February 14, 2006

Golden: state should borrow less and save more

Constitutional reduction of debt ceiling would protect AAA bond rating

State Sen. Tim Golden (D-Valdosta) introduced legislation Monday that would change the Constitution to reduce the maximum level of debt service that the state government could assume from 10 percent of the previous year’s revenues to 7 percent.

For the fourth consecutive year, the state’s budgeted amount of debt service exceeds 6 percent of receipts from the previous year, according to the Governor’s fiscal year 2007 budget report.

“That level of debt had never been reached even one time dating back at least 15 fiscal years, until this administration,” Golden said. “When interest rates were low, taking on a reasonable amount of bonded indebtedness made sense. But now that our revenues are climbing once again, it is time to put Georgia’s financial house in order.”

Debt Service as Percentage of Receipts

 Source: Georgia Budget Policy Institute

A year ago, Golden noted, the combination of a 6.6 percent level of debt service and the near depletion of the state’s revenue shortfall reserve placed Georgia’s excellent AAA bond rating in serious peril.

“Although our reserves have grown back from last year’s low point of $51 million to around $223 million this year, they are still nowhere near $734 million, where they stood four years ago,” Golden added. “With a fiscal year 2007 budget proposal that adds another $914 million in bonded indebtedness and with interest rates on the increase, we could again be facing a serious situation if revenues were to take another downturn.”

Golden, chairman of the Senate Democratic Caucus, said his legislation will be co-sponsored by Sen. George Hooks (D-Americus), former chairman of the Senate Appropriations Committee.

“This proposal would scale back the maximum amount of debt service to 7 percent, before the current borrow-and-spend philosophy gets us in real trouble,” Hooks said. “By lowering this constitutional limit, we would also send a signal to the bond rating agencies on Wall Street that Georgia is serious about containing our debt. Most of these agencies are concerned when the debt level approaches 7 percent, and they like to see a healthy percentage of reserves.”

Golden added, “Senator Hooks and I have all been in the legislature long enough to know what it takes to weather the economic storms that come and go. Writing more fiscal responsibility into the state Constitution would keep any future Governor or General Assembly from piling on more debt. If our federal government were required to balance its budget and adhere to a debt ceiling, all taxpayers would be better off.”

Golden also noted the present percentage of funds in the state’s revenue shortfall reserve is only 1.5 percent of the previous year’s revenues, the third consecutive year the savings level has dipped below 2 percent, and well short of the legal minimum of 4 percent.  The Commission for a New Georgia recommends that the Revenue Shortfall Reserve fund should have a minimum of 5 percent in addition to supporting the 7 percent debt ceiling. 

Revenue Shortfall Reserves as Percentage of Receipts

Source: Georgia Budget Policy Institute

“At least our reserves are now moving in the right direction, since they’re up from 0.4 percent a year ago. But just four years ago, we were at 5.3 percent, and I hope we can get back to that point soon.

“Saving more and borrowing less – that’s simple but sound fiscal policy,” Golden concluded. “When times are good, it’s time to take action.”

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