Cutting up the Credit Cards: Seven Ideas to Reform the Culture of Debt in State and Local Government

Arizona’s constitutional drafters early in the 20th century were averse to public debt and to the tendency of government to use subsidies favor certain private interests. As a result, Arizona has a constitutional debt limit that limits state debt to $350,000—roughly $8 million in today’s dollars. But that limit is not effective at actually limiting debt. Today, state-level bonded indebtedness equals $13.7 billion. All levels of government in Arizona have outstanding debt in one form or another in the combined amount of at least $44 billion and possibly as high as $51 billion.

The courts have interpreted the debt limit to apply only to a specific type of debt: the “full, faith, and credit” debt (also known as “guaranteed” debt, or general obligation debt). As a result, politicians are able to commit current and future taxpayers to paying off a number of debt instruments—usually called “nonguaranteed” debt—that are not subject to the constitutional limit and do not require voter approval.

Arizona ranks 25th in the nation with around $7,500 in per person debt load, above the national median of around $6,800. Debt-service payments were the fastest growing category in Arizona’s noncapital budget for state general expenditures between 2002 and 2009, growing by 170 percent in less than a decade. For Arizona’s local governments, debt service was the fifth largest expenditure category behind spending on schools, police, electricity systems, and road maintenance. In Arizona, roughly 23 percent of all state and local debts are for projects that primarily benefit private interests.

Arizona policymakers need to pay down debt and all future debt should be forced under a strict cap. After giving the state a reasonable period of time to pay off existing debt, a new debt cap of no more than 6 percent of net assessed value of private property in a state would limit all future debt. The same sort of cap should apply to cities and counties as well.

Additional reforms to get debt under control include:

• Require voter approval of all debt at the local level.
• Forbid issuance of government-grade, tax-exempt bonds by non-elected bodies.
• Require that the maturity schedule of a bond be equal to or shorter than the life of the asset being purchased or financed with the bond.
• Require transparency of all state and local debt.
• Encourage municipalities to save for future projects that can be paid for with cash instead of debt.

Arizona can reclaim its historic title as a state forged in the understanding that excessive public debt can trap future generations. Overcoming the political culture of debt may take some time, but it is possible, and present and future taxpayers will benefit both fiscally and economically.

Read ‘Cutting up the Credit Cards’ here