States lean hard toward borrowing

Buy now, pay later. It sounds like a late-night TV ad, but the lure of borrowing is attracting many state leaders faced with long-delayed demands for services and voters who've proven unwilling to support new taxes.

Many states this year are looking at big-dollar borrowing plans, on top of two years of record-breaking new debt. With elections just ahead for 11 governors and most legislatures, support for taxes is slim.

Advocates argue that low interest rates and the economic spark from a burst of government spending makes borrowing a sensible choice. Critics say bonds just delay and inflate costs for government programs, while damaging states' financial health -- especially if they're being used to pay for routine business.

"We've taken borrowing to a new level," said Illinois GOP state Sen. Steve Rauschenberger. He is harshly critical of Democratic Gov. Rod Blagojevich's plan to borrow $1 billion for road work, after the fund was raided last year to pay daily costs of running state government. "The piper's going to come due."

California leads the way nationally, with voters approving $15 billion in bonds to help the state bridge huge gaps between income and spending. But there are many more looking for a loan -- New Jersey, Pennsylvania and South Carolina among them.

Effect of lean years

The dilemma for states overall is that -- even though their economies are starting to pick up after three years of spending cuts and tax increases -- the improvement isn't enough to erase the needs created by the lean years.

While tax cuts are still on the table in some places, the focus is on targeted hikes -- as on cigarettes, liquor or car sales. Across-the-board tax increases are a nonstarter: Virginia is about the only state where broad-based taxes are being seriously debated.

It's still relatively early in the legislative year and final decisions -- on bonds, on taxes, on spending and cuts -- are unfinished for most states. Only eight have finished their legislative sessions.

But borrowing proposals are widespread:

Pennsylvania's Democratic Gov. Ed Rendell wants to borrow as much as $2.8 billion to help boost public education, clean up the environment and spur local economies.

Republicans in the South Carolina Legislature overrode their GOP governor to double to $500 million bonds to support business incentives and university research programs.

Kentucky would rely on 20-year bonds to pay for minor maintenance such as trimming trees and cleaning bat droppings under the latest House budget.

Some argue that debt makes sense, if done wisely. Interest rates are low so that money is cheap, giving states more flexibility in meeting their needs.

Like a business that wants to expand, Pennsylvania needs to borrow to boost its economy and create jobs, Rendell said, citing statistics putting the state near the bottom for job growth and population growth.

"We're a state that is at the bottom in changing our destiny," he said, while conceding an uphill fight with a GOP legislature. "We have no choice, we have to change."

That argument has won the day in many places. The past two years were record-breaking, with overall municipal bonds (which combine state and local governments) hitting $358 billion in 2002 and $380 billion in 2003.

"People want cars, computers, houses, they borrow to pay for them," said Amy Resnick, editor-in-chief of a daily newsletter that tracks the bond market. It's no different for state leaders, she said. "Governments live in the here and now."

New Jersey warning

Moody's Investors Service put New Jersey on warning earlier this month over Democratic Gov. Jim McGreevey's proposal to borrow $1.5 billion next year. That would raise the state's total borrowing for operating expenses to more than $4.6 billion over three years, putting the state behind only California in the use of such long term "deficit" borrowing, the report said.

California's credit rating was dropped by all rating agencies down to near-junk bond status.

Borrowing for one-time projects can backfire, too.

In Missouri, aggressive borrowing to fund road construction in the 1990s inflated spending for a few years. But after debt reached $900 million -- and voters two years ago rejected a statewide transportation tax -- the state highways commission this year put on the brakes and cut construction project spending nearly in half.

Now the focus is on maintenance, transportation officials said, as the state spends $75 million over the next two decades to pay the debt.

South Carolina's new bonds will cost the state $25 million a year to create research centers and the jobs that go with them, said House budget leader Bobby Harrell.

"You create higher-paying jobs," said Harrell, a Republican. "People pay income taxes, sales taxes, property taxes on their cars and houses. You'll have a huge return in terms of taxes."

South Carolina, like most other states, has yet to see the kind of strong economic growth of the late 1990s. But loans -- along with wise financial decisions -- will get them there, Harrell said. "We know that better days are right around the corner."