First bonds sold to fuel Gov. Whitmer's Rebuilding Michigan plan

On this week’s Talking Michigan Transportation podcast, MDOT Finance Director Patrick McCarthy talks about the process and work leading up to the sale of $800 million in bonds to finance rebuilding several freeways with the state’s heaviest traffic volumes.

Later, the discussion focuses on the first high-profile project made possible through the bond sales, rebuilding I-496 west of Lansing, with MDOT Lansing Transportation Service Center Manager Greg Losch and Jason Early, MDOT construction engineer on the project.,4616,7-151-9621_11008-516762--,00.html 

The bonds closed today will cover the cost of rebuilding some of Michigan’s most highly traveled freeways, including the $60 million I-496 project. When all of the $3.5 billion bonds are sold over the next few years, they will finance or help accelerate rebuilding or major improvements of 122 major highways across the state.

“For too long, our freeways have been held together with patches and emergency repairs,” Michigan Gov. Gretchen Whitmer said in a news release. “The Rebuilding Michigan program assures Michiganders across the state that they can drive to work and drop their kids at school on safe and reliable roads for many decades to come. It has also allowed us to start moving dirt this year, without an increase at the gas pump.”

In a unanimous vote on Jan. 30, the Michigan State Transportation Commission (STC) authorized the department to issue and sell $3.5 billion in bonds backed by state trunkline revenues.

Gov. Whitmer spoke on the podcast at the time about her Rebuilding Michigan plan, rolled out in her 2020 State of the State address and the STC vote.,4616,7-151-9620_95066-518607--,00.html

Bond Buyer reported on the bond sale in August, observing that while the COVID-19 pandemic has hurt recent collections of pledged revenues, sturdy coverage ratios provide a cushion that the state is banking on to see the credit through the current fiscal storm.

"Michigan's state trunkline bonds are not susceptible to immediate material credit risks related to coronavirus because of strong coverage of debt service and limits on additional leverage," Moody's said. "The longer-term impact will depend on both the severity and duration of the crisis."

Moody’s concluded that the lack of investment has taken a severe toll on the state’s transportation assets.




Narrator: It's time for Talking Michigan Transportation, a podcast devoted to the conversations with people at the forefront of the ongoing mobility revolution. In the state that put the world on wheels, here's your host, MDOT Communications Director Jeff Cranson.

Jeff Cranson: Hi, once again welcome to this week's edition of Talking Michigan Transportation. Today I’m going to be talking first with MDOT Finance Director Patrick McCarthy about closing on the bond sale, the first $800 million dollars of $3.5 billion dollars authorized by the State Transportation Commission in January to rebuild some key freeways and other roads across Michigan. He's going to explain the process and how his team got it over the finish line with the help of the bond council and the rating agencies and what it all means to your commute going forward. Then we're going to focus a little bit on one project in particular, I-496 west of Lansing, both eastbound and westbound being completely rebuilt over the course of the summer, by far the highest profile of the bonding projects this year and the only one that will actually be wrapped up this year. It's a $60 million dollar project that will make a big difference to a lot of people's lives. We're going to talk to the manager of the office for that project and the construction engineer after that, but first we're going to start with Patrick McCarthy.  Patrick, thanks for being here.

Patrick McCarthy: Thanks for having me, Jeff.

Jeff Cranson: So, let's go back to January when you and your team put things together for a presentation of the State Transportation Commission. They voted unanimously to support the governor's Rebuilding Michigan plan and the sale of $3.5 billion dollars in bonds to rebuild some major freeways and shore up some other highways around the state. What happened between then and now to get us to this point?

Patrick McCarthy: Well, first, Jeff, I think we need to go back a little bit earlier than that and talk about the fact that the governor ran on a proposal of fixing the roads and improving the road conditions for the citizens of the state. Her first efforts to try to raise the revenues was a proposal to raise gas taxes, which was not met successfully with the legislature, so the governor—

Jeff Cranson: I think that's probably an understatement.

Patrick McCarthy: [Laughing] Yes, so, the governor didn't just sit back and say, “well, I tried, you know, let's just call it a good effort and move on.” She looked for other solutions to try to improve the roadway conditions in the state of Michigan roads and bridges. So, the next opportunity, if we couldn't get a revenue increase, was to finance fixing roads while we continue to work on trying to develop a long-term, sustainable revenue source or increase. So, the governor requested the State Transportation Commission to authorize the sale of $3.5 billion dollars of bond proceeds, or bonds, in an effort to fix a list of 49 projects around the state of Michigan that were on critical corridors for traffic and commerce. We took that resolution to the Commission. They, again, approved it unanimously with the idea that over the next four years we would issue that $3.5 billion dollars in bonds to fund the work on those 49 projects, and then that would allow us, also because a lot of those projects were in our five-year plan as just some rehabilitation work or some patching work, it allowed us to also do another billion dollars of projects as backfill to those 49 projects that we're now going to fund with our bond proceeds.

