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State will borrow money to fund skilled trades training

March 3, 2015

Gov. Rick SNYDER and his administration today announced it would be sending community colleges $50 million to help them train students in skilled trades, and the up-front money will be borrowed and then paid back through legislative appropriations.

The Michigan Strategic Fund (MSF) is borrowing the money via bonds, which will have to be paid back in budget appropriations to be requested by the State Budget Office, according to briefing memos from the Michigan Economic Development Corp. (MEDC) outlining the process.

The bonds were first induced by the MSF board last fall and were authorized by the MSF board at its meeting today. Later on, Snyder held a press call to highlight the move, given it’s one of his top priorities and a “critical component” of the state’s $70 million strategy to address the skilled trades issue.

The MSF meeting and the MEDC memo provided more details about how the Community College Skilled Trades Equipment Program would be paid for.

The MSF will borrow up to $50 million in bonds to pay the grants to the community colleges, which will be matched in part by the community colleges that were selected. The 18 community colleges selected are putting up $21.5 million in matching funds, according to the Governor’s office.

But the State Budget Office will have to “agree to request an annual appropriation sufficient to cover debt service each year that the bonds are outstanding,” which the MSF will agree to use only toward the bonds, according to the memo.

But if the debt service payments aren’t appropriated, that will result “in the default of MSF on its obligations.” But it’s not clear what that means from the briefing memo, considering it also says the bond buyers assume the “appropriation risk” when they purchase the bonds.

Further, the memo warns the state’s credit rating could be at risk if the Legislature doesn’t fund the debt service on the bonds, so this “creates an incentive for the Legislature to appropriate funds in order to protect the rating on that debt and preserve the ability to issue such debt at competitive interest rates in the future.”

It wasn’t made clear which fiscal year will mark the first one the appropriation related to these bonds would be added to the budget. It’s also not clear what the anticipated per-year debt service will amount to as a result of these bonds. A series of questions sent to the MEDC weren’t returned Tuesday night.

The program is supposed to provide funding to these community colleges so they can purchase equipment to better teach skilled trades to students and deliver “educational programs in high-wage, high skill and high-demand occupations.”

“We are positioning Michigan to become the national leader in developing talent,” Snyder said in a statement today. “This serious investment — one of the largest of its kind in the country — will tap our top-notch community colleges and help new students and adults looking for new opportunities gain the skills sought by companies looking to grow and expand, creating more and better jobs in Michigan.”

Washtenaw Community College, Oakland Community College, Muskegon Community College, Lansing Community College and Henry Ford College were among the colleges with the largest grants from the state, each one receiving more than $4 million each.

According to the MEDC memo, this same type of financing was used to pay the state’s portion of the Facility for Rare Isotope Beams (FRIB) project at Michigan State University

MIRS asked the MEDC CEO at the time, Mike FINNEY, about the appropriation risk associated with the FRIB bonds.

He said that the bond would be added to the other bonds the state finances each year for various projects, and it’s not in the state’s interest to default on any of them.

“It’s highly unlikely that the Legislature would not choose to authorize this particular appropriation versus all the other ones we have in the state budget,” he said.

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