Make Debt Reduction Part of Budget
Rep. Todd Stephens (R-Montgomery) rightly says this budget season presents a perfect opportunity for the General Assembly to reduce public debt. Stephens is spurred by more than just a commitment to fiscal discipline; "Debt service is crowding out our ability to fund other vital services," he says.
The sentiment has manifested in a package of debt reduction bills introduced by Stephens and other Republican House members in April. In unveiling the bills, the lawmakers noted that the General Fund’s debt service payments take precedence in the budget – ahead of everything else. If state government doesn’t get a handle on debt, we are indeed as Stephens says "crowding out" other fundamental responsibilities of state government. The trouble is, for years Pennsylvania government has been on a trend of borrowing more than it pays down.
Here are the numbers: The General Fund debt obligation for fiscal year 2014-15 is about $10.6 billion. That represents an increase of 63% in just 12 years since the beginning of the Rendell administration. Annual debt service increased by $520 million during this same timeframe to $1.2 billion this year. This is an increase of 81% since the beginning of the Rendell Administration.
[NOTE: The debt targeted in the House GOP bills does not include the massive unfunded liability in our pension systems for state workers (SERS) and for school district employees (PSERS). Lawmakers have the pension debt in their sights under separate legislation.]
A portion of our debt is what Stephens and Rep. John Lawrence (R-Chester), another debt reduction bill sponsor, call "stealth debt." Oftentimes, lawmakers and the public only discover the enormity of the debt after it’s too late.
One area of "stealth debt" includes what’s referred to as "lease-back" deals. Pennsylvania struck nine such deals under the Rendell Administration. Under lease-back deals, a commonwealth entity is the lessee and makes payments pursuant to a lease agreement. Those payments are then used to service bond obligations. The trouble is these deals amount to expenditures that evade review by the General Assembly, which under the Constitution has sole power over appropriations.
An example involves the state government bailing out a local government authority in the financial disaster that is The Forum Place office building, which sits on the perimeter of the capitol complex in Harrisburg. The beginning of the mess goes back almost two decades. In 1998, the Dauphin County Municipal Authority financed the purchase of The Forum Place through an issuance of more than $75 million in debt. In 2010, the state entered into a 25-year lease for office space in the building. The commonwealth then bought the building for more than $100 million in 2012, but it’s still used for lease-back purposes. Most of the money — more than $99 million — was passed directly to the authority’s debt holders.
"Using lease-back debt is the equivalent of paying the electric bill with a credit card," Stephens and Lawrence wrote in a bill sponsorship memo. "These stealth debt obligations currently encumber $64 million that should be used for the current operational expenses of government. "
The remedial legislation, HB 931, would require the administration to introduce a "Lease Backed Debt Itemization Bill" and obtain a super-majority vote in the General Assembly before entering into such agreements.
"Spending restraint must include limits on the amount of debt for which taxpayers are responsible," said PMA President David N. Taylor. "Representative Stephens and his allies are to be commended for their efforts to protect the public from irresponsible government spending through debt."
Another example of debt involves state funding of capital projects. In this year’s Capital Budget Bill, the Governor was granted the authority to borrow $1,295,000,000, to fund capital projects (of his choosing) in the five different categories. The problem is, as Stephens says, the Capital Budget Bill simply provides members of the House with the category of project, the amount the Governor wishes to borrow in the upcoming fiscal year and the fund to be used to repay the indebtedness.
"We don’t know if we’re approving additional funding for ongoing projects or new ones that bring on even more debt," Stephens said. "If the administration were transparent about the projects, it would make all the difference in our decision making."
As part of this effort, Rep. Rosemary Brown (R-Monroe) is the lead sponsor of HB 929, which provides lawmakers with the category of project, the amount the Governor wishes to borrow in the upcoming fiscal year, and the funds to be used to repay the indebtedness.
Another bill in the package, HB 930, with Rep. Tarah Toohil (R-Luzerne) as lead sponsor, follows up on a 2013 vote to further reduce the debt ceiling in Redevelopment Assistance Capital Projects (RACP) by $600 million. In 2002, the RACP debt ceiling was $1.45 billion. A short eight years later, that ceiling climbed to an astonishing $4.05 billion.
The fourth bill in the package, HB 928, introduced by Rep. Steven Mentzer (R-Lancaster), amends the "Capital Facilities Debt Enabling Act" to establish an annual spending limit on two categories of projects under the "Capital Facilities Debt Enabling Act."
Stephens says he also supports public pension reform and privatization of the state liquor store system as part of an overall budget package. Following that plan would enable state government to close an anticipated deficit over FYI 2015-16 that begins in July. It’s a lot better than the alternative: higher taxes and even more debt.
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