Jeff Cranson: So, let's talk, since you went back before January let's go back even further, and talk about MDOT's history with bonding and, you know, the aggressive—you call it refunding, basically it's synonymous with refinancing over the years of the various, you know, bond issuances that have been out there and, you know, the aggressive work that your team does to track these things and save money by refinancing.

Patrick McCarthy: Sure, bonding for the department is nothing new. I’ve been with MDOT for over 22 years now, and we've done new money issues, where we bonded to do specific road programs, through every governor that's been in office. You might recall some of the programs like the Build Michigan programs, the Jobs Today programs. We did some GARVEE bonding as well as a couple of smaller new money bond deals that helped us to match federal aid when we had the last recession. So, the bonding program at MDOT is nothing new. We've been doing this for— I think the first bond was issued in 1920 or 1930 to build one of the highways in Metro Detroit. Interspersed with the new money deals that we that we have done over the last 20 some years, we are continually monitoring the conditions in the municipal bond market to refinance, or refund, the existing debt that we have outstanding to take advantage of lower interest rates and to save money on the overall debt service for those issuances that we've had in the past. Then lastly, one of the—in 2018, before Governor Snyder left office, we issued, or worked with, a private concessionaire to issue a private activity bond which was used for the I-75 project in Metro Detroit, which really the bonding was done by the contractor, but with the expectation that MDOT was going to be using our availability payments on that project to help fund the debt service payments on that private activity bond.

Jeff Cranson: So, you know, each time you do that it saves some money, but in the end, you're basically paying something an interest rate, you know, to get that money and do it up front. There are critics of that, but if you don't have any choice, I think you've made the point many times that the cost of waiting and letting the system, you know, deteriorate further, so you have to spend more to restore it bring it back, probably outweighs what you spend in interest on these bonds, right?

Patrick McCarthy: Yes, we definitely would save money on overall on the projects both from the inflationary costs of the materials and the labor as well as the opportunity cost for the motoring public. If we had to go out there for a few years and do some patchwork and, you know, fix a lane for a short-term fix that's all we can afford at the time, which I think the director has made clear in a couple of examples along I-96 near the, I think, M-52 in the last few years. We, you know, continue to have to do these short-term fixes, so it's impacting the motoring public. With this Rebuilding Michigan program, we can go in there, we can do a complete reconstruction, and not have to come back and do any work on these roadways for, you know, significant amounts of time. The average life of these projects, these 49 projects, is 25 years.

Jeff Cranson: Yeah, that's an important point. When the governor talked during her campaign in 2018 and then in 2019, she made the case for the fuel tax increase and said, “we're going to build them right the first time,” that was not a shot at the contracting world. It was not saying, you know, you guys just aren't building these roads right. it was it was her way of saying, you know, we're going to rebuild these from scratch, which is what needs to be done so we're not out there every few years doing resurfacings or capital maintenance just to squeeze a few more years out of them. That's what she meant by building them right the first time.

Patrick McCarthy: Absolutely, it was not a at all an indication of the of the quality of the work that was done. It was more an indication on the available funding that we had. It was all we could afford to do at the time was to do the patchwork. We didn't have the resources to do the correct fix at the time, which is what she's trying to do with her Rebuilding Michigan program and then her other initiatives to try to raise revenues for our transportation system.

Jeff Cranson: So, despite some volatility in the market back in the spring when the pandemic hit, you know, and things were going haywire, naturally, and everybody's looking for, you know, certainty and predictability and you just didn't have that for a while. That delayed us some but not terribly. Can you explain why at this juncture, you know, transportation revenues are attractive backing mechanism for the market for bonds?

Patrick McCarthy: Sure, the investment community that invests in municipal bonds is very happy with, or finds very attractive, our transportation revenues. They're a dedicated revenue stream that's constitutionally restricted and protected. So, there's not a concern that some of those dollars could be redirected to non-transportation purposes or in any way impede MDOT's ability to pay the debt service that we've agreed to pay back by them loaning us, or letting us borrow the money, for these construction projects. It's also evident in the ratings that we've received for this bond issuance from Moody’s and S&P, which were highly rated double A plus ratings for, and again, it's because the strength and the reliability of the revenue streams that we have for transportation.

