Panel: Global uncertainty cautions expanding Oregon’s debt

By Oregon State Treasurer

Oregonians are benefitting because of the state’s recent discipline when it comes to public debt, and a state advisory commission is urging lawmakers to keep embracing that cautious philosophy.The state’s solid credit rating has helped Oregon to better weather recent financial storms and also to save millions through refinancing of existing bonds. The credit rating has been strengthened through prudent use of debt and careful budgeting.  In the new biennium that starts July 1, limited new debt capacity will become available – in large part because deficit borrowing from a decade ago will be fully repaid this year.

While Oregon’s debt picture is improving, the State Debt Policy Advisory Commission is recommending that — due to worldwide economic uncertainty – legislators and the governor continue to exercise caution when it comes to authorizing any new public debt. In addition, commission members are calling for a longer term conversation about prioritizing potential uses for Oregon public borrowing.

“Debt is a powerful tool that can enhance short-term economic development, help improve our public institutions, and also build the capacity of future generations to compete and thrive,” said State Treasurer Ted Wheeler, the chairman of the commission. “At the same time, it is a tool that has been – and should continue to be – utilized wisely.”
The commission advises the Legislature and Governor about the prudent level of state debt that is repaid from two sources: the General Fund and Oregon Lottery revenues. It also makes general recommendations about improving how Oregon prioritizes its debt, and protecting the state’s credit rating.

Bonds that are repaid with dedicated sources of revenue, such as gas taxes, tuition, and loan repayments, are not part of the commission’s debt capacity calculus.

Based on revenue forecast and estimated interest rates, the Commission said Tuesday that the state can allot a maximum of $902 million in additional General Fund-backed debt in the 2013-15 biennium and still remain below the prudent threshold. The panel urged lawmakers to avoid borrowing that full amount, however.

The forecast for available debt that is repaid from the Oregon Lottery has declined significantly since the most recent forecast. That is due to projections of declining gaming proceeds and also the decision by the
Lottery Commission to purchase new video lottery terminals. The available additional capacity for Lottery –backed debt is $151 million, the commission said.

The commission also recommended that lawmakers actively monitor the financial status of the Small Scale Energy Loan Program, which could suffer due to delinquent loans. In addition, members suggested the state put additional focus on anticipating future demand, supply and potential uses for public-backed debt.

“Now is the time for caution, and we need to keep in mind the balance between debt and operating revenue,” said Sen. Richard Devlin, D-Tualatin, a commission member and the co-chairman of the Joint Ways and Means Committee. “There will be many compelling requests to borrow, but we need to be prudent and deliberate to protect the interests of Oregon families, today and tomorrow.”

“This forecast and the uncertainty about the future shows how vitally important it is to engage in long-term planning, especially when it comes to debt and increasing our rainy day reserves, which are two areas that impact our credit ratings,” said Rep. Phil Barnhart, D-Eugene, a commission member and the chairman of the House Revenue Committee.

Public borrowing is a powerful tool that can create jobs in the short term while improving roads, colleges and other public facilities. But bonds need to be repaid, with interest, so the commission makes recommendations about how much public money should be devoted to loan repayment, in order to keep annual payments at a manageable level.
The Commission, which considers the anticipated levels of revenues and debt service costs over a six year period, is made up of the Treasurer, two appointed legislators, the director of the Department of Administrative Services, and a citizen at-large.

The panel has strongly urged lawmakers to avoid a repeat of 2003, when the state borrowed $432 million for operating costs to balance the budget. Debt is traditionally used to pay for assets of lasting value – not operating costs.
Recommendations for the state debt capacity targets are key benchmarks and reinforce confidence that Oregon will repay its loans — and are among several factors that help to determine the state’s credit ratings. Oregon’s ratings are currently solid, and are helping to keep interest costs low on projects for which the state anticipates issuing bonds to fund.

The state’s general obligation credit ratings are AA+/Aa1/AA+ ratings by Standard & Poor’s, Moody’s Investors Service, and Fitch Investors Service respectively. The rating for Lottery-backed Oregon debt is AAA from S&P and Aa2 from Moody’s.

The Oregon State Treasury protects public assets and saves Oregonians money through its investment, banking, and debt management functions. State investment policies are overseen by the Oregon Investment Council. The State Treasury also promotes public outreach and education to help Oregonians learn strategies to save money, invest for college and make smart financial choices. You can track Treasury-related news on Twitter at @OregonTreasury.

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