Tuesday, September 25, 2012

Comments on the Calvo administration's 'spending cuts' and the debt ceiling

Tonight, I watched the public hearing on Bill No. 507-31 (COR), the Calvo administration's "spending cuts" bill. Former Speaker Ben Pangelinan was generally correct in his view of the extension of the payment period for the unfunded liability as a means of borrowing, but some may not get the correct impression from the exchanges. If one interprets his statements as meaning that extending the payment period, alone, would be additional borrowing, that could be incorrect (depending on your assumptions). While it is true that the early retirement program would probably have an impact on the unfunded liability of the Government of Guam Retirement Fund's (GGRF) Defined Benefit Plan, the extension of the repayment period might not be seen as additional borrowing, but refinancing an existing bond. It's nothing more than paying the balance of a bond with 19 years remaining for a new bond with a term of 29 years. Assuming the same interest rates apply and we discount the present value of the bond by that interest rate, it's a wash. Yes, the government of Guam must repay for 29 years instead of 19, but the payments will go down. Unless this creates a liquidity problem for the fund, there isn't much of a cost involved, assuming GovGuam is paying an interest rate which is the same as the yield on GGRF's investment portfolio (which likely isn't the case).

Unfortunately, there is a very common myth that has been floating around about GovGuam's "debt ceiling", from the Organic Act, which was reiterated during the public hearing. In Section 1423 (a) of the Organic Act of Guam, the debt limitation is created.  It says, in part, "Provided, however, That  no public indebtedness of Guam shall be authorized or allowed in excess of 10 per centum of the aggregate tax valuation of the property in Guam." This is the central issue in the case of Limtiaco v. Camacho, which was decided on March 27, 2007.

The Syllabus, prepared by the Reporter of Decisions summarized the majority opinion, authored by Justice Clarence Thomas in the following way:

Guam’s debt limitation must be calculated according to the assessed valuation of property in the Territory. The term “tax valuation” most naturally means the value to which the tax rate is applied. It therefore means “assessed valuation”—a term consistently defined as a valuation of property for tax purposes. Appraised value is simply market value, which may or may not relate to taxation.

Clearly, Guam's policymakers understand this, as they have raised the debt limit through raising the assessed valuation used for tax purposes several times since (up to 100%), while lowering the tax rate each time, so that no tax increase would result. In Justice Thomas'  majority opinion, he noted the objection of Governor Camacho to this interpretation of the law, but Justice Thomas dismissed this, writing:

The Governor suggests that our interpretation would result in no debt limitation at all because Guam may arbitrarily set its assessment rate above 100 percent of market value. For two reasons, we think the Governor has overstated this concern. First, most States have long based their debt limitations on assessed value without incident. Second, a strong political check exists; property owning voters will not fail to notice if the government sets the assessment rate above market value.

Does this sound like Justice Thomas thinks that 100% is a definite upper limit to the debt ceiling? He is relying upon (1) state histories and (2) psychological factors to ensure that this does not result, but does not say that it would be unconstitutional, inorganic or contrary to law to raise the assessed value above 100% of the appraised value. Justice Souter wrote an opinion which concurred in part and dissented in part.  One of the main issues was exactly whether the debt limit is supposed to be "hard cap" or a "soft cap".  On this he writes:

It would, after all, have been strange for Congress to set a debt cap to constrain the Guam Legislature, only to leave the limiting figure subject to easy manipulation by the legislature. While I know that actual valuation can be manipulated, too, manipulation of that figure could only be done by officials acting in bad faith and subject to an obvious political or judicial challenge.  The Court's approach, by contrast, gives the legislature a green light to subvert its own stated limit with a clear conscience.

Justice Souter thought that the majority opinion would allow the Guam Legislature, with the Governor, to raise the assessed value above 100%, raising the debt ceiling with it. In a footnote, he comments: "The specter of mischief extends to an attempt to set the assessment rate above 100 percent.  The Court contends that political or practical constraints would foreclose this maneuver.  See  ante, at 8.  After today's decision, I suppose we may find out."

Reading this, you might think that I am advocating raising the debt ceiling. That is not my purpose in writing this. The truth is that I get very annoyed when the conventional wisdom is so completely wrong as it is on this legal issue. I am not an attorney, but this fact was made as clear as day by the Supreme Court of the United States.

As for the "cuts" plan, I want people to understand that what is happening with regard to the extension of the repayment period is just changing the timing of government spending, although it may have adverse consequences for GGRF, constraining liquidity and, perhaps, giving lower returns on its investments, depending on the interest charged by the fund (if there are other important matters regarding this, I would like to know, but these are the points that come to mind). I want GGRF to remain solvent, I want current and future retirees to continue getting their retirement, and I want GovGuam to come to a long-term balance of revenues and expenditures.

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