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Verifying Debt Capacity Difficult at County Level

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By Lowell L. Kalapa

One of the stones left unturned by the 1978 Constitutional Convention was the debt limit imposed on county governments.
While con-con delegates opted to change the way the constitution limits how much the state could borrow pegging the limit to the amount of debt service, it overlooked the limit for county debt.
At the county level, the amount of debt the counties may issue is tied to the value of the real property tax base in the respective county. Since 1968, the debt limit of each county is equal to 15% of the net assessed value of the real property within the respective counties. The resulting number from taking 15% of net assessed real property values was then the cap on the amount of debt the county could issue.
While this approach to limiting debt may have made sense back in the 1960’s, everyone knows how real property values ave soared in the last decade or so. In 1968, the total net assessed value of real property in Maui was $199 million which set a cap of $29 million on the amount of debt the county could issue. Today, net assessed valuations for real property in Maui tops $16 billion. The result is that Maui lawmakers could authorize and issue more than $2.5 billion in debt. Thankfully, county officials have not authorized this amount of debt and issued less than a couple hundred million dollars of debt or county bonds to date.
And hopefully reason will reign and county officials will use their borrowing power wisely. However, the potential for abusing this generous debt limit is apparent. For example, in Honolulu county, lawmakers authorized more than a half billion in debt in this year’s budget. While some observers note that this action was largely for show and that there is no intent to really sell all of these bonds, there is always the potential that they could be sold.
As one longtime observer of the Honolulu City Council opined, council members probably authorized these bonds for public relations purposes so they could tell their constituents that they “funded” this or that project. Others argue that the debt limit applies only to debt that is outstanding and unpaid and therefore, lawmakers can authorize all the debt they want, but it is only when the bonds are issued does the debt limit apply.
The problem with the latter observation is that once authorized, those bonds could be issued at any time. More importantly, because the debt limit is so unrealistic because of soaring property values, credit rating bureaus will view the very liberal limit as potential for concern should at any time the county issue all the debt that is authorized.
So what can be done to bring some reality back to the county debt limit? Some have suggested downing the percentage from 15% to 10% or even 5%. None of the counties have outstanding debt that represents more than 2% of net assessed real property valuations. On the other hand, county officials argue that such a low percentage may actually tie the hands of future policy makers especially if real property valuations stagnate or don’t grow at an any appreciable rate.
Another alternative is to craft the debt limit so it resembles that placed on state bonds. The state limit ties the amount of debt service to a percentage of the state’s income. Under the current limit on state debt, the debt service or the annual amount that must be repaid on the state’s debt may not exceed 18.5% of the state general fund revenues averaged over the prior three years. The debt limit applies to both issued and unissued debt so that county officials would have to be a little more prudent in authorizing debt and creating the potential for issuing that debt.
Use the debt service approach to setting a debt limit would allow taxpayers to see just how much of the county’s operating budget would be spent on the annual debt repayment. Much like the family mortgage, lenders could determine if the county has the means to repay the money being borrowed and raise concerns if the county is getting too close to the limit at the time the bonds or debt is authorized.
Regardless of which alternative is adopted, taxpayers and county officials have to agree that the current limit on county debt is unrealistic and irrelevant to the county’s ability to repay that debt.

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