Debt and Taxes: Arizona Taxpayers on Hook for $66 Billion Tab, Part 1

| April 23 2012

Investigative report by Mark Flatten
Goldwater Institute 

George Lee made a comfortable living running a pair of commercial buildings in Prescott Valley, until government debt helped drag him down.

Lee owned and managed the biggest properties in a modest shopping center in a small town. In the mid-2000s the economy was strong, rents were good and the taxes Lee paid on the property were stable. So Lee agreed when city officials approached him and other property owners about forming a special taxing district to spruce up the area and give the businesses direct access to State Highway 69, the main road to Prescott.

The promises made by the town failed to materialize.

The improvements paid for with the $3.4 million in bonds issued by the Parkway Community Facilities District amounted to landscaping and a new parking lot for an area that already had ample parking, Lee said.

There was no direct access to the highway, the critical element in the city’s pitch to property owners. And within a year the property tax rate landowners had to pay was almost twice what the town had claimed it would be. It’s continued to go up.

When the economy soured and rents dropped, Lee was unable to keep up with the taxes and other debt payments he had on the properties. His taxes for the Parkway district alone were about $36,000 per year, almost half of his total property tax bill.

Lee lost both buildings to the bank a year ago. He lost his source of income, his house and his condominium. He and other property owners also lost a court challenge claiming they had been duped into approving the district by the town.

Read Debt and Taxes:
Recommendations for Reform

When districts like Parkway issue bonds, the judge ruled, property taxes must rise to whatever level necessary to make the annual debt payments, regardless of the consequences to the landowners.

“You don’t have to go any farther if you want to see a situation where property owners have really been taking it in the Snuggies,” Lee said. “It’s a travesty is all I can say.”

The amount of government debt that helped drive Lee out business is just a tiny sliver of what taxpayers owe across Arizona. But the risk of financial ruin that Lee faced is shared by all Arizonans as layer upon layer of government adds layer upon layer of debt.

Click image to enlarge Unpaid Balances

State and local governments in Arizona owe more than $66.5 billion in outstanding debt and unfunded obligations, according to official estimates in disclosure reports scattered across various agencies. That figure is based largely on annual reports from government agencies and pension funds that run through June 2011. Numbers that have been updated since have only gotten worse.

That works out to about $10,258 for every person in Arizona, just for state and local debt and unfunded obligations.

To put that figure in perspective, total personal income in the state is about $232.6 billion per year, or just under $36,000 per person, according to the most recent figures from the U.S. Bureau of Economic Analysis. The state’s operating budget for the current fiscal year is about $8.3 billion.

Nationally, the market for municipal bonds – the primary debt mechanism for state and local governments – is about $3.74 trillion, according to figures through 2011, the most recent available data compiled by the Securities Industry and Financial Markets Association, a private group that represents securities firms, banks and asset managers.

While the $15.6 trillion national debt gets a great deal of attention, the extent of state and local debt in the United States is more difficult to quantify. In 2010, a report by the U.S. Government Accountability Office projected that without major changes in the way state and local governments operate, they will face deficits, debt and unfunded obligations of at least $9.9 trillion over the next 50 years.

To close that gap, the GAO concluded state and local governments will have to raise taxes or cut spending – or both – by a total of about 12.3 percent every year, year after year, until 2058.

More recent projections are not available.

If Arizona’s debt is any indication, things have not improved since the GAO report was issued in July 2010. Money from the federal stimulus bill, which had been masking state and local financial shortfalls, has dried up. The amount of borrowed debt has increased, and so have unfunded pension liabilities.

Some groups have tried to get a fix on current debt and unfunded obligations of state governments. But those studies tend to rely on Comprehensive Annual Financial Reports (CAFRs), which are detailed financial statements that state governments must file every year. The problem with them is that CAFRs tend to be outdated – most run a year or two behind, and state CAFRs do not account for the liabilities of local governments.

 

Debt IsNotDebt

Understanding state and local government borrowing requires entering a world where debt is not debt, governments are not governments and billions of dollars in obligations are supposedly traded without risk.

No one really knows how much is owed by state and local governments in Arizona. Some of it does not have to be reported. Some of it is significantly under-reported.

There’s not even agreement on what constitutes debt, or what government is.

But whatever the definitions, it all comes with risk to taxpayers, investors and governments themselves.

Doug Ducey
Doug Ducey, Arizona state treasurer

“Taxpayers should care about it because it’s an obligation that they or their children are going to have,” said Arizona Treasurer Doug Ducey, who advocates paying down the billions in debt owed by the state. “People should be concerned about the amount of debt, the type of debt, and the fact that there is no overall plan to pay down the state debt.

“The trajectory that government writ large is on is that it is taking on too much debt. It’s not living within its means and the only way to change that is to change direction. You do need to make difficult decisions.”

Most of the government debt in Arizona – about $44 billion – is in bonds that have been issued for everything from streets and sewer lines to sports arenas and theaters. In addition, more than $938 million is pledged for lease-purchase agreements, long-term commitments by governments at all levels to buy capital improvements like new buildings or equipment with annual payments rather than bonds.

Government pensions are underfunded by more than $13.6 billion, according to the most recent official estimates. That means they do not have enough assets to cover the expected costs of paying retirement benefits they will owe to government workers. Other benefits to retired public employees, such as guarantees to pay health care premiums, are about $1.3 billion short. Estimates using a more conservative market-based approach published by the Goldwater Institute in 2010 put the unfunded liability for the four state pension funds alone at more than $50 billion.

Industrial Development Authorities, creations of state and local governments that have the power to issue tax-free bonds for certain commercial purposes, have more than $5 billion in outstanding debt.

In addition to those costs, there are intangibles such as $1.3 billion in accounting tricks used by state lawmakers to balance recent budgets, and civil litigation claims that are owed but not tallied in government debt reports.

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