Key to controlling future obligations in debt limit

Another major change made by the Constitutional Convention that was designed to

rein in the growth of government was the way the amount of debt the state could

issue was controlled.

Prior to the 1978 Constitutional Convention, the

constitution provided that the state could not issue more than three and a half

times the average of the general fund revenues for the three years prior to the

session authorizing that amount of debt. Thus, the limit applied to the

principal amount or the amount of bonds that could be sold at their face value.

Of course as revenues increase, the amount of bonds that could be sold rose

along with that increase in revenues.

The construction of this provision

dates back to before Hawai’i became a state. What convention delegates in 1978

realized was that the amount of the principal had very little to do with what

the state had to pay as repayment of those borrowed dollars. Remember this was

the late 1970s and interest rates were beginning their steep climb which

culminated in a peak of over 20 percent by the early 1980s.

Recognizing

that it was the cost of the money being borrowed that dictates just how much

state government would have to repay each year, convention delegates shifted

the focus of the debt limit from the amount of principal that could be issued

to the amount of obligation that debt would impose on future state budgets. The

result is the current constitutional provision which limits the amount of state

debts that can be issued to the amount of debt service that debt will create

for future state budgets.

The proposal that came forward would cap the

amount of debts that could be authorized for issuance at a percentage of the

state’s budget resources. Much like how lenders determine whether or not a

house buyer will have the means to support a monthly mortgage payment, the

proposal tied the amount of debt that could be authorized and issued as a

percent of the available resources that the state had to make repayments on the

debt.

The rule is a provision that limits the amount of debt service to

18.5 percent of the average of the general fund revenues for the prior three

years. So each year when the legislature approves the use of borrowed money for

state projects, they must determine whether or not the debt service that those

bonds would incur would exceed 18.5 percent of average general fund revenues.

Many assumptions have to be made, such as the anticipated interest rate at

which the bonds will be issued. Further, the average of general fund revenues

is depended on the calculation of the three prior years’ general fund revenues,

aggregated and divided by three.

This approach to limiting debt makes much

more sense when one realizes that debt repayment cannot overtake the spending

for current programs. If mortgage payments take up too much of a family’s

budget then there may not be enough money to pay the utility bills, buy food to

feed the family, or pay for the transportation to get to work or go to school.

Similarly, if debt repayments take up too much of the state budget, then there

won’t be funds to pay for current programs like education or health

services.

While the debt limit for the state was brought into line, the

debt limit imposed on the counties was not addressed. Under the constitution,

the debt the counties may issue cannot exceed 15 percent of net assessed values

of real property in that particular county. In the old days, before the tourism

boom of the 60s and more recently the boom of the Japanese bubble of the late

1980s, the value of real property in the state was rather modest. However, with

the boom in land values, the debt limit for the counties stands way out of line

from reality.

For example, the total amount of debt that the counties could

have been issued under the constitutional debt limit in 1996 was tagged at $17

billion. In contrast, the total amount the state had outstanding in debt issued

at the end of that year was just under $7 billion.

While the counties have

not gone out and issued up to the amount of the debt limits for their

respective counties, the constitutional limit for the counties bears little

resemblance to reality. This is one constitutional provision that could

certainly use some revision.

Tying the amount of debt that can be issued to

the ability of that government to make the repayments from year to year is a

reasonable measure by which to regulate the amount that can be obligated in the

future. Setting a reasonable limit based on the ability to repay that debt will

insure that future generations of taxpayers will not be faced with an untenable

financial crisis.

Lowell L. Kalapa is director of the Tax Foundation of

Hawai’i.