Jeff Cranson: So, between, you know, that time in the spring when you were really hoping, you know, we said late spring, early summer and now it took us basically until late summer to finally get a closing, get a sale in late August and a closing on September 10. What did your folks do to monitor things? Was it just a matter of staying in close touch with the bond council? Or were there things that that you guys had to do every day to really keep tabs on things?

Patrick McCarthy: There were a few things that we had to do in the meantime. After the authorization, or the resolution, from the Commission back in January on a typical sale it would take you a month or two just to get all of your paperwork together, get all your legal opinions, get your ratings from the rating agencies. So, those things would add some time to the process, but after we had the resolution from the commission in January the first thing that we did was assessed the projects and the timing of when those projects were going to be constructed. We wanted to make sure that when we went to the bond market and brought in the proceeds that those proceeds were timed to the cash needs of the spending on that construction. There's IRS regulations that require that you can't earn more money on the money that you borrowed than what you're going to pay out in the debt service. So, we want to make sure that we time as best we can the spending of those bond proceeds with the receipt of those bond proceeds from the bond issuance. So, after we've worked out the timing of the need for the cash, then we did work with our underwriters, which are the banks that are actually working on our behalf to sell our bonds. We have a public financial consultant that we work with to determine the best timing for the market based on the conditions and any other offerings or news that might be in the market at the time that could cause any sort of volatility in the pricing at the time that we wanted to go to the market. Obviously with COVID occurring in the February and March time frame the municipal markets really went when kind of haywire for a few months, so we had no interest or no real desire to price a bond from March to about June before the market settled back down again. That allowed us to proceed with this pricing and closing which we're going to do this Thursday.

Jeff Cranson: So, this week's closing includes 800 million dollars. That's a fraction of the $3.5 billion dollars, and when I say fraction, I don't want to minimize 800 million dollars because that's real money, as Everett Dirkson would say. What do you think is the future for the rest of that 3.5 billion?

Patrick McCarthy: Going back to the timing of one we thought we were going to need the bond proceeds, the 800 million dollars that we started with in this tranche they call it, this this series of issuance, that should be the cash proceeds that we need to do the design work and the construction work for fiscal year 20 through most of fiscal year 21. So, as we get into next fall, the fall of 21 would probably be the next round of bonding that we would go to the market for. At this time we haven't finalized what the sizing of those next three tranches would look like, or if we only did two it'll depend on what the market conditions look like at the time. It'll depend on how the projects are coming along and whether any of the other projects are ready to be constructed or maybe pulled forward and start them earlier. The intent over the next four years is to issue the entire 3.5 billion dollars, you know, maybe it's another three more rounds of 800,000, which would get us to 3.2, so we'd be close to that 3.5, or maybe we do a billion for a year or two and then final it out with another 700 million. It all really does depend on what the market looks like at the time and what the spending pattern, or spending needs, of the department on those 49 projects looks like at the time.

Jeff Cranson: Well, good, thanks. I think that's a really good explanation of the process and since you talked about the design and preparation for some of these projects, I should mention that a handful have begun and they will be reimbursed from the 800 million dollars. The biggest one probably, highest profile, is a 60-million-dollar project to rebuild I-496 west of Lansing and it definitely needed it. It was rough pavement in both directions. So far, you know, they finished the eastbound side and it's gone very well and now they're working on the westbound side. We'll look forward to celebrating the completion of that first bonding project in November. Thanks again, Patrick. I appreciate you taking the time.

Patrick McCarthy: I’m glad I could help, Jeff. Thank you.

Jeff Cranson: So, as promised for the second segment of this week's Talking Michigan Transportation podcast we're going to focus on the I-496 project that we mentioned earlier. It is probably the highest profile project to be funded with the bonds. There are a couple others starting this year, but this is the only one that will actually finish in this construction season. I’m pleased to have with me Greg Losch who is the Transportation Service Center Manager for MDOT's Lansing office, obviously intricately involved in planning and overseeing this project, and Jason Early who is the construction engineer on the project and lives this thing really day to day, probably as much as anybody. Thank you both for taking time to do this.

Greg Losch: Thank you.

Jason Early: Thank you.

Jeff Cranson: So, let's start with you, Greg, going back to, you know, when this project was planned, and let's talk about a little bit of the history of that segment of 496. Does this date to its original building right now?

Greg Losch: It does. It is the original pavement that was built back in the 70’s, so we're dealing with, you know, a payment section that's definitely 50 years old. We've been, you know, increasing the frequency and duration in which we are out there doing our maintenance work every year, which is leading to additional costs as well as the commuters that use it daily to get downtown. We're always being interrupted, and we had single lane closures out there, it seemed like, for a good portion of most summers recently until this year when we were actually able to reconstruct it. We were able to move the project forward and get it going this spring, despite COVID.

