Caution on state debt [Editorial]

Local government officials aren't the only ones who have to worry about meeting the stormwater pollution reduction targets set by the Environmental Protection Agency as part of its Chespaeake Bay pollution diet. The State Highway Administration also has a massive infrastructure of outmoded stormwater management systems that need upgrading, not to mention thousands of lane-miles of impervious surfaces that contribute to the flow of polluted water into the bay. Acheiving that is going to cost hundreds of millions of dollars during the next five years.

The General Assembly was conscious of that fact when it enacted a major transportation funding bill last year. It required the governor to include either capital or operating funds in the budget for the next five years to cover an anticipated $395 million in costs for the SHA's Watershed Implementation Plan. But lawmakers were also cognizant of the fact that the gas tax increase they were passing as part of that bill was hugely unpopular and would be more so if the public thought any part of the money was being diverted to a purpose other than increasing the capacity of the state's highways and mass transit systems. Legislators decided the governor would have to find some way besides the new gas tax revenues to pay for the watershed improvements.

Gov. Martin O'Malley opted for the simplest solution. His administration proposed that the state increase its self-imposed borrowing limit by $75 million a year for the next five years to cover most of those costs. The plan was approved by the state's Capital Debt Affordability Committee 4-1, with Comptroller Peter Franchot the lone dissenting vote. Now it's up to members of the legislature to decide whether to accept the committee's recommendation, and their chief budget analyst is reccommending that they say no out of concern for the state's rising debt service payments and uncertain fiscal future.

The question is not completely clear-cut. The state has to find the money somewhere, and it's not exactly flush with cash. Funding the watershed improvements within existing resources would mean cutting programs or eliminating capital spending for things like schools and other infrastructure projects that would help shore up a weak economy. And raising taxes again is (and should be) a political non-starter. Meanwhile, increasing the debt ceiling by $375 million over the next five years is not expected to cause the state to run afoul of its self-imposed debt limit tests — that debt not exceed 4 percent of total state personal income and that debt service payments not exceed 8 percent of government revenues.

On the other hand, the level of state debt has increased markedly under the O'Malley administration, and with it, debt service payments are projected to take up a big chunk of his successor's budgets. Part of the reason for the increase in debt is the governor's tactic of using bonds to pay for Program Open Space and diverting the transfer tax revenues that are supposed to fund it into covering operating expenses. This shell game is legal but not ideal, and it is projected to continue into the forseeable future, albeit at a lower level than during the worst years of the recession.

The upshot is that debt service payments are expected to be, by far, the state's fastest growing expenditure during the next five years. State property taxes are supposed to cover debt service, but because of the growth in borrowing and the weak real estate market, they will fall short. The Board of Public Works could increase the property tax rate to make up the difference, but that is both unlikely and undesireable. Instead, the state is expected to have to start kicking in general funds to make up the difference, starting with a nominal amount this fiscal year but growing by an average of more than 24 percent annually until the payments reach $557 million in fiscal 2019, the last year of the next governor's term.

The $375 million in borrowing at issue now would contribute only a small portion of that — $43 million annually when it is fully phased in — but there is good reason at the moment to approach the matter with caution. Governor O'Malley estimated the cost of the government shutdown at $5 million a day (Mr. Franchot's office will have more precise numbers in December), and that came on top of the effects of sequestration. Given the continued uncertainty around the federal budget, Maryland needs to be prepared for more fiscal shocks in the future. In addition, the state is due for another study on the adequacy of education funding — a follow-up to the Thornton Commission's work of a decade ago — and the chances that it will conclude that everything is rosy are slim. Finally, all of the candidates for governor are making proposals that will significantly affect the bottom line through new spending, tax cuts or both.

If the legislature accepts the committee’s recommendation now, it could change course later if circumstances warrant, but it would be better to approach this and all other fiscal decisions in the months ahead with due caution. Lawmakers should defer the decision about adding to the state’s debt limit until all those uncertainties become clearer. The cost of the state’s Watershed Implementation Plan in the next fiscal year is $45 million. The General Assembly should find ways to absorb that cost within existing resources and leave the decision on whether to cover the remaining tab through additional debt for the new governor and legislators who will take office in 2015.

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