Budget plan borrows to cover state shortfall

JEFFERSON CITY, Mo. -- It is often said in the state Capitol that unlike the federal government, Missouri can't deficit spend.

While the Missouri Constitution requires a balanced state budget, there is no provision that prevents the state from borrowing money to keep spending from exceeding revenue in a given fiscal year.

A bill the Missouri Legislature sent to Gov. Bob Holden on Thursday would do just that, prompting critics to complain that Missouri is fact engaging in deficit spending.

"We do not have a balanced budget ever again once we go down this path," said Senate Minority Floor Leader Ken Jacob, D-Columbia, who eventually voted for the measure.

The bill was the first sent to the governor since Republicans took control of both legislative chambers in January for the first time since 1948.

House Speaker Catherine Hanaway, R-Warson Woods, said borrowing to cover operational expenses wasn't a good idea but preferable to even worse alternatives.

"That is the reality we have to live with," Hanaway said. "We think to get to balance -- if we don't have taxpayer approval of a tax increase and we can't cut to get down to that level -- deficit spending is the only option."

However, Hanaway cautioned this is something that should be considered only in the most dire of circumstances.

$400 million in bonds

The measure would allow the state to sell $400 million in bonds that would be paid back by future general revenue collections. After taxes and fees, the sale would leave $335 million.

Plugging a hole in the current budget will take $150 million of the proceeds, though Holden will still have to cut about $82.3 million from public schools and higher education -- realistically among the only places he can find the money this late in the fiscal year -- to achieve balance.

The remaining $185 million will be used to ease pressure in the next budget year, which begins July 1. Holden's office estimates a $1 billion shortfall, which House appropriations committees are reducing through cuts where possible.

The bill passed by overwhelming, bipartisan margins in both chambers. Only two of Southeast Missouri's 16 senators and representatives -- Democratic state Reps. Denny Merideth of Caruthersville and Wes Wagner of DeSoto -- voted against it.

The plan as originally proposed by Holden, a Democrat, was to borrow against future payments the state will receive from a financial settlement with tobacco producers. If tobacco revenue at some point proved insufficient to pay back the bonds, general revenue was to make up the difference.

The House approved a version of that proposal on Feb. 13 with the expectation that the Senate would go along.

When the upper chamber took up the bill Wednesday, however, state Sen. John Russell, R-Lebanon, offered a substitute that will, on paper at least, issue bonds to cover the cost of buildings already under construction. General revenue committed to those projects will be shifted to cover other spending obligations.

Russell's plan will cost the state $738 million in principal and interest payments over 25 years. The bonds will be repaid 12 years sooner and with a savings of $200 million in interest charges from what the House initially approved.

'We do this reluctantly'

No longer though, will the tobacco money be a dedicated source for repayment, with general revenue instead going for that purpose.

"We do this reluctantly, but it will cost significantly less to retire the bonds," said Russell, the Senate budget chairman.

In the past, the state typically has used general obligation bonds to raise large amounts of capital. The constitution requires that such bonds be approved by voters, and if the legislature fails to appropriate sufficient money for repayment, the commissioner of the Office of Administration can unilaterally impose a statewide property tax hike to come up with the money.

What will be sold under this bill are revenue bonds, which don't require voter approval and aren't backed by the threat of a mandatory tax increase.

In fact, future legislatures could choose to default on the debt, though that isn't considered realistic because it would destroy the state's ability to borrow for generations. The only time the state defaulted on bonds was during the Civil War. That black mark remains on the state's credit report even though Missouri is one of the few states that has the highest possible bond rating.

The state has used revenue bonds to pay for specific projects for decades, including to build the domed stadium that is home to the St. Louis Rams football team.

But the more general revenue committed to debt repayment, the less will be available for future needs.

State Sen. Wayne Goode, D-Normandy, said lawmakers of both parties have long been unable to say no to increasing spending during times when revenue is plentiful. With this precedent, the former budget chairman -- one of only six senators to vote against the bill -- said they will have tough time rejecting future spending increases even when the money isn't there.

"It opens up pork-barrel spending, and there is no bottom in it," Goode said. "It is a bottomless pit."

Hanaway, however, downplayed the affect on future legislative decisions and said the options in this special instance were limited.

"It was a choice between doing that and reaching out to taxpayers and taking more money," Hanaway said.

mpowers@semissourian.com

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