It’s not a great time to borrow.
Talk to anyone who recently took out a mortgage or a car loan, now paying interest rates not seen in more than two decades.
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So why does Gov. Dan McKee think now is the time for another $345 million in state bonds? McKee’s fiscal 2025 budget proposal would ask voters in four, separate ballot questions to approve borrowing money for higher education, housing, a dedicated state archived building and a raft of “green economy” programs. At face value, the bond referenda — contingent first on legislative approval — don’t appear mired in controversy. After all, who doesn’t want to see the Newport Cliff Walk repaired, or more housing units built?
“It is an advisable strategy,” said Michael DiBiase, president and CEO for the R.I. Public Expenditure Council. “If you’re going to build a big life sciences building, you don’t want to wait 20 years to put the money in the bank. You’re not going to enjoy the benefits of it.”
But the characteristic stamp of approval voters have historically given on bond questions may not be so easy to secure this time around, in part because of personal experiences with rising interest rates.
Take, for instance, Megan Reilly. The North Kingstown resident and mother of four led a grassroots opposition to a $222 million borrowing proposal placed before town voters in November. Her concern over the “megabond” intended to pay for a new, consolidated middle school and public safety complex stemmed in part from the 20-year high water mark in interest rates.
“I am really not a numbers person or a bonds person, I am more into common sense,” Reilly said in an interview. “But how we felt in North Kingstown was, do we really have to do this now? The fact that we’re seeing the highest interest rates in 20 years, doesn’t that give you pause and think, maybe we should hold off?”
Borrowing costs were far from the only critique of the North Kingstown proposal, which was also clouded by distrust of local officials in the wake of a decadeslong child molestation and sexual exploitation scandal by a former North Kingstown High School teacher and basketball coach. And the prospect of tax hikes to cover the new debt didn’t help.
North Kingstown voters rejected the bond in what was considered to be a record turnout for a special election in November 2023 – one of two municipalities, along with North Smithfield, to reject local bonds on ballot questions in 10 communities.
Despite her confidence that saying “no,” to the North Kingstown bonds was the right move, Reilly said she needed to learn more about the proposed state borrowing before taking a stance.
Among the pieces of information that budget experts want voters to understand: The state bond proposals are not comparable to the conditions attached to a loan for a new homeowner, or even a town.
“It’s true that interest rates are higher, but the state is doing tax-exempt borrowing, which is at a lower rate, particularly because we have a good bond rating,” DiBiase said.
The top credit ratings agencies in October affirmed their existing, positive ratings of the state general obligation bonds, with Fitch Ratings also upgrading its economic outlook for the state from “stable” to “positive.”
While the 30-year fixed mortgage rate peaked above 8% in October 2023, the debt service on the $345 million in proposed state bonds assumes a 5% interest rate, based on the rate if the bonds were sold on Feb. 1, according to information provided by the Rhode Island Office of the General Treasurer.
Treasurer James Diossa, whose office sells state bonds with approval by the governor, thinks the rates may be even lower by the next sale.
“Mortgage rates are going down, car loans are going down, so we will probably get a better deal this time around, compared to our last bond deal, thanks to shifts in the market,” Diossa said. That means serving the debt will be much cheaper.”
It helps, too, that the state is retiring nearly the same amount of debt — $343.6 million — in the next two years, as it wants to take on with new bonds. Even if the next round of borrowing comes with higher interest rates than the soon-to-be-retired debt, it’s still within the parameters of acceptable borrowing amounts, according to the latest report by the Rhode Island Public Finance Management Board. The nine-member panel of financial experts, chaired by Diossa, is tasked with keeping tabs on the debt of state and municipal government and quasi-public agencies, to help determine when it makes sense to issue new bonds.
In its December 2023 debt affordability study, the panel concluded that Rhode Island could take on up to $1.25 billion in additional debt in fiscal 2025, with a corresponding $100.6 million in debt service capacity the next year, while still meeting the state debt limits relative to revenue and personal income (capped at 7%, and 4%, respectively).
Not that the state is aiming to max out. The 20-year repayment plan on the proposed $345 million in state bonds, assuming a Dec. 1, 2025, sale and 5.07% interest rate, projects an annual debt service of $27.9 million, according to information provided by Diossa’s office.
“The higher rate environments certainly made it even more important to ensure that the recommended authorization put forth was responsible from a debt affordability standpoint, while also making important investments in Rhode Island’s future,” McKee’s office said in an emailed statement.
There is also a $4.55 million contingency fund, intended to account for cost overruns.
That’s particularly important amid soaring construction costs, which have led to sticker shock on other state and local projects. Examples range from a pair of new high schools in Warwick now being scaled back to stay under the $350 million local bond approved by voters, to the new state health lab on former Interstate-195 land, the cost of which jumped from $82 million to $97 million, according to McKee’s budget proposal.
