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Evaluation Of County Debt Limit Needed

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By Lowell L. Kalapa

(Released on 6/08/08)

As we all know, inflation has certainly had an impact on our shopping baskets as goods and services cost more in absolute dollars than they did 20 or 30 years ago.

Where twenty dollars could put food on the table for a family of four for a week back in the 1950’s, that same twenty dollars can barely put food on the table for one meal today. And here in Hawaii, we all know that where $20,000 could buy one a new home back in the 1950’s, it isn’t even enough to put a down payment on a home today.

Indeed, as we all know, the cost of property in Hawaii has skyrocketed way beyond the imagination of anyone who lived in Hawaii 50 years ago. And that is the problem with the constitutional limit on the amount of debt the counties can issue. The limit that was developed and adopted before statehood limits the amount of debt that any county can issue to 15% of the net assessed valuation of real property in that particular county. Back in the days when real property values were more reasonable, tying the amount of debt a county could issue to those values may have made sense since the counties are dependent on the value of real property to raise tax revenues that are then used to repay any debt that is issued.

But those were those days. For example, real property valuations for all four counties in 1969 totaled just over $4 billion which meant that the most all four counties could issue in debt was about $610 million. For fiscal year 2008, total real property valuations for determining the counties’ debt limits were roughly $250 billion. The debt limit calculated under the current constitutional formula would allow the counties to issue as much as $37.5 billion of debt.

While it is doubtful that the counties would issue debt of that magnitude, the problem is that the limit is so generous, and the potential for borrowing that amount exists. In fact, in some cases, the liberal use of debt has stretched the resources of the county to the point that a larger portion of that county’s operating budget is going toward the repayment of debt. As a result, county policymakers have a difficult time funding operating programs or are faced with the prospect of raising real property tax rates in order to generate the resources needed to cover the increased cost of debt repayment as well as operating programs.

Prior to the 1978 constitutional convention, the state’s debt limit was calculated on the basis of the average general fund revenues for the preceding three years and then multiplied by three and one half times that average. Again, using 1969 as an example, the state’s debt limit was just over $900 million. However, recognizing that inflation would kick general fund revenues even higher in the future, the 1978 constitutional convention proposed limiting the amount of debt the state could issue by limiting the amount of debt service (the amount to repay that debt) to how much it would take up of the state’s budget in any one year. That amount can be no more than 18.5% of the average general fund revenues for the three years preceding the authorization of debt by the legislature. Thus, both lawmakers and taxpayers know that no more than that percentage can be paid out in debt service in any one year going forward.

Adopting a similar limitation for the counties would make a lot more sense than the current limit which is riding the roller coaster of real property values. Setting aside just so much of a county’s household budget is much like the family’s household budget when figuring out just how much that family can borrow to buy their new home. Too large a percentage of that budget will mean that other expenditures in the budget will suffer or the breadwinner will have to find another job, or in the case of the counties, raise real property taxes to cover the shortfall.

While the legislature can put an amendment on the ballot to change how the county debt limit is calculated, the question is whether or not political pressure would allow the legislature to make that change. There is no doubt that the county debt limit needs a review and a constitutional convention would afford taxpayers the opportunity to have input on this issue.

Given that the use of debt will have a long-term impact on the fiscal well being of the counties and the state, as well as taxpayers, it is imperative that this issue be addressed one way or another.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui NewsWest Hawaii TodayGarden Isle News, and the HawaiiReporter.com.

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