Key to Controlling Future Obligations in Debt Limit

Another major change made by the 1978 Constitutional Convention that was designed to rein in the growth of government was the way the amount of debt the state could issue was controlled.

Prior to the 1978 Constitutional Convention, the constitution provided that the state could not issue more than three and a half times the average of the general fund revenues for the three years prior to the session authorizing that amount of debt. Thus, the limit applied to the principal amount or the amount of bonds that could be sold at face value. Of course as revenues increase, the amount of bonds that could be sold rose along with that increase in revenues.

The construction of this provision dates back to before Hawaii became a state. What convention delegates in 1978 realized was that the amount of the principal had very little to do with what the state had to pay as repayment of those borrowed dollars. Remember that this was the late 1970’s and interest rates were beginning their steep climb which culminated in a peak of over 20% by the early 1980’s.

Recognizing that it was the cost of the money being borrowed that dictates just how much state government would have to repay each year, convention delegates shifted the focus of the debt limit from the amount of principal that could be issued to the amount of obligation that debt would impose on future state budgets. The result is the current constitutional provision which limits the amount of state debt that can be issued to the amount of debt service that debt will require in future state budgets.

The proposal that came forward would cap the amount of debt that could be authorized for issuance at a percentage of the state’s budget resources. Much like how lenders determine whether or not a house buyer will have the means to support a monthly mortgage payment, the proposal tied the amount of debt that could be authorized and issued to a percent of the available resources that the state had to make repayments on the debt.

The rule is a provision that limits the amount of debt service to 18.5% of the average of the general fund revenues for the prior three years. So each year when the legislature approves the use of borrowed money for state projects, they must determine whether or not the debt service that those bonds would incur would exceed 18.5% of average general fund revenues. Many assumptions have to be made, such as the anticipated interest rate at which the bonds will be issued. Further, the average of general fund revenues is dependent on the calculation of the three prior years’ general fund revenues, aggregated and divided by three.

This approach to limiting debt makes much more sense when one realizes that debt repayment cannot overtake the spending for current programs. If mortgage payments take up too much of a family’s budget then there may not be enough money to pay the utility bills, buy food to feed the family, or pay for the transportation to get to work or go to school. Similarly, if debt repayments take up too much of the state budget, then there won’t be funds to pay for current programs like education or health services.

While the debt limit for the state was brought into line, the debt limit imposed on the counties was not addressed. Under the constitution, the debt the counties may issue cannot exceed 15% of net assessed values of real property in that particular county. In the old days, before the tourism boom of the 60’s and more recently the boom of the Japanese bubble of the late 1980’s, the value of real property in the state was rather modest. However, with the boom in land values, the debt limit for the counties stands way out of line from reality.

For example, the total amount of debt that the counties could have issued under the constitutional debt limit in 1996 was pegged at $17 billion. In contrast, the total amount the state had outstanding in debt issued at the end of that year was just under $7 billion.

While the counties have not gone out and issued up to the amount of the debt limits for their respective counties, the constitutional limit for the counties bears little resemblance to reality. This is one constitutional provision that could certainly use some revision.

Tying the amount of debt that can be issued to the ability of that government to make the repayments from year to year is a reasonable measure by which to regulate the amount that can be obligated in the future. Setting a reasonable limit based on the ability to repay that debt will insure that future generations of taxpayers will not be faced with an untenable financial crisis.