The debt cap that isnt

When state leaders approved a $2.4 billion Big Dig bailout this spring, they said their plan was responsible. And they said it was fair to taxpayers. What they didn’t say was that it would force the state to borrow money in excess of its self-imposed debt cap. Again.

In the interest of holding down the state’s overall debt level, the Legislature and governor have, since 1995, agreed to issue no more than $1 billion worth of bonds per year to cover the cost of various construction projects. But in reality, the state backs at least $1.5 billion in new bonds every year, well in excess of the so-called cap.

The less-than-rigid nature of the annual debt ceiling means not only that the state is piling up debt faster than it admits. It also means that big–and politically important–capital projects can still get funded while others–often with less powerful allies–get squeezed out.

Tom Callahan, executive director of the Massachusetts Affordable Housing Alliance, says housing construction gets just $70 million a year of the state’s newly borrowed funds. That’s compared to a quarter-billion dollars for the Central Artery project, which now also gets additional debt funding outside the cap. Raising the official cap just $100 million, Callahan says, would allow more affordable housing projects already approved by the Legislature to get underway.

“It would make a dramatic difference with housing,” he says. “But it hardly seems like it would send Wall Street into a tizzy.”

Wall Street in a tizzy is exactly what got us the cap in the first place. In the interest of appeasing bond-rating agencies, which lowered the state’s credit rating close to junk-bond levels during the fiscal crisis of the late 1980s, then-Gov. William Weld and the Legislature agreed in 1991 to a limit of $791 million in new bonds per year. They slowly raised the limit until it reached $1 billion in 1995.

From the start, however, some borrowing was exempt from the cap: things like school building assistance, which state leaders wanted to protect, and bonds issued by the MBTA and other independent authorities that have always been separate from the state’s general-obligation debt.

Over the years, other loopholes have opened up for outside-the-cap borrowing. Some of them, such as bonds for the Massachusetts Convention Center Authority, have less impact on state finances since they will be paid off mostly by revenue generated by the center itself.

But some exemptions drain money straight from the state budget. Taxpayers, for example, are paying off $5 billion in “grant anticipation notes” that cover Big Dig costs until future federal highway aid arrives. Through “contract assistance”–a euphemism for paying interest on bonds issued by a third party–taxpayers will cover much of the $70 million needed to support the new Patriots Stadium in Foxborough and also pay for widening Route 3 north of Boston.

“Because these individual projects are big enough or important enough, they have the political support to be exempted from the bond cap,” says state Treasurer Shannon O’Brien.

O’Brien says lawmakers should consider raising the cap and then placing all the state’s bonding under it. Such consolidation would save the state a few million dollars a year in interest (because independent authorities don’t get as good a rate when they borrow money on their own). And, just as important, she says, it would allow the state to be honest about its future obligations.

Still, O’Brien and others say the cap, even riddled with holes as it is, has helped improve the state’s financial health. The Commonwealth’s credit rating has climbed steadily since 1990 and the yearly growth in general-obligation debt has fallen from 18 percent to 5 percent, according to administration officials.

But debt service is still a budget buster. The state dedicates almost 10 percent of its annual budget to pay off the debt, which now stands at $15.4 billion. That’s more than $2,100 per person–the third highest per-capita debt in the nation. And those numbers will rise again thanks to the $1.3 billion in new Big Dig debt (which will be paid back with newly reinstated driver’s license and car registration fees), though that borrowing will be partially offset by a plan to use surplus funds to pay off $600 million in old debt.

House Ways and Means Chairman Paul Haley (D-Weymouth) says state officials run all new bonding plans by Wall Street rating agencies to make sure they meet their approval. But he acknowledges that each time the state goes outside the cap, it risks hurting its bond rating in the future or, worse, committing too much of tomorrow’s budget to big projects being built today.

“It is a game of Russian roulette,” he says.

Gary Susswein is former State House bureau chief for The Patriot Ledger.