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Published: Sunday, 3/29/2009

Ohio officials fret over debt cap forecast

BY JIM PROVANCE
BLADE COLUMBUS BUREAU CHIEF
In 1999, voters amended the Ohio Constitution to limit state debt payments to no more than 5 percent of annual general fund revenue   basically the total of state taxes, fees, federal subsidies, and lottery profits. The cap does not apply to $650 million in borrowing approved by voters in 2005 for former Gov. Bob Taft s Third Frontier, an infrastructure spending program. The cap would be waived again if voters in November approve borrowing $200 million for military service bonuses. In 1999, voters amended the Ohio Constitution to limit state debt payments to no more than 5 percent of annual general fund revenue basically the total of state taxes, fees, federal subsidies, and lottery profits. The cap does not apply to $650 million in borrowing approved by voters in 2005 for former Gov. Bob Taft s Third Frontier, an infrastructure spending program. The cap would be waived again if voters in November approve borrowing $200 million for military service bonuses.
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COLUMBUS - It was October, 2007, and state officials were very pleased with themselves.

The sale of four decades of future settlement checks from the tobacco industry for a record lump sum from Wall Street meant Ohio didn't have to borrow as expected to pay for new school construction.

In essence, Ohio was paying down its credit card balance.

But like many Ohio households whose take-home pay is shrinking in this recession, the state is now looking at refinancing long-term debt to pay short-term bills and soon expects to come close to maxing out its credit card limit.

"It scares me, and I don't use that word lightly ," said Rep. Barbara Sears (R., Sylvania), a member of the House Finance Committee. "When the federal stimulus dollars go away, we'll have nothing. The credit cards will be maxed out. The savings account will virtually be gone. We won't have [fee-driven] rotary funds to raid. The only thing the governor will have is to raise taxes or call them fees."

J. Pari Sabety, Gov. Ted Strickland's budget director, predicts the state could approach its constitutional debt cap at the end of fiscal year 2012, the year after the governor's $54 billion, two-year budget now pending before lawmakers would end.

Voters amended the Ohio Constitution in 1999 to prohibit the state from additional borrowing if debt interest and principal payments exceed 5 percent of its general revenue - primarily income, business, sales, alcohol, and tobacco taxes; fees; federal subsidies, and Ohio Lottery profits.

Ohio is projected to hit 4.9 percent by June 30, 2012. That relies on the accuracy of the Strickland administration's longer-term revenue-growth projections, which some Republicans have characterized as too optimistic.If state revenues continue to shrink or grow more slowly than predicted, the state could bump

up against the debt cap even as the state's total debt remains stable.

"We have been watching over the last five years [a general revenue fund] that is either flat or in decline," Ms. Sabety said. "If the GRF remains flat, we are going to have to be extremely prudent about how we invest through the state's debt capacity to get a maximum return on those resources."

In 1980, the state carried $184 in total debt on its books for every Ohio citizen. In 2008, that tab was estimated at $751.

"This [constitutional] cap was put in historically to protect future taxpayers from bad decisions now. Frankly, the state has gotten careless in putting on more debt and just assuming that the economy only grows and we're not going to get up to the ceiling," said David Hansen, president of the Buckeye Institute for Public Policy Solutions, a conservative, Columbus-based think tank.

The tobacco securitization garnered a one-time lump sum of $5.5 billion, allowing the state to essentially pay cash to build or renovate schools rather than borrow for that purpose.

The administration locked in the interest savings to underwrite an annual property tax cut for senior citizen and disabled homeowners.

In the immediate wake of the tobacco securitization, debt service as a percentage of the general revenue fund began to decline and is projected to hit a low of just more than 3 percent in 2011. But that low is because federal economic stimulus money temporarily will inflate the size of the general revenue fund over the next two years.

In the first year the federal money is off the books in 2012, the line on the graph is projected to soar to 4.86 percent.

"We lost $3 billion of the denominator, even with the big bite out of our debt service ...," said Ms. Sabety.

"Even with the tobacco securitization, we would not have been able to offset the decline we are watching in the GRF."

The state's longer-term debt projections assume lawmakers will approve a roughly $2.2 billion, two-year capital budget next year for brick-and-mortar projects across the state.

Ms. Sabety's office emphasized that capital budget estimate is not a recommendation.

The state also has found a way around the constitutional cap.

In November, 2005, voters approved $650 million in new borrowing for the Third Frontier program, Republican former Gov. Bob Taft's investment in high-tech, biomedical research, and site development projects. When voters approved that bond issue, they also exempted it from the cap.

If the Third Frontier borrowing were counted, Ohio would be half a percentage point above the 5 percent cap by 2012, according to the Office of Budget and Management.

"We do have a rigid cap," Ms. Sabety said. "The difficulties with that is how do you adjust for extraordinary circumstances, how do you adjust to deal with long-term investments that you believe will bring rewards in the future in terms of job and industry sectors of growth that go beyond the typical 15 to 20-year term of our state's debt.

"I would classify Third Frontier in that category," she said. "That clearly envisioned investment in the long-term competitiveness of our state and will bring us rewards 20 or 30 years from now."

Voters will be asked to sidestep the cap again in November when a $200 million bond issue appears on the ballot to finance one-time military bonuses for veterans of the 1991 Persian Gulf War and the Iraq and Afghanistan wars.

Contact Jim Provance at:

jprovance@theblade.com

or 614-221-0496.



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