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.
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
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
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
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
Lowell L. Kalapa is director of the Tax Foundation of