If GOP state lawmakers wish to achieve their goal of reducing state debt to 85 percent of the constitutional cap it will take $210 million.
That was the unwelcome news given by Jonathan Ball, the Legislature’s top budget staffer, to the Republican House caucus this week.
Almost by accident, Utah has wandered into a bonded indebtedness situation not fully anticipated by the Republicans who run state government.
It’s a combination of borrowing for huge road projects – like the I-15 reconstruction in Utah County – and an unexpectedly large drop in real property values, especially housing.
In addition, Ball says that lawmakers should increase the caps of the state’s two so-called Rainy Day funds – the excess revenue pots in the General Fund and the Education Fund.
The latest deep recession hit those funds harder than originally expected. And the caps should be lifted by 1 percentage point in both the Rainy Day accounts to take into account “mistakes” in estimating future state revenues 18 months out.
Each general session, the Legislature adopts a new state budget that starts July 1. In putting together that budget, lawmakers and Ball’s staff must estimate tax revenues about 18 months from the close of the next fiscal year.
There’s a formula used in that calculation, and part of responsible, conservative budgeting (for which Utah has been recognized nationally and GOP leaders are proud of) means you need to have enough money in the two Rainy Day accounts to cover you if your estimating formulas miss the mark.
In short, said Ball, “I come before you today saying you have to save more money – a tough thing when you have billions (of dollars) in need.”
Back to the constitutionally-mandated borrowing limit: The limit is based on the overall property values in the state, since yours and my homes and businesses value stand behind state issued general obligation bonds.
The limit is 1.5 percent of property values.
Over the years the state has come up to 85 percent of the cap at times.
That 85 percent level is not in law, only in practice.
With big bonds to pay for road projects, GOP leaders thought they were at – or maybe a bit over – that 85 percent level.
But then the state Tax Commission did an analysis of real property values in Utah.
Property values went down 3.6 percent to $280 billion in 2010, says a new financial report Ball handed out to GOP caucus members.
And after the last bond sales of $610 million in July 2011, it was learned that because of dropping home values, the bonding total was $3.7 billion, or 87 percent of the cap.
GOP legislative leaders in the House and Senate say their caucuses would like to drop that 87 percent to 85 percent, if possible, this general session.
Now, says Ball, new estimates make him believe that the state is really at 90 percent of the cap.
That’s because the state must issue $205 million in bonds in 2013 (the fiscal year budget lawmakers will set this session) and $125 million in 2014 to finish road projects now under construction.
There will be a further 7 percent decline in property values when the 2011 assessments come in, with only a slight recovering in years beyond, Ball’s new report finds.
“From those assumptions, the state will be at 90 percent in the constitutional debt limit in FY 2013 and 85 percent in 2014,” the report says.
While that is not good news for the state’s AAA bond rating, because of Utah’s conservative borrowing track record and the fact that the state pays off its bonds relatively quickly – many short-term bonds of six or 12 years, no 50-year bonds – the coveted rating is not in immediate jeopardy, said Ball.
But – and Ball hedged a bit in explaining this – it is also clear that the majority Republicans can’t this year cut the borrowing from 90 percent of the cap to 85 percent.
Ball said each 1 percentage point of the cap equals $42 million. He didn’t add up to total for the House GOP caucus, but with a trusted calculator UtahPolicy can count up to $210 million to pay down the debt from 90 percent to 85 percent.
“I don’t think you can get there in one year,” said Ball. “You can work toward it.”
Bam! In about 10 minutes House Republicans learned one of their 2012 legislative goals is out of reach.