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Photo by Thomas Hawk used under a Creative Commons license.

Two bills that would restrict the amount of bond debt that Oklahoma can take on are moving through the Legislature (HB 2195 and SJR 10). In a previous post, I discussed why debt is a normal and indispensable part of budgeting for government, private sector businesses, and individual families alike. This post explains why the proposals being considered by the Legislature might actually harm our credit rating and make borrowing more expensive.

Contrary to the rhetoric of some Oklahoma lawmakers, using bonds to fund major infrastructure needs and cultural amenities that attract people here would be both prudent and cost-effective. Of course, we should be careful that bonded investments are spent wisely and that Oklahoma’s debt load does not grow too large. That leaves us with two questions—how much bond debt does Oklahoma have now, and how much can we afford?

According to Oklahoma’s State Bond Advisor Jim Joseph, there’s not a precise standard for acceptable state debt levels because they are affected by a variety of factors. These include how well the state is administered, the existence of a rainy day fund, and the state’s overall economy.

One metric broadly accepted by the market to judge the creditworthiness of states is the ratings given by Moody’s Investor Service.  The company’s 2012 State Debt Median Report shows that Oklahoma had $2.3 billion in net tax-supported debt in 2012, or $615 per capita. That’s less than half the national average ($1,408 per capita). Oklahoma’s debt service ratio (the percentage of all appropriated spending comprised by debt payments) was 2.4 percent. That’s also less than half the national average of 5.3 percent and is lower than 41 other states. Joseph said that if we consider only appropriations from general revenue and not the 1017 and ROADS funds, our debt service ratio is 4.2 percent, still below the national average.

Oklahoma’s current Moody’s rating for general obligation bonds is Aa2, the third best rating awarded by the company, which signifies a high quality investment and very low credit risk. As the chart below shows, Oklahoma per capita debt is lower than many states with the same or better bond ratings.

bond-ratings

When explaining the reasons behind Oklahoma’s rating, Moody’s cited as strengths our practice of appropriating only 95 percent of certified revenue each year, healthy fund balances, and below average debt levels. They also credited a booming oil and gas industry that is helping the state economy.

As weaknesses, Moody’s cited too much reliance on a volatile energy sector, constitutional restrictions on our ability to raise revenue, unfunded pension liabilities, and trends toward reduction of the personal income tax. Last year, Governor Fallin visited New York to ask Moody’s to boost Oklahoma’s bond rating, but the company declined due to our lack of flexibility to increase taxes paired with the push to cut taxes even further.

Joseph said any action by the legislature that further limits our state’s flexibility could be a concern for credit rating agencies. Both of the bills seeking to limit Oklahoma’s debt would set the cap far below what other states with better credit scores have done. With credit rating agencies already worried about our state’s lack of fiscal flexibility to respond to emergencies, these measures to limit our debt could actually end up making it more expensive.