Comments made at the most recent Louisiana State Bond Commission meeting invite debate over how local governments can use debt to finance current operations.
Typically, each month the SBC will approve several applications for a local government to issue short term debt instruments the proceeds of which will go to recurring expenses. Any and all debt issued by any level of government in the state cannot happen without SBC permission.
The state can’t use long term debt to finance current operations (gimmickry aside), and among others in the union that’s allowed only by Vermont. By contrast, just reviewing the last three months of loan requests, for Louisiana local entities among others a fire district asked for money to compensate for a budgetary shortfall, a municipality asked for funds to help tide itself over while the state assumes fiscal control for the time being, and a law enforcement district with significant revenue loss from a closed prison wanted to pay off expenses from last year.
That last item, concerning the Vernon Parish Correctional Facility, and others caught the attention of Republican Treasurer John Schroder. Typically, SBC meeting features a rapid-fire of proposal after proposal gaining approval with no discussion, but Schroder felt moved to speak that giving local government this leeway may not constitute the wisest policy and therefore the Legislature should review this.
Actually, it did just last year, where it passed a comprehensive streamlining of local government debt provision. Previously (and, technically, still, since some old relevant laws remain on the books until 2021 in parallel fashion), a patchwork of regulations and special cases existed. As part of the consolidation, the Legislature laid down uniform rules for debt issuance.
These continue to permit local governments to issue revenue anticipation notes, or RAN’s, or debt based upon future revenue streams in the short run. They last only as much as three months past the end of the fiscal year to which they apply and cannot exceed budgeted revenues required to be dedicated to paying them off. And, if the SBC doesn’t think credible the incoming revenues predicted will cover the principal and coupon given other expenses (potential borrowers must present rudimentary balance sheets and income statements to it), it can reject that application.
This practice in fact the state may pursue as well, with both levels of government doing so because of uneven revenue flows. For example, local governments must wait on property tax payments that spike at the end of the calendar year, while Louisiana sees a surge in revenues around May 15 with the payment of income taxes not subject to quarterly remittance. Meanwhile, expenses occur more uniformly, meaning in some periods revenues may lag expenses while around these dates revenues that month far exceed expenses.
A way around using RAN’s to smooth out cash flows would require a significant minimum general fund balance. Good luck in imposing that in a state with a history of politicians wanting to spend everything they’ve got to distribute goodies to voters.
Still, RAN’s don’t pose any real fiscal problems if not taken to extremes. Revenues at both levels of government typically accrue in a very predictable fashion unless a disaster strikes, so pledging future revenues to scheduled bond payouts represents close to zero risk.
But one kind of local government presents unique challenges in this regard; law enforcement districts. These have sprung up to broker deals with private operators of local jails. These exist as arms of the sheriff. Because they deal with capital expenditures and/or contractual payments that depend upon operating a facility, if that facility closes as in the case in Vernon Parish (meaning no payments from the state or parish to house inmates), the district may be left with substantial legacy costs.
In the worst case scenario, the sheriff would have to dip into his own general fund to pay off the debt, which wouldn’t be a RAN (because, in this scenario, no revenues exist) but something like a promissory note resting upon the faith and credit of the issuer. If worst came to worst, the sheriff would have to petition the SBC to raise taxes levied by him to cover the payments (the SBC also must authorize all local tax elections).
Closures of local jails may become a more prominent issue because of changes to Louisiana’s criminal justice system designed to have fewer people incarcerated. That’s something the Legislature may wish to address insofar as it impacts taxpayers in affected areas. It also could mandate SBC acceptance of a loan request other than a RAN conditional to bringing the state’s Fiscal Review Committee (comprised of the legislative auditor, treasurer, and attorney general) a request to put under receivership the local government asking for the loan to forestall fiscal problems down the road.
Other than these situations, current statute dealing with government debt to pay for current expenses or operations seems adequate.