Jeff Cranson: So, one of the things we've talked about in in explaining bonding and why yeah, you have to pay, obviously, some interest to do bonding and that costs money, but when you weigh that against the money spent doing, you know, maintenance resurfacing every few years, not to mention user delay costs from tying up lanes, that in the long run it makes sense just to rebuild that freeway. It was it was being held together, you know, as well as possible. Jason could you talk a little bit about, you know, I guess the value of rebuilding it versus just maintaining it?

Jason Early: Sure, basically rebuilding it we save all that maintenance cost. If we do one initial investment in the pavement in the in the work zone to get it done, completed this year. Then, again, we save all that maintenance for the future so we're investing now to save in the future.

Jeff Cranson: Yeah, I kind of liking it to buying versus renting, really.

Jason Early: Exactly.

Jeff Cranson: So, talk about in this project in particular I’ve heard a lot of good feedback from people who have been driving the eastbound lanes since they were finished, you know, regular commuters who recognized you don't really realize how bad that payment was until you drive on new payment. What did you do that might have been different? What innovations did were able to incorporate into this? I’ll direct that one to Jason first and then maybe Greg can add on to that.

Jason Early: Sure, well, one great thing is we've been able to reuse the subbase. We use the existing the old concrete from 496, we crushed that and brought that into the open graded drainage course. Basically we've recycled a lot of the old road and brought it into the new and then put a new concrete pavement over the top of it, so pretty green process.

Jeff Cranson: So, is that, you know, crushing and recycling— I mean, it's been done before but it's still relatively new. What has been discovered I guess and maybe Greg this is something you can talk about that that we didn't know, you know, 20 years ago about why that can be done, or was it just not a priority to try to reuse it?

Greg Losch: I think that the process of grinding the original material and getting the gradations that we're looking for in the byproducts that come from that has really been developing for the last, you know, 20 years. I don't think when the freeways were originally kind of constructed, you know, for this one in the 70’s the recycling material I don't think was a priority because it wasn’t a byproduct of us replacing the freeways. Now we've got a system that is aging all kind of at the same time because of the investment our country made all at the same time, and now reusing that material is very important because the ability to go out and obtain basically new material, new sand, aggregate, all these things that we would need to rebuild this system, is not as easily readily available as well as there's a much higher demand for it on the world market. So, I think to be to be able to recycle the stuff on site and reuse as much of it as possible and get the gradations that we're looking for and the material properties that we can predict is what has really kind of developed over the years.

Jeff Cranson: So, one question I get asked a lot, Jason, both by national media and locally is whether or not the lower traffic volumes in April and May, you know, allowed us to expedite the project, and, you know, my cursory answer to that is yes and no. That did allow maybe for some work, although the lanes were completely closed anyway, but also because of the pandemic and because of contractor concerns about the health of their employees, you know, they had to cut back on some of their capacity. So, in the end are we you know ahead of schedule, pretty close to where you thought we'd be by now?

Jason Early: Sure, we're actually a little bit ahead of schedule on this project. It was a little bit of a unique project because, like you said, we had one bound closed and then the other. We did have our bridge subcontractor self-suspended for a couple of weeks, but they weren't really on the critical path at that point, so they were able to make up that time. The lower traffic volumes allowed us to do a few things differently as far as sequencing and we're actually, like I said, we're ahead of schedule on this project because of that.

Jeff Cranson: That's great. So 60-million-dollar project, pretty high profile in terms of who travels at a lot of lawmakers and, you know, lobbyists and other influencers coming in and out of Lansing. How does this rate against other projects you've been construction engineer on?

Jason Early: Well, this is pretty high profile. I’ve been involved in a number of projects, but this is definitely the highest profile. It's pretty unique because we have both; we have commercial, we have commuters, we have politicians, and we have a lot of folks from downtown that travel through our work zone. As we've had this directional closure, either eastbound or westbound, we've had folks driving through the work zone and being able to observe our progress throughout the project, so it's pretty unique.

Jeff Cranson: So, Greg, you seem pleased when we've talked about the, you know, community involvement in the local agencies and the township and the county and, you know, the people you've had to work with and planning this and setting up for it and the detours and things. Can you talk a little bit about that and how you get everybody on board and collaborating?

