Debt Is Not A Dirty Word As Long As We Accept the Responsibility

November 9, 2020

By Richard A. Ciccarone, President, Merritt Research Services, an Investortools Company and external advisory panel member, GFRC


Debt and responsibility are two words that should go hand in hand, but they often do not.

Since the onset of the coronavirus pandemic, federal, state, and local government revenues have been falling far short of what is needed to pay the normal and extraordinary costs of government.

As a result, of decisions being made now, these entities will be saddled, for years to come, with many alternative forms of debt, including long term bonds, as well as the ramifications that emanate from extended contribution schedules to cover actuarial retirement liabilities as well as deferred capital outlay.

Of course, In circumstances like these, governments have no choice but to fulfill their constitutional and moral responsibility to defend the health, safety, and welfare of their citizens. To take that duty lightly would endanger the trust that gives government meaning. To do otherwise, would be irresponsible. The issue of responsibility and debt spotlights the need to focus on prudent debt policies that bring rationality to the forefront. Any increase in debt caused by the public health crisis only exacerbates escalating public sector debt loads. With heavily laden indebtedness and net retirement liabilities that already test their economic resilience, many state and local governments have less wiggle room to handle unexpected fiscal emergencies when they occur.

Taking on more debt without a responsible plan threatens to make matters harder later, especially for governments with slow economic growth. That is the issue that many governments are facing. What is the standard of responsibility that should be considered when making choices to provide relief, stimulus, or economic restructuring in order to fund, recover and restore viability?

Fiscal emergency or not, too often political expediency rather than economic common sense dictates the minimalization of charges or taxes.

Avoiding near term higher taxes and user charges seems to be the starting and ending point for many entities. A reluctance to ask stakeholders to make sacrifices now kicks the proverbial “can down the road” and increases the burden as well as the risk to future of taxpayers and voters.

That strategy is illustrated when governments use refinancing routinely to “scoop and toss” bonded debt, or when they lengthen the contributions scheduled to fund pension and other post-employment benefit plans. They also tend to defer infrastructure repair and replacement programs beyond the useful life of the assets. When that happens, responsibility is shirked and passed along to parties that do not benefit in whole or in part from the government’s remediation, service, improvement, or protection.

When liabilities are pushed into the future, the public sector squeezes available tax capacity for future taxpayers to invest in the needs of their own time. That might include not only operational and infrastructure needs, but also developing problems like climate changes, cybersecurity, economic revitalization, and infrastructure.

Emergency or not, too many state and local governments take the easier route to charge now and pay later, much later. Passing the buck into the future gambles on the notion that economic growth will mitigate the burden on a later generation. Any debt that is required for a current fiscal emergency, like the one we have today should be measured in amount according to the ability to repay in the shortest time possible.

Economic growth might be the saving grace for the future, but it is not guaranteed. If future revenue capacity is mortgaged to pay for past benefits, economic resilience is put at risk. That scenario played out in Detroit as well as other rustbelt cities when government salaries and benefits were not realigned with the declining fortunes of their once prosperous tax bases. Yet Detroit taxpayers were still paying for retirement funding for public servants who were long retired.

Future taxpayers are entitled to a clean slate of debt capacity that is free and clear of outstanding liabilities attributed to service personnel and infrastructure that is no longer providing benefit. That gives them financial flexibility to tap the economic base that exists in their own time to cover services and infrastructure needs that they or future taxpayers will be able to enjoy.

Though many state and local governments have reduced their conventional bonded debt levels relative to their resources, over the last decade, a high proportion have offset this lightened load with starkly higher liabilities related to poorly funded pension and OPEB plans. That makes deficits and additional debt requiring higher taxes and fees a more difficult option to cover in emergencies like the coronavirus pandemic as well as to invest in their future.

Responsible debt policy, which also encompasses pension and OPEB liabilities, should endeavor to better align the parties that are responsible to pay indebtedness with the same group that receive the benefits.

The pandemic’s impact on public finances underscores the critical necessity to maintain a disciplined debt policy that bolsters long term fiscal resilience even in times of crisis. Each government would be well advised to prepare for the unexpected, and not take for granted tomorrow’s economic condition to pay the tab for debts.