S.C.’s “Debt Limit” Not So Limited
JUST BECAUSE STATES CAN’T PRINT THEIR OWN MONEY DOESN’T
MEAN THEY CAN’T ACCUMULATE DEBT … LOTS OF DEBT
In a recent study by the American Legislative Exchange Council (ALEC), South Carolina was ranked third to last in debt service as a share of tax revenue. Translation: our state pays a lot in interest and principle on bonds in comparison to how much money it takes in through taxation. This poor ranking has two – and only two – possible interpretations. Either (a) South Carolina doesn’t bring in enough revenue, or (b) the state has accumulated too much debt, which creates higher allocations in debt service each year.
The first interpretation cannot be true, inasmuch as South Carolina lawmakers find innumerable ways to spend taxpayer money on non-essential government functions such as marketing, corporate welfare, “economic development”, and even film making. The only other alternative, therefore, is that we have too much debt.
So what exactly do our debt limits look like?
General Obligation Bonds
The state’s constitution generally limits annual debt service of general obligation debt to five percent of the previous year’s General Fund revenue (revenue primarily from individual and corporate income taxes, and the sales tax). According to the State Treasurer’s Annual State Debt Report in 2012, the General Assembly has enacted five classes of bonds subject to the five percent limit: School Bonds, Capital Improvement Bonds, School Facilities Bonds, Transportation Infrastructure Bonds, and Air Carrier Hub Terminal Facilities bonds.
However, the constitution also provides that the limit may fluctuate between four and seven percent if given a two thirds majority vote from both the Senate and House of Representatives. Unsurprisingly, the General Assembly has increased the debt limit twice: A half-percent increase issued in 2002, to be used for economic development projects, and another half-percent issued in 2004, to be used for research university infrastructure bonds – bumping the current debt service limit to six percent of the previous year’s General Fund income.
According to the State Debt Report for Fiscal Year 2012, the state owed $183.4 million in debt service for that year and had an outstanding overall debt of just over $1 billion for the bond classes mentioned above.
While a billion dollars is indeed a hefty debt in itself, it doesn’t even come close to the state’s overall debt.
Bonds Not Subject to Five Percent Limit
Numerous types of bonds fall outside the realm of the five percent limit and have their own limitations (or lack of limitations, as the case might be).
Fixed Principle Economic Development Bonds. In 2009, the General Assembly authorized the issuance of additional economic development bonds that would be limited to a principal amount of general obligation debt not exceeding $170 million at any time. According to the State Debt Report, a total of $11.5 million was owed in debt service for these bonds in FY 2012.
State Highway Bonds. These bonds are limited to fifteen percent of the previous year’s revenue from “taxes and licenses imposed on individuals or vehicles for the privilege of using the public highways of the state,” according to the State Debt Report. As of FY 2012, highway bonds had over $440 million in outstanding debt and owed $58.8 million in annual debt service.
State Institution Bonds. These bonds, which are used for permanent improvement projects for higher education institutions, may not incur an annual debt service of over 90 percent of the amounts received by the institution from tuition fees the previous year. In 2011, state higher education institutions paid roughly $37.5 million in debt service.
Here is a list of other bond classes and their respective principal outstanding debts as provided by the State Debt Report in 2012.
- State Transportation Infrastructure Bank – $2 billion
- Auxiliary Notes for Institutions of Higher Learning – $710.5 million
- State Ports Authority – $181 million
- State Education Assistance Authority – $73 million
- MUSC Hospital – $466.5 million
- Public Service Authority (Santee Cooper) – $5.1 billion
- State Housing Finance and Development Authority – $790 million
- Educational Facilities Authority – $336 million
- Heritage Trust – $14.8 million
- Tobacco Settlement Revenue Management Authority – $71.7 million
- Lease Revenue – $18.5 million
All of these debts added together give a total debt of well over $11 billion, roughly twice the amount of total General Fund revenue for the state that fiscal year ($5.5 billion). And according to State Budget Solutions, South Carolina has a total state debt of $54.1 billion when pension liabilities are included. That means each South Carolina resident owes over $12,000 towards the state’s debt.
Solution: Don’t Spend What You Don’t Have
It really is that simple. As much as conservative leaders in South Carolina like to complain about the $16.6+ trillion debt on the national level, rarely is a peep heard about the debt incurred on the constituents of their own state. Bonds are indeed a delayed tax and put the tax burden on generations down the line. As more money is borrowed, more and more interest must be paid each year. As debt service allocations increase, less money is available to spend on the hundreds of other state agencies. And state agencies want to grow – and have grown – regardless of the budget and economic climate. Thus to accommodate state agency budgets, legislators would have to raise taxes – or, at best, take money from reserve funds, thus eliminating any chance of either providing tax relief to South Carolinians or paying for arguably more important expenses like law enforcement and road repair.
For the coming fiscal year, the General Assembly is projected to use roughly 24.2 billion taxpayer dollars – a vast amount for such a small, comparatively poor, and allegedly “conservative” state to spend on government. It should not be beyond the powers of our state lawmakers to spend only what the state collects without seeking out massive future obligations.
A business can’t get away with constantly incurring more debt without eventually going bankrupt. The same applies to governments.