State’s low debt serves us well
George Korda’s recent guest column, “National debt is looming avalanche that must be addressed,” pointed out that the United States is facing an avalanche of debt with no realistic plan to ever pay it back.
This raises the question: How does the state of Tennessee handle its debt?
Properly managed debt is one of the most equitable ways to finance large capital projects, such as new office and academic buildings. It spreads the cost throughout the life of the project. When done correctly, debt does not punish or reward current or future generations of Tennesseans.
In Tennessee, we recognize the risks as well as the benefits of debt. That’s why we have put in place a series of safeguards to protect our citizens.
First, we borrow money only to finance capital projects. We never use debt for operating expenses, and we don’t borrow money to build our state’s roads. Second, we do not issue debt with a maturity longer than 20 years. Third, we repay our debt in equal principal payments. This means we repay our debt quickly, with interest payments declining every year.
Most importantly, we insist on having a sound plan to have the money necessary to repay the debt when it is due. Tennessee doesn’t fiddle with postponing payments or kicking the can down the road. Our state budget must include an appropriation of recurring dollars at an amount that meets, if not exceeds, the state’s annual debt service. We assume an interest rate of at least 6 percent. This means that for a project financed with 20-year debt, there has to be a budget appropriation of at least 11 percent of the amount being borrowed.
Since money for debt service competes with other needs for the state’s scarce recurring dollars, such as teachers’ salaries, it proves to be a powerful brake to stop potentially excessive borrowing. It also means that in the years we have cash available, we choose to use some of it to pay out of pocket for capital projects, like the new engineering building on the University of Tennessee-Knoxville campus.
There are all sorts of exotic methods available for “creative financing:” swaps, derivatives, forward purchase agreements, hedges, variable interest rate floaters and the like. We are repeatedly told that truly sophisticated borrowers use these instruments, but we have not engaged in such complex transactions for our long-term debt. Instead, we rely on boring, level principal, fixed-term debt. Our taste is pure vanilla.
Perhaps we have passed up opportunities, but this conservative approach has served us well. We have one of the lowest, if not the very lowest, percapita debt burdens in the country. Our bonds are rated Triple A by all three major credit rating agencies, and new businesses and people continue to be attracted to our well-managed state.
Not bad for the state with the lowest overall taxes in the nation.
Source: Knoxville News Sentinel, Justin P. Wilson is the Tennessee state comptroller of the treasury.
The East Tennessee Economic Development Agency markets and recruits business for the 15 counties in the greater Knoxville-Oak Ridge region of East Tennessee. Visit www.eteda.org
Published April 26, 2019