June 20, 2018
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LePage pulls plug on agency bonding

By Matt Wickenheiser, BDN Staff

AUGUSTA, Maine — A $31 million bond package sponsored by a little-known quasi-state government body has stalled after Gov. Paul LePage’s decision not to approve it.

The decision highlights a fundamental shift in how the executive branch views debt in the state and has implications for agencies that issue bonds to help fund such things as college loans, low-income housing, and hospital and school expansions.

The Maine Health and Higher Educational Facilities Authority, or MHHEFA, is the government entity in the state that educational and health care nonprofit groups must go through under federal law to sell tax-exempt bonds, borrowing money for capital expenditures at low rates of interest.

Maine residents have not been asked to vote on such quasi-governmental agency bonds in the past, but that appears to be changing under the LePage administration.

Husson University, Fryeburg Academy, Colby College, York Hospital, Inland Hospital in Waterville and Franklin Memorial Hospital in Farmington had sought to issue bonds through the authority, borrowing $31 million for a variety of projects.

The authority held a public hearing on the package and made a report on the hearing and the package for LePage.

Institutions must repay the money obtained through the bonds but such packages contain a stated “moral obligation” for the state to pay any bonds should the borrowing institution and the bond-issuing agency be unable to cover it. But the state’s commitment ends there, said Robert Lenna, the authority’s executive director.

“There’s no pledge of any kind of state funds being legally obligated to pay off these bonds,” said Lenna.

Ditto with revenue bonds issued by the Maine State Housing Authority, which uses the bond stream as a line of credit to fund low-income housing projects and first-time homeowner mortgage programs, said Executive Director Dale McCormick.

That differs from the general obligation bonds that the state issues after voter approval to fund such things as new bridges, sewer systems and the Land for Maine’s Future program. Those bonds are paid by tax revenues, and the state is legally obligated to pay that debt.

But LePage and State Treasurer Bruce Poliquin disagree with the long-standing assessment that the state would not be held liable for the agency bonds.

“I don’t buy that; the governor doesn’t buy that,” said Poliquin, who sits on all such quasi-governmental boards in Maine, except for the Maine Turnpike Authority. “I think if there were ever a case where any of the bonds sold by any of these state agencies got into trouble, that eventually that would come back to the taxpayers of Maine.”

MHHEFA’s latest bond package was given to LePage on Friday, Feb. 4. The next week, the authority learned the governor would not sign the package. That blocked the agency from proceeding with bonding.

Poliquin said LePage would not sign any bond package with a moral obligation that has not gone before voters. That would include bonds from Maine Housing, MHHEFA and the Maine Educational Loan Administration, but not the Maine Turnpike or the Finance Authority of Maine, he said. The governor isn’t required to sign bonds issued through the Maine Municipal Bond Bank.

“The governor believes strongly that the constitution affords the voters the opportunity to have a say on obligating the state, and he believes we have to work through this and send packages to the voters,” said Dan Demeritt, LePage’s spokesman. “We’re not torpedoing any of these projects; he just believes there’s a process that needs to be adhered to.”

Poliquin, who is a constitutional officer elected by the Legislature, asserted that the state has a total debt level of $12.9 billion, including Treasury-issued general obligation bonds ($500 million), agency-issued bonds ($5.5 billion), university system bonds, and pension and health care obligations.

Mainers have voted only on the general obligation bonds, he said.

“I happen to think that debt profile includes not only the bonds issued by Treasury, but these agency bonds — much of which has attached to it what we call a ‘moral obligation,’” said Poliquin.

Poliquin said the work those quasi-governmental agencies do is important. And the agencies are all solvent, with strong credit ratings and cash reserves above and beyond what is needed to cover any eventualities, he said. But he believes they’ve been allowed to grow debt without appropriate oversight.

“The governor and I are concerned; no one’s looking at the global debt picture,” said Poliquin. “What we do not want to do is proceed down a path where we get into trouble.”

He suggested a lack of federal oversight contributed to the problems with Fannie Mae and Freddie Mac at the national level.

