The Oregon Department of Transportation finds itself in serious financial trouble, aggravated by an increasing dependence on borrowing.
In the last two fiscal years, the agency has added about $700 million in new debt, chiefly to finance freeway widening mega-project (and their hundreds of millions of dollars in cost overruns).
In the past two weeks, the Oregon Department of Transportation has heaped blame on the Legislature for failing to vote to approve a major increase in gas taxes, vehicle registration costs and other fees. It is in the process of laying off hundreds of employees, because of the financial shortfall. But as we’ve seen at City Observatory, ODOT’s revenues haven’t actually decreased, and much of the problem is related to expensive megaprojects and their cost overruns. All of this has been amplified by the agency’s decision to take on greater amounts of debt, which reduces funds available to pay current staff and support operations.
Moving from pay as you go to debt financing
For most of its history, ODOT operated on a “pay as you go” basis, financing capital construction projects out of current income, and avoiding spending money on interest payments rather than on roads. Over the past two decades though, ODOT has become increasingly addicted to debt.
This began in the wake of the 2001 recession, when Oregon first issued bonds to finance a statewide bridge repair program. ODOT issued a second tranche of bonds (following another recession in 2008). Since then ODOT has continued to issue more bonds, and more recently has added commercial paper borrowing.
In the two most recent fiscal years (FY 2023, and FY 2024), ODOT has issued about $700 million in new debt (excluding refunding bonds which are used to pay off older, higher interest bonds).
FY 2023
In FY 2023, ODOT issued about $429 million in new “highway user tax revenue bonds” — i.e. bonds payable from future state transportation revenues, and an additional $151 million in commercial paper, for a total of $580 million in new debt. See the column labeled “Additions” from the table below. (Note: amounts shown as “reductions” represent payments of principal and interest on outstanding debt).
FY 2024
In the following fiscal year, ODOT issued an additional $120 million in commercial paper, bringing the cumulative additions to its debt over these two fiscal years to $700 million.
The issuance of $700 million in debt creates a liability to repay these funds in future years out of state highway funds, and also includes substantial interest costs as well, both of which have the effect of reducing funding that is potentially available for a range of purposes, including operation and maintenance. The act of issuing debt, secured by a pledge of future revenues is a key factor in aggravating ODOT’s inability to fund basic operations.
This commercial paper works like a payday loan: the state gets to spend money today, but gives up revenue in the future to repay this. Because ODOT has used commercial paper to pay for the increasing costs of capital projects, it has played an important role in reducing the future funding that will be available to pay for staff and operations. The decision to take on this debt, while hoping for the Legislature to approve a major revenue package turns out to have been a reckless one, because it has helped trigger the layoff of about 500 employees.