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Well-managed state debt can't stop ticking time bombs

It’s good to see that Louisiana handles it issued debt responsibly, according to a report earlier this month. But before a number of Louisiana politicians get too self-congratulatory about the nature of the state’s debt, it’s helpful to review the issue over which the last special session of the Legislature foundered that in part dealt with this and related matters.

Recall why the session went kaput – Gov. Kathleen Blanco and the Legislature’s fellow Democrats wanted to bust the state’s spending cap quickly without a lot of thought while legislative Republicans wanted to hold the line to pursue greater contemplation of what to do with the presumed budget surplus on the way. (Republicans offered to increase some state salaries and to spend in some areas provided cuts were made in other areas, or to give some pay raises of shorter duration with funds that would not go over the cap, but Blanco and Democrats prevented a solution to this standoff.) One area where some detailed discussion needed to occur was in using any surplus funds to reduce the area where the majority of the debt currently lies, and also in the area where even larger potential looms.

By way of explanation, the Louisiana Constitution caps the amount of money at a certain level that can be spent by the state as a whole in primary government functions, adjusted by the rate of private-sector economic annual growth. The reason why the cap now is coming into play is the growth of government in the state has proceeded at a far higher rate than private-sector economic growth has in the state over the past decade or so.

Louisiana law also limits the amount of new debt the state can issue, if the debt service required by such debt would exceed 6 percent in each fiscal year of taxes, licenses and fees as estimated by the Revenue Estimating Conference. Because transportation needs and delayed maintenance of roads has continued to escalate at a greater rate, a huge backlog of around $12 billion in such needs still is unmet.

As Treasurer John Kennedy notes in his annual report on this matter, even if debt per person in the state is 20 percent lower than it was 15 years ago (note this figure will increase as the state continues to lose population), the borrowing cap is going to limit, in a predicted scenario, debt issuance to highways projects (specifically, the TIMED program), to less than $2 billion for the next four years, and then none whatsoever for the next six.

In others words, not much of a dent can be made in the highway projects unless spending on other parts of the state government’s infrastructure is scaled back. And the $2 billion may not even keep up with other needs identified within that decade, or even four years. However, “surplus” money since it is not borrowed does not count against the limit, so it could eat into the backlog in a way borrowing could not.

Further, the four pension funds run by the state for retirees face a massive unfunded accrued liability that topped $11.45 billion according to the last report. State law requires that it be paid off by 2029 and, worse, has grow in spectacular fashion so that it about doubles the actual funds predicted to be available for payout through 2029. This would mean the average legislative appropriation going through then, assuming no growth in it during this span (in reality it doubled in size in the past five years) would be just about $500 million a year for those 23 years.

So while current debt may be managed well, the state has out itself in the position where future debt issuance is not going to cover transportation needs, and further demands may be placed upon the state with the woefully unfunded retirement accounts payments looming that will reduce the state’s capacity to keep up with transportation demands.

This also points out one other salient fact – spending to solve both these problems will force the state’s spending cap to be busted at current rates of economic growth. It’s unlikely to be amended out of existence and its takes a two-thirds vote to do so, so unless there is widespread political will to keep a lid on growth of other kinds of spending if surpluses are available, these problems will continue to fester now matter how well debt may be handled.

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