“We are not there at all with these agencies; they are all in good shape. But the governor and I are very concerned about the voters having a chance to weigh in on debt that they may be responsible for,” said Poliquin. “Ultimately, anything goes wrong in this state, it goes back to the taxpayers. That’s our belief.”

The Husson University part of the bond package totaled $3 million and would have been part of the $15 million dining hall renovation, said school spokeswoman Julie Green. Green said the school would seek that $3 million elsewhere and the project would proceed. She said school officials were hoping to meet with LePage to discuss the issue.

Dan Lee, headmaster at Fryeburg Academy, said the governor’s refusal to approve the package “has had little or no impact here.”

“We were days, if not hours, away from withdrawing from participation because the interest rates and fees had skyrocketed in recent weeks, thereby eliminating the financial advantages typically associated with this type of financing,” Lee said.

York Hospital President and CEO Jud Knox said his nonprofit had sought to bond $1.3 million to buy new equipment, including $800,000 to replace a 35-year-old X-ray machine.

“We were caught very much by surprise when we learned the governor had decided not to sign the authorization for these bonds to be sold,” said Knox. “It’s certainly a disappointment to us that it’s not going to be available in this go-around, and I’m not sure what it portends for the future.”

Going through the authority gives small hospitals such as his the ability to get a lower interest rate for projects and to use the authority’s expertise in the market, said Knox. He said he and senior hospital officials would meet Monday to reprioritize purchases and make new plans.

Neal Meltzer, chairman of MHHEFA’s board, said the authority was working closely with the Treasury and LePage’s office to explain fully what they do. But he said the recent actions will have consequences.

“If the decision is made to not sign off on these bonds, then that will have an impact on hospital construction, it will have an impact on higher education construction. If this mechanism is not available to those types of organizations, they will need to go to, I imagine, the private sector for funding, which will cost percentage points more than what we’re able to do this for,” said Meltzer. “Unfortunately, it would seem to me those costs would be transferred to the end recipients — the people of the state of Maine that use the services.”

Lenna noted the bond package that the governor didn’t sign included about $20 million in construction funding. That won’t happen now, or has been significantly delayed, he said, which will affect the economy. Using a conservative multiplier, that takes about $40 million out of the state’s gross state product, he said.

Asked about the potential economic impact, Demeritt said, “The principle needs to come first.”

“Sometimes it’s inconvenient to stand up for what you really believe in,” he said. “The governor believes it’s very clear the taxpayers get the final say on bond issues.”

Lenna said the state will need to set up a system to allow these bond packages to go to a vote. He questioned the expense and the need.

“When Eastern Maine Medical Center wants to build an addition to its Bangor hospital, and wants to borrow $50 million to do that, it will have to go out to referendum so everyone in Portland and Biddeford can vote on it,” said Lenna. “If there’s no state liability here, why are we spending all this money on statewide referendums? All we’re doing is increasing costs to the state for a philosophical belief.”

McCormick said her agency still was absorbing this change of policy and trying to figure out what it all means. She said Maine Housing to date has been nimble, able to move quickly in the market and take advantage of good — sometimes fleeting — rates. That will be lost with the requirement to go to referendum with bonds, she said.

And, she said, voters will be confused on the ballot questions as the debt the agencies propose would be different from the general obligation debt — but the distinction likely would be lost.

In addition, “we think this is unwise because people in Portland may not want to vote in favor of an affordable housing project in Bangor or Lewiston,” said McCormick. Likewise, people who already own their homes may not tend to support the kinds of bonds her agency would forward, she said.

Those are all valid concerns, said Poliquin. He said neither he nor the governor wanted to limit the cheap credit available to the projects and programs.

“But on the other side of the coin, we don’t want our debt to grow to an extent where we have to be increasingly concerned about the ability to pay it off,” said Poliquin. “It is a balance between those two forces.”

Poliquin said all agencies likely would have to plan more. His office has submitted a bill that would give Treasury more of a role in the bonding plans for all the agencies and also would give the treasurer a seat on the Maine Turnpike Authority.

His office is working with agencies to figure out how to ensure they can keep doing what they do going forward. All of them have cash and won’t be shutting down in the near future, he said.

“In the long run, it is our belief that the state will become more fiscally disciplined,” he said.

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