Running government like a business means taking on debt

In recent years, debt seems to have become a dirty word in the Legislature. Lawmakers have refused to approve bonds for amenities like the unfinished American Indian Cultural Center in Oklahoma City and the proposed OK Pop Museum in Tulsa, and even dire needs like repairs to the crumbling state Capitol and a new Medical Examiner’s Office.

This year, lawmakers have not been content with simply refusing to pass bonds. Bills in the House and Senate seek to restrict future lawmakers from increasing bond debt beyond certain levels. HB 2195 by House Speaker Shannon would cap state debt in bonds and leases at 28 percent of general revenue (about where they are at today). SJR 10 by Senator Brecheen would amend the state’s Constitution to cap bond debt at about $500 million above where it is today.

In an editorial for the Edmond Sun, Speaker Shannon defended his efforts to limit Oklahoma’s debt, “Even at today’s low rates, borrowing $200 million would cost the state the extra $80 million in interest over the next two decades. Only in government does it make sense to pay $280 million for something that costs $200 million.”

That may play well as government-bashing rhetoric, but it doesn’t match reality. Taking on debt and paying interest is a normal and indispensable part of the economy, both for private sector businesses and individual families. Anyone who’s ever taken out a car loan or a home mortgage should realize this.

For example, 30-year mortgage rates are at about 3.5 percent. That’s close to a historic low, but taking out a $200k mortgage at that rate would cost more than $320k over the lifetime of the loan. If we behaved like Speaker Shannon imagines, no one would ever take out a home loan.

Looking at the return on investment, Speaker Shannon’s example could actually save the state money. He claims that getting $200 million today is a bad deal because it would cost $280 million over two decades. But adjusting for inflation with the Consumer Price Index shows that the buying power of $200 million two decades ago would be equivalent to $318.7 million today. Assuming inflation over the next two decades is similar to the last two, we would gain about 14 percent on the real value of our investment through financing.

Private sector businesses know that taking on debt to invest in the future pays off. Oklahoma’s most successful large corporations have debt loads much larger than the state. For example, Devon Energy has $4.5 billion in outstanding debts and a debt to equity ratio of 0.40. That means the company finances its activities with 40 cents of debt for every dollar of shareholder investment.

Certainly private companies can get in trouble if they allow their debts to grow too large, but no successful corporation takes the Puritanical view of debt being pushed by some in the Legislature.

Of course, taking on debt only makes sense if we invest it in wise ways. But if we choose our projects carefully, using bonds to fund major infrastructure needs and cultural amenities that attract people to Oklahoma would be both prudent and cost-effective.

In a future post, we will examine Oklahoma’s current bond debt load and how it compares to other states and nationally. We’ll also look at how restrictions on our ability to issue debt could affect our bond rating.