Here’s one for you – recall how conservatives in the Utah Legislature complain and complain about how much in debt the federal government is?
Well, these same conservatives – which run the Legislature – and GOP Gov. Gary Herbert have indebted the state to the tune of $2.8 billion.
That’s billion with a B.
Now, this is NOT as bad as the federal government. Not nearly.
The state has a balanced budget each year, while the federal government is running a $400 billion deficit now and is trillions of dollars in debt – debt that won’t be paid off for the foreseeable future.
Still, as of Jan. 1, the Executive Appropriations Committee heard Tuesday afternoon, the state will owe $2.8 billion in general obligation bonds.
That is 26 percent of the annual $13 billion budget. (That is not 26 percent debt service of the annual budget, but the total debt is 26 percent of the size of the annual budget.)
The annual debt service – interest and principle – is 7.5 percent of the state’s annual tax revenue (this year that debt service is $450 million), a level the report writers said is high compared to the other AAA-rated states’, and above the median of all the states’.
This is troublesome for the Legislature’s budget staff.
“We have been talking about this (with you) for four years,” said Jonathan Ball, head of the Legislative Fiscal Analyst Office.
“This is not a new issue.”
Ball said normally legislative staff just does what lawmakers (especially leaders) want, and not argue or give their professional opinions. But this is one time budget staffers believe they must speak out.
“This (debt) is something that concerns us, as your staff,” said Ball.
“You are making progress” in reducing the overall debt, the debt per person, and the debt ratio compared to annual tax revenues.
But there are going to be demands for more bonding – maybe a lot more bonding, said Ball.
Transportation and water development groups are planning on asking the 2015 Legislature for a lot more money, which could come, in part, through bonding for specific projects — like a several billion dollar pipeline to bring Lake Powell water across the bottom of the state to St. George.
In addition, the state is looking at spending $450 million to build a new prison. While sale of the 700 acres at the Point-of-the-Mountain’s old prison site will bring in cash, that won’t come for years and the state will have to front the new prison’s cost.
In fact, the Utah Foundation, a non-profit government study group, is holding an early-morning conference Wednesday on just this topic – state bonding and debt.
You can find the Utah Foundation here and it’s bonding seminar here.
Utah’s bonded indebtedness is looking “pretty good if you stay on course,” or even go off course just a little, with small bonding projects, said Ball.
“But if you try to do all the things you are talking about – water pipelines, new prisons and roads in a growing economy, that is not the best direction to go,” warned Ball.
GO bonds pledge the good faith and credit of the whole state as collateral – that’s you, Utah citizens. If the state went bankrupt (which it won’t) a judge could raise all of your property taxes to pay off the debt.
The $2.8 billion DOES NOT include any state-issued revenue bonds.
Revenue bonds, in theory, are paid off by a specific tax or fee revenue steam – like the U of U issuing a revenue bond to build a new student health/gym facility and pledging/paying off those bonds with student athletic fees.
Currently, the state and its authorized subdivisions have $312.5 million in outstanding revenue bonds, the report said.
Legally, the state could allow some of those revenue bonds to default, if need be, and the Legislature wouldn’t be required to step up and pay the money.
But reality is different.
House budget chairman Mel Brown, R-Kamas, said that for years lawmakers have allowed certain state buildings to be constructed with revenue bonds, and then paid those bonds off with “lease” collections from the state agencies occupying those new buildings.
“I see (these kind of rent-bonds) as a general obligation of the state,” said Brown.
That’s because the revenue bonds are paid off out of the state’s General Fund, where sales tax and other revenues go, and out of which most state agency expenses are paid. The state would never default on those bonds, and even if legally escapable, would never do so.
Just this year, the Legislature authorized $226 million in new road building bonds, which won’t be paid off until July 1, 2028.
That 14-year payoff actually is rather short, compared to what some other states are doing – long-term capital projects are getting 50-year bonds in some places.
“It’s nice to see the debt level going down,” said Rep. Joel Briscoe, D-Salt Lake.
“We kept the (Utah) economy afloat during the recession with building roads. We may load up (with new bonds) in the near future, and I’d like to see (a chart) of what that would look like,” said Briscoe.
Utah state government has a AAA bond rating, the highest possible and shared by just nine other states. AAA rating lets Utah get the lowest possible interest rates when bonds are sold.
The Utah treasurer handles the bond sales and does so only when projects and the markets are the most favorable.
The Legislature has authorized about $63 million in bonding which the treasurer has not yet sold, and may not depending on a number of issues.
The Utah Constitution limits the amount of debt officials can issue. It’s a complicated formula (based on 1.5 percent of the market value of all property in the state), but according to the report released Tuesday lawmakers could issue an additional $1.2 billion in debt before hitting the ceiling.
During the Great Recession, when housing prices were falling in Utah and lawmakers were still bonding big on road projects (I-15 in Utah County), the state was getting close to the ceiling, but never hit it.
Lawmakers also passed a law a number of years ago limiting state debt (not counting road bonds).
That, also, is a complicated formula, and when the Legislature came close to that cap several years ago lawmakers just increased the cap.
Tuesday’s report says $1.1 billion in non-road bonds could be issued under that legal cap.
But Ball says approaching either cap wouldn’t be fiscally prudent and could risk the state’s AAA bond rating.
Ball says legislative leaders and staffers believe bonding at or below 45 percent of those caps is good fiscal policy. The state’s debt was way over 45 percent when housing prices fell, and I-15 reconstruction was going, during the Great Recession.
