Do the bond proposals add up?

The law and arithmetic raise questions about election issues.


By Ernest Dumas

Bond financing and the arcane law that governs it are beyond the ken of ordinary people. Utter the word “bonds” and the eyes cloud and suspicions race.


Arkansas has had a tortured history with them, its officials having once skipped out on repaying a batch of bonds and for half a century stained the state’s reputation in the financial world. The onerous debts and mismanagement of road- and levee-building bonds so irked the state’s Depression governor that he had the state Constitution changed with the notion that he was finally putting a stop to them. Voters statewide, not just the legislature and the governor, would always have to approve them.

Gov. Orval E. Faubus, by then on the leeward slope of his popularity crest, was hammered by those voters twice when he wanted to issue bonds for college and hospital construction and then for highways. Foes said the bonds would enrich Faubus’ financial angels, mainly the Stephens investment house run by brothers Witt and Jack.


Only six times in the 70 years since the amendment was ratified have voters authorized state debt and pledged their taxes to pay it off.

Now, on Dec. 13, they are asked to approve two sizable bond programs at once, both novel twists on traditional general-obligation bonds. One would let the state Highway Commission perpetually raise money to repair interstate highways and the other, which actually would authorize two separate bond issues, would pay off the holders of 15-year-old college bonds and rev up construction on college campuses for a few more years.

Gov. Huckabee, who called the special election and who like Faubus puts his considerable political clout and ambitions behind the bonds, had expected no opposition to either plan, but at least in the case of the highway bonds he was thwarted.

The powerful Arkansas Trucking Association, which had supported the highway bonds, discovered late that the wording of the proposition would allow the Highway Commission to perpetually issue bonds without a further statewide vote as long as the cumulative debt at one time never exceeded $575 million. The truckers distrust the Highway Commission owing to its unparalleled power, a distrust once shared vocally by Gov. Huckabee. Since appointing all five commissioners, he has become philosophical about the commission’s dominion. Barring deaths or resignations, Huckabee’s people will conduct Arkansas highway affairs until 2011, four years after he leaves office.


Lane Kidd, president of the Trucking Association, said the industry was not against highway bonds but against the Highway Commission having the power to issue them without public approval each time.

“The people weighing in on a bond issue is the last vestige of control that we have over the Highway Commission in this state,” he said. “They [highway commissioners] are so arrogant that they would slam the steel door shut on any voice from the people. That needs to be addressed.”

The industry was going to support the bond issue until Kidd learned that future bond votes would be waived and that the commission could borrow money whenever it wanted. He was monitoring three pieces of highway legislation closely in the 2005 session and just did not catch that provision, he said. In the closing minutes of a short debate in the House of Representatives, Rep. Sam Ledbetter of Little Rock told the assembly that the way he read the 11-page bill it might remove the right of people to vote on future interstate bonds. Still, Kidd said, no one picked up on it.

But the highway bond issues raise other questions besides the legality and propriety of scaling back popular rule, chiefly whether more highway bonds will mean greater or fewer highway improvements than would be the case without the debt. Old-style arithmetic suggests that a pay-as-you go program might produce at least as much improved highway mileage and almost as fast as the ramped-up program that would be undertaken with 12-year bonds.

There also is a good argument that the massive interstate development needlessly takes money from primary and secondary road improvements across the state although the Highway and Transportation Department is arguing just the reverse. Dan Flowers, the state highway director, told north Pulaski County interests last week that the North Belt Freeway might be delayed if the bond issue is not approved, and other parts of the state far from the interstates are getting the same message about their regional highways.

That need not happen but the Highway Commission, of course, could make it happen. A major peril for the highway bond proposition is that because all the existing and future bond debt will finance repairs to the existing interstates, people who travel on roads and secondary and primary highways and rarely on interstates will see no benefit for them and maybe some harm.

The college savings bonds, which have been couched as a simple renewal of the bond authority approved by voters in 1990, have encountered no opposition — and virtually no questioning. College construction and equipment are considered universally to be good things, although someone might ask whether it is an overriding priority when public school buildings are ancient and crumbling and whether the state-supported colleges and universities are in the desperate straits that the governor and the institutions say they are in.