Several of the big-ticket construction projects on McKee’s fiscal 2025 bond wish list lack details like design plans and even specific locations that might affect costs: $80 million for a new lab and life sciences building at the University of Rhode Island; $55 million to renovate Rhode Island College’s Whipple Hall to house its cybersecurity institute; and $60 million for a dedicated state archive and history building.
“There is a legitimate issue, that there have been times where the estimates on building projects have not proven to be the final number,” DiBiase said. “The nature of these projects is that they have not been designed when the ballot referenda are voted on.”
But, DiBiase added, “that’s going to be true of any capital projects.”
Unlike interest rates which are projected to fall in the coming year, construction costs aren’t expected to improve. Which means postponing these major building projects won’t save the state money, Diossa said.
“By waiting a year or two for the market to self-correct, the chance you’re taking is that it could be even more expensive,” Diossa warned.
While Reilly sees the rejection of the North Kingstown bonds as a savings to town taxpayers, North Kingstown Town Council President Greg Mancini feels just the opposite. Especially because the town might no longer be able to take advantage of extra incentives from the state for school construction projects. The partial reimbursement rates on local school district construction require projects to start by June 30. North Kingstown has asked the Rhode Island General Assembly for an extension, but for now, it looks like the bond rejection means forgoing up to 50% reimbursement on the new school building.
“If the opponents of the North Kingstown bond were doing this for financial reasons, they should have voted for it,” Mancini said. “The state was going to give us an extra $33 million over the life of that bond. Now, we are losing out on that money even if we build the exact same school.”
In Mancini’s eyes, the downfall of the town borrowing proposal had little to do with the finances, and everything to do with public perception. While town officials struggled to win back credibility among voters after the scandal involving the former high school basketball coach, opponents smartly conveyed that mistrust into skepticism of investments in schools and public safety.
“The most stressful thing you can do in local government is have a significant capital improvement project undertaking, unless your community has to deal with the fact that a high school teacher touched kids inappropriately for more than 20 years,” Mancini said.
But the distrust that took down North Kingstown’s borrowing proposal should not be seen as writing on the wall for other state, or local, bonds. As Mancini noted, voters in seven other municipalities approved bonds in November, along with a ballot referenda for charter changes in Central Falls which did not require borrowing money.
At the state level, bond questions are rarely rejected; the last time a ballot question was rejected was in 2006, when a $4 million bond for improvements to Fort Adams State Park was narrowly rejected, along with a non-bond question to authorize a casino in West Warwick.
McKee has smartly avoided posing controversial questions like gambling in his ballot proposals, DiBiase said. Instead, the administration is picking seemingly popular issues like housing and higher education to put before voters.
One potential exception: the state archives building, which is a “unique category” compared with more traditional items like school buildings and green economy proposals.
Not that it’s any less supported, even outside the capital city where the archives building would be located.
Proposed $8 million state bond would cover about half of Cliff Walk repairs
Both Mancini and Newport Mayor Xay Khamsyvoravong touted the benefits of investment in state history to their constituents. Khamsyvoravong hopes that same statewide appreciation will also be granted to the Newport Cliff Walk, which would get $8 million of the $50 million green economy bond proposed by McKee, if approved by voters.
“This is one of our top attractions to the state,” Khamsyvoravong said. “It’s also a unique opportunity for us to talk about the natural beauty of our landscape and the impact of changing weather.”
The state bond would cover a little over half of the estimated $14 million cost to repair the iconic oceanfront path, parts of which have been closed since March 2022 due to storm damage. Stressing the landmark’s importance to local residents and tourists, Khamsyvoravong said the city is “working aggressively” to find other funding sources including federal money and, potentially, $5 million in local borrowing which would be put to city voters in November.
A list of prioritized capital projects and potential bonds will be finalized by the City Council in April. But Khamsyvoravong was not worried a prospective Newport bond question on the Cliff Walk would meet the same fate as the failed North Kingstown school and public safety bond question.
“If you step out onto the Cliff Walk any given day of the week, you will see residents taking advantage of it,” he said. “It’s an important part of the community’s legacy as well as a unique public access point.”
Reilly also hesitated to speculate how voters in other towns might view upcoming bond referenda. But she hoped, at least, that what happened in North Kingstown proved the importance of healthy skepticism on ballot questions that might otherwise win by default.
“People can vote however they want, but we want them to vote informed,” she said. “Maybe from what we went through, people can say, ‘well North Kingstown voted it down, maybe we should take a more critical look at this.’”
Nancy Lavin is a staff writer for the Rhode Island Current.
