The growing debt you probably didn't know existed

Arizona Republic
Sunday, June 8, 2014
Sean McCarthy

Most folks are familiar with the soaring national debt, which stands at $17 trillion — about $55,000 per citizen — and has grown on average $2.3 billion per day since 2012.

But Arizonans may not be familiar with their state and local debt, about $42.7 billion. That's $6,400 per citizen.

The Arizona Tax Research Association has tracked state and local debt for more than 30 years. Ten years ago, Arizona's total debt was $22 billion, and it has nearly doubled since. State and local debt grew just $7.2 billion from 1993 to 2003.

The manner in which Arizona's elected officials are acquiring debt is also troubling. Since the late 1990s, Arizona governments have migrated toward non-voter-approved debt.

Certificates of participation (COP), municipal property corporations (MPC) and lease-purchase (LP) agreements are not only accessed without voter scrutiny, they are not subject to constitutional debt limits and draw primarily on the general fund of the entity that sells them.

The total debt serviced with these mechanisms has increased 300 percent in the past decade, to $12 billion. Voter-approved general-obligation debt once represented 51 percent of the total in 1994 but is just 25 percent today. COP, MPC and LP combined were just 11 percent of all statewide debt. The total is now 29 percent of statewide debt.

Revenue bonds are $19.8 billion (46 percent) of Arizona's debt. They typically are not voter-approved and are without constitutional limits.

That the state has debt is not an inherent problem. Financing major capital projects using dedicated tax revenues is a necessary undertaking, much like a mortgage for a family home.

However, many jurisdictions have opted to avoid voter scrutiny and rely on ongoing operating revenues to finance the debt payments. Elected officials may get their project financed immediately, but the general fund is squeezed for years or even decades.

Among Arizona's largest cities, Phoenix, Mesa, Tempe, Scottsdale, Peoria and Glendale approximately doubled their per capita debt in the past decade. Phoenix has $6.8 billion in debt.

MPC debt is increasingly popular among cities and towns, with $6.7 billion in such debt or 41 percent of their total. In 2001, MPC bonds accounted for just 8.5 percent of total city debt. The decision to use this debt mechanism rests solely with elected officials.

Pima County government curiously has $1.35 billion in debt, 12 times that of Maricopa County. Its officials are growing the debt with COPs, up 340 percent since 2008, as well as revenue bonds, up 101 percent. Pima County historically spends more per capita than Maricopa County and is reflective in its county tax rates, which combine to $5.09 vs. just $1.48, the combined tax rate for Maricopa County.

The three state universities owe a whopping $3 billion in debt, mostly in revenue bonds, but have increased their use of LP debt 50 percent in five years, to $176 million. Like MPC, LP is a convenient mechanism to acquire capital without finding a new dedicated revenue stream to finance a project.

The only jurisdiction to decrease their debt total over the past five years is the K-12 school districts (down 4.5 percent), which are mostly relegated to using voter-approved and constitutionally limited general-obligation bonds.

MPC, COP, LP and revenue-bond debt mechanisms are not subject to constitutional debt limits because Arizona courts have held that only general-obligation debt was within the purview of said limits. The court rationalized this narrow definition of debt based on the fact that general-obligation debt is secured by the full faith and credit of the issuing jurisdiction. Conversely, other debt instruments lack the same guarantee and are therefore not considered legal "debt."

Arizona governments structure these agreements to suggest that they can walk away from the obligation at any point. The reality is that no governmental entity can afford to default on such a transaction without doing major damage to its creditworthiness.

It's time for state policymakers to review Arizona's outdated view of debt before more local governments end up in Glendale's predicament. The West Valley city demonstrates why non-voter-approved and unlimited debt that feeds off the city's general budget is problematic.

Between 2001 and 2011, Glendale's total debt rose from $199 million to $1.12 billion, an astounding 463 percent increase, largely from MPC bonds.

The expected revenues to pay for this debt didn't materialize and forced the city to cut services and increase taxes. City leaders have warned constituents that their budget struggles will continue for years.

If the past decade has taught Arizonans anything, it is that counting on tax revenues to increase year over year is not guaranteed and that over-leveraging the general fund is bad public policy.

Sean McCarthy is a senior research analyst for the Arizona Tax Research Association.