Greg Losch: Sure, I think we have a unique scenario here too or maybe it's not that unique in our state but, you know, nobody could really argue that 496 needed to have reconstruction done to it. It needed new pavement. The existing material had seen its service life exceeded its service life and now was becoming a safety concern. So, you know, getting anyone convinced that the work had to be done was not very hard on our part. We that we had that made. Going out and talking to everyone about the different possibilities, or options, about how traffic would be impacted in and how commuters and businesses would be maintained for their access throughout the project life was where we, you know, really invested our time as far as what we developed for public outreach and visuals and in our presentations and where we went to talk to folks. We would hit the greater Lansing Chamber of Commerce. We would hit we would hit some of the area local agencies, such as our township partners and our county partners. We would go and talk to businesses. We would reach out to as many people as we could and we would, you know, anyone who had questions we would volunteer to go talk to them. We would have a couple basically, for lack of a better term, can presentations that would be tailored kind of towards the audience that we were planning on talking to. We actually laid down the, you know, the differences between closing the freeway, doing a directional detour, or doing part with construction where barrier wall would separate traffic and the durations associated with those different types of construction. Most folks and most of the people in our audiences all understood how we got to this directional detour that still maintained access and reduced our cost by reducing the schedule the project down to one season.

Jeff Cranson: So, you've got another pretty big one just some preliminary work this year, but some major work next year on I-69 in Eaton county. Is there anything unique or special that you could tell us about that one that?

Greg Losch: That project—what's unique and special about the project is that it started out as originally four construction projects that started I-94 and they were going to be built in you know different years all the way up to basically Charlotte. When we were looking at the overall investment down through there and these projects which were pushing, you know, 80, 90, 100 million dollars each and how they were going to be probably two-year projects each and planned out starting in 2020 with the last one possibly being built, you know, 28, we started looking at that corridor being impacted for, you know, a number of years with the same type of work, same type of traffic control, same users would be impacted. And we started looking at ways to, you know, combine and to basically take those projects and bundle them into one project that would only impact the traffic for a much smaller time frame. That's where that project basically got its idea and now we're seeing it successfully awarded to Michigan Paving & Materials as a design-build project that we hope to start crossover and maintenance of traffic work and some maintenance during construction work this fall.

Jeff Cranson: Explain real quickly for the layman what design-build means.

Greg Losch: Okay, so, design-build— probably 90 or 95 of the projects that the department delivers we call design-bid-build, which the department designs the project and then we go out with a contract, contractors bid on it, and then we work through that contract which the department put together, and the contractor signs and basically signs on to build it that way. In a design-build project, we give up a little bit of that design control and we actually hire a contractor to basically do the design as well. So, you know, we put in our requirements, our criteria, our standards, our specifications into a set of what we call books which are the contract. Then we go out and hire a contractor to design it and build it, so the contractor actually has the responsibility of design or is the, you know, the engineer of design, engineer of record for design under the contract. They do the design that best fits their means, methods that best aligns with our requirements, criterion, standards, and specifications and then basically submit it to us for approval and move forward. We are giving up some of the design, but we are also capitalizing on the efficiencies on the contractor’s knowledge of their own means, methods, and equipment to stage and construct a project. So, we reap the benefits of their efficiencies that they can get into the project as well as, in this case, the project was basically four being combined into one. We experience a lot of efficiencies such as economy and scale and inflation versus us paying for it today versus, you know, eight years from now.

Jeff Cranson: Yeah, so, the department obviously retains the overall oversight responsibility but gives the contractor more flexibility in what they can do.

Greg Losch: Correct. We are definitely the owner, and we are still accepting or approving what they are submitting for design. They are just responsible to come up with it.

Jeff Cranson: Okay, well, thanks. I guess real quickly, Jason, before we go, do you want to talk about when this thing wraps up? You're shooting for November and sounds like you feel like you're a little ahead of time, so we should be able to celebrate the completion around when?

Jason Early: Sure, we should be fairly early in November we're going to be completing the mainline 496 work. We'll still have a little bit of work to do next year, but we will not have lane closures on 496 itself, so a little bit of bridgework, some tree plantings, things like that in 2021, but we're looking at November to complete 496 itself.

Jeff Cranson: Yeah, so yeah, we'll be able to use the road there'll just be some aesthetic improvements yet to come sounds like.

Jason Early: Yes.

Jeff Cranson: Okay, well, thank you both. Very helpful. I won't say congratulations yet since we're not quite done but congratulations on the progress so far.

Jason Early: Thank you.

Greg Losch: Thank you. Appreciate it.

Jeff Cranson: Thanks again for listening to this week's edition of Talking Michigan Transportation, and I want to give a special thanks to Cory Petee, who does the sound engineering for the podcast, and to Sarah Martin, of MDOT, who does the show's intro and closing.

Narrator: That's a wrap for this edition of Talking Michigan Transportation. Check out show notes and more on Soundcloud, or by subscribing on Apple podcast.