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Is Georgia missing an opportunity?
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At $632.4 million, the non-highway bond package in the FY2012 budget was the lowest figure in 10 years when the budget was around $13 billion and the population was 1.1 million less than it is today. The debt service in the FY12 budget at $1.064 billion was lower than recent years as well.

So, is this declining bond amount an acknowledgement of the realities of borrowing less in times of economic peril or the ignoring of an opportunity to build needed projects while building costs and interest rates are at historic lows as well?

This week’s column will begin a two part review of Georgia’s bonding process and touch on how this state is viewed by the bond rating agencies.

Disciplined process for bond issuance

The three credit agencies, Fitch’s, Moody’s and of course, S&P, were the focus of much talk during August after S&P downgraded its credit rating of the federal government. Until that point, the U.S. Government had shared the highest rating available (“Triple A”) from all three agencies with Georgia and seven other states. As we all know, S&P downgraded their rating of the federal government in August.

Georgia, though, still enjoys this top rating because, unlike the federal government, we have a history and process that ensures that we do not live outside of our means.  These restrictions include:

Sustainability — Though debt might be manageable in the present, it is important to determine if it is sustainable over the long term. You could compare this decision to that of a family considering a home mortgage. We all have heard stories of people buying more house than they could make mortgage payments on. Similarly, the state should not borrow more than it can handle in making bond payments yearly.

Georgia is a sovereign entity, but still has similar concerns. Guiding the overall system of bonds is the “State of Georgia Debt Management Plan” which looks at the next five years and helps aid decisions to meet the state’s “highest priority capital requirements while not exceeding debt affordability standards generally deemed important by the debt markets and rating agencies.” The current plan covers the period from 2011 to 2015 (a link to this and other interesting resources can be found at the end of this column). This plan envisions Georgia to spend approximately $800 million a year in principal on new projects. After accounting for the economy, past bonds expiring and population, this level of spending will still keep debt service at less than 8 percent of prior year revenues. The total appropriated for FY2012 after vetoes was only $632.4 million.

Prohibition on bonding for operations — Georgia constitutionally cannot spend any bond proceeds on operations. Bonds can only be issued for state owned property and only to “acquire, construct, develop, extend, enlarge, or improve land, waters, property, highways, buildings, structures, or facilities of the State…”  This is an important point because the federal government and states such as Illinois, California and Connecticut use their bonds to fund operations or pension obligations. This is a very risky use of bond proceeds because it only solves the problem for one year. Georgia has realized that operations and pensions are long term issues that need to have long term financing plans.  Plus we have a physical asset that can be used for many years.

Meeting debt obligations — The constitution puts limitations on the legislature that ensures we do not overreach. First, Georgia cannot issue bonds if debt service will be above 10 percent of the previous year revenues. In practice, Georgia has been more conservative than this limit, remaining under 8 percent of prior year revenues. Second, all bonds must have the highest level of annual debt service appropriated to the general obligation (GO) Sinking Fund. Setting aside this money ensures we will meet our commitments.  In the event that isn’t sufficient, the constitution requires the state to pay the first dollar received in revenue to cure any deficiency.

Comments from rating agencies

The rating agencies have consistently upheld Georgia’s rating because of sound financial practices and diversified economy. Here are a few quotes from the rating agencies:

Moody’s: “The highest-quality rating is supported by Georgia’s conservative fiscal management, moderate debt burden and relatively well-funded pensions,”

Fitch’s: “Despite severe economic weakness during the recession, the state’s economy has grown rapidly and diversified over time. … The longstanding ‘AAA’ rating and Stable Outlook on the state’s GO bonds reflect its conservative debt management, a proven willingness and ability to support fiscal balance and a diversified economy,”

S&P: “Georgia has what we view as a well-diversified economy with a growing education and health sector, a healthy aerospace and defense industry and a healthy trade and transportation sector, anchored by Atlanta Hartsfield-Jackson Airport (the world’s busiest) and the port of Savannah (the fourth busiest in the nation and the fastest growing), “

The need for infrastructure

The point that Georgia borrows at responsible levels is easily made. But the next question is whether the need exists to build infrastructure. Next week, we will look at the system in place to determine infrastructure needs, the implications of not funding them, the cost of not borrowing in this low interest rate period and the important side effect of job creation in the construction industry.

Useful Web sites: Debt Management Plan Link:

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