The governments in Kansas and Missouri have been on a borrowing spree this summer.
A few days ago, Kansas borrowed a cool $1 billion to shore up its pension fund. Next week, Missouri will borrow $60 million to pay for a variety of projects, part of a $300 million bond issue approved by lawmakers last spring.
State politicians often claim they — unlike Congress — must balance their budgets. It’s misleading hogwash. States go into debt all the time for roads, buildings, hospitals and other needs.
In its latest financial report, Missouri said it owed bondholders about $3.8 billion at the end of the 2014 fiscal year. Kansas owed about $3.3 billion, roughly $1,100 per person.
It sounds horrible, but borrowing is an essential tool for infrastructure needs. Few states can build roads or bridges or schools on a pay-as-you-go basis. Properly managed, public debt keeps a state’s economy humming.
In fact, state borrowing is considered so important that interest earnings on public bonds are typically tax-free. That means states pay lower interest rates on the loans, saving taxpayer money while still providing streets, schools, hospitals and other improvements.
That makes state borrowing pretty enticing. But it can also be dangerous.
The money from the Kansas pension bonds, for example, won’t build roads or a hospital — or pay pension benefits. It will be invested in the stock market. The state hopes its portfolio will earn more than the interest rate it will pay to borrow the cash.
It’s like taking out a second mortgage to bet on your uncle’s stock tip. Pretty risky.
That means investors wanted a higher interest rate on the bonds. It’s even worse in this case because the Kansas pension bonds were taxable, further increasing the cost to taxpayers.
Missouri has a healthier credit rating but a similar cost problem.
St. Louis interests want the public to borrow $200 million or so for a football stadium. But because many taxpayers find the proposal distasteful, they have frantically dodged any public vote or legislative consideration of the idea.
That may make sense politically, but it’s a fiscal calamity. Without voter or legislative approval — and with lawmakers vowing to block repayment of the debt — lenders will almost certainly consider the bonds riskier than normal. They’ll demand a higher return, increasing the pain for taxpayers.
As most consumers understand, credit cards can be useful tools. But they can be dangerous, which means they must be used carefully too.