This commentary originally appeared in the print edition of the Midland Reporter-Telegram on April 17, 2016.
Low and falling oil prices are starting to take their toll on some Texas towns.
Moody’s Investor Services recently placed Midland city and ten other local governments that have been hit hard by the recent energy turmoil on watch for a possible credit downgrade. That comes on the heels of Houston’s actual downgrade by two credit rating agencies, both Moody’s and Standard and Poor’s, because of “high fixed costs” that includes outsized debts.
Oil’s collapse, while not welcome, is helping to shine a light on an emerging public policy threat facing Texas—too much debt propping up too much government.
This is a problem that was made clear at a recent Senate Finance hearing in Austin. Last month, staff with the Legislative Budget Board (LBB), the state’s chief fiscal advisors, informed members of the Senate Finance Committee that state and local debt outstanding, which refers to only the principal amount owed, had grown to a whopping $260 billion in fiscal year 2015. Include the interest component and Texas’ total debt soars to an unthinkable $415 billion, or roughly $15,000 owed by each and every Texan.
This rising red ink must be stopped before stressing families and wrecking the economy with higher taxes, especially at a time of potential bond credit downgrades and an uncertain economic future. By slowing spending, prioritizing debt payments, and providing increased ballot box transparency, those in Midland and all Texans can rest a little easier.
Dissecting state and local debt outstanding shows that there is $41 billion in state debt, $6 billion in revenue conduit that’s not technically a legal liability of the state, and $213 in local debt. Clearly, the major debt problem is at the local level where 82 percent of the total originates.
Evidence shows that while Texas has one of the nation’s lowest levels (45th) of state debt per capita. On the other hand, local debt ranks as the second highest next to California and the second highest in debt per capita next to New York among the top ten most populous states.
However, these amounts tell only part of the story. They don’t include interest owed that’s captured by debt service outstanding.
Instead of the $47.1 billion reported in debt outstanding for the state and revenue conduit, state debt service outstanding is $77 billion, or about $2,800 per person. Local debt service outstanding has reached a whopping $338 billion, or $12,250 per Texan.
Collectively, the total is $415 billion, or more than $15,000 owed by every man, woman, and child in the Lone Star State. This must be resolved before we are all burdened with even higher taxes, resulting in fewer opportunities to reach our full potential.
One way to get control of this costly problem is by scrutinizing all budget areas because excessive government spending results in more debt. This should be paired with zero-based budgeting such that every program starts at zero and every dollar spent must be reasonably explained as effective and efficient.
Another valuable option is to prioritize debt to consider which order they should be paid if given the opportunity. This would help determine the useful life of projects paid with debt, the interest rate, and other variables to best use taxpayer dollars.
Last, but certainly not least, Texans must urge governments to do better regarding debt transparency. This could be done by publishing on a local ballot for bond proposals how tax bills will be affected, how much the bond will cost in principal and interest, and current debt service outstanding per capita. We’ve called this ballot box transparency.
By controlling spending, prioritizing debt payments, increasing debt transparency, Texans can have a better sense of whether state and local lawmakers are being good stewards of their tax dollars.
Vance Ginn, Ph.D., is an Economist in the Center for Fiscal Policy at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. He may be reached at [email protected].
James Quintero leads the Think Local Liberty Project at the Texas Public Policy Foundation. He may be reached at [email protected].