An Alternative to Financing Public Works

For the last five years the U.S. economy has been in the dumps. Yields on savings and CDs have plummeted. Corresponding borrowing rates have been attractive for households, and, apparently, states and municipalities as well. However, while households have largely redirected their “savings” towards debt reduction and/or taken steps to reduce monthly debt service payments, many municipalities have defied common sense and used the current interest rate environment to take out additional debt—funding new projects and initiatives in the face of a rising debt load.
Today, Utah is at 75% of its constitutional debt limit, and if items such as unfunded pension liabilities are included, Utah is far in excess of 200% of this constitutional restriction. We believe it’s time for the state of Utah and its municipalities to follow the example of the families who comprise them and use this period to get their fiscal house in order—reduce debt, refinance to lower debt service payments, and return to a conservative fiscal situation as measured by historical standards—not the spendthrift standards of other, less responsible states.

We have seen in recent months a spate of municipal bankruptcies across the country. In fact, two records were recently set for largest municipal bankruptcies in U.S. history: one by Jefferson County, Alabama ($4 billion total debt) and one by Stockton, California (population 300,000). In both cases, revenues from taxes and fees did not keep up with the merciless call of creditors, and current leadership had to bite the bullet to preserve a semblance of public services. The illusion that property values would forever increase and cover these future obligations was the perpetual siren song of city and county managers—a prediction that ultimately and predictably fell flat.
By contrast, Utah’s entire General Obligation (GO) debt in 2011 stood at $3.3 billion, a far cry from the free-wheeling levels of some municipalities, but nevertheless representing a large increase from our historical debt levels. Just three years prior, Utah’s GO debt as a percentage of the constitutional debt limit was 28.30%. By 2011, this figure had increased to 77.28%. In other words, Utah was not immune to the recession’s impact on real estate values. While GO debt is not usually funded directly by property taxes, this is still a troubling development.
Utah also has a statutory debt limit which states “GO debt must not exceed 45% of total appropriations” (a fancy word for taxation by legislative fiat). On the surface it looks like Utah runs a conservative percentage, even leaving a surplus of debt capacity. However, the largest line item, Highway Construction Bonds, which in 2011 comprised 83% of all bond debt, is exempted from this so-called limit and has been since the early 90’s. Predictably, this exempted portion of GO debt has more than tripled in the last 3 years, outpacing population growth 118:1.
Either Utah officials are hoping for a triple-digit percentage population boom in the next two decades, or a lot of money is being funneled into jobs programs building our own “bridges to nowhere.” Now I’m no forensic accountant and interpreting this data is not my forte, but it’s quite clear that we have room for improvement. We should not rest on our “best managed state in the nation” laurels and ignore the ominous warning signs presented by high levels of debt. Agents of the state government, as fiduciaries of public funds, must be held to account.
How can we improve the financial picture? Consider this: how many times have you driven by road construction projects without a single working employee to be seen for miles? Each standing barrel on a construction site represents a $.40/day charge to the state. When was the last time you received excellent service at the DMV? How many private sector employees get free health insurance and amazing pension benefits?
The answers are clear. It’s beyond time to privatize more of the functions assumed by the state government. Market forces encourage restraint and fiscal discipline; government exempts itself from these forces to our collective detriment. Last year, state per capita expenditures totaled nearly $4,000. You and I already being forced to write the check—it’s time to demand more bang for our buck (while working to keep more of our bucks!).