Rationalizing a Bond Binge
Florida has recently become one of a handful of states to adopt a formal system of debt analysis aimed at helping guide debt-issuance decisions.
Florida has recently become one of a handful of states to adopt a formal system of debt analysis aimed at helping guide debt-issuance decisions. Such programs earn praise from bond-rating agencies as fiscally prudent and could find increasing acceptance in states feeling pressure to bond, especially as echo baby boomers begin to age into their college-education years.
While they are fiscally wise, debt-affordability programs are not necessarily popular among elected officials. After all, there is likely to be political profit in spending a huge chunk of money on such popular programs as school building and open-space acquisition and leaving it to future politicians and policy makers to deal with the down-the-road fiscal consequences.
That's not to say that most states have been blithely racking up debt with utter disregard for the long-term fiscal consequences. But there are some states--California, Louisiana, Maryland and Virginia, in particular--that are clearly more systematic than others in analyzing the long-term fiscal impact of adding new debt, according to those in the debt-monitoring business.
The reason for Florida's decision to join this relatively exclusive club, according to state bonding officials, is the sharp rise in the state's debt over the past 10 years, from $5.8 billion to around $17 billion. Much of that surge is directly attributable to spending demands on two policy fronts: The state has been helping fund both K- 12 and higher education infrastructure and has also been spending fairly big bucks on environmental protection projects.
While there are a number of ways to evaluate the fiscal wisdom of taking on more debt, the systems typically compare down-the-road debt profiles with a forecast of long-term revenues and expenses. In Florida, legislative- and executive-branch budget and finance officials worked with outside experts to come up with a 10-year revenue and expenditure outlook against which the advisability of new debt is weighed. The plan is to review and update the 10-year outlook annually.
Adopting a policy of more rigorous analysis has other potential benefits. It probably won't bump a state's bond rating up immediately, but credit-ratings experts note that states with formal debt-analysis systems do tend to have higher bond ratings. For instance, Maryland and Virginia, which have been doing formal debt-analysis studies for decades, have enjoyed unbroken strings of AAA ratings since ratings were first instituted, points out Hyman C. Grossman, head of public finance at Standard & Poor's.
California Treasurer Philip Angelides argues that his state's recent bond-rating rise from A to AA reflects not only California's recovering economy but also its "improved debt management practices." That means that every bonding proposal is accompanied by a formal analysis of debt affordability.
Looking across the state fiscal landscape, there may be other potential candidates for the more methodical debt-assessment process. Renee Boicourt, who analyzes state fiscal health for Moody's Investors Service, notes that, in general, states are going to have to look to issuing more bonds as echo baby boomers begin to flow into the higher education system, which might inspire some states to get more serious about evaluating the impact of long-term debt. More specifically, though, Boicourt points to New Jersey, New York and North Carolina as states where an enthusiasm for taking the bond plunge might benefit from a more rigorous evaluation of what today's generosity could mean to tomorrow's taxpayers.
Join the Discussion
After you comment, click Post. You can enter an anonymous Display Name or connect to a social profile.
LATEST FINANCE HEADLINES
Exiting Municipal Bankruptcy6 days ago
Miami's Big Budget Problem1 hour ago
The Week in Public Finance: Expensive Retirees, State Spending Redux and Following the Rules2 days ago
Twin Cities Archdiocese May File for Bankruptcy2 days ago
University of California Wants to Jack Up Tuition Again2 days ago
Why a California Town Wants Yet Another Prison4 days ago