Don’t Blow It: Why Maryland Needs a Get-Out-of-Debt Policy

Prudent families only borrow when they must. They know that the results of over borrowing can be dire. No such worries appear to exist in Maryland with respect to incurring debt. The state constitution requires the state to pay its bills on time and in full. An apparently unlimited supply of tax dollars ensures the state’s solvency. Such protection insulates Annapolis from the debt-wariness that would haunt the average family.

It is time Maryland got out of debt.

Maryland owes $3.3 billion. Forecasts show that this amount will increase to $4.5 billion by 2007.1 This is due to Annapolis’ habitual use of the state’s credit card – that is, 15-year debt financing on bond issues – to fund capital programs. Only the state’s operating budget is subject to the constitutional balanced-budget requirement. The capital budget – funds used for big-ticket construction projects and the like – is permitted to be, and invariably is, woefully in deficit. Borrowing funds for capital projects frees up operating-budget funds for program expansion – a penny-wise, dollar-foolish approach. It costs money to borrow money. Big money.

This year’s $3.3 billion debt refers only to state general-obligation debt – tax-supported, 15-year debt used in part to build, improve and equip state and locally owned capital facilities and in part to provide grants and loans to non-public entities. There is further debt, however – debt associated with highway construction and maintenance. Gas taxes, vehicular titling and registration fees finance this debt, which is not the subject of this essay.

Revised figures indicate that this year it will cost Maryland taxpayers $417.9 million to make the principal and interest payments on the $3.3 billion.2 That is about $165 for every taxpayer in the state.3 Next year, the debt will increase to $3.5 billion, necessitating $418.5 million in principal and interest payments. Maryland has committed itself to staying in debt well into the next century.

Need the state borrow at all? Naturally, borrowing is sometimes required, as with any family, when necessity dictates. But what defines “necessity” in government?

There is another way to fund projects – using existing revenue, at least to a greater degree than is currently the case. PAYGO expenditures for state capital projects in fiscal year 1999 will total $1.16 billion.4 This means spending on a pay-as-you-go basis out of current revenue, with no 15-year debt. It is like paying cash instead of financing. Of course, proponents of borrowing argue that the $1.16 billion is too little to pay for all Maryland’s capital project needs. Possibly so. But the advocates of higher program expenditure are free to parade their projects before the taxpayers. If a project is appealing enough, perhaps taxpayers will consent to pay for it by means of temporary revenue increases or by means of offsetting spending reductions elsewhere. This would result in more public scrutiny than is now the case for projects financed by borrowing.

Perhaps if voters were made more aware of the long-term costs of borrowing they might be more inclined to demand accountability and restraint. What does borrowing cost? To illustrate, on July 30, 1997, the state sold $250 million in bonds at an interest rate of 4.6396 percent.5 Every $1,000,000 borrowed will cost $1,446,852 to repay in principal and interest over the 15-year life of the loan.6 By the time that June 1997 bond issue of $250 million is fully repaid 15 years from now, it will have cost Maryland taxpayers $361.7 million! That is, $250 million in principal payments and a whopping $111.7 million in interest payments. Assuming average salary and benefits of about $40,000 per year, if it really wanted to, the state could make grants to the county school systems and use that $111.7 million to fund 195 new teachers for 15 years.

A good start toward ending this situation would be to be to limit annual new debt to annual debt redemption. In other words, why not demand of Annapolis that no new dollar of debt should be incurred without paying off in full a dollar of old debt? At its inception back in 1978, the Capital Debt Affordability Committee (CDAC) – an advisory group made up of four government officials and one-private sector member7 – advanced this idea. Sadly, the committee dropped the idea nine years late. This was principally because there were stadiums to be built, because rating agencies seemed content to give Maryland a triple-A bond rating despite high borrowing requirements, and because adherence to the policy of paying off an old dollar before borrowing a new one tied yearly authorizations to events of 15 years previously. This was held to produce highly variable bond authorizations from year to year, which was said to be inconsistent with either good management or a stable capital program.8 Translation: We have the money and we want to spend it.

The result has been an endless routine of borrowing upon borrowing ever since. This is ironic, to say the very least. It was this sort of behavior in the 1970s, seen by many as reckless, that had led to the creation of the CDAC in the first place.9

Shortly after the CDAC’s abandonment of the old policy, evidence of Annapolis’ insatiable appetite for borrowing was apparent during the recession that rocked Maryland in the early 1990s. Lawmakers faced unprecedented operating-budget deficits. Given Maryland’s constitutional requirement for a balanced operating budget, spending had to be curtailed. Baseline spending reductions over the period 1991 through 1993 totaled $2.1 billion.10 Every imaginable idea for reducing state spending was advanced – and quite a number were enacted. But has this frugality logic extended to borrowing? Most assuredly not, as table 1 illustrates.11 Despite the fiscal crunch, the assembly has continued to rack up debt. The CDAC’s debt recommendations have religiously increased by about six percent a year, as has the legislatively approved debt. (Each year’s approved debt is fractionally shy of the recommended debt in part to give an appearance of relative frugality.)

Table 1

Mourning the past solves nothing. The question is, how do we get out of this mess? Options do exist. All will require foresight and leadership in Annapolis.

The first thing to do would be, once again, to tie debt-financing to the state property tax. As reported in the fall 1997 issue of this journal, Maryland’s constitution requires the imposition of a tax to finance annual debt-service costs;12 it prohibits the General Assembly from reducing the annual appropriation made to offset this debt service.13 The tax imposed for this purpose is the state property tax, set at 21

Posted in: Efficiency in Government, News Series