choose architects, contractors, lawyers and underwriters for a particular project. It’s a power that all Louisiana’s governors, not just this current one, protect.

Jindal, for instance, vetoed an effort by the city of New Orleans to help finance more private development around the Ernest N. Morial-New Orleans Exhibition Hall. HB516 would have expanded the ability of the entity that runs the convention center to issue tax-free bonds on its own. The loans “shall not” be backed by “the full faith and credit” of the state, meaning the entity, on its own, would have to find a way to repay the loans without the state.

Jindal wrote in his veto message that, nevertheless, the bonds issued by the New Orleans entity could, somehow, count against the state’s debt limit. Instead, Jindal wrote the project should be handled through capital outlay.

“The veto bothers me because it (HB516) was empowering this authority to finance their own capital improvements, rather than go through the state,” said state Rep. Walt Leger III, the New Orleans Democrat who sponsored the measure. The veto undoes that effort and gives the power back to the governor.

Mark Ballard is editor of The Advocate’s Capitol news bureau. His email address is mballard@theadvocate.com