Huckabee and the head of the Department of Higher Education say facilities and equipment have fallen far short of the pace of enrollment growth.

Actually, the campuses have been riding a crest of construction unmatched in the state’s history. In the 10 years from 1995 through 2004, capital improvements from state funds and private grants have exceeded $1.2 billion, about a fifth of it philanthropy from vast family fortunes, which won naming rights to gleaming new edifices on the campuses for the gifts.

The issue on the ballot will be whether to allow the state to issue new college savings bonds totaling up to about $250 million. Some $100 million would be used to pay off college bonds that were issued between 1991 and 1997. Those bonds were not callable — that is, the state cannot pay the principal to investors before the maturity dates even if it has the money — so the state plans to pay the investors the full interest that they would receive if they held the bonds until the last one matured in 2017. Bond lawyers call it “defeasing,” which means you annul the bonds without the investors sacrificing any of their expected profits.

Once that is done, the state — the Arkansas Development Finance Authority — will issue another $150 million in bonds for construction and facilities on all the university and two-year campuses plus the development of the e-Corridor, a high-speed Internet research network that would connect all the campuses. Some $9.4 million of the proceeds would be used for the e-Corridor.

If voters approve the highway bond issue, a lawsuit alleging that the timeless bonding authority violates the Constitution is certain. But it would not come until the Highway Commission gets around to issuing the bonds, sometime between 2010 and 2012. The money that would retire the new bonds will not be free until at least 2010, which is the earliest that the state can call the existing bonds, pay off the principal and pledge the taxes to retire new bonds.

Which raises the question: Why hold the election now, at a special election, if nothing could be done for five years even if voters approve the bonds?

One of the arguments for letting the Highway Commission issue bonds without voters’ approval from now on is that the state would save the taxpayers the cost of elections, now nearly $1 million for a statewide vote.

But the voting need never cost a dime. The voting could take place at the general election a year from now, or November 2008 or November 2010.

Randy Ort, public affairs officer of the Highway and Transportation Department, offers one argument for voting quickly. Highways take planning and it would be nice if the department knew right away whether or not it would be able issue the bonds in five or six years, he said

Of course, Huckabee or his successor can call special elections again even if voters defeat the two propositions next month. The laws authorizing the bond elections say the governor can have a statewide vote every six months until voters approve them, and they specify that he can put the issues on either the general election ballot or call a special election.

The higher-education bond questions might claim some urgency if the highway question does not. Long-term interest rates, which have been at historical lows, are climbing. If the state is going to borrow money for more college construction, earlier probably is better.

Stanley Williams, finance director for the state Department of Higher Education, said that with interest rates in the 4.5 percent range but rising it makes sense to pay that rate rather than delay and pay compounded annual increases in building costs. Williams said building inflation has been running at 15 percent a year.

But even if the voters approve the college bonds the legislature must appropriate money for each of the projects before any of the bond proceeds could be spent. That would be done at the 2007 General Assembly unless the governor calls a special legislative session during the election year.

The question about why the bond questions are going to the voters at a $1 million special election rather than at the regular general election is an easy one politically. Few voters turn out at special elections and those who do tend to be more politically active and sophisticated and more prone to vote for taxes or debt than more casual and rural voters who go to the polls at a general election. Nevertheless, all three non-highway bond issues that have succeeded since 1934 passed at general elections.

A trucking industry foe of the bonds says the election is being held now to give Huckabee a more robust record of achievement as an activist can-do governor for his expected presidential race in 2008. He will leave office in 13 months.

The highway bonds

Huckabee’s ardent championing of bonds puts him again in the awkward position of arguing against himself, but it has proved no trouble for him. The truckers have tapes of Huckabee commercials from the winter of 1995-96 opposing highway bonds proposed by Gov. Jim Guy Tucker. Huckabee, the lieutenant governor then, said the state would be prudent not to borrow money for highways but to pay as you go.

