INVESTIGATION: State Debt Hits $8.2 Billion
Thursday, October 18, 2012
As of June 30, 2011, total state liabilities stood at $8.2 billion, a figure much higher than the figure for the amount of tax-supported debt that is normally discussed in public policy circles, which was approximately 1.7 billion in mid-2011.
“Rhode Islanders need to have more light shone on the aggregate debt that we carry on the state and municipal level. It’s a stretch to ask how much is too much when most Rhode Islanders have never been presented with the aggregate debt already on the book,” said Lisa Blais. “Too often, we get pieces of the puzzle but not the overall picture of what we have already approved on bond ballot questions in prior election years. Do we remember what we voted for?”
Quasi publics borrow the most
The $8 billion figure encompasses a wide range of debts, including general obligation bonds, money the state has to set aside for accrued vacation and sick time, the future cost of cleaning up Superfund sites, and capital leases, to name just a few.
The total figure incorporates all of the debt associated with the operations of state government, which totals $2.9 billion. The lion’s share of the remainder, about $4.8 billion, is debt incurred by the many quasi-public agencies affiliated with the state, including RIPTA, the Economic Development Corporation, the state landfill, the Rhode Island Turnpike and Bridge Authority, and state colleges and universities.
Under normal circumstances, that $4.8 billion in additional debt should have no direct or immediate impact on taxes. But the Government Accounting Standards Board nonetheless mandates that states record it on its balance sheets when those states are “financially accountable for legally separate organizations” by making appointments to their governing boards. Debt from quasi-public agencies also has to be recorded if the agency has the potential to provide financial benefits or impose financial burdens on state government—a scenario that hits a little closer to home in a state still reeling from the 38 Studios scandal.
But in big picture terms, the $4.8 billion in additional debt is offset by about $7.9 billion in long-term assets.
Also not included is yet another additional $4 billion in debt that is issued on behalf of businesses, hospitals, school districts, and others by the Rhode Island Industrial Facilities Corporation, Health and Educational Building Corporation, and the Economic Development Corporation, according to Dennis Hoyle, the state auditor. That borrowed money does not have to be accounted for on the state books because the organizations that benefit from the money are responsible for paying it back. The debt is instead recorded on their respective financial statements.
Debt is increasing
What taxpayers should be most concerned about is the amount of debt that is supported by taxes, said Gary Sasse, the former director of administration under Gov. Don Carcieri.
But there isn’t agreement on exactly how much of the state debt is actually supported by taxes. The state calculates the current number at $1.7 billion. But Moody’s Investor Services pegs it at just over $2 billion.
The disagreement is over how to classify the GARVEE debt for the Department of Transportation, which allows the state to borrow against future federal highway funding, according to Thomas Mullaney, the state budget officer. The state doesn’t count that as tax-supported debt; Moody’s does.
Further complicating the picture is debt that was not originally envisioned as tax-supported debt, but could become just that. The most obvious example is the now all-too-familiar $100 million debt stemming from 38 Studios. Not only is the money not counted among the tax-supported debt, it isn’t even really on the books, showing up only as a footnote.
One thing is certain: over the last decade tax-supported debt has increased by roughly half a billion dollars, state records show. (See chart at right.)
A better measure of debt is not the amount, but the state’s ability to pay for it, sometimes measured as a ratio of debt to personal income, according to Mullaney.
Progressive blogger and former state treasurer candidate Tom Sgouros agreed. “Evaluating borrowing in the context of what you can afford to pay is the right yardstick, not some imaginary measure of the ‘right’ level,” he said.
“As personal income in a state rises, the view is it can afford to take on more debt while maintaining the same ratio,” Mullaney said. “Our projected debt issuances compared to projected personal income will lower our ratio over time from a current level of about 4.03 percent to 3.08 percent.” (See below table.)
However, the ratio of tax-supported debt to personal income still puts Rhode Island above the national median. In per capita terms, Rhode Island recently was ranked as the ninth most indebted state, according to a 2010 RIPEC report.
Economist Leonard Lardaro says the more debt there is relative to the size of the state economy, the more difficult it will be to get out of debt and manage it in the future. “You keep lopping on the debt to a slow-growing economy, that’s going to make us stand out in a way we don’t want to stand out,” Lardaro said. “We’ve got to clean up our act.”
State officials say they are doing a better job of reining in state liabilities. When asked what Gov. Lincoln Chafee has done to address the problem, spokeswoman Christine Hunsinger pointed to the “instrumental role” he played in pension reform, which reduced the state’s long-term liabilities. She also pointed to Chafee’s push to end the state’s practice of borrowing money for transportation. “The Governor felt very strongly about not using the state’s credit card to do that,” she said.
Some say that in the current economic climate, the state cannot afford to take on any more debt. It’s something that voters will have a direct say over in just a few weeks as they to go the polls to vote on five referenda that, if approved, will add $307.5 million to the debt.
“There’s really nothing wrong with saying ‘no’ to these proposals, even if we’d normally pass them,” Lardaro said. “This is not a normal time.”
Blais suggested that there should be a moratorium on issuing any more debt until the state presents voters with a comprehensive plan for dealing with state debt.
But another taxpayer advocate, the Rhode Island Statewide Coalition, supports two of the bond referenda: the $94 million bond for the new veterans home and $50 million in higher education bonds. RISC Executive Director Donna Perry said the new veterans home “reflects our state’s acknowledgment of the contribution of veterans” while the higher education bonds are necessary for the state to offer a quality education, which “is connected to the quality of the workforce.”
“We don’t support the other bonds because the state is already carrying too much debt at a time when it has shrinking sources of revenue and still carries tremendous pension plan debt, both in the state system and in locally run plans,” Perry added. “Voters need to understand the connection between these bonds and the added debt they represent and the overall Rhode Island tax burden. There will be a continual added burden to tax rates to meet bond debt if our local economy does not improve.”
“Cutbacks on spending, and elected leaders making tough decisions to trim spending—not more debt—seems to be what voters need to support at this point,” she concluded.
Some bonded projects, according to Lardaro, could have an economic benefit. “In the near term, you get a little push,” Lardaro said. “Then you’ve got to service the debt.” He said the best kind of debt to take on is investment-oriented spending in areas like higher education.
How much is too much?
Sgouros said the right question is not how much debt is too much, but what the state and its residents are getting in return for it.
“What’s irritating about Rhode Island debt is that we often pay a lot for not very much in return, and this discredits the idea of debt for things that really matter,” Sgouros said. “For example, I think the new 195 bridge is attractive, but that highway is still clogged. The new bridge and interchange didn’t change the traffic patterns dramatically and didn’t make it easier to get to Riverside, but it cost us about a billion dollars, so was that worth it? Weigh that against the fact that all that borrowing likely means that no transit improvements that would require borrowing will ever see light of day.”
He also said some debt “doesn’t really matter”—like the money the state borrowed against future payments from the tobacco lawsuit settlement. As of June 30, 2011, the state owed $795 million on tobacco settlement asset-backed bonds. “The tobacco bonds are paid for, as I understand it, by a captured stream of payments from tobacco companies,” Sgouros said. “So why is that in the same list as debts that don’t have a payment stream attached to them?”
Blais maintains that eight billion in total state liabilities “seems pretty large for the littlest state in the union.” She said taxpayers should be concerned about the whole amount—not just what is officially regarded as tax-supported debt, invoking the cautionary example of 38 Studios.
“Bottom line, one way or another we all pay for the debt incurred—think budget, taxes, and bond ratings,” Blais said.
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