Magazine article Government Finance Review

Measuring and Forecasting Debt Capacity: The State of Oregon Experience

Magazine article Government Finance Review

Measuring and Forecasting Debt Capacity: The State of Oregon Experience

Article excerpt

For more than 15 years the State of Oregon has had a highly centralized and managed debt issuance process. This process has been very successful as measured by improved bond ratings and reduced costs of borrowing for state-level programs. The debt issuance process incorporates the executive and legislative branches of state government as well as the independently elected state treasurer.

* The executive branch provides biennial recommendations of the maximum amount of state obligations that may be issued;

* the legislative branch sets limits on the issuance of all state bonds and other financing obligations; and

* the treasurer acts as the coordinator and issuer for all state debt.

In recent years, Oregon has experienced significant population increases coupled with rapid growth and a far more diversified economy than that which existed during the early 1980s. State infrastructure and systems that had been adequate in the past are under study and review for their adequacy in the future to provide for additional increases in population, competition in an increasingly global economy, and the maintenance of the quality of life and natural beauty that typifies Oregon.

Many proposals made to respond to the changing needs in transportation, housing, education, public safety, and natural resources entail significant state capital investments over lengthy periods of time. To enhance advice given to policy makers respecting state financing capabilities and to better integrate capital financing needs with available debt capacity, the 1997 Oregon Legislative Assembly created the State Debt Policy Advisory Commission. The commission was given the responsibility of advising state decision makers on policies and actions that enhance and preserve the state's credit rating and maintain the future availability of low-cost capital financing. Additionally, the commission provides a six-year forecast of state debt capacity and compares debt capacity to the six-year capital facilities plan that identifies projects proposed to use financing for their acquisition or construction.

Prior to the commission's activities's, state financing management focused on the two-year budget cycle with debt capacity and debt affordability issues being dealt with on an as-needed basis to validate the ability of the state to carry out its biennial "bonding budget." By extending the planning horizon to six years for both debt capabilities and forecasted capital needs, policy makers are able to gain a greater understanding of financial resources available to carry out public infrastructure investments over multiple budget periods. Public polity decisions and state financial resources can now be more closely matched over an expanded planning horizon.

Similar to numerous other public entities, Oregon uses three primary types of financing obligations: general obligation bonded debt, revenue program bonded debt, and certificates of participation obligations. These financing tools are assessed using a debt capacity model, based upon the concept of net tax-supported debt outstanding.

The commission published its first report in the spring of 1998. The report reviewed the current debt situation for state bonds and adopted a debt-capacity model that will be used along with debt affordability and debt burden considerations as the foundation for its recommendations to state policy makers.

Debt Capacity Concepts

Several important debt capacity concepts were articulated within the report to assist in understanding the Oregon debt picture. The first of these concepts was the recognition of the importance of maintaining a high credit rating. A credit rating reflects an assessment of the credit risk associated with purchasing and holding a particular bond, as well as the likelihood that it will be repaid in full. Higher bond ratings signify lower risk to the investor resulting in lower interest rates to the bond issuer. …

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