Huckabee explains that he is older and wiser now and also that Tucker’s program was too big, the payout too long and the road projects political.

Tucker’s grand plan would have financed $3.5 billion of road construction and widening and new bridges with higher motor fuel and sales taxes. Tucker would have implemented the whole priority road-improvement plan of the Highway and Transportation Department, including widening U.S. Highway 71 down the western side of the state, a wide corridor across north Arkansas and extending a divided Highway 65 to the southern border.

With Tucker’s standing impaired by the Whitewater investigation — he was ultimately convicted of Whitewater-related charges and forced to resign — and the Republicans, Huckabee and truckers marshaled against the plan, voters rejected it by a margin of 6 to 1.

The Highway Commission in 1999 came up with the smaller bond plan that earmarked all the money for interstate improvement. Huckabee embraced it and it sailed easily through the legislature. Voters approved the bonds by a wide margin later in the year and the bonds were issued in three stages, $175 million in 2000 and separate issues of $185 million and $215 million in 2001. Each series of bonds has a 12-year maturity and cannot be called for 10 years. At that point, there are few savings to be realized by retiring the remaining debt in a lump sum because nearly all the interest by then will have already been paid.

The bonds are repaid from a four-cent-a-gallon increase in the diesel fuel tax (some $16 million a year) dedicated solely to pay the bonds and about $58 million a year of federal interstate maintenance funds — a total of about $75 million a year that would retire the principal and interest on $575 million of bonds. Along with other federal and state money that was added to the program, the proceeds were to improve 379 of the worst interstate miles in the state.

Nearly all the bond proceeds and the interest from investing them while they were not needed have been spent in the nearly six years since the first bonds were issued. The state has finished or has under construction 356 miles, the last stretch being Interstate 40 through North Little Rock. The work will continue into 2006.

Only $46 million of the $575 million of debt has been repaid. Like your home mortgage, the principal is repaid more rapidly in the latter stages of the debt. But from now until late 2013 little of the taxes pledged to the bonds will be available for highway work, so the interstate improvement program will grind next year to a very slow pace.

If it wins authority next month to issue new bonds, the Highway Commission in 2010 will decide whether to call the first bonds and pay them off or continue with a pay-as-you-go strategy. If interest rates are high then, highway officials say, they would not issue the new bonds regardless of the outcome of next month’s election.

The argument over borrowing and building quickly or paying for construction as tax receipts come is not new. The question always is, is the emergency so great and the benefit so important that you are willing to pay far more than the value of the work through interest to investors and front-end expenses for bond lawyers, advisers and underBut it is a much closer question if the bond issue is relatively small and the maturity of the bonds fairly short, like 12 years.

Huckabee has been fond of comparing repairing interstate highways on a pay-as-you go plan to buying a car. Would you, he asked in an op-ed article in the Arkansas Democrat-Gazette, acquire a car on such a basis — a gas cap one week, a passenger-side door another week, a tire another week until you finally had all the parts and could assemble it?

“Sounds ridiculous, doesn’t it?” he asked. No, you would buy the car all at once so that you could use it. The same for highways, he said.

But it is a ridiculous analogy. You do not get 356 miles of good interstate highways all at once either. It has taken six years. Now you have seven years more to pay for them and little money in the interim to maintain them and to improve another couple hundred miles that will need repairing.

What would have happened if instead of borrowing $575 million in 2000 the state had put all the obligated federal and state tax receipts into a pay-as-you-go program along with the other state and federal money that the state has invested in Interstate improvements in the past six years?

If the $75 million committed to bond payments each year had been spent directly on interstate work, that would be $450 million in six years. In addition to the $575 million from the bonds, the Highway Department added another $375 million from other federal and state tax receipts. Those 356 miles of improvements actually cost $950 million, which is the value of all the contracts.

That $375 million added to the $450 million would be $825 million in pay-as-you-go construction, compared with $950 million that the state actually spent during the period. So the bonds put you a year ahead of the pay-as-you-go game, not 10 years. But if you paid as you went you would have no debt now and you could continue spending at the same pace for the next six years.

