KY Policy Blog

Debt Limit Could Increase Costs for Kentucky

By Jason Bailey
February 13, 2013

A Senate committee approved legislation today to limit debt service (the annual payments made on debt the state owes) in future years to six percent of the state’s revenue. Yet rather than saving money, Senate Bill 10 could end up increasing Kentucky’s costs.

There are two reasons debt payments go up as a share of revenue: 1) the state takes on more debt; and 2) the state takes in less revenue than expected. In the latter case, sagging revenues are usually the result of a recession.

But because interest rates are often low in a bad economy, it can be a good time to borrow for necessary investments. In the recent recession, the federal government helped stimulate the economy by creating subsidized bonds that allowed state and local governments to borrow at especially low rates. A hard limit on debt as a share of revenue could keep the state from taking advantage of those opportunities—and make costs higher by delaying bond issues to times when interest rates are up.

A limit could also keep the state from investing in necessary school construction and infrastructure projects exactly when the associated jobs are most needed—when unemployment is high.

Senate Bill 10 could prevent other sensible uses of debt, such as legislation introduced last session which would allow the state to issue bonds for cost-effective energy efficiency improvements in school buildings. The bonds would pay for up-front costs, and would be paid back over time through the resulting savings on utility bills.

Taking on debt should not be done lightly. Investments should be smart and have a demonstrated need and clear benefits. But an arbitrary limit on debt payments of 6 percent of revenue does not make those decisions more rational and responsible.

Despite its language suggesting otherwise, Senate Bill 10 could be suspended at any time by the legislature. Last year’s original version was a constitutional amendment–far worse for the restrictions it would have imposed.

Regardless of SB 10’s real impact or the bill’s fate in the House, if the question prompting this legislation is how to address our fiscal problems then Kentucky must look to the revenue side. Inadequate revenues have led to underinvestment in Kentucky’s needs and an increase in unwise forms of debt.

Persistent revenue shortfalls have led to debt restructuring that has pushed payments forward to future years. The result is the same as when credit card payments are delayed–total costs increase. Another key example is in the pension system, where inadequate revenues and partial payments to our retirement system over the years have led to the large pension liability we must now pay back.

To service our debts responsibly and intelligently, and to invest in Kentucky’s future, we must enact tax reform that generates more revenue and allows it to grow with the economy.

Comments are closed.