Among the items included in the budget adjustment bill is a provision to restructure $165 million in GPR debt. Restructuring this debt is a quick and relatively easy fix to get the state through the projected shortfall for this fiscal year, which Republican leaders have said is $137 million. Like many easy fixes, though, this action comes at a cost: the state will need to pay additional interest associated with repaying the debt over the next ten years.
The $165 million debt would otherwise be paid off in May, but the budget adjustment bill would roll the debt forward so that it would be paid over the next ten years (unless it was refinanced again in the future). According to the Legislative Fiscal Bureau, this action would increase the amount of debt payment the state needs to make in the 2011-13 biennium by $29.6 million. This amount includes $15.6 million in principal and $14.0 million in additional interest that would not be accrued if the state did not restructure the debt.
Many people assume that the state’s debt restructuring is like refinancing your mortgage – replacing a higher interest loan with a lower interest loan, and saving money over the long run. Unfortunately, that’s not the case with this debt restructuring or with the similar plan approved two years ago. It’s more akin to a second mortgage that pushes costs into the future and increases them. Over the next ten years, the interest cost of restructuring this debt totals $42.1 million, according to a Wisconsin Budget Project interview with a Fiscal Bureau analyst.
The strategy of pushing debt payments out for another ten years and racking up additional interest costs would add to the state’s already significant structural deficit. That structural deficit would be $29.6 million higher in the 2011-13 budget and $207 million higher over the next decade.
The Department of Administration contends that using this measure in the current fiscal year requires authorizing the debt restructuring by the end of the week. We're attempting to learn whether that can be achieved without explicit legislative approval this week.
The proposed debt restructuring could play a very significant role in enabling the state to resolve the current budget stalemate, if the opposing sides are willing to negotiate and strike a deal that sets aside the parts of the bill that aren’t related to the current fiscal year. Considering the alternatives for addressing the projected shortfall in the current fiscal year, the future costs of debt restructuring may be worth the tradeoff. However, policymakers should be aware that restructuring the debt does come at a cost.