That other $375 million, about 80 percent of it federal aid, was vital to the improvements that most people now see on their interstate travels because the federal maintenance money pledged to the bonds can only be spent on existing roadbeds, not on new lanes, new mileage, bridges or other work. The other money paid for those improvements.

How much would the state have saved if it had not issued bonds and financed the work year by year? The Highway Department says that over the life of the bonds the interest will amount to $264 million. The front-end costs for the Friday Law Firm, other counsel and the underwriters totaled another $938,000, a fraction of what the department forecast in 1999. So the state would be saving $265 million to put into more highway improvements under pay-as-you-go, but the highway building to this point would indeed be a trifle slower. 

A few bond lawyers think the policy of parceling bonds out in a series over several years rather than all at once destroys much of the argument for bond financing, which is getting all the work done quickly. But Arkansas contractors like it that way. If all the contracts were let in close succession, big out-of-state highway builders would get much of the work because Arkansas contractors could not handle all of it. Arkansas highway contractors are big supporters of the bond proposition. They were in 1996 and 1999, too.

But the intricacies of bond finances vs. pay-as-you-go may be a small factor in the voting on Dec. 13 because they are unfathomable to most people. The truckers, who began running television ads against the question last week, believe the waiver of future voting rights is the issue that will beat it.

Huckabee and other proponents say that Amendment 20 permits the credit-card approach to highway financing. The amendment requires a vote of the people to authorize borrowing, and that is what is happening. People are deciding that maintaining safe interstate highways is important enough to keep the work going with periodic bond issues.

But the suggestion that the authors and sponsors of Amendment 20 would countenance such an approach is absurd. The author was Gov. J. Marion Futrell, probably the most reactionary governor in any state’s history. He thought public education was overrated and high schools a foolish frill.

Arkansas had a staggering $160 million of public debt — more per capita than any state in the country — when he became governor in 1933, much of it road bonds issued under his predecessors. The state had little to show for all of it. So he had two terribly constricting constitutional amendments put before the voters, one to make it (he thought) nearly impossible to raise taxes and the other to put bonds out of reach of politicians. People would have to vote them and Futrell thought people despised debt as much as he did.

But the Arkansas Supreme Court ordinarily does not try to establish original intent in interpreting the Constitution and any passable lawyer can find any construction of it that suits his purpose.

Permanent bond authority would not be found to be an outrageous thing in many states, where public debt is not only countenanced but considered progressive and necessary for progress. There is a school of thought that says Arkansas’s unusually harsh restrictions on capital movement are a reason that it lags behind other states in economic development.

So a lawsuit testing whether the Highway Commission can issue bonds from time to time at its will is a certainty. There might have to be friendly suit settling the issue before the bonds could be marketed. That cannot be done until at least 2010, if the Highway Commission exercised the option at the earliest moment.

Technically, the commission could issue bonds anytime after the Dec. 13 election even though there would be no federal maintenance and diesel tax revenues available to pay the bonds. The bond law says the mortgage payments will be made directly from the state general fund if the other revenues are not available or not sufficient. There is no limit on the amount of general revenues that could be taken.

But the Highway Department would never do that because the outcry from the public school forces, higher education and public health programs like Medicaid, which get the bulk of general revenues, would probably produce just what the trucking industry wants: an end to the Highway Commission’s independent status.

The college savings bonds

The idea of college savings bonds, an appealing way for colleges and universities to get construction money, reached Arkansas by the late 1980s. The legislature in 1989 approved the enabling legislation and voters in the 1990 general election authorized $250 million in bonds. The idea was that the bonds would be issued in small denominations so that parents and grandparents could buy them for the kids. At maturity the bonds would provide a fair scholarship for a youngster to attend an Arkansas college.

Of course, the bonds were available for traditional investors, too, and that is largely who bought them. The bonds were sold in increments between 1991 and 1997. The last ones mature in 2017. They financed $250 million in buildings, library books and equipment.

