Ohio edges closer to its debt ceiling; Rate of borrowing eclipses state's flat revenues and sluggish economy

BYLINE: JIM PROVANCE BLADE COLUMBUS BUREAU

COLUMBUS - Ohio is taking on debt at a rate eclipsing its sluggish economy, prompting its top budget prognosticator to warn that the state soon could max out its constitutional borrowing authority.

Moody's Investors Service, one of three major Wall Street credit-rating agencies, recently sent a warning shot across Ohio's bow when it lowered the state's long-term economic outlook from "stable" to "negative" just as it was going back to the bond market to borrow $250 million more for school construction.

The negative outlook on the state's finances could be a precursor to a lowering of the state's credit rating, a move that could raise interest rates and cost the state millions of dollars in added interest. Ohio's credit rating remains at the second-highest level possible for states.

The Office of Budget and Management said the state could reach its constitutional debt limit in four to five years, which would severely limit its ability to build and renovate schools, university buildings, and park facilities, let alone tackle museums, sports arenas, and other projects.

"The reality is we're facing essentially flat [general revenue fund growth] and a large part of that comes from personal income taxes," said J. Pari Sabety, the state's budget chief. "Those are flat by operation of [tax cuts in] House Bill 56 [of 2005]. We've got to start flattening our debt."

On Thursday, Gov. Ted Strickland will propose his first two-year budget based on antici-pated revenue growth of just 1.4 percent in 2008 and 0.9 percent in 2009.

Debt service, the amount the state pays on principal and interest, is currently at 4.54 percent of state general fund revenue, which is essentially personal income, business, sales, cigarette, and most other state taxes. The Ohio Constitution caps debt service at 5 percent.

Kurt Kauffman, Ohio's debt manager, said debt service is expected to rise to 4.6 percent by the time the fiscal year ends on June 30, and it could reach 4.85 percent by 2010.

"Clearly it's an area we have to pay attention to," Ms. Sabety said.

In 1980, Ohio had outstanding debt guaranteed by general taxes of just under $2 billion, the equivalent of $184 per Ohioan. By last year, that had climbed to nearly $9 billion, the equivalent of $776 per capita.

Perhaps more telling is the rate debt has outpaced personal income growth.

In 1980, the state's debt was the equivalent of 1.83 percent of personal income. By 2006, it was 2.44 percent.

The state expects to spend about $4 billion in interest over the next 20 years on debt guaranteed by general revenues alone.

That doesn't count outstanding debt for the state's highway and bridge construction, which is guaranteed by federal highway funds and state gas taxes, or its Third Frontier investment in research and development, which voters exempted from the 5 percent cap.

"Every time we turn around, the politicians are going to the ballot to take the state deeper into debt when we're supposed to be a balanced-budget state," said David Zanotti, president of the conservative American Policy Roundtable.

"The case can be made that when it comes to a state's desirability for a company that's making decisions on where to locate, stability is critical, and debt is not viewed as an asset," he said.

Mr. Strickland has voiced concerns about the rate the state has been going into debt, but in his first transportation budget, he proposed keeping to the long-term road mapped by his predecessor that would lead to even more borrowing.

Debt service for major highway construction would climb from 8 percent of transportation-related revenues to 15 percent by 2012.

That means the first 15 cents of every dollar collected in federal highway funds, gas taxes, and motorist fees would go to payments on debt principal and interest before a single penny could be poured into concrete or asphalt.

Mr. Strickland has said rising construction costs and flat gas tax collections have led to a long-term transportation plan that has promised more than it can deliver.

"If the Department of Transportation says we have a commitment to this project, the communities believe they're going to be built," Ms. Sabety said. "It's important for us to ensure a road infrastructure that supports a growing economic base and connects isolated areas with markets.

"Transportation is a key part of economic development strategy," she said. "That's what will help us with what Moody's talked about, a balanced need for investment with a conservative approach to debt management."

Arturo Perez, fiscal analyst with the National Conference of State Legislatures, said roughly 12 states do not issue any state debt because of prohibitions in their constitutions, something that was also true of Ohio in its early years.

States that did issue debt did so at record paces during the early half of the decade when their economies stagnated. That has since begun to ease, but not so far for Ohio.

"Government debt is government growing," said David Hansen, president of the conservative Buckeye Institute for Public Policy Solutions.

"In a sense with the Third Frontier issue [in 2005], the governor [Bob Taft] was going around saying it wouldn't increase taxes," he said. "But it will increase government, which will increase taxes down the road. We may not pay it, but our kids will.

"The state grew wonderfully under the constitution when government was prohibited entirely from taking on debt like this," he said.

The Cleveland-based Center for Community Solutions closely watches the budget process as part of a larger mission advocating for social services.

"One of the points we make in budget training for our people is that a certain part of the budget is really untouchable, and debt service is at the top of that list," said John Corlett, the center's director.

"You've got to pay your debts. But as the effect of those debt payments grows, it reduces the discretion that the governor has in the future to make other spending choices."

Outstanding debt guaranteed by general revenues

School facilities $3.0 billion

Higher education facilities $2.4 billion

Local infrastructure $1.3 billion

Administrative services $771.7 million

Prison facilities $744.5 million

Cultural, sports facilities $186.6 million

Natural resources $158.3 million

Youth detention facilities $155.2 million

Mental health facilities $251.2 million

Conservation $125.1 million

Parks & recreation $108.2 million

Research & development $50 million

Site development $50 million

Elementary & secondary

education $32.9 million

Coal development $30.3 million

Natural resources facilities $2.1 million

Source: Office of Budget and Management

HISTORY OF OHIO DEBT GUARANTEED BY GENERAL FUND*

YEAR TOTAL DEBT PER CAPITA DEBT AS % OF PERSONAL INCOME

1980 $2 billion $184 1.83 percent

1990 $3.7 billion $341 1.82 percent

2000 $6.3 billion $556 1.97 percent

2006 $8.9 billion $776 2.44 percent

(*) Fueled by personal income, business, sales, cigarette, and other general taxes

Source: Ohio Office of Budget and Management