January 31, 2010

State bond cost could outstrip revenue

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By Andy Rosen
Andy@MarylandReporter.com

The state might have to look to its strapped general fund next year to cover the repayment of bonds it has already issued.

The state depends on the receipts from a small property tax to repay the bonds that finance capital projects. But those receipts are likely to be $100 million below what will be needed in fiscal 2012 to cover debt services — principal and interest. Analysts warned lawmakers last week that they should consider putting aside some borrowed money this year.

The capital budget typically pays for projects such as roads, buildings and schools, but has been used in recent years to pay for other needs.  For instance, open space purchases that usually are covered out of special transfer tax funds are being paid for with bonds so open space money can be transferred to the general fund.

The bonds that have been used to relieve pressure on the general fund deficit this year might be increasing the stress next year. Lawmakers will work on the fiscal 2012 budget during next year’s General Assembly session.

A small section of a budget analysis presented to delegates Friday points out the shortfall. The state doesn’t need any operating money to pay down its debt this year. Analyst Matthew Klein suggested that the state take a look at its use of bond “premiums” that Maryland collects when it issues debt.

The money is on top of what the state issues for its bond sales, and the state has to pay it back eventually. Some are concerned that the state shouldn’t be using it for more projects.

Del. Murray Levy, D-Charles, who sits on the House Capital Budget Subcommittee, said the state uses the premiums to get around its debt limits. Gov. O’Malley’s budget proposal uses up to $53 million for school construction, which will allow the state to meet its goal of $250 million in school building this year.

Levy said that money might have been better put aside for next year or not borrowed at all.

“The premium is not for free,” he said.

Lawmakers differ on whether O’Malley’s moves have been wise.

To make room for the $461 million “operating budget relief,” the state has to put off planned capital projects. Bonds are funding about $1.1 billion of the state’s capital program for next year.

But Del. Steve Schuh, R-Anne Arundel, who also sits on the capital budget panel, said the moves are going to prove costly in the long run.

“If you combine that with the fact that we are now maxing out the bond program, we are going to severely delay a lot of important projects,” he said. “It’s going to have a decade of repercussions.”

Levy, on the other hand, thinks the move was “a very smart way to do it.” He said the capital budget has been in much better shape than the state’s general fund in recent years.