How much debt does Utah actually have? And how will that debt affect Utah’s ability to fund important priorities in coming years? Utah’s historical measure of its general obligation debt is higher than average for states with a AAA debt rating, but other liabilities might raise it higher still. Only prudent policy will allow Utah to plan for the future.
Did you know that the Utah Constitution imposes constitutional limits on the amount of debt the state can carry?
From Article XIV, Section 1:
To meet casual deficits or failures in revenue, and for necessary expenditures for public purposes, including the erection of public buildings, and for the payment of all Territorial indebtedness assumed by the State, the State may contract debts, not exceeding in the aggregate at any one time, an amount equal to one and one-half per centum of the value of the taxable property of the State, as shown by the last assessment for State purposes, previous to the incurring of such indebtedness. But the State shall never contract any indebtedness, except as provided in Article XIV, Section 2, in excess of such amount, and all monies arising from loans herein authorized, shall be applied solely to the purposes for which they were obtained. (Emphasis added)
How close is Utah to the Constitutional limit?
Utah is getting closer to hitting the constitutional debt limit, but is not as close as it was a few years back. At least, that’s according to the historical measuring stick. Listed at line 30 in the first spreadsheet below, the constitutional limit is $4,237,338,000, or about $4.2B. Right now, Utah is at about 74% of that limit.
According to an analysis prepared by the State Auditor’s office based on the state’s Comprehensive Annual Financial Report (CAFR), Utah is carrying a general obligation for $2.8 billion in bonds (see the “Utah Long-Term Liabilities” spreadsheet embedded below. It shows an amount slightly higher than Bob Bernick’s column reported last week because it includes $300M in payments, reflected in the second column, that will be or have been made this year). It’s a daunting amount for a small state like Utah and, according to State Treasurer Richard Ellis, a high debt-to-income ratio compared to other AAA rated states. At a breakfast at the Capitol on Wednesday morning last week, Ellis argued that Utah should wait to accrue new debt for capital projects until some of the current debt can be retired. Waiting just a few years, he said, can open up more capacity.
But, wait! There’s MORE…debt!
Could there be additional liabilities beyond the $2.8 billion in general obligation (GO) bonds? When you add in other long-term obligations that the state is carrying, Utah nudges even closer to its constitutional debt limit.
To boot, there is lack of clarity about what should be included in the constitutional debt limit. Including more of the state’s long-term liabilities on the balance sheet could impact whether Utah can leverage debt for the capital projects contemplated in the coming year (for example, moving the state prison, expanding highways, and building a pipeline connecting St. George to Lake Powell). Historically, only General Obligation bonds (line 19 in the spreadsheet below) have counted against the limit, but some question whether that interpretation has been too narrow. For example, does the term “contract debts” encompass other liabilities like various post-employee benefits, compensated absences, and net pension liabilities (see lines 20 through 29 in the spreadsheet below).
Yes, pensions. Because of a reporting change going into effect next year by the Governmental Accounting Standards Board (GASB), which provides standards for state and local governmental accounting and financial reporting, Utah’s net pension liabilities will be included on Utah’s books.
Why does it matter whether pension liabilities are funded or even put on the books with all of the other general obligation debts required by the Utah constitution? Nationwide, states are finding themselves further in the hole with underfunded pension funds for state employees. One study put the amount of underfunded pension liabilities at $4.7 trillion (no, that’s not a typo). As of 2013, Utah’s unfunded pension liability as a percentage of gross state product was 24%, or about $16,350 per capita. Relative to many other states, Utah carries less net pension liabilities. However, the pension liabilities have not historically been factored as part of the debt limited under the Utah constitutional limit.
With GASB 68 putting pensions on the state’s financial books next year, it has led the State Auditor to ask to what extent do net pension liabilities be considered part of the constitutional debt limit, especially considering that the state has an obligation to pay for previously vested pension benefits. Both the Auditor and the Treasurer have asked the Utah Attorney General’s office to provide additional insight on this question. The AG’s office has been researching the question since mid year. We wouldn’t be surprised if the Office of Legislative Research and General Counsel were also researching this important question.
If the traditional interpretation is wrong, then Utah needs to be even more prudent about its contractual obligations that hover at the constitutional debt limit. It’s important to note that this doesn’t even include the debt that the state carries for business-type operations (such as student loans, currently at about $1.1 billion) or component units of the state, such as the universities. Nor does it include existing agreements to enter into future transactions (such as GOED tax incentive programs, USU and UU venture capital projects, and UDOT contracts).
In addition to Ellis’ cautionary comments that I noted above, there are others who urge restraint.
“This (debt) is something that concerns us,” said Jonathan Ball, head of the Legislative Fiscal Analyst Office, speaking to Executive Appropriations Committee earlier this month.
Then there’s the reason for the constitutional debt limit in the first place. According to Jean Bickmore White’s commentary on the Utah Constitution, Utah’s founders were extremely concerned with keeping the state out of debt, initially limiting the debt to only $200,000, rather than a small percentage of all taxable property. It wasn’t until 1910 that the constitutional limit was raised to 1.5 percent by voters. Efforts to raise the limit to 2 percent in 1920 and 1922 failed. Interestingly, the Utah legislature has kept a separate statutory debt limit substantially lower than the constitutional limit.
In other words, Utah’s constitutional drafters and, later, amending voters thought that keeping Utah out of debt was, to say the least, important. According to White, the “convention debates were replete with horror stories about states that had hovered over the edge of bankruptcy—or toppled over the brink.”
Anyone who is watching Utah’s debt (and I suspect that there are only a few outside of government) might ask whether we’re keeping that prudent course. For many years prior to the 2008 recession, Utah’s GO debt floated at around 45% of the constitutional debt limit. The Utah Legislature raised that level to expedite the Utah County highway I-15 CORE expansion, but with the recession and with more large projects looming in the coming years, it’s hard not to ask if Utah’s new high debt level is becoming as durable as federal debt.
Without being overly passionate about reducing the state’s debt, I suggest that Utah’s elected officials need to find a way to keep the books in balance and to plan for the long-term liabilities Utah carries. Whether we’re worried that Utah has $2.8 billion in GO or that the state has $4.9B in long-term liabilities, the only real hegira from Utah’s debts and liabilities is careful and cautionary public policy.
As the Utah Legislature evaluates moving the state prison (estimated to cost $775 million), accepting the Affordable Care Act’s Medicaid expansion (estimated to be inestimable), or expanding Utah’s access to water from Lake Powell ($1 billion, but might be paid back by users), not to mention the ongoing fight to “improve” education spending (estimated to never be enough) and work on Utah’s highways ($2 billion. Also an estimate), legislators should consider how spending now will tie our hands later while judicious restraint could allow greater flexibility down the road.