Georgia completed another bond sale this week, again under the AAA rating that only nine other states share. The sale validated the state leadership’s businesslike management, but also saved the state money in financing costs. This week, we’ll look at the five reasons Georgia continues to earn the AAA bond rating.
Conservative debt issuance
In 1972, a constitutional amendment was passed by voters that authorized the state to issue general obligation and guaranteed revenue bonds. In that same amendment, state debt issuance oversight and administration was established through the creation of the Georgia State Financing and Investment Commission. The GSFIC board that approves the bond transactions is governed by state leaders including the governor, lieutenant governor, speaker of the House, state auditor, state treasurer, attorney general and agriculture commissioner.
Unlike other states, Georgia is not allowed to use debt to cover a revenue shortfall unless it is repaid within the same fiscal year by taxes levied for that year. The state currently issues only general obligation bonds or full faith and credit-guaranteed revenue bonds.
The constitution also mandates the maximum annual debt-service cap at 10 percent of prior-year net revenues, which as a percent of FY 2013 state treasury receipts is currently at 6.8 percent and projected to drop based on revenues going forward.
Pensions, contributions fully funded
One of the first examinations of a state’s fiscal responsibility is the funding of pensions. Georgia has a history of meeting the legal mandate of annual contributions. Full funding to meet the annual required contributions (ARC) for pension systems was included in the original FY 2014 budget and the FY 2015 budget. The two main retirement funds are the Employees Retirement System (ERS) and the Teachers Retirement System (TRS).
Since ERS and TRS are multi-employer plans, state funds as well as federal and other funds are utilized to pay the employer contributions. State general fund appropriations in FY14 for the ARC payments for ERS and TRS are estimated to be approximately $310 million and $700 million, respectively, and are estimated to comprise, together, approximately 5.3 percent of total state general fund appropriations.
Revenue estimate and budget management – key drivers
Georgia benefits from conservative fiscal management as noted by the bond raters. Each budget cycle, revenue projections are determined by the governor, giving the executive branch power to constrain expenditures to manage fiscal responsibilities. Georgia also has a history of conservative revenue estimation that assists in the replenishment of reserves. Most recently in the recession, balancing was achieved chiefly through agency reductions.
The governor also issued flat budget instructions for the most recent budgets, in FY 2014 amended and FY 2015 general, to ensure that agency expenditures didn’t outpace revenues. Although instructions were flat, both budgets were able to add new funding for K-12 enrollment growth and additional Medicaid costs.
Rebuilding reserves is a priority
Bond underwriters noted Georgia’s history of rebuilding cash reserves, called the revenue shortfall reserve. Georgia had a $1.5 billion reserve when the recession hit and the reserve was essentially emptied. Since then, the leadership of the state has worked to rebuild the RSR even in the light of budgetary constraints and demands.
The state can reserve as much as 15 percent of prior year net revenues. At the end of FY13, the RSR stood at $717 million or 4 percent of revenues, a gain of some $300 million over the previous year. This is another instance of the bond underwriters showing confidence in the state’s management and faith that Georgia will continue to build an adequate reserve.
Long-term liabilities remain conservatively managed
Outside of pensions which remain appropriately funded, the GO and GR debt supported by state taxes account for a majority of liabilities. Georgia also benefits from rapid principal amortization, with just over 70 percent maturing within 10 years. The state does have additional obligations which include $188.5 million in capital leases and $913.3 million in federal grant anticipation revenue (GARVEE) bonds. Including the current June sale, Georgia’s debt remains moderate at 2.8 percent of 2013 state personal income.
In Moody’s 2014 State Debt Medians report, Georgia’s debt-per-capita ranked 25th, at $1,064, compared with the $1,054 national median for states. Its 2.9 percent debt-to-income ratio was 22nd, compared with the 2.6 percent national median.
It is important to note that states use different financing structures and partnership shares in costs, and given the conservative purposes for which the state can issue debt, Georgians can rest easy knowing that the state’s debt serves as an investment for infrastructure and not operational purposes, with only one exception for temporary delays in collecting taxes for the year. Other operational utilization is constitutionally prohibited.
I may be reached at
234 State Capitol, Atlanta, GA 30334
(404) 656-5038 (phone)
(404) 657-7092 (fax)
E-mail at Jack.Hill@senate.ga.gov
Or call toll-free at
1-800-367-3334 day or night
Reidsville office: (912) 557-3811