Not all government debt is bad

Our view: Bond issues to pay for capital projects should be part of Md.'s response to the weak economy

November 21, 2011

The Maryland General Assembly's chief budget analyst, Warren Deschenaux, made headlines last week by advocating that the state not seek to increase its debt limit for fear that such a move could prompt one or more of the major credit ratings agencies to strip the state of its long-held AAA rating. Such a downgrade would force Maryland to pay higher interest rates on its debt and exacerbate its existing budget problems. Mr. Deschenaux is absolutely right about that, but his comments should not be misconstrued. They do not mean that Maryland can't or shouldn't increase its level of borrowing in the short term to take advantage of low construction costs and put people to work. That may sound like a contradiction, but it's not.

The reason is that the state's debt limit is different from the kind of credit limits households are used to. It's not like the hard-and-fast dollar limit on a credit card, beyond which a transaction will be denied. Rather, it is a self-imposed limit based on the state's calculation about its ability to pay back the debt, and unlike the federal government's borrowing ceiling, it isn't a specific dollar figure. The debt limit calculation has two parts. The state has decided that it cannot owe more than 4 percent of Marylanders' aggregate personal income or 8 percent of total state revenue. We have plenty of room to issue more debt under the personal income standard, but the state will come close to the revenue standard during this decade if it sticks to current capital budget plans. That would seem to suggest little room for the kind of infrastructure-and-jobs program Gov. Martin O'Malley, House Speaker Michael E. Busch and others have been calling for.

But lawmakers have some options. One, which Mr. Deschenaux alluded to in his testimony before the state's Spending Affordability Committee last week, is to do some of the borrowing the state has already planned sooner. That has the benefit of not increasing the overall value of the bonds the state plans to issue this decade but allows the spending to come now, when the economy most needs the help. A briefing paper that accompanied Mr. Deschenaux's presentation notes that the state has a backlog of requests for school construction, state building maintenance and facilities maintenance in the university system, along with other capital projects, that could be started quickly.

Such a move might be helpful, but it would have a relatively marginal effect. The state has about $2 billion in spare debt capacity under the personal income standard but only about $200 million under the revenue standard. If Maryland is going to invest in a significant infrastructure program, it will clearly need to do something about the second standard. What Mr. Deschenaux was referring to last week was the inadvisability of the legislature changing the 8 percent target to, say, 9 percent or 10 percent. That would be a mistake in that it would be a departure from what the bond rating agencies have traditionally seen as Maryland's strong tradition of fiscal controls.

However, there is another way to achieve the same goal: Increase revenues. Governor O'Malley and Senate President Thomas V. Mike Miller have recently indicated an interest in the idea of higher gas taxes to replenish the state's transportation trust fund. That would automatically increase the state's capacity to issue debt to finance new roads, bridges and mass transit projects. A blue ribbon commission on transportation funding recently recommended a package of new revenues — including a gas tax increase and higher transportation fees — that would raise some $870 million a year. Even if the legislature and governor agree to something less than that, it could put people back to work and make the state's economy more efficient, all while protecting Maryland's strong credit rating.

At a time when federal debt is ballooning and Congress can't seem to find a way to control annual deficits, it's tempting to see all government debt as bad. But that's not so. Unlike the federal government, Maryland by law cannot borrow money to pay its bills but, instead, can only do so to finance capital projects like roads and schools. Maryland has clear rules limiting the debt it issues — unique among states, it must retire any bonds it issues in 15 years or less — and it would be wise to stick with them. They have served the state well. But that doesn't mean that additional borrowing, handled responsibly, should not be a part of the state's response to the slow economic recovery.

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