McNally Sees THEC Bond Proposal as ‘Overly Ambitious’

News release from Senate Republican Caucus:
(NASHVILLE, TN) – Senate Finance Committee Chairman Randy McNally (R-Oak Ridge) said today he has great concern regarding the $2.1 billion recommendation to fund capital improvements and capital maintenance made by the Tennessee Higher Education Commission (THEC) on Tuesday.
McNally said the recommendation is overly ambitious given Tennessee’s current finances, and that he would be very concerned about some of the alternative financing methods which have been discussed in conjunction with the plan.
“Tennessee must continue to employ the prudent fiscal practices which have helped us remain one of the best financially managed states in the nation,” said McNally. “I am very concerned about any plan that could endanger our bond rating. We have been very careful in the way Tennessee handles debt and the bond rating companies recognize this fact. This is not the time to depart from those conservative financial practices that have helped us navigate through one of the toughest recessions in our nation’s history.”
Tennessee has one of the lowest per capita debts in the country. The THEC proposal could more than double the state’s current debt. Earlier this month, Moody’s Investor Services removed the negative outlook placed earlier this year on Tennessee’s Aaa (Triple-A) General Obligation Bond Rating. Moody’s said the outlook was revised from negative to stable in order to reflect the relatively lower level of risk posed by federal downsizing and U.S. spending cuts in Tennessee.
McNally said he does not favor the state borrowing for capital maintenance, which is normally paid for on a yearly basis. In addition, McNally said he would oppose any plan that finances the bond issuance beyond the customary 20 years, an 11 percent rate generally paid on capital outlay projects, and a level principal amortization.
Payment installments under a level payment amortization plan as opposed to a level principal amortization are apportioned unequally between interest and principal, with the early years going almost entirely towards payment of the interest. It is only in later years, when most of the interest has been paid off, that the principal balance is reduced significantly.
“We have capital project and maintenance needs in our colleges and universities. However, we cannot resort to any financing plan that could endanger our bond rating or our ability to keep the state on good financial footing.”

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