Give this to our super smaht, financially savvy new governor: She knows how to pack a budget with things that require detailed review and analysis if the public is going to have any real sense of whether it’s a good or bad package, on the whole.
Jennifer Bogdan does the good work of digging into the big refinance part of Governor Raimondo’s proposal in today’s Providence Journal:
Roughly $64.5 million in Raimondo’s 2016 fiscal year budget would come from a refinancing effort. Another $20 million would flow in fiscal year 2017. The bonds in question have an average interest rate of 4.9 percent, but if refinanced the interest rate is expected to be lower than 2.34 percent. She calls the refinancing conservative and says it would be irresponsible not to consider a money-saving measure for the state.
By “money-saving,” what the governor means is that she’s using the restructuring to borrow around $84 million in the first two years. In the third year, the state will actually have to pay about $10 million more in debt service, and the years will change between costing more and costing less over the refinancing period. As shown in a table included with Bogdan’s article, when the state reaches the end, in 2032, it will have actually paid $13.6 million more in debt service.
That’s where the governor deploys an accounting trick to make the analysis a bit murkier. In the words of Budget Officer Thomas Mullaney, “The key here is that we would not enter into this transaction if the state would not ultimately come out ahead.”
He’s referring to the fact that if you look at the present value of the changes in payments up and down over the sixteen years — in other words, adjust them for inflation to what they would be in today’s dollars — the real value of the changes is actually $225,238 less in debt service.
Like so many of the “bold and innovative” moves in the governor’s budget, that’s misleading. For one thing, the assumed inflation rate is critical. A rough spreadsheet suggests it’s 2.97%. In that case, it would erase these so-called savings if inflation turns out to be 2.91%. Below that, we’ll be well into negative territory.*
For another thing, the state isn’t going to treat the refinance like a restricted fund. The state will spend the savings in the years that there are savings and will have to come up with the money in years that there are costs. The money is going to have to come from somewhere to pay the extra debt service, and that somewhere will very probably have been worth more to the economy than simply inflation. (Hey, maybe the governor should invest the savings along with the state pension fund, which the state assumes makes 7.5% profit every year.)
Simply refinancing from 4.9% to 2.34% interest for the same number of years would have saved a great deal of money that could have been left in the hands of Rhode Islanders. Whatever the governor’s room full of smaht people do for economic development, they have to do better not only than the cost of the refinance, but also the economic activity of people acting without the government’s meddling.
UPDATE (03/27/15 8:37 p.m.): According to the governor’s office, the estimated rate of inflation is 2.44%, which my math leads me to believe would produce a $2 million cost to the refinancing, in current dollars. I’ve asked for more insight into the governor’s math, but if anybody has an idea, I’d be interested to hear it. There also must be something incorrect in the information out of the governor’s office. They’re saying the refinancing is of $160 million of debt, but the Projo’s numbers have the state paying nearly that amount every year.
* Posting this of a Friday afternoon, I got my signs reversed. I’ve fixed the relevant text.