All of it has been spent now and the legislature this spring authorized another election to refund the outstanding bonds and issue more to give the institutions another $150 million. The state Higher Education Coordinating Board has divided the money among the six campuses of the University of Arkansas, the five other state-supported four-year universities, the 22 two-year institutions and the Arkansas School for Science and Mathematics. The two-year schools would get a total of $50 million and the four-year schools $100 million, but part of their allocations would be spent on the e-Corridor, the high-speed Internet research network.

Even for bond law, the financing is horribly complicated. Before it can issue new bonds, the state needs to retire the outstanding debt from the 1990s bonds. The terms of the old bonds do not permit them to be called early and the remaining principal paid. The state must see that every investor reaps all the investment profits that were guaranteed them when they acquired the bonds. That means paying investors all the interest they would have received over the full life of the bonds. That amounts to about $100 million.

So defeasing bonds will be issued in roughly that amount if voters say yes to the college bonds. When the investors are repaid, a second batch of bonds totaling about $150 million will be issued, which will pay for the new construction and the e-Corridor hookups.

No new taxes will be levied, but it is wrong to say that nothing will be affected by the new bonds except higher education. All the bonds, old and new, are or will be amortized from the state’s general fund, which supports public schools, Medicaid, the prisons and most of the functions of government. If new bonds are not issued, that $24-million-a-year slice of revenues would return to the pie for distribution to the schools and other underfinanced functions.

If voters approve the bonds, the legislature will have to appropriate the money for each project in 2007, unless Gov. Huckabee calls a special session before then.

And if voters reject the bonds, he can call another special election anytime after six months and perpetually after that until the bonds are approved.

Unlike the highway bonds, the college question has attracted no vocal opposition. It didn’t in 1990 either, although it could be said that there was then a more obvious emergency. There had been little college construction since the mid-1970s when the state spent big surpluses from Gov. Dale Bumpers’ tax program on campus improvements.

Huckabee and Linda Beene, the director of higher education, say another big general-improvement program is needed because of the great enrollment growth since the college bonds were first issued in 1990.

Enrollment has grown, but there has been a building boom on college campuses as well, and the college bonds have furnished only about a fifth of the money for it. An Arkansas Times analysis of the vouchered expenditures on capital improvements at the schools for the 10 years from fiscal 1995 through 2004 showed that they spent $917,360,013.

That sum did not include private grants for new buildings and athletic facilities on the campuses, which easily exceeded another $250 million during the 10 years. The state has no central record of all that spending because appropriations were not required.

The Donald W. Reynolds Foundation alone gave the schools $132,081,364 for buildings during that period. All of the facililties, including Reynolds Razorback Stadium at Fayetteville (beneficiary of a $20 million grant) were named after Reynolds, the newspaper mogul. They included $28.8 million for the Reynolds Institute on Aging at the University of Arkansas for Medical Sciences, $15 million for a student center at the University of Arkansas at Fort Smith, $13.4 million for a business and economic development center at UALR, $12.3 million for a campus center at Southern Arkansas University, $13.1 million for a library and technology center at Arkansas Tech, $7.9 million for a science building at Henderson State University, $8.3 million for a learning resources center at Mid-South Community College at West Memphis, $5.9 million for a performing arts hall at the University of Central Arkansas and $7.7 million for a center for enterprise development at the University of Arkansas at Fayetteville.

Grants from other Arkansas-based family fortunes — Walton, Tyson, Hunt, Jones, Walker — helped build other facilities. The renovation and expansion of the U of A football stadium involved $80 million in private contributions, according to Frank Broyles, the athletic director. None of the college savings bonds, by the way, can be used for athletic facilities.

A real contrarian might also ask if college construction after that binge of building ranks as a high priority on the state’s credit when the state is already under court sanction for failing its constitutional obligation to meet $2.5 billion of needs for public school facilities and also when the state is accumulating a couple hundred million dollars of surpluses in the state treasury. Williams, the higher education finance man, has one answer for the surpluses: legislators tend to have their own and much different priorities for those funds.