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Repaying Debt In A World Of Commonplace Debt

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Pierre S.D. (KELO AM) - These days, we hear a lot about government debt. When times get tough, and balancing the budget must be done, states like Illinois and California incur debt to cover routine annual government expenses. Of course, in Washington, D.C., Congress routinely borrows money to fund the federal budget.

A more responsible approach uses government debt (bonds) for construction projects. Virtually every level of government uses bonding for this purpose. Very likely, your school district has considered a “bond issue” to build a new school facility. When our state universities and technical schools build new classroom buildings, they sometimes issue bonds. 

A bond works much like your home mortgage – you borrow the money, purchase a home, pledge the building as collateral, and repay the debt over time. South Dakota state government uses this approach, too. In the 1970s, the South Dakota Building Authority was created to issue bonds, so public buildings could be financed. Tax dollars may be used to retire the bonds over time. 

South Dakota has used the Building Authority to issue bonds for a number of construction projects. In 1993, bonds were issued to construct a new Human Services Center in Yankton. In 2005, bonds were issued to construct a new Law Enforcement Training Center in Pierre. In 2008, bonds were issued to help improve science facilities at our public universities. Most recently, in 2010, bonds were issued to construct a new dietary building at the Human Services Center in Yankton.

Last fall, South Dakota received an unexpectedly large amount of unclaimed property revenue. The question arose: What should a state like South Dakota do when it receives a one-time windfall of income, at a time when short-term interest rates are low? I proposed that South Dakota “burn some mortgages” by using $56.2 million in cash and repaying four outstanding bond issues. The state Legislature adopted the plan, which meant that rather than saving the money and earning a 1 percent yield, the state is repaying the four above-described bond issues early, to save from 4.6 to 6.7 percent in interest.

These four outstanding bonds represent nearly 16 percent of all the outstanding bonds of the South Dakota Building Authority. A fifth issue will be fully repaid by September. At that time, there will be no outstanding Building Authority bonds whose repayment is dependent upon state general funds. The only outstanding bonds will be those with dedicated revenue streams, not dependent upon tax dollars.

The benefit of early bond repayments is more than a stronger balance sheet, though. By repaying early, those dollars which would otherwise have been needed for annual payments can instead be redirected to other uses. The repayment plan has freed $6.3 million in tax revenue which was used to invest in education, healthcare and other budget priorities.

In an era when issuing bonds to finance the ordinary activities of state governments has become common practice, the state of South Dakota is doing the opposite. Individual South Dakotans make smart moves like this every day. Your state government should do the same.

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